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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, 2007 | ||
OR | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to |
State of Delaware | 20-2471174 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
12300 Liberty Boulevard | ||
Englewood, Colorado | 80112 | |
(Address of principal executive offices) | (Zip Code) |
Title of Each Class | Name of Exchange on Which Registered | |
Series A Common Stock, par value $.01 per share | Nasdaq Global Select Market | |
Series B Common Stock, par value $.01 per share | Nasdaq Global Select Market |
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
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Item 1. | Business. |
(a) General Development of Business |
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• | We will spin-off to our shareholders a wholly-owned subsidiary holding cash and Ascent Media, except for those businesses of Ascent Media that provide sound, music, mixing, sound effects and other related services; | |
• | Immediately following the spin-off, we will combine with a new holding company (“New DHC”), and our existing stockholders will receive shares of common stock of New DHC; | |
• | As part of this transaction, Advance/Newhouse will contribute its interests in Discovery and Animal Planet to New DHC in exchange for preferred stock of New DHC that, immediately after the closing of the transactions, will be convertible at any time into shares initially representing one-third of the outstanding shares of common stock of New DHC. The preferred stock held by Advance/Newhouse will entitle it to elect two members to New DHC’s board of directors and to exercise approval rights with respect to the taking of specified actions by New DHC and Discovery. |
• | general economic and business conditions and industry trends including the timing of, and spending on, feature film, television and television commercial production; | |
• | spending on domestic and foreign television advertising and spending on domestic and foreign first-run and existing content libraries; | |
• | the regulatory and competitive environment of the industries in which we, and the entities in which we have interests, operate; | |
• | continued consolidation of the broadband distribution and movie studio industries; | |
• | uncertainties inherent in the development of new business lines and business strategies; | |
• | integration of acquired operations; | |
• | uncertainties associated with product and service development and market acceptance, including the development and provision of programming for new television and telecommunications technologies; | |
• | changes in the distribution and viewing of television programming, including the expanded deployment of personal video recorders, video on demand and IP television and their impact on television advertising revenue; | |
• | rapid technological changes; | |
• | future financial performance, including availability, terms and deployment of capital; |
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• | fluctuations in foreign currency exchange rates and political unrest in international markets; | |
• | 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; | |
• | the possibility of an industry-wide strike or other job action affecting a major entertainment industry union, or the duration of any existing strike or job action; | |
• | changes in, or failure or inability to comply with, government regulations, including, without limitation, regulations of the Federal Communications Commission, and adverse outcomes from regulatory proceedings; | |
• | changes in the nature of key strategic relationships with partners and joint venturers; | |
• | competitor responses to our products and services, and the products and services of the entities in which we have interests; and | |
• | threatened terrorists attacks and ongoing military action in the Middle East and other parts of the world. |
(b) Financial Information About Operating Segments |
(c) Narrative Description of Business |
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Creative Services |
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Network Services |
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AccentHealth |
• | selected commercial time slots on the AccentHealth Waiting Room TV Networks; | |
• | print-display advertising space (traditionally used for product brochures, information pamphlets or coupons) alongside the Health Panels, AccentHealth’s wall-mounted educational print displays; | |
• | turn-key literature distribution services; and | |
• | certain services related to the production of commercial advertising spots or the customization of certain advertising services. |
Strategy |
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Seasonality |
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Strategy |
• | Maintaining Discovery’s focus on creative excellence in non-fiction programming and expanding the portfolio’s brand entitlement by developing compelling content that increases audience growth, builds advertising relationships and supports continued distribution revenue on all platforms. | |
• | Exploiting Discovery’s distribution strength in the U.S. — with three channels reaching more than 90 million U.S. subscribers and six channels reaching approximately 50 million to 70 million U.S. subscribers — to build additional branded channels and businesses that can sustain long-term growth and profitability. For example, Discovery recently announced the repositioning of several emerging television networks to build stronger consumer brands through specific category ownership that supports more passionate audience loyalty and increased advertiser and affiliate interest and integration. |
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• | Maintaining a leadership position in non-fiction entertainment in international markets, and continuing to grow and improve the performance of the international operations. This will be achieved through expanding local advertising sales capabilities, creating licensing and digital growth opportunities, and improving operating efficiencies by strengthening development and promotional collaboration between U.S. and international network groups. | |
• | Developing and growing compelling and profitable content experiences on new platforms that are aligned with its core branded channels. Specifically, extending ownership of non-fiction entertainment to all digital media devices around the world to enhance the consumer entertainment experience, further monetize Discovery’s extensive programming library, and create additional vehicles on which to offer new products and services that deliver new revenue streams. |
Recent Developments |
• | Business Restructuring: Improved margins through revenue growth and cost efficiencies across Discovery’s divisions. Management implemented a growth strategy to address underperforming assets, closed all of its 103 retail stores and shifted the focus of its commerce business toe-commerce and licensing in order to broaden the reach of Discovery-branded products. Discovery also streamlined its education business to focus on direct-to-school products includingDiscovery Education streamingand significantly reduced the investment in direct-to-consumer services. These actions, coupled with an overall focus on improved efficiency, resulted in an approximate 25% reduction in global personnel in 2007. As a result of these restructurings, Discovery improved the operating cash flow margins from the properties that it continues to use and operate. | |
• | Global Content Sharing: Strengthened development and promotional collaboration between U.S. and international networks to improve operating margins, promote content sharing and build global brand strength. | |
• | Television Network Rebrands: In January 2008, Discovery Times Channel was rebranded as Investigation Discovery as a means to exploit Discovery’s extensive library of fact-based investigation and current affairs programming. In June 2008, Discovery expects to rebrand Discovery Home as Planet Green, the only24-hour eco-lifestyle television network committed to documenting, preserving and celebrating the planet. In January 2008, Discovery announced a proposed50-50 joint venture with Oprah Winfrey and Harpo, Inc. to rebrand Discovery Health as OWN: The Oprah Winfrey Network, a new multi-platform venture designed to entertain, inform and inspire people to live their best lives through the OWN Channel and the Oprah.com website. It is expected that Discovery Health Channel will be rebranded as OWN in the second half of 2009. | |
• | Digital Media Acquisitions and Website Relaunch: Expanded internal web operations while acquiring HowStuffWorks.com and TreeHugger.com, to create a portfolio of brand-aligned digital properties that expand Discovery’s cross-platform sales and promotional opportunities and realize economies through programs that can be produced once and used often in both long- and short-form across multiple platforms. In December 2007, Discovery completed the acquisition of HowStuffWorks.com, an award-winning online source of high-quality, unbiased and easy-to-understand explanations of how the world actually works, and in August 2007, Discovery acquired Treehugger.com, an eco-lifestyle website. Discovery relaunched its flagship website, Discovery.com, and is in the process of expanding and deepening the content of all of its channel websites (e.g., TLC.com, AnimalPlanet.com) to move beyond being television promotion vehicles and to focus on audience growth, engagement and improved monetization. Together with these recent acquisitions, Discovery now has approximately 25 million unique visitors per month to all of its wholly owned websites (source: Omniture, Inc.). |
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• | Dispositions- In May 2007, Discovery and Cox completed an exchange of Cox’s 25% interest in Discovery for all of the capital stock of a subsidiary of Discovery that held Discovery’s entire interest in Travel Channel, travelchannel.com and approximately $1.3 billion in cash. |
Business Operations |
Discovery Networks U.S. |
Discovery Channel • Launched in June 1985, Discovery Channel reached approximately 97 million U.S. subscribers as of December 31, 2007. • Discovery Channel brings viewers engaging stories and extraordinary experiences that share knowledge, satisfy curiosity and inspire the very joy of discovery. • Discovery’s flagship, Discovery Channel, was the second most widely distributed cable channel in the United States, according to The Nielsen Company as of December 31, 2007. • Some of the networks most popular returning and new series includeDeadliest Catch, Mythbusters, Dirty Jobs, Man Vs Wild, Smash Lab, Some Assembly Required, Fight Quest,andBone Detectives. Discovery Channel is also home to high-profile specials and mini-series, including the critically acclaimedPlanet Earthand the forthcomingWhen We Left Earth: The NASA Missions. • Target viewers are adults25-54, particularly men. • Discovery Channel is simulcast in HD. |
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TLC • Acquired by Discovery in 1991, TLC reached approximately 96 million U.S. subscribers as of December 31, 2007. • TLC features educational programming that explores life’s key transitions and turning points, and presents high-quality, relatable and authentic personal stories. • Series highlights on TLC includeL.A. Ink, Little People, Big World, Jon And Kate Plus 8, What Not To Wear, Miami Ink, Flip That House, and the recently relaunchedTrading Spaces. • Target viewers are adults18-49, particularly women. • TLC is simulcast in HD. |
Animal Planet • Launched in October 1996, Animal Planet reached approximately 94 million U.S. subscribers as of December 31, 2007. • With a new logo and on-air look, Animal Planet leads viewers to relate to animals as characters that inspire and engage, not merely creatures to observe. Animal Planet’s engaging, insightful and high-quality entertainment taps into the instincts that drive us all with compelling stories. • Programming highlights on Animal Planet includeMeerkat Manor, Orangutan Island, Animal Precinctand Jeff Corwin specials. • Target viewers are adults25-54, particularly women. • Animal Planet is simulcast in HD. |
Discovery Health • Launched in August 1999, Discovery Health reached approximately 68 million U.S. subscribers as of December 31, 2007. • Discovery Health takes viewers inside the fascinating and informative world of health and medicine to experience first-hand compelling, real-life stories of medical breakthroughs and human triumphs. | ||
• In January 2008, Discovery announced a planned joint venture with Oprah Winfrey and Harpo, Inc. to create OWN: The Oprah Winfrey Network, a new multi-platform venture designed to entertain, inform and inspire people to live their best lives. Oprah Winfrey will serve as Chairman of OWN, LLC and the venture will be50-50 owned by Discovery and Harpo. Discovery will handle distribution, origination and other operational requirements and both organizations will contribute advertising sales services to the venture. Discovery and Harpo are currently negotiating a definitive agreement to govern these arrangements. • Discovery Health is expected to be rebranded as OWN in the second half of 2009. • OWN will build on Discovery Health’s target audience of women25-54. • OWN will be simulcast in HD. |
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Discovery Kids • Launched in October 1996, Discovery Kids reached approximately 58 million U.S. subscribers as of December 31, 2007. • Discovery Kids lets kids of all ages (from preschoolers to ’tweens and teens) explore the world from their point of view. This network provides entertaining, engaging and high-quality programming that kids enjoy and parents trust. Kids can learn about science, adventure, exploration and natural history through documentaries, reality shows, scripted dramas and animated stories. • Series highlights on Discovery Kids include the animated Real Toon series TutensteinandSaving A Species: The Great Penguin Rescue. • Target viewers are children and families. |
Science Channel • Launched in October 1996, Science Channel reached approximately 52 million U.S. subscribers as of December 31, 2007. • Science Channel is devoted to science by celebrating the “why” in everything and providing context and understanding of the full spectrum of the wonders of science. • With a refreshed brand, Science Channel includes series such asSurvivorman, How It’s Made, Patent BendingandWeird Connections. • Target viewers are men25-54. • Science Channel is simulcast in HD. |
Planet Green • Planet Green is expected to be rebranded from Discovery Home in June 2008 with an expected reach of approximately 50 million U.S. subscribers. • Committed to documenting, preserving and celebrating the planet, Planet Green will be the only24-hour eco-lifestyle television network. • Planet Green will speak to people who want to understand green living and to those who are excited to make a difference by providing tools and information to meet the critical challenge of protecting our environment. • Target viewers will be adults18-54 with a focus on late teens/college-aged viewers, new parents and young baby boomers. • Planet Green will be simulcast in HD. • In August 2007, in support of the Planet Green initiative, Discovery purchased TreeHugger.com, an eco-lifestyle website with news, opinions and information spanning the green spectrum. Discovery has also launched companion website PlanetGreen.com with a focus on community and action oriented content. |
Investigation Discovery • Launched in March 2003, Investigation Discovery (formerly Discovery Times Channel) reached approximately 50 million U.S. subscribers as of December 31, 2007. • In January 2008, Discovery Times Channel was rebranded as Investigation Discovery, exploiting Discovery’s extensive library of fact-based investigation and current affairs programming that sheds new light on our culture, history and the human condition. • Programming highlights includeDateline On ID, Fugitive Task Force, andDiamond Road. • Target viewers are adults25-54. |
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Military Channel • Originally launched in 1996 as Discovery Wings and rebranded as Military Channel in January 2005, the network reached approximately 50 million U.S. subscribers as of December 31, 2007. • Military Channel salutes the sacrifices made by our men and women in uniform with real stories and access to a world of human drama, strategic innovation and long-held traditions. • Original programming includesWeaponologyandShowdown: Air Combat. • Target viewers are men35-64. |
FitTV • Acquired by Discovery in June 2001, FitTV reached approximately 43 million U.S. subscribers as of December 31, 2007. • FitTV is designed to inspire viewers to improve their fitness and well-being on their terms. • Programming features experts and entertaining shows that help people learn how to incorporate fitness into their daily lives. • Target viewers are adults25-54. |
HD Theater • Launched in June 2002, HD Theater reached approximately 11 million U.S. subscribers as of December 31, 2007. • HD Theater was one of the first nationwide24-hour-a-day,7-day-a-week high definition networks in the U.S. offering compelling, real-world content including adventure, nature, world culture, technology and engineering programming. • Programming highlights on HD Theater includeRisk Takers, Equatorand the critically acclaimedSunrise Earth. In addition, HD Theater offers “motorized” HD content including upcoming live muscle car auctions withMecum Auto Auctions. • Target viewers are adults25-54, particularly men. |
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Discovery.com • This flagship website is the official website for Discovery Channel and was relaunched in 2007 to feature more robust content, including a new media player, increased video clips and new search tools. • Discovery.com attracted an average of more than three million unique visitors per month in 2007. • Discovery is enhancing its other vertical sites (e.g. TLC.com, AnimalPlanet.com) to feature more robust content, a new media player, increased video clips and new search tools in order to move beyond being promotional vehicles for Discovery’s television networks and focus on visitor growth, engagement and improved monetization. • Discovery’s vertical sites attracted an average of more than 12 million unique visitors per month in 2007. |
HowStuffWorks.com • Acquired in December 2007, HowStuffWorks.com is an award-winning online source of high-quality, unbiased and easy-to-understand explanations of how the world actually works. • HowStuffWorks.com provides a high-profile platform for promoting and distributing Discovery’s extensive library of programming content and for developing advertising opportunities from the additional Discovery video content on this platform. Discovery believes that the mission alignment between Discovery and HowStuffWorks.com will allow for cross promotion and cross selling opportunities across multiple platforms. • HowStuffWorks.com attracted an average of more than 10 million unique visitors per month in 2007. |
TreeHugger.com • Acquired by Discovery in August 2007, TreeHugger.com is an eco-lifestyle web site that complements the pending debut of the Planet Green television network. Together, TreeHugger.com and PlanetGreen.com will provide consumers with a multi-platform offering across topics and issues around the environment and sustainable development. • TreeHugger.com attracted an average of more than one million unique visitors per month in 2007. • Discovery has also launched companion website PlanetGreen.com with a focus on community action oriented content. | ||
Petfinder.com • Acquired in November 2006, Petfinder.com provides an additional promotional platform for the Animal Planet brand. • Over 260,000 homeless pets in over 11,000 animal placement organizations across North America have their own homepages on Petfinder.com, the oldest and largest searchable directory of adoptable pets on the web. • Petfinder.com attracted an average of more than 3.5 million unique visitors per month in 2007. |
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Discovery Networks International |
Discovery Channel • Launched internationally in 1989, Discovery Channel reached approximately 240 million international subscribers in more than 170 countries as of December 31, 2007. • Discovery Channel’s international programming includes documentaries, docudramas and reality formats covering a wide range of topics and themes, including human adventure and exploration, engineering, science, history and world culture. |
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Animal Planet • Launched internationally in 1997, Animal Planet reached approximately 210 million international subscribers in over 160 countries as of December 31, 2007. • Animal Planet is dedicated to mankind’s fascination with the creatures that share our world, featuring programs such asMeerkat Manor, UnearthedandLemur Street. • The international Animal Planet channels are generally a50-50 joint venture with the BBC. |
Discovery Lifestyle Networks • Launched beginning in 1998, Discovery Lifestyle Networks reached approximately 213 million international subscribers in over 90 countries as of December 31, 2007. | ||
• Discovery Lifestyle Networks is a global portfolio of three lifestyle brands offering inspirational content that encourages viewers to pursue unique interests and experiences: Discovery Travel & Living, Discovery Home & Health and Discovery Real Time. | ||
• Discovery Travel & Living provides a mix of lifestyle programming on travel, food, design and décor. Discovery Home & Health provides relevant and practical programming on relationships, babies, beauty and wellbeing. Discovery Real Time features practical and motivating programming on how to make the most of free time. |
Discovery Science • Launched internationally in 1998, Discovery Science reached approximately 29 million international subscribers in over 60 countries as of December 31, 2007. • Discovery Science uncovers fascinating clues to the questions that have eluded us for centuries and reveals life’s greatest mysteries and smallest wonders. | ||
Discovery Kids. • Launched internationally in 1997, Discovery Kids reached approximately 21 million international subscribers in over 25 countries across Latin America, the Carribean and Canada as of December 31, 2007. • Discovery Kids provides a unique environment that nurtures children’s curiosity using characters and stories, enabling them to relate to real-life experiences. | ||
Discovery HD. • Launched internationally in 2005, Discovery HD reached subscribers in 15 countries as of December 31, 2007. • Discovery HD showcases dynamic content from Discovery’s library of thousands of hours of visually compelling HD footage includingDiscovery Atlas. |
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People+Arts. • Launched in 1997, People+Arts reached approximately 20 million international subscribers in Latin America, Spain and Portugal as of December 31, 2007. • People+Arts is the entertainment network from the BBC and Discovery that explores the complete range of human emotions, with engaging storytelling that is moving, unexpected and authentic. • People + Arts is a50-50 joint venture with the BBC. |
DMAX Germany. • Launched in Germany in 2006, DMAX reached approximately 27 million homes in Germany as of December 31, 2007. • DMAX is a free-to-air service which has broad distribution. DMAX generates only advertising revenue, offering a broad range of original content from Germany and around the world including documentaries, talk shows and reality-based series. |
Discovery en Español. • Launched in the U.S. in June 1998, Discovery en Español reached approximately eight million U.S. subscribers as of December 31, 2007. • Discovery en Español is a non-fiction network delivering content that stimulates, informs and empowers, giving viewers a fascinating look at the incredible and often surprising world from an Hispanic perspective. • Discovery en Español is designed to give viewers more of the programming they enjoy including original programming developed specifically for Spanish-speaking audiences. • Target viewers are adults18-49, particularly men. | ||
Discovery Familia. • Launched in the U.S. in August 2007, Discovery Familia reached approximately one million U.S. subscribers as of December 31, 2007. • Discovery Familia is Discovery’sSpanish-language network dedicated to bringing the best educational and entertaining, family-oriented programming to kids and families. • Target viewers are Hispanic children, women and families. |
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Discovery Commerce |
• | Discoverystore.comis ane-commerce site where customers can shop for a large assortment of proprietary Discovery merchandise and other products. Discoverystore.com logged more than 12 million unique visitors in 2007. Discoverystore.com also reaches consumers through relationships with leadinge-commerce sites such as Amazon.com. | |
• | The Discovery Channel Store Catalogis distributed to over nine million consumers annually and highlights a selection of proprietary and other products for the whole family. The catalog is a highly targeted marketing and branding tool driving online and phone sales. It also adds value as a cross promotional vehicle for network and corporate initiatives. | |
• | Domestic Licensinghas agreements with key manufacturers and retailers, including JAKKS, Activision, and others to develop long-term, strategic programs that translate Discovery’s network brands and signature properties into an array of merchandising opportunities. From Animal Planet toy and pet products,Mythbustersbooks, DVDs and calendars toMiami Inkapparel and accessories, domestic licensing develops products that capture the look and feel of Discovery’s core brands and programs. |
Discovery Education |
Content Development |
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Sources of Revenue |
Distribution Revenue |
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Advertising Revenue |
Commerce and Education Revenue |
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Operating Expenditures |
Discovery Limited Liability Company Agreement |
Ascent Media |
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Discovery |
MVPD Programming |
À la Carte Programming and Unbundling Proposals |
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Must Carry and Leased Access |
Children’s Programming |
Regulation of the Internet |
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(d) Financial Information About Geographic Areas |
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(e) Available Information |
Item 1A. | Risk Factors. |
Risk Factors Relating to the Ownership of our Common Stock |
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• | authorizing a capital structure with multiple series of common stock: a Series B that entitles the holders to ten votes per share, a Series A that entitles the holders to one vote per share and a Series C that, except as otherwise required by applicable law, entitles the holders to no voting rights; | |
• | authorizing the issuance of “blank check” preferred stock, which could be issued by our board of directors to increase the number of outstanding shares and thwart a takeover attempt; | |
• | classifying our board of directors with staggered three-year terms, which may lengthen the time required to gain control of our board of directors; |
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• | limiting who may call special meetings of shareholders; | |
• | prohibiting shareholder action by written consent (subject to certain exceptions), thereby requiring shareholder action to be taken at a meeting of the shareholders; | |
• | establishing advance notice requirements for nominations of candidates for election to our board of directors or for proposing matters that can be acted upon by shareholders at shareholder meetings; | |
• | requiring shareholder approval by holders of at least 80% of our voting power or the approval by at least 75% of our board of directors with respect to certain extraordinary matters, such as a merger or consolidation of our company, a sale of all or substantially all of our assets or an amendment to our restated certificate of incorporation; | |
• | requiring the consent of the holders of at least 75% of the outstanding Series B common stock (voting as a separate class) to certain share distributions and other corporate actions in which the voting power of the Series B common stock would be diluted by, for example, issuing shares having multiple votes per share as a dividend to holders of Series A common stock; and | |
• | the existence of authorized and unissued stock which would allow our board of directors to issue shares to persons friendly to current management, thereby protecting the continuity of its management, or which could be used to dilute the stock ownership of persons seeking to obtain control of us. |
Risk Factors Relating to Ascent Media |
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Risk Factors Relating to Discovery |
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Item 1B. | Unresolved Staff Comments. |
Item 2. | Properties. |
Item 3. | Legal Proceedings. |
Item 4. | Submission of Matters to a Vote of Security Holders. |
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Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Series A | Series B | |||||||||||||||
High | Low | High | Low | |||||||||||||
2007 | ||||||||||||||||
First quarter | $ | 19.48 | 15.52 | 19.46 | 15.70 | |||||||||||
Second quarter | $ | 24.70 | 19.12 | 24.70 | 19.25 | |||||||||||
Third quarter | $ | 29.33 | 21.92 | 29.25 | 21.98 | |||||||||||
Fourth quarter | $ | 29.81 | 22.55 | 30.25 | 25.40 | |||||||||||
2006 | ||||||||||||||||
First quarter | $ | 15.65 | 13.88 | 15.96 | 13.58 | |||||||||||
Second quarter | $ | 15.18 | 13.61 | 15.21 | 13.73 | |||||||||||
Third quarter | $ | 14.82 | 12.81 | 14.54 | 12.97 | |||||||||||
Fourth quarter | $ | 16.96 | 14.18 | 16.85 | 13.97 |
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Item 6. | Selected Financial Data. |
December 31, | ||||||||||||||||||||
2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||
amounts in thousands | ||||||||||||||||||||
Summary Balance Sheet Data: | ||||||||||||||||||||
Current assets | $ | 371,707 | 317,362 | 400,386 | 198,969 | 131,437 | ||||||||||||||
Investment in Discovery Communications Holding, LLC | $ | 3,271,553 | 3,129,157 | 3,018,622 | 2,945,782 | 2,863,003 | ||||||||||||||
Goodwill | $ | 1,909,823 | 2,074,789 | 2,133,518 | 2,135,446 | 2,130,897 | ||||||||||||||
Total assets | $ | 5,865,752 | 5,870,982 | 5,819,236 | 5,564,828 | 5,396,627 | ||||||||||||||
Current liabilities | $ | 120,137 | 121,887 | 93,773 | 108,527 | 60,595 | ||||||||||||||
Stockholders’ equity | $ | 4,494,321 | 4,549,264 | 4,575,425 | 4,347,279 | 4,260,269 |
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Years Ended December 31, | ||||||||||||||||||||
2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||
amounts in thousands, | ||||||||||||||||||||
except per share amounts | ||||||||||||||||||||
Summary Statement of Operations Data: | ||||||||||||||||||||
Net revenue | $ | 707,214 | 688,087 | 694,509 | 631,215 | 506,103 | ||||||||||||||
Operating income (loss)(1) | $ | (167,643 | ) | (115,137 | ) | (1,402 | ) | 16,935 | (2,404 | ) | ||||||||||
Share of earnings of Discovery | $ | 141,781 | 103,588 | 79,810 | 84,011 | 37,271 | ||||||||||||||
Net earnings (loss)(1) | $ | (68,392 | ) | (46,010 | ) | 33,276 | 66,108 | (52,394 | ) | |||||||||||
Basic and diluted earnings (loss) per common share — Series A and Series B(2) | $ | (0.24 | ) | (0.16 | ) | 0.12 | 0.24 | (0.19 | ) |
(1) | Includes impairment of goodwill of $165,347,000 and $93,402,000 for the years ended December 31, 2007 and 2006, respectively. | |
(2) | Basic and diluted net earnings (loss) per common share is based on (1) 280,199,000 shares, which is the number of shares issued in the spin off, for all periods prior to the spin off and (2) the actual number of weighted average outstanding shares for all periods subsequent to the spin off. |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
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• | We will spin-off to our shareholders a wholly-owned subsidiary holding cash and Ascent Media, except for those businesses of Ascent Media that provide sound, music, mixing, sound effects and other related services; | |
• | Immediately following the spin-off, we will combine with a new holding company (“New DHC”), and our existing stockholders will receive shares of common stock of New DHC; | |
• | As part of this transaction, Advance/Newhouse will contribute its interests in Discovery and Animal Planet to New DHC in exchange for preferred stock of New DHC that, immediately after the closing of the transactions, will be convertible at any time into shares initially representing one-third of the outstanding shares of common stock of New DHC. The preferred stock held by Advance/Newhouse will entitle it to elect two members to New DHC’s board of directors and to exercise approval rights with respect to the taking of specified actions by New DHC and Discovery. |
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Years Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
amounts in thousands | ||||||||||||
Segment Revenue | ||||||||||||
Creative Services group | $ | 420,504 | 417,876 | 421,797 | ||||||||
Network Services group | 286,710 | 270,211 | 272,712 | |||||||||
Corporate and other | — | — | — | |||||||||
$ | 707,214 | 688,087 | 694,509 | |||||||||
Segment Operating Cash Flow | ||||||||||||
Creative Services group | $ | 48,493 | 48,035 | 65,098 | ||||||||
Network Services group | 49,256 | 47,005 | 52,797 | |||||||||
Corporate and other | (30,831 | ) | (36,311 | ) | (39,270 | ) | ||||||
$ | 66,918 | 58,729 | 78,625 | |||||||||
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Payments Due by period | ||||||||||||||||||||
Less than | After 5 | |||||||||||||||||||
1 year | 1-3 years | 3-5 years | years | Total | ||||||||||||||||
amounts in thousands | ||||||||||||||||||||
Operating leases | $ | 31,374 | 58,673 | 39,316 | 62,080 | 191,443 | ||||||||||||||
Capital lease | 1,080 | 2,160 | 2,160 | 1,080 | 6,480 | |||||||||||||||
Other | 6,100 | — | — | — | 6,100 | |||||||||||||||
Total contractual obligations | $ | 38,554 | 60,833 | 41,476 | 63,160 | 204,023 | ||||||||||||||
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II-10
Table of Contents
U.S. Networks |
II-11
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International Networks |
II-12
Table of Contents
Commerce and Education |
II-13
Table of Contents
Consolidated Results |
II-14
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Years Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
amounts in thousands | ||||||||||||
Revenue | ||||||||||||
Advertising | $ | 1,345,033 | 1,243,500 | 1,187,823 | ||||||||
Distribution | 1,477,479 | 1,434,901 | 1,198,686 | |||||||||
Other | 304,821 | 205,270 | 157,849 | |||||||||
Total revenue | 3,127,333 | 2,883,671 | 2,544,358 | |||||||||
Expenses | ||||||||||||
Cost of revenue | (1,172,907 | ) | (1,032,789 | ) | (907,664 | ) | ||||||
SG&A expenses | (1,148,246 | ) | (1,104,116 | ) | (928,950 | ) | ||||||
Operating cash flow | 806,180 | 746,766 | 707,744 | |||||||||
Expenses arising from long-term incentive plans | (141,377 | ) | (39,233 | ) | (49,465 | ) | ||||||
Restructuring charges and asset impairments | (46,598 | ) | — | — | ||||||||
Depreciation and amortization | (130,576 | ) | (122,037 | ) | (112,653 | ) | ||||||
Gain from disposition of business | 134,671 | — | — | |||||||||
Operating income | 622,300 | 585,496 | 545,626 | |||||||||
Other Income (Expense) | ||||||||||||
Interest expense, net | (248,757 | ) | (194,255 | ) | (184,585 | ) | ||||||
Unrealized gains (losses) from derivative instruments, net | (8,636 | ) | 22,558 | 22,499 | ||||||||
Minority interests in consolidated subsidiaries | (8,266 | ) | (2,451 | ) | (43,696 | ) | ||||||
Other | 7,839 | 8,527 | 13,771 | |||||||||
Income from continuing operations before income taxes | 364,480 | 419,875 | 353,615 | |||||||||
Income tax expense | (77,466 | ) | (190,381 | ) | (173,427 | ) | ||||||
Income from continuing operations | 287,014 | 229,494 | 180,188 | |||||||||
Loss from discontinued operations, net of taxes | (65,023 | ) | (22,318 | ) | (20,568 | ) | ||||||
Net income | $ | 221,991 | 207,176 | 159,620 | ||||||||
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II-16
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Other Income and Expense |
II-17
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Years Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
amounts in thousands | ||||||||||||
Revenue | $ | 57,853 | 129,317 | 127,396 | ||||||||
Operating cash flow | $ | (27,904 | ) | (24,343 | ) | (21,106 | ) | |||||
Loss from discontinued operations before income taxes | $ | (99,427 | ) | (35,911 | ) | (31,652 | ) | |||||
Loss from discontinued operations, net of tax | $ | (65,023 | ) | (22,318 | ) | (20,568 | ) |
Years Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
amounts in thousands | ||||||||||||
Revenue | ||||||||||||
U.S. networks | $ | 1,972,321 | 1,893,808 | 1,743,358 | ||||||||
International networks | 1,033,449 | 911,445 | 738,094 | |||||||||
Commerce and education | 149,805 | 107,285 | 88,576 | |||||||||
Corporate and eliminations | (28,242 | ) | (28,867 | ) | (25,670 | ) | ||||||
Total revenue | $ | 3,127,333 | 2,883,671 | 2,544,358 | ||||||||
Operating Cash Flow | ||||||||||||
U.S. networks | $ | 774,268 | 828,443 | 745,980 | ||||||||
International networks | 210,090 | 153,127 | 128,837 | |||||||||
Commerce and education | 1,676 | (72,599 | ) | (25,285 | ) | |||||||
Corporate and eliminations | (179,854 | ) | (162,205 | ) | (141,788 | ) | ||||||
Total operating cash flow | $ | 806,180 | 746,766 | 707,744 | ||||||||
Operating cash flow margin | 25.8 | % | 25.9 | % | 27.8 | % | ||||||
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U.S. Networks |
Years Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
amounts in thousands | ||||||||||||
Revenue | ||||||||||||
Advertising | $ | 1,014,541 | 965,648 | 944,770 | ||||||||
Distribution | 862,542 | 865,613 | 736,713 | |||||||||
Other | 95,238 | 62,547 | 61,875 | |||||||||
Total revenue | 1,972,321 | 1,893,808 | 1,743,358 | |||||||||
Cost of revenue | (737,892 | ) | (635,874 | ) | (587,370 | ) | ||||||
SG&A expenses | (460,161 | ) | (429,491 | ) | (410,008 | ) | ||||||
Operating cash flow | $ | 774,268 | 828,443 | 745,980 | ||||||||
Operating cash flow margin | 39.3 | % | 43.7 | % | 42.8 | % | ||||||
U.S. Networks without Travel Channel |
Years Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
amounts in thousands | ||||||||||||
Revenue | ||||||||||||
Advertising | $ | 974,552 | 863,690 | 852,075 | ||||||||
Distribution | 840,262 | 813,342 | 693,339 | |||||||||
Other | 94,010 | 58,876 | 58,197 | |||||||||
Total revenue | 1,908,824 | 1,735,908 | 1,603,611 | |||||||||
Cost of revenue | (710,052 | ) | (560,241 | ) | (523,426 | ) | ||||||
SG&A expenses | (439,501 | ) | (383,064 | ) | (372,322 | ) | ||||||
Operating cash flow | $ | 759,271 | 792,603 | 707,863 | ||||||||
Operating cash flow margin | 39.8 | % | 45.7 | % | 44.1 | % | ||||||
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II-20
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International Networks |
Years Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
amounts in thousands | ||||||||||||
Revenue | ||||||||||||
Advertising | $ | 330,300 | 277,559 | 242,849 | ||||||||
Distribution | 614,937 | 569,288 | 462,049 | |||||||||
Other | 88,212 | 64,598 | 33,196 | |||||||||
Total revenue | 1,033,449 | 911,445 | 738,094 | |||||||||
Cost of revenue | (408,957 | ) | (390,783 | ) | (315,539 | ) | ||||||
SG&A expenses | (414,402 | ) | (367,535 | ) | (293,718 | ) | ||||||
Operating cash flow | $ | 210,090 | 153,127 | 128,837 | ||||||||
Operating cash flow margin | 20.3 | % | 16.8 | % | 17.5 | % | ||||||
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Commerce and Education |
Years Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
amounts in thousands | ||||||||||||
Revenue | $ | 149,805 | 107,285 | 88,576 | ||||||||
Cost of revenue | (90,976 | ) | (79,460 | ) | (59,567 | ) | ||||||
SG&A expenses | (57,153 | ) | (100,424 | ) | (54,294 | ) | ||||||
Operating Cash Flow | $ | 1,676 | (72,599 | ) | (25,285 | ) | ||||||
Operating cash flow margin | 1.1 | % | (67.7 | )% | (28.5 | )% | ||||||
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Term Loan B, due quarterly September 2007 to May 2014 | $ | 1,492,500 | ||
Term Loan, due quarterly December 2008 to October 2010 | 1,000,000 | |||
8.06% Senior Notes, semi annual interest, due March 2008 | 180,000 | |||
£10,000 Uncommitted Facility, due August 2008 | 8,785 | |||
€260,000.0 Revolving Loan, due April 2009 | 94,174 | |||
7.45% Senior Notes, semi annual interest, due September 2009 | 55,000 | |||
Revolving Loan, due October 2010 | 337,500 | |||
8.37% Senior Notes, semi annual interest, due March 2011 | 220,000 | |||
8.13% Senior Notes, semi annual interest, due September 2012 | 235,000 | |||
Senior Notes, semi annual interest, due December 2012 | 90,000 | |||
6.01% Senior Notes, semi annual interest, due December 2015 | 390,000 | |||
Total long-term debt | $ | 4,102,959 | ||
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Payments Due by Period(3) | ||||||||||||||||||||
Less than 1 | After | |||||||||||||||||||
Total | year | 1-3 years | 3-5 years | 5 years | ||||||||||||||||
Long-term debt | $ | 4,102,959 | 266,285 | 1,454,174 | 575,000 | 1,807,500 | ||||||||||||||
Interest payments(1) | 1,245,596 | 261,424 | 449,275 | 335,673 | 199,224 | |||||||||||||||
Capital leases | 44,107 | 9,042 | 15,828 | 9,202 | 10,035 | |||||||||||||||
Operating leases | 415,384 | 82,357 | 122,509 | 76,777 | 133,741 | |||||||||||||||
Program license fees | 558,183 | 325,509 | 110,362 | 80,843 | 41,469 | |||||||||||||||
Launch incentives | 12,572 | 4,492 | 8,080 | — | — | |||||||||||||||
Other(2) | 292,339 | 106,320 | 157,619 | 28,000 | 400 | |||||||||||||||
Total | $ | 6,671,140 | 1,055,429 | 2,317,847 | 1,105,495 | 2,192,369 | ||||||||||||||
(1) | Amounts (i) are based on our outstanding debt at December 31, 2007, (ii) assume the interest rates on our floating rate debt remain constant at the December 31, 2007 rates and (iii) assume that our existing debt is repaid at maturity. | |
(2) | Represents Discovery’s obligations to purchase goods and services whereby the underlying agreements are enforceable, legally binding and specify all significant terms. The more significant purchase obligations include: agreements related to audience ratings, market research, contracts for entertainment talent and other education and service project agreements. | |
(3) | Table does not include certain long-term obligations reflected in the Discovery consolidated balance sheet as the timing of the payments cannot be predicted or the amounts will not be settled in cash. The most significant of these obligations is the $141.7 million accrued under Discovery’s LTIP plans. In addition, amounts accrued in the Discovery consolidated balance sheet related to derivative financial instruments are not included in the table as such amounts may not be settled in cash or the timing of the payments cannot be predicted. |
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Item 7A. | Quantitative and Qualitative Disclosures about Market Risk. |
Item 8. | Financial Statements and Supplementary Data. |
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
Item 9A. | Controls and Procedures. |
Item 9B. | Other Information. |
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II-26
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II-27
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II-28
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December 31, 2007 and 2006
2007 | 2006 | |||||||
amounts in thousands | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 209,449 | 154,775 | |||||
Trade receivables, net | 144,342 | 147,436 | ||||||
Prepaid expenses | 14,815 | 11,522 | ||||||
Other current assets | 3,101 | 3,629 | ||||||
Total current assets | 371,707 | 317,362 | ||||||
Investments in marketable securities | 23,545 | 51,837 | ||||||
Investment in Discovery Communications Holding, LLC (“Discovery”) (note 6) | 3,271,553 | 3,129,157 | ||||||
Property and equipment, net (note 7) | 269,742 | 280,775 | ||||||
Goodwill (note 8) | 1,909,823 | 2,074,789 | ||||||
Other assets, net | 19,382 | 17,062 | ||||||
Total assets | $ | 5,865,752 | 5,870,982 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 26,298 | 43,656 | |||||
Accrued payroll and related liabilities | 26,127 | 32,292 | ||||||
Other accrued liabilities | 42,761 | 29,924 | ||||||
Deferred revenue | 24,951 | 16,015 | ||||||
Total current liabilities | 120,137 | 121,887 | ||||||
Deferred income tax liabilities (note 11) | 1,228,942 | 1,174,594 | ||||||
Other liabilities | 22,352 | 25,237 | ||||||
Total liabilities | 1,371,431 | 1,321,718 | ||||||
Commitments and contingencies (notes 15 and 16) | ||||||||
Stockholders’ equity (note 12): | ||||||||
Preferred stock, $.01 par value. Authorized 50,000,000 shares; no shares issued | — | — | ||||||
Series A common stock, $.01 par value. Authorized 600,000,000 shares; issued and outstanding 269,159,928 shares at December 31, 2007 and 268,194,966 shares at December 31, 2006 | 2,691 | 2,682 | ||||||
Series B common stock, $.01 par value. Authorized 50,000,000 shares; issued and outstanding 11,869,696 shares at December 31, 2007 and 12,025,088 shares at December 31, 2006 | 119 | 120 | ||||||
Series C common stock, $.01 par value. Authorized 600,000,000 shares; no shares issued | — | — | ||||||
Additional paid-in capital | 5,728,213 | 5,714,379 | ||||||
Accumulated deficit | (1,253,483 | ) | (1,183,831 | ) | ||||
Accumulated other comprehensive earnings | 16,781 | 15,914 | ||||||
Total stockholders’ equity | 4,494,321 | 4,549,264 | ||||||
Total liabilities and stockholders’ equity | $ | 5,865,752 | 5,870,982 | |||||
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2007 | 2006 | 2005 | ||||||||||
amounts in thousands, | ||||||||||||
except per share amounts | ||||||||||||
Net revenue | $ | 707,214 | 688,087 | 694,509 | ||||||||
Operating expenses: | ||||||||||||
Cost of services | 491,034 | 468,057 | 460,805 | |||||||||
Selling, general, and administrative, including stock-based compensation (notes 13 and 17) | 150,687 | 163,791 | 159,462 | |||||||||
Restructuring and other charges (note 9) | 761 | 12,092 | 4,112 | |||||||||
Gain on sale of operating assets | (704 | ) | (2,047 | ) | (4,845 | ) | ||||||
Depreciation and amortization | 67,732 | 67,929 | 76,377 | |||||||||
Impairment of goodwill (note 8) | 165,347 | 93,402 | — | |||||||||
874,857 | 803,224 | 695,911 | ||||||||||
Operating loss | (167,643 | ) | (115,137 | ) | (1,402 | ) | ||||||
Other income: | ||||||||||||
Share of earnings of Discovery (note 6) | 141,781 | 103,588 | 79,810 | |||||||||
Other income, net | 16,627 | 9,481 | 3,704 | |||||||||
158,408 | 113,069 | 83,514 | ||||||||||
Earnings (loss) before income taxes | (9,235 | ) | (2,068 | ) | 82,112 | |||||||
Income tax expense (note 11) | (59,157 | ) | (43,942 | ) | (48,836 | ) | ||||||
Net earnings (loss) | $ | (68,392 | ) | (46,010 | ) | 33,276 | ||||||
Other comprehensive earnings (loss), net of taxes (note 14): | ||||||||||||
Unrealized holding gains (losses) arising during the period | (6,606 | ) | (148 | ) | 651 | |||||||
Foreign currency translation adjustments | 7,934 | 17,922 | (14,821 | ) | ||||||||
Minimum pension liability adjustment | (461 | ) | — | — | ||||||||
Other comprehensive earnings (loss) | 867 | 17,774 | (14,170 | ) | ||||||||
Comprehensive earnings (loss) | $ | (67,525 | ) | (28,236 | ) | 19,106 | ||||||
Basic and diluted earnings (loss) per common share — Series A and Series B (note 4) | $ | (0.24 | ) | (0.16 | ) | 0.12 | ||||||
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2007 | 2006 | 2005 | ||||||||||
amounts in thousands | ||||||||||||
(see note 5) | ||||||||||||
Cash flows from operating activities: | ||||||||||||
Net earnings (loss) | $ | (68,392 | ) | (46,010 | ) | 33,276 | ||||||
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 67,732 | 67,929 | 76,377 | |||||||||
Stock-based compensation | 1,129 | 1,817 | 4,383 | |||||||||
Payments for stock-based compensation | — | — | (2,139 | ) | ||||||||
Impairment of goodwill | 165,347 | 93,402 | — | |||||||||
Share of earnings of Discovery | (141,781 | ) | (103,588 | ) | (79,810 | ) | ||||||
Gain on lease buyout | (6,992 | ) | — | — | ||||||||
Deferred income tax expense | 56,353 | 42,115 | 50,363 | |||||||||
Other non-cash credits, net | (1,559 | ) | (1,342 | ) | (4,684 | ) | ||||||
Changes in assets and liabilities, net of acquisitions: | ||||||||||||
Trade receivables | 3,752 | (9,718 | ) | 16,237 | ||||||||
Prepaid expenses and other current assets | (6,916 | ) | 1,345 | 10,804 | ||||||||
Payables and other liabilities | (11,674 | ) | 27,683 | (19,516 | ) | |||||||
Net cash provided by operating activities | 56,999 | 73,633 | 85,291 | |||||||||
Cash flows from investing activities: | ||||||||||||
Capital expenditures | (47,115 | ) | (77,541 | ) | (90,526 | ) | ||||||
Cash paid for acquisition, net of cash acquired | — | (46,793 | ) | — | ||||||||
Net sales (purchases) of marketable securities | 28,292 | (51,837 | ) | 12,800 | ||||||||
Cash proceeds from lease buyout | 7,138 | — | — | |||||||||
Cash proceeds from dispositions | 2,143 | 5,697 | 15,374 | |||||||||
Other investing activities, net | (5,117 | ) | 992 | (394 | ) | |||||||
Net cash used in investing activities | (14,659 | ) | (169,482 | ) | (62,746 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Net cash transfers from Liberty Media Corporation (“Liberty”) | — | — | 206,044 | |||||||||
Net cash from option exercises | 12,975 | 279 | — | |||||||||
Payment of capital lease obligations | (641 | ) | (7 | ) | (12 | ) | ||||||
Other financing activities, net | — | — | 134 | |||||||||
Net cash provided by financing activities | 12,334 | 272 | 206,166 | |||||||||
Net increase (decrease) in cash and cash equivalents | 54,674 | (95,577 | ) | 228,711 | ||||||||
Cash and cash equivalents at beginning of year | 154,775 | 250,352 | 21,641 | |||||||||
Cash and cash equivalents at end of year | $ | 209,449 | 154,775 | 250,352 | ||||||||
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Accumulated | ||||||||||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||||||||||
Preferred | Common Stock | Paid-in | Parent’s | Accumulated | Comprehensive | Stockholders’ | ||||||||||||||||||||||||||||||
Stock | Series A | Series B | Series C | Capital | Investment | Deficit | Earnings (Loss) | Equity | ||||||||||||||||||||||||||||
amounts in thousands | ||||||||||||||||||||||||||||||||||||
Balance at January 1, 2005 | $ | — | — | — | — | — | 5,506,066 | (1,171,097 | ) | 12,310 | 4,347,279 | |||||||||||||||||||||||||
Net earnings | — | — | — | — | — | — | 33,276 | — | 33,276 | |||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | — | (14,170 | ) | (14,170 | ) | |||||||||||||||||||||||||
Stock compensation | — | — | — | — | 640 | 2,222 | — | — | 2,862 | |||||||||||||||||||||||||||
Net cash transfers from Liberty | — | — | — | — | — | 206,044 | — | — | 206,044 | |||||||||||||||||||||||||||
Change in capitalization in connection with 2005 Spin Off (note 3) | — | 2,681 | 121 | — | 5,711,530 | (5,714,332 | ) | — | — | — | ||||||||||||||||||||||||||
Stock option exercises | — | — | — | — | 134 | — | — | — | 134 | |||||||||||||||||||||||||||
Balance at December 31, 2005 | — | 2,681 | 121 | — | 5,712,304 | — | (1,137,821 | ) | (1,860 | ) | 4,575,425 | |||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | (46,010 | ) | — | (46,010 | ) | |||||||||||||||||||||||||
Other comprehensive earnings | — | — | — | — | — | — | — | 17,774 | 17,774 | |||||||||||||||||||||||||||
Stock compensation | — | — | — | — | 1,796 | — | — | — | 1,796 | |||||||||||||||||||||||||||
Conversion of Series B to Series A | — | 1 | (1 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||||
Stock option exercises | — | — | — | — | 279 | — | — | — | 279 | |||||||||||||||||||||||||||
Balance at December 31, 2006 | — | 2,682 | 120 | — | 5,714,379 | — | (1,183,831 | ) | 15,914 | 4,549,264 | ||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | (68,392 | ) | — | (68,392 | ) | |||||||||||||||||||||||||
Other comprehensive earnings | — | — | — | — | — | — | — | 867 | 867 | |||||||||||||||||||||||||||
Stock compensation | — | — | — | — | 867 | — | — | — | 867 | |||||||||||||||||||||||||||
Cumulative effect of accounting change (note 11) | — | — | — | — | — | — | (1,260 | ) | — | (1,260 | ) | |||||||||||||||||||||||||
Conversion of Series B to Series A | — | 1 | (1 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||||
Stock option exercises | — | 8 | — | — | 12,967 | — | — | — | 12,975 | |||||||||||||||||||||||||||
Balance at December 31, 2007 | $ | — | 2,691 | 119 | — | 5,728,213 | — | (1,253,483 | ) | 16,781 | 4,494,321 | |||||||||||||||||||||||||
II-32
Table of Contents
December 31, 2007, 2006 and 2005
(1) | Basis of Presentation |
(2) | Newhouse Transaction and Ascent Spin Off |
• | DHC will spin-off to its shareholders a wholly-owned subsidiary holding cash and Ascent Media, except for those businesses of Ascent Media that provide sound, music, mixing, sound effects and other related services (the “Ascent Media Spin Off”); | |
• | Immediately following the spin-off, DHC will combine with a new holding company(“New DHC”), and DHC’s existing stockholders will receive shares of common stock of New DHC; |
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Table of Contents
• | As part of this transaction, Advance/Newhouse will contribute its interests in Discovery and Animal Planet to New DHC in exchange for preferred stock of New DHC that, immediately after the closing of the transactions, will be convertible at any time into shares initially representing one-third of the outstanding shares of common stock of New DHC. The preferred stock held by Advance/Newhouse will entitle it to elect two members to New DHC’s board of directors and to exercise approval rights with respect to the taking of specified actions by New DHC and Discovery. |
(3) | 2005 Spin Off Transaction |
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Table of Contents
(4) | Summary of Significant Accounting Policies |
Cash and Cash Equivalents |
Trade Receivables |
Balance | Charged | Balance | ||||||||||||||||||
Beginning | (Credited) | Acquired and | End of | |||||||||||||||||
of Year | to Expense | Write-offs | Other Activity | Year | ||||||||||||||||
amounts in thousands | ||||||||||||||||||||
2007 | $ | 9,045 | 892 | — | (943 | ) | 8,994 | |||||||||||||
2006 | $ | 7,708 | 1,023 | — | 314 | 9,045 | ||||||||||||||
2005 | $ | 12,104 | (619 | ) | (2,443 | ) | (1,334 | ) | 7,708 | |||||||||||
Concentration of Credit Risk and Significant Customers |
Fair Value of Financial Instruments |
Investment in Discovery |
II-35
Table of Contents
Property and Equipment |
Buildings | 20 years | |||
Leasehold improvements | 15 years or lease term, if shorter | |||
Furniture and fixtures | 7 years | |||
Computers | 3 years | |||
Machinery and equipment | 5 to 7 years |
Goodwill |
Other Intangible Assets |
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Table of Contents
Long-Lived Assets |
Foreign Currency Translation |
Revenue Recognition |
Income Taxes |
Advertising Costs |
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Table of Contents
Stock-Based Compensation |
Year Ended | ||||
December 31, | ||||
2005 | ||||
Net earnings, as reported | $ | 33,276 | ||
Add: | ||||
Stock-based employee compensation expense included in reported net earnings, net of taxes | 2,309 | |||
Deduct: | ||||
Stock-based employee compensation expense determined under fair value based method for all awards, net of taxes | (8,247 | ) | ||
Pro forma net earnings | $ | 27,338 | ||
Pro forma basic and diluted earnings per common share: | ||||
As reported | $ | .12 | ||
Pro forma for fair value stock compensation | $ | .10 | ||
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Table of Contents
Earnings (Loss) Per Common Share — Series A and Series B |
Estimates |
Recent Accounting Pronouncements |
II-39
Table of Contents
(5) | Supplemental Disclosure of Cash Flow Information |
Years Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
amounts in thousands | ||||||||||||
Cash paid for acquisition: | ||||||||||||
Fair value of assets acquired | $ | — | 48,264 | — | ||||||||
Net liabilities assumed | — | (1,471 | ) | — | ||||||||
Cash paid for acquisition, net of cash acquired | $ | — | 46,793 | — | ||||||||
Cash paid during the year for income taxes | $ | 1,321 | 1,871 | 1,190 | ||||||||
Non-cash financing activity: | ||||||||||||
Capital lease | $ | 5,774 | — | — | ||||||||
(6) | Investment in Discovery |
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Consolidated Balance Sheets |
December 31, | ||||||||
2007 | 2006 | |||||||
amounts in thousands | ||||||||
Cash and cash equivalents | $ | 44,951 | 52,263 | |||||
Other current assets | 1,032,282 | 918,373 | ||||||
Property and equipment | 397,430 | 424,041 | ||||||
Goodwill and intangible assets | 5,051,843 | 472,939 | ||||||
Programming rights, long term | 1,048,193 | 1,253,553 | ||||||
Other assets | 385,731 | 255,384 | ||||||
Total assets | $ | 7,960,430 | 3,376,553 | |||||
Current liabilities | $ | 850,495 | 734,524 | |||||
Long-term debt | 4,109,085 | 2,633,237 | ||||||
Other liabilities | 243,867 | 175,255 | ||||||
Mandatorily redeemable equity in subsidiaries | 48,721 | 94,825 | ||||||
Members’ equity (deficit) | 2,708,262 | (261,288 | ) | |||||
Total liabilities and members’ equity (deficit) | $ | 7,960,430 | 3,376,553 | |||||
Consolidated Statements of Operations |
Years Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
amounts in thousands | ||||||||||||
Revenue | $ | 3,127,333 | 2,883,671 | 2,544,358 | ||||||||
Cost of revenue | (1,172,907 | ) | (1,032,789 | ) | (907,664 | ) | ||||||
Selling, general and administrative | (1,148,246 | ) | (1,104,116 | ) | (928,950 | ) | ||||||
Restructuring and other charges | (20,424 | ) | — | — | ||||||||
Equity-based compensation | (141,377 | ) | (39,233 | ) | (49,465 | ) | ||||||
Depreciation and amortization | (130,576 | ) | (122,037 | ) | (112,653 | ) | ||||||
Asset impairment | (26,174 | ) | — | — | ||||||||
Gain from disposition of business | 134,671 | — | — | |||||||||
Operating income | 622,300 | 585,496 | 545,626 | |||||||||
Interest expense, net | (248,757 | ) | (194,255 | ) | (184,585 | ) | ||||||
Other income (expense), net | (9,063 | ) | 28,634 | (7,426 | ) | |||||||
Income tax expense | (77,466 | ) | (190,381 | ) | (173,427 | ) | ||||||
Earnings from continuing operations | 287,014 | 229,494 | 180,188 | |||||||||
Loss from discontinued operations, net of income tax | (65,023 | ) | (22,318 | ) | (20,568 | ) | ||||||
Net earnings | $ | 221,991 | 207,176 | 159,620 | ||||||||
DHC’s share of Discovery’s net earnings | $ | 141,781 | 103,588 | 79,810 | ||||||||
Note: | In the third quarter of 2007, Discovery closed its 103 mall-based and stand-alone Discovery Channel stores. As a result, Discovery’s consolidated statements of operations above have been prepared to reflect the retail store business as discontinued operations. |
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(7) | Property and Equipment |
2007 | 2006 | |||||||
amounts in thousands | ||||||||
Property and equipment, net: | ||||||||
Land | $ | 42,525 | 42,336 | |||||
Buildings | 222,375 | 217,210 | ||||||
Equipment | 231,460 | 192,208 | ||||||
496,360 | 451,754 | |||||||
Accumulated depreciation | (226,618 | ) | (170,979 | ) | ||||
$ | 269,742 | 280,775 | ||||||
(8) | Goodwill and Other Intangible Assets |
Creative | Network | |||||||||||||||
Services | Services | |||||||||||||||
Group | Group | Discovery | Total | |||||||||||||
amounts in thousands | ||||||||||||||||
Net balance at January 1, 2006 | $ | 200,001 | 162,517 | 1,771,000 | 2,133,518 | |||||||||||
Acquisition of AccentHealth | — | 32,224 | — | 32,224 | ||||||||||||
Goodwill impairment | (93,402 | ) | — | — | (93,402 | ) | ||||||||||
Foreign exchange and other | — | 2,449 | — | 2,449 | ||||||||||||
Net balance at December 31, 2006 | 106,599 | 197,190 | 1,771,000 | 2,074,789 | ||||||||||||
Goodwill impairment | — | (165,347 | ) | — | (165,347 | ) | ||||||||||
Foreign exchange and other | — | 381 | — | 381 | ||||||||||||
Net balance at December 31, 2007 | $ | 106,599 | 32,224 | 1,771,000 | 1,909,823 | |||||||||||
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(9) | Restructuring Charges |
Opening | Ending | |||||||||||||||
Balance | Additions | Deductions | Balance | |||||||||||||
amounts in thousands | ||||||||||||||||
Excess facility costs and other | ||||||||||||||||
December 31, 2005 | $ | 2,589 | 4,112 | (2,718 | ) | 3,983 | ||||||||||
Severance | 155 | 9,005 | (2,896 | ) | 6,264 | |||||||||||
Excess facility costs | 3,828 | 3,087 | (2,251 | ) | 4,664 | |||||||||||
December 31, 2006 | $ | 3,983 | 12,092 | (5,147 | ) | 10,928 | ||||||||||
Severance | 6,264 | 761 | (5,681 | ) | 1,344 | |||||||||||
Excess facility costs | 4,664 | — | (2,703 | ) | 1,961 | |||||||||||
December 31, 2007 | $ | 10,928 | 761 | (8,384 | ) | 3,305 | ||||||||||
(10) | Acquisitions |
AccentHealth |
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(11) | Income Taxes |
Years Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
amounts in thousands | ||||||||||||
Current | ||||||||||||
Federal | $ | (584 | ) | (1,015 | ) | — | ||||||
State | (2,075 | ) | (1,340 | ) | (637 | ) | ||||||
Foreign | (145 | ) | 528 | 2,164 | ||||||||
(2,804 | ) | (1,827 | ) | 1,527 | ||||||||
Deferred | ||||||||||||
Federal | (46,079 | ) | (33,711 | ) | (26,402 | ) | ||||||
State | (9,925 | ) | (7,250 | ) | (20,743 | ) | ||||||
Foreign | (349 | ) | (1,154 | ) | (3,218 | ) | ||||||
(56,353 | ) | (42,115 | ) | (50,363 | ) | |||||||
Total tax expense | $ | (59,157 | ) | (43,942 | ) | (48,836 | ) | |||||
Years Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
amounts in thousands | ||||||||||||
Domestic | $ | 10,036 | 16,761 | 76,907 | ||||||||
Foreign | (19,271 | ) | (18,829 | ) | 5,205 | |||||||
$ | (9,235 | ) | (2,068 | ) | 82,112 | |||||||
Years Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
amounts in thousands | ||||||||||||
Computed expected tax benefit (expense) | $ | 3,232 | 724 | (28,739 | ) | |||||||
State and local income taxes, net of federal income taxes | (3,015 | ) | (4,477 | ) | (3,976 | ) | ||||||
Change in valuation allowance affecting tax expense | (25,181 | ) | (8,711 | ) | 1,630 | |||||||
Goodwill impairment not deductible for tax purposes | (26,421 | ) | (26,655 | ) | — | |||||||
U.S. taxes on foreign income | (3,503 | ) | 776 | 34 | ||||||||
Non-deductible expenses | (1,960 | ) | (2,273 | ) | (2,361 | ) | ||||||
Change in estimated state tax rate | — | — | (15,263 | ) | ||||||||
Other, net | (2,309 | ) | (3,326 | ) | (161 | ) | ||||||
Income tax expense | $ | (59,157 | ) | (43,942 | ) | (48,836 | ) | |||||
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2007 | 2006 | |||||||
amounts in thousands | ||||||||
Current assets: | ||||||||
Accounts receivable reserves | $ | 3,127 | 3,572 | |||||
Accrued liabilities | 11,241 | 12,821 | ||||||
14,368 | 16,393 | |||||||
Noncurrent assets: | ||||||||
Net operating loss carryforwards | 58,309 | 61,956 | ||||||
Intangible assets | 39,971 | 9,497 | ||||||
Other | 5,809 | 8,527 | ||||||
104,089 | 79,980 | |||||||
Total deferred tax assets, gross | 118,457 | 96,373 | ||||||
Valuation allowance | (117,551 | ) | (96,223 | ) | ||||
Total deferred tax assets, net | 906 | 150 | ||||||
Current liabilities: | ||||||||
Other | (2,000 | ) | (1,761 | ) | ||||
Noncurrent liabilities: | ||||||||
Investments | (1,228,965 | ) | (1,174,744 | ) | ||||
Other | (883 | ) | — | |||||
(1,229,848 | ) | (1,174,744 | ) | |||||
Total deferred tax liabilities | (1,231,848 | ) | (1,176,505 | ) | ||||
Net deferred tax liability | $ | (1,230,942 | ) | (1,176,355 | ) | |||
December 31, | ||||||||
2007 | 2006 | |||||||
amounts in thousands | ||||||||
Current deferred tax liabilities | $ | 2,000 | 1,761 | |||||
Long-term deferred tax liabilities, net of deferred tax assets | 1,228,942 | 1,174,594 | ||||||
Net deferred tax liabilities | $ | 1,230,942 | 1,176,355 | |||||
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(12) | Stockholders’ Equity |
Preferred Stock |
Common Stock |
(13) | Stock Options and Other Long-Term Incentive Compensation |
Stock Options |
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DHC | DHC | |||||||||||||||
Series A | Series B | |||||||||||||||
Common | Common | |||||||||||||||
Stock | WAEP | Stock | WAEP | |||||||||||||
Outstanding at January 1, 2007 | 1,943,804 | $ | 15.45 | 2,996,525 | $ | 18.87 | ||||||||||
Grants | 40,000 | $ | 22.90 | — | ||||||||||||
Exercises | (828,570 | ) | $ | 15.94 | — | |||||||||||
Cancellations | (2,942 | ) | $ | 31.61 | — | |||||||||||
Outstanding at December 31, 2007 | 1,152,292 | $ | 15.32 | 2,996,525 | $ | 18.87 | ||||||||||
Exercisable at December 31, 2007 | 926,743 | $ | 15.47 | 2,936,525 | $ | 18.93 | ||||||||||
(14) | Other Comprehensive Earnings (Loss) |
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Accumulated | ||||||||||||||||
Foreign | Unrealized | Minimum | Other | |||||||||||||
Currency | Holding | Pension | Comprehensive | |||||||||||||
Translation | Gains (losses) | Liability | Earnings (loss), | |||||||||||||
Adjustments | on Securities | Adjustment | Net of Taxes | |||||||||||||
amounts in thousands | ||||||||||||||||
Balance at January 1, 2005 | $ | 12,033 | 277 | — | 12,310 | |||||||||||
Other comprehensive loss | (14,821 | ) | 651 | — | (14,170 | ) | ||||||||||
Balance at December 31, 2005 | (2,788 | ) | 928 | — | (1,860 | ) | ||||||||||
Other comprehensive earnings | 17,922 | (148 | ) | — | 17,774 | |||||||||||
Balance at December 31, 2006 | 15,134 | 780 | — | 15,914 | ||||||||||||
Other comprehensive earnings | 7,934 | (6,606 | ) | (461 | ) | 867 | ||||||||||
Balance at December 31, 2007 | $ | 23,068 | (5,826 | ) | (461 | ) | 16,781 | |||||||||
Tax | ||||||||||||
Before-tax | (Expense) | Net-of-tax | ||||||||||
Amount | Benefit | Amount | ||||||||||
amounts in thousands | ||||||||||||
Year ended December 31, 2007: | ||||||||||||
Foreign currency translation adjustments | $ | 13,125 | (5,191 | ) | 7,934 | |||||||
Unrealized holding losses on securities arising during period | (10,928 | ) | 4,322 | (6,606 | ) | |||||||
Minimum pension liability adjustment | (763 | ) | 302 | (461 | ) | |||||||
Other comprehensive earnings | $ | 1,434 | (567 | ) | 867 | |||||||
Year ended December 31, 2006: | ||||||||||||
Foreign currency translation adjustments | $ | 29,648 | (11,726 | ) | 17,922 | |||||||
Unrealized holding losses on securities arising during period | (245 | ) | 97 | (148 | ) | |||||||
Other comprehensive earnings | $ | 29,403 | (11,629 | ) | 17,774 | |||||||
Year ended December 31, 2005: | ||||||||||||
Foreign currency translation adjustments | $ | (24,518 | ) | 9,697 | (14,821 | ) | ||||||
Unrealized holding gains on securities arising during period | 1,077 | (426 | ) | 651 | ||||||||
Other comprehensive loss | $ | (23,441 | ) | 9,271 | (14,170 | ) | ||||||
(15) | Employee Benefit Plans |
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(16) | Commitments and Contingencies |
Year ended December 31: | ||||
2008 | $ | 31,374 | ||
2009 | $ | 30,964 | ||
2010 | $ | 27,709 | ||
2011 | $ | 22,362 | ||
2012 | $ | 16,954 | ||
Thereafter | $ | 62,080 |
(17) | Related Party Transactions |
(18) | Information About Operating Segments |
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Consolidated Reportable Segments | ||||||||||||||||||||
Creative | Network | Equity | ||||||||||||||||||
Services | Services | Corporate | Consolidated | Affiliate- | ||||||||||||||||
Group | Group(1) | and Other | Total | Discovery | ||||||||||||||||
amounts in thousands | ||||||||||||||||||||
Year ended December 31, 2007 | ||||||||||||||||||||
Revenue from external customers | $ | 420,504 | 286,710 | — | 707,214 | 3,127,333 | ||||||||||||||
Operating cash flow | $ | 48,493 | 49,256 | (30,831 | ) | 66,918 | 806,180 | |||||||||||||
Capital expenditures | $ | 23,494 | 19,789 | 3,832 | 47,115 | 80,553 | ||||||||||||||
Depreciation and amortization | $ | 33,089 | 28,636 | 6,007 | 67,732 | 130,576 | ||||||||||||||
Total assets | $ | 369,845 | 257,679 | 5,238,228 | 5,865,752 | 7,960,430 | ||||||||||||||
Year ended December 31, 2006 | ||||||||||||||||||||
Revenue from external customers | $ | 417,876 | 270,211 | — | 688,087 | 2,883,671 | ||||||||||||||
Operating cash flow | $ | 48,035 | 47,005 | (36,311 | ) | 58,729 | 746,766 | |||||||||||||
Capital expenditures | $ | 27,126 | 44,331 | 6,084 | 77,541 | 90,138 | ||||||||||||||
Depreciation and amortization | $ | 38,661 | 23,055 | 6,213 | 67,929 | 122,037 | ||||||||||||||
Total assets | $ | 410,313 | 382,848 | 5,077,821 | 5,870,982 | 3,376,553 | ||||||||||||||
Year ended December 31, 2005 | ||||||||||||||||||||
Revenue from external customers | $ | 421,797 | 272,712 | — | 694,509 | 2,544,358 | ||||||||||||||
Operating cash flow | $ | 65,098 | 52,797 | (39,270 | ) | 78,625 | 707,744 | |||||||||||||
Capital expenditures | $ | 47,179 | 38,476 | 4,871 | 90,526 | 99,684 | ||||||||||||||
Depreciation and amortization | $ | 38,644 | 27,046 | 10,687 | 76,377 | 112,653 | ||||||||||||||
Total assets | $ | 470,213 | 323,558 | 5,025,465 | 5,819,236 | 3,174,620 |
(1) | Included in Network Services Group revenue is broadcast services revenue of $158,273,000, $158,151,000 and $149,568,000 and systems integration revenue of $128,437,000, $112,060,000 and $123,144,000 in 2007, 2006 and 2005, respectively. |
Years Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
amounts in thousands | ||||||||||||
Segment operating cash flow | $ | 66,918 | 58,729 | 78,625 | ||||||||
Stock-based compensation | (1,129 | ) | (1,817 | ) | (4,383 | ) | ||||||
Restructuring and other charges | (761 | ) | (12,092 | ) | (4,112 | ) | ||||||
Depreciation and amortization | (67,732 | ) | (67,929 | ) | (76,377 | ) | ||||||
Impairment of goodwill | (165,347 | ) | (93,402 | ) | — | |||||||
Share of earnings of Discovery | 141,781 | 103,588 | 79,810 | |||||||||
Other, net | 17,035 | 10,855 | 8,549 | |||||||||
Earnings (loss) before income taxes | $ | (9,235 | ) | (2,068 | ) | 82,112 | ||||||
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Years Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
amounts in thousands | ||||||||||||
Revenue | ||||||||||||
United States | $ | 561,594 | 535,792 | 525,288 | ||||||||
United Kingdom | 120,821 | 129,540 | 149,928 | |||||||||
Other countries | 24,799 | 22,755 | 19,293 | |||||||||
$ | 707,214 | 688,087 | 694,509 | |||||||||
Property and equipment, net | ||||||||||||
United States | $ | 178,299 | 184,052 | |||||||||
United Kingdom | 68,548 | 70,363 | ||||||||||
Other countries | 22,895 | 26,360 | ||||||||||
$ | 269,742 | 280,775 | ||||||||||
(19) | Quarterly Financial Information (Unaudited) |
1st | 2nd | 3rd | 4th | |||||||||||||
Quarter | Quarter | Quarter | Quarter | |||||||||||||
amounts in thousands, except per share amounts | ||||||||||||||||
2007: | ||||||||||||||||
Revenue | $ | 173,882 | 177,220 | 177,913 | 178,199 | |||||||||||
Operating income (loss) | $ | (1,201 | ) | (2,929 | ) | (1,553 | ) | (161,960 | ) | |||||||
Net earnings (loss) | $ | 20,464 | 74,217 | 7,507 | (170,580 | ) | ||||||||||
Basic and diluted net earnings (loss) per common share | $ | .07 | .26 | .03 | (.61 | ) | ||||||||||
2006: | ||||||||||||||||
Revenue | $ | 153,568 | 165,789 | 169,876 | 198,854 | |||||||||||
Operating loss | $ | (2,857 | ) | (6,252 | ) | (97,350 | ) | (8,678 | ) | |||||||
Net earnings (loss) | $ | 11,615 | 13,734 | (76,633 | ) | 5,274 | ||||||||||
Basic and diluted net earnings (loss) per common share | $ | .04 | .05 | (.27 | ) | .02 | ||||||||||
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Item 10. | Directors, Executive Officers and Corporate Governance |
Item 11. | Executive Compensation |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Item 13. | Certain Relationships and Related Transactions, and Director Independence |
Item 14. | Principal Accounting Fees and Services |
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Item 15. | Exhibits and Financial Statement Schedules. |
Page No. | ||||
Discovery Holding Company: | ||||
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(i) | All schedules have been omitted because they are not applicable, not material or the required information is set forth in the financial statements or notes thereto. |
(ii) | Separate financial statements for Discovery Communications Holding, LLC: |
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2 — Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession: | ||||
2.1 | Reorganization Agreement among Liberty Media Corporation, Discovery Holding Company (“DHC”) and Ascent Media Group, Inc. (incorporated by reference to Exhibit 2.1 to DHC’s Registration Statement on Form 10, dated July 15, 2005 (FileNo. 000-51205) (the “Form 10”)). | |||
3 — Articles of Incorporation and Bylaws: | ||||
3.1 | Restated Certificate of Incorporation of DHC (incorporated by reference to Exhibit 3.1 to the Form 10). | |||
3.2 | Bylaws of DHC (incorporated by reference to Exhibit 3.2 to the Form 10). | |||
4 — Instruments Defining the Rights of Securities Holders, including Indentures: | ||||
4.1 | Specimen Certificate for shares of the Series A common stock, par value $.01 per share, of DHC (incorporated by reference to Exhibit 4.1 to the Form 10). |
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4.2 | Specimen Certificate for shares of the Series B common stock, par value $.01 per share, of DHC (incorporated by reference to Exhibit 4.2 to the Form 10). | |||
4.3 | Rights Agreement between DHC and EquiServe Trust Company, N.A., as Rights Agent (incorporated by reference to Exhibit 4.3 to the Form 10). | |||
10 — Material Contracts: | ||||
10.1 | Amended and Restated Limited Liability Company Agreement of Discovery Communications Holding, LLC, dated as of May 14, 2007, by and among Advance/Newhouse Programming Partnership, LMC Discovery, Inc. and John S. Hendricks, filed herewith. | |||
10.2 | Form of Tax Sharing Agreement between Liberty Media Corporation and DHC (incorporated by reference to Exhibit 10.6 to the Form 10). | |||
10.3 | Discovery Holding Company 2005 Incentive Plan (As Amended and Restated Effective August 15, 2007) (incorporated by reference to Exhibit 10.1 to the Quarterly Report onForm 10-Q of Discovery Holding Company for the quarter ended September 30, 2007 (FileNo. 000-51205) as filed on November 7, 2007). | |||
10.4 | Discovery Holding Company 2005 Non-Employee Director Incentive Plan (As Amended and Restated Effective August 15, 2007) (incorporated by reference to Exhibit 10.2 to the Quarterly Report onForm 10-Q of Discovery Holding Company for the quarter ended September 30, 2007 (FileNo. 000-51205) as filed on November 7, 2007). | |||
10.5 | Discovery Holding Company Transitional Stock Adjustment Plan (As Amended and Restated Effective August 15, 2007) (incorporated by reference to Exhibit 10.3 to the Quarterly Report onForm 10-Q of Discovery Holding Company for the quarter ended September 30, 2007 (FileNo. 000-51205) as filed on November 7, 2007). | |||
10.6 | Agreement between DHC and John C. Malone (incorporated by reference to Exhibit 10.10 to the Form 10). | |||
10.7 | Agreement, dated June 24, 2005, between Discovery and DHC (incorporated by reference to Exhibit 10.11 to the Form 10). | |||
10.8 | Indemnification Agreement, dated as of June 24, 2005, between Cox and DHC (incorporated by reference to Exhibit 10.12 to the Form 10). | |||
10.9 | Indemnification Agreement, dated as of June 24, 2005, between NewChannels and DHC (incorporated by reference to Exhibit 10.13 to the Form 10). | |||
10.10 | Form of Indemnification Agreement with Directors and Executive Officers (incorporated by reference to Exhibit 10.14 to the Form 10). | |||
21 — Subsidiaries of Discovery Holding Company, filed herewith. | ||||
23.1 | Consent of KPMG LLP, filed herewith. | |||
23.2 | Consent of PricewaterhouseCoopers LLP, filed herewith. | |||
31.1 | Rule 13a-14(a)/15d — 14(a) Certification, filed herewith. | |||
31.2 | Rule 13a-14(a)/15d — 14(a) Certification, filed herewith. | |||
31.3 | Rule 13a-14(a)/15d — 14(a) Certification, filed herewith. | |||
32 — Section 1350 Certification, filed herewith. |
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Successor | Predecessor | ||||||||
Company | Company | ||||||||
December 31, 2007 | December 31, 2006 | ||||||||
in thousands, except share data | |||||||||
ASSETS | |||||||||
Current assets | |||||||||
Cash and cash equivalents | $ | 44,951 | $ | 52,263 | |||||
Accounts receivable, less allowances of $22,419 and $25,175 | 741,745 | 657,552 | |||||||
Inventories | 10,293 | 35,716 | |||||||
Deferred income taxes | 103,723 | 76,156 | |||||||
Content rights, net | 79,162 | 64,395 | |||||||
Other current assets | 97,359 | 84,554 | |||||||
Total current assets | 1,077,233 | 970,636 | |||||||
Property and equipment, net | 397,430 | 424,041 | |||||||
Content rights, net, less current portion | 1,048,193 | 1,253,553 | |||||||
Deferred launch incentives | 242,655 | 207,032 | |||||||
Goodwill | 4,870,187 | 365,266 | |||||||
Intangibles, net | 181,656 | 107,673 | |||||||
Investments in and advances to unconsolidated affiliates | 100,724 | 15,564 | |||||||
Other assets | 42,352 | 32,788 | |||||||
TOTAL ASSETS | $ | 7,960,430 | $ | 3,376,553 | |||||
LIABILITIES AND MEMBERS’ EQUITY/STOCKHOLDERS’ DEFICIT | |||||||||
Current liabilities | |||||||||
Accounts payable and accrued liabilities | $ | 267,818 | $ | 316,804 | |||||
Accrued payroll and employee benefits | 183,823 | 122,431 | |||||||
Launch incentives payable | 1,544 | 17,978 | |||||||
Content rights payable | 56,334 | 57,694 | |||||||
Current portion of long-term incentive plan liabilities | 141,562 | 43,274 | |||||||
Current portion of long-term debt | 32,006 | 7,546 | |||||||
Income taxes payable | 23,629 | 55,264 | |||||||
Unearned revenue | 78,155 | 68,339 | |||||||
Other current liabilities | 65,624 | 45,194 | |||||||
Total current liabilities | 850,495 | 734,524 | |||||||
Long-term debt, less current portion | 4,109,085 | 2,633,237 | |||||||
Derivative financial instruments, less current portion | 49,110 | 8,282 | |||||||
Launch incentives payable, less current portion | 6,114 | 10,791 | |||||||
Long-term incentive plan liabilities, less current portion | — | 41,186 | |||||||
Content rights payable, less current portion | 2,459 | 3,846 | |||||||
Deferred income taxes | 10,619 | 46,289 | |||||||
Other liabilities | 175,565 | 64,861 | |||||||
Total liabilities | 5,203,447 | 3,543,016 | |||||||
Mandatorily redeemable interests in subsidiaries | 48,721 | 94,825 | |||||||
Commitments and contingencies | |||||||||
Members’ Equity/Stockholders’ deficit | |||||||||
Class A common stock; $.01 par value; zero shares authorized, issued or outstanding at December 31, 2007; 100,000 shares authorized, 51,119 shares issued, less 719 shares of treasury stock at December 31, 2006 | — | 1 | |||||||
Class B common stock; $.01 par value; zero shares authorized, issued or outstanding at December 31, 2007; 60,000 shares authorized, 50,615 shares issued and held in treasury stock at December 31, 2006 | — | — | |||||||
Additional paid-in capital | — | 21,093 | |||||||
Members’ equity (51,119 member units issued, less 13,319 repurchased and retired) | 2,533,694 | — | |||||||
Retained earnings (deficit) | 184,712 | (306,135 | ) | ||||||
Accumulated other comprehensive (loss) income | (10,144 | ) | 23,753 | ||||||
Total members’ equity/stockholders’ deficit | 2,708,262 | (261,288 | ) | ||||||
TOTAL LIABILITIES AND MEMBERS’ EQUITY/STOCKHOLDERS’ DEFICIT | $ | 7,960,430 | $ | 3,376,553 | |||||
IV-5
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Successor | |||||||||||||||||
Company | Predecessor Company | ||||||||||||||||
May 15, 2007 | January 1, 2007 | Year Ended | Year Ended | ||||||||||||||
through | through | December 31, | December 31, | ||||||||||||||
December 31, 2007 | May 14, 2007 | 2006 | 2005 | ||||||||||||||
in thousands | |||||||||||||||||
OPERATING REVENUE | |||||||||||||||||
Advertising | $ | 874,894 | $ | 470,139 | $ | 1,243,500 | $ | 1,187,823 | |||||||||
Distribution | 930,386 | 547,093 | 1,434,901 | 1,198,686 | |||||||||||||
Other | 222,626 | 82,195 | 205,270 | 157,849 | |||||||||||||
Total operating revenue | 2,027,906 | 1,099,427 | 2,883,671 | 2,544,358 | |||||||||||||
OPERATING EXPENSES | |||||||||||||||||
Cost of revenue, exclusive of depreciation and amortization shown below | 799,716 | 373,191 | 1,032,789 | 907,664 | |||||||||||||
Selling, general and administrative | 823,918 | 486,129 | 1,143,349 | 978,415 | |||||||||||||
Depreciation and amortization | 82,807 | 73,943 | 122,037 | 112,653 | |||||||||||||
Gain from disposition of business | (134,671 | ) | — | — | — | ||||||||||||
Total operating expenses | 1,571,770 | 933,263 | 2,298,175 | 1,998,732 | |||||||||||||
INCOME FROM OPERATIONS | 456,136 | 166,164 | 585,496 | 545,626 | |||||||||||||
OTHER INCOME (EXPENSE) | |||||||||||||||||
Interest, net | (180,157 | ) | (68,600 | ) | (194,255 | ) | (184,585 | ) | |||||||||
Realized and unrealized (losses) gains from non-hedged derivative instruments, net | (10,986 | ) | 2,350 | 22,558 | 22,499 | ||||||||||||
Minority interests in consolidated subsidiaries | (7,133 | ) | (1,133 | ) | (2,451 | ) | (43,696 | ) | |||||||||
Equity in earnings of unconsolidated affiliates | 5,093 | 3,529 | 7,060 | 4,660 | |||||||||||||
Other, net | (448 | ) | (335 | ) | 1,467 | 9,111 | |||||||||||
Total other expense, net | (193,631 | ) | (64,189 | ) | (165,621 | ) | (192,011 | ) | |||||||||
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | 262,505 | 101,975 | 419,875 | 353,615 | |||||||||||||
Income tax expense | 25,303 | 52,163 | 190,381 | 173,427 | |||||||||||||
INCOME FROM CONTINUING OPERATIONS | 237,202 | 49,812 | 229,494 | 180,188 | |||||||||||||
DISCONTINUED OPERATIONS | |||||||||||||||||
Loss from discontinued operations, net of income tax benefit | (52,490 | ) | (12,533 | ) | (22,318 | ) | (20,568 | ) | |||||||||
LOSS FROM DISCONTINUED OPERATIONS | (52,490 | ) | (12,533 | ) | (22,318 | ) | (20,568 | ) | |||||||||
NET INCOME | $ | 184,712 | $ | 37,279 | $ | 207,176 | $ | 159,620 | |||||||||
IV-6
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Successor | |||||||||||||||||
Company | Predecessor Company | ||||||||||||||||
May 15, 2007 | January 1, 2007 | Year Ended | Year Ended | ||||||||||||||
through | through | December 31, | December 31, | ||||||||||||||
December 31, 2007 | May 14, 2007 | 2006 | 2005 | ||||||||||||||
in thousands | |||||||||||||||||
OPERATING ACTIVITIES | |||||||||||||||||
Net income | $ | 184,712 | $ | 37,279 | $ | 207,176 | $ | 159,620 | |||||||||
Adjustments to reconcile net income to cash provided by (used in) operations: | |||||||||||||||||
Depreciation and amortization | 111,208 | 77,186 | 133,634 | 123,209 | |||||||||||||
Amortization of deferred launch incentives and representation rights | 58,425 | 37,158 | 77,778 | 83,411 | |||||||||||||
Provision (reversal) for losses on accounts receivable | (2 | ) | 1,855 | 3,691 | 12,217 | ||||||||||||
Expenses arising from long-term incentive plans | 78,527 | 62,850 | 39,233 | 49,465 | |||||||||||||
Equity in earnings of unconsolidated affiliates | (5,093 | ) | (3,529 | ) | (7,060 | ) | (4,660 | ) | |||||||||
Deferred income taxes | (70,978 | ) | 10,511 | 108,903 | 109,383 | ||||||||||||
Realized and unrealized gains on derivative financial instruments, net | 10,986 | (2,350 | ) | (22,558 | ) | (22,499 | ) | ||||||||||
Gain from disposition of business | (134,671 | ) | — | — | — | ||||||||||||
Non-cash minority interest charges | 7,133 | 1,133 | 2,451 | 43,696 | |||||||||||||
Gain on sale of investments | — | — | (1,467 | ) | (12,793 | ) | |||||||||||
Other non-cash (income) charges | 1,733 | (4,263 | ) | 2,447 | 9,675 | ||||||||||||
Changes in assets and liabilities, net of business combinations and dispositions: | |||||||||||||||||
Accounts receivable | (45,808 | ) | (29,507 | ) | (84,598 | ) | (37,207 | ) | |||||||||
Inventories | 21,666 | 4,805 | (4,560 | ) | 1,853 | ||||||||||||
Other assets | 27,682 | (23,872 | ) | (7,434 | ) | (18,748 | ) | ||||||||||
Content rights, net of payables | 110,811 | (2,689 | ) | (84,377 | ) | (108,155 | ) | ||||||||||
Accounts payable and accrued liabilities | 119,769 | (93,260 | ) | 73,646 | 47,913 | ||||||||||||
Representation rights | — | — | 93,233 | (6,000 | ) | ||||||||||||
Deferred launch incentives | (25,623 | ) | (197,624 | ) | (49,386 | ) | (35,731 | ) | |||||||||
Long-term incentive plan liabilities | (76,315 | ) | (7,773 | ) | (841 | ) | (325,756 | ) | |||||||||
Cash provided by (used in) operations | 374,162 | (132,090 | ) | 479,911 | 68,893 | ||||||||||||
INVESTING ACTIVITIES | |||||||||||||||||
Acquisition of property and equipment | (55,965 | ) | (24,588 | ) | (90,138 | ) | (99,684 | ) | |||||||||
Business combinations, net of cash acquired | (306,094 | ) | — | (194,905 | ) | (400 | ) | ||||||||||
Purchase of intangibles | — | — | — | (583 | ) | ||||||||||||
Investments in and advances to unconsolidated affiliates | — | — | — | (363 | ) | ||||||||||||
Redemption of interests in subsidiaries | — | (44,000 | ) | (180,000 | ) | (92,874 | ) | ||||||||||
Proceeds from sale of investments | — | — | 1,467 | 14,664 | |||||||||||||
Cash used in investing activities | (362,059 | ) | (68,588 | ) | (463,576 | ) | (179,240 | ) | |||||||||
FINANCING ACTIVITIES | |||||||||||||||||
Proceeds from issuance of long-term debt | 1,286,362 | 211,277 | 316,813 | 1,785,955 | |||||||||||||
Principal payments of long-term debt | (11,742 | ) | (2,356 | ) | (307,030 | ) | (1,697,068 | ) | |||||||||
Deferred financing fees | (4,690 | ) | (16 | ) | (1,144 | ) | (4,810 | ) | |||||||||
Repurchase of member’s interest | (1,284,544 | ) | — | — | — | ||||||||||||
Contributions from minority shareholders | — | — | — | 603 | |||||||||||||
Other financing | (17,590 | ) | (2,473 | ) | (9,963 | ) | 32,153 | ||||||||||
Cash (used in) provided by financing activities | (32,204 | ) | 206,432 | (1,324 | ) | 116,833 | |||||||||||
Effect of exchange rate changes on cash and cash equivalents | 2,658 | 4,377 | 2,761 | 3,723 | |||||||||||||
CHANGE IN CASH AND CASH EQUIVALENTS | (17,443 | ) | 10,131 | 17,772 | 10,209 | ||||||||||||
Cash and cash equivalents, beginning of period | 62,394 | 52,263 | 34,491 | 24,282 | |||||||||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 44,951 | $ | 62,394 | $ | 52,263 | $ | 34,491 | |||||||||
IV-7
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Accumulated Other | ||||||||||||||||||||||||||||||||
Comprehensive Income (Loss) | ||||||||||||||||||||||||||||||||
Unrealized | ||||||||||||||||||||||||||||||||
Additional | Gain | |||||||||||||||||||||||||||||||
Paid-in | Unrealized | (Loss) | ||||||||||||||||||||||||||||||
Class A | Capital/ | Retained | Foreign | Gain | from | |||||||||||||||||||||||||||
Common Stock | Members’ | Earnings | Currency | (Loss) on | Hedging | |||||||||||||||||||||||||||
At Par | Redeemable | Equity | (Deficit) | Translation | Investment | Activities | TOTAL | |||||||||||||||||||||||||
in thousands | ||||||||||||||||||||||||||||||||
Predecessor Company: | ||||||||||||||||||||||||||||||||
Balance, December 31, 2004 | $ | 1 | $ | — | $ | 21,093 | $ | (672,931 | ) | $ | 22,732 | $ | 1,179 | $ | — | $ | (627,926 | ) | ||||||||||||||
Comprehensive income | ||||||||||||||||||||||||||||||||
Net income | 159,620 | |||||||||||||||||||||||||||||||
Foreign currency translation, net of tax of $9.6 million | (16,017 | ) | ||||||||||||||||||||||||||||||
Unrealized loss on investments, net of tax of $0.1 million | (101 | ) | ||||||||||||||||||||||||||||||
Unamortized gain on cash flow hedge, net of tax of $1.3 million | 2,066 | |||||||||||||||||||||||||||||||
Total comprehensive income | 145,568 | |||||||||||||||||||||||||||||||
Balance, December 31, 2005 | $ | 1 | $ | — | $ | 21,093 | $ | (513,311 | ) | $ | 6,715 | $ | 1,078 | $ | 2,066 | $ | (482,358 | ) | ||||||||||||||
Comprehensive income | ||||||||||||||||||||||||||||||||
Net income | $ | 207,176 | ||||||||||||||||||||||||||||||
Foreign currency translation, net of tax of $8.8 million | $ | 14,458 | ||||||||||||||||||||||||||||||
Unrealized loss on investments, net of tax of $0.2 million | $ | (355 | ) | |||||||||||||||||||||||||||||
Amortization of gain on cash flow hedge, net of tax of $0.1 million | $ | (209 | ) | |||||||||||||||||||||||||||||
Total comprehensive income | $ | 221,070 | ||||||||||||||||||||||||||||||
Balance, December 31, 2006 | $ | 1 | $ | — | $ | 21,093 | $ | (306,135 | ) | $ | 21,173 | $ | 723 | $ | 1,857 | $ | (261,288 | ) | ||||||||||||||
Comprehensive income | ||||||||||||||||||||||||||||||||
Net income for the period January 1, 2007 through May 14, 2007 | 37,279 | |||||||||||||||||||||||||||||||
Foreign currency translation, net of tax of $4.7 million | 7,691 | |||||||||||||||||||||||||||||||
Unrealized gain on investments, net of tax of $0.9 million | 1,552 | |||||||||||||||||||||||||||||||
Amortization of gain on cash flow hedge | (77 | ) | ||||||||||||||||||||||||||||||
Cumulative effect for the adoption of FIN 48 | (5,011 | ) | ||||||||||||||||||||||||||||||
Total comprehensive income | 41,434 | |||||||||||||||||||||||||||||||
Balance, May 14, 2007 | $ | 1 | $ | — | $ | 21,093 | $ | (273,867 | ) | $ | 28,864 | $ | 2,275 | $ | 1,780 | $ | (219,854 | ) | ||||||||||||||
Successor Company: | ||||||||||||||||||||||||||||||||
Formation of Successor Company | ||||||||||||||||||||||||||||||||
Pushdown of investor basis | 4,392,804 | 4,392,804 | ||||||||||||||||||||||||||||||
Comprehensive income | ||||||||||||||||||||||||||||||||
Net income for the period May 15, 2007 through December 31, 2007 | 184,712 | |||||||||||||||||||||||||||||||
Foreign currency translation, net of tax of $4.4 million | 7,354 | |||||||||||||||||||||||||||||||
Unrealized gain on investments, net of tax of $1.8 million | 3,011 | |||||||||||||||||||||||||||||||
Changes from hedging activities, net of tax of $12.2 million | (20,509 | ) | ||||||||||||||||||||||||||||||
Total comprehensive income | 174,568 | |||||||||||||||||||||||||||||||
Repurchase of members’ interest | (1,859,110 | ) | (1,859,110 | ) | ||||||||||||||||||||||||||||
Balance, December 31, 2007 | $ | 2,533,694 | $ | 184,712 | $ | 7,354 | $ | 3,011 | $ | (20,509 | ) | $ | 2,708,262 | |||||||||||||||||||
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3. | Supplemental Disclosures to Consolidated Statements of Cash Flows |
Successor | Predecessor | ||||||||||||||||
May 15 | January 1 | ||||||||||||||||
through | through | ||||||||||||||||
December 31, | May 14, | ||||||||||||||||
2007 | 2007 | 2006 | 2005 | ||||||||||||||
in thousands | |||||||||||||||||
Cash paid for acquisitions: | |||||||||||||||||
Fair value of assets acquired | $ | 419,154 | $ | — | $ | 223,293 | $ | 400 | |||||||||
Fair value of liabilities Assumed | (113,060 | ) | — | (28,388 | ) | — | |||||||||||
Cash paid for acquisitions, net of cash acquired | $ | 306,094 | $ | — | $ | 194,905 | $ | 400 | |||||||||
Cash paid for interest | $ | 179,669 | $ | 77,849 | $ | 196,195 | $ | 171,151 | |||||||||
Cash paid for income taxes | $ | 58,323 | $ | 16,554 | $ | 70,215 | $ | 27,678 |
4. | Business Combinations |
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HSW, Animal Planet and | ||||
Asset (Liability) | Treehugger, Combined | |||
in thousands | ||||
Current assets and content | $ | 22,399 | ||
Investment in HSWi stock | 79,375 | |||
Other tangible assets | 1,313 | |||
Finite-lived intangibles (including brand names, customer lists and trademarks) | 119,421 | |||
Goodwill | 196,646 | |||
Liabilities assumed | (14,753 | ) | ||
Deferred taxes | (44,585 | ) | ||
Estimated redemption liability to HSW shareholders | (53,722 | ) | ||
Cash paid, net of cash acquired | $ | 306,094 | ||
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• | Petfinder.com, a facilitator of pet adoptions and PetsIncredible, a producer and distributor of pet-training videos. During 2007, the former owners earned payment of certain contingent consideration in connection with this acquisition, resulting in the addition of $11.0 million in goodwill. | |
• | Clearvue and SVE, Inc., a provider of curriculum-oriented media educational products. | |
• | Academy123, Inc., a provider of on-line supplemental, educational content focusing largely on mathematics and sciences. In May 2007, Discovery recorded an asset impairment of $20.6 million, including $11.5 million of goodwill, for goodwill and intangible assets established during 2006 related to Academy 123, Inc. The business had not been integrated into the education reporting unit, and management decided to scale back its education business to consumers. | |
• | Thinklink, Inc., a provider of formative assessment testing services to schools servicing students in grades K through 12. |
DMAX, Antenna and | ||||
Other Acquisitions, | ||||
Asset (Liability) | Combined | |||
in thousands | ||||
Current assets and content | $ | 40,365 | ||
Other tangible assets | 7,765 | |||
Finite-lived intangible assets | 73,378 | |||
Goodwill | 101,785 | |||
Liabilities assumed | (28,388 | ) | ||
Cash paid, net of cash acquired | $ | 194,905 | ||
5. | Discontinued Operations |
IV-17
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Successor | Predecessor | ||||||||||||||||
May 15 through | January 1 through | ||||||||||||||||
December 31, 2007 | May 14, 2007 | 2006 | 2005 | ||||||||||||||
in thousands | |||||||||||||||||
Revenue | $ | 30,491 | $ | 27,362 | $ | 129,317 | $ | 127,396 | |||||||||
Loss from discontinued operations before income taxes | $ | (81,115 | ) | $ | (18,312 | ) | $ | (35,911 | ) | $ | (31,652 | ) | |||||
Loss from discontinued operations, net of tax | $ | (52,490 | ) | $ | (12,533 | ) | $ | (22,318 | ) | $ | (20,568 | ) |
December 31, | |||||||||
Successor | Predecessor | ||||||||
2007 | 2006 | ||||||||
in thousands | |||||||||
Current assets | $ | — | $ | 38,106 | |||||
Total assets | $ | — | $ | 67,707 | |||||
Current liabilities | $ | (6,349 | ) | $ | (29,961 | ) | |||
Total liabilities | $ | (6,349 | ) | $ | (39,339 | ) |
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6. | Content Rights |
December 31, | |||||||||
Successor | Predecessor | ||||||||
Content Rights | 2007 | 2006 | |||||||
in thousands | |||||||||
Produced content rights | |||||||||
Completed | $ | 1,346,985 | $ | 1,476,830 | |||||
In process | 195,025 | 161,942 | |||||||
Co-produced content rights | |||||||||
Completed | 499,127 | 681,105 | |||||||
In process | 53,984 | 86,359 | |||||||
Licensed content rights | |||||||||
Acquired | 209,082 | 213,691 | |||||||
Prepaid | 21,690 | 10,386 | |||||||
Content rights, at cost | 2,325,893 | 2,630,313 | |||||||
Accumulated amortization | (1,198,538 | ) | (1,312,365 | ) | |||||
Content rights, net | 1,127,355 | 1,317,948 | |||||||
Current portion, licensed content rights | (79,162 | ) | (64,395 | ) | |||||
Non-current portion | $ | 1,048,193 | $ | 1,253,553 | |||||
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7. | Property and Equipment |
December 31, | |||||||||
Successor | Predecessor | ||||||||
Property and Equipment | 2007 | 2006 | |||||||
in thousands | |||||||||
Equipment and software | $ | 478,616 | $ | 411,583 | |||||
Land | 28,781 | 28,781 | |||||||
Buildings | 154,227 | 153,737 | |||||||
Furniture, fixtures, leasehold improvements and other | 151,417 | 217,884 | |||||||
Assets in progress | 14,471 | 11,833 | |||||||
Property and equipment, at cost | 827,512 | 823,818 | |||||||
Accumulated depreciation and amortization | (430,082 | ) | (399,777 | ) | |||||
Property and equipment, net | $ | 397,430 | $ | 424,041 | |||||
8. | Sale of Equity Investments |
December 31, | |||||||||
Successor | Predecessor | ||||||||
Goodwill and Intangible Assets | 2007 | 2006 | |||||||
in thousands | |||||||||
Goodwill | $ | 4,870,187 | $ | 365,266 | |||||
Trademarks, net of accumulated amortization of $2,272 and $1,905 | $ | 62,193 | $ | 12,322 | |||||
Customer lists, net of accumulated amortization of $76,919 and $136,049 | 67,282 | 26,500 | |||||||
Other, net of accumulated amortization of $77,026 and $55,355 | 52,181 | 68,851 | |||||||
Intangibles, net | $ | 181,656 | $ | 107,673 | |||||
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Reconciliation of net carrying amount of goodwill | in thousands | |||
Balance at January 1, 2007 (Predecessor) | $ | 365,266 | ||
Impairment (Predecessor) (Note 4) | (11,478 | ) | ||
Translation (Predecessor) | 2,047 | |||
Push down of investor basis (Successor) (Note 1) | 4,591,581 | |||
Disposals (Successor) (Note 1) | (280,838 | ) | ||
Acquisitions (Successor) (Note 4) | 198,109 | |||
Translation (Successor) | 5,500 | |||
Balance at December 31, 2007 (Successor) | $ | 4,870,187 | ||
IV-21
Table of Contents
Accounting | ||
Affiliates: | Method | |
Joint Ventures with the BBC: | ||
JV Programs LLC (“JVP”) | Consolidated | |
Joint Venture Network LLC (“JVN”) | Consolidated | |
Animal Planet Europe | Consolidated | |
Animal Planet Latin America | Consolidated | |
People & Arts Latin America | Consolidated | |
Animal Planet Asia | Consolidated | |
Animal Planet Japan | Consolidated | |
Animal Planet Canada | Equity | |
Other Ventures: | ||
Animal Planet United States (see Note 12) | Consolidated | |
Discovery Canada | Equity | |
Discovery Japan | Equity | |
Discovery Health Canada | Equity | |
Discovery Kids Canada | Equity | |
Discovery Civilization Canada | Equity | |
HSWi (See Note 4) | Equity |
IV-22
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11. | Debt |
December 31, | |||||||||
Successor | Predecessor | ||||||||
Debt | 2007 | 2006 | |||||||
in thousands | |||||||||
$1,000,000.0 Term Loan A due quarterly December 2008 to October 2010 | $ | 1,000,000 | $ | 1,000,000 | |||||
$1,555,000.0 Revolving Loan, due October 2010 | 337,500 | 249,500 | |||||||
€260,000.0 Revolving Loan, due April 2009 | 94,174 | 187,828 | |||||||
$1,500,000.0 Term Loan B due quarterly September 2007 to May 2014 | 1,492,500 | — | |||||||
8.06% Senior Notes, semi-annual interest, due March 2008 | 180,000 | 180,000 | |||||||
7.45% Senior Notes, semi-annual interest, due September 2009 | 55,000 | 55,000 | |||||||
8.37% Senior Notes, semi-annual interest, due March 2011 | 220,000 | 220,000 | |||||||
8.13% Senior Notes, semi-annual interest, due September 2012 | 235,000 | 235,000 | |||||||
Floating Rate Senior Notes, semi-annual interest, due December 2012 | 90,000 | 90,000 | |||||||
6.01% Senior Notes, semi-annual interest, due December 2015 | 390,000 | 390,000 | |||||||
£10,000.0 Uncommitted Facility, due August 2008 | 8,785 | — | |||||||
Obligations under capital leases | 37,172 | 32,355 | |||||||
Other notes payable | 960 | 1,100 | |||||||
Subtotal | 4,141,091 | 2,640,783 | |||||||
Current portion | (32,006 | ) | (7,546 | ) | |||||
Total long-term debt | $ | 4,109,085 | $ | 2,633,237 | |||||
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12. | Mandatorily Redeemable Interests in Subsidiaries |
December 31, | |||||||||
Successor | Predecessor | ||||||||
Mandatorily Redeemable Interests in Subsidiaries | 2007 | 2006 | |||||||
in thousands | |||||||||
Animal Planet LP | $ | — | $ | 48,950 | |||||
People & Arts Latin America and Animal Planet Channel Group | 48,721 | 45,875 | |||||||
Mandatorily redeemable interests in subsidiaries | $ | 48,721 | $ | 94,825 | |||||
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13. | Commitments and Contingencies |
Year ending December 31, | ||||||||||||||||
Future Minimum Payments | Leases | Content | Other | Total | ||||||||||||
in thousands | ||||||||||||||||
2008 | $ | 80,691 | $ | 269,175 | $ | 106,187 | $ | 456,053 | ||||||||
2009 | 65,991 | 66,616 | 85,546 | 218,153 | ||||||||||||
2010 | 56,518 | 41,287 | 71,246 | 169,051 | ||||||||||||
2011 | 41,360 | 40,176 | 23,852 | 105,388 | ||||||||||||
2012 | 35,417 | 40,667 | 4,148 | 80,232 | ||||||||||||
Thereafter | 133,741 | 41,469 | 400 | 175,610 | ||||||||||||
Total | $ | 413,718 | $ | 499,390 | $ | 291,379 | $ | 1,204,487 | ||||||||
IV-25
Table of Contents
14. | Employee Savings Plans |
15. | Long-term Incentive Plans |
IV-26
Table of Contents
Successor | Predecessor | ||||||||||||||||
May 15 - | January 1 - | ||||||||||||||||
Weighted Average Assumptions | December 31, 2007 | May 14, 2007 | 2006 | 2005 | |||||||||||||
Risk-free interest rate | 3.20 | % | 4.72 | % | 4.78 | % | 4.36 | % | |||||||||
Expected term (years) | 1.48 | 3.87 | 3.86 | 4.75 | |||||||||||||
Expected volatility | 27.93 | % | 23.78 | % | 27.06 | % | 30.36 | % | |||||||||
Dividend yield | 0 | % | 0 | % | 0 | % | 0 | % |
Successor | Predecessor | ||||||||||||||||||||||||||||||||
May 15 - | January 1 - | ||||||||||||||||||||||||||||||||
December 31, 2007 | May 14, 2007 | 2006 | 2005 | ||||||||||||||||||||||||||||||
Weighted | Weighted | Weighted | Weighted | ||||||||||||||||||||||||||||||
Average | Average | Average | Average | ||||||||||||||||||||||||||||||
Exercise | Exercise | Exercise | Exercise | ||||||||||||||||||||||||||||||
Units | Price | Units | Price | Units | Price | Units | Price | ||||||||||||||||||||||||||
Outstanding at Beginning of period | 26.7 | $ | 16.01 | 26.3 | $ | 15.00 | 24.2 | $ | 14.82 | — | $ | — | |||||||||||||||||||||
Units exchanged | — | — | — | — | — | — | 7.8 | 12.77 | |||||||||||||||||||||||||
Units granted | 6.4 | 29.65 | 7.8 | 18.66 | 3.5 | 16.36 | 16.4 | 15.81 | |||||||||||||||||||||||||
Units exercised | (1.1 | ) | 15.69 | (2.3 | ) | 14.01 | (0.1 | ) | 13.12 | — | — | ||||||||||||||||||||||
Units redeemed/cancelled | (5.2 | ) | 15.29 | (5.1 | ) | 15.82 | (1.3 | ) | 15.43 | — | — | ||||||||||||||||||||||
Outstanding at end of period | 26.8 | 19.42 | 26.7 | 16.01 | 26.3 | 15.00 | 24.2 | 14.82 | |||||||||||||||||||||||||
Vested at Period-end | 6.6 | $ | 13.97 | 6.5 | $ | 13.84 | 8.5 | $ | 13.78 | 1.6 | $ | 11.22 | |||||||||||||||||||||
IV-27
Table of Contents
16. | Income Taxes |
Successor | Predecessor | ||||||||||||||||
May 15 - | January 1 - | ||||||||||||||||
Income From Continuing Operations | December 31, | May 14, | |||||||||||||||
Before Taxes | 2007 | 2007 | 2006 | 2005 | |||||||||||||
Domestic | $ | 254,772 | $ | 86,601 | $ | 444,504 | $ | 358,065 | |||||||||
Foreign | 7,733 | 15,374 | (24,629 | ) | (4,450 | ) | |||||||||||
Income from continuing operations before taxes | $ | 262,505 | $ | 101,975 | $ | 419,875 | $ | 353,615 | |||||||||
Successor | Predecessor | ||||||||||||||||
May 15 - | January 1 - | ||||||||||||||||
December 31, | May 14, | ||||||||||||||||
Income Tax Expense | 2007 | 2007 | 2006 | 2005 | |||||||||||||
in thousands | |||||||||||||||||
Current | |||||||||||||||||
Federal | $ | 52,346 | $ | 20,526 | $ | 4,591 | $ | (1,479 | ) | ||||||||
State | 7,079 | 5,064 | 5,695 | (3,205 | ) | ||||||||||||
Foreign | 28,185 | 16,634 | 59,879 | 57,644 | |||||||||||||
Total current income tax provision | 87,610 | 42,224 | 70,165 | 52,960 | |||||||||||||
Deferred | |||||||||||||||||
Federal | (65,091 | ) | 4,618 | 114,986 | 106,182 | ||||||||||||
State | 9,879 | 9,023 | 3,707 | 16,298 | |||||||||||||
Foreign | 1,989 | 3,395 | (3,637 | ) | (3,851 | ) | |||||||||||
Total deferred income tax (benefit) expense | (53,223 | ) | 17,036 | 115,056 | 118,629 | ||||||||||||
Change in valuation allowance | (9,084 | ) | (7,097 | ) | 5,160 | 1,838 | |||||||||||
Total income tax expense | $ | 25,303 | $ | 52,163 | $ | 190,381 | $ | 173,427 | |||||||||
IV-28
Table of Contents
December 31 | |||||||||||||||||
Successor | Predecessor | ||||||||||||||||
2007 | 2006 | ||||||||||||||||
Deferred Income Tax Assets and Liabilities | Current | Non-current | Current | Non-current | |||||||||||||
in thousands | |||||||||||||||||
Assets | |||||||||||||||||
Loss carryforwards | $ | 21,851 | $ | 21,145 | $ | 19,855 | $ | 27,712 | |||||||||
Compensation | 58,762 | 9,489 | 30,981 | 15,563 | |||||||||||||
Accrued expenses | 11,161 | 13,232 | 12,088 | 14,981 | |||||||||||||
Reserves and allowances | 8,613 | — | 10,938 | — | |||||||||||||
Tax credits | — | — | — | 8,574 | |||||||||||||
Derivative financial instruments | — | 6,992 | — | 3,141 | |||||||||||||
Investments | — | 13,337 | — | 10,445 | |||||||||||||
Depreciation | — | 16,169 | — | — | |||||||||||||
Intangibles | — | 68,293 | — | 104,078 | |||||||||||||
Uncertain tax positions | — | 28,089 | — | — | |||||||||||||
Other | 4,769 | 17,024 | 4,301 | 20,897 | |||||||||||||
105,156 | 193,770 | 78,163 | 205,391 | ||||||||||||||
Valuation allowance | — | (10,250 | ) | — | (26,552 | ) | |||||||||||
Total deferred income tax assets | 105,156 | 183,520 | 78,163 | 178,839 | |||||||||||||
Liabilities | |||||||||||||||||
Depreciation | — | — | — | (6,164 | ) | ||||||||||||
Content rights and deferred launch incentives | — | (156,654 | ) | — | (200,732 | ) | |||||||||||
Foreign currency translation | — | (5,744 | ) | — | (12,936 | ) | |||||||||||
Unrealized gains on investments | — | (24,970 | ) | — | (861 | ) | |||||||||||
Other | (1,433 | ) | (6,771 | ) | (2,007 | ) | (4,435 | ) | |||||||||
Total deferred income tax liabilities | (1,433 | ) | (194,139 | ) | (2,007 | ) | (225,128 | ) | |||||||||
Deferred income tax assets (liabilities), net | $ | 103,723 | $ | (10,619 | ) | $ | 76,156 | $ | (46,289 | ) | |||||||
IV-29
Table of Contents
Successor | Predecessor | ||||||||||||||||
May 15 - | January 1 - | Year Ended December 31, | |||||||||||||||
Reconciliation of Effective Tax Rate from Continuing Operations | December 31, 2007 | May 14, 2007 | 2006 | 2005 | |||||||||||||
Federal statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | |||||||||
Increase (decrease) in tax rate arising from: | |||||||||||||||||
State income taxes, net of Federal benefit | 2.4 | 1.9 | 1.5 | 3.2 | |||||||||||||
Foreign income taxes, net of Federal benefit | 7.5 | 12.8 | 7.7 | 9.7 | |||||||||||||
Non-taxable gain | (17.9 | ) | — | — | — | ||||||||||||
Travel deferred tax liabilities | (20.4 | ) | — | — | — | ||||||||||||
Change in US reserve | 3.3 | — | — | — | |||||||||||||
Non-deductible goodwill write-off | — | 3.9 | — | — | |||||||||||||
Domestic production deduction | (1.1 | ) | (1.8 | ) | — | — | |||||||||||
Other | 0.8 | (0.6 | ) | 1.1 | 1.1 | ||||||||||||
Effective income tax rate | 9.6 | % | 51.2 | % | 45.3 | % | 49.0 | % |
IV-30
Table of Contents
Reconciliation of Unrecognized Tax Benefits | ||||
Balance at January 1, 2007 (Predecessor) | $ | 91,375 | ||
Reductions for tax positions of prior years (Predecessor) | (412 | ) | ||
Additions based on tax positions related to the current year (Successor) | 11,650 | |||
Additions for tax positions of prior years (Successor) | 16,830 | |||
Reductions for tax positions of prior years (Successor) | (28,674 | ) | ||
Settlements (Successor) | (2,035 | ) | ||
Balance at December 31, 2007 (Successor) | $ | 88,734 | ||
17. | Financial Instruments |
IV-31
Table of Contents
18. | Related Party Transactions |
IV-32
Table of Contents
IV-33
Table of Contents
By | /s/ John C. Malone |
Signature | Title | Date | ||||
/s/ John C. Malone John C. Malone | Chairman of the Board, Director and Chief Executive Officer | February 15, 2008 | ||||
/s/ Robert R. Bennett Robert R. Bennett | Director and President | February 15, 2008 | ||||
/s/ Paul A. Gould Paul A. Gould | Director | February 15, 2008 | ||||
/s/ M. LaVoy Robison M. LaVoy Robison | Director | February 15, 2008 | ||||
/s/ J. David Wargo J. David Wargo | Director | February 15, 2008 | ||||
/s/ David J.A. Flowers David J.A. Flowers | Senior Vice President and Treasurer (Principal Financial Officer) | February 15, 2008 | ||||
/s/ Christopher W. Shean Christopher W. Shean | Senior Vice President and Controller (Principal Accounting Officer) | February 15, 2008 |
IV-34
Table of Contents
2 — Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession: | ||||
2.1 | Reorganization Agreement among Liberty Media Corporation, Discovery Holding Company (“DHC”) and Ascent Media Group, Inc. (incorporated by reference to Exhibit 2.1 to DHC’s Registration Statement on Form 10, dated July 15, 2005 (FileNo. 000-51205) (the “Form 10”)). | |||
3 — Articles of Incorporation and Bylaws: | ||||
3.1 | Restated Certificate of Incorporation of DHC (incorporated by reference to Exhibit 3.1 to the Form 10). | |||
3.2 | Bylaws of DHC (incorporated by reference to Exhibit 3.2 to the Form 10). | |||
4 — Instruments Defining the Rights of Securities Holders, including Indentures: | ||||
4.1 | Specimen Certificate for shares of the Series A common stock, par value $.01 per share, of DHC (incorporated by reference to Exhibit 4.1 to the Form 10). | |||
4.2 | Specimen Certificate for shares of the Series B common stock, par value $.01 per share, of DHC (incorporated by reference to Exhibit 4.2 to the Form 10). | |||
4.3 | Rights Agreement between DHC and EquiServe Trust Company, N.A., as Rights Agent (incorporated by reference to Exhibit 4.3 to the Form 10). | |||
10 — Material Contracts: | ||||
10.1 | Amended and Restated Limited Liability Company Agreement of Discovery Communications Holding, LLC, dated as of May 14, 2007, by and among Advance/Newhouse Programming Partnership, LMC Discovery, Inc. and John S. Hendricks, filed herewith. | |||
10.2 | Form of Tax Sharing Agreement between Liberty Media Corporation and DHC (incorporated by reference to Exhibit 10.6 to the Form 10). | |||
10.3 | Discovery Holding Company 2005 Incentive Plan (As Amended and Restated Effective August 15, 2007) (incorporated by reference to Exhibit 10.1 to the Quarterly Report onForm 10-Q of Discovery Holding Company for the quarter ended September 30, 2007 (FileNo. 000-51205) as filed on November 7, 2007). | |||
10.4 | Discovery Holding Company 2005 Non-Employee Director Incentive Plan (As Amended and Restated Effective August 15, 2007) (incorporated by reference to Exhibit 10.2 to the Quarterly Report onForm 10-Q of Discovery Holding Company for the quarter ended September 30, 2007 (FileNo. 000-51205) as filed on November 7, 2007). | |||
10.5 | Discovery Holding Company Transitional Stock Adjustment Plan (As Amended and Restated Effective August 15, 2007) (incorporated by reference to Exhibit 10.3 to the Quarterly Report onForm 10-Q of Discovery Holding Company for the quarter ended September 30, 2007 (FileNo. 000-51205) as filed on November 7, 2007). | |||
10.6 | Agreement between DHC and John C. Malone (incorporated by reference to Exhibit 10.10 to the Form 10). | |||
10.7 | Agreement, dated June 24, 2005, between Discovery and DHC (incorporated by reference to Exhibit 10.11 to the Form 10). | |||
10.8 | Indemnification Agreement, dated as of June 24, 2005, between Cox and DHC (incorporated by reference to Exhibit 10.12 to the Form 10). | |||
10.9 | Indemnification Agreement, dated as of June 24, 2005, between NewChannels and DHC (incorporated by reference to Exhibit 10.13 to the Form 10). | |||
10.10 | Form of Indemnification Agreement with Directors and Executive Officers (incorporated by reference to Exhibit 10.14 to the Form 10). |
Table of Contents
21 — Subsidiaries of Discovery Holding Company, filed herewith. | ||||
23.1 | Consent of KPMG LLP, filed herewith. | |||
23.2 | Consent of PricewaterhouseCoopers LLP, filed herewith. | |||
31.1 | Rule 13a-14(a)/15d — 14(a) Certification, filed herewith. | |||
31.2 | Rule 13a-14(a)/15d — 14(a) Certification, filed herewith. | |||
31.3 | Rule 13a-14(a)/15d — 14(a) Certification, filed herewith. | |||
32 — Section 1350 Certification, filed herewith. |