þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended | ||
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) |
Large accelerated filer þ | Accelerated | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
September 30, | December 31, | March 31, | December 31, | |||||||||||||
2007 | 2006 | 2008 | 2007 | |||||||||||||
amounts in thousands | amounts in thousands | |||||||||||||||
ASSETS | ASSETS | ASSETS | ||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 157,461 | 154,775 | $ | 222,577 | 209,449 | ||||||||||
Trade receivables, net | 152,413 | 147,436 | 172,624 | 144,342 | ||||||||||||
Prepaid expenses | 15,424 | 11,522 | 15,324 | 14,815 | ||||||||||||
Other current assets | 11,077 | 3,629 | 3,752 | 3,101 | ||||||||||||
Total current assets | 336,375 | 317,362 | 414,277 | 371,707 | ||||||||||||
Investments in marketable securities | 51,878 | 51,837 | — | 23,545 | ||||||||||||
Investment in Discovery Communications Holding, LLC (“Discovery”) (note 7) | 3,294,999 | 3,129,157 | ||||||||||||||
Investment in Discovery Communications Holding, LLC (“Discovery”) (note 6) | 3,330,030 | 3,271,553 | ||||||||||||||
Property and equipment, net | 278,503 | 280,775 | 262,744 | 269,742 | ||||||||||||
Goodwill (note 6) | 2,075,671 | 2,074,789 | ||||||||||||||
Goodwill (note 5) | 1,909,823 | 1,909,823 | ||||||||||||||
Other assets, net | 15,710 | 17,062 | 18,964 | 19,382 | ||||||||||||
Total assets | $ | 6,053,136 | 5,870,982 | $ | 5,935,838 | 5,865,752 | ||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | LIABILITIES AND STOCKHOLDERS’ EQUITY | LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 32,984 | 43,656 | $ | 48,555 | 26,298 | ||||||||||
Accrued payroll and related liabilities | 25,985 | 32,292 | 22,839 | 26,127 | ||||||||||||
Other accrued liabilities | 32,468 | 29,924 | 42,536 | 42,761 | ||||||||||||
Deferred revenue | 21,792 | 16,015 | 23,472 | 24,951 | ||||||||||||
Total current liabilities | 113,229 | 121,887 | 137,402 | 120,137 | ||||||||||||
Deferred income tax liabilities | 1,240,090 | 1,174,594 | 1,252,033 | 1,228,942 | ||||||||||||
Other liabilities | 29,808 | 25,237 | 21,830 | 22,352 | ||||||||||||
Total liabilities | 1,383,127 | 1,321,718 | 1,411,265 | 1,371,431 | ||||||||||||
Commitments and contingencies (note 9) | ||||||||||||||||
Commitments and contingencies (note 8) | ||||||||||||||||
Stockholders’ equity: | ||||||||||||||||
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 268,868,635 shares at September 30, 2007 and 268,194,966 shares at December 31, 2006 | 2,689 | 2,682 | ||||||||||||||
Series B common stock, $.01 par value. Authorized 50,000,000 shares; issued and outstanding 11,869,696 shares at September 30, 2007 and 12,025,088 shares at December 31, 2006 | 119 | 120 | ||||||||||||||
Series A common stock, $.01 par value. Authorized 600,000,000 shares; issued and outstanding 269,180,104 shares at March 31, 2008 and 269,159,928 shares at December 31, 2007 | 2,692 | 2,691 | ||||||||||||||
Series B common stock, $.01 par value. Authorized 50,000,000 shares; issued and outstanding 11,869,696 shares at March 31, 2008 and December 31, 2007 | 119 | 119 | ||||||||||||||
Series C common stock, $.01 par value. Authorized 600,000,000 shares; no shares issued | — | — | — | — | ||||||||||||
Additional paid-in capital | 5,727,019 | 5,714,379 | 5,728,701 | 5,728,213 | ||||||||||||
Accumulated deficit | (1,082,903 | ) | (1,183,831 | ) | (1,219,492 | ) | (1,253,483 | ) | ||||||||
Accumulated other comprehensive earnings | 23,085 | 15,914 | 12,553 | 16,781 | ||||||||||||
Total stockholders’ equity | 4,670,009 | 4,549,264 | 4,524,573 | 4,494,321 | ||||||||||||
Total liabilities and stockholders’ equity | $ | 6,053,136 | 5,870,982 | $ | 5,935,838 | 5,865,752 | ||||||||||
I-1
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
September 30, | September 30, | March 31, | ||||||||||||||||||||||
2007 | 2006 | 2007 | 2006 | 2008 | 2007 | |||||||||||||||||||
amounts in thousands, except per share amounts | amounts in thousands, except per share amounts | |||||||||||||||||||||||
Net revenue | $ | 177,913 | 169,876 | 529,015 | 489,233 | $ | 189,305 | 173,882 | ||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Cost of services | 122,539 | 111,503 | 362,174 | 318,725 | 138,060 | 121,542 | ||||||||||||||||||
Selling, general, and administrative, including stock-based compensation (notes 2 and 10) | 39,644 | 42,772 | 122,497 | 131,894 | ||||||||||||||||||||
Selling, general, and administrative, including stock-based compensation (notes 3 and 9) | 41,155 | 38,004 | ||||||||||||||||||||||
Restructuring and other charges | 192 | 3,633 | 192 | 3,963 | 1,257 | — | ||||||||||||||||||
Gain on sale of operating assets | (85 | ) | (120 | ) | (327 | ) | (287 | ) | (78 | ) | (34 | ) | ||||||||||||
Depreciation and amortization | 17,176 | 16,036 | 50,162 | 47,995 | 16,540 | 15,571 | ||||||||||||||||||
Impairment of goodwill (note 6) | — | 93,402 | — | 93,402 | ||||||||||||||||||||
179,466 | 267,226 | 534,698 | 595,692 | 196,934 | 175,083 | |||||||||||||||||||
Operating loss | (1,553 | ) | (97,350 | ) | (5,683 | ) | (106,459 | ) | (7,629 | ) | (1,201 | ) | ||||||||||||
Other income: | ||||||||||||||||||||||||
Share of earnings of Discovery (note 7) | 10,493 | 32,051 | 157,847 | 83,569 | ||||||||||||||||||||
Share of earnings of Discovery (note 6) | 66,402 | 21,557 | ||||||||||||||||||||||
Other income, net | 2,653 | 2,581 | 14,268 | 7,054 | 1,684 | 9,297 | ||||||||||||||||||
13,146 | 34,632 | 172,115 | 90,623 | 68,086 | 30,854 | |||||||||||||||||||
Earnings (loss) before income taxes | 11,593 | (62,718 | ) | 166,432 | (15,836 | ) | ||||||||||||||||||
Earnings before income taxes | 60,457 | 29,653 | ||||||||||||||||||||||
Income tax expense | (4,086 | ) | (13,915 | ) | (64,244 | ) | (35,448 | ) | (26,466 | ) | (9,189 | ) | ||||||||||||
Net earnings (loss) | 7,507 | (76,633 | ) | 102,188 | (51,284 | ) | ||||||||||||||||||
Net earnings | 33,991 | 20,464 | ||||||||||||||||||||||
Other comprehensive earnings, net of taxes: | ||||||||||||||||||||||||
Other comprehensive earnings (loss), net of taxes: | ||||||||||||||||||||||||
Foreign currency translation adjustments | 4,826 | 4,873 | 9,529 | 13,961 | 4,009 | 1,354 | ||||||||||||||||||
Unrealized holding gains (losses) arising during the period | (4,514 | ) | 160 | (2,358 | ) | 844 | (8,237 | ) | 456 | |||||||||||||||
Other comprehensive earnings | 312 | 5,033 | 7,171 | 14,805 | ||||||||||||||||||||
Other comprehensive earnings (loss) | (4,228 | ) | 1,810 | |||||||||||||||||||||
Comprehensive earnings (loss) | $ | 7,819 | (71,600 | ) | 109,359 | (36,479 | ) | |||||||||||||||||
Comprehensive earnings | $ | 29,763 | 22,274 | |||||||||||||||||||||
Basic and diluted earnings (loss) per common share (note 3) | $ | .03 | (.27 | ) | .36 | (.18 | ) | |||||||||||||||||
Basic and diluted earnings per common share — Series A and Series B (note 4) | $ | .12 | .07 | |||||||||||||||||||||
I-2
Nine Months Ended | Three Months Ended | |||||||||||||||
September 30, | March 31, | |||||||||||||||
2007 | 2006 | 2008 | 2007 | |||||||||||||
amounts in thousands (note 4) | amounts in thousands | |||||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net earnings (loss) | $ | 102,188 | (51,284 | ) | ||||||||||||
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | ||||||||||||||||
Net earnings | $ | 33,991 | 20,464 | |||||||||||||
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: | ||||||||||||||||
Depreciation and amortization | 50,162 | 47,995 | 16,540 | 15,571 | ||||||||||||
Stock-based compensation | 1,652 | 1,200 | (116 | ) | 966 | |||||||||||
Impairment of goodwill | — | 93,402 | ||||||||||||||
Share of earnings of Discovery | (157,847 | ) | (83,569 | ) | (66,402 | ) | (21,557 | ) | ||||||||
Gain on lease buyout | (6,992 | ) | — | — | (6,992 | ) | ||||||||||
Deferred income tax expense | 62,768 | 33,649 | 25,754 | 8,508 | ||||||||||||
Other non-cash charges (credits), net | (1,008 | ) | 135 | |||||||||||||
Other non-cash credits, net | (502 | ) | (487 | ) | ||||||||||||
Changes in assets and liabilities, net of acquisitions: | ||||||||||||||||
Trade receivables | (4,492 | ) | (21,875 | ) | (28,048 | ) | (1,082 | ) | ||||||||
Prepaid expenses and other current assets | (3,964 | ) | (3,730 | ) | (1,157 | ) | (1,197 | ) | ||||||||
Payables and other liabilities | (9,960 | ) | 33,213 | 17,769 | (11,629 | ) | ||||||||||
Net cash provided by operating activities | 32,507 | 49,136 | ||||||||||||||
Net cash provided by (used in) operating activities | (2,171 | ) | 2,565 | |||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Capital expenditures | (36,310 | ) | (51,220 | ) | (8,552 | ) | (13,407 | ) | ||||||||
Proceeds from lease buyout | 7,138 | — | ||||||||||||||
Net purchases of marketable securities | (41 | ) | (51,052 | ) | ||||||||||||
Cash paid for acquisitions, net of cash acquired | — | (46,793 | ) | |||||||||||||
Cash proceeds from lease buyout | — | 7,138 | ||||||||||||||
Net sales (purchases) of marketable securities | 23,545 | (665 | ) | |||||||||||||
Other investing activities, net | (4,765 | ) | 1,431 | 145 | 90 | |||||||||||
Net cash used in investing activities | (33,978 | ) | (147,634 | ) | ||||||||||||
Net cash provided by (used in) investing activities | 15,138 | (6,844 | ) | |||||||||||||
Cash flows from financing activities: | ||||||||||||||||
Net cash from option exercises | 4,626 | — | 329 | — | ||||||||||||
Other financing activities, net | (469 | ) | (6 | ) | (168 | ) | (19 | ) | ||||||||
Net cash provided (used) by financing activities | 4,157 | (6 | ) | 161 | (19 | ) | ||||||||||
Net increase (decrease) in cash and cash equivalents | 2,686 | (98,504 | ) | 13,128 | (4,298 | ) | ||||||||||
Cash and cash equivalents at beginning of period | 154,775 | 250,352 | 209,449 | 154,775 | ||||||||||||
Cash and cash equivalents at end of period | $ | 157,461 | 151,848 | $ | 222,577 | 150,477 | ||||||||||
I-3
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||||||
Preferred | Common Stock | Paid-in | Accumulated | Comprehensive | Stockholders’ | |||||||||||||||||||||||||||
Stock | Series A | Series B | Series C | Capital | Deficit | Earnings | Equity | |||||||||||||||||||||||||
amounts in thousands | ||||||||||||||||||||||||||||||||
Balance at January 1, 2007 | $ | — | 2,682 | 120 | — | 5,714,379 | (1,183,831 | ) | 15,914 | 4,549,264 | ||||||||||||||||||||||
Net earnings | — | — | — | — | — | 102,188 | — | 102,188 | ||||||||||||||||||||||||
Other comprehensive earnings | — | — | — | — | — | — | 7,171 | 7,171 | ||||||||||||||||||||||||
Stock compensation | — | — | — | — | 634 | — | — | 634 | ||||||||||||||||||||||||
Cumulative effect of accounting change (note 8) | — | — | — | — | — | (1,260 | ) | — | (1,260 | ) | ||||||||||||||||||||||
Conversion of Series B to Series A | — | 1 | (1 | ) | — | — | — | — | — | |||||||||||||||||||||||
Stock option exercises | — | 6 | — | — | 12,006 | — | — | 12,012 | ||||||||||||||||||||||||
Balance at September 30, 2007 | $ | — | 2,689 | 119 | — | 5,727,019 | (1,082,903 | ) | 23,085 | 4,670,009 | ||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||||||
Preferred | Common stock | Paid-in | Accumulated | Comprehensive | Stockholders’ | |||||||||||||||||||||||||||
Stock | Series A | Series B | Series C | Capital | Deficit | Earnings | Equity | |||||||||||||||||||||||||
amounts in thousands | ||||||||||||||||||||||||||||||||
Balance at January 1, 2008 | $ | — | 2,691 | 119 | — | 5,728,213 | (1,253,483 | ) | 16,781 | 4,494,321 | ||||||||||||||||||||||
Net earnings | — | — | — | — | — | 33,991 | — | 33,991 | ||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | (4,228 | ) | (4,228 | ) | ||||||||||||||||||||||
Stock compensation | — | — | — | — | 160 | — | — | 160 | ||||||||||||||||||||||||
Stock option exercises | — | 1 | — | — | 328 | — | — | 329 | ||||||||||||||||||||||||
Balance at March 31, 2008 | $ | — | 2,692 | 119 | — | 5,728,701 | (1,219,492 | ) | 12,553 | 4,524,573 | ||||||||||||||||||||||
I-4
(1) | Basis of Presentation |
I-5
(2) | Newhouse Transaction and Ascent Spin Off |
• | DHC will spin-off to its shareholders a wholly-owned subsidiary holding substantially all of DHC’s cash, AccentHealth 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 Ascent Media Spin Off, DHC will combine with a new holding company(“New DHC”), and DHC’s existing shareholders 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 on an as-converted basis. The preferred stock held by Advance/Newhouse will entitle it to elect three 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) | Stock Options and Other Long-Term Incentive Compensation |
I-6
Weighted | Weighted | Weighted | Weighted | |||||||||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||||||||||
DHC | Exercise | DHC | Exercise | DHC | Exercise | DHC | Exercise | |||||||||||||||||||||||||
Series A | Price | Series B | Price | Series A | Price | Series B | Price | |||||||||||||||||||||||||
Outstanding | 1,215,000 | $ | 15.33 | 2,997,000 | $ | 18.87 | 1,132,036 | $ | 15.31 | 2,996,525 | $ | 18.87 | ||||||||||||||||||||
Exercisable | 971,000 | $ | 15.49 | 2,937,000 | $ | 18.93 | 908,002 | $ | 15.45 | 2,936,525 | $ | 18.93 | ||||||||||||||||||||
I-6
Earnings |
Nine Months | ||||
Ended | ||||
September 30, 2006 | ||||
amounts in | ||||
thousands | ||||
Cash paid for acquisitions: | ||||
Fair value of assets acquired | $ | 48,264 | ||
Net liabilities assumed | (1,471 | ) | ||
Cash paid for acquisitions, net of cash acquired | $ | 46,793 | ||
(5) |
March 31, | December 31, | |||||||
2008 | 2007 | |||||||
amounts in thousands | ||||||||
Goodwill | ||||||||
Creative Services group | $ | 106,599 | 106,599 | |||||
Network Services group | 32,224 | 32,224 | ||||||
Discovery | 1,771,000 | 1,771,000 | ||||||
Total goodwill | $ | 1,909,823 | 1,909,823 | |||||
I-7
September 30, | December 31, | |||||||
2007 | 2006 | |||||||
amounts in thousands | ||||||||
Goodwill | ||||||||
Creative Services group | $ | 106,599 | 106,599 | |||||
Network Services group | 198,072 | 197,190 | ||||||
Discovery | 1,771,000 | 1,771,000 | ||||||
Total goodwill | $ | 2,075,671 | 2,074,789 | |||||
Investment in Discovery |
I-8
I-8
March 31, | December 31, | ||||||||||||||||
September 30, | December 31, | 2008 | 2007 | ||||||||||||||
2007 | 2006 | amounts in thousands | |||||||||||||||
amounts in thousands | |||||||||||||||||
Cash and cash equivalents | $ | 55,310 | 52,263 | $ | 68,654 | 44,951 | |||||||||||
Other current assets | 982,431 | 918,373 | 1,021,658 | 1,032,282 | |||||||||||||
Property and equipment, net | 383,989 | 424,041 | 379,125 | 397,430 | |||||||||||||
Goodwill and intangible assets | 4,807,931 | 472,939 | 5,041,554 | 5,051,843 | |||||||||||||
Programming rights, long term | 1,143,477 | 1,253,553 | 1,045,593 | 1,048,193 | |||||||||||||
Other assets | 354,198 | 255,384 | 364,753 | 385,731 | |||||||||||||
Total assets | $ | 7,727,336 | 3,376,553 | $ | 7,921,337 | 7,960,430 | |||||||||||
Current liabilities | $ | 740,068 | 734,524 | $ | 681,805 | 850,495 | |||||||||||
Long term debt | 3,978,252 | 2,633,237 | 4,088,607 | 4,109,085 | |||||||||||||
Other liabilities | 220,756 | 175,255 | 300,610 | 243,867 | |||||||||||||
Mandatorily redeemable equity in subsidiaries | 48,010 | 94,825 | 48,721 | 48,721 | |||||||||||||
Members’ equity (deficit) | 2,740,250 | (261,288 | ) | ||||||||||||||
Members’ equity | 2,801,594 | 2,708,262 | |||||||||||||||
Total liabilities and members’ equity (deficit) | $ | 7,727,336 | 3,376,553 | ||||||||||||||
Total liabilities and members’ equity | $ | 7,921,337 | 7,960,430 | ||||||||||||||
I-9
Nine Months Ended | Three Months Ended | |||||||||||||||
September 30, | March 31, | |||||||||||||||
2007 | 2006 | 2008 | 2007 | |||||||||||||
amounts in thousands | amounts in thousands | |||||||||||||||
Revenue | $ | 2,241,238 | 2,061,036 | $ | 794,578 | 710,198 | ||||||||||
Cost of revenue | (735,159 | ) | (706,008 | ) | (230,435 | ) | (243,523 | ) | ||||||||
Selling, general and administrative | �� | (819,997 | ) | (793,525 | ) | (278,211 | ) | (276,247 | ) | |||||||
Restructuring and other charges | (15,798 | ) | — | — | (10,999 | ) | ||||||||||
Equity-based compensation | (129,226 | ) | (10,561 | ) | 35,857 | (11,721 | ) | |||||||||
Depreciation and amortization | (95,891 | ) | (87,036 | ) | (37,720 | ) | (32,433 | ) | ||||||||
Asset impairment | (26,174 | ) | — | |||||||||||||
Gain on sale of operating assets | 134,671 | — | ||||||||||||||
Operating income | 553,664 | 463,906 | 284,069 | 135,275 | ||||||||||||
Interest expense, net | (179,135 | ) | (149,828 | ) | (68,720 | ) | (44,558 | ) | ||||||||
Other income, net | 6,031 | 21,261 | ||||||||||||||
Other income (expense), net | (22,590 | ) | 2,407 | |||||||||||||
Income tax expense | (73,938 | ) | (143,727 | ) | (87,541 | ) | (41,710 | ) | ||||||||
Earnings from continuing operations | 306,622 | 191,612 | 105,218 | 51,414 | ||||||||||||
Loss from discontinued operations, net of income taxes | (60,532 | ) | (24,473 | ) | ||||||||||||
Loss from discontinued operations, net of income tax | — | (8,300 | ) | |||||||||||||
Net earnings | $ | 246,090 | 167,139 | $ | 105,218 | 43,114 | ||||||||||
DHC’s share of Discovery’s net earnings | $ | 157,847 | 83,569 | |||||||||||||
Income Taxes |
I-10
Commitments and Contingencies |
Related Party Transactions |
Information About Operating Segments |
I-11
I-11
I-12
Consolidated Reportable Segments | Consolidated Reportable Segments | |||||||||||||||||||||||||||||||||||||||
Creative | Network | Equity | Creative | Network | Equity | |||||||||||||||||||||||||||||||||||
Services | Services | Corporate | Consolidated | Affiliate- | Services | Services | Corporate | Consolidated | affiliate- | |||||||||||||||||||||||||||||||
group | group(1) | and other | Total | Discovery | group | group(1) | and other | Total | Discovery | |||||||||||||||||||||||||||||||
amounts in thousands | amounts in thousands | |||||||||||||||||||||||||||||||||||||||
Nine months ended September 30, 2007 | ||||||||||||||||||||||||||||||||||||||||
Three months ended March 31, 2008 | ||||||||||||||||||||||||||||||||||||||||
Revenue from external customers | $ | 316,401 | 212,614 | — | 529,015 | 2,241,238 | $ | 91,782 | 97,523 | — | 189,305 | 794,578 | ||||||||||||||||||||||||||||
Operating cash flow (deficit) | $ | 35,478 | 32,507 | (21,753 | ) | 46,232 | 686,082 | $ | 3,817 | 17,170 | (10,948 | ) | 10,039 | 285,932 | ||||||||||||||||||||||||||
Capital expenditures | $ | 19,240 | 13,482 | 3,588 | 36,310 | 55,317 | $ | 3,753 | 3,728 | 1,071 | 8,552 | 13,955 | ||||||||||||||||||||||||||||
Total assets | $ | 413,219 | 388,992 | 5,250,925 | 6,053,136 | 7,727,336 | $ | 375,690 | 265,268 | 5,294,880 | 5,935,838 | 7,921,337 | ||||||||||||||||||||||||||||
Nine months ended September 30, 2006 | ||||||||||||||||||||||||||||||||||||||||
Three months ended March 31, 2007 | ||||||||||||||||||||||||||||||||||||||||
Revenue from external customers | $ | 303,498 | 185,735 | — | 489,233 | 2,061,036 | $ | 110,712 | 63,170 | — | 173,882 | 710,198 | ||||||||||||||||||||||||||||
Operating cash flow (deficit) | $ | 32,241 | 34,576 | (27,003 | ) | 39,814 | 561,503 | $ | 14,284 | 8,288 | (7,210 | ) | 15,362 | 190,428 | ||||||||||||||||||||||||||
Capital expenditures | $ | 19,243 | 29,481 | 2,496 | 51,220 | 40,109 | $ | 6,132 | 5,587 | 1,688 | 13,407 | 13,407 |
(1) | Included in network services group revenue is broadcast services revenue of |
Consolidated Reportable Segments | ||||||||||||||||||||
Creative | Network | Equity | ||||||||||||||||||
Services | Services | Corporate | Consolidated | Affiliate- | ||||||||||||||||
group | group(1) | and other | Total | Discovery | ||||||||||||||||
amounts in thousands | ||||||||||||||||||||
Three months ended September 30, 2007 | ||||||||||||||||||||
Revenue from external customers | $ | 99,959 | 77,954 | — | 177,913 | 744,631 | ||||||||||||||
Operating cash flow (deficit) | $ | 9,995 | 13,407 | (7,248 | ) | 16,154 | 231,170 | |||||||||||||
Capital expenditures | $ | 5,815 | 5,014 | 387 | 11,216 | 18,682 | ||||||||||||||
Three months ended September 30, 2006 | ||||||||||||||||||||
Revenue from external customers | $ | 101,567 | 68,309 | — | 169,876 | 704,530 | ||||||||||||||
Operating cash flow (deficit) | $ | 8,181 | 15,503 | (7,868 | ) | 15,816 | 204,960 | |||||||||||||
Capital expenditures | $ | 7,142 | 10,472 | 1,206 | 18,820 | 14,334 |
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Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
September 30, | September 30, | March 31, | ||||||||||||||||||||||
2007 | 2006 | 2007 | 2006 | 2008 | 2007 | |||||||||||||||||||
amounts in thousands | amounts in thousands | |||||||||||||||||||||||
Consolidated segment operating cash flow | $ | 16,154 | 15,816 | 46,232 | 39,814 | $ | 10,039 | 15,362 | ||||||||||||||||
Stock-based compensation | (344 | ) | (215 | ) | (1,652 | ) | (1,200 | ) | 116 | (966 | ) | |||||||||||||
Depreciation and amortization | (17,176 | ) | (16,036 | ) | (50,162 | ) | (47,995 | ) | (16,540 | ) | (15,571 | ) | ||||||||||||
Impairment of goodwill | — | (93,402 | ) | — | (93,402 | ) | ||||||||||||||||||
Share of earnings of Discovery | 10,493 | 32,051 | 157,847 | 83,569 | 66,402 | 21,557 | ||||||||||||||||||
Other, net | 2,466 | (932 | ) | 14,167 | 3,378 | 440 | 9,271 | |||||||||||||||||
Earnings (loss) before income taxes | $ | 11,593 | (62,718 | ) | 166,432 | (15,836 | ) | |||||||||||||||||
Earnings before income taxes | $ | 60,457 | 29,653 | |||||||||||||||||||||
Nine Months Ended | Three Months Ended | |||||||||||||||
September 30, | March 31, | |||||||||||||||
2007 | 2006 | 2008 | 2007 | |||||||||||||
amounts in thousands | amounts in thousands | |||||||||||||||
Revenue | ||||||||||||||||
United States | $ | 420,081 | 373,697 | $ | 150,172 | 137,212 | ||||||||||
United Kingdom | 90,339 | 98,976 | 33,042 | 30,140 | ||||||||||||
Other countries | 18,595 | 16,560 | 6,091 | 6,530 | ||||||||||||
$ | 529,015 | 489,233 | $ | 189,305 | 173,882 | |||||||||||
September 30, | December 31, | March 31, | December 31, | |||||||||||||
2007 | 2006 | 2008 | 2007 | |||||||||||||
amounts in thousands | amounts in thousands | |||||||||||||||
Property and equipment, net | ||||||||||||||||
United States | $ | 185,326 | 184,052 | $ | 175,515 | 178,299 | ||||||||||
United Kingdom | 70,293 | 70,363 | 65,661 | 68,548 | ||||||||||||
Other countries | 22,884 | 26,360 | 21,568 | 22,895 | ||||||||||||
$ | 278,503 | 280,775 | $ | 262,744 | 269,742 | |||||||||||
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results Of Operations |
• | 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; | |
• | 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 | |
• | 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. |
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• | We will spin-off to our shareholders a wholly-owned subsidiary holding substantially all of DHC’s cash, AccentHealth 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 Ascent Media Spin Off, we will combine with a new holding company (“New DHC”), and our existing shareholders 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 on an as-converted basis. The preferred stock held by Advance/Newhouse will entitle it to elect three 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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Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
September 30, | September 30, | March 31, | ||||||||||||||||||||||
2007 | 2006 | 2007 | 2006 | 2008 | 2007 | |||||||||||||||||||
amounts in thousands | amounts in thousands | |||||||||||||||||||||||
Segment Revenue | ||||||||||||||||||||||||
Creative Services group | $ | 99,959 | 101,567 | 316,401 | 303,498 | $ | 91,782 | 110,712 | ||||||||||||||||
Network Services group | 77,954 | 68,309 | 212,614 | 185,735 | 97,523 | 63,170 | ||||||||||||||||||
Corporate and other | — | — | — | — | — | — | ||||||||||||||||||
$ | 177,913 | 169,876 | 529,015 | 489,233 | $ | 189,305 | 173,882 | |||||||||||||||||
Segment Operating Cash Flow | ||||||||||||||||||||||||
Creative Services group | $ | 9,995 | 8,181 | 35,478 | 32,241 | $ | 3,817 | 14,284 | ||||||||||||||||
Network Services group | 13,407 | 15,503 | 32,507 | 34,576 | 17,170 | 8,288 | ||||||||||||||||||
Corporate and other | (7,248 | ) | (7,868 | ) | (21,753 | ) | (27,003 | ) | (10,948 | ) | (7,210 | ) | ||||||||||||
$ | 16,154 | 15,816 | 46,232 | 39,814 | $ | 10,039 | 15,362 | |||||||||||||||||
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Nine Months Ended | Three Months Ended | |||||||||||||||
September 30, | March 31, | |||||||||||||||
2007 | 2006 | 2008 | 2007 | |||||||||||||
amounts in thousands | amounts in thousands | |||||||||||||||
Revenue: | ||||||||||||||||
Advertising | $ | 968,087 | 887,627 | $ | 304,129 | 289,769 | ||||||||||
Distribution | 1,099,624 | 1,063,138 | 402,683 | 369,879 | ||||||||||||
Other | 173,527 | 110,271 | 87,766 | 50,550 | ||||||||||||
Total revenue | 2,241,238 | 2,061,036 | 794,578 | 710,198 | ||||||||||||
Expenses: | ||||||||||||||||
Cost of revenue | (735,159 | ) | (706,008 | ) | (230,435 | ) | (243,523 | ) | ||||||||
Selling, general and administrative (“SG&A”) expense | (819,997 | ) | (793,525 | ) | (278,211 | ) | (276,247 | ) | ||||||||
Operating cash flow | 686,082 | 561,503 | 285,932 | 190,428 | ||||||||||||
Restructuring and other charges | (15,798 | ) | — | |||||||||||||
Expenses arising from long-term incentive plans | (129,226 | ) | (10,561 | ) | ||||||||||||
Restructuring charges | — | (10,999 | ) | |||||||||||||
Benefit (expense) arising from long-term incentive plans | 35,857 | (11,721 | ) | |||||||||||||
Depreciation and amortization | (95,891 | ) | (87,036 | ) | (37,720 | ) | (32,433 | ) | ||||||||
Asset impairment | (26,174 | ) | — | |||||||||||||
Gain on sale of operating assets | 134,671 | — | ||||||||||||||
Operating income | 553,664 | 463,906 | 284,069 | 135,275 | ||||||||||||
Other income (expense): | ||||||||||||||||
Interest expense, net | (179,135 | ) | (149,828 | ) | (68,720 | ) | (44,558 | ) | ||||||||
Realized and unrealized gains from derivative instruments, net | 2,507 | 11,562 | ||||||||||||||
Unrealized gains (losses) from derivative instruments, net | (16,095 | ) | 1,065 | |||||||||||||
Minority interests in consolidated subsidiaries | (2,049 | ) | 3,077 | (6,806 | ) | (707 | ) | |||||||||
Other | 5,573 | 6,622 | 311 | 2,049 | ||||||||||||
Earnings before income taxes | 380,560 | 335,339 | ||||||||||||||
Income from continuing operations before income taxes | 192,759 | 93,124 | ||||||||||||||
Income tax expense | (73,938 | ) | (143,727 | ) | (87,541 | ) | (41,710 | ) | ||||||||
Earnings from continuing operations | 306,622 | 191,612 | ||||||||||||||
Income from continuing operations | 105,218 | 51,414 | ||||||||||||||
Loss from discontinued operations, net of income taxes | (60,532 | ) | (24,473 | ) | — | (8,300 | ) | |||||||||
Net earnings | $ | 246,090 | 167,139 | |||||||||||||
Net income | $ | 105,218 | 43,114 | |||||||||||||
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Nine Months Ended | ||||||||
September 30, | ||||||||
2007 | 2006 | |||||||
amounts in thousands | ||||||||
Revenue: | ||||||||
U.S. networks | $ | 1,468,061 | 1,391,520 | |||||
International networks | 723,984 | 641,299 | ||||||
Commerce, education and other | 49,193 | 28,217 | ||||||
Total revenue | $ | 2,241,238 | 2,061,036 | |||||
Operating Cash Flow: | ||||||||
U.S. networks | $ | 595,123 | 541,393 | |||||
International networks | 99,886 | 96,667 | ||||||
Commerce, education and other | (8,927 | ) | (76,557 | ) | ||||
Total operating cash flow | $ | 686,082 | 561,503 | |||||
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Three Months Ended | ||||
March 31, | ||||
2007 | ||||
Revenue | $ | 17,628 | ||
Operating cash flow | $ | (10,631 | ) | |
Loss from discontinued operations before income taxes | $ | (13,384 | ) | |
Loss from discontinued operations, net of tax | $ | (8,300 | ) |
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Three Months Ended | ||||||||
March 31, | ||||||||
2008 | 2007 | |||||||
amounts in thousands | ||||||||
Revenue | ||||||||
U.S. networks | $ | 490,837 | 476,762 | |||||
International networks | 266,885 | 216,647 | ||||||
Commerce and education | 24,510 | 23,131 | ||||||
Corporate and eliminations | 12,346 | (6,342 | ) | |||||
Total revenue | $ | 794,578 | 710,198 | |||||
Operating Cash Flow | ||||||||
U.S. networks | $ | 247,492 | 209,914 | |||||
International networks | 69,307 | 27,415 | ||||||
Commerce and education | 44 | (3,485 | ) | |||||
Corporate and eliminations | (30,911 | ) | (43,416 | ) | ||||
Total operating cash flow | $ | 285,932 | 190,428 | |||||
Operating cash flow margin | 36 | % | 27 | % | ||||
Three Months Ended | ||||||||
March 31, | ||||||||
2008 | 2007 | |||||||
amounts in thousands | ||||||||
Revenue | ||||||||
Advertising | $ | 238,792 | 234,611 | |||||
Distribution | 223,996 | 225,905 | ||||||
Other | 28,049 | 16,246 | ||||||
Total revenue | 490,837 | 476,762 | ||||||
Cost of revenue | (124,965 | ) | (152,843 | ) | ||||
SG&A expenses | (118,380 | ) | (114,005 | ) | ||||
Operating cash flow | $ | 247,492 | 209,914 | |||||
Operating cash flow margin | 50 | % | 44 | % | ||||
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Three Months Ended | ||||||||
March 31, | ||||||||
2008 | 2007 | |||||||
amounts in thousands | ||||||||
Revenue | ||||||||
Advertising | $ | 238,792 | 208,972 | |||||
Distribution | 223,996 | 211,338 | ||||||
Other | 28,049 | 15,544 | ||||||
Total revenue | 490,837 | 435,854 | ||||||
Cost of revenue | (124,965 | ) | (134,524 | ) | ||||
SG&A expenses | (118,380 | ) | (101,079 | ) | ||||
Operating cash flow | $ | 247,492 | 200,251 | |||||
Operating cash flow margin | 50 | % | 46 | % | ||||
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Three Months Ended | ||||||||
March 31, | ||||||||
2008 | 2007 | |||||||
amounts in thousands | ||||||||
Revenue | ||||||||
Advertising | $ | 65,295 | 55,067 | |||||
Distribution | 178,687 | 143,974 | ||||||
Other | 22,903 | 17,606 | ||||||
Total revenue | 266,885 | 216,647 | ||||||
Cost of revenue | (102,049 | ) | (95,345 | ) | ||||
SG&A expenses | (95,529 | ) | (93,887 | ) | ||||
Operating cash flow | $ | 69,307 | 27,415 | |||||
Operating cash flow margin | 26 | % | 13 | % | ||||
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Three Months Ended | ||||||||
March 31, | ||||||||
2008 | 2007 | |||||||
amounts in thousands | ||||||||
Revenue | $ | 24,510 | 23,131 | |||||
Cost of revenue | (12,336 | ) | (12,560 | ) | ||||
SG&A expenses | (12,130 | ) | (14,056 | ) | ||||
Operating Cash Flow | $ | 44 | (3,485 | ) | ||||
Operating cash flow margin | 0 | % | (15 | )% | ||||
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Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
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Item 4. | Controls and Procedures |
I-26I-28
Item 1. | Legal Proceedings |
Item 6. | Exhibits |
10 | .1 | Discovery Holding Company 2005 Incentive Plan (As Amended and Restated Effective August 15, 2007)* | ||
10 | .2 | Discovery Holding Company 2005 Non-Employee Director Incentive Plan (As Amended and Restated Effective August 15, 2007)* | ||
10 | .3 | Discovery Holding Company Transitional Stock Adjustment Plan (As Amended and Restated Effective August 15, 2007)* | ||
31 | .1 | Rule 13a-14(a)/15d-14(a) Certification* | ||
31 | .2 | Rule 13a-14(a)/15d-14(a) Certification* | ||
31 | .3 | Rule 13a-14(a)/15d-14(a) Certification* | ||
32 | Section 1350 Certification* |
31 | .1 | Rule 13a-14(a)/15d-14(a) Certification* | ||
31 | .2 | Rule 13a-14(a)/15d-14(a) Certification* | ||
31 | .3 | Rule 13a-14(a)/15d-14(a) Certification* | ||
32 | Section 1350 Certification** |
* | Filed herewith. | |
** | Furnished herewith. |
II-1
DISCOVERY HOLDING COMPANY | ||||
Date: | By: | /s/ John C. Malone John C. Malone Chief Executive Officer | ||
Date: | By: | /s/ David J.A. Flowers David J.A. Flowers Senior Vice President and Treasurer (Principal Financial Officer) | ||
Date: | By: | /s/ Christopher W. Shean Christopher W. Shean Senior Vice President and Controller (Principal Accounting Officer) |
II-2
10 | .1 | Discovery Holding Company 2005 Incentive Plan (As Amended and Restated Effective August 15, 2007)* | ||
10 | .2 | Discovery Holding Company 2005 Non-Employee Director Incentive Plan (As Amended and Restated Effective August 15, 2007)* | ||
10 | .3 | Discovery Holding Company Transitional Stock Adjustment Plan (As Amended and Restated Effective August 15, 2007) * | ||
31 | .1 | Rule 13a-14(a)/15d-14(a) Certification* | ||
31 | .2 | Rule 13a-14(a)/15d-14(a) Certification* | ||
31 | .3 | Rule 13a-14(a)/15d-14(a) Certification* | ||
32 | Section 1350 Certification* |
31 | .1 | Rule 13a-14(a)/15d-14(a) Certification* | ||
31 | .2 | Rule 13a-14(a)/15d-14(a) Certification* | ||
31 | .3 | Rule 13a-14(a)/15d-14(a) Certification* | ||
32 | Section 1350 Certification** |
* | Filed herewith. | |
** | Furnished herewith. |