e10vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2006
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number
000-51205
DISCOVERY HOLDING
COMPANY
(Exact name of Registrant as
specified in its charter)
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State of Delaware
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20-2471174
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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12300 Liberty
Boulevard
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Englewood, Colorado
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80112
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(Address of principal executive
offices)
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(Zip Code)
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Registrants telephone number, including area code:
(720) 875-4000
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class
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Name of exchange on which
registered
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Series A Common Stock, par
value $.01 per share
Series B Common Stock, par value $.01 per share
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Nasdaq
Nasdaq
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Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act of 1933.
Yes o No þ
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934.
Yes o No þ
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the Registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer (as defined in
Rule 12b-2
of the Act).
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the Act)
Yes o No þ
The aggregate market value of the voting stock held by
nonaffiliates of Discovery Holding Company computed by reference
to the last sales price of such stock, as of the closing of
trading on June 30, 2006, was approximately
$3.9 billion.
The number of shares outstanding of Discovery Holding
Companys common stock as of January 31, 2007 was:
Series A Common Stock 268,197,601; and
Series B Common
Stock 12,025,078 shares.
Documents Incorporated by Reference
The Registrants definitive proxy statement for its 2007
Annual Meeting of Stockholders is hereby incorporated by
reference into Part III of this Annual Report on
Form 10-K
DISCOVERY
HOLDING COMPANY
2006 ANNUAL REPORT ON
FORM 10-K
Table of Contents
PART I.
(a) General
Development of Business
Discovery Holding Company was incorporated in the state of
Delaware on March 9, 2005 as a wholly-owned subsidiary of
Liberty Media Corporation, which we refer to as Liberty. On
July 21, 2005, Liberty completed the spin off of Discovery
Holding Company to Libertys shareholders. In the spin off,
each holder of Liberty common stock received 0.10 of a share of
our Series A common stock for each share of Liberty
Series A common stock held and 0.10 of a share of our
Series B common stock for each share of Liberty
Series B common stock held. Approximately
268.1 million shares of our Series A common stock and
12.1 million shares of our Series B common stock were
issued in the spin off, which is intended to qualify as a
tax-free transaction.
We are a holding company. Through our wholly owned subsidiary,
Ascent Media Group, LLC (Ascent Media), and our 50%
owned equity affiliate Discovery Communications, Inc.
(Discovery or DCI), we are engaged
primarily in (1) the production, acquisition and
distribution of entertainment, educational and information
programming and software, (2) the retail sale and licensing
of branded and other specialty products and (3) the
provision of creative and network services to the media and
entertainment industries. Our subsidiaries and affiliates
operate in the United States, Europe, Latin America, Asia,
Africa and Australia.
The assets and operations of Ascent Media are composed primarily
of the assets and operations of 13 companies acquired by
Liberty from 2000 through 2004, including The Todd-AO
Corporation, Four Media Company, certain assets of SounDelux
Entertainment Group, Video Services Corporation, Group W Network
Services, London Playout Centre and the systems integration
business of Sony Electronics. The combination and integration of
these and other acquired entities allow Ascent Media to offer
integrated outsourcing solutions for the technical and creative
requirements of its clients, from content creation and other
post-production services to media management and transmission of
the final product to broadcast television stations, cable system
head-ends and other destinations and distribution points.
Discovery is a leading global media and entertainment company.
Discovery has grown from the 1985 launch in the United States of
its core property, Discovery Channel, to current global
operations in over 170 countries across six continents, with
over 1.5 billion total cumulative subscription units.
Discovery operates its businesses in three groups: Discovery
networks U.S., Discovery networks international, and Discovery
commerce, education and other.
On January 27, 2006, we acquired AccentHealth, LLC
(AccentHealth) for cash consideration of
$45 million, plus working capital adjustments of
$1.8 million. AccentHealth operates an
advertising-supported captive audience television network in
doctor office waiting rooms nationwide. For financial reporting
purposes, the results of operations of AccentHealth have been
included in our consolidated results as part of Ascent
Medias network services group.
* * * *
Certain statements in this Annual Report on
Form 10-K
constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, including
statements regarding our business, marketing and operating
strategies, integration of acquired businesses, new service
offerings and anticipated sources and uses of capital. In
particular, statements under Item 1. Business,
Item 1A. Risk Factors, Item 2.
Properties, Item 3. Legal
Proceedings, Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations and Item 7A. Quantitative and
Qualitative Disclosures About Market Risk contain
forward-looking statements. Where, in any forward-looking
statement, we express an expectation or belief as to future
results or events, such expectation or belief is expressed in
good faith and believed to have a reasonable basis, but there
can be no assurance that the expectation or belief will result
or be achieved or accomplished. The following include some but
not all of the factors that could cause actual results or events
to differ materially from those anticipated:
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general economic and business conditions and industry trends
including the timing of, and spending on, feature film and
television production;
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spending on domestic and foreign television advertising and
spending on domestic and foreign first-run and existing content
libraries;
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the regulatory and competitive environment of the industries in
which we, and the entities in which we have interests, operate;
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continued consolidation of the broadband distribution and movie
studio industries;
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uncertainties inherent in the development and integration of new
business lines, acquired operations and business strategies;
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changes in the distribution and viewing of television
programming, including the expanded deployment of personal video
recorders and other technology, and their impact on television
advertising revenue;
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rapid technological changes;
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uncertainties associated with product and service development
and market acceptance, including the development and provision
of programming for new television and telecommunications
technologies;
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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;
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the ability of suppliers and vendors to deliver products,
equipment, software and services;
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the outcome of any pending or threatened litigation;
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availability of qualified personnel;
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the possibility of an industry-wide strike or other job action
affecting a major entertainment industry union;
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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;
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changes in the nature of key strategic relationships with
partners and joint venturers;
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competitor responses to our products and services, and the
products and services of the entities in which we have
interests; and
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threatened terrorists attacks and ongoing military action in the
Middle East and other parts of the world.
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These forward-looking statements and such risks, uncertainties
and other factors speak only as of the date of this Annual
Report, and we expressly disclaim any obligation or undertaking
to disseminate any updates or revisions to any forward-looking
statement contained herein, to reflect any change in our
expectations with regard thereto, or any other change in events,
conditions or circumstances on which any such statement is
based. When considering such forward-looking statements, you
should keep in mind the factors described in Item 1A,
Risk Factors and other cautionary statements
contained in this Annual Report. Such risk factors and
statements describe circumstances which could cause actual
results to differ materially from those contained in any
forward-looking statement.
(b) Financial
Information About Operating Segments
We identify our reportable segments based on financial
information reviewed by our chief operating decision maker, or
his designee. We report financial information for our
consolidated business segments that represent more than 10% of
our consolidated revenue or earnings before taxes and equity
affiliates whose share of earnings represent more than 10% of
our earnings before taxes.
Based on the foregoing criteria, our three reportable segments
are our Creative Services group and Network Services group,
which are operating segments of Ascent Media, and Discovery,
which is an equity affiliate. A fourth reportable segment, media
management services group, existed for a portion of 2006, but
was realigned within the Creative Services group and Network
Services group during the third and fourth quarters of 2006.
Financial information related to our operating segments can be
found in note 17 to our consolidated financial statements
found in Part II of this report.
(c) Narrative
Description of Business
ASCENT
MEDIA
Ascent Media provides a wide variety of creative and network
services to the media and entertainment industries. Ascent
Medias clients include major motion picture studios,
independent producers, broadcast networks, programming networks,
advertising agencies and other companies that produce, own
and/or
distribute entertainment, news, sports, corporate, educational,
industrial and advertising content.
Following an operational realignment in 2006, Ascent
Medias operations are organized into two main categories:
Creative services and Network services.
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Creative
Services
Ascent Medias creative services group provides various
technical and creative services necessary to complete principal
photography into final products, such as feature films, movie
trailers, documentaries and independent films, episodic
television, TV movies and mini-series, television commercials,
music videos, interactive games and new digital media,
promotional and identity campaigns and corporate communications.
These services are referred to generally in the entertainment
industry as post-production services. In addition,
the creative services group provides a full complement of
facilities and services necessary to optimize, archive, manage
and repurpose completed media assets for global distribution via
freight, satellite, fiber and the Internet.
Ascent Media markets its creative services under various brand
names that are well known in the entertainment industry,
including Blink Digital, Cinetech, Company 3, Design
Music Group (DMG), Digital Media Data Center (DMDC), Digital
Symphony, Encore Hollywood, FilmCore, Level 3 Post, Method,
Modern Music, One Post, POP Sound, R!OT, Rushes, Soho Images,
Soundelux, Sound One, St. Annes Post, Todd-AO and
VisionText.
The creative services client base comprises major motion picture
studios and their international divisions, independent
television production companies, broadcast networks, advertising
agencies, creative editorial companies, corporate media
producers, independent owners of television and film libraries
and emerging new media distribution channels. The principal
facilities of the creative services group are in Los Angeles,
New York, Northvale (New Jersey), Atlanta, San Francisco,
Mexico City and London.
Key services provided by Ascent Medias creative services
group include the following:
Dailies. Clients require daily screening of
their previous days recorded work in order to evaluate
technical and aesthetic qualities of the production and to begin
the creative editorial process. Ascent Media provides the film
development, digital transfer from film to video and video
processing necessary for clients to view principal photography
on a daily basis, also known as dailies. For clients
that record their productions on film, Ascent Media processes
and prints film negatives for film projection. The company also
delivers dailies that are transferred from film to digital media
using telecine equipment. The transfer process is technically
challenging and is used to integrate various forms of audio and
encode the footage with feet and frame numbers from the original
film. Dailies delivered as a digital file can be processed in
high definition or standard definition video and can be screened
in a nonlinear manner on a variety of playback equipment.
Telecine. Telecine is the process of
transferring film into video (in either analog or digital
medium). During this process, a variety of parameters can be
manipulated, such as color and contrast. Because the color
spectrum of film and digital media are different, Ascent Media
has creative talent who utilize creative colorizing techniques,
equipment and processes to enable its clients to achieve a
desired visual look and feel for television commercials and
music videos, as well as feature films and television shows.
Ascent Media also provides live telecine services via satellite,
using a secure closed network able to accurately transmit subtle
color changes to connect its telecine artists with client
offices or other affiliated post-production facilities.
Digital intermediates. Ascent Medias
digital intermediates service provides customers with the
ability to convert film to a high resolution digital master file
for color correction, creative editorial and electronic assembly
of masters in other formats. If needed, the digital file can
then be converted back to film.
Creative editorial. After principal
photography has been completed, Ascent Medias editors
assemble the various elements into a cohesive story consistent
with the messaging, branding and creative direction by Ascent
Medias advertising agency clients. Ascent Media provides
the tools and talent required to support its clients through all
stages of the editing process, beginning with the low-resolution
digital images and off-line editing workstations used to create
an edit decision list, through the high-resolution editorial
process used to complete a final product suitable for broadcast.
In addition, Ascent Media is able to offer expanded
communications infrastructure to provide digital images directly
from the
film-to-tape
transfer process to a workstation through dedicated data lines.
Visual effects. Visual effects are used to
enhance the viewing audiences experience by supplementing
images obtained in principal photography with computer-generated
imagery and graphical elements. Visual effects are typically
used to create images that cannot be created by any other
cost-effective means. Ascent Media also provides services on an
array of graphics and animation workstations using a variety of
software to accomplish unique effects, including
three-dimensional animation.
Assembly, formatting and duplication. Ascent
Media implements clients creative decisions, including
decisions regarding the integration of sound and visual effects,
to assemble source material into its final form. In addition,
Ascent Media uses sophisticated computer graphics equipment to
generate titles and character imagery and to format a given
program to meet specific network requirements, including time
compression and commercial breaks. Finally, Ascent
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Media creates multiple master videotapes for delivery to the
network for broadcast, archival and other purposes designated by
the customer.
Distribution. Once a television commercial has
been completed, Ascent Media provides broadcast and support
services, including complete video and audio duplication,
distribution, and storage and asset management, for advertising
agencies, corporate advertisers and entertainment companies.
Ascent Media uses domestic and international satellite, fiber
and Integrated Services Digital Network, or ISDN, Internet
access, and conventional air freight for the delivery of
television and radio spots. Ascent Media currently houses over
85,000 commercial production elements in its vaults for future
use by its clients. Ascent Medias commercial television
distribution facilities in Los Angeles and San Francisco,
California enable Ascent Media to service any regional or
national client.
Sound supervision, sound design and sound
editorial. Ascent Media provides creative talent,
facilities and support services to create sound for feature
films, television content, commercials and trailers, interactive
multimedia games and special live venues. Sound supervisors
ensure that all aspects of sound, dialogue, sound effects and
music are properly coordinated. Ascent Medias sound
services include, but are not limited to, sound editing, sound
design, sound effect libraries, ADR (automated dialogue
replacement, a process for recording dialogue in synchronization
with previously recorded picture) and Foley (non-digital sound
effects).
Music services. Music services are an
essential component of post-production sound. Ascent Media has
the technology and talent to handle all types of music-related
services, including original music composition, music
supervision, music editing, scoring/recording, temporary sound
tracks, composer support and preparing music for soundtrack
album release.
Re-recording / Mixing. Once sound editors,
sound designers, composers, music editors, ADR and Foley crews,
and many others, have prepared the elements that will make up
the finished product, the final component of the creative sound
post production process is the mix (or re-recording). Mixing a
film involves the process of combining multiple elements, such
as tracks of sound effects, dialogue and music, to complete the
final product. Ascent Media maintains a significant number of
mixing stages, purpose-built and provisioned with advanced
recording equipment, capable of handling any type of project,
from major motion pictures to smaller independent films.
Sound effects and music libraries. Through its
Soundelux brand, Ascent Media maintains an extensive sound
effects library with over 300,000 unique sounds, which editors
and clients access through the companys intranet and
remotely via the Internet. The company also owns several
production music libraries through its Hollywood Edge brand.
Ascent Medias clients use the sound effects and music
libraries in feature films, television shows, commercials,
interactive and multimedia games. Ascent Media actively
continues to add new, original recordings to its library.
Negative developing and cutting. Ascent
Medias film laboratories provide negative developing for
television shows such as
one-hour
dramas and movie-length programming, including negative
developing of dailies (the original negative shot
during each production day), as well as the often complex and
technically demanding commercial work and motion picture
trailers. Ascent Media also provides negative cutting services
for the distribution of commercials on film.
Restoration, preservation and asset protection of existing
and damaged content. Ascent Media provides film
restoration, preservation and asset protection services. Ascent
Medias technicians use photochemical and digital processes
to clean, repair and rebuild a films elements in order to
return the content to its original and sometimes to an improved
image quality. Ascent Media also protects film element content
from future degradation by transferring the films image to
newer archival film stocks. Ascent Media also provides asset
protection services for its clients color library titles,
which is a preservation process whereby B/W, silver image,
polyester, positive and color separation masters are created,
sufficiently protecting the images of new and older films.
Transferring film to analog video or digital
media. A considerable amount of film content is
ultimately distributed to the home video, broadcast, cable or
pay-per-view
television markets. This requires film images to be transferred
to an analog video or digital file format. Each frame must be
color corrected and adapted to the size and aspect ratio of a
television screen in order to ensure the highest level of
conformity to the original film version. Because certain film
formats require transfers with special characteristics, it is
not unusual for a motion picture to be mastered in many
different versions. Technological developments, such as the
domestic introduction of television sets with a 16 X 9 aspect
ratio and the implementation of advanced and high definition
digital television systems for terrestrial and satellite
broadcasting, are expected to contribute to the growth of Ascent
Medias film transfer business. Ascent Media also digitally
removes dirt and scratches from a damaged film master that is
transferred to a digital file format.
Professional duplication and standards
conversion. Ascent Media provides professional
duplication, which is the process of creating broadcast quality
and resolution independent
sub-masters
for distribution to professional end users. Ascent Media uses
master elements to make
sub-masters
in numerous domestic and international broadcast standards as
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well as up to 22 different tape formats. Ascent Media also
provides standards conversion, which is the process of changing
the frame rate of a video signal from one video standard, such
as the United States standard (NTSC), to another, such as a
European standard (PAL or SECAM). Content is regularly copied,
converted and checked by quality control for use in intermediate
processes, such as editing, on-air backup and screening and for
final delivery to cable and
pay-per-view
programmers, broadcast networks, television stations, airlines,
home video duplicators and foreign distributors. Ascent
Medias duplication and standards conversion facilities are
technically advanced with unique characteristics that
significantly increase equipment capacity while reducing error
rates and labor cost.
DVD compression and authoring and menu
design. Ascent Media provides all stages of DVD
production, including creative menu design, special feature
production, project management, encoding, 5.1 surround editing
and quality control. Ascent Media also prepares and optimizes
content for evolving formats of digital distribution, such as
video-on-demand
and interactive television.
Storage of original elements and working
masters. Ascent Medias archives are
designed to store working master videotapes and film elements in
a highly controlled environment protected from temperature and
humidity variation, seismic disturbance, fire, theft and other
external events. In addition to the physical security of the
archive, content owners require frequent and regular access to
their libraries. Physical elements stored in Ascent Medias
archive are uniquely bar-coded and maintained in a library
management database offering rapid access to elements, concise
reporting of element status and element tracking throughout its
travel through Ascent Medias operations.
Syndicated television distribution. Ascent
Medias syndication services provide AMOL-encoding and
closed-captioned
sub-mastering,
commercial integration, library distribution, station list
management and v-chip encoding. Ascent Media distributes
syndicated television content by freight, satellite, fiber or
the Internet, in formats ranging from low-resolution proxy
streams to full-bandwidth high-definition television and
streaming media.
Network
Services
Ascent Medias network services group provides origination,
transmission/distribution and technical services to broadcast,
cable and satellite programming networks, local television
channels, broadcast syndicators, satellite broadcasters,
government, other broadband telecommunications companies and
corporations that operate private networks. Ascent Medias
network services group operates from facilities located in
California, Connecticut, Florida, Minnesota, New York, New
Jersey, Virginia and the United Kingdom and Singapore.
Key services
provided by Ascent Medias network services group include
the following:
Network origination and master control. The
network services group provides videotape and file-based
playback and origination to cable, satellite and
pay-per-view
programming networks. Ascent Media accepts daily program
schedules, programs, promotional materials and advertising and
transmits 24 hours of seamless daily programming to cable
operators, direct broadcast satellite systems and other
destinations, over fiber and satellite, using automated systems
for broadcast playback. Associated services include
cut-to-clock
and compliance editing, tape library management,
ingest & quality control, format conversion, and tape
duplication. For programming designed for export to other
markets, Ascent Media provides subtitling and voice dubbing.
Ascent Media also operates industry-standard encryption
and/or
compression systems as needed for customer satellite
transmission. Currently, over two hundred programming
feeds running 24 hours a day, seven days a
week are supported by Ascent Medias facilities
in the United States, London and Singapore. Ascent Media
operates television production studios with
live-to-satellite
interview services, cameras, production and audio control rooms,
videotape playback and record,
multi-language
prompters, computerized lighting, dressing and makeup rooms and
field and teleconferencing services. Ascent Media offers
complete post-production services for on-air promotions,
including graphics, editing, voice-over record, sound effects
editing, sound mixing and music composition.
Transport and connectivity. Ascent Media
operates satellite earth station facilities in Singapore,
California, New York, New Jersey, Minnesota, Connecticut and
Florida. Ascent Medias facilities are staffed
24 hours a day and may be used for uplink, downlink and
turnaround services. Ascent Media accesses various
satellite neighborhoods, including basic and premium
cable, broadcast syndication,
direct-to-home
and DBS markets. Ascent Media resells transponder capacity for
occasional and full-time use and bundles its transponder
capacity with other broadcast and syndication services to
provide a complete broadcast package at a fixed price. Ascent
Medias teleports are high-bandwidth
communications gateways with video switches and facilities for
satellite, optical fiber and microwave transmission. Ascent
Medias facilities offer satellite antennae capable of
transmitting and receiving feeds in both C-Band and Ku-Band
frequencies. Ascent Media also provides transportable services,
including
point-to-point
microwave transmission, transportable up-link and downlink
transmission and broadcast quality teleconference services.
Ascent Media operates
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a global fiber network (branded Global Interconnect) to carry
real-time video between its various locations in the US, London,
and Singapore. This network is used to provide full-time program
feeds and ad hoc services to clients.
Consulting Services. Ascent Media provides
strategic, technology and business consulting services to the
media and entertainment industry, leveraging the core strengths
and knowledge-base of the company. Key practice areas include:
digital migration; content delivery strategies; workflow
analysis and design; emerging delivery platforms (such as
Internet-protocol television, mobile and broadband); technology
assessment; and technology-enabled business strategies.
Engineering and systems integration. Ascent
Media designs, builds, installs and services advanced technical
systems for production, management and delivery of rich media
content to the worldwide broadcast, cable television, broadband,
government and telecommunications industries. Ascent
Medias engineering and systems integration business
operates out of facilities in New Jersey, California, Florida,
and London, and services global clients including major
broadcasters, cable and satellite networks, telecommunications
providers, corporate television networks, a major
telecommunications company as well as numerous production and
post-production facilities. Services offered include program
management, engineering design, equipment procurement, software
integration, construction, installation, service and support.
Ascent Media also designs and constructs satellite earth
stations and related facilities.
Network Operations, Field Service and Call
Center. The network services group provides field
service operations 24 hours a day, seven days a
week through an on-staff network of approximately 50
field engineers located throughout the United States. Services
include preventative and reactive maintenance of satellite earth
stations, satellite networks, fiber-based digital transmission
facilities, cable and telecommunications stations (also called
head ends), and other technical facilities for the distribution
of video content. The group operates a call center
24 hours a day, seven days a week out of its
Palm Bay, Florida facility, providing outsourced services for
technology manufacturing companies, networks and telecoms. In
addition, the group operates a network operations center,
providing outsourced services relating to monitoring and
management of satellite and terrestrial distribution networks
and remote monitoring and control of technical facilities. End
users for field service, call center and network operation
center services include major US broadcast and cable networks,
telecommunications providers, digital equipment manufacturers,
and government and corporate operations.
Strategy
The entertainment services industry has been historically
fragmented with numerous providers offering discrete,
geographically-limited, non-integrated services. Ascent
Medias services, however, span the entirety of the value
chain from the creation and management of media content to the
distribution of media content via multiple transmission paths
including satellite, fiber and Internet Protocol-based networks.
Ascent Media believes the breadth and range of its services
uniquely provide it the scale and flexibility necessary to
realize significant operating and marketing efficiencies: a
global, scaleable media services platform integrating
preparation, management and transmission services; and common
best practices operations management across the
Ascent Media enterprise. Ascent Medias goal is to be the
premier
end-to-end
digital media supply chain services provider to the media and
entertainment industry, creating, managing and distributing rich
media content across all distribution channels on a global
basis. Ascent Media believes it can optimize its position in the
market by pursuing the following strategies:
Grow digital media management business. Ascent
Media intends to increase business with major media and
entertainment clients by storing, managing and distributing
their digital media, which are necessary for repurposing for
file-based network origination and other forms of digital
distribution. In this regard, it intends to deploy its digital
media management system, which is currently deployed in Los
Angeles, in the United Kingdom and the East Coast of the U.S.
Increase scale of operations. Ascent Media
intends to increase the scale of its operations through a
combination of internal investment in facilities plus external
investment in companies and joint ventures. Its goal is to
attract additional customers in its existing lines of business
and expand its business operations geographically.
Expand scope of services. Ascent Media intends
to expand the scope of its services by applying its core
capabilities to new business activities, providing content
management and distribution services based on electronic data
files rather than physical tapes, participating in emerging high
revenue-generating services such as re-formatting content for
distribution to new platforms, and attracting new customers with
unique service needs that are less susceptible to competitive
threats.
Deploy an interconnected global media
network. Ascent Media plans to provide clients
access to an Internet-based network that manages and provides
solutions for integrated workflows. The network will provide
global connectivity and file transport capabilities, which will
make client workflows more efficient and enhance Ascents
internal business systems.
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Optimize the organization. In order to reach
the strategic goals described above, Ascent Media streamlined
its internal organization in 2006. Specifically, Ascent Media
re-aligned its divisional structure to become more compatible
with its diversified customer base and the integrated file-based
solutions that they seek.
Seasonality
The demand for Ascent Medias core motion picture services,
primarily in its creative services group, has historically been
seasonal, with higher demand in the spring (second fiscal
quarter) and fall (fourth fiscal quarter), and lower demand in
the winter and summer. Similarly, demand for Ascent Medias
television program services, primarily in its creative services
group, is higher in the first and fourth quarters and lowest in
the summer, or third quarter. Demand for Ascent Medias
commercial services, primarily in its creative services group,
are fairly consistent with slightly higher activity in the third
quarter. However, changes in the timing of the demand for
television program services may result in increased business for
Ascent Media in the summer. In addition, the timing of long-term
projects in Ascent Medias creative services group and
network services group are beginning to offset the quarters in
which there has been historically lower demand for Ascent
Medias motion picture and television services.
Accordingly, Ascent Media expects to experience less dramatic
quarterly fluctuations in its operating performance in the
future.
DISCOVERY
Discovery Communications, Inc. is a leading global media and
entertainment company. Discovery has grown from the 1985 launch
in the United States of its core property, Discovery Channel, to
current global operations in over 170 countries across six
continents, with over 1.5 billion total cumulative
subscription units. The term subscription units
means, for each separate network or other programming service
that Discovery offers, the number of television households that
are able to receive that network or programming service from
their cable, satellite or other television provider, and the
term cumulative subscription units refers to the sum
of such figures for multiple networks
and/or
programming services, including: (1) multiple networks
received in the same household, (2) subscription units for
joint venture networks, (3) subscription units for branded
programming blocks, which are generally provided without charge,
and (4) households that receive Discovery programming
networks from pay-television providers without charge pursuant
to various pricing plans that include free periods
and/or free
carriage. Discovery operates its businesses in three groups:
Discovery Networks U.S., Discovery Networks International, and
Discovery Commerce, Education and Other.
Discoverys relationships and agreements with the
distributors of its channels are critical to its business as
they provide Discoverys subscription revenue stream and
access to an audience for advertising sales purposes. There has
been a great deal of consolidation among cable and satellite
television operators in the United States in recent years, with
over 90% of the pay television households in the country now
controlled by the top eight distributors. Discovery also
operates in certain overseas markets which have experienced
similar industry consolidation. Industry consolidation has
generally provided more leverage to the distributors in their
relationships with programmers. Accordingly, as its affiliation
agreements expire, Discovery may not be able to obtain terms in
new affiliation agreements that are comparable to terms in its
existing agreements.
Discovery earns revenue from global delivery of its programming
pursuant to affiliation agreements with cable television and
direct-to-home
satellite operators (which is described as distribution revenue
throughout this report), from the sale of advertising on its
networks and from product and subscription sales in its commerce
and education businesses. Distribution revenue includes all
components of revenue earned through affiliation agreements.
Discoverys affiliation agreements typically have terms of
3 to 10 years and provide for payments based on the number
of subscribers that receive Discoverys services. Discovery
has grown its global network business by securing as broad a
subscriber base as possible for each of its channels by entering
into affiliation agreements. After obtaining scalable
distribution of its networks, Discovery invests in programming
and marketing in order to build a viewing audience to support
advertising sales. In certain cases, Discovery has made cash
payments to distributors in exchange for carriage or has entered
into contractual arrangements that allow the distributors to
show certain of Discoverys channels for extended free
periods. In the United States, Discovery has the necessary
audience and ratings for its programming such that advertising
sales provide more revenue than channel subscriptions.
Distribution revenue still accounts for the majority of the
international networks revenue base, and this is
anticipated to be the case for the foreseeable future. As a
result, growing the distribution base for existing and newly
launched international networks will continue to be the primary
focus of the international division. No single customer
represented more than 10% of Discoverys consolidated
revenue for the year ended December 31, 2006.
Discoverys principal operating costs consist of
programming expense, sales and marketing expense, personnel
expense and general and administrative expenses. Programming is
Discoverys largest expense. Costs incurred and capitalized
for the direct production of programming content are amortized
over varying periods based on the expected realization of
revenue from the underlying programs. Licensed programming is
amortized over the contract period based
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on the expected realization of revenue. Discovery incurs sales
and marketing expense to promote brand recognition and to secure
quality distribution channels worldwide.
Discovery produces original programming and acquires content
from numerous producers worldwide that is tailored to the
specific preferences of viewers around the globe. Discovery
believes it is generally well positioned for continued access to
a broad range of high-quality programming for both its
U.S. and international networks. It has assembled one of
the largest libraries of non-fiction programming and footage in
the world, due both to the aggregate purchasing power of its
many networks and a policy to own as many rights as possible in
the programs aired on its networks. Discovery also has long-term
relationships with some of the worlds most significant
non-fiction program producers, including the British
Broadcasting Corporation, which we refer to as the BBC.
Discovery believes the broad international appeal of its content
combined with its ability to utilize its programming library on
a global basis is one of its competitive advantages. Discovery
is also developing programming applications designed to position
the company to take advantage of emerging distribution
technologies including
video-on-demand,
IP-delivered
programming and mobile.
Discoverys other properties consist of Discovery.com and
over 100 retail outlets that offer technology, kids, lifestyle,
health, science and education oriented products, as well as
products related to other programming offered by Discovery.
Additionally, Discoverys newest division, Discovery
Education, distributes digital-based educational products to
schools and consumers primarily in the United States.
Discovery is a leader in offering solutions to advertisers that
allow them to reach a broad range of audience demographics in
the face of increasing fragmentation of audience share. The
overall industry is facing several issues with regard to its
advertising revenue, including (1) audience fragmentation
caused by the proliferation of other television networks,
video-on-demand
offerings from cable and satellite companies and broadband
content offerings; (2) the deployment of digital video
recording devices (DVRs), allowing consumers to time shift
programming and skip or fast-forward through advertisements; and
(3) consolidation within the advertising industry, shifting
more leverage to the bigger agencies and buying groups.
Discovery
Networks U.S.
Discovery networks U.S. currently operates 12 channels and
provides distribution and advertising sales services for BBC
America and distribution services for BBC World News. The
divisions channels include the Discovery Channel, TLC,
Animal Planet, Travel Channel, Discovery Health Channel, Fit TV
and the following emerging digital tier networks: The Science
Channel, Discovery Kids, The Military Channel, Discovery Home,
Discovery Times and Discovery HD Theater, which we refer to
collectively as the emerging networks. All of these channels are
wholly owned by Discovery other than Animal Planet, in which
Discovery has an 80% ownership interest. Cox Communications,
Advance/Newhouse and a subsidiary of Discovery Holding Company,
combined, own the remaining 20% interest in Animal Planet.
Discovery networks U.S. also operates web sites related to
its channel businesses and various other new media businesses,
including a
video-on-demand
offering distributed by various cable operators.
Discovery
Networks International
Discovery networks international, or the international networks,
manages a portfolio of channels, led by Discovery Channel and
Animal Planet, that are distributed in virtually every
pay-television market in the world via an infrastructure that
includes major operational centers in London, Singapore, New
Delhi and Miami. Discovery networks international currently
operates over 100 separate feeds in 35 languages with
channel feeds customized according to language needs and
advertising sales opportunities. Most of the divisions
channels are wholly owned by Discovery with the exception of
(1) the international Animal Planet channels, which are
generally
50-50 joint
ventures with the BBC, (2) People + Arts, which operates in
Latin America and Iberia as a
50-50 joint
venture with the BBC and (3) several channels in Japan and
Canada, which operate as joint ventures with strategically
important local partners. As with the U.S. networks
division, the international networks division operates web sites
and other new media businesses.
Discovery
Commerce, Education & Other
This group includes Discovery commerce, which operates a chain
of retail stores in the United States that offer technology,
kids, lifestyle, health, science and education-oriented
products, as well as products specifically related to
programming on Discoverys networks. This division also
operates a catalog and electronic commerce business selling
products similar to that sold in the Discovery Channel Stores,
as well as a business that licenses Discovery trademarks and
intellectual property to third parties for the purpose of
creating and selling retail merchandise.
This group also includes Discovery education. In 2004, the
company expanded beyond its traditional education businesses of
airing educational programming on its networks and selling hard
copies of such programs to schools and
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began streaming educational video material into schools via the
Internet. Discovery education now operates
Unitedstreaming, Power-Media-Plus and
Cosmeo, some of the leading educational broadband
streaming services in the United States. These services earn
revenue through subscription fees paid by schools, school
districts and consumers which use the services.
Discovery
Stockholders Agreement
A subsidiary of ours, together with a subsidiary of Cox
Communications, which we refer to as Cox Communications, and
Advance/Newhouse Programming Partnership, which we refer to as
Advance/Newhouse, and John Hendricks, the founder and Chairman
of Discovery, are parties to a Stockholders Agreement. We
own 50%, and Cox Communications and Advance/Newhouse each own
25%, of Discovery. Mr. Hendricks is the record holder of
one share of capital stock of Discovery; however,
Mr. Hendricks cannot transfer this share, the share is
subject to an irrevocable proxy in favor of Advance/Newhouse and
the share is subject to a call arrangement pursuant to which
Advance/Newhouse can purchase the share. Accordingly, we treat
such share as being owned by Advance/Newhouse for purposes of
Advance/Newhouses percentage ownership of Discovery as
described in this Annual Report. As a close
corporation under Delaware law, the stockholders manage
the business of Discovery, rather than a board of directors. The
Stockholders Agreement provides that a number of decisions
affecting Discovery, such as, among other things, a decision to
effect a fundamental change in its business, a merger or other
business combination, issuance of Discoverys equity
securities, approval of transactions between Discovery, on the
one hand, and any of its stockholders, on the other hand, and
adoption of Discoverys annual business plan, must be
approved by the holders of 80% of its outstanding capital stock.
In addition, other matters, such as the declaration and payment
of dividends on its capital stock, require the approval of the
holders of a majority of Discoverys outstanding capital
stock.
Because we own 50%, Cox Communications owns 25% and
Advance/Newhouse owns 25% of the stock of Discovery, any one of
us may block Discovery from taking any action that requires 80%
approval. In addition, because Cox Communications and
Advance/Newhouse, on the one hand, and our company, on the
other, each owns 50% of the outstanding stock of Discovery,
there is the possibility that the stockholders could deadlock
over various other matters, which require the approval of the
holders of a majority of its capital stock. To reduce the
possibility that this could occur, the stockholders have given
John Hendricks, the founder and Chairman of Discovery, the right
(but not the obligation), subject to certain limitations, to
cast a vote to break a deadlock on certain matters requiring a
majority vote for approval.
The Stockholders Agreement also restricts, subject to
certain exceptions, the ability of a stockholder to transfer its
shares in Discovery to a third party. Any such proposed transfer
is subject to a pro rata right of first refusal in favor of the
other stockholders. If all of the offered shares are not
purchased by the other stockholders, then the selling
stockholder may sell all of the offered shares to the third
party that originally offered to purchase such shares at the
same price and on the same terms, provided that such third party
agrees to be bound by the restrictions contained in the
Stockholders Agreement. In addition, in the event that
either Cox Communications or Advance/Newhouse proposes to
transfer shares, Cox Communications or Advance/Newhouse,
whichever is not proposing to transfer, would have a preemptive
right to buy the others shares, and if it does not elect
to purchase all such shares, then the remaining shares would be
subject to the pro rata right of first refusal described above.
The Stockholders Agreement also prohibits Cox
Communications, Advance/Newhouse and our company from starting,
or acquiring a majority of the voting power of, a basic
programming service carried in the United States that consists
primarily of documentary, science and nature programming,
subject to certain exceptions.
In connection with the spin off, Liberty contributed to us 100%
of an entity that owns a 10% interest in the Animal Planet
limited partnership. Our partners in this entity include
Discovery, Cox Communications and Advance/Newhouse. The
Stockholders Agreement prohibits us from selling,
transferring or otherwise disposing of either of the
subsidiaries that hold the Discovery interest or Animal Planet
interest, respectively, unless, after such transaction, such
subsidiaries are controlled by the same person or entity.
The foregoing summary of the Discovery Stockholders
Agreement is qualified by reference to the full text of the
agreement and amendments.
Regulatory
Matters
Ascent
Media
Some of Ascent Medias subsidiary companies hold licenses
and authorizations from the Federal Communications Commission,
or FCC, required for the conduct of their businesses, including
earth station and various classes of wireless licenses and an
authorization to provide certain services pursuant to
Section 214 of the Communications Act. Most of the FCC
licenses held by such subsidiaries are for transmit/receive
earth stations, which cannot be operated without
I-9
individual licenses. The licenses for these stations are granted
for a period of fifteen years and, while the FCC generally
renews licenses for satellite earth stations, there can be no
assurance that these licenses will be renewed at their
expiration dates. Registration with the FCC, rather than
licensing, is required for receiving transmissions from domestic
satellites from points within the United States. Ascent Media
relies on third party licenses or authorizations when it and its
subsidiaries transmit domestic satellite traffic through earth
stations operated by third parties. The FCC establishes
technical standards for satellite transmission equipment that
change from time to time and requires coordination of earth
stations with land-based microwave systems at certain
frequencies to assure non-interference. Transmission equipment
must also be installed and operated in a manner that avoids
exposing humans to harmful levels of radio-frequency radiation.
The placement of earth stations or other antennae also is
typically subject to regulation under local zoning ordinances.
Discovery
In the United States, the FCC regulates the providers of
satellite communications services and facilities for the
transmission of programming services, the cable television
systems that carry such services and, to some extent, the
availability of the programming services themselves through its
regulation of program licensing. Cable television systems in the
United States are also regulated by municipalities or other
state and local government authorities and are currently subject
to federal rate regulation on the provision of basic service.
Continued rate regulation or other franchise conditions could
place downward pressure on the fees cable television companies
are willing or able to pay for the Discovery networks.
Regulatory carriage requirements also could adversely affect the
number of channels available to carry the Discovery networks.
The Cable Television Consumer Protection and Competition Act of
1992 (the 1992 Cable Act) directed the FCC to promulgate
regulations regarding the sale and acquisition of cable
programming between multi-channel video programming distributors
(including cable operators) and satellite-delivered programming
services in which a cable operator has an attributable interest.
Because cable operators have an attributable interest in
Discovery, the Discovery networks are subject to these rules.
The legislation and the implementing regulations adopted by the
FCC preclude virtually all exclusive programming contracts
between cable operators and satellite programmers affiliated
with any cable operator and the 1992 Cable Act requires that
such affiliated programmers make their programming services
available to cable operators and competing multi-channel video
programming distributors on terms and conditions that do not
unfairly discriminate among distributors. As a result, Discovery
has not been, and will not be, able to enter into exclusive
distribution agreements, which could provide more favorable
terms than non-exclusive agreements. The contract exclusivity
restrictions will sunset in 2007, unless extended by the FCC.
The FCC is expected to initiate a proceeding to consider the
extension of the contract exclusivity rules early in 2007.
The 1992 Cable Act required the FCC, among other things, to
prescribe rules and regulations establishing reasonable limits
on the number of channels on a cable system that will be allowed
to carry programming in which the owner of such cable system has
an attributable interest. In 1993, the FCC adopted such channel
carriage limits. However, in 2001, the United States Court of
Appeals for the District of Columbia Circuit found that the FCC
had failed to adequately justify the channel carriage limit,
vacated the FCCs decision and remanded the rule to the FCC
for further consideration. In response to the Courts
decision, the FCC issued a further notice of proposed rulemaking
in 2001 to consider channel carriage limitations. The FCC issued
a Second Further Notice of Proposed Rulemaking on May 17,
2005, requesting comment on these issues. If such channel
carriage limitations are implemented, the ability of Cox
Communications and Advance/Newhouse to carry the full range of
Discoverys networks could be limited.
The 1992 Cable Act granted broadcasters a choice of must carry
rights or retransmission consent rights. The rules adopted by
the FCC generally provided for mandatory carriage by cable
systems of all local full-power commercial television broadcast
signals selecting must carry rights and, depending on a cable
systems channel capacity, non-commercial television
broadcast signals. Such statutorily mandated carriage of
broadcast stations coupled with the provisions of the Cable
Communications Policy Act of 1984, which require cable
television systems with 36 or more activated
channels to reserve a percentage of such channels for commercial
use by unaffiliated third parties and permit franchise
authorities to require the cable operator to provide channel
capacity, equipment and facilities for public, educational and
government access channels, could adversely affect the Discovery
networks by limiting their carriage of such services in cable
systems with limited channel capacity. In 2001, the FCC adopted
rules relating to the cable carriage of digital television
signals. Among other things, the rules clarify that a
digital-only television station can assert a right to analog or
digital carriage on a cable system. The FCC initiated a further
proceeding to determine whether television stations may assert
rights to carriage of both analog and digital signals during the
transition to digital television and to carriage of all digital
signals (multicast must carry). On February 10,
2005, the FCC denied mandatory dual carriage of a television
stations analog and digital signals during the digital
television transition and mandatory carriage of all digital
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signals, other than its primary signal. Television
station owners have petitioned the FCC to reconsider its
decision and are seeking legislative change. Those petitions are
still pending. In addition, Congress may address this issue.
In 2004, the FCCs Media Bureau conducted a notice of
inquiry proceeding regarding the feasibility of selling video
programming services a la carte, i.e. on an
individual or small tier basis. The Media Bureau released a
report in November 2004, which concluded that a la carte sales
of video programming services would not result in lower video
programming costs for most consumers and that they would
adversely affect video programming networks. On February 9,
2006, the Media Bureau released a new report which stated that
the 2004 report was flawed and which concluded that a la carte
sales could be in the best interests of consumers. Although the
FCC likely cannot mandate a la carte sales, its endorsement of
the concept could encourage Congress to consider proposals to
mandate a la carte sales or otherwise seek to impose greater
regulatory controls on how a la carte programming is sold. The
programming companies that distribute these services in tiers or
packages of programming services could experience decreased
distribution if a la carte carriage were mandated.
In general, authorization from the FCC must be obtained for the
construction and operation of a communications satellite.
Satellite orbital slots are finite in number, thus limiting the
number of carriers that can provide satellite transponders and
the number of transponders available for transmission of
programming services. At present, however, there are numerous
competing satellite service providers that make transponders
available for video services to the cable industry. The FCC also
regulates the earth stations uplinking to
and/or
downlinking from such satellites.
The regulation of programming services is subject to the
political process and has been in constant flux over the past
decade. Further material changes in the law and regulatory
requirements must be anticipated and there can be no assurance
that our business will not be adversely affected by future
legislation, new regulation or deregulation.
International
Regulatory Matters
Video distribution and content businesses are regulated in each
of the countries in which we operate. The scope of regulation
varies from country to country, although in some significant
respects regulation in Western European markets is harmonized
under the regulatory structure of the European Union, which we
refer to as the EU. Adverse regulatory developments could
subject our businesses to a number of risks. Regulations could
limit growth, revenue and the number and types of services
offered. In addition, regulation may restrict our operations and
subject them to further competitive pressure, including
restrictions imposed on foreign programming distributors that
could limit the content they may carry in ways that affect us
adversely. Failure to comply with current or future regulation
of our businesses could expose our businesses to various
penalties.
Competition
The creative media services industry is highly competitive, with
much of the competition centered in Los Angeles, California, the
largest and most competitive market, particularly for domestic
television and feature film production as well as for the
management of content libraries. We expect that competition will
increase as a result of industry consolidation and alliances, as
well as from the emergence of new competitors. In particular,
major motion picture studios such as Paramount Pictures, Sony
Pictures Corporation, Twentieth Century Fox, Universal Pictures,
The Walt Disney Company,
Metro-Goldwyn-Mayer
and Warner Brothers, while Ascent Medias customers, can
perform similar services in-house with substantially greater
financial resources than Ascent Medias, and in some cases
significant marketing advantages. These studios may also
outsource their requirements to other independent providers like
us or to other studios. Thomson, a French corporation, is also a
major competitor of Ascent Media, particularly under its
Technicolor brand, as is Kodak through its Laser Pacific
division. Ascent Media also actively competes with certain
industry participants that have a unique operating niche or
specialty business. There is no assurance that Ascent Media will
be able to compete effectively against these competitors. Ascent
Medias management believes that important competitive
factors include the range of services offered, reputation for
quality and innovation, pricing and long-term relationships with
customers.
The business of distributing programming for cable and satellite
television is highly competitive, both in the United States and
in foreign countries. Discovery competes with other programmers
for distribution on a limited number of channels. Increasing
concentration in the multichannel video distribution industry
could adversely affect Discovery by reducing the number of
distributors available to carry Discoverys networks,
subjecting more of Discoverys subscriber fees to volume
discounts and increasing the distributors bargaining power
in negotiating new affiliation agreements. Once distribution is
obtained, Discoverys programming services compete, in
varying degrees, for viewers and advertisers with other cable
and off-air broadcast television programming services as well as
with other entertainment media, including home video,
pay-per-view
services, online activities, movies and other forms of news,
information and entertainment. Discovery also competes, to
varying degrees, for creative talent and programming content.
Discoverys
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management believes that important competitive factors include
the prices charged for programming, the quantity, quality and
variety of the programming offered and the effectiveness of
marketing efforts.
Employees
We currently have no corporate employees. Liberty provides us
with certain management and administrative services pursuant to
a services agreement, which includes the services of our
executive officers some of whom remain executive officers of
Liberty.
As of December 31, 2006, Ascent Media had approximately
4,000 employees, most of which worked on a full-time basis.
Approximately 2,900 of Ascent Medias employees were
employed in the United States, with the remaining 1,100 employed
outside the United States, principally in the United Kingdom and
the Republic of Singapore. Approximately 400 of Ascent
Medias employees belong to either the International
Alliance of Theatrical Stage Employees in the United States or
the Broadcasting Entertainment Cinematograph and Theatre Union
in the United Kingdom.
As of December 31, 2006, Discovery had approximately 4,500
employees.
(d) Financial
Information About Geographic Areas
For financial information related to the geographic areas in
which we do business, see note 17 to our consolidated
financial statements found in Part II of this report.
(e) Available
Information
All of our filings with the Securities and Exchange Commission
(the SEC), including our
Form 10-Ks,
Form 10-Qs
and
Form 8-Ks,
as well as amendments to such filings are available on our
Internet website free of charge generally within 24 hours
after we file such material with the SEC. Our website address is
www.discoveryholdingcompany.com.
Our corporate governance guidelines, code of ethics,
compensation committee charter, and audit committee charter are
available on our website. In addition, we will provide a copy of
any of these documents, free of charge, to any shareholder who
calls or submits a request in writing to Investor Relations,
Discovery Holding Company, 12300 Liberty Boulevard, Englewood,
Colorado 80112, Tel. No.
(866) 876-0461.
The information contained on our website is not incorporated by
reference herein.
An investment in our common stock involves risk. You should
carefully consider the risks described below, together with all
of the other information included in this annual report in
evaluating our company and our common stock. Any of the
following risks, if realized, could have a material adverse
effect on the value of our common stock.
We are a holding company, and we could be unable in the
future to obtain cash in amounts sufficient to service our
financial obligations or meet our other
commitments. Our ability to meet our financial
obligations and other contractual commitments depends upon our
ability to access cash. We are a holding company, and our
sources of cash include our available cash balances, net cash
from the operating activities of our subsidiaries, any dividends
and interest we may receive from our investments, availability
under any credit facilities that we may obtain in the future and
proceeds from any asset sales we may undertake in the future.
The ability of our operating subsidiaries to pay dividends or to
make other payments or advances to us depends on their
individual operating results and any statutory, regulatory or
contractual restrictions to which they may be or may become
subject.
We do not have access to the cash that Discovery generates
from its operating activities. Discovery
generated approximately $480 million, $69 million and
$125 million of cash from its operations during the years
ended December 31, 2006, 2005 and 2004, respectively.
Discovery uses the cash it generates from its operations to fund
its investing activities and to service its debt and other
financing obligations. We do not have access to the cash that
Discovery generates unless Discovery declares a dividend on its
capital stock payable in cash, redeems any or all of its
outstanding shares of capital stock for cash or otherwise
distributes or makes payments to its stockholders, including us.
Historically, Discovery has not paid any dividends on its
capital stock or, with limited exceptions, otherwise distributed
cash to its stockholders and instead has used all of its
available cash in the expansion of its business and to service
its debt obligations. Covenants in Discoverys existing
debt instruments also restrict the payment of dividends and cash
distributions to stockholders. We expect that Discovery will
continue to apply its available cash to the expansion of its
business. We do not have sufficient voting control to cause
Discovery to pay dividends or make other payments or advances to
its stockholders, or otherwise provide us access to
Discoverys cash.
I-12
We have limited operating history as a separate company upon
which you can evaluate our performance. Although
our subsidiary Ascent Media was a separate public company prior
to June 2003 (when Liberty acquired the outstanding shares of
Ascent Media that it did not already own), we have limited
operating history as a separate public company. Additionally,
the historical financial information included in this annual
report for periods prior to our existence may not necessarily be
representative of our results as a separate company. There can
be no assurance that our business strategy will be successful on
a long-term basis. We may not be able to grow our businesses as
planned and may not be profitable.
We do not have the right to manage Discovery, which means we
cannot cause Discovery to operate in a manner that is favorable
to us. Discovery is managed by its stockholders
rather than a board of directors. Generally, all significant
actions to be taken by Discovery require the approval of the
holders of a majority of Discoverys shares; however,
pursuant to a Stockholders Agreement, the taking of
certain actions (including, among other things, a merger of
Discovery, or the issuance of additional shares of Discovery
capital stock or approval of annual business plans) require the
approval of the holders of at least 80% of Discoverys
shares. Because we do not own a majority of the outstanding
equity interests of Discovery, we do not have the right to
manage the businesses or affairs of Discovery. Although our
status as a 50% stockholder of Discovery enables us to exercise
influence over the management and policies of Discovery, such
status does not enable us to cause any actions to be taken. Cox
Communications and Advance/Newhouse each hold a 25% interest in
Discovery, which ownership interest enables each such company to
prevent Discovery from taking actions requiring 80% approval.
Actions to be taken by Discovery that require the approval of a
majority of Discoverys shares may, under certain
circumstances, result in a deadlock. Because we own a 50%
interest in Discovery and each of Cox Communications and
Advance/Newhouse own a 25% interest in Discovery, a deadlock may
occur when the stockholders vote to approve an action that
requires majority approval. Accordingly, unless either Cox
Communications or Advance/Newhouse elects to vote with us on
items that require majority action, such actions may not be
taken. Pursuant to the terms of the Stockholders
Agreement, if an action that requires approval by a majority of
Discoverys shares is approved by 50%, but not more than
50%, of the outstanding shares then the proposed action will be
submitted to an arbitrator designated by the stockholders.
Currently, the arbitrator is John Hendricks, the founder and
Chairman of Discovery. Mr. Hendricks, as arbitrator, is
entitled to cast the deciding vote on matters where the
stockholders have deadlocked because neither side has a
majority. Mr. Hendricks, however, is not obligated to take
action to break such a deadlock. In addition, Mr. Hendricks
may elect to approve actions we have opposed, if such a deadlock
exists. In the event of a dispute among the stockholders of
Discovery, the possibility of such a deadlock could have a
material adverse effect on Discoverys business.
The liquidity and value of our interest in Discovery may be
adversely affected by a Stockholders Agreement to which we
are a party. Our 50% interest in Discovery is
subject to the terms of a Stockholders Agreement among the
holders of Discovery capital stock. Among other things, the
Stockholders Agreement restricts our ability to directly
sell or transfer our interest in Discovery or to borrow against
its value. These restrictions impair the liquidity of our
interest in Discovery and may make it difficult for us to obtain
full value for our interest in Discovery should such a need
arise. In the event we chose to sell all or a portion of our
direct interest in Discovery, we would first have to obtain an
offer from an unaffiliated third party and then offer to sell
such interest to Cox Communications and Advance/Newhouse on
substantially the same terms as the third party had agreed to
pay.
If either Cox Communications or Advance/Newhouse decided to sell
their respective interests in Discovery, then the other of such
two stockholders would have a right to acquire such interests on
the terms set by a third party offer obtained by the selling
stockholder. If the non-selling stockholder elects not to
exercise this acquisition right, then, subject to the terms of
the Stockholders Agreement, we would have the opportunity
to acquire such interests on substantially the terms set by a
third party offer obtained by the selling stockholder. We
anticipate that the purchase price to acquire the interests held
by Cox Communications or Advance/Newhouse would be significant
and could require us to obtain significant funding in order to
raise sufficient funds to purchase one or both of their
interests. This opportunity to purchase the Discovery interests
held by Cox Communications
and/or
Advance/Newhouse may arise (if at all) at a time when it would
be difficult for us to raise the funds necessary to purchase
such interests.
We do not have the ability to require Cox Communications or
Advance/Newhouse to sell their interests in Discovery to us, nor
do they have the ability to require us to sell our interest to
them. Accordingly, the current governance relationships
affecting Discovery may continue indefinitely.
Because we do not control the business management practices
of Discovery, we rely on Discovery for the financial information
that we use in accounting for our ownership interest in
Discovery. We account for our 50% ownership
interest in Discovery using the equity method of accounting and,
accordingly, in our financial statements we record our share of
Discoverys net income or loss. Because we do not control
Discoverys decision-making process or business management
practices, within the meaning of U.S. accounting rules, we
rely on Discovery to provide us with financial information
prepared in accordance with generally accepted accounting
principles, which we use in the application of the
I-13
equity method. We have entered into an agreement with Discovery
regarding the use by us of certain information regarding
Discovery in connection with our financial reporting and
disclosure requirements as a public company. However, such
agreement limits the public disclosure by us of certain
non-public information regarding Discovery (other than specified
historical financial information), and also restricts our
ability to enforce the agreement against Discovery with a
lawsuit seeking monetary damages, in the absence of gross
negligence, reckless conduct or willful misconduct on the part
of Discovery. In addition, we cannot change the way in which
Discovery reports its financial results or require Discovery to
change its internal controls over financial reporting.
We cannot be certain that we will be successful in
integrating acquired businesses, if any. Our
businesses and those of our subsidiaries may grow through
acquisitions in selected markets. Integration of new businesses
may present significant challenges, including: realizing
economies of scale in programming and network operations;
eliminating duplicative overheads; and integrating networks,
financial systems and operational systems. We or the applicable
subsidiary cannot assure you that, with respect to any
acquisition, we will realize anticipated benefits or
successfully integrate any acquired business with our existing
operations. In addition, while we intend to implement
appropriate controls and procedures as we integrate acquired
companies, we may not be able to certify as to the effectiveness
of these companies disclosure controls and procedures or
internal control over financial reporting (as required by
U.S. federal securities laws and regulations) until we have
fully integrated them.
A loss of any of Ascent Medias large customers would
reduce our revenue. Although Ascent Media serviced over
3,800 customers during the year ended December 31, 2006,
its ten largest customers accounted for approximately 48% of its
consolidated revenue and Ascent Medias single largest
customer accounted for approximately 8% of its consolidated
revenue during that period. The loss of, and the failure to
replace, any significant portion of the services provided to any
significant customer could have a material adverse effect on the
business of Ascent Media.
Ascent Medias business depends on certain client
industries. Ascent Media derives much of its
revenue from services provided to the motion picture and
television production industries and from the data transmission
industry. Fundamental changes in the business practices of any
of these client industries could cause a material reduction in
demand by Ascent Medias clients for the services offered
by Ascent Media. Ascent Medias business benefits from the
volume of motion picture and television content being created
and distributed as well as the success or popularity of an
individual television show. Accordingly, a decrease in either
the supply of, or demand for, original entertainment content
would have a material adverse effect on Ascent Medias
results of operations. Because spending for television
advertising drives the production of new television programming,
as well as the production of television commercials and the sale
of existing content libraries for syndication, a reduction in
television advertising spending would adversely affect Ascent
Medias business. Factors that could impact television
advertising and the general demand for original entertainment
content include the growing use of personal video recorders and
video-on-demand
services, continued fragmentation of and competition for the
attention of television audiences, and general economic
conditions.
Changes in technology may limit the competitiveness of and
demand for our services. The post-production
industry is characterized by technological change, evolving
customer needs and emerging technical standards, and the data
transmission industry is currently saturated with companies
providing services similar to Ascent Medias. Historically,
Ascent Media has expended significant amounts of capital to
obtain equipment using the latest technology. Obtaining access
to any new technologies that may be developed in Ascent
Medias industries will require additional capital
expenditures, which may be significant and may have to be
incurred in advance of any revenue that may be generated by such
new technologies. In addition, the use of some technologies may
require third party licenses, which may not be available on
commercially reasonable terms. Although we believe that Ascent
Media will be able to continue to offer services based on the
newest technologies, we cannot assure you that Ascent Media will
be able to obtain any of these technologies, that Ascent Media
will be able to effectively implement these technologies on a
cost-effective or timely basis or that such technologies will
not render obsolete Ascent Medias role as a provider of
motion picture and television production services. If Ascent
Medias competitors in the data transmission industry have
technology that enables them to provide services that are more
reliable, faster, less expensive, reach more customers or have
other advantages over the data transmission services Ascent
Media provides, then the demand for Ascent Medias data
transmission services may decrease.
Technology in the video, telecommunications and data services
industry is changing rapidly. Advances in technologies such as
personal video recorders and
video-on-demand
and changes in television viewing habits facilitated by these or
other technologies could have an adverse effect on
Discoverys advertising revenue and viewership levels. The
ability to anticipate changes in, and adapt to, changes in
technology and consumer tastes on a timely basis and exploit new
sources of revenue from these changes will affect the ability of
Discovery to continue to grow, increase its revenue and number
of subscribers and remain competitive.
I-14
A labor dispute in our client industries may disrupt our
business. The cost of producing and distributing
entertainment programming has increased substantially in recent
years due to, among other things, the increasing demands of
creative talent and industry-wide collective bargaining
agreements.
A significant labor dispute in Ascent Medias client
industries could have a material adverse effect on its business.
An industry-wide strike or other job action by or affecting the
Writers Guild, Screen Actors Guild or other major entertainment
industry union could reduce the supply of original entertainment
content, which would in turn, reduce the demand for Ascent
Medias services.
Discovery airs certain entertainment programs that are dependent
on specific on-air talent, and Discoverys ability to
continue to produce these series is dependent on keeping that
on-air talent under contract.
Risk of loss from earthquakes or other catastrophic events
could disrupt Ascent Medias business. Some
of Ascent Medias specially equipped and acoustically
designed facilities are located in Southern California, a region
known for seismic activity. Due to the extensive amount of
specialized equipment incorporated into the specially designed
recording and scoring stages, editorial suites, mixing rooms and
other post-production facilities, Ascent Medias operations
in this region may not be able to be temporarily relocated to
mitigate the impacts of a catastrophic event. Ascent Media
carries insurance for property loss and business interruption
resulting from such events, including earthquake insurance,
subject to deductibles, and has facilities in other geographic
locations. Although we believe Ascent Media has adequate
insurance coverage relating to damage to its property and the
temporary disruption of its business from casualties, and that
it could provide services at other geographic locations, there
can be no assurance that such insurance and other facilities
would be sufficient to cover all of Ascent Medias costs or
damages or Ascent Medias loss of income resulting from its
inability to provide services in Southern California for an
extended period of time.
Discovery is dependent upon advertising
revenue. Discovery earns a significant portion of
its revenue from the sale of advertising time on its networks
and web sites. Discoverys advertising revenue is affected
by viewer demographics, viewer ratings and market conditions for
advertising. The overall cable and broadcast television industry
is facing several issues with regard to its advertising revenue,
including (1) audience fragmentation caused by the
proliferation of other television networks,
video-on-demand
offerings from cable and satellite companies and broadband
content offering, (2) the deployment of digital video
recording devices, allowing consumers to time shift programming
and skip or fast-forward through advertisements and
(3) consolidation within the advertising industry, shifting
more leverage to the bigger agencies and buying groups.
Expenditures by advertisers tend to be cyclical, reflecting
overall economic conditions as well as budgeting and buying
patterns. A decline in the economic prospects of advertisers or
the economy in general could alter current or prospective
advertisers spending priorities. In addition, the
publics reception toward programs or programming genres
can decline. An adverse change in any of these factors could
have a negative effect on Discoverys revenue in any given
period. Ascent Medias business is also dependent in part
on the advertising industry, as a significant portion of Ascent
Medias revenue is derived from the sale of services to
agencies
and/or the
producers of television advertising.
Discoverys revenue is dependent upon the maintenance of
affiliation agreements with cable and satellite distributors on
acceptable terms. Discovery earns a significant
portion of its revenue from per-subscriber license fees paid by
cable operators,
direct-to-home
(DTH) satellite television operators and other channel
distributors. Discoverys networks maintain affiliation
arrangements that enable them to reach a large percentage of
cable and direct broadcast satellite households across the
United States, Asia, Europe and Latin America. These
arrangements are generally long-term arrangements ranging from 3
to 10 years. These affiliation arrangements usually provide
for payment to Discovery based on the numbers of subscribers
that receive the Discovery networks. Discoverys core
networks depend on achieving and maintaining carriage within the
most widely distributed cable programming tiers to maximize
their subscriber base and revenue. The loss of a significant
number of affiliation arrangements on basic programming tiers
could reduce the distribution of Discoverys networks,
thereby adversely affecting such networks revenue from
per-subscriber fees and their ability to sell advertising or the
rates they are able to charge for such advertising. Those
Discovery networks that are carried on digital tiers are
dependent upon the continued upgrade of cable systems to digital
capability and the publics continuing acceptance of, and
willingness to pay for upgrades to, digital cable, as well as
Discoverys ability to negotiate favorable carriage
agreements on widely accepted digital tiers.
Our businesses are subject to risks of adverse government
regulation. Programming services, satellite
carriers, television stations and Internet and data transmission
companies are subject to varying degrees of regulation in the
United States by the Federal Communications Commission and other
entities and in foreign countries by similar entities. Such
regulation and legislation are subject to the political process
and have been in constant flux over the past decade. Moreover,
substantially every foreign country in which our subsidiaries or
business affiliates have, or may in the future make, an
investment regulates, in varying degrees, the distribution,
content and ownership of programming services and foreign
investment in programming companies. Further material changes in
the law and regulatory requirements must be
I-15
anticipated, and there can be no assurance that our business and
the business of our affiliates will not be adversely affected by
future legislation, new regulation or deregulation.
Failure to obtain renewal of FCC licenses could disrupt our
business. Ascent Media holds licenses,
authorizations and registrations from the FCC required for the
conduct of its network services business, including earth
station and various classes of wireless licenses and an
authorization to provide certain services. Most of the FCC
licenses held by Ascent Media are for transmit/receive earth
stations, which cannot be operated without individual licenses.
The licenses for these stations are granted for a period of
fifteen years and, while the FCC generally renews licenses for
satellite earth stations routinely, there can be no assurance
that Ascent Medias licenses will be renewed at their
expiration dates. Registration with the FCC, rather than
licensing, is required for receiving transmissions from
satellites from points within the United States. Ascent Media
relies on third party licenses or authorizations when it
transmits domestic satellite traffic through earth stations
operated by third parties. Our failure, and the failure of third
parties, to obtain renewals of such FCC licenses could disrupt
the network services segment of Ascent Media and have a material
adverse effect on Ascent Media. Further material changes in the
law and regulatory requirements must be anticipated, and there
can be no assurance that our businesses will not be adversely
affected by future legislation, new regulation, deregulation or
court decisions.
Our businesses operate in an increasingly competitive market,
and there is a risk that our businesses may not be able to
effectively compete with other providers in the
future. The entertainment and media services and
programming businesses in which we compete are highly
competitive and service-oriented. Ascent Media has few long-term
or exclusive service agreements with its creative services
customers. Business generation in these groups is based
primarily on customer satisfaction with reliability, timeliness,
quality and price. The major motion picture studios, which are
Ascent Medias customers, such as Paramount Pictures, Sony
Pictures Entertainment, Twentieth Century Fox, Universal
Pictures, The Walt Disney Company,
Metro-Goldwyn-Mayer
and Warner Brothers, have the capability to perform similar
services in-house. These studios also have substantially greater
financial resources than Ascent Medias, and in some cases
significant marketing advantages. Thus, depending on the
in-house capacity available to some of these studios, a studio
may be not only a customer but also a competitor. There are also
numerous independent providers of services similar to Ascent
Medias. Thomson, a French corporation, is also a major
competitor of Ascent Media, particularly under its Technicolor
brand, as is Kodak through its Laser Pacific division. We also
actively compete with certain industry participants that have a
unique operating niche or specialty business. If there were a
significant decline in the number of motion pictures or the
amount of original television programming produced, or if the
studios or Ascent Medias other clients either established
in-house post-production facilities or significantly expanded
their in-house capabilities, Ascent Medias operations
could be materially and adversely affected.
Discovery is primarily an entertainment and programming company
that competes with other programming networks for viewers in
general, as well as for viewers in special interest groups and
specific demographic categories. In order to compete for these
viewers, Discovery must obtain a regular supply of high quality
category-specific programming. To the extent Discovery seeks
third party suppliers of such programming, it competes with
other cable and broadcast television networks for programming.
The expanded availability of digital cable television and the
introduction of
direct-to-home
satellite distribution has greatly increased the amount of
channel capacity available for new programming networks,
resulting in the launch of a number of new programming networks
by Discovery and its competitors. This increase in channel
capacity has also made competitive niche programming networks
viable, because such networks do not need to reach the broadest
possible group of viewers in order to be moderately successful.
Discoverys program offerings must also compete for viewers
and advertisers with other entertainment media, such as home
video, online activities and movies. Increasing audience
fragmentation could have an adverse effect on Discoverys
advertising and subscription revenue. In addition, the cable
television and
direct-to-home
satellite industries have been undergoing a period of
consolidation. As a result, the number of potential buyers of
the programming services offered by Discovery is decreasing. In
this more concentrated market, there can be no assurance that
Discovery will be able to obtain or maintain carriage of its
programming services by distributors when its current long-term
contracts are up for renewal.
We have overlapping directors and management with Liberty and
Liberty Global, Inc., which may lead to conflicting
interests. Five of our six executive officers
also serve as executive officers of Liberty and one of our
executive officers serves as an executive officer of Liberty
Global, Inc., or LGI. LGI is an independent, publicly traded
company, which was formed in connection with the business
combination between UnitedGlobalCom, Inc. and Liberty Media
International, Inc., or LMI. All of the shares of LMI were
distributed by Liberty to its shareholders in June 2004. Our
board of directors includes persons who are members of the board
of directors of Liberty
and/or LGI.
We do not own any interest in Liberty or LGI, and to our
knowledge Liberty and LGI do not own any interest in us. The
executive officers and the members of our board of directors
have fiduciary duties to our stockholders. Likewise, any such
persons who serve in similar capacities at Liberty
and/or LGI
have fiduciary duties to such companys stockholders.
Therefore, such persons may have
I-16
conflicts of interest or the appearance of conflicts of interest
with respect to matters involving or affecting each company. For
example, there may be the potential for a conflict of interest
when we, Liberty or LGI look at acquisitions and other corporate
opportunities that may be suitable for each of us. Moreover,
most of our directors and officers continue to own Liberty
and/or LGI
stock and options to purchase Liberty
and/or LGI
stock. These ownership interests could create, or appear to
create, potential conflicts of interest when these individuals
are faced with decisions that could have different implications
for our company and Liberty or LGI. On June 1, 2005, the
board of directors of Liberty adopted a policy statement that,
subject to certain qualifications, including the fiduciary
duties of Libertys board of directors, Liberty will use
its commercially reasonable efforts to make available to us any
corporate opportunity relating to the acquisition of all or
substantially all of the assets of, or equity securities
representing control (as defined in the policy
statement) of, any entity whose primary business is the
acquisition, creation
and/or
distribution of television programming consisting primarily of
science and nature programming for distribution primarily in the
basic service provided by cable and satellite
television distributors. This policy statement of Libertys
board of directors can be amended, modified or rescinded by
Libertys board of directors in its sole discretion at any
time, and the policy automatically terminates without any
further action of the board of directors of Liberty on the
second anniversary of the distribution date. From time to time,
Liberty or LGI or their respective affiliates may enter into
transactions with us or our subsidiaries or other affiliates.
Although the terms of any such transactions will be established
based upon negotiations between employees of the companies
involved, there can be no assurance that the terms of any such
transactions will be as favorable to us or our subsidiaries or
affiliates as would be the case where the parties are completely
at arms length.
We and Liberty or LGI may compete for business
opportunities. Liberty and LGI each own interests
in various U.S. and international programming companies that
have subsidiaries or controlled affiliates that own or operate
domestic or foreign programming services that may compete with
the programming services offered by our businesses. We have no
rights in respect of U.S. or international programming
opportunities developed by or presented to the subsidiaries or
controlled affiliates of Liberty or LGI, and the pursuit of
these opportunities by such subsidiaries or affiliates may
adversely affect the interests of our company and its
shareholders. In addition, a subsidiary of LGI operates a
playout facility that competes with Ascent Medias London
playout facility, and it is likely that other competitive
situations will arise in the future. Because we, Liberty and LGI
have some overlapping directors and officers, the pursuit of
these opportunities may serve to intensify the conflicts of
interest or appearance of conflicts of interest faced by our
respective management teams. Our restated certificate of
incorporation provides that no director or officer of ours will
be liable to us or our stockholders for breach of any fiduciary
duty by reason of the fact that any such individual directs a
corporate opportunity to another person or entity (including LMI
and LGI) instead of us, or does not refer or communicate
information regarding such corporate opportunity to us, unless
(x) such opportunity was expressly offered to such person
solely in his or her capacity as a director or officer of our
company or as a director or officer of any of our subsidiaries,
and (y) such opportunity relates to a line of business in
which our company or any of our subsidiaries is then directly
engaged.
It may be difficult for a third party to acquire us, even if
doing so may be beneficial to our
shareholders. Certain provisions of our restated
certificate of incorporation and bylaws may discourage, delay or
prevent a change in control of our company that a shareholder
may consider favorable. These provisions include the following:
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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;
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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;
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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;
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prohibiting shareholder action by written consent (subject to
certain exceptions), thereby requiring shareholder action to be
taken at a meeting of the shareholders;
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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;
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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;
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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
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I-17
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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
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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.
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Our company has adopted a shareholder rights plan in order to
encourage anyone seeking to acquire us to negotiate with our
board of directors prior to attempting a takeover. While the
plan is designed to guard against coercive or unfair tactics to
gain control of us, the plan may have the effect of making more
difficult or delaying any attempts by others to obtain control
of us.
Holders of any single series of our common stock may not have
any remedies if any action by our directors or officers has an
adverse effect on only that series of our common
stock. Principles of Delaware law and the
provisions of our restated certificate of incorporation may
protect decisions of our board of directors that have a
disparate impact upon holders of any single series of our common
stock. Under Delaware law, the board of directors has a duty to
act with due care and in the best interests of all of our
shareholders, including the holders of all series of our common
stock. Principles of Delaware law established in cases involving
differing treatment of multiple classes or series of stock
provide that a board of directors owes an equal duty to all
common shareholders regardless of class or series and does not
have separate or additional duties to any group of shareholders.
As a result, in some circumstances, our directors may be
required to make a decision that is adverse to the holders of
one series of our common stock. Under the principles of Delaware
law referred to above, you may not be able to challenge these
decisions if our board of directors is disinterested and
adequately informed with respect to these decisions and acts in
good faith and in the honest belief that it is acting in the
best interests of all of our shareholders.
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Item 1B.
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Unresolved
Staff
Comments.
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None
We share our executive offices in Englewood, Colorado under a
services agreement with Liberty. All of our other real or
personal property is owned or leased by our subsidiaries or
affiliates.
Ascent Medias operations are conducted at over 80
properties. In the United States, Ascent Media occupies owned
and leased properties in California, Connecticut, Florida,
Georgia, New Jersey, New York and Virginia; the network services
group also operates a satellite earth station and related
facilities in Minnesota. Internationally, Ascent Media has owned
and leased properties in London, England. In addition, the
creative services group operates a leased facility in Mexico
City, Mexico, and has a 50% owned equity affiliate with
facilities in Barcelona and Madrid, Spain, and the network
services group operates two leased facilities in the Republic of
Singapore. Worldwide, Ascent Media leases approximately
1.4 million square feet and owns another
325,000 square feet. In the United States, Ascent
Medias leased properties total approximately
1.1 million square feet and have terms expiring between
March 2007 and April 2015. Several of these agreements have
extension options. The leased properties are used for our
technical operations, office space and media storage. Ascent
Medias international leases have terms that expire between
March 2007 and September 2020, and are also used for technical
operations, office space and media storage. Over half of the
international leases have extension clauses. Approximately
250,000 square feet of Ascent Medias owned properties
are located in Southern California, with another
45,000 square feet located in Northvale, New Jersey,
Tappan, New York, Minneapolis, Minnesota and Stamford,
Connecticut. In addition, Ascent Media owns approximately
30,000 square feet in London, England. Nearly all of Ascent
Medias owned properties are purpose-built for its
technical and creative service operations. Ascent Medias
facilities are adequate to support its current near term growth
needs.
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Item 3.
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Legal
Proceedings.
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The registrant and its subsidiaries are not a party to any
material legal proceedings.
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Item 4.
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Submission
of Matters to a Vote of Security
Holders.
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None.
I-18
PART II.
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity
Securities.
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Market
Information
We have two series of common stock, Series A and
Series B, which trade on the Nasdaq National Market under
the symbols DISCA and DISCB, respectively. The following table
sets forth the range of high and low sales prices of shares of
our Series A and Series B common stock since our spin
off on July 21, 2005.
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Series A
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Series B
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High
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Low
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High
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Low
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2006
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First quarter
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$
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15.65
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13.88
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15.96
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13.58
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Second quarter
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$
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15.18
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13.61
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15.21
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13.73
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Third quarter
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$
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14.82
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12.81
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14.54
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12.97
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Fourth quarter
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$
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16.96
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14.18
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16.85
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13.97
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2005
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July 21, 2005 through
September 30, 2005
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$
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16.30
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13.51
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16.77
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14.40
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Fourth quarter
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$
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16.23
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13.69
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16.80
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13.59
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Holders
As of February 6, 2007, there were approximately 84,000 and
700 record and beneficial holders of our Series A common
stock and Series B common stock, respectively.
Dividends
We have not paid any cash dividends on our Series A common
stock and Series B common stock, and we have no present
intention of so doing. Payment of cash dividends, if any, in the
future will be determined by our Board of Directors in light of
our earnings, financial condition and other relevant
considerations.
Securities
Authorized for Issuance Under Equity Compensation
Plans
Information required by this item is incorporated by reference
to our definitive proxy statement for our 2007 Annual Meeting of
shareholders.
|
|
Item 6.
|
Selected
Financial
Data.
|
Effective July 21, 2005, Liberty Media Corporation
(Liberty) completed a spin off transaction pursuant
to which our capital stock was distributed as a dividend to
holders of Libertys Series A and Series B common
stock. Subsequent to the spin off, we are a separate publicly
traded company and we and Liberty operate independently. The
spin off has been accounted for at historical cost due to the
pro rata nature of the distribution. Accordingly, our historical
financial statements are presented in a manner similar to a
pooling of interest.
The following tables present selected historical information
relating to our financial condition and results of operations
for the past five years. The following data should be read in
conjunction with our consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
amounts in thousands
|
|
|
Summary Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Discovery
Communications, Inc.
|
|
$
|
3,129,157
|
|
|
|
3,018,622
|
|
|
|
2,945,782
|
|
|
|
2,863,003
|
|
|
|
2,816,513
|
|
Goodwill
|
|
$
|
2,074,789
|
|
|
|
2,133,518
|
|
|
|
2,135,446
|
|
|
|
2,130,897
|
|
|
|
2,104,705
|
|
Total assets
|
|
$
|
5,870,982
|
|
|
|
5,819,236
|
|
|
|
5,564,828
|
|
|
|
5,396,627
|
|
|
|
5,373,150
|
|
Stockholders equity
|
|
$
|
4,549,264
|
|
|
|
4,575,425
|
|
|
|
4,347,279
|
|
|
|
4,260,269
|
|
|
|
3,617,417
|
|
II-1
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
amounts in thousands,
|
|
|
|
except per share amounts
|
|
|
Summary Statement of Operations
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
688,087
|
|
|
|
694,509
|
|
|
|
631,215
|
|
|
|
506,103
|
|
|
|
539,333
|
|
Operating income (loss)(1)
|
|
$
|
(115,137
|
)
|
|
|
(1,402
|
)
|
|
|
16,935
|
|
|
|
(2,404
|
)
|
|
|
(61,452
|
)
|
Share of earnings (losses) of
Discovery
|
|
$
|
103,588
|
|
|
|
79,810
|
|
|
|
84,011
|
|
|
|
37,271
|
|
|
|
(32,046
|
)
|
Net earnings (loss)(1)
|
|
$
|
(46,010
|
)
|
|
|
33,276
|
|
|
|
66,108
|
|
|
|
(52,394
|
)
|
|
|
(129,275
|
)
|
Basic and diluted earnings (loss)
per common share(2)
|
|
$
|
(0.16
|
)
|
|
|
0.12
|
|
|
|
0.24
|
|
|
|
(0.19
|
)
|
|
|
(0.46
|
)
|
|
|
|
(1) |
|
Includes impairment of goodwill and other long-lived assets of
$93,402,000 and $83,718,000 for the years ended
December 31, 2006 and 2002, 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.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
The following discussion and analysis provides information
concerning our results of operations and financial condition.
This discussion should be read in conjunction with our
accompanying consolidated financial statements and the notes
thereto.
Overview
Effective July 21, 2005, Liberty completed a spin off
transaction pursuant to which our capital stock was distributed
as a dividend to holders of Libertys Series A and
Series B common stock. Subsequent to the spin off, we are a
separate publicly traded company and we and Liberty operate
independently. The spin off did not involve the payment of any
consideration by the holders of Liberty common stock and was
intended to qualify as a tax-free spin off. The spin off has
been accounted for at historical cost due to the pro rata nature
of the distribution. We are a holding company and our businesses
and assets include Ascent Media Group, LLC (Ascent
Media), which we consolidate, and a 50% ownership interest
in Discovery Communications, Inc. (Discovery or
DCI), which we account for using the equity method
of accounting. Accordingly, as described below, Discoverys
revenue is not reflected in the revenue we report in our
financial statements. In addition to the foregoing assets,
immediately prior to the spin off, Liberty transferred to a
subsidiary of our company $200 million in cash.
Ascent Media provides creative and network services to the media
and entertainment industries. Ascent Medias clients
include major motion picture studios, independent producers,
broadcast networks, cable programming networks, advertising
agencies and other companies that produce, own
and/or
distribute entertainment, news, sports, corporate, educational,
industrial and advertising content. Subsequent to an operational
realignment in 2006, Ascent Medias operations are
organized into the following three groups: Creative services,
Network services and Corporate and other. Ascent Media has few
long-term or exclusive agreements with its creative services
customers.
In 2007, Ascent Media will continue to focus on leveraging its
broad array of media services to market itself as a full service
provider to new and existing customers within the feature film
and television production industry. Ascent Media also believes
it can optimize its position in the market by growing its
digital media management business. With facilities in the U.S.,
the United Kingdom, Asia and Mexico, Ascent Media hopes to
increase its services to multinational companies. The challenges
that Ascent Media faces include differentiating its products and
services to help maintain or increase operating margins and
financing capital expenditures for equipment and other items to
satisfy customers desire for services using the latest
technology.
Our most significant asset is Discovery, in which we do not have
a controlling financial interest. Discovery is a global media
and entertainment company that provides original and purchased
video programming in the United States and over 170 other
countries. We account for our 50% ownership interest in
Discovery using the equity method of accounting. Accordingly,
our share of the results of operations of Discovery is reflected
in our consolidated results as earnings or losses of Discovery.
To assist the reader in better understanding and analyzing our
business, we have included a separate discussion and analysis of
Discoverys results of operations and financial condition
below.
II-2
Acquisitions
AccentHealth. Effective January 27, 2006,
one of our subsidiaries acquired substantially all of the assets
of AccentHealth, LLCs (AccentHealth)
healthcare media business for cash consideration of $46,793,000.
AccentHealth operates an advertising-supported captive audience
television network in doctor office waiting rooms nationwide.
For financial reporting purposes, the acquisition is deemed to
have occurred on February 1, 2006, and the results of
operations of AccentHealth have been included in our
consolidated results as part of the network services group since
the date of acquisition.
Cinetech. On October 20, 2004, Ascent
Media acquired substantially all of the assets of Cinetech,
Inc., a film laboratory and still image preservation and
restoration company, for $10,000,000 in cash plus contingent
compensation of up to $1,500,000 to be paid based on the
satisfaction of certain contingencies as set forth in the
purchase agreement. Cinetech is included in Ascent Medias
creative services group.
London Playout Centre. On March 12, 2004,
Ascent Media acquired the entire issued share capital of London
Playout Centre Limited, for a cash purchase price of
$36,573,000. London Playout Centre, which we refer to as LPC, is
a UK-based television channel origination facility. LPC is
included in Ascent Medias network services group.
Operating
Cash Flow
We evaluate the performance of our operating segments based on
financial measures such as revenue and operating cash flow. We
define operating cash flow as revenue less cost of services and
selling, general and administrative expense (excluding stock and
other equity-based compensation and accretion expense on asset
retirement obligations). We believe this is an important
indicator of the operational strength and performance of our
businesses, including the ability to invest in ongoing capital
expenditures and service any debt. In addition, this measure
allows management to view operating results and perform
analytical comparisons and identify strategies to improve
performance. This measure of performance excludes depreciation
and amortization, stock and other equity-based compensation,
accretion expense on asset retirement obligations, restructuring
and impairment charges that are included in the measurement of
operating income pursuant to U.S. generally accepted
accounting principles, or GAAP. Accordingly, operating cash flow
should be considered in addition to, but not as a substitute
for, operating income, cash flow provided by operating
activities and other measures of financial performance prepared
in accordance with GAAP. See note 17 to the accompanying
consolidated financial statements for a reconciliation of
operating cash flow to earnings (loss) before income taxes.
Results
of Operations
Our consolidated results of operations include general and
administrative expenses incurred at the DHC corporate level,
100% of Ascent Medias and AccentHealths results and
our 50% share of earnings of Discovery.
Ascent Medias creative services group revenue is primarily
generated from fees for video and audio post production, special
effects and editorial services for the television, feature film
and advertising industries. Generally, these services pertain to
the completion of feature films, television programs and
advertisements. These projects normally span from a few days to
three months or more in length, and fees for these projects
typically range from $10,000 to $1,000,000 per project.
Additionally, the creative services group provides owners of
film libraries a broad range of restoration, preservation,
archiving, professional mastering and duplication services. The
scope of these creative services vary in duration from one day
to several months depending on the nature of the service, and
fees typically range from less than $1,000 to $100,000 per
project. The creative services group includes Ascent
Medias digital media center which is developing new
products and businesses in areas such as digital imaging,
digital media and interactive media.
The network services groups revenue consists of fees
relating to facilities and services necessary to assemble and
transport programming for cable and broadcast networks across
the world via fiber, satellite and the Internet. The
groups revenues are also driven by systems integration and
field support services, technology consulting services, design
and implementation of advanced video systems, engineering
project management, technical help desk and field service.
Approximately 60% of the network services groups revenue
relates to broadcast services, satellite operations and fiber
services that are earned monthly under long-term contracts
ranging generally from one to seven years. Additionally,
approximately 40% of revenue relates to systems integration and
engineering services that are provided on a project basis over
terms generally ranging from three to twelve months.
Corporate related items and expenses are reflected in Corporate
and other, below. Cost of services and operating expenses
consists primarily of production wages, facility costs and other
direct costs and selling, general and administrative expenses.
II-3
Our consolidated results of operations for the year ended
December 31, 2006 include approximately eleven months of
results for AccentHealth. The consolidated results of operations
for the year ended December 31, 2004 include approximately
nine months of results for LPC and approximately two months of
results for Cinetech.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
amounts in thousands
|
|
|
Segment
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Creative Services group
|
|
$
|
417,876
|
|
|
|
421,797
|
|
|
|
405,026
|
|
Network Services group
|
|
|
270,211
|
|
|
|
272,712
|
|
|
|
226,189
|
|
Corporate and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
688,087
|
|
|
|
694,509
|
|
|
|
631,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Cash
Flow
|
|
|
|
|
|
|
|
|
|
|
|
|
Creative Services group
|
|
$
|
52,554
|
|
|
|
70,708
|
|
|
|
72,903
|
|
Network Services group
|
|
|
49,522
|
|
|
|
55,877
|
|
|
|
62,537
|
|
Corporate and other
|
|
|
(43,347
|
)
|
|
|
(47,960
|
)
|
|
|
(37,645
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
58,729
|
|
|
|
78,625
|
|
|
|
97,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. Our total revenue decreased 0.9% and
increased 10.0% for the years ended December 31, 2006 and
2005, respectively, as compared to the corresponding prior year.
In 2006, creative services group revenue decreased $3,921,000 as
a result of (i) an $8,400,000 decline in media services due
to lower traditional media and DVD services from major studios
partially offset by continued growth in new digital services and
(ii) lower television revenue of $2,165,000 driven by
declines in the U.K. broadcast work, partially offset by higher
television audio and post services in the U.S. These
creative services revenue decreases were partially offset by a
$6,535,000 increase in commercial services, driven primarily by
strong U.S. demand, and higher feature revenue of
$1,770,000, driven by an increased number of titles for post
production services, partially offset by smaller size feature
sound projects and lower home theatre. Network services
groups 2006 revenue decreased $2,501,000 as a result of
(i) a decline in systems integration and services revenue
of $11,080,000, reflecting significant one-time projects in 2005
and (ii) lower revenue in the U.K. of $15,060,000,
primarily as a result of termination of content distribution
contracts. These network services revenue decreases were
partially offset by the acquisition of AccentHealth in 2006,
which generated $20,873,000 of revenue, and by increased content
distribution activity in the U.S. and Singapore.
In 2005, creative services group revenue increased $16,771,000
as a result of a $7,330,000 increase in commercial revenue,
primarily in the U.S., a $4,660,000 increase due to strong sales
of U.S. television services from an increased number of
shows, and $9,906,000 of higher lab revenue driven by the
acquisition of Cinetech. These increases were offset by
declining sound services revenue of $2,960,000 resulting from
lower sales of services for features and games and lower media
services volumes of $2,470,000 from traditional services,
subtitling and DVD, partially offset by higher digital services.
Network services groups 2005 revenue increased $46,523,000
due to $9,423,000 of revenue related to the LPC acquisition,
$33,634,000 from a higher number of large engineering and
systems integration projects and $13,083,000 of higher
origination business revenue and other new initiatives,
partially offset by the $9,550,000 effect of lower renewal rates
on certain ongoing broadcast services contracts.
Cost of Services. Our cost of services
increased 1.9% and 17.2% for the years ended December 31,
2006 and 2005, respectively, as compared to the corresponding
prior year. In 2006, the increase in cost of services is driven
by the AccentHealth acquisition which contributed costs of
$6,439,000 and by changes in foreign currency exchange rates of
$1,367,000. The 2005 increase is partially attributable to the
2004 acquisitions discussed above, which contributed $12,109,000
in cost of services. In addition, cost of services increased in
2005 due to a change in revenue mix driven by higher systems
engineering and integration projects in the network services
group which have higher production and engineering labor and
production material and equipment costs.
As a percent of revenue, cost of services was 66.1%, 64.2% and
60.2% for the years ended December 31, 2006, 2005 and 2004,
respectively. The increase in each year is driven by increases
in labor costs partially offset by decreases in materials cost.
Labor costs have increased as the revenue mix moves toward more
labor intensive feature services and as projects have become
increasingly more integrated, with complex work flows requiring
higher levels of production labor and project management.
Selling, General and Administrative. Our
selling, general and administrative expenses
(SG&A), (excluding stock-based compensation and
accretion expense on asset retirement obligations), increased
2.8% and 11.0% for the years
II-4
ended December 31, 2006 and 2005, respectively, as compared
to the corresponding prior year. For 2006, the acquisition of
AccentHealth added $6,565,000 of SG&A expense, slightly
offset by lower personnel costs and professional fees. The 2005
increase in SG&A expense is primarily attributable to the
impact of the 2004 acquisitions of $5,270,000 and the growth in
2005 revenue driving higher labor, facility and selling
expenses. As a percent of revenue, SG&A increased from 24.5%
to 25.4% for the years ended December 31, 2005 and 2006,
respectively, due to the acquisition of AccentHealth in 2006,
combined with a slight overall decline in revenue.
Corporate and other operating cash flow improved $4,613,000 in
2006 primarily due to lower Ascent Media corporate expenses,
partially offset by an increase in DHC corporate, general and
administrative expenses which were $9,360,000 and $6,467,000 for
the years ended December 31, 2006 and 2005, respectively.
The 2005 decrease in operating cash flow of $10,315,000 is due
to DHC corporate expenses, which primarily relate to the Spin
Off ($5,072,000) and charges pursuant to the services agreement
with Liberty subsequent to the Spin Off ($876,000), and to
higher Ascent Media corporate expenses ($3,848,000) as a result
of higher labor, facility, and professional services costs
related to reengineering of corporate departments and processes
and to a legal settlement.
Depreciation and Amortization. The decrease in
depreciation and amortization expense from 2005 to 2006 is due
to assets becoming fully depreciated partially offset by capital
expenditures and the AccentHealth acquisition. Depreciation and
amortization were comparable in 2005 and 2004.
Stock Compensation. Stock-based compensation
was $1,817,000, $4,383,000 and $2,775,000 for the years ended
December 31, 2006, 2005 and 2004, respectively, and is
included in SG&A in the Consolidated Statements of
Operations and Comprehensive Earnings (Loss). Effective
January 1, 2006, we adopted Statement No. 123R.
Statement No. 123R requires that we amortize the grant date
fair value of our stock option and SAR Awards that qualify as
equity awards as stock compensation expense over the vesting
period of such Awards. Statement No. 123R also requires
that we record our liability awards at fair value each reporting
period and that the change in fair value be reflected as stock
compensation expense in our consolidated statement of
operations. Prior to adoption of Statement No. 123R, the
amount of expense associated with stock-based compensation was
generally based on the vesting of the related stock options and
stock appreciation rights and the market price of the underlying
common stock. The expense reflected in our consolidated
financial statements was based on the market price of the
underlying common stock as of the date of the financial
statements.
In 2001, Ascent Media granted to certain of its officers and
employees stock options (the Ascent Media Options)
with exercise prices that were less than the market price of
Ascent Media common stock on the date of grant. The Ascent Media
Options became exercisable for Liberty shares in connection with
Libertys acquisition in 2003 of the Ascent Media shares
that it did not already own. Prior to January 1, 2006, we
amortized the
in-the-money
value of these options over the
5-year
vesting period. Certain Ascent Media employees also hold options
and stock appreciation rights granted by companies acquired by
Ascent Media in the past several years and exchanged for Liberty
options and SARs. Prior to January 1, 2006 we recorded
compensation expense for the SARs based on the underlying stock
price and vesting of such awards.
On May 24, 2005, Liberty commenced an offer to purchase
certain stock options and SARs held by eligible employees of
Ascent Media. The offer to purchase related to 1,173,028 options
and SARs, and the aggregate offering price for such options and
SARs was approximately $2.15 million. The offer to purchase
expired at 9:00 p.m., Pacific time, on June 21, 2005.
Eligible employees tendered options with respect to
1,121,673 shares of Liberty Series A common stock, and
Liberty purchased such options for aggregate cash payments of
approximately $2.14 million. In connection with these
purchases, Ascent Media recorded 2005 compensation expense of
$3,830,000, which included (1) the amount of the cash
payments less any previously accrued compensation for the SARs,
(2) the previously unamortized
in-the-money
value related to the Ascent Media Options and (3) ongoing
amortization of the unexercised Ascent Media options.
As of December 31, 2006, the total compensation cost
related to unvested equity awards was $1.1 million. Such
amount will be recognized in our consolidated statements of
operations through 2009.
Restructuring Charges. On August 18,
2006, Ascent Media announced that it intended to streamline its
structure into two global operating divisions
creative services group and network services group
to better align Ascent Medias organization with the
companys strategic goals and to respond to changes within
the industry driven by technology and customer requirements (the
2006 Restructuring). The operations of the media
management services group were realigned with the other two
groups, which was completed in the fourth quarter of 2006. As a
result of the realignment, Ascent Media recorded a restructuring
charge of $12,092,000 during the year ended December 31,
2006, primarily related to severance. These restructuring
activities were primarily in the Corporate and other group in
the United States and United Kingdom.
II-5
During the year ended December 31, 2005, Ascent Media
recorded a restructuring charge of $4,112,000 related to the
consolidation of certain operating facilities resulting in
excess leased space, consolidation expenses and severance from
reductions in headcount. These restructuring activities were
implemented to improve ongoing operating efficiencies and
effectiveness primarily in the creative services group in the
U.K. There was no restructuring charge in 2004.
Impairment of Goodwill. As a result of the
2006 Restructuring and the declining financial performance of
the media management services group, including ongoing operating
losses driven by technology and customer requirement changes in
the industry, the media management services group was tested for
goodwill impairment in the third quarter of 2006, prior to
DHCs annual goodwill valuation assessment of the entire
company. DHC estimated the fair value of that reporting unit
principally by using trading multiples of revenue and operating
cash flows of similar companies in the industry. This test
resulted in a goodwill impairment loss for the media management
services group of $93,402,000, which represents the excess of
the carrying value over the implied fair value of such goodwill.
Share of Earnings of Discovery. Our share of
earnings of Discovery increased $23,778,000 or 29.8% in 2006 and
decreased $4,201,000 or 5.0% in 2005. The 2006 increase is due
to Discoverys higher operating income partially offset by
higher interest expense and the change in minority interests in
consolidated subsidiaries. Discoverys net income decreased
in 2005 as increases in revenue and operating income were more
than offset by increases in interest expense and income tax
expense.
For a more detailed discussion of Discoverys results of
operations, see Managements Discussion
and Analysis of Financial Condition and Results of Operations of
Discovery.
Income Taxes. For the year ended
December 31, 2006, we recorded income tax expense of
$43,942,000, but had a loss before taxes of $2,068,000. The
pre-tax loss resulted primarily from a $93,402,000 goodwill
impairment charge recorded in the third quarter of 2006, for
which we receive no tax benefit. Our effective tax rate was
59.5% and 34.6% for the years ended December 31, 2005 and
2004, respectively. While we were a subsidiary of Liberty, we
calculated our deferred tax liabilities using Libertys
blended weighted average state tax rate. Subsequent to our spin
off, we assessed such rate in light of the fact that we are
located primarily in California, which has a higher state income
tax rate than many of the other states in which Liberty does
business, and we determined that our effective tax rate should
be increased from 39% to 39.55%. This increase resulted in
additional deferred tax expense in 2005 of $15,263,000. Our
income tax rate in 2005 was higher than the federal income tax
rate of 35% due to state and foreign tax expense.
Net Earnings (Loss). We recorded net earnings
(loss) of ($46,010,000), $33,276,000 and $66,108,000 for the
years ended December 31, 2006, 2005 and 2004, respectively.
The change between each of these years is discussed in the
aforementioned fluctuations in revenue and expenses.
Liquidity
and Capital Resources
For the year ended December 31, 2006, our primary uses of
cash were capital expenditures ($77,541,000) and acquisitions
($46,793,000). We funded these investing activities with cash
from operating activities of $73,633,000 and with our available
cash. Of the foregoing 2006 capital expenditures, $20,316,000
relates to the buildout of Ascent Medias existing
facilities for customer specific contracts. The remainder of our
capital expenditures relates to purchases of new equipment and
the upgrade of existing facilities and equipment. For the
foreseeable future, we expect to have sufficient available cash
balances and net cash from operating activities to meet our
working capital needs and capital expenditure requirements. We
intend to seek external equity or debt financing in the event
any new investment opportunities, additional capital
expenditures or our operations require additional funds, but
there can be no assurance that we will be able to obtain equity
or debt financing on terms that are acceptable to us.
In 2007, Ascent Media and AccentHealth expect to spend
approximately $60,000,000 for capital expenditures, which we
expect will be funded with their cash from operations and cash
on hand.
Our ability to seek additional sources of funding depends on our
future financial position and results of operations, which, to a
certain extent, are subject to general conditions in or
affecting our industry and our customers and to general
economic, political, financial, competitive, legislative and
regulatory factors beyond our control.
We do not have access to the cash Discovery generates from its
operations, unless Discovery pays a dividend on its capital
stock or otherwise distributes cash to its stockholders.
Historically, Discovery has not paid any dividends on its
capital stock and we do not have sufficient voting control to
cause Discovery to pay dividends or make other payments or
advances to us.
II-6
Off-Balance
Sheet Arrangements and Contractual Obligations
Information concerning the amount and timing of required
payments under our contractual obligations at December 31,
2006 is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
After 5
|
|
|
|
|
|
|
1 year
|
|
|
1-3 years
|
|
|
4-5 years
|
|
|
years
|
|
|
Total
|
|
|
|
amounts in thousands
|
|
|
Operating leases
|
|
$
|
32,058
|
|
|
|
56,801
|
|
|
|
44,026
|
|
|
|
59,144
|
|
|
|
192,029
|
|
Other
|
|
|
|
|
|
|
6,100
|
|
|
|
|
|
|
|
|
|
|
|
6,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
32,058
|
|
|
|
62,901
|
|
|
|
44,026
|
|
|
|
59,144
|
|
|
|
198,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have contingent liabilities related to legal proceedings and
other matters arising in the ordinary course of business.
Although it is reasonably possible we may incur losses upon
conclusion of such matters, an estimate of any loss or range of
loss cannot be made. In the opinion of management, it is
expected that amounts, if any, which may be required to satisfy
such contingencies will not be material in relation to the
accompanying consolidated financial statements.
Recent
Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has
issued interpretation No. 48, Accounting for
Uncertainty in Income Taxes An Interpretation of
FASB Statement No. 109 (FIN 48),
regarding accounting for, and disclosure of, uncertain tax
positions. FIN 48 clarifies the accounting for uncertainty
in income taxes recognized in an enterprises financial
statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. FIN 48 prescribes
a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting for interim
periods, disclosure and transition. FIN 48 is effective for
fiscal years beginning after December 15, 2006. We are in
the process of evaluating the potential impact of the adoption
of FIN 48 on our consolidated balance sheet and statements
of operations and comprehensive earnings (loss), and do not
believe this adoption will have a material impact.
Critical
Accounting Estimates
Valuation of Long-lived Assets and Amortizable Other
Intangible Assets. We perform impairment tests
for our long-lived assets if an event or circumstance indicates
that the carrying amount of our long-lived assets may not be
recoverable. In response to changes in industry and market
conditions, we may also strategically realign our resources and
consider restructuring, disposing of, or otherwise exiting
businesses. Such activities could result in impairment of our
long-lived assets or other intangible assets. We are subject to
the possibility of impairment of long-lived assets arising in
the ordinary course of business. We regularly consider the
likelihood of impairment and recognize impairment if the
carrying amount of a long-lived asset or intangible asset is not
recoverable from its undiscounted cash flows in accordance with
SFAS No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets. Impairment is measured as
the difference between the carrying amount and the fair value of
the asset. We use both the income approach and market approach
to estimate fair value. Our estimates of fair value are subject
to a high degree of judgment. Accordingly, any value ultimately
derived from our long-lived assets may differ from our estimate
of fair value.
Valuation of Goodwill and
Non-amortizable
Other Intangible Assets. We assess the impairment
of goodwill annually and whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable. Factors we consider important which could trigger
an impairment review include significant underperformance to
historical or projected future operating results, substantial
changes in our strategy or the manner of use of our assets, and
significant negative industry or economic trends. Fair value of
each reporting unit is determined through the use of an outside
independent valuation consultant. Both the income approach and
market approach are used in determining fair value.
Valuation of Trade Receivables. We must make
estimates of the collectibility of our trade receivables. Our
management analyzes the collectibility based on historical bad
debts, customer concentrations, customer credit-worthiness,
current economic trends and changes in our customer payment
terms. We record an allowance for doubtful accounts based upon
specifically identified receivables that we believe are
uncollectible. In addition, we also record an amount based upon
a percentage of each aged category of our trade receivables.
These percentages are estimated based upon our historical
experience of bad debts. Our trade receivables balance was
$156,481,000, net of allowance for doubtful accounts of
$9,045,000, as of December 31, 2006.
II-7
Valuation of Deferred Tax Assets. In
accordance with SFAS No. 109, Accounting for
Income Taxes, we review the nature of each component of
our deferred income taxes for reasonableness. We have determined
that it is more likely than not that we will not realize the tax
benefits associated with certain cumulative net operating loss
carry forwards and impairment reserves, and as such, we have
established a valuation allowance of $96,223,000 and $91,235,000
as of December 31, 2006 and 2005, respectively.
Discovery
We hold a 50% ownership interest in Discovery and account for
this investment using the equity method of accounting.
Accordingly, in our financial statements we record our share of
Discoverys net income or loss available to common
shareholders and reflect this activity in one line item in the
statement of operations as Share of earnings of
Discovery. The following financial information of
Discovery for the years ended December 31, 2006, 2005 and
2004 and related discussion is presented to provide the reader
with additional analysis of the operating results and financial
position of Discovery. Because we do not control the
decision-making process or business management practices of
Discovery, we rely on Discovery to provide us with financial
information prepared in accordance with GAAP that we use in the
application of the equity method. The information included in
this section should be read in conjunction with the audited
financial statements of Discovery for the year ended
December 31, 2006 included elsewhere herein. The following
discussion and analysis of Discoverys operations and
financial position has been prepared based on information that
we receive from Discovery and represents our views and
understanding of their operating performance and financial
position based on such information. Discovery is not a
separately traded public company, and we do not have the ability
to cause Discoverys management to prepare their own
managements discussion and analysis for our purposes.
Accordingly, we note that the material presented in this section
might be different if Discoverys management had prepared
it.
The following discussion of Discoverys results of
operations is presented on a consolidated basis. In order to
provide a better understanding of Discoverys operations,
we have also included a summarized presentation of revenue and
operating cash flow of Discoverys three operating groups:
Discovery networks U.S., or U.S. networks, Discovery
networks international, or international networks, and Discovery
commerce, education & other.
The U.S. networks is Discoverys largest division. It
owns and operates 12 cable and satellite channels and provides
distribution and advertising sales services for BBC America and
distribution services for BBC World News. International networks
manages a portfolio of channels, led by the Discovery Channel
and Animal Planet brands, that is distributed in virtually every
pay-television market in the world via an infrastructure that
includes major operational centers in London, Singapore, New
Delhi and Miami. Discovery commerce, education & other
includes Discoverys retail chain store operations and
other direct consumer marketing activities, as well as Discovery
education, which manages Discoverys distribution of
education content to schools and consumers.
II-8
Consolidated
Results of Discovery
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
amounts in thousands
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
$
|
1,243,500
|
|
|
|
1,187,823
|
|
|
|
1,133,807
|
|
Distribution
|
|
|
1,434,901
|
|
|
|
1,198,686
|
|
|
|
976,362
|
|
Other
|
|
|
334,587
|
|
|
|
285,245
|
|
|
|
255,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
3,012,988
|
|
|
|
2,671,754
|
|
|
|
2,365,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
(1,120,377
|
)
|
|
|
(979,765
|
)
|
|
|
(846,316
|
)
|
SG&A expense
|
|
|
(1,170,187
|
)
|
|
|
(1,005,351
|
)
|
|
|
(856,340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flow
|
|
|
722,424
|
|
|
|
686,638
|
|
|
|
662,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses arising from long-term
incentive plans
|
|
|
(39,233
|
)
|
|
|
(49,465
|
)
|
|
|
(71,515
|
)
|
Depreciation &
amortization
|
|
|
(133,634
|
)
|
|
|
(123,209
|
)
|
|
|
(129,011
|
)
|
Gain on sale of patents
|
|
|
|
|
|
|
|
|
|
|
22,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
549,557
|
|
|
|
513,964
|
|
|
|
484,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income
(Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(194,227
|
)
|
|
|
(184,575
|
)
|
|
|
(167,420
|
)
|
Realized and unrealized gains from
derivative instruments, net
|
|
|
22,558
|
|
|
|
22,499
|
|
|
|
45,540
|
|
Minority interests in consolidated
subsidiaries
|
|
|
(2,451
|
)
|
|
|
(43,696
|
)
|
|
|
(54,940
|
)
|
Other
|
|
|
8,527
|
|
|
|
13,771
|
|
|
|
2,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
383,964
|
|
|
|
321,963
|
|
|
|
309,821
|
|
Income tax expense
|
|
|
(176,788
|
)
|
|
|
(162,343
|
)
|
|
|
(141,799
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
207,176
|
|
|
|
159,620
|
|
|
|
168,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
Segment Results of Discovery
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
amounts in thousands
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. networks
|
|
$
|
1,926,180
|
|
|
|
1,743,358
|
|
|
|
1,599,678
|
|
International networks
|
|
|
879,074
|
|
|
|
738,094
|
|
|
|
596,450
|
|
Discovery commerce,
education & other
|
|
|
207,734
|
|
|
|
190,302
|
|
|
|
169,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
3,012,988
|
|
|
|
2,671,754
|
|
|
|
2,365,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Cash Flow
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. networks
|
|
$
|
727,469
|
|
|
|
643,366
|
|
|
|
597,922
|
|
International networks
|
|
|
116,446
|
|
|
|
107,096
|
|
|
|
101,875
|
|
Discovery commerce,
education & other
|
|
|
(121,491
|
)
|
|
|
(63,824
|
)
|
|
|
(37,107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating cash flow
|
|
$
|
722,424
|
|
|
|
686,638
|
|
|
|
662,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: |
|
Discovery commerce, education & other includes
intercompany eliminations. Certain prior period amounts have
been reclassified to conform to the current period presentation. |
Revenue. Discoverys consolidated revenue
increased 13% for each of the years ended December 31, 2006
and 2005 as compared to the corresponding prior year. Increased
revenue was primarily due to increases of 20% and 23% in
distribution revenue for 2006 and 2005, respectively, as well as
an increase of 5% in advertising revenue for each of the same
periods. Other revenue increased 17% and 12% for 2006 and 2005.
II-9
Distribution revenue increased $128,901,000 or 18% and
$130,609,000 or 22% at the U.S. networks during the years
ended December 31, 2006 and 2005, respectively. These
increases are due to an 11% and 10% increase in paying
subscription units for the years ended December 31, 2006
and 2005, respectively, combined with contractual rate
increases. Launch amortization at the U.S. networks, a
contra-revenue item, was $72,585,000, $67,750,000 and
$93,763,000 for the years ended December 31, 2006, 2005 and
2004, respectively. Many of Discoverys domestic networks
are currently distributed to substantially all of the cable
television and direct broadcast satellite homes in the
U.S. Accordingly, the rate of growth in
U.S. distribution revenue in future periods is expected to
be less than historical rates.
At the international networks, distribution revenue increased
23% and 25% during 2006 and 2005, respectively. Such increases
were principally comprised of combined revenue growth in Europe
and Latin America of $96,897,000 during 2006 and growth in
Europe and Asia of $79,767,000 during 2005, resulting from a
2006 increase in paying subscription units of 13% combined with
contractual rate increases in certain markets. Discovery also
experienced a 2006 full year impact of new channel launches in
Italy, France and Germany. Subsequent to December 31, 2006,
Discovery completed negotiations for the renewal of long-term
distribution agreements for certain of its European cable
networks and paid a distributor $185.4 million. Such
payment will be amortized over a five year term, resulting in an
approximate $35 million annual reduction in international
distribution revenue.
Advertising revenue, which includes revenue from paid
programming, experienced a 5% increase for each of the years
ended December 31, 2006 and 2005, with a $34,710,000 or 14%
increase at the international networks and a $20,879,000 or 2%
increase at the U.S. networks from 2005 to 2006. The
increase in international networks advertising revenue was due
primarily to higher viewership in Europe and Latin America
combined with an increased subscriber base in most markets
worldwide. The increase in advertising revenue at the
U.S. networks was primarily due to higher advertising
sell-out rates and higher audience delivery on certain channels.
Paid programming, where Discovery sells blocks of time primarily
for infomercials that are aired during the overnight hours on
certain networks, represented 6% of total advertising revenue
for each of the years ended December 31, 2006, 2005 and
2004.
The increase in advertising revenue during 2005 was primarily
due to a 28% increase at the international networks. Over
two-thirds of the international networks advertising
revenue is generated by its operations in the United Kingdom and
Europe. The increase in international networks advertising
revenue was comprised of a $36,926,000 increase resulting from
higher viewership in the U.K. combined with an increased
subscriber base in the U.K. and Europe. Advertising revenue at
the U.S. networks was essentially flat in 2005, increasing
$1,316,000, as higher rates at certain of the larger networks,
combined with growth at other newer networks, was offset by
decreases resulting from lower audience delivery at certain of
the larger networks.
With 12 domestic channels, Discovery offers solutions to
advertisers that allow them to reach a broad range of
U.S. audience demographics in the face of increasing
fragmentation of audience share. The television industry is
facing several issues with regard to its advertising revenue,
including (1) audience fragmentation caused by the
proliferation of other television networks,
video-on-demand
offerings from cable and satellite companies and broadband
content offerings; (2) the deployment of digital video
recording devices, allowing consumers to time shift programming
and skip or fast-forward through advertisements; and
(3) consolidation within the advertising industry, shifting
more leverage to the bigger agencies and buying groups.
Commerce, education and other revenue increased $10,577,000 and
$10,959,000 related to the education business and increased
$10,051,000 and $9,163,000 related to the commerce business for
the years ended December 31, 2006 and 2005, respectively.
During the fourth quarter of 2006, Discovery made a number of
organizational and strategic adjustments to its education
business to focus the resources dedicated to the companys
direct-to-school
distribution platform, unitedstreaming, as well as the
divisions other premium
direct-to-school
subscription services. Subsequent to December 31, 2006,
Discovery initiated a strategic review of its commerce business
to evaluate potential new operating alternatives with respect to
such business unit.
Cost of Revenue. Cost of revenue increased 14%
and 16% for the years ended December 31, 2006 and 2005,
respectively. As a percent of revenue, cost of revenue was 37%,
37% and 36% for the years ended December 31, 2006, 2005 and
2004, respectively. The $140,612,000 increase in 2006 primarily
resulted from a $94,981,000 increase in content amortization
expense due to continued investment in original productions
across the U.S. networks combined with increases in Europe
associated with the launch of several networks to create a
package of lifestyle-focused programming, along with a new
free-to-air
channel in Germany branded as DMAX.
The increase in 2005 primarily resulted from a $106,901,000
increase in content amortization expense due to continued
investment across all U.S. networks in original productions
and high profile specials and continued investment
II-10
in the lifestyles category internationally, particularly in
Europe. These increases were offset partially by a net aggregate
benefit of approximately $11 million related to reductions
in estimates for music rights accruals.
SG&A Expenses. SG&A expenses increased
16% and 17% during the years ended December 31, 2006 and
2005, respectively. As a percent of revenue, SG&A expense
was 39%, 38% and 36% for the years ended December 31, 2006,
2005 and 2004, respectively. During 2006, SG&A expenses
increased $32,535,000, $67,275,000 and $50,817,000 in the
U.S. networks, international networks and education groups,
respectively. SG&A expense within the commerce group was
relatively consistent with the prior year period. In
U.S. networks, the increase is primarily due to a
$33,312,000 or 20% increase in personnel expense resulting from
compensation increases combined with increased headcount from
acquisitions. In international networks, the increase is
primarily due to a $38,202,000 or 32% increase in personnel
expense, resulting from infrastructure expansions in Europe and
Asia which increased headcount and office locations, a
$5,888,000 or 7% increase in marketing expense resulting from
marketing campaigns in Europe and Asia for the launch of new
channels and a $16,920,000 or 16% increase in general and
administrative expenses to support the growth of the business,
coupled with the effects of foreign currency exchange rates. As
a percent of revenue, international SG&A expense was
consistent at 43% for both of the years ended December 31,
2006 and 2005. In the education group, the increase is primarily
due to (i) a $23,539,000 or 98% increase in personnel
expense, resulting primarily from a full year of salary expense
for headcount hired in 2005 and (ii) a $19,142,000 or 174%
increase in marketing expense resulting mainly from
Discoverys investment in Cosmeo, a new consumer homework
help service. In 2007, Discovery implemented cost cutting
measures in its education group which should reduce personnel
expense for that group in comparison to 2006.
Within the different business segments during 2005, SG&A
expense decreased 2% at the U.S. networks and increased 34%
and 65% at the international networks and Discovery commerce,
education and other, respectively. The increase at the
international networks was caused by a $27,872,000 increase in
personnel expense resulting from adding headcount as the
business expands, particularly in the U.K. and Europe combined
with a $27,124,000 increase in marketing expense associated with
branding and awareness efforts related to the lifestyles
category initiative. The increase at Discovery commerce,
education and other is comprised of a $34,329,000 increase
primarily resulting from acquisitions and organic growth in
Discoverys education business.
Expenses Arising from Long-term Incentive
Plans. Expenses arising from long-term incentive
plans are related to Discoverys unit-based, long-term
incentive plans, or LTIP, for its employees who meet certain
eligibility criteria. Units are awarded to eligible employees
and vest at a rate of 25% per year. In August 2005, Discovery
discontinued one of its LTIPs and settled all amounts with cash.
Discovery established a new LTIP in October 2005 (the 2005
LTIP Plan) for certain eligible employees pursuant to
which participants in Discoverys remaining plan could
elect to (1) continue in such plan or (2) redeem
vested units and convert partially vested units to the 2005 LTIP
Plan. Substantially all participants in the remaining plan
redeemed their vested units and received partially vested units
in the 2005 LTIP Plan. Certain eligible employees were also
granted new units in the 2005 LTIP Plan. The value of units in
the 2005 LTIP Plan is indexed to the value of DHC Series A
common stock, and upon redemption, participants receive a cash
payment based on the change in market price of DHC Series A
common stock. Under the old plans, upon exercise, participants
received a cash payment for the increase in value of the units
from the unit value on the date of issuance determined by the
year over year change in Discoverys aggregate equity
value, using a consistent methodology. The change in unit value
of LTIP awards outstanding is recorded as compensation expense
over the period outstanding. Compensation expense aggregated
$39,233,000 and $49,465,000 for the years ended
December 31, 2006 and 2005, respectively. The decrease is
primarily the result of the change in unit value determination
for the 2005 LTIP Plan units. If the remaining vested LTIP
awards at December 31, 2006 were redeemed, the aggregate
cash payments by Discovery would be approximately $36,650,000.
Depreciation and Amortization. The increase in
depreciation and amortization for the year ended
December 31, 2006 is due to an increase in new assets
placed in service combined with acquisition activity occurring
during 2006. The decrease in depreciation and amortization for
the year ended December 31, 2005 is due to intangibles
becoming fully amortized and a decrease in the depreciable asset
base resulting from a reduction in the number of retail stores,
offset by new assets placed in service during 2005.
Gain on Sale of Patents. In 2004, Discovery
recorded a gain on the sale of certain of its television
technology patents. The $22 million gain represents the
sale price less the costs incurred to sell the patents. The cost
of developing the technology had been expensed in prior years to
SG&A expense. Discovery does not expect a significant amount
of income from patent sales in the future.
Other
Income and Expense
Interest Expense. The increase in interest
expense during the years ended December 31, 2006 and 2005
is primarily due to higher levels of outstanding debt in both
years combined with increases in interest rates during those
periods.
II-11
Unrealized Gains from Derivative Instruments,
net. Unrealized gains from derivative
transactions relate, primarily, to Discoverys use of
derivative instruments to modify its exposure to interest rate
fluctuations on its debt. These instruments include a
combination of swaps, caps, collars and other structured
instruments. As a result of unrealized mark to market
adjustments, Discovery recognized $10,352,000, $29,109,000 and
$44,060,000 in unrealized gains on these instruments during the
years ended December 31, 2006, 2005 and 2004, respectively.
The foreign exchange hedging instruments used by Discovery are
spot, forward and option contracts. Additionally, Discovery
enters into non-designated forward contracts to hedge non-dollar
denominated cash flows and foreign currency balances.
Minority Interests in Consolidated
Subsidiaries. Minority interest represents
increases and decreases in the estimated redemption value of
mandatorily redeemable interests in subsidiaries which are
initially recorded at fair value.
Other. Other income in 2006 relates primarily
to Discoverys equity share of earnings on their joint
ventures. Other income in 2005 relates primarily to the gain on
sale of one of Discoverys investments.
Income Taxes. Discoverys effective tax
rate was 46%, 50% and 46% for 2006, 2005 and 2004, respectively.
Discoverys effective tax rate differed from the federal
income tax rate of 35% primarily due to foreign and state taxes.
Liquidity &
Capital Resources
Discovery generated $479,911,000, $68,893,000 and $124,704,000
of cash from operations during the years ended December 31,
2006, 2005 and 2004, respectively. Discoverys payments
under its long-term incentive plans were $841,000, $325,756,000
and $240,752,000 for each of the same periods, respectively,
driving a significant use of cash in 2005 and 2004. For a
further discussion of Discoverys LTIP, please see
Note 14 to the Discovery consolidated financial statements.
One of Discoverys primary investing activities in 2006,
2005 and 2004 was payments of $180,000,000, $92,874,000 and
$148,880,000, respectively, to acquire mandatorily redeemable
securities related to minority interests in certain consolidated
subsidiaries. In 2006, $100,000,000 and $80,000,000 was paid for
the New York Times and the British Broadcasting Corporation
mandatorily redeemable securities, respectively. Discovery also
spent $90,138,000, $99,684,000 and $88,100,000 on capital
expenditures during the years ended December 31, 2006, 2005
and 2004, respectively. During the same periods, Discovery paid
$194,905,000, $400,000 and $17,218,000 for business
acquisitions, net of cash acquired.
In addition to cash provided by operations, Discovery funds its
activities with proceeds borrowed under various debt facilities,
including a term loan, two revolving loan facilities and various
senior notes payable. During the year ended December 31,
2006, net incremental borrowings under debt facilities
aggregated approximately $16,813,000. Total commitments of these
facilities were $4,059,000,000 at December 31, 2006. Debt
outstanding on these facilities aggregated $2,607,000,000 at
December 31, 2006, providing excess debt availability of
$1,452,000,000. Discoverys ability to borrow the unused
capacity is dependent on its continuing compliance with its
covenants at the time of, and after giving effect to, a
requested borrowing.
All term and revolving loans and senior notes are unsecured. The
debt facilities contain covenants that require Discovery to meet
certain financial ratios and place restrictions on the payment
of dividends, sale of assets, additional borrowings, mergers,
and purchases of capital stock, assets and investments.
Discovery has indicated it is in compliance with all debt
covenants at December 31, 2006.
In 2007, Discovery expects to spend approximately $100,000,000
for capital expenditures and $180,000,000 for interest expense.
Payments to satisfy LTIP obligations are not expected to be
significant in 2007. Discovery believes that its cash flow from
operations and borrowings available under its credit facilities
will be sufficient to fund its working capital requirements.
Contractual Obligations. Discovery has
agreements covering leases of satellite transponders, facilities
and equipment. These agreements expire at various dates through
2020. Discovery is obligated to license programming under
agreements with content suppliers that expire over various
dates. Discovery also has other contractual commitments arising
in the ordinary course of business.
II-12
A summary of all of the expected payments for these commitments
as well as future principal payments under the current debt
arrangements and minimum payments under capital leases at
December 31, 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period(2)
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
After 5
|
|
|
|
Total
|
|
|
1 year
|
|
|
1-3 years
|
|
|
4-5 years
|
|
|
years
|
|
|
|
amounts in thousands
|
|
|
Long-term debt
|
|
$
|
2,607,300
|
|
|
|
|
|
|
|
860,300
|
|
|
|
1,032,000
|
|
|
|
715,000
|
|
Capital leases
|
|
|
38,900
|
|
|
|
9,300
|
|
|
|
14,600
|
|
|
|
9,600
|
|
|
|
5,400
|
|
Operating leases
|
|
|
505,228
|
|
|
|
87,049
|
|
|
|
141,494
|
|
|
|
100,615
|
|
|
|
176,070
|
|
Program license fees
|
|
|
559,633
|
|
|
|
318,523
|
|
|
|
109,849
|
|
|
|
87,424
|
|
|
|
43,837
|
|
Launch incentives
|
|
|
36,713
|
|
|
|
21,632
|
|
|
|
15,081
|
|
|
|
|
|
|
|
|
|
Other(1)
|
|
|
229,451
|
|
|
|
86,965
|
|
|
|
116,102
|
|
|
|
25,264
|
|
|
|
1,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,977,225
|
|
|
|
523,469
|
|
|
|
1,257,426
|
|
|
|
1,254,903
|
|
|
|
941,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents Discoverys 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. |
|
(2) |
|
The table above 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 $84.5 million accrued under
Discoverys 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. |
Discovery is subject to certain contractual agreements that may
require Discovery to acquire the ownership interests of minority
partners. At the end of 2006, Discovery estimates its aggregate
obligations thereunder at approximately $94.8 million. The
put rights are exercisable at various dates. In January 2007,
Discovery exercised its rights and paid $44.5 million to
acquire certain redeemable equity.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market
Risk.
|
Foreign
Currency Risk
We continually monitor our economic exposure to changes in
foreign exchange rates and may enter into foreign exchange
agreements where and when appropriate. Substantially all of our
foreign transactions are denominated in foreign currencies,
including the liabilities of our foreign subsidiaries. Although
our foreign transactions are not generally subject to
significant foreign exchange transaction gains or losses, the
financial statements of our foreign subsidiaries are translated
into United States dollars as part of our consolidated financial
reporting. As a result, fluctuations in exchange rates affect
our financial position and results of operations.
|
|
Item 8.
|
Financial
Statements and Supplementary
Data.
|
Our consolidated financial statements are filed under this Item,
beginning on
Page II-17.
The financial statement schedules required by
Regulation S-X
are filed under Item 15 of this Annual Report on
Form 10-K.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial
Disclosure.
|
None.
|
|
Item 9A.
|
Controls
and
Procedures.
|
In accordance with Exchange Act
Rules 13a-15
and 15d-15,
the Company carried out an evaluation, under the supervision and
with the participation of management, including its chief
executive officer, principal accounting officer and principal
financial officer (the Executives), of the
effectiveness of its disclosure controls and procedures as of
the end of the period covered by this report. Based on that
evaluation, the Executives concluded that the Companys
disclosure controls and procedures were effective as of
December 31, 2006 to provide reasonable assurance that
information required to be disclosed in its reports filed or
submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms.
See
page II-15
for Managements Report on Internal Control Over
Financial Reporting.
II-13
See
page II-16
for Report of Independent Registered Public Accounting
Firm for our accountants attestation regarding our
internal controls over financial reporting.
There has been no change in the Companys internal controls
over financial reporting identified in connection with the
evaluation described above that occurred during the three months
ended December 31, 2006 that has materially affected, or is
reasonably likely to materially affect, its internal controls
over financial reporting.
|
|
Item 9B.
|
Other
Information.
|
None.
II-14
MANAGEMENTS
REPORT ON INTERNAL
CONTROL OVER FINANCIAL REPORTING
Discovery Holding Companys management is responsible for
establishing and maintaining adequate internal control over the
Companys financial reporting. The Companys internal
control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of
financial reporting and the preparation of the consolidated
financial statements and related disclosures in accordance with
generally accepted accounting principles. The Companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions of the Company; (2) provide
reasonable assurance that transactions are recorded as necessary
to permit preparation of the consolidated financial statements
and related disclosures in accordance with generally accepted
accounting principles; (3) provide reasonable assurance
that receipts and expenditures of the Company are being made
only in accordance with authorizations of management and
directors of the Company; and (4) provide reasonable
assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
Companys assets that could have a material effect on the
consolidated financial statements and related disclosures.
Because of inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies and procedures may deteriorate.
The Company assessed the design and effectiveness of internal
control over financial reporting as of December 31, 2006.
In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal
Control-Integrated Framework.
Based upon our assessment using the criteria contained in COSO,
management has concluded that, as of December 31, 2006,
Discovery Holding Companys internal control over financial
reporting is effectively designed and operating effectively.
Discovery Holding Companys independent registered public
accountants audited the consolidated financial statements and
related disclosures in the Annual Report on
Form 10-K
and have issued an audit report on managements assessment
of the Companys internal control over financial reporting.
This report appears on
page II-16
of this Annual Report on
Form 10-K.
II-15
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Discovery Holding Company:
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control over
Financial Reporting appearing on
page II-15,
that Discovery Holding Company maintained effective internal
control over financial reporting as of December 31, 2006,
based on the criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Management of Discovery Holding Company is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express an opinion on managements assessment and an
opinion on the effectiveness of the internal control over
financial reporting of Discovery Holding Company based on our
audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions of the company; (2) provide
reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements and related
disclosure in accordance with generally accepted accounting
principles; (3) provide reasonable assurance that receipts
and expenditures of the company are being made only in
accordance with authorizations of management and directors of
the company; and (4) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use,
or disposition of the companys assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Discovery
Holding Company maintained effective internal control over
financial reporting as of December 31, 2006, is fairly
stated, in all material respects, based on criteria established
in Internal Control Integrated Framework
issued by COSO. Also, in our opinion, Discovery Holding
Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2006,
based on the criteria established in Internal
Control Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Discovery Holding Company and
subsidiaries as of December 31, 2006 and 2005, and the
related consolidated statements of operations and comprehensive
earnings (loss), cash flows and stockholders equity for
each of the years in the three-year period ended
December 31, 2006, and our report dated February 28,
2007 expressed an unqualified opinion on those consolidated
financial statements.
KPMG LLP
Denver, Colorado
February 28, 2007
II-16
Report
of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Discovery Holding Company:
We have audited the accompanying consolidated balance sheets of
Discovery Holding Company and subsidiaries as of
December 31, 2006 and 2005, and the related consolidated
statements of operations and comprehensive earnings (loss), cash
flows and stockholders equity for each of the years in the
three-year period ended December 31, 2006. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits. We did not audit the financial statements of Discovery
Communications, Inc., (a 50 percent owned investee
company). The Companys investment in Discovery
Communications, Inc. at December 31, 2006 and 2005, was
$3,129,157,000 and $3,018,622,000, respectively, and its equity
in earnings of Discovery Communications, Inc. was $103,588,000,
$79,810,000 and $84,011,000 for the years ended
December 31, 2006, 2005 and 2004, respectively. The
financial statements of Discovery Communications, Inc. were
audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included
for Discovery Communications, Inc., is based solely on the
report of the other auditors.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the
report of the other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the report of the other
auditors, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Discovery Holding Company and subsidiaries as of
December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2006, in conformity
with U.S. generally accepted accounting principles.
As discussed in note 3 to the accompanying consolidated
financial statements, effective January 1, 2006, Discovery
Holding Company adopted SFAS No. 123R, Share Based
Payment.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Discovery Holding Companys internal
control over financial reporting as of December 31, 2006,
based on the criteria established in Internal
Control Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated February 28, 2007
expressed an unqualified opinion on managements assessment
of, and the effective operation of, internal control over
financial reporting.
KPMG LLP
Denver, Colorado
February 28, 2007
II-17
DISCOVERY
HOLDING COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
amounts in thousands
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
154,775
|
|
|
|
250,352
|
|
Trade receivables, net
|
|
|
147,436
|
|
|
|
134,615
|
|
Prepaid expenses
|
|
|
11,522
|
|
|
|
10,986
|
|
Other current assets
|
|
|
3,629
|
|
|
|
4,433
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
317,362
|
|
|
|
400,386
|
|
Investments in marketable
securities
|
|
|
51,837
|
|
|
|
|
|
Investment in Discovery
Communications, Inc. (Discovery or DCI)
(note 5)
|
|
|
3,129,157
|
|
|
|
3,018,622
|
|
Property and equipment, net
(note 6)
|
|
|
280,775
|
|
|
|
256,245
|
|
Goodwill (note 7)
|
|
|
2,074,789
|
|
|
|
2,133,518
|
|
Other assets, net
|
|
|
17,062
|
|
|
|
10,465
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,870,982
|
|
|
|
5,819,236
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
43,656
|
|
|
|
26,854
|
|
Accrued payroll and related
liabilities
|
|
|
32,292
|
|
|
|
21,651
|
|
Other accrued liabilities
|
|
|
29,924
|
|
|
|
27,777
|
|
Deferred revenue
|
|
|
16,015
|
|
|
|
17,491
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
121,887
|
|
|
|
93,773
|
|
Deferred income tax liabilities
(note 10)
|
|
|
1,174,594
|
|
|
|
1,127,677
|
|
Other liabilities
|
|
|
25,237
|
|
|
|
22,361
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,321,718
|
|
|
|
1,243,811
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
(notes 14 and 15)
|
|
|
|
|
|
|
|
|
Stockholders equity
(note 11):
|
|
|
|
|
|
|
|
|
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 268,194,966 shares at December 31,
2006 and 268,097,442 shares at December 31, 2005
|
|
|
2,682
|
|
|
|
2,681
|
|
Series B common stock,
$.01 par value. Authorized 50,000,000 shares; issued
and outstanding 12,025,088 shares at December 31, 2006
and 12,106,093 shares at December 31, 2005
|
|
|
120
|
|
|
|
121
|
|
Series C common stock,
$.01 par value. Authorized 600,000,000 shares; no
shares issued
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
5,714,379
|
|
|
|
5,712,304
|
|
Accumulated deficit
|
|
|
(1,183,831
|
)
|
|
|
(1,137,821
|
)
|
Accumulated other comprehensive
earnings (loss)
|
|
|
15,914
|
|
|
|
(1,860
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
4,549,264
|
|
|
|
4,575,425
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
5,870,982
|
|
|
|
5,819,236
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
II-18
DISCOVERY
HOLDING COMPANY AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
amounts in thousands,
|
|
|
|
except per share amounts
|
|
|
Net revenue
|
|
$
|
688,087
|
|
|
|
694,509
|
|
|
|
631,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
454,482
|
|
|
|
445,839
|
|
|
|
380,290
|
|
Selling, general, and
administrative, including stock-based compensation
|
|
|
177,366
|
|
|
|
174,428
|
|
|
|
155,905
|
|
Depreciation and amortization
|
|
|
67,929
|
|
|
|
76,377
|
|
|
|
77,605
|
|
Restructuring and other charges
(note 8)
|
|
|
12,092
|
|
|
|
4,112
|
|
|
|
|
|
Loss (gain) on sale of operating
assets
|
|
|
(2,047
|
)
|
|
|
(4,845
|
)
|
|
|
429
|
|
Impairment of goodwill
(note 7)
|
|
|
93,402
|
|
|
|
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
803,224
|
|
|
|
695,911
|
|
|
|
614,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(115,137
|
)
|
|
|
(1,402
|
)
|
|
|
16,935
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Share of earnings of Discovery
(note 5)
|
|
|
103,588
|
|
|
|
79,810
|
|
|
|
84,011
|
|
Other, net
|
|
|
9,481
|
|
|
|
3,704
|
|
|
|
132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113,069
|
|
|
|
83,514
|
|
|
|
84,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes
|
|
|
(2,068
|
)
|
|
|
82,112
|
|
|
|
101,078
|
|
Income tax expense (note 10)
|
|
|
(43,942
|
)
|
|
|
(48,836
|
)
|
|
|
(34,970
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
(46,010
|
)
|
|
|
33,276
|
|
|
|
66,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive earnings
(loss), net of taxes (note 13):
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses)
arising during the period
|
|
|
(148
|
)
|
|
|
651
|
|
|
|
(1,162
|
)
|
Foreign currency translation
adjustments
|
|
|
17,922
|
|
|
|
(14,821
|
)
|
|
|
6,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive earnings (loss)
|
|
|
17,774
|
|
|
|
(14,170
|
)
|
|
|
5,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive earnings (loss)
|
|
$
|
(28,236
|
)
|
|
|
19,106
|
|
|
|
71,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings (loss)
per common share (note 3)
|
|
$
|
(0.16
|
)
|
|
|
0.12
|
|
|
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
II-19
DISCOVERY
HOLDING COMPANY AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
amounts in thousands
|
|
|
|
(see note 4)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
(46,010
|
)
|
|
|
33,276
|
|
|
|
66,108
|
|
Adjustments to reconcile net
earnings (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
67,929
|
|
|
|
76,377
|
|
|
|
77,605
|
|
Stock-based compensation
|
|
|
1,817
|
|
|
|
4,383
|
|
|
|
2,775
|
|
Payments for stock-based
compensation
|
|
|
|
|
|
|
(2,139
|
)
|
|
|
|
|
Impairment of goodwill
|
|
|
93,402
|
|
|
|
|
|
|
|
51
|
|
Share of earnings of Discovery
|
|
|
(103,588
|
)
|
|
|
(79,810
|
)
|
|
|
(84,011
|
)
|
Deferred income tax expense
|
|
|
42,115
|
|
|
|
50,363
|
|
|
|
31,692
|
|
Other non-cash charges (credits),
net
|
|
|
(1,342
|
)
|
|
|
(4,684
|
)
|
|
|
706
|
|
Changes in assets and liabilities
(net of acquisitions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade receivables
|
|
|
(9,718
|
)
|
|
|
16,237
|
|
|
|
(36,405
|
)
|
Prepaid expenses and other current
assets
|
|
|
1,345
|
|
|
|
10,804
|
|
|
|
(6,631
|
)
|
Payables and other liabilities
|
|
|
27,683
|
|
|
|
(19,516
|
)
|
|
|
32,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
73,633
|
|
|
|
85,291
|
|
|
|
84,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(77,541
|
)
|
|
|
(90,526
|
)
|
|
|
(49,292
|
)
|
Cash paid for acquisitions, net of
cash acquired
|
|
|
(46,793
|
)
|
|
|
|
|
|
|
(44,238
|
)
|
Net sales (purchases) of
marketable securities
|
|
|
(51,837
|
)
|
|
|
12,800
|
|
|
|
(12,800
|
)
|
Cash proceeds from dispositions
|
|
|
5,697
|
|
|
|
15,374
|
|
|
|
3,978
|
|
Other investing activities, net
|
|
|
992
|
|
|
|
(394
|
)
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(169,482
|
)
|
|
|
(62,746
|
)
|
|
|
(102,279
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash transfers from Liberty
|
|
|
|
|
|
|
206,044
|
|
|
|
30,999
|
|
Net cash from option exercises
|
|
|
279
|
|
|
|
|
|
|
|
|
|
Payments of long-term debt and
capital lease obligations
|
|
|
(7
|
)
|
|
|
(12
|
)
|
|
|
|
|
Other financing activities, net
|
|
|
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
272
|
|
|
|
206,166
|
|
|
|
30,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
|
(95,577
|
)
|
|
|
228,711
|
|
|
|
13,042
|
|
Cash and cash equivalents at
beginning of year
|
|
|
250,352
|
|
|
|
21,641
|
|
|
|
8,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of year
|
|
$
|
154,775
|
|
|
|
250,352
|
|
|
|
21,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
II-20
DISCOVERY
HOLDING COMPANY AND SUBSIDIARIES
Years
ended December 31, 2006, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Preferred
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Parents
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
|
Stock
|
|
|
Series A
|
|
|
Series B
|
|
|
Series C
|
|
|
Capital
|
|
|
Investment
|
|
|
Deficit
|
|
|
Earnings (loss)
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amounts in thousands
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2004
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,490,799
|
|
|
|
(1,237,205
|
)
|
|
|
6,675
|
|
|
|
4,260,269
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,108
|
|
|
|
|
|
|
|
66,108
|
|
Other comprehensive earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,635
|
|
|
|
5,635
|
|
Stock compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,268
|
|
|
|
|
|
|
|
|
|
|
|
2,268
|
|
Reallocation of enterprise level
goodwill from Liberty (note 5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(18,000
|
)
|
Net cash transfers from Liberty
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,999
|
|
|
|
|
|
|
|
|
|
|
|
30,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Spin Off (note 2)
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
II-21
DISCOVERY
HOLDING COMPANY AND SUBSIDIARIES
December 31, 2006, 2005 and 2004
(1) Basis
of Presentation
The accompanying consolidated financial statements of Discovery
Holding Company (DHC or the Company)
represent a combination of the historical financial information
of (1) Ascent Media Group, LLC (Ascent Media),
a wholly-owned subsidiary of Liberty, and Libertys 50%
ownership interest in Discovery for periods prior to the
July 21, 2005 consummation of the spin off transaction
(the Spin Off) described in note 2 and
(2) DHC and its consolidated subsidiaries (including its
50% share of Discoverys earnings) for the period following
such date. The Spin Off has been accounted for at historical
cost due to the pro rata nature of the distribution.
Accordingly, DHCs historical financial statements are
presented in a manner similar to a pooling of interests.
Ascent Media is comprised of two operating segments. Ascent
Medias creative services group provides services necessary
to complete the creation of original content, including feature
films, mini-series, television shows, television commercials,
music videos, promotional and identity campaigns, and corporate
communications programming. The group manipulates or enhances
original visual images or audio captured in principal
photography or creates new three dimensional images, animation
sequences, or sound effects. In addition, the creative services
group provides a full complement of facilities and services
necessary to optimize, archive, manage and repurpose completed
media assets for global distribution via freight, satellite,
fiber, and the Internet. The networks services group provides
the facilities and services necessary to assemble and distribute
programming content for cable and broadcast networks via fiber,
satellite, and the Internet to viewers in North America, Europe,
and Asia. Additionally, the networks services group provides
systems integration, design, consulting, engineering and project
management services.
Substantially all of the assets of AccentHealth, LLC were
acquired by a subsidiary of DHC in January 2006, and are
included as part of the network services group for financial
reporting purposes. AccentHealth operates an
advertising-supported captive audience television network in
doctor office waiting rooms nationwide.
Discovery is a global media and entertainment company that
provides original and purchased cable and satellite television
programming in the United States and over 170 other countries.
Discovery also develops and sells branded commerce and
educational product lines in the United States.
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles
(GAAP) requires management to make estimates and
assumptions that affect the reported amounts of revenue and
expenses for each reporting period. The significant estimates
made in preparation of the Companys consolidated financial
statements primarily relate to valuation of goodwill, other
intangible assets, long-lived assets, deferred tax assets, and
the amount of the allowance for doubtful accounts. Actual
results could differ from the estimates upon which the carrying
values were based.
(2) Spin
Off Transaction
On July 21, 2005 (the Spin Off Date), Liberty
completed the spin off of the capital stock of DHC. The Spin Off
was effected as a dividend by Liberty to holders of its
Series A and Series B common stock of shares of DHC
Series A and Series B common stock, respectively.
Holders of Liberty common stock on July 15, 2005 received
0.10 of a share of DHC Series A common stock for each share
of Liberty Series A common stock owned and 0.10 of a share
of DHC Series B common stock for each share of Liberty
Series B common stock owned. Approximately
268.1 million shares of DHC Series A common stock and
12.1 million shares of DHC Series B common stock were
issued in the Spin Off. The Spin Off did not involve the payment
of any consideration by the holders of Liberty common stock and
is intended to qualify as a tax-free transaction.
In addition to Ascent Media and its investment in Discovery,
Liberty transferred $200 million in cash to a subsidiary of
DHC prior to the Spin Off.
Following the Spin Off, the Company and Liberty operate
independently, and neither has any stock ownership, beneficial
or otherwise, in the other. In connection with the Spin Off, the
Company and Liberty entered into certain agreements in order to
govern certain of the ongoing relationships between the Company
and Liberty after the Spin Off and to provide for an orderly
transition. These agreements include a Reorganization Agreement,
a Services Agreement and a Tax Sharing Agreement.
The Reorganization Agreement provides for, among other things,
the principal corporate transactions required to effect the Spin
Off and cross indemnities. Pursuant to the Services Agreement,
Liberty provides the Company with office
II-22
DISCOVERY
HOLDING COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
space and certain general and administrative services including
legal, tax, accounting, treasury and investor relations support.
The Company reimburses Liberty for direct,
out-of-pocket
expenses incurred by Liberty in providing these services and for
the Companys allocable portion of costs associated with
any shared services or personnel. Liberty and DHC have agreed
that they will review cost allocations every six months and
adjust such charges, if appropriate.
Under the Tax Sharing Agreement, Liberty is generally
responsible for U.S. federal, state, local and foreign
income taxes reported on a consolidated, combined or unitary
return that includes the Company or one of its subsidiaries and
Liberty or one of its subsidiaries. The Company is responsible
for all other taxes that are attributable to the Company or one
of its subsidiaries, whether accruing before, on or after the
Spin Off. The Tax Sharing Agreement requires that the Company
will not take, or fail to take, any action where such action, or
failure to act, would be inconsistent with or prohibit the Spin
Off from qualifying as a tax-free transaction. Moreover, the
Company has indemnified Liberty for any loss resulting from
(i) such action or failure to act or (ii) any
agreement, understanding, arrangement or substantial
negotiations entered into by DHC prior to the day after the
first anniversary of the Spin Off, with respect to any
transaction pursuant to which any of the other shareholders of
Discovery would acquire shares of, or other interests in
DHCs capital stock, in each case relating to the
qualification of the Spin Off as a tax-free transaction. As of
December 31, 2006, no such loss has been incurred.
(3) Summary
of Significant Accounting Policies
Cash
and Cash Equivalents
The Company considers investments with original purchased
maturities of three months or less to be cash equivalents.
Trade
Receivables
Trade receivables are shown net of an allowance based on
historical collection trends and managements judgment
regarding the collectibility of these accounts. These collection
trends, as well as prevailing and anticipated economic
conditions, are routinely monitored by management, and any
adjustments required are reflected in current operations. The
allowance for doubtful accounts as of December 31, 2006 and
2005 was $9,045,000 and $7,708,000, respectively.
A summary of activity in the allowance for doubtful accounts is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
Charged
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
Beginning
|
|
|
(Credited)
|
|
|
|
|
|
Acquired and
|
|
|
End of
|
|
|
|
of Year
|
|
|
to Expense
|
|
|
Write-Offs
|
|
|
Other Activity
|
|
|
Year
|
|
|
|
amounts in thousands
|
|
|
2006
|
|
$
|
7,708
|
|
|
|
1,023
|
|
|
|
|
|
|
|
314
|
|
|
|
9,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
$
|
12,104
|
|
|
|
(619
|
)
|
|
|
(2,443
|
)
|
|
|
(1,334
|
)
|
|
|
7,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
$
|
11,580
|
|
|
|
555
|
|
|
|
|
|
|
|
(31
|
)
|
|
|
12,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concentration
of Credit Risk and Significant Customers
For the years ended December 31, 2006, 2005 and 2004, no
single customer accounted for more than 10% of consolidated
revenue.
Investment
in Discovery
DHC accounts for its 50% ownership interest in Discovery using
the equity method of accounting. Under this method, the
investment, originally recorded at cost, is adjusted to
recognize the Companys share of the net earnings or losses
of Discovery as they occur, rather than as dividends or other
distributions are received. The excess of the Companys
carrying value over its proportionate share of Discoverys
equity is accounted for as equity method goodwill, and
accordingly, is not amortized, but periodically reviewed for
impairment.
Changes in the Companys proportionate share of the
underlying equity of Discovery which result from the issuance of
additional equity securities by Discovery are recognized as
increases or decreases in stockholders equity. No such
adjustments were recorded during the three years ended
December 31, 2006.
II-23
DISCOVERY
HOLDING COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
The Company periodically compares the carrying value of its
investment in Discovery to its estimated fair value to determine
if there are any
other-than-temporary
declines in value, which would require an adjustment in the
statement of operations. The estimated fair value of the
investment in Discovery exceeds its carrying value for all
periods presented.
Property
and Equipment
Property and equipment are carried at cost and depreciated using
the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the shorter of
their estimated useful lives or the term of the underlying
lease. Estimated useful lives by class of asset are as follows:
|
|
|
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
|
Depreciation expense for property and equipment was $66,435,000,
$74,805,000 and $74,986,000 for the years ended
December 31, 2006, 2005 and 2004, respectively.
Goodwill
The Company accounts for its goodwill pursuant to the provisions
of SFAS No. 142, Goodwill and Other Intangible
Assets (SFAS No. 142). In accordance
with SFAS No. 142, goodwill is not amortized, but is
tested for impairment annually and whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable.
SFAS No. 142 requires the Company to consider equity
method affiliates as separate reporting units. As a result,
$1,771,000,000 of DHCs enterprise-level goodwill balance
has been allocated to a separate reporting unit which includes
only its investment in Discovery. This allocation is performed
for goodwill impairment testing purposes only and does not
change the reported carrying value of the investment. However,
to the extent that all or a portion of an equity method
investment which is part of a reporting unit containing
allocated goodwill is disposed of in the future, the allocated
portion of goodwill will be relieved and included in the
calculation of the gain or loss on disposal.
Other
Intangible Assets
In accordance with SFAS No. 142, amortizable other
intangible assets are amortized on a straight-line basis over
their estimated useful lives of four to five years, and are
reviewed for impairment in accordance with
SFAS No. 144, Accounting for Impairment or Disposal
of Long-Lived Assets (SFAS No. 144).
Long-Lived
Assets
In accordance with SFAS No. 144, management reviews
the realizability of its long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. In evaluating the value and future
benefits of long-term assets, their carrying value is compared
to managements best estimate of undiscounted future cash
flows over the remaining economic life. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying value of the assets
exceeds the estimated fair value of the assets.
Foreign
Currency Translation
The functional currencies of the Companys foreign
subsidiaries are their respective local currencies. Assets and
liabilities of foreign operations are translated into
U.S. dollars using exchange rates on the balance sheet
date, and revenues and expenses are translated into
U.S. dollars using average exchange rates for the period.
The effects of the foreign currency translation adjustments are
deferred and are included in stockholder equity as a component
of accumulated other comprehensive earnings (loss).
Revenue
Recognition
Revenue from post-production and certain distribution related
services is recognized when services are provided. Revenue on
other long-term contracts is recorded on the basis of the
estimated percentage of completion of individual
II-24
DISCOVERY
HOLDING COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
contracts. Percentage of completion is calculated based upon
actual labor and equipment costs incurred compared to total
forecasted costs for the contract. Estimated losses on long-term
contracts are recognized in the period in which a loss becomes
evident.
Prepayments received for services to be performed at a later
date are reflected in the consolidated balance sheets as
deferred revenue until such services are provided.
Income
Taxes
The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109, Accounting for
Income Taxes (SFAS No. 109).
SFAS No. 109 is an asset and liability approach that
requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have
been recognized in the Companys consolidated financial
statements or tax returns. In estimating future tax
consequences, SFAS No. 109 generally considers all
expected future events other than proposed changes in the tax
law or rates.
Advertising
Costs
Advertising costs generally are expensed as incurred.
Advertising expense aggregated $3,990,000, $3,465,000 and
$3,303,000 for the years ended December 31, 2006, 2005 and
2004, respectively.
Stock-Based
Compensation
As a result of the Spin Off and related adjustments to
Libertys stock incentive awards, options (Spin Off
DHC Awards) to acquire an aggregate of approximately
2.0 million shares of DHC Series A common stock and
3.0 million shares of DHC Series B common stock were
issued to employees of Liberty. In addition, employees of Ascent
Media who held stock options or stock appreciation rights
(SARs) to acquire shares of Liberty common stock
prior to the Spin Off continue to hold such options. Pursuant to
the Reorganization Agreement, DHC is responsible for all stock
options related to DHC common stock, and Liberty is responsible
for all incentive awards related to Liberty common stock.
Notwithstanding the foregoing, the Company records stock-based
compensation for all stock incentive awards held by DHCs
and its subsidiaries employees regardless of whether such
awards relate to DHC common stock or Liberty common stock. Any
stock-based compensation recorded by DHC with respect to Liberty
stock incentive awards is treated as a capital transaction with
the offset to stock-based compensation expense reflected as an
adjustment of additional paid-in capital.
In December 2004, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payments
(Statement 123R). Statement 123R, which is
a revision of Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based
Compensation (Statement 123) and
supersedes Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees
(APB Opinion No. 25), establishes standards
for the accounting for transactions in which an entity exchanges
its equity instruments for goods or services, primarily focusing
on transactions in which an entity obtains employee services.
Statement 123R generally requires companies to measure the
cost of employee services received in exchange for an award of
equity instruments (such as stock options and restricted stock)
based on the grant-date fair value of the award, and to
recognize that cost over the period during which the employee is
required to provide service (usually the vesting period of the
award). Statement 123R also requires companies to measure
the cost of employee services received in exchange for an award
of liability instruments (such as stock appreciation rights that
will be settled in cash) based on the current fair value of the
award, and to remeasure the fair value of the award at each
reporting date.
The Company adopted Statement 123R effective
January 1, 2006. The provisions of Statement 123R
allow companies to adopt the standard using the modified
prospective method or to restate all periods for which
Statement 123 was effective. The Company has adopted
Statement 123R using the modified prospective method, and
the impact of adoption was not material.
Liberty calculated the grant-date fair value for all of its
awards using the Black-Scholes Model. Liberty calculated the
expected term of the awards using the methodology included in
SEC Staff Accounting Bulletin No. 107. The volatility used
in the calculation is based on the implied volatility of
publicly traded Liberty options with a similar term (generally
20%-21%). Liberty uses the risk-free rate for Treasury Bonds
with a term similar to that of the subject options and has
assumed a dividend rate of zero. The Company has allocated the
grant-date fair value of the Liberty awards to the Spin Off DHC
Awards based on the relative trading prices of DHC and Liberty
common stock after the Spin Off.
II-25
DISCOVERY
HOLDING COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
Prior to the adoption of Statement 123R, the Company
applied the intrinsic-value-based method of accounting
prescribed by APB Opinion No. 25, to account for its
fixed-plan stock options. Under this method, compensation
expense was recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price
and was recognized on a straight-line basis over the vesting
period.
The following table illustrates the effect on net earnings for
the years ended December 31, 2005 and 2004 as if the
fair-value-based method of Statement 123R had been applied
to all outstanding and unvested awards. Compensation expense for
SARs was the same under APB Opinion No. 25 and
Statement 123R. Accordingly, no pro forma adjustment for
such awards is included in the following table.
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
amounts in thousands, except per share amounts
|
|
|
Net earnings, as reported
|
|
$
|
33,276
|
|
|
|
66,108
|
|
Add:
|
|
|
|
|
|
|
|
|
Stock-based employee compensation
expense included in reported net earnings, net of taxes
|
|
|
2,309
|
|
|
|
2,268
|
|
Deduct:
|
|
|
|
|
|
|
|
|
Stock-based employee compensation
expense determined under fair value based method for all awards,
net of taxes
|
|
|
(8,247
|
)
|
|
|
(6,247
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net earnings
|
|
$
|
27,338
|
|
|
|
62,129
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic and diluted
earnings per common share:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
.12
|
|
|
|
.24
|
|
|
|
|
|
|
|
|
|
|
Pro forma for fair value stock
compensation
|
|
$
|
.10
|
|
|
|
.22
|
|
|
|
|
|
|
|
|
|
|
Earnings
(Loss) Per Common Share
Basic earnings (loss) per common share (EPS) is
computed by dividing net earnings (loss) by the weighted average
number of common shares outstanding for the period. EPS in the
accompanying consolidated statements of operations 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 shares outstanding for all
periods subsequent to the Spin Off. The weighted average
outstanding shares for the years ended December 31, 2006
and 2005 were 279,951,000 and 279,557,000, respectively.
Dilutive EPS presents the dilutive effect on a per shares basis
of potential common shares as if they had been converted at the
beginning of the periods presented. Due to the relative
insignificance of the dilutive securities in 2006 and 2005,
their inclusion does not impact the EPS amount as reported in
the accompanying consolidated statements of operations.
Estimates
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles in the
United States of America (GAAP) requires management
to make estimates and assumptions that affect the reported
amounts of revenue and expenses for each reporting period. The
significant estimates made in preparation of the Companys
consolidated financial statements primarily relate to valuation
of goodwill, other intangible assets, long-lived assets,
deferred tax assets, and the amount of the allowance for
doubtful accounts. Actual results could differ from the
estimates upon which the carrying values were based.
Recent
Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has
issued interpretation No. 48, Accounting for
Uncertainty in Income Taxes An Interpretation of
FASB Statement No. 109 (FIN 48),
regarding accounting for, and disclosure of, uncertain tax
positions. FIN 48 clarifies the accounting for uncertainty
in income taxes recognized in an enterprises financial
statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. FIN 48 prescribes
a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting for interim
periods, disclosure and transition. FIN 48 is effective for
fiscal years
II-26
DISCOVERY
HOLDING COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
beginning after December 15, 2006. The Company is in the
process of evaluating the potential impact of the adoption of
FIN 48 on its consolidated balance sheet and statements of
operations and comprehensive earnings (loss), and does not
believe this adoption will have a material impact.
(4) Supplemental
Disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
amounts in thousands
|
|
|
Cash paid for acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired
|
|
$
|
48,264
|
|
|
|
|
|
|
|
60,950
|
|
Net liabilities assumed
|
|
|
(1,471
|
)
|
|
|
|
|
|
|
(17,073
|
)
|
Deferred tax liability
|
|
|
|
|
|
|
|
|
|
|
361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisitions, net of
cash acquired
|
|
$
|
46,793
|
|
|
|
|
|
|
|
44,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for
income taxes
|
|
$
|
1,871
|
|
|
|
1,190
|
|
|
|
1,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5) Investment
in Discovery
The Company has a 50% ownership interest in Discovery and
accounts for its investment using the equity method of
accounting. Discovery is a global media and entertainment
company, that provides original and purchased video programming
in the United States and over 170 other countries. Discovery
also develops and sells branded commerce and educational product
lines in the United States.
DHCs carrying value for Discovery was $3,129,157,000 at
December 31, 2006. In addition, as described in
note 7, $1,771,000,000 of enterprise-level goodwill has
been allocated to the investment in Discovery.
Prior to the Spin Off, it was necessary for Liberty to
periodically reallocate its enterprise level goodwill due to
changes in reporting units caused by transactions or by internal
reorganizations. These reallocation adjustments were made based
on the relative fair values of the remaining reporting units in
accordance with SFAS No. 142. As a result, there was
an $18,000,000 adjustment to the enterprise level goodwill
allocated to DHC in 2004. Such adjustment is reflected in
DHCs consolidated statement of stockholders equity.
Summarized financial information for Discovery is as follows:
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
amounts in thousands
|
|
|
Cash and cash equivalents
|
|
$
|
52,263
|
|
|
|
34,491
|
|
Other current assets
|
|
|
918,373
|
|
|
|
796,878
|
|
Property and equipment
|
|
|
424,041
|
|
|
|
397,578
|
|
Goodwill and intangible assets
|
|
|
472,939
|
|
|
|
397,927
|
|
Programming rights, long term
|
|
|
1,253,553
|
|
|
|
1,175,988
|
|
Other assets
|
|
|
255,384
|
|
|
|
371,758
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,376,553
|
|
|
|
3,174,620
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
734,524
|
|
|
|
692,465
|
|
Long-term debt
|
|
|
2,633,237
|
|
|
|
2,590,440
|
|
Other liabilities
|
|
|
175,255
|
|
|
|
101,571
|
|
Mandatorily redeemable equity in
subsidiaries
|
|
|
94,825
|
|
|
|
272,502
|
|
Stockholders deficit
|
|
|
(261,288
|
)
|
|
|
(482,358
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders deficit
|
|
$
|
3,376,553
|
|
|
|
3,174,620
|
|
|
|
|
|
|
|
|
|
|
II-27
DISCOVERY
HOLDING COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
amounts in thousands
|
|
|
Revenue
|
|
$
|
3,012,988
|
|
|
|
2,671,754
|
|
|
|
2,365,346
|
|
Operating expenses
|
|
|
(1,120,377
|
)
|
|
|
(979,765
|
)
|
|
|
(846,316
|
)
|
Selling, general and administrative
|
|
|
(1,170,187
|
)
|
|
|
(1,005,351
|
)
|
|
|
(856,340
|
)
|
Equity-based compensation
|
|
|
(39,233
|
)
|
|
|
(49,465
|
)
|
|
|
(71,515
|
)
|
Depreciation and amortization
|
|
|
(133,634
|
)
|
|
|
(123,209
|
)
|
|
|
(129,011
|
)
|
Gain on sale of patent
|
|
|
|
|
|
|
|
|
|
|
22,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
549,557
|
|
|
|
513,964
|
|
|
|
484,171
|
|
Interest expense
|
|
|
(194,227
|
)
|
|
|
(184,575
|
)
|
|
|
(167,420
|
)
|
Other income (expense)
|
|
|
28,634
|
|
|
|
(7,426
|
)
|
|
|
(6,930
|
)
|
Income tax expense
|
|
|
(176,788
|
)
|
|
|
(162,343
|
)
|
|
|
(141,799
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
207,176
|
|
|
|
159,620
|
|
|
|
168,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DHCs share of net earnings
|
|
$
|
103,588
|
|
|
|
79,810
|
|
|
|
84,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6) Property
and Equipment
During the year ended December 31, 2006, the Company
retired approximated $95 million of fully depreciated
property and equipment. Property and equipment at
December 31, 2006 and 2005 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
amounts in thousands
|
|
|
Property and equipment, net:
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
42,336
|
|
|
|
48,365
|
|
Buildings
|
|
|
217,210
|
|
|
|
186,389
|
|
Equipment
|
|
|
192,208
|
|
|
|
215,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
451,754
|
|
|
|
450,349
|
|
Accumulated depreciation
|
|
|
(170,979
|
)
|
|
|
(194,104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
280,775
|
|
|
|
256,245
|
|
|
|
|
|
|
|
|
|
|
(7) Goodwill
and Other Intangible Assets
The following table provides the activity and balances of
goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Creative
|
|
|
Network
|
|
|
|
|
|
|
|
|
|
Services
|
|
|
Services
|
|
|
|
|
|
|
|
|
|
Group
|
|
|
Group
|
|
|
Discovery
|
|
|
Total
|
|
|
|
amounts in thousands
|
|
|
Net balance at January 1, 2005
|
|
$
|
200,727
|
|
|
|
163,719
|
|
|
|
1,771,000
|
|
|
|
2,135,446
|
|
Foreign exchange and other
|
|
|
(726
|
)
|
|
|
(1,202
|
)
|
|
|
|
|
|
|
(1,928
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance at December 31,
2005
|
|
|
200,001
|
|
|
|
162,517
|
|
|
|
1,771,000
|
|
|
|
2,133,518
|
|
Acquisition of AccentHealth, LLC
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On August 18, 2006, Ascent Media announced that it intended
to streamline its structure into two global operating
divisions creative services group and network
services group to better align Ascent Medias
organization with the companys strategic goals and to
respond to changes within the industry driven by technology and
customer requirements.
II-28
DISCOVERY
HOLDING COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
The operations of the media management services group were
realigned with the other two groups and the realignment was
completed in the fourth quarter of 2006.
As technology and customer requirements drove changes in this
industry, revenue and operating cash flows had been declining
for this group. As a result of the restructuring and the
declining financial performance of the media management services
group, including ongoing operating losses, the media management
services group was tested for goodwill impairment in the third
quarter of 2006, prior to DHCs annual goodwill valuation
assessment of the entire company. DHC estimated the fair value
of that reporting unit principally by using trading multiples of
revenue and operating cash flows of similar companies in the
industry. In September 2006, Ascent Media recognized a goodwill
impairment loss for the media management services group of
$93,402,000, which represents the excess of the carrying value
over the implied fair value of such goodwill.
Included in other assets at December 31, 2006 are
amortizable intangibles with a net book value of $5,711,000 and
tradename intangibles (which are not subject to amortization) of
$6,040,000.
For the years ended December 31, 2006, 2005 and 2004, the
Company recorded $1,494,000, $1,572,000 and $2,619,000,
respectively, of amortization expense for other intangible
assets.
(8) Restructuring
Charges
During 2006 and 2005, the Company completed certain
restructuring activities designed to improve operating
efficiencies and to strengthen its competitive position in the
marketplace primarily through cost and expense reductions. In
connection with these integration and consolidation initiatives,
the Company recorded charges of $12,092,000 and $4,112,000,
respectively. The 2006 restructuring charge related primarily to
severance in the Corporate and other group in the United States
and United Kingdom and to the closure of facilities in the
United Kingdom. The 2005 restructuring charge relates primarily
to the closure and consolidation of facilities in the United
Kingdom.
The following table provides the activity and balances of the
restructuring reserve.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening
|
|
|
|
|
|
|
|
|
Ending
|
|
|
|
Balance
|
|
|
Additions
|
|
|
Deductions
|
|
|
Balance
|
|
|
|
amounts in thousands
|
|
|
Excess facility costs
December 31, 2004
|
|
$
|
3,377
|
|
|
|
|
|
|
|
(788
|
)
|
|
|
2,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess facility costs
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9) Acquisitions
AccentHealth
Effective January 27, 2006, one of DHCs subsidiaries
acquired substantially all of the assets of AccentHealth,
LLCs (AccentHealth) healthcare media business
for cash consideration of $46,793,000. AccentHealth operates an
advertising-supported captive audience television network in
doctor office waiting rooms nationwide. The Company recorded
goodwill of $32,224,000 and other intangible assets of
$9,800,000 in connection with this acquisition. Other intangible
assets are included in Other assets, net on the consolidated
balance sheets. The excess purchase price over the fair value of
assets acquired is attributable to the growth potential of
AccentHealth and expected compatibility with Ascent Medias
existing network services group.
For financial reporting purposes, the acquisition is deemed to
have occurred on February 1, 2006, and the results of
operations of AccentHealth have been included in DHCs
consolidated results as a part of the network services group
since the date of acquisition. On a pro forma basis, the results
of operations of AccentHealth are not significant to those of
DHC.
II-29
DISCOVERY
HOLDING COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
London
Playout Centre
On March 12, 2004, pursuant to an Agreement for the Sale
and Purchase, Ascent Media acquired all of the issued share
capital of London Playout Centre Limited (LPC) from
an independent third party for a purchase price of $36,573,000
paid at closing. LPC is a UK-based television channel
origination facility. The purchase was funded, in part, by
proceeds from Liberty. The financial position and results of
operations of LPC have been consolidated since the date of
acquisition.
(10) Income
Taxes
Deferred income tax assets and liabilities are computed annually
for differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or deductible
amounts in the future. Such deferred income tax asset and
liability computations are based on enacted tax laws and rates
applicable to periods in which the differences are expected to
affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable or
refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities. Income tax
benefit (expense) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
amounts in thousands
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(1,015
|
)
|
|
|
|
|
|
|
|
|
State
|
|
|
(1,340
|
)
|
|
|
(637
|
)
|
|
|
502
|
|
Foreign
|
|
|
528
|
|
|
|
2,164
|
|
|
|
(3,780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(1,827
|
)
|
|
|
1,527
|
|
|
|
(3,278
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(33,711
|
)
|
|
|
(26,402
|
)
|
|
|
(25,221
|
)
|
State
|
|
|
(7,250
|
)
|
|
|
(20,743
|
)
|
|
|
(7,774
|
)
|
Foreign
|
|
|
(1,154
|
)
|
|
|
(3,218
|
)
|
|
|
1,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
(42,115
|
)
|
|
|
(50,363
|
)
|
|
|
(31,692
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax expense
|
|
$
|
(43,942
|
)
|
|
|
(48,836
|
)
|
|
|
(34,970
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of pretax income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
amounts in thousands
|
|
|
Domestic
|
|
$
|
16,761
|
|
|
|
76,907
|
|
|
|
96,470
|
|
Foreign
|
|
|
(18,829
|
)
|
|
|
5,205
|
|
|
|
4,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,068
|
)
|
|
|
82,112
|
|
|
|
101,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
II-30
DISCOVERY
HOLDING COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
Income tax benefit (expense) differs from the amounts computed
by applying the U.S. federal income tax rate of 35% as a
result of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
amounts in thousands
|
|
|
Computed expected tax benefit
(expense)
|
|
$
|
724
|
|
|
|
(28,739
|
)
|
|
|
(35,377
|
)
|
State and local income taxes, net
of federal income taxes
|
|
|
(4,477
|
)
|
|
|
(3,976
|
)
|
|
|
(5,311
|
)
|
Change in valuation allowance
affecting tax expense
|
|
|
(8,711
|
)
|
|
|
1,630
|
|
|
|
3,575
|
|
Goodwill impairment not deductible
for tax purposes
|
|
|
(26,655
|
)
|
|
|
|
|
|
|
|
|
Non-deductible expenses
|
|
|
(2,273
|
)
|
|
|
(2,361
|
)
|
|
|
(476
|
)
|
Change in estimated state tax rate
|
|
|
|
|
|
|
(15,263
|
)
|
|
|
|
|
Other, net
|
|
|
(2,550
|
)
|
|
|
(127
|
)
|
|
|
2,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
(43,942
|
)
|
|
|
(48,836
|
)
|
|
|
(34,970
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of deferred tax assets and liabilities as of
December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
amounts in thousands
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Accounts receivable reserves
|
|
$
|
3,572
|
|
|
|
2,350
|
|
Accrued liabilities
|
|
|
12,821
|
|
|
|
14,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,393
|
|
|
|
17,026
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
|
61,956
|
|
|
|
59,064
|
|
Property and equipment
|
|
|
2,743
|
|
|
|
4,771
|
|
Intangible assets
|
|
|
9,497
|
|
|
|
8,249
|
|
Other
|
|
|
5,784
|
|
|
|
5,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79,980
|
|
|
|
77,590
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets, gross
|
|
|
96,373
|
|
|
|
94,616
|
|
Valuation allowance
|
|
|
(96,223
|
)
|
|
|
(91,235
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets, net
|
|
|
150
|
|
|
|
3,381
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
(139
|
)
|
|
|
(818
|
)
|
Other
|
|
|
(1,622
|
)
|
|
|
(3,010
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,761
|
)
|
|
|
(3,828
|
)
|
|
|
|
|
|
|
|
|
|
Noncurrent liabilities:
|
|
|
|
|
|
|
|
|
Investments
|
|
|
(1,174,744
|
)
|
|
|
(1,131,058
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(1,176,505
|
)
|
|
|
(1,134,886
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(1,176,355
|
)
|
|
|
(1,131,505
|
)
|
|
|
|
|
|
|
|
|
|
II-31
DISCOVERY
HOLDING COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
The Companys deferred tax assets and liabilities are
reported in the accompanying consolidated balance sheets as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
amounts in thousands
|
|
|
Current deferred tax liabilities
|
|
$
|
1,761
|
|
|
|
3,828
|
|
Long-term deferred tax
liabilities, net of deferred tax assets
|
|
|
1,174,594
|
|
|
|
1,127,677
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
1,176,355
|
|
|
|
1,131,505
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006, the Company has $76,080,000 and
$482,579,000 in net operating loss carryforwards for federal and
state tax purposes, respectively. These net operating losses
expire, for federal purposes, as follows: $6,836,000 in 2021;
$61,542,000 in 2022 and $7,702,000 in 2025. The state net
operating losses expire at various times from 2013 through 2025.
In addition, the Company has $751,000 of federal income tax
credits, which may be carried forward indefinitely. The Company
has $2,584,000 of state income tax credits, of which $2,342,000
will expire in the year 2012.
During the current year, management has determined that it is
more likely than not that the Company will not realize the tax
benefits associated with certain cumulative net operating loss
carryforwards and other deferred tax assets. As such, the
Company continues to maintain a valuation allowance of
$96,223,000. The total valuation allowance increased $4,988,000
during the year ended December 31, 2006 as a result of an
increase in deferred tax assets related to acquisitions of
$733,000, an increase of current year deferred tax assets of
$8,711,000 which affected tax expense, and a decrease of prior
year deferred tax assets of $4,456,000 which did not affect tax
expense.
During 2006, 2005 and 2004, the Company provided ($776,000),
($34,000) and $1,636,000, respectively, of U.S. tax expense
for future repatriation of cash from its Asia operations
pursuant to APB 23. This charge represents all
undistributed earnings from Asia not previously taxed in the
United States.
The Company has deficits from its United Kingdom and Mexican
operations and therefore does not have any undistributed
earnings subject to United States taxation.
(11) Stockholders
Equity
Preferred
Stock
DHCs preferred stock is issuable, from time to time, with
such designations, preferences and relative participating,
optional or other rights, qualifications, limitations or
restrictions thereof, as shall be stated and expressed in a
resolution or resolutions providing for the issue of such
preferred stock adopted by DHCs Board of Directors. As of
December 31, 2006, no shares of preferred stock were issued.
Common
Stock
Holders of DHC Series A common stock are entitled to one
vote for each share held, and holders of DHC Series B
common stock are entitled to 10 votes for each share held.
Holders of DHC Series C common stock are not entitled to
any voting powers, except as required by Delaware law. As of
December 31, 2006, no shares of DHC Series C common
stock were issued. Each share of the Series B common stock
is convertible, at the option of the holder, into one share of
Series A common stock.
As of December 31, 2006, there were 1,943,804 shares
of DHC Series A common stock and 2,996,525 shares of
DHC Series B common stock reserved for issuance under
exercise privileges of outstanding stock options.
|
|
(12)
|
Stock
Options and Other Long-Term Incentive Compensation
|
Stock
Options
On May 4, 2006, each of the non-employee directors of DHC
was granted 10,000 options to purchase DHC Series A common
stock with an exercise price of $14.48. Such options vest one
year from the date of grant, terminate 10 years from the
date of grant and had a grant-date fair value of $4.47 per
share, as determined by the Black-Scholes Model.
II-32
DISCOVERY
HOLDING COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
The following table presents the number and weighted average
exercise price (WAEP) of options to purchase DHC
Series A and Series B common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DHC
|
|
|
|
|
|
DHC
|
|
|
|
|
|
|
Series A
|
|
|
|
|
|
Series B
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
Stock
|
|
|
WAEP
|
|
|
Stock
|
|
|
WAEP
|
|
|
Outstanding at January 1, 2006
|
|
|
1,937,616
|
|
|
$
|
15.43
|
|
|
|
2,996,525
|
|
|
|
18.87
|
|
Granted
|
|
|
30,000
|
|
|
$
|
14.48
|
|
|
|
|
|
|
|
|
|
Exercises
|
|
|
(22,382
|
)
|
|
$
|
12.46
|
|
|
|
|
|
|
|
|
|
Cancellations
|
|
|
(1,430
|
)
|
|
$
|
12.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2006
|
|
|
1,943,804
|
|
|
$
|
15.45
|
|
|
|
2,996,525
|
|
|
|
18.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31,
2006
|
|
|
1,460,415
|
|
|
$
|
16.18
|
|
|
|
2,876,525
|
|
|
|
18.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, the total compensation cost
related to unvested equity awards was $1.1 million. Such
amount will be recognized in DHCs consolidated statements
of operations through 2009.
2006
Ascent Media Long-Term Incentive Plan
Effective August 3, 2006, Ascent Media adopted its 2006
Long-Term Incentive Plan (the 2006 Plan). The 2006
Plan provides the terms and conditions for the grant of, and
payment with respect to, Phantom Appreciation Rights
(PARs) granted to certain officers and other key
personnel of Ascent Media. The value of a single PAR
(Value) is calculated as the sum of (i) 6% of
cumulative free cash flow (as defined in the 2006 Plan) over a
period of up to six years, divided by 500,000 plus (ii) 5%
of the increase in the calculated value of Ascent Media over a
baseline value determined at the time of grant, divided by
10,000,000. The 2006 Plan is administered by a committee that
consists of two individuals appointed by DHC. Grants are
determined by the committee, with the first grant occurring on
August 3, 2006. The maximum number of PARs that may be
granted under the 2006 Plan is 500,000, and there were 398,500
granted PARs as of December 31, 2006. The PARs vest
quarterly over a three year period, and are payable on
March 31, 2012 (or, if earlier, on the six-month
anniversary of a grantees termination of employment
without cause). Ascent Media will record a liability and a
charge to expense based on the Value and percent vested at each
reporting period. As of December 31, 2006, the Value of the
PARs was $0.
(13) Other
Comprehensive Earnings (Loss)
Accumulated other comprehensive earnings (loss) included in
DHCs consolidated balance sheets and consolidated
statements of stockholders equity reflect the aggregate of
foreign currency translation adjustments and unrealized holding
gains and losses on
available-for-sale
securities.
The change in the components of accumulated other comprehensive
earnings (loss), net of taxes, is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Foreign
|
|
|
Unrealized
|
|
|
Other
|
|
|
|
Currency
|
|
|
Holding
|
|
|
Comprehensive
|
|
|
|
Translation
|
|
|
Gains (losses)
|
|
|
Earnings (loss),
|
|
|
|
Adjustments
|
|
|
on Securities
|
|
|
Net of Taxes
|
|
|
|
amounts in thousands
|
|
|
Balance at January 1, 2004
|
|
$
|
5,236
|
|
|
|
1,439
|
|
|
|
6,675
|
|
Other comprehensive earnings
|
|
|
6,797
|
|
|
|
(1,162
|
)
|
|
|
5,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
II-33
DISCOVERY
HOLDING COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
The components of other comprehensive earnings (loss) are
reflected in DHCs consolidated statements of comprehensive
earnings (loss) net of taxes. The following table summarizes the
tax effects related to each component of other comprehensive
earnings (loss).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
|
|
|
|
|
|
|
Before-Tax
|
|
|
(Expense)
|
|
|
Net-of-Tax
|
|
|
|
Amount
|
|
|
Benefit
|
|
|
Amount
|
|
|
|
amounts in thousands
|
|
|
Year ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustments
|
|
$
|
29,648
|
|
|
|
(11,726
|
)
|
|
|
17,922
|
|
Unrealized holding gains 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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustments
|
|
$
|
11,143
|
|
|
|
(4,346
|
)
|
|
|
6,797
|
|
Unrealized holding losses on
securities arising during period
|
|
|
(1,905
|
)
|
|
|
743
|
|
|
|
(1,162
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive earnings
|
|
$
|
9,238
|
|
|
|
(3,603
|
)
|
|
|
5,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14) Employee
Benefit Plans
Ascent Media offers a 401(k) defined contribution plan covering
most of its full-time domestic employees not eligible to
participate in the Motion Picture Industry Pension and Health
Plan (MPIPHP), a multi-employer defined benefit pension plan.
Contributions to the MPIPHP are determined in accordance with
the provisions of negotiated labor contracts and generally are
based on the number of hours worked. Ascent Media also sponsors
a pension plan for eligible employees of its foreign
subsidiaries. Employer contributions are determined by Ascent
Medias board of directors. The plans are funded by
employee and employer contributions. Total pension plan expenses
for the years ended December 31, 2006, 2005 and 2004 were
$7,868,000, $7,109,000 and $6,485,000, respectively.
(15) Commitments
and Contingencies
Future minimum lease payments under scheduled operating leases,
which are primarily for buildings, equipment and real estate,
having initial or remaining noncancelable terms in excess of one
year are as follows (in thousands):
|
|
|
|
|
Year ended December 31:
|
|
|
|
|
2007
|
|
$
|
32,058
|
|
2008
|
|
$
|
29,156
|
|
2009
|
|
$
|
27,645
|
|
2010
|
|
$
|
24,590
|
|
2011
|
|
$
|
19,436
|
|
Thereafter
|
|
$
|
59,144
|
|
Rent expense for noncancelable operating leases for real
property and equipment was $31,355,000, $31,643,000 and
$26,487,000 for the years ended December 31, 2006, 2005 and
2004, respectively. Various lease arrangements contain options
to extend terms and are subject to escalation clauses.
At December 31, 2006, the Company is committed to
compensation under long-term employment agreements with its
certain executive officers of Ascent Media as follows: 2007,
$1,815,000; 2008, $1,760,000; and 2009, $1,565,000.
On December 31, 2003, Ascent Media acquired the operations
of Sony Electronics systems integration center business
and related assets, which we refer to as SIC. In exchange, Sony
received the right to be paid in 2008 an amount equal to 20% of
the value of the combined business of Ascent Medias wholly
owned subsidiary, AF Associates, Inc. and
II-34
DISCOVERY
HOLDING COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
SIC. The value of 20% of the combined business of AF Associates
and SIC is estimated at $6,100,000. SIC is included in Ascent
Medias network services group.
The Company is involved in litigation and similar claims
incidental to the conduct of its business. In managements
opinion, none of the pending actions is likely to have a
material adverse impact on the Companys financial position
or results of operations.
(16) Related
Party Transactions
Certain third-party general and administrative and spin off
related costs were paid by Liberty on behalf of the Company
prior to the Spin Off and reflected as expenses in the
accompanying consolidated statements of operations. In addition,
certain general and administrative expenses are charged by
Liberty to DHC pursuant to the Services Agreement. Such expenses
aggregated $2,260,000 and $5,948,000 for the years ended
December 31, 2006 and 2005, respectively.
Ascent Media provides services, such as satellite uplink,
systems integration, origination, and post-production, to
Discovery. Revenue recorded by Ascent Media for these services
for the years ended December 31, 2006, 2005 and 2004
aggregated $33,741,000, $34,189,000 and $41,785,000,
respectively.
(17) Information
About Operating Segments
The Companys chief operating decision maker, or his
designee (the CODM), has identified the
Companys reportable segments based on (i) financial
information reviewed by the CODM and (ii) those operating
segments that represent more than 10% of the Companys
combined revenue or earnings before taxes. In addition, those
equity investments whose share of earnings represent more than
10% of the Companys earnings before taxes are considered
reportable segments.
Based on the foregoing criteria, the Companys business
units have been aggregated into three reportable segments: the
creative services group and the network services group, which
are operating segments of Ascent Media, and Discovery, which is
an equity affiliate. Corporate related items and unallocated
income and expenses are reflected in the Corporate and other
column listed below. As a product of our segment restructuring,
the segment presentation for prior periods has been conformed to
the current period segment presentation.
The creative services group provides various technical and
creative services necessary to complete principal photography
into final products, such as feature films, movie trailers,
documentaries and independent films, episodic television, TV
movies and mini-series, television commercials, music videos,
interactive games and new digital media, promotional and
identity campaigns and corporate communications. These services
are referred to generally in the entertainment industry as
post-production services. In addition, the creative
services group provides a full complement of facilities and
services necessary to optimize, archive, manage and repurpose
completed media assets for global distribution via freight,
satellite, fiber and the Internet. The network services group
provides broadcast services, which are comprised of services
necessary to assemble and distribute programming for cable and
broadcast networks via fiber and satellite to viewers in North
America, Europe, Asia and Latin America. Additionally, the
networks services group provides systems integration, design,
consulting, engineering and project management services.
The accounting policies of the segments that are consolidated
entities are the same as those described in the summary of
significant accounting policies and are consistent with GAAP.
The Company evaluates the performance of these operating
segments based on financial measures such as revenue and
operating cash flow. The Company defines operating cash flow as
revenue less cost of services and selling, general and
administrative expenses (excluding stock and other equity-based
compensation and accretion expense on asset retirement
obligations). The Company believes this is an important
indicator of the operational strength and performance of its
businesses, including the businesses ability to service
debt and capital expenditures. In addition, this measure allows
management to view operating results and perform analytical
comparisons and identify strategies to improve performance. This
measure of performance excludes depreciation and amortization,
stock and other equity-based compensation, accretion expense on
asset retirement obligations and restructuring and impairment
charges that are included in the measurement of operating income
pursuant to GAAP. Accordingly, operating cash flow should be
considered in addition to, but not as a substitute for,
operating income, cash flow provided by operating activities and
other measures of financial performance prepared in accordance
with GAAP.
II-35
DISCOVERY
HOLDING COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
The Companys reportable segments are strategic business
units that offer different products and services. They are
managed separately because each segment requires different
technologies, distribution channels and marketing strategies.
Summarized financial information concerning the Companys
reportable segments is presented in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
417,876
|
|
|
|
270,211
|
|
|
|
|
|
|
|
688,087
|
|
|
|
3,012,988
|
|
Operating cash flow
|
|
$
|
52,554
|
|
|
|
49,522
|
|
|
|
(43,347
|
)
|
|
|
58,729
|
|
|
|
722,424
|
|
Capital expenditures
|
|
$
|
27,126
|
|
|
|
44,331
|
|
|
|
6,084
|
|
|
|
77,541
|
|
|
|
90,138
|
|
Depreciation and amortization
|
|
$
|
38,661
|
|
|
|
23,055
|
|
|
|
6,213
|
|
|
|
67,929
|
|
|
|
133,634
|
|
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
|
|
|
|
2,671,754
|
|
Operating cash flow
|
|
$
|
70,708
|
|
|
|
55,877
|
|
|
|
(47,960
|
)
|
|
|
78,625
|
|
|
|
686,638
|
|
Capital expenditures
|
|
$
|
47,179
|
|
|
|
38,476
|
|
|
|
4,871
|
|
|
|
90,526
|
|
|
|
99,684
|
|
Depreciation and amortization
|
|
$
|
38,644
|
|
|
|
27,046
|
|
|
|
10,687
|
|
|
|
76,377
|
|
|
|
123,209
|
|
Total assets
|
|
$
|
470,213
|
|
|
|
323,558
|
|
|
|
5,025,465
|
|
|
|
5,819,236
|
|
|
|
3,174,620
|
|
Year ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
405,026
|
|
|
|
226,189
|
|
|
|
|
|
|
|
631,215
|
|
|
|
2,365,346
|
|
Operating cash flow
|
|
$
|
72,903
|
|
|
|
62,537
|
|
|
|
(37,645
|
)
|
|
|
97,795
|
|
|
|
662,690
|
|
Capital expenditures
|
|
$
|
22,810
|
|
|
|
23,123
|
|
|
|
3,359
|
|
|
|
49,292
|
|
|
|
88,100
|
|
Depreciation and amortization
|
|
$
|
38,776
|
|
|
|
27,074
|
|
|
|
11,755
|
|
|
|
77,605
|
|
|
|
129,011
|
|
Total assets
|
|
$
|
469,930
|
|
|
|
294,599
|
|
|
|
4,800,299
|
|
|
|
5,564,828
|
|
|
|
3,235,686
|
|
|
|
|
(1) |
|
Included in Network Services Group revenue is broadcast services
revenue of $158,151,000, $149,568,000 and $136,680,000 and
systems integration revenue of $112,060,000, $123,144,000 and
$89,509,000 in 2006, 2005 and 2004, respectively. |
The following table provides a reconciliation of segment
operating cash flow to earnings (loss) before income taxes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
amounts in thousands
|
|
|
Segment operating cash flow
|
|
$
|
58,729
|
|
|
|
78,625
|
|
|
|
97,795
|
|
Stock-based compensation
|
|
|
(1,817
|
)
|
|
|
(4,383
|
)
|
|
|
(2,775
|
)
|
Restructuring and other charges
|
|
|
(12,092
|
)
|
|
|
(4,112
|
)
|
|
|
|
|
Depreciation and amortization
|
|
|
(67,929
|
)
|
|
|
(76,377
|
)
|
|
|
(77,605
|
)
|
Impairment of goodwill
|
|
|
(93,402
|
)
|
|
|
|
|
|
|
(51
|
)
|
Share of earnings of Discovery
|
|
|
103,588
|
|
|
|
79,810
|
|
|
|
84,011
|
|
Other, net
|
|
|
10,855
|
|
|
|
8,549
|
|
|
|
(297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes
|
|
$
|
(2,068
|
)
|
|
|
82,112
|
|
|
|
101,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
II-36
DISCOVERY
HOLDING COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
Information as to the Companys operations in different
geographic areas is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
amounts in thousands
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
535,792
|
|
|
|
525,288
|
|
|
|
460,070
|
|
United Kingdom
|
|
|
129,540
|
|
|
|
149,928
|
|
|
|
148,002
|
|
Other countries
|
|
|
22,755
|
|
|
|
19,293
|
|
|
|
23,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
688,087
|
|
|
|
694,509
|
|
|
|
631,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
184,052
|
|
|
|
163,073
|
|
|
|
|
|
United Kingdom
|
|
|
70,363
|
|
|
|
65,017
|
|
|
|
|
|
Other countries
|
|
|
26,360
|
|
|
|
28,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
280,775
|
|
|
|
256,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18) Quarterly
Financial Information (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st
|
|
|
2nd
|
|
|
3rd
|
|
|
4th
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
amounts in thousands, except per share amounts
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
174,290
|
|
|
|
178,019
|
|
|
|
167,934
|
|
|
|
174,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
2,877
|
|
|
|
(4,982
|
)
|
|
|
(1,403
|
)
|
|
|
2,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
16,825
|
|
|
|
4,027
|
|
|
|
1,189
|
|
|
|
11,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net earnings per
common share
|
|
$
|
.06
|
|
|
|
.01
|
|
|
|
|
|
|
|
.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
II-37
PART III.
The following required information is incorporated by reference
to our definitive proxy statement for our 2007 Annual Meeting of
Stockholders presently scheduled to be held in the second
quarter of 2007:
|
|
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
|
We will file our definitive proxy statement for our 2007 Annual
Meeting of stockholders with the Securities and Exchange
Commission on or before April 30, 2007.
III-1
PART IV.
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules.
|
(a) (1) Financial Statements
Included in Part II of this Report:
|
|
|
|
|
|
|
Page No.
|
|
|
Discovery Holding Company:
|
|
|
|
|
|
|
|
II-15
|
|
|
|
|
II-16
|
|
|
|
|
II-17
|
|
|
|
|
II-18
|
|
|
|
|
II-19
|
|
|
|
|
II-20
|
|
|
|
|
II-21
|
|
|
|
|
II-22
|
|
(a) (2) Financial Statement Schedules
Included in Part IV of this Report:
|
|
|
|
(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, Inc.:
|
|
|
|
|
|
|
|
|
IV-3
|
|
|
|
|
IV-4
|
|
|
|
|
IV-5
|
|
|
|
|
IV-6
|
|
|
|
|
IV-7
|
|
|
|
|
IV-8
|
|
(a) (3) Exhibits
Listed below are the exhibits which are filed as a part of this
Report (according to the number assigned to them in
Item 601 of
Regulation S-K):
|
|
|
|
|
2 Plan of Acquisition,
Reorganization, Arrangement, Liquidation or Succession:
|
|
2.1
|
|
|
Reorganization Agreement among
Liberty Media Corporation, Discovery Holding Company
(DHC) and Ascent Media Group, Inc. (incorporated by
reference to Exhibit 2.1 to DHCs Registration
Statement on Form 10, dated July 15, 2005 (File
No. 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).
|
IV-1
|
|
|
|
|
10 Material Contracts:
|
|
10.1
|
|
|
The Shareholders Agreement, dated
as of November 30, 1991 (the Stockholders
Agreement), by and among Discovery Communications, Inc.
(Discovery), Cox Discovery, Inc. (Cox),
NewsChannels TDC Investments, Inc. (NewChannels),
TCI Cable Education, Inc. (TCID) and John S.
Hendricks (Hendricks) (incorporated by reference to
Exhibit 10.1 to the Form 10).
|
|
10.2
|
|
|
First Amendment to the
Stockholders Agreement, dated as of December 20,
1996, by and among Discovery, Cox Communications Holdings, Inc.
(the successor to Cox), Newhouse Broadcasting Corporation ( the
successor to NewChannels), TCID, Hendricks and for the purposes
stated therein only, LMC Animal Planet, Inc. (LMC)
and Liberty Media Corporation, a Colorado corporation
(Liberty) (incorporated by reference to
Exhibit 10.2 to the Form 10).
|
|
10.3
|
|
|
Second Amendment to the
Stockholders Agreement, dated as of September 7,
2000, by and among Discovery, Cox Communications Holdings, Inc.
(the successor to Cox), Advance/Newhouse Programming Partnership
(the successor to NewChannels), LMC Discovery, Inc. (formerly
known as TCID) and Hendricks (incorporated by reference to
Exhibit 10.3 to the Form 10).
|
|
10.4
|
|
|
Third Amendment to the
Stockholders Agreement, dated as of September, 2001, by
and among Discovery, Cox, NewChannels, TCID, Hendricks and
Advance Programming Holdings Corp. (incorporated by reference to
Exhibit 10.4 to the Form 10).
|
|
10.5
|
|
|
Fourth Amendment to the
Stockholders Agreement, dated as of June 23, 2003, by
and among Discovery, Cox NewChannels, TCID, Liberty Animal, Inc.
(the successor in interest to LMC) for the purposes stated
in the First Amendment to the Stockholders Agreement, and
Hendricks (incorporated by reference to Exhibit 10.5 to the
Form 10).
|
|
10.6
|
|
|
Form of Tax Sharing Agreement
between Liberty Media Corporation and DHC (incorporated by
reference to Exhibit 10.6 to the Form 10).
|
|
10.7
|
|
|
Discovery Holding Company 2005
Incentive Plan (incorporated by reference to Exhibit 10.7
to the Form 10).
|
|
10.8
|
|
|
Discovery Holding Company 2005
Non-Employee Director Plan (incorporated by reference to
Exhibit 10.8 to the Form 10).
|
|
10.9
|
|
|
Discovery Holding Company
Transitional Stock Adjustment Plan (incorporated by reference to
Exhibit 10.9 to the Form 10).
|
|
10.10
|
|
|
Agreement between DHC and John C.
Malone (incorporated by reference to Exhibit 10.10 to the
Form 10).
|
|
10.11
|
|
|
Agreement, dated June 24,
2005, between Discovery and DHC (incorporated by reference to
Exhibit 10.11 to the Form 10).
|
|
10.12
|
|
|
Indemnification Agreement, dated
as of June 24, 2005, between Cox and DHC (incorporated by
reference to Exhibit 10.12 to the Form 10).
|
|
10.13
|
|
|
Indemnification Agreement, dated
as of June 24, 2005, between NewChannels and DHC
(incorporated by reference to Exhibit 10.13 to the
Form 10).
|
|
10.14
|
|
|
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.
|
IV-2
Report
of Independent Registered Public Accounting Firm
To the Board
of Directors and Stockholders of
Discovery Communications, Inc.:
In our opinion, the accompanying consolidated balance sheets and
related consolidated statements of operations, of changes in
stockholders deficit, and of cash flows, present fairly,
in all material respects, the consolidated financial position of
Discovery Communications, Inc. and its subsidiaries at
December 31, 2006 and December 31, 2005, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2006 in
conformity with accounting principles generally accepted in the
United States of America. These financial statements are the
responsibility of the Companys management; our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
/s/PricewaterhouseCoopers LLP
McLean, Virginia
February 23, 2007
IV-3
DISCOVERY
COMMUNICATIONS, INC.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
in thousands,
|
|
|
|
except share data
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
52,263
|
|
|
|
34,491
|
|
Accounts receivable, less
allowances of $25,175 and $35,079
|
|
|
657,552
|
|
|
|
565,407
|
|
Inventories
|
|
|
35,716
|
|
|
|
30,714
|
|
Deferred income taxes
|
|
|
76,156
|
|
|
|
88,765
|
|
Content rights, net
|
|
|
64,395
|
|
|
|
55,125
|
|
Other current assets
|
|
|
84,554
|
|
|
|
56,867
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
970,636
|
|
|
|
831,369
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
424,041
|
|
|
|
397,578
|
|
Content rights, net, less current
portion
|
|
|
1,253,553
|
|
|
|
1,175,988
|
|
Deferred launch incentives
|
|
|
207,032
|
|
|
|
255,259
|
|
Goodwill
|
|
|
365,266
|
|
|
|
254,989
|
|
Intangibles, net
|
|
|
107,673
|
|
|
|
142,938
|
|
Investments in and advances to
unconsolidated affiliates
|
|
|
15,564
|
|
|
|
11,528
|
|
Deferred income taxes
|
|
|
|
|
|
|
69,316
|
|
Other assets
|
|
|
32,788
|
|
|
|
35,655
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
3,376,553
|
|
|
|
3,174,620
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS DEFICIT
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
liabilities
|
|
$
|
316,804
|
|
|
|
283,326
|
|
Accrued payroll and employee
benefits
|
|
|
122,431
|
|
|
|
88,000
|
|
Launch incentives payable
|
|
|
17,978
|
|
|
|
22,655
|
|
Content rights payable
|
|
|
57,694
|
|
|
|
97,075
|
|
Current portion of long-term
incentive plan liabilities
|
|
|
43,274
|
|
|
|
20,690
|
|
Current portion of long-term debt
|
|
|
7,546
|
|
|
|
6,470
|
|
Income taxes payable
|
|
|
55,264
|
|
|
|
51,226
|
|
Unearned revenue
|
|
|
68,339
|
|
|
|
89,803
|
|
Other current liabilities
|
|
|
45,194
|
|
|
|
33,220
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
734,524
|
|
|
|
692,465
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
|
2,633,237
|
|
|
|
2,590,440
|
|
Derivative financial instruments,
less current portion
|
|
|
8,282
|
|
|
|
18,592
|
|
Launch incentives payable, less
current portion
|
|
|
10,791
|
|
|
|
21,910
|
|
Long-term incentive plan
liabilities, less current portion
|
|
|
41,186
|
|
|
|
25,380
|
|
Content rights payable, less
current portion
|
|
|
3,846
|
|
|
|
4,380
|
|
Deferred income taxes
|
|
|
46,289
|
|
|
|
|
|
Other liabilities
|
|
|
64,861
|
|
|
|
31,309
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
3,543,016
|
|
|
|
3,384,476
|
|
|
|
|
|
|
|
|
|
|
Mandatorily redeemable interests in
subsidiaries
|
|
|
94,825
|
|
|
|
272,502
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders
deficit
|
|
|
|
|
|
|
|
|
Class A common stock; $.01 par
value; 100,000 shares authorized; 51,119 shares
issued, less 719 shares of treasury stock
|
|
|
1
|
|
|
|
1
|
|
Class B common stock; $.01 par
value; 60,000 shares authorized; 50,615 shares
|
|
|
|
|
|
|
|
|
issued and held in treasury stock
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
21,093
|
|
|
|
21,093
|
|
Accumulated deficit
|
|
|
(306,135
|
)
|
|
|
(513,311
|
)
|
Accumulated other comprehensive
income
|
|
|
23,753
|
|
|
|
9,859
|
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(261,288
|
)
|
|
|
(482,358
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND
STOCKHOLDERS DEFICIT
|
|
$
|
3,376,553
|
|
|
|
3,174,620
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
IV-4
DISCOVERY
COMMUNICATIONS, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
in thousands
|
|
|
OPERATING REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
$
|
1,243,500
|
|
|
|
1,187,823
|
|
|
|
1,133,807
|
|
Distribution
|
|
|
1,434,901
|
|
|
|
1,198,686
|
|
|
|
976,362
|
|
Other
|
|
|
334,587
|
|
|
|
285,245
|
|
|
|
255,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenue
|
|
|
3,012,988
|
|
|
|
2,671,754
|
|
|
|
2,365,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue, exclusive of
depreciation shown below
|
|
|
1,120,377
|
|
|
|
979,765
|
|
|
|
846,316
|
|
Selling, general &
administrative
|
|
|
1,209,420
|
|
|
|
1,054,816
|
|
|
|
927,855
|
|
Depreciation &
amortization
|
|
|
133,634
|
|
|
|
123,209
|
|
|
|
129,011
|
|
Gain on sale of long-lived asset
|
|
|
|
|
|
|
|
|
|
|
(22,007
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,463,431
|
|
|
|
2,157,790
|
|
|
|
1,881,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM
OPERATIONS
|
|
|
549,557
|
|
|
|
513,964
|
|
|
|
484,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME
(EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net
|
|
|
(194,227
|
)
|
|
|
(184,575
|
)
|
|
|
(167,420
|
)
|
Realized and unrealized gains from
derivative instruments, net
|
|
|
22,558
|
|
|
|
22,499
|
|
|
|
45,540
|
|
Minority interests in consolidated
subsidiaries
|
|
|
(2,451
|
)
|
|
|
(43,696
|
)
|
|
|
(54,940
|
)
|
Equity in earnings of
unconsolidated affiliates
|
|
|
7,060
|
|
|
|
4,660
|
|
|
|
171
|
|
Other, net
|
|
|
1,467
|
|
|
|
9,111
|
|
|
|
2,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(165,593
|
)
|
|
|
(192,001
|
)
|
|
|
(174,350
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME
TAXES
|
|
|
383,964
|
|
|
|
321,963
|
|
|
|
309,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
176,788
|
|
|
|
162,343
|
|
|
|
141,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
207,176
|
|
|
|
159,620
|
|
|
|
168,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
IV-5
DISCOVERY
COMMUNICATIONS, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
in thousands
|
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
207,176
|
|
|
|
159,620
|
|
|
|
168,022
|
|
Adjustments to reconcile net
income to cash provided by operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
133,634
|
|
|
|
123,209
|
|
|
|
129,011
|
|
Amortization of deferred launch
incentives and representation rights
|
|
|
77,778
|
|
|
|
83,411
|
|
|
|
107,757
|
|
Provision for losses on accounts
receivable
|
|
|
3,691
|
|
|
|
12,217
|
|
|
|
959
|
|
Expenses arising from long-term
incentive plans
|
|
|
39,233
|
|
|
|
49,465
|
|
|
|
71,515
|
|
Equity in earnings of
unconsolidated affiliates
|
|
|
(7,060
|
)
|
|
|
(4,660
|
)
|
|
|
(171
|
)
|
Deferred income taxes
|
|
|
108,903
|
|
|
|
109,383
|
|
|
|
105,522
|
|
Realized and unrealized gains on
derivative financial instruments, net
|
|
|
(22,558
|
)
|
|
|
(22,499
|
)
|
|
|
(45,540
|
)
|
Non-cash minority interest charges
|
|
|
2,451
|
|
|
|
43,696
|
|
|
|
54,940
|
|
Gain on sale of investments
|
|
|
(1,467
|
)
|
|
|
(12,793
|
)
|
|
|
|
|
Gain on sale of long-lived assets
|
|
|
|
|
|
|
|
|
|
|
(22,007
|
)
|
Other non-cash (income) charges
|
|
|
2,447
|
|
|
|
9,675
|
|
|
|
(2,681
|
)
|
Changes in assets and
liabilities, net of business combinations
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(84,598
|
)
|
|
|
(37,207
|
)
|
|
|
(60,841
|
)
|
Inventories
|
|
|
(4,560
|
)
|
|
|
1,853
|
|
|
|
4,555
|
|
Other assets
|
|
|
(7,434
|
)
|
|
|
(18,748
|
)
|
|
|
(3,711
|
)
|
Content rights, net of payables
|
|
|
(84,377
|
)
|
|
|
(108,155
|
)
|
|
|
(122,433
|
)
|
Accounts payable and accrued
liabilities
|
|
|
73,646
|
|
|
|
47,913
|
|
|
|
55,734
|
|
Representation rights
|
|
|
93,233
|
|
|
|
(6,000
|
)
|
|
|
(479
|
)
|
Deferred launch incentives
|
|
|
(49,386
|
)
|
|
|
(35,731
|
)
|
|
|
(74,696
|
)
|
Long-term incentive plan
liabilities
|
|
|
(841
|
)
|
|
|
(325,756
|
)
|
|
|
(240,752
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operations
|
|
|
479,911
|
|
|
|
68,893
|
|
|
|
124,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property and
equipment
|
|
|
(90,138
|
)
|
|
|
(99,684
|
)
|
|
|
(88,100
|
)
|
Business combinations, net of cash
acquired
|
|
|
(194,905
|
)
|
|
|
(400
|
)
|
|
|
(17,218
|
)
|
Purchase of intangibles
|
|
|
|
|
|
|
(583
|
)
|
|
|
|
|
Investments in and advances to
unconsolidated affiliates
|
|
|
|
|
|
|
(363
|
)
|
|
|
(17,433
|
)
|
Redemption of interests in
subsidiaries
|
|
|
(180,000
|
)
|
|
|
(92,874
|
)
|
|
|
(148,880
|
)
|
Proceeds from sale of investments
|
|
|
1,467
|
|
|
|
14,664
|
|
|
|
|
|
Proceeds from sale of long-lived
assets
|
|
|
|
|
|
|
|
|
|
|
22,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used by investing activities
|
|
|
(463,576
|
)
|
|
|
(179,240
|
)
|
|
|
(249,624
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of
long-term debt
|
|
|
316,813
|
|
|
|
1,785,955
|
|
|
|
1,848,000
|
|
Principal payments of long-term
debt
|
|
|
(307,030
|
)
|
|
|
(1,697,068
|
)
|
|
|
(1,699,215
|
)
|
Deferred financing fees
|
|
|
(1,144
|
)
|
|
|
(4,810
|
)
|
|
|
(8,499
|
)
|
Contributions from minority
shareholders
|
|
|
|
|
|
|
603
|
|
|
|
3,146
|
|
Other financing
|
|
|
(9,963
|
)
|
|
|
32,153
|
|
|
|
(30,840
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used) provided by financing
activities
|
|
|
(1,324
|
)
|
|
|
116,833
|
|
|
|
112,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash
|
|
|
2,761
|
|
|
|
3,723
|
|
|
|
2,535
|
|
CHANGE IN CASH AND CASH
EQUIVALENTS
|
|
|
17,772
|
|
|
|
10,209
|
|
|
|
(9,793
|
)
|
Cash and cash equivalents,
beginning of year
|
|
|
34,491
|
|
|
|
24,282
|
|
|
|
34,075
|
|
CASH AND CASH EQUIVALENTS, END
OF YEAR
|
|
$
|
52,263
|
|
|
|
34,491
|
|
|
|
24,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
IV-6
DISCOVERY
COMMUNICATIONS, INC.