2008 ANNUAL REPORT
The world’s
CANADA
13 U.S. NETWORKS
UNITED STATES
MORE THAN 100 NETWORKS
WORLDWIDE
LATIN AMERICA
across the globe
#1 nonfi ction media company
IN 170 COUNTRIES
AND 35 LANGUAGES
ASIA
UNITED KINGDOM
EUROPE
MIDDLE EAST
AFRICA
INDIA
AUSTRALIA
REACHING OVER 1.5 BILLION
CUMULATIVE SUBSCRIBERS
Discovery Communications is dedicated to satisfying curiosity and
making a diff erence in people’s lives with the highest quality content,
services and products that entertain, engage and enlighten —
inviting viewers to explore their world.
DEAR SHAREHOLDERS,
Since fi rst going on the air in 1985, Discovery Communications has been driven by a
singular mission: to be the media leader in satisfying curiosity. Our mission is not only a
noble calling, but also a strong and sustainable business model.
Beginning with the launch of Discovery Channel as a single U.S. cable network
reaching156,000 subscribers, the company has grown to become the world leader in
nonfi ction media, encompassing more than 100 networks and reaching more than
1.5 billion cumulative subscribers in 170 countries. This extensive brand and platform
growth has been driven in large part by the universal nature of Discovery’s mission and
the global appeal of our nonfi ction content, which resonates across continents, cultures
and languages.
On September 18, 2008, Discovery embarked on the next phase of its growth, when
a representative group of Discovery executives and on-air personalities gathered in
New York City for the company’s fi rst day of trading on the Nasdaq stock exchange.
Now, as a public company, Discovery is even better positioned to continue providing
the highest quality nonfi ction content to its viewers and creating long-term value for
its shareholders.
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FINANCIAL PERFORMANCE & REVENUE BALANCE
Discovery Communications reported solid results in 2008 with sustained revenue growth
and rapid margin expansion. Overall, annual revenue grew to $3.44 billion, a 10% increase
over the as adjusted revenue for 2007, and adjusted Operating Income Before Depreci-
ation and Amortization (OIBDA) grew 49% to $1.31 billion, which included the impact of
a $139 million content impairment charge from 2007. Excluding the impact of the content
impairment charge, adjusted OIBDA increased $216 million or 21% from the previous year.
This performance refl ected solid growth across both domestic and international markets
and advertising and distribution revenue streams. It also refl ected our ability to thoughtfully
manage our costs to produce signifi cant operating leverage and demonstrate the strength
of our business model.
Among Discovery Communications’ strengths is the power of its high-quality brand portfolio
– led by the most widely distributed television brand in the world, Discovery Channel.
The company also benefi ts from a balance of advertising and long-cycle distribution
revenue, with nearly 50% of Discovery’s consolidated revenue in 2008 generated from
multi-year distribution agreements providing top-line sturdiness during times of economic
fl uctuation.
Finally, there is the growth that results from Discovery’s extensive global distribution platform
and market diversifi cation, with more than one-third of consolidated revenue derived
from markets outside the U.S. With these strategic advantages, Discovery’s management is
confi dent that the company is as well positioned as any media company during this time of
economic uncertainty.
2008 ACCOMPLISHMENTS
In 2008, Discovery remained committed to executing on the company’s long-term growth
strategy, which includes the following fi ve key areas:
Maintaining Discovery’s focus on creative excellence in nonfi ction programming and
expanding the portfolio’s brand entitlement by developing compelling content that drives
audience growth, builds advertising relationships, has global utility and supports continued
distribution revenue on all platforms.
Discovery made signifi cant investments across its portfolio of networks in more new,
original programming hours in 2008 that delivered on the brand promise for each network.
In the fourth quarter, ratings on Discovery Channel – which debuted 125 premiere hours
during the last three months of the year as compared to 72 hours during the same period in
2007 – were up 18% year-over-year in the desirable 18-54 demographic. Similarly, ratings for
TLC’s Monday “family night” programming improved 37% with adults in the fourth quarter
as new premiere hours debuted, and ratings at Discovery Communications’ third fully
distributed U.S. network, Animal Planet, were up every month in 2008 following its February
repositioning. This ratings momentum positions the company very well for 2009.
Strengthening Discovery’s leadership position and continuing to grow international operations.
For 2008, Discovery’s international revenue grew by 12% and adjusted OIBDA grew by 52%.
This growth was driven by a 16% increase in international subscribers, including 22% in
Europe, Middle East and Africa, 20% in Latin America and 10% in Asia-Pacifi c. As Discovery
prepares to celebrate the 20th anniversary of its international business in 2009, the company
2008 ANN UAL REP OR T
3
has one of the most extensive footprints in the industry with between two and 12 channels
in 170 countries. Leveraging this established distribution platform, Discovery is poised for
continued growth in many international markets where pay-TV penetration is under 50%.
As pay-TV penetration grows in these markets, Discovery’s portfolio grows with it.
Importantly, the company also made signifi cant strides in recognizing program development
synergies between its U.S. and international businesses, with international networks now
sourcing approximately 50% of content from Discovery’s U.S. networks. Overall, viewership
for the company’s international portfolio grew 7% among adults 25-54 in 2008. The global
appeal of Discovery’s nonfi ction programming enables the company to continue expanding
distribution, building market share and driving international advertising revenue with new
in-market sales teams in targeted growth markets.
Realizing the potential of Discovery’s distribution strength in the U.S.
Discovery has one of the broadest distribution platforms of any media company in the U.S.
with three channels reaching more than 95 million U.S. subscribers and seven channels
reaching between 47 million and 73 million U.S. subscribers. We are focused on leveraging
this strength to build additional branded channels and businesses that can sustain long-term
growth and occupy a desired programming niche with strong consumer appeal.
Discovery took several steps in 2008 toward enhancing the value and appeal of its emerging
networks with the introduction of three new brands targeting underserved niches in the
marketplace – Investigation Discovery (ID), which was rebranded from Discovery Times; Planet
Green, which evolved from Discovery Home; and the announcement of the plan to convert
Discovery Health into OWN: The Oprah Winfrey Network in partnership with Oprah Winfrey.
The June debut of Planet Green was the fi rst-ever launch of a full-time cable network
dedicated to the growing interest in sustainable living and the environment, while
Investigation Discovery ended the year as the fastest growing non-news, ad-supported
network on cable, with double-digit ratings growth every month since its launch. ID is a key
new brand leader with global appeal and, as of early 2009, the company has launched ID in the
UK, as well as announced plans to launch the brand in Russia, Poland and Turkey.
Extending ownership of nonfi ction entertainment and “satisfying curiosity” to all digital
media platforms.
Discovery has implemented signifi cant upgrades to its brand-aligned network websites over
the past two years, including greatly improved video capabilities and expanded content
off erings, which helped to drive a 40% year-over-year increase in average unique monthly
visitors during 2008. The company also continues to explore additional opportunities to
extend all of its digital brands and leverage its library of high-quality nonfi ction content
on new platforms through its expanding mobile and on-demand off erings, as well as
partnerships with leading digital media companies such as YouTube.
Continuing to improve operating effi ciencies and margin expansion.
Excluding the impact of the previously mentioned content impairment charge, Discovery’s
adjusted OIBDA margin increased to 38% in 2008 from 28% in 2007. This margin expansion
was achieved at the same time that the company was able to increase revenue by 10%,
demonstrating Discovery’s operating fl exibility, which enables the company to grow its
business while effi ciently managing expenses and fl owing incremental revenue through to
the bottom line.
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4
Looking Ahead
As we enter 2009, the impact of the ongoing global economic downturn continues to
present uncertainties. However, we believe strongly that the power of Discovery’s brands,
its global presence and balanced revenue streams, and the steps we have taken to strengthen
the company for the long term, make Discovery as well positioned as any during these
challenging times.
For the year, the board, management and employees will remain focused on sustaining
our investment in new, original programming with global utility, greater effi ciency and
cost-eff ectiveness
investment, and careful attention
to expenses in line with revenue growth. We will also continue to leverage the
strength of our global distribution platform to build new brands in the U.S. that
target underserved categories and can sustain long-term growth, as well as take
advantage of expanding pay-TV penetration around the world.
in our operations to fuel that
Overall, we remain dedicated to the guiding principle that has defi ned Discovery from its
beginning: satisfying curiosity with the highest quality content, products and services that
invite viewers to explore their world.
Thank you for your continued support.
John S. Hendricks
Founder and Chairman
David M. Zaslav
President and Chief Executive Offi cer
2008 ANN UAL REP ORT
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DISCOVERY NETWORKS U.S.
Capturing the wonders of the world for approximately
720 million cumulative subscribers, Discovery Communications’
13 U.S. television networks comprise one of the media
industry’s most widely distributed portfolios of brands
characterized by high-quality production values, spectacular
cinematography and compelling storytelling.
The portfolio includes three channels – Discovery Channel,
TLC and Animal Planet – that reach over 95 million house-
holds and six channels – Discovery Health, Discovery Kids,
Science Channel, Planet Green, Investigation Discovery
and Military Channel – that reach at least 50 million
households.
Discovery is also a leading distributor of high-defi nition
programming in the U.S. with its 24/7 standalone HD Theater
network, as well as fi ve HD simulcasts, including Discovery
Channel, TLC, Animal Planet, Science Channel and
Planet Green.
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DISCOVERY CHANNEL
Experience the authenticity, excitement and adventure of
things both big and small, and satisfy your curiosity about
the world and all of its wonders. Discovery Channel is the
world’s most widely distributed television brand reaching
99 million subscribers in the U.S. and approximately 260
million subscribers in 170 countries around the world.
Discovery Channel ranks among the top 10 ad-supported
cable networks for men on every night of the week and
has been voted number one in overall quality among U.S.
cable networks for 12 consecutive years. It showcases the
wonders of science, technology, exploration, adventure
and history, as well as in-depth, behind-the-scenes
glimpses at the people, places and organizations
that shape and share our world.
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Discovery Channel’s DEADLIEST CATCH
was the top-rated, non-news, ad-supported
cable series in primetime for its target
demographic in 2008.
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TLC
Ever wonder what it’s like to raise multiples or to live in
a world optimized for individuals signifi cantly taller than
you? TLC is dedicated to sharing the unique and colorful
human experience, featuring quality lifestyle content that
inspires, entertains and brings viewers into characters’
lives with great respect.
A top 10 cable destination for women reaching 98
million subscribers, TLC’s Monday night “family” lineup of
premiere episodes of JON & KATE PLUS 8, LITTLE PEOPLE
BIG WORLD and 18 KIDS & COUNTING is delivering the
network’s highest ratings in more than fi ve years.
The two-part wedding episode of TLC’s hit series,
JON & KATE PLUS 8, was the number one non-sports
program on ad-supported cable during primetime
on the nights that it aired in November.
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ANIMAL PLANET
Never before have humans been able to
experience the wonders of the animal world in
such a raw, visceral and immersive way. From
man’s best friend to his own worst enemy,
from controversy to reality, it’s not just
entertainment you watch. It’s entertainment
you feel. Animal Planet is one of the most
widely distributed television brands in the
world, reaching 95 million subscribers in
the U.S. and approximately 230 million cumulative
subscribers in over 160 countries around the globe.
With a refreshed brand, Animal Planet enjoyed
double-digit ratings gains with its key demographic
of women 25-54 throughout 2008.
WHALE WARS was the best performing series
in the history of Animal Planet drawing more
than half a million adult 25-54 viewers.
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questioning assumptions
SCIENCE CHANNEL
The only network devoted entirely to the wonders of
science, including in-depth coverage of breaking and
current science news, Science Channel ended 2008
with the highest ratings in the network’s history.
Science Channel remains a strong performer among the
target audience of adults 25-54 and also grew viewer-
ship among men 18-34 by double digits in 2008.
With a refreshed logo and on-air look, Science Channel
immerses 56 million U.S. subscribers in a full spectrum of
scientifi c topics ranging from string theory and futuristic
cities to accidental discoveries and outrageous inventions.
Internationally, Discovery Science reaches 35 million
subscribers in more than 90 countries.
Science Channel’s newsmagazine, BRINK,
brings in a new audience of science enthusiasts.
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PLANET GREEN
Ever wonder how to change the world? Debuting in
June 2008 in what The New York Times called the media
industry’s “highest profi le launch of the year,” Planet Green
is the only 24-hour eco-lifestyle and entertainment
network featuring on-air talent and experts who inform
viewers and present environmental issues in a fun,
entertaining and hopeful way.
Launched in more than 50 million homes with almost
100% original content – 250 hours representing 16 new
shows – the network features engaging on-air experts and
personalities including Emeril Lagasse on EMERIL GREEN
and Steve Thomas on RENOVATION NATION. The cross-
platform Planet Green initiative also includes the leading
eco-lifestyle website Treehugger.com and the solutions-
oriented PlanetGreen.com dedicated to bringing
original eco-lifestyle content to viewers.
Celebrity Chef Emeril Lagasse shares his
philosophy for fresh, top-quality foods with
Planet Green viewers in the original series
EMERIL GREEN.
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INVESTIGATION DISCOVERY
Investigation Discovery (ID) is the authority in real
investigation for people who are driven to unravel the
truth. ID delivers remarkable insight into the real-life world
of investigation and exploration of the latest forensic
analysis and true stories that piece together dramatic
puzzles of human nature and courage.
Since debuting in January, ID has been the fastest
growing non-news network among all cable households
and has increased its audience of adults 25-54 by more
than 35%. Reaching 53 million subscribers, ID showcases
mysteries and resolutions that matter through in-depth
documentaries and series that challenge viewers on issues
shaping our culture and defi ning our world.
THE SHIFT has become ID’s top original
series, with more than half a million viewers
tuning in for the season fi nale.
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HD THEATER
One of the fi rst 24-hour high-defi nition networks to
broadcast all of its content in brilliant 1080i and 5.1 digital
surround sound, HD Theater features compelling,
real-world content from a wide variety of categories,
including adventure, technology, nature and world culture,
and provides the highest quality television experience
available to 20 million U.S. subscribers.
MILITARY CHANNEL
The only network devoted to military subjects, Military
Channel delivers compelling stories of heroism, military
strategy, technological breakthroughs and turning points
in history to 53 million U.S. subscribers.
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2008 ANN UAL REP ORT
DISCOVERY HEALTH
Taking viewers inside the fascinating and informative
world of health and medicine to experience fi rst-hand
compelling, real-life stories of medical breakthroughs
and human triumphs, Discovery Health reaches 73
million subscribers and posted double-digit ratings
gains throughout 2008. In 2010, Discovery Health
will become OWN: The Oprah Winfrey Network.
DISCOVERY KIDS
With multiple Emmys and other awards for quality
children’s television, Discovery Kids reaches 62
million U.S. subscribers and engages kids of all ages
to learn about science, adventure, exploration and
natural history through documentaries, reality shows,
scripted dramas and animated stories.
U.S. HISPANIC NETWORKS
The third most popular Spanish-language cable
network in the U.S., Discovery en Español reaches
approximately eight million households. Discovery
Familia brings the best Spanish-language educational
and family-oriented content to more than one million
subscribers.
FIT TV
Available to 47 million subscribers, FitTV is the
premier, interactive fi tness brand that inspires
consumers to improve their fi tness and well-being
on their terms.
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OWN
In January 2008, Discovery and Oprah Winfrey announced
a partnership to launch OWN: The Oprah Winfrey
Network, the fi rst network devoted to entertaining,
empowering and inspiring viewers to live their best life.
Programming will include a mix of nonfi ction, short- and
long-form programming, movies, documentaries and
acquisitions.
Launching in late 2009 or early 2010 to more than 70
million subscribers on what is currently Discovery Health,
this multi-platform media venture will also include the
award-winning digital platform Oprah.com, connecting
viewers and inviting them to become a part of a larger
community.
“Fifteen years ago, I wrote in my journal that
one day I would create a television network, as
I always felt my show was just the beginning of
what the future could hold. For me, the launch
of OWN is the evolution of the work I’ve been
doing on television all these years and a natural
extension of my show.”
— Oprah Winfrey
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DIGITAL MEDIA
Discover the wonder of Discovery’s digital media
properties, including 16 U.S. brand destinations, such
as Discovery.com, TLC.com and AnimalPlanet.com,
that provide cross-platform sales and promotional
opportunities with Discovery’s networks. Together with
HowStuff Works.com, TreeHugger.com and Petfi nder.com,
these online destinations attract an average of 33 million
cumulative unique monthly visitors. Discovery’s online
presence was further enhanced in 2008 with the debut
of nine YouTube channels featuring clips from the
company’s portfolio of networks.
Discovery’s digital media business also includes Discovery
mobile, providing original made-for-mobile short-
form content and popular titles on mobile devices, and
Discovery On-Demand, which is distributed across most
major U.S. affi liates, off ering a wide selection of programming
from Discovery’s U.S. networks.
In 2008, Discovery added more than 30,000
video clips to HowStuff Works.com, the award-
winning online source of high-quality, unbiased
and easy-to-understand explanations of how
the world actually works.
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DISCOVERY NETWORKS INTERNATIONAL
An early entrant onto the international pay-TV landscape, Discovery
has been on the ground in international markets for 20 years, building
the relationships, technical capabilities and scale required to grow a
profi table and effi cient global business. Today, Discovery Networks
International distributes a diversifi ed portfolio of 19 factual, lifestyle
and entertainment brands to 892 million cumulative subscribers in
170 countries.
Discovery is one of the largest and fastest growing international
multichannel businesses in the media industry, with regional operations
in the UK, EMEA (Europe, Middle East and Africa), Asia-Pacifi c and Latin
America that span some of the world’s fastest growing pay-TV markets.
The company continues to grow its distribution base, build local
advertising sales capabilities and further strengthen the programming
and category leadership of its brands around the world.
Discovery is one of the leading international providers of HD networks
with HD channels in 23 markets.
Discovery also operates Antenna Audio, a leading provider of audio,
multimedia and mobile tours purchased by more than 20 million visitors
each year at 450 of the world’s most famous and frequented museums,
exhibitions, historic sites and visitor attractions.
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UK
Launched in 1989, Discovery Channel in the UK was Discovery’s fi rst
international network and has been the number one factual channel
in the market throughout its 20-year history. Discovery now off ers
a portfolio of 12 channels in the UK reaching more than 100 million
cumulative subscribers. Discovery recently expanded its UK portfolio with
the launch of Investigation Discovery in January 2009, and will launch a
new entertainment channel, Quest, on the Freeview DTT platform in May.
EMEA
Discovery off ers 13 entertainment brands reaching over 200 million
cumulative subscribers in more than 100 countries throughout Europe,
the Middle East and Africa. Discovery Channel is a top-rated channel
across a number of markets in the region, including Poland, where it
delivered four of its top-rated months in history during the past year,
and Norway, where it achieved a record 5.81% share of viewers in all
television homes among men 25-39. In 2009, Discovery is launching
Animal Planet HD and Investigation Discovery in markets across the
region. The company is also enhancing its advertising sales capabilities
in EMEA, with local advertising sales offi ces opening most recently in
Romania and Russia.
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ASIA-PACIFIC
Discovery has the most networks and widest distribution
of any international television provider in the Asia-Pacifi c
region, off ering a portfolio of seven brands that reach
442 million cumulative subscribers across 30 Asia-Pacifi c
countries. This includes three branded programming
blocks in China, featuring Discovery Channel, Animal
Planet and Discovery Travel & Living. Discovery Channel
has ranked as the most watched regional cable and
satellite channel across Asia-Pacifi c for 10 consecutive
years and is consistently the most recognized brand in the
region. Discovery now distributes HD services in fi ve
Asia-Pacifi c markets.
LATIN AMERICA
Discovery Channel has maintained its leadership ranking
as the top-rated nonfi ction entertainment channel in Latin
America for 11 consecutive years. Today, Discovery off ers
nine media brands in Latin America reaching 125 million
cumulative subscribers in 33 countries and territories.
In 2008, Discovery Channel increased its viewership
by 16% in Latin America, while Discovery Kids was the
number one network among preschoolers and women
25-34 across the region. Another growing brand in Latin
America, Discovery Home & Health experienced double-
digit growth among female viewers in 2008.
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DISCOVERY COMMERCE
Enhancing viewer loyalty through direct interaction, Discovery Commerce
extends the reach of Discovery’s network brands and signature properties
through an award-winning online shopping destination and expanding
domestic licensing and merchandising partnerships.
DiscoveryStore.com attracted more than 12 million unique visitors in 2008
and Discovery Commerce introduced more than 140 DVD titles through
major retailers. Discovery Commerce also works with key manufacturers and
retailers to develop additional merchandising opportunities, including video
game titles, Discovery Kids-branded toys, Planet Green-branded sustainability
DVDs, and Animal Planet-branded pet products.
DISCOVERY EDUCATION
As the number one provider of educational media to U.S. classrooms,
Discovery Education off ers a suite of curriculum-based tools designed to
foster student achievement, as well as educator enhancement resources such
as assessment services, professional development and a nationwide teacher
community that promotes the integration of media and technology in the
classroom.
Discovery Education streaming features thousands of digital videos
segmented into concept-specifi c clips, covering all curriculum areas and
correlated to state K-12 standards. Discovery Education Science off ers
elementary and middle schools dynamic science content, virtual labs,
simulations and more. Discovery Education Health is a robust health/
prevention library that focuses on building life skills. Discovery Education also
provides educational services globally and works with corporate, non-profi t
and foundation partners to create curriculum programs and to support
broad-based student initiatives.
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In keeping with its mission to satisfy curiosity and make a diff erence in
people’s lives, Discovery is committed to being a thoughtful and responsible
corporate citizen, supporting the extension of science, environmental and
other educational programs in the U.S. and abroad.
The centerpiece of these eff orts is the Discovery Channel Global Education
Partnership (DCGEP), a public non-profi t organization dedicated to using the
power of video to provide information and support community development
in under-resourced areas. Today, DCGEP serves 625,000 children in 12
countries. In 2008, through a partnership with Discovery, Chevron and The
Coca-Cola Africa Foundation, DCGEP established 37 new Learning Centers in
underserved schools, bringing the total number to 241.
In the United States, Discovery supports a number of educational outreach
initiatives including the Discovery Education 3M Young Scientist Challenge,
the premier national science competition for students in grades 5 through 8.
Launched in 1999, the Young Scientist Challenge is designed to encourage the
exploration of science among America’s youth and to promote the importance
of science communication. In addition, Discovery supports the annual
SILVERDOCS: AFI/Discovery Channel Documentary Festival, an international
fi lm festival honoring excellence in fi lmmaking, supporting the diverse voices
and free expression of independent storytellers, and celebrating the power of
documentaries to improve our understanding of the world.
Discovery also strives to lead by example in the area of environmental
stewardship. In 2008, Discovery’s global headquarters in Silver Spring,
Maryland, earned the highest level of Leadership in Energy and Environmental
Design (LEED) certifi cation by the U.S. Green Building Council, as well as the
U.S. Environmental Protection Agency’s prestigious ENERGY STAR certifi cation,
the national symbol for superior energy effi ciency and environmental
protection, ranking in the top 5% of buildings nationwide.
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Board of Directors
John S. Hendricks
Founder and Chairman
Discovery Communications
Robert R. Beck
Independent Financial
Consultant
Robert R. Bennett
Managing Director
Hilltop Investments
Paul A. Gould
Managing Director
Allen & Company, LLC
Lawrence “Larry” S. Kramer
Senior Advisor
Polaris Venture Partners
Dr. John C. Malone
Chairman
Liberty Media Corporation
and Liberty Global, Inc.
Robert J. Miron
Chairman
Advance/Newhouse
Communications
Steven A. Miron
CEO
Bright House Networks
M. LaVoy Robison
Executive Director
The Anschutz Foundation
J. David Wargo
President
Wargo & Company, Inc.
David M. Zaslav
President and CEO
Discovery Communications
Executive Officers
John S. Hendricks
Founder and Chairman
David M. Zaslav
President and CEO
Mark Hollinger
Chief Operating Offi cer
Senior Executive Vice President
Corporate Operations
Adria Alpert Romm
Senior Executive Vice President
Human Resources
Brad Singer
Chief Financial Offi cer
Senior Executive Vice President
Bruce Campbell
President
Digital Media and
Corporate Development
Joseph A. LaSala, Jr.
General Counsel and Secretary
Senior Executive Vice President
Thomas Colan
Executive Vice President
Chief Accounting Offi cer
Table of Contents
Selected Financial Data .....................................................................................................................................................................26
Management’s Discussion and Analysis of Financial Condition and Results of Operations ....................................28
Quantitative and Qualitative Disclosures about Market Risk ..............................................................................................52
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .................................53
Controls and Procedures ...................................................................................................................................................................53
Financial Statements and Supplementary Data .......................................................................................................................54
Market for Registrant’s Common Equity, Related Stockholder Matters,
and Issuer Purchases of Equity Securities ........................................................................................................................138
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25
SELECTED FINANCIAL DATA
The following table presents our selected financial data for each of the past five years. The selected operating statement
data for each of the three years during the period ended December 31, 2008 and the selected balance sheet data as of
December 31, 2008 and 2007 have been derived from and should be read in conjunction with the audited consolidated
financial statements and other financial information included elsewhere in this Annual Report on Form 10-K. The selected
operating statement data for each of the two years during the period ended December 31, 2005 and the selected balance
sheet data as of December 31, 2006, 2005, and 2004 have been derived from audited consolidated financial statements not
included in this Annual Report on Form 10-K.
The selected financial data set forth below reflect the Newhouse Transaction, including the AMC spin-off, as though it was
consummated on January 1, 2008. Accordingly, the selected financial data as of and for the year ended December 31, 2008
include the combined results of operations and financial position of both DHC and DCH. The selected financial data for years
prior to 2008 reflect only the results of operations and financial position of DHC, as our predecessor. Prior to the Newhouse
Transaction, DHC accounted for its ownership interest in DCH using the equity method. Because the Newhouse Transaction
is presented as of January 1, 2008, the selected financial data for years prior to 2008 include DCH’s results of operations in the
Equity in earnings of Discovery Communications Holding, LLC line item. Information regarding the Newhouse Transaction
and DHC’s investment in DCH prior to Newhouse Transaction is disclosed in Note 1 and Note 2, respectively, to the audited
consolidated financial statements included in this Annual Report on Form 10-K.
The selected financial data also reflect certain reclassifications of each company’s financial information to conform to the
combined Company’s financial statement presentation, as follows:
• The consolidated financial statements for 2008 have been adjusted to eliminate the separate presentation of DHC’s
investment in DCH and the portion of DCH’s earnings recorded by DHC using the equity method during the period
January 1, 2008 through September 17, 2008.
• Advance/Newhouse’s interest in DCH’s earnings for the period January 1, 2008 through September 17, 2008 has been
recorded as Minority interests, net of tax in the Consolidated Statements of Operations.
• All DHC share and per share data have been adjusted for all periods presented to reflect the exchange into our shares.
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Selected Operating Statement
Information:
Revenues
Cost of revenues, excluding
depreciation and amortization
Impairment of intangible assets
Exit and restructuring charges
Gains on asset dispositions
Operating income (loss)
Equity in earnings of Discovery
Communications Holding, LLC
Equity in loss of unconsolidated affiliates
Minority interests, net of tax
Income from continuing operations
Income (loss) from discontinued
operations, net of tax
Net income (loss)
Income per share from continuing
operations:
Basic
Diluted
Income (loss) per share from
discontinued operations:
Basic
Diluted
Net income (loss) per share:
Basic
Diluted
Weighted average number of
shares outstanding:
Basic
Diluted
Selected Balance Sheet Information:
Cash and cash equivalents
Investment in Discovery
Communications Holding, LLC
Goodwill
Intangible assets, net
Total assets
Long-term debt:
Current portion
Long-term portion
Total liabilities
Redeemable interests in subsidiaries
Stockholders’ equity
Years Ended December 31,
2008
2007
2006
2005
2004
(Amounts in millions, except per share amounts)
$
3,443
$
76
$
80
$
82
$
1,024
30
31
—
1,057
—
( 61 )
( 128 )
274
43
317
0.85
0.85
0.13
0.13
0.99
0.98
321
322
$
$
$
$
$
$
60
—
—
1
( 8 )
142
—
—
86
( 154 )
( 68 )
0.31
0.31
( 0.55 )
( 0.55 )
( 0.24 )
( 0.24 )
281
281
63
—
2
—
( 11 )
104
—
—
52
( 98 )
( 46 )
0.19
0.19
( 0.35 )
( 0.35 )
( 0.16 )
( 0.16 )
280
280
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
64
—
—
—
( 8 )
80
—
—
25
8
33
0.09
0.09
0.03
0.03
0.12
0.12
280
280
$
$
$
$
$
$
83
64
—
—
—
—
84
—
—
51
15
66
0.18
0.18
0.06
0.06
0.24
0.24
280
280
$
100
$
8
$
—
$
1
$
—
—
6,891
716
10,484
458
3,331
4,899
49
5,536
3,272
1,782
1
5,866
—
—
1,371
—
4,495
3,129
1,782
592
5,871
—
—
1,322
—
4,549
3,019
1,782
592
5,819
—
—
1,244
—
4,575
2,946
1,782
433
5,565
—
—
1,218
—
4,347
200 8 AN NU AL RE PO RT
27
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K, including “Item 7. Management’s Discussion and Analysis of Results of Operations and
Financial Condition,” contains both historical and forward-looking statements. All statements that are not statements of
historical fact are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are not based on
historical facts, but rather reflect our current expectations concerning future results and events. Forward-looking statements
generally can be identified by the use of statements that include phrases such as “believe,” “expect,” “anticipate,” “intend,”
“plan,” “foresee,” “likely,” “continue,” “will,” “may,” “would” or other similar words or phrases. Similarly, statements that describe
our objectives, plans or goals are or may be forward-looking statements. These forward-looking statements involve known
and unknown risks, uncertainties and other factors that are difficult to predict and which may cause our actual results,
performance or achievements to be different from any future results, performance and achievements expressed or implied
by these statements. These risks, uncertainties and other factors are discussed in “Item 1A. Risk Factors” above. Other risks,
or updates to the risks discussed below, may be described from time to time in our news releases and other filings made
under the securities laws, including our reports on Form 10-Q and Form 8-K. There may be additional risks, uncertainties
and factors that we do not currently view as material or that are not necessarily known. The forward-looking statements
included in this document are made only as of the date of this document and, under Section 27A of the Securities Act and
Section 21E of the Exchange Act, we do not have any obligation to publicly update any forward-looking statements to
reflect subsequent events or circumstances.
INTRODUCTION
Management’s discussion and analysis of results of operations and financial condition is provided as a supplement to the
accompanying consolidated financial statements and notes to help provide an understanding of our financial condition,
cash flows and results of operations. This discussion is organized as follows:
•
Overview. This section provides a general description of our business segments, as well as recent developments we
believe are important in understanding the results of operations and financial condition, including a discussion of the
Newhouse Transaction.
•
•
•
•
•
Results of Operations — 2008 vs. 2007. This section provides an analysis of our result of operations for the year ended
December 31, 2008. In order to assist the reader in better understanding our operations, a table is provided that
reconciles our and DHC’s prior year income statements presented in accordance with United States Generally Accepted
Accounting Principles (“U.S. GAAP”) to the financial information discussed in our adjusted results of operations for the
years ended December 31, 2008 and 2007. This analysis is presented on both a consolidated and a business segment
basis.
Results of Operations — 2007 vs. 2006. This section provides an analysis of DHC’s prior year income statements presented
in accordance with U.S. GAAP, restated to reflect AMC as a discontinued operation, as a result of the completion of the
Newhouse Transaction
Liquidity and Capital Resources. This section provides an analysis of our cash flows for the three years ended December
31, 2008, as well as a discussion of our outstanding debt and commitments that existed as of December 31, 2008.
Included in the analysis of outstanding debt is a discussion of the amount of financial capacity available to fund our
future commitments, as well as other financing arrangements.
Critical Accounting Policies. This section identifies those accounting policies that are considered important to our results
of operations and financial condition, require significant judgment and require estimates on the part of management
in application. All of our significant accounting policies, including those considered critical accounting policies, are also
summarized in Note 2 to the accompanying consolidated financial statements.
Quantitative and Qualitative Disclosures about Market Risk. This section discusses how we manage exposure to potential
gains and losses arising from changes in market rates and prices, such as interest rates, foreign currency exchange rates,
and changes in the market value of financial instruments.
28
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OVERVIEW
We are a leading global media and entertainment company that provides original and purchased programming across
multiple distribution platforms in the United States and approximately 170 other countries, including television networks
offering customized programming in 35 languages. Our strategy is to optimize the distribution, ratings and profit potential
of each of our branded channels. We own and operate a diversified portfolio of website properties and other digital services
and develop and sell consumer and educational products and media sound services in the United States and internationally.
We operate through three divisions: (1) U.S. Networks, (2) International Networks, and (3) Commerce, Education, and Other.
Our media content is designed to target key audience demographics and the popularity of our programming creates
a reason for advertisers to purchase commercial time on our channels. Audience ratings are a key driver in generating
advertising revenue and creating demand on the part of cable television operators, direct-to-home or “DTH” satellite
operators and other content distributors to deliver our programming to their customers. The current economic conditions,
and any continuation of these adverse conditions, may adversely affect the economic prospects of advertisers and could
alter their current spending priorities.
In addition to growing distribution and advertising revenue for our branded channels, we are focused on growing revenue
across new distribution platforms, including brand-aligned web properties, mobile devices, video-on-demand and
broadband channels, which serve as additional outlets for advertising and affiliate sales, and provide promotional platforms
for our programming. We also operate internet sites, such as HowStuffWorks.com, providing supplemental news, information
and entertainment content that are aligned with our television programming.
We will continue to incur incremental legal, accounting and other expenses that we did not incur as a private company. We
will incur costs associated with public company reporting requirements and costs associated with corporate governance
requirements, including requirements under the Sarbanes-Oxley Act of 2002. We are incurring additional costs to prepare for
the management attestation requirements of the Sarbanes-Oxley Act of 2002 and the related attestation by the independent
registered public accounting firm to which we will first be subject in 2009.
U.S. Networks
U.S. Networks is our largest division, which owns and operates 11 cable and satellite channels, including Discovery Channel,
TLC and Animal Planet, as well as a portfolio of website properties and other digital services. U.S. Networks also provides
distribution and advertising sales services for Travel Channel and distribution services for BBC America and BBC World
News. U.S. Networks derives revenue primarily from distribution fees and advertising sales, which comprised 45% and 51%,
respectively, of revenue for this division for the year ended December 31, 2008. During each of the years ended December 31,
2008, 2007, and 2006, Discovery Channel, TLC and Animal Planet collectively generated more than 73% of U.S. Networks total
revenue. U.S. Networks earns distribution fees under multi-year affiliation agreements with cable operators, DTH operators
and other distributors of television programming. Distribution fees are based on the number of subscribers receiving
programming. Upon the launch of a new channel, we may initially pay distributors to carry such channel (such payments
are referred to as “launch incentives”), or may provide the channel to the distributor for free for a predetermined length
of time. Launch incentives are amortized on a straight-line basis as a reduction of revenue over the term of the affiliation
agreement. U.S. Networks sells commercial time on our networks and websites. The number of subscribers to our channels,
the popularity of our programming and our ability to sell commercial time over a group of channels are key drivers of
advertising revenue.
Several of our domestic networks, including Discovery Channel, TLC and Animal Planet, 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. Our other U.S. Networks are distributed
primarily on the digital tier of cable systems and equivalent tiers on DTH platforms and have been successful in maximizing
their distribution within this more limited universe. There is, however, no guarantee that these digital networks will ever
be able to gain the distribution levels or advertising rates of our major networks. Our contractual arrangements with U.S.
distributors are renewed or renegotiated from time to time in the ordinary course of business. In 2008, we renewed the
distribution agreements with one of our largest distributors.
U.S. Networks’ largest single cost is the cost of programming, including production costs for original programming. U.S.
Networks amortizes the cost of original or purchased programming based on the expected realization of revenue resulting
in an accelerated amortization for Discovery Channel, TLC and Animal Planet and straight-line amortization over three to five
years for the remaining networks.
29
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International Networks
International Networks manages a portfolio of channels, led by the Discovery Channel and Animal Planet brands that are
distributed in virtually every pay-television market in the world through an infrastructure that includes major operational
centers in London, Singapore, New Delhi and Miami. International Networks’ regional operations cover most major markets
including the U.K., Europe, Middle East and Africa (“EMEA”), Asia, Latin America and India. International Networks currently
operates over 100 unique distribution feeds in 35 languages with channel feeds customized according to language needs
and advertising sales opportunities. Most of the division’s channels are wholly owned by us with the exception of (1) the
international Animal Planet channels, which are generally joint ventures in which the British Broadcasting Corporation (“BBC”)
owns 50%, (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, Canada and Poland, which operate as joint ventures with strategically important local partners.
Similar to U.S. Networks, the primary sources of revenue for International Networks are distribution fees and advertising
sales, and the primary cost is programming. International Networks executes a localization strategy by offering high quality
shared programming with U.S. Networks, customized content, and localized schedules via our distribution feeds. Distribution
revenue represents approximately 62% of the division’s operating revenue and continues to deliver growth in markets with
the highest potential for pay television expansion.
Advertising sales are increasingly important to the division’s financial success. International television markets vary in their
stages of development. Some, notably the U.K., are among the more advanced digital multi-channel television markets in
the world, while others remain in the analog environment with varying degrees of investment from operators in expanding
channel capacity or converting to digital. We believe there is growth in many international markets including Latin America
and Central and Eastern Europe that are in the early stage of pay-TV evolution. In developing pay-TV markets, we expect to
see advertising revenue growth from subscriber growth, our localization strategy, and the shift of advertising spending from
broadcast to pay-TV. In relatively mature markets, such as the U.K., the growth dynamic is changing. Increased penetration and
distribution are unlikely to drive rapid growth in those markets. Instead, growth in advertising sales will come from increasing
viewership and advertising pricing on our existing pay-TV networks and launching new services, either in pay-TV or free
television environments. One such new launch came in early 2006 when the Company acquired a broadly-distributed-free-
to-air cable channel in Germany and relaunched it as DMAX. Another launch will come in 2009, when we will launch a digital
terrestrial channel in the U.K. on the free platform known as Freeview, which now has over 10 million homes. Neither of these
channels generate distribution fees, but both are broadly distributed enough to have strong advertising sales potential.
Our international businesses are subject to a number of risks including fluctuations in currency exchange rates, regulatory
issues, and political instability. Changes in any of these areas could adversely affect the performance of the International
Networks.
International Networks’ priorities include maintaining a leadership position in nonfiction and certain fictional entertainment
in international markets and continuing to grow and improve the performance of the international operations. These priorities
will be achieved through expanding local advertising sales capabilities, creating licensing and digital growth opportunities,
and improving operating efficiencies by strengthening programming and promotional collaboration between U.S. and
International Network groups.
Commerce, Education, and Other
During 2007, DCH evaluated its commerce business and made the decision to transition from running brick-and-mortar
retail locations to leveraging its products through retail arrangements and an e-commerce and catalog platform. In the
third quarter of 2007, DCH completed the closing of its 103 mall-based and stand-alone Discovery Channel stores. As a
result of the store closures, our as-adjusted results of operations have been prepared to reflect the retail store business as
discontinued operations. Accordingly, the revenue, costs and expenses of the retail store business have been excluded from
the respective captions in our financial statements and have been reported as discontinued operations.
30
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In February 2009, we announced our plan to transition our commerce business to a royalty model, thereby providing for
growth in profitability and reducing the financial risk of holding significant product inventories. As such, we will outsource
the commerce direct-to-consumer operations including our commerce website, related marketing, product development
and fulfillment to a third party in exchange for royalties. We expect to complete the transition in the second quarter of
2009. Our new structure for our commerce business will enable us to continue offering high quality Discovery Blu-Ray
and standard definition DVD programming as well as many merchandise categories leveraging both licensed and make
and sell products. Although we expect this new structure to facilitate growth in operating income, we expect an initial
compression in top-line revenue contribution, as well as a reduction in direct operating expenses in 2009. Commerce will
continue to grow our established brand and home video licensing businesses to further expand our national presence in
key retailers. Our commerce operations continue to add value to our television assets by reinforcing consumer loyalty and
creating opportunities for our advertising and distribution partners.
Our education business will continue to focus on our direct-to-school streaming distribution subscription services as well as
our benchmark student assessment services, publishing and distributing hardcopy content through a network of distribution
channels including online, catalog and dealers. Our education business also participates in a growing sponsorship and
global brand and content licensing business.
With the completion of the Newhouse Transaction, the operating results of the Creative Sound Services (“CSS”) businesses,
which provide sound, music, mixing sound effects and other related services under brand names such as Sound One,
POP Sound, Soundelux and Todd A-O, are reported in the Commerce, Education, and Other segment for the year ended
December 31, 2008.
The Newhouse Transaction
On September 17, 2008, we were formed as a result of DHC and Advance/Newhouse Programming Partnership (“Advance/
Newhouse”) combining their respective interests in Discovery and exchanging those interests with the Company (the
“Newhouse Transaction”). The Newhouse Transaction provided, among other things, for the combination of DHC’s 66-2/3%
interest with Advance/Newhouse’s 33-1/3% interest in DCH. The Newhouse Transaction was completed as follows:
•
•
•
On September 17, 2008, DHC completed the spin-off to its shareholders of Ascent Media Corporation (“AMC”), a subsidiary
holding cash and all of the businesses of its wholly-owned subsidiaries except for CSS (which businesses remained with
us following the completion of the Newhouse Transaction) (the “AMC spin-off”);
On September 17, 2008, immediately following the AMC spin-off, DHC merged with a transitory merger subsidiary of the
Company, and DHC’s existing shareholders received common stock of the Company; and
On September 17, 2008, immediately following the DHC exchange of shares for ours, Advance/Newhouse contributed
its interests in us and Animal Planet to us in exchange for shares of our Series A and Series C convertible preferred stock
that are convertible at any time into our common stock, which at the transaction date represented one-third of the
outstanding shares of our common stock.
As a result of the Newhouse Transaction, we became the successor reporting entity to DHC under the Exchange Act.
Because Advance/Newhouse was a one-third owner of Discovery prior to the completion of the Newhouse Transaction and
is a one-third owner of us immediately following completion of the Newhouse Transaction, there was no effective change
in ownership. Our convertible preferred stock does not have any special dividend rights and only a de minimis liquidation
preference. Additionally, Advance/Newhouse retains significant participatory special class voting rights with respect to certain
matters that could be submitted to stockholder vote. Pursuant to FASB Technical Bulletin 85-5, Issues Relating to Accounting
for Business Combinations, for accounting purposes the Newhouse Transaction was treated as a non-substantive merger,
and therefore, the Newhouse Transaction was recorded at the investor’s historical basis.
200 8 AN NU AL RE PO RT
200 8 AN NU AL RE PO RT
31
For financial reporting purposes, we are the successor reporting entity to DHC. Because there is no effective change in
ownership, in accordance with Accounting Research Bulletin No. 51, paragraph 11, both DHC and DCH will be consolidated in
our financial statements as if the transaction had occurred January 1, 2008. The presentation of the DCH financial statements
in accordance with U.S. GAAP includes the results of DCH’s operations as an equity method investment for the period
prior to January 1, 2008. For purposes of analyzing DCH’s business in this management’s discussion and analysis, we have
presented our consolidated operating results for 2008 consistent with our financial statement presentation, while the 2007
results have been presented as if the Newhouse Transaction occurred on January 1, 2007.
The following table summarizes the defined terms concerning the various Discovery entities included in this analysis:
Entity
Reference
Discovery Communications, Inc. (post Newhouse Transaction)
The Company, Discovery, we, or us
Discovery Communications Holding, LLC
Discovery Holding Company
Ascent Media Corporation
DCH
DHC
AMC
Advance/Newhouse Programming Partnership
Advance/Newhouse
Creative Sound Services
CSS
Discovery Restructuring and Travel Channel Disposition
On May 14, 2007, Cox Communications Holdings, Inc. exchanged its 25% ownership interest in DCH for all of the capital
stock of a subsidiary of DCH that held the Travel Channel and travelchannel.com and approximately $1.3 billion in cash. The
result was an increase in DHC’s proportional ownership of DCH from 50% to 66 2 / 3 %. Consequently, DHC’s 2007 earnings
in equity interests of DCH reflect the change in ownership.
RESULTS OF OPERATIONS — 2008 vs. 2007
The following discussion of our results of operations is presented in three parts to assist the reader in better understanding
our operations. The table below reconciles our and DHC’s prior year income statements presented in accordance with U.S.
GAAP to the financial information discussed in our adjusted results of operations for the years ended December 31, 2008
and 2007.
The second section is an overall discussion of our consolidated operating results. The third section includes a more detailed
discussion of revenue and expense activity of our three operating divisions: U.S. Networks, International Networks, and
Commerce, Education, and Other.
The following table represents the year ended December 31, 2007 on an as adjusted basis:
32
200 8 AN NU AL RE PO RT
For the Year Ended December 31, 2007
DHC(A)
Historical
Add: DCH
Historical
Less: Minority
Interest Adjustment
Discovery
As Adjusted
(Amounts in millions, except per share amounts)
Revenues:
Distribution
Advertising
Other
Total revenues
$
Operating costs and expenses:
Cost of revenues, excluding depreciation
and amortization listed below
Selling, general and administrative
Depreciation and amortization
Asset impairments
Exit and restructuring charges
Gains on asset and business
dispositions
Total operating costs and expenses
Operating (loss) income
Other income (expense):
Equity in earnings of Discovery
Communications Holding, LLC
Equity in earnings of
unconsolidated affiliates
Interest expense, net
Other, net
Total other income (expense), net
Income from continuing
operations before income
taxes and minority interests
Provision for income taxes
Minority interests, net of tax
Income from continuing operations
Loss from discontinued operations,
net of tax
Net (loss) income
Income per share from continuing
operations, basic and diluted
Loss per share from discontinued
operations, basic and diluted
Net loss per share, basic and diluted
Weighted average number of shares
outstanding, basic and diluted
$
$
$
$
—
—
76
76
60
22
3
—
—
( 1 )
84
( 8 )
142
—
—
8
150
142
( 56 )
—
86
( 154 )
( 68 )
0.31
( 0.55 )
( 0.24 )
281
$
$
1,477
1,345
305
3,127
1,167
1,296
131
26
20
( 135 )
2,505
622
—
—
—
—
—
—
—
—
—
—
—
—
—
( 142 )(B)
9
( 249 )
( 10 )
( 250 )
372
( 77 )
( 8 )
287
( 65 )
222
$
—
—
—
( 142 )
( 142 )
—
( 80 )(C)
( 222 )
—
( 222 )
$
$
$
$
$
$
1,477
1,345
381
3,203
1,227
1,318
134
26
20
( 136 )
2,589
614
—
9
( 249 )
( 2 )
( 242 )
372
( 133 )
( 88 )
151
( 219 )
( 68 )
0.54
( 0.78 )
( 0.24 )
281
(A) DHC results of operations represent DHC corporate costs and the results of CSS, while the results of AMC are
included in net loss from discontinued operations.
(B) Represents the elimination of DHC’s historical share of earnings of DCH for the year ended December 31, 2007.
(C) Represents the minority interest expense for the proportion of DCH’s historical share of earnings not recognized
by DHC for the year ended December 31, 2007.
200 8 AN NU AL RE PO RT
33
The following table represents the comparison of our Statement of Operations for the year ended December 31, 2008
with as adjusted results for the year ended December 31, 2007 for purposes of discussion and analysis of our operations:
Years Ended December 31,
2008
2007 As Adjusted
% Change
(Amounts in millions)
Revenues:
Distribution
Advertising
Other
Total revenues
Operating costs and expenses:
Cost of revenues, excluding depreciation
and amortization listed below
Selling, general and administrative
Depreciation and amortization
Asset impairments
Exit and restructuring charges
Gains on asset and business dispositions
Total operating costs and expenses
Operating income
Other (expense) income:
Equity in (loss) earnings of unconsolidated affiliates
Interest expense, net
Other, net
Total other (expense) income, net
Income from continuing operations before
income taxes and minority interests
Provision for income taxes
Minority interests, net of tax
Income from continuing operations
Income (loss) from discontinued operations, net of tax
Net income (loss)
Income per share from continuing operations:
Basic
Diluted
Income (loss) per share from discontinued operations:
Basic
Diluted
Net income (loss) per share:
Basic
Diluted
Weighted average number of shares outstanding:
Basic
Diluted
11 %
4 %
7 %
7 %
( 17 )%
( 15 )%
39 %
15 %
55 %
NM
( 8 )%
72 %
NM
3 %
NM
25 %
NM
NM
45 %
81 %
NM
NM
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,640
1,396
407
3,443
1,024
1,115
186
30
31
—
2,386
1,057
( 61 )
( 256 )
14
( 303 )
754
( 352 )
( 128 )
274
43
317
0.85
0.85
0.13
0.13
0.99
0.98
321
322
1,477
1,345
381
3,203
1,227
1,318
134
26
20
( 136 )
2,589
614
9
( 249 )
( 2 )
( 242 )
372
( 133 )
( 88 )
151
( 219 )
( 68 )
0.54
0.54
( 0.78 )
( 0.78 )
( 0.24 )
( 0.24 )
281
281
34
200 8 AN NU AL RE PO RT
Revenue. Our consolidated revenue increased $240 million for the year ended December 31, 2008 when compared with
2007. Distribution revenue increased $163 million during the year primarily due to International Networks subscriber growth
combined with annual contract increases for the fully distributed U.S. Networks, offset by the disposition of Travel Channel.
Advertising revenue increased $51 million for the period, and is primarily attributed to higher pricing and cash sellout rates
in U.S. Networks. Other revenue increased $26 million for the year ended December 31, 2008 when compared with 2007,
primarily due to an increase in licensing revenue in the International Networks, increase in sales of the Planet Earth DVD
through a joint venture, and increases in revenue from our representation of the Travel Channel through our U.S. Networks
segment, offset by a decline in revenue from the direct to consumer business in our Commerce, Education, and Other
business segment.
Cost of revenue. Cost of revenue, which includes content amortization and other production related expenses in addition
to distribution and merchandising costs, decreased $203 million for the year ended December 31, 2008 when compared
to 2007. The decrease in cost of revenues was primarily due to the effect of content impairment charges in the fourth
quarter 2007 of $139 million primarily in U.S. Networks coupled with a $76 million decrease in related amortization expense.
These decreases were partially offset by increases in costs of revenue in the International Networks and content impairment
related to TLC.
Selling, general & administrative. Selling, general & administrative expenses, which include certain personnel,
marketing and other general and administrative expenses, decreased $203 million for the year ended December 31, 2008
from 2007, primarily attributable to a $210 million decrease in expenses arising from long-term incentive plans, which were
partially offset by slight increases in costs incurred in conjunction with DCH preparing to become a consolidated subsidiary
of ours as a result of the Newhouse Transaction and an increase in personnel costs in International Networks. Expenses arising
from long-term incentive plans are largely related to DCH’s unit-based, long-term incentive plan, the Discovery Appreciation
Plan or the “DAP”, or “LTIP”, which was modified to reflect our capital structure following the Newhouse Transaction. Prior
to the Newhouse Transaction, the value of units in the LTIP was indexed to the value of DHC Series A common stock. After
the Newhouse Transaction, the units remained outstanding and were converted at the effective time of the Newhouse
Transaction to track changes in the value of our Series A common stock. The change in unit value of LTIP awards outstanding
is recorded as expenses arising from long-term incentive plans over the period outstanding. Primarily due to the decrease in
both the DHC Series A common stock and our Series A common stock price during the year ended December 31, 2008, we
recorded a benefit of $69 million to expenses arising from long-term incentive plans in 2008 compared to expenses arising
from long-term incentive plans of $141 million for the year ended December 31, 2007. In the fourth quarter 2008, eligible
new hires and promoted employees received stock options that vest in four equal installments, and those employees with
LTIP units that vest between September 18, 2008 and March 14, 2009 will receive cash-settled stock appreciation awards
that expire in March 2010. We do not intend to make additional cash-settled stock appreciation awards, except as may be
required by contract or to employees in countries where stock option awards are not permitted.
Depreciation and amortization. The increase in depreciation and amortization for the year ended December 31,
2008 is due to an increase in intangible assets resulting from the reclassification of DHC intangibles following the Newhouse
Transaction and the HowStuffWorks.com acquisition.
Asset impairment. During the fourth quarter of 2008, we recorded a write-off of intangible assets of $30 million related
to our HowStuffWorks.com business. This write-off of intangible assets was due to the decline in the cash flows projected to
be generated by the HowStuffWorks.com business. During the second quarter of 2007, DCH recorded an asset impairment
of $26 million which represents write-offs of intangible assets related to the education business .
Exit and restructuring costs. During the year ended December 31, 2008, we recorded $31 million in restructuring
charges, of which $11 million relates to the relocation and severance costs related to TLC’s repositioning strategy, $6 million
for the termination of a production group, and $6 million due to the closure of our commerce distribution center and our
store headquarters offices along with the transition of the remaining commerce distribution services to third-party service
providers. During the year ended December 31, 2007, we recorded restructuring charges of $20 million related to a number of
organizational and strategic adjustments. The purpose of these adjustments was to better align our organizational structure
with our new strategic priorities and to respond to continuing changes within the media industry.
200 8 AN NU AL RE PO RT
35
Gain on disposition of a business. In 2007, we exchanged the capital stock of a subsidiary that held the Travel
Channel and travelchannel.com (collectively, the “Travel Business”) for Cox Communications Holdings, Inc.’s 25% ownership
interest in us and $1.3 billion in cash. The distribution of the Travel Business, which was valued at $575 million, resulted in a
$135 million tax-free gain.
Equity in (loss) income of unconsolidated affiliates. Equity in loss of unconsolidated affiliates in 2008 consisted
primarily of a $57 million other-than-temporary decline in the value of our equity method investment in HSWi, coupled with
$13 million in equity losses recorded during 2008, which is offset by equity in income from our joint ventures in Canada and
Japan. In 2007, we recognized $9 million of equity in income primarily from our joint ventures in Canada and Japan.
Interest expense, net. On May 14, 2007, we entered into a $1.5 billion term loan in conjunction with the transaction with
Cox Communications Holdings, Inc., offset by a $180 million payment for a senior note that matured. The increase in interest
expense for the year ended December 31, 2008 when compared with 2007 is primarily a result of the term loan.
Other, net. Other, net includes our other non-operating income net of non-operating expenses, as well as, unrealized
losses from derivative instruments. Other non-operating income consisted of a $47 million reduction of a liability related to
the value of shares in HSWi to be exchanged to its former shareholders, which was recorded in December 2008. Offsetting
this non-operating income is unrealized losses from derivative transactions. Unrealized losses from derivative transactions
relate primarily to our use of derivative instruments to modify our exposure to interest rate fluctuations on our debt. These
instruments include a combination of swaps, caps, collars and other structured instruments. As a result of unrealized mark
to market adjustments, we recognized unrealized losses of $31 million and $9 million during the years ended December 31,
2008 and 2007, respectively. The foreign exchange hedging instruments used by us are spot, forward and option contracts.
Additionally, we enter into non-designated forward contracts to hedge non-dollar denominated cash flows and foreign
currency balances. See “Quantitative and Qualitative Disclosures about Market Risk” for a more detailed discussion of our
hedging activities.
Income tax expense. Our effective tax rate was 47% and 36% for the years ended December 31, 2008 and 2007,
respectively. Our effective tax rate for the year ended December 31, 2008 differed from the federal income tax rate of 35%
primarily due to DHC’s recognition of deferred tax expense related to its investment in DCH (net of tax benefit from intangible
amortization related to the spin-off of the Travel Channel in 2007), which is partially offset by the release of a valuation
allowance on deferred tax assets of Ascent Media Sound, Inc. Other items impacting the effective tax rate include the
following: our conversion from deducting foreign taxes to claiming foreign tax credits, foreign unrecognized tax positions,
and other miscellaneous items. Our effective tax rate for the year ended December 31, 2007 was not materially different
than the federal income tax rate of 35%. However, during this period we benefited from the tax-free treatment of the gain
recognized on the disposition of the Travel Channel and the release of Travel Channel deferred tax liabilities, offset by the
tax impact of discontinued operations.
Minority interests, net of tax. Minority interests primarily represent our and consolidated entities’ portion of earnings
which are allocable to the minority partners, as well as the increases and decreases in the estimated redemption value of
redeemable interests in subsidiaries. The increase in minority interest during the year ended December 31, 2008 is primarily a
result of our increased profits allocated to minority partners prior to the Newhouse Transaction and reporting of our financial
results in accordance with ARB 51.
Net income (loss) from discontinued operations, net of taxes. Summarized financial information included in
discontinued operations is as follows:
36
200 8 AN NU AL RE PO RT
Years Ended December 31,
2008
(Amounts in millions)
2007 As Adjusted
% Change
Revenues from discontinued operations:
Retail stores
AMC
Loss from the operations of discontinued
operations before income taxes:
Retail
AMC
Gains on dispositions:
Retail
AMC
Income (loss) from discontinued operations:
Retail
AMC
Income (loss) from discontinued operations, net of tax:
Retail
AMC
$
$
$
$
$
—
484
$
58
631
— %
24 %
—
( 6 )
—
67
—
61
—
43
( 99 )
( 151 )
— %
96 %
—
—
— %
— %
( 99 )
( 151 )
— %
NM
$
( 65 )
( 154 )
— %
NM
On September 17, 2008, as part of the Newhouse Transaction, DHC completed the spin-off to its shareholders of AMC, a
subsidiary holding the cash and businesses of DHC, except for CSS, which provides sound, music, mixing, sound effects
and other related services under brand names such as Sound One, POP Sound, Soundelux and Todd A-O (which businesses
remained with us following the completion of the Newhouse Transaction). The AMC spin-off was structured such that there
was no gain or loss related to the transaction.
Just prior to the Newhouse Transaction, DHC sold its ownership interests in Ascent Media CANS, LLC (d/b/a AccentHealth)
to AccentHealth Holdings LLC, an unaffiliated third party, for approximately $119 million in cash. It was determined that
AccentHealth was a non-core asset, and the sale of AccentHealth was consistent with DHC’s strategy to divest non-core
assets. DHC recognized a pre-tax gain of approximately $64 million in connection with the sale of AccentHealth, which is
recorded as a component of discontinued operations. As there is no continuing involvement in the operations of AMC or
AccentHealth, the financial results of their operations have been presented as discontinued operations in the consolidated
financial statements in accordance with FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (“FAS 144”).
Operating Division Results
As noted above, our operations are divided into three segments: U.S. Networks, International Networks and Commerce,
Education, and Other. Corporate expenses primarily consist of corporate functions, executive management and administrative
support services. Corporate expenses are excluded from segment results to enable executive management to evaluate
business segment performance based upon decisions made directly by business segment executives. Operating results
exclude LTIP expense, restructuring amounts, impairments, and operating gains, consistent with our segment reporting.
See Note 24.
200 8 AN NU AL RE PO RT
37
Years Ended December 31,
2008
(Amounts in millions)
2007 As Adjusted
% Change
Revenues:
U.S. Networks
International Networks
Commerce, Education, and Other
Corporate and intersegment eliminations
Total revenues
Operating costs and expenses:
U.S. Networks
International Networks
Commerce, Education, and Other
Corporate and intersegment eliminations
Total operating costs and expenses
$
$
$
$
2,062
1,158
196
27
3,443
985
812
183
228
2,208
$
$
$
$
1,941
1,030
225
7
3,203
1,167
820
221
196
2,404
6 %
12 %
( 13 )%
NM
7 %
( 16 )%
( 1 )%
( 17 )%
16 %
( 8 )%
U.S. Networks
Years Ended December 31,
2008
(Amounts in millions)
2007 As Adjusted
% Change
Revenues:
Distribution
Advertising
Other
Total revenues
Operating costs and expenses:
Cost of revenues
Selling, general and administrative
Total operating costs and expenses
$
$
$
$
927
1,058
77
2,062
509
476
985
$
$
$
$
862
1,015
64
1,941
699
468
1,167
8 %
4 %
20 %
6 %
( 27) %
2 %
( 16 )%
As noted above, in May 2007, we exchanged our subsidiary holding the Travel Channel, travelchannel.com and approximately
$1.3 billion in cash for Cox’s interest in DCH. Accordingly, DCH’s 2007 results of operations do not include Travel Channel after
May 14, 2007. The disposal of Travel Channel does not meet the requirements for discontinued operations presentation.
The following table represents U.S. Networks results of operations excluding Travel Channel for all periods. Although this
presentation is not in accordance with U.S. GAAP, we believe this presentation provides a more meaningful comparison of
the U.S. Networks results of operations and allows the reader to better understand the U.S. Networks ongoing operations.
U.S. Networks without Travel Channel
Years Ended December 31,
2008
(Amounts in millions)
2007 As Adjusted
% Change
Revenues:
Distribution
Advertising
Other
Total revenues
Operating costs and expenses:
Cost of revenues
Selling, general and administrative
Total operating costs and expenses
$
$
$
$
927
1,058
77
2,062
509
476
985
$
$
$
$
840
975
64
1,879
673
447
1,120
10 %
9 %
20 %
10 %
( 24 )%
6 %
( 12 )%
38
200 8 AN NU AL RE PO RT
Since the disposal of Travel Channel in 2007 did not meet the requirements of discontinued operations presentation, and
the results of Travel Channel are not consolidated with DCH post transaction, the following discussion excludes the results
of Travel Channel for all periods so as to facilitate comparability of the U.S. Networks segment data.
Revenue. Total revenue increased $183 million for the year ended December 31, 2008, when compared with 2007.
Distribution revenue increased $87 million over the period, driven by annual contractual rate increases for fully distributed
networks combined with subscription units, principally from networks carried on the digital tier. Distribution revenue
includes a one-time $8 million adjustment resulting from improvements in our methodology of estimating accrued revenue
for certain distribution operators. The adjustment was recorded in its entirety in the second quarter of 2008 and is not
material to the current or prior periods. Contra revenue items included in distribution revenue, such as launch amortization
and marketing consideration, decreased $19 million for the year ended December 31, 2008 when compared with 2007. This
decrease includes $3 million for replacement decoder boxes to support the digitization of an analog transponder recorded
as contra revenue in the second quarter of 2007.
Advertising revenue increased $83 million for the year ended December 31, 2008, when compared with the prior year,
primarily due to higher pricing in the up-front and scatter markets, as well as higher cash sellouts, which were partially offset
by under-delivery of committed audience levels, when compared with the corresponding prior year periods.
Other revenue increased $13 million for the year ended December 31, 2008, primarily from our representation of the Travel
Channel, which increased $11 million during the period, coupled with an increase of $5 million in revenue from How Stuff
Works, which was acquired in December 2007. These increases were partially offset by a decrease of $6 million of international
program sales revenue, which is now reported in the International Networks segment.
Cost of revenue. For the year ended December 31, 2008, cost of revenue decreased $164 million when compared with
2007, primarily due to a decrease in content amortization expense of $156 million. The decrease in content amortization
expense was primarily a result of the effect of the $129 million content impairment charge recorded in 2007 following
a change in management and related changes in strategy. This charge coupled with the related $76 million decrease in
content amortization expense was offset by $17 million of content impairment charges for TLC programs following a change
in management and related changes in strategy in the second half of 2008, and content amortization expense for new
programming on Discovery Channel, TLC, Planet Green and Science Channel.
Selling, general & administrative expenses. Total selling, general and administrative expenses increased $29
million for the year ended December 31, 2008, when compared with 2007, which was primarily a result of a $34 million
increase in personnel costs, primarily driven by continued investment in digital media, including acquisitions made during
the third and fourth quarters of 2007. This increase was partially offset by decreased marketing expense of $12 million for the
year ended December 31, 2008 when compared with the corresponding prior year period.
International Networks
Years Ended December 31,
2008
(Amounts in millions)
2007 As Adjusted
% Change
Revenues:
Distribution
Advertising
Other
Total revenues
Operating costs and expenses:
Cost of revenues
Selling, general and administrative
Total operating costs and expenses
$
$
$
$
713
336
109
1,158
394
418
812
$
$
$
$
615
330
85
1,030
373
447
820
16 %
2 %
28 %
12 %
6 %
( 6 )%
( 1 )%
Revenue. Total revenue increased $128 million for the year ended December 31, 2008, when compared with 2007, driven
by an increase in distribution revenue of $98 million. Distribution revenue increased $76 million in EMEA, Latin America, and
Asia primarily as a result of a 16% increase in average paying subscription units. In addition, foreign exchange had a favorable
impact of $13 million on distribution revenues for the year ended December 31, 2008 when compared with 2007.
39
200 8 AN NU AL RE PO RT
Advertising revenue increased $6 million for the year ended December 31, 2008, when compared with 2007. Advertising revenue
increased $42 million in EMEA and Latin America primarily due to higher viewership combined with an increased subscriber
base in most markets worldwide. These increases were offset by a $35 million decrease in the U.K. due to an interpretation of a
contract provision resulting in a limitation in our ability to monetize our audience in the U.K., as well as, a deterioration in market
conditions. Advertising revenue decreased $4 million due to the impact of unfavorable foreign exchange.
Other revenue increased $24 million mainly due to improvement in licensing and sales of programs primarily in the U.K.
offset by a $2 million unfavorable foreign exchange impact.
Cost of revenue. Cost of revenue increased $21 million for the year ended December 31, 2008, when compared with
2007, driven by a $40 million increase in content amortization expense due to continued investment in original productions
and language customization to support additional local feeds for growth in local ad sales partially offset by favorable foreign
exchange of $10 million and a reduction in sales commissions of $5 million.
Selling general & administrative expenses. Selling, general & administrative expenses decreased $29 million for
the year ended December 31, 2008, when compared with 2007. This decrease was driven by a $26 million reduction in
marketing expenditures coupled with the favorable impact of $3 million from foreign exchange.
Commerce, Education, and Others
Years Ended December 31,
2008
(Amounts in millions)
2007 As Adjusted
% Change
Total revenues
Operating costs and expenses:
Cost of revenues
Selling, general and administrative
Total operating costs and expenses
$
$
$
196
116
67
183
$
$
$
225
151
70
221
( 13 )%
( 23 )%
( 4 )%
( 17 )%
Revenue. Commerce, Education, and Other total revenue decreased $29 million for the year ended 2008 when compared
with the prior year. A challenging retail environment in 2008 coupled with the success of the Planet Earth DVD in 2007
contributed to a year over year decline of 48% in revenue from the direct to consumer business, which was partially offset by
higher licensing revenue. Education revenue increased by $6 million as the core streaming business continued to grow. New
revenue streams in licensing and sponsorships were slightly offset by the decline in the hardcopy business as customers
shifted to our digital services. Revenues generated by the CSS business were relatively flat compared with 2007.
Cost of revenue. Cost of revenue decreased $35 million for the year ended December 31, 2008, commensurate with the
decrease in Commerce’s product revenue coupled with a decrease in Education’s content amortization, which resulted from
the fourth quarter 2007 write-off of capitalized content costs that were not aligned with Education’s product offerings.
Selling, general & administrative expenses. Selling, general & administrative expenses decreased $3 million for
the year ended December 31, 2008. The decrease was primarily due to lower personnel and marketing costs incurred in
Commerce and Education coupled with a $2 million legal expense in 2007 for a legal settlement. These decreases were
partially offset by a slight increase in selling, general and administrative expense from the CSS business.
Corporate and Intersegment Eliminations
Years Ended December 31,
2008
(Amounts in millions)
2007 As Adjusted
% Change
Total revenues
Operating costs and expenses:
Cost of revenues
Selling, general and administrative
Total operating costs and expenses
$
$
$
27
5
223
228
$
$
$
7
NM
4
192
196
25 %
16 %
16 %
40
200 8 AN NU AL RE PO RT
Corporate is mainly comprised of ancillary revenue and expenses from a joint venture, corporate functions, executive
management and administrative support services. Consistent with our segment reporting, corporate expenses are excluded
from segment results to enable executive management to evaluate business segment performance based upon decisions
made directly by business segment executives.
Corporate revenue increased $20 million for the year ended December 31, 2008, when compared with 2007, primarily due to
increased ancillary revenue from a joint venture, whose primary sales were of the Planet Earth DVD; current sales volume is
not expected to continue. Corporate costs increased $32 million, for the year ended December 31, 2008, driven by increased
costs incurred in conjunction with our preparing to become a public entity as a result of the Newhouse Transaction and
costs related to the start-up of OWN.
RESULTS OF OPERATIONS — 2007 vs. 2006
Prior to the Newhouse Transaction, our consolidated results of operations included 100% of AMC’s results of operations,
general and administrative expenses incurred at the DHC corporate level, as well as DHC’s share of earnings of DCH. The
Statement of Operations reflects the CSS business in revenue and operating costs and expenses, whereas the portion
of AMC’s businesses that were spun-off as a result of the Newhouse Transaction are reflected in Loss from discontinued
operations, net of tax.
Years Ended December 31,
2007
(Amounts in millions)
2006
% Change
$
76
$
80
( 5 )%
Revenues
Operating costs and expenses:
Cost of revenues, excluding depreciation and
amortization listed below
Selling, general and administrative
Depreciation and amortization
Exit and restructuring charges
Gains on asset dispositions
Total operating costs and expenses
Operating loss
Other income:
Equity in earnings of Discovery
Communications Holding, LLC
Other, net
Total other income, net
Income from continuing operations before income taxes
Provision for income taxes
Income from continuing operations
Loss from discontinued operations, net of tax
Net loss
Income per share from continuing operations,
basic and diluted
Loss per share from discontinued operations,
basic and diluted
Net loss per share, basic and diluted
Weighted average number of shares outstanding,
60
22
3
—
( 1 )
84
( 8 )
142
8
150
142
( 56 )
86
( 154 )
( 68 )
0.31
( 0.55 )
( 0.24 )
63
23
3
2
—
91
( 11 )
104
—
104
93
( 41 )
52
( 98 )
( 46 )
0.19
( 0.35 )
( 0.16 )
$
$
$
$
$
$
$
$
basic and diluted
281
280
( 5 )%
( 4 )%
— %
NM
NM
( 8 )%
27 %
37 %
NM
44 %
53 %
( 37 )%
65 %
( 57 )%
( 48 )%
200 8 AN NU AL RE PO RT
41
Ascent Media’s CSS group generated revenue primarily from fees for sound, music, mixing sound effects and other related
services under brand names such as Sound One, POP Sound, Soundelux and Todd A-O. 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 less than $1,000 to $200,000.
Expenses related to the corporate support from DHC are reflected in selling, general and administrative expenses. Cost of
services and operating expenses consists primarily of production wages, facility costs and other direct costs.
Revenue. Revenue for CSS decreased $4 million to $76 million for the year ended December 31, 2007, when compared
with the same period in 2006. This decrease was driven by smaller feature sound projects and the shut down of certain audio
facilities in 2006.
Total operating costs and expenses. Total operating costs and expenses decreased $7 million to $84 million for the
year ended December 31, 2007, when compared with the same period in 2006. This decrease was driven by the reduction of
costs that resulted from the shut down of certain audio facilities and related selling, general and administrative expenses.
Equity in earnings of Discovery Communications Holding, LLC. From January 1, 2006 through May 14, 2007,
DHC recorded its 50% share of the earnings of DCH. Subsequent to May 14, 2007 and prior to September 17, 2008, the
date the Newhouse Transaction closed, DHC recorded its 66-2/3% share of the earnings of DCH. DHC’s share of earnings
in DCH increased $38 million for the year ended December 31, 2007, when compared with the same period in 2006. This
increase resulted from DHC’s $90 million share of DCH’s gain on the Cox Transaction, along with an $8 million increase due
to DHC’s increase in share ownership in DCH from 50% to 66-2/3%. These increases were partially offset by higher long-term
incentive compensation expense for DCH personnel and higher interest at DCH as a result of debt incurred to close the
Cox Transaction.
Net loss from Discontinued Operations. The net loss from discontinued operations increased $56 million for the
year ended December 31, 2007, from the comparable period in 2006, primarily as a result of a $72 million increase in charges
related to the impairment of goodwill on the AMC business for the year ended December 31, 2007, when compared with
the same period in 2006. The increase in goodwill impairment charges was partially offset by an improvement in operating
performance on the AMC business.
LIQUIDITY AND CAPITAL RESOURCES
The following table represents a comparison of the components of the statement of cash flows, as reported for the years
ended December 31, 2008, 2007 and 2006, respectively, with a reconciliation of historical DCH statement of cash flows for
the year ended December 31, 2007. Our as-adjusted statement of cash flows represents the cash flow activities as if the
Newhouse Transaction was completed January 1, 2007. The table includes the cash flow activity for AMC for both periods,
including cash provided by operating activities of $28 million, cash provided by investing activities of $128 million, and cash
used in financing activities of $2 million for the year ended December 31, 2008. AMC cash provided by operating activities
was $61 million, cash used in investing activities was $15 million, and cash provided by financing activities was $2 million for
the year ended December 31, 2007.
42
200 8 AN NU AL RE PO RT
For the Year Ended December 31, 2007
For the Year
Ended
December 31,
2008
For the Year
Ended
DHC
As reported
DCH
(Amounts in millions)
Discovery December 31,
as Adjusted
2006
Operating Activities:
Net income (loss)
Adjustments to reconcile net income (loss) to
$
317
$
( 68 )
$
—
$
( 68 )
$
( 46 )
cash provided by operating activities
568
139
459
598
100
Changes in operating assets and
liabilities, net of discontinued operations
Cash provided by operating activities
Investing Activities:
Purchases of property and equipment
Proceeds from business and asset dispositions
Net cash acquired from Newhouse Transaction
Business acquisitions, net of cash acquired
Purchases of securities
Proceeds from sale of securities
Other investing activities, net
Cash provided by (used in) investing activities
Financing Activities:
Ascent Media Corporation spin-off
Borrowings from long-term debt
Net repayments of revolver loans
Principal repayments of long-term debt
Principal repayments of capital lease obligations
Repurchase of members’ interests
Net cash from stock option exercises
Other financing activities, net
( 316 )
569
( 102 )
139
45
( 8 )
—
24
—
98
( 356 )
—
( 125 )
( 257 )
( 29 )
—
—
( 7 )
Cash (used in) provided by financing activities
( 774 )
Effect of exchange rate changes on
cash and cash equivalents
Change in cash and cash equivalents
Cash and cash equivalents of continuing
operations, beginning of period
Cash and cash equivalents of discontinued
operations, beginning of period
Adjustment to remove AMC cash
( 2 )
( 109 )
—
209
—
( 13 )
58
( 47 )
2
—
—
—
28
2
( 15 )
—
—
—
—
—
—
13
( 1 )
12
—
55
1
153
( 201 )
( 217 )
242
( 81 )
—
—
( 230 )
300
( 128 )
2
—
( 306 )
( 306 )
—
—
( 44 )
( 431 )
—
1,500
( 2 )
( 8 )
( 6 )
—
28
( 42 )
( 446 )
—
1,500
( 2 )
( 8 )
( 6 )
( 1,285 )
( 1,285 )
—
( 24 )
175
7
( 7 )
52
—
13
( 25 )
187
7
48
153
( 201 )
Cash and cash equivalents, end of period
$
100
$
8
$
45
$
53
$
19
73
( 77 )
6
—
( 47 )
( 52 )
—
1
( 169 )
—
—
—
—
—
—
—
—
—
—
( 96 )
250
—
154
53
—
The DHC amounts are reported net of adjustments of $222 million for net income, $142 million to eliminate the DHC equity
pick-up of DCH, and $80 million to allocate minority interest to Advance/Newhouse.
200 8 AN NU AL RE PO RT
43
Sources of Cash
Our principal sources of liquidity are cash in-hand, cash flows from operations and borrowings under our credit facilities. We
anticipate that our cash flows from operations, existing cash, cash equivalents and borrowing capacity under our revolving
credit facility are sufficient to meet our anticipated cash requirements for at least the next 12 months.
Total Liquidity at December 31, 2008. As of December 31, 2008 we had approximately $1.3 billion of total liquidity,
comprised of approximately $100 million in cash and cash equivalents and the ability to borrow approximately $1.2 billion
under our revolving credit facilities. In October 2008, we repaid $11 million outstanding under our U.K. revolving credit facility.
This facility was closed at our election in December 2008 and would have expired according to its terms in April 2009.
Cash Provided by Operations. For the year ended December 31, 2008, our cash provided by operating activities was
$569 million compared to $300 million for the same period as adjusted in 2007.
Proceeds from the sale of business. During the year ended December 31, 2008, AMC received proceeds of $139
million primarily from the sale of Accent Health as part of the spin-off of AMC.
Debt Facilities. Our committed debt facilities include two term loans, a revolving loan facility and various senior notes
payable. The second term loan was entered into on May 14, 2007 for $1.5 billion in connection with the Cox Transaction. Total
commitments of these facilities were $4.9 billion at December 31, 2008. Debt outstanding on these facilities aggregated $3.7
billion at December 31, 2008, providing excess debt availability of $1.2 billion.
We currently have fixed the interest rate on the majority of our outstanding debt. The anticipated interest payments, together
with the scheduled principal payments, due over the next year are within the available capacity on our committed facilities.
Although we have adequate liquidity to fund our operations and to meet our debt service obligations over the next 12
months, we may seek to arrange new financing in the current year in advance of the maturity of our debt facility in 2010. Also,
our current performance on the leverage and other financial maintenance tests is at levels within the established thresholds
of the debt agreements indicating some ability to absorb lower than expected operating results and still remain within the
covenant limits.
DCH’s $1.5 billion term loan is secured by its assets, excluding assets held by its subsidiaries. The remaining term loan,
revolving loan and senior notes are unsecured. The debt facilities contain covenants that require the respective borrowers
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. We were in compliance with all debt covenants as of
December 31, 2008.
Our interest expense associated with our debt facilities is exposed to movements in short-term interest rates. Derivative
instruments, including both fixed to variable and variable to fixed interest rate instruments, are used to modify this exposure.
The variable to fixed interest rate instruments have a notional principal amount of $2.3 billion and have a weighted average
interest rate of 4.68% against 3 month LIBOR at December 31, 2008. The fixed to variable interest rate agreements have
a notional principal amount of $50 million and have a weighted average interest rate of 7.90% against fixed rate private
placement debt at December 31, 2008. At December 31, 2008, we held an unexercised interest rate swap put with a notional
amount of $25 million at a fixed rate of 5.44%.
On January 29, 2009, we entered into interest rate swap transactions which will become effective on June 30, 2010, with a
notional amount of $200 million. Under the swap transactions, we will make quarterly payments at a rate of approximately
2.935% per annum to the swap counterparties in exchange for a payment approximately equal to the variable rate payable
under our Credit, Pledge and Security Agreement dated as of May 14, 2007. The swap transactions terminate on March 31,
2014, which is the interest payment date before the maturity date of our Credit, Pledge and Security Agreement, which is
May 14, 2014. The terms of the swap transactions are governed by customary ISDA interest rate swap agreements.
By entering into these swap transactions, we have effectively fixed the interest rate on $200 million of the borrowings under
its Credit, Pledge and Security Agreement at approximately 4.935% per annum, starting as of June 30, 2010.
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Uses of Cash
During the year ended December 31, 2008, our primary uses of cash were cash payments for content of $803 million,
mandatory principal payments under our bank facilities and senior notes totaling $257 million, cash payments of $125 million
under our revolving loans, capital expenditures of $102 million, and payments under our LTIP of $49 million. During the year
ended December 31, 2007, on an as-adjusted basis, our primary uses of cash were the redemption of Cox’s equity interests
of $1.3 billion, cash payments for content of $706 million and capital expenditures of $127 million.
In 2009, we expect our uses of cash to be approximately $445 million for debt repayments, $225 million for interest expense,
and $60 million for capital expenditures. We have no material commitments for capital expenditures. We will also be required
to make payments under our LTIP as well as for stock appreciation rights issued under our Incentive Plan. Amounts expensed
and payable under the LTIP are dependent on future annual calculations of unit values which are primarily affected by
changes in our stock price, changes in units outstanding, and changes to the plan.
Joint Venture Arrangement. On June 19, 2008, we entered in to a 50-50 joint venture with Oprah Winfrey and Harpo, Inc.
(“Harpo”) to rebrand Discovery Health Channel as OWN: The Oprah Winfrey Network (“OWN Network”). It is expected that
Discovery Health will be rebranded as OWN in late 2009 or early 2010. Pursuant to the agreement, we have committed to
make capital contributions of up to $100 million through September 30, 2011, of which $6 million has been funded as of
December 31, 2008. We anticipate that a significant portion of the $100 million funding obligation will occur in 2009.
Factors Affecting Sources of Liquidity
If we were to experience a significant decline in operating performance, or have to meet an unanticipated need for additional
liquidity beyond our available commitments, there is no certainty that we would be able to access the needed liquidity. While
we have established relationships with U.S. and international banks and investors which continue to participate in our various
credit agreements, the current tightening in the credit markets may cause some lenders to have to reduce or withdraw their
commitments if we were to seek to negotiate a refinancing or an increase in our total commitments. Covenants in existing
debt agreements may constrain our capacity for additional debt or there may be significant increases in costs to refinance
existing debt to access additional liquidity. As a public company, we may have access to other sources of capital such as the
public bond and equity markets. However, access to sufficient liquidity in these markets is not assured given our substantial
debt outstanding and the continued volatility in the equity markets and further tightening in the credit markets.
Our access to capital markets can be affected by factors outside of our control. In addition, our cost to borrow is impacted
by market conditions and our financial performance as measured by certain credit metrics defined in our credit agreements,
including interest coverage and leverage ratios.
Contractual Obligations
We have agreements covering leases of satellite transponders, facilities and equipment. These agreements expire at various
dates through 2028. We are obligated to license programming under agreements with content suppliers that expire over
various dates. We also have other contractual commitments arising in the ordinary course of business.
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, 2008 is as follows:
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45
Long-term debt
Interest payments (2)
Capital leases
Operating leases
Content
Other (3)
Total
Payments Due by Period (1)
Total
Less than 1
Year
1-3 Years
3-5 Years
$
3,721
$
735
82
359
538
394
445
217
18
66
354
101
$
1,128
$
274
34
105
102
115
355
179
20
73
82
41
$
5,829
$
1,201
$
1,758
$
750
$
More than
5 Years
$
1,793
65
10
115
—
137
2,120
(1) Table does not include certain long-term obligations reflected in our 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 $23 million accrued under our LTIP plans. In addition, amounts accrued in our 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.
(2) Amounts (i) are based on our outstanding debt at December 31, 2008, (ii) assume the interest rates on our floating rate
debt remain constant at the December 31, 2008 rates and (iii) assume that our existing debt is repaid at maturity.
(3) Represents our 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: obligations to purchase
goods and services, employment contracts, sponsorship agreements and transmission services.
We are subject to a contractual agreement that may require us to acquire the minority interest of certain of our subsidiaries.
The amount and timing of such payments are not currently known. We have recorded a $49 million liability as of December
31, 2008 for this redemption right.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our financial statements in conformity with U.S. GAAP requires management to make estimates, judgments
and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. On an
ongoing basis, we evaluate estimates, which are based on historical experience and on various other assumptions believed
reasonable under the circumstances. The results of these evaluations form the basis for making judgments about the carrying
values of assets and liabilities and the reported amount of expenses that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions. Critical accounting policies impact the presentation
of our financial condition and results of operations and require significant judgment and estimates. An appreciation of
our critical accounting policies facilitates an understanding of our financial results. Amounts disclosed relate to Discovery,
as-adjusted for 2007 and Discovery for 2008. Unless otherwise noted, we applied critical accounting policies and estimates
methods consistently in all material respects and for all periods presented. For further information regarding these critical
accounting policies and estimates, please see the Notes to our consolidated financial statements.
Revenue
We derive revenue from (i) distribution revenue from cable systems, satellite operators and other distributors, (ii) advertising
aired on our networks and websites, and (iii) other, which is largely e-commerce and educational sales.
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Distribution. Distributors generally pay a per-subscriber fee for the right to distribute our programming under the terms
of long-term distribution contracts (“distribution revenue”). Distribution revenue is reported net of incentive costs or other
consideration, if any, offered to system operators in exchange for long-term distribution contracts. We recognize distribution
revenue over the term of the contracts based on contracted monthly license fee provisions and reported subscriber levels.
Network incentives have historically included upfront cash incentives referred to as “launch support” in connection with the
launch of a network by the distributor within certain time frames. Any such amounts are capitalized as assets upon launch
of our programming by the distributor and are amortized on a straight-line basis as a reduction of revenue over the terms
of the contracts. In instances where the distribution agreement is extended prior to the expiration of the original term, we
evaluate the economics of the extended term and, if it is determined that the deferred launch asset continues to benefit us
over the extended term, then we will adjust the launch amortization period accordingly. Other incentives are recognized as
a reduction of revenue as incurred.
The amount of distribution revenue due to us is reported by distributors based on actual subscriber levels. Such information
is generally not received until after the close of the reporting period. Therefore, reported distribution revenue is based upon
our estimates of the number of subscribers receiving our programming for the month, plus an adjustment for the prior
month estimate. Our subscriber estimates are based on the most recent remittance or confirmation of subscribers received
from the distributor.
Advertising. We record advertising revenue net of agency commissions and audience deficiency liabilities in the period
advertising spots are broadcast. A substantial portion of the advertising sold in the United States includes guaranteed levels
of audience that either the program or the advertisement will reach. Deferred revenue is recorded and adjusted as the
guaranteed audience levels are achieved. Audience guarantees are initially developed by our internal research group and
actual audience and delivery information is provided by third party ratings services. In certain instances, the third party
ratings information is not received until after the close of the reporting period. In these cases, reported advertising revenue
and related deferred revenue is based on our estimates for any under-delivery of contracted advertising ratings based on
the most current data available from the third party ratings service. Differences between the estimated under-delivery and
the actual under-delivery have historically been insignificant. Online advertising revenues are recognized as impressions
are delivered.
Certain of our advertising arrangements include deliverables in addition to commercial time, such as the advertiser’s product
integration into the programming, customized vignettes, and billboards. These contracts that include other deliverables are
evaluated as multiple element revenue arrangements under EITF 00-21, Revenue Arrangements with Multiple Deliverables.
Commerce, Education, and Other. Commerce revenue is recognized upon product shipment, net of estimated
returns, which are not material to our consolidated financial statements. Educational service sales are generally recognized
ratably over the term of the agreement. CSS services revenue is recognized when services are performed. Revenue from
post-production and certain distribution related services is recognized when services are provided. Prepayments received
for services to be performed at a later date are deferred.
Derivative Financial Instruments
Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, (“FAS 133”),
requires every derivative instrument to be recorded on the balance sheet at fair value as either an asset or a liability. The
statement also requires that changes in the fair value of derivatives be recognized currently in earnings unless specific
hedge accounting criteria are met. We use financial instruments designated as cash flow hedges. The effective changes in
fair value of derivatives designated as cash flow hedges are recorded in accumulated other comprehensive income (loss).
Amounts are reclassified from accumulated other comprehensive income (loss) as interest expense is recorded for debt. We
use the cumulative dollar offset method to assess effectiveness. To be highly effective, the ratio calculated by dividing the
cumulative change in the value of the actual swap by the cumulative change in the hypothetical swap must be between
80% and 125%. The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings. We use
derivative instruments principally to manage the risk associated with the movements of foreign currency exchange rates and
changes in interest rates that will affect the cash flows of our debt transactions. Refer to Note 12 for additional information
regarding derivative instruments held by us and risk management strategies.
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Content Rights
Costs incurred in the direct production, co-production or licensing of content rights are capitalized and stated at the lower
of unamortized cost, fair value, or net realizable value. In accordance with SOP 00-2, Accounting by Producers or Distributors
of Films , we amortize our content assets based upon the ratio of current revenue to total estimated revenue (“ultimate
revenue”). To determine this ratio, we analyze historical and projected usage for similar programming and apply such usage
factors to projected revenue by network adjusted for any future significant programming strategy changes.
The result of this policy is an accelerated amortization pattern for the fully distributed U.S. Networks segment (Discovery
Channel, TLC, Animal Planet) and Discovery Channel in the International Networks segment over a period of no more than
four years. The accelerated amortization pattern results in the amortization of approximately 40% to 50% of the program
cost during the first year. Topical or current events programming is amortized over shorter periods based on the nature
of the programming and may be expensed upon its initial airing. All other networks in the U.S. Networks segment and
International Networks segment utilize up to five year useful life. For these networks, with programming investment levels
lower than the established networks and higher reuse of programming, straight-line amortization is considered a reasonable
estimate of the use of content consistent with the pace of earning ultimate revenue.
Ultimate revenue assessments include advertising and affiliate revenue streams. Ancillary revenue is considered immaterial
to the assessment. Changes in management’s assumptions, such as changes in expected use, could significantly alter our
estimates for amortization. Amortization is approximately $658 million for the year ended December 31, 2008 and the
unamortized programming balance at December 31, 2008 is $1.2 billion.
Programming that we expect to alter planned use by reduction or removal from a network because of changes in network
strategy is written down to its net realizable value based on adjusted ultimate revenues when identified. On a periodic
basis, management evaluates the net realizable value of content in conjunction with our strategic review of the business.
Changes in management’s assumptions, such as changes in expected use, could significantly alter our estimates for write-
offs. During the third quarter 2008, we implemented significant changes in brand strategies for TLC. As a result, we recorded a
content impairment charge of $17 million, which is included as a component of content amortization expense. Consolidated
content impairment, including accelerated amortization of certain programs is approximately $39 million for the year ended
December 31, 2008.
Expenses Arising from Long-Term Incentive Plans
Expenses arising from liability awards based on long-term incentive plans are primarily related to our unit-based, long-
term incentive plan (LTIP), for our employees who meet certain eligibility criteria. Units were awarded to eligible employees
and vest at a rate of 25% per year. Prior to the Newhouse Transaction, we accounted for the LTIP in accordance with FAS
133, Accounting for Derivative Financial Instruments and EITF 02-08, Accounting for Options Granted to Employees in
Unrestricted, Publicly Traded Shares of an Unrelated Entity, as the value of units in the LTIP was indexed to the value of
DHC Series A common stock. Upon redemption of the LTIP awards, participants received a cash payment based on the
difference between the market price of DHC Series A common stock on the vesting date and the market price on the date
of grant. Following the Newhouse Transaction, units remained outstanding and were adjusted to track changes in the value
of our publicly traded stock. We account for these cash settled stock appreciation awards in accordance with FAS 123(R),
Share-Based Payment.
The value of units in the LTIP is calculated using the Black-Scholes model each reporting period, and the change in unit
value of LTIP awards outstanding is recorded as compensation expense over the period outstanding. We elected to attribute
expense for the units in accordance with FAS 123R. We use volatility of DHC common stock or our common stock, if available,
in our Black-Scholes models. However, if the term of the units is in excess of the period common stock has been outstanding,
we use a combination of historical and implied volatility. Different assumptions could result in different market valuations.
However the most significant factor in determining the unit value is the price of common stock.
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Goodwill and Indefinite-lived Intangible Assets
Goodwill and indefinite-lived intangible assets are tested annually for impairment during the fourth quarter or earlier upon
the occurrence of certain events or substantive changes in circumstances. Our 2008 annual goodwill impairment analysis,
which was performed during the fourth quarter, did not result in any impairment charges. However, over the past year, the
decline in our stock price suggests in a lower estimated fair value for each of our reporting units. As a result of this decline,
the estimated fair value of the U.K. reporting unit approximates its carrying value. Accordingly, future declines in estimated
fair values may result in goodwill impairment charges. It is possible that such charges, if required, could be recorded prior to
the fourth quarter of 2009 (i.e., during an interim period) if our stock price, our results of operations, or other factors require
such assets to be tested for impairment at an interim date.
Goodwill impairment is determined using a two-step process. The first step of the process is to compare the fair value of
a reporting unit with its carrying amount, including goodwill. In performing the first step, we determine the fair value of
a reporting unit by using two valuation techniques: a discounted cash flow (“DCF”) analysis and a market-based approach.
Determining fair value requires the exercise of significant judgments, including judgments about appropriate discount rates,
perpetual growth rates, relevant comparable company earnings multiples and the amount and timing of expected future
cash flows. The cash flows employed in the DCF analyses are based on our budget and long-term business plan. In assessing
the reasonableness of its determined fair values, we evaluate our results against other value indicators such as comparable
company public trading values, research analyst estimates and values observed in market transactions. If the fair value of
a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the
impairment test is not necessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the
goodwill impairment test is required to be performed to measure the amount of impairment loss, if any. The second step
of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount
of that goodwill and non-amortizing trademarks. The implied fair value of goodwill is determined in the same manner as
the amount of goodwill recognized in a business combination. In other words, the estimated fair value of the reporting unit
is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting
unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid. If
the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is
recognized in an amount equal to the excess.
The impairment test for other intangible assets not subject to amortization involves a comparison of the estimated fair
value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an
impairment loss is recognized in an amount equal to that excess. The estimates of fair value of intangible assets not subject
to amortization are determined using a DCF valuation analysis.
Long-lived Assets
Long-lived assets (e.g., amortizing trademarks, customer lists, other intangibles and property, plant and equipment) do
not require that an annual impairment test be performed; instead, long-lived assets are tested for impairment upon the
occurrence of a triggering event. Triggering events include the likely (i.e., more likely than not) disposal of a portion of
such assets or the occurrence of an adverse change in the market involving the business employing the related assets.
Once a triggering event has occurred, the impairment test employed is based on whether the intent is to hold the asset
for continued use or to hold the asset for sale. If the intent is to hold the asset for continued use, the impairment test first
requires a comparison of undiscounted future cash flows against the carrying value of the asset. If the carrying value of
the asset exceeds the undiscounted cash flows, the asset would be deemed to be impaired. Impairment would then be
measured as the difference between the fair value of the asset and its carrying value. Fair value is generally determined by
discounting the future cash flows associated with that asset. If the intent is to hold the asset for sale and certain other criteria
are met (e.g., the asset can be disposed of currently, appropriate levels of authority have approved the sale, and there is an
active program to locate a buyer), the impairment test involves comparing the asset’s carrying value to its fair value. To the
extent the carrying value is greater than the asset’s fair value, an impairment loss is recognized for the difference.
Significant judgments in this area involve determining whether a triggering event has occurred, determining the future cash
flows for the assets involved and determining the proper discount rate to be applied in determining fair value. In 2007, there
were no significant long-lived asset impairments.
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49
During the year ended December 31, 2008, we recorded long-lived asset impairments of $30 million for HSW and $2 million
for exit costs of certain operations.
The determination of recoverability of goodwill and other intangibles and long-lived assets requires significant judgment
and estimates regarding future cash flows, fair values, and the appropriate grouping of assets. Such estimates are subject to
change and could result in impairment losses being recognized in the future. If different reporting units, asset groupings, or
different valuation methodologies had been used, the impairment test results could have differed.
Deferred Launch Incentives
Consideration issued to cable and satellite distributors in connection with the execution of long-term network distribution
agreements is deferred and amortized on a straight-line basis as a reduction to revenue over the terms of the agreements.
Obligations for fixed launch incentives are recorded at the inception of the agreement. Following the renewal of a distribution
agreement, the remaining deferred consideration is amortized over the extended period. Amortization of deferred launch
incentives was $75 million and $100 million for the years ended December 31, 2008 and 2007, respectively. During 2007, in
connection with the settlement of terms under a pre-existing distribution agreement, we completed negotiations for the
renewal of long-term distribution agreements for certain of our U.K. networks and paid a distributor $196 million, most of
which is being amortized over a five year period.
Redeemable Interests in Subsidiaries
For those instruments with an estimated redemption value, redeemable interests in subsidiaries are accreted or amortized
to an estimated redemption value ratably over the period to the redemption date. Accretion and amortization are recorded
as a component of minority interest expense.
Income Taxes
Income taxes are recorded using the asset and liability method of accounting for income taxes. Deferred income taxes reflect
the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is
more likely than not such assets will be unrealized.
Effective January 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation
of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s
financial statements, and 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. In instances where we have
taken or expect to take a tax position in its tax return and we believe it is more likely than not that such tax position will be
upheld by the relevant taxing authority upon settlement, we may record the benefits of such tax position in our consolidated
financial statements. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty
percent likely of being realized upon ultimate settlement. The adoption of FIN 48 did not materially impact our consolidated
financial statements.
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Recent Accounting Pronouncements
In June 2008, the FASB issued FASB Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) Issue No. 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP No. EITF 03-6-1”). This FSP
provides that all outstanding unvested share-based payment awards that contain rights to non-forfeitable dividends or
dividend equivalents (whether paid or unpaid) are considered participating securities. Because such awards are considered
participating securities, the issuing entity is required to apply the two-class method of computing basic and diluted earnings
per share. The provisions of FSP No. EITF 03-6-1 will be effective for us on January 1, 2009, and will be applied retrospectively
to all prior-period earnings per share computations. The adoption of FSP No. EITF 03-6-1 will not have a material impact on
our earnings per share amounts.
In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”), which amends
the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset pursuant to FAS No. 142. The provisions of FSP 142-3 will be effective for us on January 1, 2009,
and will be applied prospectively. We are currently evaluating the impact that the provisions of FSP 142-3 will have on our
consolidated financial statements.
In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities, an Amendment
of FASB Statement No. 133 , as amended (“FAS 161”). FAS No. 161 amends and expands the disclosure requirements of FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (“FAS 133”), to include information about how
and why an entity uses derivative instruments; how derivative instruments and related hedged items are accounted for
under FAS 133 and its related interpretations; and how derivative instruments and related hedged items affect an entity’s
financial position, financial performance and cash flows. The provisions of FAS 161 will be effective for us on January 1, 2009.
The adoption of FAS 161 is not expected to have a material impact on our consolidated financial statements.
In December 2007, the FASB issued Statement No. 141 (revised 2007), Business Combinations (“FAS 141R”). This Statement
requires, among other things, that companies: (1) expense business acquisition transaction costs, which are presently included
in the cost of the acquisition, (2) record an asset for in-process research and development, which is presently expensed at
the time of the acquisition, (3) record at fair value amounts for contingencies, including contingent consideration, as of the
purchase date with subsequent adjustments recognized in operations, which is presently accounted for as an adjustment of
purchase price, (4) recognize decreases in valuation allowances on acquired deferred tax assets in operations, which were are
presently considered to be subsequent changes in consideration and are recorded as decreases in goodwill, and (5) measure
at fair value any non-controlling interest in the acquiree. The provisions of FAS 141R will be effective for us on January 1, 2009,
and will be applied prospectively to new business combinations consummated on or subsequent to the effective date.
Generally, the effects of FAS 141R will depend on future acquisitions.
In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements (“FAS
160”). FAS 160 establishes accounting and reporting standards for the non-controlling interest in a subsidiary, commonly
referred to as minority interest. Among other matters, FAS 160 requires that non-controlling interests be reported within
equity in the balance sheet and that the amount of consolidated net income attributable to the parent and to the non-
controlling interest to be clearly presented in the statement of income. The provisions of FAS 160 will be effective for us on
January 1, 2009, and will be applied prospectively, except for the presentation and disclosure requirements, which shall be
applied retrospectively to all periods presented. The adoption of FAS 160 is not expected to have a material impact on our
consolidated financial statements.
In December 2007, the FASB issued EITF Issue No. 07-1, Accounting for Collaborative Arrangements (“EITF 07-1”). EITF 07-1 defines
collaborative arrangements and establishes accounting and reporting requirements for transactions between participants in
the arrangement and third parties. A collaborative arrangement is a contractual arrangement that involves a joint operating
activity, for example an agreement to co-produce and distribute programming with another media company. The provisions
of EITF 07-1 will be effective for us on January 1, 2009, and will be applied retrospectively to all periods presented. We are
currently evaluating the impact that EITF 07-1 will have on our consolidated financial statements.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET 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.
Our earnings and cash flow are exposed to market risk and can be affected by, among other things, economic conditions,
interest rate changes, and foreign currency fluctuations. We have established policies, procedures and internal processes
governing our management of market risks and the use of financial instruments to manage our exposure to such risks.
We use derivative financial instruments to modify our exposure to market risks from changes in interest rates and foreign
exchange rates. We do not hold or enter into financial instruments for speculative trading purposes.
The nature and amount of our long-term debt are expected to vary as a result of future requirements, market conditions and
other factors. Our interest expense is exposed to movements in short-term interest rates. Derivative instruments, including
both fixed to variable and variable to fixed interest rate instruments, are used to modify this exposure. These instruments
include swaps and swaptions to modify interest rate exposure. The variable to fixed interest rate instruments had a notional
principal amount of $2.3 billion and a weighted average interest rate of 4.68% at December 31, 2008 for us and December 31,
2007 for DCH. The fixed to variable interest rate agreements had a notional principal amount of $50 million and $225 million
and had a weighted average interest rate of 7.90% and 9.65% at December 31, 2008 for us and December 31, 2007 for DCH,
respectively. At December 31, 2008, we held an unexercised interest rate swap put with a notional amount of $25 million
at a fixed rate of 5.44%. The fair value of these derivative instruments, which aggregate ($106) million and ($50) million at
December 31, 2008 for us and December 31, 2007 for DCH, respectively, is recorded as a component of long-term liabilities
and other current liabilities in the consolidated balance sheets.
Of the total of $2.9 billion principal amount, a notional amount of $2 billion of these derivative instruments are highly
effective cash flow hedges. The value of these hedges at December 31, 2008 was ($71) million with changes in the mark-
to-market value recorded as a component of other comprehensive income (loss), net of taxes. Should any portion of these
instruments become ineffective due to a restructuring in our debt, the monthly changes in fair value would be reported
as a component of other income on the Statement of Operations. We do not expect material hedge ineffectiveness in the
next twelve months. As of December 31, 2008, a parallel shift in the interest rate yield curve equal to one percentage point
would change the fair value of our interest rate derivative portfolio by approximately $49 million. In addition, a change of
one percentage point in interest rates on variable rate debt would impact interest expense by approximately $6 million on
a yearly basis.
Our objective in managing exposure to foreign currency fluctuations is to reduce volatility of earnings and cash flow.
Accordingly, we may enter into foreign currency derivative instruments that change in value as foreign exchange rates
change. The foreign exchange instruments used are spot, forward, and option contracts. Additionally, we enter into non-
designated forward contracts to hedge non-dollar denominated cash flows and foreign currency balances. At December
31, 2008 for us, and December 31, 2007 for DCH, the notional amount of foreign exchange derivative contracts was $75
million and $174 million, respectively. The fair value of these derivative instruments is recorded as a component of long-term
liabilities and other current liabilities in the consolidated balance sheets. These derivative instruments did not receive hedge
accounting treatment. As of December 31, 2008, an estimated 10% adverse movement in exchange rates against the US
dollar would decrease the fair value of our portfolio by approximately $5 million.
We continually monitor our positions with, and the credit quality of, the financial institutions that are counterparties to our
financial instruments and do not anticipate nonperformance by the counterparties. In addition, we limit the amount of
investment credit exposure with any one institution.
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CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Prior to the completion of the merger of DHC with a wholly-owned subsidiary of Discovery on September 17, 2008, KPMG
LLP (“KPMG”) was DHC’s independent registered public accounting firm. As the transaction was treated as a non-substantive
merger for accounting purposes, DHC is considered our predecessor registrant. In connection with the merger, we made
the decision to change our independent registered public accounting firm to PricewaterhouseCoopers, LLP and dismissed
KPMG as our independent registered public accounting firm as of September 18, 2008. This change was approved by our
Audit Committee.
During DHC’s two most recent fiscal years and through the date of dismissal of KPMG, there were no disagreements with
KPMG on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure,
which disagreement(s), if not resolved to the satisfaction of KPMG, would have caused it to make reference to the subject
matter of the disagreement(s) in connection with its report. There were no reportable events under Item 304(a)(l)(v) of
Regulation S-K that occurred during the fiscal years ended December 31, 2007 and 2006 and through September 18, 2008.
CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
The Company’s management, with the participation of our chief executive officer and chief financial officer, evaluated
the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. The term
“disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended
(the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information
required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s
management, including its principal executive and principal financial officers, as appropriate to allow timely decisions
regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its
judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our
disclosure controls and procedures as of the end of the period covered by this report, our chief executive officer and chief
financial officer concluded that, as of such date, our disclosure controls and procedures were effective.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No changes were made to the Company’s internal control over financial reporting during the fiscal quarter ended December
31, 2008, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over
financial reporting.
As a result of the Newhouse Transaction, as of September 18, 2008, the Company’s internal control over financial reporting
largely consists of DCH’s controls, instead of DHC’s.
Prior to the transaction, DHC accounted for DCH as an equity investment. Accordingly, DHC’s annual management assessment
of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act did not cover DCH’s internal
controls. Due to the consummation of the Newhouse Transaction late in the fiscal year, DHC and DCH submitted a request to
the staff of the SEC for concurrence that the Company would not be required to complete an assessment of internal control
over financial reporting in accordance with Section 404 for the year ended December 31, 2008. The Company has been
advised by the staff of the SEC that it has no objection to this request.
As of December 31, 2009, the Company is required to comply with the management certification and auditor attestation
requirements of Section 404 of the Sarbanes-Oxley Act of 2002. In the interim, the Company will be required to perform the
documentation, evaluation and testing required to make these assessments.
200 8 AN NU AL RE PO RT
53
54
200 8 AN NU AL RE PO RT
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
Consolidated Financial Statements of Discovery Communications, Inc.:
Report of Independent Registered Public Accounting Firm .......................................................................................................56
Report of Independent Registered Public Accounting Firm .......................................................................................................57
Consolidated Balance Sheets as of December 31, 2008 and 2007 ..........................................................................................58
Consolidated Statements of Operations
for the Years Ended December 31, 2008, 2007, and 2006 .........................................................................................................59
Consolidated Statements of Cash Flows
for the Years Ended December 31, 2008, 2007, and 2006 .........................................................................................................60
Consolidated Statements of Stockholders’ Equity
for the Years Ended December 31, 2008, 2007, and 2006 .........................................................................................................61
Notes to Consolidated Financial Statements ..........................................................................................................................................62
Financial Statement Schedules:
Consolidated Financial Statements of Discovery Communications Holding, LLC:
Report of Independent Registered Public Accounting Firm ...............................................................................................108
Report of Independent Registered Public Accounting Firm ....................................................................................................109
Consolidated Balance Sheet of Discovery Communications Holding, LLC
as of December 31, 2007 .................................................................................................................................................................................110
Consolidated Statement of Operations of Discovery Communications Holding, LLC
for the period from May 15, 2007 through December 31, 2007 .........................................................................................111
Consolidated Statements of Operations of Discovery Communications, Inc.
(the predecessor entity to Discovery Communications Holding, LLC and not the
current registrant) for the period from January 1, 2007 through May 14, 2007
and for the Year Ended December 31, 2006 .....................................................................................................................................111
Consolidated Statement of Cash Flows of Discovery Communications Holding, LLC
for the period from May 15, 2007 through December 31, 2007 .........................................................................................112
Consolidated Statements of Cash Flows of Discovery Communications, Inc.
(the predecessor entity to Discovery Communications Holding, LLC and not the
current registrant) for the period from January 1, 2007 through May 14, 2007
and for the year ended December 31, 2006 .....................................................................................................................................112
Consolidated Statement of Changes in Members’ Equity of
Discovery Communications Holding, LLC for the period
from May 15, 2007 through December 31, 2007 ...........................................................................................................................113
Consolidated Statements of Stockholders’ Deficit of Discovery Communications, Inc.
(the predecessor entity to Discovery Communications Holding, LLC and not the
current registrant) for the period from January 1, 2007 through May 14, 2007
and for the Year Ended December 31, 2006 ................................................................................................................................... 113
Notes to Consolidated Financial Statements ...................................................................................................................................... 114
200 8 AN NU AL RE PO RT
55
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of Discovery Communications, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of
operations, of stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of
Discovery Communications, Inc. and its subsidiaries at December 31, 2008 and the results of their operations and
their cash flows for the year ended December 31, 2008 in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our
audit 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 audit provides a reasonable basis for our opinion.
McLean, Virginia
February 24, 2009
56
200 8 AN NU AL RE PO RT
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Discovery Holding Company:
We have audited the accompanying consolidated balance sheet of Discovery Holding Company and subsidiaries
(DHC) as of December 31, 2007, and the related consolidated statements of operations, cash flows, and stockholders’
equity for each of the years in the two-year period ended December 31, 2007. These consolidated financial statements
are the responsibility of DHC’s 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
Holding, LLC (a 66 2 / 3 % owned investee company as of December 31, 2007). DHC’s investment in Discovery
Communications Holding, LLC at December 31, 2007 was $3,271,553,000, and its equity in the earnings of Discovery
Communications Holding, LLC was $141,781,000 and $103,588,000 during the years ended December 31, 2007
and 2006, respectively. The financial statements of Discovery Communications Holding, LLC and its predecessor
were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to
the amounts included for Discovery Communications Holding, LLC, is based solely on the reports 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 reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports 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, 2007, and the results of their operations and their cash flows for each of the years in
the two-year period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.
Denver, Colorado
February 14, 2008
200 8 AN NU AL RE PO RT
57
DISCOVERY COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in millions, except per share amounts)
As of December 31,
2007
2008
Assets
Current assets:
Cash and cash equivalents
Receivables, net
Content rights, net
Deferred income taxes
Prepaid expenses and other current assets
Assets of discontinued operations
Total current assets
Investment in Discovery Communications Holding, LLC
Noncurrent content rights, net
Property and equipment, net
Goodwill
Intangible assets, net
Other noncurrent assets
Assets of discontinued operations
Total assets
Liabilities, Redeemable Interests in Subsidiaries, and Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued liabilities
Deferred revenues
Current portion of long-term incentive plan liability
Current portion of long-term debt
Other current liabilities
Liabilities of discontinued operations
Total current liabilities
Long-term incentive plan liability
Long-term debt
Deferred income taxes
Other noncurrent liabilities
Liabilities of discontinued operations
Total liabilities
Commitments and contingencies (Note 23)
Redeemable interests in subsidiaries
Stockholders’ equity:
Series A preferred stock, $0.01 par value; authorized 75 million shares;
issued and outstanding 70 million shares at December 31, 2008
Series C preferred stock, $0.01 par value; authorized 75 million shares;
issued and outstanding 70 million shares at December 31, 2008
Series A common stock, $0.01 par value; authorized 1.7 billion shares; issued
and outstanding 134 million shares at December 31, 2008 and December 31, 2007
Series B common stock, $0.01 par value; authorized 100 million shares; issued and
outstanding 7 million shares at December 31, 2008 and December 31, 2007
Series C common stock, $0.01 par value; authorized 2.0 billion shares; issued and
outstanding 141 million shares at December 31, 2008 and December 31, 2007
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive (loss) income
Total stockholders’ equity
Total liabilities, redeemable interests in subsidiaries, and stockholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
58
200 8 AN NU AL RE PO RT
$
100
780
73
49
107
—
1,109
—
1,163
395
6,891
716
210
—
$ 10,484
$
8
10
—
—
2
352
372
3,272
—
5
1,782
1
—
434
$ 5,866
$
71
350
93
8
458
90
—
1,070
15
3,331
246
237
—
4,899
—
49
1
1
1
—
$
1
5
—
—
—
2
112
120
—
—
1,227
1
23
1,371
—
—
—
—
1
—
2
6,545
( 936 )
( 78 )
5,536
$ 10,484
2
5,728
( 1,253 )
17
4,495
$ 5,866
DISCOVERY COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in millions, except per share amounts)
Revenues:
Distribution
Advertising
Other
Total revenues
Operating costs and expenses:
Cost of revenues, excluding depreciation
and amortization listed below
Selling, general and administrative
Depreciation and amortization
Impairment of intangible assets
Exit and restructuring charges
Gains on asset dispositions
Total operating costs and expenses
Operating income (loss)
Other (expense) income:
Equity in earnings of Discovery Communications
Holding, LLC
Equity in loss of unconsolidated affiliates
Interest expense, net
Other, net
Total other (expense) income, net
Income from continuing operations before income
taxes and minority interests
Provision for income taxes
Minority interests, net of tax
Income from continuing operations
Income (loss) from discontinued operations, net of tax
Net income (loss)
Income per share from continuing operations:
Basic
Diluted
Income (loss) per share from discontinued operations:
Basic
Diluted
Net income (loss) per share:
Basic
Diluted
Weighted average number of shares outstanding:
Basic
Diluted
Years Ended December 31,
2007
2006
2008
$
$
1,640
1,396
407
3,443
1,024
1,115
186
30
31
—
2,386
1,057
—
( 61 )
( 256 )
14
( 303 )
754
( 352 )
( 128 )
274
43
317
0.85
0.85
0.13
0.13
0.99
0.98
321
322
$
$
$
$
$
$
$
$
$
$
$
$
$
$
—
—
76
76
60
22
3
—
—
( 1 )
84
( 8 )
142
—
—
8
150
142
( 56 )
—
86
( 154 )
( 68 )
0.31
0.31
( 0.55 )
( 0.55 )
( 0.24 )
( 0.24 )
281
281
$
$
$
$
$
$
$
$
—
—
80
80
63
23
3
—
2
—
91
( 11 )
104
—
—
—
104
93
( 41 )
—
52
( 98 )
( 46 )
0.19
0.19
( 0.35 )
( 0.35 )
( 0.16 )
( 0.16 )
280
280
The accompanying notes are an integral part of these consolidated financial statements.
200 8 AN NU AL RE PO RT
59
DISCOVERY COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in millions)
Operating Activities
Net income (loss)
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Years Ended December 31,
2007
2006
2008
$
317
$
( 68 )
$
( 46 )
Share-based compensation (benefit) expense
Depreciation and amortization
Impairment of goodwill
Impairment of intangible assets
Gains on asset dispositions
Equity in earnings of Discovery Communications Holding, LLC
Equity in loss of unconsolidated affiliates
Deferred income taxes
Minority interests, net of tax
Other noncash expenses (income), net
Changes in operating assets and liabilities,
net of discontinued operations:
Receivables, net
Content rights, net
Accounts payable and accrued liabilities
Other, net
Cash provided by operating activities
Investing Activities
Purchases of property and equipment
Proceeds from business and asset dispositions
Net cash acquired from Newhouse Transaction
Business acquisitions, net of cash acquired
Purchases of securities
Proceeds from sale of securities
Other investing activities, net
Cash provided by (used in) investing activities
Financing Activities
Ascent Media Corporation spin-off
Net repayments of revolver loans
Principal repayments of long-term debt
Principal repayments of capital lease obligations
Net cash from stock option exercises
Other financing activities, net
Cash (used in) provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Change in cash and cash equivalents
Cash and cash equivalents of continuing operations,
beginning of period
Cash and cash equivalents of discontinued operations,
beginning of period
Cash and cash equivalents, end of period
( 66 )
232
—
30
( 76 )
—
61
190
128
69
( 45 )
( 145 )
( 46 )
( 80 )
569
( 102 )
139
45
( 8 )
—
24
—
98
( 356 )
( 125 )
( 257 )
( 29 )
—
( 7 )
( 774 )
( 2 )
( 109 )
8
1
68
165
—
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( 142 )
—
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—
( 8 )
4
—
( 11 )
( 6 )
58
( 47 )
2
—
—
—
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( 15 )
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—
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12
—
55
1
201
100
$
153
209
$
$
2
68
93
—
( 2 )
( 104 )
—
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—
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( 10 )
—
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1
73
( 77 )
6
—
( 47 )
( 52 )
—
1
( 169 )
—
—
—
—
—
—
—
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( 96 )
—
250
154
The accompanying notes are an integral part of these consolidated financial statements.
60
200 8 AN NU AL RE PO RT
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61
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Discovery Communications, Inc. (“Discovery” or the “Company”) is a leading global media and entertainment company
that provides original and purchased programming across multiple distribution platforms in the United States (U.S.) and
approximately 170 other countries, with over 100 television networks offering customized programming in 35 languages.
Discovery also develops and sells consumer and educational products and services as well as media sound services in the
U.S. and internationally. In addition, the Company owns and operates a diversified portfolio of website properties and other
digital services. The Company manages and reports its operations in three segments: U.S. Networks, consisting principally of
domestic cable and satellite television network programming, web brands, and other digital services; International Networks,
consisting principally of international cable and satellite television network programming; and Commerce, Education, and
Other, consisting principally of e-commerce, catalog, sound production, and domestic licensing businesses. Financial
information for Discovery’s reportable segments is presented in Note 24.
Newhouse Transaction and AMC Spin-off
Discovery was formed in connection with Discovery Holding Company (“DHC”) and Advance/Newhouse Programming
Partnership (“Advance/Newhouse”) combining their respective ownership interests in Discovery Communications Holding,
LLC (“DCH”) and exchanging those interests with and into Discovery, which was consummated on September 17, 2008 (the
“Newhouse Transaction”). Prior to the Newhouse Transaction, DCH was a stand-alone private company, which was owned
approximately 66 2 / 3 % by DHC and 33 1 / 3 % by Advance/Newhouse. The Newhouse Transaction was completed as
follows:
•
•
•
On September 17, 2008, DHC completed the spin-off to its shareholders of Ascent Media Corporation (“AMC”), a
subsidiary holding the cash and businesses of DHC, except for certain businesses that provide sound, music, mixing,
sound effects, and other related services (“Creative Sound Services” or “CSS”) (the “AMC spin-off”) (such businesses
remain with the Company following the completion of the Newhouse Transaction). The AMC spin-off was effected as
a distribution by DHC to holders of its Series A and Series B common stock. In connection with the AMC spin-off, each
holder of DHC Series A common stock received 0.05 of a share of AMC Series A common stock and each holder of DHC
Series B common stock received 0.05 of a share of AMC Series B common stock. The AMC spin-off did not involve the
payment of any consideration by the holders of DHC common stock and was structured as a tax free transaction under
Sections 368(a) and 355 of the Internal Revenue Code of 1986, as amended. There was no gain or loss related to the spin-
off. Subsequent to the AMC spin-off, the companies no longer have any ownership interests in each other and operate
independently.
On September 17, 2008, immediately following the AMC spin-off, DHC merged with a transitory merger subsidiary of
Discovery, with DHC continuing as the surviving entity and as a wholly-owned subsidiary of Discovery. In connection
with the merger, each share of DHC Series A common stock was converted into the right to receive 0.50 of a share of
Discovery Series A common stock and 0.50 of a share of Discovery Series C common stock. Similarly, each share of DHC
Series B common stock was converted into the right to receive 0.50 of a share of Discovery Series B common stock and
0.50 of a share of Discovery Series C common stock. A description of Discovery’s common stock, including pertinent
rights and preferences, is disclosed in Note 14.
On September 17, 2008, immediately following the exchange of shares between Discovery and DHC, Advance/
Newhouse contributed its ownership interests in DCH and Animal Planet to Discovery in exchange for Discovery Series
A and Series C convertible preferred stock. The preferred stock is convertible at any time into Discovery common stock
representing 33 1 / 3 % of the Discovery common stock issued in connection with the Newhouse Transaction, subject
to certain anti-dilution adjustments.
A description of Discovery’s preferred stock, including pertinent rights and preferences, is disclosed in Note 14.
As a result of the Newhouse Transaction, DHC and DCH became wholly-owned subsidiaries of Discovery, with Discovery
becoming the successor reporting entity.
200 8 AN NU AL RE PO RT
62
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Basis of Presentation
Newhouse Transaction and AMC Spin-off
In accordance with Accounting Research Bulletin No. 51, Consolidated Financial Statements (“ARB 51”), as amended, paragraph
11, the consolidated financial statements and notes present the Newhouse Transaction as though it was consummated on
January 1, 2008. Accordingly, the consolidated financial statements and notes for 2008 include the gross combined assets and
liabilities, revenues and expenses, and cash flows of both DHC and DCH. Prior to the Newhouse Transaction, DHC accounted
for its ownership interest in DCH using the equity method. Accordingly, DHC recorded its portion of DCH’s earnings as an
adjustment to the carrying value of its investment. Because the Newhouse Transaction is presented as of January 1, 2008,
the 2008 financial statements have been adjusted to eliminate DHC’s investment in DCH and the portion of DCH’s earnings
recorded by DHC during the period January 1, 2008 through September 17, 2008. The Company’s Consolidated Statements
of Operations present Advance/Newhouse’s ownership interest in DCH as Minority interests, net of tax for the period from
January 1, 2008 through September 17, 2008.
The accompanying historical consolidated financial statements and notes for 2007 and 2006 include only the gross assets
and liabilities, revenues and expenses, and cash flows of DHC and continue to present DCH’s results of operations as an
equity method investment. Information regarding DHC’s investment in DCH prior to the Newhouse Transaction is disclosed
in Note 3.
Pursuant to FASB Technical Bulletin No. 85-5, Issues Relating to Accounting for Business Combinations (“FTB 85-5”), Discovery
accounted for the Newhouse Transaction as a non-substantive merger. Accordingly, the assets and liabilities of DCH and
DHC were accounted for at the investors’ historical bases prior to the Newhouse Transaction. The Newhouse Transaction
was determined to be a non-substantive merger because of the following: (i) as Advance/Newhouse was a 33 1 / 3 % owner
of DCH prior to the completion of the Newhouse Transaction and is a 33 1 / 3 % owner of Discovery (whose only significant
asset is 100% of DCH) immediately following completion of the Newhouse Transaction, there was no effective change in
ownership, (ii) the Company’s convertible preferred stock does not provide Advance/Newhouse any special dividend rights
and only provides a de minimis liquidation preference, effectively resulting in no additional economic interest being obtained
by Advance/Newhouse as compared to its interest in DCH, and (iii) Advance/Newhouse retains significant participatory
special class voting rights with respect to the Company’s matters that are consistent with the voting rights it held with
respect to DCH prior to the Newhouse Transaction.
The consolidated financial statements reflect certain reclassifications of each company’s financial information to conform to
Discovery’s financial statement presentation, as follows:
•
•
•
•
The consolidated financial statements for 2008 have been adjusted to eliminate the separate presentation of DHC’s
investment in DCH and the portion of DCH’s earnings recorded by DHC using the equity method during the period
January 1, 2008 through September 17, 2008.
Advance/Newhouse’s interest in DCH’s earnings for the period January 1, 2008 through September 17, 2008 has been
recorded as Minority interests, net of tax in the Consolidated Statements of Operations. Additionally, Minority interests,
net of tax has been reclassified from a component of Other (expense) income to a separate account in the Consolidated
Statements of Operations.
Other comprehensive income and Total comprehensive income are now reported in the Consolidated Statements of
Stockholders’ Equity rather than in the Consolidated Statements of Operations. Additionally, the Cumulative effect of
accounting change has been excluded from Comprehensive income.
Certain accounts that were separately reported on the balance sheet prior to the Newhouse Transaction have been
combined.
200 8 AN NU AL RE PO RT
63
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
•
•
DHC’s results, excluding unallocated corporate costs and discontinued operations, have been reported in the Commerce,
Education, and Other segment. Unallocated corporate costs are classified in the “Corporate and intersegment
eliminations” category.
All DHC share and per share data have been adjusted for all periods presented to reflect the exchange with and into
Discovery shares, unless otherwise indicated.
As a result of the AMC spin-off, the assets and liabilities and results of operations of AMC are presented as Assets and liabilities
of discontinued operations and Income (loss) from discontinued operations, net of tax in the Consolidated Balance Sheets
and Consolidated Statements of Operations, respectively, for all periods presented. Cash flows from AMC have not been
segregated as discontinued operations in the Consolidated Statements of Cash Flows. Summarized financial information for
AMC is presented in Note 5.
Other Discontinued Operations
During 2008, DHC sold its ownership interests in Ascent Media CANS, LLC (DBA “AccentHealth”) and Ascent Media Systems
& Technology Services, LLC (“AMSTS”). As DHC’s financial position, results of operations, and cash flows are included in
Discovery’s consolidated financial statements for all periods presented, the assets and liabilities and results of operations of
AccentHealth and AMSTS are presented as Assets and liabilities of discontinued operations and Income (loss) from discontinued
operations, net of tax in the Consolidated Balance Sheets and Consolidated Statements of Operations, respectively, for all
periods presented. Cash flows from AccentHealth and AMSTS have not been segregated as discontinued operations in
the Consolidated Statements of Cash Flows. A description of the transactions and summarized financial information for
AccentHealth and AMSTS are presented in Note 5.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles
requires management to make estimates, judgments, and assumptions that affect the amounts reported in the consolidated
financial statements and notes thereto. Management continually re-evaluates its estimates, judgments, and assumptions
and management’s assessments could change. Actual results may differ from those estimates, judgments, and assumptions
and could have a material impact on the consolidated financial statements.
Significant estimates, judgments, and assumptions inherent in the preparation of the consolidated financial statements
include consolidation of variable interest entities, accounting for business acquisitions, dispositions, allowances for doubtful
accounts, content rights, asset impairments, redeemable interests in subsidiaries, estimating fair value, revenue recognition,
depreciation and amortization, share-based compensation, income taxes, and contingencies.
Consolidation
The consolidated financial statements include the accounts of Discovery, all majority-owned subsidiaries in which a controlling
interest is maintained, and variable interest entities for which the Company is the primary beneficiary. Controlling interest
is determined by majority ownership interest and the ability to unilaterally direct or cause the direction of management
and policies of an entity after considering any third-party participatory rights. The Company applies the guidelines set
forth in Financial Accounting Standards Board (“FASB”) Interpretation No. 46R, Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51 (“FIN 46R”), in evaluating whether it has interests in variable interest entities and in determining
whether to consolidate any such entities. All significant inter-company accounts and transactions between consolidated
companies have been eliminated in consolidation.
The effects of any changes in the Company’s ownership interest resulting from the issuance of equity capital by consolidated
subsidiaries or equity investees to unaffiliated parties and certain other equity transactions recorded by consolidated
subsidiaries or equity investees are accounted for as a capital transaction pursuant to Securities and Exchange Commission
(“SEC”) Staff Accounting Bulletin No. 51, Accounting for the Sales of Stock of a Subsidiary (“SAB 51”).
64
200 8 AN NU AL RE PO RT
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Recently Issued Accounting Pronouncements
Accounting Pronouncements Adopted
On January 1, 2008, the Company adopted certain provisions of FASB Statement No. 157, Fair Value Measurements (“FAS 157”),
which establishes the authoritative definition of fair value, sets out a framework for measuring fair value, and expands the
required disclosures about fair value measurement. The provisions of FAS 157 related to financial assets and liabilities as well
as other assets and liabilities carried at fair value on a recurring basis were adopted prospectively on January 1, 2008 and did
not have a material impact on the Company’s consolidated financial statements. Information related to financial assets and
liabilities as well as other assets and liabilities carried at fair value on a recurring basis is presented in Note 6. The provisions
of FAS 157 related to other non-financial assets and liabilities became effective for Discovery on January 1, 2009, and are
being applied prospectively. The adoption of FAS 157 related to non-financial assets and liabilities is not expected to have a
significant impact on the Company’s consolidated financial statements.
On January 1, 2008, the Company adopted the provisions of FASB Statement No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities — Including an amendment of FASB Statement No. 115 (“FAS 159”), which permits entities to choose to
measure certain financial instruments and other items at fair value. The fair value option generally may be applied instrument
by instrument, is irrevocable, and is applied only to entire instruments and not to portions of instruments. The Company did
not elect the fair value option for any financial instruments or other items under FAS 159.
Accounting Pronouncements Not Yet Adopted
In June 2008, the FASB issued FASB Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) Issue No. 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF No. 03-6-1”). This FSP
provides that all outstanding unvested share-based payment awards that contain rights to non-forfeitable dividends or
dividend equivalents (whether paid or unpaid) are considered participating securities. Because such awards are considered
participating securities, the issuing entity is required to apply the two-class method of computing basic and diluted earnings
per share. The provisions of FSP EITF No. 03-6-1 became effective for Discovery on January 1, 2009, and are being applied
retrospectively to all prior-period earnings per share computations. The adoption of FSP EITF No. 03-6-1 will not have a
significant impact on earnings per share amounts for prior periods.
In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”), which amends
the factors that should be considered in developing renewal or extension assumptions used to determine the useful life
of a recognized intangible asset pursuant to FASB Statement No. 142, Goodwill and Other Intangible Assets (“FAS 142”). The
provisions of FSP 142-3 became effective for Discovery on January 1, 2009, and are being applied prospectively to intangible
assets acquired subsequent to the effective date. Generally, the impact of FSP 142-3 will depend on future acquisitions of
intangible assets.
In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities, an
Amendment of FASB Statement No. 133 , as amended (“FAS 161”). FAS 161 amends and expands the disclosure requirements of
FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (“FAS 133”), to include information about
how and why an entity uses derivative instruments; how derivative instruments and related hedged items are accounted
for under FAS 133 and its related interpretations; and how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows. The provisions of FAS 161 became effective for Discovery on January
1, 2009. The Company will include the relevant disclosures in the consolidated financial statements beginning with the first
quarter of 2009.
200 8 AN NU AL RE PO RT
65
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In December 2007, the FASB issued Statement No. 141 (revised 2007), Business Combinations (“FAS 141R”). This Statement
requires, among other things, that companies: (i) expense business acquisition transaction costs, which are presently included
in the cost of the acquisition, (ii) record an asset for in-process research and development, which is presently expensed at
the time of the acquisition, (iii) record at fair value amounts for contingencies, including contingent consideration, as of the
purchase date with subsequent adjustments recognized in operations, which is presently accounted for as an adjustment
of purchase price, (iv) recognize decreases in valuation allowances on acquired deferred tax assets in operations, which are
presently considered to be subsequent changes in consideration and are recorded as decreases in goodwill, and (v) measure
at fair value any non-controlling interest in the acquired entity. The provisions of FAS 141R became effective for Discovery
on January 1, 2009 and will be applied prospectively to new business combinations consummated on or subsequent to the
effective date. While FAS 141R applies to new business acquisitions consummated on or subsequent to the effective date,
the amendments to FASB Statement No. 109, Accounting for Income Taxes (“FAS 109”), with respect to deferred tax valuation
allowances and liabilities for income tax uncertainties will be applied to all deferred tax valuation allowances and liabilities for
income tax uncertainties recognized in prior business acquisitions. Generally, the impact of FAS 141R will depend on future
acquisitions.
In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements (“FAS
160”). FAS 160 establishes accounting and reporting standards for the non-controlling interest in a subsidiary, commonly
referred to as minority interest. Among other matters, FAS 160 requires that non-controlling interests be reported within the
shareholders’ equity section of the balance sheet and that the amount of consolidated net income attributable to the parent
and to the non-controlling interest to be clearly presented in the statement of income. The provisions of FAS 160 became
effective for Discovery on January 1, 2009, and are being applied prospectively, except for the presentation and disclosure
requirements, which shall be applied retrospectively to all periods presented.
In December 2007, the FASB issued EITF Issue No. 07-1, Accounting for Collaborative Arrangements (“EITF 07-1”). EITF 07-1
defines collaborative arrangements and establishes accounting and reporting requirements for transactions between
participants in the arrangement and third parties. A collaborative arrangement is a contractual arrangement that involves a
joint operating activity, for example an agreement to co-produce and distribute programming with another media company.
The provisions of EITF 07-1 became effective for Discovery on January 1, 2009 and will not have a significant impact on the
Company’s consolidated financial statements.
Cash and Cash Equivalents
Highly liquid investments with original maturities of ninety days or less are recorded as cash equivalents. There were no
material amounts of restricted cash as of December 31, 2008 and 2007. Additionally, there were no material amounts of bank
or book overdrafts as of December 31, 2008 and 2007.
Investments
Investments in entities of 20% to 50%, without a controlling interest, and other investments over which the Company has
the ability to exercise significant influence but not control are accounted for using the equity method. Investments in entities
of less than 20% over which the Company has no significant influence are accounted for at fair value or using the cost
method.
Content Rights
Costs incurred in the direct production, co-production, or licensing of content rights are capitalized and stated at the lower
of unamortized cost, fair value, or net realizable value. The Company periodically evaluates the net realizable value of content
by considering expected future revenue generation.
66
200 8 AN NU AL RE PO RT
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The costs of produced and co-produced content airing on the Company’s networks are capitalized and amortized based
on the expected realization of revenues, resulting in an accelerated basis over four years for developed networks (Discovery
Channel, TLC and Animal Planet in the U.S. Networks segment and Discovery Channel in the International Networks segment),
and a straight-line basis over a period up to five years for developing networks (all other networks in the U.S. Networks
segment and International Networks segment). The cost of licensed content is capitalized and amortized over the term of
the license period based on the expected realization of revenues, resulting in an accelerated basis for developed networks
in the United States, and a straight-line basis for all educational ventures. The costs of produced educational content for
electronic, video and hardcopy supplements are amortized on a straight-line basis over a three to five year period.
All produced and co-produced content is classified as long-term. The portion of the unamortized licensed content balance
that will be amortized within one year is classified as a current asset. The Company’s co-production arrangements generally
represent the sharing of production cost. The Company records its share of costs gross and records no amounts for the
portion of costs borne by the other party as the Company does not share any associated economics of exploitation.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is recognized on a straight-line
basis over the estimated useful lives, which is 15 to 39 years for buildings and three to five years for furniture and fixtures.
Leasehold improvements are amortized on a straight-line basis over the lesser of their estimated useful lives or the terms
of the related leases, beginning on the date the asset is put into use. Equipment under capital lease represents the present
value of the minimum lease payments at the inception of the lease, net of accumulated depreciation.
Capitalized Software Costs
All capitalized software costs are for internal use. Capitalization of costs occurs during the application development stage.
Costs incurred during the preliminary project and post implementation stages are expensed as incurred. Capitalized costs
are amortized on a straight-line basis over their estimated useful lives of two to five years.
Goodwill and Indefinite-lived Intangible Assets
Goodwill impairment is determined using a two-step process. The first step of the process is to compare the fair value of a
reporting unit with its carrying amount, including goodwill. In performing the first step, the Company determines the fair
value of a reporting unit by using two valuation techniques: a discounted cash flow (“DCF”) analysis and a market-based
approach. Determining fair value requires the exercise of significant judgments, including judgments about appropriate
discount rates, perpetual growth rates, relevant comparable company earnings multiples and the amount and timing of
expected future cash flows. The cash flows employed in the DCF analyses are based on the Company’s budget and long-
term business plan. In assessing the reasonableness of its determined fair values, the Company evaluates its results against
other value indicators such as comparable company public trading values, research analyst estimates and values observed
in market transactions. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not
impaired and the second step of the impairment test is not necessary. If the carrying amount of a reporting unit exceeds
its fair value, the second step of the goodwill impairment test is required to be performed to measure the amount of
impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting
unit’s goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same
manner as the amount of goodwill recognized in a business combination. In other words, the estimated fair value of the
reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the
reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price
paid. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment
loss is recognized in an amount equal to that excess.
200 8 AN NU AL RE PO RT
67
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The impairment test for other intangible assets not subject to amortization involves a comparison of the estimated fair
value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an
impairment loss is recognized in an amount equal to that excess. The estimates of fair value of intangible assets not subject
to amortization are determined using a DCF valuation analysis.
Goodwill and indefinite-lived intangible assets are tested annually for impairment during the fourth quarter or earlier upon
the occurrence of certain events or substantive changes in circumstances. The Company’s 2008 annual impairment analysis,
which was performed during the fourth quarter, did not result in any impairment charges. However, over the past year, the
decline in the Company’s stock price has resulted in lower estimated fair values for certain of the Company’s reporting units.
The result of this decline is that the estimated fair value of the United Kingdom reporting unit approximates its carrying
value. Accordingly, future declines in estimated fair values may result in goodwill impairment charges. It is possible that such
charges, if required, could be recorded prior to the fourth quarter of 2009 (i.e., during an interim period) if the Company’s
stock price, its results of operations, or other factors require such assets to be tested for impairment at an interim date.
Long-lived Assets
Long-lived assets (e.g., amortizing trademarks, customer lists, other intangibles and property, plant and equipment) do
not require that an annual impairment test be performed; instead, long-lived assets are tested for impairment upon the
occurrence of a triggering event. Triggering events include the likely (i.e., more likely than not) disposal of a portion of
such assets or the occurrence of an adverse change in the market involving the business employing the related assets.
Once a triggering event has occurred, the impairment test employed is based on whether the intent is to hold the asset
for continued use or to hold the asset for sale. If the intent is to hold the asset for continued use, the impairment test first
requires a comparison of undiscounted future cash flows against the carrying value of the asset. If the carrying value of
the asset exceeds the undiscounted cash flows, the asset would be deemed to be impaired. Impairment would then be
measured as the difference between the fair value of the asset and its carrying value. Fair value is generally determined by
discounting the future cash flows associated with that asset. If the intent is to hold the asset for sale and certain other criteria
are met (e.g., the asset can be disposed of currently, appropriate levels of authority have approved the sale, and there is an
active program to locate a buyer), the impairment test involves comparing the asset’s carrying value to its fair value. To the
extent the carrying value is greater than the asset’s fair value, an impairment loss is recognized for the difference.
Significant judgments in this area involve determining whether a triggering event has occurred, determining the future cash
flows for the assets involved and determining the proper discount rate to be applied in determining fair value.
Discontinued Operations
In determining whether a group of assets disposed of should be presented as a discontinued operation, the Company
makes a determination as to whether the group of assets being disposed of comprises a component of the entity, which
requires cash flows that can be clearly distinguished from the rest of the entity. The Company also determines whether the
cash flows associated with the group of assets have been or will be significantly eliminated from the ongoing operations of
the Company as a result of the disposal transaction and whether the Company has no significant continuing involvement
in the operations of the group of assets after the disposal transaction. If these determinations can be made affirmatively,
the results of operations of the group of assets being disposed of (as well as any gain or loss on the disposal transaction) are
aggregated for separate presentation apart from continuing operating results of the Company in the consolidated financial
statements. The Company has elected not to segregate the cash flows from discontinued operations in its presentation of
the statements of cash flows.
Derivative Financial Instruments
Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (“FAS 133”),
requires every derivative instrument to be recorded on the balance sheet at fair value as either an asset or a liability. The
68
200 8 AN NU AL RE PO RT
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
statement also requires that changes in the fair value of derivatives be recognized currently in earnings unless specific hedge
accounting criteria are met. The Company uses financial instruments designated as cash flow hedges. The effective changes
in fair value of derivatives designated as cash flow hedges are recorded in accumulated other comprehensive income (loss).
Amounts are reclassified from accumulated other comprehensive income (loss) as interest expense is recorded for debt. The
Company uses the cumulative dollar offset method to assess effectiveness. To be highly effective, the ratio calculated by
dividing the cumulative change in the value of the actual swap by the cumulative change in the hypothetical swap must be
between 80% and 125%. The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings.
The Company uses derivative instruments principally to manage the risk associated with the movements of foreign currency
exchange rates and changes in interest rates that will affect the cash flows of its debt transactions. See Note 12 for additional
information regarding derivative instruments held by the Company and risk management strategies.
Redeemable Interests in Subsidiaries
For those instruments with an estimated redemption value, redeemable interest in subsidiaries is accreted or amortized to
an estimated redemption value ratably over the period to the redemption date. Accretion and amortization are recorded as
a component of Minority interests, net of tax . Cash receipts and payments for the sale or purchase of redeemable interests in
subsidiaries are included as a component of investing cash flows.
Share-Based and Other Long-term Incentive Compensation
The Company measures the cost of employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award. FASB Statement No. 123R, Share-Based Payment (“FAS 123R”) also requires that
the Company record liability awards at fair value each reporting period and that the change in fair value be reflected as
stock compensation expense in the Consolidated Statements of Operations. These costs are recognized in the Consolidated
Statement of Operations over the period during which an employee is required to provide service in exchange for the
award. FAS 123R also requires that excess tax benefits, as defined, realized from the exercise of stock options be reported as
a financing cash inflow rather than as a reduction of taxes paid in cash flow from operations.
The grant-date fair value of a stock option and the fair value of liability awards are estimated using the Black-Scholes
model, consistent with the provisions of FAS 123R and SEC Staff Accounting Bulletin (“SAB”) No. 107, Share-Based Payment
(“SAB 107”). Because the Black-Scholes model requires the use of subjective assumptions, changes in these assumptions
can materially affect the fair value of the equity awards. The Company recognizes equity-based compensation expense
for awards with graded vesting as a single award and recognizes equity-based compensation expense on a straight-line
basis (net of estimated forfeitures) over the employee service period. Equity-based compensation expense is recorded as a
component of Selling, general and administrative expense. When recording compensation cost for equity awards, FAS 123R
requires companies to estimate the number of equity awards granted that are expected to be forfeited.
The Company classifies as a current liability the intrinsic value of long-term incentive compensation units and stock
appreciation rights that are vested or will become vested within one year. Upon voluntary termination of employment, the
Company distributes 100% of vested unit benefits if employees agree to certain provisions.
Foreign Currency Translation
The Company’s foreign subsidiaries’ assets and liabilities are translated at exchange rates in effect at the balance sheet date,
while results of operations are translated at average exchange rates for the respective periods. The resulting translation
adjustments are included as a separate component of Accumulated other comprehensive income (loss) in the Consolidated
Statements of Stockholders’ Equity. Intercompany accounts of a trading nature are revalued at exchange rates in effect at
each month end and are included as part of operating income in the consolidated statements of operations.
200 8 AN NU AL RE PO RT
69
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Revenue Recognition
Discovery derives revenue from: (i) distribution revenue from cable systems, satellite operators and other distributors, (ii)
advertising aired on Discovery’s networks and websites, and (iii) other, which is largely e-commerce, educational, and post-
production sound services sales.
Distribution. Distributors generally pay a per-subscriber fee for the right to distribute Discovery programming under the
terms of long-term distribution contracts (“distribution revenue”). Distribution revenue is reported net of incentive costs or
other consideration, if any, offered to system operators in exchange for long-term distribution contracts. Discovery recognizes
distribution revenue over the term of the contracts based on contracted monthly license fee provisions and reported
subscriber levels. Network incentives have historically included upfront cash incentives referred to as “launch support” in
connection with the launch of a network by the distributor within certain time frames. Any such amounts are capitalized as
assets upon launch of Discovery programming by the distributor and are amortized on a straight line basis as a reduction of
revenue over the terms of the contracts. In instances where the distribution agreement is extended prior to the expiration of
the original term, Discovery evaluates the economics of the extended term and, if it is determined that the deferred launch
asset continues to benefit Discovery over the extended term, then Discovery will adjust the launch amortization period
accordingly. Other incentives are recognized as a reduction of revenue as incurred. Following the renewal of a distribution
agreement, the remaining deferred consideration is amortized over the extended period. Amortization of deferred launch
incentives for the year ended December 31, 2008 was $75 million.
The amount of distribution revenue due to Discovery is reported by distributors based on actual subscriber levels. Such
information is generally not received until after the close of the reporting period. Therefore, reported distribution revenue is
based upon Discovery’s estimates of the number of subscribers receiving Discovery programming for periods for which the
distributor has not yet reported. Discovery’s subscriber estimates are based on the most recent remittance or confirmation
of subscribers received from the distributor.
Advertising. Discovery records advertising revenue net of agency commissions and audience deficiency liabilities in the
period advertising spots are broadcast. A substantial portion of the advertising sold in the United States includes guaranteed
levels of audience that either the program or the advertisement will reach. Deferred revenue is recorded and adjusted as
the guaranteed audience levels are achieved. Audience guarantees are initially developed by Discovery’s internal research
group and actual audience and delivery information is provided by third party ratings services. In certain instances, the third
party ratings information is not received until after the close of the reporting period. In these cases, reported advertising
revenue and related deferred revenue is based on Discovery’s estimates for any under-delivery of contracted advertising
ratings based on the most current data available from the third party ratings service. Differences between the estimated
under-delivery and the actual under-delivery have historically been insignificant. Online advertising revenues are recognized
as impressions are delivered.
Certain of Discovery’s advertising arrangements include deliverables in addition to commercial time, such as the advertiser’s
product integration into the programming, customized vignettes, and billboards. These contracts are evaluated as multiple
element revenue arrangements under EITF 00-21, Revenue Arrangements with Multiple Deliverables .
Other. Commerce revenue is recognized upon product shipment, net of estimated returns, which are not material to
Discovery’s consolidated financial statements. Educational service sales are generally recognized ratably over the term of
the agreement. Revenue from post-production and certain distribution related services is recognized when services are
provided.
Prepayments received for services to be performed at a later date are deferred.
70
200 8 AN NU AL RE PO RT
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Concentration of Credit Risk and Significant Customers
For the years ended December 31, 2008, 2007, and 2006, no single customer accounted for more than 10% of consolidated
revenue.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs during the year ended December 31, 2008 totaled
$145 million. No material advertising costs were recorded by DHC during the years ended December 31, 2007 and 2006.
Income Taxes
Income taxes are recorded using the asset and liability method of accounting for income taxes. Deferred income taxes reflect
the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is
more likely than not such assets will be unrealized.
Effective January 1, 2007, Discovery adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in a company’s financial statements, and 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. In instances where
the Company has taken or expects to take a tax position in its tax return and the Company believes it is more likely than
not that such tax position will be upheld by the relevant taxing authority upon settlement, the Company may record the
benefits of such tax position in its consolidated financial statements. The tax benefit to be recognized is measured as the
largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The adoption of
FIN 48 did not materially impact the Company’s consolidated financial statements.
Minority Interests
In addition to the accretion and amortization on redeemable minority interests, the Company records minority interest
expense for the portion of the earnings of consolidated entities which are applicable to the minority interest partners.
3. DISCOVERY HOLDING COMPANY INVESTMENT IN
DISCOVERY COMMUNICATIONS HOLDING, LLC
Prior to the Newhouse Transaction described in Note 1, DCH was a stand-alone private company, which was owned
approximately 66 2 / 3 % by DHC and 33 1 / 3 % by Advance/Newhouse. DHC previously accounted for its investment in DCH
using the equity method. In connection with the Newhouse Transaction, DHC and Advance/Newhouse combined their
respective ownership interests in DCH to create Discovery. Pursuant to ARB 51 and FTB 85-5, the 2008 consolidated financial
statements and notes present the Newhouse Transaction as a non-substantive merger consummated as of January 1, 2008.
Accordingly, the consolidated financial statements and notes for 2008 include the gross combined assets and liabilities,
revenues and expenses, and cash flows of both DHC and DCH. Additionally, the consolidated financial statements for 2008
have been adjusted to eliminate the presentation of DHC’s investment in DCH and the portion of DCH’s earnings recorded
by DHC using the equity method during the period January 1, 2008 through September 17, 2008. The following information
has been disclosed as it is relevant for understanding DHC’s historical accounting for its investment in DCH prior to the
Newhouse Transaction.
200 8 AN NU AL RE PO RT
71
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Through May 14, 2007, DCH was owned by DHC (50% ownership interest), Advance/Newhouse (25% ownership interest), and
Cox Communications Holdings, Inc. (“Cox”) (25% ownership interest). On May 14, 2007, DCH was reorganized. Immediately
following the reorganization, DHC, Advance/Newhouse, and Cox each held the same ownership interests in DCH.
On May 14, 2007, subsequent to the reorganization of DCH, Cox exchanged its 25% ownership interest in DCH for all of
the capital stock of a DCH subsidiary that held Travel Channel and travelchannel.com (collectively, the “Travel Business”)
and approximately $1.3 billion in cash (the “Cox Transaction”). DCH retired the membership interest previously owned by
Cox. Accordingly, the ownership interests in DCH held by DHC and Advance/Newhouse were increased to 66 2 / 3 % and
33 1 / 3 %, respectively. Although it held a majority ownership interest, subsequent to the Cox Transaction DHC continued
to account for its investment in DCH using the equity method because of certain governance rights held by Advance/
Newhouse that restricted DHC’s ability to control DCH.
The Cox Transaction resulted in no additional investments in DCH. However, the Cox Transaction resulted in a new basis of
accounting that created a combined basis differential of $929 million between the carrying values of DHC’s and Advance/
Newhouse’s investments in DCH and their share of the underlying net assets of DCH. The following table presents a summary
of the allocation of the basis differential.
Account
Content rights
Customer relationships
Trademarks
Goodwill
Total
Useful Life
Allocation
(Years)
(Amounts in millions)
$
$
$
$
$
32
491
155
251
929
14
8 - 29
Indefinite
Indefinite
The September 30, 2008 consolidated financial statements disclosed a combined basis differential of $799 million between
the carrying values of DHC’s and Advance/Newhouse’s investments in DCH and their share of the underlying net assets of
DCH. The adjustment results from the revision of the original fair value assessment used to allocate the basis differential
between goodwill and other intangible assets.
In connection with the Newhouse Transaction, Discovery has recorded the total basis differential of $929 million to the
respective asset accounts in the Consolidated Balance Sheets. The portions of the total basis differential allocated to content
rights and customer relationships are amortized using the straight-line method over their estimated useful lives. Amortization
expense for the basis differential attributable to content rights and customer relationships, including minority interests,
totaled $2 million and $24 million, respectively, during the year ended December 31, 2008.
From January 1, 2006 through May 14, 2007, DHC recorded its 50% share of the earnings of DCH. From May 15, 2007 through
September 17, 2008, DHC originally recorded its 66 2 / 3 % share of DCH’s earnings. As described in Note 1, the financial
results of both DHC and DCH are presented on a combined basis in Discovery’s financial statements as of January 1, 2008.
Accordingly, the consolidated financial statements for 2008 have been adjusted to eliminate the presentation of DHC’s
investment in DCH and the portion of DHC’s earnings recorded by DHC using the equity method during the period January
1, 2008 through September 17, 2008. However, the accompanying historical consolidated financial statements and notes
for 2007 and 2006 include only the gross assets and liabilities, revenues and expenses, and cash flows of DHC and continue
to present DCH’s results of operations as an equity method investment. Advance/Newhouse’s interest in DCH’s earnings
for the period January 1, 2008 to September 17, 2008 has been recorded as a component of Minority interests, net of tax in
Consolidated Statements of Operations.
DHC’s carrying value for its investment in DCH was $3.3 billion at December 31, 2007.
72
200 8 AN NU AL RE PO RT
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The following tables present a summary of financial information for DCH as of and for the two years ended December 31, 2007.
Cash and cash equivalents
Other current assets
Property and equipment, net
Goodwill
Intangible assets, net
Noncurrent content rights, net
Other noncurrent assets
Total assets
Total current liabilities
Long-term debt
Other noncurrent liabilities
Redeemable interests in subsidiaries
Members’ equity
Total liabilities and members’ equity
As of December 31, 2007
(Amounts in millions)
$
$
$
$
45
1,032
397
4,870
182
1,048
386
7,960
850
4,109
244
49
2,708
7,960
Years Ended December 31,
2007
2006
(Amounts in millions)
Revenues
$
Cost of revenues, excluding depreciation and amortization listed below(a)
Selling, general and administrative(a)
Depreciation and amortization
Asset impairments
Exit and restructuring charges
Gain on business disposition
Operating income
Minority interests
Interest expense, net
Other (expense) income, net
Provision for income taxes
Income from continuing operations
Loss from discontinued operations, net of tax
Net income
DHC’s share of DCH’s net income
$
$
3,127
( 1,167 )
( 1,296 )
( 131 )
( 26 )
( 20 )
135
622
( 8 )
( 249 )
( 1 )
( 77 )
287
( 65 )
222
142
$
$
$
2,883
( 1,023 )
( 1,153 )
( 122 )
—
—
—
585
( 3 )
( 194 )
31
( 190 )
229
( 22 )
207
103
(a)
Reflects reclassifications of previously presented information of marketing costs from Cost of revenues to Selling, general
and administrative of $6 million and $10 million during the years ended December 31, 2007 and 2006, respectively.
Separate consolidated financial statements for DCH as of and for the two years ended December 31, 2007 are included in a
separate schedule in Part IV of this Annual Report on Form 10-K, in accordance with SEC Regulation S-X Rule 3-09, Separate
Financial Statements of Subsidiaries not Consolidated and 50 Percent or Less Owned Persons.
200 8 AN NU AL RE PO RT
73
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
4. CONSOLIDATION OF VARIABLE INTEREST ENTITIES
Discovery holds investments in multiple ventures, most of which were determined to be variable interest entities. Pursuant
to FIN 46R, it was determined that Discovery is the primary beneficiary of the ventures determined to be variable interest
entities and is required to consolidate them accordingly. The following table provides a list of variable interest entities
consolidated by Discovery as of December 31, 2008.
Ventures with the British Broadcasting Corporation:
JV Programs LLC (“JVP”)
Joint Venture Network LLC (“JVN”)
Animal Planet Europe
Animal Planet Latin America
People & Arts Latin America
Animal Planet Asia
Animal Planet Japan
Other ventures:
Oprah Winfrey Network
Percentage of
Ownership
50%
50%
50%
50%
50%
50%
33%
50%
During the year ended December 31, 2008, $11 million of net income generated by the ventures was allocated to other
venture partners, which was recorded as a component of Minority interests, net of tax in the Consolidated Statements of
Operations.
Ventures with the British Broadcasting Corporation
The Company and the British Broadcasting Corporation (“BBC”) formed several cable and satellite television network ventures,
other than JVN, to produce and acquire factual-based content. The JVN venture was formed to provide debt funding to the
other ventures. In addition to its own funding requirements, Discovery has assumed the BBC’s funding requirements, giving
the Company preferential cash distribution for these joint ventures. As the BBC does not have risk of loss, no cumulative
operating losses generated by the ventures are allocated to the BBC’s minority interests.
Pursuant to the venture agreements, the BBC has the right to require the Company to purchase the BBC’s interests in the
People & Arts Latin America venture and the Animal Planet ventures if certain conditions are not met. Additional information
regarding the BBC’s put right is disclosed in Note 13.
Oprah Winfrey Network
On June 19, 2008, Discovery entered into a 50-50 joint venture with Oprah Winfrey and Harpo, Inc. (“Harpo”) to rebrand
Discovery Health Channel as OWN: The Oprah Winfrey Network (“OWN Network”). It is expected that Discovery Health will
be rebranded as the OWN Network in late 2009 or early 2010. Pursuant to the arrangement, Discovery will contribute its
interest in the Discovery Health Channel and certain DiscoveryHealth.com content and Harpo will contribute the Oprah.
com website (which will serve as the platform for the venture website) and certain Oprah.com content. Discovery and Harpo
are required make these contributions on the launch date unless it is mutually agreed that certain contributions will be
made prior to the launch date for the benefit of the venture. As of December 31, 2008, the Company and Harpo have not
made any contributions to the OWN Network venture. During the year ended December 31, 2008, the Company incurred $7
million in transaction costs related to the formation of the OWN Network. Such costs are not credited to Discovery’s funding
commitment disclosed below.
74
200 8 AN NU AL RE PO RT
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Pursuant to the venture agreement, Discovery is committed to fund up to $100 million of the venture’s operations through
September 2011. To the extent funding the joint venture in excess of $100 million is necessary, the Company may provide
additional funds through a member loan or require the venture to seek third party financing. During the year ended December
31, 2008, the Company funded $6 million of the OWN Network’s operating costs. As Harpo has not yet contributed any assets
to the venture, the Company is recording 100% of the losses.
Pursuant to the venture agreement, Harpo has the right to require the Company to purchase its interest in the OWN Network
venture if certain conditions are not met. Additional information regarding Harpo’s put right is disclosed in Note 13.
5. DISPOSITIONS
Business Dispositions
Ascent Media Corporation Spin-off
On September 17, 2008, as part of the Newhouse Transaction, DHC completed the spin-off to its shareholders of AMC, a
subsidiary holding the cash and businesses of DHC, except for certain businesses that provide sound, music, mixing, sound
effects and other related services. The AMC spin-off did not involve the payment of any consideration by the holders of DHC
common stock and was structured as a tax free transaction under Sections 368(a) and 355 of the Internal Revenue Code
of 1986, as amended. There was no gain or loss related to the spin-off. Subsequent to the AMC spin-off, the companies no
longer have any ownership interests in each other and operate independently. As there is no continuing involvement in the
operations of AMC, the assets and liabilities and results of operations of AMC are presented as discontinued operations in the
Consolidated Balance Sheets and Consolidated Statements of Operations for all periods presented in accordance with FASB
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“FAS 144”). Cash flows from AMC have not
been segregated as discontinued operations in the Consolidated Statements of Cash Flows.
Ascent Media Systems & Technology Services, LLC
On September 8, 2008, DHC sold its ownership interests in AMSTS for approximately $7 million in cash. It was determined
that AMSTS was a non-core asset, and the sale of AMSTS was consistent with DHC’s strategy to divest non-core assets.
DHC recognized a pre-tax gain of approximately $3 million in connection with the sale of AMSTS, which is recorded as a
component of Income (loss) from Discontinued Operations, net of tax. As there is no continuing involvement in the operations
of AMSTS, the assets and liabilities and results of operations of AMSTS are presented as discontinued operations in the
Consolidated Balance Sheets and Consolidated Statements of Operations for all periods presented in accordance with FAS
144. Cash flows from AMSTS have not been segregated as discontinued operations in the Consolidated Statements of Cash
Flows. AMSTS was part of the AMC business.
Ascent Media CANS, LLC Disposition
On September 4, 2008, DHC sold its ownership interests in Ascent Media CANS, LLC (DBA AccentHealth) for approximately
$119 million in cash. It was determined that AccentHealth was a non-core asset, and the sale of AccentHealth was consistent
with DHC’s strategy to divest non-core assets. DHC recognized a pre-tax gain of approximately $64 million in connection
with the sale of AccentHealth, which is recorded as a component of Net Income from Discontinued Operations . As there is no
continuing involvement in the operations of AccentHealth, the assets and liabilities and results of operations of AccentHealth
are presented as discontinued operations in the Consolidated Balance Sheets and Consolidated Statements of Operations for
all periods presented in accordance with FAS 144. Cash flows from Accent Health have not been segregated as discontinued
operations in the Consolidated Statements of Cash Flows. Accent Health was a part of the AMC business.
200 8 AN NU AL RE PO RT
75
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Asset Dispositions
During 2008, DHC disposed of certain buildings and equipment for approximately $13 million in cash. DHC recognized a
pre-tax gain of approximately $9 million in connection with the asset disposals. The disposed assets were part of the AMC
business.
Summary of Discontinued Operations
The following tables present summary financial information related to the discontinued operations of the above business
dispositions as of December 31, 2007 and for the three years ended December 31, 2008. There were no assets or liabilities of
discontinued operations as of December 31, 2008.
Current assets
Property and equipment, net
Goodwill
Intangible assets, net
Other noncurrent assets
Total assets
Current liabilities
Noncurrent liabilities
Total liabilities
Net assets of discontinued operations
As of December 31, 2007
(Amounts in millions)
$
$
$
$
$
352
265
127
10
32
786
112
23
135
651
Revenues from discontinued operations
Loss from the operations of discontinued
operations before income taxes
Gains on dispositions (a)
Income (loss) from discontinued operations (b)
Provision for income taxes
Income (loss) from discontinued operations, net of tax
Income (loss) per share from discontinued operations:
Basic
Diluted
Weighted average number of shares outstanding:
Basic
Diluted
2008
Years Ended December 31,
2007
(Amounts in millions)
2006
$
484
$
631
$
608
$
$
$
( 6 )
67
61
( 18 )
43
0.13
0.13
321
322
( 151 )
—
( 151 )
( 3 )
( 154 )
( 0.55 )
( 0.55 )
281
281
$
$
$
( 95 )
—
( 95 )
( 3 )
( 98 )
( 0.35 )
( 0.35 )
280
280
$
$
$
(a) Gains on dispositions include $3 million from the sale of AMSTS and $64 million from the sale of Accent Health, which
were part of the AMC business.
(b) AMC’s operating results for the year ended December 31, 2008 include $9 million in gains from asset disposals. Operating
results for AMC for the year ended December 31, 2007 include goodwill impairment charges of $165 million. During the
year ended December 31, 2006, AMC recorded a goodwill impairment charge of $93 million and exit and restructuring
charges of $11 million. Information regarding the goodwill impairment charges is disclosed in Note 10.
76
200 8 AN NU AL RE PO RT
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
No interest expense was allocated to discontinued operations for the periods presented herein since there was no debt
specifically attributable to discontinued operations or that was required to be repaid following the spin-off.
6. FAIR VALUE MEASUREMENTS
Effective January 1, 2008, the Company adopted FAS 157 for all financial instruments accounted for at fair value on a
recurring basis. In accordance with FAS 157, a fair value measurement is determined based on the assumptions that a market
participant would use in pricing an asset or liability. FAS 157 also established a three-tiered hierarchy that draws a distinction
between market participant assumptions based on: (i) observable inputs such as quoted prices in active markets (Level
1), (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2), and (iii)
unobservable inputs that require the Company to use present value and other valuation techniques in the determination of
fair value (Level 3). The following table presents information about assets and liabilities required to be carried at fair value on
a recurring basis as of December 31, 2008.
Fair Value Measurements as of December 31, 2008 Using:
Quoted Market
Prices in Active
Markets for
Identical Assets
(Level 1)
(Amounts in millions)
Significant
Other
Observable
Inputs
(Level 2)
Fair Value as of
December 31, 2008
Significant
Unobservable
Inputs
(Level 3)
Assets:
Available-for-sale securities (Note 7)
$
Trading securities (Note 7)
Liabilities:
Derivatives (Note 12)
Supplemental retirement plan (Note 16)
HSW International, Inc. liability (Note 7)
Redeemable interests in subsidiaries (Note 13)
$
15
36
( 112 )
( 36 )
( 7 )
( 49 )
$
( 153 )
$
15
36
—
—
—
—
51
$
$
—
—
( 112 )
( 36 )
( 7 )
—
$
( 155 )
$
—
—
—
—
—
( 49 )
( 49 )
For assets that are measured using quoted prices in active markets, the total fair value is the published market price per unit
multiplied by the number of units held without consideration of transaction costs. Generally, liabilities that are measured
using significant other observable inputs are primarily valued by reference to quoted prices of similar liabilities in active
markets, adjusted for any terms specific to that liability and nonperformance risk. Through September 30, 2008, the fair
value of the Company’s liability to sell and distribute the proceeds of its investment in HSW International, Inc. (HSWI) to
former shareholders of HSW was determined by using a discounted cash flow analysis. During the quarter-ended December
31, 2008, the Company began using a Black-Scholes option pricing model to value this liability. Information regarding the
Company’s investment in HSWI and the HSWI liability is disclosed in Note 7. The fair value of the redeemable interests
in subsidiaries was determined based on the Company’s best estimate of a negotiated value. Information regarding the
redeemable interests in subsidiaries is disclosed in Note 13.
The following table provides a reconciliation between the beginning and ending balances of liabilities classified as Level 3
measurements and identifies the related net income recognized during the year ended December 31, 2008 on such liabilities
that were included in the Consolidated Balance Sheet at December 31, 2008.
200 8 AN NU AL RE PO RT
77
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Balance as of January 1, 2008
Total gains:
Included in net income
Included in other comprehensive income
Purchases, issuances, settlements, net
Transfers (in) and/or out of Level 3
Balance as of December 31, 2008
$
HSWi
Liability
Redeemable
Interests
in Subsidiaries
(Amounts in millions)
$
( 54 )
$
( 49 )
47
—
—
7
—
$
—
—
—
—
( 49 )
During the year ended December 31, 2008, total gains of $47 million related to the reduction in the fair value of the HSWI
liability were recorded in Other, net in the Consolidated Statements of Operations.
7. INVESTMENTS
The following table presents a summary of the Company’s investments.
Investment in Discovery Communications Holding, LLC (Note 3)
Other equity-method investments
Trading securities
Available-for-sale securities
As of December 31,
2008
2007
(In millions)
$
$
—
35
36
15
86
$
3,272
—
—
—
$
3,272
Other Equity-Method Investments
As of December 31, 2008, investments accounted for using the equity method primarily included Discovery Japan (50%
owned), a cable and satellite television network joint venture, HSWI (43% owned), an online source with a perpetual royalty
free license to exploit HSW online content in certain foreign markets, and Discovery Canada (20% owned), a cable and
satellite television network joint venture. Such investments were recorded as a component of Other noncurrent assets in the
Consolidated Balance Sheets.
During the year ended December 31, 2008, the Company recognized pretax impairment charges of $57 million related to
the investment in HSWI, which is recorded as a component of Equity in loss of unconsolidated affiliates in the Consolidated
Statements of Operations. The impairment charge for HSWI reflects an other-than-temporary decline in the fair value of
HSWI’s common stock following lower than expected operating performance. As of December 31, 2008, the stock price for
HSWI was below its liquidation value, and the Company utilized the HSWI liquidation value per share to determine the equity
investment asset value.
The carrying value of the Company’s equity-method investments approximates its portion of the underlying net assets of
the investees.
78
200 8 AN NU AL RE PO RT
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Based on the quoted market price as of December 31, 2008, the fair value of the Company’s investments in publicly traded
companies accounted for using the equity method approximates the Company’s carrying value.
Trading Securities
Trading securities primarily include investments in mutual funds owned as part of the Company’s supplemental retirement
plan and are used to offset changes in certain liabilities associated with the Company’s deferred compensation plan. Such
investments are recorded at fair value as a component of Other current assets in the Consolidated Balance Sheets. Discovery
records gains or losses from the change in fair value of trading securities, offset by gains or losses from changes in the
value of the supplemental retirement plan liability, as a component of Selling, general and administrative expenses in the
Consolidated Statements of Operations. The gains or losses from changes in the fair value of the trading securities and the
supplemental retirement liability were not material for all periods presented.
Available-for-Sale Securities
As of December 31, 2008, the Company held available-for-sale securities with a fair value of $15 million, including a cost
basis of $9 million and gross unrealized gains of $6 million. Available-for-sale securities primarily include investments in
common stock of publicly traded companies. Such securities are recorded as a component of Other noncurrent assets in the
Consolidated Balance Sheets. The Company records changes in the fair value of available-for-sale securities as a component
of Other comprehensive income, until realized. Changes in the fair value of available-for-sale securities were not material for all
periods presented.
During the years ended December 31, 2008 and 2007, AMC, which is reflected as discontinued operations, sold securities for
$24 million and $28 million in cash, respectively. There were no material gains or losses associated with these sales.
8. CONTENT RIGHTS
The following table presents a summary of the components of content rights of the Company’s continuing operations as of
December 31, 2008 (no such amounts were recorded by DHC as of December 31, 2007).
Produced content rights:
Completed
In-production
Co-produced content rights:
Completed
In-production
Licensed content rights:
Acquired
Prepaid
Content rights, at cost
Accumulated amortization
Content rights, net
Less: current portion
Non current portion
As of December 31, 2008
(Amounts in millions)
$
$
1,420
270
462
63
218
17
2,450
( 1,214 )
1,236
73
1,163
200 8 AN NU AL RE PO RT
79
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Amortization expense related to content rights was $658 million during the year ended December 31, 2008, which was
recorded as a component of Cost of revenues in the Consolidated Statements of Operations. Amortization expense included
impairment charges of $35 million for completed content and other charges of $4 million related to the write-off of content
that was in production at the Company’s U.S. Networks and International Networks segments. The impairment charges and
write-offs were the result of management evaluating the Company’s programming portfolio assets and concluding that
certain programming was no longer aligned with the Company’s strategy and would no longer be aired.
9. PROPERTY AND EQUIPMENT
The following table presents a summary of the components of property and equipment of the Company’s continuing
operations as of December 31, 2008 and 2007.
As of December 31,
2008
2007
(Amounts in millions)
Land
Buildings
Furniture and equipment
Capitalized software
Leasehold improvements
Accumulated depreciation
$
$
29
169
466
151
82
( 502 )
Total property and equipment, net
$
395
$
—
7
11
—
11
( 24 )
5
Depreciation expense related to property and equipment, including amortization of assets acquired under capital lease,
of continuing operations was $109 million, $2 million, and $3 million during the years ended December 31, 2008, 2007, and
2006, respectively. Amortization expense related to property and equipment acquired under capital lease of continuing
operations was $12 million during the year ended December 31, 2008. There was no amortization expense related to
property and equipment acquired under a capital lease of continuing operations during the years ended December 31, 2007
and 2006. Accumulated amortization for property and equipment acquired under a capital lease of continuing operation
was $30 million as of December 31, 2008 with no amounts as of December 31, 2007.
Depreciation expense related to property and equipment, including amortization of assets acquired under capital lease, of
discontinued operations was $46 million, $64 million, and $64 million during the years ended December 31, 2008, 2007, and
2006, respectively.
The net book value of capitalized software costs totaled $46 million as of December 31, 2008. Software costs of $12 million
were capitalized during the year ended December 31, 2008. Amortization of capitalized software costs totaled $21 million
during the year ended December 31, 2008. There were no material amounts of capitalized software costs capitalized during
the years ended December 31, 2007 and 2006. Additionally, there were no write-offs for capitalized software costs during
the year ended December 31, 2008.
80
200 8 AN NU AL RE PO RT
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
10. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The following table presents a summary of changes in the carrying value of the Company’s goodwill of continuing operations,
by segment, for the years ended December 31, 2008 and 2007.
U. S.
Networks
International
Networks
Commerce,
Education,
and Other
DHC
Discovery
Investment
Total
Balance as of December 31, 2007 (a)
$
—
$
—
$
Newhouse Transaction (b)
5,382
1,221
Excess investor basis goodwill (c)
HSW purchase accounting adjustment (d)
Translation and other
187
(13 )
13
64
—
(12 )
Balance as of December 31, 2008
$
5,569
$
1,273
$
11
38
—
—
—
49
$
1,771
$
1,782
( 1,771 )
—
—
—
—
$
4,870
251
( 13 )
1
6,891
$
(a) There were no material changes in the carrying value of the Company’s goodwill of continuing operations during the
year ended December 31, 2007. The December 31, 2007 goodwill balance excludes $127 million of goodwill related to
AMC, which was spun-off during the year ended December 31, 2008. The December 31, 2007 AMC goodwill balance is
recorded in Assets of discontinued operations in the Consolidated Balance Sheets. Information regarding the AMC spin-off
is disclosed in Note 1.
(b) The change in goodwill carrying value represents $4.9 billion in goodwill previously recorded by DCH as of December
31, 2007 and the allocation of goodwill previously allocated to DHC’s equity investment in DCH to Discovery segments.
Discovery recorded the allocation as of January 1, 2008 in connection with the Newhouse Transaction. Information
regarding the Newhouse Transaction is disclosed in Note 1.
(c) The $251 million change in goodwill carrying value represents the basis differential between the carrying value of DHC’s
and Advance/Newhouse’s investments in DCH and their share of DCH’s underlying net assets allocated to goodwill as a
result of the Cox Transaction. Information regarding the investor basis differential is disclosed in Note 3.
(d) During the year ended December 31, 2008, the Company adjusted the deferred tax liabilities associated with DCH’s
acquisition of HSW in December 2007 following an assessment of acquired net operating loss carry-forwards that would
be realizable, which resulted in a $13 million reduction of goodwill.
Intangible Assets
The following table presents a detailed list of the gross carrying value of the Company’s intangible assets and related
accumulated amortization of continuing operations, by major category, as of December 31, 2008 and 2007.
2008 ANN UAL REP ORT
81
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Weighted
Average
Amortization
Period (Years)
December 31, 2008
December 31, 2007 (a)
Gross
Accumulated
Amortization
Net
Gross
Accumulated
Amortization
Net
(Amounts in millions)
Intangible assets
subject to amortization:
Trademarks
Customer lists (b)
Other
Total
Intangible assets not
subject to amortization:
Trademarks (c)
Total
6
24
5
$
55
611
36
702
$
( 23 ) $
32
$ —
$ —
$ —
( 107 )
( 24 )
( 154 )
504
—
—
12
548
4
4
( 4 )
( 4 )
—
—
—
168
—
168
$
870
$
( 154 ) $
716
$
1
5
—
$
( 4 )
1
1
$
(a) The December 31, 2007 intangible asset and accumulated amortization balances exclude amounts related to AMC,
which was spun-off during the year ended December 31, 2008. Specifically, intangible assets exclude $15 million in other
intangibles for AMC, with a net balance of $5 million, and $5 million in non-amortizing trade names as of December 31,
2007. AMC intangible asset and accumulated amortization balances are recorded in Assets of discontinued operations in
the Consolidated Balance Sheets. Information regarding the AMC spin-off is disclosed in Note 1.
(b) The balance includes the gross carrying value of $491 million related to customer relationships allocated to the basis
differential between the carrying value of DHC’s and Advance/Newhouse’s investments in DCH and their share of DCH’s
underlying net assets resulting from the Cox Transaction. Information regarding the investor basis differential is disclosed
in Note 3.
(c) The balance includes the gross carrying value of $155 million related to non-amortizing trademarks allocated from the
basis differential between the carrying value of DHC’s and Advance/Newhouse’s investments in DCH and their share of
DCH’s underlying net assets resulting from the Cox Transaction. Information regarding the investor basis differential is
disclosed in Note 3.
Amortization expense related to intangible assets of continuing operations was $77 million during the year ended
December 31, 2008. There was no amortization expense related to intangible assets of continuing operations in 2007 and
2006. Amortization expense related to intangible assets of discontinued operations was $1 million in each of the years
ended December 31, 2007 and 2006.
The following table presents the Company’s estimate of its aggregate annual amortization expense for intangible assets subject
to amortization for each of the succeeding five years based on the amount of intangible assets as of December 31, 2008.
2009
2010
2011
2012
2013
Thereafter
(Amounts in millions)
Amortization expense
$ 56
$ 53
$ 33
$ 30
$ 26
$ 350
The amount and timing of the estimated expenses in the above table may vary due to future acquisitions, dispositions, or
impairments.
82
20 08 AN NU AL RE PO RT
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Impairments
Goodwill and non-amortizing trademarks are tested annually for impairment during the fourth quarter, or earlier upon the
occurrence of certain events or substantive changes in circumstances. Information regarding the Company’s methodology
for determining whether goodwill and non-amortizing trademarks or long-lived assets are impaired is disclosed in Note
2. Based on its annual impairment test, the Company concluded there was no impairment of goodwill or non-amortizing
trademarks during the year ended December 31, 2008.
During the year ended December 31, 2008, an impairment review in accordance with FAS 144 was required for HSW,
following lower than expected operating performance and changes in long term expectations. The Company determined
that intangible assets of HSW, an asset group within the U.S. Networks segment, were impaired. Accordingly, a pretax charge
to amortizing trademarks and customer relationships of $25 million and $5 million, respectively, was recorded during the
year ended December 31, 2008. To determine the fair value of intangible assets, the Company used discounted cash flow
analyses, including a discount factor of 18% and a long-term growth rate of 11%.
During the year ended December 31, 2007, the Company recorded a goodwill impairment charge of $165 million related to
its Network Services Group segment, which was disposed of as part of the AMC spin-off. The Company used a discounted
cash flows analysis to measure the fair value of the Network Services Group segment and the implied value of goodwill
related to this reporting unit. The goodwill impairment was the result of lower estimates of future net operating cash flows
due to a continued decline in operating cash flow margins as a percent of revenue, resulting from competitive conditions in
the entertainment and media services industries and increasingly complex customer requirements.
During the year ended December 31, 2006, the Company recorded a goodwill impairment charge of $93 million related to its
Creative Services Group segment, which was disposed of as part of the AMC spin-off. The Company principally used market
multiples of revenues and operating cash flows of similar companies to measure the fair value of the Creative Services Group
segment and the implied value of goodwill related to this reporting unit. The goodwill impairment was the result of the
Company realigning its operations into two global divisions and declining revenues and operating cash flows related to this
reporting unit. The Company restructured its operations to better align the organization with the Company’s strategic goals
and to respond to changes within the industry driven by technology and customer requirements.
These impairment charges were noncash in nature and did not affect the Company’s liquidity or result in non-compliance of
any debt covenants. The impairment charges incurred during the years ended December 31, 2007 and 2006 are recorded in
Income (loss) from discontinued operations, net of tax in the Consolidated Statements of Operations.
11. DEBT
$1.0 billion Term Loan A due quarterly to October 2010
$1.6 billion Revolving Loan, due October 2010
$1.5 billion Term Loan B due quarterly September 2007 to May 2014
7.45% Senior Notes, semi-annual interest, due September 2009
8.37% Senior Notes, semi-annual interest, due March 2011
8.13% Senior Notes, semi-annual interest, due September 2012
Floating Rate Senior Notes (3.3% at December 31, 2008), semi-annual interest, due December 2012
6.01% Senior Notes, semi-annual interest, due December 2015
Obligations under capital leases
Other notes payable
Subtotal
Current portion
Total long-term debt
200 8 AN NU AL RE PO RT
December 31, 2008
(Amounts in millions)
$
$
938
315
1,478
55
220
235
90
390
67
1
3,789
( 458 )
3,331
83
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In May 2007, DCH, a wholly owned subsidiary of the Company, entered into a $1.5 billion seven year term loan credit
agreement. Borrowings under this agreement bear interest at London Interbank Offered Rate (“LIBOR”) plus an applicable
margin of 2.0% or the higher of (a) the Federal Funds Rate plus 1 / 2 of 1% or (b) “prime rate” set by Bank of America plus
an applicable margin of 1.0% at the Company’s discretion. The company capitalized $5 million of deferred financing costs as
a result of this transaction. As of December 31, 2008, there was approximately $1.5 billion outstanding under the term loan
agreement with an interest rate of 3.46%, excluding interest rate hedges. During 2008, the weighted average interest rate
under this credit agreement was 5.6%.
In October 2008, the Company’s United Kingdom subsidiary, Discovery Communications Europe Limited (“DCEL”), a wholly
owned subsidiary of the Company, executed a £10 million uncommitted facility on similar terms to the prior facility in order
to supplement working capital requirements. The facility has a one year term or may be cancelled earlier by either DCEL or
the financial institution and is guaranteed by Discovery Communications, LLC (a wholly-owned subsidiary of the Company).
As of December 31, 2008 the Company had no outstanding debt under this facility.
In December 2008, DCEL also cancelled its €260 million three year multicurrency revolving credit agreement which was due
to mature in April 2009.
In March 2008, DCL borrowed additional funds under its U.S. Credit Facility (Revolving Loan and Term Loan A) to redeem
the maturing $180 million Senior Notes. As of December 31, 2008, the Company had $1.3 billion outstanding ($938 million
Term Loan A and $315 million Revolving Loan) under the facility with a weighted average interest rate of 2.67%. The amount
available under the revolving facility was $1.2 billion, net of amounts committed for standby letters of credit of $3 million
issued. During 2008, the average interest rate under the U.S. Credit Facility was 4.09%. The Company’s debt agreements have
certain restrictions on the payment of dividends from subsidiaries.
Discovery’s $1.5 billion term loan is secured by the assets of DCH, excluding assets held by DCH’s subsidiaries. The remaining
Term Loan, Revolving Loans and Senior Notes are unsecured.
As of December 31, 2008, the Company’s scheduled maturities of long-term debt, excluding obligations under capital leases
and other notes payable were as follows:
2009
2010
2012
2011
(Amounts in millions)
2013
Thereafter
Long-term debt
$ 445
$ 893
$ 235
$ 340
$ 15
$ 1,793
The Company uses derivative instruments to modify its exposure to interest rate fluctuations on its debt. The Term Loans,
Revolving Facility, and Senior Notes contain covenants that require the Company to meet certain financial ratios and place
restrictions on the payment of dividends, sale of assets, borrowing level, mergers, and purchases of capital stock, assets, and
investments. The Company is in compliance with all debt covenants as of December 31, 2008.
Future minimum payments under capital leases are as follows: $18 million in 2009, $17 million in 2010, $17 million in 2011, $13
million in 2012, $7 million in 2013, and $10 million thereafter. Total interest to be paid in relation to these future minimum
payments is approximately $15 million.
84
200 8 AN NU AL RE PO RT
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
12. DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments to modify its exposure to market risks from changes in interest rates and
foreign exchange rates. The Company does not hold or enter into financial instruments for speculative trading purposes.
The Company’s interest expense is exposed to movements in short-term interest rates. Derivative instruments, including
both fixed to variable and variable to fixed interest rate instruments, are used to modify this exposure. These instruments
include swaps and swaptions to modify interest rate exposure. The variable to fixed interest rate instruments are based
on the three-month LIBOR rate and have a notional principal amount of $2.3 billion and have a weighted average interest
rate of 4.68% at December 31, 2008. The fixed to variable interest rate agreements have a notional principal amount of $50
million and have a weighted average interest rate of 7.90% at December 31, 2008. At December 31, 2008, the Company held
an unexercised interest rate swap put with a notional amount of $25 million at a fixed rate of 5.44%. On December 19, 2008,
the Company entered into a $560 million forward starting swap with a fixed rate of 2.44%, based on the three-month LIBOR
rate, starting December 31, 2009 and maturing on March 31, 2014. As a result of unrealized mark-to-market adjustments $58
million in losses on these instruments were recorded in 2008.
The fair value of these interest rate derivative instruments, which aggregate ($107) million at December 31, 2008, is recorded
as a component of long-term liabilities and other current liabilities in the consolidated balance sheets. Changes in the fair
value of these derivative instruments are recorded as a component of operating cash flows.
Of the total notional amount of $2.9 billion in interest rate derivatives, a notional amount of $2 billion of these derivative
instruments are effective cash flow hedges. The value of these hedges at December 31, 2008 was ($71) million with changes
in the mark-to-market value recorded as a component of other comprehensive income (loss), net of taxes. Should any
portion of these instruments become ineffective due to a restructuring in the Company’s debt, the monthly changes in fair
value would be reported as a component of other income on the Statement of Operations. The Company does not expect
material hedge ineffectiveness in the next twelve months.
The foreign exchange instruments used are spot, forward, and option contracts. Additionally, the Company enters into non-
designated forward contracts to hedge non-dollar denominated cash flows and foreign currency balances. At December 31,
2008, the notional amount of foreign exchange derivative contracts was $75 million. During the year ended December 31,
2008, the Company recorded unrealized mark-to-market adjustments of $4 million in losses related to these instruments as
a component of Accumulated other comprehensive loss . There were no unrealized mark-to-market adjustments in 2007 and
2006. The fair value of these derivative instruments is recorded as a component of long-term liabilities and Other current
liabilities in the Consolidated Balance Sheets. These derivative instruments did not receive hedge accounting treatment.
Fair Value of Financial Instruments
The fair values of cash and cash equivalents, receivables, and accounts payable approximate their carrying values. Marketable
equity securities are carried at fair value and fluctuations in fair value are recorded through other comprehensive income
(loss). Losses on investments that are other than temporary declines in value are recorded in the statement of operations.
The carrying amount of the Company’s borrowings was $3.8 billion and the fair value was $3.4 billion at December 31, 2008
which was estimated based on current market rates and credit pricing for similar debt type and maturity.
The carrying amount of all derivative instruments represents their fair value. The net fair value of the Company’s short and
long-term derivative instruments is ($114) million at December 31, 2008; 27%, 49%, 24%, and less than 1% of these derivative
instrument contracts will expire in 2009, 2010, 2011, and 2012 and thereafter, respectively.
The fair value of derivative contracts was estimated by management including information regarding interest rate and
volatility market data from brokers. As of December 31, 2008, an estimated 100 basis point parallel shift in the interest rate
yield curve would change the fair value of the Company’s portfolio by approximately $49 million.
200 8 AN NU AL RE PO RT
85
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Credit Concentrations
The Company continually monitors its positions with, and the credit quality of, the financial institutions that are counterparties
to its financial instruments and does not anticipate nonperformance by the counterparties. In addition, the Company limits
the amount of investment credit exposure with any one institution.
The Company’s trade receivables and investments do not represent a significant concentration of credit risk at December 31,
2008 due to the wide variety of customers and markets in which the Company operates and their dispersion across many
geographic areas.
13. REDEEMABLE INTERESTS IN SUBSIDIARIES
People+Arts Latin America and Animal Planet Channel Group
As disclosed in Note 4, Discovery and the BBC have formed several cable and satellite television network joint ventures to
develop and distribute programming content. Under certain terms outlined in the contract, the BBC has the right every
three years, commencing December 31, 2002, to put to the Company its interests in: (i) People+Arts Latin America, and/or (ii)
certain Animal Planet channels outside of the U.S. (the “Channel Groups”), in each case for a value determined by a specified
formula. In January 2009, the BBC requested that a determination be made whether such conditions have occurred with
respect to both Channel Groups as of December 31, 2008. The contractual redemption value is based upon an estimate of
the proceeds from a hypothetical sale of the Channel Groups and a distribution of the proceeds to the venture partners
based on various rights and preferences. As the Company has funded all operations from inception of the ventures through
December 31, 2008, the Company believes that it has accumulated rights and preferences in excess of the fair market value
of the Channel Groups. However, due to the complexities of the redemption formula, the Company has accrued the minority
interest to an estimated negotiated value of $49 million as of December 31, 2008. Changes in contractual interpretations and
assumptions used to estimate the redemption value could materially impact current estimates. The Company recorded no
accretion to the redemption value during the period ended December 31, 2008.
OWN Network
As disclosed in Note 4, Discovery and Harpo have formed a venture to rebrand Discovery Health Channel as OWN: The
Oprah Winfrey Network. Pursuant to the venture agreement, Discovery provided a put right to Harpo which is exercisable
on four separate put exercise dates within 12.5 years of the venture’s formation date. The put arrangement provides Harpo
with the right to require Discovery to purchase its 50% ownership interest at fair market value up to a maximum put amount.
The maximum put amount ranges between $100 million on the first put exercise date up to $400 million on the fourth
put exercise date. As of December 31, 2008, no amounts have been recorded for this put right as Harpo has not made any
contributions to the venture and the venture has not yet begun its operations.
14. STOCKHOLDERS’ EQUITY
Common Stock
In connection with the Newhouse Transaction, the existing shareholders of DHC received shares of Discovery’s common
stock. DHC Series A common stockholders and DHC Series B common stockholders received 0.50 shares of the same series
of Discovery common stock and 0.50 shares of Discovery Series C common stock. As a result of this transaction, Discovery
issued 134 million, 7 million, and 141 million shares of its Series A common stock, Series B common stock, and Series C
common stock, respectively.
86
200 8 AN NU AL RE PO RT
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
All three series of Discovery common stock (Series A, B and C) have the same rights and preferences, except: (i) the Series B
common stock is convertible into the Series A common stock, and (ii) the Series B common stock has 10 votes per share, the
Series A common stock has one vote per share, and the Series C common stock does not have any voting rights except as
required by Delaware law.
Subject to any preferential rights of any outstanding series of Discovery’s preferred stock created by Discovery’s board from
time to time, the holders of Discovery’s common stock are entitled to such dividends as may be declared from time to time
by Discovery’s board from available funds. Generally, when a dividend is paid to the holders of one series of common stock,
Discovery will also pay to the holders of the other series of common stock an equal per share dividend.
In the event of Discovery’s liquidation, dissolution, or winding up, after payment or provision for payment of Discovery’s
debts and liabilities and subject to the prior payment in full of any preferential amounts to which Discovery’s preferred stock
holders may be entitled including the liquidation preference granted to holders of Series A convertible preferred stock and
Series C convertible preferred stock, the holders of Series A common stock, Series B common stock, Series C common stock,
Series A convertible preferred stock and Series C convertible preferred stock will share equally, on a share for share basis (and
in case of holders of Series A convertible preferred stock and Series C convertible preferred stock, on an as converted into
common stock basis), in Discovery’s assets remaining for distribution to the holders of Discovery’s common stock.
Preferred Stock
In connection with the Newhouse Transaction, Advance/Newhouse received shares of Discovery’s Series A convertible
preferred stock and Series C convertible preferred stock. As a result of this transaction, Discovery issued 70 million of each of
its Series A convertible preferred stock and Series C convertible preferred stock.
Both series of Discovery preferred stock (Series A and C) are convertible at any time into Discovery common stock initially
representing 33 1 / 3 % of the outstanding shares of Discovery common stock and 26% of the aggregate voting power of
Discovery (other than with respect to the election of directors and select matters) based upon the number of shares of
common stock issued in connection with the Newhouse Transaction. The Series A convertible preferred stock is convertible
into a number of shares of Discovery Series A common stock equal to 50% of the aggregate number of shares of Discovery
Series A and Series B common stock issued in the Newhouse Transaction, and the Series C convertible preferred stock is
convertible into a number of shares of Discovery Series C common stock equal to 50% of the shares of Discovery Series C
common stock issued in the Newhouse Transaction, in each case subject to anti-dilution adjustments. Advance/Newhouse
is entitled to additional shares of the same series of convertible preferred stock if the stock options and stock appreciation
rights outstanding immediately after the Newhouse Transaction are exercised into Discovery common stock. In order to
satisfy this anti-dilution provision, the Company is required to place approximately 1.6 million shares of preferred stock into
an escrow account upon the closing of the Newhouse Transaction for the benefit of Advance/Newhouse. The preferred
shares will be released from escrow upon the exercise of the stock options or stock appreciation rights. The 1.6 million
preferred shares will be issued and placed into escrow to avoid dilution to Advance/Newhouse, if necessary, as a result
of certain stock options and stock appreciation rights converted to exercise into Discovery common stock as part of the
Newhouse Transaction. The Company will place the preferred shares in escrow in 2009. In the event that shares are released
from escrow to Advance/Newhouse, the distribution will be accounted for as a dividend measured using the fair value of the
underlying shares as of the Newhouse Transaction date.
The Discovery preferred stock has a right to vote with holders of common stock on an as-converted to common stock basis,
voting together as a single class on all matters submitted for vote to the common stockholders of Discovery, except for the
election of directors. The Discovery preferred stock has the right to elect three directors (preferred stock directors), and has
special voting rights on select matters for so long as Advance/Newhouse or its permitted transferee owns at least 80% of the
shares of Series A convertible preferred stock outstanding immediately following the closing of the Newhouse Transaction,
including fundamental changes in the business of Discovery, mergers and business combinations, certain acquisitions and
dispositions and future issuances of Discovery capital stock.
Subject to the prior preferences and other rights of any senior stock, whenever a cash dividend is paid to the holders of
Discovery common stock, Discovery will also pay to the holders of the Series A convertible preferred stock and Series C
convertible preferred stock an equal per share cash dividend on an as converted to common stock basis.
200 8 AN NU AL RE PO RT
87
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In the event of Discovery’s liquidation, dissolution and winding up, after payment or provision for payment of Discovery’s
debts and liabilities and subject to the prior payment with respect to any stock ranking senior to Series A convertible preferred
stock or Series C convertible preferred stock, the holders of Series A convertible preferred stock and Series C convertible
preferred stock will receive, before any payment or distribution is made to the holders of any common stock or other junior
stock, an amount (in cash or property) equal to $0.01 per share. Following payment of such amount and the payment in full
of all amounts owing to the holders of securities ranking senior to Discovery’s common stock, holders of Series A convertible
preferred stock and Series C convertible preferred stock will be entitled to share ratably, on an as-converted to common
stock basis, with the holders of Discovery’s common stock, as to any amounts remaining for distribution to such holders.
Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) included in the Consolidated Statements of Stockholders’ Equity reflects the
aggregate of foreign currency translation adjustments, unrealized holding gains and losses on available-for-sale securities
and derivatives.
The change in the components of Accumulated other comprehensive (loss) income, net of taxes, is summarized as follows:
Foreign
Currency
Translation
Adjustments
Unrealized Holding
Gains (Losses)
on Securities and
Derivative Instruments
Accumulated
Other
Comprehensive
(Loss ) Income
Balance as of December 31, 2005
$
Other comprehensive income
Balance as of December 31, 2006
Other comprehensive income
Balance as of December 31, 2007
Other comprehensive income
Ascent Media Corporation spin-off
Balance as of December 31, 2008
$
( 3 )
18
15
8
23
( 59 )
—
( 36 )
$
$
1
—
1
( 7 )
( 6 )
( 25 )
—
( 31 )
$
$
( 2 )
18
16
1
17
( 84 )
( 11 )
( 78 )
The components of Other comprehensive (loss) income are reflected in Discovery’s Consolidated Statements of Stockholders’
Equity. The following table summarizes the tax effects related to each component of Other comprehensive (loss) income.
88
200 8 AN NU AL RE PO RT
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Before-tax
Amount
Tax
(Expense)
Benefit
(Amounts in millions)
Net-of-tax
Amount
Year ended December 31, 2008:
Foreign currency translation adjustments
$
( 94 )
$
35
$
( 59 )
Unrealized holding losses on securities
and derivative instruments
Other comprehensive loss
Year ended December 31, 2007:
Foreign currency translation adjustments
Unrealized holding losses on securities
Other comprehensive income
Year ended December 31, 2006:
Foreign currency translation adjustments
Other comprehensive income
( 38 )
( 132 )
13
( 11 )
2
30
30
$
$
$
$
$
$
$
$
13
48
( 5 )
4
( 1 )
( 12 )
( 12 )
$
$
$
$
( 25 )
( 84 )
8
( 7 )
1
18
18
15. SHARE BASED AND OTHER LONG-TERM INCENTIVE COMPENSATION
The Company has various active equity plans under which it is authorized to grant equity awards to employees including
the Discovery Holding Company 2005 Incentive Plan and the Discovery Holding Company 2005 Non-Employee Director
Incentive Plan (collectively the “Incentive Plans”). On September 17, 2008, Discovery assumed the Discovery Holding
Company Transitional Stock Adjustment Plan and converted the awards under this plan, but the Company has no ability to
issue new awards under this plan. Share based grants under the Incentive Plans may consist of non-qualified stock options,
stock appreciation rights (“SAR”), restricted shares, stock units, cash awards, performance awards or any combination of the
foregoing. The Discovery Appreciation Plan (“DAP” or “LTIP”) is a long-term incentive plan under which qualifying employees
are granted cash-settled stock appreciation rights. All share-based compensation activity is presented on an as-converted
basis as if the Newhouse Transaction had occurred on January 1, 2008. The Company also has a long term incentive plan
associated with its acquisition of HSW for the benefit of the subsidiary’s employees (“HSW Plan”). The HSW plan is cash settled
and is determined based on the share price of HSWI and the achievement of certain performance criteria. No new grants
will be made out of the plan, which is expected to terminate in 2010. Compensation expense related to the HSW plan was
$4 million for the year ended December 31, 2008.
Incentive Plans
Options are granted with exercise prices equal to, or in excess of, the fair market value at the date of grant. Generally, the
stock options vest 25% per year over a four-year vesting period beginning one year after the grant date and expire seven
to ten years from the date of grant. Certain stock option awards provide for accelerated vesting upon an election to retire
pursuant to the Company’s incentive plans or after reaching a specified age and years of service.
Prior to September 17, 2008, certain directors were granted stock options to acquire DHC stock. As of September 18, 2008,
the stock options were converted pursuant to the merger agreement into options to acquire Discovery common stock. The
conversion was based on the volume weighted average price of DHC’s common stock for the last five trading days prior to
September 17, 2008 and Discovery’s common stock for the first ten trading days including and subsequent to September 17,
2008. The conversion of DHC stock options to stock options of the Company did not require the recognition of additional
compensation expense as the value of the respective awards remained unchanged. As of December 31, 2008, the directors
held approximately 2 million options to purchase the Company’s common stock.
89
200 8 AN NU AL RE PO RT
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
During 2008, the Company issued approximately 7.7 million stock options under the Incentive Plans. These options vest 25%
per year, beginning one year after the grant date, and expire after seven to ten years. Included in this issuance were 500,000
options issued to a non-employee of the Company, which did not include a substantive performance requirement. This
resulted in the recognition of $3 million of cost for the year ended December 31, 2008.
The fair value of each stock option issued under the Incentive Plans is determined using the Black-Scholes option-pricing
model, using factors set forth in the table below. Risk-free interest rate is based on the U.S. Treasury yield curve in effect
at the time of grant. The expected term, which represents the period of time that options granted are expected to be
outstanding, is estimated based on the simplified method as allowed by Staff Accounting Bulletin No. 107, Share-Based
Payment . The simplified method allows companies who issue “plain-vanilla” options to estimate the option term without
analyzing historical data. The volatility assumption considers both historical volatility and implied volatility which may be
impacted by the Company’s performance as well as changes in economic and market conditions. Dividend yield is assumed
to be 0%, because the Company does not expect to pay dividends in the foreseeable future. The assumptions presented
in the table below represent the weighted-average value of the applicable assumptions used during the year to value the
Company’s stock options at their grant date:
Risk-free interest rate
Expected term (years)
Expected volatility
Dividend yield
2008
3.15 %
6.05
39.32 %
0.00 %
Years Ended December 31,
2007
4.57 %
5.50
25.50 %
0.00 %
2006
4.96 %
5.50
20.00 %
0.00 %
A summary of option activity as of and for the year ended December 31, 2008, is presented below:
Options
(In millions)
Weighted
Average Price
Weighted Average
Contractual Life
Aggregate
Intrinsic Value
(In millions)
Outstanding at December 31, 2007
Options granted
Options exercised
Options forfeited
Outstanding at December 31, 2008
Exercisable at December 31, 2008
3.2
7.7
—
—
10.9
3.2
$
$
$
13.87
14.72
—
—
14.47
13.87
7.24
3.02
$
$
3
1
As of December 31, 2008, the number, weighted-average exercise price, aggregate intrinsic value and weighted-average
remaining contractual term of stock options vested and expected to vest approximate amounts for options outstanding.
At December 31, 2008, there was $41 million of unrecognized compensation cost, net of expected forfeitures, related to
unvested stock options, which the Company expects to recognize over a weighted average period of 4 years.
The weighted-average fair value of a stock option granted during the year ended December 31, 2008 was $6.11. An immaterial
number of stock options were exercised during the year ended December 31, 2008.
90
200 8 AN NU AL RE PO RT
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Stock Appreciation Rights
SARs are granted with exercise prices equal to the fair market value at the date of grant. SARs entitle the recipient to receive a
payment in cash equal to the excess value of the stock over the base price specified in the grant. During 2008, the Company
issued 5.5 million SARs under the Incentive Plans. These SAR grants consist of two separate vesting tranches with the first
tranche vesting 100% on March 15, 2009 and the second tranche vesting 100% on March 15, 2010. The first tranche expires
one year after vesting. All SARs in the second tranche are automatically exercised on March 15, 2010. Upon vesting, grantees
may exercise the SARs included in the first tranche at any time prior to March 15, 2010.
Cash-settled SARs are required to be classified as liabilities in accordance with FASB Statement No. 123(R), Share-Based
Payment (FAS 123(R). The fair value of each SAR is recalculated at the end of each reporting period and the liability and
expense adjusted based on the new fair value. The assumptions used to determine the fair value of each SAR at December
31, 2008, were as follows:
Risk-free interest rate
Expected term (years)
Expected volatility
Dividend yield
Year Ended
December 31, 2008
0.37 %
1.20
39.89 %
0.00 %
A summary of SAR activity as of and for the year ended December 31, 2008, is presented below:
Outstanding at December 31, 2007
SARs granted
SARs exercised
SARs forfeited
SARs
(In millions)
—
5.5
—
—
Weighted
Average Price
Weighted Average
Contractual Life
Aggregate
Intrinsic Value
(In millions)
$
14.40
Outstanding at December 31, 2008
5.5
$
14.40
1.20
$
1
As of December 31, 2008, no SARs issued under the Incentive Plans are exercisable. At December 31, 2008, there was $8
million of unrecognized compensation cost, net of estimated forfeitures, related to unvested stock appreciation rights, which
the Company expects to recognize over a weighted average period of 1.2 years.
Long-Term Incentive Plan
These awards, which are cash-settled, consist of a number of units which represent an equivalent number of shares of Series
A common stock of the Company and have a base price which is determined based on the Company’s stock price. Each
award vests as to 25% of the units on each of the four anniversaries of the date of grant. Upon voluntary termination of
employment, the Company distributes 100% of vested unit benefits if employees agree to certain provisions.
200 8 AN NU AL RE PO RT
91
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Prior to September 17, 2008, the LTIP units were accounted for in accordance with FASB Statement No. 133, Accounting for
Derivative Financial Instruments (“FAS 133”), and EITF Issue No. 02-8, Accounting for Options Granted to Employees in Unrestricted,
Publicly Traded Shares of an Unrelated Entity (“EITF 02-8”), as the value of the units were indexed to the value of DHC Series A
common stock. The Company accounted for the units similar to a derivative, by determining their fair value each reporting
period and attributed compensation expense for the awards on a straight-line basis, based on the grant-date fair value
and scheduled vesting of the share units. As of September 18, 2008, the LTIP units were converted at the effective time
of the Newhouse Transaction to reflect the changes in DHC’s stock and are now indexed to the share price of Discovery’s
Series A common stock and subject to the provisions of FAS 123(R), which requires the Company to estimate the number
of shares that are not expected to vest due employee turnover. Upon conversion, there were approximately 31 million LTIP
units outstanding. Application of the estimated forfeiture rate, which was not required by FAS 133, resulted in a decrease
in the accrued compensation liability of $1 million. The Company does not intend to make additional cash-settled stock
appreciation awards, except as may be required by contract or to employees in countries where stock option awards are not
permitted.
In accordance with FAS 123(R), the fair value of each LTIP unit award is recalculated at the end of each reporting period and
the liability and expense adjusted based on the new fair value. The assumptions used to determine the fair value of each LTIP
unit at December 31, 2008, were as follows:
Risk-free interest rate
Expected term (years)
Expected volatility
Dividend yield
0.56 %
1.38
37.89 %
0.00 %
A summary of LTIP unit activity as of and for the year ended December 31, 2008, is presented below:
LTIP Units
(In millions)
Weighted
Average Price
Weighted Average
Contractual Life
Aggregate
Intrinsic Value
(In millions)
Outstanding at December 31, 2007
Granted
Exercised
Forfeited
Outstanding at December 31, 2008
31.0
5.5
( 14.6 )
( 1.9 )
20.0
$
$
16.27
20.63
14.10
16.86
18.95
1.38
$
7
Restricted Stock Units
Pursuant to the Incentive Plans, Discovery may grant restricted stock units (“RSUs”). RSUs entitle the grantee to receive a
specific number of shares of the Company’s common stock at a future vesting date. RSUs may be subject to forfeiture during
a specified period or periods prior to vesting. The Company issued an immaterial number of RSUs in the fourth quarter.
RSUs generally vest over a one to four year period in equal annual installments. The compensation arising from a restricted
stock grant is based upon the market price at the grant date, which is deferred and amortized to expense over the vesting
period.
92
200 8 AN NU AL RE PO RT
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Share-Based Compensation Expense
Compensation expense (benefit) and the related tax expense (benefit) recognized for share-based compensation plans for
the years ended December 31, 2008, 2007 and 2006 is as follows:
Stock options
Stock appreciation rights
HSW Plan
Long-term incentive plan benefit
Total impact on operating income
Tax expense recognized
2008
Years Ended December 31,
2007
(Amounts in millions)
2006
$
$
$
4
4
4
( 78 )
( 66 )
24
$
$
$
1
—
—
—
1
—
$
$
$
2
—
—
—
2
—
Compensation expense associated with all share based awards is recorded as a component of selling, general and
administrative expenses. The Company classifies as a current liability the intrinsic value of long-term incentive compensation
units and stock appreciation rights that are vested or will become vested within one year. The Company made cash payments
of $49 million during the year ended December 31, 2008 related to the LTIP.
16. RETIREMENT SAVINGS PLANS
Defined Contribution Plans
Discovery has certain domestic and international defined contribution savings plans. Under the plans, employees may
elect to contribute a portion of their eligible compensation, subject to certain statutory limitations. The Company pays a
discretionary matching contribution up to a certain percentage of the participant’s eligible compensation depending on
the terms of the plan. The Company paid matching contributions of $12 million, $3 million, and $3 million during the years
ended December 31, 2008, 2007, and 2006, which is classified as a component of Selling, general and administrative in the
Consolidated Statements of Operations.
Supplemental Retirement Plan
The Company administers the Supplemental Retirement Plan (the “SRP”) through which members of the Company’s
management team may elect to defer for contribution to the SRP up to 50% of their compensation. A Rabbi Trust has been
established to hold and provide a measure of security for the investments that finance benefit payments. Distributions from
the SRP are made upon retirement, termination, death, or total disability.
SRP obligations due to participants totalled $36 million at December 31, 2008 which is included in Accrued liabilities in the
accompanying Consolidated Balance Sheet. SRP obligations decreased by $1 million during the year ended December 31,
2008, consisting of participant compensation deferrals of $9 million and Company contributions of $1 million, offset by $7
million of distributions and $4 million of investment losses.
The Company maintains investment assets in a Rabbi Trust to offset the obligations under the SRP. The value of the
investments in the Rabbi Trust was $36 million at December 31, 2008. Investment losses were $4 million for the year ended
December 31, 2008.
200 8 AN NU AL RE PO RT
93
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
17. EXIT AND RESTRUCTURING COSTS
The following table presents a summary of the Company’s exit and restructuring costs expensed, by segment, for the year
ended December 31, 2008 (no material exit and restructuring costs were recorded by DHC in 2007 and 2006).
U.S. Networks
International Networks
Commerce, Education, and Other
Corporate
Total exit and restructuring costs
Years Ended
December 31, 2008
(Amounts in millions)
$
$
21
2
6
2
31
The Company’s exit and restructuring costs primarily relate to employee relocation and termination costs at the U.S. Networks
segment. Additionally, the Commerce, Education, and Other segment incurred costs relate to the closure of its distribution
center and its stores’ headquarter offices, and the transition from merchandising services to licensing of consumer products.
The purpose of these adjustments was to better align Discovery’s organizational structure with the Company’s new strategic
priorities and to respond to continuing changes within the media industry.
The following table presents a summary of the Company’s exit and restructuring costs that were expensed, by major category,
for the year ended December 31, 2008 (no material exit and restructuring costs were recorded by DHC in 2007 and 2006).
Contract termination costs
Employee relocations/terminations
Asset impairment
Total exit and restructuring costs
Years Ended
December 31, 2008
(Amounts in millions)
$
$
7
22
2
31
The following table presents a summary of changes in the Company’s liability with respect to exit and restructuring costs
from January 1, 2008 to December 31, 2008.
Contract
Termination Costs
Employee
Relocations/
Terminations
(Amounts in millions)
Total
Liability as of January 1, 2008
Net accruals
Cash paid
Remaining liability as of December 31, 2008
$
$
—
7
( 1 )
6
$
$
$
11
22
( 15 )
18
$
11
29
( 16 )
24
As of December 31, 2008, total exit and restructuring related accruals of $18 million were classified as a component of Accrued
liabilities. The Company does not expect to incur material costs with respect to these particular activities in future periods.
94
200 8 AN NU AL RE PO RT
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
18. INCOME TAXES
The Company’s income tax expense is as follows:
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
Total tax expense
Components of pretax income are as follows:
Domestic
Foreign
2008
Years Ended December 31,
2007
(Amounts in millions)
2006
84
15
73
172
158
24
( 2 )
180
352
$
$
$
—
—
—
—
50
6
—
56
56
$
$
$
—
—
—
—
36
5
—
41
41
2008
Years Ended December 31,
2007
(Amounts in millions)
2006
582
172
754
$
$
142
—
142
$
$
93
—
93
$
$
$
$
$
Income tax expense differs from the amounts computed by applying the U.S. federal income tax rate of 35% as a result of
the following:
Computed expected federal tax expense
State and local income taxes, net of federal income taxes
Change in valuation allowance affecting tax expense
Effect of foreign operations
DHC tax on equity method investment in DCH
Other, net
Income tax expense
2008
35.0 %
2.0 %
( 4.0 )%
3.0 %
12.0 %
( 1.0) %
47.0 %
Years Ended December 31,
2007
(Amounts in millions)
35.0 %
5.0 %
( 1.0 )%
—
—
—
39.0 %
2006
35.0 %
5.0 %
4.0 %
—
—
—
44.0 %
200 8 AN NU AL RE PO RT
95
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Components of deferred tax assets and liabilities as of December 31 are as follows:
2008
2007
(Amounts in millions)
Current assets:
Accounts receivable
Tax attribute carryforward
Accrued liabilities and other
Noncurrent assets:
Tax attribute carryforward
Intangible assets
Foreign currency translations
Unrealized loss on derivatives
Long lived assets
Accrued liabilities and other
Total deferred tax assets
Valuation allowance
Net deferred tax assets
Current liabilities:
Other
Noncurrent liabilities:
Intangible assets
Content rights
Unrealized gain on investments
Other
Total deferred tax liabilities
Deferred tax liabilities — discontinued operations
$
$
12
11
33
56
65
—
23
26
9
56
179
235
( 32 )
203
( 2 )
( 138 )
( 230 )
( 20 )
( 10 )
( 398 )
( 400 )
—
Net deferred tax liabilities
$
( 197 )
$
—
—
—
—
12
21
—
—
—
1
34
34
( 34 )
—
( 2 )
—
—
( 1,227 )
—
( 1,227 )
( 1,229 )
( 2 )
( 1,231 )
The Company’s deferred tax assets and liabilities are reported in the accompanying consolidated balance sheets as follows:
Current deferred tax assets, net of current liabilities
Noncurrent deferred tax liabilities, net of noncurrent deferred tax assets
Net deferred tax liabilities
$
$
49
( 246 )
( 197 )
$
$
( 2 )
( 1,227 )
( 1,229 )
December 31,
2008
2007
(Amounts in millions)
Discovery’s 2008 effective tax rate differed from the federal income tax rate of 35% primarily due to DHC’s recognition of $91
million of deferred tax expense related to its investment in DCH during the period prior to the completion of the Newhouse
Transaction, which is partially offset by the release of an $18 million valuation allowance on deferred tax assets of CSS and the
release of a $10 million valuation allowance on deferred tax assets related to net operating loss carryforwards of AMC.
96
200 8 AN NU AL RE PO RT
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In accordance with ARB 51, DHC and DCH are combined in Discovery’s financial statements as if the Newhouse Transaction
had occurred January 1, 2008. This presentation impacts Discovery’s effective tax rate for the year. Prior to the Newhouse
Transaction, DHC’s book basis in DCH was increased by its share of DCH’s net income. However, DHC’s tax basis in DCH
remained the same. This book vs. tax difference required the recognition of a deferred tax expense of $91 million related to
DHC’s investment in DCH (in addition to the tax expense already recognized by DCH prior to the Newhouse Transaction).
As a result of the Newhouse Transaction, the $1.3 billion deferred tax liability relating to the book vs. tax difference in DHC’s
basis in its investment in DCH was reversed to additional paid-in capital.
Pursuant to the Tax Sharing Agreement relating to the Newhouse Transaction, the Company and AMC have each assumed
certain tax liabilities and have indemnified one another for certain tax payments. As of December 31, 2008, the Company
received $17 million from AMC and recorded a $17 million payable under the Tax Sharing Agreement. The Company will be
required to repay AMC for such payments if and when it realizes the future benefit of the certain tax assets that arose prior
to the Newhouse Transaction.
In 2008, the Company concluded that it would be more beneficial to claim foreign tax credits than to deduct foreign income
taxes on its 2008 federal income tax return based on a combination of current results and revised expectations about future
earnings. The net effect of the conversion from taking foreign tax deductions to claiming foreign tax credits was a $24 million
benefit in 2008.
FIN 48
The Company has adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes. A reconciliation of the 2008
beginning and ending amount of unrecognized tax benefits (without related interest amounts) is as follows:
DHC balance at December 31, 2007
DCH balance at January 1, 2008
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Settlements
Reductions for foreign currency exchange rates
Balance at December 31, 2008
Reconciliation of
Unrecognized Tax Benefits
(Amounts in millions)
$
$
—
89
1
10
( 8 )
( 11 )
( 7 )
74
As of January 1, 2008, the Company’s unrecognized tax benefit (excluding related interest expense) was $89 million. The
balance decreased by $15 million (excluding related interest expense) during the twelve months ended December 31, 2008
to $74 million ($52 million inclusive of interest but net of related deferred tax assets and other offsets). Reductions for tax
positions of prior years in the amount of $8 million were attributable to the Company’s determination that certain revenues
were not subject to non-U.S. income tax. Additions for tax positions of prior years in the amount of $5 million were related
to an adjustment in the computation of the Company’s potential liability for foreign tax returns.
Discovery and its subsidiaries file U.S. federal, state, and foreign income tax returns. With few exceptions, the Company is no
longer subject to audit by the Internal Revenue Service (“IRS”), state tax authorities, or non-U.S. tax authorities for years prior
to 2004. The IRS is not currently examining Discovery. Some of the Company’s joint ventures are currently under examination
for the 2006 tax year. The Company does not expect any significant adjustments.
200 8 AN NU AL RE PO RT
97
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
It is reasonably possible that the total amount of unrecognized tax benefits related to tax positions could decrease by as
much as $33 million within the next twelve months as a result of settlement of audit issues and/or payment of uncertain tax
liabilities.
Included in the balance at December 31, 2008 are $9 million of tax positions for which the ultimate deductibility is highly
certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax
accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the
annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.
The Company’s policy is to classify tax interest and penalties related to unrecognized tax benefits as tax expense. The
Company had accrued approximately $8 million of total interest payable related to uncertain tax positions as of December
31, 2008. The Company had accrued no significant interest payable related to uncertain tax positions as of December 31,
2007. The $8 million of interest payable relates primarily to 2008 activity and the impact of the Newhouse Transaction.
19. NET INCOME PER SHARE
Basic net income per share is computed by dividing net income by the weighted average number of common and preferred
shares outstanding during the period. Preferred shares are included in the weighted average number of shares outstanding
when calculating both basic and diluted income per share as the common shares and preferred shares participate equally
in any dividends paid.
Average number of common and preferred shares
outstanding — basic
Dilutive effect of equity awards
Average number of common and preferred shares
outstanding — diluted
2008
Years Ended December 31,
2007
(Amounts in millions)
2006
321
1
322
281
—
281
280
—
280
Weighted-average common shares for 2008 represent the outstanding shares of Discovery’s common stock as though the
Newhouse Transaction was consummated on January 1, 2008. The weighted average number of common and preferred
shares for the year ended December 31, 2008 includes Series A, B, and C Common Shares, as well as Series A and C Convertible
Preferred Shares. Weighted-average common shares for 2007 represent the outstanding shares of DHC’s common stock
(Note 1).
Diluted income per common share adjusts basic income per common share for the dilutive effects of stock options, and
other potentially dilutive financial instruments, as if they had been converted at the beginning of the periods presented.
For the year ended December 31, 2008, options to purchase 9 million shares were excluded from the calculation of diluted
net income per share because they do not have a dilutive effect. In addition, the net income per share calculation excludes
any contingently issuable shares to be placed in escrow for which specific conditions have not yet been met. Due to the
relative insignificance of the dilutive securities in 2007 and 2006, they had no impact on the net income per share amounts
as reported.
98
200 8 AN NU AL RE PO RT
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
20. VALUATION AND QUALIFYING ACCOUNTS
The following table presents a summary of the Company’s valuation and qualifying accounts during the years ended
December 31, 2008, 2007, and 2006.
Beginning
of Year
Newhouse
End
Transaction(a) Additions Write-offs Utilization Other(b) of Year
(Amounts in millions)
2008:
Allowance for
doubtful accounts
Deferred tax
valuation allowance
2007:
Allowance for
doubtful accounts
Deferred tax
valuation allowance
2006:
Allowance for
doubtful accounts
Deferred tax valuation
allowance
—
34
—
35
1
35
18
10
—
—
—
—
6
22
1
3
—
3
( 4 )
( 3 )
( 1 )
—
( 1 )
—
—
( 31 )
—
( 4 )
—
( 3 )
( 4 )
—
—
—
—
—
16
32
—
34
—
35
(a) Amounts represent DCH balances as of December 31, 20007 recorded by Discovery as of January 1, 2008 in connection
with the Newhouse Transaction disclosed in Note 1.
(b) Amounts primarily include foreign currency translation adjustments.
21. SUPPLEMENTAL DISCLOSURES
Cash Flows
The following tables present a summary of cash payments made and received.
Cash payments made for interest expense
Cash payments received for interest income
Cash interest payments, net
Cash payments made for income taxes(a)
Cash payments received for income tax refunds
Cash tax payments, net
2008
Years Ended December 31,
2007
(Amounts in millions)
2006
$
$
$
$
( 258 )
2
( 256 )
( 194 )
17
( 177 )
$
$
$
$
—
11
11
—
—
—
$
$
$
$
—
10
10
( 2 )
—
( 2 )
(a) Cash payments made for income taxes exclude $17 million in payments made by discontinued operations during the
year ended December 31, 2008. There were no material income taxes paid by discontinued operations during the years
ended December 31, 2007 and 2006.
99
200 8 AN NU AL RE PO RT
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Consolidated Statements of Cash Flows exclude approximately $63 million and $6 million of equipment purchases
that were acquired under capital lease arrangements for the years ended December 31, 2008 and 2007, with no amounts
excluded during the year ended December 31, 2006.
The AMC assets and liabilities related to the spin-off, except cash, are also excluded as this was a non-cash transaction.
Accrued Liabilities
The following table presents a detailed list of accrued liabilities.
Accrued liabilities
Accrued payroll and related benefits
Accrued interest
Accrued other
Total accrued liabilities
As of December 31,
2008
2007
(Amounts in millions)
$
$
176
19
155
350
$
$
2
—
3
5
Interest Expense, Net
The following table presents a summary of interest income earned and interest expenses.
Interest income
Interest expense
Total interest expense, net
2008
Years Ended December 31,
2007
(Amounts in millions)
2006
$
$
2
258
256
$
$
—
—
—
$
$
—
—
—
22. RELATED PARTY TRANSACTIONS
The Company identifies related parties as investors in their consolidated subsidiaries, the Company’s joint venture partners
and equity investments, and the Company’s executive management and directors and their respective affiliates. Transactions
with related parties typically result from distribution of networks, mainly with Discovery Japan, Inc. and Discovery Channel
Canada, production of content primarily with BBC affiliates, and services involving satellite uplink, systems integration,
origination and post-production. Related party transactions in 2007 and 2006 also reflect general and administrative
expenses charged by Liberty Media to DHC pursuant to a services agreement.
100
200 8 AN NU AL RE PO RT
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The following is a summary of balances related to transactions with related parties during the years ended December 31,
2008, 2007 and 2006, as well as balances at December 31, 2008 and 2007.
2008
Years Ended December 31,
2007
(Amounts in millions)
2006
Revenues (A)
Operating costs and expenses (B)
$
$
44
56
$
$
—
2
$
$
—
2
(A) Revenues for the years ended December 31, 2008, 2007 and 2006 exclude $37 million, $41 million and $34 million,
respectively, for related party transactions that are recorded as a component of Income (loss) from discontinued operations,
net of tax in the Consolidated Statements of Operations.
(B) Operating costs and expenses for the year ended December 31, 2008 include disbursements to an entity that is no
longer a related party following the Newhouse Transaction.
Accounts receivable (C)
$
12
$
—
Years Ended December 31,
2008
2007
(Amounts in millions)
(C)
Accounts receivable at December 31, 2008 and 2007 exclude $0 million and $6 million, respectively, for amounts due
from related parties that are recorded as a component of assets in discontinued operations.
23. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries lease offices, satellite transponders, and certain equipment under capital and operating
lease arrangements. The Company has several investments in joint ventures. From time-to-time the Company agrees to
fund the operations of the ventures on an as needed basis. The following table summarizes the Company’s material firm
commitments as of December 31, 2008:
Future Minimum Payments
Leases
Content
Other
(Amounts in millions)
Total
Year Ending December 31,
2009
2010
2011
2012
2013
Thereafter
Total
$
$
66
60
45
39
34
115
359
$
301
$
59
40
41
41
—
$
482
$
94
74
41
25
16
137
387
$
461
193
126
105
91
252
$
1,228
200 8 AN NU AL RE PO RT
101
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company has long-term noncancelable lease commitments for office space and equipment, studio facilities,
transponders, vehicles and operating equipment. Expenses recorded in connection with operating leases, including rent
expense of $121 million, $8 million, and $9 million for the years ended December 31, 2008, 2007, and 2006, respectively.
Content commitments of the Company not recorded on the balance sheet include obligations relating to programming
development, programming production and programming acquisitions and talent contracts. Other commitments include
obligations to purchase goods and services, employment contracts, sponsorship agreements and transmission services. A
majority of such fees are payable over several years, as part of the normal course of business.
In December 2007, Discovery acquired HSW and a 49.5% interest in HSWi. Pursuant to the terms of the agreement, Discovery
has the option to: (i) distribute the HSWi stock to the former HSW shareholders, or (ii) sell the HSWi stock and distribute
substantially all of the proceeds to former HSW shareholders. Discovery recognized a liability for its estimated obligation with
respect to the HSWi shares to the former HSW shareholders.
In addition to the amounts disclosed above, the Company has committed to fund up to $100 million of the OWN venture’s
operations through September 2011 as discussed in Note 4.
Advance/Newhouse is entitled to additional shares of the same series of convertible preferred stock if the DHC stock options
and stock appreciation rights converted in connection with the Newhouse Transaction are exercised for Discovery common
stock. In order to satisfy this anti-dilution provision, the Company is required to place approximately 1.6 million shares of
preferred stock into an escrow account. The preferred stock will be released from escrow upon the exercise of the stock
options or stock appreciation rights. The 1.6 million preferred shares will be issued and placed into escrow to avoid dilution
to Advance/Newhouse as a result of certain stock options and stock appreciation rights converted to exercise into Discovery
common stock as part of the Newhouse Transaction. The Company will place the preferred shares in escrow in 2009. In
the event that shares are released from escrow to Advance/Newhouse, the distribution will be accounted for as a dividend
measured using the fair value of the underlying shares as of the Newhouse Transaction date.
In the normal course of business, the Company has pending claims and legal proceedings. It is the opinion of the Company’s
management, based on information available at this time, that none of the other current claims and proceedings will have a
material effect on the Company’s consolidated financial statements.
24. REPORTABLE SEGMENTS
The Company has three reportable segments: U.S. Networks, consisting principally of domestic cable and satellite television
network programming, web brands, and other digital services; International Networks, consisting principally of international
cable and satellite television network programming; and Commerce, Education, and Other, consisting principally of
e-commerce, catalog, and domestic licensing businesses.
Prior to the Newhouse Transaction and related AMC spin-off (Note 1), DHC had three reportable segments: Creative Services
Group, which provided various technical and creative services necessary to complete principal photography into final
products such as films, trailers, shows, and other media; Network Services Group, which provided the facilities and services
necessary to assemble and distribute programming content for cable and broadcast network; and DCH, as a significant
equity method investee. In connection with the Newhouse Transaction, DHC spun-off its interest in AMC, which included
the Creative Services Group segment, except for CSS, and the Network Services Group segment. The discontinued operations
of the Creative Services Group and Network Services Group segments have been excluded from the reportable segment
information presented below.
The CSS business, which remains with Discovery subsequent to the Newhouse Transaction and AMC spin-off, is included in
the Commerce, Education, and Other segment. In accordance with ARB 51, the financial results of both DHC and DCH have
been combined in Discovery’s financial statements as if the Newhouse Transaction occurred January 1, 2008. Accordingly,
the Commerce, Education, and Other segment information for 2008 includes amounts for CSS since January 1, 2008.
102
200 8 AN NU AL RE PO RT
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The accounting policies of the reportable segments are the same as those described in the summary of significant accounting
policies, except that certain inter-segment transactions that are eliminated at the consolidated level are not eliminated at the
segment level as they are treated similar to third-party sales transactions in determining segment performance. Inter-segment
transactions primarily include the purchase of advertising and content between segments. Inter-segment transactions are
not material to the periods presented.
The Company evaluates the operating performance of segments based on financial measures such as revenues and adjusted
operating income before depreciation and amortization (“Adjusted OIBDA”). Adjusted OIBDA is defined as revenues less: (i)
cost of revenues and selling, general and administrative expense excluding mark-to-market share-based compensation
expense, (ii) restructuring and impairment charges, (iii) amortization of deferred launch incentives, and (iv) gains on asset
dispositions. Management uses Adjusted OIBDA to assess the operational strength and performance of its operating
segments. Management uses this measure to view operating results, perform analytical comparisons, identify strategies
to improve performance and allocate resources to each operating segment. The Company believes Adjusted OIBDA is an
important measure to investors because it allows them to analyze operating performance of each business using the same
metric management uses and also provides investors a measure to analyze operating performance of each business division
against historical data. The Company excludes these charges from the calculation of Adjusted OIBDA due to their significant
volatility. The Company also excludes the amortization of deferred launch incentive payments because these payments are
infrequent and the amortization does not represent cash payments in the current reporting period. Since Adjusted OIBDA
is a non-GAAP measure, it should be considered in addition to, but not a substitute for, operating income, net income, cash
flow provided by operating activities and other measures of financial performance reported in accordance with GAAP.
The Company’s reportable segments are determined based on: (i) financial information reviewed by the chief operating
decision maker (“CODM”), the Chief Executive Officer, (ii) internal management and related reporting structure, and (iii) the
basis upon which the CODM makes resource allocation decisions.
The following tables present summarized financial information for each of the Company’s reportable segments.
Revenues of continuing operations, by Segment
Years Ended December 31,
2008
2007
(Amounts in millions)
2006
U.S. Networks
International Networks
Commerce, Education, and Other
Corporate and intersegment eliminations
$
$
2,062
1,158
196
27
Total revenues
$
3,443
$
—
—
76
—
76
$
$
—
—
80
—
80
There were no material intersegment transactions during the years ended December 31, 2008, 2007, and 2006.
Adjusted OIBDA of continuing operations, by Segment
Years Ended December 31,
2008
2007
(Amounts in millions)
2006
U.S. Networks
International Networks
Commerce, Education, and Other
Corporate and intersegment eliminations
Total adjusted OIBDA
$
200 8 AN NU AL RE PO RT
$
1,111
$
387
13
( 201 )
1,310
$
—
—
3
( 8 )
( 5 )
$
$
—
—
3
( 9 )
( 6 )
103
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Reconciliation of Total Adjusted OIBDA to Total
Operating Income (Loss) of continuing operations
2008
Years Ended December 31,
2007
(Amounts in millions)
2006
Total adjusted OIBDA
$
1,310
$
( 5 )
$
( 6 )
Income (expense) arising from long-term
incentive plan awards (marked-to-market)
Depreciation and amortization
Amortization of deferred launch incentives
Impairment of intangible assets
Gains on asset dispositions
Exit and restructuring charges
69
( 186 )
( 75 )
( 30 )
—
( 31 )
( 1 )
( 3 )
—
—
1
—
—
( 3 )
—
—
—
( 2 )
Total operating income (loss)
$
1,057
$
( 8 )
$
( 11 )
Total Assets of continuing operations, by Segment
U.S. Networks
International Networks
Commerce, Education, and Other
Corporate
Total assets
As of December 31,
2008
2007
(Amounts in millions)
$
$
1,840
1,043
115
7,486
$
10,484
$
—
—
29
5,051
5,080
Capital Expenditures of continuing operations, by Segment
U.S. Networks
International Networks
Commerce, Education, and Other
Corporate
Total capital expenditures
2008
Years Ended December 31,
2007
(Amounts in millions)
2006
$
$
19
21
3
26
69
$
$
—
—
2
—
$
2
$
—
—
2
—
2
104
200 8 AN NU AL RE PO RT
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Revenues of continuing operations, by Country
U.S.
Non-U.S.
Total revenues
2008
Years Ended December 31,
2007
(Amounts in millions)
2006
$
2,295
1,148
$
3,443
$
$
$
76
—
76
$
80
—
80
Revenues are attributed to country based on the location of the Company’s viewers.
Property and Equipment of Continuing Operations, by Country
U.S.
Non-U.S.
Total property and equipment
As of December 31,
2008
2007
(Amounts in millions)
$
$
327
68
395
$
$
5
—
5
Property and equipment allocated to country based on the Company’s country of domocile and location of asset.
25. SUBSEQUENT EVENTS
On January 29, 2009, the Company entered into interest rate swap transactions which will become effective on June 30, 2010,
with a notional amount of $200 million. Under the swap transactions, the Company will make quarterly payments at a rate of
approximately 2.935% per annum to the swap counterparties in exchange for a payment approximately equal to the variable
rate payable under the Company’s Credit, Pledge and Security Agreement dated as of May 14, 2007. The swap transactions
terminate on March 31, 2014, which is the interest payment date before the maturity date of the Company’s Credit, Pledge
and Security Agreement, which is May 14, 2014. The terms of the swap transactions are governed by customary ISDA interest
rate swap agreements.
By entering into these swap transactions, the Company has effectively fixed the interest rate on $200 million of the borrowings
under its Credit, Pledge and Security Agreement at approximately 4.935% per annum, starting as of June 30, 2010.
26. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables present the Company’s selected quarterly financial data, by quarter, for the years ended December 31,
2008 and 2007. The selected quarterly financial data set forth below reflect the Newhouse Transaction, including the AMC
spin-off, as though it was consummated on January 1, 2008. Accordingly, the selected quarterly financial data for the year
ended December 31, 2008 include the gross combined results of operations of both DHC and DCH. The presentation for the
first two quarters of 2008 will be recast when filed with the corresponding 2009 Form 10-Q. The selected quarterly financial
data for the year ended December 31, 2007 reflect only the results of operations of DHC, as predecessor to Discovery. Prior
to the Newhouse Transaction, DHC accounted for its ownership interest in DCH using the equity method. Because the
Newhouse Transaction is presented as of January 1, 2008, the selected quarterly financial data for the year ended December
31, 2007 include DCH’s results of operations as an equity-method investment. Information regarding the Newhouse
Transaction and DHC’s investment in DCH prior to Newhouse Transaction is disclosed in Note 1 and Note 2, respectively.
105
200 8 AN NU AL RE PO RT
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The selected quarterly financial data also reflect certain reclassifications of each company’s financial information to conform
to the combined Company’s financial statement presentation, as follows:
•
•
•
•
The portion of DCH’s earnings recorded by DHC using the equity method during the period January 1, 2008 through
September 17, 2008 have been eliminated.
The results of operations of AMC have been reclassified and presented as Income (loss) from discontinued operations, net
of tax for the quarters ended March 31, 2007 through September 30, 2008.
Advance/Newhouse’s interest in DCH’s earnings for the period January 1, 2008 through September 17, 2008 has been
recorded as Minority interests, net of tax .
All DHC share and per share data have been adjusted for all periods presented to reflect the exchange into Discovery
shares.
March 31
Quarter Ended
June 30 September 30
(Amounts in millions, except per share amounts)
December 31
2008(a)(b)(c)(d)(e)(f)(g)(h)
Revenues
Cost of revenues, excluding
depreciation and amortization
Operating income
Equity in loss of unconsolidated affiliates
Minority interests, net of tax
Income from continuing operations
Income from discontinued operations, net of tax
Net income
Income per share from continuing operations,
basic and diluted
Income per share from discontinued
operations, basic and diluted
Net income per share, basic and diluted
Weighted average number of shares
outstanding, basic and diluted
$
809
$
885
$
845
$
904
242
269
—
( 40 )
34
—
34
0.12
0.00
0.12
282
254
208
( 1 )
( 39 )
41
2
43
0.15
0.01
0.16
282
$
$
$
$
$
$
$
$
$
$
$
$
262
296
( 1 )
( 40 )
94
40
134
0.31
0.13
0.44
302
266
284
( 59 )
( 9 )
105
1
106
0.25
0.00
0.25
422
$
$
$
$
2007(a)
Revenues
Cost of revenues, excluding depreciation
and amortization
Operating loss
Equity in earnings (loss) of
Discovery Communications Holding, LLC
Income (loss) from continuing operations
(Loss) income from discontinued operations,
net of tax
Net income (loss)
Income (loss) per share from continuing
operations, basic and diluted
Income (loss) per share from discontinued
operations, basic and diluted
Net income (loss) per share, basic and diluted
Weighted average number of shares
outstanding, basic and diluted
$
22
$
22
$
15
$
17
17
—
22
20
—
20
0.07
0.00
0.07
16
—
126
76
( 1 )
75
0.27
( 0.01 )
0.26
$
$
$
$
$
$
$
$
280
280
$
$
$
$
11
( 4 )
10
2
5
7
0.01
0.02
0.03
280
16
( 4 )
( 16 )
( 12 )
( 158 )
( 170 )
( 0.04 )
( 0.56 )
(0.60 )
281
$
$
$
$
106
200 8 AN NU AL RE PO RT
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
(a) Income (loss) per share amounts for the quarters and full years have each been calculated separately. Accordingly,
quarterly amounts may not add to the annual amounts because of differences in the average common shares
outstanding during each period and, with regard to diluted per common share amounts only, because of the inclusion
of the effect of potentially dilutive securities only in the periods in which such effect would have been dilutive.
(b) Revenues for the quarter ended June 30, 2008 include an adjustment that resulted in an $8 million increase to distribution
revenues as a result of improvements to the Company’s methodology of estimating accrued revenue for certain
distribution operators.
(c) The Cox Transaction disclosed in Note 3 previously resulted in a basis differential of $929 million between the carrying
values of DHC’s and Advance/Newhouse’s investments in DCH (prior to the Newhouse Transaction) and their share of
the underlying net assets of DCH. The September 30, 2008 consolidated financial statements disclosed a combined
basis differential of $799 million between the carrying values of DHC’s and Advance/Newhouse’s investments in
DCH and their share of the underlying net assets of DCH. The adjustment results from the revision of the original fair
value assessment used to allocate the basis differential between goodwill and other intangible assets. Additionally, in
connection with the revised fair value assessment the Company extended the useful lives of certain intangible assets
subject to amortization. In connection with the Newhouse Transaction, Discovery has recorded the total basis differential
of $929 million to the respective asset accounts in the Consolidated Balance Sheets. The portions of the total basis
differential allocated to content rights and customer relationships are amortized using the straight-line method over
their estimated useful lives. As a result of the revised fair value assessment, the Company determined it had overstated
amortization expense related to these intangible assets by approximately $2 million per quarter during the period from
January 1, 2008 through September 30, 2008. Accordingly, the operating results for the quarter ended December 31,
2008 include a $6 million adjustment to reduce amortization expense related to basis differential allocated to content
rights and customer relationships. Additional information regarding the basis differential is disclosed in Note 3.
(d) Results for the quarter ended December 31, 2008 include pre tax impairment charges of $25 million and $5 million
related to trademarks and customer relations, respectively. Additional information regarding the impairment charges is
disclosed in Note 10.
(e) Results for the quarters ended June 30, 2008, September 30, 2008, and December 31, 2008 include exit and restructuring
charges of $4 million, $13 million, and $14 million, respectively. Additional information regarding the exit and restructuring
charges is disclosed in Note 17.
(f) Equity in loss of unconsolidated affiliates for the quarter ended December 31, 2008 includes a pre tax impairment charge
of $44 million related to the Company’s equity method investment in HSWI. Additionally, Equity in loss of unconsolidated
affiliates for the quarter ended December 31, 2008 includes a reclassification of $13 million of impairment charges related
to the Company’s equity method investment in HSWI that were previously recorded as a component of Other, net in
the Consolidated Statements of Operations in the amounts of $5 million and $8 million during the quarters ended June
30, 2008 and September 30, 2008, respectively. Additional information regarding the impairment charges is disclosed in
Note 7.
(g) Results for the quarters ended June 30, 2008, September 30, 2008, and December 31, 2008 include gains of $11 million,
$8 million, and $28 million, respectively, related to the reduction in the fair value of the HSWI liability were recorded in
Other, net in the Consolidated Statements of Operations. Additional information regarding the impairment charges is
disclosed in Note 6.
(h) Results for the quarter ended December 31, 2008 include an adjustment that resulted in an increase of $9 million in tax
expense related to revisions in the computation of the Company’s potential liability for foreign tax returns.
200 8 AN NU AL RE PO RT
107
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Members of
Discovery Communications Holding, LLC:
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations,
of changes in members’ equity and of cash flows, present fairly, in all material respects, the financial position of
Discovery Communications Holding, LLC and its subsidiaries at December 31, 2007 and the results of their operations
and their cash flows for the period from May 15, 2007 through December 31, 2007 in conformity with accounting
principles generally accepted in the United States of America. These financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit 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.
McLean, Virginia
February 14, 2008
108
200 8 AN NU AL RE PO RT
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Stockholders of
Discovery Communications, Inc:
In our opinion, the accompanying consolidated statements of operations, of changes in stockholders’ deficit
and of cash flows, present fairly, in all material respects, the results of operations and cash flows of Discovery
Communications, Inc. (Predecessor Company) and its subsidiaries for the period from January 1, 2007 to May 14,
2007, and for the year 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 Company’s 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.
As discussed in Note 16 to the consolidated financial statements, the Company changed the manner in which it
accounts for uncertain tax positions effective January 1, 2007.
McLean, Virginia
February 14, 2008
200 8 AN NU AL RE PO RT
109
DISCOVERY COMMUNICATIONS HOLDING, LLC
CONSOLIDATED BALANCE SHEET
Successor
As of December 31, 2007
(Amounts in millions, except unit amounts)
Assets
Current assets:
Cash and cash equivalents
Receivables, less allowance of $22
Inventories
Content rights, net
Deferred income taxes
Prepaid expenses and other current assets
Total current assets
Investments
Noncurrent content rights, net
Deferred launch incentives
Property and equipment, net
Goodwill
Intangible assets, net
Other noncurrent assets
Total assets
Liabilities and members’ equity
Current liabilities:
Accounts payable and accrued liabilities
Accrued payroll and employee benefits
Content rights payable
Launch incentives payable
Income taxes payable
Deferred revenues
Current portion of long-term incentive plan liability
Current portion of long-term debt
Other current liabilities
Total current liabilities
Derivative financial instruments, less current portion
Content rights payable, less current portion
Launch incentives payable, less current portion
Long-term debt
Deferred income taxes
Other noncurrent liabilities
Total liabilities
Commitments and contingencies (Note 13)
Redeemable interests in subsidiaries
Members’ equity:
Members’ units (51,119 units issued, less 13,319 units repurchased and retired)
Retained earnings
Accumulated other comprehensive loss
Total members’ equity
Total liabilities and members’ equity
$
$
$
$
45
742
10
79
104
97
1,077
101
1,048
243
397
4,870
182
42
7,960
268
184
56
1
24
78
141
32
66
850
49
2
6
4,109
11
176
5,203
—
49
2,533
185
( 10 )
2,708
7,960
110
The accompanying notes are an integral part of these consolidated financial statements.
200 8 AN NU AL RE PO RT
DISCOVERY COMMUNICATIONS HOLDING, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
Successor
Predecessor
May 15, 2007
through
December 31, 2007
January 1, 2007
through
May 14, 2007
(Amounts in millions)
Year Ended
through
December 31, 2006
Revenues:
Distribution
Advertising
Other
Total revenues
Operating costs and expenses:
Cost of revenues, excluding depreciation
and amortization listed below
Selling, general and administrative
Depreciation and amortization expense
Asset impairments
Exit and restructuring costs
Gain on business disposition
Total operating costs and expenses
Operating income
Other (expense) income:
$
930
875
223
2,028
792
823
83
—
9
( 135 )
1,572
456
Equity in earnings of unconsolidated affiliates
5
Realized and unrealized (losses) gains from
non-hedged derivative instruments, net
Minority interests
Interest expense, net
Other, net
Total other expense, net
Income from continuing operations before
income taxes
Provision for income taxes
Income from continuing operations
Loss from discontinued operations, net of tax
Net income
$
( 11 )
( 7 )
( 180 )
( 1 )
( 194 )
262
( 25 )
237
( 52 )
185
$
$
$
547
470
82
1,099
1,435
1,243
205
2,883
1,023
1,153
122
—
—
—
2,298
585
7
23
( 3 )
( 194 )
1
( 166 )
419
( 190 )
229
( 22 )
207
375
473
48
26
11
—
933
166
4
2
( 1 )
( 69 )
—
( 64 )
102
( 52 )
50
( 13 )
37
$
The accompanying notes are an integral part of these consolidated financial statements.
200 8 AN NU AL RE PO RT
111
DISCOVERY COMMUNICATIONS HOLDING, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
Successor Predecessor
May 15, 2007
through
December 31, 2007
January 1, 2007
through
May 14, 2007
(Amounts in millions)
Year Ended
through
December 31, 2006
$
185
$
37
$
207
Operating Activities
Net income
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation and amortization expense
Amortization of deferred launch incentives
and representation rights
Asset impairments
Gain on business disposition
Provision for losses on receivables
Long-term incentive plan expense
Equity in earnings of unconsolidated affiliates
Deferred income taxes
Realized and unrealized losses (gains) from
non-hedged derivative instruments, net
Minority interests
Gain on sale of investment
Other charges (income)
Changes in operating assets and liabilities,
net of business acquisitions and dispositions:
Receivables
Inventories
Content rights, net
Representation rights, net
Deferred launch incentives
Other assets
Accounts payable and accrued liabilities
Long-term incentive plan liability
Cash provided by (used in) operating activities
Investing Activities:
Purchases of property and equipment
Business acquisitions, net of cash acquired
Redemption of interests in subsidiaries
Proceeds from sale of investment
Cash used in investing activities
Financing Activities:
Proceeds from issuance of long-term debt
Payments of long-term debt and capital leases
Deferred financing fees
Repurchase of members’ interest
Other financing activities, net
Cash (used in) provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
$
83
58
28
( 135 )
—
78
(5 )
( 71 )
11
7
—
2
( 46 )
22
111
—
( 26 )
28
120
( 76 )
374
( 56 )
( 306 )
—
—
( 362 )
1,286
( 12 )
( 5 )
( 1,284 )
( 17 )
( 32 )
3
( 17 )
62
45
51
37
26
—
2
63
( 4 )
11
( 2 )
1
—
( 4 )
( 29 )
5
( 3 )
—
( 198 )
( 24 )
( 93 )
( 8 )
( 132 )
(25 )
—
(44 )
—
( 69 )
211
( 2 )
—
—
( 2 )
207
4
10
52
62
134
78
—
—
4
39
( 7 )
109
( 23 )
3
( 1 )
1
( 85 )
( 5 )
( 84 )
93
( 49 )
( 7 )
74
( 1 )
480
( 90 )
( 195 )
( 180 )
1
( 464 )
317
( 307 )
( 1 )
—
( 10 )
( 1 )
3
18
34
52
$
$
The accompanying notes are an integral part of these consolidated financial statements.
112
200 8 AN NU AL RE PO RT
DISCOVERY COMMUNICATIONS HOLDING, LLC
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT AND MEMBERS’ EQUITY
Additional
Paid-in
Capital/
Members’
Equity
Accumulated
Other
Comprehensive
Income
(Loss)
Total
Stockholders’
Deficit/
Members’
Equity
Retained
(Deficit)
Earnings
(Amounts in millions)
Predecessor:
Balance as of December 31, 2005
$
Net income
Foreign currency translation adjustments,
net of tax of $9
Comprehensive income
Balance as of December 31, 2006
Net income for the period January 1, 2007
through May 14, 2007
Foreign currency translation adjustments,
net of tax of $5
Unrealized gain on securities, net of tax of $1
Comprehensive income
Cumulative effect for the adoption of FIN 48
Balance as of May 14, 2007
$
Successor:
Formation of Successor Company Pushdown
21
—
—
—
21
—
—
—
—
—
21
$
( 513 )
207
$
—
—
( 306 )
37
—
—
—
(5 )
$
( 274 )
$
10
—
14
—
24
—
8
1
—
—
33
$
( 482 )
207
14
221
( 261 )
37
8
1
46
( 5 )
$
( 220 )
of investor basis
$
4,392
$
—
$
—
$
4,392
Net income for the period May 15, 2007
through December 31, 2007
Foreign currency translation adjustments,
net of tax of $4
Unrealized gain on securities, net of tax of $2
Changes from hedging activities,
net of tax of $12
Comprehensive income
Repurchase of members’ interest
Balance as of December 31, 2007
—
—
—
—
—
( 1,859 )
185
—
—
—
—
—
7
3
( 20 )
—
185
7
3
( 20 )
175
( 1,859 )
$
2,533
$
185
$
( 10 )
$
2,708
The accompanying notes are an integral part of these consolidated financial statements.
200 8 AN NU AL RE PO RT
113
DISCOVERY COMMUNICATIONS HOLDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Discovery Communications Holding, LLC (“Discovery” or the “Company”) is a global media and entertainment company that
provides original and purchased cable and satellite television programming across multiple platforms in the United States
and over 170 other countries. Discovery also develops and sells proprietary merchandise, other products and educational
product lines in the United States and internationally. Discovery operates through three divisions: (1) U.S. Networks, (2)
International Networks, and (3) Commerce and Education.
Basis of Presentation
Discovery was formed through a conversion completed by Discovery Communications, Inc. (the predecessor entity to
Discovery Communications Holding, LLC, and not the current registrant) (“DCI” or “the Predecessor Company”) on May
14, 2007. As part of the conversion, DCI became Discovery Communications, LLC (“DCL”), a wholly-owned subsidiary of
Discovery, and the former shareholders of DCI, including Cox Communications Holdings, Inc. (“Cox”), Advance/Newhouse
Programming Partnerships, and Discovery Holding Company (“DHC”) became members of Discovery. Subsequent to this
conversion, each of the members of Discovery held the same ownership interests in Discovery as their previous capital stock
ownership interest had been in DCI.
The formation of Discovery required “pushdown” accounting and each shareholder’s basis has been pushed down to
Discovery. The pushdown of the investors’ bases resulted in the recording of approximately $4.6 billion of additional goodwill,
which had been previously recorded on the investors’ books. No other basis differentials existed on the investors’ books;
therefore, no other assets or liabilities were adjusted. The application of push down accounting represents the termination of
the predecessor reporting entity, DCI, and the creation of the successor reporting entity, Discovery. Accordingly, the results for
the year ended December 31, 2007 are required to be presented as two distinct periods. The “Predecessor” period refers to the
period from January 1, 2007 through May 14, 2007, and the “Successor” period refers to the period from May 15, 2007 through
December 31, 2007. Accordingly, a vertical black line is shown to separate the Company financial statements from those of the
Predecessor Company for periods ended prior to May 15, 2007. As the entire pushdown was associated with non-amortizable
goodwill, there was no adjustment to the income statement during the Successor period as a result of this transaction.
Subsequent to the formation of Discovery, Cox exchanged its 25% ownership interest in Discovery for all of the capital stock
of a subsidiary of Discovery that held the Travel Channel and travelchannel.com (collectively, the “Travel Business”) and
approximately $1.3 billion in cash. Discovery retired the membership interest previously owned by Cox. The distribution
of the Travel Business, which was valued at $575 million, resulted in a $135 million tax-free gain included in continuing
operations. The gain was net of $280 million in reporting unit goodwill and $160 million in net assets. The net impact to
goodwill as a result of the pushdown of investor basis and disposition of the Travel Business was $4.3 billion.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of all majority-owned and controlled subsidiaries. In addition,
the Company evaluates its relationships with other entities to identify whether they are variable interest entities as defined by
Financial Accounting Standards Board (“FASB”) Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation
of ARB No. 51, as revised in December 2003 (“FIN 46R”) and to assess whether it is the primary beneficiary of such entities.
Variable Interest Entities (“VIEs”) are generally entities that lack sufficient equity to finance their activities without additional
financial support from other parties or whose equity holders possess rights not proportionate to their ownership. The equity
method of accounting is used for affiliates over which the Company exercises significant influence but does not control.
All inter-company accounts and transactions have been eliminated in consolidation.
114
200 8 AN NU AL RE PO RT
DISCOVERY COMMUNICATIONS HOLDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Use of Estimates
The preparation of financial statements in accordance with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the
reporting periods. Actual results may differ from those estimates and could have a material impact on the consolidated
financial statements.
Reclassifications and Revisions
Certain reclassifications have been made to the 2007 and 2006 financial statements to separately present exit and
restructuring costs and asset impairments charges where such amounts were previously included within cost of revenues
and depreciation and amortization expense, respectively.
Additionally, certain marketing costs were incorrectly classified between cost of revenues and selling, general and
administrative expenses. The Company has revised its financial statements to reclassify these marketing costs, which
resulted in a net decrease to cost of revenues and a corresponding increase to selling, general and administrative expenses
of $8 million during the period from May 15, 2007 through December 31, 2007, a net increase to cost of revenues and a
corresponding decrease to selling, general and administrative expenses of $2 million during the period from January 1,
2007 through May 14, 2007, and a net decrease to cost of revenues and a corresponding increase to selling, general and
administrative expenses of $10 million during the year ended December 31, 2006, respectively. The revisions did not have
any effect on amounts previously reported for revenues, total operating expenses, operating income, net income, or cash
flows and are not material to our overall financial statements.
Recent Accounting Pronouncements
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities — including an amendment of FASB Statement No. 115 (“FAS 159”). FAS 159 gives entities the
irrevocable option to carry most financial assets and liabilities at fair value, with changes in fair value recognized in earnings.
FAS 159 is effective for the Company as of the beginning of the Company’s 2008 fiscal year. The Company expects to adopt
fair value accounting for its equity investment in HSWi (see Note 4). The impact could be material to the financial statements
depending upon changes in fair value. The Company is currently assessing the potential effect of FAS 159 on its other assets
and liabilities.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS
157”). FAS 157 defines fair value and establishes a framework to make the measurement of fair value in generally accepted
accounting principles more consistent and comparable. FAS 157 requires expanded disclosures about the extent to which
fair value is used to measure assets and liabilities, the methods and assumptions used to measure fair value and the effect
of fair value measures on earnings. FAS 157 will be effective for the Company’s 2008 fiscal year. The Company is currently
assessing the potential effect of FAS 157 on its financial statements.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations
(“FAS 141R”). FAS 141R replaces Statement of Financial Accounting Standards No. 141, Business Combinations (“FAS 141”),
although it retains the fundamental requirement in FAS 141 that the acquisition method of accounting be used for all
business combinations. FAS 141R establishes principles and requirements for how the acquirer in a business combination
(a) recognizes and measures the assets acquired, liabilities assumed and any noncontrolling interest in the acquiree, (b)
recognizes and measures the goodwill acquired in a business combination or a gain from a bargain purchase and (c)
determines what information to disclose regarding the business combination. FAS 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the Company’s 2009 fiscal year.
200 8 AN NU AL RE PO RT
115
DISCOVERY COMMUNICATION HOLDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated
Financial Statements (“FAS 160”). FAS 160 establishes accounting and reporting standards for the noncontrolling interest in a
subsidiary, commonly referred to as minority interest. Among other matters, FAS 160 requires (a) the noncontrolling interest
be reported within equity in the balance sheet and (b) the amount of consolidated net income attributable to the parent
and to the noncontrolling interest to be clearly presented in the statement of income. FAS 160 is effective for the Company’s
2009 fiscal year. FAS 160 is to be applied prospectively, except for the presentation and disclosure requirements, which shall
be applied retrospectively for all periods presented. The Company is currently assessing the potential effect of FAS 160 on
its financial statements.
Revenue Recognition
The Company derives revenues from three primary sources: (1) distribution revenues from cable system and satellite operators
(distributors), (2) advertising revenues for commercial spots aired on the Company’s networks and websites), and (3) other
revenues, which is largely e-commerce and educational sales.
Distribution revenues are recognized over the service period, net of launch incentives and other vendor consideration.
Advertising revenues are recorded net of agency commissions and audience deficiency liabilities in the period advertising
spots are broadcast. E-commerce and educational product revenues are recognized either at the point-of-sale or upon
product shipment. Educational service sales are generally recognized ratably over the term of the agreement.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs of $108 million, $72 million, and $208 million
were incurred from May 15, 2007 through December 31, 2007, from January 1, 2007 through May 14, 2007, and in 2006,
respectively.
Cash and Cash Equivalents
Highly liquid investments with original maturities of ninety days or less are recorded as cash equivalents. Restricted cash of $8
million is included in other current assets as of December 31, 2007. Book overdrafts representing outstanding checks in excess
of funds on deposit are recorded as a component of accounts payable and totaled $11 million as of December 31, 2007.
Derivative Financial Instruments
Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, (“FAS 133”),
requires every derivative instrument to be recorded on the balance sheet at fair value as either an asset or a liability. The
statement also requires that changes in the fair value of derivatives be recognized currently in earnings unless specific hedge
accounting criteria are met. The Company uses financial instruments designated as cash flow hedges. The effective changes
in fair value of derivatives designated as cash flow hedges are recorded in accumulated other comprehensive income (loss).
Amounts are reclassified from accumulated other comprehensive income (loss) as interest expense is recorded for debt.
The Company uses the cumulative dollar offset method to assess effectiveness. To be highly effective, the ratio calculated
by dividing the cumulative change in the value of the actual swap by the cumulative change in the hypothetical swap
must be between 80% and 125%. The ineffective portion of a derivative’s change in fair value is immediately recognized
in earnings. The Company uses derivatives instruments principally to manage the risk associated with the movements of
foreign currency exchange rates and changes in interest rates that will affect the cash flows of its debt transactions. Refer to
Note 17 for additional information regarding derivative instruments held by the Company and risk management strategies.
Inventories
Inventories are carried at the lower of cost or market. Cost is determined using the weighted average cost method.
116
200 8 AN NU AL RE PO RT
DISCOVERY COMMUNICATION HOLDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Content Rights
Costs incurred in the direct production, co-production or licensing of content rights are capitalized and stated at the lower of
unamortized cost, fair value, or net realizable value. The Company evaluates the net realizable value of content by considering
the fair value of the underlying produced and co-produced content and the net realizable values of the licensed content
quarterly.
The costs of produced and co-produced content airing on the Company’s networks are capitalized and amortized based
on the expected realization of revenues, resulting in an accelerated basis over four years for developed networks (Discovery
Channel, TLC and Animal Planet) in the United States, and a straight-line basis over no longer than five years for developing
networks (all other networks in the United States) and all networks in the International division. The cost of licensed content
is capitalized and amortized over the term of the license period based on the expected realization of revenues, resulting
in an accelerated basis for developed networks in the United States, and a straight-line basis for all International Networks,
developing networks in the United States and educational ventures. The costs of content for electronic, video and hardcopy
educational supplements are amortized on a straight-line basis over a three to five year period.
All produced and co-produced content is classified as long-term. The portion of the unamortized licensed content balance
that will be amortized within one year is classified as a current asset. The Company’s co-production arrangements generally
represent the sharing of production cost. The Company records its share of costs gross and records no amounts for the
portion of costs borne by the other party as the Company does not share any associated economics of exploitation.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is recognized on a straight-line basis
over the estimated useful lives of three to seven years for equipment, furniture and fixtures, five to forty years for building
structure and construction, and six to twelve years for satellite transponders. Leasehold improvements are amortized on a
straight-line basis over the lesser of their estimated useful lives or the terms of the related leases, beginning on the date the
asset is put into use. Equipment under capital lease represents the present value of the minimum lease payments at the
inception of the lease, net of accumulated depreciation.
Capitalized Software Costs
All capitalized software costs are for internal use. Capitalization of costs occurs during the application development stage.
Costs incurred during the pre and post implementation stages are expensed as incurred. Capitalized costs are amortized
on a straight-line basis over their estimated useful lives of one to five years. Unamortized capitalized costs totaled $57
million at December 31, 2007. Software costs of $9 million, $7 million, and $22 million were capitalized from May 15, 2007
through December 31, 2007, from January 1, 2007 through May 14, 2007, and in 2006, respectively. Amortization of capitalized
software costs totaled $13 million, $7 million, and $18 million, from May 15, 2007 through December 31, 2007, from January
1, 2007 through May 14, 2007, and in 2006, respectively. There were no write-offs for capitalized software costs during 2007
or 2006.
Recoverability of Long-Lived Assets, Goodwill, and Intangible Assets
The Company annually assesses the carrying value of its acquired intangible assets, including goodwill, and its other
long-lived assets, including deferred launch incentives, to determine whether impairment may exist, unless indicators of
impairment become evident requiring immediate assessment. Goodwill impairment is identified by comparing the fair value
of the reporting unit to its carrying value. If the fair value of the reporting unit is less than its carrying value, an impairment
loss is recorded to the extent that the implied fair value of the goodwill within the reporting unit is less than its carrying
value. Intangible assets and other long-lived assets are grouped for purposes of evaluating recoverability at the lowest level
for which independent cash flows are identifiable. If the carrying amount of an intangible asset, long-lived asset, or asset
grouping exceeds its fair value, an impairment loss is recognized. Fair values for reporting units, goodwill and other asset
groups are determined based on discounted cash flows, market multiples, or comparable assets as appropriate. During the
Predecessor period, DCI recorded asset impairments of $26 million for education assets related to its consumer business.
During the Successor period, the Company recorded a $28 million write-off of leasehold improvements related to store
closures which is included in loss from discontinued operations.
117
200 8 AN NU AL RE PO RT
DISCOVERY COMMUNICATION HOLDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The determination of recoverability of goodwill and other intangibles and long-lived assets requires significant judgment
and estimates regarding future cash flows, fair values, and the appropriate grouping of assets. Such estimates are subject to
change and could result in impairment losses being recognized in the future. If different reporting units, asset groupings, or
different valuation methodologies had been used, the impairment test results could have differed.
Deferred Launch Incentives
Consideration issued to cable and satellite distributors in connection with the execution of long-term network distribution
agreements is deferred and amortized on a straight-line basis as a reduction to revenue over the terms of the agreements.
Obligations for fixed launch incentives are recorded at the inception of the agreement. Following the renewal of a distribution
agreement, the remaining deferred consideration is amortized over the extended period. Amortization of deferred launch
incentives and interest on unpaid deferred launch incentives was $61 million, $39 million, and $79 million from May 15, 2007
through December 31, 2007, from January 1, 2007 through May 14, 2007, and in 2006, respectively. During 2007, in connection
with the settlement of terms under a pre-existing distribution agreement, Discovery completed negotiations for the renewal
of long-term distribution agreements for certain of its U.K. networks and paid a distributor $196 million, most of which is
being amortized over a five year period.
Foreign Currency Translation
The Company’s foreign subsidiaries’ assets and liabilities are translated at exchange rates in effect at the balance sheet date,
while results of operations are translated at average exchange rates for the respective periods. The resulting translation
adjustments are included as a separate component of stockholders’ deficit/ members’ equity in accumulated other
comprehensive income (loss). Intercompany accounts of a trading nature are revalued at exchange rates in effect at each
month end and are included as part of operating income in the consolidated Statements of Operations.
Long-term Incentive Plans
Prior to August 2005, DCI maintained two unit-based, cash settled, long-term incentive plans. Under these plans, unit awards,
which vest over a period of years, were granted to eligible employees and increased or decreased in value based on a
specified formula of DCI’s business metrics. DCI accounted for these units similar to stock appreciation rights and applied
the guidance in FASB Interpretation No. 28, Accounting for Stock Issued to Employees (“FIN 28”). Accordingly, DCI adjusted
compensation expense for changes in the accrued value of these awards over the period outstanding.
In August 2005, DCI discontinued one of its long-term incentive plans and settled all amounts with cash payments. In
October 2005, DCI established a new long-term incentive plan for certain eligible employees. Substantially all participants in
the remaining plan redeemed their vested units for cash payment and received units in the new plan.
Under the new plan, eligible employees receive cash settled unit awards indexed to the price of Class A DHC stock. As the
units are indexed to the equity of another entity, the Company treats the units similar to a derivative, by determining their
fair value each reporting period. The Company attributes compensation expense for the new awards on a straight-line basis;
the Company attributes compensation expense for the initial grant of partially vested units by continuing to apply the FIN
28 model that was utilized over the awards’ original vesting periods. Once units are fully vested, the Company recognizes
all mark-to-market adjustments to fair value in each period as compensation expense. In March 2005, the Securities and
Exchange Commission (the “SEC”) issued Staff Accounting Bulletin No. 107, Share-Based Payment (“SAB 107”), regarding the
classification of compensation expense associated with share-based payment awards. By applying the provisions of SAB 107,
all long term incentive compensation expense is recorded as a component of selling, general and administrative expenses.
The Company classifies as a current liability the lesser of 100% of the intrinsic value of the units that are vested or will
become vested within one year or the Black-Scholes value of units that have been attributed. Upon voluntary termination
of employment, the Company distributes 100% of unit benefits if employees agree to certain provisions. Prior to a plan
amendment in August 2007, the Company classified as a current liability 75% of the intrinsic value of vested units or units
vesting within one year, as this amount corresponded to the value potentially payable should all participants separate from
the Company. Upon voluntary termination of employment, the Company distributed 75% of unit benefits. The remainder
was paid at the one-year anniversary of termination date. The August 2007 plan amendment eliminated the deferral of the
final 25%. As such, employees are paid 100% of their vested amount upon separation from the Company.
118
200 8 AN NU AL RE PO RT
DISCOVERY COMMUNICATION HOLDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Redeemable Interests in Subsidiaries
For those instruments with an estimated redemption value, redeemable interests in subsidiaries are accreted or amortized
to an estimated redemption value ratably over the period to the redemption date. Accretion and amortization are recorded
as a component of minority interest expense. For instruments with a specified rate of return, DCI records interest expense
as incurred. Cash receipts and payments for the sale or purchase of redeemable interests in subsidiaries are included as a
component of investing cash flows.
Minority Interests
In addition to the accretion and amortization on redeemable minority interests, the Company records minority interest
expense for the portion of the earnings of consolidated entities which are applicable to the minority interest partners.
Treasury Units
Treasury units are accounted for using the cost method by DCI, the Predecessor. The repurchased units are held in treasury
and are presented as if retired. There was no treasury unit activity from January 1, 2007 through May 14, 2007 or for the year
ended December 31, 2006. Discovery, the Successor, purchased and retired the membership units owned by Cox. (Refer to
Note 1 Description of Business and Basis of Presentation.)
Discontinued Operations
In determining whether a group of assets disposed of should be presented as a discontinued operation, the Company
makes a determination as to whether the group of assets being disposed of comprises a component of the entity, which
requires cash flows that can be clearly distinguished from the rest of the entity. The Company also determines whether the
cash flows associated with the group of assets have been or will be significantly eliminated from the ongoing operations of
the Company as a result of the disposal transaction and whether the Company has no significant continuing involvement
in the operations of the group of assets after the disposal transaction. If these determinations can be made affirmatively,
the results of operations of the group of assets being disposed of (as well as any gain or loss on the disposal transaction) are
aggregated for separate presentation apart from continuing operating results of the Company in the consolidated financial
statements. The Company has elected not to segregate the cash flows from discontinued operations in its presentation of
the Statements of Cash Flows.
Income Taxes
Income taxes are recorded using the asset and liability method of accounting for income taxes. Deferred income taxes reflect
the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is
more likely than not such assets will be unrealized.
Effective January 1, 2007, DCI adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation
of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s
financial statements, and 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. In instances where the Company has taken
or expects to take a tax position in its tax return and the Company believes it is more likely than not that such tax position
will be upheld by the relevant taxing authority upon settlement, the Company may record the benefits of such tax position
in its consolidated financial statements. The tax benefit to be recognized is measured as the largest amount of benefit that
is greater than 50% likely of being realized upon ultimate settlement. Upon adoption of FIN 48, DCI recorded a $5 million net
tax liability recorded directly to accumulated deficit.
200 8 AN NU AL RE PO RT
119
DISCOVERY COMMUNICATION HOLDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
3. SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED
STATEMENTS OF CASH FLOWS
Successor Predecessor
May 15, 2007
through
December 31, 2007
January 1, 2007
through
May 14, 2007
(Amounts in millions)
Year Ended
December 31, 2006
Cash paid for acquisitions:
Fair value of assets acquired
Fair value of liabilities assumed
Cash paid for business acquisitions,
net of cash acquired
Cash paid for interest
Cash paid for income taxes
$
$
$
$
419
( 113 )
306
180
58
$
$
$
$
—
—
—
78
17
$
$
$
$
223
( 28 )
195
196
70
4. BUSINESS ACQUISITIONS
On December 17, 2007, Discovery completed its acquisition of HowStuffWorks.com (“HSW”), an on-line source of explanations
of how the world actually works. This acquisition provides an additional platform for Discovery’s library of video content and
positions its brands as a hub for satisfying curiosity on both television and on-line. The results of operations have been
included in the consolidated financial statements since December 17, 2007. The aggregate purchase price was $265 million,
including $15 million of transaction costs. The Company also assumed net working capital of $1 million, content of $9 million,
and deferred tax liabilities of $45 million. As of December 31, 2007, $5 million of the purchase price has not yet been paid.
Of the $270 million of acquired intangibles, $96 million was ascribed to intangibles subject to amortization with useful lives
between two and five years and the balance of $174 million to non-tax deductible goodwill. Acquired intangibles include
trademarks, customer lists, and other items with weighted average useful lives of four years. The Company funded the
purchase through additional borrowings under its credit facilities. HSW’s content is highly ranked by the world’s leading
search engines and provides a natural link to the Company’s video library. The purchase provides the Company with an
expanded platform for content, additional ad sales outlet, and brand enhancement.
As part of the transaction, Discovery acquired approximately 49.5% of HSW International, Inc. (“HSWi”) outstanding shares,
resulting in an investment balance of $79 million. Discovery has gained voting rights which are capped at 45% of the
outstanding votes, three non-controlling board seats and certain other governance rights. As a result of its noncontrolling
interest, the Company has recorded its investment in HSWi under the equity method. Discovery will hold approximately 77%
of these shares over a period of at least one to two years. Per terms of the agreement, the Company may distribute the HSWi
stock or sell and distribute substantially all of the proceeds to former HSW shareholders. The Company initially recorded
a liability of $54 million at closing, which represents its estimated obligation to the HSW shareholders. The Company has
estimated the fair value of its investment and associated liability with information from an investment bank. The Company will
adjust the liability each period to fair value through adjustments to earnings. The valuation considers forecasted operating
results and market valuation factors. The estimated liability at December 31, 2007 is unchanged from December 17, 2007.
HSWi has a perpetual royalty free license to exploit HSW content in certain foreign markets.
On July 31, 2007, the Company acquired Treehugger.com, an eco-lifestyle website for $10 million. As of December 31, 2007,
$2 million of this purchase price has not yet been paid. The results of operations have been included in the consolidated
financial statements since that date. The acquisition furthers the Company’s goal of developing original programming related
to the environment, sustainable development, conservation and organic living. The Company also has certain contingent
considerations in connection with this acquisition payable in the event specific business metrics are achieved totaling up to
$6 million over two years, which could result in the recording of additional goodwill.
200 8 AN NU AL RE PO RT
120
DISCOVERY COMMUNICATION HOLDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Subsequent to the formation of Discovery, the Company acquired an additional 5% interest in Animal Planet L.P. (“APLP”) from
Cox for $37 million. This transaction increased the Company’s ownership interest in APLP from 80% to 85% and has been
recorded as a step acquisition. The $37 million has been recorded as brand intangibles of $7 million, affiliate relationships of
$10 million, and goodwill of $20 million. The brand intangibles and affiliate relationships will be amortized over ten years.
The following table summarizes the combined estimated fair values of the assets acquired and the liabilities assumed at the
dates of acquisition in 2007 for HSW, Animal Planet additional 5% interest and Treehugger.com. The HSW fair value allocation
of assets and liabilities is preliminary because the acquisition closed December 17, 2007 and the fair value determination of
assets and liabilities are subject to finalization.
Asset (Liability)
Current assets and content
Investment in HSWi stock
Other tangible assets
Finite-lived intangibles (including brand names, customer lists and trademarks)
Goodwill
Liabilities assumed
Deferred taxes
Estimated redemption liability to HSW shareholders
Cash paid, net of cash acquired
HSW, Animal Planet and
Treehugger, Combined
(Amounts in millions)
$
$
23
79
1
119
198
( 15 )
( 45 )
( 54 )
306
During February 2006, DCI acquired 98% of DMAX (formerly known as XXP), a free-to-air network in Germany. The results
of operations have been included in the consolidated financial statements since that date. The acquisition of a free-to-air
network is intended to support strengthening global presence. The aggregate purchase price was $60 million primarily
in cash. Of the $54 million of acquired intangible assets, $23 million was assigned to contract-based distribution channels
subject to amortization with a useful life of approximately five years and the remaining balance of $31 million to goodwill.
During 2007, Discovery acquired the remaining 2% in conjunction with the return of purchase escrow balances, for a net cash
return amount of $8 million.
In March 2006, DCI acquired all of the outstanding common shares of Antenna Audio Limited (“Antenna”), a provider of audio
tours and multimedia at museums and cultural attractions around the globe. The results of Antenna’s operations have been
included in the consolidated financial statements since that date. DCI acquired Antenna to facilitate the expansion of its
Travel brand and media content to other platforms. The aggregate purchase price was $65 million, primarily in cash. Of the
$49 million of acquired intangibles, $6 million was assigned to assets subject to amortization with useful lives between two
and seven years and the balance of $43 million to goodwill. Antenna and the Travel Channel had been integrated within a
single reporting.
In 2006, DCI also acquired the following four entities for a total cost of $70 million, which was paid primarily in cash:
•
•
Petfinder.com, a facilitator of pet adoptions and PetsIncredible, a producer and distributor of pet-training videos. During
2007, the former owners earned payment of certain contingent consideration in connection with this acquisition,
resulting in the addition of $11 million in goodwill.
Clearvue and SVE, Inc., a provider of curriculum-oriented media educational products.
200 8 AN NU AL RE PO RT
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DISCOVERY COMMUNICATION HOLDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
•
•
Academy123, Inc., a provider of on-line supplemental, educational content focusing largely on mathematics and sciences.
In May 2007, Discovery recorded an asset impairment of $21 million, including $12 million of goodwill, for goodwill and
intangible assets established during 2006 related to Academy 123, Inc. The business had not been integrated into the
education reporting unit, and management decided to scale back its education business to consumers.
Thinklink, Inc., a provider of formative assessment testing services to schools servicing students in grades K through 12.
Goodwill recognized for these transactions amounted to $28 million in 2006. Purchased identifiable intangible assets for
these acquisitions are being amortized on a straight-line basis over lives ranging from one to ten years (weighted-average
life of 4.4 years).
The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the dates of
acquisition in 2006.
Asset (Liability)
Current assets and content
Other tangible assets
Finite-lived intangible assets
Goodwill
Liabilities assumed
Cash paid, net of cash acquired
DMAX, Antenna and
Other Acquisitions, Combined
(Amounts in millions)
$
$
40
8
73
102
( 28 )
195
5. DISCONTINUED OPERATIONS
Following a comprehensive strategic review of its businesses, the Company decided to close its 103 mall based and stand
alone Discovery Stores (Retail) in the third quarter of 2007. The Company will continue to leverage its products through retail
arrangements and its e-commerce platform. As there is no continuing involvement in the retail stores or significant migration
of retail customers to e-commerce, the results of the Retail business are accounted for as discontinued operations in the
consolidated financial statements for the periods presented herein, in accordance with Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment and Disposal of Long-lived Assets (“FAS 144”).
The following amounts related to Retail have been segregated from continuing operations and included in loss from
discontinued operations in the consolidated statements of income:
Successor
Predecessor
May 15, 2007
through
January 1, 2007
through
December 31, 2007 May 14, 2007
(Amounts in millions)
Year Ended
December 31, 2006
Revenue
Loss from discontinued operations before income taxes
Loss from discontinued operations, net of tax
$
$
$
30
( 81 )
( 52 )
$
$
$
27
( 18 )
( 13 )
$
$
$
129
( 36 )
( 22 )
122
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DISCOVERY COMMUNICATION HOLDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
No interest expense was allocated to discontinued operations for the periods presented herein since there was no debt
specifically attributable to discontinued operations or required to be repaid following the closure of the retail stores. For
the Successor period, the loss from discontinued operations includes $31 million in lease terminations and other exit costs,
$9 million for severance and other employee-related costs, and $28 million in asset impairment charges, along with normal
business operations.
Summarized balance sheet information for discontinued operations for Retail is as follows:
Current assets
Total assets
Current liabilities
Total liabilities
6. CONTENT RIGHTS
Contents Rights
Produced content rights:
Completed
In-process
Co-produced content rights:
Completed
In-process
Licensed content rights:
Acquired
Prepaid
Content rights, at cost
Accumulated amortization
Content rights, net
Less: current portion
Non-current portion
Successor
December 31, 2007
(Amounts in millions)
$
$
$
$
—
—
( 6 )
( 6 )
Successor
December 31, 2007
(Amounts in millions)
$
$
1,347
195
499
54
209
22
2,326
( 1,199 )
1,127
( 79 )
1,048
200 8 AN NU AL RE PO RT
123
DISCOVERY COMMUNICATION HOLDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Amortization of content rights is recorded as a component of cost of revenues and was $558 million, $257 million, and $696
million from May 15, 2007 through December 31, 2007, from January 1, 2007 through May 14, 2007, and in 2006, respectively.
Amortization of content rights includes incremental amortization for certain programs to net realizable value of $172 million,
$2 million, and $40 million from May 15, 2007 through December 31, 2007, from January 1, 2007 through May 14, 2007,
and in 2006, respectively. The $172 million of incremental amortization includes an impairment charge of $129 million at
U.S. Networks, where new programming leadership evaluated the networks’ programming portfolio assets and identified
certain programming which no longer fit the go forward strategy of the network. The Company wrote off those assets no
longer intended for use.
The Company estimates that approximately 96% of unamortized costs of content rights at December 31, 2007 will be
amortized within the next three years. The Company expects to amortize $434 million of unamortized content rights, not
including in-process, not released, and prepaid productions, during the next twelve months.
7. PROPERTY AND EQUIPMENT
Property and Equipment
Equipment and software
Land
Buildings
Furniture, fixtures, leasehold improvements and other
Assets in progress
Property and equipment, at cost
Accumulated depreciation and amortization
Property and equipment, net
Successor
December 31, 2007
(Amounts in millions)
$
$
479
29
154
151
14
827
( 430 )
397
The cost and accumulated depreciation of equipment under capital leases was $53 million at December 31, 2007. Depreciation
and amortization of property and equipment, including equipment under capital lease, was $57 million, $40 million, and $78
million from May 15, 2007 through December 31, 2007, from January 1, 2007 through May 14, 2007, and in 2006, respectively.
Depreciation and amortization of property and equipment for Retail discontinued operations was $0, $3 million, and $10
million from May 15, 2007 through December 31, 2007, from January 1, 2007 through May 14, 2007, and in 2006, respectively,
exclusive of impairment write-downs.
8. SALE OF EQUITY INVESTMENTS
In April 2006, DCI recorded gains of $1 million as a component of other non-operating expenses for the sale of certain
investments accounted for under the cost method. The gains represent the difference between the proceeds received and
the net book value of the investments.
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DISCOVERY COMMUNICATION HOLDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
9. GOODWILL AND INTANGIBLE ASSETS
Goodwill and Intangible Assets
Goodwill
Trademarks, net of accumulated amortization of $2
Customer lists, net of accumulated amortization of $77
Other, net of accumulated amortization of $77
Intangible assets, net
During 2007, changes in the net carrying amount of goodwill were as follows:
Successor
December 31, 2007
(Amounts in millions)
$
$
$
4,870
62
68
52
182
Reconciliation of net carrying amount of goodwill
(Amounts in millions)
Balance at January 1, 2007 (Predecessor)
Impairment (Predecessor) (Note 4)
Translation (Predecessor)
Push down of investor basis (Successor) (Note 1)
Disposals (Successor) (Note 1)
Acquisitions (Successor) (Note 4)
Translation (Successor)
Balance at December 31, 2007 (Successor)
$
$
365
( 12 )
2
4,591
( 280 )
198
6
4,870
In April 2007, DCI completed a strategic analysis of the Education business and does not expect to generate revenue from
the assets acquired from the Academy 123, Inc. acquisition. Goodwill of $12 million and intangible assets of $9 million were
written-off as a component of amortization expense.
Goodwill is not amortized. Trademarks are amortized on a straight-line basis over three to ten years. Customer lists are
amortized on a straight-line basis over the estimated useful lives of three to seven years. Non-compete assets are amortized
on a straight-line basis over the contractual term of one to seven years. Other intangibles are amortized on a straight-line
basis over the estimated useful lives of three to ten years. The weighted-average amortization period for intangible assets is
5.1 years.
Amortization of intangible assets, totaled $22 million, $37 million, and $44 million from May 15, 2007 through December 31,
2007, from January 1, 2007 through May 14, 2007, and in 2006, respectively. The Company estimates that unamortized costs
of intangible assets at December 31, 2007 will be amortized over the next five years as follows: $53 million in 2008, $41 million
in 2009, $37 million in 2010, $20 million in 2011, and $12 million in 2012.
200 8 AN NU AL RE PO RT
125
DISCOVERY COMMUNICATION HOLDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
10. INVESTMENTS
The following table outlines the Company’s less than wholly-owned ventures and the method of accounting during 2007:
Affiliates
Accounting Method
Joint Ventures with the BBC:
JV Programs LLC (“JVP”)
Joint Venture Network LLC (“JVN”)
Animal Planet Europe
Animal Planet Latin America
People & Arts Latin America
Animal Planet Asia
Animal Planet Japan
Animal Planet Canada
Other Ventures:
Animal Planet United States (Note 12)
Discovery Canada
Discovery Japan
Discovery Health Canada
Discovery Kids Canada
Discovery Civilization Canada
HSWi (Note 4)
Consolidated
Consolidated
Consolidated
Consolidated
Consolidated
Consolidated
Consolidated
Equity
Consolidated
Equity
Equity
Equity
Equity
Equity
Equity
Joint Ventures with the BBC
The Company and the BBC have formed several cable and satellite television network joint ventures, JVP, a venture to produce
and acquire factual-based content, and JVN, a venture to provide debt funding to these joint ventures.
In addition to its own funding requirements, the Company has assumed the BBC funding requirements, giving the Company
preferential cash distribution with these ventures. The Company controls substantially all of the BBC ventures and consolidates
them accordingly. As the BBC does not have risk of loss, no BBC cumulative losses were allocated to minority interest for
consolidated joint ventures with the BBC, and the Company recognizes both its and the BBC’s share of cumulative losses in
the equity method venture with the BBC. After December 31, 2006, JVP obtained a level of cumulative profitability. Minority
interest expense of $4 million and $1 million for the BBC’s share of earnings in JVP was recognized from May 15, 2007 through
December 31, 2007 and from January 1, 2007 through May 14, 2007, respectively.
Other Ventures
The Company is a partner in international joint venture cable and satellite television networks. The Company also acquired
an equity interest in HSWi stock as a result of its acquisition of HSW. DCI provided no funding to the equity ventures in 2007
or 2006. At December 31, 2007, the Company’s maximum exposure to loss as a result of its involvement with the equity joint
ventures is the $47 million investment book value and future operating losses, should they occur, of the equity joint ventures
that the Company is obligated to fund.
126
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DISCOVERY COMMUNICATION HOLDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
11. DEBT
Successor
December 31, 2007
(Amounts in millions)
$1.0 billion Term Loan A due quarterly December 2008 to October 2010
$
$1.6 billion Revolving Loan, due October 2010
€260 million Revolving Loan, due April 2009
$1.5 billion Term Loan B due quarterly September 2007 to May 2014
8.06% Senior Notes, semi-annual interest, due March 2008
7.45% Senior Notes, semi-annual interest, due September 2009
8.37% Senior Notes, semi-annual interest, due March 2011
8.13% Senior Notes, semi-annual interest, due September 2012
Floating Rate Senior Notes, semi-annual interest, due December 2012
6.01% Senior Notes, semi-annual interest, due December 2015
£10 million Uncommitted Facility, due August 2008
Obligations under capital leases
Other notes payable
Subtotal
Current portion
Total long-term debt
$
1,000
338
94
1,492
180
55
220
235
90
390
9
37
1
4,141
( 32 )
4,109
In May 2007, Discovery entered into a $1.5 billion seven year term loan credit agreement. Borrowings under this agreement
bear interest at London Interbank Offered Rate (“LIBOR”) plus an applicable margin of 2.0% or the higher of (a) the Federal
Funds Rate plus 1 / 2 of 1% or (b) “prime rate” set by Bank of America plus an applicable margin of 1.0%. The Company
capitalized $5 million of deferred financing costs as a result of this transaction. At the end of 2007 there was $1.5 billion
outstanding under the term loan agreement (net of mandatory principal repayments) with a weighted average interest rate
of 6.83%. The average interest rate under this credit agreement was 7.44% for the period May 15, 2007 through December
31, 2007.
In September 2007, the Company’s United Kingdom subsidiary, Discovery Communications Europe Limited (“DCEL”) executed
a £10 million uncommitted facility to supplement working capital requirements. The facility is available through August 1,
2008 and is guaranteed by Discovery. At December 31, 2007 there was £4 million (approximately $9 million) outstanding
under this facility.
In March 2006, DCEL entered into a €70 million three year multicurrency revolving credit agreement (“U.K. credit agreement”)
which enables the Company to draw Euros and British Pounds. In April 2006, the U.K. credit agreement was amended and
restated to provide for syndication and to increase the revolving commitments to €260 million. The Company guarantees
DCEL’s obligations under the U.K. credit agreement. Borrowings under this agreement bear interest at LIBOR plus an
applicable margin based on the Company’s leverage ratios. The cost of the U.K. credit agreement also includes a fee on the
revolving commitments (ranging from 0.1% to 0.3%) based on the Company’s leverage ratio. DCEL capitalized £1 million
(approximately $1 million) of deferred financing costs as a result of this transaction. At the end of 2007 there was £48 million
(approximately U.S. $94 million) outstanding under the multicurrency credit agreement with a weighted average interest
rate of 6.75%. The interest rate averaged 7.05% and 6.42% from May 15, 2007 through December 31, 2007 and from January
1, 2007 through May 14, 2007, respectively. The U.K. credit agreement matures April 2009.
200 8 AN NU AL RE PO RT
127
DISCOVERY COMMUNICATION HOLDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In March 2006 DCI borrowed additional funds under its U.S. Credit Facility (Revolving Loan and Term A) to redeem the
maturing $300 million Senior Notes. At the end of 2007 there was $1.3 billion outstanding ($1.0 billion Term A and $338
million Revolving Loan) under the facility with a weighted average interest rate of 5.61%. The amount available under the
facility was $1.2 billion, net of amounts committed for standby letters of credit of $3 million issued. The average interest rate
under the U.S. Credit Facility was 6.11% and 6.22% from May 15, 2007 through December 31, 2007, and from January 1, 2007
through May 14, 2007, respectively. The Company’s debt agreements have certain restrictions on the payment of dividends
from subsidiaries.
The Company uses derivative instruments to modify its exposure to interest rate fluctuations on its debt. The Term Loans,
Revolving Facility, and Senior Notes contain covenants that require the Company to meet certain financial ratios and place
restrictions on the payment of dividends, sale of assets, borrowing level, mergers, and purchases of capital stock, assets, and
investments.
Future principal payments under the current debt arrangements, excluding obligations under capital leases and other notes
payable, are as follows: $266 million in 2008, $539 million in 2009, $915 million in 2010, $235 million in 2011, $340 million in
2012 and $1.8 billion thereafter. Of the $266 million of principal payments due in 2008, $243 million is excluded from the
current portion of long-term debt as of December 31, 2007 because the Company has the intent and ability to refinance its
obligations on a long-term basis.
Future minimum payments under capital leases are as follows: $9 million in 2008 and 2009, $7 million in 2010, $6 million in
2011, $3 million in 2012, and $10 million thereafter.
12. REDEEMABLE INTERESTS IN SUBSIDIARIES
Animal Planet LP
As of December 31, 2006, one of the DCI’s stockholders held 44,000 senior preferred partnership units of Animal Planet LP
(“APLP”) that had a redemption value of $44 million and carried a rate of return ranging from 8.75% to 13%. APLP’s senior
preferred partnership units were called by DCI in January 2007 for $44 million, plus accrued interest of $1 million. Preferred
returns were recorded as a component of interest expense based on a constant rate of return of 10.75% through the full term
and aggregated $5 million in 2006. DCI reversed $5 million of accrued interest upon exercise of the call.
People & Arts Latin America and Animal Planet Channel Group
The BBC has the right, upon a failure of the People & Arts Latin America or the Animal Planet Channel Group (comprised of
Animal Planet Europe, Animal Planet Asia, and Animal Planet Latin America), the Channel Groups, to achieve certain financial
performance benchmarks to put its interests back to the Company for a value determined by a specified formula every three
years which commenced December 31, 2002. The Company accretes the mandatorily redeemable equity in a subsidiary
to its estimated redemption value through the applicable redemption date. The redemption value estimate is based on a
contractual formula considering the projected results of each network within the channel group.
Based on the Company’s calculated performance benchmarks, the Company believes the BBC has the right to put their
interests as of December 2005. The BBC has 90 days following the valuation of the Channel Groups by an independent
appraiser to exercise their right. During 2006 DCI was notified that the BBC is evaluating whether to execute their rights
under the agreement. As of December 31, 2007, the BBC and the Company are assigning a valuation firm to formally assess
the performance benchmarks and the BBC’s right to put. The Company has accreted to an estimated redemption value of
$49 million as of December 31, 2007, based on certain estimates and legal interpretations. Changes in these assumptions
could materially impact current estimates. Accretion to the redemption value has been recorded as a component of minority
interest expense of $2 million, $1 million, and $9 million from May 15, 2007 through December 31, 2007, from January 1, 2007
through May 14, 2007, and in 2006, respectively.
128
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DISCOVERY COMMUNICATION HOLDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
13. COMMITMENTS AND CONTINGENCIES
Future Minimum Payments
Leases
$
$
81
66
57
41
35
134
414
Successor
Year Ending December 31,
Content
Other
(Amounts in millions)
$
269
$
106
$
67
41
40
41
41
86
71
24
4
—
Total
456
218
169
105
80
176
$
499
$
291
$
1,204
2008
2009
2010
2011
2012
Thereafter
Total
Expenses recorded in connection with operating leases, including rent expense, for continuing and discontinued operations
were $91 million, $53 million, and $143 million from May 15, 2007 through December 31, 2007, from January 1, 2007 through
May 14, 2007, and in 2006, respectively. Expenses recorded in connection with operating leases, including rent expense, for
discontinued operations were $37 million, $9 million, and $24 million from May 15, 2007 through December 31, 2007, from
January 1, 2007 through May 14, 2007, and in 2006, respectively. The Company receives contributions from certain landlords
to fund leasehold improvements. Such contributions are recorded as deferred rent and amortized as reductions to lease
expense over the lease term. Certain of the Company’s leases provide for rental rates that increase or decrease over time. The
Company recognizes operating lease minimum rentals on a straight-line basis over the lease term. The Company’s deferred
rent balance was $24 million at December 31, 2007. Approximately $7 million of Discovery’s deferred rent balance was written
off and included in discontinued operations following the closure of the retail stores.
Discovery has certain contingent considerations in connection with the acquisition of Treehugger.com payable in the event
specific business metrics are achieved totaling up to $6 million over two years (refer to Note 4).
The Company is involved in litigation incidental to the conduct of its business. In addition, the Company is involved in
negotiations with organizations holding the rights to music used in the Company’s content. As global music rights societies
evolve, the Company uses all information available to estimate appropriate obligations. During 2005, DCI analyzed its music
rights reserves and recorded a net reduction to cost of revenue of approximately $11 million. The Company believes the
reserves related to these music rights are adequate and does not expect the outcome of such litigation and negotiations to
have a material adverse effect on the Company’s results of operations, cash flows, or financial position.
14. EMPLOYEE SAVINGS PLANS
The Company maintains employee savings plans, defined contribution savings plans and a supplemental deferred
compensation plan for certain management employees, together the “Savings Plans.” The Company contributions to the
Savings Plans were $6 million, $6 million, and $10 million from May 15, 2007 through December 31, 2007, from January 1, 2007
through May 14, 2007, and in 2006, respectively.
200 8 AN NU AL RE PO RT
129
DISCOVERY COMMUNICATION HOLDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
15. LONG-TERM INCENTIVE PLANS
In October 2005, DCI established a new long-term incentive plan. At inception of the plan, eligible participants in one of DCI’s
previously established long-term incentive plans chose to either continue in that plan or to redeem their vested units at the
December 31, 2004 valuation and receive partially vested units in the new plan. Substantially all participants in the previously
established plan redeemed their vested units and received partially vested units in the new plan. Certain eligible employees
were granted new units in the new plan.
Units partially vested in the new plan have vesting similar to units in the previously established plan. New units awarded
vest 25% per year. The units in the new plan are indexed to the market price of Class A DHC stock. On August 17, 2007, the
Company amended the plan so that each year 25% of the units awarded will expire and the employees will receive a cash
payment for the increase in value. Prior to the amendment, units were paid out every two years over an eight year period.
The Company has authorized the issuance of up to 32 million units under this plan.
Prior to October 2005, DCI maintained two unit-based, long-term incentive plans with substantially similar terms. Units
were awarded to eligible employees following their one-year anniversary of hire and vested 25% per year thereafter. Upon
exercise, participants received the increase in value from the date of issuance. The value of the units was based on changes
in DCI’s value as estimated by an external investment-banking firm utilizing a specified formula of DCI business metrics. The
valuation also included a business group specific discount rate and terminal value based on business risk. The intrinsic value
for unit appreciation had been recorded as compensation expense over the period the units were outstanding. In August
2005, DCI discontinued one of these plans, which resulted in the full vesting and cash redemption of units at the December
31, 2004 valuation, including a 25% premium on appreciated value.
Upon voluntary termination of employment, the Company distributes the intrinsic value of the participant’s vested units,
if participants agree to comply with post-employment obligations for one year in order to receive remaining benefits. The
Company’s cash disbursements under the new plan aggregated $76 million, $8 million and $0 million from May 15, 2007
through December 31, 2007, from January 1, 2007 through May 14, 2007, and in 2006, respectively.
The fair value of the units issued under the new plan has been determined using the Black-Scholes option-pricing model.
The expected volatility represents the calculated volatility of the DHC stock price over each of the various contractual terms.
As a result of the limited trading history of the DHC stock, this amount for units paid out after two years is determined based
on an analysis of DHC’s industry peer group over the corresponding periods. The weighted average assumptions used in this
option-pricing model were as follows:
Weighted Average Assumptions
Successor
Predecessor
May 15, 2007
through December 31,
2007
January 1, 2007
through May 14,
2007
Year Ended
December 31,
2006
3.20 %
1.48
27.93 %
0 %
4.72 %
3.87
23.78 %
0 %
4.78 %
3.86
27.06 %
0 %
Risk-free interest rate
Expected term (years)
Expected volatility
Dividend yield
130
200 8 AN NU AL RE PO RT
DISCOVERY COMMUNICATION HOLDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The weighted average grant date fair values of units granted was $29.65, $18.66, and $16.51 from May 15, 2007 through
December 31, 2007, from January 1, 2007 through May 14, 2007, and in 2006, respectively. The weighted average fair value
of units outstanding was $11.68 as of December 31, 2007. Compensation expense in connection with the new plan was
$79 million, $63 million, and $39 million from May 15, 2007 through December 31, 2007, from January 1, 2007 through May
14, 2007, and in 2006, respectively. The accrued fair values of units outstanding under the new plan were $141 million at
December 31, 2007.
The following table summarizes information about unit transactions (units in millions) for the new plan:
Successor
Predecessor
May 15, 2007 through
December 31, 2007
January 1, 2007 through
May 14, 2007
Year Ended
December 31, 2006
Weighted
Average
Exercise
Price
Units
Outstanding at beginning of period
26.7
$ 16.01
Units exchanged
Units granted
Units exercised
Units redeemed/cancelled
Outstanding at end of period
Vested at Period-end
—
6.4
( 1.1 )
( 5.2 )
26.8
6.6
—
29.65
15.69
15.29
19.42
$ 13.97
Weighted
Average
Exercise
Price
Weighted
Average
Exercise
Price
Units
$ 15.00
24.2
$ 14.82
—
18.66
14.01
15.82
16.01
$ 13.84
—
3.5
( 0.1 )
( 1.3 )
26.3
8.5
—
16.36
13.12
15.43
15.00
$ 13.78
Units
26.3
—
7.8
( 2.3 )
( 5.1 )
26.7
6.5
The Company classified as a current liability the entire long term incentive plan liability of $141 million. At December 31,
2007, there was $137 million of unrecognized compensation cost related to unvested units, which the Company expects
to recognize over a weighted average period of 2.4 years. The weighted average remaining years of contractual life for
outstanding and vested unit awards was 1.48 and 0.75, respectively, for unit awards outstanding as of December 31, 2007. The
aggregate intrinsic value of units outstanding at December 31, 2007 is $228 million. The vested intrinsic value of outstanding
units was $94 million at December 31, 2007.
200 8 AN NU AL RE PO RT
131
DISCOVERY COMMUNICATION HOLDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
16. INCOME TAXES
Domestic and foreign income before income taxes and discontinued operations is as follows:
Income from Continuing Operations before Taxes
Domestic
Foreign
Income from continuing operations before taxes
Successor
Predecessor
May 15, 2007
through
December 31, 2007
January 1, 2007
through
May 14, 2007
Year Ended
December 31,
2006
$
$
255
7
262
$
$
87
15
102
$
$
445
( 26 )
419
Income tax expense from continuing operations for the periods May 15, 2007 through December 31, 2007,
January 1, 2007 through May 14, 2007, and the year ended December 31, 2006 is as follows:
Income Tax Expense
Successor
Predecessor
May 15, 2007
through
December 31, 2007
January 1, 2007
through
May 14, 2007
Year Ended
December 31,
2006
(Amounts in millions)
$
$
52
7
28
87
( 65 )
10
2
( 53 )
( 9 )
25
$
$
20
5
17
42
5
9
3
17
( 7 )
52
$
$
4
6
60
70
115
4
( 4 )
115
5
190
Current:
Federal
State
Foreign
Total current income tax provision
Deferred:
Federal
State
Foreign
Total deferred income tax (benefit) expense
Change in valuation allowance
Total income tax expense
132
200 8 AN NU AL RE PO RT
DISCOVERY COMMUNICATION HOLDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Components of deferred tax assets and liabilities as of December 31, 2007 are as follows:
Deferred Income Tax Assets and Liabilities
Assets:
Loss carry-forwards
Compensation
Accrued expenses
Reserves and allowances
Derivative financial instruments
Investments
Depreciation
Intangibles
Uncertain tax positions
Other
Valuation allowance
Total deferred income tax assets
Liabilities:
Content rights and deferred launch incentives
Foreign currency translation
Unrealized gains on investments
Other
Total deferred income tax liabilities
Deferred income tax assets (liabilities), net
Successor
December 31, 2007
Current
Non-current
(Amounts in millions)
$
$
22
59
11
9
—
—
—
—
—
4
105
—
105
—
—
—
( 1 )
( 1 )
104
$
$
21
10
13
—
7
14
16
68
28
17
194
( 10 )
184
( 157 )
( 6 )
( 25 )
( 7 )
( 195 )
( 11 )
200 8 AN NU AL RE PO RT
133
DISCOVERY COMMUNICATION HOLDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Income tax benefit (expense) from continuing operations differs from the amounts computed by applying the U.S. Federal
income tax rate of 35.0% as a result of the following:
Reconciliation of Effective Tax Rate from Continuing Operations
Successor
Predecessor
May 15, 2007
through
December 31, 2007
January 1, 2007
through
May 14, 2007
Year Ended
December 31,
2006
Federal statutory rate
35.0 %
35.0 %
35.0 %
Increase (decrease) in tax rate arising from:
State income taxes, net of Federal benefit
Foreign income taxes, net of Federal benefit
Non-taxable gain
Travel deferred tax liabilities
Change in U.S. reserve
Non-deductible goodwill write-off
Domestic production deduction
Other
Effective income tax rate
2.4
7.5
( 17.9 )
( 20.4 )
3.3
—
( 1.1 )
0.8
9.6 %
1.9
12.8
—
—
—
3.9
( 1.8 )
( 0.6 )
51.2 %
1.5
7.7
—
—
—
—
—
1.1
45.3 %
The disposal of the Travel Business resulted in a gain of $135 million for book purposes, but the transaction was not recognized
for tax purposes under Internal Revenue Code Sections 355 and 368. The transaction also resulted in a reduction of the
Company’s deferred tax liabilities related to the Travel Channel of $54 million.
As of December 31, 2007, the Company has federal operating loss carry-forwards of $93 million that begin to expire in 2021
and state operating loss carry-forwards of $297 million in various state jurisdictions available to offset future taxable income
that expire in various amounts through 2025. In 2007, the Company acquired federal operating loss carry-forwards of $90
million. The state operating loss carry-forwards are subject to a valuation allowance of $5 million. The change in the valuation
allowance from prior year reflects the elimination of fully reserved state operating loss carry-forwards upon disposal of the
Retail business.
Deferred tax assets are reduced by a valuation allowance relating to the state tax benefits attributable to net operating losses
in certain jurisdictions where realizability is not more likely than not.
The Company’s ability to utilize foreign tax credits is currently limited by its overall foreign loss under Section 904(f) of the
Internal Revenue Code. The Company has no alternative minimum tax credits.
The Company files U.S. federal, state, and foreign income tax returns. With few exceptions, the Company is no longer subject
to audit by the Internal Revenue Service (“IRS”), state tax authorities, or non-U.S. tax authorities for years prior to 2003.
It is reasonably possible that the total amount of unrecognized tax benefits related to tax positions taken (or expected to be
taken) on 2006 and 2007 non-U.S. tax returns could decrease by as much as $33 million within the next twelve months as a
result of settlement of audit issues and/or payment of uncertain tax liabilities, which could impact the effective tax rate.
The IRS is not currently examining the Company’s consolidated federal income tax return. However, some of the Company’s
joint ventures are under examination for the 2004 tax year. The Company does not expect any significant adjustments.
134
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DISCOVERY COMMUNICATION HOLDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
As a result of the implementation of FIN 48, the Company recognized an increase of $36 million in its liability for unrecognized
tax benefits, which was offset in part by a corresponding increase of $31 million in deferred tax assets. The remaining $5
million was accounted for as a reduction to the January 1, 2007 balance of retained earnings. A reconciliation of the beginning
and ending amount of unrecognized tax benefits (without related interest amounts) is as follows:
Reconciliation of Unrecognized Tax Benefits
(Amounts to millions)
Balance at January 1, 2007 (Predecessor)
Additions based on tax positions related to the current year (Successor)
Additions for tax positions of prior years (Successor)
Reductions for tax positions of prior years (Successor)
Settlements (Successor)
Balance at December 31, 2007 (Successor)
$
$
91
12
17
( 29 )
( 2 )
89
Included in the balance at December 31, 2007, are $10 million of tax positions for which the ultimate deductibility is highly
certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax
accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the
annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.
FIN 48 requires uncertain tax positions to be recognized and presented on a gross basis (i.e., without regard to likely offsets
for deferred tax assets, deductions, and/or credits that would result from payment of uncertain tax amounts). On a net basis,
the balance at December 31, 2007 is $45 million (including related interest amounts) after offsetting deferred tax assets,
deductions, and/or credits on the Company’s tax returns.
The Company’s policy is to classify tax interest and penalties related to unrecognized tax benefits as tax expense. Interest
expense related to unrecognized tax benefits recognized was approximately $2 million, $1 million, and $1 million from May
15, 2007 through December 31, 2007, from January 1, 2007 through May 14, 2007, and in 2006, respectively. The Company had
accrued approximately $6 million of total interest payable in the tax accounts as of December 31, 2007. Additional interest of
$1 million was accrued upon adoption of FIN 48 in the first quarter of its fiscal year 2007, with a corresponding reduction to
retained earnings.
17. FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments to modify its exposure to market risks from changes in interest rates and
foreign exchange rates. The Company does not hold or enter into financial instruments for speculative trading purposes.
The Company’s interest expense is exposed to movements in short-term interest rates. Derivative instruments, including
both fixed to variable and variable to fixed interest rate instruments, are used to modify this exposure. These instruments
include swaps and swaptions to modify interest rate exposure. The variable to fixed interest rate instruments have a notional
principal amount of $2.3 billion and have a weighted average interest rate of 4.68% at December 31, 2007. The fixed to
variable interest rate agreements have a notional principal amount of $225 million and have a weighted average interest
rate of 9.65% at December 31, 2007. At December 31, 2007, the Company held an unexercised interest rate swap put with a
notional amount of $25 million at a fixed rate of 5.44%. As a result of unrealized mark-to-market adjustments, ($10) million, $1
million, and $10 million in (losses) gains on these instruments were recorded from May 15, 2007 through December 31, 2007,
from January 1, 2007 through May 14, 2007, and in 2006, respectively.
The fair value of these derivative instruments, which aggregate ($50) million at December 31, 2007, is recorded as a component
of long-term liabilities and other current liabilities in the consolidated balance sheets. Changes in the fair value of these
derivative instruments are recorded as a component of operating cash flows.
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200 8 AN NU AL RE PO RT
DISCOVERY COMMUNICATION HOLDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Of the total of $2.3 billion, a notional amount of $1.5 billion of these derivative instruments are 100% effective cash flow
hedges. The value of these hedges at December 31, 2007 was ($33) million with changes in the mark-to-market value
recorded as a component of other comprehensive income (loss), net of taxes. Should any portion of these instruments
become ineffective due to a restructuring in the Company’s debt, the monthly changes in fair value would be reported as
a component of other income on the Statement of Operations. The Company does not expect any hedge ineffectiveness
in the next twelve months.
The foreign exchange instruments used are spot, forward, and option contracts. Additionally, the Company enters into non-
designated forward contracts to hedge non-dollar denominated cash flows and foreign currency balances. At December 31,
2007, the notional amount of foreign exchange derivative contracts was $174 million. As a result of unrealized mark-to-market
adjustments, ($3) million, ($1) million, and $2 million in (losses) gains were recognized on these instruments from May 15, 2007
through December 31, 2007, from January 1, 2007 through May 14, 2007, and in 2006, respectively. The fair value of these
derivative instruments is recorded as a component of long-term liabilities and other current liabilities in the consolidated
balance sheets. These derivative instruments did not receive hedge accounting treatment.
Fair Value of Financial Instruments
The fair values of cash and cash equivalents, receivables, and accounts payable approximate their carrying values. Marketable
equity securities are carried at fair value and fluctuations in fair value are recorded through other comprehensive income
(loss). Losses on investments that are other than temporary declines in value are recorded in the statement of operations.
The carrying amount of the Company’s borrowings was $4.1 billion and the fair value was $4.2 billion at December 31, 2007.
The carrying amount of all derivative instruments represents their fair value. The net fair value of the Company’s short
and long-term derivative instruments is ($51) million at December 31, 2007; 4%, 11%, 61%, 23%, and 1% of these derivative
instrument contracts will expire in 2008, 2009, 2010, 2011, and thereafter, respectively.
The fair value of derivative contracts was estimated by obtaining interest rate and volatility market data from brokers. As of
December 31, 2007, an estimated 100 basis point parallel shift in the interest rate yield curve would change the fair value of
the Company’s portfolio by approximately $45 million.
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200 8 AN NU AL RE PO RT
DISCOVERY COMMUNICATION HOLDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Credit Concentrations
The Company continually monitors its positions with, and the credit quality of, the financial institutions that are counterparties
to its financial instruments and does not anticipate nonperformance by the counterparties. In addition, the Company limits
the amount of investment credit exposure with any one institution.
The Company’s trade receivables and investments do not represent a significant concentration of credit risk at December 31,
2007 due to the wide variety of customers and markets in which the Company operates and their dispersion across many
geographic areas.
18. RELATED PARTY TRANSACTIONS
The Company identifies related parties as investors in their consolidated subsidiaries, the Company’s joint venture partners
and equity investments, and the Company’s executive management. Transactions with related parties typically result from
distribution of networks, production of content, or media uplink services. Gross revenue earned from related parties was
$21 million, $47 million, and $90 million from May 15, 2007 through December 31, 2007, from January 1, 2007 through May
14, 2007, and in 2006, respectively. Accounts receivable from these entities were $7 million at December 31, 2007. Purchases
from related parties totaled $55 million, $32 million, and $83 million from May 15, 2007 through December 31, 2007, from
January 1, 2007 through May 14, 2007, and in 2006, respectively; of these purchases, $5 million, $3 million, and $8 million
related to capitalized assets from January 1, 2007 through May 14, 2007, May 15, 2007 through December 31, 2007, and in 2006
respectively. Amounts payable to these parties totaled $1 million at December 31, 2007.
200 8 AN NU AL RE PO RT
137
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
We have three series of common stock, Series A, Series B, and Series C, which trade on the Nasdaq Global Select Market
under the symbols DISCA, DISCB, and DISCK, respectively. The following table sets forth the range of high and low sales
prices of shares of our Series A, Series B, and Series C common stock for the periods indicated.
Series A
Common Stock
Series B
Common Stock
Series C
Common Stock
High
Low
High
Low
High
Low
$
17.29
$ 15.00
$ 13.81
$ 10.27
$ 25.50
$ 19.00
$ 18.96
$
9.50
$ 16.87
$ 15.13
$ 14.16
$
9.79
2008
September 18, 2008 through
September 30, 2008
Fourth quarter
Holders
As of February 20, 2009, there were approximately 2,392, 114, and 2,502 record holders of our Series A common stock, Series B
common stock, and Series C common stock, respectively (which amounts do not include the number of shareholders whose
shares are held of record by banks, brokerage houses or other institutions, but include each institution as one shareholder).
Dividends
We have not paid any cash dividends on our Series A common stock, Series B common stock, or Series C 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. Our credit facility restricts our ability
to declare dividends.
Securities Authorized for Issuance Under Equity Compensation Plans
Information regarding securities authorized for issuance under equity compensation plans is incorporated herein by reference
to the Discovery Communications, Inc. definitive Proxy Statement for its 2009 Annual meeting of Shareholders.
138
200 8 AN NU AL RE PO RT
Stock Performance Graph
The following graph sets forth the performance of our Series A common, Series B common stock, and Series C common
stock for the period September 18, 2008 through December 31, 2008 as compared with the performance of the Standard
and Poor’s 500 Index and a peer group index which consists of The Walt Disney Company, Time Warner Inc., CBS Corporation
Class B common stock, Viacom, Inc. Class B common stock, News Corporation Class A Common Stock, and Scripps Network
Interactive, Inc. The graph assumes $100 originally invested on September 18, 2006 and that all subsequent dividends were
reinvested in additional shares.
125
100
75
50
s
r
a
l
l
o
D
DISCA
DISCB
DISCK
S&P 500
Peer Group
September 18, 2008
September 30, 2008
December 31, 2008
DISCA
DISCB
DISCK
S&P 500
Peer Group
September 18,
2008
September 30,
2008
$ 100.00
$ 100.00
$ 100.00
$ 100.00
$ 100.00
$
103.19
$ 105.54
$
$
$
88.50
96.54
92.67
December 31,
2008
$ 102.53
$
$
$
$
78.53
83.69
74.86
68.79
200 8 AN NU AL RE PO RT
139
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200 8 AN NU AL RE PO RT
©2009 Discovery Communications, Inc. All rights reserved. Subscriber numbers and ratings data as of December 31, 2008, according to The Nielsen Company in the U.S.,
and internal data review and external sources where available outside of the U.S. Cumulative subscribers refers to the collective sum of the total number of subscribers
to each of Discovery’s networks or programming services. Internet traffi c data as of December 31, 2008, according to Omniture, Inc.
www.discoverycommunications.com
Nasdaq: DISCA, DISCB, DISCK
One Discovery Place
Silver Spring, Maryland 20910
240-662-2000