ENGLEWOOD, Colo., Nov. 13 /PRNewswire-FirstCall/ -- On November 13,
2006, Discovery Holding Company ("DHC") (Nasdaq: DISCA, DISCB) filed its
Form 10-Q with the Securities and Exchange Commission for the three months
ended September 30, 2006. The following release is being provided to
supplement the information provided to investors in DHC's Form 10-Q as
filed with the SEC.
DHC is comprised of a 100% ownership interest in Ascent Media Group,
LLC ("Ascent Media" or "AMG"), a 100% ownership interest in AccentHealth,
LLC and a 50% ownership interest in Discovery Communications, Inc. ("DCI").
Ascent Media provides creative, media management and network services to
the media and entertainment industries. AccentHealth operates one of the
nation's largest advertising-supported captive audience television networks
serving doctor office waiting rooms nationwide. DCI is a global media and
entertainment company that provides programming in over 170 countries and
territories.
Discovery
The presentation below presents information regarding 100% of DCI's
revenue, operating cash flow and other selected financial statement metrics
even though DHC only owns 50% of the equity of DCI and accounts for DCI as
an equity affiliate. Please see page 4 for a discussion of why management
believes this presentation is meaningful to investors.
DCI's total revenue increased 13% and operating cash flow increased
13%. Total revenue increased due to a 21% increase in distribution revenue
and a 3% increase in advertising revenue.
U.S. Networks' revenue increased 10% to $469 million and operating cash
flow increased 14% to $188 million. The revenue growth was due to an 18%
increase in distribution revenue combined with a 1% decrease in advertising
revenue. The higher distribution revenue was driven by a 13% increase in
paying subscription units and contractual rate increases. Growth in paying
subscription units is occurring predominantly at DCI's emerging networks
that are carried on the digital tier. DCI experienced ratings increases at
three of its largest networks, Discovery Channel, TLC and the Travel
Channel. Despite these increases, advertising revenue decreased by 1%
primarily as a result of lower inventory sell-out rates and the soft ad
market.
U.S. Networks operating expenses increased 7% due to an increase in
programming expense partially offset by a decrease in marketing expense.
Programming expense increased due to the company's continued investment
across all U.S. networks in original productions and high profile series
and specials. The 10% revenue increase combined with the 7% expense
increase resulted in the 14% increase in operating cash flow.
International Networks revenue increased 23% to $223 million and
operating cash flow increased 20% to $36 million. The increase in revenue
was due to growth in both distribution and advertising revenue. Net
distribution revenue increased 26% due to a 16% increase in paying
subscription units. Growth in paying subscription units was primarily due
to growth in Europe, Latin America and Asia where subscription units grew
23% on a combined basis. Net advertising revenue increased 18% primarily
due to higher viewership in Europe and Latin America combined with an
increased subscriber base in most markets worldwide. Operating expenses
increased 23% due to increased programming costs combined with anticipated
increases in headcount as the business continued to expand, particularly in
Europe. These increases were offset by a decrease in marketing expense.
Operating cash flow increased 20% as the growth in revenue outpaced the
growth in operating expenses. Excluding the effects of exchange rates,
revenue increased 20% and operating cash flow increased 19%.
Revenue in the Commerce, Education and Other division increased by 3%.
The increase was the net effect of a 46%, or $4 million, increase in
education revenue offset by a 6%, or a $2 million, decrease in commerce
revenue. The decrease in commerce revenue was primarily due to a 9%
decrease in store revenue resulting from a 5% reduction in the weighted
average number of stores. The 46% increase in education revenue was due to
a 25% increase in streaming service revenue resulting from a 38% increase
in the number of schools paying for streaming service. Operating expenses
increased 15% due to a 65% increase in education expenses attributed to
increases in personnel, product development and marketing expenses to
accommodate the growth of the business and drive awareness and demand for
the new consumer product offering Cosmeo, DCI's internet-based homework
help service. Operating losses increased by 29% due to continued investment
in the education business.
DCI's outstanding debt balance was $2.7 billion at September 30, 2006.
DHC
DHC's consolidated revenue increased 1% to $169 million and
consolidated operating cash flow remained flat at $17 million. The increase
in revenue was primarily due to increases at Ascent Media's creative
services group and network services groups. The creative services group
revenue increased 1% due to higher feature film projects for post
production services and strength in commercial services in the U.S.
partially offset by continued weakness in television film services in the
U.K. The network services' group revenue increased 1% due to higher revenue
from the acquisition of AccentHealth offset by the impact of certain
contract terminations for content distribution services in the U.K. and
smaller scope contracts in the systems integration group.
During the third quarter, Ascent Media announced that it will
streamline its organizational structure into two global operating divisions
- creative services and network services - to better align its resources
with the company's strategic goals and to more effectively respond to
changes within the industry driven by technology and customer requirements.
The operations of the current media management services group have been
realigned and consolidated with the creative services group and the network
services group, subsequent to September 30, 2006. As part of this
restructuring, Ascent Media's Chief Executive Officer, along with other
officers of the company, have either left, or will be leaving, the company.
Day to day management of Ascent Media is now the responsibility of Ascent
Media's management committee, which is comprised of certain of Ascent
Media's senior management.
OTHER EVENTS
Discovery Communications Announces Roger F. Millay as Chief Financial
Officer
On September 7, 2006, Discovery Communications announced the selection
of Roger F. Millay as senior executive vice president and Chief Financial
Officer. Millay previously served as senior vice president and Chief
Financial Officer of Airgas, Inc., the largest distributor of industrial,
medical and specialty gases and the third-largest distributor of safety
supplies in the United States. Millay was recently selected as Senior
Financial Officer of the Year by Chemical Week. Prior to joining Airgas,
Millay spent 12 years at General Electric Capital Corporation, most
recently serving as senior vice president and Chief Financial Officer at
Transport International Pool, a leasing and equipment management division.
As CFO of Discovery Communications, Millay will be responsible for
leading the global financial functions and future financial strategies and
will direct all accounting, treasury, budgeting, audit and tax activities.
Millay will also serve on Discovery's executive committee and will be a key
contributor to the overall strategic direction of the company.
As previously announced, current CEO Judith McHale announced her
retirement from Discovery Communications effective December 1, 2006.
Discovery Communications is currently conducting a search for a new Chief
Executive Officer.
Discovery Communications Announces Formation of Animal Planet Media
Enterprises
On November 2, 2006, Discovery Communications announced the formation
of a new integrated, multiplatform business called Animal Planet Media
Enterprises and the acquisition of two leading companies in the pet
industry - Petfinder.com and PetsIncredible. Well-established among pet
lovers, both businesses will expand the portfolio of services and content
for the newly formed Animal Planet Media Enterprises. Petfinder.com is the
#1 pet-related Web property globally that facilitates pet adoption and
works through 10,000 animal shelters across North America. PetsIncredible
is a major producer and distributor of pet-training videos and includes web
service PetVideo.com. Both companies will be immediately integrated into
Animal Planet Media Enterprises in a seamless transition for users and
customers of both products and services.
Animal Planet Media Enterprises marks the first time animal lovers and
pet owners will have access to a centralized online, television and mobile
community for research tools, expert advice, local resources, customized
products and services, do-it-yourself projects, and user-generated and
interactive content. The new business unit also includes the Animal Planet
television network, celebrating its 10th anniversary this year, online
assets including http://www.animalplanet.com, the newly launched 24/7 broadband
channel, Animal Planet Beyond, and other media platforms including a robust
Video-on- Demand service; mobile content; and merchandise extensions.
NOTES
As a supplement to DHC's consolidated statements of operations included
in its 10-Q, the preceding is a presentation of financial information on a
stand alone basis for DCI and for the consolidated results of DHC for the
three months ended September 30, 2006.
Unless otherwise noted, the foregoing discussion compares financial
information for the three months ended September 30, 2006 to the same
periods in 2005. Please see page 5 of this press release for the definition
of operating cash flow and a discussion of management's use of this
performance measure. Schedule 1 to this press release provides a
reconciliation of DHC's consolidated segment operating cash flow for its
operating segments to consolidated earnings before income taxes. Schedule 2
to this press release provides a reconciliation of the operating cash flow
for DHC and DCI to that entity's operating income for the same period, as
determined under GAAP. Certain prior period amounts have been reclassified
for comparability with the 2006 presentation.
OUTSTANDING SHARES AND LIQUIDITY
At September 30, 2006, there were approximately 280.2 million
outstanding shares of DISCA and DISCB and 5.1 million shares of DISCA and
DISCB reserved for issuance pursuant to warrants and employee stock
options. At September 30, 2006, there were 820,005 options that had a
strike price that was lower than the closing stock price. Exercise of these
options would result in aggregate proceeds of approximately $10.3 million.
At September 30, 2006, DHC had $203 million of cash and liquid investments
and no debt.
Certain statements in this press release may constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, such as trend information in the discussion
of DCI's and Ascent Media's revenue, expenses and operating cash flow. Such
forward-looking statements involve known and unknown risks, uncertainties
and other important factors that could cause the actual results,
performance or achievements of the operating businesses of DHC included
herein or industry results, to differ materially from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such risks, uncertainties and other factors include, among
others: the risks and factors described in the publicly filed documents of
DHC, including the most recently filed Form 10-Q of DHC; general economic
and business conditions and industry trends including in the advertising
and retail markets; spending on domestic and foreign advertising; the
continued strength of the industries in which such businesses operate;
continued consolidation of the broadband distribution and movie studio
industries; uncertainties inherent in proposed business strategies and
development plans; changes in distribution and viewing of television
programming, including the expanded deployment of personal video recorders
and IP television and their impact on television advertising revenue; rapid
technological changes; future financial performance, including
availability, terms and deployment of capital; availability of qualified
personnel; the development and provision of programming for new television
and telecommunications technologies; changes in, or the failure or the
inability to comply with, government regulation, including, without
limitation, regulations of the Federal Communications Commission, and
adverse outcomes from regulatory proceedings; adverse outcomes in pending
litigation; changes in the nature of key strategic relationships with
partners and joint ventures; competitor responses to such operating
businesses' products and services, and the overall market acceptance of
such products and services, including acceptance of the pricing of such
products and services; and threatened terrorist attacks and ongoing
military action, including armed conflict in the Middle East and other
parts of the world. These forward-looking statements speak only as of the
date of this Release. DHC expressly disclaims any obligation or undertaking
to disseminate any updates or revisions to any forward-looking statement
contained herein to reflect any change in DHC's expectations with regard
thereto or any change in events, conditions or circumstances on which any
such statement is based.
Contact: John Orr (720) 875-5622
SUPPLEMENTAL INFORMATION
Please see page 5 for the definition of operating cash flow (OCF) and
Schedule 2 at the end of this document for reconciliations for the
applicable periods in 2005 and 2006 of operating cash flow to operating
income, as determined under GAAP, for each identified entity.
The selected information for DCI below presents 100% of the revenue,
operating cash flow, operating income and other selected financial metrics
for DCI even though DHC owns only 50% of DCI and accounts for it as an
equity affiliate. This presentation is designed to reflect the manner in
which DHC's management reviews the operating performance of its investment
in DCI. It should be noted, however, that the presentation is not in
accordance with GAAP since the results of operations of equity method
investments are required to be reported on a net basis. Further DHC could
not, among other things, cause DCI to distribute to DHC our proportionate
share of the revenue or operating cash flow of DCI.
The selected financial information presented for DCI was obtained
directly from DCI. DHC does not control the decision-making processes or
business management practices of DCI. The above discussion and following
analysis of DCI's operations and financial position has been prepared based
on information that DHC receives from DCI and represents DHC's views and
understanding of DCI's operating performance and financial position based
on such information. DCI is not a separately traded public company, and DHC
does not have the ability to cause DCI's management to prepare their own
management's discussion and analysis for our purposes. Accordingly, we note
that the material presented in this publication might be different if DCI's
management had prepared it. DHC is not aware, however, of any errors in or
possible misstatements of the financial information provided to it by DCI
that would have a material effect on DHC's consolidated financial
statements.
QUARTERLY SUMMARY
(amounts in millions) 3Q05 4Q05 1Q06 2Q06 3Q06
DISCOVERY HOLDING COMPANY (100%)
Revenue $168 174 154 166 169
OCF $17 23 13 10 17
Operating Income (Loss) $(1) 2 (3) (6) (97)
DISCOVERY COMMUNICATIONS,
INC. (50.0%) (1)
Revenue - U.S. Networks (2) $428 444 443 498 469
Revenue - International
Networks (3),(4) 182 218 193 207 223
Revenue - Commerce, Education
& Other (5) 29 110 23 28 30
Revenue - Total $639 772 659 733 722
OCF - U.S. Networks (2) $165 148 152 206 188
OCF - International
Networks (3),(4) 30 34 31 25 36
OCF - Commerce, Education
& Other (5) (24) 2 (38) (41) (31)
OCF - Total $171 184 145 190 193
Operating Income $166 121 110 152 160
(1) DCI - Certain prior period amounts have been reclassified to conform
to the current period presentation.
(2) DCI - Discovery Networks U.S.: Discovery Channel, TLC, Animal Planet,
Travel Channel, Discovery Health Channel, Discovery Kids Channel, The
Science Channel, Discovery Times Channel, Discovery Home, Military
Channel, Discovery HD Theater, Fit TV, BBC-America, BBC World News
Representation and online and other initiatives.
(3) DCI - Discovery Networks International: Discovery Channels in UK,
Europe, Latin America, Asia, India, Africa, Middle East; Discovery
Kids in UK, Latin America; Discovery Travel & Living in UK, Europe,
Latin America, Asia, India; Discovery Home & Health in UK, Latin
America, Asia; Discovery Real Time in UK, Europe, Asia; Discovery
Civilisation in UK, Europe, Latin America, Middle East; Discovery
Science in UK, Europe, Latin America, Asia, Middle East; Discovery
Wings in UK; Animal Planet in UK, Germany, Italy; Discovery en
Espanol, Discovery Kids en Espanol, Discovery Travel & Living (Viajar
y Vivir) in U.S.; Discovery Geschichte in Germany; Discovery HD in UK,
Germany; DMAX in Germany; Discovery Turbo in Latin America and
Spain/Portugal and consolidated BBC/DCI joint venture networks (Animal
Planet networks in Europe, Latin America, Japan, Asia, Africa; Middle
East; People + Arts in Latin America and Spain/Portugal).
Discovery Networks International Joint Ventures - Consolidated
Discovery Networks International joint venture networks (Animal Planet
networks in Europe, Latin America, Japan, Asia, Africa, Middle East;
People + Arts in Latin America and Spain/Portugal) are composed of
joint ventures with British Broadcasting Corporation. These ventures
are controlled by DCI and consolidated into the results of Discovery
Networks International. The equity in the assets of these joint
ventures is predominantly held 50/50 by DCI and BBC. Exceptions
involve participants related to the local market in which a specific
network operates.
(4) DCI - Discovery Networks International - Equity Affiliates:
DCI accounts for its interests in joint ventures it does not control
as equity method investments. The operating results of joint ventures
that DCI does not control, including Discovery Channel Canada,
Discovery Channel Japan, Discovery HD Japan, Discovery Kids Canada,
Discovery Health Canada, Discovery Civilization Canada, Discovery HD
Canada, and Animal Planet Canada are not consolidated and are not
reflected in the results presented above.
(5) DCI - Commerce, Education and Other: Commerce, Education & Other is
comprised of a North American chain of over 100 Discovery Channel
retail stores, a mail-order catalog business, an on-line shopping
site, a licensing and strategic partnerships business, and an
educational business that reaches many students in the U.S. through
the sale of supplemental hardcopy products and the delivery of
streaming video-on-demand through its digital internet enabled
platforms.
NON-GAAP FINANCIAL MEASURES
This press release includes a presentation of operating cash flow,
which is a non-GAAP financial measure, for DHC on a consolidated basis and
DCI on a stand alone basis together with a reconciliation of that non-GAAP
measure to such entity's operating income, determined under GAAP. DHC
defines operating cash flow as revenue less cost of sales, operating
expenses, and selling, general and administrative expenses (excluding stock
and other equity-based compensation). Operating cash flow, as defined by
DHC, excludes depreciation and amortization, stock and other equity-based
compensation and restructuring and impairment charges that are included in
the measurement of operating income pursuant to GAAP.
DHC believes operating cash flow is an important indicator of the
operational strength and performance of its businesses, including the
ability to service debt and fund capital expenditures. In addition, this
measure allows management to view operating results and perform analytical
comparisons and benchmarking between businesses and identify strategies to
improve performance. Because operating cash flow is used as a measure of
operating performance, DHC views operating income as the most directly
comparable GAAP measure. Operating cash flow is not meant to replace or
supercede operating income or any other GAAP measure, but rather to
supplement the information to present investors with the same information
as DHC's management considers in assessing the results of operations and
performance of its assets. Please see the attached schedules for a
reconciliation of consolidated segment operating cash flow to consolidated
earnings before income taxes (Schedule 1) and a reconciliation of each
identified entity's operating cash flow to its operating income calculated
in accordance with GAAP (Schedule 2).
DISCOVERY HOLDING COMPANY
SCHEDULE 1
The following table provides a reconciliation of consolidated segment
operating cash flow to earnings before income taxes for the three months
ended September 30, 2005 and 2006, respectively.
(amounts in millions) Q305 Q306
Consolidated segment operating cash flow $17 17
Stock compensation -- --
Depreciation and amortization (18) (16)
Impairment of Goodwill -- (93)
Share of earnings of DCI 33 32
Other, net 1 (3)
Earnings (loss) before income taxes $33 (63)
SCHEDULE 2
The following tables provide reconciliation of operating cash flow to
operating income calculated in accordance with GAAP for the three months
ended September 30, 2005, December 31, 2005, March 31, 2006, June 30, 2006
and September 30, 2006, respectively.
(amounts in millions) 3Q05 4Q05 1Q06 2Q06 3Q06
DISCOVERY HOLDING COMPANY (100%)
Operating Cash Flow $17 24 13 10 17
Depreciation and Amortization (18) (21) (16) (16) (16)
Stock Compensation Expense -- (1) -- -- --
Other -- -- -- -- (98)
Operating Income (Loss) $(1) 2 (3) (6) (97)
DISCOVERY COMMUNICATIONS,
INC. (50.0%)
Operating Cash Flow $171 184 145 190 193
Depreciation and Amortization (31) (32) (30) (33) (32)
Long-Term Incentive Plan 26 (31) (5) (5) (1)
Other -- -- -- -- --
Operating Income $166 121 110 152 160
SOURCE Discovery Holding Company
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CONTACT:
John Orr, +1-720-875-5622, for Discovery
Holding Company
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