prer14a
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment
No. 1
to
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the Registrant x
Filed by a Party other than the Registrant o
Check the appropriate box:
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Preliminary Proxy Statement |
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Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) |
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Definitive Proxy Statement |
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Definitive Additional Materials |
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Soliciting Material Pursuant to §240.14a-12 |
Discovery Holding Company
(Name of Registrant as Specified In Its Charter)
N/A
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
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Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. |
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(1)
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Title of each class of securities to which transaction applies:
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Discovery Holding Company Series A Common Stock, par value $.01 per share
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Discovery Holding Company Series B Common Stock, par value $.01 per share
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Discovery Communications, Inc. Series A Common Stock, par value $.01 per share
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Discovery Communications, Inc. Series B Common Stock, par value $.01 per share
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Discovery Communications, Inc. Series C Common Stock, par value $.01 per share
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Discovery Communications,
Inc. Series A Convertible Participating Preferred Stock, par value $.01 per share
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Discovery Communications,
Inc. Series C Convertible Participating Preferred Stock, par value $.01 per share
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(2)
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Aggregate number of securities to which transaction applies:
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As of May 31, 2008, there were (1) 269,209,385 shares of DHC Series A Common Stock
outstanding (which for this purpose includes shares subject to outstanding equity
incentive awards), and (2) 14,866,221 shares of DHC Series B Common Stock
outstanding (which for this purpose includes shares subject to outstanding equity
incentive awards). Based on the foregoing, following the transaction, there would
be outstanding (1) 134,604,693 shares of New Discovery Series A Common Stock (which
for this purpose includes shares subject to outstanding equity incentive awards),
(2) 7,433,111 shares of New Discovery Series B Common Stock (which for this purpose
includes shares subject to outstanding equity incentive awards), and (3)
142,037,803 shares of New Discovery Series C Common Stock (which for this purpose
includes shares subject to outstanding equity incentive awards). Based on the
foregoing, 70,308,038 shares of New Discovery Series A Convertible Participating
Preferred Stock and 70,308,038 shares of New Discovery Series C Convertible
Participating Preferred Stock would be issued in the Transaction (exclusive of any
shares that may subsequently be placed in escrow in favor of the preferred
stockholders).
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(3)
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Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated
and state how it was determined):
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The filing fee is being calculated based upon an aggregate transaction value of
$6,947,123,554.08, which is obtained by: (1) multiplying the number of outstanding
shares of DHC Series A Common Stock and DHC Series B Common Stock listed above by
the averages of the high and low prices reported for each series of DHC Common
Stock on the Nasdaq Global Select Market on June 4, 2008 (which were $26.27 for the
Series A and $26.05 for the Series B), (2) subtracting therefrom the book value
($654,919,000 as of March 31, 2008) of Ascent Media Corporation (which is currently
included in the market capitalization of DHC but will not be part of the
Transaction (as defined in the accompanying preliminary proxy statement/prospectus)), and (3)
adding thereto the book value ($143,933,000 as of March 31, 2008) of the assets to
be contributed by Advance/Newhouse in exchange for the issuance of the New
Discovery convertible preferred stock.
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(4)
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Proposed maximum aggregate value of transaction:
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$6,947,123,554.08 |
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(5)
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Total fee paid:
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$273,021.96, estimated pursuant to Section 14(g) of the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder, on the
basis of $39.30 per million of the estimated maximum aggregate value of the
transaction.
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x |
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Fee paid previously with preliminary materials. |
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Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the
offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule
and the date of its filing. |
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(1)
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Amount Previously Paid: |
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(2)
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Form, Schedule or Registration Statement No.: |
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(3)
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Filing Party: |
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(4)
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Date Filed: |
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Persons who are to respond to the collection of information contained in this form
are not required to respond unless the form displays a currently valid OMB control
number. |
The
information in this proxy statement/prospectus is not complete
and may be changed. We may not sell the securities offered by
this proxy statement/prospectus until the registration statement
of which this proxy statement/prospectus forms a part is
declared effective by the Securities and Exchange Commission.
This proxy statement/prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any securities in any
jurisdiction where an offer or solicitation is not permitted.
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SUBJECT
TO COMPLETION, DATED JULY 18, 2008
[ ],
2008
Dear Stockholders,
We are pleased to present for your consideration and approval
two related proposals, which, if approved, would result in
Discovery Communications, LLC (Discovery) becoming a
wholly-owned subsidiary of our company. Today, Discovery is
jointly owned by our company, with a
662/3%
interest, and Advance/Newhouse Programming Partnership, with a
331/3%
interest.
Pursuant to the first proposal, which we refer to as the
merger proposal, our company will become a subsidiary of
a new public holding company, Discovery Communications, Inc.,
which we refer to as New Discovery, in which you will be
entitled to receive, for each share of Series A common
stock or Series B common stock of our company owned by you,
0.50 of a share of the same series of common stock of New
Discovery plus 0.50 of a share of Series C common
stock of New Discovery. All three series of New Discovery common
stock (Series A, B and C) will have the same rights,
powers and preferences except as to voting, with Series B
having 10 votes per share, Series A having one vote per
share, and Series C not having any voting rights except as
required by Delaware law.
Pursuant to the second proposal, which we refer to as the
preferred stock issuance proposal, New Discovery will
issue two series of New Discovery convertible preferred stock
(Series A and Series C) to Advance/Newhouse, in
exchange for its contribution to New Discovery of its entire
interest in Discovery and its interest in Animal Planet, L.P.
The convertible preferred stocks will initially be convertible,
on an
as-converted
basis, into one-third of the common equity of New Discovery,
with the Series A convertible preferred stock being
convertible into shares of New Discovery Series A common
stock and the Series C convertible preferred stock being
convertible into shares of New Discovery Series C common
stock. Advance/Newhouse will be entitled to additional shares of
convertible preferred stock following the merger upon exercise
of certain options and stock appreciation rights that will be
outstanding immediately after the merger. The New Discovery
convertible preferred stock will have certain class voting
rights and will elect three members of New Discoverys
board of directors. Otherwise, the preferred stock will vote
with the New Discovery common stock on an
as-converted basis, except that it will not vote on
directors elected by the holders of New Discovery common stock.
We refer to our merger and the contribution by Advance/Newhouse
of its interest in Discovery and Animal Planet, L.P. in exchange
for the New Discovery convertible preferred stock as the
Transaction.
Just prior to the Transaction, we will spin off to our current
stockholders the businesses of our subsidiary Ascent Media
Corporation. We are not seeking stockholder approval for the
spin-off.
We believe that the Transaction, together with the spin-off,
will create tremendous value for our stockholders by
transforming our company into a pure-play high quality
programming company. Your board of directors has approved the
Transaction, believes it is in the best interests of our
stockholders, and recommends that you vote in favor of the
merger proposal and the preferred stock issuance proposal, which
we refer to as the transaction proposals.
The vote on the transaction proposals will occur at our 2008
Annual Meeting of Stockholders, which will be held at
the
in
on ,
2008. We will also be attending to annual business matters at
the Annual Meeting, including a proposal to re-elect
Messrs. John Malone and Robert Bennett as Class III
directors, as explained in the accompanying Notice of Annual
Meeting. Before voting on any of the proposals submitted for
your consideration, please be sure to read the accompanying
proxy statement/prospectus because it contains important
information about the matters to be acted upon.
New Discovery will have an eleven-member board of directors
after completion of the Transaction, which will initially be
composed of the existing members of our board of directors,
including Messrs. Malone and Bennett, a new independent
director, two new directors who are current executives of
Discovery and three additional directors who are to be elected
by Advance/Newhouse pursuant to the terms of the New Discovery
convertible preferred stock. Two of the initial electees of
Advance/Newhouse will be Robert J. Miron, Chairman of
Advance/Newhouse, and Steven A. Miron, the Chief Executive
Officer of Advance/Newhouse. The management team of New
Discovery will consist of the current management team of
Discovery.
We expect to list the New Discovery Series A and
Series B common stock on the Nasdaq Global Select Market
under the symbols DISCA and DISCB, the
same symbols under which our existing Series A and
Series B common stock are listed, and the New Discovery
Series C common stock to be listed on the Nasdaq Global
Select Market under the symbol DISCK.
We are very excited about the proposed Transaction, and we look
forward to obtaining your approval at the Annual Meeting. As
discussed in the accompanying proxy statement/prospectus, the
Transaction is subject to a number of conditions in addition to
approval by our stockholders at the Annual Meeting.
Your vote is very important, regardless of the number of
shares you own. Whether or not you plan to attend the Annual
Meeting, please vote as soon as possible to make sure that your
shares are represented.
Thank you for your continued support and interest in our company.
Sincerely,
John C. Malone
Chief Executive Officer and
Chairman of the Board
Discovery Holding
Company
This letter to stockholders also serves as the cover of the
prospectus of New Discovery. Pursuant to the Registration
Statement of which this proxy statement/prospectus forms a part,
New Discovery will offer up to 134,604,693 shares of its
Series A common stock, 7,433,111 shares of its
Series B common stock, and 142,037,803 shares of its
Series C common stock in the Transaction, based on the
number of outstanding shares of DHC common stock as of
May 31, 2008.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of the
Transaction or the securities being offered in the Transaction,
has passed upon the merits of the Transaction or passed upon the
adequacy or accuracy of the disclosure in this proxy
statement/prospectus. Any representation to the contrary is a
criminal offense.
Investing in our securities involves risks. See Risk Factors
beginning on page 23.
The accompanying proxy statement/prospectus is dated
[ ],
2008 and is first being mailed on or about
[ ],
2008 to our stockholders of record as of 5:00 p.m., New
York City time, on
[ ],
2008.
REFERENCES
TO ADDITIONAL INFORMATION
Discovery Holding Company is subject to the information and
reporting requirements of the Securities Exchange Act of 1934
and, in accordance with the Exchange Act, DHC files periodic
reports and other information with the Securities and Exchange
Commission. In addition, this proxy statement/prospectus
incorporates important business and financial information about
DHC from other documents that are not included in or delivered
with this proxy statement/prospectus. This information is
available to you without charge upon your written or oral
request. You can obtain copies of documents filed by DHC with
the SEC, including the documents incorporated by reference in
this proxy statement/prospectus, through the SEC website at
http://www.sec.gov
or by contacting DHC by writing or telephoning the office of
Investor Relations:
Discovery
Holding Company
12300 Liberty Boulevard
Englewood, Colorado 80112
Telephone: (877)
772-1518
If you would like to request any documents, please do so by
[ ],
2008 in order to receive them before the Annual Meeting. If
you request any documents, they will be mailed to you by first
class mail, or another equally prompt means, within one business
day after your request is received.
See Additional Information Where You Can Find
More Information beginning on page 146.
DISCOVERY
HOLDING COMPANY
a Delaware
Company
12300
Liberty Boulevard
Englewood, Colorado 80112
(720) 875-4000
NOTICE OF ANNUAL MEETING OF
STOCKHOLDERS
To Be Held
[ ],
2008
Dear Discovery Holding Company Stockholder:
You are cordially invited to attend, and notice is hereby given
of, the 2008 Annual Meeting of Stockholders of Discovery Holding
Company (DHC) to be held at
[ ],
on
[ ],
2008 at
[ ] a.m.,
local time, for the following purposes:
1. To consider and vote upon a proposal to adopt the
Agreement and Plan of Merger, dated as of June 4, 2008,
among DHC, Discovery Communications, Inc. (New Discovery)
and Merger Sub, Inc. (Merger Sub), a wholly-owned
subsidiary of New Discovery, pursuant to which, among other
things, Merger Sub would merge with and into DHC, and each
outstanding share of DHC Series A and Series B common
stock would be exchanged for 0.50 of a share of the same series
of New Discovery common stock plus 0.50 of a share of New
Discovery Series C common stock. We refer to this proposal
as the merger proposal.
2. To consider and vote upon a proposal to issue New
Discovery Series A and Series C convertible preferred
stock to Advance/Newhouse Programming Partnership in exchange
for its contribution to New Discovery of its entire indirect
interest in Discovery Communications, LLC and Animal Planet,
L.P. (Animal Planet). We refer to this proposal as the
preferred stock issuance proposal.
We refer to the merger proposal and the preferred stock issuance
proposal together as the transaction proposals. Each of
the merger proposal and the preferred stock issuance proposal is
dependent on the other, and neither will be implemented unless
they are both approved at the Annual Meeting.
In addition to the transaction proposals, at the Annual Meeting
you will be asked:
3. To consider and vote upon a proposal to re-elect John C.
Malone and Robert R. Bennett to serve as Class III members
of our board of directors until the 2011 Annual Meeting of
stockholders or until their successors are elected. We refer to
this proposal as the election of directors proposal.
4. To consider and vote upon a proposal to ratify the
selection of KPMG LLP as our independent auditors for the fiscal
year ending December 31, 2008. We refer to this proposal as
the auditors ratification proposal.
We refer to the election of directors proposal and the auditors
ratification proposal together as the annual business
proposals. We will also transact such other business as may
properly be presented at the Annual Meeting or any postponements
or adjournments of the meeting.
We describe the transaction proposals and the annual business
proposals in more detail in the accompanying proxy
statement/prospectus. We encourage you to read the proxy
statement/prospectus in its entirety before voting.
Holders of record of DHC common stock as of 5:00 p.m., New
York City time, on
[ ],
2008, the record date (record date) for the Annual
Meeting, will be entitled to notice of and to vote at the Annual
Meeting or any adjournment or postponement thereof. The
affirmative vote of the holders of at least a majority of the
aggregate voting power of the shares of both series of DHC
common stock outstanding on the record date, voting together as
a single class, is required to approve each of the transaction
proposals. The affirmative vote of the holders of a
plurality of the votes of the shares of both series of DHC
common stock outstanding on the record date, voting as a single
class, that are voted at the Annual Meeting, in person or by
proxy, is required to re-elect each of Messrs. Malone and
Bennett as a Class III member of our board of directors
pursuant to the election of directors proposal. The affirmative
vote of the holders of at least a majority of the aggregate
voting power of the shares of both series of DHC common stock
outstanding on the record date and present at the Annual
Meeting, in person or by proxy, voting together as a single
class, is required to approve the auditors ratification
proposal. A list of stockholders entitled to vote at the Annual
Meeting will be available at the office of DHC for review by any
DHC stockholder, for any purpose germane to the Annual Meeting,
for at least 10 days prior to the Annual Meeting.
The board of directors of DHC unanimously recommends that you
vote FOR approval of the merger proposal and the
preferred stock issuance proposal, FOR the
re-election of Messrs. Malone and Bennett as Class III
directors, and FOR the auditor ratification
proposal.
Your vote is very important, regardless of the number of shares
you own. To make sure your shares are represented at the Annual
Meeting, please vote as soon as possible, whether or not you
plan to attend the Annual Meeting. You may vote by proxy in any
one of the following ways:
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Use the toll-free telephone number shown on the proxy card;
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Use the Internet website shown on the proxy card; or
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Complete, sign, date and promptly return the enclosed proxy card
in the postage-paid envelope. It requires no postage if mailed
in the United States.
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You may revoke your proxy in the manner described in the
accompanying proxy statement/prospectus. If you attend the
Annual Meeting, you may vote your shares in person even if you
have previously submitted a proxy.
By Order of the Board of Directors,
Charles Y. Tanabe
Senior Vice President, General Counsel and
Secretary
Englewood, Colorado
[ ],
2008
PLEASE COMPLETE, EXECUTE AND RETURN THE ENCLOSED PROXY CARD
PROMPTLY OR VOTE BY TELEPHONE OR OVER THE INTERNET, WHETHER OR
NOT YOU INTEND TO BE PRESENT AT THE ANNUAL MEETING. IF YOU HAVE
ANY QUESTIONS ABOUT THE PROPOSALS OR ABOUT VOTING YOUR DHC
SHARES, PLEASE
CALL
AT .
TABLE
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What Will Advance/Newhouse Receive in the Transaction
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Effect of Transaction on Relative Ownership Percentages
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Pro Forma Security Ownership of Certain Beneficial Owners of New
Discovery
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Pro Forma Security Ownership of New Discovery Management
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146
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Information Concerning Discovery Communications Holding, LLC
Including
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Its Wholly-Owned Subsidiary Discovery Communications, LLC
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Part 1: Business Description
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Part 2: Managements Discussion and Analysis of
Financial Condition and Results of Operations
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Part 3: Historical Consolidated Financial Statements
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Transaction Agreement, dated as of June 4, 2008, by and among
Discovery Holding Company, Discovery Communications, Inc., DHC
Merger Sub, Inc., Advance/Newhouse Programming Partnership, and
with respect to Section 5.14 only Advance Publications, Inc.,
and Newhouse Broadcasting Corporation
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Agreement and Plan of Merger, dated as of June 4, 2008, by and
among Discovery Holding Company, Discovery Communications, Inc.,
and DHC Merger Sub, Inc.
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Form of Restated Certificate of Incorporation of Discovery
Communications, Inc.
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Form of Bylaws of Discovery Communications, Inc.
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APPENDIX F:
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Ascent Media Corporation Audited Financial Statements
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iv
The questions and answers below highlight only selected
information from this proxy statement/prospectus. They do not
contain all of the information that may be important to you. You
should read carefully the entire proxy statement/prospectus,
including the appendices included herein, and the additional
documents incorporated by reference in this proxy
statement/prospectus to fully understand the matters being
considered at the Annual Meeting.
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What is the proposed Transaction? |
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DHC and Advance/Newhouse have agreed to combine their interests
in Discovery pursuant to the terms of a transaction agreement
(Transaction Agreement). Advance/Newhouse will contribute
its entire interest in Discovery and Animal Planet L.P.
(Animal Planet) to a new parent company named Discovery
Communications, Inc. (New Discovery), in exchange for two
series of convertible preferred stock of New Discovery, and DHC
will merge with a wholly-owned subsidiary of New Discovery.
After the contribution by Advance/Newhouse in exchange for the
convertible preferred stock and the merger of DHC, DHC
stockholders and Advance/Newhouse will be stockholders of New
Discovery and Discovery will be an indirect wholly-owned
subsidiary of New Discovery. |
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Q: |
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What is the purpose of the Transaction? |
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A: |
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Currently, DHC holds a
two-thirds
equity interest in Discoverys parent, Discovery
Communications Holding, LLC (Discovery Communications
Holding), and Advance/Newhouse holds the other
one-third
equity interest and special voting rights. As a result of these
special voting rights, DHC is unable to consolidate Discovery
for financial reporting purposes. DHC desired to structure a
transaction with Advance/Newhouse that would allow DHC to
consolidate Discovery for financial reporting and tax purposes
while also preserving for its stockholders not less than the
level of control over Discovery that DHC currently holds as a
two-thirds
owner of Discovery Communications Holding. Advance/Newhouse
desired to structure a transaction with DHC that would enable
Advance/Newhouse to obtain liquidity with respect to its
interests in Discovery while also preserving its special voting
rights (subject to mutually acceptable modifications appropriate
for a public company). Advance/Newhouse also desired that
Discoverys ultimate parent company be a pure-play,
programming company, which would require the divestiture (AMC
spin-off) of DHCs interests in Ascent Media
Corporation (AMC), prior to the completion of the
Transaction. At the time of the AMC spin-off, AMC would include
all of DHCs Ascent Media Group businesses other than
certain businesses that provide sound, music, mixing, sound
effects and other related post-production audio services
(Ascent Media Sound). Lastly, both DHC and
Advance/Newhouse desired that the Transaction be generally
tax-free to each of DHC, DHCs stockholders and
Advance/Newhouse. The Transaction was structured to accomplish
the foregoing goals. |
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Q: |
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What will holders of DHC common stock receive as a result of
the Transaction? |
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A: |
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If the Transaction is completed, each share of DHC Series A
common stock or DHC Series B common stock owned by a DHC
stockholder at the effective time of the merger will be
exchanged for 0.50 of a share of the same series of New
Discovery common stock and 0.50 of a share of New
Discovery Series C common stock. All three series of New
Discovery common stock (Series A, B and C) will have
the same rights, powers and preferences, except (1) the
Series B common stock will be convertible into the
Series A common stock and (2) the Series B will
have 10 votes per share, the Series A will have one vote
per share, and the Series C will not have any voting rights
except as required by Delaware law. |
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Q: |
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Why will holders of DHC common stock receive Series C
common stock of New Discovery? |
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A: |
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One of the anticipated benefits of the Transaction is the
ability of New Discovery to issue equity on more favorable terms
in connection with future acquisitions. Using a publicly traded,
non-voting series of stock as acquisition currency will enable
New Discovery to issue stock without diluting the voting rights
of its existing stockholders, including the former DHC
stockholders and Advance/Newhouse. Issuing Series C common
stock |
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of New Discovery in the Transaction will allow a market to
develop in this stock prior to the need for its use in an
acquisition. |
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Q: |
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What will Advance/Newhouse receive as a result of the
Transaction? |
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A: |
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In exchange for its contribution to New Discovery of its entire
indirect interest in Discovery and Animal Planet in accordance
with the Transaction Agreement, Advance/Newhouse will receive
shares of New Discovery Series A convertible preferred
stock and New Discovery Series C convertible preferred
stock. The convertible preferred stocks will initially be
convertible, on an as-converted basis, into one-third of the
common equity of New Discovery. Accordingly, the Series A
convertible preferred stock will be convertible into a number of
shares of New Discovery Series A common stock equal to
one-half of the aggregate number of shares of New Discovery
Series A and Series B common stock issued in the
merger, and the Series C convertible preferred stock will
initially be convertible into a number of shares of New
Discovery Series C common stock equal to one-half of the
shares of New Discovery Series C common stock issued in the
merger, in each case, subject to anti-dilution adjustments.
Advance/Newhouse is receiving convertible preferred stock rather
than shares of common stock because the convertible preferred
stock will enable Advance/Newhouse to exercise its special
voting rights through a separate class vote in its capacity as a
stockholder of New Discovery, which reflects how
Advance/Newhouse currently exercises its special voting rights
with respect to Discovery. |
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Advance/Newhouse will also be entitled to additional shares of
the same series of convertible preferred stock following the
merger upon exercise of certain options and stock appreciation
rights in respect of New Discovery common stock that will be
outstanding immediately after the merger. These additional
shares will be deposited by Advance/Newhouse into an escrow
account upon closing for the benefit of Advance/Newhouse and
released from escrow contingent upon any such exercise. The
shares are being issued and escrowed to avoid dilution to
Advance/Newhouse as a result of the rollover of outstanding
equity awards at DHC. |
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The New Discovery preferred stock will vote as a single class
with the holders of New Discovery common stock on all matters
submitted for a vote to the common stockholders of New
Discovery, except for the election of directors. The New
Discovery convertible preferred stock will have the right to
elect three members of New Discoverys board of directors
(who we refer to as the preferred stock directors) and
will have the special voting rights referenced above on matters
such as fundamental changes in the business of New Discovery,
certain acquisitions and dispositions and future issuances of
New Discovery capital stock. |
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Q: |
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How will the Transaction affect the proportionate equity
interests of the existing stockholders of DHC in Discovery and
AMC? |
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A: |
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Following the completion of the Transaction and the AMC
spin-off, former DHC stockholders will own
662/3%
of the equity of New Discovery (which will own 100% of the
equity of Discovery and 100% of the equity of Ascent Media
Sound) and 100% of the equity of AMC. Today, DHC owns
662/3%
of the equity of Discovery, 100% of the equity of AMC and 100%
of the equity of Ascent Media Sound. Following the completion of
the Transaction and the AMC spin-off, Advance/Newhouse will own
331/3%
of the equity of New Discovery, which will own 100% of the
equity of Discovery and 100% of the equity of Ascent Media
Sound. Today, Advance/Newhouse owns
331/3%
of the equity of Discovery and no interest in AMC or Ascent
Media Sound. For financial information on AMC, see its Audited
Financial Statements included as Appendix F to this proxy
statement/prospectus. Although no formal valuation was performed
with respect to Ascent Media Sound, DHC believes that it would
have an enterprise value of up to $50 million. As a result
of the Transaction, the DHC stockholders equity interest
in Ascent Media Sound will be diluted by
331/3%.
The DHC board considered the dilutive effect on the DHC
stockholders of retaining Ascent Media Sound at New Discovery
but determined that the benefits to the Transaction of retaining
Ascent Media Sound at New Discovery outweighed the dilution to
the DHC stockholders. |
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Q: |
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How will the Transaction affect the proportionate voting
interests of the existing stockholders of DHC? |
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A: |
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Following the completion of the Transaction, former DHC
stockholders will hold 74% of the aggregate voting power of New
Discovery (other than with respect to the election of
directors), based upon the number of shares of DHC common stock
outstanding on May 31, 2008, and former DHC stockholders
will own 100% of the |
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aggregate voting power of New Discovery with respect to the
election of the eight directors that are not elected by the
holders of the New Discovery convertible preferred stock. |
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Immediately following the completion of the Transaction,
Advance/Newhouse will hold 26% of the aggregate voting power of
New Discovery (other than with respect to the election of
directors), based upon the number of shares of DHC common stock
outstanding on May 31, 2008. In addition, the New Discovery
convertible preferred stock will have the right to elect three
directors and special voting rights on select matters for so
long as Advance/Newhouse (or a permitted transferee) owns a
specified minimum amount of Series A convertible preferred
stock. |
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Although Advance/Newhouse will hold
331/3%
of the equity of New Discovery, its aggregate voting power is
less than this percentage (and, conversely, former DHC
stockholders will hold
662/3%
of the equity of New Discovery but their aggregate voting power
will exceed this percentage) because the holders of DHC
Series B common stock will receive shares of Series B
common stock of New Discovery in the Transaction, which have the
same per share voting rights as the DHC Series B shares. |
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Q: |
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Where will New Discovery common stock trade? |
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We expect the New Discovery Series A and Series B
common stock to be listed on the Nasdaq Global Select Market
under DISCA and DISCB, the same symbols
under which DHC Series A and Series B common stock
currently trade, and the New Discovery Series C common
stock to be listed on the Nasdaq Global Select Market under the
symbol DISCK. |
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What stockholder approvals are required before the
Transaction can be completed? |
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A: |
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In order for the Transaction to be completed, the DHC
stockholders must approve both the merger proposal and the
preferred stock issuance proposal at the Annual Meeting. If
either proposal is not approved, then the Transaction will not
happen. The approval of the transaction proposals require the
affirmative vote of the holders of at least a majority of the
aggregate voting power of the shares of both series of DHC
common stock outstanding on the record date for the Annual
Meeting, voting together as a single class. |
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Q: |
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What do I need to do to vote on the transaction proposals? |
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A: |
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After carefully reading and considering the information
contained in this proxy statement/prospectus, you should
complete, sign, date and return the enclosed proxy card by mail,
or vote by the telephone or through the Internet, in each case
as soon as possible so that your shares are represented and
voted at the Annual Meeting. Instructions for voting by using
the telephone or the Internet are printed on the proxy voting
instructions attached to the proxy card. In order to vote via
the Internet, have your proxy card available so you can input
the required information from the card, and log into the
Internet website address shown on the proxy card. When you log
on to the Internet website address, you will receive
instructions on how to vote your shares. The telephone and
Internet voting procedures are designed to authenticate votes
cast by use of a personal identification number, which will be
provided to each voting shareholder separately. |
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Stockholders who have shares registered in the name of a broker,
bank or other nominee should follow the voting instruction card
provided by their broker, bank or other nominee in instructing
them how to vote their shares. We recommend that you vote by
proxy even if you plan to attend the Annual Meeting. You may
change your vote at the Annual Meeting. |
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Q: |
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If my DHC shares are held in street name by a
broker, bank or other nominee, will the broker, bank or other
nominee vote those shares for me on the transaction
proposals? |
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A: |
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If you hold your shares in street name and do not provide voting
instructions to your broker, bank or other nominee, your shares
will not be voted on the transaction proposals.
Accordingly, your broker, bank or other nominee will vote your
shares held in street name only if you provide
instructions on how to vote. If a broker, who is a record holder
of shares, indicates on a form of proxy that the broker does not
have discretionary authority to vote those shares on any
proposal, or if those shares are voted in circumstances in which
proxy authority is defective or has been withheld with respect
to any proposal, these shares are considered broker |
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non-votes and will have the same effect as a vote
AGAINST the transaction proposals. You should
follow the directions your broker, bank or other nominee
provides to you regarding how to vote your shares. |
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What if I do not vote on the transaction proposals? |
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A: |
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If you fail to respond with a vote on the transaction proposals,
it will have the same effect as a vote
AGAINST the transaction proposals. If you
respond but do not indicate how you want to vote, your proxy
will be counted as a vote FOR the transaction
proposals. If you respond and indicate that you are abstaining
from voting, your proxy will have the same effect as a vote
AGAINST the transaction proposals. |
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May I change my vote on the transaction proposals after
returning a proxy card or voting by telephone or over the
Internet? |
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A: |
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Yes. Before your proxy is voted at the Annual Meeting,
you may change your vote on the transaction proposals by
telephone or over the Internet (if you originally voted by
telephone or over the Internet), by voting in person at the
Annual Meeting or by delivering a signed proxy revocation or a
new signed proxy with a later date to: Discovery Holding
Company,
c/o [ , , ]. |
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Any signed proxy revocation or new signed proxy must be received
before the start of the Annual Meeting. Your attendance at the
Annual Meeting will not, by itself, revoke your proxy. |
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If your shares are held in an account by a broker, bank or other
nominee who you previously contacted with voting instructions,
you should contact your broker, bank or other nominee to change
your vote. |
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Q: |
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When do you expect to complete the Transaction? |
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We expect to complete the Transaction as quickly as possible
once all the conditions to the Transaction, including obtaining
the approvals of each of the transaction proposals at the Annual
Meeting, are satisfied or, if applicable, waived. We currently
expect to complete the Transaction within a few days following
the Annual Meeting. |
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If the Transaction is completed, what should I do with my
shares? |
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If you are a holder of certificated shares of DHC common stock,
you will receive written instructions from the stock transfer
agent after the Transaction is completed on how to exchange your
shares of DHC common stock for shares of New Discovery common
stock. |
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If you hold shares of DHC common stock through book-entry
(whether through a bank, broker or nominee or through the
transfer agents book-entry registry), those shares will be
debited from your account, and your account will be credited
with the applicable number and series of shares of New Discovery
and cash in lieu of any fractional share interest you are
entitled to receive with respect to such shares of DHC common
stock. |
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Who can help answer my questions about the voting procedures
and the Transaction? |
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DHC has retained
[ ]
to serve as an information agent and proxy solicitor in
connection with the Annual Meeting and the Transaction. |
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DHC stockholders who have questions about the Annual Meeting,
including the voting procedures, or the transaction proposals
should call
[ ]
at
[ ]
with their questions. |
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In addition, DHC stockholders may call DHCs Investor
Relations Department at
(877) 772-1518. |
Concerning
the AMC Spin-off
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Q: |
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What is the AMC spin-off? |
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A: |
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In the AMC spin-off, DHC will distribute to its current
stockholders, on a pro rata basis, all of the issued and
outstanding shares of stock of a newly formed, wholly-owned
subsidiary, AMC, which will hold cash and all of the businesses
of DHCs wholly-owned subsidiaries, Ascent Media CANS, LLC
(dba AccentHealth) and Ascent Media Group, LLC (collectively,
Ascent Media), except for Ascent Media Sound. Ascent
Media Sound is not a necessary or integral component of the
other businesses of Ascent Media and is being retained by DHC to
address, among other things, certain tax considerations. For
financial information on AMC, see its Audited Financial
Statements included |
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as Appendix F to this proxy statement/prospectus. Although
no formal valuation was performed with respect to Ascent Media
Sound, DHC believes that it would have an enterprise value of up
to $50 million. As a result of the Transaction, the DHC
stockholders equity interest in Ascent Media Sound will be
diluted by
331/3%.
The DHC board considered this dilution to the DHC stockholders
but determined that it was outweighed by the benefits to the
Transaction of retaining Ascent Media Sound at New Discovery. |
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Q: |
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Is the AMC spin-off conditioned on the completion of the
Transaction? |
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Yes, the AMC spin-off is conditioned on all of the
conditions precedent to the Transaction (other than the spin-off
itself, and other matters that will be completed at the closing
of the Transaction) having been satisfied or, to the extent
waivable, waived. |
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Why is the AMC spin-off happening? |
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The obligations of DHC and Advance/Newhouse to complete the
Transaction are subject to the completion of the AMC spin-off.
The AMC spin-off will facilitate the Transaction by resolving
differing views with respect to the value of Ascent Media that
could otherwise preclude the consummation of the Transaction on
terms acceptable to both DHC and Advance/Newhouse. DHC wishes to
complete the Transaction for the reasons summarized above. |
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Further, the AMC spin-off will provide certain benefits for
investors in AMC, including making it easier for investors to
understand and value the Ascent Media assets (other than Ascent
Media Sound), which DHCs board of directors believes may
currently be overshadowed by DHCs interest in Discovery. |
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Q: |
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Where can I find more information about the AMC spin-off? |
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An information statement concerning the AMC spin-off will be
mailed to all DHC stockholders [as of the record date for the
AMC spin-off, which is expected to be shortly after the Annual
Meeting if the transaction proposals are approved]. You
should read the information statement when you receive it
carefully as it will contain important information about the
mechanics of the AMC spin-off as well as detailed information
about the assets of Ascent Media that are involved in the AMC
spin-off. |
Concerning
the DHC Annual Meeting and the Annual Business
Proposals
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Q: |
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Why is DHC having its Annual Meeting instead of a Special
Meeting at this time? |
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DHCs common stock is traded on the Nasdaq Global Select
Market, and it is a requirement of The Nasdaq Stock Market that
all issuers of securities traded on that market hold an annual
meeting once a year. The Annual Meeting will satisfy this
requirement. If the transaction proposals are approved and the
Transaction is completed, New Discovery, as the successor to
DHC, will not be required to hold an annual meeting until 2009. |
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In addition to the transaction proposals, what other
proposals are to be considered and voted upon at the Annual
Meeting? |
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DHC stockholders will be attending to annual business matters
and are being asked to consider and vote on the following two
proposals, in addition to the transaction proposals: |
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the election of directors
proposal, a proposal to re-elect John C. Malone and
Robert R. Bennett to serve as Class III members of
DHCs board of directors until DHCs 2011 annual
meeting of stockholders or until their successors are elected;
and
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the auditors ratification proposal,
a proposal to approve the selection of KPMG LLP as
DHCs independent auditors for the fiscal year ending
December 31, 2008.
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We will also transact such other business as may properly be
presented at the meeting or at any postponements or adjournments
of the meeting. However, we are not aware of any other matters
to be acted upon at the Annual Meeting. |
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What stockholder approval is required to approve the election
of directors proposal? |
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The election of Messrs. Malone and Bennett requires a
plurality of the affirmative votes of the shares of DHCs
Series A and Series B common stock outstanding on the
record date, voting together as a single class, that are |
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voted in person or by proxy at the Annual Meeting. This means
that the nominees will be elected if they receive more
affirmative votes than any other person. |
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If you submitted a proxy card on which you indicate that you
abstain from voting, it will have no effect on the election of
directors proposal. |
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Broker non-votes will have no effect on the election of
directors proposal. |
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How will the vote on the transaction proposals impact the DHC
directors elected pursuant to the election of directors
proposal? |
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A: |
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If the transaction proposals receive the requisite stockholder
approval at the Annual Meeting, the DHC directors elected
pursuant to the election of directors proposal will serve,
together with DHCs other directors, until the closing of
the Transaction. At that time, the board of directors of New
Discovery will be comprised of common stock directors and
preferred stock directors, with the current DHC board of
directors (including Messrs. Malone and Bennett, regardless of
whether or not they are elected at the Annual Meeting)
constituting the common stock directors of New Discovery, along
with one new independent director and two executive officers of
Discovery. Advance/Newhouse, as the holder of the New Discovery
convertible preferred stock, will appoint the three preferred
stock directors, but will not vote on the election of any common
stock director. Two of the initial preferred stock directors
will be Robert J. Miron, Chairman of Advance/Newhouse, and
Steven A. Miron, Chief Executive Officer of Advance/Newhouse. |
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If the transaction proposals do not receive the requisite
stockholder approval, or if for any other reason the Transaction
is not completed, then the persons elected as Class III
directors at the Annual Meeting will serve until the 2011 annual
meeting of DHC stockholders or until their successors are
elected. |
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What stockholder approval is required to approve the auditors
ratification proposal? |
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The auditors ratification proposal requires the affirmative vote
of the holders of at least a majority of the aggregate voting
power of the shares of DHC common stock outstanding on the
record date for the Annual Meeting and present at the Annual
Meeting, in person or by proxy, voting together as a single
class. |
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If you submit a proxy card on which you indicate that you
abstain from voting, it will have the same effect as a vote
AGAINST the auditors ratification proposal. |
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Broker non-votes will have no effect on the auditors
ratification proposal. |
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Q: |
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What do I need to do to vote on the annual business
proposals? |
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A: |
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After carefully reading and considering the information relating
to the annual business proposals contained in this proxy
statement/prospectus, you should complete, sign, date and return
the enclosed proxy card, or vote by the telephone or through the
Internet, in each case as soon as possible so that your shares
are represented and voted at the Annual Meeting. Instructions
for voting by using the telephone or the Internet are printed on
the proxy voting instructions attached to the proxy card. In
order to vote via the Internet, have your proxy card available
so you can input the required information from the card, and log
into the Internet website address shown on the proxy card. When
you log on to the Internet website address, you will receive
instructions on how to vote your shares. The telephone and
Internet voting procedures are designed to authenticate votes
cast by use of a personal identification number, which will be
provided to each voting shareholder separately. |
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Stockholders who have shares registered in the name of a broker,
bank or other nominee should follow the voting instruction card
provided by their broker, bank or other nominee in instructing
them how to vote their shares on each of the annual business
proposals. We recommend that you vote by proxy even if you plan
to attend the Annual Meeting. You may change your vote at the
Annual Meeting. |
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Q: |
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If my DHC shares are held in street name by a
broker, bank or other nominee, will the broker, bank or other
nominee vote my shares on each of the annual business
proposals? |
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A: |
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If you hold your shares in street name and do not provide voting
instructions to your broker, bank or other nominee, your shares
may, in the discretion of the broker, bank or other nominee, be
voted on the election of directors proposal and the auditors
ratification proposal. |
6
SUMMARY
The following summary includes information contained
elsewhere in this proxy statement/prospectus. This summary does
not purport to contain a complete statement of all material
information relating to the Transaction and the other matters
discussed herein and is subject to, and is qualified in its
entirety by reference to, the more detailed information and
financial statements contained or incorporated in this proxy
statement/prospectus, including the appendices included herein.
You may obtain the information about DHC that we incorporate by
reference into this proxy statement/prospectus without charge by
following the instructions in the section entitled
Additional Information Where You Can Find More
Information. You should carefully read this proxy
statement/prospectus in its entirety, as well as the Transaction
Agreement included with this proxy statement/prospectus as
Appendix B and the other Appendices included herein.
The
Companies
(see page 36)
Discovery Holding Company
12300 Liberty Boulevard
Englewood, Colorado 80112
Telephone:
(720) 875-4000
Discovery Holding Company (DHC) is a holding company.
Through its two wholly-owned operating subsidiaries, Ascent
Media Group, LLC and Ascent Media CANS, LLC (dba AccentHealth),
and through its
662/3%
owned equity affiliate Discovery Communications Holding, DHC is
engaged primarily in (1) the provision of creative and
network services to the media and entertainment industries and
(2) the production, acquisition and distribution of
entertainment, educational and informational programming and
software. DHCs subsidiaries and affiliates operate in the
United States, Europe, Latin America, Asia, Africa and
Australia. Discovery Communications Holding is an intermediary
holding company that owns 100% of the operating company
Discovery Communications, LLC (Discovery). DHCs
company website is www.discoveryholdingcompany.com.
Discovery Communications, LLC
One Discovery Place
Silver Spring, MD 20910
(240) 662-2000
Discovery is a leading global media and entertainment company
that provides original and purchased programming across multiple
distribution platforms in the United States and more than 170
other countries, including television networks offering
customized programming in 35 languages. Discovery also
develops and sells consumer and educational products and
services in the United States and internationally, and owns and
operates a diversified portfolio of website properties and other
digital services. Discovery operates through three divisions:
(1) Discovery networks U.S., (2) Discovery networks
international and (3) Discovery commerce and education.
Upon consummation of the Transaction, Discovery will become a
wholly-owned subsidiary of New Discovery. Discovery is not a
party to the Transaction Agreement. Discoverys website is
www.discoverycommunications.com.
Discovery Communications, Inc.
Prior to the Transaction:
12300 Liberty Boulevard
Englewood, Colorado 80112
Telephone:
(720) 875-4000
Following the Transaction:
One Discovery Place
Silver Spring, MD 20910
Telephone:
(240) 662-2000
New Discovery is a newly-formed corporation. New Discovery has
not conducted any activities other than those incident to its
formation, the matters contemplated by the Transaction Agreement
and the preparation of
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applicable filings under the federal securities laws. Upon
completion of the Transaction, New Discovery will become the new
publicly-traded parent of DHC and Discovery.
Merger Sub, Inc.
12300 Liberty Boulevard
Englewood, Colorado 80112
Telephone:
(720) 875-4000
Merger Sub, Inc. (which we refer to as Merger Sub) is a
wholly-owned transitory merger subsidiary of New Discovery,
recently formed solely for the purpose of merging with and into
DHC.
Advance/Newhouse Programming Partnership
5000 Campuswood Drive
E. Syracuse, NY 13057
Telephone:
(315) 438-4100
Advance/Newhouse is a privately held partnership headquartered
in Syracuse, New York. The owners of Advance/Newhouse operate
Bright House Networks, the sixth largest U.S. cable company
serving over two million customers. Their other interests
include Conde Nast magazines such as the New Yorker, Vogue,
Vanity Fair, and Wired; PARADE magazine; daily
newspapers serving 26 cities; American City Business
Journals, which publishes business journals in over
45 cities; and a direct
331/3%
interest in Discovery Communications Holding.
Purpose
of the Transaction
(see page 41)
Currently, DHC holds a
two-thirds
equity interest in Discoverys parent, Discovery
Communications Holding, and Advance/Newhouse holds the other
one-third
equity interest and special voting rights. As a result of these
special voting rights, DHC is unable to consolidate Discovery
for financial reporting purposes. DHC desired to structure a
transaction with Advance/Newhouse that would allow DHC to
consolidate Discovery for financial reporting and tax purposes
while also preserving for its stockholders not less than the
level of control over Discovery that DHC currently holds as a
two-thirds owner of Discovery Communications Holding.
Advance/Newhouse desired to structure a transaction with DHC
that would enable Advance/Newhouse to obtain liquidity with
respect to its interests in Discovery while also preserving its
special voting rights (subject to mutually acceptable
modifications appropriate for a public company).
Advance/Newhouse also desired that Discoverys ultimate
parent company be a pure-play, programming company, which would
be effected by spinning off DHCs interests in Ascent
Media, except for Ascent Media Sound, prior to the completion of
the Transaction. Lastly, both DHC and Advance/Newhouse desired
that the Transaction be generally tax-free to each of DHC,
DHCs stockholders and Advance/Newhouse. The Transaction
was structured to accomplish the foregoing goals.
Structure
of The Transaction
(see page 40)
Upon satisfaction (or waiver, where permissible) of all
conditions to the Transaction set forth in the Transaction
Agreement (other than the AMC spin-off and other conditions to
be satisfied at closing), DHC will effect the AMC spin-off.
Immediately after completion of the AMC spin-off,
Advance/Newhouse will contribute to New Discovery all of its
indirect interests in Discovery and Animal Planet in exchange
for shares of New Discovery Series A and Series C
convertible preferred stock, initially convertible into
one-third of the common equity of New Discovery, on an
as-converted basis. Immediately upon completion of the
Advance/Newhouse contribution, Merger Sub with merge with and
into DHC with DHC surviving the merger. In the merger, each
outstanding share of DHC common stock will automatically be
converted as follows:
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each share of DHC Series A common stock outstanding
immediately prior to the effective time of the merger will be
converted into the right to receive 0.50 shares of New
Discovery Series A common stock and 0.50 shares of New
Discovery Series C common stock; and
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each share of DHC Series B common stock outstanding
immediately prior to the effective time of the merger will be
converted into the right to receive 0.50 shares of New
Discovery Series B common stock and 0.50 shares of New
Discovery Series C common stock.
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Structure
Charts
The following diagrams illustrate the Transaction in general
terms and are not comprehensive. They reflect the economic
substance of the Transaction, but do not precisely reflect the
legal and corporate entities used to implement the Transaction.
The contribution of Advance/Newhouses interest in Animal
Planet is not reflected in the following diagrams because the
value of this contribution is insignificant relative to the
value of the overall Transaction. Currently, Animal Planet is
85% owned by Discovery, 10% owned by DHC and 5% owned by
Advance/Newhouse. Upon the consummation of the Transaction and
the AMC spin-off, New Discovery will indirectly own 100% of
Animal Planet. For a more complete description of the
Transaction, see The Transaction starting on
page 38 and The Transaction Agreements starting
on page 49.
Current
Structure
9
Post-Transaction
and AMC Spin-Off Structure
What Will
DHC Stockholders Receive in the Transaction
(see page 49)
If the Transaction is completed, each share of DHC Series A
common stock or DHC Series B common stock owned by a DHC
stockholder at the effective time of the merger will be
exchanged for 0.50 of a share of the same series of New
Discovery common stock and 0.50 of a share of New
Discovery Series C common stock. All three series of New
Discovery common stock (Series A, B and C) will have
the same rights powers and preferences, except (1) the
Series B common stock will be convertible into the
Series A common stock, and (2) the Series B
common stock will have 10 votes per share, the Series A
common stock will have one vote per share, and the Series C
common stock will not have any voting rights except as required
by Delaware law.
The AMC spin-off will occur shortly before the effective time of
the merger and the consummation of the Transaction. A separate
information statement describing the AMC spin-off will be mailed
to those DHC stockholders of record as of a separate record date
to be set [shortly after the Annual Meeting, if the
transaction proposals are approved at that meeting.] For
financial information on AMC, see its Audited Financial
Statements included as Appendix F to this proxy
statement/prospectus.
Following the completion of the Transaction, former DHC
stockholders will own
662/3%
of the equity of New Discovery and 74% of the aggregate voting
power of New Discovery (other than with respect to the election
of directors), based upon the number of shares of DHC common
stock outstanding on May 31, 2008, and former DHC
stockholders will own 100% of the aggregate voting power of New
Discovery with respect to the election of the eight directors
(common stock directors) that are not elected by the
holders of the New Discovery convertible preferred stocks
described below.
What Will
Advance/Newhouse Receive in the Transaction
(see page 49)
In exchange for its contribution to New Discovery of its entire
interest in Discovery and Animal Planet, Advance/Newhouse will
receive shares of New Discovery Series A convertible
preferred stock and New Discovery Series C convertible
preferred stock, representing
331/3%
of the equity of New Discovery and 26% of the aggregate voting
power of New Discovery (other than with respect to the election
of directors), in each case, immediately following the
Transaction. The Series A convertible preferred stock will
be convertible into a number of shares of
10
New Discovery Series A common stock equal to one-half of
the aggregate number of shares of New Discovery Series A
and Series B common stock issued in the merger, and the
Series C convertible preferred stock will initially be
convertible into a number of shares of New Discovery
Series C common stock equal to one-half of the shares of
New Discovery Series C common stock issued in the merger,
in each case subject to anti-dilution adjustments.
Advance/Newhouse is receiving convertible preferred stock rather
than shares of common stock because the convertible preferred
stock will enable Advance/Newhouse to exercise its special
voting rights through a separate class vote in its capacity as a
stockholder of New Discovery, which reflects how
Advance/Newhouse currently exercises its special voting rights
with respect to Discovery.
Advance/Newhouse will also be entitled to additional shares of
the same series of convertible preferred stocks following the
Transaction upon exercise of certain stock options and stock
appreciation rights in respect of New Discovery common stock
that will be outstanding immediately after the Transaction.
These additional shares will be deposited by Advance/Newhouse
into an escrow account upon closing for the benefit of
Advance/Newhouse and released from escrow contingent upon any
such exercise. The shares are being issued and escrowed to avoid
dilution to Advance/Newhouse as a result of the rollover of
outstanding equity awards at DHC.
The New Discovery preferred stock will vote as a single class
with the holders of New Discovery common stock on all matters
submitted for vote to the common stockholders of New Discovery,
except for the election of directors. The New Discovery
preferred stock will have the right to elect three directors
(preferred stock directors), and will have 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 Transaction, including
fundamental changes in the business of New Discovery, mergers
and business combinations, certain acquisitions and dispositions
and future issuances of New Discovery capital stock.
Effect of
Transaction on Relative Ownership Percentages
(page 49)
Equity
Interests
Following the completion of the Transaction and the AMC
spin-off, the former DHC stockholders will own
662/3%
of the equity of New Discovery (which will own 100% of the
equity of Discovery and 100% of the equity of Ascent Media
Sound) and 100% of the equity of AMC. Today, DHC owns
662/3%
of the equity of Discovery and 100% of the equity of Ascent
Media (which is comprised of both AMC and Ascent Media Sound).
Following the completion of the Transaction and the AMC
spin-off,
Advance/Newhouse will own
331/3%
of the equity of New Discovery, which will own 100% of the
equity of Discovery and 100% of the equity of Ascent Media
Sound. Today, Advance/Newhouse owns
331/3%
of the equity of Discovery and no interest in AMC or Ascent
Media Sound. For financial information on AMC, see its
Audited Financial Statements included as Appendix F to this
proxy statement/prospectus. Although no formal valuation was
performed with respect to Ascent Media Sound, DHC believes
that it would have an enterprise value of up to
$50 million. As a result of the Transaction, the DHC
stockholders equity interest in Ascent Media Sound will be
diluted by
331/3%.
The DHC board considered the dilutive effect on the DHC
stockholders of retaining Ascent Media Sound at New Discovery
but determined that the benefits to the Transaction of retaining
Ascent Media Sound at New Discovery outweighed the dilution to
the DHC stockholders.
Voting
Interests
As described above, following the completion of the Transaction,
former DHC stockholders and Advance/Newhouse will hold 74% and
26%, respectively, of the aggregate voting power of New
Discovery (other than with respect to the election of
directors), based upon the number of shares of DHC common stock
outstanding on May 31, 2008. Although Advance/Newhouse
will hold
331/3%
of the equity of New Discovery, its aggregate voting power is
less than this percentage (and, conversely, former DHC
stockholders will hold
662/3%
of the equity of New Discovery but their aggregate voting power
will exceed this percentage) because the holders of DHC Series B
common stock will receive shares of Series B common stock of New
Discovery in the Transaction, which have the same per share
voting rights (10 votes per share) as the DHC Series B shares.
11
The
Annual Meeting and Proxy Solicitations
(see page 124)
Where and When. The Annual Meeting will
take place at
[ ],
[ ],
[ ],
on
[ ],
2008, at [ ] a.m., local time.
What You Are Being Asked to Vote on. At
the Annual Meeting, DHC stockholders will vote on the
transaction proposals and the annual business proposals. DHC
stockholders also may be asked to consider other matters that
properly come before the Annual Meeting. At the present time,
DHC knows of no other matters that will be presented for
consideration at the Annual Meeting.
Who May Vote. You may vote at the
Annual Meeting if you were the record holder of DHC
Series A common stock or DHC Series B common stock as
of 5:00 p.m., New York City time, on
[ ],
2008, the record date for the Annual Meeting. On that date,
there were
[ ] shares
of DHC Series A common stock and
[ ] shares
of DHC Series B common stock outstanding and entitled to
vote. The holders of DHC Series A common stock and the
holders of DHC Series B common stock will vote together as
a single class. You may cast one vote for each share of DHC
Series A common stock that you owned on that date and ten
votes for each share of DHC Series B common stock that you
owned on that date.
What Vote is Needed on the Transaction
Proposals The affirmative vote, cast in
person or by proxy, of the holders of at least a majority of the
aggregate voting power of the shares of DHC Series A common
stock and DHC Series B common stock outstanding on the
record date for the Annual Meeting, voting together as a single
class, is required to approve each of the transaction proposals.
The directors and executive officers of DHC, who together
beneficially own shares of DHC common stock representing
approximately 34.4% of DHCs aggregate voting power as of
May 31, 2008, have indicated to DHC that they intend to
vote FOR both of the transaction proposals at
the Annual Meeting.
What Vote is Needed on the Annual Business
Proposals. The affirmative vote of the
holders of a plurality of the votes of the shares of DHC
Series A common stock and DHC Series B common stock
outstanding on the record date, voting as a single class, that
are voted at the Annual Meeting, in person or by proxy, is
required to re-elect Messrs. Malone and Bennett as
Class III directors pursuant to the election of directors
proposal. The affirmative vote of the holders of at least a
majority of the aggregate voting power of the shares of DHC
Series A common stock and DHC Series B common stock
outstanding on the record date and present at the Annual
Meeting, in person or by proxy, voting together as a single
class, is required to approve the auditors ratification proposal.
Recommendations
to Stockholders
DHCs board of directors unanimously approved the
Transaction, including the Transaction Agreement and the merger
agreement, the merger and the preferred stock issuance, and
determined that the Transaction is advisable and in the best
interests of DHC and its stockholders. Accordingly, DHCs
board of directors recommends that DHC stockholders vote
FOR each of the transaction proposals at the
Annual Meeting.
DHCs board of directors has also approved each of the
annual business proposals and recommends that the DHC
stockholders vote FOR the election of each of
Messrs. Malone and Bennett as Class III directors
pursuant to the election of directors proposal and
FOR the auditors ratification proposal.
Reasons
for the Transaction
DHCs Reasons for the Transaction (see
page 41)
DHCs board of directors considered various beneficial
factors in approving the Transaction, the Transaction Agreement,
the merger agreement and the preferred stock issuance to
Advance/Newhouse, including, among others:
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that the Transaction will provide DHC stockholders with a direct
interest in Discovery, which will effectively become a public
company;
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that the Transaction will create a pure-play programming
company, New Discovery, in a manner that is generally expected
to be tax-free to both DHC and its stockholders and
Advance/Newhouse, and completion
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of the Transaction will allow the board of directors and
management of New Discovery to focus almost entirely on the
programming businesses of Discovery;
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that the Transaction will enable DHC stockholders, as well as
potential investors and analysts, to obtain significantly
improved disclosure regarding Discovery, including more
transparent financial information;
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that the stock of New Discovery is expected to constitute an
improved currency, when compared with current alternatives, in
connection with issuing equity to raise capital and in
acquisitions of other media and entertainment businesses;
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that the Transaction, together with the AMC spin-off, will
enable New Discovery to more effectively tailor employee benefit
plans and retention programs, when compared with current
alternatives, to provide improved incentives to the employees
and future hires of Discovery that will better and more directly
align the incentives for management at DHC and Discovery with
their performance; and
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the other matters referred to under The
Transaction Purposes and Reasons for the
Transaction; Recommendation of the DHC Board.
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DHCs board also considered various risks in approving the
Transaction, the Transaction Agreement, the merger agreement and
the preferred stock issuance to Advance/Newhouse, including,
among other things:
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the risk that the market overhang resulting from the outstanding
shares of convertible preferred stock may depress the public
market price of New Discoverys equity;
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the risk that Advance/Newhouse could transfer its entire block
of stock to a third party without the approval of the New
Discovery board, which could diminish the effectiveness of New
Discoverys rights plan;
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the potentially significant indemnification obligation of New
Discovery to Advance/Newhouse with respect to all liabilities
incurred by DHC (but not Discovery) prior to the closing of the
Transaction; and
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the risk that Advance/Newhouse could exercise its registration
rights at inopportune times.
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The DHC board evaluated the positive and negative aspects fully
and, after careful deliberation, determined that the benefits of
the Transactions outweighed the risks.
Management
of New Discovery
(see page 90)
Following the closing of the Transaction, the board of directors
of New Discovery will consist of eight common stock directors
and three preferred stock directors. The members of the New
Discovery board of directors will be:
Common Stock Directors:
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John S. Hendricks, currently Chairman of Discovery;
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David M. Zaslav, currently President and Chief Executive Officer
of Discovery;
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John C. Malone, currently Chief Executive Officer and Chairman
of the Board of Directors of DHC;
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Robert R. Bennett, currently President and a director of DHC;
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Paul A. Gould, currently a director of DHC;
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M. LaVoy Robison, currently a director of DHC;
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J. David Wargo, currently a director of DHC; and
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Robert R. Beck, a new independent director.
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13
Preferred Stock Directors:
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Robert J. Miron, Chairman of Advance/Newhouse;
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Steven A. Miron, Chief Executive Officer of
Advance/Newhouse; and
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Lawrence S. Kramer, a new independent director.
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The management of New Discovery will be comprised of the
management of Discovery, including Mr. Zaslav who will
serve as the Chief Executive Officer and President of New
Discovery. For more information on those individuals who will be
the directors and executive officers of New Discovery
immediately following the completion of the Transaction, see
Management of New Discovery and Management of
DHC. Mr. Malone and Mr. Bennett will serve on the New
Discovery board of directors regardless of whether they are
re-elected as Class III directors of DHC at the Annual
Meeting.
Interests
of Certain Persons in the Transaction
(see page 44)
In considering the recommendation of DHCs board of
directors to vote to approve the transaction proposals,
stockholders of DHC should be aware that members of DHCs
board of directors and members of DHCs executive
management teams have relationships, agreements or arrangements
that provide them with interests in the Transaction that may be
in addition to or different from those of DHCs public
stockholders. Upon the consummation of the Transaction,
directors of DHC will receive options to purchase shares of New
Discovery common stock and, in the case of Mr. Bennett,
options to purchase shares of AMC common stock (in addition to
options to purchase New Discovery common stock), and DHC
executive officers (other than those who are also directors of
DHC) will receive share appreciation rights relating to shares
of New Discovery common stock. In addition, as of May 31,
2008, the DHC executive officers and directors beneficially
owned shares of DHC common stock representing in the aggregate
approximately 34.4% of the aggregate voting power of DHC.
DHCs board of directors were aware of these interests and
considered them when approving the transaction proposals.
Material
United States Federal Income Tax Consequences of the
Transaction
(see page 46)
The obligation of DHC to complete the Transaction is subject to
the receipt by DHC of the opinion of Skadden, Arps, Slate,
Meagher & Flom LLP, tax counsel to DHC, substantially
to the effect that, on the basis of facts and representations
and assumptions as to factual matters set forth or referred to
in such opinion, for U.S. federal income tax purposes,
(1) the merger (in conjunction with the contribution by
Advance/Newhouse) will qualify as a tax-free exchange within the
meaning of Section 351 of the Internal Revenue Code of
1986, as amended (the Code), and (2) the AMC
spin-off should qualify as a transaction under
Sections 368(a) and 355 of the Code. Accordingly, for
U.S. federal income tax purposes, (x) DHC stockholders
generally will not recognize gain or loss for U.S. federal
income tax purposes as a result of the exchange of DHC stock for
New Discovery stock pursuant to the merger, other than with
respect to fractional shares of common stock of New Discovery
for which cash is received, and (y) no gain or loss should
be recognized by, and no amount should be included in the income
of, a DHC stockholder upon the receipt of shares of the common
stock of AMC in the AMC spin-off, other than with respect to
fractional shares of common stock of AMC for which cash is
received.
In addition, the obligation of Advance/Newhouse to complete the
Transaction is subject to the receipt by Advance/Newhouse of the
opinion of its tax counsel substantially to the effect that, on
the basis of facts and representations and assumptions as to
factual matters set forth or referred to in such opinion, the
contribution of its entire interest in Discovery and its
interest in Animal Planet in exchange for New Discovery
convertible preferred stock (in conjunction with the merger)
will qualify as a tax-free exchange within the meaning of
Section 351 of the Code for U.S. federal income tax
purposes.
Tax matters are very complicated and the tax consequences of the
merger and the AMC spin-off to each DHC stockholder may depend
on such stockholders particular facts and circumstances.
Please see Material United States Federal Income Tax
Consequences of the Merger and the AMC Spin-Off. DHC
stockholders are encouraged to consult their tax advisors to
understand fully the tax consequences to them of the merger and
the AMC spin-off.
14
Transaction
Agreement and Merger Agreement
(see pages 49 and 56 and Appendices B and
C)
The Transaction Agreement and the merger agreement are included
as Appendix B and Appendix C, respectively, to this
proxy statement/prospectus. We encourage you to read both
agreements because they are the legal documents that govern the
Transaction.
Conditions
to Completion of the Transaction
The respective obligations of DHC and Advance/Newhouse under the
Transaction Agreement and the merger agreement are subject to
the satisfaction or waiver (if applicable) of a number of
conditions, including, among others:
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the requisite stockholder approval of the transaction proposals
having been obtained at the Annual Meeting;
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the shares of New Discovery common stock having been approved
for listing on the Nasdaq Global Select Market, subject only to
official notice of issuance;
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the registration statement on Form 10, as amended, for the
AMC spin-off having been declared effective under the Exchange
Act, and no stop order suspending the effectiveness thereof
having been issued or threatened by the SEC;
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each of New Discovery and Advance/Newhouse having received
favorable opinions as to certain tax matters; and
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the New Discovery rights agreement having been executed and
delivered and in full force and effect.
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We expect to consummate the Transaction, including the
Advance/Newhouse contribution and the merger, promptly after
(i) all conditions to the Transaction have been satisfied
or, if applicable, waived and (ii) the completion of the
AMC spin-off. The condition relating to stockholder approval may
not be waived.
Termination
of the Transaction Agreement and the Merger
Agreement
DHC and Advance/Newhouse may jointly agree to terminate the
Transaction Agreement at any time without completing the
Transaction, even after receiving the requisite stockholder
approval of the transaction proposals. If the Transaction is not
completed, DHC will not effect the AMC spin-off. Either DHC or
Advance/Newhouse may terminate the Transaction Agreement if,
among other things:
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all conditions precedent to consummation of the Transaction have
not been obtained by December 31, 2008; or
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any court or governmental authority issues an order, decree or
ruling, or takes other action, permanently restraining,
enjoining or otherwise prohibiting the Transaction.
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The merger agreement will automatically be terminated if the
Transaction Agreement is terminated. No termination or other fee
is payable if the Transaction Agreement or the merger agreement
is terminated.
Restated
Certificate of Incorporation
(see pages 64 and 77 and Appendix D)
The restated certificate of incorporation of New Discovery
(restated charter) is included as Appendix D to this
proxy statement/prospectus. We encourage you to read the
restated charter because it is the legal document that governs
the rights of the holders of New Discovery common stock.
Appraisal
or Dissenters Rights
(see page 45)
Under Delaware law, DHC stockholders are not entitled to
appraisal rights in connection with the Transaction.
15
Regulatory
Matters
(see page 44)
The parties have obtained all regulatory consents and approvals
required by the Transaction Agreement with respect to the
Transaction.
Risk
Factors
(see page 23)
If the Transaction is completed, stockholders of New Discovery
will face a number of risks and uncertainties including, among
others:
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New Discovery has no financial or operating history on which to
evaluate its future performance;
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It will be difficult for a third party to acquire New Discovery,
as the restated charter and bylaws of New Discovery include a
number of provisions that could prevent or delay a change of
control of New Discovery;
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Mr. John Malone, a director of New Discovery, and
Advance/Newhouse will each have significant voting power with
respect to any matters considered by New Discovery stockholders,
and Advance/Newhouse will have significant special class voting
rights over certain corporate actions by New Discovery by virtue
of its ownership of the Series A convertible preferred
stock;
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the entertainment and media programming businesses in which New
Discovery will operate are highly competitive;
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the business of New Discovery will be inherently risky, as its
revenues will be derived, and its ability to distribute its
content will depend, primarily on shifting consumer tastes and
preferences; and
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the various other risks and uncertainties described under
Risk Factors and elsewhere in this proxy
statement/prospectus.
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Please carefully read the information included under the
heading Risk Factors.
DHC
Annual Business Proposals
(see page 128)
At the Annual Meeting, DHC stockholders are also being asked to
vote on the following proposals:
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Election of directors proposal: a proposal to
re-elect John C. Malone and Robert R. Bennett to serve as
Class III members of DHCs board of directors until
the 2011 annual meeting of DHC (or New Discovery) stockholders
or until their successors are elected; and
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Auditors ratification proposal: a proposal to
ratify the selection of KPMG LLP as DHCs independent
auditors for the fiscal year ending December 31, 2008.
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Selected
Summary Historical Financial Data of DHC
The following tables present selected historical information
relating to DHCs financial condition and results of
operations for the three months ended March 31, 2008 and
2007 and for each of the years in the five-year period ended
December 31, 2007. The financial data for the quarterly
periods has been derived from DHCs unaudited financial
statements for such periods, and the financial data for the
annual periods has been derived from DHCs audited
financial statements for the corresponding periods. The data
should be read in conjunction with DHCs financial
statements and Managements Discussion and Analysis
of Financial Condition and Results of Operations included
in DHCs Quarterly Report on
Form 10-Q
for the three months ended March 31, 2008 and DHCs
16
Annual Report on
Form 10-K,
as amended, for the year ended December 31, 2007, as filed
with the SEC, which are incorporated by reference herein.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
amounts in thousands
|
|
|
Summary Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
414,277
|
|
|
|
371,707
|
|
|
|
317,362
|
|
|
|
400,386
|
|
|
|
198,969
|
|
|
|
131,437
|
|
Investment in Discovery
|
|
$
|
3,330,030
|
|
|
|
3,271,553
|
|
|
|
3,129,157
|
|
|
|
3,018,622
|
|
|
|
2,945,782
|
|
|
|
2,863,0003
|
|
Goodwill
|
|
$
|
1,909,823
|
|
|
|
1,909,823
|
|
|
|
2,074,789
|
|
|
|
2,133,518
|
|
|
|
2,135,446
|
|
|
|
2,130,897
|
|
Total assets
|
|
$
|
5,935,838
|
|
|
|
5,865,752
|
|
|
|
5,870,982
|
|
|
|
5,819,236
|
|
|
|
5,564,828
|
|
|
|
5,396,627
|
|
Current liabilities
|
|
$
|
137,402
|
|
|
|
120,137
|
|
|
|
121,887
|
|
|
|
93,773
|
|
|
|
108,527
|
|
|
|
60,595
|
|
Stockholders equity
|
|
$
|
4,524,573
|
|
|
|
4,494,321
|
|
|
|
4,549,264
|
|
|
|
4,575,425
|
|
|
|
4,347,279
|
|
|
|
4,260,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
amounts in thousands, except per share amounts
|
|
|
Summary Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
189,305
|
|
|
|
173,882
|
|
|
|
707,214
|
|
|
|
688,087
|
|
|
|
694,509
|
|
|
|
631,215
|
|
|
|
506,103
|
|
Operating income (loss)(1)
|
|
$
|
(7,629
|
)
|
|
|
(1,201
|
)
|
|
|
(167,643
|
)
|
|
|
(115,137
|
)
|
|
|
(1,402
|
)
|
|
|
16,935
|
|
|
|
(2,404
|
)
|
Share of earnings of Discovery
|
|
$
|
66,402
|
|
|
|
21,557
|
|
|
|
141,781
|
|
|
|
103,588
|
|
|
|
79,810
|
|
|
|
84,011
|
|
|
|
37,271
|
|
Net earnings (loss)(1)
|
|
$
|
33,991
|
|
|
|
20,464
|
|
|
|
(68,392
|
)
|
|
|
(46,010
|
)
|
|
|
33,276
|
|
|
|
66,108
|
|
|
|
(52,394
|
)
|
Basic and diluted net earnings (loss) per common
share Series A and Series B
|
|
$
|
.12
|
|
|
|
.07
|
|
|
|
(.24
|
)
|
|
|
(.16
|
)
|
|
|
.12
|
|
|
|
|
|
|
|
|
|
Unaudited pro forma basic and diluted net earnings (loss) per
common share Series A and Series B(2)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.24
|
|
|
|
(.19
|
)
|
|
|
|
(1) |
|
Includes impairment of goodwill and other long-lived assets of
$165,347,000, $93,402,000, $51,000 and $562,000 for the years
ended December 31, 2007, 2006, 2004 and 2003, respectively. |
|
(2) |
|
Unaudited pro forma basic and diluted net earnings (loss) per
common share for the periods prior to DHCs July 21,
2005 spin-off (DHC spin-off) from Liberty Media
Corporation (Liberty) is based on 280,199,000 common
shares which is the number of shares of DHC common stock issued
in the DHC spin-off. |
17
Selected
Summary Historical Financial Data of Discovery Communications
Holding
The following tables present selected historical information
relating to Discovery Communications Holdings financial
condition and results of operations for the three months ended
March 31, 2008 and 2007 and for each of the years in the
five-year period ended December 31, 2007. The financial
data for the quarterly periods has been derived from Discovery
Communications Holdings unaudited financial statements for
such periods, and the financial data for the annual periods has
been derived from Discovery Communications Holdings
audited financial statements for the corresponding periods. The
data should be read in conjunction with Discovery Communications
Holdings financial statements and Managements
Discussion and Analysis of Financial Condition and Results of
Operations included in
Appendix A-2
of this proxy statement/prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor(1)
|
|
|
|
Predecessor (1)
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
amounts in thousands
|
|
Summary Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
1,090,312
|
|
|
|
1,077,233
|
|
|
|
|
970,636
|
|
|
|
831,369
|
|
|
|
835,450
|
|
|
|
858,383
|
|
Goodwill and intangible assets, net
|
|
$
|
5,041,554
|
|
|
|
5,051,843
|
|
|
|
|
472,939
|
|
|
|
397,927
|
|
|
|
445,221
|
|
|
|
466,968
|
|
Programming rights, long term
|
|
$
|
1,045,593
|
|
|
|
1,048,193
|
|
|
|
|
1,253,553
|
|
|
|
1,175,988
|
|
|
|
1,027,379
|
|
|
|
881,735
|
|
Total assets
|
|
$
|
7,921,337
|
|
|
|
7,960,430
|
|
|
|
|
3,376,553
|
|
|
|
3,174,620
|
|
|
|
3,235,686
|
|
|
|
3,194,211
|
|
Current liabilities
|
|
$
|
681,805
|
|
|
|
850,495
|
|
|
|
|
734,524
|
|
|
|
692,465
|
|
|
|
880,561
|
|
|
|
1,538,798
|
|
Long-term debt
|
|
$
|
4,088,607
|
|
|
|
4,109,085
|
|
|
|
|
2,633,237
|
|
|
|
2,590,440
|
|
|
|
2,498,287
|
|
|
|
1,833,942
|
|
Mandatorily redeemable interest in subsidiaries
|
|
$
|
48,721
|
|
|
|
48,721
|
|
|
|
|
94,825
|
|
|
|
272,502
|
|
|
|
319,567
|
|
|
|
410,252
|
|
Members equity/stockholders (deficit)
|
|
$
|
2,801,594
|
|
|
|
2,708,262
|
|
|
|
|
(261,288
|
)
|
|
|
(482,358
|
)
|
|
|
(627,926
|
)
|
|
|
(801,765
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor(1)
|
|
|
|
Predecessor(1)
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 15,
|
|
|
|
January 1,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
through
|
|
|
|
through
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
May 14,
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Successor(1))
|
|
|
(Predecessor(1))
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amounts in thousands
|
|
Summary Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
794,578
|
|
|
|
710,198
|
|
|
|
2,027,906
|
|
|
|
|
1,099,427
|
|
|
|
2,883,671
|
|
|
|
2,544,358
|
|
|
|
2,240,670
|
|
|
|
1,863,677
|
|
Operating income
|
|
$
|
284,069
|
|
|
|
135,275
|
|
|
|
456,136
|
|
|
|
|
166,164
|
|
|
|
585,497
|
|
|
|
545,626
|
|
|
|
523,249
|
|
|
|
375,294
|
|
Interest expense
|
|
$
|
(68,720
|
)
|
|
|
(44,558
|
)
|
|
|
(180,157
|
)
|
|
|
|
(68,600
|
)
|
|
|
(194,255
|
)
|
|
|
(184,585
|
)
|
|
|
(167,429
|
)
|
|
|
(159,425
|
)
|
Earnings from continuing operations
|
|
$
|
105,218
|
|
|
|
51,414
|
|
|
|
237,202
|
|
|
|
|
49,812
|
|
|
|
229,494
|
|
|
|
180,188
|
|
|
|
192,350
|
|
|
|
100,313
|
|
|
|
|
(1) |
|
Discovery Communications Holding was formed in the second
quarter of 2007 as part of a restructuring (the
Restructuring) completed by Discovery, in which Discovery
was converted from a corporation into a limited liability
company and became a wholly-owned subsidiary of Discovery
Communications Holding, and the former shareholders of
Discovery, including DHC and Advance/Newhouse, became members of
Discovery Communications Holding. Discovery Communications
Holding is the successor reporting entity to Discovery. In
connection with the Restructuring, Discovery Communications
Holding applied pushdown accounting and each
shareholders basis in Discovery as of May 14, 2007
has been pushed down to Discovery Communications Holding. The
result was $4.3 billion in goodwill being recorded by
Discovery Communications Holding. Since goodwill is not
amortizable, there is no income statement impact for this change
in basis. |
18
Selected
Unaudited Condensed Pro Forma Combined Financial Data of New
Discovery
The following table presents (i) New Discoverys
unaudited pro forma combined financial position as of
March 31, 2008, after giving effect to the AMC spin-off and
the Transaction as though they had occurred as of such date and
(ii) New Discoverys unaudited pro forma combined
results of operations for the three months ended March 31,
2008 and for the year ended December 31, 2007, after giving
effect to the AMC spin-off and the Transaction as though they
had occurred as of January 1, 2007. The unaudited pro forma
combined data does not purport to be indicative of the results
of operations or financial position that may be obtained in the
future or that actually would have been obtained had such
transactions occurred on such dates. The following information
should be read in conjunction with the Selected Financial
Data and Managements Discussion and Analysis
of Financial Condition and Results of Operations of DHC
and Discovery and is qualified in it is entirety by reference to
the Unaudited Condensed Pro Forma Combined Financial Statements
of New Discovery included elsewhere herein.
Summary
Pro Forma Balance Sheet Data:
|
|
|
|
|
|
|
March 31, 2008
|
|
|
|
(amounts in thousands)
|
|
|
ASSETS
|
Cash
|
|
$
|
72,606
|
|
Other current assets
|
|
|
1,032,836
|
|
Property and equipment, net
|
|
|
383,357
|
|
Content rights
|
|
|
1,091,022
|
|
Goodwill
|
|
|
7,130,994
|
|
Other assets
|
|
|
802,792
|
|
|
|
|
|
|
Total assets
|
|
$
|
10,513,607
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities
|
|
$
|
691,950
|
|
Long-term debt
|
|
|
4,088,607
|
|
Deferred tax liabilities
|
|
|
133,676
|
|
Other liabilities
|
|
|
284,905
|
|
|
|
|
|
|
Total liabilities
|
|
|
5,199,138
|
|
Minority interest
|
|
|
48,721
|
|
Stockholders equity
|
|
|
|
|
Preferred stock
|
|
|
143,993
|
|
Common stock
|
|
|
2,811
|
|
Additional paid-in capital
|
|
|
6,337,364
|
|
Accumulated deficit
|
|
|
(1,219,492
|
)
|
Accumulated other comprehensive income
|
|
|
1,072
|
|
|
|
|
|
|
Total equity
|
|
|
5,265,748
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
10,513,607
|
|
|
|
|
|
|
19
Summary
Pro Forma Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
Three
|
|
|
|
|
|
|
Months Ended
|
|
|
Year Ended
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(amounts in thousands,
|
|
|
|
except per share amounts)
|
|
|
Revenue
|
|
$
|
810,040
|
|
|
|
3,152,929
|
|
Cost of sales
|
|
|
(243,632
|
)
|
|
|
(1,210,617
|
)
|
Selling, general and administrative expenses
|
|
|
(250,714
|
)
|
|
|
(1,317,514
|
)
|
Depreciation and amortization
|
|
|
(46,502
|
)
|
|
|
(192,766
|
)
|
Gain from dispositions
|
|
|
|
|
|
|
283
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
269,192
|
|
|
|
432,315
|
|
Interest expense
|
|
|
(68,720
|
)
|
|
|
(291,857
|
)
|
Other expense, net
|
|
|
(22,439
|
)
|
|
|
(2,891
|
)
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before income taxes
|
|
|
178,033
|
|
|
|
137,567
|
|
Income tax expense
|
|
|
(80,172
|
)
|
|
|
(29,229
|
)
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$
|
97,861
|
|
|
|
108,338
|
|
|
|
|
|
|
|
|
|
|
Basic and fully diluted pro forma earnings from continuing
operations per common share
|
|
$
|
0.23
|
|
|
|
0.26
|
|
|
|
|
|
|
|
|
|
|
Comparative
Per Share Financial Data
The following table shows (1) the basic and diluted loss
per common share and book value per share data for each of DHC
and Discovery Communications Holding on a historical basis,
(2) the basic and diluted loss per common share and book
value per share for New Discovery on a pro forma basis and
(3) the equivalent pro forma net income and book value per
share attributable to the shares of New Discovery common stock
issuable for outstanding Discovery Communications Holding member
units. The historical Discovery Communications Holding earnings
per common share for the Predecessor period and the Successor
period is based on 50,400 and 37,800 weighted average
shares/units, respectively.
The following information should be read in conjunction with
(1) the separate historical financial statements and
related notes of DHC incorporated by reference to DHCs
Quarterly Report on
Form 10-Q
for the three months ended March 31, 2008 and DHCs
Annual Report on
Form 10-K,
as amended, for the year ended December 31, 2007,
(2) the separate historical financial statements and
related notes of Discovery Communications Holding included
elsewhere herein and (3) the unaudited condensed pro forma
combined financial statements of New Discovery included
elsewhere herein. The pro forma information is not necessarily
indicative of the results of operations that would have resulted
if the Transaction and the AMC spin-off had been completed as of
the assumed dates or of the results that will be achieved in the
future.
We calculate historical book value per share by dividing
stockholders equity by the number of shares of common
stock outstanding at March 31, 2008. We calculate pro forma
book value per share by dividing pro forma stockholders
equity by the pro forma number of shares of New Discovery common
stock that would have been outstanding had the Transaction and
the AMC spin-off been completed as of March 31, 2008.
New Discovery pro forma combined loss applicable to common
stockholders, pro forma stockholders equity and the pro
forma number of shares of New Discovery common stock outstanding
have been derived from the unaudited condensed pro forma
combined financial information for New Discovery appearing
elsewhere herein.
20
We calculate the Discovery Communications Holding equivalent pro
forma per unit data by multiplying the pro forma per share
amounts by the imputed exchange ratio of 11,153 shares of
New Discovery common stock for each unit of Discovery
Communications Holding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discovery Communications Holding
|
|
|
|
DHC
|
|
|
New Discovery
|
|
|
|
|
|
Pro Forma
|
|
|
|
Historical
|
|
|
Pro Forma
|
|
|
Historical
|
|
|
Equivalent
|
|
|
Basic and fully diluted net earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2008
|
|
$
|
.12
|
|
|
|
.23
|
|
|
|
2,783.54
|
|
|
|
2,565.19
|
|
Year ended December 31, 2007
|
|
$
|
(.24
|
)
|
|
|
.26
|
|
|
|
|
|
|
|
2,899.78
|
|
Period from January 1, 2007 through May 14, 2007
(Predecessor period)
|
|
$
|
|
|
|
|
|
|
|
|
739.66
|
|
|
|
|
|
Period from May 15, 2007 through
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 (Successor period)
|
|
$
|
|
|
|
|
|
|
|
|
4,886.56
|
|
|
|
|
|
Book value per common share as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008
|
|
$
|
16.10
|
|
|
|
12.49
|
|
|
|
74,116.24
|
|
|
|
139,300.97
|
|
Cash dividends
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparative
Per Share Market Price and Dividend Information
Market
Price
The following table sets forth high and low sales prices for the
DHC Series A common stock and DHC Series B common
stock for the periods indicated.
DHC Series A common stock and DHC Series B common
stock trade on The Nasdaq Global Select Market under the symbols
DISCA and DISCB, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DHC
|
|
|
|
Series A
|
|
|
Series B
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
15.65
|
|
|
$
|
13.88
|
|
|
$
|
15.96
|
|
|
$
|
13.58
|
|
Second quarter
|
|
$
|
15.18
|
|
|
$
|
13.61
|
|
|
$
|
15.21
|
|
|
$
|
13.73
|
|
Third quarter
|
|
$
|
14.82
|
|
|
$
|
12.81
|
|
|
$
|
14.54
|
|
|
$
|
12.97
|
|
Fourth quarter
|
|
$
|
16.96
|
|
|
$
|
14.18
|
|
|
$
|
16.85
|
|
|
$
|
13.97
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
19.48
|
|
|
$
|
15.52
|
|
|
$
|
19.46
|
|
|
$
|
15.70
|
|
Second quarter
|
|
$
|
24.70
|
|
|
$
|
19.12
|
|
|
$
|
24.70
|
|
|
$
|
19.25
|
|
Third quarter
|
|
$
|
29.33
|
|
|
$
|
21.92
|
|
|
$
|
29.25
|
|
|
$
|
21.98
|
|
Fourth quarter
|
|
$
|
29.81
|
|
|
$
|
22.55
|
|
|
$
|
30.25
|
|
|
$
|
25.40
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
25.51
|
|
|
$
|
19.57
|
|
|
$
|
31.00
|
|
|
$
|
21.85
|
|
Second quarter
|
|
$
|
26.83
|
|
|
$
|
21.14
|
|
|
$
|
28.00
|
|
|
$
|
22.10
|
|
Third quarter through July [ ]
|
|
$
|
[ ]
|
|
|
$
|
[ ]
|
|
|
$
|
[ ]
|
|
|
$
|
[ ]
|
|
On December 12, 2007, the last trading day before the
public announcement of the Transaction, DHC Series A common
stock closed at $27.42 per share and DHC Series B common
stock closed at $28.24 per share. On June 3, 2008, the last
trading day before the execution of the Transaction Agreement,
DHC Series A common stock closed at $25.95 per share and
DHC Series B common stock closed at $26.33 per share.
21
New Discovery has applied to retain the symbols
DISCA and DISCB for its Series A
and Series B common stock, respectively, which will trade
on the Nasdaq Global Select Market. It has also applied to list
its Series C common stock on the Nasdaq Global Select
Market under the symbol DISCK.
Dividends
DHC
DHC has never paid any cash dividends on its Series A
common stock and Series B common stock, and has no present
intention of so doing.
New Discovery
New Discovery has no present intention to pay cash dividends on
its stock. Following the consummation of the Transaction, all
decisions regarding the payment of dividends by New Discovery
will be made by its board of directors, from time to time, in
accordance with applicable law after taking into account various
factors, including its financial condition, operating results,
current and anticipated cash needs, plans for expansion and
possible loan covenants which may restrict or prohibit its
payment of dividends. In addition, under the terms of the New
Discovery convertible preferred stock held by Advance/Newhouse,
Advance/Newhouse will have consent rights with respect to
certain dividends.
22
RISK
FACTORS
In addition to the other information contained in,
incorporated by reference in or included as an appendix to this
proxy statement/prospectus, you should carefully consider the
following risk factors in deciding whether to vote to approve
the transaction proposals.
Factors
Relating to New Discovery and Ownership of New Discovery Common
Stock
New
Discovery will be a holding company and could be unable in the
future to obtain cash in amounts sufficient to service its
financial obligations or meet its other
commitments.
New Discoverys ability to meet its financial obligations
and other contractual commitments will depend upon its ability
to access cash. New Discovery will be a holding company, and its
sources of cash will include its available cash balances, net
cash from the operating activities of its subsidiaries, any
dividends and interest New Discovery may receive from its
investments, availability under any credit facilities that New
Discovery may obtain in the future and proceeds from any asset
sales New Discovery may undertake in the future. The ability of
New Discoverys operating subsidiaries, including
Discovery, to pay dividends or to make other payments or
advances to New Discovery will depend on their individual
operating results and any statutory, regulatory or contractual
restrictions to which they may be or may become subject.
New
Discovery has no financial or operating history as a separate
company upon which you can evaluate its
performance.
New Discovery will first become a public company, and the
successor issuer to DHC, at the time the Transaction is
completed. You will not be able to evaluate the future
performance of New Discovery based on the historical financial
information included in this proxy statement/prospectus for DHC,
as substantially all of DHCs consolidated businesses will
be disposed of in the AMC spin-off. New Discoverys results
of operations will be almost entirely attributable to the
results of operations of its wholly-owned subsidiary Discovery,
which is currently accounted for by DHC as an equity affiliate.
While the Transaction, if implemented, will result in greater
disclosure regarding Discovery than the limited financial
information previously disclosed regarding Discovery, no
assurance can be given that such increased disclosure will not
reveal new information that is poorly received by investors or
analysts.
New
Discovery cannot be certain that it will be successful in
integrating any businesses it may acquire in the
future.
New Discoverys business strategy includes growth through
acquisitions in selected markets. Integration of new businesses
may present significant challenges, including: realizing
economies of scale in programming and network operations;
eliminating duplicative overheads; and integrating networks,
financial systems and operational systems. We cannot assure you
that, with respect to any acquisition, New Discovery will
realize anticipated benefits or successfully integrate any
acquired business with existing operations. In addition, while
we intend to implement appropriate controls and procedures as
acquired companies are integrated, New Discovery may not be able
to certify as to the effectiveness of these companies
disclosure controls and procedures or internal control over
financial reporting (as required by U.S. federal securities
laws and regulations) until it has fully integrated them.
New
Discoverys businesses are subject to risks of adverse
government regulation.
Programming services, satellite carriers, television stations
and Internet and data transmission companies are subject to
varying degrees of regulation in the United States by the
Federal Communications Commission and other entities and in
foreign countries by similar entities. Such regulation and
legislation are subject to the political process and have been
in constant flux over the past decade. Moreover, substantially
every foreign country in which New Discoverys subsidiaries
may have an investment regulates, in varying degrees, the
distribution, content and ownership of programming services and
foreign investment in programming companies. Further material
changes in the law and regulatory requirements must be
anticipated, and there can be no assurance that New
Discoverys business will not be adversely affected by
future legislation, new regulation or deregulation.
23
New
Discoverys directors will overlap with those of Liberty
Media Corporation and certain related persons of
Advance/Newhouse, which may lead to conflicting
interests.
New Discoverys eleven-person board of directors will
include five persons who are currently members of the board of
directors of Liberty and three designees of Advance/Newhouse,
including Robert J. Miron, the Chairman of Advance/Newhouse, and
Steven A. Miron, the Chief Executive Officer of
Advance/Newhouse. Both Liberty and the parent company of
Advance/Newhouse own interests in a range of media,
communications and entertainment businesses. DHC does not own
any interest in Liberty or Advance/Newhouse, and, to New
Discoverys knowledge, neither Liberty nor Advance/Newhouse
owns any interest in DHC and, following the Transaction, Liberty
will not own any interest in New Discovery. Mr. John C.
Malone will be a director of New Discovery and is Chairman of
the board of Liberty, and he beneficially owns stock of Liberty
representing approximately 33% of the aggregate voting power of
its outstanding stock. Mr. Malone is expected to
beneficially own stock of New Discovery representing
approximately 23% of the aggregate voting power (other than with
respect to the election of the common stock directors) of the
outstanding stock of New Discovery immediately after completion
of the Transaction. Those of the other directors of New
Discovery who are also directors of Liberty own Liberty stock
and stock incentives and will own New Discovery stock and stock
incentives. Advance/Newhouse will elect three directors annually
for so long as it owns a specified minimum amount of New
Discovery Series A convertible preferred stock, and its
initial designees to the board include its Chairman, Robert J.
Miron, and its Chief Executive Officer, Steven A. Miron. The
Advance/Newhouse Series A convertible preferred stock,
which votes with New Discovery common stock on all matters other
than the election of directors, will represent approximately 26%
of the voting power of the outstanding shares of New Discovery
immediately after the Transaction. The Series A convertible
preferred stock also grants
Advance/Newhouse
consent rights over a range of corporate actions by New
Discovery, including fundamental changes to its business, the
issuance of additional capital stock, mergers and business
combinations and certain acquisitions and dispositions. These
ownership interests
and/or
business positions could create, or appear to create, potential
conflicts of interest when these individuals are faced with
decisions that could have different implications for New
Discovery, Liberty
and/or
Advance/Newhouse. For example, there may be the potential for a
conflict of interest when New Discovery, on the one hand, or
Liberty
and/or
Advance/Newhouse, on the other hand, look at acquisitions and
other corporate opportunities that may be suitable for the other.
The members of New Discoverys board of directors will have
fiduciary duties to New Discoverys stockholders. Likewise,
those persons who serve in similar capacities at Liberty or
Advance/Newhouse have fiduciary duties to those companies.
Therefore, such persons may have conflicts of interest or the
appearance of conflicts of interest with respect to matters
involving or affecting both respective companies. From time to
time, Liberty or its affiliates and Advance/Newhouse or its
affiliates may enter into transactions with New Discovery or its
subsidiaries. Although the terms of any such transactions or
agreements will be established based upon negotiations between
employees of the companies involved, there can be no assurance
that the terms of any such transactions will be as favorable to
New Discovery or its subsidiaries as would be the case where the
parties are at arms length.
New
Discovery and Liberty may compete for business
opportunities.
Liberty owns interests in various U.S. and international
programming companies that have subsidiaries that own or operate
domestic or foreign programming services that may compete with
the programming services offered by New Discoverys
businesses. New Discovery has no rights in respect of
U.S. or international programming opportunities developed
by or presented to the subsidiaries or Liberty, and the pursuit
of these opportunities by such subsidiaries may adversely affect
the interests of New Discovery and its stockholders. Because New
Discovery and Liberty have overlapping directors, the pursuit of
business opportunities may serve to intensify the conflicts of
interest or appearance of conflicts of interest faced by the
respective management teams. New Discoverys restated
charter provides that no director or officer of New Discovery
will be liable to New Discovery or any of its subsidiaries for
breach of any fiduciary duty by reason of the fact that such
individual directs a corporate opportunity to another person or
entity (including Liberty), for which such individual serves as
a director or officer, or does not refer or communicate
information regarding such corporate opportunity to New
Discovery or any of its subsidiaries, unless (x) such
opportunity was expressly offered to such individual solely in
his or her capacity as a
24
director or officer of New Discovery or any of its subsidiaries
and (y) such opportunity relates to a line of business in
which New Discovery or any of its subsidiaries is then directly
engaged.
The
personal educational media, lifelong learning, and travel
industry investments by John S. Hendricks, a common stock
Director of New Discovery and the Founder of Discovery, may
conflict with or compete with the business activities of New
Discovery.
John S. Hendricks manages his non-Discovery, personal business
investments through Hendricks Investment Holdings LLC
(HIH), a Delaware limited liability company of which he
is the sole owner and member. HIH owns a travel club and
travel-related properties including a resort in Gateway,
Colorado with plans to create a learning academy for guests that
includes online and advanced media offerings in the area of
informal and lifelong learning. Certain video productions and
offerings of this academy may compete with the educational media
offerings of New Discovery. The academy and New Discovery may
enter into a business arrangement for the offering of New
Discovery video products for sale by the academy
and/or for
the joint-production of new educational media products.
Through HIH, Mr. Hendricks owns a number of business
interests in the automotive field some of which are involved in
programming offered by Discovery, in particular the
Turbo programming series offered by Discovery.
From time to time, HIH or its subsidiaries may enter into
transactions with New Discovery or its subsidiaries. Although
the terms of any such transactions or agreements will be
established based upon negotiations between employees of the
companies involved, there can be no assurance that the terms of
any such transactions will be as favorable to New Discovery or
its subsidiaries as would be the case where the parties are at
arms length.
It may
be difficult for a third party to acquire New Discovery, even if
doing so may be beneficial to its stockholders.
Certain provisions of New Discoverys restated charter and
bylaws may discourage, delay or prevent a change in control of
New Discovery that a stockholder may consider favorable. These
provisions include the following:
|
|
|
|
|
authorizing a capital structure with multiple series of common
stock: a Series B that entitles the holders to ten votes
per share, a Series A that entitles the holders to one vote
per share and a Series C that, except as otherwise required
by applicable law, entitles the holders to no voting rights;
|
|
|
|
authorizing the Series A convertible preferred stock with
special voting rights, which prohibits New Discovery from taking
any of the following actions, among others, without the prior
approval of the holders of a majority of the outstanding shares
of such stock:
|
|
|
|
|
|
increasing the number of members of the Board of Directors above
11;
|
|
|
|
making any material amendment to the restated charter or bylaws
of New Discovery;
|
|
|
|
engaging in a merger, consolidation or other business
combination with any other entity; or
|
|
|
|
appointing or removing the Chairman of the Board or the CEO of
New Discovery.
|
|
|
|
|
|
authorizing the issuance of blank check preferred
stock, which could be issued by New Discoverys board of
directors to increase the number of outstanding shares and
thwart a takeover attempt;
|
|
|
|
classifying New Discoverys common stock directors with
staggered three year terms and having three directors elected by
the holders of the Series A convertible preferred stock,
which may lengthen the time required to gain control of New
Discoverys board of directors;
|
|
|
|
limiting who may call special meetings of stockholders;
|
|
|
|
prohibiting stockholder action by written consent (subject to
certain exceptions), thereby requiring stockholder action to be
taken at a meeting of the stockholders;
|
|
|
|
establishing advance notice requirements for nominations of
candidates for election to New Discoverys board of
directors or for proposing matters that can be acted upon by
stockholders at stockholder meetings;
|
25
|
|
|
|
|
requiring stockholder approval by holders of at least 80% of New
Discoverys voting power or the approval by at least 75% of
New Discoverys board of directors with respect to certain
extraordinary matters, such as a merger or consolidation of New
Discovery, a sale of all or substantially all of New
Discoverys assets or an amendment to New Discoverys
restated charter;
|
|
|
|
requiring the consent of the holders of at least 75% of the
outstanding Series B common stock (voting as a separate
class) to certain share distributions and other corporate
actions in which the voting power of the Series B common
stock would be diluted by, for example, issuing shares having
multiple votes per share as a dividend to holders of
Series A common stock; and
|
|
|
|
the existence of authorized and unissued stock which would allow
New Discoverys board of directors to issue shares to
persons friendly to current management, thereby protecting the
continuity of its management, or which could be used to dilute
the stock ownership of persons seeking to obtain control of New
Discovery.
|
As a condition to and immediately preceding the consummation of
the Transaction, New Discovery will adopt a shareholder rights
plan in order to encourage anyone seeking to acquire New
Discovery to negotiate with its board of directors prior to
attempting a takeover. While the plan is designed to guard
against coercive or unfair tactics to gain control of New
Discovery, the plan may have the effect of making more difficult
or delaying any attempts by others to obtain control of New
Discovery.
Holders
of any single series of New Discovery common stock may not have
any remedies if any action by New Discoverys directors or
officers has an adverse effect on only that series of New
Discovery common stock.
Principles of Delaware law and the provisions of New
Discoverys restated charter may protect decisions of New
Discoverys board of directors that have a disparate impact
upon holders of any single series of New Discovery common stock.
Under Delaware law, the board of directors has a duty to act
with due care and in the best interests of all of the
stockholders of New Discovery, including the holders of all
series of its common stock. Principles of Delaware law
established in cases involving differing treatment of multiple
classes or series of stock provide that a board of directors
owes an equal duty to all common stockholders regardless of
class or series and does not have separate or additional duties
to any group of stockholders. As a result, in some
circumstances, New Discoverys directors may be required to
make a decision that is adverse to the holders of one series of
New Discovery common stock. Under the principles of Delaware law
referred to above, New Discovery stockholders may not be able to
challenge these decisions if New Discoverys board of
directors is disinterested and adequately informed with respect
to these decisions and acts in good faith and in the honest
belief that it is acting in the best interests of all of New
Discoverys stockholders.
The
exercise by Advance/Newhouse of its registration rights could
adversely affect the market price of New Discoverys common
stock.
As part of the Transaction, Advance/Newhouse has been granted
registration rights covering all of the shares of New Discovery
common stock issuable upon conversion of the convertible
preferred stock being issued to Advance/Newhouse in the
Transaction. Advance/Newhouses preferred stock will be
convertible into a number of shares equal to one-half of the
number of shares of common stock that are issued to former DHC
stockholders in the merger, subject to anti-dilution
adjustments. The registration rights, which are immediately
exercisable, are transferrable with the sale or transfer by
Advance/Newhouse of blocks of shares representing 10% or more of
the preferred stock received by it in the Transaction. The
exercise of the registration rights, and subsequent sale of
possibly large amounts of New Discovery common stock in the
public market, could materially and adversely affect the market
price of the New Discovery common stock.
26
New
Discovery will not be fully subject to the requirements of
Section 404 of the Sarbanes-Oxley Act of 2002 until the end
of 2008 at the earliest. If New Discovery fails to maintain an
effective system of internal control over financial reporting,
New Discoverys management may not be able to provide the
requisite certifications and its auditors may issue adverse
attestations, which could, among other things, jeopardize the
markets confidence in New Discoverys financial
results.
As DHC accounts for Discovery as an equity affiliate, Discovery
to date has not been subject to the disclosure and internal
controls for financial reporting requirements of
Section 404 of The Sarbanes Oxley Act of 2002. We do not
expect Discovery to be subject to those requirements until the
end of 2008 at the earliest. In the interim, Discovery will be
required to document, evaluate and test (and possibly remediate)
its system of internal control over financial reporting in order
for New Discovery to comply with the management certification
and auditor attestation requirements of Section 404. As a
result, New Discovery expects to incur substantial expenses and
diversion of managements time throughout this coming year.
New Discovery cannot be certain as to the timing of completion
of its evaluation, testing and remediation actions or their
effect on Discoverys operations. If New Discovery is not
able to implement the requirements of Section 404 in a
timely manner or with adequate compliance, its management may
not be able to provide the requisite certifications and its
auditors may issue adverse attestations, which could harm
investors confidence in New Discoverys financial
results and subject New Discovery to sanctions or investigation
by regulatory authorities, such as the SEC or the Financial
Industry Regulatory Authority. Any such action could cause New
Discoverys stock price to fall.
John
C. Malone and Advance/Newhouse will each have significant voting
power with respect to corporate matters considered by New
Discoverys stockholders.
Following the completion of the Transaction, John C. Malone and
Advance/Newhouse are expected to beneficially own shares of New
Discovery stock representing approximately 23% and 26%,
respectively, of the aggregate voting power represented by New
Discoverys outstanding stock (other than voting power
relating to the election of directors), based, in each case, on
the number of shares of DHC common stock outstanding as of
May 31, 2008. With respect to the election of directors,
Mr. Malone is expected to control approximately 31% of the
aggregate voting power relating to the election of the eight
common stock directors, based on the number of shares of DHC
common stock outstanding as of May 31, 2008 (and assuming
that the convertible preferred stock of New Discovery to be
owned by Advance/Newhouse (the A/N Preferred Stock) has
not been converted into New Discovery common stock). The A/N
Preferred Stock will carry with it the right to designate the
three preferred stock directors to the board of New Discovery
(subject to certain conditions), but will not vote with respect
to the election of the eight common stock directors. Also, under
the terms of the A/N Preferred Stock, Advance/Newhouse will have
special voting rights with respect to certain enumerated
matters, including material amendments to the restated charter
and bylaws, fundamental changes in the business of New
Discovery, mergers and other business combinations involving New
Discovery, certain acquisitions and dispositions and future
issuances of New Discovery capital stock. Although there is no
stockholder agreement, voting agreement or any similar
arrangement between Mr. Malone and Advance/Newhouse with
respect to New Discovery, by virtue of their respective
anticipated New Discovery holdings, each of Mr. Malone and
Advance/Newhouse may have significant influence over the outcome
of any corporate transaction or other matter submitted to the
stockholders of New Discovery.
The
AMC spin-off could result in significant tax
liability.
At the effective time of the AMC spin-off, DHC expects to
receive a tax opinion of Skadden, Arps, Slate,
Meagher & Flom LLP, tax counsel to DHC, to the effect
that, taking into account, among other things, the issuance of
the A/N Preferred Stock to
Advance/Newhouse
and the special voting rights associated with such A/N Preferred
Stock, the AMC spin-off should qualify as a transaction under
Sections 368(a) and 355 of the Code for U.S. federal
income tax purposes.
The tax opinion will be based on, among other things,
assumptions and representations as to factual matters and
certain undertakings that will be received from DHC, AMC and
certain DHC stockholders, including those contained in
certificates of officers of DHC and AMC and certain DHC
stockholders, as requested by counsel. If any of those factual
representations or assumptions were to be untrue or incomplete
in any material respect, any undertaking was not complied with,
or the facts upon which the opinion is based were to be
materially different
27
from the facts at the time of the AMC spin-off, the AMC spin-off
may not qualify for tax-free treatment. Opinions of counsel are
not binding on the U.S. Internal Revenue Service (the
IRS). As a result, the conclusions expressed in the
opinion of tax counsel could be challenged by the IRS, and if
the IRS were to prevail in such challenge, the tax consequences
to DHC stockholders could be materially less favorable.
If the AMC spin-off did not qualify as a transaction under
Sections 368(a) and 355 of the Code for U.S. federal income
tax purposes, then DHC would recognize taxable gain in an amount
equal to the excess, if any, of the fair market value of the
shares of common stock of AMC held by DHC immediately prior to
the AMC spin-off over DHCs tax basis in such shares. In
addition, a DHC stockholder that received shares of common stock
of AMC in the AMC spin-off would be treated as having received a
distribution of property in an amount equal to the fair market
value of such shares (including any fractional shares sold on
behalf of the stockholder) on the distribution date. That
distribution would be taxable to such stockholder as a dividend
to the extent of DHCs current and accumulated earnings and
profits. Any amount that exceeded DHCs earnings and
profits would be treated first as a non-taxable return of
capital to the extent of such stockholders tax basis in
its shares of DHC stock with any remaining amount being taxed as
a capital gain. See Material U.S. Federal Income Tax
Consequences of the Merger and the AMC spin-off
Material U.S. Federal Income Tax Consequences of the AMC
spin-off for more information regarding the tax
consequences of the AMC spin-off.
In
connection with the AMC spin-off, AMC will indemnify New
Discovery and DHC for certain liabilities. There can be no
assurance that the indemnity will be sufficient to insure New
Discovery and DHC against the full amount of such liabilities,
or that AMCs ability to satisfy its indemnification
obligations will not be impaired in the future.
Pursuant to the reorganization agreement, AMC agreed to
indemnify New Discovery and DHC, which indemnity is designed to
make AMC financially responsible for all liabilities that may
exist relating to the business of AMC, whether incurred prior to
or after the AMC spin-off, as well as those obligations of DHC
assumed by AMC pursuant to the reorganization agreement, as
discussed further in the section entitled The Transaction
Agreements Reorganization Agreement. The
potential liabilities subject to such indemnity from AMC cannot
be predicted or quantified, and such indemnification obligation
of AMC is not limited to any maximum amount. Third parties
(including Advance/Newhouse who is indemnified by New Discovery
under the Transaction Agreement for all liabilities incurred by
DHC (but not Discovery) prior to the closing of the Transaction)
could seek to hold New Discovery or DHC responsible for any of
the liabilities that AMC has agreed to retain, and there can be
no assurance that the indemnity from AMC will be sufficient to
protect New Discovery or DHC against the full amount of such
liabilities, or that AMC will be able to fully satisfy its
indemnification obligations. Moreover, even if New Discovery or
DHC ultimately succeed in recovering from AMC any amounts for
which either such company is held liable, New Discovery
and/or DHC,
as applicable, will be temporarily required to bear those losses
until such recovery. Each of these risks could adversely affect
New Discoverys business, results of operations and
financial condition.
Factors
Relating to Discovery
Discoverys
success is dependent upon U.S. and foreign audience acceptance
of its programming and other entertainment content which is
difficult to predict.
The production and distribution of pay television programs and
other entertainment content are inherently risky businesses
because the revenue Discovery derives and its ability to
distribute its content depend primarily on consumer tastes and
preferences that change in often unpredictable ways. The success
of Discoverys businesses depends on its ability to
consistently create and acquire content and programming that
meets the changing preferences of viewers in general, viewers in
special interest groups, viewers in specific demographic
categories and viewers in various overseas marketplaces. The
commercial success of its programming and other content also
depends upon the quality and acceptance of competing programs
and other content available in the applicable marketplace at the
same time. Other factors, including the availability of
alternative forms of entertainment and leisure time activities,
general economic conditions, piracy, digital and on-demand
distribution and growing competition for consumer discretionary
spending may also affect the audience for its content. Audience
sizes for its media networks are critical factors affecting both
(i) the volume and pricing of advertising revenue that
Discovery
28
receives, and (ii) the extent of distribution and the
license fees Discovery receives under agreements with its
distributors. Consequently, reduced public acceptance of its
entertainment content may decrease its audience share and
adversely affect all of its revenue streams.
The
loss of Discoverys affiliation agreements, or renewals
with less advantageous terms, could cause its revenue to
decline.
Because Discoverys media networks are licensed on a
wholesale basis to distributors such as cable and satellite
operators which in turn distribute them to consumers, Discovery
is dependent upon the maintenance of affiliation agreements with
these operators. These affiliation agreements generally provide
for the level of carriage Discoverys networks will
receive, such as channel placement and programming package
inclusion (widely distributed, broader programming packages
compared to lesser distributed, specialized programming
packages), and for payment of a license fee to Discovery based
on the numbers of subscribers that receive its networks. These
per-subscriber payments represent a significant portion of
Discoverys revenue. These affiliation agreements generally
have a limited term which varies from market to market and from
distributor to distributor, and there can be no assurance that
these affiliation agreements will be renewed in the future, or
renewed on terms that are as favorable to Discovery as those in
effect today. A reduction in the license fees that Discovery
receives per subscriber or in the number of subscribers for
which Discovery is paid, including as a result of a loss or
reduction in carriage for Discoverys media networks, could
adversely affect its distribution revenue. Such a loss or
reduction in carriage could also decrease the potential audience
for Discoverys programs thereby adversely affecting its
advertising revenue.
Consolidation among cable and satellite operators has given the
largest operators considerable leverage in their relationship
with programmers, including Discovery. The two largest
U.S. cable television system operators provide service to
approximately 35% of U.S. households receiving cable or
satellite television service and the two largest satellite
television operators provide service to an additional 26% of
such households. Discovery currently has agreements in place
with the major U.S. cable and satellite operators which
expire at various times beginning in 2008 through 2014.
Discovery is currently in negotiations to renew affiliation
agreements for carriage of its networks involving a substantial
portion of its domestic subscribers. A failure to secure a
renewal or a renewal on less favorable terms may have a material
adverse effect on Discoverys results of operations and
financial position. In addition, many of the overseas markets in
which Discovery distributes its networks also have a small
number of dominant distributors. Continued consolidation within
the industry could further reduce the number of distributors
available to carry Discoverys programming and increase the
negotiating leverage of its distributors which could adversely
affect Discoverys revenue.
Discovery
operates in increasingly competitive industries.
The entertainment and media programming industries in which
Discovery operates are highly competitive. Discovery competes
with other programming networks for advertising, distribution
and viewers. Discovery also competes for viewers with other
forms of media entertainment, such as home video, movies,
periodicals and online and mobile activities. In particular,
online websites and search engines have seen significant
advertising growth, a portion of which is derived from
traditional cable network and satellite advertisers. In
addition, there has been consolidation in the media industry and
Discoverys competitors include market participants with
interests in multiple media businesses which are often
vertically integrated. Discoverys online businesses
compete for users and advertising in the enormously broad and
diverse market of free internet-delivered services.
Discoverys commerce business competes against a wide range
of competitive retailers selling similar products. Its
educational video business competes with other providers of
educational products to schools. Discoverys ability to
compete successfully depends on a number of factors, including
its ability to consistently supply high quality and popular
content, access its niche viewerships with appealing
category-specific programming, adapt to new technologies and
distribution platforms and achieve widespread distribution.
There can be no assurance that Discovery will be able to compete
successfully in the future against existing or new competitors,
or that increasing competition will not have a material adverse
effect on its business, financial condition or results of
operations.
29
Discoverys
business is subject to risks of adverse laws and regulations,
both domestic and foreign.
Programming services like Discoverys, and the distributors
of its services, including cable operators, satellite operators
and Internet companies, are highly regulated by
U.S. federal laws and regulations issued and administered
by various federal agencies, including the FCC, as well as by
state and local governments. The U.S. Congress and the FCC
currently have under consideration, and may in the future adopt,
new laws, regulations and policies regarding a wide variety of
matters that could, directly or indirectly, affect the
operations of Discoverys U.S. media properties. For
example, legislators and regulators continue to consider rules
that would effectively require cable television operators to
offer all programming on an à la carte basis (which would
allow viewers to subscribe for individual networks rather a
package of channels)
and/or
require programmers to sell channels to distributors on an
à la carte basis. Certain cable television operators and
other distributors have already introduced tiers, or more
targeted channel packages, to their customers that may or may
not include some or all of Discoverys networks. The
unbundling of program services at the retail
and/or
wholesale level could reduce distribution of certain of
Discoverys program services, thereby leading to reduced
viewership and increased marketing expenses, and could affect
its ability to compete for or attract the same level of
advertising dollars or distribution fees. If the number of
channels occupied by leased access programmers expands, it could
have an adverse effect on Discoverys ability to obtain
carriage for its programming. In addition, a recent decision by
the FCC will effectively require cable operators, beginning
February 2009 and lasting for at least three years, to carry the
signals of must carry broadcast stations in both
digital and analog format unless all subscribers of the cable
operators system can view the digital signal on every
television set connected to the system. Carrying these
additional signals may result in less capacity for other
programming services, such as Discoverys networks, which
could adversely affect Discoverys revenue.
Similarly, the foreign jurisdictions in which Discoverys
networks are offered have, in varying degrees, government laws
and regulations governing Discoverys businesses.
Programming businesses are subject to regulation on a country by
country basis. Such regulations include à la carte pricing,
license requirements, local programming quotas, limits on the
amounts and kinds of advertising that can be carried, and
requirements to make programming available on non-discriminatory
terms, and can increase the cost of doing business
internationally. Changes in regulations imposed by foreign
governments could also adversely affect Discoverys
business, results of operations and ability to expand its
operations beyond their current scope.
Macroeconomic
risks associated with Discoverys business could adversely
affect its financial condition.
The current economic downturn in the United States and in other
regions of the world in which Discovery operates could adversely
affect demand for any of its businesses, thus reducing its
revenue and earnings. For example, expenditures by advertisers
are sensitive to economic conditions and tend to decline in
recessionary periods and other periods of uncertainty. Because
Discovery derives a substantial portion of its revenue from the
sale of advertising, a decline or delay in advertising
expenditures could reduce advertising prices and volume and
result in a decrease in its revenue. The decline in economic
conditions could also impact consumer discretionary spending.
Such a reduction in consumer spending may impact pay television
subscriptions, particularly to the more expensive digital
service tiers, which could lead to a decrease in
Discoverys distribution fees.
Increased
programming production and content costs may adversely affect
Discoverys results of operations and financial
condition.
One of the most significant areas of expense for Discovery is
for the licensing and production of content. In connection with
creating original content, Discovery incurs production costs
associated with, among other things, acquiring new show concepts
and retaining creative talent, including actors, writers and
producers. Discovery also incurs higher production costs when
filming in HD than standard definition. The costs of producing
programming have generally increased in recent years. These
costs may continue to increase in the future, which may
adversely affect Discoverys results of operations and
financial condition.
30
Disruption
or failure of satellites and facilities, and disputes over
supplier contracts on which Discovery depends to distribute its
programming could adversely affect its business.
Discovery depends on transponders on satellite systems to
transmit its media networks to cable television operators and
other distributors worldwide. The distribution facilities
include uplinks, communications satellites and downlinks.
Discovery obtains satellite transponder capacity pursuant to
long-term contracts and other arrangements with third-party
vendors, which expire at various times beginning in 2008 through
2019. Even with
back-up and
redundant systems, transmissions may be disrupted as a result of
local disasters or other conditions that may impair on-ground
uplinks or downlinks, or as a result of an impairment of a
satellite. Currently, there are a limited number of
communications satellites available for the transmission of
programming. If a disruption or failure occurs, Discovery may
not be able to secure alternate distribution facilities in a
timely manner, which could have a material adverse effect on its
business and results of operations.
Discovery
must respond to and capitalize on rapid changes in new
technologies and distribution platforms, including their effect
on consumer behavior, in order to remain competitive and exploit
new opportunities.
Technology in the video, telecommunications and data services
industry is changing rapidly. Discovery must adapt to advances
in technologies, distribution outlets and content transfer and
storage to ensure that its content remains desirable and widely
available to its audiences while protecting its intellectual
property interests. Discovery may not have the right, and may
not be able to secure the right, to distribute some of its
licensed content across these, or any other, new platforms and
must adapt accordingly. The ability to anticipate and take
advantage of new and future sources of revenue from these
technological developments will affect Discoverys ability
to expand its business and increase revenue.
Similarly, Discovery also must adapt to changing consumer
behavior driven by technological advances such as
video-on-demand
and a desire for more user-generated and interactive content.
Devices that allow consumers to view Discoverys
entertainment content from remote locations or on a time-delayed
basis and technologies which enable users to fast-forward or
skip advertisements may cause changes in audience behavior that
could affect the attractiveness of Discoverys offerings to
advertisers and could therefore adversely affect its revenue. If
Discovery cannot ensure that its content is responsive to the
lifestyles of its target audiences and capitalize on
technological advances, there could be a negative effect on its
business.
Discoverys
revenue and operating results are subject to seasonal and
cyclical variations.
Discoverys business has experienced and is expected to
continue to experience some seasonality due to, among other
things, seasonal advertising patterns, seasonal influences on
peoples viewing habits, and a heavy concentration of sales
in its commerce business during the fourth quarter. For example,
due to increased demand in the spring and holiday seasons, the
second and fourth quarters normally have higher advertising
revenue than the first and third quarters. In addition,
advertising revenue in even-numbered years benefit from
political advertising. If a short-term negative impact on New
Discoverys business were to occur during a time of high
seasonal demand, there could be a disproportionate effect on the
operating results of Discoverys business for the year.
Discovery
continues to develop new products and services for evolving
markets. There can be no assurance of the success of these
efforts due to a number of factors, some of which are beyond
Discoverys control.
There are substantial uncertainties associated with
Discoverys efforts to develop new products and services
for evolving markets, and substantial investments may be
required. Initial timetables for the introduction and
development of new products and services may not be achieved,
and price and profitability targets may not prove feasible.
External factors, such as the development of competitive
alternatives, rapid technological change, regulatory changes and
shifting market preferences, may cause new markets to move in
unanticipated directions.
31
Risks
associated with Discoverys international operations could
harm its financial condition.
Discoverys networks are offered worldwide. Inherent
economic risks of doing business in international markets
include, among other things, longer payment cycles, foreign
taxation and currency exchange risk. As Discovery continues to
expand the provision of its products and services to overseas
markets, we cannot assure you whether these risks and
uncertainties will harm Discoverys results of operations.
Discoverys international operations may also be adversely
affected by export and import restrictions, other trade barriers
and acts of disruptions of services or loss of property or
equipment that are critical to overseas businesses due to
expropriation, nationalization, war, insurrection, terrorism or
general social or political unrest or other hostilities.
The
loss of key talent could disrupt Discoverys business and
adversely affect its revenue.
Discoverys business depends upon the continued efforts,
abilities and expertise of its corporate and divisional
executive teams and entertainment personalities. Discovery
employs or contracts with entertainment personalities who may
have loyal audiences. These individuals are important to
audience endorsement of its programs and other content. There
can be no assurance that these individuals will remain with
Discovery or retain their current audiences. If Discovery fails
to retain these individuals or if Discoverys entertainment
personalities lose their current audience base, Discoverys
revenue could be adversely affected.
Piracy
of Discoverys entertainment content, including digital
piracy, may decrease revenue received from its programming and
adversely affect its business and profitability.
The success of Discoverys business depends in part on its
ability to maintain the intellectual property rights to its
entertainment content. Discovery is fundamentally a content
company and piracy of its brands, DVDs, cable television and
other programming, digital content and other intellectual
property has the potential to significantly affect the company.
Piracy is particularly prevalent in many parts of the world that
lack copyright and other protections similar to existing law in
the U.S. It is also made easier by technological advances
allowing the conversion of programming into digital formats,
which facilitates the creation, transmission and sharing of high
quality unauthorized copies. Unauthorized distribution of
copyrighted material over the Internet is a threat to copyright
owners ability to protect and exploit their property. The
proliferation of unauthorized use of Discoverys
entertainment content may have an adverse effect on its business
and profitability because it reduces the revenue that Discovery
potentially could receive from the legitimate sale and
distribution of its content.
Financial
market conditions may impede access to or increase the cost of
financing Discoverys operations and
investments.
The recent changes in U.S. and global financial and equity
markets, including market disruptions and tightening of the
credit markets, may make it more difficult for Discovery to
obtain financing for its operations or investments or increase
the cost of obtaining financing. In addition, Discoverys
borrowing costs can be affected by short and long-term debt
ratings assigned by independent rating agencies which are based,
in significant part, on its performance as measured by credit
metrics such as interest coverage and leverage ratios. A
decrease in these ratings could increase Discoverys cost
of borrowing or make it more difficult for Discovery to obtain
financing.
Substantial
leverage and debt service obligations may adversely affect
Discovery.
Discovery has a substantial amount of indebtedness. As of
March 31, 2008, Discovery had approximately
$4.1 billion of consolidated debt. Discoverys
substantial level of indebtedness increases the possibility that
it may be unable to generate cash sufficient to pay when due the
principal of, interest on, or other amounts due with respect to
its indebtedness. In addition, Discovery draws down its
revolving credit facility in the ordinary course, which has the
effect of increasing Discoverys indebtedness. Discovery is
also permitted, subject to certain restrictions under its
existing indebtedness, to obtain additional long-term debt and
working capital lines of credit to meet future financing needs.
This would have the effect of increasing Discoverys total
leverage.
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Discoverys substantial leverage could have significant
negative consequences on its financial condition and results of
operations, including:
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impairing Discoverys ability to meet one or more of the
financial ratio covenants contained in its debt agreements or to
generate cash sufficient to pay interest or principal, which
could result in an acceleration of some or all of its
outstanding debt in the event that an uncured default occurs;
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increasing Discoverys vulnerability to general adverse
economic and market conditions;
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limiting Discoverys ability to obtain additional debt or
equity financing;
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requiring the dedication of a substantial portion of
Discoverys cash flow from operations to service its debt,
thereby reducing the amount of cash flow available for other
purposes;
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requiring Discovery to sell debt or equity securities or to sell
some of its core assets, possibly on unfavorable terms, to meet
payment obligations;
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limiting Discoverys flexibility in planning for, or
reacting to, changes in its business and the markets in which
Discovery competes; and
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placing Discovery at a possible competitive disadvantage with
less leveraged competitors and competitors that may have better
access to capital resources.
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Restrictive
covenants in the loan agreements for Discoverys revolving
credit facilities and term loans, and the note purchase
agreements governing Discoverys private placement notes,
could adversely affect Discoverys business by limiting
flexibility.
The loan agreements for Discoverys revolving credit
facilities and term loans and the note purchase agreements
governing the terms of its private placement notes contain
restrictive covenants, as well as requirements to comply with
certain leverage and other financial maintenance tests. These
covenants and requirements limit Discoverys ability to
take various actions, including incurring additional debt,
guaranteeing indebtedness and engaging in various types of
transactions, including mergers, acquisitions and sales of
assets. These covenants could place Discovery at a disadvantage
compared to some of its competitors, who may have fewer
restrictive covenants and may not be required to operate under
these restrictions. Further, these covenants could have an
adverse effect on the business of Discovery by limiting its
ability to take advantage of financing, mergers and acquisitions
or other opportunities.
In addition, reporting and information covenants in
Discoverys loan agreements and note purchase agreements
require that Discovery provide financial and operating
information within certain time periods. If Discovery is unable
to timely provide the required information, it would be in
breach of these covenants.
33
INFORMATION
REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this proxy statement/prospectus constitute
forward-looking statements which, by definition,
involve risks and uncertainties. These statements may be made
directly in this proxy statement/prospectus or they may be made
a part of this proxy statement/prospectus by appearing in other
documents filed with the Securities and Exchange Commission and
incorporated by reference in this proxy statement/prospectus.
These statements may include statements regarding the period
following completion of the Transaction.
We intend these forward-looking statements to be covered by the
safe harbor provisions for forward-looking statements in the
federal securities laws. In some cases, you can identify these
statements by the use of forward-looking words such as
may, will, should,
anticipate, estimate,
expect, plan, believe,
predict, potential, intend
and other terms of similar substance used in connection with any
discussion of the Transaction or the future operations or
financial performance of DHC, Discovery or New Discovery. You
should be aware that these statements and any other
forward-looking statements in these documents only reflect DHC,
Discovery and New Discoverys expectations and are not
guarantees of performance. These statements involve risks,
uncertainties and assumptions. Many of these risks,
uncertainties and assumptions are beyond the control of DHC,
Discovery and New Discovery, and may cause actual results and
performance to differ materially from our expectations.
In addition to the risks and uncertainties set forth under the
heading Risk Factors on page 23, Business
Description in
Appendix A-1
and Managements Discussion and Analysis of Financial
Condition and Results of Operations, including
Quantitative and Qualitative Disclosures About Market
Risk, in
Appendix A-2
of this proxy statement/prospectus, important factors that could
cause actual results to be materially different from
expectations include, among others:
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general economic and business conditions and industry trends;
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spending on domestic and foreign television advertising;
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consumer acceptance of the programming content developed for
each of Discoverys networks;
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changes in the distribution and viewing of television
programming, including the expanded deployment of personal video
recorders and other technology, and their impact on television
advertising revenue;
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the regulatory and competitive environment of the industries in
which we operate;
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continued consolidation of the broadband distribution industry;
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uncertainties inherent in the development and integration of new
business lines, acquired operations and business strategies;
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rapid technological changes;
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uncertainties associated with product and service development
and market acceptance, including the development and provision
of programming for new television and telecommunications
technologies;
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future financial performance, including availability, terms and
deployment of capital;
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fluctuations in foreign currency exchange rates and political
unrest in international markets;
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the ability of suppliers and vendors to deliver products,
equipment, software and services;
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availability of qualified personnel;
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changes in, or failure or inability to comply with, government
regulations, including, without limitation, regulations of the
Federal Communications Commission, and adverse outcomes from
regulatory proceedings;
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changes in the nature of key strategic relationships with
partners and joint ventures;
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competitor responses to our products and services, and the
products and services of the entities in which we have
interests; and
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threatened terrorist attacks and ongoing military action in the
Middle East and other parts of the world.
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You should be aware that the programming, media and
entertainment industries are changing rapidly, and, therefore,
the forward-looking statements and statements of expectations,
plans and intent herein are subject to a greater degree of risk
than similar statements regarding certain other industries.
We caution you not to place undue reliance on the
forward-looking statements contained or incorporated by
reference in this proxy statement/prospectus. These
forward-looking statements and such risks, uncertainties and
other factors speak only as of the date of the applicable
document. Except as may be required by law, none of DHC,
Discovery or New Discovery has any obligation to update or alter
these forward-looking statements, whether as a result of new
information, future events or otherwise.
When considering such forward-looking statements, you should
keep in mind the factors described in Risk Factors
on page 23 and other cautionary statements contained in
this proxy statement/prospectus. Such risk factors and
statements describe circumstances which could cause actual
results to differ materially from those contained in any
forward-looking statement.
35
THE
COMPANIES
Discovery
Holding Company
DHC is a holding company. Through its two wholly-owned operating
subsidiaries, Ascent Media Group, LLC and Ascent Media CANS, LLC
(dba AccentHealth), and through its
662/3%
owned equity affiliate Discovery Communications Holding, DHC is
engaged primarily in (1) the provision of creative and
network services to the media and entertainment industries and
(2) the production, acquisition and distribution of
entertainment, educational and informational programming and
software. DHCs subsidiaries and affiliates operate in the
United States, Europe, Latin America, Asia, Africa and Australia.
DHC was incorporated in the state of Delaware on March 9,
2005 as a wholly-owned subsidiary of Liberty Media Corporation.
On July 21, 2005, Liberty completed the spin-off of DHC to
Libertys stockholders.
DHCs principal executive offices are located at 12300
Liberty Boulevard, Englewood, Colorado 80112. DHCs main
telephone number is
(720) 875-4000,
and its company website is www.discoveryholdingcompany.com.
Information contained on the website is not incorporated by
reference in this proxy statement/prospectus.
Additional
Information
For more information regarding DHC, please see Additional
Information Where You Can Find More
Information.
Discovery
Communications, LLC
Discovery, which is a 100% owned subsidiary of DHCs
intermediate holding company, Discovery Communications Holding,
is a leading global media and entertainment company that
provides original and purchased non-fiction programming across
multiple distribution platforms in the United States and more
than 170 other countries, including television networks offering
customized programming in 35 languages. Discovery also
develops and sells consumer and educational products and
services in the United States and internationally, and owns and
operates a diversified portfolio of website properties and other
digital services. Discovery operates through three divisions:
(1) Discovery networks U.S., (2) Discovery networks
international, and (3) Discovery commerce and education.
Discovery is not a party to any of the agreements between DHC
and Advance/Newhouse relating to the Transaction. If the
transaction proposals are approved at the Annual Meeting and the
Transaction is completed, Advance/Newhouse will combine its
331/3%
interest in Discovery Communications Holding and its interest in
Animal Planet with DHCs
662/3%
interest in Discovery Communications Holding, and Discovery will
become a wholly-owned subsidiary of New Discovery.
Discoverys principal executive officers are located at One
Discovery Place, Silver Spring, MD 20910. Discoverys main
telephone number is
(240) 662-2000,
and its website is www.discoverycommunications.com.
Information contained on the website is not incorporated by
reference in this proxy statement/prospectus.
Additional
Information
For more information regarding Discovery, please see
Appendix A: Information Concerning Discovery
Communications Holding, LLC Including Its Wholly-owned
Subsidiary Discovery Communications, LLC, which is
included as part of this proxy statement/prospectus, including:
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Part 1: Description of
Business;
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Part 2: Managements Discussion and
Analysis of Financial Condition and Results of
Operations; and
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Part 3: Historical Consolidated Financial
Statements;
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which is incorporated herein in its entirety by this reference.
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Discovery
Communications, Inc.
New Discovery is a Delaware corporation, formed on
April 28, 2008, for the purpose of effecting the
Transaction. Upon consummation of the Transaction, New Discovery
will become the parent company of Discovery, which will become
its wholly-owned subsidiary.
To date, New Discovery has not conducted any activities other
than those incident to its formation and the matters
contemplated by the Transaction Agreement, including the
formation of Merger Sub as a wholly-owned subsidiary and the
preparation of applicable filings under the securities laws.
New Discoverys principal executive offices are currently
located at 12300 Liberty Boulevard, Englewood, Colorado 80112,
and its main telephone is the same as DHCs ((720)
875-4000).
Following the completion of the Transaction, New
Discoverys principal executive offices will be located at
One Discovery Place, Silver Spring, MD 20910, and its main
telephone number will be the same as Discoverys ((240)
662-2000).
Additional
Information
For more information regarding the business of New Discovery
following the completion of the Transaction, please see the
description of Discoverys business above in The
Companies Discovery Communications, LLC. In
addition, please carefully read the information provided in this
proxy statement/prospectus, including the information provided
under the heading New Discovery Unaudited Condensed Pro
Forma Combined Financial Statements.
Merger
Sub, Inc.
Merger Sub, a wholly-owned subsidiary of New Discovery, is a
Delaware corporation, formed on April 29, 2008, solely for
the purpose of effecting the merger with DHC. Merger Sub has not
conducted any activities other than those incident to its
formation and the matters contemplated by the Transaction
Agreement.
Merger Subs principal executive offices are located at
12300 Liberty Boulevard, Englewood, Colorado 80112.
Advance/Newhouse
Programming Partnership
Advance/Newhouse is a privately held partnership headquartered
in Syracuse, New York. The owners of Advance/Newhouse operate
Bright House Networks, the sixth largest U.S. cable company
serving over two million customers. Their other interests
include Conde Nast magazines such as the New Yorker,
Vogue, Vanity Fair, and Wired; PARADE
magazine; daily newspapers serving 26 cities; American
City Business Journals, which publishes business journals in
over 45 cities; and a direct
331/3%
interest in Discovery Communications Holding.
Advance/Newhouses principal executive offices are located
at 5000 Campuswood Drive, E. Syracuse, NY 13057.
Advance/Newhouses main telephone number is
(315) 438-4100.
37
THE
TRANSACTION
Background
of the Transaction
Discovery was founded by Mr. John Hendricks in 1982, and
launched its flagship Discovery Channel in June 1985. Among the
initial investors in Discovery were cable television companies
that carried its programming, including Tele-Communications,
Inc. (which later transferred its interest to its programming
arm Liberty), NewChannels Corp. (which later transferred its
interest to Advance/Newhouse) and Cox Communications, Inc.
(Cox). Discovery for many years was organized as a
close corporation, and its business was managed by
Discoverys stockholders rather than by a board of
directors. Liberty, Advance/Newhouse, Cox and Mr. Hendricks
were parties to a stockholders agreement which provided for the
management of Discoverys business, including certain
rights of Liberty, Advance/Newhouse and Cox to veto the taking
of certain actions by Discovery, restrictions on equity
transfers and similar matters. As a result, Liberty,
Advance/Newhouse and Cox, together with Mr. Hendricks, were
for many years directly involved in the strategic direction and
business development of Discovery.
In early 2005, for various business reasons, including to permit
investors to invest more directly in Libertys interest in
Discovery, the Board of Directors of Liberty decided to pursue
the spin-off of a newly formed entity, DHC, which would hold
Libertys then 50% interest in Discovery, its wholly-owned
subsidiary Ascent Media Group, and certain other assets. Prior
to the proposed spin-off, Liberty held discussions with
Advance/Newhouse and Cox regarding their interest in exchanging
their respective interests in Discovery for equity interests in
DHC following the spin-off. The discussions were preliminary in
nature and did not result in the parties reaching any agreement
or understanding regarding such a transaction. After pursuing
these discussions for several weeks, Liberty determined the
discussions were unlikely to lead to a potential transaction and
the discussions were terminated.
Liberty thereafter proceeded with the spin-off of DHC, which was
completed in July 2005. No further discussions regarding a
possible transaction to combine the Discovery interests with
those of Advance/Newhouse or Cox were held until August 2006. At
that time, discussions proceeded for several weeks, but again
talks were broken off after common ground could not be found.
In the first quarter of 2007, Discovery commenced discussions
with Cox regarding a redemption of Coxs 25% interest in
Discovery in exchange for a subsidiary of Discovery that held
Discoverys interest in The Travel Channel, the
travelchannel.com and approximately $1.3 billion in cash.
Discovery, with the approval of DHC and Advance/Newhouse, closed
the transaction with Cox in May 2007. As a result of that
transaction and the reduction in the outstanding equity
interests in Discovery, DHCs interest in Discovery
increased to
662/3%
and Advance/Newhouses equity interest increased to
331/3%.
In May 2007, DHC approached Advance/Newhouse concerning its
interest in participating in a transaction that would
consolidate all of Discovery under a single public company. Over
the next several months the parties considered various
structures for such a transaction, which involved discussions
on, among other things, dilution, capital structure, economic
benefits to the parties and their respective stockholders, tax
attributes, and governance concerns. Throughout the negotiation
process, DHCs primary goal was to convert its
non-controlling equity position in Discovery into one which
would allow it to have management rights over Discovery and
consolidate Discovery for financial reporting and tax purposes.
Advance/Newhouse, on the other hand, sought to gain liquidity in
its Discovery stake while preserving most of the governance
rights it currently has in Discovery.
In structuring a transaction, both parties sought to reflect, to
the extent appropriate for a public company, their respective
existing governance rights in respect of Discovery. Discovery is
currently managed by its parent Discovery Communications
Holding, a limited liability company, and Discovery
Communications Holding is currently managed by its members.
Advance/Newhouse also holds special voting rights with respect
to Discovery under the terms of the limited liability company
agreement of Discovery Communications Holding.
To maintain continuity of management, the parties determined
that the size of the consolidated companys board would
need to accommodate the existing DHC directors, the
Advance/Newhouse designees and the addition of John Hendricks
(the founder of Discovery) and David Zaslav (the CEO of
Discovery), while also complying with the independence
requirements of the Nasdaq Stock Market. At that time, the
parties did not determine the exact
38
number of board designees or the persons who would serve as new
directors of the consolidated company. The parties did, however,
agree that it would be beneficial for any consolidated company
to have an officer slate comprised of the officers who run the
business of Discovery on a daily basis.
The parties also focused their negotiations on relative
ownership percentages at the consolidated company and
Advance/Newhouses desire to keep its special voting
rights. Due to the dual-class voting structure in place at DHC
and DHCs unwillingness to provide its existing
Series B holders with a lower voting series of stock, the
parties agreed that the consolidated company would issue a
10-vote per share Series B stock as well as a 1-vote per
share Series A stock. Because both parties believed a
benefit of the transaction would be the ability of the
consolidated company to use its stock as an improved acquisition
currency for the benefit of the Discovery business, the parties
agreed that there should also be a Series C non-voting
stock which could be issued without diluting the voting control
of Advance/Newhouse or the former DHC stockholders. Although the
Series C stock could have first been issued in a future
acquisition, the parties believed it would be beneficial to have
a pre-established market for the securities prior to any
attempted use of those securities in an acquisition scenario.
Accordingly, in determining the exchange ratio the parties
determined that each existing DHC Series A share would be
split into 0.5 of a New Discovery Series A share and 0.5 of
a New Discovery Series C share, and each existing DHC
Series B share would be split into 0.5 of a New Discovery
Series B share and 0.5 of a New Discovery Series C
share. (The parties had (and continue to have) no present
intention to issue the Series C stock in an acquisition; rather,
their focus is on the ability to do so.)
The parties further agreed that the number of shares issuable to
Advance/Newhouse would be calculated based on the number of
shares issued to the former DHC stockholders in the transaction
and would preserve Advance/Newhouses
331/3%
equity interest. Advance/Newhouse accepted that its voting
percentage would be less than
331/3%
due to the issuance of the higher voting Series B shares in
the transaction. Advance/Newhouse was willing to accept this
dilution in the interest of keeping its special voting rights
(subject to mutually acceptable modifications appropriate for a
public company). Following consultation with counsel,
Advance/Newhouse suggested receiving convertible preferred stock
rather than common stock, because the convertible preferred
stock would enable Advance/Newhouse to exercise its special
voting rights through a separate class vote in its capacity as a
stockholder. This proposal was agreeable to both parties because
it reflects how Advance/Newhouse currently exercises its special
voting rights with respect to Discovery. Furthermore, the
separate class of stock would allow for Advance/Newhouse to have
its own group of board designees who would not be subject to
election by the holders of New Discovery common stock. As a
result, the parties determined to divide the board of New
Discovery into two groups one group to be elected by
the holders of the common stock and a second group to be elected
solely by the holders of the convertible preferred stock.
Advance/Newhouse also required that the preferred stock it
receives be convertible at any time and have the benefit of
registration rights to ensure its future liquidity. DHC was
amenable to these conditions in exchange for provisions in the
charter and corporate documents of New Discovery that require
the shares of convertible preferred stock to automatically
convert under certain circumstances, including if the number of
outstanding shares of Series A convertible preferred stock
is less than 80% of the amount of such shares originally issued
or upon the transfer of shares of convertible preferred stock
(other than a block transfer of all of the Series A
convertible preferred stock) to a third party.
Among the final obstacles to a potential deal was DHCs
ownership of Ascent Media. The parties discussed the merits and
risks of including Ascent Media with Discovery as compared to
other alternatives such as a spin-off or its disposition in a
sale transaction. It was ultimately decided that all of Ascent
Media other than Ascent Media Sound would be distributed to
DHCs stockholders in a spin-off transaction, due to
disagreements over the proper valuation of Ascent Media and the
desire of both DHC and Advance/Newhouse to create a pure-play
programming company focused on the business of Discovery. The
AMC spin-off is intended to resolve such disagreements and to
facilitate the Transaction. The parties agreed that the AMC
spin-off would exclude Ascent Media Sound because it is not a
necessary or integral component of the other businesses of
Ascent Media and retaining it at New Discovery would address,
among other things, certain tax considerations. Although no
formal valuation was performed with respect to Ascent Media
Sound, DHC believes that Ascent Media Sound would have an
enterprise value of up to $50 million, DHC acknowledged
that its stockholders equity interest in Ascent Media
Sound would be diluted by
39
331/3%
as a result of the Transaction, but determined that this
dilution was outweighed by the benefits to the Transaction of
retaining Ascent Media Sound at the consolidated company.
On December 13, 2007, DHC and Advance/Newhouse reached an
agreement in principle on the terms of the Transaction and
signed a non-binding letter of intent to which was attached a
term sheet describing the framework of the Transaction, which
called for the AMC spin-off, Advance/Newhouse to contribute its
interest in Discovery and Animal Planet to a new public company
(New Discovery), and a merger by which the new public company
would become the new parent company of Discovery. A press
release announcing the terms of the proposed Transaction was
issued on the same day.
Over the next several months the parties negotiated the terms of
the definitive transaction documents based on the final term
sheet, and DHC proceeded with plans to spin off AMC. The
non-binding letter of intent did not address all material terms
of the Transaction and the AMC spin-off. As a result, many
details of the Transaction had to be negotiated and finalized
prior to signing the definitive documentation, including, by way
of example, the structure of the escrow arrangement, the effect
of the Transaction on the outstanding DHC equity awards and the
terms of the Series A and Series C convertible preferred
stock and New Discoverys rights plan. Through the escrow
arrangement, Advance/Newhouse sought protection against dilution
resulting from the rollover of the DHC equity awards. The
parties considered various ways to issue shares to
Advance/Newhouse to achieve this protection and ultimately
settled on a tax-efficient escrow arrangement. Also, the terms
on which the DHC equity awards would rollover to New Discovery
were subject to extensive financial analysis and negotiations
between the parties and ultimately submitted for the approval of
the compensation committee of the board of directors of DHC and
the board of directors of DHC. The adjustments to be made to
these equity awards were complex due to, among other things, the
AMC spin-off, the continuance of the DHC directors on the New
Discovery board but the absence of the DHC officers from the New
Discovery officer slate. The terms of the New Discovery rights
agreement, including those relating to ownership thresholds,
permitted transferees and rights recipients, were also heavily
negotiated between the parties. During this time, the parties
also continued to reevaluate the effect of the varying terms of
the Transaction on the tax treatment of the overall Transaction,
with the result that it was determined that the contribution
should precede the merger (which was a change to the terms of
the non-binding term sheet). Following the completion of these
negotiations, the parties executed definitive agreements on
June 4, 2008.
Structure
of the Transaction
Upon satisfaction (or waiver, where permissible) of all
conditions to the Transaction set forth in the Transaction
Agreement (other than the AMC spin-off and other conditions to
be satisfied at closing), DHC will effect the AMC spin-off.
Immediately after completion of the AMC spin-off,
Advance/Newhouse will contribute to New Discovery all of its
indirect interests in Discovery and Animal Planet in exchange
for shares of New Discovery Series A and Series C
convertible preferred stock, which shares of convertible
preferred stock would be initially convertible into one-third of
the common equity of New Discovery issued in the merger
described below, on an as-converted basis. Immediately upon
completion of the Advance/Newhouse contribution, Merger Sub will
merge with and into DHC with DHC surviving the merger. In the
merger, each outstanding share of DHC common stock will
automatically be converted as follows:
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each share of DHC Series A common stock outstanding
immediately prior to the effective time of the merger will be
converted into the right to receive 0.50 shares of New
Discovery Series A common stock and 0.50 shares of New
Discovery Series C common stock; and
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each share of DHC Series B common stock outstanding
immediately prior to the effective time of the merger will be
converted into the right to receive 0.50 shares of New
Discovery Series B common stock and 0.50 shares of New
Discovery Series C common stock.
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Immediately following the completion of the Transaction:
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DHC and Discovery will be wholly-owned subsidiaries of a new
public company named Discovery Communications, Inc.,
or New Discovery;
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the current public stockholders of DHC will be the public
stockholders of New Discovery; and
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Advance/Newhouse will be a stockholder of New Discovery (rather
than a member of Discovery Communications Holding), owning all
of the outstanding shares of Series A and Series C
convertible preferred stock of New Discovery.
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Recommendation
of the DHC Board; Purposes and Reasons for the
Transaction
DHCs board of directors has unanimously approved the
Transaction, and has determined that the Transaction Agreement
and the merger agreement, and the transactions contemplated
thereby (including the preferred stock issuance and the merger),
are advisable and in the best interests of DHC and its
stockholders. Accordingly, the DHC board recommends that
stockholders of DHC vote FOR both the merger
proposal and the preferred stock issuance proposal at the Annual
Meeting.
In approving the Transaction, the DHC board determined that the
principal benefit to DHC and its stockholders is that it will
effectively transform Discovery into a public company, and in
doing so provide stockholders of DHC with a direct interest in
one of the largest non-fiction programming companies in the
world. The DHC board also considered the following benefits of
the Transaction in its determination:
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that the Transaction will create a pure-play programming
company, New Discovery, in a manner that is generally expected
to be tax-free to both DHC and its stockholders and
Advance/Newhouse;
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that completion of the Transaction will allow the board of
directors and management of New Discovery to focus almost
entirely on the programming businesses of Discovery;
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that the Transaction will enable DHC stockholders, as well as
potential investors and analysts, to obtain significantly
improved disclosure regarding Discovery, including more
transparent financial information;
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that while the Transaction will be dilutive to the public
stockholders of DHC, the economic benefits of their indirect
ownership in Discovery will remain largely the same as Discovery
will no longer have a minority stockholder;
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that New Discoverys management will be comprised of the
current management team at Discovery, thereby ensuring a smooth
integration of Discovery into New Discovery;
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that the Transaction has been structured so as not to trigger
any change of control provisions in the benefit plans of DHC or
Discovery or the debt instruments of Discovery;
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that the Transaction is expected to allow New Discovery to issue
equity on more favorable terms with less dilution to existing
equity holders in DHC with respect to their interest in
Discovery in connection with future acquisitions and management
compensation than DHC could under its current ownership
structure;
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that the stock of New Discovery is expected to constitute an
improved currency, when compared with current alternatives, in
connection with issuing equity to raise capital and in
acquisitions of other media and entertainment
businesses; and
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that the Transaction, together with the AMC spin-off, will
enable New Discovery to more effectively tailor employee benefit
plans and retention programs, when compared with current
alternatives, to provide improved incentives to the employees
and future hires of Discovery that will better and more directly
align the incentives for management at DHC and New Discovery
with their performance.
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The DHC board weighed these benefits against various risks
associated with the Transaction, including, among other things:
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the risk that the market overhang resulting from the outstanding
shares of convertible preferred stock may depress the public
market price of New Discoverys equity;
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the risk that Advance/Newhouse could transfer its entire block
of stock to a third party without the approval of the New
Discovery board, which could diminish the effectiveness of New
Discoverys rights plan;
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the potentially significant indemnification obligation of New
Discovery to Advance/Newhouse with respect to liabilities
incurred by DHC (but not Discovery) prior to the closing of the
Transaction; and
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the risk that Advance/Newhouse could exercise its registration
rights at inopportune times.
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The DHC board also considered the terms on which
Advance/Newhouse will contribute its interests in Discovery and
Animal Planet in return for the Series A and Series C
convertible preferred stock. The Board recognized that
immediately following the Transaction, Advance/Newhouse will own
approximately one-third of the equity of DHC, which is the same
equity ownership that Advance/Newhouse currently has in
Discovery Communications Holding (the intermediate holding
company through which DHC holds its two-thirds equity interest
in Discovery). The board further recognized that the special
class voting rights included in the Series A convertible
preferred stock to be issued to Advance/Newhouse are
substantially the same as the rights that Advance/Newhouse
currently has as a member of Discovery Communications Holding,
and that significant corporate actions may be taken by the board
of New Discovery that are not subject to such special class
voting rights. Hence, the Board determined the terms of
Advance/Newhouses investment in New Discovery are
advisable and in the best interests of DHC and its stockholders
as that investment will result in the benefits described above
in exchange for Advance/Newhouse changing its ownership interest
in Discovery from an interest in Discovery Communications
Holding to an interest in New Discovery, with substantially the
same governance rights.
The DHC board also considered the requirement of the Transaction
that Ascent Media (other than Ascent Media Sound) be spun off
prior to the preferred stock issuance to Advance/Newhouse. The
DHC board determined that the AMC spin-off was advisable in the
context of the Transaction as it will facilitate the Transaction
and resolve differing views with respect to the value of Ascent
Media that could otherwise preclude the consummation of the
Transaction on terms acceptable to both DHC and
Advance/Newhouse, and eliminate the potential distraction and
use of management and other resources related to the AMC
businesses. DHC wishes to complete the Transaction for the
reasons described above. The AMC spin-off was also viewed as
making it easier for investors and analysts to understand and
value New Discoverys assets, thereby enhancing its ability
to raise capital to pursue its business strategy and to take
advantage of acquisition opportunities of other media and
entertainment businesses. Further, the AMC spin-off will provide
certain benefits for investors in AMC, including making it
easier for investors to understand and value the AMC assets,
which DHCs board of directors believes may currently be
overshadowed by DHCs interest in Discovery, thus enhancing
the ability of AMC to raise capital to pursue its business
strategy and fund acquisitions, including, possibly,
acquisitions using its equity as currency, and internal growth.
Finally, the AMC spin-off will enhance AMCs ability to
attract and retain qualified personnel, by enabling it to grant
equity incentive awards based on its own common stock, which
will directly reflect the performance of the businesses of AMC,
and will further enable AMC to more effectively tailor employee
benefit plans and retention programs, when compared with current
alternatives, to provide improved incentives to the employees
and future hires of AMC that will better and more directly align
the incentives for management at AMC with their performance.
After careful deliberation of the foregoing, the DHC board
determined that the Transaction would accomplish DHCs
primary goal of converting its non-consolidated equity position
in Discovery into a consolidated, pure-play public company,
while also accomplishing Advance/Newhouses goals of having
a liquid ownership interest in and significant governance rights
over the new public company, in a tax-efficient manner. Because
the DHC stockholders would continue to hold their stake in
Ascent Media through the shares of AMC they will receive in the
AMC spin-off, the only economic dilution to the DHC stockholders
would be the loss of an aggregate
331/3%
interest in Ascent Media Sound, which the DHC board believed to
be minor compared to the benefits of the overall Transaction.
Conduct
of the Business of DHC if the Transaction is Not
Completed
If the Transaction is not completed, DHC intends to continue to
operate its business substantially in the manner it is operated
today with its existing capital structure and management team
remaining. From time to time, DHC will evaluate and review its
business operations, properties, dividend policy and
capitalization, and make such changes as are deemed appropriate,
and continue to seek to identify strategic alternatives to
maximize stockholder value.
If the Transaction is not to be completed, the AMC spin-off will
not be effected.
42
Management
and Operations of New Discovery Following the
Transaction
New
Discovery Business
Following the Transaction and the AMC spin-off, New Discovery
will be the new parent company of Discovery. New
Discoverys business and operations will be conducted
substantially as that of Discoverys prior to the
Transaction, except that the business of Ascent Media Sound will
also be conducted by New Discovery.
New
Discovery Directors and Officers
Following the Transaction, New Discoverys management team
will be responsible for the business of Discovery and the
remaining sound business of Ascent Media. New Discoverys
management team will consist of Discoverys current
management team, including David Zaslav who will serve as the
Chief Executive Officer and President of New Discovery. New
Discovery will have a board that will consist of eleven members,
of whom one will be John Hendricks, a current executive officer
of Discovery who will serve as the Chairman of New Discovery,
one will be Mr. Zaslav, five are current members of
DHCs board of directors, one will be a new independent
director and three will be designated by Advance/Newhouse
pursuant to the terms of the New Discovery convertible preferred
stock. Two initial designees of Advance/Newhouse will be Robert
J. Miron, the Chairman of Advance/Newhouse and Steven A. Miron,
Chief Executive Officer of Advance/Newhouse. For more
information on the current directors and executive officers of
Discovery and DHC see Management of New Discovery
and Management of DHC. As provided in the bylaws of
New Discovery, the size of New Discoverys board of
directors will automatically be reduced (i) by one member
upon the resignation, removal or disqualification of John
Hendricks from the position of Chairman of the board of
directors and (ii) upon the holders of the Series A
preferred stock ceasing to have the right to elect Series A
preferred stock directors, by the number of Series A
preferred stock directors then in office. For more information
about the bylaws of New Discovery, see Comparison of the
Rights of Stockholders of DHC and New Discovery.
Listing
and Registration
Following the Transaction, DHC Series A common stock and
DHC Series B common stock will be delisted from the Nasdaq
Global Select Market and deregistered under the Exchange Act.
The shares of New Discovery common stock issuable in connection
with the Transaction will be registered under the Exchange Act,
and it is a condition of the Transaction that such shares be
authorized for listing on the Nasdaq Global Select Market,
subject only to official notice of issuance. New Discovery has
applied to list its Series A common stock and Series B
common stock on the Nasdaq Global Select Market under the
symbols DISCA and DISCB, respectively,
the same symbols under which DHCs existing Series A
and Series B common stock are listed. New Discovery has
applied to list its Series C common stock on the Nasdaq
Global Select Market under the symbol DISCK.
Reporting
Obligations
Following the merger, DHC will cease to be a reporting company
under the Exchange Act.
New Discovery will become the successor reporting company to DHC
under the Exchange Act contemporaneously with the consummation
of the merger of DHC with Merger Sub, a transitory merger
subsidiary of New Discovery.
Accounting
Treatment
The
Transaction
For financial reporting purposes, New Discovery will be the
successor reporting entity to DHC. Because Advance/Newhouse is a
one-third owner of Discovery Communications Holding prior to the
completion of the Transaction and will be a one-third owner of
New Discovery (whose only significant asset is 100% of Discovery
Communications Holding) immediately following completion of the
Transaction, there will be no effective change in ownership. The
New Discovery convertible preferred stock will not have any
special dividend rights and only a
43
de minimus liquidation preference. Additionally,
Advance/Newhouse retains significant participatory special class
voting rights with respect to New Discovery parent company
matters. Pursuant to FASB Technical
Bulletin 85-5,
and for accounting purposes, the Transaction will be treated as
a nonsubstantive merger, and therefore, the Transaction will be
recorded at carry over basis. For additional information, see
Discovery Communications, Inc. Unaudited Condensed Pro
Forma Combined Financial Statements elsewhere herein.
Amount
and Source of Funds and Financing of the Transaction;
Expenses
It is expected that DHC will incur an aggregate of approximately
[$ million] in expenses in
connection with the completion of the Transaction (exclusive of
expenses incurred in connection with the AMC spin-off). These
expenses will be comprised of:
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approximately $750,000 of printing and mailing expenses
associated with this proxy statement/prospectus;
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approximately [$ ] in legal and
accounting fees;
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approximately $270,000 in SEC filing fees; and
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approximately [$ ] in other
miscellaneous expenses (including the payment of
Advance/Newhouses filing fee relating to the
Hart-Scott-Rodino
Antitrust Improvement Act of 1976 (HSR)).
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Any such expenses required to be paid prior to the closing of
the Transaction will be paid by DHC from its existing cash
balances. Any such expenses which are not paid prior to the
closing of the Transaction will become the obligations of AMC.
See Transaction Agreements Reorganization
Agreement for more information.
Interests
of Certain Persons in the Transaction
Interests
of Directors and Executive Officers
In considering the recommendation of DHCs board of
directors to vote to approve the transaction proposals,
stockholders of DHC should be aware that members of DHCs
board of directors and members of DHCs executive
management have relationships, agreements or arrangements that
provide them with interests in the Transaction that may be in
addition to or different from those of the public stockholders
of DHC. In addition, the current directors of DHC will be
entitled to the continuation of certain indemnification
arrangements following completion of the Transaction.
Following completion of the Transaction, David Zaslav, President
and Chief Executive Officer of Discovery, will become President
and Chief Executive Officer of New Discovery. All of DHCs
five current directors have agreed to serve on the eleven-member
board of New Discovery and John Hendricks, the current Chairman
of Discovery, has agreed to serve as the Chairman of New
Discovery. In addition, New Discoverys management will be
comprised of the members of Discoverys management team.
The directors and executive officers of New Discovery are
expected to beneficially own shares of New Discovery common
stock representing in the aggregate approximately
[ ]% of the aggregate voting power
of New Discovery, based upon their beneficial ownership
interests in DHC as of the record date for the Annual Meeting.
In addition, upon the consummation of the Transaction, each
outstanding option to purchase shares of DHC common stock held
by the current DHC directors (other than Robert R. Bennett) will
be converted into options to purchase shares of New Discovery
common stock. Upon consummation of the Transaction, and in
recognition of the services Mr. Bennett will provide to AMC
following the AMC spin-off, each outstanding option to purchase
shares of DHC common stock held by Mr. Bennett will be
converted into options to purchase New Discovery common stock
and an option to purchase AMC stock. For additional information
regarding the treatment of such options, see The
Transaction Agreements Merger Agreement
Treatment of Stock Options below.
DHCs board of directors were aware of these interests and
arrangements and considered them when approving the Transaction.
For more information regarding these interests and arrangements,
see Management of New Discovery and Management
of DHC.
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Regulatory
Matters
The parties have obtained all regulatory consents and approvals
required by the Transaction Agreement with respect to the
Transaction.
Appraisal
Rights
Under Section 262 of the Delaware General Corporation Law
(DGCL), DHC stockholders are not entitled to appraisal
rights in connection with the Transaction.
Federal
Securities Law Consequences
The issuance of shares of New Discovery common stock in
connection with the Transaction will be registered under the
Securities Act, and the shares of New Discovery common stock so
issued will be freely transferable under the Securities Act,
except for shares of New Discovery common stock issued to any
person who is deemed to be an affiliate of New
Discovery after completion of the Transaction. Persons who may
be deemed to be affiliates include individuals or entities that
control, are controlled by, or are under common control with New
Discovery and may include directors, certain executive officers
and significant stockholders of New Discovery. Affiliates may
not sell their shares of New Discovery common stock, except
pursuant to:
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an effective registration statement under the Securities Act
covering the resale of those shares;
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in compliance with Rule 144 under the Securities
Act; or
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any other applicable exemption under the Securities Act.
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New Discoverys registration statement on
Form S-4,
of which this document forms a part, does not cover the resale
of shares of New Discovery common stock to be received by its
affiliates.
45
MATERIAL
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF
THE MERGER AND THE AMC SPIN-OFF
Subject to the limitations and qualifications described herein,
the following discussion constitutes the opinion of Skadden,
Arps, Slate, Meagher & Flom LLP, tax counsel to DHC,
as to the material U.S. federal income tax consequences to
DHC stockholders resulting from the merger and the AMC spin-off.
This discussion is based upon the Code, existing and proposed
Treasury regulations promulgated thereunder and current
administrative rulings and court decisions, all as in effect as
of the date of this proxy statement/prospectus, and all of which
are subject to change, possibly with retroactive effect. This
discussion is limited to DHC stockholders that are
U.S. holders, as defined below, that hold their shares of
DHC stock as a capital asset within the meaning of
Section 1221 of the Code. Further, this discussion does not
address all U.S. federal income tax considerations that may
be relevant to particular stockholders in light of their
particular circumstances, such as tax-exempt entities,
partnerships (including entities treated as partnerships for
U.S. federal income tax purposes), holders who acquired
their shares of DHC stock pursuant to the exercise of employee
stock options or otherwise as compensation, holders who hold
different blocks of DHC stock (generally shares of DHC stock
purchased or acquired on different dates or at different
prices), financial institutions, insurance companies, dealers or
traders in securities, holders who are subject to alternative
minimum tax, and holders who hold their shares of DHC stock as
part of a straddle, hedge, conversion, constructive sale,
synthetic security, integrated investment or other
risk-reduction transaction for U.S. federal income tax
purposes. In addition, the following discussion does not address
the tax consequences of the merger or the AMC spin-off under
U.S. state or local or
non-U.S. tax
laws. Accordingly, DHC stockholders are encouraged to consult
their tax advisors concerning the U.S. federal, state and
local and
non-U.S. tax
consequences to them of the merger and the AMC spin-off.
For purposes of this discussion, a U.S. holder is a
beneficial owner of DHC stock that is, for U.S. federal
income tax purposes:
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an individual who is a citizen or a resident of the United
States;
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a corporation, or other entity taxable as a corporation for
U.S. federal income tax purposes, created or organized
under the laws of the United States or any state or political
subdivision thereof;
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an estate, the income of which is subject to U.S. federal
income taxation regardless of its source; or
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a trust, if (i) a court within the United States is able to
exercise primary jurisdiction over its administration and one or
more United States persons have the authority to control all of
its substantial decisions, or (ii) in the case of a trust
that was treated as a domestic trust under the law in effect
before 1997, a valid election is in place under applicable
Treasury regulations.
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If a partnership (including any entity treated as a partnership
for U.S. federal income tax purposes) holds shares of DHC
stock, the tax treatment of a partner in such partnership
generally will depend upon the status of the partner and the
activities of the partnership. A partner of a partnership
holding shares of DHC stock should consult its tax advisor
regarding the tax consequences of the merger and the AMC
spin-off.
Material
U.S. Federal Income Tax Consequences of the Merger
Skadden, Arps, Slate, Meagher & Flom LLP, tax counsel
to DHC, is of the opinion that for U.S. federal income tax
purposes:
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No gain or loss will be recognized by DHC stockholders solely as
a result of the exchange of DHC common stock for New Discovery
common stock pursuant to the merger, other than with respect to
fractional shares of New Discovery common stock for which cash
is received.
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The aggregate tax basis of the shares of New Discovery common
stock (including any fractional shares in respect of which cash
is received) received by DHC stockholders pursuant to the merger
will be the same as the aggregate tax basis of the DHC common
stock (adjusted in connection with the AMC spin-off as described
below) exchanged for such New Discovery common stock pursuant to
the merger. The aggregate tax basis will be allocated between
shares of New Discovery Series A common stock and New
Discovery Series C common stock received in accordance with
their relative fair market values at the time of the merger.
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The holding period of the shares of New Discovery common stock
received by DHC stockholders in the merger will include the
holding period of the DHC common stock exchanged for such New
Discovery common stock pursuant to the merger, provided that
such shares of DHC stock were held as a capital asset on the
merger date.
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A DHC stockholder that receives cash in lieu of a fractional
share of New Discovery common stock pursuant to the merger will
be treated as though it first received a distribution of the
fractional share in the merger and then sold it for the amount
of such cash. Such stockholder will generally recognize capital
gain or loss, provided that the fractional share is considered
to be held as a capital asset, measured by the difference
between the cash received for such fractional share and the
stockholders tax basis in that fractional share, as
determined above. Such capital gain or loss will generally be a
long-term capital gain or loss if the stockholders holding
period for its share of DHC stock exceeds one year on the date
of the merger.
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Neither DHC, New Discovery nor Merger Sub will recognize gain or
loss as a result of the merger.
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Holders who hold different blocks of DHC common stock are
encouraged to consult with their tax advisors with respect to
identifying the tax bases and holding periods of shares of New
Discovery common stock received in the merger.
The tax opinion described above will be based on, among other
things, assumptions and representations as to factual matters
and certain undertakings that will be received from DHC and
Advance/Newhouse, including those contained in certificates of
officers of DHC and Advance/Newhouse, as requested by counsel.
The opinion referred to in this paragraph will not be binding on
the IRS or the courts, and no rulings will be sought from the
IRS regarding the tax treatment of the merger or the
contribution by Advance/Newhouse. There can be no assurance that
the IRS will not challenge the conclusions set forth in the
opinion stated above or referred to herein or that any such
challenge would not prevail.
The discussion of the material U.S. federal income tax
consequences set forth above is not intended to be a complete
analysis or description of all potential U.S. federal
income tax consequences of the merger and does not address tax
consequences that may vary with, or are contingent on,
individual circumstances. Moreover, the discussion does not
address the tax consequences of the merger under U.S. state
or local or
non-U.S. tax
laws. Accordingly, DHC stockholders are encouraged to consult
their tax advisors concerning the U.S. federal, state and
local and
non-U.S. tax
consequences to them of the merger.
Material
U.S. Federal Income Tax Consequences of the AMC
Spin-Off
Skadden, Arps, Slate, Meagher & Flom LLP, tax counsel
to DHC, is of the opinion that for U.S. federal income tax
purposes:
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No gain or loss should be recognized by DHC upon the
distribution of shares of common stock of AMC to DHC
stockholders pursuant to the AMC spin-off.
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No gain or loss should be recognized by, and no amount should be
included in the income of, a DHC stockholder upon the receipt of
shares of common stock of AMC pursuant to the AMC spin-off,
other than with respect to fractional shares of common stock of
AMC for which cash is received.
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A DHC stockholder that receives shares of common stock of AMC in
the AMC spin-off should have an aggregate adjusted basis in its
shares of common stock of AMC (including any fractional share in
respect of which cash is received) and its shares of DHC stock
immediately after the AMC spin-off equal to the aggregate
adjusted basis of such stockholders shares of DHC stock
held prior to the AMC spin-off, which should be allocated in
accordance with their relative fair market values.
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The holding period of the shares of common stock of AMC received
in the AMC spin-off by a DHC stockholder should include the
holding period of such stockholders shares of DHC stock,
provided that such shares of DHC stock were held as a capital
asset on the distribution date.
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The tax opinion described above will be based on, among other
things, assumptions and representations as to factual matters
and certain undertakings that will be received from DHC, AMC and
certain DHC stockholders, including those contained in
certificates of officers of DHC and AMC and certain DHC
stockholders, as requested by counsel. If any of those factual
representations or assumptions were to be incorrect or untrue in
any material respect, any undertaking was not complied with, or
the facts upon which the opinion is based were to be materially
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different from the facts at the time of the AMC spin-off, the
AMC spin-off may not qualify for tax-free treatment. DHC does
not intend to seek a ruling from the IRS as to the
U.S. federal income tax treatment of the AMC spin-off. The
tax opinion is not binding on the IRS or the courts, and there
can be no assurance that the IRS will not challenge the
qualification of the AMC spin-off as a transaction under
Sections 368(a) and 355 of the Code for U.S. federal
income tax purposes or that any such challenge would not prevail.
Material
U.S. Federal Income Tax Consequences if the Distribution Is
Taxable
At the effective time of the AMC spin-off, DHC expects to
receive a tax opinion from Skadden, Arps, Slate,
Meagher & Flom LLP to the effect that, taking into
account, among other things, the issuance of the A/N Preferred
Stock to Advance/Newhouse and the special voting rights
associated with such A/N Preferred Stock, the AMC spin-off
should qualify as a transaction under Sections 368(a) and
355 of the Code for U.S. federal income tax purposes. An
opinion of counsel represents counsels best legal judgment
and is not binding on the IRS or any court. If the IRS were to
assert successfully that the AMC spin-off was taxable, the above
consequences would not apply and both DHC and its stockholders
that received shares of common stock of AMC in the AMC spin-off
could be subject to tax, as described below.
If the AMC spin-off did not qualify as a transaction under
Sections 368(a) and 355 of the Code for U.S. federal
income tax purposes, then DHC would recognize taxable gain in an
amount equal to the excess, if any, of the fair market value of
the shares of common stock of AMC held by DHC immediately prior
to the AMC spin-off over DHCs tax basis in such shares. In
addition, a DHC stockholder that received shares of common stock
of AMC in the AMC spin-off would be treated as having received a
distribution of property in an amount equal to the fair market
value of such shares (including any fractional shares sold on
behalf of the stockholder) on the distribution date. That
distribution would be taxable to such stockholder as a dividend
to the extent of DHCs current and accumulated earnings and
profits. Any amount that exceeded DHCs earnings and
profits would be treated first as a non-taxable return of
capital to the extent of such stockholders tax basis in
its shares of DHC stock with any remaining amount being taxed as
a capital gain. Certain stockholders may be subject to
additional special rules governing distributions, such as those
that relate to the dividends received deduction and
extraordinary dividends.
Even if the AMC spin-off otherwise qualifies for tax-free
treatment to the DHC stockholders, it may be disqualified as
tax-free to DHC under Section 355(e) of the Code if 50% or
more of either the total combined voting power or the total fair
market value of the stock of New Discovery (or DHC) or AMC is
acquired as part of a plan or series of related transactions
that includes the AMC spin-off. Any acquisitions of stock of New
Discovery (or DHC) or AMC after the AMC spin-off are generally
part of such a plan only if there was an agreement,
understanding, arrangement or substantial negotiations regarding
the acquisition or a similar acquisition at some time during the
two-year period ending on the date of the AMC spin-off. All of
the facts and circumstances must be considered to determine
whether the AMC spin-off and any acquisition of stock are part
of such a plan, and certain acquisitions of stock pursuant to
public sales are exempted by applicable Treasury regulations. In
this regard, while the issuance of the A/N Preferred Stock to
Advance/Newhouse should generally be treated as part of a plan
or series of related transactions that includes the AMC
spin-off, such issuance by itself, taking into account the
special voting rights associated with such A/N Preferred Stock,
should not result in DHC recognizing gain in connection with the
AMC spin-off. If Section 355(e) of the Code applies as a
result of such an acquisition of stock of New Discovery (or DHC)
or AMC, DHC would recognize taxable gain in an amount equal to
the excess, if any, of the fair market value of the shares of
common stock of AMC held by DHC immediately prior to the AMC
spin-off over DHCs tax basis in such shares, but the AMC
spin-off would nevertheless generally be tax-free to each DHC
stockholder that received shares of common stock of AMC in the
AMC spin-off.
Certain
State Income Tax Matters
As noted above, this discussion does not address any tax
consequences of the AMC spin-off other than the material
U.S. federal income tax consequences set forth above. DHC
stockholders are encouraged to consult their tax advisor
concerning all possible state tax consequences of the AMC
spin-off, including any applicable state tax consequences
resulting from the fact that certain states have not adopted
changes to conform, in all material respects, their state income
tax laws related to spin-offs with the corresponding
U.S. federal income tax laws currently in effect, in which
case, depending on any such stockholders particular
circumstances, the distribution of common stock of AMC may be a
taxable distribution for state tax law purposes.
48
THE
TRANSACTION AGREEMENTS
On June 4, 2008, DHC, New Discovery and Advance/Newhouse
and certain of their respective affiliates entered into the
Transaction Agreement and certain related agreements that
together set forth the terms and conditions of the proposed
transactions. The principal documents (in the form in which they
exist today) consist of the following:
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the Transaction Agreement, which establishes the overall
framework for the transactions as well as the terms and
conditions of the Advance/Newhouse contribution;
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the merger agreement, which establishes the terms and conditions
of the merger of Merger Sub and DHC;
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the form of escrow agreement, which establishes the terms and
conditions of an escrow arrangement for certain shares of New
Discovery convertible preferred stock Advance/Newhouse receives
in the Transaction;
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the reorganization agreement, which establishes certain terms
and conditions relating to the AMC spin-off;
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the form of tax sharing agreement, which establishes the
allocation between DHC and New Discovery on the one hand and AMC
on the other hand, of liabilities for taxes arising prior to, as
a result of, and subsequent to the AMC spin-off; and
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certain other ancillary agreements contemplated by the
agreements listed above.
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Set forth below is a summary of the material terms of the
principal documents involved in the Transaction. The summary
does not purport to be complete and may not contain all of the
information that is important to you. The summary is qualified
in its entirety by reference to the actual text of the
agreements being summarized, which have been filed as Appendices
to this proxy statement/prospectus or as exhibits to the
registration statement of which this document constitutes a
part, and are incorporated by reference into this document. For
more information about how you can obtain copies of these
agreements that have been filed as exhibits, see Where You
Can Find More Information below.
Transaction
Agreement
New Discovery, DHC and Advance/Newhouse and certain of their
respective affiliates entered into the Transaction Agreement,
which establishes important terms and conditions relating to the
implementation of the Transaction, including the
Advance/Newhouse contribution. The Transaction Agreement sets
forth the terms and conditions of each of New Discoverys
and DHCs obligation to complete the AMC spin-off, the
Advance/Newhouse contribution and the merger, and
Advance/Newhouses obligation to complete the
Advance/Newhouse contribution.
AMC
Spin-off
Prior to effecting the initial steps of the Transaction, DHC
will, subject to the satisfaction of the conditions contained in
the Transaction Agreement, complete the AMC spin-off. The
Transaction Agreement provides that, prior to effecting the AMC
spin-off, DHC will complete an internal corporate restructuring
so that DHC will be the sole stockholder of AMC, which will own
all of the businesses, assets, properties and liabilities of the
creative and network services businesses of Ascent Media,
excluding Ascent Media Sound, and the excess cash and cash
equivalents held by DHC prior to the AMC spin-off. The
Transaction Agreement provides that, subject to the satisfaction
of the conditions contained in the Transaction Agreement, DHC
will take all actions within its control to complete the AMC
spin-off. See Reorganization Agreement
below for more information.
As a result of such internal restructuring and completion of the
AMC spin-off, DHC would own a
662/3%
interest in Discovery, 100% of the businesses, assets,
properties and liabilities of Ascent Media Sound, and any cash
and cash equivalents not contributed to AMC.
For more information regarding the AMC spin-off, please see
Reorganization Agreement below. For
financial information on AMC, see its Audited Financial
Statements included as Appendix F to this proxy
statement/prospectus.
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Advance/Newhouse
Contribution
Subject to the satisfaction of the conditions in the Transaction
Agreement, immediately following the completion of the AMC
spin-off, the Transaction Agreement provides that
Advance/Newhouse will contribute to New Discovery all of the
interests in Discovery and Animal Planet owned by
Advance/Newhouse, in exchange for:
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shares of New Discovery Series A convertible preferred
stock convertible into a number of shares of Series A
common stock equal to one-half of the number of shares of New
Discovery Series A common stock and New Discovery
Series B common stock issued in the merger;
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shares of New Discovery Series C convertible preferred
stock convertible into a number of shares of Series C
common stock equal to one-half of the number of shares of New
Discovery Series C common stock issued in the merger;
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additional shares of New Discovery Series A convertible
preferred stock convertible into a number of shares of
Series A common stock equal to one-half of the aggregate
number of shares of New Discovery Series A common stock and
New Discovery Series B common stock that may be issued by
New Discovery pursuant to stock options and stock appreciation
rights in effect immediately following the merger; and
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additional shares of New Discovery Series C convertible
preferred stock convertible into a number of shares of
Series C common stock equal to one-half of the aggregate
number of shares of New Discovery Series C common stock
that may be issued by New Discovery pursuant to stock options
and stock appreciation rights in effect immediately following
the merger.
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For more information regarding the New Discovery options and
stock appreciation rights, see Merger
Agreement Treatment of Options below.
Following the closing of the Transaction and issuance of
additional shares of New Discovery Series A convertible
preferred stock referenced in the final two bullet points above
to Advance/Newhouse, which are referred to as escrow
shares, Advance/Newhouse will deposit such escrow shares
into an escrow account to be held by the escrow agent pursuant
to the terms and conditions of the escrow agreement described
below. See Escrow Agreement below.
Merger
Immediately following the completion of the Advance/Newhouse
contribution described above, DHC, New Discovery and Merger Sub
will complete the merger as contemplated by the Transaction
Agreement and merger agreement. For more details regarding the
merger, including the effect on each outstanding share of DHC
common stock and outstanding stock options, see
Merger Agreement below.
We cannot assure you when, or if, all the conditions to
completion of the Transaction (including the merger) will be
satisfied or, where permissible, waived. See
Conditions to Completion of the
Transaction below. The parties intend to complete the
Transaction as promptly as practicable following the
satisfaction (or waiver) of all conditions, including receipt of
the requisite approvals of the DHC stockholders to the
transaction proposals at the Annual Meeting.
Representations
and Warranties
The Transaction Agreement contains representations and
warranties that the parties made to each other as of the date of
the Transaction Agreement or other specific dates. The
statements embodied in those representations and warranties are
subject to qualifications and limitations agreed to by the
parties in connection with negotiating the terms of that
agreement and are qualified by information in a confidential
disclosure letter that the parties have exchanged in connection
with the signing of the Transaction Agreement. Please note that
certain representations and warranties may be subject to
contractual standards of materiality different from those
generally applicable to stockholders or may have been used for
the purpose of allocating risk between the parties rather than
establishing matters as facts.
The Transaction Agreement should not be read alone, but should
instead be read in conjunction with the other information
regarding the parties and the transaction that is contained in
this proxy statement/prospectus as well as
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in the filings that the parties make and have made with the SEC.
The representations and warranties contained in the Transaction
Agreement may or may not have been accurate as of the date they
were made and we make no assertion herein that they are accurate
as of the date of this proxy statement/prospectus.
The Transaction Agreement contains customary representations and
warranties by DHC relating to, among other things:
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corporate organization and qualification;
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corporate power and authority, absence of conflicts and board
approval of the Transaction Agreement;
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capitalization of each of DHC, New Discovery and Merger Sub;
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subsidiaries;
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documents filed with the Securities and Exchange Commission and
financial statements included in such documents;
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information supplied in connection with this proxy
statement/prospectus and the registration statement of which it
is a part;
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absence of certain changes or events since December 31,
2007;
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no default under any material contracts;
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compliance with applicable laws;
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legal proceedings;
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material transactions or arrangements with affiliates;
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brokers and finders;
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tax and employee matters; and
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compliance with takeover laws.
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Except as specifically provided in the Transaction Agreement,
DHC does not make any representations or warranties under the
Transaction Agreement with respect to the businesses, assets and
liabilities of Discovery, or of Ascent Media to the extent they
are part of the AMC spin-off.
The Transaction Agreement contains customary representations and
warranties by Advance/Newhouse relating to, among other things:
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organization and qualification;
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power and authority, absence of conflicts and requisite
approvals of the Transaction Agreement;
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ownership of Discovery and Animal Planet interests;
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information supplied in connection with this proxy
statement/prospectus and the registration statement of which it
is a part;
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legal proceedings;
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brokers and finders; and
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acknowledgement of private placement of securities
Advance/Newhouse will receive in the Transaction.
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Covenants
Stockholder
Vote; Registration Statement and Issuance of Shares
DHC has agreed, subsequent to the date of the Transaction
Agreement, to use its reasonable best efforts to, among other
things:
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convene a stockholders meeting for the purpose of considering
and voting on the Transaction Agreement;
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prepare and file with the SEC this proxy statement/prospectus
and registration statement of which it is a part and to have
such filings declared effective by the SEC as soon as reasonably
practicable after filing; and
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cause the shares of the New Discovery common stock issuable in
the merger to be eligible for quotation on the Nasdaq Global
Select Market.
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Conduct
of Business of DHC Prior to Closing
Under the Transaction Agreement, DHC has agreed that, subject to
certain exceptions, between the date of the Transaction
Agreement and the closing of the Transaction, it will, and will
cause certain of its subsidiaries to, conduct its business as
currently conducted and not take action that could be expected
to result in any of the conditions to the merger and the
contribution by Advance/Newhouse not being fulfilled. In
addition, each of DHC, New Discovery and Merger Sub agreed,
subject to certain exceptions, not to, prior to completion of
the Transaction, take any action that would reasonably be
expected to create a material liability for New Discovery
following the closing of the Transaction. Further, DHC has
agreed to not issue, between the date of the Transaction
Agreement and the closing of the Transaction, any options
exercisable for Series A common stock or Series B
common stock of DHC to any director of DHC.
Reasonable
Best Efforts
The parties have agreed to use their respective reasonable best
efforts to consummate the transactions contemplated by the
Transaction Agreement and to cause all of the conditions to the
consummation of the Transaction to be satisfied, including:
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obtaining all necessary consents and approvals from governmental
authorities or other persons;
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defending any lawsuits or other actions challenging the
Transaction Agreement or the consummation of the
Transaction; and
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providing notice or obtaining consents from any third-parties
necessary for the consummation of the transactions contemplated
by the Transaction Agreement.
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Advance/Newhouse has agreed, within 10 business days of signing
the Transaction Agreement, to file with the Federal Trade
Commission and the Antitrust Division of the Department of
Justice, the notification and report form required pursuant to
the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, and request early
termination of the waiting periods relating thereto and use its
reasonable best efforts to take all actions required to cause
the expiration or early termination of such notice periods. In
addition, Advance/Newhouse has agreed, within 10 business days
of signing the Transaction Agreement, to make any required
filings under the merger regulations of the Republic of Germany,
and Advance/Newhouse has agreed, subject to certain limitations,
to use its reasonable best efforts to take all actions required
to obtain the clearance required by such merger regulations. The
parties have further agreed, subject to certain limitations, to
use their respective reasonable best efforts to resolve any
objections or challenges of any governmental authorities to the
Transaction Agreement or the Transaction. The parties agreed
that in order to resolve any objection or to obtain the consent,
approval, waiver or permission of any governmental authority in
connection with the Transaction, neither DHC nor
Advance/Newhouse nor any of their respective stockholders will
be required to:
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divest itself of any part of its ownership interest of DHC, New
Discovery, Discovery, Animal Planet or AMC;
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agree to any condition or requirement that would render such
persons ownership of such securities, shares, interests or
assets illegal or subject to the imposition of a fine or penalty;
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agree to any condition or requirement that would impose material
restrictions or limitations on such persons full rights of
ownership (including, without limitation, voting) of such
securities, shares, interests or assets, or
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agree to any condition or requirement that would materially
restrict its business or operations as currently conducted.
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Parent
Guarantee
In the Transaction Agreement, Advance Publications, Inc. and
Newhouse Broadcasting Corporation each agreed to cause
Advance/Newhouse to perform its obligations under the
Transaction Agreement and related transaction documents and to
consummate the transaction in accordance with their terms and
agreed not to take any action, or fail to take any action, that
would result in each of them not being the beneficial owner of
the Discovery and Animal Planet interests as of the closing of
the Transaction.
Conditions
to Completion of the Transaction
Conditions to obligations of each of DHC, New Discovery,
Merger Sub and Advance/Newhouse. The respective
obligations of DHC, New Discovery, Merger Sub and
Advance/Newhouse to consummate the Transaction are subject to
the satisfaction or (other than with respect to the stockholder
approval requirement described in the third bullet point below)
waiver, at or prior to the unconditional time, of the following
conditions:
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the absence of any law, injunction, order, statute or regulation
prohibiting or preventing the consummation of the Transaction;
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all authorizations, consents, orders or approvals of, or
declarations or filings with, or expiration of waiting periods
imposed by, certain specified governmental authorities
(including under the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976 and under the merger
regulations of the Republic of Germany) necessary for the
consummation of the Transaction having been filed, expired or
obtained;
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DHC having obtained the requisite approval of DHC stockholders
to the Transaction;
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the restated charter of New Discovery having been filed with the
Delaware Secretary of State;
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the declaration of effectiveness of the registration statement
of New Discovery of which this document is a part by the SEC and
the absence of any stop order suspending effectiveness or
proceedings seeking a stop order or suspension of effectiveness
with respect to such registration statement;
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each of the Transaction Agreement, merger agreement,
reorganization agreement, registration rights agreement and
escrow agreement having been executed;
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the shares of New Discovery common stock to be issued pursuant
to the merger having been approved for listing on the Nasdaq
Global Select Market, subject to official notice of issuance;
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the registration statement on Form 10 of AMC having been
declared effective by the SEC and the absence of any stop order
suspending effectiveness or proceedings seeking a stop order or
suspension of effectiveness with respect to such registration
statement;
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the shares of Series A common stock of AMC to be issued in the
AMC spin-off to holders of DHC common stock having been approved
for listing on The Nasdaq Stock Market, subject to official
notice of issuance; and
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all steps required to complete the AMC spin-off having been
satisfied, completed or waived, as applicable.
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Additional Conditions to obligations of
Advance/Newhouse. The obligation of
Advance/Newhouse to consummate the Transaction is subject to the
satisfaction or waiver, at or prior to the unconditional time,
of the following additional conditions:
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all representations and warranties of DHC will be true and
correct as of the date of the Transaction Agreement and the
unconditional time, or as of a specified earlier date, except
for inaccuracies in the
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53
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representations made by DHC (other than representations relating
to ownership of the shares of Discovery and interests of Animal
Planet which must be true and correct in all respects) that
would not have a material adverse effect on the business and
operations of New Discovery or on the ability of DHC and New
Discovery to consummate the Transaction;
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each of DHC, New Discovery and Merger Sub will have performed in
all material respects all obligations and agreements, and
materially complied with all covenants and conditions required
to be performed or complied with; and
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receipt of the opinion of Ernst and Young LLP or another
nationally recognized accounting firm or law firm to the effect
that, for U.S. federal income tax purposes, the
contribution (in conjunction with the merger) will qualify as a
tax-free exchange within the meaning of Section 351 of the
Code.
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Additional Conditions to obligations of each of DHC, New
Discovery and Merger Sub. The obligations of DHC,
New Discovery and Merger Sub to consummate the transaction are
subject to the satisfaction or waiver, at or prior to the
unconditional time, of the following additional conditions:
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all representations and warranties of Advance/Newhouse will be
true and correct as of the date of the Transaction Agreement and
the unconditional time, or as of a specified earlier date,
except for inaccuracies in the representations made by
Advance/Newhouse (other than representations relating to
ownership of the shares of Discovery and interests of Animal
Planet which must be true and correct in all respects) that
would not have a material adverse effect on the ability of
Advance/Newhouse to consummate the Transaction;
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Advance/Newhouse will have performed in all material respects
all obligations and agreements, and materially complied with all
covenants and conditions required to be performed or complied
with;
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the New Discovery rights agreement will have been executed and
delivered and in full force and effect and no act will have been
taken or, to the knowledge of DHC, New Discovery or Merger Sub,
threatened, seeking to invalidate the rights agreement or any
transactions contemplated by the rights agreement; and
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receipt of the opinion of Skadden, Arps, Slate,
Meagher & Flom LLP or another nationally recognized
law firm to the effect that, for U.S. federal income tax
purposes, the AMC spin-off should qualify as a reorganization
under Sections 368(a) and 355 of the Code, and the merger
(in conjunction with the contribution) will qualify as a
tax-free exchange within the meaning of Section 351 of the
Code.
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Under the Transaction Agreement, the term unconditional
time generally means such time prior to the effective time
of the AMC spin-off that all conditions to each partys
obligation to consummate the Transaction (other than the
delivery of certain documents that can only be delivered at the
closing of the Transaction) have been satisfied or waived and
the parties have acknowledged in writing that all such
conditions have been satisfied or waived.
DHC reserves the right to waive any of the conditions to its
obligations to close the Transaction (other than the mutual
condition relating to the receipt of DHC stockholder approval,
which is non-waivable). To the extent DHC waives any such
condition, DHC does not intend to resolicit shareholder approval
of the Transaction unless the waived condition relates to
(i) the effectiveness of New Discoverys or AMCs
registration statement under applicable securities laws,
(ii) the stock exchange listing of the New Discovery common
stock or the Series A AMC common stock, (iii) the
completion of the AMC spin-off or (iv) the receipt of an
opinion from tax counsel to the effect that, for U.S. federal
income tax purposes, the merger (in conjunction with the
contribution) will qualify as a tax-free exchange within the
meaning of Section 351 of the Code. DHC would resolicit
stockholder approval in connection with a waiver of any of these
enumerated conditions because they affect directly the
consideration being received by the DHC stockholders in the
Transaction and the AMC spin-off and could affect the tax
consequences of the merger.
Termination
of the Transaction Agreement
The Transaction Agreement may be terminated and the Transaction
abandoned at any time prior to the unconditional time, whether
before or after the approval of DHCs stockholders:
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by mutual written agreement of DHC and Advance/Newhouse;
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54
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by either DHC or Advance/Newhouse, if the approval of DHCs
stockholders is not obtained at the Annual Meeting;
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by either DHC or Advance/Newhouse, if any of the conditions
precedent to such partys obligations has become incapable
of being fulfilled;
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by either DHC or Advance/Newhouse, if any court or other
governmental authority has issued an order or taken any other
action permanently restraining or otherwise prohibiting the
Transaction and such order, or other action has become final and
nonappealable; or
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by either DHC or Advance/Newhouse, if the unconditional time
does not occur on or prior to December 31, 2008.
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In order to terminate the Transaction Agreement pursuant to any
of the final four bullets noted above, the party seeking to
terminate the Transaction Agreement must not be in breach of any
of its representations, warranties or covenants in the
Transaction Agreement in any material respect.
If the closing of the Transaction has not occurred by the
2nd business day after the unconditional time has occurred,
then the Transaction Agreement may be terminated and the
Transaction abandoned at any time after the close of business on
such day by either DHC or Advance/Newhouse; provided that the
party seeking to terminate the Transaction Agreement is not in
breach of the Transaction Agreement in any material respect.
Indemnification
Indemnification
by DHC and New Discovery
Subject to certain limitations in the Transaction Agreement,
following completion of the Transaction, DHC and New Discovery
will indemnify Advance/Newhouse, its affiliates and their
respective officers, directors, stockholders, partners,
employees, representatives, agents and trustees, against:
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any actual and direct losses incurred by any such person arising
out of or resulting from any breach of DHC and New
Discoverys representation that DHC owns shares of
Discovery and interests of Animal Planet;
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any actual and direct losses incurred by any such person arising
out of or resulting from any failure by DHC to perform any
covenant or agreement made by DHC in the Transaction Agreement
in all material respects;
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any liability for taxes incurred by Advance/Newhouse as a
consequence of the release of any of the Advance/Newhouse escrow
shares from the escrow to the extent that the Advance/Newhouse
contribution (in conjunction with the merger) otherwise
qualified as a tax-free exchange within the meaning of
Section 351 of the Code; and
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any actual or direct losses incurred by such person arising out
of or relating to any claim made by a third party that arises:
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solely out of the ownership or operation of the business, assets
or liabilities of AMC after the closing of the
Transaction; or
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out of any state of facts relating to DHC, New Discovery or AMC
(but not including any liability of Discovery) existing at or
prior to the closing of the Transaction.
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With respect to the calculation of the actual and direct losses
noted above, the amount that DHC or New Discovery would be
obligated to pay Advance/Newhouse will be equal to the amount of
such loss multiplied by one plus a fraction, the numerator of
which is the loss percentage and the denominator of
which is one minus the loss percentage.
Without duplication of the foregoing indemnity, DHC and New
Discovery will indemnify Advance/Newhouse, its affiliates and
their respective officers, directors, stockholders, employees,
representatives, agents and trustees, from
Advance/Newhouses loss percentageof:
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any losses incurred by any such person arising out of or
resulting from any failure by DHC to perform any covenant or
agreement made by DHC in the Transaction Agreement in all
material respects;
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55
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any liability of any of DHC, New Discovery or AMC (but not
including any liability of Discovery and its subsidiaries or the
company holding the assets of Ascent Media Sound and its
subsidiaries) arising out of a state of facts existing at or
prior to the closing date of the Transaction; and
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any liabilities or other obligations incurred, created or
assumed by the company holding the assets of Ascent Media Sound
or its subsidiaries prior to the closing of the Transaction for
which New Discovery or its subsidiaries (other than the company
holding the assets of Ascent Media Sound or its subsidiaries)
become obligated after the closing of the Transaction.
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No indemnification by DHC and New Discovery will be payable to
Advance/Newhouse to the extent that New Discovery has been
indemnified for losses covered by such indemnification by AMC
pursuant to the reorganization agreement or tax sharing
agreement.
Indirect losses will be calculated, for purposes of
indemnification, by multiplying (x) a fraction (1) the
numerator of which is the loss percentage and (2) the
denominator of which is one minus the loss percentage by
(y) the difference, if positive, between the fair market
value of New Discovery determined as if the relevant covenant or
agreement had been performed in all respects, and the fair
market value of New Discovery and its subsidiaries, taken as a
whole, determined after giving effect to the breach,
nonperformance or violation of such covenant or agreement. The
fair market value of New Discovery will be determined after
giving effect to, among other considerations and effects, the
stock price of shares of New Discovery common stock, the equity
value of New Discovery, any amounts recovered by New Discovery
under insurance policies or indemnities from third parties, or
AMC under the reorganization agreement and any tax effects
relating to or resulting from the loss.
Under the Transaction Agreement, the term loss
percentage means the lesser of
(i) Advance/Newhouses equity interest in New
Discovery as of the date the loss is calculated and
(ii) 331/3%.
Indemnification
by Advance/Newhouse
Subject to certain limitations in the Transaction Agreement,
following completion of the Transaction, Advance/Newhouse will
indemnify DHC and New Discovery, its affiliates and their
respective officers, directors, stockholders, partners,
employees, representatives, agents and trustees, against any
losses incurred by any such person arising out of or resulting
from:
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any breach of a representation or warranty made by
Advance/Newhouse in the Transaction Agreement; and
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any losses incurred by any such party arising out of or
resulting from any breach or failure by Advance/Newhouse to
perform any covenant or agreement made by Advance/Newhouse in
the Transaction Agreement.
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Merger
Agreement
Structure
of the Merger
To effect the merger, DHC has formed two wholly-owned
subsidiaries. A transitory merger sub that we refer to as Merger
Sub, and New Discovery. At the effective time of the merger,
Merger Sub will merge with and into DHC in accordance with the
provisions of Delaware law, and DHC will continue as the
surviving entity. As a result of the merger, including the
conversion of securities described below, New Discovery will
become the new public parent company and DHC will become a
wholly-owned subsidiary of New Discovery.
Effective
Time of Merger
The effective time of the merger will be on the date and at the
time that the certificate of merger with respect to the merger
has been accepted for filing by the Delaware Secretary of State
(or such later date and time as may be specified in the
certificate of merger). Under no circumstances, however, will
the effective time of the merger occur prior to the completion
of the AMC spin-off or the completion of the contribution by
Advance/Newhouse pursuant to the Transaction Agreement.
56
Conversion
of outstanding common stock of DHC
At the effective time of the merger:
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each share of DHC Series A common stock outstanding
immediately prior to the effective time of the merger will be
converted into the right to receive 0.50 shares of New
Discovery Series A common stock and 0.50 shares of New
Discovery Series C common stock;
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each share of DHC Series B common stock outstanding
immediately prior to the effective time of the merger will be
converted into the right to receive 0.50 shares of New
Discovery Series B common stock and 0.50 shares of New
Discovery Series C common stock;
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each share of DHC Series A common stock and DHC
Series B common stock held in treasury of DHC immediately
prior to the effective time of the merger will be cancelled and
retired without payment of any consideration therefor and
without any conversion thereof; and
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each share of common stock of Merger Sub issued and outstanding
immediately prior to the effective time of the merger will be
converted into one share of the common stock of the surviving
entity and the shares of common stock of the surviving entity so
issued in such conversion will constitute the only outstanding
shares of capital stock of the surviving entity.
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For a description of New Discoverys capital stock, see
Description of New Discovery Capital Stock, and for
a description of the comparative rights of holders of DHC common
stock and New Discovery common stock, see Comparison of
the Rights of Stockholders of DHC and New Discovery.
Conversion
of Shares; Exchange Procedures
Conversion and Exchange of Shares. The
conversion of shares of DHC common stock into the right to
receive shares of New Discovery common stock will occur
automatically at the effective time of the merger. The exchange
agent will, as soon as reasonably practicable after the
effective time of the merger, exchange certificates (or
book-entry shares) representing shares of DHC common stock for
the applicable shares of New Discovery common stock to be
received in the merger pursuant to the terms of the merger
agreement.
Letter of Transmittal. The exchange agent will
send a letter of transmittal to each record holder of shares of
common stock of DHC as of the effective time of the merger. This
mailing will contain instructions on how to surrender shares of
DHC common stock in exchange for the shares of New Discovery
common stock the holder is entitled to receive under the merger
agreement. When you deliver your DHC stock certificates to the
exchange agent along with a properly executed letter of
transmittal and any other required documents, your stock
certificates will be canceled. Do not submit your shares of
DHC common stock for exchange until you receive the transmittal
instructions and letter of transmittal from the exchange
agent.
If a certificate for DHC common stock has been lost, stolen or
destroyed, the exchange agent will issue the shares of New
Discovery common stock properly issuable under the merger
agreement upon compliance by the applicable stockholder with the
replacement requirements established by the exchange agent, a
letter of transmittal specifying that delivery shall be
effected, and risk of loss and title to the certificates held by
such holder representing such former shares shall pass, only
upon proper delivery of the certificates to the exchange agent
and instructions for use in effecting the surrender of the
certificates.
Fractional Shares. Fractional shares of New
Discovery common stock will not be issued in the merger.
Instead, each holder of DHC common stock who would otherwise
receive a fractional share of New Discovery common stock, will
receive cash in an amount determined by reference to the trading
price of a share of New Discovery common stock of the applicable
series as of the first day of regular way trading in New
Discovery common stock following the effective time.
Dividends and Distributions. No dividends or
other distributions issuable with respect to shares of New
Discovery common stock will be paid to the holder of any
unsurrendered certificates until those certificates are
surrendered. Upon surrender, New Discovery will pay such holders
of New Discovery common stock issued in exchange, without
interest, any unpaid dividends or other distributions payable
with respect to such shares of New Discovery common stock.
57
Treatment
of Stock Options
Options
Held by Robert Bennett
At the effective time of the merger, each outstanding option to
purchase shares of DHC Series A common stock held by Robert
R. Bennett, a director of DHC, will be converted into an option
to purchase shares of New Discovery Series A common stock,
an option to purchase shares of New Discovery Series C
common stock, and an option to purchase shares of AMC
Series A common stock. The exercise price of each such New
Discovery Series A option, New Discovery Series C
option and AMC Series A option will be calculated by
multiplying (x) the volume weighted average price of the
common stock subject to such option over the first 10 trading
days of regular way trading after closing of the Transaction, by
(y) a fraction, (1) the numerator of which is the
exercise price of the DHC option and (2) the denominator of
which is the volume weighted average price of the DHC
Series A common stock subject to such DHC option over 5
trading days of regular way trading prior to closing of the
Transaction. The number of shares of New Discovery Series A
common stock, New Discovery Series C common stock and AMC
Series A common stock subject to each option will be
calculated so as to preserve the aggregate intrinsic value of
the DHC Series A option. Generally, the terms and
conditions of each option granted in the merger, including
vesting conditions and the scheduled expiration date, will
remain as set forth in the DHC option held by Mr. Bennett
immediately prior to the Transaction.
By way of illustration, the chart below shows, for each
outstanding option to acquire shares of DHC Series A common
stock held by Mr. Bennett as of June 30, 2008, the
aggregate number of shares of New Discovery Series A common
stock, New Discovery Series C common stock and AMC
Series A common stock subject to the converted options and
the exercise price for each such converted option. For the
purposes of the illustration, and in lieu of a volume weighted
average price of the applicable common stock, we used the
closing price of DHC Series A common stock as of a recent
date, which was $21.18, and derived hypothetical post-closing
trading prices for New Discovery Series A common stock, New
Discovery Series C common stock and AMC Series A
common stock. Because the value of the DHC Series A common
stock, New Discovery Series A common stock, New Discovery
Series C common stock and AMC Series A common stock
may differ from the prices used in this example, the number of
shares subject to, and the exercise price for, each converted
option may be different.
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DHC Series A Options
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New Discovery and AMC Options
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No. of New
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No. of New
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No. of DHC
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Discovery
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Discovery
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No. of AMC
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Series A
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Exercise
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Series A
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Exercise
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Series C
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Exercise
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Series A
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Exercise
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Shares
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Price
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Shares
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Price
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Shares
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Price
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Shares
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Price
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100,000
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$
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11.84
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50,000
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$
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11.19
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50,000
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$
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10.12
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5,000
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$
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23.68
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100,000
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$
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13.00
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50,000
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$
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12.29
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50,000
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$
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11.12
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5,000
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$
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26.00
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10,000
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$
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22.90
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5,000
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$
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21.64
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5,000
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$
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19.58
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500
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$
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45.80
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At the effective time of the merger, each outstanding option to
purchase shares of DHC Series B common stock, all of which
options are held by Mr. Bennett, will be converted into an
option to purchase shares of New Discovery Series B common
stock, an option to purchase shares of New Discovery
Series C common stock and an option to purchase shares of
AMC Series B common stock. The exercise price of each such
New Discovery Series B option, New Discovery Series C
option and AMC Series B option will be calculated by
multiplying (x) the volume weighted average price of the
common stock subject to such option over the first 10 trading
days of regular way trading after closing of the Transaction,
and (y) a fraction, (1) the numerator of which is the
exercise price of the DHC Series B option and (2) the
denominator of which is the volume weighted average price of the
DHC Series B common stock subject to such DHC Series B
option over 5 trading days of regular way trading prior to
closing of the Transaction. The number of shares of New
Discovery Series B common stock, New Discovery
Series C common stock and AMC Series B common stock
subject to each New Discovery Series B option, New
Discovery Series C option and AMC Series B option will
be calculated so as to preserve the aggregate intrinsic value of
the DHC Series B option. Generally, the terms and
conditions of each option granted in the merger, including
vesting conditions and the scheduled expiration date, will
remain as set forth in the DHC option held by Mr. Bennett
immediately prior to the Transaction. Mr. Bennetts
options to acquire shares of DHC Series B common stock are,
at his option, exercisable for shares of DHC Series B
common stock or DHC Series A common stock. The exercise
price applicable to the DHC Series B common stock is
different from the exercise price applicable to the DHC
Series A common stock. Accordingly, after the effective
time of the merger, Mr. Bennett will have the option to
exercise such stock option for shares of New Discovery
Series A common stock, New Discovery Series C common
stock
58
and AMC Series A common stock (rather than New Discovery
Series B common stock, New Discovery Series B common
stock and AMC Series B common stock). If Mr. Bennett
exercises such stock options for shares of Series A common
stock, the number of shares subject to such options and their
exercise prices shall be determined according to the provisions
described in the first paragraph under Options Held by
Robert Bennett above.
By way of illustration, the chart below shows, for each
outstanding option to acquire DHC Series B common stock
held by Mr. Bennett as of June 30, 2008, the aggregate
number of shares of New Discovery Series B common stock,
New Discovery Series C common stock and AMC Series B
common stock subject to the converted option and the exercise
price for each such converted option. For the purposes of the
illustration, and in lieu of a volume weighted average price of
the applicable common stock, we used the closing price of DHC
Series B common stock as of a recent date, which was $21.40
and derived hypothetical post-closing trading prices for New
Discovery Series B common stock, New Discovery
Series C common stock and AMC Series B common stock.
Because the value of the DHC Series B common stock, New
Discovery Series B common stock, New Discovery
Series C common stock and AMC Series B common stock
may differ from the prices used in this example, the number of
shares subject to, and the exercise price for, each converted
option may be different.
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DHC Series B Option
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New Discovery and AMC Options
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No. of New
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No. of New
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No. of DHC
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Discovery
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Discovery
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No. of AMC
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Series B
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Exercise
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Series B
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Exercise
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Series C
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Exercise
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Series B
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Exercise
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Shares
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Price
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Shares
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Price
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Shares
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Price
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Shares
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Price
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1,667,985
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$
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19.06
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833,992
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$
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18.18
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833,992
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$
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16.13
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83,399
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$
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38.12
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Director
Options
At the effective time of the merger, each outstanding option to
purchase shares of DHC Series A common stock held by any
member of the board of directors of DHC (other than
Mr. Bennett) who will be a director of New Discovery
immediately after the effective time of the merger will be
converted into an option to purchase shares of New Discovery
Series A common stock and an option to purchase shares of
New Discovery Series C common stock. The exercise price of
each such New Discovery Series A option and Series C
option will be calculated by multiplying (x) the volume
weighted average price of the common stock subject to such
option over the first 10 trading days of regular way trading
after closing of the Transaction, by (y) a fraction,
(1) the numerator of which is the exercise price of such
DHC Series A option and (2) the denominator of which
is the volume weighted average price of the DHC Series A
common stock subject to such DHC Series A option over the 5
trading days of regular way trading prior to closing of the
Transaction. The number of shares of New Discovery Series A
common stock and New Discovery Series C common stock
subject to each New Discovery Series A option and
Series C option will be calculated so as to preserve the
aggregate intrinsic value of the DHC Series A option.
Generally, the terms and conditions of each option granted in
the merger, including vesting conditions and the scheduled
expiration date, will remain as set forth in the DHC
Series A option held by the director immediately prior to
the Transaction.
For the purposes of the following illustration, and in lieu of a
volume weighted average price of the applicable common stock, we
used the closing price of DHC Series A common stock as of a
recent date, which was $21.18 and derived hypothetical
post-closing trading prices for New Discovery Series A
common stock and New Discovery Series C common stock. Based
on such closing price and hypothetical trading prices, the
aggregate number of shares of New Discovery Series A common
stock subject to the converted options held by a director of DHC
(other than Mr. Bennett) who will be a director of New
Discovery, will be 37,580 and the aggregate number of shares of
New Discovery Series C common stock subject to the
converted options held by such directors will be 37,580. In
addition, the chart below shows, for an outstanding option to
acquire 10,000 shares of Series A common stock of DHC
held by one such director the aggregate number of shares of New
Discovery Series A common stock and New Discovery
Series C common stock subject to the converted options and
the exercise price for each such converted option. Because the
value of the DHC Series A common stock, New Discovery
Series A common stock and New Discovery Series C
common stock may differ from the prices used in this example,
the number of shares subject to, and the exercise price for,
each converted option may be different.
59
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New Discovery Options
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DHC Series A Option
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No. of New
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No. of DHC
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No. of New
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Discovery
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Series A
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Exercise
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Discovery
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Exercise
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Series C
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Exercise
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Shares
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Price
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Series A Shares
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Price
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Shares
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Price
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10,000
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$
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22.90
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5,555
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$
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21.64
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5,555
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$
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19.58
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Other
Options
At the effective time of the merger, each outstanding option to
purchase shares of DHC Series A common stock, other than
those held by Mr. Bennett or the directors of DHC who will
serve on the New Discovery board, will be converted into a stock
appreciation right relating to shares of New Discovery
Series A common stock and a stock appreciation right
relating to shares of New Discovery Series C common stock.
The base price of each New Discovery Series A SAR and New
Discovery Series C SAR will be calculated by multiplying
(x) the volume weighted average price of the common stock
subject to such New Discovery Series A SAR or New Discovery
Series C SAR over the first 10 trading days of regular way
trading after closing of the Transaction, and (y) a
fraction, (1) the numerator of which is the exercise price
of such DHC Series A option and (2) the denominator of
which is the volume weighted average price of the DHC
Series A common stock subject to such DHC Series A
option over 5 trading days of regular way trading prior to
closing of the Transaction. The number of shares of New
Discovery Series A common stock and New Discovery
Series C common stock relating to each such Series A
SAR and Series C SAR, respectively, will be calculated so
as to preserve the aggregate intrinsic value of the DHC
Series A option. Generally, the terms and conditions of
each Series A and Series C SAR granted in the merger,
including vesting conditions and the scheduled expiration date,
will remain as set forth in the DHC Series A option held by
the holder immediately prior to the Transaction, except that the
spread between the fair market value of the underlying shares
and the base price of each Series A SAR and Series C
SAR will be payable solely in shares of New Discovery
Series A common stock or New Discovery Series C common
stock, as applicable.
For the purposes of the following illustrations, and in lieu of
a volume weighted average price of the applicable common stock,
we used the closing price of DHC Series A common stock as
of a recent date, which was $21.18 and derived hypothetical
post-closing trading prices for New Discovery Series A
common stock and New Discovery Series C common stock. Based
on such closing price and hypothetical trading prices, the
aggregate number of shares of New Discovery Series A common
stock to which the Series A SARs relate will be 279,992 and
the aggregate number of shares of New Discovery Series C
common stock to which the Series C SARs relate will be
279,992. In addition, the chart below shows, for an outstanding
option to acquire 20,000 shares of Series A common
stock of DHC held by an individual other than a director of DHC,
the aggregate number of shares of New Discovery Series A
common stock to which the Series A SAR relates, the
aggregate number of shares of New Discovery Series C common
stock to which the Series C SAR relates and the base price
for each such SAR. Because the value of the DHC Series A
common stock, New Discovery Series A common stock and New
Discovery Series C common stock may differ from the prices
used in this example, the number of shares to which the SAR
relates, and the base price for each SAR, may be different.
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DHC Series A Options
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New Discovery SARs
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No. of New
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No. of DHC
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No. of New
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Discovery
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Series A
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Exercise
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Discovery
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Exercise
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Series C
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Exercise
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Shares
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Price
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Series A Shares
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Price
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Shares
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Price
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20,000
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$
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11.84
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11,111
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$
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11.19
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11,111
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$
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10.12
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Conditions
to completion of Merger
The respective obligations of the DHC, Merger Sub and New
Discovery to consummate the merger are subject to the
satisfaction (or, where applicable, waiver), at or prior to the
effective time of the merger, of the conditions to the
Transaction set forth in the Transaction Agreement.
Termination
The merger agreement will automatically terminate on termination
of the Transaction Agreement.
60
Escrow
Agreement
At or prior to the closing of the Transaction, New Discovery and
Advance/Newhouse will enter into an escrow agreement with the
escrow agent, the form of which is attached as an exhibit to the
registration statement of which this proxy statement/prospectus
forms a part.
Pursuant to the escrow agreement, following the closing of the
Transaction and the issuance of additional shares of New
Discovery Series A convertible preferred stock and New
Discovery Series C convertible preferred stock consisting
of escrow shares to Advance/Newhouse, Advance/Newhouse will
deposit such escrow shares with the escrow agent for the benefit
of Advance/Newhouse. The escrow shares will be registered in the
name of Advance/Newhouse, and Advance/Newhouse will have the
right to vote the escrow shares until such time as they are
released directly to Advance/Newhouse or returned to New
Discovery, in each case, as described below.
The escrow shares (and any related escrow property) will be
released from the escrow as follows:
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upon each issuance of shares of New Discovery Series A
common stock pursuant to the exercise of a stock appreciation
right granted in connection with the merger, the escrow agent
will promptly release from escrow and distribute to
Advance/Newhouse, a number of shares of New Discovery
Series A convertible preferred stock convertible into
1/2
of the number of shares of New Discovery Series A common
stock so issued and any escrow property (other than such shares)
that are attributable to such released shares of convertible
preferred stock;
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upon each issuance of shares of New Discovery Series C
common stock pursuant to the exercise of a stock appreciation
right granted in connection with the merger, the escrow agent
will promptly release from escrow and distribute to
Advance/Newhouse, a number of shares of New Discovery
Series C convertible preferred stock convertible into
1/2
of the number of shares of New Discovery Series C common
stock so issued and any escrow property (other than such shares)
that are attributable to such released shares of convertible
preferred stock;
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upon each issuance of shares of New Discovery Series A
common stock or New Discovery Series B common stock
pursuant to the exercise of a New Discovery Series A option
or Series B option granted in connection with the merger,
the escrow agent will promptly release from escrow and
distribute to Advance/Newhouse, a number of shares of New
Discovery Series A convertible preferred stock convertible
into shares of New Discovery Series A common stock equal to
1/2
of the quotient of (x) the aggregate number of shares of
New Discovery Series A common stock or New Discovery
Series B common stock subject to such option multiplied by
the spread between the fair market value of such shares of New
Discovery common stock issuable upon exercise of such option on
the date of exercise and the exercise price of such option and
(y) the fair market value of shares of New Discovery
Series A common stock or New Discovery Series B common
stock subject to such option, and any escrow property (other
than such shares) that are attributable to such released shares
of convertible preferred stock;
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upon each issuance of shares of New Discovery Series C
common stock pursuant to the exercise of a New Discovery
Series C option granted in connection with the merger, the
escrow agent will promptly release from escrow and distribute to
Advance/Newhouse, shares of New Discovery Series C
convertible preferred stock convertible into a number of shares
of New Discovery Series C common stock equal to
1/2
of the quotient of (x) the aggregate number of shares of
New Discovery Series C common stock subject to such option
multiplied by the spread between the fair market value of such
shares of New Discovery Series C common stock issuable upon
exercise of such Series C option on the date of exercise
and the exercise price of such Series C option and
(y) the fair market value of shares of New Discovery
Series C common stock subject to such Series C option, and
any escrow property (other than such shares) that are
attributable to such released shares of convertible preferred
stock;
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the escrow will terminate at such time as all stock appreciation
rights and converted options have been exercised or the time
period within which such stock appreciation rights and converted
options may be exercised has expired, following which the escrow
agent will promptly distribute any escrow shares and escrow
property remaining in escrow to New Discovery.
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61
The purpose of the issuance of the escrowed shares and the
escrow agreement is to provide Advance/Newhouse with protection
against dilution resulting from the rollover of the DHC equity
awards to New Discovery upon the closing of the Transaction. The
parties agreed to this escrow arrangement, in lieu of issuing
shares directly to Advance/Newhouse from
New Discoverys authorized and unissued share pool
upon any of the release events described above, because a
periodic issuance of shares in this context would have been less
efficient from a tax standpoint.
As described in Transaction
Agreement Advance/Newhouse Contribution the
number of shares of New Discovery Series A convertible
preferred stock and New Discovery Series C convertible
preferred stock that will initially be deposited with the escrow
agent will be based on the number of shares of New Discovery
Series A common stock, New Discovery Series B common
stock and New Discovery Series C common stock that may be
issued by New Discovery pursuant to stock options and stock
appreciations rights in effect immediately following the merger.
See Treatment of Stock Options for a description of
how existing options to acquire DHC common stock will be treated
in the merger and converted into options or stock appreciation
rights relating to New Discovery Series A common stock, New
Discovery Series B common stock and New Discovery
Series C common stock. For the purposes of the following
illustrations, and in lieu of a volume weighted average price of
the applicable common stock, we used the closing price of DHC
Series A common stock as of a recent date, which was
$21.18, and derived hypothetical post-closing trading prices for
New Discovery Series A common stock, New Discovery
Series B common stock and New Discovery Series C
common stock. Based on such closing price and hypothetical
trading prices, (i) the aggregate number of shares of New
Discovery Series A common stock subject to converted
options and Series A SARs will be, in the aggregate,
422,572, (ii) the aggregate number of shares of New
Discovery Series B common stock subject to converted
options will be 833,992 and (iii) the aggregate number of
shares of New Discovery Series C common stock subject to
converted options and Series C SARs will be, in the
aggregate, 1,256,563. If such options and SARs were granted as a
result of the merger, then 718,993 shares of New Discovery
Series A convertible preferred stock and
718,993 shares of New Discovery Series C convertible
preferred stock would initially be deposited with the escrow
agent. Because the value of the DHC Series A common stock,
the New Discovery Series A common stock, New Discovery
Series B common stock and New Discovery Series C
common stock may differ from the prices used in this example,
the number of shares to deposited with the escrow agent may be
different.
Reorganization
Agreement
On June 4, 2008, DHC entered into a reorganization
agreement with New Discovery, AMC, Ascent Media Group, LLC and
Ascent Media Sound that provides for, among other things, the
principal corporate transactions required to effect the AMC
spin-off, certain conditions to the AMC spin-off and provisions
governing the relationship between New Discovery and DHC on the
one hand, and AMC on the other hand, with respect to and
resulting from the AMC spin-off.
The reorganization agreement provides that, on or prior to the
record date:
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DHC will transfer to AMC, or cause its subsidiaries to transfer
to AMC, all of the outstanding ownership interests in Ascent
Media; and
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Ascent Media Group, LLC will transfer to DHC, or one of its
subsidiaries, all of the outstanding ownership interests in
Ascent Media Sound.
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The reorganization agreement also provides for mutual
indemnification obligations, which are designed to make AMC
financially responsible for substantially all liabilities that
may exist relating to the business of AMC prior to the AMC
spin-off, as well as for all liabilities incurred by AMC after
the AMC spin-off, and to make DHC and New Discovery financially
responsible for certain potential liabilities of AMC arising
prior to the AMC spin-off which are not related to the business
of AMC, including, for example, any liabilities arising as a
result of AMC having been a subsidiary of DHC. The
reorganization agreement also provides for AMC to assume all or
substantially all outstanding financial obligations of DHC at
the closing (other than any liabilities relating to Ascent Media
Sound), which are expected to be less than all or substantially
all of DHCs unrestricted cash and cash equivalents then on
hand to be transferred by DHC to AMC prior to the AMC spin-off.
62
In addition, the reorganization agreement provides for each
party to preserve the confidentiality of all confidential or
proprietary information of the other parties for five years
following the AMC spin-off, subject to customary exceptions,
including disclosures required by law, court order or government
regulation.
The reorganization agreement may be terminated, and the AMC
spin-off may be abandoned, at any time prior to the date of the
spin-off, by and in the sole discretion of DHCs board of
directors, without the approval of DHC stockholders or anyone
else.
Tax
Sharing Agreement
Under the tax sharing agreement between New Discovery, DHC, AMC
and other parties thereto, generally DHC will be responsible for
(i) all U.S. federal, state, local and foreign income
taxes attributable to DHC or any of its subsidiaries for any tax
period that begins after the date of the AMC spin-off (and for
any tax period that begins on or before and ends after the date
of the AMC spin-off, for the portion of that period after the
date of the AMC spin-off), other than such taxes arising as a
result of the AMC spin-off and related internal restructuring of
DHC, (ii) all taxes arising as a result of the AMC spin-off
to the extent such taxes arise as a result of any breach on or
after the date of the AMC spin-off of any representation,
warranty, covenant or other obligation of DHC or of a subsidiary
or shareholder of DHC made in connection with the issuance of
the tax opinion relating to, among other things, the
qualification of the AMC spin-off as a transaction under
Sections 368(a) and 355 of the Code for U.S. federal
income tax purposes or in the tax sharing agreement, and
(iii) all taxes arising as a result of such internal
restructuring of DHC to the extent such taxes arise as a result
of any action undertaken after the date of the AMC spin-off by
DHC or a subsidiary or shareholder of DHC. AMC will be
responsible for all taxes attributable to AMC or any of its
subsidiaries, whether accruing before, on or after the AMC
spin-off (other than any such taxes for which DHC is responsible
under the tax sharing agreement), as well as (i) all taxes
attributable to DHC or any of its subsidiaries (other than
Discovery) for any tax period that ends on or before the date of
the AMC spin-off (and for any tax period that begins on or
before and ends after the date of the AMC spin-off, for the
portion of that period on or before the date of the AMC
spin-off), other than such taxes arising as a result of the AMC
spin-off and related internal restructuring of DHC and
(ii) all taxes arising as a result of the AMC spin-off or
the internal restructuring of DHC to the extent such taxes are
not the responsibility of DHC under the tax sharing agreement.
Registration
Rights Agreement
On or prior to the closing of the Transaction, New Discovery and
Advance/Newhouse will enter into a registration rights
agreement, the form of which is attached as an exhibit to the
registration statement of which this proxy statement/prospectus
forms a party.
Pursuant to the registration rights agreement, subject to
certain limitations and restrictions, Advance/Newhouse will have
the right to require New Discovery to use its reasonable efforts
to register the shares of New Discovery common stock issuable
upon conversion of the convertible preferred stock issued in the
Transaction.
Advance/Newhouse
will have the right to demand up to three such registrations,
subject to certain conditions. New Discovery will be responsible
for customary registration expenses incurred in connection with
any such registration. Subject to certain limitations and
restrictions, Advance/Newhouse will have the right to assign any
or all of its registration rights to any member of its
stockholder group and to third parties. Any such transferee is
required to agree to be bound by the registration rights
agreement and such transfer is to be effected in accordance with
applicable securities laws. Advance/Newhouse may effect an
underwritten public offering with respect to shares included in
a shelf registration statement so long as the gross proceeds to
the selling holders are expected to exceed $100,000,000.
Advance/Newhouse will be permitted to select one co-lead
bookrunning managing underwriter for such public offering
reasonably acceptable to New Discovery and New Discovery will
select the remaining co-lead bookrunning managers.
Advance/Newhouse will also have piggy-back registration rights
to participate in any primary or secondary offering of shares of
New Discovery common stock by New Discovery, whether for its own
account or for the account of any other stockholders.
The registration rights agreement also contains customary
provisions relating to blackout periods and indemnification.
63
DESCRIPTION
OF NEW DISCOVERY CAPITAL STOCK
The following information summarizes New Discoverys
restated charter and bylaws as these documents will be in effect
at the time of the closing of the Transaction.
Authorized
Capital Stock
New Discoverys authorized capital stock consists of four
billion three hundred ten million (4,310,000,000) shares, of
which three billion eight hundred million (3,800,000,000) shares
are designated common stock, par value $0.01 per share, and five
hundred ten million (510,000,000) shares are designated
preferred stock, par value $0.01 per share.
New Discoverys common stock is divided into three series.
New Discovery has authorized one billion seven hundred million
(1,700,000,000) shares of Series A common stock, one
hundred million (100,000,000) shares of Series B common
stock, and two billion (2,000,000,000) shares of Series C
common stock.
New Discoverys preferred stock is divided into two series.
New Discovery has authorized seventy five million (75,000,000)
shares of Series A convertible preferred stock and seventy
five million (75,000,000) shares of Series C convertible
preferred stock. Three hundred and sixty million (360,000,000)
shares of preferred stock are undesignated as to series and are
issuable in accordance with the provisions of the restated
charter.
Immediately following the effective time of the merger, New
Discovery expects to have outstanding approximately one hundred
and thirty four million (134,000,000) shares of its
Series A common stock, six million five hundred thousand
(6,500,000) shares of its Series B common stock and one
hundred and forty million, five hundred thousand (140,500,000)
shares of its Series C common stock, seventy million
(70,000,000) shares of Series A convertible preferred stock
and seventy million (70,000,000) shares of Series C
convertible preferred stock in each case, based upon the number
of shares of DHC Series A common stock and DHC
Series B common stock outstanding on May 31, 2008.
Common
Stock
The holders of Series A common stock, Series B common
stock and Series C common stock have equal rights, powers
and privileges, except as otherwise described below.
Voting
Rights
The holders of Series A common stock will be entitled to
one vote for each share held, and the holders of Series B
common stock will be entitled to ten votes for each share held,
on all matters voted on by stockholders, including elections of
directors (other than the directors to be elected by the holders
of Series A convertible preferred stock, as provided in
Series A Convertible Preferred Stock and
Series C Convertible Preferred Stock
Series A Preferred Stock Directors below). The
holders of Series C common stock will not be entitled to
any voting powers, except as required by Delaware law. If the
vote or consent of holders of Series C common stock is
required for a matter by Delaware law, the holders of
Series C common stock will be entitled to
1/100th of
a vote for each share held. Subject to any preferential rights
of holders of Series A convertible preferred stock and any
outstanding series of New Discoverys preferred stock
created by New Discoverys board from time to time, the
holders of outstanding shares of Series A common stock,
Series B common stock, Series A convertible preferred
stock, and each series of any preferred stock entitled to vote
thereon, if any, will vote as one class with respect to all
matters to be voted on by stockholders of New Discovery
(excluding, with respect to the holders of Series A
convertible preferred stock, the election of the directors to be
elected by the holders of common stock). In addition, the
consent of holders of 75% of the then outstanding
shares of Series B common stock, voting together as a separate
class, is required for any issuance of shares of Series B
common stock by New Discovery (except in limited circumstances).
Dividends
Subject to any preferential rights of any outstanding series of
New Discoverys preferred stock created by New
Discoverys board from time to time, the holders of New
Discoverys common stock will be entitled to such dividends
as may be declared from time to time by New Discoverys
board from funds available therefor. Except as
64
otherwise described under Distributions,
whenever a dividend is paid to the holders of one of series of
common stock, New Discovery will also pay to the holders of the
other series of common stock an equal per share dividend. For a
more complete discussion of New Discoverys dividend
policy, please see Dividend Policy.
Conversion
Each share of Series B common stock is convertible, at the
option of the holder, into one share of Series A common
stock. Series A common stock and Series C common stock
are not convertible.
Distributions
Distributions made in shares of Series A common stock,
Series B common stock, Series C common stock or any
other security with respect to Series A common stock,
Series B common stock or Series C common stock may be
declared and paid only as follows:
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a share distribution (i) consisting of shares of
Series C common stock (or securities convertible therefor)
to holders of Series A common stock, Series B common
stock and Series C common stock, on an equal per share
basis, or (ii) consisting of (x) shares of
Series A common stock (or securities convertible therefor)
to holders of Series A common stock, on an equal per share
basis, (y) shares of Series B common stock (or
securities convertible therefor) to holders of Series B
common stock, on an equal per share basis, and (z) shares
of Series C common stock (or securities convertible
therefor) to holders of Series C Common Stock, on an equal
per share basis; or
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a share distribution consisting of shares of any class or series
of securities of New Discovery or any other person, other than
Series A common stock, Series B common stock or
Series C common stock (or securities convertible therefor)
on the basis of a distribution of (1) identical securities,
on an equal per share basis, to holders of Series A common
stock, Series B common stock and Series C common
stock; or (2) separate classes or series of securities, on
an equal per share basis, to holders of Series A common
stock, Series B common stock and Series C common
stock; or (3) a separate class or series of securities to
the holders of one or more series of New Discoverys common
stock and, on an equal per share basis, a different class or
series of securities to the holders of all other series of New
Discoverys common stock, provided that, in the case
of (2) or (3) above, the securities so distributed do
not differ in any respect other than their relative voting
rights and related differences in designation, conversion and
share distribution provision and the holders of Series A
common stock, Series B common stock and Series C
common stock receiving securities of the class or series such
that the relative voting rights of the securities of the class
or series of securities to be received by the holders of each
series of common stock corresponds, to the extent practicable,
to the relative voting rights of each such series of New
Discoverys common stock, and provided further that,
in each case, the distribution is otherwise made on an equal per
share basis; and provided further that the holders of New
Discovery Series B common stock have a consent right with
respect to certain distributions of voting securities on New
Discovery Series C common stock and certain distributions
pursuant to which the holders of New Discovery Series B
common stock would receive voting securities with lesser voting
rights than those of the New Discovery Series B common
stock.
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New Discovery may not reclassify, subdivide or combine any
series of its common stock without reclassifying, subdividing or
combining the other series of its common stock, on an equal per
share basis.
The foregoing distribution provisions were structured to ensure
that all holders of New Discovery common stock are treated
equally in a distribution, while protecting the relative voting
rights associated with each of the Series A and
Series B shares of New Discovery common stock. The
distribution provisions permit holders of each series to receive
a distribution of shares of the same series because such a
distribution would not affect any series relative voting
rights. The distribution provisions also permit Series C
shares to be distributed to all holders of New Discovery common
stock because the relative voting power of the holders of New
Discovery Series A and Series B common stock would not
be diluted by a distribution of non-voting stock. However, the
distribution provisions do not permit either Series A
shares or Series B shares to be distributed to all holders
of New Discovery common stock because the voting power of the
holders of the higher voting series of stock would be diluted by
the distribution of their series of voting stock to lower voting
or non-voting series of stock. Lastly, the distribution
provisions relating
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to other New Discovery securities or non-New Discovery stock
replicate, to the extent practicable, the protections afforded
to the various series of New Discovery common stock described
above.
Liquidation
and Dissolution
In the event of New Discoverys liquidation, dissolution
and winding up, after payment or provision for payment of New
Discoverys debts and liabilities and subject to the prior
payment in full of any preferential amounts to which New
Discoverys 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 as described in the section
Series A Convertible Preferred Stock and
Series C Convertible Preferred Stock
Liquidation Preference below, the holders of
Series A common stock, Series B common stock,
Series C common stock and 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 New Discoverys assets
remaining for distribution to the holders of New
Discoverys common stock.
Series A
Convertible Preferred Stock and Series C Convertible
Preferred Stock
The holders of New Discoverys Series A convertible
preferred stock and Series C convertible preferred stock
have the rights, powers and privileges described below.
General
Voting Rights
In connection with any matter as to which the holders of
Series A common stock and Series B common stock are
entitled to vote other than the election of common stock
directors, holders of Series A convertible preferred stock
and, if holders of Series C common stock are entitled to
vote pursuant to Delaware law, the holders of Series C
convertible preferred stock, have the 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 to be voted on by
stockholders of New Discovery (excluding the election of common
stock directors).
Special
Class Vote Matters
So long as Advance/Newhouse or any of the direct or indirect
subsidiaries of Advance Publications, Inc. or Newhouse
Broadcasting Corporation (collectively referred to as the
ANPP Stockholder Group) or any ANPP Permitted Transferee
(as defined below) owns or has the right to vote such number of
shares of Series A convertible preferred stock constituting
at least 80% of the number of shares equal to the sum of
(x) the number of shares of Series A convertible
preferred stock issued to the ANPP Stockholder Group in the
Transaction plus (y) the number of shares of
Series A convertible preferred stock released to the ANPP
Stockholder Group from escrow (such number of shares, the
Base Amount), New Discoverys restated charter
requires the consent of the holders of a majority of such shares
of Series A convertible preferred stock (Majority
Holders) before New Discovery or any of its subsidiaries can
take any of the actions described below (any such action, a
Special Class Vote Matter).
The term ANPP Permitted Transferee means a
person (who is not a member of the ANPP Stockholder Group) that
acquires record and beneficial ownership of all
outstanding shares of Series A convertible preferred
stock from one or more members of the ANPP Stockholder Group or
another ANPP Permitted Transferee, provided that the shares of
Series A convertible preferred stock, Series C
convertible preferred stock and New Discovery common stock
beneficially owned by such transferee and its affiliates
immediately following such transfer do not exceed the Maximum
Amount.
The term Maximum Amount means a number of
shares of New Discovery common stock equal to (x) 7.5% of
the sum of (A) the number of shares of New Discovery common
stock (including shares issuable on conversion of Series A
convertible preferred stock or Series C convertible
preferred stock (other than escrow shares)) outstanding
immediately following the effective time of the merger,
(B) the number of shares of New Discovery common stock
issuable upon conversion of Series A convertible preferred
stock and Series C convertible preferred stock released to
the ANPP Stockholder Group from escrow, and (C) the number
of shares of New Discovery common stock issuable upon exercise
of options of New Discovery, which options were converted in the
merger from options to
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acquire shares of DHC common stock; plus (y) the
number of shares of New Discovery common stock issuable upon
conversion of the shares of Series A convertible preferred
stock and Series C convertible preferred stock issued to
Advance/Newhouse in the Transaction; plus (z) any
shares of Series A convertible preferred stock and
Series C convertible preferred stock released from escrow.
The Maximum Amount is subject to adjustment upon certain
transfers of shares of Series A convertible preferred stock
or Series C convertible preferred stock (or shares of
common stock issuable upon conversion thereof). The Maximum
Amount will be deemed to have been exceeded if after the date
shares of Series A convertible preferred stock and
Series C convertible preferred stock were initially issued
to Advance/Newhouse, any member of the ANPP Stockholder Group or
any ANPP Permitted Transferee acquires shares of common stock or
transfers shares of Series A convertible preferred stock or
Series C convertible preferred stock to any third party and
such transaction results in an increase in the aggregate voting
power held by the ANPP Stockholder Group, ANPP Permitted
Transferee, or such transferee and their respective affiliates
collectively following such transaction by greater than 1% of
the aggregate voting power held by the ANPP Stockholder Group
immediately after the effective time of the merger. For purposes
of calculating such aggregate voting power, escrow shares will
be excluded, any shares of Series A convertible preferred
stock released from escrow will be included, and the number of
shares of New Discovery common stock issuable upon exercise of
options of New Discovery outstanding immediately after the
merger, will be included.
Special Class Vote Matters are:
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increase in the size of the board in excess of 11 directors;
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fundamental change in the business of New Discovery and its
subsidiaries;
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investment, joint venture or acquisition constituting a material
departure from the current lines of business of New Discovery;
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the material amendment, alteration or repeal of any provision of
New Discoverys restated charter or bylaws (or the
organizational documents of any New Discovery subsidiary);
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related party transactions between New Discovery and its
subsidiaries and any related party unless similar to comparable
transactions with third parties or on arms length terms;
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merger, consolidation or other business combination by New
Discovery into another entity other than transactions with its
direct or indirect wholly-owned subsidiaries;
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disposition or acquisition by New Discovery or any of its
subsidiaries of any assets or properties exceeding
$250 million in aggregate value or acquisition in which
stock consideration is paid having voting rights superior to the
voting rights of the Series A convertible preferred stock;
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authorization, issuance, reclassification or recombination of
any equity securities of New Discovery or its material
subsidiaries other than certain specified exceptions;
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action resulting in the voluntary liquidation, dissolution or
winding up of New Discovery or any of its material subsidiaries;
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substantial change in Discoverys service distribution
policy and practices;
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dividend on, or distribution to holders of, equity securities of
New Discovery or any subsidiary of New Discovery subject to
specified exceptions;
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incurrence of indebtedness by New Discovery or any of its
subsidiaries if total debt of New Discovery and its subsidiaries
would exceed four times the annualized cash flow of New
Discovery for the previous four consecutive quarterly periods or
result in debt service for the next twelve months exceeding
sixty-six percent of its annualized cash flow;
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appointment or removal of the Chairman of the board or Chief
Executive Officer of New Discovery;
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public offering of any securities of New Discovery or any of its
subsidiaries subject to certain specified exceptions; and
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adoption of New Discoverys annual business plan or any
material deviation therefrom.
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The Special Class Vote Matters were structured to provide
Advance/Newhouse with consent rights at New Discovery comparable
to those Advance/Newhouse held under the limited liability
company agreement of Discovery Communications Holding. The
differences in the consent rights are largely attributable to
New Discoverys status as a public company, as compared to
Discovery Communications Holdings status as a private
limited liability company. In addition, the parties sought to
decrease the extent to which Advance/Newhouse held consent
rights over activities of New Discovery and its subsidiaries
that are ordinary course activities or, in light of the
anticipated market value of New Discovery, are arguably
immaterial. For example, while Advance/Newhouse had a consent
right over the election or removal of the Chairman of the Board
and CEO of Discovery, the chief operating officer of Discovery
or of any operating division or subsidiary of Discovery and of
other officers of Discovery and its subsidiaries, the Special
Class Vote Matters are limited to the appointment or
removal of the Chairman of the Board and CEO of New Discovery.
Similarly, whereas Advance/Newhouse had a consent right over any
merger or reorganization involving Discovery or any of its
subsidiaries, or any sale of assets outside of the ordinary
course of business, the Special Class Vote Matters are
limited to mergers and business combinations involving New
Discovery and sales of assets having an aggregate value in
excess of $250 million. Consent rights over institution of
litigation, over entrance into contracts over $1 million,
over details regarding Discoverys advertising rebate plan
for The Discovery Channel, and over other transactions
outside the ordinary course of business have also
been eliminated. Under the limited liability company agreement
of Discovery Communications Holding, Advance/Newhouse had a
consent right over the annual business plan, and if the members
could not agree on an annual business plan there was a default
mechanism that would have Discovery operate on a minimal budget.
That default provision is eliminated from the Special
Class Vote Matters, in the belief that a public company is
required to have an approved budget.
Series A
Preferred Stock Directors
The holders of the Series A convertible preferred stock
will have the right to elect three members of the board of
directors and two such directors must qualify as independent
directors as defined by the applicable rules and regulations of
Nasdaq or the SEC. The shares of common stock will not be
entitled to vote in the election of such directors.
Any vacancy in the office of a preferred stock director will be
filled solely by the holders of the Series A convertible
preferred stock entitled to appoint such director. A preferred
stock director may be removed without cause by the written
consent of the holders of a majority of the then outstanding
shares of the Series A convertible preferred stock and may
be removed with cause (as defined in New Discoverys
restated charter) upon the affirmative vote of the holders of a
majority of the total voting power of the then outstanding
shares of New Discoverys common stock and Series A
convertible preferred stock and any other series of preferred
stock entitled to vote upon the election of common stock
directors voting together as a single class.
Dividends
Subject to the prior preferences and other rights of any senior
stock, whenever a cash dividend is paid to the holders of New
Discovery common stock, New 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.
Conversion
Each share of Series A convertible preferred stock is
initially convertible, at the option of the holder, into one
share of Series A common stock, subject to adjustments in
such conversion rate to provide for dividends, distributions,
rights or warrants granted to holders of New Discoverys
common stock and any reclassification, consolidation, merger,
sale or transfer or change in New Discoverys common stock.
Each share of Series C convertible preferred stock is
initially convertible, at the option of the holder, into one
share of Series C common stock, subject to adjustments in
such conversion rate to provide for dividends, distributions,
rights or warrants granted to holders of New Discoverys
common stock and any reclassification, consolidation, merger,
sale or transfer or change in New Discoverys common stock.
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Generally, each share of Series A and Series C
convertible preferred stock will automatically convert into the
applicable series of common stock if such share is transferred
to a third party and such transfer is not a Permitted Transfer.
In addition, all of the outstanding Series A and
Series C convertible preferred stock will automatically
convert into the applicable series of common stock at such time
as the number of outstanding shares of Series A convertible
preferred stock is less than 80% of the Base Amount.
Liquidation
Preference
In the event of New Discoverys liquidation, dissolution
and winding up, after payment or provision for payment of New
Discoverys 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 $.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 New
Discoverys 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 New
Discoverys common stock, as to any amounts remaining for
distribution to such holders.
Series Preferred
Stock
New Discoverys restated charter authorizes New
Discoverys board of directors to establish one or more
series of New Discoverys preferred stock and to determine,
with respect to any series of New Discoverys preferred
stock, the terms and rights of the series, including:
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the designation of the series;
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the number of authorized shares of the series, which number New
Discoverys board may thereafter increase or decrease but
not below the number of such shares then outstanding;
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the dividend rate or amounts, if any, payable on the shares and,
in the case of cumulative dividends, the date or dates from
which dividends on all shares of the series will be cumulative
and the relative preferences or rights of priority or
participation with respect to such dividends;
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the rights of the series in the event of New Discoverys
voluntary or involuntary liquidation, dissolution or winding up
and the relative preferences or rights of priority of payment;
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the rights, if any, of holders of the series to convert into or
exchange for other classes or series of stock or indebtedness
and the terms and conditions of any such conversion or exchange,
including provision for adjustments within the discretion of New
Discoverys board;
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the voting rights, if any, of the holders of the series;
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the terms and conditions, if any, for us to purchase or redeem
the shares; and
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any other relative rights, preferences and limitations of the
series.
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New Discovery believes that the ability of New Discoverys
board of directors to issue one or more series of New
Discoverys preferred stock will provide them with
flexibility in structuring possible future financing and
acquisitions, and in meeting other corporate needs which might
arise. The authorized shares of New Discoverys preferred
stock, as well as shares of New Discoverys common stock,
will be available for issuance without further action by New
Discovery stockholders, unless such action is subject to the
approval of the holders of Series A convertible preferred
stock, required by applicable law or the rules of any stock
exchange or automated quotation system on which New
Discoverys securities may be listed or traded. If the
approval of New Discovery stockholders is not required for the
issuance of shares of New Discoverys preferred stock or
New Discoverys common stock, New Discoverys board
may determine not to seek stockholder approval.
Although New Discovery has no intention at the present time of
doing so, it could issue a series of New Discoverys
preferred stock that could, depending on the terms of such
series, impede the completion of a merger, tender offer or other
takeover attempt. New Discoverys board of directors will
make any determination to issue
69
such shares based upon its judgment as to the best interests of
New Discoverys stockholders. New Discoverys board of
directors, in so acting, could issue New Discoverys
preferred stock having terms that could discourage an
acquisition attempt through which an acquirer may be able to
change the composition of New Discoverys board of
directors, including a tender offer or other transaction that
some, or a majority, of New Discovery stockholders might believe
to be in their best interests or in which stockholders might
receive a premium for their stock over the then-current market
price of the stock.
Dividend
Policy
New Discovery presently intends to retain future earnings, if
any, to finance the expansion of New Discoverys business.
Therefore, New Discovery does not expect to pay any cash
dividends in the foreseeable future. All decisions regarding the
payment of dividends by New Discovery will be made by New
Discoverys board of directors, from time to time, in
accordance with applicable law after taking into account various
factors, including New Discoverys financial condition,
operating results, current and anticipated cash needs, plans for
expansion and possible loan covenants which may restrict or
prohibit New Discoverys payment of dividends.
Additionally, the declaration and payment of any dividends to
holders of equity securities of New Discovery or any subsidiary
of New Discovery (other than cash dividends payable out of
current years earnings, dividends payable in common stock
or other securities of New Discovery or dividends by any
wholly-owned subsidiary of New Discovery to New Discovery or its
wholly-owned subsidiaries) qualifies as a Special
Class Vote Matter subject to the affirmative vote of the
holders of a majority of the outstanding shares of Series A
convertible preferred stock.
Anti-Takeover
Effects of Provisions of the Restated Charter and
Bylaws
Board
of Directors
New Discoverys restated charter and bylaws provide that,
subject to any rights of the holders of any series of New
Discoverys preferred stock to elect additional directors
and rights of holders of Series A convertible preferred
stock to elect Series A preferred stock directors, the
number of New Discoverys directors will not be less than
three and greater than fifteen directors, and the members of the
board of directors of New Discovery immediately after closing
will be as provided in a schedule to the Transaction Agreement.
The members of New Discoverys board (other than those who
may be elected by holders of New Discoverys preferred
stock or Series A preferred stock directors), which we
refer to as common stock directors, are divided into three
classes. Each class of common stock directors consists, as
nearly as possible, of a number of directors equal to one-third
of the then authorized number of common stock directors. The
term of office of New Discoverys Class I directors
expires at the annual meeting of New Discovery stockholders in
2009. The term of office of New Discoverys Class II
directors expires at the annual meeting of New Discovery
stockholders in 2010. The term of office of New Discoverys
Class III directors expires at the annual meeting of New
Discovery stockholders in 2011. At each annual meeting of New
Discovery stockholders, the successors of that class of
directors whose term expires at that meeting will be elected to
hold office for a term expiring at the annual meeting of New
Discovery stockholders held in the third year following the year
of their election. The directors of each class will hold office
until their respective successors are elected and qualified.
New Discoverys restated charter provides that, subject to
the rights of the holders of any series of New Discoverys
preferred stock, New Discoverys common stock directors may
be removed from office only for cause (as defined in New
Discoverys restated charter) upon the affirmative vote of
the holders of at least a majority of the aggregate voting power
of New Discoverys outstanding capital stock entitled to
vote at an election of directors, voting together as a single
class.
New Discoverys restated charter provides that, subject to
the rights of the holders of any series of New Discoverys
preferred stock, vacancies in the offices of common stock
directors resulting from death, resignation, removal,
disqualification or other cause, and newly created directorships
resulting from any increase in the number of directors on New
Discoverys board, will be filled only by the affirmative
vote of a majority of the remaining common stock directors then
in office (even though less than a quorum) or by the sole
remaining common stock director. Any director so elected will
hold office for the remainder of the full term of the class of
directors in which the vacancy occurred or to which the new
directorship is assigned, and until that directors
successor will have been
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elected and qualified or until such directors earlier
death, resignation or removal. No decrease in the number of
directors constituting New Discoverys board will shorten
the term of any incumbent director, except as may be provided in
the restated charter of New Discovery or in any certificate of
designation with respect to a series of New Discoverys
preferred stock with respect to any additional director elected
by the holders of that series of New Discoverys preferred
stock.
These provisions would preclude a third party from removing
incumbent directors and simultaneously gaining control of New
Discoverys board by filling the vacancies created by
removal with its own nominees. Under the classified board
provisions described above, it would take at least two elections
of directors (and in certain circumstances three elections) for
any individual or group to gain control of New Discoverys
board. Accordingly, these provisions could discourage a third
party from initiating a proxy contest, making a tender offer or
otherwise attempting to gain control of New Discovery.
No
Shareowner Action by Written Consent; Special
Meetings
New Discoverys restated charter provides that, (except (i)
as otherwise provided in the terms of any series of preferred
stock or (ii) with respect to an action taken by the holders of
Series B common stock when voting together as a separate
class), any action required to be taken or which may be taken at
any annual meeting or special meeting of stockholders may not be
taken without a meeting and may not be effected by any consent
in writing by such holders. Holders of Series A convertible
preferred stock voting as a separate class on any Special
Class Vote Matter or on the election or removal of
Series A preferred stock directors are permitted to act by
written consent. Except as otherwise required by law and subject
to the rights of the holders of any series of New
Discoverys preferred stock, special meetings of New
Discovery stockholders for any purpose or purposes may be called
only by New Discoverys Secretary at the request of at
least 75% of the members of New Discoverys board then in
office. No business other than that stated in the notice of
special meeting will be transacted at any special meeting.
Advance
Notice Procedures
New Discoverys bylaws establish an advance notice
procedure for stockholders to make nominations of candidates for
election as directors or to bring other business before an
annual meeting of New Discovery stockholders.
All nominations by stockholders or other business to be properly
brought before a meeting of stockholders will be made pursuant
to timely notice in proper written form to New Discoverys
Secretary. To be timely, a stockholders notice will be
given to New Discoverys Secretary at New Discoverys
offices as follows:
(1) with respect to an annual meeting of New Discovery
stockholders that is called for a date not more than
30 days before or 60 days after the anniversary date
of the immediately preceding annual meeting of New Discovery
stockholders, such notice will be given no earlier than the
close of business on the 90th day prior to such anniversary
and no later than the close of business on the 60th day
prior to such anniversary;
(2) with respect to an annual meeting of New Discovery
stockholders that is called for a date which is more than
30 days before or 60 days after the anniversary date
of the immediately preceding annual meeting of New Discovery
stockholders, such notice will be given no earlier than the
close of business on the 100th day prior to the current
annual meeting and not later than the close of business on the
later of (A) the 70th day prior to the current annual
meeting or (b) the 10th day following the day on which
New Discovery first publicly announces the date of the current
annual meeting; and
(3) with respect to an election to be held at a special
meeting of New Discovery stockholders, not earlier than the
close of business on the 100th day prior to such special
meeting and not later than the close of business on the later of
the 70th day prior to such special meeting or the
10th day following the day on which public announcement is
first made of the date of the special meeting.
The public announcement of an adjournment or postponement of a
meeting of New Discovery stockholders does not commence a new
time period (or extend any time period) for the giving of any
such stockholder notice. However, if the number of directors to
be elected to New Discoverys board at any meeting is
increased, and New Discovery does not make a public announcement
naming all of the nominees for director or specifying the size
of
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the increased board at least 100 days prior to the
anniversary date of the immediately preceding annual meeting, a
stockholders notice will also be considered timely, but
only with respect to nominees for any new positions created by
such increase, if it will be delivered to New Discoverys
Secretary at New Discoverys offices not later than the
close of business on the 10th day following the day on
which New Discovery first made the relevant public announcement.
For purposes of the first annual meeting of stockholders to be
held in 2009, the first anniversary date will be deemed to be
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2009.
Amendments
New Discoverys restated charter provides that, subject to
the rights of the holders of any series of New Discoverys
preferred stock and rights of holders of Series A
convertible preferred stock with respect to the Special
Class Vote Matters, the affirmative vote of the holders of
at least 80% of the aggregate voting power of New
Discoverys outstanding capital stock generally entitled to
vote upon all matters submitted to New Discovery stockholders,
voting together as a single class, is required to adopt, amend
or repeal any provision of New Discoverys restated charter
or the addition or insertion of other provisions in the
certificate, provided that the foregoing voting requirement will
not apply to any adoption, amendment, repeal, addition or
insertion (1) as to which Delaware law does not require the
consent of New Discovery stockholders or (2) which has been
approved by at least 75% of the members of New Discoverys
board then in office. Subject to the rights of holders of
Series A convertible preferred stock to approve the
amendments of any material bylaw provisions, New
Discoverys restated charter further provides that the
affirmative vote of the holders of at least 80% of the aggregate
voting power of New Discoverys outstanding capital stock
generally entitled to vote upon all matters submitted to New
Discovery stockholders, voting together as a single class, is
required to adopt, amend or repeal any provision of New
Discoverys bylaws, provided that the foregoing voting
requirement will not apply to any adoption, amendment or repeal
approved by the affirmative vote of not less than 75% of the
members of New Discoverys board then in office.
Supermajority
Voting Provisions
In addition to the Special Class Vote Matters and
supermajority voting provisions discussed under
Amendments above, New Discoverys
restated charter provides that, subject to the rights of the
holders of any series of New Discoverys preferred stock,
the affirmative vote of the holders of at least 80% of the
aggregate voting power of New Discoverys outstanding
capital stock generally entitled to vote upon all matters
submitted to New Discovery stockholders, voting together as a
single class, is required for:
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New Discoverys merger or consolidation with or into any
other corporation, provided, that the foregoing voting provision
will not apply to any such merger or consolidation (1) as
to which the laws of the State of Delaware, as then in effect,
do not require the consent of New Discovery stockholders, or
(2) that at least 75% of the members of New
Discoverys board of directors then in office have approved;
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the sale, lease or exchange of all, or substantially all, of New
Discoverys assets, provided, that the foregoing voting
provisions will not apply to any such sale, lease or exchange
that at least 75% of the members of New Discoverys board
of directors then in office have approved; or
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New Discoverys dissolution, provided, that the foregoing
voting provision will not apply to such dissolution if at least
75% of the members of New Discoverys board of directors
then in office have approved such dissolution.
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Shareholder
Rights Plan
The New Discovery board of directors has approved the adoption
of a shareholder rights plan that will include the following
terms and provisions. On
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2008 the Board of Directors of New Discovery authorized and
declared a dividend distribution of the preferred share purchase
rights as follows to holders of New Discoverys
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common stock and convertible preferred stock of record as of
immediately after the effectiveness of the merger (the Record
Date):
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one preferred share purchase right (which we refer to as a
Series A right) for each share of New Discovery
Series A common stock and each share of New Discovery
Series A convertible preferred stock outstanding
immediately after the effectiveness of the merger, which
Series A right will entitle the registered holder to
purchase from us one one-thousandth of a share of New Discovery
Series A Junior Participating Preferred Stock, par value
$0.01 per share (which we refer to as the Series A
junior preferred stock), at a purchase price of $100.00 per
one-thousandth of a share, subject to adjustment;
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one preferred share purchase right (which we refer to as a
Series B right) for each share of New Discovery
Series B common stock outstanding immediately after the
effectiveness of the merger, which Series B right will
entitle the registered holder to purchase from us one
one-thousandth of a share of Series B Junior Participating
Preferred Stock, par value $0.01 per share (which we refer to as
the Series B junior preferred stock), at a purchase
price of $100.00 per one-thousandth of a share, subject to
adjustment; and
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one preferred share purchase right (which we refer to as a
Series C right and, collectively with the
Series A rights and Series B rights, the
rights) for each share of New DHC Series C common stock
and New Discovery Series C convertible preferred stock
outstanding immediately after the effectiveness of the merger,
which Series C right will entitle the registered holder to
purchase from us one one-thousandth of a share of Series C
Junior Participating Preferred Stock, at a purchase price of
$100.00 per one-thousandth of a share, subject to adjustment.
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The description and terms of the rights will be set forth in a
Rights Agreement between us and Computershare
Trust Company, N.A., as Rights Agent, a form of which will
be filed as an exhibit to the registration statement of which
this proxy statement/prospectus forms a part. The following
description of the rights is qualified in its entirety by
reference to the Rights Agreement.
Separation and Distribution of Rights;
Exercisablility. The Series A rights will be
attached to all certificates (or, in the case of uncertificated
shares, all book-entry notations) representing shares of New
Discovery Series A common stock and New Discovery
Series A convertible preferred stock then outstanding, the
Series B rights will be attached to all certificates (or,
in the case of uncertificated shares, all book-entry notations)
representing shares of New Discovery Series B common stock
then outstanding and the Series C rights will be attached
to all certificates (or, in the case of uncertificated shares,
all book-entry notations) representing shares of New Discovery
Series C Stock and New Discovery Series C convertible
preferred stock then outstanding, and no separate rights
certificates will be distributed with respect to any of the
rights at such time. The rights will separate from the capital
stock to which it is attached on the rights distribution date,
which will occur upon the earlier of:
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10 days following a public announcement that a person or
group of affiliated or associated persons has acquired
beneficial ownership of 10% or more of the outstanding shares of
New Discoverys common stock (an acquiring person),
other than as a result of repurchases of stock by New Discovery
or purchases or holdings by certain Exempt Persons; and
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10 business days (or such later date as may be determined by
action of New Discoverys board of directors prior to such
time as any person or group of affiliated persons becomes an
acquiring person) following the commencement of, or
announcement of an intention to make, a tender offer or exchange
offer the consummation of which would result in any person or
group of affiliated persons becoming an acquiring
person.
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An Exempt Person includes Advance/Newhouse and the
members of its stockholder group and any third-party transferee
that acquires all of the outstanding shares of New Discovery
Series A convertible preferred stock and New Discovery
Series C convertible preferred stock, so long as the number
of shares of common stock beneficially owned by Advance/Newhouse
(including the shares of New Discovery common stock issuable
upon conversion of the New Discovery convertible preferred
stock) or such third party transferee does not exceed the
Maximum Amount, as such amount may be adjusted under certain
circumstances. Please see Description of New Discovery
Capital Stock Series A Convertible
Preferred Stock and Series C Convertible Preferred
Stock for a summary of Maximum Amount.
73
Except in certain situations, a person or group of affiliated or
associated persons becomes an acquiring person upon
acquiring beneficial ownership of New Discoverys
outstanding common stock representing in the aggregate 10% or
more of the shares of New Discoverys common stock then
outstanding. For purposes of the shareholder rights plan,
group generally means any group within the meaning
of Section 13(d)(3) of the Securities Exchange Act of 1934.
The rights agreement provides that, until the rights
distribution date (or earlier expiration of the rights), the
rights will be evidenced by and transferred with (and only with)
the New Discovery Series A common stock, New Discovery
Series B common stock, New Discovery Series C common
stock, New Discovery Series A convertible preferred stock
and New Discovery Series C convertible preferred stock to
which they are attached. Until the rights distribution date (or
earlier expiration of the rights), common stock and preferred
stock certificates will contain a notation incorporating the
rights agreement by reference. Until the rights distribution
date (or earlier expiration of the rights), the transfer of any
shares of New Discovery Series A common stock, New
Discovery Series B common stock, New Discovery
Series C common stock, New Discovery Series A
convertible preferred stock or New Discovery Series C
convertible preferred stock outstanding will also constitute the
transfer of the rights associated with the shares of common
stock or preferred stock, as applicable, represented by such
shares. As soon as practicable following the rights distribution
date, separate certificates evidencing the rights related to the
applicable series of common stock and preferred stock (which we
refer to as right certificates) will be mailed to holders of
record of New Discovery common stock and preferred stock as of
the close of business on the rights distribution date and
thereafter such separate right certificates alone will evidence
the rights.
The rights are not exercisable unless and until a rights
distribution date occurs. The rights will expire ten years after
the date of the completion of the Transaction, unless such date
is advanced or extended or unless the rights are earlier
redeemed or exchanged by New Discovery, in each case as
described below.
Anti-dilution Adjustments. The purchase price
payable, and the number of shares of the applicable series of
junior preferred stock or other securities or property issuable,
upon the exercise of the rights will be subject to adjustment
from time to time to prevent dilution:
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in the event of a stock dividend on, or a subdivision,
combination or reclassification of, the applicable series of
junior preferred stock;
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if any person acquires, or obtains the right to subscribe for or
purchase the applicable junior preferred stock at a price, or
securities convertible into the applicable junior preferred
stock with a conversion price, less than the then current market
price of the applicable junior preferred stock; or
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upon the distribution to holders of the applicable series of
junior preferred stock of evidences of indebtedness, cash
(excluding regular quarterly cash dividends), assets (other than
dividends payable in junior preferred stock) or subscription
rights or warrants.
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The number of outstanding rights associated with the applicable
series of common stock or convertible preferred stock, as the
case may be, will also be subject to adjustment in the event of
a stock dividend on a series of convertible preferred stock or
common stock, as the case may be, or a subdivision,
consolidation or combination of the applicable series of common
stock or series of preferred stock, in each case until a rights
distribution date occurs.
Dividend and Liquidation Rights of the Junior Preferred
Stock. No shares of any series of junior
preferred stock purchasable upon exercise of the rights will be
redeemable. Each share of the applicable series of junior
preferred stock will be entitled, when, as and if declared, to a
minimum preferential quarterly dividend payment of the greater
of (1) $10 per share and (2) an amount equal to 1,000
times the dividend declared per share of New Discovery
Series A common stock, Series B common stock or
Series C common stock, as the case may be. In the event of
the liquidation, dissolution or winding up of New Discovery, the
holders of each series of junior preferred stock will be
entitled in priority to the holders of common stock to a minimum
preferential payment equal to the greater of (1) $10 per
share (plus any accrued but unpaid dividends and distributions)
and (2) an amount equal to 1,000 times the payment made per
share of New Discovery Series A common stock, Series B
common stock or Series C common stock, as the case may be.
Each share of the applicable series of junior preferred stock
will have 1,000 times the number of votes as each share of the
corresponding common stock on all matters which the
74
corresponding common stock is entitled, voting together with the
applicable series of common stock. Upon any merger,
consolidation or other transaction in which shares of New
Discoverys Series A common stock or Series B
common stock or Series C common stock are converted or
exchanged, each share of the corresponding series of junior
preferred stock will be entitled to receive 1,000 times the
amount received per share of New Discoverys Series A
common stock, Series B common stock or Series C common
stock, as the case may be. These rights are protected by
customary anti-dilution provisions.
Because of the nature of the dividend, liquidation and voting
rights of each series of junior preferred stock, the value of
the fractional share of Series A junior preferred stock
purchasable upon exercise of each Series A right, the value
of the fractional share of Series B junior preferred stock
purchasable upon exercise of each Series B right and the
value of the fractional share of Series C junior preferred
stock purchasable upon exercise of each Series C right
should approximate the value of one share of New Discovery
Series A common stock, New Discovery Series B common
stock and New Discovery Series C common stock, respectively.
Flip-in and Flip-Over Events. In the event
that any person or group of affiliated or associated persons
becomes an acquiring person, each holder of a Series A
right (other than rights beneficially owned by the acquiring
person, which will become void) will have the right to receive
upon exercise of a Series A right shares of New Discovery
Series A common stock, each holder of a Series B right
(other than rights beneficially owned by the acquiring person,
which will become void) will have the right to receive upon
exercise of a Series B right shares of New Discovery
Series B common stock, and each holder of a Series C
right (other than rights beneficially owned by the acquiring
person, which will become void) will have the right to receive
upon exercise of a Series C right shares of New Discovery
Series C common stock, in each case, having a market value
equal to two times the exercise price of the Series A
right, Series B right or Series C right, as the case
may be. The events described in this paragraph are referred to
as flip-in events.
In the event that, after a person or group has become an
acquiring person, New Discovery is acquired in a merger or other
business combination transaction or 50% or more of New
Discoverys consolidated assets or earning power are sold,
proper provisions will be made so that each holder of a
Series A right, Series B right or a Series C
right (in each case other than rights beneficially owned by an
acquiring person, which will have become void) will have the
right to receive upon exercise of Series A rights,
Series B rights or Series C rights shares of common
stock of the person with which New Discovery has engaged in the
foregoing transaction (or its parent) that at the time of such
transaction have a market value of two times the exercise price
of the Series A right, the Series B right or the
Series C right, as the case may be. The events described in
this paragraph are referred to as flip-over events.
Exchange of the Rights. At any time after any
person or group becomes an acquiring person and prior to the
earlier of the occurrence of a flip-over event or the
acquisition by such acquiring person of shares of New Discovery
common stock representing 50% or more of the total number of
votes entitled to be cast generally by the holders of common
stock then outstanding, the board of directors of New Discovery
may cause the exchange of the rights (other than the rights
beneficially owned by the acquiring person, which will become
void), in whole or in part, for shares of the corresponding
series of common stock or junior preferred stock at an exchange
ratio of one share of the corresponding series of common stock
or a fractional share of junior preferred stock of equivalent
value for each right, subject to adjustment.
Redemption of Rights. At any time prior to the
time a person or group becomes an acquiring person, the board of
directors of New Discovery may redeem the rights in whole, but
not in part, at a price of $.01 per right (referred to as the
redemption price), subject to adjustment, payable, at the option
of New Discovery, in cash, shares of common stock or other
consideration deemed appropriate by the board of directors of
New Discovery. The redemption of the rights may be made
effective at the time, on the basis and with the conditions as
the board of directors of New Discovery in its sole discretion
may establish. Immediately upon any redemption of the rights,
the right to exercise the rights will terminate and the only
right of the holders of rights will be to receive the redemption
price.
Amendment of Rights. For so long as the rights
are redeemable, New Discovery may, except with respect to the
redemption price, amend the rights agreement in any manner
without approval of the holders of New Discoverys common
stock. After the rights are no longer redeemable, New Discovery
may, except with respect
75
to the redemption price, amend the rights agreement in any
manner that does not adversely affect the interests of holders
of the rights.
No Rights as Stockholder. Until a right is
exercised or exchanged, the holder of the rights, as such, will
not have any rights as a stockholder of New Discovery,
including, without limitation, any right to vote or to receive
dividends.
Certain Tax Considerations. For
U.S. federal income tax purposes, the distribution by New
Discovery of the rights will not be taxable to New Discovery,
and the receipt of the rights which will be attached to New
Discoverys common stock and convertible preferred stock
will not be taxable to holders of DHC common stock. Depending
upon the circumstances, holders of the rights could recognize
taxable income or gain on or after the date that the rights
become exercisable or in the event that the rights are redeemed
by us as provided above.
Section 203
of the Delaware General Corporation Law
Section 203 of the Delaware General Corporation Law
prohibits certain transactions between a Delaware corporation
and an interested stockholder. An interested
stockholder for this purpose is a stockholder who is
directly or indirectly a beneficial owner of 15% or more of the
aggregate voting power of a Delaware corporation. This provision
prohibits certain business combinations between an interested
stockholder and a corporation for a period of three years after
the date on which the stockholder became an interested
stockholder, unless: (1) the transaction which resulted in
the stockholder becoming an interested stockholder is approved
by the corporations board of directors before the
stockholder became an interested stockholder, (2) the
interested stockholder acquired at least 85% of the aggregate
voting power of the corporation in the transaction in which the
stockholder became an interested stockholder, or (3) the
business combination is approved by a majority of the board of
directors and the affirmative vote of the holders of two-thirds
of the aggregate voting power not owned by the interested
stockholder at or subsequent to the time that the stockholder
became an interested stockholder. These restrictions do not
apply if, among other things, the corporations restated
charter contains a provision expressly electing not to be
governed by Section 203. In New Discoverys restated
charter, New Discovery has elected not to be governed by
Section 203.
Transfer
Agent and Registrar
[ ]
will be the transfer agent and registrar for New
Discoverys common stock.
76
COMPARISON
OF THE RIGHTS OF STOCKHOLDERS OF DHC AND NEW DISCOVERY
New Discovery and DHC are each organized under the laws of the
State of Delaware. Any differences, therefore, in the rights of
holders of capital stock in New Discovery and DHC arise from
differences in their respective charters and bylaws, in the case
of DHC, as in effect on the date of this proxy
statement/prospectus, and, in the case of New Discovery, as will
be in effect at the effective time of the merger. Upon
completion of the merger and related transactions, holders of
DHC common stock will become holders of New Discovery common
stock and their rights will be governed by Delaware law and New
Discoverys restated charter and bylaws.
The following discussion summarizes the material differences
between the rights of DHC stockholders and New Discovery
stockholders, as described in the applicable provisions of their
respective charters and bylaws. This section does not include a
complete description of all the differences among the rights of
these stockholders, nor does it include a complete description
of the specific rights of these stockholders. All DHC
stockholders are urged to carefully read the form of restated
charter and form of bylaws of New Discovery included with this
proxy statement/prospectus as Appendix D and
Appendix E, respectively.
Authorized
Capital Stock
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DHC
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New Discovery
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The authorized capital stock of DHC consists
of(i) 1,250,000,000 shares of common stock, par value
$.01 per share, of which 600,000,000 shares are designated
DHC Series A common stock, 50,000,000 shares are
designated DHC Series B common stock and
600,000,000 shares are designated DHC Series C common
stock and (ii) 50,000,000 shares of DHC preferred
stock, par value $.01 per share. DHCs restated charter
authorizes the board of directors to authorize the issuance of
one or more series of preferred stock.
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The authorized capital stock of New Discovery consists of (i)
3,800,000,000 shares of common stock, par value $.01 per
share, of which 1,700,000,000 shares are designated New
Discovery Series A common stock, 100,000,000 shares are
designated New Discovery Series B common stock and
2,000,000,000 shares are designated New Discovery Series C
common stock and (ii) 510,000,000 shares of New Discovery
preferred stock, par value $.01 per share, of which
75,000,000 shares are designated Series A convertible
preferred stock 75,000,000 shares are designated Series C
convertible preferred stock and 360,000,000 shares are
shares of preferred stock that are undesignated as to series.
New Discoverys restated charter authorizes the board of
directors to authorize the issuance of one or more series of
preferred stock.
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Voting
Rights
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DHC
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New Discovery
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Under DHCs restated charter, holders of DHC Series A
common stock are entitled to one vote for each share of such
stock held, and holders of DHC Series B common stock are
entitled to ten votes for each share of such stock held, on all
matters submitted to a vote of DHC stockholders at any annual or
special meeting. Holders of DHC Series C common stock are
not entitled to any voting powers, except as required by
Delaware law (in which case holders of DHC Series C common
stock are entitled to 1/100th of a vote per share).
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The voting rights of holders of common stock of New Discovery
are the same as the voting rights of holders of DHC common
stock.
Additionally, so long as the ANPP Stockholder Group or any ANPP
Permitted Transferees holds shares of New Discovery Series A
convertible preferred stock constituting at least 80% of the
Base Amount, New Discoverys restated charter requires the
consent of the holders of a majority of the shares of Series A
convertible preferred stock with respect to any Special Class
Vote Matter. Further, holders of Series A convertible preferred
stock have the right to vote on the election of the Series A
preferred stock directors and on all matters voted on by the
holders of Series A common stock, other than the election of
common stock directors. In addition, the consent of holders of
75% of the then outstanding shares of Series B
common stock, voting together as a separate class, is required
for any issuance of shares of Series B common stock by New
Discovery (except in limited circumstances).
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Cumulative
Voting
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DHC
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New Discovery
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Under Delaware law, stockholders of a Delaware corporation do
not have the right to cumulate their votes in the election of
directors, unless that right is granted in the charter of the
corporation. DHCs restated charter does not permit
cumulative voting by DHC stockholders.
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Same as DHC.
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Size
of Board of Directors
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DHC
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New Discovery
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DHCs board of directors has five members. DHCs
restated charter provides that the minimum number of directors
is three and the maximum number of directors is nine, and that
the exact number of directors may be fixed by the board of
directors.
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New Discoverys board of directors will initially consist
of eleven directors, eight of which will constitute common stock
directors and three of which will constitute Series A preferred
stock directors; however, the size of New Discoverys board
of directors will automatically be reduced (i) by one
member upon the death, resignation, removal or disqualification
of the person who first serves as Chairman of the board of
directors immediately following the merger and (ii) upon
the holders of the Series A preferred stock ceasing to have
the right to elect Series A preferred stock directors, by
the number of Series A preferred stock directors then in
office. New Discoverys restated charter and bylaws will
provide that the minimum number of directors is three and the
maximum number of directors is fifteen, and that the exact
number of directors may be fixed by the board of directors.
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Classes
of Directors
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DHC
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New Discovery
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DHCs restated charter provides that its board of directors
is divided into three classes of directors with each class being
elected to a staggered three-year term. The holders of preferred
stock may be granted the right to separately elect additional
directors.
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New Discoverys restated charter provides that its common
stock directors will be elected by holders of common stock.
Common stock directors are divided into three classes of
directors with each class being elected to a staggered
three-year term.
New Discoverys restated charter provides that holders of
Series A convertible preferred stock will be entitled to elect
three preferred stock directors.
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Removal
of Directors
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DHC
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New Discovery
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Under DHCs restated charter, a director may be removed
from office only for cause upon the affirmative vote of the
holders of a majority of the aggregate voting power of the
outstanding shares of DHC Series A common stock, DHC
Series B common stock and any series of preferred stock
entitled to vote upon matters that may be submitted to an DHC
stockholder vote.
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Under New Discoverys restated charter, a common stock
director may be removed from office only for cause upon the
affirmative vote of the holders of a majority of the aggregate
voting power of the outstanding shares of Series A common stock,
Series B common stock and any series of preferred stock entitled
to vote upon the election of common stock directors.
A preferred stock director may be removed from office (i) for
cause upon the affirmative vote of the holders of a majority of
the aggregate voting power of the outstanding shares of Series A
common stock, Series B common stock, Series A convertible
preferred stock and any series of preferred stock entitled to
vote upon the election of common stock directors voting together
as a single class and (ii) without cause by holders of a
majority of the shares of Series A convertible preferred stock.
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Vacancies
on the Board of Directors
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DHC
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New Discovery
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DHCs restated charter provides that vacancies resulting
from death, resignation, removal, disqualification or other
cause, and newly created directorships resulting from any
increase in the number of directors on the board of directors,
will be filled only by the affirmative vote of a majority of the
remaining directors then in office (even though less than a
quorum) or by the sole remaining director.
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Same as DHC with respect to vacancies in the offices of common
stock directors.
Vacancies in offices of preferred stock directors will be filled
by holders of Series A convertible preferred stock.
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Limitation
of Personal Liability of Directors
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DHC
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New Discovery
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Under Delaware law, a corporation may include in its charter a
provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director; however, the
provision may not eliminate or limit the liability of a director
for a breach of the duty of loyalty, acts or omissions not in
good faith or that involve intentional misconduct or a knowing
violation of law, unlawful payments of dividends, certain stock
repurchases or redemptions or any transaction from which the
director derived an improper personal benefit. DHCs
restated charter limits the personal liability of DHC directors
for monetary damages for breach of fiduciary duty as a director
to the fullest extent permitted by Delaware law.
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Same as DHC.
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Indemnification
of Directors and Officers
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DHC
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New Discovery
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Delaware law provides that, subject to certain limitations in
the case of derivative suits brought by a corporations
stockholders in its name, a corporation may indemnify any person
who is made a party to any third-party action, suit or
proceeding (other than an action by or in the right of the
corporation) on account of being a current or former director,
officer, employee or agent of the corporation (or is or was
serving at the request of the corporation in such capacity for
another corporation, partnership, joint venture, trust or other
enterprise) against expenses, including attorneys fees,
judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or her in connection with the action,
suit or proceeding through, among other things, a majority of
directors who were not parties to the suit or proceeding, if the
person(i) acted in good faith and in a manner reasonably
believed to be in the best interests of the corporation (or in
some circumstances, at least not opposed to its best interests),
and (ii) in a criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful.
Delaware corporate law also permits indemnification by a
corporation under similar circumstances for expenses (including
attorneys fees) actually and reasonably incurred by such
persons in connection with the defense or settlement of a
derivative action or suit, except that no indemnification may be
made in respect of any claim, issue or matter as to which the
person is adjudged to be liable to the corporation unless the
Delaware Court of Chancery or the court in which the action or
suit was brought determines upon application that the person is
fairly and reasonably entitled to indemnity for the expenses
which the court deems to be proper. To the extent that a current
or former director, officer, employee or agent is successful in
the defense of such an action, suit or proceeding, the
corporation is required by Delaware corporate law to indemnify
such person for reasonable expenses incurred thereby. Expenses
(including attorneys fees) incurred by such persons in
defending any action, suit or proceeding may be paid in advance
of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of that person to
repay the amount if it is ultimately determined that that person
is not entitled to be so indemnified. DHCs restated
charter provides for(i) the indemnification of its current
or former directors and officers to the fullest extent permitted
by law, and (ii) the prepayment of expenses (including
attorneys fees) upon receipt of an undertaking to repay
such amounts if it is ultimately determined that the director or
officer is not entitled to indemnification.
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Same as DHC.
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Action
by Written Consent
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DHC
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New Discovery
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DHCs restated charter specifically denies DHC stockholders
the power to consent in writing, without a meeting, to the
taking of any action, other than the rights of holders of DHC
Series B common stock to act by written consent with
respect to certain matters.
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Same as DHC, but New Discoverys restated charter
additionally permits the holders of Series A convertible
preferred stock to act by written consent with respect to
matters on which they are entitled to vote separately as a
single class (e.g. for preferred directors and on Special Voting
Matters).
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Amendments
to Certificate of Incorporation
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DHC
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New Discovery
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DHCs restated charter requires, for the amendment,
alteration or repeal of any provision of or the addition or
insertion of any provision in DHCs restated charter, the
affirmative vote of the holders of at least 80% of the aggregate
voting power of the outstanding shares of DHC Series A
common stock, DHC Series B common stock and any series of
preferred stock entitled to vote upon matters submitted to a
stockholder vote, unless the amendment(i) is not required
to be approved by DHC stockholders under Delaware Law or
(ii) has been approved by 75% of the DHC directors then in
office.
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New Discoverys restated charter requires, for the
amendment, alteration or repeal of any provision of or the
addition or insertion of any provision in New Discoverys
restated charter, the affirmative vote of the holders of at
least 80% of the aggregate voting power of the outstanding
shares of New Discovery Series A common stock, New Discovery
Series B common stock and Series A convertible preferred stock
(on an as converted into common stock basis) and any series of
preferred stock entitled to vote upon matters submitted to a
stockholder vote, unless the amendment (i) is not required to be
approved by New Discovery stockholders under Delaware Law or
(ii) has been approved by 75% of the New Discovery directors
then in office.
Additionally, New Discoverys restated charter requires the
approval of the holders of a majority of the outstanding shares
of Series A convertible preferred stock for any amendment,
alteration or repeal of any material provision of or the
addition or insertion of any provision (other then provisions
relating to filing of certificates of designations relating to
preferred stock or any other amendment otherwise approved by
such holders or that does not materially adversely affect the
rights of Series A convertible preferred stock) therein.
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Amendments
to Bylaws
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DHC
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New Discovery
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Delaware law provides that stockholders have the power to amend
the bylaws of a corporation unless the charter grants such power
to the board of directors, in which case either the stockholders
or the board of directors may amend the bylaws. DHCs
restated charter authorizes the board of directors, by the
affirmative vote of not less than 75% of the directors then in
office, to adopt, amend or repeal any provision of the bylaws.
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Same as DHC.
Additionally, New Discoverys restated charter requires the
approval of a majority of holders of Series A convertible
preferred stock for any amendment, alteration or repeal of any
material provision of or the addition or insertion of any
provision (other then provisions relating to filing of
certificates of designations relating to preferred stock or any
other amendment otherwise approved by such holders or that does
not materially adversely affect the rights of Series A
convertible preferred stock) so long as the ANPP Stockholder
Group and ANPP Permitted Transferees collectively hold shares of
Series A convertible preferred stock constituting 80% of the
Base Amount.
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Special
Meetings of Stockholders
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DHC
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New Discovery
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DHCs restated charter and bylaws provide that the
secretary may call special meetings of the stockholders, only at
the request of 75% of the members of the board of directors then
in office.
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Same as DHC.
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Vote
on Extraordinary Corporate Transactions
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DHC
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New Discovery
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Under Delaware law, a sale or other disposition of all or
substantially all of a corporations assets, a merger or
consolidation of a corporation with another corporation or a
dissolution of a corporation requires the affirmative vote of
the corporations board of directors (except in limited
circumstances) plus, with limited exceptions, the affirmative
vote of a majority of the outstanding stock entitled to vote on
the transaction. DHCs restated charter requires the
affirmative vote of holders of at least 80% of the aggregate
voting power of the outstanding shares of DHC Series A
common stock, DHC Series B common stock and any series of
preferred stock entitled to vote upon matters submitted to a DHC
stockholder vote to authorize:(i) a merger or consolidation
with and into any other corporation, unless(a) the laws of
the state of Delaware do not require stockholder consent
or(b) 75% of the members of the board of directors have
approved the merger or consolidation, (ii) the sale, lease
or exchange of all, or substantially all, assets of DHC, unless
75% of the members of the board of directors then in office have
approved the transaction or (iii) the dissolution of DHC,
unless 75% of the members of the board of directors then in
office have approved the dissolution.
|
|
Same as DHC.
Additionally, New Discoverys restated charter requires the
approval of a majority of holders of Series A convertible
preferred stock for (i) any merger, consolidation or other
business combination by New Discovery into another entity, other
than certain specified exceptions, (ii) the disposition or
acquisition by New Discovery or any of its subsidiaries of any
assets or properties (including stock or other equity interests
of a third party) exceeding $250 million, or acquisition in
which stock consideration is provided with voting rights that
are senior to the voting rights of the Series A convertible
preferred stock and (iii) any actions resulting in voluntary
liquidation, dissolution or winding up of New Discovery or any
of its material subsidiaries.
|
82
State
Anti-Takeover Statutes
|
|
|
DHC
|
|
New Discovery
|
|
Subject to certain exceptions, Section 203 of the Delaware
corporate statute generally prohibits public corporations from
engaging in significant business transactions, including
mergers, with a holder of 15% or more of the corporations
stock, referred to as an interested stockholder, for a period of
three years after the interested stockholder becomes an
interested stockholder, unless the charter contains a provision
expressly electing not to be governed by such a section.
DHCs restated charter expressly elects not to be governed
by Section 203.
|
|
Same as DHC.
|
Notice
of Stockholder Proposals and Director Nominations
|
|
|
DHC
|
|
New Discovery
|
|
Under DHCs bylaws, for director nominations or other
business to be properly brought before an DHC annual meeting by
a stockholder, the stockholder must have given timely notice
thereof in writing to the Secretary of DHC and any such proposed
business other than the nominations of persons for election to
the board of directors, must constitute a proper matter for
stockholder action. To be timely, a stockholders notice
must be delivered to the Secretary at the principal executive
offices of DHC not later than the close of business on the
ninetieth (90th) day nor earlier than the close of business on
the one hundred twentieth (120th) day prior to the first
anniversary of the preceding years annual meeting
(provided, however, that in the event that the date of
the annual meeting is more than thirty (30) days before or
more than seventy (70) days after such anniversary date, or
if no annual meeting was held in the preceding year, notice by
the stockholder must be so delivered not earlier than the close
of business on the one hundred twentieth (120th) day prior to
such annual meeting and not later than the close of business on
the later of the ninetieth (90th) day prior to such annual
meeting or the tenth (10th) day following the day on which
public announcement of the date of such meeting is first made by
DHC).
|
|
Under New Discoverys bylaws, to be timely, a
stockholders notice must be delivered to the Secretary at
the principal executive offices of New Discovery not later than
the close of business on the sixtieth (60th) day nor earlier
than the close of business on the ninetieth (90th) day prior to
the first anniversary of the preceding years annual
meeting (provided, however, that (i) in the event that the date
of the annual meeting is more than thirty (30) days before or
more than sixty (60) days after such anniversary date, (ii) if
no annual meeting was held in the preceding year or (iii) in the
case of a special meeting, notice by the stockholder must be so
delivered not earlier than the close of business on the one
hundredth (100th) day prior to such meeting and not later than
the close of business on the later of the seventieth (70th) day
prior to such meeting or the tenth (10th) day following the day
on which public announcement of the date of such meeting is
first made by New Discovery).
|
83
DISCOVERY
COMMUNICATIONS, INC.
UNAUDITED CONDENSED PRO FORMA COMBINED FINANCIAL
STATEMENTS
In June 2008, DHC and Advance/Newhouse entered into the
Transaction Agreement, which provides, among other things, for
the combination of DHCs
662/3%
interest in Discovery Communications Holding with
Advance/Newhouses
331/3%
interest in Discovery Communications Holding, as follows:
|
|
|
|
|
DHC will spin-off to its shareholders AMC, a subsidiary holding
cash and all of the businesses of its wholly-owned subsidiaries,
Ascent Media CANS, LLC (dba AccentHealth) and Ascent Media
Group, LLC, except for certain businesses of Ascent Media Group,
LLC that provide sound, music, mixing, sound effects and other
related services (which businesses will remain with New
Discovery following the completion of the Transaction);
|
|
|
|
Immediately following the AMC spin-off, Advance/Newhouse will
contribute its interests in Discovery Communications Holding and
Animal Planet to New Discovery in exchange for Series A and
Series C convertible preferred stock of New Discovery that
would be convertible at any time into New Discovery common stock
initially representing one-third of the outstanding shares of
New Discovery common stock; and
|
|
|
|
DHC will merge with a transitory merger subsidiary of New
Discovery, the new holding company, and DHCs existing
shareholders will receive shares of New Discovery common stock.
|
The merger of DHC and contribution by Advance/Newhouse of its
interests in Discovery Communications Holding and Animal Planet
are referred to as the Transaction.
Discovery Communications Holding was formed in the second
quarter of 2007 as part of the Restructuring completed by
Discovery. In the Restructuring, Discovery was converted into a
limited liability company and became a wholly-owned subsidiary
of Discovery Communications Holding, and the former shareholders
of Discovery became members of Discovery Communications Holding.
Discovery Communications Holding is the successor reporting
entity to Discovery. In connection with the Restructuring,
Discovery Communications Holding applied pushdown
accounting, and each shareholders basis in Discovery was
pushed down to Discovery Communications Holding. The result was
$4.3 billion of goodwill being recorded by Discovery
Communications Holding. As goodwill is not amortizable for
financial reporting purposes, there is no current impact to
Discovery Communications Holdings statement of operations.
Therefore, for purposes of the accompanying unaudited condensed
pro forma combined statement of operations, Discovery
Communications Holdings results of operations for the
period prior to the Restructuring and the period subsequent to
the Restructuring have been combined.
In May 2007, Discovery Communications Holding and Cox completed
an exchange of Coxs 25% ownership interest in Discovery
Communications Holding for a subsidiary of Discovery
Communications Holding that held Travel Channel,
travelchannel.com and approximately $1.3 billion in cash
(the Cox Transaction).
The following unaudited condensed pro forma combined balance
sheet dated as of March 31, 2008 assumes that the
Transaction and the AMC spin-off had been completed as of such
date. The following unaudited condensed pro forma combined
statements of operations for the three months ended
March 31, 2008 and the year ended December 31, 2007
assume that the Cox Transaction, the Transaction and the AMC
spin-off had been completed as of January 1, 2007. The
unaudited pro forma results do not purport to be indicative of
the results that would have been obtained if the Transaction had
been completed as of such date.
84
Discovery
Communications, Inc.
Unaudited
Condensed Pro Forma Combined Balance Sheet
March 31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discovery
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communications
|
|
|
Pro forma
|
|
|
New
|
|
|
|
DHC
|
|
|
AMC
|
|
|
Holding
|
|
|
adjustments for
|
|
|
Discovery
|
|
|
|
historical
|
|
|
historical(1)
|
|
|
historical(1)
|
|
|
Transaction
|
|
|
pro forma
|
|
|
|
amounts in thousands
|
|
|
Assets
|
Cash
|
|
$
|
222,577
|
|
|
|
218,625
|
|
|
|
68,654
|
|
|
|
|
|
|
|
72,606
|
|
Other current assets
|
|
|
191,700
|
|
|
|
180,522
|
|
|
|
1,021,658
|
|
|
|
|
|
|
|
1,032,836
|
|
Investment in Discovery
|
|
|
3,330,030
|
|
|
|
|
|
|
|
|
|
|
|
143,993
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,474,023
|
)(4)
|
|
|
|
|
Property and equipment, net
|
|
|
262,744
|
|
|
|
258,512
|
|
|
|
379,125
|
|
|
|
|
|
|
|
383,357
|
|
Content rights
|
|
|
|
|
|
|
|
|
|
|
1,045,593
|
|
|
|
45,429
|
(4)
|
|
|
1,091,022
|
|
Goodwill and other nonamortizable intangible assets
|
|
|
1,909,823
|
|
|
|
127,405
|
|
|
|
4,873,518
|
|
|
|
475,058
|
(4)
|
|
|
7,130,994
|
|
Other intangible assets
|
|
|
|
|
|
|
|
|
|
|
168,036
|
|
|
|
269,138
|
(4)
|
|
|
437,174
|
|
Other assets
|
|
|
18,964
|
|
|
|
18,099
|
|
|
|
364,753
|
|
|
|
|
|
|
|
365,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,935,838
|
|
|
|
803,163
|
|
|
|
7,921,337
|
|
|
|
(2,540,405
|
)
|
|
|
10,513,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
Current liabilities
|
|
$
|
137,402
|
|
|
|
127,257
|
|
|
|
681,805
|
|
|
|
|
|
|
|
691,950
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
4,088,607
|
|
|
|
|
|
|
|
4,088,607
|
|
Deferred tax liabilities
|
|
|
1,252,033
|
|
|
|
(146
|
)
|
|
|
16,454
|
|
|
|
(1,252,153
|
)(5)
|
|
|
133,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117,196
|
(4)
|
|
|
|
|
Other liabilities
|
|
|
21,830
|
|
|
|
21,081
|
|
|
|
284,156
|
|
|
|
|
|
|
|
284,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,411,265
|
|
|
|
148,192
|
|
|
|
5,071,022
|
|
|
|
(1,134,957
|
)
|
|
|
5,199,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
48,721
|
|
|
|
|
|
|
|
48,721
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143,993
|
(3)
|
|
|
143,993
|
|
Common stock
|
|
|
2,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,811
|
|
Additional
paid-in-capital
|
|
|
5,728,701
|
|
|
|
643,490
|
|
|
|
2,801,594
|
|
|
|
(2,801,594
|
)(4)
|
|
|
6,337,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,252,153
|
(5)
|
|
|
|
|
Accumulated deficit
|
|
|
(1,219,492
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,219,492
|
)
|
Accumulated other comprehensive earnings
|
|
|
12,553
|
|
|
|
11,481
|
|
|
|
|
|
|
|
|
|
|
|
1,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
4,524,573
|
|
|
|
654,971
|
|
|
|
2,801,594
|
|
|
|
(1,405,448
|
)
|
|
|
5,265,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
5,935,838
|
|
|
|
803,163
|
|
|
|
7,921,337
|
|
|
|
(2,540,405
|
)
|
|
|
10,513,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
Discovery
Communications, Inc.
Unaudited
Condensed Pro Forma Combined Statement of Operations
Three
Months Ended March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discovery
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communications
|
|
|
Pro forma
|
|
|
New
|
|
|
|
DHC
|
|
|
AMC
|
|
|
Holding
|
|
|
adjustments for
|
|
|
Discovery
|
|
|
|
historical
|
|
|
historical(1)
|
|
|
historical(1)
|
|
|
Transaction
|
|
|
pro forma
|
|
|
|
amounts in thousands, except per share amounts
|
|
|
Revenue
|
|
$
|
189,305
|
|
|
|
173,843
|
|
|
|
794,578
|
|
|
|
|
|
|
|
810,040
|
|
Cost of sales
|
|
|
(138,060
|
)
|
|
|
(125,664
|
)
|
|
|
(230,435
|
)
|
|
|
(801
|
)(6)
|
|
|
(243,632
|
)
|
Selling, general and administrative expenses
|
|
|
(42,412
|
)
|
|
|
(34,052
|
)
|
|
|
(242,354
|
)
|
|
|
|
|
|
|
(250,714
|
)
|
Depreciation and amortization
|
|
|
(16,540
|
)
|
|
|
(16,002
|
)
|
|
|
(37,720
|
)
|
|
|
(8,244
|
)(7)
|
|
|
(46,502
|
)
|
Gain from dispositions
|
|
|
78
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(7,629
|
)
|
|
|
(1,797
|
)
|
|
|
284,069
|
|
|
|
(9,045
|
)
|
|
|
269,192
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(68,720
|
)
|
|
|
|
|
|
|
(68,720
|
)
|
Share of earnings of Discovery
|
|
|
66,402
|
|
|
|
|
|
|
|
|
|
|
|
(66,402
|
)(8)
|
|
|
|
|
Other income (expense), net
|
|
|
1,684
|
|
|
|
1,533
|
|
|
|
(22,590
|
)
|
|
|
|
|
|
|
(22,439
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations before income taxes
|
|
|
60,457
|
|
|
|
(264
|
)
|
|
|
192,759
|
|
|
|
(75,447
|
)
|
|
|
178,033
|
|
Income tax expense
|
|
|
(26,466
|
)
|
|
|
116
|
|
|
|
(87,541
|
)
|
|
|
33,951
|
(9)
|
|
|
(80,172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations
|
|
$
|
33,991
|
|
|
|
(148
|
)
|
|
|
105,218
|
|
|
|
(41,496
|
)
|
|
|
97,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and fully diluted earnings (loss) from continuing
operations per common share
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and fully diluted weighted average outstanding common
shares
|
|
|
281,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
421,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
Discovery
Communications, Inc.
Unaudited
Condensed Pro Forma Combined Statement of Operations
Year
Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discovery
|
|
|
Pro forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communications
|
|
|
adjustments for
|
|
|
Pro forma
|
|
|
New
|
|
|
|
DHC
|
|
|
AMC
|
|
|
Holding
|
|
|
Cox
|
|
|
adjustments for
|
|
|
Discovery
|
|
|
|
historical
|
|
|
historical(1)
|
|
|
historical(1)
|
|
|
Transaction(2)
|
|
|
Transaction
|
|
|
pro forma
|
|
|
|
amounts in thousands, except per share amounts
|
|
|
Revenue
|
|
$
|
707,214
|
|
|
|
631,425
|
|
|
|
3,127,333
|
|
|
|
(50,193
|
)
|
|
|
|
|
|
|
3,152,929
|
|
Cost of sales
|
|
|
(491,034
|
)
|
|
|
(431,367
|
)
|
|
|
(1,172,907
|
)
|
|
|
25,163
|
|
|
|
(3,206
|
)(6)
|
|
|
(1,210,617
|
)
|
Selling, general and administrative expenses
|
|
|
(151,448
|
)
|
|
|
(129,824
|
)
|
|
|
(1,310,047
|
)
|
|
|
14,157
|
|
|
|
|
|
|
|
(1,317,514
|
)
|
Depreciation and amortization
|
|
|
(67,732
|
)
|
|
|
(65,544
|
)
|
|
|
(156,750
|
)
|
|
|
(854
|
)
|
|
|
(32,974
|
)(7)
|
|
|
(192,766
|
)
|
Impairment of goodwill
|
|
|
(165,347
|
)
|
|
|
(165,347
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain from dispositions
|
|
|
704
|
|
|
|
421
|
|
|
|
134,671
|
|
|
|
(134,671
|
)
|
|
|
|
|
|
|
283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(167,643
|
)
|
|
|
(160,236
|
)
|
|
|
622,300
|
|
|
|
(146,398
|
)
|
|
|
(36,180
|
)
|
|
|
432,315
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(248,757
|
)
|
|
|
(43,100
|
)
|
|
|
|
|
|
|
(291,857
|
)
|
Share of earnings of Discovery
|
|
|
141,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(141,781
|
)(8)
|
|
|
|
|
Other income (expense), net
|
|
|
16,627
|
|
|
|
10,455
|
|
|
|
(9,063
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,891
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations before income taxes
|
|
|
(9,235
|
)
|
|
|
(149,781
|
)
|
|
|
364,480
|
|
|
|
(189,498
|
)
|
|
|
(177,961
|
)
|
|
|
137,567
|
|
Income tax expense
|
|
|
(59,157
|
)
|
|
|
(2,640
|
)
|
|
|
(77,466
|
)
|
|
|
24,672
|
|
|
|
80,082
|
(9)
|
|
|
(29,229
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations
|
|
$
|
(68,392
|
)
|
|
|
(152,421
|
)
|
|
|
287,014
|
|
|
|
(164,826
|
)
|
|
|
(97,879
|
)
|
|
|
108,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and fully diluted earnings (loss) from continuing
operations per common share
|
|
$
|
(0.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and fully diluted weighted average outstanding common
shares
|
|
|
280,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
420,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
Discovery
Communications, Inc.
Notes to
Unaudited Condensed Pro Forma Combined Financial Statements
March 31,
2008
(1) On June 4, 2008, DHC and Advance/Newhouse entered
into the Transaction Agreement providing for the combination of
their respective interests in Discovery Communications Holding
(the direct parent of Discovery). DHC and Advance/Newhouse
directly own
662/3%
and
331/3%
of Discovery Communications Holding, respectively. The
Transaction Agreement contemplates the following steps:
|
|
|
|
|
DHC will spin off to its shareholders AMC, a subsidiary holding
cash and all of the businesses of its wholly-owned subsidiaries,
Ascent Media CANS, LLC (dba AccentHealth) and Ascent Media
Group, LLC, except for certain businesses of Ascent Media Group,
LLC that provide sound, music, mixing, sound effects and other
related services;
|
|
|
|
Immediately following the AMC spin-off, Advance/Newhouse will
contribute its interest in Discovery Communications Holding and
its interest in Animal Planet to New Discovery in exchange for
preferred stock of New Discovery that would be convertible at
any time into New Discovery common stock initially representing
one-third of the outstanding shares of New Discovery common
stock; and
|
|
|
|
DHC will merge with a transitory subsidiary of New Discovery, a
new holding company, and DHCs existing Series A
common shareholders will receive 0.5 of a share of New Discovery
Series A common stock plus 0.5 of a share of New Discovery
Series C common stock, and DHCs existing
Series B common shareholders will receive 0.5 of a share of
New Discovery Series B common stock plus 0.5 of a share of
New Discovery Series C common stock.
|
For financial reporting purposes, New Discovery is the successor
reporting entity to DHC. Because Advance/Newhouse is a one-third
owner of Discovery Communications Holding prior to the
completion of the Transaction and is a one-third owner of New
Discovery (whose only significant asset is 100% of Discovery
Communications Holding) after completion of the transaction,
there is no effective change in ownership. The convertible
preferred stock will not have any special dividend rights and
only a de minimus liquidation preference. Additionally,
Advance/Newhouse retains significant participatory special class
voting rights with respect to New Discovery parent company
matters. Pursuant to FASB Technical
Bulletin 85-5
and for accounting purposes, the Transaction will be treated as
nonsubstantive merger, and therefore, the Transaction will be
recorded at carry over basis.
Certain tax-related amounts in the AMC historical column of
these unaudited condensed pro forma combined financial
statements are different than the corresponding amounts in
Ascent Media Groups historical combined financial
statements included elsewhere herein due to differences in the
assessment of the realizability of deferred tax assets and the
resulting need for valuation allowances between DHCs
consolidated financial statements (of which the AMC historical
column is a part) and Ascent Media Groups historical
combined financial statements. In this regard, certain deferred
tax assets were deemed to not be realizable in the DHC
historical consolidated financial statements, but were deemed to
be realizable by Ascent Media on a stand-alone basis.
(2) Represents pro forma adjustments to reflect the Cox
Transaction as if it had occurred on January 1, 2007
including the elimination of (i) revenue and expenses for
Travel Channel for the period from January 1, 2007 through
May 14, 2007 and (ii) the gain recognized by Discovery
in connection with the Cox Transaction. Also includes additional
interest expense for the period from January 1, 2007
through May 14, 2007 related to additional debt incurred by
Discovery Communications Holding in connection with the Cox
Transaction.
(3) Represents the issuance of the New Discovery preferred
stock to Advance/Newhouse. As New Discovery will employ
carryover-basis accounting, the convertible preferred stock is
recorded at an amount equal to Advance/Newhouses
historical carrying value for its
331/3%
ownership interest in Discovery Communications Holding.
88
(4) Represents the elimination of the historical
investments in Discovery Communications Holding and Discovery
Communications Holdings equity. The difference between the
investment and equity represents excess basis and has been
allocated preliminarily as follows (amounts in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life
|
|
|
Program library
|
|
$
|
45,429
|
|
|
|
15 years
|
|
Affiliate contracts
|
|
|
119,127
|
|
|
|
8 years
|
|
Advertising relationships
|
|
|
150,011
|
|
|
|
10 years
|
|
Goodwill and other nonamortizable intangible assets
|
|
|
475,058
|
|
|
|
indefinite
|
|
Deferred tax liability
|
|
|
(117,196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
672,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The foregoing excess basis allocation is consistent with
DHCs allocation of its equity method excess basis related
to its investment in Discovery Communications Holding, and is
based on estimates of the fair value of such tangible and
intangible assets as compared to the underlying book value, if
any, reflected in Discovery Communications Holdings
historical financial statements for these assets. The fair value
and useful life estimates were determined based on DHCs
understanding of cable programming businesses in general and
Discovery Communications Holdings business, specifically.
(5) Represents the elimination of DHCs historical
deferred tax liability related to its investment in Discovery
Communications Holding with an offsetting elimination to equity.
(6) Represents amortization of the program library
step-up
recorded in note 5.
(7) Represents amortization of the amortizable intangible
assets recorded in note 5.
(8) Represents the elimination of DHCs historical
share of earnings of Discovery Communications Holding.
(9) Represents the estimated income tax effects of the pro
forma adjustments using an assumed tax rate of 45%. Discovery
Communications Holdings 2007 effective tax rate differed
from 45% due to the tax-free nature of its gains from
dispositions. See note 16 to Discovery Communications
Holdings consolidated financial statements for the year
ended December 31, 2007 included in Part 3 of
Appendix A to the proxy statement/prospectus for more
information regarding Discovery Communications Holdings
2007 income taxes.
89
MANAGEMENT
OF NEW DISCOVERY
Executive
Officers and Directors
The following sets forth certain information concerning the
persons who are expected to serve as New Discoverys
executive officers and directors immediately following the
closing of the Transaction, including their birth dates,
directorships held and a description of their business
experience, including positions held with New Discovery. Mr.
Malone and Mr. Bennett will serve on the New Discovery board of
directors regardless of whether they are re-elected as directors
of DHC at the Annual Meeting. New Discoverys executive
officers will consist of the current executive officers of
Discovery and thus their information is included below.
|
|
|
Name
|
|
Position
|
|
John S. Hendricks
Born March 29, 1952
|
|
Chairman and a common stock director of New Discovery.
Mr. Hendricks is the Founder of Discovery and has served as
Chairman of Discovery since September 1982. Mr. Hendricks
served as Chief Executive Officer of Discovery from September
1982 to June 2004; and Interim Chief Executive Officer of
Discovery from December 2006 to January 2007. Mr. Hendricks
continues to provide leadership vision for Discoverys
major content initiatives that reinforce and enhance brand and
value, have long shelf life, and have global appeal. Mr.
Hendricks also chairs Discoverys Global Content Committee.
|
David M. Zaslav
Born January 15, 1960
|
|
President, Chief Executive Officer and a common stock director
of New Discovery. Mr. Zaslav has served as President and Chief
Executive Officer of Discovery since January 2007. Mr. Zaslav
served as President, Cable & Domestic Television and New
Media Distribution of NBC Universal, Inc., a media and
entertainment company (NBC), from May 2006 to December
2006. Mr. Zaslav served as Executive Vice President of NBC, and
President of NBC Cable, a division of NBC, from October 1999 to
May 2006. Mr. Zaslav is a director of TiVo Inc.
|
Mark G. Hollinger
Born August 26, 1959
|
|
Chief Operating Officer and Senior Executive Vice President,
Corporate Operations, of New Discovery. Mr. Hollinger has
served as Chief Operating Officer of Discovery since January
2008; and as Senior Executive Vice President, Corporate
Operations of Discovery since January 2003. Mr. Hollinger served
as General Counsel of Discovery from 1991 to January 2008, and
as President, Global Businesses and Operations of Discovery from
February 2007 to January 2008.
|
Bradley E. Singer.
Born July 11, 1966
|
|
Senior Executive Vice President, Chief Financial Officer of New
Discovery. Mr. Singer has served as Senior Executive Vice
President, Chief Financial Officer of Discovery since July 2008.
Mr. Singer served as Chief Financial Officer and Treasurer
of American Tower Corporation from December 2001 to June 2008.
Mr. Singer served as Executive Vice President, Finance of
American Tower from July 2001 to December 2001, Vice
President and General Manager of the Southeast Region from
November 2000 to July 2001 and as Executive Vice President,
Strategy, of American Tower from September 2000 until July 2001.
|
Joseph A. LaSala, Jr.
Born November 5, 1954
|
|
Senior Executive Vice President, General Counsel and Secretary
of New Discovery. Mr. LaSala has served as Senior Executive
Vice President, General Counsel and Secretary of Discovery since
January 2008. Mr. LaSala served as Senior Vice President,
General Counsel and Secretary for Novell, Inc., a provider of
enterprise software and related services, from January 2003 to
January 2008.
|
90
|
|
|
Name
|
|
Position
|
|
Adria Alpert Romm
Born March 2, 1955
|
|
Senior Executive Vice President, Human Resources of New
Discovery. Ms. Romm has served as Senior Executive Vice
President, Human Resources of Discovery since March 2007.
Ms. Romm served as Senior Vice President of Human Resources
of NBC from 2004 to 2007. Prior to 2004, Ms. Romm served as a
Vice President in Human Resources for the NBC TV network and NBC
staff functions.
|
Bruce L. Campbell
Born November 26, 1967
|
|
President, Digital Media & Corporate Development of New
Discovery. Mr. Campbell has served as President, Digital Media
& Corporate Development of Discovery since March 2007. Mr.
Campbell served as Executive Vice President, Business
Development of NBC from December 2005 to March 2007, and Senior
Vice President, Business Development of NBC from January 2003 to
November 2005.
|
John C. Malone
Born March 7, 1941
|
|
A common stock director of New Discovery. Mr. Malone has served
as Chief Executive Officer and Chairman of the Board of DHC
since March 2005, and a director of DHC since May 2005. Mr.
Malone has served as Chairman of the Board and a director of
Liberty since 1990. Mr. Malone served as Chairman of the Board
of Tele-Communications, Inc. (TCI) from November 1996 to
March 1999; and Chief Executive Officer of TCI from January 1994
to March 1999. Mr. Malone is Chairman of the Board of Liberty
Global, Inc. (Liberty Global) and The DirecTV Group, Inc.; and a
director of IAC/InterActiveCorp and Expedia, Inc.
|
Robert R. Bennett
Born April 19, 1958
|
|
A common stock director of New Discovery. Mr. Bennett has
served as President of DHC since March 2005, and a director of
DHC since May 2005. Mr. Bennett served as President of Liberty
from April 1997 to February 2006 and as Chief Executive Officer
of Liberty from April 1997 to August 2005. Mr. Bennett held
various executive positions with Liberty since its inception in
1990. Mr. Bennett is a director of Liberty and Sprint Nextel
Corporation.
|
Paul A. Gould
Born September 27, 1945
|
|
A common stock director of New Discovery. Mr. Gould has served
as a director of DHC since May 2005. Mr. Gould has served as a
Managing Director and Executive Vice President of Allen &
Company Incorporated, an investment banking services company,
for more than the last five years. Mr. Gould is a director of
Liberty, Ampco-Pittsburgh Corporation and Liberty Global.
|
M. LaVoy Robison
Born September 6, 1935
|
|
A common stock director of New Discovery. Mr. Robison has
served as a director of DHC since May 2005. Mr. Robison has
been executive director and a board member of The Anschutz
Foundation (a private foundation) since January 1998. Mr.
Robison is a director of Liberty.
|
J. David Wargo
Born October 1, 1953
|
|
A common stock director of New Discovery. Mr. Wargo has served
as a director of DHC since May 2005. Mr. Wargo has served
as President of Wargo & Company, Inc., a private investment
company specializing in the communications industry, since
January 1993. Mr. Wargo is a director of Strayer Education,
Inc. and Liberty Global.
|
Robert R. Beck
Born July 2, 1940
|
|
A common stock director of New Discovery. Since 2001, Mr. Beck
has served as an independent consultant, advising on complex
financial and business matters. Prior to 2001, Mr. Beck
served as a Managing Director of Putnam Investments.
|
91
|
|
|
Name
|
|
Position
|
|
Robert J. Miron
Born July 7, 1937
|
|
A preferred stock director of New Discovery. Mr. Robert
Miron has served as Chairman of Advance/Newhouse Communications
and Bright House Networks, LLC (Bright House) since July
2002; as Chief Executive Officer of Advance/Newhouse
Communications and Bright House from July 2002 to May 2008; and
as President of Advance/Newhouse Communications and Bright House
from April 1995 to July 2002. Mr. Robert Miron served as
President of Newhouse Broadcasting Corporation from October 1986
to April 1995.
|
Steven A. Miron.
Born April 24, 1966
|
|
A preferred stock director of New Discovery. Mr. Steve
Miron was appointed as Chief Executive Officer of Advance
Newhouse Communications and Bright House in May 2008.
Mr. Steven Miron served as President of Advance Newhouse
Communications and Bright House from July 2002 to May 2008.
|
Lawrence S. Kramer..
Born April 24, 1950
|
|
A preferred stock director of New Discovery. Mr. Kramer has
served as senior advisor at Polaris Venture Partners, a national
venture capital firm since July 2007. From January 2005 to mid
2006, Mr. Kramer served as first president of CBS Digital
Media, a division of CBS Television Network (CBS). After
that, Mr. Kramer held a consulting role at CBS until April
2008. Prior to joining CBS, Mr. Kramer was Chairman and CEO of
Marketwatch, Inc., a financial news business. Mr. Kramer is a
director of Answers Corporation and Xinhua Finance Media Ltd.
|
The executive officers named above will serve in such capacities
until the annual meeting of New Discoverys board of
directors following completion of the Transaction, or until
their respective successors have been duly elected and have been
qualified, or until their earlier death, resignation,
disqualification or removal from office.
Except for Steven A. Miron being the son of Robert J. Miron,
there is no family relationship among any of New
Discoverys executive officers or directors, by blood,
marriage or adoption.
During the past five years, none of the above persons has had
any involvement in such legal proceedings as would be material
to an evaluation of his or her ability or integrity.
Board
Composition
The board of directors of New Discovery will initially consist
of eight common stock directors, divided among three classes.
New Discoverys Class I directors, whose term will
expire at the annual meeting of its stockholders in 2009, are J.
David Wargo and Robert R. Beck. New Discoverys
Class II directors, whose term will expire at the annual
meeting of its stockholders in 2010, are John S. Hendricks, M.
LaVoy Robison and Paul A. Gould. New Discoverys
Class III directors, whose term will expire at the annual
meeting of its stockholders in 2011, are John C. Malone, Robert
R. Bennett and David M. Zaslav. At each annual meeting of New
Discovery stockholders, the successors of that class of
directors whose term(s) expire at that meeting shall be elected
to hold office for a term expiring at the annual meeting of New
Discovery stockholders held in the third year following the year
of their election. The directors of each class will hold office
until their respective death, resignation or removal and until
their respective successors are elected and qualified. The
bylaws of New Discovery provide that the number of directors of
New Discovery will be reduced by one upon the resignation,
removal or disqualification of John Hendricks from the board of
directors.
The board of directors of New Discovery will also include three
preferred stock directors, consisting of Robert J. Miron,
Steven A. Miron and Lawrence S. Kramer, whose term will expire
at the annual meeting of its stockholders in 2009. Holders of
New Discovery Series A convertible preferred stock will
vote on the election of the preferred stock directors but will
not vote on the election of any common stock director.
Advance/Newhouse, as the initial holder of all the New Discovery
convertible preferred stock, will appoint the three initial
preferred stock directors. At each annual meeting of New
Discovery stockholders, the successors of the preferred stock
directors shall be elected to hold office for a term expiring at
the following annual meeting of New Discovery stockholders.
92
The preferred stock directors will hold office until their
respective death, resignation or removal and until their
respective successors are elected and qualified.
Executive
Compensation
New Discovery has not yet paid any compensation to any of its
executive officers or any person expected to become an executive
officer of New Discovery. The form and amount of the
compensation to be paid to each of New Discoverys
executive officers in any future period will be determined by
the compensation committee of New Discoverys board of
directors, subject to the terms of any applicable employment
agreement.
This section sets forth the executive compensation information
for the Chief Executive Officer, Principal Financial Officer and
the three other most highly compensated executive officers of
Discovery during the years ended December 31, 2007 and
December 31, 2006. For information concerning the
compensation paid to the Chief Executive Officer of DHC,
Principal Financial Officer of DHC, Principal Accounting Officer
of DHC and the three other most highly compensated executive
officers of DHC during the years ended December 31, 2007
and December 31, 2006, see Management of
DHC Executive Compensation.
Compensation
Discussion and Analysis
The executive officers of New Discovery will be comprised of the
current executive officers of Discovery. This Compensation
Discussion and Analysis explains Discoverys compensation
program for:
|
|
|
|
|
John S. Hendricks, Founder and Chairman of the Board of
Discovery;
|
|
|
|
David M. Zaslav, President and Chief Executive Officer of
Discovery;
|
|
|
|
Mark G. Hollinger, Senior Executive Vice President and Chief
Operating Officer of Discovery;
|
|
|
|
|
|
Roger F. Millay, former Senior Executive Vice President and
Chief Financial Officer of Discovery; and
|
|
|
|
|
|
Bruce L. Campbell, President, Digital Media &
Corporate Development of Discovery.
|
Messrs. Hendricks, Hollinger and Campbell were
Discoverys three most highly compensated executive
officers for 2007, other than its CEO and CFO. These three
individuals, together with Mr. Zaslav, Discoverys CEO
and Mr. Millay, Discoverys former CFO, are referred
to collectively herein as the Discovery Named Executive
Officers. In January 2008, Mr. Millay indicated
his intention to leave Discovery. Mr. Millays departure
date is July 25, 2008.
Bradley E. Singer, Discoverys Senior Executive Vice
President, Chief Financial Officer, joined Discovery in July
2008. As a result, he was not paid compensation by Discovery for
2007. Mr. Singers employment arrangements are
described below in Executive Compensation
Arrangements Singer Employment Agreement.
Decision
Makers
Discovery is a member-managed limited liability company, which
is currently owned, indirectly,
662/3%
by DHC and
331/3%
by Advance/Newhouse. Because Discovery is a private company,
Discovery does not have an independent compensation committee.
In addition, the compensation committee of DHC does not make
compensation decisions for Discovery management. Following the
completion of the Transaction, decisions regarding executive
compensation will be made by a compensation committee comprised
of independent New Discovery directors.
The objectives and principles of Discoverys executive
compensation program have been established by Discoverys
CEO and his executive management team with the approval of
Discoverys Chairman and the members two designated
representatives: Robert R. Bennett, President of DHC, and Robert
J. Miron, Chairman of Advance/Newhouse (who we refer to as the
member representatives). Decisions regarding the
executive compensation packages paid to the Discovery Named
Executive Officers, other than Messrs. Zaslav and
Hendricks, are generally made by Mr. Zaslav with the review
and approval of the member representatives. Decisions regarding
the executive compensation packages paid to Messrs. Zaslav
and Hendricks are made directly by the member representatives.
See Process of Decision Making below.
93
Objectives
The compensation program for the Discovery Named Executive
Officers is designed to meet the following objectives that align
with and support Discoverys strategic business goals:
|
|
|
|
|
attracting and retaining a high-performing executive management
team who will help Discovery to attain its strategic objectives
and build long-term company value;
|
|
|
|
emphasizing variable performance-based compensation components
by linking individual compensation with corporate operating
metrics as well as individual professional achievements; and
|
|
|
|
aligning the interests of management with the members of
Discovery using equity-type incentive awards.
|
Following the completion of the Transaction, Discovery expects
that New Discoverys compensation objectives will be
determined by the New Discovery board of directors and
compensation committee, although Discovery anticipates that the
objectives would be consistent with the objectives identified
above. As a public company, New Discovery will have more
flexibility in structuring its equity-based compensation
programs to better align compensation for executive officers and
other employees with the companys performance.
Principles
The following principles are used to guide the design of
Discoverys executive compensation program and to ensure
that the program is consistent with the objectives described
above:
|
|
|
|
|
Competitive Compensation. Discovery
believes that its executive compensation program must provide
compensation to the Discovery Named Executive Officers that,
based on general business and industry knowledge and experience,
is competitive with the compensation paid to similarly situated
employees of companies in Discoverys industry and
companies with which Discovery competes for talent.
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Pay for Performance
Philosophy. Discovery believes its
compensation program should align the interests of the Discovery
Named Executive Officers with the interests of the company and
its members by strengthening the link between pay and company
and individual performance. Of the total compensation mix for
the Discovery Named Executive Officers during 2007, the most
significant elements of each Discovery Named Executive
Officers compensation package consisted of awards under
the Discovery Appreciation Program and his annual bonus award.
The awards under the DAP increase in value only if the stock
price of DHC increases, which depends largely on
Discoverys performance. In addition, three of the
Discovery Named Executive Officers bonus awards, those for
Messrs. Campbell, Hollinger and Millay, were tied directly
to company and individual performance measures under the
Discovery Incentive Compensation Plan. In connection with
attracting Mr. Zaslav to join Discovery as Chief Executive
Officer, Discovery entered into an employment agreement with him
under which he is entitled to minimum guaranteed annual bonuses
for the original term of the agreement, and after the first year
is eligible to earn additional amounts based on achievement of
qualitative and quantitative performance objectives.
Mr. Hendricks also receives annual bonuses based on his
performance as determined by the member representatives.
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Process
of Decisionmaking
General. As noted above, the member
representatives determine the compensation of
Messrs. Zaslav and Hendricks, and Mr. Zaslav generally
determines the compensation of the other named executive
officers with the review and approval of the member
representatives. Competitive levels of compensation for the
named executive officers for 2007 were based on industry
knowledge of the decision makers rather than formal
benchmarking, although in the case of Mr. Millay, survey
data regarding compensation of chief financial officers was also
considered as more fully described in New
Hires below.
New Hires. Mr. Zaslav joined
Discovery in the beginning of 2007. When negotiating his
compensation package, the member representatives considered
their knowledge of industry compensation standards to establish
the terms of a competitive compensation package with which to
entice Mr. Zaslav to accept Discoverys offer of
employment. The terms of Mr. Zaslavs employment
agreement, which are described in Executive Compensation
Arrangements Zaslav Employment Agreement
below, reflect the result of these negotiations.
94
Messrs. Millay and Campbell joined the company in the third
quarter of 2006 and early 2007, respectively. The compensation
package offered to Mr. Millay was determined by
Ms. Judith McHale, Discoverys Chief Executive Officer
at the time, and the compensation package offered to
Mr. Campbell was determined by Mr. Zaslav. In
determining the compensation to offer to Mr. Millay,
Ms. McHale considered, among other things, her general
knowledge of industry compensation standards as well as the
compensation paid to chief financial officers at other
companies. The companies considered for benchmarking the
compensation offered to Mr. Millay were included in two
surveys, the 2006 Cable and Television Human Resource
Association (CTHRA) Cable Programmers/Broadcast Networks
Compensation Survey and the Towers Perrin 2005 Entertainment
Industry Survey, in each case updated with a 4 percent
annual factor. The companies in the CTHRA survey included the
following: A&E Networks, ESPN, Lifetime Television, MTV
Networks, Scripps Networks, Turner Broadcasting System, ABC
Television Group, Disney ABC Cable Networks Group, CBS, Fox
Broadcasting, and NBC Cable. The companies in the Towers Perrin
survey included the following: A&E Networks, CBS, Fox
Broadcasting, HBO, MTV Networks, NBC Universal, Showtime, Turner
Broadcasting, DreamWorks, DreamWorks Animating, New Line Cinema,
Paramount Pictures, Sony Pictures Entertainment, Twentieth
Century Fox, and Warner Bros. The target pay positioning for the
compensation package to be offered to Mr. Millay was the
50th percentile for base salary and the
75th percentile for total cash compensation and for total
direct compensation. Subsequent to Mr. Millays hire
date but before the award date, Mr. Hendricks, with the
approval of the member representatives, decided to increase the
amount of Mr. Millays award under the Discovery
Appreciation Plan as described in Executive Compensation
Arrangements Millay Employment Agreement; Millay
Retention Agreement, below. This change did not take
account of the survey data noted above.
When negotiating Mr. Campbells compensation package,
Mr. Zaslav considered his knowledge of industry
compensation standards to establish the terms of a competitive
compensation package with which to attract Mr. Campbell to
Discovery. The member representatives approved the compensation
arrangements for Messrs. Millay and Campbell based on their
general industry knowledge. As was the case with
Mr. Zaslav, the compensation packages ultimately paid to
Messrs. Millay and Campbell were very much dependent on the
negotiation process with these executives.
Mr. Hendricks. With respect to
Mr. Hendricks compensation package, the member
representatives work directly with Mr. Hendricks annually
to construct a compensation package which fairly rewards
Mr. Hendricks for his ongoing and valuable contributions to
Discovery which include his leadership of major content and
strategic initiatives and his focus on key priority areas such
as the globalization of Discoverys programming,
multi-platform distribution activities, and the monetization of
Discoverys content. Mr. Hendricks also chairs
Discoverys Global Content Committee and the Advisory
Committee for Planet Green.
Mr. Hollinger. Mr. Zaslav
determined Mr. Hollingers 2007 compensation, with
approval of the member representatives, taking into account the
extensive responsibilities assumed by Mr. Hollinger during
2007. In recognition of his assumption of certain new
responsibilities, leadership and strong performance,
Mr. Hollinger was promoted to the position of Senior
Executive Vice President and Chief Operating Officer of
Discovery effective January 1, 2008.
Elements
of Compensation
A summary of each element of the compensation program for the
Discovery Named Executive Officers is set forth below. Discovery
believes that each element complements the others and that
together they serve to achieve Discoverys compensation
objectives.
Base
Salary
Discovery provides base salaries that it believes are
competitive to attract and retain high-performing executive
talent. Discovery believes that a competitive base salary is an
important component of compensation as it provides a degree of
financial stability for executives. Base salaries also form the
basis for calculating other compensation opportunities for the
Discovery Named Executive Officers, including, for example, the
metrics for each Discovery Named Executive Officers
Incentive Compensation Plan award and the amount of life
insurance provided by Discovery. The base salary level of each
Discovery Named Executive Officer is generally determined based
on the
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responsibilities assumed by him; his experience, overall
effectiveness and demonstrated leadership ability; the
performance expectations set for him; and the decision
makers understanding of competitive market factors.
Mr. Hendricks is the founder of Discovery. In recognition
of the valuable strategic guidance, long range planning and
years of industry experience that Mr. Hendricks continues
to contribute to the business and priorities of Discovery in his
role as Chairman, Mr. Hendrickss base salary has been
fixed at $1 million per year pursuant to long-standing
resolutions of the members.
When Mr. Zaslav joined Discovery in the beginning of 2007,
his base salary was determined based on the member
representatives knowledge of market rates for an executive
with his breadth of experience and demonstrated leadership
skills. As CEO, he would have overall responsibility for the
entire companys strategic growth objectives, the editorial
and creative direction across brand groups, the organizational
redesign of Discoverys senior management team, and the
investment priorities for Discoverys underperforming
assets and was, accordingly, given the highest salary of any
Discovery executive officer.
When Mr. Millay joined Discovery in the third quarter of
2006, his base salary was determined, in part, based on market
rates for a chief financial officer with his level of financial
expertise. As CFO, he would have significant oversight
responsibilities with respect to the accounting and financial
condition of the company and was granted a salary commensurate
with those responsibilities. Since Mr. Millay joined the
company in the third quarter of 2006, his salary carried over to
2007 without change. As noted above, Mr. Millay is
departing from Discovery effective July 25, 2008. Discovery
entered into a Retention Agreement with Mr. Millay
providing for a retention payment, salary pending his departure,
treatment of his incentive compensation for 2007 and 2008,
treatment of his Discovery Appreciation Units and other matters,
which is described in Executive Compensation
Arrangements Millay Employment Agreement; Millay
Retention Agreement below.
Mr. Hollingers salary increased 39% in 2007 in
recognition of his extensive contributions to the company as
Senior Executive Vice President and General Counsel of Discovery
and the increase in responsibilities associated with his new
post as head of the International Networks and Commerce
divisions.
Mr. Campbell joined Discovery in 2007. His base salary
reflected Mr. Zaslavs understanding of market rates
for a network executive with his level of experience, taking
into account the need to build a Corporate Development
organization, restructure Discoverys digital media staff
and infrastructure, and establish new investment priorities and
overall growth strategy for Discovery across operating units.
Bonus
Annual. The Discovery Named Executive
Officers, other than Messrs. Hendricks and Zaslav,
participate in Discoverys Incentive Compensation Plan (the
ICP), which provides for annual bonuses based on company
and individual performance. The ICP is a performance-based
compensation program designed to focus the Discovery Named
Executive Officers (other than Messrs. Hendricks and
Zaslav, who do not participate in the ICP) on achieving annual
operating performance goals on a corporate level and with
respect to any individual business lines over which he is
responsible, as well as on achieving individual professional
goals. See Incentive Plan Compensation
below for more information regarding this plan.
Under his employment agreement, Mr. Zaslav is entitled to
minimum, guaranteed annual bonuses for the original term of the
agreement. Subject to the achievement of certain qualitative and
quantitative objectives, after the first year of employment,
Mr. Zaslav may earn an actual bonus in excess of the
guaranteed bonus amount applicable to a particular year. For
2007, his guaranteed and actual bonus amount was
$3 million. For 2008, his minimum, guaranteed bonus amount
is $2 million and his target bonus amount is
$3 million. In determining the amount and terms of
Mr. Zaslavs bonus, the member representatives
considered the substantial payments that Mr. Zaslav would
forego at his previous employer and Mr. Zaslavs
experience and demonstrated leadership skills. Under the terms
of Mr. Zaslavs employment agreement and subject to
his right to receive minimum annual bonuses outlined therein,
the amount of his annual bonus will depend on the achievement of
qualitative and quantitative objectives established by the
compensation committee in consultation with Mr. Zaslav. For
more information regarding Mr. Zaslavs employment
agreement, see Executive Compensation
Arrangements Zaslav Employment Agreement below.
96
During the first quarter of each year, the member
representatives work with Mr. Hendricks to determine an
appropriate bonus amount for Mr. Hendricks prior year
contributions to Discovery. For 2006, Mr. Hendricks was
granted a bonus of $1.875 million in recognition of his
services as Interim CEO prior to Mr. Zaslavs arrival
and of his successful recruitment of Mr. Zaslav. For 2007,
Mr. Hendricks received a $500,000 bonus due to his fewer
responsibilities following the arrival of Mr. Zaslav.
Signing. Discovery pays signing bonuses to
certain executives upon their joining the company. Market
conditions often dictate when a signing bonus will be necessary
to attract a qualified candidate and the size thereof. Discovery
paid an aggregate signing bonus to Mr. Zaslav of
$2.5 million to induce him to forego his then-current and
prospective leadership roles at his former employer. The signing
bonus was paid in two tranches: he received the first
$1.5 million upon joining Discovery in 2007 and the balance
was paid in early 2008 based on Mr. Zaslav remaining with
the company through the end of 2007.
Incentive
Compensation Plan
Under the ICP, all qualifying employees, including the Discovery
Named Executive Officers (other than Messrs. Hendricks and
Zaslav, who do not participate in the ICP), are eligible to
receive annual cash payments based on the extent to which
pre-established Discovery as a whole and, if applicable, line of
business, operational goals are achieved, and an assessment of
the performance of such employees, including in the case of the
participating Discovery Named Executive Officers, an assessment
by Mr. Zaslav. The amounts payable under the ICP are based
on certain pre-established performance metrics, which in the
case of the participating Discovery Named Executive Officers for
2007 were tied 60% to adjusted operating cash flow and 40% to
net revenue of Discovery as a whole and any applicable line of
business. Discovery established in the first quarter of 2007 for
each of these metrics a minimum amount below which no payment
would be made relating to such metric, an amount where
participants would be paid their entire targeted bonus relating
to such metric and an overachievement amount which serves as a
ceiling where higher payments would only be made relating to
such metric at Discoverys discretion, and in between the
minimum and the overachievement amounts, the amount payable
would be increased or decreased in accordance with a
pre-established scale.
The aggregate amount payable to an individual under his annual
award for 2007 was determined by:
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first, determining the target bonus of each employee, which is
equal to a pre-established percentage of his base salary (for
the target bonus of each Discovery Named Executive Officer
participating in the ICP, please refer to the Grants of Plan
Based Awards table below).
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second, establishing the amount payable pursuant to the
achievement of Discovery as a whole and any applicable line of
business performance measures (which as noted above is based on
adjusted operating cash flow and net revenue with respect to the
Discovery Named Executive Officers participating in the
ICP); and
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then, multiplying that amount by an individual multiplier
(ranging from 0 to 1.5) that is reflective of the
individuals performance classification.
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The calculation of the amount of an ICP award for 2007 was as
follows: [(target bonus x percentage of bonus tied to Discovery
as a whole x percentage based on achieving Discovery as a whole
based performance metrics) + (target bonus x percentage of bonus
tied to line of business x percentage based on achieving line of
business performance metrics)] x individual performance
multiplier.
The determination of what portion of the bonus of a
participating Discovery Named Executive Officer would be based
on the performance of Discovery as a whole
and/or any
applicable line of business was made in the first quarter of
2007 by Mr. Zaslav and approved by the member
representatives with the goal of linking each such
officers bonus to the portions of Discovery for which he
has responsibility, whether Discovery as a whole
and/or a
line of business. Mr. Hollingers corporate
performance measure for 2007 was divided as follows: 40%
Discovery as a whole; 40% Discovery Networks International; and
20% Commerce. Mr. Campbells corporate performance
measure for 2007 was divided as follows: 60% Discovery as a
whole; 20% U.S. Networks; and 20% Emerging Networks. For
ICP purposes, Emerging Networks consists of Investigation
Discovery, HD Theater and Military Channel.
Mr. Millays corporate performance measure for 2007
was based 100% on Discovery as a whole, since as Chief Financial
Officer, he was responsible for the overall organization.
97
Discovery management decided to use net revenue and adjusted
operating cash flow targets to determine whether bonuses would
be paid under the ICP to each participating Discovery Named
Executive Officer because it believes that net revenue is an
important indicator of the overall growth and strength of the
business and adjusted operating cash flow is an important
measure of Discoverys profitability. Since
Discoverys profitability is viewed as the most important
indicator of operating performance, adjusted operating cash flow
was weighted more heavily than net revenue for purposes of 2007
ICP awards.
Operating cash flow amounts were adjusted to eliminate items
that affected the measure but, in the view of Discoverys
management, were not indicative of performance. Discoverys
management exercised discretion in determining the adjustments
to operating cash flow for purposes of the ICP. For 2007, the
significant items that were added back to adjusted operating
cash flow for Discovery and the lines of business used for ICP
purposes were the following: content impairment in
U.S. Networks of $129 million and content and certain
charges in Education of $12 million. For Discovery Networks
International, adjusted operating cash flow for ICP purposes
excludes the results of Antenna Audio as well as Discovery
Networks Internationals allocable share of corporate
expenses.
The performance targets for Discovery as a whole and the lines
of business (other than Commerce and Emerging Networks) that
were applicable to Messrs. Campbell, Hollinger and Millay
are set forth in the following table:
Summary
of 2007 ICP Targets
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Over
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Actual
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Business Unit
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Threshold
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Target
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Achievement
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Results
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($ Millions)
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Net Revenue
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Discovery Communications, LLC
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2,847.5
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2,997.4
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3,147.3
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3,127.3
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Discovery Networks International
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837.9
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931.0
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1,024.1
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985.0
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US Networks
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1,815.0
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1,910.5
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1,986.9
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1,972.3
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Adjusted Operating Cash Flow
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Discovery Communications, LLC
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732.9
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771.5
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888.8
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886.4
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Discovery Networks International
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131.4
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146.0
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186.2
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212.7
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US Networks
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730.2
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768.7
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839.7
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793.6
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Targets for Commerce were adjusted during 2007 to reflect the
continuing business after Discovery ceased to operate the
Discovery Channel Stores. The adjusted targets for Commerce set
forth quantitative measures that required the continuing
business to operate at a profit, which Commerce had not achieved
in prior years. Commerce achieved these targets based on the
continuing business achieving a positive adjusted operating cash
flow in 2007.
Targets for Emerging Networks set forth quantitative measures
that required that the three networks increase revenue by at
least 30% in the aggregate in 2007, compared to 2006, while
maintaining the level of adjusted operating cash flow in 2007,
at least at the 2006 level. Emerging Networks achieved these
goals.
The determination as to whether the 2007 corporate performance
measures were met was made during the first quarter of 2008
following the conclusion and review of the full-year 2007
results of operations. Individual performance classifications
were then determined as described above and final bonus amounts
were approved for payment to such Discovery Named Executive
Officers. As the member representatives had approved the terms
of the 2007 ICP awards in the beginning of 2007, no separate
approval by the member representatives was required at this
time. Please refer to the Estimated Future Payouts Under
Non Equity Incentive Plan Awards column of the Grants of
Plan Based Awards Table for more information regarding the range
of 2007 payouts available to Messrs. Campbell, Hollinger
and Millay and the Non-Equity Incentive Plan
Compensation column of the Summary Compensation Table for
the actual amounts paid to those executives with respect to
their 2007 ICP awards.
The ICP bonus payments made to each of the participating
Discovery Named Executive Officers under the ICP for 2007
reflected the performance of the operations over which the
Discovery Named Executive Officer had
98
responsibility and, in the case of Mr. Hollinger and
Mr. Campbell, the individual performance of the Discovery
Named Executive Officer as determined by Mr. Zaslav.
Mr. Hollingers ICP bonus reflected the strong
performance of Discovery as a whole and Discovery Networks
International, as shown in the table above, as well as
Mr. Hollingers exceptional performance in 2007.
Mr. Campbells ICP bonus reflected the strong
performance of Discovery as a whole and U.S. Networks, and
Emerging Networks achievement of its goals as described
above, as well as Mr. Campbells exceptional
performance in 2007. In January 2008 before ICP awards were
determined, Mr. Millay advised that he would be leaving
Discovery. As noted above, in connection with agreeing upon the
terms of his retention agreement, which governed
Mr. Millays compensation prior to and following his
departure from Discovery, the parties decided that
Mr. Millay would be assigned an agreed upon performance
classification for 2007 rather than undertaking the regular
performance review. As a result, Mr. Millays ICP
bonus payment for 2007 reflects the strong performance of
Discovery as a whole, but does not reflect an assessment of his
individual performance.
Discovery
Appreciation Program
The Discovery Appreciation Program (the DAP) is a
long-term incentive plan designed to reward Discovery employees
at the level of Director and above for increases in the market
value of the Series A common stock of Discoverys
indirect member, DHC. Upon joining the company or, in some
cases, being promoted within the company, each qualifying
employee receives a DAP award. These awards consist of a number
of units which represent an equivalent number of shares of DHC
Series A common stock and a base price which is determined
based on 110% of the average of the closing stock prices of the
DHC Series A common stock on the Nasdaq Global Select
Market over the 10 trading days immediately preceding and
including the grant date and the 10 trading days immediately
following the grant date. Each award vests as to 25% of the
units on each of the four anniversaries of the date of grant.
With respect to all DAP awards granted in 2007, on each vesting
date, if the recipient is employed by Discovery or any of its
subsidiaries, the recipient will be entitled to receive a cash
payment equal to product of (x) the number of units that
vested on that date, multiplied by (y) the spread between
the base price and 110% of the average of the closing stock
prices of the DHC Series A common stock on the Nasdaq
Global Select Market over the 10 trading days immediately
preceding and including the vesting date and the 10 trading days
immediately following the vesting date.
Unlike the 2007 DAP awards, DAP awards granted in 2005 and 2006
were subject to a multi-year payment cycle, whereby the
recipient would not be paid for a vested tranche of units on the
vesting date, rather the recipient would be paid for
(i) the first tranche of units on the one year anniversary
of the vesting date of such tranche, (ii) the second
tranche of units on the second year anniversary of the vesting
date of such tranche, (iii) the third tranche of units on
the third anniversary of such vesting date and (iv) the
fourth tranche of units on the fourth anniversary of such
vesting date. The payment made to the recipient would equal the
product of (x) the number of units in the tranche for which
payment is due, multiplied by (y) the spread between the
base price and 110% of the average of the closing stock prices
of the DHC Series A common stock on the Nasdaq Global
Select Market over the 10 trading days immediately preceding and
including the applicable anniversary date and the 10 trading
days following the applicable anniversary. The 2005 and 2006
awards have been amended, such that, beginning in 2008, all
participants in the DAP will receive payment upon vesting and
the payment amount will be determined in the same manner as it
is determined for the 2007 awards. These amendments were
intended to create more competitive compensation packages for
the participants, as it was believed that the multi-year payment
cycle created too long a period between vesting and
cash-in-hand.
The DAP provides that on termination of employment for cause (as
defined in the DAP), a participants units, whether vested
or unvested, are forfeited. If a participant voluntarily or
involuntarily (other than for cause) terminates employment other
than for death, disability or retirement, all unvested units are
forfeited. In the case of the participants voluntary
termination of employment other than for retirement, 100% of the
value of vested units will be paid if the participant signs a
general release that includes a covenant not to compete and
abides by such agreements as provided in the DAP, and, if not,
only 75% of the value of the vested units will be paid. If a
participant is involuntarily terminated other than for cause,
the participant would be paid for all vested DAP units. Vesting
of 100% of units generally is accelerated in the event that
(1) a participant dies, becomes disabled, or retires,
(2) a participants employment is terminated other
than for cause within twelve months of a change in control (as
defined
99
in the DAP), or (3) the DAP is terminated. Under the DAP, a
participant may retire and qualify for accelerated vesting, in
general, after attainment of age 62 with five years of
service. Also, in the event that the DAP is terminated and a
long-term incentive plan providing comparable benefits to
participants (as determined in the member representatives
reasonable discretion) is not offered in lieu of the DAP,
amounts payable for vested DAP awards would be increased to 125%
of the amount otherwise payable pursuant to the DAP.
The DAPs provisions for vesting or forfeiture of units on
termination of employment in various circumstances as described
above govern the DAP units awarded to the Discovery Named
Executive Officers unless otherwise provided in employment or
other agreements with them. Please see Executive
Compensation Arrangements and Potential Payments
Upon Termination or
Change-in-Control
below for a description of these agreements.
It has been the practice of Discovery under the DAP that,
subject to the absence of any performance issues on the part of
the applicable participant except with respect to
Mr. Zaslav as described below, each participant receives a
replenishment award on each vesting date, pursuant to which he
will receive a new award of a number of units equal to the
number of units that vested on that vesting date. Such vesting
date becomes the grant date of the corresponding replenishment
award. Each replenishment award has a base price determined
based on 110% of the average of the closing stock prices of the
DHC Series A common stock on the Nasdaq Global Select
Market over the 10 trading days immediately preceding and
including the grant date of the replenishment award and the 10
trading days immediately following such grant date.
Replenishment awards are otherwise granted subject to the same
terms and conditions as the award that vested triggering the
grant of the replenishment award. Discovery adopted this
practice as a means of continuing to emphasize the link between
individual compensation and company performance. Additionally,
this practice coupled with the adoption of the payment upon
vesting schedule enabled Discovery to maintain a cap on the
number of units outstanding at any given time (subject only to
increase for new hires or promotions).
The DAP is consistent with Discoverys pay for performance
principles because these awards are designed to focus the
attention of executives on achieving operational goals and
increasing company value over time, which in turn aligns the
interest of executives with Discoverys members. Because
Discovery was not a public company, Discovery could not make
grants tied directly to its own stock performance. Accordingly,
the DAP was designed to replicate, as closely as possible, an
equity-type incentive award program. Because DHC indirectly owns
2/3
of the membership interests in Discovery and DHCs interest
in Discovery accounts for a significant portion of DHCs
market value, DHCs stock price was chosen as the basis for
the DAP awards.
The size of the DAP awards for executive officers (other than
Messrs. Hendricks and. Zaslav) are generally determined by
Mr. Zaslav in conjunction with the setting of their overall
compensation package. As Mr. Zaslav had not yet assumed his
role as CEO at the time awards were made to Mr. Millay upon
his joining the company, his DAP award was determined by
Ms. McHale, the Chief Executive Officer at the time, with
the approval of the member representatives, in conjunction with
the setting of his overall compensation package. Subsequent to
Mr. Millays hire date but before the award date,
Mr. Hendricks, with the approval of the member
representatives, decided to increase the amount of
Mr. Millays award under the Discovery Appreciation
Plan as described in Executive Compensation
Arrangements Millay Employment Agreement; Millay
Retention Agreement, below. Mr. Zaslav determined the
amount of Mr. Campbells DAP award, with the approval
of the member representatives. In determining the amount of
Mr. Campbells award, Mr. Zaslav took into
account the size of other grants within Discovery and the
substantial longer-term pension and other benefits that
Mr. Campbell would be sacrificing by leaving his previous
employer. Mr. Zaslav also considered
Mr. Campbells status and future prospects at his
previous employer, and believed that a substantial grant would
be required to persuade Mr. Campbell to make the move to
Discovery.
The member representatives determined that Mr. Zaslav would
receive 4 million units in connection with his joining
Discovery as a part of the negotiations of his employment
agreement. The size of the grant was determined by the member
representatives in order to ensure that Mr. Zaslav has a
substantial stake in Discoverys success in order to align
his interest with the interest of Discovery and its members. As
noted in his employment agreement, this grant was intended to be
roughly equivalent to an interest of 0.794% in the appreciation
in the value of Discovery and this level of participation is to
be maintained through the award of replenishment grants as his
vested units are paid out under the DAP. The grant
Mr. Zaslav received upon joining the company was not priced
consistent
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with the DAP mechanism described above. Rather, under his
employment agreement, Mr. Zaslav received a DAP award with
respect to 4 million units at a base price equal to 110% of
the closing stock price of the DHC Series A common stock on
December 29, 2006, the last trading day prior to his
January 1, 2007 grant date. Given the size of
Mr. Zaslavs grant, he and the member representatives
selected these pricing terms in order to ensure that his base
price was not lower than the closing stock price on his grant
date (which can sometimes occur under the existing pricing
mechanism described above).
Given Mr. Hendricks long-standing tenure with
Discovery since the time of his founding of the company in 1982,
he has a current DAP awards balance that is reflective of his
unique contribution to the creation and expansion of Discovery
from a
start-up
company to a clear leader in the industry during the course of
Discoverys
25-year
history as a private company. Mr. Hendricks DAP grant
holdings represent his continued participation in approximately
1.3% of Discoverys appreciation, which the Discovery
members continue to maintain through their award of
replenishment grants as his vested DAP units are paid out under
the DAP. Although Mr. Hendricks has not received any new
DAP grants during the past two years, he has continued to
receive his replenishment awards. Mr. Hendricks DAP
units are subject to special rules regarding forfeiture or
rescission, as set forth in an agreement between
Mr. Hendricks and Discoverys stockholders entered
into in 2004. See Executive Compensation
Arrangements John Hendricks Employment
Arrangements 2004 Agreement below for a
description of these provisions.
Because equity-based incentive compensation represents a
material component of Discoverys executive compensation
plan, the Transaction is expected to provide real and
substantial benefits in this regard. The Transaction, together
with the AMC spin-off, will further enhance the ability of New
Discovery, and therefore Discovery, to attract, retain and
provide incentives to qualified personnel, by enabling it to
grant equity incentive awards based on the publicly traded
common stock of New Discovery, which will directly reflect the
performance of the businesses of Discovery. The Transaction,
together with the AMC spin-off, will further enable New
Discovery, and therefore, Discovery, to more effectively tailor
employee benefit plans and retention programs, when compared
with current alternatives, to provide improved incentives to the
employees and future hires of New Discovery that will better and
more directly align the incentives for management at New
Discovery and Discovery with their performance.
The member representatives are currently considering what effect
the Transaction will have on the DAP, including adjustments to
outstanding DAP awards to reflect the Transaction and plans for
equity incentive awards in the future. In any event, the
Discovery Holding Company 2005 Incentive Plan will be assumed by
New Discovery in the Transaction. Under this plan (as so
assumed), it is expected that New Discovery will provide equity
incentive awards, including stock options, restricted shares,
stock appreciation rights and performance awards, to its
employees and independent contractors following the closing of
the Transaction. The plan is designed to provide awards in those
circumstances in which either (i) the award would help
better align the interests of a recipient with those of the
stockholders and help motivate the recipient to increase the
value of the company for the stockholders or (ii) the award
would assist the company in attracting key employees. Please see
Executive Compensation Arrangements Singer
Employment Agreement below for a description of equity
awards that Discovery plans to provide to Mr. Singer
following completion of the Transaction in accordance with his
employment agreement.
The DAP awards are included in the Summary Compensation Table in
the Option Awards column. The dollar amounts
reported in the Summary Compensation Table for the DAP awards do
not reflect actual payments made to the Discovery Named
Executive Officers in the years presented. As further explained
in footnote (1) to the table, the dollar amounts reflect
the compensation expense recognized for financial reporting
purposes with respect to DAP awards held by the executives. The
dollar amounts paid to the Discovery Named Executive Officers in
2007 on account of previously vested DAP awards are reported in
the Option Exercises table. For more information with respect to
DAP awards granted to the Discovery Named Executive Officers in
2007, please refer to the Grants of Plan-Based Awards table.
Retirement
Benefits
In order to ensure that the Discovery Named Executive
Officers receive competitive compensation packages, in
addition to a standard 401(k) defined contribution plan,
Discovery offers a Supplemental Retirement Plan (the
101
SRP) to all of its full-time employees at the vice
president level and above. The employee can make an election to
defer a portion of base salary each calendar year into the SRP
account. To encourage participation in the defined contribution
plans, Discovery makes a matching contribution of (i) 100%
of the employees first 3% of salary contributions to the
defined contribution plans, and (ii) 50% of the
employees next 3% of salary contributions to the defined
contribution plans, up to a maximum amount of 4.5% of company
matching contributions, subject to certain limits under
applicable tax regulations. Participants in the SRP are also
permitted to contribute portions of their DAP payments, their
ICP awards and any other incentive payments they receive from
Discovery to their SRP accounts. These contributions are not
matched by Discovery. The 401(k) accounts and the SRP accounts
are managed by the same plan administrators and offer the same
investment options.
For more information about the SRP, please refer to the
Non-Qualified Deferred Compensation Table below.
Health,
Welfare and Other Personal Benefits
The Discovery Named Executive Officers are entitled to
participate in the health, welfare and fringe benefits generally
made available by Discovery to all of its full-time employees,
such as basic and supplemental life insurance, short and
long-term disability, commuter reimbursement, fitness
reimbursement and access to legal resources. The Discovery Named
Executive Officers are also entitled to participate in
executive-level long-term disability and long-term care plans.
In addition, Discovery provides the following perquisites and
other personal benefits to its Discovery Named Executive
Officers:
Relocation Expenses; Related
Gross-Up. Consistent
with Discoverys objective to attract and retain a
high-performing executive management team, Discovery actively
recruits top-notch candidates from all over the country to fill
executive level openings and will reimburse the newly hired
executive for his relocation costs. Mr. Zaslav,
Discoverys CEO, joined the company in the beginning of
2007, and Mr. Millay, Discoverys former CFO, joined
the company in the third quarter of 2006. Each of
Messrs. Zaslav and Millay received reimbursement of
relocation expenses, as well as
gross-ups to
cover taxes associated with this benefit, as described in
notes 6, 7 and 9 to the Summary Compensation Table.
Aircraft Usage; Related
Gross-Up. Discovery
has an agreement with NetJets Inc. pursuant to which it leases
the right to a specified amount of travel each calendar year on
NetJets aircraft. Discovery allows Messrs. Hendricks
and Zaslav to use a portion of Discoverys allotted travel
time on NetJets aircraft for their personal use. Under
Mr. Zaslavs employment agreement, he is entitled to
the commuting use of company aircraft until July 31, 2008,
which Discovery provides through its NetJets agreement. Family
members may accompany Mr. Hendricks and Mr. Zaslav on
these flights at no aggregate incremental cost to the company.
Other executives are permitted to travel on the NetJets aircraft
for business travel with approval of Mr. Zaslav. For 2007,
Discovery provided a
gross-up to
Mr. Hendricks to cover taxes for imputed income arising
when Mr. Hendricks spouse accompanied him on business
travel, but did not provide a tax
gross-up to
Mr. Hendricks for his personal use of the aircraft. For
2007, Discovery provided a
gross-up to
Mr. Zaslav to cover taxes for imputed income arising when
Mr. Zaslavs spouse accompanied him on business
travel. In addition, Discovery provided Mr. Zaslav a
gross-up to
cover taxes arising from his commuting use of aircraft for the
first seven months of 2007.
Mobile Access. Discovery reimburses
Mr. Zaslav for limited home office expenses, including his
monthly satellite, cable and related television charges and
Internet access.
Car Allowance. Discovery provides
Mr. Zaslav with a monthly car allowance in keeping with its
principle of providing its Discovery Named Executive Officers
with competitive compensation packages.
Life Insurance Policy. Discovery has agreed to
provide Mr. Hendricks death benefit coverage under a
split-dollar life insurance policy. Death benefits are payable
upon the death of both Mr. Hendricks and his wife. At that
time, Discovery will recover the total premiums paid for the
policy, and the remaining death benefit will be payable to a
Hendricks family trust. The premiums paid for this policy
are included in the Summary Compensation Table in All
Other Compensation below.
102
For more information regarding the perquisites provided in 2007
to each Discovery Named Executive Officer, please refer to the
All Other Compensation column of the Summary
Compensation Table.
Payments
on Change of Control or Certain Terminations
Under the employment agreements that Discovery has entered into
with its Discovery Named Executive Officers (other than
Messrs. Hendricks and Hollinger), Discovery will be
required to make certain payments to any such Discovery Named
Executive Officer who is terminated by Discovery without
cause or who quits for good reason as well as
following the death or disability of the Discovery Named
Executive Officer and in connection with certain change of
control events (in each case as defined in the applicable
agreement). In addition, the DAP provides for the acceleration
of vesting upon prescribed events such as the death or
disability of the participant and in connection with certain
change in control events (as defined therein). For
more information regarding these payments, please see
Potential Payments Upon Termination or
Change-in-Control
below.
Pursuant to the terms of Mr. Millays retention
agreement, Mr. Millay will receive a retention payment, ICP
payments, and payment for his vested DAP units and other
benefits in connection with his departure from the company. For
more information regarding these payments, please see
Executive Compensation Arrangements Millay
Employment Agreement; Millay Retention Agreement below.
Cash
Compensation Paid With Respect to 2007
The following table shows the total cash compensation paid to
the Discovery Named Executive Officers with respect to 2007. As
described above, cash compensation was paid for salary, bonus
(including signing bonus, if applicable), ICP awards, and
pursuant to the DAP, as well as in connection with other
compensation such as Discoverys 401(k) and SRP plans, and
tax
gross-ups in
connection with certain perquisites and personal benefits. The
ICP awards included in the table below were paid in the first
quarter of 2008 for 2007 performance. The ICP awards paid in
2007 for 2006 performance are not included in this table. As
described in footnote (1) to the Summary Compensation
Table, amounts shown in the Summary Compensation Table on
account of DAP awards represent the compensation expense
recognized in the particular year for financial reporting
purposes only. The table below shows the amount of cash
compensation actually paid to the Discovery Named Executive
Officers with respect to 2007, which Discovery believes is
useful to understanding the companys compensation
programs. Additional detail about these payments is included in
the footnotes to the Summary Compensation Table. The
compensation included in other cash compensation
does not include the value of the other perquisites and other
personal benefits identified in the Summary Compensation Table.
While the table below is presented to show the actual cash paid
to the Discovery Named Executive Officers under Discoverys
compensation program with respect to 2007, the table is not a
substitute for the tables and disclosures required by the
SECs rules. The tables and related disclosures required by
the SEC rules begin below.
2007 Cash
Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
DAP
|
|
|
ICP
|
|
|
Cash
|
|
|
Total Cash
|
|
|
|
Salary
|
|
|
Bonus
|
|
|
Payments
|
|
|
Payments
|
|
|
Compensation
|
|
|
Compensation
|
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
John S. Hendricks
|
|
|
1,000,000
|
|
|
|
500,000
|
|
|
|
28,692,131
|
|
|
|
|
|
|
|
24,803
|
|
|
|
30,216,934
|
|
David M. Zaslav
|
|
|
1,953,846
|
|
|
|
5,500,000
|
|
|
|
|
|
|
|
|
|
|
|
106,364
|
|
|
|
7,560,210
|
|
Mark G. Hollinger
|
|
|
967,692
|
|
|
|
|
|
|
|
3,046,456
|
|
|
|
1,344,291
|
|
|
|
24,750
|
|
|
|
5,383,189
|
|
Roger F. Millay
|
|
|
550,000
|
|
|
|
|
|
|
|
|
|
|
|
451,110
|
|
|
|
22,500
|
|
|
|
1,023,610
|
|
Bruce L. Campbell
|
|
|
615,385
|
|
|
|
461,539
|
|
|
|
|
|
|
|
361,074
|
|
|
|
9,000
|
|
|
|
1,446,998
|
|
103
Summary
Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Option
|
|
|
Plan
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
Salary
|
|
|
Bonus
|
|
|
Awards
|
|
|
Awards
|
|
|
Compensation
|
|
|
Compensation
|
|
|
Total
|
|
Name and Principal Position
|
|
Year
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)(1)
|
|
|
($)(2)
|
|
|
($)(3)
|
|
|
($)
|
|
|
John S. Hendricks
|
|
|
2007
|
|
|
|
1,000,000
|
|
|
|
500,000
|
|
|
|
|
|
|
|
56,199,809
|
|
|
|
|
|
|
|
154,370
|
(4)
|
|
|
57,854,179
|
|
Founder and
|
|
|
2006
|
|
|
|
1,000,000
|
|
|
|
1,875,000
|
|
|
|
|
|
|
|
12,200,606
|
|
|
|
|
|
|
|
80,869
|
(4)
|
|
|
15,156,475
|
|
Chairman of the Board
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David M. Zaslav
|
|
|
2007
|
|
|
|
1,953,846
|
|
|
|
5,500,000
|
(5)
|
|
|
|
|
|
|
11,145,669
|
|
|
|
|
|
|
|
504,844
|
(6)
|
|
|
19,104,359
|
|
President and
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark G. Hollinger
|
|
|
2007
|
|
|
|
967,692
|
|
|
|
|
|
|
|
|
|
|
|
6,617,496
|
|
|
|
1,344,291
|
|
|
|
28,352
|
|
|
|
8,957,831
|
|
Senior Executive Vice
|
|
|
2006
|
|
|
|
719,423
|
|
|
|
|
|
|
|
|
|
|
|
1,251,236
|
|
|
|
596,160
|
|
|
|
28,046
|
|
|
|
2,594,865
|
|
President and Chief Operating Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Roger F. Millay
|
|
|
2007
|
|
|
|
550,000
|
|
|
|
|
|
|
|
|
|
|
|
2,273,259
|
|
|
|
451,110
|
|
|
|
212,418
|
(7)
|
|
|
3,486,787
|
|
Senior Executive Vice
|
|
|
2006
|
*
|
|
|
129,038
|
|
|
|
160,000
|
(8)
|
|
|
|
|
|
|
84,885
|
|
|
|
97,734
|
|
|
|
93,655
|
(9)
|
|
|
565,312
|
|
President and Chief
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bruce L. Campbell
|
|
|
2007
|
*
|
|
|
615,385
|
|
|
|
461,539
|
(10)
|
|
|
|
|
|
|
1,340,689
|
|
|
|
361,074
|
(11)
|
|
|
9,873
|
|
|
|
2,788,560
|
|
President, Digital Media
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
& Corporate Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The dollar amounts in this column reflect the compensation
expense recognized for financial statement reporting purposes
with respect to the DAP awards held by the Discovery Named
Executive Officers for each of the applicable fiscal years.
These amounts do not reflect actual payments made to the
Discovery Named Executive Officers. See the table captioned
Option Exercises for information about amounts paid
during 2007 on account of the DAP awards, as the DAP awards are
payable in cash only. The compensation expense reflected in the
table is calculated in accordance with FAS 133,
Accounting for Derivative Instruments and Hedging
Activities, because the DAP awards relate to stock of DHC,
not stock of Discovery or a consolidating parent company of
Discovery. However, because the DAP awards are similar to
liability awards under FAS 123R,
FAS Statement No. 123 (Revised
2004) Share-Based Payment, the compensation expense
actually recognized by Discovery is equal to the expense that
would be recognized by Discovery under FAS 123R. |
|
|
|
These dollar amounts include compensation expense attributable
to awards granted during 2007 and 2006 and awards granted prior
thereto that remained unvested during 2007 and 2006, as the case
may be, and exclude the impact of estimates for forfeitures as
these are service-based vesting awards. For a description of the
assumptions applied in these calculations, see footnote 15 to
the consolidated financial statements of Discovery
Communications Holding for the year ended December 31, 2007
(which are included as
Appendix A-3
hereto). For more information regarding the DAP awards, please
see Compensation Discussion and Analysis
Elements of Compensation Discovery Appreciation
Program above. |
|
(2) |
|
These amounts reflect the cash performance awards earned by the
applicable Discovery Named Executive Officers during 2007 and
2006 under Discoverys Incentive Compensation Plan, which
is more fully described under Compensation Discussion and
Analysis Elements of Compensation
Incentive Compensation Plan above. The 2007 award amounts
were determined and paid out during the first quarter of 2008,
and the 2006 award amounts were determined and paid out during
the first quarter of 2007. |
|
(3) |
|
Discovery offers its executives basic life insurance as well as
executive level disability and long-term care coverage.
Discovery also offers matching contributions to an
executives 401(k) plan and supplemental |
104
|
|
|
|
|
retirement plan, subject to certain limitations. Below are the
payments made on behalf of the Discovery Named Executive
Officers to the foregoing plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disability/Long
|
|
Matching Contributions
|
|
|
|
|
Basic Life ($)
|
|
Term Care ($)
|
|
401(k) ($)
|
|
SRP ($)
|
|
Mr. Hendricks
|
|
|
2007
|
|
|
|
1,092
|
|
|
|
|
|
|
|
10,125
|
|
|
|
14,365
|
|
|
|
|
2006
|
|
|
|
1,092
|
|
|
|
|
|
|
|
9,900
|
|
|
|
14,850
|
|
Mr. Zaslav
|
|
|
2007
|
|
|
|
1,092
|
|
|
|
3,967
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mr. Hollinger
|
|
|
2007
|
|
|
|
1,092
|
|
|
|
2,510
|
|
|
|
10,125
|
|
|
|
14,625
|
|
|
|
|
2006
|
|
|
|
786
|
|
|
|
2,510
|
|
|
|
9,900
|
|
|
|
14,850
|
|
Mr. Millay
|
|
|
2007
|
|
|
|
600
|
|
|
|
2,399
|
|
|
|
9,173
|
|
|
|
13,327
|
|
|
|
|
2006
|
|
|
|
600
|
|
|
|
472
|
|
|
|
|
|
|
|
|
|
Mr. Campbell
|
|
|
2007
|
|
|
|
873
|
|
|
|
|
|
|
|
9,000
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For more information regarding these benefits, please see
Compensation Discussion and Analysis Elements
of Compensation Retirement Benefits and
Health, Welfare and Other Personal
Benefits above. |
|
(4) |
|
Discovery has an agreement with NetJets pursuant to which it
leases the right to a specified amount of travel each calendar
year on NetJets aircraft. Discovery allows
Mr. Hendricks a portion of Discoverys allotted travel
time on the NetJets aircraft for his personal use. Discovery
provided a
gross-up to
Mr. Hendricks to cover taxes for imputed income arising
when Mr. Hendricks spouse accompanied him on business
travel, but did not provide a tax
gross-up to
Mr. Hendricks for his personal use of the aircraft. The
amount of this
gross-up for
2007 and 2006 was $313 and $3,055, respectively, and is included
in the table. In addition, the aggregate incremental cost to
Discovery for Mr. Hendricks personal use of the
aircraft during 2007 in the amount of $78,326 is included in the
table. Also included in the table for 2006 are reimbursements to
him for limited home-office expenses. The table also includes
annual premiums of $50,149 for Mr. Hendricks split
dollar life insurance policy as described in Compensation
Discussion and Analysis Elements of
Compensation Health Welfare and other Personal
Benefits above. |
|
(5) |
|
Includes Mr. Zaslavs signing bonus of
$2.5 million as well as an annual bonus of $3 million
paid in 2008 with respect to services rendered by him under his
employment agreement in 2007. |
|
(6) |
|
Discovery allows Mr. Zaslav a portion of Discoverys
allotted travel time on the NetJets aircraft for his personal
use. Discovery provided a
gross-up to
Mr. Zaslav to cover taxes for imputed income arising when
Mr. Zaslavs spouse accompanied him on business
travel. In addition, Discovery provided Mr. Zaslav a
gross-up to
cover taxes arising from his commuting use of aircraft for the
first seven months of 2007. The amount of this
gross-up for
2007 is included in the table. In addition, the aggregate
incremental cost to Discovery for Mr. Zaslavs
personal use of the aircraft (including commuting) during 2007
in the amount of $252,415 (and related personal use of car
services in the amount of $15,945) is included in the table.
Also included in the table are Mr. Zaslavs relocation
expenses of $106,124, a tax
gross-up for
imputed income associated with the reimbursement of certain
relocation and other expenses, his car allowance, and various
reimbursements to him for miscellaneous travel and home-office
expenses. Mr. Zaslav received an aggregate amount of
$106,364 in tax
gross-ups
for these items for 2007, which is included in the table. |
|
(7) |
|
Includes reimbursement to Mr. Millay of relocation expenses
in the amount of $186,919. |
|
(8) |
|
Reflects Mr. Millays signing bonus. |
|
(9) |
|
Includes reimbursement to Mr. Millay of relocation expenses
in the amount of $92,583. |
|
(10) |
|
Reflects the minimum bonus amount to which Mr. Campbell was
entitled under his employment agreement. |
|
(11) |
|
Reflects the balance of Mr. Campbells 2007 bonus
amount which was paid pursuant to the ICP. |
105
Grants
of Plan-Based Awards in 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
|
|
|
|
|
|
Grant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
Exercise
|
|
|
Date Fair
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
or Base
|
|
|
Value of
|
|
|
|
|
|
|
Estimated Future Payouts Under Non-Equity Incentive Plan
Awards
|
|
|
Shares
|
|
|
Price of
|
|
|
Stock and
|
|
|
|
Grant
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
|
|
|
Underlying
|
|
|
of Option
|
|
|
Option
|
|
Name
|
|
Date
|
|
|
($)
|
|
|
($)
|
|
|
($)(1)
|
|
|
Options (#)
|
|
|
Awards ($/sh)
|
|
|
Awards ($)
|
|
|
John S. Hendricks
|
|
|
10/1/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,663,324
|
(2)
|
|
|
31.01
|
|
|
|
9,069,907
|
|
David M. Zaslav
|
|
|
1/2/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,000,000
|
(2)
|
|
|
17.70
|
|
|
|
14,380,237
|
|
Mark G. Hollinger
|
|
|
|
(3)
|
|
|
0
|
|
|
|
729,863
|
|
|
|
1,532,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10/1/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
199,999
|
(2)
|
|
|
31.01
|
|
|
|
1,090,571
|
|
Roger F. Millay
|
|
|
|
(3)
|
|
|
0
|
|
|
|
330,000
|
|
|
|
693,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bruce L. Campbell
|
|
|
|
(3)
|
|
|
0
|
|
|
|
473,425
|
|
|
|
994,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/19/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
700,000
|
(2)
|
|
|
19.50
|
|
|
|
4,406,872
|
|
|
|
|
(1) |
|
Amounts in excess of this maximum may be paid on a discretionary
basis. |
|
(2) |
|
Reflects the number of units granted under the applicable DAP
award. Each award vests as to 25% of the units on each
anniversary of the grant date and is payable in cash. For more
information regarding the DAP awards, please see
Compensation Discussion and Analysis Elements
of Compensation Discovery Appreciation Program
above. |
|
(3) |
|
These grants were made under Discoverys Incentive
Compensation Plan with respect to the year ended
December 31, 2007. The performance metrics and potential
payout amounts under a Discovery Named Executive Officers
2007 ICP grant were determined in the first quarter of 2007. For
more information regarding these grants, please see
Compensation Discussion and Analysis Elements
of Compensation Incentive Compensation Plan
above. |
Outstanding
Equity Awards at Fiscal Year-End
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards(1)
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Option
|
|
|
Option
|
|
|
|
Options (#)
|
|
|
Options (#)
|
|
|
Exercise
|
|
|
Expiration
|
|
Name
|
|
Exercisable(2)
|
|
|
Unexercisable
|
|
|
Price ($)
|
|
|
Date(3)
|
|
|
John S. Hendricks
|
|
|
|
|
|
|
1,663,324
|
(4)
|
|
|
31.01
|
|
|
|
|
|
|
|
|
2,765,294
|
|
|
|
345,663
|
(5)
|
|
|
12.52
|
|
|
|
|
|
|
|
|
1,252,679
|
|
|
|
626,340
|
(5)
|
|
|
15.81
|
|
|
|
|
|
David M. Zaslav
|
|
|
|
|
|
|
4,000,000
|
(6)
|
|
|
17.70
|
|
|
|
|
|
Mark G. Hollinger
|
|
|
|
|
|
|
199,999
|
(4)
|
|
|
31.01
|
|
|
|
|
|
|
|
|
62,500
|
|
|
|
187,500
|
(7)
|
|
|
17.22
|
|
|
|
|
|
|
|
|
396,062
|
|
|
|
198,032
|
(5)
|
|
|
15.81
|
|
|
|
|
|
|
|
|
5,250
|
|
|
|
657
|
(5)
|
|
|
12.52
|
|
|
|
|
|
Roger F. Millay
|
|
|
187,500
|
|
|
|
562,500
|
(7)
|
|
|
17.22
|
|
|
|
|
|
Bruce L. Campbell
|
|
|
|
|
|
|
700,000
|
(8)
|
|
|
19.50
|
|
|
|
|
|
|
|
|
(1) |
|
All awards listed in the table consist of awards that were made
under the Discovery Appreciation Program. Each award vests as to
25% on each anniversary of its grant date and is payable in
cash. For more information regarding the DAP awards, please see
Compensation Discussion and Analysis Elements
of Compensation Discovery Appreciation Program
above. |
|
|
|
(2) |
|
The units listed in this column consist of the portion of each
outstanding DAP award that has vested but with respect to which
payment has not yet been made due to the delayed payment cycle
of the pre-2007 DAP awards described in Compensation
Discussion and Analysis Elements of
Compensation Discovery Appreciation Program
above. The amount to be paid for these DAP units is not known at
this time. The amount to be |
106
|
|
|
|
|
paid per unit will be equal to the difference between the
exercise price shown in the table and 110% of the average of the
closing stock prices of the DHC Series A common stock on
the Nasdaq Global Select Market over the 10 trading days
immediately preceding and including the applicable anniversary
date and the 10 trading days following the applicable
anniversary (the Ending Unit Value). The amounts
shown for Mr. Hendricks are payable within 60 days of
the October 1, 2008 applicable anniversary date. With
respect to the amounts shown for Mr. Hollinger, the 62,500
DAP unit award is payable within 60 days of the
December 5, 2008 applicable anniversary date, and the
396,062 and 5,250 DAP unit awards are payable within
60 days of the October 1, 2008 applicable anniversary
date. The amount shown for Mr. Millay is payable within
60 days of his departure date (July 25, 2008). The
amount to be paid per unit will be the difference between the
exercise price shown in the table and the Ending Unit Value
(with his departure date used as the applicable anniversary
date). As discussed in Compensation Discussion and
Analysis Elements of Compensation
Discovery Appreciation Program above, the member
representatives are currently determining what adjustments to
the outstanding DAP units will be made in connection with the
Transaction. |
|
|
|
(3) |
|
DAP awards have no expiration date. Payment is made in cash in
connection with vesting. |
|
(4) |
|
Grant date of award was October 1, 2007. |
|
(5) |
|
Grant date of award was October 1, 2005. |
|
(6) |
|
Grant date of award was January 2, 2007. |
|
(7) |
|
Grant date of award was December 5, 2006. |
|
(8) |
|
Grant date of award was March 19, 2007. |
Option
Exercises and Stock Vested in 2007
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
|
Number of
|
|
|
Value
|
|
|
|
Shares Acquired
|
|
|
Realized on
|
|
|
|
on Exercise
|
|
|
Exercise
|
|
Name
|
|
(#)(1)
|
|
|
($)(2)
|
|
|
John S. Hendricks
|
|
|
1,663,324
|
|
|
|
28,692,131
|
|
David M. Zaslav
|
|
|
|
|
|
|
|
|
Mark G. Hollinger
|
|
|
199,999
|
|
|
|
3,046,456
|
(3)
|
Roger F. Millay
|
|
|
|
|
|
|
|
|
Bruce L. Campbell
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
These awards were made under the Discovery Appreciation Program.
The amounts consist of payments that were made on a delayed
payment cycle basis for pre-2007 DAP awards as described in
Compensation Discussion and Analysis Elements
of Compensation Discovery Appreciation Program
above. Payment was made in cash and no shares were issued. The
numbers listed in this column reflect the number of units that
vested and gave rise to the value realization event. |
|
(2) |
|
Represents amount of cash actually received with respect to
units listed in corresponding column of table. |
|
(3) |
|
Of this amount, $75,800 was deferred by Mr. Hollinger as a
contribution to his Supplemental Retirement Plan. |
Nonqualified
Deferred Compensation (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
|
|
|
Registrant
|
|
|
Aggregate
|
|
|
|
|
|
|
|
|
|
Contributions
|
|
|
Contributions
|
|
|
Earnings
|
|
|
Aggregate
|
|
|
Aggregate
|
|
|
|
in last
|
|
|
in last
|
|
|
in last
|
|
|
Withdrawals/
|
|
|
Balance at
|
|
Name
|
|
fiscal yr ($)
|
|
|
fiscal yr ($)
|
|
|
fiscal yr ($)
|
|
|
Distributions ($)
|
|
|
12/31/07 ($)
|
|
|
John S. Hendricks
|
|
|
264,692
|
(2)
|
|
|
14,365
|
(3)
|
|
|
10,957
|
|
|
|
|
|
|
|
389,024
|
|
David M. Zaslav
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark G. Hollinger
|
|
|
154,916
|
(4)
|
|
|
14,625
|
(3)
|
|
|
7,914
|
|
|
|
|
|
|
|
689,506
|
|
Roger F. Millay
|
|
|
17,769
|
(5)
|
|
|
13,327
|
(3)
|
|
|
1,083
|
|
|
|
|
|
|
|
30,614
|
|
Bruce L. Campbell
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107
|
|
|
(1) |
|
This table provides information with respect to Discoverys
Supplemental Retirement Plan for employees at the level of vice
president and above. For more information regarding the SRP,
please see Compensation Discussion and
Analysis Elements of Compensation
Retirement Benefits above. |
|
(2) |
|
Of this amount, $77,192 is reported under Salary for 2007 and
$187,500 is reported under Bonus for 2006 in the Summary
Compensation Table. |
|
(3) |
|
This amount is reported under All Other Compensation in the
Summary Compensation Table. |
|
(4) |
|
Of this amount, $95,300 is reported under Salary for 2007 and
$59,616 is reported under Bonus for 2006 in the Summary
Compensation Table. |
|
(5) |
|
This amount is reported under Salary for 2007 in the Summary
Compensation Table. |
Executive
Compensation Arrangements
Hendricks
Employment Arrangements; 2004 Agreement
John Hendricks, the founder and Chairman of Discovery, does not
have a formal employment agreement. Pursuant to resolutions
adopted by Discoverys stockholders in 2004,
Mr. Hendricks is paid an annual salary of $1 million
and his bonus opportunity is 60% of annual salary. As described
in Compensation Discussion and Analysis
Elements of Compensation Bonus,
Mr. Hendricks actual bonus varies from year-to-year.
In 2004, Mr. Hendricks and the stockholders of
Discoverys predecessor (DCI), entered into an
agreement, which is reflected in a letter agreement between
DCIs compensation committee and Mr. Hendricks (the
2004 Agreement). The 2004 Agreement includes special
rules for Mr. Hendricks DAP units and the conditions
under which he continues to serve as Chairman of Discovery, each
as described below.
Mr. Hendricks DAP units replaced units that had been
granted under the Discovery Communications, Inc. Executive
Incentive Plan (EIP). Discovery established the DAP in
2005 following the DHC spin-off. In the 2004 Agreement, the
parties agreed to additional terms governing
Mr. Hendricks EIP units, which, to the extent
relevant, continue to govern Mr. Hendricks DAP units
that were issued to replace the EIP units, and any replenishment
DAP units issued with respect thereto. Specifically, the parties
agreed that Mr. Hendricks EIP units that have not yet
vested may be rescinded, and any vested EIP units may be subject
to a forced cash out (and paid to Mr. Hendricks) to prevent
further appreciation, but only by either (i) the unanimous
action of DCIs stockholders if the company has not gone
public, or (ii) the vote of two-thirds of the DCI board of
directors, including the votes of any board members representing
the current DCI stockholders, in the event that the company has
gone public.
In addition, under the 2004 Agreement, the earned value of any
vested EIP units that have not already been subject to
rescission or forced cash out may not be rescinded by DCI or
forfeited by Mr. Hendricks except (i) as provided
under the EIP in the event of his voluntary departure and
subsequent work for a competitor, or (ii) in the event of
his conviction for any act of fraud or any other felony in
connection with DCI, in which case the value of any vested EIP
units may be subject to partial or complete forfeiture upon the
unanimous action of DCIs stockholders. Under the
provisions of the DAP that now apply to Mr. Hendricks
previous EIP units, in the event of Mr. Hendricks
voluntary departure and subsequent work for a competitor,
Mr. Hendricks would receive 75% of the value of his vested
DAP units. Under the DAP, a participant, including
Mr. Hendricks, who voluntarily terminates employment
ordinarily receives 100% of the value of his vested DAP units if
he signs a release that includes a covenant not to compete.
Pursuant to the 2004 Agreement, the DCI stockholders and
Mr. Hendricks agreed that he would remain in the position
of Chairman of the Board of DCI. The 2004 Agreement confirms the
agreement between Mr. Hendricks and the DCI stockholders
that Mr. Hendricks may be removed from the position of
Chairman of DCI at any time for any reason, but only by
unanimous action of the DCI stockholders if the company has not
gone public, or the vote of two-thirds of the DCI board of
directors, including the votes of any board members representing
any of the current DCI stockholders, in the event that the
company has gone public.
Discoverys members and Mr. Hendricks currently are
discussing possible revisions to the 2004 Agreement. The
revisions will be described once they are finalized.
108
Zaslav
Employment Agreement
Discovery has entered into an employment agreement with David
Zaslav, its President and Chief Executive Officer, for an
original term of five years commencing on January 2, 2007,
with automatic one year extensions (subject to termination by
either party prior to the commencement of an extension period).
Pursuant to this agreement, Mr. Zaslav is entitled to
receive a base salary of $2 million per annum and an annual
bonus. During the first year of employment, Mr. Zaslav was
entitled to receive and did receive a guaranteed bonus of
$3 million. During each of the remaining four years of the
original term of the agreement, Mr. Zaslav will be entitled
to receive a guaranteed annual bonus, equal to $2 million
for the second year of employment, $1.5 million for the
third year of employment, and $1 million for each of the
fourth and fifth years of employment. There is no guaranteed
bonus amount for any extension period. After the first year of
employment, Mr. Zaslav may earn a performance-based bonus
in excess of the guaranteed bonus amount applicable to a
particular year. The amount of the performance-based bonus will
depend on the achievement of qualitative and quantitative
performance criteria. The compensation committee of the New
Discovery board will determine the quantitative and qualitative
performance criteria for Mr. Zaslavs annual bonuses
going forward. Mr. Zaslav also received a signing bonus of
$2.5 million pursuant to the agreement. Mr. Zaslav
receives 4 weeks of vacation under his agreement.
Pursuant to the employment agreement, Discovery was required to
reimburse Mr. Zaslav for reasonable expenses incurred in
relocating his principal residence, including temporary housing,
closing and realtor costs and packing and transport expenses,
subject to a maximum reimbursement of $250,000. In addition,
during 2007 and a portion of 2008, Mr. Zaslav is entitled
to limited personal use of aircraft under Discoverys
NetJets agreement for commuting between his residence and
Discoverys offices. Under the agreement, to the extent any
expense associated with Mr. Zaslavs use of the
aircraft is not deductible by Discovery, he will reimburse
Discovery for the loss of any tax benefit or, at his election,
pay for the use of such aircraft in a manner such that no
portion of the expense is nondeductible.
Mr. Zaslav is also entitled to other perquisites, such as a
monthly car allowance and certain mobile technology, as well as
the ability to participate in all employee benefit plans
available to Discoverys senior executive group.
On his start date, Mr. Zaslav received a DAP award with
respect to 4 million units pursuant to the terms of his
agreement. The terms of this award are substantially similar to
the standard terms of the DAP awards described in
Compensation Discussion and Analysis Elements
of Compensation Discovery Appreciation Program
above, except as to the noted difference in pricing, the
accelerated vesting described below and Mr. Zaslavs
right to receive replenishment grants on each maturity date of
his original award. If Mr. Zaslav is terminated without
cause or he terminates his employment for good
reason (in each case, as defined in the agreement), his
DAP awards all accelerate with the amount to be paid and the
timing of such payment to be based on his termination date. If,
however, any such termination occurs prior to the fifth
anniversary of his start date,
1/2
of his vested DAP awards will be valued as of the date of
termination with the remaining
1/2
being valued as of their respective regular maturity dates or
the fifth anniversary of his start date, whichever is earlier,
in each case for purposes of determining the amount and timing
of the payments to be made to him.
Upon any termination of his employment, Mr. Zaslav is
entitled to all accrued and unpaid salary and bonus, accrued and
unused vacation days and benefits accrued under Discoverys
welfare and retirement plans. In addition, Mr. Zaslav is
entitled to certain severance payments in the event he is
terminated without cause or by reason of death or
disability or he terminates his employment for good
reason (in each case, as defined in the agreement). The
payment of Mr. Zaslavs severance is conditioned on
his execution of a release in favor of Discovery. For more
information regarding these severance payments, please see
Potential Payments Upon Termination or
Change-in-Control
below.
Pursuant to Mr. Zaslavs employment agreement, he is
subject to customary restrictive covenants, including those
relating to non-solicitation, non-interference, non-competition
and confidentiality, during the term of his employment with
Discovery and for a period thereafter.
Discoverys members and Mr. Zaslav currently are
discussing possible revisions to Mr. Zaslavs
employment agreement. The revisions will be described once they
are finalized.
109
Millay
Employment Agreement; Millay Retention Agreement
On August 8, 2006, Discovery entered into an employment
agreement with Roger F. Millay, its former Senior Executive Vice
President and Chief Financial Officer. This agreement was
amended and restated on April 22, 2008 to comply with the
requirements of Section 409A of the Code. The original term
of Mr. Millays employment agreement was three years
beginning on September 29, 2006 and ending
September 28, 2009, with an option to renew for an
additional term. Pursuant to this agreement, Mr. Millay
received a signing bonus of $160,000 and was entitled to receive
a base salary of $550,000 per annum. For each year of the term,
Mr. Millay was eligible to receive an annual bonus under
the ICP with his target bonus equal to 60% of his base salary.
For 2006, he was entitled to a minimum bonus amount of $40,000.
Mr. Millay was also entitled to reimbursement of reasonable
relocation expenses.
Under his employment agreement, Mr. Millay was entitled to
receive a DAP award in April 2007 consisting of
460,000 units, however, he instead received a DAP award
with respect to 750,000 units in December 2006. The terms
of this award are substantially similar to the standard terms of
the DAP awards described in Compensation Discussion and
Analysis Elements of Compensation
Discovery Appreciation Program above, except
as to accelerated vesting in certain events (such as termination
by Discovery other than for cause (as defined
therein)).
Under his employment agreement, Mr. Millay is entitled to
all benefits available to similarly situated executives of
Discovery and is subject to customary covenants as to
confidentiality and non-competition.
In January 2008, Mr. Millay indicated his intention to
leave Discovery, and, on January 8, 2008, Discovery entered
into a retention agreement with Mr. Millay, pursuant to
which the parties agreed to retain his services as Senior
Executive Vice President and Chief Financial Officer through
September 30, 2008, or earlier at the discretion of
Discovery. Under the terms of the retention agreement,
Mr. Millay will receive his base salary through
September 30, 2008, amounting to $416,730, regardless of
the date of final termination, as well as a retention payment of
$1.5 million, to be paid within 30 days of his final
departure date. Mr. Millay will also be entitled to receive
payment for his vested DAP awards within 60 days after his
departure, valued as of his final departure date. His unvested
DAP awards will not accelerate. Mr. Millays final
departure date is July 25, 2008.
The retention agreement entitles Mr. Millay to receive a
payment under the ICP for 2007, based on an individual
performance multiplier of 1.0. For more information about the
2007 ICP awards, please see Compensation Discussion and
Analysis Elements of Compensation
Incentive Compensation Program. The retention agreement
also entitles Mr. Millay to receive a prorated payment
under the ICP for 2008 in the amount of $247,500 (based on a
9-month
retention period). This lump sum is payable within 30 days
of his final departure date.
As a condition to receiving any payments under the retention
agreement, Mr. Millay must execute a general release in
favor of Discovery as well as a mutual non-disparagement
agreement.
Campbell
Employment Agreement
Discovery entered into an employment agreement with Bruce L.
Campbell, its President, Digital Media & Corporate
Development, on March 13, 2007. This agreement was amended
and restated on April 2, 2008 to comply with the
requirements of Section 409A of the Code. The term of employment
is for four years beginning on March 19, 2007 and ending
March 18, 2011, with automatic one-year extensions (subject
to termination by either party prior to the commencement of an
extension period). Pursuant to this employment agreement,
Mr. Campbells base salary is $800,000 per annum, with
minimum yearly increases of no less than $50,000.
Mr. Campbell is also eligible to receive an annual
performance bonus under the ICP with his target bonus equal to
75% of his then-base salary, with a minimum bonus payment for
fiscal year 2007 equal to 75% of his prorated 2007 base salary.
Under his employment agreement, Mr. Campbell received a DAP
award on March 19, 2007 consisting of 700,000 units.
The terms of this award are substantially similar to the
standard terms of the DAP awards described in Compensation
Discussion and Analysis Elements of
Compensation Discovery Appreciation Program
above, except if Mr. Campbell voluntarily terminates his
employment other than for good reason (as defined
therein), he would forfeit all rights under his DAP awards.
Mr. Campbell is also entitled to all benefits available to
110
similarly situated executives of Discovery and is subject to
customary covenants as to confidentiality and non-competition.
Under Mr. Campbells employment agreement, he is
entitled to severance if Discovery terminates his employment
other than for cause or if he terminates for
good reason (in each case, as defined therein). The
payment of Mr. Campbells severance is conditioned on
his execution of a release in favor of Discovery. In the event
Discovery provides notice to Mr. Campbell that it will not
extend his employment for any applicable period,
Mr. Campbell is entitled to a non-renewal payment. For more
information regarding these payments, please see Potential
Payments Upon Termination or
Change-in-Control
below.
Singer Employment Agreement
Discovery entered into an employment agreement with Brad Singer,
its Senior Executive Vice President, Chief Financial
Officer, for an original term of three years commencing on
July 15, 2008, with one automatic three year extension
(subject to termination by either party prior to the
commencement of an extension period). Pursuant to the agreement,
Mr. Singer will receive a sign-on bonus of $35,000. The
agreement provides Mr. Singer a base salary of $750,000 per
annum, subject to annual increases in accordance with
Discoverys standard practices and procedures.
Mr. Singer is also eligible to receive an annual
performance bonus with a payment target of 75% of his base
salary. For fiscal year 2008 only, Mr. Singer is entitled
to receive a guaranteed bonus of $470,000 and is eligible for an
additional discretionary bonus in the sole discretion of the CEO
and the compensation committee of the New Discovery board
based on individual performance and the success of
Discoverys transition to a public company.
Pursuant to the agreement, Discovery is required to reimburse
Mr. Singer for reasonable expenses incurred in relocating
his principal residence in accordance with Discoverys
relocation policies, provided that the maximum reimbursement
afforded under Discoverys relocation policy is increased
to $1,750,000 (including financial loss protection on sale of
his then current residence and tax gross ups). Reimbursement for
relocation expenses is subject to continued employment and may
be required to be repaid on a resignation without good
reason or a termination for cause (in each
case, as defined in the agreement) within 18 months of
employment commencement.
Mr. Singers agreement provides that he will be
recommended for stock option awards with respect to
New Discovery to be made if Discovery becomes a public
company within 18 months following his employment
commencement. The awards will consist of a sign-on award valued
at $3 million under the assumptions below and an additional
award valued at $1.6 million on the same assumptions. For
purposes of determining the shares subject to the awards, the
values stated above will be divided by the Black-Scholes value
of DHCs common stock as of his commencement date (using
Discoverys standard Black-Scholes assumptions for
compensatory purposes). The options will be priced at the higher
of the DHC price on employment commencement and the price of
New Discovery stock on option grant. If New
Discoverys stock price is higher, resulting in an upward
price adjustment, Mr. Singer will be entitled to a cash
payment of the difference, payable 75% on the third anniversary
of employment commencement and 25% on the fourth anniversary,
assuming continued employment at those dates (or, for the
sign-on option, a prior termination without cause or resignation
for good reason). The number of shares covered by the options
and/or the
price may be adjusted as appropriate to reflect the use of New
Discovery stock rather than the stock of DHC. The options will
vest at a rate of no less than 25% per year, beginning
July 15, 2009. The sign-on option will include full vesting
if Mr. Singer is terminated without cause or he
terminates his employment for good reason or the
original term is not extended. The agreement also provides that
he may be recommended for additional option grants. If Discovery
does not become a reporting company within 18 months,
Discovery, in lieu of the foregoing, will provide him with an
equity interest in Discovery with a value of $4.6 million,
adjusted to reflect changes in value since employment
commencement, in a form determined by Discoverys board and
reasonably acceptable to Mr. Singer.
Mr. Singer is also entitled to participate in employee
benefit plans available to executives at his level at the
company and is subject to customary covenants as to
confidentiality and non-competition.
In the event that Mr. Singer is terminated without
cause (including by contract non-extension) or he
terminates his employment for good reason, he is
entitled to payment of his base salary for the remainder of his
employment term, but not less than 12 months base
salary, pro-rated bonus and vesting of the sign-on option (as
111
described above). These payments are conditioned on his
execution of a release in favor of Discovery. Mr. Singer
also is entitled to payment on death or disability as provided
in the agreement.
Potential
Payments Upon Termination or
Change-in-Control
The following summarizes the potential payments and other
benefits required to be made available to the Discovery Named
Executive Officers in connection with a termination of their
employment or a change in control. The summaries do not include
payments or other benefits under incentive plans and other
benefit plans and policies that apply equally to all salaried
employees participating in such plans. Defined terms such as
cause, good reason, and change of
control used in this summary are described at the end of
this summary. The quantitative examples provided below are
premised on:
|
|
|
|
|
the applicable Discovery Named Executive Officer ceasing to be
employed by Discovery as of December 31, 2007;
|
|
|
|
the ending unit value under the DAP as of that date equaling
$27.40 (which is 110% of the average closing market prices of
the DHC Series A common stock during the 10-trading days
before and including the assumed termination date and the
10-trading days after the assumed termination date);
|
|
|
|
all accrued salary at that assumed termination date having
previously been paid;
|
|
|
|
all accrued vacation for 2007 having been used; and
|
|
|
|
where the below calculations require the inclusion of an ending
unit value under the DAP at a specified future date (such as
upon expiration of any employment term), that the applicable
ending unit value is $27.40.
|
John S.
Hendricks
Mr. Hendricks does not have a formal employment agreement
with Discovery. However, Mr. Hendricks 2004 Agreement
governs his DAP units that were issued to replace his EIP units
and any replenishment DAP units issued with respect thereto. The
terms of the DAP also govern his DAP units for matters not
addressed in the 2004 Agreement.
On termination of employment, Mr. Hendricks generally would
be entitled to payment for any vested portions of his DAP units
as provided in the DAP. If Mr. Hendricks voluntarily
terminates his employment (other than for retirement) and signs
a general release that includes a covenant not to compete and
abides by such agreements, he is entitled to receive 100% of the
value of his vested DAP units (as shown in the table below). If
Mr. Hendricks does not sign a general release or does not
abide by the agreements, he is entitled to receive 75% of the
value of his vested DAP units. In addition, as a result of the
application of the 2004 Agreement, if Mr. Hendricks were
terminated for cause, he would not forfeit the value of his
vested DAP units unless he were convicted of any act of fraud or
any other felony in connection with Discovery, in which case the
value of any vested DAP units may be subject to partial or
complete forfeiture upon the unanimous action of
Discoverys stockholders. Please see Compensation
Discussion and Analysis Elements of
Compensation Discovery Appreciation Program
for a description of the accelerated vesting of the DAP awards
upon retirement.
Under the 2004 Agreement, his unvested DAP awards may only be
rescinded or forfeited (whether or not Mr. Hendricks
terminates employment) upon the specified vote of the Discovery
stockholders or the Discovery board of directors. Consequently,
if Mr. Hendricks were terminated for cause, he would be
entitled to retain his unvested DAP awards unless the Discovery
stockholders or the Discovery board of directors voted to
rescind the DAP awards in accordance with the 2004 Agreement.
For more information, see Executive Compensation
Arrangements John Hendricks Employment Arrangements;
2004 Agreement and Compensation Discussion and
Analysis Elements of Compensation
Discovery Appreciation Program.
112
|
|
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|
|
Event
|
|
Value of DAP Awards ($)
|
|
|
By Discovery for Death or Disability; By Discovery other than
for Cause within 1 year of a Change in Control(1)
|
|
|
68,046,415
|
|
By Discovery following conviction of any act of fraud or any
other felony in connection with Discovery(2)
|
|
|
|
|
By Discovery for cause not following conviction of any act of
fraud or any other felony in connection with Discovery(3)
|
|
|
55,648,043
|
|
By Mr. Hendricks; By Discovery other than for Cause, Death
or Disability(4)
|
|
|
55,648,043
|
|
|
|
|
(1) |
|
Represents acceleration of all DAP units. |
|
(2) |
|
Represents forfeiture of all DAP units (vested and unvested),
assuming unanimous stockholder vote for forfeiture of all units
in this case. |
|
(3) |
|
Represents payment for all vested DAP units and forfeiture of
all unvested DAP units, and assumes board or stockholders (as
required) vote for forfeiture of unvested units in this case. |
|
(4) |
|
Represents payment for all vested DAP units and forfeiture of
all unvested DAP units, and assumes board or stockholders (as
required) vote for forfeiture of unvested units in this case. |
David M.
Zaslav
By Discovery Other than for Death, Disability or Cause; By
Mr. Zaslav for Good Reason. If
Mr. Zaslavs employment is terminated by Discovery
other than for death, disability or cause (as
defined therein) or by Mr. Zaslav for good
reason, Mr. Zaslavs employment agreement
entitles him to receive payments for the following:
(1) all accrued and unpaid salary, accrued and unpaid
annual bonus (including any guaranteed bonus) for any completed
year and accrued and unused vacation, in each case in a lump
sum, and other vested benefits under DCIs welfare and
benefit plans;
(2) a prorated portion of Mr. Zaslavs then
current annual bonus (including any guaranteed bonus), based on
the portion of the calendar year during which Mr. Zaslav
was employed by Discovery, payable during the first quarter of
the following year, in the ordinary course of Discoverys
bonus payments;
(3) an amount equal to one-twelfth (1/12) of
Mr. Zaslavs then current base salary and one-twelfth
(1/12) of Mr. Zaslavs then current target annual
bonus multiplied by the number of months in the applicable
severance period (as defined below), payable over
the course of the severance period consistent with
Discoverys normal payroll practices;
(4) accelerated vesting and payment for all of his DAP
awards;
(5) the provision of COBRA premiums for the continuation of
Discoverys group health insurance benefits to
Mr. Zaslav and his family until the expiration of the
severance period (or the earlier eligibility of such persons for
coverage by a subsequent employer of Mr. Zaslav or when
COBRA rights otherwise expire).
The severance period applicable to a December 31, 2007
termination was 36 months. Under Mr. Zaslavs
employment agreement, the severance period for a later
termination would be (1) 30 months if the termination
were to occur during the second year of employment,
(2) 24 months if termination were to occur during the
third year of employment, (3) 18 months if termination
were to occur during the fourth year of employment, and
(4) 12 months if termination were to occur during the
fifth year of employment, except that the severance period is
the lesser of 36 months and the fifth anniversary of
employment in the event of a termination by Discovery other than
for cause or any termination by Mr. Zaslav for
good reason within 12 months following a change
in control of Discovery. In addition, Mr. Zaslav has the
right to reduce his severance period to 12 months in all
events in exchange for a reduction in the period of his
non-competition covenant to one year from termination.
113
By Reason of Death or
Disability. Mr. Zaslavs employment
agreement provides for the payment of the following amounts upon
termination of his employment by reason of his death or
disability:
(1) all accrued and unpaid salary, accrued and unpaid
annual bonus (including any guaranteed bonus) for any completed
year and accrued and unused vacation, in each case in a lump
sum, and other vested benefits under DCIs welfare and
benefit plans;
(2) a prorated portion of Mr. Zaslavs then
current annual bonus (including any guaranteed bonus), based on
the portion of the calendar year during which Mr. Zaslav
was employed by Discovery, payable during the first quarter of
the following year, in the ordinary course of Discoverys
bonus payments;
(3) payment for his DAP awards, in a lump sum, in
accordance with the terms of the DAP (which provide for
acceleration of vesting in such event); and
(4) the provision of COBRA premiums for the continuation of
Discoverys group health insurance benefits to
Mr. Zaslav, if applicable, and his family for so long as
they remain eligible to receive COBRA benefits.
As a condition to receiving the severance payments described
above (other than in the event of his death), Mr. Zaslav
would be required to sign a general release.
By Discovery for Cause; By Mr. Zaslav Other than for
Good Reason. If Mr. Zaslavs
employment is terminated by Discovery for cause or
by Mr. Zaslav other than for good reason (in
each case, as defined therein), his employment agreement
entitles him to receive all accrued and unpaid salary, accrued
and unpaid annual bonus (including any guaranteed bonus) for any
completed year and accrued and unused vacation, in each case in
a lump sum, and other vested benefits under DCIs welfare
and benefit plans. If such termination was effected by Discovery
for cause, or by Mr. Zaslav other than for
good reason (including on retirement),
Mr. Zaslav forfeits all rights under his DAP awards
(regardless of whether all or any portion of the award is then
vested or unvested).
The following table summarizes the potential benefits to
Mr. Zaslav had termination of his employment occurred under
any of the circumstances described above as of December 31,
2007:
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Bonus
|
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Continued
|
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Continued
|
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Value of
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COBRA
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|
Payment
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|
Salary
|
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|
Bonus
|
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DAP
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|
Premiums
|
|
Event
|
|
($)
|
|
|
($)*
|
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|
($)*
|
|
|
Awards ($)
|
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|
($)*
|
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|
By Discovery Other than for Death, Disability or Cause; By
Mr. Zaslav for Good Reason
|
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3,000,000
|
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|
6,000,000
|
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|
9,000,000
|
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|
38,782,000
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|
27,190
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By Discovery Other than for Cause or By Mr. Zaslav for Good
Reason, within 1 year of a Change in Control
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3,000,000
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|
6,000,000
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9,000,000
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|
38,782,000
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|
27,190
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|
Death or Disability
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3,000,000
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|
38,782,000
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|
27,190
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|
By Discovery for Cause; By Mr. Zaslav Other than for Good
Reason
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* |
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Payable over the course of the severance period |
Mark G.
Hollinger
Mr. Hollinger does not have an employment agreement with
Discovery. On termination of his employment, he would be
entitled to payment for any vested portions of his DAP awards
(unless he is terminated by Discovery for cause, in which case
he would forfeit all his DAP awards) and, in limited
circumstances, for any unvested portion of his DAP awards, in
each case, as provided by the terms of the DAP.
If Mr. Hollinger voluntarily terminates his employment
(other than for retirement) and signs a general release that
includes a covenant not to compete and abides by such
agreements, he is entitled to receive 100% of the value of his
vested DAP units (as shown below). If Mr. Hollinger does
not sign a general release or does not abide by the agreements,
he is entitled to receive 75% of the value of his vested DAP
units. See Compensation Discussion and
114
Analysis Elements of Compensation
Discovery Appreciation Program for a description of the
accelerated vesting of the DAP awards upon retirement.
Mr. Hollinger would also be entitled to the amount payable
under the ICP. Under Discoverys policies that govern the
ICP, if Mr. Hollinger is terminated after September 30
(other than for cause), he is entitled to a pro-rated ICP award.
For purposes of determining the amount of the ICP award, the
individual performance multiplier is 1.0. If Mr. Hollinger
voluntarily terminates his employment prior to payment of the
award, he would forfeit all rights under the ICP.
The following table summarizes the potential benefits to
Mr. Hollinger had termination of his employment occurred
under any of the circumstances described above as of
December 31, 2007:
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Value of DAP
|
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ICP
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Event
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Awards ($)
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Payment ($)
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|
By Discovery for Death or Disability; By Discovery other than
for Cause within 1 year of a Change in Control
|
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|
9,514,621
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|
$
|
729,863
|
|
By Discovery for Cause
|
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|
|
|
|
|
|
By Mr. Hollinger; By Discovery other than for Cause, Death
or Disability
|
|
|
5,302,641
|
|
|
|
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Roger F.
Millay
In the beginning of January 2008, Mr. Millay announced his
intention to leave Discovery and entered into a retention
agreement with Discovery, which provides for the terms on which
he will be retained as Senior Executive Vice President and Chief
Financial Officer through September 30, 2008, unless
Discovery selects an earlier departure date. The severance
provisions of the retention agreement supersede those contained
in Mr. Millays employment agreement to the extent the
retention agreement addresses the same circumstances. Otherwise,
the provisions of the employment agreement remain applicable.
Mr. Millays final departure date is July 25, 2008.
Under the terms of the retention agreement, Mr. Millay will
receive his base salary through September 30, 2008,
regardless of the date of final termination, as well as a
retention payment of $1.5 million, to be paid within
30 days of his final departure date. Mr. Millay will
also be entitled to receive payment for his vested DAP awards
within 60 days after his departure, valued as of his final
departure date in accordance with the plan. His unvested DAP
awards will not accelerate.
The retention agreement entitles Mr. Millay to receive a
payment under the ICP for 2007, based on an individual
performance multiplier of 1.0. For more information about the
2007 ICP awards, please see Compensation Discussion and
Analysis Elements of Compensation
Incentive Compensation Program. The retention agreement
also entitles Mr. Millay to receive a prorated payment
under the ICP for 2008 in the amount of $247,500 (based on a
9-month
retention period). This lump sum is payable within 30 days
of his final departure date.
Under the retention agreement, as a condition to receiving all
payments described above, Mr. Millay would be required to
(i) devote his full and undivided efforts to Discovery and
perform at a level expected of a chief financial officer,
(ii) participate in all financial functions relating to
Discoverys corporate restructuring, (iii) cooperate
with any transition plan and ensure that the financial functions
are performed during the retention period and (iv) adhere
to all legal responsibilities and Discoverys practices
regarding confidentiality. Mr. Millay would also be
required to execute a general release in favor of Discovery as
well as a mutual non-disparagement agreement. The retention
agreement provides that Discovery has authority and sole
discretion to certify that Mr. Millay has fully and
professionally complied with all of the conditions for the
retention payment, and that Discovery will exercise such
discretion prudently and in good faith and will not deny
Mr. Millay payments set forth in the retention agreement
without cause.
Notwithstanding the foregoing, if Mr. Millays
employment were to terminate by reason of death or disability,
under the terms of the DAP, any unvested units credited to him
will become 100% vested and all vested units will be paid out in
a single lump sum payment. In the case of his disability only,
Mr. Millay is also entitled to the
115
continuance of his coverage under Discoverys relevant
medical or disability plans to the extent permitted by such
plans and to the extent these benefits are provided generally to
similarly situated Discovery executives.
The following table summarizes the potential benefits to
Mr. Millay under his retention agreement had termination of
his employment occurred under any of the circumstances listed
below as of December 31, 2007:
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|
|
|
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Retention
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Prorated 2008
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Value of
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|
Event
|
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Salary ($)
|
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Payment ($)
|
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|
ICP Payment ($)
|
|
|
DAP Awards ($)
|
|
|
Pursuant to Retention Agreement
|
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|
416,730
|
|
|
|
1,500,000
|
|
|
|
247,500
|
|
|
|
1,907,906
|
|
Death
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,631,625
|
|
Disability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,631,625
|
|
Bruce L.
Campbell
By Discovery Other than for Death, Disability or Cause; By
Mr. Campbell for Good Reason. If
Mr. Campbells employment is terminated by Discovery
other than for death, disability or cause or by
Mr. Campbell for good reason, including a
successors failure to assume his employment agreement
following a change of control (in each case, as
defined therein), Mr. Campbells employment agreement
entitles him to receive payments for the following:
(1) an amount, payable in a lump sum, equal to his annual
base salary and his target level annual bonus (which is 75% of
his then-base salary) for the balance of the then-applicable
term of employment, which in no event shall be less than one
year;
(2) payment, in a lump sum, for all of his vested DAP
awards; and
(3) payment, within 60 days of the end of the
then-applicable employment term, for the unvested DAP awards,
based on what those awards would have been worth had they vested
according to their terms and been valued using the last day of
the then-applicable employment term as of the relevant
termination date.
His original employment term ends March 18, 2011, and each
extension term would last one year.
Notwithstanding the foregoing, in the event
Mr. Campbells employment is terminated by Discovery
not for cause, if Discovery has a standard severance
policy at the time of termination which would provide
Mr. Campbell with a higher sum than these arrangements,
Mr. Campbell will be entitled to such higher sum.
As a condition to receiving the severance payments described
above, Mr. Campbell would be required to sign a general
release and, if such termination occurs during the original
employment term, continued compliance with his non-competition
covenant.
By Discovery for Cause; By Mr. Campbell Other than
for Good Reason. If Mr. Campbells
employment is terminated by Discovery for cause or
by Mr. Campbell other than for good reason
(including retirement) (in each case, as defined therein),
Mr. Campbell forfeits all rights under his DAP awards
(regardless of whether all or any portion of the award is then
vested or unvested.
By Reason of Death or Disability. If
Mr. Campbells employment terminates by reason of his
death or disability, Mr. Campbell will not be entitled to
any further payments or benefits from Discovery, other than
payment for his DAP awards, in a lump sum, in accordance with
the terms of the DAP (which provide for acceleration of vesting
in such event), and in the case of his disability only, the
continuance of his coverage under Discoverys relevant
medical or disability plans, to the extent permitted by such
plans and to the extent these benefits are provided generally to
similarly situated Discovery executives.
Upon Discoverys Election Not to Extend
Term. If Discovery exercises its option to
not extend Mr. Campbells employment beyond the
then-current term, Mr. Campbells employment agreement
entitles him to receive payments for the following:
(1) an amount, payable in a lump sum, equal to one full
year of his then-annual base salary and his then-target level
annual bonus (which is 75% of his then-base salary); and
(2) payment, in a lump sum, for all of his vested DAP
awards.
116
The following table summarizes the potential benefits to
Mr. Campbell had termination of his employment occurred
under any of the circumstances described above as of
December 31, 2007:
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Value of DAP
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|
Event
|
|
Salary ($)
|
|
|
Bonus ($)
|
|
|
Awards ($)
|
|
|
By Discovery Other than for Death, Disability or
Cause; By Mr. Campbell for Good Reason
|
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2,572,040
|
|
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1,929,030
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5,526,850
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By Discovery for Cause; By Mr. Campbell Other
than for Good Reason, including on retirement
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|
|
|
|
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|
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Death
|
|
|
|
|
|
|
|
|
|
|
5,526,850
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Disability
|
|
|
|
|
|
|
|
|
|
|
5,526,850
|
|
Defined
Terms
As noted above, the DAP and the employment agreements with
Mr. Zaslav and Mr. Campbell include definitions of
various terms relevant to determining whether amounts will be
paid. Set forth below is a summary of the more significant
defined terms.
Discovery Appreciation Plan
(DAP). Under the terms of the DAP,
cause means the commission of any of the following
acts: (i) disorderly conduct; (ii) reporting to work
under the influence of alcohol or illegal drugs, or abuse of
alcohol or use of illegal drugs on Discovery premises or while
on Discovery business, or use outside of the Discovery premises
which impairs the employees ability to perform his or her
work; (iii) committing or attempting to commit deliberate
damage to Discovery property, misuse of Discovery property,
advocating or taking part in seizure or theft of, or trespassing
on, Discovery property; (iv) failing to observe established
safety rules or participating in activities which would endanger
the safety of others or damage the property or inventory of
Discovery; (v) dishonesty or any act reflecting negatively
on the good reputation of Discovery; (vi) obtaining
employment on the basis of false or misleading information;
(vii) falsifying time sheets, attendance, or other
Discovery records; (viii) being absent from work without
proper authority; or (ix) consistent with the general
policies and practices of Discovery, such other acts as may be
determined by Discovery in its sole discretion.
Under the terms of the DAP, change in control means
(i) the merger, consolidation or reorganization of
Discovery with any other company (or the issuance by Discovery
of its voting securities as consideration in a merger,
consolidation or reorganization of a subsidiary with any other
company) other than such a merger, consolidation or
reorganization which would result in the voting securities of
Discovery outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted
into voting securities of the other entity) at least fifty
percent of the combined voting power of the voting securities of
Discovery or such other entity outstanding immediately after
such merger, consolidation or reorganization, provided that DHC
or Advance Newhouse Communications (and their respective
affiliates) shall hold, in the aggregate, at least fifty percent
of the voting power of the voting securities of Discovery;
(ii) the approval by the shareholders of Discovery of a
plan of complete liquidation of Discovery or an agreement for
the sale or disposition by Discovery of all or substantially all
of Discoverys assets, other than any such sale or
disposition to an entity at least fifty percent of the combined
voting power of the voting securities of which is owned
immediately after the sale or disposition by DHC or Advance
Newhouse Communications (and their respective affiliates); or
(iii) any sale, transfer or issuance of voting securities
of Discovery (including any series of related transactions) as a
result of which DHC or Advance Newhouse Communications (and
their respective affiliates) shall cease to hold, in the
aggregate, directly or indirectly, at least fifty percent of the
voting power of the voting securities of Discovery.
David Zaslav Employment
Agreement. Under the terms of David
Zaslavs employment agreement, cause means
(i) willful malfeasance by Mr. Zaslav in connection
with his employment, including embezzlement, misappropriation of
funds, property or corporate opportunity or material breach of
his employment agreement, as determined by the Board after
investigation, notice to Mr. Zaslav of the charge and
provision to him of an opportunity to respond; (ii) if
Mr. Zaslav commits any act or becomes involved in any
situation or occurrence involving moral turpitude, which is
materially damaging to the business or reputation of Discovery;
or (iii) if Mr. Zaslav is convicted of, or pleads
guilty or nolo contendre to, fails to defend against, or is
indicted for a felony or a crime involving moral turpitude.
117
Under the terms of Mr. Zaslavs employment agreement,
good reason means (1) reduction of
Mr. Zaslavs base salary; (2) material reduction
in the amount of the annual bonus which he is eligible to earn;
(3) relocation of his primary office at Discovery to a
facility or location that is more than forty (40) miles
away from his primary office location immediately prior to such
relocation and is further away from his residence, provided that
a relocation to midtown Manhattan, New York shall not constitute
good reason; (4) material reduction of his duties; or
(5) material breach of his employment agreement.
Under the terms of Mr. Zaslavs employment agreement,
change in control means (A) the merger,
consolidation or reorganization of Discovery with any other
company (or the issuance by Discovery of its voting securities
as consideration in a merger, consolidation or reorganization of
a subsidiary with any other company) other than such a merger,
consolidation or reorganization which would result in the voting
securities of Discovery outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by
being converted into voting securities of the other entity) at
least 50% of the combined voting power of the voting securities
of Discovery or such other entity outstanding immediately after
such merger, consolidation or reorganization, provided that DHC,
Cox Communications, Inc. or Advance Newhouse Communications (and
their respective affiliates) shall hold, in the aggregate, at
least 50% of the voting power of the voting securities of
Discovery; (B) the consummation by Discovery of a plan of
complete liquidation of Discovery or an agreement for the sale,
or disposition by Discovery of all or substantially all of
Discoverys assets, other than any such sale or disposition
to an entity at least 50% of the combined voting power of the
voting securities of which is owned immediately after the sale
or disposition by DHC, Cox Communications, Inc. or Advance
Newhouse Communications (and their respective affiliates); or
(C) any sale, transfer or issuance of voting securities of
Discovery (including any series of related transactions) as a
result of which DHC, Cox Communications, Inc. or Advance
Newhouse Communications (and their respective affiliates) shall
cease to hold, in the aggregate, directly or indirectly, at
least 50% of the voting power of the voting securities of
Discovery.
Bruce Campbell Employment
Agreement. Under the terms of Bruce
Campbells employment agreement, termination for
cause occurs in the event that Mr. Campbell
(a) is convicted of any felony, any lesser crime of
sufficient import that materially discredits or materially and
adversely affects Discoverys reputation or ability to
conduct its business in the normal course, or any substantial
offense involving the property of Discovery or any of its
subsidiaries or affiliates (e.g., theft, conversion, destruction
of property, tampering with Discoverys computer system),
(b) engages in willful misconduct or neglect in connection
with the performance of Mr. Campbells duties that has
a materially adverse effect on Discovery, or (c) engages in
other conduct that constitutes a breach of his employment
agreement.
Under the terms of Mr. Campbells employment
agreement, good reason means (a) his demotion
or a material reduction in his duties, responsibilities or
authority; (b) Discoverys material change in the
location of the Discovery office where Mr. Campbell works
(e.g., not relocation to another location in New York, New
York); (c) a material breach of Mr. Campbells
employment agreement by Discovery; (d) a change of
control of Discovery where the successor does not assume
Mr. Campbells employment agreement; (e) a
reduction in base salary or target bonus opportunity; (f) a
change in the DAP which reduces Mr. Campbells
potential benefits thereunder; and (g) a change in the
position to whom Mr. Campbell reports.
Under the terms of Mr. Campbells employment
agreement, a change in control shall be deemed to
occur upon (i) the dissolution, liquidation or sale of all
or substantially all of the assets of Discovery; (ii) a
merger or consolidation in which Discovery is not the sole
surviving corporation; (iii) a reverse merger in which
Discovery is the surviving corporation but the shares of
Discoverys common stock immediately preceding the merger
are converted by virtue of the merger into other property;
(iv) the consummation of a transaction or series of
transactions (other than an offering of stock to the general
public through a registration statement filed with the
Securities and Exchange Commission) whereby any
person or related group of
persons (as such terms are used in
Sections 13(d) and 14(d)(2) of the Exchange Act) other than
Discovery, any of its subsidiaries, an employee benefit plan
maintained by Discovery or any of its subsidiaries or a
person that, prior to such transaction, directly or
indirectly controls, is controlled by, or is under common
control with, Discovery directly or indirectly acquires
beneficial ownership (within the meaning of
Rule 13d-3
under the Exchange Act) of securities of Discovery possessing
more than 50% of the total combined voting power of
Discoverys securities outstanding immediately after such
acquisition; or (v) the sale or other disposition of all or
substantially all the assets of Discovery.
118
Compensation
of Directors
In accordance with existing practice of DHC, it is expected that
directors of New Discovery who are also employees of New
Discovery will receive no additional compensation for their
services as directors. Each non-employee director of New
Discovery will receive compensation for services as a director
of New Discovery and, if applicable, for services as a member of
any board committee, as will be determined by New
Discoverys board of directors.
It is expected that in connection with the Transaction, the
Discovery Holding Company 2005 Nonemployee Director Incentive
Plan will be assumed by New Discovery. Under this plan (as so
assumed), it is expected that New Discovery will provide equity
incentive awards, including stock options, restricted shares,
stock appreciation rights and performance awards, to its
nonemployee directors following the closing of the Transaction.
The plan is designed to provide awards in those circumstances in
which either (i) the award would help better align the
interests of a recipient with those of the stockholders and help
motivate the recipient to increase the value of the company for
the stockholders or (ii) the award would assist the company
in attracting non-employees directors.
For information concerning the compensation policy for directors
of DHC, see Management of DHC Director Compensation
Table.
Certain
Relationships and Related Transactions
Michael J. Donohue, the
brother-in-law
of John Hendricks, has been employed by Discovery since 1983,
shortly after the founding of the company by Mr. Hendricks
in 1982. In connection with the Transaction, Mr. Hendricks
will become the Chairman of the Board and a director of New
Discovery. Mr. Donohue currently serves as Director of
Credit Risk and Analysis in Discoverys finance department.
For 2007, Mr. Donohue received cash compensation of
approximately $164,000 (which includes base salary, incentive
compensation under the ICP and payments under the DAP). On
vesting of his DAP units in 2007, Mr. Donohue received
3,750 additional DAP units. Mr. Donohue participates in
Discoverys employee benefit programs on the same basis as
other employees at his level in the company.
Mr. Hendricks is involved in a leadership role with
numerous nonprofit organizations, many of which have missions
that are aligned with Discoverys business philosophy.
Mr. Hendricks and the John and Maureen Hendricks Charitable
Foundation provide significant funding to these organizations
and Discovery also has made charitable contributions or payments
to these organizations. In 2007, amounts in excess of $120,000
were contributed or paid by Discovery to the following
organizations in which Mr. Hendricks serves as a director
or in another leadership role as indicated.
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Discovery Channel Global Education Partnership (DCGEP)
(Director and Chairman). Discoverys cash and in-kind
contributions totaled $1,386,641 in 2007. The DCGEP is a
nonprofit organization that provides educational media and
television services to schools in third-world countries with an
emphasis in Africa. Discovery is a founding member and other
companies and individuals also make contributions to the DCGEP.
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Lowell Observatory (Member of non-governing Advisory Council).
Lowell Observatory is a nonprofit astronomical research
organization. Discovery is the named sponsor of the
next-generation Lowell telescope, which is known as The
Discovery Channel Telescope. Discovery provided a
10-year
grant of $10 million, $8 million of which has been
paid to date ($2 million was paid in 2007) and
$2 million of which will be payable in 2008. Discovery has
naming rights to the telescope and is a media partner for the
telescope, its discoveries and related public educational
outreach activities.
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American Film Institute (AFI) (Member of Board of
Governors). Discovery and AFI collaborate on the annual
SilverDocs Film Festival, a documentary festival, which AFI and
Discovery jointly created. As part of the partnership effort to
fund and operate the annual SilverDocs Film Festival, Discovery
makes cash payments each year. The cash payments totaled
$830,244 in 2007.
|
Mr. Hendrickss personal investment business, HIH,
previously leased office space from Discovery and received
information technology and various other support services from
Discovery. In early 2007, HIH moved
119
these activities to other office space located near the
Discovery headquarters building. Co-located at the HIH offices
are The John and Maureen Hendricks Charitable Foundation. At the
new location, Discovery continues to provide various support
services to HIH, including administrative, technology and office
support services. HIH reimburses Discovery for its incremental
costs for these services. In 2007, total costs incurred by
Discovery and billed to HIH for these services were $245,411.
Steve Sidel, the
son-in-law
of Mr. Robert J. Miron and the brother-in-law of Mr. Steven
Miron (who will be directors of New Discovery), has been
employed by Discovery for approximately 11 years and is
currently employed in Discoverys Education division. For
2007, Mr. Sidel received cash compensation of approximately
$864,000 (which includes base salary, incentive compensation
under the ICP and payments under the DAP). On vesting of his DAP
units in 2007, Mr. Sidel received 25,000 additional DAP
units. Mr. Sidel participates in Discoverys employee
benefit programs on the same basis as other employees at his
level in the company.
The operating agreement of Discovery Communications Holding
requires that DHC and Advance/Newhouse approve all transactions
between (i) Discovery Communications Holding and any of its
subsidiaries, including Discovery, and (ii) DHC,
Advance/Newhouse or Mr. Hendricks or their affiliates or
family members, including the amendment of any currently
outstanding agreement. Except as described below, the members of
Discovery review and approve related party transactions to which
Discovery is a party. Although the members have generally
approved the initial hiring of the family members described
above (except Mr. Donohue who was hired shortly after the
company was founded) and the initial relationship with the
nonprofit organizations described above, the members have
generally not formally approved Discoverys ongoing
relationships with these family members and nonprofit
organizations. Following completion of the Transaction, it is
anticipated that related person transactions (as defined in the
SECs rules) in which New Discovery is a participant will
be subject to review and approval in accordance with New
Discoverys Corporate Governance Guidelines. Because New
Discoverys Corporate Governance Guidelines will be adopted
by the new Board of Directors following completion of the
Transaction, the standards for review and approval of related
person transactions have not been determined as of the date of
this proxy statement/prospectus.
Director
Independence
In accordance with the existing policy of DHC regarding director
independence, it is expected that a majority of the members of
New Discoverys board of directors be independent of its
management. For a director to be deemed independent, New
Discoverys board of directors will have to affirmatively
determine that the director has no direct or indirect material
relationship with New Discovery. To assist its board of
directors in determining which of its directors qualify as
independent, New Discovery will apply The Nasdaq Stock Market
listing standards as well as applicable rules and regulations
adopted by the SEC. For information concerning DHCs
current criteria for director independence, see Management
of DHC Director Independence.
In accordance with these criteria, it is expected that New
Discoverys board of directors will determine that each of
Paul A. Gould, M. LaVoy Robison, J. David Wargo, Robert J.
Miron, Robert R. Beck, Lawrence S. Kramer and Steven A.
Miron will qualify as an independent director of New Discovery.
Committees
of the Board of Directors
Persons serving on the committees of New Discoverys board
of directors will be determined by the board of New Discovery
following the completion of the Transaction.
Pro Forma
Security Ownership Information of Certain Beneficial Owners and
Management of New Discovery
Pro
Forma Security Ownership of Certain Beneficial Owners of New
Discovery
The following table sets forth information, to the extent known
by New Discovery or ascertainable from public filings, with
respect to the estimated beneficial ownership of each person or
entity (other than certain of the New Discovery directors
and executive officers, whose pro forma ownership information
follows) who is expected
120
to beneficially own more than five percent of the outstanding
shares of New Discovery, assuming that the Transaction had been
effected on May 31, 2008.
If the Transaction is effected, each share of DHC Series A
common stock will be converted into 0.50 share of New
Discovery Series A common stock and 0.50 share of New
Discovery Series C common stock, and each share of DHC
Series B common stock will be converted into
0.50 share of New Discovery Series B common stock and
0.50 share of New Discovery Series C common stock.
The security ownership information for New Discovery common
stock has been estimated based upon outstanding stock
information for DHC common stock as of May 31, 2008, and in
the case of percentage ownership information, has been estimated
based upon 134,046,959 shares of New Discovery
Series A common stock, 6,569,118 shares of New
Discovery Series B common stock and 140,616,077 shares
of New Discovery Series C common stock estimated to have
been issued in the Transaction.
The voting percentages in the table represent the power of the
holders to vote on all matters other than the election of
directors. As the holder of the New Discovery convertible
preferred stock, Advance/Newhouse will be entitled to vote, on
an as-converted basis, with the holders of New Discovery common
stock on such matters. With respect to the election of common
stock directors, the voting percentages represented by the
shares included in the table (other than those beneficially
owned by Advance/Newhouse) would be significantly higher because
Advance/Newhouse,
which will be the holder of the New Discovery convertible
preferred stock, will not vote in this election. Conversely, the
holders of New Discovery common stock do not vote in the
election of preferred stock directors.
So far as is known to New Discovery, the persons indicated below
would have sole voting power with respect to the shares
estimated to be owned by them, except as otherwise stated in the
notes to the table.
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Amount and Nature of
|
|
Percent of
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|
Voting
|
Name and Address of Beneficial Owner
|
|
Title of Class
|
|
Beneficial Ownership
|
|
Class
|
|
|
Power
|
|
Advance/Newhouse
|
|
Series A
|
|
71,027,031(1)
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|
34.6
|
%
|
|
26.2%
|
Programming Partnership
|
|
Series C
|
|
71,027,031(1)
|
|
|
33.6
|
%
|
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5000 Campuswood Drive
E. Syracuse, NY 13057
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Harris Associates L.P.
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Series A
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|
13,468,525(2)
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10.0
|
%
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6.7%
|
Two North LaSalle Street
Suite 500
Chicago, IL 60602
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Series C
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|
13,468,525(2)
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9.6
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%
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T. Rowe Price Associates, Inc.
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|
Series A
|
|
7,745,636(3)
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5.8
|
%
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|
3.9%
|
100 E. Pratt Street
Baltimore, MD 21202
|
|
Series C
|
|
7,745,636(3)
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5.5
|
%
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(1) |
|
Includes the number of shares of common stock issuable upon
conversion of the shares of New Discovery Series A
convertible preferred stock and New Discovery Series C
convertible preferred stock estimated to be held by
Advance/Newhouse upon the closing of the Transaction. The
convertible preferred stock may be converted at any time at the
option of the holder and in certain other circumstances. Also
includes 718,993 shares of New Discovery Series A
convertible preferred stock and 718,993 shares of New
Discovery Series C convertible preferred stock that may be
issued to Advance/Newhouse in the Transaction as a result of the
number of shares of New Discovery common stock subject to
options and stock appreciation rights immediately after the
closing. These shares of New Discovery Series A convertible
preferred stock and New Discovery Series C convertible
preferred stock will be subject to an escrow agreement between
New Discovery and Advance/Newhouse and are subject to change
depending on the number of options to acquire DHC common stock
outstanding immediately prior to the completion of the
Transaction and the trading prices of the Discovery common stock
prior to the closing of the Transaction and the trading prices
of the New Discovery common stock and AMC common stock after the
Transaction. For a description of the Escrow Agreement, see
The Transaction Agreements Escrow
Agreement, and for a description on treatment of
outstanding DHC options in the merger, see The Transaction
Agreements Merger Agreement Treatment of
Stock Options. |
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(2) |
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See footnote (1) to the Security Ownership of Certain
Beneficial Owners table under Management of
DHC Security Ownership of Certain Beneficial Owners
and Management. |
121
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|
|
(3) |
|
See footnote (2) to the Security Ownership of Certain
Beneficial Owners table under Management of
DHC Security Ownership of Certain Beneficial Owners
and Management. |
Pro
Forma Security Ownership of New Discovery
Management
The following table sets forth information with respect to the
estimated beneficial ownership by each person who is expected to
serve as an executive officer or director of New Discovery and
all of such persons as a group of shares of New Discovery
Series A common stock, New Discovery Series B common
stock and New Discovery Series C common stock, assuming
that the Transaction had been effected on May 31, 2008.
If the Transaction is effected, each share of DHC Series A
common stock will be converted into 0.50 share of New
Discovery Series A common stock and 0.50 share of New
Discovery Series C common stock, and each share of DHC
Series B common stock will be converted into
0.50 share of New Discovery Series B common stock and
0.50 share of New Discovery Series C common stock.
The security ownership information for New Discovery common
stock has been estimated based upon outstanding stock
information for DHC common stock as of May 31, 2008, and in
the case of percentage ownership information, has been estimated
based upon 134,046,959 shares of New Discovery
Series A common stock, 6,569,118 shares of New
Discovery Series B common stock and 140,616,077 shares
of New Discovery Series C common stock estimated to have
been issued in the Transaction.
Shares of DHC common stock issuable upon exercise or conversion
of options, warrants and convertible securities that were
exercisable or convertible on or within 60 days after
May 31, 2008, are deemed to be outstanding and to be
beneficially owned by the person holding the options, warrants
or convertible securities for the purpose of computing the
percentage ownership of the person, but are not treated as
outstanding for the purpose of computing the percentage
ownership of any other person. For purposes of the following
presentation, beneficial ownership of shares of New Discovery
Series B common stock, though convertible on a one-for-one
basis into shares of New Discovery Series A common stock,
is reported as beneficial ownership of New Discovery
Series B common stock only, and not as beneficial ownership
of New Discovery Series A common stock, but the voting
power of the New Discovery Series A and Series B
common stock have been aggregated.
The voting percentages in the table represent the power of the
holders to vote on all matters other than the election of
directors. The holders of New Discovery convertible preferred
stock are entitled to vote, on an as-converted basis, with the
holders of New Discovery common stock on such matters. With
respect to the election of common stock directors, the voting
percentages represented by the shares included in the table
would be significantly higher because the holders of New
Discovery convertible preferred stock do not vote in this
election. Conversely, the holders of New Discovery common stock
do not vote in the election of preferred stock directors.
So far as is known to New Discovery, the persons indicated below
would have sole voting power with respect to the shares
estimated to be owned by them, except as otherwise stated in the
notes to the table.
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Amount and Nature of
|
|
Percent
|
|
Voting
|
Name of Beneficial Owner
|
|
Title of Class
|
|
Beneficial Ownership
|
|
of Class
|
|
Power
|
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|
(In thousands)
|
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|
David M. Zaslav
|
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Series A
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Chief Executive Officer,
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Series B
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President and Director
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Series C
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Mark G. Hollinger
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Series A
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*
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*
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Chief Operating Officer and
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Series B
|
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Senior Executive Vice President
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Series C
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Bradley E. Singer
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Series A
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Senior Executive Vice President,
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Series B
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Chief Financial Officer
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Series C
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|
|
|
|
Joseph A. LaSala, Jr.
|
|
|
Series A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Executive Vice President,
|
|
|
Series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Counsel & Secretary
|
|
|
Series C
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adria Alpert Romm
|
|
|
Series A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Executive Vice President,
|
|
|
Series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Human Resources
|
|
|
Series C
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount and Nature of
|
|
Percent
|
|
Voting
|
Name of Beneficial Owner
|
|
Title of Class
|
|
Beneficial Ownership
|
|
of Class
|
|
Power
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Bruce L. Campbell
|
|
|
Series A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President, Digital Media and
|
|
|
Series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Development
|
|
|
Series C
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John S. Hendricks
|
|
|
Series A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chairman of the Board
|
|
|
Series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and Director
|
|
|
Series C
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John C. Malone
|
|
|
Series A
|
|
|
|
1,149
|
(1)
|
|
|
*
|
|
|
|
23.0
|
%
|
Director
|
|
|
Series B
|
|
|
|
6,094
|
(2)
|
|
|
92.3
|
%
|
|
|
|
|
|
|
|
Series C
|
|
|
|
7,243
|
(1)
|
|
|
5.1
|
%
|
|
|
|
|
Robert R. Bennett
|
|
|
Series A
|
|
|
|
164
|
(3)
|
|
|
*
|
|
|
|
4.1
|
%
|
Director
|
|
|
Series B
|
|
|
|
834
|
(4)
|
|
|
11.3
|
%
|
|
|
|
|
|
|
|
Series C
|
|
|
|
998
|
(3)
|
|
|
*
|
|
|
|
|
|
Paul A. Gould
|
|
|
Series A
|
|
|
|
101
|
(5)
|
|
|
*
|
|
|
|
*
|
|
Director
|
|
|
Series B
|
|
|
|
87
|
|
|
|
1.3
|
%
|
|
|
|
|
|
|
|
Series C
|
|
|
|
188
|
(5)
|
|
|
|
|
|
|
|
|
Robert J. Miron
|
|
|
Series A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
|
Series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series C
|
|
|
|
|
|
|
|
|
|
|
|
|
|
M. LaVoy Robison
|
|
|
Series A
|
|
|
|
7
|
(5)
|
|
|
*
|
|
|
|
*
|
|
Director
|
|
|
Series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series C
|
|
|
|
7
|
(5)
|
|
|
|
|
|
|
|
|
J. David Wargo
|
|
|
Series A
|
|
|
|
10
|
(6)
|
|
|
*
|
|
|
|
*
|
|
Director
|
|
|
Series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series C
|
|
|
|
10
|
(6)
|
|
|
|
|
|
|
|
|
Robert R. Beck
|
|
|
Series A
|
|
|
|
21
|
|
|
|
*
|
|
|
|
*
|
|
Director
|
|
|
Series B
|
|
|
|
11
|
|
|
|
*
|
|
|
|
|
|
|
|
|
Series C
|
|
|
|
32
|
|
|
|
*
|
|
|
|
|
|
Lawrence S. Kramer
|
|
|
Series A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
|
Series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series C
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven A. Miron
|
|
|
Series A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
|
Series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series C
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All directors and executive
|
|
|
Series A
|
|
|
|
1,607
|
|
|
|
1.2
|
%
|
|
|
27.3
|
%
|
officers as a Group
|
|
|
Series B
|
|
|
|
7,026
|
|
|
|
94.6
|
%
|
|
|
|
|
(16 persons)
|
|
|
Series C
|
|
|
|
8,478
|
|
|
|
5.9
|
%
|
|
|
|
|
|
|
|
* |
|
Less than one percent |
|
(1) |
|
See footnotes (1), (2) and (3) to the Security
Ownership of Management table under Management of
DHC Security Ownership of Certain Beneficial
Owners and Management. |
|
(2) |
|
See footnotes (1) and (3) to the Security Ownership of
Management table under Management of DHC
Security Ownership of Certain Beneficial Owners and
Management. |
|
(3) |
|
See footnotes (3), (4) and (5) to the Security
Ownership of Management table under Management of
DHC Security Ownership of Certain Beneficial
Owners and Management. |
|
(4) |
|
See footnotes (3) and (5) to the Security Ownership of
Management table under Management of DHC
Security Ownership of Certain Beneficial Owners and
Management. |
|
(5) |
|
See footnote (3) to the Security Ownership of Management
table under Management of DHC Security
Ownership of Certain Beneficial Owners and Management. |
|
(6) |
|
See footnotes (3) and (6) to the Security Ownership of
Management table under Management of DHC
Security Ownership of Certain Beneficial Owners and
Management. |
123
DHC
ANNUAL STOCKHOLDER MEETING AND PROXY SOLICITATIONS
DHC ANNUAL MEETING
|
|
|
Time, Place & Date |
|
[ ],
2008
[ ] a.m., local time
[ ]
[ ]
[ ],
Colorado
[ ] |
|
|
|
The Annual Meeting may be adjourned or postponed to another
date, time or place for proper purposes, including for the
purpose of soliciting additional proxies. |
|
Purposes |
|
To consider and vote on the merger proposal;
|
|
|
|
To consider and vote on the preferred stock issuance
proposal;
|
|
|
|
To consider and vote on the re-election of John C.
Malone and Robert R. Bennett as Class III directors
pursuant to the election of directors proposal;
|
|
|
|
To consider and vote on the auditors ratification
proposal; and
|
|
|
|
To transact other business as may properly be
presented at the Annual Meeting or any postponements or
adjournments thereof.
|
|
|
|
At the present time, DHC knows of no other matters that will be
presented at the Annual Meeting. |
|
Quorum |
|
In order to carry on the business of the Annual Meeting, DHC
must have a quorum present. This means that at least a majority
of the aggregate voting power represented by the outstanding
shares of DHC common stock, as of the record date, must be
represented at the Annual Meeting, either in person or by proxy.
For purposes of determining a quorum, your shares will be
included as represented at the meeting even if you indicate on
your proxy that you abstain from voting. In addition, if a
broker, who is a record holder of shares, indicates on a form of
proxy that the broker does not have discretionary authority to
vote those shares on any proposal, or if those shares are voted
in circumstances in which proxy authority is defective or has
been withheld with respect to any proposal, these shares (which
we refer to as broker non-votes) will be treated as
present for purposes of determining the presence of a quorum.
See Voting Procedures for Shares Held in
Street Name Effect of Broker Non-Votes below. |
|
Record Date |
|
5:00 p.m., New York City time, on
[ ],
2008 |
|
Shares Entitled to Vote |
|
Holders of DHC Series A common stock and DHC Series B
common stock, as recorded in DHCs stock register as of the
record date for the Annual Meeting, may vote at the Annual
Meeting. |
|
Votes You Have |
|
At the Annual Meeting, holders of DHC Series A common stock
will have one vote for each share of DHC Series A common
stock that DHCs records show they owned as of the record
date for the Annual Meeting. |
|
|
|
At the Annual Meeting, holders of DHC Series B common stock
will have ten votes for each share of DHC Series B common
stock that |
124
|
|
|
|
|
DHCs records show they owned as of the record date for the
Annual Meeting. |
|
Recommendation of the Board of Directors |
|
Transaction proposals. DHCs board
of directors has unanimously approved the Transaction, including
the Transaction Agreement, the merger agreement, the merger and
the preferred stock issuance, and determined that the
Transaction is advisable and in the best interests of DHC and
its stockholders. Accordingly, DHCs board of directors
recommends that DHC stockholders vote FOR
each of the transaction proposals. |
|
|
|
Annual Business Proposals. DHCs
board of directors has also approved the annual business
proposals. Accordingly, DHCs board of directors recommends
that DHC stockholders vote FOR each of the
annual business proposals. |
|
Votes Required |
|
Transaction proposals. Approval of each
of the transaction proposals requires the affirmative vote of
the holders of at least a majority of the aggregate voting power
of the DHC Series A common stock and DHC Series B
common stock outstanding as of the record date for the Annual
Meeting, voting together as a single class. |
|
|
|
|
|
The directors and executive officers of DHC, who as of
May 31, 2008 together beneficially own shares of DHC common
stock representing approximately 34.4% of DHCs aggregate
voting power, have indicated to DHC that they intend to vote
FOR the transaction proposals at the Annual
Meeting. |
|
|
|
|
|
Annual Business Proposals. The election
of each of Messrs. Malone and Bennett as Class III
directors pursuant to the election of directors proposal
requires the affirmative vote of the holders of a plurality of
the votes of the shares of DHC Series A common stock and
DHC Series B common stock outstanding on the record date
and present, in person or by proxy, and voting at the Annual
Meeting, in person or by proxy. |
|
|
|
Approval of the DHC auditors ratification proposal requires the
affirmative vote of the holders of at least a majority of the
aggregate voting power of the shares of DHC Series A common
stock and DHC Series B common stock outstanding on the
record date for the Annual Meeting and present, in person or by
proxy, at the Annual Meeting, voting together as a single class. |
|
Shares Outstanding |
|
As of the record date for the Annual Meeting, there were
[ ] shares
of DHC Series A common stock and
[ ] shares
of DHC Series B common stock outstanding and entitled to
vote at the Annual Meeting. |
|
Numbers of Holders |
|
As of the record date for the Annual Meeting, there were
approximately
[ ]
record holders of DHC Series A common stock and
[ ]
record holders of DHC Series B common stock (which amounts
do not include the number of stockholders whose shares are held
of record by banks, brokers or other nominees, but include each
such institution as one holder). |
125
|
|
|
Voting Procedures for Record Holders |
|
Holders of record of DHC common stock as of the record date for
the Annual Meeting may vote in person thereat. Alternatively,
they may give a proxy by completing, signing, dating and
returning the proxy card that is being included with the mailing
of this proxy statement/prospectus, or by voting by telephone or
over the Internet. Instructions for voting by using the
telephone or the Internet are printed on the proxy voting
instructions attached to the proxy card. In order to vote via
the Internet, have your proxy card available so you can input
the required information from the card, and log into the
Internet website address shown on the proxy card. When you log
on to the Internet website address, you will receive
instructions on how to vote your shares. The telephone and
Internet voting procedures are designed to authenticate votes
cast by use of a personal identification number, which will be
provided to each voting shareholder separately. |
|
|
|
|
|
Unless subsequently revoked, shares of DHC common stock
represented by a proxy submitted as described below and received
at or before the Annual Meeting will be voted in accordance with
the instructions on the proxy. |
|
|
|
|
|
YOUR VOTE IS IMPORTANT. It is recommended that you vote
by proxy even if you plan to attend the Annual Meeting. You may
change your vote at the Annual Meeting. To submit a written
proxy by mail, you should complete, sign, date and mail the
proxy in accordance with its instructions. |
|
|
|
If any other matters are properly presented before the Annual
Meeting, the persons you choose as proxies will have discretion
to vote or to act on these matters according to their best
judgment, unless you indicate otherwise on your proxy. |
|
|
|
If a proxy is signed and returned by a DHC record holder without
indicating any voting instructions, the shares of DHC common
stock represented by the proxy will be voted FOR
the approval of each of the transaction proposals and
FOR the approval of each of the annual
business proposals. |
|
|
|
If a proxy is signed and returned by a DHC record holder and the
DHC record holder indicates that it is abstaining from voting,
the proxy will have the same effect as a vote
AGAINST each of the transaction proposals and
the auditors ratification proposal, but it will have no effect
on the vote on the election of directors proposal. |
|
|
|
Failure of a DHC record holder to submit a proxy representing
shares of DHC common stock or vote in person at the Annual
Meeting will have the same effect as a vote
AGAINST each of the transaction proposals but
it will have no effect on the vote on either of the annual
business proposals. |
|
Voting Procedures for Shares Held in |
|
General |
Street Name |
|
If you hold your shares in the name of a bank, broker or other
nominee, you should follow the instructions provided by your
bank, broker or nominee when voting your shares of DHC common
stock or when granting or revoking a proxy. If you do not
provide voting instructions to your broker, your broker may, in
their discretion, vote your shares of |
126
|
|
|
|
|
DHC common stock on the election of directors proposal and the
auditors ratification proposal. However, absent specific
instructions from you, your broker is not permitted to vote your
shares of DHC common stock on either of the transaction
proposals. |
|
|
|
Effect of Broker Non-Votes |
|
|
|
Broker non-votes will be counted as present and represented at
the Annual Meeting but will not be voted on any of the
enumerated proposals or any other matter submitted to
stockholders. |
|
|
|
Shares represented by broker non-votes will be deemed shares not
entitled to vote and will not be included for purposes of
determining the aggregate voting power and number of shares
present and entitled to vote on the annual business proposals.
As a result, broker non-votes will have no effect on any of the
annual business proposals. However, a broker non-vote will have
the same effect as a vote AGAINST each of the
transaction proposals. |
|
|
|
YOUR VOTE IS IMPORTANT. |
|
|
|
Revoking a Proxy |
|
Before your proxy is voted, you may change your vote by
telephone or over the Internet (if you originally voted by
telephone or over the Internet), by voting in person at the
Annual Meeting or by delivering a signed proxy revocation or a
new signed proxy with a later date to Discovery Holding Company,
[c/o , , ].
Any signed proxy revocation or new signed proxy must be received
before the start of the Annual Meeting. |
|
|
|
|
|
Your attendance at the Annual Meeting will not, by itself,
revoke your proxy. |
|
|
|
If your shares are held in an account by a broker, bank or other
nominee, you should contact your broker, bank or other nominee
to change your vote. |
|
Solicitation of Proxies |
|
The accompanying proxy for the Annual Meeting is being solicited
on behalf of DHCs board of directors. In addition to this
mailing, DHCs employees may solicit proxies personally,
electronically or by telephone. DHC pays the cost of soliciting
these proxies. DHC also reimburses brokers and other nominees
for their expenses in sending these materials to you and getting
your voting instructions. |
|
|
|
In addition to this mailing, DHC has hired
[ ]
to solicit proxies on DHCs behalf.
[ ]
will receive [$ ] from DHC as
compensation for such services, plus expenses. |
|
Auditors |
|
KPMG LLP serves as DHCs independent auditors. A
representative of KPMG is expected to attend the Annual Meeting
with the opportunity to make a statement and/or respond to
appropriate questions from DHC stockholders at the Annual
Meeting. |
127
DHC
ANNUAL BUSINESS PROPOSALS
Election
of directors proposal
Board
of Directors
DHCs board of directors currently consists of five
directors, divided among three classes. DHCs
Class III directors, whose term will expire at the Annual
Meeting, are John C. Malone and Robert R. Bennett.
Mr. Malone and Mr. Bennett are nominated for
re-election to DHCs board to continue to serve as
Class III directors, and DHC has been informed that they
are willing to continue to serve as directors of DHC. The term
of the Class III directors who are elected at the Annual
Meeting will expire at the annual meeting of DHCs
stockholders in the year 2011. DHCs Class I director,
whose term will expire at the annual meeting of DHCs
stockholders in the year 2009, is J. David Wargo. DHCs
Class II directors, whose term will expire in the year
2010, are Paul A. Gould and M. LaVoy Robison. The directors of
each class will hold office until their respective death,
resignation or removal and until their respective successors are
elected and qualified. Set forth under Management of
DHC Executive Officers and Directors is
certain background information for the director nominees for
re-election and the three directors of DHC whose terms of office
will continue after the Annual Meeting.
The number of shares of DHC common stock beneficially owned by
each director of DHC, as of May 31, 2008, is set forth in
this proxy statement/prospectus under the caption
Management of DHC Security Ownership of
Certain Beneficial Owners and Management Security
Ownership of Management.
If any nominee should decline re-election or should become
unable to serve as a director of DHC for any reason before the
Annual Meeting, votes in favor of that nominee will be cast for
a substitute nominee, if any, designated by the DHC board of
directors, or, if none is so designated prior to the election,
votes will be cast according to the judgment of the person or
persons voting the proxy.
Vote
and Recommendation
A plurality of the affirmative votes of the shares of DHC common
stock outstanding on the record date, voting together as a
single class, that are voted in person or by proxy at the Annual
Meeting is required to elect Mr. John C. Malone and
Mr. Robert R. Bennett as Class III directors of
DHCs board of directors.
The DHC board of directors recommends a vote
FOR the election of the nominees to
DHCs board of directors.
Auditors
ratification proposal
DHC is asking its stockholders to ratify the selection of KPMG
LLP as its independent auditors for the fiscal year ending
December 31, 2008.
Even if the selection of KPMG LLP is ratified, the audit
committee of DHCs board in its discretion may direct the
appointment of a different independent accounting firm at any
time during the year if DHCs audit committee determines
that such a change would be in the best interests of DHC and its
stockholders. In the event DHC stockholders fail to ratify the
selection of KPMG LLP, DHCs audit committee will consider
it as a direction to select other auditors for the year ending
December 31, 2008.
Ratification of KPMG LLP as DHCs independent auditors for
the year ending December 31, 2008 has no effect on the
auditor selection of New Discovery, upon consummation of the
Transaction, for the year ending December 31, 2008.
A representative of KPMG LLP is expected to be present at the
Annual Meeting, will have the opportunity to make a statement if
that representative so desires and will be available to respond
to appropriate questions.
128
Audit
Fees and All Other Fees
The following table presents fees for professional audit
services rendered by KPMG LLP for the audit of the annual
financial statements of DHC, including its consolidated
subsidiaries, for the fiscal years 2007 and 2006, and fees
billed for other services rendered by KPMG LLP:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Audit fees
|
|
$
|
1,969,000
|
|
|
|
2,044,000
|
|
Audit related fees(1)
|
|
|
33,000
|
|
|
|
152,000
|
|
|
|
|
|
|
|
|
|
|
Audit and audit related fees
|
|
|
2,002,000
|
|
|
|
2,196,000
|
|
Tax fees(2)
|
|
|
527,000
|
|
|
|
283,000
|
|
|
|
|
|
|
|
|
|
|
Total fees
|
|
$
|
2,529,000
|
|
|
|
2,479,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Audit related fees include fees incurred for due diligence
related to potential business combinations and audits of
financial statements of certain employee benefits plans. |
|
(2) |
|
Tax fees consisted of tax compliance and consultations regarding
the tax implications of certain transactions. |
DHCs audit committee has considered whether the provision
of services by KPMG LLP to DHC other than auditing is compatible
with KPMG LLP maintaining its independence and believes that the
provision of such other services is compatible with KPMG LLP
maintaining its independence.
Policy
on Audit Committee Pre-Approval of Audit and Permissible
Non-Audit Services of Independent Auditor
DHCs audit committee has adopted a policy regarding the
pre-approval of all audit and permissible non-audit services
provided by DHCs independent auditor. Pursuant to this
policy, DHCs audit committee has approved the engagement
of DHCs independent auditor to provide the following
services (all of which are collectively referred to as
pre-approved services):
|
|
|
|
|
audit services as specified in the policy, including
(i) financial audits of DHC and its subsidiaries,
(ii) services associated with DHCs periodic reports,
registration statements and other documents filed or issued in
connection with a securities offering (including comfort letters
and consents), (iii) attestations of DHC managements
reports on internal controls and (iv) consultations with
management as to accounting or reporting of transactions;
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audit related services as specified in the policy, including
(i) due diligence services, (ii) financial audits of
employee benefit plans, (iii) attestation services not
required by statute or regulation, (iv) certain audits
incremental to the audit of DHCs consolidated financial
statements and (v) closing balance sheet audits related to
dispositions; and
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tax services as specified in the policy, including federal,
state, local and international tax planning, compliance and
review services, and tax due diligence and advice regarding
mergers and acquisitions.
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Notwithstanding the foregoing general pre-approval, any
individual project involving the provision of pre-approved
services that is expected to result in fees in excess of $40,000
requires the specific pre-approval of DHCs audit
committee. In addition, any engagement of DHCs independent
auditors for services other than the pre-approved services
requires the specific approval of DHCs audit committee.
DHCs audit committee has delegated the authority for the
foregoing approvals to the chairman of the audit committee,
subject to his subsequent disclosure to the entire audit
committee of the granting of any such approval. M. LaVoy Robison
currently serves as the chairman of the DHC audit committee.
129
DHCs pre-approval policy prohibits the engagement of
DHCs independent auditor to provide any services that are
subject to the prohibition imposed by Section 201 of the
Sarbanes-Oxley Act.
All services provided by DHCs independent auditor during
2007 were approved in accordance with the terms of the policy.
Vote
and Recommendation
The affirmative vote of the holders of a least a majority of the
aggregate voting power of the shares of DHC common stock
outstanding on the record date and present at the Annual
Meeting, in person or by proxy, voting together as a single
class, is required to ratify the selection of KPMG LLP as
DHCs independent auditors for the year ending
December 31, 2008.
The DHC board of directors recommends a vote
FOR the ratification of the selection of KPMG
LLP as DHCs independent auditors for the year ending
December 31, 2008.
130
MANAGEMENT
OF DHC
Executive
Officers and Directors
The following lists the executive officers and directors of DHC,
their birth dates and a description of their business
experience, including positions held with DHC. Each of
DHCs executive officers is also an employee of Liberty,
and each of them provides his services to DHC under the terms of
a services agreement between DHC and Liberty described under
Executive Compensation
Compensation Discussion and Analysis below.
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Name
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Position
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John C. Malone
Born March 7, 1941
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Chief Executive Officer and Chairman of the Board of DHC since
March 2005, and a director of DHC since May 2005.
Mr. Malone has served as Chairman of the Board and a
director of Liberty since 1990. Mr. Malone served as
Chairman of the Board of TCI from November 1996 to March 1999;
and Chief Executive Officer of TCI from January 1994 to March
1999. Mr. Malone is Chairman of the Board of Liberty Global
and The DirecTV Group, Inc.; and a director of
IAC/InterActiveCorp and Expedia, Inc.
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Robert R. Bennett
Born April 19, 1958
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President of DHC since March 2005, and a director of DHC since
May 2005. Mr. Bennett served as President of Liberty from
April 1997 to February 2006 and as Chief Executive Officer of
Liberty from April 1997 to August 2005. Mr. Bennett held
various executive positions with Liberty since its inception in
1990. Mr. Bennett is a director of Liberty and
Sprint Nextel Corporation.
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David J.A. Flowers
Born May 17, 1954
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Senior Vice President and Treasurer of DHC since March 2005.
Mr. Flowers has served as Senior Vice President of Liberty
since October 2000 and Treasurer of Liberty since April 1997.
Mr. Flowers served as a Vice President of Liberty from June
1995 to October 2000.
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Albert E. Rosenthaler
Born August 29, 1959
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Senior Vice President of DHC since March 2005.
Mr. Rosenthaler has served as Senior Vice President of
Liberty since April 2002. Prior to joining Liberty,
Mr. Rosenthaler was a tax partner in the accounting firm of
Arthur Andersen LLP for more than five years.
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Christopher W. Shean
Born July 16, 1965
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Senior Vice President and Controller of DHC since March 2005.
Mr. Shean has served as Senior Vice President of Liberty
since January 2002 and Controller of Liberty since October 2000.
Mr. Shean served as a Vice President of Liberty from
October 2000 to January 2002.
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Charles Y. Tanabe
Born November 27, 1951
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Senior Vice President, General Counsel and Secretary of DHC
since March 2005. Mr. Tanabe has served as Executive Vice
President of Liberty since January 2007 and General Counsel of
Liberty since January 1999. Mr. Tanabe served as Senior
Vice President of Liberty from January 1999 to December 2006 and
Secretary of Liberty from April 2001 to January 2007.
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Paul A. Gould
Born September 27, 1945
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A director of DHC since May 2005. Mr. Gould has served as a
Managing Director and Executive Vice President of
Allen & Company Incorporated, an investment banking
services company, for more than the last five years.
Mr. Gould is a director of Liberty, Ampco-Pittsburgh
Corporation and Liberty Global.
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M. LaVoy Robison
Born September 6, 1935
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A director of DHC since May 2005. Mr. Robison has been
executive director and a board member of The Anschutz Foundation
(a private foundation) since January 1998. Mr. Robison is a
director of Liberty.
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J. David Wargo
Born October 1, 1953
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A director of DHC since May 2005. Mr. Wargo has served as
President of Wargo & Company, Inc., a private
investment company specializing in the communications industry,
since January 1993. Mr. Wargo is a director of Strayer
Education, Inc. and Liberty Global.
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131
The executive officers named above will serve in such capacities
until the next annual meeting of DHCs board of directors,
or until their respective successors have been duly elected and
have been qualified, or until their earlier death, resignation,
disqualification or removal from office.
There is no family relationship among any of DHCs
executive officers or directors, by blood, marriage or adoption.
During the past five years, none of the above persons has had
any involvement in such legal proceedings that would be material
to an evaluation of his or her ability or integrity.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as
amended, requires DHC executive officers and directors, and
persons who own more than ten percent of a registered class of
DHC equity securities, to file reports of ownership and changes
in ownership with the SEC. Officers, directors and greater than
ten-percent stockholders are required by SEC regulation to
furnish us with copies of all Section 16 forms they file.
Based solely on a review of the copies of the Forms 3, 4
and 5 and amendments to those forms furnished to DHC with
respect to its most recent fiscal year, or written
representations that no Forms 5 were required, DHC believes
that, during the year ended December 31, 2007, all
Section 16(a) filing requirements applicable to DHC
officers, directors and greater than ten-percent beneficial
owners were complied with.
Director
Independence
It is DHCs policy that a majority of the members of its
board of directors be independent of its management. For a
director to be deemed independent, DHCs board of directors
must affirmatively determine that the director has no direct or
indirect material relationship with DHC. To assist its board of
directors in determining which of its directors qualify as
independent for purposes of the NASDAQ Stock Market listing
standards as well as applicable rules and regulations adopted by
the SEC, DHC developed categorical standards of director
independence, which DHC refers to as its criteria for director
independence. Under these criteria, a director will be deemed
independent if such director:
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is not an employee or member of DHCs management or the
management of any of its subsidiaries;
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has no material relationship with DHC (either directly or as a
partner, stockholder or officer of an organization that has a
relationship with DHC); for this purpose material relationships
can, for example, include commercial, industrial, banking,
consulting, legal, accounting, charitable and familial
relationships;
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has no other relationship with DHC or its subsidiaries that
would interfere with the exercise of independent judgment as a
director; and
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does not accept any consulting, advisory or other compensatory
fee from DHC, except fees received for services as a director
(including fees for serving on a committee of DHCs board
of directors).
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In addition, under these criteria, a director will not be
deemed independent if such director:
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is, or, during the three years preceding the determination date
(which period of three years is referred to as the
determination period), was employed by DHC or any of its
subsidiaries, or has a family member who is or was during the
determination period an executive officer of DHC or any of its
subsidiaries;
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is, or has an immediate family member who is, an executive
officer, partner or controlling stockholder of an organization
that made payments to or received payments from DHC for property
or services in the current or any of the past three fiscal
years, in an amount which exceeded the greater of $200,000 or 5%
of the recipients consolidated gross revenue for that
year, other than payments solely from investments in DHC
securities or payments under non-discretionary charitable
contribution matching programs;
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received, or has an immediate family member who received, any
payment in excess of $60,000 from DHC or any of its subsidiaries
during any period of twelve consecutive months within the
determination period, other than (a) director and committee
fees, (b) payments arising solely from investments in DHC
securities,
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132
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(c) compensation to an immediate family member who is a
non-executive employee of DHC or any of its subsidiaries,
(d) benefits under a tax-qualified retirement plan,
(e) non-discretionary compensation, or (f) certain
permitted loans;
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is, or has an immediate family member who is, a current partner
of the external auditor of DHC or any of its subsidiaries or was
a partner or employee with the external auditor of DHC or any of
its subsidiaries who worked on the audit of DHC or any of its
subsidiaries at any time during the determination period; or
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is, or during the determination period was, or has a family
member who is, or during the determination period was, employed
as an executive officer by a company as to which an executive
officer of DHC serves, or during the determination period
served, as a director and member of the compensation committee
of such other company.
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DHCs criteria for director independence can be found, in
its entirety, on its website at
www.discoveryholdingcompany.com. In accordance with these
criteria, DHCs board of directors has determined that each
of Paul A. Gould, M. LaVoy Robison and J. David Wargo qualifies
as an independent director of DHC.
Committees
of the Board of Directors
Executive
Committee
DHCs board of directors has established an executive
committee, whose members are Robert R. Bennett, Paul A. Gould
and John C. Malone. Except as specifically prohibited by the
General Corporation Law of the State of Delaware, the executive
committee may exercise all the powers and authority of
DHCs board of directors in the management of DHCs
business and affairs, including the power and authority to
authorize the issuance of shares of DHC capital stock.
Compensation
Committee
DHCs board of directors has established a compensation
committee, whose members are Paul A. Gould, M. LaVoy Robison and
J. David Wargo. See Director
Independence above. The compensation committee reviews and
makes recommendations to DHCs board of directors regarding
all forms of compensation provided to DHCs executive
officers and directors. In addition, the compensation committee
reviews and makes recommendations on bonus and stock
compensation arrangements for all employees of DHC and has
responsibility for the administration of the Discovery Holding
Company 2005 Incentive Plan and the Discovery Holding Company
Transitional Stock Adjustment Plan. The compensation committee
also reviews, evaluates and approves, on a semi-annual basis,
the allocation of costs and expenses made by Liberty for
services rendered to DHC by DHCs named executive officers
under the services agreement between DHC and Liberty. For a
description of the services agreement and DHCs process for
determining the propriety of the cost and expense allocations
for DHCs named executive officers thereunder, see
Executive Compensation
Compensation Discussion and Analysis.
The DHC board of directors has adopted a written charter for the
compensation committee, which is available on DHCs website
at www.discoveryholdingcompany.com.
Compensation
Committee Interlocks and Insider Participation in Compensation
Decisions
The members of DHCs compensation committee are Paul A.
Gould, M. LaVoy Robison and J. David Wargo. No member of
DHCs compensation committee is a current or former officer
or, during 2007 an employee, of DHC or any of its subsidiaries.
No interlocking relationship exists between DHCs board and
its compensation committee and the board of directors or
compensation committee of any other company.
Audit
Committee
The DHC board of directors has established an audit committee,
whose members are Mr. Gould, Mr. Robison and
Mr. Wargo. See Director
Independence above. The audit committee reviews and
monitors the corporate
133
financial reporting and the internal and external audits of DHC.
The committees functions include, among other things:
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appointing or replacing DHCs independent auditors;
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reviewing and approving in advance the scope of and fees for
DHCs annual audit and reviewing the results of DHCs
audits with its independent auditors;
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reviewing and approving in advance the scope of and the fees for
non-audit services of DHCs independent auditors;
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reviewing audited financial statements with DHCs
management and independent auditors and making recommendations
regarding inclusion of such audited financial statements in
certain of DHCs public filings;
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overseeing the performance of services by DHCs independent
auditors, including holding quarterly meetings to review the
quarterly reports of DHCs independent auditors, discussing
with DHCs independent auditors issues regarding the
ability of DHCs independent auditors to perform such
services, obtaining, annually, a letter from DHCs
independent auditors addressing certain internal quality-control
issues, reviewing with DHCs independent auditors any
audit-related problems or difficulties and the response of
DHCs management, and addressing other general oversight
issues;
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reviewing compliance with and the adequacy of DHCs
existing major accounting and financial reporting policies;
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overseeing the implementation and maintenance of an internal
audit function, discussing with DHCs independent auditors
and DHCs management the internal audit functions
responsibilities, budget and staff, periodically reviewing with
DHCs independent auditors the results and findings of the
internal audit function and coordinating with DHCs
management to ensure that the issues associated with such
results and findings are addressed;
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reviewing and overseeing compliance with, and establishing
procedures for the treatment of alleged violations of,
applicable securities laws, SEC and Nasdaq Stock Market rules
regarding audit committees and the code of business conduct and
ethics adopted by DHCs board of directors; and
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preparing a report for DHCs annual proxy statement.
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DHCs board of directors has adopted a written charter for
the audit committee, which is available on DHCs website at
www.discoveryholdingcompany.com.
Audit Committee Report. Each member of
the audit committee is an independent director as determined by
the board of directors of Discovery Holding Company, based on
the rules of the Nasdaq Stock Market and the criteria of
director independence adopted by the board. Each member of the
audit committee also satisfies the SECs independence
requirements for members of audit committees. M. LaVoy Robison
is Discovery Holding Companys audit committee
financial expert under applicable SEC rules and
regulations.
The audit committee reviews Discovery Holding Companys
financial reporting process on behalf of the board of directors.
KPMG LLP, Discovery Holding Companys independent auditor
for 2007, is responsible for expressing opinions on the
conformity of Discovery Holding Companys audited
consolidated financial statements with U.S. generally
accepted accounting principles.
The audit committee has reviewed and discussed with management
and KPMG Discovery Holding Companys most recent audited
consolidated financial statements. The audit committee has also
discussed with KPMG the matters required to be discussed by the
Statement on Auditing Standards No. 114, The Auditors
Communication with those charged with Governance, as modified or
supplemented, including that firms judgment about the
quality of Discovery Holding Companys accounting
principles, as applied in its financial reporting.
KPMG has provided the audit committee with the written
disclosures and the letter required by Independence Standards
Board Standard No. 1 (Independence Discussions with Audit
Committees), as modified or supplemented,
134
and the audit committee has discussed with KPMG that firms
independence from Discovery Holding Company and its subsidiaries.
Based on the reviews, discussions and other considerations
referred to above, the audit committee recommended to the board
of directors of Discovery Holding Company that the audited
financial statements be included in Discovery Holding
Companys Annual Report on
Form 10-K
for the year ended December 31, 2007, filed on
February 15, 2008 with the SEC.
Submitted
by the Members of the Audit Committee:
Paul A. Gould
M. LaVoy Robison
J. David Wargo
Absence
of a Nominating Committee
DHC does not have a standing nominating committee. The board as
a whole performs the functions of a nominating committee for
purposes of the annual selection of nominees for the election of
directors. DHC believes a nominating committee is not necessary
because the board as a whole is familiar with the industries in
which DHC operates and is knowledgeable regarding the selection
of directors. In addition, a majority of DHCs directors
are considered independent directors within the meaning of the
applicable rules of the Nasdaq Stock Market. The board does not
have a charter or other written guidelines for its nominating
process. While the board will consider nominees recommended by
stockholders, it has not actively solicited such
recommendations, nor has it to date established any director
nominee criteria or stockholder nominee procedures. The board
has historically selected nominees based on their business,
financial, accounting or other relevant expertise, their prior
experience in the industries in which DHC operates and their
involvement with DHC.
Other
The board, by resolution, may from time to time establish
certain other committees of the board, consisting of one or more
of the directors of DHC. Any committee so established will have
the powers delegated to it by resolution of the board, subject
to applicable law.
Board
Meetings
During 2007, there were 4 meetings of DHCs full board of
directors, 2 meetings of DHCs compensation committee, 4
meetings of DHCs audit committee and no meetings of
DHCs executive committee.
Director
Attendance at Annual Meetings
DHCs board of directors encourages all members or the
board to attend each annual meeting of the companys
stockholders. All of DHCs board members attended
DHCs 2007 annual meeting of stockholders.
Stockholder
Communication with Directors
DHCs stockholders may send communications to DHCs
board of directors or to individual directors by mail addressed
to the Board of Directors or to an individual director
c/o Discovery
Holding Company, 12300 Liberty Boulevard, Englewood, Colorado
80112. Communications from stockholders will be forwarded to
DHCs directors on a timely basis.
Executive
Sessions
The independent directors of DHC held 1 executive session
without the participation of management during 2007.
135
Executive
Compensation
Compensation
Discussion and Analysis
Services Agreement with Liberty
DHCs Chief Executive Officer is John C. Malone, its
President is Robert R. Bennett, its principal financial officer
is David J.A. Flowers and its three other most highly
compensated executive officers for 2007 are Albert R.
Rosenthaler, Christopher W. Shean and Charles Y. Tanabe. These
persons are collectively referred to as the DHC Named
Executive Officers. All of the DHC Named Executive Officers
are also executive officers or employees of Liberty.
DHC was formerly a wholly-owned subsidiary of Liberty. In July
2005, Liberty distributed to its stockholders all of DHCs
shares in the tax-free DHC spin-off. Prior to the DHC spin-off,
the DHC Named Executive Officers were the persons primarily
responsible for managing and making policy decisions for
DHCs business. In connection with the DHC spin-off, DHC
entered into a services agreement with Liberty pursuant to which
Liberty agreed to make available to DHC the services of certain
personnel, including the DHC Named Executive Officers. Each of
the DHC Named Executive Officers is compensated by Liberty as an
executive officer or employee of that company, and is not
directly compensated by DHC. Rather, pursuant to the services
agreement DHC pays to Liberty an allocated portion of the salary
and fringe benefits paid by Liberty to the DHC Named Executive
Officers.
When DHC entered into the services agreement with Liberty, DHC
agreed to a scheduled estimate of the annual allocation of
employee costs and expenses for the DHC Named Executive Officers
(and others) for calendar year 2005, which was based on the
percentage of their respective work hours it was anticipated
they would spend on DHCs business. Pursuant to the
services agreement, DHC and Liberty reevaluate the
appropriateness of the allocation schedule on a semi-annual
basis to make appropriate adjustments. The allocation for each
of the DHC Named Executive Officers for a particular period is
evaluated based on discussions with that DHC Named Executive
Officer and after an analysis of the business demands expected
to be made on him by DHC for that period. DHC then discusses the
proposed allocation with its compensation committee.
The annual allocations for each of the DHC Named Executive
Officers in 2007 were as follows: Mr. Malone: 15%;
Mr. Bennett: 100%; Mr. Flowers: 5%;
Mr. Rosenthaler: 10%, Mr. Shean: 20% and
Mr. Tanabe: 20%. These allocations resulted in payments to
Liberty for the services of the DHC Named Executive Officers in
the amounts set forth in the Salary column of the Summary
Compensation Table below.
The services agreement is renewed automatically each year for
successive one-year periods, unless earlier terminated
(1) by DHC at any time on at least 30 days prior
written notice, (2) by Liberty at the end of any renewal
term, upon at least 180 days prior notice,
(3) by Liberty upon written notice to DHC, following
certain changes in control of DHC or DHC being the subject of
certain bankruptcy or insolvency-related events or (4) by
DHC upon written notice to Liberty, following certain changes in
control of Liberty or Liberty being the subject of certain
bankruptcy or insolvency-related events. If the Transaction is
approved and consummated, the services agreement will be
terminated effective upon the closing of the Transaction.
The compensation committee has determined that utilizing the
services agreement with Liberty to obtain and pay for the
services of the DHC Named Executive Officers enables DHC to
obtain the services of highly-qualified individuals who are
knowledgeable about DHCs business for less than the amount
DHC would be required to pay full time executive officers with
similar capabilities and responsibilities.
Equity
Incentive Compensation
In connection with the DHC spin-off, DHCs board of
directors adopted the Discovery Holding Company 2005 Incentive
Plan, which we refer to as the DHC incentive plan, and
the Discovery Holding Company Transitional Stock Adjustment
Plan, which we refer to as the DHC transitional plan. The
DHC incentive plan, which is expected to be assumed by New
Discovery if the Transaction is consummated, provides for the
grant of a variety of incentive awards, including stock options,
restricted shares, stock appreciation rights and performance
awards. The DHC transitional plan provided for the grant of
awards with respect to DHC common stock that resulted from
adjustments made, in connection with the DHC spin-off, to the
then-outstanding Liberty incentive awards in
136
accordance with the anti-dilution provisions of the Liberty
incentive plans. The DHC incentive plan and the DHC transitional
plan are administered by the compensation committee of
DHCs board of directors.
The awards granted under the DHC transitional plan were made
pursuant to the terms of a reorganization agreement DHC entered
into with Liberty at the time of the DHC spin-off. In accordance
with the reorganization agreement, each outstanding Liberty
stock option and stock appreciation right held by the DHC Named
Executive Officers was divided into an option to purchase a
number of shares of the same series of DHC common stock as the
series of Liberty common stock for which the outstanding Liberty
award was exercisable equal to 0.10 times the number of shares
for which the Liberty award was exercisable (a DHC spin-off
option) and an adjusted option or stock appreciation right,
as applicable, with respect to shares of Liberty common stock
equal to the same series and number of shares of Liberty common
stock for which the Liberty award was exercisable (an
adjusted Liberty award). The exercise price or base price
of each Liberty award was allocated between the DHC spin-off
option and the adjusted Liberty award. DHC believes that the DHC
spin-off options help to align the interests of the DHC Named
Executive Officers with those of DHCs stockholders and
help motivate them to increase the value of DHC for its
stockholders.
On May 16, 2007, DHCs compensation committee
determined to award Mr. Bennett options to purchase
10,000 shares of DHC Series A common stock under the
DHC incentive plan, in recognition of Mr. Bennetts
service to DHC. The options received by Mr. Bennett had an
exercise price equal to $22.90, which was the closing price of
DHC Series A common stock on the grant date, and a grant
date fair value of $77,382. For more information, please see the
Grants of Plan-Based Awards table below.
DHCs compensation committee does not expect to grant
future awards under the DHC incentive plan prior to the
completion of the Transaction. If the Transaction is not
completed, the DHC compensation committee expects to grant
future awards under the DHC incentive plan in those
circumstances in which either (i) the award will help
better align the interests of a recipient with those of
DHCs stockholders and help motivate the recipient to
increase the value of DHC for its stockholders or (ii) the
award will assist DHC in attracting key employees. Although the
DHC compensation committee has not adopted a formal policy in
this regard, the DHC compensation committee does not intend to
award equity or equity-linked awards under the DHC incentive
plan at a time when DHCs board of directors is in
possession of undisclosed, material information that can
reasonably be expected to cause increased trading in DHC stock.
No further awards may be granted under the transitional plan.
Employment
Contracts, Termination of Employment and Change in Control
Arrangements
DHC has no employment contracts, termination of employment
agreements or change of control agreements with any of the DHC
Named Executive Officers. However, under the terms of the
services agreement if Liberty terminates any of the DHC Named
Executive Officers who devoted 50% or more of his time to
providing services to DHC over the one-year period preceding
such termination (the look-back period), a portion of any
severance payments payable to that officer by Liberty will be
allocated to DHC. The amount allocated to DHC will be based upon
the percentage determined by dividing the total number of months
in which such executive devoted 50% or more of his time
providing services to DHC under the services agreement by the
total number of months that he was employed by Liberty or its
predecessors, to the extent taken into account for purposes of
determining the severance payment payable to that executive (or
using such other basis upon which the amount of the severance
payment is determined to be payable to that executive),
multiplied by the percentage of the executives time
devoted to providing services to DHC during the look-back period.
In addition, under the DHC incentive plan following a change of
control of DHC all awards granted thereunder will fully vest,
unless the DHC compensation committee determines otherwise and
effective provision is made to substitute new, equivalent awards
of any successor company.
137
Summary
Compensation Table
The following table sets forth information regarding the
compensation paid to each of the DHC Named Executive Officers
during the years ended December 31, 2007 and 2006.
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Option
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All Other
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Salary
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Awards
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Compensation
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Total
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Name and Principal Position
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Year
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($)(1)
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($)(2)
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($)(3)
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($)
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John C. Malone
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2007
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390
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278,896
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150,000
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429,286
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Chief Executive Officer and
Chairman of the Board
(principal executive officer)
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2006
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390
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355,303
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75,000
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430,693
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Robert R. Bennett
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2007
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500,000
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51,588
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(4)
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551,588
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President
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2006
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|
|
|
468,750
|
|
|
|
|
|
|
|
|
|
|
|
468,750
|
|
David J.A. Flowers
|
|
|
2007
|
|
|
|
31,250
|
|
|
|
61,133
|
|
|
|
|
|
|
|
92,383
|
|
Senior Vice President and Treasurer
(principal financial officer)
|
|
|
2006
|
|
|
|
28,750
|
|
|
|
88,850
|
|
|
|
|
|
|
|
117,600
|
|
Albert E. Rosenthaler
|
|
|
2007
|
|
|
|
62,500
|
|
|
|
70,374
|
|
|
|
|
|
|
|
132,874
|
|
Senior Vice President
|
|
|
2006
|
|
|
|
43,125
|
|
|
|
119,208
|
|
|
|
|
|
|
|
162,333
|
|
Christopher W. Shean
|
|
|
2007
|
|
|
|
125,000
|
|
|
|
62,364
|
|
|
|
|
|
|
|
187,364
|
|
Senior Vice President and Controller
(principal accounting officer)
|
|
|
2006
|
|
|
|
115,000
|
|
|
|
82,647
|
|
|
|
|
|
|
|
197,647
|
|
Charles Y. Tanabe
|
|
|
2007
|
|
|
|
170,000
|
|
|
|
62,073
|
|
|
|
|
|
|
|
232,073
|
|
Senior Vice President,
General Counsel and Secretary
|
|
|
2006
|
|
|
|
143,000
|
|
|
|
93,770
|
|
|
|
|
|
|
|
236,770
|
|
|
|
|
(1) |
|
During 2006 and 2007, each DHC Named Executive Officer was also
an executive officer or employee of Liberty. Pursuant to a
services agreement between DHC and Liberty, Liberty allocates a
portion of the compensation it pays to the DHC Named Executive
Officers to DHC as described above in Compensation
Discussion and Analysis. In addition to the salary amount
for each DHC Named Executive Officer included in the table,
Liberty allocates to DHC an amount for employee benefits equal
to 15% of the allocated amount of the salary that is allocated
to DHC for that DHC Named Executive Officer. The amounts in the
table represent amounts allocated to DHC by Liberty for the
years ended December 31, 2007 and 2006. |
|
(2) |
|
The dollar amounts recognized for financial statement reporting
purposes have been calculated in accordance with FAS 123R.
For a description of the assumptions applied in these
calculations, see Note 4 to DHCs consolidated
financial statements for the year ended December 31, 2007
(which are included in DHCs Annual Report on
Form 10-K,
as amended, as filed with the SEC). |
|
(3) |
|
Pursuant to Mr. Malones employment agreement with
Liberty, he is entitled to receive an annual allowance for
personal expenses (which was $500,000 during 2006 and increased
to $1 million during 2007), such as payment for or
reimbursement of professional fees and other expenses incurred
for estate, tax planning and other services and personal use of
corporate aircraft and flight crew. Liberty has allocated 15% of
this allowance during each of 2007 and 2006 to DHC pursuant to
the services agreement. |
|
(4) |
|
On May 16, 2007, Mr. Bennett received a grant of
options to acquire 10,000 shares of DHC Series A stock
for his service to DHC. The dollar amounts recognized for
financial statement purposes, as calculated in accordance with
FAS 123R, under these options is included in the table. |
Grants
of Plan-Based Awards
The following table contains information regarding plan-based
incentive awards granted during the year ended December 31,
2007 to the DHC Named Executive Officers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other option
|
|
|
|
|
|
|
|
|
|
|
|
|
awards: Number of
|
|
|
Exercise or base
|
|
|
Grant date fair
|
|
|
|
|
|
|
securities
|
|
|
price of option
|
|
|
value of stock and
|
|
Name
|
|
Grant date
|
|
|
underlying options
|
|
|
awards
|
|
|
option awards
|
|
|
Robert R. Bennett
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
May 16, 2007
|
|
|
|
10,000(1
|
)
|
|
$
|
22.90
|
|
|
$
|
77,382
|
|
|
|
|
(1) |
|
Vests on May 16, 2008. |
138
Outstanding
Equity Awards at Fiscal Year-End
The following table contains information regarding unexercised
options to acquire shares of DHC common stock, which were
outstanding as of December 31, 2007 and held by the DHC
Named Executive Officers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option awards
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
securities
|
|
|
securities
|
|
|
|
|
|
|
|
|
|
underlying
|
|
|
underlying
|
|
|
|
|
|
|
|
|
|
unexercised
|
|
|
unexercised
|
|
|
Option
|
|
|
Option
|
|
|
|
options-
|
|
|
options-
|
|
|
exercise
|
|
|
expiration
|
|
Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
price ($)
|
|
|
date
|
|
|
John C. Malone
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
13,333
|
|
|
|
6,667
|
(1)
|
|
|
14.67
|
|
|
|
6/14/08
|
|
Series B
|
|
|
1,148,540
|
|
|
|
|
|
|
|
19.06
|
|
|
|
2/28/11
|
|
|
|
|
120,000
|
|
|
|
60,000
|
(1)
|
|
|
15.91
|
|
|
|
6/14/08
|
|
Robert R. Bennett
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
100,000
|
|
|
|
|
|
|
|
13.00
|
|
|
|
7/31/13
|
|
|
|
|
100,000
|
|
|
|
|
|
|
|
11.84
|
|
|
|
8/6/14
|
|
|
|
|
|
|
|
|
10,000
|
(2)
|
|
|
22.90
|
|
|
|
5/16/17
|
|
Series B
|
|
|
1,667,985
|
|
|
|
|
|
|
|
19.06
|
|
|
|
2/28/11
|
|
David J.A. Flowers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
147,686
|
|
|
|
|
|
|
|
17.54
|
|
|
|
2/28/11
|
|
|
|
|
16,000
|
|
|
|
4,000
|
(3)
|
|
|
13.00
|
|
|
|
7/31/13
|
|
|
|
|
15,000
|
|
|
|
10,000
|
(4)
|
|
|
11.84
|
|
|
|
8/6/14
|
|
Albert E. Rosenthaler
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
|
|
|
|
5,000
|
(3)
|
|
|
13.00
|
|
|
|
7/31/13
|
|
|
|
|
|
|
|
|
10,000
|
(4)
|
|
|
11.84
|
|
|
|
8/6/14
|
|
Christopher W. Shean
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
|
|
|
|
5,000
|
(3)
|
|
|
13.00
|
|
|
|
7/31/13
|
|
|
|
|
|
|
|
|
10,000
|
(4)
|
|
|
11.84
|
|
|
|
8/6/14
|
|
Charles Y. Tanabe
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
101,915
|
|
|
|
|
|
|
|
17.54
|
|
|
|
2/28/11
|
|
|
|
|
|
|
|
|
5,000
|
(3)
|
|
|
13.00
|
|
|
|
7/31/13
|
|
|
|
|
|
|
|
|
9,000
|
(4)
|
|
|
11.84
|
|
|
|
8/6/14
|
|
|
|
|
(1) |
|
Vests as to 100% on June 14, 2008. |
|
(2) |
|
Vests as to 100% on May 16, 2008. |
|
(3) |
|
Vests as to 100% on July 31, 2008. |
|
(4) |
|
Vests as to 50% on each of August 6, 2008 and 2009. |
139
Option
Exercises and Stock Vested Table
The following table sets forth information regarding the
exercise of stock options held by the DHC Named Executive
Officers, in each case, during the year ended December 31,
2007.
|
|
|
|
|
|
|
|
|
|
|
Option awards
|
|
|
|
Number of
|
|
|
|
|
|
|
shares
|
|
|
Value
|
|
|
|
acquired on
|
|
|
realized on
|
|
Name
|
|
exercise
|
|
|
exercise ($)
|
|
|
Albert E. Rosenthaler
|
|
|
|
|
|
|
|
|
Series A
|
|
|
86,280
|
|
|
|
1,207,334
|
|
Christopher W. Shean
|
|
|
|
|
|
|
|
|
Series A
|
|
|
68,845
|
|
|
|
839,732
|
|
Charles Y. Tanabe
|
|
|
|
|
|
|
|
|
Series A
|
|
|
128,500
|
|
|
|
1,329,189
|
|
Director
Compensation Table
The following table sets forth information regarding the
compensation paid to each director of DHC, other than
Messrs. Malone and Bennett, during the year ended
December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned
|
|
|
Option
|
|
|
|
|
Name(1)
|
|
or Paid in Cash ($)(2)
|
|
|
Awards ($)(3)(4)
|
|
|
Total ($)
|
|
|
Paul A. Gould
|
|
|
63,000
|
|
|
|
66,494(5
|
)
|
|
|
129,494
|
|
M. LaVoy Robison
|
|
|
75,000
|
|
|
|
66,494(6
|
)
|
|
|
141,494
|
|
J. David Wargo
|
|
|
63,000
|
|
|
|
66,494(7
|
)
|
|
|
129,494
|
|
|
|
|
(1) |
|
Excludes John C. Malone and Robert R. Bennett, each of whom is a
director of DHC and a DHC Named Executive Officer. |
|
(2) |
|
Each of the DHC directors who is not an officer or employee of
DHC is paid a retainer of $50,000 per year, payable quarterly in
arrears, plus a fee of $1,000 for each board meeting he attends.
In addition, the chairman and each other member of the audit
committee of DHCs board of directors is paid a fee of
$5,000 and $2,000, respectively, for each audit committee
meeting he attends. Each member of the executive committee and
the compensation committee who is not an employee of DHC
receives a fee of $1,000 for each committee meeting he attends.
Fees to DHC directors are payable in cash. In addition, DHC
reimburses members of its board for travel expenses incurred to
attend any meetings of its board or any committee thereof. |
|
(3) |
|
The dollar amounts recognized for financial statement purposes
have been calculated in accordance with FAS 123R. For a
description of the assumptions applied in these calculations,
see Note 13 to DHCs consolidated financial statements
for the year ended December 31, 2007 (which are included in
DHCs Annual Report on
Form 10-K,
as amended, as filed with the SEC). |
|
(4) |
|
Pursuant to the Discovery Holding Company 2005 Nonemployee
Director Incentive Plan, on May 16, 2007, DHCs board
of directors granted each of the nonemployee directors options
(the director options) to purchase 10,000 shares of
DHC Series A common stock at an exercise price equal to
$22.90, which was the closing price of DHC Series A common
stock on the grant date. The director options received by each
director had a grant date fair value of $77,382. The director
options will become exercisable on the date of the Annual
Meeting, or on such earlier date that the grantee ceases to be a
director because of death or disability, and will terminate
without becoming exercisable if the grantee resigns or is
removed from the board before the date of the Annual Meeting.
The director options will, upon becoming exercisable, be
exercisable until May 16, 2017, or, if earlier, until the
first business day following the first anniversary of the date
the grantee ceases to be a director (or, if the grantee dies
within that period, until the first business day following the
expiration of the one-year period beginning on the date of the
grantees death). |
|
(5) |
|
In addition to the director options, as of February 29,
2008, Mr. Gould held an aggregate 14,175 outstanding option
awards, all of which were granted prior to 2007. |
140
|
|
|
(6) |
|
In addition to the director options, as of February 29,
2008, Mr. Robison held an aggregate 13,300 outstanding
option awards, all of which were granted prior to 2007. |
|
(7) |
|
In addition to the director options, as of February 29,
2008, Mr. Wargo held an aggregate 11,048 outstanding option
awards, all of which were granted prior to 2007. |
Equity
Compensation Plans
Securities
Authorized for Issuance under Equity Compensation
Plans
The following table sets forth information as of
December 31, 2007, with respect to shares of DHC common
stock authorized for issuance under DHC equity compensation
plans.
EQUITY
COMPENSATION PLAN INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
securities
|
|
|
|
|
|
|
|
|
|
available for
|
|
|
|
Number of
|
|
|
|
|
|
future issuance
|
|
|
|
securities to be
|
|
|
|
|
|
under equity
|
|
|
|
issued upon
|
|
|
Weighted average
|
|
|
compensation plans
|
|
|
|
exercise of
|
|
|
exercise price of
|
|
|
(excluding
|
|
|
|
outstanding
|
|
|
outstanding
|
|
|
securities
|
|
|
|
options, warrants
|
|
|
options, warrants
|
|
|
reflected in the
|
|
Plan Category
|
|
and rights
|
|
|
and rights
|
|
|
first column)
|
|
|
Equity compensation plans approved by security holders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discovery Holding Company 2005 Incentive Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A common stock
|
|
|
10,000
|
|
|
$
|
22.90
|
|
|
|
19,990,000
|
(1)
|
Series B common stock
|
|
|
|
|
|
$
|
|
|
|
|
|
|
Discovery Holding Company 2005 Nonemployee Director Incentive
Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A common stock
|
|
|
60,000
|
|
|
$
|
18.69
|
|
|
|
4,940,000
|
(1)
|
Series B common stock
|
|
|
|
|
|
$
|
|
|
|
|
|
|
Discovery Holding Company Transitional Stock Adjustment Plan(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A common stock
|
|
|
1,082,292
|
|
|
$
|
15.42
|
|
|
|
|
|
Series B common stock
|
|
|
2,996,525
|
|
|
$
|
18.87
|
|
|
|
|
|
Equity compensation plans not approved by security
holders None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,148,817
|
|
|
$
|
17.91
|
|
|
|
24,930,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Each plan permits grants of, or with respect to, shares of DHC
Series A common stock or Series B common stock subject
to a single aggregate limit. |
|
(2) |
|
The DHC transitional plan was adopted in connection with the DHC
spin-off to provide for the supplemental award of options to
purchase shares of DHC common stock and restricted shares of DHC
Series A common stock, in each case, pursuant to
adjustments made to Liberty stock incentive awards in accordance
with the anti-dilution provisions of Libertys stock
incentive plans. |
141
Security
Ownership of Certain Beneficial Owners and Management
Security
Ownership of Certain Beneficial Owners
The following table sets forth information, to the extent known
by DHC or ascertainable from public filings, concerning shares
of DHC common stock beneficially owned by each person or entity
(other than certain of the DHC directors and executive officers,
whose ownership information follows) known by DHC to own more
than five percent of the outstanding shares of its common stock.
The percentage ownership information is based upon
268,093,917 shares of DHC Series A common stock and
13,138,236 shares of DHC Series B common stock
outstanding as of May 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Address of
|
|
|
|
|
Amount and Nature of
|
|
|
Percent of
|
|
|
Voting
|
|
Beneficial Owner
|
|
Title of Class
|
|
|
Beneficial Ownership
|
|
|
Class
|
|
|
Power
|
|
|
Harris Associates L.P.
|
|
|
Series A
|
|
|
|
26,937,050
|
(1)
|
|
|
10.0
|
%
|
|
|
6.7
|
%
|
Two North LaSalle Street
Suite 500
Chicago, IL 60602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
T. Rowe Price Associates, Inc.
|
|
|
Series A
|
|
|
|
15,491,272
|
(2)
|
|
|
5.8
|
%
|
|
|
5.8
|
%
|
100 E. Pratt Street
Baltimore, MD 21202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The number of shares of common stock is based upon Amendment
No. 3 to the Schedule 13G dated February 12,
2008, filed by Harris Associates L.P., an investment adviser,
and its general partner, Harris Associates Inc., with respect to
DHC Series A common stock. Harris Associates is deemed to
be the beneficial owner of 26,937,050 shares of DHC
Series A common stock, as a result of acting as investment
adviser. The Schedule 13G reflects that Harris Associates
has shared voting power over 24,731,330 shares of DHC
Series A common stock. |
|
(2) |
|
The number of shares of common stock is based upon Amendment
No. 1 to the Schedule 13G dated February 14,
2008, filed by T. Rowe Price Associates, Inc., an investment
adviser, with respect to DHC Series A common stock. T. Rowe
Price is deemed to be the beneficial owner of
15,491,272 shares of DHC Series A common stock. The
Schedule 13G reflects that T. Rowe Price has sole voting
power over 2,700,515 shares of DHC Series A common
stock. |
Security
Ownership of Management
The following table sets forth information with respect to the
ownership by each of DHCs directors and each of the DHC
Named Executive Officers, and by all of DHCs directors and
executive officers as a group, of shares of DHC Series A
and DHC Series B common stock.
The security ownership information is given as of May 31,
2008, and, in the case of percentage ownership information, is
based upon 268,093,917 shares of DHC Series A common
stock and 13,138,236 shares of DHC Series B common
stock outstanding on such date.
Shares of common stock issuable upon exercise or conversion of
options, warrants and convertible securities that were
exercisable or convertible on or within 60 days after
May 31, 2008, are deemed to be outstanding and to be
beneficially owned by the person holding the options, warrants
or convertible securities for the purpose of computing the
percentage ownership of the person, but are not treated as
outstanding for the purpose of computing the percentage
ownership of any other person. For purposes of the following
presentation, beneficial ownership of shares of DHC
Series B common stock, though convertible on a one-for-one
basis into shares of DHC Series A common stock, is reported
as beneficial ownership of DHC Series B common stock only,
and not as beneficial ownership of DHC Series A common
stock, but the voting power of the Series A common stock
and Series B
142
common stock have been aggregated. So far as is known to DHC,
the persons indicated below have sole voting power with respect
to the shares indicated as owned by them, except as otherwise
stated in the notes to the table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount and Nature of
|
|
|
Percent
|
|
|
|
|
Name of Beneficial Owner
|
|
Title of Class
|
|
|
Beneficial Ownership
|
|
|
of Class
|
|
|
Voting Power
|
|
|
|
(In thousands)
|
|
|
John C. Malone
|
|
|
Series A
|
|
|
|
2,298
|
(1)(2)(3)
|
|
|
|
*
|
|
|
31.0
|
%
|
|
|
|
Series B
|
|
|
|
12,187
|
(1)(3)
|
|
|
92.3
|
%
|
|
|
|
|
Robert R. Bennett
|
|
|
Series A
|
|
|
|
328
|
(3)(4)(5)
|
|
|
|
*
|
|
|
4.1
|
%
|
|
|
|
Series B
|
|
|
|
1,668
|
(3)(5)
|
|
|
11.3
|
%
|
|
|
|
|
Paul A. Gould
|
|
|
Series A
|
|
|
|
202
|
(3)
|
|
|
|
*
|
|
|
|
*
|
|
|
|
Series B
|
|
|
|
174
|
|
|
|
1.3
|
%
|
|
|
|
|
M. LaVoy Robison
|
|
|
Series A
|
|
|
|
14
|
(3)
|
|
|
|
*
|
|
|
|
*
|
|
|
|
Series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
J. David Wargo
|
|
|
Series A
|
|
|
|
20
|
(3)(6)
|
|
|
|
*
|
|
|
|
*
|
|
|
|
Series B
|
|
|
|
|
|
|
|
|
*
|
|
|
|
|
David J.A. Flowers
|
|
|
Series A
|
|
|
|
206
|
(3)(4)
|
|
|
|
*
|
|
|
|
*
|
|
|
|
Series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Albert E. Rosenthaler
|
|
|
Series A
|
|
|
|
1
|
(4)
|
|
|
|
*
|
|
|
|
*
|
|
|
|
Series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher W. Shean
|
|
|
Series A
|
|
|
|
1
|
(4)
|
|
|
|
*
|
|
|
|
*
|
|
|
|
Series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles Y. Tanabe
|
|
|
Series A
|
|
|
|
103
|
(3)(4)(7)
|
|
|
|
*
|
|
|
|
*
|
|
|
|
Series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All directors and executive
|
|
|
Series A
|
|
|
|
3,172
|
(2)(3)(4)(5)(6)(8)
|
|
|
1.2
|
%
|
|
|
34.4
|
%
|
officers as a Group (9 persons)
|
|
|
Series B
|
|
|
|
14,029
|
(3)(5)(8)
|
|
|
94.4
|
%
|
|
|
|
|
|
|
|
* |
|
Less than one percent |
|
(1) |
|
Includes 480,889 shares of DHC Series A common stock
and 340,943 shares of DHC Series B common stock held
by Mr. Malones wife, Mrs. Leslie Malone, as to
which shares Mr. Malone has disclaimed beneficial ownership. |
|
(2) |
|
Includes 330 and 1,217,920 shares of DHC Series A
common stock held by two trusts with respect to which
Mr. Malone is the sole trustee and, with his wife, retains
a unitrust interest in the trust. |
|
(3) |
|
Includes beneficial ownership of shares that may be acquired
upon exercise of stock options exercisable within 60 days
after May 31, 2008. Messrs. Malone and Bennett have
the right to convert the options to purchase shares of DHC
Series B common stock into options to purchase shares of
DHC Series A common stock. |
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
Series B
|
|
|
John C. Malone
|
|
|
6,667
|
|
|
|
60,000
|
|
Robert R. Bennett
|
|
|
200,000
|
|
|
|
1,667,985
|
|
Paul A. Gould
|
|
|
14,175
|
|
|
|
|
|
M. LaVoy Robison
|
|
|
13,300
|
|
|
|
|
|
J. David Wargo
|
|
|
11,048
|
|
|
|
|
|
David J.A. Flowers
|
|
|
178,686
|
|
|
|
|
|
Charles Y. Tanabe
|
|
|
101,915
|
|
|
|
|
|
143
|
|
|
(4) |
|
Includes shares of DHC Series A common stock held by the
Liberty 401(k) Savings Plan as follows: |
|
|
|
|
|
Robert R. Bennett
|
|
|
2,688
|
|
David J.A. Flowers
|
|
|
1,213
|
|
Albert E. Rosenthaler
|
|
|
529
|
|
Christopher W. Shean
|
|
|
563
|
|
Charles Y. Tanabe
|
|
|
628
|
|
|
|
|
(5) |
|
Includes 109,826 shares of DHC Series A common stock
and 40 shares of DHC Series B common stock owned by
Hilltop Investments, Inc., which is jointly owned by
Mr. Bennett and his wife, Mrs. Deborah Bennett. |
|
(6) |
|
Includes 3,137 shares of DHC Series A common stock
held in various accounts managed by Mr. Wargo, as to which
shares Mr. Wargo has disclaimed beneficial ownership. |
|
(7) |
|
Includes 306 shares of DHC Series A common stock held
by Mr. Tanabes wife, Arlene Bobrow, as to which
shares Mr. Tanabe has disclaimed beneficial ownership. |
|
(8) |
|
Includes 481,195 shares of DHC Series A common stock
and 340,943 shares of DHC Series B common stock held
by relatives of certain directors and executive officers, as to
which shares beneficial ownership by such directors and
executive officers has been disclaimed. |
Change
of Control
Other than as contemplated by the Transaction, DHC knows of no
arrangements, including any pledge by any person of its
securities, the operation of which may at a subsequent date
result in a change in control of DHC. For more information about
the Transaction, please see The Transaction.
144
ADDITIONAL
INFORMATION
Experts
DHC
The consolidated financial statements and schedules of DHC and
subsidiaries, except Discovery Communications Holdings LLC and
Discovery Communications, Inc., as of December 31, 2007 and
2006, and for each of the years in the three-year period ended
December 31, 2007, have been incorporated by reference
herein, in reliance upon the reports of KPMG LLP, independent
registered public accounting firm, and upon the authority of
said firms as experts in accounting and auditing. The report of
KPMG LLP refers to a change in the accounting for share-based
payments in 2006.
Discovery
Communications Holding
The consolidated financial statements of Discovery
Communications Holding and subsidiaries (successor company) as
of December 31, 2007 and for the period from May 15,
2007 through December 31, 2007, included in this proxy
statement/prospectus, have been so included in reliance on the
report of PricewaterhouseCoopers LLP, an independent registered
public accounting firm, given on the authority of said firm as
experts in auditing and accounting.
The consolidated financial statements of Discovery and
subsidiaries (predecessor company) as of December 31, 2006
and for the period from January 1, 2007 through
May 14, 2007 and for each of the two years in the period
ended December 31, 2006, included in this proxy
statement/prospectus, have been so included in reliance on the
report of PricewaterhouseCoopers LLP, an independent registered
public accounting firm, given on the authority of said firm as
experts in auditing and accounting.
AMC
[To come]
Legal
Matters
Legal matters relating to the validity of the common stock to be
issued in the Transaction will be passed upon by Baker Botts
L.L.P.
Stockholder
Proposals
New
Discovery
DHC currently expects that New Discoverys first annual
meeting of stockholders will be held during the second quarter
of 2009. In order to be eligible for inclusion in New
Discoverys proxy materials for its first annual meeting,
any stockholder proposal must be submitted in writing to New
Discoverys Corporate Secretary and received at New
Discoverys executive offices, by the close of business on
[ ]
or such later date as New Discovery may determine and announce
in connection with the actual scheduling of the first annual
meeting. To be considered for presentation at New
Discoverys first annual meeting, although not included in
its proxy statement, any stockholder proposal must be received
at the executive offices of New Discovery on or before the close
of business on
[ ]
or such later date as New Discovery may determine and announce
in connection with the actual scheduling of the first annual
meeting.
All stockholder proposals for inclusion in New Discoverys
proxy materials will be subject to the requirements of the proxy
rules adopted under the Exchange Act and, as with any
stockholder proposal (regardless of whether it is included in
New Discoverys proxy materials), New Discoverys
restated charter, New Discoverys bylaws and Delaware law.
145
DHC
If the Transaction is not completed for any reason, DHC expects
that its annual meeting of stockholders for the calendar year
2009 will be held during the second quarter of 2009. In order to
be eligible for inclusion in DHCs proxy material for the
2009 annual meeting, any stockholder proposal must be submitted
in writing to DHCs Corporate Secretary and received at
DHCs executive offices at 12300 Liberty Boulevard,
Englewood, Colorado 80112, by the close of business on
[ ]
or such later date as DHC may determine and announce in
connection with the actual scheduling of the 2009 annual
meeting. To be considered for presentation at the 2009 annual
meeting, although not included in DHCs proxy statement,
any stockholder proposal must be received at DHCs
executive offices at the foregoing address on or before the
close of business on
[ ],
or such later date as DHC may determine and announce in
connection with the actual scheduling of the 2009 annual meeting.
All stockholder proposals for inclusion in DHCs proxy
materials will be subject to the requirements of the proxy rules
adopted under the Exchange Act and, as with any stockholder
proposal (regardless of whether it is included in DHCs
proxy materials), DHCs restated charter, DHCs bylaws
and Delaware law.
Where You
Can Find More Information
New Discovery has filed with the Securities and Exchange
Commission a registration statement on
Form S-4
under the Securities Act with respect to the shares of New
Discovery common stock being offered by this proxy
statement/prospectus. This proxy statement/prospectus, which
forms a part of the registration statement, does not contain all
the information included in the registration statement and the
exhibits thereto. You should refer to the registration
statement, including its exhibits and schedules, for further
information about New Discovery and the securities being offered
hereby.
DHC is subject to the information and reporting requirements of
the Exchange Act and, in accordance with the Exchange Act, DHC
files periodic reports and other information with the Securities
and Exchange Commission. New Discovery is the successor
reporting person to DHC if the Transaction is completed.
You may read and copy any document that DHC or New Discovery
file at the Public Reference Room of the Securities and Exchange
Commission at 100 F Street, N.E.,
Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the Securities
and Exchange Commission at (800) SEC-0330. You may also
inspect such filings on the Internet website maintained by the
SEC at www.sec.gov. Additional information can also be
found on DHCs website at
www.discoveryholdingcompany.com. Information contained on
any website referenced in this proxy statement/prospectus is not
incorporated by reference in this proxy statement/prospectus. In
addition, copies of documents filed by DHC or New Discovery with
the Securities and Exchange Commission are also available by
contacting DHC, as applicable, by writing or telephoning the
office of Investor Relations:
Discovery Holding Company
12300 Liberty Boulevard
Englewood, Colorado 80112
Telephone:
(877) 772-1518
The Securities and Exchange Commission allows DHC to
incorporate by reference information into this
document, which means that we can disclose important information
about DHC to you by referring you to other documents. The
information incorporated by reference is an important part of
this proxy statement/prospectus, and is deemed to be part of
this document except for any information superseded by this
document or any other document incorporated by reference into
this document. Any statement, including financial statements,
contained in DHCs Annual Report on
Form 10-K
and 10-K/A
for the year ended December 31, 2007 shall be deemed to be
modified or superseded to the extent that a statement, including
financial statements, contained in this proxy
statement/prospectus or in any other later incorporated document
modifies or supersedes that statement. We incorporate by
reference the documents listed below and any future filings made
by DHC with the SEC pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act, prior to the date of the Annual
Meeting:
|
|
|
|
|
DHCs Annual Report on
Form 10-K
for the year ended December 31, 2007, filed on
February 15, 2008;
|
|
|
|
DHCs Annual Report on
Form 10-K/A
for the year ended December 31, 2007, filed on
April 29, 2008;
|
146
|
|
|
|
|
DHCs Annual Report on
Form 10-K/A
for the year ended December 31, 2007, filed on June 2,
2008; and
|
|
|
|
DHCs Quarterly Report on
Form 10-Q
for the period ended March 31, 2008, filed on May 8,
2008.
|
|
|
|
|
|
DHCs Current Report on
Form 8-K,
filed on June 5, 2008.
|
Neither DHC nor New Discovery has authorized anyone to give any
information or make any representation about the Transaction,
New Discovery, DHC or Discovery, that is different from, or in
addition to, the information contained in this proxy
statement/prospectus or in any of the materials that we have
incorporated into this document by reference. Therefore, if
anyone does give you information of this sort, you should not
rely on it. If you are in a jurisdiction where offers to
exchange or sell, or solicitations of offers to exchange or
purchase, the securities offered by this proxy
statement/prospectus or the solicitation of proxies is unlawful,
or if you are a person to whom it is unlawful to direct these
types of activities, then the offer presented in this proxy
statement/prospectus does not extend to you. The information
contained in this proxy statement/prospectus speaks only as of
the date of this proxy statement/prospectus unless the
information specifically indicates that another date applies.
147
Appendix
A Information Concerning Discovery
Communications Holding, LLC Including Its Wholly Owned
Subsidiary Discovery Communications, LLC
Part 1 Business
Description
Discovery is a leading global media and entertainment company
that provides original and purchased programming across multiple
distribution platforms in the United States and more than 170
other countries, with over 100 television networks offering
customized programming in 35 languages. As one of the
worlds largest providers of non-fiction television
programming, Discoverys strategy is to optimize the
distribution, ratings and profit potential of each of its
branded channels. Discovery also develops and sells consumer and
educational products and services in the United States and
internationally, and owns and operates a diversified portfolio
of website properties and other digital services. Discovery
operates through three divisions: (1) Discovery networks
U.S., (2) Discovery networks international, and
(3) Discovery commerce and education.
Discoverys media content spans non-fiction genres
including science, exploration, survival, natural history,
sustainability of the environment, technology, anthropology,
paleontology, history, space, archaeology, health and wellness,
engineering, adventure, lifestyles and current events. This type
of programming tends to be culturally neutral and maintains its
relevance for an extended period of time, referred to as
long-tail. As a result, Discoverys content
translates well across international borders and is made even
more accessible through extensive use of dubbing and subtitles
in local languages as well as the creation of local programming
tailored to individual market preferences.
Discoverys content is designed to target key audience
demographics, and the popularity of its programming offers a
compelling reason for advertisers to purchase time on its
channels. Discoverys audience ratings are a key driver in
generating advertising revenue and create demand on the part of
cable television operators, direct-to-home or DTH
satellite operators, telephone and communications companies and
other content distributors to deliver its programming to their
customers.
Discovery has an extensive library of over 100,000 hours of
programming and footage that provides a high-quality source of
content for creating new services and launching into new markets
and onto new platforms. Discovery generally owns most or all
rights to the majority of this programming and footage which
enables Discovery to exploit its library to launch new brands
and services into new markets quickly without significant
incremental spending. Programming can be re-edited and updated
to provide topical versions of subject matter in a
cost-effective manner and utilized around the world.
In addition to growing distribution and advertising revenue for
its branded channels, Discovery is 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 its programming. Discovery currently operates
Internet sites providing news, information and entertainment
content that are aligned with its television programming. In
December 2007, Discovery completed the acquisition of
HowStuffWorks.com, an award-winning online source of
high-quality, unbiased and easy-to-understand explanations of
how the world actually works. This acquisition provides an
additional platform for Discoverys extensive library of
video content and positions its brand as a hub for satisfying
curiosity on a variety of topics on both television and online.
Discovery is also exploiting its programming assets to take
advantage of the growing demand for high definition (HD)
programming in the U.S. and throughout the world. In 2007,
Discovery launched HD simulcasts of four of its networks
(Discovery Channel, TLC, Animal Planet and Science Channel) in
addition to its existing HD Theater service, which was launched
in 2002. Discovery also operates HD channels in 16 countries
outside of the U.S., making it the number-one programming
provider of HD channels outside of the U.S. based on the
number of HD channels that it operates. Discovery believes it is
well positioned to take advantage of the accelerating growth in
sales of HD televisions and Blu-Ray DVD players, and the
expanding distribution of HD channels around the world. Where
Discovery operates HD simulcasts of its networks, Discovery also
benefits from the ability to aggregate audiences for advertising
sales purposes. In June 2008, Discovery launched Planet
Green HD, its sixth HD channel in the U.S.
A-1-1
Discoverys strategy is to deliver sustainable long-term
growth at or above our peers through the development of high
quality media brands that build consumer viewership, optimize
distribution growth and capture advertising sales. In addition,
Discovery is focused on maximizing the overall efficiency and
effectiveness of its global operations through collaboration and
innovation across operating units and regions around the world
and across all television and digital platforms.
In line with this strategy, Discoverys specific priorities
include:
|
|
|
|
|
Maintaining Discoverys focus on creative excellence in
non-fiction programming and expanding the portfolios brand
entitlement by developing compelling content that increases
audience growth, builds advertising relationships, has global
utility and supports continued distribution revenue on all
platforms.
|
|
|
|
Exploiting Discoverys distribution strength in the
U.S. with three channels reaching more than
90 million U.S. subscribers and six channels reaching
approximately 50 million to 70 million
U.S. subscribers to build additional branded
channels and businesses that can sustain long-term growth and
occupy a desired programming niche with strong consumer appeal.
For example, Discovery recently announced the repositioning of
several emerging television networks to build stronger consumer
brands through specific category ownership that supports more
passionate audience loyalty and increased advertiser and
affiliate interest and integration.
|
|
|
|
Maintaining a leadership position in non-fiction entertainment
in international markets, and continuing to grow and improve the
performance of the international operations. This will be
achieved through expanding local advertising sales capabilities,
creating licensing and digital growth opportunities, and
improving operating efficiencies by strengthening development
and promotional collaboration between U.S. and
international network groups.
|
|
|
|
Developing and growing compelling and profitable content
experiences on new platforms that are aligned with its core
branded channels. Specifically, extending ownership of
non-fiction entertainment and satisfying curiosity
to all digital media devices around the world to enhance the
consumer entertainment experience, further monetize
Discoverys extensive programming library, and create
additional vehicles on which to offer new products and services
that deliver new revenue streams.
|
In support of its strategy and priorities, in January 2007,
Discovery re-evaluated its operations to identify and implement
strategic initiatives designed to improve operational and
financial performance and allocate capital in a more disciplined
and efficient manner. The following actions are representative
of these initiatives:
|
|
|
|
|
Business Restructuring: Improved margins
through revenue growth and cost efficiencies across
Discoverys divisions. Management implemented a growth
strategy to address underperforming assets, closed all of its
103 retail stores and shifted the focus of its commerce business
to
e-commerce
and licensing in order to broaden the reach of Discovery-branded
products. Discovery also streamlined its education business to
focus on direct-to-school products including Discovery
Education streaming and significantly reduced the investment
in direct-to-consumer services. These actions, coupled with an
overall focus on improved efficiency, resulted in an approximate
25% reduction in global personnel in 2007. As a result of these
restructurings, Discovery improved the operating performance of
the properties that it continues to use and operate.
|
|
|
|
Global Content Sharing: Strengthened
development and promotional collaboration between U.S. and
international networks to improve operating margins, promote
content sharing and build global brand strength.
|
|
|
|
Television Network Rebrands: In January 2008,
Discovery Times Channel was rebranded as Investigation Discovery
as a means to exploit Discoverys extensive library of
fact-based investigation and current affairs programming. In
June 2008, Discovery rebranded Discovery Home as Planet Green,
the only
24-hour
eco-lifestyle television network committed to documenting,
preserving and celebrating the planet. In January
|
A-1-2
|
|
|
|
|
2008, Discovery announced a
50-50 joint
venture with Oprah Winfrey and Harpo, Inc. to rebrand Discovery
Health as OWN: The Oprah Winfrey Network, a new multi-platform
venture designed to entertain, inform and inspire people to live
their best lives through the OWN Channel and the Oprah.com
website. It is expected that Discovery Health Channel will be
rebranded as OWN in the second half of 2009.
|
|
|
|
|
|
Digital Media Acquisitions and Website
Relaunch: Expanded internal web operations while
acquiring HowStuffWorks.com and TreeHugger.com, to create a
portfolio of brand-aligned digital properties that expand
Discoverys cross-platform sales and promotional
opportunities and realize economies through programs that can be
produced once and used often in both long- and short-form across
multiple platforms. In December 2007, Discovery completed the
acquisition of HowStuffWorks.com, an award-winning online source
of high-quality, unbiased and easy-to-understand explanations of
how the world actually works, and in August 2007, Discovery
acquired Treehugger.com, an eco-lifestyle website. Discovery
relaunched its flagship website, Discovery.com, and is in the
process of expanding and deepening the content of all of its
channel websites (e.g., TLC.com, AnimalPlanet.com) to move
beyond being television promotion vehicles and to focus on
audience growth, engagement and improved monetization. Together
with these recent acquisitions, Discovery now has approximately
33 million unique visitors per month to all of its wholly
owned websites (source: Omniture, Inc.).
|
|
|
|
Dispositions - In May 2007, Discovery and Cox completed
an exchange of Coxs 25% interest in Discovery for all of
the capital stock of a subsidiary of Discovery that held
Discoverys entire interest in Travel Channel,
travelchannel.com and approximately $1.3 billion in cash.
|
Discovery operates through the three divisions discussed below.
A discussion of the financial performance of each of these
divisions can be found in Managements Discussion and
Analysis of Financial Condition and Results of Operations.
Reaching approximately 680 million cumulative subscribers
(as defined below) in the United States as of March 31,
2008 and having one of the industrys most widely
distributed portfolio of brands, Discovery networks
U.S. delivers 11 cable and satellite television channels in
the U.S. The portfolio includes three channels that each
reach over 90 million U.S. subscribers (as defined
below) and four channels that each reach over 50 million
U.S. subscribers. Discovery networks U.S. also
provides distribution and advertising sales services for Travel
Channel and distribution services for BBC America and BBC World
Service.
Domestic subscriber numbers set forth in this document are
according to The Nielsen Company. As used herein, a
U.S. subscriber is a single household that
receives the applicable Discovery channel from its cable,
satellite or other television provider, including those who
receive Discovery networks from pay-television providers without
charge pursuant to various pricing plans that include free
periods
and/or free
carriage. The term cumulative subscribers in the
U.S. refers to the collective sum of the total number of
U.S. subscribers to each of Discoverys
U.S. channels. By way of example, two U.S. households
that each receive five Discovery networks from their cable
provider represent 10 cumulative subscribers in the
U.S. The term cumulative subscribers in the U.S. also
includes seven million cumulative subscribers in Canada who
receive direct feeds of TLC and Military Channel from Discovery
networks U.S.
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Discovery Channel
Launched in June 1985, Discovery Channel reached approximately 97 million U.S. subscribers as of March 31, 2008.
Discovery Channel brings viewers engaging stories and extraordinary experiences that share knowledge, satisfy curiosity and inspire the very joy of discovery.
Discoverys flagship, Discovery Channel, was the second most widely distributed cable channel in the United States, according to The Nielsen Company as of March 31, 2008.
Some of the networks most popular returning and new series include Deadliest Catch, Mythbusters, Dirty Jobs, Man Vs Wild, Smash Lab, Some Assembly Required, and Bone Detectives. Discovery Channel is also home to high-profile specials and mini-series, including the critically acclaimed Planet Earth and When We Left Earth: The NASA Missions.
Target viewers are adults 25-54, particularly men.
Discovery Channel is simulcast in HD.
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TLC
Acquired by Discovery in 1991, TLC reached approximately 96 million U.S. subscribers as of March 31, 2008.
TLC features educational programming that explores lifes key transitions and turning points, and presents high-quality, relatable and authentic personal stories.
Series highlights on TLC include L.A. Ink, Little People, Big World, Jon And Kate Plus 8, What Not To Wear, Flip That House, and the recently relaunched Trading Spaces.
Target viewers are adults 18-49, particularly women.
TLC is simulcast in HD.
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Animal Planet
Launched in October 1996, Animal Planet reached approximately 94 million U.S. subscribers as of March 31, 2008.
With a new logo and on-air look, Animal Planet leads viewers to relate to animals as characters that inspire and engage, not merely creatures to observe. Animal Planets engaging, insightful and high-quality entertainment taps into the instincts that drive us all with compelling stories.
Programming highlights on Animal Planet include Meerkat Manor, Orangutan Island, Animal Precinct and Jeff Corwin specials.
Target viewers are adults 25-54, particularly women.
Animal Planet is simulcast in HD.
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Discovery Health
Launched in August 1999, Discovery Health reached approximately 68 million U.S. subscribers as of March 31, 2008.
Discovery Health takes viewers inside the fascinating and informative world of health and medicine to experience first-hand compelling, real-life stories of medical breakthroughs and human triumphs.
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In January 2008, Discovery announced a joint venture with Oprah Winfrey and Harpo, Inc. to create OWN: The Oprah Winfrey Network, a new multi-platform venture designed to entertain, inform and inspire people to live their best lives. Oprah Winfrey will serve as Chairman of OWN, LLC and the venture will be 50-50 owned by Discovery
and Harpo. Discovery will handle distribution, origination and other operational requirements and both organizations will contribute advertising sales services to the venture.
Discovery Health is expected to be rebranded as OWN in the second half of 2009.
OWN will build on Discovery Healths target audience of women 25-54.
OWN will be simulcast in HD.
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Discovery Kids
Launched in October 1996, Discovery Kids reached approximately 58 million U.S. subscribers as of March 31, 2008.
Discovery Kids lets kids of all ages (from preschoolers to tweens and teens) explore the world from their point of view. This network provides entertaining, engaging and high-quality programming that kids enjoy and parents trust. Kids can learn about science, adventure, exploration and natural history through documentaries, reality shows, scripted dramas and animated stories.
Series highlights on Discovery Kids include the animated Real Toon series Tutenstein and Saving A Species: The Great Penguin Rescue.
Target viewers are children and families.
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Science Channel
Launched in October 1996, Science Channel reached approximately 52 million U.S. subscribers as of March 31, 2008.
Science Channel is devoted to science by celebrating the why in everything and providing context and understanding of the full spectrum of the wonders of science.
With a refreshed brand, Science Channel includes series such as Survivorman, How Its Made, Patent Bending and Weird Connections.
Target viewers are men 25-54.
Science Channel is simulcast in HD.
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Planet Green
Planet Green was rebranded from Discovery Home in June 2008 with a reach of approximately 50 million U.S. subscribers as of March 31, 2008.
Committed to documenting, preserving and celebrating the planet, Planet Green is the only 24-hour eco-lifestyle television network.
Planet Green speaks to people who want to understand green living and to those who are excited to make a difference by providing tools and information to meet the critical challenge of protecting our environment.
Target viewers are adults 18-54 with a focus on late teens/college-aged viewers, new parents and young baby boomers.
Planet Green is simulcast in HD.
In August 2007, in support of the Planet Green initiative, Discovery purchased TreeHugger.com, an eco-lifestyle website with news, opinions and information spanning the green spectrum. Discovery has also launched companion website PlanetGreen.com with a focus on community and action oriented content.
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Investigation Discovery
Launched in March 2003, Investigation Discovery (formerly Discovery Times Channel) reached approximately 50 million U.S. subscribers as of March 31, 2008.
In January 2008, Discovery Times Channel was rebranded as Investigation Discovery, exploiting Discoverys extensive library of fact-based investigation and current affairs programming that sheds new light on our culture, history and the human condition.
Programming highlights include Dateline On ID, Fugitive Task Force, and Diamond Road.
Target viewers are adults 25-54.
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Military Channel
Originally launched in 1996 as Discovery Wings and rebranded as Military Channel in January 2005, the network reached approximately 50 million U.S. subscribers as of March 31, 2008.
Military Channel salutes the sacrifices made by our men and women in uniform with real stories and access to a world of human drama, strategic innovation and long-held traditions.
Original programming includes Weaponology and Showdown: Air Combat.
Target viewers are men 35-64.
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FitTV
Acquired by Discovery in June 2001, FitTV reached approximately 43 million U.S. subscribers as of March 31, 2008.
FitTV is designed to inspire viewers to improve their fitness and well-being on their terms.
Programming features experts and entertaining shows that help people learn how to incorporate fitness into their daily lives.
Target viewers are adults 25-54.
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HD Theater
Launched in June 2002, HD Theater reached approximately 14 million U.S. subscribers as of March 31, 2008.
HD Theater was one of the first nationwide 24-hour-a-day, 7-day-a-week high definition networks in the U.S. offering compelling, real-world content including adventure, nature, world culture, technology and engineering programming.
Programming highlights on HD Theater include Risk Takers, Equator and the critically acclaimed Sunrise Earth. In addition, HD Theater offers motorized HD content including upcoming live muscle car auctions with Mecum Auto Auctions.
Target viewers are adults 25-54, particularly men.
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Discoverys U.S. networks are wholly owned by
Discovery except for (1) Animal Planet, which is co-owned
with DHC (10%) and Advance/Newhouse (5%) and (2) OWN
Network, which would be a
50-50 joint
venture between Discovery and Harpo, Inc.
Discovery networks U.S. also includes Discoverys
digital media businesses in the United States, which feature
three main components: (1) organic channel websites such as
Discovery.com, TLC.com and AnimalPlanet.com and acquired assets
including HowStuffWorks.com, TreeHugger.com and Petfinder.com;
(2) Discovery Mobile, Discoverys mobile video
service; and (3) Discovery on-demand, a free on demand
service featuring content from across Discoverys stable of
U.S. networks.
Discoverys digital media business is an increasingly
important part of Discoverys business, given the broad
cross-platform sales and promotional opportunities with
Discoverys television networks and the reach of the
websites themselves, coupled with the economies realized through
programs that can be produced once and used often in both long-
and short-term formats across multiple platforms.
The U.S. Internet traffic data set forth herein is
according to Omniture, Inc. Discoverys digital assets
include:
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Discovery.com
This flagship website is the official website for Discovery Channel and was relaunched in 2007 to feature more robust content, including a new media player, increased video clips and new search tools.
Discovery.com attracted more than four million unique visitors in March 2008.
Discovery is enhancing its other vertical sites (e.g. TLC.com, AnimalPlanet.com) to feature more robust content, a new media player, increased video clips and new search tools in order to move beyond being promotional vehicles for Discoverys television networks and focus on visitor growth, engagement and improved monetization.
Discoverys vertical sites attracted approximately 11 million unique visitors in March 2008.
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HowStuffWorks.com
Acquired in December 2007, HowStuffWorks.com is an award-winning online source of high-quality, unbiased and easy-to-understand explanations of how the world actually works.
HowStuffWorks.com provides a high-profile platform for promoting and distributing Discoverys extensive library of programming content and for developing advertising opportunities from the additional Discovery video content on this platform. Discovery believes that the mission alignment between Discovery and HowStuffWorks.com will allow for cross promotion and cross selling opportunities
across multiple platforms.
HowStuffWorks.com attracted more than 15 million unique visitors in March 2008.
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TreeHugger.com
Acquired by Discovery in August 2007, TreeHugger.com is an eco-lifestyle web site that complements the pending debut of the Planet Green television network. Together, TreeHugger.com and PlanetGreen.com will provide consumers with a multi-platform offering across topics and issues around the environment and sustainable development.
TreeHugger.com attracted more than two million unique visitors in March 2008.
Discovery has also launched companion website PlanetGreen.com with a focus on community action oriented content.
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Petfinder.com
Acquired in November 2006, Petfinder.com provides an additional promotional platform for the Animal Planet brand.
Over 260,000 homeless pets in over 11,000 animal placement organizations across North America have their own homepages on Petfinder.com, the oldest and largest searchable directory of adoptable pets on the web.
Petfinder.com attracted more than 4.5 million unique visitors in March 2008.
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Discovery networks U.S. also has distribution arrangements
with the majority of mobile carriers in the U.S. to provide
unique made-for-mobile short-form content and long-form episodes
of popular titles on mobile devices. Discoverys
video-on-demand
service is distributed across most major U.S. affiliates,
offering a selection of full-length programming such as
Discovery Channels Mythbusters and Deadliest
Catch.
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Discovery
Networks International
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Reaching approximately 859 million cumulative subscribers
(as defined below) in over 170 countries outside the U.S as of
March 31, 2008, Discovery networks international operates
one of the most extensive international television businesses in
the media industry and executes a localization strategy by
offering customized programming and in-market schedules via more
than 100 unique distribution feeds and 35 languages.
Discovery networks international encompasses four regional
operations covering all major foreign cable and satellite
markets, including Asia-Pacific, Latin America, the UK and EMEA
(Europe, the Middle East and Africa), and has more than 25
international offices with regional headquarters located in
Singapore, New Delhi, Miami and London.
International subscriber statistics are derived from internal
data review coupled with external sources when available. As
used herein, an international subscriber is a single
household that receives the applicable Discovery network or
programming service from its cable, satellite or other
television provider, including those who receive Discovery
networks from pay-television providers without charge pursuant
to various pricing plans that include free periods
and/or free
carriage. The term cumulative subscribers outside
the U.S. refers to the collective sum of the total number
of international subscribers to each of Discoverys
networks or programming services outside of the U.S. By way
of example, two international households that each receive five
Discovery networks from their cable
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provider represent 10 cumulative subscribers outside the
U.S. Cumulative subscribers outside the U.S. include
subscriptions for branded programming blocks in China, which are
generally provided without charge to third-party channels and
represented approximately 280 million cumulative
subscribers outside the U.S. as of March 31, 2008.
Discoverys international networks are wholly owned by
Discovery except (1) the international Animal Planet
channels which are generally
50-50 joint
ventures with the BBC, (2) People+Arts which operates in
Latin America and Iberia as a
50-50 joint
venture with the BBC and (3) several channels in Japan,
Canada and Poland which operate as joint ventures with strategic
local partners and which are not consolidated in
Discoverys financial statements but whose subscribers are
included in Discoverys international cumulative
subscribers. Pursuant to the terms of the Animal Planet
international joint ventures, BBC has the right, subject to
certain conditions, to cause Discovery to acquire BBCs
interest in these joint ventures. Pursuant to the terms of the
People + Arts joint venture, BBC has the right, subject to
certain conditions, to cause Discovery to either acquire
BBCs interest in, or sell to the BBC Discoverys
interest in, this joint venture. Certain preliminary steps have
been taken with respect to the exercise by BBC of its rights;
however, we cannot assure you whether BBC will exercise either
or both of these rights.
Led by flagship brand Discovery Channel, Discovery networks
international distributes 16 network entertainment brands,
including:
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Discovery Channel
Launched internationally in 1989, Discovery Channel reached approximately 248 million international subscribers in more than 170 countries as of March 31, 2008.
Discovery Channels international programming includes documentaries, docudramas and reality formats covering a wide range of topics and themes, including human adventure and exploration, engineering, science, history and world culture.
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Animal Planet
Launched internationally in 1997, Animal Planet reached approximately 218 million international subscribers in over 160 countries as of March 31, 2008.
Animal Planet is dedicated to mankinds fascination with the creatures that share our world, featuring programs such as Meerkat Manor, Unearthed and Lemur Street.
The international Animal Planet channels are generally a 50-50 joint venture with the BBC.
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Discovery Lifestyle Networks
Launched beginning in 1998, Discovery Lifestyle Networks reached approximately 227 million international subscribers in over 90 countries as of March 31, 2008.
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Discovery Lifestyle Networks is a global
portfolio of three lifestyle brands offering inspirational
content that encourages viewers to pursue unique interests and
experiences: Discovery Travel & Living, Discovery
Home & Health and Discovery Real Time.
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Discovery Travel & Living provides a
mix of lifestyle programming on travel, food, design and
décor. Discovery Home & Health provides relevant
and practical programming on relationships, babies, beauty and
wellbeing. Discovery Real Time features practical and motivating
programming on how to make the most of free time.
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Discovery Science
Launched internationally in 1998, Discovery Science reached approximately 31 million international subscribers in over 60 countries as of March 31, 2008.
Discovery Science uncovers fascinating clues to the questions that have eluded us for centuries and reveals lifes greatest mysteries and smallest wonders.
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Discovery Kids
Launched internationally in 1997, Discovery Kids reached approximately 22 million international subscribers in over 25 countries across Latin America, the Carribean and Canada as of March 31, 2008.
Discovery Kids provides a unique environment that nurtures childrens curiosity using characters and stories, enabling them to relate to real-life experiences.
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Discovery HD
Launched internationally in 2005, Discovery HD reached subscribers in 16 countries as of March 31, 2008.
Discovery HD showcases dynamic content from Discoverys library of thousands of hours of visually compelling HD footage including Discovery Atlas.
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People+Arts
Launched in 1997, People+Arts reached approximately 20 million international subscribers in Latin America, Spain and Portugal as of March 31, 2008.
People+Arts is the entertainment network from the BBC and Discovery that explores the complete range of human emotions, with engaging storytelling that is moving, unexpected and authentic.
People + Arts is a 50-50 joint venture with the BBC.
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DMAX Germany
Launched in Germany in 2006, DMAX reached approximately 31 million homes in Germany as of March 31, 2008.
DMAX is a free-to-air service which has broad distribution. DMAX generates only advertising revenue, offering a broad range of original content from Germany and around the world including documentaries, talk shows and reality-based series.
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Discovery networks international also includes the following
television channels: Discovery Civilization, Discovery
Geschichte, Discovery Historia, Discovery Knowledge, Discovery
Turbo, and DMAX UK.
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The following
Spanish-language
networks are distributed to U.S. subscribers, but are
operated by and included as part of Discovery networks
international for financial reporting and management purposes:
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Discovery en Español
Launched in the U.S. in June 1998, Discovery en Español reached approximately eight million U.S. subscribers as of March 31, 2008.
Discovery en Español is a non-fiction network delivering content that stimulates, informs and empowers, giving viewers a fascinating look at the incredible and often surprising world from an Hispanic perspective.
Discovery en Español is designed to give viewers more of the programming they enjoy including original programming developed specifically for Spanish-speaking audiences.
Target viewers are adults 18-49, particularly men.
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Discovery Familia
Launched in the U.S. in August 2007, Discovery Familia reached approximately one million U.S. subscribers as of March 31, 2008.
Discovery Familia is Discoverys Spanish-language network dedicated to bringing the best educational and entertaining, family-oriented programming to kids and families.
Target viewers are Hispanic children, women and families.
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Discovery networks international also operates Antenna Audio
which was acquired by Discovery in 2006, and is a leading
provider of audio and multimedia tours to museums, exhibitions,
historic sites and visitor attractions around the world. Each
year, more than 20 million visitors purchase Antenna
Audios tours in 12 languages across 20 countries at
approximately 450 of the worlds most famous, fascinating
and frequented locations, including museums such as the
Metropolitan Museum of Art, the Musée du Louvre and Tate;
historic and cultural sites including Graceland, Château de
Versailles and Alcatraz; and popular destinations such as the
Statue of Liberty and Yosemite National Park.
Discovery networks internationals digital business is in
its early stages of development. Discoverys international
websites currently function as marketing vehicles for the
network brands. Discovery networks international also operates a
program sales business pursuant to which it sells programming
internationally and a licensing business pursuant to which it
licenses its brands for consumer products internationally.
Discovery
Commerce and Education
Discovery commerce represents an additional revenue stream for
Discovery. It also plays an important role in support of
Discoverys overall strategic objectives by instilling
viewer loyalty. In 2007, as part of a company-wide strategic
review, Discovery made the decision to discontinue its
brick-and-mortar
retail stores and instead focus on exploiting its on-air brands
and increasing the reach of its products through its
e-commerce
platform and licensing arrangements. In the third quarter of
2007, Discovery completed the closing of its 103 mall-based and
stand-alone Discovery Channel stores.
The divisions platforms now include an
e-commerce
business, seasonal catalogs and domestic licensing business:
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Discoverystore.com is an
e-commerce
site where customers can shop for a large assortment of
proprietary Discovery merchandise and other products.
Discoverystore.com logged more than 12 million unique
visitors in 2007. Discoverystore.com also reaches consumers
through relationships with leading
e-commerce
sites such as Amazon.com.
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The Discovery Channel Store Catalog is distributed to
over nine million consumers annually and highlights a selection
of proprietary and other products for the whole family. The
catalog is a highly
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targeted marketing and branding tool driving online and phone
sales. It also adds value as a cross promotional vehicle for
network and corporate initiatives.
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Domestic Licensing has agreements with key manufacturers
and retailers, including JAKKS, Activision, and others to
develop long-term, strategic programs that translate
Discoverys network brands and signature properties into an
array of merchandising opportunities. From Animal Planet toy and
pet products, Mythbusters books, DVDs and calendars to
Miami Ink apparel and accessories, domestic licensing
develops products that capture the look and feel of
Discoverys core brands and programs.
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Discovery education provides video-based broadband educational
content through subscription services to public and private K-12
schools serving over one million teachers nationwide.
Discoverys flagship educational service, Discovery
Education streaming, is an online
video-on-demand
teaching service that features 4,000 digital videos and 40,000
content specific video clips correlated to state K-12 curriculum
standards.
Discovery education also publishes and distributes content on
DVD, VHS, and CD-ROM through catalogs, an online teacher store,
and a network of distributors. Discovery education also
participates in licensing and sponsorship programs with
corporate partners and supports Discoverys digital
initiatives by providing educational content in multiple formats
that meet the needs of teachers and students.
Discoverys content development strategy is designed to
increase viewership, maintain innovation and quality leadership,
and provide value for its distributors and advertising
customers. Discoverys production agreements fall into
three categories: commissions, co-productions and acquisitions.
Commissions refer to programming for which Discovery generally
owns most or all rights for at least 10 years and, in
exchange for paying for all production costs, retains all
editorial control. Co-productions refer to programs where
Discovery retains significant (but more limited) rights to
exploit the programs. The rights package retained by Discovery
is generally in proportion to the portion of the total project
costs covered by Discovery, which generally ranges from
25-70% of
the total project cost. Co-productions are typically high-cost
projects for which neither Discovery nor its co-producers wish
to bear the entire cost or productions in which the producer has
already taken on an international broadcast partner.
Acquisitions are license agreements for films or series that
have already been produced.
As revenue and network distribution grows, Discoverys
program mix matures from acquired content to sharing in
co-productions to full commissions. To minimize programming
expense in the early stages, as an audience base begins to form,
acquired programming is used to a greater extent and repeated
frequently. The transition from acquired content provides for
more customized use of programming for individual networks and
broader rights for re-use on television networks and new
platforms.
Discovery sources content from a wide range of producers,
building long-standing relationships with some of the
worlds leading non-fiction production companies as well as
consistently developing and encouraging young independent
producers. Discovery also has long-term relationships with some
of the worlds most significant non-fiction program
producers, including the British Broadcasting Corporation.
The programming schedule on Discoverys most widely
distributed networks is mostly a mix of high-cost special
event programming combined with miniseries and regular
series. Large-scale programming events such as Planet Earth,
Nefertiti Resurrected, Walking With Cavemen and Blue
Planet bring brand prestige, favorable media coverage and
substantial cross-promotional opportunities for other content
platforms. Given the success of these global programming
tent-poles, Discovery will continue to invest in a
mix of programs that have the potential to draw larger audiences
while also increasing the investment in regularly scheduled
series. Brand-defining series such as Mythbusters, Dirty
Jobs, Deadliest Catch, What Not To Wear, Man Vs Wild, John And
Kate Plus 8 and Little People, Big World bring
predictability to the schedule, increase repeat viewership and
channel loyalty, and create new sub-brands that can be exploited
and monetized across other platforms and around the world.
Discovery has an extensive library of over 100,000 hours of
programming and footage that provides a high-quality source of
programming for debuting new services quickly without
significant incremental spending. For
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example, Discovery was able to exploit the long-tail
popularity of its extensive non-fiction library of forensics and
investigation programming to debut the re-branded Investigation
Discovery channel in January 2008. Programming can be re-edited
and updated to provide topical versions of subject matter in a
cost-effective manner. Library development also provides a
mechanism to share program ideas around the world and repurpose
for display on new digital and mobile platforms.
Discovery earns revenue principally from (1) the receipt of
affiliate fees from the global delivery of non-fiction
programming pursuant to affiliation agreements with cable
television operators, direct-to-home satellite operators and
other distributors, (2) advertising sales on its television
networks and websites and (3) product and subscription
sales in the commerce and education businesses. No single
customer represented more than 10% of Discoverys
consolidated revenue for the year ended December 31, 2007.
Distribution revenue represented 47% of Discoverys
consolidated total revenue in 2007. Distribution revenue in the
U.S. represented 44% of U.S. networks revenue, and
international distribution fees represented 60% of international
networks revenue in 2007. Distribution revenue is generated
through affiliation agreements with cable, satellite and other
television distributors, which have a typical term of
3-7 years. These affiliation agreements generally provide
for the level of carriage Discoverys networks will
receive, such as channel placement and package inclusion
(whether on more widely distributed, broader packages or
lesser-distributed, specialized packages), and for payment of a
fee to Discovery based on the numbers of subscribers that
receive its networks. Upon the launch of a new channel,
Discovery 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. Discovery has
long-term contracts with distributors representing most cable
and satellite operators around the world, including the largest
operators in the U.S. and major international distributors.
In the U.S., 90% of distribution revenue comes from the top
eight distributors, with whom Discovery has agreements that
expire at various times beginning in 2008 through 2014.
Discovery is currently in negotiations to renew distribution
agreements for carriage of its networks involving a substantial
portion of its domestic subscribers. A failure to secure a
renewal or a renewal on less favorable terms may have a material
adverse effect on Discoverys results of operations and
financial position. Outside of the U.S., Discovery has
agreements with numerous distributors with no individual
agreement representing more than 10% of Discoverys
international distribution revenue.
Advertising revenue comprised 43% of Discoverys
consolidated total revenue in 2007. Advertising revenue in the
U.S. represented 51% of U.S. networks revenue, and
international advertising revenue represented 32% of
international networks revenue in 2007. Discovery typically
builds network brands by securing as broad a subscriber base as
possible. After obtaining sufficient distribution to provide an
attractive platform for advertising, Discovery increases its
investment in programming and marketing to build audience share
and drive strong ratings performance in order to increase
advertising sales opportunities. Advertising revenue generated
by each program service depends on the number of subscribers
receiving the service, viewership demographics, the brand appeal
of the network and ratings as determined by third-party research
companies such as The Nielsen Company. Revenue from advertising
is subject to seasonality and market-based variations.
Advertising revenue is typically highest in the second and
fourth quarters. Revenue can also fluctuate due to the
popularity of particular programs and viewership ratings. In
some cases, advertising sales are subject to ratings guarantees
that may require Discovery to provide additional advertising
time or refunds if the guarantees are not met.
Discovery sells advertising time in both the upfront and scatter
markets. In the upfront market, advertisers buy advertising time
for the upcoming season, and by buying in advance, often receive
discounted rates. In the scatter market, advertisers buy
advertising time close to the time when the ads will be run, and
often pay a premium. The mix between the upfront and scatter
markets is based upon a number of factors such as pricing,
demand for advertising time and economic conditions.
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The companys two flagship networks, Discovery Channel and
TLC, target key demographics that have historically been
considered attractive to advertisers, notably viewers in the
18-54 age
range who are viewed as having significant spending power. The
Discovery Channels target audience skews toward male
viewers, while TLC targets female viewers, providing a healthy
gender balance in Discoverys portfolio for distribution
and advertising clients.
Discovery benefits by having a portfolio of networks appealing
to a broad range of demographics. This allows Discovery to
create advertising packages that exploit the strength of its
large networks to benefit smaller niche or targeted networks and
networks on digital tiers. Utilizing the strength of its diverse
networks, coupled with its online and digital platforms,
Discovery seeks to create innovative programming initiatives and
multifaceted campaigns for the benefit of a wide variety of
companies and organizations who desire to reach key audience
demographics unique to each network. Discovery delivers
customized, integrated marketing campaigns to clients worldwide
by catering to the special needs of multi-regional advertisers
who are looking for integrated campaigns that move beyond
traditional spot advertising to include sponsorships, product
placements and other opportunities.
Discovery also generates advertising revenue from its websites.
Discovery sells advertising on its websites both on a
stand-alone basis and as part of advertising packages with its
television networks.
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Commerce
and Education Revenue
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Discovery commerce and education derives revenue principally
from the sale of products online and through its catalogs,
licensing royalties and subscriptions to its educational
streaming services. As part of its commerce business, Discovery
has a domestic consumer products licensing business which
licenses Discoverys brands in connection with merchandise,
videogames and publishing. Discovery is generally paid a royalty
based upon a percentage of its licensees wholesale
revenues, with an advance against future expected royalties. As
part of its strategic reorganization described above, Discovery
closed its 103 retail stores in 2007.
E-commerce
and catalog sales are highly seasonal with a majority of the
sales occurring in the fourth quarter due to the holiday season.
Licensing revenue may vary from period to period depending upon
the popularity of the properties available for license and the
popularity of licensed products in a particular period.
Subscription sales to Discoverys educational streaming
services are primarily sold at the beginning of each school year
as school budgets are appropriated and approved. The revenue
derived from the subscription agreements are generally
recognized over the school year. Discovery education also
provides products that are sold throughout the school year. In
2007, revenue from
e-commerce
and catalog sales (excluding sales from Discoverys retail
stores which were closed in 2007), licensing and education
subscriptions was 54%, 5% and 27%, respectively, of total
revenue for Discovery commerce and education.
Discoverys principal operating costs consist of
programming expense, sales and marketing expense, personnel
expense and general and administrative expenses. Content
amortization expense is Discoverys largest category,
representing 35% of Discoverys 2007 consolidated operating
expenses, as investment in maintaining high-quality editorial
and production values is a key differentiator for Discovery
content. In connection with creating original content, Discovery
incurs production costs associated with acquiring new show
concepts and retaining creative talent, including actors,
writers and producers. Discovery also incurs higher production
costs when filming in HD versus standard definition. Discovery
incurs sales and marketing expense to promote brand recognition
and to secure quality distribution channels worldwide.
REGULATORY
MATTERS
Discoverys businesses are subject to and affected by
regulations of U.S. federal, state and local government
authorities, and Discoverys international operations are
subject to laws and regulations of local countries and
international bodies such as the European Union. The rules,
regulations, policies and procedures affecting Discoverys
businesses are constantly subject to change. These descriptions
are summary in nature and do not purport to describe all present
and proposed laws and regulations affecting Discoverys
businesses.
A-1-14
The FCCs Program Access Rules prevent a satellite cable
programming vendor in which a cable operator has an
attributable ownership interest under FCC rules from
entering into exclusive contracts for programming with a cable
operator and from discriminating among competing Multi-Channel
Video Programming Distributors (MVPDs) in the price,
terms and conditions for the sale or delivery of programming.
These rules also permit MVPDs to initiate complaints to the FCC
against program suppliers if an MVPD is unable to obtain rights
to programming on nondiscriminatory terms. The FCC recently
voted to extend the Program Access Rules exclusivity ban
for an additional five years, and has proposed other changes
that would increase the rights of MVPDs. Discovery is currently
subject to the Program Access Rules because:
(a) Advance/Newhouse, which operates cable systems, holds
an attributable interest in Discovery under the FCCs rules
on ownership interests; (b) Mr. John Malone, who holds
an attributable interest in Discovery through Discovery Holding
Company, currently holds an attributable interest in a company
whose subsidiary operates a cable television system; and (c) as
part of the FCCs approval of the application of Liberty,
another company in which Mr. Malone holds an attributable
interest and serves as Chairman of the Board, to acquire de
facto control of DirecTV, a direct broadcast satellite provider,
the FCC imposed program access conditions on Discoverys
networks for as long as Mr. Malone or any other officer or
director of Liberty or DirecTV holds an attributable interest in
Discovery and for as long as Liberty holds an attributable
interest in DirecTV, provided the FCCs program access
rules are otherwise in effect.
|
|
|
À la
Carte Programming and Unbundling Proposals
|
The FCC previously initiated proceedings inquiring about its
authority to require MVPD programming to be provided to
subscribers on an à la carte basis, which would require
them to be sold as individual channels rather than as part of
program tiers. It also has proposed that satellite cable program
vendors and broadcasters be required to sell programming to
MVPDs on an unbundled basis, so that programming vendors like
Discovery would be precluded from requiring MVPDs to take a
basket of program channels. Some members of Congress also have
indicated an interest in enacting legislation to achieve these
same goals.
|
|
|
Must
Carry, Leased Access and Program Carriage
|
The Cable Act of 1992 imposed must carry regulations
on cable systems, requiring them to carry the signals of local
broadcast television stations. Direct broadcast satellite
systems are also subject to their own must carry rules. The FCC
recently adopted an order requiring cable systems, following the
anticipated end of analog television broadcasting in February
2009, to carry the digital signals of local television stations
that have must carry status and to carry the same signal in
analog format, or to carry the signal in digital format alone,
provided that all subscribers have the necessary equipment to
view the broadcast content. The FCC in November 2007 announced
that it will require cable operators to provide independent
programmers with leased capacity at rates significantly below
those now prevailing. In June 2007, the FCC released a notice of
proposed rulemaking considering changes to its program carriage
rules, which govern carriage disputes between programmers and
distributors. Changes to any of these rules could affect the
terms under which Discoverys services are distributed
FCC rules limit the amount and content of commercial matter that
may be shown on cable channels during programs designed for
children 12 years of age or younger. Additionally, new
rules, which became effective in 2007, restrict the ability of
programmers to display website addresses during childrens
programming unless those websites meet certain criteria designed
to limit exposure to commercial matter. The FCC and other
policymakers are examining other issues that could affect
advertising during programming designed for children.
|
|
|
Regulation
of the Internet
|
Discovery operates several internet websites which Discovery
uses to distribute information about and supplement
Discoverys programs and to offer consumers the opportunity
to purchase consumer products and services. Internet services
are now subject to regulation in the United States relating to
the privacy and security of personally identifiable user
information and acquisition of personal information from
children under 13, including
A-1-15
the federal Child Online Protection Act (COPA) and the federal
Controlling the Assault of Non-Solicited Pornography and
Marketing Act (CAN-SPAM). In addition, a majority of states have
enacted laws that impose data security and security breach
obligations. Additional federal and state laws and regulations
may be adopted with respect to the Internet or other online
services, covering such issues as user privacy, child safety,
data security, advertising, pricing, content, copyrights and
trademarks, access by persons with disabilities, distribution,
taxation and characteristics and quality of products and
services. In addition, to the extent Discovery offers products
and services to online consumers outside the United States, the
laws and regulations of foreign jurisdictions, including,
without limitation, consumer protection, privacy, advertising,
data retention, intellectual property, and content limitations,
may impose additional compliance obligations on Discovery.
COMPETITION
Cable and satellite network programming is a highly competitive
business in the United States and worldwide. Discoverys
cable and satellite networks and websites generally compete for
advertising revenue with other cable and broadcast television
networks, online and mobile outlets, radio programming and print
media. Discoverys networks and websites also compete for
their target audiences with all forms of programming and other
media provided to viewers, including broadcast networks, local
over-the-air television stations, competitors pay and
basic cable television networks,
pay-per-view
and
video-on-demand
services, online activities and other forms of news, information
and entertainment. Discoverys networks also compete with
other television networks for distribution and affiliate fees
derived from distribution agreements with cable television
operators, satellite operators and other distributors. The
Discovery commerce and education division also operates in
highly competitive industries with Discoverys
e-commerce
and catalogue business competing with brick and mortar and
online retailers and Discoverys education business
competing with other providers of educational products to
schools, including providers with long-standing relationships,
such as Scholastic.
INTELLECTUAL
PROPERTY
Discoverys intellectual property assets principally
include copyrights in television programming, websites and other
content, trademarks in brands, names and logos, domain names and
licenses of intellectual property rights of various kinds.
Discovery is fundamentally a content company and the protection
of its brands and content are of primary importance. To protect
Discoverys intellectual property assets, Discovery relies
upon a combination of copyright, trademark, unfair competition,
trade secret and Internet/domain name statutes and laws and
contract provisions. However, there can be no assurance of the
degree to which these measures will be successful in any given
case. Moreover, effective intellectual property protection may
be either unavailable or limited in certain foreign territories.
Policing unauthorized use of Discoverys products and
services and related intellectual property is often difficult
and the steps taken may not always prevent the infringement by
unauthorized third parties of Discoverys intellectual
property. Discovery seeks to limit that threat through a
combination of approaches.
Third parties may challenge the validity or scope of
Discoverys intellectual property from time to time, and
such challenges could result in the limitation or loss of
intellectual property rights. Irrespective of their validity,
such claims may result in substantial costs and diversion of
resources which could have an adverse effect on Discoverys
operations. In addition, piracy, including in the digital
environment, continues to present a threat to revenues from
products and services based on intellectual property.
A-1-16
Appendix
A Information Concerning Discovery
Communications Holding, LLC Including Its Wholly Owned
Subsidiary Discovery Communications, LLC
Part 2 Managements
Discussion and Analysis of Financial Condition and Results of
Operations
This Part 2 of Appendix A discusses the financial
condition and results of operations of Discovery Communications
Holding, LLC including its wholly owned subsidiary Discovery
Communications, LLC. Please note that references in this
Part 2 to Discovery refer to the intermediary
holding company Discovery Communications Holding, LLC, and
references to DCI refer to Discovery
Communications, Inc., which was converted into the
operating company Discovery Communications, LLC.
Overview
Discovery is a leading global media and entertainment company
that provides original and purchased programming across multiple
distribution platforms in the United States and more than 170
other countries, including television networks offering
customized programming in 35 languages. Discoverys
strategy is to optimize the distribution, ratings and profit
potential of each of its branded channels. Discovery also
develops and sells consumer and educational products and
services in the United States and internationally, and owns and
operates a diversified portfolio of website properties and other
digital services. Discovery operates through three divisions:
(1) Discovery networks U.S., or U.S. networks,
(2) Discovery networks international, or international
networks, and (3) Discovery commerce and education.
Discoverys media content is designed to target key
audience demographics and the popularity of its programming
creates a reason for advertisers to purchase commercial time on
Discoverys channels. Audience ratings are a key driver in
generating advertising revenue and create demand on the part of
cable television operators, direct-to-home or DTH
satellite operators and other content distributors to deliver
Discoverys programming to their customers.
In addition to growing distribution and advertising revenue for
its branded channels, Discovery is 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 its programming. Discovery also operates internet
sites providing supplemental news, information and entertainment
content that are aligned with its television programming.
Discoverys recent acquisition of HowStuffWorks.com creates
a stronger platform for distributing Discoverys extensive
video library.
As a public company, Discovery will incur incremental legal,
accounting and other expenses that the company did not incur as
a private company. Discovery 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. Discovery has and will continue
to hire additional accounting, financial, legal and compliance
staff and consulting support with appropriate public company
experience. In addition, Discovery will incur additional costs
due to the new attestation requirements of the Act and the
related attestation and assessment of the independent registered
public accounting firm. Discovery expects that these reporting
and other obligations will place significant demands on
Discoverys management, administrative, operational,
internal audit and financial resources, increase its legal and
financial compliance costs and will make some activities more
time-consuming and costly. These additional activities are not
expected to adversely impact significant business initiatives
including Discoverys negotiations to renew distribution
agreements. Discovery is currently evaluating the impact these
activities will have on its results of operations. Any of these
expenses or failure to achieve and maintain effective internal
controls could have a material adverse effect on
Discoverys results of operations.
U.S. networks is Discoverys 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 46% and 49%, respectively, of revenue for this
division for the three months
A-2-1
ended March 31, 2008, and 44% and 51%, respectively, for
the year ended December 31, 2007. During the three months
ended March 31, 2008 and each of the years ended
December 31, 2007, 2006 and 2005, Discovery Channel and TLC
collectively generated more than 65% of U.S. networks total
revenue. U.S. networks earns distribution fees under
multi-year affiliation agreements with cable operators, DTH
satellite operators and other distributors of television
programming. Distribution fees are based on the number of
subscribers receiving Discoverys programming. Upon the
launch of a new channel, Discovery 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 its networks and
websites. The number of subscribers to Discoverys
channels, the popularity of its programming and its ability to
sell commercial time over a group of channels are key drivers of
advertising revenue.
Several of Discoverys 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.
Discoverys 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
Discoverys major networks. Discoverys contractual
arrangements with U.S. distributors are renewed or
renegotiated from time to time in the ordinary course of
business. Although U.S. networks believes carriage and
marketing of its networks by the larger affiliates will
continue, the loss of one or more affiliate agreements could
have a material adverse impact on U.S. networks results of
operations. Discovery is currently in negotiations to renew
distribution agreements for carriage of its networks involving a
substantial portion of its domestic subscribers. A failure to
secure a renewal or a renewal on less favorable terms may have a
material adverse effect on Discoverys results of
operations and financial position.
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.
U.S. networks top strategic priorities are
(1) maintaining the companys focus on creative
excellence in nonfiction programming and expanding the
portfolios brand entitlement by developing compelling
content that increases audience growth, builds advertising
relationships and supports continued distribution revenue on all
platforms, (2) leveraging Discoverys distribution
strength in the U.S. to build additional branded channels
and businesses that can sustain long-term growth and
profitability, and (3) developing and growing compelling
and profitable content experiences on new platforms that are
aligned with its core branded channels.
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 divisions
channels are wholly owned by Discovery with the exception of
(1) the international Animal Planet channels, which are
generally joint ventures in which the 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 customized
content and localized schedules via its distribution feeds.
Distribution revenue represents approximately 60% of the
divisions operating revenue and continues to deliver
growth in markets with the highest
A-2-2
potential for pay television expansion. Advertising sales are
increasingly important to the divisions 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. Discovery believes there is future growth
in many markets including Latin American and Central and Eastern
Europe that are in the early stage of pay TV evolution. In
developing pay TV markets, Discovery expects to see advertising
revenue growth from its 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 is expected
in advertising sales, which are driven by increased audience
performance and viewing market share. To help further drive this
focus, Discovery entered the global free-to-air television
business with the acquisition of a free-to-air channel in
Germany (DMAX) in early 2006.
Discoverys international businesses are subject to a
number of risks including fluctuations in currency exchange
rates, regulatory issues, and political instability. The past
few years have seen relative economic and political stability,
but these trends may not be indicative of future events. 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 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 development and
promotional collaboration between U.S. and international
network groups.
During 2007, Discovery 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
platform. In the third quarter, Discovery completed the closing
of its 103 mall-based and stand-alone Discovery Channel stores.
As a result of the store closures, Discoverys 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 Discovery financial
statements and have been reported as discontinued operations.
Discovery commerce is now focused on its
e-commerce,
catalog, and domestic licensing businesses. Discovery commerce
leverages its partnerships with leading
e-commerce
portals such as Amazon and QVC, to showcase key products,
increase customer outreach, acquisition and conversion and
maximize transaction opportunities. Discovery commerce adds
value to Discoverys television assets by reinforcing
consumer loyalty and creating opportunities for Discoverys
advertising and distribution partners.
Discoverys education business will continue to focus on
its direct-to-school distribution platform and its other premium
direct-to-school subscription services in addition to publishing
and distributing content on DVD, VHS, online and through a
network of distribution partners. Discovery education also
participates in licensing and sponsorship programs with
corporate partners.
Acquisitions
To complement its existing businesses, Discovery completed
several acquisitions in 2006 and 2007. Among these acquisitions
are (i) DMAX, a free-to-air network in Germany, which was
acquired in February 2006, (ii) Antenna Audio, a provider
of audio tours and multimedia at museums and cultural
attractions around the globe, which was acquired in March 2006,
(iii) PetFinder.com, a facilitator of pet adoptions and
PetsIncredible, a producer of pet-training videos were acquired
in November 2006, (iv) TreeHugger.com, an eco-lifestyle
website to supplement the Planet Green initiative was acquired
in August 2007 and (v) HowStuffWorks.com, an online source
of easy-to-understand explanations of how the world works, which
was acquired in December 2007. These entities have been included
in Discoverys results of operations since their respective
dates of acquisition.
A-2-3
Dispositions
On May 14, 2007 Discovery and Cox Communications Holdings,
Inc. (Cox) completed an exchange of Coxs 25%
ownership interest in Discovery for all of the capital stock of
a subsidiary of Discovery that held Travel Channel,
travelchannel.com and approximately $1.3 billion in cash
(the Cox Transaction). Discovery raised the cash
component through additional debt financing, and retired the
membership interest previously owned by Cox.
DCI
Restructuring
Discovery was formed in the second quarter of 2007 as part of a
restructuring (the DCI Restructuring) completed by
Discovery Communications, Inc. (DCI). In the DCI
Restructuring, DCI became a wholly-owned subsidiary of
Discovery, and the former shareholders of DCI, including DHC,
became members of Discovery. Discovery is the successor
reporting entity to DCI. In connection with the DCI
Restructuring, Discovery applied pushdown accounting
and each shareholders basis in DCI as of May 14, 2007
has been pushed down to Discovery resulting in $4.3 billion
of goodwill being recorded by Discovery. Since goodwill is not
amortizable, there is no current income statement impact for
this change in basis.
Operational
Restructuring
During 2007, Discovery undertook broad restructuring activities
to better position its portfolio of assets and to facilitate
growth and enhanced profitability. These activities resulted in
additional operating expenses that impact the comparability of
results from 2007 to 2008. The more significant cost of revenue
items include fourth quarter 2007 content impairment charges of
$129,091,000 at U.S. Networks and $9,976,000 at Education
which both impacted content amortization expense when comparing
expenses in the first quarter of 2008 to those in the
corresponding prior year period. Additionally, a $10,999,000
restructuring charge as reflected in the financial statements
was recorded in the first quarter of 2007, with no similar
charge recorded in 2008.
Adjusted
OIBDA
Discovery evaluates the performance of its operating segments
based on financial measures such as revenue and adjusted
operating income before depreciation and amortization
(Adjusted OIBDA). Discovery defines Adjusted OIBDA
as revenue less cost of sales, operating expenses, and selling,
general and administrative expenses (excluding long-term
incentive compensation). Discovery 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. Discovery believes Adjusted OIBDA is an
important measure to investors because it allows them to assess
the performance of each business using the same metric that
management uses and also provides investors a measure to analyze
operating performance of each business division against
historical data. This measure of performance excludes
depreciation and amortization, long-term incentive compensation,
and restructuring charges that are included in the measurement
of operating income pursuant to GAAP. Discoverys Long Term
Incentive Plan (LTIP) tracks the performance of DHC
Series A common stock, and compensation related to the LTIP
is indexed to the value of such common stock. Stock-based
compensation is included in the calculation of operating income.
Discovery excludes these charges from its calculation of
Adjusted OIBDA due to their significant volatility. Since
Adjusted OIBDA is a non-GAAP measure, it should be considered in
addition to, but not as a substitute for, operating income, net
income, cash flow provided by operating activities and other
measures of financial performance reported in accordance with
GAAP.
A-2-4
Results
of Operations Three Months Ended March 31, 2008
and 2007
The following discussion of Discoverys results of
operations is presented in two parts to assist the reader in
better understanding Discoverys operations. The first
section is an overall discussion of Discoverys
consolidated operating results. The second section includes a
more detailed discussion of revenue and expense activity of
Discoverys three operating divisions: Discovery networks
U.S., or U.S. networks, Discovery networks international, or
international networks, and Discovery commerce and education.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
amounts in thousands
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Advertising
|
|
$
|
304,129
|
|
|
|
289,769
|
|
Distribution
|
|
|
402,683
|
|
|
|
369,879
|
|
Other
|
|
|
87,766
|
|
|
|
50,550
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
794,578
|
|
|
|
710,198
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
(230,435
|
)
|
|
|
(243,523
|
)
|
Selling, general and administrative (SG&A)
expense
|
|
|
(278,211
|
)
|
|
|
(276,247
|
)
|
|
|
|
|
|
|
|
|
|
Adjusted OIBDA
|
|
|
285,932
|
|
|
|
190,428
|
|
Restructuring charges
|
|
|
|
|
|
|
(10,999
|
)
|
Benefit (expense) arising from long-term incentive plans
|
|
|
35,857
|
|
|
|
(11,721
|
)
|
Depreciation and amortization
|
|
|
(37,720
|
)
|
|
|
(32,433
|
)
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
284,069
|
|
|
|
135,275
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(68,720
|
)
|
|
|
(44,558
|
)
|
Unrealized gains (losses) from derivative instruments, net
|
|
|
(16,095
|
)
|
|
|
1,065
|
|
Minority interests in consolidated subsidiaries
|
|
|
(6,806
|
)
|
|
|
(707
|
)
|
Other
|
|
|
311
|
|
|
|
2,049
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
192,759
|
|
|
|
93,124
|
|
Income tax expense
|
|
|
(87,541
|
)
|
|
|
(41,710
|
)
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
105,218
|
|
|
|
51,414
|
|
Loss from discontinued operations, net of income taxes
|
|
|
|
|
|
|
(8,300
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
105,218
|
|
|
|
43,114
|
|
|
|
|
|
|
|
|
|
|
Revenue. Discoverys consolidated revenue
increased 12% for the three months ended March 31, 2008, as
compared to the corresponding prior year period, due to
increases of 74% in other revenue, 9% in distribution revenue,
and 5% in advertising revenue. Other revenue primarily increased
as a result of (i) a $16,435,000 increase in ancillary
revenue from a joint venture primarily due to an unprecedented
level of seasonal sales driven by the success of the Planet
Earth programming in 2007, which is not expected to continue at
the same level, (ii) $8,688,000 earned by
U.S. networks representation of Travel Channel, and
(iii) the impact of the acquisition of HowStuffWorks in
December 2007. Increased distribution revenue is primarily due
to international networks subscriber growth and favorable
exchange rates, combined with annual contract increases for the
fully distributed U.S. networks, offset by the disposition
of Travel Channel. Increases in advertising revenue were
primarily due to higher viewership in Europe and the impact of
favorable exchange rates, higher cash sellouts and higher
scatter rates across most networks at the U.S. networks,
offset by the disposition of Travel Channel. Program ratings are
an indication of consumer acceptance and directly affect
Discoverys ability to generate revenue during the airing
of its programs. If programs do not achieve sufficient
acceptance, the revenue from advertising sales may decline.
A-2-5
Cost of revenue. Cost of revenue, which
includes content amortization and other production related
expenses in addition to distribution and merchandising costs,
decreased 5% for the three months ended March 31, 2008, as
compared to the corresponding prior year period. The decrease is
primarily a result of (i) an $18,319,000 decrease from the
disposition of Travel Channel and (ii) the effect of the
$129,091,000 content impairment charge recorded in 2007 at
U.S. networks which decreased content amortization expense
by $17,702,000 for the first quarter of 2008 compared to the
corresponding prior year period. Partially offsetting the
decrease is the impact of International networks continued
investment to support additional local feeds for growth in local
ad sales, and the unfavorable impact of foreign currency
exchange rates. As a result of the foregoing fluctuations, cost
of revenue as a percent of revenue decreased to 29% in 2008 from
34% in 2007.
SG&A expenses. SG&A expenses, which
include personnel, marketing and other general and
administrative expenses, increased by 1% for the three months
ended March 31, 2008, as compared to the corresponding
prior year period. Such increase is primarily due to
U.S. networks continued investment in digital media and an
impact related to the expansion of network teams to support the
re-branding strategies for Planet Green and Investigation
Discovery, offset by the disposition of Travel Channel. Also
contributing to the increase is the impact of unfavorable
foreign currency exchange rates. As a percent of revenue,
SG&A expense was 35% and 39% for the three months ended
March 31, 2008 and 2007, respectively.
Expenses arising from long-term incentive
plans. Expenses arising from long-term incentive
plans are related to Discoverys unit-based, long-term
incentive plan, or LTIP, for its employees who meet certain
eligibility criteria. Units are awarded to eligible employees
and generally vest at a rate of 25% per year. The value of units
in the LTIP is indexed to the value of DHC Series A common
stock and is calculated using the Black Scholes Model. The
change in unit value of LTIP awards outstanding is recorded as
compensation expense over the period outstanding. Upon
redemption of the LTIP awards, participants receive a cash
payment based on the value of the award as described in the
terms of the LTIP. In the third quarter of 2007, Discovery
amended the LTIP such that the redemption dates occur annually
over a 4 year period instead of bi-annually over an
8 year period. Due to the decrease in the DHC Series A
common stock price during the three months ended March 31,
2008, a benefit of $40,510,000 was recorded to compensation
expense compared to compensation expense of $11,721,000 for the
three months ended March 31, 2007. Partially offsetting the
benefit for the three months ended March 31, 2008 is
$4,653,000 of compensation expense arising from a long-term
incentive plan related to one of Discoverys subsidiaries,
for which there was no expense in the corresponding prior year
period. If the remaining vested LTIP awards at March 31,
2008 were redeemed, the aggregate cash payments by Discovery
would be approximately $65,610,000.
Restructuring charges. During the first
quarter of 2007, Discovery recorded restructuring charges of
$10,999,000 related to a number of organizational and strategic
adjustments which consisted mainly of severance due to a
reduction in headcount. The purpose of these adjustments was to
better align Discoverys organizational structure with the
companys new strategic priorities and to respond to
continuing changes within the media industry. There was no
similar restructuring charge in 2008.
Depreciation and amortization. The increase in
depreciation and amortization for the three months ended
March 31, 2008 is due to an increase in intangible assets
resulting from acquisitions combined with increases in
Discoverys depreciable asset base resulting from capital
expenditures.
Interest expense. On May 14, 2007,
Discovery entered into a new $1.5 billion term loan in
connection with the Cox Transaction. The increase in interest
expense for the three months ended March 31, 2008 as
compared to the corresponding prior year period is primarily a
result of the new term loan. The increase is also impacted by
Discovery exercising its call rights in January 2007 to acquire
mandatorily redeemable securities and reversing
$4.5 million of accrued preferred returns. Preferred
returns had been recorded as a component of interest expense
based on a constant rate of return through the full term.
Unrealized gains from derivative instruments,
net. Unrealized gains from derivative
transactions relate primarily to Discoverys use of
derivative instruments to modify its exposure to interest rate
fluctuations on its debt. These instruments include a
combination of swaps, caps, collars and other structured
instruments. As a result of unrealized
A-2-6
mark to market adjustments, Discovery recognized an unrealized
loss of $16,095,000 during the three months ended March 31,
2008 and an unrealized gain of $1,065,000 for the three months
ended March 31, 2007. The foreign exchange hedging
instruments used by Discovery are spot, forward and option
contracts. Additionally, Discovery enters into non-designated
forward contracts to hedge non-dollar denominated cash flows and
foreign currency balances.
Minority interests in consolidated
subsidiaries. Minority interests primarily
represent the portion of earnings of consolidated entities which
are allocable to the minority partners as well as the increases
and decreases in the estimated redemption value of mandatorily
redeemable interests in subsidiaries which are initially
recorded at fair value. The increase for the three months ended
March 31, 2008 as compared to the corresponding prior year
period is the result of increased profits earned by these
consolidated subsidiaries, mainly driven by royalties on the
Planet Earth DVD sales.
Other. Other income in 2008 and 2007 relates
primarily to Discoverys equity share of earnings of its
joint ventures.
Income taxes. Discoverys effective tax
rate was 45% for each of the three months ended March 31,
2008 and 2007. Discoverys effective tax rate differed from
the federal income tax rate of 35% primarily due to foreign and
state taxes.
Loss from discontinued operations. Summarized
financial information for the retail stores business included in
discontinued operations is as follows (amounts in thousands):
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
Revenue
|
|
$
|
17,628
|
|
Loss from discontinued operations before income taxes
|
|
$
|
(13,384
|
)
|
Loss from discontinued operations, net of tax
|
|
$
|
(8,300
|
)
|
Net earnings. Discoverys net earnings
were $105,218,000 and $43,114,000 for the three months ended
March 31, 2008 and 2007, respectively. The changes in net
earnings are due to the aforementioned fluctuations in revenue
and expense.
|
|
|
Operating
Division Results
|
As noted above, Discoverys operations are divided into
three groups: U.S. networks, international networks and
commerce and education. 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. Certain prior period amounts have
been reclassified between segments to conform to
Discoverys 2008 operating structure.
A-2-7
Discovery
Consolidated
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
amounts in thousands
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
U.S. networks
|
|
$
|
490,837
|
|
|
|
476,762
|
|
International networks
|
|
|
266,885
|
|
|
|
216,647
|
|
Commerce and education
|
|
|
24,510
|
|
|
|
23,131
|
|
Corporate and eliminations
|
|
|
12,346
|
|
|
|
(6,342
|
)
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
794,578
|
|
|
|
710,198
|
|
|
|
|
|
|
|
|
|
|
Adjusted OIBDA
|
|
|
|
|
|
|
|
|
U.S. networks
|
|
$
|
247,492
|
|
|
|
209,914
|
|
International networks
|
|
|
69,307
|
|
|
|
27,415
|
|
Commerce and education
|
|
|
44
|
|
|
|
(3,485
|
)
|
|
|
|
|
|
|
|
|
|
Total segment Adjusted OIBDA
|
|
$
|
316,843
|
|
|
|
233,844
|
|
|
|
|
|
|
|
|
|
|
Corporate expenses and eliminations
|
|
|
(30,911
|
)
|
|
|
(43,416
|
)
|
Restructuring charges
|
|
|
|
|
|
|
(10,999
|
)
|
Benefit (expense) arising from long-term incentive plans
|
|
|
35,857
|
|
|
|
(11,721
|
)
|
Depreciation and amortization
|
|
|
(37,720
|
)
|
|
|
(32,433
|
)
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
284,069
|
|
|
|
135,275
|
|
|
|
|
|
|
|
|
|
|
U.S.
Networks
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
amounts in thousands
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
Advertising
|
|
$
|
238,792
|
|
|
|
234,611
|
|
Distribution
|
|
|
223,996
|
|
|
|
225,905
|
|
Other
|
|
|
28,049
|
|
|
|
16,246
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
490,837
|
|
|
|
476,762
|
|
Cost of revenue
|
|
|
(124,965
|
)
|
|
|
(152,843
|
)
|
SG&A expenses
|
|
|
(118,380
|
)
|
|
|
(114,005
|
)
|
|
|
|
|
|
|
|
|
|
Adjusted OIBDA
|
|
$
|
247,492
|
|
|
|
209,914
|
|
|
|
|
|
|
|
|
|
|
Adjusted OIBDA margin
|
|
|
50
|
%
|
|
|
44
|
%
|
|
|
|
|
|
|
|
|
|
As noted above, in May 2007, Discovery exchanged its subsidiary
holding the Travel Channel, travelchannel.com and approximately
$1.3 billion in cash for Coxs interest in Discovery.
Accordingly, Discoverys 2008 results of operations do not
include Travel Channel. The disposal of Travel Channel does not
meet the requirements for discontinued operations presentation.
The following table presents U.S. networks results of
operations excluding Travel Channel for all periods. This
presentation is not in accordance with GAAP. However, Discovery
A-2-8
believes 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
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
amounts in thousands
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
Advertising
|
|
$
|
238,792
|
|
|
|
208,972
|
|
Distribution
|
|
|
223,996
|
|
|
|
211,338
|
|
Other
|
|
|
28,049
|
|
|
|
15,544
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
490,837
|
|
|
|
435,854
|
|
Cost of revenue
|
|
|
(124,965
|
)
|
|
|
(134,524
|
)
|
SG&A expenses
|
|
|
(118,380
|
)
|
|
|
(101,079
|
)
|
|
|
|
|
|
|
|
|
|
Adjusted OIBDA
|
|
$
|
247,492
|
|
|
|
200,251
|
|
|
|
|
|
|
|
|
|
|
Adjusted OIBDA margin
|
|
|
50
|
%
|
|
|
46
|
%
|
|
|
|
|
|
|
|
|
|
The following discussion excludes the results of Travel Channel
for all periods.
Revenue. For the three months ended
March 31, 2008, advertising revenue increased 14%,
distribution revenue increased 6%, and other revenue increased
80%, as compared to the corresponding prior year period. The
increase in advertising revenue at the U.S. networks was
primarily due to higher cash sellouts and scatter market rate
increases across most networks. Distribution revenue was driven
by a 5% increase in average paying subscription units,
principally from networks carried on the digital tier, combined
with annual contractual rate increases for the fully distributed
networks. Contra revenue items included in distribution revenue,
such as launch amortization and marketing consideration, totaled
$21,328,000 and $21,057,000 for the three months ended
March 31, 2008 and 2007, respectively. U.S. networks
is currently in negotiations to renew distribution agreements
for carriage of its networks involving a substantial portion of
its subscribers. A failure to secure a renewal or a renewal on
less favorable terms may have a material adverse effect on
U.S. networks results of operations and financial position.
Other revenue increased primarily from Discoverys
representation of the Travel Channel and the acquisition of How
Stuff Works in December 2007.
Cost of revenue. For the three months ended
March 31, 2008, cost of revenue decreased $9,559,000 or 7%,
as compared to the corresponding prior year period, primarily
due to a decrease in content amortization expense of
$13,863,000. The decrease in content amortization expense was
primarily a result of the effect of the $129,091,000 content
impairment charge recorded in 2007 which drove a $17,702,000
decrease in content amortization expense for the three months
ended March 31, 2008 as compared to the corresponding prior
year period. Partially offsetting this reduction is new content
amortization expense for programming that began to air during
the three months ended March 31, 2008. Starting in the
second quarter of 2008, additional content amortization expense
is expected from the launch of new programming on most networks
and the rebranding of certain networks.
SG&A expenses. SG&A expenses
increased $17,301,000 or 17% for the three months ended
March 31, 2008, as compared to the corresponding prior year
period. The increase is primarily driven by $10,812,000 of
expenses related to the continued investment in digital media,
including acquisitions from the third and fourth quarters of
2007, and a $3,690,000 impact related to the expansion of
network teams to support the re-branding strategies for Planet
Green and Investigation Discovery.
Digital Media Business. U.S. networks
digital media business revenue was $12,259,000 and $5,756,000
for the three months ended March 31, 2008 and 2007,
respectively, and is included in total U.S. networks
revenue. Operating expenses for these businesses were
$22,241,000 and $8,926,000 for the three months ended
March 31, 2008 and 2007, respectively. Discovery expects to
continue to invest in digital media due to its recent
acquisitions of
A-2-9
PetFinder.com, TreeHugger.com and HowStuffWorks.com, as well as
any future organic investments in this arena, with Adjusted
OIBDA losses remaining below 5% of Discoverys consolidated
Adjusted OIBDA.
International
Networks
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
amounts in thousands
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
Advertising
|
|
$
|
65,295
|
|
|
|
55,067
|
|
Distribution
|
|
|
178,687
|
|
|
|
143,974
|
|
Other
|
|
|
22,903
|
|
|
|
17,606
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
266,885
|
|
|
|
216,647
|
|
Cost of revenue
|
|
|
(102,049
|
)
|
|
|
(95,345
|
)
|
SG&A expenses
|
|
|
(95,529
|
)
|
|
|
(93,887
|
)
|
|
|
|
|
|
|
|
|
|
Adjusted OIBDA
|
|
$
|
69,307
|
|
|
|
27,415
|
|
|
|
|
|
|
|
|
|
|
Adjusted OIBDA margin
|
|
|
26
|
%
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
Revenue. Distribution revenue increased 24%,
or $34,713,000, for the three months ended March 31, 2008,
as compared to the corresponding prior year period, principally
comprised of combined revenue growth in Europe, Latin America
and Asia of $22,063,000 and a favorable foreign exchange impact
of $10,765,000. The increase in revenue resulted from increases
in average paying subscription units of 15% primarily due to pay
TV subscriber growth in many markets in Europe, combined with
contractual rate increases in certain markets. Advertising
revenue increased 19%, or $10,228,000, for the three months
ended March 31, 2008, primarily due to higher viewership in
Europe combined with an increased subscriber base in most
markets worldwide and favorable foreign exchange impacts of
$3,564,000. Other revenue increased 30%, or $5,297,000,
primarily due to growth at Antenna Audio.
Cost of revenue. Cost of revenue increased 7%,
or $6,704,000, for the three months ended March 31, 2008,
as compared to the corresponding prior year period, driven by an
$8,907,000 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. In addition, transponder costs were $2,488,000
higher than the corresponding prior year period due to
additional feeds in Europe. These increases were partially
offset by reduced spending and efficiencies in production
operations of $4,711,000.
SG&A expenses. SG&A expenses
increased 2%, or $1,642,000, for the three months ended
March 31, 2008, as compared to the corresponding prior year
period. The increase is primarily due to an increase in
personnel costs of $5,013,000 which includes an unfavorable
foreign exchange impact of $2,040,000, offset by decreases in
marketing and other general expenses.
For the three months ended March 31, 2008 and 2007, the
international networks revenue and Adjusted OIBDA were impacted
favorably by changes in the exchange rates of various foreign
currencies. In the event the U.S. dollar strengthens
against certain foreign currencies in the future, the
international networks groups revenue and Adjusted OIBDA
will be negatively impacted. Had there been no impact from
changes in exchange rates, international networks would have
increased revenue by 15% instead of 23% and operating expenses
would have remained relatively flat during the three months
ended March 31, 2008, as compared to 2007.
A-2-10
Commerce
and Education
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
amounts in thousands
|
|
|
Revenue
|
|
$
|
24,510
|
|
|
|
23,131
|
|
Cost of revenue
|
|
|
(12,336
|
)
|
|
|
(12,560
|
)
|
SG&A expenses
|
|
|
(12,130
|
)
|
|
|
(14,056
|
)
|
|
|
|
|
|
|
|
|
|
Adjusted OIBDA
|
|
$
|
44
|
|
|
|
(3,485
|
)
|
|
|
|
|
|
|
|
|
|
Adjusted OIBDA margin
|
|
|
0
|
%
|
|
|
(15
|
)%
|
|
|
|
|
|
|
|
|
|
Revenue. Commerce and education revenue
increased 6% for the three months ended March 31, 2008, as
compared to the corresponding prior year period, primarily due
to an increase in commerce revenue which was driven by continued
DVD sales of Planet Earth, along with other popular series such
as Human Body, Body Atlas and Dirty Jobs. Education revenue
improved slightly as a result of increased streaming and other
revenue driven by further penetration of core streaming
businesses and new products offset by a decrease in other
non-digital services.
Cost of revenue. Cost of revenue was
relatively flat for the three months ended March 31, 2008,
as compared to the corresponding prior year period, but
decreased slightly as a percentage of revenue due to lower
content amortization.
SG&A expenses. SG&A expenses
decreased $1,926,000 or 14% for the three months ended
March 31, 2008, as compared to the corresponding prior year
period, primarily due to a legal settlement occurring in the
first quarter of 2007.
Corporate Adjusted OIBDA losses decreased $12,505,000 or 29% for
the three months ended March 31, 2008, as compared to the
corresponding prior year period, primarily due to increased
ancillary revenue from a joint venture primarily due to an
unprecedented level of seasonal sales driven by the success of
the Planet Earth programming in 2007, which is not expected to
continue at the same level. Corporate costs decreased 2% driven
by a reduction in headcount from corporate restructurings which
occurred throughout 2007.
Results
of Operations Years Ended December 31, 2007,
2006 and 2005
The following discussion of Discoverys results of
operations is presented in two parts to assist the reader in
better understanding Discoverys operations. The first
section is an overall discussion of Discoverys
consolidated operating results. The second section includes a
more detailed discussion of revenue and expense activity of
Discoverys three operating divisions: U.S. networks,
international networks, and commerce and education.
The combining of predecessor and successor accounting periods is
not permitted by GAAP. However, to provide a more meaningful
basis for comparing 2007 to 2006 and 2005, Discoverys
operating results for the seven
A-2-11
and one-half months ended December 31, 2007 have been
combined with the four and one-half months ended May 14,
2007 in the following tables and discussion.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
amounts in thousands
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
$
|
1,345,033
|
|
|
|
1,243,500
|
|
|
|
1,187,823
|
|
Distribution
|
|
|
1,477,479
|
|
|
|
1,434,901
|
|
|
|
1,198,686
|
|
Other
|
|
|
304,821
|
|
|
|
205,270
|
|
|
|
157,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
3,127,333
|
|
|
|
2,883,671
|
|
|
|
2,544,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
(1,172,907
|
)
|
|
|
(1,032,789
|
)
|
|
|
(907,664
|
)
|
SG&A expenses
|
|
|
(1,148,246
|
)
|
|
|
(1,104,116
|
)
|
|
|
(928,950
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted OIBDA
|
|
|
806,180
|
|
|
|
746,766
|
|
|
|
707,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses arising from long-term incentive plans
|
|
|
(141,377
|
)
|
|
|
(39,233
|
)
|
|
|
(49,465
|
)
|
Restructuring charges and asset impairments
|
|
|
(46,598
|
)
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(130,576
|
)
|
|
|
(122,037
|
)
|
|
|
(112,653
|
)
|
Gain from disposition of business
|
|
|
134,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
622,300
|
|
|
|
585,496
|
|
|
|
545,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(248,757
|
)
|
|
|
(194,255
|
)
|
|
|
(184,585
|
)
|
Unrealized gains (losses) from derivative instruments, net
|
|
|
(8,636
|
)
|
|
|
22,558
|
|
|
|
22,499
|
|
Minority interests in consolidated subsidiaries
|
|
|
(8,266
|
)
|
|
|
(2,451
|
)
|
|
|
(43,696
|
)
|
Other
|
|
|
7,839
|
|
|
|
8,527
|
|
|
|
13,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
364,480
|
|
|
|
419,875
|
|
|
|
353,615
|
|
Income tax expense
|
|
|
(77,466
|
)
|
|
|
(190,381
|
)
|
|
|
(173,427
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
287,014
|
|
|
|
229,494
|
|
|
|
180,188
|
|
Loss from discontinued operations, net of taxes
|
|
|
(65,023
|
)
|
|
|
(22,318
|
)
|
|
|
(20,568
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
221,991
|
|
|
|
207,176
|
|
|
|
159,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. Discoverys consolidated revenue
increased 8% for the year ended December 31, 2007, as
compared to 2006, due to increases of 8% in advertising revenue,
48% in other revenue and 3% in distribution revenue. Increases
in advertising revenue were primarily due to increased ratings
and advertising rates at the U.S. networks, particularly at
Discovery Channel and TLC, combined with increased growth in
local ad sales in Europe and the impact of favorable exchange
rates, partially offset by the disposition of Travel Channel.
Program ratings are an indication of consumer acceptance and
directly affect Discoverys ability to generate revenue
during the airing of its programs. If programs do not achieve
sufficient acceptance, the revenue from advertising sales may
decline. International networks advertising sales increased due
to the continued growth in audience, driven by growth in
subscription units. Increased distribution revenue is primarily
due to international networks subscriber growth and favorable
exchange rates, partially offset by the disposition of Travel
Channel and an increase in contra revenue items. Launch
incentives increased in 2007 due to the renewal of long-term
distribution agreements for certain U.K. networks which resulted
in a payment of $195.8 million, most of which is being
amortized over a five-year period. Other revenue increased due
to (i) the full year impact of the 2006 acquisition of
Antenna Audio and (ii) Discoverys new Travel Channel
representation arrangement.
In 2006, consolidated revenue increased 13%, as compared to
2005, due to a 20% increase in distribution revenue, a 5%
increase in advertising revenue and a 30% increase in other
revenue. Increased distribution revenue is
A-2-12
primarily due to contractual rate increases, subscriber growth
at both U.S. networks and international networks and a
reduction in launch support amortization as certain
U.S. networks affiliation agreements were extended at no
additional cost to Discovery. Distribution revenue also
benefited from contractual arrangements in the
U.S. networks whereby certain subscribers that were
previously covered under free carriage periods with distributors
were converted to paying subscribers. Increases in advertising
revenue were primarily due to increased advertising rates at the
U.S. networks combined with positive developments in
international networks advertising sales resulting from
continued growth in subscription units. Other revenue increased
due to acquisitions in 2006.
Cost of revenue. Cost of revenue, which
includes content amortization and other production related
expenses in addition to distribution and merchandising costs,
increased 14% in 2007, as compared to 2006. Such increase is
primarily a result of higher programming costs, including a
fourth quarter 2007 impairment charge of $129,091,000 at
U.S. networks where new channel leadership has implemented
strategic plans to maximize viewership and ratings across most
networks. In the fourth quarter of 2007 and in connection with
these initiatives, Discovery evaluated its programming portfolio
assets and determined that the carrying values of certain
programming assets exceeded their estimated fair values which
resulted in such impairment charge. Contributing to the increase
in cost of revenue is also the impact of several new networks
launched in Europe in 2006 and 2007, and the unfavorable impact
of foreign currency exchange rates. Partially offsetting these
increases is a decrease due to the disposition of Travel
Channel. As a result of the foregoing fluctuations, cost of
revenue as a percent of revenue increased to 38% in 2007 from
36% in 2006.
During 2006, cost of revenue increased 14%, as compared to 2005,
which is consistent with the 2006 percentage increase in
revenue. Such increase in cost of revenue is primarily a result
of higher programming costs for Discoverys
U.S. networks due to continued investment in original
productions and high profile specials, combined with increases
in Europe associated with the launch of several networks
including DMAX. Additionally, cost of revenue in 2005 was
reduced by a net aggregate benefit of approximately
$11 million related to reductions in estimates for music
rights accruals.
SG&A expenses. SG&A expenses, which
include personnel, marketing and other general and
administrative expenses, increased 4% in 2007, as compared to
2006. Such increase is due to higher personnel costs which
resulted from merit, benefit and performance-based compensation
increases in U.S. networks and international networks
driven by expanding business activity through acquisition,
increased international advertising sales coverage, expansion of
network teams to support the new brand strategies and digital
media. Also contributing to the increase is the impact of
unfavorable foreign currency exchange rates. These increases
were partially offset by lower marketing expenses at
U.S. networks and lower marketing and personnel expenses in
the education division as a result of cost cutting measures
implemented in 2007. As a percent of revenue, SG&A expense
was 37% in 2007, down from 38% in 2006. Although no assurance
can be given, Discovery believes that as a result of its ongoing
cost containment initiatives, SG&A expense as a percent of
revenue will continue to decrease in 2008.
During 2006, SG&A expenses increased 19%, as compared to
2005, due primarily to international infrastructure expansions
which increased headcount and office locations to support growth
in local advertising sales operations driving increased revenue.
Additionally, personnel and marketing costs increased at
Discoverys education division, particularly due to its
investment in its Cosmeo homework help service. As a result,
SG&A as a percent of revenue increased from 37% in 2005 to
38% in 2006.
Expenses arising from long-term incentive
plans. Expenses arising from long-term incentive
plans are related to Discoverys unit-based, long-term
incentive plan, or LTIP, for its employees who meet certain
eligibility criteria. Such plan was established in 2005 (the
2005 LTIP Plan) and replaced the former LTIP Plan
under which unit values were tied to Discoverys equity
value. Units are awarded to eligible employees and generally
vest at a rate of 25% per year. The value of units in the 2005
LTIP Plan is indexed to the value of DHC Series A common
stock and is calculated using the Black Scholes Model. The
change in unit value of LTIP awards outstanding is recorded as
compensation expense over the period outstanding. Upon
redemption of the LTIP awards, participants receive a cash
payment based on the value of the award as described in the
terms of the 2005 LTIP Plan. In the third quarter of 2007,
Discovery amended the 2005 LTIP such that the redemption dates
occur annually over a 4 year period instead of bi-annually
over an 8 year period. Compensation expense aggregated
$141,377,000, $39,233,000, and $49,465,000 for the years ended
December 31, 2007, 2006, and 2005, respectively. The
increase in 2007 is
A-2-13
primarily the result of increases in the DHC Series A
common stock price offset by a decrease in expense related to
the shortened redemption time period under the amended 2005 LTIP
Plan. The decrease in 2006 is primarily the result of the change
in unit value determination for the 2005 LTIP Plan units. If the
remaining vested LTIP awards at December 31, 2007 were
redeemed, the aggregate cash payments by Discovery would be
approximately $94,190,000.
Restructuring charges. During 2007, Discovery
recorded restructuring charges of $20,424,000 related to a
number of organizational and strategic adjustments which
consisted mainly of severance due to a reduction in headcount.
The purpose of these adjustments was to better align
Discoverys organizational structure with the
companys new strategic priorities and to respond to
continuing changes within the media industry. There was no
similar restructuring charge in 2006.
Asset impairment. During the second quarter of
2007, Discovery recorded a $26,174,000 asset impairment charge
which represents write-offs of education intangible assets
related to its consumer business due to Discoverys
decision to decrease its investment in certain product offerings.
Depreciation and amortization. The increase in
depreciation and amortization in both 2007 and 2006 is due to an
increase in intangible assets resulting from acquisitions
combined with increases in Discoverys depreciable asset
base resulting from capital expenditures.
Gain from disposition of business. Discovery
recognized a gain from disposition of business of $134,671,000
during 2007 in connection with the Cox Transaction and the sale
of the Travel Channel.
Interest expense. On May 14, 2007,
Discovery entered into a new $1.5 billion term loan in
connection with the Cox Transaction. The increase in interest
expense for the twelve months ended December 31, 2007 is
primarily a result of the new term loan. The increase in
interest expense during the year ended December 31, 2006 is
primarily due to higher levels of outstanding debt combined with
increases in interest rates during the period.
Unrealized gains from derivative instruments,
net. Unrealized gains from derivative
transactions relate, primarily, to Discoverys use of
derivative instruments to modify its exposure to interest rate
fluctuations on its debt. These instruments include a
combination of swaps, caps, collars and other structured
instruments. As a result of unrealized mark to market
adjustments, Discovery recognized an unrealized loss of
$8,617,000 during the year ended December 31, 2007 and
unrealized gains of $10,352,000 and $29,109,000 during the years
ended December 31, 2006 and 2005, respectively. The foreign
exchange hedging instruments used by Discovery are spot, forward
and option contracts. Additionally, Discovery enters into
non-designated forward contracts to hedge non-dollar denominated
cash flows and foreign currency balances.
Minority interests in consolidated
subsidiaries. Minority interests primarily
represent increases and decreases in the estimated redemption
value of mandatorily redeemable interests in subsidiaries which
are initially recorded at fair value, as well as the portion of
earnings of consolidated entities which are allocable to the
minority partners.
Other. Other income in 2007, 2006 and 2005
relates primarily to Discoverys equity share of earnings
of its joint ventures.
Income taxes. Discoverys effective tax
rate was 21%, 45% and 49% for 2007, 2006 and 2005, respectively.
Discoverys effective tax rate differed from the federal
income tax rate of 35% primarily due to the tax-free treatment
of the disposition of the Travel Channel and the corresponding
reversal of deferred tax liabilities in 2007 and due to foreign
and state taxes in 2006 and 2005.
A-2-14
Loss from discontinued operations. Summarized
financial information for the retail stores business included in
discontinued operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
amounts in thousands
|
|
|
Revenue
|
|
$
|
57,853
|
|
|
|
129,317
|
|
|
|
127,396
|
|
Loss from discontinued operations before income taxes
|
|
$
|
(99,427
|
)
|
|
|
(35,911
|
)
|
|
|
(31,652
|
)
|
Loss from discontinued operations, net of tax
|
|
$
|
(65,023
|
)
|
|
|
(22,318
|
)
|
|
|
(20,568
|
)
|
The 2007 loss from discontinued operations includes $39,904,000
in restructuring costs and $28,264,000 in asset impairment
charges, along with normal business operations.
Net earnings. Discoverys net earnings
were $221,991,000, $207,176,000, and $159,620,000, for 2007,
2006 and 2005, respectively. The changes in net earnings are due
to the aforementioned fluctuations in revenue and expense.
|
|
|
Operating
Division Results
|
As noted above, Discoverys operations are divided into
three groups: U.S. networks, international networks and
commerce and education. 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. Certain prior period amounts have
been reclassified between segments to conform to
Discoverys 2007 operating structure.
Discovery
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
amounts in thousands
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. networks
|
|
$
|
1,972,321
|
|
|
|
1,893,808
|
|
|
|
1,743,358
|
|
International networks
|
|
|
1,033,449
|
|
|
|
911,445
|
|
|
|
738,094
|
|
Commerce and education
|
|
|
149,805
|
|
|
|
107,285
|
|
|
|
88,576
|
|
Corporate and eliminations
|
|
|
(28,242
|
)
|
|
|
(28,867
|
)
|
|
|
(25,670
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
3,127,333
|
|
|
|
2,883,671
|
|
|
|
2,544,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted OIBDA
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. networks
|
|
$
|
774,268
|
|
|
|
828,443
|
|
|
|
745,980
|
|
International networks
|
|
|
210,090
|
|
|
|
153,127
|
|
|
|
128,837
|
|
Commerce and education
|
|
|
1,676
|
|
|
|
(72,599
|
)
|
|
|
(25,285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment Adjusted OIBDA
|
|
$
|
986,034
|
|
|
|
908,971
|
|
|
|
849,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate expenses and eliminations
|
|
|
(179,854
|
)
|
|
|
(162,205
|
)
|
|
|
(141,788
|
)
|
Restructuring charges and asset impairments
|
|
|
(46,598
|
)
|
|
|
|
|
|
|
|
|
Expenses arising from long-term incentive plans
|
|
|
(141,377
|
)
|
|
|
(39,233
|
)
|
|
|
(49,465
|
)
|
Depreciation and amortization
|
|
|
(130,576
|
)
|
|
|
(122,037
|
)
|
|
|
(112,653
|
)
|
Gain from disposition of business
|
|
|
134,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
622,300
|
|
|
|
585,496
|
|
|
|
545,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A-2-15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
amounts in thousands
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
$
|
1,014,541
|
|
|
|
965,648
|
|
|
|
944,770
|
|
Distribution
|
|
|
862,542
|
|
|
|
865,613
|
|
|
|
736,713
|
|
Other
|
|
|
95,238
|
|
|
|
62,547
|
|
|
|
61,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
1,972,321
|
|
|
|
1,893,808
|
|
|
|
1,743,358
|
|
Cost of revenue
|
|
|
(737,892
|
)
|
|
|
(635,874
|
)
|
|
|
(587,370
|
)
|
SG&A expenses
|
|
|
(460,161
|
)
|
|
|
(429,491
|
)
|
|
|
(410,008
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted OIBDA
|
|
$
|
774,268
|
|
|
|
828,443
|
|
|
|
745,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted OIBDA margin
|
|
|
39.3
|
%
|
|
|
43.7
|
%
|
|
|
42.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As noted above, in May 2007, Discovery exchanged its subsidiary
holding the Travel Channel, travelchannel.com and approximately
$1.3 billion in cash for Coxs interest in Discovery.
Accordingly, Discoverys 2007 results of operations do not
include Travel Channel for the full year. The disposal of Travel
Channel does not meet the requirements for discontinued
operations presentation. The following table presents
U.S. networks results of operations excluding Travel
Channel for all periods. This presentation is not in accordance
with GAAP. However, Discovery believes 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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
amounts in thousands
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
$
|
974,552
|
|
|
|
863,690
|
|
|
|
852,075
|
|
Distribution
|
|
|
840,262
|
|
|
|
813,342
|
|
|
|
693,339
|
|
Other
|
|
|
94,010
|
|
|
|
58,876
|
|
|
|
58,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
1,908,824
|
|
|
|
1,735,908
|
|
|
|
1,603,611
|
|
Cost of revenue
|
|
|
(710,052
|
)
|
|
|
(560,241
|
)
|
|
|
(523,426
|
)
|
SG&A expenses
|
|
|
(439,501
|
)
|
|
|
(383,064
|
)
|
|
|
(372,322
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted OIBDA
|
|
$
|
759,271
|
|
|
|
792,603
|
|
|
|
707,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted OIBDA margin
|
|
|
39.8
|
%
|
|
|
45.7
|
%
|
|
|
44.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following discussion excludes the results of Travel Channel
for all periods.
Revenue. In 2007, advertising revenue
increased 13%, distribution revenue increased 3%, and other
revenue increased 60%, as compared to 2006. The increase in
advertising revenue at the U.S. networks was primarily due
to improved advertising sell-out rates, better unit pricing and
higher audience delivery on most channels, notably the Discovery
Channel and TLC. The advertising market was strong and scatter
pricing was well above upfront pricing. Primetime sell-outs on
the major networks increased by an average of seven percentage
points. Primetime ratings increased on Discovery Channel due to
original content such as Planet Earth, Deadliest
Catch, Man vs. Wild, Dirty Jobs and Mythbusters. TLC
Primetime ratings increased due to original content such as
Little People Big World, What Not to Wear and L.A.
Ink. Advertising revenue growth on certain networks carried
on the digital tier was 36% led by The Science Channel and
Discovery Times. Distribution revenue was driven by a 6%
increase in average paying subscription units, principally from
networks carried on the digital tier, partially offset by an
increase in contra-revenue items. Contra-revenue items included
in distribution revenue, such as launch amortization and
A-2-16
marketing consideration, increased from $86,399,000 in 2006 to
$95,213,000 in 2007. Other revenue primarily increased as a
result of increased revenue from Discoverys representation
of the Travel Channel.
In 2006, distribution revenue increased 17% and advertising
revenue increased 1%, as compared to 2005. Distribution revenue
was driven by a 13% increase in average paying subscription
units, principally from networks carried on the digital tier,
combined with contractual rate increases, partially offset by an
increase in contra-revenue items from $75,705,000 in 2005 to
$86,399,000 in 2006. Advertising was flat although ratings were
higher compared to 2005. During the fourth quarter of 2006, the
advertising sales market began to reflect the ratings
turnaround, and advertising revenue in the fourth quarter
increased 14%, as compared to the fourth quarter of 2005.
Cost of revenue. In 2007, cost of revenue
increased 27%, as compared to 2006, primarily due to a
$122,099,000 increase in content amortization expense, including
an impairment charge of $129,091,000. In 2007, following several
changes in channel leadership, Discovery undertook strategic
reviews to maximize viewership and ratings across most networks.
As a result, programming at the Discovery Channel, TLC and
Animal Planet is being re-positioned to better align content
with these channel brands. In addition, certain other networks
are being re-branded, including the transition of the Discovery
Times channel to Investigation Discovery, the Discovery Home
channel to Planet Green, and the recently announced creation of
OWN: The Oprah Winfrey Network, a joint venture between
Discovery and Harpo Productions, Inc. on what is currently the
Discovery Health channel. In the fourth quarter of 2007 and in
connection with these initiatives, Discovery evaluated its
programming portfolio assets and determined that the carrying
values of certain programming assets exceeded their estimated
fair values which resulted in the aforementioned impairment
charge. The program impairment was primarily related to content
that was capitalized in 2006 and 2007 and would have been
amortized over the next 3 years. Excluding the 2007
impairment charge and accelerated amortization of certain
programs in 2007 and 2006, content amortization increased due to
continued investment in original programs that are aligned with
the future strategy and from 2006 acquisitions.
Cost of revenue increased 7% in 2006, as compared to 2005,
primarily as a result of a $51,222,000 increase in content
amortization expense due to continued investment in original
productions on the widely distributed channels and accelerated
amortization on certain programs. These increases were partially
offset by a decrease of $9,064,000 in transponder and uplink
costs due to cost savings associated with Discoverys
launch of its broadcast facility in 2005.
SG&A expenses. SG&A expenses
increased 15% in 2007, as compared to 2006. The increase is due
to personnel cost increases of $35,410,000 driven by merit,
benefit and performance-based compensation increases, along with
the impact of the expansion of its network teams to support the
new brand strategies and continued investment in digital media.
Also contributing to the increase were higher research expenses
of $11,157,000 resulting from contractual increases for ratings
research and additional fees associated with providing
commercial minute ratings. These increases were partially offset
by a decrease in marketing expense of $7,636,000 which coincided
with a re-evaluation of the related programming strategies.
The 2006 3% increase in SG&A expenses is primarily due to a
12% or $13,581,000 increase in personnel expense resulting from
compensation and benefit increases.
Digital Media Business. Revenue for the
U.S. networks digital media businesses totaled
approximately $31 million in 2007 and $19 million in
2006. Operating expenses for these businesses were
$43 million and $28 million for 2007 and 2006,
respectively. Discovery expects these amounts to increase in the
future due to its recent acquisitions of PetFinder.com,
TreeHugger.com and HowStuffWorks.com, as well as any future
organic investments in this arena, with Adjusted OIBDA losses
remaining below 5% of Discoverys consolidated Adjusted
OIBDA.
A-2-17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
amounts in thousands
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
$
|
330,300
|
|
|
|
277,559
|
|
|
|
242,849
|
|
Distribution
|
|
|
614,937
|
|
|
|
569,288
|
|
|
|
462,049
|
|
Other
|
|
|
88,212
|
|
|
|
64,598
|
|
|
|
33,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
1,033,449
|
|
|
|
911,445
|
|
|
|
738,094
|
|
Cost of revenue
|
|
|
(408,957
|
)
|
|
|
(390,783
|
)
|
|
|
(315,539
|
)
|
SG&A expenses
|
|
|
(414,402
|
)
|
|
|
(367,535
|
)
|
|
|
(293,718
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted OIBDA
|
|
$
|
210,090
|
|
|
|
153,127
|
|
|
|
128,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted OIBDA margin
|
|
|
20.3
|
%
|
|
|
16.8
|
%
|
|
|
17.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. In 2007, advertising revenue
increased 19%, as compared to 2006, due primarily to higher
viewership in Europe and Latin America combined with an
increased subscriber base in most markets worldwide, favorable
exchange rate impacts and a full year of activity related to
DMAX. These increases were partially offset by a decline in
advertising revenue in the U.K. which was driven by lower
ratings for Discovery Channel resulting from increased
competition and a continuing shift in viewing habits due to
channel placement on the Electronic Programming Guide which
lists scheduled programs on each channel. Distribution revenue
increased 8% in 2007 principally comprised of combined revenue
growth in Europe, Latin America and Asia of $71,927,000 and
favorable foreign exchange impact of $29,402,000, primarily in
the U.K. and Europe, partially offset by a $55,684,000 revenue
decline in the U.K. The net increase in revenue resulted from an
overall increase in average paying subscription units of 13%
primarily due to pay TV subscriber growth in many markets in
Europe and Latin America combined with contractual rate
increases in certain markets, partially offset by an increase in
launch amortization. In January 2007 and 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 U.K. networks and paid a
distributor $195.8 million. Most of the payment was
attributed to the renewal period and is being amortized over a
five year term. As a result, launch amortization at the
international networks increased from $6,474,000 in 2006 to
$44,291,000 in 2007. Other revenue increased $23,614,000
primarily due to the full year impact of Antenna Audio, which
was acquired in March 2006.
In 2006, distribution revenue increased 23%, as compared to
2005, primarily due to combined revenue growth in Europe and
Latin America of $79,235,000 resulting from a 27% increase in
average paying subscription units, primarily on networks with
lower rates, in those markets. Subscriber growth in those
markets was driven by increased penetration and distribution
along with the full year impact of new channel launches in
Italy, France and Germany. Favorable foreign exchange impacts of
$6,533,000, primarily in Europe and Latin America, also
contributed to the increase in distribution revenue. Advertising
revenue increased 14% in 2006 primarily due to higher viewership
in Europe and Latin America combined with an increased
subscriber base in most markets worldwide. Other revenue
increased 95% due primarily to the inclusion of $32,371,000 in
revenue from the acquisition of Antenna Audio in April 2006.
Cost of revenue. In 2007, cost of revenue
increased 5%, as compared to 2006, primarily due to the full
year impact of $15,613,000 from DMAX and Antenna Audio, which
were acquired in 2006.
In 2006, cost of revenue increased 24%, as compared to 2005,
primarily from a $27,434,000 increase in content amortization
expense. The amortization expense increase is associated with
additional programming to support the launch of several
lifestyle-focused networks including $10,142,000 related to DMAX
and Antenna Audio. Other increases in cost of revenue related to
DMAX and Antenna Audio aggregated $23,394,000.
SG&A expenses. SG&A expenses
increased 13% during 2007, as compared to 2006. The increase is
primarily due to a $43,507,000 increase in personnel expense, of
which $19,428,000 resulted from a full year of activity related
to the DMAX and Antenna Audio acquisitions in 2006. Personnel
costs in Europe increased $18,610,000 due to infrastructure
expansions of sales personnel allowing for increased targeting
of advertising consistent with geographic demand to support
revenue growth.
A-2-18
In 2006, SG&A expenses increased 25%, as compared to 2005,
primarily due to a $46,568,000 or 44% increase in personnel
expense, resulting from infrastructure expansions in Europe to
support revenue growth combined with the acquisition of Antenna
Audio. Marketing expense increased $6,087,000 or 7% due to
marketing campaigns in Europe and Asia for the launch of new
channels. General and administrative expenses increased
$21,161,000 or 20% primarily due to the inclusion of Antenna
Audio coupled with the unfavorable effect of foreign currency
exchange rates.
During the years ended December 31, 2007 and 2006, the
international networks revenue and Adjusted OIBDA were impacted
favorably by changes in the exchange rates of various foreign
currencies. In the event the U.S. dollar strengthens
against certain foreign currencies in the future, the
international networks groups revenue and Adjusted OIBDA
will be negatively impacted. Had there been no impact from
changes in exchange rates, international networks would have
increased revenue and operating expenses 8% and 4%,
respectively, during the year ended December 31, 2007, as
compared to 2006, and 22% and 23%, respectively, during the year
ended December 31, 2006, as compared to 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
amounts in thousands
|
|
|
Revenue
|
|
$
|
149,805
|
|
|
|
107,285
|
|
|
|
88,576
|
|
Cost of revenue
|
|
|
(90,976
|
)
|
|
|
(79,460
|
)
|
|
|
(59,567
|
)
|
SG&A expenses
|
|
|
(57,153
|
)
|
|
|
(100,424
|
)
|
|
|
(54,294
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted OIBDA
|
|
$
|
1,676
|
|
|
|
(72,599
|
)
|
|
|
(25,285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted OIBDA margin
|
|
|
1.1
|
%
|
|
|
(67.7
|
)%
|
|
|
(28.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. In 2007, commerce and education
revenue increased 40%, as compared to 2006, due to a $17,595,000
increase in education revenue as a result of an increase in
subscribers and improved pricing for Discoverys
direct-to-school education distribution platform, and a
$24,925,000 increase in commerce revenue which was driven by an
increase in sales of Planet Earth DVDs following the series
premiere in March 2007.
In 2006, Commerce and education revenue increased 21%, as
compared to 2005, due to a $10,578,000 increase in revenue
related to the education business as a result of a 30% increase
in average paying school subscribers and the impact of
acquisitions in 2006. Also contributing to the increase was an
$8,131,000 increase in revenue related to the commerce business
mainly driven by increased ecommerce sales.
Cost of revenue. During the fourth quarter of
2006, Discovery made a number of organizational and strategic
adjustments to its education business to focus resources on the
companys direct-to-school distribution platform,
unitedstreaming, as well as the divisions other
premium direct-to-school subscription services. In 2007, cost of
revenue increased 14%, or $11,516,000, as compared to 2006,
primarily due to increased content amortization related to an
impairment charge of $9,976,000 as a result of the re-focus of
the education business.
In 2006, cost of revenue increased 33%, or $19,893,000, as
compared to 2005, primarily as a result of a $14,127,000
investment in education content to accommodate the growth of the
education business.
SG&A expenses. In 2007, SG&A
expenses decreased 43%, as compared to 2006, primarily due to a
$10,671,000 reduction in personnel expense as a result of
business restructuring in commerce and education, combined with
a $26,649,000 reduction in marketing expense as Discovery
re-focused the direction of the education business. Included in
SG&A are approximately $5 million in costs incurred
during the fourth quarter of 2007 to transition the back-office
and distribution services of the remaining commerce business to
Discoverys headquarters
and/or
third-party service providers.
In 2006, SG&A expenses increased 85%, as compared to 2005.
Expenses in the education division increased as a result of
(i) a 91%, or $18,056,000, increase in personnel expense,
resulting primarily from a full year of salary expense for
employees hired in 2005 and (ii) a 174%, or $19,142,000,
increase in marketing expense resulting primarily from
Discoverys investment in Cosmeo, a new consumer homework
help service.
A-2-19
Corporate
Corporate Adjusted OIBDA losses increased 11%, or $17,650,000,
in 2007, as compared to 2006, primarily due to costs incurred as
a result of supporting Discoverys shareholder transactions
combined with increases in performance-based compensation
resulting from strong fiscal year financial performance and the
impact of changes in executive management including related
hiring costs. The 2006 increase of 14% or $20,418,000 was driven
primarily by merit, benefit and performance-based compensation
increases.
Liquidity
and Capital Resources
Discoverys principal sources of liquidity are cash flows
from operations and borrowings under its credit facility, and
its principal uses of cash are for capital expenditures,
acquisitions, debt service requirements, and other obligations.
Discovery anticipates that its cash flows from operations,
existing cash, cash equivalents and borrowing capacity under its
revolving credit facility are sufficient to meet its anticipated
cash requirements for at least the next 12 months.
Discovery has over the years established relationships with U.S.
and international commercial banks which continue to participate
in syndicated revolving and term loan facilities. In addition,
Discovery has established relationships with investors in the
traditional private placement market, who provide long term
loans, and with investors in the leveraged loan market. As a
public company, Discovery should also have access to other
capital sources, including the public bond and equity markets,
which previously were not available to it. Discovery believes
these markets will be available to it, in some combination,
along with cash flows from operations, in amounts that will
provide sufficient liquidity to fund future operating
requirements, capital expenditures, new business development
activities, and maturities of existing debt.
During the three months ended March 31, 2008,
Discoverys primary uses of cash were principal payments
under its bank facilities and senior notes totaling
$190,500,000, capital expenditures of $13,955,000, and payments
under its LTIP of $12,411,000. Discovery funded these investing
and financing activities with cash from operations of
$68,951,000 and bank borrowings of $165,500,000.
During the year ended December 31, 2007, Discoverys
primary uses of cash were the redemption of Coxs equity
interests ($1,284,544,000), acquisitions ($306,094,000, net of
cash acquired) and capital expenditures ($80,553,000). Discovery
funded these investing and financing activities with cash from
operations of $242,072,000 and bank borrowings of $1,497,639,000.
Discoverys various debt facilities include two term loans,
two revolving loan facilities 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 $5,445,000,000 at
March 31, 2008. Debt outstanding on these facilities
aggregated $4,078,501,000 at March 31, 2008, providing
excess debt availability of $1,366,499,000. Discoverys
ability to borrow the unused capacity is dependent on its
continuing compliance with its covenants at the time of, and
after giving effect to, a requested borrowing.
Discoverys $1.5 billion term loan is secured by the
assets of Discovery, excluding assets held by its subsidiaries.
The remaining term loan, revolving loans 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. Discovery has indicated that it was in
compliance with all debt covenants as of March 31, 2008.
A-2-20
Discoverys outstanding notes payable and long-term debt at
March 31, 2008 consists of the following (amounts in
thousands):
|
|
|
|
|
Term Loan B, due quarterly through May 2014
|
|
$
|
1,488,750
|
|
Term Loan A, due quarterly December 2008 to October 2010
|
|
|
1,000,000
|
|
£10,000 Uncommitted Facility, due August 2008
|
|
|
2,473
|
|
260,000.0 Revolving Loan, due April 2009
|
|
|
94,278
|
|
7.45% Senior Notes, semi annual interest, due September 2009
|
|
|
55,000
|
|
Revolving Loan, due October 2010
|
|
|
503,000
|
|
8.37% Senior Notes, semi annual interest, due March 2011
|
|
|
220,000
|
|
8.13% Senior Notes, semi annual interest, due September 2012
|
|
|
235,000
|
|
Senior Notes, semi annual interest, due December 2012
|
|
|
90,000
|
|
6.01% Senior Notes, semi annual interest, due December 2015
|
|
|
390,000
|
|
Other
|
|
|
34,549
|
|
|
|
|
|
|
Total debt
|
|
$
|
4,113,050
|
|
|
|
|
|
|
In 2008, including amounts discussed above, Discovery expects
its uses of cash to be approximately $266,285,000 for debt
repayments, $90,000,000 for capital expenditures and
$260,000,000 for interest expense. Discovery will also be
required to make payments under its LTIP Plan. However, amounts
expensed and payable under the LTIP are dependent on future
annual calculations of unit values which are affected primarily
by changes in DHCs stock price, annual grants of
additional units, redemptions of existing units, and changes to
the plan. If the remaining vested LTIP awards at March 31,
2008 were redeemed, the aggregate cash payments by Discovery
would be approximately $65,610,000. Discovery believes that its
cash flow from operations and borrowings available under its
credit facilities will be sufficient to fund its cash
requirements, including LTIP obligations.
The Companys 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. The variable to
fixed interest rate instruments have a notional principal amount
of $2.27 billion and have a weighted average interest rate
of 4.68% against 3 month LIBOR at December 31, 2007.
The fixed to variable interest rate agreements have a notional
principal amount of $225.0 million and have a weighted
average interest rate of 9.65% against fixed rate private
placement debt at December 31, 2007. At December 31,
2007, the Company held an unexercised interest rate swap put
with a notional amount of $25.0 million at a fixed rate of
5.44%.
Discoverys access to capital markets can be affected by
factors outside of its control. In addition, its cost to borrow
is impacted by market conditions and its financial performance
as measured by certain credit metrics defined it its credit
agreements, including interest coverage and leverage ratios.
Contractual obligations. Discovery has
agreements covering leases of satellite transponders, facilities
and equipment. These agreements expire at various dates through
2020. Discovery is obligated to license programming under
agreements with content suppliers that expire over various
dates. Discovery also has other contractual commitments arising
in the ordinary course of business.
A-2-21
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, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period(3)
|
|
|
|
|
|
|
Less than 1
|
|
|
|
|
|
|
|
|
After
|
|
|
|
Total
|
|
|
year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
5 years
|
|
|
Long-term debt
|
|
$
|
4,102,959
|
|
|
|
266,285
|
|
|
|
1,454,174
|
|
|
|
575,000
|
|
|
|
1,807,500
|
|
Interest payments(1)
|
|
|
1,245,596
|
|
|
|
261,424
|
|
|
|
449,275
|
|
|
|
335,673
|
|
|
|
199,224
|
|
Capital leases
|
|
|
44,107
|
|
|
|
9,042
|
|
|
|
15,828
|
|
|
|
9,202
|
|
|
|
10,035
|
|
Operating leases
|
|
|
415,384
|
|
|
|
82,357
|
|
|
|
122,509
|
|
|
|
76,777
|
|
|
|
133,741
|
|
Program license fees
|
|
|
558,183
|
|
|
|
325,509
|
|
|
|
110,362
|
|
|
|
80,843
|
|
|
|
41,469
|
|
Launch incentives
|
|
|
12,572
|
|
|
|
4,492
|
|
|
|
8,080
|
|
|
|
|
|
|
|
|
|
Other(2)
|
|
|
292,339
|
|
|
|
106,320
|
|
|
|
157,619
|
|
|
|
28,000
|
|
|
|
400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,671,140
|
|
|
|
1,055,429
|
|
|
|
2,317,847
|
|
|
|
1,105,495
|
|
|
|
2,192,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts (i) are based on our outstanding debt at
December 31, 2007, (ii) assume the interest rates on
our floating rate debt remain constant at the December 31,
2007 rates and (iii) assume that our existing debt is
repaid at maturity. |
|
(2) |
|
Represents Discoverys obligations to purchase goods and
services whereby the underlying agreements are enforceable,
legally binding and specify all significant terms. The more
significant purchase obligations include: agreements related to
audience ratings, market research, contracts for entertainment
talent and other education and service project agreements. |
|
(3) |
|
Table does not include certain long-term obligations reflected
in the Discovery consolidated balance sheet as the timing of the
payments cannot be predicted or the amounts will not be settled
in cash. The most significant of these obligations is the
$141.7 million accrued under Discoverys LTIP plans.
In addition, amounts accrued in the Discovery consolidated
balance sheet related to derivative financial instruments are
not included in the table as such amounts may not be settled in
cash or the timing of the payments cannot be predicted. |
Discovery is subject to a contractual agreement that may require
Discovery to acquire the minority interest of certain of its
subsidiaries. The amount and timing of such payments are not
currently known. Discovery has recorded an estimated liability
as of December 31, 2007 for this redemption right.
Critical
Accounting Policies and Estimates
The preparation of Discoverys 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 accompanying notes. On an ongoing
basis, Discovery evaluates estimates, which are based on
historical experience and on various other assumptions believed
reasonable under the circumstances. The result of these
evaluations forms 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 Discoverys financial condition and results
of operations and require significant judgment and estimates. An
appreciation of Discoverys critical accounting policies
facilitates an understanding of its financial results. Unless
otherwise noted, Discovery 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 the Discovery consolidated financial statements.
Revenue
Discovery derives revenue from (1) advertising aired on
Discoverys networks and websites, (2) distribution
revenue from cable system, satellite operators and other
distributors, and (3) other, which is largely
e-commerce
and educational sales.
A-2-22
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
appropriately recorded and adjusted as the guaranteed audience
levels are achieved. Audience guarantees are initially developed
by Discoverys 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 Discoverys
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.
Certain of Discoverys advertising arrangements include
deliverables in addition to commercial time, such as the
advertisers 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.
Discovery believes that these other deliverables do not have a
material impact on the pattern of revenue recognition since they
are not separately priced or sold on a stand-alone basis, there
is no objective and reliable evidence of fair value of these
other elements, there is no right of return associated with
these other elements, and they are generally delivered over the
same period as the commercials that have been purchased.
However, should any of these factors change in the future, the
value of these other deliverables could impact the timing of the
revenue recognition.
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 straightline 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.
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 Discoverys estimates of the number of
subscribers receiving Discovery programming for the month, plus
an adjustment for the prior month estimate. Discoverys
subscriber estimates are based on the most recent remittance or
confirmation of subscribers received from the distributor.
Adjustments between Discoverys estimates and the actual
amounts are generally positive and have not been material.
Commerce and Education. Commerce revenue is
recognized upon product shipment, net of estimated returns,
which are not material to Discoverys consolidated
financial statements. Educational service sales are generally
recognized ratably over the term of the agreement.
Content
rights
Cost 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,
Discovery amortizes its content assets based upon the ratio
of current revenue to total estimated revenue (ultimate
revenue). To determine this ratio, Discovery analyzes
historical and projected usage for similar programming and
applies such usage factors to projected revenue by network
adjusted for any future significant programming strategy changes.
A-2-23
For U.S. networks, the result of this policy is an
accelerated amortization pattern for the established networks
(Discovery Channel, TLC, and Animal Planet) over a period of no
more than four years. The accelerated amortization pattern
results in the amortization of approximately 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. The less mature, domestic networks utilize a four year
useful life and international networks utilize a three to four
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 managements assumptions, such
as changes in expected use, could significantly alter
Discoverys estimates for amortization. Amortization is
approximately $814 million for the year ended
December 31, 2007 and the unamortized programming balance
at December 31, 2007 is $1,127 million.
Programming that Discovery expects 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 its strategic review of the
business. Changes in managements assumptions, such as
changes in expected use, could significantly alter
Discoverys estimates for write-offs. During the fourth
quarter of 2007, Discovery implemented significant changes in
brand strategies for several of the U.S. networks and the
education division. The result was content impairment, a
component of content amortization expense, of $129 million
for U.S. networks and $10 million for the education
division. Consolidated content impairment, including accelerated
amortization of certain programs, for Discovery is
$174 million, $40 million, and $17 million in
2007, 2006, and 2005, respectively.
Valuation
of goodwill
Discovery assesses the impairment of goodwill annually and
whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. For purposes of
performing the impairment test for goodwill, reporting units are
Discovery, TLC, Animal Planet, all other U.S. networks,
each international region, Antenna Audio, the commerce division,
and the education division. Factors which could trigger an
impairment review include significant underperformance to
historical or projected future operating results, substantial
changes in strategy or the manner in which assets are used, and
significant negative industry or economic trends. To determine
the fair value of reporting units, Discovery generally uses
market data, appraised values and discounted cash flow analyses.
The use of a discounted cash flow analysis requires significant
judgment to estimate the future cash flow derived from the asset
or business and the period of time over which those cash flows
will occur and to determine an appropriate discount rate.
Changes in estimates and projections or changes in established
reporting units could materially affect the determination of
fair value for each reporting unit. Management utilized an 11%
and 13% discount factor for the U.S. networks and
international networks, respectively.
Expenses
arising from long-term incentive plans
Expenses arising from long-term incentive plans are related to
Discoverys unit-based, long-term incentive plan, (LTIP),
for its employees who meet certain eligibility criteria, which
for 2007 were outstanding under the Discovery Appreciation Plan
(DAP). Units are awarded to eligible employees and vest at a
rate of 25% per year. Discovery accounts 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 is indexed to the value of DHC
Series A common stock. Upon redemption of the LTIP awards,
participants receive 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.
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. Discovery has
elected to attribute expense for the units in accordance with
FAS 123R. Alternative attribution models could impact the
timing of compensation expense. Discovery uses volatility of DHC
common stock if available. However, if the term of the units is
in excess of the period DHC common stock has been outstanding,
A-2-24
Discovery uses a market proxy. Different assumptions regarding a
reasonable market proxy could result in different market
valuations. However the most significant factor in determining
the unit value is the price of DHC common stock.
Mandatorily
redeemable equity
Mandatorily redeemable interests in subsidiaries are initially
recorded at fair value. For those instruments with an estimated
redemption value, Discovery accretes or decretes to the
estimated redemption value ratably over the period to the
redemption date. Discovery determines fair values using
discounted cash flow analyses against the related
subsidiarys estimated 5 year strategic plan
performance. The use of a discounted cash flow analysis requires
significant judgment to estimate the future cash flows derived
from the entity, the expected period of time over which those
cash flows will occur and an appropriate discount rate. Changes
in such estimates could affect the amounts estimated for fair
value and resulting redemption values. While Discovery believes
its assumptions are reasonable based on the best information
available, if different assumptions, interpretations of
contractual agreements, or negotiated settlements were made, the
amount allocated to redeemable interests could differ
substantially from the reported amounts. Cash receipts and
payments for the sale or purchase of mandatorily redeemable
interests in subsidiaries are included as a component of
investing cash flows.
Income
Taxes
Discovery is a Delaware limited liability company with two
members, and has elected to be classified as a corporation for
federal income tax purposes. Discovery accounts for income taxes
using the asset and liability method in accordance with
FAS 109, 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. Discovery provides a valuation allowance against
deferred tax assets if, based upon the weight of available
evidence, Discovery believes it is more likely than not that
some or all of the deferred tax assets will not be realized.
Discovery considers ongoing prudent and feasible tax planning
strategies in assessing the need for a valuation allowance. In
the event Discovery determines the deferred tax asset realizable
would be greater or less than the net amount recorded, an
adjustment would be made to the tax provision in that period.
Discovery accounts for uncertain tax positions in accordance
with FIN 48, An Interpretation for Uncertainty in Income
Taxes an interpretation of FASB Statement 109,
Accounting for Income Taxes. FIN 48 requires the
evaluation of using a two-step process. The first step is
recognition: Discovery determines whether it is more likely than
not that a tax position will be sustained upon examination,
including resolution of any related appeals or litigation
processes, based on the technical merits of the position. In
evaluating whether a tax position has met the
more-likely-than-not recognition threshold, Discovery assumes
that the position will be examined by the appropriate taxing
authority that has full knowledge of all relevant information.
The second step is measurement: A tax position that meets the
more-likely-than-not recognition threshold is measured to
determine the amount of benefit to recognize in the financial
statements. The tax position is measured at the largest amount
of benefit that is greater than 50 percent likely of being
realized upon ultimate settlement.
Recent
Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board (the
FASB) issued Statement of Financial Accounting
Standards No. 141 (revised 2007), Business Combinations
(Statement 141R). Statement 141R replaces
Statement of Financial Accounting Standards No. 141,
Business Combinations (Statement 141),
although it retains the fundamental requirement in Statement 141
that the acquisition method of accounting be used for all
business combinations. Statement 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 the business combination disclosure
information. Statement 141R applies prospectively to business
combinations for which the acquisition date is on or after the
beginning of the Companys 2009 fiscal year.
A-2-25
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 160, Noncontrolling
Interests in Consolidated Financial Statements
(Statement 160). Statement 160 establishes
accounting and reporting standards for the noncontrolling
interest in a subsidiary, commonly referred to as minority
interest. Among other matters, Statement 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.
Statement 160 is effective for fiscal years beginning after
December 15, 2008. Statement 160 is to be applied
prospectively, except for the presentation and disclosure
requirements, which shall be applied retrospectively for all
periods presented. Discovery is currently evaluating the impact
of Statement 160 on its financial statements.
Quantitative
and Qualitative Disclosures about Market Risk
Discoverys 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. Discovery has established policies, procedures and
internal processes governing its management of market risks and
the use of financial instruments to manage its exposure to such
risks. Discovery uses derivative financial instruments to modify
its exposure to market risks from changes in interest rates and
foreign exchange rates. Discovery does not hold or enter into
financial instruments for speculative trading purposes.
The nature and amount of Discoverys
long-term
debt are expected to vary as a result of future requirements,
market conditions and other factors. Discoverys 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 $2,270.0 million and $1,025.0 million and had a
weighted average interest rate of 4.68% and 5.09% at
December 31, 2007 and 2006, respectively. The fixed to
variable interest rate agreements had a notional principal
amount of $225.0 million and had a weighted average
interest rate of 9.65% and 9.86% at December 31, 2007 and
2006, respectively. At December 31, 2007, the Company held
an unexercised interest rate swap put with a notional amount of
$25.0 million at a fixed rate of 5.44%. The fair value of
these derivative instruments, which aggregate
($49.6) million and $8.5 million at December 31,
2007 and 2006, respectively, is recorded as a component of
long-term
liabilities and other current liabilities in the consolidated
balance sheets.
Of the total of $2,270.0 million, a notional amount of
$1,460.0 million of these derivative instruments are 100%
effective cash flow hedges. The value of these hedges at
December 31, 2007 was ($32.5) 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 Discoverys
debt, the monthly changes in fair value would be reported as a
component of other income on the Statement of Operations.
Discovery does not expect any hedge ineffectiveness in the next
twelve months. As of December 31, 2007, a parallel shift in
the interest rate yield curve equal to one percentage point
would change the fair value of the Discoverys interest
rate derivative portfolio by approximately $45 million. In
addition, a change of one percentage point in interest rates on
variable rate debt would impact interest expense by
approximately $10 million on a yearly basis.
Discoverys objective in managing exposure to foreign
currency fluctuations is to reduce volatility of earnings and
cash flow. Accordingly, Discovery 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, Discovery
enters into
non-designated
forward contracts to hedge non-dollar denominated cash flows and
foreign currency balances. At December 31, 2007 and 2006,
the notional amount of foreign exchange derivative contracts was
$174.2 million and $364.1 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, 2007, an
estimated 10% adverse movement in exchange rates against the US
dollar would change the fair value of Discoverys portfolio
by approximately $8.5 million.
Discovery 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,
Discovery limits the amount of investment credit exposure with
any one institution.
A-2-26
Appendix
A Information Concerning Discovery
Communications Holding, LLC Including Its Wholly Owned
Subsidiary Discovery Communications, LLC
Part 3 Historical
Consolidated Financial Statements
This Part 3 of Appendix A sets forth the historical
consolidated financial statements of Discovery Communications
Holding, LLC including its wholly owned subsidiary Discovery
Communications, LLC. Please note that references in this
Part 3 to Discovery and the Company
refer to the intermediary holding company Discovery
Communications Holding, LLC, and references to DCI
and the Predecessor Company refer to Discovery
Communications, Inc., which was converted into the
operating company Discovery Communications, LLC (which is
referred to as DCL).
A-3-1
Discovery
Communications Holding, LLC
Consolidated
Balance Sheets (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
in thousands, except unit data
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
68,654
|
|
|
$
|
44,951
|
|
Accounts receivable, less allowances of $23,833 and $22,419
|
|
|
743,495
|
|
|
|
741,745
|
|
Inventories
|
|
|
6,516
|
|
|
|
10,293
|
|
Deferred income taxes
|
|
|
92,297
|
|
|
|
103,723
|
|
Content rights, net
|
|
|
83,266
|
|
|
|
79,162
|
|
Other current assets
|
|
|
96,084
|
|
|
|
97,359
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,090,312
|
|
|
|
1,077,233
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
379,125
|
|
|
|
397,430
|
|
Content rights, net, less current portion
|
|
|
1,045,593
|
|
|
|
1,048,193
|
|
Deferred launch incentives
|
|
|
223,285
|
|
|
|
242,655
|
|
Goodwill
|
|
|
4,873,518
|
|
|
|
4,870,187
|
|
Intangibles, net
|
|
|
168,036
|
|
|
|
181,656
|
|
Investments in and advances to unconsolidated affiliates
|
|
|
100,989
|
|
|
|
100,724
|
|
Other assets
|
|
|
40,479
|
|
|
|
42,352
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
7,921,337
|
|
|
$
|
7,960,430
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
190,476
|
|
|
$
|
267,818
|
|
Accrued payroll and employee benefits
|
|
|
113,919
|
|
|
|
183,823
|
|
Launch incentives payable
|
|
|
0
|
|
|
|
1,544
|
|
Content rights payable
|
|
|
54,201
|
|
|
|
56,334
|
|
Current portion of long-term incentive plan liabilities
|
|
|
91,539
|
|
|
|
141,562
|
|
Current portion of long-term debt
|
|
|
24,443
|
|
|
|
32,006
|
|
Income taxes payable
|
|
|
67,591
|
|
|
|
23,629
|
|
Unearned revenue
|
|
|
79,642
|
|
|
|
78,155
|
|
Other current liabilities
|
|
|
59,994
|
|
|
|
65,624
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
681,805
|
|
|
|
850,495
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
|
4,088,607
|
|
|
|
4,109,085
|
|
Derivative financial instruments, less current portion
|
|
|
100,996
|
|
|
|
49,110
|
|
Launch incentives payable, less current portion
|
|
|
4,735
|
|
|
|
6,114
|
|
Long-term incentive plan liabilities, less current portion
|
|
|
1,975
|
|
|
|
|
|
Content rights payable, less current portion
|
|
|
5,489
|
|
|
|
2,459
|
|
Deferred income taxes
|
|
|
16,454
|
|
|
|
10,619
|
|
Other liabilities
|
|
|
170,961
|
|
|
|
175,565
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
5,071,022
|
|
|
|
5,203,447
|
|
|
|
|
|
|
|
|
|
|
Mandatorily redeemable interests in subsidiaries
|
|
|
48,721
|
|
|
|
48,721
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Members Equity
|
|
|
|
|
|
|
|
|
Members equity (51,119 member units issued, less 13,319
repurchased and retired)
|
|
|
2,533,694
|
|
|
|
2,533,694
|
|
Retained earnings
|
|
|
289,930
|
|
|
|
184,712
|
|
Accumulated other comprehensive loss
|
|
|
(22,030
|
)
|
|
|
(10,144
|
)
|
|
|
|
|
|
|
|
|
|
Total members equity
|
|
|
2,801,594
|
|
|
|
2,708,262
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND MEMBERS EQUITY
|
|
$
|
7,921,337
|
|
|
$
|
7,960,430
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
A-3-2
Discovery
Communications Holding, LLC
Consolidated
Statements of Operations (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
in thousands
|
|
OPERATING REVENUE
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
$
|
304,129
|
|
|
|
$
|
289,769
|
|
Distribution
|
|
|
402,683
|
|
|
|
|
369,879
|
|
Other
|
|
|
87,766
|
|
|
|
|
50,550
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenue
|
|
|
794,578
|
|
|
|
|
710,198
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue, exclusive of depreciation and amortization
shown below
|
|
|
230,435
|
|
|
|
|
243,523
|
|
Selling, general & administrative
|
|
|
242,354
|
|
|
|
|
298,967
|
|
Depreciation & amortization
|
|
|
37,720
|
|
|
|
|
32,433
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
510,509
|
|
|
|
|
574,923
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
|
|
284,069
|
|
|
|
|
135,275
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
Interest, net
|
|
|
(68,720
|
)
|
|
|
|
(44,558
|
)
|
Realized and unrealized (losses) gains from non-hedged
derivative instruments, net
|
|
|
(16,095
|
)
|
|
|
|
1,065
|
|
Minority interests in consolidated subsidiaries
|
|
|
(6,806
|
)
|
|
|
|
(707
|
)
|
Equity in earnings of unconsolidated affiliates
|
|
|
311
|
|
|
|
|
2,049
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(91,310
|
)
|
|
|
|
(42,151
|
)
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
|
|
|
192,759
|
|
|
|
|
93,124
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
87,541
|
|
|
|
|
41,710
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS
|
|
|
105,218
|
|
|
|
|
51,414
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of income tax benefit
|
|
|
|
|
|
|
|
(8,300
|
)
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
105,218
|
|
|
|
$
|
43,114
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
A-3-3
Discovery
Communications Holding, LLC
Consolidated
Statements of Cash Flows (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
in thousands
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
105,218
|
|
|
|
$
|
43,114
|
|
Adjustments to reconcile net income to cash provided by
operations
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
37,720
|
|
|
|
|
35,188
|
|
Amortization of deferred launch incentives and representation
rights
|
|
|
19,889
|
|
|
|
|
24,712
|
|
Provision for losses on accounts receivable
|
|
|
2,212
|
|
|
|
|
1,778
|
|
Expenses (income) arising from long-term incentive plans
|
|
|
(35,857
|
)
|
|
|
|
11,721
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
(311
|
)
|
|
|
|
(2,049
|
)
|
Deferred income taxes
|
|
|
24,338
|
|
|
|
|
(27,419
|
)
|
Realized and unrealized gains (losses) on derivative financial
instruments, net
|
|
|
16,095
|
|
|
|
|
(1,065
|
)
|
Non-cash minority interest charges
|
|
|
6,806
|
|
|
|
|
707
|
|
Other non-cash charges
|
|
|
(209
|
)
|
|
|
|
(4,410
|
)
|
Changes in assets and liabilities, net of business combinations
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
2,373
|
|
|
|
|
35,023
|
|
Inventories
|
|
|
3,777
|
|
|
|
|
5,541
|
|
Other assets
|
|
|
(1,257
|
)
|
|
|
|
(18,806
|
)
|
Content rights, net of payables
|
|
|
1,466
|
|
|
|
|
4,405
|
|
Accounts payable and accrued liabilities
|
|
|
(96,912
|
)
|
|
|
|
(72,290
|
)
|
Deferred launch incentives
|
|
|
(3,986
|
)
|
|
|
|
(196,081
|
)
|
Long-term incentive plan liabilities
|
|
|
(12,411
|
)
|
|
|
|
(7,000
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) operations
|
|
|
68,951
|
|
|
|
|
(166,931
|
)
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
|
(13,955
|
)
|
|
|
|
(13,407
|
)
|
Business combinations, net of cash acquired
|
|
|
(2,773
|
)
|
|
|
|
|
|
Redemption of interests in subsidiaries
|
|
|
|
|
|
|
|
(44,000
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
(16,728
|
)
|
|
|
|
(57,407
|
)
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net borrowings on revolver loan
|
|
|
165,432
|
|
|
|
|
262,912
|
|
Principal payments of long-term debt
|
|
|
(190,431
|
)
|
|
|
|
|
|
Payments of capital leases and affiliated debt
|
|
|
(2,068
|
)
|
|
|
|
(1,518
|
)
|
Other financing
|
|
|
(9,967
|
)
|
|
|
|
(21,163
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by financing activities
|
|
|
(37,034
|
)
|
|
|
|
240,231
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
8,514
|
|
|
|
|
3,129
|
|
CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
23,703
|
|
|
|
|
19,022
|
|
Cash and cash equivalents, beginning of year
|
|
|
44,951
|
|
|
|
|
52,263
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
68,654
|
|
|
|
$
|
71,285
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
A-3-4
Discovery
Communications Holding, LLC
Consolidated
Statements of Comprehensive Income (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Period Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
in thousands
|
|
|
Net income
|
|
$
|
105,218
|
|
|
$
|
43,114
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
13,155
|
|
|
|
4,825
|
|
Change in unrealized gain on available-for-sale securities
|
|
|
855
|
|
|
|
2,501
|
|
Changes from hedging activities
|
|
|
(33,509
|
)
|
|
|
(83
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,499
|
)
|
|
|
7,243
|
|
Income tax benefit related to other comprehensive income
|
|
|
7,613
|
|
|
|
(2,746
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,886
|
)
|
|
|
4,497
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
93,332
|
|
|
$
|
47,611
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
A-3-5
Discovery
Communications Holding, LLC
Notes to
Consolidated Financial Statements
|
|
1.
|
Basis of
Presentation and Description of Business
|
Basis
of Presentation
Discovery Communications Holding, LLC (Discovery or
the Company) was formed through a conversion
completed by Discovery Communications, Inc. (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. Immediately after 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. Subsequently, Discovery repurchased
Coxs members equity for approximately
$1.9 billion.
The formation of Discovery required pushdown
accounting and each investors 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. 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 period ended
March 31, 2007 are presented as the Predecessor
period, and the Successor period refers to all
periods subsequent to May 15, 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.
Interim
Financial Statements
The accompanying interim unaudited consolidated financial
statements are prepared in accordance with U.S. generally
accepted accounting principles (GAAP) for interim
financial information. In the opinion of management, they
contain all the adjustments (consisting of those of a normal
recurring nature) considered necessary to present fairly the
financial position, the results of operations and cash flows for
the periods presented in conformity with applicable to interim
periods. The consolidated financial statements should be read in
conjunction with the audited consolidated financial statements
of Discovery Communications Holding, LLC for the year ended
December 31, 2007.
Description
of Business
Discovery 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.
|
|
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.
A-3-6
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.
Recent
Accounting Pronouncements
On January 1, 2008, the Company adopted certain provisions
of Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards No. 157,
Fair Value Measurements (FAS 157).
FAS 157 establishes a single authoritative definition of
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. The provision of FAS 157 adopted on
January 1, 2008 relates to financial assets and liabilities
as well as other assets and liabilities carried at fair value on
a recurring basis and the adoption did not have a material
impact on the Companys consolidated financial statements.
The provisions of FAS 157 related to other nonfinancial
assets and liabilities will be effective for the Company
January 1, 2009, and will be applied prospectively. The
Company is currently evaluating the impact that these additional
FAS 157 provisions will have on the Companys
consolidated financial statements. See Note 3 for further
discussion.
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
Companys 2009 fiscal year.
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 Companys 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.
In March 2008, the FASB issued Statement No. 161,
Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement
No. 133 (FAS 161). FAS 161
requires entities to provide enhanced disclosures related to how
an entity uses derivative instruments, how derivatives are
accounted for under FASB Statement No. 133,
Accounting for Derivative Instruments and Hedging
Activities and how derivative instruments and the related
hedged items impact an entitys financial statements.
FAS 161 is effective for the Company beginning in 2009. The
Company is currently assessing the effect of the disclosure
requirements on the Companys financial statements.
A-3-7
Discovery
Communications Holding, LLC
Notes to
Consolidated Financial
Statements (Continued)
Cash
and Cash Equivalents
Highly liquid investments with original maturities of ninety
days or less are recorded as cash equivalents. Restricted cash
of $1.3 million and $3.2 million is included in other
current assets as of March 31, 2008 and December 31,
2007, respectively. Book overdrafts representing outstanding
checks in excess of funds on deposit are a component of accounts
payable and total $0.9 million and $10.9 million as of
March 31, 2008 and December 31, 2007, respectively.
Inventories
Inventories are carried at the lower of cost or market. Cost is
determined using the weighted average cost method.
|
|
3.
|
Fair
Value Measurements
|
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). We maintain policies and procedures to value
instruments using the best and most relevant data available. The
following table presents information about assets and
liabilities required to be carried at fair value on a recurring
basis as of March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of
|
|
|
|
|
|
|
March 31, 2008 Using
|
|
|
|
|
|
|
Quoted Market
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Prices in Active
|
|
|
Other
|
|
|
Significant
|
|
|
|
Fair Value
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
as of
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
Description
|
|
3/31/08
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
in thousands
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities
|
|
$
|
19,798
|
|
|
$
|
19,798
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan assets
|
|
|
39,272
|
|
|
|
39,272
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
(100,996
|
)
|
|
|
|
|
|
$
|
(100,996
|
)
|
|
|
|
|
Deferred compensation plan liability
|
|
|
(39,272
|
)
|
|
|
|
|
|
|
(39,272
|
)
|
|
|
|
|
HSW International, Inc. (HSWI) liability
|
|
|
(53,722
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(53,722
|
)
|
Long-term Incentive Plan liability
|
|
|
(93,514
|
)
|
|
|
|
|
|
|
(93,514
|
)
|
|
|
|
|
Mandatorily redeemable interests in subsidiaries
|
|
|
(48,721
|
)
|
|
|
|
|
|
|
|
|
|
|
(48,721
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(277,155
|
)
|
|
$
|
59,070
|
|
|
$
|
(233,782
|
)
|
|
$
|
(102,443
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. Assets and liabilities that
are measured using significant other observable inputs are
primarily valued by reference to quoted prices of similar assets
or liabilities in active markets, adjusted for any terms
specific to that asset or liability.
The value of the HSWI liability is determined based on a
discounted cash flow model using managements best
judgments with respect to discount rates and terminal values.
The Company estimates the mandatorily redeemable interests in
subsidiaries based on a contractual formula considering the
projected results of applicable networks
A-3-8
Discovery
Communications Holding, LLC
Notes to
Consolidated Financial
Statements (Continued)
(See Note 7). There was no material activity related to
fair value measurements using significant unobservable inputs
during the quarter ended March 31, 2008.
|
|
4.
|
Discontinued
Operations
|
The Company decided to close its 103 mall based and stand alone
Discovery Stores (Retail) in the third quarter of 2007. 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 as well as at year-end, 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
|
|
|
|
Period Ended
|
|
|
|
Period Ended
|
|
|
|
March 31,
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
in thousands
|
|
Revenue
|
|
$
|
|
|
|
|
$
|
17,628
|
|
Loss from discontinued operations before income taxes
|
|
|
|
|
|
|
|
(13,384
|
)
|
Loss from discontinued operations, net of tax
|
|
|
|
|
|
|
|
(8,300
|
)
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
Content Rights
|
|
2008
|
|
|
2007
|
|
|
|
in thousands
|
|
|
Produced content rights
|
|
|
|
|
|
|
|
|
Completed
|
|
$
|
1,392,620
|
|
|
$
|
1,346,985
|
|
In process
|
|
|
240,087
|
|
|
|
195,025
|
|
Co-produced content rights
|
|
|
|
|
|
|
|
|
Completed
|
|
|
461,364
|
|
|
|
499,127
|
|
In process
|
|
|
58,567
|
|
|
|
53,984
|
|
Licensed content rights
|
|
|
|
|
|
|
|
|
Acquired
|
|
|
208,211
|
|
|
|
209,082
|
|
Prepaid
|
|
|
25,834
|
|
|
|
21,690
|
|
|
|
|
|
|
|
|
|
|
Content rights, at cost
|
|
|
2,386,683
|
|
|
|
2,325,893
|
|
Accumulated amortization
|
|
|
(1,257,824
|
)
|
|
|
(1,198,538
|
)
|
|
|
|
|
|
|
|
|
|
Content rights, net
|
|
|
1,128,859
|
|
|
|
1,127,355
|
|
Current portion, licensed content rights
|
|
|
(83,266
|
)
|
|
|
(79,162
|
)
|
|
|
|
|
|
|
|
|
|
Non-current portion
|
|
$
|
1,045,593
|
|
|
$
|
1,048,193
|
|
|
|
|
|
|
|
|
|
|
Amortization of content rights is recorded as a component of
cost of revenue and was $152.8 million and
$169.4 million, for the period ended March 31, 2008
and 2007, respectively.
A-3-9
Discovery
Communications Holding, LLC
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
in thousands
|
|
|
$1,000,000.0 Term Loan A due quarterly December 2008 to
October 2010
|
|
$
|
1,000,000
|
|
|
$
|
1,000,000
|
|
$1,555,000.0 Revolving Loan, due October 2010
|
|
|
503,000
|
|
|
|
337,500
|
|
260,000.0 Revolving Loan, due April 2009
|
|
|
94,297
|
|
|
|
94,174
|
|
$1,500,000.0 Term Loan B due quarterly September 2007 to
May 2014
|
|
|
1,488,750
|
|
|
|
1,492,500
|
|
8.06% Senior Notes, semi-annual interest, due March 2008
|
|
|
|
|
|
|
180,000
|
|
7.45% Senior Notes, semi-annual interest, due September 2009
|
|
|
55,000
|
|
|
|
55,000
|
|
8.37% Senior Notes, semi-annual interest, due March 2011
|
|
|
220,000
|
|
|
|
220,000
|
|
8.13% Senior Notes, semi-annual interest, due September 2012
|
|
|
235,000
|
|
|
|
235,000
|
|
Floating Rate Senior Notes, semi-annual interest, due December
2012
|
|
|
90,000
|
|
|
|
90,000
|
|
6.01% Senior Notes, semi-annual interest, due December 2015
|
|
|
390,000
|
|
|
|
390,000
|
|
£10,000.0 Uncommitted Facility, due August 2008
|
|
|
2,473
|
|
|
|
8,785
|
|
Obligations under capital leases
|
|
|
33,605
|
|
|
|
37,172
|
|
Other notes payable
|
|
|
944
|
|
|
|
960
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
4,113,050
|
|
|
|
4,141,091
|
|
Current portion
|
|
|
(24,443
|
)
|
|
|
(32,006
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
4,088,607
|
|
|
$
|
4,109,085
|
|
|
|
|
|
|
|
|
|
|
In March 2008 the Company borrowed additional funds under its
Revolving Loan to redeem the maturing $180.0 million
8.06% Senior Notes.
|
|
7.
|
Mandatorily
Redeemable Interests in Subsidiaries
|
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. The redemption
value estimate is based on a contractual formula considering the
projected results of each network within the channel group. The
Company has accreted to an estimated redemption value of
$48.7 million as of March 31, 2008 and
December 31, 2007, based on certain estimates and legal
interpretations. 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
March 31, 2008. Accretion during the period ended
March 31, 2007 was $0.7 million.
|
|
8.
|
Commitments
and Contingencies
|
The Company is involved in litigation and similar claims
incidental to the conduct of its business. In managements
opinion, none of the pending actions is likely to have a
material adverse impact on the Companys financial position
or results of operations.
Discoverys effective tax rate related to income from
continuing operations was 45% for each of three-months ended
March 31, 2008 and March 31, 2007. Discoverys
effective tax rate differed from the federal income tax rate of
35% primarily due to foreign and state taxes.
A-3-10
Discovery
Communications Holding, LLC
Notes to
Consolidated Financial
Statements (Continued)
As of January 1, 2008, the Companys unrecognized tax
benefit was $88.7 million. The balance decreased by
$7.3 million during the three months ended March 31,
2008 mainly as a result of filing a non-US amended prior year
income tax return. The reduction was partially offset by
addition to tax positions for the current year. It is reasonably
possible that the total amount of unrecognized tax benefits
related to tax positions taken (or expected to be taken) on
2005, 2006, 2007 and 2008
non-U.S. tax
returns could decrease by as much as $21.6 million within
the current year as a result of settlement of audit issues
and/or
payment of uncertain tax liabilities, all of which could impact
the effective tax rate.
|
|
10.
|
Related
Party Transactions
|
The Company identifies related parties as investors in their
consolidated subsidiaries, the Companys joint venture
partners and equity investments, and the Companys
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 $7.2 million and $19.4 million for
the period ended March 31, 2008 and 2007, respectively.
Accounts receivable from these entities were $6.6 million
and $6.5 million at March 31, 2008 and
December 31, 2007, respectively. Purchases from related
parties totaled $14.9 million and $15.7 million for
the period ended March 31, 2008 and 2007, respectively; of
these purchases, $1.7 million and $2.4 million related
to capitalized assets for the period ended March 31, 2008
and 2007, respectively. Amounts payable to these parties totaled
$10.9 million and $11.9 million at March 31, 2008
and December 31, 2007, respectively.
As of December 31, 2006, one of the DCIs stockholders
held 44,000 senior preferred partnership units of Animal Planet
LP (APLP) that had a redemption value of
$44.0 million and carried a rate of return ranging from
8.75% to 13%. APLPs senior preferred partnership units
were called by DCI in January 2007 for $44.0 million, plus
accrued interest of $0.5 million.
|
|
11.
|
Members
Equity Transaction
|
On June 4, 2008, our Members signed an agreement to
contribute their interests in the Company to a newly formed
public entity. When this transaction is consummated, it is
expected that the Company will become a consolidated subsidiary
of that newly formed public entity.
A-3-11
Report
of Independent Registered Public Accounting Firm
To the Board
of Directors and Stockholders of
Discovery Communications, Inc.:
In our opinion, the accompanying consolidated balance sheet and
related consolidated statements of operations, of changes in
stockholders deficit, and of cash flows, present fairly,
in all material respects, the financial position of Discovery
Communications, Inc. and its subsidiaries at December 31,
2006, and the results of their operations and their cash flows
for the period from January 1, 2007 through May 14,
2007, and for each of the two years in the period ended
December 31, 2006 in conformity with accounting principles
generally accepted in the United States of America. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
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.
/s/ PricewaterhouseCoopers
LLP
McLean, Virginia
February 14, 2008
A-3-12
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
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
Companys 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.
/s/ PricewaterhouseCoopers
LLP
McLean, Virginia
February 14, 2008
A-3-13
DISCOVERY
COMMUNICATIONS HOLDING, LLC
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
Company
|
|
|
|
Company
|
|
|
|
December 31, 2007
|
|
|
|
December 31, 2006
|
|
|
|
in thousands, except share data
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
44,951
|
|
|
|
$
|
52,263
|
|
Accounts receivable, less allowances of $22,419 and $25,175
|
|
|
741,745
|
|
|
|
|
657,552
|
|
Inventories
|
|
|
10,293
|
|
|
|
|
35,716
|
|
Deferred income taxes
|
|
|
103,723
|
|
|
|
|
76,156
|
|
Content rights, net
|
|
|
79,162
|
|
|
|
|
64,395
|
|
Other current assets
|
|
|
97,359
|
|
|
|
|
84,554
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,077,233
|
|
|
|
|
970,636
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
397,430
|
|
|
|
|
424,041
|
|
Content rights, net, less current portion
|
|
|
1,048,193
|
|
|
|
|
1,253,553
|
|
Deferred launch incentives
|
|
|
242,655
|
|
|
|
|
207,032
|
|
Goodwill
|
|
|
4,870,187
|
|
|
|
|
365,266
|
|
Intangibles, net
|
|
|
181,656
|
|
|
|
|
107,673
|
|
Investments in and advances to unconsolidated affiliates
|
|
|
100,724
|
|
|
|
|
15,564
|
|
Other assets
|
|
|
42,352
|
|
|
|
|
32,788
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
7,960,430
|
|
|
|
$
|
3,376,553
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS EQUITY/STOCKHOLDERS
DEFICIT
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
267,818
|
|
|
|
$
|
316,804
|
|
Accrued payroll and employee benefits
|
|
|
183,823
|
|
|
|
|
122,431
|
|
Launch incentives payable
|
|
|
1,544
|
|
|
|
|
17,978
|
|
Content rights payable
|
|
|
56,334
|
|
|
|
|
57,694
|
|
Current portion of long-term incentive plan liabilities
|
|
|
141,562
|
|
|
|
|
43,274
|
|
Current portion of long-term debt
|
|
|
32,006
|
|
|
|
|
7,546
|
|
Income taxes payable
|
|
|
23,629
|
|
|
|
|
55,264
|
|
Unearned revenue
|
|
|
78,155
|
|
|
|
|
68,339
|
|
Other current liabilities
|
|
|
65,624
|
|
|
|
|
45,194
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
850,495
|
|
|
|
|
734,524
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
|
4,109,085
|
|
|
|
|
2,633,237
|
|
Derivative financial instruments, less current portion
|
|
|
49,110
|
|
|
|
|
8,282
|
|
Launch incentives payable, less current portion
|
|
|
6,114
|
|
|
|
|
10,791
|
|
Long-term incentive plan liabilities, less current portion
|
|
|
|
|
|
|
|
41,186
|
|
Content rights payable, less current portion
|
|
|
2,459
|
|
|
|
|
3,846
|
|
Deferred income taxes
|
|
|
10,619
|
|
|
|
|
46,289
|
|
Other liabilities
|
|
|
175,565
|
|
|
|
|
64,861
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
5,203,447
|
|
|
|
|
3,543,016
|
|
|
|
|
|
|
|
|
|
|
|
Mandatorily redeemable interests in subsidiaries
|
|
|
48,721
|
|
|
|
|
94,825
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Members Equity/Stockholders deficit
|
|
|
|
|
|
|
|
|
|
Class A common stock; $.01 par value; zero shares
authorized, issued or outstanding at December 31, 2007;
100,000 shares authorized, 51,119 shares issued, less
719 shares of treasury stock at December 31, 2006
|
|
|
|
|
|
|
|
1
|
|
Class B common stock; $.01 par value; zero shares
authorized, issued or outstanding at December 31, 2007;
60,000 shares authorized, 50,615 shares issued and
held in treasury stock at December 31, 2006
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
21,093
|
|
Members equity (51,119 member units issued, less 13,319
repurchased and retired)
|
|
|
2,533,694
|
|
|
|
|
|
|
Retained earnings (deficit)
|
|
|
184,712
|
|
|
|
|
(306,135
|
)
|
Accumulated other comprehensive (loss) income
|
|
|
(10,144
|
)
|
|
|
|
23,753
|
|
|
|
|
|
|
|
|
|
|
|
Total members equity/stockholders deficit
|
|
|
2,708,262
|
|
|
|
|
(261,288
|
)
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND MEMBERS EQUITY/STOCKHOLDERS
DEFICIT
|
|
$
|
7,960,430
|
|
|
|
$
|
3,376,553
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
A-3-14
DISCOVERY
COMMUNICATIONS HOLDING, LLC
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
|
|
|
|
Company
|
|
|
|
Predecessor Company
|
|
|
|
May 15, 2007
|
|
|
|
January 1, 2007
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
through
|
|
|
|
through
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
December 31, 2007
|
|
|
|
May 14, 2007
|
|
|
2006
|
|
|
2005
|
|
|
|
in thousands
|
|
OPERATING REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
$
|
874,894
|
|
|
|
$
|
470,139
|
|
|
$
|
1,243,500
|
|
|
$
|
1,187,823
|
|
Distribution
|
|
|
930,386
|
|
|
|
|
547,093
|
|
|
|
1,434,901
|
|
|
|
1,198,686
|
|
Other
|
|
|
222,626
|
|
|
|
|
82,195
|
|
|
|
205,270
|
|
|
|
157,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenue
|
|
|
2,027,906
|
|
|
|
|
1,099,427
|
|
|
|
2,883,671
|
|
|
|
2,544,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue, exclusive of depreciation and amortization
shown below
|
|
|
799,716
|
|
|
|
|
373,191
|
|
|
|
1,032,789
|
|
|
|
907,664
|
|
Selling, general and administrative
|
|
|
823,918
|
|
|
|
|
486,129
|
|
|
|
1,143,349
|
|
|
|
978,415
|
|
Depreciation and amortization
|
|
|
82,807
|
|
|
|
|
73,943
|
|
|
|
122,037
|
|
|
|
112,653
|
|
Gain from disposition of business
|
|
|
(134,671
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,571,770
|
|
|
|
|
933,263
|
|
|
|
2,298,175
|
|
|
|
1,998,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
|
|
456,136
|
|
|
|
|
166,164
|
|
|
|
585,496
|
|
|
|
545,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net
|
|
|
(180,157
|
)
|
|
|
|
(68,600
|
)
|
|
|
(194,255
|
)
|
|
|
(184,585
|
)
|
Realized and unrealized (losses) gains from non-hedged
derivative instruments, net
|
|
|
(10,986
|
)
|
|
|
|
2,350
|
|
|
|
22,558
|
|
|
|
22,499
|
|
Minority interests in consolidated subsidiaries
|
|
|
(7,133
|
)
|
|
|
|
(1,133
|
)
|
|
|
(2,451
|
)
|
|
|
(43,696
|
)
|
Equity in earnings of unconsolidated affiliates
|
|
|
5,093
|
|
|
|
|
3,529
|
|
|
|
7,060
|
|
|
|
4,660
|
|
Other, net
|
|
|
(448
|
)
|
|
|
|
(335
|
)
|
|
|
1,467
|
|
|
|
9,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(193,631
|
)
|
|
|
|
(64,189
|
)
|
|
|
(165,621
|
)
|
|
|
(192,011
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
|
|
|
262,505
|
|
|
|
|
101,975
|
|
|
|
419,875
|
|
|
|
353,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
25,303
|
|
|
|
|
52,163
|
|
|
|
190,381
|
|
|
|
173,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS
|
|
|
237,202
|
|
|
|
|
49,812
|
|
|
|
229,494
|
|
|
|
180,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISCONTINUED OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of income tax benefit
|
|
|
(52,490
|
)
|
|
|
|
(12,533
|
)
|
|
|
(22,318
|
)
|
|
|
(20,568
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM DISCONTINUED OPERATIONS
|
|
|
(52,490
|
)
|
|
|
|
(12,533
|
)
|
|
|
(22,318
|
)
|
|
|
(20,568
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
184,712
|
|
|
|
$
|
37,279
|
|
|
$
|
207,176
|
|
|
$
|
159,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
A-3-15
DISCOVERY
COMMUNICATIONS HOLDING, LLC
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
|
|
|
|
Company
|
|
|
|
Predecessor Company
|
|
|
|
May 15, 2007
|
|
|
|
January 1, 2007
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
through
|
|
|
|
through
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
December 31, 2007
|
|
|
|
May 14, 2007
|
|
|
2006
|
|
|
2005
|
|
|
|
in thousands
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
184,712
|
|
|
|
$
|
37,279
|
|
|
$
|
207,176
|
|
|
$
|
159,620
|
|
Adjustments to reconcile net income to cash provided by (used
in) operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
111,208
|
|
|
|
|
77,186
|
|
|
|
133,634
|
|
|
|
123,209
|
|
Amortization of deferred launch incentives and representation
rights
|
|
|
58,425
|
|
|
|
|
37,158
|
|
|
|
77,778
|
|
|
|
83,411
|
|
Provision (reversal) for losses on accounts receivable
|
|
|
(2
|
)
|
|
|
|
1,855
|
|
|
|
3,691
|
|
|
|
12,217
|
|
Expenses arising from long-term incentive plans
|
|
|
78,527
|
|
|
|
|
62,850
|
|
|
|
39,233
|
|
|
|
49,465
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
(5,093
|
)
|
|
|
|
(3,529
|
)
|
|
|
(7,060
|
)
|
|
|
(4,660
|
)
|
Deferred income taxes
|
|
|
(70,978
|
)
|
|
|
|
10,511
|
|
|
|
108,903
|
|
|
|
109,383
|
|
Realized and unrealized gains on derivative financial
instruments, net
|
|
|
10,986
|
|
|
|
|
(2,350
|
)
|
|
|
(22,558
|
)
|
|
|
(22,499
|
)
|
Gain from disposition of business
|
|
|
(134,671
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash minority interest charges
|
|
|
7,133
|
|
|
|
|
1,133
|
|
|
|
2,451
|
|
|
|
43,696
|
|
Gain on sale of investments
|
|
|
|
|
|
|
|
|
|
|
|
(1,467
|
)
|
|
|
(12,793
|
)
|
Other non-cash (income) charges
|
|
|
1,733
|
|
|
|
|
(4,263
|
)
|
|
|
2,447
|
|
|
|
9,675
|
|
Changes in assets and liabilities, net of business
combinations and dispositions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(45,808
|
)
|
|
|
|
(29,507
|
)
|
|
|
(84,598
|
)
|
|
|
(37,207
|
)
|
Inventories
|
|
|
21,666
|
|
|
|
|
4,805
|
|
|
|
(4,560
|
)
|
|
|
1,853
|
|
Other assets
|
|
|
27,682
|
|
|
|
|
(23,872
|
)
|
|
|
(7,434
|
)
|
|
|
(18,748
|
)
|
Content rights, net of payables
|
|
|
110,811
|
|
|
|
|
(2,689
|
)
|
|
|
(84,377
|
)
|
|
|
(108,155
|
)
|
Accounts payable and accrued liabilities
|
|
|
119,769
|
|
|
|
|
(93,260
|
)
|
|
|
73,646
|
|
|
|
47,913
|
|
Representation rights
|
|
|
|
|
|
|
|
|
|
|
|
93,233
|
|
|
|
(6,000
|
)
|
Deferred launch incentives
|
|
|
(25,623
|
)
|
|
|
|
(197,624
|
)
|
|
|
(49,386
|
)
|
|
|
(35,731
|
)
|
Long-term incentive plan liabilities
|
|
|
(76,315
|
)
|
|
|
|
(7,773
|
)
|
|
|
(841
|
)
|
|
|
(325,756
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) operations
|
|
|
374,162
|
|
|
|
|
(132,090
|
)
|
|
|
479,911
|
|
|
|
68,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
|
(55,965
|
)
|
|
|
|
(24,588
|
)
|
|
|
(90,138
|
)
|
|
|
(99,684
|
)
|
Business combinations, net of cash acquired
|
|
|
(306,094
|
)
|
|
|
|
|
|
|
|
(194,905
|
)
|
|
|
(400
|
)
|
Purchase of intangibles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(583
|
)
|
Investments in and advances to unconsolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(363
|
)
|
Redemption of interests in subsidiaries
|
|
|
|
|
|
|
|
(44,000
|
)
|
|
|
(180,000
|
)
|
|
|
(92,874
|
)
|
Proceeds from sale of investments
|
|
|
|
|
|
|
|
|
|
|
|
1,467
|
|
|
|
14,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
(362,059
|
)
|
|
|
|
(68,588
|
)
|
|
|
(463,576
|
)
|
|
|
(179,240
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
|
1,286,362
|
|
|
|
|
211,277
|
|
|
|
316,813
|
|
|
|
1,785,955
|
|
Principal payments of long-term debt
|
|
|
(11,742
|
)
|
|
|
|
(2,356
|
)
|
|
|
(307,030
|
)
|
|
|
(1,697,068
|
)
|
Deferred financing fees
|
|
|
(4,690
|
)
|
|
|
|
(16
|
)
|
|
|
(1,144
|
)
|
|
|
(4,810
|
)
|
Repurchase of members interest
|
|
|
(1,284,544
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions from minority shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
603
|
|
Other financing
|
|
|
(17,590
|
)
|
|
|
|
(2,473
|
)
|
|
|
(9,963
|
)
|
|
|
32,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by financing activities
|
|
|
(32,204
|
)
|
|
|
|
206,432
|
|
|
|
(1,324
|
)
|
|
|
116,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
2,658
|
|
|
|
|
4,377
|
|
|
|
2,761
|
|
|
|
3,723
|
|
CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
(17,443
|
)
|
|
|
|
10,131
|
|
|
|
17,772
|
|
|
|
10,209
|
|
Cash and cash equivalents, beginning of period
|
|
|
62,394
|
|
|
|
|
52,263
|
|
|
|
34,491
|
|
|
|
24,282
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
44,951
|
|
|
|
$
|
62,394
|
|
|
$
|
52,263
|
|
|
$
|
34,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
A-3-16
DISCOVERY
COMMUNICATIONS HOLDING, LLC
Consolidated
Statements of Changes in Members Equity and
Stockholders Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
Gain
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
(Loss)
|
|
|
|
|
|
|
Class A
|
|
|
Capital/
|
|
|
Retained
|
|
|
Foreign
|
|
|
Gain
|
|
|
from
|
|
|
|
|
|
|
Common Stock
|
|
|
Members
|
|
|
Earnings
|
|
|
Currency
|
|
|
(Loss) on
|
|
|
Hedging
|
|
|
|
|
|
|
At Par
|
|
|
Redeemable
|
|
|
Equity
|
|
|
(Deficit)
|
|
|
Translation
|
|
|
Investment
|
|
|
Activities
|
|
|
TOTAL
|
|
|
|
in thousands
|
|
|
Predecessor Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
21,093
|
|
|
$
|
(672,931
|
)
|
|
$
|
22,732
|
|
|
$
|
1,179
|
|
|
$
|
|
|
|
$
|
(627,926
|
)
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation, net of tax of $9.6 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,017
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on investments, net of tax of $0.1 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(101
|
)
|
|
|
|
|
|
|
|
|
Unamortized gain on cash flow hedge, net of tax of
$1.3 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,066
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
21,093
|
|
|
$
|
(513,311
|
)
|
|
$
|
6,715
|
|
|
$
|
1,078
|
|
|
$
|
2,066
|
|
|
$
|
(482,358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
207,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation, net of tax of $8.8 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on investments, net of tax of $0.2 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(355
|
)
|
|
|
|
|
|
|
|
|
Amortization of gain on cash flow hedge, net of tax of
$0.1 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(209
|
)
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
221,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
21,093
|
|
|
$
|
(306,135
|
)
|
|
$
|
21,173
|
|
|
$
|
723
|
|
|
$
|
1,857
|
|
|
$
|
(261,288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the period January 1, 2007 through
May 14, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation, net of tax of $4.7 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on investments, net of tax of $0.9 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,552
|
|
|
|
|
|
|
|
|
|
Amortization of gain on cash flow hedge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(77
|
)
|
|
|
|
|
Cumulative effect for the adoption of FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,011
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, May 14, 2007
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
21,093
|
|
|
$
|
(273,867
|
)
|
|
$
|
28,864
|
|
|
$
|
2,275
|
|
|
$
|
1,780
|
|
|
$
|
(219,854
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Formation of Successor Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pushdown of investor basis
|
|
|
|
|
|
|
|
|
|
|
4,392,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,392,804
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the period May 15, 2007 through
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
184,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation, net of tax of $4.4 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on investments, net of tax of $1.8 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,011
|
|
|
|
|
|
|
|
|
|
Changes from hedging activities, net of tax of $12.2 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,509
|
)
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
174,568
|
|
Repurchase of members interest
|
|
|
|
|
|
|
|
|
|
|
(1,859,110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,859,110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
|
|
|
|
|
|
|
$
|
2,533,694
|
|
|
$
|
184,712
|
|
|
$
|
7,354
|
|
|
$
|
3,011
|
|
|
$
|
(20,509
|
)
|
|
$
|
2,708,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
A-3-17
DISCOVERY
COMMUNICATIONS HOLDING, LLC
1. Basis
of Presentation and Description of Business
Basis
of Presentation
Discovery Communications Holding, LLC (Discovery or
the Company) was formed through a conversion
completed by Discovery Communications, Inc. (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 shareholders 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 through May 14, 2007,
while the Successor period refers to the period from
May 15 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 $575.0 million, resulted in a $134.7 million
tax-free gain included in continuing operations. The gain was
net of $280.8 million in reporting unit goodwill and
$159.5 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.
Description
of Business
Discovery 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) Discovery commerce
and education.
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.
A-3-18
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.
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 Companys 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 Companys 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
Companys 2009 fiscal year.
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 Companys 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 revenue from three primary sources:
(1) advertising revenue for commercial spots aired on the
Companys networks and websites, (2) distribution
revenue from cable system and satellite operators
(distributors), and (3) Other, which is largely
e-commerce
and educational sales.
Advertising revenue is recorded net of agency commissions and
audience deficiency liabilities in the period advertising spots
are broadcast. Distribution revenue is recognized over the
service period, net of launch incentives and other vendor
consideration.
E-commerce
and educational product revenues are recognized either at the
A-3-19
DISCOVERY
COMMUNICATIONS HOLDING, LLC
Notes to
Consolidated Financial
Statements (Continued)
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 $107.7 million, $71.6 million,
$207.7 million and $208.6 million were incurred from
May 15, 2007 through December 31, 2007, from
January 1, 2007 through May 14, 2007, in 2006 and in
2005, respectively.
Cash
and Cash Equivalents
Highly liquid investments with original maturities of ninety
days or less are recorded as cash equivalents. Restricted cash
of $7.6 million and $7.1 million is included in other
current assets as of December 31, 2007 and 2006,
respectively. Book overdrafts representing outstanding checks in
excess of funds on deposit are a component of accounts payable
and total $10.9 million and $30.9 million in 2007 and
2006, respectively.
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
derivatives 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. See
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.
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
Companys 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 Companys co-production
A-3-20
DISCOVERY
COMMUNICATIONS HOLDING, LLC
Notes to
Consolidated Financial
Statements (Continued)
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 $57.1 million and
$61.4 million at December 31, 2007 and 2006
respectively. Software costs of $8.7 million,
$7.2 million, $21.6 million and $23.2 million
were capitalized from May 15, 2007 through
December 31, 2007, from January 1, 2007 through
May 14, 2007, in 2006 and in 2005, respectively.
Amortization of capitalized software costs totaled
$12.7 million, $7.3 million, $18.3 million, and
$19.3 million from May 15, 2007 through
December 31, 2007, from January 1, 2007 through
May 14, 2007, in 2006 and in 2005, respectively. There were
no write-offs for capitalized software costs during 2007, 2006
and 2005.
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 an asset impairment of
$26.2 million for education assets related to its consumer
business, which is included as a component of depreciation and
amortization. During the Successor period, the Company recorded
a $28.3 million write-off of leasehold improvements related
to store closures which is included in loss from discontinued
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.
A-3-21
DISCOVERY
COMMUNICATIONS HOLDING, LLC
Notes to
Consolidated Financial
Statements (Continued)
Amortization of deferred launch incentives and interest on
unpaid deferred launch incentives was $61.4 million,
$39.0 million, $79.1 million and $74.1 million
from May 15, 2007 through December 31, 2007, from
January 1, 2007 through May 14, 2007, in 2006 and in
2005, 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 $195.8 million, most of which is being
amortized over a 5 year period.
Foreign
Currency Translation
The Companys 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 members equity/stockholders deficit 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 DCIs business metrics. DCI
accounted for these units similar to stock appreciation rights
and applied the guidance in FASB Interpretation Number 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 (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.
A-3-22
DISCOVERY
COMMUNICATIONS HOLDING, LLC
Notes to
Consolidated Financial
Statements (Continued)
Mandatorily
Redeemable Interest in Subsidiaries
For those instruments with an estimated redemption value,
mandatorily redeemable interest in subsidiaries is accreted or
decreted to an estimated redemption value ratably over the
period to the redemption date. Accretion and decretion 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 mandatorily redeemable interests in
subsidiaries are included as a component of investing cash flows.
Minority
Interest
In addition to the accretion and decretion 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
Stock
Treasury stock is accounted for using the cost method by DCI,
the Predecessor. The repurchased shares are held in treasury and
are presented as if retired. There was no treasury stock
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 equity of Cox.
(See Note 1 Basis of Presentation and Description of
Business.)
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 companys
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. Upon adoption of FIN 48, DCI recorded
a $5.0 million net tax liability recorded directly to
accumulated deficit.
A-3-23
DISCOVERY
COMMUNICATIONS HOLDING, LLC
Notes to
Consolidated Financial
Statements (Continued)
|
|
3.
|
Supplemental
Disclosures to Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
May 15
|
|
|
January 1
|
|
|
|
|
|
|
through
|
|
|
through
|
|
|
|
|
|
|
December 31,
|
|
|
May 14,
|
|
|
|
|
|
|
2007
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
in thousands
|
Cash paid for acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired
|
|
$
|
419,154
|
|
|
|
$
|
|
|
|
$
|
223,293
|
|
|
$
|
400
|
|
Fair value of liabilities Assumed
|
|
|
(113,060
|
)
|
|
|
|
|
|
|
|
(28,388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisitions, net of cash acquired
|
|
$
|
306,094
|
|
|
|
$
|
|
|
|
$
|
194,905
|
|
|
$
|
400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
179,669
|
|
|
|
$
|
77,849
|
|
|
$
|
196,195
|
|
|
$
|
171,151
|
|
Cash paid for income taxes
|
|
$
|
58,323
|
|
|
|
$
|
16,554
|
|
|
$
|
70,215
|
|
|
$
|
27,678
|
|
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 Discoverys 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 $264.9 million, including $14.9 million of
transaction costs. The Company also assumed net working capital
of $1.1 million, content of $9.0 million, and deferred
tax liabilities of $44.6 million. As of December 31,
2007, $4.6 million of the purchase price has not yet been
paid. Of the $269.6 million of acquired intangibles,
$95.8 million was ascribed to intangibles subject to
amortization with useful lives between two and five years and
the balance of $173.8 million to non-tax deductible
goodwill. Acquired intangibles include trademarks, customer
lists, and other items with weighted average useful lives of
4 years. The Company funded the purchase through additional
borrowings under its credit facilities. HSWs content is
highly ranked by the worlds leading search engines and
provides a natural link to the Companys 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
$79.4 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
12-24 months.
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 $53.7 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 based upon appraised values, market data and a
discounted cash flow analysis using managements best
judgments with respect to discount rates and terminal values.
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 $10.0 million. As of
December 31, 2007, $1.8 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 Companys goal of
developing original programming related to the environment,
sustainable development, conservation and organic living. The
Company also has
A-3-24
DISCOVERY
COMMUNICATIONS HOLDING, LLC
Notes to
Consolidated Financial
Statements (Continued)
certain contingent considerations in connection with this
acquisition payable in the event specific business metrics are
achieved totaling up to $6.0 million over 2 years,
which could result in the recording of additional goodwill.
Subsequent to the formation of Discovery, the Company acquired
an additional 5% interest in Animal Planet L.P.
(APLP) from Cox for $37.0 million. This
transaction increased the Companys ownership interest in
APLP from 80% to 85% and has been recorded as a step
acquisition. The $37.0 million has been recorded as brand
intangibles of $7.0 million, affiliate relationships of
$10.0 million, and goodwill of $17.0 million. The
brand intangibles and affiliate relationships will be amortized
over 10 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.
|
|
|
|
|
|
|
HSW, Animal Planet and
|
|
Asset (Liability)
|
|
Treehugger, Combined
|
|
|
|
in thousands
|
|
|
Current assets and content
|
|
$
|
22,399
|
|
Investment in HSWi stock
|
|
|
79,375
|
|
Other tangible assets
|
|
|
1,313
|
|
Finite-lived intangibles (including brand names, customer lists
and trademarks)
|
|
|
119,421
|
|
Goodwill
|
|
|
196,646
|
|
Liabilities assumed
|
|
|
(14,753
|
)
|
Deferred taxes
|
|
|
(44,585
|
)
|
Estimated redemption liability to HSW shareholders
|
|
|
(53,722
|
)
|
|
|
|
|
|
Cash paid, net of cash acquired
|
|
$
|
306,094
|
|
|
|
|
|
|
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 $60.2 million primarily in
cash. Of the $54.3 million of acquired intangible assets,
$23.0 million was assigned to contract-based distribution
channels subject to amortization with a useful life of
approximately 5 years and the remaining balance of
$31.3 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
$8.1 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 Antennas 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 $64.4 million, primarily in
cash. Of the $49.1 million of acquired intangibles,
$6.4 million was assigned to assets subject to amortization
with useful lives between two and seven years and the balance of
$42.7 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 $70.4 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 $11.0 million in goodwill.
|
|
|
|
Clearvue and SVE, Inc., a provider of curriculum-oriented media
educational products.
|
A-3-25
DISCOVERY
COMMUNICATIONS 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
$20.6 million, including $11.5 million of goodwill,
for goodwill and intangible assets established during 2006
related to Academy 123, Inc. The business had not been
integrated into the education reporting unit, and management
decided to scale back its education business to consumers.
|
|
|
|
Thinklink, Inc., a provider of formative assessment testing
services to schools servicing students in grades K through 12.
|
Goodwill recognized for these transactions amounted to
$27.9 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.
|
|
|
|
|
|
|
DMAX, Antenna and
|
|
|
|
Other Acquisitions,
|
|
Asset (Liability)
|
|
Combined
|
|
|
|
in thousands
|
|
|
Current assets and content
|
|
$
|
40,365
|
|
Other tangible assets
|
|
|
7,765
|
|
Finite-lived intangible assets
|
|
|
73,378
|
|
Goodwill
|
|
|
101,785
|
|
Liabilities assumed
|
|
|
(28,388
|
)
|
|
|
|
|
|
Cash paid, net of cash acquired
|
|
$
|
194,905
|
|
|
|
|
|
|
|
|
5.
|
Discontinued
Operations
|
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 through
|
|
|
January 1 through
|
|
|
|
|
|
|
December 31, 2007
|
|
|
May 14, 2007
|
|
2006
|
|
2005
|
|
|
|
|
|
in thousands
|
Revenue
|
|
$
|
30,491
|
|
|
|
$
|
27,362
|
|
|
$
|
129,317
|
|
|
$
|
127,396
|
|
Loss from discontinued operations before income taxes
|
|
$
|
(81,115
|
)
|
|
|
$
|
(18,312
|
)
|
|
$
|
(35,911
|
)
|
|
$
|
(31,652
|
)
|
Loss from discontinued operations, net of tax
|
|
$
|
(52,490
|
)
|
|
|
$
|
(12,533
|
)
|
|
$
|
(22,318
|
)
|
|
$
|
(20,568
|
)
|
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
$31.1 million in lease terminations and other exit costs,
$8.8 million for severance and other employee-related costs
and $28.3 million in asset impairment charges, along with
normal business operations.
A-3-26
DISCOVERY
COMMUNICATIONS HOLDING, LLC
Notes to
Consolidated Financial
Statements (Continued)
Summarized balance sheet information for discontinued operations
for Retail is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
2007
|
|
|
|
2006
|
|
|
|
in thousands
|
|
Current assets
|
|
$
|
|
|
|
|
$
|
38,106
|
|
Total assets
|
|
$
|
|
|
|
|
$
|
67,707
|
|
Current liabilities
|
|
$
|
(6,349
|
)
|
|
|
$
|
(29,961
|
)
|
Total liabilities
|
|
$
|
(6,349
|
)
|
|
|
$
|
(39,339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
Content Rights
|
|
2007
|
|
|
|
2006
|
|
|
|
in thousands
|
|
Produced content rights
|
|
|
|
|
|
|
|
|
|
Completed
|
|
$
|
1,346,985
|
|
|
|
$
|
1,476,830
|
|
In process
|
|
|
195,025
|
|
|
|
|
161,942
|
|
Co-produced content rights
|
|
|
|
|
|
|
|
|
|
Completed
|
|
|
499,127
|
|
|
|
|
681,105
|
|
In process
|
|
|
53,984
|
|
|
|
|
86,359
|
|
Licensed content rights
|
|
|
|
|
|
|
|
|
|
Acquired
|
|
|
209,082
|
|
|
|
|
213,691
|
|
Prepaid
|
|
|
21,690
|
|
|
|
|
10,386
|
|
|
|
|
|
|
|
|
|
|
|
Content rights, at cost
|
|
|
2,325,893
|
|
|
|
|
2,630,313
|
|
Accumulated amortization
|
|
|
(1,198,538
|
)
|
|
|
|
(1,312,365
|
)
|
|
|
|
|
|
|
|
|
|
|
Content rights, net
|
|
|
1,127,355
|
|
|
|
|
1,317,948
|
|
Current portion, licensed content rights
|
|
|
(79,162
|
)
|
|
|
|
(64,395
|
)
|
|
|
|
|
|
|
|
|
|
|
Non-current portion
|
|
$
|
1,048,193
|
|
|
|
$
|
1,253,553
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of content rights is recorded as a component of
cost of revenue and was $558.0 million,
$257.0 million, $696.0 million and $601.1 million
from May 15, 2007 through December 31, 2007, from
January 1, 2007 through May 14, 2007, in 2006 and in
2005, respectively. Amortization of content rights includes
incremental amortization for certain programs to net realizable
value of $171.7 million, $1.9 million,
$40.1 million and $16.6 million from May 15, 2007
through December 31, 2007, from January 1, 2007
through May 14, 2007, in 2006 and in 2005, respectively.
The $171.7 million of incremental amortization includes an
impairment charge of $129.1 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 networks. 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 $434.3 million of unamortized content rights, not
including in-process, not released, and prepaid productions,
during the next twelve months.
A-3-27
DISCOVERY
COMMUNICATIONS HOLDING, LLC
Notes to
Consolidated Financial
Statements (Continued)
|
|
7.
|
Property
and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
Property and Equipment
|
|
2007
|
|
|
|
2006
|
|
|
|
in thousands
|
|
Equipment and software
|
|
$
|
478,616
|
|
|
|
$
|
411,583
|
|
Land
|
|
|
28,781
|
|
|
|
|
28,781
|
|
Buildings
|
|
|
154,227
|
|
|
|
|
153,737
|
|
Furniture, fixtures, leasehold improvements and other
|
|
|
151,417
|
|
|
|
|
217,884
|
|
Assets in progress
|
|
|
14,471
|
|
|
|
|
11,833
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, at cost
|
|
|
827,512
|
|
|
|
|
823,818
|
|
Accumulated depreciation and amortization
|
|
|
(430,082
|
)
|
|
|
|
(399,777
|
)
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
397,430
|
|
|
|
$
|
424,041
|
|
|
|
|
|
|
|
|
|
|
|
The cost and accumulated depreciation of equipment under capital
leases was $53.3 million and $19.8 million,
respectively, at December 31, 2007, and $39.7 million
and $13.2 million, respectively, at December 31, 2006
respectively. Depreciation and amortization of property and
equipment, including equipment under capital lease, was
$57.3 million, $40.4 million, $78.4 million and
$74.5 million from May 15, 2007 through
December 31, 2007, from January 1, 2007 through
May 14, 2007, in 2006 and in 2005, respectively.
Depreciation and amortization of property and equipment for
Retail discontinued operations was $0.1 million,
$3.2 million, $10.2 million and $10.4 million
from May 15, 2007 through December 31, 2007, from
January 1, 2007 through May 14, 2007, in 2006 and in
2005, respectively, exclusive of impairment write-downs.
|
|
8.
|
Sale of
Equity Investments
|
In April 2006 and January 2005, DCI recorded gains of
$1.5 million and $12.8 million, respectively, 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.
9. Goodwill
and Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
Goodwill and Intangible Assets
|
|
2007
|
|
|
|
2006
|
|
|
|
in thousands
|
|
Goodwill
|
|
$
|
4,870,187
|
|
|
|
$
|
365,266
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks, net of accumulated amortization of $2,272 and $1,905
|
|
$
|
62,193
|
|
|
|
$
|
12,322
|
|
Customer lists, net of accumulated amortization of $76,919 and
$136,049
|
|
|
67,282
|
|
|
|
|
26,500
|
|
Other, net of accumulated amortization of $77,026 and $55,355
|
|
|
52,181
|
|
|
|
|
68,851
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles, net
|
|
$
|
181,656
|
|
|
|
$
|
107,673
|
|
|
|
|
|
|
|
|
|
|
|
A-3-28
DISCOVERY
COMMUNICATIONS HOLDING, LLC
Notes to
Consolidated Financial
Statements (Continued)
During 2007, changes in the net carrying amount of goodwill were
as follows:
|
|
|
|
|
Reconciliation of net carrying amount of goodwill
|
|
in thousands
|
|
|
Balance at January 1, 2007 (Predecessor)
|
|
$
|
365,266
|
|
Impairment (Predecessor) (Note 4)
|
|
|
(11,478
|
)
|
Translation (Predecessor)
|
|
|
2,047
|
|
Push down of investor basis (Successor) (Note 1)
|
|
|
4,591,581
|
|
Disposals (Successor) (Note 1)
|
|
|
(280,838
|
)
|
Acquisitions (Successor) (Note 4)
|
|
|
198,109
|
|
Translation (Successor)
|
|
|
5,500
|
|
|
|
|
|
|
Balance at December 31, 2007 (Successor)
|
|
$
|
4,870,187
|
|
|
|
|
|
|
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 $11.5 million and intangible assets of
$9.1 million were written-off as a component of
amortization expense.
Goodwill is not amortized. Trademarks are amortized on a
straight-line basis over 3 to 10 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 $22.3 million,
$36.7 million, $43.6 million and $38.2 million
from May 15, 2007 through December 31, 2007, from
January 1, 2007 through May 14, 2007, in 2006 and in
2005, respectively. The Company estimates that unamortized costs
of intangible assets at December 31, 2007 will be amortized
over the next five years as follows: $52.5 million in 2008,
$40.9 million in 2009, $37.2 million in 2010,
$20.4 million in 2011, and $12.2 million in 2012.
A-3-29
DISCOVERY
COMMUNICATIONS HOLDING, LLC
Notes to
Consolidated Financial
Statements (Continued)
10. Investments
The following table outlines the Companys less than
wholly-owned ventures and the method of accounting during 2007:
|
|
|
|
|
Accounting
|
Affiliates:
|
|
Method
|
|
Joint Ventures with the BBC:
|
|
|
JV Programs LLC (JVP)
|
|
Consolidated
|
Joint Venture Network LLC (JVN)
|
|
Consolidated
|
Animal Planet Europe
|
|
Consolidated
|
Animal Planet Latin America
|
|
Consolidated
|
People & Arts Latin America
|
|
Consolidated
|
Animal Planet Asia
|
|
Consolidated
|
Animal Planet Japan
|
|
Consolidated
|
Animal Planet Canada
|
|
Equity
|
Other Ventures:
|
|
|
Animal Planet United States (see Note 12)
|
|
Consolidated
|
Discovery Canada
|
|
Equity
|
Discovery Japan
|
|
Equity
|
Discovery Health Canada
|
|
Equity
|
Discovery Kids Canada
|
|
Equity
|
Discovery Civilization Canada
|
|
Equity
|
HSWi (See Note 4)
|
|
Equity
|
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 BBCs 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 $4.3 million
and $1.1 million for the BBCs 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,
2006 or 2005. At December 31, 2007, the Companys
maximum exposure to loss as a result of its involvement with the
equity joint ventures is the $47.0 million investment book
value and future operating losses, should they occur, of the
equity joint ventures that the Company is obligated to fund.
A-3-30
DISCOVERY
COMMUNICATIONS HOLDING, LLC
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
Debt
|
|
2007
|
|
|
|
2006
|
|
|
|
in thousands
|
|
$1,000,000.0 Term Loan A due quarterly December 2008 to October
2010
|
|
$
|
1,000,000
|
|
|
|
$
|
1,000,000
|
|
$1,555,000.0 Revolving Loan, due October 2010
|
|
|
337,500
|
|
|
|
|
249,500
|
|
260,000.0 Revolving Loan, due April 2009
|
|
|
94,174
|
|
|
|
|
187,828
|
|
$1,500,000.0 Term Loan B due quarterly September 2007 to May 2014
|
|
|
1,492,500
|
|
|
|
|
|
|
8.06% Senior Notes, semi-annual interest, due March 2008
|
|
|
180,000
|
|
|
|
|
180,000
|
|
7.45% Senior Notes, semi-annual interest, due September 2009
|
|
|
55,000
|
|
|
|
|
55,000
|
|
8.37% Senior Notes, semi-annual interest, due March 2011
|
|
|
220,000
|
|
|
|
|
220,000
|
|
8.13% Senior Notes, semi-annual interest, due September 2012
|
|
|
235,000
|
|
|
|
|
235,000
|
|
Floating Rate Senior Notes, semi-annual interest, due December
2012
|
|
|
90,000
|
|
|
|
|
90,000
|
|
6.01% Senior Notes, semi-annual interest, due December 2015
|
|
|
390,000
|
|
|
|
|
390,000
|
|
£10,000.0 Uncommitted Facility, due August 2008
|
|
|
8,785
|
|
|
|
|
|
|
Obligations under capital leases
|
|
|
37,172
|
|
|
|
|
32,355
|
|
Other notes payable
|
|
|
960
|
|
|
|
|
1,100
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
4,141,091
|
|
|
|
|
2,640,783
|
|
Current portion
|
|
|
(32,006
|
)
|
|
|
|
(7,546
|
)
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
4,109,085
|
|
|
|
$
|
2,633,237
|
|
|
|
|
|
|
|
|
|
|
|
In May 2007, Discovery entered into a $1,500.0 million,
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
$4.7 million of deferred financing costs as a result of
this transaction. At the end of 2007 there was
$1,492.5 million 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 Companys 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
£4.4 million (approximately $8.8 million)
outstanding under this facility.
In March 2006, DCEL entered into a 70.0 million three
year multicurrency revolving credit agreement (UK credit
agreement) which enables the Company to draw Euros and
British Pounds. In April 2006, the UK credit agreement was
amended and restated to provide for syndication and to increase
the revolving commitments to 260.0 million. The
Company guarantees DCELs obligations under the UK credit
agreement. Borrowings under this agreement bear interest at
LIBOR plus an applicable margin based on the Companys
leverage ratios. The cost of the UK credit agreement also
includes a fee on the revolving commitments (ranging from 0.1%
to 0.3%) based on the Companys leverage ratio. DCEL
capitalized £0.7 million (approximately
$1.4 million) of deferred financing costs as a result of
this transaction. At the end of 2007 there was
£47.5 million (approximately
U.S. $94.2 million) outstanding under the
multicurrency credit agreement with a weighted average interest
rate of 6.75%. At the end of 2006 there was
£95.9 million (approximately $187.8 million)
outstanding under the multicurrency credit agreement with a
weighted average interest rate of 5.91%. The interest rate
averaged 7.05% and 6.42% from May 15, 2007
A-3-31
DISCOVERY
COMMUNICATIONS HOLDING, LLC
Notes to
Consolidated Financial
Statements (Continued)
through December 31, 2007 and from January 1, 2007
through May 14, 2007, respectively. The UK credit agreement
matures April 2009.
In March 2006 DCI borrowed additional funds under its US Credit
Facility (Revolving Loan and Term A) to redeem the maturing
$300.0 million Senior Notes. At the end of 2007 there was
$1,337.5 million outstanding ($1,000 million Term A
and $337.5 million Revolving Loan) under the facility with
a weighted average interest rate of 5.61%. The amount available
under the facility was $1,214.9 million, net of amounts
committed for standby letters of credit of $2.6 million
issued. At the end of 2006 there was $1,249.5 million
outstanding under the facility with a weighted average interest
rate of 6.35%. The amount available under the facility was
$1,302.8 million, net of amounts committed for standby
letters of credit of $2.7 million issued. The average
interest rate under the U.S. Credit Facility was 6.11%,
6.22% and 6.01% from May 15, 2007 through December 31,
2007, from January 1, 2007 through May 14, 2007 and
2006, respectively. The Companys 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: $266.3 million in 2008,
$539.2 million in 2009, $915.0 million in 2010,
$235.0 million in 2011, $340.0 million in 2012 and
$1,807.5 million thereafter. Of the $266.3 million of
principal payments due in 2008, $242.5 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:
$9.0 million in 2008 and 2009, $6.8 million in 2010,
$6.2 million in 2011, $3.0 million in 2012 and
$10.0 million thereafter.
|
|
12.
|
Mandatorily
Redeemable Interests in Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
Mandatorily Redeemable Interests in Subsidiaries
|
|
2007
|
|
|
|
2006
|
|
|
|
in thousands
|
|
Animal Planet LP
|
|
$
|
|
|
|
|
$
|
48,950
|
|
People & Arts Latin America and Animal Planet Channel
Group
|
|
|
48,721
|
|
|
|
|
45,875
|
|
|
|
|
|
|
|
|
|
|
|
Mandatorily redeemable interests in subsidiaries
|
|
$
|
48,721
|
|
|
|
$
|
94,825
|
|
|
|
|
|
|
|
|
|
|
|
Animal
Planet LP
As of December 31, 2006, one of the DCIs stockholders
held 44,000 senior preferred partnership units of Animal Planet
LP (APLP) that had a redemption value of
$44.0 million and carried a rate of return ranging from
8.75% to 13%. Payments were made quarterly and totaled
$4.6 million during 2006. APLPs senior preferred
partnership units were called by DCI in January 2007 for
$44.0 million, plus accrued interest of $0.5 million.
At December 31, 2006, DCI recorded this security at the
redemption value of $44.0 million plus accrued returns of
$5.0 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 $4.7 million
in 2006 and 2005. DCI reversed $5.0 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
A-3-32
DISCOVERY
COMMUNICATIONS HOLDING, LLC
Notes to
Consolidated Financial
Statements (Continued)
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 Companys 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 an independent valuation of the Channel Groups 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
have commenced to formally assess the performance benchmarks and
the BBCs right to put. The Company has accreted to an
estimated redemption value of $48.7 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
$1.7 million, $1.1 million, $9.1 million and
$34.6 million from May 15, 2007 through
December 31, 2007, from January 1, 2007 through
May 14, 2007, in 2006 and 2005, respectively.
|
|
13.
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ending December 31,
|
|
Future Minimum Payments
|
|
Leases
|
|
|
Content
|
|
|
Other
|
|
|
Total
|
|
|
|
in thousands
|
|
|
2008
|
|
$
|
80,691
|
|
|
$
|
269,175
|
|
|
$
|
106,187
|
|
|
$
|
456,053
|
|
2009
|
|
|
65,991
|
|
|
|
66,616
|
|
|
|
85,546
|
|
|
|
218,153
|
|
2010
|
|
|
56,518
|
|
|
|
41,287
|
|
|
|
71,246
|
|
|
|
169,051
|
|
2011
|
|
|
41,360
|
|
|
|
40,176
|
|
|
|
23,852
|
|
|
|
105,388
|
|
2012
|
|
|
35,417
|
|
|
|
40,667
|
|
|
|
4,148
|
|
|
|
80,232
|
|
Thereafter
|
|
|
133,741
|
|
|
|
41,469
|
|
|
|
400
|
|
|
|
175,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
413,718
|
|
|
$
|
499,390
|
|
|
$
|
291,379
|
|
|
$
|
1,204,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses recorded in connection with operating leases, including
rent expense, for continuing and discontinued operations were
$91.2 million, $53.1 million, $142.5 million and
$142.1 million from May 15, 2007 through
December 31, 2007, from January 1, 2007 through
May 14, 2007, in 2006 and in 2005, respectively. Expenses
recorded in connection with operating leases, including rent
expense, for discontinued operations were $37.2 million,
$8.8 million, $24.0 million and $25.4 million
from May 15, 2007 through December 31, 2007, from
January 1, 2007 through May 14, 2007, in 2006 and in
2005, 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
Companys 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 Companys deferred rent balance was $24.2 million
at December 31, 2007 and $37.4 million at
December 31, 2006. Approximately $7.0 million of
Discoverys 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
$6.0 million over 2 years (see 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 Companys 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 $11.0 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 Companys results of
operations, cash flows, or financial position.
A-3-33
DISCOVERY
COMMUNICATIONS HOLDING, LLC
Notes to
Consolidated Financial
Statements (Continued)
|
|
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 $6.2 million, $5.5 million,
$9.9 million and $8.2 million from May 15, 2007
through December 31, 2007, from January 1, 2007
through May 14, 2007 in 2006 and in 2005, respectively.
|
|
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
DCIs 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 31.9 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
DCIs value 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 participants vested
units, if participants agree to comply with post-employment
obligations for one year in order to receive remaining benefits.
The Companys cash disbursements under the new plan
aggregated $75.6 million, $7.8 million and
$0.3 million from May 15, 2007 through
December 31, 2007, from January 1, 2007 through
May 14, 2007 and in 2006, respectively. There were no
payments during 2005 related to the new plan. DCIs cash
disbursements under the prior plans aggregated
$325.8 million during 2005.
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 DHCs industry peer group over the
corresponding periods. The weighted average assumptions used in
this option-pricing model were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
May 15 -
|
|
|
January 1 -
|
|
|
|
|
Weighted Average Assumptions
|
|
December 31, 2007
|
|
|
May 14, 2007
|
|
2006
|
|
2005
|
Risk-free interest rate
|
|
|
3.20
|
%
|
|
|
|
4.72
|
%
|
|
|
4.78
|
%
|
|
|
4.36
|
%
|
Expected term (years)
|
|
|
1.48
|
|
|
|
|
3.87
|
|
|
|
3.86
|
|
|
|
4.75
|
|
Expected volatility
|
|
|
27.93
|
%
|
|
|
|
23.78
|
%
|
|
|
27.06
|
%
|
|
|
30.36
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
The weighted average grant date fair values of units granted was
$29.65, $18.66, $16.51 and $15.81 from May 15, 2007 through
December 31, 2007, from January 1, 2007 through
May 14, 2007, in 2006 and in 2005, respectively. The
weighted average fair value of units outstanding was $11.68 and
$6.71 as of December 31, 2007
A-3-34
DISCOVERY
COMMUNICATIONS HOLDING, LLC
Notes to
Consolidated Financial
Statements (Continued)
and 2006, respectively. Compensation expense in connection with
the new plan was $78.5 million, $62.9 million,
$39.2 million and $29.1 million from May 15, 2007
through December 13, 2007, from January 1, 2007
through May 14, 2007, in 2006 and in 2005, respectively.
Included in the 2005 expense is $12.8 million related to
the exchange of the partially vested units which represents the
difference between the fair value of the award and the intrinsic
value of the award attributable to prior vesting. The accrued
fair values of units outstanding under the new plan were
$141.6 million and $84.5 million at December 31,
2007 and 2006.
The following table summarizes information about unit
transactions (units in millions) for the new plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
May 15 -
|
|
|
|
January 1 -
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
May 14, 2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Units
|
|
|
Price
|
|
|
|
Units
|
|
|
Price
|
|
|
Units
|
|
|
Price
|
|
|
Units
|
|
|
Price
|
|
Outstanding at Beginning of period
|
|
|
26.7
|
|
|
$
|
16.01
|
|
|
|
|
26.3
|
|
|
$
|
15.00
|
|
|
|
24.2
|
|
|
$
|
14.82
|
|
|
|
|
|
|
$
|
|
|
Units exchanged
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.8
|
|
|
|
12.77
|
|
Units granted
|
|
|
6.4
|
|
|
|
29.65
|
|
|
|
|
7.8
|
|
|
|
18.66
|
|
|
|
3.5
|
|
|
|
16.36
|
|
|
|
16.4
|
|
|
|
15.81
|
|
Units exercised
|
|
|
(1.1
|
)
|
|
|
15.69
|
|
|
|
|
(2.3
|
)
|
|
|
14.01
|
|
|
|
(0.1
|
)
|
|
|
13.12
|
|
|
|
|
|
|
|
|
|
Units redeemed/cancelled
|
|
|
(5.2
|
)
|
|
|
15.29
|
|
|
|
|
(5.1
|
)
|
|
|
15.82
|
|
|
|
(1.3
|
)
|
|
|
15.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
26.8
|
|
|
|
19.42
|
|
|
|
|
26.7
|
|
|
|
16.01
|
|
|
|
26.3
|
|
|
|
15.00
|
|
|
|
24.2
|
|
|
|
14.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at Period-end
|
|
|
6.6
|
|
|
$
|
13.97
|
|
|
|
|
6.5
|
|
|
$
|
13.84
|
|
|
|
8.5
|
|
|
$
|
13.78
|
|
|
|
1.6
|
|
|
$
|
11.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company classified as a current liability the entire long
term incentive plan liability of $141.6 million. At
December 31, 2007, there was $137.3 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 and 2006 is
$228.0 million and $82.0 million respectively. The
vested intrinsic value of outstanding units was
$94.2 million and $36.7 million at December 31,
2007 and 2006, respectively.
Domestic and foreign income (loss) before income taxes and
discontinued operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
May 15 -
|
|
|
|
January 1 -
|
|
|
|
|
|
|
|
Income From Continuing Operations
|
|
December 31,
|
|
|
|
May 14,
|
|
|
|
|
|
|
|
Before Taxes
|
|
2007
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Domestic
|
|
$
|
254,772
|
|
|
|
$
|
86,601
|
|
|
$
|
444,504
|
|
|
$
|
358,065
|
|
Foreign
|
|
|
7,733
|
|
|
|
|
15,374
|
|
|
|
(24,629
|
)
|
|
|
(4,450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before taxes
|
|
$
|
262,505
|
|
|
|
$
|
101,975
|
|
|
$
|
419,875
|
|
|
$
|
353,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A-3-35
DISCOVERY
COMMUNICATIONS HOLDING, LLC
Notes to
Consolidated Financial
Statements (Continued)
Income tax expense from continuing operations for the years
ended December 31, 2007, 2006 and 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
May 15 -
|
|
|
|
January 1 -
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
May 14,
|
|
|
|
|
|
|
|
Income Tax Expense
|
|
2007
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
in thousands
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
52,346
|
|
|
|
$
|
20,526
|
|
|
$
|
4,591
|
|
|
$
|
(1,479
|
)
|
State
|
|
|
7,079
|
|
|
|
|
5,064
|
|
|
|
5,695
|
|
|
|
(3,205
|
)
|
Foreign
|
|
|
28,185
|
|
|
|
|
16,634
|
|
|
|
59,879
|
|
|
|
57,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current income tax provision
|
|
|
87,610
|
|
|
|
|
42,224
|
|
|
|
70,165
|
|
|
|
52,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(65,091
|
)
|
|
|
|
4,618
|
|
|
|
114,986
|
|
|
|
106,182
|
|
State
|
|
|
9,879
|
|
|
|
|
9,023
|
|
|
|
3,707
|
|
|
|
16,298
|
|
Foreign
|
|
|
1,989
|
|
|
|
|
3,395
|
|
|
|
(3,637
|
)
|
|
|
(3,851
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax (benefit) expense
|
|
|
(53,223
|
)
|
|
|
|
17,036
|
|
|
|
115,056
|
|
|
|
118,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
(9,084
|
)
|
|
|
|
(7,097
|
)
|
|
|
5,160
|
|
|
|
1,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
25,303
|
|
|
|
$
|
52,163
|
|
|
$
|
190,381
|
|
|
$
|
173,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A-3-36
DISCOVERY
COMMUNICATIONS HOLDING, LLC
Notes to
Consolidated Financial
Statements (Continued)
Components of deferred tax assets and liabilities as of
December 31, 2007 and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
2007
|
|
|
|
2006
|
|
Deferred Income Tax Assets and Liabilities
|
|
Current
|
|
|
Non-current
|
|
|
|
Current
|
|
|
Non-current
|
|
|
|
in thousands
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss carryforwards
|
|
$
|
21,851
|
|
|
$
|
21,145
|
|
|
|
$
|
19,855
|
|
|
$
|
27,712
|
|
Compensation
|
|
|
58,762
|
|
|
|
9,489
|
|
|
|
|
30,981
|
|
|
|
15,563
|
|
Accrued expenses
|
|
|
11,161
|
|
|
|
13,232
|
|
|
|
|
12,088
|
|
|
|
14,981
|
|
Reserves and allowances
|
|
|
8,613
|
|
|
|
|
|
|
|
|
10,938
|
|
|
|
|
|
Tax credits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,574
|
|
Derivative financial instruments
|
|
|
|
|
|
|
6,992
|
|
|
|
|
|
|
|
|
3,141
|
|
Investments
|
|
|
|
|
|
|
13,337
|
|
|
|
|
|
|
|
|
10,445
|
|
Depreciation
|
|
|
|
|
|
|
16,169
|
|
|
|
|
|
|
|
|
|
|
Intangibles
|
|
|
|
|
|
|
68,293
|
|
|
|
|
|
|
|
|
104,078
|
|
Uncertain tax positions
|
|
|
|
|
|
|
28,089
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
4,769
|
|
|
|
17,024
|
|
|
|
|
4,301
|
|
|
|
20,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,156
|
|
|
|
193,770
|
|
|
|
|
78,163
|
|
|
|
205,391
|
|
Valuation allowance
|
|
|
|
|
|
|
(10,250
|
)
|
|
|
|
|
|
|
|
(26,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax assets
|
|
|
105,156
|
|
|
|
183,520
|
|
|
|
|
78,163
|
|
|
|
178,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,164
|
)
|
Content rights and deferred launch incentives
|
|
|
|
|
|
|
(156,654
|
)
|
|
|
|
|
|
|
|
(200,732
|
)
|
Foreign currency translation
|
|
|
|
|
|
|
(5,744
|
)
|
|
|
|
|
|
|
|
(12,936
|
)
|
Unrealized gains on investments
|
|
|
|
|
|
|
(24,970
|
)
|
|
|
|
|
|
|
|
(861
|
)
|
Other
|
|
|
(1,433
|
)
|
|
|
(6,771
|
)
|
|
|
|
(2,007
|
)
|
|
|
(4,435
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax liabilities
|
|
|
(1,433
|
)
|
|
|
(194,139
|
)
|
|
|
|
(2,007
|
)
|
|
|
(225,128
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets (liabilities), net
|
|
$
|
103,723
|
|
|
$
|
(10,619
|
)
|
|
|
$
|
76,156
|
|
|
$
|
(46,289
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A-3-37
DISCOVERY
COMMUNICATIONS 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
May 15 -
|
|
|
January 1 -
|
|
Year Ended December 31,
|
Reconciliation of Effective Tax Rate from Continuing
Operations
|
|
December 31, 2007
|
|
|
May 14, 2007
|
|
2006
|
|
2005
|
Federal statutory rate
|
|
|
35.0
|
%
|
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Increase (decrease) in tax rate arising from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of Federal benefit
|
|
|
2.4
|
|
|
|
|
1.9
|
|
|
|
1.5
|
|
|
|
3.2
|
|
Foreign income taxes, net of Federal benefit
|
|
|
7.5
|
|
|
|
|
12.8
|
|
|
|
7.7
|
|
|
|
9.7
|
|
Non-taxable gain
|
|
|
(17.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Travel deferred tax liabilities
|
|
|
(20.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in US reserve
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-deductible goodwill write-off
|
|
|
|
|
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
Domestic production deduction
|
|
|
(1.1
|
)
|
|
|
|
(1.8
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
0.8
|
|
|
|
|
(0.6
|
)
|
|
|
1.1
|
|
|
|
1.1
|
|
Effective income tax rate
|
|
|
9.6
|
%
|
|
|
|
51.2
|
%
|
|
|
45.3
|
%
|
|
|
49.0
|
%
|
The disposal of the Travel Business resulted in a gain of
$134.7 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 Companys deferred tax liabilities related
to the Travel Channel of $54.0 million.
As of December 31, 2007, the Company has federal operating
loss carryforwards of $93.3 million that begin to expire in
2021 and state operating loss carryforwards of
$296.9 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 carryforwards of $89.6 million. The state operating
loss carryforwards are subject to a valuation allowance of
$5.4 million. The change in the valuation allowance from
prior year reflects the elimination of fully reserved state
operating loss carryforwards 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 Companys 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 2005, 2006, and 2007
non-U.S. tax
returns could decrease by as much as $32.8 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 Companys
consolidated federal income tax return. However, some of the
Companys joint ventures are under examination for the 2004
tax year. The Company does not expect any significant
adjustments.
As a result of the implementation of FIN 48, the Company
recognized an increase of $36.3 million in its liability
for unrecognized tax benefits, which was offset in part by a
corresponding increase of $31.3 million in deferred tax
assets. The remaining $5.0 million was accounted for as a
reduction to the January 1, 2007 balance of
A-3-38
DISCOVERY
COMMUNICATIONS HOLDING, LLC
Notes to
Consolidated Financial
Statements (Continued)
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
|
|
|
|
|
Balance at January 1, 2007 (Predecessor)
|
|
$
|
91,375
|
|
Reductions for tax positions of prior years (Predecessor)
|
|
|
(412
|
)
|
Additions based on tax positions related to the current year
(Successor)
|
|
|
11,650
|
|
Additions for tax positions of prior years (Successor)
|
|
|
16,830
|
|
Reductions for tax positions of prior years (Successor)
|
|
|
(28,674
|
)
|
Settlements (Successor)
|
|
|
(2,035
|
)
|
|
|
|
|
|
Balance at December 31, 2007 (Successor)
|
|
$
|
88,734
|
|
|
|
|
|
|
Included in the balance at December 31, 2007, are
$9.5 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 $45.2 million (including related interest amounts) after
offsetting deferred tax assets, deductions,
and/or
credits on the Companys tax returns.
The Companys 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 $2.1 million, $1.3 million,
$0.8 million, and $0.9 million from May 15, 2007
through December 31, 2007, from January 1, 2007
through May 14, 2007, in 2006 and in 2005, respectively.
The Company had accrued approximately $6.4 million and
$2.3 million of total interest payable in the tax accounts
as of December 31, 2007, and 2006, respectively. Additional
interest of $0.7 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 Companys 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 $2,270.0 million and
$1,025.0 million and have a weighted average interest rate
of 4.68% and 5.09% at December 31, 2007 and 2006,
respectively. The fixed to variable interest rate agreements
have a notional principal amount of $225.0 million and have
a weighted average interest rate of 9.65% and 9.86% at
December 31, 2007 and 2006, respectively. At
December 31, 2007, the Company held an unexercised interest
rate swap put with a notional amount of $25.0 million at a
fixed rate of 5.44%. As a result of unrealized mark-to-market
adjustments, ($10.0) million, $1.4 million,
$10.4 million and $29.1 million in gains (losses) on
these instruments were recorded from May 15, 2007 through
December 31, 2007, from January 1, 2007 through
May 14, 2007, in 2006 and in 2005, respectively.
The fair value of these derivative instruments, which aggregate
($49.6) million and $8.5 million at December 31,
2007 and 2006, respectively, 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.
A-3-39
DISCOVERY
COMMUNICATIONS HOLDING, LLC
Notes to
Consolidated Financial
Statements (Continued)
Of the total of $2,270.0 million, a notional amount of
$1,460.0 million of these derivative instruments are 100%
effective cash flow hedges. The value of these hedges at
December 31, 2007 was ($32.5) 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 Companys 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 and 2006, the notional amount of foreign exchange
derivative contracts was $174.2 million and
$364.1 million, respectively. As a result of unrealized
mark-to-market adjustments, ($3.3) million,
($0.9) million, $2.0 million and ($2.3) million
in gains (losses) were recognized on these instruments from
May 15, 2007 through December 31, 2007, from
January 1, 2007 through May 14, 2007, in 2006 and in
2005, 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 Companys borrowings was
$4,141.1 million and the fair value was
$4,186.7 million at December 31, 2007. The carrying
amount of the Companys borrowings was
$2,641.0 million and the fair value was
$2,702.0 million at December 31, 2006.
The carrying amount of all derivative instruments represents
their fair value. The net fair value of the Companys short
and long-term derivative instruments is ($51.2) 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 Companys portfolio by approximately
$45.2 million.
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 Companys 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.
A-3-40
DISCOVERY
COMMUNICATIONS HOLDING, LLC
Notes to
Consolidated Financial
Statements (Continued)
|
|
18.
|
Related
Party Transactions
|
The Company identifies related parties as investors in their
consolidated subsidiaries, the Companys joint venture
partners and equity investments, and the Companys
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 $21.3 million, $46.9 million,
$90.0 million and $73.7 million from May 15, 2007
through December 31, 2007, from January 1, 2007
through May 14, 2007, in 2006 and in 2005, respectively.
Accounts receivable from these entities were $6.5 million
and $15.0 million at December 31, 2007 and 2006,
respectively. Purchases from related parties totaled
$54.8 million, $31.8 million, $83.3 million and
$71.4 million from May 15, 2007 through
December 31, 2007, from January 1, 2007 through
May 14, 2007, in 2006 and in 2005, respectively; of these
purchases, $5.1 million, $3.0 million,
$8.4 million and $23.1 million related to capitalized
assets from January 1, 2007 through May 14, 2007,
May 15, 2007 through December 31, 2007, in 2006 and in
2005 respectively. Amounts payable to these parties totaled
$0.6 million and $2.4 million at December 31,
2007 and 2006, respectively.
A-3-41
Execution
Copy
TRANSACTION
AGREEMENT
by and among
DISCOVERY HOLDING COMPANY,
DISCOVERY COMMUNICATIONS, INC.,
DHC MERGER SUB, INC.,
ADVANCE/NEWHOUSE PROGRAMMING PARTNERSHIP,
and with respect to Section 5.14 hereof only
ADVANCE PUBLICATIONS, INC., and
NEWHOUSE BROADCASTING CORPORATION
Dated as of June 4, 2008
TABLE OF
CONTENTS
|
|
|
|
|
|
|
|
|
|
|
Page
|
|
ARTICLE I Definitions and Usage
|
|
|
B-1
|
|
Section 1.01.
|
|
Definitions
|
|
|
B-1
|
|
Section 1.02.
|
|
Additional Terms
|
|
|
B-7
|
|
ARTICLE II Transactions and Closing
|
|
|
B-9
|
|
Section 2.01.
|
|
Pre-Closing Restructuring Transactions and AMG Spin-Off
|
|
|
B-9
|
|
Section 2.02.
|
|
Contributions and Merger
|
|
|
B-9
|
|
Section 2.03.
|
|
The Merger
|
|
|
B-10
|
|
Section 2.04.
|
|
Closing Date
|
|
|
B-13
|
|
Section 2.05.
|
|
ANPP Escrow Shares
|
|
|
B-14
|
|
ARTICLE III Representations and Warranties of DHC
|
|
|
B-14
|
|
Section 3.01.
|
|
Organization and Standing
|
|
|
B-14
|
|
Section 3.02.
|
|
Power and Authority; Execution and Delivery; Enforceability
|
|
|
B-14
|
|
Section 3.03.
|
|
Board and Stockholder Approval
|
|
|
B-15
|
|
Section 3.04.
|
|
No Conflicts; Consents
|
|
|
B-15
|
|
Section 3.05.
|
|
Capitalization of DHC; New DHC and Merger Sub
|
|
|
B-15
|
|
Section 3.06.
|
|
Subsidiaries
|
|
|
B-17
|
|
Section 3.07.
|
|
DHC Reports and Financial Statements; Debt and No Undisclosed
Material Liabilities
|
|
|
B-17
|
|
Section 3.08.
|
|
Registration Statement; Proxy Statement/Prospectus
|
|
|
B-18
|
|
Section 3.09.
|
|
Contracts
|
|
|
B-18
|
|
Section 3.10.
|
|
Absence of Changes or Events
|
|
|
B-19
|
|
Section 3.11.
|
|
Compliance with Laws
|
|
|
B-19
|
|
Section 3.12.
|
|
Litigation
|
|
|
B-19
|
|
Section 3.13.
|
|
Affiliate and Other Transactions
|
|
|
B-19
|
|
Section 3.14.
|
|
Brokers or Finders
|
|
|
B-19
|
|
Section 3.15.
|
|
Tax Matters
|
|
|
B-19
|
|
Section 3.16.
|
|
Employee Matters
|
|
|
B-20
|
|
Section 3.17.
|
|
Takeover Laws
|
|
|
B-20
|
|
Section 3.18.
|
|
Limitation on Warranties
|
|
|
B-20
|
|
ARTICLE IV Representations and Warranties of ANPP
|
|
|
B-21
|
|
Section 4.01.
|
|
Organization and Standing
|
|
|
B-21
|
|
Section 4.02.
|
|
Power and Authority; Execution and Delivery; Enforceability
|
|
|
B-21
|
|
Section 4.03.
|
|
No Conflicts; Consents
|
|
|
B-21
|
|
Section 4.04.
|
|
Ownership of ANPP Contributed Assets; DHC Shares
|
|
|
B-22
|
|
Section 4.05.
|
|
Registration Statement; Proxy Statement/Prospectus
|
|
|
B-22
|
|
Section 4.06.
|
|
Litigation
|
|
|
B-22
|
|
Section 4.07.
|
|
Brokers or Finders
|
|
|
B-22
|
|
Section 4.08.
|
|
Private Placement and Certain Tax Representations
|
|
|
B-23
|
|
Section 4.09.
|
|
Limitation on Warranties
|
|
|
B-23
|
|
ARTICLE V Agreements and Covenants
|
|
|
B-23
|
|
Section 5.01.
|
|
Covenants Relating to Conduct of Business
|
|
|
B-23
|
|
Section 5.02.
|
|
Access to Information
|
|
|
B-24
|
|
Section 5.03.
|
|
No Additional Options
|
|
|
B-24
|
|
B-i
|
|
|
|
|
|
|
|
|
|
|
Page
|
|
Section 5.04.
|
|
Confidentiality
|
|
|
B-24
|
|
Section 5.05.
|
|
Reasonable Best Efforts
|
|
|
B-24
|
|
Section 5.06.
|
|
Expenses; Transfer Taxes
|
|
|
B-25
|
|
Section 5.07.
|
|
Publicity
|
|
|
B-25
|
|
Section 5.08.
|
|
Stockholder Meeting; Registration Statement and Other SEC Filings
|
|
|
B-25
|
|
Section 5.09.
|
|
Notification of Certain Matters
|
|
|
B-26
|
|
Section 5.10.
|
|
Defense of Litigation
|
|
|
B-26
|
|
Section 5.11.
|
|
Section 16 Matters
|
|
|
B-27
|
|
Section 5.12.
|
|
Transaction Documents
|
|
|
B-27
|
|
Section 5.13.
|
|
Discovery Matters
|
|
|
B-27
|
|
Section 5.14.
|
|
ANPP Parents Undertaking
|
|
|
B-27
|
|
Section 5.15.
|
|
Tax Covenants
|
|
|
B-27
|
|
ARTICLE VI [Intentionally Omitted]
|
|
|
B-28
|
|
ARTICLE VII
|
|
Conditions Precedent
|
|
|
B-28
|
|
Section 7.01.
|
|
Conditions to Obligations of Each Party
|
|
|
B-28
|
|
Section 7.02.
|
|
Additional Conditions to ANPPs Obligations
|
|
|
B-29
|
|
Section 7.03.
|
|
Additional Conditions to the DHC Parties Obligations
|
|
|
B-29
|
|
Section 7.04.
|
|
Frustration of Closing Conditions
|
|
|
B-30
|
|
ARTICLE VIII Termination
|
|
|
B-30
|
|
Section 8.01.
|
|
Termination
|
|
|
B-30
|
|
Section 8.02.
|
|
Effect of Termination
|
|
|
B-30
|
|
ARTICLE IX Indemnification
|
|
|
B-31
|
|
Section 9.01.
|
|
Indemnification
|
|
|
B-31
|
|
Section 9.02.
|
|
Calculation of Losses
|
|
|
B-32
|
|
Section 9.03.
|
|
Defense of Claims
|
|
|
B-32
|
|
Section 9.04.
|
|
Survival
|
|
|
B-33
|
|
Section 9.05.
|
|
Tax Treatment
|
|
|
B-34
|
|
Section 9.06.
|
|
Exclusive Remedy
|
|
|
B-34
|
|
ARTICLE X Miscellaneous
|
|
|
B-34
|
|
Section 10.01.
|
|
Notices
|
|
|
B-34
|
|
Section 10.02.
|
|
No Third Party Beneficiaries
|
|
|
B-35
|
|
Section 10.03.
|
|
Waiver
|
|
|
B-35
|
|
Section 10.04.
|
|
Assignment
|
|
|
B-35
|
|
Section 10.05.
|
|
Integration
|
|
|
B-35
|
|
Section 10.06.
|
|
Captions
|
|
|
B-35
|
|
Section 10.07.
|
|
Counterparts
|
|
|
B-35
|
|
Section 10.08.
|
|
Severability
|
|
|
B-35
|
|
Section 10.09.
|
|
Governing Law
|
|
|
B-35
|
|
Section 10.10.
|
|
Jurisdiction
|
|
|
B-35
|
|
Section 10.11.
|
|
WAIVER OF JURY TRIAL
|
|
|
B-36
|
|
Section 10.12.
|
|
Specific Performance
|
|
|
B-36
|
|
Section 10.13.
|
|
Amendments
|
|
|
B-36
|
|
Section 10.14.
|
|
Interpretation
|
|
|
B-36
|
|
Section 10.15.
|
|
Rules of Construction
|
|
|
B-36
|
|
B-ii
Exhibits
|
|
|
Form of Escrow Agreement
|
|
Exhibit A
|
Form of Registration Rights Agreement
|
|
Exhibit B
|
Form of Reorganization Agreement
|
|
Exhibit C
|
Form of Tax Sharing Agreement
|
|
Exhibit D
|
Restated Certificate of Incorporation
|
|
Exhibit 2.01(c)(i)
|
Restated Bylaws
|
|
Exhibit 2.01(c)(ii)
|
Form of Rights Agreement
|
|
Exhibit 2.01(c)(iii)
|
Merger Agreement
|
|
Exhibit 2.03(a)
|
ANPP Tax Opinion Representations
|
|
Exhibit E
|
DHC Tax Opinion Representations
|
|
Exhibit F
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B-iii
TRANSACTION AGREEMENT (this
Agreement), dated as of June 4,
2008, by and among Discovery Holding Company, a Delaware
corporation (DHC), Discovery
Communications, Inc. a Delaware corporation and Wholly-Owned
Subsidiary of DHC (New DHC), DHC
Merger Sub, Inc., a Delaware corporation and Wholly-Owned
Subsidiary of New DHC (Merger Sub),
Advance/Newhouse Programming Partnership, a New York general
partnership (ANPP), and with respect
to Section 5.14 hereof only, Advance Publications, Inc., a
New York corporation (API), and
Newhouse Broadcasting Corporation, a New York corporation
(NBCo and together with API, the
ANPP Parents).
Preliminary
Statement
WHEREAS, DHC Beneficially Owns all of the membership interests
of Ascent Media Group, LLC, a Delaware limited liability company
(AMG), which, among other things,
operates the Audio Business (as defined below);
WHEREAS, the board of directors of DHC (the DHC
Board) has deemed it advisable and in the best
interest of DHC and its stockholders to effect the AMG Spin-Off
(as defined below) pursuant to this Agreement and the
Reorganization Agreement (as defined below), and the completion
of the AMG Spin-Off is a condition precedent to the transactions
contemplated by this Agreement;
WHEREAS, DHC is the Beneficial Owner of 25,200 limited liability
company interests (the DHC Discovery
Shares) of Discovery Communications Holding, LLC,
a Delaware limited liability company
(Discovery), and ANPP is the owner of
12,600 limited liability company interests (the ANPP
Discovery Shares) of Discovery;
WHEREAS, DHC is the Beneficial Owner of limited partnership
interests of Animal Planet, L.P., a Delaware limited partnership
(Animal Planet), representing 10% of
the outstanding partnership interests of Animal Planet (the
DHC AP Interests), and ANPP is the
owner of limited partnership interests of Animal Planet,
representing 5% of the outstanding ownership interest of Animal
Planet (such interests, the ANPP AP
Interests and, together with the ANPP Discovery
Shares, the ANPP Contributed Assets);
WHEREAS, upon the terms and conditions set forth in this
Agreement and the other Transaction Documents (as defined
below), (i) each of DHC, New DHC and ANPP desire that,
immediately following the AMG Spin-Off, ANPP contribute the ANPP
Discovery Shares and the ANPP AP Interests to New DHC in
exchange for shares of New DHC Preferred Stock (as defined
below) as provided herein, and (ii) the DHC Board has
deemed it advisable and in the best interest of DHC and its
stockholders to, immediately following the contribution
described in clause (i) of this recital, merge Merger Sub
with and into DHC, which will result in New DHC becoming the new
public parent company of Discovery and DHC (as the surviving
corporation in the merger with Merger Sub) will become a
Wholly-Owned Subsidiary of New DHC and shares of outstanding DHC
Common Stock (as defined below) will be converted into shares of
New DHC Common Stock (as defined below); and
NOW, THEREFORE, the parties hereto hereby agree as follows:
ARTICLE I
Definitions
and Usage
Section 1.01. Definitions. For
purposes of this Agreement, the following terms will have the
following meanings:
Affiliate of any specified Person means any
other Person directly or indirectly Controlling, Controlled by
or under direct or indirect common Control with such specified
Person; provided, that, for purposes of the foregoing,
neither DHC nor ANPP will be an Affiliate of Discovery or of
each other.
AMG Spin-Off means the distribution to the
holders of record of DHC Common Stock at the close of business
on the record date set by the DHC Board, of all the issued and
outstanding shares of capital stock of the Spin-Off Company on
the terms and conditions described in the Reorganization
Agreement.
B-1
Animal Planet Limited Partnership Agreement
means the Limited Partnership Agreement of Animal Planet L.P.,
dated as of December 20, 1996, by and among Animal Planet,
L.L.C., Liberty Animal Planet, Inc., NBCo and Cox Discovery,
Inc., as amended from time to time.
ANPP Tax Opinion Representations means the
representations set forth in a letter, which will be executed by
ANPP on such date as the DHC Tax Counsel or the ANPP Tax Counsel
issues its respective opinion and re-executed as of the Closing
Date, to be made by ANPP to the ANPP Tax Counsel and DHC Tax
Counsel as a condition to, and in connection with, the issuance
of the respective opinions of the ANPP Tax Counsel and DHC Tax
Counsel, including representations in form and substance as set
forth in Exhibit E to this Agreement (amended as
necessary to reflect changes in relevant facts occurring after
the date of this Agreement and on or before the execution or
re-execution date, as applicable).
Antitrust Division means the Antitrust
Division of the United States Department of Justice.
Audio Business means the businesses operated
in the United States by AMG and its subsidiaries under the brand
names Soundelux, Todd-AO, Sound One, POP Sound, Modern Music,
DMG and The Hollywood Edge, substantially all the assets and
Liabilities of which as of the date hereof are reflected on the
unaudited balance sheet of the Audio Company as of
December 31, 2007, and the operating results of which are
reflected on the unaudited Audio Business consolidated statement
of operations (adjusted) for the period ended December 31,
2007, a copy of each of which is set forth as
Schedule 1.01 hereto.
Audio Company means Ascent Media Creative
Sound Services, Inc., which following the DHC Restructuring will
own all of the businesses, assets, properties and Liabilities
comprising the Audio Business.
Beneficial Ownership or Beneficially
Own has the meaning given to such term in
Rule 13d-3
under the Exchange Act; provided, however, that
for purposes of determining Beneficial Ownership, a Person will
be deemed to be the Beneficial Owner of any securities which
such Person has the right to acquire (whether such right is
exercisable immediately or only after the passage of time or
occurrence of conditions) pursuant to any agreement, arrangement
or understanding (other than customary agreements with and
between underwriters and selling group members with respect to a
bona fide public offering of securities) or upon the exercise of
conversion rights, exchange rights, warrants, options, rights or
otherwise.
Business Day means any day other than
Saturday, Sunday or any day on which banks are required or
permitted to close in Denver, Colorado or New York, New York.
Code means the Internal Revenue Code of 1986,
as amended.
Communications Act means the Communications
Act of 1934, as amended, and the rules, regulations and
published orders of the FCC thereunder.
Contracts means all contracts, agreements,
commitments and other legally binding arrangements, whether oral
or written.
Control means, as used with respect to any
Person, the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of
a Person, whether through the ownership of voting securities, by
agreement or otherwise, and the terms Controlling,
Controlled by, and under common Control
with will have correlative meanings.
Current Effective Tax Rate means
(i) 8.4%, in the case of amounts received as dividends from
a domestic corporation for which the dividends received
deduction is allowed under Section 243(a) of the Code, as
modified by Section 243(c) of the Code (or any
corresponding provision of any successor statute) and
(ii) 42%, in all other cases, in each case, subject to
adjustment for any calendar year in which the highest federal
corporate Tax rate is other than the 35% Tax rate, or the
percentage of the dividends received deduction under
Section 243(a) of the Code (as modified by
Section 243(c) of the Code) is other than the 80%
deduction, included in the calculation of the applicable Tax
rate above.
Debt means, with respect to any Person at any
time, without duplication, (i) all obligations of such
Person for borrowed money; (ii) all obligations of such
Person evidenced by bonds, debentures, notes or other similar
instruments; (iii) all obligations of such Person to pay
the deferred purchase price of property or services, except
B-2
(x) trade accounts payable that arise in the ordinary
course of business and (y) obligations relating to employee
benefits or any other compensatory arrangements in favor of any
employee; (iv) all obligations of such Person as lessee
under capital leases other than capital leases relating to
equipment entered into in the ordinary course of business
consistent with past practice; (v) all obligations of such
Person, which such Person is required to, or may, at the option
of any other Person, become obligated to, redeem, repurchase or
retire; (vi) all Debt of others secured by a Lien on any
asset of such Person; and (vii) all Debt of others
guaranteed by such Person.
DHC Common Stock means the DHC Series A
Common Stock, the DHC Series B Common Stock and the DHC
Series C Common Stock.
DHC Incentive Plans means the Discovery
Holding Company 2005 Incentive Plan (As Amended and Restated
Effective August 15, 2007), the Discovery Holding Company
2005 Non-Employee Director Plan (As Amended and Restated
Effective August 15, 2007) and the Discovery Holding
Company Transitional Stock Adjustment Plan (As Amended and
Restated Effective August 15, 2007).
DHC Parties means, collectively, DHC, New DHC
and Merger Sub.
DHC Plan means each bonus, deferred
compensation, incentive compensation, stock purchase, stock
option, severance or termination pay, hospitalization, medical,
life or other insurance, supplemental unemployment benefits,
profit-sharing, pension or retirement plan, program, agreement
or arrangement, and each other employee benefit plan, program,
agreement or arrangement, sponsored, maintained or contributed
to or required to be contributed to at any time since
March 9, 2005 by DHC or by any trade or business, whether
or not incorporated (DHC ERISA
Affiliate), that together with DHC would be deemed
a controlled group within the meaning of
Section 4001(a)(14) of ERISA, for the benefit of any
employee, director or former employee or director of DHC or any
DHC ERISA Affiliate including any such type of plan established,
maintained or contributed to under the laws of any foreign
country; provided, however, that DHC Plan will not
include any such plan or arrangement maintained by
(i) Discovery or any Subsidiary of Discovery, (ii) the
Spin-Off Company or any Subsidiary of the Spin-Off Company, or
(iii) the Audio Company or any Subsidiary of the Audio
Company.
DHC Restructuring means the restructuring
effected by DHC and its Subsidiaries pursuant to the steps set
forth on Schedule 1.02 hereto.
DHC Rights Agreement means the Rights
Agreement, dated as of July 18, 2005, between DHC and
Computershare Trust Company, N.A., as Rights Agent.
DHC Series A Common Stock means the
Series A Common Stock, par value $0.01 per share, of DHC
(including the DHC Series A Right attached thereto).
DHC Series B Common Stock means the
Series B Common Stock, par value $0.01 per share, of DHC
(including the DHC Series B Right attached thereto).
DHC Series C Common Stock means the
Series C Common Stock, par value $0.01 per share, of DHC
(including the DHC Series C Right attached thereto).
DHC Series A Right has the meaning
ascribed to it in the DHC Rights Agreement.
DHC Series B Right has the meaning
ascribed to it in the DHC Rights Agreement.
DHC Series C Right has the meaning
ascribed to it in the DHC Rights Agreement.
DHC Tax Opinion Representations means the
representations set forth in a letter, which will be executed by
DHC on such date as the DHC Tax Counsel or the ANPP Tax Counsel
issues its respective opinion and re-executed as of the Closing
Date, to be made by DHC to the DHC Tax Counsel and ANPP Tax
Counsel as a condition to, and in connection with, the issuance
of the respective opinions of the DHC Tax Counsel and the ANPP
Tax Counsel, including representations in form and substance as
set forth in Exhibit F to this Agreement (amended as
necessary to reflect changes in relevant facts occurring after
the date of this Agreement and on or before the execution or
re-execution date, as applicable).
B-3
Discovery Limited Liability Company Agreement
means the Amended and Restated Limited Liability Company
Agreement of Discovery Communications Holding, LLC, dated as of
May 14, 2007, by and among ANPP, LMC Discovery, Inc. and
John S. Hendricks.
DGCL means the Delaware General Corporation
Law, as amended from time to time.
Escrow means the escrow account established
pursuant to the Escrow Agreement.
Escrow Agent means an entity mutually
agreeable to New DHC and ANPP to serve as escrow agent under the
Escrow Agreement.
Escrow Agreement means the agreement between
New DHC and ANPP in substantially the form of
Exhibit A (subject to any reasonable changes
requested by the Escrow Agent), pursuant to which, among other
matters, ANPP and New DHC will establish the Escrow pursuant to
the terms and conditions set forth in Section 2.05.
Exchange Act means the Securities Exchange
Act of 1934, as amended, and the rules and regulations
thereunder.
Fair Market Value means with respect to a
share of any series of New DHC Common Stock on any day, the last
sale price (or, if no last sale price is reported, the average
of the high bid and low asked prices) for a share of the
applicable series of New DHC Common Stock on such day (or if
such day is not a trading day, the next trading day) as reported
on the Nasdaq Stock Market, Inc. or if such shares are not then
listed on the Nasdaq Stock Market, Inc., as reported on the
consolidated transaction reporting system for the principal
national securities exchange on which shares of the applicable
series of New DHC Common Stock are listed on such day; provided,
that, if for any day the Fair Market Value of a share of the
applicable series of New DHC Common Stock is not determinable by
any of the foregoing means, then the Fair Market Value for such
day shall be determined in good faith by the board of directors
of New DHC or any committee thereof on the basis of such
quotations and other considerations as the board or its
committee deems appropriate.
FCC means the United States Federal
Communications Commission, including a bureau or subdivision
thereof acting on delegated authority.
FTC means the United States Federal Trade
Commission.
GAAP means generally accepted accounting
principles as accepted by the accounting profession in the
United States as in effect from time to time, consistently
applied.
Governmental Authority means any
supranational, national, federal, state or local government,
foreign or domestic, or the government of any political
subdivision of any of the foregoing, or any entity, authority,
agency, ministry, department, board, commission, court or other
similar body exercising executive, legislative, judicial,
regulatory or administrative authority or functions of or
pertaining to government, including any authority or other
quasi-governmental entity established by a Governmental
Authority to perform any of such functions.
HSR Act means the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the rules
and regulations promulgated thereunder.
Income Tax means all Taxes based on or
measured by net income.
Law means any federal, state, local or
foreign law, statute or ordinance, common law or any rule,
regulation, standard, judgment, order, writ, injunction, decree,
arbitration award, agency requirement, license or permit of a
Governmental Authority, including any of the foregoing as they
relate to Tax.
Liabilities means any and all debts,
liabilities, commitments and obligations, whether or not fixed,
contingent or absolute, matured or unmatured, direct or
indirect, liquidated or unliquidated, accrued or unaccrued,
known or unknown, and whether or not required by GAAP to be
reflected in financial statements or disclosed in the notes
thereto.
Lien means any lien, mortgage, pledge,
security interest, encumbrance or other similar security
arrangement which grants to any Person any security interest,
including any restriction on the transfer of any asset, any
right of
B-4
first offer, right of first refusal, right of first negotiation
or any similar right in favor of any Person, any restriction on
the receipt of any income derived from any asset and any
limitation or restriction on the right to own, vote, sell or
otherwise dispose of any security, but excluding any such
restrictions, limitations and other encumbrances for Taxes not
yet due and payable.
Loss means any loss, liability, claim, damage
or expense (including reasonable legal fees and expenses).
New DHC Common Stock means the New DHC
Series A Common Stock, the New DHC Series B Common
Stock and the New DHC Series C Common Stock.
New DHC Preferred Stock means the New DHC
Series A Preferred Stock and the New DHC Series C
Preferred Stock.
New DHC Rights means, collectively, the New
DHC Series A Rights, the New DHC Series B Rights and
the New DHC Series C Rights.
New DHC Series A Common Stock means the
Series A Common Stock, par value $0.01 per share, of New
DHC (including, after the Effective Time of the Merger, the New
DHC Series A Right attached thereto pursuant to the New DHC
Rights Agreement).
New DHC Series B Common Stock means the
Series B Common Stock, par value $0.01 per share, of New
DHC (including, after the Effective Time of the Merger, the New
DHC Series B Right attached thereto pursuant to the New DHC
Rights Agreement).
New DHC Series C Common Stock means the
Series C Common Stock, par value $0.01 per share, of New
DHC (including, after the Effective Time of the Merger, the New
DHC Series C Right attached thereto pursuant to the New DHC
Rights Agreement).
New DHC Series A Preferred Stock means
the Series A Convertible Participating Preferred Stock, par
value $0.01 per share, of New DHC (including, after the
Effective Time of the Merger, the New DHC Series A Right
attached thereto pursuant to the New DHC Rights Agreement).
New DHC Series C Preferred Stock means
the Series C Convertible Participating Preferred Stock, par
value $0.01 per share, of New DHC (including, after the
Effective Time of the Merger, the New DHC Series C Right
attached thereto pursuant to the New DHC Rights Agreement).
New DHC Series A Right means a
Series A Right (as defined in the New DHC Rights Agreement).
New DHC Series B Right means a
Series B Right (as defined in the New DHC Rights Agreement).
New DHC Series C Right means a
Series C Right (as defined in the New DHC Rights Agreement).
Permitted Liens means, collectively,
(i) all statutory or other liens for taxes or assessments
which are not yet due or the validity of which is being
contested in good faith by appropriate proceedings,
(ii) all mechanics, material mens,
carriers, workers and repairers liens, and
other similar liens imposed by law, incurred in the ordinary
course of business, which allege unpaid amounts that are less
than 30 days delinquent or which are being contested in
good faith by appropriate proceedings, and (iii) all other
Liens which do not materially detract from or materially
interfere with the marketability, value or present use of the
asset subject thereto or affected thereby.
Person means any individual, firm,
corporation, partnership, limited liability company, trust,
joint venture, Governmental Authority or other entity.
Registration Rights Agreement means the
agreement between New DHC and ANPP relating to the registration
of shares of New DHC Common Stock issuable upon conversion of
shares of New DHC Preferred Stock, in substantially the form of
Exhibit B hereto.
Related Party means any Affiliate of a
Person; provided, that, for the purposes of this
definition only, without limiting the generality of the
definition of Affiliate, any Person (First
Person) that directly or indirectly owns and has
the right to vote or direct the vote (in the election of
directors) of securities of another Person (Other
Person) constituting 25% or more of the
outstanding voting power of such Other Person will be deemed to
Control such Other Person, so long as no other securityholder of
such Other Person directly or indirectly owns and has the
B-5
right to vote or direct the vote (in the election of directors)
of securities of such Other Person constituting a greater
percentage of the outstanding voting power that is owned by such
First Person in such Other Person.
Retained Subsidiaries means the Subsidiaries
of DHC, after giving effect to the DHC Restructuring, other than
the Spin-Off Company, the Audio Company and their respective
Subsidiaries.
SEC means the United States Securities and
Exchange Commission.
Securities Act means the Securities Act of
1933, as amended, and the rules and regulations thereunder.
Reorganization Agreement means the agreement
relating to the AMG Spin-Off by and among DHC, AMG and certain
of their Subsidiaries, in substantially the form of
Exhibit C hereto.
Spin-Off Effective Time has the meaning
ascribed to such term in the Reorganization Agreement.
Subsidiary when used with respect to any
Person, means any other Person (1) of which (x) in the
case of a corporation, at least (A) a majority of the
equity and (B) a majority of the voting interests are owned
or Controlled, directly or indirectly, by such first Person, by
any one or more of its Subsidiaries, or by such first Person and
one or more of its Subsidiaries or (y) in the case of any
Person other than a corporation, such first Person, one or more
of its Subsidiaries, or such first Person and one or more of its
Subsidiaries (A) owns a majority of the equity interests
thereof and (B) has the power to elect or direct the
election of a majority of the members of the governing body
thereof or otherwise has Control over such organization or
entity; or (2) that is required to be consolidated with
such first Person for financial reporting purposes under GAAP;
provided that, for purposes of this Agreement, unless
otherwise specified, prior to the Closing neither Discovery nor
any of its Subsidiaries will be deemed to be Subsidiaries of
(x) DHC or any of DHCs Subsidiaries or (y) ANPP
or any of ANPPs Subsidiaries, whether or not such entities
would otherwise be Subsidiaries of DHC or any of DHCs
Subsidiaries or ANPP or any of ANPPs Subsidiaries, as
applicable, under the foregoing definition.
Tax Return means a report, return or other
information required to be supplied to or filed with a Taxing
Authority with respect to any Tax including an information
return, claim for refund, amended Tax Return or declaration of
estimated Tax.
Taxes means (i) all taxes (whether
federal, state, local or foreign) based upon or measured by
income and any other tax whatsoever, including gross receipts,
profits, sales, use, occupation, value added, ad valorem,
transfer, franchise, withholding, payroll, employment, excise,
or property taxes, and all unclaimed property assessments,
together with any interest or penalties imposed with respect
thereto and (ii) any obligations under any agreements or
arrangements with respect to any Taxes described in
clause (i) above.
Taxing Authority means any Governmental
Authority having jurisdiction over the assessment,
determination, collection or other imposition of Tax.
Tax Sharing Agreement means the agreement
among DHC, New DHC, the Spin-Off Company and the other parties
thereto, in substantially the form of Exhibit D hereto.
Transaction Documents means this Agreement,
the Merger Agreement, the Reorganization Agreement, the
Registration Rights Agreement and the Escrow Agreement,
collectively.
Transactions means the transactions
contemplated by the Transaction Documents.
Unconditional Time means such time prior to
the Spin-Off Effective Time as all conditions to each
partys obligation to consummate the Transactions have been
satisfied or waived, other than the delivery of (v) the
certificates specified in Sections 7.02(c) and 7.03(c),
(w) the DHC Tax Opinion Representations and the ANPP Tax
Opinion Representations, (x) the opinions of ANPP Tax
Counsel and DHC Tax Counsel pursuant to Sections 7.02(d)
and 7.03(d), respectively, (y) all documents and
instruments necessary to effect the ANPP Contribution (including
share, limited liability company interest or limited partnership
interest certificates, if any, or other instruments evidencing
the ANPP Contribution Shares and the ANPP Contributed Assets)
and (z) all documents and instruments necessary to effect
the Merger (including the Certificate of Merger), each of which
have been validly executed by the applicable party.
B-6
VWAP means, (i) with respect to the DHC
Series A Common Stock or DHC Series B Common Stock,
the average of the daily volume weighted average prices of such
security over the 5-trading days ending on the trading day
immediately preceding the Closing Date or, if applicable, the
trading day immediately preceding the first date on which the
DHC Series A Common Stock or DHC Series B Common
Stock, as applicable, trades regular way on the Nasdaq Global
Select Market without the right to receive shares of common
stock of the Spin-Off Company, and (ii) with respect to the
New DHC Series A Common Stock, New DHC Series B Common
Stock, New DHC Series C Common Stock, Series A common
stock of the Spin-Off Company or Series B common stock of
the Spin-Off Company, the average of the daily volume weighted
average prices of such security over the 10-trading days
beginning on the day immediately following the Closing.
Wholly-Owned Subsidiary means, as to any
Person, a Subsidiary of such Person, 100% of the equity and
voting interest in which is owned beneficially or of record,
directly
and/or
indirectly, by such Person.
Section 1.02. Additional
Terms. As used in this Agreement, the
following terms will have the meanings set forth in the
referenced sections of this Agreement:
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Term
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Section
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Agreement
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Preamble
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AMG
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Preliminary Statement
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Animal Planet
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Preliminary Statement
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ANPP
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Preamble
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ANPP AP Interests
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Preliminary Statement
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ANPP Indemnified Parties
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Section 9.01(a)(i)
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ANPP Contribution
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Section 2.02(a)
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ANPP Contributed Assets
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Preliminary Statement
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ANPP Contribution Shares
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Section 2.02(a)
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ANPP Discovery Shares
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Preliminary Statement
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ANPP Escrow Shares
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Section 2.02(a)
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ANPP Parents
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Preamble
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ANPP Tax Counsel
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Section 7.02(d)
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Antitrust Laws
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Section 5.05(b)(ii)
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API
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Preamble
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Balance Sheet
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Section 3.07(b)
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Carryover Director
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Section 2.03(d)(ii)
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Certificate of Merger
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Section 2.03(a)
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Closing
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Section 2.04
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Closing Date
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Section 2.04
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Closing Documents
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Section 5.12(b)
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Contribution Effective Time
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Section 2.02(a)
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Converted Options
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Section 2.03(d)(iv)
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Converted Series A Option
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Section 2.03(d)(i)
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Converted Series B Option
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Section 2.03(d)(iv)
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DHC
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Preamble
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DHC AP Interests
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Preliminary Statement
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DHC Board
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Preliminary Statement
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DHC Bylaws
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Section 2.03(e)
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DHC Charter
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Section 2.03(e)
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DHC Discovery Shares
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Preliminary Statement
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DHC Group
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Section 3.15(b)
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Term
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Section
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DHC Indemnified Parties
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Section 9.01(b)
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DHC Preferred Stock
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Section 3.05(a)(i)
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DHC SEC Filings
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Section 3.07(a)
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DHC Stockholder Approval
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Section 3.03
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DHC Tax Counsel
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Section 7.03(d)
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Director Series A Option
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Section 2.03(d)(ii)
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Discovery
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Preliminary Statement
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Effective Time
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Section 2.03(a)
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Existing New DHC Common Stock
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Section 3.05(c)(i)
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Indemnified Party
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Section 9.03(a)
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Indemnifying Party
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Section 9.03(a)
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LMC
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Section 3.15(b)
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LMC Group
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Section 3.15(b)
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Loss Percentage
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Section 9.02
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Material Contracts
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Section 3.09
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Merger
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Section 2.03(a)
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Merger Agreement
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Section 2.03(a)
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Merger Sub
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Preamble
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NBCo
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Preamble
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New DHC
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Preamble
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New DHC Bylaws
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Section 2.01(c)(ii)
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New DHC Charter
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Section 2.01(c)(i)
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New DHC Rights Agreement
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Section 2.01(c)(iii)
|
Nondisclosure Agreement
|
|
Section 5.04
|
Proxy Statement/Prospectus
|
|
Section 5.08(b)
|
Registration Statement
|
|
Section 5.08(b)
|
Rights Dividend
|
|
Section 2.03(c)
|
Rollover SARs
|
|
Section 2.03(d)(iii)
|
Scheduled Series A Option
|
|
Section 2.03(d)(i)
|
Series A Option
|
|
Section 2.03(d)(iii)
|
Series B Option
|
|
Section 2.03(d)(iv)
|
Series C Option
|
|
Section 2.03(d)(i)
|
Series A SAR
|
|
Section 2.03(d)(iii)
|
Series C SAR
|
|
Section 2.03(d)(iii)
|
Special Meeting
|
|
Section 5.08(a)
|
Spin-Off Company
|
|
Section 2.01(a)(i)
|
Spin-Off Company Series A Option
|
|
Section 2.03(d)(i)
|
Spin-Off Company Series B Option
|
|
Section 2.03(d)(iv)
|
Submission
|
|
Section 5.05(b)
|
Surviving Entity
|
|
Section 2.03(a)
|
Transfer Taxes
|
|
Section 5.06(b)
|
Voting Subsidiary Debt
|
|
Section 3.06(a)
|
B-8
ARTICLE II
Transactions
and Closing
Upon the terms and subject to the conditions set forth herein,
the parties will consummate each of the following transactions.
Section 2.01. Pre-Closing
Restructuring Transactions and AMG Spin-Off.
(a) After the Unconditional Time, but prior to the Spin-Off
Effective Time, DHC will complete the DHC Restructuring such
that after the DHC Restructuring:
(i) DHC will be the sole shareholder of an entity (the
Spin-Off Company) that owns
(x) all of the businesses, assets, properties and
Liabilities currently held by AMG, other than the businesses,
assets, properties and Liabilities comprising the Audio Business
and (y) all cash and cash equivalents held by DHC
immediately prior to the Closing (other than, at the sole
discretion of DHC, cash held in bank accounts in the name of
Audio Company or any of its Subsidiaries); and
(ii) DHC, the Retained Subsidiaries and the Audio Company
and its Subsidiaries will hold all of the businesses, assets,
properties and Liabilities currently held by DHC, other than
those businesses, assets (including all cash and cash
equivalents held by DHC immediately prior to the Closing (other
than, at the sole discretion of DHC, cash held in bank accounts
in the name of Audio Company or any of its Subsidiaries)),
properties and Liabilities transferred to the Spin-Off Company.
(b) Following the Unconditional Time and the completion of
the DHC Restructuring, but prior to the Contribution Effective
Time (as defined below), DHC will take all actions within its
control legally required to effect the AMG Spin-Off. The parties
agree that, notwithstanding any other provision of this
Agreement, DHC and its Subsidiaries, and to the extent
applicable, Discovery and its Subsidiaries, are expressly
authorized and permitted to take the actions contemplated in
Article II.
(c) Prior to the Contribution Effective Time, New DHC will:
(i) cause the Certificate of Incorporation of New DHC
(New DHC Charter) to be restated as
set forth in Exhibit 2.01(c)(i) and filed with the
Delaware Secretary of State;
(ii) cause the Bylaws (New DHC
Bylaws) of New DHC to be restated as set forth in
Exhibit 2.01(c)(ii); and
(iii) execute and deliver to the Computershare
Trust Company, N.A., the Rights Agreement between New DHC
and the Computershare Trust Company, N.A., in substantially
the form of Exhibit 2.01(c)(iii) hereof (the
New DHC Rights Agreement).
Section 2.02. Contributions
and Merger. At the Closing, immediately
following the consummation of the AMG Spin-Off, upon the terms
and subject to the conditions set forth in this Agreement and in
the order set forth below (and otherwise substantially
concurrently):
(a) ANPP will contribute, convey, transfer, assign and
deliver to New DHC (the ANPP
Contribution), free and clear of all Liens, the
ANPP Contributed Assets, in exchange for (i) a number of
shares of New DHC Series A Preferred Stock equal to
one-half of the sum of (x) the aggregate number of shares
of New DHC Series A Common Stock to be issued in the Merger
and (y) the aggregate number of shares of New DHC
Series B Common Stock to be issued in the Merger,
(ii) a number of shares of New DHC Series C Preferred
Stock equal to one-half of the aggregate number of shares of New
DHC Series C Common Stock to be issued in the Merger,
(iii) an additional number of shares of New DHC
Series A Preferred Stock equal to one-half of the sum of
(x) the aggregate number of shares of New DHC Series A
Common Stock to which the Series A SARs (as defined below)
relate, (y) the aggregate number of shares of New DHC
Series A Common Stock issuable upon exercise of the
Converted Series A Options (as defined below) and
(z) the aggregate number of shares of New DHC Series B
Common Stock issuable upon exercise of the Converted
Series B Option (as defined below), and (iv) an
additional number of shares of New DHC Series C Preferred
Stock equal to one-half of the sum of (x) the aggregate
number of shares of New DHC Series C Common Stock to which
the Series C SARs
B-9
(as defined below) relate and (y) the aggregate number of
shares of New DHC Series C Common Stock issuable upon
exercise of the Series C Options (as defined below) (such
additional shares of New DHC Preferred Stock referenced in
(iii) and (iv) (including any shares of New DHC Common
Stock issuable upon conversion of such shares of New DHC
Preferred Stock) are referred to collectively as the
ANPP Escrow Shares, and together with
the other shares of New DHC Preferred Stock referenced in
(i) and (ii) are referred to collectively as the
ANPP Contribution Shares). The
contribution, conveyance, transfer and assignment by ANPP of the
ANPP Contributed Assets will be evidenced by duly endorsed in
blank limited liability company interest or limited partnership
interest certificates, if any, or by instruments of transfer
reasonably satisfactory in form and substance to DHC, and the
issuance of the ANPP Contribution Shares by New DHC to ANPP will
be evidenced by share certificates or by instruments reasonably
satisfactory in form and substance to ANPP. The time at which
the ANPP Contribution is completed pursuant to this
Section 2.02(a) is referred to as the
Contribution Effective Time. The ANPP
Escrow Shares will be issued by New DHC to ANPP no later than
the second Business Day after the number of shares of New DHC
Common Stock subject to the Series A SARs, the Converted
Series A Options, Converted Series B Options,
Series C SARs and Series C Options is determined as
provided in Section 2.03(d) below.
(b) DHC, New DHC and Merger Sub will effect the Merger, as
described in Section 2.03 below.
Section 2.03. The
Merger.
(a) Simultaneously with the execution and delivery of this
Agreement, DHC, New DHC and Merger Sub have entered into an
Agreement and Plan of Merger, dated the date hereof, a copy of
which is attached hereto as Exhibit 2.03(a) (the
Merger Agreement). As described in
Section 2.02, upon the terms and conditions of the Merger
Agreement and immediately following the Contribution Effective
Time, Merger Sub will merge (the
Merger) with and into DHC in
accordance with the provisions of the DGCL, and upon the
Effective Time, the separate corporate existence of Merger Sub
will cease and DHC will continue as the surviving entity in the
Merger (the Surviving Entity). The
Effective Time of the Merger (the Effective
Time) will be on the date and at the time that the
certificate of merger with respect to the Merger, containing the
provisions required by, and executed in accordance with
Section 251 of the DGCL (the Certificate of
Merger), has been accepted for filing by the
Delaware Secretary of State, and all other documents required by
the DGCL to effectuate the Merger will have been properly
executed and filed (or such later date and time as may be
specified in the Certificate of Merger); provided that,
under no circumstances, will the Effective Time of the Merger
occur prior to the Spin-Off Effective Time or the Contribution
Effective Time.
(b) From and after the Effective Time of the Merger, the
Merger will have the effects set forth in the DGCL (including
Sections 259, 260 and 261 thereof) and the Merger
Agreement, the terms of which are incorporated into this
Section 2.03. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time of the
Merger, all the properties, rights, privileges, powers and
franchises of DHC and Merger Sub will vest in the Surviving
Entity, and all debts, liabilities and duties of DHC and Merger
Sub will, by operation of law, become the debts, liabilities and
duties of the Surviving Entity.
(c) By virtue of the Merger and as more fully described in
the Merger Agreement, at the Effective Time of the Merger:
(i) each share of DHC Series A Common Stock
outstanding immediately prior to the Effective Time of the
Merger (together with the DHC Series A Right attached
thereto) will be converted into and represent the right to
receive, and will be exchangeable for, 0.50 shares of New
DHC Series A Common Stock and 0.50 shares of New DHC
Series C Common Stock;
(ii) each share of DHC Series B Common Stock
outstanding immediately prior to the Effective Time of the
Merger (together with the DHC Series B Right attached
thereto) will be converted into and represent the right to
receive and will be exchangeable for, 0.50 shares of New
DHC Series B Common Stock and 0.50 shares of New DHC
Series C Common Stock;
(iii) each share of DHC Series A Common Stock and DHC
Series B Common Stock held in treasury of DHC immediately
prior to the Effective Time of the Merger will be canceled and
retired without payment of any consideration therefor and
without any conversion thereof; and
B-10
(iv) each share of common stock of Merger Sub issued and
outstanding immediately prior to the Effective Time of the
Merger will be converted into one share of the common stock of
the Surviving Entity and the shares of common stock of the
Surviving Entity so issued in such conversion will constitute
the only outstanding shares of capital stock of the Surviving
Entity.
Immediately after the Effective Time of the Merger, the board of
directors of New DHC will declare a dividend (the
Rights Dividend) of preferred share
purchase rights pursuant to the New DHC Rights Agreement to
holders of New DHC Common Stock of record as of the Effective
Time of the Merger and the holders of the New DHC Preferred
Stock. The Rights Dividend will consist of one New DHC
Series A Right for each share of New DHC Series A
Common Stock issued in the Merger, one New DHC Series B
Right for each share of New DHC Series B Common Stock
issued in the Merger, one New DHC Series C Right for each
share of New DHC Series C Common Stock issued in the
Merger, one New DHC Series A Right for each share of New
DHC Series A Preferred Stock outstanding immediately
following the Merger, and one New DHC Series C Right for
each share of New DHC Series C Preferred Stock outstanding
immediately following the Merger. Notwithstanding anything to
the contrary contained herein, in the New DHC Charter or any of
the Transaction Documents, ANPP hereby acknowledges and agrees
to, and ANPP will not object to, the adoption and entering into
by New DHC of the New DHC Rights Agreement, the declaration and
distribution of the Rights Dividend and the filing of the
Certificates of Designation (in substantially the form attached
to the New DHC Rights Agreement) establishing the rights,
preferences and designations of the series of preferred stock
issuable upon exercise of the applicable New DHC Rights.
(d) Treatment of Options.
(i) At the Effective Time of the Merger, each of the then
outstanding stock options, if any, to purchase shares of DHC
Series A Common Stock set forth on Schedule 2.03(d)
hereto (each, a Scheduled Series A
Option) issued by DHC pursuant to the DHC
Incentive Plans, will, by virtue of the AMG Spin-Off and the
Merger, and without any further action on the part of any holder
thereof, be converted into (A) an option (a
Converted Series A Option) to
purchase shares of New DHC Series A Common Stock in an
amount and at an exercise price as determined below, (B) an
option (a Series C Option) to
purchase shares of New DHC Series C Common Stock in an
amount and at an exercise price as determined below, and
(C) an option (a Spin-Off Company Series A
Option) to purchase shares of Series A common
stock of the Spin-Off Company in an amount and at an exercise
price as determined below. The exercise price of such Converted
Series A Option, Series C Option and Spin-Off Company
Series A Option will be equal to the applicable VWAP for
the series of common stock subject to such option, multiplied
by a fraction, the numerator of which is the exercise price
of such Scheduled Series A Option and the denominator of
which is the VWAP for the DHC Series A Common Stock. The
number of shares of New DHC Series A Common Stock, New DHC
Series C Common Stock and Series A common stock of the
Spin-Off Company subject to the Converted Series A Option,
Series C Option and Spin-Off Company Series A Option,
as applicable, will be determined so that the aggregate amount
by which the Scheduled Series A Option was
in-the-money or out-of-the-money, as
applicable, immediately prior to the Transactions (determined
according to the VWAP for the DHC Series A Common Stock) is
preserved immediately following the Transactions (allocating
such aggregate in-the-money or
out-of-the-money amounts according to the applicable
VWAP for the New DHC Series A Common Stock, New DHC
Series C Common Stock and Series A common stock of the
Spin-Off Company). The terms and conditions of each Converted
Series A Option, Series C Option and Spin-Off Company
Series A Option, including vesting conditions (which will
not be accelerated by the Transactions) and the scheduled
expiration date, will otherwise remain as set forth in the
Scheduled Series A Option converted into such Converted
Series A Option, Series C Option and Spin-Off Company
Series A Option. If the foregoing calculation results in a
Converted Series A Option, Series C Option or Spin-Off
Company Series A Option being exercisable for a fraction of
a share of New DHC Series A Common Stock, New DHC
Series C Common Stock or Series A common stock of the
Spin-Off Company, as applicable, then the number of shares of
New DHC Series A Common Stock, New DHC Series C Common
Stock or Series A common stock of the Spin-Off Company, as
applicable, subject to such option will be rounded down to the
nearest whole number of shares, with no cash being payable for
such fractional share.
(ii) At the Effective Time of the Merger, each of the then
outstanding stock options, if any, to purchase shares of DHC
Series A Common Stock (excluding any Scheduled
Series A Options and any such options that are, at the
option of the holder, exercisable for shares of DHC
Series A Common Stock or DHC Series B Common Stock)
held by those members of the DHC Board (other than those
directors that hold Scheduled Series A Options) as of the
date
B-11
of this Agreement who will be directors of New DHC immediately
after the Effective Time of the Merger (each, a
Director Series A Option any such
director, and any director that holds a Scheduled Series A
Option, a Carryover Director) issued
by DHC pursuant to the DHC Incentive Plans, will, by virtue of
the AMG Spin-Off and the Merger, and without any further action
on the part of any holder thereof, be converted into (A) a
Converted Series A Option to purchase shares of New DHC
Series A Common Stock in an amount and at an exercise price
as determined below, and (B) a Series C Option to
purchase shares of New DHC Series C Common Stock in an
amount and at an exercise price as determined below. The
exercise price of such Converted Series A Option and
Series C Option will be equal to the applicable VWAP for
the series of common stock subject to such option, multiplied
by a fraction, the numerator of which is the exercise price
of such Director Series A Option and the denominator of
which is the VWAP for the DHC Series A Common Stock. The
number of shares of New DHC Series A Common Stock and New
DHC Series C Common Stock subject to the Converted
Series A Option and Series C Option, as applicable, will be
determined so that the aggregate amount by which the Director
Series A Option was in-the-money or
out-of-the-money, as applicable, immediately prior
to the Transactions (determined according to the VWAP for the
DHC Series A Common Stock) is preserved immediately
following the Transactions (allocating such aggregate
in-the-money or out-of-the-money amounts
according to the applicable VWAP for the New DHC Series A
Common Stock and New DHC Series C Common Stock). The terms and
conditions of each Converted Series A Option and
Series C Option, including vesting conditions (which will
not be accelerated by the Transactions) and the scheduled
expiration date, will otherwise remain as set forth in the
Director Series A Option converted into such Converted
Series A Option and Series C Option. If the foregoing
calculation results in a Converted Series A Option or a
Series C Option being exercisable for a fraction of a share
of New DHC Series A Common Stock or New DHC Series C
Common Stock, as applicable, then the number of shares of New
DHC Series A Common Stock or New DHC Series C Common
Stock, as applicable, subject to such option will be rounded
down to the nearest whole number of shares, with no cash being
payable for such fractional share.
(iii) At the Effective Time of the Merger, each of the then
outstanding stock options, if any, to purchase shares of DHC
Series A Common Stock other than the Director Series A
Options and the Scheduled Series A Options (each, a
Series A Option) issued by DHC
pursuant to the DHC Incentive Plans, will, by virtue of the AMG
Spin-Off and the Merger, and without any further action on the
part of any holder thereof, be converted into (A) a stock
appreciation right (a Series A
SAR) with respect to that number of shares of New
DHC Series A Common Stock and at such base price as
determined below, and (B) a stock appreciation right (a
Series C SAR and, together with
the Series A SARs, the Rollover
SARs) with respect to that number of shares of New
DHC Series C Common Stock and at such base price as
determined below. The base price of each Series A SAR and
Series C SAR will be equal to the applicable VWAP for the
series of common stock subject to such Rollover SAR,
multiplied by a fraction, the numerator of which is the
exercise price of such Series A Option and the denominator
of which is the VWAP for the DHC Series A Common Stock. The
number of shares of New DHC Series A Common Stock and New
DHC Series C Common Stock to which the Series A SAR
and Series C SAR, as applicable, relate will be determined
so that the aggregate amount by which the Series A Option
was in-the-money or out-of-the-money, as
applicable, immediately prior to the Transactions (determined
according to the VWAP for the DHC Series A Common Stock) is
preserved immediately following the Transactions (allocating
such aggregate in-the-money or
out-of-the-money amounts according to the applicable
VWAP for the New DHC Series A Common Stock and New DHC
Series C Common Stock). The terms and conditions of each
Series A SAR and Series C SAR, including vesting
conditions (which will not be accelerated by the Transactions)
and the scheduled expiration date, will otherwise remain as set
forth in the Series A Option converted into such
Series A SARs and Series C SARs, except, that, the
spread between the Fair Market Value of the underlying shares
and the base price of each Series A SAR and Series C
SAR will be payable solely in shares of New DHC Series A
Common Stock or New DHC Series C Common Stock, as
applicable (with such shares of New DHC Common Stock valued at
the Fair Market Value of shares of New DHC Series A Common
Stock or New DHC Series C Common Stock, as applicable, on the
date of exercise). If the foregoing calculation results in a
Series A SAR or a Series C SAR being exercisable for a
fraction of a share of New DHC Series A Common Stock or New
DHC Series C Common Stock, as applicable, then the number
of shares of New DHC Series A Common Stock or New DHC
Series C Common Stock, as applicable, subject to such SAR
will be rounded down to the nearest whole number of shares, with
no cash being payable for such fractional share.
B-12
(iv) At the Effective Time of the Merger, each of the then
outstanding stock options, if any, to purchase shares of DHC
Series B Common Stock (including any such options that are,
at the option of the holder, exercisable for shares of DHC
Series B Common Stock or DHC Series A Common Stock) held by
any Carryover Director (each, a Series B
Option) issued by DHC pursuant to the DHC
Incentive Plans, will, by virtue of the AMG Spin-Off and the
Merger, and without any further action on the part of any holder
thereof, be converted into (A) an option (a
Converted Series B Option and,
together with the Converted Series A Options and
Series C Options, the Converted
Options) to purchase shares of New DHC
Series B Common Stock in an amount and at an exercise price
as determined below, (B) a Series C Option to purchase
shares of New DHC Series C Common stock in an amount and at
an exercise price as determined below, and (C) an option (a
Spin-Off Company Series B Option)
to purchase shares of Series B common stock of the Spin-Off
Company in an amount and at an exercise price as determined
below. The exercise price of such Converted Series B
Option, Series C Option and Spin-Off Company Series B
Option will be equal to the applicable VWAP for the series of
common stock subject to such option, multiplied by a
fraction, the numerator of which is the exercise price of the
Series B Option and the denominator of which is the VWAP
for the DHC Series B Common Stock. The number of shares of
New DHC Series B Common Stock, New DHC Series C Common
Stock and Series B common stock of the Spin-Off Company
subject to the Converted Series B Option, Series C
Option and Spin-Off Company Series B Option, as applicable,
will be determined so that the aggregate amount by which the
Series B Option was in-the-money or
out-of-the-money, as applicable, immediately prior
to the Transactions (determined according to the VWAP for the
DHC Series B Common Stock) is preserved immediately
following the Transactions (allocating such aggregate
in-the-money or out-of-the-money amounts
according to the applicable VWAP for the New DHC Series B
Common Stock, New DHC Series C Common Stock and
Series B common stock of the Spin-Off Company). The terms
and conditions of each Converted Series B Option,
Series C Option and Spin-Off Company Series B Option,
including vesting conditions (which will not be accelerated by
the Transactions) and the scheduled expiration date, will
otherwise remain as set forth in the Series B Option
converted into such Converted Series B Option,
Series C Option and Spin-Off Company Series B Option.
If the foregoing calculation results in a Converted
Series B Option, a Series C Option or a Spin-Off
Company Series B Option being exercisable for a fraction of
a share of New DHC Series B Common Stock, New DHC
Series C Common Stock or Series B common stock of the
Spin-Off Company, as applicable, then the number of shares of
New DHC Series B Common Stock, New DHC Series C Common
Stock or Series B common stock of the Spin-Off Company, as
applicable, subject to such option will be rounded down to the
nearest whole number of shares, with no cash being payable for
such fractional share.
(v) Notwithstanding the foregoing, DHC may, in its sole
discretion, cancel any or all outstanding Director Series A
Options, Scheduled Series A Options, Series A Options or
Series B Options prior to or as of the Effective Time of
the Merger for such cash or other consideration as may be
determined to be appropriate by the DHC Board.
(e) At the Effective Time of the Merger, the Amended and
Restated Certificate of Incorporation of DHC (the
DHC Charter) will be amended pursuant
to the Certificate of Merger to be identical to the Certificate
of Incorporation of Merger Sub in effect immediately prior to
the Effective Time of the Merger, except that Article FIRST
thereof will read as follows: The name of the Corporation
(which is hereinafter called the Corporation) is
Discovery Holding Company. Such DHC Charter as so amended
will be the Certificate of Incorporation of the Surviving Entity
until thereafter duly amended or restated in accordance with the
terms thereof and the DGCL. At the Effective Time, the Restated
Bylaws of DHC (the DHC Bylaws) will be
amended to be identical to the bylaws of Merger Sub in effect
immediately prior to the Effective Time and, in such amended
form, will be the Bylaws of the Surviving Entity until
thereafter duly amended or restated in accordance with the terms
thereof, the terms of the Certificate of Incorporation of the
Surviving Entity and the DGCL.
(f) As provided in the Merger Agreement, as of and
following the Effective Time of the Merger, until their
successors are duly elected or appointed in accordance with the
New DHC Charter and the New DHC Bylaws, the directors, executive
officers and certain other officers of New DHC will be as set
forth on Schedule 2.03(f).
Section 2.04. Closing
Date. Subject to the satisfaction of the
conditions set forth in Article VII hereof and the
Unconditional Time having occurred (or the waiver thereof by the
party entitled to waive that condition), the closing of the AMG
Spin-Off, the ANPP Contribution and the Merger (the
Closing) will take place at the
offices of Baker Botts L.L.P., 30 Rockefeller Plaza, New York,
New York 10012, immediately following the Unconditional Time in
the order specified in Sections 2.01 and 2.02, which will
be no later than on the second Business Day
B-13
following the Unconditional Time, or at such other place, time
and date as the parties hereto may agree. The date on which the
Closing will occur is referred to in this Agreement as the
Closing Date.
Section 2.05. ANPP
Escrow Shares.
(a) Immediately following the issuance by New DHC of the
ANPP Escrow Shares to ANPP pursuant to Section 2.02 hereof,
ANPP will deliver the ANPP Escrow Shares to the Escrow Agent
pursuant to the Escrow Agreement. The ANPP Escrow Shares, and,
except as otherwise provided herein or in the Escrow Agreement,
all dividends and distributions made or paid thereon and all
income and property resulting therefrom, will be held by the
Escrow Agent in Escrow and be subject to the terms of the Escrow
Agreement and this Agreement, subject to release as described in
the Escrow Agreement. Except as provided in the Escrow
Agreement, all of the costs, fees and expenses of the Escrow
Agent, and all other costs, fees and expenses arising under the
Escrow Agreement, will be borne by New DHC.
(b) All voting rights with respect to any of the ANPP
Escrow Shares may be exercised by ANPP, and the Escrow Agent
will from time to time execute and deliver to ANPP such proxies,
consents, or other documents as may be necessary to enable ANPP
to exercise such rights.
ARTICLE III
Representations
and Warranties of DHC
DHC hereby represents and warrants to ANPP as follows:
Section 3.01. Organization
and Standing. Each DHC Party and Retained
Subsidiary is duly organized or formed, validly existing and in
good standing under the laws of its respective jurisdiction of
organization or formation and has all requisite corporate or
similar power and authority to own, lease and operate its
properties and assets and to carry on its business as presently
conducted and is qualified to do business and is in good
standing as a foreign corporation or other legal entity in each
jurisdiction where the ownership, leasing or operation of its
assets or properties or conduct of its business requires such
qualification, except where failure to be so qualified or in
good standing would not reasonably be expected to have,
individually or in the aggregate, a material adverse effect on
the business and operations of DHC and the Retained
Subsidiaries, taken as a whole.
Section 3.02. Power
and Authority; Execution and Delivery;
Enforceability. Each DHC Party has all
requisite corporate power and authority to enter into and
deliver this Agreement, the other Transaction Documents to which
it is a party and each other agreement, instrument or other
document to be executed and delivered by it in connection with
this Agreement and the Transactions, to consummate the
Transactions and to perform and comply with all the terms and
conditions of each Transaction Document to which it is a party.
The execution, delivery and, subject to receipt of the DHC
Stockholder Approval, performance of this Agreement by each DHC
Party and the consummation by the DHC Parties of the
Transactions, including the execution, delivery and performance
of the other Transaction Documents to which it is a party and
the other agreements, documents and instruments to be executed
and delivered in connection with this Agreement by such DHC
Party and the consummation of the Transactions, have been duly
authorized by all necessary action on the part of each DHC
Party. This Agreement has been duly executed and delivered by
each DHC Party and constitutes the legal, valid and binding
obligation of each DHC Party, enforceable against each DHC Party
in accordance with its terms, except as may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or
other similar Laws now or hereafter in effect relating to or
affecting creditors rights generally, including the effect
of statutory and other Laws regarding fraudulent conveyances and
preferential transfers and subject to the limitations imposed by
general equitable principles (regardless of whether such
enforceability is considered in a proceeding at law or in
equity). When executed and delivered in accordance with and
pursuant to this Agreement, each other Transaction Document and
the other agreements, documents, certificates and instruments to
be executed and delivered by a DHC Party in connection with this
Agreement and the Transactions will have been duly executed and
delivered by such DHC Party thereto and will constitute the
legal, valid and binding obligation of such DHC Party,
enforceable against it in accordance with their respective
terms, except as may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar Laws now
or hereafter in effect relating to or affecting creditors
rights generally, including the effect of statutory and other
Laws regarding fraudulent conveyances and preferential
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transfers and subject to the limitations imposed by general
equitable principles (regardless of whether such enforceability
is considered in a proceeding at law or in equity).
Section 3.03. Board
and Stockholder Approval. The DHC Board, at a
meeting duly called and held, has duly determined that the
Transaction Documents and the Transactions are advisable, fair
to and in the best interests of DHC and its stockholders. The
only vote of stockholders of DHC required under the DGCL, the
DHC Charter, DHCs Bylaws and the rules and regulations of
the Nasdaq Global Select Market in order for DHC to validly
perform its obligations under this Agreement is the affirmative
vote of a majority of the aggregate voting power of the issued
and outstanding shares of DHC Common Stock voting together as a
single class, and no other vote or approval of or other action
by the holders of any capital stock or other securities of DHC
is required thereby (the DHC Stockholder
Approval).
Section 3.04. No
Conflicts; Consents. Except as set forth on
Schedule 3.04, none of the execution, delivery and
performance by each DHC Party of this Agreement, the execution,
delivery and performance by each DHC Party of each other
Transaction Document to which it is a party and the other
agreements, documents and instruments to be executed and
delivered by each of them in connection with the Transactions,
nor the consummation of the Transactions, will:
(a) conflict with, or result in a breach of, the
organizational documents of any DHC Party;
(b) conflict with, violate, result in a breach of,
terminate, constitute a default (or an event that, with the
giving of notice, the passage of time or otherwise, would
constitute a default) under, or require any action, consent,
waiver or approval of any Person pursuant to, or give others any
rights to modify, amend, accelerate or cancel any term or
provision of any material Contract to which DHC or any Retained
Subsidiary is a party or pursuant to which any of their
respective properties or assets are bound, or result in the
creation of any Lien (other than Permitted Liens) upon any of
the properties or assets of DHC or any Retained Subsidiary,
except, in each case, for any such conflicts, violations,
breaches, defaults or occurrences which would not reasonably be
expected to have, individually or in the aggregate, a material
adverse effect on the business and operations of DHC and the
Retained Subsidiaries, taken as a whole;
(c) assuming the approvals required under
Section 3.04(d) are obtained, violate any judgment, order,
writ, or injunction, or any decree, or any material Law
applicable to DHC or any Retained Subsidiary, or any of their
respective properties or assets; or
(d) require any consent, approval, authorization or permit
of, or filing with or notification to, any Governmental
Authority, except for (i) (A) applicable requirements of
the Exchange Act, the Securities Act, and state securities or
blue sky Laws, (B) the pre-merger notification
requirements of the HSR Act, (C) DHC Stockholder Approval
and (D) approval of the Transactions under the
Communications Act and (ii) where the failure to obtain
such consents, approvals, authorizations or permits, or to make
such filings or notifications would not reasonably be expected
to have, individually or in the aggregate, a material adverse
effect on the business and operations of DHC and the Retained
Subsidiaries, taken as a whole.
Section 3.05. Capitalization
and Continuation of Existence of DHC; New DHC and Merger
Sub.
(a) Capitalization of DHC.
(i) The authorized capital stock of DHC consists of
(i) 1,250,000,000 shares of common stock, par value
$0.01 per share, of which 600,000,000 shares are designated
DHC Series A Common Stock, 50,000,000 shares are
designated DHC Series B Common Stock and
600,000,000 shares are designated DHC Series C Common
Stock and (ii) 50,000,000 shares of preferred stock of
DHC, par value $0.01 per share (DHC Preferred
Stock), of which 600,000 shares are
designated Series A Junior Participating Preferred Stock,
50,000 shares are designated Series B Junior
Participating Preferred Stock and 600,000 share are
designated Series C Junior Participating Preferred Stock.
(ii) As of April 30, 2008,
(A) 268,091,082 shares of DHC Series A Common
Stock, 13,138,236 shares of DHC Series B Common Stock
and no shares of DHC Series C Common Stock (in each case
net of shares held in treasury) were issued and outstanding, and
(B) no shares of DHC Preferred Stock were issued and
outstanding.
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(iii) All outstanding shares of DHC Series A Common
Stock and DHC Series B Common Stock are duly authorized,
validly issued, fully paid and nonassessable and not subject to
or issued in violation of any purchase option, call option,
right of first refusal, preemptive right, subscription right or
any similar right under any provision of the DGCL, the DHC
Charter or DHC Bylaws or any Contract to which DHC is a party or
otherwise bound.
(iv) Other than (i) options to purchase not more than
an aggregate of 1,118,703 shares of DHC Series A
Common Stock (which excludes options to acquire
1,727,985 shares of DHC Series B Common Stock that can
be exercised for an equal number of shares of DHC Series A
Common Stock, at the option of the holder) of which options to
purchase an aggregate of 285,190 shares consist of Director
Series A Options and Scheduled Series A Options held by
Carryover Directors, issued pursuant to the DHC Incentive Plans
as of April 30, 2008, and (ii) Series B Options
to purchase not more than an aggregate of 1,727,985 shares
of DHC Series B Common Stock (all of which options can be
exercised for an equal number of shares of DHC Series A
Common Stock, at the option of the holder) held by Carryover
Directors issued pursuant to the DHC Incentive Plans as of
April 30, 2008, except in connection with this Agreement
and the Transactions and other than as set forth on
Schedule 3.05(a), as of April 30, 2008, there
were not any options, warrants, rights, convertible or
exchangeable securities, phantom stock rights, stock
appreciation rights, stock-based performance units, redemption
rights, repurchase rights, calls, commitments, Contracts or
undertakings of any kind to which DHC is a party or by which DHC
is bound (x) obligating DHC to issue, deliver or sell, or
cause to be issued, delivered or sold, additional shares of
capital stock or other equity interests in, or any security
convertible or exercisable for or exchangeable into any capital
stock of or other equity interest in, DHC, (y) obligating
DHC to issue, grant, extend or enter into any such option,
warrant, call, right, security, commitment, Contract,
arrangement or undertaking or (z) that give any Person the
right to receive any economic benefit or right similar to or
derived from the economic benefits and rights accruing to
holders of DHC Common Stock.
(b) Continuation of Corporate Existence of
DHC. There is no plan or intention to liquidate,
merge or dissolve DHC after the Merger.
(c) Capitalization of New DHC.
(i) As of the date hereof, the authorized capital stock of
New DHC consists of 10,000 shares of Common Stock, par
value US $0.01 per share (Existing New DHC Common
Stock). As of the date hereof (A) there are
no issued or outstanding shares of Existing New DHC Common Stock
other than 1,000 shares of Existing New DHC Common Stock
held, beneficially and of record, by DHC, (B) there are no
securities of New DHC convertible into or exchangeable for
shares of capital stock or voting securities of New DHC and
(C) other than as set forth on
Schedule 3.05(c), there are no options or other
rights to acquire from New DHC, and no obligations of New DHC to
issue, any capital stock, voting securities or securities
convertible into or exchangeable for capital stock or voting
securities of New DHC, other than, in the case of (B) and
(C), as provided in this Agreement and the other Transaction
Documents.
(ii) Immediately prior to the Closing, the total authorized
shares of capital stock of New DHC will consist solely of the
shares designated by the New DHC Charter and (A) there will
be no issued or outstanding shares of capital stock or other
securities or ownership interests of New DHC other than
1,000 shares of New DHC Series A Common Stock held,
beneficially and of record, by DHC, (B) there will be no
securities of New DHC convertible into or exchangeable for
shares of capital stock or voting securities of New DHC and
(C) there will be no options or other rights to acquire
from New DHC, and no obligations of New DHC to issue, any
capital stock, voting securities or securities convertible into
or exchangeable for capital stock or voting securities of New
DHC, other than, in the case of (B) and (C), as provided in
this Agreement and the other Transaction Documents.
(iii) Prior to the Closing, the shares of New DHC Common
Stock and New DHC Preferred Stock to be issued pursuant to this
Agreement and the other Transaction Documents will have been
duly authorized, and, when issued, will be validly issued, fully
paid, nonassessable, free of preemptive rights and free of
Liens, other than as a result of the Escrow Agreement, Liens
created by the holder thereof and restrictions on transfer under
securities Laws of general applicability.
(d) Capitalization of Merger Sub. The
authorized capital stock of Merger Sub consists of
10,000 shares of Common Stock, par value $0.01 per share,
1,000 of which shares are validly issued and outstanding. All of
the
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issued and outstanding capital stock of Merger Sub is, and at
the Effective Time of the Merger will be, owned by New DHC, and
there are (i) no other shares of capital stock or voting
securities of Merger Sub, (ii) no securities of Merger Sub
convertible into or exchangeable for shares of capital stock or
voting securities of Merger Sub and (iii) no options or
other rights to acquire from Merger Sub, and no obligations of
Merger Sub to issue, any capital stock, voting securities or
securities convertible into or exchangeable for capital stock or
voting securities of Merger Sub. Merger Sub has not conducted
any business prior to the date hereof and has no, and prior to
the Effective Time of the Merger will have no, assets,
liabilities or obligations of any nature other than those
incident to its formation and pursuant to this Agreement and the
Merger and the other Transactions.
Section 3.06. Subsidiaries.
(a) After giving effect to the DHC Restructuring,
Schedule 3.06(a) sets forth, for each Retained
Subsidiary, the amount of its authorized capital stock or other
ownership interests, the amount of its outstanding capital stock
or other ownership interests and the record owners of its
outstanding capital stock or other ownership interests. Except
as set forth on Schedule 3.06(a), there are no
shares of capital stock or other ownership interests in any such
Retained Subsidiary issued, reserved for issuance or
outstanding. All the outstanding shares of capital stock or
other ownership interests of each such Retained Subsidiary have
been duly authorized and validly issued and are fully paid and
non-assessable and not subject to or issued in violation of any
purchase option, call option, right of first refusal, preemptive
right, subscription right or any similar right under any
provision of the DGCL, if applicable, the certificate of
incorporation, bylaws or other organizational documents of such
Retained Subsidiary or any Contract to which such Retained
Subsidiary is a party or otherwise bound. There are no bonds,
debentures, notes or other indebtedness of any such Retained
Subsidiary having the right to vote (or convertible into, or
exchangeable for, securities having the right to vote) on any
matters on which holders of capital stock or other ownership
interests of such Subsidiary may vote (Voting
Subsidiary Debt).
(b) Except as set forth above and other than as set forth
on Schedule 3.06(b), as of the date hereof, there
are no options, warrants, rights, convertible or exchangeable
securities, phantom stock rights, stock appreciation
rights, stock-based performance units, commitments, Contracts or
undertakings of any kind to which any such Retained Subsidiary
is a party or by which any of them is bound (i) obligating
such Retained Subsidiary to issue, deliver or sell, or cause to
be issued, delivered or sold, additional shares of capital stock
or other ownership interests in, or any security convertible
into or exercisable or exchangeable for any capital stock of or
other ownership interests in, any such Retained Subsidiary or
Voting Subsidiary Debt, (ii) obligating such Retained
Subsidiary to issue, grant, extend or enter into any such
option, warrant, call, right, security, commitment, Contract,
arrangement or undertaking or (iii) that give any Person
the right to receive any economic benefit or right similar to or
derived from the economic benefits and rights accruing to
holders of capital stock or other ownership interests of such
Retained Subsidiary. As of the date hereof, except as otherwise
provided by the DHC Restructuring, there are no outstanding
contractual obligations of any such Retained Subsidiary to
repurchase, redeem or otherwise acquire any shares of capital
stock of such Retained Subsidiary.
(c) DHC Beneficially Owns all of the DHC Discovery Shares
and the DHC AP Interests, free and clear of all Liens, other
than Liens arising under this Agreement, any Transaction
Document, the Discovery Limited Liability Company Agreement or
the Animal Planet Limited Partnership Agreement, or Liens
arising under securities Laws of general applicability.
(d) Except as otherwise provided herein, and for ownership
interests in Discovery, Animal Planet, its Wholly Owned
Subsidiaries and the ownership interests set forth on
Schedule 3.06(d), as of the date hereof, no Retained
Subsidiary owns, directly or indirectly, any capital stock,
membership interest, partnership interest, joint venture
interest or other equity interest in any Person.
Section 3.07. DHC
Reports and Financial Statements; Debt and No Undisclosed
Material Liabilities.
(a) DHC has filed on a timely basis all forms, statements,
certifications, reports and documents (including exhibits and in
each case together with all amendments thereto) with the SEC
required to be filed by it under the Securities Act or the
Exchange Act since July 21, 2005 (collectively, together
with the Form 10, dated July 15, 2005, filed by DHC
and other than preliminary material, the DHC SEC
Filings). As of their respective dates, each of
the DHC SEC Filings complied in all material respects with the
applicable requirements of the Securities Act or the
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Exchange Act and the rules and regulations thereunder, and none
of the DHC SEC Filings contained as of such date any untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which
they were made, not misleading. When filed with the SEC, the
financial statements of DHC and its consolidated Subsidiaries
(including the related notes) included in the DHC SEC Filings
complied as to form in all material respects with the applicable
requirements of the Securities Act or the Exchange Act and the
applicable rules and regulations thereunder and were prepared in
accordance with GAAP applied on a consistent basis (except as
may be indicated therein or in the schedules thereto), and such
financial statements fairly present, in all material respects,
the consolidated financial position of DHC and its consolidated
Subsidiaries as of the respective dates thereof and the
consolidated results of their operations and their consolidated
cash flows for the respective periods then ended, subject, in
the case of the unaudited interim financial statements, to
normal, recurring year-end audit adjustments. Notwithstanding
anything herein to the contrary, no DHC Party makes any
representation or warranty with respect to information about
Discovery or any of its Subsidiaries provided by Discovery for
inclusion in the DHC SEC Filing to the extent such information
is determined to be false or misleading and, in providing such
information to DHC or any of its representatives, Discovery is
determined to have been grossly negligent, or guilty of reckless
conduct or willful misconduct in the provision of such
information.
(b) Other than those Debt items listed on
Schedule 3.07(b), as of the date hereof, there are
no Debt obligations of DHC or any of the Retained Subsidiaries
other than Debt disclosed and provided for in the balance sheet
(the Balance Sheet) for DHC included
with DHCs Annual Report on
Form 10-K
for the year ending December 31, 2007, as filed with the
SEC on February 15, 2008.
(c) Other than those Liabilities listed on
Schedule 3.07(b)
and/or
Schedule 3.07(c), and except as disclosed in the DHC
SEC Filings filed with the SEC, there are no Liabilities of DHC
or any of the Retained Subsidiaries other than
(i) Liabilities disclosed and provided for in the Balance
Sheet, (ii) Liabilities for Income Taxes,
(iii) Liabilities for the performance obligations of DHC or
any Retained Subsidiary under a Material Contract,
(iv) Liabilities incurred in the ordinary course of
business consistent with past practice and (v) Liabilities
that would not reasonably be expected to have, individually or
in the aggregate, a material adverse effect on DHC and the
Retained Subsidiaries taken as a whole.
Section 3.08. Registration
Statement; Proxy Statement/Prospectus. None
of the information with respect to DHC or its Subsidiaries which
is included or incorporated by reference in, (a) the
Registration Statement or any amendment or supplement thereto,
will, at the respective times such documents are filed, and,
when the same becomes effective, at the time of the Special
Meeting or at the Effective Time of the Merger, contain any
untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make
the statements therein not misleading, or (b) the Proxy
Statement/Prospectus or any other documents filed or to be filed
with the SEC or any other Governmental Authority in connection
with the Transactions, will, at the respective times such
documents are filed and, in the case of the Proxy
Statement/Prospectus and any amendment or supplement thereto, at
the time of mailing to stockholders of DHC and at the time of
the Special Meeting, in light of the circumstances under which
they were made, be false or misleading with respect to any
material fact, or omit to state any material fact necessary in
order to make the statements therein not false or misleading or
necessary to correct any statement in any earlier communication
with respect to the Special Meeting or the Transactions which
has become false or misleading. The Registration Statement and
the Proxy Statement/Prospectus and the furnishing thereof by DHC
will comply as to form in all material respects with the
applicable requirements of the Securities Act, the Exchange Act
and the rules and regulations promulgated thereunder.
Section 3.09. Contracts. DHCs
SEC Filings complied in all material respects with the
disclosure requirements of Item 601 of
Regulation S-K.
Except as set forth on Schedule 3.09, all of the
Contracts of DHC disclosed pursuant to Item 601 of
Regulation S-K
(the Material Contracts) are in full
force and effect and are valid and binding agreements of DHC or
its Subsidiaries and, to the knowledge of DHC, the other parties
thereto, enforceable in accordance with their terms. Except as
set forth on Schedule 3.09, to the knowledge of DHC,
no party is in default in any material respect under any of the
Material Contracts, nor does any condition exist that with
notice or the lapse of time or both would constitute such a
default. Except for the need to obtain the consents listed on
Schedule 3.04 and except as would not have,
individually or in the aggregate, a material adverse effect on
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the business and operations of DHC and the Retained
Subsidiaries, taken as a whole, the Transactions will not affect
the validity or enforceability of any of the Material Contracts.
Section 3.10. Absence
of Changes or Events. Since December 31,
2007 (a) there has not been any material adverse change in
the business, properties, operations or financial condition of
DHC and the Retained Subsidiaries, taken as a whole, and
(b) no action has been taken by DHC that, if
Section 5.01 of this Agreement had then been in effect,
would have been prohibited by such Section without the consent
or approval of ANPP, and no Contract to take any such action was
entered into during such period.
Section 3.11. Compliance
with Laws. Neither DHC nor any of the
Retained Subsidiaries is in violation of, and DHC and the
Retained Subsidiaries have not received any notices of
violations with respect to, any material Laws of any
Governmental Authority.
Section 3.12. Litigation. There
are no material claims, actions, suits, investigations or
proceedings pending, or, to the knowledge of DHC, threatened
against DHC or any of the Retained Subsidiaries before any
Governmental Authority.
Section 3.13. Affiliate
and Other
Transactions. Schedule 3.13 sets
forth, as of the date hereof, all Contracts (other than any
Transaction Documents) and all material allocations,
obligations, transactions or other arrangements (oral or
written) between (a) DHC or any Retained Subsidiary, on the
one hand, and the Spin-Off Company or any of its Subsidiaries,
on the other hand, and (b) between DHC or any Retained
Subsidiary, on the one hand, and any Related Party of DHC, on
the other hand, that, in any case, will be in effect immediately
following the Closing.
Section 3.14. Brokers
or Finders. No agent, broker, investment
banker or other firm or person is or will be entitled to receive
from DHC or New DHC any brokers or finders fee or
any other commission or similar fee in connection with any of
the Transactions.
Section 3.15. Tax
Matters. Except as to amounts which,
individually or in the aggregate, are not material to DHC and
the Retained Subsidiaries, taken as a whole:
(a) Filing, Payment and
Compliance. (i) DHC has timely filed, or has
caused to be timely filed (taking into account any extension of
time within which to file), all Tax Returns that are required to
have been filed by DHC and any of the Retained Subsidiaries, and
all such filed Tax Returns are correct and complete in all
material respects; (ii) DHC has paid timely, or has caused
to be paid timely, all Taxes shown to be due and payable on such
Tax Returns; (iii) no deficiency with respect to Taxes has
been proposed, asserted or assessed against DHC or any of the
Retained Subsidiaries; (iv) no audit or other
administrative or court proceedings are pending with any Taxing
Authority with respect to Taxes of DHC or any of the Retained
Subsidiaries, and no written notice thereof has been received;
and (v) DHC has withheld and paid or caused to be withheld
and paid all material Taxes required to have been withheld and
paid in connection with amounts paid or owing to any employees
of DHC or the Retained Subsidiaries.
(b) Consolidation and Similar Arrangements; Tax
Sharing Agreements. Except as set forth on
Schedule 3.15(b), DHC (i) has not been a member
of an affiliated group (within the meaning of Section 1504
of the Code) filing a consolidated federal income Tax Return,
other than (A) an affiliated group the common parent of
which is or was Liberty Media Corporation, a Delaware
corporation (LMC), and (B) an
affiliated group the common parent of which is DHC,
(ii) has not been a member of any affiliated, combined,
consolidated, unitary or similar group for state, local or
foreign Tax purposes other than (x) a group (such group,
together with the group referenced in (i)(A), collectively, a
LMC Group) the common parent of which
is or was a member of an affiliated group the common parent of
which is or was LMC or (y) a group (such group, together
with the group referenced in (i)(B), collectively, a
DHC Group) the common parent of which
is or was a member of an affiliated group the common parent of
which is or was DHC, (iii) is not a party to, and does not
have any liability for any Tax under, any Tax sharing agreement
other than the Tax Sharing Agreement and the Tax Sharing
Agreement between LMC and DHC, dated as of July 20, 2005,
or (iv) has no liability for the Taxes of any Person under
Treasury Regulations
Section 1.1502-6
(or any similar provision of state, local, or foreign Law) or as
a transferee or successor, except for such liability arising
from membership in the LMC Group or the DHC Group.
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(c) The DHC Parties do not have any plan or intention to
take any action, or to fail to take any action, which action or
omission would be inconsistent with (i) the AMG Spin-Off
qualifying as a reorganization under Sections 368(a) and
355 of the Code, (ii) the Merger (in conjunction with the
ANPP Contribution) qualifying as a tax-free exchange within the
meaning of Section 351 of the Code, or (iii) the ANPP
Contribution (in conjunction with the Merger) qualifying as a
tax-free exchange with the meaning of Section 351 of the
Code.
(d) The DHC Parties do not know of any facts that would
cause (i) the AMG Spin-Off to fail to qualify as a
reorganization under Sections 368(a) and 355 of the Code,
(ii) the Merger (in conjunction with the ANPP Contribution)
to fail to qualify as a tax-free exchange within the meaning of
Section 351 of the Code or (iii) the ANPP Contribution
(in conjunction with the Merger) to fail to qualify as a
tax-free exchange within the meaning of Section 351 of the
Code.
Section 3.16. Employee
Matters.
(a) To the knowledge of DHC, each DHC Plan intended to be
qualified under Section 401(a) of the Code continues to
satisfy the requirements for such qualification.
(b) Each DHC Plan has been maintained and administered in
compliance with its terms and with ERISA and the Code to the
extent applicable thereto, except for such non-compliance, which
would not reasonably be expected to have, individually or in the
aggregate, a material adverse effect on the business and
operations of DHC and the Retained Subsidiaries, taken as a
whole.
(c) Except with respect to Liabilities of AMG for which the
Spin-Off Company is or will be responsible, there has been no
event or circumstance that has resulted in any material
Liability being asserted by any DHC Plan, the Pension Benefit
Guaranty Corporation or any other Person or entity under
Title IV of ERISA or Section 412 of the Code against
DHC or any DHC ERISA Affiliate.
(d) Except with respect to Liabilities of AMG for which the
Spin-Off Company is solely responsible, there is no contract,
agreement, plan or arrangement to which DHC or any of the
Retained Subsidiaries is a party covering any employee, former
employee, officer, director, shareholder or contract worker of
DHC or any of the Retained Subsidiaries, which, individually or
collectively, may reasonably be expected to give rise to the
payment of any amount that would not be deductible pursuant to
Section 280G of the Code solely as a result of the
Transactions.
Section 3.17. Takeover
Laws. Prior to the date hereof, the DHC Board
has taken all action, if any, necessary to exempt (a) the
execution of the Transaction Documents and (b) the
Transactions, or make the foregoing actions not subject to
(i) any takeover law or law that purports to limit or
restrict business combinations or the ability to acquire or vote
shares and (ii) the DHC Rights Agreement or any other
stockholder rights plan or any similar anti-takeover plan or
device.
Section 3.18. Limitation
on Warranties.
(a) EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, NO DHC
PARTY MAKES ANY REPRESENTATION OR WARRANTY TO ANPP, EXPRESS OR
IMPLIED, AT LAW OR IN EQUITY, WITH RESPECT TO DHC OR ANY
SUBSIDIARY OF DHC, INCLUDING WITH RESPECT TO MERCHANTABILITY OR
FITNESS FOR ANY PARTICULAR PURPOSE. ALL REPRESENTATIONS OR
WARRANTIES NOT EXPRESSLY SET FORTH IN THIS AGREEMENT ARE HEREBY
DISCLAIMED, AND ANPP ACKNOWLEDGES THAT IT IS NOT RELYING ON ANY
REPRESENTATION OR WARRANTY OF DHC NOT EXPRESSLY SET FORTH IN
THIS AGREEMENT.
(b) Except as expressly provided for in
Section 3.06(c) and 3.07, which representations and
warranties are made to insure ANPP against any third-party
claims based on the material contained in the respective filings
referred to in Section 3.07, no DHC Party makes any
representation or warranty, express or implied, and under no
circumstances will a DHC Party be deemed to have made any
representation or warranty, regarding Discovery or any of its
Subsidiaries, and, except as expressly provided in
Article IX, no DHC Party will be liable to ANPP for any
direct or indirect Losses as a result of the business,
operations, results of operations, assets, liabilities or
properties of Discovery or any of its Subsidiaries (including,
with respect to information provided by Discovery regarding the
business, operations, results of operations, assets, liabilities
or properties of Discovery and its Subsidiaries, to the
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extent determinations of any DHC Party made pursuant to
Section 3.04(d) are based upon such Discovery information).
ARTICLE IV
Representations
and Warranties of ANPP
ANPP represents and warrants to the DHC Parties as follows:
Section 4.01. Organization
and Standing. ANPP is duly organized or
formed, validly existing and in good standing under the laws of
its jurisdiction of organization or formation and has all
requisite corporate or similar power and authority to own, lease
and operate its properties and assets and to carry on its
business as presently conducted and is qualified to do business
and is in good standing as a foreign corporation or other legal
entity in each jurisdiction where the ownership, leasing or
operation of its assets or properties or conduct of its business
requires such qualification, except where failure to be so
qualified or in good standing would not reasonably be expected
to have, individually or in the aggregate, a material adverse
effect on the business and operations of ANPP.
Section 4.02. Power
and Authority; Execution and Delivery;
Enforceability. ANPP has all requisite
partnership power and authority to enter into and deliver this
Agreement and the other Transaction Documents to which it is a
party and each other agreement, instrument or other document to
be executed and delivered by it in connection with this
Agreement or the Transactions, to consummate the Transactions
and to perform and comply with all the terms and conditions of
each Transaction Document to which it is a party. The execution,
delivery and performance of this Agreement by ANPP and the
consummation by ANPP of the Transactions, including the
execution, delivery and performance of the other Transaction
Documents to which it is a party and the other agreements,
documents and instruments to be executed and delivered in
connection with this Agreement by ANPP and the consummation of
the Transactions, have been duly authorized by all necessary
action on the part of ANPP. This Agreement has been duly
executed and delivered by ANPP and constitutes the legal, valid
and binding obligation of ANPP, enforceable against ANPP in
accordance with its terms, except as may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or
other similar Laws now or hereafter in effect relating to or
affecting creditors rights generally, including the effect
of statutory and other Laws regarding fraudulent conveyances and
preferential transfers and subject to the limitations imposed by
general equitable principles (regardless of whether such
enforceability is considered in a proceeding at law or in
equity). When executed and delivered in accordance with and
pursuant to this Agreement, each other Transaction Document to
which ANPP is a party and the other agreements, documents,
certificates and instruments to be executed and delivered by
ANPP in connection with this Agreement and the Transactions will
have been duly executed and delivered by ANPP and will
constitute the legal, valid and binding obligations of ANPP,
enforceable against ANPP in accordance with their respective
terms, except as may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar Laws now
or hereafter in effect relating to or affecting creditors
rights generally, including the effect of statutory and other
Laws regarding fraudulent conveyances and preferential transfers
and subject to the limitations imposed by general equitable
principles (regardless of whether such enforceability is
considered in a proceeding at law or in equity).
Section 4.03. No
Conflicts; Consents. Except as set forth on
Schedule 4.03, none of the execution, delivery and
performance by ANPP of this Agreement, the execution, delivery
and performance by ANPP of each other Transaction Document to
which it is a party and the other agreements, documents and
instruments to be executed and delivered by it in connection
with the Transactions, nor the consummation of the Transactions,
will:
(a) conflict with, or result in a breach of, the
organizational documents of ANPP;
(b) conflict with, violate, result in a breach of,
terminate, constitute a default (or an event that, with the
giving of notice, the passage of time or otherwise, would
constitute a default) under, or require any action, consent,
waiver or approval of any Person pursuant to, or give others any
rights to modify, amend, accelerate or cancel any term or
provision of any material Contract to which ANPP is a party or
pursuant to which any of its assets are bound, or result in the
creation of any Lien upon any of the ANPP Contributed Assets,
except, in each case, for any such conflicts, violations,
breaches, defaults or occurrences which would not reasonably be
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expected to have, individually or in the aggregate, a material
adverse effect on the ability of ANPP to consummate the
Transactions;
(c) assuming the approvals required under
Section 4.03(d) are obtained, violate any judgment, order,
writ, or injunction, or any decree, or any material Law
applicable to ANPP, or any of its properties or assets, except
as would not prevent or materially delay the performance of any
Transaction Document by ANPP; or
(d) require any consent, approval, authorization or permit
of, or filing with or notification to, any Governmental
Authority, except for (i) (A) applicable requirements of
the Exchange Act, the Securities Act, and state securities or
blue sky Laws, (B) the pre-merger notification
requirements of the HSR Act, and (C) approval of the
Transactions under the Communications Act and (ii) where
the failure to obtain such consents, approvals, authorizations
or permits, or to make such filings or notifications would not
reasonably be expected to have, individually or in the
aggregate, a material adverse effect on the ability of ANPP to
consummate the Transactions.
Section 4.04. Ownership
of ANPP Contributed Assets; DHC Shares.
(a) ANPP owns all of the ANPP Discovery Shares and the ANPP
AP Interests, free and clear of all Liens, other than Liens
arising under this Agreement, any Transaction Document, the
Discovery Limited Liability Company Agreement or the Animal
Planet Limited Partnership Agreement, or arising under
securities Laws of general applicability. Immediately after the
ANPP Contribution, New DHC will have good and valid title to all
of the ANPP Discovery Shares and the ANPP AP Interests, free and
clear of all Liens, other than Liens arising under this
Agreement, or any Transaction Document or arising under
securities Laws of general applicability or created by New DHC.
(b) None of ANPP, any of its Affiliates or any Related
Party of API or NBCo Beneficially Owns, or has any economic
interest in, any shares of DHC Common Stock, or has the right to
acquire any shares of DHC Common Stock pursuant to any
agreement, arrangement or understanding or upon the exercise of
conversion rights, exchange rights, other rights, warrants or
options.
Section 4.05. Registration
Statement; Proxy Statement/Prospectus. None
of the information supplied or to be supplied by ANPP, any of
its Affiliates or their respective representatives in writing
specifically for inclusion or incorporation by reference in, and
which is included or incorporated by reference in, (a) the
Registration Statement or any amendment or supplement thereto
will, at the respective times such documents are filed, and,
when the same becomes effective, at the time of the Special
Meeting or at the Effective Time of the Merger, contain any
untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make
the statements therein not misleading, or (b) the Proxy
Statement/Prospectus and any other documents filed or to be
filed with the SEC or any other Governmental Authority in
connection with the Transactions, will, at the respective times
such documents are filed and, in the case of the Proxy
Statement/Prospectus or any amendment or supplement thereto, at
the time of mailing to stockholders of DHC and at the time of
the Special Meeting, in light of the circumstances under which
they were made, be false or misleading with respect to any
material fact, or omit to state any material fact necessary in
order to make the statements therein not false or misleading or
necessary to correct any statement in any earlier communication
with respect to the Special Meeting or the Transactions which
has become false or misleading.
Section 4.06. Litigation. There
are no claims, actions, suits, investigations or proceedings
pending, or, to the knowledge of ANPP, threatened against ANPP
or any of its Affiliates before any court, arbitrator or
administrative, governmental or regulatory authority or body,
domestic or foreign, that, individually or in the aggregate,
would, or would reasonably be expected to, have a material
adverse effect on the ability of ANPP to consummate the
Transactions.
Section 4.07. Brokers
or Finders. Except as set forth on
Schedule 4.07, no agent, broker, investment banker
or other firm or person is or will be entitled to receive from
any DHC Party or any of their respective Affiliates any
brokers or finders fee or any other commission or
similar fee in connection with any of the Transactions.
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Section 4.08. Private
Placement and Certain Tax Representations.
(a) ANPP understands that the issuance of the ANPP
Contribution Shares by New DHC pursuant to this Agreement is
intended to be exempt from registration under the Securities Act.
(b) ANPP (either alone or together with its advisors) has
sufficient knowledge and experience in financial and business
matters so as to be capable of evaluating the merits and risks
of its investment in the ANPP Contribution Shares and is capable
of bearing the economic risks of such investment.
(c) ANPP is acquiring the ANPP Contribution Shares to be
acquired hereunder for its own account, for investment and not
with a view to the public resale or distribution thereof in
violation of any federal, state or foreign securities Law.
(d) ANPP understands that the ANPP Contribution Shares will
be issued in a transaction exempt from the registration or
qualification requirements of the Securities Act and applicable
state securities Laws, and that such securities must be held
indefinitely unless a subsequent disposition thereof is
registered or qualified under the Securities Act and such Laws
or is exempt from such registration or qualification.
(e) ANPP can bear the economic risk of (i) an
investment in the ANPP Contribution Shares indefinitely and
(ii) a total loss in respect of such investment.
(f) ANPP does not have any plan or intention to take any
action, or to fail to take any action, which action or omission
would be inconsistent with (i) the ANPP Contribution (in
conjunction with the Merger) qualifying as a tax-free exchange
within the meaning of Section 351 of the Code or
(ii) the Merger (in conjunction with the ANPP Contribution)
qualifying as a tax-free exchange within the meaning of
Section 351 of the Code.
(g) ANPP does not know of any facts that would cause
(i) the ANPP Contribution (in conjunction with the Merger)
to fail to qualify as a tax-free exchange within the meaning of
Section 351 of the Code or (ii) the Merger (in
conjunction with the ANPP Contribution) to fail to qualify as a
tax-free exchange within the meaning of Section 351 of the
Code.
Section 4.09. Limitation
on Warranties.
(a) EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, ANPP
MAKES NO REPRESENTATION OR WARRANTY TO ANY DHC PARTY, EXPRESS OR
IMPLIED, AT LAW OR IN EQUITY, WITH RESPECT TO THE ANPP DISCOVERY
SHARES, THE ANPP AP INTERESTS, OR ANPP, INCLUDING WITH RESPECT
TO MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE. ALL
REPRESENTATIONS OR WARRANTIES NOT EXPRESSLY SET FORTH IN THIS
AGREEMENT ARE HEREBY DISCLAIMED, AND EACH DHC PARTY ACKNOWLEDGES
THAT IT IS NOT RELYING ON ANY REPRESENTATION OR WARRANTY OF ANPP
NOT EXPRESSLY SET FORTH IN THIS AGREEMENT.
(b) Except as expressly provided for in Section 4.04,
ANPP makes no representation or warranty, express or implied,
and under no circumstances will ANPP be deemed to have made any
representation or warranty, regarding Discovery or any of its
Subsidiaries, and ANPP will not be liable to any DHC Party for
any direct or indirect Losses as a result of the business,
operations, results of operations, assets, liabilities or
properties of Discovery or any of its Subsidiaries (including,
with respect to information provided by Discovery regarding the
business, operations, results of operations, assets, liabilities
or properties of Discovery and its Subsidiaries, to the extent
determinations of ANPP made pursuant to Section 4.03(d) are
based upon such Discovery information).
ARTICLE V
Agreements
and Covenants
Section 5.01. Covenants
Relating to Conduct of Business. From the
date hereof to the Closing, except for matters (i) set
forth in Schedule 5.01, (ii) otherwise
expressly permitted by the terms of this Agreement or a
Transaction Document or (iii) in connection with the DHC
Restructuring:
(a) each DHC Party will, and will cause the Audio Company
and its Subsidiaries and each Retained Subsidiary to
(i) conduct its business as currently conducted in the
usual, regular and ordinary course in
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substantially the same manner as previously conducted;
(ii) not take any action that would reasonably be expected
to result in any of the conditions to the Merger and the ANPP
Contribution set forth in Article VII not being fulfilled;
and (iii) not authorize or enter into any contract,
agreement, commitment or arrangement to do any of the
foregoing; and
(b) no DHC Party will take any action or fail to take any
action, and no DHC Party will permit the Spin-Off Company, the
Audio Company or their respective Subsidiaries or the Retained
Subsidiaries to take any action or fail to take any action in
any case that would reasonably be expected to result in the
creation or incurrence of any Liability for which New DHC, DHC,
the Audio Company or its Subsidiaries or the Retained
Subsidiaries would be liable or otherwise obligated following
the Closing which is material to New DHC and its Subsidiaries
taken as a whole following the Closing.
Section 5.02. Access
to Information. Following the date hereof and
prior to the Closing, DHC will permit (and will cause the Audio
Company and its Subsidiaries and the Retained Subsidiaries to
permit) representatives of ANPP to have reasonable access during
normal business hours and upon reasonable notice to all
premises, properties, personnel, books, records, Contracts,
commitments, reports of examination and documents of or
pertaining to DHC, the Audio Company or its Subsidiaries or the
Retained Subsidiaries as may be reasonably necessary to permit
ANPP to, at its sole expense, make, or cause to be made, such
investigations thereof as ANPP may reasonably determine
necessary in connection with the consummation of the
Transactions, and DHC will (and will cause the Audio Company and
its Subsidiaries and the Retained Subsidiaries to) reasonably
cooperate in good faith with any such investigations;
provided, however, that (A) such access does
not unreasonably disrupt the normal operations of DHC, any DHC
Party, the Audio Company or its Subsidiaries or any of the
Retained Subsidiaries; (B) none of the DHC Parties will be
under any obligation to disclose to ANPP any information, the
disclosure of which is restricted by Contract or Law, except in
strict compliance with the applicable Contract or Law; and
(C) none of the DHC Parties are under any obligation to
disclose to ANPP any information as to which the attorney-client
privilege may be available and where such disclosure would
reasonably be expected to cause the loss of such privilege. No
information or knowledge obtained in any investigation pursuant
to this Section 5.02 or otherwise will affect or be deemed
to modify any representation or warranty contained herein or to
modify the conditions to the obligations of the parties hereto
to consummate the Transactions.
Section 5.03. No
Additional Options. Following the date hereof
and prior to the Closing, without the consent of ANPP, DHC will
not issue any additional Series A Options or Series B
Options to any Carryover Director.
Section 5.04. Confidentiality. ANPP
acknowledges that the information regarding DHC and its
Subsidiaries being provided to it in connection with the
consummation of the Transactions, is intended to be kept
confidential, and ANPP will hold such information furnished by
the DHC Parties pursuant to Section 5.02 in confidence in
accordance with the provisions of the Confidentiality and
Nondisclosure Agreement, dated July 9, 2007 (the
Nondisclosure Agreement), between AMG
and ANPP.
Section 5.05. Reasonable
Best Efforts. (a) On the terms and
subject to the conditions of this Agreement, each party hereto
will use reasonable best efforts to take, or to cause to be
taken, all actions and to do, or to cause to be done, all things
necessary, proper or advisable to satisfy the conditions set
forth in Article VII and to consummate the Transactions as
promptly as reasonably possible. Each party will cooperate in
all reasonable respects with the other parties hereto in
assisting such party to comply with this Section 5.05. In
the event that after the Closing Date any further action is
necessary or desirable to carry out the purposes of this
Agreement, the parties to this Agreement will use their
reasonable best efforts to take such action and will reasonably
cooperate in good faith with the other parties hereto in respect
of any such action.
(a) Promptly following the date hereof (and in any event
within ten (10) Business Days hereof), (i) ANPP will
file with the FTC and the Antitrust Division the notification
and report form required pursuant to the HSR Act in connection
with the Transactions and a request for early termination of the
waiting periods applicable thereto, and (ii) ANPP will make
the required filings pursuant to the antitrust laws of any other
Governmental Authority that may be applicable (the HSR Act and
any applicable antitrust laws of any other Governmental
Authority being referred to herein as the Antitrust
Laws). ANPP will use reasonable best efforts to
take such action as may be required to cause the expiration of
the notice periods under, or obtain any clearance required by,
the HSR Act or
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other Antitrust Laws with respect to the Transactions as
promptly as practicable. ANPP will keep DHC apprised of any
communications with, and inquiries or requests for additional
information from, the FTC and the Antitrust Division, or under
any other Antitrust Law, ANPP will comply promptly with any such
inquiry or request and DHC will provide ANPP with any necessary
information and reasonable assistance to comply with any such
inquiry or request. Each of DHC and ANPP will use reasonable
best efforts to resolve such objections, if any, as may be
asserted by any Governmental Authority with respect to the
Transactions under the HSR Act, the other Antitrust Laws, the
Sherman Antitrust Act of 1890, as amended, the Clayton Antitrust
Act of 1914, as amended, the Federal Trade Commission Act of
1914, as amended, and any other United States federal or state
or foreign statutes, rules, regulations, orders, decrees,
administrative or judicial doctrines or other Laws that are
designed to prohibit, restrict or regulate actions having the
purpose or effect of monopolization or restraint of trade;
provided, however, that in order to resolve any
such objection or to obtain the consent, approval, waiver or
permission of any Governmental Authority in connection with the
Transactions, neither DHC nor ANPP nor any of their respective
Affiliates or stockholders will be required to (A) divest
itself of any part of its Beneficial Ownership of DHC, New DHC,
Discovery, Animal Planet or AMG, or interests therein, or any
other material assets of such Person; (B) agree to any
condition or requirement that would render such Persons
ownership of such securities, shares, interests or assets
illegal or subject to the imposition of a fine or penalty;
(C) agree to any condition or requirement that would impose
material restrictions or limitations on such Persons full
rights of ownership (including, without limitation, voting) of
such securities, shares, interests or assets, or (D) agree
to any condition or requirement that would materially restrict
its business or operations as currently conducted.
Section 5.06. Expenses;
Transfer Taxes.
(a) Whether or not the Closing takes place, and except as
set forth in Article IX, all costs and expenses incurred in
connection with the preparation of the Transaction Documents and
the consummation of the Transactions will be paid by the party
incurring such costs and expenses, including all costs and
expenses incurred pursuant to Section 5.05; provided
that, after the Closing, New DHC will reimburse ANPP for any
filing fees relating to the notification and report form filed
pursuant to the HSR Act.
(b) All sales, transfer, filing, recordation, registration
and similar Taxes and fees (Transfer
Taxes) arising from or associated with the
Transactions (including, the DHC Restructuring, the Spin-Off,
the Merger and the ANPP Contribution), whether levied on DHC,
ANPP or their respective Affiliates, will be paid by New DHC.
The DHC Parties, on the one hand, or ANPP, on the other hand,
whichever is required under applicable Law, will file all
necessary documentation with respect to such Transfer Taxes on a
timely basis.
Section 5.07. Publicity. From
the date hereof through the Closing Date, no public release or
announcement concerning the Transactions will be issued by DHC
or its Affiliates or ANPP or its Affiliates without the prior
consent of the other party (which consent will not be
unreasonably withheld or delayed), except as such release or
announcement may be required by Law or the rules or regulations
of any securities exchange on which such partys securities
are listed or traded (in which case the party required to make
the release or announcement will allow the other party
reasonable time to comment on such release or announcement in
advance of such issuance); provided, however, that
a party may make internal announcements to its and its
Affiliates employees that are consistent with the
parties prior public disclosures regarding the
Transactions, and AMG and DHC may make announcements and public
filings in connection with the AMG Spin-Off.
Section 5.08. Stockholder
Meeting; Registration Statement and Other SEC
Filings.
(a) DHC will, in accordance with applicable Law, the DHC
Charter and DHC Bylaws, duly call, give notice of, convene and
hold, as soon as reasonably practicable after the date hereof, a
meeting of DHCs stockholders for the purpose of
considering and voting upon this Agreement (the
Special Meeting).
(b) Proxy Statement/Prospectus and Registration
Statement. As soon as reasonably practicable
after the execution of this Agreement, (i) DHC will prepare
and file with the SEC a preliminary proxy statement relating to
the Special Meeting, and (ii) New DHC will prepare and file
with the SEC a Registration Statement on
Form S-4
(the Registration Statement) in
connection with the registration under the Securities Act of the
New DHC Common Stock issuable in the Merger and of the New DHC
Common Stock issuable upon exercise of the Rollover SARs and the
Converted Options. The proxy statement furnished to DHCs
stockholders in connection with the
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Special Meeting will be included as part of the prospectus (the
Proxy Statement/Prospectus) forming
part of the Registration Statement. Each DHC Party will use its
reasonable best efforts to respond as promptly as practicable to
any comments of the SEC with respect to the preliminary proxy
statement, the Proxy Statement/Prospectus or the Registration
Statement. The DHC Parties will notify ANPP promptly of the
receipt of any comments of the SEC or its staff and of any
request by the SEC or its staff or any other governmental
officials for amendments or supplements to the preliminary proxy
statement, the Proxy Statement/Prospectus, or the Registration
Statement, will supply ANPP with copies of all correspondence
between any DHC Party and any of their respective
representatives, on the one hand, and the SEC or its staff or
any other governmental officials, on the other hand, with
respect to the preliminary proxy statement, the Proxy
Statement/Prospectus or the Registration Statement, and will
consult with ANPP prior to responding to any such comments or
request or filing any amendment or supplement of the preliminary
proxy statement, the Proxy Statement/Prospectus or the
Registration Statement. Each DHC Party will use reasonable best
efforts to cause the Registration Statement to be declared
effective under the Securities Act as soon as reasonably
practicable after such filing and to continue to be effective as
of the Effective Time of the Merger and to cause the Proxy
Statement/Prospectus approved by the SEC to be mailed to
DHCs stockholders at the earliest practicable time.
(c) DHC, New DHC and ANPP will cooperate with each other in
connection with the preparation and filing of the preliminary
proxy statement, the Proxy Statement/Prospectus, the
Registration Statement and any other documents to be
disseminated to holders of DHC Common Stock, which cooperation
will include causing Discovery and its Subsidiaries to provide
information to the DHC Parties and any of their respective
representatives with respect to Discovery and its Subsidiaries
as may be reasonably requested in connection with the
preparation and filing of the preliminary proxy statement, the
Proxy Statement/Prospectus, the Registration Statement, and the
execution and delivery by each of ANPP and DHC, on such date as
the ANPP Tax Counsel or the DHC Tax Counsel issues its
respective opinion, of the ANPP Tax Opinion Representations or
the DHC Tax Opinion Representations, as applicable. Without
limiting the generality of the foregoing, ANPP will use its
reasonable best efforts to provide information to the DHC
Parties and any of their respective representatives with respect
to itself as may be reasonably requested in connection with
preparation and filing of the preliminary proxy statement, the
Proxy Statement/Prospectus and the Registration Statement.
(d) Nasdaq Listing. DHC will use
its reasonable best efforts to cause the shares of New DHC
Common Stock issuable in the Merger (including the shares of New
DHC Common Stock reserved for issuance with respect to Rollover
SARs and the Converted Options) to be eligible for listing on
the Nasdaq Global Select Market prior to the Effective Time of
the Merger.
Section 5.09. Notification
of Certain Matters. Between the date hereof
and the Closing Date, each party will give prompt notice in
writing to the other party of: (a) any breach of its
representations or warranties contained herein, (b) the
occurrence or non-occurrence of any event which will result, or
is reasonably likely to result, in the failure of any condition
set forth in Article VII, any covenant or agreement
contained in this Agreement to be complied with or satisfied,
(c) any failure of DHC or ANPP, as the case may be, to
satisfy any condition or comply with any covenant or agreement
to be satisfied or complied with by it hereunder, (d) any
notice or other communication from any Person alleging that the
consent of such Person is or may be required in connection with
the Transactions or that the Transactions otherwise may violate
the rights of or confer remedies upon such Person and
(e) any notice of, or other communication relating to, any
litigation referred to in Section 5.10 or any order or
judgment entered or rendered therein; provided, however,
that the delivery of any notice pursuant to this
Section 5.09 will not limit or otherwise affect the
remedies available hereunder to the party receiving such notice.
Section 5.10. Defense
of Litigation. Each of the parties agrees to
vigorously defend against all actions, suits or proceedings in
which such party is named as a defendant which seek to enjoin,
restrain or prohibit the Transactions or any part thereof or
seek damages with respect to any such transactions. No party
will settle any such action, suit or proceeding or fail to
perfect on a timely basis any right to appeal any judgment
rendered or order entered against such party therein without the
written consent of the other parties (which consent will not be
unreasonably withheld or delayed). Each of the parties further
agrees to use reasonable best efforts to cause each of its
Affiliates, directors and officers to vigorously defend any
action, suit or proceeding in which such Affiliate, director or
officer is named as a defendant and which seeks any such relief
to comply with this Section to the same extent as if such Person
were a party hereto.
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Section 5.11. Section 16
Matters. Prior to the Closing, the DHC Board
or a committee of Non-Employee Directors thereof (as such term
is defined for purposes of
Rule 16b-3(d)
under the Exchange Act)
and/or the
board of directors of New DHC, or a committee of Non-Employee
Directors thereof, will adopt a resolution providing that the
receipt by each officer or director of DHC or New DHC of New DHC
Common Stock in exchange for shares of DHC Common Stock, or
shares of New DHC Common Stock upon exercise of Rollover SARs
and Convertible Options, in each case pursuant to the
Transactions, are intended to be exempt from liability pursuant
to Section 16(b) under the Exchange Act such that any such
receipt will be so exempt.
Section 5.12. Transaction
Documents.
(a) Each party hereto agrees to execute or cause the
applicable of their respective Subsidiaries to execute,
concurrently with the Closing, each of the Transaction
Documents, to which it is a party, that has not been executed by
such party or its applicable Subsidiaries as of the date of this
Agreement.
(b) At such time prior to the Spin-Off Effective Time as
all conditions to each partys obligation to consummate the
Transactions have been satisfied or waived, other than the
delivery of (v) the certificates specified in
Sections 7.02(c) and 7.03(c), (w) the DHC Tax Opinion
Representations and the ANPP Tax Opinion Representations,
(x) the opinions of ANPP Tax Counsel and DHC Tax Counsel
pursuant to Sections 7.02(d) and 7.03(d), respectively,
(y) all documents and instruments necessary to effect the
ANPP Contribution (including share certificates or other
instruments evidencing the ANPP Contribution Shares and the ANPP
Contributed Assets) and (z) all documents and instruments
necessary to effect the Merger (including the Certificate of
Merger) (the certificates, opinions, documents, instruments
described in clauses (v), (w), (x), (y) and (z) of
this Section 5.12(b), the Closing
Documents), (i) the applicable parties will
execute the Closing Documents, which are to be held in escrow by
such applicable parties and released from escrow and delivered
to the other parties immediately following the Spin-Off
Effective Time, and (ii) each of the parties will execute
an instrument acknowledging that all such conditions to each
partys obligation to consummate the Transactions have been
satisfied or waived.
Section 5.13. Discovery
Matters. Prior to the Spin-Off Effective
Time, ANPP will exercise the Call with respect to
the Hendricks Share (as defined in the Discovery Limited
Liability Company Agreement) pursuant to the Stock Purchase
Agreement, dated as of June 23, 2003, among John S.
Hendricks and ANPP, among others, and acquire record ownership
of the Hendricks Share pursuant to the terms of such agreement.
Prior to the Closing, DHC and ANPP will enter into an agreement
terminating the Indemnification Agreement, dated as of
June 24, 2005, between DHC and ANPP.
Section 5.14. ANPP
Parents Undertaking. Each of API and NBCo
covenants and agrees (i) to cause ANPP to perform its
obligations under this Agreement and the Transaction Documents
to which it is a party and to consummate the Transactions in
accordance with the terms and subject to the conditions hereof
and thereof, and (ii) that it will not take any action, or
fail to take any action, that would result in the ANPP Parents
not being the Beneficial Owner of the ANPP Contribution
Interests as of the Contribution Effective Time. In respect of
this Section 5.14 only, each ANPP Parent makes the
representations set forth in Section 4.02 as to itself.
Section 5.15. Tax
Covenants.
(a) Each of ANPP and DHC shall provide the other with a
copy of the legal opinion received by each of them from their
respective tax counsel in accordance with Sections 7.02(d)
and 7.03(d), respectively.
(b) None of the DHC Parties, ANPP or their respective
Affiliates will take or permit to be taken any action at any
time that is reasonably likely, directly or indirectly, in whole
or in part, to (i) jeopardize the receipt of any of the tax
opinions contemplated by Sections 7.02(d) and 7.03(d)
hereof, or (ii) adversely affect the qualification of
(w) the ANPP Contribution (in conjunction with the Merger)
as a tax-free exchange within the meaning of Section 351 of
the Code, (x) the AMG Spin-Off as a reorganization under
Sections 368(a) and 355 of the Code or (y) the Merger
(in conjunction with the ANPP Contribution) as a tax-free
exchange within the meaning of Section 351 of the Code.
(c) The DHC Parties, ANPP, and their respective Affiliates
will use reasonable best efforts to take or cause to be taken
any action reasonably necessary (i) to ensure the receipt
of, as well as the continued validity and applicability of, the
tax opinions contemplated by Sections 7.02(d) and 7.03(d)
hereof and (ii) to preserve the qualification of
(w) the ANPP Contribution (in conjunction with the Merger)
as a tax-free exchange within the
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meaning of Section 351 of the Code, (x) the AMG
Spin-Off as a reorganization under Sections 368(a) and 355
of the Code and (y) the Merger (in conjunction with the
ANPP Contribution) as a tax-free exchange within the meaning of
Section 351 of the Code.
(d) The DHC Parties will not adopt any plan to liquidate,
merge or dissolve DHC within two years after the Merger.
ARTICLE VI
[Intentionally
Omitted]
ARTICLE VII
Conditions
Precedent
Section 7.01. Conditions
to Obligations of Each Party. The respective
obligations of each party to this Agreement to consummate the
Transactions is subject to the satisfaction at or prior to the
Unconditional Time of each of the following conditions, any of
which may be waived (to the extent such condition may be waived
by such party) in writing:
(a) No Law, and no injunction or other order issued by any
court or other Governmental Authority of competent jurisdiction
or other legal or regulatory prohibition will be in effect, in
each case that would prevent the consummation of the
Transactions.
(b) All authorizations, consents, orders or approvals of,
or declarations or filings with, or expiration of waiting
periods under the HSR Act or under the laws of any of the
jurisdictions listed on Schedule 7.01(b) hereto, necessary
for the consummation of the Transactions will have been filed,
expired or been obtained.
(c) The DHC Stockholder Approval has been obtained.
(d) The New DHC Charter has been filed with the Secretary
of State of the State of Delaware, and has become effective, in
accordance with the DGCL.
(e) The Registration Statement (as amended or supplemented)
has been declared effective and will be effective under the
Securities Act at the Unconditional Time, and no stop order
suspending effectiveness has been issued, and no action, suit,
proceeding or, to the knowledge of DHC, investigation seeking a
stop order or to suspend the effectiveness of the Registration
Statement will be pending before or threatened by the SEC.
(f) Each of the Transaction Documents has been executed and
delivered and is in full force and effect.
(g) The shares of New DHC Common Stock to be issued
pursuant to the Merger have been approved for listing on the
Nasdaq Global Select Market, subject to official notice of
issuance.
(h) The registration statement on Form 10 (as amended
or supplemented) of the Spin-Off Company has been declared
effective and will be effective under the Exchange Act at the
Unconditional Time, and no stop order suspending effectiveness
has been issued, and no action, suit, proceeding or, to the
knowledge of DHC, investigation seeking a stop order or to
suspend the effectiveness of such registration statement will be
pending before or threatened by the SEC.
(i) The shares of Series A common stock of the
Spin-Off Company to be issued in the AMG Spin-Off to holders of
DHC Common Stock have been approved for listing on the Nasdaq
Stock Market, subject to official notice of issuance.
(j) All other conditions and steps to completing the AMG
Spin-Off have been satisfied, completed or waived, as
applicable, except those documents and instruments necessary to
complete the AMG Spin-Off that can only be delivered at or
immediately prior to the Spin-Off Effective Time.
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Section 7.02. Additional
Conditions to ANPPs Obligations. The
obligations of ANPP to consummate the ANPP Contribution are also
subject to the satisfaction at or prior to the Unconditional
Time of each of the following conditions, unless waived by ANPP
(to the extent such condition may be waived by ANPP) in writing:
(a) Except as set forth in the following sentence, the
representations and warranties of DHC contained in this
Agreement and in any certificate or other writing delivered by
DHC pursuant hereto will be true and correct (without giving
effect to any limitation as to materiality set forth therein) as
of the date of this Agreement and (except to the extent such
representations and warranties speak as of a specified earlier
date, in which case, as of such earlier date) as of the
Unconditional Time as though made as of the Unconditional Time,
except where the failure of such representations and warranties
to be true and correct (without giving effect to any limitation
as to materiality set forth therein) would not, individually or
in the aggregate, have a material adverse effect on the business
and operations of New DHC and its Subsidiaries, taken as a
whole, or on the ability of DHC to consummate the Transactions.
The representations and warranties of the DHC Parties contained
in Section 3.06(c) will be true and correct in all respects
at and as of the Unconditional Time as if made at and as of such
time.
(b) Each DHC Party has performed in all material respects
all obligations and agreements, and complied in all material
respects with all covenants and conditions, contained in this
Agreement to be performed or complied with by it at or prior to
the Unconditional Time.
(c) ANPP has received such certificates of DHC, effective
as of the Unconditional Time, in each case signed by an
executive officer of DHC (but without personal liability
thereto), to evidence satisfaction of the conditions set forth
in Sections 7.01(c), 7.02(a) and 7.02(b), as may be
reasonably requested by ANPP.
(d) ANPP has received the opinion of Ernst &
Young LLP or another nationally recognized accounting firm or
law firm (ANPP Tax Counsel), in form
and substance reasonably satisfactory to ANPP and dated as of
the Closing Date, to the effect that, for United States federal
income tax purposes, the ANPP Contribution (in conjunction with
the Merger) will qualify as a tax-free exchange within the
meaning of Section 351 of the Code. In rendering such
opinion, ANPP Tax Counsel may rely upon (and may incorporate by
reference) representations and covenants contained in the ANPP
Tax Opinion Representations.
Section 7.03. Additional
Conditions to the DHC Parties
Obligations. The obligations of the DHC
Parties to consummate the Transactions are also subject to the
satisfaction at or prior to the Unconditional Time of each of
the following conditions, unless irrevocably waived by DHC, on
behalf of the DHC Parties (to the extent such condition may be
waived by the DHC Parties) in writing:
(a) Except as set forth in the following sentence, the
representations and warranties of ANPP contained in this
Agreement and in any certificate or other writing delivered by
ANPP pursuant hereto will be true and correct (without giving
effect to any limitation as to materiality set forth therein) as
of the date of this Agreement and (except to the extent such
representations and warranties speak as of a specified earlier
date, in which case, as of such earlier date) as of the
Unconditional Time as though made as of the Unconditional Time,
except where the failure of such representations and warranties
to be true and correct (without giving effect to any limitation
as to materiality set forth therein) would not, individually or
in the aggregate, have a material adverse effect on ANPPs
ability to consummate the Transactions. The representations and
warranties of ANPP contained in Section 4.04 will be true
and correct in all respects at and as of the Unconditional Time
as if made at and as of such time.
(b) ANPP has performed in all material respects all
obligations and agreements, and complied in all material
respects with all covenants and conditions, contained in this
Agreement to be performed or complied with by it at or prior to
the Unconditional Time.
(c) DHC has received such certificates of ANPP, effective
as of the Unconditional Time, in each case signed by an
executive officer of ANPP (but without personal liability
thereto), to evidence satisfaction of the conditions set forth
in Sections 7.03(a) and 7.03(b), as may be reasonably
requested by DHC.
(d) DHC has received the opinion of Skadden, Arps, Slate,
Meagher & Flom LLP or another nationally recognized
law firm (DHC Tax Counsel), in form
and substance reasonably satisfactory to DHC and dated
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as of the Closing Date, to the effect that, for United States
federal income tax purposes, (i) the AMG Spin-Off should
qualify as a reorganization under Sections 368(a) and 355
of the Code to DHC and the holders of DHC Common Stock, and
(ii) the Merger (in conjunction with the ANPP Contribution)
will qualify as a tax-free exchange within the meaning of
Section 351 of the Code. In rendering such opinion, DHC Tax
Counsel may rely upon (and may incorporate by reference)
representations and covenants contained in the DHC Tax Opinion
Representations.
(e) The New DHC Rights Agreement has been executed and
delivered and is in full force and effect and no investigation,
action, suit or proceeding has been commenced, brought, taken
or, to the knowledge of any DHC Party, threatened, seeking to
invalidate the New DHC Rights Agreement (or any provision or
term thereof), any of the New DHC Rights, the Rights Dividend or
any of the transactions contemplated by the New DHC Rights
Agreement.
Section 7.04. Frustration
of Closing Conditions. None of the DHC
Parties or ANPP may rely on the failure of any condition set
forth in this Article VII to be satisfied if such failure
was caused by such partys failure to act in good faith or
to use its reasonable best efforts to cause the Closing to occur
as required by Section 5.05.
ARTICLE VIII
Termination
Section 8.01. Termination.
(a) Notwithstanding anything to the contrary in this
Agreement, this Agreement may be terminated and the Transactions
abandoned at any time prior to the Unconditional Time, whether
before or after the DHC Stockholder Approval is obtained:
(i) by mutual written agreement of DHC and ANPP;
(ii) by either DHC or ANPP, if the DHC Stockholder Approval
is not obtained at the DHC Stockholder Meeting (as such meeting
may be adjourned from time to time);
(iii) by either DHC or ANPP, if any of the conditions to
such partys obligations set forth in Article VII has
become incapable of fulfillment, and has not been waived by such
party;
(iv) by either DHC or ANPP, if any court of competent
jurisdiction or other Governmental Authority has issued an
order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the Transactions
and such order, decree, ruling or other action has become final
and nonappealable; or
(v) by either DHC or ANPP, if the Unconditional Time does
not occur on or prior to December 31, 2008;
provided, however, that the party seeking
termination pursuant to clause (ii), (iii), (iv) or
(v) is not in breach of any of its representations,
warranties, covenants or agreements contained in this Agreement
in any material respect.
(b) Notwithstanding anything to the contrary in this
Agreement, if the Closing has not occurred by the close of
business on the 2nd Business Day after the Unconditional
Time has occurred, then this Agreement may be terminated and the
Transactions abandoned at any time after the close of business
on the 2nd Business Day after the Unconditional Time has
occurred by either DHC or ANPP; provided, however,
that the party seeking termination pursuant to this
Section 8.01(b) is not in breach of any of its
representations, warranties, covenants or agreements contained
in this Agreement in any material respect.
(c) In the event of termination by a party pursuant to this
Section 8.01, written notice thereof will forthwith be
given to the other parties, and the Transactions will be
terminated without further action by any party. If this
Agreement is terminated as provided herein, each party will
return all documents and other material received from any other
party relating to the Transactions, whether so obtained before
or after the execution hereof.
Section 8.02. Effect
of Termination. In the event of the
termination of this Agreement pursuant to Section 8.01,
this Agreement, except for the provisions of Section 5.04,
Article X and this Section 8.02, will
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become void and will be of no further effect, without any
liability on the part of any party hereto or its directors,
officers or stockholders. Nothing in this Section 8.02 will
be deemed to release any party from any liability for any breach
by such party of the terms and provisions of this Agreement.
ARTICLE IX
Indemnification
Section 9.01. Indemnification. (a)(i)
The DHC Parties, jointly and severally, covenant and agree, on
the terms and subject to the limitations set forth in this
Agreement, from and after the Closing to indemnify and hold
harmless ANPP, its Affiliates and their respective officers,
directors, shareholders, employees, representatives, agents and
trustees (the ANPP Indemnified
Parties), from and against any actual and direct
Losses incurred by such ANPP Indemnified Party, to the extent
arising out of or resulting from:
(x) the representations and warranties of the DHC Parties
contained in Section 3.06(c) not being true and correct
when made or deemed made;
(y) any failure by any DHC Party to perform or fulfill any
of its covenants or agreements contained in this Agreement to be
performed in all material respects at or prior to the Closing
Date; and
(z) (1) any Liability for Taxes, if any, incurred by
ANPP (as determined below) as a consequence of the release of
any of the ANPP Escrow Shares from the Escrow to the extent that
the ANPP Contribution (in conjunction with the Merger) otherwise
qualified as a tax-free exchange within the meaning of
Section 351 of the Code, or (2) a claim made by a
third party against an ANPP Indemnified Party that arises
(A) solely out of the ownership or operation of the
business, assets or liabilities of the Spin-Off Company after
the Closing Date or (B) out of any Liability of any of the
DHC Parties or of the Spin-Off Company (but not including any
Liability of Discovery and its Subsidiaries or the Audio Company
and its Subsidiaries) to the extent existing at, or arising out
of a state of facts existing at or prior to, the Closing Date.
The Liability for Taxes incurred by ANPP pursuant to
subparagraph (a)(i)(z)(1) shall be based upon the Tax that ANPP
would incur if it were subject to Tax as a corporation using the
Current Effective Tax Rate, plus the Liability for Taxes that
would be incurred by ANPP as a result of the receipt of any
payment made pursuant to subparagraph (a)(i)(z)(1).
(ii) Without any duplication of the foregoing indemnity in
Section 9.01(a)(i) above, the DHC Parties, jointly and
severally, covenant and agree, on the terms and subject to the
limitations set forth in this Agreement, from and after the
Closing, to indemnify and hold harmless ANPP from and against
its Loss Percentage of any Losses incurred by New DHC calculated
in the manner provided in Section 9.02 below, to the extent
arising out of or resulting from:
(x) any failure by any DHC Party to perform or fulfill any
of its covenants or agreements contained in this Agreement to be
performed in all material respects at or prior to the Closing
Date;
(y) any Liability of any of the DHC Parties or of the
Spin-Off Company (but not including any Liability of Discovery
and its Subsidiaries or the Audio Company and its Subsidiaries)
to the extent existing at, or arising out of a state of facts
existing at or prior to, the Closing Date; and
(z) any Liabilities or other obligations incurred, created
or assumed by the Audio Company or its Subsidiaries prior to the
Closing for which New DHC or its Subsidiaries (other than the
Audio Company or its Subsidiaries) become obligated after the
Closing.
(iii) No indemnification by the DHC Parties under
Section 9.01(a)(ii) above will be due and payable to the
ANPP Indemnified Parties, to the extent of any Losses arising
from Liabilities that are subject to indemnification by the
Spin-Off Company pursuant to the Reorganization Agreement or Tax
Sharing Agreement to the extent New DHC has been indemnified by
the Spin-Off Company for such Losses.
(b) ANPP covenants and agrees, on the terms and subject to
the limitations set forth in this Agreement, from and after the
Closing to indemnify and hold harmless the DHC Parties, their
respective Affiliates and their
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respective officers, directors, shareholders, employees,
representatives, agents and trustees (the DHC
Indemnified Parties), from and against any Losses
incurred by such DHC Indemnified Party, to the extent arising
out of or resulting from:
(i) any representation or warranty of ANPP contained in
this Agreement and in any certificate or other writing delivered
by ANPP or its Affiliates pursuant hereto, in each case, that
survives the Closing not being true and correct when made or
deemed made; and
(ii) any failure by ANPP or its Affiliates to perform or
fulfill any of its covenants or agreements contained in this
Agreement.
Section 9.02. Calculation
of Losses. This Section 9.02 provides
the calculation of the amount of indemnity to which ANPP will be
entitled in respect of actual and direct Losses for which ANPP
may be entitled to indemnification pursuant to
Section 9.01(a)(i) and for indirect Losses in the form of a
diminution in value of ANPPs interest in New DHC for which
ANPP may be entitled to indemnification pursuant to
Section 9.01(a)(ii). With respect to the calculation of
Losses for which ANPP may be entitled to indemnification
pursuant to Section 9.01(a)(i), the amount which the DHC
Parties shall pay ANPP in respect of such Losses shall be
computed by multiplying such Losses by one plus a fraction,
(y) the numerator of which is the Loss Percentage
(expressed as a decimal) and (z) the denominator of which
is one minus the Loss Percentage (expressed as a decimal). With
respect to the calculation of Losses for which ANPP may be
entitled to indemnification pursuant to
Section 9.01(a)(ii), ANPPs Losses for which the DHC
Parties would be obligated to indemnify ANPP pursuant to
Section 9.01(a)(ii) will be deemed to equal the product of
(x) a fraction, (1) the numerator of which is the Loss
Percentage (expressed as a decimal) and (2) the denominator
of which is one minus the Loss Percentage (expressed as a
decimal), and (y) the difference, if positive, between the
fair market value of New DHC and its Subsidiaries (other than,
prior to the AMG Spin-Off, AMG and its Subsidiaries), taken as a
whole, determined as if such covenant or agreement had been
performed in all respects or such Liability of DHC, the Spin-Off
Company or the Audio Company and its Subsidiaries did not exist,
and the fair market value of New DHC and its Subsidiaries (other
than, prior to the AMG Spin-Off, AMG and its Subsidiaries),
taken as a whole, determined after giving effect to the breach,
nonperformance or violation of such covenant or agreement or the
existence of such Liability at DHC, the Spin-Off Company or the
Audio Company and its Subsidiaries. (but without giving effect
to any indemnification obligation of the DHC Parties pursuant to
this Agreement). The fair market value of New DHC for purposes
of the immediately preceding sentence, will be determined after
giving effect to, among other considerations and effects, the
stock price of shares of New DHC Common Stock, the equity value
of New DHC, any amounts recovered by New DHC under insurance
policies or indemnities from third parties or from the Spin-Off
Company pursuant to the Reorganization Agreement or the Tax
Sharing Agreement, and any Tax effects relating to or resulting
from the Loss. For purposes of this Agreement, the term
Loss Percentage means the lesser of
(1) 331/3%
and (2) the percentage obtained by dividing (A) the
total number of shares of New DHC Common Stock Beneficially
Owned by ANPP after giving effect to conversion of all shares of
New DHC Preferred Stock (other than any ANPP Escrow Shares) held
by the ANPP Stockholder Group (as defined in the New DHC
Charter), including any Released Series A Preferred Shares
(as defined in the Escrow Agreement) and Released Series C
Preferred Shares (as defined in the Escrow Agreement), on the
date the indemnification payment is made by (B) the sum of
the total number of shares of New DHC Common Stock issued and
outstanding after giving effect to conversion of all shares of
New DHC Preferred Stock held by the ANPP Stockholder Group
(other than the ANPP Escrow Shares) on the date the
indemnification payment is made, including any Released
Series A Preferred Shares and Released Series C
Preferred Shares.
Section 9.03. Defense
of Claims.
(a) Any Party seeking indemnification under
Section 9.01 hereof (the Indemnified
Party) will give the party from whom such
indemnification is sought (the Indemnifying
Party) prompt (which, in the case of any claim,
investigation, action, suit or proceeding made or commenced by a
third party for which indemnity is being sought, will be no
later than ten Business Days following receipt by the
Indemnified Party of written notice of such third party claim,
investigation, action, suit or proceeding) notice of any claim,
investigation, action, suit or proceeding with respect to which
such indemnification is sought; provided, however, that
failure to give such notification will not affect the
indemnification provided hereunder except to the extent the
Indemnifying Party has been actually and materially prejudiced
as a result of such failure (except that the Indemnifying Party
will not be
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liable for any expenses incurred during the period in which the
Indemnified Party failed to give such notice). Thereafter, the
Indemnified Party will deliver to the Indemnifying Party, within
five Business Days time after the Indemnified Partys
receipt thereof, copies of all notices and documents (including
court papers) received by the Indemnified Party relating to the
third party claim, investigation, action, suit or proceeding. In
the case of any such third party claim, investigation, action,
suit or proceeding (other than as provided below), the
Indemnified Party will be entitled, at the sole expense and
liability of the Indemnifying Party, to exercise full control of
the defense of, and subject to the other provisions of this
Article IX, to the compromise or settlement of any third
party claim, investigation, action, suit or proceeding unless
the Indemnifying Party, within a reasonable time after the
giving of such notice by the Indemnified Party:
(i) delivers a written confirmation to such Indemnified
Party that the indemnification provisions of Section 9.01
are applicable to such claim, investigation, action, suit or
proceeding and that the Indemnifying Party will indemnify such
Indemnified Party in respect of such claim, investigation,
action, suit or proceeding pursuant to the terms of
Section 9.01, (ii) notifies such Indemnified Party in
writing of the Indemnifying Partys intention to assume the
defense thereof, and (iii) retains legal counsel reasonably
satisfactory to such Indemnified Party to conduct the defense of
such claim, investigation, action, suit or proceeding, in which
case the Indemnifying Party will be entitled to exercise full
control of the defense, compromise or settlement of such third
party claim, investigation, action, suit or proceeding, except
to the extent otherwise expressly provided herein.
Notwithstanding anything herein to the contrary, in the case of
any third party claim, investigation, action, suit or proceeding
against DHC, New DHC or any of their respective Subsidiaries,
DHC, New DHC or such Subsidiary, as applicable, will be entitled
to exercise full control of the defense, compromise or
settlement thereof.
(b) If the Indemnifying Party so assumes the defense of any
such claim, investigation, action, suit or proceeding in
accordance herewith, then such Indemnified Party will cooperate
with the Indemnifying Party in any manner that the Indemnifying
Party reasonably may request in connection with the defense,
compromise or settlement thereof. If the Indemnifying Party so
assumes the defense of any such claim, investigation, action,
suit or proceeding, the Indemnified Party will have the right to
employ separate counsel and to participate in (but not control)
the defense, compromise, or settlement thereof, but the fees and
expenses of such counsel will be the expense of such Indemnified
Party unless such Indemnified Party is a party to such claim,
action, suit or proceeding, or a subject of such investigation,
as applicable, and (i) the Indemnifying Party has agreed to
pay such fees and expenses, (ii) any relief other than the
payment of money damages is sought against the Indemnified Party
or (iii) such Indemnified Party has been advised by its
counsel that there may be one or more legal defenses available
to it that are different from or additional to those available
to the Indemnifying Party or that there may be a conflict of
interest between the Indemnifying Party and the Indemnified
Party in the conduct of the defense of such claim,
investigation, action, suit or proceeding (in either of which
cases the Indemnifying Party will not have the right to control
the defense, compromise or settlement of such claim,
investigation, action, suit or proceeding on behalf of the
Indemnified Party), and in any such case described in clauses
(i), (ii) or (iii) the reasonable fees and expenses of
such separate counsel will be borne by the Indemnifying Party.
No Indemnified Party will settle or compromise or consent to
entry of any judgment with respect to any such claim,
investigation, action, suit or proceeding for which it is
entitled to indemnification hereunder without the prior written
consent of the Indemnifying Party, which will not be
unreasonably withheld, unless the Indemnifying Party had the
right under this Section 9.03 to undertake control of the
defense of such claim, investigation, action, suit or proceeding
and, after reasonable notice, failed to do so. The Indemnifying
Party will not, without the written consent of such Indemnified
Party, settle or compromise or consent to entry of any judgment
with respect to any such claim, investigation, action, suit or
proceeding (x) in which any relief other than the payment
of money damages is or may be sought against such Indemnified
Party, (y) in which the amount of money damages
contemplated to be paid in connection with such settlement,
compromise or judgment, exceeds any dollar limitations on the
Indemnifying Partys obligations hereunder pursuant to
Section 9.01 or (z) that does not include as an
unconditional term thereof the giving by the claimant, party
conducting such investigation, plaintiff or petitioner to such
Indemnified Party of a release from all liability with respect
to such claim, investigation, action, suit or proceeding.
Section 9.04. Survival. The
representations and warranties of ANPP contained herein will
survive the Closing and continue in full force and effect
(1) until the expiration of the applicable statute of
limitations applicable to claims that may be asserted in respect
of the matters covered thereby or related thereto, in the case
of the representations and warranties set forth in
Sections 4.01, 4.02, 4.04, 4.07 and 4.08, and
(2) until the
12-month
anniversary of the Closing Date, in the case of all other
representations and warranties. The representations and
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warranties of the DHC Parties contained in Section 3.06(c)
will survive the Closing and continue in full force and effect
until the expiration of the applicable statute of limitations
applicable to claims that may be asserted in respect of the
matters covered thereby or related thereto. The covenants and
agreements made by each Party in this Agreement will survive the
Closing without limitation unless otherwise contemplated by
their terms. Any representation, warranty or covenant that is
the subject of a claim or dispute asserted in writing prior to
the expiration of the applicable above-stated periods will
survive with respect to such claim or dispute until the final
resolution thereof.
Section 9.05. Tax
Treatment. For all Tax purposes and to the
extent permitted by applicable Tax law, the Parties will treat
any payment made pursuant to this Article IX to
(1) ANPP as an adjustment of the original consideration
occurring in connection with the Transactions and (2) to
the DHC Parties as a capital contribution by ANPP to New DHC
occurring in connection with the Transactions.
Section 9.06. Exclusive
Remedy. Following the Closing, except in the
case of common law fraud, the sole and exclusive monetary remedy
of the parties with respect to any and all claims arising from
any breach of this Agreement or any of the other matters
addressed in Section 9.01 will be pursuant to the
indemnification provisions set forth in this Article IX.
ARTICLE X
Miscellaneous
Section 10.01. Notices. All
notices, requests, demands, waivers and other communications
required or permitted to be given under this Agreement will be
in writing and will be deemed to have been duly given if
delivered personally or mailed, certified or registered mail
with postage prepaid, or sent by telegram, overnight courier or
confirmed facsimile, as follows:
|
|
|
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(a)
|
if to New DHC, DHC, or Merger Sub, to:
|
Discovery Holding Company
12300 Liberty Boulevard
Englewood, Colorado 80112
Attn: Charles Y. Tanabe, Esq.
Facsimile:
(720) 875-5858
and with a copy to:
Baker Botts L.L.P.
30 Rockefeller Plaza
New York, New York 10112
Attn: Frederick McGrath, Esq.
Facsimile:
(212) 259-2530
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|
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(b)
|
if to ANPP or ANPP Parent, to:
|
Advance/Newhouse Programming Partnership
5000 Campuswood Drive
E. Syracuse, NY 13057
Attn: Robert J. Miron
Facsimile:
(315) 463-4127
and with a copy to:
Sabin, Bermant & Gould LLP
Four Times Square
New York, NY 10036
Attn: Craig D. Holleman, Esq.
Facsimile:
(212) 381-7226
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or to such other Person or address as any party will specify by
notice in writing to the other party. All such notices,
requests, demands, waivers and communications will be deemed to
have been received on the date of delivery or on the third
business day after the mailing thereof, except that any notice
of a change of address will be effective only upon actual
receipt thereof.
Section 10.02. No
Third Party Beneficiaries. The terms of this
Agreement are not intended to confer any rights or remedies
hereunder upon, and will not be enforceable by, any Person other
than the parties hereto, other than with respect to the
provisions of Article IX hereof, each indemnified person.
Section 10.03. Waiver. No
failure by any party to this Agreement to insist upon the strict
performance of any covenant, agreement, term or condition hereof
or to exercise any right or remedy consequent upon a breach of
such or any other covenant, agreement, term or condition will
operate as a waiver of such or any other covenant, agreement,
term or condition of this Agreement. Any party to this
Agreement, by notice given in accordance with
Section 10.01, may, but will not be under any obligation
to, waive any of its rights or conditions to its obligations
under this Agreement, or any duty, obligation or covenant of any
other party hereto. No waiver will affect or alter the remainder
of this Agreement and each and every covenant, agreement, term
and condition hereof will continue in full force and effect with
respect to any other then existing or subsequent breach. The
rights and remedies provided by this Agreement are cumulative
and the exercise of any one right or remedy by any party will
not preclude or waive its right to exercise any or all other
rights or remedies.
Section 10.04. Assignment. Neither
this Agreement nor any of the rights, interests or obligations
hereunder will be assigned prior to the Closing (including by
operation of law, in a merger or other business combination) by
any of the parties hereto without the prior written consent of
the other parties. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be
enforceable by the parties and their respective successors and
permitted assigns.
Section 10.05. Integration. This
Agreement and the other Transaction Documents (including the
schedules and exhibits hereto and thereto) constitute the entire
agreement among the parties hereto pertaining to the subject
matter hereof and, except for the Nondisclosure Agreement,
supersede all prior agreements and understandings of the parties
in connection herewith, and no covenant, representation or
condition not expressed in such Transaction Documents will
affect, or be effective to interpret, change or restrict, the
express provisions of this Agreement.
Section 10.06. Captions. The
captions herein are included for convenience of reference only
and will be ignored in the construction or interpretation hereof.
Section 10.07. Counterparts. This
Agreement may be executed in one or more counterparts, all of
which will be considered one and the same instrument and will
become effective when one or more counterparts have been signed
by each of the parties hereto and delivered to the other parties
hereto, it being understood that all parties hereto need not
sign the same counterpart.
Section 10.08. Severability. Each
provision of this Agreement will be considered separable and if
for any reason any provision of this Agreement, or the
application thereof, becomes or is declared by a court of
competent jurisdiction to be illegal, void or unenforceable, the
remainder of this Agreement will continue in full force and
effect and the application of such provision to other Persons or
circumstances will be interpreted so as reasonably to effect the
intent of the parties hereto. The parties hereto further agree
to replace such void or unenforceable provision of this
Agreement with a valid and enforceable provision that will
achieve, to the extent possible, the economic, business and
other purposes of such illegal, void or unenforceable provision.
Section 10.09. Governing
Law. This Agreement will be governed by and
construed in accordance with the laws of the State of Delaware
without giving effect to the conflicts of law principles thereof.
Section 10.10. Jurisdiction. Each
of the parties hereto irrevocably submits to the exclusive
jurisdiction of the courts of the Delaware Chancery Courts, or,
if the Delaware Chancery Courts do not have subject matter
jurisdiction, in the state courts of the State of Delaware
located in Wilmington, Delaware, or in the United States
District Court for any district within such state, for the
purpose of any suit, action or other proceeding arising out of
this Agreement or the Transactions. Each party agrees that
service of any process, summons, notice or document by
U.S. registered mail to such partys respective
address in accordance with Section 10.01 will be effective
service of process for any action, suit or proceeding in
Delaware with respect to any matters to which it has submitted
to
B-35
jurisdiction in this Section 10.10. Each party hereto
irrevocably and unconditionally waives and agrees not to plead
or claim any objection to the laying of venue of any such suit,
action or proceeding brought in such courts and irrevocably and
unconditionally waives any claim that any such suit, action or
proceeding brought in any such court has been brought in an
inconvenient forum.
Section 10.11. WAIVER
OF JURY TRIAL. EACH OF THE PARTIES HERETO
HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN
ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT
OR THE TRANSACTIONS.
Section 10.12. Specific
Performance. Each of the parties to this
Agreement agrees that the other parties hereto would be
irreparably damaged if any of the provisions of this Agreement
are not performed in accordance with its specific terms and that
monetary damages would not provide an adequate remedy in such
event. Accordingly, in addition to any other remedy to which the
nonbreaching parties may be entitled, at law or in equity, the
nonbreaching parties may be entitled to injunctive relief to
prevent breaches of this Agreement and to specifically enforce
the terms and provisions hereof.
Section 10.13. Amendments. This
Agreement may be amended by an instrument in writing signed on
behalf of each of the parties hereto at any time before or after
receipt of the DHC Stockholder Approval, provided,
however, that after the DHC Stockholder Approval and
prior to the Closing, there will be made no amendment that by
Law requires further approval by the DHC stockholders without
the further approval of such stockholders.
Section 10.14. Interpretation. When
a reference is made in this Agreement to Exhibits, Schedules,
Articles or Sections, such reference will be to an Exhibit,
Schedule, Article or Section to this Agreement unless otherwise
indicated. The words include, includes,
included, and including, when used
herein will be deemed in each case to be followed by the words
without limitation. The words close of
business will be deemed to mean 5:00 PM, New York
City time, on the date specified. The words hereof,
herein, hereby, and
hereunder and words of similar import when used in
this Agreement will refer to this Agreement as a whole and not
to any particular provision of this Agreement. The words
date hereof will refer to the date of this
Agreement. The term or is not exclusive and means
and/or unless the context in which such phrase is
used will dictate otherwise. The word extent in the
phrase to the extent will mean the degree to which a
subject or other such thing extends, and such phrase will not
mean simply if unless the context in which such
phrase is used dictates otherwise. The definitions contained in
this Agreement are applicable to the singular as well as the
plural forms of such terms and to the masculine as well as to
the feminine and neuter genders of such term. The table of
contents and Article and Section headings contained in this
Agreement are for reference purposes only and will not affect in
any way the meaning or interpretation of this Agreement.
Whenever the context may require, any pronoun will include the
corresponding masculine, feminine and neuter forms. Any
reference in this Agreement to a Person will be deemed to be a
reference to such Person and any successor (by merger,
consolidation, transfer or otherwise) to all or substantially
all its assets.
Section 10.15. Rules
of Construction. Each of the parties to this
Agreement agrees that they have been represented by counsel
during the negotiation, preparation and execution of this
Agreement and, therefore, waive the application of any law,
regulation, holding or rule of construction providing that
ambiguities in an agreement or other document will be construed
against the party drafting such agreement or document.
B-36
IN WITNESS WHEREOF, this Agreement has been duly executed by the
parties, and is effective as of the day and year first above
written.
DISCOVERY HOLDING COMPANY
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By:
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/s/ Charles
Y. Tanabe
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Name: Charles Y. Tanabe
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Title:
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Senior Vice President
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DISCOVERY COMMUNICATIONS, INC.
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By:
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/s/ Charles
Y. Tanabe
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Name: Charles Y. Tanabe
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Title:
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Senior Vice President
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DHC MERGER SUB, INC.
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By:
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/s/ Charles
Y. Tanabe
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Name: Charles Y. Tanabe
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Title:
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Senior Vice President
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ADVANCE/NEWHOUSE PROGRAMMING PARTNERSHIP
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By:
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Newhouse Programming Holdings Corp., its Managing Partner
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By:
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/s/ Donald
E. Newhouse
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Name: Donald E. Newhouse
[Signature Page to Transaction Agreement]
B-37
For purposes of Section 5.14 hereof only:
ADVANCE PUBLICATIONS, INC.
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By:
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/s/ Donald
E. Newhouse
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Name: Donald E. Newhouse
Title: President
NEWHOUSE BROADCASTING CORPORATION
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By:
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/s/ Donald
E. Newhouse
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Name: Donald E. Newhouse
[Signature Page to Transaction Agreement]
B-38
Appendix C
Execution
Copy
AGREEMENT
AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this
Agreement) is made as of this 4th day
of June, 2008, by and among Discovery Holding Company, a
Delaware corporation (DHC), Discovery
Communications, Inc., a Delaware corporation (New
DHC), and DHC Merger Sub, Inc., a Delaware
corporation (Merger Sub).
RECITALS
WHEREAS, each of New DHC and Merger Sub is a direct or
indirect subsidiary of DHC;
WHEREAS, the parties desire to effect the transactions
set forth in this Agreement in connection with (i) the
creation of a new holding company structure by merging Merger
Sub with and into DHC with DHC surviving, pursuant to which
merger New DHC will become the new, public, parent company and
DHC will become a wholly-owned subsidiary of New DHC, and
(ii) the conversion of outstanding DHC Common Stock (as
defined below) into New DHC Common Stock (as defined below);
WHEREAS, this Agreement has been approved and declared
advisable by the board of directors of each party hereto, and
has been adopted by the sole stockholders of each of Merger Sub
and New DHC; and
WHEREAS, the transactions contemplated by this Agreement
are intended to qualify as a tax-free exchange (in conjunction
with the ANPP Contribution (as defined in the Transaction
Agreement)) within the meaning of Section 351 of the Code
(as defined below).
NOW, THEREFORE, in consideration of the foregoing
premises and of the mutual covenants, representations,
warranties and agreements contained herein, the parties hereto
hereby agree as follows:
ARTICLE I
DEFINITIONS
As used in the Agreement, the following terms will have the
following meanings unless the context otherwise requires:
ANPP means Advance/Newhouse Programming
Partnership, a New York general partnership.
Book-Entry Shares means shares of DHC Common
Stock held in the Direct Registration System.
Code means U.S. Internal Revenue Code of
1986, as amended.
Certificates means certificates that
immediately prior to the Effective Time of the Merger
represented shares of DHC Common Stock.
DHC Board means the Board of Directors of DHC.
DHC Common Stock means the DHC Series A
Common Stock, the DHC Series B Common Stock and DHC
Series C Common Stock.
DHC Incentive Plans means the Discovery
Holding Company 2005 Incentive Plan (As Amended and Restated
Effective August 15, 2007), the Discovery Holding Company
2005 Non-Employee Director Plan (As Amended and Restated
Effective August 15, 2007) and the Discovery Holding
Company Transitional Stock Adjustment Plan (As Amended and
Restated Effective August 15, 2007).
DHC Rights Agreement means the Rights
Agreement, dated as of July 18, 2005, between DHC and
Computershare Trust Company, N.A., as Rights Agent.
DHC Series A Common Stock means the
Series A Common Stock, par value $.01 per
share, of DHC (including the DHC Series A Right attached
thereto).
C-1
DHC Series B Common Stock means the
Series B Common Stock, par value $.01 per
share, of DHC (including the DHC Series B Right attached
thereto).
DHC Series C Common Stock means the
Series C Common Stock, par value $.01 per
share, of DHC (including the DHC Series C Right attached
thereto).
DHC Series A Right has the meaning
ascribed to it in the DHC Rights Agreement.
DHC Series B Right has the meaning
ascribed to it in the DHC Rights Agreement.
DHC Series C Right has the meaning
ascribed to it in the DHC Rights Agreement.
Direct Registration System means the service
of the Exchange Agent that provides for electronic direct
registration of securities in a record holders name on the
Companys transfer books and allows shares to be
transferred between record holders electronically.
Effective Time of the Merger means the time
when the Merger becomes effective under applicable law as
provided in Section 3.01(a).
Exchange Agent means Computershare Trust
Company, N.A., which is the transfer agent for DHC Common Stock,
is expected to be the transfer agent for New DHC Common Stock
and is expected to be designated to act as exchange agent for
the purpose of exchanging Certificates and Book-Entry Shares in
the Merger.
Fair Market Value means with respect to a
share of any series of New DHC Common Stock on any day, the last
sale price (or, if no last sale price is reported, the average
of the high bid and low asked prices) for a share of the
applicable series of New DHC Common Stock on such day (or if
such day is not a trading day, the next trading day) as reported
on the Nasdaq Stock Market, Inc. or if such shares are not then
listed on the Nasdaq Stock Market, Inc., as reported on the
consolidated transaction reporting system for the principal
national securities exchange on which shares of the applicable
series of New DHC Common Stock are listed on such day; provided,
that, if for any day the Fair Market Value of a share of the
applicable series of New DHC Common Stock is not determinable by
any of the foregoing means, then the Fair Market Value for such
day shall be determined in good faith by the board of directors
of New DHC or any committee thereof on the basis of such
quotations and other considerations as the board or its
committee deems appropriate.
Merger means the merger of Merger Sub with
and into DHC with DHC surviving the merger.
New DHC Common Stock means, collectively, the
New DHC Series A Common Stock, New DHC Series B Common
Stock and New DHC Series C Common Stock.
New DHC Rights means, collectively, the New
DHC Series A Rights, the New DHC Series B Rights and
the New DHC Series C Rights.
New DHC Series A Common Stock means the
Series A Common Stock, par value $0.01 per share, of
New DHC (including, after the Effective Time of the Merger,
the New DHC Series A Right attached thereto pursuant to the
New DHC Rights Agreement).
New DHC Series B Common Stock means the
Series B Common Stock, par value $0.01 per share, of
New DHC (including, after the Effective Time of the Merger,
the New DHC Series B Right attached thereto pursuant to the
New DHC Rights Agreement).
New DHC Series C Common Stock means the
Series C Common Stock, par value $0.01 per share, of
New DHC (including, after the Effective Time of the Merger,
the New DHC Series C Right attached thereto pursuant to the
New DHC Rights Agreement).
New DHC Series A Right means a
Series A Right (as defined in the New DHC Rights Agreement).
New DHC Series B Right means a
Series B Right (as defined in the New DHC Rights Agreement).
New DHC Series C Right means a
Series C Right (as defined in the New DHC Rights Agreement).
Person means an individual, firm,
corporation, partnership, limited liability company, trust,
joint venture or other entity or a government, agency, political
subdivision, or instrumentality thereof.
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Record Date means the date and time as of
which holders of DHC Common Stock must own shares of DHC Common
Stock to be eligible to vote such shares at the Special Meeting.
SEC means the Securities and Exchange
Commission, and any successor commission or agency having
similar powers.
Securities Act means the Securities Act of
1933, as amended, and the rules and regulations thereunder.
Special Meeting has the meaning ascribed to
it in the Transaction Agreement.
Transactions has the meaning ascribed to it
in the Transaction Agreement.
Transaction Agreement means the agreement,
dated as of June 4, 2008, by and among DHC, New DHC,
Merger Sub, ANPP and, with respect to Section 5.14 thereof
only, Advance Publications, Inc., a New York corporation,
and Newhouse Broadcasting Corporation, a New York corporation.
VWAP means, (i) with respect to the DHC
Series A Common Stock or DHC Series B Common Stock,
the average of the daily volume weighted average prices of such
security over the 5-trading days ending on the trading day
immediately preceding the Closing Date (as defined in the
Transaction Agreement) or, if applicable, the trading day
immediately preceding the first date on which the DHC
Series A Common Stock or DHC Series B Common Stock, as
applicable, trades regular way on the Nasdaq Global Select
Market without the right to receive shares of common stock of
the Spin-Off Company (as defined in the Transaction Agreement),
and (ii) with respect to the New DHC Series A Common
Stock, New DHC Series B Common Stock, New DHC Series C
Common Stock, Series A common stock of the Spin-Off Company
or Series B common stock of the Spin-Off Company, the
average of the daily volume weighted average prices of such
security over the 10-trading days beginning on the day
immediately following the Closing (as defined in the Transaction
Agreement).
C-3
The following terms have the meanings ascribed thereto in the
sections set forth opposite such terms:
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Additional Defined Terms
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Section
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Agreement
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Preamble
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Awards
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3.04(a)
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Carryover Director
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3.04(b)(ii)
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Certificate of Merger
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3.01(a)
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Consideration
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3.02(a)(ii)
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Converted Options
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3.04(b)(iv)
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Converted Series A Option
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3.04(b)(i)
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Converted Series B Option
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3.04(b)(iv)
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DGCL
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3.01(a)
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DHC
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Preamble
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DHC Awards
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3.04(a)
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DHC Charter
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3.01(c)
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Director Series A Option
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3.04(b)(ii)
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Former Book-Entry Holders
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3.03(b)
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Former Book-Entry Shares
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3.03(b)
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Former Certificate Holders
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3.03(a)(i)
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Former Certificated Shares
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3.03(a)(i)
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Former DHC Holders
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3.03(b)
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Former DHC Shares
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3.03(b)
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Merger Sub
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Preamble
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New DHC
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Preamble
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New DHC Bylaws
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2.01
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New DHC Charter
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2.01
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New DHC Original Stock
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2.01
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Rollover SARs
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3.04(b)(iii)
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Scheduled Series A Option
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3.04(b)(i)
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Series A Consideration
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3.02(a)(i)
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Series B Consideration
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3.02(a)(ii)
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Series A Option
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3.04(b)(iii)
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Series B Option
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3.04(b)(iv)
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Series C Option
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3.04(b)(i)
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Series A SAR
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3.04(b)(iii)
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Series C SAR
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3.04(b)(iii)
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Spin-Off Company Series A Option
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3.04(b)(i)
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Spin-Off Company Series B Option
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3.04(b)(iv)
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Surviving Entity
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3.01(a)
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ARTICLE II
NEW DHC
Section 2.01 Organization
of New DHC. DHC has caused New DHC to be
organized under the laws of the State of Delaware. The
authorized capital stock of New DHC on the date hereof consists
of 10,000 shares of common stock, par value $0.01 per
share (the New DHC Original Stock), of
which 1,000 shares has been issued to DHC and no other
shares are issued and outstanding. Prior to the Contribution
Effective Time (as defined in the Transaction Agreement), New
DHC will (i) cause the Certificate of Incorporation of New
DHC (New DHC Charter) to be restated
as set forth in Exhibit 2.01(c)(i) to the Transaction
Agreement and filed with the Delaware Secretary of State, and
such New DHC Charter will be in effect as of the Effective Time
of the Merger, (ii) cause the
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Bylaws (New DHC Bylaws) of New DHC to
be restated as set forth in Exhibit 2.01(c)(ii) to the
Transaction Agreement, and such New DHC Bylaws will be in effect
as of the Effective Time of the Merger, and (iii) execute
and deliver to Computershare Trust Company, N.A., the Rights
Agreement between New DHC and the Computershare Trust Company,
N.A., in substantially the form of Exhibit 2.01(c)(iii) to
the Transaction Agreement (the New DHC Rights
Agreement). The authorized capital stock of New
DHC at the Effective Time of the Merger will be as provided for
in the New DHC Charter.
Section 2.02 Directors
and Officers of New DHC.
As of and following the Effective Time of the Merger, until
their successors are duly elected or appointed in accordance
with the New DHC Charter and the New DHC Bylaws, the directors,
executive officers and certain other officers of New DHC will be
as set forth on Schedule 2.03(f) to the Transaction
Agreement.
ARTICLE III
THE MERGER
AND RELATED MATTERS
Section 3.01 The
Merger.
(a) Merger; Effective Time of the
Merger. At the Effective Time of the Merger
and subject to and upon the terms and conditions of this
Agreement, Merger Sub will merge with and into DHC in accordance
with the provisions of the General Corporation Law of the State
of Delaware (DGCL), the separate
corporate existence of Merger Sub will cease and DHC will
continue as the surviving entity (the Surviving
Entity). The Effective Time of the Merger will be
on the date and at the time that the certificate of merger with
respect to the Merger, containing the provisions required by and
executed in accordance with Section 251 of the DGCL
(the Certificate of Merger), has been
accepted for filing by the Delaware Secretary of State, and all
other documents required by the DGCL to effectuate the Merger
will have been properly executed and filed (or such later date
and time as may be specified in the Certificate of Merger).
(b) Effects of the Merger. From
and after the Effective Time of the Merger, the Merger will have
the effects set forth in the DGCL (including Sections 259,
260 and 261 thereof). Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time of the
Merger, all the properties, rights, privileges, powers and
franchises of DHC and Merger Sub will vest in the Surviving
Entity, and all debts, liabilities and duties of DHC and Merger
Sub will, by operation of law, become the debts, liabilities and
duties of the Surviving Entity.
(c) Certificate of Incorporation of the Surviving
Entity. At the Effective Time of the Merger,
the Amended and Restated Certificate of Incorporation of DHC
(the DHC Charter) will be amended
pursuant to the Certificate of Merger to be identical to the
Certificate of Incorporation of Merger Sub in effect immediately
prior to the Effective Time of the Merger, except that
Article FIRST thereof will read as follows: The name
of the Corporation (which is hereinafter called the
Corporation) is Discovery Holding Company.
Such DHC Charter as so amended will be the Certificate of
Incorporation of the Surviving Entity until thereafter duly
amended or restated in accordance with the terms thereof and the
DGCL.
(d) Bylaws of the Surviving
Entity. At the Effective Time of the Merger,
the Restated Bylaws of DHC (the DHC
Bylaws) will be amended to be identical to the
bylaws of Merger Sub in effect immediately prior to the
Effective Time of the Merger and, in such amended form, will be
the Bylaws of the Surviving Entity until thereafter duly amended
or restated in accordance with the terms thereof, the terms of
the Certificate of Incorporation of the Surviving Entity and the
DGCL.
Section 3.02 Conversion
of Securities.
(a) Conversion of DHC
Securities. At the Effective Time of the
Merger, by virtue of the Merger and without any action on the
part of any party hereto or any holder of shares of DHC Common
Stock:
(i) each share of DHC Series A Common Stock issued and
outstanding immediately prior to the Effective Time of the
Merger (together with the DHC Series A Right attached
thereto) will be converted into and represent the right to
receive, and will be exchangeable for, 0.50 shares of New
DHC Series A Common Stock and 0.50 shares of New DHC
Series C Common Stock (the Series A
Consideration);
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(ii) each share of DHC Series B Common Stock (together
with the DHC Series B Right attached thereto) issued and
outstanding immediately prior to the Effective Time of the
Merger will be converted into and represent the right to
receive, and will be exchangeable for, 0.50 shares of New
DHC Series B Common Stock and 0.50 shares of New DHC
Series C Stock (the Series B
Consideration, which, together with the
Series A Consideration, is the
Consideration); and
(iii) each share of DHC Common Stock held in treasury of
DHC immediately prior to the Effective Time of the Merger will
be cancelled and retired without payment of any consideration
therefor and without any conversion thereof.
At the Effective Time, all shares of DHC Common Stock issued and
outstanding immediately prior to the Effective Time will no
longer be outstanding and will automatically be canceled and
retired and will cease to exist, and each holder of a
Certificate or Book-Entry Share will have no further rights with
respect thereto, except as set forth in Section 3.03.
(b) Conversion of Merger Sub
Stock. At the Effective Time of the Merger,
by virtue of the Merger and without any action on the part of
any party hereto or any holder of shares of stock of Merger Sub,
each share of common stock of Merger Sub issued and outstanding
immediately prior to the Effective Time of the Merger will be
converted into and become one validly issued, fully paid and
nonassessable share of common stock of the Surviving Entity.
Such shares will constitute the only outstanding shares of
capital stock of the Surviving Entity.
(c) Treatment of New DHC
Securities. At the Effective Time of the
Merger, by virtue of the Merger and without any action on the
part of any party hereto, each share of New DHC Original Stock
held by DHC will be cancelled and retired and will cease to
exist.
Section 3.03 Exchange
Procedures.
(a) Exchange of Certificates.
(i) As soon as reasonably practicable after the Effective
Time of the Merger, New DHC will cause to be mailed to
(x) each record holder, as of the Effective Time of the
Merger, of Certificates (such holders, Former
Certificate Holders and such shares,
Former Certificated Shares): (A) a
letter of transmittal (which will specify that delivery will be
effected, and risk of loss and title to the Certificates held by
such holder representing such Former Certificated Shares will
pass, only upon proper delivery of the Certificates to the
Exchange Agent) and (B) instructions for use in effecting
the surrender of the Certificates for the Consideration. Such
letter of transmittal will be in such form and have such other
reasonable provisions as New DHC may specify.
(ii) Upon surrender by a Former Certificate Holder to the
Exchange Agent of a Certificate, together with a letter of
transmittal, duly completed and validly executed in accordance
with the instructions thereto, and such other documents as may
be required pursuant to such instructions, each Former
Certificate Holder will be entitled to receive in exchange
therefor: (A) the number of whole shares of New DHC Common
Stock into which such holders shares of DHC Common Stock
represented by such holders properly surrendered
Certificates were converted in accordance with this
Article III, and such Certificates so surrendered will be
forthwith cancelled, (B) a check in an amount of
U.S. dollars (after giving effect to any required
withholdings pursuant to Section 3.03(e)) equal to any cash
consideration in lieu of fractional shares to which such holder
is entitled pursuant to Section 3.03(d), and (C) any
unpaid dividends or distributions which such holder is entitled
to receive.
(iii) If issuance of the Consideration is to be made to a
Person other than the Person in whose name the surrendered
Certificate is registered, it will be a condition of payment or
issuance that the Certificate so surrendered will be properly
endorsed or will be otherwise in proper form for transfer and
that the Person requesting such payment or issuance will have
paid to the Exchange Agent any transfer and other taxes required
by reason of the payment or issuance of the Consideration to a
Person other than the registered holder of the Certificate
surrendered or will have established to the satisfaction of the
Exchange Agent that such tax either has been paid or is not
applicable. In the event that any Certificate will have been
lost, stolen or destroyed, upon the holders compliance
with the replacement requirements established by the Exchange
Agent, including, if necessary, the posting by the holder of a
bond in customary amount as indemnity against any claim that may
be made against it with respect to the Certificate, the Exchange
Agent will deliver in exchange for the lost, stolen or destroyed
Certificate the applicable
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Consideration payable in respect of the shares of DHC Common
Stock represented by the Certificate pursuant to this
Article III, together with any cash or other consideration
to which such holder is entitled.
(iv) Until surrendered as contemplated hereby, each
Certificate will, after the Effective Time of the Merger,
represent for all purposes only the right to receive upon such
surrender the applicable Consideration as contemplated by this
Article III, together with any cash or other consideration
to which such holder is entitled.
(v) At the Effective Time of the Merger, the stock transfer
books of DHC will be closed, and thereafter there will be no
further registration of transfers of shares of DHC Common Stock,
that were outstanding prior to the Effective Time of the Merger.
After the Effective Time of the Merger, Certificates presented
to DHC for transfer will be canceled and exchanged for the
applicable Consideration in accordance with the procedures set
forth in this Article III, together with any cash or other
consideration to which such holder is entitled.
(b) Treatment of Book-Entry
Shares. As soon as reasonably practicable
after the Effective Time of the Merger, New DHC will cause to be
mailed to (x) each record holder, as of the Effective Time
of the Merger, of Book-Entry Shares (such holders,
Former Book-Entry Holders and together with
Former Certificate Holders, Former DHC
Holders, and such shares, Former
Book-Entry Shares and together with Former
Certificated Shares, Former DHC
Shares): (A) a statement of holdings which
will state the number of whole shares of New DHC Common
Stock into which such Former Book Entry Holders shares of
DHC Common Stock were converted in accordance with this
Article III, and (B) a check in an amount of
U.S. dollars (after giving effect to any required
withholdings pursuant to Section 3.03(e)) equal to any cash
consideration to which such holder is entitled hereunder.
(c) Distributions With Respect to Unexchanged
Shares. No dividends or other distributions
with respect to shares of New DHC Common Stock issuable with
respect to Former Certificated Shares will be paid to the holder
of any unsurrendered Certificates until those Certificates are
surrendered as provided in this Article III. Upon
surrender, there will be issued
and/or paid
to the holder of the shares of New DHC Common Stock issued in
exchange therefor, without interest, (i) at the time of
surrender, the dividends or other distributions payable with
respect to those shares of New DHC Common Stock with a record
date on or after the date of the Effective Time of the Merger
and a payment date on or prior to the date of such surrender and
not previously paid and (ii) at the appropriate payment
date, the dividends or other distributions payable with respect
to those shares of New DHC Common Stock with a record date on or
after the date of the Effective Time of the Merger but with a
payment date subsequent to surrender.
(d) No Fractional Shares. No
certificates or scrip representing fractional shares of New DHC
Common Stock will be issued with respect to Book-Entry Shares
evidencing DHC Common Stock or upon the surrender for exchange
of Certificates, and such fractional share interests will not
entitle the owner thereof to vote or to any rights of a
stockholder of New DHC. In lieu thereof, upon surrender of the
applicable Certificates or upon conversion of Book-Entry Shares,
New DHC will pay each holder of DHC Common Stock an amount in
cash equal to the product obtained by multiplying (i) the
fractional share interest of the series of New DHC Common Stock
to which such holder would otherwise be entitled, by
(ii) the closing price for a share of such stock on the
first trading day on which shares of New DHC Common Stock trade
in the regular way market.
(e) Withholding. New DHC and the
Exchange Agent will be entitled to deduct and withhold from the
consideration otherwise payable pursuant to this Agreement to
any holder of shares of DHC Common Stock such amounts as it is
required to deduct and withhold with respect to the making of
such payment under the Code and the Treasury Regulations
promulgated thereunder, or any provision of state, local or
foreign tax law. To the extent that amounts are so withheld by
New DHC or the Exchange Agent, such withheld amounts shall be
treated for all purposes of this Agreement as having been paid
to the holder of the shares of DHC Common Stock in respect of
which such deduction and withholding was made by New DHC or the
Exchange Agent.
Section 3.04 Stock
Incentive Plans; Treatment of Outstanding DHC Common Stock
Options.
(a) Assumption of Plans and
Awards. As of the Effective Time of the
Merger, New DHC will assume (i) the DHC Incentive Plans and
(ii) each of the then outstanding options, stock
appreciation rights and other incentive awards representing a
right with respect to shares of DHC Series A Common Stock
or DHC Series B Common Stock, as applicable
(collectively, Awards), issued or
assumed by DHC pursuant to the DHC Incentive Plans
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(collectively, DHC Awards). As of the
Effective Time of the Merger, each DHC Award will be assumed (as
assumed, a Replacement Award) by New
DHC and will thereafter be exercisable for or relate to shares
of New DHC Common Stock, as more particularly described in
Section 3.04(b).
(b) DHC Common Stock Options.
(i) At the Effective Time of the Merger, each of the then
outstanding stock options, if any, to purchase shares of DHC
Series A Common Stock set forth on Schedule 3.04(b)
hereto (each, a Scheduled Series A
Option) issued by DHC pursuant to the DHC
Incentive Plans, will, by virtue of the AMG Spin-Off (as defined
in the Transaction Agreement) and the Merger, and without any
further action on the part of any holder thereof, be converted
into (A) an option (a Converted Series A
Option) to purchase shares of New DHC
Series A Common Stock in an amount and at an exercise price
as determined below, (B) an option (a
Series C Option) to purchase
shares of New DHC Series C Common Stock in an amount
and at an exercise price as determined below, and (C) an
option (a Spin-Off Company Series A
Option) to purchase shares of Series A common
stock of the Spin-Off Company in an amount and at an exercise
price as determined below. The exercise price of such Converted
Series A Option, Series C Option and Spin-Off Company
Series A Option will be equal to the applicable VWAP for
the series of common stock subject to such option, multiplied
by a fraction, the numerator of which is the exercise price
of such Scheduled Series A Option and the denominator of
which is the VWAP for the DHC Series A Common Stock. The
number of shares of New DHC Series A Common Stock, New DHC
Series C Common Stock and Series A common stock of the
Spin-Off Company subject to the Converted Series A Option,
Series C Option and Spin-Off Company Series A Option,
as applicable, will be determined so that the aggregate amount
by which the Scheduled Series A Option was
in-the-money
or
out-of-the-money,
as applicable, immediately prior to the Transactions (determined
according to the VWAP for the DHC Series A Common Stock) is
preserved immediately following the Transactions (allocating
such aggregate
in-the-money
or
out-of-the-money
amounts according to the applicable VWAP for the New DHC
Series A Common Stock, New DHC Series C Common Stock
and Series A common stock of the Spin-Off Company). The
terms and conditions of each Converted Series A Option,
Series C Option and Spin-Off Company Series A Option,
including vesting conditions (which will not be accelerated by
the Transactions) and the scheduled expiration date, will
otherwise remain as set forth in the Scheduled Series A
Option converted into such Converted Series A Option,
Series C Option and Spin-Off Company Series A Option.
If the foregoing calculation results in a Converted
Series A Option, Series C Option or Spin-Off Company
Series A Option being exercisable for a fraction of a share
of New DHC Series A Common Stock, New DHC Series C
Common Stock or Series A common stock of the Spin-Off
Company, as applicable, then the number of shares of New DHC
Series A Common Stock, New DHC Series C Common Stock
or Series A common stock of the Spin-Off Company, as
applicable, subject to such option will be rounded down to the
nearest whole number of shares, with no cash being payable for
such fractional share.
(ii) At the Effective Time of the Merger, each of the then
outstanding stock options, if any, to purchase shares of DHC
Series A Common Stock (excluding any Scheduled
Series A Options and any such options that are, at the
option of the holder, exercisable for shares of DHC
Series A Common Stock or DHC Series B Common Stock)
held by those members of the DHC Board (other than those
directors that hold Scheduled Series A Options) as of the
date of this Agreement who will be directors of New DHC
immediately after the Effective Time of the Merger (each, a
Director Series A Option, any
such director, and any director that holds a Scheduled
Series A Option, a Carryover
Director) issued by DHC pursuant to the DHC
Incentive Plans, will, by virtue of the AMG Spin-Off and the
Merger, and without any further action on the part of any holder
thereof, be converted into (A) a Converted Series A
Option to purchase shares of New DHC Series A Common Stock
in an amount and at an exercise price as determined below, and
(B) a Series C Option to purchase shares of New DHC
Series C Common Stock in an amount and at an exercise price
as determined below. The exercise price of such Converted
Series A Option and Series C Option will be equal to
the applicable VWAP for the series of common stock subject to
such option, multiplied by a fraction, the numerator of
which is the exercise price of such Director Series A
Option and the denominator of which is the VWAP for the DHC
Series A Common Stock. The number of shares of New DHC
Series A Common Stock and New DHC Series C Common
Stock subject to the Converted Series A Option and
Series C Option, as applicable, will be determined so that
the aggregate amount by which the Director Series A Option
was
in-the-money
or
out-of-the-money,
as applicable, immediately prior to the Transactions (determined
according to the VWAP for the DHC Series A Common Stock) is
preserved immediately following the Transactions
C-8
(allocating such aggregate
in-the-money
or
out-of-the-money
amounts according to the applicable VWAP for the New DHC
Series A Common Stock and New DHC Series C Common
Stock). The terms and conditions of each Converted Series A
Option and Series C Option, including vesting conditions
(which will not be accelerated by the Transactions) and the
scheduled expiration date, will otherwise remain as set forth in
the Director Series A Option converted into such Converted
Series A Option and Series C Option. If the foregoing
calculation results in a Converted Series A Option or a
Series C Option being exercisable for a fraction of a share
of New DHC Series A Common Stock or New DHC Series C
Common Stock, as applicable, then the number of shares of New
DHC Series A Common Stock or New DHC Series C Common
Stock, as applicable, subject to such option will be rounded
down to the nearest whole number of shares, with no cash being
payable for such fractional share.
(iii) At the Effective Time of the Merger, each of the then
outstanding stock options, if any, to purchase shares of DHC
Series A Common Stock other than the Director Series A
Options and the Scheduled Series A Options (each, a
Series A Option) issued by DHC pursuant
to the DHC Incentive Plans, will, by virtue of the AMG Spin-Off
and the Merger, and without any further action on the part of
any holder thereof, be converted into (A) a stock
appreciation right (a Series A
SAR) with respect to that number of shares of New
DHC Series A Common Stock and at such base price as
determined below, and (B) a stock appreciation right
(a Series C SAR and, together
with the Series A SARs, the Rollover
SARs) with respect to that number of shares of New
DHC Series C Common Stock and at such base price as
determined below. The base price of each Series A SAR and
Series C SAR will be equal to the applicable VWAP for the
series of common stock subject to such Rollover SAR,
multiplied by a fraction, the numerator of which is the
exercise price of such Series A Option and the denominator
of which is the VWAP for the DHC Series A Common Stock. The
number of shares of New DHC Series A Common Stock and
New DHC Series C Common Stock to which the
Series A SAR and Series C SAR, as applicable, relate
will be determined so that the aggregate amount by which the
Series A Option was
in-the-money
or
out-of-the-money,
as applicable, immediately prior to the Transactions (determined
according to the VWAP for the DHC Series A Common Stock) is
preserved immediately following the Transactions (allocating
such aggregate
in-the-money
or
out-of-the-money
amounts according to the applicable VWAP for the New DHC
Series A Common Stock and New DHC Series C Common
Stock). The terms and conditions of each Series A SAR and
Series C SAR, including vesting conditions (which will not
be accelerated by the Transactions) and the scheduled expiration
date, will otherwise remain as set forth in the Series A
Option converted into such Series A SARs and Series C
SARs, except that, the spread between the Fair Market Value of
the underlying shares and the base price of each Series A
SAR and Series C SAR will be payable solely in shares of
New DHC Series A Common Stock or New DHC Series C
Common Stock, as applicable (with such shares of New DHC Common
Stock valued at the Fair Market Value of shares of New DHC
Series A Common Stock or New DHC Series C Common
Stock, as applicable, on the date of exercise). If the foregoing
calculation results in a Series A SAR or a Series C
SAR being exercisable for a fraction of a share of New DHC
Series A Common Stock or New DHC Series C Common
Stock, as applicable, then the number of shares of New DHC
Series A Common Stock or New DHC Series C Common
Stock, as applicable, subject to such SAR will be rounded down
to the nearest whole number of shares, with no cash being
payable for such fractional share.
(iv) At the Effective Time of the Merger, each of the then
outstanding stock options, if any, to purchase shares of DHC
Series B Common Stock (including any such options that are,
at the option of the holder, exercisable for shares of DHC
Series B Common Stock or DHC Series A Common Stock)
held by any Carryover Director (each, a
Series B Option) issued by DHC pursuant
to the DHC Incentive Plans, will, by virtue of the AMG Spin-Off
and the Merger, and without any further action on the part of
any holder thereof, be converted into (A) an option
(a Converted Series B Option and,
together with the Converted Series A Options and
Series C Options, the Converted
Options) to purchase shares of New DHC
Series B Common Stock in an amount and at an exercise price
as determined below, (B) a Series C Option to purchase
shares of New DHC Series C Common stock in an amount and at
an exercise price as determined below, and (C) an option
(a Spin-Off Company Series B
Option) to purchase shares of Series B common
stock of the Spin-Off Company in an amount and at an exercise
price as determined below. The exercise price of such Converted
Series B Option, Series C Option and Spin-Off Company
Series B Option will be equal to the applicable VWAP for
the series of common stock subject to such option, multiplied
by a fraction, the numerator of which is the exercise price
of the Series B Option and the denominator of which is the
VWAP for the DHC Series B Common Stock. The number of
shares of New DHC Series B Common Stock, New DHC
Series C Common Stock and Series B common stock of the
Spin-Off Company subject to the
C-9
Converted Series B Option, Series C Option and
Spin-Off Company Series B Option, as applicable, will be
determined so that the aggregate amount by which the
Series B Option was
in-the-money
or
out-of-the-money,
as applicable, immediately prior to the Transactions (determined
according to the VWAP for the DHC Series B Common Stock) is
preserved immediately following the Transactions (allocating
such aggregate
in-the-money
or
out-of-the-money
amounts according to the applicable VWAP for the New DHC
Series B Common Stock, New DHC Series C Common
Stock and Series B common stock of the Spin-Off Company).
The terms and conditions of each Converted Series B Option,
Series C Option and Spin-Off Company Series B Option,
including vesting conditions (which will not be accelerated by
the Transactions) and the scheduled expiration date, will
otherwise remain as set forth in the Series B Option
converted into such Converted Series B Option,
Series C Option and Spin-Off Company Series B Option.
If the foregoing calculation results in a Converted
Series B Option, a Series C Option or a Spin-Off
Company Series B Option being exercisable for a fraction of
a share of New DHC Series B Common Stock, New DHC
Series C Common Stock or Series B common stock of the
Spin-Off Company, as applicable, then the number of shares of
New DHC Series B Common Stock, New DHC Series C Common
Stock or Series B common stock of the Spin-Off Company, as
applicable, subject to such option will be rounded down to the
nearest whole number of shares, with no cash being payable for
such fractional share.
(v) Notwithstanding the foregoing, DHC may, in its sole
discretion, cancel any or all outstanding Director Series A
Options, Scheduled Series A Options, Series A Options
or Series B Options prior to or as of the Effective Time of
the Merger for such cash or other consideration as may be
determined to be appropriate by the DHC Board.
ARTICLE IV
CONDITIONS
PRECEDENT
The respective obligations of the parties to consummate the
transactions contemplated by this Agreement are subject to the
completion of the ANPP Contribution (as defined in the
Transaction Agreement) and the satisfaction, at or prior to the
Effective Time of the Merger, of the conditions set forth in
Article VII of the Transaction Agreement.
ARTICLE V
TERMINATION
This Agreement may be terminated and the transactions
contemplated by this Agreement may be abandoned at any time
prior to the Effective Time of the Merger by action of the Board
of Directors of DHC, New DHC and Merger Sub for any reason,
notwithstanding the adoption of this Agreement by the respective
stockholders of DHC, New DHC or Merger Sub. Notwithstanding the
foregoing, this Agreement will automatically terminate upon
termination of the Transaction Agreement.
ARTICLE VI
MISCELLANEOUS
Section 6.01 Notices. All
notices, requests, demands, waivers and other communications
required or permitted to be given under this Agreement will be
in writing and will be deemed to have been duly given if
delivered personally or mailed, certified or registered mail
with postage prepaid, or sent by telegram, overnight courier or
confirmed facsimile, as follows:
Discovery Holding Company
12300 Liberty Boulevard
Englewood, Colorado 80112
Attn: Charles Y. Tanabe, Esq.
Facsimile:
(720) 875-5858
or to such other Person or address as any party will specify by
notice in writing to the other party. All such notices,
requests, demands, waivers and communications will be deemed to
have been received on the date of delivery or on
C-10
the third business day after the mailing thereof, except that
any notice of a change of address will be effective only upon
actual receipt thereof.
Section 6.02 No
Third Party Beneficiaries. The terms of this
Agreement are not intended to confer any rights or remedies
hereunder upon, and will not be enforceable by, any Person
(including any holder of a DHC Award) other than the parties
hereto.
Section 6.03 Waiver. No
failure by any party to this Agreement to insist upon the strict
performance of any covenant, agreement, term or condition hereof
or to exercise any right or remedy consequent upon a breach of
such or any other covenant, agreement, term or condition will
operate as a waiver of such or any other covenant, agreement,
term or condition of this Agreement. Any party to this
Agreement, by notice given in accordance with Section 6.01,
may, but will not be under any obligation to, waive any of its
rights or conditions to its obligations under this Agreement, or
any duty, obligation or covenant of any other party hereto. No
waiver will affect or alter the remainder of this Agreement and
each and every covenant, agreement, term and condition hereof
will continue in full force and effect with respect to any other
then existing or subsequent breach. The rights and remedies
provided by this Agreement are cumulative and the exercise of
any one right or remedy by any party will not preclude or waive
its right to exercise any or all other rights or remedies.
Section 6.04 Assignment. Neither
this Agreement nor any of the rights, interests or obligations
hereunder will be assigned prior to the Closing (including by
operation of law, in a merger or other business combination) by
any of the parties hereto without the prior written consent of
the other parties. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be
enforceable by the parties and their respective successors and
permitted assigns.
Section 6.05 Integration. This
Agreement and the Transaction Agreement (including the schedules
and exhibits hereto and thereto) constitute the entire agreement
among the parties hereto pertaining to the subject matter hereof
and supersede all prior agreements and understandings of the
parties in connection herewith, and no covenant, representation
or condition not expressed herein or therein will affect, or be
effective to interpret, change or restrict, the express
provisions of this Agreement.
Section 6.06 Captions. The
captions herein are included for convenience of reference only
and will be ignored in the construction or interpretation hereof.
Section 6.07 Counterparts. This
Agreement may be executed in one or more counterparts, all of
which will be considered one and the same instrument and will
become effective when one or more counterparts have been signed
by each of the parties hereto and delivered to the other parties
hereto, it being understood that all parties hereto need not
sign the same counterpart.
Section 6.08 Severability. Each
provision of this Agreement will be considered separable and if
for any reason any provision of this Agreement, or the
application thereof, becomes or is declared by a court of
competent jurisdiction to be illegal, void or unenforceable, the
remainder of this Agreement will continue in full force and
effect and the application of such provision to other Persons or
circumstances will be interpreted so as reasonably to effect the
intent of the parties hereto. The parties hereto further agree
to replace such void or unenforceable provision of this
Agreement with a valid and enforceable provision that will
achieve, to the extent possible, the economic, business and
other purposes of such illegal, void or unenforceable provision.
Section 6.09 Governing
Law. This Agreement will be governed by and
construed in accordance with the laws of the State of Delaware
without giving effect to the conflicts of law principles thereof.
Section 6.10 Jurisdiction. Each
of the parties hereto irrevocably submits to the exclusive
jurisdiction of the courts of the Delaware Chancery Courts, or,
if the Delaware Chancery Courts do not have subject matter
jurisdiction, in the state courts of the State of Delaware
located in Wilmington, Delaware, or in the United States
District Court for any district within such state, for the
purpose of any suit, action or other proceeding arising out of
this Agreement or the Transactions. Each party agrees that
service of any process, summons, notice or document by
U.S. registered mail to such partys respective
address in accordance with Section 6.01 will be effective
service of process for any action, suit or proceeding in
Delaware with respect to any matters to which it has submitted
to jurisdiction in this Section 6.10. Each party hereto
irrevocably and unconditionally waives and agrees not to plead
or
C-11
claim any objection to the laying of venue of any such suit,
action or proceeding brought in such courts and irrevocably and
unconditionally waives any claim that any such suit, action or
proceeding brought in any such court has been brought in an
inconvenient forum.
Section 6.11 WAIVER
OF JURY TRIAL. EACH OF THE PARTIES HERETO
HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN
ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT
OR THE TRANSACTIONS.
Section 6.12 Specific
Performance. Each of the parties to this
Agreement agrees that the other parties hereto would be
irreparably damaged if any of the provisions of this Agreement
are not performed in accordance with its specific terms and that
monetary damages would not provide an adequate remedy in such
event. Accordingly, in addition to any other remedy to which the
nonbreaching parties may be entitled, at law or in equity, the
nonbreaching parties may be entitled to injunctive relief to
prevent breaches of this Agreement and to specifically enforce
the terms and provisions hereof.
Section 6.13 Amendments. This
Agreement may be amended by an instrument in writing signed on
behalf of each of the parties hereto at any time before or after
the adoption of this Agreement by their respective stockholders;
provided, however, that after any such adoption,
there will be made no amendment that by Law requires further
approval by such stockholders without the further approval of
such stockholders.
Section 6.14 Interpretation. When
a reference is made in this Agreement to Exhibits, Schedules,
Articles or Sections, such reference will be to an Exhibit,
Schedule, Article or Section to this Agreement unless otherwise
indicated. The words include, includes,
included, and including, when used
herein will be deemed in each case to be followed by the words
without limitation. The words hereof,
herein, hereby, and
hereunder and words of similar import when used in
this Agreement will refer to this Agreement as a whole and not
to any particular provision of this Agreement. The words
date hereof will refer to the date of this
Agreement. The term or is not exclusive and means
and/or unless the context in which such phrase is
used will dictate otherwise. The word extent in the
phrase to the extent will mean the degree to which a
subject or other such thing extends, and such phrase will not
mean simply if unless the context in which such
phrase is used dictates otherwise. The definitions contained in
this Agreement are applicable to the singular as well as the
plural forms of such terms and to the masculine as well as to
the feminine and neuter genders of such term. The Article and
Section headings contained in this Agreement are for reference
purposes only and will not affect in any way the meaning or
interpretation of this Agreement. Whenever the context may
require, any pronoun will include the corresponding masculine,
feminine and neuter forms. Any reference in this Agreement to a
Person will be deemed to be a reference to such Person and any
successor (by merger, consolidation, transfer or otherwise) to
all or substantially all its assets.
Section 6.15 Rules
of Construction. Each of the parties to this
Agreement agrees that they have been represented by counsel
during the negotiation, preparation and execution of this
Agreement and, therefore, waive the application of any law,
regulation, holding or rule of construction providing that
ambiguities in an agreement or other document will be construed
against the party drafting such agreement or document.
C-12
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement and Plan of Merger as of the date first written above.
DISCOVERY HOLDING COMPANY
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By:
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/s/ Charles
Y. Tanabe
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Name: Charles Y. Tanabe
Title: Senior Vice President
DISCOVERY COMMUNICATIONS, INC.
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By:
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/s/ Charles
Y. Tanabe
|
Name: Charles Y. Tanabe
|
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Title:
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Senior Vice President
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DHC MERGER SUB, INC.
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By:
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/s/ Charles
Y. Tanabe
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Name: Charles Y. Tanabe
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Title:
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Senior Vice President
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[Signature Page to Merger Agreement]
C-13
Appendix D
FORM OF
CERTIFICATE OF INCORPORATION
OF
DISCOVERY COMMUNICATIONS, INC.
ARTICLE I
NAME
The name of the corporation is Discovery Communications, Inc.
(the Corporation).
ARTICLE II
REGISTERED OFFICE
The address of the registered office of the Corporation in the
State of Delaware is 2711 Centerville Road, Suite 400, in
the City of Wilmington, County of New Castle, 19808. The name of
its registered agent at such address is the Corporation Service
Company.
ARTICLE III
PURPOSE
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the
General Corporation Law of Delaware (as the same may be amended
from time to time, DGCL).
ARTICLE IV
AUTHORIZED STOCK
The total number of shares of capital stock which the
Corporation shall have authority to issue is four billion three
hundred ten million (4,310,000,000) shares, of which three
billion eight hundred million (3,800,000,000) shares shall be of
a class designated as Common Stock, par value $0.01 per share
(Common Stock), such class to be issuable in
series as follows:
a. One billion seven hundred million (1,700,000,000) shares
of Common Stock shall be of a series designated as Series
A Common Stock (the Series A Common
Stock);
b. One hundred million (100,000,000) shares of Common Stock
shall be of a series designated as Series B Common
Stock (the Series B Common Stock);
c. Two billion (2,000,000,000) shares of Common Stock shall
be of a series designated as Series C Common
Stock (the Series C Common Stock);
and five hundred ten million (510,000,000) shares shall be of a
class designated as Preferred Stock, par value $0.01 per share
(Preferred Stock), such class to be issuable
in series as follows:
d. Seventy five million (75,000,000) shares of Preferred
Stock shall be of a series designated as Series A
Convertible Participating Preferred Stock (the
Series A Preferred Stock);
e. Seventy five million (75,000,000) shares of Preferred
Stock shall be of a series designated as Series C
Convertible Participating Preferred Stock (the
Series C Preferred Stock and, together
with the Series A Preferred Stock, the Convertible
Preferred Stock); and
f. Three hundred sixty million (360,000,000) shares of
Preferred Stock which are undesignated as to series and are
issuable in accordance with the provisions of Article IV,
Section D (the Series Preferred Stock).
D-1
Other than shares issued in connection with (x) the Merger
(as defined in the Merger Agreement), (y) the exercise of
any stock options or stock appreciation rights of the
Corporation outstanding immediately following the effectiveness
of the Merger, or (z) a Share Distribution in accordance
with Article IV, Section B.4(a) below (such issuance
pursuant to clause (x), (y) or (z) above, a
Permitted Series B Share Issuance), so
long as any shares of Series B Common Stock are issued and
outstanding, the Corporation shall not issue, or enter into any
agreement to issue, any shares of Series B Common Stock
without the prior consent of the holders of at least 75% of the
outstanding shares of Series B Common Stock, voting as a
separate class (such consent of the holders of Series B
Common Stock, a Series B Consent). The
Series B Consent may be obtained at a meeting of
stockholders of the Corporation or by written consent pursuant
to Article VI, Section B of this Certificate.
The description of the Common Stock and the Preferred Stock of
the Corporation, and the relative rights, preferences and
limitations thereof, or the method of fixing and establishing
the same, are as hereinafter set forth in this Article IV.
SECTION A
CERTAIN DEFINITIONS AND INTERPRETATIONS
Unless the context otherwise requires, the terms defined below
shall have, for all purposes of this Certificate of
Incorporation (as it may from time to time hereafter be amended
or restated, the Certificate), the meanings
herein specified:
Affiliate means, with respect to any
Person, any other Person that directly or indirectly through one
or more intermediaries Controls, is Controlled by, or is under
common Control with such Person.
ANPP means Advance/Newhouse
Programming Partnership, a New York general partnership.
ANPP Permitted Transferee means a
Person that acquires record and Beneficial Ownership of shares
of Series A Preferred Stock from a member of the ANPP
Stockholder Group or an ANPP Permitted Transferee, in each case,
in a Permitted Transfer.
ANPP Stockholder Group means Advance
Publications, Inc., Newhouse Broadcasting Corporation and, as of
the date of determination, any direct or indirect Subsidiary of
Advance Publications, Inc. or Newhouse Broadcasting Corporation.
Annual Business Plan means for any
fiscal year of the Corporation, a comprehensive statement of the
objectives and projections of the Corporation (including its
Subsidiaries) with respect to the operations of its business,
including objectives and projections concerning capital
expenditures, cable television programming developments, license
fees, subscriber discounts, revenues and expenses.
Base Amount means the sum of
(x) the number of shares of Series A Preferred Stock
issued to the members of the ANPP Stockholder Group as of the
Issue Date (other than any such shares of Series A
Preferred Stock that are Escrow Shares as of the Issue Date) and
(y) as of the date of determination, the number of Released
Series A Shares.
Beneficial Ownership or
Beneficially Own has the meaning given
to such term in
Rule 13d-3
under the Securities Exchange Act of 1934, as amended;
provided, however, that for purposes of
determining Beneficial Ownership, (i) a Person shall be
deemed to be the Beneficial Owner of any securities which such
Person has the right to acquire (whether such right is
exercisable immediately or only after the passage of time or
occurrence of conditions) pursuant to any agreement, arrangement
or understanding (other than customary agreements with and
between underwriters and selling group members with respect to a
bona fide public offering of securities) or upon the exercise of
conversion rights, exchange rights, warrants, options, rights or
otherwise, and (ii) a Person shall not be deemed the
Beneficial Owner of, or to Beneficially Own, securities that
such Person has a right to acquire upon the exercise of Rights.
Board of Directors or
Board means the Board of Directors of
the Corporation and, unless the context indicates otherwise,
also means, to the extent permitted by law, any committee
thereof authorized, with respect to any particular matter, to
exercise the power of the Board of Directors of the Corporation
with respect to such matter.
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Business Day means any day other than
a Saturday, Sunday or a day on which banks are required or
permitted to close in New York, New York.
capital stock means any and all
shares, interests, rights to purchase, warrants, options,
participations or other equivalents of or interests in corporate
stock (however designated).
Capitalized Lease Obligations of any
Person means any obligations to pay rent or other amounts under
a lease of (or other arrangement conveying the right to use)
real or personal property, or a combination thereof, which are
required to be classified and accounted for as capital leases on
a balance sheet of such Person under GAAP and the amount of such
obligations at any time will be the capitalized amount thereof
at such time determined in accordance with GAAP.
Cash Flow means for any Person, for
any period, gross operating revenues of such Person and any
entities required to be consolidated with such Person on a
financial statement in accordance with GAAP (the
Consolidated Group) for such period derived
in the ordinary course of business from continuing operations
minus all operating expenses from continuing operations of such
Consolidated Group for such period, including, without
limitation, technical, programming, selling, advertising,
general and administrative expenses and corporate overhead
incurred to the extent deducted in calculating operating income
by such Consolidated Group during such period and all income
taxes paid, but excluding depreciation, amortization, deferred
taxes and other non-cash charges and interest expense, all the
foregoing otherwise being determined in accordance with GAAP.
Interest income, extraordinary items and gains or losses on
sales or dispositions of property will be excluded from the
calculation of Cash Flow. In the event of a sale, transfer or
other disposition of any asset by any member of the Consolidated
Group during any period, Cash Flow will be adjusted (x) to
give effect to such sale, transfer or other disposition by
excluding from Cash Flow the actual cash flow derived from such
asset as if such sale, transfer or other disposition occurred on
the first day of such period, and (y) by adding to Cash
Flow all sale, transfer and other disposition-related operating
expenses incurred by such member in connection with the sale,
transfer or other disposition of such asset. In the event of an
acquisition of any asset by any member of the Consolidated Group
during any period, Cash Flow will be adjusted (x) to give
effect to such acquisition by including in Cash Flow the actual
cash flow derived from such asset as if such acquisition
occurred on the first day of such period, and (y) by adding
to Cash Flow all acquisition-related operating expenses incurred
by such member in connection with the acquisition of such asset.
Cause means (1) commission of an
act of fraud, misappropriation, embezzlement or similar conduct
against the Corporation, (2) conviction of, or plea of
guilty or nolo contendere to, any crime (whether or not
involving the Corporation) constituting a felony, or
(3) the willful engaging by the director in misconduct that
is materially injurious to the Corporation or its Subsidiaries,
monetarily or otherwise; provided that, for purposes of
this subclause (3), no action or failure to act on a
directors part shall be considered willful
unless done, or omitted to be done, by the director in bad faith
and without reasonable belief that such action or omission was
in the best interests of the Corporation.
Commission means the Securities and
Exchange Commission, and any successor commission or agency
having similar powers.
Company Rights Plan means the Rights
Agreement, dated as of
[ ],
2008, between the Corporation and Computershare
Trust Company, N.A., as Rights Agent (and any successor or
substitute shareholder rights plan).
Control means the possession, directly
or indirectly, of the power to direct or cause the direction of
the management and policies of a Person, whether through the
ownership of voting securities, by agreement, or otherwise. The
terms Controls, Controlled and
Controlling will have corresponding meanings.
Conversion Shares means the
Series A Conversion Shares and shares of Common Stock or
other securities of the Corporation issued or issuable upon
conversion of the shares of Series C Preferred Stock.
Convertible Securities means
(x) any securities of the Corporation (other than any
series of Common Stock) that are directly or indirectly
convertible into or exchangeable for, or that evidence the right
to purchase, directly or indirectly, securities of the
Corporation or any other Person, whether upon conversion,
exercise, exchange, pursuant to anti-dilution provisions of such
securities or otherwise, and (y) any securities of any
other Person that are directly or indirectly convertible into or
exchangeable for, or that evidence the right to purchase,
directly or indirectly,
D-3
securities of such Person or any other Person (including the
Corporation), whether upon conversion, exercise, exchange,
pursuant to anti-dilution provisions of such securities or
otherwise.
Debt Service means for any period, the
sum of (x) all principal due and payable with respect to
any item of Indebtedness during such period and (y) all
interest, premium, commitment, and other recurring or
nonrecurring charges that are payable and should be accrued in
accordance with GAAP with respect to any item of Indebtedness
during such period.
Discovery means Discovery
Communications Holding, LLC, a Delaware limited liability
company.
Escrow Shares means any shares of
Series A Preferred Stock or shares of Series C
Preferred Stock that, on any date of determination, are held by
[ ],
as Escrow Agent, pursuant to the Escrow Agreement, dated as of
[ ],
2008 (the Escrow Agreement), by and among
ANPP, the Corporation and the Escrow Agent.
GAAP means generally accepted
accounting principles as accepted by the accounting profession
in the United States as in effect from time to time.
Indebtedness means with respect to any
Person, any indebtedness or obligations, direct or indirect,
secured or unsecured, contingent or otherwise (whether or not
the recourse of the lender is to the whole of the assets of such
Person or only to a portion thereof) for borrowed money, and any
deposits or advances of any kind held by such Person, and all
obligations with respect to which interest charges are
customarily paid, and all obligations evidenced by bonds, notes,
debentures or similar instruments or representing the balance
deferred and unpaid of the purchase price of any property or
payment for any services (other than accounts payable to
suppliers incurred in the ordinary course of business and paid
in the ordinary course of business), if and to the extent any of
the foregoing obligations or indebtedness would appear as a
liability upon a balance sheet of such Person prepared in
accordance with GAAP, and will also include, to the extent not
otherwise included (but without duplication), (i) any
Capitalized Lease Obligations, (ii) obligations secured by
a lien to which the property or assets owned or held by such
Person are subject, whether or not the obligation or obligations
secured thereby will have been assumed, (iii) any
obligations, contingent or otherwise, guaranteeing or having the
economic effect of guaranteeing any debt or obligation of any
other Person, (iv) the face value of any letters of credit
and bankers acceptances less amounts drawn thereunder and for
which reimbursement has been made, (v) the amount of any
obligations of such Person under conditional sales and title
retention agreements and (vi) obligations of any such
Person under any interest rate agreement applicable to any of
the foregoing.
Independent Director means a director
who satisfies the independence requirements set forth in the
Corporate Governance Rules of NASDAQ (or the rules and
regulations of the principal securities exchange on which the
Corporations equity securities are then listed) in effect
from time to time; provided, however, that if, at
any particular time, NASDAQ (or the principal securities
exchange on which the Corporations equity securities are
then listed) has not then adopted a definition of
independent director, Independent
Director means a director who, as determined in good faith
by the Board (other than the Independent Director in
question), has no relationship to the Corporation that may
interfere with the exercise of his or her independence in
carrying on his or her duties to the Corporation under the DGCL
or any other applicable laws.
Issue Date means the date on which
shares of Convertible Preferred Stock are first issued.
Junior Stock means, as the context
requires, (i) the Common Stock, (ii) any other class
or series of capital stock, whether now existing or hereafter
created, of the Corporation, other than (A) the Convertible
Preferred Stock, (B) any class or series of Parity Stock
(except to the extent provided under clause (iii) hereof)
and (C) any Senior Stock, and (iii) any class or
series of Parity Stock to the extent that it ranks junior to the
Convertible Preferred Stock as to dividend rights, rights of
redemption
and/or
rights on liquidation, as the case may be. For purposes of
clause (iii) above, a class or series of Parity Stock shall
rank junior to the Convertible Preferred Stock as to dividend
rights, rights of redemption
and/or
rights on liquidation if the holders of shares of Convertible
Preferred Stock shall be entitled to dividend payments, payments
on redemption or payments of amounts distributable upon
dissolution, liquidation or winding up of the Corporation, as
the case may be, in preference or priority to the holders of
shares of such class or series.
D-4
Liquidation Preference measured per
share of the Convertible Preferred Stock as of the date in
question (the Determination Date), means an
amount equal to $0.01 (as appropriately adjusted to take into
account any stock splits, reverse splits and the like affecting
the Convertible Preferred Stock occurring after the Issue Date).
In connection with the determination of the Liquidation
Preference of a share of Convertible Preferred Stock upon any
liquidation, dissolution or winding up of the Corporation, the
Determination Date shall be the record date for the distribution
of amounts payable to stockholders in connection with any such
liquidation, dissolution or winding up.
Maximum Amount means a number of
shares of Common Stock equal to (i) 7.5% of the sum of
(A) the number of shares of Common Stock of the Corporation
outstanding (with Conversion Shares (other than Conversion
Shares issuable in respect of Escrow Shares) deemed outstanding
for this purpose) immediately following the effectiveness of the
Merger, (B) the number of Conversion Shares issued or
issuable in respect of Released Shares as of the date of
determination, and (C) the number of shares of Common Stock
issuable upon exercise of the Converted Options (as defined in
the Merger Agreement); plus (ii) the number of
Conversion Shares issuable upon conversion of shares of
Convertible Preferred Stock issued to the members of the ANPP
Stockholder Group upon the effectiveness of the Merger (other
than any such Conversion Shares issuable in respect of Escrow
Shares); plus (iii) the number of Conversion Shares
issued or issuable in respect of Released Shares as of the date
of determination; provided, that, in the event any
member of the ANPP Stockholder Group or any ANPP Permitted
Transferee Transfers shares of Convertible Preferred Stock or
Conversion Shares following the effectiveness of the Merger
(other than (1) in a Transfer that constitutes a Permitted
Transfer or (2) in a Transfer to the Corporation as a
result of the retirement or cancellation of any Escrow Shares
pursuant to the terms of the Escrow Agreement) then the amount
of shares calculated above will be reduced by such number of
shares of Conversion Shares issuable upon conversion of shares
of Convertible Preferred Stock, or Conversion Shares, so
Transferred. Notwithstanding the foregoing, in the event any
member of the ANPP Stockholder Group or any of its Affiliates,
or any ANPP Permitted Transferee or any of its Affiliates
(x) acquires, or enters into any agreement, arrangement or
understanding to acquire, Beneficial Ownership of shares of
Common Stock following the effectiveness of the Merger, or
(y) Transfers or enters into any agreement, arrangement or
understanding to Transfer, Beneficial Ownership of shares of
Convertible Preferred Stock to any third party, then such
acquisition or Transfer, as the case may be, will be deemed,
upon the execution or entry of any such agreement, arrangement
or understanding or the consummation of any such acquisition or
Transfer, to result in the Maximum Amount being exceeded to the
extent that after giving effect to such acquisition of
Beneficial Ownership of shares of Common Stock or such Transfer
of Beneficial Ownership of shares of Convertible Preferred Stock
(other than the Transfer of any Escrow Shares to the Corporation
as a result of the retirement or cancellation of any Escrow
Shares pursuant to the terms of the Escrow Agreement), the
aggregate voting power (stated as a percentage) of all shares of
Common Stock Beneficially Owned by the members of the ANPP
Stockholder Group and its Affiliates, the ANPP Permitted
Transferee and its Affiliates, or such third-party Transferee
and its Affiliates (including for these purposes Conversion
Shares, other than Conversion Shares issued or issuable in
respect of any Escrow Shares), as applicable, would exceed by
more than one percentage point the aggregate voting power of the
ANPP Stockholder Group to vote with the holders of the Common
Stock, voting together as a single class, on matters that may be
submitted to a vote of stockholders of the Corporation (other
than the election of directors) immediately following the
effectiveness of the Merger; provided, that Escrow Shares
will be excluded for purposes of calculating whether the one
percentage point voting power threshold has been exceeded, and
(x) any Released Series A Shares or Series A
Conversion Shares and (y) any shares of Common Stock
issuable upon exercise of the Converted Options, will, in each
case, be deemed to have been outstanding immediately following
the effectiveness of the Merger for purposes of calculating
whether the one percentage point voting power threshold has been
exceeded.
Merger Agreement means the Agreement
and Plan of Merger, dated as of June 4, 2008, by and among
the Corporation, Discovery Holding Company and DHC Merger Sub,
Inc.
NASDAQ means The Nasdaq Stock Market,
Inc.
Parity Stock means, as the context
requires, any class or series of capital stock, whether now
existing or hereafter created, of the Corporation ranking on a
parity basis with the Convertible Preferred Stock as to dividend
rights, rights of redemption
and/or
rights on liquidation, as the case may be. Capital stock of any
class or series shall rank on a parity basis as to dividend
rights, rights of redemption or rights on liquidation with the
Convertible Preferred Stock, whether or not the dividend rates,
dividend payment dates, redemption or liquidation prices per
D-5
share or sinking fund or mandatory redemption provisions, if
any, are different from those of the Convertible Preferred
Stock, if the holders of shares of such class or series shall be
entitled to dividend payments, payments on redemption or
payments of amounts distributable upon dissolution, liquidation
or winding up of the Corporation, as the case may be, in
proportion to their respective accrued and unpaid dividends,
redemption prices or liquidation prices, respectively, without
preference or priority, one over the other, as between the
holders of shares of such class or series and the holders of
Convertible Preferred Stock. No class or series of capital stock
that ranks junior to the Convertible Preferred Stock as to
rights on liquidation shall rank or be deemed to rank on a
parity basis with the Convertible Preferred Stock as to dividend
rights or rights of redemption, unless the instrument creating
or evidencing such class or series of capital stock otherwise
expressly provides. The Series A Preferred Stock and the
Series C Preferred Stock shall each be deemed to be Parity
Stock as to each of the other such series.
Permitted Transfer means the Transfer
of (i) all shares of Series A Preferred Stock then
outstanding, (ii) all shares of Series A Conversion
Shares held by such Person Transferring shares of Series A
Preferred Stock and its Affiliates, and (iii) all shares of
Series A Preferred Stock and Series A Conversion
Shares that are Escrow Shares, to any Transferee so long as
after giving effect to such Transfer to it, the shares of
Convertible Preferred Stock and Common Stock Beneficially Owned
by such Transferee and its Affiliates (including any Conversion
Shares) immediately following such Transfer do not result in
such Transferee and its Affiliates collectively Beneficially
Owning a number of shares that is in excess of the Maximum
Amount.
Person means any individual,
corporation, partnership, limited liability company, joint
venture, association, joint stock company, trust, unincorporated
organization, government or agency or political subdivision
thereof, or other entity, whether acting in an individual,
fiduciary or other capacity.
Related Party means any Affiliate of a
Person; provided, that, for the purposes of this
definition only, without limiting the generality of the
definition of Affiliate, any Person (First
Person) that directly or indirectly owns and has the
right to vote or direct the vote (in the election of directors)
of securities of another Person (Other
Person) constituting 25% or more of the outstanding
voting power of such Other Person will be deemed to Control such
Other Person, so long as no other securityholder of such Other
Person directly or indirectly owns and has the right to vote or
direct the vote (in the election of directors) of securities of
such Other Person constituting a greater percentage of the
outstanding voting power that is owned by such First Person in
such Other Person.
Released Series A Shares means
any issued and outstanding shares of Series A Preferred
Stock that were Escrow Shares, which, as of the date of
determination, are no longer subject to the Escrow Agreement.
Released Series C Shares means
any issued and outstanding shares of Series C Preferred
Stock that were Escrow Shares, which, as of the date of
determination, are no longer subject to the Escrow Agreement.
Released Shares means, as of the date
of determination, Released Series A Shares and Released
Series C Shares.
Rights has the meaning ascribed
thereto in the Company Rights Plan (or the comparable right
under any successor or substitute shareholder rights plan).
Series A Conversion Shares shares
of Common Stock or other securities of the Corporation issued or
issuable upon conversion of the shares of Series A
Preferred Stock.
Series A Convertible Securities
means Convertible Securities convertible into or exercisable or
exchangeable for Series A Common Stock.
Series B Convertible Securities
means Convertible Securities convertible into or exercisable or
exchangeable for Series B Common Stock.
Series C Convertible Securities
means Convertible Securities convertible into or exercisable or
exchangeable for Series C Common Stock.
Senior Stock means, as the context
requires, (i) any class or series of Series Preferred
Stock hereafter created, or (ii) any class or series of
capital stock, whether now existing or hereafter created, of the
Corporation, in each case, ranking prior to the Convertible
Preferred Stock as to dividend rights, rights of redemption
and/or
rights on liquidation, as the case may be. Capital stock of any
class or series shall rank prior to the Convertible Preferred
D-6
Stock as to dividend rights, rights of redemption or rights on
liquidation if the holders of shares of such class or series
shall be entitled to dividend payments, payments on redemption
or payments of amounts distributable upon dissolution,
liquidation or winding up of the Corporation, as the case may
be, in preference or priority to the holders of shares of
Convertible Preferred Stock. No class or series of capital stock
that ranks on a parity basis with or junior to the Convertible
Preferred Stock as to rights on liquidation shall rank or be
deemed to rank prior to the Convertible Preferred Stock as to
dividend rights or rights of redemption, notwithstanding that
the dividend rate, dividend payment dates, sinking fund
provisions, if any, or redemption provisions thereof are
different from those of the Convertible Preferred Stock, unless
the instrument creating or evidencing such class or series of
capital stock otherwise expressly provides. Notwithstanding the
foregoing, any class or series of capital stock which requires
the Corporation to cumulate or accrue dividends on such shares,
or to pay such dividends in shares of capital stock in the event
such dividends are not declared and paid during any dividend
period applicable to such class or series, or to add any such
unpaid dividends to the liquidation or redemption price of any
such class or series of capital stock, shall constitute Senior
Stock.
Subsidiary when used with respect to
any Person, means any other Person (1) of which (x) in
the case of a corporation, at least (A) a majority of the
equity and (B) a majority of the voting interests are owned
or Controlled, directly or indirectly, by such first Person, by
any one or more of its Subsidiaries, or by such first Person and
one or more of its Subsidiaries or (y) in the case of any
Person other than a corporation, such first Person, one or more
of its Subsidiaries, or such first Person and one or more of its
Subsidiaries (A) owns a majority of the equity interests
thereof and (B) has the power to elect or direct the
election of a majority of the members of the governing body
thereof or otherwise has Control over such organization or
entity; or (2) that is required to be consolidated with
such first Person for financial reporting purposes under GAAP.
Transaction Agreement means the
Transaction Agreement, dated as of June 4, 2008, by and
among Discovery Holding Company, the Corporation, DHC Merger
Sub, Inc., Advance/Newhouse Programming Partnership, and, with
respect to Section 5.14 thereof only, Advance Publications,
Inc. and Newhouse Broadcasting Corporation.
Transfer means, directly or
indirectly, to sell, transfer, assign, pledge, encumber,
hypothecate or similarly dispose of, either voluntarily or
involuntarily, or to enter into any contract, option or other
arrangement or understanding with respect to the sale, transfer,
assignment, pledge, encumbrance, hypothecation or similar
disposition of, any capital stock Beneficially Owned by a
stockholder or any interest in any capital stock Beneficially
Owned by a stockholder and Transferee means any
Person to whom such a Transfer is made.
Wholly-Owned Subsidiary means, as to
any Person, a Subsidiary of such Person, 100% of the equity and
voting interest in which is owned beneficially or of record,
directly
and/or
indirectly, by such Person.
Underlying Securities means, with
respect to any class or series of Convertible Securities, the
class or series of securities into which such class or series of
Convertible Securities are directly or indirectly convertible,
or for which such Convertible Securities are directly or
indirectly exchangeable, or that such Convertible Securities
evidence the right to purchase or otherwise receive, directly or
indirectly.
If, after the effectiveness of the Merger, there is a
subdivision, split, stock dividend, combination,
reclassification or similar event with respect to any shares of
the capital stock of the Corporation, then, in any such event,
the numbers and types of shares of such capital stock referred
to in this Certificate shall be appropriately adjusted.
D-7
SECTION B
SERIES A COMMON STOCK, SERIES B COMMON STOCK AND
SERIES C COMMON STOCK
Each share of Series A Common Stock, each share of
Series B Common Stock and each share of Series C
Common Stock shall, except as otherwise provided in this
Article IV, Section B, be identical in all respects
and shall have equal rights, powers and privileges.
1. Voting Rights.
Holders of Series A Common Stock shall be entitled to one
vote for each share of such stock held, and holders of
Series B Common Stock shall be entitled to ten votes for
each share of such stock held, on all matters that may be
submitted to a vote of stockholders of the Corporation
(regardless of whether such holders are voting together with the
holders of all Voting Securities (as defined below), or as a
separate class with the holders of one or more series of Common
Stock, or as a separate series of Common Stock, or otherwise).
Holders of Series C Common Stock shall not be entitled to
any voting powers, except as (and then only to the extent)
otherwise required by the laws of the State of Delaware. If a
vote or consent of the holders of Series C Common Stock
should at any time be required by the laws of the State of
Delaware on any matter, the holders of Series C Common
Stock shall be entitled to
1/100th of
a vote on such matter for each share of Series C Common
Stock held. Except as may otherwise be required by the laws of
the State of Delaware or as may otherwise be provided in this
Certificate, or, with respect to any series of
Series Preferred Stock, in any resolution or resolutions
establishing such series pursuant to authority vested in the
Board of Directors by Article IV of this Certificate, the
holders of outstanding shares of Series A Common Stock, the
holders of outstanding shares of Series B Common Stock, the
holders of outstanding shares of Series A Preferred Stock,
and the holders of outstanding shares of each series of
Series Preferred Stock entitled to vote thereon, if any,
shall vote as one class with respect to all matters to be voted
on by stockholders of the Corporation (excluding, with respect
to the Series A Preferred Stock, the election of directors
and any matter provided by Section 242 of the DGCL, but
including, without limitation, and irrespective of the
provisions of Section 242(b)(2) of the DGCL, any proposed
amendment to this Certificate that would (x) increase
(i) the number of authorized shares of Common Stock or any
series thereof, (ii) the number of authorized shares of
Preferred Stock or any series thereof or (iii) the number
of authorized shares of any other class or series of capital
stock of the Corporation hereafter established or
(y) decrease (i) the number of authorized shares of
Common Stock or any series thereof, (ii) the number of
authorized shares of Preferred Stock or any series thereof or
(iii) the number of authorized shares of any other class or
series of capital stock of the Corporation hereafter established
(but not below the number of shares of such class or series of
capital stock, as the case may be, then outstanding)), and no
separate class or series vote or consent of the holders of
shares of any class or series of capital stock of the
Corporation shall be required for the approval of any such
matter. As provided for in Article V of this Certificate,
the Series A Preferred Stock Directors shall be elected by
the holders of the Series A Preferred Stock (and holders of
Series A Common Stock or Series B Common Stock shall
have no right to vote or participate in the election of the
Series A Preferred Stock Directors), and the Common Stock
Directors (as defined in Article V, Section A.2) shall
be elected by the holders of the Series A Common Stock,
Series B Common Stock and any series of
Series Preferred Stock authorized to vote thereon (and the
holders of the Series A Preferred Stock shall have no right
to vote or participate in the election of the Common Stock
Directors). The term Voting Securities means
the shares of Series A Common Stock, Series B Common
Stock, and, subject to Article IV, Section C.5, shares
of Series A Preferred Stock, on an as converted basis, and
any series of Series Preferred Stock and any other class or
series of securities of the Corporation hereafter established
the holders of which are entitled to vote with the holders of
the Series A Common Stock and the Series B Common
Stock generally upon all matters that may be submitted to a vote
of stockholders.
2. Conversion Rights.
(a) Each share of Series B Common Stock shall be
convertible, at the option of the holder thereof, into one fully
paid and non-assessable share of Series A Common Stock. Any
such conversion may be effected by any holder of Series B
Common Stock by surrendering such holders certificate or
certificates for the Series B Common Stock to be converted,
duly endorsed, at the office of the Corporation or any transfer
agent for the Series B Common Stock, together with a
written notice to the Corporation at such office that such
holder elects to convert all or a specified number of shares of
Series B Common Stock represented by such certificate and
stating the name or
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names in which such holder desires the certificate or
certificates representing shares of Series A Common Stock
to be issued and, if less than all of the shares of
Series B Common Stock represented by one certificate are to
be converted, the name or names in which such holder desires the
certificate representing such remaining shares of Series B
Common Stock to be issued. If so required by the Corporation,
any certificate representing shares surrendered for conversion
in accordance with this Section shall be accompanied by
instruments of transfer, in form satisfactory to the
Corporation, duly executed by the holder of such shares or the
duly authorized representative of such holder, and shall, if
required by the last sentence of Article IV,
Section B.2(b), be accompanied by payment, or evidence of
payment, of applicable issue or transfer taxes. Promptly
thereafter, the Corporation shall issue and deliver to such
holder or such holders nominee or nominees, a certificate
or certificates representing the number of shares of
Series A Common Stock to which such holder shall be
entitled as herein provided. If less than all of the shares of
Series B Common Stock represented by any one certificate
are to be converted, the Corporation shall issue and deliver to
such holder or such holders nominee or nominees a new
certificate representing the shares of Series B Common
Stock not converted. Such conversion shall be deemed to have
been made at the close of business on the date of receipt by the
Corporation or any such transfer agent of the certificate or
certificates, notice and, if required, instruments of transfer
and payment or evidence of payment of taxes referred to above,
and the person or persons entitled to receive the Series A
Common Stock issuable on such conversion shall be treated for
all purposes as the record holder or holders of such
Series A Common Stock on that date. A number of shares of
Series A Common Stock equal to the number of shares of
Series B Common Stock outstanding from time to time shall
be set aside and reserved for issuance upon conversion of shares
of Series B Common Stock. Shares of Series B Common
Stock that have been converted hereunder shall become treasury
shares that may be issued or retired by resolution of the Board
of Directors. Shares of Series A Common Stock and shares of
Series C Common Stock shall not be convertible into shares
of any other series of Common Stock.
(b) The Corporation shall pay any and all documentary,
stamp or similar issue or transfer taxes that may be payable in
respect of the issue or delivery of certificates representing
shares of Common Stock on conversion of shares of Series B
Common Stock pursuant to this Article IV, Section B.2.
The Corporation shall not, however, be required to pay any tax
that may be payable in respect of any issue or delivery of
certificates representing any shares of Common Stock in a name
other than that in which the shares of Series B Common
Stock so converted were registered and no such issue or delivery
shall be made unless and until the person requesting the same
has paid to the Corporation the amount of any such tax or has
established to the satisfaction of the Corporation that such tax
has been paid.
3. Dividends.
Whenever a dividend, other than a dividend that constitutes a
Share Distribution, is paid to the holders of any series of
Common Stock then outstanding, the Corporation shall also pay to
the holders of each other series of Common Stock then
outstanding an equal dividend per share. Dividends shall be
payable only as and when declared by the Board of Directors of
the Corporation out of assets of the Corporation legally
available therefor. Whenever a Share Distribution is paid to the
holders of any series of Common Stock then outstanding, the
Corporation shall also pay a Share Distribution to the holders
of each other series of Common Stock then outstanding, as
provided in Article IV, Section B.4 below. For
purposes of this Article IV, Section B.3 and
Article IV, Section B.4 below, a Share
Distribution means a dividend or distribution
(including a distribution made in connection with any
dissolution, winding up or full or partial liquidation of the
Corporation) payable in shares of any class or series of capital
stock, Convertible Securities or other securities of the
Corporation or any other Person.
4. Share Distributions.
If at any time a Share Distribution is to be made with respect
to any series of Common Stock, such Share Distribution may be
declared and paid only as follows:
(a) a Share Distribution (i) consisting of shares of
Series C Common Stock or Series C Convertible
Securities may be declared and paid to holders of Series A
Common Stock, Series B Common Stock and Series C
Common Stock, on an equal per share basis, or
(ii) consisting of (x) shares of Series A Common
Stock or Series A Convertible Securities may be declared
and paid to holders of Series A Common Stock, on an equal
per share basis, (y) shares of Series B Common Stock
or Series B Convertible Securities may be declared and paid
to holders of Series B Common Stock, on an equal per share
basis, and (z) shares of Series C Common
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Stock or Series C Convertible Securities may be declared
and paid to holders of Series C Common Stock, on an equal
per share basis; or
(b) subject to Section B.4(c) below, a Share
Distribution consisting of any class or series of securities of
the Corporation or any other Person other than Series A
Common Stock, Series B Common Stock or Series C Common
Stock (or Series A Convertible Securities, Series B
Convertible Securities or Series C Convertible Securities),
may be declared and paid on the basis of a distribution of
(i) identical securities, on an equal per share basis, to
holders of Series A Common Stock, Series B Common
Stock and Series C Common Stock, (ii) separate classes
or series of securities, on an equal per share basis, to the
holders of each such series of Common Stock or (iii) a
separate class or series of securities to the holders of one or
more series of Common Stock and, on an equal per share basis, a
different class or series of securities to the holders of all
other series of Common Stock; provided, that, in
connection with a Share Distribution pursuant to
clause (ii) or clause (iii), (1) such separate classes
or series of securities (and, if the distribution consists of
Convertible Securities, the Underlying Securities) do not differ
in any respect other than their relative voting rights (and any
related differences in designation, conversion, redemption and
share distribution provisions, as applicable), with holders of
shares of Series B Common Stock receiving the class or
series of securities having (or convertible into or exercisable
or exchangeable for securities having) the highest relative
voting rights and the holders of shares of each other series of
Common Stock receiving securities of a class or series having
(or convertible into or exercisable or exchangeable for
securities having) lesser relative voting rights, in each case,
without regard to whether such rights differ to a greater or
lesser extent than the corresponding differences in voting
rights (and any related differences in designation, conversion,
redemption and share distribution, as applicable) among the
Series A Common Stock, the Series B Common Stock and
the Series C Common Stock, and (2) in the event the
securities to be received by the holders of shares of Common
Stock other than the Series B Common Stock consist of
different classes or series of securities, with each such class
or series of securities (or the Underlying Securities into which
such class or series is convertible or for which such class or
series is exercisable or exchangeable) differing only with
respect to the relative voting rights of such class or series
(and any related differences in designation, conversion,
redemption and share distribution provisions, as applicable),
then such classes or series of securities will be distributed to
the holders of each series of Common Stock (other than the
Series B Common Stock) (A) as the Board of Directors
determines or (B) such that the relative voting rights (and
any related differences in designation, conversion, redemption
and share distribution provisions, as applicable) of the class
or series of securities (or the Underlying Securities) to be
received by the holders of each series of Common Stock (other
than the Series B Common Stock) corresponds to the extent
practicable to the relative voting rights (and any related
differences in designation, conversion, redemption and share
distribution provisions, as applicable) of such series of Common
Stock, as compared to the other series of Common Stock (other
than the Series B Common Stock).
(c) So long as any shares of Series B Common Stock are
issued and outstanding, unless a Series B Consent has been
received approving the terms of such Share Distribution,
(i) no Share Distribution may be declared or paid if the
securities to be received by the holders of the Series C
Common Stock in such Share Distribution (and, if the Share
Distribution consists of Convertible Securities, the Underlying
Securities with respect thereto) are entitled to vote with
respect to matters upon which security holders of the issuer
thereof are generally entitled to vote (other than to an extent
no greater than the holders of Series C Common Stock are
entitled to vote upon matters as provided in this Certificate);
and (ii) no Share Distribution of securities entitled to
vote generally upon matters that may be submitted to a vote of
security holders of the issuer thereof, whether consisting of
any class or series of securities of the Corporation or any
other Person (or Convertible Securities that are convertible
into, exchangeable for or evidence the right to purchase such
securities), may be declared or paid unless the securities to be
received by the holders of Series B Common Stock in such
Share Distribution (and, if the Share Distribution consists of
Convertible Securities, the Underlying Securities with respect
thereto) at all times have voting power with respect to matters
upon which security holders of the issuer thereof are generally
entitled to vote per share or other unit (Per Share
Voting Power) of not less than ten times the Per Share
Voting Power of the securities (and, if the Share Distribution
consists of Convertible Securities, the Underlying Securities
with respect thereto) to be received in such Share Distribution
by the holders of each other series of Common Stock receiving
securities entitled to such voting power, if any.
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5. Reclassification.
The Corporation shall not reclassify, subdivide or combine one
series of Common Stock without reclassifying, subdividing or
combining each other series of Common Stock, on an equal per
share basis. Any such reclassification, subdivision or
combination must also satisfy the requirements set forth in
Article VII of this Certificate.
6. Liquidation and Dissolution.
In the event of a liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, after payment or
provision for payment of the debts and liabilities of the
Corporation and subject to the prior payment in full of the
preferential amounts to which any series of
Series Preferred Stock and the Convertible Preferred Stock
are entitled, the holders of shares of Series A Common
Stock, the holders of shares of Series B Common Stock, the
holders of shares of Series C Common Stock and the holders
of shares of Convertible Preferred Stock shall share equally, on
a share for share basis (and, in the case of the Convertible
Preferred Stock, on an as converted into Common Stock basis), in
the assets of the Corporation remaining for distribution to the
holders of Common Stock. Neither the consolidation or merger of
the Corporation with or into any other Person or Persons nor the
sale, transfer or lease of all or substantially all of the
assets of the Corporation shall itself be deemed to be a
liquidation, dissolution or winding up of the Corporation within
the meaning of this Article IV, Section B.6.
SECTION C
SERIES A PREFERRED STOCK AND SERIES C PREFERRED
STOCK
The Convertible Preferred Stock shall have the following
preferences, limitations and relative rights.
1. Dividends.
(a) Cash Dividend Rights. Subject
to the prior preferences and other rights of any Senior Stock
and the provisions of Article IV, Section C.3 hereof,
the holders of shares of Convertible Preferred Stock shall be
entitled to receive cash dividends per share in an amount (the
Participating Dividend) equal to the product
of (x) the amount of the cash dividend declared and to be
paid on a single share of Common Stock and (y) the number
of shares of Common Stock into which a share of Convertible
Preferred Stock may be converted as of the record date for the
determination of holders of Common Stock entitled to receive
such dividend. Except for a dividend of the Rights pursuant to
the Company Rights Plan (a Rights Dividend),
the Participating Dividends shall be the only dividends payable
to holders of Convertible Preferred Stock and such Participating
Dividends shall be declared and paid only when, as and if a cash
dividend is declared and paid upon the outstanding shares of
Common Stock. Dividends or distributions on the Common Stock
which are paid or made in Common Stock or other securities,
properties or other assets of the Corporation or any other
Person other than cash shall not constitute Participating
Dividends and holders of Convertible Preferred Stock shall have
no rights with respect thereto, other than as may be provided in
Article IV, Section C.4. Participating Dividends shall
be payable to holders of record of shares of Convertible
Preferred Stock as of the record date for the determination of
holders of Common Stock entitled to receive such dividend and
shall be payable on the payment date established by the
Corporation for the payment of such cash dividend to holders of
Common Stock. To the extent that the Convertible Preferred Stock
is, at the time of the declaration of any such cash dividend,
convertible into any other securities of the Corporation in
addition to or in lieu of being convertible into Common Stock,
then the Corporation shall pay to the holders of Convertible
Preferred Stock, in addition to the amount of the dividend
calculated above in respect of the number of shares of Common
Stock into which such share of Convertible Preferred Stock is
then convertible, if any, an amount equal to the amount of the
dividend payable per share or other unit of securities into
which the Convertible Preferred Stock is then convertible
multiplied by the number of shares or other units issuable to
such holder upon conversion of a share of Convertible Preferred
Stock.
(b) Method of Payment. All
dividends (other than a Rights Dividend) payable with respect to
the shares of Convertible Preferred Stock pursuant to
Article IV, Section C.1(a) shall be declared and paid
in cash. All cash dividends paid with respect to the shares of
Convertible Preferred Stock pursuant to Article IV,
Section C.1(a) shall be paid pro rata to all the
holders of shares of Convertible Preferred Stock outstanding on
the applicable record date, on an as converted basis.
D-11
2. Distribution Upon Liquidation, Dissolution
or Winding Up. Subject to the prior payment
in full of the preferential amounts to which any Senior Stock is
entitled, in the event of any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary,
the holders of Convertible Preferred Stock shall be entitled to
receive from the assets of the Corporation available for
distribution to stockholders, before any payment or distribution
shall be made to the holders of any Junior Stock, an amount in
cash or property at its fair market value, as determined by the
Board of Directors in good faith, or a combination thereof, per
share, equal to the Liquidation Preference of a share of
Convertible Preferred Stock as of the date of payment or
distribution, which payment or distribution shall be made
pari passu with any such payment or distribution made to
the holders of any Parity Stock ranking on a parity basis with
the Convertible Preferred Stock with respect to distributions
upon liquidation, dissolution or winding up of the Corporation.
Following the payment of all amounts owing to holders of each
class or series of capital stock of the Corporation having a
preference or priority over the Common Stock as to distributions
upon the liquidation, dissolution or winding up of the
Corporation, then the holders of the Convertible Preferred Stock
shall be entitled to participate, with the holders of the Common
Stock and with the holders of any other securities of the
Corporation entitled to participate, pro rata, based upon
the number of shares of Common Stock into which the shares of
Convertible Preferred Stock are then convertible, as to any
amounts remaining for distribution to the holders of Common
Stock upon the liquidation, dissolution or winding up of the
Corporation. If, upon distribution of the Corporations
assets in liquidation, dissolution or winding up, the assets of
the Corporation to be distributed among the holders of the
Convertible Preferred Stock and to all holders of any Parity
Stock ranking on a parity basis with the Convertible Preferred
Stock with respect to distributions upon liquidation,
dissolution or winding up shall be insufficient to permit
payment in full to such holders of the respective preferential
amounts to which they are entitled, then the entire assets of
the Corporation to be distributed to holders of the Convertible
Preferred Stock and such Parity Stock shall be distributed to
such holders based upon and in proportion to the full
preferential amounts to which the shares of Convertible
Preferred Stock and such Parity Stock would otherwise be
entitled. Neither the consolidation or merger of the Corporation
with or into any other corporation or corporations nor the sale,
transfer or lease of all or substantially all of the assets of
the Corporation shall itself be deemed to be a liquidation,
dissolution or winding up of the Corporation within the meaning
of this Article IV, Section C.2. Notice of the
liquidation, dissolution or winding up of the Corporation shall
be given, not less than 20 days prior to the date on which
such liquidation, dissolution or winding up is expected to take
place or become effective, to the holders of record of the
shares of Convertible Preferred Stock.
3. Limitations on
Dividends. If at any time the Corporation
shall have declared a dividend on the Convertible Preferred
Stock and failed to pay or set aside consideration sufficient to
pay such dividend, or if the Corporation declares a cash
dividend on the shares of Common Stock and fails to pay or set
aside the Participating Dividend required to be paid to the
holders of the Convertible Preferred Stock, then (i) the
Corporation shall not declare or pay any dividend on or make any
distribution with respect to any Parity Stock or Junior Stock or
set aside any money or assets for any such purpose until such
dividend payable to the holders of Convertible Preferred Stock
has been paid or consideration sufficient to pay such dividend
has been set aside for such purpose, and (ii) neither the
Corporation nor any Subsidiary thereof shall redeem, exchange,
purchase or otherwise acquire any shares of Convertible
Preferred Stock, Parity Stock or Junior Stock, or set aside any
money or assets for any such purpose, a sinking fund or
otherwise, unless all then outstanding shares of any class or
series of Parity Stock that by the terms of the instrument
creating or evidencing such Parity Stock is required to be
redeemed under such circumstances are redeemed or exchanged
pursuant to the terms hereof and thereof.
Neither the Corporation nor any Subsidiary thereof shall redeem,
exchange, purchase or otherwise acquire any Parity Stock or
Junior Stock, or set aside any money or assets for any such
purpose, if after giving effect to such redemption, exchange,
purchase or other acquisition, the amount (as determined by the
Board of Directors in good faith) that would be available for
distribution to the holders of the Convertible Preferred Stock
upon liquidation, dissolution or winding up of the Corporation
if such liquidation, dissolution or winding up were to occur on
the date fixed for such redemption, exchange, purchase or other
acquisition of such Parity Stock or Junior Stock would be less
than the aggregate Liquidation Preference as of such date of all
shares of Convertible Preferred Stock then outstanding.
Nothing contained in this Article IV, Section C.3
shall prevent (i) the payment of dividends on any Junior
Stock solely in shares of Junior Stock or the redemption,
purchase or other acquisition of Junior Stock solely in exchange
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for (together with a cash adjustment for fractional shares, if
any) shares of Junior Stock, or (ii) the payment of
dividends on any Parity Stock solely in shares of Parity Stock
and/or
Junior Stock or the redemption, exchange, purchase or other
acquisition of Parity Stock solely in exchange for (together
with a cash adjustment for fractional shares, if any), or
through the application of the proceeds from the sale of, shares
of Parity Stock
and/or
Junior Stock.
All provisions of this Article IV, Section C.3 are for
the sole benefit of the holders of Convertible Preferred Stock
and accordingly, if the holders of shares of Convertible
Preferred Stock shall have waived (as provided in
Article IV, Section C.6) in whole or in part the
benefit of the applicable provisions, either generally or in the
specific instance, such provision shall not (to the extent of
such waiver, in the case of a partial waiver) restrict the
redemption, exchange, purchase or other acquisition of, or
declaration, payment or making of any dividends or distributions
on the Convertible Preferred Stock, any Parity Stock or any
Junior Stock.
4. Conversion.
(a) Series A Preferred Stock Optional and
Mandatory Conversion. Each outstanding share
of Series A Preferred Stock is convertible at the option of
the holder at any time into fully paid and non-assessable full
share(s) of Series A Common Stock at the then effective
Series A Conversion Rate (as defined below). In addition,
(i) the holder of each outstanding share of Series A
Preferred Stock shall be deemed to have automatically converted
such share into fully paid and non-assessable share(s) of
Series A Common Stock at the then effective Series A
Conversion Rate immediately upon the Transfer (other than a
Transfer that is a Permitted Transfer or a Transfer from one
member of the ANPP Stockholder Group to another member of the
ANPP Stockholder Group) of such share to any Person, and
(ii) the holders of all outstanding shares of Series A
Preferred Stock shall be deemed to have automatically converted
all such shares of Series A Preferred Stock into fully paid
and non-assessable share(s) of Series A Common Stock at
such time as the number of issued and outstanding shares of
Series A Preferred Stock (other than any such shares that
are Escrow Shares as of the date of determination) is less than
80% of the Base Amount. Such conversion pursuant to
clauses (i) or (ii) above is referred to herein as the
Series A Mandatory Conversion. In the
event of a Series A Mandatory Conversion, the share(s) of
Series A Preferred Stock subject to such Series A
Mandatory Conversion shall be automatically converted into fully
paid and non-assessable share(s) of Series A Common Stock
at the then effective Series A Conversion Rate without any
further action by the Corporation or holders of Series A
Preferred Stock and whether or not the certificate(s)
representing such share(s) of Series A Preferred Stock are
surrendered to the Corporation; and the Corporation shall not be
obligated to issue certificate(s) evidencing the share(s) of
Series A Common Stock issuable upon such Series A
Mandatory Conversion unless the certificate(s) evidencing such
share(s) of Series A Preferred Stock are delivered to the
Corporation, or the holder thereof notifies the Corporation that
such certificate(s) have been lost, stolen or destroyed and
executes an agreement satisfactory to the Corporation to
indemnify the Corporation from any loss incurred by it in
connection with such certificate(s). In case cash, securities or
property other than Series A Common Stock shall be payable,
deliverable or issuable upon conversion as provided herein, then
all references to Series A Common Stock in this
Article IV, Section C.4 shall be deemed to apply, so
far as appropriate and as nearly as may be, to such cash,
property or other securities. Subject to the provisions for
adjustment hereinafter set forth in this Article IV,
Section C.4, the Series A Preferred Stock may be
converted into Series A Common Stock at the initial
conversion rate of one fully paid and non-assessable share of
Series A Common Stock for each share of Series A
Preferred Stock so converted (this conversion rate as from time
to time adjusted cumulatively pursuant to the provisions of this
Section is hereinafter referred to as the Series A
Conversion Rate).
(b) Series C Preferred Stock Optional and
Mandatory Conversion. Each outstanding share
of Series C Preferred Stock is convertible at the option of
the holder at any time into fully paid and non-assessable full
share(s) of Series C Common Stock at the then effective
Series C Conversion Rate. In addition, (i) the holder
of each outstanding share of Series C Preferred Stock shall
be deemed to have automatically converted such share into fully
paid and non-assessable share(s) of Series C Common Stock
at the then effective Series C Conversion Rate immediately
upon the Transfer of such share to any Person that is not a
member of the ANPP Stockholder Group, and (ii) the holders
of all outstanding shares of Series C Preferred Stock shall
be deemed to have automatically converted all such shares of
Series C Preferred Stock into fully paid and non-assessable
share(s) of Series C Common Stock at such time as a
Series A Mandatory Conversion shall be deemed to have
occurred pursuant to Article IV, Section C.4(a)(ii).
Such conversion pursuant to (i) or (ii) referred to
above is referred to herein as the
D-13
Series C Mandatory Conversion and,
together with any Series A Mandatory Conversion, the
Mandatory Conversion. In the event of a
Series C Mandatory Conversion, the share(s) of
Series C Preferred Stock subject to such Series C
Mandatory Conversion shall be automatically converted into fully
paid and non-assessable share(s) of Series C Common Stock
at the then effective Series C Conversion Rate without any
further action by the Corporation or holders of Series C
Preferred Stock and whether or not the certificate(s)
representing such share(s) of Series C Preferred Stock are
surrendered to the Corporation; and the Corporation shall not be
obligated to issue certificate(s) evidencing the share(s) of
Series C Common Stock issuable upon such Series C
Mandatory Conversion unless the certificate(s) evidencing such
share(s) of Series C Preferred Stock are delivered to the
Corporation, or the holder thereof notifies the Corporation that
such certificate(s) have been lost, stolen or destroyed and
executes an agreement satisfactory to the Corporation to
indemnify the Corporation from any loss incurred by it in
connection with such certificate(s). In case cash, securities or
property other than Series C Common Stock shall be payable,
deliverable or issuable upon conversion as provided herein, then
all references to Series C Common Stock in this
Article IV, Section C.4 shall be deemed to apply, so
far as appropriate and as nearly as may be, to such cash,
property or other securities. Subject to the provisions for
adjustment hereinafter set forth in this Article IV,
Section C.4, the Series C Preferred Stock may be
converted into Series C Common Stock at the initial
conversion rate of one fully paid and non-assessable share of
Series C Common Stock for each share of Series C
Preferred Stock so converted (this conversion rate as from time
to time adjusted cumulatively pursuant to the provisions of this
Section is hereinafter referred to as the Series C
Conversion Rate and, together with the Series A
Conversion Rate, the Conversion Rate).
Notwithstanding anything to the contrary in this
Article IV, subject to the provisions for adjustment
hereinafter set forth in this Article IV, Section C.4,
any provisions in this Article that refers to a conversion of
the Convertible Preferred Stock shall mean, (x) in the case
of the Series A Preferred Stock, the conversion of the
Series A Preferred Stock into the Series A Common
Stock and (y) in the case of the Series C Preferred
Stock, the conversion of the Series C Preferred Stock into
the Series C Common Stock.
(c) Adjustments for Stock Splits, Stock Dividends,
Etc.
(i) In case after the Issue Date the Corporation shall
(1) pay a dividend or make a distribution on its
outstanding shares of Series A Common Stock in shares of
its Common Stock, (2) subdivide the then outstanding shares
of Series A Common Stock into a greater number of shares of
Series A Common Stock, (3) combine the then
outstanding shares of Series A Common Stock into a smaller
number of shares of Series A Common Stock, or
(4) issue by reclassification of its shares of
Series A Common Stock any shares of any other class of
capital stock of the Corporation (including any such
reclassification in connection with a merger in which the
Corporation is the continuing corporation), then the
Series A Conversion Rate in effect immediately prior to the
opening of business on the record date for such dividend or
distribution or the effective date of such subdivision,
combination or reclassification shall be adjusted so that the
holder of each share of the Series A Preferred Stock
thereafter surrendered for conversion shall be entitled to
receive the number and kind of shares of capital stock of the
Corporation that such holder would have owned or been entitled
to receive immediately following such action had such shares of
Series A Preferred Stock been converted immediately prior
to such time.
(ii) In case after the Issue Date the Corporation shall
(1) pay a dividend or make a distribution on its
outstanding shares of Series C Common Stock in shares of
its Common Stock, (2) subdivide the then outstanding shares
of Series C Common Stock into a greater number of shares of
Series C Common Stock, (3) combine the then
outstanding shares of Series C Common Stock into a smaller
number of shares of Series C Common Stock, or
(4) issue by reclassification of its shares of
Series C Common Stock any shares of any other class of
capital stock of the Corporation (including any such
reclassification in connection with a merger in which the
Corporation is the continuing corporation), then the
Series C Conversion Rate in effect immediately prior to the
opening of business on the record date for such dividend or
distribution or the effective date of such subdivision,
combination or reclassification shall be adjusted so that the
holder of each share of the Series C Preferred Stock
thereafter surrendered for conversion shall be entitled to
receive the number and kind of shares of capital stock of the
Corporation that such holder would have owned or been entitled
to receive immediately following such action had such shares of
Series C Preferred Stock been converted immediately prior
to such time.
D-14
(iii) An adjustment made pursuant to this Article IV,
Section C.4(c) for a dividend or distribution shall become
effective immediately after the record date for the dividend or
distribution and an adjustment made pursuant to this
Article IV, Section C.4(c) for a subdivision,
combination or reclassification shall become effective
immediately after the effective date of the subdivision,
combination or reclassification. Such adjustment shall be made
successively whenever any action listed above shall be taken.
(d) Adjustments for Rights, Warrants, etc.
(i) In case the Corporation shall after the Issue Date
issue any rights or warrants to all holders of shares of
Series A Common Stock entitling them (for a period of not
more than 45 days after the record date for the
determination of stockholders entitled to receive such rights or
warrants) to subscribe for or purchase shares of Series A
Common Stock (or Series A Convertible Securities) at a
price per share of the Series A Common Stock (or having an
initial exercise price or conversion price per share of
Series A Common Stock) less than the then current market
price per share of such Series A Common Stock on such
record date, the number of shares of Series A Common Stock
into which each share of Series A Preferred Stock shall
thereafter be convertible shall be determined by multiplying the
number of shares of Series A Common Stock into which such
share of Series A Preferred Stock was theretofore
convertible immediately prior to such record date by a fraction,
the numerator of which shall be the number of shares of
Series A Common Stock outstanding on such record date plus
the number of additional shares of Series A Common Stock
offered for subscription or purchase (or into which the
Series A Convertible Securities so offered are initially
convertible) and the denominator of which shall be the number of
shares of Series A Common Stock outstanding on such record
date plus the number of shares of Series A Common Stock,
which the aggregate offering price of the total number of shares
of Series A Common Stock so offered (or the aggregate
initial conversion or exercise price of the Series A
Convertible Securities so offered) would purchase at the then
current market price per share of Series A Common Stock on
such record date. Such adjustment shall be made successively
whenever any such rights or warrants are issued and shall become
effective immediately after the record date for the
determination of stockholders entitled to receive such rights or
warrants. In the event that all of the shares of Series A
Common Stock (or all of the Series A Convertible
Securities) subject to such rights or warrants have not been
issued when such rights or warrants expire (or, in the case of
rights or warrants to purchase Series A Convertible
Securities which have been exercised, all of the shares of
Series A Common Stock issuable upon conversion of such
Series A Convertible Securities have not been issued prior
to the expiration of the conversion right thereof), then the
Series A Conversion Rate shall be readjusted retroactively
to be the Series A Conversion Rate which would then be in
effect had the adjustment upon the issuance of such rights or
warrants been made on the basis of the actual number of shares
of Series A Common Stock (or Series A Convertible
Securities) issued upon the exercise of such rights or warrants
(or the conversion of such Series A Convertible
Securities); but such subsequent adjustment shall not affect the
number of shares of Series A Common Stock issued upon the
conversion of any share of Series A Preferred Stock prior
to the date such subsequent adjustment is made. Any
determination of the current market price per share of
Series A Common Stock under this Section shall be in
accordance with Article IV, Section C.4(n).
(ii) In case the Corporation shall after the Issue Date
issue any rights or warrants to all holders of shares of
Series C Common Stock entitling them (for a period expiring
not more than 45 days after the record date for the
determination of stockholders entitled to receive such rights or
warrants) to subscribe for or purchase shares of Series C
Common Stock (or Series C Convertible Securities) at a
price per share of Series C Common Stock (or having an
initial exercise price or conversion price per share of
Series C Common Stock) less than the then current market
price per share of Series C Common Stock on such record
date, the number of shares of Series C Common Stock into
which each share of Series C Preferred Stock shall
thereafter be convertible shall be determined by multiplying the
number of shares of Series C Common Stock into which such
share of Series C Preferred Stock was theretofore
convertible immediately prior to such record date by a fraction,
the numerator of which shall be the number of shares of
Series C Common Stock outstanding on such record date plus
the number of additional shares of Series C Common Stock
offered for subscription or purchase (or into which the
Series C Convertible Securities so offered are initially
convertible) and of which the denominator shall be the number of
shares of Series C Common Stock outstanding on such record
date plus the number of shares of Series C Common Stock,
which the aggregate offering price of the total number of shares
of Series C Common Stock so offered (or the aggregate
initial conversion or exercise price of the Series C
Convertible Securities so offered) would purchase at the then
current
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market price per share of Series C Common Stock on such
record date. Such adjustment shall be made successively whenever
any such rights or warrants are issued and shall become
effective immediately after the record date for the
determination of stockholders entitled to receive such rights or
warrants. In the event that all of the shares of Series C
Common Stock (or all of the Series C Convertible
Securities) subject to such rights or warrants have not been
issued when such rights or warrants expire (or, in the case of
rights or warrants to purchase Series C Convertible
Securities which have been exercised, all of the shares of
Series C Common Stock issuable upon conversion of such
Series C Convertible Securities have not been issued prior
to the expiration of the conversion right thereof), then the
Series C Conversion Rate shall be readjusted retroactively
to be the Series C Conversion Rate which would then be in
effect had the adjustment upon the issuance of such rights or
warrants been made on the basis of the actual number of shares
of Series C Common Stock (or Series C Convertible
Securities) issued upon the exercise of such rights or warrants
(or the conversion of such Series C Convertible
Securities); but such subsequent adjustment shall not affect the
number of shares of Series C Common Stock issued upon the
conversion of any share of Series C Preferred Stock prior
to the date such subsequent adjustment is made. Any
determination of the current market price per share of
Series C Common Stock under this Section shall be in
accordance with Article IV, Section C.4(n).
(e) Adjustments for Other Distributions and
Dividends.
(i) In case the Corporation shall distribute after the
Issue Date to all holders of shares of Series A Common
Stock (including any such distribution made in connection with a
merger in which the Corporation is the continuing corporation,
other than a merger to which Article IV,
Section C.4(f) is applicable) any securities, evidences of
its indebtedness or assets (other than cash dividends or with
respect to stock dividends, subdivisions, combinations or
reclassifications on the Series A Common Stock in respect
of which an adjustment is made pursuant to Article IV,
Section C.4(c)(i) hereof) or rights or warrants to purchase
shares of Series A Common Stock or securities convertible
into shares of Series A Common Stock (excluding a Rights
Dividend and those referred to in Article IV,
Section C.4(d)(i) above), then in each such case the number
of shares of Series A Common Stock into which each share of
Series A Preferred Stock shall thereafter be convertible
shall be determined by multiplying the number of shares of
Series A Common Stock into which such share was theretofore
convertible immediately prior to the record date for the
determination of stockholders entitled to receive the
distribution by a fraction, the numerator of which shall be the
then current market price per share of Series A Common
Stock on such record date and the denominator of which shall be
such current market price per share of Series A Common
Stock less the fair market value on such record date (as
determined in good faith by the Board of Directors of the
Corporation, whose good faith determination shall be conclusive)
of the portion of the securities, assets or evidences of
indebtedness or rights or warrants so to be distributed
applicable to one share of Series A Common Stock. Such
adjustment shall be made successively whenever any such
distribution is made and shall become effective immediately
after the record date for the determination of stockholders
entitled to receive such distribution is made. Any determination
of the current market price per share of Series A Common
Stock under this Section shall be in accordance with
Article IV, Section C.4(n).
(ii) In case the Corporation shall distribute after the
Issue Date to all holders of shares of Series C Common
Stock (including any such distribution made in connection with a
merger in which the Corporation is the continuing corporation,
other than a merger to which Article IV,
Section C.4(f) is applicable) any securities, evidences of
its indebtedness or assets (other than cash dividends or with
respect to stock dividends, subdivisions, combinations or
reclassifications on the Series C Common Stock in respect
of which an adjustment is made pursuant to Article IV,
Section C.4(c)(ii) hereof) or rights or warrants to
purchase shares of Series C Common Stock or securities
convertible into shares of Series C Common Stock (excluding
a Rights Dividend and those referred to in Article IV,
Section C.4(d)(ii) above), then in each such case the
number of shares of Series C Common Stock into which each
share of Series C Preferred Stock shall thereafter be
convertible shall be determined by multiplying the number of
shares of Series C Common Stock into which such share was
theretofore convertible immediately prior to the record date for
the determination of stockholders entitled to receive the
distribution by a fraction, the numerator of which shall be the
then current market price per share of Series C Common
Stock on such record date and the denominator of which shall be
such current market price per share of Series C Common
Stock less the fair market value on such record date (as
determined in good faith by the Board of Directors of the
Corporation, whose good faith determination shall be conclusive)
of the portion of the securities, assets or evidences of
indebtedness or rights
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or warrants so to be distributed applicable to one share of
Series C Common Stock. Such adjustment shall be made
successively whenever any such distribution is made and shall
become effective immediately after the record date for the
determination of stockholders entitled to receive such
distribution is made. Any determination of the current market
price per share of Series C Common Stock under this Section
shall be in accordance with Article IV, Section C.4(n).
(f) Adjustments for Reclassification, Merger,
Etc. In case of any reclassification or
change in the Series A Common Stock, Series B Common
Stock or Series C Common Stock (other than any
reclassification or change referred to in Article IV,
Section C.4(c) and other than a change in par value) or in
case of any consolidation of the Corporation with any other
corporation or any merger of the Corporation into another
corporation or of another corporation into the Corporation
(other than a merger in which the Corporation is the continuing
corporation and which does not result in any reclassification or
change (other than a change in par value or any reclassification
or change to which Article IV, Section C.4(c) is
applicable) in the outstanding Series A Common Stock,
Series B Common Stock or Series C Common Stock), or in
case of any sale or transfer to another corporation or entity
(other than by mortgage or pledge) of all or substantially all
of the properties and assets of the Corporation, in any such
case after the Issue Date, the Corporation (or its successor in
such consolidation or merger) or the purchaser of such
properties and assets shall make appropriate provision so that
the holder of a share of the Convertible Preferred Stock shall
have the right thereafter to convert such share into the kind
and amount of shares of stock and other securities and property
that such holder would have owned immediately after such
reclassification, change, consolidation, merger, sale or
transfer if such holder had converted such share immediately
prior to the effective date of such reclassification, change,
consolidation, merger, sale or transfer (assuming for this
purpose (to the extent applicable) that such holder failed to
exercise any rights of election and received per share the kind
and amount of shares of stock and other securities and property
received per share by a plurality of the non-electing shares),
and the holders of the Convertible Preferred Stock shall have no
other conversion rights under these provisions; provided,
that effective provision shall be made, in the articles or
certificate of incorporation of the resulting or surviving
corporation or otherwise or in any contracts of sale or
transfer, so that the provisions set forth herein for the
protection of the conversion rights of the Convertible Preferred
Stock shall thereafter be made applicable, as nearly as
reasonably may be to any such other shares of stock and other
securities and property deliverable upon conversion of the
Convertible Preferred Stock remaining outstanding or other
Convertible Preferred Stock or other Convertible Securities
received by the holders of Convertible Preferred Stock in place
thereof; and provided, further, that any such
resulting or surviving corporation or purchaser shall expressly
assume the obligation to deliver, upon the exercise of the
conversion privilege, such shares, securities or property as the
holders of the Convertible Preferred Stock remaining
outstanding, or other Convertible Preferred Stock or other
Convertible Securities received by the holders in place thereof,
shall be entitled to receive pursuant to the provisions hereof,
and to make provisions for the protection of the conversion
rights as above provided.
(g) Notice of Adjustments in Conversion Rates.
(i) Whenever the Series A Conversion Rate or the
conversion privilege shall be adjusted as provided in
Article IV, Sections C.4(c)(i), (d)(i), (e)(i) or (f),
the Corporation shall promptly cause a notice to be mailed to
the holders of record of the Series A Preferred Stock
describing the nature of the event requiring such adjustment and
the Series A Conversion Rate in effect immediately
thereafter, the kind and amount of stock or other securities or
property into which the Series A Preferred Stock shall be
convertible after such event. In case of an adjustment pursuant
to Article IV, Section C.4(e)(i), such notice shall
enclose the resolution of the Board of Directors of the
Corporation making the fair market value determination of the
Series A Common Stock for the purpose of calculating the
Series A Conversion Rate. Where appropriate, such notice
may be given in advance and included as a part of a notice
required to be mailed under the provisions of Article IV,
Section C.4(i).
(ii) Whenever the Series C Conversion Rate or the
conversion privilege shall be adjusted as provided in
Article IV, Sections C.4(c)(ii), (d)(ii), (e)(ii) or
(f), the Corporation shall promptly cause a notice to be mailed
to the holders of record of the Series C Preferred Stock
describing the nature of the event requiring such adjustment,
the Series C Conversion Rate in effect immediately
thereafter and the kind and amount of stock or other securities
or property into which the Series C Preferred Stock shall
be convertible after such event. In case of an adjustment
pursuant to Article IV, Section C.4(e)(ii), such
notice shall enclose the resolution of the Board of Directors of
the Corporation making the fair market value determination of
the Series C Common Stock for the purpose of
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calculating the Series C Conversion Rate. Where
appropriate, such notice may be given in advance and included as
a part of a notice required to be mailed under the provisions of
Article IV, Section C.4(i).
(h) Calculation and Timing of
Adjustments. The Corporation may, but shall
not be required to, (i) make any adjustment of the
Series A Conversion Rate if such adjustment would require
an increase or decrease of less than 1% in the Series A
Conversion Rate, or (ii) make any adjustment of the
Series C Conversion Rate if such adjustment would require
an increase or decrease of less than 1% in the Series C
Conversion Rate; provided, however, that, in each
case, any adjustments which by reason of this Article IV,
Section C.4(h) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All
calculations under this Article IV, Section C.4(h)
shall be made to the nearest 1/100th of a share. In any
case in which this Article IV, Section C.4(h) shall
require that an adjustment shall become effective immediately
after a record date for such event, the Corporation may defer
until the occurrence of such event (x) issuing to the
holder of any shares of Convertible Preferred Stock converted
after such record date and before the occurrence of such event
the additional shares of Series A Common Stock or
Series C Common Stock, as applicable, or other capital
stock issuable upon such conversion by reason of the adjustment
required by such event over and above the shares of
Series A Common Stock or Series C Common Stock, as
applicable, or other capital stock issuable upon such conversion
before giving effect to such adjustment and (y) paying to
such holder cash in lieu of any fractional interest to which
such holder is entitled pursuant to Article IV,
Section C.4(n); provided, however, that, if
requested by such holder, the Corporation shall deliver to such
holder a due bill or other appropriate instrument evidencing
such holders right to receive such additional shares of
Series A Common Stock or Series C Common Stock, as
applicable, or other capital stock, and such cash, upon the
occurrence of the event requiring such adjustment.
(i) Notice of Certain Events. In case at any
time:
(i) the Corporation shall take any action which would
require an adjustment in the Conversion Rate pursuant to
Article IV, Section C.4;
(ii) there shall be any capital reorganization or
reclassification of the Common Stock (other than a change in par
value), or any consolidation or merger to which the Corporation
is a party and for which approval of any stockholders of the
Corporation is required, or any sale, transfer or lease of all
or substantially all of the properties and assets of the
Corporation, or a tender offer for shares of Common Stock
representing at least a majority of the total voting power
represented by the outstanding shares of Common Stock which has
been recommended by the Board of Directors as being in the best
interests of the holders of Common Stock; or
(iii) there shall be a voluntary or involuntary
dissolution, liquidation or winding up of the Corporation;
then, in any such event, the Corporation shall give written
notice to the holders of the Convertible Preferred Stock at
their respective addresses as the same appear on the books of
the Corporation, at least twenty days (or ten days in the case
of a recommended tender offer as specified in clause (ii)
above) prior to any record date for such action, dividend or
distribution or the date as of which it is expected that holders
of Common Stock of record shall be entitled to exchange their
shares of Common Stock for securities or other property, if any,
deliverable upon such reorganization, reclassification,
consolidation, merger, sale, transfer, lease, tender offer,
dissolution, liquidation or winding up, during which period such
holders may exercise their conversion rights; provided,
however, that any notice required by any event described
in clause (ii) of this Article IV, Section C.4(i)
shall be given in the manner and at the time that such notice is
given to the holders of Common Stock. Without limiting the
obligations of the Corporation to provide notice of corporate
actions hereunder, the failure to give the notice required by
this Article IV, Section C.4(i) or any defect therein
shall not affect the legality or validity of any such corporate
action of the Corporation or the vote upon such action.
(j) Procedures for
Conversion. Before any holder of Convertible
Preferred Stock shall be entitled to convert the same into
Series A Common Stock or Series C Common Stock, as
applicable (or, in the case of the Mandatory Conversion, before
any holder of Convertible Preferred Stock so converted shall be
entitled to receive certificate(s) evidencing the shares of
Series A Common Stock, Series C Common Stock or other
securities or property, as applicable, issuable upon such
conversion), such holder shall surrender the certificate(s) for
such Convertible Preferred Stock at the office of the
Corporation or at the office of the transfer agent for the
Convertible Preferred Stock, which certificate(s), if the
Corporation shall so request, shall be duly endorsed to the
Corporation or in blank
D-18
or accompanied by proper instruments of transfer to the
Corporation or in blank (such endorsements or instruments of
transfer to be in form satisfactory to the Corporation), and
shall give written notice to the Corporation at said office that
such holder elects to convert all or a part of the shares
represented by said certificate(s) (or, in the case of the
Mandatory Conversion, that such holder is surrendering the same)
in accordance with the terms of this Article IV,
Section C.4(j), and shall state in writing therein the name
or names in which such holder wishes the certificate(s) for
Series A Common Stock, Series C Common Stock or other
securities or property, as applicable, to be issued. Every such
notice of election to convert shall constitute a contract
between the holder of such Convertible Preferred Stock and the
Corporation, whereby the holder of such Convertible Preferred
Stock shall be deemed to subscribe for the amount of
Series A Common Stock, Series C Common Stock or other
securities or property, as applicable, which such holder shall
be entitled to receive upon conversion of the number of share(s)
of Convertible Preferred Stock to be converted, and, in
satisfaction of such subscription, to deposit the share(s) of
Convertible Preferred Stock to be converted, and thereby the
Corporation shall be deemed to agree that the surrender of the
shares of Convertible Preferred Stock to be converted shall
constitute full payment of such subscription for Series A
Common Stock or Series C Common Stock, as applicable, to be
issued upon such conversion. The Corporation will as soon as
practicable after such deposit of the certificate(s) for
Convertible Preferred Stock, accompanied by the written notice
and the statement above prescribed, issue and deliver at the
office of the Corporation or of said transfer agent to the
Person for whose account such Convertible Preferred Stock was so
surrendered, or to his nominee(s) or, subject to compliance with
applicable law, transferee(s), certificate(s) for the number of
full share(s) of Series A Common Stock or Series C
Common Stock, as applicable, to which such holder shall be
entitled, together with cash in lieu of any fraction of a share
as hereinafter provided together with an amount in cash equal to
the full amount of any cash dividend declared (or required to be
declared) on the Convertible Preferred Stock which, as of the
date of such conversion, remains unpaid (provided, that
the Corporation will use commercially reasonable efforts to make
such delivery within two Business Days after such deposit and
such notice and statement). If surrendered certificate(s) for
Convertible Preferred Stock are converted only in part, the
Corporation will issue and deliver to the holder, or to his
nominee(s), without charge therefor, new certificate(s)
representing the aggregate of the unconverted shares. Such
conversion shall be deemed to have been made as of the date of
such surrender of the Convertible Preferred Stock to be
converted or date of the event that gives rise to the Mandatory
Conversion; and the Person(s) entitled to receive the
Series A Common Stock or Series C Common Stock, as
applicable, issuable upon conversion of such Convertible
Preferred Stock shall be treated for all purposes as the record
holder or holders of such Series A Common Stock or
Series C Common Stock, as applicable, on such date.
(k) Transfer Taxes. The issuance
of certificate(s) for share(s) of Series A Common Stock or
Series C Common Stock, as applicable, upon conversion of
share(s) of Convertible Preferred Stock shall be made without
charge for any issue, stamp or other similar tax in respect of
such issuance; provided, however, if any such
certificate is to be issued in a name other than that of the
registered holder of the share(s) of Convertible Preferred Stock
converted, the Person(s) requesting the issuance thereof shall
pay to the Corporation the amount of any tax which may be
payable in respect of any transfer involved in such issuance or
shall establish to the satisfaction of the Corporation that such
tax has been paid.
(l) Reservation of Shares. The
Corporation shall reserve and keep available at all times
thereafter, solely for the purpose of issuance upon conversion
of the outstanding shares of Convertible Preferred Stock, such
number of shares of Series A Common Stock and Series C
Common Stock as shall be issuable upon the conversion of all
outstanding shares of Convertible Preferred Stock;
provided, that nothing contained herein shall be
construed to preclude the Corporation from satisfying its
obligations in respect of the conversion of the outstanding
shares of Convertible Preferred Stock by delivery of shares of
Series A Common Stock or Series C Common Stock, as
applicable, which are held in the treasury of the Corporation.
The Corporation shall take all such corporate and other actions
as from time to time may be necessary to insure that all shares
of Series A Common Stock and Series C Common Stock
issuable upon conversion of shares of Convertible Preferred
Stock at the applicable Conversion Rate in effect from time to
time will, upon issue, be duly and validly authorized and
issued, fully paid and nonassessable and free of any preemptive
or similar rights.
(m) Retirement of Convertible Preferred
Stock. All shares of Convertible Preferred
Stock received by the Corporation upon conversion thereof shall
be retired and shall not be reissued
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(n) Payment in Lieu of Fractional
Shares. The Corporation shall not be required
to issue fractional shares of Series A Common Stock or
Series C Common Stock, as applicable, or scrip upon
conversion of the Convertible Preferred Stock. As to any final
fraction of a share of Series A Common Stock or
Series C Common Stock, as applicable, which a holder of one
or more shares of Convertible Preferred Stock would otherwise be
entitled to receive upon conversion of such shares in the same
transaction, the Corporation shall make a cash payment in
respect of such final fraction in an amount equal to the same
fraction of the current market price of a full share of
Series A Common Stock or Series C Common Stock as
applicable, as determined in good faith by the Board of
Directors. For the purpose of any computation of current market
price under this Certificate, current market price of any
security on any date shall be deemed to be the average of the
daily closing prices per share of such security for the 20
consecutive Trading Days immediately prior to such date or, with
respect to any adjustment in conversion rights as set forth
herein, the earlier of the date in question and the date
immediately prior to the Ex Date; provided,
however, that if any other transaction occurs requiring
an adjustment in the conversion rights as set forth herein, and
the Ex Date for such other transaction falls during such 20
consecutive Trading Day period, then, and in each such case, the
current per share market price shall be appropriately adjusted.
The closing price for each day shall be the last sale price,
regular way, or, in case no such sale takes place on such day,
the average of the closing bid and asked prices, regular way, in
either case as reported on the principal national securities
exchange on which the security is listed or admitted to trading
or, if the security is not listed or admitted to trading on any
national securities exchange, the last quoted price or, if not
so quoted, the average of the high bid and low asked prices in
the over-the-counter market, as reported by NASDAQ or such other
system then in use, or, if on any such date the security is not
quoted by any such organization, the average of the closing bid
and asked prices as furnished by a professional market maker
making a market in the security selected by the Board of
Directors of the Corporation. Trading Day
means a day on which the principal national securities exchange
on which the security is listed or admitted to trading is open
for the transaction of business or, if the security is not
listed or admitted to trading on any national securities
exchange, a Business Day. Ex Date means
(i) when used with respect to any dividend, distribution or
issuance, the first date on which the Common Stock trades
regular way on the relevant exchange or in the relevant market
from which the closing price is obtained without the right to
receive such dividend, distribution or issuance, (ii) when
used with respect to any subdivision or combination of shares of
Common Stock, the first date on which the Common Stock trades
regular way on such exchange or in such market after the time at
which such subdivision or combination becomes effective,
(iii) when used with respect to any tender or exchange
offer, the first date on which the Common Stock trades regular
way on such exchange or in such market after such tender or
exchange offer expires and (iv) when used with respect to
any other transaction, the date of consummation of such
transaction.
(o) Regulatory Matters. If any
shares of Series A Common Stock or Series C Common
Stock, which would be issuable upon conversion of shares of
Convertible Preferred Stock require the approval of any
governmental authority before such shares may be issued upon
conversion, the Corporation, at the request and expense of the
holder(s) of such Convertible Preferred Stock, will use its
reasonable best efforts to cooperate with the holder(s) of such
Convertible Preferred Stock to obtain such approvals.
5. Voting Rights.
(a) General Voting Rights. In
connection with any matter as to which the holders of
Series A Common Stock and Series B Common Stock are
entitled to vote other than the election of Common Stock
Directors, each share of Series A Preferred Stock issued
and outstanding as of the record date for such meeting shall
have (and the holder of record thereof shall be entitled to
cast) the number of votes equal to the number of votes such
holder would have been entitled to cast had it converted its
shares of Series A Preferred Stock into shares of
Series A Common Stock immediately prior to the record date
for the determination of stockholders entitled to vote upon such
matter. In connection with any matter as to which the holders of
Series C Common Stock are entitled to vote pursuant to this
Certificate, each share of Series C Preferred Stock issued
and outstanding as of the record date for such meeting shall
have (and the holder of record thereof shall be entitled to
cast) the number of votes equal to the number of votes such
holder would have been entitled to cast had it converted its
shares of Series C Preferred Stock into shares of
Series C Common Stock immediately prior to the record date
for the determination of stockholders entitled to vote upon such
matter. Except as provided in this Article IV,
Section C.5 and Article IV, Section B.1 and
except as otherwise may be required by law or
Series Preferred Stock Designation (as defined below) of
any series of Series Preferred Stock, the holders of Common
Stock, the holders of Convertible Preferred Stock and the
holders of
D-20
any other series of Series Preferred Stock shall be
entitled to notice of and to attend any, meeting of stockholders
and to vote together as a single class.
(b) Election of Series A Preferred Stock
Directors.
(i) Until such time as a Series A Mandatory Conversion
shall be deemed to have occurred pursuant to Article IV,
Section C.4(a)(ii), the holders of the Series A
Preferred Stock shall have the exclusive right to elect three
members of the Board of Directors (each such director elected by
the holders of the Series A Preferred Stock is hereinafter
referred to as a Series A Preferred Stock
Director). Notwithstanding the foregoing provisions of
this Section, so long as the applicable rules and regulations of
the NASDAQ or the Commission (in each case, as may be amended
from time to time) require that the Board of Directors or any
committee thereof, include as members thereof, directors who
qualify as Independent Directors, then two of the persons
proposed, designated or nominated in writing or otherwise by the
holders of the Series A Preferred Stock to serve as a
Series A Preferred Stock Director will, in addition to any
other qualifications as a director imposed by the DGCL, qualify
as Independent Directors, as determined by the then current
Board, acting in good faith.
(ii) Each Series A Preferred Stock Director will be
that person elected, by the written consent of the holders of a
majority of the outstanding shares of Series A Preferred
Stock given in accordance with Article IV,
Section C.5(d) below or by the affirmative vote of the
holders of a majority of the outstanding shares of Series A
Preferred Stock at a meeting called for that purpose.
(iii) A Series A Preferred Stock Director may be
removed from office (x) without Cause upon the affirmative
vote of the holders of at least a majority of the outstanding
voting shares of the Series A Preferred Stock entitled to
vote upon the election of directors, voting together as a
separate class and (y) may be removed with Cause as
provided in Article V, Section C below. Any vacancy in
the office of a Series A Preferred Stock Director occurring
during the effectiveness of the applicable provisions of
Article IV, Section C.5(b)(i) shall be filled solely
by the written consent of the holders of a majority of the
outstanding shares of the Series A Preferred Stock given in
accordance with Article IV, Section C.5(d) below or by
the affirmative vote of the holders of a majority of the
outstanding shares of Series A Preferred Stock at a meeting
called for that purpose. Any director elected to fill a vacancy
shall and serve the same remaining term as that of his or her
predecessor and until his or her successor has been chosen and
has qualified.
(c) Special Class Vote
Matters. Until such time as a Series A
Mandatory Conversion shall be deemed to have occurred pursuant
to Article IV, Section C.4(a)(ii), neither the
Corporation nor any of its Subsidiaries will take any of the
following actions (any such action, a Special
Class Vote Matter) following the Issue Date
without having obtained the affirmative vote or written consent
of the holders of a majority of the outstanding shares of the
Series A Preferred Stock given in accordance with
Article IV, Section C.5(d) below or by the affirmative
vote of the holders of a majority of the outstanding shares of
the Series A Preferred Stock at a meeting called for that
purpose:
(i) any increase in the number of members of the Board of
Directors to a number of directors in excess of 11;
(ii) any fundamental change in the business of the
Corporation and its Subsidiaries from the business of the
Corporation and its Subsidiaries as conducted as of the Issue
Date or the making of any investment, establishment of joint
venture, or any acquisition, in each case, constituting a
material departure from the current lines of business of the
Corporation and its Subsidiaries (other than any such change,
investment, joint venture or acquisition that has been approved
in accordance with Article IV, Section C.5(c)(vi)
below);
(iii) the material amendment, alteration or repeal of any
provision of this Certificate or the Bylaws (as defined in
Article V, Section F) (or the organizational documents
of any Subsidiary of the Corporation) or the addition or
insertion of other provisions therein, other than (i) any
amendments to the articles or certificate of incorporation,
bylaws or organizational documents of any Wholly-Owned
Subsidiary or (ii) an amendment to or modification of this
Certificate that is necessary in order to implement any action
that has been otherwise approved by the holders of a majority of
the outstanding shares of the Series A Preferred Stock;
(iv) any transaction (a Related Party
Transaction) between (x) the Corporation or any
of its Subsidiaries, on the one hand, and (y) any Related
Party of the Corporation, on the other hand, including the
amendment of any agreement between the Corporation or any of its
Subsidiaries and any Related Party of the Corporation as in
effect
D-21
on the Issue Date; provided, however, that any
transaction between the Corporation or any of its Subsidiaries
and a Related Party of the Corporation will not constitute a
Related Party Transaction if the terms and conditions of such
transaction, taken as a whole, are no more favorable to such
Related Party than the terms and conditions made available to
similarly situated third parties, or, if there are no such
similarly situated third parties, such transaction is otherwise
on arms length terms;
(v) the merger, consolidation or other business combination
by the Corporation into or with any other entity, other than any
transaction involving only the Corporation
and/or one
or more direct or indirect Wholly-Owned Subsidiaries of the
Corporation; provided, however, that the
provisions of this Section will not apply to the Merger or apply
to transactions that have been approved in accordance with
Article IV, Sections C.5(c)(vi) and (vii) below;
(vi) the acquisition by the Corporation or any of its
Subsidiaries of any assets or properties (including stock or
other equity interests of a third party) in one transaction or a
series of related transactions, which assets or properties have
an aggregate value or funding commitment by the Corporation in
excess of $250 million;
(vii) the disposition (by way of sale, distribution to
stockholders of the Corporation of any securities or assets, or
any other means) by the Corporation or any of its Subsidiaries
of any assets or properties (including stock or other equity
interests of a third party) in one transaction or a series of
related transactions, which assets or properties have an
aggregate value in excess of $250 million;
(viii) the authorization, issuance, reclassification,
redemption, exchange, subdivision or recombination of any equity
securities of the Corporation or its material Subsidiaries,
other than: (1) any issuance of equity securities to the
Corporation or its Subsidiaries of any entity if subsequent to
such issuance, such entity would be a direct or indirect
Wholly-Owned Subsidiary of the Corporation, provided,
that such Wholly-Owned Subsidiary may not Transfer such equity
securities to any Person other than the Corporation or another
Wholly-Owned Subsidiary; (2) any issuance of equity
securities in connection with a transaction that has been
approved in accordance with Article IV,
Sections C.5(c)(v) or (vi) above or in connection with
an acquisition (or series of related acquisitions) with respect
to which the approval of the holders of the Series A
Preferred Stock is not otherwise required, provided, that
none of the Corporation or any of its Subsidiaries pays
consideration consisting of or including capital stock of the
Corporation or any of its material Subsidiaries in any such
transaction that provides (other than as required by the DGCL)
the holders of such security with voting rights superior in any
respect to the voting rights of the holders of the Series A
Common Stock, on a per share basis; (3) pursuant to the
terms of the Company Rights Plan or the Rights distributed
pursuant thereto; (4) in connection with the exercise of
any stock options or stock appreciation rights of the
Corporation or any of its Subsidiaries outstanding immediately
following the effectiveness of the Merger; or (5) pursuant
to any equity compensation plan of the Corporation approved by
the holders of the Series A Preferred Stock;
(ix) any action resulting in the voluntary liquidation,
dissolution or winding up of the Corporation or any material
Subsidiary of the Corporation;
(x) any substantial change in Discoverys service
distribution policy and practices from the service distribution
policy and practices of Discovery and its Subsidiaries as of the
Issue Date;
(xi) the declaration or payment of any dividend on, or the
making of any distribution to holders of equity securities of
the Corporation or any Subsidiary of the Corporation, other than
(1) cash dividends payable out of current year earnings;
(2) dividends or distributions payable or made in shares of
Common Stock or other securities of the Corporation, subject to
the limitations otherwise provided for herein;
(3) dividends or distributions to the Corporation or any
Wholly-Owned Subsidiary of the Corporation that are declared and
paid by a Wholly-Owned Subsidiary of the Corporation; and
(4) the Rights Dividend;
(xii) the incurrence of Indebtedness after the Issue Date,
by or on behalf of the Corporation or any of its Subsidiaries,
if (1) such Indebtedness, together with all other
Indebtedness of the Corporation and its Consolidated Group,
would exceed four (4) times the Cash Flow of the
Corporation and its Consolidated Group for the last four
(4) consecutive calendar quarters (the Annualized
Cash Flow) or (2) the Debt Service for the next
twelve (12) calendar months related to such Indebtedness,
together with the Debt Service for the next twelve
(12) calendar months for all other Indebtedness of the
Corporation and its Consolidated Group, would exceed sixty-six
percent (66%) of the Annualized Cash Flow of the Corporation and
its Consolidated Group;
D-22
(xiii) the appointment or removal of the Chairman of the
Board of Directors of the Corporation and the appointment or
removal of the Chief Executive Officer of the Corporation;
(xiv) any offering of any security of the Corporation or
any of its Subsidiaries that would constitute a public
offering within the meaning of the Securities Act of 1933,
other than, (1) in connection with an acquisition (or
series of related acquisitions) with respect to which the
approval of the holders of the Series A Preferred Stock is
not otherwise required; (2) an offering of securities
pursuant to the Company Rights Plan; or (3) in connection
with any equity compensation plan of the Corporation or any of
its Subsidiaries in effect as of the Issue Date or approved by
the holders of the Series A Preferred Stock;
provided, that, in the case of (1) of this
subsection, none of the Corporation or any of its Subsidiaries
pays consideration consisting of capital stock of the
Corporation or any of its Subsidiaries in any such transaction
that provides (other than as required by the DGCL) the holders
of such security with voting rights superior in any respect to
the voting rights of the holders of the Series A Common
Stock, on a per share basis; and
(xv) the adoption of the Annual Business Plan of the
Corporation and any material deviation therefrom.
(d) Action By Written
Consent. With respect to actions by the
holders of the Series A Preferred Stock upon those matters
on which such holders are entitled to vote as a separate class
(including but not limited to the Special Class Vote
Matters), such actions may be taken without a meeting, without
prior notice and without a vote, if a consent or consents in
writing, setting forth the action so taken, shall be signed by
at least a majority of the outstanding shares of Series A
Preferred Stock, and shall be delivered to the Corporation as
provided in the DGCL. Notice shall be given in accordance with
the applicable provisions of the DGCL of the taking of corporate
action without a meeting by less than unanimous written consent.
6. Waiver. Unless otherwise
provided in this Certificate, any provision which, for the
benefit of the holders of the Convertible Preferred Stock or any
series thereof, prohibits, limits or restricts actions by the
Corporation, or imposes obligations on the Corporation, may be
waived in whole or in part, or the application of all or any
part of such provision in any particular circumstance or
generally may be waived, in each case only pursuant to the
consent of the holders of a majority (or such greater percentage
thereof as may be required by applicable law or any applicable
rules of any national securities exchange) of the outstanding
shares of Convertible Preferred Stock, or the series thereof so
affected, consenting together as a single class. Any such waiver
shall be binding on all holders, including any subsequent
holders, of the Convertible Preferred Stock.
7. Method of Giving
Notices. Any notice required or permitted
hereby to be given to the holders of shares of Convertible
Preferred Stock shall be deemed duly given if deposited in the
United States mail, first class mail, postage prepaid, and
addressed to each holder of record at the holders address
appearing on the books of the Corporation or supplied by the
holder in writing to the Corporation for the purpose of such
notice.
8. Exclusion of Other
Rights. Except as provided in the Bylaws of
the Corporation or as may otherwise be required by law and
except for the equitable rights and remedies which may otherwise
be available to holders of Convertible Preferred Stock, the
shares of Convertible Preferred Stock shall not have any
designations, preferences, limitations or relative rights other
than those specifically set forth herein.
9. Heading of
Subdivisions. The headings of the various
subdivisions hereof are for convenience of reference only and
shall not affect the interpretation of any of the provisions
hereof.
SECTION D
SERIES PREFERRED STOCK
1. The Series Preferred Stock may be divided and
issued in one or more series from time to time, with such
powers, designations, preferences and relative, participating,
optional or other rights, and qualifications, limitations or
restrictions thereof, as shall be stated and expressed in a
resolution or resolutions providing for the issue of each such
series adopted by the Board of Directors (a
Series Preferred Stock Designation).
D-23
2. The Board of Directors, in the Series Preferred
Stock Designation with respect to a series of
Series Preferred Stock (a copy of which shall be filed as
required by law), shall, without limitation of the foregoing, be
authorized to fix the following with respect to such series of
Series Preferred Stock:
(a) the distinctive serial designations and the number of
authorized shares of such series, which may be increased or
decreased from time to time, but not below the number of shares
thereof then outstanding, by a certificate made, signed and
filed as required by law (except where otherwise provided in a
Series Preferred Stock Designation);
(b) the dividend rate or amounts, if any, for such series,
the date or dates from which dividends on all shares of such
series shall be cumulative, if dividends on shares of such
series shall be cumulative, and the relative preferences or
rights of priority, if any, or participation, if any, with
respect to payment of dividends on shares of such series;
(c) the rights of the shares of such series in the event of
any voluntary or involuntary liquidation, dissolution or winding
up of the Corporation, if any, and the relative preferences or
rights of priority, if any, of payment of shares of such series;
(d) the right, if any, of the holders of such series to
convert or exchange such shares into or for other classes or
series of a class of stock or indebtedness of the Corporation or
of another Person, and the terms and conditions of such
conversion or exchange, including provision for the adjustment
of the conversion or exchange rate in such events as the Board
of Directors may determine;
(e) the voting powers, if any, of the holders of such
series;
(f) the terms and conditions, if any, for the Corporation
to purchase or redeem shares of such series; and
(g) any other relative rights, powers, preferences and
limitations, if any, of such series.
3. The Board of Directors is hereby expressly authorized to
exercise its authority with respect to fixing and designating
various series of the Series Preferred Stock and
determining the relative rights, powers and preferences, if any,
thereof to the full extent permitted by applicable law, subject
to any stockholder vote that may be required by this
Certificate. All shares of any one series of the
Series Preferred Stock shall be alike in every particular.
Except to the extent otherwise expressly provided in the
Series Preferred Stock Designation for a series of
Series Preferred Stock, the holders of shares of such
series shall have no voting rights except as may be required by
the laws of the State of Delaware. Further, unless otherwise
expressly provided in the Series Preferred Stock
Designation for a series of Series Preferred Stock, no
consent or vote of the holders of shares of
Series Preferred Stock or any series thereof shall be
required for any amendment to this Certificate that would
increase the number of authorized shares of
Series Preferred Stock or the number of authorized shares
of any series thereof or decrease the number of authorized
shares of Series Preferred Stock or the number of
authorized shares of any series thereof (but not below the
number of authorized shares of Series Preferred Stock or
such series, as the case may be, then outstanding).
4. Except as may be provided by the Board of Directors in a
Series Preferred Stock Designation or by law, shares of any
series of Series Preferred Stock that have been redeemed
(whether through the operation of a sinking fund or otherwise)
or purchased by the Corporation, or which, if convertible or
exchangeable, have been converted into or exchanged for shares
of stock of any other class or classes shall have the status of
authorized and unissued shares of Series Preferred Stock
and may be reissued as a part of the series of which they were
originally a part or may be reissued as part of a new series of
Series Preferred Stock to be created by a
Series Preferred Stock Designation or as part of any other
series of Series Preferred Stock.
D-24
ARTICLE V
DIRECTORS
SECTION A
NUMBER OF DIRECTORS
The governing body of the Corporation shall be a Board of
Directors and the number of directors of the Corporation shall
be determined in accordance with the Bylaws of the Corporation.
The Board of Directors immediately following the effectiveness
of the Merger shall be comprised of the persons listed on
Schedule 2.03(f) to the Transaction Agreement. Election of
directors need not be by written ballot.
1. Series A Preferred Stock
Directors. The Series A Preferred Stock
Directors shall be elected by the holders of the Series A
Preferred Stock, subject to, and in the manner provided in,
Article IV, Section C.5(b) of this Certificate. In the
event the holders of Series A Preferred Stock cease to have
the right to elect Series A Preferred Stock Directors in
accordance with Article IV, Section C.5(b), any
Series A Preferred Stock Director in office at such time
shall automatically be removed as a member of the Board of
Directors and the number of directors constituting the Board of
Directors at such time shall automatically be reduced by the
number of Series A Preferred Stock Directors immediately
prior to such removal. For the avoidance of doubt, the
provisions relating to classification and appointment of
directors set forth in Article V, Sections B and D
below shall apply only to the Common Stock Directors and not the
Series A Preferred Stock Directors. The Series A
Preferred Stock Directors immediately after the effectiveness of
the Merger shall be as provided in Schedule 2.03(f) to the
Transaction Agreement.
2. Common Stock
Directors. Directors of the Corporation,
other than (i) the Series A Preferred Stock Directors,
and (ii) directors elected by the holders of any series of
Series Preferred Stock entitled to elect a separate class
of directors pursuant to the applicable Series Preferred
Stock Designation, shall be elected, by the holders of the
Common Stock, subject to, and in the manner provided in, this
Article V, and shall be designated as Common Stock
Directors.
SECTION B
CLASSIFICATION OF THE BOARD
Except as otherwise fixed by or pursuant to the provisions of
(i) Article IV, Section C hereof relating to the
rights of the holders of Series A Preferred Stock to elect
the Series A Preferred Stock Directors who are not required
to be classified, and (ii) the Series Preferred Stock
Designation in respect of any series of Series Preferred
Stock the holders of which are entitled to separately elect
additional directors, which additional directors are not
required to be classified pursuant to the terms of such series
of Series Preferred Stock, the Common Stock Directors shall
be divided into three classes: Class I, Class II and
Class III. Each class shall consist, as nearly as possible,
of a number of directors equal to one-third (1/3) of the number
of Common Stock Directors. The Common Stock Directors as of
immediately following the effectiveness of the Merger shall be
designated into classes as set forth on Schedule 2.03(f) to
the Transaction Agreement. The term of office of the initial
Class I directors shall expire at the annual meeting of
stockholders in 2009; the term of office of the initial
Class II directors shall expire at the annual meeting of
stockholders in 2010; and the term of office of the initial
Class III directors shall expire at the annual meeting of
stockholders in 2011. At each annual meeting of stockholders of
the Corporation the successors of that class of directors whose
term expires at that meeting shall be elected to hold office for
a term expiring at the annual meeting of stockholders held in
the third year following the year of their election. The
directors of each class will hold office until their respective
successors are elected and qualified or until such
directors earlier death, resignation or removal.
D-25
SECTION C
REMOVAL OF DIRECTORS
Subject to the rights of the holders of any series of
Series Preferred Stock, Common Stock Directors may be
removed from office only for Cause upon the affirmative vote of
the holders of at least a majority of the total voting power of
the then outstanding shares of Series A Common Stock,
Series B Common Stock and any series of
Series Preferred Stock entitled to vote upon the election
of Common Stock Directors, and the Series A Preferred Stock
Directors may be removed from office (x) for Cause upon the
affirmative vote of the holders of at least a majority of the
total voting power of the then outstanding shares of
Series A Common Stock, Series B Common Stock,
Series A Preferred Stock and any series of
Series Preferred Stock entitled to vote upon the election
of Common Stock Directors voting together as a single class, and
(y) without Cause by the holders of a majority of the
shares of Series A Preferred Stock outstanding, voting
together as a separate class, subject, in the case of the
removal of a Series A Preferred Stock Director, to the
right of the holders of Series A Preferred Stock to elect
or appoint a replacement to fill such vacancy.
SECTION D
NEWLY CREATED DIRECTORSHIPS AND VACANCIES
Subject to the rights of holders of any series of
Series Preferred Stock and except as otherwise provided in
the Bylaws, any vacancy in the office of a Common Stock Director
resulting from death, resignation, removal, disqualification or
other cause, and newly created directorships resulting from any
increase in the number of directors on the Board of Directors,
shall be filled only by the affirmative vote of a majority of
Common Stock Directors then in office (even though less than a
quorum) or by the sole remaining Common Stock Director. Any
Common Stock Director elected in accordance with the preceding
sentence shall hold office for the remainder of the full term of
the class of directors in which the vacancy occurred or to which
the new directorship is apportioned, and until such
directors successor shall have been elected and qualified
or until such directors earlier death, resignation or
removal. No decrease in the number of directors constituting the
Board of Directors shall shorten the term of any incumbent
director, except as provided by Article V, Section A
or as may be provided in a Series Preferred Stock
Designation with respect to any additional director elected by
the holders of the applicable series of Series Preferred
Stock.
SECTION E
LIMITATION ON LIABILITY AND INDEMNIFICATION
1. Limitation On
Liability. To the fullest extent permitted by
the DGCL as the same exists or may hereafter be amended, a
director of the Corporation shall not be liable to the
Corporation or any of its stockholders for monetary damages for
breach of fiduciary duty as a director. Any amendment, repeal or
modification of this Article V, Section E.1 shall be
prospective only and shall not adversely affect any limitation,
right or protection of a director of the Corporation existing at
the time of such amendment, repeal or modification.
2. Indemnification.
(a) Right to Indemnification. The
Corporation shall indemnify and hold harmless, to the fullest
extent permitted by applicable law as it presently exists or may
hereafter be amended, any person who was or is made or is
threatened to be made a party or is otherwise involved in any
action, suit or proceeding, whether civil, criminal,
administrative or investigative (a
proceeding) by reason of the fact that he, or
a person for whom he is the legal representative, is or was a
director or officer of the Corporation or while a director or
officer of the Corporation is or was serving at the request of
the Corporation as a director, officer, employee, representative
or agent of another corporation or of a partnership, joint
venture, limited liability company, trust, enterprise or
nonprofit entity, including service with respect to employee
benefit plans, against all liability and loss suffered and
expenses (including attorneys fees) incurred by such
person. Such right of indemnification shall inure whether or not
the claim asserted is based on matters that antedate the
adoption of this Article V, Section E. The Corporation
shall be
D-26
required to indemnify or make advances to a person in connection
with a proceeding (or part thereof) initiated by such person
only if the proceeding (or part thereof) was authorized by the
Board of Directors of the Corporation.
(b) Prepayment of Expenses. The
Corporation shall pay the expenses (including attorneys
fees) incurred by a director or officer in defending any
proceeding in advance of its final disposition; provided,
however, that the payment of expenses incurred by a
director or officer in advance of the final disposition of the
proceeding shall be made only upon receipt of an undertaking by
the director or officer to repay all amounts advanced if it
should be ultimately determined that the director or officer is
not entitled to be indemnified under this Section or otherwise.
(c) Claims. If a claim for
indemnification or payment of expenses under this Section is not
paid in full within 30 days after a written claim therefor
has been received by the Corporation, the claimant may file suit
to recover the unpaid amount of such claim and, to the extent
permitted by law, shall be entitled to be paid the expense of
prosecuting such claim. In any such action the Corporation shall
have the burden of proving that the claimant was not entitled to
the requested indemnification or payment of expenses under
applicable law.
(d) Non-Exclusivity of Rights. The
rights conferred on any person by this Section shall not be
exclusive of any other rights which such person may have or
hereafter acquire under any statute, provision of this
Certificate, the Bylaws, agreement, vote of stockholders or
resolution of disinterested directors or otherwise.
(e) Insurance. The Board of
Directors may, to the full extent permitted by applicable law as
it presently exists, or may hereafter be amended from time to
time, authorize an appropriate officer or officers to purchase
and maintain at the Corporations expense insurance:
(i) to indemnify the Corporation for any obligation which
it incurs as a result of the indemnification of directors and
officers under the provisions of this Article V,
Section E; and (ii) to indemnify or insure directors
and officers against liability in instances in which they may
not otherwise be indemnified by the Corporation under the
provisions of this Article V, Section E.
(f) Other Indemnification. The
Corporations obligation, if any, to indemnify any person
who was or is serving at its request as a director, officer,
employee or agent of another corporation, partnership, joint
venture, limited liability company, trust, enterprise or
nonprofit entity shall be reduced by any amount such person may
collect as indemnification from such other corporation,
partnership, joint venture, limited liability company, trust,
enterprise or nonprofit entity.
3. Amendment or Repeal.
Any amendment, modification or repeal of the foregoing
provisions of this Article V, Section E shall not
adversely affect any right or protection hereunder of any person
in respect of any act or omission occurring prior to the time of
such amendment, modification or repeal.
SECTION F
AMENDMENT OF BYLAWS
In furtherance and not in limitation of the powers conferred by
the DGCL and subject to the rights of the holders of
Series A Preferred Stock as set forth in Article IV,
Section C.5(c)(iii), the Board of Directors, by action
taken by the affirmative vote of not less than 75% of the
members of the Board of Directors then in office, is hereby
expressly authorized and empowered to adopt, amend or repeal any
provision of the Bylaws of this Corporation
(Bylaws).
D-27
ARTICLE VI
MEETINGS OF STOCKHOLDERS
SECTION A
ANNUAL AND SPECIAL MEETINGS
Subject to the rights of the holders of any series of
Series Preferred Stock and the rights of the holders of
Series A Preferred Stock and except as provided in
Article VI, Section B, stockholder action may be taken
only at an annual or special meeting. Except as otherwise
provided in a Series Preferred Stock Designation with
respect to any series of Series Preferred Stock or unless
otherwise prescribed by law or by another provision of this
Certificate, special meetings of the stockholders of the
Corporation, for any purpose or purposes, shall be called by the
Secretary of the Corporation at the request of at least 75% of
the members of the Board of Directors then in office.
SECTION B
ACTION WITHOUT A MEETING
No action required to be taken or which may be taken at any
annual meeting or special meeting of stockholders may be taken
without a meeting, and the power of stockholders to consent in
writing, without a meeting, to the taking of any action is
specifically denied; provided, however, that
notwithstanding the foregoing, (i) the holders of the
Series B Common Stock may take action by written consent
for purposes of consenting to (x) any Share Distribution
pursuant to Article IV, Section B.4(c) of this
Certificate, (y) the issuance of shares of Series B
Common Stock other than in a Permitted Series B Issuance,
and/or
(z) any amendment, alteration, repeal, addition or
insertion of any provision of this Certificate for which a
Series B Consent is required in accordance with
Article VII of this Certificate, (ii) holders of
Convertible Preferred Stock may take action by written consent
as set forth in Article IV, Section C.5(d), and
(iii) holders of any series of Series Preferred Stock
may take action by written consent to the extent provided in a
Series Preferred Stock Designation with respect to such
series.
ARTICLE VII
ACTIONS REQUIRING SUPERMAJORITY STOCKHOLDER VOTE
Subject to the rights of the holders of any series of
Series Preferred Stock and the rights of the holders of
Series A Preferred Stock as set forth in Article IV,
Section C.5(c), the affirmative vote of the holders of at
least 80% of the total voting power of the then outstanding
Voting Securities, voting together as a single class at a
meeting specifically called for such purpose, shall be required
in order for the Corporation to take any action to authorize:
(a) the amendment, alteration or repeal of any provision of
this Certificate or the addition or insertion of other
provisions herein; provided, however, that this
clause (a) shall not apply to any such amendment,
alteration, repeal, addition or insertion (i) as to which
the laws of the State of Delaware, as then in effect, do not
require the consent of this Corporations stockholders, or
(ii) that at least 75% of the members of the Board of
Directors then in office have approved; provided,
further that, notwithstanding the foregoing, so long as
any shares of Series B Common Stock are issued and
outstanding, unless the Corporation shall have obtained the
Series B Consent with respect to such amendment,
alteration, repeal, addition or insertion, (x) the
Corporation will not amend, alter or repeal the provisions of
this clause (a), the second full paragraph of Article IV or
any provisions of Article IV, Section B of this
Certificate and (y) the Corporation will not amend, alter
or repeal any provision of this Certificate or add to or insert
any provision in this Certificate if (1) such amendment,
alteration, repeal, addition or insertion would result, directly
or indirectly, in the reclassification or recapitalization of
the then outstanding shares of Common Stock into securities of
the Corporation or any other Person (or securities convertible
into or exchangeable for, or which evidence the right to
purchase, securities of the Corporation or any other Person) and
(2) the securities to be held or received by the holders of
Series B Common Stock as a result of such reclassification
or recapitalization (and, if such securities are Convertible
Securities, the Underlying Securities with respect thereto)
would have no voting power, or would have Per Share Voting Power
of less than ten times the Per Share Voting Power of the
securities (and, if such securities are Convertible Securities,
the Underlying Securities with respect thereto) to be held or
D-28
received as a result of such reclassification or
recapitalization by the holders of shares of Series A
Common Stock, (or, if there are two or more other series of
Common Stock then outstanding, that series of Common Stock
holding or receiving, as a result of such reclassification or
recapitalization, securities (and, if such securities are
Convertible Securities, the Underlying Securities with respect
thereto) having the next highest Per Share Voting Power relative
to the securities (and, if such securities are Convertible
Securities, the Underlying Securities with respect thereto) to
be held or received by the holders of Series B Common
Stock), or (3) the securities to be held or received by the
holders of Series C Common Stock as a result of such
reclassification or recapitalization (and, if such securities
are Convertible Securities, the Underlying Securities with
respect thereto) would be entitled to vote with respect to
matters upon which securities holders of the issuer thereof are
generally entitled to vote (other than to an extent no greater
than the holders of Series C Common Stock are entitled to
vote upon matters as provided in this Certificate);
(b) the adoption, amendment or repeal of any provision of
the Bylaws of the Corporation; provided, however,
that this clause (b) shall not apply to, and no vote of the
stockholders of the Corporation shall be required to authorize,
the adoption, amendment or repeal of any provision of the Bylaws
of the Corporation by the Board of Directors in accordance with
the power conferred upon it pursuant to Article V,
Section F of this Certificate;
(c) the merger or consolidation of this Corporation with or
into any other Person or any other business combination
involving the Corporation; provided, however, that
this clause (c) shall not apply to any such merger or
consolidation (i) as to which the laws of the State of
Delaware, as then in effect, do not require the consent of this
Corporations stockholders, or (ii) that at least 75%
of the members of the Board of Directors then in office have
approved;
(d) the sale, lease or exchange of all, or substantially
all, of the assets of the Corporation; provided,
however, that this clause (d) shall not apply to any
such sale, lease or exchange that at least 75% of the members of
the Board of Directors then in office have approved; or
(e) the dissolution of the Corporation; provided,
however, that this clause (e) shall not apply to
such dissolution if at least 75% of the members of the Board of
Directors then in office have approved such dissolution.
Subject to the foregoing provisions of this Article VII,
the Corporation reserves the right at any time, and from time to
time, to amend, alter, change or repeal any provision contained
in this Certificate, and other provisions authorized by the laws
of the State of Delaware at the time in force may be added or
inserted, in the manner now or hereafter prescribed by law; and
all rights, preferences and privileges of whatsoever nature
conferred upon stockholders, directors or any other Persons
whomsoever by and pursuant to this Certificate in its present
form or as hereafter amended are granted subject to the rights
reserved in this Article VII.
ARTICLE VIII
SECTION 203 OF THE DGCL
The Corporation expressly elects not to be governed by
Section 203 of the DGCL.
ARTICLE IX
CERTAIN BUSINESS OPPORTUNITIES
1. Certain Acknowledgements;
Definitions. In recognition and anticipation
that (a) directors and officers of the Corporation and its
Subsidiaries may serve as directors, officers and employees of
any other corporation, company, partnership, association, firm
or other entity (Other Entity), (b) the
Corporation and its Affiliates, directly or indirectly, may
engage and are expected to continue to engage in the same,
similar or related lines of business as those engaged in by any
Other Entity and other business activities that overlap with or
compete with those in which such Other Entity may engage,
(c) the Corporation and its Affiliates may have an interest
in the same areas of business opportunity as any Other Entity,
(d) the Corporation and its Affiliates may engage in
material business transactions with any Other Entity and its
Affiliates, including (without limitation) receiving services
from, providing services to or being a significant customer or
supplier to such Other Entity and its Affiliates, and that the
Corporation and such Other Entity or one or more of their
respective Affiliates may benefit from such
D-29
transactions, and (e) as a consequence of the foregoing, it
is in the best interests of the Corporation that the rights of
the Corporation and its Subsidiaries, and the duties of any
directors or officers of the Corporation or any of its
Subsidiaries (including any such persons who are also directors,
officers or employees of any Other Entity), be determined and
delineated in respect of (x) any transactions between the
Corporation and its Affiliates, on the one hand, and such Other
Entity and its Affiliates, on the other hand, and (y) any
potential transactions or matters that may be presented to
officers and directors or the Corporation and its Subsidiaries,
or of which such officers or directors may otherwise become
aware, which potential transactions or matters may constitute
business opportunities of the Corporation or any of its
Affiliates, and in recognition of the benefits to be derived by
the Corporation through its continued contractual, corporate and
business relations with such Other Entity and of the benefits to
be derived by the Corporation by the possible service as
directors or officers of the Corporation and its Subsidiaries of
Persons who may also serve from time to time as directors,
officers and employees of such Other Entity, the provisions of
this Article IX shall, to the fullest extent permitted by
law, regulate and define the conduct of the business and affairs
of the Corporation and its Subsidiaries in relation to such
Other Entity and its Affiliates, and as such conduct and affairs
may involve such Other Entitys respective directors,
officers and employees, and the powers, rights, duties and
liabilities of the Corporation and its Subsidiaries and their
respective officers and directors in connection therewith and in
connection with any potential business opportunities of the
Corporation. Any Person purchasing or otherwise acquiring any
shares of capital stock of the Corporation, or any interest
therein, shall be deemed to have notice of and to have consented
to the provisions of this Article IX. References in this
Article IX to directors, officers
or employees of any Person shall be deemed to
include those Persons who hold similar positions or exercise
similar powers and authority with respect to any Other Entity
that is a limited liability company, partnership, joint venture
or other non-corporate entity.
2. Duties of Directors and Officers Regarding
Potential Business Opportunities; No Liability for Certain Acts
or Omissions. If a director or officer of the
Corporation or any Subsidiary of the Corporation is offered, or
otherwise acquires knowledge of, a potential transaction or
matter that may constitute or present a business opportunity for
the Corporation or any of its Affiliates (any such transaction
or matter, and any such actual or potential business
opportunity, a Potential Business
Opportunity), such director or officer shall, to the
fullest extent permitted by law, have no duty or obligation to
refer such Potential Business Opportunity to the Corporation or
any of its Subsidiaries, or to refrain from referring such
Potential Business Opportunity to any Other Entity, or to give
any notice to the Corporation or any of its Subsidiaries
regarding such Potential Business Opportunity (or any matter
related thereto), and such director or officer will not be
liable to the Corporation or any of its Subsidiaries, as a
director, officer, stockholder or otherwise, for any failure to
refer such Potential Business Opportunity to the Corporation or
any of its Subsidiaries, or for referring such Potential
Business Opportunity to any Other Entity, or for any failure to
give any notice to the Corporation or any of its Subsidiaries
regarding such Potential Business Opportunity or any matter
relating thereto, unless both the following conditions are
satisfied: (A) such Potential Business Opportunity was
expressly offered to such director or officer solely in his or
her capacity as a director or officer of the Corporation or as a
director or officer of any Subsidiary of the Corporation and
(B) such opportunity relates to a line of business in which
the Corporation or any Subsidiary of the Corporation is then
directly engaged.
3. Amendment of
Article IX. No alteration, amendment or
repeal, or adoption of any provision inconsistent with, any
provision of this Article IX shall have any effect upon
(a) any agreement between the Corporation or an Affiliate
thereof and any Other Entity or an Affiliate thereof, that was
entered into before such time or any transaction entered into in
connection with the performance of any such agreement, whether
such transaction is entered into before or after such time,
(b) any transaction entered into between the Corporation or
an Affiliate thereof and any Other Entity or an Affiliate
thereof, before such time, (c) the allocation of any
business opportunity between the Corporation or an Affiliate
thereof and any Other Entity before such time, or (d) any
duty or obligation owed by any director or officer of the
Corporation or any Subsidiary of the Corporation (or the absence
of any such duty or obligation) with respect to any Potential
Business Opportunity which such director or officer was offered,
or of which such director or officer otherwise became aware,
before such time.
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IN WITNESS WHEREOF, the undersigned has signed this
Certificate of Incorporation this
[ ] day of
[ ],
2008.
DISCOVERY COMMUNICATIONS, INC.
Name:
Title:
D-31
Appendix E
FORM OF
BY-LAWS
OF
DISCOVERY COMMUNICATIONS, INC.
A
Delaware Corporation
(the Corporation)
ARTICLE I
STOCKHOLDERS
Section 1.1 Annual
Meeting.
An annual meeting of stockholders for the purpose of electing
directors and of transacting any other business properly brought
before the meeting pursuant to these Bylaws shall be held each
year at such date, time and place, either within or without the
State of Delaware or, if so determined by the Board of Directors
in its sole discretion, at no place (but rather by means of
remote communication), as may be specified by the Board of
Directors in the notice of meeting.
Section 1.2 Special
Meetings.
Except as otherwise provided in the terms of any series of
preferred stock or unless otherwise provided by law or by the
Corporations Certificate of Incorporation, special
meetings of stockholders of the Corporation, for the transaction
of such business as may properly come before the meeting, may be
called by the Secretary of the Corporation only at the request
of not less than 75% of the members of the Board of Directors
then in office. Only such business may be transacted as is
specified in the notice of the special meeting. The Board of
Directors shall have the sole power to determine the time, date
and place, either within or without the State of Delaware, for
any special meeting of stockholders. Following such
determination, it shall be the duty of the Secretary to cause
notice to be given to the stockholders entitled to vote at such
meeting that a meeting will be held at the time, date and place
and in accordance with the record date determined by the Board
of Directors.
Section 1.3 Record
Date.
In order that the Corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders
or any adjournment thereof, or entitled to receive payment of
any dividend or other distribution or allotment of any rights,
or entitled to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other
lawful action, the Board of Directors may fix a record date,
which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of
Directors, and which record date: (i) in the case of
determination of stockholders entitled to vote at any meeting of
stockholders or adjournment thereof, shall, unless otherwise
required by the laws of the State of Delaware, not be more than
sixty (60) nor less than ten (10) days before the date
of such meeting, and (ii) in the case of any other lawful
action, shall not be more than sixty (60) days prior to
such other action. If no record date is fixed by the Board of
Directors: (i) the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders
shall be at the close of business on the day next preceding the
day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the
meeting is held, and (ii) the record date for determining
stockholders for any other purpose shall be at the close of
business on the day on which the Board of Directors adopts the
resolution relating thereto. A determination of stockholders of
record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may
fix a new record date for the adjourned meeting.
Section 1.4 Notice
of Meetings.
Notice of all stockholders meetings, stating the place, if any,
date and hour thereof; the means of remote communication, if
any, by which stockholders and proxy holders may be deemed to be
present in person and vote at such meeting; the place within the
city, other municipality or community or electronic network at
which the list of stockholders may be examined; and, in the case
of a special meeting, the purpose or purposes for which the
meeting
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is called, shall be delivered in accordance with applicable law
and applicable stock exchange rules and regulations by the
Chairman of the Board, the President, any Vice President, the
Secretary or an Assistant Secretary, to each stockholder
entitled to vote thereat at least ten (10) days but not
more than sixty (60) days before the date of the meeting,
unless a different period is prescribed by law, or the lapse of
the prescribed period of time shall have been waived. If mailed,
such notice shall be deemed to be given when deposited in the
United States mail, postage prepaid, directed to such
stockholders address as it appears on the records of the
Corporation.
Section 1.5 Notice
of Stockholder Business and Nominations.
(a) Annual Meetings of
Stockholders. (1) Nominations of persons
for election to the Board of Directors of the Corporation and
the proposal of business to be considered by the stockholders
may be made at an annual meeting of stockholders only
(i) pursuant to the Corporations notice of meeting
(or any supplement thereto), (ii) by or at the direction of
the Board of Directors or (iii) by any stockholder of the
Corporation who was a stockholder of record of the Corporation
at the time the notice provided for in this Section 1.5 is
delivered to the Secretary of the Corporation, who (x) in
the case of nominations of persons for election to the Board of
Directors, was a holder of record as of such date of shares of
the class or series of capital stock of the Corporation entitled
to vote upon such election, and (y) in the case of all
other matters, was a holder of record as of such date of shares
of the class or series of capital stock of the Corporation
entitled to vote on such matter, and, in each case, who complies
with the notice procedures set forth in this Section 1.5.
(2) In addition to any other requirements under applicable
law and the Corporations Certificate of Incorporation, no
nomination by any stockholder or stockholders of a person or
persons for election to the Board of Directors, and no other
proposal by any stockholder or stockholders, shall be considered
properly brought before an annual meeting unless the stockholder
shall have given timely notice thereof in writing to the
Secretary of the Corporation and any such proposed business,
other than the nominations of persons for election to the Board
of Directors, constitutes a proper matter for stockholder
action. To be timely, a stockholders notice shall be
delivered to the Secretary at the principal executive offices of
the Corporation not later than the close of business on the
sixtieth (60th) day nor earlier than the close of business on
the ninetieth (90th) day prior to the first anniversary of the
preceding years annual meeting (or, in the case of the
Corporations first annual meeting, the preceding
years annual meeting for Discovery Holding Company
(DHC)); provided, however, that
in the event that the date of the annual meeting is more than
thirty (30) days before or more than sixty (60) days after
such anniversary date, notice by the stockholder must be so
delivered not earlier than the close of business on the one
hundredth (100th) day prior to such annual meeting and not later
than the close of business on the later of the seventieth (70th)
day prior to such annual meeting or the tenth (10th) day
following the day on which public announcement of the date of
such meeting is first made by the Corporation. In no event shall
the public announcement of an adjournment or postponement of an
annual meeting commence a new time period (or extend any time
period) for the giving of a stockholders notice as
described above. Such stockholders notice shall set forth:
(i) as to each person whom the stockholder proposes to
nominate for election as a director (x) all information
relating to such person that is required to be disclosed in
solicitations of proxies for election of directors in an
election contest, or is otherwise required, in each case
pursuant to and in accordance with Regulation 14A under the
Securities Exchange Act of 1934, as amended (the
Exchange Act) and (y) such persons
written consent to being named in the proxy statement as a
nominee and to serving as a director if elected; (ii) as to
any other business that the stockholder proposes to bring before
the meeting, a brief description of the business desired to be
brought before the meeting, the text of the proposal or business
(including the text of any resolutions proposed for
consideration and in the event that such business includes a
proposal to amend the Bylaws of the Corporation, the language of
the proposed amendment), the reasons for conducting such
business at the meeting and any material interest in such
business of such stockholder and the beneficial owner, if any,
on whose behalf the proposal is made; and (iii) as to the
stockholder giving the notice and the beneficial owner, if any,
on whose behalf the nomination or proposal is made (v) the
name and address of such stockholder, as they appear on the
Corporations books, and of such beneficial owner,
(w) the class or series and number of shares of capital
stock of the Corporation which are owned beneficially and of
record by such stockholder and such beneficial owner, (x) a
representation that the stockholder is a holder of record of
stock of the Corporation entitled to vote on the matter to which
its proposal relates at such meeting and intends to appear in
person or by proxy at the meeting to propose such business or
nomination, (y) a representation (A) whether any such
person or such stockholder has received any financial
assistance, funding or other consideration from any other person
in respect of the nomination (and the details thereof) (a
Stockholder Associated Person) and
(B) whether and the extent to
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which any hedging, derivative or other transaction has been
entered into with respect to the Corporation within the past six
months by, or is in effect with respect to, such stockholder,
any person to be nominated by such stockholder or any
Stockholder Associated Person, the effect or intent of which
transaction is to mitigate loss to or manage risk or benefit of
share price changes for, or to increase or decrease the voting
power of, such stockholder, nominee or any such Stockholder
Associated Person, and (z) a representation whether the
stockholder or the beneficial owner, if any, intends or is part
of a group which intends (A) to deliver a proxy statement
and/or form
of proxy to holders of at least the percentage of the class or
series of the Corporations outstanding capital stock
required to approve or adopt the proposal or elect the nominee
and/or
(B) otherwise to solicit proxies from stockholders in
support of such proposal or nomination. The foregoing notice
requirements of clauses (a)(2)(ii) and (iii) of this
Section 1.5 shall not apply to any proposal made pursuant
to
Rule 14a-8
(or any successor thereof) promulgated under the Exchange Act. A
proposal to be made pursuant to
Rule 14a-8
(or any successor thereof) promulgated under the Exchange Act
shall be deemed satisfied if the stockholder making such
proposal complies with the provisions of
Rule 14a-8
and has notified the Corporation of his or her intention to
present a proposal at an annual meeting in compliance with
Rule 14a-8
and such stockholders proposal has been included in a
proxy statement that has been prepared by the Corporation to
solicit proxies for such annual meeting. The Corporation may
require any proposed nominee to furnish such other information
as it may reasonably require to determine (x) the
eligibility of such proposed nominee to serve as a director of
the Corporation and (y) whether the nominee would be
considered independent under the independence
requirements set forth in the Corporate Governance Rules of
NASDAQ (or the rules and regulations of the principal securities
exchange on which the Corporations equity securities are
then listed) in effect from time to time.
(3) Notwithstanding anything in the second sentence of
paragraph (a)(2) of this Section 1.5 to the contrary, in
the event that the number of directors to be elected to the
Board of Directors of the Corporation at an annual meeting is
increased and there is no public announcement by the Corporation
naming the nominees for the additional directorships at least
one hundred (100) days prior to the first anniversary of
the preceding years annual meeting (or, in the case of the
Corporations first annual meeting, the preceding
years annual meeting for DHC), a stockholders notice
required by this Section 1.5 shall also be considered
timely, but only with respect to nominees for the additional
directorships, if it shall be delivered to the Secretary at the
principal executive offices of the Corporation not later than
the close of business on the tenth (10th) day following the day
on which such public announcement is first made by the
Corporation.
(b) Special Meetings of
Stockholders. Only such business shall be
conducted at a special meeting of stockholders as shall have
been brought before the meeting pursuant to the
Corporations notice of meeting. Subject to the rights of
the holders of any series of preferred stock, nominations of
persons for election to the Board of Directors may be made at a
special meeting of stockholders at which directors are to be
elected pursuant to the Corporations notice of meeting
(1) by or at the direction of the Board of Directors or
(2) provided that the Board of Directors has determined
that directors shall be elected at such meeting, by any
stockholder of the Corporation who is a holder of record of the
class or series of capital stock of the Corporation entitled to
vote upon such election at the time the notice provided for in
this Section 1.5 is delivered to the Secretary of the
Corporation, and who complies with the notice procedures set
forth in this Section 1.5. In the event the Corporation
calls a special meeting of stockholders for the purpose of
electing one or more directors to the Board of Directors, any
such stockholder entitled to vote in such election of directors
may nominate a person or persons (as the case may be) for
election to such position(s) as specified in the
Corporations notice of meeting, if the stockholders
notice required by paragraph (a)(2) of this Section 1.5
shall be delivered to the Secretary at the principal executive
offices of the Corporation not earlier than the close of
business on the ninetieth (90th) day prior to such special
meeting and not later than the close of business on the later of
the sixtieth (60th) day prior to such special meeting or the
tenth (10th) day following the day on which public announcement
is first made of the date of the special meeting and of the
nominees proposed by the Board of Directors to be elected at
such meeting. In no event shall the public announcement of an
adjournment or postponement of a special meeting commence a new
time period (or extend any time period) for the giving of a
stockholders notice as described above.
(c) General. (1) Only such
persons who are nominated in accordance with the procedures set
forth in this Section 1.5 shall be eligible to be elected
at an annual or special meeting of stockholders of the
Corporation to serve as directors and only such business shall
be conducted at a meeting of stockholders as shall have been
brought before the meeting in accordance with the procedures set
forth in this Section 1.5. Except as otherwise provided by
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law, the chairman of the meeting shall have the power and duty
(i) to determine whether a nomination or any business
proposed to be brought before the meeting was made or proposed,
as the case may be, in accordance with the procedures set forth
in this Section 1.5 (including whether the stockholder or
beneficial owner, if any, on whose behalf the nomination or
proposal is made solicited (or is part of a group which
solicited) or did not so solicit, as the case may be, proxies in
support of such stockholders nominee or proposal in
compliance with such stockholders representation as
required by clause (a)(2)(iii)(z) of this Section 1.5) and
(ii) if any proposed nomination or business was not made or
proposed in compliance with this Section 1.5, to declare
that such nomination shall be disregarded or that such proposed
business shall not be transacted. Notwithstanding the foregoing
provisions of this Section 1.5, if the stockholder (or a
qualified representative of the stockholder) does not appear at
the annual or special meeting of stockholders of the Corporation
to present a nomination or proposed business, such nomination
shall be disregarded and such proposed business shall not be
transacted, notwithstanding that proxies in respect of such vote
may have been received by the Corporation. For purposes of this
Section 1.5, to be considered a qualified representative of
the stockholder, a person must be authorized by a writing
executed by such stockholder or an electronic transmission
delivered by such stockholder to act for such stockholder as
proxy at the meeting of stockholders and such person must
produce such writing or electronic transmission, or a reliable
reproduction of the writing or electronic transmission, at the
meeting of stockholders.
(2) For purposes of this Section 1.5, public
announcement shall include disclosure in a press release
reported by the Dow Jones News Service, Associated Press or
comparable national news service or in a document publicly filed
by the Corporation with the Securities and Exchange Commission
pursuant to Section 13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this
Section 1.5, a stockholder shall also comply with all
applicable requirements of the Exchange Act and the rules and
regulations thereunder with respect to the matters set forth in
this Section 1.5. Nothing in this Section 1.5 shall be
deemed to affect any rights (i) of stockholders to request
inclusion of proposals in the Corporations proxy statement
pursuant to
Rule 14a-8
under the Exchange Act or (ii) of the holders of any series
of preferred stock to elect directors pursuant to any applicable
provisions of the Corporations Certificate of
Incorporation.
Section 1.6 Quorum.
Subject to the rights of the holders of any series of preferred
stock and except as otherwise provided by law or in the
Corporations Certificate of Incorporation or these Bylaws,
at any meeting of stockholders, the holders of a majority in
total voting power of the outstanding shares of stock entitled
to vote at the meeting shall be present or represented by proxy
in order to constitute a quorum for the transaction of any
business. Where a separate vote by one or more classes or series
of capital stock is required by law or by the Certificate of
Incorporation with respect to a particular matter to be
presented at any such meeting, a majority in total voting power
of the outstanding shares of such class or classes or series
present in person or represented by proxy shall constitute a
quorum entitled to take action with respect to that vote on that
matter. The chairman of the meeting shall have the power and
duty to determine whether a quorum is present at any meeting of
the stockholders or for any matter to be voted on. Shares of its
own stock belonging to the Corporation or to another
corporation, if a majority in total voting power of the
outstanding shares entitled to vote in the election of directors
of such other corporation is held, directly or indirectly, by
the Corporation, shall neither be entitled to vote nor be
counted for quorum purposes; provided, however,
that the foregoing shall not limit the right of the Corporation
or any subsidiary of the Corporation to vote stock, including,
but not limited to, its own stock, held by it in a fiduciary
capacity. In the absence of a quorum, the chairman of the
meeting may adjourn the meeting from time to time in the manner
provided in Section 1.7 hereof until a quorum shall be
present.
Section 1.7 Adjournment.
Any meeting of stockholders, annual or special, may be adjourned
from time to time solely by the chairman of the meeting because
of the absence of a quorum or for any other reason and to
reconvene at the same or some other time, date and place, if
any. Notice need not be given of any such adjourned meeting if
the time, date and place thereof are announced at the meeting at
which the adjournment is taken. The chairman of the meeting
shall have full power and authority to adjourn a stockholder
meeting in his sole discretion even over stockholder opposition
to such adjournment. The stockholders present at a meeting shall
not have the authority to adjourn the meeting. If the time,
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date and place, if any, thereof, and the means of remote
communication, if any, by which the stockholders and the proxy
holders may be deemed to be present and in person and vote at
such adjourned meeting are announced at the meeting at which the
adjournment is taken and the adjournment is for less than thirty
(30) days, no notice need be given of any such adjourned
meeting. If the adjournment is for more than thirty
(30) days and the time, date and place, if any, and the
means of remote communication, if any, by which the stockholders
and the proxy holders may be deemed to be present and in person
and vote are not announced at the meeting at which the
adjournment is taken, or if after the adjournment a new record
date is fixed for the adjourned meeting, then notice shall be
given by the Secretary as required for the original meeting. At
the adjourned meeting, the Corporation may transact any business
that might have been transacted at the original meeting.
Section 1.8 Organization.
The Chairman of the Board, or in his absence the President, or
in their absence any Vice President, shall call to order
meetings of stockholders and preside over and act as chairman of
such meetings. The Board of Directors or, if the Board fails to
act, the stockholders, may appoint any stockholder, director or
officer of the Corporation to act as chairman of any meeting in
the absence of the Chairman of the Board, the President and all
Vice Presidents. The date and time of the opening and closing of
the polls for each matter upon which the stockholders will vote
at a meeting shall be determined by the chairman of the meeting
and announced at the meeting. The Board of Directors may adopt
by resolution such rules and regulations for the conduct of the
meeting of stockholders as it shall deem appropriate. Unless
otherwise determined by the Board of Directors, the chairman of
the meeting shall have the exclusive right to determine the
order of business and to prescribe other such rules, regulations
and procedures and shall have the authority in his discretion to
regulate the conduct of any such meeting. Such rules,
regulations or procedures, whether adopted by the Board of
Directors or prescribed by the chairman of the meeting, may
include, without limitation, the following: (i) rules and
procedures for maintaining order at the meeting and the safety
of those present; (ii) limitations on attendance at or
participation in the meeting to stockholders of record of the
Corporation, their duly authorized and constituted proxies or
such other persons as the chairman of the meeting shall
determine; (iii) restrictions on entry to the meeting after
the time fixed for the commencement thereof; and
(iv) limitations on the time allotted to questions or
comments by participants. Unless and to the extent determined by
the Board of Directors or the chairman of the meeting, meetings
of stockholders shall not be required to be held in accordance
with the rules of parliamentary procedure.
The Secretary shall act as secretary of all meetings of
stockholders, but, in the absence of the Secretary, the chairman
of the meeting may appoint any other person to act as secretary
of the meeting.
Section 1.9 Postponement
or Cancellation of Meeting.
Any previously scheduled annual or special meeting of the
stockholders may be postponed or canceled by resolution of the
Board of Directors upon public notice given prior to the time
previously scheduled for such meeting of stockholders.
Section 1.10 Voting.
Subject to the rights of the holders of any series of preferred
stock and except as otherwise provided by law, the
Corporations Certificate of Incorporation or these Bylaws
and except for the election of directors, at any meeting duly
called and held at which a quorum is present, the affirmative
vote of a majority of the combined voting power of the
outstanding shares present in person or represented by proxy at
the meeting and entitled to vote on the subject matter shall be
the act of the stockholders. Subject to the rights of the
holders of any series of preferred stock to elect a specified
number of directors in certain circumstances, at any meeting
duly called and held for the election of directors at which a
quorum is present, directors shall be elected by a plurality of
the combined voting power of the outstanding shares present in
person or represented by proxy at the meeting and entitled to
vote on the election of directors as provided in the
Corporations Certificate of Incorporation.
Section 1.11 Consent
of Stockholders in Lieu of Meeting. If the
Corporations Certificate of Incorporation permits the
holders of any series of capital stock of the Corporation to act
by written consent, such action may be taken without a meeting,
without prior notice and without a vote, if a consent or
consents in writing, setting forth the action so taken, shall be
signed and delivered to the Corporation in the manner set forth
in the Certificate of Incorporation.
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ARTICLE II
BOARD OF
DIRECTORS
Section 2.1 Number
and Term of Office.
(a) The governing body of this Corporation shall be a Board
of Directors. Subject to any rights of the holders of any series
of preferred stock to elect additional directors, the Board of
Directors shall be comprised of not less than three
(3) members nor more than fifteen (15) members. The
Board of Directors of the Corporation as of the Effective Time
of the Merger (as defined in the Transaction Agreement (as
defined below)) shall be comprised of eleven (11) members,
3 of which are designated Series A Preferred Stock
Directors (as defined in the Corporations Certificate of
Incorporation) and 8 of which are designated Common Stock
Directors (as defined in the Corporations Certificate of
Incorporation), and the members of the Board of Directors as of
such time shall be the persons listed on Schedule 2.03(f)
to the Transaction Agreement. For purposes of these Bylaws,
Transaction Agreement means the Transaction
Agreement, dated as of June 4, 2008, by and among Discovery
Holding Company, the Corporation, DHC Merger Sub, Inc.,
Advance/Newhouse Programming Partnership, and, with respect to
Section 5.14 thereof only, Advance Publications, Inc. and
Newhouse Broadcasting Corporation. Subject to the rights of the
holders of any series of preferred stock, the Board of Directors
can be increased or decreased by resolution adopted by the
affirmative vote of 75% of the members of the Board of Directors
then in office; provided that the size of the Board of
Directors shall automatically be reduced by one (1) member
upon the death, resignation, removal or disqualification of the
person who first serves as Chairman of the Board immediately
after the Effective Time of the Merger; provided,
further that, if the holders of the Series A
Preferred Stock (as defined in the Corporations
Certificate of Incorporation) cease to have the right to elect
Series A Preferred Stock Directors, then the number of
directors constituting the Board of Directors at such time shall
automatically be reduced by the number of Series A
Preferred Stock Directors in office immediately prior to such
removal. Directors need not be stockholders of the Corporation.
The Corporation shall nominate the person(s) holding the offices
of Chairman of the Board and President for election as directors
at any meeting at which such person(s) are subject to election
as directors.
(b) Except as otherwise fixed by the Corporations
Certificate of Incorporation relating to the rights of the
holders of any series of preferred stock to separately elect
additional directors, which directors are not required to be
classified pursuant to the terms of such series of preferred
stock, the Board of Directors immediately after the Effective
Time shall be comprised of the Common Stock Directors and the
Series A Preferred Stock Directors. The Common Stock
Directors shall be divided into three classes: Class I,
Class II and Class III. The Series A Preferred
Stock Directors shall not be classified pursuant to the terms of
such series of preferred stock. Each class of Common Stock
Directors shall consist, as nearly as possible, of a number of
directors equal to one-third
(331/3%)
of the then authorized number of Common Stock Directors. The
Common Stock Directors immediately following the Effective Time
of the Merger shall be assigned to the specific classes as
provided in Schedule 2.03(f) to the Transaction Agreement.
The term of office of the initial Class I directors shall
expire at the annual meeting of stockholders in 2009; the term
of office of the initial Class II directors shall expire at
the annual meeting of stockholders in 2010; and the term of
office of the initial Class III directors shall expire at
the annual meeting of stockholders in 2011. At each annual
meeting of stockholders of the Corporation the successors of
that class of Common Stock Directors whose term expires at that
meeting shall be elected to hold office for a term expiring at
the annual meeting of stockholders held in the third year
following the year of their election. The Common Stock Directors
of each class will serve until the earliest to occur of their
death, resignation, removal or disqualification or the election
and qualification of their respective successors.
Section 2.2 Resignations.
Any director of the Corporation, or any member of any committee,
may resign at any time by giving written notice to the Board of
Directors, the Chairman of the Board or the President or
Secretary of the Corporation. Any such resignation shall take
effect at the time specified therein or, if the time be not
specified therein, then upon receipt thereof. The acceptance of
such resignation shall not be necessary to make it effective
unless otherwise stated therein.
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Section 2.3 Removal
of Directors.
Subject to the rights of the holders of any series of preferred
stock, Common Stock Directors may be removed from office only
for Cause upon the affirmative vote of the holders of at least a
majority of the total voting power of the then outstanding
shares entitled to elect the Common Stock Directors, and the
Series A Preferred Stock Directors may be removed from
office (x) for Cause upon the affirmative vote of the
holders of at least a majority of the total voting power of the
then outstanding shares entitled to vote upon the election of
Preferred Stock Directors and Common Stock Directors, voting
together as a single class, and (y) without Cause by the
holders of a majority of the shares of Series A Preferred
Stock outstanding, voting together as a separate class. For the
purposes of these Bylaws, Cause means
(1) commission of an act of fraud, misappropriation,
embezzlement or similar conduct against the Corporation,
(2) conviction of, or plea of guilty or nolo contendere
to, any crime (whether or not involving the Corporation)
constituting a felony, or (3) the willful engaging by the
director in misconduct that is materially injurious to the
Corporation or its subsidiaries, monetarily or otherwise;
provided that, for purposes of this subclause (3), no
action or failure to act on a directors part shall be
considered willful unless done, or omitted to be
done, by the director in bad faith and without reasonable belief
that such action or omission was in the best interests of the
Corporation.
Section 2.4 Newly
Created Directorships and Vacancies.
Subject to the rights of the holders of any series of preferred
stock, any vacancy in the office of a Common Stock Director
resulting from death, resignation, removal, disqualification or
other cause, and newly created directorships resulting from any
increase in the number of directors on the Board of Directors,
shall be filled only by the affirmative vote of a majority of
Common Stock Directors then in office (even though less than a
quorum) or by the sole remaining Common Stock Director. Any
Common Stock Director elected in accordance with the preceding
sentence shall hold office for the remainder of the full term of
the class of directors in which the vacancy occurred or to which
the new directorship is apportioned, and until such
directors successor shall have been elected and qualified
or until such directors earlier death, resignation or
removal. Any vacancy in the office of a Series A Preferred
Stock Director occurring during the period that the
Series A Preferred Stock is outstanding shall be filled
solely by the written consent of the holders of a majority of
the outstanding shares of the Series A Preferred Stock
below or by the affirmative vote of the holders of a majority of
the outstanding shares of Series A Preferred Stock. Except
as otherwise provided by the Corporations Certificate of
Incorporation, no decrease in the number of directors
constituting the Board of Directors shall shorten the term of
any incumbent director. Notwithstanding Article I of these
Bylaws, in case the entire Board of Directors shall die or
resign, the President or Secretary of the Corporation, or any
ten (10) stockholders may call and cause notice to be given
for a special meeting of stockholders in the same manner that
the Chairman of the Board may call such a meeting, and directors
for the unexpired terms may be elected at such special meeting.
Section 2.5 Meetings.
The annual meeting of the Board of Directors may be held on such
date and at such time and place as the Board of Directors
determines. The annual meeting of the Board of Directors may be
held immediately following the annual meeting of stockholders,
and if so held, no notice of such meeting shall be necessary to
the directors in order to hold the meeting legally, provided
that a quorum shall be present thereat.
Notice of each regular meeting shall be furnished in writing to
each member of the Board of Directors not less than five
(5) days in advance of said meeting, unless such notice
requirement is waived in writing by each member. No notice need
be given of the meeting immediately following an annual meeting
of stockholders.
Special meetings of the Board of Directors shall be held at such
time and place as shall be designated in the notice of the
meeting. Special meetings of the Board of Directors may be
called by the Chairman of the Board, and shall be called by the
President or Secretary of the Corporation upon the written
request of not less than 75% of the members of the Board of
Directors then in office.
Section 2.6 Notice
of Special Meetings.
The Secretary, or in his absence any other officer of the
Corporation, shall give each director notice of the time and
place of holding of special meetings of the Board of Directors
by mail at least ten (10) days before the meeting,
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or by facsimile transmission, electronic mail or personal
service at least twenty-four (24) hours before the meeting
unless such notice requirement is waived in writing by each
member. Unless otherwise stated in the notice thereof, any and
all business may be transacted at any meeting without
specification of such business in the notice.
Section 2.7 Conference
Telephone Meeting.
Unless otherwise restricted by the Certificate of Incorporation
or these Bylaws, members of the Board of Directors, or any
committee thereof, may participate in a meeting of the Board of
Directors or such committee by means of telephone conference or
other similar communications equipment by means of which all
persons participating in the meeting can hear each other and
communicate with each other, and such participation in a meeting
shall constitute presence in person at such meeting.
Section 2.8 Quorum
and Organization of Meetings.
A majority of the total number of members of the Board of
Directors as constituted from time to time shall constitute a
quorum for the transaction of business, but, if at any meeting
of the Board of Directors (whether or not adjourned from a
previous meeting) there shall be less than a quorum present, a
majority of those present may adjourn the meeting to another
time, date and place, and the meeting may be held as adjourned
without further notice or waiver. Except as otherwise provided
by law, the Corporations Certificate of Incorporation or
these Bylaws, a majority of the directors present at any meeting
at which a quorum is present may decide any question brought
before such meeting. Meetings shall be presided over by the
Chairman of the Board or in his absence by such other person as
the directors may select. The Board of Directors shall keep
written minutes of its meetings. The Secretary of the
Corporation shall act as secretary of the meeting, but in his or
her absence the chairman of the meeting may appoint any person
to act as secretary of the meeting.
Section 2.9 Indemnification.
To the fullest extent permitted by applicable law as it
presently exists or may hereafter be amended, the Corporation
shall indemnify and hold harmless any person who is or was made,
or threatened to be made, a party to or is otherwise involved in
any threatened, pending or completed action, suit or proceeding
(a Proceeding), whether civil, criminal,
administrative or investigative, including, without limitation,
an action by or in the right of the Corporation to procure a
judgment in its favor, by reason of the fact that such person,
or a person of whom such person is the legal representative, is
or was a director or officer of the Corporation, or while a
director or officer of the Corporation is or was serving at the
request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, limited liability
company, joint venture, trust, employee benefit plan or other
enterprises including non-profit enterprises (an Other
Entity), against all liabilities and losses,
judgments, fines, penalties, excise taxes, amounts paid in
settlement and costs, charges and expenses (including
attorneys fees and disbursements). Persons who are not
directors or officers of the Corporation may be similarly
indemnified in respect of service to the Corporation or to an
Other Entity at the request of the Corporation to the extent the
Board of Directors at any time specifies that such persons are
entitled to the benefits of this Section 2.9. Except as
otherwise provided in Section 2.11 hereof, the Corporation
shall be required to indemnify a person in connection with a
proceeding (or part thereof) commenced by such person only if
the commencement of such proceeding (or part thereof) by the
person was authorized in the specific case by the Board of
Directors.
Section 2.10 Advancement
of Expenses.
The Corporation shall, from time to time, reimburse or advance
to any director or officer or other person entitled to
indemnification hereunder the funds necessary for payment of
expenses, including attorneys fees and disbursements,
incurred in connection with any Proceeding in advance of the
final disposition of such Proceeding; provided,
however, that, if required by the laws of the State of
Delaware, such expenses incurred by or on behalf of any director
or officer or other person may be paid in advance of the final
disposition of a Proceeding only upon receipt by the Corporation
of an undertaking, by or on behalf of such director or officer
(or other person indemnified hereunder), to repay any such
amount so advanced if it shall ultimately be determined by final
judicial decision from which there is no further right of appeal
that such director, officer or other person is not entitled to
be indemnified for such expenses. Except as otherwise provided
in Section 2.11 hereof, the Corporation shall be required
to reimburse or advance expenses incurred by a person in
connection with a proceeding (or part thereof) commenced by such
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person only if the commencement of such proceeding (or part
thereof) by the person was authorized by the Board of Directors.
Section 2.11 Claims.
If a claim for indemnification or advancement of expenses under
this Article II is not paid in full within thirty
(30) days after a written claim therefor by the person
seeking indemnification or reimbursement or advancement of
expenses has been received by the Corporation, the person may
file suit to recover the unpaid amount of such claim and, if
successful, in whole or in part, shall be entitled to be paid
the expense of prosecuting such claim. In any such action the
Corporation shall have the burden of proving that the person
seeking indemnification or reimbursement or advancement of
expenses is not entitled to the requested indemnification,
reimbursement or advancement of expenses under applicable law.
Section 2.12 Amendment,
Modification or Repeal.
Any amendment, modification or repeal of the foregoing
provisions of this Article II shall not adversely affect
any right or protection hereunder of any person entitled to
indemnification under Section 2.9 hereof in respect of any
act or omission occurring prior to the time of such repeal or
modification.
Section 2.13 Nonexclusivity
of Rights.
The rights conferred on any person by this Article II shall
not be exclusive of any other rights which such person may have
or hereafter acquire under any statute, provision of the
Corporations Certificate of Incorporation, these Bylaws,
agreement, vote of stockholders or disinterested directors or
otherwise.
Section 2.14 Other
Sources.
The Corporations obligation, if any, to indemnify or to
advance expenses to any person who was or is serving at its
request as a director, officer, employee or agent of an Other
Entity shall be reduced by any amount such person may collect as
indemnification or advancement of expenses from such Other
Entity.
Section 2.15 Other
Indemnification and Prepayment of Expenses.
This Article II shall not limit the right of the
Corporation, to the extent and in the manner permitted by law,
to indemnify and to advance expenses to additional persons when
and as authorized by appropriate corporate action.
Section 2.16 Committees
of the Board of Directors.
The Board may designate one or more committees, each committee
to consist of one or more of the directors of the Corporation.
The Board may designate one or more Directors as alternate
members of any committee to replace absent or disqualified
members at any meeting of such committee. If a member of a
committee shall be absent from any meeting, or disqualified from
voting thereat, the remaining member or members present and not
disqualified from voting, whether or not such member or members
constitute a quorum, may, by a unanimous vote, appoint another
member of the Board of Directors to act at the meeting in place
of any such absent or disqualified member. Any such committee,
to the extent provided in a resolution of the Board of Directors
passed as aforesaid, shall have and may exercise all the powers
and authority of the Board of Directors in the management of the
business and affairs of the Corporation, and may authorize the
seal of the Corporation to be impressed on all papers that may
require it, but no such committee shall have the power or
authority of the Board of Directors in reference to
(i) approving or adopting, or recommending to the
stockholders, any action or matter expressly required by the
laws of the State of Delaware to be submitted to the
stockholders for approval or (ii) adopting, amending or
repealing any Bylaw of the Corporation. Such committee or
committees shall have such name or names as may be determined
from time to time by resolution adopted by the Board of
Directors. Unless otherwise specified in the resolution of the
Board of Directors designating a committee, at all meetings of
such committee a majority of the total number of members of the
committee shall constitute a quorum for the transaction of
business, and the vote of a majority of the members of the
committee present at any meeting at which there is a quorum
shall be the act of the committee. Each committee shall keep
regular minutes of its meetings. Unless the Board of Directors
otherwise provides, each committee designated by the Board of
Directors may make, alter and repeal rules for the conduct of
its business. In the absence of such rules each committee shall
conduct its business in the same manner as the Board of
Directors conducts its business pursuant to Article II of
these Bylaws.
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Section 2.17 Directors
Compensation.
Directors shall receive such compensation for attendance at any
meetings of the Board and any expenses incidental to the
performance of their duties as the Board of Directors shall
determine by resolution. Such compensation may be in addition to
any compensation received by the members of the Board of
Directors in any other capacity.
Section 2.18 Action
Without Meeting.
Nothing contained in these Bylaws shall be deemed to restrict
the power of members of the Board of Directors or any committee
designated by the Board of Directors to take any action required
or permitted to be taken by them at any meeting of the Board of
Directors or of any committee thereof, without a meeting, if all
members of the Board of Directors or of such committee, as the
case may be, consent thereto in writing and the writing or
writings are filed with the minutes of proceedings of the Board
of Directors or the applicable committee.
ARTICLE III
OFFICERS
Section 3.1 Executive
Officers.
The Board of Directors shall elect from its own members, at its
first meeting after each annual meeting of stockholders, a
Chairman of the Board and a President. The Chairman of the Board
of Directors and the President of the Corporation immediately
following the consummation of the transactions contemplated by
the Transaction Agreement shall be the persons specified in
Schedule 2.03(f) of the Transaction Agreement. The Board of
Directors may also elect such Vice Presidents as in the opinion
of the Board of Directors the business of the Corporation
requires, a Treasurer and a Secretary, any of whom may or may
not be directors. The Board of Directors may also elect, from
time to time, such other or additional officers as in its
opinion are desirable for the conduct of business of the
Corporation. Any person may hold at one time two or more
offices; provided, however, that the President
shall not hold any other office except that of Chairman of the
Board.
Unless otherwise provided in the resolution of the Board of
Directors electing any officer, each officer shall hold office
until his or her successor is elected and qualified or until his
or her earlier resignation or removal. Any officer may resign at
any time upon written notice to the Board or the President or
the Secretary of the Corporation. Such resignation shall take
effect at the time specified therein, and unless otherwise
specified therein no acceptance of such resignation shall be
necessary to make it effective. The Board of Directors may
remove any officer with or without cause at any time. Any such
removal shall be without prejudice to the contractual rights of
such officer, if any, with the Corporation, but the election of
an officer shall not of itself create contractual rights. Any
vacancy occurring in any office of the Corporation by death,
resignation, removal or otherwise may be filled by the Board at
any regular or special meeting.
Section 3.2 Powers
and Duties of Officers.
The Chairman will preside over all meetings of the stockholders
and the Board of Directors, at which he is present, and shall
perform such other duties as may be prescribed from time to time
by the Board of Directors.
The President shall have overall responsibility for the
management and direction of the business and affairs of the
Corporation and shall exercise such powers and duties as
customarily pertain to a chief executive officer and the office
of the president and such other duties as may be prescribed from
time to time by the Board of Directors. He shall be the senior
officer of the Corporation and in the absence or disability of
the Chairman of the Board, the President shall perform the
duties and exercise the powers of the office of Chairman of the
Board. The President may sign, execute and deliver, in the name
of the Corporation, powers of attorney, contracts, bonds and
other obligations.
Vice Presidents shall have such powers and perform such duties
as may be assigned to them by the Chairman of the Board, the
President, the executive committee, if any, or the Board of
Directors. A Vice President may sign and execute contracts and
other obligations pertaining to the regular course of his duties
which implement policies established by the Board of Directors.
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The Treasurer shall be the chief financial officer of the
Corporation. Unless the Board of Directors otherwise declares by
resolution, the Treasurer shall have general custody of all the
funds and securities of the Corporation and general supervision
of the collection and disbursement of funds of the Corporation.
He shall endorse for collection on behalf of the Corporation
checks, notes and other obligations, and shall deposit the same
to the credit of the Corporation in such bank or banks or
depository as the Board of Directors may designate. He may sign,
with the Chairman of the Board, President or such other person
or persons as may be designated for the purpose by the Board of
Directors, all bills of exchange or promissory notes of the
Corporation. He shall enter or cause to be entered regularly in
the books of the Corporation a full and accurate account of all
moneys received and paid by him on account of the Corporation,
shall at all reasonable times exhibit his books and accounts to
any director of the Corporation upon application at the office
of the Corporation during business hours and, whenever required
by the Board of Directors or the President, shall render a
statement of his accounts. He shall perform such other duties as
may be prescribed from time to time by the Board of Directors or
by these Bylaws. He may be required to give bond for the
faithful performance of his duties in such sum and with such
surety as shall be approved by the Board of Directors. Any
Assistant Treasurer shall, in the absence or disability of the
Treasurer, perform the duties and exercise the powers of the
Treasurer and shall perform such other duties and have such
other powers as the Board of Directors may from time to time
prescribe.
The Secretary shall keep the minutes of all meetings of the
stockholders and of the Board of Directors. The Secretary shall
cause notice to be given of meetings of stockholders, of the
Board of Directors, and of any committee appointed by the Board
of Directors. He or she shall have custody of the corporate
seal, minutes and records relating to the conduct and acts of
the stockholders and Board of Directors, which shall, at all
reasonable times, be open to the examination of any director.
The Secretary or any Assistant Secretary may certify the record
of proceedings of the meetings of the stockholders or of the
Board of Directors or resolutions adopted at such meetings, may
sign or attest certificates, statements or reports required to
be filed with governmental bodies or officials, may sign
acknowledgments of instruments, may give notices of meetings and
shall perform such other duties and have such other powers as
the Board of Directors may from time to time prescribe.
Section 3.3 Bank
Accounts.
In addition to such bank accounts as may be authorized in the
usual manner by resolution of the Board of Directors, the
Treasurer, with approval of the Chairman of the Board or the
President, may authorize such bank accounts to be opened or
maintained in the name and on behalf of the Corporation as he
may deem necessary or appropriate, provided payments from such
bank accounts are to be made upon and according to the check of
the Corporation, which may be signed jointly or singularly by
either the manual or facsimile signature or signatures of such
officers or bonded employees of the Corporation as shall be
specified in the written instructions of the Treasurer or
Assistant Treasurer of the Corporation with the approval of the
Chairman of the Board or the President of the Corporation.
Section 3.4 Proxies;
Stock Transfers.
Unless otherwise provided in the Corporations Certificate
of Incorporation or directed by the Board of Directors, the
Chairman of the Board or the President or any Vice President or
their designees shall have full power and authority on behalf of
the Corporation to attend and to vote upon all matters and
resolutions at any meeting of stockholders of any corporation in
which this Corporation may hold stock, and may exercise on
behalf of this Corporation any and all of the rights and powers
incident to the ownership of such stock at any such meeting,
whether regular or special, and at all adjournments thereof, and
shall have power and authority to execute and deliver proxies
and consents on behalf of this Corporation in connection with
the exercise by this Corporation of the rights and powers
incident to the ownership of such stock, with full power of
substitution or revocation.
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ARTICLE IV
CAPITAL STOCK
Section 4.1 Shares.
The shares of the Corporation shall be represented by a
certificate or shall be uncertificated. Certificates shall be
signed by the Chairman of the Board of Directors or the
President and by the Secretary or the Treasurer, and sealed with
the seal of the Corporation. Such seal may be a facsimile,
engraved or printed. Within a reasonable time after the issuance
or transfer of uncertificated shares, the Corporation shall send
to the registered owner thereof a written notice containing the
information required to be set forth or stated on certificates
pursuant to Sections 151, 156, 202(a) or 218(a) of the
Delaware General Corporation Law or a statement that the
Corporation will furnish without charge to each stockholder who
so requests the powers, designations, preferences and relative
participating, optional or other special rights of each class of
stock or series thereof and the qualification, limitations or
restrictions of such preferences
and/or
rights.
Any of or all the signatures on a certificate may be facsimile.
In case any officer, transfer agent or registrar who has signed
or whose facsimile signature has been placed upon a certificate
shall have ceased to be such an officer, transfer agent or
registrar before such certificate is issued, it may be issued by
the Corporation with the same effect as if such officer,
transfer agent or registrar had not ceased to hold such position
at the time of its issuance.
Except as otherwise expressly provided by law, the rights and
obligations of the holders of uncertificated shares and the
rights and obligations of the holders of certificates
representing stock of the same class and series shall be
identical.
Section 4.2 Transfer
of Shares.
(a) Upon surrender to the Corporation or the transfer agent
of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the Corporation to issue a new
certificate to the person entitled thereto, cancel the old
certificate and record the transaction upon its books. Upon
receipt of proper transfer instructions from the registered
owner of uncertificated shares such uncertificated shares shall
be cancelled, and the issuance of new equivalent uncertificated
shares or certificated shares shall be made to the person
entitled thereto and the transaction shall be recorded upon the
books of the Corporation.
(b) The person in whose name shares of stock stand on the
books of the Corporation shall be deemed by the Corporation to
be the owner thereof for all purposes, and the Corporation shall
not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other
person, whether or not it shall have express or other notice
thereof, except as otherwise provided by the laws of the State
of Delaware.
Section 4.3 Lost
Certificates.
The Board of Directors or any transfer agent of the Corporation
may direct a new certificate or certificates or uncertificated
shares representing stock of the Corporation to be issued in
place of any certificate or certificates theretofore issued by
the Corporation, alleged to have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person
claiming the certificate to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates or
uncertificated shares, the Board of Directors (or any transfer
agent of the Corporation authorized to do so by a resolution of
the Board of Directors) may, in its discretion and as a
condition precedent to the issuance thereof, require the owner
of such lost, stolen or destroyed certificate or certificates,
or his legal representative, to give the Corporation a bond in
such sum as the Board of Directors (or any transfer agent so
authorized) shall direct to indemnify the Corporation and the
transfer agent against any claim that may be made against the
Corporation with respect to the certificate alleged to have been
lost, stolen or destroyed or the issuance of such new
certificates or uncertificated shares, and such requirement may
be general or confined to specific instances.
Section 4.4 Transfer
Agent and Registrar.
The Board of Directors may appoint one or more transfer agents
and one or more registrars, and may require all certificates for
shares to bear the manual or facsimile signature or signatures
of any of them.
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Section 4.5 Regulations.
The Board of Directors shall have power and authority to make
all such rules and regulations as it may deem expedient
concerning the issue, transfer, registration, cancellation and
replacement of certificates representing stock of the
Corporation or uncertificated shares, which rules and
regulations shall comply in all respects with the rules and
regulations of the transfer agent.
ARTICLE V
GENERAL
PROVISIONS
Section 5.1 Offices.
The Corporation shall maintain a registered office in the State
of Delaware as required by the laws of the State of Delaware.
The Corporation may also have offices in such other places,
either within or without the State of Delaware, as the Board of
Directors may from time to time designate or as the business of
the Corporation may require.
Section 5.2 Corporate
Seal.
The corporate seal shall have inscribed thereon the name of the
Corporation, the year of its organization, and the words
Corporate Seal and Delaware.
Section 5.3 Fiscal
Year.
The fiscal year of the Corporation shall be determined by
resolution of the Board of Directors.
Section 5.4 Notices
and Waivers Thereof.
Whenever any notice is required by the laws of the State of
Delaware, the Corporations Certificate of Incorporation or
these Bylaws to be given to any stockholder, director or
officer, such notice, except as otherwise provided by law, may
be given personally, or by mail, or, in the case of directors or
officers, by electronic mail or facsimile transmission,
addressed to such address as appears on the books of the
Corporation. Any notice given by electronic mail or facsimile
transmission shall be deemed to have been given when it shall
have been transmitted and any notice given by mail shall be
deemed to have been given three (3) business days after it
shall have been deposited in the United States mail with postage
thereon prepaid.
Whenever any notice is required to be given by law, the
Corporations Certificate of Incorporation, or these
Bylaws, a written waiver thereof, signed by the person entitled
to such notice, whether before or after the meeting or the time
stated therein, shall be deemed equivalent in all respects to
such notice to the full extent permitted by law.
Section 5.5 Saving
Clause.
These Bylaws are subject to the provisions of the
Corporations Certificate of Incorporation and applicable
law. In the event any provision of these Bylaws is inconsistent
with the Corporations Certificate of Incorporation or the
corporate laws of the State of Delaware, such provision shall be
invalid to the extent only of such conflict, and such conflict
shall not affect the validity of any other provision of these
Bylaws.
Section 5.6 Amendments.
In furtherance and not in limitation of the powers conferred by
the laws of the State of Delaware, subject to the rights of the
holders of any series of preferred stock, the Board of
Directors, by action taken by the affirmative vote of not less
than 75% of the members of the Board of Directors then in
office, is hereby expressly authorized and empowered to adopt,
amend or repeal any provision of the Bylaws of this Corporation.
Subject to the rights of the holders of any series of preferred
stock, these Bylaws may be adopted, amended or repealed by the
affirmative vote of the holders of not less than 80% of the
total voting power of the then outstanding capital stock of the
Corporation entitled to vote thereon; provided,
however, that this paragraph shall not apply to, and no
vote of the stockholders of the Corporation shall be required to
authorize, the adoption, amendment or repeal of any provision of
the Bylaws by the Board of Directors in accordance with the
preceding paragraph.
E-13
Appendix F
AUDITED FINANCIAL STATEMENTS
OF
ASCENT MEDIA CORPORATION
[TO COME]