UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
þ | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 2013
or
¨ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number: 1-35106
AMC Networks Inc.
(Exact name of registrant as specified in its charter)
Delaware | 27-5403694 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
11 Penn Plaza, New York, NY | 10001 | |
(Address of principal executive offices) | (Zip Code) | |
(212) 324-8500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Class A Common Stock, par value $0.01 per share | The NASDAQ Stock Market LLC | |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes þ No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Exchange Act Rule 12b-2).
Large accelerated filer | þ | Accelerated filer | ¨ |
Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant, computed by reference to the closing price of a share of common stock on June 28, 2013 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $3,923,000,000.
The number of shares of common stock outstanding as of February 18, 2014:
Class A Common Stock par value $0.01 per share | 60,813,360 | |
Class B Common Stock par value $0.01 per share | 11,484,408 | |
DOCUMENTS INCORPORATED BY REFERENCE:
Certain information required in Item 10 through Item 14 of Part III of this Annual Report on Form 10-K is incorporated herein by reference to the Registrant’s definitive Proxy Statement for its 2014 Annual Meeting of Stockholders, which shall be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, within 120 days of the Registrant’s fiscal year end.
TABLE OF CONTENTS
Page | ||
Part I | ||
Item 1. | Business | |
Item 1A. | Risk Factors | |
Item 1B. | Unresolved Staff Comments | |
Item 2. | Properties | |
Item 3. | Legal Proceedings | |
Item 4. | Mine Safety Disclosures | |
Part II | ||
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | |
Item 6. | Selected Financial Data | |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
Item 7A. | Quantitative and Qualitative Disclosure About Market Risk | |
Item 8. | Financial Statements and Supplementary Data | |
Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | |
Item 9A. | Controls and Procedures | |
Item 9B. | Other Information | |
Part III | ||
Item 10. | Directors, Executive Officers and Corporate Governance | |
Item 11. | Executive Compensation | |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
Item 13. | Certain Relationships and Related Transactions, and Director Independence | |
Item 14. | Principal Accounting Fees and Services | |
Part IV | ||
Item 15. | Exhibits, Financial Statement Schedules | |
SIGNATURES | ||
3
Part I
Item 1. Business.
General
AMC Networks Inc. is a Delaware corporation with our principal executive offices at 11 Penn Plaza, New York, NY 10001. AMC Networks Inc. is a holding company and conducts substantially all of its operations through its subsidiaries. Unless the context otherwise requires, all references to “we,” “our,” “us,” “AMC Networks” or the “Company” refer to AMC Networks Inc., together with its direct and indirect subsidiaries. “AMC Networks Inc.” refers to AMC Networks Inc. individually as a separate entity. Our telephone number is (212) 324-8500. Our internet address is http://www.amcnetworks.com and the investor relations section of our website is located at http://investor.amcnetworks.com. We make available, free of charge through the investor relations section of our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as well as our proxy statements, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”). References to our website in this Annual Report on Form 10-K (this “Annual Report”) are provided as a convenience and the information contained on, or available through, the website is not part of this or any other report we file with or furnish to the SEC.
AMC Networks Inc. was incorporated on March 9, 2011 as an indirect, wholly-owned subsidiary of Cablevision Systems Corporation (Cablevision Systems Corporation and its subsidiaries are referred to as “Cablevision”). On June 30, 2011, Cablevision spun off the Company (the “Distribution”) and the Company became an independent public company. In connection with the Distribution, Cablevision contributed all of the membership interests of Rainbow Media Holdings LLC (“RMH”) to the Company. RMH owned, directly or indirectly, the businesses included in Cablevision’s Rainbow Media segment. Both Cablevision and AMC Networks continue to be controlled by Charles F. Dolan, certain members of his immediate family and certain family related entities (collectively the “Dolan Family”).
Our Company
AMC Networks owns and operates several of cable television’s most recognized brands delivering high quality content to audiences and a valuable platform to distributors and advertisers. Since our founding in 1980, we have been a pioneer in the cable television programming industry, having created or developed some of the industry’s leading programming networks, with a focus on programming of film and original productions. AMC, which was created in 1984, features original programming that includes critically-acclaimed and award-winning original scripted dramatic series such as Mad Men, Breaking Bad, Hell on Wheels and The Walking Dead, which in 2012 became the first cable series in television history to achieve higher Nielsen ratings than any other show among adults 18-49. Our dedication to quality programming and storytelling also led to the creation of The Independent Film Channel (today known as IFC) in 1994 and WE tv (which we launched as Romance Classics in 1997) as well as our acquisition of SundanceTV (formerly known as Sundance Channel) in 2008.
We manage our business through two operating segments: (i) National Networks, which principally includes AMC, WE tv, IFC and SundanceTV; and (ii) International and Other, which principally includes AMC/Sundance Channel Global, IFC Films, AMC Networks Broadcasting & Technology and various developing online content distribution initiatives. Our National Networks are distributed throughout the United States (“U.S.”) via cable and other multichannel video programming distribution platforms, including direct broadcast satellite (“DBS”), platforms operated by telecommunications providers (we refer to cable and other multichannel video programming distributors as “multichannel video programming distributors” and collectively with digital and home video distributors as “distributors”). In addition to our extensive U.S. distribution, AMC, IFC and Sundance Channel are available in Canada. Sundance Channel is also distributed in Europe, Asia and Latin America and WE tv is distributed in Asia. We earn revenue principally from the distribution of our programming and the sale of advertising. Distribution revenue primarily includes affiliation fees paid by distributors to carry our programming networks and the licensing of original programming for digital, foreign and home video distribution. In 2013, distribution revenue accounted for 58% of our consolidated revenues, net and advertising sales accounted for 42% of our consolidated revenues, net. In 2013, revenues from DIRECTV, including domestic and international distribution and advertising sales, accounted for approximately 10% of our consolidated revenues, net.
For financial information of the Company by operating segment, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Consolidated Results of Operations” and Note 18 to the accompanying consolidated financial statements.
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Acquisition of Chellomedia
On January 31, 2014, certain subsidiaries of AMC Networks purchased substantially all of Chellomedia, the international content division of Liberty Global plc, for a purchase price of €750 million (approximately $1.0 billion), subject to adjustments for working capital, cash, and indebtedness acquired and for the purchase of minority equity interests. AMC Networks funded the purchase price with cash on hand and additional indebtedness of $600 million (see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Debt Financing Agreements").
The acquisition provides AMC Networks with television channels that are distributed to more than 390 million subscribers in over 130 countries and span a wide range of programming genres, most notably movie and entertainment networks. The acquisition of Chellomedia's operating businesses include: Chello Central Europe, Chello Latin America, Chello Multicanal, Chello Zone, the ad sales unit Atmedia, and the broadcast solutions unit, Chello DMC. The acquisition provides us with the opportunity to accelerate and enhance our international expansion strategy. We view the international opportunity as one that has the potential to provide long-term growth and value.
Our Strengths
Our strengths include:
Strong Industry Presence and Portfolio of Brands. We have operated in the cable programming industry for more than 30 years and over this time we have continually enhanced the value of our network portfolio. Our programming network brands are well known and well regarded by our key constituents—our viewers, distributors and advertisers—and have developed strong followings within their respective targeted demographics, increasing our value to distributors and advertisers. AMC (which targets adults aged 25 to 54), WE tv (which targets women aged 18 to 49 and 25 to 54), IFC (which targets adults aged 18 to 49) and SundanceTV (which targets adults aged 25 to 54) have established themselves as important within their respective markets. Our deep and established presence in the industry and the recognition we have received for our brands through industry awards and other honors lend us a high degree of credibility with distributors and content producers, and help provide us with stable affiliate and studio relationships, advantageous channel placements and heightened viewer engagement.
Broad Distribution and Penetration of Our National Networks. Our national networks are broadly distributed in the United States. AMC, WE tv, IFC and SundanceTV are each carried by all major multichannel video programming distributors. Our national networks are available to a significant percentage of subscribers in these distributors’ systems. This broad distribution and penetration provides us with a strong national platform on which to maintain, promote and grow our business.
Compelling Programming. We continually refine our mix of programming and, in addition to our popular film content, have increasingly focused on highly visible, critically-acclaimed original programming, including the award-winning Mad Men, Breaking Bad and The Walking Dead, which in 2012 became the first cable series in television history to achieve higher Nielsen ratings than any other show among adults 18-49. Other popular series include Hell on Wheels, Rectify, The Returned, Braxton Family Values, Tamar & Vince, Mary Mary, Portlandia and Maron. Our focus on quality original programming, targeting specific audiences, has allowed us in recent years to increase our programming networks’ ratings and their viewership within these respective targeted demographics.
Recurring Revenue from Affiliation Agreements. Our affiliation agreements with multichannel video programming distributors are a recurring source of revenue. We generally seek to structure these agreements so that they are long-term in nature and to stagger their expiration dates, thereby increasing the predictability and stability of our affiliation fee revenues.
Desirable Advertising Platform. Our national networks have a strong connection with each of their respective targeted demographics, which make our programming networks an attractive platform to advertisers. We have experienced significant growth in our advertising revenues in recent years, which has allowed us to develop high-quality programming.
Our Strategy
Our strategy is to maintain and improve our position as a leading programming and entertainment company by owning and operating several of the most popular and award-winning brands in cable television that create engagement with audiences globally across multiple media and distribution platforms. The key focuses of our strategy are:
Continued Development of High-Quality Original Programming. We intend to continue developing strong original programming across all of our programming networks to enhance our brands, strengthen our relationships with our viewers, distributors and advertisers, and increase distribution and audience ratings. We intend to continue to seek increased distribution of our national networks to grow affiliate and advertising revenues. We believe that our continued investment in original programming supports future growth in distribution and advertising revenue. We also intend to continue to expand the exploitation of our original programming across multiple media and distribution platforms.
5
Increased Global Distribution. We are expanding the distribution of our programming networks around the globe. We first expanded beyond the U.S. market with the launch in Canada of IFC (in 2001), AMC (in 2006), and a distribution arrangement for Sundance Channel in 2010. AMC/Sundance Channel Global has since built on this base, and is now distributed in 40 countries throughout the world. Further expansion for AMC/Sundance Channel Global is anticipated in 2014, within the existing footprint and beyond. Additionally, the acquisition of Chellomedia provides distribution of its programming in over 130 countries.
Continued Growth of Advertising Revenue. We have a proven track record of significantly increasing revenue by introducing advertising on networks that were previously not advertiser supported. We first accomplished this in 2002, when we moved AMC and WE tv to an advertiser-supported model, followed by IFC in December 2010, and SundanceTV in September 2013. Prior to September 2013, SundanceTV principally sold sponsorships. We seek to continue to evolve the programming on each of our networks to achieve even stronger viewer engagement within their respective core targeted demographics, thereby increasing the value of our programming to advertisers and allowing us to obtain higher advertising rates. We are continuing to seek additional advertising revenue through higher Nielsen ratings in desirable demographics.
Increased Control of Content. We believe that control (including long-term contract arrangements) and ownership of content is becoming increasingly important, and we intend to increase our control position over our programming content. We currently control, own or have long-term license agreements covering significant portions of our content across our programming networks as well as in our independent film distribution business operated by IFC Films. We intend to continue to focus on obtaining the broadest possible control rights (both as to territory and platforms) for our content.
Exploitation of Emerging Media Platforms. The technological landscape surrounding the distribution of entertainment content is continuously evolving as new digital platforms emerge. We intend to distribute our content across as many of these new platforms as possible, when it makes business sense to do so, so that our viewers can access our content where, when and how they want it. To that end, our programming networks are allowing many of our distributors to offer our content to subscribers on computers and other digital devices, and on video-on-demand platforms, all of which permit subscribers to access programs at their convenience. We also make our IFC Films library content available on third-party digital platforms such as Netflix and iTunes. In addition to amctv.com, which delivers approximately 4 million unique browsers each month, our networks each host dedicated websites that promote their brands, provide programming information and provide access to content.
Key Challenges
We face a number of challenges, including:
• | intense competition in the markets in which we operate; |
• | a limited number of distributors for our programming networks; |
• | continuing availability of desirable programming; |
• | integration of Chellomedia; and |
• | significant levels of debt and leverage, as a result of the debt financing agreements described under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” |
See Item 1A, “Risk Factors” for a discussion of these and other factors that could impact our performance and operating results.
6
National Networks
We own four nationally distributed entertainment programming networks: AMC, WE tv, IFC and SundanceTV, which are available to our distributors in high-definition and/or standard-definition formats. Our programming networks principally generate their revenues from the distribution of programming and the sale of advertising. Affiliation fees paid by multichannel video programming distributors represent the largest component of distribution revenue, which also includes the licensing of original programming for digital, foreign and home video distribution.
AMC
Whether commemorating favorite films from various genres and decades or creating acclaimed original programming, AMC is a television network dedicated to the highest-quality story-telling in keeping with its "Something More" brand. We launched AMC in 1984, and over the past several years it has garnered many of the industry’s highest honors, including multiple Emmy® Awards, Golden Globe® Awards, Screen Actors Guild Awards, Peabody Awards, and American Film Institute (AFI) Awards for Top 10 Most Outstanding Television Programs of the Year. The network is currently the only cable network in history ever to win the Emmy® Award for Outstanding Drama Series four years in a row, and five out of the last six, and boasts the most-watched drama series in basic cable history and the highest Nielsen rated show on television among adults 18-49 with The Walking Dead. In 2013, AMC received the Emmy® Award for Best Television Series - Drama for Breaking Bad. In addition, Breaking Bad’s Bryan Cranston received the Emmy® Award for Outstanding Lead Actor in a Drama Series, and Anna Gunn received the Emmy® Award for Outstanding Supporting Actress in a Drama Series.
AMC’s original drama series include Mad Men, Breaking Bad and Hell on Wheels. Breaking Bad completed its run in 2013 and will not return in 2014. The network will premiere three new drama series in 2014; Turn, Halt and Catch Fire and the Breaking Bad prequel, Better Call Saul. Additionally, the network includes a number of unscripted original series: Talking Dead, Comic Book Men, Small Town Security, Freakshow and the forthcoming Game of Arms.
AMC’s film library consists of films that are licensed from major studios such as Twentieth Century Fox, Warner Bros., Sony, MGM, NBC Universal, Paramount and Buena Vista under long-term contracts. AMC generally structures its contracts for the exclusive cable television rights to air the films during identified window periods.
AMC Subscribers and Affiliation Agreements. As of December 31, 2013, AMC had affiliation agreements with all major U.S. multichannel video programming distributors and reached approximately 97 million Nielsen subscribers.
Historical Subscribers—AMC
2013 | 2012 | 2011 | |||||||
(in millions) | |||||||||
Nielsen Subscribers (at year-end) | 97.4 | 98.9 | 96.3 | ||||||
Growth from Prior Year-end | (2 | )% | 3 | % | — | % | |||
Year-to-year changes in the Nielsen subscribers may be impacted by changes in the Nielsen sample.
WE tv
WE tv showcases and celebrates modern women who are bold, independent and taking control of their lives. Whether they are celebrities like Joan Rivers or Toni Braxton, or everyday women, their stories are as relatable as they are entertaining. WE tv’s popular slate of fresh and modern unscripted original series includes the hit shows Braxton Family Values, Joan & Melissa: Joan Knows Best? and Mary Mary, among others. WE tv will debut its first scripted original series, The Divide, in 2014.
Additionally, WE tv’s programming includes series such as Will and Grace and Roseanne as well as feature films, with exclusive license rights to certain films from studios such as Paramount, Sony and Warner Bros.
WE tv Subscribers and Affiliation Agreements. As of December 31, 2013, WE tv had affiliation agreements with all major U.S. multichannel video distributors and reached approximately 84 million Nielsen subscribers.
Historical Subscribers—WE tv
2013 | 2012 | 2011 | |||||||
(in millions) | |||||||||
Nielsen Subscribers (at year-end) | 84.0 | 81.5 | 76.1 | ||||||
Growth from Prior Year-end | 3 | % | 7 | % | (1 | )% | |||
The increase in Nielsen subscribers noted in the above table primarily reflects the repositioning of carriage of WE tv with certain operators to more widely distributed tiers of service. Additionally, year-to-year changes in the Nielsen subscribers may be impacted by changes in the Nielsen sample.
7
IFC
IFC creates original comedies that are in keeping with the network’s “Always On. Slightly Off” brand and which air alongside a collection of films and comedic cult TV shows.
The network’s original content includes the comedy series Portlandia, created by and starring Fred Armisen and Carrie Brownstein, and executive produced by Saturday Night Live's Lorne Michaels. Other IFC originals include Comedy Bang! Bang!, Maron, The Birthday Boys and The Spoils of Babylon (which premiered in January 2014). IFC's programming also includes films from various film distributors, including Fox, Miramax, Sony, Lionsgate, Universal, Paramount and Warner Bros.
IFC Subscribers and Affiliation Agreements. As of December 31, 2013, IFC had affiliation agreements with all major U.S. multichannel video distributors and reached approximately 70 million Nielsen subscribers.
Historical Subscribers—IFC
2013 | 2012 | 2011 | |||||||
(in millions) | |||||||||
Nielsen Subscribers (at year-end) | 69.9 | 69.6 | 65.3 | ||||||
Growth from Prior Year-end | — | % | 7 | % | 4 | % | |||
The increase in Nielsen subscribers noted in the above table primarily reflects the repositioning of carriage of IFC with certain operators to more widely distributed tiers of service. Additionally, year-to-year changes in the Nielsen subscribers may be impacted by changes in the Nielsen sample.
SundanceTV
Launched in 1996 and acquired by the Company in 2008, SundanceTV is making and celebrating television as distinctive as the best independent films. Working with today’s most remarkable talent, SundanceTV is attracting viewer and critical acclaim for its original scripted and unscripted series. The network delivers on the spirit of founder Robert Redford’s mission to celebrate creativity.
In 2013, SundanceTV earned ten Emmy® Award nominations, its most ever, including one win for its acclaimed original programming for the Jane Campion-helmed mini-series, Top of the Lake, starring Elisabeth Moss and Holly Hunter. The network also earned a Golden Globe® Award for Best Performance by an Actress in a Mini-Series or a Motion Picture Made for Television (Elisabeth Moss in Top of the Lake) as well as a nomination for Best Mini-Series or Motion Picture Made for Television (Top of the Lake.) In April 2013, the network launched Rectify, its first owned original scripted series which was greeted with critical and audience acclaim. In October 2013, SundanceTV introduced The Returned, a French subtitled zombie drama. Top of the Lake, Rectify and The Returned earned placement on numerous high-profile Top Ten lists for the best TV of 2013.
In 2014, SundanceTV will premiere original scripted series The Red Road starring Jason Momoa, Martin Henderson and Julianne Nicholson, The Honorable Woman starring Maggie Gyllenhaal, season two of Rectify and season two of The Returned.
SundanceTV also has a slate of original unscripted series, each exploring aspects of contemporary culture. The network’s original unscripted programming includes The Writers’ Room which takes viewers behind the scenes on today’s most popular scripted dramas; it was recently renewed for a second season to premiere in 2014. Non-fiction series Dream School premiered in 2013 and was enthusiastically received by audiences.
SundanceTV Subscribers and Affiliation Agreements. As of December 31, 2013, SundanceTV had affiliation agreements with all major U.S. multichannel video programming distributors and reached approximately 56 million Nielsen subscribers. As discussed above, in September 2013, we moved SundanceTV to an advertiser-supported model. Prior to September 2013, SundanceTV principally sold sponsorships.
Historical Subscribers—SundanceTV
2013 | 2012 | 2011 | |||||||
(in millions) | |||||||||
Nielsen Subscribers (at year-end) | 56.2 | 54.1 | 41.8 | ||||||
Growth from Prior Year-end | 4 | % | 29 | % | 5 | % | |||
The increase in Nielsen subscribers noted in the above table primarily reflects the repositioning of carriage of our SundanceTV with certain operators to more widely distributed tiers of service. Additionally, year-to-year changes in the Nielsen subscribers may be impacted by changes in the Nielsen sample.
8
International and Other
Our International and Other segment includes the operations of AMC/Sundance Channel Global, IFC Films, and AMC Networks Broadcasting & Technology. Our International and Other segment also includes VOOM HD Holdings LLC (“VOOM HD”).
AMC/Sundance Channel Global
AMC/Sundance Channel Global’s business principally consists of nine distinct channels distributed in sixteen languages spread across forty countries, focusing primarily on AMC in Canada and globally on versions of Sundance Channel and WE tv brands. Principally generating revenues from affiliation fees, AMC/Sundance Channel Global reached approximately 22 million viewing subscribers in Canada, Europe, Asia and Latin America as of December 31, 2013, and has broad availability to distributors within these territories through satellite and fiber delivery that can facilitate future expansion.
Sundance Channel—International
An internationally-recognized brand, Sundance Channel’s global services provide not only the best of the independent film world but also feature certain content from AMC, IFC, Sundance Channel and IFC Films, as well as serve as a unique pipeline of international content, in an effort to provide distinctive programming to an upscale audience.
The ability of Sundance Channel to offer content in standard definition and high definition across multiple platforms provides value to distributors and opportunity for expansion into additional international markets. The international version of Sundance Channel is currently available via eight distinct feeds providing service throughout various countries in Europe, Asia and Latin America and provides programming in sixteen different languages. The network is distributed via satellite and fiber in Europe, via satellite in Asia with a substantial footprint (which extends from the Philippines to the Middle East and from Russia to Australia), and by satellite in Latin America, with a footprint that extends throughout all of South America, Central America, and Mexico).
Canada
We provide programming to the Canadian market through our AMC and Sundance Channel brands, which are distributed through affiliation arrangements with the three major Canadian multichannel video programming distributors and through trademark license and content distribution arrangements with Canadian programming outlets. AMC Canada has today achieved near-full distribution in the Canadian market.
WE tv Asia
Providing programming in four languages (Korean, Mandarin, Malay, and Thai), WE tv Asia provides a selection of the best domestic programming from the WE tv U.S. network with programs like Bridezillas and My Fair Wedding with David Tutera, and some of the best programming from networks in the U.S., such as Tabatha’s Salon Takeover and Tori & Dean. With the same broad satellite footprint as Sundance Channel—International, WE tv Asia is available in South Korea, Malaysia, Taiwan, Singapore and Thailand.
Chellomedia
On January 31, 2014, we acquired the Chellomedia programming businesses in Europe, Africa, Asia, the Middle East and Latin America as well as joint venture interests in certain programming businesses. Chellomedia produces and markets a number of widely distributed multi-territory thematic channels in over 130 countries and span a wide range of programming genres, most notably movie and entertainment networks. Chellomedia consists of a portfolio of international cable channels and reaches over 390 million subscribers in Europe, Latin America, the Middle East and parts of Asia and Africa. Its channels are distributed to multichannel video programming distributors. In addition, Chellomedia owns and manages a Digital Media Center (DMC) in Amsterdam. The DMC is a technologically advanced production facility that services Chellomedia and third-party clients with channel origination, post-production, VOD encoding and satellite and fiber transmission.
IFC Films
IFC Films, our independent film distribution business, makes independent films available to a worldwide audience. IFC Films operates three distribution labels: Sundance Selects, IFC Films and IFC Midnight, all of which distribute independent films across virtually all available media platforms, including in theaters, on cable/satellite video-on-demand (reaching approximately 50 million homes), DVDs and cable network television, and streaming/downloading to computers and other electronic devices. IFC Films has a film library consisting of more than 600 titles. Recently released films include: the Oscar®-nominated Dirty Wars and Golden Globe nominated Blue is the Warmest Color and Frances Ha.
As part of its strategy to encourage the growth of the marketplace for independent films, IFC Films also operates the IFC Center and the DOC NYC Film Festival. IFC Center is a state-of-the-art independent movie theater located in the heart of New York City’s Greenwich Village. DOC NYC is an annual festival also located in New York City celebrating documentary storytelling in film, photography, prose and other media.
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AMC Networks Broadcasting & Technology
AMC Networks Broadcasting & Technology is a full-service network programming feed origination and distribution company, which primarily services the national programming networks of the Company. AMC Networks Broadcasting & Technology’s operations are located in Bethpage, New York, where AMC Networks Broadcasting & Technology consolidates origination and satellite communications functions in a 60,000 square-foot facility designed to keep AMC Networks at the forefront of network origination and distribution technology. AMC Networks Broadcasting & Technology has 30 plus years of experience across its network services groups, including network origination, affiliate engineering, network transmission, traffic and scheduling that provide day-to-day delivery of any programming network, in high definition or standard definition.
Currently, AMC Networks Broadcasting & Technology is responsible for the origination and transmission of multiple highly acclaimed network programming feeds for both national and international distribution. In addition to serving the programming networks of the Company, AMC Networks Broadcasting & Technology’s affiliated and third-party clients include Fuse, MSG Network, MSG Plus, MSG Varsity, SNY and Mid Atlantic Sports Network.
Content Rights and Development
The programming on our networks includes original programming that we control, either through outright ownership or through long-term licensing arrangements, and acquired programming that we license from studios and other rights holders.
Original Programming
We contract with some of the industry’s leading production companies, including Lionsgate, Sony Pictures Television, Fox Television Studios, Entertainment One Television USA, Scott Free Productions, RelativityREAL, Magical Elves, Broadway Video, Reveille Productions and Pilgrim Films & Television, to produce most of the original programming that appears on our programming networks. These contractual arrangements either provide us with outright ownership of the programming, in which case we hold all programming and other rights to the content, or they consist of long-term licensing arrangements, which provide us with exclusive rights to exhibit the content on our programming networks, but may be limited in terms of specific geographic markets or distribution platforms. The license agreements are typically of multi-season duration and provide us with a right of first negotiation or a right of first refusal on the renewal of the license for additional programming seasons. Historically, we have generally licensed our owned content to third parties for international distribution. We may also license content to other programming networks or distribution platforms. Future decisions as to how to distribute programming will be made on the basis of a variety of factors including the relative value of any particular alternative. We currently produce certain of our owned original series: The Walking Dead, Turn (premiering on AMC in 2014), Halt and Catch Fire (premiering on AMC in 2014), The Divide (premiering on WE tv in 2014), Rectify and The Red Road (premiering on SundanceTV in 2014). The original programming that we either license or own outright includes, for AMC: Mad Men, Breaking Bad and Hell on Wheels; for WE tv: Bridezillas, which is currently in syndication, Braxton Family Values, Tamar & Vince, Mary Mary, Joan & Melissa: Joan Knows Best?, and Marriage Boot Camp; for IFC: Portlandia, Maron, Comedy Bang! Bang!, The Birthday Boys and The Spoils of Babylon (premiered in January 2014); and for SundanceTV: Dream School and The Writers’ Room.
Acquired Programming
The majority of the content on our programming networks consists of existing films, episodic series and specials that we acquire pursuant to rights agreements with film studios, production companies or other rights holders. This acquired programming includes episodic series such as Law and Order, CSI: Miami, Will & Grace, Roseanne, Malcolm in the Middle and Arrested Development, as well as an extensive film library. The rights agreements for this content are of varying duration and generally permit our programming networks to carry these series, films and other programming during certain window periods.
Affiliation Agreements
Affiliation Agreements. Our programming networks are distributed to our viewing audience pursuant to affiliation agreements with multichannel video programming distributors. These agreements, which typically have durations of several years, require us to deliver programming that meets certain standards set forth in the agreement. We earn affiliation fees under these agreements, generally based upon the number of each distributor’s subscribers or, in some cases, based on a fixed contractual monthly fee. Our affiliation agreements also give us the right to sell a specific amount of national advertising time on our programming networks.
Our programming networks’ existing affiliation agreements expire at various dates through 2023. Failure to renew affiliation agreements, or renewal on less favorable terms, or the termination of those agreements could have a material adverse effect on our business, and, even if affiliation agreements are renewed, there can be no assurance that renewal rates will equal or exceed the rates that are currently being charged.
We frequently negotiate with distributors in an effort to increase the subscriber base for our networks. We have in some instances made upfront payments to distributors in exchange for these additional subscribers or agreed to waive or accept lower subscriber fees if certain numbers of additional subscribers are provided. We also may help fund the distributors’ efforts to market our programming networks or we may permit distributors to offer limited promotional periods without payment of subscriber fees.
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As we continue our efforts to add subscribers, our subscriber revenue may be negatively affected by such deferred carriage fee arrangements, discounted subscriber fees and other payments; however, we believe that these transactions generate a positive return on investment over the contract period.
Advertising Arrangements
Under affiliation agreements with our distributors, we have the right to sell a specified amount of national advertising time on our programming networks. Our advertising revenues are more variable than affiliation fee revenues because the majority of our advertising is sold on a short-term basis, not under long-term contracts. We sell advertising time in both the upfront and scatter markets. In the upfront market, advertisers buy advertising time for the upcoming season, and by purchasing in advance, often receive discounted rates. In the scatter market, advertisers buy advertising time close to the time when the commercials 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. Our advertising arrangements with advertisers provide for a set number of advertising units to air over a specific period of time at a negotiated price per unit. In most advertising sales arrangements, our programming networks guarantee specified viewer ratings for their programming. If these guaranteed viewer ratings are not met, we are generally required to provide additional advertising units to the advertiser at no charge. For these types of arrangements, a portion of the related revenue is deferred if the guaranteed viewer ratings are not met and is subsequently recognized either when we provide the required additional advertising time, the guarantee obligation contractually expires or performance requirements become remote. Most of our advertising revenues vary based upon the popularity of our programming as measured by Nielsen.
In 2013, our national programming networks had approximately 1,200 advertisers representing companies in a broad range of sectors, including the health, insurance, food, automotive and retail industries. All of our National Networks, including SundanceTV beginning in September 2013, use a traditional advertising sales model. Prior to September 2013, SundanceTV principally sold sponsorships.
Subscriber and Viewer Measurement
The number of subscribers receiving our programming from multichannel video programming distributors generally determines the affiliation fees we receive. These numbers are reported monthly by the distributor and are reported net of certain excluded categories of subscribers set forth in the relevant affiliation agreement. For most day-to-day management purposes, we use a different measurement, Nielsen subscribers. Nielsen subscribers represent the number of subscribers receiving our programming from multichannel video programming distributors as reported by Nielsen, based on their sampling procedures. Nielsen subscriber figures tend to be higher than viewing subscribers for a given programming network. Nielsen subscriber figures are available for all of our programming networks.
For purposes of the advertising rates we are able to charge advertisers, the relevant measurement is the Nielsen rating, which measures the number of viewers actually watching the commercials within programs we show on our programming networks. This measurement is calculated by The Nielsen Company using their sampling procedures and reported daily, although advertising rates are adjusted less frequently. In addition to the Nielsen rating, our advertising rates are also influenced by the demographic mix of our viewing audiences, since advertisers tend to pay premium rates for more desirable demographic groups of viewers.
Regulation
The Federal Communications Commission (the “FCC”) regulates programming networks in certain respects when they are affiliated with a cable television operator, as we are with Cablevision. Other FCC regulations, although imposed on cable television operators and satellite operators, affect programming networks indirectly.
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Closed Captioning
Certain of our networks must provide closed-captioning of programming for the hearing impaired. The 21st Century Communications and Video Accessibility Act of 2010 also requires us to provide closed captioning on certain video content that we offer on the Internet or through other Internet Protocol distribution.
CALM Act
FCC rules require multichannel video programming distributors to ensure that all commercials comply with specified volume standards, and our affiliation agreements generally require us to certify compliance with such standards.
Obscenity Restrictions
Cable operators and other distributors are prohibited from transmitting obscene programming, and our affiliation agreements generally require us to refrain from including such programming on our networks.
Violent Programming
In 2007, the FCC issued a report on violence in programming that recommended that Congress prohibit the availability of violent programming, including cable programming, during the hours when children are likely to be watching. Recent events have led to a renewed interest by some members of Congress in the alleged effects of violent programming, which could lead to a renewal of interest in limiting the availability of such programming or prohibiting it.
Program Access
The “program access” provisions of the Federal Cable Act generally require satellite delivered video programming in which a cable operator holds an attributable interest, as that term is defined by the FCC, to be made available to all multichannel video programming distributors, including DBS providers and telephone companies, on nondiscriminatory prices, terms and conditions, subject to certain exceptions specified in the statute and the FCC’s rules. FCC rules provide that the FCC may order a cable-affiliated programmer to continue to make a programming service available to a multichannel video programming distributor during the pendency of a program access complaint, under the terms of the existing contract. For purposes of these rules, the common directors and five percent or greater voting stockholders of Cablevision and AMC Networks are deemed to be cable operators with attributable interests in us. As long as we continue to have common directors and major stockholders with Cablevision, our satellite-delivered video programming services will remain subject to the program access provisions. The FCC allowed a previous blanket prohibition on exclusive arrangements with cable operators to expire in October 2012, but will consider case-by-case complaints that exclusive contracts between cable operators and cable-affiliated programmers significantly hinder or prevent a competing distributor from providing satellite cable programming.
The FCC has also extended the program access rules to terrestrially-delivered programming created by cable operator-affiliated programmers such as us when a showing can be made that the lack of such programming significantly hinders or prevents the distributor from providing satellite cable programming. The rules authorize the FCC to compel the licensing of such programming in response to a complaint by a multichannel video programming distributor. These rules could require us to make any terrestrial programming services we create available to multichannel video programming distributors on nondiscriminatory prices, terms and conditions.
Program Carriage
The FCC has sought comment on proposed changes to the rules governing carriage agreements between cable programming networks and cable operators or other multichannel video programming distributors. Some of these changes could give an advantage to cable programming networks that are not affiliated with any distributor and make it easier for those programming networks to challenge a distributor’s decision to terminate a carriage agreement or to decline to carry a network in the first place.
Wholesale “À La Carte”
In 2007, the FCC sought comment on whether cable programming networks require distributors to purchase and carry undesired programming in return for the right to carry desired programming and, if so, whether such arrangements should be prohibited. The FCC has taken no action on this proposal. We do not currently require distributors to carry more than one of our national programming networks in order to obtain the right to carry a particular national programming network. However, we generally negotiate with a distributor for the carriage of all of our national networks concurrently.
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Effect of “Must-Carry” Requirements
The FCC’s implementation of the statutory “must-carry” obligations requires cable and DBS operators to give broadcasters preferential access to channel space. In contrast, programming networks, such as ours, have no guaranteed right of carriage on cable television or DBS systems. This may reduce the amount of channel space that is available for carriage of our networks by cable television systems and DBS operators.
Satellite Carriage
All satellite carriers must under federal law offer their service to deliver our and our competitor’s programming networks on a nondiscriminatory basis (including by means of a lottery). A satellite carrier cannot unreasonably discriminate against any customer in its charges or conditions of carriage.
Media Ownership Restrictions
FCC rules set media ownership limits that restrict, among other things, the number of daily newspapers and radio and television stations in which a single entity may hold an attributable interest as that term is defined by the FCC. Pursuant to a Congressional mandate, the FCC must review these rules every four years. Such a review is currently underway. Cablevision currently owns Newsday, a daily newspaper published on Long Island, New York. The fact that the common directors and five percent or greater voting stockholders of Cablevision and AMC Networks hold attributable interests in each of the companies for purposes of these rules means that these cross-ownership rules may have the effect of limiting the activities or strategic business alternatives available to us, at least for as long as we continue to have common directors and major stockholders with Cablevision. Although we have no plans or intentions to become involved in the businesses affected by these restrictions, we would need to be mindful of these rules if we were to consider engaging in any such business in the future.
Website Requirements
We maintain various websites that provide information regarding our businesses and offer content for sale. The operation of these websites may be subject to a range of federal, state and local laws such as privacy, data security, child safety and consumer protection regulations.
Other Regulation
The FCC also imposes rules regarding political broadcasts and telemarketing. In addition, our international operations are subject to regulation on a country-by-country basis, including programming content requirements, local content quotas, and requirements to make programming available on nondiscriminatory terms.
Competition
Our programming networks operate in two highly competitive markets. First, our programming networks compete with other programming networks to obtain distribution on cable television systems and other multichannel video programming distribution systems, such as DBS, and ultimately for viewing by each system’s subscribers. Second, our programming networks compete with other programming networks and other sources of video content, including broadcast networks, to secure desired entertainment programming. The success of our businesses depends on our ability to license and produce content for our programming networks that is adequate in quantity and quality and will generate satisfactory viewer ratings. In each of these cases, some of our competitors are large publicly held companies that have greater financial resources than we do. In addition, we compete with these entities for advertising revenue.
It is difficult to predict the future effect of technology on many of the factors affecting AMC Networks’ competitive position. For example, data compression technology has made it possible for most video programming distributors to increase their channel capacity, which may reduce the competition among programming networks and broadcasters for channel space. On the other hand, the addition of channel space could also increase competition for desired entertainment programming and ultimately, for viewing by subscribers. As more channel space becomes available, the position of our programming networks in the most favorable tiers of these distributors would be an important goal. Additionally, video content delivered directly to viewers over the Internet competes with our programming networks for viewership.
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Distribution of Programming Networks
The business of distributing programming networks to cable television systems and other multichannel video programming distributors is highly competitive. Our programming networks face competition from other programming networks’ carriage by a particular multichannel video programming distributor, and for the carriage on the service tier that will attract the most subscribers. Once our programming network is selected by a distributor for carriage, that network competes for viewers not only with the other programming networks available on the distributor’s system, but also with over-the-air broadcast television, Internet-based video and other online services, mobile services, radio, print media, motion picture theaters, DVDs, and other sources of information and entertainment.
Important to our success in each area of competition we face are the prices we charge for our programming networks, the quantity, quality and variety of the programming offered on our networks, and the effectiveness of our networks’ marketing efforts. The competition for viewers among advertiser supported networks is directly correlated with the competition for advertising revenues with each of our competitors.
Our ability to successfully compete with other networks may be hampered because the cable television systems or other multichannel video programming distributors through which we seek distribution may be affiliated with other programming networks. In addition, because such distributors may have a substantial number of subscribers, the ability of such programming networks to obtain distribution on the systems of affiliated distributors may lead to increased affiliation and advertising revenue for such programming networks because of their increased penetration compared to our programming networks. Even if such affiliated distributors carry our programming networks, such distributors may place their affiliated programming network on a more desirable tier, thereby giving the affiliated programming network a competitive advantage over our own.
New or existing programming networks that are affiliated with broadcasting networks like NBC, ABC, CBS or Fox may also have a competitive advantage over our programming networks in obtaining distribution through the “bundling” of agreements to carry those programming networks with agreements giving the distributor the right to carry a broadcast station affiliated with the broadcasting network.
An important part of our strategy involves exploiting identified markets of the cable television viewing audience that are generally well defined and limited in size. Our networks have faced and will continue to face increasing competition as other programming networks and online or other services seek to serve the same or similar niches.
Sources of Programming
We also compete with other programming networks to secure desired programming. Most of our original programming and all of our acquired programming is obtained through agreements with other parties that have produced or own the rights to such programming. Competition for this programming will increase as the number of programming networks increases. Other programming networks that are affiliated with programming sources such as movie or television studios or film libraries may have a competitive advantage over us in this area.
With respect to the acquisition of entertainment programming, such as syndicated programs and movies that are not produced by or specifically for networks, our competitors include national broadcast television networks, local broadcast television stations, video-on-demand programs and other cable programming networks. Internet-based video content distributors have also emerged as competitors for the acquisition of content or the rights to distribute content. Some of these competitors have exclusive contracts with motion picture studios or independent motion picture distributors or own film libraries.
Competition for Advertising Revenue
Our programming networks must compete with other sellers of advertising time and space, including other cable programming networks, radio, newspapers, outdoor media and, increasingly, Internet sites. We compete for advertisers on the basis of rates we charge and also on the number and demographic nature of viewers who watch our programming. Advertisers will often seek to target their advertising content to those demographic categories they consider most likely to purchase the product or service they advertise. Accordingly, the demographic make-up of our viewership can be equally or more important than the number of viewers watching our programming.
Employees
As of February 3, 2014 we had 2,123 full-time employees and 74 part-time employees (including 1,063 full-time employees and 45 part-time employees from Chellomedia). In addition, certain of our subsidiaries engages the services of writers who are subject to a collective bargaining agreement. We believe that our employee and labor relations are good.
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Item 1A. Risk Factors.
The risk factors described below are not inclusive of all risk factors but highlight those that the Company believes are the most significant and that could impact its performance and financial results. These risk factors should be considered together with all other information presented in this Annual Report.
Our business depends on the appeal of our programming to our distributors and our U.S. and foreign viewers, which may be unpredictable and volatile.
Our business depends in part upon viewer preferences and audience acceptance in the U.S. and abroad of the programming on our networks. These factors are often unpredictable and volatile, and subject to influences that are beyond our control, such as the quality and appeal of competing programming, general economic conditions and the availability of other entertainment activities. We may not be able to anticipate and react effectively to shifts in tastes and interests in our markets. A change in viewer preferences could cause our programming to decline in popularity, which could cause a reduction in advertising revenues and jeopardize renewal of our contracts with distributors. In addition, our competitors may have more flexible programming arrangements, as well as greater amounts of available content, distribution and capital resources, and may be able to react more quickly than we can to shifts in tastes and interests.
To an increasing extent, the success of our business depends on original programming, and our ability to predict accurately how audiences will respond to our original programming is particularly important. Because original programming often involves a greater degree of commitment on our part, as compared to acquired programming that we license from third parties, and because our network branding strategies depend significantly on a relatively small number of original programs, a failure to anticipate viewer preferences for such programs could be especially detrimental to our business. We periodically review the programming usefulness of our program rights based on a series of factors, including ratings, type and quality of program material, standards and practices, and fitness for exhibition. We have incurred write-offs of programming rights in the past, and may incur future programming rights write-offs if it is determined that program rights have no future usefulness.
In addition, feature films constitute a significant portion of the programming on our AMC, IFC and SundanceTV programming networks. In general, the popularity of feature-film content on linear television is declining, due in part to the broad availability of such content through an increasing number of distribution platforms. Should the popularity of feature-film programming suffer significant further declines, we may lose viewership or be forced to rely more heavily on original programming, which could increase our costs.
If our programming does not gain the level of audience acceptance we expect, or if we are unable to maintain the popularity of our programming, our ratings may suffer, which will negatively affect advertising revenues, and we may have a diminished bargaining position when dealing with distributors, which could reduce our affiliation fee revenues. We cannot assure you that we will be able to maintain the success of any of our current programming, or generate sufficient demand and market acceptance for our new programming.
If economic problems persist in the United States or in other parts of the world, our results of operations could be adversely affected.
Our business is significantly affected by prevailing economic conditions and by disruptions to financial markets. We derive substantial revenues from advertisers, and these expenditures are sensitive to general economic conditions and consumer buying patterns. Financial instability or a general decline in economic conditions in the United States and other countries where our networks are distributed could adversely affect advertising rates and volume, resulting in a decrease in our advertising revenues.
Decreases in U.S. and consumer discretionary spending in other countries where our networks are distributed may affect cable television and other video service subscriptions, in particular with respect to digital service tiers on which certain of our programming networks are carried. This could lead to a decrease in the number of subscribers receiving our programming from multichannel video programming distributors, which could have a negative impact on our viewing subscribers and affiliation fee revenues. Similarly, a decrease in viewing subscribers would also have a negative impact on the number of viewers actually watching the programs on our programming networks, which could also impact the rates we are able to charge advertisers.
Economic conditions affect a number of aspects of our businesses worldwide and impact the businesses of our partners who purchase advertising on our networks and reduce their spending on advertising. Economic conditions can also negatively affect the ability of those with whom we do business to satisfy their obligations to us. The general worsening of current global economic conditions could adversely affect our business, financial condition or results of operations, and the worsening of economic conditions in certain parts of the world, specifically, could impact the expansion and success of our businesses in such areas.
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Because a limited number of distributors account for a large portion of our business, the loss of any significant distributor would adversely affect our revenues.
Our programming networks depend upon agreements with a limited number of cable television system operators and other multichannel video programming distributors. The loss of any significant distributor would have a material adverse effect on our consolidated results of operations.
In addition, we have in some instances made upfront payments to distributors in exchange for additional subscribers or have agreed to waive or accept lower affiliation fees if certain numbers of additional subscribers are provided. We also may help fund our distributors' efforts to market our programming networks or we may permit distributors to offer promotional periods without payment of subscriber fees. As we continue our efforts to add viewing subscribers, our net revenues may be negatively affected by these deferred carriage fee arrangements, discounted subscriber fees or other payments.
Failure to renew our programming networks’ affiliation agreements, or renewal on less favorable terms, or the termination of those agreements, both in the U.S. and internationally, could have a material adverse effect on our business.
Currently our programming networks have affiliation agreements that have staggered expiration dates through 2023. Failure to renew these affiliation agreements, or renewal on less favorable terms, or the termination of those agreements could have a material adverse effect on our business. A reduced distribution of our programming networks would adversely affect our affiliation fee revenue, and impact our ability to sell advertising or the rates we charge for such advertising. Even if affiliation agreements are renewed, we cannot assure you that the renewal rates will equal or exceed the rates that we currently charge these distributors.
In some cases, if a distributor is acquired, the affiliation agreement of the acquiring distributor will govern following the acquisition. In those circumstances, the acquisition of a distributor that is party to one or more affiliation agreements with our programming networks on terms that are more favorable to us could adversely impact our financial condition and results of operations.
Consolidation among cable and satellite operators has given the largest operators considerable leverage in their relationships with programmers, including us. Most of our U.S. revenues come from a handful of the largest distributors. The two largest cable distributors provide service to approximately 33% of U.S. households receiving multichannel video programming distribution, while the two largest DBS distributors provide service to an additional 34% of such households. In certain countries outside the U.S., one or a small number of distributors have a dominant market position. Continued consolidation within the industry could further reduce the number of distributors available to carry our content and increase the negotiating leverage of our distributors which could adversely affect our revenue.
We are subject to intense competition, which may have a negative effect on our profitability or on our ability to expand our business.
The programming industry is highly competitive. Our programming networks compete with other programming networks and other types of video programming services for marketing and distribution by cable and other multichannel video programming distribution systems. In distributing a programming network, we face competition with other providers of programming networks for the right to be carried by a particular cable or other multichannel video programming distribution system and for the right to be carried by such system on a particular “tier” of service.
Certain programming networks affiliated with broadcast networks like NBC, ABC, CBS or Fox or other key free-to-air programming networks in countries where our networks are distributed may have a competitive advantage over our programming networks in obtaining distribution through the “bundling” of carriage agreements for such programming networks with a distributor's right to carry the affiliated broadcasting network. In addition, our ability to compete with certain programming networks for distribution may be hampered because the cable television or other multichannel video programming distributors through which we seek distribution may be affiliated with these programming networks. Because such distributors may have a substantial number of subscribers, the ability of such programming networks to obtain distribution on the systems of affiliated distributors may lead to increased affiliation and advertising revenue for such programming networks because of their increased penetration compared to our programming networks. Even if the affiliated distributors carry our programming networks, they may place their affiliated programming network on a more desirable tier, thereby giving their affiliated programming network a competitive advantage over our own.
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In addition to competition for distribution, we also face intense competition for viewing audiences with other cable and broadcast programming networks, home video products and Internet-based video content providers, some of which are part of large diversified entertainment or media companies that have substantially greater resources than us. To the extent that our viewing audiences are eroded by competition with these other sources of programming content, our ratings would decline, negatively affecting advertising revenues, and we may face difficulty renewing affiliation agreements with distributors on acceptable terms, which could cause affiliation fee revenues to decline. In addition, competition for advertisers with these content providers, as well as with other forms of media (including print media, Internet websites and radio), could affect the amount we are able to charge for advertising time on our programming networks, and therefore our advertising revenues.
An important part of our strategy involves exploiting identified markets of the cable television viewing audience that are generally well defined and limited in size. Our programming networks have faced and will continue to face increasing competition obtaining distribution and attracting advertisers as other programming networks seek to serve the same or similar markets.
Our programming networks’ success depends upon the availability of programming that is adequate in quantity and quality, and we may be unable to secure or maintain such programming.
Our programming networks' success depends upon the availability of quality programming, particularly original programming and films, that is suitable for our target markets. While we produce some of our original programming, we obtain most of the programming on our networks (including original programming, films and other acquired programming) through agreements with third parties that have produced or control the rights to such programming. These agreements expire at varying times and may be terminated by the other parties if we are not in compliance with their terms.
We compete with other programming networks to secure desired programming. Competition for programming has increased as the number of programming networks has increased. Other programming networks that are affiliated with programming sources such as movie or television studios or film libraries may have a competitive advantage over us in this area. In addition to other cable programming networks, we also compete for programming with national broadcast television networks, local broadcast television stations, video-on-demand services and Internet-based content delivery services, such as Netflix, iTunes, Hulu and Amazon. Some of these competitors have exclusive contracts with motion picture studios or independent motion picture distributors or own film libraries.
We cannot assure you that we will ultimately be successful in negotiating renewals of our programming rights agreements or in negotiating adequate substitute agreements in the event that these agreements expire or are terminated.
Our programming networks have entered into long-term programming acquisition contracts that require substantial payments over long periods of time, even if we do not use such programming to generate revenues.
Our programming networks have entered into numerous contracts relating to the acquisition of programming, including rights agreements with film companies. These contracts typically require substantial payments over extended periods of time. We must make the required payments under these contracts even if we do not use the programming.
Increased programming costs may adversely affect our profits.
We incur costs for the creative talent, including actors, writers and producers, who create our original programming. Some of our original programming has achieved significant popularity and critical acclaim, which has increased and could continue to increase the costs of such programming in the future. An increase in the costs of programming may lead to decreased profitability or otherwise adversely affect our business.
We may not be able to adapt to new content distribution platforms and to changes in consumer behavior resulting from these new technologies, which may adversely affect our business.
We must successfully adapt to technological advances in our industry, including the emergence of alternative distribution platforms. Our ability to exploit new distribution platforms and viewing technologies will affect our ability to maintain or grow our business. Emerging forms of content distribution may provide different economic models and compete with current distribution methods in ways that are not entirely predictable. Such competition could reduce demand for our traditional television offerings or for the offerings of digital distributors and reduce our revenue from these sources. Accordingly, we must adapt to changing consumer behavior driven by advances such as digital video recorders, video-on-demand, Internet-based content delivery, including services such as Netflix, Hulu, Apple TV, Google TV and Amazon and mobile devices. Gaming and other consoles such Microsoft’s Xbox, Sony’s PS3 and Nintendo’s Wii and Roku are establishing themselves as alternative providers of video services. Such changes may impact the revenues we are able to generate from our traditional distribution methods, either by decreasing the viewership of our programming networks on cable and other multichannel video programming distribution systems which are almost entirely directed at television video delivery or by making advertising on our programming networks less valuable to advertisers. If we fail to adapt our distribution methods and content to emerging technologies, our appeal to our targeted audiences might decline and there could be a negative effect on our business. In addition, advertising revenues could be significantly impacted by emerging technologies, since advertising sales are dependent on audience measurement provided by third parties, and the results
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of audience measurement techniques can vary independent of the size of the audience for a variety of reasons, including difficulties related to the employed statistical sampling methods, new distribution platforms and viewing technologies, and the shifting of the marketplace to the use of measurement of different viewer behaviors, such as delayed viewing. Moreover, devices that allow users to fast forward or skip programming, including commercials, are causing changes in consumer behavior that may affect the desirability of our programming services to advertisers.
We face risks from doing business internationally.
We have operations through which we distribute programming outside the United States. As a result, our business is subject to certain risks inherent in international business, many of which are beyond our control. These risks include:
• | laws and policies affecting trade and taxes, including laws and policies relating to the repatriation of funds and withholding taxes, and changes in these laws; |
• | changes in local regulatory requirements, including restrictions on content, imposition of local content quotas and restrictions on foreign ownership; |
• | differing degrees of protection for intellectual property and varying attitudes towards the piracy of intellectual property; |
• | the instability of foreign economies and governments; |
• | exchange controls; |
• | war and acts of terrorism; |
• | anti-corruption laws and regulations such as the Foreign Corrupt Practices Act and the U.K. Bribery Act that impose stringent requirements on how we conduct our foreign operations and changes in these laws and regulations; |
• | foreign privacy and data protection laws and regulation and changes in these laws; and |
• | shifting consumer preferences regarding the viewing of video programming. |
Events or developments related to these and other risks associated with international trade could adversely affect our revenues from non-U.S. sources, which could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.
We are also exposed to foreign currency exchange rate risk to the extent that we enter into transactions denominated in currencies other than our or our subsidiaries’ respective functional currencies (non-functional currency risk), such as programming contracts, notes payable and notes receivable (including intercompany amounts) that are denominated in a currency other than the applicable functional currency. Changes in exchange rates with respect to amounts recorded in our consolidated balance sheets related to these items will result in unrealized (based upon period-end exchange rates) or realized foreign currency transaction gains and losses upon settlement of the transactions. Moreover, to the extent that our revenue, costs and expenses are denominated in currencies other than our respective functional currencies, we will experience fluctuations in our revenue, costs and expenses solely as a result of changes in foreign currency exchange rates.
We also are exposed to unfavorable and potentially volatile fluctuations of the U.S. dollar (our reporting currency) against the currencies of our operating subsidiaries when their respective financial statements are translated into U.S. dollars for inclusion in our consolidated financial statements. Cumulative translation adjustments are recorded in accumulated other comprehensive income (loss) as a separate component of equity. Any increase (decrease) in the value of the U.S. dollar against any foreign currency that is the functional currency of one of our operating subsidiaries will cause us to experience unrealized foreign currency translation losses (gains) with respect to amounts already invested in such foreign currencies. Accordingly, we may experience a negative impact on our comprehensive income (loss) and equity with respect to our holdings solely as a result of foreign currency translation. Our primary exposure to foreign currency risk from a foreign currency translation perspective is to the euro and, to a lesser extent, other local currencies in Europe. We generally do not hedge against the risk that we may incur non-cash losses upon the translation of the financial statements of our subsidiaries and affiliates into U.S. dollars.
Our business is limited by United States regulatory constraints which may adversely impact our operations.
Although most aspects of our business generally are not directly regulated by the FCC, there are certain FCC regulations that govern our business either directly or indirectly. See Item 1, “Business—Regulation” in this Annual Report. Furthermore, to the extent that regulations and laws, either presently in force or proposed, hinder or stimulate the growth of the cable television and satellite industries, our business will be affected.
The United States 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 our operations.
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The regulation of cable television services, satellite carriers, and other multichannel video programming distributors is subject to the political process and has been in constant flux over the past two decades. Further material changes in the law and regulatory requirements must be anticipated. We cannot assure you that our business will not be adversely affected by future legislation, new regulation or deregulation.
Our businesses are subject to risks of adverse regulation by foreign governments.
Programming businesses are subject to regulation on a country-by-country basis, including restrictions on types of advertising that can be sold on our networks, programming content requirements, requirements to make programming available on non-discriminatory terms, and local content quotas. Consequently, our businesses must adapt their ownership and organizational structure as well as their pricing and service offerings to satisfy the rules and regulations to which they are subject. A failure to comply with applicable rules and regulations could result in penalties, restrictions on our business or loss of required licenses or other adverse conditions.
Adverse changes in rules and regulations could have a significant adverse impact on our profitability.
Theft of our content, including digital copyright theft and other unauthorized exhibitions of our content, may decrease revenue received from our programming and adversely affect our businesses and profitability.
The success of our businesses depends in part on our ability to maintain and monetize our intellectual property rights to our entertainment content. We are fundamentally a content company and theft of our brands, television programming, digital content and other intellectual property has the potential to significantly affect us and the value of our content. Copyright theft is particularly prevalent in many parts of the world that lack effective copyright and technical protective measures similar to those existing in the United States or that lack effective enforcement of such measures. The interpretation of copyright, privacy and other laws as applied to our content, and piracy detection and enforcement efforts, remain in flux. The failure to strengthen, or the weakening of, existing intellectual property laws could make it more difficult for us to adequately protect our intellectual property and negatively affect its value.
Content theft has been made easier by the wide availability of higher bandwidth and reduced storage costs, as well as tools that undermine security features such as encryption and the ability of pirates to cloak their identities online. In addition, we and our numerous production and distribution partners operate various technology systems in connection with the production and distribution of our programming, and intentional or unintentional acts could result in unauthorized access to our content, a disruption of our services, or improper disclosure of confidential information. The increasing use of digital formats and technologies heightens this risk. Unauthorized access to our content could result in the premature release of television shows, which is likely to have a significant adverse effect on the value of the affected programming.
Copyright theft has an adverse effect on our business because it reduces the revenue that we are able to receive from the legitimate sale and distribution of our content, undermines lawful distribution channels and inhibits our ability to recoup or profit from the costs incurred to create such works. Efforts to prevent the unauthorized distribution, performance and copying of our content may affect our profitability and may not be successful in preventing harm to our business.
Litigation may be necessary to enforce our intellectual property rights, protect trade secrets or to determine the validity and scope of proprietary rights claimed by others. Any litigation of this nature, regardless of outcome or merit, could result in substantial costs and diversion of management and technical resources, any of which could adversely affect our business, financial condition and results of operations. Our failure to protect our intellectual property rights, particularly our brand, in a meaningful manner or challenges to related contractual rights could result in erosion of our brand and limit our ability to control marketing of our networks, which could have a materially adverse effect on our business, financial condition and results of operations.
Protection of electronically stored data is costly and if our data is compromised in spite of this protection, we may incur additional costs, lost opportunities and damage to our reputation.
We maintain information in digital form as necessary to conduct our business, including confidential and proprietary information regarding our distributors, advertisers, viewers and employees as well as personal information. Data maintained in digital form is subject to the risk of intrusion, tampering and theft. We develop and maintain systems to prevent this from occurring, but the development and maintenance of these systems is costly and requires ongoing monitoring and updating as technologies change and efforts to overcome security measures become more sophisticated. Moreover, despite our efforts, the possibility of intrusion, tampering and theft cannot be eliminated entirely, and risks associated with each of these remain. In addition, we provide confidential, proprietary and personal information to third parties when it is necessary to pursue business objectives. While we obtain assurances that these third parties will protect this information and, where appropriate, monitor the protections employed by these third parties, there is a risk the confidentiality of data held by third parties may be compromised. If our data systems are compromised, our ability to conduct our business may be impaired, we may lose profitable opportunities or the value of those opportunities may be diminished and, as described above, we may lose revenue as a result of unlicensed use of our intellectual property. Further, a penetration of our network security or other misappropriation or misuse of personal consumer or employee
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information could subject us to business, regulatory, litigation and reputation risk, which could have a negative effect on our business, financial condition and results of operations.
If our technology facilities fail or their operations are disrupted, or if we lose access to third party satellites, our performance could be hindered.
Our programming is transmitted using technology facilities at certain of our subsidiaries. These technology facilities are used for a variety of purposes, including signal processing, program editing, promotions, creation of programming segments to fill short gaps between featured programs, quality control, and live and recorded playback. These facilities are subject to interruption from fire, lightning, adverse weather conditions and other natural causes. Equipment failure, employee misconduct or outside interference could also disrupt the facilities' services. Although we have an arrangement with a third party to re-broadcast the previous 48 hours of our national networks' programming in the event of a disruption, we currently do not have a backup operations facility for our programming.
In addition, we rely on third-party satellites in order to transmit our programming signals to our distributors. As with all satellites, there is a risk that the satellites we use will be damaged as a result of natural or man-made causes, or will otherwise fail to operate properly. Although we maintain in-orbit protection providing us with back-up satellite transmission facilities should our primary satellites fail, there can be no assurance that such back-up transmission facilities will be effective or will not themselves fail.
Any significant interruption at any of our technology facilities affecting the distribution of our programming, or any failure in satellite transmission of our programming signals, could have an adverse effect on our operating results and financial condition.
The loss of any of our key personnel and artistic talent could adversely affect our business.
We believe that our success depends to a significant extent upon the performance of our senior executives. We generally do not maintain “key man” insurance. In addition, we depend on the availability of third-party production companies to create most of our original programming. Some of the writers employed by one of our subsidiaries and some of the employees of third party production companies that create our original programming are subject to collective bargaining agreements. Any labor disputes or a strike by one or more unions representing our subsidiary's writers or employees of third-party production companies who are essential to our original programming could have a material adverse effect on our original programming and on our business as a whole. The loss of any significant personnel or artistic talent, or our artistic talent losing their audience base, could also have a material adverse effect on our business.
No assurance can be made that we will be successful in integrating any acquired businesses.
We recently completed the acquisition of Chellomedia and we may make other acquisitions in the future. Integration of new businesses presents significant challenges, including: realizing economies of scale; eliminating duplicative overhead; and integrating networks, financial systems and operational systems. No assurance can be given that, with respect to any acquisition, we will realize anticipated benefits or successfully integrate any acquired business with our existing operations. In addition, while we intend to implement appropriate controls and procedures as we integrate acquired companies, we may not be able to certify as to the effectiveness of these companies’ disclosure controls and procedures or internal control over financial reporting (as required by U.S. federal securities laws and regulations) until we have fully integrated them.
We may have exposure to additional tax liabilities.
We are subject to income taxes as well as non-income based taxes, such as payroll, sales, use, value-added, net worth, property and goods and services taxes, in both the United States and various foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes and other tax liabilities. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are regularly under audit by tax authorities in both the United States and various foreign jurisdictions. Although we believe that our tax estimates are reasonable, (1) there is no assurance that the final determination of tax audits or tax disputes will not be different from what is reflected in our historical income tax provisions, expense amounts for non-income based taxes and accruals and (2) any material differences could have an adverse effect on our financial position and results of operations in the period or periods for which determination is made.
Although a portion of our revenue and operating income is generated outside the United States, we are subject to potential current U.S. income tax on this income due to our being a U.S. corporation. Our worldwide effective tax rate may be reduced under a provision in U.S. tax law that defers the imposition of U.S. tax on certain foreign active income until that income is repatriated to the United States. Any repatriation of assets held in foreign jurisdictions or recognition of foreign income that fails to meet the U.S. tax requirements related to deferral of U.S. income tax may result in a higher effective tax rate for our company. This includes what is referred to as “Subpart F Income,” which generally includes, but is not limited to, such items as interest, dividends, royalties, gains from the disposition of certain property, certain currency exchange gains in excess of currency exchange losses, and certain related party sales and services income. While the Company may mitigate this increase in its effective tax rate through claiming a foreign tax credit against its U.S. federal income taxes or potentially have foreign or U.S. taxes reduced under
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applicable income tax treaties, we are subject to various limitations on claiming foreign tax credits or we may lack treaty protections in certain jurisdictions that will potentially limit any reduction of the increased effective tax rate. A higher effective tax rate may also result to the extent that losses are incurred in non-U.S. subsidiaries that do not reduce our U.S. taxable income.
We are subject to changing tax laws, treaties and regulations in and between countries in which we operate, including treaties between the United States and other nations. A change in these tax laws, treaties or regulations, including those in and involving the United States, or in the interpretation thereof, could result in a materially higher income or non-income tax expense. Also, various income tax proposals in the countries in which we operate, such as those relating to fundamental U.S. international tax reform and measures in response to the economic uncertainty in certain European jurisdictions in which we operate, could result in changes to the existing tax laws under which our taxes are calculated. We are unable to predict whether any of these or other proposals in the United States or foreign jurisdictions will ultimately be enacted. Any such material changes could negatively impact our business.
Our substantial debt and high leverage could adversely affect our business.
We have a significant amount of debt. As of December 31, 2013, we have $2,180 million principal amount of total debt (excluding capital leases), $880 million of which is senior secured debt under our Credit Facility and $1,300 million of which is senior unsecured debt. On January 31, 2014, we incurred additional senior secured indebtedness of $600 million under our Term Loan A Facility in connection with the acquisition of Chellomedia.
Our ability to make payments on, or repay or refinance, our debt, and to fund planned distributions and capital expenditures, will depend largely upon our future operating performance. Our future performance, to a certain extent, is subject to general economic, financial, competitive, regulatory and other factors that are beyond our control. In addition, our ability to borrow funds in the future to make payments on our debt will depend on the satisfaction of the covenants in the Credit Facility and our other debt agreements, including the 7.75% Notes Indenture, the 4.75% Notes Indenture and other agreements we may enter into in the future.
Our substantial amount of debt could have important consequences. For example, it could:
• increase our vulnerability to general adverse economic and industry conditions;
• require us to dedicate a substantial portion of our cash flow from operations to make interest and principal payments on our debt, thereby limiting the availability of our cash flow to fund future programming investments, capital expenditures, working capital, business activities and other general corporate requirements;
• limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
• place us at a competitive disadvantage compared with our competitors; and
• limit our ability to borrow additional funds, even when necessary to maintain adequate liquidity.
In the long-term, we do not expect to generate sufficient cash from operations to repay at maturity our outstanding debt obligations. As a result, we will be dependent upon our ability to access the capital and credit markets. Failure to raise significant amounts of funding to repay these obligations at maturity could adversely affect our business. If we are unable to raise such amounts, we would need to take other actions including selling assets, seeking strategic investments from third parties or reducing other discretionary uses of cash. The Credit Facility, the 7.75% Notes Indenture and the 4.75% Notes Indenture will restrict, and market or business conditions may limit, our ability to do some of these things.
A significant portion of our debt bears interest at variable rates. While we have entered into hedging agreements limiting our exposure to higher interest rates, such agreements do not offer complete protection from this risk.
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The agreements governing our debt, the Credit Facility, the 7.75% Notes Indenture and the 4.75% Notes Indenture, contain various covenants that impose restrictions on us that may affect our ability to operate our business.
The agreements governing the Credit Facility, the 7.75% Notes Indenture and the 4.75% Notes Indenture contain covenants that, among other things, limit our ability to:
• | borrow money or guarantee debt; |
• | create liens; |
• | pay dividends on or redeem or repurchase stock; |
• | make specified types of investments; |
• | enter into transactions with affiliates; and |
• | sell assets or merge with other companies. |
The Credit Facility requires us to comply with a Cash Flow Ratio and an Interest Coverage Ratio, each as defined in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Debt Financing Agreements.”
Compliance with these covenants may limit our ability to take actions that might be to the advantage of the Company and our stockholders.
Various risks, uncertainties and events beyond our control could affect our ability to comply with these covenants and maintain these financial ratios. Failure to comply with any of the covenants in our existing or future financing agreements could result in a default under those agreements and under other agreements containing cross-default provisions. A default would permit lenders to accelerate the maturity for the debt under these agreements and to foreclose upon any collateral securing the debt. Under these circumstances, we might not have sufficient funds or other resources to satisfy all of our obligations. In addition, the limitations imposed by financing agreements on our ability to incur additional debt and to take other actions might significantly impair our ability to obtain other financing.
Despite our current levels of debt, we may still be able to incur substantially more debt. This could further exacerbate the risks associated with our substantial debt.
We may be able to incur additional debt in the future. The terms of the Credit Facility, the 7.75% Notes Indenture and the 4.75% Notes Indenture allow us to incur substantial amounts of additional debt, subject to certain limitations. In addition, we may refinance all or a portion of our debt, including borrowings under the Credit Facility, and obtain the ability to incur more debt as a result. If new debt is added to our current debt levels, the related risks we could face would be magnified.
A lowering or withdrawal of the ratings assigned to our debt securities by rating agencies may further increase our future borrowing costs and reduce our access to capital.
The debt ratings for our notes are below the “investment grade” category, which results in higher borrowing costs as well as a reduced pool of potential purchasers of our debt as some investors will not purchase debt securities that are not rated in an investment grade rating category. In addition, there can be no assurance that any rating assigned will remain for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency, if in that rating agency's judgment, future circumstances relating to the basis of the rating, such as adverse changes, so warrant. A lowering or withdrawal of a rating may further increase our future borrowing costs and reduce our access to capital.
A significant amount of our book value consists of intangible assets that may not generate cash in the event of a voluntary or involuntary sale.
At December 31, 2013, our consolidated financial statements included approximately $2.6 billion of consolidated total assets, of which approximately $286 million were classified as intangible assets. Intangible assets primarily include affiliation agreements and affiliate relationships, advertiser relationships, trademarks and goodwill. While we believe that the carrying values of our intangible assets are recoverable, you should not assume that we would receive any cash from the voluntary or involuntary sale of these intangible assets, particularly if we were not continuing as an operating business.
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We may have a significant indemnity obligation to Cablevision if the Distribution is treated as a taxable transaction.
Prior to the distribution of all of the outstanding common stock of the Company to Cablevision stockholders in the Distribution, Cablevision received a private letter ruling from the Internal Revenue Service (“IRS”) to the effect that, among other things, the Distribution, and certain related transactions would qualify for tax-free treatment under the Internal Revenue Code (the “Code”) to Cablevision, AMC Networks, and holders of Cablevision common stock. Although a private letter ruling from the IRS generally is binding on the IRS, if the factual representations or assumptions made in the letter ruling request were untrue or incomplete in any material respect, Cablevision would not be able to rely on the ruling. Furthermore, the IRS will not rule on whether a distribution satisfies certain requirements necessary to obtain tax-free treatment under the Code. Rather, the ruling was based upon representations by Cablevision that these conditions were satisfied, and any inaccuracy in such representations could invalidate the ruling.
If the Distribution does not qualify for tax-free treatment for United States federal income tax purposes, then, in general, Cablevision would be subject to tax as if it had sold the common stock of our Company in a taxable sale for its fair market value. Cablevision's stockholders would be subject to tax as if they had received a distribution equal to the fair market value of our common stock that was distributed to them, which generally would be treated first as a taxable dividend to the extent of Cablevision's earnings and profits, then as a non-taxable return of capital to the extent of each stockholder's tax basis in his or her Cablevision stock, and thereafter as capital gain with respect to the remaining value. It is expected that the amount of any such taxes to Cablevision's stockholders and Cablevision would be substantial.
As part of the Distribution, we entered into a tax disaffiliation agreement with Cablevision, which sets out each party's rights and obligations with respect to deficiencies and refunds, if any, of federal, state, local or foreign taxes for periods before and after the Distribution and related matters such as the filing of tax returns and the conduct of IRS and other audits. Pursuant to the tax disaffiliation agreement, we are required to indemnify Cablevision for losses and taxes of Cablevision relating to the Distribution or any related debt exchanges resulting from the breach of certain covenants, including as a result of certain acquisitions of our stock or assets or as a result of modification or repayment of certain related debt in a manner inconsistent with the private letter ruling or letter ruling request. If we are required to indemnify Cablevision under the circumstances set forth in the tax disaffiliation agreement, we may be subject to substantial liabilities, which could have a material negative effect on our business, results of operations, financial position and cash flows.
The tax disaffiliation agreement with Cablevision limits our ability to pre-pay certain of our indebtedness.
The tax disaffiliation agreement with Cablevision limits our ability to pre-pay, pay down, redeem, retire, or otherwise acquire the 7.75% Notes or the 4.75% Notes. These restrictions may for a time limit our ability to optimize our capital structure or to pursue other transactions that could increase the value of our business.
We are controlled by the Dolan family, which may create certain conflicts of interest and which means certain stockholder decisions can be taken without the consent of the majority of the holders of our Class A Common Stock.
We have two classes of common stock:
• | Class B Common Stock, which is generally entitled to ten votes per share and is entitled collectively to elect 75% of our Board of Directors, and |
• | Class A Common Stock, which is entitled to one vote per share and is entitled collectively to elect the remaining 25% of our Board of Directors. |
As of December 31, 2013, Charles F. Dolan, our Executive Chairman, and the Dolan family, including trusts for the benefit of members of the Dolan family, collectively own all of our Class B Common Stock, less than 2% of our outstanding Class A Common Stock and approximately 66% of the total voting power of all our outstanding common stock. The members of the Dolan family holding Class B Common Stock have entered into a stockholders agreement pursuant to which, among other things, the voting power of the holders of our Class B Common Stock will be cast as a block with respect to all matters to be voted on by holders of Class B Common Stock. The Dolan family is able to prevent a change in control of our Company and no person interested in acquiring us will be able to do so without obtaining the consent of the Dolan family.
Charles F. Dolan, members of his family and certain related family entities, by virtue of their stock ownership, have the power to elect all of our directors subject to election by holders of Class B Common Stock and are able collectively to control stockholder decisions on matters on which holders of all classes of our common stock vote together as a single class. These matters could include the amendment of some provisions of our certificate of incorporation and the approval of fundamental corporate transactions.
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In addition, the affirmative vote or consent of the holders of at least 66 2/3% of the outstanding shares of the Class B Common Stock, voting separately as a class, is required to approve:
• | the authorization or issuance of any additional shares of Class B Common Stock, and |
• | any amendment, alteration or repeal of any of the provisions of our certificate of incorporation that adversely affects the powers, preferences or rights of the Class B Common Stock. |
As a result, Charles F. Dolan, members of his family and certain related family entities also collectively have the power to prevent such issuance or amendment.
We have adopted a written policy whereby an independent committee of our Board of Directors will review and approve or take such other action as it may deem appropriate with respect to certain transactions involving the Company and its subsidiaries, on the one hand, and certain related parties, including Charles F. Dolan and certain of his family members and related entities on the other hand. This policy does not address all possible conflicts which may arise, and there can be no assurance that this policy will be effective in dealing with conflict scenarios.
We are a “controlled company” for NASDAQ purposes, which allows us not to comply with certain of the corporate governance rules of NASDAQ.
Charles F. Dolan, members of his family and certain related family entities have entered into a stockholders agreement relating, among other things, to the voting of their shares of our Class B Common Stock. As a result, we are a “controlled company” under the corporate governance rules of NASDAQ. As a controlled company, we have the right to elect not to comply with the corporate governance rules of NASDAQ requiring: (i) a majority of independent directors on our Board of Directors, (ii) an independent compensation committee and (iii) an independent corporate governance and nominating committee. Our Board of Directors has elected for the Company to be treated as a “controlled company” under NASDAQ corporate governance rules and not to comply with the NASDAQ requirement for a majority independent board of directors and an independent corporate governance and nominating committee because of our status as a controlled company. For purposes of this agreement, the term “independent directors” means the directors of the Company who have been determined by our Board of Directors to be independent directors for purposes of NASDAQ corporate governance standards.
Future stock sales, including as a result of the exercising of registration rights by certain of our shareholders, could adversely affect the trading price of our Class A Common Stock.
Certain parties have registration rights covering a portion of our shares. We have entered into registration rights agreements with Charles F. Dolan, members of his family, certain Dolan family interests and the Dolan Family Foundations that provide them with “demand” and “piggyback” registration rights with respect to approximately 13.4 million shares of Class A Common Stock, including shares issuable upon conversion of shares of Class B Common Stock. Sales of a substantial number of shares of Class A Common Stock could adversely affect the market price of the Class A Common Stock and could impair our future ability to raise capital through an offering of our equity securities.
We share a senior executive and certain directors with Cablevision and The Madison Square Garden Company, which may give rise to conflicts.
Our Executive Chairman, Charles F. Dolan, also serves as the Chairman of Cablevision. As a result, a senior executive officer of the Company will not be devoting his full time and attention to the Company’s affairs. In addition, eight members of our Board of Directors are also directors of Cablevision and seven members of our Board are also directors of The Madison Square Garden Company (“MSG”), an affiliate of Cablevision and the Company. These directors may have actual or apparent conflicts of interest with respect to matters involving or affecting each company. For example, the potential for a conflict of interest exists when we on one hand, and Cablevision or MSG on the other hand, consider acquisitions and other corporate opportunities that may be suitable for us and either or both of them. Also, conflicts may arise if there are issues or disputes under the commercial arrangements that exist between Cablevision or MSG and us. In addition, certain of our directors and officers, including Charles F. Dolan, own Cablevision or MSG stock, restricted stock units and options to purchase, and stock appreciation rights in respect of, Cablevision or MSG stock, as well as cash performance awards with any payout based on Cablevision’s or MSG’s performance. These ownership interests could create actual, apparent or potential conflicts of interest when these individuals are faced with decisions that could have different implications for our Company, Cablevision or MSG. See “Certain Relationships and Related Party Transactions—Certain Relationships and Potential Conflicts of Interest” in our proxy statement filed with the SEC on April 25, 2013 for a description of our related party transaction approval policy that we have adopted to help address such potential conflicts that may arise.
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Our overlapping directors and executive officer with Cablevision and MSG may result in the diversion of corporate opportunities to and other conflicts with Cablevision or MSG and provisions in our amended and restated certificate of incorporation may provide us no remedy in that circumstance.
The Company’s amended and restated certificate of incorporation acknowledges that directors and officers of the Company may also be serving as directors, officers, employees, consultants or agents of Cablevision and its subsidiaries or MSG and its subsidiaries and that the Company may engage in material business transactions with such entities. The Company has renounced its rights to certain business opportunities and the Company’s amended and restated certificate of incorporation provides that no director or officer of the Company who is also serving as a director, officer, employee, consultant or agent of Cablevision and its subsidiaries or MSG and its subsidiaries will be liable to the Company or its stockholders for breach of any fiduciary duty that would otherwise exist by reason of the fact that any such individual directs a corporate opportunity (other than certain limited types of opportunities set forth in our certificate of incorporation) to Cablevision or any of its subsidiaries or MSG or any of its subsidiaries instead of the Company, or does not refer or communicate information regarding such corporate opportunities to the Company. These provisions in our amended and restated certificate of incorporation also expressly validates certain contracts, agreements, assignments and transactions (and amendments, modifications or terminations thereof) between the Company and Cablevision or any of its subsidiaries or MSG or any of its subsidiaries and, to the fullest extent permitted by law, provide that the actions of the overlapping directors or officers in connection therewith are not breaches of fiduciary duties owed to the Company, any of its subsidiaries or their respective stockholders.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
We lease approximately 379,000 square feet of space in the U.S., including approximately 260,000 square feet of office space that we lease at 11 Penn Plaza, New York, NY 10001, under lease arrangements with remaining terms of up to seven years. We use this space as our corporate headquarters and as the principal business location of our Company. We also lease approximately 60,000 square-feet of space for our broadcasting and technology center in Bethpage, New York under a lease arrangement with a remaining term of six years, from which AMC Networks Broadcasting & Technology conducts its operations. In addition, we lease other properties in New York, California and Florida.
We lease approximately 182,000 square feet of space outside of the U.S., including in the Netherlands, Hungary, Argentina, the United Kingdom and Spain that support our international operations.
We believe our properties are adequate for our use.
Item 3. Legal Proceedings.
On April 15, 2011, Thomas C. Dolan, a director of the Company and Executive Vice President, Strategy and Development, in the Office of the Chairman and a director of Cablevision, filed a lawsuit against Cablevision and RMH in New York Supreme Court. The lawsuit raises compensation-related claims (seeking approximately $11 million) related to events in 2005. The matter is being handled under the direction of an independent committee of the board of directors of Cablevision. In connection with the Distribution Agreement, Cablevision indemnified the Company and RMH against any liabilities and expenses related to this lawsuit. Based on the indemnification and Cablevision’s and the Company’s assessment of this possible loss contingency, no provision has been made for this matter in the consolidated financial statements.
In addition to the matters discussed above, the Company is party to various lawsuits and claims in the ordinary course of business. Although the outcome of these other matters cannot be predicted with certainty and the impact of the final resolution of these other matters on the Company’s results of operations in a particular subsequent reporting period is not known, management does not believe that the resolution of these matters will have a material adverse effect on the financial position of the Company or the ability of the Company to meet its financial obligations as they become due.
Item 4. Mine Safety Disclosures.
Not applicable.
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Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our Class A Common Stock is listed on The NASDAQ Stock Market LLC (“NASDAQ”) under the symbol “AMCX.” Our Class B Common Stock is not listed on any exchange. Our Class A Common Stock began trading on NASDAQ on July 1, 2011.
Performance Graph
The following graph compares the performance of the Company’s Class A Common Stock with the performance of the S&P Mid-Cap 400 Index and a peer group (the “Peer Group Index”) by measuring the changes in our Class A Common Stock prices from July 1, 2011, the first day our Class A Common Stock began regular-way trading on NASDAQ, through December 31, 2013. Because no published index of comparable media companies currently reports values on a dividends-reinvested basis, the Company has created a Peer Group Index for purposes of this graph in accordance with the requirements of the SEC. The Peer Group Index is made up of companies that engage in cable television programming as a significant element of their business, although not all of the companies included in the Peer Group Index participate in all of the lines of business in which the Company is engaged, and some of the companies included in the Peer Group Index also engage in lines of business in which the Company does not participate. Additionally, the market capitalizations of many of the companies included in the Peer Group are quite different from that of the Company. The common stocks of the following companies have been included in the Peer Group Index: Discovery Communications Inc., the Walt Disney Company, Scripps Networks Interactive Inc., Starz, Time Warner Inc., Twenty-First Century Fox Inc. and Viacom Inc. The chart assumes $100 was invested on July 1, 2011 in each of: i) Company’s Class A Common Stock, ii) the S&P Mid-Cap 400 Index, and iii) in this Peer Group weighted by market capitalization.
INDEXED RETURNS Period Ending | ||||||||||||
Company Name / Index | Base Period 7/01/11 | 12/31/11 | 6/30/12 | 12/31/12 | 6/30/13 | 12/31/13 | ||||||
AMC Networks Inc. | 100 | 94.30 | 89.21 | 124.22 | 163.94 | 170.92 | ||||||
S&P MidCap 400 Index | 100 | 89.03 | 96.06 | 104.94 | 120.25 | 140.10 | ||||||
Peer Group | 100 | 95.90 | 115.98 | 131.07 | 166.78 | 205.10 | ||||||
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or incorporated by reference into any of our filings under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
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As of February 18, 2014 there were 911 holders of record of our Class A Common Stock and 33 holders of record of our Class B Common Stock. We did not pay any cash dividend on our common stock during 2013 and do not expect to pay a cash dividend on our common stock for the foreseeable future. Our Amended and Restated Credit Facility, the 7.75% Notes Indenture and the 4.75% Notes Indenture restrict our ability to declare dividends in certain situations.
Price Range of AMC Networks' Class A Common Stock
The following table sets forth for the periods indicated the intra-day high and low sales prices per share of the AMCX Class A Common Stock as reported on the NASDAQ:
Year Ended December 31, 2013 | High | Low | ||||||
First Quarter | $ | 63.26 | $ | 49.97 | ||||
Second Quarter | $ | 70.65 | $ | 59.56 | ||||
Third Quarter | $ | 72.46 | $ | 61.05 | ||||
Fourth Quarter | $ | 73.39 | $ | 61.69 | ||||
Year Ended December 31, 2012 | High | Low | ||||||
First Quarter | $ | 46.69 | $ | 36.98 | ||||
Second Quarter | $ | 46.00 | $ | 34.78 | ||||
Third Quarter | $ | 45.09 | $ | 35.30 | ||||
Fourth Quarter | $ | 55.38 | $ | 40.75 | ||||
Issuer Purchases of Equity Securities
Set forth below is information concerning acquisitions of AMC Networks' Class A Common Stock by the Company during the three months ended December 31, 2013.
Period | (a) Total Number of Shares (or Units) Purchased | (b) Average Price Paid per Share (or Unit) | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | |||||||
October 1, 2013 to October 31, 2013 | — | $ | — | N/A | N/A | ||||||
November 1, 2013 to November 30, 2013 | 26 | $ | 65.95 | N/A | N/A | ||||||
December 1, 2013 to December 31, 2013 | 2,031 | $ | 65.54 | N/A | N/A | ||||||
Total | 2,057 | $ | 65.54 | N/A | |||||||
During the fourth quarter of 2013, certain restricted shares of AMC Networks' Class A common stock previously issued to employees of Cablevision vested. In connection with the employees’ satisfaction of the statutory minimum tax withholding obligations for the applicable income and other employment taxes, 2,057 shares, with an aggregate value of approximately $135 thousand, were surrendered to the Company. The 2,057 acquired shares have been classified as treasury stock.
The table above does not include any shares received in connection with forfeitures of awards pursuant to the Company’s employee stock plan.
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Item 6. Selected Financial Data.
The operating and balance sheet data included in the following selected financial data as of December 31, 2013 and 2012 and for each of the years in the three-year period ended December 31, 2013, have been derived from the audited consolidated financial statements of the Company included in this Annual Report. The balance sheet data included in the following selected financial data as of December 31, 2011, 2010 and 2009 and the operating data for the years ended December 31, 2010 and 2009 have been derived from the audited consolidated financial statements of the Company, not included in this Annual Report. The financial information presented below does not necessarily reflect what our results of operations and financial position would have been through 2011 if we had operated as a separate publicly-traded entity prior to July 1, 2011. The selected financial data below is also not necessarily indicative of results of future operations and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the accompanying consolidated financial statements and related notes.
Years Ended December 31, | |||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||
(Dollars in thousands, except per share amounts) | |||||||||||||||||||
Operating Data: | |||||||||||||||||||
Revenues, net | $ | 1,591,858 | $ | 1,352,577 | $ | 1,187,741 | $ | 1,078,300 | $ | 973,644 | |||||||||
Operating expenses: | |||||||||||||||||||
Technical and operating (excluding depreciation and amortization shown below) | 662,233 | 507,436 | 425,961 | 366,093 | 310,365 | ||||||||||||||
Selling, general and administrative | 425,735 | 396,926 | 335,656 | 328,134 | 313,904 | ||||||||||||||
Restructuring (credit) expense (a) | — | (3 | ) | (240 | ) | (2,218 | ) | 5,162 | |||||||||||
Depreciation and amortization | 54,667 | 85,380 | 99,848 | 106,455 | 106,504 | ||||||||||||||
Litigation settlement gain | (132,944 | ) | — | — | — | — | |||||||||||||
1,009,691 | 989,739 | 861,225 | 798,464 | 735,935 | |||||||||||||||
Operating income | 582,167 | 362,838 | 326,516 | 279,836 | 237,709 | ||||||||||||||
Other income (expense) | (113,166 | ) | (140,564 | ) | (115,906 | ) | (73,574 | ) | (78,755 | ) | |||||||||
Income from continuing operations before income taxes | 469,001 | 222,274 | 210,610 | 206,262 | 158,954 | ||||||||||||||
Income tax expense | (178,841 | ) | (86,058 | ) | (84,248 | ) | (88,073 | ) | (70,407 | ) | |||||||||
Income from continuing operations | 290,160 | 136,216 | 126,362 | 118,189 | 88,547 | ||||||||||||||
Income (loss) from discontinued operations, net of income taxes | — | 314 | 92 | (38,090 | ) | (34,791 | ) | ||||||||||||
Net income including noncontrolling interests | 290,160 | 136,530 | 126,454 | 80,099 | 53,756 | ||||||||||||||
Net loss attributable to noncontrolling interests | 578 | — | — | — | — | ||||||||||||||
Net income attributable to AMC Networks' stockholders | $ | 290,738 | $ | 136,530 | $ | 126,454 | $ | 80,099 | $ | 53,756 | |||||||||
Income from continuing operations per share: | |||||||||||||||||||
Basic (b) | $ | 4.06 | $ | 1.94 | $ | 1.82 | $ | 1.71 | $ | 1.28 | |||||||||
Diluted (b) | $ | 4.00 | $ | 1.89 | $ | 1.79 | $ | 1.71 | $ | 1.28 | |||||||||
Balance Sheet Data, at period end: | |||||||||||||||||||
Cash and cash equivalents | $ | 521,951 | $ | 610,970 | $ | 215,836 | $ | 79,960 | $ | 29,828 | |||||||||
Total assets | 2,636,689 | 2,596,219 | 2,183,934 | 1,853,896 | 1,934,362 | ||||||||||||||
Total debt (including capital leases) (c) | 2,171,288 | 2,168,977 | 2,306,957 | 1,118,875 | 1,417,711 | ||||||||||||||
Stockholders’ (deficiency) equity (c) | (571,519 | ) | (882,352 | ) | (1,036,995 | ) | 24,831 | (236,992 | ) | ||||||||||
(a) | In December 2008, we decided to discontinue funding the domestic programming business of VOOM HD. In connection with this decision, we recorded restructuring expense (credit) in each of the years 2009 to 2012. |
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(b) | Common shares assumed to be outstanding during the years ended December 31, 2010 and 2009 totaled 69,161,000, representing the number of shares of AMC Networks common stock issued to Cablevision shareholders on the Distribution date, and excludes unvested outstanding restricted shares, based on a distribution ratio of one share of AMC Networks common stock for every four shares of Cablevision common stock outstanding. |
(c) | In 2011, as part of the Distribution, we incurred $2,425,000 of debt (the “Distribution Debt”), consisting of $1,725,000 aggregate principal amount of senior secured term loans and $700,000 aggregate principal amount of 7.75% senior unsecured notes. Approximately $1,063,000 of the proceeds of the Distribution Debt was used to repay all pre-Distribution outstanding Company debt (excluding capital leases), including principal and accrued and unpaid interest to the date of repayment, and, as partial consideration for Cablevision’s contribution of the membership interests in RMH to the Company, $1,250,000, net of discount, of Distribution Debt was issued to CSC Holdings, a wholly-owned subsidiary of Cablevision, which is reflected as a deemed capital distribution in the consolidated statement of stockholders’ deficiency for the year ended December 31, 2011. See Note 1 to the accompanying consolidated financial statements. |
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains statements that constitute forward-looking information within the meaning of the Private Securities Litigation Reform Act of 1995. In this Management’s Discussion and Analysis of Financial Condition and Results of Operations there are statements concerning our future operating results and future financial performance. Words such as “expects,” “anticipates,” “believes,” “estimates,” “may,” “will,” “should,” “could,” “potential,” “continue,” “intends,” “plans” and similar words and terms used in the discussion of future operating results and future financial performance identify forward-looking statements. You are cautioned that any such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties and that actual results or developments may differ materially from the forward-looking statements as a result of various factors. Factors that may cause such differences to occur include, but are not limited to:
• the level of our revenues;
• market demand for our programming networks and our programming;
• demand for advertising inventory;
• | the demand for our programming among cable and other multichannel video programming distributors and our ability to maintain and renew affiliation agreements with multichannel video programming distributors; |
• | the cost of, and our ability to obtain or produce, desirable programming content for our networks and independent film distribution businesses; |
• | market demand for our services internationally and for our independent film distribution business, and our ability to profitably provide those services; |
• the security of our program rights and other electronic data;
• the loss of any of our key personnel and artistic talent;
• the highly competitive nature of the cable programming industry;
• changes in both domestic and foreign laws or regulations under which we operate;
• general economic conditions in the areas in which we operate;
• our substantial debt and high leverage;
• reduced access to capital markets or significant increases in costs to borrow;
• the level of our expenses;
• the level of our capital expenditures;
• future acquisitions and dispositions of assets;
•integration of Chellomedia;
• the outcome of litigation and other proceedings;
• | whether pending uncompleted transactions are completed on the terms and at the times set forth (if at all); |
• other risks and uncertainties inherent in our programming businesses;
• | financial community and rating agency perceptions of our business, operations, financial condition and the industry in which we operate, and the additional factors described herein; and |
•the factors described under Item 1A, “Risk Factors” in this Annual Report.
We disclaim any obligation to update or revise the forward-looking statements contained herein, except as otherwise required by applicable federal securities laws.
All dollar amounts and subscriber data included in the following Management’s Discussion and Analysis of Financial Condition and Results of Operations are presented in thousands.
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Introduction
Management’s discussion and analysis, or MD&A, of our results of operations and financial condition is provided as a supplement to, and should be read in conjunction with, the accompanying consolidated financial statements and notes thereto included elsewhere herein to enhance the understanding of our financial condition, changes in financial condition and results of our operations. Our MD&A is organized as follows:
Business Overview. This section provides a general description of our business and our operating segments, as well as other matters that we believe are important in understanding our results of operations and financial condition and in anticipating future trends.
Consolidated Results of Operations. This section provides an analysis of our results of operations for the years ended December 31, 2013, 2012 and 2011. Our discussion is presented on both a consolidated and segment basis. Our two segments are: (i) National Networks and (ii) International and Other.
Liquidity and Capital Resources. This section provides a discussion of our financial condition as of December 31, 2013 as well as an analysis of our cash flows for the years ended December 31, 2013, 2012 and 2011. The discussion of our financial condition and liquidity includes summaries of (i) our primary sources of liquidity and (ii) our contractual obligations and off balance sheet arrangements that existed at December 31, 2013.
Critical Accounting Policies and Estimates. This section provides a discussion of our accounting policies considered to be important to an understanding of our financial condition and results of operations, and which require significant judgment and estimates on the part of management in their application.
Business Overview
We manage our business through the following two operating segments:
• | National Networks: Principally includes our four nationally distributed programming networks: AMC, WE tv, IFC and SundanceTV. These programming networks are distributed throughout the United States via multichannel video programming distributors; |
• | International and Other: Principally includes AMC/Sundance Channel Global, our international programming business; IFC Films, our independent film distribution business; AMC Networks Broadcasting & Technology, our network technical services business, which primarily services the programming networks of the Company; and various developing online content distribution initiatives. AMC and Sundance Channel are distributed in Canada, Sundance Channel is also distributed in Europe, Asia and Latin America and WE tv is distributed in Asia. The International and Other operating segment also includes VOOM HD. |
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The tables presented below set forth our consolidated revenues, net, operating income (loss) and adjusted operating cash flow (“AOCF”), defined below, for the periods indicated.
Years Ended December 31, | |||||||||||
2013 | 2012 | 2011 | |||||||||
Revenues, net | |||||||||||
National Networks | $ | 1,485,016 | $ | 1,254,186 | $ | 1,082,358 | |||||
International and Other | 122,429 | 114,541 | 125,573 | ||||||||
Inter-segment eliminations | (15,587 | ) | (16,150 | ) | (20,190 | ) | |||||
Consolidated revenues, net | $ | 1,591,858 | $ | 1,352,577 | $ | 1,187,741 | |||||
Operating income (loss) | |||||||||||
National Networks | $ | 501,825 | $ | 408,117 | $ | 349,272 | |||||
International and Other (a) | 76,598 | (48,607 | ) | (21,890 | ) | ||||||
Inter-segment eliminations | 3,744 | 3,328 | (866 | ) | |||||||
Consolidated operating income | $ | 582,167 | $ | 362,838 | $ | 326,516 | |||||
AOCF (deficit) | |||||||||||
National Networks | $ | 555,911 | $ | 492,129 | $ | 447,555 | |||||
International and Other | (35,466 | ) | (30,040 | ) | (4,976 | ) | |||||
Inter-segment eliminations | 3,744 | 3,328 | (866 | ) | |||||||
Consolidated AOCF | $ | 524,189 | $ | 465,417 | $ | 441,713 | |||||
(a) Amounts for the year ended December 31, 2013 include the litigation settlement gain recorded in connection with the settlement with DISH Network. See DISH Network discussion below.
We evaluate segment performance based on several factors, of which the primary financial measure is operating segment AOCF. We define AOCF, which is a financial measure that is not calculated in accordance with generally accepted accounting principles (“GAAP”), as operating income (loss) before depreciation and amortization, share-based compensation expense or benefit, restructuring expense or credit and the litigation settlement gain recorded in connection with the settlement with DISH Network. We do not consider the one-time litigation settlement gain with DISH Network to be indicative of our ongoing operating performance.
We believe that AOCF is an appropriate measure for evaluating the operating performance on both an operating segment and consolidated basis. AOCF and similar measures with similar titles are common performance measures used by investors, analysts and peers to compare performance in the industry.
Internally, we use revenues, net and AOCF measures as the most important indicators of our business performance, and evaluate management’s effectiveness with specific reference to these indicators. AOCF should be viewed as a supplement to and not a substitute for operating income (loss), net income (loss), cash flows from operating activities and other measures of performance and/or liquidity presented in accordance with GAAP. Since AOCF is not a measure of performance calculated in accordance with GAAP, this measure may not be comparable to similar measures with similar titles used by other companies.
The following is a reconciliation of consolidated operating income to AOCF for the periods indicated:
Years Ended December 31, | |||||||||||
2013 | 2012 | 2011 | |||||||||
Operating income | $ | 582,167 | $ | 362,838 | $ | 326,516 | |||||
Share-based compensation expense | 20,299 | 17,202 | 15,589 | ||||||||
Depreciation and amortization | 54,667 | 85,380 | 99,848 | ||||||||
Litigation settlement gain | (132,944 | ) | — | — | |||||||
Restructuring credit | — | (3 | ) | (240 | ) | ||||||
AOCF | $ | 524,189 | $ | 465,417 | $ | 441,713 | |||||
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National Networks
In our National Networks segment, which accounted for 93% of our consolidated revenues, net for the year ended December 31, 2013, we earn revenue principally from the distribution of our programming and the sale of advertising. Distribution revenue primarily includes affiliation fees paid by distributors to carry our programming networks and the licensing of original programming for digital, foreign and home video distribution. Affiliation fees paid by distributors represents the largest component of distribution revenue. Our affiliation fee revenues are generally based on a per subscriber fee under multi-year contracts, commonly referred to as “affiliation agreements,” which generally provide for annual affiliation rate increases. The specific affiliation fee revenues we earn vary from period to period, distributor to distributor and also vary among our networks, but are generally based upon the number of each distributor’s subscribers. The terms of certain other affiliation agreements provide that the affiliation fee revenues we earn are a fixed contractual monthly fee, which could be adjusted for acquisitions and dispositions of multichannel video programming systems by the distributor. Revenue from the licensing of original programming for digital and foreign distribution is recognized upon availability or distribution by the licensee.
Under affiliation agreements with our distributors, we have the right to sell a specified amount of national advertising time on our programming networks. Our advertising revenues are more variable than affiliation fee revenues because the majority of our advertising is sold on a short-term basis, not under long-term contracts. Our advertising arrangements with advertisers provide for a set number of advertising units to air over a specific period of time at a negotiated price per unit. Additionally, in these advertising sales arrangements, our programming networks generally guarantee specified viewer ratings for their programming. If these guaranteed viewer ratings are not met, we are generally required to provide additional advertising units to the advertiser at no charge. For these types of arrangements, a portion of the related revenue is deferred if the guaranteed viewer ratings are not met and is subsequently recognized either when we provide the required additional advertising time, the guarantee obligation contractually expires or performance requirements become remote. Most of our advertising revenues vary based upon the popularity of our programming as measured by Nielsen. In 2013, our national programming networks had approximately 1,200 advertisers representing companies in a broad range of sectors, including the health, insurance, food, automotive and retail industries. All of our National Networks, including SundanceTV beginning in September 2013, use a traditional advertising sales model. Prior to September 2013, SundanceTV principally sold sponsorships.
Changes in revenue are primarily derived from changes in contractual affiliation rates charged for our services, changes in the number of subscribers, changes in the prices and level of advertising on our networks and changes in the availability, amount and timing of licensing fees earned from the distribution of our original programming. We seek to grow our revenues by increasing the number of viewing subscribers of the distributors that carry our services. We refer to this as our “penetration.” AMC, which is widely distributed, has a more limited ability to increase its penetration than WE tv, IFC and SundanceTV. To the extent not already carried on more widely penetrated service tiers, WE tv, IFC and SundanceTV, although carried by all of the larger distributors, have higher growth opportunities due to their current penetration levels with those distributors. WE tv and IFC are currently carried on either expanded basic or digital tiers, while SundanceTV is currently carried primarily on digital tiers. Our revenues may also increase over time through contractual rate increases stipulated in most of our affiliation agreements. In negotiating for increased or extended carriage, we have agreed in some instances to make upfront payments in exchange for additional subscribers or extended carriage, which we record as deferred carriage fees and which are amortized as a reduction to revenue over the period of the related affiliation agreements, or agreed to waive for a specified period or accept lower per subscriber fees if certain additional subscribers are provided. We also may help fund the distributors’ efforts to market our channels. We believe that these transactions generate a positive return on investment over the contract period. We seek to increase our advertising revenues by increasing the rates we charge for such advertising, which is directly related to the overall distribution of our programming, penetration of our services and the popularity (including within desirable demographic groups) of our services as measured by Nielsen. Distribution revenues in each quarter also vary based on the timing of availability of our programming to distributors. We also seek to increase our revenues by expanding the opportunities for distribution of our programming through digital, foreign and home video services.
Our principal goal is to increase our revenues by increasing distribution and penetration of our services, and increasing our ratings. To do this, we must continue to contract for and produce high-quality, attractive programming. As competition for programming increases and alternative distribution technologies continue to emerge and develop in the industry, costs for content acquisition and original programming may increase. There is a concentration of subscribers in the hands of a few distributors, which could create disparate bargaining power between the largest distributors and us by giving those distributors greater leverage in negotiating the price and other terms of affiliation agreements.
Programming expense, included in technical and operating expense, represents the largest expense of the National Networks segment and primarily consists of amortization and impairments or write-offs of programming rights, such as those for original programming, feature films and licensed series, as well as participation and residual costs. The other components of technical and operating expense primarily include distribution and production related costs and program operating costs, such as origination, transmission, uplinking and encryption.
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To an increasing extent, the success of our business depends on original programming, both scripted and unscripted, across all of our networks. In recent years, we have introduced a number of scripted original series, primarily on AMC and, in 2013, on SundanceTV. These series have resulted in higher audience ratings for our networks. Historically, in periods when we air original programming, our ratings have increased. Among other things, higher audience ratings drive increased revenues through higher advertising revenues. The timing of exhibition and distribution of original programming varies from period to period, which results in greater variability in our revenues, earnings and cash flows from operating activities. We will continue to increase our investment in programming across all of our channels. During 2013, AMC aired six scripted original series. There may be significant changes in the level of our technical and operating expenses due to the amortization of content acquisition and/or original programming costs and/or the impact of management’s periodic assessment of programming usefulness. Such costs will also fluctuate with the level of revenues derived from owned original programming in each period as these costs are amortized based on the film-forecast-computation method.
Most original series require us to make up-front investments, which are often significant amounts. Not all of our programming efforts are commercially successful, which could result in a write-off of program rights. If it is determined that programming rights have no future programming usefulness based on actual demand or market conditions, a write-off of the unamortized cost is recorded in technical and operating expense. Program rights write-offs of $61,005, $9,990 and $18,332 were recorded for the years ended December 31, 2013, 2012 and 2011, respectively. Program rights write-offs in 2013 primarily related to two scripted original series: The Killing and Low Winter Sun, each of which was canceled in 2013.
See “— Critical Accounting Policies and Estimates” for a discussion of the amortization and write-off of program rights.
International and Other
Our International and Other segment primarily includes the operations of AMC/Sundance Channel Global, IFC Films, and AMC Networks Broadcasting & Technology. This operating segment also includes VOOM HD.
VOOM HD historically offered a suite of channels, produced exclusively in high definition and marketed for distribution to DBS and other multichannel video programming distributors. Through 2008, VOOM was available in the U.S. only on the cable television systems of Cablevision and on the satellite delivered programming of DISH Network. VOOM HD, which we are winding down, continues to sell certain limited amounts of programming through program license agreements.
We view our international expansion as an important long-term strategy. While our current international operations represent only a small percentage of our consolidated financial results, on January 31, 2014, as more fully described below, we purchased substantially all of Chellomedia, Liberty Global plc’s international content division.
We may experience an adverse impact to the International and Other segment's operating results and cash flows in periods of increased international investment. Similar to our domestic businesses, the most significant business challenges we expect to encounter in our international business include programming competition (from both foreign and domestic programmers), limited channel capacity on distributors’ platforms, the growth of subscribers on those platforms and economic pressures on affiliation fees. Other significant business challenges unique to international expansion include increased programming costs for international rights and translation (i.e. dubbing and subtitling), a lack of availability of international rights for a portion of our domestic programming content, increased distribution costs for cable, satellite or fiber feeds and a limited physical presence in each territory. See also the risk factors described under Item 1A, “Risk Factors - We face risks from doing business internationally.” in this Annual Report.
Acquisition of Chellomedia
On January 31, 2014, certain subsidiaries of AMC Networks purchased substantially all of Chellomedia, the international content division of Liberty Global plc, for a purchase price of €750 million (approximately $1.0 billion), subject to adjustments for working capital, cash, and indebtedness acquired and for the purchase of minority equity interests. AMC Networks funded the purchase price with cash on hand and additional indebtedness of $600 million (see "Amended and Restated Credit Facility" discussion below).
The acquisition provides AMC Networks with television channels that are distributed to more than 390 million subscribers in over 130 countries and span a wide range of programming genres, most notably movie and entertainment networks. The acquisition of Chellomedia's operating businesses include: Chello Central Europe, Chello Latin America, Chello Multicanal, Chello Zone, the ad sales unit Atmedia, and the broadcast solutions unit, Chello DMC. The acquisition provides us with the opportunity to accelerate and enhance our international expansion strategy.
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DISH Network
On October 21, 2012, DISH Network, VOOM HD and Cablevision entered into a confidential settlement agreement (the “Settlement Agreement”) to settle the litigation between VOOM HD and DISH Network. In connection with the Settlement Agreement, DISH Network entered into a long-term affiliation agreement with the Company that provided for the carriage of AMC, WE tv, IFC and SundanceTV. In addition, DISH Network paid $700,000 to an account for the benefit of Cablevision and the Company (“Settlement Funds”). During the fourth quarter of 2012, AMC Networks and Rainbow Programming Holdings LLC, a wholly-owned subsidiary of AMC Networks (collectively, the “AMC Parties”) and CSC Holdings, LLC (“CSC Holdings”), a wholly-owned subsidiary of Cablevision, agreed that, pending a final determination of the allocation of the proceeds, the Settlement Funds would be distributed equally to each of the Company and Cablevision.
On April 8, 2013, Cablevision and the Company entered into an agreement (the “DISH Network Proceeds Allocation Agreement”) in which a final allocation of the proceeds of the settlement, including the Settlement Funds, was made. The principal terms of the DISH Network Proceeds Allocation Agreement were as follows: Cablevision received $525,000 of the Settlement Funds and the Company received $175,000 of the Settlement Funds representing the allocation of cash and non-cash proceeds (including the portion of the DISH Network affiliation agreement attributable to the Settlement). The DISH Network Proceeds Allocation Agreement was in full and final settlement of the allocation between Cablevision and the Company of the proceeds of the Settlement.
In accordance with the Company's Related Party Transaction Approval Policy, the final allocation of the proceeds from the settlement was approved by an independent committee of the Company's Board of Directors, as well as an independent committee of Cablevision's board of directors.
The $350,000 of Settlement Funds previously disbursed to the Company is included in cash and cash equivalents in the consolidated balance sheet at December 31, 2012. Deferred litigation settlement proceeds at December 31, 2012 of approximately $308,000, is the result of the $350,000 of Settlement Funds, less $31,000 representing the excess of the fair value of the DISH Network affiliation agreement over the contractual affiliation fees recorded to deferred revenue on October 21, 2012 and less an $11,000 receivable related to VOOM HD's previous affiliation agreement with DISH Network.
On April 9, 2013, the Company paid to Cablevision $175,000 of the Settlement Funds. Additionally, in 2013, the Company recorded a litigation settlement gain of approximately $133,000, included in operating income within the International and Other segment, representing the deferred litigation settlement proceeds liability of approximately $308,000 recorded in the consolidated balance sheet at December 31, 2012 less the $175,000 paid to Cablevision on April 9, 2013.
Spin-off from Cablevision
On June 30, 2011, Cablevision spun-off the Company (the "Distribution") and we became an independent public company. Immediately prior to the Distribution, we were an indirect wholly-owned subsidiary of Cablevision. Both Cablevision and AMC Networks continue to be controlled by the Dolan Family.
As part of the Distribution, the Company incurred debt of $2,425,000 ("Distribution Debt"), consisting of $1,725,000 aggregate principal amount of senior secured term loans and $700,000 aggregate principal amount of senior unsecured notes (see Note 7 in the accompanying consolidated financial statements). Approximately $1,063,000 of the proceeds of the Distribution Debt was used to repay all pre-Distribution outstanding debt (excluding capital leases), including principal and accrued and unpaid interest to the date of repayment, and, as partial consideration for Cablevision’s contribution of the membership interests in RMH to us, $1,250,000, net of discount, of Distribution Debt was issued to CSC Holdings, a wholly-owned subsidiary of Cablevision, which is reflected as a deemed capital distribution in the consolidated statement of stockholders’ deficiency for the year ended December 31, 2011. CSC Holdings used such Distribution Debt to satisfy and discharge outstanding CSC Holdings debt, which ultimately resulted in such Distribution Debt being held by third party investors.
Corporate Expenses
Our historical results of operations reflected in our consolidated financial statements, for periods prior to the Distribution, include management fee charges and the allocation of expenses related to certain corporate functions historically provided by Cablevision. Our results of operations after the Distribution reflect certain revenues and expenses related to transactions with or charges from related parties as described in Note 15 in the accompanying consolidated financial statements. As a separate, stand-alone public company, we have expanded our financial, administrative and other staff to support the related new requirements. Pursuant to a consulting agreement with Cablevision, until the Distribution date the Company paid a management fee calculated based on certain of our subsidiaries' gross revenues (as defined under the terms of the consulting agreement) on a monthly basis. We terminated the consulting agreement on the Distribution date and did not replace it.
We allocate corporate overhead to each segment based upon their proportionate estimated usage of services. The segment financial information set forth below, including the discussion related to individual line items, does not reflect inter-segment eliminations unless specifically indicated.
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Impact of Economic Conditions
Our future performance is dependent, to a large extent, on general economic conditions including the impact of direct competition, our ability to manage our businesses effectively, and our relative strength and leverage in the marketplace, both with suppliers and customers.
Capital and credit market disruptions could cause economic downturns, which may lead to lower demand for our products, such as lower demand for television advertising and a decrease in the number of subscribers receiving our programming networks from our distributors. Events such as these may adversely impact our results of operations, cash flows and financial position.
Consolidated Results of Operations
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
The following table sets forth our consolidated results of operations for the periods indicated.
Years Ended December 31, | ||||||||||||||||||||
2013 | 2012 | |||||||||||||||||||
Amount | % of Revenues, net | Amount | % of Revenues, net | $ change | % change | |||||||||||||||
Revenues, net | $ | 1,591,858 | 100.0 | % | $ | 1,352,577 | 100.0 | % | $ | 239,281 | 17.7 | % | ||||||||
Operating expenses: | ||||||||||||||||||||
Technical and operating (excluding depreciation and amortization) | 662,233 | 41.6 | 507,436 | 37.5 | 154,797 | 30.5 | ||||||||||||||
Selling, general and administrative | 425,735 | 26.7 | 396,926 | 29.3 | 28,809 | 7.3 | ||||||||||||||
Restructuring credit | — | — | (3 | ) | — | 3 | (100.0 | ) | ||||||||||||
Depreciation and amortization | 54,667 | 3.4 | 85,380 | 6.3 | (30,713 | ) | (36.0 | ) | ||||||||||||
Litigation settlement gain | (132,944 | ) | (8.4 | ) | — | — | (132,944 | ) | n/m | |||||||||||
Total operating expenses | 1,009,691 | 63.4 | 989,739 | 73.2 | 19,952 | 2.0 | ||||||||||||||
Operating income | 582,167 | 36.6 | 362,838 | 26.8 | 219,329 | 60.4 | ||||||||||||||
Other income (expense): | ||||||||||||||||||||
Interest expense, net | (115,041 | ) | (7.2 | ) | (127,276 | ) | (9.4 | ) | 12,235 | (9.6 | ) | |||||||||
Write-off of deferred financing costs | (4,007 | ) | (0.3 | ) | (1,862 | ) | (0.1 | ) | (2,145 | ) | 115.2 | |||||||||
Loss on extinguishment of debt | (1,087 | ) | (0.1 | ) | (10,774 | ) | (0.8 | ) | 9,687 | (89.9 | ) | |||||||||
Miscellaneous, net | 6,969 | 0.4 | (652 | ) | — | 7,621 | n/m | |||||||||||||
Total other income (expense) | (113,166 | ) | (7.1 | ) | (140,564 | ) | (10.4 | ) | 27,398 | (19.5 | ) | |||||||||
Income from continuing operations before income taxes | 469,001 | 29.5 | 222,274 | 16.4 | 246,727 | 111.0 | ||||||||||||||
Income tax expense | (178,841 | ) | (11.2 | ) | (86,058 | ) | (6.4 | ) | (92,783 | ) | 107.8 | |||||||||
Income from continuing operations | 290,160 | 18.2 | 136,216 | 10.1 | 153,944 | 113.0 | ||||||||||||||
Income from discontinued operations, net of income taxes | — | — | 314 | — | (314 | ) | (100.0 | ) | ||||||||||||
Net income including noncontrolling interests | 290,160 | 18.2 | % | 136,530 | 10.1 | % | 153,630 | 112.5 | % | |||||||||||
Net loss attributable to noncontrolling interests | 578 | — | % | — | — | % | 578 | n/m | ||||||||||||
Net income attributable to AMC Networks’ stockholders | $ | 290,738 | 18.3 | % | $ | 136,530 | 10.1 | % | $ | 154,208 | 112.9 | % | ||||||||
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The following is a reconciliation of our consolidated operating income to AOCF:
Years Ended December 31, | ||||||||||||||
2013 | 2012 | $ change | % change | |||||||||||
Operating income | $ | 582,167 | $ | 362,838 | $ | 219,329 | 60.4 | % | ||||||
Share-based compensation expense | 20,299 | 17,202 | 3,097 | 18.0 | ||||||||||
Depreciation and amortization | 54,667 | 85,380 | (30,713 | ) | (36.0 | ) | ||||||||
Litigation settlement gain | (132,944 | ) | — | (132,944 | ) | n/m | ||||||||
Restructuring credit | — | (3 | ) | 3 | (100.0 | ) | ||||||||
Consolidated AOCF | $ | 524,189 | $ | 465,417 | $ | 58,772 | 12.6 | % | ||||||
National Networks Segment Results
The following table sets forth our National Networks segment results for the periods indicated.
Years Ended December 31, | ||||||||||||||||||||
2013 | 2012 | |||||||||||||||||||
Amount | % of Revenues, net | Amount | % of Revenues, net | $ change | % change | |||||||||||||||
Revenues, net | $ | 1,485,016 | 100.0 | % | $ | 1,254,186 | 100.0 | % | $ | 230,830 | 18.4 | % | ||||||||
Operating expenses: | ||||||||||||||||||||
Technical and operating (excluding depreciation and amortization) | 592,587 | 39.9 | 450,124 | 35.9 | 142,463 | 31.6 | ||||||||||||||
Selling, general and administrative | 352,731 | 23.8 | 325,509 | 26.0 | 27,222 | 8.4 | ||||||||||||||
Depreciation and amortization | 37,873 | 2.6 | 70,436 | 5.6 | (32,563 | ) | (46.2 | ) | ||||||||||||
Operating income | $ | 501,825 | 33.8 | % | $ | 408,117 | 32.5 | % | $ | 93,708 | 23.0 | % | ||||||||
Share-based compensation expense | 16,213 | 1.1 | 13,576 | 1.1 | 2,637 | 19.4 | ||||||||||||||
Depreciation and amortization | 37,873 | 2.6 | 70,436 | 5.6 | (32,563 | ) | (46.2 | ) | ||||||||||||
AOCF | $ | 555,911 | 37.4 | % | $ | 492,129 | 39.2 | % | $ | 63,782 | 13.0 | % | ||||||||
International and Other Segment Results
The following table sets forth our International and Other segment results for the periods indicated.
Years Ended December 31, | ||||||||||||||||||||
2013 | 2012 | |||||||||||||||||||
Amount | % of Revenues, net | Amount | % of Revenues, net | $ change | % change | |||||||||||||||
Revenues, net | $ | 122,429 | 100.0 | % | $ | 114,541 | 100.0 | % | $ | 7,888 | 6.9 | % | ||||||||
Operating expenses: | ||||||||||||||||||||
Technical and operating (excluding depreciation and amortization) | 88,665 | 72.4 | 76,468 | 66.8 | 12,197 | 16.0 | ||||||||||||||
Selling, general and administrative | 73,316 | 59.9 | 71,739 | 62.6 | 1,577 | 2.2 | ||||||||||||||
Restructuring credit | — | — | (3 | ) | — | 3 | (100.0 | ) | ||||||||||||
Depreciation and amortization | 16,794 | 13.7 | 14,944 | 13.0 | 1,850 | 12.4 | ||||||||||||||
Litigation settlement gain | (132,944 | ) | (108.6 | )% | — | — | % | (132,944 | ) | n/m | ||||||||||
Operating income (loss) | $ | 76,598 | 62.6 | % | $ | (48,607 | ) | (42.4 | )% | $ | 125,205 | (257.6 | )% | |||||||
Share-based compensation expense | 4,086 | 3.3 | 3,626 | 3.2 | 460 | 12.7 | ||||||||||||||
Depreciation and amortization | 16,794 | 13.7 | 14,944 | 13.0 | 1,850 | 12.4 | ||||||||||||||
Litigation settlement gain | (132,944 | ) | (108.6 | ) | — | — | (132,944 | ) | n/m | |||||||||||
Restructuring credit | — | — | (3 | ) | — | 3 | (100.0 | ) | ||||||||||||
AOCF deficit | $ | (35,466 | ) | (29.0 | )% | $ | (30,040 | ) | (26.2 | )% | $ | (5,426 | ) | 18.1 | % | |||||
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Revenues, net
Revenues, net increased $239,281 to $1,591,858 for the year ended December 31, 2013 as compared to the year ended December 31, 2012. The net change by segment was as follows:
Years Ended December 31, | ||||||||||||||||||||
2013 | % of total | 2012 | % of total | $ change | % change | |||||||||||||||
National Networks | $ | 1,485,016 | 93.3 | % | $ | 1,254,186 | 92.7 | % | $ | 230,830 | 18.4 | % | ||||||||
International and Other | 122,429 | 7.7 | 114,541 | 8.5 | 7,888 | 6.9 | ||||||||||||||
Inter-segment eliminations | (15,587 | ) | (1.0 | ) | (16,150 | ) | (1.2 | ) | 563 | (3.5 | ) | |||||||||
Consolidated revenues, net | $ | 1,591,858 | 100.0 | % | $ | 1,352,577 | 100.0 | % | $ | 239,281 | 17.7 | % | ||||||||
National Networks
The increase in National Networks revenues, net was attributable to the following:
Years Ended December 31, | ||||||||||||||||||||
2013 | % of total | 2012 | % of total | $ change | % change | |||||||||||||||
Advertising | $ | 662,789 | 44.6 | % | $ | 522,917 | 41.7 | % | $ | 139,872 | 26.7 | % | ||||||||
Distribution | 822,227 | 55.4 | 731,269 | 58.3 | 90,958 | 12.4 | ||||||||||||||
$ | 1,485,016 | 100.0 | % | $ | 1,254,186 | 100.0 | % | $ | 230,830 | 18.4 | % | |||||||||
• | Advertising revenues increased $139,872 across all of our networks, with the largest increase attributable to AMC. This increase resulted from higher pricing per unit sold due to an increased demand for our programming by advertisers, led by The Walking Dead, and an increased number of original programming series that aired on AMC as compared to the number of original programming series that aired on AMC during 2012. This increase was also impacted by a decrease in advertising revenues in the 2012 associated with the temporary DISH Network carriage termination of all our networks for approximately four months in 2012. As previously discussed, most of our advertising revenues vary based on the timing of our original programming series and the popularity of our programming as measured by Nielsen. Due to these factors, we expect advertising revenues to vary from quarter to quarter; and |
• | Distribution revenues increased $90,958 principally due to an increase of $55,645 in affiliation fee revenues resulting from an increase in rates, primarily at AMC. As previously discussed, affiliation fee revenues and subscribers were negatively impacted in 2012 due to the temporary DISH Network carriage termination of all our networks for approximately four months in 2012. Distribution revenues increased $35,312 principally from licensing and digital distribution revenues derived from our original programming, primarily at AMC and IFC. In addition, distribution revenues vary based on the timing of availability of our programming to distributors. Because of these factors, we expect distribution revenues to vary from quarter to quarter. |
The following table presents certain subscriber information at December 31, 2013 and December 31, 2012:
Estimated Domestic Subscribers (1) | |||||
December 31, 2013 | December 31, 2012 | ||||
National Programming Networks: | |||||
AMC | 97,400 | 98,900 | |||
WE tv | 84,000 | 81,500 | |||
IFC | 69,900 | 69,600 | |||
SundanceTV | 56,200 | 54,100 | |||
________________
(1) | Estimated U.S. subscribers as measured by Nielsen. |
38
The increase in subscribers reflects the repositioning of our networks' carriage with certain operators to more widely distributed tiers of service. Additionally, the number of reported subscribers may be impacted by changes in the Nielsen sample.
International and Other
The increase in International and Other revenues, net was attributable to the following:
Years Ended December 31, | ||||||||||||||||||||
2013 | % of total | 2012 | % of total | $ change | % change | |||||||||||||||
Advertising | $ | — | — | % | $ | 147 | 0.1 | % | $ | (147 | ) | (100.0 | )% | |||||||
Distribution | 122,429 | 100.0 | 114,394 | 99.9 | 8,035 | 7.0 | ||||||||||||||
$ | 122,429 | 100.0 | % | $ | 114,541 | 100.0 | % | $ | 7,888 | 6.9 | % | |||||||||
Distribution revenues increased primarily due to an increase in foreign affiliation fee revenues of $12,176 principally from our international distribution of AMC in Canada and, to a lesser extent, from our expanded distribution of Sundance Channel in Europe and an increase in origination fee revenue at AMC Networks Broadcasting and Technology of $1,217. These increases were partially offset by a decrease in revenue of $4,607 at IFC Films primarily due to a decrease in home video distribution revenues and lower performance of theatrical titles.
Technical and operating expense (excluding depreciation and amortization)
The components of technical and operating expense primarily include the amortization and impairments or write-offs of program rights, such as those for original programming, feature films and licensed series, participation and residual costs, distribution and production related costs and program operating costs, such as origination, transmission, uplinking and encryption.
Technical and operating expense (excluding depreciation and amortization) increased $154,797 to $662,233 for 2013 as compared to 2012. The net change by segment was as follows:
Years Ended December 31, | ||||||||||||||
2013 | 2012 | $ change | % change | |||||||||||
National Networks | $ | 592,587 | $ | 450,124 | $ | 142,463 | 31.6 | % | ||||||
International and Other | 88,665 | 76,468 | 12,197 | 16.0 | ||||||||||
Inter-segment eliminations | (19,019 | ) | (19,156 | ) | 137 | (0.7 | ) | |||||||
Total | $ | 662,233 | $ | 507,436 | $ | 154,797 | 30.5 | % | ||||||
Percentage of revenues, net | 41.6 | % | 37.5 | % | ||||||||||
National Networks
The increase in the National Networks segment was attributable to increased program rights expense of $131,117 and an increase of $11,345 for programming related costs. The increase in program rights expense is due to our increased investment in scripted original series primarily at AMC and SundanceTV and includes write-offs of $61,005 based on management's assessment of programming usefulness, primarily at AMC due to the cancellation of The Killing and Low Winter Sun, and to a lesser extent to programming at SundanceTV as we prepared our programming schedule for the transition to a traditional advertising model. There may be significant changes in the level of our technical and operating expenses due to the amortization of content acquisition and/or original programming costs and/or the impact of management’s periodic assessment of programming usefulness. Such costs will also fluctuate with the level of revenues derived from owned original programming in each period as these costs are amortized based on the film-forecast-computation method. As additional competition for programming increases and alternate distribution technologies continue to develop in the industry, costs for content acquisition and original programming may increase. As we continue to increase our investment in original programming, we expect program rights expense to continue to increase in 2014 over the prior year comparable period.
International and Other
The increase in the International and Other segment was primarily due to an increase of $8,083 related to higher content acquisition costs at IFC Films and an increase of $4,945 at AMC/Sundance Channel Global primarily related to program rights and programming related expenses as we expand internationally.
39
Selling, general and administrative expense
The components of selling, general and administrative expense primarily include sales, marketing and advertising expenses, administrative costs and costs of facilities.
Selling, general and administrative expense increased $28,809 to $425,735 for 2013 as compared to 2012. The net change by segment was as follows:
Years Ended December 31, | ||||||||||||||
2013 | 2012 | $ change | % change | |||||||||||
National Networks | $ | 352,731 | $ | 325,509 | $ | 27,222 | 8.4 | % | ||||||
International and Other | 73,316 | 71,739 | 1,577 | 2.2 | ||||||||||
Inter-segment eliminations | (312 | ) | (322 | ) | 10 | (3.1 | ) | |||||||
Total | $ | 425,735 | $ | 396,926 | $ | 28,809 | 7.3 | % | ||||||
Percentage of revenues, net | 26.7 | % | 29.3 | % | ||||||||||
National Networks
The increase in the National Networks segment was primarily attributable to increased general and administration expenses of $17,684 primarily due to an increase in professional fees, employee related expenses and other corporate expenses. In addition, sales and marketing expenses increased $9,538. Marketing costs increased for the year ended December 31, 2013 compared to the same period in 2012 primarily at AMC due to the airing of a higher number of original programming series; however, this amount was substantially offset by a decrease in marketing costs for subscriber retention marketing efforts as compared to those incurred in 2012 associated with the DISH Network carriage termination for approximately four months in 2012. There may be significant changes in the level of our selling, general and administrative expense from quarter to quarter and year to year due to the timing of promotion and marketing of original programming series and subscriber retention marketing efforts.
International and Other
The increase in the International and Other segment was primarily due to an increase in general and administrative expenses of $1,160 principally for employee related expenses. Additionally, during 2013, we incurred acquisition related professional fees of $8,898 primarily related to the Chellomedia acquisition which were substantially offset by a decrease in legal fees and other related costs and expenses of $8,887 compared to the same period in 2012 in connection with the DISH Network contract dispute related to VOOM HD.
Depreciation and amortization
Depreciation and amortization decreased $30,713 to $54,667 for 2013 as compared to 2012. The net change by segment was as follows:
Years Ended December 31, | ||||||||||||||
2013 | 2012 | $ change | % change | |||||||||||
National Networks | $ | 37,873 | $ | 70,436 | $ | (32,563 | ) | (46.2 | )% | |||||
International and Other | 16,794 | 14,944 | 1,850 | 12.4 | ||||||||||
$ | 54,667 | $ | 85,380 | $ | (30,713 | ) | (36.0 | )% | ||||||
The decrease in depreciation and amortization expense in the National Networks segment was primarily attributable to a decrease in amortization expense of $32,858 principally at AMC and at SundanceTV as certain intangible assets became fully amortized in the second quarter of 2012 (SundanceTV) and in the third quarter of 2013 (AMC).
40
Litigation settlement gain
Litigation settlement gain relates to the final allocation of the proceeds from the settlement of litigation with DISH Network (see “DISH Network” discussion above). The deferred litigation settlement proceeds liability of approximately $308,000 recorded in the consolidated balance sheet at December 31, 2012 less the $175,000 paid to Cablevision on April 9, 2013 resulted in a gain of $132,944 for the year ended December 31, 2013 included in the International and Other segment. See the income tax expense discussion for the increase in income taxes paid, net in connection with this litigation settlement.
AOCF
AOCF increased $58,772 to $524,189 for 2013 as compared to 2012. The net change by segment was as follows:
Years Ended December 31, | ||||||||||||||
2013 | 2012 | $ change | % change | |||||||||||
National Networks | $ | 555,911 | $ | 492,129 | $ | 63,782 | 13.0 | % | ||||||
International and Other | (35,466 | ) | (30,040 | ) | (5,426 | ) | 18.1 | |||||||
Inter-segment eliminations | 3,744 | 3,328 | 416 | 12.5 | ||||||||||
AOCF | $ | 524,189 | $ | 465,417 | $ | 58,772 | 12.6 | % | ||||||
National Networks AOCF increased due to an increase in revenues, net of $230,830 partially offset by an increase in technical and operating expenses of $142,463 resulting primarily from an increase in program rights including programming rights write-off of $61,005 and an increase in selling and administrative expenses of $27,222. As a result of the factors discussed above impacting the variability in revenues and operating expenses, we expect AOCF to vary from quarter to quarter.
International and Other AOCF deficit increased primarily due to an increase in technical and operating expenses of $12,197 due principally to content acquisitions costs at IFC Films and AMC/Sundance Channel Global, partially offset by an increase in revenues, net of $7,888.
Interest expense, net
The decrease in interest expense, net of $12,235 from 2012 to 2013 was attributable to the following:
Change in fair value of interest rate swap contracts (a) | $ | (11,660 | ) |
Increase in interest income | (317 | ) | |
Other | (258 | ) | |
$ | (12,235 | ) | |
(a) During 2012, in connection with the repayment of the outstanding principal amount under the term loan B facility, we recorded an unrealized loss of $8,725, included in interest expense, on the related interest rate swap contracts previously designated as cash flow hedges of a portion of the term loan B facility as the related interest rate swap contracts no longer qualified for hedge accounting.
As a result of incurring additional indebtedness of $600,000 under our Term Loan A Facility (defined below) on January 31, 2014, we expect interest expense will be higher in future periods. See "Amended and Restated Senior Secured Credit Facility" discussion below.
Write-off of deferred financing costs
On December 16, 2013, we entered into an amended and restated credit agreement. This credit agreement amended and restated AMC Networks’ June 30, 2011 original credit agreement in its entirety. In connection with this amendment, we recorded a write-off of deferred financing costs of $4,007 for the year ended December 31, 2013, which includes certain unamortized deferred financing costs associated with the original credit agreement of $3,719 and certain financing costs relating to the amended and restated credit agreement of $288.
The write-off of deferred financing costs of $1,862 for the year ended December 31, 2012 represents $964 of deferred financing costs written off in connection with the $150,000 of voluntary prepayments of the term loan A facility during 2012 and $898 of deferred financing costs written off in connection with the repayment of the outstanding amount of the term loan B facility in December 2012.
41
Loss on extinguishment of debt
As discussed above, in connection with entering into the amended and restated credit agreement on December 16, 2013, we also recorded a loss on extinguishment of debt of $1,087 for the year ended December 31, 2013 related to a portion of the unamortized discount associated with the June 30, 2011 original credit agreement that was written off.
In December 2012, we issued $600,000 aggregate principal amount of 4.75% senior notes due December 15, 2022. We used the net proceeds from the issuance of the notes to repay the outstanding amount under the term loan B facility of approximately $587,600, with the remaining proceeds used for general corporate purposes. In connection with this repayment, we recorded a loss on extinguishment of debt of $10,774 for the year ended December 31, 2012 representing the excess of the principal amount repaid over the carrying value of the term loan B facility.
Miscellaneous, net
The increase in miscellaneous, net primarily relates to an increase in unrealized transaction gains associated with the strengthening of the euro compared to the U.S. dollar related to the translation of euro denominated cash and cash equivalents at December 31, 2013 in anticipation of closing of the Chellomedia acquisition (see "Chellomedia Acquisition" discussion above).
Income tax expense
Income tax expense attributable to continuing operations was $178,841 for the year ended December 31, 2013, representing an effective tax rate of 38%. The effective tax rate differs from the federal statutory rate of 35% due primarily to state income tax expense of $8,786, tax expense of $9,089 related to uncertain tax positions, including accrued interest and tax expense of $5,179 resulting from an increase in the valuation allowance relating primarily to certain foreign and local income tax credit carry forwards.
In addition, income taxes paid, net increased by $95,186 to $135,708 for the year ended December 31, 2013 as compared to the year ended December 31, 2012. The increase was due primarily to the utilization of our net operating loss carry forward in 2012 and the increase in operating income in 2013. In addition, approximately $23,000 of such increase was a result of the VOOM HD Settlement Agreement and the DISH Network Proceeds Allocation Agreement, which increased tax payments (in the first quarter of 2013) by $81,000, and reduced tax payments (in the remaining quarters of 2013) by $58,000.
Income tax expense attributable to continuing operations was $86,058 for the year ended December 31, 2012, representing an effective tax rate of 39%. The effective tax rate differs from the federal statutory rate of 35% due primarily to state income tax expense of $4,970, tax expense of $4,685 related to uncertain tax positions, including accrued interest and a tax benefit of $2,344 resulting from a decrease in the valuation allowance relating primarily to certain foreign and local income tax credit carry forwards.
42
Consolidated Results of Operations
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
The following table sets forth our consolidated results of operations for the periods indicated.
Years Ended December 31, | ||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||
Amount | % of Revenues, net | Amount | % of Revenues, net | $ change | % change | |||||||||||||||
Revenues, net | $ | 1,352,577 | 100.0 | % | $ | 1,187,741 | 100.0 | % | $ | 164,836 | 13.9 | % | ||||||||
Operating expenses: | ||||||||||||||||||||
Technical and operating (excluding depreciation and amortization) | 507,436 | 37.5 | 425,961 | 35.9 | 81,475 | 19.1 | ||||||||||||||
Selling, general and administrative | 396,926 | 29.3 | 335,656 | 28.3 | 61,270 | 18.3 | ||||||||||||||
Restructuring credit | (3 | ) | — | (240 | ) | — | 237 | (98.8 | ) | |||||||||||
Depreciation and amortization | 85,380 | 6.3 | 99,848 | 8.4 | (14,468 | ) | (14.5 | ) | ||||||||||||
Total operating expenses | 989,739 | 73.2 | 861,225 | 72.5 | 128,514 | 14.9 | ||||||||||||||
Operating income | 362,838 | 26.8 | 326,516 | 27.5 | 36,322 | 11.1 | ||||||||||||||
Other income (expense): | ||||||||||||||||||||
Interest expense, net | (127,276 | ) | (9.4 | ) | (94,796 | ) | (8.0 | ) | (32,480 | ) | 34.3 | |||||||||
Write-off of deferred financing costs | (1,862 | ) | (0.1 | ) | (6,247 | ) | (0.5 | ) | 4,385 | — | ||||||||||
Loss on extinguishment of debt | (10,774 | ) | (0.8 | ) | (14,726 | ) | (1.2 | ) | 3,952 | — | ||||||||||
Miscellaneous, net | (652 | ) | — | (137 | ) | — | (515 | ) | 375.9 | |||||||||||
Total other income (expense) | (140,564 | ) | (10.4 | ) | (115,906 | ) | (9.8 | ) | (24,658 | ) | 21.3 | |||||||||
Income from continuing operations before income taxes | 222,274 | 16.4 | 210,610 | 17.7 | 11,664 | 5.5 | ||||||||||||||
Income tax expense | (86,058 | ) | (6.4 | ) | (84,248 | ) | (7.1 | ) | (1,810 | ) | 2.1 | |||||||||
Income from continuing operations | 136,216 | 10.1 | 126,362 | 10.6 | 9,854 | 7.8 | ||||||||||||||
Income from discontinued operations, net of income taxes | 314 | — | 92 | — | 222 | 241.3 | ||||||||||||||
Net income attributable to AMC Networks’ stockholders | $ | 136,530 | 10.1 | % | $ | 126,454 | 10.6 | % | $ | 10,076 | 8.0 | % | ||||||||
The following is a reconciliation of our consolidated operating income to AOCF:
Years Ended December 31, | ||||||||||||||
2012 | 2011 | $ change | % change | |||||||||||
Operating income | $ | 362,838 | $ | 326,516 | $ | 36,322 | 11.1 | % | ||||||
Share-based compensation expense | 17,202 | 15,589 | 1,613 | 10.3 | ||||||||||
Depreciation and amortization | 85,380 | 99,848 | (14,468 | ) | (14.5 | ) | ||||||||
Restructuring credit | (3 | ) | ||||||||||||