AMCX - 9.30.2012 - 10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
(Mark One)
þ
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2012
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)
 
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 Web site, 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 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
¨
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
þ
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 number of shares of common stock outstanding as of November 1, 2012:
Class A Common Stock par value $0.01 per share
59,909,223
Class B Common Stock par value $0.01 per share
11,784,408





AMC NETWORKS INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
 
PART I.
FINANCIAL INFORMATION
Page
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 6.
 
 



Table of Contents


PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
AMC NETWORKS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(unaudited) 
 
September 30,
2012
 
December 31,
2011
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
313,252

 
$
215,836

Accounts receivable, trade (less allowance for doubtful accounts of $1,325 and $3,092)
254,895

 
286,810

Amounts due from related parties, net
7,753

 
5,540

Program rights, net
242,402

 
235,171

Prepaid expenses and other current assets
37,352

 
67,370

Deferred tax asset, net
19,724

 
59,272

Total current assets
875,378

 
869,999

Property and equipment, net of accumulated depreciation of $148,051 and $132,745
65,105

 
63,814

Program rights, net
773,101

 
765,609

Amounts due from related parties, net
3,282

 
3,214

Deferred carriage fees, net
40,756

 
47,304

Intangible assets, net
253,706

 
305,673

Goodwill
79,963

 
83,173

Other assets
61,585

 
45,148

Total assets
$
2,152,876

 
$
2,183,934

LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
62,604

 
$
61,605

Accrued liabilities:
 
 
 
Interest
14,862

 
31,254

Employee related costs
63,858

 
57,160

Other accrued expenses
24,127

 
11,385

Amounts due to related parties, net
1,066

 
5,336

Program rights obligations
162,557

 
146,339

Deferred revenue
32,975

 
23,853

Credit facility debt
5,950

 
5,950

Capital lease obligations
1,520

 
1,314

Total current liabilities
369,519

 
344,196

Program rights obligations
392,566

 
472,690

Senior notes
687,169

 
686,434

Credit facility debt
1,496,529

 
1,598,896

Capital lease obligations
14,508

 
14,363

Deferred tax liability, net
41,435

 
51,905

Other liabilities
66,574

 
52,445

Total liabilities
3,068,300

 
3,220,929

Commitments and contingencies


 


Stockholders’ deficiency:
 
 
 
Class A Common Stock, $0.01 par value, 360,000,000 shares authorized, 60,554,932 and 58,628,764 shares issued and 59,914,043 and 58,434,704 shares outstanding, respectively
606

 
586

Class B Common Stock, $0.01 par value, 90,000,000 shares authorized, 11,784,408 and 13,534,408 shares issued and 11,784,408 and 13,534,408 shares outstanding, respectively
118

 
135

Preferred stock, $0.01 par value, 45,000,000 shares authorized; none issued

 

Paid-in capital
25,523

 
5,942

Accumulated deficit
(908,615
)
 
(1,029,954
)
Treasury stock, at cost (640,889 and 194,060 shares Class A Common Stock, respectively)
(17,666
)
 
(1,677
)
Accumulated other comprehensive loss
(15,390
)
 
(12,027
)
Total stockholders’ deficiency
(915,424
)
 
(1,036,995
)
Total liabilities and stockholders’ deficiency
$
2,152,876

 
$
2,183,934

See accompanying notes to consolidated financial statements.

1

Table of Contents


AMC NETWORKS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three and Nine Months Ended September 30, 2012 and 2011
(In thousands, except per share amounts)
(unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Revenues, net (including revenues, net from related parties of $8,106, $7,901, $24,281 and $23,869, respectively)
$
332,056

 
$
283,914

 
$
985,865

 
$
848,782

Operating expenses:
 
 
 
 
 
 
 
Technical and operating (excluding depreciation and amortization shown below and including charges from related parties of $155, $1,292, $465 and $3,893, respectively)
129,627

 
96,420

 
348,906

 
282,714

Selling, general and administrative (including charges (credits) from related parties of $(1,174), $3,184, $1,930 and $53,934, respectively)
97,202

 
68,229

 
287,302

 
243,714

Restructuring credit

 
(191
)
 
(3
)
 
(240
)
Depreciation and amortization
18,368

 
25,012

 
67,486

 
75,197

 
245,197

 
189,470

 
703,691

 
601,385

Operating income
86,859

 
94,444

 
282,174

 
247,397

Other income (expense):
 
 
 
 
 
 
 
Interest expense
(29,962
)
 
(31,789
)
 
(89,190
)
 
(65,492
)
Interest income
100

 
318

 
307

 
938

Write-off of deferred financing costs
(334
)
 

 
(646
)
 
(5,703
)
Loss on extinguishment of debt

 
(17
)
 

 
(14,535
)
Miscellaneous, net
1

 
(199
)
 
(631
)
 
(120
)
 
(30,195
)
 
(31,687
)
 
(90,160
)
 
(84,912
)
Income from continuing operations before income taxes
56,664

 
62,757

 
192,014

 
162,485

Income tax expense
(20,121
)
 
(22,440
)
 
(70,989
)
 
(65,388
)
Income from continuing operations
36,543

 
40,317

 
121,025

 
97,097

Income (loss) from discontinued operations, net of income taxes
105

 
(314
)
 
314

 
(121
)
Net income
$
36,648

 
$
40,003

 
$
121,339

 
$
96,976

 
 
 
 
 
 
 
 
Basic net income per share:
 
 
 
 
 
 
 
Income from continuing operations
$
0.52

 
$
0.58

 
$
1.72

 
$
1.40

Income (loss) from discontinued operations
$

 
$

 
$

 
$

Net income
$
0.52

 
$
0.58

 
$
1.73

 
$
1.40

 
 
 
 
 
 
 
 
Diluted net income per share:
 
 
 
 
 
 
 
Income from continuing operations
$
0.51

 
$
0.56

 
$
1.68

 
$
1.38

Income (loss) from discontinued operations
$

 
$

 
$

 
$

Net income
$
0.51

 
$
0.55

 
$
1.68

 
$
1.38

 
 
 
 
 
 
 
 
Weighted average common shares:
 
 
 
 
 
 
 
Basic weighted average common shares
70,506

 
69,284

 
70,286

 
69,203

Diluted weighted average common shares
72,265

 
72,268

 
72,194

 
70,209

See accompanying notes to consolidated financial statements.

2

Table of Contents


AMC NETWORKS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three and Nine Months Ended September 30, 2012 and 2011
(Dollars in thousands)
(unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Net income
$
36,648

 
$
40,003

 
$
121,339

 
$
96,976

Other comprehensive loss:
 
 
 
 
 
 
 
Unrealized loss on interest rate swaps
(890
)
 
(17,290
)
 
(5,338
)
 
(17,290
)
Other comprehensive loss, before income taxes
(890
)
 
(17,290
)
 
(5,338
)
 
(17,290
)
Income tax benefit
329

 
6,397

 
1,975

 
6,397

Other comprehensive loss, net of income taxes
(561
)
 
(10,893
)
 
(3,363
)
 
(10,893
)
Comprehensive income
$
36,087

 
$
29,110

 
$
117,976

 
$
86,083

See accompanying notes to consolidated financial statements.

3

Table of Contents
AMC NETWORKS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2012 and 2011
(Dollars in thousands)
(unaudited)


 
Nine Months Ended September 30,
 
2012
 
2011
Cash flows from operating activities:
 
 
 
Income from continuing operations
$
121,025

 
$
97,097

Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
 
 
 
Depreciation and amortization
67,486

 
75,197

Share-based compensation expense related to equity classified awards
12,846

 
12,663

Amortization and write-off of program rights
234,894

 
174,216

Amortization of deferred carriage fees
6,550

 
17,972

Amortization and write-off of financing and other costs
7,064

 
9,566

Loss on extinguishment of debt

 
14,535

(Recovery of) provision for doubtful accounts
(635
)
 
670

Deferred income taxes
29,645

 
53,275

Excess tax benefits from share-based compensation arrangements
(7,259
)
 

Other, net
(99
)
 

Changes in assets and liabilities:
 
 
 
Accounts receivable, trade
32,550

 
9,419

Amounts due from/to related parties, net
(6,203
)
 
(9,333
)
Prepaid expenses and other assets
10,487

 
(11,279
)
Program rights and obligations, net
(313,523
)
 
(224,949
)
Deferred carriage fees and deferred carriage fees payable, net
(434
)
 
(3,204
)
Accounts payable, accrued expenses and other liabilities
29,608

 
(13,484
)
Net cash provided by operating activities
224,002

 
202,361

Cash flows from investing activities:
 
 
 
Capital expenditures
(13,673
)
 
(7,129
)
Acquisition of investment securities
(750
)
 

Payment for acquisition of a business
(185
)
 
(270
)
Proceeds from sale of equipment, net of costs of disposal
100

 
13

Net cash used in investing activities
(14,508
)
 
(7,386
)
Cash flows from financing activities:
 
 
 
Capital contributions from Cablevision

 
20,813

Capital distributions to Cablevision

 
(20,813
)
Repayment of credit facility debt
(104,463
)
 
(826,488
)
Redemption of senior notes

 
(300,000
)
Redemption of senior subordinated notes, including tender premium and fees

 
(338,365
)
Payments for financing costs
(393
)
 
(26,599
)
Proceeds from credit facility debt

 
1,442,364

Purchase of treasury stock
(15,989
)
 
(83
)
Proceeds from stock option exercises
2,074

 
2,460

Excess tax benefits from share-based compensation arrangements
7,259

 

Principal payments on capital lease obligations
(1,047
)
 
(3,417
)
Net cash used in financing activities
(112,559
)
 
(50,128
)
Net increase in cash and cash equivalents from continuing operations
96,935

 
144,847

Cash flows from discontinued operations:
 
 
 
Net cash provided by (used in) operating activities
481

 
(410
)
Net cash provided by investing activities

 
562

Net increase in cash and cash equivalents from discontinued operations
481

 
152

Cash and cash equivalents at beginning of period
215,836

 
79,960

Cash and cash equivalents at end of period
$
313,252

 
$
224,959

See accompanying notes to consolidated financial statements.

4

Table of Contents
AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(unaudited)


Note 1. Description of Business and Basis of Presentation
Description of Business
AMC Networks Inc. (“AMC Networks”) and collectively with its subsidiaries (the “Company”) own and operate entertainment businesses and assets. The Company is comprised of two reportable segments:
National Networks: Includes four nationally distributed programming networks: AMC, WE tv, IFC and Sundance Channel. These programming networks are distributed throughout the United States (“U.S.”) via cable and other multichannel video programming distribution platforms, including direct broadcast satellite (“DBS”) and platforms operated by telecommunications providers (we refer collectively to these cable and other multichannel video programming distributors as “multichannel video programming distributors” or “distributors”); and
International and Other: Principally includes AMC/Sundance Channel Global, the Company’s international programming business; IFC Films, the Company’s independent film distribution business; and AMC Networks Broadcasting & Technology, the Company’s network technical services business, which primarily services the programming networks of the Company. AMC and Sundance Channel are distributed in Canada and Sundance Channel and WE tv are distributed in other countries throughout Europe and Asia. The International and Other reportable segment also includes VOOM HD Holdings LLC (“VOOM HD”), which the Company is winding down, and which continues to sell certain limited amounts of programming through program license agreements.
On June 30, 2011, Cablevision Systems Corporation (Cablevision Systems Corporation and its subsidiaries are referred to as “Cablevision”) spun-off the Company (the “Distribution”) and AMC Networks became an independent public company. In connection with the Distribution, Cablevision contributed all of the membership interests of Rainbow Media Holdings LLC (“RMH”) to AMC Networks, which was an indirect wholly-owned subsidiary of Cablevision immediately prior to the Distribution. RMH owned, directly or indirectly, the businesses included in Cablevision’s Rainbow segment. On June 30, 2011, Cablevision effected the Distribution of all of AMC Networks’ outstanding common stock to its shareholders. Both Cablevision and the Company continue to be controlled by Charles F. Dolan, certain members of his immediate family and certain family related entities (collectively the “Dolan Family”).
Basis of Presentation
These unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, these unaudited consolidated financial statements do not include all the information and notes required for complete annual financial statements.
These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2011 contained in the Company’s 2011 Annual Report on Form 10-K (“2011 Form 10-K”) filed with the SEC.
The consolidated financial statements as of September 30, 2012 and for the three and nine months ended September 30, 2012 and 2011 are unaudited; however, in the opinion of management, such consolidated financial statements include all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of the results for the periods presented. All intercompany transactions and balances have been eliminated in consolidation.
The results of operations for the interim periods are not necessarily indicative of the results that might be expected for future interim periods or for the full year ending December 31, 2012.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Significant estimates and judgments inherent in the preparation of the consolidated financial statements include the determination of ultimate revenues as it relates to accounting for amortization of owned original programming costs, valuation and recoverability of long-lived assets, income taxes and contingencies and litigation matters.

5

Table of Contents
AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(unaudited)

The Company’s consolidated financial statements for periods prior to the Distribution have been derived from the consolidated financial statements and accounting records of Cablevision and reflect certain assumptions and allocations. The results of operations and cash flows of the Company for those periods could differ from those that might have resulted had the Company been operated autonomously or as an entity independent of Cablevision. The Company’s consolidated financial statements after the Distribution reflect certain revenues and expenses related to transactions with or charges from Cablevision and The Madison Square Garden Company and its subsidiaries (“MSG”) as described in Note 11.
Discontinued Operations
Discontinued operations consists of receipts related to the sale of the Lifeskool and Sportskool video-on-demand services in September and October 2008, respectively, which were recorded under the installment sales method.
Recently Adopted Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-08, Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment (ASU 2011-08), to allow entities to use a qualitative approach to test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. The Company adopted ASU 2011-08 effective January 1, 2012 and applied it to the Company’s annual impairment test as of the end of February 2012 (see Note 3).
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (ASU 2011-05). The provisions of ASU 2011-05 provide that an entity that reports items of other comprehensive income has the option to present comprehensive income as (i) a single statement that presents the components of net income and total net income, the components of other comprehensive income and total other comprehensive income and a total for comprehensive income or (ii) in a two-statement approach, whereby an entity must present the components of net income and total net income in the first statement and that statement is immediately followed by a financial statement that presents the components of other comprehensive income, a total for other comprehensive income and a total for comprehensive income. The previous option under GAAP that permitted the presentation of other comprehensive income in the statement of stockholders’ equity has been eliminated. In December 2011, the FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (ASU 2011-12). ASU 2011-12 defers the requirement in ASU 2011-05 to present reclassification adjustments for each component of accumulated other comprehensive income (“AOCI”) in both other comprehensive income and net income on the face of the financial statements, and the presentation of reclassification adjustments is not required in interim periods. The Company adopted ASU 2011-05 and ASU 2011-12 effective January 1, 2012 and presents comprehensive income using the two-statement approach.
 In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in GAAP and IFRSs (ASU 2011-04). ASU 2011-04 provides amendments to Topic 820 that change the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. The Company adopted ASU 2011-04 effective January 1, 2012. The adoption of this authoritative guidance did not have any impact on the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements
In October 2012, the FASB issued ASU No. 2012-07, Accounting for Fair Value Information That Arises after the Measurement Date and Its Inclusion in the Impairment Analysis of Unamortized Film Costs (ASU 2012-07), which eliminates the rebuttable presumption that the conditions leading to the write-off of unamortized film costs after the balance sheet date existed as of the balance sheet date. ASU 2012-07 also eliminates the requirement that an entity incorporate into fair value measurements used in the impairment tests the effects of any changes in estimates resulting from the consideration of subsequent evidence if the information would not have been considered by market participants at the measurement date. ASU 2012-07 does not change an entity's responsibility to analyze and consider any relevant subsequent events and information to assess whether the fair value measurement reflects all relevant information and assumptions that market participants would have considered under the current conditions at the measurement date. This authoritative guidance will be effective for the Company's programming usefulness impairment assessments performed on or after December 15, 2012 and earlier application is permitted.

6

Table of Contents
AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(unaudited)

In July 2012, the FASB issued ASU No. 2012-02, Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment (ASU 2012-02), to allow entities to use a qualitative approach to test indefinite-lived intangible assets for impairment. ASU 2012-02 permits an entity to first perform a qualitative assessment to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If it is concluded that this is the case, an entity is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Subtopic 350-30. Otherwise, the quantitative impairment test is not required. This authoritative guidance will be effective for the Company’s 2013 annual impairment test and earlier adoption is permitted. The Company will evaluate performing a qualitative assessment in 2013.
Note 2. Net Income per Share
The consolidated statements of income present basic and diluted net income per share (“EPS”). Basic EPS is based upon net income divided by the weighted-average number of common shares outstanding during the period. Diluted EPS reflects the dilutive effects of AMC Networks stock options (including those held by directors and employees of related parties of the Company) and AMC Networks restricted shares/units (including those held by employees of related parties of the Company).
The following is a reconciliation between basic and diluted weighted average shares outstanding:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Basic weighted average shares outstanding
70,506,000

 
69,284,000

 
70,286,000

 
69,203,000

Effect of dilution:
 
 
 
 
 
 
 
Stock options
821,000

 
1,083,000

 
847,000

 
365,000

Restricted shares/units
938,000

 
1,901,000

 
1,061,000

 
641,000

Diluted weighted average shares outstanding
72,265,000

 
72,268,000

 
72,194,000

 
70,209,000

The number of shares used to compute basic and diluted EPS includes 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. The dilutive effect of the Company’s share-based awards that were issued in connection with the adjustment or conversion of Cablevision’s share-based awards upon the Distribution (including Cablevision stock options and restricted share awards granted prior to the Distribution) and subsequent Company grants, are included in the computation of diluted EPS in periods subsequent to the Distribution.
Approximately 231,000 restricted shares/units for the three and nine months ended September 30, 2012 and approximately 149,000 restricted shares/units for the three and nine months ended September 30, 2011 have been excluded from diluted weighted average common shares outstanding since the performance criteria on these awards has not yet been satisfied.
 

7

Table of Contents
AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(unaudited)

Note 3. Goodwill and Other Intangible Assets
The carrying amount of goodwill, by reporting unit and reportable segment is as follows:
 
September 30, 2012
 
December 31, 2011
Reporting Unit and Segment
 
 
 
AMC
$
34,251

 
$
34,251

WE tv
5,214

 
5,214

IFC
13,582

 
13,582

Sundance Channel
25,720

 
28,930

Total National Networks
78,767

 
81,977

AMC Networks Broadcasting & Technology
1,196

 
1,196

Total International and Other
1,196

 
1,196

 
$
79,963

 
$
83,173

The reduction of $3,210 in the carrying amount of goodwill for Sundance Channel is due to the realization of a tax benefit for the amortization of "second component" goodwill. Second component goodwill is the amount of tax deductible goodwill in excess of goodwill for financial reporting purposes. In accordance with the authoritative guidance at the time of the Sundance Channel acquisition, the tax benefits associated with this excess are applied to first reduce the amount of goodwill, and then other intangible assets for financial reporting purposes, if and when such tax benefits are realized in the Company's tax returns.
The following tables summarize information relating to the Company’s identifiable intangible assets:
 
September 30, 2012
 
Gross
 
Accumulated
Amortization
 
Net
Amortizable intangible assets:
 
 
 
 
 
Affiliation agreements and affiliate relationships
$
840,757

 
$
(612,986
)
 
$
227,771

Advertiser relationships
74,248

 
(68,370
)
 
5,878

Other amortizable intangible assets
644

 
(487
)
 
157

Total amortizable intangible assets
915,649

 
(681,843
)
 
233,806

Indefinite-lived intangible assets:
 
 
 
 
 
Trademarks
19,900

 

 
19,900

Total intangible assets
$
935,549

 
$
(681,843
)
 
$
253,706

 
December 31, 2011
 
Gross
 
Accumulated
Amortization
 
Net
Amortizable intangible assets:
 
 
 
 
 
Affiliation agreements and affiliate relationships
$
911,357

 
$
(637,394
)
 
$
273,963

Advertiser relationships
103,723

 
(92,166
)
 
11,557

Other amortizable intangible assets
644

 
(391
)
 
253

Total amortizable intangible assets
1,015,724

 
(729,951
)
 
285,773

Indefinite-lived intangible assets:
 
 
 
 
 
Trademarks
19,900

 

 
19,900

Total intangible assets
$
1,035,624

 
$
(729,951
)
 
$
305,673

During the nine months ended September 30, 2012, the Company retired $29,475 and $70,600 of fully amortized advertiser relationships and affiliation agreements, respectively.

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AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(unaudited)

 Aggregate amortization expense for amortizable intangible assets for the nine months ended September 30, 2012 and 2011 was $51,967 and $59,332, respectively. The Company expects its future aggregate amortization expense for existing intangible assets subject to amortization to be as follows:
 
 
Years Ending December 31,
 
2012
$
64,489

2013
31,631

2014
9,759

2015
9,746

2016
9,746

Impairment of Goodwill and Identifiable Indefinite-Lived Intangible Assets
In accordance with the accounting guidance adopted on January 1, 2012, the annual goodwill impairment test allows for the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. An entity may choose to perform the qualitative assessment on none, some or all of its reporting units or an entity may bypass the qualitative assessment for any reporting unit and proceed directly to step one of the quantitative impairment test. If it is determined, on the basis of qualitative factors, that the fair value of a reporting unit is, more likely than not, less than its carrying value, the quantitative impairment test is required. The quantitative impairment test is a two-step process. The first step compares the carrying amount of a reporting unit, including goodwill, with its fair value utilizing an enterprise-value based approach. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of the goodwill impairment loss, if any. The second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill that would be recognized in a business combination.
In assessing the recoverability of goodwill and other long-lived assets, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. These estimates and assumptions could have a significant impact on whether an impairment charge is recognized and also the magnitude of any such charge. Fair value estimates are made at a specific point in time, based on relevant information. These estimates are subjective in nature and involve uncertainties and matters of significant judgments and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Estimates of fair value are primarily determined using discounted cash flows and comparable market transactions. These valuations are based on estimates and assumptions including projected future cash flows, discount rate and determination of appropriate market comparables and determination of whether a premium or discount should be applied to comparables. These valuations also include assumptions for renewals of affiliation agreements, the projected number of subscribers and the projected average rates per basic and viewing subscribers and growth in fixed price contractual arrangements used to determine affiliation fee revenue, access to program rights and the cost of such program rights, amount of programming time that is advertiser supported, number of advertising spots available and the sell through rates for those spots, average fee per advertising spot and operating margins, among other assumptions. If these estimates or material related assumptions change in the future, we may be required to record impairment charges related to our long-lived assets.
The impairment test for identifiable indefinite-lived intangible assets consists of a comparison of the estimated fair value of the intangible asset with its carrying value. If the carrying value exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. Significant judgments inherent in a valuation include the selection of appropriate discount and royalty rates, estimating the amount and timing of estimated future cash flows and identification of appropriate continuing growth rate assumptions. The discount rates used in the analysis are intended to reflect the risk inherent in the projected future cash flows generated by the respective intangible assets.

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AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(unaudited)

Based on the Company’s annual impairment test for goodwill and identifiable indefinite-lived intangible assets as of the end of February 2012, no impairment charge was required for any of the reporting units. The Company performed a qualitative assessment for the AMC, WE tv, IFC and AMC Networks Broadcasting and Technology reporting units, which included, but was not limited to, consideration of the historical significant excesses of the estimated fair value of each reporting unit over its respective carrying value (including allocated goodwill), macroeconomic conditions, industry and market considerations, cost factors and historical and projected cash flows. The Company performed a quantitative assessment for the Sundance Channel reporting unit. Based on the quantitative assessment, if the fair value of the Sundance Channel reporting unit decreased by 11%, the Company would be required to perform step-two of the quantitative assessment.
The Company’s indefinite-lived trademark intangible assets relate to Sundance Channel trademarks, which were valued using a relief-from-royalty method in which the expected benefits are valued by discounting estimated royalty revenue over projected revenues covered by the trademarks. In order to evaluate the sensitivity of the fair value calculations for the Company’s identifiable indefinite-lived intangible assets, the Company applied a hypothetical 20% decrease to the estimated fair value of the identifiable indefinite-lived intangible assets. This hypothetical decrease in estimated fair value would not result in an impairment.
Note 4. Income Taxes
For the three and nine months ended September 30, 2012, income tax expense attributable to continuing operations was $20,121 and $70,989, respectively, representing an effective tax rate of 36% and 37%, respectively. The effective tax rate differs from the federal statutory rate of 35% due primarily to state and local income tax expense of $1,147 and $4,210, for the three and nine months ended September 30, 2012, respectively, and tax expense of $1,544 related to uncertain tax positions, including accrued interest, for the nine months ended September 30, 2012, partially offset by a tax benefit of $570 and $2,370 resulting from a decrease in the valuation allowance with regard to certain local income tax credit carry forwards, for the three and nine months ended September 30, 2012, respectively.
For the three and nine months ended September 30, 2011, income tax expense attributable to continuing operations was $22,440 and $65,388, respectively, representing an effective tax rate of 36% and 40%, respectively. The effective tax rate differs from the federal statutory rate of 35% due primarily to state and local income tax expense of $1,272 and $6,562, tax expense of $839 and $2,908 related to uncertain tax positions, including accrued interest, partially offset by a tax benefit of $2,674 and $2,182 resulting from a decrease in the valuation allowance with regard to certain local income tax credit carry forwards, for the three and nine months ended September 30, 2011, respectively.
At September 30, 2012, the Company had foreign tax credit carry forwards of approximately $17,000, expiring on various dates from 2014 through 2022. For the nine months ended September 30, 2012, the utilization of the remaining federal net operating loss carry forwards (“NOLs”) and alternative minimum tax credit carry forwards reduced current deferred income tax assets by $50,000 and $2,300, respectively. In addition, for the nine months ended September 30, 2012, excess tax benefits of $7,259 relating to share-based compensation awards and $3,210 relating to amortization of tax deductible second component goodwill were realized as a reduction in tax liability (as determined on a 'with-and-without' approach) and recorded as an increase to paid-in capital and a decrease in goodwill, respectively.
Under the Company's Tax Disaffiliation Agreement with Cablevision, Cablevision is liable for all income taxes of the Company for periods prior to the Distribution except for New York City Unincorporated Business Tax. A deemed capital distribution, net of $2,596 was recorded for the nine months ended September 30, 2012 to reflect true-ups as of the Distribution date for utilization of Cablevision's NOLs and for adjustments to deferred tax assets and liabilities as a result of the Distribution. The City of New York is currently auditing the Company's Unincorporated Business Tax Returns for the years 2006 through 2008.
 

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AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(unaudited)

Note 5. Debt
Long-term debt consists of:
 
September 30, 2012
 
December 31, 2011
Credit facility debt: (a) (b)
 
 
 
Term A Facility
$
926,016

 
$
1,025,065

Term B Facility
576,463

 
579,781

Senior notes (b)
687,169

 
686,434

 
2,189,648

 
2,291,280

Less: current portion
5,950

 
5,950

Total
$
2,183,698

 
$
2,285,330

(a)
The Company’s $500,000 revolving credit facility remains undrawn at September 30, 2012. Total undrawn revolver commitments are available to be drawn for general corporate purposes of the Company.
(b)
The carrying amount of credit facility debt and senior notes is net of unamortized discounts.
In each of March, July and November 2012, the Company voluntarily prepaid $50,000 under the Term A Facility. These voluntary prepayments were applied to the earliest required quarterly installments due, and were in addition to the regularly scheduled quarterly principal payments made under the Term B Facility. As a result of these voluntary prepayments, the next required quarterly installment under the Term A Facility will be due on December 31, 2014 in the amount of $4,250. The Company wrote-off $334 and $646 of deferred financing costs associated with the voluntary prepayments that were made during the three and nine months ended September 30, 2012, respectively.
Pursuant to a registration rights agreement, dated as of June 30, 2011, among AMC Networks, the Subsidiary Guarantors (as defined in the agreement) and the initial purchasers of the $700,000 of AMC Networks 7.75% Senior Notes due July 15, 2021 (the “Notes”), AMC Networks filed a registration statement with the SEC on April 24, 2012 with respect to an offer to exchange the Notes for registered notes (the “Exchange Offer”) with terms identical in all material respects to the Notes except that the registered notes do not contain terms that provide for restrictions on transfer (the “Registered Notes”), which was declared effective by the SEC on June 7, 2012. On July 10, 2012, the Exchange Offer was completed and all of AMC Networks’ original Notes were exchanged for Registered Notes.

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AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(unaudited)

Note 6. Derivative Financial Instruments
To manage interest rate risk, the Company enters into interest rate swap contracts to adjust the amount of total debt that is subject to variable interest rates. Such contracts effectively fix the borrowing rates on floating rate debt to limit the exposure against the risk of rising interest rates. The Company does not enter into interest rate swap contracts for speculative or trading purposes and it has only entered into interest rate swap contracts with financial institutions that it believes are creditworthy counterparties. The Company monitors the financial institutions that are counterparties to its interest rate swap contracts and to the extent possible diversifies its swap contracts among various counterparties to mitigate exposure to any single financial institution.
The Company’s risk management objective and strategy with respect to interest rate swap contracts is to protect the Company against adverse fluctuations in interest rates by reducing its exposure to variability in cash flows relating to interest payments on a portion of its outstanding debt. The Company is meeting its objective by hedging the risk of changes in its cash flows (interest payments) attributable to changes in the LIBOR index rate, the designated benchmark interest rate being hedged (the “hedged risk”), on an amount of the Company’s debt principal equal to the then-outstanding swap notional. The forecasted interest payments are deemed to be probable of occurring.
The Company’s interest rate swap contracts are designated as cash flow hedges for accounting and tax purposes. The Company assesses, both at the hedge’s inception and on an ongoing basis, hedge effectiveness based on the overall changes in the fair value of the interest rate swap contracts. Hedge effectiveness of the interest rate swap contracts is based on a hypothetical derivative methodology. Any ineffective portion of the interest rate swap contracts is recorded in current-period earnings.
 As of September 30, 2012, the Company had interest rate swap contracts outstanding with notional amounts aggregating $849,406. The Company’s outstanding interest rate swap contracts have varying maturities ranging from September 2015 to July 2017. At September 30, 2012, the Company’s interest rate cash flow hedges were highly effective, in all material respects.
The fair values of the Company’s derivative financial instruments included in the consolidated balance sheets are as follows:
 
Liability Derivatives
 
Balance Sheet Location
 
Fair Value
 
 
 
September 30, 2012
 
December 31, 2011
Derivatives designated as hedging instruments:
 
 
 
 
 
Interest rate swap contracts
Other liabilities
 
$
24,429

 
$
19,091

Total derivatives
 
 
$
24,429

 
$
19,091

The amounts of the gains and losses related to the Company’s derivative financial instruments designated as hedging instruments are as follows:
 
Amount of Loss Recognized 
in Other Comprehensive  Income
(“OCI”) on Derivatives 
(Effective Portion)
 
Location of Loss
Reclassified from
Accumulated OCI into
Earnings  (Effective Portion)
 
Amount of Loss Reclassified 
from Accumulated OCI into  Earnings
(Effective Portion)(a)
 
Three Months Ended September 30,
 
 
 
Three Months Ended September 30,
 
2012
 
2011
 
 
 
2012
 
2011
Derivatives in Cash Flow Hedging Relationships:
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
$
3,618

 
$
19,666

 
Interest expense
 
$
2,728

 
$
2,376

(a)
There were no gains or losses recognized in earnings related to any ineffective portion of the hedging relationship or related to any amount excluded from the assessment of hedge effectiveness for the three months ended September 30, 2012 and 2011.


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AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(unaudited)

 
Amount of Loss Recognized in
OCI on Derivatives 
(Effective Portion)
 
Location of Loss
Reclassified from
Accumulated OCI into
Earnings  (Effective Portion)
 
Amount of Loss Reclassified 
from Accumulated OCI into  Earnings
(Effective Portion)(b)
 
Nine Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
2012
 
2011
 
 
 
2012
 
2011
Derivatives in Cash Flow Hedging Relationships:
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
$
12,346

 
$
19,666

 
Interest expense
 
$
7,008

 
$
2,376

(b)
There were no gains or losses recognized in earnings related to any ineffective portion of the hedging relationship or related to any amount excluded from the assessment of hedge effectiveness for the nine months ended September 30, 2012 and 2011.
Note 7. Commitments and Contingencies
Commitments
As of September 30, 2012, the Company’s off-balance sheet arrangements not reflected on the Company’s consolidated balance sheet decreased approximately $26,000 to approximately $317,600 as compared to approximately $343,600 at December 31, 2011. The decrease relates primarily to future program rights obligations.
Legal Matters
DISH Network Contract Dispute
In 2005, subsidiaries of the Company entered into agreements with EchoStar Communications Corporation and its affiliates by which EchoStar Media Holdings Corporation acquired a 20% interest in VOOM HD and EchoStar Satellite L.L.C. (the predecessor to DISH Network L.L.C. (“DISH Network”)) agreed to distribute VOOM on the satellite delivered programming of DISH Network for a 15-year term. The affiliation agreement with DISH Network for such distribution provides that if VOOM HD fails to spend $100,000 per year (subject to reduction to the extent that the number of offered channels is reduced to fewer than 21), up to a maximum of $500,000 in the aggregate, on VOOM, DISH Network may seek to terminate the agreement under certain circumstances. On January 30, 2008, DISH Network purported to terminate the affiliation agreement, effective February 1, 2008, based on its assertion that VOOM HD had failed to comply with this spending provision in 2006. On January 31, 2008, VOOM HD sought and obtained a temporary restraining order from the New York State Supreme Court for New York County prohibiting DISH Network from terminating the affiliation agreement. In conjunction with its request for a temporary restraining order, VOOM HD also requested a preliminary injunction and filed a lawsuit against DISH Network asserting that DISH Network did not have the right to terminate the affiliation agreement. In a decision filed on May 5, 2008, the court denied VOOM HD’s motion for a preliminary injunction. On or about May 13, 2008, DISH Network ceased distribution of VOOM on its DISH Network. On May 27, 2008, VOOM HD amended its complaint to seek damages for DISH Network’s improper termination of the affiliation agreement. On June 24, 2008, DISH Network answered VOOM HD’s amended complaint and asserted counterclaims alleging breach of contract and breach of the duty of good faith and fair dealing with respect to the affiliation agreement. On July 14, 2008, VOOM HD replied to DISH Network’s counterclaims. VOOM HD and DISH Network each filed cross-motions for summary judgment. In November 2010, the court denied both parties’ cross-motions for summary judgment but granted VOOM HD’s motion for sanctions based on DISH Network’s spoliation of evidence as well as its motion to exclude DISH Network’s principal damages expert. DISH Network appealed these latter two rulings. On January 31, 2012, the Appellate Division of the New York State Supreme Court issued a decision affirming (i) the trial court’s finding of spoliation and imposition of the sanction of an adverse inference at trial; and (ii) the trial court’s decision to exclude DISH Network’s damages expert. On February 6, 2012, DISH Network filed a motion seeking leave from the Appellate Division to appeal the order. On April 26, 2012, the Appellate Division denied DISH Network’s motion, thereby precluding any further appeal of the trial court rulings. The stay of the pending trial court proceedings was lifted on May 1, 2012. A trial before the New York State Supreme Court began on September 28, 2012. On October 21, 2012, VOOM HD and CSC Holdings, LLC ("CSC Holdings"), a wholly owned subsidiary of Cablevision, entered into a confidential settlement agreement and release (the “Settlement Agreement”) with DISH Network, and for certain limited purposes, MSG Holdings, L.P., The Madison Square Garden Company and EchoStar Corporation, to settle the litigation between VOOM HD and DISH Network. On October 24, 2012, VOOM HD and DISH Network filed a stipulation of discontinuance with prejudice

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AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(unaudited)

with the New York State Supreme Court with respect to the litigation.
The principal terms of the Settlement Agreement are as follows: 1) DISH Network paid $700 million to an account for the benefit of Cablevision and the Company, $80 million of which is in consideration for the purchase by DISH Network from a subsidiary of Cablevision of certain MVDDS spectrum licenses; 2) simultaneously with the execution of the Settlement Agreement, DISH Network entered into a long-term affiliation agreement with AMC Network Entertainment LLC, WE: Women's Entertainment LLC, The Independent Film Channel LLC, The Sundance Channel L.L.C. and Fuse Network LLC, a subsidiary of The Madison Square Garden Company, that provided for resumption of carriage of all of the Company's networks by no later than November 1, 2012; and 3) an affiliate of DISH Network agreed to convey its 20% membership interest in VOOM HD to Rainbow Programming Holdings LLC ("Rainbow Programming Holdings"), a wholly owned subsidiary of AMC Networks.
In connection with the Distribution, AMC Networks and Rainbow Programming Holdings (collectively, the “AMC Parties”) and CSC Holdings entered into an agreement, pursuant to which, CSC Holdings had full control over the litigation with DISH Network and the decision with respect to settlement was made jointly by CSC Holdings and the AMC Parties. In addition, pursuant to this agreement CSC Holdings and the AMC Parties will share equally in the proceeds (including in the value of any non-cash consideration) of the settlement in the litigation with DISH Network. The AMC Parties were responsible for the legal fees and costs until such costs reached an agreed upon threshold, which occurred in the third quarter of 2012, subsequent to which CSC Holdings and the AMC Parties bear such fees and expenses equally. The allocation of the settlement proceeds between Cablevision and the AMC Parties is being determined pursuant to this existing agreement. Once the AMC Parties' share of the proceeds are determined, such amount will be allocated to the AMC Parties' related elements of the arrangement and will be recorded commencing in the fourth quarter of 2012.
Other Legal Matters
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 $11,000) 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.
Note 8. Equity and Long-Term Incentive Plans
In connection with the Distribution, the Company adopted the AMC Networks Inc. 2011 Employee Stock Plan (the “2011 Employee Stock Plan”), the AMC Networks Inc. 2011 Stock Plan for Non-Employee Directors (the “2011 Non-Employee Director Plan”) and the AMC Networks Inc. 2011 Cash Incentive Plan (the “2011 Cash Incentive Plan”). All Plans were amended and restated and approved by the Company’s shareholders on June 5, 2012.
On March 15, 2012, AMC Networks granted 441,111 restricted share units to certain executive officers and employees under the 2011 Employee Stock Plan that vest on the third anniversary of the grant date. The vesting criteria for 97,915 of those restricted share units include the achievement of certain performance targets by the Company. Also in March 2012, AMC Networks granted three-year performance based awards to certain executive officers and employees under the 2011 Cash Incentive Plan.
On June 5, 2012, AMC Networks granted 30,393 restricted share units under the 2011 Non-Employee Director Plan to non-employee directors that vested on the date of grant.
Share-based compensation expense included in continuing operations, a component of selling, general and administrative expense, for the three and nine months ended September 30, 2012 was $4,362 and $12,846, respectively, related to equity classified awards. For the three and nine months ended September 30, 2011, share-based compensation expense was $4,320 and $12,663, respectively, related to equity classified awards. For the nine months ended September 30, 2012, there was no share-based compensation expense included in continuing operations for liability classified awards (stock appreciation rights). For the three and nine months ended September 30, 2011, there was $623 and $476, respectively, of share-based compensation credits included

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AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(unaudited)

in continuing operations for liability classified awards. For periods prior to the Distribution, the Company’s share-based compensation expense includes amounts related to Company employees participating in the Cablevision equity awards programs, as well as amounts related to Cablevision corporate employees and non-employee directors to the extent allocated to the Company. For periods after the Distribution, the Company no longer receives an allocation of share-based compensation expense for Cablevision corporate employees and non-employee directors, including expense related to the Company’s Executive Chairman with respect to his participation in the Cablevision equity awards program (since he remained an executive officer of Cablevision).
As of September 30, 2012, there was $29,083 of total unrecognized share-based compensation cost related to Company employees who held unvested AMC Networks and Cablevision restricted shares/units. The unrecognized compensation cost is expected to be recognized over a weighted-average remaining period of approximately 2.0 years.
During the nine months ended September 30, 2012, 1,032,018 shares of AMC Networks Class A common stock previously issued to employees of Cablevision, MSG and the Company vested. In connection with the employees’ satisfaction of the statutory minimum tax withholding obligations for the applicable income and other employment taxes, 352,910 of these shares, with an aggregate value of $15,988, were surrendered to the Company. These acquired shares, as well as 93,919 forfeited unvested restricted shares, have been classified as treasury stock.
Long-term incentive plan compensation expense included in continuing operations for the three and nine months ended September 30, 2012 was $2,987 and $8,057, respectively. For the three and nine months ended September 30, 2011, long-term incentive plan compensation expense was $2,166 and $9,451, respectively. Such amount is accrued for performance-based awards for which the performance criteria had not yet been met as the awards are based on achievement of certain performance criteria through December 31, 2014. The Company has accrued the pro-rata amount earned that it currently believes will ultimately be paid based upon the performance criteria established for these performance-based awards. If the Company subsequently determines that the performance criteria for the awards are not probable of being achieved, the Company would reverse the accrual in respect of the award at that time.

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Table of Contents
AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(unaudited)

Note 9. Fair Value Measurement
The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:
Level I - Quoted prices for identical instruments in active markets.
Level II - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level III - Instruments whose significant value drivers are unobservable.
 The following table presents for each of these hierarchy levels, the Company’s financial assets and liabilities that are measured at fair value on a recurring basis:
 
Level I
 
Level II
 
Level III
 
Total
At September 30, 2012:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Cash equivalents (a)
$
287,100

 
$

 
$

 
$
287,100

Liabilities:
 
 
 
 
 
 
 
Interest rate swap contracts
$

 
$
24,429

 
$

 
$
24,429

At December 31, 2011:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Cash equivalents (a)
$
202,276

 
$

 
$

 
$
202,276

Liabilities:
 
 
 
 
 
 
 
Interest rate swap contracts
$

 
$
19,091

 
$

 
$
19,091

(a)
Represents the Company’s investment in money market funds.
The Company’s cash equivalents are classified within Level I of the fair value hierarchy because they are valued using quoted market prices.
The Company’s interest rate swap contracts are classified within Level II of the fair value hierarchy and their fair values are determined based on a market approach valuation technique that uses readily observable market parameters and the consideration of counterparty risk.

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Table of Contents
AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(unaudited)

Credit Facility Debt and Senior Notes
The fair values of each of the Company’s debt instruments are based on quoted market prices for the same or similar issues or on the current rates offered to the Company for instruments of the same remaining maturities.
The carrying values and estimated fair values of the Company’s financial instruments, excluding those that are carried at fair value in the consolidated balance sheets are summarized as follows:
 
September 30, 2012
 
Carrying
Amount
 
Estimated
Fair Value
Debt instruments:
 
 
 
Credit facility debt
$
1,502,479

 
$
1,495,866

Senior notes
687,169

 
791,000

 
$
2,189,648

 
$
2,286,866

 
December 31, 2011
 
Carrying
Amount
 
Estimated
Fair Value
Debt instruments:
 
 
 
Credit facility debt
$
1,604,846

 
$
1,550,960

Senior notes
686,434

 
761,250

 
$
2,291,280

 
$
2,312,210

Fair value estimates related to the Company’s debt instruments presented above are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgments and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
 
Note 10. Concentration of Risk
Financial Instruments
Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash and cash equivalents and trade accounts receivable. Cash is invested in money market funds and bank time deposits. The Company monitors the financial institutions and money market funds where it invests its cash and cash equivalents with diversification among counterparties to mitigate exposure to any single financial institution. The Company’s emphasis is primarily on safety of principal and liquidity and secondarily on maximizing the yield on its investments.
Customers
Two customers accounted for the following percentages of the Company’s revenues, net:
 
Nine Months Ended September 30,
 
2012
 
2011
Customer 1
*

 
11
%
Customer 2
12
%
 
13
%
 *
Less than 10%
Failure to renew affiliation agreements with the Company’s largest customers, or renewal on less favorable terms, or the termination of those agreements could have a material adverse effect on the Company’s business. A reduced distribution of the Company’s programming networks would adversely affect the Company’s affiliation fee revenue, and impact the Company’s ability to sell advertising or the rates the Company charges for such advertising.
At September 30, 2012, Customer 2 represented 10% of the Company’s net trade receivable balances.

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Table of Contents
AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(unaudited)

Note 11. Related Party Transactions
Members of the Dolan Family, for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended, including trusts for the benefit of the Dolan Family, collectively beneficially own all of the Company’s outstanding Class B Common Stock and own approximately 3% of the Company’s outstanding Class A Common Stock. Such shares of the Company’s Class A Common Stock and Class B Common Stock, collectively, represent approximately 67% of the aggregate voting power of the Company’s outstanding common stock. Members of the Dolan Family are also the controlling stockholders of both Cablevision and MSG.
In connection with the Distribution, the Company entered into various agreements with Cablevision, such as a distribution agreement, a tax disaffiliation agreement, a transition services agreement, an employee matters agreement and certain related party arrangements. These agreements govern certain of the Company’s relationships with Cablevision subsequent to the Distribution and provide for the allocation of employee benefits, taxes and certain other liabilities and obligations attributable to periods prior to the Distribution. These agreements also include arrangements with respect to transition services and a number of on-going commercial relationships. The distribution agreement includes an agreement that the Company and Cablevision agree to provide each other with indemnities with respect to liabilities arising out of the businesses Cablevision transferred to the Company.
The Company provides services to and receives services from Cablevision and MSG. Until the Distribution date, the consolidated financial statements of the Company reflect the application of certain cost allocation policies of Cablevision. Management believes that these allocations were made on a reasonable basis. However, it is not practicable to determine whether the charged amounts represent amounts that might have been incurred on a stand-alone basis, including as a separate independent publicly owned company, as there are no company-specific or comparable industry benchmarks with which to make such estimates. Further, as many of these transactions are conducted between subsidiaries under common control of the Dolan Family, amounts charged for these services may not represent amounts that might have been received or incurred if the transactions were based upon arm’s-length negotiations. Through the Distribution date, the Company paid Cablevision a management fee pursuant to a consulting agreement between Cablevision and certain of the Company’s subsidiaries. The consulting agreement was terminated on the Distribution date and the Company did not replace it.
The Company records revenues, net from subsidiaries of Cablevision and MSG. Revenues, net from related parties amounted to $8,106 and $7,901 for the three months ended September 30, 2012 and 2011, respectively. Revenues, net from related parties amounted to $24,281 and $23,869 for the nine months ended September 30, 2012 and 2011, respectively.
In addition, the Company and its related parties routinely enter into transactions with each other in the ordinary course of business. Amounts charged to the Company, included in technical and operating expenses, pursuant to transactions with its related parties amounted to $155 and $1,292 for the three months ended September 30, 2012 and 2011, respectively, and $465 and $3,893 for the nine months ended September 30, 2012 and 2011, respectively. Amounts charged (credited) to the Company, included in selling, general and administrative expenses, pursuant to the transition services agreement and for other transactions, including management fees allocated by Cablevision for periods through the Distribution date, with its related parties amounted to $(1,174) and $3,184 for the three months ended September 30, 2012 and 2011, respectively, and $1,930 and $53,934 for the nine months ended September 30, 2012 and 2011, respectively. Amounts charged to the Company for the three and nine months ended September 30, 2012 are net of shared legal fees charged to Cablevision associated with the DISH Network Contract Dispute (see Note 7).

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AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(unaudited)

Note 12. Cash Flows
The Company’s non-cash investing and financing activities and other supplemental data were as follows:
 
Nine Months Ended September 30,
 
2012
 
2011
Non-Cash Investing and Financing Activities:
 
 
 
Continuing Operations:
 
 
 
Deemed capital (distribution) contribution related to the utilization of Cablevision tax losses (see Note 4)
$
(1,448
)
 
$
37,912

Deemed capital (distribution) contribution, net related to adjustments to the liability for uncertain tax positions and net deferred tax assets as a result of the Distribution (see Note 4)
(1,148
)
 
44,508

Capital distribution for the transfer of a promissory note receivable to Cablevision (see Promissory Note discussion below)

 
(17,113
)
Deemed capital distribution to Cablevision related to employee benefit plans as a result of the Distribution (see Employee Matters Agreement discussion below)

 
(6,602
)
Deemed capital distribution associated with the issuance of debt to Cablevision (see Issuance of Debt to Cablevision discussion below)

 
(1,250,000
)
Deemed capital contribution related to the allocation of Cablevision share-based compensation expense

 
8,343

Leasehold improvements paid by landlord
2,071

 
150

Increase in capital lease obligations and related assets
1,399

 
39

Supplemental Data:
 
 
 
Cash interest paid — continuing operations
99,193

 
64,300

Income taxes paid, net — continuing operations (see Income Taxes Paid, Net discussion below)
19,892

 
8,289

Promissory Note
In September 2009, RMH and one of its subsidiaries that was transferred by the Company to Cablevision on December 31, 2010 agreed to the terms of a promissory note having an initial principal amount of $0 and increasing from time to time by advances made by RMH, with an interest rate of 8.625%. Interest income recognized by RMH related to this note amounted to $0 and $120 for the three and nine months ended September 30, 2011, respectively. On January 31, 2011, RMH distributed to a subsidiary of Cablevision all of its rights, title and interest in and to the promissory note. This distribution, which amounted to $17,113, including principal and accrued and unpaid interest, is reflected as a non-cash capital distribution for the nine months ended September 30, 2011.
Employee Matters Agreement
In connection with the Distribution, AMC Networks entered into an Employee Matters Agreement with Cablevision which allocated assets, liabilities and responsibilities with respect to certain employee compensation and benefit plans and programs and certain other related matters. As a result of such agreement, as of June 30, 2011, AMC Networks recorded a net receivable from Cablevision of $876, an increase in accrued employee related costs of $7,478 and a capital distribution of $6,602 which decreased additional paid-in capital for the transfer to the Company from Cablevision of the obligations related to the Company’s employees’ participant accounts in the Cablevision Excess Savings Plan $(3,616) and the Cablevision Excess Cash Balance Pension Plan $(3,862) and for the Company’s obligation to Cablevision for the $6,193 unfunded liability associated with Company employee participants in Cablevision’s Cash Balance Pension Plan. In addition, the Company reduced its long-term incentive plan and stock appreciation rights liabilities and increased amounts due to related parties by $6,742 for its obligation to pay Cablevision for its allocated share of the related expense for Cablevision corporate employees through June 30, 2011. As of December 31, 2011, these related party balances were settled.

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AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(unaudited)

Issuance of Debt to Cablevision
In connection with the Distribution, as partial consideration for Cablevision’s contribution of the membership interests in RMH to the Company, $1,250,000, net of discount, of AMC Networks debt was issued to CSC Holdings, which was reflected as a deemed capital distribution in the consolidated statement of stockholders’ deficiency for the year ended December 31, 2011.
Income Taxes Paid, Net
Income taxes paid, net increased by $11,603 primarily due to federal estimated tax payments during the nine months ended September 30, 2012, which were based on annualized taxable income after utilization of NOLs.
Note 13. Segment Information
As discussed in Note 1, the Company classifies its operations into two reportable segments: National Networks, and International and Other. These reportable segments are strategic business units that are managed separately.
The Company generally allocates all corporate overhead costs to the Company’s two reportable segments based upon their proportionate estimated usage of services, including such costs as executive salaries and benefits, costs of maintaining corporate headquarters, facilities and common support functions (such as human resources, legal, finance, tax, accounting, audit, treasury, risk management, strategic planning and information technology) as well as sales support functions and creative and production services.
The Company evaluates segment performance based on several factors, of which the primary financial measure is business segment adjusted operating cash flow (defined as operating income (loss) before depreciation and amortization, share-based compensation expense or benefit and restructuring expense or credit), a non-GAAP measure. The Company has presented the components that reconcile adjusted operating cash flow to operating income, an accepted GAAP measure. Information as to the continuing operations of the Company’s reportable segments is set forth below.
 
Three Months Ended September 30, 2012
 
National
Networks
 
International
and Other
 
Inter-segment
eliminations
 
Consolidated
Revenues, net
 
 
 
 
 
 
 
Advertising
$
107,453

 
$
5

 
$

 
$
107,458

Affiliation fee and other
198,775

 
29,302

 
(3,479
)
 
224,598

Consolidated revenues, net
$
306,228

 
$
29,307

 
$
(3,479
)
 
$
332,056

Adjusted operating cash flow (deficit)
$
116,440

 
$
(8,117
)
 
$
1,266

 
$
109,589

Depreciation and amortization
(14,449
)
 
(3,919
)
 

 
(18,368
)
Share-based compensation expense
(3,463
)
 
(899
)
 

 
(4,362
)
Operating income (loss)
$
98,528

 
$
(12,935
)
 
$
1,266

 
$
86,859

 
Three Months Ended September 30, 2011
 
National
Networks
 
International
and Other
 
Inter-segment
eliminations
 
Consolidated
Revenues, net
 
 
 
 
 
 
 
Advertising
$
98,482

 
$
5

 
$

 
$
98,487

Affiliation fee and other
159,865

 
30,715

 
(5,153
)
 
185,427

Consolidated revenues, net
$
258,347

 
$
30,720

 
$
(5,153
)
 
$
283,914

Adjusted operating cash flow (deficit)
$
123,228

 
$
(21
)
 
$
(245
)
 
$
122,962

Depreciation and amortization
(21,453
)
 
(3,559
)
 

 
(25,012
)
Share-based compensation expense
(3,053
)
 
(644
)
 

 
(3,697
)
Restructuring credit

 
191

 

 
191

Operating income (loss)
$
98,722

 
$
(4,033
)
 
$
(245
)
 
$
94,444


 

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AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(unaudited)

 
Nine Months Ended September 30, 2012
 
National
Networks
 
International
and Other
 
Inter-segment
eliminations
 
Consolidated
Revenues, net
 
 
 
 
 
 
 
Advertising
$
366,218

 
$
15

 
$

 
$
366,233

Affiliation fee and other
549,417

 
81,907

 
(11,692
)
 
619,632

Consolidated revenues, net
$
915,635

 
$
81,922

 
$
(11,692
)
 
$
985,865

Adjusted operating cash flow (deficit)
$
385,435

 
$
(25,738
)
 
$
2,806

 
$
362,503

Depreciation and amortization
(56,281
)
 
(11,205
)
 

 
(67,486
)
Share-based compensation expense
(10,111
)
 
(2,735
)
 

 
(12,846
)
Restructuring credit

 
3

 

 
3

Operating income (loss)
$
319,043

 
$
(39,675
)
 
$
2,806

 
$
282,174

Capital Expenditures
$
4,271

 
$
9,402

 
$

 
$
13,673

 
Nine Months Ended September 30, 2011
 
National
Networks
 
International
and Other
 
Inter-segment
eliminations
 
Consolidated
Revenues, net
 
 
 
 
 
 
 
Advertising
$
312,318

 
$
15

 
$

 
$
312,333

Affiliation fee and other
464,602

 
86,312

 
(14,465
)
 
536,449

Consolidated revenues, net
$
776,920

 
$
86,327

 
$
(14,465
)
 
$
848,782

Adjusted operating cash flow (deficit)
$
346,476

 
$
(11,883
)
 
$
(52
)
 
$
334,541

Depreciation and amortization
(64,505
)
 
(10,692
)
 

 
(75,197
)
Share-based compensation expense
(9,838
)
 
(2,349
)
 

 
(12,187
)
Restructuring credit

 
240

 

 
240

Operating income (loss)
$
272,133

 
$
(24,684
)
 
$
(52
)
 
$
247,397

Capital Expenditures
$
2,256

 
$
4,873

 
$

 
$
7,129

Inter-segment eliminations are primarily revenues recognized by the International and Other segment for transmission revenues recognized by AMC Networks Broadcasting & Technology and the licensing of its program rights by the national programming networks.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Inter-segment revenues
 
 
 
 
 
 
 
National Networks
$
(6
)
 
$
(125
)
 
$
(510
)
 
$
(380
)
International and Other
(3,473
)
 
(5,028
)
 
(11,182
)
 
(14,085
)
 
$
(3,479
)
 
$
(5,153
)
 
$
(11,692
)
 
$
(14,465
)
Substantially all revenues and assets of the Company are attributed to or located in the U.S.

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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 new programming services;
demand for advertising inventory;
the demand for our programming among cable and other multichannel video programming distribution platforms, including direct broadcast satellite (“DBS”) and platforms operated by telecommunications providers (we refer collectively to these cable and other multichannel video programming distributors as “multichannel video programming distributors” or “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 film distribution businesses;
market demand for our services internationally and for our 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;
the outcome of litigation and other proceedings, including the matters described in the notes to our consolidated financial statements;
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;
whether pending uncompleted transactions, if any, 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;
allocation of the proceeds from the settlement of the litigation with DISH Network, as described in Note 7, Commitments and Contingencies in the unaudited consolidated financial statements included elsewhere herein; and
the factors described under Item 1A, “Risk Factors” in our 2011 Annual Report on Form 10-K (the “2011 Form 10-K”), as filed with the Securities and Exchange Commission (“SEC”).
We disclaim any obligation to update or revise the forward-looking statements contained herein, except as otherwise required by applicable federal securities laws.

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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.
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 unaudited consolidated financial statements and notes thereto included elsewhere herein and our 2011 Form 10-K to enhance the understanding of our financial condition, changes in financial condition and results of our operations. Unless the context otherwise requires, all references to “we,” “us,” “our,” “AMC Networks” or the “Company” refer to AMC Networks Inc., together with its direct and indirect subsidiaries. Our MD&A is organized as follows:
Business Overview. This section provides a general description of our business, as well as other matters that we believe are important in understanding our results of operations and financial condition and in anticipating future trends.
Results of Operations. This section provides an analysis of our results of operations for the three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 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 September 30, 2012, as well as an analysis of our cash flows for the nine months ended September 30, 2012 and 2011. The discussion of our financial condition and liquidity includes summaries of (i) our primary sources of liquidity and (ii) our off-balance sheet arrangements that existed at September 30, 2012 and December 31, 2011.
Critical Accounting Policies. This section provides an update to, and should be read in conjunction with, the critical accounting policies and estimates summarized in our 2011 Form 10-K under “Item 7- Management's Discussion and Analysis of Financial Condition and Results of Operations.” Specifically, our goodwill and identifiable indefinite-lived intangible assets policy is updated in order to provide the results of our annual impairment testing performed as of the end of February 2012. In addition, our program rights policy is updated to provide additional clarification regarding the role this policy has in understanding our results of operations.
Business Overview
We manage our business through the following two reportable segments:
National Networks: Includes four nationally distributed programming networks: AMC, WE tv, IFC and Sundance Channel. These programming networks are distributed throughout the United States (“U.S.”) 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; and AMC Networks Broadcasting & Technology, our network technical services business, which primarily services the programming networks of the Company. AMC and Sundance Channel are distributed in Canada and Sundance Channel and WE tv are distributed in other countries throughout Europe and Asia. The International and Other reportable segment also includes VOOM HD, which we are winding down, and which continues to sell certain limited amounts of programming through program license agreements.

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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.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Revenues, net
 
 
 
 
 
 
 
National Networks
$
306,228

 
$
258,347

 
$
915,635

 
$
776,920

International and Other
29,307

 
30,720

 
81,922

 
86,327

Inter-segment eliminations
(3,479
)
 
(5,153
)
 
(11,692
)
 
(14,465
)
Consolidated revenues, net
$
332,056

 
$
283,914

 
$
985,865

 
$
848,782

Operating income (loss)
 
 
 
 
 
 
 
National Networks
$
98,528

 
$
98,722

 
$
319,043

 
$
272,133

International and Other
(12,935
)
 
(4,033
)
 
(39,675
)
 
(24,684
)
Inter-segment eliminations
1,266

 
(245
)
 
2,806

 
(52
)
Consolidated operating income
$
86,859

 
$
94,444

 
$
282,174

 
$
247,397

AOCF (deficit)
 
 
 
 
 
 
 
National Networks
$
116,440

 
$
123,228

 
$
385,435

 
$
346,476

International and Other
(8,117
)
 
(21
)
 
(25,738
)
 
(11,883
)
Inter-segment eliminations
1,266

 
(245
)
 
2,806

 
(52
)
Consolidated AOCF
$
109,589

 
$
122,962

 
$
362,503

 
$
334,541

We evaluate segment performance based on several factors, of which the primary financial measure is business segment AOCF. We define AOCF, which is not a generally accepted accounting principles (“GAAP”) financial measure, as operating income (loss) before depreciation and amortization, share-based compensation expense or benefit and restructuring expense or credit.
We believe that AOCF is an appropriate measure for evaluating the operating performance on both a business 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:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Operating income
$
86,859

 
$
94,444

 
$
282,174

 
$
247,397

Share-based compensation expense
4,362

 
3,697

 
12,846

 
12,187

Restructuring credit

 
(191
)
 
(3
)
 
(240
)
Depreciation and amortization
18,368

 
25,012

 
67,486

 
75,197

AOCF
$
109,589

 
$
122,962

 
$
362,503

 
$
334,541

National Networks
In our National Networks segment, which accounted for 93% of our consolidated revenues for the nine months ended September 30, 2012, we earn revenues in two principal ways. First, we receive distribution revenue from affiliation fees paid by distributors. These 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 who receive our programming, referred to as “viewing 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. Other sources of revenue are primarily derived from the licensing of original programming for distribution, including digital, foreign and home video distribution.

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Table of Contents


Advertising is our second principal source of revenues. Under our affiliation agreements with our distributors, we have the right to sell a specified amount of national advertising time on certain of our programming networks. Our advertising revenues are more variable than affiliation fee revenues because virtually all 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. In certain 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 Media Research (“Nielsen”). As of September 30, 2012, our national programming networks had approximately 1,000 advertisers representing companies in a broad range of sectors, including the health, insurance, food, automotive and retail industries. Our AMC, WE tv and IFC programming networks use a traditional advertising sales model, while Sundance Channel principally sells sponsorships. Prior to December 2010, IFC 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 revenue 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 Sundance Channel. WE tv, IFC and Sundance Channel, although carried by substantially all of the larger distributors, have higher growth opportunities due to their current penetration levels with those distributors. IFC and Sundance Channel are currently carried primarily on digital tiers, while WE tv is carried on either analog expanded basic or digital tiers. Therefore, WE tv, IFC and Sundance Channel penetration rates may increase if distributors are successful in converting their analog subscribers to digital tiers of service that include those networks. 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 in some instances made 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 number of minutes of national advertising sold and by increasing the rates we charge for such advertising, but, ultimately, the level of our advertising revenues, in most cases, 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. Other revenues vary based on the timing of availability of our programming to distributors.
Programming expense, including the amortization and impairments of programming rights, such as those for original programming, feature films and licensed series, included in technical and operating expense, represents the largest expense of the National Networks segment. The other components of technical and operating expense primarily include participation and residual costs, distribution and production related costs and program operating costs, such as origination, transmission, uplinking and encryption.
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 from programming services 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.
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, the majority of which have been critically acclaimed, award winning and commercially successful. These successful series have resulted in higher audience ratings for our networks. Historically, in periods when we air original programming, our ratings have increased. During 2012, AMC aired five scripted original series. This resulted in higher audience ratings for AMC. Among other things, higher audience ratings drive increased revenues particularly 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.
Scripted 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.

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Table of Contents


See “ — Critical Accounting Policies and Estimates” for a discussion of the amortization and write-off of program rights.
DISH Network
Effective May 20, 2012 with regard to Sundance Channel and July 1, 2012 with regard to AMC, WE tv and IFC, DISH Network L.L.C. (“DISH Network”) terminated carriage of our national networks. At the time of the termination, DISH Network's termination reduced the Company's total subscribers under affiliation agreements by approximately 13%. This termination had a material impact on revenues, net for the three months ended September 30, 2012; however, it did not have a material impact on revenues, net for the nine months ended September 30, 2012. Additionally, the termination had a material impact on the Company's and the National Network's AOCF and operating income for both the three and nine months ended September 30, 2012.
On October 21, 2012, DISH Network, VOOM HD, and Cablevision entered into a confidential settlement agreement and release (the “Settlement Agreement”) to settle litigation between VOOM HD and DISH Network involving various claims arising out of a joint venture between the parties. See Note 7, Commitments and Contingencies in the unaudited consolidated financial statements included elsewhere herein for a description of the principal terms of this settlement agreement. Simultaneously with the execution of the Settlement Agreement, DISH Network entered into a long-term affiliation agreement with AMC Network Entertainment LLC, WE: Women's Entertainment LLC, The Independent Film Channel LLC, The Sundance Channel L.L.C. and Fuse Network LLC, a subsidiary of The Madison Square Garden Company that provided for resumption of carriage of all the networks by no later than November 1, 2012.
Cablevision and the Company entered into an agreement which provides that Cablevision and the Company will share equally in the proceeds (including in the value of any non-cash consideration) of any settlement of the litigation with DISH Network. As such, the allocation between Cablevision and the Company of the proceeds from the settlement will be determined pursuant to this agreement.
International and Other
Our International and Other segment primarily includes the operations of AMC/Sundance Channel Global, IFC Films, AMC Networks Broadcasting & Technology and VOOM HD.
VOOM HD historically offered a suite of channels, produced exclusively in high definition (“HD”) and marketed for distribution to DBS and other multichannel video programming distributors. VOOM was available in the U.S. only on the cable television systems of Cablevision Systems Corporation (Cablevision Systems Corporation and its subsidiaries are referred to as “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. See also Note 7, Commitments and Contingencies in the unaudited consolidated financial statements included elsewhere herein.
Although we view our international expansion as an important long-term strategy, our international operations are currently expected to represent only a small percentage of our projected overall financial results over the next five years. However, international expansion could provide a benefit to our financial results if we are able to grow this portion of our business faster than expected. 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.
Spin-off from Cablevision
On June 30, 2011, Cablevision spun-off the Company (the “Distribution”) and we became an independent public company. In connection with the Distribution, Cablevision contributed all of the membership interests of Rainbow Media Holdings LLC (“RMH”) to us. Both Cablevision and the Company continue to be controlled by the Dolan family.
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 11 in the unaudited consolidated financial statements included elsewhere herein. As a separate, stand-alone public company, we have expanded our financial, administrative and other staff to support the related new requirements. In addition, we continue to add staff and are adding systems to replace some of the functions previously provided by Cablevision. However, our corporate operating costs as a separate company subsequent to the Distribution, including those associated with being a publicly-traded company, through September 30, 2012 have been, and are expected to continue to be, lower than the historical allocation of expenses related to certain corporate functions (including management fee charges). Pursuant to a consulting agreement with Cablevision, until the Distribution date, the Company paid a management fee calculated based on

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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.
Cautionary Note Concerning Historical Financial Statements
As noted above, our consolidated financial statements for periods prior to the Distribution have been derived from the consolidated financial statements and accounting records of Cablevision and reflect certain assumptions and allocations. Our results of operations and cash flows could differ from those that might have resulted had we operated autonomously or as an entity independent of Cablevision.
Our capital structure after the Distribution is different from the capital structure presented in the historical consolidated financial statements for periods prior to the Distribution and, accordingly, our interest expense in periods after June 30, 2011 as a separate independent entity is, and we expect will continue to be, materially higher than the interest expense reflected in our historical consolidated financial statements in periods prior to June 30, 2011.
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.
Additional 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. We have experienced some of the effects of the recent economic downturn. Continuation of events such as these may adversely impact our results of operations, cash flows and financial position.

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Consolidated Results of Operations
Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011
The following table sets forth our consolidated results of operations for the periods indicated.
 
Three Months Ended September 30,
 
 
 
 
 
2012
 
2011
 
 
 
 
 
Amount
 
% of
Revenues,
net
 
Amount
 
% of
Revenues,
net
 
$ change
 
%
change
Revenues, net
$
332,056

 
100
 %
 
$
283,914

 
100
 %
 
$
48,142

 
17
 %
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Technical and operating (excluding depreciation and amortization)
129,627

 
39

 
96,420

 
34

 
33,207

 
34

Selling, general and administrative
97,202

 
29

 
68,229

 
24

 
28,973

 
42

Restructuring credit

 

 
(191
)
 

 
191

 
(100
)
Depreciation and amortization
18,368

 
6

 
25,012

 
9

 
(6,644
)
 
(27
)
Total operating expenses
245,197

 
74

 
189,470

 
67

 
55,727

 
29

Operating income
86,859

 
26

 
94,444

 
33

 
(7,585
)
 
(8
)
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
Interest expense, net
(29,862
)
 
(9
)
 
(31,471
)
 
(11
)
 
1,609

 
(5
)
Write-off of deferred financing costs
(334
)
 

 

 

 
(334
)
 

Loss on extinguishment of debt

 

 
(17
)
 

 
17

 
(100
)
Miscellaneous, net
1

 

 
(199
)
 

 
200

 
(101
)
Total other income (expense)
(30,195
)
 
(9
)
 
(31,687
)
 
(11
)
 
1,492

 
(5
)
Income from continuing operations before income taxes
56,664

 
17

 
62,757

 
22

 
(6,093
)
 
(10
)
Income tax expense
(20,121
)
 
(6
)
 
(22,440
)
 
(8
)
 
2,319

 
(10
)
Income from continuing operations
36,543

 
11

 
40,317

 
14

 
(3,774
)
 
(9
)
Income (loss) from discontinued operations, net of income taxes
105

 

 
(314
)
 

 
419

 
(133
)
Net Income
$
36,648

 
11
 %
 
$
40,003

 
14
 %
 
$
(3,355
)
 
(8
)%
The following is a reconciliation of our consolidated operating income to AOCF:
 
Three Months Ended September 30,
 
 
 
 
 
2012
 
2011
 
$ change
 
% change
Operating income
$
86,859

 
$
94,444

 
$
(7,585
)
 
(8
)%
Share-based compensation expense
4,362

 
3,697

 
665

 
18

Restructuring credit

 
(191
)
 
191

 
(100
)
Depreciation and amortization
18,368

 
25,012

 
(6,644
)
 
(27
)
Consolidated AOCF
$
109,589

 
$
122,962

 
$
(13,373
)
 
(11
)%


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National Networks Segment Results
The following table sets forth our National Networks segment results for the periods indicated.
 
Three Months Ended September 30,
 
 
 
 
 
2012
 
2011
 
 
 
 
 
Amount
 
% of
Revenues,
net
 
Amount
 
% of
Revenues,
net
 
$ change
 
%
change
Revenues, net
$
306,228

 
100
%
 
$
258,347

 
100
%
 
$
47,881

 
19
 %
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Technical and operating (excluding depreciation and amortization)
115,366

 
38

 
82,159

 
32

 
33,207

 
40

Selling, general and administrative
77,885

 
25

 
56,013

 
22

 
21,872

 
39

Depreciation and amortization
14,449

 
5

 
21,453

 
8

 
(7,004
)
 
(33
)
Operating income
$
98,528

 
32
%
 
$
98,722

 
38
%
 
$
(194
)
 
 %
The following is a reconciliation of our National Networks segment operating income to AOCF:
 
Three Months Ended September 30,
 
 
 
 
 
2012
 
2011
 
$ change
 
%
change
Operating income
$
98,528