SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
______________
FORM 10-Q
______________
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 2001
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 1-14595
FOX ENTERTAINMENT GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 95-4066193
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1211 Avenue of the Americas, New York, New York 10036
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (212) 852-7111
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 [X] No [_]
As of November 9, 2001, 298,804,106 shares of Class A Common Stock, par value
$.01 per share, and 547,500,000 shares of Class B Common Stock, par value $.01
per share, were outstanding.
FOX ENTERTAINMENT GROUP, INC.
FORM 10-Q
TABLE OF CONTENTS
-----------------
Part I. Financial Information Page
----
Item 1. Financial Statements
Unaudited Consolidated Condensed Statements of Operations for
the three months ended September 30, 2001 and 2000 ................................... 3
Consolidated Condensed Balance Sheets as of September 30, 2001
(unaudited) and June 30, 2001 (audited) .............................................. 4
Unaudited Consolidated Condensed Statements of Cash Flows for
the three months ended September 30, 2001 and 2000 ................................... 5
Notes to the Unaudited Consolidated Condensed Financial Statements ................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations ........................................................................... 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk ........................... 22
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K ..................................................... 22
Signature ..................................................................................... 23
2
FOX ENTERTAINMENT GROUP, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in million except per share amounts)
For the three months ended
September 30,
-------------------------------
2001 2000
-------- --------
Revenues $ 2,091 $ 1,828
Expenses:
Operating 1,515 1,262
Selling, general and administrative 305 278
Depreciation and amortization 129 117
-------- --------
Operating income 142 171
Other Expense:
Interest expense, net (72) (84)
Equity losses of affiliates (51) (20)
Minority interest in subsidiaries (11) (1)
-------- --------
Income before income taxes and cumulative effect of accounting change 8 66
Income tax expense on a stand-alone basis (4) (30)
-------- --------
Income before cumulative effect of accounting change 4 36
Cumulative effect of accounting change, net of tax (26) (494)
-------- --------
Net income (loss) $ (22) $ (458)
======== ========
Basic and diluted earnings per share before cumulative effect of
accounting change $ 0.01 $ 0.05
Basic and diluted cumulative effect of accounting change, net of tax, per
share (0.04) (0.68)
-------- --------
Basic and diluted earnings (loss) per share $ (0.03) $ (0.63)
======== ========
Basic and diluted weighted average number of common equivalent shares
outstanding 806 724
======== ========
The accompanying notes are an integral part of these unaudited consolidated
condensed financial statements.
3
FOX ENTERTAINMENT GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in millions except share and per share amounts)
As of
------------------------------------
September 30, 2001 June 30, 2001
------------------ -------------
(unaudited) (audited)
Assets
Cash and cash equivalents $ 120 $ 66
Accounts receivable, net 2,650 2,504
Filmed entertainment and television programming costs, net 4,009 3,703
Investments in equity affiliates 1,400 1,493
Property and equipment, net 1,498 1,454
Intangible assets, net 12,683 7,647
Other assets and investments 1,151 989
-------- --------
Total assets $ 23,511 $ 17,856
======== ========
Liabilities
Accounts payable and accrued liabilities $ 2,059 $ 1,705
Participations, residuals and royalties payable 993 890
Television programming rights payable 1,512 1,133
Deferred revenue 620 553
Borrowings 948 1,032
Deferred income taxes 1,638 706
Other liabilities 125 142
-------- --------
7,895 6,161
Due to affiliates of News Corporation 3,364 2,866
-------- --------
Total liabilities 11,259 9,027
-------- --------
Minority interest in subsidiaries 871 861
Commitments and contingencies
Shareholders' Equity
Preferred Stock, $.01 par value per share; 100,000,000 shares authorized; 0
shares issued and outstanding at September 30 and June 30, 2001 - -
Class A Common Stock, $.01 par value per share; 1,000,000,000 authorized;
298,804,106 and 176,559,834 issued and outstanding at September 30 and
June 30, 2001, respectively 3 2
Class B Common Stock, $.01 par value per share; 650,000,000 authorized;
547,500,000 issued and outstanding at September 30 and June 30, 2001 6 6
Paid-in capital 11,454 8,023
Retained deficit and accumulated other comprehensive income (82) (63)
-------- --------
Total shareholders' equity 11,381 7,968
-------- --------
Total liabilities and shareholders' equity $ 23,511 $ 17,856
======== ========
The accompanying notes are an integral part of these unaudited consolidated
condensed financial statements.
4
FOX ENTERTAINMENT GROUP, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in millions)
For the three months ended
September 30,
------------------------------
2001 2000
------- -------
Operating activities:
Net income (loss) $ (22) $ (458)
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization 129 117
Cumulative effect of accounting change, net of tax 26 494
Equity losses of affiliates and distributions 59 45
Change in operating assets and liabilities, net of acquisitions:
Accounts receivable and other assets (12) 61
Filmed entertainment and television programming costs, net (253) (219)
Accounts payable and accrued liabilities 67 61
Participations, residuals and royalties payable and other liabilities 103 (141)
------- -------
Net cash provided by (used in) operating activities 97 (40)
------- -------
Investing activities:
Acquisitions, net of cash acquired (381) -
Investments in equity affiliates, net of acquisitions (7) (63)
Other investments (15) (102)
Purchases of property and equipment, net of acquisitions (20) (31)
Disposals of property and equipment 10 -
------- -------
Net cash used in investing activities (413) (196)
------- -------
Financing activities:
Borrowings (repayments) (93) 61
Increase in minority interest in subsidiaries 12 -
Advances from (repayments to) affiliates of News Corporation, net 451 155
------- -------
Net cash provided by financing activities 370 216
------- -------
Net increase (decrease) in cash and cash equivalents 54 (20)
Cash and cash equivalents, beginning of period 66 114
------- -------
Cash and cash equivalents, end of period $ 120 $ 94
======= =======
The accompanying notes are an integral part of these unaudited consolidated
condensed financial statements.
5
FOX ENTERTAINMENT GROUP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
Fox Entertainment Group, Inc. (the "Company") is principally engaged in the
development, production and worldwide distribution of feature films and
television programs, television broadcasting and cable network programming. The
Company was incorporated in Delaware in May 1985 as Twentieth Holdings
Corporation. In 1998, the Company changed its corporate name to Fox
Entertainment Group, Inc. The Company is a majority-owned subsidiary of The News
Corporation Limited ("News Corporation"), which, as of September 30, 2001, holds
equity and voting interests in the Company of 85.25% and 97.84%, respectively.
The accompanying unaudited consolidated condensed financial statements of the
Company have been prepared in accordance with accounting principles generally
accepted in the United States ("GAAP") for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the
opinion of management, all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation have been reflected in
these unaudited consolidated condensed financial statements. Operating results
for the interim periods presented are not necessarily indicative of the results
that may be expected for the fiscal year ending June 30, 2002.
These interim unaudited consolidated condensed financial statements and notes
thereto should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's Form 10-K filed with the
Securities and Exchange Commission on September 28, 2001.
The preparation of financial statements in conformity with GAAP requires that
management make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the consolidated condensed financial
statements and the reported amounts of revenues and expenses during the
reporting period. Because of the use of estimates inherent in the financial
reporting process, actual results could differ from those estimates.
At the beginning of fiscal 2001, the Company adopted Statement of Position No.
00-2, "Accounting by Producers or Distributors of Films" ("SOP 00-2"), which
established new accounting standards for producers and distributors of films and
supersedes Statement of Financial Accounting Standards ("SFAS") No. 53,
"Financial Reporting by Producers and Distributors of Motion Pictures Films."
SOP 00-2 establishes new accounting standards for, among other things, marketing
and development costs. The Company recorded a one-time, non-cash charge of $494
million, net of $302 million tax, as a cumulative effect of accounting change as
of July 1, 2000. This charge primarily reflects the write-off of marketing and
certain development costs, which were previously capitalized under SFAS No. 53
and are no longer capitalizable under SOP 00-2. Subsequent to the adoption of
SOP 00-2, the Company's accounting policy is to expense marketing and certain
development costs as incurred.
Fox Family Worldwide, Inc. ("FFW"), an equity affiliate of the Company, adopted
SOP 00-2 on July 1, 2001, at which time they recorded a one-time, non-cash
charge of approximately $53 million as a cumulative effect of accounting change.
The Company's portion, approximately $26 million, has been accounted for as a
cumulative effect of accounting change in the accompanying unaudited condensed
consolidated statement of operations.
Total comprehensive income (loss) for the three months ended September 30, 2001
and 2000 was a loss of $19 million and a loss of $453 million, respectively.
Total other comprehensive income for the three months ended September 30, 2001
of $3 million consists of currency translation gains. Total other comprehensive
income for the three months ended September 30, 2000 was $5 million consisting
of currency translation gains offset by an unrealized loss on a foreign currency
forward contract.
Certain prior year amounts have been reclassified to conform to the fiscal 2002
presentation.
6
FOX ENTERTAINMENT GROUP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 2 - Chris-Craft Acquisition
On July 31, 2001, News Corporation, through a wholly-owned subsidiary, acquired
all of the outstanding common stock of Chris-Craft Industries, Inc. and its
subsidiaries, BHC Communications, Inc. and United Television, Inc.,
(collectively, "Chris-Craft"). The consideration for the acquisition was
approximately $2 billion in cash and approximately $3 billion in News
Corporation preferred American Depositary Receipts ("ADRs"). Simultaneously with
the closing of the merger, News Corporation transferred $3,432 million of net
assets, constituting Chris-Craft's ten television stations (the "Acquired
Stations") to the Company in exchange for 122,244,272 shares of the Company's
Class A Common Stock and net indebtedness of $48 million (the "Exchange"),
thereby increasing News Corporation's ownership in the Company from 82.76% to
85.25%. The Company has assigned the licenses issued by the Federal
Communications Commission ("FCC") for the Acquired Stations to its indirect
subsidiary, Fox Television Stations, Inc., which became the licensee and
controls the operations of the Acquired Stations.
The Company, as of the date of Exchange, July 31, 2001, has consolidated the
operations of the Acquired Stations with the exception of KTVX-TV in Salt Lake
City, whose operations have not been consolidated due to regulatory requirements
which precluded the Company from controlling the station and required its
disposal (see description of Clear Channel swap below). Accordingly, KTVX-TV is
treated as an asset held for sale and is included in Other assets and
investments on the September 30, 2001 balance sheet. For financial reporting
purposes, in accordance with Emerging Issues Task Force ("EITF") No. 90-5,
"Exchanges of Ownership Interests between Entities under Common Control," the
Company has recognized the assets and liabilities of Chris-Craft based upon
their acquired basis in the News Corporation merger.
In July 2001, News Corporation entered into a binding agreement to swap KTVX-TV
in Salt Lake City and KMOL-TV in San Antonio to Clear Channel Communications,
Inc. in exchange for WFTC-TV in Minneapolis (the "Clear Channel swap"). The
Clear Channel swap closed October 1, 2001. In addition, in August 2001, News
Corporation entered into an Asset Exchange Agreement to swap KBHK-TV in San
Francisco to Viacom Inc. in an exchange for WDCA-TV in Washington, DC and
KTXH-TV in Houston (the "Viacom swap", and together with the Clear Channel swap,
the "Station Swaps"). The Viacom swap closed November 1, 2001. All of the
stations exchanged in the Station Swaps were Acquired Stations.
The following table summarizes the preliminary fair values of the assets
transferred and liabilities assumed at the date of the Exchange.
As of July 31, 2001
------------------
(in millions)
Accounts receivable, net $ 109
Filmed entertainment and television programming costs, net 45
Property and equipment, net 92
Intangible assets, net 4,636
Other assets and investments 197
---------------
Total assets transferred 5,079
---------------
Television programming rights payable 381
Accrued expenses 221
Deferred income taxes 973
Other liabilities 72
---------------
Total liabilities assumed 1,647
---------------
Net assets transferred $ 3,432
===============
7
FOX ENTERTAINMENT GROUP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 2 - Chris-Craft Acquisition - continued
The $4,636 million of acquired intangible assets includes both goodwill and FCC
licenses, which are deemed to have indefinite lives, and therefore are not
subject to amortization in accordance with the provisions of SFAS No. 142,
"Goodwill and Other Intangible Assets." The goodwill was assigned to the
Television Stations segment and is not deductible for tax purposes. In
accordance with SFAS No. 109, "Accounting for Income Taxes," the Company has
recorded deferred taxes for the basis difference related to FCC licenses and
other acquired assets and liabilities. This difference has been included in
Intangible assets, net.
The above summary of estimated fair values is based on preliminary estimates and
is subject to adjustment.
The table below reflects the unaudited pro forma combined results of the Company
as if the Exchange and the Station Swaps had taken place as of July 1, 2000.
For the three months ended September 30,
--------------------------------------------
2001 2000
--------------------- --------------------
(in millions, except per share amounts)
Revenues $ 2,129 $ 1,945
Operating income 152 204
Cumulative effect of accounting change, net of tax (26) (494)
Net income (loss) (17) (442)
Basic and diluted earnings (loss) per share $ (0.02) $ (0.52)
The unaudited pro forma financial information is presented for comparative
purposes only and is not necessarily indicative of the operating results that
actually would have occurred had the Exchange and the Station Swaps been
consummated on July 1, 2000. In addition, these results are not intended to be a
projection of future results and do not reflect any synergies that might be
achieved from the combined operations.
8
FOX ENTERTAINMENT GROUP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 3 - Other Acquisitions and Dispositions
On July 25, 2001, as a result of the exercise of rights by existing
shareholders, the Company acquired 53.44% of Speedvision Network LLC
("Speedvision") for approximately $401 million. This acquisition resulted in the
Company owning approximately 85.46% of Speedvision. As a result, the Company has
consolidated the results of Speedvision beginning July 25, 2001. In October
2001, the Company acquired the remaining minority interest in Speedvision held
by Comcast Corporation ("Comcast"). The Company paid a purchase price of $111
million to acquire the remaining 14.54% of Speedvision. This transaction was
treated as a purchase in accordance with SFAS No. 141, "Business Combinations".
On July 25, 2001, as a result of the exercise of rights by existing
shareholders, the Company acquired 50.23% of Outdoor Life Network LLC ("Outdoor
Life") for approximately $309 million. This acquisition resulted in the Company
owning approximately 83.18% of Outdoor Life. The Company agreed to sell its
entire interest in Outdoor Life to Comcast. In accordance with SFAS No. 94,
"Consolidation of All Majority-Owned Subsidiaries," and EITF No. 87-11,
"Allocation of Purchase Price to Assets to be Sold," for the period from the
Company's acquisition of its additional 50.23% interest in Outdoor Life until
the closing of the sale of Outdoor Life to Comcast on October 30, 2001, control
of Outdoor Life was deemed to be temporary. Therefore, the results of operations
related to the additional 50.23% interest acquired of Outdoor Life will not be
consolidated in the Company's statement of operations. On October 30, 2001, the
Company completed the sale of its 83.18% interest in Outdoor Life to Comcast for
the aggregate purchase price of approximately $512 million in cash, of which
approximately $400 million was received prior to September 30, 2001. As a result
of this transaction, the Company will recognize a gain on the sale of Outdoor
Life in the second quarter of fiscal year 2002.
The Company and Liberty/TINTA LLC ("Liberty/TINTA"), a subsidiary of Liberty
Media Corporation ("Liberty"), each own 50% of International Sports Programming
Partners ("Fox Sports International"). On July 15, 2001, under a preexisting
option, Liberty exercised its right to cause Liberty/TINTA to sell its 50%
interest in Fox Sports International held by Liberty/TINTA to News Corporation
in exchange for an aggregate 3,633,866 ADRs of News Corporation representing
14,535,464 preferred shares subject to adjustment for dividends paid since July
1999. Under the terms of this transaction, News Corporation will transfer the
acquired interest in Fox Sports International to the Company for approximately
3,632,000 shares of Class A Common Stock. This transaction is expected to close
during the second quarter of fiscal 2002.
Note 4 - Segment Information
The Company manages and reports its activities in four business segments: Filmed
Entertainment, which principally consists of the production and acquisition of
live-action and animated motion pictures for distribution and licensing in all
formats in all entertainment media primarily in the United States, Canada and
Europe, and the production of original television programming in the United
States and Canada; Television Stations, which principally consists of the
operation of broadcast television stations in the United States; Television
Broadcast Network, which principally consists of the broadcasting of network
programming in the United States; and Cable Network Programming, which
principally consists of the production and licensing of programming distributed
through cable television systems and direct broadcast satellite operators in the
United States and professional sports team ownership in the United States.
In the first quarter of fiscal year 2002, management redefined its Filmed
Entertainment segment to reflect a change in how the business is analyzed and
evaluated. The redefined segment includes all of the previous filmed
entertainment activity along with the activity of the former Other Television
Businesses segment, primarily comprised of divisions which produce and
distribute television programming and also distribute feature motion pictures
for syndication and on cable television in the United States. Prior year
segments have been reclassified to conform to current year presentation.
The Company's reportable operating segments have been determined in accordance
with the Company's internal management structure, which is organized based on
operating activities. The Company evaluates performance based upon several
factors, of which the primary financial measure is segment operating income.
9
FOX ENTERTAINMENT GROUP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 4 - Segment Information - continued
For the three months ended
September 30,
---------------------------------
2001 2000
------------- -------------
(in millions)
Revenues:
Filmed Entertainment $ 939 $ 755
Television Stations 396 369
Television Broadcast Network 320 339
Cable Network Programming 436 365
------------- ------------
Total Revenues $ 2,091 $ 1,828
============= ============
Operating income (loss):
Filmed Entertainment $ 123 $ 102
Television Stations 78 106
Television Broadcast Network (43) (36)
Cable Network Programming (16) (1)
------------- ------------
Total operating income (loss) 142 171
------------- ------------
Interest expense, net (72) (84)
Equity losses of affiliates (51) (20)
Minority interest in subsidiaries (11) (1)
------------- ------------
Income before income taxes and cumulative effect of accounting change $ 8 $ 66
============= ============
As of
-----------------------------------
September 30, 2001 June 30, 2001
------------------ -------------
Total assets: (in millions)
Filmed Entertainment $ 4,658 $ 4,690
Television Stations 11,194 6,106
Television Broadcast Network 1,599 1,534
Cable Network Programming 4,660 4,033
Investments in equity affiliates 1,400 1,493
------------- ------------
Total assets $ 23,511 $ 17,856
============= ============-
Equity losses of affiliates, which primarily relate to entities involved in the
production and licensing of cable network programming, Interest expense, net,
Minority interest in subsidiaries and Income tax expense on a stand-alone basis
are not allocated to segments, as they are not under the control of segment
management. There is no material reliance on any single customer. Revenues from
any individual foreign country were not material in the periods presented.
10
FOX ENTERTAINMENT GROUP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 5 - Guarantees of News Corporation Debt
The Company, News Corporation and certain of News Corporation's subsidiaries,
are guarantors of various debt obligations of News Corporation and certain of
its subsidiaries. The principal amount of indebtedness outstanding under such
debt instruments as of June 30 and September 30, 2001 was approximately $9.3
billion and $9.4 billion, respectively. The debt instruments limit the ability
of guarantors, including the Company, to subject their properties to liens and
certain of the debt instruments impose limitations on the ability of News
Corporation and certain of its subsidiaries, including the Company, to incur
indebtedness in certain circumstances. Such debt instruments mature at various
times between 2002 and 2096, with a weighted average maturity of over 20 years.
In the case of any event of default under such debt obligations, the Company
will be directly liable to the creditors or debtholders. News Corporation has
agreed to indemnify the Company from and against any obligations it may incur by
reason of its guarantee of such debt obligations.
Note 6 - Filmed Entertainment and Television Programming Costs, net
Filmed entertainment and television programming costs, net consisted of the
following as of:
September 30, 2001 June 30, 2001
-------------------- -----------------
(in millions)
Filmed entertainment costs:
Films:
Released $ 744 $ 732
Completed, not released 75 23
In production 433 555
In development or preproduction 59 69
-------------------- -----------------
Television productions: 1,311 1,379
-------------------- -----------------
Released 462 484
In production 251 150
In development or preproduction 2 10
-------------------- -----------------
715 644
-------------------- -----------------
Total filmed entertainment costs, less accumulated amortization 2,026 2,023
Television programming costs, less accumulated amortization 1,983 1,680
-------------------- -----------------
Total filmed entertainment and television programming costs, net $ 4,009 $ 3,703
==================== =================
Note 7 - Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No
141 and No. 142. SFAS No. 141 requires all business combinations be accounted
for by the purchase method and that acquired intangible assets be recognized
apart from goodwill if they meet specific criteria. SFAS No. 141 supersedes
Accounting Principles Board ("APB") Opinion No. 16 and is effective for all
business combinations initiated after June 30, 2001. SFAS No. 142 eliminates the
requirement to amortize goodwill and intangible assets that have indefinite
useful lives. However, it requires that such assets be tested for impairment at
least annually using the guidance specifically provided in the statement. SFAS
No. 142 supersedes APB Opinion No 17 and
11
FOX ENTERTAINMENT GROUP, INC
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 7 - Recent Accounting Pronouncements - continued
will be adopted by the Company on July 1, 2002. The Company is in the process of
evaluating the impact of adopting these new standards on its consolidated
statements of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which is effective for fiscal years beginning
after December 15, 2001, and interim periods within those fiscal years. SFAS No.
144 establishes an accounting model for impairment or disposal of long-lived
assets to be disposed of by sale. The Company plans to adopt SFAS No. 144 on
July 1, 2002.
Note 8 - Subsequent Events
In October 2001, the Company, Haim Saban and the other stockholders of FFW, sold
FFW to The Walt Disney Company ("Disney") for total consideration of
approximately $5.2 billion (including the assumption of certain debt) of which
approximately $1.6 billion is in consideration of the Company's interest in FFW.
Fox Broadcasting Company ("FOX") has entered into an arm's-length programming
arrangement with Disney to allow the continued broadcast for the 2001 - 2002
broadcast season of certain FFW programming on FOX affiliates through the Fox
Kids Network. As a result of this transaction, the Company will recognize a gain
on the sale of FFW in the second quarter of fiscal year 2002. Net cash received
on this transaction will be used to reduce obligations to News Corporation and
affiliates.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This document contains statements that constitute "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as amended. The words
"expect," "estimate," "anticipate," "predict," "believe" and similar expressions
and variations thereof are intended to identify forward-looking statements.
These statements appear in a number of places in this document and include
statements regarding the intent, belief or current expectations of the Fox
Entertainment Group, Inc. (the "Company"), its directors or its officers with
respect to, among other things, trends affecting the Company's financial
condition or results of operations. The readers of this document are cautioned
that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties. Those risks and uncertainties
are discussed under the headings "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," in the Company's
Registration Statement Form S-1 (SEC file no. 333-61515) as declared effective
by the Securities and Exchange Commission on November 9, 1998, as well as the
information set forth below. The Company does not ordinarily make projections of
its future operating results and undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise, except as required by law. Readers should carefully
review other documents filed by the Company with the Securities and Exchange
Commission. This section should be read in conjunction with the unaudited
consolidated condensed financial statements of the Company and related notes set
forth elsewhere herein.
The Company manages and reports its businesses in four segments: Filmed
Entertainment, which principally consists of the production and acquisition of
live-action and animated motion pictures for distribution and licensing in all
formats in all entertainment media worldwide and the production of original
television programming; Television Stations, which principally consists of the
operation of broadcast television stations; Television Broadcast Network, which
principally consists of the broadcasting of network programming; and Cable
Network Programming, which principally consists of the production and licensing
of programming distributed through cable television systems and direct broadcast
satellite ("DBS") operators and professional sports team ownership. The
Company's equity interests in certain cable network programming and related
ventures, including, Fox Family Worldwide, Inc. ("FFW") through October 2001,
Fox Cable Networks Ventures, Inc., Regency Television, The National Geographic
Channels and International Sports Programming Partners ("Fox Sports
International"), are included in Equity losses of affiliates and, accordingly,
are not reported in the segments set forth above. Additionally, through the
Company's subsidiary, Fox Sports Networks, the Company holds equity interests in
cable-related businesses (the "Fox Sports Networks' domestic" affiliates),
including Regional Programming Partners ("RPP"), National Sports Partners
("NSP"), National Advertising Partners ("NAP"), Speedvision Network LLC
("Speedvision") through July 2001 and Outdoor Life Network LLC ("Outdoor Life")
through July 2001, that are likewise reported in Equity losses of affiliates
and, accordingly, are not reported in the Cable Network Programming segment.
In the first quarter of fiscal year 2002, management redefined its Filmed
Entertainment segment to reflect a change in how the business is analyzed and
evaluated. The redefined segment includes all of the previous filmed
entertainment activity along with the activity of the former Other Television
Businesses segment, primarily comprised of divisions which produce and
distribute television programming and also distribute feature motion pictures
for syndication and on cable television. Prior year segments have been
reclassified to conform to current year presentation.
Sources of Revenue
Filmed Entertainment. The Filmed Entertainment segment derives revenue from
theatrical distribution, home video and DVD sales and distribution through
pay-per-view, pay television services and broadcast television. The revenues and
operating results of the Filmed Entertainment segment are significantly affected
by the timing of the Company's theatrical, home video and DVD releases, the
number of its original and returning television series that are aired by
television networks and the number of its television series on off-network
syndication. Theatrical release dates are determined by several factors,
including timing of vacation and holiday periods and competition in the
marketplace. Each motion picture is a separate and distinct product with its
financial success dependent upon many factors, including audience acceptance.
Television Stations and Television Broadcast Network. The two reportable
television segments derive their revenues principally from the sale of
advertising time. Generally, advertising time is sold to national advertisers by
the Fox Broadcasting Company ("FOX") and to national "spot" and local
advertisers by the Company's group of 32 owned and operated television broadcast
stations in their respective markets. The sale of advertising time is affected
by viewer demographics, program ratings and general market conditions. Adverse
changes in the general market conditions for advertising may affect revenues.
13
Cable Network Programming. The Cable Network Programming segment derives
revenues from monthly affiliates fees based on the number of subscribers as well
as from the sale of advertising time. Monthly affiliate fees are dependent on
maintenance of carriage arrangements with cable television systems and DBS
operators. The sale of advertising time is affected by viewer demographics,
program ratings and general market conditions. Adverse changes in general market
conditions for advertising may affect revenues.
Components of Expenses
Filmed Entertainment. Operating costs incurred by the Filmed Entertainment
segment include exploitation costs, primarily prints and advertising; the
amortization of capitalized production, overhead and interest costs; and
participations and talent residuals. Selling, general and administrative
expenses include salaries, employee benefits, rent and other routine overhead.
Television Stations, Television Broadcast Network and Cable Network Programming.
Operating expenses of the two reportable television segments and the Cable
Network Programming segment include expenses related to acquiring programming
and rights to programming. Operating expenses also typically include production
and technical expenses related to operating the technical facilities of the
broadcaster or cable network. Selling, general and administrative expenses
include all promotional expenses related to improving the market visibility and
awareness of the broadcaster or cable network and sales commissions paid to the
in-house sales force involved in the sale of advertising as well as salaries,
employee benefits, rent and other routine overhead. Depreciation and
amortization expense includes the amortization of acquired intangible assets and
cable distribution investments.
14
Results of Operations - Three months ended September 30, 2001 versus Three
months ended September 30, 2000.
The following table sets forth the Company's operating results, by segment, for
the three months ended September 30, 2001 as compared to the three months ended
September 30, 2000.
For the three months ended September 30,
-------------------------------------------------
2001 2000 Change
----------------- ------------- -----------------
(in millions)
Revenues:
Filmed Entertainment $ 939 $ 755 $ 184
Television Stations 396 369 27
Television Broadcast Network 320 339 (19)
Cable Network Programming 436 365 71
------- ------- -------
Total revenues $ 2,091 $ 1,828 $ 263
======= ======= =======
Operating income (loss):
Filmed Entertainment $ 123 $ 102 $ 21
Television Stations 78 106 (28)
Television Broadcast Network (43) (36) (7)
Cable Network Programming (16) (1) (15)
------- ------- -------
Total operating income (loss) 142 171 (29)
Interest expense, net (72) (84) 12
Equity losses of affiliates (51) (20) (31)
Minority interest in subsidiaries (11) (1) (10)
------- ------- -------
Income before income taxes and cumulative effect of accounting
change 8 66 (58)
Income tax expense on a stand-alone basis (4) (30) 26
------- ------- -------
Income before cumulative effect of accounting change 4 36 (32)
Cumulative effect of accounting change, net of tax (26) (494) 468
------- ------- -------
Net income (loss) $ (22) $ (458) $ 436
======= ======= =======
Other data:
Operating Income Before Depreciation and Amortization /(1)/:
Filmed Entertainment $ 137 $ 117 $ 20
Television Stations 129 152 (23)
Television Broadcast Network (38) (31) (7)
Cable Network Programming 43 50 (7)
------- ------- -------
Total Operating Income Before Depreciation and Amortization $ 271 $ 288 $ (17)
======= ======= =======
FOOTNOTE:
(1) Operating Income Before Depreciation and Amortization is defined as
operating income (loss) before depreciation and amortization, which
includes amortization of acquired intangible assets and cable distribution
investments. While Operating Income Before Depreciation and Amortization is
considered to be an appropriate measure for evaluating operating
performance by management, it should be considered in addition to, not as a
substitute for, operating income (loss), net income (loss), cash flow and
other measures of financial performance prepared in accordance with
accounting principles generally accepted in the United States and presented
in the unaudited consolidated financial statements included elsewhere in
this filing.
15
Overview of Company Results. For the quarter ended September 30, 2001, total
revenues increased approximately 14% from $1,828 million in the first quarter of
fiscal 2001 to $2,091 million. Revenues at the Filmed Entertainment and Cable
Network Programming segments principally contributed to this increase. In
aggregate, Operating, Selling, general and administrative and Depreciation and
amortization expenses increased approximately 18% from the corresponding period
of the prior year. Operating expenses increased approximately 20% for the
quarter ended September 30, 2001 due primarily to increased amortization of
capitalized film costs corresponding to higher revenues at the Filmed
Entertainment segment. Selling, general and administrative expenses increased
approximately 10% due to increased distribution fees related to the second
domestic syndication cycle of NYPD Blue. In the first quarter of fiscal year
2002, Depreciation and amortization increased approximately 10% due to increased
amortization of cable distribution investments at the Cable Network Programming
segment. For the quarter ended September 30, 2001, Operating income and
Operating Income Before Depreciation and Amortization decreased approximately
17% to $142 million and approximately 6% to $271 million, respectively, from the
corresponding period of the preceding fiscal year. The Cable Network Programming
and Television Stations segments' results primarily contributed to these
declines.
Equity losses of affiliates of $51 million increased from losses of $20 million
from the corresponding period of the preceding fiscal year. These increased
losses relate primarily to increased losses at RPP and National
Geographic-Domestic.
For the quarter ended September 30, 2001, the Company recognized its share of
FFW's one-time, non-cash charge for a cumulative effect of accounting change in
the amount of $26 million for the change in FFW's film accounting according to
Statement of Position No. 00-2, "Accounting by Producers or Distributors of
Films" (SOP00-2).
Net loss for the quarter ended September 30, 2001 was $22 million ($0.03 loss
per share), an improvement of approximately 95% from losses of $458 million
($0.63 loss per share) for the quarter ended September 30, 2000. This
significant change was the result of the Company's one-time, non-cash charge of
$494 million as a cumulative effect of accounting change for SOP 00-2 recognized
in the corresponding period of the prior year.
Filmed Entertainment. For the first quarter of fiscal 2002, revenues increased
from $755 million to $939 million or approximately 24% compared to the
corresponding period of the preceding fiscal year primarily due to the strong
worldwide theatrical results of Planet of The Apes, strong worldwide catalog DVD
and VHS sales and the domestic pay television release of Me, Myself and Irene.
Also contributing to this increase, at Twentieth Century Fox Television, are the
network revenues for The Practice and the domestic syndication for NYPD Blue as
compared with domestic syndication for The Pretender released in the
corresponding period of the prior year. For the three months ending September
30, 2001, the Filmed Entertainment segment reported an operating income increase
of approximately 21% from $102 million in the corresponding period of the prior
year to $123 million. This increase is due to the strong product performance
mentioned above, partially offset by the related increased amortization of
capitalized film costs. Operating Income Before Depreciation and Amortization
increased from $117 million to $137 million, an approximate 17% increase as
compared to the corresponding period of the prior year. Depreciation and
amortization were flat for the quarter and, as such, the change is due to the
changes noted above. These results are compared to the prior year, which
included the worldwide theatrical performance of X-Men, which was partially
offset by the pre-release costs incurred for the second quarter releases,
Bedazzled and Woman On Top.
Television Stations. On July 31, 2001, the Company acquired the television
broadcasting business of Chris-Craft Industries, Inc. and its subsidiaries, BHC
Communications, Inc. and United Television, Inc., (collectively, "Chris-Craft"),
consisting of ten television stations (the "Acquired Stations"). This
acquisition increased the Company's owned and operated television stations to 32
as compared to the prior year.
For the first quarter of fiscal year 2002, Television Stations' revenues
increased to $396 million this quarter from $369 million in the corresponding
quarter of the prior year. Excluding the Acquired Stations, advertising revenues
decreased approximately 18% from the prior year as a result of continued soft
advertising in all of the Television Stations' markets and the adverse impact of
the tragic events of September 11th. Despite this market decline, excluding
the Acquired Stations, the Television Stations' gained market share of 2.0
percentage points due primarily to the strength of syndicated programming, most
notably Seinfeld, particularly in the New York market, and the telecast of the
Major League Baseball ("MLB") All-Star game. Operating income from the
Television Stations segment decreased from $106 million to $78 million or
approximately 26% for the quarter ended September 30, 2001. Operating Income
Before Depreciation and Amortization decreased approximately 15% from $152
million to $129 million for the first quarter of fiscal year 2002. These changes
are due to increased programming costs for Seinfeld and increased news
production costs resulting from the coverage of the tragic events of September
11th, partially offset by the results of the Acquired Stations.
16
Television Broadcast Network. For the first quarter of fiscal 2002, the
Television Broadcast Network's revenues decreased $19 million to $320 million
from $339 million in the corresponding period of the prior year. This
approximate 6% decline is due primarily to lower National Football League
("NFL") advertising revenue as there were two additional network broadcasts in
the prior year (one network broadcast was re-scheduled due to the tragic events
of September 11th) and a decrease in regular season ratings. These results were
partially offset by higher MLB advertising revenue resulting from the 2001
All-Star game which did not air on FOX in the prior year. Operating loss
decreased $7 million to a loss of $43 million and Operating Income Before
Depreciation and Amortization decreased $7 million from the prior fiscal year to
a loss of $38 million. Higher license fees on returning series and increased NFL
programming rights contributed to the increased Operating loss.
Cable Network Programming. Total revenues for the Cable Network Programming
segment increased by $71 million or approximately 19% from $365 million to $436
million for the quarter ended September 30, 2001. This increase is attributed to
increased revenues at the Fox News Channel ("Fox News") and the regional sports
networks ("RSNs"). The increase in revenues also reflects the first time
inclusion of Speedvision. Operating losses increased $15 million from $1 million
for the quarter ended September 30, 2000 to $16 million. Operating Income Before
Depreciation and Amortization decreased $7 million to $43 million from $50
million from the corresponding period of the prior year. Increased Operating
losses and decreased Operating Income Before Depreciation and Amortization are
primarily attributable to increased player compensation at the Los Angeles
Dodgers from late season changes in the roster.
Fox Sports Networks consists of the results of the FX Channel ("FX"), their
consolidated RSNs and Speedvision as of July 25, 2001. During the first quarter
of fiscal year 2002, Fox Sports Networks acquired a controlling interest in
Speedvision and has consolidated its results since July 25, 2001. For
comparative purposes, the following discussion will exclude the results of
Speedvision, which are not material to the overall segment.
For the quarter ended September 30, 2001, revenues at FX and the RSNs increased
approximately 11% and approximately 17%, respectively. FX affiliate revenue
increased reflecting an approximate 29% increase in average cable subscribers
over the prior year. At September 30, 2001, FX reached over 71 million
households. Despite the difficult advertising market, FX advertising revenue
increased approximately 15%, a result of an increase in average audience. The
RSNs' revenue increase of approximately 17% reflects an approximate 15% increase
in combined cable and DTH affiliate revenue, excluding the impact of Midwest
Sports Channel ("FSN North"), which was acquired in February 2001. The affiliate
revenue at the RSNs increased primarily from increased average cable rates per
subscriber, as well as increases in total subscribers. The RSNs experienced an
approximate 4% decline in advertising revenues on regional sports programming,
excluding the impact of FSN North, primarily resulting from the soft advertising
market. Operating income increased at FX by approximately 4% for the first
quarter of fiscal year 2002. The RSNs' operating income was flat, excluding the
impact of FSN North, over the corresponding period of the prior year. The RSNs
had significant increases in operating expenses, primarily resulting from higher
average rights fees associated with new professional rights agreements. FX's
operating expenses also increased substantially due to the increased promotional
and marketing costs resulting from new series debuting during the current
quarter, as well as the launch of FX on certain major cable systems.
Depreciation and amortization expenses for the quarter increased due to
increases in amortization of cable distribution investments at FX.
For the quarter ended September 30, 2001, Fox News' revenues increased
approximately 23% from the corresponding period of the prior year. An
approximate 29% increase in cable affiliate fees was attributable to an
approximate 33% increase in Fox News subscribers from 54.6 million subscribers
in the first quarter of fiscal 2001 to 72.5 million in the first quarter of
fiscal 2002. The advertising revenue increase of approximately 10% was driven by
improved ratings, partially offset by lower national sell-out and higher
pre-emptions due to the tragic events of September 11th. Fox News' operating
losses improved approximately 17% as compared to the first quarter of fiscal
year 2001. This improvement primarily resulted from a 23% increase in sales due
to affiliate subscriber growth and an increase in advertising sales due to
higher ratings, partially offset by lower national sell-out and higher
pre-emptions. Overall costs increased approximately 10%, including the costs
associated with breaking news events from September 11th, talent expenses,
FoxNews.com, and amortization expenses. Depreciation and amortization expenses
for the quarter increased approximately 12% due to increases in amortization of
cable distribution investments.
17
Equity losses of affiliates. Equity losses of affiliates for the quarter ended
September 30, 2001 increased $31 million to $51 million from the corresponding
period of the prior year.
For the three months ended
Ownership September 30,
--------------------------------
Percentage 2001 2000 Change
----------------- ------------------- ------------
(in millions)
Fox Family Worldwide (FFW) 49.5% $(15) $(13) $ (2)
Fox Sports International 50% (4) (5) 1
Fox Sports Networks Domestic:
National Sports Partners (NSP) 50% (6) (5) (1)
Regional Programming Partners (RPP) 40% (24) (2) (22)
Speedvision /(a)/ 32% 1 1 -
Ventures Arena 40% - - -
Other Various 7 8 (1)
National Geographic Channel - Domestic 66.7% (10) (2) (8)
Fox Studios Australia 50% (1) (3) 2
Other Various 1 1 -
---- ---- ----
Total equity losses of affiliates $(51) $(20) $(31)
==== ==== ----
(a) Subsequent to the acquisition of a controlling interest on July 25, 2001,
the results of Speedvision have been consolidated in the Cable Network
Programming segment.
For the quarter ended September 30, 2001, the Company's share of FFW's net
losses was $15 million, $2 million greater than the corresponding period of the
prior year. These losses were primarily due to lower production and distribution
revenues, which were slightly offset by higher advertising and affiliate
revenues due to subscriber growth.
At Fox Sports International, for the first quarter of fiscal 2002, the Company's
share of net losses improved $1 million to a loss of $4 million. Operating
results reflect decreased programming and production costs at Fox Sports World
and Fox Sports Latin America, offset by increased marketing expenses and
production costs at Fox Sports Espanol and Fox Sports Middle East. Subscribers
increased 22% to approximately 25 million.
The Company's share of Fox Sports Networks' domestic equity affiliates' net
income decreased from $2 million to a loss of $22 million for the quarter ended
September 30, 2001. The largest contributor to this decline was the losses at
RPP, where Madison Square Garden incurred charges associated with the buyout of
certain professional player contracts. NSP losses increased as a result of a
weak advertising market. Home Team Sports, which generated positive earnings in
the prior year, was sold in February 2001. These declines were partially offset
by improvements at NAP resulting from increased commission revenue. From July
25, 2001 to September 30, 2001, the Company did not reflect earnings from
Outdoor Life, as this investment has been designated as an asset held for sale,
pending the closing of the committed sale to Comcast, which was completed on
October 30, 2001.
The Company's share of National Geographic-Domestic's net losses was $10
million. National Geographic-Domestic was launched in January 1, 2001. As of
September 30, 2001, National Geographic-Domestic had over 15 million
subscribers.
Interest expense, net. Interest expense, net decreased $12 million for the first
quarter of fiscal year 2002 from $84 million to $72 million due to the
completion of the New Millennium financing in March 2001. (See Liquidity and
Capital Resources-New Millennium).
18
Minority interest in subsidiaries. Minority interest in subsidiaries increased
$10 million to $11 million for the quarter ended September 30, 2001 due to an
increase in the preferred interests relating to the Company's film financing
arrangement. (See Liquidity and Capital Resources - New Millennium).
Income tax on a stand-alone basis. Income tax expense for the first quarter of
fiscal 2002 decreased to $4 million from $30 million from in the corresponding
period of the preceding year. The effective tax rate for the period increased to
49% compared to 45.5% in the corresponding period of the preceding fiscal year.
The increased effective rate is primarily attributable to the relationship of
nondeductible items to lower taxable income in the current fiscal quarter.
Liquidity and Capital Resources
The Company's principal sources of cash flow are internally generated funds and
borrowings from The News Corporation Limited and its subsidiaries ("News
Corporation").
Net cash flows provided by operating activities during the three months ended
September 30, 2001 were $97 million as compared to cash used of $40 million in
the corresponding period of the preceding fiscal year. The increase in cash
provided was primarily due to a lower investment in working capital as compared
to the corresponding period of the prior year.
Net cash flows used in investing activities were $413 million and $196 million
during the three months ended September 30, 2001 and 2000, respectively. The
current year included the acquisition of Speedvision, investments in Regency
Television, National Geographic and Fox Studios Australia and increases in cable
distribution investments by Fox News and FX.
Net cash flows provided by financing activities were $370 million and $216
million during the three months ended September 30, 2001 and 2000, respectively.
The increase in cash provided by financing activities is primarily attributable
to higher Advances from affiliates of News Corporation, net used to fund
operating and investing activities.
Guarantees
The Company, News Corporation and certain of News Corporation's subsidiaries,
are guarantors of various debt obligations of News Corporation and certain of
its subsidiaries. The principal amount of indebtedness outstanding under such
debt instruments as of June 30 and September 30, 2001 was approximately $9.3
billion and $9.4 billion, respectively. The debt instruments limit the ability
of guarantors, including the Company, to subject their properties to liens and
certain of the debt instruments impose limitations on the ability of News
Corporation and certain of its subsidiaries, including the Company, to incur
indebtedness in certain circumstances. Such debt instruments mature at various
times between 2002 and 2096, with a weighted average maturity of over 20 years.
In the case of any event of default under such debt obligations, the Company
will be directly liable to the creditors or debtholders. News Corporation has
agreed to indemnify the Company from and against any obligations it may incur by
reason of its guarantee of such debt obligations.
New Millennium
Due to increased competition and costs associated with film production, film
studios and the Company constantly evaluate the risks and rewards of production.
Various strategies are used to balance risk with capital needs, including, among
other methods, co-production, contingent profit participations, acquisition of
distribution rights only and insurance.
In March 2001, the Company entered into a new series of film rights agreements
whereby a controlled consolidated subsidiary of the Company, Cornwall Venture
LLC ("NM2"), that holds certain library film rights, funds the production or
acquisition costs of all eligible films, as defined, to be produced or acquired
by Twentieth Century Fox Film Corporation, a subsidiary of the Company, between
2001 and 2004. NM2 issued preferred interests to a third party to fund the film
financing, which is presented on the unaudited consolidated condensed balance
sheets as Minority interest in subsidiaries. The Preferred Interest has no fixed
redemption rights but is entitled to an allocation of the gross receipts to be
derived by NM2 from the distribution of each eligible film. Such allocation
consists of (i) a return on the Preferred Interest (the "Preferred Payments"),
based on certain reference rates (generally based on commercial paper rates or
LIBOR) prevailing on the respective dates of
19
determination, and (ii) a redemption of the Preferred Interest, based on a
contractually determined amortization schedule. The Preferred Interest has a
preference in the event of a liquidation of NM2 equal to the unredeemed portion
of the investment plus any accrued and unpaid Preferred Payments.
Fox Sports International
The Company and Liberty/TINTA LLC ("Liberty/TINTA"), a subsidiary of Liberty
Media Corporation ("Liberty"), each own 50% of Fox Sports International. On July
15, 2001, under a preexisting option, Liberty exercised its right to cause
Liberty/TINTA to sell its 50% interest in Fox Sports International held by
Liberty/TINTA to News Corporation in exchange for an aggregate 3,633,866
American Depositary Receipts ("ADRs") of News Corporation representing
14,535,464 preferred shares subject to adjustment for dividends paid since July
1999. Under the terms of this transaction, News Corporation will transfer the
acquired interest in Fox Sports International to the Company for approximately
3,632,000 shares of Class A Common Stock. The transaction is expected to close
in the second quarter of fiscal 2002.
Chris-Craft
On July 31, 2001, News Corporation, through a wholly-owned subsidiary, acquired
all of the outstanding common stock of Chris-Craft Industries, Inc. and its
subsidiaries, BHC Communications, Inc. and United Television, Inc.,
(collectively, "Chris-Craft"). The consideration for the acquisition was
approximately $2 billion in cash and approximately $3 billion in News
Corporation preferred ADRs. Simultaneously with the closing of the merger, News
Corporation transferred $3,432 million of net assets, constituting Chris-Craft's
ten television stations (the "Acquired Stations") to the Company in exchange for
122,244,272 shares of the Company's Class A Common Stock and net indebtedness of
$48 million (the "Exchange"), thereby increasing News Corporation's ownership in
the Company from 82.76% to 85.25%. The Company has assigned the licenses issued
by the Federal Communications Commission for the Acquired Stations to its
indirect subsidiary, Fox Television Stations, Inc., which became the licensee
and controls the operations of the Acquired Stations.
The Company, as of the date of Exchange, July 31, 2001, has consolidated the
operations of the Acquired Stations with the exception of KTVX-TV in Salt Lake
City, whose operations have not been consolidated due to regulatory requirements
which precluded the Company from controlling the station and required its
disposal (see description of Clear Channel swap below). Accordingly, KTVX-TV is
treated as an asset held for sale and is included in Other assets and
investments on the September 30, 2001 balance sheet. For financial reporting
purposes, in accordance with Emerging Issues Task Force ("EITF") No. 90-5,
"Exchanges of Ownership Interests between Entities under Common Control," the
Company has recognized the assets and liabilities of Chris-Craft based upon
their acquired basis in the News Corporation merger.
In July 2001, News Corporation entered into a binding agreement to swap KTVX-TV
in Salt Lake City and KMOL-TV in San Antonio to Clear Channel Communications,
Inc. in exchange for WFTC-TV in Minneapolis (the "Clear Channel swap"). The
Clear Channel swap closed October 1, 2001. In addition, in August 2001, News
Corporation entered into an Asset Exchange Agreement to swap KBHK-TV in San
Francisco to Viacom Inc. in an exchange for WDCA-TV in Washington, DC and
KTXH-TV in Houston (the "Viacom swap", and together with the Clear Channel swap,
the "Station Swaps"). The Viacom swap closed November 1, 2001. All of the
stations exchanged in the Station Swaps were Acquired Stations.
FFW
In October 2001, the Company, Haim Saban and the other stockholders of FFW, sold
FFW to The Walt Disney Company ("Disney") for total consideration of
approximately $5.2 billion (including the assumption of certain debt) of which
approximately $1.6 billion is in consideration of the Company's interest in FFW.
FOX has entered into an arm's-length programming arrangement with Disney to
allow the continued broadcast for the 2001 - 2002 broadcast season of certain
FFW programming on FOX affiliates through the Fox Kids Network. As a result of
this transaction, the Company will recognize a gain on the sale of FFW in the
second quarter of fiscal year 2002. Net cash received on this transaction will
be used to reduce obligations to News Corporation and affiliates.
20
Fox News
AT&T, through a predecessor company, holds a warrant to purchase (the "Warrant")
a 20% non-voting common equity interest in Fox News exercisable until January 2,
2002 (the "Exercise Date"). The Warrant is exercisable at an exercise price of
$200 million plus interest accrued monthly from May 1, 1997 through the Exercise
Date (the exercise price is approximately $285 million as of September 30,
2001). On October 1, 2003, subject to certain conditions, AT&T will have the
right to put its equity interest in Fox News to the Company in return for, at
the Company's sole option, either (a) cash, or (b) an equivalent amount in News
Corporation preferred shares. The amount of cash or preferred shares will be
calculated based on the appropriate fair market value of the 20% equity interest
in Fox News determined by mutual agreement of the parties. In the event that the
parties are unable to agree upon a price, the price will be determined by
valuation procedures using an independent investment banker.
Speedvision
On July 25, 2001, as a result of the exercise of rights by existing
shareholders, the Company acquired 53.44% of Speedvision for approximately $401
million. This acquisition resulted in the Company owning approximately 85.46% of
Speedvision. As a result, the Company has consolidated the results of
Speedvision beginning July 25, 2001. In October 2001, the Company acquired the
remaining minority interest in Speedvision held by Comcast Corporation
("Comcast"). The Company paid a purchase price of $111 million to acquire the
remaining 14.54% of Speedvision. This transaction was treated as a purchase in
accordance with Statement of Financial Accounting Standard ("SFAS") No. 141,
"Business Combinations."
Outdoor Life
On July 25, 2001, as a result of the exercise of rights by existing
shareholders, the Company acquired 50.23% of Outdoor Life for approximately $309
million. This acquisition resulted in the Company owning approximately 83.18% of
Outdoor Life. The Company agreed to sell its entire interest in Outdoor Life to
Comcast. In accordance with SFAS No. 94, "Consolidation of All Majority-Owned
Subsidiaries," and EITF No. 87-11, "Allocation of Purchase Price to Assets to be
Sold," for the period from the Company's acquisition of its additional 50.23%
interest in Outdoor Life until the closing of the sale of Outdoor Life to
Comcast on October 30, 2001, control of Outdoor Life was deemed to be temporary.
Therefore, the results of operations related to the additional 50.23% interest
acquired of Outdoor Life will not be consolidated in the Company's statement of
operations. On October 30, 2001, the Company completed the sale of its 83.18%
interest in Outdoor Life to Comcast for the aggregate purchase price of
approximately $512 million in cash, of which approximately $400 million was
received prior to September 30, 2001. As a result of this transaction, the
Company will recognize a gain on the sale of Outdoor Life in the second quarter
of fiscal year 2002.
Recent Accounting Pronouncements
At the beginning of fiscal 2001, the Company adopted SOP 00-2, which established
new accounting standards for producers and distributors of films and supersedes
SFAS No. 53, "Financial Reporting by Producers and Distributors of Motion
Picture Films." SOP 00-2 establishes new accounting standards for, among other
things, marketing and development costs. The Company recorded a one-time,
non-cash charge of $494 million, net of $302 million tax, as a cumulative effect
of accounting change as of July 1, 2000. This charge primarily reflects the
write-off of marketing and certain development costs, which were previously
capitalized under SFAS No. 53 and are no longer capitalizable under SOP 00-2.
Subsequent to the adoption of SOP 00-2, the Company's accounting policy is to
expense marketing and certain development costs as incurred.
In June 2000, the Financial Accounting Standards Board ("FASB") issued SFAS No.
139, which rescinds SFAS No. 53 and requires public companies to follow the
guidance provided by SOP 00-2.
In July 2001, the FASB issued SFAS No. 141 and No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires all business combinations be accounted
for by the purchase method and that acquired intangible assets be recognized
apart from goodwill if they meet specific criteria. SFAS No. 141 supersedes
Accounting Principles Board ("APB") Opinion No. 16 and is effective for all
business combinations initiated after June 30, 2001. SFAS No. 142 eliminates the
requirement to amortize goodwill and intangible assets that have indefinite
useful lives. However, it requires that such assets be tested for impairment at
least annually using guidance specifically provided in this statement. SFAS No.
142 supersedes APB Opinion No. 17 and will be adopted by the Company on July 1,
2002. The Company is in the process of evaluating the impact of adopting these
new standards on its consolidated statements of operations.
21
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which is effective for fiscal years beginning
after December 15, 2001, and interim periods within those fiscal years. SFAS No.
144 establishes an accounting model for impairment or disposal of long-lived
assets to be disposed of by sale. The Company plans to adopt SFAS No. 144 on
July 1, 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Part II. Other Information
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
Exhibits and Reports on Form 8-K
(i) Current Report on Form 8-K of the registrant filed August 14, 2001
relating to the announcement that, on July 31, 2001, News
Corporation completed its acquisition of Chris-Craft.
(ii) Amendment to the August 14, 2001 Current Report on Form 8-K of the
registrant filed October 15, 2001 to include the financial
information required by Item 7(a)(4) of Form 8-K
22
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 9, 2001 FOX ENTERTAINMENT GROUP, INC.
By: /s/ David F. DeVoe
------------------
Name: David F. DeVoe
Title: Chief Financial Officer
23