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 March 31, 2002
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 May 15, 2002, 302,436,375 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 and nine months ended March 31, 2002 and 2001 ................................. 3
Consolidated Condensed Balance Sheets at March 31, 2002
(unaudited) and June 30, 2001 (audited) ................................................. 4
Unaudited Consolidated Condensed Statements of Cash Flows for
the nine months ended March 31, 2002 and 2001 ........................................... 5
Notes to the Unaudited Consolidated Condensed Financial Statements ...................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations .............................................................................. 15
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K ........................................................ 33
Signature ........................................................................................ 34
2
FOX ENTERTAINMET GROUP, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in millions except per share amounts)
For the three months For the nine months
ended March 31, ended March 31,
---------------------- -----------------------
2002 2001 2002 2001
--------- --------- ---------- ----------
Revenues, net $ 2,488 $ 1,943 $ 7,294 $ 6,231
Expenses:
Operating 1,815 1,483 5,453 4,595
Selling, general and administrative 312 264 921 798
Depreciation and amortization 99 96 302 291
Other operating charge - - 909 -
--------- --------- ---------- ----------
Operating income (loss) 262 100 (291) 547
Other Income (Expense):
Interest expense, net (54) (92) (192) (274)
Equity losses of affiliates (26) (52) (135) (69)
Minority interest in subsidiaries (7) (1) (29) (3)
Other, net - 40 1,585 (103)
--------- --------- ---------- ----------
Income (loss) before provision for income taxes and
cumulative effect of accounting change 175 (5) 938 98
Provision for income tax expense on a stand-alone basis (67) (4) (371) (66)
--------- --------- ---------- ----------
Income (loss) before cumulative effect of accounting change 108 (9) 567 32
Cumulative effect of accounting change, net of tax - - (26) (494)
--------- --------- ---------- ----------
Net income (loss) $ 108 $ (9) $ 541 $ (462)
========= ========= ========== ==========
Basic and diluted earnings (loss) per share before
cumulative effect of accounting change $ 0.13 $ (0.01) $ 0.68 $ 0.04
Basic and diluted cumulative effect of accounting change,
net of tax, per share - - (0.03) (0.68)
--------- --------- ---------- ----------
Basic and diluted earnings (loss) per share $ 0.13 $ (0.01) $ 0.65 $ (0.64)
========= ========= ========== ==========
Basic and diluted weighted average number of common
equivalent shares outstanding 850 724 835 724
========= ========= ========== ==========
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)
At March 31, 2002 At June 30, 2001
------------------- -----------------
(unaudited) (audited)
Assets:
Cash and cash equivalents $ 69 $ 66
Accounts receivable, net 2,857 2,504
Filmed entertainment and television programming costs, net 3,414 3,703
Investments in equity affiliates 1,430 1,493
Property and equipment, net 1,460 1,454
Intangible assets, net 13,202 7,647
Other assets and investments 1,109 989
------------------- -----------------
Total assets $ 23,541 $ 17,856
=================== =================
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable and accrued liabilities $ 1,891 $ 1,705
Participations, residuals and royalties payable 1,170 890
Television programming rights payable 1,540 1,133
Deferred revenue 747 553
Borrowings 910 1,032
Deferred income taxes 1,967 706
Other liabilities 688 142
------------------- -----------------
8,913 6,161
Due to affiliates of News Corporation 1,719 2,866
------------------ -----------------
Total liabilities 10,632 9,027
------------------- -----------------
Minority interest in subsidiaries (Note 9) 869 861
------------------- -----------------
Commitments and contingencies
Shareholders' Equity:
Preferred Stock, $.01 par value per share; 100,000,000 shares authorized;
none issued and outstanding at March 31, 2002 and June 30, 2001 - -
Class A Common Stock, $.01 par value per share; 1,000,000,000 shares
authorized; 302,436,375 and 176,559,834 issued and Outstanding at
March 31, 2002 and June 30, 2001, respectively 3 2
Class B Common Stock, $.01 par value per share; 650,000,000 shares
authorized; 547,500,000 issued and outstanding at March 31, 2002 and
June 30, 2001 6 6
Additional paid-in capital 11,569 8,023
Retained earnings (deficit) and accumulated other comprehensive income 462 (63)
------------------- -----------------
Total shareholders' equity 12,040 7,968
------------------- -----------------
Total liabilities and shareholders' equity $ 23,541 $ 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 nine months ended
March 31,
------------------------------------
2002 2001
--------------- ----------------
Operating activities:
Net income (loss) $ 541 $ (462)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 302 291
Amortization of cable distribution investments 84 64
Other operating charge 909 -
Cumulative effect of accounting change, net of tax 26 494
Equity losses of affiliates and distributions 163 129
Other, net (1,585) 103
Minority interest in subsidiaries 6 -
Change in operating assets and liabilities, net of acquisitions:
Accounts receivable and other assets (239) (224)
Filmed entertainment and television programming costs, net (31) (598)
Accounts payable and accrued liabilities 422 337
Participations, residuals and royalties payable and other liabilities 281 (74)
--------------- ----------------
Net cash provided by operating activities 879 60
--------------- ----------------
Investing activities:
Acquisitions, net of cash acquired (346) (75)
Proceeds from the sale of investments in equity affiliates 1,491 -
Investments in equity affiliates (242) (134)
Other investments (90) (181)
Purchases of property and equipment, net of acquisitions (55) (97)
--------------- ----------------
Net cash provided by (used in) investing activities 758 (487)
--------------- ----------------
Financing activities:
Borrowings (repayments), net (149) (627)
Increase in minority interest in subsidiaries 1 752
(Repayments to) advances from affiliates of News Corporation, net (1,486) 234
--------------- ----------------
Net cash (used in) provided by financing activities (1,634) 359
--------------- ----------------
Net increase (decrease) in cash and cash equivalents 3 (68)
Cash and cash equivalents, beginning of period 66 114
--------------- ----------------
Cash and cash equivalents, end of period $ 69 $ 46
=============== ================
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 is a majority-owned subsidiary of The News Corporation Limited ("News
Corporation"), which, at March 31, 2002, held equity and voting interests in the
Company of 85.32% 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 ended 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 for the fiscal
year ended June 30, 2001 as 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 tax benefit of $302 million, 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"), formerly an equity affiliate of the Company
until it was sold in October 2001, adopted SOP 00-2 on July 1, 2001, at which
time it recorded a one-time, non-cash charge of approximately $53 million as a
cumulative effect of accounting change. The Company's share, approximately $26
million, has been accounted for as a cumulative effect of accounting change in
the accompanying unaudited consolidated condensed statement of operations for
the nine months ended March 31, 2002.
Certain prior year amounts have been reclassified to conform to the fiscal 2002
presentation (See Note 6 and Note 11).
6
FOX ENTERTAINMENT GROUP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 2 - Comprehensive Income (Loss)
Comprehensive income (loss) is as follows:
For the three months ended For,the nine months ended
March 31, March 31,
---------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ -----------
(in millions)
Net income (loss) $ 108 $ (9) $ 541 $ (462)
Other comprehensive income (loss):
Foreign currency translation adjustments (7) 11 (16) 22
------------ ------------ ------------ ------------
Total comprehensive income (loss) $ 101 $ 2 $ 525 $ (440)
============ ============ ============ ============
Note 3 - 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 American Depositary Receipts representing preferred limited voting
ordinary shares ("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 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. News Corporation acquired
Chris-Craft and transferred to the Company the Acquired Stations in order to
strengthen the Company's existing television station business.
The Company has consolidated the results of operations of the Acquired Stations,
as of the date of Exchange, July 31, 2001, with the exception of KTVX-TV in Salt
Lake City, whose operations were not consolidated as of the exchange due to
regulatory requirements which precluded the Company from controlling the station
and required its disposal (see description of Clear Channel swap below). 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 and
issued equity to News Corporation at that value.
In October 2001, the Company exchanged KTVX-TV in Salt Lake City and KMOL-TV in
San Antonio with Clear Channel Communications, Inc. for WFTC-TV in Minneapolis
(the "Clear Channel swap"). In addition, on November 1, 2001, the Company
exchanged KBHK-TV in San Francisco with Viacom Inc. for WDCA-TV in Washington,
DC and KTXH-TV in Houston (the "Viacom swap", and together with the Clear
Channel swap, the "Station Swaps"). All of the stations exchanged in the Station
Swaps were Acquired Stations. No gain or loss was recognized by the Company as a
result of the Station Swaps.
In March 2002, Fox Television Stations entered into an Asset Exchange Agreement
with Meredith Corporation ("Meredith"). Fox Television Stations will exchange
KPTV-TV in Portland, an Acquired Station, for Meredith's WOFL-TV in Orlando and
WOGX-TV in Ocala (the "Meredith swap"). The Meredith swap is subject to
regulatory approval and customary closing conditions. The Meredith swap is
expected to close in the fourth quarter of fiscal year 2002. No gain or loss
will be recognized by the Company as a result of the Meredith swap.
7
FOX ENTERTAINMENT GROUP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 3 - Chris-Craft Acquisition - continued
The purchase price was primarily allocated to acquired intangible assets
including 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. The offset to the tax effect
of this basis difference has been included in Intangible assets, net.
The purchase price allocation is based on preliminary estimates and is subject
to adjustment, which is expected to be completed by the end of the fiscal year.
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 For the nine months
ended March 31, ended March 31,
------------------------ ----------------------
2002 2001 2002 2001
----------- ---------- ---------- ---------
(in millions, except per share amounts)
Revenues, net $ 2,488 $ 2,046 $ 7,332 $ 6,581
Operating income (loss) 262 116 (280) 633
Cumulative effect of accounting change, net of tax - - (26) (494)
Net income (loss) 108 14 547 (393)
Basic and diluted earnings (loss) per share $ 0.13 $ 0.02 $ 0.65 $ (0.46)
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.
Note 4 - Other Acquisitions and Dispositions
In July 2001, as a result of the exercise of rights by existing shareholders,
the Company acquired an additional 53.44% of Speedvision Network, LLC, now Speed
Channel, Inc. ("Speed Channel"), for approximately $401 million. This
acquisition resulted in the Company owning approximately 85.46% of Speed
Channel. As a result, the Company consolidated the results of Speed Channel
beginning in July 2001. In October 2001, the Company acquired the remaining
14.54% minority interest in Speed Channel for approximately $111 million
bringing the Company's ownership to 100%. These transactions have been treated
as a purchase in accordance with SFAS No. 141, "Business Combinations".
In July 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. In August 2001, a shareholder of Outdoor
Life exercised its option to acquire the Company's ownership interest in Outdoor
Life for approximately $512 million in cash. During the period from July 2001
until the closing of the sale of Outdoor Life in October 2001, the ownership
interest in Outdoor Life was held for sale and control of Outdoor Life was
deemed temporary. Therefore, 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," the results of Outdoor Life were not consolidated
in the Company's statement of operations for this period. Upon the closing of
the sale of the Company's ownership interest in Outdoor Life, the Company
recognized a gain of $147 million, which is reflected in Other, net in the
accompanying unaudited consolidated condensed statements of operations for the
nine months ended March 31, 2002.
8
FOX ENTERTAINMENT GROUP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 4 - Other Acquisitions and Dispositions - continued
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 was in consideration of the Company's interest in
FFW, which was rebranded ABC Family. Fox Broadcasting Company ("FOX") has
entered into a programming arrangement with Disney, which allowed 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 recognized a pre-tax gain on the sale of FFW in the amount of
approximately $1.4 billion, which is reflected in Other, net in the accompanying
unaudited consolidated condensed statements of operations for the nine months
ended March 31, 2002. The proceeds from this transaction were used to reduce
obligations to affiliates of News Corporation, to reduce third party debt and to
fund working capital requirements. In addition, the Company sublicensed certain
post-season Major League Baseball ("MLB") games for the 2001 to 2006 MLB seasons
to Disney for approximately $675 million.
In December 2001, News Corporation acquired from Liberty Media Corporation
("Liberty") its 50% interest in International Sports Programming LLC ("Fox
Sports International"), in exchange for 3,673,183 ADRs valued at $115 million.
Under the terms of this transaction, the Company purchased News Corporation's
acquired interest in Fox Sports International, which increased the Company's
ownership interest from 50% to 100%, in exchange for the issuance of 3,632,269
shares of the Company's Class A Common Stock. As a result of this transaction,
News Corporation's ownership interest in the Company increased from 85.25% to
85.32%. For financial reporting purposes, in accordance with EITF No. 90-5, the
Company has recognized the assets and liabilities of Fox Sports International
based upon their acquired basis in the News Corporation acquisition and issued
3,632,269 shares of the Company's Class A Common Stock to News Corporation at
that value.
In January 2002, the Company acquired an approximate 23.3% interest in the
Sunshine Network ("Sunshine") for approximately $23.3 million. This resulted in
the acquisition of a controlling interest in Sunshine and increased the
Company's ownership percentage in Sunshine to approximately 83.3%. In February
2002, the Company acquired an additional approximate .4% interest in Sunshine,
increasing the Company's ownership interest to approximately 83.7%. Since the
acquisition date in January 2002, Sunshine has been consolidated into the Cable
Network Programming segment of the Company as it is now under the control of the
Company.
Note 5 - Other Operating Charge
The Company has several multi-year sports rights agreements including a contract
with the National Football League ("NFL") through fiscal year 2006, a contract
with the National Association of Stock Car Auto Racing ("NASCAR") through fiscal
year 2009 and a contract with Major League Baseball ("MLB") through fiscal year
2007. These contracts provide the Company with the broadcast rights to certain
national sporting events during their respective terms. The NFL and NASCAR
contracts contain certain early termination clauses that are exercisable by the
NFL and NASCAR.
The Company continually evaluates the recoverability of the rights costs against
the revenues directly associated with the program material and related direct
expenses over the expected contract lives. At December 31, 2001, the Company
recorded an Other operating charge of $909 million in its unaudited consolidated
condensed statements of operations. This charge related to a change in
accounting estimate on the Company's national sports rights agreements caused by
the downturn in the advertising market, which caused the Company to write off
programming costs inventory and to provide for estimated losses on these
contracts. This evaluation considered the severe downturn in sports-related
advertising, the lack of any sustained advertising rebound subsequent to
September 11/th/ and the industry-wide reduction of projected long-term
advertising growth rates, all of which resulted in the Company's estimate of
future directly attributable revenues associated with these contracts being
lower than previously anticipated. Because the vast majority of costs incurred
under these contracts are fixed, such as the rights costs and production costs,
the results of these lower revenue estimates indicated that the Company would
generate a loss over the remaining term of the sports contracts.
In accordance with Accounting Principles Board ("APB") Opinion No. 20,
"Accounting Changes," the Company has determined that the impact of the charge
on Basic and diluted earnings (loss) per share, net of tax benefit of $346
million, for the nine months ended March 31, 2002 is $0.67 loss per share.
9
FOX ENTERTAINMENT GROUP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 5 - Other Operating Charge - continued
The costs of these sports contracts are charged to expense based on the ratio of
each period's operating profits to estimated total operating profit of the
contract. Considering the provision of $909 million for estimated losses and
absent a difference between actual revenues and costs as compared to estimated
revenues and costs, no operating profit or loss will be recognized over the
remaining term of the sports contracts.
The profitability of these long-term national sports contracts as discussed
above is based on the Company's best estimates at March 31, 2002, of directly
attributable revenues and costs; such estimates may change in the future, and
such changes may be significant. Should revenues decline from estimates applied
at March 31, 2002, an additional loss will be recorded. Should revenues improve
as compared to estimated revenues, then none of the recorded loss will be
restored, but the Company will have a positive operating profit, which will be
recognized over the remaining contract life.
Note 6 - 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.
10
FOX ENTERTAINMENT GROUP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 6 - Segment Information - continued
For the three months For the nine months
ended March 31, ended March 31,
------------------------ ------------------------
2002 2001 2002 2001
---------- ---------- ---------- -----------
(in millions)
Revenues, net:
Filmed Entertainment $ 1,065 $ 880 $ 3,121 $ 2,717
Television Stations 435 320 1,357 1,146
Television Broadcast Network 553 426 1,595 1,414
Cable Network Programming 435 317 1,221 954
---------- ---------- ---------- -----------
Total Revenues, net $ 2,488 $ 1,943 $ 7,294 $ 6,231
========== ========== ========== ===========
Operating income (loss):
Filmed Entertainment $ 164 $ 45 $ 408 $ 281
Television Stations 125 76 409 385
Television Broadcast Network (50) (3) (223) (104)
Cable Network Programming 23 (18) 24 (15)
Other operating charge - - (909) -
---------- ---------- ---------- -----------
Total operating income (loss) 262 100 (291) 547
---------- ---------- ---------- -----------
Interest expense, net (54) (92) (192) (274)
Equity losses of affiliates (26) (52) (135) (69)
Minority interest in subsidiaries (7) (1) (29) (3)
Other, net - 40 1,585 (103)
---------- ---------- ---------- -----------
Income (loss) before provision for income taxes
and cumulative effect of accounting change $ 175 $ (5) $ 938 $ 98
========== ========== ========== ===========
Other operating charge, Interest expense, net, Equity losses of affiliates
(which primarily relate to entities involved in the production and licensing of
cable network programming), Minority interest in subsidiaries, Other, net and
Provision for 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.
At March 31, 2002 At June 30, 2001
------------------- ------------------
Total assets: (in millions)
Filmed Entertainment $ 4,800 $ 4,690
Television Stations 10,990 6,106
Television Broadcast Network 1,105 1,534
Cable Network Programming 5,216 4,033
Investments in equity affiliates 1,430 1,493
------------------- ------------------
Total assets $ 23,541 $ 17,856
=================== ==================
11
FOX ENTERTAINMENT GROUP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 7 - 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 at March 31, 2002 and June 30, 2001 was approximately $8.7
billion and $9.3 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 2004 and 2096, with a weighted average maturity of more than 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 8 - Filmed Entertainment and Television Programming Costs, net
Filmed entertainment and television programming costs, net consisted of the
following at:
March 31, 2002 June 30, 2001
------------------- -----------------
(in millions)
Filmed entertainment costs:
Films:
Released $ 716 $ 732
Completed, not released 64 23
In production 382 555
In development or preproduction 40 69
------------------- -----------------
1,202 1,379
------------------- -----------------
Television productions:
Released 493 484
In production 166 150
In development or preproduction 21 10
------------------- -----------------
680 644
------------------- -----------------
Total filmed entertainment costs, less accumulated amortization 1,882 2,023
Television programming costs, less accumulated amortization 1,532 1,680
------------------- -----------------
Total filmed entertainment and television programming costs, net $ 3,414 $ 3,703
=================== =================
12
FOX ENTERTAINMENT GROUP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 9 - Minority Interest in Subsidiaries
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 ("TCF"), a subsidiary of the Company,
between 2001 and 2004 (these film rights agreements are collectively referred to
as the, "New Millennium II Agreement"). NM2 is a separate legal entity from the
Company and TCF and has separate assets and liabilities. NM2 issued a preferred
limited liability membership interest ("Preferred Interest") 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
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.
At March 31, 2002, there was $843 million of Preferred Interests outstanding,
which is included in the unaudited consolidated condensed balance sheets as
Minority interest in subsidiaries. The Preferred Payments are recorded as an
expense in Minority interest in subsidiaries on the unaudited consolidated
condensed statements of operations.
A Ratings Trigger Event for the New Millennium II Agreement would occur if News
Corporation's debt rating:
(i)(a) falls below BB+ and below Ba1, or (b) falls below BB, or (c) falls
-- --
below Ba2, or (d) it is not rated by both rating agencies, and, in
-- -------
each case, neither News Corporation nor the Company shall, within ten
---------
business days after the occurrence of such event, have provided credit
enhancement so that the resulting New Millennium II Agreement is rated
at least BB+ and Ba1, or
--
(ii)(a) falls below BBB- and Baa3, or (b) it is not rated by both rating
--
agencies, and, in each case, more than $25 million in capital payments
-----------------
redeemable at that time from film gross receipts remain unredeemed for
at least one quarter.
If a Ratings Trigger Event were to occur then (a) no new films will be
transferred, (b) rights against certain film assets may be enforced, and (c)
the Preferred Interest may become redeemable.
As of March 31, 2002, no Ratings Trigger Event had occurred. If a Ratings
Trigger Event were to occur, then $425 million (or approximately 50% of the
outstanding balance at March 31, 2002) may be payable immediately. The balance
of the redemption would be payable from future gross receipts from films that
had been transferred to NM2 as they are collected in the normal course of
business.
Note 10 - Other, Net
Other, net consisted of gains from the sale of the Company's investments in FFW
and Outdoor Life of $1,439 million and $147 million, respectively, for the nine
months ended March 31, 2002. For the three months ended March 31, 2001, Other,
net consisted of $40 million for the gain on the sale of Home Team Sports. For
the nine months ended March 31, 2001, Other, net was a loss of $103 million
consisting of the $143 million loss on the restructuring of the Healtheon/WebMD
transaction and the $40 million gain on the sale of Home Team Sports.
13
FOX ENTERTAINMENT GROUP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 11 - Recent Accounting Pronouncements
In November 2001, the Financial Accounting Standards Board ("FASB") issued EITF
No. 01-09, "Accounting for the Consideration Given by a Vendor to a Customer or
a Reseller of the Vendor's Products." This EITF, among other things, codified
the issues and examples of EITF No. 00-25, "Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's Products."
EITF No. 00-25 states that the financial statement classification of customer
incentives, including the amortization of such cable distribution investments,
should be presented as a reduction in revenue. As required, effective January 1,
2002, the Company has reclassified the amortization of cable distribution
investments against revenues. All comparative periods have been reclassified.
The amortization of cable distribution investments had previously been included
in Depreciation and amortization. Operating income, Net income and Earnings per
share are not affected by this reclassification. This reclassification affects
the Company's and the Cable Network Programming segment's results. The effect of
the reclassification on the Company is as follows:
For the three months ended For the nine months ended
March 31, March 31,
-------------------------- -------------------------
2002 2001 2002 2001
----------- ----------- ---------- -----------
(in millions)
Revenues $ 2,518 $ 1,965 $ 7,378 $ 6,295
Amortization of cable distribution investments (30) (22) (84) (64)
----------- ----------- ---------- -----------
Revenues, net $ 2,488 $ 1,943 $ 7,294 $ 6,231
=========== =========== ========== ===========
In June 2001, the 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 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 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. SFAS No. 144 establishes an accounting model for
impairment or disposal of long-lived assets to be (i) held and used and (ii)
disposed of by sale. The Company plans to adopt SFAS No. 144 on July 1, 2002.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," required
that gains and losses from extinguishment of debt be classified as an
extraordinary item, net of the related income tax effect. Any gain or loss on
extinguishment of debt that was classified as an extraordinary item in prior
periods presented that does not meet the criteria in APB Opinion No. 30 for
classification as an extraordinary item shall be reclassified. SFAS No. 13,
"Accounting for Leases," has been amended to require sale-leaseback accounting
for certain lease modifications that are similar to sale-leaseback transactions.
The rescission of SFAS No. 4 and the amendment to SFAS No. 13 shall be effective
for fiscal years and transactions, respectively, occurring after May 15, 2002.
The Company does not expect the provisions of SFAS No. 145 to have a material
impact on its consolidated statements of operations.
14
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 heading "Risk Factors," in the Company's Registration
Statement on Form S-3 (SEC file no. 333-85978) as declared effective by the
Securities and Exchange Commission on May 3, 2002, 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,
Regency Television, and International Sports Programming LLC ("Fox Sports
International") through December 2001, are included in Equity losses of
affiliates and, accordingly, are not reported in the segments set forth above.
Additionally, through the Company's subsidiaries, Fox Sports Networks, LLC and
Fox Cable Networks Ventures, Inc. (together, "Fox Sports Cable Networks"), the
Company holds equity interests in cable programming-related businesses,
including Regional Programming Partners ("RPP"), National Sports Partners
("NSP"), National Advertising Partners ("NAP"), The National Geographic
Channels, Speedvision Network, LLC 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 33 owned and operated full power
television broadcast stations ("O&Os") 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.
15
Cable Network Programming. The Cable Network Programming segment derives
revenues from monthly affiliate 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. Consideration paid in connection with multi-year carriage
arrangements (cable distribution investments) are amortized over the term of the
arrangement as a reduction against revenue. 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.
Other Operating Charge. The Company has several multi-year sports rights
agreements including a contract with the National Football League ("NFL")
through fiscal year 2006, a contract with the National Association of Stock Car
Auto Racing ("NASCAR") through fiscal year 2009 and a contract with Major League
Baseball ("MLB") through fiscal year 2007. These contracts provide the Company
with the broadcast rights to certain national sporting events during their
respective terms. The NFL and NASCAR contracts contain certain early termination
clauses that are exercisable by the NFL and NASCAR.
The Company continually evaluates the recoverability of the rights costs against
the revenues directly associated with the program material and related direct
expenses over the expected contract lives. At December 31, 2001, the Company
recorded an Other operating charge of $909 million in its unaudited consolidated
condensed statements of operations. This charge related to a change in
accounting estimate on the Company's national sports rights agreements caused by
the downturn in the advertising market, which caused the Company to write off
programming costs inventory and to provide for estimated losses on these
contracts. This evaluation considered the severe downturn in sports-related
advertising, the lack of any sustained advertising rebound subsequent to
September 11/th/ and the industry-wide reduction of projected long-term
advertising growth rates, all of which resulted in the Company's estimate of
future directly attributable revenues associated with these contracts being
lower than previously anticipated. Because the vast majority of costs incurred
under these contracts are fixed, such as the rights costs and production costs,
the results of these lower revenue estimates indicated that the Company would
generate a loss over the remaining term of the sports contracts.
In accordance with Accounting Principles Board ("APB") Opinion No. 20,
"Accounting Changes," the Company has determined that the impact of the charge
on Basic and diluted earnings (loss) per share, net of tax benefit of $346
million, for the nine months ended March 31, 2002 is $0.67 loss per share.
The costs of these sports contracts are charged to expense based on the ratio of
each period's operating profits to estimated total operating profit of the
contract. Considering the provision of $909 million for estimated losses and
absent a difference between actual revenues and costs as compared to estimated
revenues and costs, no operating profit or loss will be recognized over the
remaining term of the sports contracts.
The profitability of these long-term national sports contracts as discussed
above is based on the Company's best estimates at March 31, 2002, of directly
attributable revenues and costs; such estimates may change in the future, and
such changes may be significant. Should revenues decline from estimates applied
at March 31, 2002, an additional loss will be recorded. Should revenues improve
as compared to estimated revenues, then none of the recorded loss will be
restored, but the Company will have a positive operating profit, which will be
recognized over the remaining contract life.
16
Use of Operating Income Before Depreciation and Amortization
Management believes that an appropriate measure for evaluating the operating
performance of the Company's business segments is Operating Income Before
Depreciation and Amortization. Operating Income Before Depreciation and
Amortization provides a basis to measure liquidity and operating performance of
each business segment. Although historical results, including Operating Income
Before Depreciation and Amortization, may not be indicative of future results
(as operating performance is highly contingent on many factors including
customer tastes and preferences), Operating Income Before Depreciation and
Amortization provides management a measure to analyze operating performance
against historical and competitors' data. Operating Income Before Depreciation
and Amortization eliminates the uneven effect across business segments of
considerable amounts of depreciation and amortization primarily resulting from
the value of intangible assets acquired in business combinations accounted for
by the purchase method of accounting. Operating Income Before Depreciation and
Amortization is defined as operating income (loss) plus depreciation and
amortization and the amortization of cable distribution investments.
Depreciation and amortization expense includes the amortization of acquired
intangible assets. Amortization of cable distribution investments represents a
reduction against revenues over the term of a carriage arrangement and as such
it is excluded from Operating Income Before Depreciation and Amortization. The
following comparative discussion of the results of operations of the Company
includes, among other factors, an analysis of changes in business segment
Operating Income Before Depreciation and Amortization. However, Operating Income
Before Depreciation and Amortization 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 reported in accordance with accounting
principles generally accepted in the United States ("GAAP"). Operating Income
Before Depreciation and Amortization does not reflect cash available to fund
requirements, and the items excluded from Operating Income Before Depreciation
and Amortization, such as depreciation and amortization, are significant
components in assessing the Company's financial performance.
Pro Forma Results
In order to enhance comparability, the following discussion of the Company's
results of operations is supplemented by pro forma financial information that
assumes the acquisition of the Acquired Stations (as defined below) and Midwest
Sports Channel ("RSN North") and the acquisition of the controlling interest in
Speed Channel, Inc., formerly Speedvision Networks, LLC, ("Speed Channel"), Fox
Sports International and the Sunshine Network ("Sunshine") had occurred July 1,
2000. The pro forma results are presented for informational purposes only and
are not indicative of the operating results that would have occurred had the
transactions actually occurred at July 1, 2000, nor are they necessarily
indicative of future operating results.
17
Results of Operations - Three months ended March 31, 2002 versus Three months
ended March 31, 2001.
The following table sets forth the Company's operating results, by segment, for
the three months ended March 31, 2002 as compared to the three months ended
March 31, 2001.
For the three months ended March 31,
----------------------------------------------
2002 2001 Change
------------ ----------- -----------
(in millions)
Revenues, net:
Filmed Entertainment $ 1,065 $ 880 $ 185
Television Stations 435 320 115
Television Broadcast Network 553 426 127
Cable Network Programming/(1)/ 435 317 118
------- ------- -------
Total revenues, net $ 2,488 $ 1,943 $ 545
======= ======= =======
Operating income (loss):
Filmed Entertainment $ 164 $ 45 $ 119
Television Stations 125 76 49
Television Broadcast Network (50) (3) (47)
Cable Network Programming 23 (18) 41
------- ------- -------
Total operating income (loss) 262 100 162
Interest expense, net (54) (92) 38
Equity losses of affiliates (26) (52) 26
Minority interest in subsidiaries (7) (1) (6)
Other, net -- 40 (40)
------- ------- -------
Income (loss) before provision for income taxes 175 (5) 180
Provision for income tax expense on a stand-alone basis (67) (4) (63)
------- ------- -------
Net income (loss) $ 108 $ (9) $ 117
======= ======= =======
Other data:
Operating Income Before Depreciation and Amortization/(2)/:
Filmed Entertainment $ 180 $ 60 $ 120
Television Stations 173 122 51
Television Broadcast Network (45) 1 (46)
Cable Network Programming 83 35 48
------- ------- -------
Total Operating Income Before Depreciation and Amortization $ 391 $ 218 $ 173
======= ======= =======
FOOTNOTE:
(1) In January 2002, the Company adopted Emerging Issues Task Force No. 01-09,
"Accounting for the Consideration Given by a Vendor to a Customer or a
Reseller of the Vendor's Products." As required, effective January 1, 2002,
the Company has reclassified the amortization of cable distribution
investments against revenues. All comparative periods have been
reclassified. The amortization of cable distribution investments had
previously been included in Depreciation and amortization. Operating
income, Net income and Earnings per share are not affected by this
reclassification. This reclassification affects the Company's and the Cable
Network Programming segment's results. The effect of the reclassification
is as follows:
18
For the Cable Network
Programming segment For the Company
---------------------- ---------------------
For the three months ended March 31,
-----------------------------------------------------
2002 2001 2002 2001
-------- ------- ------- -------
(in millions)
Revenues $ 465 $ 339 $ 2,518 $ 1,965
Amortization of cable distribution investments (30) (22) (30) (22)
-------- ------- ------- -------
Revenues, net $ 435 $ 317 $ 2,488 $ 1,943
======== ======= ======= =======
FOOTNOTE:
(2) Operating Income Before Depreciation and Amortization is defined as
operating income (loss) plus depreciation and amortization and the
amortization of cable distribution investments. Depreciation and
amortization expense includes the amortization of acquired intangible
assets. Amortization of cable distribution investments represents a
reduction against revenues over the term of a carriage arrangement and as
such it is excluded from Operating Income Before Depreciation and
Amortization. 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
GAAP and presented in the unaudited consolidated condensed financial
statements included elsewhere in this filing.
Overview of Company Results. For the quarter ended March 31, 2002, Revenues, net
increased approximately 28% to $2,488 million from $1,943 million in the third
quarter of fiscal 2001. Increased Revenues, net at the Filmed Entertainment and
Television Broadcast Network segments principally contributed to this 28%
increase. In aggregate, Operating, Selling, general and administrative and
Depreciation and amortization expenses increased approximately 21% from the
corresponding period of the prior year. Operating expenses increased
approximately 22% for the quarter ended March 31, 2002 due primarily to
increased programming rights costs related to the telecast of the Super Bowl,
which was not telecast on FOX in the prior year, at the Television Broadcast
Network segment and overall higher programming license fees. Selling, general
and administrative expenses increased approximately 18% primarily due to the
acquisition of the Acquired Stations and consolidation of Speed Channel. In the
third quarter of fiscal year 2002, Depreciation and amortization increased
approximately 3% due to the acquisition of the Acquired Stations. For the
quarter ended March 31, 2002, Operating income increased $162 million to $262
million from $100 million for the quarter ended March 31, 2001. For the third
quarter of fiscal year 2002, Operating Income Before Depreciation and
Amortization increased $173 million to $391 million from $218 million for the
corresponding period of the preceding fiscal year. The Filmed Entertainment and
Television Stations segments contributed to the increases in Operating income
and Operating Income Before Depreciation and Amortization.
Equity losses of affiliates of $26 million improved $26 million from losses of
$52 million in the corresponding period of the preceding fiscal year. These
decreased losses are primarily due to the absence of losses from FFW, Speed
Channel and Outdoor Life. FFW was sold in October 2001, Outdoor Life was held
for sale from July 2001 until its sale in October 2001 and Speed Channel has
been consolidated since July 2001.
Net income for the quarter ended March 31, 2002 was $108 million ($0.13 per
share), an improvement from a loss of $9 million ($0.01 loss per share) for the
quarter ended March 31, 2001. This increase was primarily the result of the
changes described above, which was partially offset by a higher provision for
income taxes.
Filmed Entertainment. For the quarter ended March 31, 2002, Revenues, net at the
Filmed Entertainment segment increased 21% from $880 million in the third
quarter of fiscal year 2001 to $1,065 million. Revenues, net increased due to
additional Twentieth Century Fox Television ("TCFTV") syndication revenues for
NYPD Blue and higher license fees for Buffy the Vampire Slayer. Also
contributing to the increase were increased foreign television licensing fees
and domestic home entertainment revenues for The Simpsons. Operating income at
the Filmed Entertainment segment for the quarter ended March 31, 2002 increased
$119 million to $164 million as compared to $45 million in the corresponding
period of the prior year. Operating Income Before Depreciation and Amortization
also increased $120 million to $180 million for the third quarter of fiscal year
2002 from $60 million in the corresponding period of the prior year. These
increases are primarily due to the successful worldwide theatrical performance
of Ice Age, worldwide home entertainment performance of Moulin Rouge, domestic
home entertainment performance of Kiss of the Dragon, library titles on DVD and
lower amortization of capitalized production expense. The results of the
corresponding period of the prior year included the worldwide theatrical
performance of Cast Away, international theatrical performance of What Lies
Beneath, worldwide home entertainment release of Me, Myself
19
and Irene, international home entertainment performance of X-Men and
international television sales of Titanic. These prior year results were
substantially offset by the disappointing results of Monkeybone, Say It Isn't So
and Legend of Bagger Vance.
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 and subsequently exchanged three former
Chris-Craft stations with Viacom, Inc. and Clear Channel Communications, Inc.
for three other television stations (after giving effect to these transactions
the acquired television stations are referred to as the "Acquired Stations").
These transactions increased the number of the Company's O&Os television
stations to 33 full power stations.
The table below reflects the unaudited pro forma combined results of the
Television Stations segment as if the acquisition of the Acquired Stations had
taken place as of July 1, 2000.
For the three months ended March 31,
---------------------------------------
2002 2001 Change
--------- -------- --------
(in millions)
Revenues, net $ 435 $ 423 $ 12
Operating income 125 92 33
Operating Income Before Depreciation and Amortization 173 143 30
On a pro forma basis, for the quarter ended March 31, 2002, Revenues, net at the
Television Stations segment increased 3% to $435 million from $423 million in
the corresponding period of the prior year. Revenues, net increased due to the
telecast of higher rated programming, including the Super Bowl on FOX, which was
not telecast on FOX in the prior year, the replacement of Fox Kids programming
with higher rated daytime syndicated programming and the syndicated programming
of Seinfeld. Despite the telecast of the Olympics on another network, the
Television Stations' market share, excluding the Acquired Stations, for the
quarter increased by 1.1% from the prior year. The market share gain is
attributable to the revenue increases noted above as well as the strong
performance of local news programs. Operating income for the Television Stations
segment for the quarter ended March 31, 2002 increased 36% to $125 million from
$92 million in the corresponding period of the prior year. Revenue increases
noted above and cost efficiencies at the Acquired Stations in the current
quarter were partially offset by higher programming and production expenses
primarily due to the license fees associated with Seinfeld. Operating Income
Before Depreciation and Amortization increased $30 million from $143 million to
$173 million for the quarter ended March 31, 2002.
Television Broadcast Network. For the third quarter of fiscal year 2002, the
Television Broadcast Network segment's Revenues, net increased $127 million to
$553 million from $426 million in the corresponding period of the prior year.
This 30% increase is due primarily to advertising revenues from the Super Bowl,
which was not telecast on FOX in the prior year. Operating loss increased $47
million to a loss of $50 million from a loss of $3 million for the quarter ended
March 31, 2001. Operating Income Before Depreciation and Amortization decreased
$46 million from the corresponding period of the prior year to a loss of $45
million. Revenue increases were more than offset by increased allocation of NFL
programming rights associated with the increased revenues for the Super Bowl and
higher prime time license fees for returning series.
Cable Network Programming. On a reported basis, total Revenues, net for the
Cable Network Programming segment increased by $118 million or approximately 37%
from $317 million to $435 million for the quarter ended March 31, 2002. Higher
revenues across all of the channels, especially the inclusion of newly acquired
and consolidated channels, attributed to this increase. Operating income
increased $41 million from a loss of $18 million for the quarter ended March 31,
2001 to income of $23 million for the quarter ended March 31, 2002. Improved
results at the Fox News Channel, increases at the Regional Sports Networks
("RSNs") and the inclusion of Speed Channel contributed to the increased
profitability of the Cable Network Programming segment. Operating Income Before
Depreciation and Amortization increased $48 million to $83 million from $35
million from the corresponding period of the prior year.
Fox Sports Cable Networks consolidates the results of the FX Channel ("FX"), the
majority-owned RSNs, Speed Channel and Fox Sports International. In February
2001, Fox Sports Cable Networks acquired RSN North and in January 2002, a
20
controlling interest in Sunshine was acquired. Both RSN North and Sunshine are
consolidated in the results of the RSNs. During fiscal year 2002, Fox Sports
Cable Networks acquired the remaining interest in Speed Channel and has
consolidated its results since July 25, 2001. On December 3, 2001, Fox Sports
Cable Networks acquired the remaining 50% interest in Fox Sports International
and has consolidated its results since the date of acquisition.
The table below reflects the unaudited pro forma combined results of the Cable
Network Programming segment as if the acquisitions discussed above had taken
place as of July 1, 2000.
For the three months ended March 31,
-----------------------------------------
2002 2001 Change
-------- -------- -------
(in millions)
Revenues, net $ 438 $ 357 $ 81
Operating income 25 (39) 64
Operating Income Before Depreciation and Amortization 84 23 61
On a pro forma basis, for the quarter ended March 31, 2002, Fox Sports Cable
Networks' Revenues, net increased 18% from the corresponding period in the prior
year. Revenues, net at FX and the RSNs grew 20% and 10%, respectively. FX
affiliate revenues, net of amortization of cable distribution investments
increased 14%, reflecting a 19% increase in average subscribers over the prior
year. At March 31, 2002, FX reached over 76 million households, an increase of
16 million over the prior year. Despite the difficult advertising sales market,
FX advertising revenues increased 30% over the prior year due to increases in
average audience and higher ratings in the month of March 2002, primarily due to
ratings on FX's new original series, The Shield, which were partially offset by
declines in pricing. Affiliate revenues, net of amortization of cable
distribution investments at the RSNs increased 14% primarily from increased
average rates per subscriber, as well as increases in total subscribers.
Advertising revenues for the RSNs were even with prior year primarily resulting
from the weak advertising market. Revenues, net at Speed Channel increased 61%
from the corresponding period of the prior year primarily from increased
subscribers, increased average audience and new programming. At March 31, 2002,
Speed Channel reached over 50 million subscribers. Operating income at the Fox
Sports Cable Networks improved approximately $42 million from an operating loss
in the corresponding period of the prior year. Revenue increases noted above
primarily drove Fox Sports Cable Networks' operating profit. Revenues were
partially offset by higher marketing at Speed Channel related to the channel's
February 2002 re-launch, higher average rights fees associated with new
professional rights agreements and an increase in the number of professional
events telecast at the RSNs and increased programming and marketing costs
associated with FX's new original series, The Shield. Operating Income Before
Depreciation and Amortization improved approximately $40 million from the
corresponding period of the prior year due to the reasons noted above.
For the quarter ended March 31, 2002, Fox News' Revenues, net increased 51% from
the corresponding period of the prior year. A 78% increase in advertising
revenue was driven by improved ratings and increased pricing, partially offset
by lower national advertising sell-out. Affiliate revenues, net increased by
32%, attributable to a 24% increase in subscribers from 63.8 million subscribers
at March 31, 2001 to 79.1 million at March 31, 2002. These increases were
partially offset by higher amortization due to an increase in cable distribution
investments from subscriber acquisition. Operating income increased 115% in the
third quarter of fiscal 2002 compared to the corresponding period of the prior
year. This increase primarily resulted from the revenue increase of 52% noted
above, which was only partially offset by higher costs associated with breaking
news events and increased talent expenses. Operating Income Before Depreciation
and Amortization improved approximately $16 million from the corresponding
period of the prior year due to the reasons noted above.
21
Equity losses of affiliates. Equity losses of affiliates for the quarter ended
March 31, 2002 of $26 million improved $26 million from losses of $52 million in
the quarter ended March 31, 2001. These decreased losses are primarily due to
the absence of losses from FFW, Speed Channel and Outdoor Life. FFW was sold in
October 2001, Outdoor Life was held for sale from July 2001 until its sale in
October 2001 and Speed Channel has been consolidated since July 2001.
Ownership For the three months ended March 31,
---------------------------------------------------
Percentage 2002 2001 Change
----------------- ---------------------------------------------------
(in millions)
Fox Family Worldwide (FFW)/(a)/ 50% $ - $ (13) $ 13
Fox Sports International/(b)/ 50% - (6) 6
National Geographic Channel - Domestic 66.7% (6) (7) 1
Other/(c)/ Various (20) (26) 6
---------------------------------------------------
Total equity losses of affiliates $ (26) $ (52) $ 26
===================================================
(a) The Company sold its interests in FFW in October 2001.
(b) Subsequent to the acquisition of the remaining 50% interest on December
3, 2001, the results of Fox Sports International have been consolidated
in the Cable Network Programming segment.
(c) Included in Other are the Company's share of the results of National
Geographic-International, Fox Studios Australia, The Golf Channel until
sold in June 2001, NAP, NSP, RPP, Speed Channel until the acquisition
of a controlling interest in July 2001, and Outdoor Life, which was
held for sale from July 2001 until its sale in October 2001.
For the three months ended March 31, 2002, the Company's share of National
Geographic Channel-Domestic's losses was $6 million as compared to $7 million in
losses in the corresponding period in the prior year. The National Geographic
Channel-Domestic's increases in programming and advertising revenues more than
offset increases in programming, production and marketing expenses. National
Geographic Channel-Domestic was launched in January 2001.
Other equity losses of affiliates improved by $6 million during the quarter
ended March 31, 2002 due to the exclusion of Speed Channel and Outdoor Life
losses noted above partially offset by increased equity losses at RPP as a
result of lower attendance at Madison Square Garden ("MSG") from poor team
performance and lower advertising revenues.
Interest expense, net. Interest expense, net decreased $38 million for the third
quarter of fiscal year 2002 from $92 million to $54 million due to a lower
amount Due to affiliates of News Corporation, the expiration of the New
Millennium film financing agreement in March 2001 and the classification of the
expense related to the New Millennium II film financing arrangement as Minority
interest in subsidiaries.
Minority interest in subsidiaries. Minority interest in subsidiaries increased
$6 million to $7 million for the quarter ended March 31, 2002 due to the
preferred interests relating to the Company's film financing arrangement, under
which outstanding amounts are reflected as Minority interest in subsidiaries in
the accompanying unaudited consolidated condensed balance sheets.
Provision for income tax on a stand-alone basis. The effective tax rate of 38.3%
for the third quarter of fiscal 2002 differs from the federal income tax
statutory rate of 35% principally due to the effect of the permanent differences
arising from the amortization of non-deductible goodwill.
22
Results of Operations - Nine months ended March 31, 2002 versus Nine months
ended March 31, 2001.
The following table sets forth the Company's operating results, by segment, for
the nine months ended March 31, 2002 as compared to the nine months ended March
31, 2001.
For the nine months ended March 31,
----------------------------------------------
2002 2001 Change
----------------------------------------------
(in millions)
Revenues, net:
Filmed Entertainment $ 3,121 $ 2,717 $ 404
Television Stations 1,357 1,146 211
Television Broadcast Network 1,595 1,414 181
Cable Network Programming/(1)/ 1,221 954 267
--------- --------- --------
Total revenues, net $ 7,294 $ 6,231 $ 1,063
========= ========= ========
Operating (loss) income:
Filmed Entertainment $ 408 $ 281 $ 127
Television Stations 409 385 24
Television Broadcast Network (223) (104) (119)
Cable Network Programming 24 (15) 39
Other operating charge (909) - (909)
--------- --------- --------
Total operating (loss) income (291) 547 (838)
Interest expense, net (192) (274) 82
Equity losses of affiliates (135) (69) (66)
Minority interest in subsidiaries (29) (3) (26)
Other, net 1,585 (103) 1,688
--------- --------- --------
Income before provision for income taxes and cumulative
effect of accounting change 938 98 840
Provision for income tax expense on a stand-alone basis (371) (66) (305)
--------- --------- --------
Income before cumulative effect of accounting change 567 32 535
Cumulative effect of accounting change, net of tax (26) (494) 468
--------- --------- --------
Net income (loss) $ 541 $ (462) $ 1,003
========= ========= ========
Other data:
Operating Income Before Depreciation and Amortization/(2)/:
Filmed Entertainment $ 452 $ 328 $ 124
Television Stations 561 523 38
Television Broadcast Network (208) (90) (118)
Cable Network Programming 199 141 58
Other operating charge (909) - (909)
--------- --------- --------
Total Operating Income Before Depreciation and
Amortization $ 95 $ 902 $ (807)
========= ========= ========
23
FOOTNOTE:
(1) In January 2002, the Company adopted Emerging Issues Task Force No.
01-09, "Accounting for the Consideration Given by a Vendor to a
Customer or a Reseller of the Vendor's Products." As required,
effective January 1, 2002, the Company has reclassified the
amortization of cable distribution investments against revenues.
All comparative periods have been reclassified. The amortization of
cable distribution investments had previously been included in
Depreciation and amortization. Operating income, Net income and
Earnings per share are not affected by this reclassification. This
reclassification affects the Company's and the Cable Network
Programming segment's results. The effect of the reclassification is as
follows:
For the Cable Network
Programming segment For the Company
------------------------ -------------------------
For the nine months ended March 31,
-----------------------------------------------------
2002 2001 2002 2001
-------- -------- --------- ------------
(in millions)
Revenues $ 1,305 $ 1,018 $ 7,378 $ 6,295
Amortization of cable distribution investments (84) (64) (84) (64)
-------- ------- -------- --------
Revenues, net $ 1,221 $ 954 $ 7,294 $ 6,231
======== ======= ======== ========
(2) Operating Income Before Depreciation and Amortization is defined as
operating income (loss) plus depreciation and amortization and the
amortization of cable distribution investments. Depreciation and
amortization expense includes the amortization of acquired intangible
assets. Amortization of cable distribution investments represents a
reduction against revenues over the term of a carriage arrangement and
as such it is excluded from Operating Income Before Depreciation and
Amortization. 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 GAAP and presented in the unaudited
consolidated condensed financial statements included elsewhere in this
filing.
Overview of Company Results. For the nine months ended March 31, 2002, Revenues,
net increased approximately 17% from $6,231 million to $7,294 million. Increased
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 17% from the corresponding period of the prior year. Operating
expenses increased approximately 19% for the nine months ended March 31, 2002
due primarily to increased programming rights costs at the Television Broadcast
Network and higher production and participation expense at the Filmed
Entertainment segment. Selling, general and administrative expenses increased
approximately 15% due to the acquisition of RSN North and the consolidation of
Speed Channel and Sunshine. During the first nine months of fiscal year 2002,
Depreciation and amortization increased approximately 4% due to the acquisition
of the Acquired Stations at the Television Stations segment. For the first nine
months of fiscal year 2002, the Company reported an operating loss of $291
million declining from income of $547 million in the corresponding period of the
prior year. Operating Income Before Depreciation and Amortization decreased to
$95 million from $902 million for the nine months ended March 31, 2001. These
decreases are primarily due to the Other operating charge of $909 million
related to losses on the Company's sports contracts caused by changes in
accounting estimates primarily with respect to reductions of projected
advertising revenue on national sports rights agreements with the NFL, MLB and
NASCAR. Partially offsetting the Other operating charge was increased results at
the Filmed Entertainment and Cable Network Programming segments.
Equity losses of affiliates of $135 million increased $66 million from $69
million from the corresponding period of the preceding fiscal year. These
increased losses relate primarily to the Company's share of a non-cash
compensation charge recorded at FFW prior to the sale of the Company's interests
in FFW to Disney and increased losses at RPP and the National Geographic
Channel-Domestic, after its launch in January 2001.
For the nine months ended March 31, 2002, 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 in accordance
with Statement of Position No. 00-2 ("SOP 00-2"). This is compared to the
Company's adoption of SOP 00-2 beginning July 1, 2000. The Company's non-cash
charge of $494 million, net of tax benefit of $302 million, was recorded during
the nine months ended March 31, 2001.
Net income for the nine months ended March 31, 2002 was $541 million ($0.65 per
share), an improvement from losses of $462 million ($0.64 loss per share) for
the nine months ended March 31, 2001. This change was the result of the
Company's
24
gains on the sales of FFW and Outdoor Life, which were partially offset by the
charge for the change in accounting estimate on the Company's national sports
rights agreements as compared to the non-cash charge of $494 million for the
Company's adoption of SOP 00-2 in the corresponding period of the prior year.
Filmed Entertainment. Revenues, net from the Filmed Entertainment segment
increased from $2,717 million for the nine months ended March 31, 2001 to $3,121
million for the nine months ended March 31, 2002. This revenue increase was due
to additional TCFTV syndication revenues for NYPD Blue that was not telecast in
the prior year, higher license fees for Buffy the Vampire Slayer and increased
worldwide home entertainment and international free-TV revenues for The
Simpsons. The Filmed Entertainment segment's operating income for the nine
months ended March 31, 2002 increased $127 million to $408 million from $281
million in the corresponding period of the prior year. This increase is due to
the worldwide theatrical and home entertainment performance of Planet of The
Apes, the domestic theatrical and home entertainment performance of Kiss of The
Dragon, the worldwide theatrical performance of Ice Age, the worldwide home
entertainment performances of Moulin Rouge and Dr. DoLittle 2 and library titles
on DVD. Prior year results include the worldwide theatrical and domestic home
entertainment performance of X-Men, the international television sales of
Titanic and the worldwide home entertainment performance of library titles.
These prior year results were partially offset by the disappointing results of
Monkeybone, Say It Isn't So and Legend of Bagger Vance. Operating Income Before
Depreciation and Amortization increased $124 million to $452 million for the
nine months ended March 31, 2002 from $328 million in the corresponding period
of the prior year, primarily due to the reasons noted above.
Television Stations. On July 31, 2001, the Company acquired the television
broadcasting business of Chris-Craft, consisting of ten television stations and
subsequently exchanged three former Chris-Craft stations with Viacom, Inc. and
Clear Channel Communications, Inc. for three other television stations (after
giving effect to these transactions the acquired television stations are
referred to as the "Acquired Stations"). This acquisition increased the number
of the Company's O&Os to 33 full power stations.
The table below reflects the unaudited pro forma combined results of the
Television Stations segment as if the acquisition of the Acquired Stations had
taken place as of July 1, 2000.
For the nine months ended March 31,
------------------------------------------------------
2002 2001 Change
------------ --------------- -----------------
(in millions)
Revenues, net $ 1,395 $ 1,496 $ (101)
Operating income 420 471 (51)
Operating Income Before Depreciation and Amortization 569 625 (56)
On a pro forma basis, for the nine months ended March 31, 2002, Revenues, net at
the Television Stations segment decreased $101 million to $1,395 million from
$1,496 million for the corresponding period of the prior year. The adverse
impact of the September 11/th/ terrorist attacks, which further weakened the
advertising markets, were partially offset by an estimated 1.6 percentage point
gain in market share over the prior year decreased Television Stations revenues.
The market share gain resulted from the positive impact of non-returning
political advertising, syndicated programming of Seinfeld, the replacement of
Fox Kids programming with better rated programming and the telecast of major
sporting events including the MLB All-Star game, post-season MLB Baseball and
the Super Bowl. For the nine months ended March 31, 2002, Operating income at
the Television Stations segment decreased $51 million to $420 million from $471
million in the corresponding period of the prior year. Revenue declines noted
above, higher programming and production expenses associated with Seinfeld and
higher security costs contributed to this decline. For the nine months ended
March 31, 2002, Operating Income Before Depreciation and Amortization for the
Television Stations segment decreased approximately 9% from $625 million in the
corresponding period of the prior year to $569 million.
Television Broadcast Network. For the nine months ended March 31, 2002, the
Television Broadcast Network's Revenues, net increased $181 million to $1,595
million from $1,414 million in the corresponding period of the prior year. This
approximate 13% increase is due primarily to advertising revenues from the Super
Bowl, which was not telecast on FOX in the prior year,
25
and $85 million of revenue recognized from the current year portion of the $675
million sale of the 2001 to 2006 MLB divisional series rights to ABC Family.
These results were partially offset by lower prime time advertising revenue
resulting from a ratings decline in entertainment programming and lower NFL
advertising revenue due to a decrease in regular season pricing and ratings. For
the first nine months of fiscal year 2002, operating losses for the Television
Broadcast Network segment increased $119 million to a loss of $223 million and
Operating Income Before Depreciation and Amortization decreased $118 million to
a loss of $208 million compared to the corresponding period of the preceding
year. Increased NFL and MLB programming rights associated with more games shown
than in the prior year and higher prime time license fees for returning series
contributed to the increased losses.
Cable Network Programming. On a reported basis, Revenues, net for the Cable
Network Programming segment increased by $267 million from $954 million to
$1,221 million for the nine months ended March 31, 2002. Higher revenues across
all of the RSNs and the inclusion of newly acquired channels, attributed to this
increase. Operating income improved $39 million from a loss of $15 million for
the nine months ended March 31, 2001 to income of $24 million for the nine
months ended March 31, 2002 primarily due to improved results at the Fox News
Channel and increased results at the RSNs. Operating Income Before Depreciation
and Amortization increased $58 million to $199 million from $141 million from
the corresponding period of the prior year.
Fox Sports Cable Networks consolidates the results of FX, the majority-owned
RSNs, Speed Channel and Fox Sports International. In February 2001, Fox Sports
Cable Networks acquired RSN North and in January 2002, a controlling interest in
Sunshine was acquired. Both RSN North and Sunshine are consolidated in the
results of the RSNs. During fiscal year 2002, Fox Sports Cable Networks acquired
the remaining interest in Speed Channel and has consolidated its results since
July 25, 2001. On December 3, 2001, Fox Sports Cable Networks acquired the
remaining 50% interest in Fox Sports International and has consolidated its
results since the date of acquisition.
The table below reflects the unaudited pro forma combined results of the Cable
Network Programming segment as if the acquisitions discussed above had taken
place as of July 1, 2000.
For the nine months ended March 31,
------------------------------------------------------
2002 2001 Change
-------------- ------------- ---------------
(in millions)
Revenues, net $ 1,292 $ 1,106 $ 186
Operating income 30 (37) 67
Operating Income Before Depreciation and Amortization 209 133 76
On a pro forma basis, for the nine months ended March 31, 2002, Fox Sports Cable
Networks' Revenues, net increased 15% from the corresponding period in the prior
year. Revenues, net at FX and the RSNs grew 16% and 9%, respectively. FX
affiliate revenues, net of amortization of cable distribution investments
increased 23%, reflecting a 23% increase in average subscribers over the prior
year. At March 31, 2002, FX reached over 76 million households, an increase of
16 million over the prior year. Despite the difficult advertising sales market,
FX advertising revenues increased 14% over the prior year, due to an increase in
average audience, partially offset by declines in pricing. Affiliate revenues,
net of amortization of cable distribution investments increased 14% at the RSNs
primarily from increased average cable rates per subscriber, as well as
increases in total subscribers. Advertising revenues for the RSNs were even with
prior year primarily resulting from the weak advertising market. Revenues, net
at Speed Channel increased 52% from the corresponding period in the prior year
primarily due to increased average audience and new programming. At March 31,
2002, Speed Channel reached over 50 million subscribers. Fox Sports Cable
Networks' operating income increased 86% for the nine months ended March 31,
2002. Revenue increases noted above primarily drove Fox Sports Cable Networks'
operating profit. Revenues were partially offset by higher average rights fees
associated with new professional rights agreements and an increase in the number
of professional events telecast at the RSNs, costs associated with the telecast
of certain MLB events on ABC Family, and increased programming and marketing
costs associated with FX's new original series, The Shield. Operating Income
Before Depreciation and Amortization improved approximately 39% from the
corresponding period of the prior due to the reasons noted above.
26
For the nine months ended March 31, 2001, Fox News' Revenues, net increased 39%
from the corresponding period of the prior year. A 54% increase in advertising
revenue was driven by improved ratings, partially offset by lower national
advertising sales and the impact of pre-emptions. Affiliate revenues, net
increase of 37% was attributable to a 24% increase in subscribers from 63.8
million subscribers at March 31, 2001 to 79.1 million at March 31, 2002. These
increases were partially offset by higher amortization due to an increase in
cable distribution investments from subscriber acquisitions. Operating loss
improved 49% for the nine months ended March 31, 2002 compared to the
corresponding period of the prior year. This improvement resulted from the
revenue increase of 39% noted above, which was only partially offset by higher
costs associated with breaking news events and talent expenses. These higher
costs were partially offset by cost savings due to no election coverage in the
current year. Operating Income Before Depreciation and Amortization improved $27
million from the corresponding period of the prior year due to the reasons noted
above.
Other operating charge. During the nine months ended March 31, 2002, the Company
recorded an Other operating charge of $909 million in its unaudited consolidated
condensed statement of operations. This charge relates to a change in accounting
estimate on the Company's national sports rights agreements caused by the
downturn in the advertising market, which caused the Company to write off
programming costs inventory and to provide for estimated losses on these
contracts. The charge, by contract is as follows: NFL for $387 million, MLB for
$225 million and NASCAR for $297 million.
Equity losses of affiliates. Equity losses of affiliates for the nine months
ended March 31, 2002 increased $66 million to $135 million from $69 million in
the corresponding period of the prior year. The primary reasons for the increase
in Equity losses of affiliates are the Company's share of FFW's net losses,
which include a non-cash compensation charge of which the Company's share is $30
million, recorded before the sale of FFW, and the absence of earnings from the
Golf Channel, which was sold in June 2001.
Ownership For the nine months ended March 31,
------------------------------------------------------
Percentage 2002 2001 Change
-------------- -------------- ------------------ ------------------
(in millions)
Fox Family Worldwide (FFW)/(a)/ 50% $ (51) $ (22) $ (29)
Fox Sports International/(b)/ 50% (9) (16) 7
National Geographic Channel - Domestic 66.7% (32) (14) (18)
Other/(c)/ Various (43) (17) (26)
-------------- ------------------ ------------------
Total equity losses of affiliates $ (135) $ (69) $ (66)
============== ================== ==================
(a) The Company sold its interests in FFW in October 2001.
(b) Subsequent to the acquisition of the remaining 50% interest on December
3, 2001, the results of Fox Sports International have been consolidated
in the Cable Network Programming segment.
(c) Included in Other are the Company's share of the results of National
Geographic-International, Fox Studios Australia, The Golf Channel until
sold in June 2001, NAP, NSP, RPP, Speed Channel until the acquisition
of a controlling interest in July 2001, and Outdoor Life, which was
held for sale from July 2001 until its sale in October 2001.
For the nine months ended March 31, 2002, the Company's share of National
Geographic Channel-Domestic's losses was $32 million as compared to $14 million
in losses in the corresponding period in the prior year. The growth in
programming and advertising revenues at National Geographic Channel-Domestic
were not sufficient to cover the increase in production and marketing expenses
and amortization of cable distribution investments. While revenues at National
Geographic Channel-Domestic increased with the growth of its distribution, the
revenues reflect an average distribution of 23 million subscribers as the
network completed its first full year since launching in January 2001. Other
equity losses of affiliates increased by $26 million primarily due to increased
equity losses at RPP due to MSG incurring charges associated with two
professional player contracts and lower revenues from lower attendance at the
Radio City Music Hall Christmas Spectacular.
Interest expense, net. Interest expense, net decreased $82 million for the first
nine months of fiscal year 2002 from $274 million to $192 million due to the
expiration of the New Millennium film financing agreement in March 2001 and the
classification of the expenses related to the New Millennium II film financing
as minority interest in subsidiaries, a decrease in amounts due to affiliates of
News Corporation and lower expenses related to single picture film financing.
27
Minority interest in subsidiaries. Minority interest in subsidiaries increased
$26 million to $29 million for the nine months ended March 31, 2002 due to an
increase in the preferred interests relating to the Company's film financing
arrangement, under which outstanding amounts are reflected as Minority interest
in subsidiaries in the accompanying unaudited consolidated condensed balance
sheets.
Other, net. Other, net was $1,585 million for the nine months ended March 31,
2002 as compared to other expense of $103 million in the corresponding period of
the prior year. The current year's income includes the gains recognized on the
sales of FFW in the amount of $1,439 million and Outdoor Life Network in the
amount of $147 million. The corresponding period of the prior year recorded a
loss of $103 million consisting of the loss on the Healtheon/WebMD transaction
in the amount of $143 million and the $40 million gain on the sale of Home Team
Sports.
Provision for income tax on a stand-alone basis. The effective tax rate of 39.6%
for the first nine months of 2002 differs from the federal income tax statutory
rate of 35% principally due to the permanent differences arising from the
amortization of non-deductible goodwill amortization.
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 provided by operating activities during the nine months ended March 31,
2002 and 2001 were $879 and $60 million, respectively. During the current
period, receivables increased from the sale of home entertainment and theatrical
products; sports billings related to NASCAR; and the syndication of certain
programs. Offsetting these uses of cash were higher accounts payables and
accrued expenses due to increased participations and residuals from film titles,
higher deferred revenue from prepayments for syndicated product.
Net cash provided by investing activities was $758 million during the nine
months ended March 31, 2002 as compared to cash used of $487 million in the
corresponding period of the preceding fiscal year. The current year included the
proceeds of the sales of FFW and Outdoor Life, partially offset by cash used for
the acquisition of the Acquired Stations and a controlling interest in the Speed
Channel, investments in the National Geographic Channels and Fox Studios
Australia and increased cable distribution investments for Fox News, FX and
Speed Channel.
Net cash used in financing activities was $1,634 million during the nine months
ended March 31, 2002 as compared to $359 million net cash provided by financing
activities in the corresponding period of the preceding fiscal year. The
increase in cash used by financing activities is primarily attributable to
higher repayments to affiliates of News Corporation.
Under a tax sharing agreement between the Company and News Corporation ("Tax
Sharing Agreement"), the Company is included in the consolidated tax return of
News Corporation. Amounts accrued in accordance with the Tax Sharing Agreement
were $267 million during the nine months ended March 31, 2002. This accrual,
included in Due to affiliates of News Corporation, principally relates to the
gain on the sale of the Company's interest in FFW.
28
Regional Programming Partners
In June 1997, Rainbow Media Sports Holdings, Inc. ("Rainbow") (a subsidiary of
Cablevision Systems Corporation ("Cablevision") and Fox Sports Net, LLC ("Fox
Sports Net") (a subsidiary of the Company) entered into a Formation Agreement
pursuant to which they agreed to form RPP and to hold various programming
interests in connection with the operation of certain RSNs. In accordance with
the terms of the Formation Agreement, upon consummation of the transactions
contemplated thereby (the "Rainbow Transaction") on December 18, 1997, Rainbow
contributed various interests in RSNs, the Madison Square Garden Entertainment
Complex, Radio City Music Hall, the New York Rangers NHL franchise, and the New
York Knickerbockers NBA franchise, to RPP in exchange for a 60% partnership
interest in RPP, and Fox Sports Net contributed $850 million in cash for a 40%
partnership interest in RPP.
Pursuant to the partnership agreement of RPP (the "RPP Agreement"), after the
third anniversary of the closing of the Rainbow Transaction, upon certain
actions being taken by Fox Sports RPP Holdings, LLC ("Fox Sports RPP"), a
subsidiary of Fox Sports Net, Rainbow Regional Holdings, Inc. ("RRH"), a
subsidiary of Rainbow, has the right to purchase from Fox Sports RPP all of Fox
Sports RPP's interests in RPP. The buyout price will be the greater of (i) (a)
$2.125 billion, increased by capital contributions and decreased by capital
distributions times Fox Sports Net's interest in RPP plus (b) an 8% rate of
return on the amount in (a) and (ii) the fair market value of Fox Sports Net's
interest in RPP. Consideration will be, at Rainbow's option, in the form of cash
or a three-year note with an interest rate of prime plus 1/2%.
Additionally, for (i) 30 days following the fifth anniversary of the closing of
the Rainbow Transaction, (ii) 30 days following each third year anniversary of
the fifth anniversary of the closing of the Rainbow Transaction and (iii) 30
days following receipt by Fox Sports RPP of RRH's notice initiating the buy-out
procedure described above, so long as RPP has not commenced an initial public
offering of its securities, Fox Sports RPP has the right to cause RRH, at RRH's
option, to either (i) purchase all of its interests in RPP or (ii) consummate an
initial public offering of RPP's securities. The sales price in an acquisition
by RRH will be the fair market value of Fox Sports RPP's interest in RPP and the
consideration will be, at Rainbow's option, in the form of marketable securities
of certain affiliated companies of Rainbow or a three year note with an interest
rate of prime plus 1/2%.
In connection with the Rainbow Transaction, a subsidiary of Rainbow ("RNSH") and
a subsidiary of Fox Sports Net ("Fox Sports NSP") agreed to form National Sports
Partners, a New York general partnership ("NSP") in which each of RNSH and Fox
Sports NSP were issued a 50% partnership interest to operate Fox Sports Net
("FSN"), a national sports programming service that provides its affiliated RSNs
with 24 hour per day national sports programming. Fox Sports NSP is the managing
partner of NSP.
Also in connection with the Rainbow Transaction, a subsidiary of Rainbow
("Rainbow Ad Sales") and a subsidiary of Fox Sports Net ("Fox Sports Ad Sales"),
agreed to form the National Advertising Partners, a New York general partnership
("NAP") in which each of Fox Sports Ad Sales and Rainbow Ad Sales were issued a
50% partnership interest to act as the national advertising sales representative
for the Fox Sports Net-owned RSNs and the RPP-owned and managed RSNs.
For 30 days following the fifth anniversary of the closing of the Rainbow
Transaction and for the 30 days following each third year anniversary of the
fifth anniversary of the closing of the Rainbow Transaction, so long as NSP and
NAP have not commenced an initial public offering of its securities, RNSH has
the right to cause Fox Sports NSP, at Fox Sports NSP's option and Rainbow Ad
Sales has the right to cause Fox Sports Ad Sales, at Fox Sports Ad Sales' option
to either (i) purchase all of the Rainbow subsidiary's interests in RPP, NSP and
NAP, or (ii) consummate an initial public offering of NSP's and NAP's
securities.
The sales price in an acquisition will be the fair market value of the Rainbow
subsidiary's interest in NSP and NAP and the consideration will be, at Fox
Sports Net's option, in the form of marketable Securities of certain affiliated
entities of Fox Sports Net or a three-year note with an interest rate of prime
plus 1/2%.
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. During fiscal year 2001, certain of the Company's subsidiaries
were released as guarantors of these debt obligations. The principal amount of
indebtedness outstanding under such debt instruments as of March 31, 2002 and
June 30, 2001 was approximately $8.7 billion and $9.3 billion, respectively. The
debt instruments limit the
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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 2004 and 2096, with a weighted average maturity of more
than 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 guarantees of such debt obligations. At March 31, 2002, News
Corporation was in compliance with all of its debt covenants and had satisfied
all financial ratios and tests and expects to remain in compliance and to
satisfy all such ratios and tests.
Ratings of News Corporation and Fox Sports Networks Public Debt
At March 31, 2002, the ratings for News Corporation's debt that is guaranteed by
the Company, by Moody's (Ba1 for subordinated notes and Baa3 for senior
unsecured notes) and Standard & Poor's (BBB-), were within the investment grade
scale.
At March 31, 2002, the ratings for Fox Sports Networks LLC's Senior Notes and
Senior Discount Notes, by Moody's (Ba1) and Standard & Poor's (BBB-), were
within the investment grade scale.
New Millennium II
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 ("TCF"), a subsidiary of the Company,
between 2001 and 2004 (these film rights agreements are collectively referred to
as the, "New Millennium II Agreement"). NM2 is a separate legal entity from the
Company and TCF and has separate assets and liabilities. NM2 issued a preferred
limited liability membership interest ("Preferred Interest") 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
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.
At March 31, 2002, there was $843 million of Preferred Interests outstanding,
which is included in the unaudited consolidated condensed balance sheets as
Minority interest in subsidiaries. The Preferred Payments are recorded as an
expense in Minority interest in subsidiaries on the unaudited consolidated
condensed statements of operations.
A Ratings Trigger Event for the New Millennium II Agreement would occur if News
Corporation's debt rating:
(i) (a) falls below BB+ and below Ba1, or (b) falls below BB, or (c) falls
-- --
below Ba2, or (d) it is not rated by both rating agencies, and, in
-- -------
each case, neither News Corporation nor the Company shall, within
---------
ten business days after the occurrence of such event, have provided
credit enhancement so that the resulting New Millennium II
Agreement is rated at least BB+ and Ba1, or
--
(ii)(a) falls below BBB- and Baa3, or (b) it is not rated by both rating
--
agencies, and, in each case, more than $25 million in capital
-----------------
payments redeemable at that time from film gross receipts remain
unredeemed for at least one quarter.
If a Ratings Trigger Event were to occur then (a) no new films will be
transferred, (b) rights against certain film assets may be enforced, and (c)
the Preferred Interest may become redeemable.
As of March 31, 2002, no Ratings Trigger Event had occurred. If a Ratings
Trigger Event were to occur, then $425 million (or approximately 50% of the
outstanding balance at March 31, 2002) may be payable immediately. The balance
of the redemption
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would be payable from future gross receipts from films that had been transferred
to NM2 as they are collected in the normal course of business.
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 American Depositary Receipts representing preferred limited voting
ordinary shares ("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 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. News Corporation acquired
Chris-Craft and transferred to the Company the Acquired Stations in order to
strengthen the Company's existing television station business.
The Company has consolidated the results of operations of the Acquired Stations,
as of the date of Exchange, July 31, 2001, with the exception of KTVX-TV in Salt
Lake City, whose operations were not consolidated as of the exchange due to
regulatory requirements which precluded the Company from controlling the station
and required its disposal (see description of Clear Channel swap below). 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 and
issued equity to News Corporation at that value.
In October 2001, the Company exchanged KTVX-TV in Salt Lake City and KMOL-TV in
San Antonio with Clear Channel Communications, Inc. for WFTC-TV in Minneapolis
(the "Clear Channel swap"). In addition, on November 1, 2001, the Company
exchanged KBHK-TV in San Francisco with Viacom Inc. for WDCA-TV in Washington,
DC and KTXH-TV in Houston (the "Viacom swap", and together with the Clear
Channel swap, the "Station Swaps"). All of the stations exchanged in the Station
Swaps were Acquired Stations. No gain or loss was recognized by the Company as a
result of the Station Swaps.
In March 2002, Fox Television Stations entered into an Asset Exchange Agreement
with Meredith Corporation ("Meredith"). Fox Television Stations will exchange
KPTV-TV in Portland, an Acquired Station, for Meredith's WOFL-TV in Orlando and
WOGX-TV in Ocala (the "Meredith swap"). The Meredith swap is subject to
regulatory approval and customary closing conditions. The Meredith swap is
expected to close in the fourth quarter of fiscal year 2002. No gain or loss
will be recognized by the Company as a result of the Meredith swap.
Fox Sports International
In December 2001, News Corporation acquired from Liberty Media Corporation
("Liberty") its 50% interest in Fox Sports International, in exchange for
3,673,183 ADRs valued at $115 million. Under the terms of this transaction, the
Company purchased News Corporation's acquired interest in Fox Sports
International, which increased the Company's ownership interest from 50% to
100%, in exchange for the issuance of 3,632,269 shares of the Company's Class A
Common Stock. As a result of this transaction, News Corporation's ownership
interest in the Company increased from 85.25% to 85.32%. For financial reporting
purposes, in accordance with Emerging Issues Task Force ("EITF") No. 90-5, the
Company has recognized the assets and liabilities of Fox Sports International
based upon their acquired basis in the News Corporation acquisition and issued
3,632,269 shares of the Company's Class A Common Stock to News Corporation at
that value.
FFW
In October 2001, the Company, Haim Saban and the other stockholders of FFW, sold
FFW to Disney for total consideration of approximately $5.2 billion (including
the assumption of certain debt) of which approximately $1.6 billion was in
consideration of the Company's interest in FFW, which was rebranded ABC Family.
FOX has entered into a programming arrangement with Disney, which allowed 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 recognized a pre-tax gain on the sale of
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FFW in the amount of approximately $1.4 billion, which is reflected in Other,
net in the accompanying unaudited consolidated condensed statements of
operations for the nine months ended March 31, 2002. The proceeds from this
transaction were used to reduce obligations to News Corporation, to reduce third
party debt and to fund working capital requirements. In addition, the Company
sublicensed certain post-season MLB games for the 2001 to 2006 MLB seasons to
Disney for approximately $675 million.
Speed Channel
In July 2001, as a result of the exercise of rights by existing shareholders,
the Company acquired 53.44% of Speed Channel for approximately $401 million.
This acquisition resulted in the Company owning approximately 85.46% of Speed
Channel. As a result, the Company has consolidated the results of Speed Channel
beginning in July 2001. In October 2001, the Company acquired the remaining
14.54% minority interest in Speed Channel for approximately $111 million. These
transactions have been treated as a purchase in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations".
Outdoor Life
In July 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.
In August 2001, a shareholder of Outdoor Life exercised its option to acquire
the Company's ownership interest in Outdoor Life for approximately $512 million
in cash. During the period from July 2001 until the closing of the sale of
Outdoor Life in October 2001, the ownership interest in Outdoor Life was held
for sale and control of Outdoor Life was deemed temporary. Therefore, 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," the
results of Outdoor Life were not consolidated in the Company's statement of
operations for this period. Upon the closing of the sale of the Company's
ownership interest in Outdoor Life, the Company recognized a gain of $147
million, which is reflected in Other, net in the accompanying unaudited
consolidated condensed statements of operations for the nine months ended March
31, 2002.
Sunshine
In January 2002, the Company acquired an approximate 23.3% interest in Sunshine
for approximately $23.3 million. This resulted in the acquisition of a
controlling interest in Sunshine and increased the Company's ownership
percentage in Sunshine to approximately 83.3%. In February 2002, the Company
acquired an additional approximate .4% interest in Sunshine, increasing the
Company's ownership interest to approximately 83.7%. As of the acquisition date
in January 2002, Sunshine has been consolidated into the Cable Network
Programming segment of the Company as it is now under the control of the
Company.
Los Angeles Dodgers
In November 2001, the collective bargaining agreement between MLB and the MLB
Players Association ("MLBPA") expired. MLB and MLBPA are currently discussing
several proposals and no agreement has been finalized. The possibility of a
labor stoppage exists in the absence of a new agreement. A labor stoppage could
result in a significant reduction in revenues for the Los Angeles Dodgers.
Recent Accounting Pronouncements
In November 2001, the Financial Accounting Standards Board ("FASB") issued EITF
No. 01-09, "Accounting for the Consideration Given by a Vendor to a Customer or
a Reseller of the Vendor's Products." This EITF, among other things, codified
the issues and examples of EITF No. 00-25, "Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's Products."
EITF No. 00-25 states that the financial statement classification of customer
incentives (in the case of the Company, fees paid to a cable or DBS operator to
facilitate the launch of a cable network), including the amortization of cable
distribution investments, should be presented as a reduction in revenue. As
required, effective January 1, 2002, the Company has reclassified the
amortization of cable distribution investments against revenues. All
comparative periods have been reclassified. The amortization of cable
distribution investments had previously been included in Depreciation and
amortization. Operating income, Net income and Earnings per share are not
affected by this reclassification. This reclassification affects the Company's
and Cable Network Programming segment's results.
32
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 tax benefit of $302 million, 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 FASB issued SFAS No. 139, which rescinds SFAS No. 53 and
requires public companies to follow the guidance provided by SOP 00-2.
In June 2001, the 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 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 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. SFAS No. 144 establishes an accounting model for
impairment or disposal of long-lived assets to be (i) held and used and (ii)
disposed of by sale. The Company plans to adopt SFAS No. 144 on July 1, 2002.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," required
that gains and losses from extinguishment of debt be classified as an
extraordinary item, net of the related income tax effect. Any gain or loss on
extinguishment of debt that was classified as an extraordinary item in prior
periods presented that does not meet the criteria in APB Opinion No. 30 for
classification as an extraordinary item shall be reclassified. SFAS No. 13,
"Accounting for Leases," has been amended to require sale-leaseback accounting
for certain lease modifications that are similar to sale-leaseback transactions.
The rescission of SFAS No. 4 and the amendment to SFAS No. 13 shall be effective
for fiscal years and transactions, respectively, occurring after May 15, 2002.
The Company does not expect the provisions of SFAS No. 145 to have a material
impact on its consolidated statements of operations.
Part II. Other Information
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 March 1, 2002
relating to the announcement that, on February 27, 2002, Lachlan
Murdoch was elected to the Board of Directors of the Company.
(ii) Current Report on Form 8-K of the registrant filed April 22, 2002
relating to the announcement that, on April 16, 2002, the Company
dismissed Arthur Andersen LLP as its independent auditor.
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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: May 15, 2002 FOX ENTERTAINMENT GROUP, INC.
By: /s/ David F. DeVoe
------------------
Name: David F. DeVoe
Title: Chief Financial Officer
34