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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
FORM 10-Q
----------------
{X} Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended December 31, 2000.
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 of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1211 Avenue of the Americas, New York, NY 10036
(Address of Principal Executive Offices)
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 February 14, 2001, 176,559,834 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.
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FOX ENTERTAINMENT GROUP, INC.
FORM 10-Q
TABLE OF CONTENTS
-----------------
Page
----
Part I. Financial Information
Item 1. Financial Statements
Unaudited Consolidated Condensed Statements of Operations for the three and six months
ended December 31, 2000 and 1999........................................................................ 3
Consolidated Condensed Balance Sheets at December 31, 2000 (unaudited) and
at June 30, 2000 (audited).............................................................................. 4
Unaudited Consolidated Condensed Statements of Cash Flows for the six months
ended December 31, 2000 and 1999........................................................................ 5
Notes to the Unaudited Consolidated Condensed Financial Statements........................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................................... 11
Item 3. Qualitative and Quantitative Disclosures about Market Risk....................................... 21
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 22
Part II. Other Information
Signature...................................................................................................... 22
2
FOX ENTERTAINMENT GROUP, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in millions except per share amounts)
For the three months ended For the six months ended
December 31, December 31,
-------------------------------------- ------------------------------------------
2000 1999 2000 1999
----------------- --------------- ----------------- -------------------
Revenues $ 2,502 $ 2,436 $ 4,330 $ 4,237
Expenses:
Operating 1,850 1,853 3,112 3,150
Selling, general and administrative 256 264 534 488
Depreciation and amortization 120 107 237 213
----------------- --------------- ----------------- -------------------
Operating income 276 212 447 386
Other expense:
Interest expense, net (98) (79) (182) (141)
Equity in earnings (losses) of
affiliates 3 38 (17) 2
Minority interest (1) (1) (2) (2)
Other expense (143) - (143) -
----------------- --------------- ----------------- -------------------
Income before income taxes and
cumulative effect of accounting
change 37 170 103 245
Income tax expense on a stand-alone
basis (32) (76) (62) (108)
----------------- --------------- ----------------- -------------------
Income before cumulative effect of 5 94 41 137
accounting change
Cumulative effect of accounting
change, net of tax -- -- (494) --
----------------- --------------- ----------------- -------------------
Net income (loss) $ 5 $ 94 $ (453) $ 137
================= =============== ================= ===================
Basic and diluted earnings per share
before cumulative effect of
accounting change $ 0.01 $ 0.13 $ 0.06 $ 0.19
Basic and diluted cumulative effect
of accounting change, net of tax,
per share -- -- (0.68) --
----------------- --------------- ----------------- -------------------
Basic and diluted earnings (loss) per
share $ 0.01 $ 0.13 $(0.62) $ 0.19
================= =============== ================= ===================
Basic and diluted weighted average
number of common equivalent shares
outstanding 724 724 724 719
================= =============== ================= ===================
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)
December 31, June 30,
2000 2000
-------------------- ---------------------
(unaudited) (audited)
ASSETS
Cash and cash equivalents $ 53 $ 114
Accounts receivable, net 2,826 2,191
Filmed entertainment and television programming costs, net 2,780 3,438
Investments in equity affiliates 1,578 1,510
Property and equipment, net 1,463 1,478
Intangible assets, net 7,927 7,836
Other assets and investments 894 1,363
------------------ ----------------
Total assets $ 17,521 $ 17,930
================== ================
LIABILITIES
Accounts payable and accrued liabilities $ 1,842 $ 1,946
Participations, residuals and royalties payable 1,158 1,209
Television programming rights payable 941 903
Deferred revenue 609 688
Borrowings 1,041 974
Deferred income taxes 782 1,058
Other liabilities 196 147
------------------ ----------------
6,569 6,925
Due to intercompany affiliates 3,127 2,739
------------------ ----------------
Total liabilities 9,696 9,664
------------------ ----------------
Minority interest in subsidiaries 21 20
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value per share; 100,000,000 shares
authorized; 0 shares issued and outstanding at December 31 and
June 30, 2000 -- --
Class A Common stock, $.01 par value per share; 1,000,000,000
authorized; 176,559,834 issued and outstanding
at December 31 and June 30, 2000 2 2
Class B Common stock, $.01 par value per share; 650,000,000
authorized; 547,500,000 issued and outstanding at December 31 and
June 30, 2000 6 6
Paid-in capital 8,023 8,023
Retained (deficit) earnings and accumulated other comprehensive
income (227) 215
------------------ ----------------
Total shareholders' equity 7,804 8,246
------------------ ----------------
Total liabilities and shareholders' equity $17,521 $17,930
================== ================
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
FOX ENTERTAINMENT GROUP, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in millions)
For the six months ended
December 31,
--------------------------------
2000 1999
--------------- -------------
Operating Activities:
Net (loss) income $(453) $ 137
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Depreciation and amortization 237 213
Cumulative effect of accounting change, net of tax 494 --
Equity in losses of affiliates and distributions 68 (2)
Other Expense 143 --
Change in operating assets and liabilities, net of acquisition:
Accounts receivable and other assets (677) (444)
Filmed entertainment and television programming costs, net (133) (827)
Accounts payable and accrued liabilities 204 382
Participations, residuals and royalties payable and other
liabilities (57) (128)
--------------- -------------
Net cash used in operating activities (174) (669)
--------------- -------------
Investing Activities:
Cash acquired -- 63
Purchases of property and equipment, net of acquisition (67) (107)
Investments in equity affiliates, net of acquisition (107) (139)
Other investments (162) (116)
--------------- -------------
Net cash used in investing activities (336) (299)
--------------- -------------
Financing Activities:
Borrowings 51 98
Repayment of borrowings -- (730)
Advances from affiliates, net 398 1,621
--------------- -------------
Net cash provided by financing activities 449 989
--------------- -------------
Net (decrease) increase in cash and cash equivalents (61) 21
Cash and cash equivalents, beginning of period 114 121
--------------- -------------
Cash and cash equivalents, end of period $ 53 $ 142
=============== =============
Supplemental information on businesses acquired:
Fair value of assets acquired $3,313
Cash acquired 63
Less: liabilities assumed 1,951
-------------
Fair value of stock consideration $1,425
=============
The accompanying notes are an integral part of these unaudited consolidated
condensed financial statements.
5
FOX ENTERTAINMENT GROUP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
Fox Entertainment Group, Inc. (the "Company") is principally engaged in the
development, production and worldwide distribution of feature films and
television programs, television broadcasting and cable network programming. The
Company was incorporated in Delaware in May 1985 as Twentieth Holdings
Corporation. In 1998, the Company changed its corporate name to Fox
Entertainment Group, Inc. The Company is a majority-owned subsidiary of The
News Corporation Limited ("News Corporation"), which, at December 31, 2000,
holds equity and voting interests in the Company of 82.76% and 97.80%,
respectively.
The financial information included herein may not necessarily reflect the
consolidated results of operations, financial position, changes in shareholders'
equity and cash flows of the Company in the future or what they would have been
had the Company been a separate, stand-alone entity during all the periods
presented.
The accompanying unaudited consolidated condensed financial statements of the
Company have been prepared in accordance with accounting principles generally
accepted in the United States 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 period presented are not necessarily indicative of the results that may
be expected for the fiscal year ending June 30, 2001.
These interim unaudited consolidated condensed financial statements and notes
thereto should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's Form 10-K filed with the
Securities and Exchange Commission on September 28, 2000.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
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.
Total comprehensive income (loss) for the three and six months ended December
31, 2000 was income of $11 million and a loss of $442 million, respectively.
Total other comprehensive income for the three and six months ended December 31,
2000 of $6 million and $11 million, respectively, consists of currency
translation gains. Total comprehensive income for the three and six months ended
December 31, 1999 was $95 million and $140 million, respectively. Total other
comprehensive income for the three and six months ended December 31, 1999
consisted of currency translation adjustments of $1 million and $3 million,
respectively.
Certain prior year amounts have been reclassified to conform with the fiscal
2001 presentation.
6
FOX ENTERTAINMENT GROUP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 2 - Acquisitions
In August 2000, News Corporation announced its intention to acquire Chris-Craft
Industries, Inc., BHC Communications, Inc. and United Television, Inc.
(collectively, "Chris-Craft"). Chris-Craft owns a group of ten television
stations in the United States. News Corporation will pay approximately $5.35
billion in the aggregate, comprised of a cash payment of approximately $2.13
billion and approximately 73 million American Depositary Receipts ("ADRs")
representing 292 million News Corporation preferred limited voting ordinary
shares. As part of the acquisition, News Corporation will transfer the assets,
excluding approximately $1.7 billion in cash, to the Company, which will perform
the day to day operations of the acquired stations, in exchange for the issuance
to News Corporation of approximately 122.2 million shares of the Company's Class
A common stock, increasing News Corporation's equity interest in the Company
from 82.76% to approximately 85.25%. The closing of the acquisition is subject
to customary conditions including shareholder and regulatory approval.
In December 2000, Haim Saban, Chairman and Chief Executive Officer of Fox Family
Worldwide ("FFW"), exercised his right to put his 49.5% interest in FFW (the
"Saban Interest") to the Company. In January 2001, the Company exercised its
right to call the Saban Interest. The purchase price for the sale of the Saban
Interest is to be determined by mutual agreement of the parties. In the event
that the parties are unable to agree upon a price, the price will be determined
by a valuation procedure using investment bankers.
Note 3 - Segment Information
The Company manages and reports its activities in five 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 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; Television Broadcast Network, which
principally consists of the broadcasting of network programming; Other
Television Businesses, which represents other broadcast television related
activities; 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 Canada
and professional sports team ownership. The television-related segments operate
in the United States and Canada.
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.
7
FOX ENTERTAINMENT GROUP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 3 - Segment Information (continued)
For the three months ended For the six months ended
December 31, December 31,
---------------------------------------- -------------------------------------------
(in millions) 2000 1999 2000 1999
--------------- ------------------- ----------------- ------------------
REVENUES
Filmed Entertainment $1,057 $1,073 $1,788 $1,862
Television Stations 457 469 826 826
Television Broadcast Network 649 582 988 914
Other Television Businesses 25 23 49 44
Cable Network Programming 314 289 679 591
--------------- ------------------- ----------------- ------------------
$2,502 $2,436 $4,330 $4,237
=============== ================= ================= ==================
OPERATING INCOME (LOSS)
Filmed Entertainment $ 133 $ 32 $ 238 $ 81
Television Stations 203 211 309 324
Television Broadcast Network (65) (19) (101) (4)
Other Television Businesses 1 -- (2) --
Cable Network Programming 4 (12) 3 (15)
--------------- ------------------- ----------------- ------------------
Total Operating Income 276 212 447 386
--------------- ----------------- ---------------- -------------------
Interest expense, net (98) (79) (182) (141)
Equity in earnings (losses) of
affiliates 3 38 (17) 2
Minority interest (1) (1) (2) (2)
Other expense (143) -- (143) --
--------------- ----------------- ---------------- ------------------
Income before income taxes and
cumulative effect of accounting
change $ 37 $ 170 $ 103 $ 245
================ ================ ================ ===================
December 31, June 30,
2000 2000
--------------------------------------
(in millions)
TOTAL ASSETS
Filmed Entertainment............................................................ $ 4,041 $ 4,620
Television Stations............................................................. 6,085 6,213
Television Broadcast Network.................................................... 1,597 1,382
Other Television Businesses..................................................... 317 364
Cable Network Programming....................................................... 3,903 3,841
Investments in equity affiliates................................................ 1,578 1,510
-------------- ----------------
$ 17,521 $ 17,930
============== ================
Equity in earnings (losses) of affiliates primarily relates to entities involved
in the production and licensing of cable network programming. Interest expense,
minority interest, other expense and income tax expense are not allocated to
segments as they are not under the control of the segment management. There is
no material reliance on any single customer. Revenues from any individual
foreign country were not material in the periods presented.
8
FOX ENTERTAINMENT GROUP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 4 - 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. During the period, certain of the Company's subsidiaries were
released as guarantors of these debt obligations. The principal amount of
indebtedness outstanding under such debt instruments at December 31 and June 30,
2000 was approximately $9.6 billion and $9.9 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 2001 and 2096, with a weighted
average maturity of over 20 years.
In the case of any event of default under such debt obligations, the Company
will be directly liable to the creditors or debtholders. News Corporation has
agreed to indemnify the Company from and against any obligations it may incur by
reason of its guarantees of such debt obligations.
Note 5 - Filmed Entertainment and Television Programming Costs, net
Filmed entertainment and television programming costs, net consisted of the
following:
December 31, 2000 June 30, 2000
------------------- ----------------------
Filmed entertainment costs: (in millions)
Feature films:
Released $ 217 $ 753
Completed, not released 87 42
Production 390 692
Development or preproduction 88 154
------------------ -----------------
782 1,641
------------------ -----------------
Television productions:
Released 435 516
Production 172 79
Development or preproduction 12 4
------------------ -----------------
619 599
------------------ -----------------
Total filmed entertainment costs 1,401 2,240
Television programming costs, less accumulated amortization 1,379 1,198
------------------ -----------------
Total filmed entertainment and television programming costs, net $ 2,780 $ 3,438
================== =================
9
FOX ENTERTAINMENT GROUP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 6 - Other
In January 2000, the Company completed a series of integrated transactions with
Healtheon/WebMD Corporation ("WebMD") to exchange, among other things, media
services and its interest in The Health Network ("THN") for a cost based
Preferred stock interest in WebMD. No gain or loss was recorded by the Company
in connection with this original integrated transaction. On December 29, 2000,
the Company, News Corporation and WebMD entered into an agreement to restructure
the initial integrated transaction, which resulted in the Company agreeing to
exchange its entire Preferred stock investment with a carrying value of $505
million, for an approximate $126 million reduction in the Company's obligation
to provide future media services, an approximate $37 million elimination of
future funding commitments to THN, and the acquisition of WebMD's interest in
THN. The acquisition of THN has been recorded at its fair market value of
approximately $200 million, which has been determined by independent appraisal
and preliminarily allocated to goodwill. A final allocation of the purchase
price to the assets acquired and liabilities assumed will be completed within
the next 12 months. The Company will continue to provide future domestic media
services over 10 years and will remain obligated for cash payments to WebMD of
$27.5 million over 4 years. The carrying value of the deferred revenue for
future media services is approximately $162 million at December 31, 2000, with a
market value of approximately $205 million. Such deferred revenue will be
recognized over the ten-year term as such media services are delivered under an
agreed annual commitment schedule based upon rates prevailing in each future
period. The restructuring transaction has resulted in the Company recording a
non-cash charge of approximately $143 million, which is reflected within Other
Expense in the statement of operations.
Note 7 - New Accounting Pronouncements
At the beginning of fiscal 2001, the Company adopted Statement of Position 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 Picture Films". SOP
00-2 establishes new accounting standards for, among other things, marketing and
development costs. The Company recorded a one-time, non-cash charge of $494
million, net of $302 million tax, as a cumulative effect of an accounting change
for the quarter ended September 30, 2000. This charge primarily reflects the
write-off of marketing and certain development costs, which were previously
capitalized under SFAS No. 53 and are no longer capitalizable under SOP 00-2.
Subsequent to the adoption of SOP 00-2, the Company's accounting policy is to
expense marketing and certain development costs as incurred.
In June 2000, the Financial Accounting Standards Board issued SFAS No. 139,
which rescinds SFAS No. 53 and requires public companies to follow the guidance
provided by SOP 00-2.
The Company also adopted, as of the beginning of fiscal 2001, SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires every derivative instrument (including certain derivative instruments
embedded in other contracts) to be recorded on the balance sheet at fair value
as either an asset or a liability. The statement also requires that changes in
the derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. The Company's adoption of SFAS No. 133 had
no material impact on the Company's financial statements for the six months
ended December 31, 2000.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This document contains statements that constitute "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as amended. The words
"expect," "estimate," "anticipate," "predict," "believe" and similar expressions
and variations thereof are intended to identify forward-looking statements.
These statements appear in a number of places in this document and include
statements regarding the intent, belief or current expectations of the Fox
Entertainment Group, Inc. (the "Company"), its directors or its officers with
respect to, among other things, trends affecting the Company's financial
condition or results of operations. The readers of this document are cautioned
that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties. Those risks and uncertainties
are discussed under the headings "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," in the Company's
Registration Statement Form S-1 (SEC file no. 333-61515) as declared effective
by the Securities and Exchange Commission on November 9, 1998, as well as the
information set forth below. The Company does not ordinarily make projections of
its future operating results and undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise, except as required by law. Readers should carefully
review other documents filed by the Company with the Securities and Exchange
Commission. This section should be read in conjunction with the unaudited
consolidated condensed financial statements of the Company and related notes set
forth elsewhere herein.
The Company manages and reports its businesses in five 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; Other
Television Businesses, which represents other broadcast television related
activities; 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 Sports Networks, LLC ("Fox
Sports Networks") prior to the Company's acquisition of substantially all of the
50% interest it did not previously own in July 1999, Fox Family Worldwide, Inc.
("FFW"), Fox Sports Ventures, LLC, Regional Programming Partners ("RPP"),
Regency Television and International Sports Programming Partners ("Fox Sports
International"), are included in equity in earnings (losses) of affiliates and,
accordingly, are not reported in the segments set forth above.
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, broadcast and cable 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 licensed in 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, Television Broadcast Network and Other Television
Businesses. The three 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 23 owned and
operated television broadcast stations in their respective markets. The sale of
advertising time is affected by viewer demographics, program ratings and market
conditions. Adverse changes in general market conditions for advertising may
also affect revenues.
Cable Network Programming. The Cable Network Programming segment derives
revenues from monthly subscriber fees as well as from the sale of advertising
time. Monthly subscriber fees are dependent on maintenance of carriage
arrangements with cable television systems and DBS operators. The sale of
advertising time is affected by viewer demographics, program ratings and general
market conditions.
11
Components of Expenses
Filmed Entertainment. Operating costs incurred by the Filmed Entertainment
segment include the amortization of capitalized production costs, overhead and
interest costs; exploitation costs, primarily prints and advertising; and
participations and talent residuals. Selling, general and administrative
expenses include salaries, employee benefits, rent and other routine overhead.
At the beginning of the first quarter of 2001, the Company adopted Statement of
Position 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 Picture Films".
SOP 00-2 establishes new accounting standards for, among other things, marketing
and development costs. The Company recorded a one-time, non-cash charge of $494
million, net of $302 million tax, as a cumulative effect of an accounting change
for the quarter ended September 30, 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.
Television Stations, Television Broadcast Network, Other Television Businesses
and Cable Network Programming Segments. Expenses of the three television
segments and the Cable Network Programming segment include operating expenses
related to acquiring programming and rights to programming, as well as selling,
general and administrative expenses. 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.
12
Results of Operations - Three months ended December 31, 2000 vs. Three months
ended December 31, 1999
The following table sets forth the Company's operating results, by segment, for
the three months ended December 31, 2000 as compared to the three months ended
December 31, 1999:
Three months ended
December 31,
------------
2000 1999 Change
------ ------ -----
(Dollars in Millions)
Revenues:
Filmed Entertainment.................................................. $ 1,057 $ 1,073 $ (16)
Television Stations................................................... 457 469 (12)
Television Broadcast Network.......................................... 649 582 67
Other Television Businesses........................................... 25 23 2
Cable Network Programming............................................. 314 289 25
-----------------------------------------------
Total Revenues........................................................ $ 2,502 $ 2,436 $ 66
===============================================
Operating Income (Loss):
Filmed Entertainment.................................................. $ 133 $ 32 $ 101
Television Stations................................................... 203 211 (8)
Television Broadcast Network.......................................... (65) (19) (46)
Other Television Businesses........................................... 1 -- 1
Cable Network Programming............................................. 4 (12) 16
-----------------------------------------------
Total Operating Income................................................ 276 212 64
Interest expense, net................................................. (98) (79) (19)
Equity in earnings (losses) of affiliates............................. 3 38 (35)
Minority interest..................................................... (1) (1) --
Other expense......................................................... (143) -- (143)
-----------------------------------------------
Income before income taxes............................................ 37 170 (133)
Income tax expense on a stand-alone basis............................. (32) (76) 44
-----------------------------------------------
Net income (loss)..................................................... $ 5 $ 94 $ (89)
===============================================
Other Data:
Operating Income Before Depreciation and Amortization(1):
Filmed Entertainment.................................................. $ 151 $ 44 $ 107
Television Stations................................................... 249 259 (10)
Television Broadcast Network.......................................... (60) (16) (44)
Other Television Businesses........................................... -- -- --
Cable Network Programming............................................. 56 32 24
-----------------------------------------------
Total Operating Income Before
Depreciation and Amortization (1)..................................... $ 396 $ 319 $ 77
===============================================
(1) Operating Income Before Depreciation and Amortization is defined as
operating income (loss) before depreciation and amortization. While
Operating Income Before Depreciation and Amortization is considered to be an
important measure of comparative performance by many in the financial
community, it should be considered in addition to, but not as a substitute
for, operating income, net income, cash flow and other measures of financial
performance prepared in accordance with accounting principles generally
accepted in the United States and presented in the unaudited consolidated
condensed financial statements included elsewhere in this filing.
Overview of Company Results. For the second quarter of fiscal 2001, revenues of
$2,502 million were approximately 3% above the $2,436 million reported for the
second quarter of fiscal 2000. The increase in revenues was primarily derived
from increases at the Television Broadcast Network segment. In aggregate,
Operating, Selling, general and administrative, and
13
Depreciation and amortization remained flat compared to the prior year quarter.
Depreciation and amortization increased $13 million due to depreciation expense
on the prior year's capital expenditures at the Fox Studios Lot in Los Angeles,
California. The Company reported operating income of $276 million for the second
quarter of fiscal 2001, as compared to the $212 million reported in the second
quarter of fiscal 2000. Operating Income Before Depreciation and Amortization of
$396 million increased approximately 24% from the $319 million reported in the
second quarter of fiscal 2000. Significant growth in operating income and
Operating Income Before Depreciation and Amortization was achieved by the
Company's Filmed Entertainment and Cable Network Programming segments. These
increases were primarily offset by losses associated with the Company's
broadcast of the Major League Baseball ("MLB") post season games at the
Television Broadcast Network segment.
Equity in earnings of affiliates of $3 million decreased $35 million over the
second quarter of fiscal 2000 primarily due to the decrease in earnings from FFW
resulting from prior year's $61 million gain related to the Fox Kids Europe N.V.
("FKE") initial public offering ("IPO").
Net income for the quarter ended December 31, 2000 was $5 million ($0.01 per
share) compared to $94 million ($0.13 per share) for the corresponding period of
the prior year. This decrease primarily relates to an approximate $143 million
charge for the restructuring of the Healtheon/WebMD ("WebMD") transaction.
Filmed Entertainment. For the second quarter of fiscal 2001, revenues decreased
2% compared to the corresponding period of the preceding fiscal year. Second
quarter results were reported in accordance with the new film SOP that was
adopted at the beginning of fiscal 2001. The Filmed Entertainment segment
reported a second quarter operating income increase of $101 million over the
second quarter of fiscal 2000. Operating Income Before Depreciation and
Amortization increased to $151 million from $44 million in the corresponding
period of the prior year. The strong second quarter operating results were
primarily due to the domestic video performance and continuing international
theatrical performance of X-Men, income from the network availability of Titanic
and the on-going strength of worldwide library sales in video and DVD formats.
These results were partially offset by the recording of marketing costs for Men
of Honor, Quills, and Cast Away. Prior year results included disappointing
results from the domestic theatrical releases of Anna and the King and Light It
Up and the worldwide video release of Bartok. At Twentieth Century Fox
Television ("TCFTV"), operating results improved over the corresponding period
of the prior year reflecting higher international television and worldwide video
revenues for Ally McBeal, Buffy the Vampire Slayer and The X-Files.
Television. For the second quarter of fiscal 2001, combined revenues from all
television related segments increased to $1,131 million, an approximate 5%
increase from the corresponding period of the preceding fiscal year, operating
income decreased by approximately 28% and Operating Income Before Depreciation
and Amortization decreased by approximately 22%. The aggregate decrease in the
television segments was primarily due to the MLB post season losses at FOX and a
decline in advertising revenues at the Fox Television Stations due to the weak
advertising markets.
For the second quarter of fiscal 2001, the Television Stations segment's net
revenues and operating income decreased approximately 3% and 4%, respectively.
Operating Income Before Depreciation and Amortization decreased by $10 million
from the prior year's corresponding period to $249 million. Advertising revenue
declined in all major revenue categories and across all major markets. This
decline was led by a decrease in spending by Internet related businesses. News
production and overhead expenses increased 7%, primarily due to the launch of
local news at the Denver television station. These results were partially offset
by cost reductions from lower promotional spending, commissions on revenue and
overhead savings.
At FOX, for the second quarter of fiscal 2001, revenues increased $67 million,
operating losses increased by $46 million and Operating Income Before
Depreciation and Amortization decreased $44 million from the corresponding
period of the preceding fiscal year. FOX's results have been negatively
impacted by an approximate $71 million loss due to the short duration and lower
ratings of the MLB post season and the weak advertising market. At FOX's
entertainment division, advertising and promotion expenses increased 32% due to
higher off-air media awareness spending for the fall launch this quarter
compared to the prior year quarter. These results were partially offset by the
significant ratings improvements and reduced programming costs at FOX's
entertainment division.
Cable Network Programming. The revenues of the Cable Network Programming
segment for the second quarter of fiscal 2001 compared to the corresponding
period in the prior year increased $25 million, operating income increased $16
million
14
and Operating Income Before Depreciation and Amortization improved by $24
million over the second quarter of fiscal 2000. Revenue increases were due to a
combination of subscriber growth and advertising revenue increases primarily at
the FX Channel ("FX") and the Fox News Channel ("Fox News"). Costs increased due
to programming increases at FX, the costs of launching regional news and sports
rights increases at the Regional Sports Networks ("RSNs"), and the costs related
to the extended presidential coverage at Fox News.
At FX, revenues and operating income grew 23% and 22%, respectively, through
higher priced advertising and increased affiliate revenues, reflecting a 20%
increase in average subscribers over the corresponding period in the prior year.
FX reached 55.5 million households as of December 31, 2000, a 23% increase over
December 31, 1999. FX's revenue increases were partially offset by increased
marketing and programming costs for The Sight, FX's second original movie. Fox
Sports Networks' operating income declined approximately $11 million versus the
prior year quarter. This decline relates to the continued rollout of regional
sports news as well as increases in sports rights fees of the RSNs as a result
of higher average rights fees per event, arising from new rights agreements, and
an increase in the number of National Basketball Association ("NBA") and
National Hockey League ("NHL") events. The operating income decline was
partially offset by the effect of increases in the average rate per subscriber
arising from new affiliation agreements and an increase in the number of
subscribers.
Fox News improved operating losses by 61% during the second quarter compared to
the corresponding period of the prior year. Fox News' revenues and operating
costs increased by approximately 38% and 3%, respectively. Advertising revenues
increased related to Fox News Sunday and the addition of several new major
advertising clients. The operating costs increased primarily due to the extended
presidential election coverage. Fox News' subscribers increased to
approximately 55 million as compared to approximately 44 million in the second
quarter of fiscal 2000.
Equity in earnings (losses) of affiliates. In the second quarter of fiscal
2001, equity in earnings of affiliates decreased to $3 million from $38 million
in the corresponding period of the preceding fiscal year.
The Company's share of Fox Sports Networks' domestic equity affiliates'
breakeven net income remained flat for the second quarter of fiscal 2001. An
increase in profits at RPP and higher affiliate revenue at the Speedvision and
Outdoor Life Networks were offset by lower advertising revenue at National
Sports Partnership ("NSP") and higher rights and production costs associated
with more NBA and NHL games at the Sunshine Network.
For the second quarter of fiscal 2001, the Company's share of FFW's net income
decreased by $52 million to $4 million. Prior year's results included a $61
million gain related to the FKE IPO. Revenue increases of 11% resulting from
higher domestic cable and international subscription fee revenue, partially
offset by increases in production and programming costs associated with
increased distribution were the factors contributing to FFW's improved operating
performance.
At Fox Sports Cable Networks International, the Company's share of net losses
decreased from $8 million to $4 million due to increased affiliate revenues at
Fox Sports World and Fox Sports World Espanol due to increased subscribers and
to the decreased programming costs at Fox Sports Latin America due to the timing
of the broadcast of sporting events.
Interest expense, net. Net interest expense increased $19 million as compared to
prior year quarter. This increase relates to higher intercompany balances with
The News Corporation Limited ("News Corporation") from cash advances and
increases in film production financing.
Other expense. In January 2000, the Company completed a series of integrated
transactions with WebMD to exchange, among other things, media services and its
interest in The Health Network ("THN") for a cost based Preferred stock interest
in WebMD. No gain or loss was recorded by the Company in connection with this
original integrated transaction. On December 29, 2000, the Company, News
Corporation and WebMD entered into an agreement to restructure the initial
integrated transaction, which resulted in the Company agreeing to exchange its
entire Preferred stock investment with a carrying value of $505 million, for an
approximate $126 million reduction in the Company's obligation to provide future
media services, an approximate $37 million elimination of future funding
commitments to THN, and the acquisition of WebMD's interest in THN. The
acquisition of THN has been recorded at its fair market value of approximately
$200 million, which has been determined by independent appraisal and
preliminarily allocated to goodwill. A final allocation of the purchase price to
the assets acquired and liabilities assumed will be completed within the next 12
months. The Company will continue to provide future domestic
15
media services over 10 years and will remain obligated for cash payments to
WebMD of $27.5 million over 4 years. The carrying value of the deferred revenue
for future media services is approximately $162 million at December 31, 2000,
with a market value of approximately $205 million. Such deferred revenue will be
recognized over the ten-year term as such media services are delivered under an
agreed annual commitment schedule based upon rates prevailing in each future
period. The restructuring transaction has resulted in the Company recording a
non-cash charge of approximately $143 million, which is reflected within Other
Expense in the statement of operations.
Income tax expense on a stand-alone basis. Income tax expense for the second
quarter of fiscal 2001 decreased to $32 million from $76 million in the
corresponding period of the preceding year. The effective tax rate for the
period increased to 86.5% compared to 44.7% in the corresponding period of the
preceding year. The increase in the effective tax rate resulted from the
relationship of nondeductible items to lower pre-tax income in the second
quarter of fiscal 2001.
16
Results of Operations - Six months ended December 31, 2000 vs. Six months ended
December 31, 1999
The following table sets forth the Company's operating results, by segment, for
the six months ended December 31, 2000 as compared to the six months ended
December 31, 1999:
Six months ended December 31,
-----------------------------
2000 1999 Change
------ ------ ------
(Dollars in Millions)
Revenues:
Filmed Entertainment.................................................. $ 1,788 $ 1,862 $ (74)
Television Stations................................................... 826 826 --
Television Broadcast Network.......................................... 988 914 74
Other Television Businesses........................................... 49 44 5
Cable Network Programming............................................. 679 591 88
----------------------------------------------
Total Revenues........................................................ $ 4,330 $ 4,237 $ 93
==============================================
Operating Income (Loss):
Filmed Entertainment.................................................. $ 238 $ 81 $ 157
Television Stations................................................... 309 324 (15)
Television Broadcast Network.......................................... (101) (4) (97)
Other Television Businesses........................................... (2) -- (2)
Cable Network Programming............................................. 3 (15) 18
----------------------------------------------
Total Operating Income................................................ 447 386 61
Interest expense, net................................................. (182) (141) (41)
Equity in earnings (losses) of affiliates............................. (17) 2 (19)
Minority interest..................................................... (2) (2) --
Other expense......................................................... (143) -- (143)
----------------------------------------------
Income before income taxes and cumulative effect of accounting
change................................................................ 103 245 (142)
Income tax expense on a stand-alone basis............................. (62) (108) 46
----------------------------------------------
Income before cumulative effect of accounting change 41 137 (96)
Cumulative effect of accounting change, net of tax.................... (494) -- (494)
----------------------------------------------
Net (loss) income..................................................... $ (453) $ 137 $(590)
==============================================
Other Data:
Operating Income Before Depreciation and Amortization(1):
Filmed Entertainment.................................................. $ 270 $ 106 $ 164
Television Stations................................................... 401 419 (18)
Television Broadcast Network.......................................... (91) 4 (95)
Other Television Businesses........................................... (2) -- (2)
Cable Network Programming............................................. 106 70 36
----------------------------------------------
Total Operating Income Before
Depreciation and Amortization (1)..................................... $ 684 $ 599 $ 85
==============================================
(1) Operating Income Before Depreciation and Amortization is defined as
operating income (loss) before depreciation and amortization. While
Operating Income Before Depreciation and Amortization is considered to be an
important measure of comparative performance by many in the financial
community, it should be considered in addition to, but not as a substitute
for, operating income, net income, cash flow and other measures of financial
performance prepared in accordance with accounting principles generally
accepted in the United States and presented in the unaudited consolidated
condensed financial statements included elsewhere in this filing.
Overview of Company Results. For the six months ended December 31, 2000,
revenues of $4,330 million were 2% above the $4,237 million reported for the
corresponding period in the prior year. The increase in revenues was primarily
derived from
17
increases at the Television Broadcast Network and Cable Network Programming
segments. In aggregate, Operating, Selling, general and administrative, and
Depreciation and amortization increased $32 million compared to the
corresponding period of the prior year. Operating expenses decreased 1% compared
to the corresponding period of the prior year. Selling, general and
administrative expenses increased $46 million from the corresponding period of
the prior year mainly due to an increase in video return reserves in line with
the increase in video sales at the Filmed Entertainment segment. Depreciation
and amortization increased $24 million due to depreciation on capital
expenditures at the Fox Studios Lot in Los Angeles, California and at Fox Sports
Networks. The Company reported operating income of $447 million for the six
months ended December 31, 2000, as compared to the $386 million reported in the
six months ended December 31, 1999. Operating Income Before Depreciation and
Amortization of $684 million increased 14% over $599 million reported in the
corresponding period in the prior year. Significant growth in operating income
and Operating Income Before Depreciation and Amortization was achieved by the
Company's Filmed Entertainment and Cable Network Programming segments. A loss of
approximately $71 million related to the broadcast of the MLB post season games
at the Television Broadcast Network partially offset these improvements.
Equity in losses of affiliates of $17 million increased by $19 million from the
first six months of fiscal 2000 due to the decease in contributions from FFW
resulting from prior year's gain related to the FKE IPO.
At the beginning of fiscal 2001, the Company adopted SOP 00-2, "Accounting by
Producers or Distributors of Films", which established new accounting standards
for producers and distributors of films and supersedes SFAS No. 53, "Financial
Reporting by Producers and Distributors of Motion Picture Films". SOP 00-2
establishes new accounting standards for, among other things, marketing and
development costs. The Company recorded a one-time, non-cash charge of $494
million, net of $302 million tax, as a cumulative effect of an accounting change
for the quarter ended September 30, 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. The decrease in
deferred income taxes included in the accompanying consolidated condensed
balance sheet primarily relates to the deferred tax benefit recorded from this
cumulative effect of an accounting change.
Net loss for the six months ended December 31, 2000 was $453 million ($0.62 per
share) as compared to net income of $137 million ($0.19 per share) for the
corresponding period of the prior year. This decrease primarily relates to an
approximate $494 million charge for the adoption of SOP 00-2.
Filmed Entertainment. For the six months ended December 31, 2000, revenues
decreased approximately 4% compared to the corresponding period of the preceding
fiscal year. Operating income increased $157 million from the first six months
of fiscal 2000. Operating Income Before Depreciation and Amortization increased
to $270 million, from $106 million in the corresponding period of the prior
year. During the first six months of fiscal 2001, the Company adopted SOP 00-2
changing its film accounting policies. The successful worldwide theatrical
release and domestic video revenues of X-Men and the continued strength of
worldwide video and DVD catalog sales were partially offset by the marketing
costs related to promotion and marketing. SOP 00-2 requires the Filmed
Entertainment segment to expense these costs incurred in contrast to
capitalizing and amortizing them over the life of the film resulting in
increased current period costs. Prior year results included the disappointing
domestic theatrical releases of Anna and the King, Brokedown Palace and Light It
Up, which were partially offset by the international theatrical performance of
Star Wars, Episode I: The Phantom Menace and contributions from domestic and
international pay television agreements covering available films. At TCFTV,
operating results improved over the corresponding period of the prior year
reflects higher international television revenue for Ally McBeal, Buffy the
Vampire Slayer and X-Files and increased domestic video sales for X-Files.
These results were partially offset by increased fees related to the X-Files.
Television. For the first six months of fiscal 2001, combined revenues from all
television related segments increased to $1,863 million, a 4% increase from the
corresponding period of the preceding fiscal year, operating income decreased by
36% and Operating Income Before Depreciation and Amortization decreased by 27%.
For the six months ended December 31, 2000, the Television Stations segment's
net revenues were flat and operating income decreased 5%. The weak advertising
market and competition related to the Olympics broadcast on another network
resulted in flat revenues for the first six months of fiscal 2001. Higher
programming costs for newly acquired syndicated series, as
18
well as increased local broadcast rights fees and production costs for
additional local MLB games in the Boston and Dallas markets also contributed to
the decrease in operating income.
At FOX, for the first six months of fiscal 2001, revenues increased $74 million,
operating losses grew by $97 million and Operating Income Before Depreciation
and Amortization decreased $95 million from the corresponding period of the
preceding fiscal year. FOX's results have been negatively impacted by an
approximate $71 million loss due to the short duration and lower ratings of the
MLB post season and the weak advertising market. In addition, operating income
related to sports programming declined 165% due to lower National Football
League ("NFL") pre-season and MLB regular season ratings, as well as the
broadcast of two additional NFL games. In our primetime entertainment
broadcasts, increased advertising and promotion costs and competition from the
Summer Olympics broadcast on another television network during the first quarter
more than offset the strong performance of FOX's new series and returning shows.
Cable Network Programming. The revenues of the Cable Network Programming
segment for the six months ended December 31, 2000 compared to the corresponding
period in the prior year increased $88 million, operating income of $3 million
improved by $18 million and Operating Income Before Depreciation and
Amortization improved by $36 million. Revenue increases were due to a
combination of subscriber growth and advertising revenue increases primarily at
FX and Fox News. Costs increased due to programming increases at FX, the costs
of launching regional news, sports rights increases at the RSNs and the costs
related to the extended presidential coverage at Fox News.
At FX, revenues and operating income grew 27% and 28%, respectively, as a result
of affiliate revenue increases reflecting a 25% increase in subscribers over the
prior year and advertising revenue increase from the successful premiere of FX's
first two original movies, Deliberate Intent and The Sight. This growth was
partially offset by increased programming and marketing expenses to support its
original programming. Fox Sports Networks' operating income decreased 58%
versus the same period in fiscal 2000 primarily as a result of the continued
rollout of regional sports news. The RSNs benefited from recently completed
affiliation agreements, which increased their subscriber base as well as
revenues per subscriber and the increase in the number of MLB, NBA and NHL
events. These revenue gains were more than offset by the costs associated with
the increased rights fees and production costs associated with increases in the
number of events and the rights fee per event.
Fox News' operating income increased 37% during the first six months of fiscal
2001. Fox News' sales and operating costs increased 32% and 8%, respectively,
through higher advertising due to better national and direct response pricing
and affiliate revenues due to higher subscribers. The increase in operating
costs was primarily due to the extended presidential election coverage. Fox
News's subscriber base now exceeds 55 million.
Equity in earnings (losses) of affiliates. For the six months ended December
31, 2000, equity in losses of affiliates declined $19 million to a loss of
$17 million.
The Company's share of Fox Sports Networks' domestic equity affiliates'
operating results increased from a loss of $4 million to income of $2 million
during the six months ended December 31, 2000. This improvement reflects an
increase in profits at RPP due to increased affiliate revenue across all RSNs
resulting principally from higher subscribers and rate surcharges, as well as
higher advertising and affiliate revenues at CTV Sports Net. In addition,
subscriber gains continued to improve operating performance at the Speedvision
and Outdoor Life cable networks. These gains were partially offset by increased
losses at NSP and Sunshine RSN.
For the first six months of fiscal 2001, the Company's share of FFW's net income
decreased $48 million to a loss of $9 million. The decrease in FFW's net income
relates to the gain of $61 million recognized during the corresponding period of
the prior year in relation to the FKE IPO. Increases in international cable ad
sales and subscription revenue fees, partially offset by decreases in production
and distribution revenues were the factors contributing to FFW's improved
operating performance. Decreases in production and programming costs primarily
relate to lower amortization expenses associated with FFW's mix of domestic and
foreign revenues as compared to the corresponding period of the prior year.
At Fox Sports Cable Networks International, the Company's share of net losses
decreased from $15 million to $9 million. Increased advertising and affiliate
revenues at Fox Sports World and Fox Sports World Espanol due to increased
subscribers, improved the equity losses related to Fox Sports Cable Networks
International by approximately 40% for the six months
19
ended December 31, 2000. In addition, results improved related to the
acquisition of the rights to broadcast the English Premiere League soccer
matches.
Interest expense, net. Net interest expense increased $41 million as compared to
prior year quarter. This increase relates to the higher intercompany balances
with News Corporation from cash advances and external balances associated with
film production financing.
Other expense. In January 2000, the Company completed a series of integrated
transactions with WebMD to exchange, among other things, media services and its
interest in THN for a cost based Preferred stock interest in WebMD. No gain or
loss was recorded by the Company in connection with this original integrated
transaction. On December 29, 2000, the Company, News Corporation and WebMD
entered into an agreement to restructure the initial integrated transaction,
which resulted in the Company agreeing to exchange its entire Preferred stock
investment with a carrying value of $505 million, for an approximate $126
million reduction in the Company's obligation to provide future media services,
an approximate $37 million elimination of future funding commitments to THN, and
the acquisition of WebMD's interest in THN. The acquisition of THN has been
recorded at its fair market value of approximately $200 million, which has been
determined by independent appraisal and preliminarily allocated to goodwill. A
final allocation of the purchase price to the assets acquired and liabilities
assumed will be completed within the next 12 months. The Company will continue
to provide future domestic media services over 10 years and will remain
obligated for cash payments to WebMD of $27.5 million over 4 years. The carrying
value of the deferred revenue for future media services is approximately $162
million at December 31, 2000, with a market value of approximately $205 million.
Such deferred revenue will be recognized over the ten-year term as such media
services are delivered under an agreed annual commitment schedule based upon
rates prevailing in each future period. The restructuring transaction has
resulted in the Company recording a non-cash charge of approximately $143
million, which is reflected within Other Expense in the statement of operations.
Income tax expense on a stand-alone basis. Income tax expense for the six
months ended December 31, 2000 decreased to $62 million from $108 million in the
corresponding period of the preceding year. The effective tax rate for the
period increased to 60.2% compared to 44.1% in the corresponding period of the
preceding year. The increase in the effective rate resulted from the
relationship of nondeductible items to lower pre-tax income in the six months
ended December 31, 2000.
Liquidity and Capital Resources
The Company's principal sources of cash flow are internally generated funds and
borrowings from News Corporation and its subsidiaries.
Net cash flows used in operating activities during the six months ended December
31, 2000 were $174 million as compared to $669 million in the corresponding
period of the preceding fiscal year. The decrease in cash used was primarily
due to lower levels of filmed entertainment and television programming costs,
partially offset by an increase in home video receivables.
Net cash flows used in investing activities were $336 million and $299 million
during the six months ended December 31, 2000 and 1999, respectively. The
current year included investments in Regency Television, NSP, THN and Fox News
and FX launch support payments.
Net cash flows provided by financing activities were $449 million and $989
million during the six months ended December 31, 2000 and 1999, respectively.
The decrease in cash provided by financing activities is primarily attributable
to lower advances from affiliates used to fund operations.
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 the period, certain of the Company's subsidiaries were
released as guarantors of these debt obligations. The principal amount of
indebtedness outstanding under such debt instruments at December 31 and June 30,
2000 was approximately $9.6 billion and $9.9 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 2001 and 2096, with a weighted
average
20
maturity of over 20 years.
In the case of any event of default under such debt obligations, the Company
will be directly liable to the creditors or debtholders. News Corporation has
agreed to indemnify the Company from and against any obligations it may incur by
reason of its guarantees of such debt obligations.
The Company and Liberty/TINTA LLC ("Liberty/TINTA"), a subsidiary of Liberty
Media Corporation ("Liberty"), each own 50% of Fox Sports International. In
conjunction with the Company's July 1999 acquisition of substantially all of the
remaining 50% of Fox Sports Networks, Liberty has an option to cause News
Corporation to acquire and News Corporation has the option to cause
Liberty/TINTA to sell the 50% interest in Fox Sports International held by
Liberty/TINTA in exchange for an aggregate 3,633,866 American Depositary
Receipts ("ADRs") representing 14,535,464 preferred shares. Such options may be
exercised at any time during the 60 days following July 15, 2001. If such
options are exercised, News Corporation will transfer the acquired interest in
Fox Sports International to the Company for approximately 3,632,000 shares of
Class A common stock.
In August 2000, News Corporation announced its intention to acquire Chris-Craft
Industries, Inc., BHC Communications, Inc. and United Television, Inc.
(collectively, "Chris-Craft"). Chris-Craft owns a group of ten television
stations in the United States. News Corporation will pay approximately $5.35
billion in the aggregate, comprised of a cash payment of approximately $2.13
billion and approximately 73 million ADRs representing 292 million News
Corporation preferred limited voting ordinary shares. As part of the
acquisition, News Corporation will transfer the assets, excluding approximately
$1.7 billion in cash, to the Company, which will perform the day to day
operations of the acquired stations, in exchange for the issuance to News
Corporation of approximately 122.2 million shares of the Company's Class A
common stock, increasing News Corporation's equity interest in the Company from
82.76% to approximately 85.25%. The closing of the acquisition is subject to
customary conditions including shareholder and regulatory approval.
In December 2000, Haim Saban, Chairman and Chief Executive Officer of Fox Family
Worldwide ("FFW"), exercised his right to put his 49.5% interest in FFW (the
"Saban Interest") to the Company. In January 2001, the Company exercised its
right to call the Saban Interest. The purchase price for the sale of the Saban
Interest is to be determined by mutual agreement of the parties. In the event
that the parties are unable to agree upon a price, the price will be determined
by a valuation procedure using investment bankers.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
Part II. Other Information
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
21
Item 4. Submission of Matters to a Vote of Security Holders
On November 15, 2000, the Company held its annual meeting of
stockholders. At this meeting, the Board of Directors was elected and
the appointment of Arthur Andersen, LLP as independent public
accountants of the Company for the fiscal year ended June 30, 2001 was
ratified. Shares were voted for the election of the directors of the
Company as follows: for K. Rupert Murdoch, 5,569,983,328 shares voted
for, 9,737,807 shares withheld and 1,024,833 abstained; for Peter
Chernin, 5,569,904,790 shares voted for, 9,816,345 shares withheld and
1,024,833 abstained; for Chase Carey, 5,569,909,725 shares voted for,
9,811,410 shares withheld and 1,024,833 abstained; for David F. DeVoe,
5,579,221,011 shares voted for, 500,124 shares withheld and 1,024,833
abstained; for Arthur M. Siskind, 5,579,224,848 shares voted for,
496,286 shares withheld and 1,024,833 abstained; for Christos M.
Cotsakos, 5,579,213,422 shares voted for, 507,713 shares withheld and
1,024,833 abstained; for Laura D'Andrea Tyson, 5,579,571,612 shares
voted for, 149,523 shares withheld and 1,024,833 abstained. There were
5,580,544,697 shares voted in favor of the appointment of Arthur
Andersen, LLP as the independent public accountants of the Company with
37,596 shares voted against and 63,675 abstentions.
Item 5. Other Information.
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
Not Applicable
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: February 14, 2001 FOX ENTERTAINMENT GROUP, INC.
By: /s/ David F. DeVoe
-------------------
Name: David F. DeVoe
Title: Chief Financial Officer
22