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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
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{x} Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 2001.
or
{_} Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from to.
Commission file number 1- 14595
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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
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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__
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As of May 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
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Part I. Financial Information Page
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Item 1. Financial Statements
Unaudited Consolidated Condensed Statements of Operations for the three and
nine months ended March 31, 2001 and 2000......................................................... 3
Consolidated Condensed Balance Sheets at March 31, 2001 (unaudited) and at
June 30, 2000 (audited)........................................................................... 4
Unaudited Consolidated Condensed Statements of Cash Flows for the nine
months ended March 31, 2001 and 2000.............................................................. 5
Notes to the Unaudited Consolidated Condensed Financial Statements................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................................ 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk........................................ 24
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.................................................................. 24
Signature.................................................................................................... 25
2
FOX ENTERTAINMENT GROUP, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in millions except per share amounts)
For the three months ended For the nine months ended
March 31, March 31,
--------------------------- -------------------------
2001 2000 2001 2000
--------- ---------- ----------- -----------
Revenues $ 1,965 $ 1,884 $ 6,295 $ 6,121
Expenses:
Operating 1,483 1,393 4,595 4,543
Selling, general and administrative 264 229 798 717
Depreciation and amortization 118 111 355 324
-------- ------- ------- -------
Operating Income 100 151 547 537
Other Expense:
Interest expense, net (92) (80) (274) (221)
Equity losses of affiliates (52) (37) (69) (35)
Minority interest (1) -- (3) (2)
Other income (expense) 40 -- (103) --
-------- ------- ------- -------
Income (loss) before income taxes and
cumulative effect of accounting change (5) 34 98 279
Income tax expense on a stand-alone basis (4) (15) (66) (123)
-------- ------- ------- -------
Income (loss) before cumulative effect of
accounting change (9) 19 32 156
Cumulative effect of accounting change, net of tax -- -- (494) --
-------- ------- ------- -------
Net income (loss) $ (9) $ 19 $ (462) $ 156
======== ======= ======= =======
Basic and diluted earnings (loss) per share
before cumulative effect of accounting change $ (0.01) $ 0.03 $ 0.04 $ 0.22
Basic and diluted cumulative effect of
accounting change, net of tax, per share -- -- (0.68) --
-------- ------- ------- -------
Basic and diluted earnings (loss) per share $ (0.01) $ 0.03 $ (0.64) $ 0.22
======== ======= ======= =======
Basic and diluted weighted average number
of common equivalent shares outstanding 724 724 724 721
======== ======= ======= =======
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)
March 31, June 30,
2001 2000
------- -------
(unaudited) (audited)
ASSETS
Cash and cash equivalents $ 46 $ 114
Accounts receivable, net 2,299 2,191
Filmed entertainment and television programming costs, net 3,794 3,438
Investments in equity affiliates 1,543 1,510
Property and equipment, net 1,461 1,478
Intangible assets, net 7,701 7,836
Other assets and investments 1,203 1,363
--------- ----------
Total assets $ 18,047 $ 17,930
========= =========
LIABILITIES
Accounts payable and accrued liabilities $ 1,700 $ 1,946
Participations, residuals and royalties payable 883 1,209
Television programming rights payable 1,188 903
Deferred revenue 727 688
Borrowings 1,123 974
Deferred income taxes 770 1,058
Other liabilities 131 147
--------- ----------
6,522 6,925
Due to intercompany affiliates 2,947 2,739
--------- ----------
Total liabilities 9,469 9,664
--------- ----------
Minority interest in subsidiaries 772 20
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value per share; 100,000,000 shares
authorized; 0 shares issued and outstanding at March 31, 2001
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 March 31,
2001 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 March 31,
2001 and June 30, 2000 6 6
Paid-in capital 8,023 8,023
Retained (deficit) earnings and accumulated other comprehensive
income (225) 215
--------- ----------
Total shareholders' equity 7,806 8,246
--------- ----------
Total liabilities and shareholders' equity $ 18,047 $ 17,930
========= ==========
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,
----------------------------
2001 2000
---------- ---------
Operating activities:
Net income (loss) $ (462) $ 156
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating acvities:
Depreciation and amortization 355 324
Cumulative effect of accounting change, net of tax 494 -
Equity losses of affiliates and distributions 129 35
Other income (expense) 103 -
Change in operating assets and liabilities, net of acquisition:
Accounts receivable and other assets (224) (244)
Filmed entertainment and television programming costs, net (598) (766)
Accounts payable and accrued liabilities 337 353
Participations, residuals and royalties payable and other liabilities (74) (120)
-------- --------
Net cash provided by (used in) operating activities 60 (262)
-------- --------
Investing activities:
Acquisitions, net of cash acquired (75) 63
Investments in equity affiliates, net of acquisition (134) (157)
Other investments (181) (135)
Purchases of property and equipment, net of acquisition (97) (171)
-------- --------
Net cash used in investing activities (487) (400)
-------- --------
Financing activities:
Borrowings 125 146
Repayment of borrowings (752) (730)
Minority interest in subsidiaries 752 -
Advances from affiliates, net 234 1,258
-------- --------
Net cash provided by financing activities 359 674
-------- --------
Net (decrease) increase in cash and cash equivalents (68) 12
Cash and cash equivalents, beginning of period 114 121
-------- --------
Cash and cash equivalents, end of period $ 46 $ 133
======== ========
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 March 31, 2001, holds equity
and voting interests in the Company of 82.76% and 97.80%, 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 for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation have been reflected in these
unaudited consolidated condensed financial statements. Operating results for the
interim periods presented are not necessarily indicative of the results that may
be expected for the fiscal year ending June 30, 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 nine months ended March 31,
2001 was income of $2 million and a loss of $440 million, respectively. Total
other comprehensive income for the three and nine months ended March 31, 2001 of
$11 million and $22 million, respectively, consists of currency translation
gains. Total comprehensive income for the three and nine months ended March 31,
2000 was $26 million and $166 million, respectively. Total other comprehensive
income for the three and nine months ended March 31, 2000 consisted of currency
translation gains of $7 million and $10 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 and Dispositions
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 $2.13
billion in cash and approximately 73 million American Depositary Receipts,
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 own the
assets and manage 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%. Also at the
effective time of the acquisition, the Company will assign the licenses issued
by the Federal Communications Commission ("FCC") for the acquired stations to
its indirect subsidiary, Fox Television Stations, Inc., which will become the
licensee and control the operations of the acquired stations. On April 24, 2001,
the stockholders of Chris-Craft Industries, Inc., BHC Communications, Inc. and
United Television, Inc. approved and adopted the applicable Merger Agreement
which each party entered into with News Corporation, News Publishing Australia
Limited and Fox Television Holdings, Inc. The mergers remain subject to approval
by the FCC, where the transaction is currently under review.
In December 2000, Haim Saban, Chairman and Chief Executive Officer of Fox Family
Worldwide, Inc. ("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.
In February 2001, Fox Sports Networks, LLC ("FSN"), a subsidiary of the Company,
acquired certain assets and liabilities constituting the business of Midwest
Sports Channel, a regional sports network serving the Minneapolis, Minnesota and
Milwaukee, Wisconsin metropolitan areas, pursuant to an Assignment and
Assumption Agreement among FSN, Viacom, Inc. ("Viacom") and Comcast Corporation
("Comcast") and a Purchase Agreement between Viacom and Comcast for
approximately $35 million. The excess of the net purchase price over the net
assets acquired, of approximately $30 million is reflected within Intangible
assets, net on the unaudited consolidated condensed balance sheet and will be
amortized over a useful life of 40 years.
In February 2001, FSN sold its approximate 34% limited partnership interest in
Home Team Sports Limited Partnership to Comcast, in exchange for Comcast
entering into new or amended cable carriage arrangements related to the
distribution of the Company's programming services on Comcast's cable systems.
The Company has recognized a gain of approximately $40 million, which is
reflected within Other income (expense) in the unaudited consolidated condensed
statement of operations.
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 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; 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 nine months ended
March 31, March 31,
-------------------------- -------------------------
(in millions) 2001 2000 2001 2000
------------ ----------- ------------ -----------
REVENUES
Filmed Entertainment $ 859 $ 805 $ 2,647 $ 2,667
Television Stations 320 341 1,146 1,167
Television Broadcast Network 426 439 1,414 1,353
Other Television Businesses 21 26 70 70
Cable Network Programming 339 273 1,018 864
--------- --------- --------- ----------
Total Revenues $ 1,965 $ 1,884 $ 6,295 $ 6,121
========= ========= ========= ==========
OPERATING INCOME (LOSS)
Filmed Entertainment $ 49 $ 98 $ 287 $ 179
Television Stations 76 87 385 411
Television Broadcast Network (3) (12) (104) (16)
Other Television Businesses (4) (4) (6) (4)
Cable Network Programming (18) (18) (15) (33)
--------- --------- --------- ----------
Total Operating Income 100 151 547 537
========= ========= ========= ==========
Interest expense, net (92) (80) (274) (221)
Equity losses of affiliates (52) (37) (69) (35)
Minority interest (1) -- (3) (2)
Other income (expense) 40 -- (103) --
--------- --------- --------- ----------
Income (loss) before income taxes and
cumulative effect of accounting change $ (5) $ 34 $ 98 $ 279
========= ========= ========= ==========
March 31, June 30,
2001 2000
--------- ----------
TOTAL ASSETS (in millions)
Filmed Entertainment $ 4,330 $ 4,620
Television Stations 6,126 6,213
Television Broadcast Network 1,633 1,382
Other Television Businesses 369 364
Cable Network Programming 4,046 3,841
Investments in equity affiliates 1,543 1,510
--------- ---------
Total Assets $ 18,047 $ 17,930
========= =========
Equity losses of affiliates primarily relate to entities involved in the
production and licensing of cable network programming. Interest expense, net,
Minority interest, Other income (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 nine months ended March 31, 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 at
March 31, 2001 and June 30, 2000 was approximately $9.4 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:
March 31, June 30,
2001 2000
------------- ------------
(in millions)
Filmed entertainment costs:
Feature films:
Released $ 727 $ 753
Completed, not released 17 42
In production 511 692
In development or preproduction 80 154
------------- ------------
1,335 1,641
------------- ------------
Television productions:
Released 494 516
In production 175 79
In development or preproduction 9 4
------------- ------------
678 599
------------- ------------
Total filmed entertainment costs 2,013 2,240
Television programming costs, less accumulated amortization 1,781 1,198
------------- ------------
Total filmed entertainment costs and television programming costs, net $ 3,794 $ 3,438
============= ============
9
FOX ENTERTAINMENT GROUP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 6 - Minority Interest in Subsidiaries
On March 30, 2001, the Company's film distribution arrangement with New
Millennium Investors, LLC ("New Millennium") expired. The Company acquired the
outstanding equity of New Millennium and repaid all of New Millennium's existing
debt, resulting in the acquisition of Filmed entertainment costs of $650 million
and elimination of Participations, residuals and royalties payable of $117
million.
Concurrently, 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, will fund the production
costs of all eligible films, as defined, to be produced by Twentieth Century Fox
Film Corporation ("TCF"), a subsidiary of the Company, between 2001 and 2004.
NM2 is a separate legal entity from the Company and TCF and has separate assets
and liabilities. NM2 issued $752 million of a preferred limited liability
membership interest (the "Preferred Interest"), which is presented on the
unaudited consolidated condensed balance sheet 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.
Note 7 - 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.
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 $155 million at March 31, 2001, with a market value of
approximately $196 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 income
(expense) in the unaudited consolidated condensed statement of operations.
During April 2001, the Company entered into an agreement to sell its entire
interest in THN for cash of approximately $155 million and a 10% carried
interest in the equity of the acquirer with a minimum guarantee value of $100
million. The sale is expected to be consummated pursuant to further definitive
agreements between parties, subject to the satisfaction of certain conditions.
In accordance with SFAS No. 94, "Consolidation of All Majority-Owned
Subsidiaries", and EITF 87-11, "Allocation of Purchase Price to Assets to Be
Sold", for the period from December 29, 2000 until the Closing Date of the sale,
control of THN is deemed to be temporary and therefore, its results of
operations have not been consolidated in the Company's statements of operations
for the three months ended March 31, 2001. During the three months ended March
31, 2001, the Company has provided approximately $9.9 million to THN of which
approximately $5.5 million was used to fund net losses and approximately $4.4
million was used to finance working capital. The net assets of THN and the
funding provided to THN are included in Other assets and investments on the
unaudited consolidated condensed balance sheet of the Company as of March 31,
2001.
10
FOX ENTERTAINMENT GROUP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 8 - 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 accounting change
as of July 1, 2000. This charge primarily reflects the write-off of marketing
and certain development costs, which were previously capitalized under SFAS No.
53 and are no longer capitalizable under SOP 00-2. Subsequent to the adoption of
SOP 00-2, the Company's accounting policy is to expense marketing and certain
development costs as incurred.
In June 2000, the Financial Accounting Standards Board 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 fair value of recorded derivatives 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 nine months ended March 31, 2001.
Note 9 - Subsequent Events
The motion pictures and television programs produced by the Company, and the
other major U.S. studios, generally employ actors, writers and directors who are
members of the Screen Actors Guild ("SAG"), Writers Guild of America ("WGA") and
Directors Guild of America ("DGA"), pursuant to industry-wide collective
bargaining agreements. The collective bargaining agreement with WGA expired on
May 1, 2001 and the collective bargaining agreement with SAG is due to expire on
or about June 30, 2001. Negotiations to renew those agreements are underway, and
a tentative agreement was recently reached with the WGA. The unexpected failure
of the WGA membership to ratify the agreement or the inability to conclude a new
SAG agreement would leave strikes by WGA and/or SAG as a possibility in calendar
year 2001. The DGA collective bargaining agreement expires in mid-2002. A strike
by one or more of the unions that provide personnel essential to the production
of motion pictures and television programs could delay or halt the Company's
ongoing production activities. Such a halt or delay, depending on the length of
time involved, could cause delay or interruption in the Company's release of new
motion pictures and broadcast of new television programs and thereby could
adversely affect the Company's results of operations and earnings per share.
11
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 Family Worldwide, Inc. ("FFW"),
Fox Sports Ventures, LLC, Regional Programming Partners ("RPP"), Regency
Television, The National Geographic Channels and International Sports
Programming Partners ("Fox Sports International"), are included in Equity losses
of affiliates and, accordingly, are not reported in the segments set forth
above.
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 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
affect revenues.
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. 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.
12
Components of Expenses
Filmed Entertainment. Operating costs incurred by the Filmed Entertainment
segment include the amortization of capitalized production, 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 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 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.
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
as well as salaries, employee benefits, rent and other routine overhead.
13
Results of Operations - Three months ended March 31, 2001 vs. Three months ended
March 31, 2000
The following table sets forth the Company's operating results, by segment, for
the three months ended March 31, 2001 as compared to the three months ended
March 31, 2000:
Three months ended
March 31,
------------------
2001 2000 Change
----- ------- ------
(in Millions)
Revenues:
Filmed Entertainment $ 859 $ 805 $ 54
Television Stations 320 341 (21)
Television Broadcast Network 426 439 (13)
Other Television Businesses 21 26 (5)
Cable Network Programming 339 273 66
------- ------- -------
Total Revenues $ 1,965 $ 1,884 $ 81
======= ======= =======
Operating Income (Loss):
Filmed Entertainment $ 49 $ 98 $ (49)
Television Stations 76 87 (11)
Television Broadcast Network (3) (12) 9
Other Television Businesses (4) (4) --
Cable Network Programming (18) (18) --
------- ------- -------
Total Operating Income 100 151 (51)
Interest expense, net (92) (80) (12)
Equity losses of affiliates (52) (37) (15)
Minority interest (1) -- (1)
Other income (expense) 40 -- 40
------- ------- -------
Income (loss) before income taxes (5) 34 (39)
Income tax expense on a stand-alone basis (4) (15) 11
------- ------- -------
Net income (loss) $ (9) $ 19 $ (28)
======= ======= =======
Other Data:
Operating Income Before Depreciation and Amortization /(1)/:
Filmed Entertainment $ 63 $ 111 $ (48)
Television Stations 122 133 (11)
Television Broadcast Network 1 (5) 6
Other Television Businesses (3) (5) 2
Cable Network Programming 35 28 7
------- ------- -------
Total Operating Income Before Depreciation and Amortization/(1)/ $ 218 $ 262 $ (44)
======= ======= =======
/(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 (loss), net income (loss), cash flow and other
measures of financial performance prepared in accordance with accounting
principles generally accepted in the United States and presented in the
unaudited consolidated condensed financial statements included elsewhere in
this filing.
14
Overview of Company Results. For the third quarter of fiscal 2001, revenues of
$1,965 million were approximately 4% above the $1,884 million reported for the
third quarter of fiscal 2000. The increase in revenues was primarily derived
from increases at the Filmed Entertainment and Cable Network Programming
segments. In aggregate, Operating, Selling, general and administrative, and
Depreciation and amortization increased by approximately 8% compared to the same
period of the prior year. Operating expenses for the third quarter increased
approximately 6% over the third quarter of fiscal 2000. This increase primarily
resulted from increased pre-marketing expenses at the Filmed Entertainment
segment and increased programming rights costs at the Cable Network Programming
segment, partially offset by lower prime time programming costs at FOX. Selling,
general and administrative expenses increased approximately 15% over the
corresponding period in the prior year. Depreciation and amortization increased
6% from the third quarter of fiscal 2000 primarily due to increased amortization
for launch support payments at the Cable Network Programming segment. The
Company reported operating income of $100 million for the third quarter of
fiscal 2001, as compared to $151 million reported in the third quarter of fiscal
2000. Operating Income Before Depreciation and Amortization of $218 million
decreased approximately 17% from $262 million reported in the third quarter of
fiscal 2000. This decline primarily relates to the expensing of pre-release
costs at the Filmed Entertainment segment and the impact of the soft advertising
market at the Television Stations and Television Broadcast Network segments,
partially offset by higher revenues from the Filmed Entertainment and Cable
Network Programming segments.
Equity losses of affiliates of $52 million increased $15 million over the third
quarter of fiscal 2000 primarily due to the January 2001 launch of the domestic
National Geographic Channel and increased sports rights and production expenses
at National Sports Partnership ("NSP") primarily related to the National
Association of Stock Car Auto Racing ("NASCAR").
Net loss for the quarter ended March 31, 2001 was $9 million ($0.01 loss per
share) compared to net income of $19 million ($0.03 per share) for the
corresponding period of the prior year.
Filmed Entertainment. For the third quarter of fiscal 2001, revenues at Filmed
Entertainment increased approximately 7% over the corresponding period of the
prior year. Operating income and Operating Income Before Depreciation and
Amortization decreased by 50% and 43%, respectively, to $49 million and $63
million, respectively, for the quarter ended March 31, 2001. These decreases
were driven by increased operating expenses related to pre-release costs
incurred for the Company's releases during the quarter under SOP 00-2 which was
adopted at the beginning of fiscal 2001, as well as write-offs for the
disappointing performances of Monkeybone, The Legend of Bagger Vance, and Say It
Isn't So. The increase in operating expenses were partially offset by increased
revenue resulting from the strong worldwide theatrical performance of Cast Away,
the international theatrical performance of What Lies Beneath, the worldwide
video release of Me, Myself and Irene, the international video release of X-Men,
international sales of Titanic and strong DVD catalog sales. The prior year
results included significant contributions from domestic and international pay
television agreements covering available films and series, which were partially
offset by the disappointing theatrical results of Here On Earth and the poor
video performance of Bartok.
For the quarter ended March 31, 2001, Twentieth Century Fox Television ("TCFTV")
results decreased 30% from the corresponding period of the prior year. These
decreases were due to lower international television revenues for The X-Files
and The Simpsons, which were partially offset by increased network revenue for
The Practice resulting from the extension of the license term agreement.
Television. For the third quarter of fiscal 2001, combined revenues from all
television-related segments decreased to $767 million, an approximate 5%
decrease from the corresponding period of the preceding fiscal year. Operating
income decreased by approximately 3% and Operating Income Before Depreciation
and Amortization decreased by approximately 2% for the quarter ended March 31,
2001. The aggregate decreases at the television segments were primarily due to
decreased advertising revenues, the increased marketing and programming costs
associated with NASCAR programming and increased local programming expenses.
For the quarter ended March 31, 2001, the Television Stations segment's revenues
decreased 6% to $320 million from the corresponding period of the prior year.
The decrease in advertising revenues from the prior year resulted from
non-returning political spending as well as decreased spending by advertisers in
all major categories, including Internet, automotive and entertainment, which
was partially offset by revenue gains from advertising market share increases.
Operating income and Operating Income Before Deprecation and Amortization for
the quarter ended March 31, 2001 decreased 13% and 8%, respectively, as compared
to the quarter ended March 31, 2000. These decreases primarily
15
resulted from the costs of the new local broadcast rights of the Dallas Stars,
the local news launch at KDVR in Denver and the decreases in revenue. Cost
savings from lower promotional spending, commissions on revenues and overhead
savings partially offset those decreases.
At FOX, for the third quarter of fiscal 2001, revenues decreased $13 million as
compared to the corresponding period of the preceding fiscal year. Operating
loss decreased 75% from $12 million to $3 million and Operating Income Before
Depreciation and Amortization increased $6 million over the quarter ended March
31, 2000. The revenue decline relates to lower advertising sales due to lower
pricing and sell-out levels related to the weak advertising market and decreased
ratings for the National Football League ("NFL"). Several new shows such as
Boston Public, Dark Angel and Grounded For Life contributed to the increased
network ratings while also significantly reducing prime time programming costs
year over year. These new series replaced older more expensive shows (i.e. Party
of Five and Beverly Hills 90210) and reduced the number of cancellations and
related costs as compared to the prior year. Operating loss for the sports
division increased primarily due to decreased advertising sales as a result of
lower ratings for the NFL post-season and promotion, production and rights costs
related to the inaugural season of NASCAR in fiscal 2001.
Cable Network Programming. The revenues of the Cable Network Programming segment
for the third quarter of fiscal 2001 compared to the corresponding period in the
prior year increased $66 million, operating loss remained flat and Operating
Income Before Depreciation and Amortization increased by $7 million over the
third 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 higher
programming rights and productions costs related to NASCAR on FX and the
increased number of National Basketball Association ("NBA") and National Hockey
League ("NHL") games at the Regional Sports Networks ("RSNs").
At FX, revenues and operating income grew 39% and 53%, respectively, through
higher priced advertising and increased affiliate revenues, reflecting a 27%
increase in average audience and a 20% increase in average subscribers over the
corresponding period in the prior year. FX reached over 60 million households as
of March 31, 2001, a 27% increase over March 31, 2000. FX's revenue increases
were partially offset by higher programming and production costs related to the
inaugural season of NASCAR on FX. Fox Sports Networks' operating results
declined approximately 128% to a loss versus the prior year quarter. This
decline relates to the costs of regional news, which were not operative in the
corresponding period of the prior year, and higher average rights fees per event
and production expenses at the RSNs associated with an increased number of NBA
and NHL cable and broadcast games. The operating income decline was partially
offset by higher affiliate and direct to home ("DTH") revenues, resulting from
the increased average rate per subscriber and increased cable and DTH
subscribers.
Fox News improved operating losses by 47% during the third quarter compared to
the corresponding period of the prior year. Fox News' revenues increased 33%,
due to a 32% increase in cable affiliate revenue resulting from a 29% increase
in Fox News subscribers, and a 59% increase in cable advertising sales driven by
higher pricing and improved ratings. These revenue increases were partially
offset by higher amortization of cable carriage fees, arising from new
affiliation agreements with cable operators. Fox News subscribers increased to
approximately 63.8 million as compared to approximately 47.4 million in the
third quarter of fiscal 2000.
Equity losses of affiliates. In the third quarter of fiscal 2001, Equity losses
of affiliates increased to $52 million from $37 million in the corresponding
period of the preceding fiscal year.
For the quarter ended March 31, 2001, the Company's share of Fox Sports
Networks' domestic equity affiliates' net losses increased $11 million to $23
million. Increased losses from the Metro Channels at RPP, increased rights and
production expenses at NSP for NASCAR and regional news expenses at Rainbow more
than offset increased revenues from National Advertising Partnership.
For the third quarter of fiscal 2001, the Company's share of net losses from FFW
increased $4 million to $13 million. At FFW, decreased advertising revenues
due to lower pricing and lower foreign syndication sales at Fox Kids Network
were offset by increased advertising and affiliate revenues at Fox Kids Europe
N.V. ("FKE") and Fox Family Channel due to subscriber growth.
The three months ended March 31, 2001 included $6 million of equity losses
related to the domestic launch of The National Geographic Channel in January
2001.
16
The Company's share of Fox Sports International's net loss was flat at $6
million for the third quarter of fiscal 2001. Higher programming expenses and
lower affiliate revenue at Fox Sports Latin America were offset by increased
syndication revenue and lower programming expenses at LMC International.
Interest expense, net. Net interest expense increased $12 million as compared to
prior year quarter. This increase relates to higher intercompany balances with
affiliates as a result of cash advances and increases in film production
financing.
Other income (expense). In February 2001, Fox Sports Networks, LLC ("FSN") sold
its approximate 34% limited partnership interest in Home Team Sports Limited
Partnership ("Home Team Sports") to Comcast, in exchange for Comcast entering
into new or amended cable carriage arrangements related to the distribution of
the Company's programming services on Comcast's cable systems. The Company has
recognized a gain of approximately $40 million, which is reflected within Other
income (expense) in the unaudited consolidated condensed statement of
operations.
Income tax expense on a stand-alone basis. Income tax expense for the third
quarter of fiscal 2001 decreased to $4 million from $15 million in the
corresponding period of the preceding year. The effective tax rate for the
period decreased to (80)% compared to 44% in the corresponding period of the
preceding year. The decrease in the effective tax rate resulted from the
relationship of nondeductible items, the amount of which did not change
significantly from the corresponding period in the prior year, to a pre-tax loss
in the third quarter of fiscal 2001 as compared to pre-tax income in the third
quarter of fiscal 2000.
17
Results of Operations - Nine months ended March 31, 2001 vs. Nine months ended
March 31, 2000
The following table sets forth the Company's operating results, by segment, for
the nine months ended March 31, 2001 as compared to the nine months ended March
31, 2000:
Nine months ended
March 31,
-------------------------
2001 2000 Change
--------- ------- ------
(in Millions)
Revenues:
Filmed Entertainment $ 2,647 $ 2,667 $ (20)
Television Stations 1,146 1,167 (21)
Television Broadcast Network 1,414 1,353 61
Other Television Businesses 70 70 -
Cable Network Programming 1,018 864 154
--------- ------- ------
Total Revenues $ 6,295 $ 6,121 $ 174
========= ======= ======
Operating Income (Loss):
Filmed Entertainment $ 287 $ 179 $ 108
Television Stations 385 411 (26)
Television Broadcast Network (104) (16) (88)
Other Television Businesses (6) (4) (2)
Cable Network Programming (15) (33) 18
--------- ------- ------
Total Operating Income 547 537 10
Interest expense, net (274) (221) (53)
Equity losses of affiliates (69) (35) (34)
Minority interest (3) (2) (1)
Other income (expense) (103) - (103)
--------- ------- ------
Income (loss) before income taxes and cumulative effect of accounting change 98 279 (181)
Income tax expense on a stand-alone basis (66) (123) 57
--------- ------- ------
Income (loss) before cumulative effect of accounting change 32 156 (124)
Cumulative effect of accounting change, net of tax (494) - (494)
--------- ------- ------
Net income (loss) $ (462) $ 156 $ (618)
========= ======= ======
Other Data:
Operating Income Before Depreciation and Amortization/(1)/:
Filmed Entertainment $ 333 $ 217 $ 116
Television Stations 523 552 (29)
Television Broadcast Network (90) (1) (89)
Other Television Businesses (5) (5) -
Cable Network Programming 141 98 43
--------- ------- ------
Total Operating Income Before Depreciation and Amortization/(1)/ $ 902 $ 861 $ 41
========= ======= ======
/(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
(loss), net income (loss), cash flow and other measures of financial performance
prepared in accordance with accounting principles generally accepted in the
United States and presented in the unaudited consolidated condensed financial
statements included elsewhere in this filing.
18
Overview of Company Results. For the nine months ended March 31, 2001, revenues
of $6,295 million were 3% above the $6,121 million reported for the
corresponding period in the prior year. The increase in revenues was primarily
derived from increases at the Television Broadcast Network and Cable Network
Programming segments. In aggregate, Operating, Selling, general and
administrative, and Depreciation and amortization increased by approximately 3%
compared to the corresponding period of the prior year. Operating expenses
remained flat compared to the corresponding period of the prior year. Selling,
general and administrative expenses increased 11% from the corresponding period
of the prior year mainly due to an increase in the video return reserve at the
Filmed Entertainment segment. Depreciation and amortization increased $31
million due to increased amortization of launch support payments at the Cable
Network Programming segment. The Company reported operating income of $547
million for the nine months ended March 31, 2001, as compared to $537
million reported in the nine months ended March 31, 2000. Operating Income
Before Depreciation and Amortization of $902 million increased 5% over $861
million reported in the corresponding period in the prior year. These increases
relate to the improved operating results at the Filmed Entertainment and Cable
Network Programming segments.
Equity losses of affiliates of $69 million increased by $34 million from the
first nine months of fiscal 2000 due to decreased contributions from FFW
resulting from the prior year's gain related to the FKE initial public offering
("IPO") and the January 2001 launch of the domestic National Geographic Channel.
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 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.
Net loss for the nine months ended March 31, 2001 was $462 million ($0.64 loss
per share) as compared to net income of $156 million ($0.22 per share) for the
corresponding period of the prior year. This decrease primarily relates to the
$494 million charge for the adoption of SOP 00-2 and a non-recurring charge
related to the restructuring of the Company's relationship with Healtheon/WebMD
Corporation ("WebMD").
Filmed Entertainment. For the nine months ended March 31, 2001, Filmed
Entertainment's revenues remained flat compared to the corresponding period of
the prior year. Operating income and Operating Income Before Depreciation and
Amortization increased by 60% and 53%, respectively, over the nine months ended
March 31, 2000. In the current year, theatrical and catalog releases overall
performed better than releases in the prior year. The current period's results
included the strong worldwide theatrical and domestic video performance of X-
Men, worldwide catalog releases, the broadcast network release of Titanic and
performance of releases in international free television markets. These results
were partially offset by write-offs for the disappointing performances of
Monkeybone, The Legend of Bagger Vance and Say It Isn't So. During the first
nine months of fiscal 2001, the Company adopted SOP 00-2 changing its film
accounting policies. Prior year results included the poor performances of
Brokedown Palace, Anna and the King, Light It Up and Bartok.
At TCFTV, for the nine months ended March 31, 2001, operating results increased
66% over the prior year primarily due to the increased network revenue for The
Practice resulting from the extension of the license term agreement and
increased international video and television revenues of Buffy the Vampire
Slayer and Ally McBeal. These results were partially offset by decreased
international television revenue for NYPD Blue and increased development
expenses in the current period over the corresponding period in the prior year.
Television. For the nine months ended March 31, 2001, combined revenues from all
television-related segments increased to $2,630 million, a 2% increase from the
corresponding period of the preceding fiscal year. Operating income decreased by
30% and Operating Income Before Depreciation and Amortization decreased by 22%
for the nine months ended March 31, 2001. Operating results were greatly
affected by the negative impact of the soft advertising market and increased
programming, broadcast and news costs at the Television Stations, as well as an
approximate $71
19
million loss at FOX resulting from the short duration and low ratings of the
Major League Baseball ("MLB") post-season divisional playoffs and World Series.
For the nine months ended March 31, 2001, the Television Stations segment's
revenues decreased to $1,146 million from $1,167 million in the corresponding
period of the prior year. This decrease resulted from the impact of the soft
advertising market, the broadcast of the Olympics on NBC and the delayed Fall
launch, as well as lower FOX prime time ratings in the first half of the year.
Operating income and Operating Income Before Depreciation and Amortization for
the nine months ended March 31, 2001 decreased from $411 million to $385 million
and from $552 million to $523 million, respectively. Increases in program
amortization for Drew Carey and 3rd Rock From The Sun, local broadcast rights
for the Boston Red Sox and the Texas Rangers and news costs related to the local
news launch at KDVR in Denver contributed to the decreases in operating income
and Operating Income Before Depreciation and Amortization.
For the first nine months of fiscal 2001, FOX revenues increased 5% from the
corresponding period of the preceding fiscal year. Operating losses increased by
$88 million to $104 million and Operating Income Before Depreciation and
Amortization decreased by $89 million for the first nine months of fiscal 2001.
The increase in revenues resulted from higher advertising revenue from increased
NFL regular season pricing and the current year domestic syndication sales of
FOX-owned product. During fiscal 2001, the sports division incurred an
approximate $71 million loss due to the operating loss for the World Series,
which was not telecast in the prior year and a ratings shortfall coupled with
lower sell-out for the MLB Divisional and Championship playoff series. This loss
was increased by higher NFL program rights and lower advertising sales as
a result of lower ratings for the NFL post-season. At FOX's entertainment
division, lower prime time programming costs due to the replacement of Party of
Five and Beverly Hills 90210 with new less expensive programming more than
offset the 27% increase in advertising and promotional expenses resulting from
higher off-air media awareness spending for the fall launch.
Cable Network Programming. The revenues of the Cable Network Programming segment
for the nine months ended March 31, 2001 compared to the corresponding period in
the prior year increased $154 million, operating losses of $15 million improved
by $18 million and Operating Income Before Depreciation and Amortization
improved by $43 million to $141 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 higher rights and productions costs
related to NASCAR on FX and the increased number of NBA and NHL games at the
RSNs.
At FX, revenues and operating income grew 31% and 35%, respectively, as a result
of affiliate revenue increases reflecting a 22% increase in average subscribers
over the prior year period and advertising revenue increases from an increase in
pricing and an increase in average audience. This growth was partially offset
by increased programming and marketing expenses to support its original
programming and the inaugural season of NASCAR on FX. Fox Sports Networks'
operating income decreased 83% versus the same period in fiscal 2000 primarily
as a result of the costs associated with the continued rollout of regional
sports news, which were not operating during the same period of the prior year.
The RSNs benefited from recently completed affiliation agreements, which
increased their subscriber base as well as revenues per subscriber. These
revenue gains were offset by the costs related to the increased rights fees and
production costs associated with the increased number of events and increased
rights fee per event.
For the nine months ended March 2001, revenues of Fox News increased 32% over
the corresponding period of the prior year primarily resulting from a 30%
increase in cable affiliate revenue and a 62% increase in cable advertising
sales. Fox News benefited from recently completed affiliation agreements, which
increased their subscriber base as well as revenues per subscriber. Fox News
subscribers increased 35% to 63.8 million as compared to 47.4 million
subscribers. Cable advertising revenue was driven by higher pricing and improved
ratings. Operating loss decreased 40% from the corresponding period of prior
year primarily from higher sales from advertising and affiliates due to
increased ratings, pricing, and subscriber growth. This was partially offset by
higher programming expenses associated with the presidential election coverage
on the channel.
Equity losses of affiliates. For the nine months ended March 31, 2001, Equity
losses of affiliates increased by $34 million to $69 million.
The Company's share of Fox Sports Networks' domestic equity affiliates' net
losses increased from $16 million to $21 million during the nine months ended
March 31, 2001. RPP experienced higher affiliate revenues across all RSNs from
increased subscribers and rate charges, which was partially offset by losses at
the Metro Channels. CTV Sports Net
20
PAGE>
experienced higher affiliate and advertising revenues. NSP had decreased
revenues due to the soft advertising market and higher programming and
production expenses, which were partially offset by higher affiliate revenue due
to increased subscribers at the Speedvision and Outdoor Life channels.
For the nine months ended March 31, 2001, the Company's share of FFW decreased
from income of $30 million to losses of $22 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. FFW had increased
production and distribution revenues, increased subscriber revenues at Fox
Family Channel and FKE and increased merchandising and Digimon toy revenues.
Higher programming costs and higher general and administrative expenses due to
the expansion of FKE and new Internet areas more than offset these revenue
increases.
The nine months ended March 31, 2001 included $13 million of equity losses
related to the January 2001 domestic launch of The National Geographic Channel.
The Company's share of Fox Sports International's net losses decreased $6
million to $15 million for the first nine months of fiscal 2001. Higher
affiliate revenues at Fox Sports World due to increased subscribers and
increased revenue and lower programming costs at LMC International were
partially offset by start up losses at Fox Sports Eastern Europe.
Interest expense, net. Net interest expense increased $53 million as compared to
prior year quarter. This increase relates to the higher intercompany balances
with affiliates as a result of cash advances and external balances associated
with film production financing.
Other income (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, The News Corporation Limited ("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. 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 $155 million at
March 31, 2001, with a market value of approximately $196 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 income (expense) in the unaudited consolidated condensed statement
of operations.
In February 2001, FSN sold its approximate 34% limited partnership interest in
Home Team Sports to Comcast, in exchange for Comcast entering into new or
amended cable carriage arrangements related to the distribution of the Company's
programming services on Comcast's cable systems. The Company has recognized a
gain of approximately $40 million, which is reflected within Other income
(expense) in the unaudited consolidated condensed statement of operations.
Income tax expense on a stand-alone basis. Income tax expense for the nine
months ended March 31, 2001 decreased to $66 million from $123 million in the
corresponding period of the preceding year. The effective tax rate for the
period increased to 67% compared to 44% in the corresponding period of the
preceding year. The increase in the effective rate resulted from the
relationship of nondeductible items, the amount of which did not change
significantly from the corresponding period in the prior year, to lower pre-tax
income in the nine months ended March 31, 2001.
21
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 provided by operating activities during the nine months ended
March 31, 2001 were $60 million as compared to cash used of $262 million in the
corresponding period of the preceding fiscal year. The increase in cash provided
was primarily due to a lower investment in working capital and increased cash
distributions from equity affiliates as compared to the corresponding period of
the prior year.
Net cash flows used in investing activities were $487 million and $400 million
during the nine months ended March 31, 2001 and 2000, respectively. The current
year included the acquisition of Midwest Sports Channel and New Millennium
Investors, LLC ("New Millennium"), investments in Regency Television, NSP, THN
and launch support payments by Fox News and FX.
Net cash flows provided by financing activities were $359 million and $674
million during the nine months ended March 31, 2001 and 2000, respectively. The
decrease in cash provided by financing activities is primarily attributable to
lower Advances from affiliates, net used to fund operating and investing
activities.
Guarantees
The Company, News Corporation and certain of News Corporation's subsidiaries,
are guarantors of various debt obligations of News Corporation and certain of
its subsidiaries. During the nine months ended March 31, 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 at
March 31, 2001 and June 30, 2000 was approximately $9.4 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.
New Millennium
Due to increased competition and costs associated with film production, film
studios and the Company constantly evaluate the risks and rewards of production.
Various strategies are used to balance risk with capital needs, including, among
other methods, co-production, contingent profit participations, acquisition of
distribution rights only and insurance.
On March 30, 2001, the Company's film distribution arrangement with New
Millennium expired. The Company acquired the outstanding equity of New
Millennium and repaid all of New Millennium's existing debt, resulting in the
acquisition of Filmed entertainment costs of $650 million and elimination of
Participations, residuals and royalties payable of $117 million.
Concurrently, 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, will fund the production
costs of all eligible films, as defined, to be produced by Twentieth Century Fox
Film Corporation ("TCF"), a subsidiary of the Company, between 2001 and 2004.
NM2 is a separate legal entity from the Company and TCF and has separate assets
and liabilities. NM2 issued $752 million of a preferred limited liability
membership interest (the "Preferred Interest"), which is presented on the
unaudited consolidated condensed balance sheet 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
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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.
Fox Sports International
The Company and Liberty/TINTA LLC ("Liberty/TINTA"), a subsidiary of Liberty
Media Corporation ("Liberty"), each own 50% of Fox Sports International. In
conjunction with the Company's July 1999 acquisition of substantially all of the
remaining 50% of FSN, 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.
Chris-Craft
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 $2.13
billion in cash 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 own the assets and manage 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%. Also at the effective time of the acquisition,
the Company will assign the licenses issued by the Federal Communications
Commission ("FCC") for the acquired stations to its indirect subsidiary, Fox
Television Stations, Inc., which will become the licensee and control the
operations of the acquired stations. On April 24, 2001, the stockholders of
Chris-Craft Industries, Inc., BHC Communications, Inc. and United Television,
Inc. approved and adopted the applicable Merger Agreement which each party
entered into with News Corporation, News Publishing Australia Limited and Fox
Television Holdings, Inc. The mergers remain subject to approval by the FCC,
where the transaction is currently under review.
FFW
In December 2000, Haim Saban, Chairman and Chief Executive Officer of 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.
Other
In February 2001, FSN, a subsidiary of the Company, acquired certain assets and
liabilities constituting the business of Midwest Sports Channel, a regional
sports network serving the Minneapolis, Minnesota and Milwaukee, Wisconsin
metropolitan areas, pursuant to an Assignment and Assumption Agreement among
FSN, Viacom, Inc. ("Viacom") and Comcast Corporation ("Comcast") and a Purchase
Agreement between Viacom and Comcast for approximately $35 million. The excess
of the net purchase price over the net assets acquired, of approximately $30
million is reflected within Intangible assets, net on the unaudited consolidated
condensed balance sheet and will be amortized over a useful life of 40 years.
In February 2001, FSN sold its approximate 34% limited partnership interest in
Home Team Sports to Comcast, in exchange for Comcast entering into new or
amended cable carriage arrangements related to the distribution of the Company's
programming services on Comcast's cable systems. The Company has recognized a
gain of approximately $40 million, which is reflected within Other income
(expense) in the unaudited consolidated condensed statement of operations.
The motion pictures and television programs produced by the Company, and the
other major U.S. studios, generally employ actors, writers and directors who are
members of the Screen Actors Guild ("SAG"), Writers Guild of America ("WGA") and
Directors Guild of America ("DGA"), pursuant to industry-wide collective
bargaining agreements. The
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collective bargaining agreement with WGA expired on May 1, 2001 and the
collective bargaining agreement with SAG is due to expire on or about June 30,
2001. Negotiations to renew those agreements are underway, and a tentative
agreement was recently reached with the WGA. The unexpected failure of the WGA
membership to ratify the agreement or the inability to conclude a new SAG
agreement would leave strikes by WGA and/or SAG as a possibility in calendar
year 2001. The DGA collective bargaining agreement expires in mid-2002. A strike
by one or more of the unions that provide personnel essential to the production
of motion pictures and television programs could delay or halt the Company's
ongoing production activities. Such a halt or delay, depending on the length of
time involved, could cause delay or interruption in the Company's release of new
motion pictures and broadcast of new television programs and thereby could
adversely affect the Company's results of operations and earnings per share.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
Part II. Other Information
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information.
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(i) Current Report on Form 8-K of the registrant filed January 4,
2001 relating to the announcement made by Haim Saban, Chairman and Chief
Executive Officer of Fox Family Worldwide Inc., that he has exercised his
contractual right to require Fox Broadcasting Company, a subsidiary of the
Company, to buy his 49.5% stake in Fox Family Worldwide.
(ii) Current Report on Form 8-K of the registrant filed January 9,
2001 relating to an agreement among The News Corporation Limited, the Company,
and WebMD Corporation, to revise their comprehensive strategic partnership
through a series of related transactions.
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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 14, 2001 FOX ENTERTAINMENT GROUP, INC.
By: /s/ David F. DeVoe
----------------------
Name: David F. DeVoe
Title: Chief Financial Officer
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