SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
__________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ______________
Commission file number 1-14595
FOX ENTERTAINMENT GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 95-4066193
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1211 Avenue of the Americas, New York, New York 10036
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (212) 852-7111
Securities registered pursuant to Section 12 (b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Class A Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of September 24, 2001, the aggregate market value of common stock held
by non-affiliates of the registrant (based on the closing price on such date as
reported on the New York Stock Exchange - Composite Transactions) was
$2,315,040,000.
As of September 24, 2001, 298,804,106 shares of Class A Common Stock, par
value $.01 per share, and 547,500,000 shares of Class B Common Stock, par value
$.01 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Fox Entertainment Group, Inc.'s Notice of 2001 Annual Meeting
and Proxy Statement to be filed with the Commission pursuant to Regulation 14A
of the Securities Exchange Act of 1934 are incorporated by reference into Part
III of this report.
PART I
ITEM 1. BUSINESS
Background
Fox Entertainment Group, Inc. (together with its direct and indirect
subsidiaries, and their respective predecessors, unless the context otherwise
requires, the "Company") is a multi-faceted entertainment company with
operations in five business segments: (i) Filmed Entertainment; (ii) Television
Stations; (iii) Television Broadcast Network; (iv) Other Television Businesses;
and (v) Cable Network Programming.
In November 1998, the Company sold 124,800,000 shares of its Class A Common
Stock in an initial public offering. The News Corporation Limited ("News
Corporation") is the beneficial owner of 174,004,106 shares of Class A Common
Stock and 547,500,000 shares of Class B Common Stock, which in the aggregate
represent approximately 85.25% of the equity and 97.84% of the voting power of
the Company.
The address of the Company's principal executive offices is 1211 Avenue of
the Americas, New York, New York 10036, and the telephone number is
(212) 852-7111. The Company maintains a 52-53 week fiscal year ending on the
Sunday nearest to June 30 in each year. At June 30, 2001, the Company had
approximately 11,700 full-time and part-time employees.
Special Note Regarding Forward-Looking Statements
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
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 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 the risk factors referred to
above and the other documents filed by the Company with the Securities and
Exchange Commission. This section should be read in conjunction with the audited
consolidated condensed financial statements of the Company and related notes set
forth elsewhere herein.
Business
Filmed Entertainment
The Company engages in feature film and television production and
distribution principally through the following businesses: Fox Filmed
Entertainment ("FFE"), a leading producer and distributor of feature films;
Twentieth Century Fox Television ("TCFTV"), a producer of network
television programming; and Fox Television Studios ("FtvS"), a leading producer
of U.S. broadcast and cable and international programming.
Fox Filmed Entertainment
One of the world's largest producers and distributors of motion pictures,
FFE produces, finances, acquires and distributes motion pictures throughout the
world under a variety of arrangements. During fiscal 1999, 2000 and 2001, FFE
placed 22, 20 and 20 films, respectively, in general release in the United
States. Those motion pictures were produced or acquired by the following units
of FFE: Twentieth Century Fox and Fox 2000, which produce motion pictures for
mainstream audiences; Fox Searchlight Pictures, which produces and acquires
specialized motion pictures; and Twentieth Century Fox Animation, which produces
feature length animated motion pictures. Successful motion pictures produced
and/or distributed by FFE since the beginning of fiscal 1999 include There's
Something About Mary, Entrapment, Never Been Kissed, Star Wars Episode I: The
Phantom Menace, The Beach, Big Momma's House, Me, Myself & Irene, X-Men, Cast
Away (together with DreamWorks SKG), Moulin Rouge and Dr. Dolittle 2. The
Company currently plans to release approximately 27 films in fiscal 2002,
including Minority Report (together with DreamWorks SKG), Star Wars Episode II,
Unfaithful, Planet of the Apes and Ice Age.
In addition, pursuant to an agreement that became effective at the end of
May 1998 with Monarchy Enterprises Holdings B.V. ("MEH"), the parent company of
Regency Entertainment (USA), Inc. ("New Regency"), FFE will distribute certain
New Regency films and all films co-financed by the Company and New Regency
produced over a 15-year term in all media worldwide, excluding certain
international territories with respect to theatrical and home video rights and
most international territories with respect to television rights. The Company
expects to release approximately seven New Regency films during fiscal 2002. In
connection with this distribution arrangement, the Company acquired a 20%
interest in MEH. The parties also agreed to enter into certain motion picture
financing arrangements and formed Regency Television, a 50/50 joint venture to
produce television programming through a partnership with FtvS.
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 an independent third party, 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. Concurrently, the Company entered into a new series of film rights
agreements whereby a subsidiary of the Company, Cornwall Venture LLC ("NM2"),
that holds certain library film rights will fund the production costs of some
films to be produced by Twentieth Century Fox Film Corporation ("TCF"), a
subsidiary of the Company, between 2001 and 2004. NM2 issued to a third party a
$752 million preferred limited liability membership interest which 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 film it funds.
Motion picture companies, such as FFE, typically seek to generate revenues
from various distribution channels. FFE derives its worldwide motion picture
revenues primarily from four basic sources (set forth in general chronology of
exploitation): (i) distribution of motion pictures for theatrical exhibition in
the United States and Canada and markets outside of the United States and Canada
("International" markets); (ii) distribution of motion pictures in various home
media formats; (iii) distribution of motion pictures for exhibition on pay-per-
view and premium pay television programming services; and (iv) distribution of
motion pictures for exhibition on free television networks, other broadcast
program services, independent television stations and basic cable
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programming services, including certain services which are affiliates of the
Company and News Corporation. The Company does not always have rights in all
media of exhibition to all motion pictures which it releases, and does not
necessarily distribute a given motion picture in all of the foregoing media in
all markets.
The Company distributes and markets its films worldwide principally through
its own distribution and marketing companies. The Company believes that the pre-
release marketing of a feature film is an integral part of its motion picture
distribution strategy and generally begins marketing efforts three to six months
in advance of a film's release date in any given territory.
Through Twentieth Century Fox Home Entertainment, Inc., the Company
distributes motion pictures and other programming produced by units of FFE, its
affiliates and other producers in the United States, Canada and International
markets in all home media formats, including the sale and rental of
videocassettes and DVDs. In fiscal 2001, the domestic home entertainment
division released or re-released over 100 produced and acquired titles,
including approximately 70 titles in DVD format. In International markets, the
Company distributes produced and acquired titles both directly and through
foreign distribution channels, with approximately 400 releases in fiscal 2001,
including 30 new FFE releases, nearly 200 catalog titles and approximately 100
television and non-theatrical releases. In addition, the Company has an
agreement with Metro-Goldwyn-Mayer ("MGM") to distribute its video product in
most International markets in return for certain fees. The Company released over
200 MGM Home Entertainment theatrical, catalog and television programs
internationally in fiscal 2001.
Units of FFE license motion pictures and other programs in the United
States, Canada and International markets to various third parties and certain
affiliated subscription pay television services and pay-per-view services. The
license agreements reflecting the subscription pay television arrangements
generally provide for a specified number of exhibitions of the program during a
fixed term in exchange for a license fee which is based on a variety of factors,
including the box office performance of each program and the number of
subscribers to the service or system. The license agreements reflecting the pay-
per-view arrangements generally provide for a minimum number of scheduled
exhibitions of the program during a fixed term, for a license fee based on a
percentage of the licensee's gross receipts from the pay-per-view exhibition of
the program and, in some cases, a guaranteed minimum fee. Among third-party
license agreements that units of FFE have in place in the United States for
subscription pay television exhibition of its motion pictures are exclusive
agreements with Home Box Office ("HBO"), providing for the licensing of films
initially released for theatrical exhibition through the year 2009, as well as
arrangements with Encore and American Movie Classics. Units of FFE also license
motion pictures in the United States to direct broadcast satellite ("DBS") pay-
per-view services operated by DIRECTV, Inc. and EchoStar Communications
Corporation, as well as cable pay-per-view services such as In Demand. In
addition, in International markets, units of FFE license motion pictures to
leading third-party pay television services and pay-per-view services as well as
to programming services operated by various affiliated entities.
Units of FFE also license motion pictures to broadcast television networks,
including the Fox Broadcasting Company ("FOX"), independent broadcast television
stations and basic cable networks, pursuant to agreements which generally allow
a fixed number of telecasts of a motion picture over a stated period of time in
exchange for a specified license fee.
3
Twentieth Century Fox Television
During the past three fiscal years, TCFTV produced television programs for
the Fox, ABC, CBS, NBC as well as WB broadcast television networks and the USA
cable network. TCFTV currently produces or has orders to produce episodes of the
following network television series: Bob Patterson, Dharma & Greg and The
Practice for ABC, The Education of Max Bickford (a co-production with FtvS),
Judging Amy and Yes, Dear (each co-produced with CBS Worldwide, Inc.) for CBS;
24, Ally McBeal, The Bernie Mac Show (a co-production with FtvS), Boston Public,
Dark Angel, Emma Brody, Family Guy, Greg the Bunny, Futurama, King of the Hill,
The Simpsons, Titus and The X-Files for Fox; Inside Schwartz (a co-production
with NBC Studios) and U.C.: Undercover (a co-production with FtvS and NBC
Studios) for NBC; Buffy the Vampire Slayer and Roswell (a co-production with
FtvS) for UPN; and Angel and Reba for the WB. Generally, a network will license
a specified number of episodes for exhibition on the network during the license
period. All other distribution rights, including international and off-network
syndication rights, are typically retained by TCFTV.
Generally, television programs are produced under contracts that provide
for license fees which may cover only a portion of the anticipated production
costs. As these costs have increased in recent years, the resulting deficit
between production costs and license fees for domestic first-run programming has
also increased. Successful network television series are licensed (i) for first-
run exhibition in Canadian and International markets, (ii) for off-network
exhibition in the United States (including in syndication or to cable
programmers) and (iii) for syndication in International markets. Such additional
licensing is often critical to the financial success of a series since the
license fee paid by a network generally does not fully recover production costs.
Generally, a series must be broadcast for at least three to four television
seasons for there to be a sufficient number of episodes to offer the series in
syndication in the United States or to cable and DBS programmers in the United
States. The decision of a television network to continue a series through an
entire television season or to renew a series for another television season
depends largely on the series' audience ratings.
Fox Television Studios
FtvS was established to create television and video content complementary
to TCFTV's activities. It is organized as a group of smaller, entrepreneurial
production "pods" that share common executive, management and production
infrastructure. In addition to U.S. prime time network series, FtvS also
produces programming in a wide variety of genres for a variety of domestic and
international programming services. FtvS is grouped into six basic lines of
business: (i) network primetime programming through Regency Television and The
Greenblatt Janollari Studio, (ii) "alternative," cable and low-cost
entertainment programming through FtvS Productions, (iii) movies and mini-series
through Fox TV Pictures, (iv) non-fiction programming through Foxstar and
Natural History New Zealand; (v) localized programming for international
broadcasters through Fox World Productions; and (vi) digital, interactive media
through the Fox Foundry. FtvS produces or has orders to produce a variety of
network and cable series, including Malcolm in the Middle and The Bernie Mac
Show (a co-production with TCFTV) for FOX; Son of the Beach for FX; The
Education of Max Bickford (a co-production with TCFTV and CBS Productions) for
CBS; U.C.: Undercover, a co-production with TCFTV and NBC Studios) for NBC; and
The Hughleys and Roswell (a co-production with TCFTV) for UPN, as well as
television movies, mini-series, specials, game and talk shows and non-fictional
programming for networks including The National Geographic Channel, USA Network,
A&E, Discovery Channel, American Movie Classics, The Learning Channel, Animal
Planet and Sky One (U.K.).
4
Motion Picture and Television Libraries
The Company's motion picture and television library (the "Fox Library")
consists of varying rights to over 2,500 previously released films, of which
approximately 300 have been released since 1980, and many well-known television
series. The motion pictures in the Fox Library include many successful, well-
known and well-loved titles, such as The Sound of Music and Miracle on 34th
Street, and seven of the top 12 domestic box office grossing films of all time,
which are Titanic (together with Paramount Pictures Corporation), Star Wars
Episode I: The Phantom Menace, Independence Day, Star Wars, Return of the Jedi,
The Empire Strikes Back and Home Alone. The Company earns significant revenues
through the licensing of titles in the Fox Library in many media, including
television and home entertainment formats, and through licensing and
merchandising of films and characters in films.
In addition, the Fox Library contains varying rights to certain television
series and made-for-television motion pictures. The television library contains
such classic series as Batman, The Mary Tyler Moore Show, M*A*S*H, Hill Street
Blues, Doogie Howser, M.D., L.A. Law, The Wonder Years, Picket Fences, Room 222,
Trapper John, M.D. and Daniel Boone and such recent hits as The Simpsons, The
X-Files, NYPD Blue, Ally McBeal, The Practice, King of the Hill, Buffy the
Vampire Slayer, Dharma & Greg and Judging Amy (together with CBS Worldwide,
Inc.).
Licensing and Merchandising
Through its licensing and merchandising division, the Company exploits its
motion picture and television properties and characters by entering into
licensing agreements for merchandising, literary publishing and commercial
tie-ins. Television series and films which have experienced success throughout
the world in licensing and merchandising include The Simpsons, The X-Files,
Buffy the Vampire Slayer, Dark Angel, the Alien series of motion pictures,
Titanic and Planet of the Apes.
Fox Interactive
Fox Interactive produces entertainment computer software and video game
titles. Fox Interactive leverages the name recognition and popularity of Fox
Library films and television series such as The Simpsons, Buffy the Vampire
Slayer, Die Hard, The X-Files and the Alien and Predator series of motion
pictures through its line of interactive games.
Fox Music and Music Publishing
Fox Music produces and licenses for distribution through third parties
soundtracks of the Company's film and television productions. The Company's
successful film and television soundtracks include Moulin Rouge, Titanic,
Waiting to Exhale, Romeo + Juliet, Hope Floats, Ally McBeal, The X-Files, Dr.
Dolittle and Buffy the Vampire Slayer. In addition, Fox Music Publishing
generally owns the publishing rights for songs and scores commissioned for the
Company's film and television programming. Fox Music Publishing licenses these
rights to third parties for many uses in different media.
Television Stations
During fiscal 2001, Fox Television Stations owned and operated 23 full
power stations located in nine of the top 10 largest designated market areas
("DMAs"). As a result of the acquisition of Chris-Craft Industries, Inc. and its
subsidiaries (together, "Chris-Craft") and the proposed transactions with each
of Viacom, Inc. ("Viacom") and Clear Channel Communications Inc. ("Clear
Channel") which are
5
described below, Fox Television Stations will own and operate 34 full power
stations, including two stations in each of New York and Los Angeles, the first
and second largest DMAs, respectively.
On July 31, 2001, News Corporation completed its acquisitions of Chris-
Craft Industries, Inc. and its subsidiaries, BHC Communications, Inc. and United
Television, Inc., for $2.03 billion in cash and the issuance of 68,854,209
preferred American Depositary Receipts ("ADRs") (representing 275,416,836 News
Corporation preferred shares). As part of this acquisition, News Corporation
transferred all of the assets and liabilities of Chris-Craft , except for cash
and certain non-television related assets and liabilities, to the Company in
exchange for 122,244,272 shares of its Class A common stock. As a result of this
transaction, News Corporation's indirect equity interest in the Company
increased from 82.76% to 85.25%. Simultaneously with the receipt of these assets
and liabilities, the Company transferred title to the Federal Communications
Commission ("FCC") licenses of the 10 newly-acquired television stations to Fox
Television Stations.
Eight of the 10 television stations acquired in the Chris-Craft
transactions are party to an affiliation agreement with UPN until August 31,
2002. The term of the affiliation agreement may be extended for each of the
stations through the end of the 2004-2005 broadcast season at the option of the
stations. UPN provides approximately 23 hours of programming a week, including
two hour prime time programming blocks five nights a week, to its affiliates.
The other two television stations acquired in the Chris-Craft transaction are
affiliates of other television networks and subject to the Asset Exchange
Agreements described below. All other stations owned by Fox Television Stations
are affiliates of FOX. For a description of FOX programming, see "-Television
Broadcast Network."
6
The following table lists certain information as of August 2001 about each
Fox Television Station, including the stations acquired from Chris-Craft. Unless
otherwise noted, all stations are primary affiliates of FOX.
PERCENTAGE OF U.S. TELEVISION
DMA/RANK STATION CHANNEL/TYPE HOUSEHOLDS REACHED (1)
-------- ------- ------------ ----------------------
New York, NY 1 WNYW 5 VHF 6.9%
WWOR* (2) 9 VHF
Los Angeles, CA 2 KTTV 11 VHF 5.0%
KCOP* (2) 13 VHF
Chicago, IL 3 WFLD 32 UHF 3.2%
Philadelphia, PA 4 WTXF 29 UHF 2.7%
San Francisco, CA 5 KBHK** (2) 44 VHF 2.3%
Boston, MA 6 WFXT 25 UHF 2.2%
Dallas, TX 7 KDFW 4 VHF 2.0%
KDFI (3) 27 UHF N/A
Washington, DC 8 WTTG 5 VHF 2.0%
Atlanta, GA 9 WAGA 2 VHF 1.9%
Detroit, MI 10 WJBK 5 VHF 1.8%
Houston, TX 11 KRIV 26 UHF 1.7%
Minneapolis, MN 13 KMSP* (2) 9 VHF 1.5%
Tampa, FL 14 WTVT 13 VHF 1.5%
Phoenix, AZ 16 KUTP* (2) 45 VHF 1.5%
KSAZ 10 VHF
Cleveland, OH 17 WJW 8 VHF 1.4%
Denver, CO (4) 18 KDVR 31 UHF 1.3%
Orlando, FL 20 WRBW* (2) 65 VHF 1.1%
St. Louis, MO 22 KTVI 2 VHF 1.1%
Portland, OR 23 KPTV* (2) 12 VHF 1.0%
Baltimore, MD 24 WUTB* (2) 24 VHF 1.0%
Kansas City, MO 31 WDAF 4 VHF 0.8%
Milwaukee, WI 33 WITI 6 VHF 0.8%
Salt Lake City, UT 35 KTVX** (5) 4 VHF 0.7%
KSTU 13 VHF
San Antonio, TX 37 KMOL** (6) 4 VHF 0.7%
Birmingham, AL 39 WBRC 6 VHF 0.6%
Memphis, TN 41 WHBQ 13 VHF 0.6%
Greensboro, NC 44 WGHP 8 VHF 0.6%
Austin, TX(7) 54 KTBC 7 VHF 0.5%
Total: 48.4%
Source: Nielsen Media Research, September 2001
* Station acquired in Chris-Craft transactions.
** Station acquired in Chris-Craft transactions and subject to an Asset Exchange
Agreement as described below.
(1) VHF stations transmit on Channels 2 through 13 and UHF stations on
Channels 14 through 69. UHF
television stations in many cases have a weaker signal and therefore do
not achieve the same coverage as VHF stations. To address this
disparity, the FCC ownership rule applies a UHF discount (the "UHF
Discount") which attributes only 50% of the television households in a
local television market to the audience reach of a UHF station for
purposes of calculating whether that station's owner complies with the
35% national audience reach cap imposed by FCC regulations. In
addition, the coverage of two commonly owned stations in the same
market is only counted once. The percentages listed are rounded and do
not take into account the UHF Discount. See "--Regulation."
(2) UPN affiliate.
(3) Secondary FOX affiliate, carrying the Fox Kids Network.
(4) The Company also owns and operates KFCT, Channel 22, Fort Collins, CO,
as a satellite station of KDVR, Channel 31, Denver, CO.
(5) ABC affiliate.
(6) NBC affiliate.
(7) The Company also owns and operates K13VC, Channel 13, Austin, TX, a
LPTV (low power television) station. K13VC is a secondary FOX
affiliate, carrying the Fox Kids Network.
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On August 8, 2001, News Corporation, Fox Television Stations and Viacom
entered into an Asset Exchange Agreement pursuant to which Fox Television
Stations will exchange television station KBHK (UPN) in San Francisco for two
Viacom television stations, WDCA (UPN) in Washington, D.C. and KTXH (UPN) in
Houston. On July 31, 2001, News Corporation, Fox Television Stations and Clear
Channel entered into an Asset Exchange Agreement pursuant to which Fox
Television Stations will exchange two television stations, KTVX (ABC) in Salt
Lake City and KMOL (NBC) in San Antonio, for Clear Channel's television station
WFTC (FOX) in Minneapolis. These asset exchanges are subject to customary
closing conditions and are anticipated to close before the end of the 2001
calendar year.
Regulatory approval of the Chris-Craft acquisition required that the
Company divest the television station KTVX in Salt Lake City. This requirement
is being satisfied by the Asset Exchange Agreement with Clear Channel described
above. In addition, the FCC required the Company to divest sufficient stations
to come into compliance with the FCC's national station ownership cap. To comply
with this requirement, Fox Television Stations is required to file with the FCC
the license assignment applications necessary to come into compliance with the
cap within 12 months of the issuance of a final order in a pending legal
challenge to the FCC's national ownership rule. Both the Clear Channel and
Viacom transactions will reduce the national audience reach of Fox Television
Stations and, therefore, assist the Company in complying with the FCC's national
station ownership cap.
The Fox Television Stations derive substantially all of their revenues from
national spot and local advertising. Advertising rates are determined by each
Fox Television Station based on market conditions in the area which it serves.
In addition to cash sales, the Fox Television Stations enter into customary
barter agreements with syndicators, pursuant to which the Fox Television
Stations acquire programming and the rights to sell a specified amount of
advertising time for use in national spot and local advertising markets in
exchange for allowing the syndicator to retain a specified amount of advertising
time for sale in the national advertising market in lieu of cash consideration.
Television Broadcast Network
FOX has 197 affiliated stations, including the full power television
stations that are owned by subsidiaries of the Company, which reach
approximately 99% of all U.S. television households. In general, each week FOX
regularly delivers to its affiliates 15 hours of prime time programming, one
hour of late-night programming on Saturday and one hour of Sunday morning news
programming. Through the Fox Kids Network, programmed by Fox Family Worldwide,
Inc. ("FFW"), FOX regularly delivers to its affiliates 14 hours of children's
daytime programming. FOX's prime time programming features such series as The
Simpsons, The X-Files, King of the Hill, Ally McBeal, That 70's Show, Malcolm in
the Middle, Titus, Boston Public, Dark Angel and various movies and specials. In
addition, a significant component of FOX's programming consists of sports
programming, with FOX providing live coverage (including post-season) of the
National Football Conference of the National Football League ("NFL") and Major
League Baseball ("MLB") and live coverage of the premiere racing series (the
Winston Cup and the Busch series) of the National Association of Stock Car Auto
Racing ("NASCAR") to its affiliates.
FOX derives its revenues from sales in the national advertising
marketplace of commercial advertising time. FOX's programming line-up is
intended to appeal primarily to target audiences of 18 to 49-year old adults,
the demographic group that advertisers seek to reach most often. During the
2000-2001 broadcast season, FOX ranked second and one share point out of the
lead in regularly scheduled prime time programming based on viewership of adults
aged 18-49 (NBC had a 4.8 rating and 13 share, FOX had a 4.5 rating and a 12
share, ABC had a 4.4 rating and a 12 share and CBS
8
had a 4.0 rating and 11 share). The median age of the FOX viewer is 34 years, as
compared to 45 years for NBC, 47 years for ABC and 51 years for CBS.
The Company obtains programming for FOX from major television studios and
independent television production companies pursuant to license agreements. The
terms of such agreements generally provide the Company with the right to
broadcast a television series for a minimum of four seasons. FOX licenses its
film programming from major film studios and independent film production
companies and licenses made-for-television films from a number of sources.
National sports programming, such as NFL, MLB and NASCAR programming, is
obtained under license agreements with professional sports leagues or
organizations. In September 2000, the Company entered into a new license with
MLB for the 2001-2006 seasons. The Company's current licenses with the NFL and
NASCAR extend until the 2005/2006 NFL season and the 2008 NASCAR season.
FOX provides programming to its television station affiliates in accordance
with affiliation agreements of varying durations, which grant to each affiliate
the right to broadcast network television programming on the affiliated station
(the "Fox Affiliates"). Such agreements typically run three or more years and
have staggered expiration dates. These affiliation agreements generally require
FOX's full-time television station affiliates to carry FOX programming in all
time periods in which FOX programming is offered to such affiliates, subject to
certain exceptions stated in affiliation agreements. In 1999, FOX entered into
an arrangement with most of its television station affiliates relating to the
amount of commercial advertising time in FOX programming that FOX provides to
each affiliate for the affiliate to sell to advertisers ("local commercial
advertising time"). Under that arrangement, which runs until 2002, the affiliate
pays FOX for additional local commercial advertising time.
Other Television Businesses
The Company is also engaged in television programming, production,
distribution and licensing through Twentieth Television. Twentieth Television
produces and distributes television programs and distributes feature motion
pictures for syndication and on cable television in the United States. Twentieth
Television also licenses programming (including feature motion pictures) that
it, TCFTV or third parties have produced and which has been previously exhibited
on network television. Twentieth Television currently produces and distributes
the first-run syndicated programs Divorce Court, Power of Attorney and Texas
Justice.
Cable Network Programming
The Company holds interests in cable network programming businesses in the
areas of news, sports, general entertainment, family entertainment and movies.
The Fox Cable Networks Group includes all of the Company's cable network
programming businesses other than the Fox News Channel.
Fox News Channel ("Fox News")
Fox News is a 24-hour all news cable channel which is currently available
to over 67 million U.S. cable and DBS households.
Fox News also produces a weekend political commentary show, Fox News
Sunday, for broadcast on FOX. Fox News, through its Fox News Edge service,
licenses news feeds to Fox Affiliates and other subscribers to use as part of
local news broadcasts.
9
AT&T, through a predecessor company, holds a warrant to purchase a 20% non-
voting common equity interest in Fox News (the "Warrant") exercisable until
January 2, 2002 (the "Exercise Date"). The Warrant is exercisable at an exercise
price of $200 million plus accrued interest from May 1, 1997 through the
Exercise Date. As of June 30, 2001, the exercise price was approximately $280
million. On October 1, 2003, if AT&T has exercised the Warrant and subject to
certain conditions, AT&T will have the right to put its equity interest in Fox
News to the Company in return for, at the Company's sole option, either (a) cash
or (b) an equivalent amount in News Corporation preferred shares. The amount of
cash or preferred shares will be calculated based on the appropriate fair market
value of the 20% equity interest in Fox News determined by mutual agreement of
the parties. If the parties are unable to agree upon a price, the price will be
determined by valuation procedures using an independent investment banker.
Fox Sports Networks
Fox Sports Networks operates two principal business units: (i) sports
programming operations and (ii) FX Network, a general entertainment network.
Sports programming operations. Fox Sports Net, LLC ("FSN") is the largest
regional sports network ("RSN") programmer in the United States, focusing on
live professional and major collegiate home team sports events. FSN's sports
programming business consists of equity interests in 21 RSNs (the "Fox Sports
RSNs") and Fox Sports Net, a national sports programming service, which is owned
in a 50/50 partnership between FSN and Rainbow Media Sports Holdings, Inc.
("Rainbow"), an indirect subsidiary of Cablevision Systems Corporation
("Cablevision"). Fox Sports Net provides its affiliated RSNs with 24-hour
national sports programming featuring live and replay sporting events and
original programming and a national sports news program, National Sports Report.
FSN owns an equity interest in, or through Fox Sports Net is affiliated
with, 24 RSNs. These RSNs reach approximately 73 million households and,
together with FSN, have rights to telecast live games of 72 professional sports
teams in the MLB, National Basketball Association ("NBA") and National Hockey
League ("NHL") (out of a total of 80 such teams in the United States) and
numerous collegiate sports teams. Because of their home team programming, RSNs
have strong local appeal in their respective markets, generating high prime time
ratings and attractive subscriber fees from cable operators. FSN's strategy is
to utilize its RSNs and Fox Sports Net to build a national cable sports network
under the Fox brand name.
FSN owns a 40% interest in Regional Programming Partners ("RPP"), a
partnership with Rainbow which owns various interests in RSNs (including two in
which FSN owns 50% interests), the New York Knickerbockers NBA franchise, the
New York Rangers NHL franchise, the Madison Square Garden entertainment complex,
and Radio City Music Hall.
FX Network. Launched in June 1994, FX Networks LLC ("FX") currently reaches
approximately 71 million U.S. cable and DBS households. FX is a general
entertainment network that combines original programming with acquired
television series and feature films. In addition, FX carries sports programming
with live coverage of certain NASCAR events and, through the 2001 season,
national MLB games airing one night per week. FX's line-up for the Fall 2001
season includes the following syndicated hits from TCFTV: Ally McBeal, The
Practice, and Buffy the Vampire Slayer; and original programming, including Son
of the Beach, a Howard Stern and FtvS production, and The Toughman World
Championship series. FX, which aired three original movies in fiscal 2001, is in
production on Sins of the Father, an original movie expected to air in fiscal
2002.
10
Fox Cable Network Ventures
In March 2001, certain investors in the Speedvision Network LLC
("Speedvision") and Outdoor Life Network LLC ("Outdoor Life") programming
services exercised their rights to require the Company to purchase all of the
interests held by them in Speedvision and Outdoor Life. The aggregate ownership
percentage of the investors was approximately 53.44% and 50.23% of Speedvision
and Outdoor Life, respectively. On July 25, 2001, the Company paid total
consideration of approximately $401 million and $309 million to purchase the
investors' interests in Speedvision and Outdoor Life, respectively, which
resulted in the Company owning approximately 85.46% of Speedvision and
approximately 83.18% of Outdoor Life. The remaining interests in Speedvision and
Outdoor Life are owned by Comcast Corporation ("Comcast"). Shortly following the
exercise of the Speedvision and Outdoor Life "put" options described above, the
Company entered into a Purchase Agreement with Comcast pursuant to which the
Company has agreed to sell its entire interest in Outdoor Life to Comcast.
Pursuant to the Purchase Agreement, Comcast elected to call the Company's
interest in Outdoor Life on August 23, 2001 for approximately $512 million. The
transaction is expected to close during the second quarter of fiscal 2002.
The Speedvision programming service focuses exclusively on the world of
racing, including cars, motorcycles, airplanes and boats, and the Outdoor Life
programming service provides information and entertainment on nature, the
environment and outdoor recreation. Speedvision and Outdoor Life currently reach
approximately 43.8 million and 36.7 million U.S. cable and DBS households,
respectively.
Fox Cable Network Ventures owns a 40% interest in an entity that owns
and operates the Staples Center, a new sports and entertainment complex in
downtown Los Angeles, California. Since October 1999, the Staples Center has
been the home of the Los Angeles Kings NHL franchise and the Los Angeles Lakers
and the Los Angeles Clippers NBA franchises.
Fox Sports International
The Company and Liberty/TINTA LLC, a subsidiary of Liberty Media
Corporation ("Liberty/TINTA"), each owns a 50% interest in International Sports
Programming Partners ("Fox Sports International"). Fox Sports International
holds interests in the following programming services: Fox Sports Latin America
(a Spanish language sports network which airs throughout Central and South
America), Fox Sports World (a U.S. sports network featuring 24-hour
international sports in the English language), Fox Sports World Espanol (a
Spanish language sports network featuring international sports which airs in the
U.S.) and Fox Sports World-Middle East (an English-language sports network which
airs in the Middle East).
On July 15, 2001, Liberty exercised its right, under a pre-existing
option, to cause Liberty/TINTA to sell its 50% interest in Fox Sports
International to News Corporation in exchange for 3,633,866 ADRs of News
Corporation (representing 14,535,464 preferred shares), subject to adjustment
for dividends paid since July 1999. Under the terms of this transaction, News
Corporation will transfer the acquired interest in Fox Sports International to
the Company for approximately 3,632,000 shares of Class A common stock. The
transaction is expected to close in the second quarter of fiscal 2002.
11
Fox Family Worldwide
FFW is owned 49.5% by the Company and 49.5% by Haim Saban and certain
limited partnerships controlled by Mr. Saban.
In December 2000, Haim Saban, Chairman and Chief Executive Officer of
FFW, exercised his right to require FOX to purchase all of the Class B common
stock of FFW held by Mr. Saban, other former stockholders of Saban
Entertainment, Inc. and their transferees (the "Saban Interest"). In January
2001, a subsidiary of FOX exercised its option to purchase the Saban Interest.
In July 2001, the Company, Haim Saban and the other stockholders of FFW and
subordinated debtholders reached a definitive agreement to sell FFW to The Walt
Disney Company ("Disney") for total consideration of approximately $5.3 billion
(including the assumption of certain debt). FOX has entered into an arm's-length
programming arrangement with Disney to allow the continued broadcast for the
2001-2002 broadcast season of certain FFW programming on FOX affiliates through
the Fox Kids Network following closing of the FFW sale to Disney. This
transaction is expected to close during the second quarter of fiscal 2002.
FFW is an integrated family and children's entertainment company that
develops, acquires, produces, broadcasts and distributes live-action and
animated family and children's television programming on a global basis. FFW's
principal operations are comprised of (i) the Fox Family Channel; (ii) the Fox
Kids Network; and (iii) the Fox Kids International Networks, including Fox Kids
Europe, N.V. ("FKE") and Fox Kids Latin America ("FKLA").
The Fox Family Channel is a basic cable network that currently provides
family oriented programming reaching approximately 96% of all U.S. cable and DBS
households. The Fox Family Channel maintains a family image and general
entertainment format with a schedule, look, marketing campaign and on-air
packaging designed to appeal to the adult 18-49 and 25-54 demographics during
prime time and evenings and to children and tweens (early adolescents,
approximately ages 9-14) during the day. From 6 p.m. to 11 p.m. and from
midnight to 1 a.m., the Fox Family Channel telecasts programming intended to
appeal to adults ages 18-49 and 25-54 and carries advertising sold on the basis
of adult demographics. The channel's prime time strategy is to deliver adults
ages 18-49 and 25-54 a balanced mix of off-network series (such as 7/th/ Heaven,
Freaks and Geeks, Step by Step and Providence), movies, specials and original
programming (such as the Fox Family original dramedy State of Grace), all of
which is suitable for family viewing. From 7 a.m. to 6 p.m., the Fox Family
Channel telecasts programming targeted principally to children and tweens.
The Fox Kids Network, one of the leading U.S. children's broadcasting
television networks, broadcasts 14 hours of children's programming each week to
97% of
U.S. television households.
FFW, through its subsidiaries, creates, produces and acquires animated
and live-action children's television programming with brand-name characters and
elements which are either widely known to children, such as the Mighty Morphin
Power Rangers, Digimon and NASCAR Racers, or which are or have been developed or
purchased due to their likelihood of maturing into popular brands. FFW produced,
financed or co-financed approximately 370 episodes of children's television
programming for the year ended June 30, 2001 and had approximately 380 episodes
in production on June 30, 2001. FFW currently distributes its children's
programming in more than 400 terrestrial, cable and satellite channels in over
100 countries around the world.
FKE owns the broadcast, distribution and home video rights to
children's television series and specials and all merchandising and internet
rights to children's programming and properties held by FFW for the territories
of Europe (including Central and Eastern Europe), the Middle East (except
Israel) and certain Caribbean and French speaking African and South Pacific
territories. FKE has
12
operations in many countries in Europe and currently is broadcasting
11children's channel feeds in 16 different languages via cable and satellite
transmission to 54 countries, reaching approximately 24.9 million households. In
addition, FKE has a network of 17 fully-localized online web sites.
FKLA was launched in November 1996 and currently reaches approximately
9.6 million households in 19 countries in two different languages.
National Geographic Channels
The Company, NBC and National Geographic Television ("NGT") each own
approximately 50%, 25% and 25% interests, respectively, in NGC Network
International, LLC ("NGCI"), which produces the National Geographic Channel for
distribution in various international markets, including certain countries in
Europe, Asia and Latin America. In January 2001, the Company and NGT launched
the National Geographic Channel in the United States. The National Geographic
Channel currently reaches approximately 15 U.S. cable and DBS households. The
Company holds a 66.67% interest in NGC Network US, LLC, the producer of the U.S.
channel, with NGT holding the remainder. The National Geographic Channel airs
documentary programming on such topics as natural history, adventure, science,
exploration and culture.
The National Geographic Channel is currently shown in approximately 133
countries internationally, as well as the United States. National Geographic
programming is provided in Australia, certain countries in Europe and
Scandinavia by a partnership in which British Sky Broadcasting Limited, NBC and
NGT are currently partners.
The Golf Channel
In June 2001, the Company sold its approximately 31% interest in TGC,
Inc., which owns and operates The Golf Channel, to Comcast, for total
consideration of approximately $375 million. The Golf Channel broadcasts studio
shows and has rights to broadcast certain Professional Golfers' Association
("PGA") tournaments and other European PGA, Australian PGA, LPGA and Nike Tour
events.
WebMD/The Health Network
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"), a
health-focused cable network, for a preferred stock interest in WebMD. On
December 29, 2000, the Company, News Corporation and WebMD entered into an
agreement to restructure the initial integrated transactions, which resulted in
the Company agreeing to exchange its entire preferred stock investment to WebMD
in exchange for, among other things, WebMD's interest in THN. The Company will
continue to provide domestic media services over 10 years and will remain
obligated for cash payments to WebMD of $27.5 million over four years. In June
2001, the Company completed the previously announced sale of its entire interest
in THN for cash of approximately $155 million, of which $100 million was paid at
closing and $55 million is due one year from closing, and a 10% carried interest
in the equity of the acquirer with a minimum guarantee value of $100 million in
December 2003.
13
Fox Movie Channel
Launched in November 1994 and currently reaching approximately 12
million U.S. cable and DBS households, Fox Movie Channel ("FMC"), which is
wholly-owned by the Company, is Hollywood's first and only studio-based movie
network. FMC showcases commercial-free contemporary hits and classics from the
Fox Library.
Los Angeles Dodgers
The Company owns and operates the Los Angeles Dodgers MLB franchise
(the "Dodgers") along with Dodger Stadium and other related real estate
including Dodgertown, the home of the Dodgers' spring training facilities in
Vero Beach, Florida. The Company acquired its interest in the Los Angeles
Dodgers, Inc. in April 1998. The Dodgers are currently in their 111th year in
the National League and in each of the last five seasons have achieved
attendance of over three million fans at Dodger Stadium.
Canal Fox
The Company, through its subsidiary Fox Latin American Channel, Inc.,
operates Canal Fox, a general entertainment cable and satellite service for
Latin America covering Central and South America. Canal Fox broadcasts in the
Portuguese language in Brazil and in the Spanish language in the rest of Central
and South America. The channel's programming line-up consists of movies, series
and music specials.
LAPTV
Fox LAPTV, L.L.C., a subsidiary of the Company, owns a 20.2% equity
interest in LAPTV, a partnership which distributes three premium pay television
channels (Movie City, Cinecanal 1 and its multiplex channel, Cinecanal 2) and
one basic television channel (The Film Zone) in Latin America (excluding
Brazil). Such channels primarily feature theatrical motion pictures of the
Company and three other studio partners in the English language with Spanish
subtitles.
Telecine
The Company, through its subsidiary Fox Latin America, Inc., owns a
12.5% equity interest in Telecine, a limited liability company which distributes
five premium pay television channels (Telecine Premium, Telecine Action,
Telecine Emotion, Telecine Happy and Telecine Classic) in Brazil. Such channels
primarily feature theatrical motion pictures of the Company and three other
studio partners in the English language with Portuguese subtitles.
Competition
The Company faces competition from companies within the motion picture
and television industry and alternative forms of leisure and entertainment
activities. The entertainment industry is also subject to rapid developments in
technology and shifting consumer tastes.
Filmed Entertainment
Motion picture and television production and distribution are highly
competitive businesses. The Company competes with other film studios,
independent production companies and others for the acquisition of artistic
properties, the services of creative and technical personnel, exhibition
14
outlets and the public's interest in its products. The number of films released
by the Company's competitors, particularly the other major film studios, in any
given period may create an oversupply of product in the market, and that may
reduce the Company's shares of gross box office admissions and may make it more
difficult for the Company's films to succeed.
The commercial success of the motion pictures produced and/or
distributed by the Company is substantially affected by the public's often
unpredictable response to the motion pictures produced and distributed by it. In
addition, television networks are now producing more programs internally and
thus may reduce such networks' demand for programming from other parties.
Competitive risks affecting the Company's home entertainment business
include competition among home video formats (e.g., DVD) and with other methods
of distribution, such as video-on-demand, as well as risks associated with
controlling copying and unauthorized distribution of the Company's programs.
Television Stations, Television Broadcast Network and Other Television
Businesses
The network television broadcasting business is highly competitive. FOX
directly competes for programming and for viewers with ABC, NBC, CBS, and the WB
and UPN networks. ABC, NBC and CBS each broadcasts a significantly greater
number of hours of programming than FOX and accordingly, may be able to
designate or change time periods in which programming is to be broadcast with
greater flexibility than FOX. FOX also competes with other non-network sources
of television service, including cable television and DBS services. Other
sources of competition may include home video exhibition, the Internet and home
computer usage. In addition, future technological developments may affect
competition within the television marketplace.
FOX competes for advertising revenues with the other broadcast
networks, as well as with all other forms of advertising. Each of ABC, NBC and
CBS has a greater number of affiliates with VHF signals, which are generally
considered to have greater reach in their markets and, therefore, more appealing
to advertisers. ABC, NBC and CBS also realize greater advertising revenues than
FOX for most of their programming in various time periods.
In addition, each of the Fox Television Stations competes for audiences
and advertising revenues with radio and television stations and cable systems in
its market area and with other advertising media such as newspapers, magazines,
outdoor advertising, direct mail and Internet websites. All of the Fox
Television Stations are located in highly competitive markets. Additional
elements which are material to the competitive position of television stations
include management experience, authorized power and assigned frequency.
Competition for sales of broadcast advertising time is based primarily on the
anticipated and actually delivered size and demographic characteristics of
audiences as determined by various rating services, price, the time of day when
the advertising is to be broadcast, competition from the other broadcast
networks, cable television systems, DBS services and other media and general
economic conditions. Competition for audiences is based primarily on the
selection of programming, the acceptance of which is dependent on the reaction
of the viewing public which is often difficult to predict.
Cable Network Programming
General
-------
The cable network programming business is another highly competitive
field. Cable programming services compete for distribution and, when
distribution is obtained, compete for
15
viewers and advertisers with over-the-air broadcast television, radio, print
media, motion picture theaters, videocassettes and other sources of information
and entertainment. Important competitive factors are the prices charged for
programming, the quantity, quality and variety of programming offered and the
effectiveness of marketing efforts. More generally, the Company's cable networks
compete with various other leisure-time activities such as home videos, movie
theaters, personal computers and other alternative sources of entertainment and
information.
Sports Programming
------------------
A number of basic and pay television programming services (such as
ESPN) as well as free over-the-air stations and broadcast networks provide
programming that targets the Fox Sports RSNs' audience. FSN is currently the
only programming service distributing a full range of sports programming on both
a national and regional level. On a national level, FSN's primary competitor is
ESPN, and to a lesser extent, ESPN2. In addition, ESPNews and CNNSI each offers
24 hour sports news formats which compete directly with the National Sports
Report. In regional markets, the Company's RSNs compete with other regional
sports networks, including those operated by team owners and other sports
programming providers and distributors.
In addition, the Fox Sports RSNs and Fox Sports Net compete, to varying
degrees, for sports programming rights. The Fox Sports RSNs compete for local
and regional rights with local broadcast television stations, other local and
regional sports networks and the owners of distribution outlets such as cable
television systems. Fox Sport Net competes for national rights principally with
the national broadcast television networks, a number of national cable services
that specialize in or carry sports programming, and television "superstations,"
which distribute sports and other programming to cable television systems by
satellite, and with independent syndicators that acquire and resell such rights
nationally, regionally and locally. The owners of distribution outlets such as
cable television systems may also contract directly with the sports teams in
their service area for the right to distribute a number of such teams' games on
their systems. The owners of teams may also launch their own regional sports
network and contract with cable television systems for carriage. In certain
markets, the owners of distribution outlets, such as cable television systems,
also own one or more of the professional teams in the region, increasing their
ability to launch competing networks and thereby limiting the professional
sports rights available for acquisition by the Company's RSNs.
FX
--
A number of basic and pay television programming services (such as USA
Network and Turner Network Television) as well as free over-the-air broadcast
networks provide programming that targets the same viewing audience as FX. FX
faces competition in the acquisition of distribution rights to programming.
Fox Family Worldwide
--------------------
FFW competes, through the Fox Kids Network and the Fox Family Channel,
with the other broadcast television networks, public television and cable
television channels, such as Cartoon Network, Kids WB, the Disney Channel and
Nickelodeon for market acceptance of its programming and for viewership ratings
and advertising revenues. To the extent that FFW produces original programming
for distribution outlets it does not own, it competes with other producers of
children's programming. Internationally, FFW competes with a large number of
U.S. based and international distributors of children's programming, including
Disney, Warner Bros. and Nickelodeon, in the development or acquisition of
programming expected to appeal to international audiences. Such programming
often must comply with foreign broadcast rules and regulations, which may
stipulate certain minimum local content requirements.
16
Regulation
Filmed Entertainment
FFE is subject to the provisions of so-called "trade practice laws" in
effect in 25 states relating to theatrical distribution of motion pictures.
These laws substantially restrict the licensing of motion pictures unless
theater owners are first invited to attend a screening of such motion pictures
and, in certain instances, also prohibit payment of advances and guarantees to
motion picture distributors by exhibitors. Further, pursuant to various consent
judgments, FFE and certain other motion picture companies are subject to certain
restrictions on their trade practices in the U.S., including a requirement to
offer motion pictures for exhibition to theaters on a theater-by-theater basis
and, in some cases, a prohibition against the ownership of theaters.
Television Stations, Television Broadcast Network & Other Television Businesses
In general, the television broadcast industry in the U.S. is highly
regulated by Federal laws and regulations issued and administered by various
Federal agencies, including the FCC. The FCC regulates television broadcast
stations pursuant to the Communications Act of 1934, as amended (the
"Communications Act"). The Communications Act permits the operation of
television broadcast stations only in accordance with a license issued by the
FCC upon a finding that grant of the license would serve the public interest,
convenience and necessity. The FCC grants television broadcast station licenses
for specific periods of time and, upon application, may renew the licenses for
additional terms. Under the Communications Act, television broadcast licenses
may be granted for a maximum permitted term of eight years. Generally, the FCC
renews broadcast licenses upon finding that (i) the television station has
served the public interest, convenience and necessity, (ii) there have been no
serious violations by the licensee of the Communications Act or FCC rules and
regulations; and (iii) there have been no other violations by the licensee of
the Communications Act or FCC rules and regulations which, taken together,
indicate a pattern of abuse. After considering these factors, the FCC may grant
the license renewal application with or without conditions, including renewal
for a term lesser than the maximum otherwise permitted, or hold an evidentiary
hearing.
In February 1998, the FCC adopted a final table of digital channel
allotments and rules for the implementation of digital television ("DTV")
service (including high-definition television) in the United States. The digital
table of allotments provides each existing full power television station
licensee or permittee, including the 34 Fox Television Stations, with a second
broadcast channel in order to facilitate a transition from analog to digital
transmission, conditioned upon the surrender of one of the channels at the end
of the DTV transition period. Twenty-three of the Fox Television Stations have
launched digital facilities. The FCC will require completion of digital
facilities in the remaining 11 Fox Television Stations by May 1, 2002. Under FCC
rules, television stations may use their second channel to broadcast either one
or two streams of "high definition" digital programming or to "multicast"
several streams of standard definition digital programming or a mixture of both.
Broadcasters may also deliver data over these channels, provided that such
supplemental services do not derogate the mandated, free over-the-air program
service. The Company is currently formulating plans for use of its digital
channels. It is difficult to assess how digital television will affect the
Company's broadcast business with respect to other broadcasters and video
program providers.
Under the Communications Act, a broadcast license may not be granted to
or held by any corporation that has more than one-fifth of its capital stock
owned or voted by non-U.S. citizens or entities or their representatives, by
foreign governments or their representatives, or by non-U.S. corporations. The
Communications Act further provides that no FCC broadcast license may be granted
to any corporation directly or indirectly controlled by any other corporation of
which more than one-fourth of its capital stock is owned of record or voted by
non-U.S. citizens if the FCC finds the
17
public interest will be served by the refusal of such license. In 1995, the FCC
acknowledged that News Corporation owns the vast preponderance of equity of the
corporate parent of the Fox Television Stations. The FCC also concluded that Mr.
K. Rupert Murdoch, Chairman and Chief Executive of News Corporation, a U.S.
citizen, controls the corporate licensee and thus found the level of alien
equity to be consistent with the public interest. Mr. Murdoch has 76% voting
control of Fox Television Holdings, Inc., the corporate parent of the Fox
Television Stations, and News Corporation will continue to hold indirectly stock
representing the majority of equity of the corporate licensee. The Restated
Certificate of Incorporation of Fox Television Holdings, Inc. provides that the
voting capital stock of the company shall only be owned by persons who are
citizens of, or incorporated entities formed in, the United States, or would not
otherwise disqualify such company or any subsidiary of such company from being
issued a television broadcast license by the FCC.
On August 6, 1999 the FCC amended the rules that determine what
constitutes a "cognizable interest" in applying its media cross-ownership
restrictions (the "Attribution Rules"), as well as the rules that govern the
ownership of two television stations, or a television station and a radio
station, located in the same market (the "Local Restriction"). Under the new
Attribution Rules, a party will be deemed to have a cognizable interest in a
television or radio station, cable system or daily newspaper ("Media Outlet")
that triggers the FCC's cross-ownership restrictions if (i) it owns 5% or more
of the voting stock in the Media Outlet; (ii) its interest exceeds 33% of the
total asset value (equity plus debt) of the Media Outlet and it either (x)
supplies at least 15% of a station's weekly broadcast hours or (y) has a
cognizable interest in another Media Outlet in the same market. Under the new
Attribution Rules, Local Marketing Agreements ("LMAs") are cognizable interests
if the brokering station provides more than 15% of the brokered station's
broadcast hours per week. The FCC also eliminated its "cross interest" policy,
which had prohibited common ownership of a cognizable interest in one Media
Outlet and a "meaningful" non-cognizable interest in another Media Outlet
serving essentially the same market.
The FCC relaxed the Local Restriction to (i) permit the ownership of
two television stations with overlapping coverage areas if the stations are in
separate DMAs; (ii) permit common ownership of two stations in the same DMA if
their Grade B coverage areas do not overlap or if eight independently owned full
power television stations will remain after the stations which had been
independently owned become commonly owned (which is referred to by the FCC as a
"merger"), and one of the stations is not among the top four-ranked stations in
the market, based on audience share. The remaining Local Restriction can be
waived if one of the stations is "failed" or "failing," or where the merger
would result in the construction and operation of an "unbuilt" station. The FCC
also relaxed its radio-television cross-ownership rule to permit some degree of
same-market radio and television joint ownership. These changes in the FCC
ownership restrictions permitted Fox Television Stations to acquire second
television stations in New York, Los Angeles and Phoenix.
FCC rules permit a party to have a cognizable interest in an unlimited
number of television stations nationally so long as the audience reach of such
stations does not exceed, in the aggregate and after application of the UHF
Discount, 35% of U.S. television households (the "National Restriction").
Pursuant to Congressional directive, the FCC conducted a formal review of all
its broadcast ownership rules and on June 20, 2000, released a decision in which
it refused to modify the National Restriction, retained the UHF Discount and
commenced proceedings to further review and modify the dual network and
newspaper/broadcast cross-ownership rule. Fox Television Stations has appealed
the FCC's decision to retain the National Restriction. It is not possible to
predict whether the appeal will be successful or the timing or effect of other
changes in FCC rules or policies pursuant to the 1996 Telecom Act or pending FCC
proceedings.
The FCC has adopted rules requiring closed captioning of most broadcast
and cable programming on a phased-in basis, beginning in the year 2000. The
broadcast and cable industries
18
have adopted, and the FCC has approved, a voluntary content ratings system
which, when used in conjunction with so-called "V-Chip" technology, will permit
the blocking of programs with a common rating. The FCC has directed that all
television receiver models with picture screens 13 inches or greater be equipped
with "V-Chip" technology under a phased implementation which began July 1, 1999.
On July 21, 2000, the FCC adopted a rule requiring broadcasters and multichannel
video programming distributors ("MVPDs") to supply "video descriptions" of their
programming. Video descriptions, which are transmitted on a separate audio
channel and are accessible through a decoding device attached to TV sets, are
narrative descriptions of a program's visual aspects and are intended for the
visually impaired. The FCC's rules require stations located in the top 25 DMAs
and affiliated with one of the major television networks, including Fox, to
provide video descriptions for at least 50 hours of prime time and/or children's
programming per calendar quarter commencing April 1, 2002. The rules also
require MVPDs with 50,000 or more subscribers to provide 50 hours per calendar
quarter of prime time and/or children's programming with video descriptions on
each of the top five national non-broadcast networks they carry commencing April
1, 2002.
FCC regulations implementing the 1992 Cable Act require each television
broadcaster to elect, at three-year intervals beginning June 17, 1993, either to
(i) require carriage of its signal by cable systems in the station's market
("must carry") or (ii) negotiate the terms on which such broadcast station would
permit transmission of its signal by the cable systems within its market
("retransmission consent"). The constitutionality of the analog must carry
provisions was upheld by the U.S. Supreme Court. The FCC has initiated a
rulemaking proceeding to determine carriage requirements for digital broadcast
television systems on cable systems, including carriage during the period of
transition from analog to digital signals. The Satellite Home Viewer Improvement
Act of 1999 ("SHVIA") requires satellite carriers, by January 1, 2002, to carry
upon request all television stations located in markets in which the satellite
carrier retransmits at least one local station pursuant to the statutory
copyright license provided by SHVIA. FCC regulations implementing this statutory
provision require affected stations to either elect mandatory carriage at the
same three year intervals applicable to cable must carry or to negotiate
carriage terms.
Federal legislation enacted in 1990 limits the amount of commercial
matter that may be broadcast during programming designed for children 12 years
of age and younger. In addition, under FCC license renewal processing
guidelines, television stations are generally required to broadcast a minimum of
three hours per week of programming, which, among other requirements, must have,
as a "significant purpose," the educational and informational needs of children
16 years of age and under. A television station found not to have complied with
the programming requirements or commercial limitations could face sanctions,
including monetary fines and the possible non-renewal of its license. The FCC
has indicated its intent to enforce its children's television rules strictly.
The FCC continues to enforce strictly its regulations concerning
"indecent" programming, political advertising, environmental concerns, technical
operating matters and antenna tower maintenance. The FCC also has traditionally
enforced its equal employment opportunity rules vigorously with respect to
recruitment efforts and recordkeeping requirements. In addition, FCC regulations
governing network affiliation agreements mandate that television broadcast
station licensees retain the right to reject or refuse network programming in
certain circumstances or to substitute programming that the licensee reasonably
believes to be of greater local or national importance. Violation of FCC
regulations can result in substantial monetary forfeitures, periodic reporting
conditions, short-term license renewals and, in egregious cases, denial of
license renewal or revocation of license.
19
Cable Network Programming
FCC regulations adopted pursuant to the 1992 Cable Act prevent a cable
operator that has an attributable interest (including voting or non-voting stock
ownership of 5% or more or limited partnership equity interests of 5% or more)
in a programming vendor from exercising undue or improper influence over the
vendor in its dealings with competitors to cable. The regulations also prohibit
a cable programmer in which a cable operator has an attributable interest from
entering into exclusive contracts with any cable operator or from discriminating
among competing multichannel program distributors in the price, terms and
conditions of sale or delivery of programming. With respect to cable systems
having channel capacity of less than 76 channels, the FCC's regulations limit to
40% the number of programming channels that may be occupied by video programming
services in which the cable operator has an attributable interest. As a result
of Liberty's ownership interest in News Corporation, the Fox Family Channel,
cable networksoperated by the Fox Cable Networks Group and Fox News Channel are
subject to these requirements. Similarly, Cablevision is deemed to have an
attributable interest in RPP. The FCC's program access and non-discrimination
regulations therefore restrict the ability of these cable programming services
to enter into exclusive contracts. The rules also permit multichannel video
programming distributors (such as multi-channel multi-point distribution
services ("MMDS"), satellite master antenna televisions ("SMATV"), DBS and
direct-to-home operators) to bring complaints against the Company to the FCC
charging they are unable to obtain the affected programming networks on
nondiscriminatory terms. While cable systems are expanding their capacity, there
may be instances in which a Cablevision cable system with 75 channels or less
will not be able to carry an RPP channel or will have to remove another
affiliated channel.
The FCC's regulations concerning the commercial limits in children's
programs and political advertising also apply to certain cable television
programming services carried by cable system operators. The Company must provide
program ratings information and increased closed captioning of its cable
programming services to comply with FCC regulations, and may have to provide
video descriptions on some of its services, which could increase its operating
expenses.
The Children's Online Privacy Protection Act of 1998 ("COPPA")
prohibits web sites from collecting personally identifiable information online
from children under age 13 without prior parental consent. Online services
provided by the Company may be subject to COPPA requirements. Congress and
individual states may also consider online privacy legislation that would apply
to personal information collected from teens and adults.
ITEM 2. PROPERTIES
The Company maintains executive offices and certain of its operations,
as well as the Fox News studios at 1211 Avenue of the Americas, New York, New
York. These offices cover approximately 284,000 square feet and are provided by
News Corporation, which maintains executive offices at such location.
The Company owns the Fox Studios Lot at 10201 West Pico Boulevard, Los
Angeles, California, which consists of approximately 54 acres containing 15
sound stages, production facilities, administrative, technical and dressing room
structures, screening theaters and machinery equipment facilities and three
restaurants. The Company also leases approximately 320,000 square feet of office
space at Fox Plaza, located adjacent to the Fox Studios Lot. The Company owns a
studio facility in Rosarito, Mexico, which consists of approximately 37 acres
containing office space, production facilities and the largest fresh and
saltwater tanks used in motion picture production in the world. Fox Studios
Australia, a 50/50 joint venture between the Company and Lend Lease Corporation,
has entered into a 40-year lease, with a 10-year renewal option, with respect to
integrated film and
20
television production and public entertainment facilities in Sydney, Australia,
which consists of approximately 60 acres.
The Company owns Dodger Stadium, which is situated on approximately 275
acres in Los Angeles. The Company completed a sale-leaseback transaction in
September 2001 with civic authorities and private developers for Dodgertown, the
Dodger's spring training facility, which is located on 467 acres in Vero Beach,
Florida. The Company will retain the use of the facility as the Dodgers spring
training facility.
The Company also owns and leases office space, broadcast and production
facilities and other ancillary support properties in various cities in the
United States and several countries around the world for its businesses. The
Company considers its properties adequate for its present needs.
ITEM 3. LEGAL PROCEEDINGS
The Company experiences routine litigation in the normal course of its
business. The Company believes that none of its pending litigation will have a
material adverse effect on its consolidated financial condition, future results
of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
21
Executive Officers of the Company
Set forth below is certain information concerning the executive
officers of the Company as of September 28, 2001, which information is hereby
included in Part I of this report.
The Executive Officers of the Company are as follows:
Name Age Position
---- --- --------
K. Rupert Murdoch 70 Chairman and Chief Executive Officer
Peter Chernin 50 President, Chief Operating Officer
David F. DeVoe 54 Senior Executive Vice President, Chief Financial Officer
Arthur M. Siskind 62 Senior Executive Vice President, General Counsel
All of the Executive Officers of the Company are also executive
officers of News Corporation. As executive officers of News Corporation, the
Executive Officers of the Company continue to render services to News
Corporation.
The Senior Executives of the Company (in addition to persons identified
as Executive Officers above) are as follows:
Name Age Position
---- --- --------
James N. Gianopulos 49 Chairman of Fox Filmed Entertainment
David Hill 55 Chairman and Chief Executive Officer of Fox
Sports Television Group
Thomas E. Rothman 46 Chairman of Fox Filmed Entertainment
Mitchell Stern 47 Chairman and Chief Executive Officer of Fox
Television Stations
Backgrounds of Executive Officers and Senior Executives
-------------------------------------------------------
K. Rupert Murdoch has been a Director of the Company since 1985,
Chairman since 1992 and Chief Executive Officer of the Company since 1995. Mr.
Murdoch has been Chairman of the Board of Directors of News Corporation since
1991, and Director and Chief Executive of News Corporation since its formation
in 1979. Mr. Murdoch has served as a Director of News Limited, News
Corporation's principal subsidiary in Australia, since 1953, a Director of News
International plc, News Corporation's principal subsidiary in the United
Kingdom, since 1969, and a Director of News America Incorporated, News
Corporation's principal subsidiary in the United States ("NAI"), since 1973. Mr.
Murdoch has served as a Director of STAR since 1993 and as Chairman from 1993 to
1998, as a Director of British Sky Broadcasting Group plc ("BSkyB") since 1990
and Chairman since June 1999 and as a Director of FFW since 1996. Mr. Murdoch is
also a member of the board of directors of Philip Morris Companies, Inc. and
China Netcom Corporation (Hong Kong) Limited.
Peter Chernin has been a Director and President and Chief Operating
Officer of the Company since 1998. Mr. Chernin has been a Director, President
and Chief Operating Officer of News Corporation and a Director, Chairman and
Chief Executive Officer of NAI, since 1996. Mr. Chernin was Chairman and Chief
Executive Officer of FFE from 1994 until 1996, Chairman of Twentieth
22
Century Fox Film Corporation from 1992 until 1994 and President of FOX from 1989
until 1992. Mr. Chernin served as a Director of TV Guide, Inc. from 1999 until
July 2000 and has been a Director of Sky Global Networks, Inc. ("SGN") since
June 2001. Mr. Chernin has served on the Advisory Board of PUMA AG since 1999,
and as a Director of E*TRADE Group, Inc. since 1999.
David F. DeVoe has been a Director of the Company since 1991 and Senior
Executive Vice President and Chief Financial Officer of the Company since 1998.
Mr. DeVoe has been a Director, Chief Financial Officer and Finance Director of
News Corporation since 1990 and Senior Executive Vice President of News
Corporation since 1996. Mr. DeVoe was an Executive Vice President of News
Corporation from 1990 until 1996. Mr. DeVoe has been a Director of NAI since
1991 and a Senior Executive Vice President since January 1998. Mr. DeVoe served
as Executive Vice President of NAI from 1991 to 1998. Mr. DeVoe has been a
Director of SGN since June 2001, NDS Group plc since 1996, STAR since 1993 and
BSkyB since 1994.
Arthur M. Siskind has been a Director and Senior Executive Vice President
and General Counsel of the Company since 1998. Mr. Siskind has been a Director
and Group General Counsel of News Corporation since 1991 and a Senior Executive
Vice President of News Corporation since 1996. Mr. Siskind served as Executive
Vice President of News Corporation from 1991 until 1996. Mr. Siskind has been a
Director of NAI since 1991 and a Senior Executive Vice President since 1998. Mr.
Siskind served as an Executive Vice President of NAI from 1991 to 1998. Mr.
Siskind has been a Director of SGN since June 2001, NDS Group plc since 1996,
STAR since 1993 and BSkyB since 1992. Mr. Siskind has been a member of the Bar
of the State of New York since 1962.
James N. Gianopulos has been Chairman of FFE since July 2000. He shares the
position with Thomas E. Rothman. Mr. Gianopulos was President of Twentieth
Century Fox International from 1994 until July 2000 overseeing both the
Theatrical and the Home Entertainment units. Mr. Gianopulos was President of
International and Pay Television for Twentieth Century Fox from 1992 to 1994.
Mr. Gianopulos serves on the boards of the USC Entertainment Technology
Committee and KCRW for National Public Radio.
David Hill has served as Chairman and Chief Executive Officer of Fox Sports
Television Group since 1999. Mr. Hill served as Chairman and Chief Executive
Officer of FOX from 1997 until 1999 and served as President of Fox Sports, a
division of Fox Television, from 1993 to 1999. From 1996 until 1997, Mr. Hill
has served as Chief Operating Officer of Fox Television. In addition, Mr. Hill
has served as Chairman of Fox Sports Networks since 1996. From 1996 through
1997, Mr. Hill also served as the Chief Executive Officer of Fox Sports
Networks.
Thomas E. Rothman has been Chairman of FFE since July 2000. He shares the
position with James N. Gianopulos. Mr. Rothman previously served as President of
Twentieth Century Fox Film Group from January to August 2000, and was President
of Twentieth Century Fox Production from 1995 to 2000. In 1994, he was the
founder and first President of Fox Searchlight Pictures. Mr. Rothman also serves
as a member of the board of directors of the Sundance Institute.
Mitchell Stern has been Chairman and Chief Executive Officer of Fox
Television Stations since 1998. Mr. Stern was President and Chief Operating
Officer of Fox Television Stations, Inc. from 1993 to 1998.
23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class A Common Stock is listed and traded on the New York
Stock Exchange under the symbol "FOX". As of September 24, 2001, there were
approximately 838 holders of record of the Company's Class A Common Stock.
The following table sets forth, for the periods indicated, the high and
low closing sale prices per share of the Company's Class A Common Stock.
Fiscal 2000 High Low
----------- ---- ---
First Quarter $ 26.19 $ 21.13
Second Quarter $ 26.19 $ 20.44
Third Quarter $ 29.81 $ 22.25
Fourth Quarter $ 33.31 $ 23.44
Fiscal 2001 High Low
----------- ---- ---
First Quarter $ 34.00 $ 25.88
Second Quarter $ 25.25 $ 15.81
Third Quarter $ 24.15 $ 17.88
Fourth Quarter $ 29.28 $ 19.20
Fiscal 2002 High Low
----------- ---- ---
First Quarter (through September 24, 2001) $ 27.95 $ 18.26
The Company has never declared or paid cash dividends on its Class A
Common Stock and it is the Company's present intention to retain earnings to
finance the expansion of its business.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial data of the Company
presented below for the year ended June 30, 2001, 2000, and 1999 and as of June
30, 2001 and 2000 have been derived from, and are qualified by reference to, the
audited consolidated financial statements of the Company included elsewhere
herein. The selected historical consolidated financial data of the Company
presented below for the year ended June 30, 1998 and 1997 and as of June 30,
1999, 1998 and 1997 have been derived from our audited consolidated financial
statements, which are not included herein. The financial statements prior to
November 11, 1998 were presented on a combined basis. The financial statements
presented subsequent to November 11, 1998 are consolidated to reflect the
Reorganization (as defined in Note 1 of the Notes to the Consolidated Financial
Statements). For reporting purposes, the financial statements for all periods
are collectively referred to as Consolidated Financial Statements. The selected
consolidated financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and the related Notes thereto and the
other financial information included elsewhere herein.
24
YEAR ENDED JUNE 30,
--------------------------------------------------------
2001 (1) 2000 (2) 1999 1998 1997 (3)
-------- -------- --------- --------- --------
STATEMENT OF OPERATIONS DATA: (in millions, except per share data)
Total revenues $ 8,504 $ 8,589 $ 8,057 $ 7,023 $ 5,847
Operating income 652 656 716 663 320
Income (loss) before cumulative effect of
accounting change 206 145 205 176 30
Net income (loss) (288) 145 205 176 30
Basic and diluted earnings per share before
cumulative effect of accounting change $ 0.28 $ 0.20 $ 0.33 $ 0.32 $ 0.05
Basic and diluted earnings (loss) per share $ (0.40) $ 0.20 $ 0.33 $ 0.32 $ 0.05
Operating Income Before Depreciation and
Amortization /(4)/ $ 1,129 $ 1,096 $ 1,031 $ 906 $ 500
STATEMENT OF CASH FLOWS DATA:
Net cash provided by (used in) operating activities $ (153) $ (253) $ 753 $ 306 $ 117
Net cash provided by (used in) investing activities (176) (536) (615) (876) (278)
Net cash provided by (used in) financing activities 281 782 (118) 415 362
AS OF JUNE 30,
--------------------------------------------------------
2001 2000 (2) 1999 1998 1997 (3)
-------- -------- --------- --------- --------
BALANCE SHEET DATA: (in millions)
Cash and cash equivalents $ 66 $ 114 $ 121 $ 101 $ 256
Total assets 17,856 17,930 13,163 12,630 11,697
Due to affiliates of News Corporation 2,866 2,739 1,389 3,702 2,581
Borrowings 1,032 974 53 375 1,065
Shareholders' equity 7,968 8,246 6,668 3,941 3,767
FOOTNOTES:
(1) Fiscal 2001 Net income (loss) and Basic and diluted earnings (loss) per
share include the impact of the one-time, after-tax charge of $494 million
for the cumulative effect of accounting change.
(2) Fiscal 2000 includes the operating results of the Fox Sports Networks, LLC,
which was fully acquired in July 1999 ("the Fox Sports Networks
Acquisition").
(3) Fiscal 1997 includes the operating results of the ten television stations
acquired as part of the January 1997 acquisition of New World
Communications Group, Inc. ("the New World Acquisition").
(4) Operating Income Before Depreciation and Amortization is defined as
operating income (loss) before depreciation and amortization, which
includes the amortization of acquired intangible assets and cable
distribution investments. While Operating Income Before Depreciation and
Amortization is considered to be an appropriate measure for evaluating
operating performance by management, it should be considered in addition
to, not as a substitute for, operating income (loss), net income (loss),
cash flow and other measures of financial performance prepared in
accordance with GAAP and presented in the audited consolidated financial
statements included elsewhere in this filing.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The following discussion and analysis of the Fox Entertainment Group Inc.'s
(the "Company") financial condition and results of operations should be read in
conjunction with the Consolidated Financial Statements and the related Notes
thereto included 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 and
production related activities; and Cable Network Programming, which principally
consists of the production and licensing of programming distributed through
cable television systems and 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 Cable
Networks Ventures, Inc., Regency Television, The National Geographic Channels
and International Sports Programming Partners ("Fox Sports International"), are
included in Equity losses of affiliates and, accordingly, are not reported in
the segments set forth above. Additionally, through the Company's subsidiary,
Fox Sports Networks, the Company holds equity interests in cable-related
businesses (the "Fox Sports Networks' domestic" affiliates), including Regional
Programming Partners ("RPP"), National Sports Partners ("NSP"), National
Advertising Partners ("NAP"), Speedvision Network LLC ("Speedvision") and
Outdoor Life Network LLC ("Outdoor Life"), that are likewise reported in Equity
losses of affiliates and, accordingly, are not reported in the Cable Network
Programming segment.
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
26
television systems and DBS operators. The sale of advertising time is affected
by viewer demographics, program ratings and general market conditions. Adverse
changes in general market conditions for advertising may affect revenues.
Components of Expenses
Filmed Entertainment. Operating costs incurred by the Filmed Entertainment
segment include the amortization of capitalized production, overhead and
interest costs; participations and talent residuals; and exploitation costs,
primarily prints and advertising (through June 30, 2000). 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. These costs are included within Operating
expenses in the consolidated statement of operations.
Television Stations, Television Broadcast Network, Other Television
Businesses and Cable Network Programming Segments. Operating expenses of the
three television segments and the Cable Network Programming segment include
expenses related to acquiring programming and rights to programming. Operating
expenses also typically include production and technical expenses related to
operating the technical facilities of the broadcaster or cable network. Selling,
general and administrative expenses include all promotional expenses related to
improving the market visibility and awareness of the broadcaster or cable
network and sales commissions paid to the in-house sales force involved in the
sale of advertising as well as salaries, employee benefits, rent and other
routine overhead. Depreciation and amortization expense includes the
amortization of acquired intangible assets and cable distribution investments.
Industry Accounting Practices
Revenue Recognition. Revenues from theatrical distribution of feature films
are recognized on the dates of exhibition. Revenues from home video and DVD
distribution, together with related costs, are recognized in the period in which
the product is made widely available for sale by retailers. Revenues from
television distribution are recognized when the motion picture or television
program is made available to the licensee for broadcast. Television advertising
revenue is recognized as the commercials are aired. Subscriber fees received
from cable systems and DBS operators are recognized as revenue when services are
provided. Revenues from professional team ownership are recognized on a game by
game basis.
Operating Expenses. In accordance with generally accepted accounting
principles ("GAAP") and industry practice, the Company amortizes filmed
entertainment and television programming costs using the individual-film-
forecast method. Under the individual-film-forecast method, such programming
costs are amortized for each film or television program in the ratio that
revenue earned in the current period for such title bears to management's
estimate of the total revenues or operating profits to be realized from all
media and markets for such title. The costs of sports contracts for the
27
Television Broadcast Network segment are charged to expense based on the ratio
of each period's operating profit to estimated total operating profit of the
contract. Program rights for entertainment programs and sporting contracts for
the Television Stations and Cable Network Programming segments are amortized
over the license period. Management regularly reviews, and revises when
necessary, its total revenue estimates on a title-by-title and contract basis,
which may result in a change in the rate of amortization and/or a writedown of
the film or television asset to fair value.
At the beginning of fiscal 2001, the Company adopted SOP 00-2, which
established new accounting standards for producers and distributors of films and
supersedes SFAS No. 53. 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.
Use of Operating Income Before Depreciation and Amortization
Management believes that an appropriate measure for evaluating the
operating performance of the Company's business segments is Operating Income
Before Depreciation and Amortization. Operating Income Before Depreciation and
Amortization provides a basis to measure liquidity and operating performance of
each business segment. Although historical results, including Operating Income
Before Depreciation and Amortization, may not be indicative of future results
(as operating performance is highly contingent on many factors including
customer tastes and preferences), Operating Income Before Depreciation and
Amortization provides management a measure to analyze operating performance
against historical and competitors' data. Operating Income Before Depreciation
and Amortization eliminates the uneven effect across business segments of
considerable amounts of depreciation and amortization primarily resulting from
the value of intangible assets acquired in business combinations accounted for
by the purchase method of accounting. Operating Income Before Depreciation and
Amortization is defined as operating income (loss) plus depreciation and
amortization, which includes the amortization of acquired intangible assets and
cable distribution investments. The following comparative discussion of the
results of operations of the Company includes, among other factors, an analysis
of changes in business segment Operating Income Before Depreciation and
Amortization. However, Operating Income Before Depreciation and Amortization
should be considered in addition to, not as a substitute for, operating income
(loss), net income (loss), cash flow and other measures of financial performance
reported in accordance with GAAP. Operating Income Before Depreciation and
Amortization does not reflect cash available to fund requirements, and the items
excluded from Operating Income Before Depreciation and Amortization, such as
depreciation and amortization, are significant components in assessing the
Company's financial performance.
28
YEAR ENDED JUNE 30,
------------------------------------------------------------------------------------------------
(in millions)
OTHER DATA:
OPERATING INCOME BEFORE
DEPRECIATION AND
REVENUES OPERATING INCOME AMORTIZATION(1)
-------------------------------------------------------------------------------------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
------- ------- ------- ------ ------- ------- ------ ------- --------
Filmed Entertainment $ 3,585 $ 3,856 $ 4,416 $ 286 $ 128 $ 355 $ 350 $ 179 $ 396
Television Stations 1,550 1,635 1,469 499 585 557 683 774 731
Television Broadcast Network 1,823 1,751 1,743 (65) 29 (32) (45) 47 (16)
Other Television Businesses 91 97 118 (9) (11) (7) (8) (11) (3)
Cable Network Programming 1,455 1,250 311 (59) (75) (157) 149 107 (77)
------- ------- ------- ------ ------- ------- ------ ------- --------
Total $ 8,504 $ 8,589 $ 8,057 $ 652 $ 656 $ 716 $1,129 $ 1,096 $ 1,031
======= ======= ======= ====== ======= ======= ====== ======= ========
FOOTNOTE:
(1) Operating Income Before Depreciation and Amortization is defined as
operating income (loss) before depreciation and amortization, which
includes that amortization of acquired intangible assets and cable
distribution investments. While Operating Income Before Depreciation and
Amortization is considered to be an appropriate measure for evaluating
operating performance by management, it should be considered in addition
to, not as a substitute for, operating income (loss), net income (loss),
cash flow and other measures of financial performance prepared in
accordance with GAAP and presented in the audited consolidated financial
statements included elsewhere in this filing.
29
Results of Operations - Fiscal 2001 versus Fiscal 2000
The following table sets forth the Company's operating results, by segment,
for fiscal 2001 as compared to fiscal 2000.
Year Ended June 30,
-----------------------------------------------------------
2001 2000 Change
------------ ------------- -----------
(in millions)
Revenues:
Filmed Entertainment $ 3,585 $ 3,856 $ (271)
Television Stations 1,550 1,635 (85)
Television Broadcast Network 1,823 1,751 72
Other Television Businesses 91 97 (6)
Cable Network Programming 1,455 1,250 205
------------ ------------- -----------
Total revenues $ 8,504 $ 8,589 $ (85)
============ ============= ===========
Operating income (loss):
Filmed Entertainment $ 286 $ 128 $ 158
Television Stations 499 585 (86)
Television Broadcast Network (65) 29 (94)
Other Television Businesses (9) (11) 2
Cable Network Programming (59) (75) 16
------------ ------------- -----------
Total operating income (loss) 652 656 (4)
------------ ------------- -----------
Interest expense, net (345) (297) (48)
Equity losses of affiliates (92) (90) (2)
Minority interest in subsidiaries (14) (4) (10)
Other income (expense) 190 - 190
------------ ------------- -----------
Income before income taxes and cumulative effect of
accounting change 391 265 126
Income tax expense on a stand-alone basis (185) (120) (65)
------------ ------------- -----------
Income before cumulative effect of accounting change 206 145 61
Cumulative effect of accounting change, net of tax (494) - (494)
------------ ------------- -----------
Net income (loss) $ (288) $ 145 $ (433)
============ ============= ===========
Other data:
Operating Income Before Depreciation and Amortization/(1)/:
Filmed Entertainment $ 350 $ 179 $ 171
Television Stations 683 774 (91)
Television Broadcast Network (45) 47 (92)
Other Television Businesses (8) (11) 3
Cable Network Programming 149 107 42
------------ ------------- -----------
Total Operating Income Before Depreciation and Amortization $ 1,129 $ 1,096 $ 33
============ ============= ===========
30
Year Ended June 30,
----------------------------------------------------------------
2001 2000 Change
---------- ----------- --------------
(in millions)
Depreciation and amortization:
Filmed Entertainment 64 $ 51 $ 13
Television Stations 184 189 (5)
Television Broadcast Network 20 18 2
Other Television Businesses 1 - 1
Cable Network Programming 208 182 26
---------- -------- --------------
Total depreciation and amortization $ 477 $ 440 $ 37
========== ======== ==============
FOOTNOTE:
(1) Operating Income Before Depreciation and Amortization is defined as
operating income (loss) before depreciation and amortization, which
includes the amortization of acquired intangible assets and cable
distribution investments. While Operating Income Before Depreciation and
Amortization is considered to be an appropriate measure for evaluating
operating performance by management, it should be considered in addition
to, not as a substitute for, operating income (loss), net income (loss),
cash flow and other measures of financial performance prepared in
accordance with GAAP and presented in the audited consolidated financial
statements included elsewhere in this filing.
Overview of Company Results. For the fiscal year ended June 30, 2001,
revenues of $8,504 million declined slightly compared to the $8,589 million
reported for the prior year. Decreased revenues from the Filmed Entertainment
and Television Stations segments were partially offset by a 16% increase in
revenue at the Cable Network Programming segment. In aggregate, Operating,
Selling, general and administrative, and Depreciation and amortization expenses
were flat compared to the corresponding period of the prior year. Operating
expenses decreased approximately 3% compared to fiscal 2000 due to savings
resulting from the production of fewer new series as compared to the prior year.
Selling, general and administrative expenses increased approximately 9% from the
corresponding period of the prior year mainly due to an increase in bad debt
reserve and overhead expenses. Depreciation and amortization increased
approximately 8% due to increased amortization of cable distribution investments
at the Cable Network Programming segment. The Company reported operating income
of $652 million for the year ended June 30, 2001, as compared to $656 million
reported in fiscal 2000. Operating Income Before Depreciation and Amortization
of $1,129 million increased approximately 3% over the $1,096 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 $92 million increased $2 million from
fiscal 2000 due to decreased contributions from FFW resulting from the prior
year's one-time gain related to the Fox Kids Europe N.V.'s ("FKE") initial
public offering ("IPO") and the January 2001 launch of the National Geographic
Channel in the US, which offset improved results due to subscriber growth at the
Fox Sports Networks' domestic equity affiliates.
At the beginning of fiscal 2001, the Company adopted SOP 00-2, which
established new accounting standards for producers and distributors of films and
supersedes SFAS No. 53. 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 year ended June 30, 2001 was $288 million ($0.40 loss
per share) as compared to net income of $145 million ($0.20 per share) for the
corresponding period of the prior year. This decrease primarily relates to the
$494 million after-tax charge for the adoption of SOP 00-2
31
and a non-recurring charge related to the restructuring of the Company's
relationship with Healtheon/WebMD Corporation ("WebMD"). These charges were
partially offset by gains related to the sales of the Company's interest in The
Golf Channel and Home Team Sports.
Filmed Entertainment. For the twelve months ended June 30, 2001, Filmed
Entertainment's revenues decreased 7% compared to the corresponding period of
the prior year. Decreased revenues from international theatrical releases were
partially offset by increased revenues from domestic theatrical releases,
international free television revenues, and network revenues. Operating income
and Operating Income Before Depreciation and Amortization increased by 123% to
$286 million and by 96% to $350 million, respectively, for fiscal year 2001. In
the current year, theatrical and catalog releases overall performed better than
releases in the prior year. The current year's results included the strong
worldwide theatrical and video performance of X-Men, strong growth in video
catalog sales primarily due to growth in the DVD market, the broadcast network
release of Titanic and the solid performance of releases in international free
television markets. These results were partially offset by losses from
Monkeybone, The Legend of Bagger Vance and Say It Isn't So. At the beginning of
fiscal 2001, the Company adopted SOP 00-2 changing its film accounting policies;
accordingly operating income and Operating Income Before Depreciation and
Amortization were further offset by the releasing costs for Moulin Rouge, Dr.
Dolittle 2, Planet of the Apes and Kiss of the Dragon, which are now, under SOP
00-2, expensed as incurred. These results are compared to prior year results,
which included the poor performances of Brokedown Palace, Anna and the King,
Light It Up, Bartok and Titan AE.
At Twentieth Century Fox Television ("TCFTV"), for the twelve months
ended June 30, 2001, revenues increased approximately 2% primarily due to higher
network revenue from the license fee renegotiations for The Practice and
increased license fees for three additional returning series as compared to the
prior year. Operating results increased approximately 116% over the prior year
primarily due to greater gross profit from The Practice due to the renegotiated
license fees, increased gross profit from Buffy the Vampire Slayer due to
increased international home video and domestic syndication revenues and savings
resulting from the production of fewer new series as compared to the prior year.
Partially offsetting the increases were higher development expenses and
production expenses from a greater number of pilots in the current year.
Television. For the year ended June 30, 2001, combined revenues from
all television-related segments declined slightly to $3,464 million as compared
to the corresponding period of the preceding fiscal year of $3,483 million.
Operating income decreased by 30% and Operating Income Before Depreciation and
Amortization decreased by 22% for the year ended June 30, 2001. Operating
results were greatly affected by the negative impact of the weak advertising
market and increased programming, broadcasting and news costs at the Television
Stations, as well as a $71 million loss at FOX resulting from the short duration
and lower ratings of the Major League Baseball ("MLB") post-season divisional
playoffs and World Series in October 2000.
For fiscal year 2001, the Television Broadcast Network segment's
revenues increased 4% over the prior year primarily related to National
Association of Stock Car Auto Racing ("NASCAR") events, which is in its first
year of contract, and an increase in National Football League ("NFL")
advertising sales resulting from higher pricing. Operating income decreased $94
million to a loss of $65 million and Operating Income Before Depreciation and
Amortization decreased $92 million from the prior fiscal year. These losses were
primarily driven by the $71 million loss associated with the World Series that
was not telecast in the prior year and a ratings shortfall coupled with lower
sell-out for the MLB Divisional and Championship play-off series, all in October
2000. This loss was increased by higher NFL program rights costs and higher
advertising and promotional costs of off-air media awareness spending for the
Fall launch. These decreases were partially offset by lower prime time
programming costs due to the replacement of Party of Five and Beverly Hills
90210 with new
32
less expensive programming. In the current year, FOX prime time delivered a 2.5%
adults 18 - 49 ratings increase over the prior year due primarily to the
successful launch of series such as Boston Public, Dark Angel and Grounded for
Life.
For fiscal year 2001, the Fox Television Stations' revenues decreased
to $1,550 million from $1,635 million in the corresponding period of the prior
year. This 5% revenue decline primarily relates to the weak advertising market.
Also contributing to the decreased revenues were the competition from NBC's
broadcast of the Olympics, the delayed Fall launch and lower FOX prime time
ratings in the first half of the year. For the twelve months ended June 30,
2001, Fox Television Stations produced operating income and Operating Income
Before Depreciation and Amortization of $499 million and $683 million,
respectively, decreasing $86 million and $91 million, respectively, versus the
prior year. Increases in program amortization for new shows, including Drew
Carey and 3rd Rock From The Sun, local broadcast rights amortization for the
Boston Red Sox and the Texas Rangers and 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.
Cable Network Programming. The revenues of the Cable Network
Programming segment for the year ended June 30, 2001 as compared to the prior
year increased $205 million, operating losses of $59 million improved by $16
million and Operating Income Before Depreciation and Amortization improved by
$42 million to $149 million. 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
rights and production costs related to NASCAR on FX and the increased number of
National Basketball Association and National Hockey League ("NHL") games at the
Regional Sports Networks ("RSNs").
For the year ended June 30, 2001, revenues at FX and the RSNs grew 32%
and 8%, respectively. At FX, cable and DTH affiliate revenue increased 41%,
reflecting a 36% increase in average subscribers over the prior year and a 4%
increase in average rates per subscriber. As of June 30, 2001, FX reached over
66 million households, an increase of 18 million over the prior year. Despite
the difficult advertising sales market, FX advertising revenue increased 23%,
due to an increase in pricing and an increase in average audience. The RSNs'
revenue increases reflect an 11% increase in combined cable and DTH affiliate
revenue, excluding the impact of the newly acquired Midwest Sports Channel ("FSN
North"), resulting from recently completed affiliation agreements, whereby the
RSNs increased their average rate per subscriber and an increase in total
subscribers. While the number of professional sports events increased over the
prior year, the RSNs experienced a 5% decline in advertising revenues on
regional sports programming, excluding the impact of FSN North, primarily
resulting from the weak advertising market. Despite increased programming and
marketing costs supporting its original programming and the rights fees and
production costs associated with the inaugural season of NASCAR, FX's operating
income increased 54% from fiscal year 2000. Operating income for fiscal year
2001 decreased 141% at the RSNs primarily due to significant increases in
operating expenses resulting from an increased number of professional sports
events and higher average rights fees associated with new professional sports
rights agreements. Also contributing to the decreased operating income were
first year broadcast costs associated with the recently completed MLB cable
deal. Depreciation and amortization expenses for the year increased 10% from the
prior year, due to increases in amortization of cable distribution investments
at FX and the RSNs.
For the year ended June 30, 2001, revenues at Fox News increased 30%
versus fiscal 2000. This increase primarily resulted from a 30% increase in
cable affiliate revenue and a 48% increase in cable advertising sales. The
increase in cable affiliate revenue was attributable to an increase of 33% in
Fox News subscribers from 50.8 million to 67.7 million. Advertising revenue was
driven by higher pricing and improved ratings. Operating losses decreased 38%
over the prior year primarily
33
resulting from the revenue increase, the shutdown of the Fox Files Magazine
Unit, partially offset by increased programming expenses associated with
political coverage on the channel and additional costs associated with the re-
launch of FoxNews.com. Depreciation and amortization expenses for the period
increased 18% from the corresponding period in the prior year due to higher
amortization costs due to an increase in cable distribution investments.
Equity losses of affiliates. For the year ended June 30, 2001, Equity
losses of affiliates increased by $2 million to $92 million.
Year Ended June 30,
Ownership ----------------------------------------------------
Affiliate: Percentage 2001 2000 Change
-------------------------------------------- ---------- ------------ --------- --------
(in millions)
Fox Family Worldwide (FFW) 49.5% $ (37) $ 23 $ (60)
Fox Sports International 50% (22) (28) 6
Fox Sports Networks Domestic:
National Sports Partners (NSP) 50% (22) (17) (5)
Regional Programming Partners (RPP) 40% 2 (1) 3
Speedvision Channel 32% (9) (2) (7)
Ventures Arena 40% 12 (5) 17
Other Various 8 13 (5)
National Geographic Channel - Domestic 66.7% (22) (1) (21)
Fox Studios Australia 50% (12) (50) 38
Other Various 10 (22) 32
------------ --------- --------
Total equity losses of affiliates $ (92) $ (90) $ (2)
============ ========= ========
For the twelve months ended June 30, 2001, the Company's share of FFW's
net losses were flat as compared to the prior year, excluding the approximate
$60 million one-time gain resulting from the FKE IPO. Revenue at FFW increased
3% resulting from higher affiliate revenues at Fox Family Channel and FKE and
Digimon toy royalties. These revenue increases were partially offset by lower
advertising revenue at Fox Family Channel and Fox Kids Network, higher marketing
expenses due to rebranding of the Fox Family Channel and higher general and
administrative expenses due to expansion of Internet activities and FKE.
The Company's share of Fox Sports International's net losses decreased
$6 million to $22 million for fiscal 2001. Fox Sports World and Fox Sports World
Espanol experienced higher affiliate revenues due to increased subscribers. In
addition, LMC International's revenues increased due to the English Premier
League and Argentine Football. Partially offsetting these revenue increases were
decreased operating results at Fox Sports Latin America, particularly in
Argentina, due to the weak economic environment.
The Company's share of Fox Sports Networks' domestic equity affiliates'
net losses improved to $9 million during the year ended June 30, 2001. RPP
generated higher affiliate revenues across all of its RSNs from increased
subscribers and rates, which was partially offset by losses associated with the
continued investment in the Metro Channels. CTV Sports Net experienced higher
affiliate and advertising revenues, resulting from continued distribution growth
as well as a slight decrease in professional sports rights, production and
marketing expenses. NSP experienced decreased revenues due to the soft
advertising market and higher programming and production expenses, while NAP had
increased commission revenues. Deferred compensation expenses associated with a
management equity appreciation rights plan at Speedvision and Outdoor Life more
than offset the increased affiliate revenues generated at each network resulting
from distribution gains over the prior year.
34
The year ended June 30, 2001 included $22 million of equity losses
related to the January 2001 launch of The National Geographic Channel in the US.
National Geographic, which has 12 million subscribers as of June 30, 2001,
incurred considerable studio, programming and marketing costs during the year,
in addition to significant amortization charges related to long-term cable
distribution investments with major multi-system operators.
Interest expense, net. Net interest expense increased $48 million as
compared to prior year. This increase relates to the higher intercompany
balances with affiliates as a result of cash advances and external balances
associated with film production financing.
Minority interest in subsidiaries. Minority interest in subsidiaries
increased $10 million to $14 million in fiscal 2001. This increase is related to
distributions paid on the preferred interests issued in relation to the New
Millennium transaction entered into in the third quarter of fiscal 2001. (See
"New Millennium" in Liquidity and Capital Resources.)
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 transactions, 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, as 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 $152 million as of June 30, 2001,
with a market value of approximately $192 million. Such deferred revenue will be
recognized over the remaining nine-year term as such media services are
delivered under an agreed annual commitment schedule. 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 consolidated statement of operations.
In February 2001, Fox Sports Networks sold its approximate 34% limited
partnership interest in Home Team Sports to Comcast Corporation ("Comcast"), in
a non-cash exchange for Comcast entering into new or amended cable carriage
arrangements valued at approximately $46 million 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 consolidated statement of operations.
In June 2001, the Company sold its approximate 31% interest in The Golf
Channel to Comcast for total consideration of approximately $375 million, of
which $365 million was received in cash during fiscal 2001. The Company has
recorded a gain of approximately $311 million related to this transaction, which
is reflected in Other income (expense) in the consolidated statement of
operations.
In June 2001, the Company completed the previously announced sale of
its entire interest in THN for cash of approximately $155 million, of which $100
million was paid at closing and $55 million is due one year from closing, and a
10% carried interest in the equity of the acquirer with a minimum guarantee
value of $100 million in December 2003. In accordance with SFAS No. 94,
"Consolidation of All Majority-Owned Subsidiaries," and Emerging Issues Task
Force No. ("EITF") 87-11, "Allocation
35
of Purchase Price to Assets to be Sold," for the period from the acquisition of
THN (December 29, 2000) until the Closing Date of the sale, control of THN was
deemed to be temporary and therefore, its results of operations have not been
consolidated in the Company's statement of operations for the six months ended
June 30, 2001. The Company recorded a loss of approximately $15 million from the
sale, which is reflected in Other income (expense) in the consolidated statement
of operations.
Income tax expense on a stand-alone basis. Income tax expense for the
year ended June 30, 2001 increased to $185 million from $120 million in the
corresponding period of the preceding year. The effective tax rate for the
period increased to 47% compared to 45% in the corresponding period of the
preceding year. The increase in the effective rate resulted from an increase in
nondeductible items from the corresponding period in the prior year.
36
Results of Oprations - Fiscal 2000 versus Fiscal 1999
The folloing table sets forth the Company's operating results, by
segment, for fiscal 2000 as compared to fiscal 1999.
Year Ended June 30,
--------------------------------------------------
2000 1999 Change
------------- ----------- -----------
(in millions)
Revenues:
Filmed Entertainment $ 3,856 $ 4,416 $ (560)
Television Stations 1,635 1,469 166
Television Broadcast Network 1,751 1,743 8
Other Television Businesses 97 118 (21)
Cable Network Programming 1,250 311 939
------------- ----------- -----------
Total revenues $ 8,589 $ 8,057 $ 532
============= =========== ===========
Operating income (loss):
Filmed Entertainment $ 128 $ 355 $ (227)
Television Stations 585 557 28
Television Broadcast Network 29 (32) 61
Other Television Businesses (11) (7) (4)
Cable Network Programming (75) (157) 82
------------- ----------- -----------
Total operating income (loss) 656 716 (60)
------------- ----------- -----------
Interest expense, net (297) (223) (74)
Equity losses of affiliates (90) (146) 56
Minority interest in subsidiaries (4) - (4)
------------- ----------- -----------
Income before income taxes 265 347 (82)
Income tax expense on a stand-alone basis (120) (142) 22
------------- ----------- -----------
Net income (loss) $ 145 $ 205 $ (60)
============= =========== ===========
Other data:
Operating Income Before Depreciation and Amortization /(1)/:
Filmed Entertainment $ 179 $ 396 $ (217)
Television Stations 774 731 43
Television Broadcast Network 47 (16) 63
Other Television Businesses (11) (3) (8)
Cable Network Programming 107 (77) 184
------------- ----------- -----------
Total Operating Income Before Depreciation and Amortization $ 1,096 $ 1,031 $ 65
============= =========== ===========
Depreciation and amortization:
Filmed Entertainment $ 51 $ 41 $ 10
Television Stations 189 174 15
Television Broadcast Network 18 16 2
Other Television Businesses - 4 (4)
Cable Network Programming 182 80 102
------------- ----------- -----------
Total depreciation and amortization $ 440 $ 315 $ 125
============= =========== ===========
FOOTNOTE:
/(1)/ Operating Income Before Depreciation and Amortization is defined as
operating income (loss) before depreciation and amortization, which
includes the amortization of acquired intangible assets and cable
distribution investments. While Operating Income Before Depreciation and
Amortization is considered to be an appropriate measure for operating
performance by management, it should be considered in addition to, not as
a substitute for, operating income (loss), net income (loss), cash flow
and other measures of financial performance prepared in accordance with
GAAP and presented in the audited consolidated financial statements
included elsewhere in this filing.
37
Overview of Company Results. Fiscal year 2000 revenues of $8.6 billion
were 7% above the $8.1 billion reported a year ago. The Company reported
operating income of $656 million for fiscal 2000, an 8% decrease from the $716
million reported in the prior year. Operating Income Before Depreciation and
Amortization of $1,096 million increased 6% over the $1,031 million reported in
the prior year. These results reflect increased operating income and Operating
Income Before Depreciation and Amortization at the Company's Television Stations
and Cable Network Programming businesses which were partially offset by lower
Filmed Entertainment operating income and Operating Income Before Depreciation
and Amortization.
Equity losses of affiliates of $90 million improved $56 million over
the prior year. This improvement was primarily due to the $60 million gain
related to FKE's IPO in November 1999, which was partially offset by a $39
million write down relating to the Company's investment in Fox Studios
Australia.
Net income was $145 million ($0.20 per share) as compared to prior year
results of $205 million ($0.33 per share). The weighted average number of common
shares outstanding for the year of 722 million reflects the full weighting of
the shares issued in connection with the Company's IPO in November 1998 and the
issuance of 51.8 million shares to News Corporation in connection with the July
1999 acquisition of substantially all of Liberty Media Corporation's
("Liberty") 50% interest in Fox Sports Networks.
Filmed Entertainment. For the year, Filmed Entertainment reported
revenues of $3.9 billion, which is a decline of $560 million from the prior
year. During fiscal 2000, the Company released 20 new feature films as compared
to 22 films released during fiscal 1999. The prior year included the
contributions from the foreign theatrical and domestic video sales of Titanic,
one of the most successful films of all time, and the strong theatrical
performances of There's Something About Mary and Dr. Dolittle. The current year
contained disappointing results from the domestic theatrical releases of Anna
and the King, Brokedown Palace and Titan A.E. Partially offsetting these
disappointing results were contributions from domestic and international pay
television and free television licensing agreements covering available film and
television series and the domestic theatrical performance of Big Momma's House.
For fiscal 2000, operating expenses increased primarily as a result of
the increase in the amortization of film costs and in the number of full season
series produced by TCFTV and related entities for the Networks. In addition,
operating expenses increased due to renegotiated participation agreements.
For fiscal 2000, operating income decreased approximately 64% to $128
million. Operating losses from Titan A.E., Anna and the King and Brokedown
Palace and direct costs of $12 million relating to the shut-down of the
Twentieth Century Fox Animation Studios facility in Phoenix, Arizona contributed
to these unfavorable results. Partially offsetting these unfavorable results
were the strong performance of the domestic DVD release of Independence Day and
improved contributions from the domestic and international pay television
agreements covering available films and television series, as mentioned above.
For fiscal 2000, Operating Income Before Depreciation and Amortization
decreased approximately 55% to $179 million representing a decrease in operating
performance as a result of the factors described above. The increase in
depreciation and amortization of $10 million relates to depreciation on new
facilities at the Fox Studios Lot in Los Angeles, California.
38
Television Segments. For fiscal 2000, combined revenues of the
television related segments increased 5% from prior year, operating income
increased 16% and Operating Income Before Depreciation and Amortization
increased 14%. In the Television Stations segment, strong revenue increases from
a robust advertising market and growth in market share contributed to these
gains, which were achieved despite the absence of the World Series and the Super
Bowl, both of which were broadcast on the Fox Television Stations during the
prior fiscal year. The Fox Television Stations experienced continued revenue
growth of 11% due to increases in market share of 0.2 percentage points to
19.6%, and increases in gross advertising expenditures in the stations' market
for fiscal 2000. Operating expenses of the Fox Television Stations increased
primarily as a result of higher program costs for newly acquired series, as well
as the broadcast of additional MLB games in New York and Boston resulting in
increased operating income of 5% to $585 million. In the Television Broadcast
Network segment, higher prime time advertising sales combined with revenue from
FOX's new economic arrangement with its affiliates, were partially offset by the
effect of weaker ratings and by higher prime time programming costs reflecting
series cancellations. The increase in operating income primarily relates to the
absence of the NHL broadcasts and the World Series, which generated losses in
the prior year and higher prime time net advertising sales due to increases in
pricing. Partially offsetting these improvements were higher abandonment costs
from cancelled shows and higher license fees from returning series.
Cable Network Programming. In connection with the acquisition of the
remaining 50% of Fox Sports Networks, the Company changed the composition of
this segment. This segment now includes the Fox Sports Networks (including 12
owned and operated RSNs and FX) and Fox News, as well as the Los Angeles Dodgers
and other cable-related properties, which were previously included in the Other
Television Businesses segment. Prior year amounts reflect the new segment
composition. The revenues reported during fiscal 2000 reflect an increase of
approximately $939 million, an increase in operating income of $82 million and a
$184 million increase in Operating Income Before Depreciation and Amortization
compared to fiscal 1999. These significant increases relate primarily to the
first time inclusion of the consolidated results of Fox Sports Networks, as well
as narrowing losses at Fox News. At Fox Sports Networks, increased subscriber
rates from recently completed affiliation agreements, combined with a growing
subscriber base, drove affiliate revenues higher across all RSNs and at FX.
These increased revenues were partially offset by increased costs associated
with new original programming and launching regional sports news shows. At Fox
News, improved results were driven by significant gains in advertising revenues
from increased national advertising sales volume and pricing, as well as growth
in subscribers. Fox News continues to expand its distribution and currently has
approximately 51 million subscribers, up from 41 million in the prior year.
Interest expense, net. For fiscal 2000, Interest expense, net increased
approximately 33% to $297 million from $223 million in fiscal 1999, which was
primarily due to the interest related to the debt assumed with the purchase of
substantially all of Liberty's 50% interest in Fox Sports Networks.
Equity losses of affiliates. For fiscal 2000, Equity losses of
affiliates improved approximately 38% to $90 million as compared to Equity
losses of affiliates of $146 million in fiscal 1999. These reduced losses
resulted primarily from the $60 million gain related to FKE's IPO in November
1999. Additionally, losses declined at Fox Sports International primarily due to
the increased distribution of the channels. These improvements were partially
offset by a $39 million write-down at Fox Studios Australia and losses at THN
and National Geographic International channel, both of which were launched
during fiscal 2000.
Income tax expense on a stand-alone basis. Income tax expense consists
of federal, state and foreign taxes on earnings. For fiscal 2000, income tax
expense decreased to $120 million from $142 million primarily reflecting the
decrease in income before income taxes. The effective income
39
tax rate for fiscal 2000 was 45% compared with 41% in the prior year. The higher
effective tax rate is primarily due to an increase in non-deductible intangible
amortization related to the Fox Sports Networks acquisition.
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 year ended June
30, 2001 were $153 million as compared to $253 million in the preceding fiscal
year. The decrease in cash used 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 $176 million and $536
million during the year ended June 30, 2001 and 2000, respectively. The current
year included the acquisition of FSN North and New Millennium Investors, LLC
("New Millennium"), investments in the National Geographic Channels, Regency
Television, NSP, THN and cable distribution investments by Fox News and FX,
partially offset by the proceeds from the sales of The Golf Channel and Home
Team Sports.
Net cash flows provided by financing activities were $281 million and
$782 million during the fiscal years 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 fiscal year 2001, certain of the Company's
subsidiaries were released as guarantors of these debt obligations. The
principal amount of indebtedness outstanding under such debt instruments as of
June 30, 2001 and 2000 was approximately $9.3 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
40
existing debt, resulting in the acquisition of Filmed entertainment costs of
$650 million and the 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 or acquisition costs of all eligible films, as defined, to be
produced or acquired by Twentieth Century Fox Film Corporation ("TCF"), a
subsidiary of the Company, between 2001 and 2004. 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") to a third party, which is presented on the consolidated
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.
Fox Sports International
The Company and Liberty/TINTA LLC ("Liberty/TINTA"), a subsidiary of
Liberty Media Corporation ("Liberty"), each own 50% of Fox Sports International.
On July 15, 2001, under a preexisting option Liberty exercised its right to
cause Liberty/TINTA to sell its 50% interest in Fox Sports International held by
Liberty/TINTA to News Corporation in exchange for 3,633,866 American Depositary
Receipts ("ADRs") of News Corporation (representing 14,535,464 preferred
shares), subject to adjustment for dividends paid since July 1999. Under the
terms of this transaction, News Corporation will transfer the acquired interest
in Fox Sports International to the Company for approximately 3,632,000 shares of
Class A common stock. The transaction is expected to close in the second quarter
of fiscal 2002.
Chris-Craft
In July 2001, News Corporation acquired Chris-Craft Industries, Inc.,
BHC Communications, Inc. and United Television, Inc (collectively,
"Chris-Craft"). Total consideration paid by News Corporation amounted to US$2.03
billion in cash and the issuance of 68,854,209 preferred ADRs, representing
275,416,836 News Corporation preferred limited voting ordinary shares. News
Corporation subsequently transferred the acquired business (excluding
approximately US$1.7 billion in cash) to the Company, for an exchange in which
the Company issued to News Corporation 122,244,272 Class A common shares of the
Company, increasing News Corporation's equity interest in the Company from
82.76% to approximately 85.25%. The Company then assigned the licenses issued by
the Federal Communications Commission ("FCC") for the acquired stations to its
indirect subsidiary, Fox Television Stations, Inc., which became the licensee
and controls the operations of the acquired stations. In July 2001, News
Corporation entered into a binding agreement to swap KTVX-TV in Salt Lake City
and KMOL-TV in San Antonio, to Clear Channel Communications, Inc. in exchange
for WFTC-TV in Minneapolis (the "Clear Channel swap"). In addition, in August
2001, News Corporation entered into an Asset Exchange Agreement to swap KBHK-TV
in San Francisco, recently acquired in the Chris-Craft transaction, to Viacom,
Inc. ("Viacom") in exchange for WDCA-TV in Washington, DC and KTXH-TV in Houston
(the "Viacom swap"). Both the Clear Channel and the Viacom swaps are subject to
FCC approval.
41
WebMD
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, as 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 $152 million as of June 30, 2001,
with a market value of approximately $192 million. Such deferred revenue will be
recognized over the remaining nine-year term as such media services are
delivered under an agreed annual commitment schedule. 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 consolidated statement of operations.
In June 2001, the Company completed the previously announced sale of
its entire interest in THN for cash of approximately $155 million, of which $100
million was paid at closing and $55 million is due one year from Closing, and a
10% carried interest in the equity of the acquirer with a minimum guarantee
value of $100 million in December 2003. In accordance with SFAS No. 94 and EITF
87-11 for the period from the acquisition of THN (December 29, 2000) until the
Closing Date of the sale, control of THN was deemed to be temporary and
therefore, its results of operations have not been consolidated in the Company's
statement of operations for the six months ended June 30, 2001. The Company
recorded a loss of approximately $15 million from the sale, which is reflected
in Other income (expense) in the consolidated statement of operations.
FFW
In December 2000, Haim Saban, Chairman and Chief Executive Officer of
FFW, exercised his right to require FOX to purchase all of the Class B Common
Stock of FFW held by Mr. Saban, other former stockholders of Saban
Entertainment, Inc. and their transferees ("the Saban Interest"). In January
2001, a subsidiary of FOX exercised its option to purchase the Saban Interest.
In July 2001, the Company, Haim Saban and the other stockholders of FFW and
subordinated debtholders reached a definitive agreement to sell FFW to The Walt
Disney Company ("Disney") for total consideration of approximately $5.3 billion
(including the assumption of certain debt). FOX has entered into an arm's-length
programming arrangement with Disney to allow the continued broadcast for the
2001-2002 broadcast season of certain FFW programming on Fox affiliates through
the Fox Kids Network following closing of the FFW sale to Disney. This
transaction is expected to close during the second quarter of fiscal 2002.
Fox News
AT&T, through a predecessor company, holds a warrant to purchase (the
"Warrant") a 20% non-voting common equity interest in Fox News exercisable until
January 2, 2002 (the "Exercise Date"). The Warrant is exercisable at an exercise
price of $200 million plus interest accrued monthly from May 1, 1997 through the
Exercise Date (the exercise price is approximately $280 million as of June 30,
2001). On October 1, 2003, subject to certain conditions, AT&T will have the
right to put its
42
equity interest in Fox News to the Company in return for, at the Company's sole
option, either (a) cash, or (b) an equivalent amount in News Corporation
preferred shares. The amount of cash or preferred shares will be calculated
based on the appropriate fair market value of the 20% equity interest in Fox
News determined by mutual agreement of the parties. In the event that the
parties are unable to agree upon a price, the price will be determined by
valuation procedures using an independent investment banker.
Other
In February 2001, Fox Sports Networks, 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 Fox Sports Networks, Viacom and Comcast and a
Purchase Agreement between Viacom and Comcast for approximately $40 million. The
excess of the net purchase price over the net assets acquired, of approximately
$33 million is reflected within Intangible assets, net on the consolidated
balance sheet.
In February 2001, Fox Sports Networks sold its approximate 34% limited
partnership interest in Home Team Sports to Comcast, in a non-cash exchange for
Comcast entering into new or amended cable carriage arrangements valued at
approximately $46 million 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 related to this transaction, which is
reflected within Other income (expense) in the consolidated statement of
operations.
In June 2001, the Company sold its approximate 31% interest in The Golf
Channel to Comcast for total consideration of approximately $375 million, of
which $365 million was received in cash during fiscal 2001. The Company has
recorded a gain of approximately $311 million related to this transaction, which
is reflected in Other income (expense) in the consolidated statement of
operations.
In March 2001, certain investors in Speedvision and Outdoor Life
exercised their rights to require subsidiaries of the Company to purchase all of
the interests held by them in Speedvision and Outdoor Life. The aggregate
ownership percentage of the investors was approximately 53.44% and 50.23% of
Speedvision and Outdoor Life, respectively. Based on independent fair value
determinations of these interests, on July 25, 2001, the Company paid total
consideration of approximately $401 million and approximately $309 million to
purchase the investors' interests in Speedvision and Outdoor Life, respectively,
which resulted in the Company owning approximately 85.46% of Speedvision and
approximately 83.18% of Outdoor Life. The remaining interests in Speedvision and
Outdoor Life are owned by Comcast. Shortly following the exercise of the
Speedvision and Outdoor Life "put" options described above, the Company entered
into a Purchase Agreement with Comcast pursuant to which the Company will sell
the Company's approximate 83.18% interest in Outdoor Life to Comcast. Pursuant
to the Purchase Agreement, Comcast elected to call the Company's interest in
Outdoor Life on August 23, 2001 for approximately $512 million. The transaction
is expected to close during the second quarter of fiscal 2002. As a result of
the Company's purchase of the additional 53.44% of Speedvision as described
above, the Company will consolidate the results of Speedvision subsequent to
July 25, 2001.
Intercompany Financing
The Company is funded primarily by loans from other subsidiaries of
News Corporation. Interest on outstanding intercompany balances has been charged
at commercial market rates not to exceed News Corporation's average cost of
borrowing as set forth in the Master Intercompany Agreement between the Company
and News Corporation. As of June 30, 2001, the intercompany
43
interest rate approximated 8%. The Company anticipates that cash from future
operations will be sufficient to meet its working capital requirements.
Commitments
Under the Company's eight year contract with the NFL, which contains
certain termination clauses, remaining future minimum payments for program
rights to broadcast certain football games aggregated approximately $3.3 billion
as of June 30, 2001, and are payable over the remaining five year term.
The Company's eight year contract with NASCAR, which contains certain
termination clauses, gives the Company rights to broadcast certain NASCAR races.
This agreement commenced February 2001 with the Daytona 500. The remaining
future minimum payments for program rights to broadcast certain NASCAR events
aggregated approximately $1.6 billion as of June 30, 2001, and are payable over
the remaining seven year term.
The Company's minimum commitments and guarantees under certain other
programming, production, licensing, artists, athletes and other agreements
aggregated approximately $8.0 billion as of June 30, 2001, which are payable
principally over a five year period. The Company's various sports contracts'
impact on the Company's results over the remaining contract term is dependent
upon a number of factors, including strength of advertising markets,
effectiveness of marketing efforts and the size of viewer audience.
Recent Accounting Pronouncements
At the beginning of fiscal 2001, the Company adopted SOP 00-2, which
established new accounting standards for producers and distributors of films and
supersedes SFAS No. 53. SOP 00-2 establishes new accounting standards for, among
other things, marketing and development costs. The Company recorded a one-time,
non-cash charge of $494 million, net of $302 million tax, as a cumulative effect
of accounting change as of July 1, 2000. This charge primarily reflects the
write-off of marketing and certain development costs, which were previously
capitalized under SFAS No. 53 and are no longer capitalizable under SOP 00-2.
Subsequent to the adoption of SOP 00-2, the Company's accounting policy is to
expense marketing and certain development costs as incurred.
In June 2000, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 139, which rescinds SFAS No. 53 and requires public companies to follow
the guidance provided by SOP 00-2.
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 year ended June 30, 2001.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all
business combinations be accounted for by the purchase method and that acquired
intangible assets be recognized apart from goodwill if they meet specific
criteria. SFAS No. 141 supersedes APB Opinion No. 16 and is effective for all
business combinations initiated after June 30, 2001. SFAS No. 142 eliminates the
requirement to amortize goodwill and intangible assets that have indefinite
useful lives. However, it requires that
44
such assets be tested for impairment at least annually using guidance
specifically provided in this statement. SFAS No. 142 supersedes APB Opinion No.
17 and will be adopted by the Company on July 1, 2002. The Company is in the
process of evaluating the impact of adopting these new standards on its
consolidated statement of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
45
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
FOX ENTERTAINMENT GROUP, INC.
Report of Independent Public Accountants....................................................... 47
Consolidated Balance Sheets as of June 30, 2001 and 2000....................................... 48
Consolidated Statements of Operations for the year ended
June 30, 2001, 2000 and 1999................................................................. 49
Consolidated Statements of Cash Flows for the year ended
June 30, 2001, 2000 and 1999................................................................. 50
Consolidated Statements of Shareholders' Equity for the year ended
June 30, 2001, 2000 and 1999................................................................. 51
Notes to the Consolidated Financial Statements................................................. 52
FOX FAMILY WORLDWIDE, INC.
Report of Independent Public Accountants....................................................... 76
Consolidated Balance Sheets as of June 30, 2000 and 2001....................................... 77
Consolidated Statements of Operations for each of the three
years in the period ended June 30, 2001...................................................... 78
Consolidated Statements of Stockholders' Equity (Deficit) and
Comprehensive Income (Loss) for each of the three years
in the period ended June 30, 2001............................................................ 79
Consolidated Statements of Cash Flows for each of the
three years in the period ended June 30, 2001................................................ 80
Notes to the Consolidated Financial Statements................................................. 82
Financial Statement Schedules:
Report of Independent Public Accountants....................................................... 105
Schedule I: Condensed Financial Information of the Registrant.................................. 106
Schedule II: Valuation and Qualifying Accounts and Reserves.................................... 110
46
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Fox Entertainment Group, Inc.
We have audited the accompanying consolidated balance sheets of Fox
Entertainment Group, Inc., a Delaware corporation, and Subsidiaries (the
"Company"), as of June 30, 2001 and 2000, and the related consolidated
statements of operations, cash flows and shareholders' equity for each of the
three years in the period ended June 30, 2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Fox Entertainment
Group, Inc. and Subsidiaries as of June 30, 2001 and 2000, and the results of
its operations and its cash flows for each of the three years in the period
ended June 30, 2001, in conformity with accounting principles generally accepted
in the United States.
As explained in Note 2 to the consolidated financial statements, effective July
1, 2000, the Company changed its method of accounting for filmed entertainment
costs.
ARTHUR ANDERSEN LLP
Los Angeles, California
August 16, 2001
except for Note 19 b, as to
which the date is August 23, 2001
47
FOX ENTERTAINMENT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30,
(in millions except share and per share amounts)
2001 2000
-------- --------
ASSETS
Cash and cash equivalents $ 66 $ 114
Accounts receivable, net 2,504 2,191
Filmed entertainment and television programming costs, net 3,703 3,438
Investments in equity affiliates 1,493 1,510
Property and equipment, net 1,454 1,478
Intangible assets, net 7,647 7,836
Other assets and investments 989 1,363
-------- --------
Total assets $ 17,856 $ 17,930
======== ========
LIABILITIES
Accounts payable and accrued liabilities $ 1,705 $ 1,946
Participations, residuals and royalties payable 890 1,209
Television programming rights payable 1,133 903
Deferred revenue 553 688
Borrowings 1,032 974
Deferred income taxes 706 1,058
Other liabilities 142 147
-------- --------
6,161 6,925
Due to affiliates of News Corporation 2,866 2,739
-------- --------
Total liabilities 9,027 9,664
-------- --------
Minority interest in subsidiaries 861 20
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value per share; 100,000,000 shares authorized; 0
shares issued and outstanding as of June 30, 2001 and 2000 - -
Class A Common stock, $.01 par value per share; 1,000,000,000 authorized;
176,559,834 issued and outstanding as of June 30, 2001 and 2000 2 2
Class B Common stock, $.01 par value per share; 650,000,000 authorized;
547,500,000 issued and outstanding as of June 30, 2001 and 2000 6 6
Paid-in capital 8,023 8,023
Retained (deficit) earnings and accumulated other comprehensive income (63) 215
-------- --------
Total shareholders' equity 7,968 8,246
-------- --------
Total liabilities and shareholders' equity $ 17,856 $ 17,930
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
48
FOX ENTERTAINMENT GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30,
(in millions except per share amounts)
2001 2000 1999
------- ------- -------
Revenues $ 8,504 $ 8,589 $ 8,057
Expenses:
Operating 6,274 6,482 6,220
Selling, general and administrative 1,101 1,011 806
Depreciation and amortization 477 440 315
------- ------- -------
Operating income 652 656 716
Other Expense:
Interest expense, net (345) (297) (223)
Equity losses of affiliates (92) (90) (146)
Minority interest in subsidiaries (14) (4) -
Other income (expense) 190 - -
------- ------- -------
Income before income taxes and cumulative effect of accounting change 391 265 347
Income tax expense on a stand-alone basis (185) (120) (142)
------- ------- -------
Income before cumulative effect of accounting change 206 145 205
Cumulative effect of accounting change, net of tax (494) - -
------- ------- -------
Net income (loss) $ (288) $ 145 $ 205
======= ======= =======
Basic and diluted earnings per share before cumulative effect of accounting change $ 0.28 $ 0.20 $ 0.33
Basic and diluted cumulative effect of accounting change, net of tax, per share (0.68) - -
------- ------- -------
Basic and diluted earnings (loss) per share $ (0.40) $ 0.20 $ 0.33
======= ======= =======
Basic and diluted weighted average number of common equivalent shares outstanding 724 722 626
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
49
FOX ENTERTAINMENT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30,
(in millions)
2001 2000 1999
------ ------- -------
Operating activities:
Net income (loss) $ (288) $ 145 $ 205
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
Depreciation and amortization 477 440 315
Cumulative effect of accounting change, net of tax 494 - -
Equity losses of affiliates and distributions 137 90 146
Other (income) expense (190) - -
Change in operating assets and liabilities, net of acquisitions:
Accounts receivable and other assets (268) (310) 161
Filmed entertainment and television programming costs, net (507) (786) (513)
Accounts payable and accrued liabilities 59 100 252
Participations, residuals and royalties payable and other liabilities (67) 68 187
------ ------- -------
Net cash (used in) provided by operating activities (153) (253) 753
------ ------- -------
Investing activities:
Acquisitions, net of cash acquired (85) 63 -
Proceeds from sale of other assets and investments 465 - -
Investments in equity affiliates, net of acquisitions (177) (174) (140)
Other investments (234) (178) (168)
Purchases of property and equipment, net of acquisitions (145) (247) (307)
------ ------- -------
Net cash used in investing activities (176) (536) (615)
------ ------- -------
Financing activities:
Borrowings 26 197 110
Repayment of borrowings (727) (784) (432)
Increase in minority interest in subsidiaries 841 - -
Proceeds from Initial Public Offering - - 2,689
Advances from (repayments to) affiliates of News Corporation, net 141 1,369 (2,485)
------ ------- -------
Net cash provided by (used in) financing activities 281 782 (118)
------ ------- -------
Net (decrease) increase in cash and cash equivalents (48) (7) 20
Cash and cash equivalents, beginning of year 114 121 101
------ ------- -------
Cash and cash equivalents, end of year $ 66 $ 114 $ 121
====== ======= =======
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 consolidated financial
statements.
50
FOX ENTERTAINMENT GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30,
(in millions)
ACCUMULATED
RETAINED OTHER
PREFERRED COMMON PAID-IN EARNINGS COMPREHENSIVE
STOCK STOCK CAPITAL (DEFICIT) INCOME (LOSS) TOTAL
--------- ------ -------- --------- ------------- ---------
BALANCE AS OF JUNE 30, 1998 $ 1 $ - $ 3,132 $ 812 $ (4) $ 3,941
Redemption of preferred stock in
connection with Reorganization (1) - - - - (1)
Issuance of Class A Common
Stock - 1 2,688 - - 2,689
Conversion of Class B Common
Stock in connection with
Recapitalization - 6 (6) - - -
Elimination of certain
intercompany debt and payment
of dividends - - 785 (948) - (163)
Comprehensive income (loss):
Net income (loss) - - - 205 - 205
Foreign currency translation
adjustments - - - - (3) (3)
------- ------ -------- ------- -------- ---------
Total comprehensive income
(loss) - - - 205 (3) 202
------- ------ -------- ------- -------- ---------
BALANCE AS OF JUNE 30, 1999 - 7 6,599 69 (7) 6,668
Issuance of Class A Common
Stock - 1 1,424 - - 1,425
Comprehensive income (loss):
Net income (loss) - - - 145 - 145
Foreign currency translation
adjustments - - - - 8 8
------- ------ -------- ------- -------- ---------
Total comprehensive income (loss) - - - 145 8 153
------- ------ -------- ------- -------- ---------
BALANCE AS OF JUNE 30, 2000 - 8 8,023 214 1 8,246
Comprehensive income (loss):
Net income (loss) - - - (288) - (288)
Foreign currency translation
adjustments - - - - 10 10
------- ------ -------- ------- -------- ---------
Total comprehensive income (loss) - - - (288) 10 (278)
------- ------ -------- ------- -------- ---------
BALANCE AS OF JUNE 30, 2001 $ - $ 8 $ 8,023 $ (74) $ 11 $ 7,968
======= ====== ======== ======= ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
51
FOX ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Fox Entertainment Group, Inc. and its subsidiaries (the "Company") is a
diversified entertainment company with operations in five business segments.
These business segments are: 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 was incorporated
in Delaware in May 1985 as Twentieth Holdings Corporation. In 1998, the Company
changed its corporate name to Fox Entertainment Group, Inc.
Prior to the transactions referred to in Note 3, The News Corporation Limited
and its subsidiaries ("News Corporation") effected a reorganization (the
"Reorganization") by contributing to the Company, at book value, certain of its
assets and subsidiaries engaged in the production and distribution of feature
films and television programming. Included in this contribution were Twentieth
Century Fox Film Corporation ("TCF"), which was acquired by News Corporation in
1985, and News Corporation's interests in Fox Family Worldwide, Inc. ("FFW"),
Fox Sports Networks, LLC, International Sports Programming Partners ("Fox Sports
International"), Fox Cable Networks Ventures, Inc. and other cable network
programming and related interests.
In connection with the Reorganization in fiscal 1999, the outstanding voting
preferred stock of the Company was acquired from an executive of the Company for
its par value of $760,000 plus accrued dividends. Contemporaneous with this
transaction, the executive acquired the voting preferred stock of a subsidiary
of the Company, Fox Television Holdings, Inc. ("FTH") for the identical par
value and dividend rate (See Note 2). The voting preferred stock of the Company
had been acquired by the executive in accordance with a 1985 order of the
Federal Communications Commission ("FCC") in connection with the Company's
acquisition of television stations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
consolidated with the accounts of its majority-owned and controlled
subsidiaries. For financial reporting purposes, control generally means
ownership of a majority interest in an entity but may, in certain instances,
result from other considerations, including the Company's capacity to dominate
decision making in relation to the financial and operating policies of the
consolidated entity. FTH, a subsidiary of the Company, has 7,600 shares of
voting preferred stock issued and outstanding with a liquidation value of
$760,000 and cumulative dividends at the rate of 12% per annum. Such shares are
held by an executive of the Company and represent 76% of the voting power of
FTH.
FTH is included in these consolidated financial statements because the Company
is deemed to control FTH for financial reporting purposes. Among the reasons why
the Company has a controlling financial interest in FTH are (i) the Company has
the ability to redeem the voting preferred stock, at any time, at the
liquidation value of $760,000 plus accrued dividends, (ii) the dividends on, and
52
FOX ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
amounts to be paid on redemption of, the voting preferred stock are fixed, and
not related to the performance of FTH, and, (iii) senior management of FTH,
including its Board of Directors, consists solely of persons employed by the
Company. As a result, the controlling financial interest in FTH rests with the
Company through its common stock ownership of FTH.
The Company uses the equity basis of accounting for investments in equity
affiliates and joint ventures where it exercises significant influence but not
control. All material intercompany accounts and transactions have been
eliminated in the consolidated financial statements of the Company.
The Company maintains a 52-53 week fiscal year ending on the Sunday nearest to
June 30. Fiscal years 1999 and 2001 comprised 52-week periods, while fiscal year
2000 comprised a 53-week period.
BALANCE SHEET PRESENTATION
As permitted by Statement of Position ("SOP") 00-2, "Accounting by Producers or
Distributors of Films," the Company presents an unclassified balance sheet.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and marketable securities with
original maturities of three months or less.
REVENUE RECOGNITION
Filmed Entertainment:
In accordance with SOP 00-2, revenues from the theatrical distribution of motion
pictures are recognized on the dates of exhibition. Revenues from home video and
DVD sales, net of a reserve for returns, are recognized on the date that video
and DVD units are made widely available for sale by retailers. Revenues from the
licensing of feature films and television programming are recorded when the
material is available for telecasting by the licensee and when certain other
conditions are met.
License agreements for the telecast of theatrical and television product in the
broadcast network, syndicated television and cable television markets are
routinely entered into in advance of their available date for telecast. Cash
received in connection with such contractual rights for which revenue is not yet
recognizable is classified as deferred revenue. Because deferred revenue
generally relates to contracts for the licensing of theatrical and television
product which have already been produced, the recognition of revenue for such
completed product is principally only dependent upon the commencement of the
availability period for telecast under the terms of the related licensing
agreement.
Television Stations, Television Broadcast Network, Other Television Businesses
and Cable Network Programming:
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 63,
"Financial Reporting by Broadcasters", television advertising revenue is
recognized as the commercials are aired. Subscriber fees received from cable
systems and DBS operators are recognized as revenue
53
FOX ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
when services are provided. Revenues from professional team ownership are
recognized on a game by game basis.
FILMED ENTERTAINMENT AND TELEVISION PROGRAMMING COSTS
Filmed Entertainment Costs:
In accordance with SOP 00-2, Filmed entertainment costs include capitalizable
production costs, overhead and interest costs expected to benefit future
periods, net any amounts received from outside investors. These costs, as well
as participations and talent residuals, are amortized as operating expenses on
an individual film basis in the ratio that the current year's gross revenues
bear to management's estimate of total ultimate gross revenues from all sources.
Filmed entertainment costs are stated at the lower of unamortized cost or
estimated fair value on an individual film or television series basis. Revenue
forecasts for both motion pictures and television products are continually
reviewed by management and revised when warranted by changing conditions. When
estimates of total revenues and other events or changes in circumstances
indicate that a motion picture or television production has a fair value that is
less than its unamortized cost, a loss is recognized currently for the amount by
which the unamortized cost exceeds the film or television production's fair
value.
Through June 30, 2000, the Company employed the guidance of SFAS No. 53. The
Company adopted SOP 00-2 on July 1, 2000, which established new accounting
standards for producers and distributors of films and superseded SFAS No. 53.
SOP 00-2 established 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 and Cable Programming Costs:
In accordance with SFAS No. 63, program rights for entertainment programs and
sporting events for the Television Stations and Cable Network Programming
segments are amortized over their license periods. The Company has single and
multi-year contracts for broadcast rights of programs and sporting events. At
the inception of these contracts and periodically thereafter, the Company
evaluates the recoverability of the costs associated therewith against the
revenues directly associated with the program material and related expenses.
Where an evaluation indicates that a programming contract will result in an
ultimate loss, additional amortization is provided to currently recognize that
loss. The costs of sports contracts for the Television Broadcast Network segment
are charged to expense based on the ratio of each period's operating profits to
estimated total operating profit of the contract. Estimates of total operating
profit can change significantly and accordingly, are reviewed periodically and
amortization is adjusted as necessary.
54
FOX ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENTS IN EQUITY AFFILIATES
Investments in and advances to affiliates or joint ventures in which the Company
has a substantial ownership interest of approximately 20% to 50%, or for which
the Company owns more than 50% but does not control policy decisions, are
accounted for by the equity method. The Company's share of net earnings or
losses of affiliates includes the amortization of the excess of the Company's
investment over its underlying share of the net assets of the investee at
acquisition, which is amortized over 40 years.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using the
straight-line method over an estimated useful life of three to forty years.
Leasehold improvements are amortized using the straight-line method over the
shorter of their useful lives or the life of the lease. Costs associated with
the repair and maintenance of property are expensed as incurred.
INTANGIBLE ASSETS
As a creator and distributor of branded information and entertainment
copyrights, the Company has a significant and growing amount of intangible
assets, including goodwill, free and cable television networks and stations,
film and television libraries, FCC licenses, sports franchises, entertainment
franchises, and other copyright products and trademarks. In accordance with
generally accepted accounting principles ("GAAP"), the Company does not record
the fair value of these internally generated intangible assets. However,
intangible assets acquired in business combinations are recorded at their fair
market value. Goodwill is recorded as the difference between the cost of
acquiring entities and amounts assigned to their tangible and identifiable
intangible net assets. Intangible assets are amortized using the straight-line
method over the following lives: goodwill (40 years); FCC licenses (40 years);
Franchises and other (4 - 40 years).
IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," the Company evaluates the
recoverability of the carrying amount of its long-lived assets and certain
identifiable intangibles to be held and used by the Company. Such reviews are
performed periodically or whenever events or changes in circumstances indicate
full recoverability is questionable and on an individual business-entity basis.
The recoverable amount is defined by the net amount expected to be recovered
from operating cash inflows and outflows arising from an asset's continued use
and subsequent disposal.
Assessment of any impairment would include a comparison of undiscounted
estimated future cash flows anticipated to be generated during the remaining
amortization period to the net carrying value. If the Company determines that
impairment has occurred, the measurement of the impairment will be equal to the
excess of the carrying amount over, but not limited to, the amount of the
discounted estimated operating cash flows. Certain other factors used in
ascertaining the estimated fair market value of such assets include operating
income before interest and taxes, television ratings and subscriber numbers.
Should the review determine impairment, the loss will be recognized through the
statement of operations as part of income from continuing operations and the
corresponding asset value will be reduced.
55
FOX ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL INSTRUMENTS
The fair value of financial instruments, including cash and cash equivalents,
investments and long-term borrowings, is generally determined by reference to
market values resulting from trading on national securities exchanges. In cases
where quoted market prices are not available, fair value is based on estimates
using present value or other valuation techniques.
INCOME TAXES
The Company accounts for income taxes using SFAS No. 109, "Accounting for Income
Taxes". SFAS No. 109 requires an asset and liability approach for financial
accounting and reporting for income taxes and allows recognition and measurement
of deferred tax assets based upon the likelihood of realization of tax benefits
in future years. Under the asset and liability approach, deferred taxes are
provided for the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Deferred taxes have not been provided on
the cumulative undistributed earnings of foreign subsidiaries since amounts are
expected to be reinvested indefinitely.
STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to account for stock-
based compensation awards to employees under Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and its
interpretation, FASB Interpretation No. ("FIN") 44, "Accounting for Certain
Transactions Involving Stock Compensation, an interpretation of APB Opinion No.
25".
COMPREHENSIVE INCOME
The Company follows SFAS No. 130, "Reporting Comprehensive Income" for the
reporting and display of comprehensive income and its components in financial
statements and thereby reports a measure of all changes.
DERIVATIVES
The Company adopted, as of July 1, 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 year ended June
30, 2001.
TRANSLATION OF FOREIGN CURRENCIES
All asset and liability accounts of foreign subsidiaries and affiliates are
translated into US dollars at appropriate year-end current rates and all income
and expense accounts are translated at rates that approximate those rates
prevailing at the time of the transactions. The resulting translation
adjustments are accumulated as a component of accumulated other comprehensive
income. Foreign
56
FOX ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
currency receivables and payables are translated at appropriate year-end current
rates and the resulting translation gains or losses are taken into income
currently.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the consolidated financial statements, and the
reported amounts of revenues and expenses during the reporting period. The
Company uses significant estimates in determining the amortization of filmed
entertainment costs and programming contracts. Because of the use of estimates
inherent in the financial reporting process, especially for entertainment
companies, actual results could differ from those estimates. These differences
could be material.
3. INITIAL PUBLIC OFFERING
On November 11, 1998, the Company consummated an initial public offering ("IPO")
through the issuance and sale of 124,800,000 shares of Class A Common Stock. The
newly issued shares of Class A Common Stock represented approximately 18.6% of
the Company's outstanding common stock. The net proceeds from the IPO were
approximately $2.7 billion and were used to reduce intercompany indebtedness.
Prior to the IPO, News Corporation effected a Reorganization and a
recapitalization that gave effect to the following transactions: (i)
contributing to the Company, at book value, certain of its assets and
subsidiaries engaged in the production and distribution of feature films,
television programming and cable network programming, (ii) the elimination of
certain outstanding intercompany debt against paid-in capital, (iii) the
concurrent payment of dividends to a subsidiary of News Corporation (which
reduced retained earnings and paid-in capital) such that after (ii) and (iii),
$4.5 billion of intercompany debt was outstanding, (iv) the authorization of the
new Class A and Class B Common Stock and the conversion of the Company's
outstanding common stock into 547,500,000 shares of Class B Common Stock, and
(v) the adjustment to increase the interest rate from 5% to 8% under the terms
of the intercompany indebtedness that was outstanding after the Reorganization.
For the year ended June 30, 1999, after giving effect to the IPO, Reorganization
and recapitalization, as if they had occurred on July 1, 1998 rather than on
November 11, 1998, the pro forma net income and earnings per share would have
been $246 million and $0.37, respectively, as a result of a decrease in
intercompany interest expense of $69 million, an increase in income taxes of $28
million and an increase of 46 million shares in the weighted average number of
shares outstanding.
4. ACQUISITIONS AND DISPOSITIONS
In February 2001, Fox Sports Networks, LLC ("Fox Sports Networks"), 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 Fox Sports Networks, Viacom, Inc.
("Viacom") and Comcast Corporation ("Comcast") and a Purchase Agreement between
Viacom and Comcast for approximately $40 million. The excess of the net purchase
price over the net assets acquired, of approximately $33 million is reflected
within Intangible assets, net on the consolidated balance sheets.
57
FOX ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In February 2001, Fox Sports Networks sold its approximate 34% limited
partnership interest in Home Team Sports to Comcast, in a non-cash exchange for
Comcast entering into new or amended cable carriage arrangements valued at
approximately $46 million 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 related to this transaction, which is
reflected within Other income (expense) in the consolidated statement of
operations.
In March 2001, the Company acquired the outstanding equity of New Millennium
Investors, LLC ("New Millennium") for an aggregate purchase price of $45
million. (See Note 9 Minority Interest in Subsidiaries.)
In June 2001, the Company sold its approximate 31% interest in The Golf Channel
to Comcast for total consideration of approximately $375 million, of which $365
million was received in cash during fiscal 2001. The Company has recorded a gain
of approximately $311 million related to this transaction, which is reflected in
Other income (expense) in the consolidated statement of operations.
5. FILMED ENTERTAINMENT AND TELEVISION PROGRAMMING COSTS, NET
Filmed entertainment and television programming costs, net consisted of the
following as of June 30:
2001 2000
---------- ----------
(in millions)
Filmed entertainment costs:
Films:
Released $ 732 $ 753
Completed, not released 23 42
In production 555 692
In development or preproduction 69 154
---------- ----------
1,379 1,641
---------- ----------
Television productions:
Released 484 516
In production 150 79
In development or preproduction 10 4
---------- ----------
644 599
---------- ----------
Total filmed entertainment costs, less accumulated amortization 2,023 2,240
Television programming costs, less accumulated amortization 1,680 1,198
---------- ----------
Total filmed entertainment and television programming costs, net $ 3,703 $ 3,438
========== ==========
As of June 30, 2001 the Company estimated that approximately 60% of unamortized
filmed entertainment costs from completed films are expected to be amortized
during fiscal year 2002 and approximately 88% of released unamortized filmed
entertainment costs will be amortized within the next three years. As of June
30, 2001, the Company estimated that approximately 32% of accrued participation
liabilities will be payable during fiscal year 2002.
58
FOX ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INVESTMENTS
The Company's investments in equity affiliates consist principally of a 49.5% of
Fox Family Worldwide ("FFW"), a family television programming venture; 40% of
Regional Programming Partners ("RPP"), a partnership holding interests in
various regional sporting networks ("RSNs") and sporting teams and arenas; 40%
of Ventures Arena, an entity which holds interests in sporting arenas; 66.7% of
the domestic National Geographic Channel and 50% of the international National
Geographic Channel (together, the "National Geographic Channels"), which air
documentary programming on such topics as natural history, adventure, science
and culture.
As of June 30, 2001, the investment in these affiliates was as follows: FFW -
$119 million; RPP - $908 million; Ventures Arena - $131 million; and National
Geographic Channels - $76 million.
The Company's investment in several of its affiliates exceeded its equity in the
underlying net assets by a total of $420 million and $427 million as of June 30,
2001 and 2000, respectively. These excess amounts are being amortized on a
straight-line basis over 40 years. The amortization aggregated to $12 million
during both of the year ended June 30, 2001 and 2000 and $16 million for the
year ended June 30, 1999.
FOX FAMILY WORLDWIDE
In November 1995, the Company and Saban Entertainment Inc. ("Saban") formed a
joint venture, Fox Kids Worldwide, LLC, to jointly develop and acquire appealing
family programming that can be commercially exploited worldwide. In connection
with the acquisition of International Family Entertainment, Inc., in August
1997, this venture was reorganized pursuant to which it became a wholly owned
subsidiary of FFW. The Company has a 49.5% interest in this venture. (See Note
19d.)
In November 1999, Fox Kids Europe N.V. ("FKE"), a subsidiary of FFW, completed
an IPO of 24% of FKE ordinary shares. The resulting gain for FFW included in the
Company's equity losses of affiliates and net income for fiscal 2000 was
approximately $61 million and $39 million, respectively.
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 was recorded at its fair market value of
approximately $200 million, as determined by an 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 $152 million as of June 30, 2001, with a market value of
approximately $192 million. Such deferred revenue will be recognized over the
remaining nine-year term as such media services are delivered under an agreed
annual commitment schedule based upon rates prevailing in each future period.
The restructuring
59
FOX ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
transaction has resulted in the Company recording a non-cash charge of
approximately $143 million, which is reflected within Other income (expense) in
the consolidated statement of operations.
In June 2001, the Company completed the previously announced sale of its entire
interest in THN for cash of approximately $155 million, of which $100 million
was paid at closing and $55 million is due one year from closing, and a 10%
carried interest in the equity of the acquirer with a minimum guarantee value of
$100 million in December 2003. In accordance with SFAS No. 94, "Consolidation of
All Majority-Owned Subsidiaries," and Emerging Issues Task Force No. 87-11,
"Allocation of Purchase Price to Assets to be Sold," for the period from the
acquisition of THN (December 29, 2000) until the Closing Date of the sale,
control of THN was deemed to be temporary and therefore, its results of
operations have not been consolidated in the Company's statement of operations.
The Company recorded a loss of approximately $15 million from the sale, which is
reflected in Other income (expense) in the consolidated statement of operations.
During 2000, included in equity losses of affiliates, the Company wrote down $39
million relating to its 50% investment in Fox Studios Australia due to lower
than expected attendance.
The Company's share of the income (loss) of each of its equity affiliates is as
follows:
Year Ended June 30,
-------------------------------------------------------------
Affiliate: 2001 2000 1999
---------------------------------------- ---------------- ----------------- -------------
(in millions)
Fox Sports Networks $ - $ - $ (99)
Fox Family Worldwide (37) 23 (42)
Fox Sports International (22) (28) -
Fox Sports Networks Domestic:
National Sports Partners (22) (17) -
Regional Programming Partners 2 (1) -
Speedvision Channel (9) (2) -
Ventures Arena 12 (5) -
Other 8 13 -
National Geographic Channel - Domestic (22) (1) -
Fox Studios Australia (12) (50) -
Other 10 (22) (5)
---------------- ----------------- ------------
Total equity losses of affiliates $ (92) $ (90) $ (146)
================ ================= ============
60
FOX ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARIZED FINANCIAL DATA
Summarized financial information for significant equity affiliates and joint
ventures, as defined in Rule 1-02(w) of Regulation S-X, accounted for under the
equity method is as follows:
Year Ended June 30,
------------------------------------------------------------
2001 2000 1999
-------------- ---------------- --------------
(in millions)
Revenues $ 2,258 $2,012 $ 1,404
Operating income (loss) (270) 61 38
Net income (loss) (166) 4 (291)
As of June 30,
-----------------------------------
2001 2000
-----------------------------------
(in millions)
Total assets $5,225 $ 5,145
Total liabities 3,424 3,212
7. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of June 30:
2001 2000
------------ -----------
(in millions)
Machinery and equipment $ 998 $ 885
Buildings and leaseholds 914 919
Land 175 175
------------ -----------
2,087 1,979
Less accumulated depreciation and amortization (633) (501)
------------ -----------
Total property and equipment, net $ 1,454 $ 1,478
============ ============
Depreciation and amortization expenses related to property and equipment were
$164 million, $142 million and $109 million for the year ended June 30, 2001,
2000 and 1999, respectively.
8. BORROWINGS
Borrowings consisted of the following as of June 30:
2001 2000
--------- ----------
(in millions)
Film production financing (a) $ 168 $ 143
$500 million 8 7/8% Senior Notes due 2007 (b) 500 500
$405 million 9 3/4% Senior Discount Notes due 2007 (b) 364 331
--------- ----------
Total borrowings $ 1,032 $ 974
--------- ----------
(a) The Company has various single-film production financing arrangements, which
are secured by the film assets and bear interest at approximately 6.5% for
fiscal years 2001 and 2000. The film production financing is due to mature in
fiscal 2002.
(b) In conjunction with the Company's July 1999 acquisition of substantially all
of the remaining 50%
61
FOX ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of Fox Sports Networks, the Company assumed the 8?% Senior Notes and the 9 3/4%
Senior Discount Notes (together, the "Notes"). Interest on the Senior Notes is
payable semi-annually. Interest payments on the Senior Discount Notes commence
in February 2003. The indentures pursuant to which the Notes were issued include
certain covenants regarding, among other things, limitations on the incurrence
of debt by Fox Sports Networks and distributions to its partners.
The carrying value of the Company's debt approximates its fair value.
In connection with the purchase of Fox Sports Networks, the Company assumed its
bank debt of approximately $678 million, which was immediately repaid by the
Company.
External interest paid, including amounts capitalized, was $135 million, $128
million and $79 million for the year ended June 30, 2001, 2000 and 1999,
respectively. The Company capitalizes interest on filmed entertainment and
television programming in process and fixed assets. The total interest
capitalized was $29 million, $43 million and $19 million for the year ended June
30, 2001, 2000 and 1999, respectively.
9. MINORITY INTEREST IN SUBSIDIARIES
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 or
acquisition costs of all eligible films, as defined, to be produced or acquired
by 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") to a third party, which is presented on the
consolidated 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.
10. INCOME TAXES
Although, during the periods presented, the Company and certain of its
subsidiaries were included in the consolidated tax returns of another News
Corporation entity and other subsidiaries of the Company filed a separate tax
return, the Company has provided for income taxes as if it were a stand-alone
taxpayer, in accordance with SFAS No. 109.
62
FOX ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income before income taxes was attributable to the following jurisdictions for
the year ended June 30:
2001 2000 1999
-------- ------------ -----------
(in millions)
United States (including exports) $ 350 $ 201 $ 271
Foreign 41 64 76
-------- ------------ -----------
$ 391 $ 265 $ 347
======== ============ ===========
Components of income tax expense were as follows for the year ended June 30:
2001 2000 1999
-------- ------------ -----------
(in millions)
Current:
Federal - pursuant to the Tax Sharing Agreement $ 119 $ 70 $ 60
Foreign 23 19 22
-------- ------------ -----------
$ 142 $ 89 $ 82
-------- ------------ -----------
Deferred:
Federal $ 39 $ 26 $ 56
State and local 4 5 4
Foreign - - -
-------- ------------ -----------
$ 43 $ 31 $ 60
-------- ------------ -----------
Total income tax expense $ 185 $ 120 $ 142
======== ============ ===========
2001 2000 1999
-------- ------------ -----------
U.S. Federal income tax rate 35% 35% 35%
State and local taxes (net of federal tax benefit) 1 1 1
Effect of foreign operations 2 (1) (1)
Non-deductible amortization and expenses 7 10 4
Other 2 - 2
-------- ------------ -----------
Effective tax rate 47% 45% 41%
======== ============ ===========
The following is a summary of the components of the deferred tax accounts as of
June 30:
2001 2000
------------ -----------
(in millions)
Deferred tax assets (liabilities):
Amortization and basis difference on intangible assets $ (1,641) $ (1,605)
Revenue recognition 438 165
Accrued liabilities 201 201
Other (112) (164)
Net operating loss carryforwards 555 423
------------ -----------
Net deferred tax liability (559) (980)
Income tax payable (147) (78)
------------ -----------
$ (706) $ (1,058)
============ ===========
As of June 30, 2001, the Company had approximately $1.4 billion of combined
unused tax net operating loss carryforwards, expiring between 2002 and 2021. As
part of a consolidated tax return, the Company and certain of its subsidiaries
are not required to record a valuation allowance against their net operating
loss ("NOLs") since it is more likely than not that these loss carryforwards
will be realized on a consolidated basis, in future years. Pursuant to the Tax
Sharing Agreement, these NOLs on a stand-alone basis will be utilized concurrent
with the utilization of the NOLs at the consolidated tax level. For its
remaining subsidiaries, realization of these NOLs is dependent on
63
FOX ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
generating sufficient taxable income prior to the expiration of the loss
carryforwards, subject to any limitations on their use. Although realization is
not assured, management believes it is more likely than not that the deferred
tax assets relating to these loss carryforwards will be realized; accordingly,
no valuation allowance has been provided.
As noted above, certain subsidiaries of the Company are included in the
consolidated group of News Publishing Australia Limited ("NPAL"), the principal
U.S. subsidiary of News Corporation, for U.S. federal income tax purposes (the
"Consolidated Group") as well as in certain consolidated, combined or unitary
groups which include NPAL and/or certain of its subsidiaries (the "Combined
Group") for state and local income tax purposes. The Company and NPAL have
entered into a tax sharing agreement (the "Tax Sharing Agreement"). Pursuant to
the Tax Sharing Agreement, the Company and NPAL generally will make payments
between them such that, with respect to tax returns for any taxable period in
which the Company or any of its subsidiaries are included in the Consolidated
Group or any Combined Group, the amount of such consolidated or combined taxes
to be paid by the Company will be determined, subject to certain adjustments, as
if the Company and each of its subsidiaries included in the Consolidated Group
or Combined Group filed their own consolidated, combined or unitary tax return.
Net operating losses and other future tax benefits actually availed of to reduce
the tax liabilities of the Consolidated Group or Combined Group and any taxes
actually paid by the Company's subsidiaries included in such groups will be
taken into account for this purpose. The Company will be responsible for any
taxes with respect to tax returns that include only the Company and its
subsidiaries.
Pursuant to the Tax Sharing Agreement, the Company paid a total of $153 million
in income taxes to NPAL for the year ended June 30, 2001 for June 30, 2000 and
2001 taxable income. The income taxes paid in fiscal 2000 and 1999 were not
significant.
11. SHARE OPTION PLAN
The Company does not have a share option plan.
Certain of the Company's employees have been granted News Corporation stock
options under News Corporation's Share Option Plan (the "Plan"). The price of
options granted under the Plan is the weighted average market price of the
shares sold on the Australian Stock Exchange during the five trading days
immediately prior to the date of the option being granted. Stock options are
exercisable at a ratio of four options per American Depositary Receipt ("ADR").
Options issued under the Plan have a term of ten years, but are exercisable only
after they have been vested in the option holder. The options granted vest and
become exercisable as to one quarter on each anniversary of the grant until all
options have vested.
As permitted under SFAS No. 123, the Company has chosen to account for
stock-based awards to employees using the intrinsic value method in accordance
with APB Opinion No. 25.
A summary of the Plan activity is as follows for the year ended June 30, (in
thousands of shares and Australian dollars):
64
FOX ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2001 2000 1999
------------------------ --------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-------- ---------- --------- ---------- --------- --------
Outstanding at the beginning of the year 46,419 A$ 7.75 42,278 A$ 6.32 31,481 A$5.22
Granted 20,083 A$17.74 16,851 A$10.52 14,567 A$8.28
Exercised (4,736) A$ 6.35 (8,120) A$ 6.47 (2,849) A$5.62
Cancelled (2,181) A$12.16 (4,590) A$ 7.04 (921) A$4.96
-------- ---------- --------- ---------- --------- --------
Outstanding at the end of the year 59,585 A$11.08 46,419 A$ 7.75 42,278 A$6.32
======== ========== ========= ========== ========= ========
Exercisable at the end of the year 21,687 14,207 11,204
Weighted average fair value of options granted A$ 7.50 A$ 4.52 A$3.25
As of June 30, 2001, 14,742 of the outstanding options have exercise prices
between A$4.79 and A$6.56, a weighted average exercise price of A$4.95 and a
weighted average remaining contractual life of 5.70 years. Of these, 12,412 are
exercisable with a weighted average exercise price of A$4.97. 25,550 of the
outstanding options have exercise prices between A$8.08 and A$10.86, a weighted
average exercise price of A$9.57 and a weighted average remaining contractual
life of 7.79 years. Of these, 9,263 are exercisable with a weighted average
exercise price of A$9.19. The remaining 19,292 options have exercise prices
between A$12.68 and A$18.15, with a weighted average exercise price of A$17.75
and a weighted average remaining contractual life of 9.12 years. Of these, 12
are exercisable with a weighted average exercise price of A$13.01.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model, with the following assumptions:
2001 2000 1999
-------- ------- ---------
Australian risk free interest rate 6.59% 6.55% 4.81%
Dividend yield 1.5% 1.5% 1.5%
Expected volatility 33.27% 33.27% 33.27%
Expected life of options 7 years 7 years 7 years
Had compensation expense for the Plan been determined on the fair value at the
date of grant for options under the alternative method prescribed by SFAS No.
123, the Company's Net income (loss) would have been adjusted to the pro forma
amounts indicated below:
Year Ended June 30,
---------------------------------------------------
2001 2000 1999
-------- ---------- ----------
(in millions except per share data)
Net income (loss):
As reported $ (288) $ 145 $ 205
Pro forma (308) 129 195
Basic and diluted earnings (loss) per share:
As reported $ (0.40) $ 0.20 $ 0.33
Pro forma (0.43) 0.18 0.31
65
FOX ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
PENSION PLANS
The Company has non-contributory pension plans covering specific groups of
employees. The benefits for these plans are based primarily on an employee's
years of service and pay near retirement. Participant employees are vested in
the plans after five years of service. The Company's policy for all pension
plans is to fund amounts in accordance with the Employee Retirement Income
Security Act of 1974. Plan assets consist principally of common stocks,
marketable bonds and government securities.
Accumulated plan benefits and plan net assets for the Company's defined benefit
plans are as follows as of June 30, 2001:
Assets Projected
Exceed Benefits
Projected Exceed
Benefits Assets Total
----------- -------------- -----------
(in millions)
Actuarial present value of accumulated benefit obligations:
Vested $ 14 $ 239 $ 253
Nonvested - - -
----------- -------------- ----------
Accumulated benefit obligation 14 239 253
Effect of projected future salary increases 3 36 39
----------- -------------- ----------
Total projected benefit obligations 17 275 292
Plan assets at fair value 17 220 237
----------- -------------- ----------
Plan assets (in excess of) less than projected benefit obligations $ - $ 55 $ 55
=========== ============== ==========
66
FOX ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of net periodic pension costs were as follows for the year ended
June 30:
2001 2000 1999
---------- -------------- ----------
(in millions)
Service cost-benefits earned during the period $ 16 $ 16 $ 15
Interest cost on projected benefit obligation 19 17 16
Expected return on plan assets (24) (21) (20)
Net amortization and deferral - - -
---------- -------------- ----------
Net periodic pension cost $ 11 $ 12 $ 11
========== ============== ==========
The following assumptions were used in accounting for the defined benefit plans
for the year ended June 30:
2001 2000 1999
---------- -------------- ----------
Discount rate 7% - 7.75% 7.25% 7.25%
Expected return on plan assets 10% 10% 10%
Rate of increase in future compensation 4% - 5.5% 4% - 6% 4% - 6%
The following table sets forth the change in defined benefit obligation for the
Company's benefit plans for the year ended June 30:
2001 2000
-------------- ----------
(in millions)
Benefit obligation, beginning of the year $ 253 $ 242
Service cost 16 16
Interest cost 19 17
Benefits paid (10) (9)
Actuarial gain (loss) 14 (13)
-------------- ----------
Benefit obligation, end of the year $ 292 $ 253
============== ==========
The following table sets forth the change in the fair value of plan assets for
the Company's defined benefit plans for the year ended June 30:
2001 2000
-------------- ----------
(in millions)
Fair value of plan assets, beginning of the year $ 232 $ 221
Actual return on plan assets (3) 17
Employer contributions 18 3
Benefits paid (10) (9)
-------------- ----------
Fair value of plan assets, end of the year $ 237 $ 232
============== ==========
The funded status of the defined benefit plans was as follows as of June 30:
2001 2000
-------------- ----------
(in millions)
Funded status $ (55) $ (21)
Unrecognized net (gain) loss 33 (7)
Unrecognized prior service cost (2) (3)
-------------- ----------
Accrued pension liability, end of the year $ (24) $ (31)
-------------- ----------
13. RELATED PARTY TRANSACTIONS
As a subsidiary of News Corporation, the Company has entered into a Master
Intercompany Agreement, which will provide various cash management, financial,
tax, legal and other services. The consideration for each of the services and
other arrangements set forth in the Master Intercompany Agreement has been
mutually agreed upon based upon allocated costs; provided that all such
consideration and any material arrangements are subject to the approval of the
audit committee of the Company. The Company has used and expects that it will
continue to use various
67
FOX ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
cash management, financial, tax, legal and other services provided by News
Corporation or its subsidiaries. All costs relating to direct intercompany
services have been reflected in the accompanying consolidated financial
statements.
The Master Intercompany Agreement has been entered into in the context of a
parent-subsidiary relationship; therefore, these services are not the result of
arm's-length negotiations between independent parties. There can be no
assurance, therefore, that each of such agreements, or the transactions provided
for therein, or any amendments thereof will be effected on terms at least
favorable to the Company as could have been obtained from unaffiliated third
parties.
The Company and its subsidiaries sell broadcast rights to certain of its filmed
entertainment products to other affiliates of News Corporation. Management
believes that the pricing of these transactions results from arm's-length
negotiations between the parties and are reflective of the market value for
these rights. The revenues associated with these sales were not significant in
the periods presented.
The Company is funded primarily by loans from other subsidiaries and affiliates
of News Corporation. Intercompany interest expense of $239 million, $211 million
and $164 million for the year ended June 30, 2001, 2000 and 1999, respectively,
is included in interest expense, net in the consolidated statements of
operations and reflects the net interest expense associated with the aggregate
borrowings from subsidiaries or affiliates of News Corporation. From November
11, 1998, interest on outstanding intercompany balances has been charged at
commercial market rates not to exceed News Corporation's average cost of
borrowings as set forth in the Master Intercompany Agreement. As of June 30,
2001, the intercompany interest rate approximated 8%.
As of June 30, 2001, the Company has two fully subordinated notes receivable
from FFW, which aggregate $58 million. Both of these notes have interest rates
of 20% and mature between June and September 2009.
The Company, through the normal course of business, is involved in transactions
with its equity affiliates that have not been significant in any of the periods
presented.
14. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases transponders, office facilities, equipment and microwave
channels used to carry its broadcast signals. These leases, which are classified
as operating leases, expire at various dates through 2016. Future minimum
payments under non-cancelable long-term operating leases aggregate $515 million,
of which $278 million is payable over the next five years.
Total operating lease expense was approximately $70 million, $77 million and $67
million for the year ended June 2001, 2000 and 1999, respectively.
COMMITMENTS AND CONTINGENCIES
Under the Company's eight-year contract with the National Football League, which
contains certain termination clauses, remaining future minimum payments for
program rights to broadcast certain football games aggregated approximately $3.3
billion as of June 30, 2001, and are payable over the remaining five year term.
68
FOX ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's eight-year contract with the National Association of Stock Car
Auto Racing ("NASCAR"), which contains certain termination clauses, gives the
Company rights to broadcast certain NASCAR races. This agreement commenced in
February 2001 with the Daytona 500. The remaining future minimum payments for
program rights to broadcast certain NASCAR events aggregated approximately $1.6
billion as of June 30, 2001, and are payable over the remaining seven year term.
The Company's minimum commitments and guarantees under certain other
programming, production, licensing, artists, athletes and other agreements
aggregated approximately $8.0 billion as of June 30, 2001, which are payable
principally over a five year period.
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 fiscal year 2001, certain of the Company's subsidiaries
were released as guarantors of these debt obligations. The principal amount of
indebtedness outstanding under such debt instruments as of June 30, 2001 and
2000 was approximately $9.3 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 2002 and 2096, with a weighted
average maturity of over 20 years.
In the case of any event of default under such debt obligations, the Company
will be directly liable to the creditors or debtholders. News Corporation has
agreed to indemnify the Company from and against any obligations it may incur by
reason of its guarantees of such debt obligations.
FOX NEWS
AT&T, through a predecessor company, holds a warrant to purchase (the "Warrant")
a 20% non-voting common equity interest in Fox News Channel LLC ("Fox News")
exercisable until January 2, 2002 (the "Exercise Date"). The Warrant is
exercisable at an exercise price of $200 million plus interest accrued monthly
from May 1, 1997 through the Exercise Date (the exercise price is approximately
$280 million as of June 30, 2001). On October 1, 2003, subject to certain
conditions, AT&T will have the right to put its equity interest in Fox News to
the Company in return for, at the Company's sole option, either (a) cash, or (b)
an equivalent amount in News Corporation preferred shares. The amount of cash or
preferred shares will be calculated based on the appropriate fair market value
of the 20% equity interest in Fox News determined by mutual agreement of the
parties. In the event that the parties are unable to agree upon a price, the
price will be determined by valuation procedures using an independent investment
banker.
LITIGATION
In the ordinary course of business, the Company has become involved in disputes
or litigation. While the results of such disputes cannot be predicted with
certainty, in management's opinion, based in part on the advice of counsel, the
ultimate resolution of these disputes will not have a material adverse effect on
the Company's financial position or its results of operations.
69
FOX ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. SEGMENT INFORMATION
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS No. 131 established revised standards
for public companies relating to the reporting of financial and descriptive
information about their operating segments in financial statements.
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 DBS operators in the United States and Canada and professional
sports team ownership. The television-related segments operate primarily 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. Should the internal management structure of the Company
change, the reportable operating segments of the Company will likewise change.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies (See Note 2). The
Company evaluates performance based upon several factors, of which the primary
financial measure is segment operating income.
For the Year Ended June 30,
-----------------------------------------------
2001 2000 1999
----------- ------------ -----------
(in millions)
Revenues:
Filmed Entertainment $ 3,585 $ 3,856 $ 4,416
Television Stations 1,550 1,635 1,469
Television Broadcast Network 1,823 1,751 1,743
Other Television Businesses 91 97 118
Cable Network Programming 1,455 1,250 311
----------- ------------ -----------
Total revenues $ 8,504 $ 8,589 $ 8,057
=========== ============ ===========
70
FOX ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended June 30,
-----------------------------------------------------------
2001 2000 1999
----------- --------------- -----------
(in millions)
Operating income (loss):
Filmed Entertainment $ 286 $ 128 $ 355
Television Stations 499 585 557
Television Broadcast Network (65) 29 (32)
Other Television Businesses (9) (11) (7)
Cable Network Programming (59) (75) (157)
----------- --------------- -----------
Total operating income (loss) 652 656 716
----------- --------------- -----------
Interest expense, net (345) (297) (223)
Equity losses of affiliates (92) (90) (146)
Minority interest in subsidiaries (14) (4) -
Other income (expense) 190 - -
----------- --------------- -----------
Income before income taxes $ 391 $ 265 $ 347
=========== =============== ===========
Depreciation and amortization:
Filmed Entertainment $ 64 $ 51 $ 41
Television Stations 184 189 174
Television Broadcast Network 20 18 16
Other Television Businesses 1 - 4
Cable Network Programming 208 182 80
----------- --------------- -----------
Total depreciation and amortization $ 477 $ 440 $ 315
=========== =============== ===========
Capital expenditures:
Filmed Entertainment $ 58 $ 72 $ 116
Television Stations 22 85 133
Television Broadcast Network 11 12 49
Other Television Businesses - - -
Cable Network Programming 54 78 9
----------- --------------- -----------
Total capital expenditures $ 145 $ 247 $ 307
=========== =============== ===========
Equity losses of affiliates which primarily relate to entities involved in the
production and licensing of cable network programming, Interest expense, net,
Minority interest in subsidiaries, Other income (Expense) and Income tax on a
stand-alone basis are not allocated to segments, as they are not under the
control of the segment management.
71
FOX ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of June 30,
------------------------
2001 2000
--------- --------
(in millions)
Total assets:
Filmed Entertainment $ 4,382 $ 4,620
Television Stations 6,106 6,213
Television Broadcast Network 1,534 1,382
Other Television Businesses 308 364
Cable Network Programming 4,033 3,841
Investments in equity affiliates 1,493 1,510
-------- --------
Total assets $ 17,856 $ 17,930
======== ========
Intangibles, net:
Filmed Entertainment $ 459 $ 469
Television Stations 4,783 4,918
Television Broadcast Network - -
Other Television Businesses - -
Cable Network Programming 2,405 2,449
-------- --------
Total intangibles, net $ 7,647 $ 7,836
======== ========
For the Year Ended June 30,
-----------------------------------------
Geographic Segments 2001 2000 1999
-------- -------- --------
(in millions)
Revenues:
United States and Canada $ 6,917 $ 6,660 $ 6,150
Europe 1,071 1,175 1,173
Other 516 754 734
-------- -------- --------
Total revenues $ 8,504 $ 8,589 $ 8,057
======== ======== ========
As of June 30,
------------------------
2001 2000
--------- --------
(in millions)
Long-Lived Assets:
United States and Canada $ 13,911 $ 14,507
Europe 87 16
Other 76 56
--------- --------
Total long-lived assets $ 14,074 $ 14,579
========= ========
Revenues are attributed to geographic segments based on the orgin of the sale.
Revenues from any individual foreign country were not material in the periods
presented. There is no material reliance on any single customer.
72
FOX ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. DETAIL OF OTHER FINANCIAL STATEMENT ACCOUNTS
For the Year Ended June 30,
-----------------------------------------
2001 2000 1999
-------- -------- --------
(in millions)
ALLOWANCE FOR RETURNS AND DOUBTFUL ACCOUNTS
Balance at the beginning of the year $ 167 $ 125 $ 204
Charged to costs and expenses 242 194 185
Actual returns/ write-offs/ recoveries/ other (239) (152) (264)
-------- -------- --------
Balance at the end of the year $ 170 $ 167 $ 125
======== ======== ========
As of June 30,
-----------------------------------------
2001 2000 1999
-------- -------- --------
(in millions)
INTANGIBLE ASSETS, NET
Goodwill $ 3,284 $ 3,252 $ 1,011
FCC licenses 5,506 5,506 5,505
Franchises and other 212 212 212
-------- -------- --------
9,002 8,970 6,728
Less accumulated amortization (1,355) (1,134) (910)
-------- -------- --------
Total intangible assets, net $ 7,647 $ 7,836 $ 5,818
======== ======== ========
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
For the Three Months Ended
---------------------------------------------------------
September 30, December 31, March 31, June 30,
------------- ------------ --------- --------
(in millions, except per share amounts)
Fiscal 2001
---------------------------------------------
Revenues $ 1,828 $ 2,502 $ 1,965 $ 2,209
Operating income 171 276 100 105
Net income (loss) (458) 5 (9) 174
Basic and diluted earnings (loss) per share $ (0.63) $ 0.01 $ (0.01) $ 0.24
Fiscal 2000
---------------------------------------------
Revenues $ 1,801 $ 2,436 $ 1,884 $ 2,468
Operating income 174 212 151 119
Net income (loss) 43 94 19 (11)
Basic and diluted earnings (loss) per share $ 0.06 $ 0.13 $ 0.03 $ (0.02)
18. RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and No.
142," Goodwill and Other Intangible Assets." SFAS No.141 requires all business
combinations be accounted for by the purchase method and that acquired
intangible assets be recognized apart from goodwill if they meet specific
criteria. SFAS No. 141 supersedes APB Opinion No. 16 and is effective for all
business combinations initiated after June 30, 2001. SFAS No. 142 eliminates the
requirement to amortize goodwill and intangible assets that have indefinite
useful lives. However, it requires that such assets be tested for impairment at
least annually using the guidance specifically provided in the statement. SFAS
No. 142 supersedes APB Opinion No. 17 and will be adopted by the Company on July
1, 2002.
73
FOX ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company is in the process of evaluating the impact of adopting
these new standards on its consolidated statement of operations.
19. SUBSEQUENT EVENTS
a) In July 2001, News Corporation acquired Chris-Craft Industries, Inc., BHC
Communications, Inc. and United Television, Inc (collectively, "Chris-Craft").
Total consideration paid by News Corporation amounted to US$2.03 billion in cash
and the issuance of 68,854,209 preferred ADRs, representing 275,416,836 News
Corporation preferred limited voting ordinary shares. News Corporation
subsequently transferred the acquired business (excluding approximately US$1.7
billion in cash) to the Company, for an exchange in which, the Company issued to
News Corporation 122,244,272 Class A common shares of the Company, increasing
News Corporation's equity interest in the Company from 82.76% to approximately
85.25%. The Company then assigned the licenses issued by the FCC for the
acquired television stations to its indirect subsidiary, Fox Television
Stations, Inc., which became the licensee and controls the operations of the
acquired stations. In July 2001, News Corporation entered into a binding
agreement to swap KTVX-TV in Salt Lake City and KMOL-TV in San Antonio, to Clear
Channel Communications, Inc. in exchange for WFTC-TV in Minneapolis (the "Clear
Channel swap"). In addition, in August 2001, News Corporation entered into an
Asset Exchange Agreement to swap KBHK-TV in San Francisco, recently acquired in
the Chris-Craft transaction, to Viacom in exchange for WDCA-TV in Washington, DC
and KTXH-TV in Houston (the "Viacom swap"). Both the Clear Channel and the
Viacom swaps are subject to FCC approval.
b) In March 2001, certain investors in Speedvision Network LLC ("Speedvision")
and Outdoor Life Network LLC ("Outdoor Life") exercised their rights to require
subsidiaries of the Company to purchase all of the interests held by them in
Speedvision and Outdoor Life. The aggregate ownership percentage of the
investors was approximately 53.44% and 50.23% of Speedvision and Outdoor Life,
respectively. Based on independent fair value determinations of these interests,
on July 25, 2001, the Company paid total consideration of approximately $401
million and approximately $309 million to purchase the investors' interests in
Speedvision and Outdoor Life, respectively, which resulted in the Company owning
approximately 85.46% of Speedvision and approximately 83.18% of Outdoor Life.
The remaining interests in Speedvision and Outdoor Life are owned by Comcast.
Shortly following the exercise of the Speedvision and Outdoor Life "put" options
described above, the Company entered into a Purchase Agreement with Comcast
pursuant to which the Company will sell the Company's approximate 83.18%
interest in Outdoor Life to Comcast. Pursuant to the Purchase Agreement, Comcast
elected to call the Company's interest in Outdoor Life on August 23, 2001 for
approximately $512 million. The transaction is expected to close during the
second quarter of fiscal 2002. As a result of the Company's purchase of the
additional 53.44% of Speedvision as described above, the Company will
consolidate the results of Speedvision subsequent to July 25, 2001.
c) The Company and Liberty/TINTA LLC ("Liberty/TINTA"), a subsidiary of Liberty
Media Corporation ("Liberty"), each own 50% of Fox Sports International. On July
15, 2001, under a preexisting option Liberty exercised its right to cause
Liberty/TINTA to sell its 50% interest in Fox Sports International held by
Liberty/TINTA to News Corporation in exchange for 3,633,866 ADRs of News
Corporation representing 14,535,464 preferred shares subject to adjustment for
dividends paid since July 1999. Under the terms of this transaction, News
Corporation will transfer the acquired interest in Fox Sports International to
the Company for approximately 3,632,000 shares of Class A common stock. This
transaction is expected to close during the second quarter of fiscal 2002.
74
FOX ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
d) Haim Saban, Chairman and Chief Executive Officer of FFW, during December
2000, exercised his right to require Fox Broadcasting Company to purchase all of
the Class B Common Stock of FFW held by Mr. Saban, other former stockholders of
Saban Entertainment, Inc. and their transferees ("the Saban Interest"). In
January 2001, a subsidiary of Fox Broadcasting Company exercised its option to
purchase the Saban Interest. In July 2001, the Company, Haim Saban and the other
stockholders of FFW and subordinated debtholders reached a definitive agreement
to sell FFW to The Walt Disney Company ("Disney") for total consideration of
approximately $5.3 billion (including the assumption of certain debt). Fox
Broadcasting Company has entered into an arm's-length programming arrangement
with Disney to allow the continued broadcast for the 2001-2002 broadcast season
of certain FFW programming on Fox affiliates through the Fox Kids Network
following closing of the FFW sale to Disney. This transaction is expected to
close during the second quarter of fiscal 2002.
75
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Fox Family Worldwide, Inc.:
We have audited the accompanying consolidated balance sheets of Fox Family
Worldwide, Inc. (a Delaware corporation) and subsidiaries (the "Company") as of
June 30, 2000 and 2001, and the related consolidated statements of operations,
stockholders' equity (deficit) and comprehensive income (loss), and cash flows
for each of the three years in the period ended June 30, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of June 30, 2000 and 2001, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 2001 in
conformity with accounting principles generally accepted in the United States.
Arthur Andersen LLP
Los Angeles, California
September 17, 2001
76
FOX FAMILY WORLDWIDE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 30, 2000 June 30, 2001
--------------- --------------
Assets:
Cash and cash equivalents....................................................................... $ 89,674 $ 86,327
Restricted cash................................................................................. 8,215 8,225
Accounts receivable, net of allowance for doubtful accounts of $4,688 and $5,321 at
June 30, 2000 and 2001, respectively....................................................... 143,817 149,540
Amounts receivable from related parties, net.................................................... 56,753 140,039
Programming costs, net.......................................................................... 671,443 710,101
Property and equipment, net..................................................................... 51,874 48,693
Deferred income taxes........................................................................... -- 3,228
Intangible assets, net.......................................................................... 1,481,189 1,440,667
Other assets, net............................................................................... 51,297 35,076
------------------------------
Total assets.................................................................................. $2,554,262 $2,621,896
==============================
Liabilities and stockholders' deficit:
Accounts payable................................................................................ $ 57,773 $ 59,402
Accrued liabilities............................................................................. 96,959 94,367
Accrued programming costs....................................................................... 153,765 151,495
Deferred revenues............................................................................... 36,534 36,105
Accrued participations.......................................................................... 54,073 55,878
Deferred income taxes........................................................................... 14,888 17,591
Bank and other debt............................................................................. 1,744,134 1,868,547
Amounts payable to related parties, net......................................................... 21,243 22,672
------------------------------
Total liabilities............................................................................. 2,179,369 2,306,057
------------------------------
Commitments and contingencies
Series A Mandatorily Redeemable Preferred Stock, $0.001 par value; 500,000 shares authorized;
345,000 shares issued and outstanding ($1,000 per share liquidation value).................... 345,000 345,000
------------------------------
Minority interest............................................................................... 54,236 53,744
------------------------------
Stockholders' deficit:
Preferred Stock, $0.001 par value; 2,000,000 shares authorized, of which 500,000 shares are
designated as Series A Preferred Stock; no shares issued or outstanding..................... -- --
Class A Common Stock, $0.001 par value; 2,000,000 shares authorized, 160,000 shares
issued and outstanding at June 30, 2000 and 2001, respectively.............................. -- --
Class B Common Stock, $0.001 par value; 16,000,000 shares authorized, 15,840,000 shares
issued and outstanding at June 30, 2000 and 2001, respectively.............................. 16 16
Contributed capital........................................................................... 78,671 78,671
Accumulated other comprehensive loss.......................................................... (6,683) (8,468)
Deficit....................................................................................... (96,347) (153,124)
------------------------------
Total stockholders' deficit................................................................... (24,343) (82,905)
------------------------------
Total liabilities and stockholders' deficit................................................... $2,554,262 $2,621,896
==============================
See accompanying notes.
77
FOX FAMILY WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
Years Ended June 30,
----------------------------------------------------
1999 2000 2001
------------ -------------- --------------
Revenues........................................... $635,273 $641,876 $ 724,221
------------ -------------- --------------
Costs and expenses:
Production and programming....................... 302,232 270,549 311,309
Selling, general and administrative.............. 173,245 209,477 216,566
Depreciation..................................... 10,083 10,883 11,582
Amortization of intangibles...................... 40,434 40,522 40,522
------------ -------------- --------------
525,994 531,431 579,979
------------ -------------- --------------
109,279 110,445 144,242
Operating income...................................
Equity in loss (earnings) of affiliates............ 5,088 1,609 (1,559)
Minority interest share of losses.................. (444) (2,184) (491)
Other income, net.................................. (62) -- --
Interest expense, net.............................. 169,107 168,415 172,018
Gain on issuance of subsidiary stock:
Staff Accounting Bulletin No. 51 gain............ -- 117,316 --
Gain on issuance of subsidiary stock............. -- 78,623 --
------------ -------------- --------------
Income (loss) before provision for income taxes.... (64,410) 138,544 (25,726)
Provision for income taxes......................... 1,989 77,159 --
------------ -------------- --------------
Net income (loss).................................. $(66,399) $ 61,385 $ (25,726)
============ ============== ==============
See accompanying notes.
78
FOX FAMILY WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
Series A Class A and Class B Accumulated
Preferred Stock Common Stock Other
---------------- ------------ Contributed Comprehensive Comprehensive
Shares Amount Shares Amount Capital Loss Deficit Total Income (Loss)
------ ------ ------ ------ ------- ---- ------- ----- -------------
Balance at June 30, 1998 -- $ -- 16,000 $ 16 $ 60,731 $ (1,201) $ (29,150) $ 30,396
Dividends on Series A
Mandatorily Redeemable
Preferred Stock........... -- -- -- -- -- -- (31,048) (31,048)
Exchange loss on
translation of foreign
subsidiaries' financial
statements................ -- -- -- -- -- (692) -- (692) $ (692)
Net loss................... -- -- -- -- -- -- (66,399) (66,399) (66,399)
------ ------ -------- -------- ----------- ------------- ---------- --------- -------------
Balance at June 30, 1999 -- -- 16,000 16 60,731 (1,893) (126,597) (67,743) $ (67,091)
=============
Dividends on Series A
Mandatorily Redeemable
Preferred Stock........... -- -- -- -- -- -- (31,135) (31,135)
Capital contribution by
related party in formation
of an unconsolidated
affiliate................. -- -- -- -- 17,940 -- -- 17,940
Exchange loss on
translation of foreign
subsidiaries' financial
statements................ -- -- -- -- -- (4,790) -- (4,790) $ (4,790)
Net income................. -- -- -- -- -- -- 61,385 61,385 61,385
------ ------ -------- -------- ----------- ------------- ---------- --------- -------------
Balance at June 30, 2000 -- -- 16,000 16 78,671 (6,683) (96,347) (24,343) $ 56,595
=============
Dividends on Series A
Mandatorily Redeemable
Preferred Stock........... -- -- -- -- -- -- (31,051) (31,051)
Exchange loss on
translation of foreign
subsidiaries' financial
statements................ -- -- -- -- -- (1,785) -- (1,785) $ (1,785)
Net loss................... -- -- -- -- -- -- (25,726) (25,726) (25,726)
------ ------ -------- -------- ----------- ------------- ---------- --------- -------------
Balance at June 30, 2001 -- $ -- 16,000 $ 16 $ 78,671 $ (8,468) $ (153,124) $ (82,905) $ (27,511)
====== ====== ======== ======== =========== ============= ========== ========= =============
See accompanying notes.
79
FOX FAMILY WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended June 30,
-------------------------------------
1999 2000 2001
---------- ---------- ----------
Operating activities:
Net income (loss)........................................................................ $ (66,399) $ 61,385 $ (25,726)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Amortization of programming costs...................................................... 277,808 223,060 266,219
Depreciation........................................................................... 10,083 10,883 11,582
Amortization of intangibles............................................................ 40,434 40,522 40,522
Amortization of debt issuance costs.................................................... 3,253 3,250 3,269
Reduction of goodwill due to realization of tax benefits............................... -- 18,141 --
Equity in loss (earnings) of affiliates................................................ 5,088 1,609 (1,559)
Minority interest in share of losses................................................... (444) (2,184) (491)
Non-cash interest expense.............................................................. 66,746 79,983 94,002
Gain on issuance of subsidiary stock................................................... -- (195,939) --
Changes in operating assets and liabilities:
Restricted cash....................................................................... (204) (11) (10)
Accounts receivable................................................................... (12,997) 1,233 (5,723)
Amounts receivable from related parties............................................... 44,043 (22,753) (83,286)
Other assets.......................................................................... 5,143 16,425 12,161
Accounts payable and accrued liabilities.............................................. (42,500) 11,931 (963)
Accrued programming costs............................................................. 29,076 66,124 (2,270)
Deferred revenue...................................................................... (15,204) (22,780) (429)
Accrued participations................................................................ (13,741) 15,213 1,805
Deferred income taxes, net............................................................ -- 32,969 (525)
---------- ---------- ----------
Net cash provided by operating activities...................................... 330,185 339,061 308,578
---------- ---------- ----------
Investing activities:
Purchase of property and equipment....................................................... (11,394) (8,256) (11,449)
Additions to production and programming costs............................................ (358,399) (352,689) (301,829)
Intangible assets........................................................................ 14,000 -- --
Other.................................................................................... (4,279) (1,747) 564
---------- ---------- ----------
Net cash used in investing activities.......................................... (360,072) (362,692) (312,714)
---------- ---------- ----------
Financing activities:
Proceeds from bank borrowings............................................................ 25,622 36,073 31,734
Payments on bank borrowings.............................................................. (137,296) (112,969) (1,054)
Dividends on Preferred Stock............................................................. (31,048) (31,135) (31,051)
Proceeds on Fox Kids Europe N.V. public offering, net.................................... -- 152,963 --
Cost accrued for Fox Kids Europe N.V. public offering.................................... -- 915 --
Paydown on NAI Bridge loan............................................................... (267) (268) (269)
Proceeds from Fox Subordinated Debt...................................................... 25,000 15,000 --
Advances from related parties............................................................ 112,421 5,868 1,429
---------- ---------- ----------
Net cash provided by (used in) financing activities............................ (5,568) 66,447 789
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents......................................... (35,455) 42,816 (3,347)
Cash and cash equivalents at beginning of year........................................... 82,313 46,858 89,674
---------- ---------- ----------
Cash and cash equivalents at end of year................................................. $ 46,858 $ 89,674 $ 86,327
========== ========== ==========
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest (net of amounts capitalized)................................................. $ 86,874 $ 80,646 $ 73,037
========== ========== ==========
Income taxes.......................................................................... $ 2,296 $ 2,178 $ 3,628
========== ========== ==========
See accompanying notes.
80
FOX FAMILY WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
Supplemental disclosure of non-cash investing and financing activities
Year ended June 30, 2000
A related party contributed non-cash capital in the amount of $17,940,000
in connection with the formation of an unconsolidated affiliate. Additionally,
the unconsolidated affiliate assumed payables of $20,000,000.
Shares of subsidiary ordinary shares were issued as settlement of a
$100,000,000 subscription advance.
See accompanying notes.
81
FOX FAMILY WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
1. Basis of Financial Statement Presentation and Organization
Fox Family Worldwide, Inc. ("Fox Family Worldwide" or the "Company") is an
integrated global family and children's entertainment company that produces,
broadcasts and distributes live-action and animated family and children's
television programming. The Company's principal operations comprise (i)
International Family Entertainment, Inc. ("IFE"), which operates the Fox Family
Channel, one of the top 10 most widely distributed cable television networks in
the United States and one which provides family-oriented entertainment
programming reaching approximately 96% of all cable and satellite television
households, (ii) the Fox Kids Network, one of the leading children's (ages 2-11)
oriented broadcast television networks in the United States, and (iii) the Fox
Kids International Networks, including Fox Kids Europe, N.V. ("FKE") and Fox
Kids Latin America, Inc. ("FKLA"), a growing portfolio of Fox Kids branded cable
and direct-to-home ("DTH") satellite channels reaching approximately 34.5
million households operating in approximately 73 countries and 16 languages
worldwide. The Company's production and distribution operations include Saban
Entertainment, Inc. ("Saban"), whose library of approximately 6,500 half-hours
of completed and in-production children's programming is among the largest in
the world (the "Fox Family Kids Library"), and certain other subsidiaries. By
combining a widely distributed cable platform, a top-rated broadcast network,
one of the world's largest children's programming libraries, and the Fox Kids
branded international channels, the Company has the ability to manage family and
children's properties and brands from their creation through production,
distribution and the merchandising of related consumer products.
Television production, distribution and broadcast are speculative and
inherently risky. There can be no assurance of the economic success of
television programming since the revenues derived from the production,
distribution and broadcast (which do not necessarily bear a direct correlation
to the production or distribution costs incurred) depend primarily upon its
acceptance by the public, which cannot be predicted. The commercial success of
programming also depends upon the quality and acceptance of other competing
programming released into the marketplace at or near the same time, the
availability of alternative forms of entertainment and leisure time activities,
general economic conditions and other tangible and intangible factors, all of
which can change and cannot be predicted with certainty. The success of the
Company's television programming also may be impacted by prevailing advertising
rates, which are subject to fluctuation. Therefore, there is a risk that not all
of the Company's television projects will be commercially successful, resulting
in costs not being recouped or anticipated profits not being realized.
The financial statements of the Company as of and for the years ended June
30, 1999, 2000 and 2001 reflect the consolidated financial statements of Fox
Family Worldwide and its majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
As permitted by Statement of Financial Accounting Standards ("SFAS") No.
53, "Financial Reporting by Producers and Distributors of Motion Pictures," the
Company has presented an unclassified consolidated balance sheet.
The Reorganization
The Company was incorporated in August 1996 under Delaware law as a holding
company of FCN Holding, Inc. ("FCN Holding") and Saban. Between August 1996 and
August 1997, the Company conducted no business or operations. On August 1, 1997,
in connection with the Company's acquisition of IFE (see Note 3), (i) a wholly
owned indirect subsidiary of Fox Broadcasting Company ("Fox Broadcasting"),
exchanged its capital stock in FCN Holding, which indirectly owns Fox Children's
Network, Inc. ("FCN") for 7,920,000 shares of Class B Common Stock of the
Company, (ii) the other stockholder of FCN Holding exchanged its capital stock
in FCN Holding for an aggregate of 160,000 shares of Class A Common Stock of the
Company, (iii) Haim Saban and the other former stockholders of Saban (together,
the "Saban Stockholders") exchanged their capital stock of Saban for an
aggregate of 7,920,000 shares of Class B Common Stock of the Company, and (iv)
all outstanding management options to purchase Saban capital stock became
options to purchase an aggregate of 646,548 shares of Class A Common Stock of
the Company (together, the "Reorganization"). In addition, Fox Broadcasting
exchanged its preferred, non-voting interest in Fox Kids Worldwide, L.L.C. (the
"LLC") and its $50 million contingent note receivable from the LLC for a new
subordinated pay-in-kind note (the "Fox Subordinated Note") from the Company,
which accrues interest at the rate of 10.427%.
82
In connection with the acquisition of IFE, the Company issued the NAI
Bridge Note to News America Incorporated ("NAI") upon substantially the same
terms and conditions as the Fox Subordinated Note. In addition, the Company
issued to Liberty IFE, Inc. ("Liberty IFE") $345,000,000 of Series A Mandatorily
Redeemable Preferred Stock.
As part of the formation of the LLC, Saban, the Saban Stockholders, Fox
Broadcasting, FCN Holding and one of its subsidiaries entered into a Strategic
Stockholders Agreement dated December 22, 1995, which provided, among other
things, for restrictions on transfer of the stock held by the parties, certain
voting rights between them, as well as the terms of the Reorganization. The
parties to the Strategic Stockholders Agreement also agreed to provide Haim
Saban and the Saban Stockholders and Fox Broadcasting certain registration
rights. On August 1, 1997, the Strategic Stockholders Agreement was amended and
restated (the "Amended and Restated Strategic Stockholders Agreement") to add
provisions regarding voting between Fox Broadcasting and the former Saban
Stockholders.
As part of the Amended and Restated Strategic Stockholders Agreement, Haim
Saban agreed with Fox Broadcasting Sub, Inc. ("FBSI"), a wholly owned indirect
subsidiary of Fox Broadcasting, as follows: if the Company is unable to meet its
obligations (i) to pay any dividend under the terms of the Series A Mandatorily
Redeemable Preferred Stock or to redeem the Series A Mandatorily Redeemable
Preferred Stock, (ii) under its lease of 10960 Wilshire Boulevard, Los Angeles,
California, or any obligation guaranteed by The News Corporation Limited ("News
Corp."), or (iii) under the Funding Agreement among News Corp., News Publishing
Australia Limited ("NPAL"), a wholly owned subsidiary of News Corp., and the
Company (the "Funding Agreement"), and either News Corp. or NPAL provides funds
to the Company, the advance will be treated as a loan, or if Citibank, in its
sole discretion as administrative agent under the Amended Credit Facility,
determines it is unacceptable to treat the advance as a loan, the advance will
be treated as preferred stock. To the extent the advance is treated as a loan
and the amount exceeds $50,000,000, if the advance is not repaid after 18 months
(or 12 months for all advances after the third anniversary of the agreement),
all or any portion of the advance in excess of $50,000,000 may be converted into
shares of Class B Common Stock. If FBSI elects to convert any portion of the
advance into Class B Common Stock, Haim Saban will have the right to purchase
from Fox Broadcasting up to 50% of the number of shares of Class B Common Stock
issued pursuant to the conversion. If instead, the advance is treated as
preferred stock, the first $50,000,000 of the advance shall be applied to the
issuance of shares of Series B Preferred Stock, and the remainder of the advance
shall be applied to the issuance of Series C Convertible Preferred Stock, which
is convertible into Class B Common Stock at the election of the holder. Each of
the Series B and Series C Preferred Stock will have a liquidation preference
equal to its issue price of $100,000 per share. The Series B and Series C
Preferred Stock will be entitled to dividends at an annual rate of 11.7% of its
liquidation value. If Fox Broadcasting elects to convert the Series C
Convertible Preferred Stock into Class B Common Stock, Haim Saban will have the
right to purchase up to 50% of the number of shares of Class B Common Stock
issued pursuant to the conversion. Notwithstanding the agreements, News Corp.
has no obligation to make any advances, and the Company has no obligation to
accept any amounts from News Corp.
In connection with the formation of the LLC and pursuant to a Stock
Ownership Agreement dated December 22, 1995, as amended (the "Stock Ownership
Agreement") the LLC was granted an option to purchase, upon the occurrence of
certain events, all of the Class B Common Stock held by the Saban Stockholders,
and any of their transferees. The purchase price formula under the option is
based on the fair market value of the Company. In September 1996 the LLC
distributed the Stock Ownership Agreement to FCN Holding, which immediately
distributed that agreement to FBSI.
In addition, under the terms of the original Amended and Restated Strategic
Stockholders Agreement, Haim Saban has the right and option to cause Fox
Broadcasting to purchase all of the Class B Common Stock held by the Saban
Stockholders, which option may be exercised by Haim Saban upon the occurrence of
certain events. In connection with the "Change of Control" provisions of the
Indentures that govern the Notes, and the "Change of Control" provisions of the
Amended Credit Facility, the exercise of FBSI's option to purchase the Class B
Common Stock held by the Saban Stockholders, or the exercise by Haim Saban of
his option to cause Fox Broadcasting to purchase all of the Class B Common Stock
held by the Saban Stockholders, would not constitute a "Change of Control."
On December 21, 2000, Mr. Saban exercised the option to cause Fox
Broadcasting to purchase all of the Class B Common Stock held by the Saban
Stockholders in accordance with the terms of the Amended and Restated Strategic
Stockholders Agreement. On January 17, 2001, FBSI delivered notice to Mr. Saban,
stating that it had exercised the Call
83
Option (as defined in the Stock Ownership Agreement) under the Stock Ownership
Agreement, to purchase such shares pursuant thereto. (See Note 14 - Subsequent
Event.)
Pursuant to the Funding Agreement, each of News Corp. and NPAL, jointly and
severally, agreed to provide the Company with the funds necessary to redeem in
full or pay the liquidation distribution on all other amounts owing in respect
of the Series A Preferred Stock in the event of an event of default under the
provisions governing the Series A Preferred Stock contained in the Company's
Certificate of Incorporation or a liquidation, dissolution or similar event of
the Company. In addition, pursuant to an Exchange Agreement among NPAL, Liberty
Media Corporation and Liberty IFE, each holder of the Series A Preferred Stock
has the right, in the event of an event of default under the provisions
governing the Series A Preferred Stock contained in the Company's Certificate of
Incorporation or a liquidation, dissolution or similar event of the Company, to
exchange its shares for an equivalent number of shares of preferred stock of
NPAL.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements for the years ended June 30, 1999,
2000 and 2001 include the accounts of the Company and all of its majority-owned
and controlled subsidiaries. The accounts of certain foreign subsidiaries were
consolidated as of May 31 due to the time needed to consolidate these
subsidiaries. No events occurred related to these foreign subsidiaries in June
1999, 2000 and 2001 that materially affected the Company's consolidated
financial position or results of operations. The Company's investments in
related companies which represent a 20% to 50% ownership interest over which the
Company has significant influence but not control are accounted for using the
equity method. All significant intercompany transactions and balances have been
eliminated.
Revenue Recognition
Revenue from television, music, and merchandising lease agreements, which
provide for the receipt by the Company of nonrefundable guaranteed amounts, is
recognized when the lease period begins, collectibility is reasonably assured
and the product is available pursuant to the terms of the lease agreement.
Amounts in excess of minimum guarantees under these lease agreements are
recognized when earned. Amounts received in advance of recognition of revenue
are recorded as deferred revenues. Advertising revenue is recognized as earned
in the period in which the advertising commercials are telecast. The Company
generally provides advertisers with guaranteed ratings in connection with its
domestic network broadcasts. Revenue is recorded net of estimated shortfalls,
which are settled either by additional advertising time ("make goods") or cash
refunds to the advertiser. Subscriber revenue is recognized based upon the
reported level of subscribers.
Production and Programming Costs
Programming costs, consisting of direct production costs, acquisition of
story rights, costs to acquire distribution rights, allocable production
overhead, interest and exploitation costs which are expected to benefit future
periods are capitalized as incurred. The individual film forecast method is used
to amortize programming costs in which the Company owns or controls distribution
rights. Under such method, costs accumulated in the production of a program are
amortized in the proportion that gross revenues realized bear to management's
estimate of the total gross revenues expected to be received. Estimated
liabilities for residuals and participations are accrued and expensed in the
same manner as programming cost inventories are amortized.
For programs in which the Company acquires only broadcast rights, the
Company amortizes such program costs over the estimated number of telecasts. The
Company evaluates its programming rights for possible changes in the estimated
number of telecasts or the possibility of impairment.
84
Revenue estimates on a program-by-program basis are reviewed periodically
by management and are revised, if warranted, based upon management's appraisal
of current market conditions. Based on this review, if estimated future gross
revenues from a program are not sufficient to recover the unamortized costs, the
unamortized programming cost will be written down to net realizable value.
Production and programming costs also include the use of satellite
transponders and costs associated with engineering and technical support
services.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of temporary cash investments
and accounts receivables. The Company places its temporary cash investments with
high credit quality financial institutions or in a mutual fund which invests in
government securities and therefore are subject to reduced risk. The Company has
not incurred any losses relating to these investments.
The Company leases its product to distributors and broadcasters and sells
advertising time throughout the world. The Company performs periodic credit
evaluations of its customers' condition and generally does not require
collateral. Generally, payment is received in full or in part prior to the
Company's release of product to such distributors and broadcasters. At June 30,
2000 and June 30, 2001, substantially all of the Company's trade receivables
were from customers in the entertainment or broadcast industries or from
advertising agencies. Receivables generally are due within 30 days. Credit
losses relating to customers in the entertainment and broadcast industries or
advertising agencies consistently have been within management's expectations.
Cash and Cash Equivalents
Cash and cash equivalents consist of all highly liquid investments that are
both readily convertible into cash and with maturities when purchased of three
months or less to be cash equivalents.
Restricted Cash
Restricted cash primarily represents amounts held by financial institutions
as collateral on outstanding debt.
Financial Instruments
Financial instruments are carried at historical cost which approximate fair
value.
Property and Equipment, net
Property and equipment are stated at cost less accumulated depreciation and
amortization. Property and equipment acquired as part of the acquisition of IFE
is stated at estimated fair market value at the date of purchase. Depreciation
of property and equipment is computed under the straight-line method over the
expected useful lives of applicable assets, ranging from three to eight years.
Leasehold improvements are amortized under the straight-line method over the
shorter of the estimated useful lives of the assets or the terms of the related
leases. When property is sold or otherwise disposed of, the cost and related
accumulated depreciation or amortization is removed from the accounts, and any
resulting gain or loss is included in operating income (loss). The costs of
normal maintenance, repairs and minor replacements are charged to expense when
incurred.
Intangible Assets, net
The intangible assets resulting from the acquisition of IFE are amortized
over an estimated useful life of 40 years using the straight-line method.
Management continuously monitors and evaluates the realizability of existing
assets, to determine whether their carrying values have been impaired. In
evaluating the value and future benefits of existing assets, their carrying
value is compared to management's best estimate of undiscounted future cash
flows expected to result from the use of the assets and their eventual
disposition. Management also considers events or changes in circumstances, such
as changes in the number of subscribers, which indicates that assets may not be
recoverable. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount
85
by which the carrying value of the assets exceeds the estimated fair value of
the assets. Estimated fair value will be based on either reliably determined
third-party valuations, if available, or discounted cash flows. When discounting
cash flows, a discount rate will be selected which will be commensurate with the
risk involved as it relates to IFE. As of June 30, 2001, there are no
indications of impairment as it relates to the intangible assets.
Accumulated amortization of intangibles as of June 30, 2000 and 2001 was
$118,513,000 and $159,035,000, respectively. For the year ended June 30, 2000,
intangible assets related to the IFE acquisition were reduced by $18,141,000 due
to the utilization of certain tax assets not benefited at the acquisition date.
Debt Issuance Costs
Included within other assets, net, are debt issuance costs and deferred
loan fees incurred in connection with the issuance of the Senior Notes, the
Senior Discount Notes and the Amended Credit Facility (see Note 6). Such costs
and fees are being amortized over the term of the debt using the straight-line
method, which approximates the effective interest method. Accumulated
amortization of debt issuance costs and deferred loan fees was $8,956,000 and
$12,225,000 as of June 30, 2000 and 2001, respectively.
Foreign Currency Translation and Cumulative Adjustment
Saban International N.V. (SINV), which is deemed to be a wholly-owned
subsidiary of the Company, uses the U.S. dollar as its functional currency. All
other foreign subsidiaries of the Company use local currency as their functional
currency. Assets and liabilities are translated into U.S. dollars at current
exchange rates. Revenues and expenses are translated into U.S. dollars based
generally on the average rates prevailing during the period.
Gains and losses arising from foreign currency transactions are included in
determining net income (loss) for the period. The aggregate transaction losses
for the years ended June 30, 1999, 2000 and 2001, were $1,596,000, $5,575,000
and $4,584,000, respectively, and are generally netted against the related
revenues.
The cumulative translation adjustment included in accumulated other
comprehensive loss in stockholders' deficit represents the Company's net
unrealized exchange losses on the translation of foreign subsidiaries' financial
statements.
Income Taxes
In accordance with SFAS No. 109 "Accounting for Income Taxes," deferred tax
assets and liabilities are recognized with respect to the tax consequences
attributable to differences between the financial statement carrying values and
tax bases of existing assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which these temporary differences are expected to be
recovered or settled. Further, the effect on deferred tax assets and liabilities
of changes in tax rates is recognized in income in the period that included the
enactment date.
Use of Estimates
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 amounts reported in the financial
statements and accompanying notes including amortization of programming costs.
Actual results could differ from those estimates. Management periodically
reviews and revises its estimates of future airings and revenues, as necessary,
which may result in revised amortization of its programming costs. Results of
operations may be significantly affected by such periodic adjustments in
amortization.
Stock-Based Compensation
The Company accounts for its stock compensation arrangements with employees
under the provisions of Accounting Principles Board ("APB") No. 25, "Accounting
for Stock Issued to Employees." As such, compensation expense would be recorded
on the date of grant only if the current market price of the underlying stock
exceeded the exercise price.
86
SFAS No. 123, "Accounting for Stock-Based Compensation," requires entities
to recognize as expense over the vesting period the fair value of all stock-
based awards on the date of grant or allows entities to continue to apply the
provisions of APB No. 25 and provide pro forma disclosures for employee stock
option grants as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB No.
25 and provide the pro forma disclosure provisions of SFAS No. 123 (see Note
12).
Reclassifications
Certain reclassifications have been made to prior years' financial
statements to conform with fiscal 2001 presentation.
New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 clarifies certain existing accounting principles for the
recognition and classification of revenues in financial statements. The new
rules resulted in some changes as to how the filmed entertainment industry
classifies its revenue, particularly relating to distribution arrangements for
third-party and co-financed joint ventures product, but it does not result in
any changes to net income. The Company adopted SAB 101 during the first quarter
of fiscal 2001. SAB 101 has had no material effect on the Company's
consolidated financial statements.
In January 2000, EITF 99-17, "Accounting for Advertising Barter
Transactions" was issued. EITF 99-17 requires that revenues and expenses related
to advertising barter transactions be recognized at fair value only if the fair
value of the advertising surrendered in the transaction is determinable based on
the entity's own historical practice of receiving cash, marketable securities,
or other consideration that is readily convertible to a known amount of cash for
similar advertising from buyers unrelated to the counterparty in the barter
transaction. This EITF has had no material impact on the financial position or
operating results of the Company.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued by the Financial Accounting Standards Board
("FASB"). SFAS No. 133 was subsequently amended by SFAS No. 137, which had the
effect of deferring the date of its effectiveness. In March 2000, SFAS No. 133
was also amended by SFAS No. 138, "Accounting for Certain Derivative Instruments
and Hedging Activities - An Amendment to FASB Statement No. 133," which amends
the accounting and reporting standards of SFAS No. 133 for certain derivative
instruments and hedging activities. SFAS No. 133 and 138 establish accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 and 138 are effective for fiscal periods beginning after June 15, 2000. The
Company adopted SFAS No. 133 and 138 as of July 1, 2000, which had no material
effect on the consolidated financial statements.
In June 2000, the FASB issued SFAS No. 139, which, effective for financial
statements for fiscal years beginning after December 15, 2000, rescinds FASB No.
53. The companies that were previously subject to the requirements of SFAS No.
53 are now required to follow the guidance of Statement of Position 00-2,
"Accounting by Producers and Distributors of Films" ("SOP 00-2"), issued by the
American Institute of Certified Public Accountants. SOP 00-2 requires that
advertising and other exploitation costs for theatrical and television product
be expensed as incurred. This compares to the Company's existing policy of
capitalizing and then expensing advertising cost for theatrical and television
product over the related revenue streams, as prescribed under SFAS No. 53. In
addition, SOP 00-2 requires development costs for abandoned projects after three
years and certain indirect overhead costs to be charged directly to expense,
instead of those costs being capitalized to programming costs, which currently
is required under the existing accounting standard. The Company will also be
required to classify film additions to operating activities in the statements of
cash flow as opposed to the Company's current policy of including these as
investing activities. SOP 00-2 is effective for financial statements for fiscal
years beginning after December 15, 2000. The Company plans to adopt SOP 00-2
during the first quarter of fiscal 2002. Based on the Company's estimates at
this time, the effect of adopting SOP 00-2 will result in a one-time, non-cash,
pre-tax charge as a cumulative effect of accounting change in the range of
approximately $55 million to $60 million.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations." This
statement has eliminated the flexibility to account for some mergers and
acquisitions as pooling of interests, and is effective as of July 1, 2001, all
business combinations are to be accounted for using the purchase method. The
Company will adopt SFAS No. 141 as
87
of July 1, 2001, and the impact of such adoption is not anticipated to have a
material impact on the Company's financial statements.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." Under this statement goodwill and intangible assets with indefinite
lives are no longer subject to amortization, but rather an annual assessment of
impairment by applying a fair-value-based test. The Company will implement SFAS
No. 142 on July 1, 2002. The impact of such adoption has not been determined.
3. Acquisition of International Family Entertainment, Inc.
On August 1, 1997, the Company acquired a 50.7% interest in IFE through the
purchase, for $35 per share, of the stock owned by M.G. "Pat" Robertson, Tim
Robertson and certain trusts of which they are trustees, The Christian
Broadcasting Network, Inc. ("CBN") and Regent University (together, the
"Privately Owned Shares") and Liberty IFE exchanged of all of the IFE stock
owned by it and $23,000,000 principal amount of 6% Convertible Secured Notes due
2004 of IFE (the "Convertible Notes") (which have since been retired) for shares
of Series A Mandatorily Redeemable Preferred Stock of the Company (the "IFE
Acquisition"). On September 4, 1997, the Company consummated a merger to acquire
the remaining shares of IFE from the public shareholders. Total consideration
for the IFE Acquisition was approximately $1.9 billion including assumption of
liabilities. The Company paid approximately $545,000,000 for the Privately Owned
Shares and issued $345,000,000 of its Series A Mandatorily Redeemable Preferred
Stock to Liberty IFE as payment for the IFE stock and the Convertible Notes. The
balance of the consideration was paid to acquire the publicly traded shares
through the merger, to cash out existing options, to acquire shares of IFE stock
held by IFE senior executives and employees, and to assume IFE's existing bank
debt, which has since been retired.
When IFE was acquired, the Company had plans to relocate IFE to California
and consolidate certain other operations of IFE and therefore recorded severance
and related reserves of $36,500,000 of which $3,147,000, payable to former IFE
employees, remains as of June 30, 2001. The Company made severance and related
payments of $8,873,000 for the year ended June 30, 1999, $2,713,000 for the year
ended June 30, 2000 and $1,917,000 for the year ended June 30, 2001. Severance
amounts are being paid monthly to certain former employees of IFE through fiscal
2006. The Company also recorded litigation and other related accruals of
$4,800,000, of which $2,444,000 remains as of June 30, 2001. The Company made
litigation and other related payments of $1,139,000 and $331,000 in the years
ended June 30, 2000 and 2001, respectively. Legal matters pertaining to IFE
which existed prior to the acquisition are being charged against the accrual
until resolution of such matters.
4. Programming Costs, net
Programming costs, net of accumulated amortization, are comprised of the
following as of June 30, (in thousands):
2000
-----------------------------------------------------------------
Accumulated Net Programming
Cost Amortization Costs
---------------- --------------- ---------------
Children's programming................................. $ 1,446,229 $ 1,177,591 $ 268,638
Family programming, movies and mini-series............. 805,078 454,809 350,269
Projects in production................................. 44,818 -- 44,818
Development............................................ 7,718 -- 7,718
---------------- --------------- -------------
$ 2,303,843 $ 1,632,400 $ 671,443
================ =============== =============
88
2000
-----------------------------------------------------------------
Accumulated Net Programming
Cost Amortization Costs
---------------- --------------- ---------------
Children's programming.................................. $ 1,710,678 $ 1,314,171 $ $396,507
Family programming, movies and mini-series.............. 840,846 584,448 256,398
Projects in production.................................. 41,325 -- 41,325
Development............................................. 15,871 -- 15,871
---------------- --------------- ---------------
$ 2,608,720 $ 1,898,619 $ $710,101
================ =============== ===============
Future minimum program commitments as of June 30, 2001 are approximately
$303 million.
As of June 30, 2001 the Company estimates that approximately 71% of
released unamortized programming costs will be amortized within the next three
years. Interest amounting to $3,128,000, $2,253,000 and $5,759,000 was
capitalized to programming costs for the years ended June 30, 1999, 2000 and
2001, respectively. Capitalized depreciation expense for the years ended June
30, 1999, 2000 and 2001 amounted to $4,020,000, $3,595,000 and $3,048,000,
respectively.
5. Property and Equipment, net
Property and equipment is comprised of the following as of June 30, (in
thousands):
2000 2001
-------------- --------------
Studio and other equipment........................................ $ 28,595 $ 35,463
Satellite transponders............................................ 39,596 39,596
Office furniture and fixtures..................................... 18,474 20,368
Leasehold improvements............................................ 9,536 9,439
Other............................................................. 2,460 2,399
-------------- --------------
98,661 107,265
Less accumulated depreciation and amortization.................... (46,787) (58,572)
-------------- --------------
$ 51,874 $ 48,693
============== ==============
6. Bank and Other Debt
Bank and other debt is comprised of the following as of June 30, (in
thousands):
2000 2001
-------------- --------------
Senior Notes......................................................................... $ 475,000 $ 475,000
Senior Discount Notes, net of unamortized discount of $130,242 and $77,049 at
June 30, 2000 and 2001, respectively................................................ 488,428 541,621
NAI Bridge Note...................................................................... 131,784 145,884
Fox Subordinated Notes............................................................... 194,693 221,133
Citicorp USA, secured revolving line of credit; interest at prime rate (9.5% and
6.75% at June 30, 2000 and 2001, respectively) or six month LIBOR (6.94% and
3.71% at June 30, 2000 and 2001, respectively) plus 0.75%; maximum borrowings of
$355,000............................................................................ 325,000 355,000
Citicorp USA; secured term loan facility; interest at prime rate (9.5% and 6.75%
at June 30, 2000 and 2001, respectively) or six month LIBOR (6.94% and 3.71% at
June 30, 2000 and 2001, respectively) plus 0.75%; maximum borrowings of $120,000.... 120,000 120,000
Secured lines of credit with varying due dates between December 12, 2001 and
November 30, 2002; maximum borrowing availability $10,578 at June 30, 2001;
varying interest rates between 4.25% and 5.5%....................................... 9,229 9,909
-------------- --------------
$ 1,744,134 $ 1,868,547
============== ==============
89
Payments of bank and other debt in future periods are as follows (in
thousands):
Year ending June 30,
--------------------
2002............................................... $ 74,386
2003............................................... 98,710
2004............................................... 239,688
2005............................................... 72,124
Thereafter......................................... 1,383,639
------------
$1,868,547
============
In August 1997, the Company, FCN Holding, Saban and IFE entered into a
credit facility ("Old Credit Facility") with a group of banks led by Citicorp in
the amount of $1.25 billion. The Old Credit Facility comprised a $602,000,000
seven-year secured reducing revolving credit facility, a $298,000,000 seven-year
secured reducing revolving credit facility and a $350,000,000 nine-year secured
term loan facility.
The proceeds of the loans under the old Credit Facility were used to
finance, in part, the IFE Acquisition and to repay certain obligations of
subsidiaries of the Company.
In October 1997, upon consummation of the Company's Offering, the Old
Credit Facility was amended (the "Amended Credit Facility") to provide a
$355,000,000 seven-year term loan, subsequently reduced to $120,000,0000 as of
June 30, 2001, and a $355,000,000 seven-year reducing revolving credit facility.
The Company is not a borrower under the Amended Credit Facility but is a
guarantor. A wholly-owned subsidiary of the Company, Fox Kids Holdings, LLC, was
created by the Company to hold the equity interests of FCN Holding, Saban and
IFE (which remained borrowers) and guarantee the Amended Credit Facility.
Subsequently, two additional subsidiaries of Fox Kids Holdings, LLC were formed,
Fox Family Properties, Inc. and Fox Family Management, LLC, which are also
borrowers under the Amended Credit Facility.
The collateral for the Amended Credit Facility is limited to the equity
interests of Fox Kids Holdings, LLC, the borrowers and their subsidiaries
(subject to certain limitations for foreign and less than wholly owned
subsidiaries) and certain intercompany indebtedness of subsidiaries of Fox Kids
Holdings, LLC. Scheduled payments on the term loan began December 30, 2000, with
10% of the term loan being reduced in year 3 of the loan, 20% in each of years 4
and 5 and 25% in each of years 6 and 7. Scheduled quarterly reductions to the
revolving credit commitment will begin December 28, 2001, with 15% of the
commitment being reduced in each of years 5 and 6 and 70% in year 7.
The borrowings under the Amended Credit Facility bear interest at the
Company's option at a rate per annum equal to either LIBOR plus an applicable
interest rate margin or the base rate. In addition, the Company pays a
commitment fee on the unused and available amounts under the Amended Credit
Facility.
The Amended Credit Facility contains a number of significant covenants
that, among other things, limit the ability of the co-borrowers and their
respective subsidiaries to incur additional indebtedness, create liens and other
encumbrances, prepay indebtedness, sell assets, make certain payments and
investments, make distributions to owners and repurchase debt and equity. In
addition, the Amended Credit Facility requires the maintenance of certain
specified financial and operating covenants, including, without limitation,
capital expenditure limitations and ratios of earnings before interest expense,
taxes, depreciation and amortization of intangible assets ("EBITDA") to fixed
charges, total debt to EBITDA and EBITDA to interest expense. The Amended
Credit Facility also contains representations, warranties, covenants, conditions
and events of default customary for senior credit facilities of similar size and
nature. (See Note 14 - Subsequent Event.)
On October 28, 1997, the Company issued $475,000,000 aggregate principal
amount of 9-1/4% Senior Notes Due 2007 ("Senior Notes") and $618,670,000
aggregate principal amount at maturity of 10-1/4% Senior Discount Notes Due 2007
("Senior Discount Notes" and collectively the "Notes") in a transaction not
registered under the Securities Act in reliance upon an exemption from the
registration requirements of the Securities Act. Gross proceeds from the
offering amounted to $850,000,000. The discount on the Senior Discount Notes is
being accreted under the effective interest method.
90
Cash interest on the Senior Notes is payable semi-annually in arrears on
each May 1 and November 1, commencing May 1, 1998. Cash interest will not accrue
or be payable on the Senior Discount Notes prior to November 1, 2002.
Thereafter, cash interest on the Senior Discount Notes will be payable semi-
annually in arrears on each May 1 and November 1, commencing on May 1, 2003.
However, at any time prior to November 1, 2002, the Company may elect (the "Cash
Interest Election") on any interest payment date (the date of such Cash Interest
Election, the "Cash Interest Election Date") to commence the accrual of cash
interest from and after the Cash Interest Election Date, in which case the
principal amount at maturity of each Senior Discount Note will on such interest
payment date be reduced to the accreted value of such Senior Discount Note as of
such interest payment date, and cash interest (accruing at a rate of 10- 1/4%
per annum from the Cash Interest Election Date) shall be payable with respect to
such Senior Discount Note on each interest payment date thereafter.
The Senior Notes will be redeemable at the option of the Company, in whole
or in part, at any time on or after November 1, 2002, at the redemption prices
(expressed as percentages of principal amount) set forth below, plus accrued and
unpaid interest, if any, to the redemption date, if redeemed during the 12-month
period beginning on November 1 of the years indicated below:
Redemption
Year Price
---- -----------
2002............................................ 104.63%
2003............................................ 103.08%
2004............................................ 101.54%
2005 and thereafter............................. 100.00%
The Senior Discount Notes will be redeemable at the option of the Company,
in whole or in part, at any time on or after November 1, 2002, at the redemption
prices (expressed as a percentage of principal amount at maturity) set forth
below, plus accrued and unpaid interest thereon, if any, to the redemption date,
if redeemed during the 12-month period beginning on November 1 of the years
indicated below:
Redemption
Year Price
---- ------------
2002............................................ 105.13%
2003............................................ 103.42%
2004............................................ 101.71%
2005 and thereafter............................. 100.00%
Upon the occurrence of a change of control, the Company shall be obligated
to make an offer to purchase (a "Change of Control Offer"), on a business day
(the "Change of Control Purchase Date") not more than 60 nor less than 30 days
following the occurrence of the change of control, all of the then outstanding
Notes tendered at a purchase price in cash (the "Change of Control Purchase
Price") equal to (x) with respect to the Senior Notes, 101% of the principal
amount thereof plus accrued and unpaid interest, if any, to the Change of
Control Purchase Date and (y) with respect to the Senior Discount Notes, 101% of
the accreted value on the Change of Control Purchase Date, unless the Change of
Control Purchase Date is on or after the earlier to occur of November 1, 2002
and the Cash Interest Election Date, in which case such Change of Control
Purchase Price shall be equal to 101% of the aggregate principal amount at
maturity thereof, plus accrued and unpaid interest thereon, if any, to the
Change of Control Purchase Date. The Company shall be required to purchase all
Notes tendered into the Change of Control Offer and not withdrawn. The Change of
Control Offer is required to remain open for at least 20 business days and until
the close of business on the Change of Control Purchase Date. The closing of
the Disney Acquisition would result in a "Change of Control" under the
Indentures that govern the Notes (See Note 14 - Subsequent Event).
The Notes will be senior unsecured obligations of the Company and will rank
senior in right of payment to all future subordinated indebtedness of the
Company. Claims of the holders of the Notes will effectively be subordinated to
the claims of creditors of the Company's subsidiaries, including the banks under
the Bank Facility.
The Company is subject to certain covenants in connection with the issuance
of the Notes which include for example limitation on indebtedness, restricted
payments, liens, dividends, transactions with affiliates and disposition of
assets. The Company was in compliance with these covenants at June 30, 1999,
2000 and 2001.
91
The initial Fox Subordinated Note was restated on May 19, 1998 and accretes
interest at the rate of 10.427% and is due on May 1, 2008. Two additional Fox
Subordinated Notes in the amounts of $25 million and $15 million were issued in
June 1999 and September 1999, respectively, and accrete interest at the rate of
20% and are due on June 28, 2009 and September 27, 2009, respectively. The
payment of principal and interest under the Fox Subordinated Notes is
subordinated in right to the obligations of the Company and its subsidiaries
under the Amended Credit Facility and the Indentures. (See Note 14 - Subsequent
Event.)
On August 29, 1997, in connection with the acquisition of IFE, the Company
issued the NAI Bridge Note to NAI upon substantially the same terms and
conditions as the Fox Subordinated Note, except that the NAI Bridge Note has a
principal amount of $345,500,000. The NAI Bridge Note was restated on May 19,
1998 to reflect a change in the interest rate, effective as of the date of
issuance. As restated, the NAI Bridge Note accretes interest at a rate of
approximately 10.427% per annum. The Company may repay the NAI Bridge Note in
whole or in part, subject to the terms of the Amended Credit Facility and the
Indentures. The payment of principal and interest under the NAI Bridge Note will
be subordinated in right to the obligations of the Company under the Amended
Credit Facility and the Indentures. In October 1997, a $215 million paydown was
made to the NAI Bridge Note in connection with the issuance of the Senior Notes
and Senior Discount Notes. (See Note 14 - Subsequent Event.)
7. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows as of June 30,
(in thousands):
2000 2001
---------- ----------
Deferred tax liabilities:
Accounts receivable........................ $ 127 $ 477
Property and equipment..................... 5,108 6,723
Contract discount.......................... 1,042 407
Other...................................... 8,611 9,984
---------- ----------
Total deferred tax liabilities................. 14,888 17,591
---------- ----------
Deferred tax assets:
Deferred revenues.......................... 1,550 264
Programming costs.......................... 10,160 5,081
Accrued liabilities........................ 19,487 19,057
Loss carryforwards......................... 123,467 174,090
Other...................................... 2,483 3,212
---------- ----------
Total deferred tax assets...................... 157,147 201,704
Valuation allowance for deferred tax assets.... (157,147) (198,476)
---------- ----------
Deferred tax assets............................ -- 3,228
---------- ----------
Net deferred tax (liabilities)................. $ (14,888) $ (14,363)
========== ==========
The Company currently has approximately $354,000,000 of operating loss
carryforwards which will expire at various dates through June 30, 2021.
Approximately $63,600,000 of the operating loss carryforwards are separate
return year losses. As such federal and state income tax law and regulations
might limit utilization.
Management has determined that as of June 30, 2001, $198,476,000 of
deferred tax assets do not satisfy the recognition criteria set forth in SFAS
No. 109. Accordingly, a valuation allowance has been recorded for this amount.
Approximately $56,658,000 of the prior year valuation allowance relates to
deferred tax assets acquired in the IFE acquisition. (See Note 3). For the
year ended June 30, 2000, the Company realized the benefit of $18,140,000 of
these deferred tax assets for which the benefit was recorded as a reduction to
goodwill. As of June 30, 2001, approximately $38,518,000 of the valuation
allowance relates to the remaining deferred tax assets acquired in the IFE
transaction. Accordingly, goodwill will be reduced at such time as these
deferred tax assets are realized.
92
Income before income taxes includes the following components (in
thousands):
Years Ended June 30,
---------------------------------------------------
1999 2000 2001
------------- -------------- ---------------
Pretax income (loss):
United States.................................................. $(86,202) $121,879 $(33,674)
Foreign........................................................ 21,792 16,665 7,948
------------- -------------- ---------------
$(64,410) $138,544 $(25,726)
============= ============== ===============
Significant components of the provision for income taxes are as
follows (in thousands):
Years Ended June 30,
--------------------------------------------------------
1999 2000 2001
-------------- -------------- ----------------
Current:
Federal........................................................ $ -- $ 21,281 $ --
State.......................................................... 500 2,090 --
Foreign........................................................ 1,489 2,678 525
-------------- -------------- -----------------
1,989 26,049 525
Deferred:
Federal........................................................ -- 48,284 --
State.......................................................... -- 2,826 --
Foreign........................................................ -- -- (525)
-------------- -------------- -----------------
-- 51,110 (525)
-------------- -------------- -----------------
$ 1,989 $ 77,159 $ --
============== ============== =================
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to the provision for income taxes:
Years Ended June 30,
--------------------------------------------------
1999 2000 2001
------------- ------------- ------------
Tax at U.S. statutory rates..................................... (35)% 35% (35)%
State taxes, net of federal benefit............................. (4) 2 --
Foreign income/transactions..................................... (10) (8) 4
Subsidiary disposition.......................................... -- -- (222)
U.S. operating loss for which no federal and state benefit was 26 -- 197
derived........................................................
Change in valuation allowance................................... -- 16 --
Non-deductible amortization of intangibles...................... 24 10 55
Other........................................................... 2 1 1
------------- ------------- ------------
3% 56% --%
============= ============= ============
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $399,263,000 at June 30, 2001. Those earnings are considered to be
indefinitely reinvested and, accordingly, no provision for U.S. federal and
state income taxes has been provided thereon. Upon distribution of those
earnings in the form of dividends or otherwise, the Company would be subject to
both U.S. income taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to the various foreign countries. Determination of the
amount of unrecognized deferred U.S. income tax liability is not practicable
because of the complexities associated with its hypothetical calculation;
however, unrecognized foreign tax credit carryforwards would be available to
reduce some portion of the U.S. liability. It is possible that the Internal
Revenue Service could under certain theories attempt to tax the foreign
subsidiaries' income. Currently, management of the Company believe that any such
theories would be without merit.
93
8. Commitments and Contingencies
Leases
In July 1995, the Company entered into a ten-year lease commencing on April
1, 1996 for office space in Los Angeles, California subject to two separate five
year extension options. The lease provides for early termination at the end of
the eighth year upon payment of a termination fee. The lease calls for monthly
payments plus maintenance and property tax payments. The Company also leases
other facilities throughout the world on an as needed basis expiring at various
dates.
Noncancellable future minimum payments for the remainder of the initial,
noncancellable lease periods are as follows (in thousands):
Years ending June 30,
---------------------
2002................................................. $13,531
2003................................................. 12,472
2004................................................. 11,376
2005................................................. 11,306
2006................................................. 8,983
Thereafter........................................... 5,411
----------
$63,079
==========
Rent expense for the years ended June 30, 1999, 2000 and 2001, net of
amounts capitalized, was approximately $6,392,000, $7,119,000 and $7,667,000,
respectively.
Legal Matters
The Company is involved in various lawsuits, both as a plaintiff and
defendant, in the ordinary course of its business. Based on an evaluation which
included consultation with counsel concerning legal and factual issues involved,
management is of the opinion that the foregoing claims and lawsuits will not
have a material adverse effect on the Company's consolidated financial position
or results of operations.
Employment Agreements
The Company has entered into employment agreements with certain key members
of management. Such agreements are for terms originally ranging from one to six
and one-half years and generally include bonus provisions. Future minimum
payments under these agreements approximate $41,365,000, of which $30,278,000 is
due in 2002, $9,489,000 is due in 2003 and $1,598,000 is due in 2004.
9. Profit Sharing Plan
The Company has a qualified tax deferred profit sharing plan (the "Plan")
for all of its eligible employees. Under the Plan, employees become eligible on
the first January 1 following such employees' completion of six months of
service with the Company. Each participant is permitted to make voluntary
contributions, not to exceed 15% of his or her respective compensation and the
applicable statutory limitations, which are immediately vested. The Company, at
the discretion of the Board of Directors, may make matching contributions to the
Plan. Related expense for the years ended June 30, 1999, 2000 and 2001, was
approximately $448,000, $343,000 and $384,000, respectively.
IFE had a 401(k) retirement savings plan (the "401(k) Plan") which covered
the majority of its employees. Subject to certain limitations, employees were
permitted to contribute up to 15% of their compensation to the 401(k) Plan.
IFE's contribution to the 401(k) Plan was discretionary as determined annually
by the Company's Board of Directors. As of January 1, 1999, the 401(k) Plan was
terminated and the participating employee contributions were transferred to the
Company's Plan.
94
10. Other Related Party Transactions
The following amounts are included within the consolidated statements of
operations and balance sheets in relation to related party transactions (in
thousands):
Years Ended June 30,
------------------------------------------------------
1999 2000 2001
--------------- --------------- ---------------
Consolidated Statements of Operations
Revenues............................................................. $106,205 $104,373 $193,670
Production and programming costs(1).................................. 7,179 10,588 7,297
Selling, general and administrative expenses......................... 9,090 6,052 5,012
Interest expense, net................................................ 24,642 39,263 42,237
As of June 30,
------------------------------------
2000 2001
---------------- ----------------
Consolidated Balance Sheets
Amounts receivable from related parties, net...................................... $ 56,753 $140,039
Accounts payable.................................................................. 3,664 548
Accrued liabilities............................................................... -- 583
Deferred revenues................................................................. 2,218 672
NAI Bridge Note................................................................... 131,784 145,884
Fox Subordinated Notes............................................................ 194,693 221,133
Amounts payable to related parties, net........................................... 21,243 22,672
____________
(1) Includes satellite transponder, engineering and technical support
costs.
Amounts receivable from related parties include advances of $5,631,000 and
$5,578,000 at June 30, 2000 and 2001, respectively, to certain non-stockholder
officers and directors of the Company.
Related companies of Fox Broadcasting have funded certain of the operations
of the Company from its inception through loans to the Company and have
collected funds related to the Company's advertising sales receivables. Amounts
due to the related companies of Fox Broadcasting in connection therewith,
including interest, totaled $70,724,000 at June 30, 2001. Amounts due from
related companies of Fox Broadcasting totaled $98,662,000 at June 30, 2001.
The Company broadcasts Fox Kids U.K., a cable and satellite channel via a
digital transponder. The channel is distributed as part of British Sky
Broadcasting Group, plc's ("BSkyB") Sky Multichannels DTH package. News Corp.
holds an approximately 36% interest in BSkyB, a public company, as of June 30,
2001. As part of its agreement with BSkyB, the Company acquired, for
approximately $3,100,000, certain of BSkyB's United Kingdom license rights to
children's programming which had been previously acquired by BSkyB.
Additionally, the Company entered into an analog transponder sublease agreement
with BSkyB which expired February 1, 2001, requiring a financial commitment of
approximately $28,000,000. A five-year digital transponder and uplink sublease
agreement, commenced in late 1998 and expires October 19, 2004, requiring a
future financial commitment of approximately $3,300,000, subject to annual cost
of living increases. In addition, BSkyB provides support services for the
Company for a fee equal to 15% of net revenue, as defined in the agreement.
The Company broadcasts FKLA, a Fox Kids branded pan-regional Latin American
channel. The Company has entered into a cost sharing arrangement for employees
and service support in connection with the operation of the channel with Canal
Fox, a related party. The Company believes that such arrangement for employees
and service support are at rates which approximate fair market value.
Foxtel, an Australian-based cable and satellite television service, has
carried a Fox Kids Network children's channel segment since 1994 under a license
agreement between Foxtel and an affiliate of Fox Broadcasting. This license was
assigned to the Company. Foxtel is owned and operated by Telstra, the Australian
telephone company; News Corp.; and Publishing and Broadcasting Limited.
95
In connection with Haim Saban's employment agreement, the Company agreed to
reimburse Haim Saban for all out-of-pocket costs and expenses for domestic and
international travel, including private air charter which may include aircraft
owned directly or indirectly by Haim Saban. The Company has entered into a
contract with 5161 Corporation ("5161"), a corporation wholly owned by Haim
Saban, the Chief Executive Officer of the Company, for a minimum of fifty
charter hours during a twelve month period. For the twelve months ended June 30,
1999, 2000 and 2001, the Company has paid approximately $722,000, $552,000 and
$862,000, respectively, for such costs.
The Company is party to a music services agreement (the "Music Agreement")
with 5161. Under the terms of the Music Agreement, the Company acquires
substantially all of the original theme music, underscores, cues and songs it
uses in programming produced by the Company from 5161. In addition, the Company
has the royalty-free right to use the compositions in articles of merchandise
such as home video units, video games and interactive toys and has been granted
the non-exclusive, worldwide, and perpetual license to use the music to (i)
synchronize and perform compositions in theatrical motion pictures and (ii)
synchronize compositions in all other forms of programming.
The rights for the territory of Israel in programming produced or acquired
by the Company are transferred to Duveen Trading Ltd. (Distributor), a
corporation affiliated with Haim Saban's brother. The term of the agreement has
been orally extended through December 31, 2001.
The Company creates and owns all rights, titles and interests in master
recordings of compositions for use in the Company's programming, and the Company
owns the proceeds derived from all forms of exploitation thereof. In
consideration for providing the compositions to the Company, 5161 is entitled to
receive all publishing income derived from the exploitation of all music
compositions. 5161 reimburses the Company for certain costs associated with the
creation of the compositions, which amounted to $301,000, $397,000 and $285,000,
respectively, for the years ended June 30, 1999, 2000 and 2001. At June 30,
2000 and 2001, approximately $316,000 and $2,000, respectively, was owed to 5161
by the Company in connection with royalties collected by the Company on behalf
of 5161.
The Company utilizes the legal services of Matthew Krane, a director of the
Company since January 2000. Mr. Krane was paid approximately $145,000 for such
services for the year ended June 30, 2001.
The Company is party to a distribution agreement with Fox Family Films,
Inc. ("Distributor") for "Turbo: A Power Rangers Movie," which was released
theatrically in the United States in Spring 1997 and in home video in late
Summer 1997. Distributor holds in perpetuity worldwide theatrical, non-
theatrical, home video, and television rights in the movie (except for the
territories of Japan and certain Asian territories and Israel). The Company
holds the copyright as well as certain rights including merchandising,
television series, stage, publication, radio, theme park and touring, music
publishing and soundtrack. Commercial tie-in rights are mutually controlled by
the Company and Distributor. The Company will receive 100% of gross receipts
after certain distribution fees and expenses are deducted, based upon a formula
set forth in the agreement.
In April 1998, the Company sold its ownership interest in Fit TV and
certain other assets to Fox/Liberty Networks, LLC, a joint venture between News
Corp. and Liberty Media Corporation, for $15,000,000. The Company acquired Fit
TV in August 1997 as part of the IFE Acquisition.
In January 1997, the Company obtained from Fox Television ("Fox
Television"), a division of Fox, Inc., distribution rights to the New World
Communications Group, Inc. ("New World") animation library of children's
programming, which Fox Television acquired as part of its purchase of New World.
In July 1998, the Company acquired the New World animation library from Fox
Television for approximately $14.1 million.
The Company entered into a long-term license agreement effective October 1,
1997 with Twentieth Century Fox Film Corp. ("Twentieth Century Fox"), pursuant
to which Twentieth Century Fox will distribute certain products in the Company's
programming library. In February 2001, Twentieth Century Fox exercised an
option to acquire a portion of the film library covered by the long-term license
agreement. In June 2001, Twentieth Century Fox acquired the remaining portion.
The Company recognized revenue on the sale in the amount of $80,800,000 for the
fiscal year ended June 30, 2001. Included in amounts receivable from related
parties at June 30, 2001 are two promissory notes totaling $59,672,000
(including interest). These promissory notes earn interest at 10.31% and are
payable in annual installments.
96
Pursuant to a Guaranty of Lease entered into on August 1, 1997 and amended
as of July 26, 2000 (the "Guaranty"), News Corp. and NPAL have guaranteed
certain of the Company's obligations under the lease of its corporate
headquarters. Under the Guaranty, News Corp. and NPAL are liable, jointly and
severally, for any amounts not paid by the Company. News Corp.'s and NPAL's
aggregate liability under the Guaranty is limited to approximately $6.6 million,
to be reduced annually over two years on a straight-line basis.
In May 1996, the Company entered into an agreement with Fox Video (the "Fox
Video Agreement") for the production and distribution of a live-action feature
film for the home video market based upon the animated character of Casper (the
"Film") which was released by Fox Video in the United States on September 9,
1997. The Company and Fox Video each contributed one-half of the production
costs of the Film subject to the rights of both parties to recoup certain of
these costs. The Company and Fox Video will share the television net income 55%
and 45%, respectively, and the home video net income 45% and 55%, respectively,
subject to the participation rights of the Harvey Entertainment Company
("Harvey"), which holds the copyright to Casper.
The Company entered into an agreement in principle with Fox Video for the
production and distribution of, a second live-action feature film (Casper Meets
Wendy) for the home video market released in fiscal 1999. Saban and Fox Video
each contributed one-half of the production costs subject to the rights of both
parties to recoup certain of these costs. The Company and Fox Video will share
the combined television, non-theatrical, airline, and home video receipts
equally, subject to the participation rights of Harvey.
In August 1996, Fox Video and the Company entered into a Home Video Rights
Acquisition Agreement pursuant to which the Company granted to Fox Video the
exclusive home video rights to distribute English and Spanish language versions
throughout the United States and to distribute English language versions
throughout Canada of certain of its programs, all television programs produced
for children and owned or controlled by the Company or FCN, all television
programs produced or to be produced pursuant to an agreement with Marvel and all
television programs which are owned or controlled first by Marvel and
subsequently by the Company. In consideration for the grant of the distribution
rights, Fox Video has agreed to pay the Company 50% of gross receipts from these
home videos, after deduction of certain expenses. In connection with this
Agreement the Company has received $13,002,000 through June 30, 2001.
Pursuant to an arrangement with Fox Broadcasting, the Fox Family Channel
has aired one regular season Major League Baseball game per week during the 2001
baseball season and expects to broadcast between eight and eleven playoff games
during October. Such programs are supplied to the Company by Fox Broadcasting
in exchange for advertising time during the airing of the program.
Effective August 1, 1998, as part of a joint venture with a subsidiary of
News Corp., a subsidiary of the Company, Fox Kids Europe Holdings, Inc.
("FKEH"), contributed its 100% interest in a cable network in The Netherlands,
TV10 BV, to a U.S. limited liability company (the "TV10 LLC") in exchange for a
50% equity interest in the TV10 LLC. The subsidiary of News Corp. contributed
$20,000,000 in cash to the TV10 LLC in exchange for its 50% equity interest in
the TV10 LLC. In accordance with the operating agreement between the parties,
an affiliate of the Company is responsible for procuring the supply of
programming during the hours of 6:00a.m. and 6:00p.m. and an affiliate of News
Corp. is responsible for the hours of 6:00p.m. to 1:00a.m. The parties retain
the revenues and are responsible for costs and expenses related to their
respective programming hours (or "day parts"). Costs that are not directly
related to specific day parts are shared on the basis of a formula that ensures
that News Corp.'s share will not exceed two-thirds of total indirect costs. No
gain or loss was recorded by the Company related to this transaction. In
December 2000, TV10 BV through a series of transactions transferred the day part
operations of the TV10 channel to a subsidiary of the Company and the evening
part of the TV10 channel to a subsidiary of News Corp. The subsidiary of News
Corp. then sold its 50% interest in TV10 LLC to SBS Broadcasting BV. TV10 BV
now acts as a service company for the day part and evening part of the TV10
channel. At June 30, 2001, amounts receivable from related parties included
approximately $24,148,000 owed to the Company by TV10 LLC, and amounts payable
to related parties included approximately $22,672,000 owed by the Company to
TV10 LLC.
In June 1999, a subsidiary of the Company, Fox Kids Europe Holdings, Inc.
("FKEH") entered into a subscription agreement (the "Subscription Agreement")
with Fox Broadcasting pursuant to the terms of which Fox Broadcasting paid FKEH
$100,000,000 in exchange for a subscription (the "Subscription Rights") for
shares of FKEH's
97
non-voting Class B Common Stock (the "Stock"). In addition, in June 1999, Fox
entered into an exchange agreement with the Company pursuant to which Fox
Broadcasting was granted the right, but not the obligation, to require the
Company to acquire its Subscription Rights in exchange for a deeply subordinated
note with an interest rate of 20% per annum to be issued by the Company. Upon
exercise of the conversion rights, interest begins to accrete as of the earlier
of the exercise date or January 1, 2000. At June 30, 1999, the amount paid by
Fox Broadcasting was included in amounts payable to related parties. In November
1999, a subsidiary of the Company caused to be transferred 7,507,591 shares of
FKE to Fox Broadcasting as settlement of the $100 million Subscription
Agreement.
In June 1999, the Company issued a deeply subordinated note in the
principal amount of $25,000,000 to Fox Broadcasting payable on June 28, 2009
with interest accreting at a rate of 20% per annum. In September 1999, the
Company issued an additional deeply subordinated note in the principal amount of
$15,000,000 to Fox Broadcasting payable September 27, 2009 with interest
accreting at a rate of 20% per annum.
Effective as of January 1, 2001, the Company entered into a transponder
lease agreement with a subsidiary of News Corp. The agreement calls for the
subsidiary of News Corp. to pay a monthly lease payment to the Company through
the end-of-life (as defined in the agreement) of the satellite.
11. Business Segment Reporting
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," for its fiscal year ended June 30, 1999,
which changed the way the Company reports information about its operating
segments. The Company's business units have been aggregated into two reportable
operating segments: production and distribution and broadcasting. The "other"
column includes corporate related items and income (including SAB No. 51 and
subsidiary stock gains) and expenses not allocated to reportable segments. 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 accounting policies of the operating segments are the
same as those described in the summary of significant accounting policies (see
Note 2). The Company evaluates performance based upon several factors, of which
the primary financial measure is segment income (loss) before income taxes,
interest, depreciation and amortization of intangibles.
Summarized financial information concerning the Company's reportable
segments is shown in the following tables (in thousands):
Production and
Broadcasting Distribution Other Total
---------------- ---------------- ---------------- ----------------
Year Ended June 30, 2001:
Revenues............................. $ 460,158 $ 263,580 $ 483 $ 724,221
Equity in earnings of affiliates..... 1,559 -- -- 1,559
Income (loss) before income taxes,
interest, depreciation and
amortization of intangibles......... 104,621 97,109 (3,334) 198,396
Identifiable assets.................. 590,549 565,280 25,400 1,181,229
Intangible assets, net............... 1,440,667 -- -- 1,440,667
Capital expenditures................. 10,405 490 554 11,449
Depreciation expense................. 10,786 768 28 11,582
98
Production and
Broadcasting Distribution Other Total
---------------- ---------------- ---------------- ----------------
Year Ended June 30, 2000:
Revenues............................. $ 434,392 $ 202,086 $ 5,398 $ 641,876
Equity in loss of affiliates......... (1,609) -- -- (1,609)
Income before income taxes,
interest, depreciation and
amortization of intangibles......... 109,109 61,871 187,384 358,364
Identifiable assets.................. 593,706 453,889 25,478 1,073,073
Intangible assets, net............... 1,481,189 -- -- 1,481,189
Capital expenditures................. 7,266 844 146 8,256
Depreciation expense................. 10,104 726 53 10,883
Year Ended June 30, 1999:
Revenues............................. $ 429,610 $ 204,321 $ 1,342 $ 635,273
Equity in loss of affiliates......... (5,088) -- -- (5,088)
Income (loss) before income taxes,
interest, depreciation and
amortization of intangibles......... 112,921 54,314 (12,021) 155,214
Identifiable assets.................. 299,598 587,672 39,670 926,940
Intangible assets, net............... 1,539,852 -- -- 1,539,852
Capital expenditures................. 2,790 7,957 647 11,394
Depreciation expense................. 8,432 1,491 160 10,083
The following table reconciles segment income (loss) before income taxes,
interest, depreciation and amortization of intangibles to the Company's
consolidated net income (loss) (in thousands):
Years Ended June 30,
--------------------------------------------
1999 2000 2001
------------ ------------ ------------
Income before income taxes, interest,
depreciation and amortization of intangibles... $ 155,214 $ 358,364 $ 198,396
Amortization of intangibles........................ (40,434) (40,522) (40,522)
Interest expense, net.............................. (169,107) (168,415) (172,018)
Depreciation....................................... (10,083) (10,883) (11,582)
Provision for income taxes......................... (1,989) (77,159) --
------------ ------------ ------------
Net income (loss).................................. $ (66,399) $ 61,385 $ (25,726)
============ ============ ============
Geographic Segments
Revenues are attributed to geographic segments based upon origin of sale.
Years Ended June 30,
--------------------------------------------
1999 2000 2001
------------ ------------ ------------
(in thousands)
Revenues
United States.................................... $ 474,629 $ 466,293 $ 540,273
Europe........................................... 151,995 163,666 170,604
Central and South America........................ 8,649 11,917 13,344
------------ ------------ ------------
$ 635,273 $ 641,876 $ 724,221
============ ============ ============
99
Years Ended June 30,
--------------------------------------------
Identifiable and Intangible Assets 1999 2000 2001
------------ ------------ ------------
(in thousands)
United States.................................... $ 2,071,161 $ 2,100,050 $ 2,137,834
Europe........................................... 394,696 453,461 482,539
Central and South America........................ 935 751 1,523
------------ ------------ ------------
$ 2,466,792 $ 2,554,262 $ 2,621,896
============ ============ ============
For the years ended June 30, 1999, 2000 and 2001, the Company's production
and development segment earned revenues from one customer, a related party, of
approximately $37,949,000 (6% of consolidated revenues), $37,815,000 (6% of
consolidated revenues) and $109,205,000 (15% of consolidated revenues),
respectively. The Company had no significant properties for the years ended June
30, 1999, 2000 and 2001.
12. Capital Stock
Common Stock
The authorized capital stock of the Company consists of 2,000,000 shares of
Class A Common Stock,16,000,000 shares of Class B Common Stock and 2,000,000
shares of Preferred Stock, of which 500,000 shares have been designated as
Series A Preferred Stock. As of June 30, 2000 and 2001, 160,000 shares of Class
A Common Stock and 15,840,000 shares of Class B Common Stock were outstanding.
The holders of Class A Common Stock (the "Class A Stockholders") are
entitled to one vote per share and the holders of Class B Common Stock (the
"Class B Stockholders") are entitled to ten votes per share. Both classes vote
together as a single class. A majority vote (or any other greater percentage)
for stockholder action requires a majority of the aggregate number of votes
entitled to be cast as such vote. The Company's Corrected Restated Certificate
of Incorporation does not provide for cumulative voting rights.
Subject to the rights of the holders of shares of any series of Preferred
Stock, the Class A and Class B Stockholders are to receive like dividends and
other similar distributions of the Company. In the case of any split,
subdivision, combination or reclassification of shares of Class A or Class B
Common Stock, an equivalent split, subdivision, combination or reclassification
must be made to the shares of Class B or Class A Common Stock, as the case may
be.
The Class A and Class B Stockholders have equivalent rights to
distributions in the event of any liquidation, dissolution or winding up (either
voluntary or involuntary) of the Company, in proportion to the number of shares
held by them without regard to class.
In the event of any corporate merger, consolidating purchase or
acquisition, the Class A and Class B Stockholders are to receive the same
consideration on a per share basis, and if the consideration in such transaction
consists in any part of voting securities, the Class B Stockholders are to
receive, on a per share basis, voting securities with ten times the number of
votes per share as those voting securities to be received by the Class A
Stockholders.
The shares of Class A Common Stock are freely transferable, but the shares
of Class B Common Stock are subject to transfer restrictions as set forth more
fully in the Company's charter and in the Amended and Restated Strategic
Stockholders Agreement. The Class B Stockholders may only transfer their shares
to a "Permitted Transferee" and any unauthorized transfer will cause an
automatic conversion of such shares into shares of Class A Common Stock.
Regardless of the transfer restriction on the Class B Common Stock, any Class B
Stockholder may pledge its shares as collateral security for any indebtedness or
other obligation.
Each share of Class B Common Stock is convertible, at the option of its
holder, at any time into one validly issued, fully paid and non-assessable share
of Class A Common Stock.
100
Stock Options
Effective June 1994, the Company issued stock options to three employees.
In connection with the Reorganization as described in Note 1, the options became
options to purchase an aggregate of 484,911 shares of Class A Common Stock, all
of which were exercisable at June 30, 1999, 2000 and 2001. These options are
exercisable at prices ranging from $12.37 (161,637 shares) to $34.02 (323,274
shares) per share. No options have been exercised at June 30, 2001. With respect
to termination for any reason, so long as the Company is not public, the Company
will purchase from the employee and the employee will sell to the Company any
and all option shares owned by the employee and the option granted to the
employee for an amount equal to the fair market value of the option shares owned
by the employee plus the fair market value of the option shares with respect to
which the employee's option has vested but not exercised less the exercise
price.
In addition, in the event Haim Saban, any member of his immediate family or
any of his affiliated entities (Haim Saban and such family members, the "Saban
Entities") sells to a third party any shares of common stock of the Company (the
"Saban Company Shares"), each of these option holders must sell to the Company,
and the Company must purchase, the "applicable percentage" of his or her options
for the same per share consideration paid by the third party for the Saban
Company Shares less the exercise price of such options. The "applicable
percentage" is equal to the percentage of the Saban Company Shares sold to the
third party out of the total shares of the Company owned by the Saban Entities
immediately prior to the sale. (See Note 14 - Subsequent Event.)
In May 1998, the Company provided two employees compensation of $2,000,000
each and in April 1999, the Company provided the two employees additional
compensation of $1,500,000 each in the form of an advance (together the
"Advances"). The Advances were included in the employees' taxable income and
bear no interest. Further, if the two employees exercise any stock options to
acquire shares of the Company's Class A Common Stock, the two employees shall
concurrently repay the Advances through an increase in the purchase price in
connection with the exercise.
Included in accrued liabilities at June 30, 2000 and 2001 is $13,040,000
related to compensation recorded in connection with these options. (See Note 14
- Subsequent Event.)
As of June 30, 2001, 646,548 shares of Class A Common Stock are reserved
for future issuance related to options.
In connection with FKE's initial public offering (see Note 13), FKE
approved a stock incentive plan under which FKE may grant options to personnel
at exercise prices equal to or exceeding the market price at the date of grant.
Options become exercisable over a four year period from the date of grant and
expire ten years after the date of grant. Shares available for future option
grants at June 30, 2001 totaled 5,276,901.
The following table summarizes information about FKE stock options
outstanding and transactions as of and for the years ended June 30, 2000 and
2001:
Weighted average
Shares exercise price ($)
---------------------------- ----------------------------
2000 2001 2000 2001
------------ ------------ ------------ ------------
Outstanding at beginning of year -- 2,950,780 -- 12.71
Awards granted 2,975,030 269,889 12.71 12.67
Awards cancelled (24,250) (261,103) 12.60 12.47
------------ ------------ ------------ ------------
Outstanding at end of year 2,950,780 2,959,566 12.71 12.17
============ ============ ============ ============
Exercisable options -- 712,231 -- 12.11
============ ============ ============ ============
101
The following table summarizes information about stock options outstanding
at June 30, 2001:
Outstanding Exercisable
---------------------------------------------------- ----------------------------
Weighted average Weighted Weighted
Range of Number remaining average Number average
Exercise of years of exercise of exercise
Prices ($) Options contractual life price ($) Options price ($)
----------------- ----------- -------------------- ------------- ----------- -------------
9.10 - 12.04 2,774,069 8.56 11.64 703,228 12.04
14.71 - 18.02 185,497 8.93 17.09 9,003 17.50
Exercise prices for the above tables have been translated from Euros to
U.S. dollars based on average exchange rates during the year.
Mandatorily Redeemable Preferred Stock
In connection with the acquisition of IFE, the Company issued 345,000
shares of Series A Mandatorily Redeemable Preferred Stock to Liberty IFE. The
holders of the Series A Mandatorily Redeemable Preferred Stock will receive cash
dividends of 9% per annum in arrears, paid quarterly. Any accrued or unpaid
dividends will be added to the liquidation price and until such accrued and
unpaid dividends are paid in full, the dividend rate will increase to 11.5% of
the liquidation price. The liquidation price is $1,000 per share plus any
accrued and unpaid dividends.
Pursuant to the Funding Agreement among News Corp., NPAL, and the Company
(the "Funding Agreement"), each of News Corp. and NPAL has unconditionally
agreed that, upon the occurrence and during the continuation of an event of
default under the provisions governing the Series A Mandatorily Redeemable
Preferred Stock in the Company's Corrected Restated Certificate of Incorporation
or liquidation, dissolution, winding up or other similar event of the Company,
News Corp. or NPAL, as the case may be, will provide the Company with the funds
necessary to redeem in full, or pay the liquidation distribution on all of the
outstanding Series A Mandatorily Redeemable Preferred Stock and to pay any other
amounts owing in respect of such shares. Pursuant to the Amended and Restated
Strategic Stockholders Agreement (as defined), such funds will be, except under
certain circumstances, in the form of an advance or loan to the Company. The
following constitute events of default with respect to the Series A Mandatorily
Redeemable Preferred Stock under the Corrected Restated Certificate of
Incorporation: (i) the failure of the Company to mandatorily redeem Series A
Mandatorily Redeemable Preferred Stock at the redemption dates indicated below;
(ii) a breach for thirty days of any of the covenants contained in the
provisions governing the Series A Mandatorily Redeemable Preferred Stock; and
(iii) an event of default under the terms of the preferred stock of NPAL, if any
shares of which are outstanding. In addition, pursuant to the Exchange Agreement
among NPAL, Liberty Media Corporation and Liberty IFE (the "Exchange
Agreement"), each of the holders of the Series A Mandatorily Redeemable
Preferred Stock has the right, upon the occurrence and during the continuation
of an event of default under the Corrected Restated Certificate of Incorporation
or the liquidation, winding up or other similar event of the Company, to
exchange their shares for an equivalent number of shares of preferred stock of
NPAL.
The Series A Mandatorily Redeemable Preferred Stock issued to Liberty IFE
will rank senior as to dividend, redemption and liquidation rights to all other
classes and series of capital stock of the Company authorized on the date of
issuance, or to any other class or series of capital stock issued while any
shares of the Series A Mandatorily Redeemable Preferred Stock remain
outstanding. The Series A Mandatorily Redeemable Preferred Stock does not
generally have voting rights, except for certain approval rights set forth in
the Corrected Restated Certificate of Incorporation and as required by law.
Stockholders of Series A Mandatorily Redeemable Preferred Stock do not have
preemptive rights over any stock or securities that may be issued by the
Company.
Stock Based Compensation
The Company and its subsidiary, FKE, have elected to follow APB Opinion
No. 25, "Accounting for Stock Issued to Employees," and related Interpretations
in accounting for their employee stock options.
Pro forma information regarding net income as required by FAS No. 123,
"Accounting for Stock-Based Compensation," has been determined as if the Company
and FKE had accounted for their employee stock options
102
under the fair value method of that Statement. The fair value for options issued
by the Company was estimated at the date of grant in January 1996 to be
$2,623,000 using the minimum value method with the following weighted-average
assumptions, respectively: risk-free interest rate of 5.86%; dividend yields of
0%; and a weighted-average expected life of the option of 5 years. The remaining
contractual life of options granted by the Company is 5.5 years. The fair value
for options issued by FKE was estimated at the date of grant in November 1999 to
be $13,827,000 using the fair value method with the following weighted-average
assumptions, respectively: risk-free interest rate 5.5%; dividend yield of 0%;
expected stock volatility 60%; and an expected life of the options of 2 years.
The weighted average fair value of options at their date of grant during the
year ended June 30, 2001, where the exercise price exercise price equaled the
market price on the grant date, was $1,223,000. The estimated fair value of each
option granted was calculated using the following weighted average assumptions,
respectively: risk free interest rate of 4.25%; dividend yield of 0%; expected
stock volatility of 60%; and expected life of the options of 2 years.
The minimum value valuation method used by the Company was developed for
use in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, valuation models require
the input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of employee stock options issued by the
Company.
The pro forma net income (loss) determined as if the Company and its
subsidiaries had accounted for its employee stock options under the fair value
method would be $(66,924,000), $58,387,000 and $(30,958,000) for the years
ended June 30, 1999, 2000 and 2001, respectively.
These pro forma valuations may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense over the
vesting period, and additional options may be granted in future years.
13. Issuance of Subsidiary Ordinary Shares
In November 1999, net assets of certain direct and indirect subsidiaries of
the Company were contributed to FKE, a wholly owned indirect subsidiary of the
Company at the time the assets were contributed. Net assets contributed mainly
represent the Fox Kids cable channels broadcasting in the European markets and
the distribution rights of children's programming in those markets owned by
SINV, a wholly owned indirect subsidiary of the Company. In November 1999, FKE
issued 12,519,307 previously unissued ordinary shares (or 15.2 percent) for
gross proceeds of $175,518,000 ($14.02 per share) in an initial public offering
("IPO") on the Official Market for Amsterdam Exchanges. Offering costs for the
IPO totaled $22,550,000 and consisted mainly of underwriter and professional
fees plus certain capital taxes. The Company has accounted for the offering in
accordance with Staff Accounting Bulletin ("SAB") No. 51, "Accounting by the
parent in consolidation for sale of stock by subsidiary." Accordingly, a pre-
tax gain of $117,316,000 was recorded in the year ended June 30, 2000. The gain
recorded represents the Company's portion of the excess net offering price per
share of FKE's ordinary shares compared to the book carrying amount per share.
In November 1999, in connection with the IPO, a subsidiary of the Company
caused to be transferred 7,507,591 ordinary shares of FKE (or 9.1 percent), to
Fox Broadcasting as settlement of a $100,000,000 subscription advance payable.
These shares were issued to the public on behalf of Fox Broadcasting in the IPO
for gross proceeds of $105,256,000 ($14.02 per share). The gross proceeds from
these shares, less underwriter fees and capital taxes of $5,256,000, were
retained by Fox Broadcasting. A pre-tax gain of $78,623,000 was recorded on
this transaction in the year ended June 30, 2000.
14. Subsequent Event
On July 23, 2001, The Walt Disney Company ("Disney") entered into a
Purchase Agreement with Fox Broadcasting, FBSI, Haim Saban and the other Saban
Stockholders, Allen & Company Incorporated, News America Incorporated ("NAI")
and News Corp. (the "Disney Purchase Agreement"), pursuant to which Disney
agreed to purchase for cash from FBSI, the Saban Stockholders and Allen &
Company Incorporated all the outstanding shares of the Company's Class A Common
Stock and Class B Common Stock (the "Disney Acquisition") and subordinated debt.
Upon the closing of the Disney Acquisition, Disney would acquire control of the
Company by virtue of holding all of the Company's outstanding shares of common
stock.
103
Immediately following the closing under the Disney Purchase Agreement, the
Company will cease to broadcast the Fox Kids Network, which will be operated by
Fox Broadcasting following the Disney Acquisition. The Company will provide
certain programming to Fox Broadcasting for the 2001-2002 broadcast season for
broadcast on the Fox Kids Network. The closing of the Disney Acquisition will
occur following receipt of required U.S. and foreign governmental or regulatory
approvals, among other customary conditions to closing. The parties currently
expect the Disney Acquisition to close in the fourth quarter of the 2001
calendar year. The Company will change its name following the Disney
Acquisition.
In connection with the Disney Acquisition, the Company will pay the
obligations owed under the Amended Credit Facility. In addition, according to
the terms of the Disney Purchase Agreement, Disney will purchase the Fox
Subordinated Notes and the NAI Bridge Note from Fox Broadcasting and NAI,
respectively.
Pursuant to the Disney Purchase Agreement and in accordance with the terms
of their respective employment agreements, the Company will make certain cash
payments to the Company stock option holders with respect to the option shares
held by each of such option holders, and the number of such option shares
outstanding shall be reduced to zero. The closing of the Disney Acquisition
will result in a compensation charge in the amount of approximately $78,000,000,
representing the difference between the net sales proceeds (as defined in the
Disney Purchase Agreement) and the stock option exercise price which ranges from
$12.37 to $34.02 per share.
104
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Fox Family Worldwide, Inc.:
We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of Fox Family
Worldwide, Inc. (a Delaware corporation) and subsidiaries (the "Company") as of
June 30, 2000 and 2001 and each of the three years ended June 30, 2001 included
in this Report on Form 10-K and have issued our report thereon dated September
17, 2000. Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedules listed in the index
at F-1 are the responsibility of the Company's management and are presented for
purposes of complying with the Securities and Exchange Commission's rules and
are not part of the basic financial statements. These schedules have been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly state in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
Arthur Andersen LLP
Los Angeles, California
September 17, 2001
105
SCHEDULE 1 -- CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
FOX FAMILY WORLDWIDE, INC.
(PARENT ONLY)
BALANCE SHEETS
(in thousands, except share data)
June 30, 2000 June 30, 2001
--------------- -----------------
Assets:
Cash and cash equivalents................................................................. $ 1,207 $ 3,223
Amounts receivable from related parties, net.............................................. 1,215 845
Investments in and advances to subsidiaries............................................... 1,614,627 1,661,750
Other assets, net......................................................................... 23,909 18,371
--------------- ----------------
Total assets........................................................................... $ 1,640,958 $ 1,684,189
=============== ================
Liabilities and stockholders' deficit:
Accounts payable.......................................................................... $ 154 $ 31
Accrued liabilities....................................................................... 8,999 15,753
NAI Bridge Note........................................................................... 131,784 145,884
Fox Subordinated Notes.................................................................... 194,693 221,133
Senior Notes.............................................................................. 475,000 475,000
Senior Discount Notes, net of unamortized discount of $130,242 and $77,049
at June 30, 2000 and 2001, respectively.................................................. 488,428 541,621
Amounts payable to related parties........................................................ 21,243 22,672
--------------- ----------------
Total liabilities....................................................................... 1,320,301 1,422,094
--------------- ----------------
Commitments and contingencies
Series A Mandatorily Redeemable Preferred Stock, $0.001 par value; 500,000 shares
authorized; 345,000 shares issued and outstanding ($1,000 per share liquidation value)... 345,000 345,000
--------------- ----------------
Stockholders' deficit:
Preferred Stock, $0.001 par value; 2,000,000 shares authorized, of which 500,000
shares are designated as Series A Preferred Stock, no shares issued and outstanding...... -- --
Class A Common Stock, $0.001 par value; 2,000,000 shares authorized,
160,000 shares issued and outstanding at June 30, 2000 and 2001, respectively............ -- --
Class B Common Stock, $0.001 par value; 16,000,000 shares authorized,
15,840,000 shares issued and outstanding at June 30, 2000 and 2001, respectively......... 16 16
Contributed capital....................................................................... 78,671 78,671
Accumulated other comprehensive loss...................................................... (6,683) (8,468)
Deficit................................................................................... (96,347) (153,124)
--------------- ----------------
Total stockholders' deficit............................................................. (24,343) (82,905)
--------------- ----------------
Total liabilities and stockholders' deficit............................................. $ 1,640,958 $ 1,684,189
=============== ================
See accompanying notes.
106
FOX FAMILY WORLDWIDE, INC.
(PARENT ONLY)
STATEMENTS OF OPERATIONS
(in thousands)
Years Ended June 30,
--------------------------------------
1999 2000 2001
------------ ------------ ----------
Revenues:
Equity in income of subsidiaries.......................................... $ 55,700 $ 277,366 $ 116,887
Other..................................................................... 135 103 262
--------- --------- ---------
Total revenue.......................................................... 55,835 277,469 117,149
Costs and expenses:
Selling, general and administrative....................................... 6,172 9,755 3,906
Depreciation.............................................................. 133 24 20
Interest expense, net..................................................... 113,940 129,146 138,949
--------- --------- ---------
Income (loss) before provision for income taxes............................. (64,410) 138,544 (25,726)
Provision for income taxes.................................................. 1,989 77,159 --
--------- --------- ---------
Net income (loss)........................................................... $ (66,399) $ 61,385 $ (25,726)
========= ========= =========
See accompanying notes.
107
FOX FAMILY WORLDWIDE, INC.
(PARENT ONLY)
STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended June 30,
-------------------------------------
1999 2000 2001
----------- ---------- -----------
Operating activities:
Net income (loss).......................................................................... $(66,399) $ 61,385 $ (25,726)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Equity gains on investments, net of taxes................................................ (55,700) (277,366) (116,887)
Amortization of debt issuance costs...................................................... 3,253 3,250 3,269
Depreciation expense..................................................................... 133 24 20
Non-cash interest expense................................................................ 66,746 79,983 94,002
Decrease (increase) in amounts receivable from related parties, net...................... -- (1,215) 370
Decrease (increase) in other assets...................................................... (1,069) (1,845) 464
Increase (decrease) in accounts payable and accrued liabilities.......................... (2,656) 773 6,631
Increase in amounts payable to related parties........................................... -- -- 1,429
-------- --------- ---------
Net cash used in operating activities (55,692) (135,011) (36,428)
-------- --------- ---------
Investing activities:
Purchase of property and equipment....................................................... (410) -- --
-------- --------- ---------
Net cash used in investing activities................................................... (410) -- --
-------- --------- ---------
Financing activities:
Paydown of NAHI Bridge Note.............................................................. (267) (268) (269)
Proceeds from Fox Subordinated Note...................................................... 25,000 15,000 --
Dividends on Preferred Stock............................................................. (31,048) (31,135) (31,051)
Net intercompany advances................................................................ 55,515 152,584 69,764
-------- --------- ---------
Net cash provided by financing activities.............................................. 49,200 136,181 38,444
-------- --------- ---------
Increase (decrease) in cash and cash equivalents........................................... (6,902) 1,170 2,016
Cash and cash equivalents, beginning of year............................................... 6,939 37 1,207
-------- --------- ---------
Cash and cash equivalents, end of year..................................................... $ 37 $ 1,207 $ 3,223
======== ========= =========
Supplemental disclosure of non-cash flow investment activities (in thousands):
Year ended June 30, 1999
Property and equipment with a book value of $638 was transferred to a
subsidiary.
Year ended June 30, 2000
Property and equipment with a book value of $350 was transferred to a
subsidiary.
See accompanying notes.
108
FOX FAMILY WORLDWIDE, INC.
(PARENT ONLY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying condensed financial statements include the accounts of Fox
Family Worldwide, Inc. (the "Company") presented on a separate company (parent
only) basis. The Company is a Delaware corporation formed in August 1996 as a
holding company. Between August 1996 and August 1997, the Company conducted no
business or operations. On August 1, 1997 the Company underwent a
reorganization in connection with its acquisition of International Family
Entertainment, Inc. This reorganization is more fully explained in Note 1 to
the Consolidated Financial Statements.
2. Debt
Information relating to the NAI Bridge Note, Fox Subordinated Notes, Senior
and Senior Discount Notes is contained in Note 6 to the Consolidated
Financial Statements. Payments of principal in future periods are all due
subsequent to June 30, 2003. The Company is a guarantor under the Amended
Credit Facility, as described in Note 6 to the Consolidated Financial
Statements.
3. Issuance of Subsidiary Ordinary Shares
Information relating to the issuance of ordinary shares of FKE, a wholly
owned indirect subsidiary of the company, in an initial public offering of its
shares and the resulting SAB No. 51 pre-tax gain of $117,316,000 and pre-tax
gain on issuance of subsidiary stock of $78,623,000 recorded for the year ended
June 30, 2000, is contained in Note 13 to the Consolidated Financial Statements.
4. Subsequent Event
On July 23, 2001, Disney entered into the Disney Purchase Agreement with
Fox Broadcasting, FBSI, Haim Saban and the other Saban Stockholders, Allen &
Company Incorporated, News America Incorporated, and News Corp., pursuant to
which Disney agreed to purchase for cash from FBSI, the Saban Stockholders and
Allen & Company Incorporated all the outstanding shares of the Company's Class A
Common Stock and Class B Common Stock. Upon the closing of the Disney
Acquisition, Disney would acquire control of the Company by virtue of holding
all of the Company's outstanding shares of common stock. Immediately following
the closing under the Disney Purchase Agreement, the Company will cease to
broadcast the Fox Kids Network, which will be operated by Fox Broadcasting
following the Disney Acquisition. The Company will provide certain programming
to Fox Broadcasting for the 2001-2002 broadcast season for broadcast on the Fox
Kids Network. The closing of the Disney Acquisition will occur following receipt
of required U.S. and foreign governmental or regulatory approvals, among other
customary conditions to closing. The parties currently expect the Disney
Acquisition to close in the fourth quarter of the 2001 calendar year. The
Company will change its name following the Disney Acquisition.
According to the terms of the Disney Purchase Agreement, Disney will
purchase the Fox Subordinated Notes and the NAI Bridge Note from Fox
Broadcasting and NAI, respectively, upon closing of the Disney Acquisition.
109
FOX FAMILY WORLDWIDE, INC.
(CONSOLIDATED)
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Additions
----------------------------------
Acquired or
Balance at Charged to Charged to Balance
beginning of Costs and Other at end of
Description Year Expenses Accounts Deductions Year
----------- ------------ ---------- ----------- ---------- ---------
(in thousands)
Year ended June 30, 1999
Allowance for doubtful accounts....... 1,594 990 -- (91) 2,493
Reserve for severance and related
costs under acquisition.............. 16,650 -- -- (8,873) 7,777
Accruals for litigation and other
related costs under acquisition...... 4,800 -- -- (886) 3,914
Year ended June 30, 2000
Allowance for doubtful accounts....... 2,493 2,011 436 (252) 4,688
Reserve for severance and related
costs under acquisition.............. 7,777 -- -- (2,713) 5,064
Accruals for litigation and other
related costs under acquisition...... 3,914 -- -- (1,139) 2,775
Year ended June 30, 2001
Allowance for doubtful accounts....... 4,688 1,593 -- (960) 5,321
Reserve for severance and related
costs under acquisition.............. 5,064 -- -- (1,917) 3,147
Accruals for litigation and other
related costs under acquisition...... 2,775 -- -- (331) 2,444
110
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information contained in the Company's Proxy Statement for the 2001
Annual Meeting of Stockholders (the "2001 Proxy Statement") under the captions
"Election of Directors" and "Executive Officers of the Company" is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the 2001 Proxy Statement under the captions
"Executive Officers of the Company" and "Committees of the Board -Board
Meetings" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the 2001 Proxy Statement under the caption
"Security Ownership of Certain Beneficial Owners and Management" is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained in the 2001 Proxy Statement under the caption
"Certain Relationships and Related Transactions" is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) and (d) Financial Statements and Schedules (see Index on Page 46)
(b) Reports on Form 8-K
None.
(c) Exhibits (see Exhibit Index)
111
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.
By /s/ K. RUPERT MURDOCH
--------------------------------------
K. Rupert Murdoch,
Chairman and
Chief Executive Officer
(Principal Executive Officer)
By /s/ DAVID F. DeVOE
--------------------------------------
David F. DeVoe,
Senior Executive Vice President,
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: September 28, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
112
Signature Title Date
--------- ----- -----
/s/ K. RUPERT MURDOCH Director September 28, 2001
-----------------------------------
K. Rupert Murdoch
/s/ DAVID DeVOE Director September 28, 2001
-----------------------------------
David F. DeVoe
/s/ ARTHUR M. SISKIND Director September 25, 2001
-----------------------------------
Arthur M. Siskind
/s/ PETER CHERNIN Director September 26, 2001
-----------------------------------
Peter Chernin
/s/ CHASE CAREY Director September 26, 2001
-----------------------------------
Chase Carey
/s/ CHRISTOS M. COTSAKOS
----------------------------------- Director September 27, 2001
Christos M. Cotsakos
___________________________________ Director September __, 2001
Laura D'Andrea Tyson
/s/ THOMAS W. JONES
----------------------------------- Director September 26, 2001
Thomas W. Jones
113
EXHIBIT INDEX
EXHIBIT NO.
IN DOCUMENT
EXHIBIT INCORPORATED
NO. DESCRIPTION BY REFERENCE
-------- ----------- ------------
2.1 Agreement and Plan of Merger, dated
as of August 13, 2000, among Chris-Craft
Industries, Inc., The News Corporation
Limited, News Publishing Australia Limited
and Fox Television Holdings, Inc. 2.1(1)
2.2 Agreement and Plan of Merger, dated as
of August 13, 2000, among BHC
Communications, Inc., The News Corporation
Limited, News Publishing Australia Limited
and Fox Television Holdings, Inc. 2.1(2)
2.3 Agreement and Plan of Merger, dated as of
August 13, 2000, among United Television, Inc.,
The News Corporation Limited, News
Publishing Australia Limited and Fox Television
Holdings, Inc. 2.1(3)
3.1 Restated Certificate of
Incorporation of the Company 3.1(4)
3.2 Form of By-Laws of the Company 3.2(4)
4.1 Specimen Certificate for Shares of
Class A Common Stock of the Company 4.1(5)
10.1 Indenture, dated as of January 28,
1993, by and among News America Holdings
Incorporated, the guarantors
named therein and State Street Bank
and Trust Company (as successor to
The First National Bank of Boston),
as Trustee, with respect to senior
debt securities 2(6)
10.2 First Supplemental Indenture, dated
as of March 24, 1993, by and among
News America Holdings Incorporated,
the guarantors named therein and
State Street Bank and Trust Company
(as successor to The First National
Bank of Boston), as Trustee, with re-
spect to senior debt securities 2(7)
10.3 Second Supplemental Indenture, dated
as of April 8, 1993, by and among
News America Holdings Incorporated,
the guarantors named therein and
State Street Bank and Trust Company
(as successor to The First National
Bank of Boston), as Trustee, with re-
spect to senior debt securities 3(7)
10.4 Third Supplemental Indenture, dated
as of May 20, 1993, by and among News
America Holdings Incorporated, the
guarantors named therein and State
Street Bank and Trust Company (as
successor to The First National Bank
of Boston), as Trustee, with respect
to senior debt securities 4.7(8)
10.5 Fourth Supplemental Indenture, dated
as of May 28, 1993, by and among News
America Holdings Incorporated, the
guarantors named therein and State
Street Bank and Trust Company (as
successor to The First National Bank
of Boston), as Trustee, with respect
to senior debt securities 4.8(8)
1
EXHIBIT NO.
IN DOCUMENT
EXHIBIT INCORPORATED
NO. DESCRIPTION BY REFERENCE
-------- ----------- ------------
10.6 Fifth Supplemental Indenture, dated
as of July 21, 1993, by and among
News America Holdings Incorporated,
the guarantors named therein and
State Street Bank and Trust Company
(as successor to The First National
Bank of Boston), as Trustee, with re-
spect to senior debt securities 4.6(9)
10.7 Form of Sixth Supplemental Indenture,
dated as of January 25, 1994, by and among
News America Holdings Incorporated, the
guarantors named therein and State Street
Bank and Trust Company (as successor to
The First National Bank of Boston), as
Trustee, with respect to senior debt securi-
ties 4.7(10)
10.8 Form of Seventh Supplemental
Indenture, dated as of February 4, 1994, by
and among News America Holdings
Incorporated, the guarantors named therein
and State Street Bank and Trust Company (as
successor to The First National Bank of
Boston), as Trustee, with respect to senior
debt securities 4.8(11)
10.9 Form of Eight Supplemental Indenture,
dated as of May 12, 1994, by and
among News America Holdings
Incorporated, the guarantors named
therein and State Street Bank and
Trust Company (as successor to The
First National Bank of Boston), as
Trustee, with respect to senior debt
securities 4.9(11)
10.11 Form of Ninth Supplemental Indenture,
dated as of July 27, 1995 by and
among News America Holdings Incorporated, the
guarantors named therein and State Street
Bank and Trust Company (as successor to The
First National Bank of Boston), as Trustee,
with respect to senior debt securities 4.10(12)
10.12 Form of Tenth Supplemental Indenture,
dated as of March 2, 2000 by and among
News America Holdings Incorporated, the guarantors
named therein and State Street Bank and Trust
Company (as successor to The First National Bank of
Boston), as Trustee, with respect to senior debt
securities
10.13 Form of Eleventh Supplemental Indenture,
dated as of February 14, 2001 by and
among News America Holdings Incorporated, the
guarantors named therein and State Street Bank and
Trust Company (as successor to The First National
Bank of Boston), as Trustee, with respect to senior
debt securities
2
First National Bank of Boston), as Trustee,
with respect to senior debt securities
EXHIBIT NO.
IN DOCUMENT
EXHIBIT INCORPORATED
NO. DESCRIPTION BY REFERENCE
-------- ----------- ------------
10.14 Form of Amended and Restated
Indenture, dated as of March 24,
1993, by and among News America
Holdings Incorporated, the guarantors
named therein and The Bank of New
York, as Trustee, with respect to
senior debt securities 4.1(15)
10.15 First Supplemental Indenture, dated
as of May 20, 1993, by and among News
America Holdings Incorporated, the
guarantors named therein and The Bank
of New York, as Trustee, with respect
to senior debt securities 4.2(8)
10.16 Second Supplemental Indenture, dated
as of May 28, 1993, by and among News
America Holdings Incorporated, the
guarantors named therein and The Bank
of New York, as Trustee, with respect
to senior debt securities 4.3(8)
10.17 Third Supplemental Indenture, dated
as of July 21, 1993, by and among
News America Holdings Incorporated,
the guarantors named therein and The
Bank of New York, as Trustee, with
respect to senior debt securities 4.14(16)
10.18 Fourth Supplemental Indenture, dated
as of October 20, 1995, by and among
News America Holdings Incorporated,
the guarantors named therein and The
Bank of New York, as Trustee, with
respect to the senior debt securities 4.15(16)
10.19 Fifth Supplemental Indenture, dated
as of January 8, 1998, by and among
News America Incorporated, the guarantors
named therein and The Bank of New York,
as Trustee with respect to senior debt securities 4.6(17)
10.20 Sixth Supplemental Indenture, dated as of March 1,
1999, by and among News America Incorporated, the
guarantors named therein and The Bank of New York, as
Trustee, with respect to the senior debt securities
10.21 Seventh Supplemental Indenture dated as of February
14, 2001, by and among News America Incorporated, the
guarantors named therein and The Bank of New York, as
Trustee, with respect to the senior debt securities
10.22 Composite Revolving Credit Agreement,
dated as of May 19, 1993 (including
amendments dated August 9, 1993,
September 14, 1993, May 12,
1994, March 30, 1995, February 29,
1996 and December 20, 1996) among
News America Incorporated et al,
several agents, managers and banks 10.21(5)
10.23 Indenture for the 5% Subordinated
Discount Debentures, dated as of No-
vember 12, 1996, among News America
Holdings Incorporated, The News Cor-
3
poration Limited, each of the Sub-
sidiary Guarantors named therein and
The Bank of New York, as Trustee 4(i)(18)
10.24 First Supplemental Indenture, dated as of
March 2, 2000, by and among News America
Holdings Incorporated, The News Corporation
Limited, each of the Subsidiary Guarantors named
therein and The Bank of New York, as Trustee
10.25 Second Supplemental Indenture, dated as of
February 14, 2001, by and among News America
Holdings Incorporated, The News Corporation
Limited, each of the Subsidiary Guarantors named
therein and The Bank of New York, as Trustee
10.26 Funding Agreement, dated as of June
11, 1997 by and among The News
Corporation Limited, News Publishing
Australia Limited and Fox Kids
Worldwide, Inc. 10.33(19)
10.27(a) Amended and Restated Strategic
Stockholders Agreement, dated as of
August 1, 1997, by and among Haim
Saban, certain entities listed on
Schedule A thereto, Fox Broadcasting
Company, Fox Broadcasting Sub, Inc.
and Allen & Company Incorporated 10.1(19)
10.27(b) Amendment to Amended and Restated
Strategic Stockholders Agreement, dated
as of June 26, 2000 10.2(20)
10.28 Form of Master Intercompany
Agreement between the Company and
The News Corporation Limited 10.29(5)
10.29(a) Form of Intercompany Note of
Twentieth Century Fox Film
Corporation to FEG Holdings, Inc. 10.30(a)(21)
10.29(b) Form of Intercompany Note of the
Company to News America Incorporated 10.30(b)(21)
10.29(c) Form of Intercompany Note of Fox
Television Stations, Inc. to News
America Incorporated 10.30(c)(21)
10.30 Form of Tax Sharing Agreement between
the Company and News Publishing
Australia Limited 10.31(5)
10.31 Amendment No. 7, dated as of June 8, 1998,
to the Revolving Credit Agreement dated
as of May 19, 1993 (as amended on August 9, 1993,
September 14, 1993, May 12, 1994, March 30, 1995,
February 29, 1996 and December 29, 1996) among
News America Incorporated et al, several agents,
managers and banks 10.32(5)
10.32 Amendment No. 8, dated as of
November 22, 2000, to the Revolving Credit
Agreement dated as of May 19, 1993 (as
amended on August 9, 1993, September 14,
1993, May 12, 1994, March 30, 1995, February
29, 1996, December 20, 1996 and June 8, 1998)
among News America Incorporated et al, several
agents, managers and banks 1.1(24)
10.33 Amended and Restated Indenture, as
amended and restated as of September
30, 1994, between NWCG Holdings Corporation
and Nationsbank of Georgia, National Association, as
Trustee, with respect to the Senior
Secured Discount Notes Due 1999 4.1A(22)
10.34 Form of Transfer Agreement among The News
Corporation Limited, News Publishing Australia
Limited, FEG Holdings, Inc. and Fox Entertainment
4
Group, Inc. 10.5(23)
21.1 List of Principal Subsidiaries of the
Company
------------------------
(1) Incorporated by reference to the Report on Form 8-K of Chris-Craft
Industries, Inc., filed with the Securities and Exchange Commission on
August 23, 2000.
(2) Incorporated by reference to the Report on Form 8-K of BHC Communications,
Inc., filed with the Securities and Exchange Commission on August 23, 2000.
(3) Incorporated by reference to the Report on Form 8-K of United Television,
Inc., filed with the Securities and Exchange Commission on August 23, 2000.
(4) Incorporated by reference to the Report on Form 10-Q of Fox Entertainment
Group, Inc., dated December 22, 1998.
(5) Incorporated by reference to Amendment No. 4 to the Registration Statement
on Form S-1 of Fox Entertainment Group, Inc. (Registration No. 333-61515)
filed with the Securities and Exchange Commission on November 4, 1998.
(6) Incorporated by reference to the Report on Form 6-K of The News Corporation
Limited, dated January 28, 1993.
(7) Incorporated by reference to the Report on Form 6-K of The News Corporation
Limited, dated April 26, 1993.
(8) Incorporated by reference to the Registration Statement on Form F-3 of News
America Holdings Incorporated (Registration No. 33-63604) and Post-
Effective Amendment No. 1 to the Registration Statement on Form F-3 of the
News America Holdings Incorporated (Registration No. 33-59688) filed with
the Securities and Exchange Commission on May 28, 1993.
(9) Incorporated by reference to the Registration Statement on Form F-3 of News
America Holdings Incorporated (Registration No. 33-74574) filed with the
Securities and Exchange Commission on January 28, 1994.
(10) Incorporated by reference to Amendment No. 1 to the Registration Statement
on Form F-3 of News America Holdings Incorporated (Registration No. 33-
74574) filed with the Securities and Exchange Commission on February 4,
1994.
(11) Incorporated by reference to Amendment No. 1 to the Registration Statement
on Form F-3 of News America Holdings Incorporated (Registration No. 33-
79334) filed with the Securities and Exchange Commission on June 14, 1994.
(12) Incorporated by reference to the Registration Statement on Form F-3 of News
America Holdings Incorporated (Registration No. 33-94868) filed with the
Securities and Exchange Commission on July 24, 1995.
(13) Incorporated by reference to Pre-Effective Amendment No. 2 to the
Registration Statement on Form F-3 of News America Holdings Incorporated
(Registration No. 33-62008) filed with the Securities and Exchange
Commission on August 18, 1993.
(14) Incorporated by reference to Pre-Effective Amendment No. 1 to the
Registration Statement on Form F-3 of News America Holdings Incorporated
(Registration No. 33-62008) and Post-Effective Amendment No. 2 to the
Registration Statement on Form F-3 of News America Holdings Incorporated
(Registration No. 33-81272) filed with the Securities and Exchange
Commission on July 21, 1994.
(15) Incorporated by reference to the Registration Statement of The News
Corporation Limited on Form F-3 (Registration No. 33-67008) filed with the
Securities and Exchange Commission on May 4, 1993.
(16) Incorporated by reference to Amendment No. 1 to the Registration Statement
of News America Holdings Incorporated on Form F-3 (Registration No. 33-
98238) filed with the Securities and Exchange Commission on October 23,
1995.
(17) Incorporated by reference to the Registration Statement of News America
Incorporated on Form F-4 (Registration No. 333-8744) filed with the
Securities and Exchange Commission on May 12, 1998.
(18) Incorporated by reference to the Registration Statement on Form F-3 of The
News Corporation Limited (Registration No. 333-6896) filed with the
Securities and Exchange Commission on January 26, 1998.
(19) Incorporated by reference to Amendment No. 1 to the Registration Statement
on Form S-1 of Fox Kids Worldwide, Inc. (Registration No. 333-12995) filed
with the Securities and Exchange Commission on January 26, 1998.
(20) Incorporated by reference to the Report on Form 10-K of Fox Family
Worldwide, Inc., filed with the Securities and Exchange Commission on
September 28, 2000.
(21) Incorporated by reference to Amendment No. 5 to the Registration Statement
of Fox Entertainment Group, Inc. on Form S-1 (Registration No. 333-61515)
filed with the Securities and Exchange Commission on November 9, 1998.
(22) Incorporated by reference to Amendment No. 1 to the Registration Statement
of NWCG Holdings Corporation on Form S-1 (Registration No. 33-82274) filed
with the Securities and Exchange Commission on October 18, 1994.
(23) Incorporated by reference to the Report on Form 8-K of Fox Entertainment
Group, Inc., dated August 13, 2000 and filed with the Securities and
Exchange Commission on August 23, 2000.
(24) Incorporated by reference to the Annual report on Form 20-F of The News
Corporation Limited, filed with the Securities and Exchange Commission on
December 15, 2000.
5