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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_________________
FORM 10-Q/A
_________________
{X} Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the quarterly period ended September 30, 2000.
or
{_} Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from to .
Commission file number 1- 14595
_________________
FOX ENTERTAINMENT GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 95-4066193
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1211 Avenue of the Americas, New York, NY 10036
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (212) 852-7111
_________________
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No __
---
As of November 10, 2000, 176,559,834 shares of Class A Common Stock, par
value $.01 per share, and 547,500,000 shares of Class B Common Stock, par value
$.01 per share, were outstanding.
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FOX ENTERTAINMENT GROUP, INC.
FORM 10-Q
TABLE OF CONTENTS
-----------------
Page
----
Part I. Financial Information
Item 1. Financial Statements
Unaudited Consolidated Condensed Statements of Operations for the three months
ended September 30, 2000 and 1999................................................................... 3
Consolidated Condensed Balance Sheets at September 30, 2000 (unaudited) and
at June 30, 2000 (audited).......................................................................... 4
Unaudited Consolidated Condensed Statements of Cash Flows for the three months
ended September 30, 2000 and 1999................................................................... 5
Notes to the Unaudited Consolidated Condensed Financial Statements.................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................................ 11
Item 3. Qualitative and Quantitative Disclosures about Market Risk................................. 16
Part II. Other Information
Signature...................................................................................................... 17
Exhibit Index.................................................................................................. 18
2
FOX ENTERTAINMENT GROUP, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in millions except per share amounts)
For the three months ended
September 30,
----------------------------------
2000 1999
-------------- --------------
Revenues $ 1,828 $ 1,801
Expenses:
Operating 1,262 1,297
Selling, general and administrative 278 224
Depreciation and amortization 117 106
-------------- --------------
Operating income 171 174
-------------- --------------
Other expenses:
Interest expense, net (84) (62)
Equity in losses of affiliates (20) (36)
Minority interest in operating profit (1) (1)
-------------- --------------
Income before income taxes and cumulative effect of
accounting change 66 75
Income tax expense (30) (32)
-------------- --------------
Income before cumulative effect of accounting change 36 43
Cumulative effect of accounting change, net of tax (494) --
-------------- --------------
Net (loss) income $ (458) $ 43
============== ==============
Basic and diluted earnings per share before
cumulative effect of accounting change $ 0.05 $ 0.06
Basic and diluted cumulative effect of accounting change,
net of tax, per share (0.68) --
-------------- --------------
Basic and diluted (loss) earnings per share $ (0.63) $ 0.06
============== ==============
Basic and diluted weighted average number of common
equivalent shares outstanding 724 714
============== ==============
The accompanying notes are an integral part of these unaudited consolidated
condensed financial statements.
3
FOX ENTERTAINMENT GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in millions except share and per share amounts)
September 30, June 30,
2000 2000
--------------- ---------------
(unaudited) (audited)
ASSETS
Cash and cash equivalents $ 94 $ 114
Accounts receivable, net 2,105 2,191
Filmed entertainment and television programming costs, net 2,828 3,438
Investments in equity affiliates 1,493 1,510
Property and equipment, net 1,469 1,478
Intangible assets, net 7,782 7,836
Other assets and investments 1,404 1,363
----------- -----------
Total assets $ 17,175 $ 17,930
=========== ===========
LIABILITIES
Accounts payable and accrued liabilities $ 1,801 $ 1,946
Participations, residuals and royalties payable 1,035 1,209
Television programming rights payable 974 903
Deferred revenue 693 688
Borrowings 1,042 974
Deferred income taxes 765 1,058
Other liabilities 164 147
----------- -----------
6,474 6,925
Due to intercompany affiliates 2,887 2,739
----------- -----------
Total liabilities 9,361 9,664
----------- -----------
Minority interest in subsidiaries 21 20
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value per share; 100,000,000 shares
authorized; 0 shares issued and outstanding at September 30 and
June 30, 2000 -- --
Class A Common stock, $.01 par value per share; 1,000,000,000 authorized;
176,559,834 issued and outstanding at September 30 and June 30, 2000 2 2
Class B Common stock, $.01 par value per share; 650,000,000 authorized;
547,500,000 issued and outstanding at September 30 and
June 30, 2000 6 6
Paid-in capital 8,023 8,023
Retained (deficit) earnings and accumulated other
comprehensive income (238) 215
----------- -----------
Total shareholders' equity 7,793 8,246
----------- -----------
Total liabilities and shareholders' equity $ 17,175 $ 17,930
=========== ===========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
FOX ENTERTAINMENT GROUP, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in millions)
For the three months ended
September 30,
----------------------------------
2000 1999
------------- -------------
Operating Activities:
Net (loss) income $ (458) $ 43
Adjustments to reconcile net (loss) income to net cash used in operating
activities:
Depreciation and amortization 117 106
Cumulative effect of accounting change 494 --
Equity in losses of affiliates and distributions 45 36
Change in operating assets and liabilities, net of acquisition:
Accounts receivable and other assets 61 (54)
Filmed entertainment and television programming costs, net (219) (539)
Accounts payable and accrued liabilities 61 49
Participations, residuals and royalties payable and
other liabilities (141) (147)
---------- ----------
Net cash used in operating activities (40) (506)
---------- ----------
Investing Activities:
Cash acquired -- 63
Purchases of property and equipment, net of acquisition (31) (52)
Investments in equity affiliates, net of acquisition (63) (182)
Other investments (102) (24)
---------- ----------
Net cash used in investing activities (196) (195)
---------- ----------
Financing Activities:
Borrowings 61 55
Repayment of borrowings -- (704)
Advances from affiliates, net 155 1,409
---------- ----------
Net cash provided by financing activities 216 760
---------- ----------
Net (decrease) increase in cash and cash equivalents (20) 59
Cash and cash equivalents, beginning of period 114 121
---------- ----------
Cash and cash equivalents, end of period $ 94 $ 180
========== ==========
Supplemental information on business acquired:
Fair value of assets acquired $ 3,313
Cash acquired 63
Less: liabilities assumed 1,951
----------
Fair value of stock consideration $ 1,425
==========
The accompanying notes are an integral part of these unaudited consolidated
condensed financial statements.
5
FOX ENTERTAINMENT GROUP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
Fox Entertainment Group, Inc. (the "Company") is principally engaged in the
development, production and worldwide distribution of feature films and
television programs, television broadcasting and cable network programming. The
Company was incorporated in Delaware in May 1985 as Twentieth Holdings
Corporation. In 1998, the Company changed its corporate name to Fox
Entertainment Group, Inc. The Company is a majority-owned subsidiary of The News
Corporation Limited ("News Corporation"), which, at September 30, 2000, holds
equity and voting interests in the Company of 82.76% and 97.8%, respectively.
The financial information included herein may not necessarily reflect the
consolidated results of operations, financial position, changes in shareholders'
equity and cash flows of the Company in the future or what they would have been
had the Company been a separate, stand-alone entity during all the periods
presented.
The accompanying unaudited consolidated condensed financial statements of the
Company have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation have been reflected in these
unaudited consolidated condensed financial statements. Operating results for the
interim period presented are not necessarily indicative of the results that may
be expected for the fiscal year ending June 30, 2001.
These interim unaudited consolidated condensed financial statements and notes
thereto should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's Form 10-K filed with the
Securities and Exchange Commission on September 28, 2000.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the consolidated condensed financial statements and the reported
amounts of revenues and expenses during the reporting period. Because of the use
of estimates inherent in the financial reporting process, actual results could
differ from those estimates.
Total comprehensive (loss) income for the three months ended September 30, 2000
and 1999 was $(453) million and $45 million, respectively. Total other
comprehensive income for the three months ended September 30, 2000 of $5 million
consists of currency translation gains offset by an unrealized loss on a foreign
currency forward contract. Total other comprehensive income for the three months
ended September 30, 1999 consisted of currency translation adjustments of $2
million.
Certain prior year amounts have been reclassified to conform with the fiscal
2001 presentation.
6
FOX ENTERTAINMENT GROUP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 2 - Acquisitions
In July 1999, News Corporation acquired substantially all of Liberty Media
Corporation's ("Liberty") 50% interest in Fox/Liberty Networks, LLC and
Fox/Liberty Ventures, LLC. In exchange for its interest, Liberty received
approximately 51.8 million News Corporation ADRs, representing 207.1 million
preferred shares of News Corporation, valued at $1.425 billion. Upon
consummation of this transaction, News Corporation transferred the acquired
interests to the Company in exchange for 51,759,834 shares of the Company's
Class A Common shares valued at $1.425 billion. This transfer to the Company
increased News Corporation's equity interest in the Company to 82.76% from
81.44%, while its voting interest remained at 97.8%. Concurrent with this
transaction, the Company repaid approximately $678 million of Fox/Liberty
Networks, LLC's outstanding bank debt. The repayment of this bank debt was
funded through additional advances from its affiliates. Fox/Liberty Networks,
LLC was subsequently renamed Fox Sports Networks, LLC ("Fox Sports Networks").
The acquisition has been accounted for as a purchase business combination. The
results of Fox Sports Networks have been consolidated in the Company's results
of operations since July 1999.
In August 2000, News Corporation announced its intention to acquire Chris-Craft
Industries, Inc., BHC Communications, Inc. and United Television, Inc. (together
"Chris-Craft"). Chris-Craft owns a group of ten television stations in the
United States. News Corporation will pay approximately $5.35 billion, comprised
of a cash payment of approximately $2.13 billion and approximately 73 million
American Depositary Receipts ("ADRs") representing 292 million News Corporation
preferred shares. Upon consummation of the acquisition, News Corporation will
transfer the assets, excluding approximately $1.7 billion in cash, to the
Company, which will own and operate the acquired stations in exchange for the
issuance to News Corporation of approximately 122.2 million shares of the
Company's Class A common stock, increasing News Corporation's ownership
percentage in the Company from 82.76% to approximately 85.25%. The closing of
the acquisition is subject to customary conditions including shareholder and
regulatory approval.
Note 3 - Segment Information
The Company manages and reports its activities in five business segments: Filmed
Entertainment, which principally consists of the production and acquisition of
live-action and animated motion pictures for distribution and licensing in all
formats in entertainment media primarily in the United States, Canada and
Europe, and the production of original television programming in the United
States and Canada; Television Stations, which principally consists of the
operation of broadcast television stations; Television Broadcast Network, which
principally consists of the broadcasting of network programming; Other
Television Businesses, which represents other broadcast television related
activities; and Cable Network Programming, which principally consists of the
production and licensing of programming distributed through cable television
systems and direct broadcast satellite operators in the United States and Canada
and professional sports team ownership. The television-related segments operate
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. The Company evaluates performance based upon several
factors, of which the primary financial measure is segment operating income.
7
FOX ENTERTAINMENT GROUP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 3 - Segment Information (Continued)
For the three months ended
September 30,
----------------------------
2000 1999
---------- ----------
(in millions)
REVENUES
Filmed Entertainment....................................................... $ 731 $ 789
Television Stations........................................................ 369 357
Television Broadcast Network............................................... 339 332
Other Television Businesses................................................ 24 21
Cable Network Programming.................................................. 365 302
---------- ----------
$ 1,828 $ 1,801
========== ==========
OPERATING INCOME (LOSS)
Filmed Entertainment....................................................... $ 105 $ 49
Television Stations........................................................ 106 113
Television Broadcast Network............................................... (36) 15
Other Television Businesses................................................ (3) --
Cable Network Programming.................................................. (1) (3)
---------- ----------
Total Operating Income.............................................. 171 174
Interest expense, net...................................................... (84) (62)
Equity in losses of affiliates............................................. (20) (36)
Minority interest in operating profit...................................... (1) (1)
---------- ----------
Income before income taxes and cumulative effect of accounting
change............................................................ $ 66 $ 75
========== ==========
September 30, June 30,
2000 2000
----------------------------
(in millions)
TOTAL ASSETS
Filmed Entertainment...................................................... $ 3,770 $ 4,620
Television Stations....................................................... 6,084 6,213
Television Broadcast Network.............................................. 1,569 1,382
Other Television Businesses............................................... 342 364
Cable Network Programming................................................. 3,917 3,841
Investments in equity affiliates......................................... 1,493 1,510
---------- ----------
$ 17,175 $ 17,930
========== ==========
Equity in losses of affiliates primarily relates to entities involved in the
production and licensing of cable network programming. Interest expense,
minority interest and income tax expense are not allocated to segments as they
are not under the control of the segment management. There is no material
reliance on any single customer. Revenues from any individual foreign country
were not material in the periods presented.
8
FOX ENTERTAINMENT GROUP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 4 - Guarantees of News Corporation Debt
News Corporation and certain of its subsidiaries, including certain subsidiaries
of the Company (the "Fox Guarantors") are guarantors of various debt obligations
of News Corporation and certain of its subsidiaries. The principal amount of
indebtedness outstanding under such debt instruments at September 30 and June
30, 2000 was approximately $9.4 billion and $9.9 billion, respectively. The debt
instruments limit the ability of News Corporation and the Fox Guarantors to
subject their properties to liens and certain of the debt instruments impose
limitations on the ability of News Corporation and its subsidiaries, including
the Fox Guarantors, to incur indebtedness in certain circumstances. Such debt
instruments mature at various times between 2000 and 2096, with a weighted
average maturity of over 20 years. Additional subsidiaries of the Company may
from time to time be required to become guarantors of certain debt obligations.
In the case of any event of default under such debt obligations, the Fox
Guarantors will be directly liable to the creditors or debtholders. News
Corporation has agreed to indemnify the Fox Guarantors from and against any
obligations they may incur by reason of their guarantees of such debt
obligations.
Note 5 - Filmed Entertainment and Television Programming Costs, net
Filmed entertainment and television programming costs, net consisted of the
following:
September 30, 2000 June 30, 2000
------------------ -------------
Filmed entertainment costs: (in millions)
Feature films:
Released $ 320 $ 753
Completed, not released 189 42
Production 354 692
Development or preproduction 81 154
------------------ ------------
944 1,641
------------------ ------------
Television productions:
Released 385 516
Production 184 79
Development or preproduction 18 4
------------------ ------------
587 599
------------------ ------------
Total filmed entertainment costs 1,531 2,240
Television programming costs, less accumulated amortization 1,297 1,198
------------------ ------------
Total filmed entertainment and television programming costs, net $ 2,828 $ 3,438
================== ============
9
FOX ENTERTAINMENT GROUP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 6 - New Accounting Pronouncements
At the beginning of the first quarter of 2001, the Company adopted Statement of
Position 00-2, "Accounting by Producers or Distributors of Films" ("SOP 00-2"),
which established new accounting standards for producers and distributors of
films and supersedes Statement of Financial Accounting Standards ("SFAS") No.
53, "Financial Reporting by Producers and Distributors of Motion Picture Films".
SOP 00-2 establishes new accounting standards for, among other things, marketing
and development costs. The Company has recorded a one-time, non-cash charge of
$494 million, net of $302 million tax, as a cumulative effect of accounting
change. This charge primarily reflects the write-off of marketing and certain
development costs, which were previously capitalized under SFAS No. 53 and are
no longer capitalizable under SOP 00-2. Subsequent to the adoption of SOP 00-2,
the Company's accounting policy is to expense marketing and certain development
costs as incurred.
In June 2000, the Financial Accounting Standards Board issued SFAS No. 139,
which rescinds SFAS No. 53 and requires public companies to follow the guidance
provided by SOP 00-2.
The Company also adopted, as of the beginning of the quarter, SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires every derivative instrument (including certain derivative instruments
embedded in other contracts) to be recorded on the balance sheet at fair value
as either an asset or a liability. The statement also requires that changes in
the derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. The Company's adoption of SFAS No. 133 had no
material impact on the Company's financial statements for the three months ended
September 30, 2000.
Note 7 -OTHER
In January 2000, the Company completed a series of integrated transactions with
Healtheon/WebMD Corporation ("WebMD") to exchange media branding services and a
50% interest in The Health Network for a cost basis preferred stock interest in
WebMD. Pursuant to these transactions, WebMD issued to the Company 105,518
shares of Series A preferred stock subject to a three-year lockup, independently
valued at approximately $500 million, which will convert to approximately 14.4
million shares of WebMD common stock in three years. On a pro forma basis, if
the Company were able to convert the Series A preferred stock it currently holds
into 10.5 million shares of common stock, the market value of such common stock
would have been $157.5 million as of September 30, 2000. The Company has
evaluated the carrying value of the WebMD Series A preferred stock and
determined, as of September 30, 2000, that current events and circumstances did
not indicate an other than temporary decline in the carrying value of the
preferred stock at that time. As part of its evaluation, the Company considered,
among other factors, WebMD's announcement at September 28, 2000 of its new
strategic plan to streamline its business and accelerate profitability; the
appointment of a new management team; an improved liquidity and capital resource
position; and agreements to restructure previous business relationships with
third parties as indicators that an other than temporary decline had not
occurred. Additionally, at September 30, 2000, the Company had the ability and
intent to hold the Preferred stock for a period of time sufficient to allow for
any anticipated recovery in its value. These evaluation factors were also
considered in the context of the Company's ongoing discussions with WebMD to
restructure its relationship with WebMD, which is expected to ultimately include
the acquisition of WebMD's ownership interest in The Health Network and relief
from certain funding and future media services obligations. As of September 30,
2000, based on all information available, the Company has no reason to believe
that a restructuring transaction will not be satisfactorily completed and that a
loss would result from such a restructuring transaction. However, there can be
no assurance at such date that circumstances affecting the Company, WebMD, their
respective businesses or the markets in which they operate, will not change in a
manner which would lead to a conclusion in a future period that an other than
temporary decline in the carrying value of the Preferred stock has occurred.
The Company will update its assessment of the recovery of the carrying value of
the Preferred stock during the three month period ended December 31, 2000 and
based on all factors available at that time, including the status of the
restructuring discussions, determine if an other than temporary decline has
occurred.
Note 8 -Subsequent Events
In October 2000, the Company entered into a new license agreement with MLB for
the six years beginning with the 2001 season for a license fee of $2.5 billion.
The extension covers network and basic cable rights and includes all divisional
series, all league championship series, World Series and All-Star games for the
next six seasons.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This document contains statements that constitute "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as amended. The words
"expect," "estimate," "anticipate," "predict," "believe" and similar expressions
and variations thereof are intended to identify forward-looking statements.
These statements appear in a number of places in this document and include
statements regarding the intent, belief or current expectations of the Fox
Entertainment Group, Inc. (the "Company"), its directors or its officers with
respect to, among other things, trends affecting the Company's financial
condition or results of operations. The readers of this document are cautioned
that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, those risks and uncertainties
are discussed under the headings "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," in the Company's
Registration Statement Form S-1 (SEC file no. 333-61515) as declared effective
by the Securities and Exchange Commission on November 9, 1998, as well as the
information set forth below. The Company does not ordinarily make projections of
its future operating results and undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise. Readers should carefully review other documents
filed by the Company with the Securities and Exchange Commission. This section
should be read in conjunction with the unaudited consolidated condensed
financial statements of the Company and related notes set forth elsewhere
herein.
The Company manages and reports its businesses in five segments: Filmed
Entertainment, which principally consists of the production and acquisition of
live-action and animated motion pictures for distribution and licensing in all
formats in all entertainment media worldwide and the production of original
television programming; Television Stations, which principally consists of the
operation of broadcast television stations; Television Broadcast Network, which
principally consists of the broadcasting of network programming; Other
Television Businesses, which represents other broadcast television related
activities; and Cable Network Programming, which principally consists of the
production and licensing of programming distributed through cable television
systems and direct broadcast satellite ("DBS") operators and professional sports
team ownership. The Company's equity interests in certain cable network
programming and related ventures, including Fox Sports Networks, LLC ("Fox
Sports Networks") prior to the Company's acquisition of substantially all of the
50% interest it did not previously own in July 1999, Fox Family Worldwide, Inc.
("FFW"), Fox/Liberty Ventures, LLC, Regional Programming Partners ("RPP"),
Regency Television and International Sports Programming Partners ("Fox Sports
International"), are included in equity in losses of affiliates and,
accordingly, are not reported in the segments set forth above.
Sources of Revenue
Filmed Entertainment. The Filmed Entertainment segment derives revenue from
theatrical distribution, home video sales, and distribution through
pay-per-view, pay television services, broadcast and cable television. The
revenues and operating results of the Filmed Entertainment segment are
significantly affected by the timing of the Company's theatrical and home video
releases, the number of its original and returning television series that are
aired by television networks and the number of its television series licensed in
off-network syndication. Theatrical release dates are determined by several
factors, including timing of vacation and holiday periods and competition in the
marketplace. Each motion picture is a separate and distinct product with its
financial success dependent upon many factors, including audience acceptance.
Television Stations, Television Broadcast Network and Other Television
Businesses. The three reportable Television segments derive their revenues
principally from the sale of advertising time. Generally, advertising time is
sold to national advertisers by the Fox Broadcasting Company ("FOX") and to
national "spot" and local advertisers by the Company's group of 23 owned and
operated television broadcast stations in their respective markets. The sale of
advertising time is affected by viewer demographics, program ratings and market
conditions. Adverse changes in general market conditions for advertising may
also affect revenues.
11
Cable Network Programming. The Cable Network Programming segment derives
revenues from monthly subscriber fees as well as from the sale of advertising
time. Monthly subscriber fees are dependent on maintenance of carriage
arrangements with cable television systems and DBS operators. The sale of
advertising time is affected by viewer demographics, program ratings and general
market conditions.
Components of Expenses
Filmed Entertainment. Operating costs incurred by the Filmed Entertainment
segment include production expenses; certain exploitation costs, primarily
prints and advertising; capitalized overhead and interest costs; and
participations and talent residuals. Selling, general and administrative
expenses include salaries, employee benefits, rent and other routine overhead.
At the beginning of the first quarter of 2001, the Company adopted Statement of
Position 00-2, "Accounting by Producers or Distributors of Films" ("SOP 00-2"),
which established new accounting standards for producers and distributors of
films and supersedes Statement of Financial Accounting Standards ("SFAS") No.
53, "Financial Reporting by Producers and Distributors of Motion Picture Films".
SOP 00-2 establishes new accounting standards for, among other things, marketing
and development costs. The Company has recorded a one-time, non-cash charge of
$494 million, net of $302 million tax, as a cumulative effect of accounting
change. This charge primarily reflects the write-off of marketing and certain
development costs, which were previously capitalized under SFAS No. 53 and are
no longer capitalizable under SOP 00-2. Subsequent to the adoption of SOP 00-2,
the Company's accounting policy is to expense marketing and certain development
costs as incurred.
Television Stations, Television Broadcast Network, Other Television Businesses
and Cable Network Programming Segments. Expenses of the three Television
segments and the Cable Network Programming segment include operating expenses
related to acquiring programming and rights to programming, as well as selling,
general and administrative expenses. Operating expenses typically include
production and technical expenses related to operating the technical facilities
of the broadcaster or cable network. Selling, general and administrative
expenses include all promotional expenses related to improving the market
visibility and awareness of the broadcaster or cable network and sales
commissions paid to the in-house sales force involved in the sale of
advertising.
12
Results of Operations - Three months ended September 30, 2000 vs. Three months
ended September 30, 1999
The following table sets forth the Company's operating results, by segment, for
the three months ended September 30, 2000 as compared to the three months ended
September 30, 1999:
Three months ended
September 30,
-------------
2000 1999 Change
---- ---- ------
(Dollars in Millions)
Revenues:
Filmed Entertainment................................................... $ 731 $ 789 $ (58)
Television Stations.................................................... 369 357 12
Television Broadcast Network........................................... 339 332 7
Other Television Businesses............................................ 24 21 3
Cable Network Programming.............................................. 365 302 63
---------------------------------
Total Revenues........................................................... $ 1,828 $ 1,801 $ 27
=================================
Operating Income (Loss):
Filmed Entertainment................................................... $ 105 $ 49 $ 56
Television Stations.................................................... 106 113 (7)
Television Broadcast Network........................................... (36) 15 (51)
Other Television Businesses............................................ (3) -- (3)
Cable Network Programming.............................................. (1) (3) 2
---------------------------------
Total Operating Income................................................... 171 174 (3)
Interest expense, net...................................................... (84) (62) (22)
Equity in losses of affiliates............................................. (20) (36) 16
Minority interest in operating profit...................................... (1) (1) --
---------------------------------
Income before income taxes and cumulative effect of accounting
change................................................................... 66 75 (9)
Income tax expense......................................................... (30) (32) 2
---------------------------------
Income before cumulative effect of accounting change....................... 36 43 (7)
Cumulative effect of accounting change, net of tax......................... (494) -- (494)
---------------------------------
Net (loss) income.......................................................... $ (458) $ 43 $ (501)
=================================
Other Data:
Operating Income (Loss) Before Depreciation and Amortization/(1)/:
Filmed Entertainment................................................... $ 119 $ 62 $ 57
Television Stations.................................................... 152 160 (8)
Television Broadcast Network........................................... (31) 20 (51)
Other Television Businesses............................................ (2) - (2)
Cable Network Programming.............................................. 50 38 12
---------------------------------
Total Operating Income Before
Depreciation and Amortization /(1)/................................. $ 288 $ 280 $ 8
=================================
/(1)/ Operating Income Before Depreciation and Amortization is defined as
operating income (loss) before depreciation and amortization. While
Operating Income Before Depreciation and Amortization is considered to be an
important measure of comparative performance by many in the financial
community, it should be considered in addition to, but not as a substitute
for, operating income, net income, cash flow and other measures of financial
performance prepared in accordance with generally accepted accounting
principles and presented in the unaudited consolidated condensed financial
statements included elsewhere in this filing.
Overview of Company Results. For the first quarter of fiscal 2001, revenues of
$1,828 million were approximately 2% above the $1,801 million reported for the
first quarter of fiscal 2000. The Company reported operating income of $171
million for the first quarter of fiscal 2001, as compared to the $174 million
reported in the first quarter of fiscal 2000. Operating Income Before
Depreciation and Amortization of $288 million increased 3% over the $280
13
million reported in the first quarter of fiscal 2000. These results reflect
increased operating income and Operating Income Before Depreciation and
Amortization at the Company's Filmed Entertainment and Cable Network Programming
segments, which were partially offset by lower operating income and Operating
Income Before Depreciation and Amortization from the Television-related
segments.
Equity in losses of affiliates of $20 million improved $16 million over the
first quarter of fiscal 2000 reflecting improvements in FFW's cable business and
the equity affiliates of Fox Sports Networks.
At the beginning of the first quarter of 2001, the Company adopted SOP 00-2,
"Accounting by Producers or Distributors of Films", which established new
accounting standards for producers and distributors of films and supersedes SFAS
No. 53, "Financial Reporting by Producers and Distributors of Motion Picture
Films". SOP 00-2 establishes new accounting standards for, among other things,
marketing and development costs. The Company has recorded a one-time, non-cash
charge of $494 million, net of $302 million tax, as a cumulative effect of
accounting change. 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 quarter ended September 30, 2000 was $458 million ($0.63 per
share) as compared to net income of $43 million ($0.06 per share) for the
corresponding period of the prior year.
Filmed Entertainment. For the first quarter of fiscal 2001, revenues decreased
7% compared to the corresponding period of the preceding fiscal year. The Filmed
Entertainment segment reported a first quarter operating income increase of $56
million over first quarter fiscal 2000. Operating Income Before Depreciation and
Amortization increased to $119 million, a 92% increase as compared to the
corresponding period of the prior year. The significantly improved first quarter
results include the worldwide theatrical release of X-Men compared to the prior
year's losses on Brokedown Palace and Lake Placid. Operating results also
include contributions from strong worldwide video and DVD catalog sales, which
were partially offset by the pre-release costs incurred for second quarter
releases, Bedazzled and Woman on Top, in accordance with the new film SOP.
At Twentieth Century Fox Television, increased operating results over the
corresponding period of the prior year reflects higher international revenue for
Ally McBeal, Buffy the Vampire Slayer and Angel, which was partially offset by
lower international revenue for The X-Files.
Television. For the first quarter of fiscal 2001, combined revenues from all
Television related segments increased to $732 million, a 3% increase from the
corresponding period of the preceding fiscal year, operating income decreased by
48% and Operating Income Before Depreciation and Amortization decreased by 34%.
For the first quarter of fiscal 2001, Fox Television Stations Group's net
revenues increased approximately 3% primarily due to higher advertising revenues
on local news programs and sports, which benefited from two additional weeks of
NFL regular season games in the quarter. These results were more than offset by
higher programming costs for newly acquired syndicated series, as well as
increased local broadcast rights fees and production costs for additional local
MLB games in the Boston and Dallas markets.
At FOX, for the first quarter of fiscal 2001, revenues increased $7 million, and
operating income and Operating Income Before Depreciation and Amortization
decreased $51 million from the corresponding period of the preceding fiscal
year. In our primetime entertainment broadcasts, higher programming costs,
reflecting a higher ratio of traditional programming versus reality specials,
and weaker primetime ratings reflecting competition from the Summer Olympics
broadcast on another television network, resulted in a loss for the quarter. In
addition, operating results included higher advertising and promotional costs to
support the launch of FOX's fall broadcast season. In sports programming,
operating income declined due to lower National Football League ("NFL") pre-
season and Major League Baseball ("MLB") regular season ratings, as well as the
broadcast of two additional NFL games in the fiscal quarter. Continuing into the
second quarter, FOX's results have been negatively impacted by an approximate
$70 million loss due to the short duration and low ratings of the MLB post-
season divisional playoffs and World Series.
14
Cable Network Programming. The revenues of the Cable Network Programming segment
for the first quarter of fiscal 2001 compared to the corresponding period in the
prior year increased $63 million, operating losses decreased $2 million and
Operating Income Before Depreciation and Amortization improved by $12 million.
These improvements primarily reflect higher earnings contributions from the FX
Channel ("FX"), as well as lower operating losses at the Fox News Channel ("Fox
News").
Fox Sports Networks' operating income increased 13% versus the same quarter in
fiscal 2000. The RSNs continue to benefit from recently completed affiliation
agreements, which increased their subscriber base as well as revenues per
subscriber. These revenue gains were partially offset by increased costs
associated with additional MLB broadcasts as well as the continued rollout of
regional sports news in additional markets. At FX, revenues and operating income
grew 32% and 35%, respectively, as a result of advertising and subscription
revenue increases reflecting the addition of 11 million subscribers during the
past 12 months. This growth was partially offset by increased marketing costs to
support its new original programming.
Fox News continued to lower its operating losses and approach breakeven with
first quarter operating losses declining 17% compared to last year. These
improved results were driven by an increase in advertising revenue of 71% and
higher cable affiliate revenue due to the addition of over 12 million
subscribers versus a year ago. Fox News's subscriber base now exceeds 54 million
with commitments to grow this base to over 67 million subscribers. Fox News's
primetime ratings are up 41% versus the first quarter a year ago.
Equity in losses of affiliates. In the first quarter of fiscal 2001, equity in
losses of affiliates decreased to $20 million from $36 million in the
corresponding period of the preceding fiscal year.
Fox Sports Networks' domestic equity affiliates' operating results reflects an
increase in profits at RPP resulting principally from improved results at
Madison Square Garden ("MSG"). The equity earnings of $2 million improved by $6
million over the prior year. This improvement was primarily due to an increase
in events held at MSG arena and Radio City Music Hall, as well as higher
subscriber fees and advertising revenue generated by the MSG Network. In
addition, subscriber gains continued to improve operating performance at the
Speedvision and Outdoor Life cable networks, which have now achieved a combined
subscriber level of almost 51 million.
Increased advertising and affiliate revenues at Fox Sports World and Fox Sports
Espanol improved the equity loss related to Fox Sports Cable Networks
International by $2 million as compared to the corresponding period in the prior
year. Subscribers increased 30% to approximately 21 million.
For the first quarter of fiscal 2001, the Company's share of FFW's operating
results improved by $4 million. Savings from low cost animation programming at
the Fox Kids Network were partially offset by higher costs of acquiring
off-network series and new image campaigns at the Fox Family Channel.
Income tax expense. Income tax expense for the first quarter of fiscal 2001
decreased to $30 million from $32 million in the corresponding period of the
preceding year. The effective tax rate for the period increased to 45.5%
compared to 42.7% in the corresponding period of the preceding fiscal year. The
increased effective rate is primarily attributable to the relationship of
nondeductible items to lower taxable income in the current fiscal quarter.
Liquidity and Capital Resources
The Company's principal sources of cash flow are internally generated funds and
borrowings from News Corporation and its subsidiaries.
Net cash flows used in operating activities during the three months ended
September 30, 2000 were $40 million as compared to $506 million in the
corresponding period of the preceding fiscal year. The decrease in cash used was
primarily due to the collection of outstanding domestic home video receivables
and lower inventory levels at the Television stations.
15
Net cash flows used in investing activities were $196 million and $195 million
during the three months ended September 30, 2000 and 1999, respectively. The
current quarter included investments in Regency Television, National Sports
Partners, the Health Network and Fox News and FX launch support payments.
Net cash flows provided by financing activities were $216 million and $760
million during the three months ended September 30, 2000 and 1999, respectively.
The decrease in cash provided by financing activities is primarily attributable
to lower advances from affiliates used to fund operations.
News Corporation and certain of its subsidiaries, including certain subsidiaries
of the Company (the "Fox Guarantors"), are guarantors of various debt
obligations of News Corporation and certain of its subsidiaries. The principal
amount of indebtedness outstanding under such debt instruments at September 30
and June 30, 2000 was approximately $9.4 billion and $9.9 billion, respectively.
The debt instruments limit the ability of News Corporation and the Fox
Guarantors to subject their properties to liens and certain of the debt
instruments impose limitations on the ability of News Corporation and its
subsidiaries, including the Fox Guarantors, to incur indebtedness in certain
circumstances. Such debt instruments mature at various times between 2000 and
2096, with a weighted average maturity of over 20 years. Additional subsidiaries
of the Company may from time to time be required to become guarantors of certain
debt obligations.
In the case of any event of default under such debt obligations, the Fox
Guarantors will be directly liable to the creditors or debtholders. News
Corporation has agreed to indemnify the Fox Guarantors from and against any
obligations they may incur by reason of their guarantees of such debt
obligations.
The Company and Liberty/TINTA LLC ("Liberty/TINTA"), a subsidiary of Liberty
Media Corporation ("Liberty"), each own 50% of Fox Sports International. In
conjunction with the Company's July 1999 acquisition of substantially all of the
remaining 50% of Fox Sports Networks, Liberty has an option to cause News
Corporation to acquire and News Corporation has the option to cause
Liberty/TINTA to sell the 50% interest in Fox Sports International held by
Liberty/TINTA in exchange for an aggregate 3,633,866 American Depositary
Receipts ("ADRs") representing 14,535,464 preferred shares. Such options may be
exercised at any time during the 60 days following July 15, 2001. If such
options are exercised, News Corporation will transfer the acquired interest in
Fox Sports International to the Company for approximately 3,632,000 shares of
Class A common stock.
In connection with the formation of FFW and pursuant to a Stock Ownership
Agreement dated December 22, 1995 and Strategic Stockholders Agreement dated as
of August 1, 1997, as amended, the stockholders of Saban Entertainment Inc. were
granted an option to sell to the Company, upon the occurrence of certain events,
all of the Class B Common Stock then held by them, and any of their transferees.
The exercise of the option may be triggered (i) by the death of Haim Saban, if
he dies prior to December 22, 2012, in which case the option is exercisable for
a period of up to one year from the time of his death; (ii) upon a change of
control of FOX; (iii) on January 31, 2001 or (iv) any time after December 22,
2002. The price purchase formula under the option is based on the fair market
value of FFW.
In August 2000, News Corporation announced its intention to acquire Chris-Craft
Industries, Inc., BHC Communications, Inc. and United Television, Inc. In the
transaction, News Corporation will pay approximately $5.35 billion, comprised of
a cash payment of approximately $2.13 billion and approximately 73 million ADRs
representing 292 million News Corporation preferred shares. Upon consummation of
the acquisition, News Corporation will transfer the assets, excluding
approximately $1.7 billion in cash, to the Company, which will own and operate
the acquired stations in exchange for the issuance to News Corporation of
approximately 122.2 million shares of the Company's Class A common stock,
increasing News Corporation's ownership percentage in the Company from 82.76% to
approximately 85.25%. The closing of the acquisition is subject to customary
conditions including shareholder and regulatory approval.
In January 2000, the Company completed a series of integrated transactions with
Healtheon/WebMD Corporation ("WebMD") to exchange media branding services and a
50% interest in The Health Network for a cost basis preferred stock interest in
WebMD. Pursuant to these transactions, WebMD issued to the Company 105,518
shares of Series A preferred stock subject to a three-year lockup, independently
valued at approximately $500 million, which will convert to approximately 14.4
million shares of WebMD common stock in three years. On a pro forma basis, if
the Company were able to convert the Series A preferred stock it currently holds
into 10.5 million shares of common stock, the market value of such common stock
would have been $157.5 million as of September 30, 2000. The Company has
evaluated the carrying value of the WebMD Series A preferred stock and
determined, as of September 30, 2000, that current events and circumstances did
not indicate an other than temporary decline in the carrying value of the
preferred stock at that time. As part of its evaluation, the Company considered,
among other factors, WebMD's announcement at September 28, 2000 of its new
strategic plan to streamline its business and accelerate profitability; the
appointment of a new management team; an improved liquidity and capital resource
position; and agreements to restructure previous business relationships with
third parties as indicators that an other than temporary decline had not
occurred. Additionally, at September 30, 2000, the Company had the ability and
intent to hold the Preferred stock for a period of time sufficient to allow for
any anticipated recovery in its value. These evaluation factors were also
considered in the context of the Company's ongoing discussions with WebMD to
restructure its relationship with WebMD, which is expected to ultimately include
the acquisition of WebMD's ownership interest in The Health Network and relief
from certain funding and future media services obligations. As of September 30,
2000, based on all information available, the Company has no reason to believe
that a restructuring transaction will not be satisfactorily completed and that a
loss would result from such a restructuring transaction. However, there can be
no assurance at such date that circumstances affecting the Company, WebMD, their
respective businesses or the markets in which they operate, will not change in a
manner which would lead to a conclusion in a future period that an other than
temporary decline in the carrying value of the Preferred stock has occurred.
The Company will update its assessment of the recovery of the carrying value of
the Preferred stock during the three month period ended December 31, 2000 and
based on all factors available at that time, including the status of the
restructuring discussions, determine if an other than temporary decline has
occurred.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
16
Part II. Other Information
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information.
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
The exhibit index filed with this Form 10-Q/A follows on page 18.
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 12, 2001 FOX ENTERTAINMENT GROUP, INC.
By: /s/ David F. DeVoe
------------------
Name: David F. DeVoe
Title: Chief Financial Officer
17
Exhibit Index
Exhibit
Number Description
27.1 Financial Data Schedule
18