UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

or

Commission file number 001-32352

 

TWENTY-FIRST CENTURY FOX, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Registrant’s telephone number, including area code (212) 852-7000

 

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  x     No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨     No  x

As of May 2, 2014, 1,427,837,712 shares of Class A Common Stock, par value $0.01 per share, and 798,520,953 shares of Class B Common Stock, par value $0.01 per share, were outstanding.

 

 

 

 

 

 

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TWENTY-FIRST CENTURY FOX, INC.

FORM 10-Q

TABLE OF CONTENTS

 

 

 

 

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TWENTY-FIRST CENTURY FOX, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

 

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TWENTY-FIRST CENTURY FOX, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(IN MILLIONS)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

 

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TWENTY-FIRST CENTURY FOX, INC.

CONSOLIDATED BALANCE SHEETS

(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

 

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TWENTY-FIRST CENTURY FOX, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN MILLIONS)

 

 

 

 

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

 

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1. BASIS OF PRESENTATION

Twenty-First Century Fox, Inc. (formerly known as News Corporation) and its subsidiaries (together, “Twenty-First Century Fox” or the “Company”) is a Delaware corporation. Twenty-First Century Fox is a diversified global media and entertainment company, which manages and reports its businesses in five segments: Cable Network Programming, Television, Filmed Entertainment, Direct Broadcast Satellite Television and Other, Corporate and Eliminations.

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments consisting only of normal recurring adjustments necessary for a fair presentation have been reflected in these unaudited consolidated financial statements. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2014.

These interim unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2013 as filed with the Securities and Exchange Commission (“SEC”) on August 19, 2013 (the “2013 Form 10-K”).

The consolidated financial statements include the accounts of Twenty-First Century Fox. Intercompany transactions and balances have been eliminated. Investments in which the Company exercises significant influence but does not exercise control and is not the primary beneficiary are accounted for using the equity method. Investments in which the Company is not able to exercise significant influence over the investee are designated as available-for-sale if readily determinable fair values are available. If an investment’s fair value is not readily determinable, the Company accounts for its investment under the cost method.

The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts that are reported in the consolidated financial statements and accompanying disclosures. Actual results could differ from those estimates.

On September 19, 2013, the Company changed its fiscal year from a 52-53 week fiscal year ending on the Sunday closest to June 30 to a fiscal year ending on June 30 of each year. The Company’s 2013 fiscal year ended on June 30, 2013. The Company made this change to better align its financial reporting with the media and entertainment assets retained following the separation of its business into two independent publicly traded companies (the “Separation”) by distributing to its stockholders all of the outstanding shares of the new News Corporation (“News Corp”) on June 28, 2013. (See Note 4 – Discontinued Operations)

Certain fiscal 2013 amounts have been reclassified to conform to the fiscal 2014 presentation. As a result of the Separation, News Corp has been classified as discontinued operations for all periods presented (See Note 4 – Discontinued Operations). Unless indicated otherwise, the information in the notes to the unaudited consolidated financial statements relate to the Company’s continuing operations.

Recently Adopted and Recently Issued Accounting Guidance

Adopted

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU 2013-02”), which requires the Company to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, it requires the Company to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, the Company is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. ASU 2013-02 became effective for the Company for interim reporting periods beginning July 1, 2013. The adoption of ASU 2013-02 resulted in the disclosure of additional information within the notes to the consolidated financial statements. (See Note 12 – Stockholders’ Equity)

Issued

In March 2013, the FASB issued ASU 2013-05, “Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity,” (“ASU 2013-05”). The objective of ASU 2013-05 is to resolve the diversity in practice regarding the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets or a business within a foreign entity. ASU 2013-05 is effective for the Company for interim reporting periods beginning July 1, 2014, however, early adoption is permitted. The Company is currently evaluating the impact ASU 2013-05 will have on its consolidated financial statements.

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360)” (“ASU 2014-08”). The amendments in ASU 2014-08 provide guidance for the recognition of discontinued operations, change the requirements for reporting discontinued operations in ASC 205-20, “Discontinued Operations” (“ASC 205-20”) and require additional disclosures about discontinued operations. ASU 2014-08 is effective for the Company for interim reporting periods beginning July 1, 2015, however, early adoption is permitted. The Company is currently evaluating the impact ASU 2014-08 will have on its consolidated financial statements.

 

NOTE 2. VARIABLE INTEREST ENTITIES

The Company evaluates whether a Twenty-First Century Fox entity or interest is a variable interest entity (“VIE”) and whether the Company is the primary beneficiary. Consolidation is required if both of these criteria are met.

The Company owns an approximate 33% interest in Hulu LLC (“Hulu”). In October 2012, Hulu redeemed Providence Equity Partners’ equity interest for $200 million. In connection with the transaction, Hulu incurred a charge primarily related to employee equity-based compensation. Accordingly, the Company recorded approximately $60 million to reflect its share of the charge in the second quarter of fiscal 2013. The Company has guaranteed $115 million of Hulu’s $338 million five-year term loan which was used by Hulu, in part, to finance the transaction. The fair value of this guarantee was calculated using Level 3 inputs and was included in the consolidated balance sheets in Other liabilities. In July 2013, the Company invested an additional $125 million in Hulu and has committed to invest an additional $125 million in Hulu to maintain its ownership percentage of approximately 33%.

Hulu is considered a VIE. However, the Company is not the primary beneficiary. The Company’s risk of loss related to this investment is $115 million, the portion of Hulu’s debt that it guarantees. The Company will continue to account for its interest in Hulu as an equity method investment.

 

NOTE 3. ACQUISITIONS, DISPOSALS AND OTHER TRANSACTIONS

During the nine months ended March 31, 2014 and fiscal year ended June 30, 2013, the Company completed a number of acquisitions as more fully described below. All of the Company’s acquisitions were accounted for under Accounting Standards Codification (“ASC”) 805, “Business Combinations” (“ASC 805”), which requires, among other things, that an acquirer (i) remeasure any previously held equity interest in an acquiree at its acquisition date fair value and recognize any resulting gains or losses in earnings and (ii) record any non-controlling interests in an acquiree at their acquisition date fair values. Accordingly, several of the transactions described below resulted in the recognition of remeasurement gains since the Company acquired control of an acquiree in stages. Further, other transactions described below involved the Company acquiring control with an ownership stake of less than 100%. In those instances, the allocation of the excess purchase price reflects 100% of the fair value of the acquiree with the non-controlling interests recorded at fair value.

The below acquisitions all support the Company’s strategic priority of increasing its brand presence and reach in key international and domestic markets, acquiring greater control of investments that complement its portfolio of businesses and creating new pay-TV sports franchises. For those acquisitions where the accounting for the business combination is based on provisional amounts and the allocation of the excess purchase price is not final, the amounts allocated to intangibles and goodwill, the estimates of useful lives and the related amortization expense are subject to change pending the completion of final valuations of certain assets and liabilities. A change in the purchase price allocations and any estimates of useful lives could result in a change in the value allocated to the intangible assets that could impact amortization expense.

Fiscal 2014

Acquisitions

Latin America Pay Television

In September 2013, the Company acquired the 22% interest it did not already own in Latin America Pay Television (“LAPTV”), an entity that distributes premium and basic television channels in Latin America, for approximately $75 million in cash. As a result of this transaction, the Company now owns 100% of LAPTV. The transaction is accounted for as the purchase of subsidiary shares from noncontrolling interests.

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Plazamedia

In December 2013, Sky Deutschland AG (“Sky Deutschland”), a majority-owned consolidated subsidiary of the Company, agreed to acquire from Constantin Medien AG, a 100% interest in the production company PLAZAMEDIA TV and Film Produktion GmbH (“Plazamedia”) as well as a 25.1% equity stake in Sport1 GmbH and Constantin Sport Marketing GmbH for €57.5 million (approximately $80 million), net of cash acquired. Plazamedia is an established full-service provider for television and new media as well as one of the leading producers of sports television in the German-speaking markets. This transaction will be financed under Sky Deutschland’s credit agreement, as amended.  (See Note 10 – Borrowings)

Yankees Entertainment and Sports Network

In December 2012, the Company acquired a 49% equity interest in the Yankees Entertainment and Sports Network (“YES Network”), a Regional Sports Network (“RSN”) primarily broadcasting pre-season and regular season games for the New York Yankees and the Brooklyn Nets, for $584 million. Simultaneous with the closing of this transaction, the Company also paid approximately $250 million of upfront programming costs on behalf of the YES Network.  The Company accounted for its investment in the YES Network under the equity method of accounting.  The Company’s total investment of $834 million was allocated between tangible and intangible assets in accordance with ASC 323, “Investments – Equity Investments.”

On February 28, 2014, the Company acquired an additional 31% interest in the YES Network, increasing the Company’s ownership interest to 80%, for approximately $680 million, net of cash acquired, and subsequent to the acquisition, the Company has consolidated the balance sheet and operating results of the YES Network, including $1.7 billion in debt.  The remaining 20% of the YES Network not owned by the Company has been recorded at fair value of approximately $385 million based on the Company’s provisional valuation of the YES Network business using a market approach (a Level 3 measurement as defined in Note 8 – Fair Value).  The carrying amount of the Company’s previously held equity interest in the YES Network was revalued to its provisional fair value of approximately $860 million as of the acquisition date.  The aggregate excess purchase price has been preliminarily allocated, based on a provisional valuation of 100% of the YES Network, as follows: approximately $1.9 billion to intangible assets consisting of Multiple-System Operator (“MSO”) agreements with useful lives of 20 years and advertiser relationships with useful lives of 6 years, and the indefinite-lived YES Network trade name; approximately $1.7 billion to debt; approximately $1.5 billion representing the goodwill on the transaction; and other net assets. The goodwill reflects the synergies and increased market penetration expected from combining the operations of the YES Network and the Company.  Subsequent to the acquisition, the Company paid approximately $160 million of upfront programming costs on behalf of the YES Network.

Fiscal 2013

Acquisitions

Eredivisie Media & Marketing

In November 2012, the Company acquired a controlling 51% ownership stake in Eredivisie Media & Marketing CV (“EMM”) for approximately $350 million, of which $325 million was cash and $25 million was contingent consideration. EMM is a media company that holds the collective media and sponsorship rights of the Dutch Premier League. The remaining 49% of EMM, which is owned by the Dutch Premier League and the global TV production company Endemol, has been recorded at its acquisition date fair value. The excess purchase price, based on a valuation of 100% of EMM, of approximately $670 million has been allocated as follows: $325 million to amortizable intangible assets, primarily customer relationships, with useful lives ranging from 6 to 20 years, and approximately $345 million representing the goodwill on the transaction. The goodwill reflects the synergies and increased market penetration expected from combining the operations of EMM and the Company.

Fox Sports Asia (formerly ESPN Star Sports)

In November 2012, the Company acquired the remaining 50% interest in ESPN Star Sports, now operating as Fox Sports Asia, that it did not already own for approximately $220 million, net of cash acquired. Fox Sports Asia is a leading sports broadcaster in Asia and the Company now, through its wholly owned subsidiaries, owns 100% of Fox Sports Asia. The carrying amount of the Company’s previously held equity interest in Fox Sports Asia was revalued to fair value as of the acquisition date, resulting in a non-taxable gain of $174 million which was included in Other, net in the unaudited consolidated statements of operations for the nine months ended March 31, 2013. The aggregate excess purchase price of $1,030 million, including the revalued previously held investment of $280 million and contract-related liabilities of approximately $450 million, has been allocated as follows: $190 million to amortizable intangible assets, primarily MSO agreements, with useful lives ranging from 8 to 15 years, and approximately $840 million representing the goodwill on the transaction.  The goodwill reflects the synergies and increased market penetration expected from combining the operations of Fox Sports Asia and the Company.

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

SportsTime Ohio

In December 2012, the Company acquired SportsTime Ohio, a RSN serving the Cleveland, Ohio market, for an estimated total purchase price, including post-closing costs, of approximately $285 million, of which $135 million was in cash. The balance of the purchase price represents the fair value of deferred payments and payments that are contingent upon achievement of certain performance objectives. The excess purchase price of approximately $275 million has been allocated as follows: $135 million to amortizable intangible assets, primarily MSO agreements, with useful lives ranging from 8 to 20 years, and approximately $140 million representing the goodwill on the transaction. The goodwill reflects the synergies and increased market penetration expected from combining the operations of the RSN and the Company.

Sky Deutschland

During the third quarter of fiscal 2013, the Company acquired, through a combination of a private placement and a rights offering, approximately 92 million additional shares of Sky Deutschland increasing the Company’s ownership interest to 55%. The remaining 45% of Sky Deutschland not owned by the Company has been recorded at fair value of approximately $2.3 billion, based on the closing price of its shares on the Frankfurt Stock Exchange on the date control was acquired (a Level 1 measurement as defined in Note 8 – Fair Value). The aggregate cost of shares acquired by the Company was approximately €410 million (approximately $550 million). The carrying amount of the Company’s previously held equity interest in Sky Deutschland was revalued to fair value as of the acquisition date, resulting in a gain of approximately $2.1 billion which was included in Other, net in the unaudited consolidated statements of operations for the three and nine months ended March 31, 2013. The aggregate excess purchase price has been allocated as follows: approximately $1.7 billion to intangible assets, primarily consisting of subscriber relationships, with a useful life of 11 years, and the indefinite-lived Sky trade name, approximately $4.3 billion representing the goodwill on the transaction and the related deferred tax liabilities. As of result of these transactions, the Company has the power to control Sky Deutschland and the results of Sky Deutschland were included in the Company’s consolidated results of operations beginning in January 2013. Prior to the acquisition of the additional 5% ownership interest, the Company accounted for its investment in Sky Deutschland under the equity method of accounting and the Company’s investment consisted of common stock, convertible bonds and loans.

The Company has guaranteed Sky Deutschland’s €300 million (approximately $415 million) five-year bank credit facility, of which €225 million (approximately $310 million) has been utilized and is included in Borrowings. In connection with the consolidation of Sky Deutschland, the Company assumed approximately $480 million in bank debt, which Sky Deutschland repaid in full during the third quarter of fiscal 2013. Additionally, the Company is the guarantor to the German Football League for Sky Deutschland’s Bundesliga broadcasting license for the 2013-2014 to 2016-2017 seasons in an amount up to 50% of the license fee per season and the Company has also agreed to extend the maturity of existing shareholder loans that were issued before it became a consolidated subsidiary.

In January 2011, the Company purchased a convertible bond from Sky Deutschland for approximately $225 million. The Company currently has the right to convert the bonds into 53.9 million underlying Sky Deutschland shares, subject to certain black-out periods. If not converted, the Company will redeem the bonds for cash upon their maturity in January 2015. The convertible bonds were separated into their host and derivative financial instrument components. Prior to Sky Deutschland becoming a consolidated subsidiary, both the host and derivative financial instrument components were recorded at their estimated fair value in Investments in the consolidated balance sheets. The change in estimated fair value of the derivative instrument resulted in a gain of $58 million which was recorded in Other, net in the Company’s unaudited consolidated statements of operations for the nine months ended March 31, 2013. Subsequent to becoming a consolidated subsidiary, the convertible loan was effectively settled as a pre-existing relationship under the provisions of ASC 805-10-25-21 with the carrying amount of the asset for the derivative component written off as a settlement loss which was included in Other, net in the unaudited consolidated statements of operations for the three and nine months ended March 31, 2013.

Other

In May 2012, the Company renewed its existing FOX affiliation agreement with a major FOX affiliate group (“Network Affiliate”). As part of the transaction, the Company received cash consideration of $50 million and the Network Affiliate had an option to buy the Company’s Baltimore station. Network Affiliate exercised its option to purchase the Baltimore television station and the Company recognized a loss on the transaction, of which $92 million was included in Other, net in the unaudited consolidated statements of operations for the nine months ended March 31, 2013. The Company is amortizing the $50 million received from the Network Affiliate over the term of the affiliation agreement.

 

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 4. DISCONTINUED OPERATIONS

Separation of News Corp

On June 28, 2013, the Company completed the Separation of its business into two independent publicly traded companies by distributing to its stockholders all of the outstanding shares of News Corp. The Company retained its interests in a global portfolio of media and entertainment assets spanning six continents. News Corp holds the Company’s former businesses including newspapers, information services and integrated marketing services, digital real estate services, book publishing, digital education and sports programming and pay-TV distribution in Australia. The Company completed the Separation by distributing to its stockholders one share of News Corp Class A common stock for every four shares of the Company’s Class A common stock held on June 21, 2013, and one share of News Corp Class B common stock for every four shares of the Company’s Class B common stock held on June 21, 2013. The Company’s stockholders received cash in lieu of fractional shares. Following the Separation, the Company does not beneficially own any shares of News Corp Class A common stock or News Corp Class B common stock.

Effective June 28, 2013, the Separation qualified for discontinued operations treatment in accordance with ASC 205-20, and accordingly the Company deconsolidated News Corp’s balance sheet as of June 30, 2013, and presented its results for the three and nine months ended March 31, 2013 as discontinued operations on the unaudited consolidated statements of operations and as discontinued operations on the unaudited consolidated statements of cash flows for the nine months ended March 31, 2013. The footnotes to the financial statements have also been revised accordingly.

The Company entered into a separation and distribution agreement with News Corp (“Separation and Distribution Agreement”) pursuant to which the Company agreed to provide a cash contribution to News Corp immediately prior to the Separation, so that as of the Separation, News Corp would have approximately $2.6 billion of cash on hand. Accordingly, immediately prior to the Separation, the Company distributed approximately $2.4 billion to News Corp, which was comprised of $1.6 billion in cash funding and approximately $800 million that was held by News Corp’s subsidiaries immediately prior to the Separation. The Company made a final cash distribution of $217 million in September 2013, pursuant to the Separation and Distribution Agreement.

Separation and Distribution Agreement

The Separation and Distribution Agreement sets forth, among other things, the parties’ agreements regarding the principal transactions necessary to effect the Separation.

The Separation and Distribution Agreement provides for the transfers of entities and their related assets and liabilities so that as of the Separation, the Company and News Corp each consists of the entities associated with the businesses described above. The Separation and Distribution Agreement also provides that the Company will indemnify News Corp, on an after-tax basis, for payments made after the Separation arising out of civil claims and investigations relating to the U.K. Newspaper Matters (as defined below), as well as legal and professional fees and expenses paid in connection with the related criminal matters, other than fees, expenses and costs relating to employees who are not (i) directors, officers or certain designated employees or (ii) with respect to civil matters, co-defendants with News Corp. U.K. Newspaper Matters refers to ongoing investigations by U.K. and U.S. regulators and governmental authorities relating to phone hacking, illegal data access and inappropriate payments to public officials at The News of the World and The Sun and related matters. In addition, the Separation and Distribution Agreement governs the Company’s and News Corp’s agreements with regard to each party’s ability to comply with certain statutes or rules and regulations promulgated by the Federal Communications Commission. (See Note 14 – Commitments and Contingencies)

Tax Sharing and Indemnification Agreement

The Company entered into a tax sharing and indemnification agreement with News Corp that governs the Company’s and News Corp’s respective rights, responsibilities and obligations with respect to tax liabilities and benefits, tax attributes, tax contests and other matters regarding income taxes, non-income taxes and related tax returns. Under the tax sharing and indemnification agreement, News Corp will generally indemnify the Company against taxes attributable to News Corp’s assets or operations for all tax periods or portions thereof after the Separation. For taxable periods or portions thereof prior to the Separation, the Company will generally indemnify News Corp against U.S. consolidated and combined taxes attributable to such periods, and News Corp will indemnify the Company against News Corp’s separately filed U.S. state and foreign taxes and foreign consolidated and combined taxes for such periods. The tax sharing and indemnification agreement also provides that the proceeds, if any, from the refunds of certain foreign taxes (plus interest) of a subsidiary of News Corp that were claimed prior to the Separation are to be paid to the Company, net of certain taxes.

A subsidiary of News Corp, prior to the Separation, had filed refunds to claim certain losses in a foreign jurisdiction. At June 30, 2013, News Corp did not recognize an asset for the claims since such amounts were being disputed by the foreign tax authority and the resolution was not determinable at that time. During the nine months ended March 31, 2014, the foreign jurisdiction notified News Corp that it had accepted its claims and would refund the taxes plus interest to News Corp. As of March 31, 2014, the net amount that the Company has received, pursuant to the tax sharing and indemnification agreement with News Corp, is approximately $720 million, which has been included in (Loss) income from discontinued operations, net of tax, in the unaudited consolidated statement of operations.

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Employee Matters Agreement

The Company entered into an employee matters agreement that governs the Company’s and News Corp’s obligations with respect to employment, compensation, benefits and other related matters for employees of certain of News Corp’s U.S.-based businesses (the “Employee Matters Agreement”). In general, the Employee Matters Agreement addresses matters relating to employees transferring to News Corp’s U.S. businesses and former News Corp employees of those businesses that participated in the Company’s retirement plans (including postretirement benefits) and welfare programs, which were retained by the Company following the distribution. The Employee Matters Agreement also addresses equity compensation matters relating to employees of both companies.

Summarized Financial Information

Revenues and (Loss) income from discontinued operations related to News Corp were as follows:

 

Cash flows from discontinued operations related to News Corp were as follows:

 

 

 

NOTE 5. RECEIVABLES, NET

Receivables are presented net of an allowance for returns and doubtful accounts, which is an estimate of amounts that may not be collectible. In determining the allowance for returns, management analyzes historical returns, current economic trends and changes in customer demand and acceptance of the Company’s products. Based on this information, management reserves a percentage of each dollar of product sales that provide the customer with the right of return. The allowance for doubtful accounts is estimated based on historical experience, receivable aging, current economic trends and specific identification of certain receivables that are at risk of not being paid.

The Company has receivables with original maturities greater than one year in duration principally related to the Company’s sale of program rights in the television syndication markets within the Filmed Entertainment segment. Allowances for credit losses are established against these non-current receivables as necessary. As of March 31, 2014 and June 30, 2013, these allowances were not material.

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Receivables, net consisted of:

 

 

 

NOTE 6. INVENTORIES

The Company’s inventories were comprised of the following:

 

 

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 7. INVESTMENTS

The Company’s investments were comprised of the following:

 

BSkyB

BSkyB’s shareholders and board of directors have authorized a share repurchase program. The Company entered into an agreement with BSkyB under which, following any market purchases of shares by BSkyB, the Company will sell to BSkyB sufficient shares to maintain its approximate 39% interest subsequent to those market purchases, for a price equal to the price paid by BSkyB in respect of the relevant market purchases. BSkyB began repurchasing shares as part of this share repurchase program during the second quarter of fiscal 2012. As a result, the Company received cash considerations of $35 million and $14 million during the three months ended March 31, 2014 and 2013, respectively, and of $107 million and $272 million during the nine months ended March 31, 2014 and 2013, respectively.  The Company recognized gains of $28 million and $11 million during the three months ended March 31, 2014 and 2013, respectively, and of $84 million and $217 million during the nine months ended March 31, 2014 and 2013, respectively, which were included in Equity earnings of affiliates in the Company’s unaudited consolidated statements of operations.

NDS

In July 2012, the Company sold its 49% investment in NDS Group Limited (“NDS”) to Cisco Systems Inc. for approximately $1.9 billion, of which approximately $60 million was set aside in escrow to satisfy any indemnification obligations. The Company recorded a gain of approximately $1.4 billion on this transaction which was included in Other, net in the unaudited consolidated statements of operations for the nine months ended March 31, 2013.

During the third quarter of fiscal 2014, upon the resolution of the indemnification obligations, the escrow was released.  The Company received approximately $30 million of the amount set aside in escrow and has recorded a charge for the remaining amount. The charge is included in Other, net in the unaudited consolidated statements of operations for the three and nine months ended March 31, 2014.

Other

In January 2014, the Company agreed to sell its 47% interest in CMC-News Asia Holdings Limited, which has a carrying value of approximately $80 million. The Company expects this transaction to close in the fourth quarter of fiscal 2014 and expects to record a gain on the sale.

In March 2013, the Company sold a portion of its interest in Phoenix Satellite Television Holdings Ltd. (“Phoenix”), for approximately $90 million in cash, decreasing its ownership interest to 12% from 18% at June 30, 2012. The Company recorded a gain of approximately $81 million on this transaction which was included in Other, net in the unaudited consolidated statements of operations for the three and nine months ended March 31, 2013. In November 2013, the Company sold its remaining 12% interest in Phoenix for approximately $210 million. The Company recorded a gain of $199 million on this transaction which was included in Other, net in the unaudited consolidated statements of operations for the nine months ended March 31, 2014.

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Fair value of available-for-sale investments

The cost basis, unrealized gains, unrealized losses and fair market value of available-for-sale investments are set forth below:

 

 

NOTE 8. FAIR VALUE

In accordance with ASC 820, “Fair Value Measurement,” fair value measurements are required to be disclosed using a three-tiered fair value hierarchy which distinguishes market participant assumptions into the following categories: (i) inputs that are quoted prices in active markets (“Level 1”); (ii) inputs other than quoted prices included within Level 1 that are observable, including quoted prices for similar assets or liabilities (“Level 2”); and (iii) inputs that require the entity to use its own assumptions about market participant assumptions (“Level 3”). 

The tables below present information about financial assets and liabilities carried at fair value on a recurring basis:

 

 

 

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

The changes in redeemable noncontrolling interests classified as Level 3 measurements were as follows:

 

 

 

Financial Instruments

The carrying value of the Company’s financial instruments, including cash and cash equivalents, receivables, payables and cost method investments, approximates fair value.

The aggregate fair value of the Company’s borrowings at March 31, 2014 was $22,109 million compared with a carrying value of $19,054 million and, at June 30, 2013, was $18,756 million compared with a carrying value of $16,458 million. Fair value is generally determined by reference to market values resulting from trading on a national securities exchange or in an over-the-counter market (a Level 1 measurement).

16

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Foreign Currency Forward Contracts

The Company uses financial instruments primarily to hedge certain exposures to foreign currency exchange risks associated with the cost of producing or acquiring films and television programming. The Company’s foreign currency forward contracts are valued using an income approach based on the present value of the forward rate less the contract rate multiplied by the notional amount. The notional amount of foreign currency forward contracts designated as cash flow hedges with foreign currency risk outstanding at March 31, 2014 and June 30, 2013 were $410 million and $578 million, respectively. As of March 31, 2014, the fair value of the foreign currency forward contracts designated as cash flow hedges of $(10) million were recorded along with the underlying hedged balances. The notional amount of foreign currency forward contracts, not designated as cash flow hedges, but used as economic hedges with foreign currency risk outstanding at March 31, 2014 and June 30, 2013 were $318 million and $128 million, respectively. As of March 31, 2014, the fair value of the foreign currency forward contracts used as economic hedges of $(3) million were recorded along with the underlying hedged balances. For the three and nine months ended March 31, 2014, the changes in the fair values of foreign currency forward contracts that are not designated as cash flow hedges were not material. These changes were recorded in earnings each period and are presented net within Other in the table below.

Interest Rate Swap Contracts

The Company uses financial instruments to hedge certain exposures to interest rate risks associated with certain borrowings. The Company’s interest rate swap contracts are valued using an income approach. The notional amount of interest rate swap contracts outstanding at March 31, 2014 and June 30, 2013 were $584 million and nil.  As of March 31, 2014, approximately $310 million of the total notional amount of interest rate swap contracts outstanding were designated as cash flow hedges. The fair value of the interest rate swap contracts as of March 31, 2014 was approximately $(5) million and was recorded along with the underlying hedged balances. The changes in the fair values of the interest rate swap contracts for the three and nine months ended March 31, 2014 were not material. For designated cash flow hedges and economic hedges, these changes were recorded in each period in accumulated other comprehensive income and earnings, respectively, and are presented net in the table below.

The following table shows the changes in fair value of derivatives designated as cash flow hedges and other derivatives:

 

 

The effective changes in the fair values of derivative contracts designated as cash flow hedges are reclassified from accumulated other comprehensive income to net income when the underlying hedged item is recognized in earnings. The Company expects to reclassify the cumulative changes in fair values of the foreign currency forward contracts, included in accumulated other comprehensive income, within the next 24 months. For interest rate swaps, the Company expects to reclassify changes in fair values included in accumulated other comprehensive income to earnings during the relevant period as interest payments are made until the expiration of the swap contracts occurs at various dates until fiscal 2017. Cash flows from the settlement of these derivative contracts offset cash flows from the underlying hedged item and are included in operating activities in the unaudited consolidated statement of cash flows.

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Concentrations of Credit Risk

Cash and cash equivalents are maintained with several financial institutions. The Company has deposits held with banks that exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions of reputable credit and, therefore, bear minimal credit risk.

The Company’s receivables did not represent significant concentrations of credit risk as of March 31, 2014 or June 30, 2013 due to the wide variety of customers, markets and geographic areas to which the Company’s products and services are sold.

The Company monitors its positions with, and the credit quality of, the financial institutions which are counterparties to its financial instruments. The Company is exposed to credit loss in the event of nonperformance by the counterparties to the agreements. At March 31, 2014, the Company did not anticipate nonperformance by any of the counterparties.

 

NOTE 9. GOODWILL

The changes in the carrying value of goodwill, by segment, are as follows:

 

 

 

The increase in the carrying value of the Cable Network Programming segment goodwill during the nine months ended March 31, 2014 was attributable to the preliminary allocation of the excess purchase price related to the acquisition of the majority interest in the YES Network in February 2014 (See Note 3 – Acquisitions, Disposals and Other Transactions) and the finalization of the allocation of excess purchase price related to Fox Sports Asia. The decrease in the carrying value of Direct Broadcast Satellite Television segment goodwill during the nine months ended March 31, 2014 was primarily due to the finalization of the allocation of excess purchase price from goodwill to acquired identifiable intangible assets of approximately $1.7 billion partially offset by deferred tax liabilities of approximately $0.4 billion in connection with the consolidation of Sky Deutschland.

 

NOTE 10. BORROWINGS

Senior Notes Issued

In September 2013, 21st Century Fox America, Inc. (formerly known as News America Incorporated) (“21CFA”), a wholly-owned subsidiary of the Company, issued $300 million of 4.00% Senior Notes due 2023 and $700 million of 5.40% Senior Notes due 2043. The net proceeds of approximately $987 million were used for general corporate purposes.

In September 2012, 21CFA issued $1.0 billion of 3.00% Senior Notes due 2022. The net proceeds of approximately $987 million were used for general corporate purposes.

Senior Notes Due

In February 2014, the Company retired A$150 million ($134 million) of 8.625% Senior Notes.

Included in Borrowings within Current liabilities as of March 31, 2014 was 5.30% Senior Notes of $750 million that are due in December 2014.

YES Network Debt

The Company acquired the majority interest in the YES Network in February 2014 (See Note 3 – Acquisitions, Disposals and Other Transactions).  In connection with the acquisition, the Company consolidated the YES Network’s debt, which, on preliminary allocation of the purchase price, had an estimated fair value of $1.7 billion as of the acquisition date, consisting of $1.1 billion outstanding under a credit agreement and approximately $605 million of Senior Subordinated Notes due June 2018.  No changes were made to the terms and conditions of the debt.

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

The carrying value of the YES Network’s debt, as of March 31, 2014, is comprised of the following:

 

Other

In January 2013, Sky Deutschland, a majority owned subsidiary of the Company, entered into a credit agreement, with major financial institutions, that 21CFA and the Company have both guaranteed. The credit agreement provides a €300 million unsecured credit facility with a sub-limit of €75 million revolving credit facility available for cash drawdowns or the issuance of letters of credit and a maturity date of February 2018. Sky Deutschland may request that the maturity date be extended for one year. The material terms of the agreement include limitations on liens and indebtedness. Fees under the credit agreement are based on the Company’s long-term senior unsecured non-credit enhanced debt ratings. Given the current debt ratings of the Company, Sky Deutschland pays a facility fee of 0.125% and interest of Eurocurrency Rate plus 1.125%. As of March 31, 2014, €225 million (approximately $310 million) was outstanding under this credit agreement and €73 million was available for either additional financing or letters of credit. The proceeds were used to repay existing Sky Deutschland debt.

In April 2014, Sky Deutschland amended its credit agreement to increase the size of its revolving credit facility by €78.5 million, which currently remains unused.  Sky Deutschland intends to utilize the funds from this amendment to finance the acquisition of Plazamedia at the closing date of the transaction.  If the Plazamedia transaction is not finalized, this amendment to the credit agreement will be rescinded.  The amendment did not materially change the terms of the original credit facility entered into in January 2013.

 

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 11. FILM PRODUCTION FINANCING

The Company enters into arrangements with third parties to co-produce certain of its theatrical productions. These arrangements, which are referred to as co-financing arrangements, take various forms. The parties to these arrangements include studio and non-studio entities both domestic and international. In several of these agreements, other parties control certain distribution rights. The Filmed Entertainment segment records the amounts received for the sale of an economic interest as a reduction of the cost of the film, as the investor assumes full risk for that portion of the film asset acquired in these transactions. The substance of these arrangements is that the third-party investors own an interest in the film and, therefore, receive a participation based on the third-party investor’s contractual interest in the profits or losses incurred on the film. Consistent with the requirements of ASC 926 “Entertainment – Films” (“ASC 926”), the estimate of the third-party investor’s interest in profits or losses on the film is based on total estimated ultimate revenues.

 

NOTE 12. STOCKHOLDERS’ EQUITY

The following table summarizes changes in equity:

 

 

 

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Other Comprehensive Income

Comprehensive income is reported in the unaudited consolidated statement of comprehensive income and consists of Net income and other gains and losses, including foreign currency translation adjustments, unrealized holding gains and losses on securities, and benefit plan adjustments, which affect shareholders’ equity, and under GAAP, are excluded from Net income.

The following table summarizes the activity within Other comprehensive income (loss):

 

 

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Dividends

The following table summarizes the dividends declared per share on both the Company’s Class A common stock, par value $0.01 per share (“Class A Common Stock”) and the Class B common stock, par value $0.01 per share (“Class B Common Stock”):

 

 

The Company declared a dividend of $0.125 per share on both the Class A Common Stock and Class B Common Stock in the three months ended March 31, 2014, which was paid in April 2014 to stockholders of record on March 12, 2014.

Earnings Per Share Data  

The following table sets forth the Company’s computation of Income from continuing operations attributable to Twenty-First Century Fox, Inc. stockholders:

 

Stock Repurchase Program

The Board has authorized a stock repurchase program, under which the Company is currently authorized to acquire Class A Common Stock. In August 2013, the Board authorized the repurchase of $4 billion of Class A Common Stock, excluding commissions, which replaced the remaining authorized amount under the stock repurchase program. The Company intends to complete this stock repurchase program by August 2014.

The remaining authorized amount under the Company’s stock repurchase program as of March 31, 2014, excluding commissions, was approximately $1.6 billion.

The program may be modified, extended, suspended or discontinued at any time.

Temporary Suspension of Voting Rights Affecting Non-U.S. Stockholders

On April 18, 2012, the Company announced that it suspended 50% of the voting rights of the Class B Common Stock held by stockholders who are not U.S. citizens (“Non-U.S. Stockholders”) in order to maintain compliance with U.S. law which states that no broadcast station licensee may be owned by a corporation if more than 25% of that corporation’s stock was owned or voted by Non-U.S. Stockholders, their representatives, or by any other corporation organized under the laws of a foreign country. The Company owns broadcast station licensees in connection with its ownership and operation of U.S. television stations. As of October 2013, the suspension of voting rights of shares of Class B Common Stock held by Non-U.S. Stockholders was 35%. This suspension of voting rights will remain in place for as long as the Company deems it necessary to maintain compliance with applicable U.S. law, and may be adjusted by the Audit Committee as it deems appropriate.

Voting Agreement with the Murdoch Family Interests

On April 18, 2012, the Murdoch Family Trust and K. Rupert Murdoch (together the “Murdoch Family Interests”) entered into an agreement with the Company, whereby the Murdoch Family Interests agreed to limit their voting rights during the voting rights suspension period. Under this agreement, the Murdoch Family Interests will not vote or provide voting instructions with respect to a portion of their shares of Class B Common Stock to the extent that doing so would increase their percentage of voting power from what it was prior to the suspension of voting rights. Currently, as a result of the suspension of voting rights, the aggregate percentage vote of the Murdoch Family Interests is at 39.4% of the outstanding shares of Class B Common Stock not subject to the suspension of voting rights, and the percentage vote may be adjusted as provided in the agreement with the Company.

22

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Delisting from the Australian Securities Exchange

In March 2014, the Company received approval from its stockholders and subsequently the Australian Securities Exchange (the “ASX”) for removal of its full foreign listing from the ASX. Delisting from the ASX occurred on May 8, 2014 and, effective as of that date, all of Twenty-First Century Fox’s Class A and Class B Common Stock is listed solely on the NASDAQ Global Select Market.

 

NOTE 13. EQUITY BASED COMPENSATION

Separation-Related Adjustments

In connection with the Separation, the Company entered into an Employee Matters Agreement with News Corp, which generally provides that employees of News Corp no longer participate in benefit plans sponsored or maintained by the Company. Pursuant to the Employee Matters Agreement, the Company made certain adjustments to the exercise price and number of our share-based compensation awards, using the closing price of the Company’s Class A Common Stock on the final day of trading prior to the effective date of the Separation and the volumetric weighted-average prices for the first day of trading for the Company immediately following the Separation, with the intention of preserving the intrinsic value of the awards immediately prior to the Separation. These adjustments are summarized as follows:

The Separation-related adjustments did not have a material impact on either compensation expense or the potentially dilutive securities to be considered in the calculation of diluted earnings per share of common stock.

The following table summarizes the Company’s equity-based compensation transactions:

 

 

As of March 31, 2014, the Company’s total compensation cost related to restricted stock units (“RSUs”) and performance stock units (“PSUs”), not yet recognized, was approximately $130 million, and is expected to be recognized over a weighted average period between one and two years. Compensation expense on all equity-based awards is generally recognized on a straight-line basis over the vesting period of the entire award. However, certain performance based awards are recognized on an accelerated basis.

The intrinsic value of stock options exercised during the nine months ended March 31, 2014 and 2013 was $32 million and $51 million, respectively. The intrinsic value of the stock options outstanding as of March 31, 2014 and June 30, 2013 was nil and $29 million, respectively. The Company’s stock option program has no stock options outstanding as of March 31, 2014.

As of March 31, 2014 and June 30, 2013, the liability for cash-settled awards was approximately $145 million and $185 million, respectively. Cash settled awards are marked-to-market at each reporting period.

The Company recognized an incremental tax benefit, on vested PSUs, RSUs and stock options exercised, of $37 million and $34 million for the nine months ended March 31, 2014 and 2013, respectively.

Performance Stock Units

During the nine months ended March 31, 2014 and 2013, approximately 4.9 million and 7.2 million PSUs were granted, respectively, of which approximately 3.9 million and 5.7 million, respectively, will be settled in shares of Class A Common Stock. PSUs granted to executive directors and certain awards granted to employees in certain foreign locations are settled in cash.

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

During the nine months ended March 31, 2014, approximately 2.8 million PSUs vested, of which approximately 0.7 million were settled in shares of Class A Common Stock, before statutory tax withholdings. The fair value of PSUs settled in shares of Class A Common Stock was $21 million for the nine months ended March 31, 2014. The remaining 2.1 million PSUs settled during the nine months ended March 31, 2014 were settled in cash of $67 million before statutory tax withholdings. No PSUs vested during the nine months ended March 31, 2013.

Restricted Stock Units

During the nine months ended March 31, 2014 and 2013, approximately 0.8 million and 1.3 million RSUs were granted, respectively, and will be settled in shares of Class A Common Stock.

During the nine months ended March 31, 2014 and 2013, approximately 5.6 million and 7.1 million RSUs vested, respectively, of which approximately 5.0 million and 6.2 million, respectively, were settled in shares of Class A Common Stock, before statutory tax withholdings. The fair value of RSUs settled in shares of Class A Common Stock was $160 million and $147 million for the nine months ended March 31, 2014 and 2013, respectively. The remaining 0.6 million and 0.9 million RSUs settled during the nine months ended March 31, 2014 and 2013, respectively, were settled in cash of $18 million and $22 million, respectively, before statutory tax withholdings.

 

NOTE 14. COMMITMENTS AND CONTINGENCIES

Commitments

The Company has commitments under certain firm contractual arrangements (“firm commitments”) to make future payments. These firm commitments secure the future rights to various assets and services to be used in the normal operations. The total firm commitments and future debt payments as of March 31, 2014 and June 30, 2013 were $85.3 billion and $79.9 billion, respectively. The increase from June 30, 2013 was primarily due to the acquisition of the majority interest in the YES Network in February 2014 (See Note 3 – Acquisitions, Disposals and Other Transactions).

Guarantees

The Company’s guarantees as of March 31, 2014 have not changed significantly from disclosures included in the 2013 Form 10-K.

Contingencies  

Shareholder Litigation

The following discussion is limited to certain recent developments concerning the Company’s legal proceedings and should be read in conjunction with the disclosure set forth in Part I, Item 3 of the 2013 Form 10-K.

Delaware

Reference is made to the Amalgamated Bank Litigation, the New Orleans Employees’ Retirement Litigation, the Mass. Laborers Litigation and the Cohen Litigation which were purported stockholder derivative actions consolidated in the Delaware Court of Chancery (the “Consolidated Action”) and previously described by the Company in the 2013 Form 10-K. The plaintiffs’ Third Amended Complaint in the Consolidated Action alleged claims against director defendants for breach of fiduciary duty arising from the Company’s purchase of Shine and from their purported failure to investigate alleged acts of voicemail interception at The News of the World (the “NoW Matter”) and allegedly permitting the Company to engage in a cover up related to the NoW Matter. The Third Amended Complaint sought a declaration that the defendants violated their fiduciary duties, damages, pre- and post-judgment interest, fees and costs.

On June 26, 2013, the Court approved the settlement in principle that the parties reached on April 17, 2013, and entered a final judgment dismissing the Consolidated Action. Pursuant to the terms of that settlement, the parties agreed that the director defendants in the Consolidated Action would cause to be paid on their behalf the amount of $139 million to the Company, minus $28 million in attorneys’ fees and expenses awarded by the Court to the plaintiffs’ counsel. No stockholder objected to either the settlement or the proposed fee award. The settlement became effective on August 16, 2013, because as of that date, the dismissal of the Consolidated Action as well as the dismissals of each of the Shields Litigation, the Iron Workers Litigation and the Stricklin Litigation (each as described in the 2013 Form 10-K under the heading “Shareholder Litigation—Southern District of New York”) were no longer subject to appeal. The above amount was paid from an escrow account created for the benefit of the director defendants pursuant to an agreement reached between the defendants and their directors’ and officers’ liability insurers for the payment of insurance proceeds, subject to a claims release, and accordingly the Company recorded the net settlement of $111 million in Other, net in the unaudited consolidated statements of operations for the nine months ended March 31, 2014. In addition to the payment to the Company, the settlement contemplates that the Company will build on corporate governance and compliance enhancements which the Company has implemented. These shall remain in effect at least through December 31, 2016, and will be applicable to both the Company and News Corp.

24

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Southern District of New York

On July 19, 2011, a purported class action lawsuit captioned Wilder v. News Corp., et al. (“Wilder Litigation”), was filed on behalf of all purchasers of the Company’s common stock between March 3, 2011 and July 11, 2011, in the United States District Court for the Southern District of New York. The plaintiff brought claims under Section 10(b) and Section 20(a) of the Securities Exchange Act, alleging that false and misleading statements were issued regarding the NoW Matter. The suit names as defendants the Company, Rupert Murdoch, James Murdoch and Rebekah Brooks, and seeks compensatory damages, rescission for damages sustained, and costs. On June 5, 2012, the court issued an order appointing the Avon Pension Fund (“Avon”) as lead plaintiff and Robbins Geller Rudman & Dowd as lead counsel. Thereafter, on July 3, 2012, the court issued an order providing that an amended consolidated complaint shall be filed by July 31, 2012. Avon filed an amended consolidated complaint on July 31, 2012, which among other things, added as defendants NI Group Limited (now known as News Corp UK & Ireland Limited) and Les Hinton, and expanded the class period to include February 15, 2011 to July 18, 2011. The defendants filed motions to dismiss the litigation, which were granted by the court on March 31, 2014. Plaintiffs were given until April 30, 2014 to amend their complaint. On April 30, 2014, plaintiffs filed a second amended consolidated complaint, which generally repeats the allegations of the amended consolidated complaint and also expands the class period to July 8, 2009 to July 18, 2011. The Company’s management believes the claims in the Wilder Litigation are entirely without merit, and intends to vigorously defend those claims.

U.K. Newspaper Matters and Related Investigations and Litigation

U.S. regulators and governmental authorities continue to conduct investigations initiated in 2011 with respect to the U.K. Newspaper Matters. The Company is cooperating with these investigations. It is not possible at this time to estimate the liability, if any, of the Company relating to these investigations.

In connection with the Separation, the Company and News Corp agreed in the Separation and Distribution Agreement that the Company will indemnify News Corp, on an after-tax basis, for payments made after the Separation arising out of civil claims and investigations relating to the U.K. Newspaper Matters, as well as legal and professional fees and expenses paid in connection with the related criminal matters, other than fees, expenses and costs relating to employees who are not (i) directors, officers or certain designated employees or (ii) with respect to civil matters, co-defendants with News Corp (the “Indemnity”). As of June 30, 2013, the Company recognized approximately $150 million as its obligation under the Indemnity, of which approximately $40 million related to the amounts accrued by News Corp as of the date of the Separation and approximately $110 million for the fair value of expected future payments to be made under the Indemnity. Pursuant to ASC 460 “Guarantees” (“ASC 460”), the amount provided for future payments is being amortized in a systematic pattern that reflects the release from the underlying risks and is included in (Loss) income from discontinued operations, net of tax, in the consolidated statement of operations. As of March 31, 2014, the Company has recognized approximately $110 million as its obligation under the Indemnity, of which approximately $70 million relates to amounts payable to News Corp and approximately $40 million for the remaining unamortized fair value of expected future payments to be made under the Indemnity. Pursuant to the Indemnity, the Company made payments of $58 million to News Corp during the nine months ended March 31, 2014. If additional information becomes available and as payments are made, the Company will update the liability provision for the Indemnity. Any changes to the liability provision for the Indemnity in the future will impact the results of operations for that period. The liability provision for the Indemnity was estimated by probability weighting expected payments to be made to News Corp under such Agreement and discounting probability-weighted expected payments to the valuation date, using a discount rate based on the Company’s cost of debt.

It is possible that these proceedings and any adverse resolution thereof, including any fines or other penalties associated with any plea, judgment or similar result could damage the Company’s reputation, impair its ability to conduct its business and adversely affect its results of operations and financial condition.

Other

The Company’s operations are subject to tax in various domestic and international jurisdictions and as a matter of course, the Company is regularly audited by federal, state and foreign tax authorities. The Company believes it has appropriately accrued for the expected outcome of all pending tax matters and does not currently anticipate that the ultimate resolution of pending tax matters will have a material adverse effect on its consolidated financial condition, future results of operations or liquidity.

The Company establishes an accrued liability for legal claims when the Company determines that a loss is both probable and the amount of the loss can be reasonably estimated. Once established, accruals are adjusted from time to time, as appropriate, in light of additional information. The amount of any loss ultimately incurred in relation to matters for which an accrual has been established may be higher or lower than the amounts accrued for such matters. Any fees, expenses, fines, penalties, judgments or settlements which might be incurred by the Company in connection with the various proceedings could affect the Company’s results of operations and financial condition. For the contingencies disclosed above for which there is at least a reasonable possibility that a loss may be incurred, other than the accrual provided, the Company was unable to estimate the amount of loss or range of loss.

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 15. PENSION AND OTHER POSTRETIREMENT BENEFITS

The Company participates in and/or sponsors various pension, savings and postretirement benefit plans. The major pension plans and postretirement benefit plans are closed to new participants (with the exception of groups covered by collective bargaining agreements). The Company has a legally enforceable obligation to contribute to some plans and is not required to contribute to others. The Company makes contributions in accordance with applicable laws or contract terms in each jurisdiction in which the Company operates. The Company’s benefit obligation is calculated using several assumptions which the Company reviews on a regular basis. The net periodic benefits costs for pension and postretirement benefits were approximately $30 million and $40 million for the three months ended March 31, 2014 and 2013, respectively, and approximately $90 million and $130 million for the nine months ended March 31, 2014 and 2013, respectively.

 

NOTE 16. SEGMENT INFORMATION

The Company has realigned its reporting segments following the Separation and the Other segment has been renamed Other, Corporate and Eliminations. This segment includes costs not directly associated with an operating segment, such as corporate overhead and eliminations.

The Company is a diversified global media and entertainment company, which manages and reports its businesses in the following five segments:

The Company’s 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 OIBDA.

Segment OIBDA is defined as revenues less operating expenses and selling, general and administrative expenses. Segment OIBDA does not include: depreciation and amortization, amortization of cable distribution investments, impairment charges, equity earnings of affiliates, interest expense, interest income, other, net, income tax expense and net income attributable to noncontrolling interests. Management believes that Segment OIBDA is an appropriate measure for evaluating the operating performance of the Company’s business segments because it is the primary measure used by the Company’s chief operating decision maker to evaluate the performance of and allocate resources within the Company’s businesses.

Management believes that information about Total Segment OIBDA assists all users of the Company’s consolidated financial statements by allowing them to evaluate changes in the operating results of the Company’s portfolio of businesses separate from non-operational factors that affect net income, thus providing insight into both operations and the other factors that affect reported results.

Total Segment OIBDA provides management, investors and equity analysts a measure to analyze the operating performance of the Company’s business and its enterprise value against historical data and competitors’ data, although historical results, including Segment OIBDA and Total Segment OIBDA, may not be indicative of future results (as operating performance is highly contingent on many factors, including customer tastes and preferences).

Total Segment OIBDA is a non-GAAP measure and should be considered in addition to, not as a substitute for, net income (loss), cash flow and other measures of financial performance reported in accordance with GAAP. In addition, this measure does not reflect cash available to fund requirements and excludes items, such as depreciation and amortization and impairment charges, which are significant components in assessing the Company’s financial performance.

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

Intersegment revenues, generated by the Filmed Entertainment segment, of approximately $305 million and $330 million for the three months ended March 31, 2014 and 2013, respectively, and of approximately $916 million and $779 million for the nine months ended March 31, 2014 and 2013, respectively, have been eliminated within the Other, Corporate and Eliminations segment. Segment OIBDA, generated by the Filmed Entertainment segment, of approximately $(3) million and $13 million for the three months ended March 31, 2014 and 2013, respectively, and of approximately $31 million and $21 million for the nine months ended March 31, 2014 and 2013, respectively, have been eliminated within the Other, Corporate and Eliminations segment.

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Depreciation and amortization for the three months ended March 31, 2014 and 2013 include the amortization of definite lived intangible assets of $82 million and $51 million, respectively. Depreciation and amortization for the nine months ended March 31, 2014 and 2013 include the amortization of definite lived intangible assets of $300 million and $125 million, respectively.

 

 

 

 

 

Revenues by Component

 

 

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 17. ADDITIONAL FINANCIAL INFORMATION

Supplemental Cash Flows Information

 

 

Other, net

The following table sets forth the components of Other, net included in the unaudited consolidated statements of operations:

 

Income Taxes

The Company’s unrecognized tax benefits, excluding interest and penalties, as of March 31, 2014 and June 30, 2013 was $140 million and $200 million, respectively. The decrease of $60 million from June 30, 2013 was primarily due to the settlement of a foreign tax matter. Interest related to the settled foreign tax matter was $24 million as of June 30, 2013.

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 18. SUPPLEMENTAL GUARANTOR INFORMATION

In May 2012, 21CFA entered into a credit agreement (the “Credit Agreement”), among 21CFA as Borrower, the Company as Parent Guarantor, the lenders named therein, the initial issuing banks named therein, JPMorgan Chase Bank, N.A. (“JPMorgan Chase”) and Citibank, N.A. as Co-Administrative Agents, JPMorgan Chase as Designated Agent and Bank of America, N.A. as Syndication Agent. The Credit Agreement provides a $2 billion unsecured revolving credit facility with a sub-limit of $400 million (or its equivalent in Euros) available for the issuance of letters of credit and a maturity date of May 2017. Under the Credit Agreement, the Company may request an increase in the amount of the credit facility up to a maximum amount of $2.5 billion and the Company may request that the maturity date be extended for up to two additional one-year periods. Borrowings are issuable in U.S. dollars only, while letters of credit are issuable in U.S. dollars or Euros. The material terms of the agreement include the requirement that the Company maintain specific leverage ratios and limitations on secured indebtedness. Fees under the Credit Agreement will be based on the Company’s long-term senior unsecured non-credit enhanced debt ratings. Given the current debt ratings, 21CFA pays a facility fee of 0.125% and an initial drawn cost of LIBOR plus 1.125%.

The Parent Guarantor presently guarantees the senior public indebtedness of 21CFA and the guarantee is full and unconditional. The supplemental condensed consolidating financial information of the Parent Guarantor should be read in conjunction with these consolidated financial statements.

In accordance with rules and regulations of the SEC, the Company uses the equity method to account for the results of all of the non-guarantor subsidiaries, representing substantially all of the Company’s consolidated results of operations, excluding certain intercompany eliminations.

The following condensed consolidating financial statements present the results of operations, financial position and cash flows of 21CFA, the Company and the subsidiaries of the Company and the eliminations and reclassifications necessary to arrive at the information for the Company on a consolidated basis.

 

 

 

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Supplemental Condensed Consolidating Statement of Operations

For the three months ended March 31, 2014

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to supplemental guarantor information

 

 

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Supplemental Condensed Consolidating Statement of Operations

For the three months ended March 31, 2013

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to supplemental guarantor information

 

 

 

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Supplemental Condensed Consolidating Statement of Operations

For the nine months ended March 31, 2014

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to supplemental guarantor information

 

 

 

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Supplemental Condensed Consolidating Statement of Operations

For the nine months ended March 31, 2013

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to supplemental guarantor information

 

 

 

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Supplemental Condensed Consolidating Balance Sheet

At March 31, 2014

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

See notes to supplemental guarantor information

 

 

 

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Supplemental Condensed Consolidating Balance Sheet

At June 30, 2013

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

See notes to supplemental guarantor information

 

 

 

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Supplemental Condensed Consolidating Statement of Cash Flows

For the nine months ended March 31, 2014

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to supplemental guarantor information

 

 

 

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Supplemental Condensed Consolidating Statement of Cash Flows

For the nine months ended March 31, 2013

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to supplemental guarantor information

 

 

 

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Notes to Supplemental Guarantor Information

 

 

 

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This document contains statements that constitute “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), 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 Twenty-First Century Fox, Inc., its directors or its officers with respect to, among other things, trends affecting Twenty-First Century Fox, Inc.’s financial condition or results of operations. The readers of this document are cautioned that any forward-looking statements are not guarantees of future performance and involve risks and uncertainties. More information regarding these risks, uncertainties and other factors is set forth under the heading Part II “Other Information,” Item 1A “Risk Factors” in this report. Twenty-First Century Fox, Inc. does not ordinarily make projections of its future operating results and undertakes no obligation (and expressly disclaims any 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 this document and the other documents filed by Twenty-First Century Fox, Inc. with the Securities and Exchange Commission (the “SEC”). This section should be read together with the unaudited consolidated financial statements of Twenty-First Century Fox, Inc. and related notes set forth elsewhere herein and Twenty-First Century Fox, Inc.’s Annual Report on Form 10-K for the fiscal year ended June 30, 2013 as filed with the SEC on August 19, 2013 (the “2013 Form 10-K”).

INTRODUCTION

On June 28, 2013, Twenty-First Century Fox, Inc. and its subsidiaries (formerly known as News Corporation) (together, “Twenty-First Century Fox” or the “Company”) completed the separation of its business into two independent publicly traded companies (the “Separation”) by distributing to its stockholders all of the outstanding shares of the new News Corporation (“News Corp”). The Company retained its interests in a global portfolio of media and entertainment assets spanning six continents. News Corp holds the Company’s former businesses including newspapers, information services and integrated marketing services, digital real estate services, book publishing, digital education and sports programming and pay-TV distribution in Australia. The Company completed the Separation by distributing to its stockholders one share of News Corp Class A common stock for every four shares of the Company’s Class A common stock held on June 21, 2013, and one share of News Corp Class B common stock for every four shares of the Company’s Class B common stock held on June 21, 2013. The Company’s stockholders received cash in lieu of fractional shares. Following the Separation, the Company does not beneficially own any shares of News Corp Class A common stock or News Corp Class B common stock.

Effective June 28, 2013, the Separation qualified for discontinued operations treatment in accordance with Accounting Standards Codification (“ASC”) 205-20, “Discontinued Operations” (“ASC 205-20”), and accordingly the Company deconsolidated News Corp’s balance sheet as of June 30, 2013, and presented its results for the three and nine months ended March 31, 2013 as discontinued operations on the unaudited statements of operations and as discontinued operations on the unaudited statements of cash flows for the nine months ended March 31, 2013. The footnotes to the financial statements have also been revised accordingly for the three and nine months ended March 31, 2013. Management’s discussion and analysis of financial condition and results of operations describes the Company giving effect to the Separation, except where stated otherwise.

Management’s discussion and analysis of financial condition and results of operations is intended to help provide an understanding of the Company’s financial condition, changes in financial condition and results of operations. This discussion is organized as follows:

OVERVIEW OF THE COMPANY’S BUSINESS

The Company has realigned its reporting segments following the Separation and the Other segment has been renamed Other, Corporate and Eliminations. This segment includes costs not directly associated with an operating segment, such as corporate overhead and eliminations.

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The Company is a diversified global media and entertainment company, which manages and reports its businesses in the following five segments:

Television and Cable Network Programming

The Company’s television operations primarily consist of FOX, MyNetworkTV and the 28 television stations owned by the Company.

The television operations derive revenues primarily from the sale of advertising, and to a lesser extent, retransmission consent revenue. Adverse changes in general market conditions for advertising may affect revenues. The U.S. television broadcast environment is highly competitive and the primary methods of competition are the development and acquisition of popular programming. Program success is measured by ratings, which are an indication of market acceptance, with the top rated programs commanding the highest advertising prices. FOX is a broadcast network that airs original programming and MyNetworkTV is a programming distribution service that airs original and off-network programming. FOX and MyNetworkTV compete with broadcast networks, such as ABC, CBS, NBC and The CW Television Network, independent television stations, cable and Direct Broadcast Satellite Television program services, as well as other media, including over-the-top services, DVDs, Blu-rays, video games and print for audiences, programming and advertising revenues. In addition, FOX and MyNetworkTV compete with the other broadcast networks and other programming distribution services to secure affiliations with independently owned television stations in markets across the U.S. ABC, NBC and CBS each broadcasts a 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. In addition, future technological developments may affect competition within the television marketplace.

U.S. law governing retransmission consent revenue provides a mechanism for the television stations owned by the Company to seek and obtain payment from multi-channel video programming distributors who carry the Company’s broadcast signals. Retransmission consent revenue consists of per subscriber-based compensatory fees paid to the Company by cable and satellite distribution systems that distribute the Company’s television stations affiliated with FOX and MyNetworkTV. The Company also receives compensation from independently-owned television stations that are affiliated with FOX and MyNetworkTV.

The television stations owned and operated by the Company compete for programming, audiences and advertising revenues with other television stations and cable systems in their respective coverage areas and, in some cases, with respect to programming, with other station groups, and in the case of advertising revenues, with other local and national media. The competitive position of the television stations owned by the Company is largely influenced by the quality and strength of FOX and MyNetworkTV programming, and, in particular, their respective prime-time viewership.

The Company’s U.S. cable network programming operations primarily consist of the Fox News Channel (“FOX News”), Fox Sports 1, FX Networks, LLC (“FX”), FXX, Regional Sports Networks (“RSNs”), the National Geographic Channels and the Big Ten Network. The Company’s international cable networks consist of the Fox International Channels (“FIC”) and STAR. FIC produces and distributes entertainment, lifestyle, factual, sports, and movie channels through distribution channels in Europe, Africa, Asia and Latin America using several brands, including Fox, Fox Crime, Fox Life, FX, Fox Sports and National Geographic Channel. STAR’s owned and affiliated channels are distributed in the following countries and regions: India; Pakistan; the rest of South Asia; Greater China; Indonesia; the rest of South East Asia; the Middle East and Africa; the United Kingdom and Europe; and North America.

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Generally, the Company’s cable networks, which target various demographics, derive a majority of their revenues from monthly affiliate fees received from cable television systems and direct broadcast satellite operators based on the number of their subscribers. Affiliate fee revenues are net of the amortization of cable distribution investments (capitalized fees paid to U.S. multi-channel video programming distributors to typically facilitate the carriage of a domestic cable network). The Company defers the cable distribution investments and amortizes the amounts on a straight-line basis over the contract period. Cable television and direct broadcast satellite are currently the predominant means of distribution of the Company’s program services in the U.S. Internationally, distribution technology varies region by region.

The Company’s cable networks compete for carriage on cable television systems, direct broadcast satellite systems and other distribution systems with other program services. A primary focus of competition is for distribution of the Company’s cable network channels that are not already distributed by particular cable television or direct broadcast satellite systems. For such program services, distributors make decisions on the use of bandwidth based on various considerations, including amounts paid by programmers for launches, subscription fees payable by distributors and appeal to the distributors’ subscribers.

The most significant operating expenses of the Television segment and the Cable Network Programming segment are the acquisition and production expenses related to programming and the expenses related to operating the technical facilities of the broadcaster or cable network. Other expenses include promotional expenses related to improving the market visibility and awareness of the broadcaster or cable network and its programming. Additional expenses include sales commissions paid to the in-house advertising sales force, as well as salaries, employee benefits, rent and other routine overhead expenses.

National sports programming is obtained through license agreements with professional or collegiate sports leagues or organizations. The Company’s current licenses with the National Football League (“NFL”), Major League Baseball (“MLB”), college football conferences, National Association of Stock Car Auto Racing (“NASCAR”), International Federation of Football Association (“FIFA”), United States Golf Association (“USGA”), and Ultimate Fighting Championship (“UFC”) are secured by long-term agreements.

While the Company seeks to ensure compliance with federal indecency laws and related Federal Communications Commission (“FCC”) regulations, the definition of “indecency” is subject to interpretation and there can be no assurance that the Company will not broadcast programming that is ultimately determined by the FCC to violate the prohibition against indecency. Such programming could subject the Company to regulatory review or investigation, fines, adverse publicity or other sanctions, including the loss of station licenses.

Filmed Entertainment

The Filmed Entertainment segment derives revenue from the production and distribution of live-action and animated motion pictures and television series. In general, motion pictures produced or acquired for distribution by the Company are exhibited in U.S. and foreign theaters, followed by home entertainment, including sale and rental of DVDs and Blu-rays, licensing through digital distribution platforms, premium subscription television, network television and basic cable and syndicated television exploitation. Television series initially produced for the networks and first-run syndication are generally licensed to domestic and international markets concurrently and subsequently released in seasonal DVD and Blu-ray box sets and made available via digital distribution platforms. More successful series are later syndicated in domestic markets. The length of the revenue cycle for television series will vary depending on the number of seasons a series remains in active production and, therefore, may cause fluctuations in operating results. License fees received for television exhibition (including international and U.S. premium television and basic cable television) are recorded as revenue in the period that licensed films or programs are available for such exhibition, which may cause substantial fluctuations in operating results.

The revenues and operating results of the Filmed Entertainment segment are significantly affected by the timing of the Company’s theatrical and home entertainment releases, the number of its original and returning television series that are aired by television networks and cable channels and the number of its television series in off-network syndication. Theatrical and home entertainment release dates are determined by several factors, including timing of vacation and holiday periods and competition in the marketplace. The distribution windows for the release of motion pictures theatrically and in various home entertainment products and services (including subscription rentals, rental kiosks and digital distribution platforms), have been compressing and may continue to change in the future. A further reduction in timing between theatrical and home entertainment releases could adversely affect the revenues and operating results of this segment.

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The Company enters into arrangements with third parties to co-produce many of its theatrical productions. These arrangements, which are referred to as co-financing arrangements, take various forms. The parties to these arrangements include studio and non-studio entities, both domestic and foreign. In several of these agreements, other parties control certain distribution rights. The Filmed Entertainment segment records the amounts received for the sale of an economic interest as a reduction of the cost of the film, as the investor assumes full risk for that portion of the film asset acquired in these transactions. The substance of these arrangements is that the third-party investors own an interest in the film and, therefore, receive a participation based on the respective third-party investor’s interest in the profits or losses incurred on the film. Consistent with the requirements of Financial Accounting Standards Board (“FASB”) ASC 926 “Entertainment—Films” (“ASC 926”), the estimate of a third-party investor’s interest in profits or losses on the film is based on total estimated ultimate revenues.

Operating costs incurred by the Filmed Entertainment segment include: exploitation costs, primarily theatrical prints and advertising and home entertainment marketing and manufacturing costs; amortization of capitalized production, overhead and interest costs; and participations and talent residuals. Selling, general and administrative expenses include salaries, employee benefits, rent and other routine overhead.

The Company competes with other film studios, such as Disney, CBS Television Studios, Sony, Universal, Warner Bros. and other independent film producers in the production and distribution of motion pictures, DVDs and Blu-rays. As a producer and distributor of television programming, the Company competes with studios, television production groups and independent producers and syndicators, such as Disney, Sony, NBC Universal, Warner Bros. and CBS Television Studios, to sell programming both domestically and internationally. The Company also competes to obtain creative talent and story properties, which are essential to the success of the Company’s filmed entertainment businesses.

Direct Broadcast Satellite Television

The Direct Broadcast Satellite Television (“DBS”) segment’s operations consist of SKY Italia and the Company’s majority-owned subsidiary Sky Deutschland AG (“Sky Deutschland”), which provide basic and premium services via satellite, cable and broadband directly to subscribers in Italy (in the case of SKY Italia) and Germany and Austria (in the case of Sky Deutschland). The DBS segment derives revenues principally from subscriber fees. The Company believes that the quality and variety of programming, audio and interactive programming including personal video recorders, quality of picture including high definition channels, access to service, customer service and price are the key elements for gaining and maintaining market share. The DBS segment’s competition includes companies that offer video, audio, interactive programming, telephony, data and other information and entertainment services, including broadcasters of free-to-air television channels, broadband Internet providers, digital terrestrial transmission services, wireless companies and companies that are developing new media technologies.

The DBS segment’s most significant operating expenses are those related to the acquisition of entertainment, movie and sports programming and subscribers and the expenses related to operating the technical facilities. Operating expenses related to sports programming are generally recognized over the course of the related sport season, which may cause fluctuations in the operating results of this segment.

The continued challenging economic environment in Europe has contributed to a reduction in consumer spending and has posed challenges for subscriber retention and growth. If this trend continues, it could have a material effect on the operating results of the DBS segment.

Other, Corporate and Eliminations

The Other, Corporate and Eliminations segment consists primarily of corporate overhead and eliminations and other businesses.

Other Business Developments

In September 2013, the Company acquired the 22% interest it did not already own in Latin America Pay Television (“LAPTV”), an entity that distributes premium and basic television channels in Latin America, for approximately $75 million in cash. As a result of this transaction, the Company now owns 100% of LAPTV.

In November 2013, the Company sold its remaining 12% interest in Phoenix Satellite Television Holdings Ltd. (“Phoenix”) for approximately $210 million. The Company recorded a gain of $199 million on this transaction which was included in Other, net in the unaudited consolidated statements of operations for the nine months ended March 31, 2014.

In December 2013, Sky Deutschland, a majority-owned consolidated subsidiary of the Company, agreed to acquire from Constantin Medien AG, a 100% interest in the production company PLAZAMEDIA TV and Film Produktion GmbH (“Plazamedia”) as well as a 25.1% equity stake in Sport1 GmbH and Constantin Sport Marketing GmbH for €57.5 million (approximately $80 million), net of cash acquired. Plazamedia is an established full-service provider for television and new media as well as one of the leading producers of sports television in the German-speaking markets. This transaction will be financed under Sky Deutschland’s credit agreement, as amended.  (See Note 10 – Borrowings to the accompanying unaudited consolidated financial statements for further discussion)

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In January 2014, the Company agreed to sell its 47% interest in CMC-News Asia Holdings Limited, which has a carrying value of approximately $80 million. The Company expects this transaction to close in the fourth quarter of fiscal 2014 and expects to record a gain on the sale.

On February 28, 2014, the Company acquired an additional 31% interest in the Yankees Entertainment and Sports Network (“YES Network”), a RSN primarily broadcasting pre-season and regular season games for the New York Yankees and the Brooklyn Nets, for approximately $680 million, net of cash acquired. As a result of this transaction, the Company consolidated the balance sheet and operating results of the YES Network beginning March 2014, including $1.7 billion in debt, as it owns an 80% controlling interest.

In March 2014, the Company received approval from its stockholders and subsequently the Australian Securities Exchange (the “ASX”) for removal of its full foreign listing from the ASX. Delisting from the ASX occurred on May 8, 2014 and, effective as of that date, all of Twenty-First Century Fox’s Class A and Class B Common Stock is listed solely on the NASDAQ Global Select Market.

RESULTS OF OPERATIONS

Results of Operations—For the three and nine months ended March 31, 2014 versus the three and nine months ended March 31, 2013

The following table sets forth the Company’s operating results for the three and nine months ended March 31, 2014 as compared to the three and nine months ended March 31, 2013.

 

Overview – The Company’s revenues increased 12% and 15% for the three and nine months ended March 31, 2014, respectively, as compared to the corresponding periods of fiscal 2013, primarily due to increases in advertising, affiliate fees and subscription revenues.  The increase in advertising revenue for the three and nine months ended March 31, 2014 was primarily due to revenues arising from the broadcast of Super Bowl XLVIII in February 2014. The increases in affiliate fees for the three and nine months ended March 31, 2014 were principally attributable to higher average rates per subscriber across most cable channels, higher retransmission consent revenues and the conversion and related launch of new channels, including Fox Sports 1. Also contributing to the increase in

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affiliate fees for the nine months ended March 31, 2014 was the absence of the distributor allowances resulting from the 2012-2013 National Hockey League (“NHL”) lockout in the prior year, and the incremental impact of the acquisition of Eredivisie Media & Marketing CV (“EMM”) and SportsTime Ohio and the consolidation of Fox Sports Asia (formerly ESPN Star Sports) (collectively the “Acquisitions”). The increase in subscription revenues for the three months ended March 31, 2014 was primarily due to an increase in the number of subscribers and average revenue per subscriber (“ARPU”) at Sky Deutschland. The increase for the nine months ended March 31, 2014 was primarily due to the effect of the consolidation of Sky Deutschland from January 2013.  The strengthening of the U.S. dollar against local currencies (non-Euro) resulted in revenue decreases of approximately $75 million and $215 million, respectively, partially offset by the effect of the weakening of the U.S. dollar against the Euro of approximately $55 million and $150 million, respectively, for the three and nine months ended March 31, 2014, as compared to the corresponding periods of fiscal 2013.

Operating expenses increased 13% and 20% for the three and nine months ended March 31, 2014, respectively, as compared to the corresponding periods of fiscal 2013.  During the three months ended March 31, 2014, operating expenses at the DBS, Television and Cable Network Programming segments increased by approximately $230 million, $250 million and $205 million, respectively, as compared to the corresponding period of fiscal 2013.  During the nine months ended March 31, 2014, operating expenses at the DBS, Television and Cable Network Programming segments, increased by approximately $1,250 million, $355 million and $750 million, respectively.  Operating expenses at the Filmed Entertainment segment also increased by approximately $445 million during the nine months ended March 31, 2014. The increase at the DBS segment for the three months ended March 31, 2014 was due to the higher programming costs related to the exclusive German Bundesliga soccer coverage and the broadcast of the Sochi Olympics. Also contributing to the operating expense increase at the DBS segment for the nine months ended March 31, 2014 was the effect of the consolidation of Sky Deutschland from January 2013. The increase at the Television segment for the three and nine months ended March 31, 2014 was primarily due to the costs associated with the broadcast of Super Bowl XLVIII in February 2014. The increase at the Cable Network Programming segment for the three months ended March 31, 2014 was primarily related to the continued investments in the new channels, Fox Sports 1, STAR Sports networks and FXX, and higher programming costs. Also contributing to the increase during the nine months ended March 31, 2014 was the Acquisitions as well as higher programming costs related to additional NHL games in the current period. The increase at the Filmed Entertainment segment for the nine months ended March 31, 2014 was primarily related to higher theatrical marketing costs as a result of the increase in the number of significant theatrical releases in fiscal 2014 as compared to fiscal 2013, including Mr. Peabody and Sherman, The Secret Life of Walter Mitty and Rio 2 and an increase in production amortization and participation costs related to the television programming production businesses.

Selling, general and administrative expenses remained consistent for the three months ended March 31, 2014 as compared to the corresponding period of fiscal 2013. Selling, general and administrative expenses increased 6% for the nine months ended March 31, 2014 as compared to the corresponding period of fiscal 2013 primarily due to the increases at the Cable Network Programming and DBS segments of approximately $145 million and $90 million, respectively. The increase at the Cable Network Programming segment for the nine months ended March 31, 2014 was primarily due to the Acquisitions and higher personnel costs. The increase at the DBS segment was primarily due to the effect of the consolidation of Sky Deutschland. Partially offsetting these increases was a decrease of approximately $100 million at the Other, Corporate and Eliminations segment primarily due to lower compensation expenses and legal and professional fees.

Depreciation and amortization increased 25% and 48% for the three and nine months ended March 31, 2014, respectively, as compared to the corresponding periods of fiscal 2013, primarily due to the consolidation of Sky Deutschland, including the amortization of acquired identifiable intangible assets.

Equity earnings of affiliates – Equity earnings of affiliates increased $38 million for the three months ended March 31, 2014 and decreased $2 million for the nine months ended March 31, 2014, as compared to the corresponding periods of fiscal 2013. The increase for the three months ended March 31, 2014 was primarily due to improved results at the Cable channel equity affiliates and improved results at the Other equity affiliates, primarily related to Hulu LLC (“Hulu”). The increase at the Cable channel equity affiliates was led by higher contributions from the YES Network, which was an affiliate until the date of its acquisition. Hulu’s results benefited from higher subscription and advertising revenues. The nominal decrease in Equity earnings of affiliates during the nine months ended March 31, 2014 was primarily due to the decreases at the DBS equity affiliates primarily related to lower results and gains at BSkyB partially offset by the absence of equity losses due to the consolidation of Sky Deutschland from January 2013. The gains from the Company’s participation in BSkyB’s share repurchase program declined by approximately $130 million during the nine months ended March 31, 2014. Partially offsetting the decrease at the DBS equity affiliates were increases at the Cable channel equity affiliates, led by the YES Network, and Other equity affiliates, led by Hulu. Hulu’s improved contributions were due to the revenue increases noted above and the effect of the charges recorded during fiscal 2013 for the redemption of Providence Equity Partners’ equity interest in October 2012.

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Interest expense, net – Interest expense, net increased $7 million and $28 million for the three and nine months ended March 31, 2014, respectively, as compared to the corresponding periods of fiscal 2013, primarily due to the issuance of $300 million of 4.00% Senior Notes due 2023 and $700 million of 5.40% Senior Notes due 2043 in September 2013 as well as higher average debt outstanding due to the debt consolidated in connection with the acquisition of the majority interest in the YES Network. Also contributing to the nine months ended March 31, 2014 increase was the effect of the consolidation of Sky Deutschland’s debt.

Other, net –

 

Income tax expense – The Company’s effective tax rates for the three and nine months ended March 31, 2014 were 20% and 24%, respectively.  For the three months ended March 31, 2014, the rate was lower than the statutory rate of 35%, primarily due to rate reductions related to the Company's foreign operations including a 3% reduction due to tax credits and deductions arising from a corporate restructuring and an 8% reduction due to the recognition of a deferred tax asset for additional tax basis. Also contributing to the difference for the nine months ended March 31, 2014 were changes in valuation allowances as a result of the Phoenix sale in the first quarter of fiscal 2014.

The Company's effective income tax rates for the three and nine months ended March 31, 2013 were 22% and 19%, respectively. These rates were lower than the statutory rate of 35% primarily due to a 12% rate reduction related to the gain on the consolidation of Sky Deutschland.  The consolidation resulted in the removal of a historical valuation allowance which, in accordance with ASC 740, “Income Taxes” (“ASC 740”), reduced tax expense. Also contributing to the difference for the nine months ended March 31, 2013 was the rate reduction from the Company’s foreign operations due to tax credits and deductions arising from a corporate restructuring, the utilization of foreign tax credits in connection with the NDS Group Limited sale and non-taxable gains related to the consolidation of Fox Sports Asia.

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(Loss) income from discontinued operations, net of tax – For the three months ended March 31, 2014, the Company recorded a loss from discontinued operations of $16 million as compared to income of $321 million in the corresponding period of fiscal 2013. For the nine months ended March 31, 2014, the Company recorded income from discontinued operations of $696 million as compared to income of $1.6 billion in the corresponding period of fiscal 2013. The changes were primarily due to the absence of income from discontinued operations as a result of the Separation in the prior year and the recognition in fiscal 2014 of a tax refund from News Corp in accordance with the tax sharing and indemnification agreement.  A subsidiary of News Corp, prior to the Separation, had filed refunds to claim certain losses in a foreign jurisdiction. During the nine months ended March 31, 2014, the foreign jurisdiction notified News Corp that it had accepted its claims and refunded the taxes plus interest to News Corp.

Net income – Net income decreased for the three and nine months ended March 31, 2014 as compared to the corresponding periods of fiscal 2013, primarily due to the absence of the gain recorded upon the consolidation of Sky Deutschland in fiscal 2013 and the absence of income from the discontinued operations partially offset by an increase in Total Segment OIBDA (See Segment Analysis below).  Also contributing to the decrease during the nine months ended March 31, 2014 was the absence of the gain related to the sale of NDS in July 2012.

Net income attributable to noncontrolling interests – Net income attributable to noncontrolling interests decreased for the three and nine months ended March 31, 2014 as compared to the corresponding periods of fiscal 2013 primarily due to the inclusion of the noncontrolling interests’ share of Sky Deutschland’s net losses on its consolidation.

Segment Analysis

Segment OIBDA is defined as revenues less operating expenses and selling, general and administrative expenses. Segment OIBDA does not include: depreciation and amortization, amortization of cable distribution investments, impairment charges, equity earnings of affiliates, interest expense, interest income, other, net, income tax expense and net income attributable to noncontrolling interests. Management believes that Segment OIBDA is an appropriate measure for evaluating the operating performance of the Company’s business segments because it is the primary measure used by the Company’s chief operating decision maker to evaluate the performance of and allocate resources within the Company’s businesses.

Management believes that information about Total Segment OIBDA assists all users of the Company’s consolidated financial statements by allowing them to evaluate changes in the operating results of the Company’s portfolio of businesses separate from non-operational factors that affect net income, thus providing insight into both operations and the other factors that affect reported results. Total Segment OIBDA provides management, investors and equity analysts a measure to analyze the operating performance of the Company’s business and its enterprise value against historical data and competitors’ data, although historical results, including Segment OIBDA and Total Segment OIBDA, may not be indicative of future results (as operating performance is highly contingent on many factors, including customer tastes and preferences).

Total Segment OIBDA is a non-GAAP measure and should be considered in addition to, not as a substitute for, net income (loss), cash flow and other measures of financial performance reported in accordance with GAAP. In addition, this measure does not reflect cash available to fund requirements and excludes items, such as depreciation and amortization and impairment charges, which are significant components in assessing the Company’s financial performance.

The following tables reconcile Total Segment OIBDA to Income from continuing operations before income tax expense for the three and nine months ended March 31, 2014 as compared to the three and nine months ended March 31, 2013.

  

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Cable Network Programming (38% and 39% of the Company’s consolidated revenues in the first nine months of fiscal 2014 and 2013, respectively)

For the three and nine months ended March 31, 2014, revenues at the Cable Network Programming segment increased $325 million, or 11%, and $998 million, or 13%, respectively, as compared to the corresponding periods of fiscal 2013, primarily due to higher net affiliate and advertising revenues as shown below:

 

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These revenue increases are net of decreases of approximately $75 million and $230 million for the three and nine months ended March 31, 2014, respectively, as compared to the corresponding periods of fiscal 2013 due to the strengthening of the U.S. dollar against local currencies and in the nine months ended March 31, 2014, due to the absence of distributor credits recorded in fiscal 2013.

Domestic net affiliate revenues increased 12% for the three and nine months ended March 31, 2014, respectively, as compared to the corresponding periods of fiscal 2013.  Approximately one-half of the increase in each respective period is due to higher average rates per subscriber across most channels. The balance of the growth was primarily attributable to the conversion and related launch of new channels, primarily Fox Sports 1.  Also contributing to the variance during the nine months ended March 31, 2014 were increases due to the absence of distributor allowances resulting from the 2012-2013 NHL lockout in fiscal 2013 and the incremental impact resulting from the acquisition of SportsTime Ohio in December 2012. Domestic advertising revenues increased 8% and 7% for the three and nine months ended March 31, 2014, respectively, as compared to the corresponding periods of fiscal 2013. Approximately one-third of the increase during the three months ended March 31, 2014 was due to the strong advertising volume at the Fox News Channel. The balance of the growth was attributable to the conversion and related launch of new channels, primarily FXX, and additional NHL games in the current period which also had a positive impact for the nine months ended March 31, 2014. Also contributing to the variance during the nine months ended March 31, 2014 were higher advertising revenues at FX and the National Geographic Channels due to higher pricing and volume partially offset by lower political related advertising at the Fox News Channel.

For the three and nine months ended March 31, 2014, international net affiliate revenues increased 12% and 23%, respectively, and international advertising revenues increased 4% and 10%, respectively, as compared to the corresponding periods of fiscal 2013.  For the three and nine months ended March 31, 2014, the increase in international affiliate revenues was substantially led by local currency growth, primarily at FIC, as a result of rate increases in Latin America and higher rates and number of subscribers in Europe. The increase in advertising revenues for the three and nine months ended March 31, 2014 was significantly driven by local currency growth at FIC and STAR due to higher pricing and volume in Latin America and STAR’s broadcast of the Asia Cup and International Cricket Council cricket tournaments. Also contributing to the increase in affiliate and advertising revenues for the nine months ended March 31, 2014 was the consolidation of Fox Sports Asia and the acquisition of EMM. The revenue increases in local currencies, for both the three and nine months ended March 31, 2014, were partially offset by the adverse impact of the strengthening of the U.S. dollar against local currencies.

The increase in other revenues for the three months ended March 31, 2014 was due to higher digital distribution revenues, primarily from a new contract with Amazon, higher international syndication revenues, and the benefit arising from the modification of a channel distribution agreement.

For the three and nine months ended March 31, 2014, Segment OIBDA at the Cable Network Programming segment increased $107 million, or 10%, and $107 million, or 3%, respectively, as compared to the corresponding periods of fiscal 2013, primarily due to the revenue increases noted above, partially offset by higher expenses of $218 million, or 12%, and $891 million, or 18%, respectively.  Operating expenses increased by approximately $205 million and $750 million for the three and nine months ended March 31, 2014, respectively.  These increases were primarily due to the continued investment in new channels and higher programming costs. The increase in Segment OIBDA from the consolidation of the YES Network was substantially offset by the comparative impact of the NHL lockout during the corresponding period in fiscal 2013. Also contributing to the increase during the nine months ended March 31, 2014 was the Acquisitions as well as higher programming costs related to additional NHL games in the current period. Selling, general and administrative expenses increased for the three and nine months ended March 31, 2014 by approximately $10 million and $145 million, respectively, primarily due to higher personnel costs related to the continued investments in the new channels and higher marketing costs. Also contributing to the increase during the nine months ended March 31, 2014 were the effect of the Acquisitions and higher personnel costs.  These changes in Segment OBDIA are net of decreases of approximately $40 million and $95 million for the three and nine months ended March 31, 2014, respectively, as compared to the corresponding periods of fiscal 2013 due to the strengthening of the U.S. dollar against local currencies.

Television (18% of the Company’s consolidated revenues in the first nine months of fiscal 2014 and 2013)

For the three and nine months ended March 31, 2014, revenues at the Television segment increased $338 million, or 27%, and $501 million, or 13%, respectively, as compared to the corresponding periods of fiscal 2013 primarily due to higher advertising revenues.  Advertising revenues increased 30% and 10% for the three and nine months ended March 31, 2014, respectively, as compared to the corresponding periods of fiscal 2013 primarily due to the revenues arising from the broadcast of Super Bowl XLVIII in February 2014 of approximately $350 million and from higher pricing and ratings driven by the strong NFL post season.  These increases were partially offset by lower primetime ratings led by declines at American Idol. Also contributing to the increase in advertising revenues for the nine months ended March 31, 2014 was the positive impact from the strong NFL regular season and the MLB post season, including the two additional MLB World Series games in the current year.  Partially offsetting these increases were lower political advertising due to the absence of the benefit in fiscal 2013 from the 2012 elections and the impact of lower primetime ratings led by declines at X-Factor.  Affiliate fee revenues increased as a result of higher retransmission consent revenues for the three and nine months ended March 31, 2014 as compared to the corresponding periods of fiscal 2013.  

For the three and nine months ended March 31, 2014, Segment OIBDA at the Television Segment increased $69 million, or 32%, and $95 million, or 15%, respectively, as compared to the corresponding periods of fiscal 2013, primarily due to the revenue increases

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noted above partially offset by higher expenses of $269 million, or 26%, and $406 million, or 13%, respectively.  Operating expenses increased by approximately $250 million and $355 million for the three and nine months ended March 31, 2014, respectively.  These increases were primarily due to the broadcast of Super Bowl XLVIII in February 2014 and higher primetime programming costs.  Also contributing to the increase in operating expenses, during the nine months ended March 31, 2014, were higher sports programming costs primarily related to the two additional MLB World Series games in the current year and increased costs to support the launch of new television series such as Almost Human and Sleepy Hollow. Selling, general and administrative expenses increased by approximately $20 million and $50 million for the three and nine months ended March 31, 2014, respectively, as compared to the corresponding periods of fiscal 2013 primarily due to higher legal fees and the broadcast of Super Bowl XLVIII in February 2014.

Filmed Entertainment (29% and 32% of the Company’s consolidated revenues in the first nine months of fiscal 2014 and 2013, respectively)

For the three months ended March 31, 2014, revenues at the Filmed Entertainment segment decreased $67 million, or 3% as compared to the corresponding period of fiscal 2013.  The decrease in revenues was primarily due to lower worldwide theatrical and home entertainment revenues from feature film production and distribution, partially offset by higher digital distribution revenues from the sales of television product.  For the nine months ended March 31, 2014, revenues at the Filmed Entertainment segment increased $269 million, or 4% as compared to the corresponding period of fiscal 2013.  The increase in revenues was primarily due to higher digital distribution revenues from the sales of television product, partially offset by lower worldwide theatrical and home entertainment revenues.  The increase in digital distribution revenue for both the three and nine months ended March 31, 2014 was primarily due to the licensing of on-line and mobile rights for various products led by the sale of series to Amazon, including 24 and The Americans.  Also contributing to revenues in the three and nine months ended March 31, 2014 was higher network and syndication revenues primarily due to Modern Family.  The decrease in worldwide theatrical and home entertainment revenues was primarily due to the strength of the products released in fiscal 2013.  The three months ended March 31, 2014 included the worldwide theatrical releases of Mr. Peabody and Sherman and The Secret Life of Walter Mitty as compared to the corresponding fiscal 2013 period which included the worldwide theatrical and home entertainment release of Life of Pi and the worldwide theatrical releases of A Good Day to Die Hard and The Croods.  The nine months ended March 31, 2014 included the worldwide theatrical and home entertainment releases of The Wolverine and Turbo as compared to the corresponding fiscal 2013 period which included the worldwide theatrical and home entertainment releases of Ice Age: Continental Drift, Life of Pi and Taken 2.  

For the three months ended March 31, 2014, Segment OIBDA at the Filmed Entertainment segment increased $20 million, or 6%, as compared to the corresponding period of fiscal 2013, primarily due to lower expenses of $87 million, or 4%, partially offset by the revenue decreases noted above. For the nine months ended March 31, 2014, Segment OIBDA at the Filmed Entertainment segment decreased $172 million, or 14%, as compared to the corresponding period of fiscal 2013, primarily due to higher expenses of $441 million, or 8%, partially offset by the revenue increases noted above. Operating expenses decreased by approximately $60 million for the three months ended March 31, 2014 primarily due to a decrease in feature film production amortization, partially offset by higher participation costs related to the television programming production businesses.  Operating expenses increased by approximately $445 million for the nine months ended March 31, 2014 primarily due to higher theatrical marketing costs as a result of the increase in the number of significant theatrical releases in fiscal 2014 as compared to fiscal 2013, including Mr. Peabody and Sherman, The Secret Life of Walter Mitty and Rio 2 and an increase in production amortization and participation costs related to the television programming production businesses.  Also contributing to the Segment OIBDA decrease in the nine months ended March 31, 2014 was the contribution of Ice Age: Continental Drift in fiscal 2013 with no comparable movies in fiscal 2014.  Selling, general and administrative expenses decreased by approximately $30 million and $5 million for the three and nine months ended March 31, 2014, respectively, as compared to the corresponding period of fiscal 2013.  The decrease in the three months ended March 31, 2014 was primarily due to foreign currency exchange movements.

Direct Broadcast Satellite Television (19% and 15% of the Company’s consolidated revenues in the first nine months of fiscal 2014 and 2013, respectively)

For the three and nine months ended March 31, 2014, revenues at the Direct Broadcast Satellite Television segment increased $210 million, or 16%, and $1,377 million, or 45%, respectively, as compared to the corresponding periods of fiscal 2013, primarily due to higher revenues at Sky Deutschland. Also contributing to revenue variance for the nine months ended March 31, 2014 was the inclusion of revenues resulting from the consolidation of Sky Deutschland from January 2013. The weakening of the U.S. dollar against the Euro also contributed to revenue increases of approximately $55 million and $150 million for the three and nine months ended March 31, 2014, respectively, as compared to the corresponding periods of fiscal 2013.

SKY Italia’s average and ending subscriber base of 4.8 million for the three and nine months ended March 31, 2014 was consistent with the corresponding periods of fiscal 2013. The total churn for the three and nine months ended March 31, 2014 was approximately 117,000 and 363,000 subscribers, respectively, as compared to a churn of approximately 200,000 and 530,000 subscribers, respectively, in the corresponding periods of fiscal 2013. Sky Deutschland’s ending subscriber base was 3.7 million and had a net increase of approximately 64,000 and 278,000 subscribers during the three and nine months ended March 31, 2014, respectively. The total churn for the three and nine months ended March 31, 2014 was approximately 81,000 and 296,000 subscribers on average subscriber bases of 3.7 million and 3.6 million, respectively, as compared to churn of approximately 95,000 and 313,000 subscribers

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on average subscriber bases of 3.4 million and 3.3 million, respectively, in the corresponding periods of fiscal 2013. Subscriber churn for the period represents the number of subscribers whose service was disconnected during the period.

SKY Italia’s ARPU of approximately €42 for the three and nine months ended March 31, 2014, was consistent with the corresponding periods of fiscal 2013. Sky Deutschland’s ARPU of approximately €35 and €34 for the three and nine months ended March 31, 2014, respectively, increased from approximately €33 in the corresponding periods of fiscal 2013, primarily due to upgrades in services. ARPU is calculated by dividing total subscriber-related revenues for the period by the average subscribers for the period and dividing that amount by the number of months in the period. Subscriber-related revenues are comprised of total subscription revenue, pay-per-view revenue and equipment rental revenue, if any, for the period.  Average subscribers are calculated for the respective periods by adding the beginning and ending subscribers for the period and dividing by two.

SKY Italia’s subscriber acquisition costs per subscriber (“SAC”) of approximately €345 and €390 for the three and nine months ended March 31, 2014, respectively, increased from approximately €280 and €380 for the corresponding periods of fiscal 2013, primarily due to increased advertising and marketing costs on a per subscriber basis. SAC is calculated by dividing total subscriber acquisition costs for a period by the number of gross subscribers added during the period. Subscriber acquisition costs include the cost of the commissions paid to retailers and other distributors, the cost of equipment sold directly to subscribers and the costs related to installation and acquisition advertising net of any upfront activation fee. SAC excludes the value of equipment capitalized under equipment lease programs, as well as payments and the value of returned equipment related to disconnected lease program subscribers.

For the three months ended March 31, 2014, Segment OIBDA at the DBS segment decreased $33 million as compared to the corresponding period of fiscal 2013, primarily due to an increase in programming costs at Sky Deutschland related to the exclusive German Bundesliga soccer coverage and at Sky Italia related to the broadcast of the Sochi Olympics. For the nine months ended March 31, 2014, Segment OIBDA at the DBS segment increased $37 million as compared to the corresponding period of fiscal 2013, primarily due to the inclusion of Sky Deutschland. Programming costs at SKY Italia for the nine months ended March 31, 2014 were consistent with the costs for the corresponding period of fiscal 2013 as the effect of increased costs associated with the broadcast of the Sochi Olympics and Formula One rights were offset by the absence of costs associated with the broadcast of the London Olympics in fiscal 2013. During the three and nine months ended March 31, 2014, the weakening of the U.S. dollar against the Euro contributed $2 million and $15 million, respectively, to increase Segment OIBDA as compared to fiscal 2013.

Other, Corporate and Eliminations ((4)% of the Company’s consolidated revenues in the first nine months of fiscal 2014 and 2013)

For the three and nine months ended March 31, 2014, the change in revenues at the Other, Corporate and Eliminations segment, as compared to the corresponding periods of fiscal 2013, was primarily due to intercompany transactions and the absence of revenues from the Company’s digital media business, as it was disposed in the third quarter of fiscal 2013.

For the three and nine months ended March 31, 2014, the improvement in the Segment OIBDA results at the Other, Corporate and Eliminations segment, as compared to the corresponding periods of fiscal 2013, was primarily due to lower compensation expenses and legal and professional fees.

LIQUIDITY AND CAPITAL RESOURCES

Current Financial Condition

The Company’s principal source of liquidity is internally generated funds. The Company also has a five-year unused $2 billion revolving credit facility, which expires in May 2017, and has access to various film co-production alternatives to supplement its cash flows. In addition, the Company has access to the worldwide capital markets, subject to market conditions. As of March 31, 2014, the Company was in compliance with all of the covenants under the revolving credit facility, and it does not anticipate any violation of such covenants. The Company’s internally generated funds are highly dependent upon the state of the advertising markets and public acceptance of its film and television products.

The principal uses of cash that affect the Company’s liquidity position include the following: investments in the production and distribution of new feature films and television programs; the acquisition of and payments under programming rights for entertainment and sports programming; operational expenditures including employee costs; capital expenditures; interest expenses; income tax payments; investments in associated entities; dividends; acquisitions; debt repayments; and stock repurchases.

The Company entered into a separation and distribution agreement with News Corp (“Separation and Distribution Agreement”) pursuant to which the Company agreed to provide a cash contribution to News Corp, immediately prior to the Separation, so that as of the Separation, News Corp would have approximately $2.6 billion of cash on hand. Accordingly, immediately prior to the Separation, the Company distributed approximately $2.4 billion to News Corp, which was comprised of $1.6 billion in cash funding and approximately $800 million that was held by News Corp’s subsidiaries immediately prior to the Separation. The Company made a final cash distribution of $217 million in September 2013, pursuant to the Separation and Distribution Agreement.

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In addition to the acquisitions, sales and possible acquisitions disclosed elsewhere, the Company has evaluated, and expects to continue to evaluate, possible acquisitions and dispositions of certain businesses. Such transactions may be material and may involve cash, the Company’s securities or the assumption of additional indebtedness.

Sources and Uses of Cash

Net cash provided by operating activities for the nine months ended March 31, 2014 and 2013 was as follows (in millions):

 

The change in net cash provided by operating activities during the nine months ended March 31, 2014 as compared to the corresponding period of fiscal 2013 primarily reflects higher production spending and participation payments at the Filmed Entertainment segment, an increase in sports rights payments and programming rights payments at the Cable Network Programming segment and higher income taxes paid.

Net cash (used in) provided by investing activities for the nine months ended March 31, 2014 and 2013 was as follows (in millions):

 

The change in net cash used in investing activities during the nine months ended March 31, 2014 as compared to the corresponding period of fiscal 2013 was primarily due to lower cash received from dispositions and lower cash utilized to acquire equity investments.

Net cash used in financing activities for the nine months ended March 31, 2014 and 2013 was as follows (in millions):

 

The change in net cash used in financing activities during the nine months ended March 31, 2014 as compared to the corresponding period of fiscal 2013 was primarily due to an increase in cash used for share repurchases of approximately $920 million.

In August 2013, the Board authorized the repurchase of $4 billion of Class A Common Stock, excluding commissions, which replaced the remaining authorized amount under the stock repurchase program. The Company intends to complete this stock repurchase program by August 2014.

Debt Instruments

The following table summarizes cash from borrowings and cash used in repayment of borrowings for the nine months ended March 31, 2014 and 2013.

 

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Ratings of the public debt

The table below summarizes the Company’s credit ratings as of March 31, 2014.

 

Revolving Credit Agreement

In May 2012, 21CFA (formerly known as News America, Inc.), entered into a credit agreement (the “Credit Agreement”), among 21CFA as Borrower, the Company as Parent Guarantor, the lenders named therein, the initial issuing banks named therein, JPMorgan Chase Bank, N.A. (“JPMorgan Chase”) and Citibank, N.A. as Co-Administrative Agents, JPMorgan Chase as Designated Agent and Bank of America, N.A. as Syndication Agent. The Credit Agreement provides a $2 billion unsecured revolving credit facility with a sub-limit of $400 million (or its equivalent in Euros) available for the issuance of letters of credit and a maturity date of May 2017. Under the Credit Agreement, the Company may request an increase in the amount of the credit facility up to a maximum amount of $2.5 billion and the Company may request that the maturity date be extended for up to two additional one-year periods. Borrowings are issuable in U.S. dollars only, while letters of credit are issuable in U.S. dollars or Euros. The material terms of the agreement include the requirement that the Company maintain specific leverage ratios and limitations on secured indebtedness. Fees under the Credit Agreement will be based on the Company’s long-term senior unsecured non-credit enhanced debt ratings. Given the current debt ratings, 21CFA pays a facility fee of 0.125% and an initial drawn cost of LIBOR plus 1.125%.

Commitments

The Company has commitments under certain firm contractual arrangements (“firm commitments”) to make future payments. These firm commitments secure the future rights to various assets and services to be used in the normal operations. The total firm commitments and future debt payments as of March 31, 2014 and June 30, 2013 were $85.3 billion and $79.9 billion, respectively. The increase from June 30, 2013 was primarily due to the acquisition of the majority interest in the YES Network in February 2014 (See Note 3 – Acquisitions, Disposals and Other Transactions to the accompanying unaudited consolidated financial statements for further discussion).

Guarantees

The Company’s guarantees as of March 31, 2014 have not changed significantly from disclosures included in the 2013 Form 10-K.

Contingencies

Other than as disclosed in the notes to the accompanying unaudited consolidated financial statements, the Company is party to several other purchase and sale arrangements which become exercisable by the Company or the counter-party to the agreement. None of these arrangements that become or are exercisable in the next twelve months are material. Purchase arrangements that are exercisable by the counter-party to the agreement, and that are outside the sole control of the Company, are accounted for in accordance with ASC 480-10-S99-3A, “Distinguishing Liabilities from Equity.” Accordingly, the fair values of such purchase arrangements are classified in redeemable noncontrolling interests.

U.S. regulators and governmental authorities continue to conduct investigations initiated in 2011 with respect to the U.K. Newspaper Matters. The Company is cooperating with these investigations. It is not possible at this time to estimate the liability, if any, of the Company relating to these investigations.

In connection with the Separation, the Company and News Corp agreed in the Separation and Distribution Agreement that the Company will indemnify News Corp, on an after-tax basis, for payments made after the Separation arising out of civil claims and investigations relating to the U.K. Newspaper Matters, as well as legal and professional fees and expenses paid in connection with the related criminal matters, other than fees, expenses and costs relating to employees who are not (i) directors, officers or certain designated employees or (ii) with respect to civil matters, co-defendants with News Corp (the “Indemnity”). If additional information becomes available and as payments are made, the Company will update the liability provision for the Indemnity. Any changes to the liability provision for the Indemnity in the future will impact the results of operations for that period.

It is possible that these proceedings and any adverse resolution thereof, including any fines or other penalties associated with any plea, judgment or similar result could damage the Company’s reputation, impair its ability to conduct its business and adversely affect its results of operations and financial condition.

The Company’s operations are subject to tax in various domestic and international jurisdictions and as a matter of course, the Company is regularly audited by federal, state and foreign tax authorities. The Company believes it has appropriately accrued for the expected outcome of all pending tax matters and does not currently anticipate that the ultimate resolution of pending tax matters will have a material adverse effect on its consolidated financial condition, future results of operations or liquidity.

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The Company establishes an accrued liability for legal claims when the Company determines that a loss is both probable and the amount of the loss can be reasonably estimated. Once established, accruals are adjusted from time to time, as appropriate, in light of additional information. The amount of any loss ultimately incurred in relation to matters for which an accrual has been established may be higher or lower than the amounts accrued for such matters. Any fees, expenses, fines, penalties, judgments or settlements which might be incurred by the Company in connection with the various proceedings could affect the Company’s results of operations and financial condition.

Recent Accounting Pronouncements

See Note 1 – Basis of Presentation to the accompanying unaudited consolidated financial statements for discussion of recent accounting pronouncements.

 

 

 

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The Company has exposure to several types of market risk: changes in foreign currency exchange rates, interest rates and stock prices. The Company neither holds nor issues financial instruments for trading purposes.

The following sections provide quantitative information on the Company’s exposure to foreign currency exchange rate risk, interest rate risk and stock price risk. The Company makes use of sensitivity analyses that are inherently limited in estimating actual losses in fair value that can occur from changes in market conditions.

Foreign Currency Exchange Rates

The Company conducts operations in two principal currencies: the U.S. dollar and the Euro. These currencies operate as the functional currency for the Company’s U.S., and European operations, respectively. Cash is managed centrally within each of the two regions with net earnings reinvested locally and working capital requirements met from existing liquid funds. To the extent such funds are not sufficient to meet working capital requirements, draw downs in the appropriate local currency are available from intercompany borrowings. Since earnings of the Company’s European operations are expected to be reinvested in those businesses indefinitely, the Company does not hedge its investment in the net assets of those foreign operations. Information on financial instruments with exposure to foreign currency exchange rate risk is presented below:

Interest Rates

The Company's current financing arrangements and facilities include $17.0 billion of outstanding fixed-rate debt, approximately $1.7 billion of outstanding variable and fixed-rate debt consolidated with the acquisition of the majority interest in the YES Network, approximately €225 million of Sky Deutschland's outstanding five-year bank credit facility which carries variable rate debt and the Credit Agreement, which also carries variable rate interest (see Note 10 – Borrowings to the accompanying unaudited consolidated financial statements). The Company also entered into interest rate swap contracts during fiscal 2014.  As of March 31, 2014, the notional amount of interest rate swap contracts outstanding was $584 million, and the fair value of the interest rate swap contracts outstanding was $(5) million.

Fixed and variable rate debts are impacted differently by changes in interest rates.  A change in the interest rate or yield of fixed rate debt will only impact the fair market value of such debt, while a change in the interest rate of variable debt will impact interest expense, as well as the amount of cash required to service such debt.  As of March 31, 2014, substantially all of the Company's financial instruments with exposure to interest rate risk were denominated in U.S. dollars.  Information on financial instruments with exposure to interest rate risk is presented below:

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Stock Prices

The Company has common stock investments in several publicly traded companies that are subject to market price volatility. These investments principally represent the Company’s equity method affiliates.  Information on the Company’s investments with exposure to stock price risk is presented below:

Credit Risk

Cash and cash equivalents are maintained with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions of reputable credit and, therefore, bear minimal credit risk.

The Company’s receivables did not represent significant concentrations of credit risk at March 31, 2014 or June 30, 2013 due to the wide variety of customers, markets and geographic areas to which the Company’s products and services are sold.

The Company monitors its positions with, and the credit quality of, the financial institutions which are counterparties to its financial instruments. The Company is exposed to credit loss in the event of nonperformance by the counterparties to the agreements. At March 31, 2014, the Company did not anticipate nonperformance by any of the counterparties.

 

 

 

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The Company’s management, with the participation of the Company’s Chairman and Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this quarterly report. Based on such evaluation, the Company’s Chairman and Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective in recording, processing, summarizing and reporting on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and were effective in ensuring that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s Chairman and Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There has been no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) during the Company’s third quarter of fiscal 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

 

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PART II

 

Shareholder Litigation

Southern District of New York

On July 19, 2011, a purported class action lawsuit captioned Wilder v. News Corp., et al. (“Wilder Litigation”), was filed on behalf of all purchasers of the Company’s common stock between March 3, 2011 and July 11, 2011, in the United States District Court for the Southern District of New York. The plaintiff brought claims under Section 10(b) and Section 20(a) of the Securities Exchange Act, alleging that false and misleading statements were issued regarding the alleged acts of voicemail interception at The News of the World. The suit names as defendants the Company, Rupert Murdoch, James Murdoch and Rebekah Brooks, and seeks compensatory damages, rescission for damages sustained, and costs. On June 5, 2012, the court issued an order appointing the Avon Pension Fund (“Avon”) as lead plaintiff and Robbins Geller Rudman & Dowd as lead counsel. Thereafter, on July 3, 2012, the court issued an order providing that an amended consolidated complaint shall be filed by July 31, 2012. Avon filed an amended consolidated complaint on July 31, 2012, which among other things, added as defendants NI Group Limited (now known as News Corp UK & Ireland Limited) and Les Hinton, and expanded the class period to include February 15, 2011 to July 18, 2011. The defendants filed motions to dismiss the litigation, which were granted by the court on March 31, 2014.  Plaintiffs were given until April 30, 2014 to amend their complaint. On April 30, 2014, plaintiffs filed a second amended consolidated complaint, which generally repeats the allegations of the amended consolidated complaint and also expands the class period to July 8, 2009 to July 18, 2011.  The Company’s management believes the claims in the Wilder Litigation are entirely without merit, and intends to vigorously defend those claims.

U.K. Newspaper Matters and Related Investigations and Litigation

U.S. regulators and governmental authorities continue to conduct investigations initiated in 2011 with respect to the U.K. Newspaper Matters. The Company is cooperating with these investigations. It is not possible at this time to estimate the liability, if any, of the Company relating to these investigations.

In connection with the Separation, the Company and News Corp agreed in the Separation and Distribution Agreement that the Company will indemnify News Corp, on an after-tax basis, for payments made after the Separation arising out of civil claims and investigations relating to the U.K. Newspaper Matters, as well as legal and professional fees and expenses paid in connection with the related criminal matters, other than fees, expenses and costs relating to employees who are not (i) directors, officers or certain designated employees or (ii) with respect to civil matters, co-defendants with News Corp (the “Indemnity”).

It is possible that these proceedings and any adverse resolution thereof, including any fines or other penalties associated with any plea, judgment or similar result could damage the Company’s reputation, impair its ability to conduct its business and adversely affect its results of operations and financial condition.

Other

The Company’s operations are subject to tax in various domestic and international jurisdictions and as a matter of course, the Company is regularly audited by federal, state and foreign tax authorities. The Company believes it has appropriately accrued for the expected outcome of all pending tax matters and does not currently anticipate that the ultimate resolution of pending tax matters will have a material adverse effect on its consolidated financial condition, future results of operations or liquidity.

 

 

 

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Prospective investors should consider carefully the risk factors set forth below before making an investment in the Company’s securities.

A Decline in Advertising Expenditures Could Cause the Company’s Revenues and Operating Results to Decline Significantly in any Given Period or in Specific Markets.

The Company derives substantial revenues from the sale of advertising on or in its television stations, broadcast and cable networks and direct broadcast satellite services. Expenditures by advertisers tend to be cyclical, reflecting overall economic conditions, as well as budgeting and buying patterns. A decline in the economic prospects of advertisers or the economy in general could alter current or prospective advertisers’ spending priorities. Demand for the Company’s products is also a factor in determining advertising rates. For example, ratings points for the Company’s television stations and broadcast and cable networks are factors that are weighed when determining advertising rates, and with respect to the Company’s television stations and broadcast and television networks, when determining the affiliate rates received by the Company. In addition, newer technologies, including new video formats, streaming and downloading capabilities via the Internet, video-on-demand, personal video recorders and other devices and technologies are increasing the number of media and entertainment choices available to audiences. Some of these devices and technologies allow users to view television or motion pictures from a remote location or on a time-delayed basis and provide users the ability to fast-forward, rewind, pause and skip programming and advertisements. These technological developments which are increasing the number of media and entertainment choices available to audiences could negatively impact not only consumer demand for our content and services but also could affect the attractiveness of the Company’s offerings to viewers, advertisers and/or distributors. Failure to effectively anticipate or adapt to emerging technologies or changes in consumer behavior could have an adverse effect on our business. Further, a decrease in advertising expenditures or reduced demand for the Company’s offerings can lead to a reduction in pricing and advertising spending, which could have an adverse effect on the Company’s businesses and assets.

Global Economic Conditions May Have a Continuing Adverse Effect on the Company’s Business.

The United States and global economies have undergone a period of economic uncertainty, which caused, among other things, a general tightening in the credit markets, limited access to the credit markets, lower levels of liquidity, increases in the rates of default and bankruptcy, lower consumer and business spending and lower consumer net worth. The resulting pressure on the labor and retail markets and the downturn in consumer confidence weakened the economic climate in certain markets in which the Company does business and has had and may continue to have an adverse effect on the Company’s business, results of operations, financial condition and liquidity. A continued decline in these economic conditions could further impact the Company’s business, reduce the Company’s advertising and other revenues and negatively impact the performance of its motion pictures and home entertainment releases, television operations and other consumer products. In addition, these conditions could also impair the ability of those with whom the Company does business to satisfy their obligations to the Company. As a result, the Company’s results of operations may be adversely affected. Although the Company believes that its operating cash flow and current access to capital and credit markets, including the Company’s existing credit facility, will give it the ability to meet its financial needs for the foreseeable future, there can be no assurance that continued or increased volatility and disruption in the global capital and credit markets will not impair the Company’s liquidity or increase its cost of borrowing.

Acceptance of the Company’s Film and Television Programming by the Public is Difficult to Predict, Which Could Lead to Fluctuations in Revenues.

Feature film and television production and distribution are speculative businesses since the revenues derived from the production and distribution of a feature film or television series depend primarily upon its acceptance by the public, which is difficult to predict. The commercial success of a feature film or television series also depends upon the quality and acceptance of other competing films and television series released into the marketplace at or near the same time, the availability of a growing number of alternative forms of entertainment and leisure time activities, general economic conditions and their effects on consumer spending and other tangible and intangible factors, all of which can change and cannot be predicted with certainty. Further, the theatrical success of a feature film and the audience ratings for a television series are generally key factors in generating revenues from other distribution channels, such as home entertainment and premium pay television, with respect to feature films, and syndication, with respect to television series.

The Company Could Suffer Losses Due to Asset Impairment Charges for Goodwill, Intangible Assets and Programming.

In accordance with applicable generally accepted accounting principles, the Company performs an annual impairment assessment of its recorded goodwill and indefinite-lived intangible assets, including FCC licenses, during the fourth quarter of each fiscal year. The Company also continually evaluates whether current factors or indicators, such as the prevailing conditions in the capital markets, require the performance of an interim impairment assessment of those assets, as well as other investments and other long-lived assets. Any significant shortfall, now or in the future, in advertising revenue and/or the expected popularity of the programming for which the Company has acquired rights could lead to a downward revision in the fair value of certain reporting units.

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A downward revision in the fair value of a reporting unit, indefinite-lived intangible assets, investments or long-lived assets could result in an impairment and a non-cash charge would be required. Any such charge could be material to the Company’s reported net earnings.

Fluctuations in Foreign Exchange Rates Could Have an Adverse Effect on the Company’s Results of Operations.

The Company has significant operations in a number of foreign jurisdictions and certain of the Company operations are conducted in foreign currencies. The value of these currencies fluctuates relative to the U.S. dollar. As a result, the Company is exposed to exchange rate fluctuations, which could have an adverse effect on its results of operations in a given period or in specific markets.

For example, our business activities in Venezuela operate in a highly inflationary economy.  Recently, there have been significant changes to the foreign currency exchange rate environment in Venezuela governing the conversion of Venezuelan Bolivars (“Bolivars”) to U.S. Dollars (“$”).  Companies generally have used the official exchange rate controlled by Venezuela’s Commission for the Administration of Foreign Exchange (“CADIVI”), which is 6.3 Bolivars per $ unless they had transactions or were among the entities the Venezuelan government had specifically authorized to use the Supplementary Foreign Currency Administration System (“SICAD”) auction rate.  In January 2014, the Venezuelan government significantly expanded the use of the SICAD rate and, more recently, in March 2014,  the Venezuelan government created a third currency exchange mechanism called SICAD 2 and said it may be used by all entities for all transactions.  There is significant uncertainty regarding the exchange rate that we can access to convert our Venezuelan Bolivar denominated monetary assets to U.S. Dollars.   The Venezuelan government may issue more regulations or take other steps that may affect our decision on which exchange rate(s) to use for financial reporting purposes.  As of March 31, 2014, our cash balances include $110 million of Venezuelan Bolivar denominated cash converted at the official exchange rate of 6.3 Bolivars per $.  

The Loss of Carriage Agreements Could Cause the Company’s Revenue and Operating Results to Decline Significantly in any Given Period or in Specific Markets.

The Company’s broadcast stations and cable networks maintain affiliation and carriage arrangements that enable them to reach a large percentage of cable and direct broadcast satellite households across the United States. The loss of a significant number of these arrangements or the loss of carriage on basic programming tiers could reduce the distribution of the Company’s broadcast stations and cable networks, which may adversely affect those networks’ revenues from subscriber fees and their ability to sell national and local advertising time. The Company is dependent upon the maintenance of affiliation agreements with third party owned television stations and there can be no assurance that these affiliation agreements will be renewed in the future on terms acceptable to the Company. The loss of a significant number of these affiliation arrangements could reduce the distribution of FOX and MyNetworkTV and adversely affect the Company’s ability to sell national advertising time.

The Inability to Renew Sports Programming Rights Could Cause the Company’s Affiliate and Advertising Revenue to Decline Significantly in any Given Period or in Specific Markets.

The sports rights contracts between the Company, on the one hand, and various professional sports leagues and teams, on the other, have varying duration and renewal terms. As these contracts expire, renewals on favorable terms may be sought; however, third parties may outbid the current rights holders for the rights contracts. In addition, professional sports leagues or teams may create their own networks or the renewal costs could substantially exceed the original contract cost. The loss of rights could impact the extent of the sports coverage offered by the Company and its affiliates, as it relates to FOX, and could adversely affect the Company’s advertising and affiliate revenues. Upon renewal, the Company’s results could be adversely affected if escalations in sports programming rights costs are unmatched by increases in advertising rates and, in the case of cable networks, subscriber fees.

The Company Relies on Network and Information Systems and Other Technology That May Be Subject to Disruption or Misuse, Which Could Result in Improper Disclosure of Personal Data or Confidential Information as well as Increased Costs or Loss of Revenue.

Network and information systems and other technologies, including those related to our network management, are important to our business activities. Network and information systems-related events, such as computer hackings, computer viruses, worms or other destructive or disruptive software, process breakdowns, denial of service attacks, malicious social engineering or other malicious activities, or any combination of the foregoing, could result in a disruption of our services or improper disclosure of personal data or confidential information. Improper disclosure of such information could harm our reputation, require us to expend resources to remedy such a security breach or subject us to liability under laws that protect personal data, resulting in increased costs or loss of revenue.

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Technological Developments May Increase the Threat of Content Piracy and Signal Theft and Limit the Company’s Ability to Protect Its Intellectual Property Rights.

Content piracy and signal theft present a threat to the Company’s revenues from products and services, including, but not limited to, films, television shows, cable and other programming. The Company seeks to limit the threat of content piracy and direct broadcast satellite programming signal theft; however, policing unauthorized use of the Company’s products and services and related intellectual property is often difficult and the steps taken by the Company may not in every case prevent the infringement by unauthorized third parties. Developments in technology, including digital copying, file compressing and the growing penetration of high-bandwidth Internet connections, increase the threat of content piracy by making it easier to duplicate and widely distribute high-quality pirated material. In addition, developments in software or devices that circumvent encryption technology and the falling prices of devices incorporating such technologies increase the threat of unauthorized use and distribution of direct broadcast satellite programming signals and the proliferation of user-generated content sites and live and stored video streaming sites, which deliver unauthorized copies of copyrighted content, including those emanating from other countries in various languages, may adversely impact the Company’s businesses. The proliferation of unauthorized distribution and use of the Company’s content could have an adverse effect on the Company’s businesses and profitability because it reduces the revenue that the Company could potentially receive from the legitimate sale and distribution of its products and services.

The Company has taken, and will continue to take, a variety of actions to combat piracy and signal theft, both individually and, in some instances, together with industry associations. However, protection of the Company’s intellectual property rights is dependent on the scope and duration of the Company’s rights as defined by applicable laws in the United States and abroad and the manner in which those laws are construed. If those laws are drafted or interpreted in ways that limit the extent or duration of the Company’s rights, or if existing laws are changed, the Company’s ability to generate revenue from intellectual property may decrease, or the cost of obtaining and enforcing our rights may increase. There can be no assurance that the Company’s efforts to enforce its rights and protect its products, services and intellectual property will be successful in preventing content piracy or signal theft. Further, while piracy and technology tools continue to escalate, if any U.S. or international laws intended to combat piracy and protect intellectual property are repealed or weakened or not adequately enforced, or if the legal system fails to evolve and adapt to new technologies that facilitate piracy, we may be unable to effectively protect our rights and the value of our intellectual property may be negatively impacted and our costs of enforcing our rights could increase.

The Company Must Respond to Changes in Consumer Behavior as a Result of New Technologies in Order to Remain Competitive.

Technology, particularly digital technology used in the entertainment industry, continues to evolve rapidly, leading to alternative methods for the delivery and storage of digital content. These technological advancements have driven changes in consumer behavior and have empowered consumers to seek more control over when, where and how they consume digital content. Content owners are increasingly delivering their content directly to consumers over the Internet, often without charge, and innovations in distribution platforms have enabled consumers to view such Internet-delivered content on televisions and portable devices. There is a risk that the Company’s responses to these changes and strategies to remain competitive, including distribution of its content on a “pay” basis, may not be adopted by consumers. In addition, enhanced Internet capabilities and other new media may reduce television viewership, the demand for DVDs and Blu-rays and the desire to see motion pictures in theaters, which could negatively affect the Company’s revenues. The Company’s failure to protect and exploit the value of its content, while responding to and developing new technology and business models to take advantage of advancements in technology and the latest consumer preferences, could have a significant adverse effect on the Company’s businesses, asset values and results of operations.

Labor Disputes May Have an Adverse Effect on the Company’s Business.

In a variety of the Company’s businesses, the Company and its partners engage the services of writers, directors, actors and other talent, trade employees and others who are subject to collective bargaining agreements, including employees of the Company’s film and television studio operations. If the Company or its partners are unable to renew expiring collective bargaining agreements, it is possible that the affected unions could take action in the form of strikes or work stoppages. Such actions, as well as higher costs in connection with these collective bargaining agreements or a significant labor dispute, could have an adverse effect on the Company’s business by causing delays in production or by reducing profit margins.

Changes in U.S. or Foreign Regulations May Have an Adverse Effect on the Company’s Business.

The Company is subject to a variety of U.S. and foreign regulations in the jurisdictions in which its businesses operate. In general, the television broadcasting and multichannel video programming and distribution industries in the United States are highly regulated by federal laws and regulations issued and administered by various federal agencies, including the FCC. The FCC generally regulates, among other things, the ownership of media, broadcast and multichannel video programming and technical operations of broadcast licensees. Our program services and online properties are subject to a variety of laws and regulations, including those relating to issues such as content regulation, user privacy and data protection, and consumer protection, among others. Further, the United States Congress, the FCC and state legislatures currently have under consideration, and may in the future adopt, new laws, regulations and policies regarding a wide variety of matters, including technological changes and measures relating to privacy and

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data security, which could, directly or indirectly, affect the operations and ownership of the Company’s U.S. media properties. Similarly, changes in interpretations of law or in regulations imposed by governments in other jurisdictions in which the Company, or entities in which the Company has an interest, operate could adversely affect its business and results of operations.

In addition, changes in tax laws, regulations or the interpretations thereof in the U.S. and other jurisdictions in which the Company has operations could affect the Company’s results of operations.

U.S. Citizenship Requirements May Limit Common Stock Ownership and Voting Rights.

The Company owns broadcast station licensees in connection with its ownership and operation of U.S. television stations. Under U.S. law, no broadcast station licensee may be owned by a corporation if more than 25% of its stock is owned or voted by non-U.S. persons, their representatives, or by any other corporation organized under the laws of a foreign country. The Company’s Restated Certificate of Incorporation authorizes the Board of Directors to prevent, cure or mitigate the effect of stock ownership above the applicable foreign ownership threshold by taking any action including: refusing to permit any transfer of common stock to or ownership of common stock by a non-U.S. stockholder; voiding a transfer of common stock to a non-U.S. stockholder; suspending rights of stock ownership if held by a non-U.S. stockholder; or redeeming common stock held by a non-U.S. stockholder. In order to maintain compliance with U.S. law, as of October 2013, the suspension of voting rights of the Class B Common Stock held by non-U.S. stockholders was 35%. This suspension will remain in place for as long as the Company deems it necessary to maintain compliance with applicable U.S. law, and may be adjusted by the Audit Committee as it deems appropriate. The Company is not able to predict whether it will need to adjust the suspension or whether additional action pursuant to its Restated Certificate of Incorporation may be necessary. The FCC could review the Company’s compliance with applicable U.S. law in connection with its consideration of the Company’s renewal applications for licenses to operate the broadcast stations the Company owns.

The Company and News Corp Face Investigations Regarding Allegations of Phone Hacking, Illegal Data Access, Inappropriate Payments to Public Officials and Other Related Matters and Related Civil Lawsuits.

U.S. regulators and governmental authorities are conducting investigations relating to the U.K. Newspaper Matters. The Company is cooperating with these investigations. It is not possible at this time to estimate the liability, if any, of the Company relating to these investigations.

In connection with the Separation, the Company and News Corp agreed in the Separation and Distribution Agreement that the Company will indemnify News Corp, on an after-tax basis, for payments made after the Separation arising out of civil claims and investigations relating to the U.K. Newspaper Matters, as well as legal and professional fees and expenses paid in connection with the related criminal matters, other than fees, expenses and costs relating to employees who are not (i) directors, officers or certain designated employees or (ii) with respect to civil matters, co-defendants with News Corp.

It is possible that these proceedings and any adverse resolution thereof, including any fines or other penalties associated with any plea, judgment or similar result could damage the Company’s reputation, impair its ability to conduct its business and adversely affect its results of operations and financial condition.

Risks Related to the Separation

If the Separation, Together with Certain Related Transactions, Were Ultimately Determined to be Taxable Transactions for U.S. Federal Income Tax Purposes, then We Could Be Subject to Significant Tax Liability.

The Company received (i) a private letter ruling from the IRS substantially to the effect that, among other things, the distribution of Class A Common Stock and Class B Common Stock of News Corp qualifies as tax-free under Sections 368 and 355 of the Internal Revenue Code of 1986, as amended (the “Code”) except for cash received in lieu of fractional shares of News Corp stock and (ii) an opinion from the law firm of Hogan Lovells US LLP confirming the tax-free status of the distribution for U.S. federal income tax purposes, including confirming the satisfaction of the requirements under Section 368 and 355 of the Code not specifically addressed in the IRS private letter ruling. The opinion of Hogan Lovells US LLP will not be binding on the IRS or the courts, and there is no assurance that the IRS or a court will not take a contrary position.

The private letter ruling and the opinion rely on certain facts and assumptions, and certain representations from the Company and News Corp regarding the past and future conduct of our respective businesses and other matters. Notwithstanding the receipt of the private letter ruling and the opinion, the IRS could determine on audit that the distribution or the internal transactions should be treated as taxable transactions if it determines that any of these facts, assumptions, representations or undertakings is not correct or has been violated, or that the distribution or the internal transactions should be taxable for other reasons, including as a result of a significant change in stock or asset ownership after the distribution. If the distribution ultimately is determined to be taxable, the distribution could be treated as a taxable dividend or capital gain for U.S. federal income tax purposes, and U.S. stockholders and certain non-U.S. stockholders could incur significant U.S. federal income tax liabilities. In addition, if the internal reorganization and/or the distribution is ultimately determined to be taxable, the Company would recognize gains on the internal reorganization and/or recognize gain in an amount equal to the excess of the fair market value of shares of the News Corp common stock distributed to our stockholders on the distribution date over our tax basis in such shares of our common stock.

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We Could Be Liable for Income Taxes Owed by News Corp.

Each member of our consolidated group, which until June 28, 2013 included News Corp and each of our other subsidiaries, is jointly and severally liable for the U.S. federal income tax liability of each other member of the consolidated group. Consequently, we could be liable in the event any such liability is incurred, and not discharged, by any other member of our consolidated group. Under the terms of the tax sharing and indemnification agreement that we entered into in connection with the Separation, we will be required to indemnify News Corp for any such liability. Disputes or assessments could arise during future audits by the IRS in amounts that we cannot quantify.

We Might Not Be Able to Engage in Desirable Strategic Transactions and Equity Issuances Because of Certain Restrictions Relating to Requirements for Tax-Free Distributions for U.S. Federal Income Tax Purposes.

Our ability to engage in significant strategic transactions and equity issuances may be limited or restricted in order to preserve, for U.S. federal income tax purposes, the tax-free nature of the distribution. Even if the distribution otherwise qualifies for tax-free treatment under Section 355 of the Code, it may result in corporate level taxable gain to us under Section 355(e) of the Code if 50% or more, by vote or value, of shares of our stock or News Corp’s stock are acquired or issued as part of a plan or series of related transactions that includes the distribution.

To preserve the tax-free treatment of the distribution and the internal transactions in connection with the distribution for U.S. federal income tax purposes, under the tax sharing and indemnification agreement that we entered into with News Corp, we will be prohibited from taking or failing to take certain actions that may prevent the distribution and related transactions from being tax-free for U.S. federal income tax purposes. Further, for the two-year period following the distribution, we may be prohibited from:

These restrictions may limit our ability to pursue strategic transactions or engage in new business or other transactions that may maximize the value of our business.

The Separation and Distribution Agreement May Restrict Us From Acquiring or Owning Certain Types of Assets in the U.S.

The FCC has promulgated certain rules and regulations that limit the ownership of radio and television broadcast stations, television broadcast networks and newspapers (the “Broadcast Ownership Rules”). Under the FCC’s rules for determining ownership of the media assets described above, the Murdoch Family Trust’s ownership interest in both News Corp and the Company following the Separation would generally result in each company’s businesses and assets being attributable to the Murdoch Family Trust for purposes of determining compliance with the Broadcast Ownership Rules. Consequently, our future conduct, including the acquisition of any broadcast networks, or stations or any newspapers, in the same local markets in which News Corp owns or operates newspapers or has acquired television stations, may affect News Corp’s ability to own and operate its newspapers or any television stations it acquires or otherwise comply with the Broadcast Ownership Rules. Therefore, we and News Corp agreed in the Separation and Distribution Agreement that if the Company acquires, after the Separation, newspapers, radio or television broadcast stations or television broadcast networks in the U.S. and such acquisition would impede or be reasonably likely to impede News Corp’s business, then the Company will be required to take certain actions, including divesting assets, in order to permit News Corp to hold its media interests and to comply with such rules. This agreement will effectively limit the activities or strategic business alternatives available to us if such activities or strategic business alternatives implicate the Broadcast Ownership Rules and would impede or be reasonably likely to impede News Corp’s business.

The Indemnification Arrangements We Entered Into With News Corp in Connection With the Separation May Require Us to Divert Cash to Satisfy Indemnification Obligations to News Corp.

Pursuant to the Separation and Distribution Agreement and certain other related agreements, the Company agreed to indemnify News Corp for certain liabilities and News Corp agreed to indemnify the Company for certain liabilities. As a result, we could be required, under certain circumstances, to indemnify News Corp against certain liabilities to the extent such liabilities result from an action we or our affiliates take or from any breach of our or our affiliates’ representations, covenants or obligations under the Separation and Distribution Agreement, tax sharing and indemnification agreement or any other agreement entered into in connection with the Separation.

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Certain of Our Directors and Officers May Have Actual or Potential Conflicts of Interest Because of Their Equity Ownership in News Corp, and Certain of Our Officers and Directors May Have Actual or Potential Conflicts of Interest Because They Also Serve as Officers and/or on the Board of Directors of News Corp.

Certain of our directors and executive officers own shares of News Corp’s common stock, and the individual holdings may be significant for some of these individuals compared to their total assets. In addition, certain of our officers and directors also serve as officers and/or as directors of News Corp, including our Chairman and Chief Executive Officer K. Rupert Murdoch, who serves as News Corp’s Executive Chairman, our Non-Executive Co-Chairman Lachlan K. Murdoch, who serves as News Corp’s Non-Executive Co-Chairman and our Group General Counsel Gerson Zweifach, who serves as News Corp’s General Counsel. This ownership or service to both companies may create, or may create the appearance of, conflicts of interest when these directors and officers are faced with decisions that could have different implications for News Corp and us.

For example, potential conflicts of interest could arise in connection with the resolution of any dispute that may arise between News Corp and us regarding the terms of the agreements governing the internal reorganization, the distribution and the relationship thereafter between the companies, including with respect to the indemnification of certain matters. In addition to any other arrangements that the Company and News Corp may agree to implement, the Company and News Corp agreed that officers and directors who serve at both companies will recuse themselves from decisions where conflicts arise due to their positions at both companies.

 

 

 

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The Board has authorized a stock repurchase program, under which the Company is currently authorized to acquire Class A Common Stock. In August 2013, the Board authorized the repurchase of $4 billion of Class A Common Stock, excluding commissions, which replaced the remaining authorized amount under the stock repurchase program. The Company intends to complete this stock repurchase program by August 2014.

The remaining authorized amount under the Company’s stock repurchase program as of March 31, 2014, excluding commissions, was approximately $1.6 billion.

The program may be modified, extended, suspended or discontinued at any time.

Below is a summary of the Company’s purchases of its Class A Common Stock during the three months ended March 31, 2014:

 

The Company did not purchase any of its Class B Common Stock during the three months ended March 31, 2014.

 

Not applicable.

 

Not applicable.

 

Not applicable.

 

 

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: May 8, 2014

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