SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
| x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended December 31, 2003 |
or
| ¨ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to |
Commission file number 1-14595
FOX ENTERTAINMENT GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
| Delaware | 95-4066193 | |
| (State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
| 1211 Avenue of the Americas, New York, New York | 10036 | |
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including area code (212) 852-7111
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 is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes x No ¨
As of February 11, 2004, 426,959,080 shares of Class A Common Stock, par value $.01 per share, and 547,500,000 shares of Class B Common Stock, par value $.01 per share, were outstanding.
FOX ENTERTAINMENT GROUP, INC.
FORM 10-Q
| Page | ||||
| Part I. Financial Information |
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| Item 1. |
Financial Statements |
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| 3 | ||||
| 4 | ||||
| 5 | ||||
| Notes to the Unaudited Consolidated Condensed Financial Statements |
6 | |||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
18 | ||
| Item 3. |
32 | |||
| Item 4. |
32 | |||
| Part II. Other Information |
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| Item 4. |
33 | |||
| Item 6. |
33 | |||
| 34 | ||||
2
FOX ENTERTAINMENT GROUP, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in millions except per share amounts)
| For the three months ended |
For the six months ended |
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| 2003 |
2002 |
2003 |
2002 |
|||||||||||||
| Revenues |
$ | 3,380 | $ | 3,150 | $ | 6,138 | $ | 5,494 | ||||||||
| Expenses: |
||||||||||||||||
| Operating |
2,489 | 2,296 | 4,275 | 3,882 | ||||||||||||
| Selling, general and administrative |
289 | 309 | 608 | 631 | ||||||||||||
| Depreciation and amortization |
44 | 45 | 86 | 92 | ||||||||||||
| Operating income |
558 | 500 | 1,169 | 889 | ||||||||||||
| Other income (expense): |
||||||||||||||||
| Interest expense, net |
(15 | ) | (49 | ) | (23 | ) | (95 | ) | ||||||||
| Equity earnings (losses) of affiliates |
(2 | ) | (12 | ) | 5 | (10 | ) | |||||||||
| Minority interest in subsidiaries |
(1 | ) | (7 | ) | (3 | ) | (16 | ) | ||||||||
| Other, net |
(7 | ) | — | 19 | — | |||||||||||
| Income before provision for income taxes |
533 | 432 | 1,167 | 768 | ||||||||||||
| Provision for income tax expense on a stand-alone basis |
(203 | ) | (149 | ) | (436 | ) | (271 | ) | ||||||||
| Net income |
$ | 330 | $ | 283 | $ | 731 | $ | 497 | ||||||||
| Basic and diluted earnings per share |
$ | 0.36 | $ | 0.32 | $ | 0.81 | $ | 0.58 | ||||||||
| Basic and diluted weighted average number of common equivalent shares outstanding |
905 | 874 | 902 | 862 | ||||||||||||
The accompanying notes are an integral part of these unaudited consolidated condensed financial statements.
3
FOX ENTERTAINMENT GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in millions except share per share amounts)
| As of December 31, 2003 |
As of June 30, 2003 | |||||
| (unaudited) | (audited) | |||||
| Assets: |
||||||
| Cash and cash equivalents |
$ | 41 | $ | 72 | ||
| Accounts receivable, net |
3,382 | 2,647 | ||||
| Filmed entertainment and television programming costs, net |
3,627 | 3,161 | ||||
| Investments in equity affiliates |
8,322 | 1,560 | ||||
| Property and equipment, net |
1,432 | 1,464 | ||||
| Intangible assets, net |
8,646 | 8,663 | ||||
| Goodwill, net |
4,816 | 4,813 | ||||
| Other assets and investments |
1,118 | 919 | ||||
| Total assets |
$ | 31,384 | $ | 23,299 | ||
| Liabilities and Shareholders’ Equity: |
||||||
| Liabilities: |
||||||
| Accounts payable and accrued liabilities |
$ | 1,704 | $ | 1,665 | ||
| Participations, residuals and royalties payable |
1,341 | 1,141 | ||||
| Television programming rights payable |
1,312 | 1,397 | ||||
| Deferred revenue |
408 | 449 | ||||
| Borrowings |
798 | — | ||||
| Deferred income taxes |
2,164 | 2,053 | ||||
| Other liabilities |
879 | 797 | ||||
| 8,606 | 7,502 | |||||
| Due to affiliates of News Corporation |
5,408 | 704 | ||||
| Total liabilities |
14,014 | 8,206 | ||||
| Minority interest in subsidiaries |
32 | 790 | ||||
| Commitments and contingencies |
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| Shareholders’ Equity: |
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| Preferred stock, $.01 par value per share; 100,000,000 shares authorized; 0 shares issued and outstanding as of December 31 and June 30, 2003 |
— | — | ||||
| Class A Common stock, $.01 par value per share; 1,000,000,000 authorized; 426,959,080 and 352,436,375 issued and outstanding as of December 31 and June 30, 2003, respectively |
4 | 4 | ||||
| Class B Common stock, $.01 par value per share; 650,000,000 authorized; 547,500,000 issued and outstanding as of December 31 and June 30, 2003 |
6 | 6 | ||||
| Additional paid-in capital |
15,080 | 12,780 | ||||
| Retained earnings and accumulated other comprehensive income |
2,248 | 1,513 | ||||
| Total shareholders’ equity |
17,338 | 14,303 | ||||
| Total liabilities and shareholders’ equity |
$ | 31,384 | $ | 23,299 | ||
The accompanying notes are an integral part of these unaudited consolidated condensed financial statements.
4
FOX ENTERTAINMENT GROUP, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in millions)
| For the six months ended December 31, |
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| 2003 |
2002 |
|||||||
| Operating activities: |
||||||||
| Net income |
$ | 731 | $ | 497 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
86 | 92 | ||||||
| Amortization of cable distribution investments |
63 | 63 | ||||||
| Equity (earnings) losses of affiliates and distributions |
(2 | ) | 13 | |||||
| Minority interest in subsidiaries |
3 | 7 | ||||||
| Other, net |
(19 | ) | — | |||||
| Deferred income taxes |
110 | 180 | ||||||
| Change in operating assets and liabilities, net of acquisitions: |
||||||||
| Accounts receivable and other assets |
(824 | ) | (1,029 | ) | ||||
| Filmed entertainment and television programming costs, net |
(428 | ) | (265 | ) | ||||
| Accounts payable and accrued liabilities |
15 | 205 | ||||||
| Participations, residuals and royalties payable and other liabilities |
185 | 395 | ||||||
| Net cash (used in) provided by operating activities |
(80 | ) | 158 | |||||
| Investing activities: |
||||||||
| Acquisitions, net of cash acquired |
(5 | ) | (430 | ) | ||||
| Investments in and acquisition of interests in equity affiliates |
(73 | ) | (87 | ) | ||||
| Other investments |
(30 | ) | (9 | ) | ||||
| Purchases of property and equipment, net of acquisitions |
(50 | ) | (63 | ) | ||||
| Disposals of property and equipment |
— | 9 | ||||||
| Net cash used in investing activities |
(158 | ) | (580 | ) | ||||
| Financing activities: |
||||||||
| Borrowings |
338 | 95 | ||||||
| Repayment of borrowings |
(276 | ) | (947 | ) | ||||
| Increase (decrease) in Minority interest in subsidiaries |
1 | (1 | ) | |||||
| Decrease in Preferred Interests |
(26 | ) | (99 | ) | ||||
| Proceeds from the issuance of common stock |
— | 1,211 | ||||||
| (Repayments to) advances from affiliates of News Corporation, net |
170 | 177 | ||||||
| Net cash provided by financing activities |
207 | 436 | ||||||
| Net (decrease) increase in cash and cash equivalents |
(31 | ) | 14 | |||||
| Cash and cash equivalents, beginning of period |
72 | 56 | ||||||
| Cash and cash equivalents, end of period |
$ | 41 | $ | 70 | ||||
The accompanying notes are an integral part of these unaudited consolidated condensed financial statements.
5
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1 – Basis of Presentation
Fox Entertainment Group, Inc. (the “Company”) is principally engaged in the development, production and worldwide distribution of feature films and television programs, television broadcasting and cable network programming. The Company is a majority-owned subsidiary of The News Corporation Limited (“News Corporation”), which, as of December 31, 2003, held equity and voting interests in the Company of 82% and 97%, respectively.
The accompanying unaudited consolidated condensed financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“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) considered necessary for a fair presentation have been reflected in these unaudited consolidated condensed financial statements. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2004.
These interim unaudited consolidated condensed financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended June 30, 2003 as filed with the Securities and Exchange Commission.
The preparation of financial statements in conformity with GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated condensed financial statements and the reported amounts of revenues and expenses during the reporting period. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform to the fiscal 2004 presentation.
Effective for the third quarter of fiscal 2003, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123,” which requires quarterly disclosure about the method of accounting for stock-based employee compensation and the effect on reported results. The Company follows the disclosure-only provisions of SFAS No. 123 “Accounting for Stock-Based Compensation,” and in accordance with its provisions, applies the intrinsic value method set forth in Accounting Principles Board Opinion (“APB”) No. 25 “Accounting for Stock Issued to Employees.”
The following table reflects the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions for stock-based employee compensation. These pro forma effects may not be representative of future amounts since the estimated fair value of stock options on the date of grant is amortized to expense over the vesting period and additional options may be granted in future years.
6
FOX ENTERTAINMENT GROUP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1 – Basis of Presentation - continued
| For the three months ended December 31, |
For the six months ended December 31, |
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| 2003 |
2002 |
2003 |
2002 |
|||||||||||||
| (in millions except per share data) | ||||||||||||||||
| Net income, as reported |
$ | 330 | $ | 283 | $ | 731 | $ | 497 | ||||||||
| Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
(17 | ) | (12 | ) | (30 | ) | (23 | ) | ||||||||
| Pro forma net income |
$ | 313 | $ | 271 | $ | 701 | $ | 474 | ||||||||
| Basic and diluted earnings per share: |
||||||||||||||||
| As reported |
$ | 0.36 | $ | 0.32 | $ | 0.81 | $ | 0.58 | ||||||||
| Pro forma |
$ | 0.35 | $ | 0.31 | $ | 0.78 | $ | 0.55 | ||||||||
Note 2 – Comprehensive Income
In accordance with SFAS No. 130, “Reporting Comprehensive Income,” total comprehensive income for the Company consists of the following:
| For the three months ended< | ||||||||||||