FOX ENTERTAINMENT GROUP INC - 10-Q Quarterly Report

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 March 31, 2004

¨	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 May 10, 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

TABLE OF CONTENTS


		Page
Part I. Financial Information

Item 1.	Financial Statements

	Unaudited Consolidated Condensed Statements of Operations for the three and nine months ended March 31, 2004 and 2003	3

	Consolidated Condensed Balance Sheets as of March 31, 2004 (unaudited) and June 30, 2003 (audited)	4

	Unaudited Consolidated Condensed Statements of Cash Flows for the nine months ended March 31, 2004 and 2003	5

	Notes to the Unaudited Consolidated Condensed Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34

Item 4.	Controls and Procedures	34

Part II. Other Information

Item 6.	Exhibits and Reports on Form 8-K	35

Signature		36

FOX ENTERTAINMENT GROUP, INC.

UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(in millions except per share amounts)


	For the three months ended March 31,						For the nine months ended March 31,
	2004			2003			2004			2003
Revenues	$	2,840		$	2,707		$	8,978		$	8,201
Expenses:
Operating		1,895			1,882			6,170			5,764
Selling, general and administrative		322			314			930			945
Depreciation and amortization		41			47			127			139

Operating income		582			464			1,751			1,353
Other income (expense):
Interest expense, net		(75	)		(25	)		(98	)		(120	)
Equity earnings (losses) of affiliates		(26	)		(8	)		(21	)		(18	)
Minority interest in subsidiaries		(1	)		(5	)		(4	)		(21	)
Other, net		—			—			19			—

Income before provision for income taxes		480			426			1,647			1,194
Provision for income tax expense on a stand-alone basis		(181	)		(150	)		(617	)		(421	)

Net income	$	299		$	276		$	1,030		$	773

Basic and diluted earnings per share	$	0.31		$	0.31		$	1.11		$	0.88

Basic and diluted weighted average number of common equivalent shares outstanding		974			900			926			875

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

FOX ENTERTAINMENT GROUP, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(in millions except share and per share amounts)


	As of March 31, 2004		As of June 30, 2003
	(unaudited)		(audited)
Assets:
Cash and cash equivalents	$	127	$	72
Accounts receivable, net		2,659		2,647
Filmed entertainment and television programming costs, net		3,528		3,161
Investments in equity affiliates		8,305		1,560
Property and equipment, net		1,270		1,464
Intangible assets, net		8,456		8,663
Goodwill, net		4,765		4,813
Other assets and investments		1,201		919

Total assets	$	30,311	$	23,299

Liabilities and Shareholders’ Equity:
Liabilities:
Accounts payable and accrued liabilities	$	1,572	$	1,665
Participations, residuals and royalties payable		1,361		1,141
Television programming rights payable		1,269		1,397
Deferred revenue		364		449
Borrowings		742		—
Deferred income taxes		2,074		2,053
Other liabilities		845		797

		8,227		7,502
Due to affiliates of News Corporation		4,438		704

Total liabilities		12,665		8,206

Minority interest in subsidiaries		7		790
Commitments and contingencies
Shareholders’ Equity:
Preferred stock, $.01 par value per share; 100,000,000 shares authorized; 0 shares issued and outstanding as of March 31, 2004 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 March 31, 2004 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 March 31, 2004 and June 30, 2003		6		6
Additional paid-in capital		15,080		12,780
Retained earnings and accumulated other comprehensive income		2,549		1,513

Total shareholders’ equity		17,639		14,303

Total liabilities and shareholders’ equity	$	30,311	$	23,299

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

FOX ENTERTAINMENT GROUP, INC.

UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(in millions)


	For the nine months ended March 31,
	2004			2003
Operating activities:
Net income	$	1,030		$	773
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		127			139
Amortization of cable distribution investments		94			94
Equity (earnings) losses of affiliates and distributions		35			23
Minority interest in subsidiaries		4			8
Other, net		(19	)		—
Deferred income taxes		78			170
Change in operating assets and liabilities, net of acquisitions:
Accounts receivable and other assets		(108	)		(159	)
Filmed entertainment and television programming costs, net		(468	)		(182	)
Accounts payable and accrued liabilities		(23	)		(70	)
Participations, residuals and royalties payable and other liabilities		205			205

Net cash provided by operating activities		955			1,001

Investing activities:
Acquisitions, net of cash acquired		(8	)		(424	)
Investments in and acquisition of interests in equity affiliates		(107	)		(116	)
Other investments		(40	)		(23	)
Purchases of property and equipment, net of acquisitions		(83	)		(114	)
Proceeds from sale of business		150			—
Disposals of property and equipment		9			9

Net cash used in investing activities		(79	)		(668	)

Financing activities:
Borrowings		419			95
Repayment of borrowings		(413	)		(947	)
Decrease in Minority interest in subsidiaries		(1	)		(3	)
Decrease in Preferred Interests		(26	)		(159	)
Proceeds from the issuance of common stock		—			1,211
(Repayments to) advances from affiliates of News Corporation, net		(800	)		(523	)

Net cash used in financing activities		(821	)		(326	)

Net increase in cash and cash equivalents		55			7
Cash and cash equivalents, beginning of period		72			56

Cash and cash equivalents, end of period	$	127		$	63

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

FOX ENTERTAINMENT GROUP, INC.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Note 1 – Basis of Presentation

Fox Entertainment Group, Inc. (the “Company”) is principally engaged in the development, production and worldwide distribution of feature films and television programs, television broadcasting and cable network programming. The Company is a majority-owned subsidiary of The News Corporation Limited (“News Corporation”), which, as of March 31, 2004, 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 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.


	For the three months ended March 31,						For the nine months ended March 31,
	2004			2003			2004			2003
	(in millions except per share data)
Net income, as reported	$	299		$	276		$	1,030		$	773
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(18	)		(12	)		(52	)		(35	)

Pro forma net income	$	281		$	264		$	978		$	738

Basic and diluted earnings per share:
As reported	$	0.31		$	0.31		$	1.11		$	0.88
Pro forma	$	0.29		$	0.29		$	1.06		$	0.84

FOX ENTERTAINMENT GROUP, INC.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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
March 31,

For the nine
months ended
March 31,

2004

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