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, 2004
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 2, 2005, 426,959,080 shares of Class A Common Stock, par value $0.01 per share, and 547,500,000 shares of Class B Common Stock, par value $0.01 per share, were outstanding.
FOX ENTERTAINMENT GROUP, INC.
FORM 10-Q
| Page | ||||||
| Part I. Financial Information |
||||||
| Item 1. | Financial Statements |
|||||
| Unaudited Consolidated Statements of Operations for the three and six months ended December 31, 2004 and 2003 | 3 | |||||
| Consolidated Balance Sheets as of December 31, 2004 (unaudited) and June 30, 2004 (audited) |
4 | |||||
| Unaudited Consolidated Statements of Cash Flows for the six months ended December 31, 2004 and 2003 | 5 | |||||
| 6 | ||||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
15 | ||||
| Item 3. | 27 | |||||
| Item 4. | 27 | |||||
| Item 6. | 28 | |||||
| Signature | 29 | |||||
2
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
| For the three months ended December 31, |
For the six months ended December 31, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| Revenues |
$ | 3,943 | $ | 3,380 | $ | 6,832 | $ | 6,138 | ||||||||
| Expenses: |
||||||||||||||||
| Operating |
2,812 | 2,489 | 4,660 | 4,275 | ||||||||||||
| Selling, general and administrative |
337 | 289 | 664 | 608 | ||||||||||||
| Depreciation and amortization |
42 | 44 | 81 | 86 | ||||||||||||
| Operating income |
752 | 558 | 1,427 | 1,169 | ||||||||||||
| Other (expense) income: |
||||||||||||||||
| Interest expense, net |
(70 | ) | (15 | ) | (136 | ) | (23 | ) | ||||||||
| Equity (losses) earnings of affiliates |
(29 | ) | (2 | ) | (126 | ) | 5 | |||||||||
| Other, net |
39 | (7 | ) | 39 | 19 | |||||||||||
| Income before provision for income taxes and minority interest in subsidiaries |
692 | 534 | 1,204 | 1,170 | ||||||||||||
| Provision for income tax expense on a stand-alone basis |
(259 | ) | (203 | ) | (448 | ) | (436 | ) | ||||||||
| Minority interest in subsidiaries, net of tax |
(2 | ) | (1 | ) | (5 | ) | (3 | ) | ||||||||
| Net income |
$ | 431 | $ | 330 | $ | 751 | $ | 731 | ||||||||
| Basic and diluted earnings per share |
$ | 0.44 | $ | 0.36 | $ | 0.77 | $ | 0.81 | ||||||||
| Basic and diluted weighted average number of common equivalent shares outstanding |
974 | 905 | 974 | 902 | ||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share amounts)
| At December 31, 2004 |
At June 30, | |||||
| (unaudited) | (audited) | |||||
| Assets: |
||||||
| Cash and cash equivalents |
$ | 161 | $ | 122 | ||
| Accounts receivable, net |
3,964 | 3,002 | ||||
| Filmed entertainment and television programming costs, net |
3,515 | 3,193 | ||||
| Investments in equity affiliates |
8,077 | 8,194 | ||||
| Property and equipment, net |
1,236 | 1,247 | ||||
| Intangible assets |
8,400 | 8,400 | ||||
| Goodwill |
4,782 | 4,758 | ||||
| Other assets and investments |
1,113 | 1,132 | ||||
| Total assets |
$ | 31,248 | $ | 30,048 | ||
| Liabilities and Shareholders’ Equity: |
||||||
| Liabilities: |
||||||
| Accounts payable and accrued liabilities |
$ | 1,706 | $ | 1,566 | ||
| Participations and residuals payable |
1,754 | 1,395 | ||||
| Television programming rights payable |
1,001 | 1,102 | ||||
| Deferred revenue |
353 | 318 | ||||
| Borrowings |
153 | 659 | ||||
| Deferred income taxes |
2,182 | 2,063 | ||||
| Other liabilities |
591 | 735 | ||||
| 7,740 | 7,838 | |||||
| Due to affiliates of News Corporation |
4,724 | 4,236 | ||||
| Total liabilities |
12,464 | 12,074 | ||||
| Minority interest in subsidiaries |
9 | 7 | ||||
| Commitments and contingencies |
||||||
| Shareholders’ Equity: |
||||||
| Preferred stock, $0.01 par value per share; 100,000,000 shares authorized; 0 shares issued and outstanding at December 31 and June 30, 2004 |
— | — | ||||
| Class A Common stock, $0.01 par value per share; 1,000,000,000 shares authorized; 426,959,080 shares issued and outstanding at December 31 and June 30, 2004 |
4 | 4 | ||||
| Class B Common stock, $0.01 par value per share; 650,000,000 shares authorized; 547,500,000 shares issued and outstanding at December 31 and June 30, 2004 |
6 | 6 | ||||
| Additional paid-in capital |
15,082 | 15,081 | ||||
| Retained earnings and accumulated other comprehensive income |
3,683 | 2,876 | ||||
| Total shareholders’ equity |
18,775 | 17,967 | ||||
| Total liabilities and shareholders’ equity |
$ | 31,248 | $ | 30,048 | ||
The accompanying notes are an integral part of these consolidated financial statements.
4
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
| For the six months ended December 31, |
||||||||
| 2004 |
2003 |
|||||||
| Operating activities: |
||||||||
| Net income |
$ | 751 | $ | 731 | ||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
||||||||
| Depreciation and amortization |
81 | 86 | ||||||
| Amortization of cable distribution investments |
58 | 63 | ||||||
| Equity losses (earnings) of affiliates |
126 | (5 | ) | |||||
| Cash distributions received from investees |
3 | 3 | ||||||
| Other, net |
(39 | ) | (19 | ) | ||||
| Minority interest in subsidiaries, net of tax |
5 | 3 | ||||||
| Deferred taxes |
120 | 110 | ||||||
| Change in operating assets and liabilities, net of acquisitions: |
||||||||
| Accounts receivable and other assets |
(966 | ) | (824 | ) | ||||
| Filmed entertainment and television programming costs, net |
(393 | ) | (428 | ) | ||||
| Accounts payable and accrued liabilities |
67 | 15 | ||||||
| Participations and residuals payable and other liabilities |
359 | 185 | ||||||
| Net cash provided by (used in) operating activities |
172 | (80 | ) | |||||
| Investing activities: |
||||||||
| Acquisitions, net of cash acquired |
(23 | ) | (5 | ) | ||||
| Investments in and acquisition of interests in equity affiliates |
(33 | ) | (73 | ) | ||||
| Other investments |
(26 | ) | (30 | ) | ||||
| Purchases of property and equipment, net of acquisitions |
(62 | ) | (50 | ) | ||||
| Expenses related to sale of business |
(12 | ) | — | |||||
| Proceeds from sale of investments in equity affiliates |
43 | — | ||||||
| Disposals of property and equipment |
2 | — | ||||||
| Net cash used in investing activities |
(111 | ) | (158 | ) | ||||
| Financing activities: |
||||||||
| Borrowings |
— | 338 | ||||||
| Repayment of borrowings |
(507 | ) | (276 | ) | ||||
| Decrease in minority interest in subsidiaries |
(3 | ) | 1 | |||||
| Decrease in Preferred Interests |
— | (26 | ) | |||||
| Advances from affiliates of News Corporation, net |
488 | 170 | ||||||
| Net cash (used in) provided by financing activities |
(22 | ) | 207 | |||||
| Net increase (decrease) in cash and cash equivalents |
39 | (31 | ) | |||||
| Cash and cash equivalents, beginning of year |
122 | 72 | ||||||
| Cash and cash equivalents, end of period |
$ | 161 | $ | 41 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
NOTES TO THE UNAUDITED CONSOLIDATED 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 News Corporation which, as of December 31, 2004, held equity and voting interests in the Company of approximately 82% and 97%, respectively.
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with US 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, 2005.
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 Form 10-K for the fiscal year ended June 30, 2004 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 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 fiscal 2004 amounts have been reclassified to conform to the fiscal 2005 presentation.
The Company follows the disclosure-only provisions of Statement of Financial Accounting Standards (“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 December 31, |
For the six months ended December 31, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| (in millions, except per share data) | ||||||||||||||||
| Net income, as reported |
$ | 431 | $ | 330 | $ | 751 | $ | 731 | ||||||||
| Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects |
(15 | ) | (17 | ) | (30 | ) | (34 | ) | ||||||||
| Pro forma net income |
$ | 416 | $ | 313 | $ | 721 | $ | 697 | ||||||||
| Basic and diluted earnings per share: |
||||||||||||||||
| As reported |
$ | 0.44 | $ | 0.36 | $ | 0.77 | $ | 0.81 | ||||||||
| Pro forma |
$ | 0.43 | $ | 0.35 | $ | 0.74 | $ | 0.77 | ||||||||
6