UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 333-12995
FOX FAMILY WORLDWIDE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4596247
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10960 WILSHIRE BOULEVARD
LOS ANGELES, CALIFORNIA 90024
(Address of principal executive offices)
Registrant's Telephone Number, Including Area Code: (310) 235-5100
Former name, address and fiscal year, if changed since last report
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: As of May 1, 2000, there
were 160,000 shares of Class A Common Stock outstanding and 15,840,000 shares of
Class B Common Stock outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOX FAMILY WORLDWIDE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except for share data)
June 30, March 31,
1999 2000
(audited) (unaudited)
------------ ------------
Assets:
Cash and cash equivalents.......................................................... $ 46,858 $ 104,523
Restricted cash.................................................................... 8,204 8,212
Accounts receivable, net........................................................... 145,050 164,781
Amounts receivable from related parties............................................ 19,082 83,953
Programming costs, net............................................................. 538,219 567,144
Property and equipment, net........................................................ 58,096 51,192
Deferred income taxes.............................................................. 38,829 38,829
Intangible assets, net............................................................. 1,539,852 1,509,460
Other assets, net.................................................................. 77,684 59,325
------------ ------------
Total assets.................................................................... $ 2,471,874 $ 2,587,419
============ ============
Liabilities and stockholders' (deficit) equity:
Accounts payable................................................................... $ 44,743 $ 60,938
Accrued liabilities ............................................................... 190,664 176,923
Deferred revenue................................................................... 59,314 49,795
Accrued participations............................................................. 38,860 43,693
Deferred income taxes.............................................................. 20,748 94,225
Bank and other debt................................................................ 1,726,315 1,713,510
Amounts payable to related parties................................................. 113,973 45,007
------------ ------------
Total liabilities............................................................... 2,194,617 2,184,091
============ ============
Commitments and contingencies
Series A Mandatorily Redeemable Preferred Stock, $0.001 par value; 500,000
shares authorized; 345,000 shares issued and outstanding
($1,000 per share liquidation value) ........................................... 345,000 345,000
------------ ------------
Minority interest.................................................................. -- 56,572
------------ ------------
Stockholders' (deficit) equity:
Preferred Stock, $0.001 par value; 1,500,000 shares authorized; no shares
issued or outstanding........................................................ -- --
Class A Common Stock, $0.001 par value; 2,000,000 shares
authorized, 160,000 shares issued and outstanding............................ -- --
Class B Common Stock, $0.001 par value; 16,000,000 shares
authorized, 15,840,000 shares issued and outstanding......................... 16 16
Contributed capital............................................................ 60,731 78,672
Accumulated other comprehensive loss........................................... (1,893) (3,677)
Deficit........................................................................ (126,597) (73,255)
------------ ------------
Total stockholders' (deficit) equity .......................................... (67,743) 1,756
------------ ------------
Total liabilities and stockholders' (deficit) equity .......................... $ 2,471,874 $ 2,587,419
============ ============
See accompanying notes.
Page 2
FOX FAMILY WORLDWIDE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED
MARCH 31, 1999 AND 2000
(UNAUDITED)
Three Months Ended Nine Months Ended
March 31, March 31,
1999 2000 1999 2000
----------- ----------- ---------- ----------
(In thousands) (In thousands)
Revenues $ 128,279 $ 148,976 $ 489,316 $ 488,314
----------- ----------- ----------- ----------
Costs and expenses:
Production and programming................... 50,110 64,840 223,843 212,606
Selling, general and administrative.......... 41,789 46,787 143,188 150,726
Depreciation................................. 2,630 2,584 7,597 7,887
Amortization of intangibles.................. 10,220 10,131 30,660 30,392
----------- ----------- ----------- ----------
104,749 124,342 405,288 401,611
----------- ----------- ----------- ----------
Operating income.................................. 23,530 24,634 84,028 86,703
Equity in loss of unconsolidated affiliates....... 1,175 1,120 3,840 2,410
Minority interest share of (losses) earnings...... (126) 20 (310) 137
Other expense, net................................ 110 1 12 36
Interest expense, net............................. 40,868 41,042 123,703 128,328
Gain on issuance of subsidiary stock:
Staff Accounting Bulletin No. 51............. -- -- -- 117,316
Gain on issuance of subsidiary stock......... -- -- -- 78,623
----------- ----------- ----------- ----------
Income (loss) before provision for income
taxes........................................ (18,497) (17,549) (43,217) 151,731
Provision for income taxes........................ 542 476 1,258 74,998
----------- ----------- ----------- ----------
Net income (loss)................................. $ (19,039) $ (18,025) $ (44,475) $ 76,733
=========== =========== =========== ==========
See accompanying notes.
Page 3
FOX FAMILY WORLDWIDE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
MARCH 31, 1999 AND 2000
(UNAUDITED)
1999 2000
------------- -----------
(In thousands)
OPERATING ACTIVITIES:
Net income (loss)................................................................. $ (44,475) $ 76,733
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Amortization of programming costs......................................... 207,141 182,708
Depreciation.............................................................. 7,597 7,887
Amortization of intangibles............................................... 30,660 30,392
Amortization of debt issuance costs....................................... 2,441 2,447
Equity in loss of unconsolidated affiliates............................... 3,840 2,410
Minority interest share of (losses) earnings ............................. (310) 137
Non-cash interest expense................................................. 49,417 59,481
Gain on issuance of subsidiary stock...................................... -- (195,939)
Changes in operating assets and liabilities:
Restricted cash...................................................... (200) (8)
Accounts receivable, net............................................. (9,473) (19,731)
Amounts receivable from related parties.............................. 13,178 (44,871)
Other assets......................................................... 11,319 9,355
Accounts payable and accrued liabilities............................. 5,762 (4,279)
Accrued participations............................................... (14,270) 4,833
Deferred income taxes ............................................... 2,685 73,477
Deferred revenue..................................................... (9,177) (9,519)
------------ ------------
Net cash provided by operating activities......................................... 256,135 175,513
------------ ------------
INVESTING ACTIVITIES:
Purchase of property and equipment................................................ (10,041) (3,785)
Additions to production and programming costs..................................... (275,087) (208,831)
Intangible assets................................................................. 14,000 --
Other............................................................................. (3,157) 300
------------ ------------
Net cash used in investing activities............................................. (274,285) (212,316)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from bank borrowings..................................................... 622 25,029
Paydown on bank borrowings........................................................ (11,586) (112,114)
Paydown on NAI Bridge loan........................................................ (202) (201)
Proceeds from Fox Subordinated Debt............................................... -- 15,000
Dividends on Preferred Stock...................................................... (23,308) (23,391)
Proceeds on Fox Kids Europe N.V. public offering, net ............................ -- 152,963
Costs accrued for Fox Kids Europe N.V. public offering............................ -- 6,148
Advances from related parties..................................................... 8,865 31,034
------------ ------------
Net cash (used in) provided by investing activities............................... (25,609) 94,468
------------ ------------
(Decrease) increase in cash and cash equivalents.................................. (43,759) 57,665
Cash and cash equivalents at beginning of period.................................. 82,313 46,858
------------ ------------
Cash and cash equivalents at end of period........................................ $ 38,554 $ 104,523
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amounts capitalized)..................................... $ 53,901 $ 51,461
Income taxes.............................................................. $ 1,996 $ 1,521
Non-cash investing and financing activities:
Shares of subsidiary ordinary stock issued as settlement of a
subscription advance................................................. $ -- $ 100,000
Note payable assumed by unconsolidated affiliate.......................... $ -- $ 20,000
Contributed capital by related party in formation of an
unconsolidated affiliate............................................. $ -- $ 17,941
See accompanying notes.
Page 4
FOX FAMILY WORLDWIDE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
Note 1--Preparation of Condensed Consolidated Financial Statements
The accompanying unaudited condensed consolidated financial statements of
Fox Family Worldwide, Inc. (the "Company") have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Certain prior year amounts have been
reclassified to conform to the current year presentation. Operating results for
the nine-month period ended March 31, 2000 are not necessarily indicative of the
results that may be expected for the year ended June 30, 2000.
These interim unaudited condensed consolidated financial statements and the
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 year ended June 30, 1999.
The preparation of the unaudited condensed consolidated financial
statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect
the amounts reported in the unaudited condensed consolidated financial
statements and accompanying notes, principally amortization of programming
costs. Actual results could differ from those estimates. Management periodically
reviews and revises its estimates of future broadcast airings and revenues, as
necessary, which may result in revised amortization of its programming costs.
Results of operations may be significantly affected by the periodic adjustments
in such amortization.
Note 2--Issuance of Subsidiary Ordinary Shares
In November 1999, net assets of certain direct and indirect subsidiaries of
the Company were contributed to Fox Kids Europe N.V. ("FKE"), a wholly owned
indirect subsidiary of the Company at the time the assets were contributed. Net
assets contributed mainly represent the Fox Kids cable channels broadcasting in
the European markets and the distribution rights of children's programming in
those markets owned by Saban International N.V., a wholly-owned indirect
subsidiary of the Company. In November 1999, FKE issued 12,519,307 previously
unissued ordinary shares (or 15.2 percent) for gross proceeds of $175,518,000
($14.02 per share) in an initial public offering ("IPO") on the Official Market
for Amsterdam Exchanges. Offering costs for the IPO totaled $22,550,000 and
consisted mainly of underwriter and professional fees plus certain capital
taxes. The Company has accounted for the offering in accordance with Staff
Accounting Bulletin ("SAB") No. 51, "Accounting by the parent in consolidation
for sale of stock by subsidiary." Accordingly, a gain of $117,316,000 was
recorded in the second quarter of fiscal year 2000, less an income tax provision
of $43,994,000. The gain recorded represents the Company's portion of the excess
net offering price per share of FKE's ordinary shares compared to the book
carrying amount per share.
In November 1999, in conjunction with the IPO, a subsidiary of the Company
caused to be transferred 7,507,591 ordinary shares of FKE (or 9.1 percent), to
Fox Broadcasting Company ("FBC") as settlement of a $100,000,000 subscription
advance payable. These shares were issued to the public on behalf of FBC in the
initial public offering for gross proceeds of $105,256,000 ($14.02 per share).
The gross proceeds from these shares, less underwriter fees and capital taxes of
$5,256,000, were retained by FBC. A gain of $78,623,000, less an income tax
provision of $29,483,000, was recorded on this transaction in the second quarter
of fiscal year 2000.
Page 5
Note 3--Programming Costs
Programming costs, less accumulated amortization, are comprised of the
following (in thousands):
JUNE 30, 1999
--------------------------------------------
ACCUMULATED PROGRAMMING
COST AMORTIZATION COSTS, NET
------------- ------------- -----------
Children's programming........................... $ 1,289,026 $ 1,064,308 $ 224,718
Family programming, movies and mini-series....... 562,304 328,291 234,013
Projects in production........................... 72,172 -- 72,172
Development...................................... 7,316 -- 7,316
------------- ------------ -----------
$ 1,930,818 $ 1,392,599 $ 538,219
============= ============ ===========
MARCH 31, 2000
--------------------------------------------
ACCUMULATED PROGRAMMING
COST AMORTIZATION COSTS, NET
------------- ------------ -----------
Children's programming........................... $ 1,431,540 $ 1,156,911 $ 274,629
Family programming, movies and mini-series....... 669,113 418,396 250,717
Projects in production........................... 36,779 -- 36,779
Development...................................... 5,019 -- 5,019
------------- ------------ -----------
$ 2,142,451 $ 1,575,307 $ 567,144
============= ============ ===========
Interest amounting to $1,788,000 and $2,414,000 was capitalized to
programming costs for the nine months ended March 31, 2000 and 1999,
respectively. Depreciation amounting to $2,802,000 and $2,831,000 was
capitalized to programming costs for the nine months ended March 31, 2000 and
1999, respectively.
Note 4--Comprehensive Income (Loss)
Comprehensive income (loss) for the three months and nine months ended
March 31, 2000 and 1999 are as follows (in thousands):
Three Months Ended Nine Months Ended
March 31, March 31,
1999 2000 1999 2000
---------- ----------- ---------- ---------
Net income (loss) $ (19,039) $ (18,025) $ (44,475) $ 76,733
Foreign currency translation adjustment (806) (1,463) (210) (1,784)
---------- ----------- ---------- ---------
Comprehensive income (loss) $ (19,845) $ (19,488) $ (44,685) $ 74,949
========== =========== ========== =========
Note 5--Business Segment Reporting
The Company's business units have been aggregated into two reportable
operating segments: production & distribution and broadcasting. The other column
includes corporate related items, income and expenses not allocated to the
reportable segments and for the nine-month period ended March 31, 2000, the
Company's gain on issuance of subsidiary stock. The Company's reportable
operating segments have been determined in accordance with the Company's
internal management structure, which is organized based on operating activities.
The Company evaluates performance based upon several factors, of which the
primary financial measure is segment income (loss) before interest, income
taxes, depreciation and amortization of intangibles.
Page 6
Summarized financial information concerning the Company's reportable
segments is shown in the following tables (in thousands):
Production
& Distribution Broadcasting Other Total
-------------- ------------ ---------- -----------
NINE MONTHS ENDED MARCH 31, 2000:
Revenues...................................... $ 157,592 $ 326,094 $ 4,628 $ 488,314
Income before interest, income taxes, $ 41,044 $ 82,616 $ 194,678 $ 318,338
depreciation and amortization of
intangibles
NINE MONTHS ENDED MARCH 31, 1999:
Revenues...................................... $ 164,084 $ 324,578 $ 654 $ 489,316
Income (loss) before interest, income taxes, $ 42,881 $ 81,067 $ (5,205) $ 118,743
depreciation and amortization of
intangibles
THREE MONTHS ENDED MARCH 31, 2000:
Revenues...................................... $ 41,277 $ 107,751 $ (52) $ 148,976
Income (loss) before interest, income taxes, $ 7,606 $ 30,182 $ (1,580) $ 36,208
depreciation and amortization of
intangibles
THREE MONTHS ENDED MARCH 31, 1999:
Revenues...................................... $ 27,761 $ 100,471 $ 47 $ 128,279
Income before interest, income taxes, $ 7,132 $ 27,688 $ 401 $ 35,221
depreciation and amortization of
intangibles
The following table reconciles segment income before interest, income
taxes, depreciation and amortization of intangibles to the Company's condensed
consolidated statements of operations (in thousands):
Three Months Ended Nine Months Ended
March 31, March 31,
1999 2000 1999 2000
----------- ---------- ----------- -----------
Segment income before interest, income taxes,
depreciation and amortization of
intangibles................................ $ 35,221 $ 36,208 $ 118,743 $ 318,338
Amortization of intangibles.................... 10,220 10,131 30,660 30,392
Interest expense, net.......................... 40,868 41,042 123,703 128,328
Depreciation................................... 2,630 2,584 7,597 7,887
Provision for income taxes..................... 542 476 1,258 74,998
----------- ---------- ----------- -----------
Net income (loss).............................. $ (19,039) $ (18,025) $ (44,475) $ 76,733
=========== ========== =========== ===========
Note 6--New/Proposed Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement established accounting and reporting standards for derivative
instruments and hedging activities and required that an entity recognize all
derivatives in the statement of financial position and measure those instruments
at fair value. In 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133," which defers the effective date of SFAS No. 133 to fiscal
years beginning after June 15, 2000. The Company has not yet made a final
determination of its impact to the financial statements. Management believes
that the adoption of these statements will not have a material effect on the
financial position or the results of operations of the Company.
In October 1998, the Accounting Standards Executive Committee ("AcSEC") of the
American Institute of Certified Public Accountants issued an exposure draft of a
proposed Statement of Position, "Accounting by Producers and Distributors of
Films" (the "SOP"), which would establish new accounting standards for producers
and distributors of films and supersede Statement of Financial Accounting
Standard No. 53. Based on AcSEC's conclusion, the SOP would require that
advertising costs for theatrical and television product be expensed as incurred.
This compares to the Company's existing policy of capitalizing and then
expensing advertising cost for theatrical and television product over the
related revenue streams. In addition, the SOP would require development cost for
abandoned projects and certain indirect overhead costs to be charged directly to
expense, instead of those costs being capitalized to programming costs, which
currently is required under the existing accounting standard. At the time that
the Company adopts the final provisions of the SOP, it expects to record a
one-time, non-cash charge as a cumulative
Page 7
effect of a change in accounting principles. The provisions of the SOP is
expected to be effective for the Company beginning in fiscal 2001.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB
101 clarifies certain existing accounting principles for the recognition and
classification of revenues in financial statements. The new rules are expected
to result in some changes as to how the filmed entertainment industry classifies
its revenue, particularly relating to distribution arrangements for third-party
and co-financed joint ventures product, but is not expected to result in any
changes to net income. The Company is required to adopt SAB 101 during the first
quarter of fiscal 2001. As a result, the Company is in the process of evaluating
the overall impact of SAB 101 on its consolidated financial statements.
Page 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This filing contains statements that constitute "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The
words "expect," "estimate," "anticipate," "predict," "believe" and similar
expressions and variations thereof are intended to identify forward-looking
statements. These statements appear in a number of places in this filing and
include statements regarding the intent, belief or current expectations of the
Company, its directors or its officers with respect to, among other things: (a)
trends affecting the Company's financial condition or results of operations; (b)
the Company's programming on the Fox Family Channel; (c) the impact of
competition; and (d) certain other operations. The readers of this filing are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those projected in this filing, including, without
limitation, those risks and uncertainties discussed under the headings "Factors
That Could Impact Future Results" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," in the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 1999 as well as the information
set forth below. The Company does not ordinarily make projections of its future
operating results and undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. Readers should carefully review the risk factors referred
to above and the other documents the Company files from time to time with the
Securities and Exchange Commission, including the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1999, the quarterly reports on Form
10-Q filed by the Company, and any current reports on Form 8-K filed by the
Company.
RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 2000 COMPARED WITH NINE MONTHS ENDED
MARCH 31, 1999
For the nine-month period ended March 31, 2000, revenues decreased slightly
to $488.3 million as compared to $489.3 million for the same nine-month period
of the prior year. Revenues for the Company's production and distribution
segment decreased $6.5 million due to lower direct-to-video revenues of $26.5
million offset by higher foreign syndication and merchandising revenues. The
market for direct-to-video features continues to be highly competitive,
primarily due to an oversupply of family-oriented product in the marketplace and
as such, the Company did not release or produce any new titles in the current
year. The Company's broadcast segment revenues increased $1.5 million due to
higher subscription fee and international ad sales revenues offset by lower
domestic cable and network ad sales revenues. Subscriber fee revenues for the
Fox Family Channel increased due to greater household penetration and higher
subscriber rates while both ad sales and subscription fee revenues from the
Company's international cable channels improved as a result of increased
penetration in the marketplace and the launch of additional channels.
Production and programming costs for the nine-month period ended March 31,
2000 decreased 5.0% to $212.6 million as compared to $223.8 million for the same
nine-month period of the prior year. Production and programming costs as a
percentage of total revenues decreased to 43.5% for the nine-month period ended
March 31, 2000 from 45.7% for the comparable prior year period. The decrease in
production and programming costs are attributable to a number of factors,
primarily the decrease in direct-to-video revenues described above, which have
high amortization rates, and lower amortization expense associated with the
Company's mix of domestic and foreign revenues as compared to the prior year.
Selling, general and administrative expenses increased 5.3% to $150.7
million for the nine-month period ended March 31, 2000, from $143.2 million for
the same nine months of the prior year. This increase is due to various costs
incurred with the expansion of the international channels and increased
marketing expenses for the Fox Kids Network. Offsetting this increase were lower
marketing expenses for the Fox Family Channel as the result of the reformatting
costs incurred in the prior year.
Depreciation expense for the nine-month period ended March 31, 2000
increased $ .3 million or 3.8% as compared to the comparable prior year period.
The increase is due to depreciation on property and equipment additions.
Amortization of intangible assets for the nine-month period ended March 31,
2000 resulted from the acquisition of International Family Entertainment, Inc.
("IFE"). These intangible assets are being amortized over 40 years.
Page 9
The equity in loss of unconsolidated affiliates represents the Company's
portion of the losses generated by the Company's international channels in The
Netherlands and Spain.
Minority interest represents the minority interest share of earnings
(losses) of the Company's international channel in Poland.
Interest expense increased by $4.6 million for the nine-month period ended
March 31, 2000, as compared to the same period in 1999. The increase is
principally due to higher levels of the Company's subordinated debt partially
offset by lower levels of bank facility borrowings.
In November 1999, a subsidiary of the Company, Fox Kids Europe N.V., a
public limited liability company organized in The Netherlands ("FKE"), issued
12,519,307 previously unissued shares (15.2%) for net proceeds of approximately
$153.0 million in an initial public offering of its ordinary shares on the
Official Market of Amsterdam Exchanges. The Company has accounted for the
proceeds of the offering in accordance with Staff Accounting Bulletin ("SAB")
51, "Accounting by the parent in consolidation for sale of stock in subsidiary."
Accordingly, a gain of $117.3 million was recorded during the current period.
The gain recorded represents the Company's portion of the excess net offering
price per share of FKE's ordinary shares compared to the book carrying amount
per share. Additionally, a subsidiary of the Company caused to be transferred
7,507,591 shares of FKE, or 9.1% of its ordinary shares, to Fox Broadcasting
Company ("FBC") as settlement of a $100.0 million subscription advance payable.
These shares were issued to the public on behalf of FBC, as a selling
stockholder, in the initial public offering and the net proceeds from these
shares were retained by FBC. A gain of $78.6 million was recorded on the stock
issuance to FBC during the current period. (See Note 2 in the Notes to Condensed
Consolidated Financial Statements).
The Company's provision for income taxes for the nine-month period ended
March 31, 2000 primarily reflects deferred taxes associated with the initial
public offering gains as described above plus foreign withholding taxes.
THREE MONTHS ENDED MARCH 31, 2000 COMPARED WITH THREE MONTHS ENDED
MARCH 31, 1999
For the three-month period ended March 31, 2000, revenues increased 16.1%
to $149.0 million as compared to $128.3 million for the same three-month period
of the prior year. The revenue increase of $20.7 million resulted from higher
revenues at both the Company's production and distribution and broadcast
segments. The Company's production and distribution segment posted higher
revenues of $13.5 million primarily as a result of higher
merchandising/licensing and foreign syndication revenues. Revenues for the
Company's broadcast segment increased $7.3 million. This segment posted higher
domestic cable and international subscription revenues and higher international
ad sales revenues as a result of the growth described above partially offset by
lower domestic cable and network ad sales revenues.
Production and programming costs for the three-month period ended March 31,
2000 increased 29.4% to $64.8 million as compared to $50.1 million for the same
three-month period of the prior year. Production and programming costs as a
percentage of total revenues increased to 43.5% for the three-month period ended
March 31, 2000 from 39.1% for the comparable prior year period. The increase in
production and programming costs is attributable to higher amortization expense
due to the revenue increase and the Company's mix of domestic and foreign
revenues as compared to the prior year.
Selling, general and administrative expenses increased 12.0% to $46.8
million for the three-month period ended March 31, 2000, from $41.8 million for
the same three months of the prior year. This increase is due to various costs
incurred with the expansion of the international channels and increased
marketing expenses for the Fox Kids Network.
Amortization of intangible assets for the three-month period ended March
31, 2000 results from the acquisition of IFE. These intangible assets are being
amortized over 40 years.
The equity in loss of unconsolidated affiliates represents the Company's
portion of the losses generated by the Company's international channels in The
Netherlands and Spain.
Minority interest represents the minority interest share of earnings
(losses) of the Company's international channel in Poland.
Page 10
Interest expense increased slightly for the three-month period ended March
31, 2000, as compared to the same period in 1999. The increase is principally
due to higher levels of the Company's subordinated debt partially offset by
lower levels of bank facility borrowings.
The Company's provision for income taxes for the three-month period ended
March 31, 2000 primarily reflects foreign withholding taxes.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the various financing transactions utilized to fund the IFE
acquisition (the "Acquisition"), which was completed in September 1997, the
Company's principal liquidity requirements arise from interest payments on both
the Company's credit facility ("Credit Facility") and the 9 1/4% Senior Notes
due 2007 and the dividend payments on the Mandatorily Redeemable Preferred
Stock. The Company further anticipates certain seasonal working capital needs
related to the development, production and acquisition of programming, the
financing of accounts receivable and other related operating costs. The Company,
on a regular basis has had, and intends to continue to engage in, exploratory
discussions concerning programming and other acquisition opportunities, and any
such acquisition could result in additional capital requirements. The Company's
principal sources of liquidity include borrowings under the Credit Facility,
cash generated from operations and funding from the Company's stockholders.
In November 1999, FKE, the Company's indirect subsidiary, completed an
initial public offering of its ordinary shares in The Netherlands, as described
above, generating net cash proceeds of approximately $153.0 million of which
$90.0 million was utilized to pay down the Company's credit facility and the
remaining amount was made available for working capital purposes. It is not
currently contemplated that similar transactions will take place in the near
future.
The Credit Facility is comprised of a seven-year amortizing term loan and a
seven-year reducing revolving credit facility. The maximum borrowings allowed
under the facility as of March 31, 2000 are $120 million for the term loan and
$355 million for the revolving credit facility. The Credit Facility is scheduled
to terminate September 29, 2004. Borrowings under the Credit Facility bear
interest, at the Company's option, at a rate per annum equal to either LIBOR
plus a .75% interest rate margin or a base rate plus a .25% interest rate
margin. As of March 31, 2000, $40.0 million was available under the Credit
Facility for additional borrowings, subject to certain restrictions.
Net cash provided by operating activities of the Company for the nine
months ended March 31, 2000 was $175.5 million as compared to $256.1 million for
the nine months ended March 31, 1999. This decrease is primarily due to
expansion of the Company's international channel activities and timing of
production, programming and other payments.
Net cash used in investing activities of the Company during the nine months
ended March 31, 2000 and 1999 was $212.3 million and $274.3 million,
respectively. The net cash flow used in investing activities for the nine months
ended March 31, 2000 and 1999 primarily related to additions to production and
programming costs and purchases of property and equipment. The nine months ended
March 31, 1999 reflected higher than normal production and programming costs
associated with the completely revamped program schedule of the Fox Family
Channel.
Net cash provided by (used in) financing activities of the Company during
the nine months ended March 31, 2000 and 1999 was $94.5 million and $(25.6)
million, respectively. The financing activities for the nine months ended March
31, 2000 relate to proceeds from the initial public offering of the ordinary
shares of FKE, the issuance of additional Fox subordinated debt and advances
from related parties, payments of dividends related to the Company's Series A
Mandatorily Redeemable Preferred Stock and proceeds from and paydown of bank
borrowings, while the financing activities for the nine months ended March 31,
1999 related primarily to dividend payments, paydown of bank borrowings and
advances from related parties.
The Company's total unrestricted cash and cash equivalents balance at March
31, 2000 was $104.5 million.
The Company believes that the available borrowings under the Credit
Facility, together with cash flows from operations, cash on hand and funding
from the Company's stockholders should be sufficient to fund its operations and
service its debt for the foreseeable future.
Page 11
USE OF EBITDA
While many in the financial community consider earnings before interest,
income taxes, depreciation and amortization of intangibles ("EBITDA") to be an
important measure of comparative operating performance, it should be considered
in addition to, but not as a substitute for or superior to, operating income,
net income (loss), cash flow and other measures of financial performance
prepared in accordance with accounting principles generally accepted in the
United States. EBITDA does not reflect cash available to fund cash requirements,
and the items excluded from EBITDA, such as depreciation and non-film
amortization, are significant components in assessing the Company's financial
performance. Other significant uses of cash flows are required before cash will
be available to the Company, including debt service, taxes and expenditures for
production, distribution and broadcast assets. EBITDA eliminates the uneven
effect across business segments of depreciation and amortization primarily
resulting from the value of intangible assets acquired in business combinations
accounted for by the purchase method of accounting, including the Company's
August 1997 acquisition of IFE. The Company's calculation of EBITDA may be
different from the calculation used by other companies and, therefore,
comparability may be limited.
The following table sets forth the Company's revenues and earnings before
interest, income taxes, depreciation and amortization of intangibles for the
nine-month period ended March 31, 1999 and 2000 (in thousands). Included in
EBITDA for the nine month period ended March 31, 2000 is the Company's gain on
issuance of subsidiary stock which totalled $195.9 million.
Three Months Ended Nine Months Ended
March 31, March 31,
1999 2000 1999 2000
----------- ----------- ------------ -----------
REVENUES:
Production and distribution..................... $ 27,761 $ 41,277 $ 164,084 $ 157,592
Broadcasting.................................... 100,471 107,751 324,578 326,094
Other........................................... 47 (52) 654 4,628
----------- ----------- ------------ -----------
Total revenues........................ $ 128,279 $ 148,976 $ 489,316 $ 488,314
----------- ----------- ------------ -----------
EBITDA:
Production and distribution..................... $ 7,132 $ 7,606 $ 42,881 $ 41,044
Broadcasting.................................... 27,688 30,182 81,067 82,616
Other........................................... 401 (1,580) (5,205) 194,678
----------- ----------- ------------ -----------
Total EBITDA.......................... 35,221 36,208 118,743 318,338
OTHER EXPENSE:
Interest expense, net........................... 40,868 41,042 123,703 128,328
Depreciation.................................... 2,630 2,584 7,597 7,887
Amortization of intangibles..................... 10,220 10,131 30,660 30,392
----------- ----------- ------------ -----------
Income (loss) before provision for income taxes....... (18,497) (17,549) (43,217) 151,731
Provision for income taxes............................ 542 476 1,258 74,998
----------- ----------- ------------ -----------
Net income (loss)..................................... $ (19,039) $ (18,025) $ (44,475) $ 76,733
=========== =========== ============ ===========
Page 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risks include fluctuations in interest rates,
variability in interest rate spread relationships (i.e., prime to LIBOR spreads)
and exchange rate variability. The Company manages these market risks by using
derivative financial instruments in accordance with established policies and
procedures. The Company does not use derivative financial instruments for
trading purposes.
When the Company licenses its programming outside the United States, the
majority of transactions are denominated in U.S. dollars. Channel subscription
fees are denominated in local currencies. For those transactions denominated in
foreign currencies, to the extent possible, sales and purchases in specific
currencies are offset against each other. The foreign currencies in which the
Company has the most significant exchange rate exposure are the British pound,
French franc, German mark and Canadian dollar. To manage these exposures, the
Company periodically initiates hedging activities by entering into currency
exchange agreements, consisting primarily of currency forward contracts, to
minimize cost variations which could result from fluctuations in currency
exchange rates. The currency exchange agreements which provide hedge coverage
typically mature within one year of origination, consistent with the underlying
purchase or sales commitment.
The Company maintains a mix of fixed and floating debt to mitigate its
exposure to interest rate fluctuations.
The Company's management believes that fluctuations in interest rates and
currency exchange rates in the near term would not materially affect the
Company's consolidated operating results, financial position or cash flows as
the Company has limited risks related to interest rate and currency exchange
rate fluctuations.
Page 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company currently and from time to time is engaged in litigation in the
ordinary course of its business. The Company is not currently a party to any
lawsuit or proceeding which, in the opinion of management, if decided adversely
to the Company, would be likely to have a material adverse effect on the
Company's financial condition and results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
3.1 Certificate of Amendment of Corrected Restated Certificate of
Incorporation of Fox Family Worldwide, Inc.
27.1 Financial Data Schedule.
(b) REPORTS ON FORM 8-K:
None.
Page 14
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.
FOX FAMILY WORLDWIDE, INC.
Date: May 12, 2000 /S/ MEL WOODS
------------------------------------------
Mel Woods
President, Chief Operating Officer and
Chief Financial Officer
Page 15
EXHIBIT INDEX
ITEM EXHIBIT PAGE
3.1 Certificate of Amendment of Corrected Restated Certificate of
Incorporation of Fox Family Worldwide, Inc.
27.1 Financial Data Schedule
Page 16