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, 2001
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, 2001, 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,
2000 2001
(audited) (unaudited)
---------------- ---------------
Assets:
Cash and cash equivalents.............................................. $ 89,674 $ 68,108
Restricted cash........................................................ 8,215 8,224
Accounts receivable, net............................................... 146,103 160,199
Amounts receivable from related parties, net........................... 56,753 120,374
Programming costs, net................................................. 658,712 729,604
Property and equipment, net............................................ 51,874 46,607
Intangible assets, net................................................. 1,481,189 1,450,797
Other assets, net...................................................... 51,297 47,574
---------------- --------------
Total assets......................................................... $ 2,543,817 $ 2,631,487
================ ==============
Liabilities and stockholders' deficit:
Accounts payable....................................................... $ 65,023 $ 53,784
Accrued liabilities ................................................... 236,324 273,679
Deferred revenue....................................................... 36,534 47,993
Accrued participations................................................. 50,778 46,799
Deferred income taxes.................................................. 14,888 14,888
Bank and other debt.................................................... 1,744,134 1,836,898
Amounts payable to related parties, net................................ 21,243 22,377
---------------- --------------
Total liabilities.................................................... 2,168,924 2,296,418
---------------- --------------
Commitments and contingencies
Series A Mandatorily Redeemable Preferred Stock, $0.001 par value;
500,000 shares authorized; 345,000 shares issued and outstanding
at June 30, 2000 and March 31, 2001, respectively,
($1,000 per share liquidation value) ................................ 345,000 345,000
---------------- --------------
Minority interest...................................................... 54,236 54,001
---------------- --------------
Stockholders' deficit:
Preferred Stock, $0.001 par value; 2,000,000 shares authorized
of which 500,000 shares are designated as Series A Preferred
Stock; no shares issued or outstanding......................... -- --
Class A Common Stock, $0.001 par value; 2,000,000 shares
authorized; 160,000 shares issued and outstanding at
June 30, 2000 and March 31, 2001, respectively................. -- --
Class B Common Stock, $0.001 par value; 16,000,000 shares
authorized; 15,840,000 shares issued and outstanding
at June 30, 2000 and March 31, 2001, respectively.............. 16 16
Contributed capital.............................................. 78,671 78,671
Accumulated other comprehensive loss............................. (6,683) (7,323)
Accumulated deficit.............................................. (96,347) (135,296)
---------------- --------------
Total stockholders' deficit ...................................... (24,343) (63,932)
---------------- --------------
Total liabilities and stockholders' deficit ...................... $ 2,543,817 $ 2,631,487
================ ==============
See accompanying notes.
Page 2
FOX FAMILY WORLDWIDE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED
MARCH 31, 2000 AND 2001
(UNAUDITED)
Three Months Ended Nine Months Ended
March 31, March 31,
2000 2001 2000 2001
----------- ----------- ----------- ----------
(In thousands) (In thousands)
Revenues....................................... $ 148,976 $ 179,500 $ 488,314 $ 521,381
----------- ----------- ----------- ----------
Costs and expenses:
Production and programming................. 64,840 82,177 212,606 212,843
Selling, general and administrative........ 46,788 51,919 150,726 160,087
Depreciation............................... 2,583 2,297 7,887 7,654
Amortization of intangibles................ 10,131 10,131 30,392 30,392
----------- ----------- ----------- ----------
124,342 146,524 401,611 410,976
----------- ----------- ----------- ----------
Operating income............................... 24,634 32,976 86,703 110,405
Equity in loss (earnings) of affiliates........ 1,120 362 2,410 (1,289)
Minority interest.............................. 20 (684) 137 (235)
Other expense, net............................. 1 -- 36 --
Interest expense, net.......................... 41,042 42,467 128,328 127,569
Gain on issuance of subsidiary stock:
Staff Accounting Bulletin No. 51 gain...... -- -- 117,316 --
Gain on issuance of subsidiary stock....... -- -- 78,623 --
----------- ----------- ----------- ----------
Income (loss) before provision for income
taxes...................................... (17,549) (9,169) 151,731 (15,640)
Provision for income taxes..................... 476 -- 74,998 --
----------- ----------- ----------- ----------
Net income (loss).............................. $ (18,025) $ (9,169) $ 76,733 $ (15,640)
=========== =========== =========== ==========
See accompanying notes.
Page 3
FOX FAMILY WORLDWIDE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
MARCH 31, 2000 AND 2001
(UNAUDITED)
2000 2001
----------- -----------
(In thousands)
OPERATING ACTIVITIES:
Net income (loss)........................................................ $ 76,733 $ (15,640)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Amortization of programming costs................................. 182,708 176,842
Depreciation...................................................... 7,887 7,654
Amortization of intangibles....................................... 30,392 30,392
Amortization of debt issuance costs............................... 2,447 2,453
Equity in loss (earnings) of unconsolidated affiliates............ 2,410 (1,289)
Minority interest share of losses (earnings)...................... 137 (235)
Non-cash interest expense......................................... 59,481 67,161
Gain on issuance of subsidiary stock.............................. (195,939) --
Changes in operating assets and liabilities:
Restricted cash............................................... (8) (9)
Accounts receivable, net...................................... (19,731) (14,096)
Amounts receivable from related parties....................... (33,837) (63,621)
Other assets.................................................. 9,355 2,179
Accounts payable and accrued liabilities...................... (4,279) 26,116
Accrued participations........................................ 4,833 (3,979)
Deferred income taxes ........................................ 73,477 --
Deferred revenue.............................................. (9,519) 11,459
----------- -----------
Net cash provided by operating activities................................ 186,547 225,387
----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment....................................... (3,785) (4,744)
Additions to production and programming costs............................ (208,831) (245,377)
Other.................................................................... 300 (260)
----------- -----------
Net cash used in investing activities.................................... (212,316) (250,381)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from bank borrowings............................................ 25,029 26,241
Paydown on bank borrowings............................................... (112,114) (437)
Paydown on NAI Bridge loan............................................... (201) (201)
Proceeds from Fox Subordinated Debt...................................... 15,000 --
Dividends on Preferred Stock............................................. (23,391) (23,309)
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............................................ 20,000 1,134
----------- -----------
Net cash provided by financing activities................................ 83,434 3,428
----------- -----------
(Decrease) increase in cash and cash equivalents......................... 57,665 (21,566)
Cash and cash equivalents at beginning of period......................... 46,858 89,674
----------- -----------
Cash and cash equivalents at end of period............................... $ 104,523 $ 68,108
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized)............................. $ 51,901 $ 43,555
Income taxes...................................................... $ 1,521 $ 1,898
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, 2001
(UNAUDITED)
Note 1--Preparation of 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 accounting principles generally accepted
in the United States 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, 2001 are not necessarily
indicative of the results that may be expected for the year ended June 30, 2001.
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, 2000.
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 pre-tax gain of $117,316,000
was recorded in the second quarter of fiscal year 2000. 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 ("Fox Broadcasting") as settlement of a $100,000,000
subscription advance payable. These shares were issued to the public on behalf
of Fox Broadcasting in the IPO 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 Fox Broadcasting. A pre-tax gain of
$78,623,000 was recorded on this transaction in the second quarter of fiscal
year 2000.
Page 5
Note 3--Programming Costs
Programming costs, net of accumulated amortization, are comprised of the
following (in thousands):
JUNE 30, 2000
----------------------------------------------
ACCUMULATED PROGRAMMING
COST AMORTIZATION COSTS, NET
------------- ------------ -----------
Children's programming............................. $ 1,446,229 $ 1,177,591 $ 268,638
Family programming, movies and mini-series......... 792,347 454,809 337,538
Projects in production............................. 44,818 -- 44,818
Development........................................ 7,718 -- 7,718
------------- ------------ -----------
$ 2,291,112 $ 1,632,400 $ 658,712
============= ============ ===========
MARCH 31, 2001
----------------------------------------------
ACCUMULATED PROGRAMMING
COST AMORTIZATION COSTS, NET
------------- ------------ -----------
Children's programming............................. $ 1,633,393 $ 1,265,415 $ 367,978
Family programming, movies and mini-series......... 817,901 543,827 274,074
Projects in production............................. 73,177 -- 73,177
Development........................................ 14,375 -- 14,375
------------- ------------- ------------
$ 2,538,846 $ 1,809,242 $ 729,604
============= ============= ============
Interest amounting to $4,379,000 and $1,788,000 was capitalized to programming
costs for the nine months ended March 31, 2001 and 2000, respectively.
Depreciation amounting to $2,357,000 and $2,802,000 was capitalized to
programming costs for the nine months ended March 31, 2001 and 2000,
respectively.
Note 4--Comprehensive Income (Loss)
Comprehensive income (loss) for the three months and nine months ended
March 31, 2001 and 2000 are as follows (in thousands):
Three Months Ended Nine Months Ended
March 31, March 31,
2000 2001 2000 2001
---------- ---------- ---------- ----------
Net income (loss)............................. $ (18,025) $ (9,169) $ 76,733 $ (15,640)
Foreign currency translation adjustment....... (1,463) 577 (1,784) (640)
---------- ---------- ---------- ----------
Comprehensive income (loss)................... $ (19,488) $ (8,592) $ 74,949 $ (16,280)
========== =========== ========== ==========
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
-------------- ------------ ---------- -----------
QUARTER ENDED MARCH 31, 2000:
Revenues.................................. $ 41,277 $ 107,751 $ (52) $ 148,976
Income (loss) before interest, income
taxes, depreciation and amortization
of intangibles.......................... $ 7,606 $ 30,182 $ (1,581) $ 36,207
QUARTER ENDED MARCH 31, 2001:
Revenues.................................. $ 81,412 $ 98,072 $ 16 $ 179,500
Income before interest, income taxes,
depreciation and amortization of
intangibles............................. $ 34,195 $ 10,651 $ 880 $ 45,726
NINE MONTHS ENDED MARCH 31, 2000:
Revenues.................................. $ 157,592 $ 326,094 $ 4,628 $ 488,314
Income before interest, income taxes,
depreciation and amortization of
intangibles............................. $ 41,044 $ 82,616 $ 194,678 $ 318,338
NINE MONTHS ENDED MARCH 31, 2001:
Revenues.................................. $ 182,931 $ 338,264 $ 186 $ 521,381
Income (loss) before interest, income
taxes, depreciation and amortization
of intangibles.......................... $ 73,802 $ 79,916 $ (3,743) $ 149,975
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,
2000 2001 2000 2001
----------- ----------- ----------- -----------
Segment income before interest, income taxes,
depreciation and amortization of intangibles.. $ 36,207 $ 45,726 $ 318,338 $ 149,975
Amortization of intangibles..................... 10,131 10,131 30,392 30,392
Interest expense, net........................... 41,042 42,467 128,328 127,569
Depreciation.................................... 2,583 2,297 7,887 7,654
Provision for income taxes...................... 476 -- 74,998 --
----------- ----------- ----------- -----------
Net income (loss)............................... $ (18,025) $ (9,169) $ 76,733 $ (15,640)
=========== =========== =========== ===========
Note 6--New Accounting Pronouncements
For the quarter ended September 30, 2000, the Company adopted Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which had no material effect on the
condensed consolidated financial statements.
In June 2000, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 00-2,
"Accounting by Producers and Distributors of Films" ("SOP 00-2"), which
established new accounting standards for producers and distributors of films and
supersedes SFAS No. 53. SOP 00-2 requires that advertising and other
exploitation 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, as prescribed under SFAS No. 53. In addition, SOP 00-2
requires development cost for abandoned projects after three years 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. SOP 00-2 is effective for financial statements
for fiscal years beginning after December 15, 2000, however, earlier application
is encouraged. The Company plans to adopt SOP 00-2 during the first quarter of
fiscal 2002. Based on the Company's estimates at this time, the effect of
adopting SOP 00-2 will result in a one-time, non-cash, pre-tax charge as a
cumulative effect of a change in accounting principles in the amount of
approximately $50 million to $75 million. Also, SOP 00-2 will require the
Company to classify film cost additions as operating activities in the statement
of cash flows as opposed to the Company's current policy of including these as
investing activities.
Page 7
Note 7--Option Agreements Regarding SEI Option Shares
Under the terms of the Amended and Restated Strategic Stockholders
Agreement dated as of August 1, 1997, as amended, among, inter alia, Haim Saban,
Fox Broadcasting Company and Fox Broadcasting Sub, Inc., Mr. Saban was granted
the right and option, under certain circumstances, to require Fox Broadcasting
Company to purchase all of the Class B Common Stock held by Mr. Saban and the
other former stockholders of Saban Entertainment, Inc., and any of their
transferees (the "SEI Option Shares"). On December 21, 2000, Mr. Saban exercised
this option in accordance with the terms of the Amended and Restated Strategic
Stockholders Agreement. On January 17, 2001, Fox Broadcasting Sub, Inc.
delivered notice to Mr. Saban, stating that it had exercised the Call Option (as
defined in the Stock Ownership Agreement) under the Stock Ownership Agreement
dated as of December 22, 1995, as amended, to purchase the SEI Option Shares
pursuant thereto. Pursuant to the terms of the applicable agreements between
them, the parties are currently working together to consummate the transaction.
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; (d) the exercise by Haim Saban of his option to require Fox
Broadcasting Company to purchase all of the shares of Class B Common Stock held
by Mr. Saban and the other former stockholders of Saban Entertainment, Inc., and
any of their transferees (the "SEI Option Shares") and the exercise by Fox
Broadcasting Sub, Inc. of its option to purchase the SEI Option Shares; and (e)
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, 2000, 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,
except as required by law. 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, 2000, 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, 2001 COMPARED WITH NINE MONTHS ENDED
MARCH 31, 2000
For the nine-month period ended March 31, 2001, revenues increased 6.8% to
$521.4 million as compared to $488.3 million for the same nine-month period of
the prior year. The revenue increase of $33.1 million for the period results
from higher revenues from both the Company's broadcast and production and
distribution segments. The Company's broadcast segment revenues increased $12.2
million due to higher domestic and international subscription fee revenues and
higher domestic cable and international ad sales revenues. These increases were
offset in part by lower ad sales revenues for the Fox Kids Network. Subscriber
fee revenues increased due to greater household penetration and higher
subscriber rates. 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 in Europe. The Company's
production and distribution segment revenues increased $25.3 million primarily
due to the exercise by an affiliate of the Company of an option to acquire a
portion of the film library acquired in connection with the acquisition of
International Family Entertainment, Inc. ("IFE"), which generated revenues of
$38.4 million, and higher merchandising revenues offset by lower foreign
syndication revenues due to timing of deliveries of new programming.
Production and programming costs for the nine-month period ended March 31,
2001 increased 0.1% to $212.8 million as compared to $212.6 million for the same
nine-month period of the prior year. Production and programming costs as a
percentage of total revenues decreased to 40.8% for the nine-month period ended
March 31, 2001 from 43.5% for the comparable prior year period. The decrease in
production and programming costs is primarily due to 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 6.2% to $160.1
million for the nine-month period ended March 31, 2001, from $150.7 million for
the same nine months of the prior year. This increase is primarily due to
various factors including the expansion of the international channels and
worldwide internet activities ($5.9 million in total) and increased marketing
expenses for the Fox Family Channel ($5.1 million) offset slightly by lower
marketing expenses for the Fox Kids Network and other general and administrative
expenses.
Depreciation expense for the nine-month period ended March 31, 2001
decreased $0.2 million or 3.0% as compared to the comparable prior year period.
The decrease was due to a lower level of property and equipment as compared to
the prior year.
Page 9
Amortization of intangible assets for the nine-month periods ended March
31, 2001 and March 31, 2000 results from the acquisition of IFE. These
intangible assets are being amortized over 40 years.
The equity in loss (earnings) of affiliates represents the Company's
portion of the earnings (losses) generated by the Company's international
channels in The Netherlands and Spain. Both channels generated earnings in the
current year period as compared to losses in the previous year period.
Minority interest primarily represents the minority interest share of
earnings of the Company's European subsidiary, Fox Kids Europe N.V. ("FKE"),
which completed its initial public offering ("IPO") in November 1999.
Interest expense decreased slightly for the nine-month period ended March
31, 2001, as compared to the same period in 2000. The decrease is principally
due to lower levels of bank facility borrowings as compared to the prior year.
In November 1999, FKE, a subsidiary of the Company, issued 12,519,307
previously unissued shares (15.2%) for net proceeds of approximately $153.0
million in an IPO of its ordinary shares on the Official Market of Amsterdam
Exchanges. The Company accounted for the proceeds of the offering in accordance
with SAB 51, "Accounting by the parent in consolidation for sale of stock in
subsidiary." Accordingly, a pre-tax gain of $117.3 million was recorded during
the 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 as settlement of a $100.0 million subscription advance payable.
These shares were issued to the public on behalf of Fox Broadcasting, as a
selling stockholder, in the IPO and the net proceeds from these shares were
retained by Fox Broadcasting. A pre-tax gain of $78.6 million was recorded on
the stock issuance to Fox Broadcasting during the nine-month period ended March
31, 2000. (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 taxes associated with the IPO plus foreign
withholding taxes. There were no material foreign withholding taxes for the nine
months ended March 31, 2001.
THREE MONTHS ENDED MARCH 31, 2001 COMPARED WITH THREE MONTHS ENDED
MARCH 31, 2000
For the three-month period ended March 31, 2001, revenues increased 20.5%
to $179.5 million as compared to $149.0 million for the same three-month period
of the prior year. The Company's broadcast segment revenues decreased $9.7
million primarily due to lower domestic cable and network ad sales revenues as a
result of lower ratings as compared to the prior year period. The Company's
production and distribution segment revenues increased $40.1 million primarily
due to the exercise of the option to acquire a portion of the IFE film library
described above.
Production and programming costs for the three-month period ended March 31,
2001 increased 26.7% to $82.2 million as compared to $64.8 million for the same
three-month period of the prior year. Production and programming costs as a
percentage of total revenues increased to 45.8% for the three-month period ended
March 31, 2001 from 43.5% for the comparable prior year period. The increase in
production and programming costs is primarily due to the increase in revenues
described above, and the Company's mix of domestic and foreign revenues as
compared to the prior year.
Selling, general and administrative expenses increased 11.0% to $51.9
million for the three-month period ended March 31, 2001, from $46.8 million for
the same three months of the prior year. This increase is primarily due to
higher marketing expenses for the Fox Kids Network and the Fox Family Channel
($6.3 million in total) offset by lower other general and administrative
expenses ($1.2 million in total).
Amortization of intangible assets for the three-month periods ended March
31, 2001 and March 31, 2000 results from the acquisition of IFE. These
intangible assets are being amortized over 40 years.
The equity in loss of affiliates represents the Company's portion of the
losses generated by the Company's international channels in The Netherlands and
Spain for both three-month periods.
Page 10
Minority interest primarily represents the minority interest share of
earnings of the Company's European subsidiary, FKE, which completed its IPO in
November 1999.
Interest expense increased by $1.4 million for the three-month period ended
March 31, 2001, as compared to the same period in 2000. The increase is
principally due to higher levels of bank facility borrowings and subordinated
debt during the current period as compared to the prior period.
LIQUIDITY AND CAPITAL RESOURCES
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 Company's Series A 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 have been borrowings
under the Credit Facility, cash flows from operations and funding from the
Company's stockholders.
In November 1999, FKE, the Company's indirect subsidiary, completed an IPO
of its ordinary shares in The Netherlands, as described above, generating net
cash proceeds of approximately $153.0 million of which $100.0 million was
utilized to pay down the Credit Facility and the remaining amount was made
available for working capital purposes.
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, 2001 are $120.0 million for the term loan and
$355.0 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 the base prime rate. As of March 31,
2001, $5.0 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, 2001 was $225.4 million, as compared to $186.5 million
for the nine months ended March 31, 2000. This increase is primarily due to the
timing of production and programming payments and account receivable
collections.
Net cash used in investing activities of the Company during the nine months
ended March 31, 2001 and 2000 was $250.4 million and $212.3 million,
respectively. The net cash flow used in investing activities for the nine months
ended March 31, 2001 and 2000 primarily related to additions to production and
programming costs and purchases of property and equipment. The nine months ended
March 31, 2001 reflected higher than normal production and programming costs
associated with the acquisition of several off network series during the period.
Payment of the license fees on such series are being made in installments over
the respective license periods. There were no such large acquisitions made in
the prior period. Under Statement of Position 00-2 "Accounting by Producers and
Distributors of Films" ("SOP 00-2") (See Note 6), the Company will be required
to classify film cost additions as operating activities in the statement of cash
flows as opposed to the Company's current policy of including these as investing
activities.
Net cash provided by financing activities of the Company during the nine
months ended March 31, 2001 and 2000 was $3.4 million and $83.4 million,
respectively. The financing activities for the nine months ended March 31, 2001
relate to proceeds from bank borrowings, advances from related parties and
payments of dividends related to the Company's Series A Mandatorily Redeemable
Preferred Stock, while the financing activities for the nine months ended March
31, 2000 relate to proceeds from the IPO of the ordinary shares of FKE which
were used to pay down bank borrowings, the issuance of additional Fox
subordinated debt and advances from related parties and payments of dividends
related to the Company's Series A Mandatorily Redeemable Preferred Stock.
The Company's total unrestricted cash and cash equivalents balance at March
31, 2001 was $68.1 million.
Page 11
Under the terms of the Amended and Restated Strategic Stockholders
Agreement dated as of August 1, 1997, as amended, among, inter alia, Haim Saban,
Fox Broadcasting Company and Fox Broadcasting Sub, Inc., Mr. Saban was granted
the right and option, under certain circumstances, to require Fox Broadcasting
Company to purchase the SEI Option Shares. On December 21, 2000, Mr. Saban
exercised this option in accordance with the terms of the Amended and Restated
Strategic Stockholders Agreement. On January 17, 2001, Fox Broadcasting Sub,
Inc. delivered notice to Mr. Saban, stating that it had exercised the Call
Option (as defined in the Stock Ownership Agreement) under the Stock Ownership
Agreement dated as of December 22, 1995, as amended, to purchase the SEI Option
Shares pursuant thereto. Pursuant to the terms of the agreements, the parties
are currently working together to consummate the transaction.
The Company has outstanding stock options issued to three employees for the
purchase of an aggregate of 484,911 shares of Class A Common Stock, all of which
are currently exercisable. In the event Haim Saban, any member of his immediate
family or any of his affiliated entities (Haim Saban and such family members,
the "Saban Entities") sells to a third party any shares of common stock of the
Company (the "Saban Company Shares"), each of these option holders must sell to
the Company, and the Company must purchase, the "applicable percentage" of his
option shares for the same per share consideration paid by the third party for
the Saban Company Shares less the exercise price of such option shares. The
"applicable percentage" is equal to the percentage of the Saban Company Shares
sold to the third party out of the total shares of the Company owned by the
Saban Entities immediately prior to the sale.
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.
NEW ACCOUNTING PRONOUNCEMENT
In June 2000, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP 00-2, which established new
accounting standards for producers and distributors of films and supersedes SFAS
No. 53. SOP 00-2 requires that advertising and other exploitation 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, as
prescribed under SFAS No. 53. In addition, SOP 00-2 requires development cost
for abandoned projects after three years 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. SOP 00-2 is effective for financial statements for fiscal years
beginning after December 15, 2000, however, earlier application is encouraged.
The Company plans to adopt SOP 00-2 during the first quarter of fiscal 2002.
Based on the Company's estimates at this time, the effect of adopting SOP 00-2
will result in a one-time, non-cash, pre-tax charge as a cumulative effect of a
change in accounting principles in the amount of approximately $50 million to
$75 million.
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 generally accepted accounting principles. 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.
Page 12
The following table sets forth the Company's revenues and earnings before
interest, income taxes, depreciation and amortization of intangibles for the
three and nine-month periods ended March 31, 2000 and 2001. Included in EBITDA
for the nine month period ended March 31, 2000 is the Company's gain on issuance
of subsidiary stock, which totaled $195.9 million.
Three Months Ended Nine Months Ended
March 31, March 31,
2000 2001 2000 2001
----------- ------------ ----------- ----------
REVENUES:
Production and distribution.................. $ 41,277 $ 81,412 $ 157,592 $ 182,931
Broadcasting................................. 107,751 98,072 326,094 338,264
Other........................................ (52) 16 4,628 186
----------- ----------- ----------- -----------
Total Revenues...................... $ 148,976 $ 179,500 $ 488,314 $ 521,381
=========== =========== =========== ===========
EBITDA:
Production and distribution.................. $ 7,606 $ 34,195 $ 41,044 $ 73,802
Broadcasting................................. 30,182 10,651 82,616 79,916
Other........................................ (1,581) 880 194,678 (3,743)
----------- ----------- ----------- -----------
Total EBITDA........................ 36,207 45,726 318,338 149,975
RECONCILIATION TO NET INCOME (LOSS):
Interest expense, net........................ 41,042 42,467 128,328 127,569
Depreciation................................. 2,583 2,297 7,887 7,654
Amortization of intangibles.................. 10,131 10,131 30,392 30,392
----------- ----------- ----------- -----------
Income (loss) before provision for income taxes... (17,549) (9,169) 151,731 (15,640)
Provision for income taxes........................ 476 -- 74,998 --
----------- ----------- ----------- -----------
Net income (loss)................................. $ (18,025) $ (9,169) $ 76,733 $ (15,640)
=========== =========== =========== ===========
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. On occasion, the Company may choose to manage
these market risks by using derivative financial instruments in accordance with
established policies and procedures. Currently, the Company does not use
derivative financial instruments for trading purposes. Additionally, the Company
maintains a mix of fixed and floating debt to mitigate its exposure to interest
rate fluctuations.
The Company had no interest rate swaps or other material derivative
financial instruments outstanding at March 31, 2001.
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, Euro 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 had no forward exchange agreements outstanding at March 31,
2001.
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:
None.
(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 14, 2001 /S/ MEL WOODS
--------------------------------------
Mel Woods
President, Chief Operating Officer and
Chief Financial Officer
Page 15