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, 1999
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, 1999,
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 SHARE DATA)
June 30, March 31,
1998 1999
(audited) (unaudited)
------------ -------------
Assets:
Cash and cash equivalents................................. $ 82,313 $ 38,554
Restricted cash........................................... 8,000 8,200
Accounts receivable, net.................................. 132,053 141,526
Amounts receivable from related parties................... 58,043 44,865
Programming costs, net.................................... 453,608 524,385
Property and equipment, net............................... 60,805 60,418
Deferred income taxes..................................... 39,779 39,779
Intangible assets, net.................................... 1,594,286 1,563,626
Other assets, net......................................... 87,137 72,484
------------ ------------
Total assets............................................ $ 2,516,024 $ 2,493,837
============ ============
Liabilities and stockholders' equity (deficit):
Accounts payable.......................................... $ 37,668 $ 36,785
Accrued liabilities ...................................... 194,353 200,688
Deferred revenue.......................................... 74,518 65,341
Accrued residuals and participations...................... 52,601 38,331
Income taxes payable...................................... 10,326 26,416
Deferred income taxes..................................... 21,698 22,293
Bank and other debt....................................... 1,746,510 1,784,761
Amounts payable to related parties........................ 2,954 11,819
------------ ------------
Total liabilities....................................... 2,140,628 2,186,434
------------ ------------
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
------------ ------------
Stockholders' equity (deficit):
Preferred Stock, $0.001 par value,
19,500,000 shares authorized,
no shares issued or outstanding................... -- --
Class A Common Stock, $0.001 par value; 16,000,000
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 60,731
Accumulated comprehensive loss....................... (1,201) (1,411)
Deficit.............................................. (29,150) (96,933)
------------ ------------
Total stockholders' equity (deficit)................. 30,396 (37,597)
------------ ------------
Total liabilities and stockholders' equity (deficit).... $ 2,516,024 $ 2,493,837
============ ============
See accompanying notes.
Page 2
FOX FAMILY WORLDWIDE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED
MARCH 31, 1998 AND 1999
(UNAUDITED)
Three Months Ended March 31, Nine Months Ended March 31,
1998 1999 1998 1999
------------ ----------- ----------- ------------
(In thousands) (In thousands)
Revenues............................ $ 153,441 $ 129,355 $ 486,412 $ 493,133
Costs and expenses:
Production and programming....... 77,480 57,205 270,106 247,063
Selling, general and
administrative................. 32,329 35,770 92,658 123,785
Depreciation..................... 2,810 2,630 7,752 7,597
Amortization of intangible
assets......................... 10,463 10,220 27,899 30,660
----------- ----------- ----------- ------------
123,082 105,825 398,415 409,105
Operating income.................... 30,359 23,530 87,997 84,028
Equity in loss of unconsolidated
affiliate........................ 1,174 1,175 3,562 3,840
Other (income) expense, net......... 122 (16) 184 (298)
Interest expense, net............... 37,972 40,868 96,360 123,703
----------- ----------- ----------- ------------
Loss before provision (credit) for
income taxes...................... (8,909) (18,497) (12,109) (43,217)
Provision (credit) for
income taxes...................... (944) 542 1,459 1,258
----------- ----------- ----------- ------------
Net loss............................ $ (7,965) $ (19,039) $ (13,568) $ (44,475)
=========== =========== =========== ============
See accompanying notes.
Page 3
FOX FAMILY WORLDWIDE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
MARCH 31, 1998 AND 1999
(UNAUDITED)
1998 1999
------ ------
(In thousands)
OPERATING ACTIVITIES:
Net loss........................................................... $ (13,568) $ (44,475)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Amortization of programming costs............................ 220,213 207,141
Depreciation of property and equipment....................... 7,752 7,597
Amortization of intangible assets............................ 27,899 30,660
Equity in loss of unconsolidated affiliate................... 3,562 3,840
Non-cash interest expense.................................... 34,361 49,417
Changes in operating assets and liabilities:
Restricted cash........................................... -- (200)
Accounts receivable....................................... (7,637) (9,473)
Amounts receivable from related parties................... (5,817) 13,178
Other assets.............................................. (21,702) 13,760
Accounts payable and accrued liabilities.................. 3,539 5,452
Accrued residuals and participations ..................... 6,731 (14,270)
Income taxes payable and deferred income taxes ........... 12,847 16,685
Deferred revenue.......................................... 22,541 (9,177)
----------- ----------
Net cash provided by operating activities.......................... 290,721 270,135
----------- ----------
INVESTING ACTIVITIES:
Purchase of property and equipment................................. (7,841) (10,041)
Additions to programming costs..................................... (258,220) (275,087)
Acquisition of IFE................................................. (1,370,076) --
Sale of marketable securities...................................... 61,396 --
Proceeds from sale of property and equipment....................... 1,100 --
Cash acquired in acquisition of IFE................................ 19,241 --
Other.............................................................. (53,305) (3,157)
----------- ----------
Net cash used in investing activities.............................. (1,607,705) (288,285)
----------- ----------
FINANCING ACTIVITIES:
Proceeds from bank borrowings...................................... 1,282,063 622
Paydown on bank borrowings......................................... (836,753) (11,586)
Proceeds from News America Bridge Note............................. 345,514 --
Paydown on News America Bridge Note................................ (250,819) (202)
Issuance of Senior Notes........................................... 475,000 --
Issuance of Senior Discount Notes.................................. 375,001 --
Dividends on Mandatorily Redeemable Preferred Stock................ (20,671) (23,308)
Issuance of common stock........................................... 10 --
Proceeds from related party borrowings............................. 1,073 8,865
----------- ----------
Net cash provided by (used in) financing activities................ 1,370,418 (25,609)
----------- ----------
Increase (decrease) in cash and cash equivalents................... 53,434 (43,759)
Cash and cash equivalents at beginning of period................... 28,877 82,313
----------- ----------
Cash and cash equivalents at end of period......................... $ 82,311 $ 38,554
=========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amounts capitalized......................... $ 22,994 $ 53,901
Income taxes................................................. $ 1,858 $ 1,996
See accompanying notes.
Page 4
FOX FAMILY WORLDWIDE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
Note 1--Basis of 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 generally accepted accounting principles 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 three and nine month
periods ended March 31, 1999 are not necessarily indicative of the results that
may be expected for the year ended June 30, 1999.
These interim 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, 1998.
The preparation of the condensed consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the 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--Acquisition of International Family Entertainment, Inc.
In September 1997, the Company completed the acquisition of
International Family Entertainment, Inc. ("IFE"). The following unaudited pro
forma information for the nine months ended March 31, 1998 reflect the results
of the Company's consolidated operations as if the acquisition had occurred at
the beginning of the period presented. The unaudited pro forma consolidated
financial results are not necessarily indicative of the actual results that
would have been reported had the acquisition occurred at the beginning of the
period presented (in thousands).
Nine Months
Ended
March 31, 1998
(unaudited)
---------------
Revenues.................................................. $ 510,897
Operating income.......................................... 91,786
Net loss.................................................. (27,081)
Page 5
Note 3--Programming Costs
Programming costs, less accumulated amortization, are comprised of the
following:
JUNE 30, 1998
-------------------------------------------------
(in thousands)
Accumulated Programming
Cost Amortization Costs, Net
------------- ------------ -----------
Children's programming......................... $ 1,081,397 $ 900,785 $ 180,612
Family programming, movies and mini-series .... 413,507 214,006 199,501
Projects in production......................... 67,070 -- 67,070
Development.................................... 6,425 -- 6,425
------------- ----------- -----------
$ 1,568,399 $ 1,114,791 453,608
============= =========== ===========
MARCH 31, 1999
------------------------------------------------
(in thousands)
Accumulated Programming
Cost Amortization Costs, Net
------------- ------------- -----------
Children's programming......................... $ 1,197,123 $ 1,017,246 $ 179,877
Family programming, movies and mini-series .... 539,616 304,686 234,930
Projects in production......................... 102,494 -- 102,494
Development.................................... 7,084 -- 7,084
------------- ------------- -----------
$ 1,846,317 $ 1,321,932 $ 524,385
============= ============= ===========
Interest expense amounting to $2,414,000 and $1,232,000 was capitalized to
programming costs for the nine months ended March 31, 1999 and 1998,
respectively.
Note 4--Comprehensive Income (Loss)
Effective July 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
Comprehensive income (loss) for the three and nine month periods ended March 31,
1998 and 1999 are as follows:
Three Months Ended March 31, Nine Months Ended March 31,
1998 1999 1998 1999
----------- ---------- ----------- ------------
(in thousands) (in thousands)
Net loss ............................... $ (7,965) $ (19,039) $ (13,568) $ (44,475)
Foreign currency translation
adjustment ........................... (342) (806) 45 (210)
----------- ---------- ----------- ------------
Comprehensive income (loss) ............ $ (8,307) $ (19,845) $ (13,523) $ (44,685)
=========== ========== =========== ============
Accumulated comprehensive loss at March 31, 1998 consisted of foreign currency
translation adjustments of $758,000.
Page 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This report 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 report 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 its channels; (c) the impact of competition; and
(d) the expansion of the Company's international channels and certain other
operations. The readers of this report 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, 1998 as well as the information set forth below. The
Company does not ordinarily make public 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, 1998, 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, 1999 COMPARED WITH NINE MONTHS ENDED MARCH 31,
1998
For the nine-month period ended March 31, 1999, revenues increased 1.4%
to $493.1 million as compared to $486.4 million for the same nine-month period
of the prior year. On a pro forma basis, giving effect to the International
Family Entertainment, Inc. ("IFE") acquisition as if it had occurred on July 1,
1997, revenues decreased $17.8 million or 3.5%. The actual revenue increase of
$6.7 million for the period results from a number of factors, including the
results of one additional month of operations for the Fox Family Channel (the
Company acquired a controlling interest in IFE on August 1, 1997, and only eight
months were included for the Fox Family Channel for the nine-month period ended
March 31, 1998) and increased domestic and foreign revenue. The domestic and
foreign revenue increase of approximately $12.3 million resulted principally
from increased licensing of library product accompanied by higher revenue from
the international cable channels as a result of increased penetration in the
marketplace. These increases were offset, in part, by a decrease in
direct-to-video revenue of approximately $23.6 million. The market for
direct-to-video features is highly competitive, primarily due to an oversupply
of product in the marketplace.
On August 15, 1998, The Family Channel was rebranded as the Fox Family
Channel to the cable households of America with new programming and a new
schedule, which included children's programming, followed by evening and
late-night programming for the entire family. The Company utilizes its library
product along with other third party acquired and original programming during
the daytime children's block. Prime time programming, on the other hand,
consists principally of original series, specials, and movies produced for or
licensed by the Fox Family Channel. The process of repositioning the Fox Family
Channel is challenging and will take time to accomplish. The industry response
to the rebranding has been positive. The Company has not lost any cable or
direct broadcast system subscribers as a result of the rebranding. Since August
15, 1998, overall ratings compared to last year are lower. However, the Company
introduced various programming changes which have had a positive impact on
ratings and have improved important demographics. The Company continues to
pursue its long-term objective of attracting a broader audience with improved
advertiser demographics.
Production and programming costs for the nine-month period ended March
31, 1999 decreased 8.5% to $247.1 million as compared to $270.1 million for the
same nine-month period of the prior year. Production and programming costs as a
percentage of total revenues decreased to 50.1% for the nine-month period ended
March 31, 1999 from 55.5% for the comparable prior year period. The decreases in
production and programming costs are attributable to a number of factors,
including 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, also described above, offset by
the inclusion of the operations of IFE for nine months versus eight months in
the prior year.
Page 7
Selling, general and administrative expenses increased 33.6% to $123.8
million for the nine-month period ended March 31, 1999, from $92.7 million for
the same nine months of the prior year. This increase is due principally to
various one-time costs of approximately $26.9 million incurred in connection
with the rebranding of the Fox Family Channel and from the inclusion of nine
months of activity at IFE as compared to eight months in the prior year.
Amortization of intangible assets for the nine-month period ended March
31, 1999 results from the acquisition of IFE. These intangible assets are being
amortized over 40 years. The increase in amortization expense results from nine
months of IFE activity for the nine-month period ended March 31, 1999 as
compared to eight months of activity for the nine months ended March 31, 1998.
The equity in loss of unconsolidated affiliate represents the Company's
portion of the loss generated by TV10, a cable network based in The Netherlands.
The Company has entered into an agreement, which is subject to approval of the
Company's lender under the Amended Credit Facility (defined below), to sell 50%
of its interest in TV10 to an affiliate.
Interest expense increased by $27.3 million for the nine-month period
ended March 31, 1999, as compared to the same period in 1998. The increase is
principally due to interest on the debt and long-term liabilities incurred in
connection with the acquisition of IFE plus the offering described below.
The Company's provision for income taxes for the nine-month period ended
March 31, 1999 reflects foreign withholding taxes.
Due primarily to the amount of interest expense, the Company does not
expect to report net income for fiscal 1999.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1998
For the three-month period ended March 31, 1999, revenues decreased
15.7% to $129.4 million as compared to $153.4 million for the same three-month
period of the prior year. The decrease in revenues for the current quarter
primarily relates to lower revenues for the Company's direct-to-video releases
and lower advertising sales revenue for the Fox Family Channel offset by an
increase in Fox Family Channel subscriber fees. In the prior year period, the
Company released "Casper: A Spirited Beginning" and "Turbo: A Power Rangers
Movie" which generated revenue of $11.9 million. No such revenue was generated
in the current year by the Company's new releases.
Production and programming costs for the three-month period ended March
31, 1999 decreased 26.2% to $57.2 million as compared to $77.5 million for the
same three-month period of the prior year. Production and programming costs as a
percentage of total revenues decreased to 44.2% for the three-month period ended
March 31, 1999 from 50.5% for the comparable prior year period. These decreases
are attributable principally to the decrease in direct-to-video revenues
discussed above and to a lesser extent, lower amortization expense associated
with the Company's current period revenue mix.
Selling, general and administrative expenses increased 10.6% to $35.8
million for the three-month period ended March 31, 1999, from $32.3 million for
the same three months of the prior year. This increase is due principally to
various one-time costs of $4.6 million incurred in connection with the
rebranding of the Fox Family Channel.
Interest expense increased by $2.9 million for the three-month period
ended March 31, 1999, as compared to the same three-month period in 1998. The
increase is principally due to increased interest expense on the Company's
subordinated debt and imputed interest on long-term Fox Family Channel film
contracts partially offset by lower interest rates on the bank facility.
The Company's provision for income taxes for the three-month period
ended March 31, 1999 reflects foreign withholding taxes.
Page 8
LIQUIDITY AND CAPITAL RESOURCES
In September 1997, the Company completed the acquisition of IFE (the
"IFE Acquisition"). The total consideration for the IFE Acquisition was
approximately $1.9 billion, including assumption of debt, and was financed by
(i) the borrowing of $1.25 billion under a credit facility (the "Old Credit
Facility"), (ii) the issuance of approximately $345 million of Series A
Preferred Stock to Liberty IFE, Inc. ("Liberty IFE") and (iii) the issuance of a
note to News America Incorporated in the amount of $345.5 million (the "News
America Bridge Note"). In October 1997, the Company completed an offering (the
"Offering") of 9 1/4% Senior Notes due 2007 and 10 1/4% Senior Discount Notes
due 2007 (collectively, the "Company Notes"), generating net proceeds to the
Company of approximately $830 million. Of the net proceeds from the Offering,
$215 million was used to repay a portion of the News America Bridge Note and the
balance of $615 million was used to repay indebtedness under the Company's Old
Credit Facility. Approximately $116.1 million (including accreted interest) was
outstanding under the News America Bridge Note at March 31, 1999; however, no
payments are due under the News America Bridge Note until March 2008.
In October 1997, as part of the Offering, the Company amended the Old
Credit Facility to a new credit facility (the "Amended Credit Facility") which
includes a $710 million facility, comprised of a seven-year amortizing term loan
and a seven-year reducing revolving credit facility. The Amended Credit Facility
is scheduled to terminate September 29, 2004. Borrowings under the Amended
Credit Facility bear interest, at the Company's option, at a rate per annum
equal to either LIBOR plus a 1.5% interest rate margin or a base rate plus a .5%
interest rate margin. As of March 31, 1999, $75 million was available under the
Amended Credit Facility for additional borrowings subject to certain
restrictions. Consequently, the Company's principal sources of liquidity include
borrowings under the Amended Credit Facility and cash generated from operations.
As a result of the IFE Acquisition and the financing transactions
described above, the Company's principal liquidity requirements arise from
interest and dividend payments. 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.
Net cash provided by operating activities of the Company for the nine
months ended March 31, 1999 was $270.1 million as compared to $290.7 million for
the nine months ended March 31, 1998, primarily reflecting one-time costs
incurred in connection with the rebranding of the Fox Family Channel and
expansion of the Company's international channel activities.
Net cash used in investing activities of the Company during the nine
months ended March 31, 1999 and 1998 was $288.3 million and approximately $1.6
billion, respectively. The net cash flow used in investing activities for the
nine months ended March 31, 1999 primarily related to additions to programming
costs. The Company's net cash flow used in investing activities for the nine
months ended March 31, 1998 primarily related to the IFE Acquisition as
described above and additions to programming costs.
Net cash provided by (used in) financing activities of the Company
during the nine months ended March 31, 1999 and 1998 was $(25.6) million and
approximately $1.4 billion, respectively. The financing activities for the nine
months ended March 31, 1999 related to payments of dividends and paydown of bank
borrowings while the financing activities for the nine months ended March 31,
1998 related to bank and other borrowings in connection with the IFE
Acquisition.
The Company's total unrestricted cash and cash equivalents balance at
March 31, 1999 was $38.6 million.
The Company believes that the available borrowings under the Amended
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 9
IMPACT OF YEAR 2000
The Year 2000 issue is the result of computer programs being written
using two digits instead of four to define the applicable year. Any of the
Company's computer programs that have time-sensitive software or facilities or
equipment containing embedded micro-controllers may recognize a date using "00"
as the year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing potential disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
The Company's Year 2000 compliance project is divided into two areas:
information technology and non-information technology. The Company began its
Year 2000 information technology project in June 1998 and has completed its
assessment of the significant software applications and equipment used in the
Company's operations. The Company has substantially completed the modification
or replacement of its software so that its computer systems will function
properly with respect to dates in the year 2000 and thereafter. The Company is
also in the process of testing and implementing both software and hardware
changes where required. The Company expects that these phases of the project
will continue through the end of the second calendar quarter of 1999.
With respect to the Company's Year 2000 project for non-information
technology, the Company has identified two areas which require attention:
engineering and operations. The assessment phase of the engineering project and
the operations project are in process. The Company has engaged the services of a
consulting firm to review all phases completed to date, to assist the Company
with testing and to help the Company build its contingency plan. With the
assistance of the consultant, the Company's goal is to complete all phases of
its information technology and non-information technology project by the end of
the second calendar quarter of 1999.
The Company is in the process of contacting its key vendors and
customers to determine if there are any significant Year 2000 exposures which
would have a material effect on the Company. However, if the Company, its
customers or vendors are unable to resolve any Year 2000 compliance problems in
a timely manner, it could result in a material financial risk. Accordingly,
management plans to devote the resources it concludes are appropriate to resolve
all significant Year 2000 problems in a timely manner.
The Year 2000 project cost has not been material to date and, based on
preliminary information, is not currently anticipated to have a material adverse
effect on the Company's financial condition, results of operations or cash flows
in future periods.
Based upon its efforts to date, the Company continues to believe that
the vast majority of its systems will be able to process date-related data
without error after January 1, 2000. Accordingly, the Company does not currently
anticipate that internal systems failures will result in any material adverse
effect to its operations or financial condition. At this time, the Company
continues to believe that the most likely "worst-case" scenario involves
potential disruptions in areas in which the Company's operations must rely on
third parties whose systems may not work properly after January 1, 2000. While
such failures could affect important operations of the Company and its
subsidiaries, either directly or indirectly, in a significant manner, the
Company cannot, at present, estimate either the likelihood or the potential cost
of such failures.
Readers are cautioned that forward-looking statements contained in this
Year 2000 disclosure should be read in conjunction with the Company's
disclosures under the heading "Factors That Could Impact Future Results" in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1998.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third-party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved, or that there will not be a delay in, or increased costs associated
with, the implementation of the Company's Year 2000 compliance project. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, timely responses to and
corrections by third parties and suppliers, the ability to implement interfaces
between the new systems and the systems not being replaced, and similar
uncertainties. Due to the general uncertainty inherent in the Year 2000
readiness of third parties and the interconnection of national and international
businesses, the Company cannot ensure that its ability to timely and cost
effectively resolve problems associated with the Year 2000 issue will not affect
its operations and business, or expose it to third party liability.
Page 10
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 11
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:
10.1 Employment Agreement dated as of April 1, 1999 between
Mel Woods, on the one hand, and Fox Family Management,
LLC and Fox Family Worldwide, Inc., on the other hand.
10.2 First Amendment to Employment Agreement dated as of
April 1, 1999 between Saban Entertainment, Inc. and
Mark Ittner.
27.1 Financial Data Schedule.
(b) REPORTS ON FORM 8-K:
None.
Page 12
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, 1999 /S/ MEL WOODS
-------------
Mel Woods
President, Chief Operating Officer
and Chief Financial Officer
Page 13
EXHIBIT INDEX
ITEM EXHIBIT PAGE
- ---- ------- -----
10.1 Employment Agreement dated as of April 1, 1999 between
Mel Woods, on the one hand, and Fox Family Management,
LLC and Fox Family Worldwide, Inc., on the other hand
10.2 First Amendment to Employment Agreement dated as of
April 1, 1999 between Mark Ittner and Saban Entertainment, Inc.
27.1 Financial Data Schedule
Page 14