SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2005 |
For the quarterly period ended March 31, 2005
or
¨ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to |
For the transition period fromto
Commission file number 001-32352
NEWS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware | 26-0075658 | |
(State or Other Jurisdiction Incorporation or Organization) | (I.R.S. Employer
|
1211 Avenue of the Americas, New York, New York | 10036 | ||
(Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including area code (212) 852-7000
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes x No ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ¨ No x
As of May 4,November 8, 2005, 2,251,413,2582,214,840,541 shares of Class A Common Stock, par value $0.01 per share, and 1,044,776,1581,029,576,988 shares of Class B Common Stock, par value $0.01 per share, were outstanding.
FORM 10-Q
TABLE OF CONTENTS
Page | ||||||
Part I. | Financial Information | |||||
Item 1. | Financial Statements | |||||
3 | ||||||
4 | ||||||
5 | ||||||
6 | ||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and | |||||
Item 3. | ||||||
Item 4. | ||||||
Other Information | ||||||
Item 1. | ||||||
Item 2. | 62 | |||||
Item 3. | 62 | |||||
Item 4. | 62 | |||||
Item 5. | 62 | |||||
Item 6. | ||||||
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
For the three months ended March 31, | For the nine months ended | For the three months ended September 30, | ||||||||||||||||||||||
2005 | 2004 | 2005 | 2004 | 2005 | 2004 | |||||||||||||||||||
Revenues | $ | 6,043 | $ | 5,164 | $ | 17,751 | $ | 15,332 | $ | 5,682 | $ | 5,146 | ||||||||||||
Expenses: | ||||||||||||||||||||||||
Operating expenses | 4,060 | 3,384 | 11,925 | 10,268 | ||||||||||||||||||||
Operating | 3,639 | 3,380 | ||||||||||||||||||||||
Selling, general, and administrative | 918 | 816 | 2,715 | 2,379 | 959 | 859 | ||||||||||||||||||
Depreciation and amortization | 176 | 149 | 453 | 428 | 175 | 128 | ||||||||||||||||||
Other operating charge | — | — | 49 | — | — | 13 | ||||||||||||||||||
Operating income | 889 | 815 | 2,609 | 2,257 | 909 | 766 | ||||||||||||||||||
Other (expense) income: | ||||||||||||||||||||||||
Other (Expense) Income: | ||||||||||||||||||||||||
Interest expense, net | (143 | ) | (136 | ) | (405 | ) | (400 | ) | (128 | ) | (125 | ) | ||||||||||||
Equity earnings (losses) of affiliates | 91 | 71 | 154 | 88 | ||||||||||||||||||||
Equity earnings of affiliates | 186 | 15 | ||||||||||||||||||||||
Other, net | (62 | ) | 14 | 15 | 34 | 11 | 191 | |||||||||||||||||
Income before income tax expense and minority interest in subsidiaries | 775 | 764 | 2,373 | 1,979 | ||||||||||||||||||||
Income before income tax expense, minority interest in subsidiaries and cumulative effect of accounting change | 978 | 847 | ||||||||||||||||||||||
Income tax expense | (317 | ) | (282 | ) | (773 | ) | (725 | ) | (382 | ) | (180 | ) | ||||||||||||
Minority interest in subsidiaries, net of tax | (58 | ) | (48 | ) | (189 | ) | (150 | ) | (16 | ) | (42 | ) | ||||||||||||
Net income | $ | 400 | $ | 434 | $ | 1,411 | $ | 1,104 | ||||||||||||||||
Income before cumulative effect of accounting change | 580 | 625 | ||||||||||||||||||||||
Cumulative effect of accounting change, net of tax | (1,013 | ) | — | |||||||||||||||||||||
Basic earnings per share: | ||||||||||||||||||||||||
Net (loss) income | $ | (433 | ) | $ | 625 | |||||||||||||||||||
Basic (losses) earnings per share: | ||||||||||||||||||||||||
Income before cumulative effect of accounting change | ||||||||||||||||||||||||
Class A | $ | 0.14 | $ | 0.16 | $ | 0.51 | $ | 0.43 | 0.19 | 0.23 | ||||||||||||||
Class B | $ | 0.12 | $ | 0.13 | $ | 0.43 | $ | 0.36 | 0.16 | 0.19 | ||||||||||||||
Diluted earnings per share: | ||||||||||||||||||||||||
Cumulative effect of accounting change, net of tax | ||||||||||||||||||||||||
Class A | $ | 0.14 | $ | 0.16 | $ | 0.50 | $ | 0.42 | (0.33 | ) | — | |||||||||||||
Class B | $ | 0.12 | $ | 0.13 | $ | 0.42 | $ | 0.35 | (0.27 | ) | — | |||||||||||||
Net (loss) income | ||||||||||||||||||||||||
Class A | (0.14 | ) | 0.23 | |||||||||||||||||||||
Class B | (0.12 | ) | 0.19 | |||||||||||||||||||||
Diluted (losses) earnings per share: | ||||||||||||||||||||||||
Income before cumulative effect of accounting change | ||||||||||||||||||||||||
Class A | 0.19 | 0.22 | ||||||||||||||||||||||
Class B | 0.15 | 0.19 | ||||||||||||||||||||||
Cumulative effect of accounting change, net of tax | ||||||||||||||||||||||||
Class A | (0.32 | ) | — | |||||||||||||||||||||
Class B | (0.27 | ) | — | |||||||||||||||||||||
Net (loss) income | ||||||||||||||||||||||||
Class A | (0.14 | ) | 0.22 | |||||||||||||||||||||
Class B | (0.11 | ) | 0.19 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share amounts)
At March 31, 2005 | At June 30, 2004 | At September 30, 2005 | At June 30, 2005 | |||||||||||||
(unaudited) | (audited) | (unaudited) | (audited) | |||||||||||||
Assets | ||||||||||||||||
Current assets: | ||||||||||||||||
Current Assets: | ||||||||||||||||
Cash and cash equivalents | $ | 5,993 | $ | 4,051 | $ | 6,450 | $ | 6,470 | ||||||||
Cash on deposit | — | 287 | ||||||||||||||
Receivables, net | 5,016 | 4,214 | 4,697 | 4,353 | ||||||||||||
Inventories, net | 1,745 | 1,530 | 1,742 | 1,516 | ||||||||||||
Deferred income taxes | 355 | 521 | 84 | 155 | ||||||||||||
Other | 307 | 396 | 337 | 285 | ||||||||||||
Total current assets | 13,416 | 10,999 | ||||||||||||||
Total Current Assets | 13,310 | 12,779 | ||||||||||||||
Non-current assets: | ||||||||||||||||
Receivables | 740 | 766 | 730 | 673 | ||||||||||||
Investments | 11,169 | 10,914 | 10,352 | 10,268 | ||||||||||||
Inventories, net | 2,366 | 2,669 | 2,551 | 2,366 | ||||||||||||
Property, plant, and equipment, net | 4,440 | 3,796 | 4,452 | 4,346 | ||||||||||||
Intangible assets | 11,383 | 10,998 | 10,946 | 12,517 | ||||||||||||
Goodwill | 11,159 | 7,153 | 11,723 | 10,944 | ||||||||||||
Other non-current assets | 910 | 1,048 | 796 | 799 | ||||||||||||
Total non-current assets | 42,167 | 37,344 | ||||||||||||||
Total Non-current Assets | 41,550 | 41,913 | ||||||||||||||
Total assets | $ | 55,583 | $ | 48,343 | $ | 54,860 | $ | 54,692 | ||||||||
Liabilities and Shareholders’ Equity | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||
Current Liabilities: | ||||||||||||||||
Borrowings | $ | 918 | $ | 1,084 | $ | 924 | $ | 912 | ||||||||
Accounts payable, accrued expenses and other current liabilities | 4,331 | 3,963 | 4,735 | 3,564 | ||||||||||||
Participations, residuals and royalties payable | 1,114 | 890 | 1,049 | 1,051 | ||||||||||||
Program rights payable | 815 | 654 | 750 | 696 | ||||||||||||
Deferred revenue | 556 | 467 | 505 | 426 | ||||||||||||
Total current liabilities | 7,734 | 7,058 | ||||||||||||||
Total Current Liabilities | 7,963 | 6,649 | ||||||||||||||
Non-current liabilities: | ||||||||||||||||
Non-current Liabilities: | ||||||||||||||||
Borrowings | 10,013 | 9,080 | 10,100 | 10,087 | ||||||||||||
Other liabilities | 3,813 | 3,878 | 3,653 | 3,543 | ||||||||||||
Deferred income taxes | 4,051 | 3,620 | 4,410 | 4,817 | ||||||||||||
Minority interest in subsidiaries | 198 | 3,832 | 204 | 219 | ||||||||||||
Commitments and contingencies | ||||||||||||||||
Shareholders’ Equity: | ||||||||||||||||
Class A common stock, $0.01 par value per share, 6,000,000,000 shares authorized, 2,222,387,506 shares and 1,934,840,645 shares issued and outstanding, net of 1,739,914,819 and 0 treasury shares at par at March 31, 2005 and June 30, 2004, respectively | 22 | 19 | ||||||||||||||
Class B common stock, $0.01 par value per share, 3,000,000,000 shares authorized, 1,044,776,157 shares and 1,049,962,215 shares issued and outstanding, net of 313,721,702 and 0 treasury shares at par at March 31, 2005 and June 30, 2004, respectively | 10 | 11 | ||||||||||||||
Stockholders’ Equity: | ||||||||||||||||
Class A Common Stock, $0.01 par value per share, 6,000,000,000 shares authorized, 2,225,622,283 shares and 2,237,072,659 shares issued and outstanding, net of 1,739,914,819 treasury shares at par at September 30, and June 30, 2005, respectively | 22 | 22 | ||||||||||||||
Class B Common Stock, $0.01 par value, 3,000,000,000 shares authorized, 1,029,576,988 shares issued and outstanding, net of 313,721,702 treasury shares at par at September 30, and June 30, 2005 | 10 | 10 | ||||||||||||||
Additional paid-in capital | 30,564 | 23,636 | 29,589 | 30,044 | ||||||||||||
Accumulated deficit and accumulated other comprehensive loss | (822 | ) | (2,791 | ) | (1,091 | ) | (699 | ) | ||||||||
Total shareholders’ equity | 29,774 | 20,875 | ||||||||||||||
Total stockholders’ equity | 28,530 | 29,377 | ||||||||||||||
Total liabilities and shareholders’ equity | $ | 55,583 | $ | 48,343 | ||||||||||||
Total liabilities and stockholders’ equity | $ | 54,860 | $ | 54,692 | ||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
For the nine months ended March 31, | For the three months ended September 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Operating activities: | �� | |||||||||||||||
Net income | $ | 1,411 | $ | 1,104 | ||||||||||||
Adjustments to reconcile net income to cash (used in) provided by operating activities: | ||||||||||||||||
Net (loss) income | $ | (433 | ) | $ | 625 | |||||||||||
Adjustments to reconcile net (loss) income to cash provided by operating activities: | ||||||||||||||||
Cumulative effect of accounting change, net of tax | 1,013 | — | ||||||||||||||
Depreciation and amortization | 453 | 428 | 175 | 128 | ||||||||||||
Amortization of cable distribution investments | 86 | 94 | 27 | 30 | ||||||||||||
Equity earnings of affiliates | (154 | ) | (88 | ) | (186 | ) | (15 | ) | ||||||||
Cash distributions received from investees | 78 | 31 | 15 | 3 | ||||||||||||
Other, net | (15 | ) | (34 | ) | (11 | ) | (191 | ) | ||||||||
Minority interest in subsidiaries, net of tax | 189 | 150 | 16 | 42 | ||||||||||||
Change in operating assets and liabilities, net of acquisitions: | ||||||||||||||||
Receivables and other assets | (612 | ) | (370 | ) | (470 | ) | (562 | ) | ||||||||
Inventories, net | 20 | (420 | ) | (399 | ) | (146 | ) | |||||||||
Accounts payable and other liabilities | 857 | 1,104 | 750 | 668 | ||||||||||||
Net cash provided by operating activities | 2,313 | 1,999 | 497 | 582 | ||||||||||||
Investing activities: | ||||||||||||||||
Property, plant, and equipment, net of acquisitions | (710 | ) | (213 | ) | ||||||||||||
Property, plant, and equipment | (199 | ) | (135 | ) | ||||||||||||
Acquisitions, net of cash acquired | (141 | ) | (151 | ) | (238 | ) | (34 | ) | ||||||||
Investments in equity affiliates | (142 | ) | (3,213 | ) | ||||||||||||
Investments in associated entities | (19 | ) | (44 | ) | ||||||||||||
Other investments | (30 | ) | (64 | ) | — | (26 | ) | |||||||||
Proceeds from sale of non-current assets | 643 | 549 | ||||||||||||||
Proceeds from sale of investments, non-current assets and business disposals | 114 | 124 | ||||||||||||||
Net cash used in investing activities | (380 | ) | (3,092 | ) | (342 | ) | (115 | ) | ||||||||
Financing activities: | ||||||||||||||||
Borrowings | 1,776 | 440 | 6 | — | ||||||||||||
Repayment of borrowings and exchangeable securities | (2,095 | ) | (616 | ) | ||||||||||||
Repayment of borrowings | (5 | ) | (655 | ) | ||||||||||||
Cash on deposit | 275 | 163 | — | 275 | ||||||||||||
Issuance of shares | 65 | 545 | 29 | 14 | ||||||||||||
Repurchase of shares | (213 | ) | — | |||||||||||||
Dividends paid | (124 | ) | (106 | ) | (1 | ) | (7 | ) | ||||||||
Net cash (used in) provided by financing activities | (103 | ) | 426 | |||||||||||||
Net cash used in financing activities | (184 | ) | (373 | ) | ||||||||||||
Net increase (decrease) in cash and cash equivalents | 1,830 | (667 | ) | |||||||||||||
Cash and cash equivalents, beginning of year | 4,051 | 4,477 | ||||||||||||||
Net (decrease) increase in cash and cash equivalents | (29 | ) | 94 | |||||||||||||
Cash and cash equivalents, beginning of period | 6,470 | 4,051 | ||||||||||||||
Exchange movement on opening cash balance | 112 | 59 | 9 | 3 | ||||||||||||
Cash and cash equivalents, end of period | $ | 5,993 | $ | 3,869 | $ | 6,450 | $ | 4,148 | ||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Basis of Presentation
On November 12, 2004, a new Delaware corporation named News Corporation became, through a wholly-owned subsidiary named News Australia Holdings Pty Ltd (“News Australia Holdings”), the parent of News Holdings Limited (formerly known as The News Corporation Limited), an Australian corporation (“TNCL” or for periods prior to November 12, 2004, the “Company”). We referThese transactions are collectively referred to these transactions collectively as the “Reorganization.”
In the Reorganization, all outstanding TNCL ordinary shares and preferred limited voting ordinary shares were cancelled and shares of the Company’s Class A common stock (“Class A Common Stock”) and Class B common stock (“Class B Common Stock and Class A Common Stock, respectively,Stock”), were issued in exchange on a one for two share basis. The financial statements have been presented as if the one for two share exchange took place on July 1, 2003.2004.
News Corporation (the “Company”) is a diversified entertainment and media company. The Company manages and reports its businesses in eight segments, which are: Filmed Entertainment, Television, Cable Network Programming, Direct Broadcast Satellite Television, Magazines and Inserts, Newspapers, Book Publishing and Other.
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments consisting only of normal recurring adjustments necessary for a fair presentation have been reflected in these unaudited consolidated financial statements. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2005.2006.
These interim unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2004 included in the Company’s Current Report on Form 8-K2005 as filed with the Securities and Exchange Commission (“SEC”) on November 24, 2004.September 1, 2005.
The preparation of consolidated financial statements in conformity with GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates.
Certain fiscal 20042005 amounts have been reclassified to conform to the fiscal 20052006 presentation.
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1- Basis of Presentation (continued)
The Company follows the disclosure-only provisions ofIn accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” and in accordance with its provisions, applies the intrinsic value method set forth in Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees.”
The following table reflects the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions for stock-based employee compensation. These pro forma effects are not representative of future amounts since the estimated fair value of stock options on the date of grant is amortized to expense over the vesting period, additional options may be granted in future years and the vesting of certain options was accelerated on May 3, 2005 (See Note 14).
For the three months ended March 31, | For the nine months ended March 31, | |||||||||||||||
�� | 2005 | 2004 | 2005 | 2004 | ||||||||||||
(in millions, except per share data) | ||||||||||||||||
Net income, as reported | $ | 400 | $ | 434 | $ | 1,411 | $ | 1,104 | ||||||||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | (18 | ) | (22 | ) | (51 | ) | (66 | ) | ||||||||
Pro forma net income | $ | 382 | $ | 412 | $ | 1,360 | $ | 1,038 | ||||||||
As reported: | ||||||||||||||||
Basic earnings per share | ||||||||||||||||
Class A | $ | 0.14 | $ | 0.16 | $ | 0.51 | $ | 0.43 | ||||||||
Class B | $ | 0.12 | $ | 0.13 | $ | 0.43 | $ | 0.36 | ||||||||
Diluted earnings per share | ||||||||||||||||
Class A | $ | 0.14 | $ | 0.16 | $ | 0.50 | $ | 0.42 | ||||||||
Class B | $ | 0.12 | $ | 0.13 | $ | 0.42 | $ | 0.35 | ||||||||
Pro forma: | ||||||||||||||||
Basic earnings per share | ||||||||||||||||
Class A | $ | 0.14 | $ | 0.15 | $ | 0.49 | $ | 0.40 | ||||||||
Class B | $ | 0.12 | $ | 0.12 | $ | 0.41 | $ | 0.34 | ||||||||
Diluted earnings per share | ||||||||||||||||
Class A | $ | 0.14 | $ | 0.15 | $ | 0.48 | $ | 0.40 | ||||||||
Class B | $ | 0.11 | $ | 0.12 | $ | 0.40 | $ | 0.33 |
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R), “Share-Based Payment.” This standard will require the cost of employee compensation paid with equity instruments to be measured based on grant-date fair values. That cost will be recognized over the vesting period. SFAS No. 123(R) will become effective for the Company in the first quarter of fiscal 2006. An illustration of the impact on the Company using a Black-Scholes option valuation methodology is presented above.
In accordance with SFAS No. 130, “Reporting Comprehensive Income,” total comprehensive income for the Company consists of the following:
For the three months ended March 31, | For the nine months ended March 31, | ||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||
(in millions) | |||||||||||||
Net income, as reported | $ | 400 | $ | 434 | $ | 1,411 | $ | 1,104 | |||||
Other comprehensive income: | |||||||||||||
Foreign currency translation adjustments | (22 | ) | 30 | 521 | 844 | ||||||||
Unrealized holding gains on securities, net of tax | 17 | 8 | 37 | 26 | |||||||||
Total comprehensive income | $ | 395 | $ | 472 | $ | 1,969 | $ | 1,974 | |||||
For the three months ended September 30, | ||||||||
2005 | 2004 | |||||||
(in millions) | ||||||||
Net (loss) income, as reported | $ | (433 | ) | $ | 625 | |||
Other comprehensive income: | ||||||||
Foreign currency translation adjustments | 83 | 56 | ||||||
Unrealized holding (losses) gains on securities, net of tax | (42 | ) | (8 | ) | ||||
Total comprehensive (loss) income | $ | (392 | ) | $ | 673 | |||
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Basis of Presentation (continued)STATEMENTS—(Continued)
Recent Accounting Pronouncements
In October 2004, the American Jobs Creation Act (the “Act”) was signed into law. The Jobs Creation Act includes a temporary incentive for U.S. multinationals to repatriate foreign earnings at an effective 5.25 percent tax rate. Such repatriations must occur in either an enterprise’s last tax year that began before the enactment date, or the first tax year that begins during the one-year period beginning on the date of enactment. In December 2004, the FASBFinancial Accounting Standards Board (“FASB”) issued a FASB Staff Position, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (“FSP FAS 109-2”). FSP FAS 109-2 allows companies additional time to evaluate the effect of the Act as to whether unrepatriated foreign earnings continue to qualify for the SFAS No. 109, “Accounting for Income Taxes,” exception regarding non-recognition of deferred tax liabilities and would require explanatory disclosures from those who need the additional time. The Company is currently considering the effects of the repatriation provisions of the Act. Through March 31,September 30, 2005, the Company has not provided deferred taxes on substantially all of the undistributed earnings of foreign subsidiaries since substantially all such earnings were expected to be permanently invested in foreign operations but has started an evaluation of the effects of the repatriation provision. Whether the Company will ultimately take advantage of this provision depends on a number of factors, including reviewing future Congressional or Treasury Department guidance, before a determination can be made. The range of possible amounts that the Company is considering for repatriation under this provision is up to approximately $500 million. The related potential range of income tax is up to approximately $30 million.
In September 2004,May 2005, the Emerging Issues Task ForceFASB issued TopicSFAS No. D-108, “Use154, “Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3.” This standard establishes, unless impracticable, retrospective application as the Residual Method to Value Acquired Assets Other Than Goodwill” (“Topic D-108”). Topic D-108 requiresrequired method for reporting a direct value method, rather thanchange in accounting principle in the residual value method, be used to value intangible assets other than goodwill for such assets acquired in business combinations completed after September 29, 2004. Topic D-108 also requires that registrants who have applied the residual methodabsence of explicit transition requirements specific to the valuation of intangible assetsnewly adopted accounting principle. SFAS No. 154 will become effective for purposes of impairment testing should perform an impairment test using a direct value method for such intangibles no later than the beginning of their first fiscal year beginning after December 15, 2004. The Company has used the residual value method to value its broadcast licenses. Pursuant to the provisions of Topic D-108, the Company plans to utilize a direct methodfor accounting changes and corrections of valuation for an impairment test to be performed as of July 1, 2005. The Company has not yet evaluated the impact of adopting Topic D-108 on its financial position, results of operations or cash flows.
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSerrors beginning in fiscal 2007.
Note 2 – Incorporation in the United States2—Acquisitions and Disposals
On November 12, 2004, the Reorganization was accomplished under Australian law whereby the holders of TNCL’s ordinary and preferred limited voting ordinary shares, including those ordinary shares and preferred limited voting ordinary shares represented by American Depositary Shares, had their shares cancelled and received in exchange shares of Class B Common Stock and Class A Common Stock of News Corporation, respectively, on a one for two share basis. Reorganization costs expensed during the nine month period ended March 31, 2005 amounted to $49 million and are included in Other operating charge in the unaudited consolidated statements of operations.
As a result of the Reorganization, News Corporation became the parent company of TNCL. News Corporation has a primary listing on the New York Stock Exchange and secondary listings on the Australian Stock Exchange and the London Stock Exchange.Fiscal 2006 Transactions
In connection with the Reorganization, the Company acquired from the Murdoch Interests the approximate 58% interest in Queensland Press Pty Limited (“QPL”) not already owned bySeptember 2005, the Company through the acquisitionits wholly owned subsidiary acquired all of the Cruden Groupoutstanding common and preferred stock of companies. The Murdoch Interests are certain trusts, the beneficiaries of which include Mr. K.R. Murdoch, members of his family and certain charities. The principal assets of the Cruden Group were shares of the Company and a 58% interest in QPL. QPL owns a publishing business which includes two metropolitan and eight regional newspapers in Queensland, Australia, as well as shares of News Corporation. This transaction has been accounted for as a purchase in accordance with SFAS No. 141, “Business Combinations”Intermix Media, Inc. (“SFAS No. 141”Intermix”). The consideration for the Intermix acquisition ofwas approximately $580 million in cash which was paid subsequent to quarter end. The Company acquired Intermix in order to increase the net assets of the Cruden Group, excluding shares of the Company owned directlyCompany’s Internet presence through the Cruden Group and indirectly (through QPL), was the issuance of approximately 60 million shares of Class B Common Stock valued at approximately $1 billion and the assumption of approximately $400 million of debt. All of the debt assumed was retired in November 2004.its recently formed Fox Interactive Media unit. The excess purchase price over the fair value of the net assets acquired of approximately $1.2 billion$576 million has been preliminarily allocated to certain indefinite-lived intangibles and goodwill, which in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets” (“SFAS No. 142”) areis not being amortized. The allocation of the excess is not final and is subject to changes upon completion of final valuations of certain assets and liabilities. A future reduction in goodwill for additional value to be assigned to identifiable finite-lived intangible assets or tangible assets could reduce future earnings as a result of additional amortization. For every $100 million reduction in goodwill for additional value to be assigned to identifiable finite-lived intangible assets or tangible assets, Depreciation and amortization expense would increase by approximately $10 million per year representing amortization expense assuming an average useful life of 10ten years. The resultsSee Note 16—Subsequent Events.
In September 2005, the Company acquired Scout Media, Inc., the parent company of QPL have been includedScout.com, the country’s leading independent online sports network, and Scout Publishing, producer of widely read local sports magazines in the U.S., for approximately $60 million.
In September 2005, the Company acquired the 25% stake in News Out of Home (“NOOH”) held by Capital International Global Emerging Markets Private Equity Fund, L.P. for approximately $175 million in cash. This
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
acquisition increases the Company’s consolidated statementsownership of operationsNOOH to 100%. NOOH owns 68% of Media Support Services Limited, an outdoor advertising company with operating subsidiaries located in Russia and NOOH also owns and operates outdoor advertising companies located in Eastern Europe.
Fiscal 2005 Transactions
Incorporation in the United States
In April 2004, the Company announced that it would pursue a reorganization that would change the Company’s place of incorporation from Australia to the United States. In August 2004, the Company announced that a Special Committee of Non-executive Directors and the Board of Directors of the Company had unanimously recommended the proposed reorganization of the Company. On October 26, 2004, the reorganization was approved by the Company’s stockholders and option holders and on November 3, 2004, the Federal Court of Australia also approved the reorganization.
On November 12, 2004, the dateproposed reorganization was accomplished under Australian law whereby the holders of acquisition.TNCL’s ordinary and preferred shares, including those ordinary shares and preferred limited voting ordinary shares represented by American Depositary Receipts (“ADRs”), had their shares cancelled and received in exchange shares of voting and non-voting common stock of News Corporation at a one-for-two ratio. Reorganization costs expensed during fiscal 2005 amounted to $49 million and were included in Other operating charge in the Other segment in the consolidated statements of operations. Of these costs, $13 million and $36 million were expensed in the first and second quarter of fiscal 2005, respectively.
In connection with this reorganization, the Company acquired from the A.E. Harris Trust (the “Harris Trust”) the approximate 58% interest in Queensland Press Pty Ltd. (“QPL”) not already owned by the Company through the acquisition of the Cruden Group of companies. The principal assets of the Cruden Group were shares of the Company and a 58% interest in QPL. QPL owns a publishing business which includes two metropolitan and eight regional newspapers in Queensland, Australia, as well as shares of News Corporation. The consideration for the acquisition of the net assets of the Cruden Group, excluding shares of the Company owned directly through the Cruden Group and indirectly (through QPL) by the Cruden Group, was the issuance of approximately 61 million shares of Class B Common Stock valued at approximately $1 billion and the assumption of approximately $400 million of debt. All of the debt assumed was retired in November 2004. The excess purchase price over the fair value of the net assets acquired of approximately $1.3 billion has been allocated to newspaper mastheads and goodwill, which in accordance with SFAS No. 142 are not being amortized. As a result of the purchase of this interest in QPL, the Company’s ownership interest in QPL increased from 42% to 100% and accordingly on November 12, 2004, the Company ceased to equity account for QPL. The results of QPL have been included in the Company’s consolidated statements of operations from November 12, 2004, the date of acquisition.
As a result of the reorganization, News Corporation became the new parent company of TNCL. News Corporation has a primary listing on the New York Stock Exchange and secondary listings on the Australian Stock Exchange and the London Stock Exchange.
In exchange for the approximately 78 million shares of Class A Common Stock and approximately 247 million shares of Class B Common Stock which were owned directly through the Cruden Group and indirectly (through QPL) by the Cruden Group, the Murdoch InterestsHarris Trust received shares of News Corporation in the same exchange ratio as all other holders of Company sharesTNCL stockholders in the Reorganization.reorganization. The number of shares of Class A Common StockNews Corporation non-voting stock that the Murdoch InterestsHarris Trust received waswere reduced by the number of shares equal in value to the net debt and certain other net liabilities of the Cruden Group which were assumed by the Company in the transaction. InThe shares issued to the Reorganization, the Murdoch Interests Harris Trust
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
were issued approximately 6061 million shares of Class A Common Stock, and approximately 247 million shares of Class B Common Stock with an approximate value of $7$6 billion, and the Company assumed approximately $250 million of net debt and certain other net liabilities of the Cruden Group. All of the debt assumed was retired in November 2004.
The Company shares acquired through the acquisition of the Cruden Group as well as the shares which were indirectly owned by the Company through its 42% ownership interest in QPL prior to the acquisition are considered treasury shares. The treasury shares are accounted for using the par value method. Shares of Class A Common Stock and shares of Class B Common Stock related to this transaction that were held in treasury as a result of the acquisition of the Cruden Group at March 31,September 30, 2005 were approximately 109 million and 314 million, respectively.
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 3 – Investments
The Company’s investments were comprised Immediately following the reorganization, the Harris Trust owned approximately 29.5% of the following at:
March 31, 2005 | June 30, 2004 | |||||||
(in millions) | ||||||||
Equity investments: | ||||||||
The DIRECTV Group, Inc.(1)(4) | Direct Broadcast Satellite (“DBS”) (operator principally in the U.S.) | $ | 6,621 | $ | 6,813 | |||
Gemstar-TV Guide International Inc. (4) | U.S. print and electronic guidance company | 609 | 604 | |||||
Regional Programming Partners (2) | U.S. partnership holding interests in sporting networks, teams and arenas | 1,005 | 943 | |||||
British Sky Broadcasting Group plc (4) | U.K. DBS operator | 771 | 495 | |||||
China Network Systems | Taiwan cable TV operator | 222 | 250 | |||||
Independent Newspapers Limited | New Zealand media company | 321 | 315 | |||||
FOXTEL | Australian pay TV operator | 85 | 90 | |||||
National Geographic Channel (US) (3) | U.S. cable channel | 175 | 172 | |||||
National Geographic International | International cable channel | 77 | 71 | |||||
Other equity affiliates | 647 | 493 | ||||||
Cost investments | 636 | 668 | ||||||
$ | 11,169 | $ | 10,914 | |||||
DIRECTV
Investments in equity affiliates primarily reflect the Company’s investment in DIRECTV and includes the excessvoting shares of fair value over the Company’s proportionate share of DIRECTV’s underlying net assets at December 22, 2003, as adjusted to record such net assets at fair value, most notably the adjustment to the carrying value of DIRECTV’s SPACEWAY and PanAmSat businesses and assets and its deferred subscriber acquisition costs. This excess, approximately $3.6 billion, has been allocated to finite-lived intangibles, which are being amortized over lives ranging from 6-20 years, and to certain indefinite-lived intangibles and goodwill, which are not subject to amortization in accordance with SFAS No. 142.
Summarized financial information for DIRECTV, accounted for under the equity method, is as follows:
For the three months ended March 31, | For the nine months ended March 31, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
(in millions) | ||||||||||||||||
Revenues | $ | 3,148 | $ | 2,493 | $ | 9,372 | $ | 7,626 | ||||||||
Operating loss | (54 | ) | (96 | ) | (2,049 | ) | (265 | ) | ||||||||
(Loss) income from continuing operations before discontinued operations and cumulative effect of accounting changes | (41 | ) | 175 | (1,255 | ) | (134 | ) | |||||||||
Net loss | (41 | ) | (639 | ) | (1,338 | ) | (972 | ) |
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 3 – Investments (continued)
The Company’s share of DIRECTV’s losses for the nine months ended March 31, 2005 was $217 million and includes the Company’s share of DIRECTV’s increased loss from its sale of PanAmSat resulting from a reduction in the sales proceeds, the Company’s portion of the SPACEWAY program impairment and the amortization of certain finite-lived intangibles.
Note 4 – Inventories, net
Inventories, net consisted of the following at:
March 31, 2005 | June 30, 2004 | |||||||
(in millions) | ||||||||
Current inventories: | ||||||||
Raw materials | $ | 124 | $ | 98 | ||||
Work and projects in progress | 56 | 52 | ||||||
Finished goods | 135 | 139 | ||||||
Programming rights | 1,463 | 1,270 | ||||||
1,778 | 1,559 | |||||||
Less: inventory reserve | (33 | ) | (29 | ) | ||||
Total current inventories, net | 1,745 | 1,530 | ||||||
Non-current inventories: | ||||||||
Filmed entertainment costs: | ||||||||
Films: | ||||||||
Released (including acquired film libraries) | 706 | 734 | ||||||
Completed, not released | 150 | 125 | ||||||
In production | 365 | 545 | ||||||
In development or preproduction | 78 | 52 | ||||||
1,299 | 1,456 | |||||||
Television productions: | ||||||||
Released (including acquired libraries) | 453 | 449 | ||||||
Completed, not released | — | 13 | ||||||
In production | 203 | 112 | ||||||
In development or preproduction | 1 | 1 | ||||||
657 | 575 | |||||||
Total filmed entertainment costs, less accumulated amortization | 1,956 | 2,031 | ||||||
Programming rights | 410 | 638 | ||||||
Total non-current inventories | 2,366 | 2,669 | ||||||
Total inventories, net | $ | 4,111 | $ | 4,199 | ||||
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 5 – BorrowingsNews Corporation.
EurobondsFox Entertainment Group Acquisition
In July 2004, the Company retired the Eurobonds that were outstanding as of June 30, 2004.
New Millennium II
In May 2004, the Company ended the transfer term under the New Millennium II Agreement, the Company’s film financing vehicle, and ceased drawing any borrowings under the facility. During the nine months ended March 31, 2005, the Company fully repaid the remaining outstanding principal of $659 million under the facility that was outstanding as of June 30, 2004.
Notes due 2014 and Notes due 2034
On December 3, 2004, the Company issued approximately $750 million of 5.30% Senior Notes due 2014 and $1,000 million of 6.20% Senior Notes due 2034. The Company received proceeds of $1,743 million on the issuance of this debt, net of expenses.
Notes due 2005
On February 15, 2005, the Company repaid approximately $132 million in principal and $6 million in interest on the 8.5% Notes due February 2005.
LYONS
In February 2001, the Company issued Liquid Yield Option Notes (“LYONS™”) which pay no interest and have an aggregate principal amount at maturity of $1,515 million representing a yield of 3.5% per annum on the issue price. The holders may exchange the notes at any time into Class A shares of News Corporation or, at the option of the Company, the cash equivalent thereof at a fixed exchange rate of 24.2966 Class A shares per $1,000 note. The notes are redeemable at the option of the holders on February 28, 2006, February 28, 2011 and February 28, 2016 at a price of $594.25, $706.82 and $840.73, respectively. The Company, at its election, may satisfy the redemption amounts in cash, Class A shares or any combination thereof. The Company can redeem the notes in cash at any time on or after February 28, 2006 at specified redemption amounts. The notes, which have been recorded at a discount, are being accreted using the effective interest rate method and had a carrying value of $873 million at March 31, 2005 and are included in current liabilities.
Note 6 – Acquisitions and Disposals
Fiscal 2005 Transactions
In September 2004, the Company purchased Telecom Italia’s 20% interest in SKY Italia, increasing the Company’s ownership interest in SKY Italia to 100%, for aggregate cash consideration of $108 million (€88 million) before fees.
In October 2004, the Company and its 34% investee, DIRECTV, announced a series of transactions with Grupo Televisa, Globopar and Liberty Media International, Inc. that will result in the reorganization of the companies’ direct-to-home (“DTH”) satellite TV platforms in Latin America. The transactions will result in DIRECTV Latin America and Sky Latin America consolidating their two DTH platforms into a single platform in each of the major territories served in the region. As part of these transactions, DIRECTV agreed to aquire News Corporation’s interests in Sky Brasil, Innova and Sky Multi-Country Partners. The Sky Multi-Country Partners transaction has closed and the Company recorded a pre-tax loss during the second quarter of fiscal 2005 of $55 million. Upon the completion of the reorganization of the other platforms, which is subject to the necessary governmental approvals, the Company will record a gain. As a result of these transactions, the Company’s transponder lease guarantee increased by $175 million. However, upon the closing of the Latin American DTH reorganization transactions, the Company will be released from the transponder lease guarantees. (See Note 10 – Commitments and Guarantees)
In December 2004, the Company sold its 20% investment in Rogers Sportsnet to Rogers Broadcasting Limited for $41 million and recognized a gain of $39 million on this sale in Other, net in the unaudited consolidated statements of operations.
In January 2005, STAR completed the acquisition of approximately 26% in Balaji Telefilms Limited, a television content production company in India for $34 million. Balaji’s shares are listed for trading on The Stock Exchange, Mumbai and the National Stock Exchange of India.
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 6 – Acquisitions and Disposals (continued)
In February 2005, the Company and Rainbow Media Holdings (“Rainbow”) announced the exchange of their investments in Regional Programming Partners (“RPP”). Under the terms of the agreement, the Company will exchange its 40% interest in RPP for Rainbow’s 60% interests in Fox Sports Net Ohio (“FSN Ohio”) and Fox Sports Net Florida (“FSN Florida”) (formerly included in the RPP business) and Rainbow’s 50% interests in National Sports Partners (“NSP”) and National Advertising Partners (“NAP”). In addition, the Company will retain its 40% interest in Fox Sports Net Bay Area (“FSN Bay Area”) (also formerly included in the RPP business) and will remit to RPP the $150 million in promissory notes it received from RPP as a result of RPP’s 2003 acquisition of the Company’s direct ownership interests in Fox Sports Net Chicago and FSN Bay Area. The Company is accounting for this exchange in accordance with Accounting Principles Board Opinion No. 29, “Accounting for Nonmonetary Transactions” and accordingly the Company will record the assets received at fair value upon closing. Accordingly, during the third quarter, the Company recognized a loss of approximately $77 million on this exchange in Other, net on the accompanying unaudited consolidated statement of operations for the nine months ended March 31, 2005, as the fair value of the assets received is less than the book value of the assets exchanged. This transaction closed in April 2005.
In March 2005, Fox Acquisition Corp,Corp., a direct wholly-ownedwholly owned subsidiary of the Company, completed its offer to the holders of Class A common stock of Fox Entertainment Group, Inc. (“FEG”) to exchange 2.04 shares of the Company’s Class A common stockCommon Stock for each outstanding share of FEG’s Class A common stock validly tendered and not withdrawn in the exchange offer (the “Offer”). Shortly thereafter, the Company effected a “short form” merger of FEG with and into Fox Acquisition Corp. Each share of FEG Class A common stock not acquired in the Offer, other than the shares already owned by the Company, was converted in the “short form” merger into 2.04 shares of the Company’s Class A common stock.Common Stock. The Company issued approximately 357 million shares of News Corporation’s Class A Common Stock valued at approximately $6.3 billion in exchange for the outstanding shares of FEG Class A common shares.stock. After the consummation of the offerOffer and the subsequent merger, Fox Acquisition CorpCorp. changed its name to “Fox Entertainment Group, Inc.” As a result of the Offer, the Company’s ownership interest increased from approximately 82% to 100%. This acquisition of the remaining non-controlling interests in FEG has been accounted for under the purchase method in accordance with SFAS No. 141, “Business Combinations” (“SFAS No. 141”).
In connection with the Offer and subsequent merger, a wholly owned subsidiary of the Company tendered the shares of FoxFEG Class A common stock and FoxFEG Class B common stock that it owned prior to the acquisition to Fox Acquisition CorpCorp. in exchange for News Corporation Class A Common Stock at the same exchange ratio as iswas provided in the Offer for shares of FoxFEG Class A common stock. As a result of the exchange, the wholly owned subsidiary owns 1,631 million shares of News Corporation, whichCorporation’s Class A Common Stock, with an approximate value of $8 billion, that are consideredreflected as treasury shares. The treasury shares are accounted for using the par value method. Of the Class A Common Stock held in treasury at March 31, 2005, approximately 1,631 million shares were received in exchange for shares of FEG’s common stock.
This transaction has been accounted for as a purchase in accordance with SFAS No. 141. The Company has not yet completedfinalized the evaluation and allocation of the purchase price as the appraisals associated with the valuation of tangible and intangible assets are not yet complete. Until the final allocation is complete, theThe Company has preliminarily allocated the purchase price to certain finite-lived intangible assets which are being amortized, and certain indefinite-lived intangibles and goodwill, which are not being amortized in the Other segment. In accordance with SFAS No. 142, goodwilluntil the final allocation is not being amortized, however acomplete. These assets are included in the Filmed Entertainment, Television, Cable Network Programming and Other segments. A future reduction in goodwill for additional value to be assigned to identifiable finite-lived intangible assets or tangible assets could reduce future earnings as a result of additional amortization. For every $100 million reduction in goodwill for additional value to be assigned to identifiable finite-lived intangible assets or tangible assets, Depreciation and amortization expense would increase by approximately $10 million per year representing amortization expense assuming an average useful life of 10ten years.
Fiscal 2004 Transactions
On December 22, 2003, the Company acquired a 34% interest in Hughes Electronics Corporation (“Hughes”) for total consideration of approximately $6.8 billion. General Motors Corporation (“GM”) sold its 20% interest in Hughes to the Company in exchange for approximately $3.1 billion, in cash, and 57.2 million shares of News Corporation Class A Common Stock, valued at approximately $800 million. The Company acquired 14% of Hughes from the former GM Class H common stockholders in exchange for approximately 204.2 million shares of News Corporation Class A Common Stock, valued at $2.9 billion. Immediately following the acquisition, the Company transferred its entire 34% interest in Hughes to FEG in exchange for two promissory notes totaling $4.5 billion and approximately 74.5 million shares of FEG’s Class A common stock valued at $2.3 billion. The issuance of approximately 74.5 million shares of FEG’s Class A common stock to the Company increased its equity interest in FEG from approximately 81% to approximately 82% while its voting power remained at approximately 97%. Subsequent to the above transaction, Hughes changed its corporate name to The DIRECTV Group, Inc.
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSSTATEMENTS—(Continued)
Other Fiscal 2005 Transactions
In September 2004, the Company purchased Telecom Italia S.p.A.’s (“Telecom Italia”) 20% interest in SKY Italia for cash consideration of $108 million (€88 million), thereby increasing the Company’s ownership interest in SKY Italia to 100%.
Note 3—Inventories, net
The Company’s inventory was comprised of the following:
At September 30, 2005 | At June 30, 2005 | |||||||
(in millions) | ||||||||
Current inventories: | ||||||||
Raw materials | $ | 134 | $ | 132 | ||||
Work and projects in progress | 54 | 55 | ||||||
Finished goods | 145 | 123 | ||||||
Programming rights | 1,443 | 1,235 | ||||||
1,776 | 1,545 | |||||||
Less: inventory reserve | (34 | ) | (29 | ) | ||||
Total current inventories, net | 1,742 | 1,516 | ||||||
Non-current inventories: | ||||||||
Filmed entertainment costs: | ||||||||
Films: | ||||||||
Released (including acquired film libraries) | 710 | 733 | ||||||
Completed, not released | 151 | 234 | ||||||
In production | 391 | 218 | ||||||
In development or preproduction | 87 | 90 | ||||||
1,339 | 1,275 | |||||||
Television productions: | ||||||||
Released (including acquired libraries) | 491 | 470 | ||||||
Completed, not released | — | 14 | ||||||
In production | 200 | 149 | ||||||
In development or preproduction | 1 | 2 | ||||||
692 | 635 | |||||||
Total filmed entertainment costs, less accumulated amortization | 2,031 | 1,910 | ||||||
Programming rights | 520 | 456 | ||||||
Total non-current inventories | 2,551 | 2,366 | ||||||
Total inventories, net | $ | 4,293 | $ | 3,882 | ||||
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 6 –4—Investments
The Company’s investments were comprised of the following:
Ownership Percentage | At September 30, 2005 | At June 30, 2005 | ||||||||
(in millions) | ||||||||||
Equity investments: | ||||||||||
The DIRECTV Group, Inc.(1) | DBS operator principally in the U.S. | 34% | $ | 6,708 | $ | 6,688 | ||||
Gemstar-TV Guide International, Inc.(1) | U.S. print and electronic guidance company | 41% | 630 | 608 | ||||||
British Sky Broadcasting Group plc(1) | U.K. DBS operator | 37% | 883 | 787 | ||||||
China Network Systems | Taiwan cable TV operator | various | 230 | 225 | ||||||
Sky Network Television Ltd. | New Zealand media company | 44% | 262 | 254 | ||||||
FOXTEL | Australian pay TV operator | 25% | 70 | 70 | ||||||
National Geographic Channel (US)(2) | U.S. cable channel | 67% | 325 | 320 | ||||||
National Geographic International | International cable channel | 50% | 133 | 133 | ||||||
Other equity method investments | various | 596 | 557 | |||||||
Cost method investments | various | 515 | 626 | |||||||
$ | 10,352 | $ | 10,268 | |||||||
(1) | The market values of the Company’s investments in The DIRECTV Group, Inc. (“DIRECTV”), Gemstar-TV Guide International Inc. (“Gemstar-TV Guide”) and British Sky Broadcasting Group plc were $7,047 million, $518 million and $6,804 million, respectively, at September 30, 2005. |
(2) | The Company does not consolidate this entity as it does not hold a majority on the Board of Directors, is unable to dictate operating decision-making and the National Geographic Channel is not a variable interest entity. |
During the three months ended September 30, 2005, Gemstar-TV Guide experienced a decline in its market value. As a result of this decline, the Company’s carrying value in Gemstar-TV Guide exceeds its market value by approximately $112 million. Upon review, as discussed below, the Company has determined that at this time the impairment in the value of its investment in Gemstar-TV Guide is temporary.
In determining if the decline in Gemstar-TV Guide’s market value was other than temporary, the Company considered a number of factors: (1) the financial condition, operating performance and near term prospects of the investee; (2) the reason for the decline in fair value, be it general market conditions, industry specific or investee specific; (3) analysts’ ratings and estimates of 12 month share price targets for the investee; (4) the length of the time and the extent to which the investee’s market value has been less than the carrying value of the Company’s investment; and (5) the Company’s intent and ability to hold the investment for a period of time sufficient to allow for a recovery in fair value.
The Company will continue to monitor this investment.
Fiscal Year 2006 Acquisitions and Disposals (continued)
In December 2003, NDS Group plc (“NDS”), a subsidiary of the Company, acquired 100% of the MediaHighway middleware business from a subsidiary of Thomson SA and licensed certain related patents from Thomson SA for a total consideration of $73 million (€60 million) in cash. Subsequent to this acquisition, the Company concluded that certain intangible assets recognized on acquisition were not supported by projections of the incremental future cash flows attributable to the acquired business. Accordingly,during the second quarter of fiscal 2004, the Company recorded an impairment charge against these intangibles of $11.3 million reflected in Operating expenses in the unaudited consolidated statements of operations for the nine months ended March 31, 2004.
In December 2003,July 2005, the Company sold its 50% direct ownership interestsentire cost investment in SportsChannel Chicago AssociatesChina Netcom Group Corporation (“SportsChannel Chicago”China Netcom”) and SportsChannel Pacific Associates (“SportsChannel Bay Area”) (collectively the “SportsChannels”) to subsidiaries ofRegional Programming Partners (“RPP”). The Company’s 77 million shares of China Netcom were sold for total consideration of $150approximately $112 million. This consideration was paid wholly in the form of two three-year promissory notes issued by the subsidiaries of RPP, which own only the acquired interests in the SportsChannels, in an aggregate amount of $150 million and bearing interest at prime plus 1% per annum. The $150 million notes were remitted to RPP as partial consideration for the transaction with Rainbow that closed in April 2005, as described above. Upon the close of this sale, the SportsChannels were held 100% by RPP and indirectly 60% by Rainbow Media Sports Holdings, Inc. and 40% by the Company. The Company recognized a net gain of approximately $52 million on this sale in the salefirst quarter of the SportsChannels of $9 million, which was reflectedfiscal 2006 included in Other, net in the unaudited consolidated statementsstatement of operations for the nine months ended March 31, 2004.
In February 2004, the Company sold the Los Angeles Dodgers (“Dodgers”), together with Dodger Stadium and the team’s training facilities in Vero Beach, Florida and the Dominican Republic, to entities owned by Frank McCourt (the “McCourt Entities”). The gross consideration for the sale of the Dodgers franchise and real estate assets was $421 million, subject to further adjustment. The consideration at closing was comprised of (i) $225 million in cash, (ii) a $125 million two-year note secured by non-team real estate, (iii) a $40 million four-year note secured by bank letters of credit and (iv) a $31 million three-year note that is convertible, at the Company’s option, into preferred equity in the McCourt Entities if unpaid at maturity. The Company agreed to remit $50 million during the first two years following the closing of the transaction to reimburse the McCourt Entities for certain pre-existing commitments of which approximately $39 million has been remitted as of March 31, 2005. Pending the final determination of contractual adjustments, the sale has resulted in an estimated loss of $19 million, which was recorded in Other, net in the Company’s statements of operations for the year ended June 30, 2004.operations.
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSSTATEMENTS—(Continued)
Summarized financial information for significant equity affiliates, determined in accordance with Regulation S-X, accounted for under the equity method is as follows:
For the three months ended September 30, | |||||||
2005 | 2004 | ||||||
(in millions) | |||||||
Revenues | $ | 5,059 | $ | 2,862 | |||
Operating (loss) income | 540 | (1,550 | ) | ||||
Net income/(loss) from continuing operations before discontinued operations and cumulative effect of accounting changes | 344 | (926 | ) | ||||
Net income (loss) | 344 | (1,009 | ) |
Note 5—Intangible Assets
Effective July 1, 2005, the Company adopted Emerging Issues Task Force Topic No. D-108 “Use of the Residual Method to Value Acquired Assets Other Than Goodwill” (“D-108”). D-108 requires companies who have applied the residual value method in the valuation of acquired identifiable intangibles for purchase accounting and impairment testing to now use a direct value method. As a result of the adoption, the Company recorded a charge of $1.6 billion ($1 billion net of tax, or ($0.32) per diluted share of Class A Common Stock and ($0.27) per diluted share of Class B Common Stock), to reduce the intangible balances attributable to its television stations’ Federal Communications Commission (“FCC”) licenses. As required, this charge has been reflected as a cumulative effect of accounting change, net of tax in the unaudited consolidated statement of operations.
As of September 30, 2005, the Company’s FCC licenses were valued at approximately $6.9 billion, reflecting a $1.6 billion reduction of the intangible balances attributable to its television stations’ FCC licenses due to the adoption of D-108 which requires the application of a direct value method to determine the fair value of assets other than goodwill. At June 30, 2005, the Company’s FCC licenses were valued at approximately $8.5 billion. The Company’s FCC licenses are recorded as intangible assets with indefinite lives and are not subject to amortization.
Note 6—Borrowings
LYONs
In February 2001, the Company issued Liquid Yield Option Notes (“LYONs™”) which pay no interest and have an aggregate principal amount at maturity of $1,515 million representing a yield of 3.5% per annum on the issue price. The holders may exchange the notes at any time into Class A Common Stock or, at the option of the Company, the cash equivalent thereof at a fixed exchange rate of 24.2966 shares of Class A Common Stock per $1,000 note. The notes are redeemable at the option of the holders on February 28, 2006, February 28, 2011 and February 28, 2016 at a price of $594.25, $706.82 and $840.73, respectively. The Company, at its election, may satisfy the redemption amounts in cash, Class A Common Stock or any combination thereof. The Company can redeem the notes in cash at any time on or after February 28, 2006 at specified redemption amounts. The notes, which have been recorded at a discount, are being accreted using the effective interest rate method and had a carrying value of $888 million at September 30, 2005 and are included in Borrowings within current liabilities.
Note 7—Stockholders’ Equity
In August 2005, the Company announced that the Board of Directors determined to extend the expiration date of the Company’s stockholder rights plan for an additional two-year period.
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Under the terms of the Kayarem Share Exchange Agreement (the ”KSEA”) and the Cruden Share Exchange Agreement (the “CSEA and together with the KSEA, the “Exchange Agreements”) related to the Reincorporation (See Note 2 Acquisitions and Disposals), the Company and News Australia Holdings Pty Ltd (formerly known as Carlholt Pty Limited), acquired 100% of the entities formerly held by the Harris Trust, which indirectly held shares of TNCL. In exchange for these entities, the Harris Trust received shares of Class A Common Stock and Class B Common Stock. The amounts paid under the terms of the Exchange Agreements were calculated using agreed estimates. The Exchange Agreements provided that any difference between the estimated amount provided in the Exchange Agreements and actual amounts owed to the Harris Trust would be reconciled after the completion of the Company’s reincorporation to the United States with an adjustment (the “Adjustment Amount”).
The Adjustment Amount owed to the Harris Trust under the KSEA was an additional $32 million. The Company and the parties to the KSEA executed an agreement in relation to the Adjustment Amounts under the KSEA under which the Company would issue shares of Class A Common Stock of approximately equivalent value to the Adjustment Amount. Following approval by stockholders on October 21, 2005, a total of approximately 2 million shares of Class A Common Stock were issued on October 27, 2005 to settle the Adjustment Amount under the KSEA. The number of shares was determined based on the NYSE closing price of the Class A Common Stock on October 25, 2005.
Dividends
The Company declared a dividend of $0.07 per share for Class A Common Stock and $0.08 per share for Class B Common Stock in August 2005.
In June 2005, the Company announced a stock repurchase program under which the Company is authorized to acquire from time to time up to an aggregate of $3 billion in Class A Common Stock and Class B Common Stock. Below is a summary of the Company’s purchases of its Class A Common Stock and Class B Common Stock as of September 30, 2005:
Total Number of Shares Purchased | Average Price per Share | Total Cost of Purchase | Remaining Authorized | |||||||||
(in millions, except for share and per share amounts) | ||||||||||||
Class A Common Stock | 29,053,649 | $ | 16.32 | $ | 474 | |||||||
Class B Common Stock | 15,199,170 | 18.01 | 274 | |||||||||
Total | 44,252,819 | $ | 748 | $ | 2,253 | (1) |
(1) | The remaining authorized amount at September 30, 2005 is excluding commission. |
Note 8—Stock Option Plans
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (Revised 2004),Share-Based Payment(“SFAS 123R”). SFAS 123R is a revision of SFAS No. 123, as amended, Accounting for Stock-Based Compensation (“SFAS 123”), and supersedes Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees (“APB 25”). SFAS 123R eliminates the alternative to use the intrinsic value method of accounting that was provided in SFAS 123, which generally resulted in no compensation expense recorded in the financial statements related to the issuance of stock options. SFAS 123R requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. SFAS 123R establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all companies to apply a fair-value-based measurement method in accounting for generally all share-based payment transactions with employees.
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In July 2005, the Company adopted SFAS 123R using a modified prospective application, as permitted under SFAS 123R. Accordingly, prior period amounts have not been restated. Under this application, the Company is required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption.
News Corporation 2005 Long-Term Incentive Plan
The Company has adopted the News Corporation 2005 Long-Term Incentive Plan (the “2005 Plan”) under which stock based compensation, including stock options, restricted stock, restricted stock units and other types of awards, may be granted. Such equity grants under the 2005 Plan will generally vest over a four-year period and expire ten years from the date of grant. The Company’s employees and directors are entitled to participate in the 2005 Plan. The Compensation Committee of the Board of Directors of the Company will determine the recipients, type of award to be granted and amounts of awards to be granted under the 2005 Plan. Stock options awarded under the 2005 plan will be granted at exercise prices which are equal to or exceed the market price at the date of grant. The 2005 Plan replaced the Company’s existing News Corporation 2004 Stock Option Plan under which no additional options will be granted. The maximum number of shares of Class A Common Stock that may be issued under the 2005 Plan is 165 million shares. The Company will issue new shares of Class A Common Stock for award exercises. As of September 30, 2005, no stock options were issued under the 2005 Plan. During the three months ended September 30, 2005, the Company issued 1.6 million Restricted Stock Units (“RSUs”) to several executives of the Company. Subsequent to September 30, 2005, the Company issued 12.7 million RSUs to employees which vest over four years.
The fair value of stock based compensation under the 2005 Plan will be calculated according to the type of award issued. Stock options and Stock Appreciation Rights (“SARs”) will be fair valued using a Black-Scholes option valuation method that uses the following assumptions: expected volatility is based on the historical volatility of the Class A Common Stock; expected term of awards granted is derived from the historical activity of the Company’s awards and represents the period of time that the awards granted are expected to be outstanding; weighted average risk-free interest rate is an average of the interest rates of United States government bonds with similar lives on the dates of the option grants; and dividend yield was calculated as an average of a ten year history of the Company’s yearly dividend divided by the fiscal year’s average closing stock price.
News Corporation 2004 Stock Option Plan and 2004 Replacement Stock Option Plan
As a result of the Company’s reincorporation, all preferred limited voting ordinary shares which the Company issued options over were cancelled and holders received in exchange options for shares of Class A Common Stock of the Company on a one-for-two basis with no change in the original terms under the News Corporation 2004 Stock Option Plan and 2004 Replacement Stock Option Plan (collectively, the “2004 Plan”). In addition, all other outstanding stock options to purchase preferred limited voting ordinary shares were adjusted to be exercisable into shares of Class A Common Stock subject to the one-for-two share exchange. Prior to the Company’s reincorporation in the U.S., stock options were granted to employees with Australian dollar exercise prices.
Under the 2004 Plan, equity grants generally vest over a four-year period and expire ten years from the date of grant. The equity awards granted prior to June 30, 2005 have exercise prices, which are equal to or exceeding the market price at the date of grant, in Australian dollars. No future grants will be issued under the 2004 Plan and the plan automatically terminates in ten years.
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The fair value of each outstanding option award under the 2004 Plan was estimated on the date of grant using the Black-Scholes option valuation model that uses the following assumptions; expected volatility was based on historical volatility of the Company’s Class A Common Stock; expected term of options granted was derived from the historical activity of the Company’s options and represented the period of time that options granted were expected to be outstanding; weighted average risk-free interest rate was an average of the interest rates of Australian government bonds with similar lives on the dates of the option grants; and dividend yield was calculated as an average of a ten year history of the Company’s yearly dividend divided by the fiscal year’s average closing stock price.
Other
The Company operates an employee share ownership scheme in the United Kingdom. This plan enables employees to enter into a fixed-term savings contract with independent financial institutions linked to an option for Class A Common Stock. The savings contracts can range from three to seven years with an average expected life of four years.
The following table summarizes information about the Company’s stock option transactions (options in thousands):
Shares (in thousands) | Weighted average exercise price (in US$) | Weighted average exercise price (in A$) | Weighted average remaining contractual term (in years) | Aggregate intrinsic value (in US$ millions) | ||||||||||
Outstanding at July 1, 2005 | 131,367 | $ | 13.97 | $ | 23.35 | |||||||||
Granted | — | — | — | |||||||||||
Exercised | (2,098 | ) | 10.51 | 16.74 | ||||||||||
Cancelled | (928 | ) | 13.52 | 23.81 | ||||||||||
Outstanding at September 30, 2005 | 128,341 | $ | 14.03 | $ | 23.65 | 5.42 | $ | 199,789 | ||||||
Vested and unvested expected to vest at September 30, 2005 | 128,341 | $ | 14.03 | $ | 23.65 | 5.42 | $ | 199,789 | ||||||
Vested and exercisable at | 119,556 | $ | 14.33 | $ | 24.16 | 5.82 | $ | 150,784 | ||||||
The exercise prices for the options presented above are in Australian dollars. The US dollar equivalents above have been converted at historical exchange rates; therefore, the proceeds from the exercise of these options may differ due to fluctuations in exchange rates in periods subsequent to the date of the grants.
No options were granted in the three months ended September 2005 and 2004.
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NDS Option Schemes
NDS, an indirect majority-owned subsidiary of the Company which is a publicly traded company, has three executive share option schemes (“the NDS Plans”). The NDS Plans provide for the grant of options to purchase Series A ordinary shares in NDS with a maximum term of ten years. Options granted under the NDS Plans vest over a four-year period. The NDS Plans authorize options to be granted subject to a maximum of 10% of the ordinary shares of NDS on issue at the date of grant. All NDS employees are entitled to participate in the NDS Plans, however (with the exception of the employee share ownership schemes which are open to all), management determines to whom and how many options are granted.
A summary of the NDS options (options in thousands):
Shares (in thousands) | Weighted average exercise price (in US$) | Weighted average remaining contractual term (in years) | Aggregate intrinsic value (in US$ millions) | ||||||||
Outstanding at July 1, 2005 | 4,338 | $ | 18.17 | ||||||||
Granted | — | — | |||||||||
Exercised | (208 | ) | 13.68 | ||||||||
Cancelled | (9 | ) | 21.83 | ||||||||
Outstanding at September 30, 2005 | 4,121 | $ | 18.39 | 5.8 | $ | 78 | |||||
Vested and unvested expected to vest at September 30, 2005 | 4,103 | $ | 18.39 | 5.8 | $ | 77 | |||||
Exercisable at September 30, 2005 | 2,672 | $ | 19.44 | 5.5 | $ | 48 | |||||
For the three months ended September 30, | |||||
2005(1) | 2004 | ||||
Expected volatility | — | 83.00 | % | ||
Expected term | — | 6.25 | |||
Weighted average risk-free interest rate | — | 4.57 | % |
(1) | NDS did not grant any options in this period |
Expected volatility was based on historical volatility of the NDS’s American Depositary Shares as quoted on the NASDAQ National Market. The expected life of options granted was derived from the historical activity of NDS’s options and represented the period of time that options granted were expected to be outstanding. The weighted average risk-free rate was the average interest rates of U.S. government bonds of comparable term to the options on the dates of the option grants. A dividend yield was not calculated because NDS has not, and does not currently expect to pay a dividend.
For the three months ended September 30, | ||||||
2005 | 2004 | |||||
Weighted-average grant-date fair value of options granted (in US$) | $ | — | $ | 18.57 |
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The aggregate intrinsic value of options exercised for all plans presented during the first quarter of fiscal 2006 and 2005 was $13 million and $9 million, respectively.
For the three months ended September 30, 2005, as a result of the adoption of SFAS 123R, the expense related to stock options previously issued under the Company’s 2004 Stock Option Plan and under the NDS Plans was $14 million. For the three months ended September 30, 2005, the Company recognized approximately $8 million in compensation costs for all other equity-based long-term incentive plans. During the three months ended September 30, 2005, the Company received $29 million in cash from stock option exercises and recognized a tax benefit of $4 million on stock options exercised for all plans presented.
At September 30, 2005, the Company’s total compensation cost related to non-vested stock options not yet recognized for all plans presented is approximately $50 million, which is expected to be recognized over the next three fiscal years.
Compensation Expense
On May 3, 2005, the Compensation Committee of the Board of Directors of the Company approved the acceleration of vesting of unvested out-of-the-money stock options granted under the Company’s 2004 Stock Option Plan. The affected options are those with exercise prices greater than A$19.74 per share, which was the closing price of the Company’s Class A Common Stock (as traded on the Australian Stock Exchange in the form of CHESS Depositary Interests) on May 2, 2005. Prior to the Company’s reorganization in the United States, stock options were granted to employees with Australian dollar exercise prices. As a result of this action, the vesting of approximately 19,862,000 previously unvested stock options was accelerated and are now immediately exercisable. None of the unvested stock options held by directors, some of whom have options with exercise prices in excess of $19.74, were accelerated.
The Compensation Committee’s decision to accelerate the vesting of these options was in anticipation of compensation expense to be recorded subsequent to the effective date of SFAS 123R on July 1, 2005. In addition, the Compensation Committee considered that because these options had exercise prices in excess of the current market value they were not fully achieving their original objectives of incentive compensation and employee retention, and it believed that the acceleration would have a positive effect on employee morale. The future compensation expense to be recorded upon adoption of SFAS 123R that was eliminated as a result of the acceleration of the vesting of these options was approximately $100 million ($65 million net of tax) of which $58 million ($38 million net of tax) and $42 million ($27 million net of tax) were to be realized in fiscal years 2006 and 2007, respectively.
The following table reflects the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions for stock-based employee compensation prior to the adoption of SFAS 123R on July 1, 2004. These pro forma effects may not be representative of future amounts since the estimated fair value of stock options on the date of grant is amortized to expense over the vesting period, additional options may be granted in future years and the vesting of certain options was accelerated on May 3, 2005 (see above).
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the three months ended September 30, 2004 | ||||
Net (loss) income, as reported | $ | 625 | ||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | (18 | ) | ||
Pro forma net income | $ | 607 | ||
Basic earnings per share: | ||||
As reported: | ||||
Class A | $ | 0.23 | ||
Class B | $ | 0.19 | ||
Pro forma: | ||||
Class A | $ | 0.22 | ||
Class B | $ | 0.18 | ||
Diluted earnings per share: | ||||
As reported: | ||||
Class A | $ | 0.22 | ||
Class B | $ | 0.19 | ||
Pro forma: | ||||
Class A | $ | 0.22 | ||
Class B | $ | 0.18 |
Note 9—Guarantees
The Company’s guarantees have not changed from disclosures included in the Company’s Annual Report Form 10-K for the fiscal year ended June 30, 2005 filed with the SEC on September 1, 2005.
Note 10—Contingencies
Stockholder Litigation
On October 6, 2005, 13 professionally managed investment funds that own the Company’s stock filed a complaint in the Court of Chancery of the State of Delaware against the Company and its individual directors. The complaint, styled Unisuper et al. v. News Corp., C.A. No. 1699-N, raises claims of breach of contract, promissory estoppel, fraud, negligent misrepresentation and breach of fiduciary duty relating to the Company’s Board of Directors’ policy concerning rights plans, and the August 2005 decision of the board to extend the expiration of the existing stockholder rights plan until November 8, 2007. The plaintiffs are seeking, among other things: (1) a declaration that the amendment extending the rights plan until November 8, 2007 is null and void, and (2) an order permanently enjoining the Defendants from extending the stockholder rights plan without first obtaining approval from the Company’s stockholders.
Also on October 6, 2005, the plaintiffs moved for expedited proceedings, requesting that the court set an expedited trial date. This request was denied. On October 22, 2005, the Company filed a motion to dismiss the complaint. A hearing on that motion is scheduled for November 10, 2005. The duration and outcome of this litigation cannot be determined at this time. The Company believes that the claims raised in the complaint are without merit, and intends to defend against them vigorously.
FEG Offer
News Corporation received complaints relating to a number of purported class actions filed in Court of Chancery in the State of Delaware. The complaints generally allege, among other things, that News Corporation
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
and the members of the FEG Board of Directors breached its fiduciary duties owed to the public stockholders of FEG, including the allegation that News Corporation offered to acquire shares of FEG Class A common stock at an unfair price and at a time that disadvantaged the FEG stockholders. The complaints generally sought declaratory and injunctive relief and damages in an unspecified amount.
Approximately 17 purported class action complaints were filed in January 2005 at the Court of Chancery of the State of Delaware challenging the FEG Offer. The Delaware complaints are captioned:Allen v. News Corp., et al., No. 979-N;Mascarenhas v. Fox Entm’t. Group, et al., No. 980-N;Shemesh v. Fox Entm’t. Group, et al., No. 981-N;Striffler v. FEG Holdings, et al., No. 982-N;Howard Vogel Ret. Plan v. Powers, et al., No. 984-N;Doniger v. News Corp., et al., No. 985-N;Engle v. Murdoch, et al., No. 986-N;Shrank v. Murdoch, et al., No. 988-N;Blackman v. Fox Entm’t. Group, et al., No. 991-N;Fishbone v. News Corp., et al., No. 994-N;Kennel v. News Corp., et al., No. 995-N;Millner v. News Corp., et al., No. 996-N;Pipefitters Locals v. Fox Entm’t. Group, et al., No. 1003-N;Molinari v. News Corp., et al., C.A. No. 1018-N;Seaview Services v. Fox Entertainment, et al., C.A. No. 1026-N;Teachers’ Retirement System of Louisiana v. Powers, et al., C.A. No. 1033-N; andNew Jersey Building Laborers’ Pension Fund v. Powers, et al., C.A. No. 1034. TheShrank action, No. 988-N, was voluntarily dismissed on January 19, 2005. News Corporation is also currently aware of two purported class action complaints raising substantially similar claims that have been filed in the Supreme Court of the State of New York, County of New York, and one that has been filed in the United States District Court for the Southern District of New York (the “Southern District of New York Complaint”), which were filed in January 2005. The New York complaints are captioned:Shrank v. Murdoch, et al., Index No. 600114/2005; andGreen Meadows Ptr. v. Fox Entertainment, et al., No. 100706/2005. The Southern District of New York Complaint is captionedGary Kosseff v. Fox Entertainment Group, Inc., et. al., No. 05 Civ. 1942 (LLS). On January 21, 2005, certain plaintiffs in the Delaware lawsuits filed a motion that seeks to consolidate the Delaware actions. In addition, the Company filed motions to dismiss and to stay discovery, and the plaintiffs have filed a motion for expedited proceedings. On February 3, 2005, the Court of Chancery denied News Corporation’s motion to stay discovery, and granted the plaintiffs’ motion for expedited discovery and motion to consolidate. The consolidated Delaware complaint was styledIn re Fox Entertainment Group, Inc. Stockholders Litigation, Consol. C.A. No. 1033-N.
Each of the consolidated Delaware complaints and the New York Supreme Court complaints generally alleges, among other things, that News Corporation and the members of the FEG Board of Directors purportedly breached fiduciary duties owed to the public stockholders of FEG in connection with the FEG Offer by: (1) offering to acquire their shares at an unfair price; (2) offering to acquire their shares at a time that disadvantages the public stockholders; (3) having FEG appoint directors who are neither independent nor disinterested to a special committee created to consider the FEG Offer; and (4) failing to adequately disclose information material to the FEG Offer, including disclosure with respect to the FEG 2005 budget. The Southern District of New York Complaint also generally alleges, among other things, some of the foregoing matters. The plaintiffs filed an amended complaint on February 24, 2005 in the US Southern District of New York alleging violations of the federal securities laws in addition to the foregoing matters. On February 24, 2005, the US Southern District of New York denied the plaintiffs’ motion for expedited proceedings.
As for relief, the plaintiffs sought, among other things: (1) an order that the complaints are properly maintainable as a class action; (2) a declaration that defendants have breached their fiduciary duties and other duties to the plaintiffs and other members of the purported class; (3) injunctive relief; (4) unspecified monetary damages; (5) attorneys’ fees, costs and expenses; and (6) such other and further relief as the Court may deem just and proper. News Corporation believes that these claims are without merit and intends to vigorously contest these allegations.
A memorandum of understanding setting forth the terms of a settlement with respect to the aforementioned litigation was entered into by the plaintiffs and the named defendants as of March 2, 2005. The New York actions
were dismissed. On or about June 15, 2005, the parties entered into a stipulation of settlement in the consolidated Delaware action. In an Order dated June 23, 2005, the Chancellor, among other things, (i) preliminarily approved the stipulation of settlement; (ii) preliminarily certified the class for settlement purposes; and (iii) set a hearing for September 19, 2005. Among other conditions, the settlement is subject to final court approval of the settlement and dismissal with prejudice of the litigation. The court approved the settlement on September 16, 2005 and the case has been dismissed with prejudice.
NDS
On June 6, 2003, Echostar Communications Corporation, Echostar Satellite Corporation, Echostar Technologies Corporation and Nagrastar L.L.C. (collectively, “Echostar”) filed an action against NDS in the United States District Court for the Central District of California. Echostar filed an amended complaint on October 8, 2003, which purported to allege claims for violation of the Digital Millennium Copyright Act (“DMCA”), the Communications Act of 1934 (“CA”), the Electronic Communications Privacy Act, The Computer Fraud and Abuse Act, California’s Unfair Competition statute and the federal RICO statute. The complaint also purported to allege claims for civil conspiracy, misappropriation of trade secrets and interference with prospective business advantage. The complaint sought injunctive relief, unspecified compensatory and exemplary damages and restitution. On December 22, 2003, all of the claims were dismissed by the court, except for the DMCA, CA and unfair competition claims, and the court limited these claims to acts allegedly occurring within three years of the filing of the complaint. Echostar filed a second amended complaint. NDS filed a motion to dismiss the second amended complaint on March 31, 2004. On July 21, 2004, the court issued an order among other things directing Echostar to file a third amended complaint within ten days correcting various deficiencies in the second amended complaint noted by the court. Echostar filed its third amended complaint on August 4, 2004. On August 6, 2004, the court ruled that NDS was free to file a motion to dismiss the third amended complaint, which NDS did on September 20, 2004. The hearing occurred on January 3, 2005. On February 28, 2005, the court issued an order treating the motion as a motion for a more definite statement, granted the motion and gave Echostar until March 30, 2005 to file a fourth amended compliant correcting various deficiencies in the third amended complaint noticed by the court. On March 30, 2005, Echostar filed a fourth amended complaint. NDS filed a motion to dismiss the fourth amended complaint which Echostar opposed. On July 27, 2005, the court granted the motion in part and denied the motion in part. NDS believes the remaining claims are without merit and intends to vigorously defend against them. On October 24. 2005, NDS filed its Amended Answer with Counterclaim, alleging that Echostar misappropriated NDS’s trade secrets, violated the Computer Fraud and Abuse Act and engaged in unfair competition. Echostar has not yet filed a reply.
On July 25, 2003, Sogecable, S.A. and its subsidiary Canalsatellite Digital, S.L., Spanish satellite broadcasters and customers of Canal+ Technologies SA (together, “Sogecable”), filed an action against NDS in the United States District Court for the Central District of California. Sogecable filed an amended complaint on October 9, 2003, which purported to allege claims for violation of the DMCA and the federal RICO statute. The amended complaint also purported to allege claims for interference with contract and prospective business advantage. The complaint sought injunctive relief, unspecified compensatory and exemplary damages and restitution. On December 22, 2003, all of the claims were dismissed by the court. Sogecable filed a second amended complaint. NDS filed a motion to dismiss the second amended complaint on March 31, 2004. On July 23, 2004, the court heard oral argument on the motion and advised that a formal ruling should be issued by early August. On August 4, 2004, the court issued an order dismissing the second amended complaint in its entirety. Sogecable had until October 4, 2004 to file a third amended complaint. On October 1, 2004, Sogecable notified the court that it would not be filing a third amended complaint, but would appeal the court’s entry of final judgment dismissing the suit to the United States Ninth Circuit Court of Appeals. Sogecable has filed a brief on appeal, NDS’s opposition was filed on August 22, 2005, and Sogecable filed its reply on September 6, 2005.
On April 18, 1997, International Electronics Technology Corp. filed suit in the United States District Court for the Central District of California against NDS’s customers, DIRECTV, Inc. and Thomson Consumer Electronics, Inc., alleging infringement of one U.S. patent and seeking unspecified damages and injunction.
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Although not a party to this case, NDS has assumed the defense and agreed to indemnify the named defendants. The defendants have raised defenses of non-infringement and/or invalidity. On August 2, 2004, the court stayed the case indefinitely pending decision by the Federal Circuit in another case. The Federal Circuit’s decision was issued on July 12, 2005, and the court held a status conference on August 8, 2005.
Intermix
Greenspan Litigation
On February 10, 2005, Brad Greenspan, Intermix’s former Chairman and Chief Executive Officer who was asked to resign as CEO and was removed as Chairman in the fall of 2003, filed in derivative complaint in Los Angeles Superior Court against Intermix, various of its former directors and officers, VantagePoint Venture Partners, a former large stockholder of Intermix (“VantagePoint”), and certain of VantagePoint’s principals and affiliates. The complaint alleged claims of libel and fraud against Intermix and various of its then current and former officers and directors, claims of intentional interference with contract and prospective economic advantage, unfair competition and fraud against VantagePoint and certain of its affiliates and principals and claims alleging that Intermix’s forecasts of profitability leading up to its January 2004 annual stockholder meeting and associated proxy contest waged by Mr. Greenspan were false and misleading. These claims generally related to Intermix’s decision to consummate its Series C Preferred Stock financing with VantagePoint in October 2003, Mr. Greenspan’s contemporaneous separation from Intermix and matters arising during the proxy contest. The complaint also alleged that Intermix’s acquisition of the assets of a company known as Supernation LLC (“Supernation”) in July 2004 involved breaches of fiduciary duty. Mr. Greenspan sought remittance of compensation received by the various then current and former Intermix director and officer defendants, unspecified damages, removal of various Intermix directors, disgorgement of unspecified profits, reformation of the Supernation purchase, punitive damages, fees and costs, injunctive relief and other remedies. Intermix and the other defendants filed motions challenging the validity of the action and Mr. Greenspan’s ability to pursue it. Mr. Greenspan voluntarily dismissed this action in October 2005.
Prior to dismissing his derivative lawsuit, in August 2005, Mr. Greenspan filed another complaint in Los Angeles Superior Court against the same defendants. The complaint, for breach of fiduciary duty, included substantially the same allegations made by Mr. Greenspan in the above-referenced lawsuit. Mr. Greenspan further alleged that defendants’ actions have, with the FIM Transaction, culminated in the loss of Mr. Greenspan’s interest in Intermix for a cash payment allegedly below its value. Mr. Greenspan seeks compensatory and consequential damages, punitive damages, fees and costs, injunctive relief and other remedies. The defendants in the matter have filed motions seeking dismissal of the lawsuit on the grounds that the complaint fails to state any cause of action. Intermix believes that the claims and allegations in the complaint are without merit and expects that the defendants in the matter will vigorously defend themselves. Intermix, as well as News Corporation with respect to certain claims, is obligated to defend and indemnify the defendants in the matter.
Downloads
On April 28, 2005, the Attorney General of the State of New York (the “NY AG”) commenced an action against Intermix for allegedly unlawful and deceptive acts and practices associated with Intermix’s distribution of toolbar, redirect and contextual ad serving applications (“downloads”). The NY AG asserted that Intermix and/or third parties distributed downloads that were installed by users without sufficient notice or consent and in a manner that made it difficult to locate and remove the programs. The petition sought disgorgement of profits, civil penalties and other remedies. In June 2005, Intermix announced an agreement in principle with the NY AG pursuant to which Intermix agreed to pay a total of $7.5 million to the State of New York and to discontinue
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
distribution of its adware, redirect and toolbar programs. In September 2005, Intermix and the NY AG entered into a stipulation for entry of a Consent Order and Judgment memorializing the terms of the settlement, and the court entered the Consent Order and Judgment in October 2005. Intermix did not admit any wrongdoing or liability in connection with settlement of the matter. Intermix voluntarily suspended any ongoing distribution of the relevant applications in April 2005, and the payments to the State of New York exceed any and all profits associated with Intermix’s distribution of the subject downloadable applications.
In May 2005, Intermix was served with a Statement of Claim filed by an individual in the Federal Court of Canada in Montreal. The plaintiff in the action purports to act on behalf of an unspecified class of individuals who have been allegedly damaged by Intermix’s violation of provisions of Canada’s 1985 Competition Act in connection with Intermix’s distribution of downloads. The plaintiff is seeking an award of unjust enrichment, civil penalties and costs in unspecified amounts. Intermix has filed a motion seeking dismissal of the lawsuit on the grounds that the court lacks jurisdiction over the alleged claims and over Intermix and that the claims of the plaintiff are factually baseless. Intermix disputes the allegations of the Statement of Claim, believes they are without merit and intends to vigorously defend itself in this matter.
A similar complaint was also filed by an individual, Thomas Kerrins, against Intermix in the United States District Court for the Central District of California. Mr. Kerrins purports to act on behalf of all United States residents who, during the period from July 25, 2002 to the present, had spyware or adware put onto their computers by Intermix. The complaint alleges claims of trespass, unjust enrichment, violation of a California penal statute concerning unauthorized access to computers, computer systems and data, and unfair and deceptive business practices. The plaintiff is seeking an order certifying a class and appointing a class representative and class counsel, injunctive relief, disgorgement of ill-gotten gains and an award of unspecified damages, attorneys’ fees, costs and expenses. Intermix has filed a motion to dismiss the lawsuit on the ground that, among others, the complaint fails to state a viable cause of action against Intermix. Prior to the hearing on the motion to dismiss, plaintiff amended his complaint. Intermix has until November 14, 2005 to file a motion to dismiss plaintiff’s first amended complaint.
In April 2005, the Los Angeles City Attorney’s Office (the “City”) approached Intermix about its downloadable software practices and threatened to file an action against Intermix. In June 2005, the City verbally informed Intermix that, in light of its proposed settlement with the NY AG, the City would not seek a monetary penalty. Then on August 31, 2005, the City provided a written offer to Intermix reiterating that it would not seek a monetary penalty in the threatened action if Intermix completed a settlement with the NY AG. On September 29, 2005, the day after Intermix finalized its settlement with the NY AG on the terms directed by the City’s August 31 proposal, the City changed its position and informed Intermix that it would seek to impose a monetary penalty. Intermix refused to agree to the imposition of a penalty. To date, no complaint has been filed.
Patents
On January 31, 2003, Arcade Planet, Inc. (“Arcade Planet”), a California corporation, filed a patent infringement complaint against Intermix in the United States District Court for the District of Nevada. Arcade Planet alleges that an online skill-based gaming business owned and operated by Intermix at the time of the filing of the lawsuit, and which Intermix subsequently sold in July 2004, infringed a patent held by Arcade Planet entitled the “918 Patent.” In its complaint, Arcade Planet seeks to prevent future infringement of the 918 Patent and compensation for lost profits or royalty damages. In April 2003, Intermix filed an answer denying Arcade Planet’s allegations and seeking declaratory judgment from the court that Intermix has not infringed the 918 Patent and that the patent is invalid and unenforceable. In July 2003, the court stayed the action pending reexamination by the United States Patent and Trademark Office (“USPTO”) of substantial new questions of patentability affecting certain claims underlying the 918 Patent. The USPTO has recently issued a final rejection of the claims of the 918 Patent asserted against Intermix.
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In October 2005, Beneficial Innovations, Inc. (“BII”) filed a first amended patent infringement complaint against an Intermix subsidiary and another unaffiliated company in the United States District Court for the Central District of California. BII alleges, on information and belief, that aspects of Intermix’s Grab.com website infringe a patent relating to a method and system for playing games on a network entitled the “702 Patent.” In the complaint, BII seeks to enjoin the Intermix subsidiary from infringing the 702 Patent and seeks unspecified compensatory damages, fees and costs. Intermix has filed an answer to the complaint denying BII’s allegations and asserting various defenses. Intermix believes that BII’s claims are without merit and intends to vigorously defend itself.
FIM Transaction
On August 26, 2005, a purported class action lawsuit, captionedRon Sheppard v. Richard Rosenblatt et. al., was filed in the California Superior Court, County of Los Angeles. In addition to Mr. Rosenblatt, the lawsuit names as defendants Intermix’s former Chief Executive Officer (Brad Greenspan), a former Intermix director, all of the other then incumbent members of the Intermix Board and entities affiliated with Venture Partners, a former major Intermix stockholder. The complaint alleges that in pursuing the FIM Transaction and approving the merger agreement, the defendants breached their fiduciary duties to Intermix stockholders by, among other things, engaging in self-dealing and failing to obtain the highest price reasonably available for Intermix and its stockholders. The complaint further alleges that the merger agreement resulted from a flawed process and that the defendants tailored the terms of the merger to advance their own interests. The complaint seeks an injunction preventing the completion of the merger, an order requiring Intermix directors to exercise their fiduciary duties to obtain a transaction in the best interests of Intermix stockholders, rescission of the proposed merger to the extent already implemented and reasonable costs and attorneys’ fees.
On August 30, 2005, a similar purported class action lawsuit, captionedJohn Friedmann v. Intermix Media, Inc. et. al.,was filed in the California Superior Court, County of Los Angeles, naming as defendants all of the same individuals and entities named in theSheppard action, as well as Intermix. The complaint makes substantially similar claims and allegations and seeks substantially similar relief as theSheppard action. Prior to the consummation of FIM Transaction on September 30, 2005, plaintiff conducted expedited discovery and filed a motion with the court seeking to enjoin the acquisition. Plaintiff withdrew his motion after Intermix filed supplemental proxy materials augmenting certain information included by Intermix in its proxy statement distributed to Intermix stockholders in connection with seeking stockholder approval of the FIM Transaction. On September 23, 2005, Mr. Greenspan announced his presentation of an alternative acquisition proposal to the Intermix board of directors which, on September 26, 2005, the board publicly rejected. Plaintiff thereafter applied to the court for an order delaying the vote by Intermix stockholders on the FIM Transaction in order to afford Intermix stockholders additional time to consider the Greenspan proposal. The Court denied the plaintiff’s request and Intermix stockholders approved the FIM Transaction on September 30, 2005.
Except as described above, there has been no activity in the foregoing matters. Intermix expects that theFriedmann andSheppard lawsuits will be consolidated under lead counsel and a lead plaintiff and that a consolidated amended complaint will be filed. Intermix further believes that the lawsuits described above are meritless and intends to vigorously defend against the claims and allegations in the complaints.
DIRECTV
TNCL was named as a defendant in a Revised Amended Consolidated Complaint filed on May 7, – 2004 in a lawsuit captioned “In re General Motors (Hughes) Stockholders Litigation,” filed in the Court of Chancery of the
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
State of Delaware, Consolidated Civil Action No. 20269-NC. The lawsuit relates to TNCL’s acquisition of stock in Hughes on December 22, 2003 which was subsequently transferred to FEG. The complaint alleges that TNCL aided and abetted an alleged breach of fiduciary duty by the Board of Directors of GM allegedly owed to a class of certain GM stockholders. The plaintiffs allegedly seek “appropriate equitable relief... including rescissory remedies to the extent feasible…” The Company believes that the lawsuit is without merit and intends to vigorously defend against claims brought against TNCL in the lawsuit. The Company also believes it is entitled to indemnification by GM under the agreements related to the transaction. On August 30, 2004, TNCL filed a brief in support of its motion to dismiss the complaint. On October 18, 2004, the plaintiffs filed their opposition to the motion. The Company filed its reply on November 17, 2004. The oral argument was heard on March 7, 2005. On May 4, 2005, the court issued its decision granting the motion to dismiss. Plaintiffs have appealed the decision and the Company has cross-appealed on jurisdictional and improper service issues. Oral argument on the appeal is scheduled for December 21, 2005.
Other
The Company experiences routine litigation in the normal course of its business. The Company believes that none of its pending litigation will have a material adverse effect on its consolidated financial condition, future results of operations or liquidity.
Note 11—Pension Plans and Other Postretirement Benefits
The Company sponsors non-contributory pension plans and retiree health and life insurance benefit plans covering specific groups of employees. The benefits payable for the non-contributory pension plans are based primarily on a formula factoring both an employee’s years of service and pay near retirement. Participant employees are vested in the plans after five years of service. The Company’s policy for all pension plans is to fund amounts, at a minimum, in accordance with statutory requirements. During the ninethree months ended March 31,September 30, 2005 and 2004, the Company made discretionary contributions of $127$29 million and $90$37 million, respectively, to its pension plans. Plan assets consist principally of common stocks, marketable bonds and government securities. The retiree health and life insurance benefit plans offer medical and/or life insurance to certain full-time employees and eligible dependents that retire after fulfilling age and service requirements.
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The components of net periodic benefit costs were as follows:
Pension Benefits | Postretirement Benefits | ||||||||||||||
For the three months ended March 31, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||||
(in millions) | |||||||||||||||
Service cost benefits earned during the period | $ | 22 | $ | 21 | $ | 1 | $ | 3 | |||||||
Interest costs on projected benefit obligation | 28 | 24 | 2 | 3 | |||||||||||
Expected return on plan assets | (29 | ) | (22 | ) | — | — | |||||||||
Amortization of deferred losses | 7 | 8 | — | — | |||||||||||
Other | — | — | (1 | ) | — | ||||||||||
Net periodic costs | $ | 28 | $ | 31 | $ | 2 | $ | 6 | |||||||
Pension Benefits | Postretirement Benefits | ||||||||||||||
For the nine months ended March 31, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||||
(in millions) | |||||||||||||||
Service cost benefits earned during the period | $ | 66 | $ | 62 | $ | 3 | $ | 9 | |||||||
Interest costs on projected benefit obligation | 82 | 71 | 6 | 7 | |||||||||||
Expected return on plan assets | (85 | ) | (65 | ) | — | — | |||||||||
Amortization of deferred losses | 21 | 24 | 2 | 2 | |||||||||||
Other | (2 | ) | 1 | (5 | ) | — | |||||||||
Net periodic costs | $ | 82 | $ | 93 | $ | 6 | $ | 18 | |||||||
Other Postretirement Benefits Amendments
The fiscal 2005 postretirement net periodic costs reflect plan amendments implemented during the second quarter of fiscal 2004.
In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“the Medicare Act”) was signed into law. The Medicare Act introduced a prescription drug benefit under Medicare (Medicare Part D) and a federal subsidy to sponsors of retirement health care plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. In accordance with FASB Staff Position 106-1, the Company elected to defer recognizing the effects of the Medicare Act on the accounting for its retirement health care plans in fiscal 2004. In May 2004, the FASB issued FASB Staff Position 106-2, providing final guidance on accounting for the Medicare Act. FASB Staff Position 106-2 was implemented by the Company in the first quarter of fiscal 2005. The adoption of FASB Staff Position 106-2 did not have a material impact on the financial condition and results of operations of the Company in fiscal 2005, but reduced the Company’s Accumulated Postretirement Benefit Obligation (“APBO”) by approximately $5 million. The amortization of the $5 million reduction in APBO will reduce our future net postretirement benefit cost.
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Pension Benefits | Postretirement Benefits | |||||||||||||||
For the three months ended September 30, | ||||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
(in millions) | ||||||||||||||||
Service cost benefits earned during the period | $ | 21 | $ | 22 | $ | 1 | $ | 1 | ||||||||
Interest costs on projected benefit obligation | 27 | 27 | 2 | 2 | ||||||||||||
Expected return on plan assets | (31 | ) | (28 | ) | — | — | ||||||||||
Amortization of deferred losses | 11 | 7 | 1 | 1 | ||||||||||||
Other | 1 | (1 | ) | (2 | ) | (2 | ) | |||||||||
Net periodic costs | $ | 29 | $ | 27 | $ | 2 | $ | 2 | ||||||||
Note 8 – 12—Other, net
Other, net consisted of the following:
For the three months ended September 30, | |||||||
2005 | 2004 | ||||||
(in millions) | |||||||
Sale of China Netcom(a) | $ | 52 | $ | — | |||
Change in fair value of exchangeable securities(b) | (41 | ) | 179 | ||||
Other | — | 12 | |||||
Total Other, net | $ | 11 | $ | 191 | |||
(a) | See Note 4—Investments |
(b) | The Company has certain outstanding exchangeable debt securities which contain embedded derivatives. Pursuant to SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” these embedded derivatives require separate accounting and, as such, changes in their fair value are recognized in Other, net. |
Note 13—Segment Information
The Company is a diversified entertainment company, which manages and reports its businesses in eight segments:
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company’s 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 measures are segment operating income (loss) and Operating income (loss) before depreciation and amortization.
Operating income (loss) before depreciation and amortization, defined as operating income (loss) plus depreciation and amortization and the amortization of cable distribution investments, eliminates the variable effect across all business segments of non-cash depreciation and amortization. Depreciation and amortization expense includes the depreciation of property and equipment, as well as amortization of finite-lived intangible assets. Amortization of cable distribution investments represents a reduction against revenues over the term of a carriage arrangement and as such it is excluded from Operating income (loss) before depreciation and amortization. Operating income (loss) before depreciation and amortization is a non-GAAP measure and it should be considered in addition to, not as a substitute for, operating income (loss), net income (loss), cash flow and other measures of financial performance reported in accordance with GAAP. Operating income (loss) before depreciation and amortization does not reflect cash available to fund requirements, and the items excluded from Operating income (loss) before depreciation and amortization, such as depreciation and amortization, are significant components in assessing the Company’s financial performance.
Management believes that Operating income (loss) before depreciation and amortization is an appropriate measure for evaluating the operating performance of the Company’s business segments. Operating income (loss) before depreciation and amortization provides management, investors and equity analysts a measure to analyze operating performance of each business segment and enterprise value against historical and competitors’ data, although historical results, including Operating income (loss) before depreciation and amortization, may not be indicative of future results (as operating performance is highly contingent on many factors including customer tastes and preferences).
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSSTATEMENTS—(Continued)
Note 8 – Segment Information (continued)
For the three months ended March 31, | For the nine months ended March 31, | For the three months ended September 30, | ||||||||||||||||||||||
2005 | 2004 | 2005 | 2004 | 2005 | 2004 | |||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Filmed Entertainment | $ | 1,477 | $ | 1,184 | $ | 4,726 | $ | 3,809 | $ | 1,419 | $ | 1,377 | ||||||||||||
Television | 1,414 | 1,182 | 3,982 | 3,748 | 1,048 | 1,004 | ||||||||||||||||||
Cable Network Programming | 633 | 580 | 1,857 | 1,741 | 775 | 600 | ||||||||||||||||||
Direct Broadcast Satellite Television | 624 | 494 | 1,620 | 1,179 | 498 | 415 | ||||||||||||||||||
Magazines & Inserts | 283 | 278 | 774 | 729 | ||||||||||||||||||||
Magazines and Inserts | 267 | 232 | ||||||||||||||||||||||
Newspapers | 1,062 | 914 | 2,937 | 2,511 | 1,012 | 865 | ||||||||||||||||||
Book Publishing | 300 | 321 | 1,041 | 1,009 | 391 | 364 | ||||||||||||||||||
Other | 250 | 211 | 814 | 606 | 272 | 289 | ||||||||||||||||||
Total revenues | $ | 6,043 | $ | 5,164 | $ | 17,751 | $ | 15,332 | $ | 5,682 | $ | 5,146 | ||||||||||||
Operating income (loss) before depreciation and amortization: | ||||||||||||||||||||||||
Operating income (loss): | ||||||||||||||||||||||||
Filmed Entertainment | $ | 265 | $ | 232 | $ | 988 | $ | 851 | $ | 368 | $ | 291 | ||||||||||||
Television | 241 | 281 | 669 | 668 | 160 | 234 | ||||||||||||||||||
Cable Network Programming | 210 | 152 | 681 | 493 | 197 | 166 | ||||||||||||||||||
Direct Broadcast Satellite Television | 21 | 19 | (133 | ) | (123 | ) | (61 | ) | (121 | ) | ||||||||||||||
Magazines & Inserts | 80 | 86 | 220 | 210 | ||||||||||||||||||||
Magazines and Inserts | 76 | 64 | ||||||||||||||||||||||
Newspapers | 256 | 217 | 639 | 558 | 125 | 118 | ||||||||||||||||||
Book Publishing | 31 | 38 | 156 | 156 | 70 | 60 | ||||||||||||||||||
Other | (11 | ) | (30 | ) | (72 | ) | (34 | ) | (26 | ) | (46 | ) | ||||||||||||
Total operating income (loss) before depreciation and amortization | 1,093 | 995 | 3,148 | 2,779 | ||||||||||||||||||||
Amortization of cable distribution investments | (28 | ) | (31 | ) | (86 | ) | (94 | ) | ||||||||||||||||
Depreciation and amortization | (176 | ) | (149 | ) | (453 | ) | (428 | ) | ||||||||||||||||
Total operating income | 889 | 815 | 2,609 | 2,257 | 909 | 766 | ||||||||||||||||||
Interest expense, net | (143 | ) | (136 | ) | (405 | ) | (400 | ) | (128 | ) | (125 | ) | ||||||||||||
Equity earnings (losses) of affiliates | 91 | 71 | 154 | 88 | ||||||||||||||||||||
Equity earnings of affiliates | 186 | 15 | ||||||||||||||||||||||
Other, net | (62 | ) | 14 | 15 | 34 | 11 | 191 | |||||||||||||||||
Income before income tax expense and minority interest in subsidiaries | 775 | 764 | 2,373 | 1,979 | ||||||||||||||||||||
Income before income tax expense, minority interest in subsidiaries and cumulative effect of accounting change | 978 | 847 | ||||||||||||||||||||||
Income tax expense | (317 | ) | (282 | ) | (773 | ) | (725 | ) | (382 | ) | (180 | ) | ||||||||||||
Minority interest in subsidiaries, net of tax | (58 | ) | (48 | ) | (189 | ) | (150 | ) | (16 | ) | (42 | ) | ||||||||||||
Net income | $ | 400 | $ | 434 | $ | 1,411 | $ | 1,104 | ||||||||||||||||
Income before cumulative effect of accounting change | 580 | 625 | ||||||||||||||||||||||
Cumulative effect of accounting change, net of tax | (1,013 | ) | — | |||||||||||||||||||||
Net (loss) income | $ | (433 | ) | $ | 625 | |||||||||||||||||||
Interest expense, net, Equity earnings (losses) of affiliates, Other, net, Minority interest in subsidiaries, net of tax and Income tax expense are not allocated to segments, as they are not under the control of segment management.
Intersegment revenues, generated primarily by the Filmed Entertainment segment, of approximately $219$185 million and $195$176 million for the three months ended March 31, 2005 and 2004, respectively, and approximately $538 million and $546 million for the nine months ended March 31,September 30, 2005 and 2004, respectively, have been eliminated within the Filmed Entertainment segment. Intersegment operating losses,profit, generated primarily by the Filmed Entertainment segment, of approximately $2$12 million and $4$19 million for the three months ended March 31, 2005 and 2004, respectively, and intersegment operating profits of approximately $26 million and $30 million for the nine months ended March 31,September 30, 2005 and 2004, respectively, have been eliminated within the Filmed Entertainment segment.
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 8 – Segment Information (continued)
For the three months ended March 31, 2005 | ||||||||||||||||
Operating income (loss) before depreciation and | Depreciation and amortization | Amortization of cable distribution investments | Operating income (loss) | |||||||||||||
(in millions) | ||||||||||||||||
Filmed Entertainment | $ | 265 | $ | (14 | ) | $ | — | $ | 251 | |||||||
Television | 241 | (20 | ) | — | 221 | |||||||||||
Cable Network Programming | 210 | (10 | ) | (28 | ) | 172 | ||||||||||
Direct Broadcast Satellite Television | 21 | (42 | ) | — | (21 | ) | ||||||||||
Magazines & Inserts | 80 | (1 | ) | — | 79 | |||||||||||
Newspapers | 256 | (70 | ) | — | 186 | |||||||||||
Book Publishing | 31 | (1 | ) | — | 30 | |||||||||||
Other | (11 | ) | (18 | ) | — | (29 | ) | |||||||||
Total | $ | 1,093 | $ | (176 | ) | $ | (28 | ) | $ | 889 | ||||||
For the three months ended March 31, 2004 | ||||||||||||||||
Operating income (loss) before depreciation and amortization | Depreciation and amortization | Amortization of cable distribution investments | Operating income (loss) | |||||||||||||
(in millions) | ||||||||||||||||
Filmed Entertainment | $ | 232 | $ | (14 | ) | $ | — | $ | 218 | |||||||
Television | 281 | (21 | ) | — | 260 | |||||||||||
Cable Network Programming | 152 | (10 | ) | (31 | ) | 111 | ||||||||||
Direct Broadcast Satellite Television | 19 | (43 | ) | — | (24 | ) | ||||||||||
Magazines & Inserts | 86 | (2 | ) | — | 84 | |||||||||||
Newspapers | 217 | (41 | ) | — | 176 | |||||||||||
Book Publishing | 38 | (2 | ) | — | 36 | |||||||||||
Other | (30 | ) | (16 | ) | — | (46 | ) | |||||||||
Total | $ | 995 | $ | (149 | ) | $ | (31 | ) | $ | 815 | ||||||
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSSTATEMENTS—(Continued)
Note 8 – Segment Information (continued)
For the nine months ended March 31, 2005 | ||||||||||||||||
Operating income (loss) before depreciation and | Depreciation and amortization | Amortization of cable distribution investments | Operating (loss) | |||||||||||||
(in millions) | ||||||||||||||||
Filmed Entertainment | $ | 988 | $ | (39 | ) | $ | — | $ | 949 | |||||||
Television | 669 | (61 | ) | — | 608 | |||||||||||
Cable Network Programming | 681 | (30 | ) | (86 | ) | 565 | ||||||||||
Direct Broadcast Satellite Television | (133 | ) | (114 | ) | — | (247 | ) | |||||||||
Magazines & Inserts | 220 | (4 | ) | — | 216 | |||||||||||
Newspapers | 639 | (151 | ) | — | 488 | |||||||||||
Book Publishing | 156 | (4 | ) | — | 152 | |||||||||||
Other | (72 | ) | (50 | ) | — | (122 | ) | |||||||||
Total | $ | 3,148 | $ | (453 | ) | $ | (86 | ) | $ | 2,609 | ||||||
For the nine months ended March 31, 2004 | ||||||||||||||||
Operating income (loss) before depreciation and amortization | Depreciation and amortization | Amortization of cable distribution | Operating (loss) | |||||||||||||
(in millions) | ||||||||||||||||
Filmed Entertainment | $ | 851 | $ | (41 | ) | $ | — | $ | 810 | |||||||
Television | 668 | (69 | ) | — | 599 | |||||||||||
Cable Network Programming | 493 | (31 | ) | (94 | ) | 368 | ||||||||||
Direct Broadcast Satellite Television | (123 | ) | (128 | ) | — | (251 | ) | |||||||||
Magazines & Inserts | 210 | (5 | ) | — | 205 | |||||||||||
Newspapers | 558 | (110 | ) | — | 448 | |||||||||||
Book Publishing | 156 | (4 | ) | — | 152 | |||||||||||
Other | (34 | ) | (40 | ) | — | (74 | ) | |||||||||
Total | $ | 2,779 | $ | (428 | ) | $ | (94 | ) | $ | 2,257 | ||||||
For the three months ended September 30, 2005 | ||||||||||||||||
Operating income (loss) before depreciation and amortization | Depreciation and amortization | Amortization of cable distribution investments | Operating income (loss) | |||||||||||||
(in millions) | ||||||||||||||||
Filmed Entertainment | $ | 387 | $ | (19 | ) | $ | — | $ | 368 | |||||||
Television | 179 | (19 | ) | — | 160 | |||||||||||
Cable Network Programming | 236 | (12 | ) | (27 | ) | 197 | ||||||||||
Direct Broadcast Satellite Television | (20 | ) | (41 | ) | — | (61 | ) | |||||||||
Magazines and Inserts | 78 | (2 | ) | — | 76 | |||||||||||
Newspapers | 191 | (66 | ) | — | 125 | |||||||||||
Book Publishing | 72 | (2 | ) | — | 70 | |||||||||||
Other | (12 | ) | (14 | ) | — | (26 | ) | |||||||||
Total | $ | 1,111 | $ | (175 | ) | $ | (27 | ) | $ | 909 | ||||||
For the three months ended September 30, 2004 | ||||||||||||||||
Operating income (loss) before depreciation and amortization | Depreciation and amortization | Amortization of cable distribution investments | Operating income (loss) | |||||||||||||
(in millions) | ||||||||||||||||
Filmed Entertainment | $ | 303 | $ | (12 | ) | $ | — | $ | 291 | |||||||
Television | 254 | (20 | ) | — | 234 | |||||||||||
Cable Network Programming | 206 | (10 | ) | (30 | ) | 166 | ||||||||||
Direct Broadcast Satellite Television | (89 | ) | (32 | ) | — | (121 | ) | |||||||||
Magazines and Inserts | 66 | (2 | ) | — | 64 | |||||||||||
Newspapers | 153 | (35 | ) | — | 118 | |||||||||||
Book Publishing | 61 | (1 | ) | — | 60 | |||||||||||
Other | (30 | ) | (16 | ) | — | (46 | ) | |||||||||
Total | $ | 924 | $ | (128 | ) | $ | (30 | ) | $ | 766 | ||||||
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSSTATEMENTS—(Continued)
Note 8 – Segment Information (continued)
At March 31, 2005 | At June 30, 2004 | At September 30, 2005 | At June 30, 2005 | |||||||||
(in millions) | (in millions) | |||||||||||
Total assets: | ||||||||||||
Filmed Entertainment | $ | 5,031 | $ | 4,532 | $ | 6,254 | $ | 4,413 | ||||
Television | 14,258 | 14,144 | ||||||||||
Television(1) | 12,810 | 13,950 | ||||||||||
Cable Network Programming | 4,911 | 4,795 | 7,140 | 5,890 | ||||||||
Direct Broadcast Satellite Television | 2,300 | 2,232 | 2,029 | 1,862 | ||||||||
Magazines & Inserts | 1,246 | 1,209 | ||||||||||
Magazines and Inserts | 1,269 | 1,253 | ||||||||||
Newspapers | 5,643 | 4,038 | 5,215 | 5,195 | ||||||||
Book Publishing | 1,472 | 1,362 | 1,667 | 1,382 | ||||||||
Other | 9,553 | 5,117 | 8,124 | 10,479 | ||||||||
Investments | 11,169 | 10,914 | 10,352 | 10,268 | ||||||||
Total assets | $ | 55,583 | $ | 48,343 | $ | 54,860 | $ | 54,692 | ||||
Goodwill and Intangible assets: | ||||||||||||
Goodwill and Intangible assets, net: | ||||||||||||
Filmed Entertainment | $ | 370 | $ | 370 | $ | 1,769 | $ | 249 | ||||
Television | 11,446 | 11,438 | ||||||||||
Television(1) | 10,334 | 11,567 | ||||||||||
Cable Network Programming | 2,799 | 2,774 | 4,961 | 3,754 | ||||||||
Direct Broadcast Satellite Television | 696 | 685 | 539 | 537 | ||||||||
Magazines & Inserts | 1,003 | 1,000 | ||||||||||
Newspapers1 | 1,862 | 488 | ||||||||||
Magazines and Inserts | 1,004 | 1,002 | ||||||||||
Newspapers | 1,757 | 1,724 | ||||||||||
Book Publishing | 501 | 501 | 501 | 501 | ||||||||
Other2 | 3,865 | 895 | ||||||||||
Other | 1,804 | 4,127 | ||||||||||
Total goodwill and intangibles | $ | 22,542 | $ | 18,151 | ||||||||
Total goodwill and intangibles, net | $ | 22,669 | $ | 23,461 | ||||||||
See Note |
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 9 – Other, net
Other, net consisted of the following:
For the three months ended March 31, | For the nine months ended March 31, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
(in millions) | ||||||||||||||||
Gain on sale of SkyPerfecTV!(a) | $ | — | $ | — | $ | — | $ | 105 | ||||||||
World Trade Center insurance settlement | — | — | — | 26 | ||||||||||||
Change in fair value of Exchangeable securities(b) | 14 | (7 | ) | 105 | (104 | ) | ||||||||||
Loss on sale of Sky Multi-Country Partners(c) | — | — | (55 | ) | — | |||||||||||
Gain on sale of Rogers Sportsnet(c) | — | — | 39 | — | ||||||||||||
Loss on RPP exchange(c) | (77 | ) | — | (77 | ) | — | ||||||||||
Other | 1 | 21 | 3 | 7 | ||||||||||||
Total Other, net | $ | (62 | ) | $ | 14 | $ | 15 | $ | 34 | |||||||
Note 10 – Commitments and Guarantees
Commitments
In October 2004, the Company announced its intentions to invest in new printing plants in the United Kingdom and Australia to take advantage of technological and market changes. The Company intends to expend approximately $1 billion in the United Kingdom for new printing plants and related costs for its UK newspapers and $500 million for the Australian printing plants. As a result, the Company has accelerated the depreciation of our existing plant assets over a four to five year period.
In November 2004, the Company entered into a six-year follow-on contract with the National Football League commencing with the 2006 season, increasing the Company’s commitments with respect to sports programming rights by approximately $4.3 billion.
In November 2004, the Company entered into an agreement with the Bowl Championship Series from fiscal 2007 through fiscal 2010, increasing the Company’s commitments with respect to sports programming rights by approximately $330 million.
Guarantees
In August 2004, the Company guaranteed the obligations of Sky Brasil, an equity affiliate of the Company, under a $210 million three-year credit agreement with JP Morgan Chase Bank and Citibank NA. Upon the closing of the Latin American DTH reorganization transactions, the Company will be released from this guarantee. (See Note 6 –Acquisitions and Disposals)
The Company has guaranteed various transponder leases for certain associated companies operating in Latin America. The aggregate of these guarantees at March 31, 2005 is approximately $458 million and the final guarantee expires in 2019. Upon the closing of the Latin American DTH reorganization transactions, the Company will be released from the transponder lease guarantees. (See Note 6 –Acquisitions and Disposals)
In December 2004, the Company guaranteed $45 million of the obligations of Innova, an equity affiliate of the Company, under a credit agreement. Upon the closing of the Latin American DTH reorganization transactions, the Company will be released from this guarantee. (See Note 6 – Acquisitions and Disposals)
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 10 – Commitments and Guarantees (continued)
The Company has guaranteed $49 million of a bank loan facility for Star Channel Japan representing the Company’s pro rata ownership share. The Company’s portion of the guarantee represents a term loan of $26 million (¥2.8 billion) which matures in September 2005, and an agreement for overdraft of $23 million (¥2.5 billion). The Company would be liable under this guarantee, to the extent of its ownership interest, in the event of default by Star Channel Japan.
Note 11 – Contingencies
NDS
On June 6, 2003, Echostar Communications Corporation, Echostar Satellite Corporation, Echostar Technologies Corporation and Nagrastar L.L.C. (collectively, Echostar) filed an action against NDS in the United States District Court for the Central District of California. Echostar filed an amended complaint on October 8, 2003, which purported to allege claims for violation of the Digital Millennium Copyright Act (DMCA), the Communications Act of 1934 (CA), the Electronic Communications Privacy Act, The Computer Fraud and Abuse Act, California’s Unfair Competition statute and the federal RICO statute. The complaint also purported to allege claims for civil conspiracy, misappropriation of trade secrets and interference with prospective business advantage. The complaint sought injunctive relief, unspecified compensatory and exemplary damages and restitution. On December 22, 2003, all of the claims were dismissed by the court, except for the DMCA, CA and unfair competition claims, and the Court limited these claims to acts allegedly occurring within three years of the filing of the complaint. Echostar filed a second amended complaint. NDS filed a motion to dismiss the second amended complaint on March 31, 2004. The motion was scheduled to be heard by the Court on July 23, 2004. On July 21, 2004, the Court issued an order vacating the July 23, 2004 hearing date and ordering, among other things, Echostar to file a third amended complaint within 10 days correcting various deficiencies in the second amended complaint noted by the Court. Echostar filed its third amended complaint on August 4, 2004. On August 6, 2004, the Court ruled that NDS was free to file motion to dismiss the third amended complaint, which NDS did on September 20, 2004. The hearing occurred on January 3, 2005. On February 28, 2005, the Court issued an order treating the motion as a motion for a more definite statement, granted the motion and gave Echostar until March 30, 2005 to file a fourth amended complaint correcting various deficiencies in the third amended complaint noticed by the Court. On March 30, 2005, Echostar filed a fourth amended complaint. NDS believes the claims contained therein are without merit and intends to file a motion to dismiss with the court.
On July 25, 2003, Sogecable, S.A. and its subsidiary Canalsatellite Digital, S.L., Spanish satellite broadcasters and customers of Canal+ Technologies SA (together, Sogecable), filed an action against NDS in the United States District Court for the Central District of California. Sogecable filed an amended complaint on October 9, 2003, which purported to allege claims for violation of the DMCA and the federal RICO statute. The amended complaint also purported to allege claims for interference with contract and prospective business advantage. The complaint sought injunctive relief, unspecified compensatory and exemplary damages and restitution. On December 22, 2003, all of the claims were dismissed by the court. Sogecable filed a second amended complaint. NDS filed a motion to dismiss the second amended complaint on March 31, 2004. On July 23, 2004, the Court heard oral argument on the motion and advised that a formal ruling should be issued by early August. On August 4, 2004, the court issued an order dismissing the second amended complaint in its entirety. Sogecable had until October 4, 2004 to file a third amended complaint. On October 1, 2004, Sogecable notified the Court that it would not be filing a third amended complaint, but would appeal the Court’s entry of final judgement dismissing the suit to the Ninth Circuit Court of Appeals. Sogecable has until May 17, 2005 to file its brief or appeal and there have been no developments since October 4, 2004.
On April 18, 1997, International Electronics Technology Corp. filed suit in the United States District Court for the Central District of California against NDS’s customers, DIRECTV, Inc. and Thomson Consumer Electronics, Inc., alleging infringement of one US patent and seeking unspecified damages and injunction. Although not a party to this case, NDS has assumed the defense and agreed to indemnify the named defendants. The defendants have raised defenses of non-infringement and/or invalidity. On August 2, 2004, the Court stayed the case indefinitely pending decision by the Federal Circuit in another case.
DIRECTV
TNCL was named as a defendant in a Revised Amended Consolidated Complaint filed on May 7, 2004 in a lawsuit captioned “In re General Motors (Hughes) Shareholders Litigation,” filed in the Court of Chancery of the State of Delaware, Consolidated Civil Action No. 20269-NC. The lawsuit relates to TNCL’s acquisition of stock in Hughes on December 22, 2003 which was subsequently transferred to FEG. The complaint alleges that TNCL aided and abetted an alleged breach of fiduciary duty by the Board of
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 11 – Contingencies (continued)
Directors of GM allegedly owed to a class of certain GM shareholders. The plaintiffs allegedly seek “appropriate equitable relief…including rescissory remedies to the extent feasible…” The Company believes that the lawsuit is without merit and intends to vigorously defend against claims brought against TNCL in the lawsuit. The Company also believes it is entitled to indemnification by GM under the agreements related to the transaction. On August 30, 2004, TNCL filed a brief in support of its motion to dismiss the complaint. On October 18, 2004, the plaintiffs filed their opposition to the motion. The Company filed its reply on November 17, 2004. The oral argument was heard on March 7, 2005. On May 4, 2005, the court issued its decision granting the motion to dismiss.
FEG Offer
News Corporation received complaints relating to a number of purported class actions filed in Court of Chancery in the State of Delaware. The complaints generally allege, among other things, that News Corporation and the members of the FEG board of directors have breached fiduciary duties owed to the public stockholders of FEG, including as a result of News Corporation offering to acquire shares of FEG Class A common stock at an unfair price and at a time that disadvantages the FEG stockholders. The complaints generally seek declaratory and injunctive relief and damages in an unspecified amount. News Corporation believes that these claims are without merit and intends to vigorously contest the allegations.
News Corporation is currently aware of 17 purported class action complaints that were filed in January 2005 at the Court of Chancery of the State of Delaware challenging the FEG Offer. The Delaware complaints are captioned:Allen v. News Corp., et al., No. 979-N;Mascarenhas v. Fox Entm’t. Group, et al., No. 980-N;Shemesh v. Fox Entm’t. Group, et al., No. 981-N;Striffler v. FEG Holdings, et al., No. 982-N;Howard Vogel Ret. Plan v. Powers, et al., No. 984-N;Doniger v. News Corp., et al., No. 985-N;Engle v. Murdoch, et al., No. 986-N;Shrank v. Murdoch, et al., No. 988-N;Blackman v. Fox Entm’t. Group, et al., No. 991-N;Fishbone v. News Corp., et al., No. 994-N;Kennel v. News Corp., et al., No. 995-N;Millner v. News Corp., et al., No. 996-N;Pipefitters Locals v. Fox Entm’t. Group, et al., No. 1003-N;Molinari v. News Corp., et al., C.A. No. 1018-N;Seaview Services v. Fox Entertainment, et al., C.A. No. 1026-N;Teachers’ Retirement System of Louisiana v. Powers, et al., C.A. No. 1033-N; andNew Jersey Building Laborers’ Pension Fund v. Powers, et al., C.A. No. 1034. TheShrank action, No. 988-N, was voluntarily dismissed on January 19, 2005. News Corporation is also currently aware of two purported class action complaints raising substantially similar claims that have been filed in the Supreme Court of the State of New York, County of New York, and one that has been filed in the US District Court for the Southern District of New York, which were filed in January 2005. The New York complaints are captioned:Shrank v. Murdoch, et al., Index No. 600114/2005; andGreen Meadows Ptr. v. Fox Entertainment, et al., No. 100706/2005. The US Southern District of New York complaint is captionedGary Kosseff v. Fox Entertainment Group, Inc., et. al., No. 05 Civ. 1942 (LLS). On January 21, 2005, certain plaintiffs in the Delaware lawsuits filed a motion that seeks to consolidate the Delaware actions. In addition, the Company has filed motions to dismiss and to stay discovery, and the plaintiffs have filed a motion for expedited proceedings. On February 3, 2005, the Court of Chancery denied News Corporation’s motion to stay discovery, and granted the plaintiffs’ motion for expedited discovery and motion to consolidate. The consolidated Delaware complaint was styledIn re Fox Entertainment Group, Inc. Shareholders Litigation, Consol. C.A. No. 1033-N.
Each of the consolidated Delaware complaint and the New York Supreme Court complaints generally alleges, among other things, that News Corporation and the members of the FEG board of directors purportedly breached fiduciary duties owed to the public stockholders of FEG in connection with the FEG Offer by: (1) offering to acquire their shares at an unfair price; (2) offering to acquire their shares at a time that disadvantages the public stockholders; (3) having FEG appoint directors who are neither independent nor disinterested to a special committee created to consider the FEG Offer; and (4) failing to adequately disclose information material to the FEG Offer, including disclosure with respect to the FEG 2005 budget. The US Southern District of New York complaint also generally alleges, among other things, some of the foregoing matters. The plaintiffs filed an amended complaint on February 24, 2005 in the US Southern District of New York alleging violations of the federal securities laws in addition to the foregoing matters. On February 24, 2005, the US Southern District of New York denied the plaintiffs’ motion for expedited proceedings.
As for relief, the plaintiffs seek, among other things: (1) an order that the complaints are properly maintainable as a class action; (2) a declaration that defendants have breached their fiduciary duties and other duties to the plaintiffs and other members of the purported class; (3) injunctive relief; (4) unspecified monetary damages; (5) attorneys’ fees, costs and expenses; and (6) such other and further relief as the Court may deem just and proper. News Corporation believes that these claims are without merit and intends to vigorously contest these allegations.
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 11 – Contingencies (continued)
A memorandum of understanding setting forth the terms of a settlement with respect to the aforementioned litigation was entered intoby the plaintiffs and the named defendants as of March 2, 2005. Among other conditions, the settlement is subject to negotiation of final settlement documentation, confirmatory discovery by the plaintiffs, court approval of the settlement and dismissal with prejudice of the litigation.
Other
The Company experiences routine litigation in the normal course of its business. The Company believes that none of its pending litigation will have a material adverse effect on its consolidated financial condition, future results of operations or liquidity.
Note 12 – 14—Earnings Per Share
Earnings per share (“EPS”) is computed individually for the Class A common shareCommon Stock and Class B common share.Common Stock. Net income (loss) is apportioned to both Class A shareholdersstockholders and Class B shareholdersstockholders on the ratio of 1.2 to 1, respectively, in accordance with the rights of the shareholdersstockholders as described in the Company’s Restated Certificate of Incorporation. In order to give effect to this apportionment when determining EPS, the weighted average Class A shareshares is increased by 20% (the “Adjusted Class”) and is then compared to the sum of the weighted average Class B shares and the weighted average Adjusted Class. The resulting percentage is then applied to the Net income (loss) to determine the apportionment for the Class A shareholdersstockholders with the balance attributable to the Class B shareholders.stockholders.
EPS has been presented in the two-class presentation, as the shares of Class B sharesCommon Stock participate in dividends with the shares of Class A shares.Common Stock.
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table sets forth the computation of basic and diluted earnings per share under SFAS No. 128, “Earnings per Share” (in millions, except per share amounts and %):
For the three months ended March 31, | For the nine months ended March 31, | ||||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||||
(in millions) | |||||||||||||||
Net income | $ | 400 | $ | 434 | $ | 1,411 | $ | 1,104 | |||||||
Perpetual preference dividends | — | (7 | ) | (10 | ) | (21 | ) | ||||||||
Net income available to shareholders - basic | 400 | 427 | 1,401 | 1,083 | |||||||||||
Interest on convertible debt | 4 | 4 | 14 | 14 | |||||||||||
Net income available to shareholders - diluted | $ | 404 | $ | 431 | $ | 1,415 | $ | 1,097 | |||||||
For the three months ended September 30, | |||||||
2005 | 2004 | ||||||
(in millions) | |||||||
Income before cumulative effect of accounting change | $ | 580 | $ | 625 | |||
Perpetual preference dividends | — | (7 | ) | ||||
Income before cumulative effect of accounting change available to shareholders—basic | 580 | 618 | |||||
Interest on convertible debt | 5 | 5 | |||||
Income before cumulative effect of accounting change available to shareholders—diluted | $ | 585 | $ | 623 | |||
For the three months ended March 31, | ||||||||||||||||||||||
2005 | 2004 | |||||||||||||||||||||
Class A | Class B | Total | Class A | Class B | Total | |||||||||||||||||
(in millions, except % and per share data) | ||||||||||||||||||||||
Allocation percent - basic | 69 | % | 31 | % | 100 | % | 70 | % | 30 | % | 100 | % | ||||||||||
Allocation of income - basic | 273 | 127 | 400 | 298 | 129 | 427 | ||||||||||||||||
Allocation percent - diluted | 69 | % | 31 | % | 100 | % | 70 | % | 30 | % | 100 | % | ||||||||||
Allocation of income - diluted | 280 | 124 | 404 | 304 | 127 | 431 | ||||||||||||||||
Weighted average shares - basic | 1,893 | 1,045 | 2,938 | 1,898 | 983 | 2,881 | ||||||||||||||||
Weighted average shares - diluted | 1,966 | 1,045 | 3,011 | 1,951 | 983 | 2,934 | ||||||||||||||||
Earnings per share: | ||||||||||||||||||||||
Net income - basic | $ | 0.14 | $ | 0.12 | $ | 0.16 | $ | 0.13 | ||||||||||||||
Net income - diluted | $ | 0.14 | $ | 0.12 | $ | 0.16 | $ | 0.13 | ||||||||||||||
For the three months ended September 30, | ||||||||||||||||||||||
2005 | 2004 | |||||||||||||||||||||
Class A | Class B | Total | Class A | Class B | Total | |||||||||||||||||
(in millions, except % and per share data) | ||||||||||||||||||||||
Allocation percent—basic | 72 | % | 28 | % | 100 | % | 70 | % | 30 | % | 100 | % | ||||||||||
Allocation of income before cumulative effect of accounting change—basic | 419 | 161 | 580 | 432 | 186 | 618 | ||||||||||||||||
Allocation percent—diluted | 73 | % | 27 | % | 100 | % | 71 | % | 29 | % | 100 | % | ||||||||||
Allocation of income before cumulative effect of accounting change—diluted | 425 | 160 | 585 | 439 | 184 | 623 | ||||||||||||||||
Weighted average shares—basic | 2,237 | 1,030 | 3,267 | 1,905 | 983 | 2,888 | ||||||||||||||||
Weighted average shares—diluted | 2,288 | 1,030 | 3,318 | 1,961 | 983 | 2,944 | ||||||||||||||||
Earnings per share: | ||||||||||||||||||||||
Income before cumulative effect of accounting change—basic | $ | 0.19 | $ | 0.16 | $ | 0.23 | $ | 0.19 | ||||||||||||||
Income before cumulative effect of accounting change—diluted | $ | 0.19 | $ | 0.15 | $ | 0.22 | $ | 0.19 | ||||||||||||||
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSSTATEMENTS—(Continued)
For the three months ended September 30, | |||||||
2005 | 2004 | ||||||
(in millions) | |||||||
Cumulative effect of accounting change | $ | (1,013 | ) | $ | — |
For the three months ended September 30, | ||||||||||||||||||||||
2005 | 2004 | |||||||||||||||||||||
Class A | Class B | Total | Class A | Class B | Total | |||||||||||||||||
(in millions, except % and per share data) | ||||||||||||||||||||||
Allocation percent—basic | 72 | % | 28 | % | 100 | % | 70 | % | 30 | % | 100 | % | ||||||||||
Allocation of cumulative effect of accounting change, | (732 | ) | (281 | ) | (1,013 | ) | — | — | — | |||||||||||||
Allocation percent—diluted | 73 | % | 27 | % | 100 | % | 71 | % | 29 | % | 100 | % | ||||||||||
Allocation of cumulative effect of accounting change, | (737 | ) | (276 | ) | (1,013 | ) | — | — | — | |||||||||||||
Weighted average shares—basic | 2,237 | 1,030 | 3,267 | 1,905 | 983 | 2,888 | ||||||||||||||||
Weighted average shares—diluted | 2,288 | 1,030 | 3,318 | 1,961 | 983 | 2,944 | ||||||||||||||||
(Losses) Earnings per share: | ||||||||||||||||||||||
Cumulative effect of accounting change, | $ | (0.33 | ) | $ | (0.27 | ) | $ | — | $ | — | ||||||||||||
Cumulative effect of accounting change, | $ | (0.32 | ) | $ | (0.27 | ) | $ | — | $ | — | ||||||||||||
For the three months ended September 30, | ||||||||
2005 | 2004 | |||||||
(in millions) | ||||||||
Net (loss) income | $ | (433 | ) | $ | 625 | |||
Perpetual preference dividends | — | (7 | ) | |||||
Net income available to shareholders—basic | (433 | ) | 618 | |||||
Interest on convertible debt | 5 | 5 | ||||||
Net (loss) income available to shareholders—diluted | $ | (428 | ) | $ | 623 | |||
For the three months ended September 30, | ||||||||||||||||||||||
2005 | 2004 | |||||||||||||||||||||
Class A | Class B | Total | Class A | Class B | Total | |||||||||||||||||
(in millions, except % and per share data) | ||||||||||||||||||||||
Allocation percent—basic | 72 | % | 28 | % | 100 | % | 70 | % | 30 | % | 100 | % | ||||||||||
Allocation of net (loss) income—basic | (313 | ) | (120 | ) | (433 | ) | 432 | 186 | 618 | |||||||||||||
Allocation percent—diluted | 73 | % | 27 | % | 100 | % | 71 | % | 29 | % | 100 | % | ||||||||||
Allocation of net (loss) income—diluted | (311 | ) | (117 | ) | (428 | ) | 439 | 184 | 623 | |||||||||||||
Weighted average shares—basic | 2,237 | 1,030 | 3,267 | 1,905 | 983 | 2,888 | ||||||||||||||||
Weighted average shares—diluted | 2,288 | 1,030 | 3,318 | 1,961 | 983 | 2,944 | ||||||||||||||||
(Losses) Earnings per share: | ||||||||||||||||||||||
Net (loss) income—basic | $ | (0.14 | ) | $ | (0.12 | ) | $ | 0.23 | $ | 0.19 | ||||||||||||
Net (loss) income—diluted | $ | (0.14 | ) | $ | (0.11 | ) | $ | 0.22 | $ | 0.19 | ||||||||||||
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 12 – Earnings Per Share (continued)
For the nine months ended March 31, | ||||||||||||||||||||||
2005 | 2004 | |||||||||||||||||||||
Class A | Class B | Total | Class A | Class B | Total | |||||||||||||||||
(in millions, except % and per share data) | ||||||||||||||||||||||
Allocation percent - basic | 69 | % | 31 | % | 100 | % | 68 | % | 32 | % | 100 | % | ||||||||||
Allocation of income - basic | 970 | 431 | 1,401 | 732 | 351 | 1,083 | ||||||||||||||||
Allocation percent - diluted | 70 | % | 30 | % | 100 | % | 68 | % | 32 | % | 100 | % | ||||||||||
Allocation of income - diluted | 990 | 425 | 1,415 | 750 | 347 | 1,097 | ||||||||||||||||
Weighted average shares - basic | 1,899 | 1,014 | 2,913 | 1,707 | 983 | 2,690 | ||||||||||||||||
Weighted average shares - diluted | 1,969 | 1,014 | 2,983 | 1,767 | 983 | 2,750 | ||||||||||||||||
Earnings per share: | ||||||||||||||||||||||
Net income - basic | $ | 0.51 | $ | 0.43 | $ | 0.43 | $ | 0.36 | ||||||||||||||
Net income - diluted | $ | 0.50 | $ | 0.42 | $ | 0.42 | $ | 0.35 | ||||||||||||||
Dividends
The Company declared a dividend of $0.06 per share for Class A common shares and $0.02 per share for Class B common shares on September 16, 2004, which was paid on November 2, 2004 to shareholders of record on September 16, 2004.
The Company declared a dividend of $0.05 per share for Class A common shares and $0.02 per share for Class B common shares on March 16, 2005, which was paid on April 20, 2005 to shareholders of record on March 16, 2005.
Perpetual Preference Shares
In November 2004, the Company redeemed all of the outstanding adjustable rate cumulative perpetual preference shares and the guaranteed 8 5/8% perpetual preference shares for $345 million at par.
Note 13 – 15—Additional Financial Information
Interest Expense, Net
Interest expense, net consists of:
For the three months ended March 31, | For the nine months ended March 31, | For the three months ended September 30, | ||||||||||||||||||||||
2005 | 2004 | 2005 | 2004 | 2005 | 2004 | |||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Interest income | $ | 58 | $ | 43 | $ | 160 | $ | 135 | $ | 66 | $ | 51 | ||||||||||||
Interest expense | (201 | ) | (179 | ) | (565 | ) | (535 | ) | (194 | ) | (176 | ) | ||||||||||||
Interest expense, net | $ | (143 | ) | $ | (136 | ) | $ | (405 | ) | $ | (400 | ) | $ | (128 | ) | $ | (125 | ) | ||||||
For the three months ended September 30, | ||||||||||||||||||||||||
2005 | 2004 | |||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Supplemental cash flows information: | ||||||||||||||||||||||||
Cash paid for income taxes | $ | 90 | $ | 93 | ||||||||||||||||||||
Cash paid for interest | 131 | 161 | ||||||||||||||||||||||
Supplemental information on businesses acquired: | ||||||||||||||||||||||||
Fair value of assets acquired | 848 | 47 | ||||||||||||||||||||||
Cash acquired | 15 | — | ||||||||||||||||||||||
Less: Liabilities assumed | (68 | ) | (12 | ) | ||||||||||||||||||||
Consideration Payable | (581 | ) | (1 | ) | ||||||||||||||||||||
Assets exchanged | — | — | ||||||||||||||||||||||
Minority interest acquired | 39 | — | ||||||||||||||||||||||
Cash paid | (253 | ) | (34 | ) | ||||||||||||||||||||
Fair value of stock consideration | $ | — | $ | — | ||||||||||||||||||||
Supplemental Cash Flow InformationNote 16—Subsequent Events
Supplemental information on businesses acquired:Under an existing stockholders agreement between Intermix, MySpace, Inc. (“MySpace”) and certain other stockholders of MySpace, Intermix exercised its option in July 2005 to acquire the outstanding 47% equity interest of MySpace, an Internet entertainment company that it did not already own for approximately $70 million in cash. This transaction was completed in October 2005, increasing Intermix’s ownership in MySpace to 100%. In a related intercompany restructuring, the Company issued to one of its subsidiaries approximately 19 million shares of Class A Common Stock, which are considered treasury shares.
For the nine months ended March 31, | ||||||
2005 | 2004 | |||||
(in millions) | ||||||
Fair Value of Assets acquired | $ | 8,022 | $ | 6,962 | ||
Cash Acquired | 33 | 11 | ||||
Less: Liabilities assumed | 778 | 10 | ||||
Cash paid | 174 | 3,235 | ||||
Fair value of stock consideration | $ | 7,103 | $ | 3,728 | ||
In October 2005, the Company sold its TSL Education Ltd. division, which includes The Times Educational Supplement and other newspapers, magazines, Web sites and exhibitions aimed at teachers and education professionals in the United Kingdom, to Exponent Private Equity for cash consideration of approximately $410 million. Under the terms of the transaction the Company will continue to print and distribute The Times Educational Supplement and The Times Higher Education Supplement under third party arrangements. The Company will be recording a gain on this transaction in the three months ended December 31, 2005.
In October 2005, the Company acquired IGN Entertainment, Inc, a leading community-based Internet media and services company for video games and other forms of digital entertainment, for approximately $650 million in cash. IGN and its network of sites will become part of News Corporation’s Fox Interactive Media unit.
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSSTATEMENTS—(Continued)
Note 14 – Subsequent Events
On May 3, 2005, the Compensation Committee of the Board of Directors of the Company approved the acceleration of vesting of unvested out-of-the-money stock options granted under the Company’s 2004 Stock Option Plan. The affected options are those with exercise prices greater than A$19.74 per share, which was the closing price of the Company’s Class A common stock (as traded on the Australian Stock Exchange in the form of CHESS Depositary Interests) on May 2, 2005. Prior to the Company’s reorganization in the United States, stock options were granted to employees with Australian dollar exercise prices. As a result of this action, the vesting of approximately 19,862,000 previously unvested stock options was accelerated and are now immediately exercisable. None of the unvested stock options held by directors, some of whom have options with exercise prices in excess of $19.74, were accelerated.
The Compensation Committee’s decision to accelerate the vesting of these options was in anticipation of compensation expense to be recorded subsequent to the effective date of Statement of Financial Accounting Standards No. 123 (Revised 2004),Share-Based Payment (“SFAS 123R”) on July 1, 2005. SFAS 123R requires companies to recognize the grant-date fair value of stock options issued to employees as an expense in the income statement, and as of the effective date will require the Company to recognize the compensation costs related to share-based payment transactions, including stock options. In addition, the Compensation Committee considered that because these options had exercise prices in excess of the current market value they were not fully achieving their original objectives of incentive compensation and employee retention, and it believed that the acceleration would have a positive effect on employee morale. The future compensation expense to be recorded upon adoption of SFAS 123R that is eliminated as a result of the acceleration of the vesting of these options is approximately $100 million ($65 million net of tax) of which $58 million ($38 million net of tax) and $42 million ($27 million net of tax) will be realized in fiscal years 2006 and 2007, respectively.
Note 15 - 17—Supplemental Guarantor Information
On June 27, 2003, News America Incorporated (“NAI”), a subsidiary of the Company, entered into a $1.75 billion Five Year Credit Agreement (the “Credit Agreement”) with Citibank N.A., as administrative agent, JP Morgan Chase Bank, as syndication agent, and the lenders named therein. News Corporation, News Australia Holdings Pty Limited, FEG Holdings, Inc., Fox Entertainment Group, Inc., News America Marketing FSI, L.L.C.Inc., News Publishing Australia Limited and News Publishing Australia Holdings Pty Limited are guarantors (the “Guarantors”) under the Credit Agreement.
The Credit Agreement provides a $1.75 billion revolving credit facility with a sub-limit of $600 million available for the issuance of letters of credit, and expires on June 30, 2008. Borrowings are in U.S. dollars only, while letters of credit are issuable in U.S. dollars or Euros. The significant terms of the agreementCredit Agreement include the requirement that the Company maintain specific gearing and interest coverage ratios and limitations on secured indebtedness. The Company pays a facility fee of 0.20%0.15% regardless of facility usage. The Company pays interest of a margin over LIBOR for borrowings and lettersa letter of credit at LIBOR plus 0.675%fee of 0.60%. The Company pays an additional fee of 0.125% if borrowings under the facility exceed 25% of the committed facility. The interest and fees are based on the Company’s current debt rating.
The Guarantors presently guarantee the senior public indebtedness of News Corporation’s indirect wholly owned subsidiary, NAI. The supplemental condensed consolidating financial information of the Guarantors should be read in conjunction with the unaudited consolidated financial statements included herein.
In accordance with SEC Rules and Regulations, the Company uses the equity method to account for the results of all of the non-guarantor subsidiaries, representing substantially all of the Company’s consolidated results of operations, excluding certain intercompany eliminations.
The following condensed consolidating financial statements present the results of operations, financial position and cash flows of NAI, News Corporation, the guarantor subsidiaries of News Corporation, the non-guarantor subsidiaries of News Corporation and the eliminations and reclassifications necessary to arrive at the information for the Company on a consolidated basis.
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSSTATEMENTS—(Continued)
Note 15 – Supplemental Guarantor Information (continued)SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the ninethree months ended March 31,September 30, 2005
(US$ in millions)
News America Incorporated | News Corporation | Guarantor | Non-Guarantor | Reclassifications and Eliminations | News Corporation and Subsidiaries | News America Incorporated | News Corporation | Guarantor | Non- Guarantor | Reclassifications and Eliminations | News Corporation and Subsidiaries | ||||||||||||||||||||||||||||||
Revenues | 3 | — | 494 | 17,254 | — | 17,751 | $ | 1 | $ | — | $ | 164 | $ | 5,517 | $ | — | $ | 5,682 | |||||||||||||||||||||||
Expenses | 185 | — | 353 | 14,604 | — | 15,142 | 69 | — | 106 | 4,598 | — | 4,773 | |||||||||||||||||||||||||||||
Operating (loss) income | (182 | ) | — | 141 | 2,650 | — | 2,609 | (68 | ) | — | 58 | 919 | — | 909 | |||||||||||||||||||||||||||
Other (Expense) Income: | |||||||||||||||||||||||||||||||||||||||||
Interest expense, net | (1,425 | ) | — | 454 | 566 | — | (405 | ) | (466 | ) | (12 | ) | 110 | 240 | — | (128 | ) | ||||||||||||||||||||||||
Equity earnings (losses) of affiliates, net | — | — | 3 | 151 | — | 154 | |||||||||||||||||||||||||||||||||||
Equity earnings (losses) of affiliates | — | — | 12 | 174 | — | 186 | |||||||||||||||||||||||||||||||||||
Earnings (losses) from subsidiary entities | 1,603 | 1,411 | 736 | — | (3,750 | ) | — | 288 | (408 | ) | (362 | ) | — | 482 | — | ||||||||||||||||||||||||||
Other, net | 132 | — | 15 | (132 | ) | — | 15 | (30 | ) | (13 | ) | 9 | 45 | — | 11 | ||||||||||||||||||||||||||
Income (loss) before income tax expense and minority interest in subsidiaries | 128 | 1,411 | 1,349 | 3,235 | (3,750 | ) | 2,373 | ||||||||||||||||||||||||||||||||||
Income (loss) before income tax expense, minority interest in subsidiaries and cumulative effect of accounting change | (276 | ) | (433 | ) | (173 | ) | 1,378 | 482 | 978 | ||||||||||||||||||||||||||||||||
Income tax (expense) benefit | (45 | ) | — | (472 | ) | (1,132 | ) | 876 | (773 | ) | 108 | — | 68 | (538 | ) | (20 | ) | (382 | ) | ||||||||||||||||||||||
Minority interest in subsidiaries, net of tax | — | — | — | (16 | ) | — | (16 | ) | |||||||||||||||||||||||||||||||||
Minority interest in subsidiaries, net of tax | — | — | (184 | ) | (5 | ) | — | (189 | ) | ||||||||||||||||||||||||||||||||
Income (loss) before cumulative effect of accounting change | (168 | ) | (433 | ) | (105 | ) | 824 | 462 | 580 | ||||||||||||||||||||||||||||||||
Cumulative effect of accounting change, net of tax | — | — | — | (1,013 | ) | — | (1,013 | ) | |||||||||||||||||||||||||||||||||
Net income (loss) | 83 | 1,411 | 693 | 2,098 | (2,874 | ) | 1,411 | $ | (168 | ) | $ | (433 | ) | $ | (105 | ) | $ | (189 | ) | $ | 462 | $ | (433 | ) | |||||||||||||||||
See notes to supplemental guarantor information
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 15 – Supplemental Guarantor Information (continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the nine months ended March 31, 2004
(US$ in millions)
News America Incorporated | News Corporation | Guarantor | Non-Guarantor | Reclassifications and Eliminations | News Corporation and Subsidiaries | ||||||||||||
Revenues | 4 | — | 489 | 14,839 | — | 15,332 | |||||||||||
Expenses | 132 | — | 339 | 12,604 | — | 13,075 | |||||||||||
Operating (loss) income | (128 | ) | — | 150 | 2,235 | — | 2,257 | ||||||||||
Other (Expense) Income: | |||||||||||||||||
Interest expense, net | (1,954 | ) | — | 503 | 1,051 | — | (400 | ) | |||||||||
Equity earnings (losses) of affiliates, net | — | — | (24 | ) | 112 | — | 88 | ||||||||||
Earnings (losses) from subsidiary entities | 2,031 | 1,104 | 48 | — | (3,183 | ) | — | ||||||||||
Other, net | (74 | ) | — | (15 | ) | 123 | — | 34 | |||||||||
Income (loss) before income tax expense and minority interest in subsidiaries | (125 | ) | 1,104 | 662 | 3,521 | (3,183 | ) | 1,979 | |||||||||
Income tax (expense) benefit | 44 | — | (232 | ) | (1,232 | ) | 695 | (725 | ) | ||||||||
Minority interest in subsidiaries, net of tax | — | — | (195 | ) | 45 | — | (150 | ) | |||||||||
Net income (loss) | (81 | ) | 1,104 | 235 | 2,334 | (2,488 | ) | 1,104 | |||||||||
See notes to supplemental guarantor information
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS
At March 31, 2005
(US$ in millions)
News America Incorporated | News Corporation | Guarantor | Non-Guarantor | Reclassifications and Eliminations | News Corporation and Subsidiaries | |||||||||||
Assets: | ||||||||||||||||
Current Assets: | ||||||||||||||||
Cash and cash equivalents | 3,877 | — | — | 2,116 | — | 5,993 | ||||||||||
Cash on deposit | — | — | — | — | — | — | ||||||||||
Receivables, net | 24 | — | 2 | 4,990 | — | 5,016 | ||||||||||
Inventories, net | — | — | 43 | 1,702 | — | 1,745 | ||||||||||
Deferred income taxes | — | — | — | — | 355 | 355 | ||||||||||
Other | 4 | — | 1 | 302 | — | 307 | ||||||||||
Total Current Assets | 3,905 | — | 46 | 9,110 | 355 | 13,416 | ||||||||||
Non-current Assets: | ||||||||||||||||
Receivables | 1 | — | — | 739 | — | 740 | ||||||||||
Inventories, net | — | — | — | 2,366 | — | 2,366 | ||||||||||
Property, plant and equipment, net | 86 | — | 6 | 4,348 | — | 4,440 | ||||||||||
Intangible assets | 153 | — | 542 | 10,688 | — | 11,383 | ||||||||||
Goodwill | — | — | — | 11,159 | — | 11,159 | ||||||||||
Other non-current assets | 132 | — | — | 778 | — | 910 | ||||||||||
Investments | ||||||||||||||||
Investments in associated companies and Other investments | 119 | — | 1,235 | 9,815 | — | 11,169 | ||||||||||
Intragroup investments | 42,855 | 74,904 | 88,409 | 16,525 | (222,693 | ) | — | |||||||||
Total Investments | 42,974 | 74,904 | 89,644 | 26,340 | (222,693 | ) | 11,169 | |||||||||
Total Non-current Assets | 43,346 | 74,904 | 90,192 | 56,418 | (222,693 | ) | 42,167 | |||||||||
Total Assets | 47,251 | 74,904 | 90,238 | 65,528 | (222,338 | ) | 55,583 | |||||||||
Liabilities and Shareholders’ Equity: | ||||||||||||||||
Current Liabilities: | ||||||||||||||||
Borrowings | 887 | — | — | 31 | — | 918 | ||||||||||
Other current liabilities | 342 | 116 | 148 | 6,412 | (202 | ) | 6,816 | |||||||||
Total Current Liabilities | 1,229 | 116 | 148 | 6,443 | (202 | ) | 7,734 | |||||||||
Non-current Liabilities: | ||||||||||||||||
Borrowings | 9,948 | — | — | 65 | — | 10,013 | ||||||||||
Other liabilities | — | — | 1,224 | 7,612 | (972 | ) | 7,864 | |||||||||
Intercompany | 13,889 | (34 | ) | (5,018 | ) | (8,837 | ) | — | — | |||||||
Minority interest in subsidiaries | — | — | 136 | 62 | — | 198 | ||||||||||
Shareholders’ Equity | 22,185 | 74,822 | 93,748 | 60,183 | (221,164 | ) | 29,774 | |||||||||
Total Liabilities and Shareholders’ Equity | 47,251 | 74,904 | 90,238 | 65,528 | (222,338 | ) | 55,583 | |||||||||
See notes to supplemental guarantor information
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSSTATEMENTS—(Continued)
Note 15 – Supplemental Guarantor Information (continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETSSTATEMENT OF OPERATIONS
At JuneFor the three months ended September 30, 2004
(US$ in millions)
News America Incorporated | News Corporation | Guarantor | Non-Guarantor | Reclassifications and Eliminations | News Corporation and Subsidiaries | |||||||||||
Assets: | ||||||||||||||||
Current Assets: | ||||||||||||||||
Cash and cash equivalents | 1,972 | 3 | — | 2,076 | — | 4,051 | ||||||||||
Cash on deposit | 287 | — | — | — | — | 287 | ||||||||||
Receivables, net | 40 | — | — | 4,174 | — | 4,214 | ||||||||||
Inventories, net | — | — | 35 | 1,495 | — | 1,530 | ||||||||||
Deferred income taxes | — | — | — | — | 521 | 521 | ||||||||||
Other | 1 | — | 95 | 300 | — | 396 | ||||||||||
Total Current Assets | 2,300 | 3 | 130 | 8,045 | 521 | 10,999 | ||||||||||
Non-current Assets: | ||||||||||||||||
Receivables | 10 | — | — | 756 | — | 766 | ||||||||||
Inventories, net | — | — | — | 2,669 | — | 2,669 | ||||||||||
Property, plant and equipment, net | 94 | — | 1 | 3,701 | — | 3,796 | ||||||||||
Intangible assets | 153 | — | 502 | 10,343 | — | 10,998 | ||||||||||
Goodwill | — | — | 150 | 7,003 | — | 7,153 | ||||||||||
Other non-current assets | 140 | — | 1 | 907 | — | 1,048 | ||||||||||
Investments | ||||||||||||||||
Investments in associated companies and Other investments | 125 | — | 1,226 | 9,563 | — | 10,914 | ||||||||||
Intragroup investments | 40,466 | 26,700 | 64,824 | 61,693 | (193,683 | ) | — | |||||||||
Total Investments | 40,591 | 26,700 | 66,050 | 71,256 | (193,683 | ) | 10,914 | |||||||||
Total Non-current Assets | 40,988 | 26,700 | 66,704 | 96,635 | (193,683 | ) | 37,344 | |||||||||
Total Assets | 43,288 | 26,703 | 66,834 | 104,680 | (193,162 | ) | 48,343 | |||||||||
Liabilities and Shareholders’ Equity: | ||||||||||||||||
Current Liabilities: | ||||||||||||||||
Borrowings | 161 | — | — | 923 | — | 1,084 | ||||||||||
Other current liabilities | 248 | 34 | 807 | 5,019 | (134 | ) | 5,974 | |||||||||
Total Current Liabilities | 409 | 34 | 807 | 5,942 | (134 | ) | 7,058 | |||||||||
Non-current Liabilities: | ||||||||||||||||
Borrowings | 8,996 | — | — | 84 | — | 9,080 | ||||||||||
Other liabilities | 7 | — | 2,288 | 8,185 | (2,982 | ) | 7,498 | |||||||||
Intercompany | 26,167 | (270 | ) | (7,050 | ) | (18,847 | ) | — | — | |||||||
Minority interest in subsidiaries | — | — | 3,398 | 434 | — | 3,832 | ||||||||||
Shareholders’ Equity | 7,709 | 26,939 | 67,391 | 108,882 | (190,046 | ) | 20,875 | |||||||||
Total Liabilities and Shareholders’ Equity | 43,288 | 26,703 | 66,834 | 104,680 | (193,162 | ) | 48,343 | |||||||||
News America Incorporated | News Corporation | Guarantor | Non- Guarantor | Reclassifications and Eliminations | News and Subsidiaries | ||||||||||||||||||
Revenues | $ | 1 | $ | — | $ | 145 | $ | 5,000 | $ | — | $ | 5,146 | |||||||||||
Expenses | 69 | — | 102 | 4,209 | — | 4,380 | |||||||||||||||||
Operating (loss) income | (68 | ) | — | 43 | 791 | — | 766 | ||||||||||||||||
Other (Expense) Income: | |||||||||||||||||||||||
Interest expense, net | (748 | ) | — | 213 | 410 | — | (125 | ) | |||||||||||||||
Equity earnings (losses) of affiliates, net | — | — | 3 | 12 | — | 15 | |||||||||||||||||
Earnings (losses) from subsidiary entities | 853 | 625 | 696 | 100 | (2,274 | ) | — | ||||||||||||||||
Other, net | 183 | — | (4 | ) | 12 | — | 191 | ||||||||||||||||
Income (loss) before income tax expense and minority interest in subsidiaries | 220 | 625 | 951 | 1,325 | (2,274 | ) | 847 | ||||||||||||||||
Income tax (expense) benefit | (77 | ) | — | (334 | ) | (464 | ) | 695 | (180 | ) | |||||||||||||
Minority interest in subsidiaries, net of tax | — | — | (35 | ) | (7 | ) | — | (42 | ) | ||||||||||||||
Net income (loss) | $ | 143 | $ | 625 | $ | 582 | $ | 854 | $ | (1,579 | ) | $ | 625 | ||||||||||
See notes to supplemental guarantor information
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 15 – Supplemental Guarantor Information (continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the nine months ended March 31, 2005
(US$ in millions)
News America Incorporated | News Corporation | Guarantor | Non-Guarantor | Reclassifications and Eliminations | News Corporation and Subsidiaries | ||||||||||||
Operating activities: | |||||||||||||||||
Net cash provided by (used in) operating activities | 145 | 47 | (93 | ) | 2,214 | — | 2,313 | ||||||||||
Investing and other activities: | |||||||||||||||||
Property, plant, and equipment, net of acquisitions | (1 | ) | — | (4 | ) | (705 | ) | — | (710 | ) | |||||||
Investments | (136 | ) | — | (4 | ) | (173 | ) | — | (313 | ) | |||||||
Proceeds from sale of non-current assets | 14 | — | 98 | 531 | — | 643 | |||||||||||
Net cash provided by (used in) investing activities | (123 | ) | — | 90 | (347 | ) | — | (380 | ) | ||||||||
Financing activities: | |||||||||||||||||
Borrowings | 1,743 | — | — | 33 | — | 1,776 | |||||||||||
Repayment of borrowings and exchangeable securities | (135 | ) | — | — | (1,960 | ) | — | (2,095 | ) | ||||||||
Cash on deposit | 275 | — | — | — | — | 275 | |||||||||||
Issuance of shares | — | 54 | — | 11 | — | 65 | |||||||||||
Dividends paid | — | (101 | ) | — | (23 | ) | — | (124 | ) | ||||||||
Net cash provided by (used in) financing activities | 1,883 | (47 | ) | — | (1,939 | ) | — | (103 | ) | ||||||||
Net increase (decrease) in cash and cash equivalents | 1,905 | — | (3 | ) | (72 | ) | — | 1,830 | |||||||||
Cash and cash equivalents, beginning of year | 1,972 | — | 3 | 2,076 | — | 4,051 | |||||||||||
Exchange movement on opening cash balance | — | — | — | 112 | — | 112 | |||||||||||
Cash and cash equivalents, end of year | 3,877 | — | — | 2,116 | — | 5,993 | |||||||||||
See notes to supplemental guarantor information
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSSTATEMENTS—(Continued)
Note 15 – Supplemental Guarantor Information (continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWSBALANCE SHEET
For the nine months ended March 31, 2004At September 30, 2005
(US$ in millions)
News America Incorporated | News Corporation | Guarantor | Non-Guarantor | Reclassifications and Eliminations | News Corporation and Subsidiaries | ||||||||||||
Operating activities: | |||||||||||||||||
Net cash (used in) provided by operating activities | (1,426 | ) | 30 | (477 | ) | 3,872 | — | 1,999 | |||||||||
Investing and other activities: | |||||||||||||||||
Property, plant, and equipment, net of acquisitions | (3 | ) | — | — | (210 | ) | — | (213 | ) | ||||||||
Investments | (6 | ) | — | (23 | ) | (3,399 | ) | — | (3,428 | ) | |||||||
Proceeds from sale of non-current assets | 59 | — | — | 490 | — | 549 | |||||||||||
Net cash provided by (used in) investing activities | 50 | — | (23 | ) | (3,119 | ) | — | (3,092 | ) | ||||||||
Financing activities: | |||||||||||||||||
Borrowings | — | — | — | 440 | — | 440 | |||||||||||
Repayment of borrowings and exchangeable securities | (17 | ) | — | — | (599 | ) | — | (616 | ) | ||||||||
Cash on deposit | 163 | — | — | — | — | 163 | |||||||||||
Issuance of shares | — | 45 | 500 | — | — | 545 | |||||||||||
Dividends paid | — | (81 | ) | — | (25 | ) | — | (106 | ) | ||||||||
Net cash provided by (used in) financing activities | 146 | (36 | ) | 500 | (184 | ) | — | 426 | |||||||||
Net (decrease) increase in cash and cash equivalents | (1,230 | ) | (6 | ) | — | 569 | — | (667 | ) | ||||||||
Cash and cash equivalents, beginning of year | 3,622 | 6 | — | 849 | — | 4,477 | |||||||||||
Exchange movement on opening cash balance | — | — | — | 59 | — | 59 | |||||||||||
Cash and cash equivalents, end of year | 2,392 | — | — | 1,477 | — | 3,869 | |||||||||||
News America Incorporated | News Corporation | Guarantor | Non- Guarantor | Reclassifications and Eliminations | News Corporation and Subsidiaries | ||||||||||||||||
ASSETS: | |||||||||||||||||||||
Current Assets: | |||||||||||||||||||||
Cash and cash equivalents | $ | 3,956 | $ | — | $ | — | $ | 2,494 | $ | — | $ | 6,450 | |||||||||
Receivables, net | 26 | — | — | 4,671 | — | 4,697 | |||||||||||||||
Inventories, net | — | — | 52 | 1,690 | — | 1,742 | |||||||||||||||
Deferred income taxes | — | — | — | — | 84 | 84 | |||||||||||||||
Other | 9 | — | — | 328 | — | 337 | |||||||||||||||
Total Current Assets | 3,991 | — | 52 | 9,183 | 84 | 13,310 | |||||||||||||||
Non-current Assets: | |||||||||||||||||||||
Receivables | 1 | — | — | 729 | — | 730 | |||||||||||||||
Inventories, net | — | — | — | 2,551 | — | 2,551 | |||||||||||||||
Property, plant and equipment, net | 86 | — | 2 | 4,364 | — | 4,452 | |||||||||||||||
Intangible assets | 121 | — | 70 | 10,755 | — | 10,946 | |||||||||||||||
Goodwill | — | — | — | 11,723 | — | 11,723 | |||||||||||||||
Other non-current assets | 126 | — | — | 670 | — | 796 | |||||||||||||||
Investments in associated companies and Other investments | 125 | — | 1,256 | 8,971 | — | 10,352 | |||||||||||||||
Intragroup investments | 44,753 | 75,213 | 73,983 | 15,760 | (209,709 | ) | — | ||||||||||||||
Total Investments | 44,878 | 75,213 | 75,239 | 24,731 | (209,709 | ) | 10,352 | ||||||||||||||
Total Non-current Assets | 45,212 | 75,213 | 75,311 | 55,523 | (209,709 | ) | 41,550 | ||||||||||||||
TOTAL ASSETS | $ | 49,203 | $ | 75,213 | $ | 75,363 | $ | 64,706 | $ | (209,625 | ) | $ | 54,860 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY: | |||||||||||||||||||||
Current Liabilities: | |||||||||||||||||||||
Borrowings | 888 | — | — | 36 | — | 924 | |||||||||||||||
Other current liabilities | 293 | 239 | 1,270 | 4,994 | 243 | 7,039 | |||||||||||||||
Total Current Liabilities | 1,181 | 239 | 1,270 | 5,030 | 243 | 7,963 | |||||||||||||||
Non-current Liabilities: | |||||||||||||||||||||
Borrowings | 9,974 | — | — | 126 | — | 10,100 | |||||||||||||||
Other non-current liabilities | — | — | 343 | 7,502 | 218 | 8,063 | |||||||||||||||
Intercompany | 15,450 | 790 | (4,986 | ) | (11,254 | ) | — | — | |||||||||||||
Minority interest in subsidiaries | — | — | — | 204 | — | 204 | |||||||||||||||
Stockholders’ Equity | 22,598 | 74,184 | 78,736 | 63,098 | (210,086 | ) | 28,530 | ||||||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 49,203 | $ | 75,213 | $ | 75,363 | $ | 64,706 | $ | (209,625 | ) | $ | 54,860 | ||||||||
See notes to supplemental guarantor information
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSSTATEMENTS—(Continued)
Note 15 – Supplemental Guarantor Information (continued)SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
As of June 30, 2005
(US$ in millions)
News Incorporated | News Corporation | Guarantor | Non- Guarantor | Reclassifications and Eliminations | News Corporation and Subsidiaries | ||||||||||||||||
ASSETS: | |||||||||||||||||||||
Current Assets: | |||||||||||||||||||||
Cash and cash equivalents | $ | 4,234 | $ | — | $ | — | $ | 2,236 | $ | — | $ | 6,470 | |||||||||
Receivables, net | 22 | — | — | 4,331 | — | 4,353 | |||||||||||||||
Inventories, net | — | — | 56 | 1,460 | — | 1,516 | |||||||||||||||
Deferred income taxes | — | — | — | — | 155 | 155 | |||||||||||||||
Other | 1 | — | — | 284 | — | 285 | |||||||||||||||
Total Current Assets | 4,257 | — | 56 | 8,311 | 155 | 12,779 | |||||||||||||||
Non-current Assets: | |||||||||||||||||||||
Receivables | 1 | — | — | 672 | — | 673 | |||||||||||||||
Inventories, net | — | — | — | 2,366 | — | 2,366 | |||||||||||||||
Property, plant and equipment, net | 86 | — | 9 | 4,251 | — | 4,346 | |||||||||||||||
Intangible assets | 132 | — | 69 | 12,316 | — | 12,517 | |||||||||||||||
Goodwill | — | — | — | 10,944 | — | 10,944 | |||||||||||||||
Other non-current assets | 130 | — | — | 669 | — | 799 | |||||||||||||||
Investments | |||||||||||||||||||||
Investments in associated companies and Other investments | 109 | — | 1,245 | 8,914 | — | 10,268 | |||||||||||||||
Intragroup investments | 44,445 | 75,622 | 73,917 | 15,735 | (209,719 | ) | — | ||||||||||||||
Total Investments | 44,554 | 75,622 | 75,162 | 24,649 | (209,719 | ) | 10,268 | ||||||||||||||
Total Non-current Assets | 44,903 | 75,622 | 75,240 | 55,867 | (209,719 | ) | 41,913 | ||||||||||||||
TOTAL ASSETS | $ | 49,160 | $ | 75,622 | $ | 75,296 | $ | 64,178 | $ | (209,564 | ) | $ | 54,692 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY: | |||||||||||||||||||||
Current Liabilities: | |||||||||||||||||||||
Borrowings | 880 | — | — | 32 | — | 912 | |||||||||||||||
Other current liabilities | 316 | — | 1,246 | 4,081 | 94 | 5,737 | |||||||||||||||
Total Current Liabilities | 1,196 | — | 1,246 | 4,113 | 94 | 6,649 | |||||||||||||||
Non-current Liabilities: | |||||||||||||||||||||
Borrowings | 9,958 | — | — | 129 | — | 10,087 | |||||||||||||||
Other non-current liabilities | — | — | 1,799 | 8,361 | (1,800 | ) | 8,360 | ||||||||||||||
Intercompany | 15,180 | 593 | (4,987 | ) | (10,786 | ) | — | — | |||||||||||||
Minority interest in subsidiaries | — | — | — | 219 | — | 219 | |||||||||||||||
Stockholders’ Equity | 22,826 | 75,029 | 77,238 | 62,142 | (207,858 | ) | 29,377 | ||||||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 49,160 | $ | 75,622 | $ | 75,296 | $ | 64,178 | $ | (209,564 | ) | $ | 54,692 | ||||||||
See notes to supplemental guarantor information
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the three months ended September 30, 2005
(US$ in millions)
News America Incorporated | News Corporation | Guarantor | Non- Guarantor | Reclassifications and Eliminations | News Corporation and Subsidiaries | |||||||||||||||||
Operating activities: | ||||||||||||||||||||||
Net cash provided by (used in) operating activities | $ | (275 | ) | $ | 186 | $ | — | $ | 586 | $ | — | $ | 497 | |||||||||
Investing and other activities: | ||||||||||||||||||||||
Property, plant and equipment | (2 | ) | — | — | (197 | ) | — | (199 | ) | |||||||||||||
Investments | (1 | ) | — | — | (256 | ) | — | (257 | ) | |||||||||||||
Proceeds from sale of investments, non-current assets and business disposals | — | — | — | 114 | — | 114 | ||||||||||||||||
Net cash used in investing activities | (3 | ) | — | — | (339 | ) | — | (342 | ) | |||||||||||||
Financing activities: | ||||||||||||||||||||||
Borrowings | — | — | — | 6 | — | 6 | ||||||||||||||||
Repayment of borrowings | — | — | — | (5 | ) | — | (5 | ) | ||||||||||||||
Issuance of shares | — | 27 | — | 2 | — | 29 | ||||||||||||||||
Repurchase of shares | — | (213 | ) | — | — | — | (213 | ) | ||||||||||||||
Dividends paid | — | — | — | (1 | ) | — | (1 | ) | ||||||||||||||
Net cash provided by (used in) financing activities | — | (186 | ) | — | 2 | — | (184 | ) | ||||||||||||||
Net increase (decrease) in cash and cash equivalents | (278 | ) | — | — | 249 | — | (29 | ) | ||||||||||||||
Cash and cash equivalents, beginning of period | 4,234 | — | — | 2,236 | — | 6,470 | ||||||||||||||||
Exchange movement on opening cash balance | — | — | — | 9 | — | 9 | ||||||||||||||||
Cash and cash equivalents, end of period | $ | 3,956 | $ | — | $ | — | $ | 2,494 | $ | — | $ | 6,450 | ||||||||||
See notes to supplemental guarantor information
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the three months ended September 30, 2004
(US$ in millions)
News America Incorporated | News Corporation | Guarantor | Non- Guarantor | Reclassifications and Eliminations | News Corporation and Subsidiaries | ||||||||||||||||||
Operating activities: | |||||||||||||||||||||||
Net cash (used in) provided by operating activities | $ | (380 | ) | $ | (17 | ) | $ | 3 | $ | 976 | $ | — | $ | 582 | |||||||||
Investing and other activities: | |||||||||||||||||||||||
Property, plant and equipment | (1 | ) | — | (1 | ) | (133 | ) | — | (135 | ) | |||||||||||||
Investments | — | — | (1 | ) | (103 | ) | — | (104 | ) | ||||||||||||||
Proceeds from sale of investments, non-current assets and business disposals | — | — | — | 124 | — | 124 | |||||||||||||||||
Net cash used in investing activities | (1 | ) | — | (2 | ) | (112 | ) | — | (115 | ) | |||||||||||||
Financing activities: | |||||||||||||||||||||||
Repayment of borrowings | — | — | — | (655 | ) | — | (655 | ) | |||||||||||||||
Cash on deposit | 275 | — | — | — | — | 275 | |||||||||||||||||
Issuance of shares | — | 15 | (1 | ) | — | — | 14 | ||||||||||||||||
Dividends paid | — | — | — | (7 | ) | — | (7 | ) | |||||||||||||||
Net cash provided by (used in) financing activities | 275 | 15 | (1 | ) | (662 | ) | — | (373 | ) | ||||||||||||||
Net (decrease) increase in cash and cash equivalents | (106 | ) | (2 | ) | — | 202 | — | 94 | |||||||||||||||
Cash and cash equivalents, beginning of period | 1,972 | 3 | — | 2,076 | — | 4,051 | |||||||||||||||||
Exchange movement on opening cash balance | — | — | — | 3 | — | 3 | |||||||||||||||||
Cash and cash equivalents, end of period | $ | 1,866 | $ | 1 | $ | — | $ | 2,281 | $ | — | $ | 4,148 | |||||||||||
See notes to supplemental guarantor information
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Notes to Supplemental Guarantor Information
(1) Guarantors consist of the Company and the following subsidiaries:
(1) | Guarantors consist of the Company and the following wholly owned subsidiaries: |
Subsidiaries | Jurisdiction of Incorporation | Principal Business | ||
News Australia Holdings Pty Ltd | Australia | |||
News Publishing Australia Limited | Delaware, USA | U.S. holding company, which owns 100% of NAI. | ||
FEG Holdings, Inc. | Delaware, USA | |||
News America Marketing FSI, L.L.C. | Delaware, USA | Publishes free-standing inserts. | ||
Fox Entertainment Group, Inc. | Delaware, USA |
(2) Investments in the Company’s subsidiaries, for purposes of the supplemental consolidating presentation, are accounted for by their parent companies under the equity method of accounting whereby earnings of subsidiaries are reflected in the parent company’s investment account and earnings.
(2) | Investments in the Company’s subsidiaries, for purposes of the supplemental condensed consolidating presentation, are accounted for by their parent companies under the equity method of accounting whereby earnings of subsidiaries are reflected in the parent company’s investment account and earnings. |
(3) | The guarantees of NAI’s senior public indebtedness constitute senior indebtedness of each of the guarantors thereto, including the Company, and rank pari passu with all present and future senior indebtedness of such guarantors. Because the factual basis underlying the obligations created pursuant to the various facilities and other obligations constituting senior indebtedness of the Company and the guarantors of NAI’s senior public indebtedness, including the Company, differ, it is not possible to predict how a court in bankruptcy would accord priorities among the obligations of the Company and its subsidiaries. |
(3) The guarantees of NAI’s senior public indebtedness constitute senior indebtedness of each of the guarantors thereto, including the Company, and rank pari passu with all present and future senior indebtedness of such guarantors. Because the factual basis underlying the obligations created pursuant to the various facilities and other obligations constituting senior indebtedness of the Company and the guarantors of NAI’s senior public indebtedness, including the Company differ, it is not possible to predict how a court in bankruptcy would accord priorities among the obligations of the Company and its subsidiaries.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This document 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 document and include statements regarding the intent, belief or current expectations of News Corporation (the “Company”), its directors or its officers with respect to, among other things, trends affecting the Company’s financial condition or results of operations. The readers of this document are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. ThoseMore information regarding these risks, uncertainties and uncertainties are discussedother factors is set forth under the heading “Risk Factors,” in the Company’s Registration StatementAnnual Report on Form 8-K (SEC file no. 001-32352) as10-K for the fiscal year ended June 30, 2005 filed with the Securities and Exchange CommissionSEC on November 24, 2004 and amended on March 4, 2005, as well as the information set forth below.September 1, 2005. The Company does not ordinarily make projections of its future operating results and undertakes no obligation (and expressly disclaims any 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 other documents filed by the Company with the Securities and Exchange Commission. This section should be read in conjunctiontogether with the unaudited consolidated condensed financial statements of the Company and related notes set forth elsewhere herein.
SIGNIFICANT DEVELOPMENTSQUARTER HIGHLIGHTS
REORGANIZATION
Effective November 12, 2004, wethe Company changed ourits corporate domicile from Australia to the United States and ourits reporting currency from the Australian dollar to the U.S. dollar (the “Reorganization”(“the Reorganization”). As a result, ourthe Company’s accompanying consolidated financial statements are stated in U.S. dollars as opposed to Australian dollars, which was the currency wethe Company previously used to present ourits financial statements, and have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP.
In the Reorganization, all outstanding News Corporation Limited (“TNCL”) ordinary shares and preferred limited voting ordinary shares and ordinary shares of The News Corporation Limited (“TNCL”) were cancelled and shares of Class A Common Stock and Class B Common Stock of the Company were issued in exchange, respectively, on a one for twoone-for-two share basis, respectively.basis. The financial statements have been presented as if the one for twoone-for-two share exchange took place on July 1, 2003.2004.
INTRODUCTION
Management’s discussion and analysis of financial condition and results of operations (“MD&A”) is intended to help provide an understanding of News Corporation’s (together with its subsidiaries, the “Company”) financial condition, changes in financial condition and results of operations. MD&A is organized as follows:
• | Overview of |
• | Results of Operations |
• | Liquidity and Capital Resources |
OVERVIEW OF OUR BUSINESS
The Company is a diversified entertainment company, which manages and reports its businesses in eight segments:
Filmed Entertainment
The Filmed Entertainment segment derives revenue from theatrical distribution, home entertainment salesthe production and distribution throughof feature motion pictures and television series. In general, motion pictures produced or acquired for distribution by the Company are exhibited in U.S. and foreign theaters followed by DVDs, pay-per-view pay television, servicespremium subscription television, network television and broadcast television. basic cable and syndicated television exploitation. Television series initially produced for the networks and first-run syndication are generally licensed to domestic and international markets concurrently. The more successful series are typically released in seasonal DVD box sets and later syndicated in domestic markets and international markets.The length of the revenue cycle for television series will vary depending on the number of seasons a series remains in active production and therefore may cause fluctuations in operating results.
The revenues and operating results of the Filmed Entertainment segment are significantly affected by the timing of the Company’s theatrical and home entertainment releases, the number of its original and returning television series that are aired by television networks, and the number of its television series in off-network syndication. Theatrical release dates are determined by several factors, including timing of vacation and holiday periods and competition in the marketplace. In seeking to manage its risk, the Company has pursued a strategy of entering into agreements to share the financing of certain films with other parties. The parties to these arrangements include studio and non-studio entities, both domestic and foreign. In several of these agreements, other parties control certain distribution rights.
Operating costs incurred by the Filmed Entertainment segment include exploitation costs, primarily theatrical prints and advertising;advertising and home entertainment marketing and manufacturing costs; the amortization of capitalized production, overhead and interest costs; and participations and talent residuals. Selling, general and administrative expenses include salaries, employee benefits, rent and other routine overhead.
Feature film and television production and distribution are speculative businesses since the revenues derived from the production and distribution of a feature film or television series dependdepends primarily upon their acceptance by the public, which is difficult to predict. Operating results derived from the Company’s motion picture and television production businesses fluctuate depending upon cost of such productions, the commercial success of the feature films and television series produced and the timing of the recognition of related revenues. Motion picture and television production has experienced cycles in which increased costs for talent and other factors have resulted in higher production costs. The commercial success of a feature film or television series also depends upon the quality and acceptance of other competing films and television series released into the marketplace at or near the same time, the availability of alternative forms of entertainment and leisure time activities, general economic conditions and other tangible and intangible factors, all of which can change and cannot be predicted with certainty. Further, the theatrical success of a feature film and the audience ratings for a television series are generally key factors in generating revenues from other distribution channels, such as home entertainment and premium pay television, with respect to feature films, and syndication and home entertainment, with respect to television series. The home entertainment market, more specifically DVDs, continues to be a growingLicense fees received for television exhibition (including international and U.S. premium television and basic cable television) are recorded as revenue stream in the filmed entertainment industry.period that licensed films or programs are available for such exhibition, which may cause substantial fluctuations in operating results.
Piracy continuesThe Company competes with other major studios, such as Disney, DreamWorks, Paramount, Sony, Universal and Warner Bros. and independent film producers in the production and distribution of motion pictures and DVDs. As a producer and distributor of television programming, the Company competes with studios, television production groups, and independent producers and syndicators such as Disney, Sony, NBC Universal, Warner Bros. and Paramount Television to be a significant issue forsell programming both domestically and internationally. The Company also competes to obtain creative talent and story properties which are essential to the success of the Company’s filmed entertainment industry, especially from onlinebusinesses.
Developments in technology, including digital copying and file sharing, which has expanded from musiccompression, and the growing penetration of high-bandwidth Internet connections, increase the threat of content piracy by making it easier to moviesduplicate and television programming due to changes in technology.
widely distribute pirated material. The Company has taken, and will continue to take, a variety of actions to combat piracy, both individually and together with industry associations. To the extent that piracy in the filmed entertainment industry continues or increases, ourthe Company’s revenues in this segment may be materially adversely impacted.
In the operation of its businesses, the Company engages the services of writers, directors, actors and others, which are subject to collective bargaining agreements. Work stoppages and/or higher costs in connection with these agreements could adversely impact the Company’s operations.
Television and Cable Network Programming
The Company’s U.S television operations consist of the FOX Broadcasting Company (“FOX”) and the 35 television stations owned by the Company and the FOX Broadcast Network (“FOX”).Company. The Company’s internationalInternational television operations consist primarily of STAR Group Limited (“STAR”).
The Television segment derives revenues principally from the sale of advertising time. The Cable Network Programming segment also derives a portion of its revenues from national and local advertising sales. The sale of advertising time is affected by viewer demographics, program ratings, major sporting events, major political elections and general market conditions. Adverse changes in the general market conditions for advertising may affect revenues and operating results. Expenditures by advertisers tend to be cyclical, reflecting overall economic conditions, as well as buying patterns. A decline in the economic prospects of advertisers or the economy in general could alter current or prospective advertisers’ spending priorities. This could cause ourthe Company’s revenues and operating results to decline significantly in any given period or in specific markets.period. Rating points for the Television segment and Cable Network Programming segment are also factors that are also weighed when deciding on the advertising rates and the renegotiation of affiliate rates that the Company receives. Poor ratings can lead to a reduction in pricing and advertising spending.
The television broadcast environment is highly competitive. The primary methods of competition in broadcast television are the development and acquisition of popular programming and the development of audience interest through programming promotion, in order to sell advertising at profitable rates. FOX competes for audience, advertising revenues and programming with other broadcast networks such as CBS, ABC, NBC, UPN and the WB, independent television stations, cable program services as well as other media, including DBS television services, DVDs, print and the Internet. In addition, FOX competes with the other broadcast networks to secure affiliations with independently owned television stations in markets across the country.
The television stations owned and operated by the Company compete for programming, audiences and advertising revenues with other television stations and cable networks in their respective coverage areas and, in some cases, with respect to programming, with other station groups, and in the case of advertising revenues, with other local and national media. The competitive position of the television stations owned by the Company is largely influenced by the strength of FOX, and, in particular, the primetime viewership of FOX, as well as the quality of the syndicated programs and local news programs in time periods not programmed by FOX.
In 2002, Nielsen Media Research (“Nielsen”) began to transition the existing local television ratings system to the use of Local People Meters (“LPMs”) in certain large markets. The transition to LPMs has adversely impacted the ratings of the television stations owned by the Company in the markets where the transition has occurred. In the fourth quarter of fiscal 2005, Nielsen plans to introduceintroduced LPMs in the Philadelphia and Washington D.C. markets. In fiscal 2006, Nielsen plans to introduce LPMs in the Dallas and Detroit markets.
TheNewer technologies, including video on demand, personal video recorders and other devices that allow users to view television or motion pictures from a remote location or on a time-delayed basis, and technologies which implement the ability for users to fast-forward, rewind, pause and skip programming may cause changes in consumer behavior that could affect the attractiveness of the Company’s offerings to viewers, advertisers and/or distributors and could, therefore, have an adverse effect on the Company’s businesses, particularly its Television and Cable Network Programming segment derivesbusinesses.
Generally, the Company’s cable networks, which target various demographics, derive a majority of itstheir revenues from monthly affiliate fees received from cable television systems and DBS operators based on the number of its subscribers, net of the amortization of cable distribution investments (capitalized fees paid to a cable operator or DBS operator to facilitate the launch of a cable network). Cable television and DBS are currently the predominant means of distribution of the Company’s program services in the United States. Internationally, distribution technology varies region by region.
WeThe Company’s cable networks compete for carriage on cable television systems, DBS operators and other distributors with other program services, as well as other uses of bandwidth, such as retransmission of free over-the-air broadcast networks, telephony and data transmission. A primary focus of competition is for distribution of the Company’s cable networks that are not already distributed within a particular cable television or DBS system. For such program services, distributors make decisions on the use of bandwidth based on various considerations, including amounts paid by programmers for launches, subscription fees payable by distributors and appeal to the distributors’ subscribers.
FOX is dependent upon the maintenance of affiliation agreements with third party owned television stations, and there can be no assurance that these affiliation agreements will be renewed in the future on terms acceptable to us.the Company. The loss of a significant number of these affiliation arrangements could reduce the distribution of FOX thereby adversely affecting ourthe Company’s ability to sell national advertising time. Similarly, ourthe Company’s cable networks maintain affiliation and carriage arrangements that enable them to reach a large percentage of cable television and direct broadcast satellite households across the United States. The loss of a significant number of these arrangements or the loss of carriage on basic programming tiers could reduce the distribution of ourthe Company’s cable networks, which may also adversely affect such cable networks’ revenues from subscriber fees and ability to sell national and local advertising time.
In Asia, STAR’s programming is primarily distributed via satellite to local cable operators or other pay TVpay- television platform operators including DBS and cable for distribution to their subscribers. STAR derives its revenue from the sale of advertising time as well as affiliate fees from these pay TVpay-television platform operators.
The most significant operating expenses of the Television segment and the Cable Network Programming segment are expenses related to acquiring and producing programming and the production and technical expenses related to operating the technical facilities of the broadcaster or cable network. Other expenses include promotional expenses related to improving the market visibility and awareness of the broadcaster or cable network and sales commissions paid to the in-house advertising sales force, as well as salaries, employee benefits, rent and other routine overhead.
Sports programming rights contracts between the Company, on the one hand, and various professional sports leagues and teams, on the other, have varying duration and renewal terms. As these contracts expire, wethe Company may seek renewals on commercial terms. However,terms; however, third parties may outbid the current rights holders for such rights contracts. In addition, professional sports leagues or teams may create their own networks or the renewal costs could substantially exceed the original contract cost. The loss of rights could impact the extent of the sports coverage offered by FOX and its affiliates, and ourthe Company’s regional sports networks (“RSNs”), and could adversely affect ourits advertising and affiliate revenues. Conversely, if we arethe Company is able to renew these contracts, ourthe results could be adversely affected if escalations in sports programming rights costs are unmatched by increases in advertising rates and, in the case of cable networks, subscriber fees.
The Company has several multi-year sports rights agreements, including contracts with the National Football League (“NFL”) through fiscal 2012, contracts with the National Association of Stock Car Auto Racing (“NASCAR”) for certain races through fiscal 2013calendar year 2006 and exclusive rights for certain ancillary content through calendar year 2012, and a contract with Major League Baseball (“MLB”) through fiscal 2007.calendar year 2006. These contracts provide the Company with the broadcast rights to certain national sporting events during their respective terms. TheIn June 2005, NASCAR contract contains certainexercised an early termination clauses that are exercisable by NASCAR.clause in one of its contracts. Prior to
the early termination, the Company had the right to broadcast certain races through calendar year 2008. The Company still maintains certain exclusive NASCAR ancillary content rights through calendar year 2012. The costs of these sports contracts are charged to expense based on the ratio of each period’s operating profits to estimated total remaining operating profit of the contract.
The profitability of these long-term national sports contracts, as discussed above, is based on the Company’s best estimates at March 31,September 30, 2005 of directly attributable revenues and costs; such estimates may change in the future, and such changes may be significant. Should revenues decline from estimates applied at March 31,September 30, 2005, a loss will be recorded. Should revenues improve as compared to estimated revenues, the Company will have a positive operating profit related to the contract, which will be recognized over the estimated remaining contract term.
In general, the television broadcasting and multichannel video programming and distribution industries in the United States are highly regulated by federal laws and regulations issued and administered by various federal agencies, including the Federal Communications Commission (“FCC”). The FCC generally regulates, among other things, the ownership of media, (including ownership by non-U.S. citizens), broadcast and multichannel video programming and technical operations of broadcast and satellite licensees. Further, the United States Congress and the FCC currently have under consideration, and may in the future adopt, new laws, regulations and policies regarding a wide variety of matters that could, directly or indirectly, affect the operations and ownership of ourthe Company’s U.S. media properties. Similarly, changes in regulations imposed by governments in other jurisdictions in which the Company, or entities in which it has an interest, operate could adversely affect ourthe Company’s business and results of operations.
While the Company seeks to ensure compliance with federal indecency laws and related FCC regulations, the definition of “indecency” is subject to interpretation and there can be no assurance that the Company will not broadcast programming that is ultimately determined by the FCC to violate the prohibition against indecency. Such programming could subject the Company to regulatory review or investigation, fines, adverse publicity or other sanctions, including the loss of station licenses.
Direct Broadcast Satellite Television
SKY Italia derives revenues principally from subscriber fees. The Company believes that the quality and variety of video, audio and interactive programming, quality of picture, access to service, customer service and price are the key elements for gaining and maintaining market share. SKY Italia’s competition includes companies that offer video, audio, interactive programming, telephony, data and other information and entertainment services, including broadband Internet providers, digital terrestrial transmission (“DTT”) services, wireless companies and companies that are developing new technologies.
As of March 31,During fiscal 2005, SKY Italia had approximately 3.2 million subscribers, with over 95% of new subscribers opting for premium programming including movies and/or sports programming. The Company anticipates continued growth of the existing subscriber base.
During the quarter, competitive digital terrestrial transmission (DTT)DTT services in Italy expanded to include pay-per-view offeroffering of soccer games previously available exclusively on the SkySKY Italia platform. The Company is currently prohibited from providing a DTT service under regulations of the European Commission. In addition, the Italian government offers a subsidy on DTT decoders. As a result, DTT operators could entice potential SkySKY Italia subscribers to their system.
SKY Italia’s most significant operating expenses are expensesthose related to acquiring entertainment, movie and sports programming and subscribers and the production and technical expenses related to operating the technical facilities.
Magazines and Inserts
The Magazine and Inserts segment derives revenues from the sale of advertising space in free standing inserts, in-store promotional advertising, subscriptions and production fees. Adverse changes in general market conditions for advertising may affect revenues. Operating expenses for the Magazine and Inserts segment include paper costs, promotional, printing, retail commissions, distribution expenses and distribution expenses.production costs. Selling, general and administrative expenses include salaries, employee benefits, rent and other routine overhead.
Newspapers
The Newspapers segment derives revenues from the sale of advertising space and the sale of published newspapers. Adverse changes in general market conditions for advertising may affect revenues. Circulation revenues can be greatly affected by changes in competitors’ cover prices and by promotion activities. Operating expenses for the Newspapers segment include costs related to newsprint, ink, printing costs and editorial content. Selling, general and administrative expenses include salaries, employee benefits, rent and other routine overhead.
The Newspapers segment’s advertising volume and the price of newsprint are the key uncertainties whose fluctuations can have a material effect on the Company’s operating results and cash flow. The Company has to anticipate the level of advertising volume and newsprint prices in managing its businesses to maximize operating profit during expanding and contracting economic cycles. Newsprint is a basic commodity and its price is sensitive to the balance of supply and demand. The Company’s costs and expenses are affected by the cyclical increases and decreases in the price of newsprint. The Company’s newspapers published by the Company compete for readership and advertising with local and readers’ timenational newspapers and attentionalso compete with broadcast, satellite and cable television, the Internetradio and other computer services, radio, magazines, billboardscommunications media in their respective locales. Competition for newspaper circulation is based on the news and direct mail.editorial content of the newspaper, cover price and, from time to time, various promotions. The Company’ssuccess of the newspapers competepublished by the Company in competing with other newspapers and media for advertising principally ondepends upon advertisers’ judgments as to the basismost effective use of their advertising budgets. Competition for advertising among newspapers is based upon circulation levels, reader demographics, advertising rates and their performance in helping to sell the advertisers’ products or services. They compete foradvertiser results. Such judgments are based on factors, such as cost, availability of alternative media, circulation principally on the basisand quality of their content, price, promotion and brand loyalty. In addition, most of the Company’s newspapers compete with daily newspaper competitors that are published in the same city and with free distribution and paid advertising weeklies, as well as other print and non-print media.readership demographics.
Book Publishing
The Book Publishing segment derives revenues from the sale of books.adult and children’s books in the United States and internationally. The revenues and operating results of the Book Publishing segment are significantly affected by the timing of the Company’s releases and the number of its books in the marketplace. The book publishing marketplace is subject to increased periods of demand in the summer months and during the end-of-year holiday season. Each book is a separate and distinct product, and its financial success depends upon many factors, including public acceptance.
Major new title releases represent a significant portion of the Company’s sales throughout the year. Consumer books are generally sold on a fully returnable basis, resulting in the return of unsold books. In the domestic and international markets, the Company is subject to global trends and local economic conditions.
Operating expenses for the Book Publishing segment include costs related to paper, printing, authors’ royalties, and editorial, art and design expenses. Selling, general and administrative expenses include promotional expenses, salaries, employee benefits, rent and other routine overhead.
The book publishing business operates in a highly competitive market and has been affected by consolidation trends. This market continues to change in response to technological innovations and other factors. Recent years have brought a number of significant mergers among the leading book publishers. The book superstore remains a significant factor in the industry contributing to the general trend toward consolidation in the retail channel. There have also been a number of mergers completed in the distribution channel. The Company must compete with other publishers such as Random House, Penguin Group, Simon & Schuster and Time Warner for the rights to works by well-known authors and public personalities. Although wethe Company currently havehas strong positions in each of ourits markets, further consolidation in the book publishing industry could place usthe Company at a competitive disadvantage with respect to scale and resources.
Other Recent Business Developments
In July 2005, the Company announced the formation of Fox Interactive Media (“FIM”), a new unit that manages the Company’s entertainment, news and sports brands, including foxsports.com, foxnews.com and
fox.com, and the Company owned television station web properties, across the Internet. FIM will focus on leveraging the Company’s current and archive video assets, while building an integrated web domain with multiple points of entry and navigation capabilities that users will be able to customize and personalize.
In September 2005, the Company through its wholly owned subsidiary acquired all of the outstanding common and preferred stock of Intermix Media, Inc. (“Intermix”). The consideration for the Intermix acquisition was approximately $580 million in cash which was paid subsequent to quarter end. The Company acquired Intermix in order to increase the Company’s Internet presence through its recently formed Fox Interactive Media unit. The excess purchase price over the fair value of the net assets acquired of approximately $576 million has been preliminarily allocated to goodwill, which in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets” is not being amortized. The allocation of the excess is not final and is subject to changes upon completion of final valuations of certain assets and liabilities. A future reduction in goodwill for additional value to be assigned to identifiable finite-lived intangible assets or tangible assets could reduce future earnings as a result of additional amortization. For every $100 million reduction in goodwill for additional value to be assigned to identifiable finite-lived intangible assets or tangible assets, Depreciation and amortization expense would increase by approximately $10 million per year representing amortization expense assuming an average useful life of ten years.
In September 2005, the Company acquired Scout Media, Inc., the parent company of Scout.com, the country’s leading independent online sports network, and Scout Publishing, producer of widely read local sports magazines in the United States, for approximately $60 million.
RESULTS OF OPERATIONS
Results of Operations—For the three months ended March 31,September 30, 2005 versus the three months ended March 31,September 30, 2004.
The following table sets forth the Company’s operating results, by segment, for the three months ended March 31,September 30, 2005 as compared to the three months ended March 31,September 30, 2004.
For the three months ended March 31, | ||||||||||||||
2005 | 2004 | Change | % Change | |||||||||||
(in millions, except % and per share data) | ||||||||||||||
Revenues(1): | ||||||||||||||
Filmed Entertainment | $ | 1,477 | $ | 1,184 | $ | 293 | 25 % | |||||||
Television | 1,414 | 1,182 | 232 | 20 % | ||||||||||
Cable Network Programming | 633 | 580 | 53 | 9 % | ||||||||||
Direct Broadcast Satellite Television | 624 | 494 | 130 | 26 % | ||||||||||
Magazines & Inserts | 283 | 278 | 5 | 2 % | ||||||||||
Newspapers | 1,062 | 914 | 148 | 16 % | ||||||||||
Book Publishing | 300 | 321 | (21 | ) | (7)% | |||||||||
Other | 250 | 211 | 39 | 18 % | ||||||||||
Total revenues | $ | 6,043 | $ | 5,164 | $ | 879 | 17 % | |||||||
Operating income (loss): | ||||||||||||||
Filmed Entertainment | $ | 251 | $ | 218 | $ | 33 | 15 % | |||||||
Television | 221 | 260 | (39 | ) | (15)% | |||||||||
Cable Network Programming | 172 | 111 | 61 | 55 % | ||||||||||
Direct Broadcast Satellite Television | (21 | ) | (24 | ) | 3 | 13 % | ||||||||
Magazines & Inserts | 79 | 84 | (5 | ) | (6)% | |||||||||
Newspapers | 186 | 176 | 10 | 6 % | ||||||||||
Book Publishing | 30 | 36 | (6 | ) | (17)% | |||||||||
Other | (29 | ) | (46 | ) | 17 | 37 % | ||||||||
Total operating income | 889 | 815 | 74 | 9 % | ||||||||||
Interest expense, net | (143 | ) | (136 | ) | (7 | ) | (5)% | |||||||
Equity earnings (losses) of affiliates | 91 | 71 | 20 | 28 % | ||||||||||
Other, net | (62 | ) | 14 | (76 | ) | ** | ||||||||
Income before income tax expense and minority interest in subsidiaries | 775 | 764 | 11 | 1 % | ||||||||||
Income tax expense | (317 | ) | (282 | ) | (35 | ) | (12)% | |||||||
Minority interest in subsidiaries, net of tax | (58 | ) | (48 | ) | (10 | ) | (21)% | |||||||
Net income | $ | 400 | $ | 434 | $ | (34 | ) | (8)% | ||||||
Diluted earnings per share(2) | $ | 0.13 | $ | 0.15 |
For the three months ended September 30, | |||||||||||||||
2005 | 2004 | Change | % Change | ||||||||||||
($ in millions) | |||||||||||||||
Revenues | $ | 5,682 | $ | 5,146 | $ | 536 | 10 | % | |||||||
Expenses: | |||||||||||||||
Operating | $ | 3,639 | $ | 3,380 | $ | 259 | 8 | % | |||||||
Selling, general and administrative | 959 | 859 | 100 | 12 | % | ||||||||||
Depreciation and amortization | 175 | 128 | 47 | 37 | % | ||||||||||
Other operating charge | — | 13 | (13 | ) | ** | ||||||||||
Total operating income | $ | 909 | $ | 766 | $ | 143 | 19 | % | |||||||
Interest expense, net | $ | (128 | ) | $ | (125 | ) | $ | (3 | ) | (2 | )% | ||||
Equity earnings of affiliates | 186 | 15 | 171 | ** | |||||||||||
Other, net | 11 | 191 | (180 | ) | (94 | )% | |||||||||
Income before income tax expense, minority interest in subsidiaries and cumulative effect of accounting change | $ | 978 | $ | 847 | $ | 131 | 15 | % | |||||||
Income tax expense | (382 | ) | (180 | ) | (202 | ) | ** | ||||||||
Minority interest in subsidiaries, net of tax | (16 | ) | (42 | ) | 26 | 62 | % | ||||||||
Income before cumulative effect of accounting change | 580 | 625 | (45 | ) | (7 | )% | |||||||||
Cumulative effect of accounting change, net of tax | (1,013 | ) | — | (1,013 | ) | ** | |||||||||
Net (loss) income | $ | (433 | ) | $ | 625 | $ | (1,058 | ) | ** | ||||||
Diluted net earnings before cumulative effect of accounting | $ | 0.18 | $ | 0.21 |
** | not meaningful |
(1) |
For the three months ended March 31, | ||||||||
2005 | 2004 | |||||||
(in millions) | ||||||||
Revenues before amortization of cable distribution investments | $ | 6,071 | $ | 5,195 | ||||
Amortization of cable distribution investments | (28 | ) | (31 | ) | ||||
Revenues | $ | 6,043 | $ | 5,164 | ||||
Represents earnings per share based on the total weighted average shares outstanding (Class A and Class B combined) for the three months ended |
Overview –—For the three months ended March 31,September 30, 2005, the Company’s revenues increased $879$536 million from $5,164$5,146 million for the three months ended March 31,September 30, 2004 to $6,043$5,682 million. This 17%10% increase was primarily due to revenue increases at the Filmed Entertainment, Television,Cable Network Programming, Newspapers and Direct Broadcast Satellite Television and Newspaper segments. Operating expenses increased approximately 20%8% for the three months ended March 31,September 30, 2005 from the corresponding period of fiscal 2004,2005, primarily due to the Cable Network Programming, Television and Newspaper segments. The increased theatrical releasing costs, home entertainment marketing and manufacturing costs and amortization of production and participation costsoperating expenses at the Filmed EntertainmentCable Network Programming segment was due to the consolidation of the Florida and increasedOhio RSNs, and the consolidation of Fox Sports Net, a national sports programming costs, including the Super Bowl and Daytona 500 costs during the three months ended March 31, 2005,program service in April 2005. The increase at the Television segment was due to higher marketing costs associated with the earlier premier of the FOX fall schedule as well as the consolidation of Queensland Press Pty Ltd (“QPL”) in the Newspapers segment. Selling, general and administrative expenses increased approximately 13%12% from the corresponding period of fiscal 2004 primarily2005 which was also due to increased subscriber acquisition costs at Sky Italiathe consolidation of the Florida and increased employee costs in support of our growing businesses.Ohio RSNs, Fox Sports Net and QPL. Depreciation and amortization expense increased approximately 18%37% primarily due to accelerated depreciation recognized on printing plantsplant assets in the UK.United Kingdom and the amortization of intangible assets acquired on the purchase of the Fox Entertainment Group, Inc. minority interest in March 2005. During the first quarter of fiscal 2006, the expense related to stock options previously issued under the Company’s 2004 Stock Option Plan was $14 million. For the three months ended March 31,September 30, 2005, Operating income increased $74$143 million to $889$909 million from the corresponding period of fiscal 2004. This increase was mainly driven by an increase at2005 due to the Cable Network Programming segment.changes noted above.
Interest expense, net –—Interest expense increased $7$3 million from the corresponding period of fiscal 20042005 due primarily to interest on the Company’s issuance of $1.75 billion in Senior Notes in December 2004 partially offset by increased interest income on higher cash balances.
Equity earnings (losses) of affiliates –Equity—First quarter net earnings of affiliates of $91from affiliate entities were $186 million for the three months ended March 31, 2005 improved $20 million from $71versus $15 million in the same period a year ago. The increase is primarily due to improved results at The DIRECTV Group (“DIRECTV”) due to increased revenues resulting from higher subscribers and higher revenue per subscriber. The corresponding period of fiscal 2004. This2005 included the Company’s share of DIRECTV’s loss from its sale of PanAmSat resulting from a reduction in the sales proceeds and the Company’s portion of the SPACEWAY program impairment. Also contributing to the improvement was primarily due to increased contributionsadditional earnings from British Sky Broadcasting Group, plc (“BSkyB”), resulting from higher DTH subscribers and price increases, partly offset by higher subscriber acquisition costs.
For the three months ended September 30, | ||||||||||||||
2005 | 2004 | Change | % Change | |||||||||||
(in millions) | ||||||||||||||
BSkyB | $ | 100 | $ | 78 | $ | 22 | 28 | % | ||||||
DIRECTV | 9 | (100 | ) | 109 | ** | |||||||||
Sky Brasil | 14 | 13 | 1 | 8 | % | |||||||||
Innova | 8 | 3 | 5 | ** | ||||||||||
FOXTEL | (2 | ) | (7 | ) | 5 | 71 | % | |||||||
Other equity affiliates | 57 | 28 | 29 | ** | ||||||||||
Total equity earnings (losses) of affiliates, net | $ | 186 | $ | 15 | 171 | ** | ||||||||
** | not meaningful |
Other, net—For the three months ended September 30, 2005, the $11 million of Other, net was primarily comprised of a $52 million gain on the sale of a cost based investment in China Netcom, partially offset by increasedunrealized losses at The DIRECTV Group, Inc. (“DIRECTV”).
For the three months ended March 31, | ||||||||||||
2005 | 2004 | Change | ||||||||||
(in millions) | ||||||||||||
BSkyB | $ | 107 | $ | 90 | $ | 17 | ||||||
DIRECTV | (40 | ) | (27 | ) | (13 | ) | ||||||
Sky Brasil | (2 | ) | (6 | ) | 4 | |||||||
Innova | 6 | 4 | 2 | |||||||||
FOXTEL | (3 | ) | (8 | ) | 5 | |||||||
Other equity affiliates | 23 | 18 | 5 | |||||||||
Total equity earnings (losses) of affiliates | $ | 91 | $ | 71 | $ | 20 | ||||||
Thein fair value on the Company’s shareexchangeable securities in the amount of DIRECTV’s lossesapproximately $41 million. This is compared to $191 million of Other, net for the three months ended March 31, 2005 was $40 million and includes the amortization of certain finite-lived intangibles. These results reflect the Company’s allocation of the fair value of DIRECTV’s assets and liabilities as of December 22, 2003 and, as required, exclude certain items that were recognized by DIRECTV as income and expense within its results.
Other, net –For the three months ended March 31, 2005, the $62 million of Other, net lossesSeptember 30, 2004, which was primarily comprised of a $77 million loss on the exchange of the Company’s investment in Regional Programming Partners (“RPP”), partially offset by a $14 million unrealized gain related to the changegains in fair value ofon the Company’s exchangeable securities. There were no comparable losses duringsecurities in the corresponding periodamount of fiscal 2004.approximately $179 million.
Income tax expense – —The effective tax rate for the three months ended March 31,September 30, 2005 is 40.9%was 39.1% as compared to the effective tax rate of 36.9%21.2% for the corresponding period of fiscal 2004. The difference betweenSeptember 30, 2005 effective rate is higher than the statutory federalSeptember 30, 2004 effective tax rate primarily due to the resolution of foreign income tax rate and theaudits in September 2004. The effective tax rates,rate for both periods,the three months ended September 30, 2005 is primarilyhigher than the result ofUS Statutory rate due to state and foreign income taxes.
Minority interest in subsidiaries, net of tax—Minority interest expense decreased to $16 million from $42 million in the corresponding period of fiscal 2005. This decrease was primarily due to the buyout of minority interest of Fox Entertainment Group, Inc. (“FEG”) in fiscal 2005.
Cumulative effect of accounting change, net of tax—Effective July 1, 2005, the Company adopted Emerging Issues Task Force Topic No. D-108 “Use of the Residual Method to Value Acquired Assets Other Than Goodwill” (“D-108”). D-108 requires companies who have applied the residual value method in the valuation of acquired identifiable intangibles for purchase accounting and impairment testing to now use a direct value method. As required, as a result of the adoption, the Company recorded a charge of $1.6 billion ($1 billion net of tax, or ($0.32) per share of Class A Common Stock and ($0.27) per share of Class B Common Stock), to reduce the intangible balances attributable to its television stations’ FCC licenses. This charge has been reflected as a cumulative effect of accounting change, net of tax in the statement of operations.
Net income –—For the three months ended March 31,September 30, 2005, the Company reported net incomeloss of $400$433 million as compared to $434net income of $625 million for the quarterthree months ended March 31,September 30, 2004. This decrease was primarily due to the cumulative effect of accounting change recognized due to the Company’s adoption of D-108.
Segment Analysis:
The following table sets forth the Company’s revenues and operating income increase being more than offset by Other, net losses and increased income taxes,segment, for the three months ended September 30, 2005 as noted above.
For the three months ended September 30, | |||||||||||||
2005 | 2004 | Change | % Change | ||||||||||
(in millions) | |||||||||||||
Revenues: | |||||||||||||
Filmed Entertainment | $ | 1,419 | $ | 1,377 | $ | 42 | 3 | % | |||||
Television | 1,048 | 1,004 | 44 | 4 | % | ||||||||
Cable Network Programming | 775 | 600 | 175 | 29 | % | ||||||||
Direct Broadcast Satellite Television | 498 | 415 | 83 | 20 | % | ||||||||
Magazines and Inserts | 267 | 232 | 35 | 15 | % | ||||||||
Newspapers | 1,012 | 865 | 147 | 17 | % | ||||||||
Book Publishing | 391 | 364 | 27 | 7 | % | ||||||||
Other | 272 | 289 | (17 | ) | (6 | )% | |||||||
Total revenues | $ | 5,682 | $ | 5,146 | $ | 536 | 10 | % | |||||
Segment Analysis:
For the three months ended September 30, | |||||||||||||||
2005 | 2004 | Change | % Change | ||||||||||||
(in millions) | |||||||||||||||
Operating (loss) income: | |||||||||||||||
Filmed Entertainment | $ | 368 | $ | 291 | $ | 77 | 26 | % | |||||||
Television | 160 | 234 | (74 | ) | (32 | )% | |||||||||
Cable Network Programming | 197 | 166 | 31 | 19 | % | ||||||||||
Direct Broadcast Satellite Television | (61 | ) | (121 | ) | 60 | 50 | % | ||||||||
Magazines and Inserts | 76 | 64 | 12 | 19 | % | ||||||||||
Newspapers | 125 | 118 | 7 | 6 | % | ||||||||||
Book Publishing | 70 | 60 | 10 | 17 | % | ||||||||||
Other | (26 | ) | (46 | ) | 20 | 43 | % | ||||||||
Total operating (loss) income | $ | 909 | $ | 766 | $ | 143 | 19 | % | |||||||
Filmed Entertainment – (25% and 27% of the Company’s consolidated revenues in the first quarter of fiscal 2006 and 2005, respectively)
For the three months ended March 31,September 30, 2005, revenues at the Filmed Entertainment segment increased $42 million from $1,184$1,377 million to $1,477 million or 25%,$1,419 million. This increase was primarily due to higher home entertainmentincreased revenues from the domestic syndication ofThe X-Files and the initial domestic cable availability ofDharma and Gregas well as an increase in domestic pay television revenues due to a stronger film lineup and more feature films available during the first quarter of fiscal 2006. Although the first quarter of fiscal 2006 included the successful worldwide theatrical revenues. Higher home entertainment revenues for film titles were driven byrelease ofFantastic Four, the strong worldwide performancecorresponding period of fiscal 2005 had a higher volume of successful theatrical releases, includingI, Robot andAlien vs. Predator. In addition, the corresponding period of fiscal 2005 included continued contributions from fiscal 2004 releasesDodgeball, domestic performance ofNapoleon DynamiteGarfield andThe Day After Tomorrow and as a result worldwide theatrical revenue was down in the continued international performance ofI, Robot. Television titles contributing to this increase include24andFamily Guy.three months ended September 30, 2005. The Company’s DVD revenues rose approximately 76% for the three months ended March 31,September 30, 2005 overare consistent with the corresponding period of fiscal 2004,2005, with 82%77% and 18%23% of DVD revenues generated from the sale and distribution of film titles and television titles, respectively. IncreasedFiscal 2006 DVD revenues included the worldwide theatrical revenues were driven by strong theatrical releases includinghome entertainment performances ofRobots, Hide &and Seek, 24andSideways. The corresponding period of fiscal 2004 includedWelcome to Mooseport, Catch That KidSimpsons and carryoverthe domestic performance ofCheaper byFamily Guy. This is compared to the Dozenfiscal 2005 performance ofStar Wars Trilogy and the distribution ofPassion of the Christ.
For the quarterthree months ended March 31,September 30, 2005, the Filmed Entertainment segment reported Operating income of $251$368 million, an increase of $33$77 million, or 15%26% from the corresponding period of fiscal 2004.2005. These improvements were due to the revenue increasesincreased domestic cable syndication and domestic pay-television revenues noted above partially offset by increasedas well as lower theatrical releasing costs home entertainment marketing and manufacturing costs andlower amortization of production and participation costs directly associated withdue to fewer films released in the increase in revenues noted above.three months ended September 30, 2005 as compared to the corresponding period of fiscal 2005.
Television – (18% and 20% of the Company’s consolidated revenues in the first quarter of fiscal 2006 and 2005, respectively)
The Television segment reported revenue of $1,414$1,048 million infor the third quarter of fiscalthree months ended September 30, 2005 as compared to $1,182$1,004 million in the corresponding period of fiscal 2004.2005. For the three months ended March 31,September 30, 2005, Operating income at the Television segment was $221$160 million, a decrease of 15%32% from $260$234 million reported in the thirdfirst quarter of fiscal 2004.2005.
Revenues for the three months ended March 31,September 30, 2005 at the Company’s U.S. television operations increased approximately 21%3% as compared to the corresponding period of fiscal 2004. The Company experienced2005. Advertising revenues increased advertising revenue from the telecastas a result of the Super Bowl and the Daytona 500 in the current quarter, which were not telecast in the corresponding period ofhigher prime time ratings versus fiscal 2004 as well as pricing improvements. This increase was partially offset by the adverse impact of the transition to LPMs on the ratings at the Company’s Boston, New York, Los Angeles and Chicago television stations.2005. Operating income for the three months ended March 31,September 30, 2005 at the Company’s U.S. television operations decreased approximately 20%28% as compared to the corresponding period of fiscal 2004. This decrease was primarily2005. Expenses increased due to higher sports programming costs for the Super Bowl and Daytona 500 and higher entertainment program costs due to increased license fees and marketing costs for returning series and severallocal news expansions, new series cancellations, partially offset by lower music license fees.sports programming on the UPN stations and off-air media costs relating to the earlier launch of the fall prime time line-up on FOX as compared to fiscal 2005.
Revenues and operating income for the three months ended March 31,September 30, 2005 at the Company’s International television operations increased from the corresponding period of fiscal 2004.2005. These increases were primarily driven by increasedhigher advertising revenues at STAR Plus and STAR Gold and increased subscription revenues from India. Operating income decreased as compared to the first quarter of fiscal 2005 due to higher programming costs associated with the launch of new channels, in India.programming price increases as well as increased costs associated with expanding the Company’s Indian prime-time broadcasts to include weekends and increased operating costs to support the business growth.
Cable Network Programming – (14% and 12% of the Company’s consolidated revenues in the first quarter of fiscal 2006 and 2005, respectively)
Total revenues for the Cable Network Programming segment increased by $53$175 million or approximately 9%29% from $580$600 million to $633$775 million for the three months ended March 31,September 30, 2005. Fox News Channel’s (“Fox News”) and, the FX Network’s (“FX”) and the RSN’s revenues increased 21%16%, 20% and 25%30%, respectively, from the corresponding period of fiscal 2004, partially offset by a 5% decrease in the RSNs’ revenues due to the National Hockey League (“NHL”) season cancellation.2005.
At Fox News, advertising revenues increased 24%18% from the corresponding period of fiscal 20042005 primarily driven by higher national pricing and higher volume. Net affiliate revenue increased 10%9%, which can be attributed to an increase in subscribers and average rates per subscriber and subscribers from the corresponding period of fiscal 2004.2005. As of March 31,September 30, 2005, Fox News reached approximately 88 million Nielsen households, a 1% increase over the corresponding period of fiscal 2005.
At FX, advertising revenues increased 23% over the corresponding period of fiscal 2005 due to higher volume and higher pricing. Net affiliate revenues increased 17% over the corresponding period of fiscal 2005, reflecting an increase in average rates per subscriber and subscribers. As of September 30, 2005, FX reached approximately 87 million Nielsen households, a 2% increase over the corresponding period of fiscal 2004.
At FX, advertising revenues increased 23% over the corresponding period of fiscal 2004 due to higher ratings and improved pricing. Affiliate revenues increased 14% over the corresponding period of fiscal 2004, reflecting an increase in subscribers and average rates per subscriber. As of March 31, 2005, FX reached approximately 86 million Nielsen households, a 2% increase over the corresponding period of fiscal 2004.2005.
At the RSNs, advertising revenues decreased 5%increased 32% due to the consolidation of the Florida and Ohio RSNs acquired in April 2005 and an increase in MLB events. Affiliate revenues increased 29% from the corresponding period of fiscal 20042005 primarily due to the cancellationconsolidation of the NHL season which more than offset the impact of increasedFlorida and Ohio RSNs, an increase in DBS subscribers and higher average rates per subscriber as compared to the corresponding period of fiscal 2004.subscriber.
The Cable Network Programming segment reported Operating income of $172$197 million, an increase of $61$31 million from the corresponding period of fiscal 2004. These improvements were2005. This improvement was primarily driven by the net revenue increases noted above, as well as lowerpartially offset by higher programming costsand marketing expenses. Programming expenses increased primarily due to the consolidation of the Florida and Ohio RSNs and Fox Sports Net in April 2005. Also contributing to this increase were additional MLB events at the RSNs, due to the NHL season cancellationnew acquired series and the absence of losses from the sale of the Dodgers in February 2004. Partially offsetting these improvements were highermore original programming expenses for original series at FX and increased programmingnewsgathering and broadcasting expenses at Fox NewsNews. Marketing expenses increased at FX due to several international breaking news events duringincreased promotion for its new original series and returning shows in the thirdfirst quarter of fiscal 2005.
Direct Broadcast Satellite Television– For (9% and 8% of the three months ended March 31, 2005, SKY ItaliaCompany’s consolidated revenues increased to $624 million from $494 million in the corresponding period of fiscal 2004. The 26% revenue growth was primarily driven by strong subscriber additions including over 136,000 net new subscribers during the thirdfirst quarter of fiscal 2006 and 2005, which resulted in SKY Italia’s subscriber base growth to approximately 3.2 million at March 31, 2005.respectively)
For the three months ended March 31,September 30, 2005, SKY Italia revenues increased to $498 million from $415 million in the corresponding period of fiscal 2005. The 20% revenue growth was primarily driven by an increase of approximately 595 thousand subscribers in the average subscriber base over the same period of fiscal 2005. During first quarter of fiscal 2006, Sky Italia added over 80 thousand net subscribers, which resulted in SKY Italia’s subscriber base totaling approximately 3.4 million at September 30, 2005. The total churn in the first quarter of fiscal 2006 was approximately 115 thousand subscribers on an average subscriber base of 3.3 million as compared to churn of approximately 80 thousand subscribers on an average subscriber base of approximately 2.7 million in the corresponding period of fiscal 2005. Since the first quarter has the largest number of expiring annual subscriber contracts, it traditionally represents the highest churn period. Subscriber churn for the period represents the number of SKY Italia subscribers whose service is disconnected during the period.
Also contributing to revenue growth during the first quarter of fiscal 2006 was an increase in average rate per subscriber (“ARPU”) to approximately €38.2 from €37.9 in the corresponding period of fiscal 2005. SKY Italia calculates ARPU by dividing total subscriber-related revenues for the period by the average subscribers for the period, and dividing that amount by the number of months in the period. Subscriber-related revenues are comprised of total subscription revenue, pay-per-view revenue and equipment rental revenue for the period. Average subscribers are calculated for the period by adding the beginning and ending subscribers for the period and dividing by two.
Subscriber acquisition costs per subscriber (“SAC”) increased from approximately €260 in the first quarter of fiscal 2005 to approximately €270 in the first quarter of fiscal 2006 due to changes in the new subscriber offer, which reduced the upfront activation fees paid by the subscriber. SAC is calculated by dividing total subscriber acquisition costs for a period by the number of gross new SKY Italia subscribers during the period. Subscriber acquisition costs include the cost of the commissions paid to retailers and other distributors, the cost of equipment sold directly by SKY Italia to subscribers and the costs related to installation and acquisition advertising, net of any upfront activation fee. SKY Italia excludes the value of equipment capitalized under SKY Italia’s equipment lease program as well as payments and the value of returned equipment related to disconnected lease program subscribers from subscriber acquisition costs.
For the three months ended September 30, 2005, the operating loss at SKY Italia improveddecreased by 13%50% from the thirdfirst quarter of fiscal 2004. The2005. This is due to the revenue growth wasincreases noted above, partially offset by higheran increase in programming spending primarily due to the broadcastinghigher fees paid for content due to the increase in the subscriber base and the broadcast of additional soccer matches and movie titles as well as the addition of new entertainment and news channels on the basic programming tier as well as increased subscriber acquisition costs. Additionally, the Company incurred costs associated with the one-time swap-out of set-top boxes which were using outdated encryption software.titles.
Magazines and Inserts –(5% of the Company’s consolidated revenues in the first quarter of fiscal 2006 and 2005)
For the three months ended March 31,September 30, 2005, revenues at the Magazines and Inserts segment increased to $283$267 million from $278$232 million in the corresponding period of fiscal 2004.2005. This was primarily the result of a volume increase in ourthe Company’s free standing insert division as well as in the InStore advertising business due to higher demand for ourits at-shelf advertising products in supermarkets in the U.S. and an increase in volume from the Free Standing Insert (“FSI”) business. Partially offsetting these increases was a decrease in pricing at the FSI business.supermarkets.
Operating income decreasedincreased to $79$76 million for the three months ended March 31,September 30, 2005 from $84$64 million in the corresponding period of fiscal 2004.2005. This decreaseincrease is primarily due primarily to margin declines from the decrease in pricing at FSIrevenue increases above partially offset by higher operating and an increase in production costs.selling expenses as a result of the increased volume.
Newspapers –(18% and 17% of the Company’s consolidated revenues in the first quarter of fiscal 2006 and 2005, respectively)
The Newspapers segment reported revenue of $1,062$1,012 million in the thirdfirst quarter of fiscal 20052006 as compared to $914$865 million in the corresponding period of fiscal 2004.2005. For the three months ended March 31,September 30, 2005, Operating income at the Newspapers segment was $186$125 million, an increase of 6% from $176$118 million reported in the thirdfirst quarter of 2004. During the three months ended September 30, 2005, foreign currency fluctuations did not have a significant impact on the Newspapers segment.
For the three months ended March 31,September 30, 2005, UK newspapers’ revenues increased approximately 5%remained consistent due to increased circulation revenue and the weakening of the U.S. dollar against Sterling.offset by lower advertising revenues. Circulation revenue was higher primarilyincreased over the corresponding period of fiscal 2005 due to the national rollout of the compact product atcover price increases across all titles and higher net circulation onThe Times. andThe Sunday Times as a result of promotional activities and strong editorial coverage. Advertising revenue decreased from the corresponding period of fiscal 2005 as a result of a general weakness in the UK advertising market. Operating income decreased by 23%60% for the quarter ended March 31,September 30, 2005 as compared to the corresponding period of fiscal 2004.2005. This decrease was primarily due to increased depreciation and other costs associated with the development of new printing plants in the UKUnited Kingdom over the next four to five years.years with no equivalent amount in the corresponding period of fiscal 2005. Also contributing to the decrease in operating income were increased operatingpromotional costs resulting from increased production, increased paginationforThe Sun,The Times andThe News of The World and higher newsprint costs. The increased costs were partially offset by the weakening of the U.S. dollar against Sterling. During the three months ended March, 31, 2005, the weakening of the U.S. dollar against Sterling resulted in a 3% and 4% increase to revenues and operating income, respectively, as compared to the three months ended March 31, 2004.
For the three months ended March 31,September 30, 2005, the Australian newspapers’ revenues increased 36%43% due to the consolidation of the results of Queensland Press Pty Limited (“QPL”),QPL in November 2004 and improved display and classified advertising revenues. The advertising revenue increases were driven by the continued strong economic conditions in Australia and new sales initiatives, resulting in gains in national and retail display, and the employment classified sections.advertising. Operating income increased 67%62% as compared to the corresponding period of fiscal 20042005 primarily due to the revenue increases noted above. During the three months ended March 31, 2005, the weakening U.S. dollar had a minimal impact to both revenues and operating income, as compared to the three months ended March 31, 2004.
Book Publishing –(7% of the Company’s consolidated revenues in the first quarter of fiscal 2006 and 2005)
For the three months ended March 31,September 30, 2005, revenues at HarperCollins decreasedincreased by $21$27 million or 7% to $300$391 million as compared to the corresponding period of fiscal 2004. The decrease2005. This increase is primarily dueattributable to stronger performances in HarperCollins’s Trade divisions and the lower volumestrength of salesThe Chronicles of Zondervan’sNarnia series in the Childrens divisions. For the three months ended September 30, 2005, HarperCollins had 42 titles on theNew York Times Bestseller List with 6 titles reaching the number 1 position. Additional titles in fiscal 2006 revenue includeThe Fair Tax Book by Neal Boortz and John Linder,YOU: The Owners Manual by Michael F. Roizen and Mehmet C. Oz,Freakonomics by Steven Levitt and Stephen Dubner and100 People Who Are Screwing Up America by Bernard Goldberg andThe Purpose Driven Life in the third quarter of fiscal 2005 as compared to the third quarter of fiscal 2004 partially offset by strong sales of the 11 titles in the Lemony Snicket’sA Series of Unfortunate Events.Rick Warren. Operating income for the third quarter of fiscalthree months ended September 30, 2005 was $30$70 million, a $6 million oran increase of 17% decrease from the third quarter of fiscal 2004 primarily due to the revenue decreasesincreases noted above.
Other – For the third quarter of fiscal 2005, revenues at the Other segment increased from $211 million for the third quarter of fiscal 2004 to $250 million or 18%. Included in the increase was higher revenue at NDS from increased smartcard shipments as well as an increase in total authorized smartcards in use as compared to the corresponding period of fiscal 2004. For the three months ended March 31, 2005, the Other segment reported Operating loss of $29 million as compared to Operating loss of $46 million in the corresponding period of fiscal 2004 due to the revenue increases noted above partially offset by increased research(5% and development costs at NDS.
Results of Operations—For the nine months ended March 31, 2005 versus the nine months ended March 31, 2004.
The following table sets forth the Company’s operating results by segment, for the nine months ended March 31, 2005 as compared to the nine months ended March 31, 2004.
For the nine months ended March 31, | ||||||||||||||
2005 | 2004 | Change | % Change | |||||||||||
(in millions, except % and per share data) | ||||||||||||||
Revenues(1): | ||||||||||||||
Filmed Entertainment | $ | 4,726 | $ | 3,809 | $ | 917 | 24 % | |||||||
Television | 3,982 | 3,748 | 234 | 6 % | ||||||||||
Cable Network Programming | 1,857 | 1,741 | 116 | 7 % | ||||||||||
Direct Broadcast Satellite Television | 1,620 | 1,179 | 441 | 37 % | ||||||||||
Magazines & Inserts | 774 | 729 | 45 | 6 % | ||||||||||
Newspapers | 2,937 | 2,511 | 426 | 17 % | ||||||||||
Book Publishing | 1,041 | 1,009 | 32 | 3 % | ||||||||||
Other | 814 | 606 | 208 | 34 % | ||||||||||
Total revenues | $ | 17,751 | $ | 15,332 | $ | 2,419 | 16 % | |||||||
Operating income (loss): | ||||||||||||||
Filmed Entertainment | $ | 949 | $ | 810 | $ | 139 | 17 % | |||||||
Television | 608 | 599 | 9 | 2 % | ||||||||||
Cable Network Programming | 565 | 368 | 197 | 54 % | ||||||||||
Direct Broadcast Satellite Television | (247 | ) | (251 | ) | 4 | 2 % | ||||||||
Magazines & Inserts | 216 | 205 | 11 | 5 % | ||||||||||
Newspapers | 488 | 448 | 40 | 9 % | ||||||||||
Book Publishing | 152 | 152 | — | — | ||||||||||
Other | (122 | ) | (74 | ) | (48 | ) | (65)% | |||||||
Total operating income | 2,609 | 2,257 | 352 | 16 % | ||||||||||
Interest expense, net | (405 | ) | (400 | ) | (5 | ) | (1)% | |||||||
Equity earnings (losses) of affiliates | 154 | 88 | 66 | 75 % | ||||||||||
Other, net | 15 | 34 | (19 | ) | (56)% | |||||||||
Income before income tax expense and minority interest in subsidiaries | 2,373 | 1,979 | 394 | 20 % | ||||||||||
Income tax expense | (773 | ) | (725 | ) | (48 | ) | (7)% | |||||||
Minority interest in subsidiaries, net of tax | (189 | ) | (150 | ) | (39 | ) | (26)% | |||||||
Net income | $ | 1,411 | $ | 1,104 | $ | 307 | 28 % | |||||||
Diluted earnings per share(2) | $ | 0.47 | $ | 0.40 |
For the nine months ended March 31, | ||||||||
2005 | 2004 | |||||||
(in millions) | ||||||||
Revenues before amortization of cable distribution investments | $ | 17,837 | $ | 15,426 | ||||
Amortization of cable distribution investments | (86 | ) | (94 | ) | ||||
Revenues | $ | 17,751 | $ | 15,332 | ||||
Overview –For the nine months ended March 31, 2005, the Company’s revenues increased $2,419 million from $15,332 million for the nine months ended March 31, 2004 to $17,751 million. This 16% increase was primarily due to revenue increases at the Filmed Entertainment, Direct Broadcast Satellite Television and Newspapers segments. Operating expenses increased approximately 16% for the three months ended March 31, 2005 from the corresponding period of fiscal 2004, primarily due to increased theatrical releasing costs, home entertainment marketing and manufacturing costs and amortization of production and participation costs at the Filmed Entertainment segment, and increased sports programming and entertainment programming costs at the Television and Direct Broadcast Satellite Television segments. Selling, general and administrative expenses increased approximately 14% from the corresponding period of fiscal 2004 primarily due to increased subscriber acquisition costs at Sky Italia and increased employee costs in support of our growing businesses. Depreciation and amortization increased approximately 6% primarily due to accelerated depreciation recognized on printing plant assets in the UK. For the nine months ended March 31, 2005, Operating income increased $352 million to $2,609 million from the corresponding period of fiscal 2004. This increase was due to improved results at the Cable Network Programming and Filmed Entertainment segments.
Interest expense, net –Interest expense increased $5 million from the corresponding period of fiscal 2004 due primarily to interest on the Company’s issuance of $1.75 billion in Senior Notes in December 2004 partially offset by increased interest income on higher cash balances.
Equity earnings (losses) of affiliates –Equity earnings of affiliates of $154 million for the nine months ended March 31, 2005 increased $66 million from $88 million for the nine months ended March 31, 2004 primarily due to increased contributions from RPP, Gemstar – TV Guide International, Inc. (“Gemstar”), and BSkyB and comparatively favorable impact from foreign currency fluctuations reported by the Latin America DTH platforms, partially offset by increased losses at DIRECTV.
For the nine months ended March 31, | ||||||||||||
2005 | 2004 | Change | ||||||||||
(in millions) | ||||||||||||
BSkyB | $ | 249 | $ | 199 | $ | 50 | ||||||
DIRECTV | (217 | ) | (27 | ) | (190 | ) | ||||||
Sky Brasil | 23 | (20 | ) | 43 | ||||||||
Innova | 17 | (10 | ) | 27 | ||||||||
FOXTEL | (17 | ) | (15 | ) | (2 | ) | ||||||
Other equity affiliates | 99 | (39 | ) | 138 | ||||||||
Total equity earnings (losses) of affiliates | $ | 154 | $ | 88 | $ | 66 | ||||||
The Company’s share of DIRECTV’s losses for the nine months ended March 31, 2005 was $217 million and includes the Company’s share of DIRECTV’s increased loss from its sale of PanAmSat resulting from a reduction in the sales proceeds, the Company’s portion of the SPACEWAY program impairment and the amortization of certain finite-lived assets and liabilities as of December 22, 2003 and, as required, exclude certain items that were recognized by DIRECTV as income and expense within its results.
Other, net –For the nine months ended March 31, 2005, the Company reported income of $15 million in Other, net primarily comprised of the unrealized gain in fair value on the Company’s exchangeable securities in the amount of approximately $105 million and a gain on the sale of Rogers Sportsnet of approximately $39 million, partially offset by a $77 million loss on the exchange of the Company’s investment in RPP and a $55 million loss on the sale of a Latin American DTH business to DIRECTV. For the nine months ended March 31, 2004, Other, net of $34 million was primarily comprised of a gain on the sale of SKY PerfecTV! of approximately $105 million and a gain of $26 million related to the settlement of the Company’s insurance claim primarily for the September 2001 loss of its broadcast tower at the World Trade Center in New York, partially offset by the unrealized loss in fair value on the Company’s exchangeable securities in the amount of $104 million.
Income tax expense – The effective tax rate for the nine months ended March 31, 2005 is 32.6% as compared to the effective tax rate of 36.6% for the corresponding period of fiscal 2004. The effective tax rate for the nine months ended March 31, 2005 is lower than the U.S. statutory rate primarily due to the resolution of income tax auditsconsolidated revenues in the first quarter of fiscal 2005. Excluding this tax benefit, the effective tax rate was 37.8% for the nine months ended March 31, 2005.2006 and 2005, respectively)
Net income – For the nine months ended March 31, 2005,first quarter of fiscal 2006, revenues at the Company reported net income of $1,411 million as compared to $1,104Other segment decreased from $289 million for the nine months ended March 31, 2004.first quarter of fiscal 2005 to $272 million or 6%. This increase wasdecrease is primarily due to the operating income increase noted above.
Segment Analysis:
Filmed Entertainment – For the nine months ended March 31, 2005, revenues at the Filmed Entertainment segment increased from $3,809 million to $4,726 million or 24%. This increase was primarily due to higher worldwide home entertainment revenues and worldwide theatrical revenues. Higher home entertainment revenues reflect the strong worldwide performances of successful theatrical releases ofDay After Tomorrow, Garfield, Dodgeball, Alien vs. Predator andI, Robot, and improved performance from various library titles on DVD as compared to the corresponding period of fiscal 2004. In addition, the home entertainment release of theStar Wars Trilogy and the distribution ofThe Passion of the Christalso contributed to the increase in home entertainment revenues. Television titles contributing to this increase include24, The SimpsonsandFamily Guy.The Company’s DVD revenues rose approximately 54% for the nine months ended March 31, 2005 over the corresponding period of fiscal 2004, with 81% and 19% of DVD revenues generated from the sale and distribution of film titles and television titles, respectively. The theatrical revenue increase was driven by several strong theatrical releases includingI, Robot, Alien vs. Predator, Robots, Hide & Seek andSideways, as well as continued worldwide contributions from fiscal 2004 releasesDodgeball, GarfieldandDay After Tomorrow. The corresponding period of fiscal 2004 included the theatrical releasesLeague of Extraordinary Gentlemen, Cheaper by the Dozen, Master and Commander: The Far Side of theWorld and28 Days Later.
For the nine months ended March 31, 2005, the Filmed Entertainment segment reported Operating income of $949 million as compared to $810 million in the corresponding period of fiscal 2004. This improvement was due to the revenue increases noted above, partially offset by increased theatrical releasing costs, home entertainment marketing and manufacturing costs, amortization of production and participation costs directly associated with the increase in revenues noted above, and the disappointing result ofFlight of the Phoenix.
Television—The Television segment reported revenue of $3,982 million for the nine months ended March 31, 2005 as compared to $3,748 million in the corresponding period of fiscal 2004. For the nine months ended March 31, 2005, Operating income at the Television segment was $608 million, an increase of 2% from $599 million reported in the corresponding period of fiscal 2004.
Revenues for the nine months ended March 31, 2005 at the Company’s U.S. television operations increased approximately 6% from the corresponding period of fiscal 2004. The Company experienced increased advertising revenues from the telecast of the Super Bowl and Daytona 500 during the nine months ended March 31, 2005, which were not telecast in the corresponding period of fiscal 2004. This increase was partially offset by a decrease in prime time ratings as compared to the corresponding period of fiscal 2004 as well as by the adverse impact of the transition to LPMs on ratings at the Company’s Boston, New York, Los Angeles and Chicago television stations. Operating income for the nine months ended March 31, 2005 at the Company’s U.S. television operations decreased approximately 6% as compared to the corresponding period of fiscal. This decrease was primarily due to higher sports programming costs for the Super Bowl and Daytona 500, higher entertainment program costs for returning series, several new series cancellations, higher news costs due to expansion of local news in several markets and higher marketing costs due to the launch of new fall programs and the November/February sweeps. The decrease in Operating income was partially offset by the revenue increases noted above, lower programming costs as a result of expired syndicated product and lower priced renewals, as well as lower music license fees.
Revenues and operating income for the nine months ended March 31, 2005 at the Company’s International television operations increased from the corresponding period of fiscal 2004. These increases were primarily driven by increased advertising revenues due to growth in India and increased subscription revenues due to the launch of new channels in India.
Cable Network Programming – Total revenues for the Cable Network Programming segment increased by $116 million or approximately 7% from $1,741 million to $1,857 million for the nine months ended March 31, 2005. Fox News’, FX’s and the RSNs’ revenues increased 21%, 19% and 3%, respectively, over the corresponding period of fiscal 2004, partially offset by the absence of revenues from the Dodgers which was sold in February 2004.
At Fox News, advertising revenues increased 25%, primarily due to increased national pricing and higher volume. Net affiliate revenue increased by 12%, which was attributed to an increase in subscribers and average rates per subscriber from the corresponding periodbroadcast of fiscal 2004. As of March 31, 2005, Fox News reached approximately 87 million Nielsen households, a 2% increase over fiscal 2004.
At FX, advertising revenues increased 23% from the corresponding period of fiscal 2004 due to higher ratings and improved pricing. Affiliate revenues increased 10% over the corresponding period of fiscal 2004, reflecting an increase in subscribers and average rates per subscriber. As of March 31, 2005, FX reached approximately 86 million Nielsen households, a 2% increase over the corresponding period of fiscal 2004.
At the RSNs, revenues increased 3% from the corresponding period of fiscal 2004 primarily from an increase in subscribers and higher average rates per subscriber. This increase was partially offset by revenue decreases related to the cancellation of the NHL season. RSN advertising revenue decreased 8% from the corresponding period of fiscal 2004. This decrease in advertising revenues was due to the absence of NHL telecasts in the current period as a result of the cancellation of the NHL season.
The Cable Network Programming segment reported Operating income of $565 million, an increase of $197 million from the corresponding period of fiscal 2004. These improvements were primarily driven by the net revenue increases noted above as well as the absence of losses from the sale of the Dodgers, lower programming costs at the RSNs primarily due to the cancellation of the NHL season and lower programming costs at FX due in part to costs associated with the fiscal 2004 cancellations ofLucky andThe Orlando Jones Show.Partially offsetting these improvements were increased programming costs for Fox News and the partial recovery in the corresponding period of fiscal 2004 of approximately $15 million of certain receivables claims against Adelphia Communications Corporation which were previously written-off.
Direct Broadcast Satellite Television– For the nine months ended March 31, 2005, SKY Italia’s revenues increased to $1,620 million from $1,179 million in the corresponding period of fiscal 2004. The 37% revenue growth was primarily driven by strong subscriber additions over the past year including approximately 575,000 net new subscribers during the first nine months of fiscal 2005 which resulted in SKY Italia’s subscriber base growth to approximately 3.2 million at March 31, 2005. Also contributing to revenue growth during the nine months ended March 31, 2005 was an increase in average rate per subscriber as compared to the corresponding period of fiscal 2004. This increase was driven by subscribers opting for more premium programming.
For the nine months ended March 31, 2005, the operating loss at SKY Italia of $247 million improved by 2% as compared to the loss of $251 million in the corresponding period of fiscal 2004. The revenue growth noted above was offset by increased subscriber acquisition costs as well as higher sports and entertainment programming costs. Additionally, the Company incurred costs associated with the one-time swap-out of set-top boxes which were using outdated encryption software.
Magazines and Inserts – For the nine months ended March 31, 2005, revenues at the Magazines and Inserts segment increased to $774 million from $729 million in the corresponding period of fiscal 2004. This was primarily the result of a volume increase in our InStore advertising business due to higher demand for our at-shelf advertising products in supermarkets in the U.S. and an increase in volume from the FSI business. Partially offsetting these increases was a decrease in pricing at the FSI business.
Operating income increased to $216 million for the nine months ended March 31, 2005 from $205 million in the corresponding period of fiscal 2004. This increase is due primarily to the increases noted above.
Newspapers – The Newspapers segment reported revenue of $2,937 million for the nine months ended March 31, 2005 as compared to $2,511 million in the corresponding period of fiscal 2004. For the nine months ended March 31, 2005, Operating income at the Newspapers segment was $488 million, an increase of 9% from $448 million reported in the corresponding period of fiscal 2004.
For the nine months ended March 31, 2005, UK newspapers’ revenues increased approximately 11% primarily due to increased advertising and circulation revenue and the weakening of the U.S. dollar against Sterling. Advertising revenue was higher due to increases atThe SunandThe News of the Worldprimarily due to a higher volume of color advertisements, increased commercial inserts and additional display. Circulation revenue was higher primarily due to the national rollout of the compact product atThe Times. Operating income decreased by 14% for the nine months ended March 31, 2005 as compared to the corresponding period of fiscal 2004. This decrease is primarily due to increased depreciation and other costs associated with the development of new printing plants in the UK over the next four to five years. Also contributing to the decrease in operating income are increased operating costs resulting from increased production, increased pagination and higher newsprint costs. The increased costs were partially offset by the weakening of the U.S. dollar against Sterling. During the nine months ended March, 31, 2005, the weakening of the U.S. dollar against Sterling resulted in approximately 8% increases to both revenues and operating income, respectively, as compared to the nine months ended March 31, 2004.
For the nine months ended March 31, 2005, the Australian newspapers’ revenues increased 28% due to the consolidation of the results of Queensland Press Pty Limited (“QPL”), improved display and classified revenues and the weakening of the U.S. dollar against the Australian dollar. The advertising revenue increases were driven by the continued strong economic conditions in Australia and new sales initiatives, resulting in gains in national and retail display, and the employment classified sections. Operating income increased 46% as compared to the corresponding period of fiscal 2004 primarily due to the revenue increases noted above. During the nine months ended March 31, 2005, the weakening U.S. dollar resulted in approximately 5% increases to both revenues and operating income, noted above, respectively, as compared to the nine months ended March 31, 2004.
Book Publishing – For the nine months ended March 31, 2005, revenues at HarperCollins increased by $32 million from $1,009 million in the corresponding period of fiscal 2004 to $1,041 million or 3%. This revenue increase was driven by strong sales of the 11 titles in Lemony Snicket’sA Series of Unfortunate Events, and bestseller performance that continues to exceed fiscal 2004. HarperCollins had 78 titles on the New York Times Bestseller List compared to 67 titles in the corresponding period of fiscal 2004. Operating Profit for the nine months ended March 31, 2005 of $152 million is consistent with the corresponding period of fiscal 2004.
Other – For the nine months ended March 31, 2005, revenues at the Other segment increased from $606 million for the corresponding period of fiscal 2004 to $814 million or 34%. Included in this increase was higher revenue at NDS and Global Cricket Corporation (“GCC”). The increase in NDS’ revenues was due to increased smartcard shipments as well as an increase in total authorized smartcards as compared to the corresponding period of fiscal 2004. The increase in GCC’s revenues was due to the International Cricket Council Champions Trophy 2004 that was held in September 2004 with no comparativecomparable event in the first quarter of fiscal 2004.2006. This decrease was partially offset by revenue increases at News Outdoor due to the growth of these businesses in their markets. For the ninethree months ended March 31,September 30, 2005, the Other segment reported Operating lossesloss of $122$26 million as compared to $74losses of $46 million in the corresponding period of fiscal 2004. The increased loss was2005 due mainly to improved operating income from NDS and revenue increases at News Outdoor. Also contributing to the decrease were the costs related to the Company’s reincorporation toReorganization in the United States and increased research and development costs at NDS partially offset by the revenue increases noted above.first three months of fiscal 2005.
Liquidity and Capital Resources
Current Financial Condition
The Company’s principal source of liquidity is internally generated funds; however, the Company has access to the worldwide capital markets, a $1.75 billion Revolving Credit Facility and various film financing alternatives to supplement its cash flows. The availability onunder the Revolving Credit Facility as of March 31,September 30, 2005 was reduced by letters of credit issued which totaled $182$169 million. Also as of March 31,September 30, 2005, the Company had consolidated cash and cash equivalents of approximately $6$6.5 billion. We believeThe Company believes that cash flows from operations will be adequate for the Company to conduct its operations. The Company’s internally generated funds are highly dependent upon the state of the advertising market and public acceptance of film and television products. Any significant decline in the advertising market or the performance of its films could adversely impact its cash flows from operations which could require the Company to seek other sources of funds including proceeds from the sale of certain assets or other alternative sources.
The principal uses of cash that affect the Company’s liquidity position include the following: investments in the production and distribution of new feature films and television programs,programs; the acquisition of and payments under programming rights for entertainment and sports programming,programming; paper purchases,purchases; operational expenditures,expenditures; capital expenditures,expenditures; interest expense,expense; income tax payments andpayments; investments in associated entities.entities; dividends; acquisitions and stock repurchases.
Sources and uses of cash
Net cash provided by operating activities for the ninethree months ended March 31,September 30, 2005 and 2004 is as follows (in millions):
For the nine months ended March 31, | 2005 | 2004 | ||||||||||
For the three months ended September 30, | 2005 | 2004 | ||||||||||
Net cash provided by operating activities | $ | 2,313 | $ | 1,999 | $ | 497 | $ | 582 | ||||
The increasedecrease in net cash provided by operating activities during the three months ended September 30, 2005 reflects higher cash collections primarily from increased sale of home entertainment product and lower cash spent on thefilm production of feature filmsspending at the Filmed Entertainment segment during the nine months ended March 31, 2005. These increases were offset by higher sports rights and film participation payments, higher interest and tax payments and higher pension contributions. The higherinternational sports rights payments reflects contractually scheduleddue to the timing of payments. Partially offsetting these increases on our national and international sports contracts as well aswas lower interest payments due to the renewal of several sports teams’ local rights agreements. The Company made discretionary pension contributions of approximately $127 million during the nine months ended March 31, 2005 as compared to $90 million in the corresponding periodretirement of the Eurobonds and our film financing facility in fiscal 2004.2005.
Net cash used in investing activities for the ninethree months ended March 31,September 30, 2005 and 2004 is as follows (in millions):
For the nine months ended March 31, | 2005 | 2004 | ||||||||||||||
For the three months ended September 30, | 2005 | 2004 | ||||||||||||||
Property, plant, and equipment | $ | (710 | ) | $ | (213 | ) | $ | (199 | ) | $ | (135 | ) | ||||
Acquisitions, net of cash acquired | (141 | ) | (151 | ) | (238 | ) | (34 | ) | ||||||||
Investments in associated entities | (142 | ) | (3,213 | ) | (19 | ) | (44 | ) | ||||||||
Other investments | (30 | ) | (64 | ) | — | (26 | ) | |||||||||
Proceeds from sale of non-current assets | 643 | 549 | 114 | 124 | ||||||||||||
Net cash (used in) investing activities | $ | (380 | ) | $ | (3,092 | ) | ||||||||||
Net cash used in investing activities | $ | (342 | ) | $ | (115 | ) | ||||||||||
CashThe increase in net cash used in investing activities during the ninethree months ended March 31,September 30, 2005 was lower than the corresponding period of fiscal 2004is due to the Company’s purchase of a 34% investmentthe 25% stake in DIRECTVNews Out of Home held by Capital International Global Emerging Markets Private Equity Fund, L.P. for approximately $3.1 billion in fiscal 2004. Property, plant and equipment acquired primarily represents cash used for the purchase of set top boxes that are rented to customers at the Direct Broadcast Satellite Television segment and cash used$175 million. This increase is partially offset by the Newspaper segment in connection with the investment in new printing presses. Proceedsproceeds from the sale of non-current assets primarily represent cash receivedthe cost based investment in advance onChina Netcom in the sale of Sky Brasil to DIRECTV during the nine months ended March 31, 2005, and cash received on the sale of SKY Perfect! during the corresponding periodfirst quarter of fiscal 2004.2006.
In fiscal 2005, the Company announced its intentions to invest in new printing plants in the United Kingdom and Australia to take advantage of technological and market changes. The Company intends to invest approximately $1 billion in the United Kingdom printing plants forThe Sun, theNews of the World,The Times andThe Sunday Times and $500 million for the Australian printing plants. The Company plans to fully fund the investment out of its operating cash flow. Depreciation expense on plant and equipment that will be replaced will be accelerated over the next four to five years.
The Company has evaluated, and expects to continue to evaluate, possible acquisitions and dispositions of certain businesses. Such transactions may be material and may involve cash, the Company’s securities or the assumption of additional indebtedness.
Net cash (used in) provided byused in financing activities for the ninethree months ended March 31,September 30, 2005 and 2004 is as follows (in millions):
For the nine months ended March 31, | 2005 | 2004 | ||||||||||||||
For the three months ended September 30, | 2005 | 2004 | ||||||||||||||
Borrowings | $ | 1,776 | $ | 440 | $ | 6 | $ | — | ||||||||
Repayment of borrowings and exchangeable securities | (2,095 | ) | (616 | ) | ||||||||||||
Repayment of borrowings | (5 | ) | (655 | ) | ||||||||||||
Cash on deposit | 275 | 163 | — | 275 | ||||||||||||
Issuance of shares | 65 | 545 | 29 | 14 | ||||||||||||
Repurchase of shares | (213 | ) | — | |||||||||||||
Dividends paid | (124 | ) | (106 | ) | (1 | ) | (7 | ) | ||||||||
Net cash (used in) provided by financing activities | $ | (103 | ) | $ | 426 | |||||||||||
Net cash used in financing activities | $ | (184 | ) | $ | (373 | ) | ||||||||||
Net
The decrease in net cash used in financing activities duringis due to higher repayments of debt in the ninethree months ended March 31, 2005 changed from net cash providedSeptember 30, 2004 offset by financing activitiesthe repurchase of Class A Common Stock in the corresponding period of fiscal 2004 primarily due to the absence of the stock offering that occurred in the corresponding period of fiscal 2004. The debt repayments during the ninethree months ended March 31, 2005 included the retirement of debt assumed in the acquisition of the Cruden Group of companies, the film financing facility, the Eurobonds and the perpetual preference shares. (See Notes 2, 5 and 12 to the unaudited consolidated financial statements for further detail.) In December 2004, the Company issued $1.75 billion in Senior Notes which offset the repayments noted above.September 30, 2005.
Debt Instruments(1)
Repayments | Amount of indebtedness | ||
(in millions) | |||
Cruden Group assumed debt(2) | $ | 654 | |
New Millennium II | 659 | ||
Preferred Perpetual Shares(3) | 345 | ||
All other | 437 | ||
$ | 2,095 | ||
Issuances | |||
Notes due 2014 | $ | 748 | |
Notes due 2034 | 995 | ||
All other | 33 | ||
$ | 1,776 | ||
LYONSLYONs
In February of 2006 the LYONSLYONs will have an accreted value of approximately $900 million and the holders of the LYONs may require usthe Company to redeem all or a portion of their LYONS.LYONs. The Company, at its election, may satisfy the redemption amounts in cash, Class A sharesCommon Stock or any combination thereof.
Other
The Company’s $200 million, 8.45% Senior Debentures due August 2034, are puttable at the option of the holder to the Company in August 2006 at par. Additionally, the Company’s $240 million, 7.43% Senior Debentures due October 2026, are puttable at the option of the holder to the Company in October 2006 at par. These debentures are currently trading significantly above par and the Company believes that under the current low U.S. interest rate environment such debentures will not be put to the Company. As such, the Company believes that these borrowings will not impact the Company’s liquidity in the next twelve months.
Ratings of the Public Debt
The table below summarizes the Company’s credit ratings as of March 31,September 30, 2005.
Rating Agency | Senior Debt | Outlook | ||
Moody’s | Baa 3 | Positive | ||
Standard & Poor’s | Positive |
Revolving Credit Agreement
On June 27, 2003, News America Incorporated (“NAI”), a subsidiary of the Company, entered into a new $1.75 billion Five Year Credit Agreement (the “Credit Agreement”) with Citibank N.A., as administrative agent, JP Morgan Chase Bank, as syndication agent, and the lenders named therein. News Corporation, News Australia Holdings Pty Limited, FEG Holdings, Inc., Fox Entertainment Group, Inc., News America Marketing FSI, L.L.C.Inc., News Publishing Australia Limited and News Publishing Australia Holdings Pty Limited are guarantors (the “Guarantors”) under the Credit Agreement.
The Credit Agreement provides a $1.75 billion revolving credit facility with a sub-limit of $600 million available for the issuance of letters of credit, and expires on June 30, 2008. Borrowings are in U.S. dollars only, while letters of credit are issuable in U.S. dollars or Euros. The significant terms of the agreementCredit Agreement include the requirement that the Company maintain specific gearing and interest coverage ratios and limitations on secured indebtedness. The Company pays a facility fee of 0.20%0.15% regardless of facility usage. The Company pays interest of a margin over LIBOR for borrowings and lettersa letter of credit at LIBOR plus 0.675%fee of 0.60%. The Company pays an additional feefees of 0.125% if borrowings under the facility exceed 25% of the committed facility. The interest and fees are based on the Company’s current debt rating. At September 30, 2005, letters of credit representing $169 million were issued under the Credit Agreement.
CommitmentsGuarantees
In October 2004, the Company announced its intentions to invest in new printing plantsThe Company’s guarantees have not changed from disclosures included in the United Kingdom and Australia to take advantage of technological and market changes. The Company intends to expend approximately $1 billion in the United Kingdom for new printing plants and related costs for its UK newspapers and $500 millionCompany’s Annual Report Form 10-K for the Australian printing plants.
In November 2004, the Company entered into a six-year follow-on contractfiscal year ended June 30, 2005 filed with the National Football League commencing with the 2006 season, increasing the Company’s commitments with respect to sports programming rights by approximately $4.3 billion.
In November 2004, the Company entered into an agreement with the Bowl Championship Series from fiscal 2007 through fiscal 2010, increasing the Company’s commitments with respect to sports programming rights by approximately $330 million.SEC on September 1, 2005.
Contingencies
The Company is party to several purchase and sale arrangements, which become exercisable over the next ten years by the Company or the counter-party to the agreement. Total contingent receipts/payments under these agreements (including cash and stock) have not been included in the Company’s financial statements.
In fiscal 2005,the next twelve months, the Company has one significant arrangement is exercisable, which would not have a material impact on thethat becomes exercisable. The Company’s financial statements.
News Corporation owns 75% of News Out of Home BV, a joint venture with an affiliate of Capital International, Inc (“Capital”).wholly owned subsidiary, News Out of Home owns and operates outdoor advertising companies located in Eastern Europe and also owns 68% of Media Support Services Limited, an outdoor advertising company with operating subsidiaries located in Russia. InDuring fiscal 2006, the minority shareholdersstockholders of Media Support Services Limited have the right to putsell their interests to News Out of Home and Capital also has the right to put its interest in News Out of Home to the Company.Home. The Company believes that none of the purchase and sale arrangements will have a material effect ofon its consolidated financial condition, future results of operations or liquidity.
The Company experiences routine litigation in the normal course of its business. The Company believes that none of its pending litigation will have a material adverse effect on its consolidated financial condition, future results of operations or liquidity.
Risk Factors
Prospective investors should consider carefully the risk factors set forth below before making an investment in the Company’s securities.
A Decline in Advertising Expenditures Could Cause the Company’s Revenues and Operating Results to Decline Significantly in any Given Period or in Specific Markets.
The Company derives substantial revenues from the sale of advertising on its television stations, broadcast and cable networks, newspapers and inserts and DTH television services. Expenditures by advertisers tend to be cyclical, reflecting overall economic conditions, as well as budgeting and buying patterns. A decline in the economic prospects of advertisers or the economy in general could alter current or prospective advertisers’ spending priorities. This could cause the Company’s revenues and operating results to decline significantly in any given period or in specific markets. Rating points for the Company’s television stations and broadcast and cable networks are also factors that are weighed when deciding on the advertising rates and the renegotiation of affiliate rates that we receive. Poor ratings can lead to a reduction in pricing and advertising spending. In addition, newer technologies, including video-on-demand, personal video recorders and other devices that allow users to view television or motion pictures from a remote location or on a time-delayed basis, and technologies which implement the ability for users to fast-forward, rewind, pause and skip programming may cause changes in consumer behavior that could affect the attractiveness of the Company’s offerings to viewers, advertisers and/or distributors and could, therefore, have an adverse effect on the Company’s businesses.
Acceptance of the Company’s Film and Television Programming by the Public is Difficult to Predict, Which Could Lead to Fluctuations in Revenues.
Feature film and television production and distribution are speculative businesses since the revenues derived from the production and distribution of a feature film or television series depend primarily upon its acceptance by the public, which is difficult to predict. The commercial success of a feature film or television series also depends upon the quality and acceptance of other competing films and television series released into the marketplace at or near the same time, the availability of alternative forms of entertainment and leisure time activities, general economic conditions and other tangible and intangible factors, all of which can change and cannot be predicted with certainty. Further, the theatrical success of a feature film and the audience ratings for a television series are generally key factors in generating revenues from other distribution channels, such as home entertainment and premium pay television, with respect to feature films, and syndication, with respect to television series.
The Loss of Carriage Agreements Could Cause the Company’s Revenue and Operating Results to Decline Significantly in any Given Period or in Specific Markets.
The Company is dependent upon the maintenance of affiliation agreements with third-party owned television stations, and there can be no assurance that these affiliation agreements will be renewed in the future
on terms acceptable to the Company. The loss of a significant number of these affiliation arrangements could reduce the distribution of FOX and adversely affecting the Company’s ability to sell national advertising time. Similarly, the Company’s cable networks maintain affiliation and carriage arrangements that enable them to reach a large percentage of cable and direct broadcast satellite households across the United States. The loss of a significant number of these arrangements or the loss of carriage on basic programming tiers could reduce the distribution of the Company’s cable networks, which may adversely affect those networks’ revenues from subscriber fees and ability to sell national and local advertising time.
The Inability to Renew Sports Programming Rights Could Cause the Company’s Advertising Revenue to Decline Significantly in any Given Period or in Specific Markets.
The sports rights contracts between the Company, on the one hand, and various professional sports leagues and teams, on the other, have varying duration and renewal terms. As these contracts expire, renewals on favorable terms may be sought; however, third parties may outbid the current rights holders for the rights contracts. In addition, professional sports leagues or teams may create their own networks or the renewal costs could substantially exceed the original contract cost. The loss of rights could impact the extent of the sports coverage offered by the Company and its affiliates, as it relates to FOX, and could adversely affect the Company’s advertising and affiliate revenues. Upon renewal, the Company’s results could be adversely affected if escalations in sports programming rights costs are unmatched by increases in advertising rates and, in the case of cable networks, subscriber fees.
Technological Developments May Increase the Threat of Content Piracy and Limit the Company’s Ability to Protect Its Intellectual Property Rights.
The Company seeks to limit the threat of content piracy; however, policing unauthorized use of the Company’s products and services and related intellectual property is often difficult and the steps taken by the Company may not in every case prevent the infringement by unauthorized third parties. Developments in technology, including digital copying, file compressing and the growing penetration of high-bandwidth Internet connections, increase the threat of content piracy by making it easier to duplicate and widely distribute pirated material. The Company has taken, and will continue to take, a variety of actions to combat piracy, both individually and together with industry associations. There can be no assurance that the Company’s efforts to enforce its rights and protect its intellectual property will be successful in preventing content piracy. Content piracy presents a threat to the Company’s revenues from products and services based on intellectual property.
Changes in U.S. or Foreign Communications Laws and Other Regulations May Have an Adverse Effect on the Company’s Business.
In general, the television broadcasting and multichannel video programming and distributions industries in the United States are highly regulated by federal laws and regulations issued and administered by various federal agencies, including the FCC. The FCC generally regulates, among other things, the ownership of media (including ownership by non-U.S. citizens), broadcast and multichannel video programming and technical operations of broadcast and satellite licensees. Further, Congress and the FCC currently have under consideration, and may in the future adopt, new laws, regulations and policies regarding a wide variety of matters, including technological changes, which could, directly or indirectly, affect the operations and ownership of the Company’s U.S. media properties. Similarly, changes in regulations imposed by governments in other jurisdictions in which the Company, or entities in which the Company has an interest, operate could adversely affect its business and results of operations.
Provisions in the Company’s Corporate Documents, Delaware Law and the Ownership of the Company’s Class B Common Stock by Certain Principal Stockholders Could Delay or Prevent a Change of Control of News Corporation, Even if That Change Would be Beneficial to the Company’s Stockholders.
The existence of some provisions in the Company’s corporate documents could delay or prevent a change of control of News Corporation, even if that change would be beneficial to the Company’s stockholders. The
Company’s Restated Certificate of Incorporation and Amended and Restated By-laws, contain provisions that may make acquiring control of News Corporation difficult, including:
In addition, the Company has also adopted a stockholder rights plan, which would cause extreme dilution to any person or group that attempts to acquire a significant interest in the Company without advance approval of its Board of Directors. Further, as a result of Mr. K. Rupert Murdoch’s ability to appoint certain members of the board of directors of the corporate trustee of the A.E. Harris Trust, which beneficially owns 2.7% of the Company’s Class A Common Stock and 28.9% of its Class B Common Stock, Mr. K. Rupert Murdoch may be deemed to be a beneficial owner of the shares beneficially owned by the A.E. Harris Trust. Mr. K. Rupert Murdoch, however, disclaims any beneficial ownership of those shares. Also, Mr. K. Rupert Murdoch beneficially owns an additional 0.7% of the Company’s Class A Common Stock and 1.0% of its Class B Common Stock. Thus, Mr. K. Rupert Murdoch may be deemed to beneficially own in the aggregate 3.4% of the Company’s Class A Common Stock and 29.9% of its Class B Common Stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK |
News Corporation has exposure to several types of market risk: changes in foreign currency exchange rates, interest rates and stock prices. The Company neither holds nor issues financial instruments for trading purposes. The following sections provide quantitative information on the Company’s exposure to foreign currency exchange rate risk, interest rate risk and stock price risk. It makes use of sensitivity analyses that are inherently limited in estimating actual losses in fair value that can occur from changes in market conditions.
Foreign Currency Exchange Rates
News Corporation conducts operations in three principal currencies: the U.S. dollar, the British pound sterling, the Australian dollar and, to a lesser extent, the Euro. These currencies operate as the functional currency for the Company’s U.S., European,U.K. and Australian operations, respectively. Cash is managed centrally within each of the three regions with net earnings reinvested locally and working capital requirements met from existing liquid funds. To the extent such funds are not sufficient to meet working capital requirements, drawdowns in the appropriate local currency are available either under the New Credit Agreement or from intercompany borrowings. Since earnings of the Company’s Australian and European operations are expected to be reinvested in those businesses indefinitely, the Company does not hedge its investment in the net assets of those foreign operations.
At March 31,September 30, 2005, the Company’s outstanding financial instruments with foreign currency exchange rate risk exposure had an aggregate fair value of $140$88 million (including the Company’s non-U.S. dollar-denominated fixed rate debt). The potential increase in the fair values of these instruments resulting from a 10% adverse change in quoted foreign currency exchange rates would be approximately $16$28 million at March 31,September 30, 2005.
Interest Rates
The Company’s current financing arrangements and facilities include $10.9$11 billion of outstanding debt with fixed interest and the Credit Agreement, which carries variable interest. Fixed and variable rate debts are impacted differently by changes in interest rates. A change in the interest rate or yield of fixed rate debt will only impact the fair value of such debt, while a change in the interest rate of variable debt will impact interest expense as well as the amount of cash required to service such debt. As of March 31,September 30, 2005 substantially all of the Company’s financial instruments with exposure to interest rate risk was denominated in U.S. dollars and had an aggregate fair value of $11.6$12.1 billion. The potential change in fair value for these financial instruments from an adverse 10% change in quoted interest rates across all maturities, often referred to as a parallel shift in the yield curve, would be approximately $565$548 million at March 31,September 30, 2005.
Stock Prices
The Company has common stock investments in several publicly traded companies that are subject to market price volatility. These investments principally represent the Company’s equity affiliates and have an aggregate fair value of approximately $16,191$15,589 million as of March 31,September 30, 2005. A hypothetical decrease in the market price of these investments of 10% would result in a fair value of approximately $14,572$14,030 million. Such a hypothetical decrease would result in a decrease in comprehensive income of approximately $19$8 million, as any changes in fair value of the Company’s equity affiliates are not recognized unless deemed other-than-temporary, as these investments are accounted for under the equity method.
In accordance with SFAS No. 133, the Company has recorded the conversion feature embedded in its exchangeable debentures in other liabilities. At March 31,September 30, 2005, the fair value of this conversion feature is $276$191 million and is sensitive to movements in the share price of one of the Company’s publicly traded equity affiliates. A 10% increase in the price of the underlying stock, holding other factors constant, would increase the fair value of the call option by approximately $77$58 million.
ITEM 4. | CONTROLS AND PROCEDURES |
(a) | Disclosure Controls and Procedures. |
ITEM 4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s Chairman and Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this quarterly report. Based on such evaluation, the Company’s Chairman and Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b) | Internal Control Over Financial Reporting. |
(b) Internal Control Over Financial Reporting. There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company’s first quarter of fiscal quarter to which this report relates2006 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 1. | LEGAL PROCEEDINGS |
See Note 1110 to the unaudited consolidated financial statements, which is incorporated by reference.
ITEM 2. |
Common Stock Repurchases
Not ApplicableIn June 2005, the Company announced a stock repurchase program under which the Company is authorized to acquire from time to time up to an aggregate of $3 billion in Class A Common Stock and Class B Common Stock.
Below is a summary of the Company’s purchases of its common stock during the three months ended September 30, 2005:
Total Number Purchased | Average Price per Share | Total Cost of Purchase | ||||||
(in millions) | ||||||||
Class A Common Stock—July | — | $ | — | $ | — | |||
Class A Common Stock—August | 3,000,000 | 16.68 | 50 | |||||
Class A Common Stock—September | 10,600,000 | 15.39 | 163 | |||||
Total | 13,600,000 | $ | 213 |
The remaining authorized amount at September 30, 2005, excluding commissions under the Company’s stock repurchase program is $2,253 million.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
Not Applicable
ITEM 5. | OTHER INFORMATION |
ITEM 5. OTHER INFORMATIONNot Applicable
A stockholder proposal submitted pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended, for inclusion in the Company’s proxy statement and form of proxy statement for the annual meeting of stockholders to be held in 2005 must be received by the Company by June 1, 2005 and must comply with the requirements as to form and substance established by the SEC for such proposals.
(a) Exhibits
ITEM 6. | EXHIBITS |
4.1 | Amendment No. 2 to Rights Agreement, by and between News Corporation and Computershare Investor Services, LLC, as Rights Agent, dated August 16, 2005.1 | |
10.1 | Letter Agreement between the Company and K. Rupert Murdoch dated July 28, 2005.2 | |
10.2 | Letter Agreement between the Company and David F. DeVoe dated July 28, 2005.3 | |
10.3 | Letter Agreement between the Company and Lachlan K. Murdoch dated July 28, 2005.4 | |
10.4 | Letter Agreement between the Company and Lachlan K. Murdoch regarding separation arrangements, dated July 28, 2005.5 | |
10.5 | Form of Amendment to the Amended and Restated Employment Agreement | |
10.6 | Amendment to the Amended and Restated Employment Agreement between News America Incorporated and Peter Chernin, dated September 8, 2005.* |
10.7 | Form of Restricted Share Unit Agreement for Cash-Settled Restricted Stock Units.7 | |
10.8 | Form of Restricted Share Agreement for Stock-Settled Restricted Stock Units.8 | |
31.1 | ||
31.2 | ||
32.1 | Certification of | |
* | Filed |
1 | Incorporated by reference to Exhibit 4.1 to the Current Report of News Corporation on Form 8-K (File No. 001-32352) filed with the Securities and Exchange Commission on August 16, 2005. |
2 | Incorporated by reference to Exhibit 10.1 to the Current Report of News Corporation on Form 8-K (File No. 001-32352) filed with the Securities and Exchange Commission on August 3, 2005. |
3 | Incorporated by reference to Exhibit 10.2 to the Current Report of News Corporation on Form 8-K (File No. 001-32352) filed with the Securities and Exchange Commission on August 3, 2005. |
4 | Incorporated by reference to Exhibit 10.3 to the Current Report of News Corporation on Form 8-K (File No. 001-32352) filed with the Securities and Exchange Commission on August 3, 2005. |
5 | Incorporated by reference to Exhibit 10.4 to the Current Report of News Corporation on Form 8-K (File No. 001-32352) filed with the Securities and Exchange Commission on August 3, 2005. |
6 | Incorporated by reference to Exhibit 10.1 to the Current Report of News Corporation on Form 8-K (File No. 001-32352) filed with the Securities and Exchange Commission on August 10, 2005. |
7 | Incorporated by reference to Exhibit 10.2 to the Current Report of News Corporation on Form 8-K (File No. 001-32352) filed with the Securities and Exchange Commission on August 10, 2005. |
8 | Incorporated by reference to Exhibit 10.3 to the Current Report of News Corporation on Form 8-K (File No. 001-32352) filed with the Securities and Exchange Commission on August 10, 2005. |
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.
NEWS CORPORATION (Registrant) | ||||
By: | /S/ DAVID F. DEVOE | |||
| ||||
Senior Executive Vice President and Chief Financial Officer |
54Date: November 10, 2005
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