UNITED STATES
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 |
or
¨ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to |
Commission file number 001-32352
NEWS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware | 26-0075658 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
1211 Avenue of the Americas, New York, New York | 10036 | |
(Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including area code (212) 852-7000
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 a large accelerated filed,filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filerfiler” and largelarger accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x | Accelerated filer ¨ |
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 9,November 6, 2006, 2,166,089,1952,176,588,834 shares of Class A Common Stock, par value $0.01 per share, and 987,948,111986,520,953 shares of Class B Common Stock, par value $0.01 per share, were outstanding.
NEWS CORPORATION
FORM 10-Q
Page | ||||||
Part I. | Financial Information | |||||
Item 1. | Financial Statements | |||||
Unaudited Consolidated Statements of Operations for the three | 3 | |||||
Consolidated Balance Sheets at | 4 | |||||
Unaudited Consolidated Statements of Cash Flows for the | 5 | |||||
Notes to the Unaudited Consolidated Financial Statements | 6 | |||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||
Item 3. | ||||||
Item 4. | ||||||
Part II. | Other Information | |||||
Item 1. | ||||||
Item 1A. | ||||||
Item 2. | ||||||
Item 3. | ||||||
Item 4. | ||||||
Item 5. | ||||||
Item 6. | ||||||
Signature |
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
For the three months ended March 31, | For the nine months ended March 31, | For the three months ended September 30, | ||||||||||||||||||||||
2006 | 2005 | 2006 | 2005 | 2006 | 2005 | |||||||||||||||||||
Revenues | $ | 6,198 | $ | 6,043 | $ | 18,545 | $ | 17,751 | $ | 5,914 | $ | 5,682 | ||||||||||||
Expenses: | ||||||||||||||||||||||||
Operating | 4,006 | 4,060 | 12,116 | 11,925 | 3,750 | 3,639 | ||||||||||||||||||
Selling, general and administrative | 989 | 918 | 2,926 | 2,715 | 1,102 | 959 | ||||||||||||||||||
Depreciation and amortization | 189 | 176 | 561 | 453 | 207 | 175 | ||||||||||||||||||
Other operating charges | 3 | — | 102 | 49 | 4 | — | ||||||||||||||||||
Operating income | 1,011 | 889 | 2,840 | 2,609 | 851 | 909 | ||||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||
Interest expense, net | (141 | ) | (143 | ) | (410 | ) | (405 | ) | (125 | ) | (128 | ) | ||||||||||||
Equity earnings of affiliates | 264 | 91 | 610 | 154 | 243 | 186 | ||||||||||||||||||
Other, net | 170 | (62 | ) | 243 | 15 | 428 | 11 | |||||||||||||||||
Income from continuing operations before income tax expense and minority interest in subsidiaries | 1,304 | 775 | 3,283 | 2,373 | ||||||||||||||||||||
Income before income tax expense, minority interest in subsidiaries and cumulative effect of accounting change | 1,397 | 978 | ||||||||||||||||||||||
Income tax expense | (471 | ) | (317 | ) | (1,145 | ) | (773 | ) | (538 | ) | (382 | ) | ||||||||||||
Minority interest in subsidiaries, net of tax | (13 | ) | (58 | ) | (44 | ) | (189 | ) | (16 | ) | (16 | ) | ||||||||||||
Income from continuing operations | 820 | 400 | 2,094 | 1,411 | ||||||||||||||||||||
Gain on disposition of discontinued operations, net of tax | — | — | 381 | — | ||||||||||||||||||||
Income before cumulative effect of accounting change | 820 | 400 | 2,475 | 1,411 | 843 | 580 | ||||||||||||||||||
Cumulative effect of accounting change, net of tax | — | — | (1,013 | ) | — | — | (1,013 | ) | ||||||||||||||||
Net income | $ | 820 | $ | 400 | $ | 1,462 | $ | 1,411 | ||||||||||||||||
Net income (loss) | $ | 843 | $ | (433 | ) | |||||||||||||||||||
Basic earnings per share: | ||||||||||||||||||||||||
Income from continuing operations | ||||||||||||||||||||||||
Basic earnings (loss) per share: | ||||||||||||||||||||||||
Income before cumulative effect of accounting change | ||||||||||||||||||||||||
Class A | $ | 0.27 | $ | 0.14 | $ | 0.68 | $ | 0.51 | 0.28 | 0.19 | ||||||||||||||
Class B | $ | 0.23 | $ | 0.12 | $ | 0.57 | $ | 0.43 | 0.23 | 0.16 | ||||||||||||||
Net income | ||||||||||||||||||||||||
Cumulative effect of accounting change, net of tax | ||||||||||||||||||||||||
Class A | $ | 0.27 | $ | 0.14 | $ | 0.48 | $ | 0.51 | — | (0.33 | ) | |||||||||||||
Class B | $ | 0.23 | $ | 0.12 | $ | 0.40 | $ | 0.43 | — | (0.27 | ) | |||||||||||||
Diluted earnings per share: | ||||||||||||||||||||||||
Income from continuing operations | ||||||||||||||||||||||||
Net income (loss) | ||||||||||||||||||||||||
Class A | $ | 0.27 | $ | 0.14 | $ | 0.68 | $ | 0.50 | 0.28 | (0.14 | ) | |||||||||||||
Class B | $ | 0.22 | $ | 0.12 | $ | 0.57 | $ | 0.42 | 0.23 | (0.12 | ) | |||||||||||||
Net income | ||||||||||||||||||||||||
Diluted earnings (loss) per share: | ||||||||||||||||||||||||
Income before cumulative effect of accounting change | ||||||||||||||||||||||||
Class A | $ | 0.27 | $ | 0.14 | $ | 0.48 | $ | 0.50 | 0.28 | 0.19 | ||||||||||||||
Class B | $ | 0.22 | $ | 0.12 | $ | 0.40 | $ | 0.42 | 0.23 | 0.15 | ||||||||||||||
Cumulative effect of accounting change, net of tax | ||||||||||||||||||||||||
Class A | — | (0.32 | ) | |||||||||||||||||||||
Class B | — | (0.27 | ) | |||||||||||||||||||||
Net income (loss) | ||||||||||||||||||||||||
Class A | 0.28 | (0.14 | ) | |||||||||||||||||||||
Class B | 0.23 | (0.11 | ) |
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, 2006 | At June 30, 2005 | At September 30, 2006 | At June 30, 2006 | ||||||||||
(unaudited) | (audited) | (unaudited) | (audited) | ||||||||||
Assets | |||||||||||||
Current assets: | |||||||||||||
Cash and cash equivalents | $ | 5,324 | $ | 6,470 | $ | 6,292 | $ | 5,783 | |||||
Receivables, net | 4,893 | 4,353 | 5,269 | 5,150 | |||||||||
Inventories, net | 1,817 | 1,516 | 1,903 | 1,840 | |||||||||
Other | 368 | 440 | 399 | 350 | |||||||||
Total current assets | 12,402 | 12,779 | 13,863 | 13,123 | |||||||||
Non-current assets: | |||||||||||||
Receivables | 703 | 673 | 461 | 593 | |||||||||
Investments | 10,393 | 10,268 | 10,845 | 10,601 | |||||||||
Inventories, net | 2,872 | 2,366 | 2,563 | 2,410 | |||||||||
Property, plant and equipment, net | 4,505 | 4,346 | 4,869 | 4,755 | |||||||||
Intangible assets | 11,280 | 12,517 | |||||||||||
Intangible assets, net | 11,414 | 11,446 | |||||||||||
Goodwill | 12,148 | 10,944 | 12,603 | 12,548 | |||||||||
Other non-current assets | 962 | 799 | 968 | 1,173 | |||||||||
Total non-current assets | 42,863 | 41,913 | 43,723 | 43,526 | |||||||||
Total assets | $ | 55,265 | $ | 54,692 | $ | 57,586 | $ | 56,649 | |||||
Liabilities and Stockholders’ Equity | |||||||||||||
Current liabilities: | |||||||||||||
Borrowings | $ | 57 | $ | 912 | $ | 4 | $ | 42 | |||||
Accounts payable, accrued expenses and other current liabilities | 3,966 | 3,564 | 4,385 | 4,047 | |||||||||
Participations, residuals and royalties payable | 1,218 | 1,051 | 1,086 | 1,007 | |||||||||
Program rights payable | 878 | 696 | 786 | 801 | |||||||||
Deferred revenue | 526 | 426 | 689 | 476 | |||||||||
Total current liabilities | 6,645 | 6,649 | 6,950 | 6,373 | |||||||||
Non-current liabilities: | |||||||||||||
Borrowings | 11,368 | 10,087 | 11,394 | 11,385 | |||||||||
Other liabilities | 3,714 | 3,543 | 2,920 | 3,536 | |||||||||
Deferred income taxes | 4,782 | 4,817 | 5,352 | 5,200 | |||||||||
Minority interest in subsidiaries | 242 | 219 | 275 | 281 | |||||||||
Commitments and contingencies | |||||||||||||
Stockholders’ Equity: | |||||||||||||
Class A common stock, $0.01 par value per share, 6,000,000,000 shares authorized, 2,170,118,495 shares and 2,237,072,659 shares issued and outstanding, net of 1,761,942,441 and 1,739,914,819 treasury shares at par at March 31, 2006 and June 30, 2005, respectively | 22 | 22 | |||||||||||
Class B common stock, $0.01 par value, 3,000,000,000 shares authorized, 990,559,958 shares and 1,029,576,988 shares issued and outstanding, net of 313,721,702 treasury shares at par at March 31, 2006 and June 30, 2005 | 10 | 10 | |||||||||||
Class A common stock, $0.01 par value per share, 6,000,000,000 shares authorized, 2,173,688,378 shares and 2,169,184,961 shares issued and outstanding, net of 1,777,832,584 and 1,777,837,008 treasury shares at par at September 30, 2006 and June 30, 2006, respectively | 22 | 22 | |||||||||||
Class B common stock, $0.01 par value per share, 3,000,000,000 shares authorized, 986,520,953 and 986,530,368 shares issued and outstanding, net of 313,721,702 treasury shares at par at September 30, 2006 and June 30, 2006, respectively | 10 | 10 | |||||||||||
Additional paid-in capital | 28,179 | 30,044 | 28,162 | 28,153 | |||||||||
Retained earnings (deficit) and accumulated other comprehensive loss | 303 | (699 | ) | ||||||||||
Retained earnings and accumulated other comprehensive income | 2,501 | 1,689 | |||||||||||
Total stockholders’ equity | 28,514 | 29,377 | 30,695 | 29,874 | |||||||||
Total liabilities and stockholders’ equity | $ | 55,265 | $ | 54,692 | $ | 57,586 | $ | 56,649 | |||||
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, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Operating activities: | ||||||||||||||||
Net income | $ | 1,462 | $ | 1,411 | ||||||||||||
Gain on disposition of discontinued operations, net of tax | (381 | ) | — | |||||||||||||
Net income (loss) | $ | 843 | $ | (433 | ) | |||||||||||
Adjustments to reconcile net income (loss) to cash provided by operating activities: | ||||||||||||||||
Cumulative effect of accounting change, net of tax | 1,013 | — | — | 1,013 | ||||||||||||
Income from continuing operations | 2,094 | 1,411 | ||||||||||||||
Adjustments to reconcile income from continuing operations to cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 561 | 453 | 207 | 175 | ||||||||||||
Amortization of cable distribution investments | 78 | 86 | 23 | 27 | ||||||||||||
Equity earnings of affiliates | (610 | ) | (154 | ) | (243 | ) | (186 | ) | ||||||||
Cash distributions received from investees | 111 | 78 | ||||||||||||||
Cash distributions received from affiliates | 14 | 15 | ||||||||||||||
Other, net | (243 | ) | (15 | ) | (428 | ) | (11 | ) | ||||||||
Minority interest in subsidiaries, net of tax | 44 | 189 | 16 | 16 | ||||||||||||
Change in operating assets and liabilities, net of acquisitions: | ||||||||||||||||
Receivables and other assets | (692 | ) | (612 | ) | (55 | ) | (470 | ) | ||||||||
Inventories, net | (995 | ) | 20 | (232 | ) | (399 | ) | |||||||||
Accounts payable and other liabilities | 1,701 | 857 | 571 | 750 | ||||||||||||
Net cash provided by operating activities | 2,049 | 2,313 | 716 | 497 | ||||||||||||
Investing activities: | ||||||||||||||||
Property, plant and equipment, net of acquisitions | (648 | ) | (710 | ) | (282 | ) | (199 | ) | ||||||||
Acquisitions, net of cash acquired | (1,578 | ) | (141 | ) | (157 | ) | (238 | ) | ||||||||
Investments in equity affiliates | (39 | ) | (142 | ) | (11 | ) | (19 | ) | ||||||||
Other investments | (46 | ) | (30 | ) | (17 | ) | — | |||||||||
Proceeds from sale of investments and other non-current assets | 404 | 643 | 288 | 114 | ||||||||||||
Proceeds from disposition of discontinued operations | 395 | — | ||||||||||||||
Net cash used in investing activities | (1,512 | ) | (380 | ) | (179 | ) | (342 | ) | ||||||||
Financing activities: | ||||||||||||||||
Borrowings | 1,149 | 1,776 | 145 | 6 | ||||||||||||
Repayment of borrowings | (839 | ) | (2,095 | ) | (190 | ) | (5 | ) | ||||||||
Cash on deposit | — | 275 | ||||||||||||||
Issuance of shares | 110 | 65 | 68 | 29 | �� | |||||||||||
Repurchase of shares | (1,810 | ) | — | (59 | ) | (213 | ) | |||||||||
Dividends paid | (246 | ) | (124 | ) | (3 | ) | (1 | ) | ||||||||
Net cash used in provided by financing activities | (1,636 | ) | (103 | ) | ||||||||||||
Net cash used in financing activities | (39 | ) | (184 | ) | ||||||||||||
Net (decrease) increase in cash and cash equivalents | (1,099 | ) | 1,830 | |||||||||||||
Net increase (decrease) in cash and cash equivalents | 498 | (29 | ) | |||||||||||||
Cash and cash equivalents, beginning of period | 6,470 | 4,051 | 5,783 | 6,470 | ||||||||||||
Exchange movement on opening cash balance | (47 | ) | 112 | 11 | 9 | |||||||||||
Cash and cash equivalents, end of period | $ | 5,324 | $ | 5,993 | $ | 6,292 | $ | 6,450 | ||||||||
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,News Corporation, a new Delaware corporation, named News Corporation (for periods after November 12, 2004,with its subsidiaries (together “News Corporation” or the “Company”) 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”). These transactions are collectively referred to 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”), 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, 2004.
News Corporation is a diversified entertainment company. The Companycompany, which manages and reports its businesses in eight segments, which are:segments: Filmed Entertainment, Television, Cable Network Programming, Direct Broadcast Satellite Television (“DBS”), 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, 2006.2007.
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, 20052006 as filed with the Securities and Exchange Commission (“SEC”) on September 1, 2005.August 23, 2006.
The financial statements include the accounts of News Corporation and its subsidiaries. Intercompany transactions and balances have been eliminated. Equity investments in which the Company exercises significant influence but does not exercise control and is not the primary beneficiary are accounted for using the equity method. Investments in which the Company is not able to exercise significant influence over the investee are accounted for under the cost method.
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 20052006 amounts have been reclassified to conform to the fiscal 20062007 presentation.
The Company maintains a 52-53 week fiscal year ending on the Sunday nearest to each reporting date. As such, all references to March 31,September 30, 2006 and March 31,September 30, 2005 relate to the three and nine month periods ended April 2,October 1, 2006 and March 27,October 2, 2005, respectively. For convenience purposes, the Company continues to date its financial statements as of March 31September 30stth.
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Basis of Presentation (continued)
In accordance with Statement of Financial Accounting Standards (“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, | ||||||||||||||
2006 | 2005 | 2006 | 2005 | ||||||||||||
(in millions) | |||||||||||||||
Net income, as reported | $ | 820 | $ | 400 | $ | 1,462 | $ | 1,411 | |||||||
Other comprehensive income: | |||||||||||||||
Foreign currency translation adjustments | (39 | ) | (22 | ) | (224 | ) | 521 | ||||||||
Unrealized holding (losses) gains on securities, net of tax | (9 | ) | 17 | (58 | ) | 37 | |||||||||
Total comprehensive income | $ | 772 | $ | 395 | $ | 1,180 | $ | 1,969 | |||||||
Recent Accounting Pronouncements
In October 2004, the American Jobs Creation Act (the “Act”) was signed into law. The Act includes a temporary incentive for U.S. multinationals to repatriate foreign earnings at the favorable effective tax rate of 5.25%. 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 Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (“FSP 109-2”). FSP 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 requires explanatory disclosures from those who need the additional time.
Under the Act, the maximum amount that the Company can repatriate under the favorable tax treatment is $500 million, which results in a tax benefit to the Company of approximately $150 million. Through March 31, 2006, the Company has provided deferred taxes on a portion of undistributed earnings of its foreign subsidiaries, at the statutory federal rate, in anticipation of repatriating these earnings in the future. As of March 31, 2006, approximately $380 million of this income is planned to be repatriated at the favorable effective tax rate of 5.25%. This has resulted in a tax benefit of approximately $113 million which is included in the unaudited consolidated statements of operations for the nine months ended March 31, 2006. The Company is still evaluating the repatriation of the remaining balance of approximately $120 million allowed under the Act. If the Company does repatriate the full amount, it will recognize an additional $37 million tax benefit due to the favorable tax rate. The amounts repatriated will be used to compensate non-executive U.S. employees for services performed within the United States.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS No. 154”). This standard establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. SFAS No. 154 will become effective for the Company for accounting changes and corrections of errors beginning in fiscal 2007.
In November 2005, the FASB issued FSP FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” (“FSP 115-1”) which addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary and the measurement of an
For the three months ended September 30, | |||||||
2006 | 2005 | ||||||
(in millions) | |||||||
Net income (loss), as reported | $ | 843 | $ | (433 | ) | ||
Other comprehensive income: | |||||||
Foreign currency translation adjustments | 76 | 83 | |||||
Unrealized holding gains (losses) on securities, net of tax | 75 | (42 | ) | ||||
Total comprehensive income (loss) | $ | 994 | $ | (392 | ) | ||
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Basis of Presentation (continued)
impairment loss. FSP 115-1 also includes accounting considerations subsequent toRecent Accounting Pronouncements
In June 2006, the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance in FSP 115-1 amends FASB StatementFinancial Accounting Standards Board (the “FASB”) issued Interpretation No. 115,48, “Accounting for Certain InvestmentsUncertainty in Debt and Equity Securities,” and Accounting Principles Board (“APB”) Opinion No. 18, “The Equity MethodIncome Taxes, an interpretation of FAS 109, Accounting for InvestmentsIncome Taxes” (“FIN 48”), to create a single model to address accounting for uncertainty in Common Stock.” FSP 115-1tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for reporting periodsfiscal years beginning after December 15, 2005.2006. The Company will adopt FIN 48 as of July 1, 2007, as required. The cumulative effect of adopting FIN 48 will be recorded in retained earnings and other accounts as applicable. The Company has not determined the effect, if any, the adoption of FSP 115-1 did notFIN 48 will have a material impact on the Company’s consolidated financial statements.position and results of operations.
In FebruarySeptember 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Instruments”157, “Fair Value Measurements” (“SFAS No. 155”157”), providing a framework to improve the comparability and consistency of fair value measurements in applying GAAP. SFAS No. 157 also expands the disclosures regarding fair value measurement. SFAS No. 157 will become effective for the Company beginning in fiscal 2009. The Company is currently evaluating what effects the adoption of SFAS No. 157 will have on the Company’s future results of operations and financial condition.
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS No. 158”). SFAS No. 155 amends158 improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the fiscal year in which the changes occur through comprehensive income. SFAS No. 133, “Accounting158 is effective for Derivative Instruments and Hedging Activities” and SFAS No. 140, “Accounting for Transfers and Servicingthe Company as of Financial Assets and Extinguishments of Liabilities.” SFAS No. 155, among other things: permits the fair value remeasurement of any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies which interest-only strips and principal-only strips are not subject tofiscal year ending June 30, 2007. The Company is currently evaluating what effects the requirementsadoption of SFAS No. 133; and establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. SFAS No. 155 is effective for all financial instruments acquired or issued in fiscal years beginning after September 15, 2006. SFAS No. 155 is not expected to158 will have a material impact on the Company’s consolidatedresults of operations and financial statements.condition.
Note 2—Acquisitions, Disposals and Other Transactions
Fiscal 2007 Transactions
Acquisitions
In July 2006, the Company entered into an agreement with an independent third party to acquire TGRT, a national, general interest broadcast television station in Turkey, for approximately $102 million. The closing was subject to customary closing conditions, including Turkish regulatory approval. In November 2006, Turkish regulatory approval was received and the transaction closed.
In September 2006, the Company and VeriSign, Inc. (“VeriSign”) announced a joint venture to form a new provider of mobile entertainment. The Company will pay approximately $188 million for a controlling interest in VeriSign’s wholly-owned subsidiary, Jamba, and will combine Jamba with the Company’s Fox Mobile Entertainment assets. The closing of this transaction is subject to customary closing conditions, including regulatory approval.
Other Transactions
In August 2006, the Company announced that its Fox Interactive Media (“FIM”) division entered into a multi-year search technology and services agreement with Google, Inc. (“Google”), pursuant to which Google
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 2—Acquisitions, Disposals and Other Transactions (continued)
will be the exclusive search and keyword-targeted advertising sales provider for a majority of FIM’s web properties. Under the terms of the agreement, Google will be obligated to make guaranteed minimum revenue share payments to FIM of $900 million based on FIM’s achievement of certain traffic and other commitments. These guaranteed minimum revenue share payments are expected to be made over the period beginning the first quarter of calendar 2007 and ending in the second quarter of calendar 2010.
Fiscal 2006 Transactions
Acquisitions
In September 2005, the Company acquired the 25% stake in News Out of Home (“NOOH”) that it did not already own from Capital International Global Emerging Markets Private Equity Fund, L.P. for approximately $175 million in cash. This acquisition increased the Company’s ownership of NOOH to 100%. The excess purchase price over the fair value of the net assets acquired of approximately $133$130 million has been preliminarilyof which, $51 million was allocated to goodwill with the remaining $79 million allocated to certain identifiable indefinite-lived intangible assets, which in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,”Assets” (“SFAS No. 142”), are not being amortized. The allocation of the excess purchase price is not final and is subject to changes upon completion of final valuations of certain assets and liabilities.
In order to increase the Company’s Internet presence, the Company purchased several Internet companies during fiscal 2006 through its recently formed Fox Interactive Media (“FIM”)FIM division. The amount of goodwill resulting from Internet acquisitions during the nine months ended March 31,fiscal 2006 was approximately $1.2$1.3 billion and primarily related to the following fiscal 2006 transactions:
In September 2005, the Company acquired all of the outstanding common and preferred stock of Intermix Media, Inc. (“Intermix”) for approximately $580 million in cash. Under an existing stockholders’ agreement between Intermix, MySpace, Inc. (“MySpace”), an Internet entertainment company, and certain other stockholders of MySpace, in July 2005 Intermix exercised its option in July 2005 to acquire the outstanding 47% equity interest of MySpace that it did not already own for approximately $70 million in cashcash. This transaction, which closed in October 2005. This transaction2005, increased Intermix’s ownership in MySpace to 100%. In a related intercompany restructuring, the Company issued approximately 19 million shares of Class A Common Stock, which are considered treasury shares, to one of its subsidiaries. The excess purchase price over the fair value of the net assets acquired from Intermix was approximately $642$644 million, of which approximately $570$567 million has been preliminarily allocated to goodwill.goodwill¸ with the remaining $77 million preliminarily allocated to definite-lived intangible assets.
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, substantially all of which $59 million has been preliminarily allocated to goodwill.
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 2—Acquisitions and Disposals (continued)
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 $620 million in cash and approximately $30 million to be paid in cash pending the satisfaction of certain conditions. The excess purchase price over the fair value of the net assets acquired including acquisition related costs was approximately $619$622 million, of which approximately $550$551 million has been preliminarily allocated to goodwill.goodwill, with the remaining $71 million preliminarily allocated to definite-lived intangible assets.
In May 2006, the Company acquired a U.S. regional cable sports and entertainment channel in the southeast region for approximately $375 million. This channel has broadcast rights to the National Hockey League’s Atlanta Thrashers and shares broadcast rights to Major League Baseball’s (“MLB”) Atlanta Braves and the National Basketball Association’s Atlanta Hawks together with one of the Company’s existing regional sports networks. The purchase price preliminarily allocated to goodwill was $295 million, with the remaining $80 million preliminarily allocated to definite-lived intangible assets.
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 2—Acquisitions, Disposals and Other Transactions (continued)
In accordance with SFAS No. 142, the excess purchase price that has been allocated or has been preliminarily allocated to goodwill is not being amortized for all of the acquisitions noted above. TheWhere the allocation of the excess purchase price is not final, andthe amount allocated to goodwill 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.
The aforementioned acquisitions were all accounted for in accordance with SFAS No. 141, “Business Combinations.”
Fiscal 2006 Disposals
In October 2005, the Company sold its TSL Education Ltd. division (“TSL”), which includedThe Times Educational Supplement and other newspapers, magazines, websites and exhibitions aimed at teachers and education professionals in the United Kingdom to Exponent Private Equity for cash consideration of approximately $395 million. In connection with this transaction, the Company recorded a gain of $381 million, in Gain on dispositionnet of discontinued operationstax of $0.
In April 2006, the Company sold Sky Radio Limited (“Sky Radio”), a commercial radio station group in the unaudited consolidated statementsNetherlands and Germany for cash consideration of operations. approximately $215 million. In connection with this transaction, the Company recorded a gain of approximately $134 million, net of tax of $0.
The net income, assets, liabilities and cash flow attributable to the TSL and Sky Radio operations are not material to the Company in any of the periods presented and accordingly have not been presented separately. TheThere was no provision for income taxes of $0 reported in discontinued operations differs from the amount computed using the statutory incomerelated to these transactions as any tax rate, due to the tax beingwas offset by a release of a valuation allowance that was applied to an existing deferred tax asset established for capital losses, which because of the sale of TSL transaction can nowand Sky Radio was able to be utilized. Therefore, there will bewas no resulting tax liability.provision.
In February 2004, the Company sold the Los Angeles Dodgers (“Dodgers”) and related properties to entities owned by Frank McCourt (the “McCourt Entities”) for $421 million in consideration. Part of the consideration delivered by the McCourt Entities at closing was a $125 million note secured by certain real estate in Boston, Massachusetts. In March 2006, the McCourt Entitiesentities remitted the real estate to the Company in full satisfaction of the note, including accrued interest of $20 million. This real estate consists of approximately 23 acres located in the Seaport District of Boston, Massachusetts. In conjunction with this transfer, the Company assumed $36 million in debt and the obligation to purchase an adjacent parcel of land.debt. The Company recorded the assets and liabilities received at fair value upon closing. No gain or loss was recognized as the net fair value of the land approximated the value of the note. In September 2006, the Company sold this property for $202 million in cash. The Company currently intends to further develop this real estate for sale.
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 (the “Board”) 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.
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 2—Acquisitions and Disposals (continued)
On November 12, 2004, the proposed 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 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 charges in the Other segment in the consolidated statements of operations.
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 the Company. 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 $1.0 billion and the assumption of approximately $400 million of debt. Alldischarged all of the debt assumed was retired in November 2004. The excess purchase price overon the fair valueproperty at the time 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 approximately 78 million shares of Class A Common Stock and approximately 247 million shares of Class B Common Stock owned directly through the Cruden Group and indirectly (through QPL) by the Cruden Group, the Harris Trust received shares of News Corporation in the same exchange ratio as all other TNCL stockholders in the Reorganization. The shares of News Corporation non-voting stock that the Harris Trust received were 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. The shares issued to the Harris Trust were approximately 61 million shares of Class A Common Stock and approximately 247 million shares of Class B Common Stock with an approximate aggregate value of $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 61 million shares of Class A Common Stock issued to the Harris Trust were based on agreed estimates. The Company agreed to compensate the Harris Trust for any difference between the estimated amounts and the actual amounts (the “Adjustment Amount”) aftersale. Upon the completion of the Company’s reincorporation to the United States, and it was subsequently agreed thatMarch 2006 transaction, the Company would issue torecorded the Harris Trust additional shares of Class A Common Stock of approximately equivalentassets and liabilities received at fair value to the Adjustment Amount. The Adjustment Amount owed to the Harris Trustand accordingly no gain or loss was approximately an additional $32 million. Following approval by stockholders on October 21, 2005, a total of approximately two million additional shares of Class A Common Stock were issued to the Harris Trust on October 27, 2005 to provide for the difference between the estimated and actual amounts. The number of shares was determined basedrecognized on the New York Stock Exchange closing price of the Class A Common Stock on October 25, 2005.
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 2—Acquisitions and Disposals (continued)
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 interestsale 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 at March 31, 2006 were approximately 109 million and 314 million, respectively. Immediately following the Reorganization, the Harris Trust owned approximately 29.5% of the voting shares of News Corporation.
Fox Entertainment Group Acquisition
In March 2005, Fox Acquisition Corp., a direct wholly-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 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 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 merger into 2.04 shares of the Company’s Class A 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 stock, resulting in an excess purchase price of approximately $2.9 billion. After the consummation of the Offer and the subsequent merger, Fox Acquisition Corp. 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”). The Company has allocated the purchase price of $2.9 billion to finite-lived intangible assets, indefinite-lived intangibles, goodwill and deferred tax liabilities which are included in the Filmed Entertainment, Television, Cable Network Programming and Other segments.
In connection with the Offer and subsequent merger, a wholly-owned subsidiary of the Company tendered the shares of Fox Class A common stock and Fox Class B common stock that it owned prior to the acquisition to Fox Acquisition Corp. in exchange for News Corporation Class A Common Stock at the same exchange ratio as was provided in the Offer for shares of Fox Class A common stock. As a result of the exchange, the wholly-owned subsidiary owns 1,631 million shares of News Corporation’s Class A Common Stock, with an approximate value of $8 billion, which are reflected as treasury shares. The treasury shares are accounted for using the par value method.
The following unaudited pro forma consolidated results of operations for the fiscal years ended June 30, 2005 and 2004 assume that the acquisitions of FEG and QPL were completed as of July 1, 2003.
For the year ended June 30, | ||||
2005 | 2004 | |||
(in millions, except per share amounts) | ||||
Revenues | 24,020 | 21,151 | ||
Net Income | 2,316 | 1,781 | ||
Earnings per share—basic | ||||
Class A | 0.74 | 0.59 | ||
Class B | 0.62 | 0.49 | ||
Earnings per share—diluted | ||||
Class A | 0.73 | 0.59 | ||
Class B | 0.61 | 0.49 |
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 2—Acquisitions and Disposals (continued)
Pro forma data may not be indicative of the results that would have been obtained had these events actually occurred at the beginning of the periods presented, nor does it intend to be a projection of future results.
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, thereby increasing the Company’s ownership interest in SKY Italia to 100%.2006.
Note 3—United Kingdom Redundancy Program
In fiscal 2005, the Company announced its intention to invest in new printing plants in the United Kingdom to take advantage of technological and market changes. As the new automated technology comes on line, the Company expects lower production costs and improved newspaper quality, including expanded color.
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 3—United Kingdom Redundancy Program (continued)
In conjunction with this project, during the three months ended December 31, 2005,second quarter of fiscal 2006, the Company received formal approval for the construction of the main new plant which was the last contingency, thereby committing the Company to a redundancy program (the “Program”) for certain production employees at the Company’s U.K. newspaper operations. The Program is in response to the reduced workforce that will be required as new printing presses and the new printing facilities eventually come on line. As a result of this Program, the Company expects to reduce its production workforce by approximately 65%, and as of March 31,September 30, 2006, approximately 700 employees in the United Kingdom havehad already voluntarily accepted severance agreements and are expected to leave the Company primarily in fiscal 2007 and 2008.
In accordance with SFAS No. 88, “Employers’ Accounting for Settlements & Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” the Company recorded a redundancy provision of approximately $102 million, which includes accretion expense of $3$109 million during the nine months ended March 31,fiscal 2006 in Other operating charges. During the three months ended September 30, 2006, the Company recorded an additional $4 million relating to the Program, which was comprised of accretion and retention expenses, in Other operating charges in the unaudited consolidated statements of operations. As of September 30, 2006, the remaining liability balance relating to the Program was approximately $112 million, of which approximately $44 million was included in other current liabilities and Non-current$68 million was included in non-current other liabilities in the unaudited consolidated financial statements.balance sheet. The Company expects to record an additional provision of approximately $30$20 million through fiscal 2008 to record accretion on the redundancy provision and to recognize any retention bonuses earned. A majority of the Program’s costs are expected to be paid in cash to employees in fiscal 2008.
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 4—Inventories, net
The Company’s inventory was comprised of the following:
At March 31, 2006 | At June 30, 2005 | At September 30, 2006 | At June 30, 2006 | |||||||||||||
(in millions) | (in millions) | |||||||||||||||
Current inventories: | ||||||||||||||||
Raw materials | $ | 137 | $ | 132 | ||||||||||||
Work and projects in progress | 44 | 55 | ||||||||||||||
Finished goods | 131 | 123 | ||||||||||||||
Programming rights | 1,539 | 1,235 | $ | 2,252 | $ | 2,147 | ||||||||||
1,851 | 1,545 | |||||||||||||||
Less: inventory reserve | (34 | ) | (29 | ) | ||||||||||||
Total current inventories, net | 1,817 | 1,516 | ||||||||||||||
Non-current inventories: | ||||||||||||||||
Books, DVDs, paper and other merchandise | 485 | 466 | ||||||||||||||
Filmed entertainment costs: | ||||||||||||||||
Films: | ||||||||||||||||
Released (including acquired film libraries) | 690 | 733 | 522 | 588 | ||||||||||||
Completed, not released | 65 | 234 | 65 | 88 | ||||||||||||
In production | 569 | 218 | 355 | 251 | ||||||||||||
In development or preproduction | 105 | 90 | 42 | 59 | ||||||||||||
1,429 | 1,275 | 984 | 986 | |||||||||||||
Television productions: | ||||||||||||||||
Released (including acquired libraries) | 523 | 470 | 527 | 475 | ||||||||||||
Completed, not released | — | 14 | 1 | 27 | ||||||||||||
In production | 181 | 149 | 209 | 147 | ||||||||||||
In development or preproduction | 1 | 2 | 8 | 2 | ||||||||||||
705 | 635 | 745 | 651 | |||||||||||||
Total filmed entertainment costs, less accumulated amortization | 2,134 | 1,910 | ||||||||||||||
Programming rights | 738 | 456 | ||||||||||||||
Total non-current inventories | 2,872 | 2,366 | ||||||||||||||
Total filmed entertainment costs, less accumulated amortization(a) | 1,729 | 1,637 | ||||||||||||||
Total inventories, net | $ | 4,689 | $ | 3,882 | 4,466 | 4,250 | ||||||||||
Less: current portion of inventory, net(b) | (1,903 | ) | (1,840 | ) | ||||||||||||
Total noncurrent inventories, net | $ | 2,563 | $ | 2,410 | ||||||||||||
(a) | Does not include $576 million and $584 million of net intangible film library costs as of September 30, 2006 and June 30, 2006, respectively, which are included in intangible assets subject to amortization in the consolidated balance sheets. |
(b) | Current inventory as of September 30, 2006 and June 30, 2006 is comprised of programming rights ($1,456 million and $1,411 million, respectively), books, DVDs, paper and other merchandise. |
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 5—Investments
The Company’s investments were comprised of the following:
Ownership Percentage | At March 31, 2006 | At June 30, 2005 | Ownership Percentage | At September 30, 2006 | At June 30, 2006 | ||||||||||||||||
(in millions) | (in millions) | ||||||||||||||||||||
Equity investments: | |||||||||||||||||||||
The DIRECTV Group, Inc.(1) | DBS operator principally in the U.S. | 37%(3) | $ | 6,692 | $ | 6,688 | DBS operator principally in the U.S. | 39% | (3) | $ | 6,821 | $ | 6,866 | ||||||||
Gemstar-TV Guide International, Inc.(1) | U.S. print and electronic guidance company | 41% | 640 | 608 | U.S. print and electronic guidance company | 41% | 656 | 647 | |||||||||||||
British Sky Broadcasting Group plc(1) | U.K. DBS operator | 38%(4) | 990 | 787 | U.K. DBS operator | 39% | (4) | 1,156 | 1,061 | ||||||||||||
China Network Systems | Taiwan cable TV operator | various | 235 | 225 | Taiwan cable TV operator | various | 231 | 239 | |||||||||||||
Sky Network Television Ltd. | New Zealand media company | 44% | 239 | 254 | New Zealand media company | 44% | 267 | 239 | |||||||||||||
National Geographic Channel (US)(2) | U.S. cable channel | 67% | 292 | 320 | U.S. cable channel | 67% | 300 | 295 | |||||||||||||
National Geographic International | International cable channel | 50% | 96 | 133 | International cable channel | various | (5) | 101 | 99 | ||||||||||||
Other equity method investments | various | 678 | 627 | various | 620 | 679 | |||||||||||||||
Cost method investments | various | 531 | 626 | various | 693 | 476 | |||||||||||||||
$ | 10,393 | $ | 10,268 | $ | 10,845 | $ | 10,601 | ||||||||||||||
(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 (“BSkyB”) were |
(2) | The Company does not consolidate |
(3) | The Company’s ownership in DIRECTV increased from approximately |
(4) | The Company’s ownership in BSkyB increased from approximately |
(5) | The Company’s ownership percentage in NGC Network International LLC and NGC Network Latin America LLC was 50% and 67%, respectively, as of September 30, 2006 and June 30, 2006. |
During the ninethree months ended March 31,September 30, 2006, Gemstar-TV Guide’s common stock has experienced significant volatility in its market value fromtrading between a low of $2.59 per share on July 25, 2006 and a high of $3.76$3.58 per share to a low of $2.40 per share. Subsequent to March 31,on July 3, 2006, through May 8, 2006, Gemstar-TV Guide’s common stock traded between $3.65 per shareapproximately 69% and $3.03 per share which represented a market value that represented approximately 100% and 83%96% of the Company’s carrying value at March 31,September 30, 2006, respectively. As a result of this volatility,September 30, 2006, the Company’s carrying value in Gemstar-TV Guide exceeded its market value by approximately $105 million at March 31, 2006 and approximately $18 million at May 8, 2006.$75 million.
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; (5) the Company’s intent and ability to hold the investment for a period of time sufficient to allow
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 5—Investments (continued)
for a recovery in fair valuevalue; and (6) the recent volatility of Gemstar-TV Guide’s share price. Upon review, the Company has determined that at this time the impairment in the value of its investment in Gemstar-TV Guide is temporary.
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 5—Investments (continued)
Due to the volatility of Gemstar-TV Guide’s common stock, the Company will continue to monitor this investment for possible future impairment.
Fiscal Year 2007 Acquisitions and Disposals
In August 2006, the Company sold a portion of its equity investment in Phoenix Satellite Television Holdings Limited (“Phoenix”), representing a 19.9% stake for approximately $164 million. The Company recognized a pre-tax gain of approximately $136 million on the sale included in Other, net in the unaudited consolidated statement of operations for the three months ended September 30, 2006. The Company will retain a 17.6% stake in Phoenix after this transaction, which will be accounted for under the cost method of accounting and accordingly the carrying value will be adjusted to market value each reporting period as required under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.”
Prior Fiscal Years Acquisitions and Disposals
In July 2005, the Company sold its entire cost investment in China Netcom Group Corporation (“China Netcom”). The Company’s 1% investment in China Netcom was sold for total consideration of approximately $112 million. The Company recognized a pre-tax gain of approximately $52 million on this sale included in Other, net in the unaudited consolidated statement of operations for the ninethree months ended March 31, 2006.
Fiscal Year 2005 Acquisitions and DisposalsSeptember 30, 2005.
In October 2004, the Company and its then 34% investee, DIRECTV, announced a series of transactions with Grupo Televisa, Globopar and Liberty Media International, Inc. (“Liberty”) that would result in the reorganization of the companies’ direct-to-home (“DTH”) satellite television platforms in Latin America. The transactions would 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 would acquire News Corporation’s interests in Sky Brasil,Multi-Country Partners, Innova and Sky Multi-Country Partners. Brasil.
The Sky Multi-Country Partners transaction closed during fiscal 2005 and the Company recognized a pre-tax loss of approximately $55 million on this transaction at that time. transaction.
In February 2006, the Company completed its previously announced sale of its investment in Innova, a Mexican DTH platform, to DIRECTV for $285 million. As a result of this transaction, the Company recognized a pre-tax gain during the three months ended March 31, 2006 of approximately $206 million, which is included in Other, net in the unaudited consolidated statementsthird quarter of operations.fiscal 2006. The balanceCompany deferred a portion of theits total gain is deferredon sale due to its indirect retained interest through the Company’s investment in DIRECTV, the acquirerownership of Innova.DIRECTV. Upon the closing of the Innova transaction, the Company was released from both its Innova transponder lease guarantee and its guarantee under Innova’s credit agreement.
In December 2004,August 2006, the Company soldcompleted the sale of its 20% investment in Rogers SportsnetSky Brasil, a Brazilian DTH platform, to Rogers Broadcasting LimitedDIRECTV for $41 million. Rogers Sportsnet operates regional sports networksapproximately $300 million in Canada covering local sports events plus national programming. For the nine months ended March 31, 2005, thecash which was received in fiscal 2005. The Company recognized a pre-tax gain of $39approximately $261 million, on this salewhich is included in Other, net in the unaudited consolidated statementsstatement of operations.
Inoperations for the three months ended September 30, 2006. The Company deferred a portion of its total gain on sale due to its indirect retained interest through the Company’s ownership of DIRECTV. As a result of the transaction, the Company was released from its Sky Brasil transponder lease guarantee and will be released from its Sky Brasil credit agreement guarantee on or before 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, Mumbai31, 2007. (See Note 10 Commitments and the National Stock Exchange of India.Guarantees)
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 5—Investments (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 March 31, | For the nine months ended March 31, | |||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||
(in millions) | (in millions) | |||||||||||||
Revenues | $ | 5,038 | $ | 3,148 | $ | 15,639 | $ | 9,372 | ||||||
Operating (loss) income | 824 | (54 | ) | 1,930 | (2,049 | ) | ||||||||
Income (loss) from continuing operations before discontinued operations and cumulative effect of accounting changes | 500 | (41 | ) | 1,200 | (1,255 | ) | ||||||||
Net income (loss) | 500 | (41 | ) | 1,200 | (1,338 | ) |
For the three months ended September 30, | ||||||
2006 | 2005 | |||||
(in millions) | ||||||
Revenues | $ | 5,674 | $ | 5,059 | ||
Operating income | 965 | 540 | ||||
Net income from continuing operations before discontinued operations and cumulative effect of accounting changes | 587 | 344 | ||||
Net income | 587 | 344 |
Note 6—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 non-cash charge of $1.6 billion ($1.0 billion net of tax, or ($0.33)0.32) per diluted share of Class A common stock, par value $0.01 per share (“Class A Common StockStock”) and ($0.27) per diluted share of the Company’s Class B common stock, par value $0.01 per share (“Class B Common Stock)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.
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. At March 31, 2006, 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.
Note 7—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 were redeemable at the option of the holders on February 28, 2006 at a price of $594.25. The LYONs are also redeemable at the option of the holders on February 28, 2011 and February 28, 2016 at a price of $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.
On February 28, 2006, 92% of the LYONs were redeemed for cash at the specified redemption amount of $594.25 per LYON. Accordingly, the Company paid an aggregate of approximately $831 million to the holders of the LYONs that had exercised this redemption option. LYONs with a carrying value of approximately
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 7—Borrowings (continued)
$69 million remained outstanding as of March 31, 2006. The pro-rata portion of unamortized deferred financing costs relating to the redeemed LYONs approximating $13 million was recognized and included in Other, net in the unaudited consolidated statements of operations for the three and nine months ended March 31, 2006.
Notes due 2035
In December 2005, the Company issued $1,150 million of 6.40% Senior Notes due 2035. The Company received proceeds of approximately $1,133 million on the issuance of this debt, net of expenses. These notes were issued under the Amended and Restated Indenture, dated as of March 24, 1993, as supplemented, among News America Incorporated, the Company, the subsidiary guarantors named therein and The Bank of New York, as Trustee.
Note 8—Stockholders’ Equity
Rights of Holders of Common Stock
The Company has two classes of Common Stock that are authorized and outstanding, non-voting Class A Common Stock and voting Class B Common Stock. Class A Common Stock carry the right to dividends in the amount equal to 120% of the aggregate of all dividends declared on a share of Class B Common Stock. Class A Common Stock retain this right through fiscal year 2007. Subsequent to the final fiscal 2007 dividend payment, shares of Class A Common Stock will cease to carry any rights to a greater dividend than shares of Class B Common Stock.
In the event of a liquidation or dissolution of the Company, or a portion thereof, holders of Class A Common Stock and Class B Common Stock shall be entitled to receive all of the remaining assets of the Company available for distribution to its shareholders, ratably in proportion to the number of shares held by Class A Common Stock stockholders and Class B Common Stock stockholders, respectively. In the event of any merger or consolidation with or into another entity the holders of Class A Common Stock and the holders of Class B Common Stock shall be entitled to receive substantially identical per share consideration.
In August 2005, the Company announced that its Board determined to extend the expiration date of the Company’s stockholder rights plan that it had adopted in November 2004 for an additional two-year period. On April 13, 2006, the Company agreed to a settlement of a lawsuit regarding the extension of its stockholder rights plan. (See Note 11 Contingencies for more information on the settlement).
Preferred Stock Authorization
The Company is authorized to issue 100,000,000 shares of preferred stock, par value $0.01, of which 9,000,000 preferred shares have been designated as Series A Junior Participating Preferred Stock, par value $0.01 per share. As of March 31, 2006, there were no shares of preferred stock, including Series A Junior Participating Preferred Stock, issued and outstanding. The Board has the authority, without any further vote or action by the stockholders, to issue preferred stock in one or more series and to fix the number of shares, designations, relative rights (including voting rights), preferences, qualifications and limitations of such series to the full extent permitted by Delaware law.
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 the three months ended September 30, 2005,2005.
The direct valuation method used for FCC licenses requires, among other inputs, the use of published industry data that are based on subjective judgments about future advertising revenues in the markets where the Company owns television stations. This method also involves the use of management’s judgment in estimating an appropriate discount rate reflecting the risk of a market participant in the U.S. broadcast industry. The resulting fair values for FCC licenses are sensitive to these long-term assumptions and any variations to such assumptions could result in an impairment to existing carrying values in future periods.
Note 7—Borrowings
The Company previously entered into two loan agreements with the European Bank for Reconstruction and Development (the “EBRD”) and had an outstanding balance of $154 million under these loans at June 30, 2006. In August 2006, the Company entered into a loan agreement with Raiffeisen Zentralbank Österreich AG (“RZB”) for $300 million and repaid all amounts outstanding under the Company’s loan agreements with the EBRD with the remaining balance available for future use. The RZB loan bears interest at LIBOR for a period equal to each one, three or six month interest period, plus a margin of up to 2.85% dependent upon certain financial metrics. Principal amounts under the RZB loan are to be repaid in equal amounts every six months starting on the second anniversary of the date of the agreement until the fifth anniversary of the date of the agreement. The remaining available amount under the RZB loan, which was paidmay be drawn prior to the second anniversary of the date of the agreement, will be used to expand the Company’s outdoor advertising business primarily in October 2005 to stockholdersRussia and Eastern Europe. The loans are secured by certain guarantees, bank accounts and share pledges of record on September 14, 2005. The total aggregate dividend paid in October 2005 to stockholders was approximately $240 million.the Company’s Russian operating subsidiaries.
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 8—Stockholders’ Equity (continued)
Rights of Holders of Common Stock
On August 8, 2006, the Company announced that, in accordance with the terms of the settlement of a lawsuit regarding the Company’s stockholder rights plan, the Company’s Board of Directors (the “Board”) had approved the adoption of an Amended and Restated Rights Plan, extending the term of the Company’s existing stockholder rights plan from November 7, 2007 to October 20, 2008. The Board has the right to extend the term for an additional year if the situation with Liberty has not, in the Board’s judgment, been resolved. The terms of the Amended and Restated Rights Plan remain the same as the Company’s existing stockholder rights plan in all other material respects. Pursuant to the terms of the settlement, on October 20, 2006, the Amended and Restated Rights Plan was presented for a vote of the Company’s Class B stockholders at the Company’s 2006 annual meeting of stockholders and the stockholders voted in favor of its approval. (See Note 11 Contingencies and Note 17 Subsequent Events for more information on the settlement of the lawsuit).
Dividends
The Company declared a dividend of $0.06 per share of Class A Common Stock and a dividend of $0.05 per share for the Company’s Class B Common Stock in the three months ended March 31,September 30, 2006, which waswere paid in AprilOctober 2006 to stockholders of record on March 15,September 13, 2006. The total aggregate dividend paid in AprilOctober 2006 to stockholders was approximately $180 million.
Repurchase Program
In June 2005, the Company announced a stock repurchase program under which the Company iswas authorized to acquire from time to time up to an aggregate of $3 billion in Class A Common Stock and Class B Common Stock. In May 2006, the Company announced that the Board had authorized increasing the total amount of the stock repurchase program to $6 billion. The remaining authorized amount at March 31, 2006, excluding commissions under the Company’s stock repurchase program isat September 30, 2006, excluding commissions, was approximately $658$3,383 million. (See Note 17 Subsequent Events for update to repurchase program authorization.)
Note 9—Equity Based Compensation
In December 2004, the FASB issued SFAS 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 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 stock-based payment transactions be recognized in the financial statements. SFAS 123R establishes fair value as the measurement objective in accounting for stock-based payment arrangements and requires all companies to apply a fair-value-based measurement method in accounting for generally all stock-based payment transactions with employees.
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
Under the News Corporation 2005 Long-Term Incentive Plan (the “2005 Plan”), stock-based compensation, including stock options, restricted stock, restricted stock units (“RSUs”) 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 (the “Compensation Committee”) 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 stock 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 remaining shares available for issuance under the 2005 Plan at March 31, 2006 were approximately 149 million. The Company will issue new shares of Class A Common Stock for award exercises.
The fair value of stock based compensation under the 2005 Plan will be calculated according to the type of award issued.
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 9—Equity Based Compensation (continued)
Stock options and Stock Appreciation Rights (“SARs”) issued under the 2005 Plan or under the NDS Group plc (“NDS”), executive share option schemes 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 or NDS’s Series A ordinary shares, as applicable; expected term of awards granted is derived from the historical activity of the Company’s or NDS’s awards, as applicable, 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 U.S. government bonds with similar lives on the dates of the option grants; and dividend yield is calculated as an average of a ten year history of the Company’s yearly dividend divided by the fiscal year’s closing stock price.
RSU awards are grants that entitle the holder to shares of Class A Common Stock as the award vests, subject to the 2005 Plan and such other terms and conditions as the Compensation Committee may establish. RSUs issued under the 2005 Plan are fair valued based upon the fair market value of Class A Common Stock on the grant date. Any person who holds RSUs shall have no ownership interest in the shares of Class A Common Stock to which such RSUs relate until and unless shares of Class A Common Stock are delivered to the holder. All shares of Class A Common Stock reserved for cancelled or forfeited RSU awards or for awards that are settled in cash become available for future grants. Certain RSU awards are settled in cash and are subject to terms and conditions of the 2005 Plan and such other terms and conditions as the Compensation Committee may establish.
During the nine months ended March 31, 2006, the Company issued 15.9 million RSUs which primarily vest over four years. The RSUs will be payable in shares of the Company’s Class A Common Stock, par value $0.01 per share, upon vesting, except for approximately 3.0 million RSUs that will be settled in cash.
The following table summarizes the activity related to the Company’s RSUs to be settled in stock:equity-based compensation transactions:
Restricted Stock Units | Weighted Average Grant-Date Fair Value | |||||
(Shares in thousands) | ||||||
Unvested restricted stock units at July 1, 2005 | — | $ | — | |||
Granted | 12,887 | 15.30 | ||||
Cancelled | (123 | ) | 15.24 | |||
Unvested restricted stock units at March 31, 2006 | 12,764 | $ | 15.30 | |||
News Corporation 2004 Stock Option Plan and 2004 Replacement Stock Option Plan
As a result of the Reincorporation, all preferred limited voting ordinary shares which the Company issued stock options over were cancelled and holders received in exchange stock 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 Reincorporation, stock options were granted to employees with Australian dollar exercise prices.
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 9—Equity Based Compensation (continued)
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 exceed the market price at the date of grant in Australian dollars. No future grants will be issued under the 2004 Plan and the 2004 Plan automatically terminates in 2014.
The fair value of each outstanding stock 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 stock options granted was derived from the historical activity of the Company’s stock options and represented the period of time that stock 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 stock 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 closing stock price.
Other
The Company operates an employee share ownership scheme in the United Kingdom (“UK Sharesave Scheme”). This scheme 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. During the three months ended March 31, 2006 and 2005, the Company granted approximately 341 thousand stock options and approximately 1.4 million stock options under this scheme, respectively.
The following table summarizes information about the Company’s stock option transactions for all News Corporation’s stock option plans:
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 | 341 | 12.68 | * | |||||||||||
Exercised | (7,932 | ) | 10.14 | 15.95 | ||||||||||
Cancelled | (4,727 | ) | 14.08 | 24.49 | ||||||||||
Outstanding at March 31, 2006 | 119,049 | $ | 14.22 | $ | 23.98 | 5.0 | $ | 284.4 | ||||||
Vested and unvested expected to vest at March 31, 2006 | 119,049 | $ | 14.22 | $ | 23.98 | 5.0 | $ | 284.4 | ||||||
Vested and exercisable at March 31, 2006 | 110,754 | $ | 14.54 | $ | 24.55 | 5.3 | $ | 229.7 | ||||||
The weighted average exercise prices for the stock options presented above are in Australian dollars. The U.S. dollar equivalents above have been converted at historical exchange rates; therefore, the proceeds from the exercise of these stock options may differ due to fluctuations in exchange rates in periods subsequent to the date of the grants.
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 9—Equity Based Compensation (continued)
No stock options were granted in the nine months ended March 31, 2006 and 2005, other than under the UK Sharesave Scheme, as noted above.
The company issued 1,325,000 SARs in both fiscal 2005 and fiscal 2004 at strike prices of $15.20 and $12.99, respectively. As of March 31, 2006, none of the SARs have been exercised and 331,250 of the SARs issued in fiscal 2005 and 662,500 of the SARs issued in fiscal 2004 were vested and exercisable. No SARs have been issued in fiscal 2006.
NDS Option Schemes
NDS, an indirect majority-owned subsidiary of the Company which is a publicly traded company, has three executive share option schemes (the “NDS Plans”). The NDS Plans provide for the grant of share options to purchase Series A ordinary shares in NDS with a maximum term of ten years. Share options granted under the NDS Plans vest over a four-year period. The NDS Plans authorize share options to be granted subject to a maximum of 10% of the ordinary shares of NDS on issue at the date of grant. All NDS employees are entitled to participate in the NDS Plans, however (with the exception of the employee share ownership schemes which are open to all), management determines to whom and how many share options are granted.
A summary of the NDS options:
Shares (in thousands) | Weighted average exercise price (in US$) | Weighted average remaining contractual term (in years) | Aggregate intrinsic value (in US$ millions) | ||||||||
Outstanding at July 1, 2005 | 4,338 | $ | 18.17 | ||||||||
Granted | 941 | 43.13 | |||||||||
Exercised | (1,239 | ) | 13.05 | ||||||||
Cancelled | (28 | ) | 18.44 | ||||||||
Outstanding at March 31, 2006 | 4,012 | $ | 25.61 | 7.0 | $ | 106 | |||||
Vested and unvested expected to vest at March 31, 2006 | 3,982 | $ | 25.55 | 6.9 | $ | 106 | |||||
Exercisable at March 31, 2006 | 2,461 | $ | 20.59 | 5.7 | $ | 78 | |||||
The aggregate intrinsic value of options exercised for all of the Company’s plans, including the NDS plans, presented during the first nine months of fiscal 2006 and 2005 was $68 million and $39 million, respectively.
Equity based compensation recorded for the three and nine months ended March 31, 2006 was $37 million and $88 million, respectively. During the nine months ended March 31, 2006, the Company received $110 million in cash from stock option exercises and recognized a tax benefit of $17 million on stock options exercised for all plans presented.
For the three months ended | ||||||
2006 | 2005 | |||||
(in millions) | ||||||
Equity-based compensation | $ | 29 | $ | 22 | ||
Cash received from exercise of equity-based compensation | $ | 59 | $ | 29 | ||
Total intrinsic value of options exercised | $ | 31 | $ | 13 | ||
At March 31,September 30, 2006, the Company’s total compensation cost related to non-vested stock options, RSUsrestricted stock units (“RSUs”) and SARsstock appreciation rights not yet recognized for all plans presented iswas approximately $257$243 million, a portionthe majority of which is expected to be recognized within the current fiscal year, with the remainder to be recognized over the next three fiscal years. Compensation expense on all stock-basedequity-based awards is recognized on a straight linestraight-line basis over the vesting period of the entire award.
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 9—Equity Based Compensation (continued)
Compensation Expense
On May 3,Options exercised during the three months ended September 30, 2006 and September 30, 2005 the Compensation Committee approved the acceleration of vesting of unvested out-of-the-money stock options granted underresulted in the Company’s 2004 Stock Option Plan. The affected stock options are those with exercise prices greater than A$19.74 per share, which was the closing priceissuance of the Company’s4.7 million and 2.1 million shares of Class A Common Stock, (as tradedrespectively. The Company recognized a tax benefit on the Australian Stock Exchange in the form of CHESS Depositary Interests) on May 2, 2005. Prior to the Reorganization, stock options were granted to employees with Australian dollar exercise prices. As a resultexercised of this action,$11 million and $4 million for the vesting of approximately 19,862,000 previously unvested stock options were acceleratedthree months ended September 30, 2006 and were immediately exercisable. None ofSeptember 30, 2005, respectively.
During the unvested stock options held by directors, some of whom have stock options with exercise prices in excess of A$19.74, were accelerated.
The Compensation Committee’s decision to accelerate the vesting of these stock options was in anticipation of the related compensation expense that would be recorded subsequent to the Company’s adoption of SFAS 123R. In addition, the Compensation Committee considered that because these stock options had exercise prices in excess of the prevailing market value on May 2, 2005, 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. Incremental expense of approximately $100 million ($65 million, net of tax) associated with the acceleration was recorded in the fourth quarter fiscal 2005 pro forma disclosure.
The following table reflects the effect on net income and earnings per share as ifthree months ended September 30, 2006, the Company had appliedissued 1.7 million RSUs. These RSUs will be payable in shares of Class A Common Stock upon vesting, except for approximately 0.5 million RSUs that will be settled in cash.
During the fair value recognition provisions for stock-based employee compensation prior to the adoptionthree months ended September 30, 2006, approximately 4.0 million RSUs vested, of SFAS 123R on July 1, 2004. These pro forma effects may not be representative of future amounts since the estimated fair value ofwhich approximately 3.4 million were settled in stock, options on the date of grant is amortized to expense over the vesting period. Additional stock options may be granted in future yearsbefore statutory tax withholdings, and the vesting of certain options was accelerated on May 3, 2005 (see above).
For the three months ended March 31, 2005 | For the nine months ended March 31, 2005 | |||||||
Net income, as reported | $ | 400 | $ | 1,411 | ||||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | (18 | ) | (51 | ) | ||||
Pro forma net income | $ | 382 | $ | 1,360 | ||||
Basic earnings per share: | ||||||||
As reported: | ||||||||
Class A | $ | 0.14 | $ | 0.51 | ||||
Class B | $ | 0.12 | $ | 0.43 | ||||
Pro forma: | ||||||||
Class A | $ | 0.14 | $ | 0.49 | ||||
Class B | $ | 0.12 | $ | 0.41 | ||||
Diluted earnings per share: | ||||||||
As reported: | ||||||||
Class A | $ | 0.14 | $ | 0.50 | ||||
Class B | $ | 0.12 | $ | 0.42 | ||||
Pro forma: | ||||||||
Class A | $ | 0.14 | $ | 0.48 | ||||
Class B | $ | 0.11 | $ | 0.40 |
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSremaining RSUs were settled for cash.
Note 10—Commitments and Guarantees
Commitments
As a result of the FIM acquisitions that occurred in September and October 2005, the Company has commitments under certain contractual arrangements to make future payments of up to a maximum of $148 million as of March 31, 2006. These commitments are comprised of operating leases, capital expenditures and contractual employee obligations.
In December 2005,July 2006, the Company signed a new broadcastcontract with MLB for rights agreement with the National Association of Stock Car Auto Racing (“NASCAR”) forto telecast certain racesregular season and post season games, as well as exclusive rights for certain ancillary content for an eight year term, commencing in calendar year 2007 in the amount of $1.7 billion.
Sky Italia entered into a new operating lease agreement in January 2006to telecast MLB’s World Series and All-Star Game for a newly developed property in Milan, Italy currently under construction for an initial 12-year term which is expected to commence in fiscal 2007 with an automatic renewal option for an additional 12-yearseven-year term through fiscal 2031.the 2013 MLB season. The lease includes an annual increase based on a costCompany will pay approximately $1.8 billion over the term of living index as defined by the contract commencingfor these rights.
The Company has commenced a project to upgrade its printing presses with the payment of the rental fee in the second year. Total payments relating to this leasenew automated technology, that once on line, are expected to approximate $375 million.
Other than previously disclosedlower production costs and improve newspaper quality, including expanded color. As part of this initiative, the Company entered into several third party printing contracts in the notes to these unaudited consolidated financial statements, the Company’s commitments have not changed significantly from disclosures includedUnited Kingdom totaling approximately $463 million and expiring in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2005 filed with the SEC on September 1, 2005.2022.
Guarantees
The Company had guaranteed a transponder lease for Innova,Sky Brasil, an equity affiliate of the Company. The Company also guaranteed $46$210 million of the obligationsobligation of InnovaSky Brasil under a credit agreement. Upon the closing of the sale of Innova duringSky Brasil in the thirdfirst quarter of 2006,fiscal 2007, the Company was released from these guarantees.
Other than previously disclosed in the notes to these unaudited consolidated financial statements,transponder lease and will be released from the Company’s guarantees have not changed significantly from disclosures included in the Company’s Annual Reportcredit agreement guarantee on Form 10-K for the fiscal year ended June 30, 2005 filed with the SEC on September 1, 2005.or before January 31, 2007.
Note 11—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, captionedUnisuper et al. v. News Corp., C.A. No. 1699-N, raised claims of breach of contract, promissory estoppel, fraud, negligent misrepresentation and breach of fiduciary duty relating to the Board’s policy of the Board concerning the Company’s stockholder rights plan, and the August 2005 decision of the Board to extend the expiration of the existing stockholder rights plan until November 8, 2007.
On April 13, 2006, the Company announced that it had entered into a settlement agreement with the plaintiffs. Under the terms of the settlement agreement, the trial and all remaining proceedings in the litigation will bewere postponed pending a stockholder vote on a rights plan to be held at the Company’s annual stockholders meeting in October 2006 (the “Annual Meeting”). If stockholders vote in favor of the rights plan, the litigation will be dismissed. If stockholders vote against the rights plan, the Company has the right to treat the vote as advisory and proceed with the litigation.
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 11—Contingencies (continued)
At the Annual Meeting, an extension of the existing rights plan tomeeting in October 2008 will be proposed, with the Company having the right to extend the rights plan for one year if the situation with Liberty Media Corporation, which led to the adoption2006 (the “Annual Meeting”). If stockholders voted in favor of the rights plan, remains unresolved.the litigation was to be dismissed. If stockholders voted against the rights plan, the Company had the right to treat the vote as advisory and proceed with the litigation.
Under the terms of the settlement agreement, if the Company’s stockholders votevoted in favor of the rights plan, then at the expiration of the existing rights plan or any other rights plan, the Company may adopt subsequent rights plans of one-year duration without stockholder approval, subject to interim periods of nine months between rights plans. If during or prior to any interim period, any stockholder (i) acquires 5 percent or more of the Company’s voting stock, (ii) offers to purchase voting stock or assets that would result in their owning 30 percent or more of the Company’s voting stock or assets or (iii) in certain other circumstances, the Company may immediately adopt a new rights plan of one-year duration. The Company may, of course, also adopt new rights plans or extend existing rights plans of unlimited duration with stockholder approval. The provisions discussed in this paragraph shall be in effect until the twentieth anniversary of the Annual Meeting. The terms of the settlement agreement are not intended to limit, restrict or eliminate the ability of the Company’s stockholders under applicable Delaware law to amend the Company’s certificate of incorporation in any manner. As part of the settlement, the Company has agreed to pay the plaintiffs’ attorneys fees and expenses in the litigation.
On April 18, 2006, the Delaware Court of Chancery entered a scheduling order (the “Scheduling Order”) (i) preliminarily approving the lawsuit as a class action on behalf of the class of Plaintiffs (the “Class”) set forth in the Stipulation of Settlement and (ii) setting the date for a hearing for the purposes of: (a) determining whether the action should be certified as a class action, (b) determining whether the terms of the proposed settlement are fair, reasonable and in the best interests of the Class, and (c) considering the application of Plaintiffs’ counsel for an award of attorneys’ fees and expenses. The settlement hearing is scheduled forwas held on May 23, 2006. Liberty filed an objection to the settlement. Before approving the settlement, the Court instructed the parties to clarify the terms of the releases that they were providing each other in order to make them easier to read, and to make express that claims against the parties based on future conduct were not being released. On June 1, 2006, the Court issued its order and final judgment approving the settlement.
DIRECTV
TNCL was named asAt the Annual Meeting on October 20, 2006, the Company’s stockholders approved the extension of the existing rights plan to October 2008, with the Company having the right to extend the rights plan for a defendant in a Revised Amended Consolidated Complaint filed on May 7, 2004 in a lawsuit captionedIn re General Motors (Hughes) Stockholders Litigation, filedyear if the situation with Liberty has not, 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 aidedBoard’s judgment, been resolved, and abetted an alleged breach of fiduciary duty by the Board of Directors of General Motors (“GM”) allegedly owed to a class of certain GM stockholders. The plaintiffs allegedly seek “appropriate equitable relief… including rescissory remediespursuant 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 supportStipulation 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 decisionSettlement and the CompanyCourt’s order, this action has cross-appealed on jurisdictional and improper service issues. Oral argument on the appeal took place on December 21, 2005. The Delaware Supreme Court affirmed the decision on March 20, 2006.been dismissed, with prejudice.
NDS
The International Electronic Technology Corp.Sogecable Litigation
On April 18, 1997, International Electronic Technology Corp. (“IETC”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 suitan action against NDS in the United States District Court for the Central District of California against NDS’s customers, Hughes, DIRECTV, Inc.California. Sogecable filed an amended complaint on October 9, 2003, which purported to allege claims for violation of the Digital Millennium Copyright Act and Thomson Consumer Electronics, Inc., alleging infringement of one U.S. patentthe federal Racketeer Influenced and seekingCorrupt Organizations (“RICO”) Act. 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 injunction.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 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.
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 11—Contingencies (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, including non-infringement and invalidity. On September 22, 2005,October 1, 2004, Sogecable notified the court issued an order construing certain terms inthat it would not be filing a third amended complaint, but would appeal the patent as a mattercourt’s entry of law, after an extensive delay due tofinal judgment dismissing the death of two judges previously assigned to the case. Following receipt of the claim construction order, defendants notified IETC that they intended to file a motion for summary judgment of non-infringement based on the claim construction. During a status conference with the court on January 9, 2006, IETC requested that defendants’ motion be deferred to permit it to seek additional document discovery. The court denied this request, and ordered IETC to make its request in response to defendants’ summary judgment motion. Defendants’ motion for summary judgment was filed on January 30, 2006. On March 9, 2006, the court granted defendants’ motion, and judgment for defendants was entered on March 24, 2006. IETC has filed a notice of appealsuit to the United States Ninth Circuit Court of AppealsAppeals. 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. The court has scheduled oral arguments for the Federal Circuit.November 14, 2006.
Intermix
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’ 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 would pay a total of $7.5 million to the State of New York and would be prohibited from resuming 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 had voluntarily suspended 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’ 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’ violation of provisions of Canada’s 1985 Competition Act in connection with Intermix’ 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 alleged claims are frivolous and vexatious. 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 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,
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 11—Contingencies (continued)
plaintiff amended his complaint. On November 14, 2005, Intermix filed a motion to dismiss plaintiff’s first amended complaint. This motion to dismiss was granted in part, and denied in part. The Judge denied Intermix’ request to dismiss all class allegations and claims for trespass to chattels and violation of California Penal Code section 502 but dismissed with prejudice the claims for unjust enrichment and violation of California Business and Professions Code section 17200. Trial has been set for January 23, 2007.
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 or about 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. On November 17, 2005, the City filed a complaint against Intermix for equitable relief and civil penalties pursuant to California Business and Professions Code sections 17200 and 17500. On November 23, 2005, Intermix filed a verified answer denying the City’s allegations. The City Attorney filed a motion for judgment on the pleadings as to Intermix’s sixth affirmative defense (lack of standing/jurisdiction). That motion is set for hearing on May 19, 2006. The City Attorney also filed a motion for judgment on the pleadings as to Intermix’s first and third affirmative defenses (release and equitable estoppel). That motion is set for hearing on May 23, 2006. Intermix filed a motion for summary judgment or, in the alternative summary adjudication, seeking dismissal of the City Attorney’s causes of action for false/misleading advertising and unfair business practices. Intermix’s motion is set for hearing on May 23, 2006. Trial has been set for November 6, 2006. Intermix believes the City’s claims are without merit and intends to vigorously defend itself.
FIM Transaction
On August 26, 2005 aand August 30, 2005, two purported class action lawsuit,lawsuits captioned, respectively,Ron Sheppard v. Richard Rosenblatt et. al., wasandJohn Friedmann v. Intermix Media, Inc. et al., were filed in the California Superior Court, County of Los Angeles. In addition toBoth lawsuits named as defendants all of the then incumbent members of the Intermix Board, including Mr. Rosenblatt, Intermix’ former Chief Executive Officer, and a former Intermix director, the lawsuit names as defendants all of the other then incumbent members of the Intermix Board and certain entities affiliated with VantagePoint Venture Partners, a former major Intermix stockholder. The complaintcomplaints alleged that, in pursuing the transaction whereby Intermix was to be acquired by FIM Transaction(the “FIM Transaction”) and approving the related merger agreement, the director 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 complaintcomplaints further alleged that the merger agreement resulted from a flawed process and that the defendants tailored the terms of the merger to advance their own interests. On August 30, 2005, a similar purported class action lawsuit, captionedJohn Friedmann v. Intermix Media, Inc. et. al.,was filed in the same Court naming as defendants all of the same individuals and entities named in theSheppard action, as well as Intermix. TheFriedmann complaint included substantially similar claims and allegations as those asserted in theSheppard action. The FIM Transaction was consummated on September 30, 2005. TheFriedmannandSheppardlawsuits were subsequently consolidated and, on January 17, 2006, a consolidated amended complaint was filed (the “Intermix“Intermix Media Shareholder Litigation”Litigation”). The plaintiffs in the consolidated action are seeking various forms of declaratory relief, damages, disgorgement and fees and costs. On March 20, 2006, the court ordered that substantially identical claims asserted in a separate state action filed by Brad Greenspan, captionedGreenspan v. Intermix Media, Inc., et al., be severed and related to theIntermix Media Shareholder Litigation. The defendants have filed demurrers seeking dismissal of all claims in the Intermix Media Shareholder Litigation. Intermix believes that the Intermix Media Shareholder Litigation is meritless and intendsthe severed Greenspan claims, which were heard by the Court on July 6, 2006. On October 6, 2006, the Court sustained the demurrers without leave to vigorously defend against the claims and allegations in the complaints.amend.
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 11—Contingencies (continued)
In November 2005, plaintiff in a derivative action captionedLeBoyer v. Greenspan et al. pending against various former Intermix directors and officers in the United States District Court for the Central District of California, filed a First Amended Class and Derivative Complaint (the “Amended Complaint”). The original derivative action was filed in May 2003 and arose out of Intermix’ restatement of quarterly financial results for its fiscal year ended March 31, 2003. PlaintiffThe plaintiff asserted breach of fiduciary duty and related claims in connection with the restatement. Until the filing of the Amended Complaint, the action had been stayed by mutual agreement of the parties since its inception pending determination of whether plaintiffs in a related securities class action lawsuit (the “Securities Litigation”) would be able to state a claim against the defendants. The Securities Litigation was dismissed pursuant to a class settlement in September 2005. In addition, a substantially similar derivative action filed in Los Angeles Superior Court was dismissed based on inability of the plaintiffs to adequately plead demand futility. In thePlaintiff LeBoyer’s November 2005 Amended Complaint in addition to the previously pleaded restatement-related allegations and derivative claims, plaintiff includesadded various allegations and purported class claims arising out of the FIM Transaction which are substantially similar to those asserted in theIntermix Media Shareholder Litigation.Litigation. The Amended Complaint also adds as defendants the individuals and entities named in theIntermix Media Shareholder Litigation that were not already defendants in the matter. PlaintiffThe plaintiff seeks unspecified damages, disgorgement, costs and fees. Intermix believes that the plaintiff in the action lacks standing to pursue any claims in a derivative capacity and notwithstanding, that the lawsuit is generally without merit andmerit. Intermix intends to vigorously defend itself, and expects that the individual defendants will vigorously defend themselves in the matter. On July 14, 2006, the parties filed their briefing on defendants’ motion to dismiss and stay the matter. On October 16, 2006, the court dismissed the fourth through seventh
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 11—Contingencies (continued)
claims for relief, which related to the 2003 restatement, finding that the plaintiff is precluded from relitigating demand futility. At the same time, the court asked for further briefing regarding the standing issues and the effect of the judge’s dismissal of the claims in theGreenspan case and theIntermix Media Shareholder Litigation on the remaining claims, which include two direct class action claims related to alleged breaches of fiduciary duty leading up to the FIM Transaction and a third claim under Section 14a of the Exchange Act asserted as a derivative claim and alleging material misstatements and omission in the FIM Transaction proxy statement. The court has scheduled a November 27, 2006 hearing on the remaining issues.
On June 14, 2006, a purported class action lawsuit, captionedJim Brown v. Brett C. Brewer, et al., was filed against certain former Intermix directors and officers in the United States District Court for the Central District of California. The plaintiff asserts claims for alleged violations of Section 14a of the Exchange Act and SEC Rule 14a-9, as well as control person liability under Section 20a. The plaintiff alleges that certain defendants disseminated false and misleading definitive proxy statements on two occasions: one on December 30, 2003 in connection with the shareholder vote on January 29, 2004 on the election of directors and ratification of financing transactions with certain entities of VantagePoint Venture Partners (“VantagePoint”), a former large stockholder of Intermix, and another on August 25, 2005 in connection with the shareholder vote on the FIM Transaction. The complaint names as defendants certain Vantage Point related entities and the members of the Intermix Board who were incumbent on the dates of the respective proxy statements. Intermix is not named as a defendant, but has certain indemnity obligations to the former officer and director defendants in connection with these claims and allegations. Intermix believes that the claims are without merit and expects that the individual defendants will vigorously defend themselves in the matter. On August 25, 2006, plaintiff amended his complaint to add certain investment banks (the “Investment Banks”) as defendants. Intermix has certain indemnity obligations to the Investment Banks as well. After conferring with defendants concerning deficiencies in the amended complaint pursuant to local rule and entering a stipulation with defendants regarding a briefing schedule, plaintiff amended his complaint again on September 27, 2006. On October 19, 2006, defendants filed motions to dismiss all claims in the Second Amended Complaint. These motions will be heard on December 18, 2006. Intermix believes that the claims are without merit and expects the individual defendants will vigorously defend themselves in the matter.
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 a 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.
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 11—Contingencies (continued)
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. On October 31, 2005, the defendants filed motions seeking dismissal of the lawsuit on the grounds that the complaint fails to state any
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 11—Contingencies (continued)
cause of action. Instead of responding to these motions, Mr. Greenspan filed an amended complaint on February 21, 2006, in which Mr. Greenspan omitted certain previously named defendants and added two other former directors as defendants. In this amended complaint, Mr. Greenspan asserts seven causes of action. The first two causes of action, for intentional interference with prospective economic advantage and violation of California’s Business & Professions Code section 17200, generally related to Intermix’ decision to consummate its Series C Preferred Stock financing with VantagePoint in October 2003 and allege that Mr. Greenspan was “forced” to resign. The third through sixth causes of action assert various claims for breach of fiduciary duty related to the FIM Transaction and substantially mirror the allegations in the Intermix Media Shareholder Litigation. By Order of March 20, 2006, the court ordered that Mr. Greenspan’s claims based on the FIM Transaction be severed from the rest of his complaint and coordinated with the claims asserted in the Intermix Media Shareholder Litigation. The seventh cause of action is asserted against Intermix for indemnification. In his amended complaint, Mr. Greenspan seeks compensatory and consequential damages, punitive damages, fees and costs, injunctive relief and other remedies. Motions to dismiss the first six causes of action have been filed.were filed and, on October 6, 2006, granted without leave to amend. Intermix as well as News Corporation with respect to certain claims, is obligated to defend and indemnify the defendantsonly remaining defendant in the matter.action and the only remaining cause of action is the seventh action for indemnification. Intermix believes that the claims and allegations in the complaint arethis claim is without merit and expects that the defendants in the matter willintends to vigorously defend themselves.
Patent Litigation
In October 2005, Beneficial Innovations, Inc. (“BII”) filed a first amended patent infringement complaintitself against an Intermix subsidiary and another unaffiliated company in the United States District Court for the Central District of California. BII alleged, 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 sought to enjoin the Intermix subsidiary from infringing the 702 Patent and sought unspecified compensatory damages, fees and costs. On April 21, 2006, the parties entered into a settlement agreement pursuant to which BII’s lawsuit will be dismissed with prejudice. In consideration for such dismissal with prejudice, Intermix paid $100,000 to BII on May 1, 2006, for a non-exclusive, perpetual patent license for use of all BII’s patents by News Corporation and all of its subsidiaries.this claim.
News America Marketing
On January 18, 2006, Valassis Communications, Inc. (“Valassis”) filed a complaint against News America Incorporated, News America Marketing FSI, Inc. and News America Marketing Services, In-Store, Inc. (collectively “News America”) in the United States District Court for the Eastern District of Michigan. Valassis alleges that News America possesses monopoly power in a claimed in-store advertising and promotions market (the “in-store market”) and has used that power to gain an unfair advantage over Valassis in a purported market for coupons distributed by free standing inserts (“FSIs”). Valassis alleges that News America has entrenched its monopoly power in the alleged in-store market by entering into exclusive contracts with retailers. Valassis further alleges that News America has unlawfully bundled the sale of in-store marketing products with the sale of FSIs and that such bundling constitutes unlawful tying in violation of Sections 1 and 3 of the Sherman Antitrust Act of 1890, as amended (the “Sherman Act”). Valassis also asserts that News America has violated Section 2 of the Sherman Act, various state antitrust statutes and has tortiously interfered with Valassis’ actual or expected business relationships. Valassis’ complaint seeks injunctive relief, damages, fees and costs. On April 20, 2006, News America moved to dismiss Valassis’ complaint in its entirety for failure to state a cause of action. Simultaneously,On September 28, 2006, the Magistrate Judge issued a Report and Recommendation granting the motion. On October 16, 2006, Valassis filed an Amended Complaint, alleging the same causes of action. Pursuant to agreement among the parties, discovery has not yet commenced. News America movedAmerica’s deadline to stay discovery until resolution of the motionanswer or otherwise respond to dismiss.Valassis’ Amended Complaint is November 17, 2006. News America believes Valassis’ claims are without merit and intends to vigorously defend itself in this matter.
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 11—Contingencies (continued)
Other
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 the next twelve months, none of these arrangements that become exercisable are material.
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.
The Company’s operations are subject to tax in various domestic and international jurisdictions.jurisdictions and as a matter of course, the Company is regularly audited by federal, state and foreign tax authorities. The Company believes it has appropriately accrued for the expected outcome of all pending tax matters and does not currently anticipate that the ultimate resolution of pending tax matters will have a material adverse effect on its consolidated financial condition, future results of operations or liquidity.
Note 12—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, 2006 and 2005, the Company made discretionary contributions of $112$4 million and $127$29 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.
The components of net periodic benefit costs were as follows:
Pension Benefits | Postretirement Benefits | Pension Benefits | Postretirement Benefits | |||||||||||||||||||||||||||||
For the three months ended March 31, | For the three months ended September 30, | |||||||||||||||||||||||||||||||
2006 | 2005 | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | |||||||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||||||||||
Service cost benefits earned during the period | $ | 21 | $ | 22 | $ | 1 | $ | 1 | $ | 17 | $ | 21 | $ | 1 | $ | 1 | ||||||||||||||||
Interest costs on projected benefit obligation | 26 | 28 | 2 | 2 | 30 | 27 | 2 | 2 | ||||||||||||||||||||||||
Expected return on plan assets | (31 | ) | (29 | ) | — | — | (33 | ) | (31 | ) | — | — | ||||||||||||||||||||
Amortization of deferred losses | 11 | 7 | — | — | 5 | 11 | 1 | 1 | ||||||||||||||||||||||||
Other | 1 | — | (1 | ) | (1 | ) | — | 1 | (2 | ) | (2 | ) | ||||||||||||||||||||
Net periodic costs | $ | 28 | $ | 28 | $ | 2 | $ | 2 | $ | 19 | $ | 29 | $ | 2 | $ | 2 | ||||||||||||||||
For the nine months ended March 31, | ||||||||||||||||||||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||
Service cost benefits earned during the period | $ | 62 | $ | 66 | $ | 3 | $ | 3 | ||||||||||||||||||||||||
Interest costs on projected benefit obligation | 79 | 82 | 6 | 6 | ||||||||||||||||||||||||||||
Expected return on plan assets | (92 | ) | (85 | ) | — | — | ||||||||||||||||||||||||||
Amortization of deferred losses | 34 | 21 | 2 | 2 | ||||||||||||||||||||||||||||
Other | 1 | (2 | ) | (4 | ) | (5 | ) | |||||||||||||||||||||||||
Net periodic costs | $ | 84 | $ | 82 | $ | 7 | $ | 6 | ||||||||||||||||||||||||
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 13—Other, net
Other, net consisted of the following:
For the three months ended March 31, | For the nine months ended March 31, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
(in millions) | (in millions) | |||||||||||||||
Gain on sale of Innova(a) | $ | 206 | $ | — | $ | 206 | $ | — | ||||||||
Gain on sale of China Netcom(a) | — | — | 52 | — | ||||||||||||
Change in fair value of exchangeable securities(b) | (35 | ) | 14 | (8 | ) | 105 | ||||||||||
LYONs deferred financing costs(c) | (13 | ) | — | (13 | ) | — | ||||||||||
Loss on sale of Sky Multi-Country Partners(a) | — | — | — | (55 | ) | |||||||||||
Gain on sale of Rogers Sportsnet(a) | — | — | — | 39 | ||||||||||||
Loss on RPP exchange(d) | — | (77 | ) | — | (77 | ) | ||||||||||
Other | 12 | 1 | 6 | 3 | ||||||||||||
Total Other, net | $ | 170 | $ | (62 | ) | $ | 243 | $ | 15 | |||||||
For the three months ended September 30, | ||||||||
2006 | 2005 | |||||||
(in millions) | ||||||||
Gain on the sale of Sky Brasil(a) | $ | 261 | $ | — | ||||
Gain on the sale of Phoenix Satellite Television Holdings Limited(a) | 136 | — | ||||||
Gain on the sale of China Netcom(a) | — | 52 | ||||||
Change in fair value of exchangeable securities(b) | 38 | (41 | ) | |||||
Other | (7 | ) | — | |||||
Total Other, net | $ | 428 | $ | 11 | ||||
(a) | See Note 5—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 14—Segment Information
The Company is a diversified entertainment company, which manages and reports its businesses in eight segments:
Filmed Entertainment, which principally consists of the production and acquisition of live-action and animated motion pictures for distribution and licensing in all formats in all entertainment media worldwide, and the production of original television programming in the United States and Canada.
Television, which principally consists of the operation of 35 full power broadcast television stations, including nine duopolies, in the United States (of(Of these stations, 25 are affiliated with the FOX network, and ten are affiliated with the MyNetworkTV network. Prior to September 2006, nine areof the MyNetworkTV stations were affiliated with the UPN network until September 2006 and one iswas an independent station); the broadcasting of network programming in the United States; and the development, production and broadcasting of television programming in Asia.
Cable Network Programming, which principally consists of the productionlicensing and licensingproduction of programming distributed through cable television systems and direct broadcast satelliteDBS operators in the United States.
Direct Broadcast Satellite Television, which principally consists of the distribution of premium programming services via satellite directly to subscribers in Italy.
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 14—Segment Information (continued)
Magazines and Inserts,, which principally consists of the publication of free standing inserts, which are promotional booklets containing consumer offers distributed through insertion in local Sunday newspapers in the United States and providing in-store marketing products and services, primarily to consumer packaged goods manufacturers in the United States and Canada.
Newspapers, which principally consists of the publication of four national newspapers in the United Kingdom, the publication of more than 110 newspapers in Australia, and the publication of a mass circulation, metropolitan morning newspaper in the United States.
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 14—Segment Information (continued)
Book Publishing, which principally consists of the publication of English language books throughout the world.
Other, which includesincludes: NDS Group plc, a company engaged in the business of supplying open end-to-end digital technology and services to digital pay-television platform operators and content providers; News Outdoor, an advertising business which offers display advertising in locations primarily throughout Russia and Eastern Europe; FIM, which operates the Company’s Internet activities; and Global Cricket Corporation, which has the exclusive rights to broadcast the Cricket World Cup and other related International Cricket Council cricket events through 2007; News Outdoor, an advertising business which offers display advertising in locations throughout Russia and Eastern Europe; and Fox Interactive Media, which operates the Company’s Internet activities.2007.
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 14—Segment Information (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.
For the three months ended March 31, | For the nine months ended March 31, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
(in millions) | (in millions) | |||||||||||||||
Revenues: | ||||||||||||||||
Filmed Entertainment | $ | 1,388 | $ | 1,477 | $ | 4,414 | $ | 4,726 | ||||||||
Television | 1,347 | 1,414 | 3,991 | 3,982 | ||||||||||||
Cable Network Programming | 839 | 633 | 2,424 | 1,857 | ||||||||||||
Direct Broadcast Satellite Television | 675 | 624 | 1,793 | 1,620 | ||||||||||||
Magazines and Inserts | 300 | 283 | 832 | 774 | ||||||||||||
Newspapers | 1,015 | 1,062 | 3,037 | 2,937 | ||||||||||||
Book Publishing | 275 | 300 | 1,056 | 1,041 | ||||||||||||
Other | 359 | 250 | 998 | 814 | ||||||||||||
Total revenues | $ | 6,198 | $ | 6,043 | $ | 18,545 | $ | 17,751 | ||||||||
Operating income (loss): | ||||||||||||||||
Filmed Entertainment | $ | 225 | $ | 251 | $ | 892 | $ | 949 | ||||||||
Television | 286 | 221 | 629 | 608 | ||||||||||||
Cable Network Programming | 211 | 172 | 670 | 565 | ||||||||||||
Direct Broadcast Satellite Television | 69 | (21 | ) | (45 | ) | (247 | ) | |||||||||
Magazines and Inserts | 90 | 79 | 242 | 216 | ||||||||||||
Newspapers | 153 | 186 | 347 | 488 | ||||||||||||
Book Publishing | 26 | 30 | 173 | 152 | ||||||||||||
Other | (49 | ) | (29 | ) | (68 | ) | (122 | ) | ||||||||
Total operating income | 1,011 | 889 | 2,840 | 2,609 | ||||||||||||
Interest expense, net | (141 | ) | (143 | ) | (410 | ) | (405 | ) | ||||||||
Equity earnings of affiliates | 264 | 91 | 610 | 154 | ||||||||||||
Other, net | 170 | (62 | ) | 243 | 15 | |||||||||||
Income from continuing operations before income tax expense and minority interest in subsidiaries | 1,304 | 775 | 3,283 | 2,373 | ||||||||||||
Income tax expense | (471 | ) | (317 | ) | (1,145 | ) | (773 | ) | ||||||||
Minority interest in subsidiaries, net of tax | (13 | ) | (58 | ) | (44 | ) | (189 | ) | ||||||||
Income from continuing operations | 820 | 400 | 2,094 | 1,411 | ||||||||||||
Gain on disposition of discontinued operations, net of tax | — | — | 381 | — | ||||||||||||
Income before cumulative effect of accounting change | 820 | 400 | 2,475 | 1,411 | ||||||||||||
Cumulative effect of accounting change, net of tax | — | — | (1,013 | ) | — | |||||||||||
Net income | $ | 820 | $ | 400 | $ | 1,462 | $ | 1,411 | ||||||||
InterestOperating 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 Equity earningsincome (loss), cash flow and other measures of affiliates, Other, net, Minority interestfinancial performance reported in subsidiaries, net of taxaccordance with GAAP. Operating income (loss) before depreciation and Income tax expenseamortization 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 not allocated to segments, as they are not undersignificant components in assessing the control of segment management.Company’s financial performance.
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 14—Segment Information (continued)
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).
For the three months ended September 30, | ||||||||
2006 | 2005 | |||||||
(in millions) | ||||||||
Revenues: | ||||||||
Filmed Entertainment | $ | 1,213 | $ | 1,419 | ||||
Television | 1,103 | 1,048 | ||||||
Cable Network Programming | 889 | 775 | ||||||
Direct Broadcast Satellite Television | 622 | 498 | ||||||
Magazines and Inserts | 275 | 267 | ||||||
Newspapers | 1,049 | 1,012 | ||||||
Book Publishing | 368 | 391 | ||||||
Other | 395 | 272 | ||||||
Total revenues | $ | 5,914 | $ | 5,682 | ||||
Operating income (loss): | ||||||||
Filmed Entertainment | $ | 239 | $ | 368 | ||||
Television | 192 | 160 | ||||||
Cable Network Programming | 249 | 197 | ||||||
Direct Broadcast Satellite Television | (13 | ) | (61 | ) | ||||
Magazines and Inserts | 78 | 76 | ||||||
Newspapers | 124 | 125 | ||||||
Book Publishing | 55 | 70 | ||||||
Other | (73 | ) | (26 | ) | ||||
Total operating income | 851 | 909 | ||||||
Interest expense, net | (125 | ) | (128 | ) | ||||
Equity earnings of affiliates | 243 | 186 | ||||||
Other, net | 428 | 11 | ||||||
Income before income tax expense, minority interest in subsidiaries and cumulative effect of accounting change | 1,397 | 978 | ||||||
Income tax expense | (538 | ) | (382 | ) | ||||
Minority interest in subsidiaries, net of tax | (16 | ) | (16 | ) | ||||
Income before cumulative effect of accounting change | 843 | 580 | ||||||
Cumulative effect of accounting change, net of tax | — | (1,013 | ) | |||||
Net income (loss) | $ | 843 | $ | (433 | ) | |||
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 14—Segment Information (continued)
Interest expense, net, Equity earnings of affiliates, Other, net, Income tax expense and Minority interest in subsidiaries 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 $242$197 million and $219$185 million for the three months ended March 31, 2006 and 2005, respectively, and of approximately $637 million and $538 million for the nine months ended March 31,September 30, 2006 and 2005, respectively, have been eliminated within the Filmed Entertainment segment. Intersegment operating profit, generated primarily by the Filmed Entertainment segment, of approximately $6 million and operating losses of approximately $2$12 million for the three months ended March 31,September 30, 2006 and 2005, respectively, and intersegment operating profits of approximately $27 million and $26 million for the nine months ended March 31, 2006 and 2005, respectively, have been eliminated within the Filmed Entertainment segment.
For the three months ended March 31, 2006 | For the three months ended September 30, 2006 | |||||||||||||||||||||||||||
Operating income (loss) | Depreciation and amortization | Amortization of cable distribution investments | Operating income (loss) before depreciation and amortization | Operating income (loss) | Depreciation and amortization | Amortization of cable distribution investments | Operating income (loss) before depreciation and amortization | |||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||||||
Filmed Entertainment | $ | 225 | $ | 17 | $ | — | $ | 242 | $ | 239 | $ | 20 | $ | — | $ | 259 | ||||||||||||
Television | 286 | 24 | — | 310 | 192 | 22 | — | 214 | ||||||||||||||||||||
Cable Network Programming | 211 | 13 | 25 | 249 | 249 | 13 | 23 | 285 | ||||||||||||||||||||
Direct Broadcast Satellite Television | 69 | 37 | — | 106 | (13 | ) | 48 | — | 35 | |||||||||||||||||||
Magazines and Inserts | 90 | 2 | — | 92 | 78 | 2 | — | 80 | ||||||||||||||||||||
Newspapers | 153 | 65 | — | 218 | 124 | 68 | — | 192 | ||||||||||||||||||||
Book Publishing | 26 | 2 | — | 28 | 55 | 2 | — | 57 | ||||||||||||||||||||
Other | (49 | ) | 29 | — | (20 | ) | (73 | ) | 32 | — | (41 | ) | ||||||||||||||||
Total | $ | 1,011 | $ | 189 | $ | 25 | $ | 1,225 | $ | 851 | $ | 207 | $ | 23 | $ | 1,081 | ||||||||||||
For the three months ended March 31, 2005 | For the three months ended September 30, 2005 | |||||||||||||||||||||||||||
Operating income (loss) | Depreciation and amortization | Amortization of cable distribution investments | Operating income (loss) before depreciation and amortization | Operating income (loss) | Depreciation and amortization | Amortization of cable distribution investments | Operating income (loss) before depreciation and amortization | |||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||||||
Filmed Entertainment | $ | 251 | $ | 14 | $ | — | $ | 265 | $ | 368 | $ | 19 | $ | — | $ | 387 | ||||||||||||
Television | 221 | 20 | — | 241 | 160 | 19 | — | 179 | ||||||||||||||||||||
Cable Network Programming | 172 | 10 | 28 | 210 | 197 | 12 | 27 | 236 | ||||||||||||||||||||
Direct Broadcast Satellite Television | (21 | ) | 42 | — | 21 | (61 | ) | 41 | — | (20 | ) | |||||||||||||||||
Magazines and Inserts | 79 | 1 | — | 80 | 76 | 2 | — | 78 | ||||||||||||||||||||
Newspapers | 186 | 70 | — | 256 | 125 | 66 | — | 191 | ||||||||||||||||||||
Book Publishing | 30 | 1 | — | 31 | 70 | 2 | — | 72 | ||||||||||||||||||||
Other | (29 | ) | 18 | — | (11 | ) | (26 | ) | 14 | — | (12 | ) | ||||||||||||||||
Total | $ | 889 | $ | 176 | $ | 28 | $ | 1,093 | $ | 909 | $ | 175 | $ | 27 | $ | 1,111 | ||||||||||||
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 14—Segment Information (continued)
For the nine months ended March 31, 2006 | ||||||||||||||
Operating income (loss) | Depreciation and amortization | Amortization of cable distribution investments | Operating income (loss) before depreciation and amortization | |||||||||||
(in millions) | ||||||||||||||
Filmed Entertainment | $ | 892 | $ | 63 | $ | — | $ | 955 | ||||||
Television | 629 | 66 | — | 695 | ||||||||||
Cable Network Programming | 670 | 38 | 78 | 786 | ||||||||||
Direct Broadcast Satellite Television | (45 | ) | 121 | — | 76 | |||||||||
Magazines and Inserts | 242 | 5 | — | 247 | ||||||||||
Newspapers | 347 | 196 | — | 543 | ||||||||||
Book Publishing | 173 | 5 | — | 178 | ||||||||||
Other | (68 | ) | 67 | — | (1 | ) | ||||||||
Total | $ | 2,840 | $ | 561 | $ | 78 | $ | 3,479 | ||||||
For the nine months ended March 31, 2005 | ||||||||||||||
Operating income (loss) | Depreciation and amortization | Amortization of cable distribution investments | Operating income (loss) before depreciation and amortization | |||||||||||
(in millions) | ||||||||||||||
Filmed Entertainment | $ | 949 | $ | 39 | $ | — | $ | 988 | ||||||
Television | 608 | 61 | — | 669 | ||||||||||
Cable Network Programming | 565 | 30 | 86 | 681 | ||||||||||
Direct Broadcast Satellite Television | (247 | ) | 114 | — | (133 | ) | ||||||||
Magazines and Inserts | 216 | 4 | — | 220 | ||||||||||
Newspapers | 488 | 151 | — | 639 | ||||||||||
Book Publishing | 152 | 4 | — | 156 | ||||||||||
Other | (122 | ) | 50 | — | (72 | ) | ||||||||
Total | $ | 2,609 | $ | 453 | $ | 86 | $ | 3,148 | ||||||
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 14—Segment Information (continued)
At March 31, 2006 | At June 30, 2005 | |||||
(in millions) | ||||||
Total assets: | ||||||
Filmed Entertainment | $ | 6,810 | $ | 5,971 | ||
Television(1) | 13,180 | 14,275 | ||||
Cable Network Programming | 7,260 | 7,065 | ||||
Direct Broadcast Satellite Television | 2,067 | 1,862 | ||||
Magazines and Inserts | 1,283 | 1,253 | ||||
Newspapers | 4,717 | 5,195 | ||||
Book Publishing | 1,452 | 1,382 | ||||
Other | 8,103 | 7,421 | ||||
Investments | 10,393 | 10,268 | ||||
Total assets | $ | 55,265 | $ | 54,692 | ||
Goodwill and Intangible assets, net: | ||||||
Filmed Entertainment | $ | 2,050 | $ | 1,807 | ||
Television(1) | 10,269 | 11,892 | ||||
Cable Network Programming | 4,885 | 4,929 | ||||
Direct Broadcast Satellite Television | 536 | 537 | ||||
Magazines and Inserts | 1,004 | 1,002 | ||||
Newspapers | 1,649 | 1,724 | ||||
Book Publishing | 501 | 501 | ||||
Other | 2,534 | 1,069 | ||||
Total goodwill and intangibles, net | $ | 23,428 | $ | 23,461 | ||
At September 30, 2006 | At June 30, 2006 | |||||
(in millions) | ||||||
Total assets: | ||||||
Filmed Entertainment | $ | 6,634 | $ | 6,489 | ||
Television | 13,007 | 12,903 | ||||
Cable Network Programming | 7,616 | 7,813 | ||||
Direct Broadcast Satellite Television | 1,965 | 2,124 | ||||
Magazines and Inserts | 1,272 | 1,257 | ||||
Newspapers | 4,688 | 4,524 | ||||
Book Publishing | 1,588 | 1,452 | ||||
Other | 9,971 | 9,486 | ||||
Investments | 10,845 | 10,601 | ||||
Total assets | $ | 57,586 | $ | 56,649 | ||
Goodwill and Intangible assets, net: | ||||||
Filmed Entertainment | $ | 2,003 | $ | 2,010 | ||
Television | 10,195 | 10,195 | ||||
Cable Network Programming | 5,387 | 5,393 | ||||
Direct Broadcast Satellite Television | 558 | 563 | ||||
Magazines and Inserts | 1,006 | 1,006 | ||||
Newspapers | 1,717 | 1,709 | ||||
Book Publishing | 508 | 508 | ||||
Other | 2,643 | 2,610 | ||||
Total goodwill and intangibles, net | $ | 24,017 | $ | 23,994 | ||
Note 15—Earnings Per Share
Earnings per share (“EPS”) is computed individually for the Class A Common Stock and Class B Common Stock. Net income is apportioned to both Class A stockholders and Class B stockholders on thea ratio of 1.2 to 1, respectively, in accordance with the rights of the stockholders 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 sharesCommon Stock is increased by 20% (the “Adjusted Class”) and is then compared to the sum of the weighted average Class B sharesCommon Stock and the weighted average Adjusted Class. The resulting percentage is then applied to the Net income to determine the apportionment for the Class A stockholders with the balance attributable to the Class B stockholders.
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 15—Earnings Per Share (continued)
EPS has been presented in the two-class presentation, as the shares of Class B Common Stock participate in dividends with the shares of Class A Common Stock. The following tables set forth the computation of basic and diluted earnings per share under SFAS No. 128, “Earnings per Share”:
For the three months ended March 31, | ||||||
2006 | 2005 | |||||
(in millions) | ||||||
Income from continuing operations available to shareholders—basic | $ | 820 | $ | 400 | ||
Interest on convertible debt(a) | — | 4 | ||||
Income from continuing operations available to shareholders—diluted | $ | 820 | $ | 404 | ||
Net income available to shareholders—basic | $ | 820 | $ | 400 | ||
Interest on convertible debt(a) | — | 4 | ||||
Net income available to shareholders—diluted | $ | 820 | $ | 404 | ||
For the three months ended September 30, | |||||||
2006 | 2005 | ||||||
(in millions) | |||||||
Income before cumulative effect of accounting change available to shareholder—basic | $ | 843 | $ | 580 | |||
Interest on convertible debt(a) | — | 5 | |||||
Income before cumulative effect of accounting change available to shareholders—diluted | $ | 843 | $ | 585 | |||
Cumulative effect of accounting change, net of tax | $ | — | $ | (1,013 | ) | ||
Net income (loss) available to shareholders—basic | $ | 843 | $ | (433 | ) | ||
Interest on convertible debt(a) | — | 5 | |||||
Net income (loss) available to shareholders—diluted | $ | 843 | $ | (428 | ) | ||
(a) | In February 2006, the Company redeemed 92% of the Liquid Yield Option NotesTM (“LYONs”) for cash at the specified redemption amount of $594.25 per LYON. |
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 15—Earnings Per Share (continued)
For the three months ended September 30, | |||||||||||||||||||||
2006 | 2005 | ||||||||||||||||||||
Class A | Class B | Total | Class A | Class B | Total | ||||||||||||||||
(in millions, except per share data) | |||||||||||||||||||||
Allocation of income—basic: | |||||||||||||||||||||
Income before cumulative effect of accounting change | $ | 611 | $ | 232 | $ | 843 | $ | 419 | $ | 161 | $ | 580 | |||||||||
Cumulative effect of accounting change, net of tax | — | — | — | (732 | ) | (281 | ) | (1,013 | ) | ||||||||||||
Net income (loss) available to stockholders | 611 | 232 | 843 | (313 | ) | (120 | ) | (433 | ) | ||||||||||||
Weighted average shares used in income allocation | 2,606 | 987 | 3,593 | 2,684 | 1,030 | 3,714 | |||||||||||||||
Allocation of income—diluted: | |||||||||||||||||||||
Income before cumulative effect of accounting change | $ | 613 | $ | 230 | $ | 843 | $ | 425 | $ | 160 | $ | 585 | |||||||||
Cumulative effect of accounting change, net of tax | — | — | — | (737 | ) | (276 | ) | (1,013 | ) | ||||||||||||
Net income (loss) available to stockholders | 613 | 230 | 843 | (311 | ) | (117 | ) | (428 | ) | ||||||||||||
Weighted average shares used in income allocation | 2,630 | 987 | 3,617 | 2,746 | 1,030 | 3,776 | |||||||||||||||
Weighted average shares—basic | 2,172 | 987 | 3,159 | 2,237 | 1,030 | 3,267 | |||||||||||||||
Shares issuable under equity based compensation plans | 19 | — | 19 | 12 | — | 12 | |||||||||||||||
Convertible debt(a) | — | — | — | 37 | — | 37 | |||||||||||||||
Other | — | — | — | 2 | — | 2 | |||||||||||||||
Weighted average shares—diluted | 2,191 | 987 | 3,178 | 2,288 | 1,030 | 3,318 | |||||||||||||||
Earnings (loss) per share—basic: | |||||||||||||||||||||
Income before cumulative effect of accounting change | $ | 0.28 | $ | 0.23 | $ | 0.19 | $ | 0.16 | |||||||||||||
Cumulative effect of accounting change, net of tax | $ | — | $ | — | $ | (0.33 | ) | $ | (0.27 | ) | |||||||||||
Net income (loss) | $ | 0.28 | $ | 0.23 | $ | (0.14 | ) | $ | (0.12 | ) | |||||||||||
Earnings (loss) per share—diluted: | |||||||||||||||||||||
Income before cumulative effect of accounting change | $ | 0.28 | $ | 0.23 | $ | 0.19 | $ | 0.15 | |||||||||||||
Cumulative effect of accounting change, net of tax | $ | — | $ | — | $ | (0.32 | ) | $ | (0.27 | ) | |||||||||||
Net income (loss) | $ | 0.28 | $ | 0.23 | $ | (0.14 | ) | $ | (0.11 | ) |
(a) | In February 2006, the Company redeemed 92% of the LYONs for cash at the specified redemption amount of $594.25 per LYON. |
For the three months ended March 31, | ||||||||||||||||||
2006 | 2005 | |||||||||||||||||
Class A | Class B | Total | Class A | Class B | Total | |||||||||||||
(in millions, except per share data) | ||||||||||||||||||
Allocation of income—basic: | ||||||||||||||||||
Income from continuing operations | $ | 593 | $ | 227 | $ | 820 | $ | 273 | $ | 127 | $ | 400 | ||||||
Net income available to shareholders | $ | 593 | $ | 227 | $ | 820 | $ | 273 | $ | 127 | $ | 400 | ||||||
Weighted average shares used in income allocation | 2,622 | 1,004 | 3,626 | 2,272 | 1,045 | 3,317 | ||||||||||||
Allocation of income—diluted: | ||||||||||||||||||
Income from continuing operations | $ | 594 | $ | 226 | $ | 820 | $ | 280 | $ | 124 | $ | 404 | ||||||
Net income available to shareholders | $ | 594 | $ | 226 | $ | 820 | $ | 280 | $ | 124 | $ | 404 | ||||||
Weighted average shares used in income allocation | 2,643 | 1,004 | 3,647 | 2,359 | 1,045 | 3,404 | ||||||||||||
Weighted average shares—basic | 2,185 | 1,004 | 3,189 | 1,893 | 1,045 | 2,938 | ||||||||||||
Stock options | 18 | — | 18 | 36 | — | 36 | ||||||||||||
Convertible debt(a) | — | — | — | 37 | — | 37 | ||||||||||||
Weighted average shares—diluted | 2,203 | 1,004 | 3,207 | 1,966 | 1,045 | 3,011 | ||||||||||||
Earnings per share—basic: | ||||||||||||||||||
Income from continuing operations | $ | 0.27 | $ | 0.23 | $ | 0.14 | $ | 0.12 | ||||||||||
Net income | $ | 0.27 | $ | 0.23 | $ | 0.14 | $ | 0.12 | ||||||||||
Earnings per share—diluted: | ||||||||||||||||||
Income from continuing operations | $ | 0.27 | $ | 0.22 | $ | 0.14 | $ | 0.12 | ||||||||||
Net income | $ | 0.27 | $ | 0.22 | $ | 0.14 | $ | 0.12 |
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 15—Earnings Per Share (continued)
For the nine months ended March 31, | ||||||||
2006 | 2005 | |||||||
(in millions) | ||||||||
Income from continuing operations | $ | 2,094 | $ | 1,411 | ||||
Perpetual preference dividends(a) | — | (10 | ) | |||||
Income from continuing operations available to shareholders—basic | 2,094 | 1,401 | ||||||
Interest on convertible debt(b) | — | 14 | ||||||
Other | (1 | ) | — | |||||
Income from continuing operations available to shareholders—diluted | $ | 2,093 | $ | 1,415 | ||||
Gain on disposition of discontinued operations | $ | 381 | $ | — | ||||
Cumulative effect of accounting change, net of tax | $ | (1,013 | ) | $ | — | |||
Net income | $ | 1,462 | $ | 1,411 | ||||
Perpetual preference dividends(a) | — | (10 | ) | |||||
Net income available to shareholders—basic | 1,462 | 1,401 | ||||||
Interest on convertible debt(b) | — | 14 | ||||||
Other | (1 | ) | ||||||
Net income available to shareholders—diluted | $ | 1,461 | $ | 1,415 | ||||
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 15—Earnings Per Share (continued)
For the nine months ended March 31, | |||||||||||||||||||||
2006 | 2005 | ||||||||||||||||||||
Class A | Class B | Total | Class A | Class B | Total | ||||||||||||||||
(in millions, except per share data) | |||||||||||||||||||||
Allocation of income—basic: | |||||||||||||||||||||
Income from continuing operations | $ | 1,512 | $ | 582 | $ | 2,094 | $ | 970 | $ | 431 | $ | 1,401 | |||||||||
Gain on disposition of discontinued operations | 275 | 106 | 381 | — | — | — | |||||||||||||||
Cumulative effect of accounting change, net of tax | (732 | ) | (281 | ) | (1,013 | ) | — | — | — | ||||||||||||
Net income available to shareholders | $ | 1,056 | $ | 406 | $ | 1,462 | $ | 970 | $ | 431 | $ | 1,401 | |||||||||
Weighted average shares used in income allocation | 2,650 | 1,020 | 3,670 | 2,279 | 1,014 | 3,293 | |||||||||||||||
Allocation of income—diluted: | |||||||||||||||||||||
Income from continuing operations | $ | 1,515 | $ | 578 | $ | 2,093 | $ | 990 | $ | 425 | $ | 1,415 | |||||||||
Gain on disposition of discontinued operations | 276 | 105 | 381 | — | — | — | |||||||||||||||
Cumulative effect of accounting change, net of tax | (733 | ) | (280 | ) | (1,013 | ) | — | — | — | ||||||||||||
Net income available to shareholders | $ | 1,058 | $ | 403 | $ | 1,461 | $ | 990 | $ | 425 | $ | 1,415 | |||||||||
Weighted average shares used in income allocation | 2,672 | 1,020 | 3,692 | 2,363 | 1,014 | 3,377 | |||||||||||||||
Weighted average shares—basic | 2,208 | 1,020 | 3,228 | 1,899 | 1,014 | 2,913 | |||||||||||||||
Stock options | 19 | — | 19 | 33 | — | 33 | |||||||||||||||
Convertible debt(a) | — | — | — | 37 | — | 37 | |||||||||||||||
Weighted average shares—diluted | 2,227 | 1,020 | 3,247 | 1,969 | 1,014 | 2,983 | |||||||||||||||
Earnings per share—basic: | |||||||||||||||||||||
Income from continuing operations | $ | 0.68 | $ | 0.57 | $ | 0.51 | $ | 0.43 | |||||||||||||
Gain on disposition of discontinued operations | $ | 0.12 | $ | 0.10 | $ | — | $ | — | |||||||||||||
Cumulative effect of accounting change, net of tax | $ | (0.33 | ) | $ | (0.28 | ) | $ | — | $ | — | |||||||||||
Net income | $ | 0.48 | $ | 0.40 | $ | 0.51 | $ | 0.43 | |||||||||||||
Earnings per share—diluted: | |||||||||||||||||||||
Income from continuing operations | $ | 0.68 | $ | 0.57 | $ | 0.50 | $ | 0.42 | |||||||||||||
Gain on disposition of discontinued operations | $ | 0.12 | $ | 0.10 | $ | — | $ | — | |||||||||||||
Cumulative effect of accounting change, net of tax | $ | (0.33 | ) | $ | (0.27 | ) | $ | — | $ | — | |||||||||||
Net income | $ | 0.48 | $ | 0.40 | $ | 0.50 | $ | 0.42 |
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 16—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, | ||||||||||||||||||||||
2006 | 2005 | 2006 | 2005 | 2006 | 2005 | |||||||||||||||||||
(in millions) | (in millions) | (in millions) | ||||||||||||||||||||||
Interest income | $ | 66 | $ | 50 | $ | 182 | $ | 132 | $ | 75 | $ | 61 | ||||||||||||
Interest expense | (217 | ) | (201 | ) | (615 | ) | (563 | ) | (204 | ) | (194 | ) | ||||||||||||
Interest capitalized | 10 | 8 | 23 | 26 | 4 | 5 | ||||||||||||||||||
Interest expense, net | $ | (141 | ) | $ | (143 | ) | $ | (410 | ) | $ | (405 | ) | $ | (125 | ) | $ | (128 | ) | ||||||
Supplemental Cash Flows Information
For the nine months ended March 31, | For the three months ended September 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
(in millions) | (in millions) | |||||||||||||||
Supplemental cash flows information: | ||||||||||||||||
Cash paid for income taxes | $ | 407 | $ | 324 | $ | (96 | ) | $ | (90 | ) | ||||||
Cash paid for interest | 469 | 461 | (132 | ) | (131 | ) | ||||||||||
Sale of other investments | 6 | 5 | ||||||||||||||
Purchase of other investments | (23 | ) | (5 | ) | ||||||||||||
Supplemental information on businesses acquired: | ||||||||||||||||
Fair value of assets acquired | 1,725 | 8,022 | 140 | 848 | ||||||||||||
Cash acquired | 25 | 33 | — | 15 | ||||||||||||
Less: Liabilities assumed | (152 | ) | (778 | ) | (5 | ) | (68 | ) | ||||||||
Consideration payable | — | — | — | (581 | ) | |||||||||||
Minority interest acquired | 39 | — | 22 | 39 | ||||||||||||
Cash paid | (1,604 | ) | (174 | ) | (157 | ) | (253 | ) | ||||||||
Fair value of stock consideration | $ | 33 | $ | 7,103 | $ | — | $ | — | ||||||||
Note 17—Subsequent Events
On August 8, 2006, the Company announced that in accordance with the terms of the settlement of a lawsuit regarding the Company’s stockholder rights plan, the Board approved the adoption of the Amended and Restated Rights Plan, which extended the term of the Company’s then existing stockholder rights plan from November 2007 to October 2008. The Board has the right to extend the term of the Amended and Restated Rights Plan for an additional year if the situation with Liberty has not, in the Board’s judgment, been resolved. The terms of the Amended and Restated Rights Plan remain the same as the Company’s existing stockholder rights plan in all other material respects. Pursuant to the terms of the settlement, on October 20, 2006, the Amended and Restated Rights Plan was presented for a vote of the Company’s Class B stockholders at the Company’s 2006 annual meeting of stockholders and the stockholders voted in favor of its approval. (See Note 11 Contingencies for more information on the settlement of the lawsuit)
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 17—Subsequent Events (continued)
In AprilOctober 2006, certain cable systems in Taiwan entered into an agreement to be acquired. The acquisition is subject to regulatory approval by the Taiwan government and other conditions. The Company sold Sky Radio Limited, a commercial radio station groupcurrently has minority interests in the Netherlandsvarious cable systems in Taiwan to be acquired and Germany, to Telegraaf Media Groep N.V. and ING Corporate Investments Participaties B.V., for cash consideration of approximately $225 million. The Company expects to record a gain on the sale of Sky Radio Limited.this transaction.
In MayOctober 2006, the Company acquired a regional cable sports channel7.3% share in John Fairfax Holdings, Ltd., an Australian newspaper publisher, for approximately $375 million from Time Warner Inc. This channel has rights to the National Hockey League’s Atlanta Thrashers and shares rights to Major League Baseball’s Atlanta Braves and the National Basketball Association’s Atlanta Hawks with one of the Company’s existing regional sports networks.
On June 13, 2005, the Company announced that its Board approved a stock repurchase program, under which the Company was authorized to acquire up to an aggregate of $3.0 billion in the Company’s Class A and Class B common stock. In May 2006, the Company announced that the Board had authorized increasing the total amount of the stock repurchase program to $6.0 billion.$295 million.
Note 18—Supplemental Guarantor Information
On June 27, 2003, News America Incorporated (“NAI”), an indirect wholly-owned subsidiary of News Corporation, 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, FEG Holdings, Inc., Fox Entertainment Group, Inc., News America Marketing FSI, LLC,L.L.C., News Publishing Australia Limited and News Australia Holdings Pty Limited are guarantors (the “Guarantors”) under the Credit Agreement. The guarantors are wholly owned by the Company or NAI and the guarantees provided are full and unconditional and joint and several.
The Credit Agreement provides a $1.75 billion revolving credit facility with a sub-limit of $600 million available for the issuance of letters of credit, and expires on June 30, 2008. Borrowings are in U.S. dollars only, while letters of credit are issuable in U.S. dollars or Euros. The significant terms of the Credit Agreement include the requirement that the Company maintain specific gearing and interest coverage ratios and limitations on secured indebtedness. The Company pays a facility fee of 0.15% regardless of facility usage. The Company pays interest of a margin over LIBOR for borrowings and a letter of credit fee of 0.60%. The Company is subject to an additional fee of 0.125% if borrowings under the facility exceed 25% of the committed facility. The interest and fees are based on the Company’s current debt rating.
The Guarantors presently guarantee the senior public indebtedness of NAI. The supplemental condensed consolidating financial information of the Guarantors should be read in conjunction with the unaudited consolidated financial statements included herein.
In accordance with SEC rules and regulations of the SEC, the Company uses the equity method to account for the results of all of the non-guarantor subsidiaries, representing substantially all of the Company’s consolidated results of operations, excluding certain intercompany eliminations.
The following condensed, consolidating financial statements present the results of operations, financial position and cash flows of NAI, News Corporation, the subsidiary guarantors of News Corporation, the non-guarantor subsidiaries of News Corporation and the eliminations and reclassifications necessary to arrive at the information for the Company on a consolidated basis.
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 18—Supplemental Guarantor Information (continued)
Supplemental Condensed Consolidating Statement of Operations
For the ninethree months ended March 31,September 30, 2006
(US$ 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 | 5 | — | 493 | 18,047 | — | 18,545 | $ | 1 | $ | — | $ | 166 | $ | 5,747 | $ | — | $ | 5,914 | ||||||||||||||||||||||||
Expenses | 159 | — | 329 | 15,217 | — | 15,705 | 68 | — | 118 | 4,877 | — | 5,063 | ||||||||||||||||||||||||||||||
Operating income (loss) | (154 | ) | — | 164 | 2,830 | — | 2,840 | |||||||||||||||||||||||||||||||||||
Operating (loss) income | (67 | ) | — | 48 | 870 | — | 851 | |||||||||||||||||||||||||||||||||||
Other (Expense) Income: | ||||||||||||||||||||||||||||||||||||||||||
Other (expense) Income: | ||||||||||||||||||||||||||||||||||||||||||
Interest expense, net | (1,196 | ) | (75 | ) | 116 | 745 | — | (410 | ) | (455 | ) | (72 | ) | 131 | 271 | — | (125 | ) | ||||||||||||||||||||||||
Equity earnings (losses) of affiliates | — | — | 21 | 589 | — | 610 | ||||||||||||||||||||||||||||||||||||
Equity earnings of affiliates | 1 | — | 6 | 236 | — | 243 | ||||||||||||||||||||||||||||||||||||
Earnings (losses) from subsidiary entities | 1,037 | 1,607 | 1,760 | — | (4,404 | ) | — | 361 | 936 | 1,287 | — | (2,584 | ) | — | ||||||||||||||||||||||||||||
Other, net | 36 | (70 | ) | 22 | 255 | — | 243 | 30 | (21 | ) | (35 | ) | 454 | — | 428 | |||||||||||||||||||||||||||
Income (loss) before income tax expense and minority interest in subsidiaries | (277 | ) | 1,462 | 2,083 | 4,419 | (4,404 | ) | 3,283 | ||||||||||||||||||||||||||||||||||
Income tax (expense) benefit | 97 | — | (727 | ) | (1,542 | ) | 1,027 | (1,145 | ) | |||||||||||||||||||||||||||||||||
Income (loss) before income tax expense, minority interest in subsidiaries and cumulative effect of accounting change | (130 | ) | 843 | 1,437 | 1,831 | (2,584 | ) | 1,397 | ||||||||||||||||||||||||||||||||||
Income tax benefit (expense) | 50 | — | (554 | ) | (705 | ) | 671 | (538 | ) | |||||||||||||||||||||||||||||||||
Minority interest in subsidiaries, net of tax | — | — | — | (44 | ) | — | (44 | ) | — | — | — | (16 | ) | — | (16 | ) | ||||||||||||||||||||||||||
Income (loss) from continuing operations | (180 | ) | 1,462 | 1,356 | 2,833 | (3,377 | ) | 2,094 | ||||||||||||||||||||||||||||||||||
Gain (loss) on disposal of discontinued operations | — | — | — | 381 | — | 381 | ||||||||||||||||||||||||||||||||||||
Income (loss) before cumulative effect of accounting change | (180 | ) | 1,462 | 1,356 | 3,214 | (3,377 | ) | 2,475 | (80 | ) | 843 | 883 | 1,110 | (1,913 | ) | 843 | ||||||||||||||||||||||||||
Cumulative effect of accounting change, net of tax | — | — | — | (1,013 | ) | — | (1,013 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||||||
Net income (loss) | (180 | ) | 1,462 | 1,356 | 2,201 | (3,377 | ) | 1,462 | ||||||||||||||||||||||||||||||||||
Net (loss) income | $ | (80 | ) | $ | 843 | $ | 883 | $ | 1,110 | $ | (1,913 | ) | $ | 843 | ||||||||||||||||||||||||||||
See notes to supplemental guarantor information
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 18—Supplemental Guarantor Information (continued)
Supplemental Condensed Consolidating Statement of Operations
For the nine month periodthree 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 income (loss) | (182 | ) | — | 141 | 2,650 | — | 2,609 | ||||||||||||||||||||||||||||||||||
Operating (loss) income | (68 | ) | — | 58 | 919 | — | 909 | ||||||||||||||||||||||||||||||||||
Other (Expense) Income: | |||||||||||||||||||||||||||||||||||||||||
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 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 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 | — | — | (184 | ) | (5 | ) | — | (189 | ) | — | — | — | (16 | ) | — | (16 | ) | ||||||||||||||||||||||||
Net income (loss) | 83 | 1,411 | 693 | 2,098 | (2,874 | ) | 1,411 | ||||||||||||||||||||||||||||||||||
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 (loss) income | $ | (168 | ) | $ | (433 | ) | $ | (105 | ) | $ | (189 | ) | $ | 462 | $ | (433 | ) | ||||||||||||||||||||||||
See notes to supplemental guarantor information
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 18—Supplemental Guarantor Information (continued)
Supplemental Condensed Consolidating Balance Sheet
At March 31,September 30, 2006
(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 | |||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||
Current Assets: | ||||||||||||||||||||||||||||||||||||
Current assets: | ||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | 2,530 | 1 | — | 2,793 | — | 5,324 | $ | 4,465 | $ | — | $ | — | $ | 1,827 | $ | — | $ | 6,292 | ||||||||||||||||||
Receivables, net | 26 | — | — | 4,867 | — | 4,893 | 26 | 7 | — | 5,236 | — | 5,269 | ||||||||||||||||||||||||
Inventories, net | — | — | 52 | 1,765 | — | 1,817 | — | — | 43 | 1,860 | — | 1,903 | ||||||||||||||||||||||||
Other | 10 | — | — | 337 | 21 | 368 | 11 | — | 1 | 387 | — | 399 | ||||||||||||||||||||||||
Total Current Assets | 2,566 | 1 | 52 | 9,762 | 21 | 12,402 | ||||||||||||||||||||||||||||||
Total current assets | 4,502 | 7 | 44 | 9,310 | — | 13,863 | ||||||||||||||||||||||||||||||
Non-Current Assets: | ||||||||||||||||||||||||||||||||||||
Non-current assets: | ||||||||||||||||||||||||||||||||||||
Receivables | 1 | — | — | 702 | — | 703 | 2 | — | — | 459 | — | 461 | ||||||||||||||||||||||||
Inventories, net | — | — | — | 2,872 | — | 2,872 | — | — | — | 2,563 | — | 2,563 | ||||||||||||||||||||||||
Property, plant and equipment, net | 85 | — | 1 | 4,419 | — | 4,505 | 81 | — | 2 | 4,786 | — | 4,869 | ||||||||||||||||||||||||
Intangible assets | 121 | — | 70 | 11,089 | — | 11,280 | ||||||||||||||||||||||||||||||
Intangible assets, net | — | — | 70 | 11,344 | — | 11,414 | ||||||||||||||||||||||||||||||
Goodwill | — | — | — | 12,148 | — | 12,148 | 4 | — | — | 12,599 | — | 12,603 | ||||||||||||||||||||||||
Other | 134 | — | — | 828 | — | 962 | 151 | 1 | 133 | 683 | — | 968 | ||||||||||||||||||||||||
Investments | ||||||||||||||||||||||||||||||||||||
Investments in associated companies and Other investments | 121 | — | 1,259 | 9,013 | — | 10,393 | ||||||||||||||||||||||||||||||
Investments in associated companies and other investments | 96 | — | 522 | 10,227 | — | 10,845 | ||||||||||||||||||||||||||||||
Intragroup investments | 43,302 | 78,399 | 75,493 | 15,585 | (212,779 | ) | — | 43,688 | 80,320 | 78,387 | 17,027 | (219,422 | ) | — | ||||||||||||||||||||||
Total Investments | 43,423 | 78,399 | 76,752 | 24,598 | (212,779 | ) | 10,393 | |||||||||||||||||||||||||||||
Total investments | 43,784 | 80,320 | 78,909 | 27,254 | (219,422 | ) | 10,845 | |||||||||||||||||||||||||||||
Total Non-Current Assets | 43,764 | 78,399 | 76,823 | 56,656 | (212,779 | ) | 42,863 | |||||||||||||||||||||||||||||
Total non-current assets | 44,022 | 80,321 | 79,114 | 59,688 | (219,422 | ) | 43,723 | |||||||||||||||||||||||||||||
Total Assets | 46,330 | 78,400 | 76,875 | 66,418 | (212,758 | ) | 55,265 | |||||||||||||||||||||||||||||
Total assets | $ | 48,524 | $ | 80,328 | $ | 79,158 | $ | 68,998 | $ | (219,422 | ) | $ | 57,586 | |||||||||||||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||
Current Liabilities: | ||||||||||||||||||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||||||||||||||||||
Borrowings | — | — | — | 57 | — | 57 | $ | — | $ | — | $ | — | $ | 4 | $ | — | $ | 4 | ||||||||||||||||||
Other current liabilities | 309 | 178 | 1,230 | 4,573 | 298 | 6,588 | 262 | 180 | 1,345 | 4,549 | 610 | 6,946 | ||||||||||||||||||||||||
Total Current Liabilities | 309 | 178 | 1,230 | 4,642 | 298 | 6,645 | ||||||||||||||||||||||||||||||
Non-Current Liabilities: | ||||||||||||||||||||||||||||||||||||
Total current liabilities | 262 | 180 | 1,345 | 4,553 | 610 | 6,950 | ||||||||||||||||||||||||||||||
Non-current liabilities: | ||||||||||||||||||||||||||||||||||||
Borrowings | 11,215 | — | — | 153 | — | 11,368 | 11,249 | — | — | 145 | — | 11,394 | ||||||||||||||||||||||||
Other non-current liabilities | 537 | — | 1,578 | 5,944 | 437 | 8,496 | 342 | 1 | 2,801 | 6,505 | (1,377 | ) | 8,272 | |||||||||||||||||||||||
Intercompany | 13,127 | 3,208 | (5,103 | ) | (11,232 | ) | — | — | 15,220 | 3,628 | (6,011 | ) | (12,837 | ) | — | — | ||||||||||||||||||||
Minority interest in subsidiaries | — | — | — | 242 | — | 242 | — | — | — | 275 | — | 275 | ||||||||||||||||||||||||
Stockholders’ Equity | 21,142 | 75,014 | 79,170 | 66,681 | (213,493 | ) | 28,514 | 21,451 | 76,519 | 81,023 | 70,357 | (218,655 | ) | 30,695 | ||||||||||||||||||||||
Total Liabilities and Stockholders’ Equity | 46,330 | 78,400 | 76,875 | 66,418 | (212,758 | ) | 55,265 | |||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 48,524 | $ | 80,328 | $ | 79,158 | $ | 68,998 | $ | (219,422 | ) | $ | 57,586 | |||||||||||||||||||||||
See notes to supplemental guarantor information
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 18—Supplemental Guarantor Information (continued)
Supplemental Condensed Consolidating Balance Sheet
At June 30, 20052006
(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 | |||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||
Current Assets: | ||||||||||||||||||||||||||||||||||||
Current assets: | ||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | 4,234 | — | — | 2,236 | — | 6,470 | $ | 4,094 | $ | 17 | $ | — | $ | 1,672 | $ | — | $ | 5,783 | ||||||||||||||||||
Receivables, net | 22 | — | — | 4,331 | — | 4,353 | 25 | — | — | 5,125 | — | 5,150 | ||||||||||||||||||||||||
Inventories, net | — | — | 56 | 1,460 | — | 1,516 | — | — | 47 | 1,793 | — | 1,840 | ||||||||||||||||||||||||
Other | 1 | — | — | 284 | 155 | 440 | 4 | — | — | 328 | 18 | 350 | ||||||||||||||||||||||||
Total Current Assets | 4,257 | — | 56 | 8,311 | 155 | 12,779 | ||||||||||||||||||||||||||||||
Total current assets | 4,123 | 17 | 47 | 8,918 | 18 | 13,123 | ||||||||||||||||||||||||||||||
Non-Current Assets: | ||||||||||||||||||||||||||||||||||||
Non-current assets: | ||||||||||||||||||||||||||||||||||||
Receivables | 1 | — | — | 672 | — | 673 | 2 | — | — | 591 | — | 593 | ||||||||||||||||||||||||
Inventories, net | — | — | — | 2,366 | — | 2,366 | — | — | — | 2,410 | — | 2,410 | ||||||||||||||||||||||||
Property, plant and equipment, net | 86 | — | 9 | 4,251 | — | 4,346 | 83 | — | 2 | 4,670 | — | 4,755 | ||||||||||||||||||||||||
Intangible assets | 132 | — | 69 | 12,316 | — | 12,517 | ||||||||||||||||||||||||||||||
Intangible assets, net | — | — | 70 | 11,376 | — | 11,446 | ||||||||||||||||||||||||||||||
Goodwill | — | — | — | 10,944 | — | 10,944 | 4 | — | — | 12,544 | — | 12,548 | ||||||||||||||||||||||||
Other | 130 | — | — | 669 | — | 799 | 157 | 1 | 141 | 874 | — | 1,173 | ||||||||||||||||||||||||
Investments | ||||||||||||||||||||||||||||||||||||
Investments in associated companies and Other investments | 109 | — | 1,245 | 8,914 | — | 10,268 | ||||||||||||||||||||||||||||||
Investments in associated companies and other investments | 100 | — | 516 | 9,985 | — | 10,601 | ||||||||||||||||||||||||||||||
Intragroup investments | 44,445 | 75,622 | 73,917 | 15,735 | (209,719 | ) | — | 43,290 | 79,384 | 77,035 | 16,847 | (216,556 | ) | — | ||||||||||||||||||||||
Total Investments | 44,554 | 75,622 | 75,162 | 24,649 | (209,719 | ) | 10,268 | |||||||||||||||||||||||||||||
Total investments | 43,390 | 79,384 | 77,551 | 26,832 | (216,556 | ) | 10,601 | |||||||||||||||||||||||||||||
Total Non-Current Assets | 44,903 | 75,622 | 75,240 | 55,867 | (209,719 | ) | 41,913 | |||||||||||||||||||||||||||||
Total non-current assets | 43,636 | 79,385 | 77,764 | 59,297 | (216,556 | ) | 43,526 | |||||||||||||||||||||||||||||
Total Assets | 49,160 | 75,622 | 75,296 | 64,178 | (209,564 | ) | 54,692 | |||||||||||||||||||||||||||||
Total assets | $ | 47,759 | $ | 79,402 | $ | 77,811 | $ | 68,215 | $ | (216,538 | ) | $ | 56,649 | |||||||||||||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||
Current Liabilities: | ||||||||||||||||||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||||||||||||||||||
Borrowings | 880 | — | — | 32 | — | 912 | $ | — | $ | — | $ | — | $ | 42 | $ | — | $ | 42 | ||||||||||||||||||
Other current liabilities | 316 | — | 1,246 | 4,081 | 94 | 5,737 | 251 | — | 1,311 | 4,419 | 350 | 6,331 | ||||||||||||||||||||||||
Total Current Liabilities | 1,196 | — | 1,246 | 4,113 | 94 | 6,649 | ||||||||||||||||||||||||||||||
Non-Current Liabilities: | ||||||||||||||||||||||||||||||||||||
Total current liabilities | 251 | — | 1,311 | 4,461 | 350 | 6,373 | ||||||||||||||||||||||||||||||
Non-current liabilities: | ||||||||||||||||||||||||||||||||||||
Borrowings | 9,958 | — | — | 129 | — | 10,087 | 11,233 | — | — | 152 | — | 11,385 | ||||||||||||||||||||||||
Other non-current liabilities | — | — | 1,799 | 8,361 | (1,800 | ) | 8,360 | 376 | 1 | 1,858 | 6,380 | 121 | 8,736 | |||||||||||||||||||||||
Intercompany | 15,180 | 593 | (4,987 | ) | (10,786 | ) | — | — | 14,330 | 3,609 | (5,786 | ) | (12,153 | ) | — | — | ||||||||||||||||||||
Minority interest in subsidiaries | — | — | — | 219 | — | 219 | — | — | — | 281 | — | 281 | ||||||||||||||||||||||||
Stockholders’ Equity | 22,826 | 75,029 | 77,238 | 62,142 | (207,858 | ) | 29,377 | 21,569 | 75,792 | 80,428 | 69,094 | (217,009 | ) | 29,874 | ||||||||||||||||||||||
Total Liabilities and Stockholders’ Equity | 49,160 | 75,622 | 75,296 | 64,178 | (209,564 | ) | 54,692 | |||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 47,759 | $ | 79,402 | $ | 77,811 | $ | 68,215 | $ | (216,538 | ) | $ | 56,649 | |||||||||||||||||||||||
See notes to supplemental guarantor information
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 18—Supplemental Guarantor Information (continued)
Supplemental Condensed Consolidating Statement of Cash Flows
For the ninethree months ended March 31,September 30, 2006
(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 | |||||||||||||||||||||||||||
Operating activities: | ||||||||||||||||||||||||||||||||||||||
Net cash (used in) provided by operating activities | (2,002 | ) | 1,956 | — | 2,095 | — | 2,049 | |||||||||||||||||||||||||||||||
Net cash provided by (used in) operating activities | $ | 379 | $ | (16 | ) | $ | — | $ | 353 | $ | — | $ | 716 | |||||||||||||||||||||||||
Investing and other activities: | ||||||||||||||||||||||||||||||||||||||
Property, plant and equipment | (6 | ) | — | — | (642 | ) | — | (648 | ) | (1 | ) | — | — | (281 | ) | — | (282 | ) | ||||||||||||||||||||
Investments | 2 | — | — | (1,665 | ) | — | (1,663 | ) | (12 | ) | — | — | (173 | ) | — | (185 | ) | |||||||||||||||||||||
Proceeds from sale of investments, non-current assets and business disposals | — | — | — | 799 | — | 799 | ||||||||||||||||||||||||||||||||
Proceeds from sale of investments and non-current assets | 5 | — | — | 283 | — | 288 | ||||||||||||||||||||||||||||||||
Net cash (used in) provided by investing activities | (4 | ) | — | — | (1,508 | ) | — | (1,512 | ) | (8 | ) | — | — | (171 | ) | — | (179 | ) | ||||||||||||||||||||
Financing activities: | ||||||||||||||||||||||||||||||||||||||
Issuance of debt | 1,133 | — | — | 16 | — | 1,149 | ||||||||||||||||||||||||||||||||
Repayment of debt | (831 | ) | — | — | (8 | ) | — | (839 | ) | |||||||||||||||||||||||||||||
Borrowings | — | — | — | 145 | — | 145 | ||||||||||||||||||||||||||||||||
Repayment of borrowings | — | — | — | (190 | ) | — | (190 | ) | ||||||||||||||||||||||||||||||
Issuance of shares | — | 94 | — | 16 | — | 110 | — | 58 | — | 10 | — | 68 | ||||||||||||||||||||||||||
Repurchase of shares | — | (1,810 | ) | — | — | — | (1,810 | ) | — | (59 | ) | — | — | — | (59 | ) | ||||||||||||||||||||||
Dividends paid | — | (239 | ) | — | (7 | ) | — | (246 | ) | — | — | — | (3 | ) | — | (3 | ) | |||||||||||||||||||||
Net cash provided by (used in) financing activities | 302 | (1,955 | ) | — | 17 | — | (1,636 | ) | — | (1 | ) | — | (38 | ) | — | (39 | ) | |||||||||||||||||||||
Net (decrease) increase in cash and cash equivalents | (1,704 | ) | 1 | — | 604 | — | (1,099 | ) | ||||||||||||||||||||||||||||||
Net increase (decrease) in cash and cash equivalents | 371 | (17 | ) | — | 144 | — | 498 | |||||||||||||||||||||||||||||||
Cash and cash equivalents, beginning of period | 4,234 | — | — | 2,236 | — | 6,470 | 4,094 | 17 | — | 1,672 | — | 5,783 | ||||||||||||||||||||||||||
Exchange movement on opening cash balance | — | — | — | (47 | ) | — | (47 | ) | — | — | — | 11 | — | 11 | ||||||||||||||||||||||||
Cash and cash equivalents, end of period | 2,530 | 1 | — | 2,793 | — | 5,324 | $ | 4,465 | $ | — | $ | — | $ | 1,827 | $ | — | $ | 6,292 | ||||||||||||||||||||
See notes to supplemental guarantor information
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 18—Supplemental Guarantor Information (continued)
Supplemental Condensed Consolidating Statement of Cash Flows
For the nine month periodthree 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 | ||||||||||||||||||||||||||||
Operating activities: | |||||||||||||||||||||||||||||||||||||||
Net cash (used in) provided by operating activities | 145 | 47 | (93 | ) | 2,214 | — | 2,313 | $ | (275 | ) | $ | 186 | $ | — | $ | 586 | $ | — | $ | 497 | |||||||||||||||||||
Investing and other activities: | |||||||||||||||||||||||||||||||||||||||
Property, plant and equipment | (1 | ) | — | (4 | ) | (705 | ) | — | (710 | ) | (2 | ) | — | — | (197 | ) | — | (199 | ) | ||||||||||||||||||||
Investments | (136 | ) | — | (4 | ) | (173 | ) | — | (313 | ) | (1 | ) | — | — | (256 | ) | — | (257 | ) | ||||||||||||||||||||
Proceeds from sale of investments, non-current assets and business disposals | 14 | — | 98 | 531 | — | 643 | |||||||||||||||||||||||||||||||||
Proceeds from sale of investments and non-current assets | — | — | — | 114 | — | 114 | |||||||||||||||||||||||||||||||||
Net cash provided by (used in) investing activities | (123 | ) | — | 90 | (347 | ) | — | (380 | ) | ||||||||||||||||||||||||||||||
Net cash (used in) provided by investing activities | (3 | ) | — | — | (339 | ) | — | (342 | ) | ||||||||||||||||||||||||||||||
Financing activities: | |||||||||||||||||||||||||||||||||||||||
Issuance of debt | 1,743 | — | — | 33 | — | 1,776 | |||||||||||||||||||||||||||||||||
Repayment of debt | (135 | ) | — | — | (1,960 | ) | — | (2,095 | ) | ||||||||||||||||||||||||||||||
Cash on deposit | 275 | — | — | — | — | 275 | |||||||||||||||||||||||||||||||||
Borrowings | — | — | — | 6 | — | 6 | |||||||||||||||||||||||||||||||||
Repayment of borrowings | — | — | — | (5 | ) | — | (5 | ) | |||||||||||||||||||||||||||||||
Issuance of shares | — | 54 | — | 11 | — | 65 | — | 27 | — | 2 | — | 29 | |||||||||||||||||||||||||||
Repurchase of shares | — | (213 | ) | — | — | — | (213 | ) | |||||||||||||||||||||||||||||||
Dividends paid | — | (101 | ) | — | (23 | ) | — | (124 | ) | — | — | — | (1 | ) | — | (1 | ) | ||||||||||||||||||||||
Net cash provided by (used in) financing activities | 1,883 | (47 | ) | — | (1,939 | ) | — | (103 | ) | — | (186 | ) | — | 2 | — | (184 | ) | ||||||||||||||||||||||
Net (decrease) increase in cash and cash equivalents | 1,905 | — | (3 | ) | (72 | ) | — | 1,830 | (278 | ) | — | — | 249 | — | (29 | ) | |||||||||||||||||||||||
Cash and cash equivalents, beginning of period | 1,972 | — | 3 | 2,076 | — | 4,051 | 4,234 | — | — | 2,236 | — | 6,470 | |||||||||||||||||||||||||||
Exchange movement on opening cash balance | — | — | — | 112 | — | 112 | — | — | — | 9 | — | 9 | |||||||||||||||||||||||||||
Cash and cash equivalents, end of period | 3,877 | — | — | 2,116 | — | 5,993 | $ | 3,956 | $ | — | $ | — | $ | 2,494 | $ | — | $ | 6,450 | |||||||||||||||||||||
See notes to supplemental guarantor information
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 18—Supplemental Guarantor Information (continued)
Notes to Supplemental Guarantor Information
(1) Guarantors consist of the Company and the following wholly-owned subsidiaries of the Company:
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, | Delaware, USA | Publishes free-standing inserts. | ||
Fox Entertainment Group, Inc. | Delaware, USA |
(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.
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, its directors or its officers with respect to, among other things, trends affecting News Corporation’s financial condition or results of operations. The readers of this document are cautioned that any forward-looking statements are not guarantees of future performance and involve risks and uncertainties. More information regarding these risks, uncertainties and other factors is set forth under the headingItem 1A “Risk Factors,” in this report. News Corporation 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 News Corporation with the Securities and Exchange Commission (“SEC”). This section should be read together with the unaudited consolidated financial statements of News Corporation and related notes set forth elsewhere herein.
REORGANIZATION
Effective November 12, 2004, the Company changed its corporate domicile from Australia to the United States and its reporting currency from the Australian dollar to the U.S. dollar (“the Reorganization”). As a result, the Company’s accompanying unaudited consolidated financial statements are stated in U.S. dollars as opposed to Australian dollars, which was the currency the Company previously used to present its financial statements, and have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP.
In the Reorganization, all outstanding ordinary shares and preferred limited voting ordinary shares of The News Corporation Limited (“TNCL”) were cancelled and shares of the Company’s Class A (“Class A Common Stock”) non-voting common stock and Class B voting common stock (“Class B Common Stock”) of the Company were issued in exchange, respectively, 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, 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 and its subsidiaries’ (together “News Corporation” or the Company’s“Company”) financial condition, changes in financial condition and results of operations. MD&AThis discussion is organized as follows:
• | Overview of the Company’s Business—This section provides a general description of the Company’s businesses, as well as recent developments that have occurred either during fiscal |
• | Results of Operations—This section provides an analysis of the Company’s results of operations for the three |
• | Liquidity and Capital Resources—This section provides an analysis of the Company’s cash flows for the |
OVERVIEW OF THE COMPANY’S 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 the production and distribution of 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 television, premium subscription television, network television and 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 seriesSeries are then typically released in seasonal DVD box sets and more successful series are 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. License fees received for television exhibition (including international and U.S. premium television and basic cable television) are recorded as revenue in the period that licensed films or programs are available for such exhibition, which may cause substantial 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 and home entertainment release dates are determined by several factors, including timing of vacation and holiday periods and competition in the marketplace. The distribution windows for the release of motion pictures theatrically and in various home entertainment formats have been compressing and may continue to change in the future. A reduction in timing between theatrical and home entertainment releases could adversely affect the revenues and operating results of this segment. 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 includeinclude: exploitation costs, primarily theatrical prints and 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.
The 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 sell 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 businesses.
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.SU.S. television operations primarily consist of the FOX Broadcasting Company (“FOX”) and the 35 television stations owned by the Company. The Company’s international television operations consist primarily of STAR Group Limited (“STAR”).
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,The CW, independent television stations, cable program services, as well as other media, including DBS television services, DVDs, video games, 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. (See Other Recent Business Developments below for discussion of the announced UPN and WB network combination and the launch of My Network TV.)
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 primetimeprime-time 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 some of the markets where the transition has occurred. In January 2006, Nielsen introduced LPMs in the Dallas and Detroit markets and plans to establish LPMs in the Atlanta market at the end of fiscal 2006.
Generally, the Company’s cable networks, which target various demographics, derive a majority of their 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). The Company defers the cable distribution investments and amortizes the amounts on a straight-line basis over the contract period. 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.
The Company’s cable networks, including the Fox News Channel (“Fox News”), the FX Network (“FX”), and the Regional Sports Networks (“RSNs”), compete for carriage on cable television systems, DBS operatorssystems and other distributorsdistribution systems 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 network channels 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.
In Asia, STAR’s programming is primarily distributed via satellite to local cable operators or other pay-television platform operators for distribution to their subscribers. STAR derives its revenue from the sale of advertising time and affiliate fees from these pay-television platform operators.
The most significant operating expenses of the Television segment and the Cable Network Programming segment are the acquisition and production expenses related to acquiring and producing programming and to 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.overhead expenses.
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 and exclusive rights for certain ancillary content through calendar year 2014 and a contract with Major League Baseball (“MLB”) through calendar year 2006.2013. These contracts provide the Company with the broadcast rights to certain national sporting events during their respective terms. 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, 2006 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, 2006, a loss willmay be recorded. Should revenues improve as compared to estimated revenues, the Company will have a positivean improved operating profit related to the contract, which will be recognized over the estimated remaining contract term.
While the Company seeks to ensure compliance with federal indecency laws and related regulations of the Federal Communications Commission (the “FCC”(“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.
During fiscal 2005, competitive DTT services in Italy expanded to include pay-per-view offering of soccer games previously available exclusively on the SKY Italia platform. The Company is currently prohibited from providing a DTT service under regulations of the European Commission. In addition, the Italian government previously offered a subsidy on the purchase of DTT decoders. As a result, DTT operators could entice potential SKY Italia subscribers to their system.
SKY Italia’s most significant operating expenses are those related to acquiring entertainment, movie and sports programming and subscribers and the production and technical expenses related to operating the technical facilities. Operating expenses related to sports programming are generally recognized over the course of the related sport season, which may cause fluctuations in the operating results of this segment.
Magazines and Inserts
The MagazinesMagazine 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 MagazinesMagazine and Inserts segment include paper costs, promotional, printing, retail commissions, distribution expenses and 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. Competition for circulation is based upon the content of the newspaper, service and price. 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, circulation 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, circulation 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 newspapers published by the Company compete for readership and advertising with local and national newspapers and also compete with television, radio and other media alternatives in their respective locales. Competition for newspaper circulation is based on the news and editorial content of the newspaper, cover price and, from time to time, various promotions. The success of the newspapers published by the Company in competing with other newspapers and media for advertising depends upon advertisers’ judgments as to the most effective use of their advertising budgets. Competition for advertising among newspapers is based upon circulation levels, readership levels, reader demographics, advertising rates and advertiser results. Such judgments are based on factors, such as cost, availability of alternative media, circulation and quality of readership demographics.
Book Publishing
The Book Publishing segment derives revenues from the sale of adultgeneral 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, 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
Hachette Livre, for the rights to works by well-known authors and public personalities. Although the Company currently has strong positions in each of its markets, further consolidation in the book publishing industry could place the Company at a competitive disadvantage with respect to scale and resources.
Other
NDS
NDS supplies open end-to-end digital technology and services to digital pay-television platform operators and content providers. NDS technologies include conditional access and microprocessor security, broadcast stream management, set-top box middleware, electronic program guides, digital video recording technologies and interactive infrastructure and applications. NDS’ software systems, consultancy and systems integration services are focused on providing platform operators and content providers with technology to help them profit from the secure distribution of digital information and entertainment to consumer devices which incorporate various technologies supplied by NDS.
News Outdoor
The Company sells, through its News Outdoor businesses, advertising space on various media, including billboards, street furniture and transit shelters, unique boards, airport transit advertising and in-store point of sale displays in shopping malls and supermarkets. It has outdoor advertising operations primarily in Russia and Eastern Europe.
Fox Interactive Media
The Company sells, through its FIM division, advertising, sponsorships and subscription services on the Company’s various Internet properties. Web properties include the social networking site MySpace.com, IGN.com, AmericanIdol.com, Scout.com and Foxsports.com. The Company also has a distribution agreement with Microsoft’s MSN for Foxsports.com.
Other Recent Business Developments
In JanuaryAugust 2006, CBS Corp.the Company announced that its FIM division entered into a multi-year search technology and services agreement with Google, Inc. (“Google”), ownerpursuant to which Google will be the exclusive search and keyword-targeted advertising sales provider for a majority of FIM’s web properties. Under the terms of the UPN networkagreement, Google will be obligated to make guaranteed minimum revenue share payments to FIM of $900 million based on FIM’s achievement of certain traffic and other commitments. These guaranteed minimum revenue share payments are expected to be made over the period beginning the first quarter of calendar 2007 and ending in the second quarter of calendar 2010.
In September 2006, the Company and VeriSign, Inc. (“UPN”VeriSign”), and Time Warner Inc., owner of the WB network (the “WB”), announced that UPN and the WB would combinea joint venture to form a new network, which is expected to launch in September 2006.provider of mobile entertainment. The Company owns nine major-market television stations that are affiliatedwill pay approximately $188 million for a controlling interest in VeriSign’s wholly-owned subsidiary, Jamba, and will combine Jamba with UPN, which affiliations expire in August 2006. In February 2006, the Company announced it would launch My Network TV, a new primetime program network in September 2006. My Network TV will provide primetime programming to the Company’s nine stations that had been affiliated with UPN, as well asFox Mobile Entertainment assets. The closing of this transaction is subject to numerous affiliate stations. To the extent that My Network TV is not successful, the Company’s operating results in the Television segment may be adversely impacted.
In July 2005, the Company formed a new division, Fox Interactive Media (“FIM”), to expand the Company’s Internet presence, and increase the Company’s opportunity to participate in the growing web-based advertising market. FIM’s primary focus is to build an integrated online Internet network of premiere destinations that allows users to experience, engage, customize and personalize their web experience. The Company purchased several Internet companies during fiscal 2006 through its FIM division.customary closing conditions, including regulatory approval.
RESULTS OF OPERATIONS
Results of Operations—For the three and nine months ended March 31,September 30, 2006 versus the three and nine months ended March 31,September 30, 2005.
The following table sets forth the Company’s operating results, for the three and nine months ended March 31,September 30, 2006 as compared to the three and nine months ended March 31,September 30, 2005.
For the three months ended March 31, | For the nine months ended March 31, | For the three months ended September 30, | |||||||||||||||||||||||||||||||||||
2006 | 2005 | % Change | 2006 | 2005 | % Change | 2006 | 2005 | Change | % Change | ||||||||||||||||||||||||||||
(in millions, except % and per share amounts) | ($ in millions) | ||||||||||||||||||||||||||||||||||||
Revenues | $ | 6,198 | $ | 6,043 | 3 | % | $ | 18,545 | $ | 17,751 | 4 | % | $ | 5,914 | $ | 5,682 | $ | 232 | 4 | % | |||||||||||||||||
Expenses: | |||||||||||||||||||||||||||||||||||||
Operating | 4,006 | 4,060 | (1 | )% | 12,116 | 11,925 | 2 | % | $ | 3,750 | $ | 3,639 | $ | 111 | 3 | % | |||||||||||||||||||||
Selling, general and administrative | 989 | 918 | 8 | % | 2,926 | 2,715 | 8 | % | 1,102 | 959 | 143 | 15 | % | ||||||||||||||||||||||||
Depreciation and amortization | 189 | 176 | 7 | % | 561 | 453 | 24 | % | 207 | 175 | 32 | 18 | % | ||||||||||||||||||||||||
Other operating charge | 3 | — | * | * | 102 | 49 | * | * | |||||||||||||||||||||||||||||
Other operating charges | 4 | — | 4 | * | * | ||||||||||||||||||||||||||||||||
Total operating income | $ | 1,011 | $ | 889 | 14 | % | $ | 2,840 | $ | 2,609 | 9 | % | $ | 851 | $ | 909 | $ | (58 | ) | (6 | )% | ||||||||||||||||
Interest expense, net | (141 | ) | (143 | ) | 1 | % | (410 | ) | (405 | ) | (1 | )% | $ | (125 | ) | $ | (128 | ) | $ | 3 | (2 | )% | |||||||||||||||
Equity earnings of affiliates | 264 | 91 | * | * | 610 | 154 | * | * | 243 | 186 | 57 | 31 | % | ||||||||||||||||||||||||
Other, net | 170 | (62 | ) | * | * | 243 | 15 | * | * | 428 | 11 | 417 | * | * | |||||||||||||||||||||||
Income from continuing operations before income tax expense and minority interest in subsidiaries | 1,304 | 775 | 68 | % | $ | 3,283 | $ | 2,373 | 38 | % | |||||||||||||||||||||||||||
Income before income tax expense, minority interest in subsidiaries and cumulative effect of accounting change | $ | 1,397 | $ | 978 | $ | 419 | 43 | % | |||||||||||||||||||||||||||||
Income tax expense | (471 | ) | (317 | ) | (49 | )% | (1,145 | ) | (773 | ) | (48 | )% | (538 | ) | (382 | ) | (156 | ) | 41 | % | |||||||||||||||||
Minority interest in subsidiaries, net of tax | (13 | ) | (58 | ) | 78 | % | (44 | ) | (189 | ) | 77 | % | (16 | ) | (16 | ) | — | — | |||||||||||||||||||
Income from continuing operations | 820 | 400 | * | * | 2,094 | 1,411 | 48 | % | |||||||||||||||||||||||||||||
Gain on disposition of discontinued operations, net of tax | — | — | — | 381 | — | * | * | ||||||||||||||||||||||||||||||
Income before cumulative effect of accounting change | 820 | 400 | * | * | 2,475 | 1,411 | 75 | % | 843 | 580 | 263 | 45 | % | ||||||||||||||||||||||||
Cumulative effect of accounting change, net of tax | — | — | — | (1,013 | ) | — | * | * | — | (1,013 | ) | 1,013 | * | * | |||||||||||||||||||||||
Net income | $ | 820 | $ | 400 | * | * | $ | 1,462 | $ | 1,411 | 4 | % | |||||||||||||||||||||||||
Net income (loss) | $ | 843 | $ | (433 | ) | $ | 1,276 | * | * | ||||||||||||||||||||||||||||
Diluted earnings per share from continuing operations (1) | $ | 0.26 | $ | 0.13 | 100 | % | $ | 0.64 | $ | 0.47 | 36 | % | |||||||||||||||||||||||||
Diluted net earnings before cumulative effect of accounting change per share(1) | $ | 0.27 | $ | 0.18 | $ | 0.09 | 50 | % |
** | not meaningful |
(1) | Represents earnings per share based on the total weighted average shares outstanding (Class A common stock, par value $0.01 per share (“Class A Common Stock”) and Class B common stock, par value $0.01 per share (“Class B Common Stock”) combined) for the three |
Overview—The Company’s revenues increased 3% and 4%, for the three and nine months ended March 31,September 30, 2006 respectively,increased 4% as compared to the corresponding periods of fiscalthree months ended September 30, 2005. The increases for the three and nine months ended March 31, 2006 wereincrease was primarily due to revenue increases at the DBS, Cable Network Programming Direct Broadcast Satellite Television and Other segments, which were partially offset by lower revenue declines at the Filmed Entertainment segment. Additionally, reduced revenues at the Television segment, primarily from the absence of the Super Bowl broadcast, also offset the revenue increase
Operating expenses increased 3% for the three months ended March 31,September 30, 2006 noted above.
Operating expenses were down 1% foras compared to the three months ended March 31, 2006 from the corresponding period of fiscal 2005, primarily due to the absence of the sports rights associated with the broadcast of Super Bowl XXXIX in the prior fiscal year. Operating expenses for the nine months ended March 31, 2006 increased approximately 2% from the corresponding period of fiscalSeptember 30, 2005, primarily due to increased expensesentertainment and sports programming amortization at the DBS, Cable Network Programming segment and Television segments, as well as the inclusion of three months of operating expenses related to the acquisitions made byat FIM in September and October 2005, collectively referred to as the Newspaper segment and FIM.“FIM acquisitions.” These increases were partially offset by reduced operating
expenses at the Filmed Entertainment segment. The increased operating expenses at the Cable Network Programming segment wereprimarily due to the consolidation of the Floridadecreased home entertainment manufacturing and Ohio Regional Sports Networks (“RSNs”),marketing costs and the consolidation of Fox Sports Net, a national sports program service, beginning in April 2005 and higher programming costs at the remaining RSNs and FX Network (“FX”). In addition, operating results include the consolidation of Queensland Press Pty Ltd (“QPL”) within the Newspapers segment and the impact of the FIM acquisitions. The operating expense reduction at the Filmed Entertainment segment was due to reduced amortization oflower production and participation costs, as well as reduced home entertainment marketing and manufacturing costs.
Selling, general and administrative expenses increased approximately 8%15% for the three and nine months ended March 31,September 30, 2006 fromas compared to the corresponding periods ofperiod in fiscal 2005, primarily due2006. Depreciation and amortization increased 18% during the three months ended September 30, 2006 as compared to the consolidation of the Florida and Ohio RSNs, Fox Sports Net and QPL. In addition, the impact of acquisitions at FIM also contributed to the increasecorresponding period in fiscal 2006. The increases in selling, general and administrative expenses during the three and nine months ended March 31, 2006. Depreciationdepreciation and amortization expense increased approximately 7% and 24% during the three and nine months ended March 31, 2006, respectively, when compared to the corresponding periods of fiscal 2005,are primarily due to the amortization of intangible assets acquired on the purchase of the minority interest in the Fox Entertainment Group, Inc. in March 2005, as well as incremental expenses resulting from the acquisitions at FIM noted above. Accelerated depreciation recognized on printing plant assets in the United Kingdom also impacted the nine months ended March 31, 2006.acquisitions.
During the three and nine months ended March 31,September 30, 2006, Operating income increased 14% and 9%, respectively, fromdecreased 6% as compared to the corresponding periods of fiscalthree months ended September 30, 2005, primarily due to decreased operating results at the revenue increases noted above. The Operating income increase for the nine months ended March 31, 2006 wasFilmed Entertainment and Other segments. These decreases were partially offset by a $102 million redundancy provision recorded as an other operating charge during fiscal 2006. The redundancy provision was recordedresult increases at the Newspapers segment, for certain U.K. employees as a result of the Company committing to a reduction in workforce, which is associated with the development of new printing plants in the United Kingdom.Cable Network Programming, DBS and Television segments.
Interest expense,Income, net—Interest expense, net decreased by $2$3 million in the three months ended March 31, 2006 and increased $5 million in the nine months ended March 31, 2006. Interest expense increased for the three and nine months ended March 31, 2006, as compared tofrom the corresponding periodsperiod of fiscal 2005. These increases are2006 due primarily to increased interest income on higher cash balances, partially offset by increased interest expense due to the Company’s issuance of $1.0 billion in 6.2% senior notes due 2034 and $750 million in 5.3% senior notes due 2014 in December 2004 and $1.15 billion in 6.4% senior notesSenior Notes due 2035 in December 2005. These increases were more than offset in the three months ended March 31, 2006 and were partially offset in the nine months ended March 31, 2006 due to higher interest income.
Equity earnings (losses) of affiliates—Net earnings from affiliates for the three and nine months ended March 31,September 30, 2006 increased $173$57 million and $456 million, respectively, as compared to the corresponding periodsperiod of fiscal 2005. These improvements were2006. The increase was primarily due to increased contributionsimproved earnings from The DIRECTV Group Inc. (“DIRECTV”) on subscriber growth and increased pricing. DIRECTV’s results also reflect, partially offset by lower expenses
associated with the introduction of a new set-top receiver program. The improved results also include the recognition of a tax benefit by Innova. Additionally the net earnings from affiliates for the three and nine months ended March 31, 2006 include a favorable impact from foreign currency fluctuations at Sky Brasil and increased contributions from the British Sky Broadcasting Group plc (“BSkyB”), respectively. and the absence of earnings from Innova, sold in February 2006, and Sky Brasil, sold in August 2006. The increased earnings from DIRECTV reflect subscriber growth and higher pricing as well as lower expenses resulting from the set-top receiver lease program. At BSkyB, the decline in equity earnings is primarily due to costs associated with the launch of its broadband offering.
For the three months ended March 31, | For the nine months ended March 31, | ||||||||||||||||||||
2006 | 2005 | % Change | 2006 | 2005 | % Change | ||||||||||||||||
(in millions, except %) | |||||||||||||||||||||
BSkyB | $ | 100 | $ | 107 | (7 | )% | $ | 286 | $ | 249 | 15 | % | |||||||||
DIRECTV | 61 | (40 | ) | * | * | 89 | (217 | ) | * | * | |||||||||||
Sky Brasil | 19 | (2 | ) | * | * | 23 | 23 | — | |||||||||||||
Innova | 41 | 6 | * | * | 61 | 17 | * | * | |||||||||||||
FOXTEL | 2 | (3 | ) | * | * | (1 | ) | (17 | ) | 94 | % | ||||||||||
Other equity affiliates | 41 | 23 | 78 | % | 152 | 99 | 54 | % | |||||||||||||
Total equity earnings of affiliates | $ | 264 | $ | 91 | * | * | $ | 610 | $ | 154 | * | * | |||||||||
For the three months ended September 30, | |||||||||||||
2006 | 2005 | Change | % Change | ||||||||||
(in millions) | |||||||||||||
British Sky Broadcasting Group plc | $ | 82 | $ | 100 | $ | (18 | ) | (18 | )% | ||||
The DIRECTV Group, Inc. | 116 | 9 | 107 | * | * | ||||||||
Other DBS equity affiliates | 9 | 29 | (20 | ) | (69 | )% | |||||||
Cable channel equity affiliates | 21 | 17 | 4 | 24 | % | ||||||||
Other equity affiliates | 15 | 31 | (16 | ) | (52 | )% | |||||||
Total equity earnings of affiliates, net | $ | 243 | $ | 186 | $ | 57 | 31 | % | |||||
** | not meaningful |
Other, net—Other, net consisted of the following:
For the three months ended March 31, | For the nine months ended March 31, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
(in millions) | (in millions) | |||||||||||||||
Gain on sale of Innova(a) | $ | 206 | $ | — | $ | 206 | $ | — | ||||||||
Gain on sale of China Netcom(a) | — | — | 52 | — | ||||||||||||
Change in fair value of exchangeable securities(b) | (35 | ) | 14 | (8 | ) | 105 | ||||||||||
LYONs deferred financing costs(c) | (13 | ) | — | (13 | ) | — | ||||||||||
Loss on sale of Sky Multi-Country Partners(a) | — | — | — | (55 | ) | |||||||||||
Gain on sale of Rogers Sportsnet(a) | — | — | — | 39 | ||||||||||||
Loss on RPP exchange(d) | — | (77 | ) | — | (77 | ) | ||||||||||
Other | 12 | 1 | 6 | 3 | ||||||||||||
Total Other, net | $ | 170 | $ | (62 | ) | $ | 243 | $ | 15 | |||||||
For the three months ended September 30, | ||||||||
2006 | 2005 | |||||||
(in millions) | ||||||||
Gain on the sale of Sky Brasil(a) | $ | 261 | $ | — | ||||
Gain on the sale of Phoenix Satellite Television Holdings Limited(a) | 136 | — | ||||||
Gain on the sale of China Netcom(a) | — | 52 | ||||||
Change in fair value of exchangeable securities(b) | 38 | (41 | ) | |||||
Other | (7 | ) | — | |||||
Total Other, net | $ | 428 | $ | 11 | ||||
(a) | See Note 5— |
(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,” (“SFAS No. 133”) these embedded derivatives require separate accounting and, as such, changes in their fair value are recognized in Other, net. |
Income tax expense—The effective tax rate for the three months ended March 31,September 30, 2006 of approximately 39% was 36.1% which was higher thanconsistent with the U.S. Statutory rate due to the state and foreign income taxes. The effective tax rate for the nine months ended March 31, 2006 was 34.9%. The effective tax rates for the fiscal 2006 periods reflect the positive impact of the Company’s applicationfirst quarter of the American Jobs Creation Act of 2004 (“AJCA”). The Company reflected a tax benefit of approximately $11 million and $113 million in the three and nine months ended March 31, 2006, respectively, primarily resulting from the reduction of prior tax accruals relating to the planned repatriation of foreign earnings at the lower rate of 5.25% under the AJCA.
fiscal 2006. The effective tax rate for the three months ended March 31,September 30, 2006 was lower than the effective tax rate of 40.9% for the corresponding period of fiscal 2005 due to the impact of the AJCA noted above. The effective tax rate for the nine months ended March 31, 2006 wasis higher than the effective tax rate for the corresponding period of fiscal 2005 of 32.6%, primarily due to the impact on the effective rate of the resolution of foreign income tax audits in September 2004.
Minority interest in subsidiaries, net of tax—Minority interest expense improved by $45 million and $145 million for the three and nine months ended March 31, 2006, respectively, as compared to the corresponding periods of fiscal 2005. These improvements are primarily due to the acquisition of minority shares of Fox Entertainment Group, Inc. in fiscal 2005.
Gain on disposition of discontinued operations, net of tax—In October 2005, the Company sold its TSL Education Ltd. division, which primarily included The Times Educational Supplement publication in the United Kingdom for cash consideration of approximately $395 million. In connection with this transaction, the Company recorded a gain of $381 million, net of tax of $0, in Gain on disposition of discontinued operations in the unaudited consolidated statement of operations for the nine months ended March 31, 2006.
The provision for income taxes reported in discontinued operations of $0 differs from the amount computed using theU.S. statutory income tax rate due to the tax being offset by a release of a valuation allowance that was applied to an existing deferred tax asset established for capital losses, which because of the TSL transaction can now be utilized. Therefore, there will be no resulting tax liability.foreign and state income taxes.
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 ($0.33)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’ FCC licenses. This charge has been reflected as a cumulative effect of accounting change, net of tax in the unaudited consolidated statementsstatement of operations.
Net income—Net income increased $420 million and $51$1,276 million for the three and nine months ended March 31,September 30, 2006 respectively, as compared to the corresponding periodsperiod of fiscal 2005. These increases were2006. This increase is primarily due to increases in Operating income, Equity earnings from affiliates and Other income, as well as lower minority interest expense. The Net income increase for the nine months ended March 31, 2006 also includesabsence of the Gain on the disposition of discontinued operations and is partially offset by the Cumulativecumulative effect of accounting change.change charge recognized in the corresponding period of fiscal 2006 and the gains from the sales noted above.
Segment Analysis:
The following table sets forth the Company’s revenues and operating income by segment, for the three and nine months ended March 31,September 30, 2006, as compared to the three and nine months ended March 31,September 30, 2005.
For the three months ended March 31, | For the nine months ended March 31, | For the three months ended September 30, | |||||||||||||||||||||||||||||||||||
2006 | 2005 | % Change | 2006 | 2005 | % Change | 2006 | 2005 | Change | % Change | ||||||||||||||||||||||||||||
(in millions, except %) | (in millions) | ||||||||||||||||||||||||||||||||||||
Revenues: | |||||||||||||||||||||||||||||||||||||
Filmed Entertainment | $ | 1,388 | $ | 1,477 | (6 | )% | $ | 4,414 | $ | 4,726 | (7 | )% | $ | 1,213 | $ | 1,419 | $ | (206 | ) | (15 | )% | ||||||||||||||||
Television | 1,347 | 1,414 | (5 | )% | 3,991 | 3,982 | — | 1,103 | 1,048 | 55 | 5 | % | |||||||||||||||||||||||||
Cable Network Programming | 839 | 633 | 33 | % | 2,424 | 1,857 | 31 | % | 889 | 775 | 114 | 15 | % | ||||||||||||||||||||||||
Direct Broadcast Satellite Television | 675 | 624 | 8 | % | 1,793 | 1,620 | 11 | % | 622 | 498 | 124 | 25 | % | ||||||||||||||||||||||||
Magazines and Inserts | 300 | 283 | 6 | % | 832 | 774 | 7 | % | 275 | 267 | 8 | 3 | % | ||||||||||||||||||||||||
Newspapers | 1,015 | 1,062 | (4 | )% | 3,037 | 2,937 | 3 | % | 1,049 | 1,012 | 37 | 4 | % | ||||||||||||||||||||||||
Book Publishing | 275 | 300 | (8 | )% | 1,056 | 1,041 | 1 | % | 368 | 391 | (23 | ) | (6 | )% | |||||||||||||||||||||||
Other | 359 | 250 | 44 | % | 998 | 814 | 23 | % | 395 | 272 | 123 | 45 | % | ||||||||||||||||||||||||
Total revenues | $ | 6,198 | $ | 6,043 | 3 | % | $ | 18,545 | $ | 17,751 | 4 | % | $ | 5,914 | $ | 5,682 | $ | 232 | 4 | % | |||||||||||||||||
Operating income (loss): | |||||||||||||||||||||||||||||||||||||
Filmed Entertainment | $ | 225 | $ | 251 | (10 | )% | $ | 892 | $ | 949 | (6 | )% | $ | 239 | $ | 368 | $ | (129 | ) | (35 | )% | ||||||||||||||||
Television | 286 | 221 | 29 | % | 629 | 608 | 3 | % | 192 | 160 | 32 | 20 | % | ||||||||||||||||||||||||
Cable Network Programming | 211 | 172 | 23 | % | 670 | 565 | 19 | % | 249 | 197 | 52 | 26 | % | ||||||||||||||||||||||||
Direct Broadcast Satellite Television | 69 | (21 | ) | * | * | (45 | ) | (247 | ) | 82 | % | (13 | ) | (61 | ) | 48 | (79 | )% | |||||||||||||||||||
Magazines and Inserts | 90 | 79 | 14 | % | 242 | 216 | 12 | % | 78 | 76 | 2 | 3 | % | ||||||||||||||||||||||||
Newspapers | 153 | 186 | (18 | )% | 347 | 488 | (29 | )% | 124 | 125 | (1 | ) | (1 | )% | |||||||||||||||||||||||
Book Publishing | 26 | 30 | (13 | )% | 173 | 152 | 14 | % | 55 | 70 | (15 | ) | (21 | )% | |||||||||||||||||||||||
Other | (49 | ) | (29 | ) | (69 | )% | (68 | ) | (122 | ) | 44 | % | (73 | ) | (26 | ) | (47 | ) | * | * | |||||||||||||||||
Total operating income (loss) | $ | 1,011 | $ | 889 | 14 | % | $ | 2,840 | $ | 2,609 | 9 | % | $ | 851 | $ | 909 | $ | (58 | ) | (6 | )% | ||||||||||||||||
** | not meaningful |
Filmed Entertainment (24%(20% and 27%25% of the Company’s consolidated revenues in the first nine monthsquarter of fiscal 20062007 and 2005,2006, respectively)
For the three and nine months ended March 31,September 30, 2006, revenues at the Filmed Entertainment segment decreased $89$206 million, or 6%15%, and $312 million, or 7%, respectively, as compared to the corresponding periodsperiod of fiscal 2005. These decreases are2006. This decrease is primarily due to decreasesa decrease in worldwide home entertainment revenues of 26% and 17% for the three and nine months ended March 31, 2006, respectively, as compared to the corresponding periods of fiscal 2005 driven by fewer filmlower syndication revenues from Twentieth Century Fox Television. The decrease in worldwide home entertainment releases. The three months ended March 31,revenue is primarily due to a higher volume of successful releases in fiscal 2006, included the domestic home entertainment releases ofWalk the Line andTransporter 2,as well as the continued performance of Fantastic Four. The three months ended March 31, 2005 includedincluding the worldwide release ofAlien vs. Predator, the domestic release ofFat AlbertRobots andTaxi, as well as carryover performance of prior year titles includingI,Robot, Garfield,Hide andNapoleon Dynamite Seek. Home entertainment revenue from television titles, includingFamily Guy and24, slightly offset the film home entertainment decreases. Domestic theatrical revenues for the three and nine months ended March 31, 2006 were consistent with the corresponding periods of fiscal 2005.
Home entertainment revenues generated from the sale and distribution of film and television titles in the three months ended March 31,September 30, 2006 were 77%70% and 23%30%, respectively, of total home entertainment revenues. Home entertainment revenues generated from the sale and distribution of film and television titles in the nine months ended March 31, 2006 were 74% and 26%, respectively, of total home entertainment revenues.
Operating income at the Filmed Entertainment segment for the three and nine months ended March 31, 2006 decreased $26 million, or 10%, and $57 million, or 6%, respectively,Syndication revenue was lower as compared to the corresponding periodsperiod in fiscal 2006 because the first quarter of fiscal 2005. 2006 included the domestic syndication ofThe reductionX-Files and the initial domestic cable availability ofDharma and Gregwith no comparable syndication revenues in Operatingthe first quarter of fiscal 2007. The first quarter of fiscal 2007 also included several successful theatrical releases includingThe Devil Wears Prada andLittle Miss Sunshine, compared to the corresponding period of fiscal 2006 which included the successful worldwide release ofFantastic Four.
For the three months ended September 30, 2006, the Filmed Entertainment segment reported operating income of $239 million, a decrease of $129 million, or 35%, from the corresponding period of fiscal 2006. This reduction was due to lower home entertainment revenue,revenues noted above, partially offset by lower home entertainment marketing and manufacturing costs and lower amortization of production and participation costs directly associated with the decrease in revenues noted above.revenue.
Television(22%19% and 18% of the Company’s consolidated revenues in the first nine monthsquarter of fiscal 2007 and 2006, and 2005)respectively)
The television segment reported revenue of $1,103 million for the three months ended September 30, 2006 as compared to $1,048 million in the corresponding period of fiscal 2006. For the three months ended March 31,September 30, 2006 the Television segment reported a revenue decrease of $67operating income increased $32 million, or 5%20%, as compared to the corresponding period of fiscal 2005. Revenue2006.
Revenues for the Television segment for the ninethree months ended March 31,September 30, 2006 remained consistent with revenues of the corresponding period of fiscal 2005. For the three and nine months ended March 31, 2006, the Television segment reported increases in Operating income of $65 million, or 29%, and $21 million, or 3%, respectively, from the corresponding periods of fiscal 2005.
Revenues at the Company’s U.S. television operations decreased 6% and 2% for the three and nine months ended March 31, 2006, respectively,increased approximately 8% as compared to the corresponding periodsperiod of fiscal 2005. These decreases are2006. The increase in revenue was primarily due to the broadcast of the Super Bowlincreased prime-time and Daytona 500 in the third quarter of fiscal 2005 with no comparable events in the corresponding periods of fiscal 2006. Offsetting these decreases is an increase in primetimeNFL net advertising revenue as a result of higher primetimeNFL ratings, pricing and continued growth in local news programming versusadditional commercial spots sold. Also contributing to this increase was higher political advertising revenue at the corresponding periodstelevision stations as a result of fiscal 2005.political spending leading up to the November 2006 elections. Operating income for the three months ended September 30, 2006 at the Company’s U.S. television operations for the three and nine months ended March 31, 2006 increased approximately 3% and 5%, respectively, from19% as compared to the corresponding periodsperiod of fiscal 2005. These increases are mainly2006. The increase in Operating income was driven by higher revenues as noted above and lower entertainment programming costs due to the absence of programming costs for the Super Bowl and Daytona 500 that were broadcastfewer cancellations. The increases in the third quarter of fiscal 2005,Operating income was partially offset by the decreased revenues noted above and by higher sports programming costs, for returning shows, local news expansions, music license feesexpansion, and new sports programming on the UPN affiliated stations.start up costs for MyNetworkTV which was launched in September 2006.
Revenues for the three and nine months ended March 31,September 30, 2006 at the Company’s internationalInternational television operations increased overoperation decreased from the corresponding periodsperiod of fiscal 2005. These increases were2006. The decrease was primarily drivendue to lower advertising revenues, partially offset by higher advertising and subscription revenues. Operating income forincreased as compared to the Company’s international television operations increased for the three and nine months ended March 31, 2006 over the corresponding periodsfirst quarter of fiscal 2005, primarily driven by increased revenues, as noted above, which were2006 due to lower programming costs and selling, general and administrative expenses, partially offset by increased programming costs associated with the launch of new channels and programming.decreases in revenues noted above.
Cable Network Programming (13%(15% and 10%14% of the Company’s consolidated revenues in the first nine monthsquarter of fiscal 20062007 and 2005,2006, respectively)
For the three and nine months ended March 31,September 30, 2006, revenues for the Cable Network Programming segment increased $206$114 million, or 33%15%, and $567 million, or 31%, respectively, as compared to the corresponding periods of fiscalthree months ended September 30, 2005. For the third quarter of fiscal 2006, Fox News, Channel’s (“Fox News”), the FX Network’s (“FX”) and the Regional Sports Networks’ (“RSNs”) revenues increased 18%, 13% and 48%, respectively, from the third quarter of fiscal 2005. For the nine months ended March 31, 2006, Fox News’, FX’s and the RSNs’ revenues increased 15%12%, 18%12% and 38%14%, respectively, from the corresponding period of fiscal 2005.2006.
At Fox News’ advertising revenues increased 8% and 11% for the three and nine months ended March 31, 2006, respectively, primarily driven by higher pricing and higher volume. NetNews, net affiliate revenue increased 8% for the three and nine months ended March 31, 2006, as a result of increases9%, which can be attributed to an increase in subscribers and average rates per subscriber from the corresponding periodsperiod of fiscal 2005.2006. In addition, revenues from licensing fees contributed to the increase from the corresponding period of fiscal 2006. Slightly offsetting these increases was lower advertising revenue, primarily driven by lower volume. As of March 31,September 30, 2006, Fox News reached approximately 8990 million Nielsen households.
FX’s advertising revenues increased 16% and 22% for the three and nine months ended March 31, 2006, respectively, as compared to14% over the corresponding periodsperiod of fiscal 2005.2006. The increases wereincrease was driven by higher
volume in both the three pricing and nine months ended March 31, 2006, as well as higher pricing in the third quarter of fiscal 2006 as compared to the respective periods of fiscal 2005. For the three and nine months ended March 31, 2006, netvolume. Net affiliate revenue increased 11% and 16%, respectively, as compared to9% over the corresponding periodsperiod of fiscal 2005,2006, reflecting an increase in average rates per subscriber and DBSthe number of subscribers. As of March 31,September 30, 2006, FX reached approximately 8890 million Nielsen households.
RSNs’ advertisingThe RSN’s affiliate revenues increased 34% and 31%14% for the three and nine months ended March 31,September 30, 2006 respectively, as compared to the corresponding periods of fiscal 2005. These increases were primarily due to the consolidation of the Florida and Ohio RSNs acquired in April 2005 and the resumption of National Hockey League (“NHL”) games in the second quarter of fiscal 2006 after the cancellation of the 2004-05 NHL season. In addition, there was an increase in MLB pricing in the nine months ended March 31, 2006, as compared tofrom the corresponding period of fiscal 2005. Affiliate revenues increased 51% and 40% for the three and nine months ended March 31, 2006, respectively, as compared to the corresponding periods of fiscal 2005. These increases were primarily due to higher rates and a higher number of subscribers including those from the consolidationacquisition of the FloridaTurner South RSN in May 2006. Advertising revenues increased 8% from the three months ended September 30, 2005, due to the acquisition of the Turner South RSN and Ohio RSNs, the absence of allowances recordeda net increase in the prior year related to the cancellationnumber of the 2004-05 NHL season, an increase in DBS subscribers and higher average rates per subscriber.events broadcasted.
The Cable Network Programming segment Operating income increased $39$52 million, or 23%26%, and $105 million, or 19% for the three and nine months ended March 31, 2006, respectively, as compared tofrom the corresponding periodsperiod of fiscal 2005. These improvements were2006. This improvement was primarily driven by the revenue increases noted above and lower marketing and on-air expenses of new shows at FX. Operating income increases were partially offset by higher programming expenses. Programming expenses increasedsports rights amortization primarily due to the consolidation of the Floridaadditional MLB games and Ohio RSNs and Fox Sports Net in April 2005 and thehigher entertainment programming costs associated with the resumption of NHL games after the cancellation of the 2004-05 season. Also contributing to this increase were newly acquired series and more original programming at FX. In addition, marketing expenses increased at FX for the first nine months of fiscal 2006 due to increased promotion costs for its new original series as well as returning shows in fiscal 2006.rights.
Direct Broadcast Satellite Television(10% and 9% of the Company’s consolidated revenues in the first nine monthsquarter of fiscal 20062007 and 2005,2006, respectively)
For the three and nine months ended March 31,September 30, 2006, SKY Italia revenues increased $51$124 million, or 8%25%, and $173 million, or 11%, respectively, as compared to the corresponding periodsperiod of fiscal 2005.2006. This revenue growth was primarily driven by an increase of approximately 500,000434,000 subscribers over the corresponding period of fiscal 2005.2006. During the thirdfirst quarter of fiscal 2006,2007, SKY Italia added approximately 112,0003,000 net subscribers, which resulted inmaintained SKY Italia’s total subscriber base totaling more than 3.7at 3.8 million at March 31,September 30, 2006. The total churn infor the third quarter of fiscalthree months ended September 30, 2006 was approximately 66,000147,000 on an average subscriber base of 3.8 million, as compared to churn of approximately 116,000 subscribers on an average subscriber base of approximately 3.7 million, as compared to churn of approximately 62,000 subscribers on an average subscriber base of approximately 3.23.3 million in the corresponding periodfirst quarter of fiscal 2005. The total churn for the nine months ended March 31, 2006 was approximately 250,000 on an average subscriber base of 3.5 million, as compared to churn of approximately 210,000 subscribers on an average subscriber base of 3.0 million in the corresponding period of fiscal 2005.2006. Subscriber churn for the period represents the number of SKY Italia subscribers whose service was disconnected during the period.
Average revenue per subscriber (“ARPU”) for the three and nine months ended March 31,September 30, 2006 was approximately €46 and approximately €43, respectively.€39. The ARPU for the three months ended March 31,September 30, 2006 improved by approximately €1increased over the corresponding period in the prior yearof fiscal 2006 primarily due to a nearly €2 price increase during the second quarter of fiscal 2006. The ARPU for the nine months ended March 31, 2006, which was consistent with that of the corresponding period of the prior year.partially offset by new subscriber price promotions. 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 periodrespective periods by adding the beginning and ending subscribers for the period and dividing by two.
Subscriber acquisition costs per subscriber (“SAC”) of approximately €235€330 in the thirdfirst quarter of fiscal 2007 increased over the first quarter fiscal 2006 was relatively flat as compareddue to changes in the corresponding prior year.consumer offer that reflected increased advertising and marketing cost on a per gross addition basis and lower upfront activation fees. SAC is calculated by dividing total subscriber acquisition costs for a period by the number of gross SKY Italia subscribers added 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.
During the three months ended March 31,September 30, 2006, the strengtheningweakening of the U.S. dollar resulted in decreasesincreases of approximately 8% and 3%4% in revenues and operating incomelosses, as compared to the corresponding period of fiscal 2005. The strengthening of2006.
For the U.S. dollar resulted in decreases of approximately 5% in both revenues and operating income for the ninethree months ended March 31,September 30, 2006, Operating results at SKY Italia improved by $48 million as compared to the corresponding period of fiscal 2005.
For the three and nine months ended March 31, 2006, Operating results at SKY Italia improved by $90 million and $202 million, respectively, as compared to the corresponding periods of fiscal 2005. These improvements were2006. The improvement was primarily due to the revenue increases noted above, partially offset by the higher programming costsfees paid for content due to the increasedincrease in subscriber base, and additional channels.as well as higher sports rights amortization.
Magazines and Inserts(4%5% of the Company’s consolidated revenues in the first nine monthsquarter of fiscal 2007 and 2006, and 2005)respectively)
For the three and nine months ended March 31,September 30, 2006, revenues at the Magazines and Inserts segment increased $17$8 million, or 6%, and $58 million, or 7%3%, as compared to the corresponding periods ofperiod in fiscal 2005, respectively.2006. The increase in the three months ended March 31, 2006fiscal 2007 primarily resulted from an increase in sales of the Company’s in-store marketing products due to higher demand in supermarkets, partially offset by lower rates for the publication of free standing inserts. For the nine months ended March 31, 2006, an increase in demand for the Company’s in-Store shelf products and an increase in international volume resulted in an increase in revenues partially offset by lower rates for the publication of free standing inserts as compared to the first nine months of fiscal 2005.
Operating incomewell as higher demand for the three and nine months ended March 31, 2006 increased $11 million, or 14%, and $26 million, or 12%, as compared to the corresponding periods of fiscal 2005, respectively. The increases were primarily due to volume increases in in-store marketing products, partially offset by lower revenue rates forfrom the publication of free standing inserts, as noted above, and a lower operating profit margininserts.
Operating income increased to $78 million for the three months ended September 30, 2006 from $76 million in the corresponding period of fiscal 2006. The increase was primarily due to changes in product mix as the free standing inserts yield a lower profit margin than sales of in-store marketing products.revenue increases noted above.
Newspapers(16% and 17%18% of the Company’s consolidated revenues in the first nine monthsquarter of fiscal 20062007 and 2005,2006, respectively)
The NewspapersNewspaper segment revenues decreased $47reported revenue of $1,049 million or 4%,in the first quarter of fiscal 2007 as compared to $1,012 million in the corresponding period of fiscal 2006. Operating income for the three months ended March 31,September 30, 2006 and increased $100 million, or 3%, forwas relatively consistent with that of the nine months ended March 31, 2006, as compared to the corresponding periodsfirst quarter of fiscal 2005. Operating income decreased $33 million, or 18%, and $141 million, or 29%, for the three and nine months ended March 31, 2006, respectively, as compared to the corresponding periods of fiscal 2005.2006. During the three months ended March 31,September 30, 2006, the strengtheningweakening of the U.S. dollar resulted in decreasesincreases of approximately 6%2% and 1% in both revenues and operating income, respectively, as compared to the corresponding period of fiscal 2005. The strengthening2006.
For the three months ended September 30, 2006, the U.K. newspapers’ revenues increased 6% over the corresponding period in fiscal 2006 due to higher circulation, advertising and digital revenue. Circulation revenue increased over the corresponding period of fiscal 2006 due to cover price increases, partly offset by lower net circulation across all titles. Advertising revenue increased over the U.S. dollar resulted in decreasescorresponding period of approximately 2% in both revenuesfiscal 2006 as a result of higher color display revenue, partially offset by lower mono display and operatingclassified revenue. Operating income increased by 1% for the ninethree months ended March 31,September 30, 2006 as compared to the corresponding period of fiscal 2005.
For the three and nine months ended March 31, 2006, U.K. newspapers’ revenues decreased 8% and 6%, respectively, as compared to the corresponding periods of fiscal 2005. For the three and nine months ended
March 31, 2006, U.K. newspapers’ advertising revenues decreased from the corresponding periods of fiscal 2005 as a result of a general weakness in the U.K. advertising market. Revenues also decreased2006. This increase was due to the absence of revenue from TSL Education Ltd., which the Company sold in October 2005. Circulationhigher revenues increased over the corresponding periods of fiscal 2005 due to cover price increases across all titlesnoted above and higher net circulation onThe Times in the nine months ended March 31, 2006 as a result oflower promotional activities. U.K. newspapers’ Operating income decreased 29% and 80% for the three and nine months ended March 31, 2006, respectively, as compared to the corresponding periods of fiscal 2005. These decreases are primarily due to the absence ofcosts.This was partially offset by start up operating profit due to the sale of the Company’s TSL Education Ltd. division in October 2005 and costs incurred in fiscal 2006 associated with the consumer magazine division, the launch of a consumer magazine division. Also contributing to the decrease in Operating income for the nine months ended March 31, 2006 as compared to the corresponding period of fiscal 2005 was the increased depreciationfree London newspaper and other costs associated with the development of new printing plants in the United Kingdom and a redundancy provision of $102 million recorded in fiscal 2006 for certain U.K. production employees as a result of the Company committing to a reduction in workforce expected to occur in fiscal 2007 and 2008. The Company expects annualized personnel cost savings of approximately $65 million when the U.K. workforce reduction is completed.higher newsprint costs.
For the three months ended March 31, 2006, the Australian newspapers’ revenues were consistent with the corresponding period of fiscal 2005. For the nine months ended March 31,September 30, 2006, the Australian newspapers’ revenues increased 16%, as compared to the corresponding period of fiscal 2005, mainly1% due to the consolidation of the results of QPL beginning in November 2004. Also contributing to this increase was improved display and classified advertising revenues, along with the impact of cover price increases at the major weekend newspapers. Operating income decreased 5% forFor the three months ended March 31,September 30 2006, primarily due to movement in exchange rates. Excluding the impact of foreign exchange fluctuations, operating income for the three months ended March 31, 2006 was consistent with the corresponding period of fiscal 2005, with display and classified advertising growth being offset by higher editorial and production costs. The increase in operating income of 16% for the nine months ended March 31, 2006,decreased 3% as compared to the corresponding period of fiscal 2005, was2006, primarily attributabledue to the consolidation of QPL beginning in November 2004.higher employee costs and higher newsprint costs.
Book Publishing(6% and 7% of the Company’s consolidated revenues in the first nine months of fiscal 2006 and 2005)
For the three months ended March 31, 2006, revenues at HarperCollins decreased $25 million, or 8% from the corresponding period of fiscal 2005 due to lower volume of sales. For the nine months ended March 31, 2006, revenues at HarperCollins increased $15 million, or 1%, from the corresponding period of fiscal 2005. The increase in revenues in the nine month period is primarily attributable to more bestsellers in fiscal 2006 than fiscal 2005 as well as the strength ofThe Chronicles of Narnia series in the Childrens divisions. During the three months ended March 31, 2006, HarperCollins had 36 titles on theNew York Times Bestseller List with four titles reaching the number one position. During the nine months ended March 31, 2006, HarperCollins had 83 titles on theNew York Times Bestseller List with 12 titles reaching the number one position.
Operating income decreased $4 million, or 13%, for the three months ended March 31, 2006 and increased $21 million, or 14%, for the nine months ended March 31, 2006 as compared to the corresponding periods of fiscal 2005. The decrease in Operating income for the third quarter of fiscal 2007 and 2006, was primarily due to lower volume of sales, as noted above, when compared to the corresponding period of fiscal 2005. The increase in Operating income for the nine months ended March 31, 2006 was primarily attributable to the revenue increases noted above.
Other (5% of the Company’s consolidated revenues in the first nine months of fiscal 2006 and 2005)respectively)
For the three and nine months ended March 31, 2006, revenues at the Other segment increased $109 million, or 44%, and $184 million, or 23%, respectively, as compared to the corresponding periods of fiscal 2005. These increases were primarily driven by incremental revenues from FIM.
For the three months ended March 31,September 30, 2006, the Operating lossrevenues at the OtherBook Publishing segment increased $20decreased by $23 million, or 69%6%, as compared to the corresponding period of fiscal 2005,2006 which included the results of significant
sales ofThe Chronicles of Narnia series by C.S. Lewis,YOU: The Owners Manualby Michael F. Roizen and Mehmet C. Oz, M.D. andFreakonomics by Steven D. Levitt and Stephen J. Dubner. During the three months ended September 30, 2006, HarperCollins had 33 titles onThe New York Times Bestseller List, with 2 titles reaching the number one position. Notable bestsellers for the three months ended September 30, 2006 included:Marley and Me by John Grogan,Wins, Losses and Lessons by Lou Holtz,Dead Wrong by J.A. Jance,All Aunt Hagar’s Children by Edward P. Jones andFreakonomicsby Steven D. Levitt and Stephen J. Dubner. Operating income for the three months ended September 30, 2006 decreased by $15 million, or 21%, due to revenue decreases noted above and reduced backlist sales.
Other (7% and 5% of the Company’s consolidated revenues in the first quarter of fiscal 2007 and 2006, respectively)
Revenues at the Other segment increased $123 million for the three months ended September 30, 2006 from the corresponding period of fiscal 2006. The increase was primarily driven by incremental revenues from the FIM acquisitions. The Operating loss at the Other segment increased $47 million for the three months ended September 30, 2006 as compared to the corresponding period in fiscal 2006, primarily as a result of higher staff and facility costs due to increased headcount at NDS and inclusion of the FIM operating losses in the first quarter of fiscal 2007, principally resulting from employee retention expenses and amortization of purchased intangible assets. The Operating loss at the Other segment decreased $54 million, or 44%, for the nine months ended March 31, 2006 as compared to the corresponding period of fiscal 2005, primarily as a result of prior year results including reorganization costs in connection with the Company’s incorporation in the United States partially offset by the inclusion of the current year FIM operating losses noted above.
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 facilityRevolving Credit Facility and various film financing alternatives to supplement its cash flows. The availability under the revolving credit facilityRevolving Credit Facility as of March 31,September 30, 2006 was reduced by letters of credit issued which totaled $171approximately $178 million. AsAlso, as of March 31,September 30, 2006, the Company had consolidated cash and cash equivalents of approximately $5.3$6.3 billion. The 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 itsthe Company’s 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; the acquisition of and payments under programming rights for entertainment and sports programming; paper purchases; operational expenditures; capital expenditures; interest expense; income tax payments; investments in equity affiliates;associated entities; dividends; debt repayments; business acquisitions;acquisitions and stock repurchases.
Sources and uses of cash
Net cash provided by operating activities for the ninethree months ended March 31,September 30, 2006 and 2005 wasis as follows (in millions):
For the nine months ended March 31, | 2006 | 2005 | ||||||||||
For the three months ended September 30, | 2006 | 2005 | ||||||||||
Net cash provided by operating activities | $ | 2,049 | $ | 2,313 | $ | 716 | $ | 497 | ||||
The decreaseincrease in net cash provided by operating activities primarily reflects lower cash collections from worldwide home entertainment product primarily driven by a lower number of film home entertainment releases and higher film and television production spending at the Filmed Entertainment segment as compared to the prior year corresponding period. In addition, also contributing to this decrease was higher sports rights and higher tax payments during the ninethree months ended March 31,September 30, 2006 as compared to the corresponding period of fiscal 2005.2006 reflects lower production spending and higher home entertainment receipts at the Filmed Entertainment segment and lower international sports rights payments.
Net cash used in investing activities for the ninethree months ended March 31,September 30, 2006 and 2005 wasis as follows (in millions):
For the nine months ended March 31, | 2006 | 2005 | ||||||
Property, plant and equipment, net of acquisitions | $ | (648 | ) | $ | (710 | ) | ||
Acquisitions, net of cash acquired | (1,578 | ) | (141 | ) | ||||
Investments in equity affiliates | (39 | ) | (142 | ) | ||||
Other investments | (46 | ) | (30 | ) | ||||
Proceeds from sale of investments and other non-current assets | 404 | 643 | ||||||
Proceeds from disposition of discontinued operations | 395 | — | ||||||
Net cash used in investing activities | $ | (1,512 | ) | $ | (380 | ) | ||
For the three months ended September 30, Property, plant, and equipment, net of acquisitions Acquisitions, net of cash acquired Investments in equity affiliates Other investments Proceeds from sale of investments and other non-current assets Net cash used in investing activities 2006 2005 $ (282 ) $ (199 ) (157 ) (238 ) (11 ) (19 ) (17 ) — 288 114 $ (179 ) $ (342 )
Cash used in investing activities during the nine months ended March 31, 2006 was higherlower than the corresponding period of fiscal 2005the prior year due to higher proceeds from sales of investments and other assets and a reduction in cash used for acquisitions. Partially offsetting these improvements was higher capital expenditures.
The increase in capital expenditures is primarily due to the acquisitions of Intermix Media, Inc. and IGN Entertainment, Inc. that occurred during the first half of fiscal 2006. The cash used in investing activities during the nine months ended March 31, 2006 was partially offset by proceeds received from the disposition of discontinued operations as the Company sold its TSL Education Ltd. division for approximately $395 million in cash consideration in October 2005.
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.
In fiscal 2005, the Company announced its intentions to investcontinued investment in new printing plants in the United Kingdom and AustraliaAustralia.
Proceeds from the sale of investments and other non-current assets primarily related to take advantagethe sale of technological and market changes. The Company intends to invest approximately $1 billionland in the United Kingdom on printing plantsSeaport District of Boston, Massachusetts forThe Sun, $202 million and from theNews sale of a portion of the World, Company’s equity investment in Phoenix Satellite Television Holdings Limited for approximately $164 million. These proceeds were partially offset by a final payout relating to a fiscal 2006 transaction of approximately $97 million. Proceeds from the sale of investments and other non-current assets for the three months ended September 30, 2005 primarily represent cash received from the sale of China Netcom of approximately $112 million.
The Timesandnet cash used for acquisition activities for the three months ended September 30, 2006 primarily consisted of TGRT, a national, general interest broadcast television station in Turkey for approximately $102 million. The Sunday Timesand $500 millionnet cash used for Australian printing plants. The Company plansacquisition activities during the three months ended September 30, 2005 is primarily due to fully fund the investment outpurchase of operating cash flow. Depreciation expense on plant and equipment that will be replaced will be accelerated over the next three to four years.25% stake in News Out of Home for approximately $175 million.
Net cash used in financing activities for the ninethree months ended March 31,September 30, 2006 and 2005 wasis as follows (in millions):
For the nine months ended March 31, | 2006 | 2005 | ||||||||||||||
For the three months ended September 30, | 2006 | 2005 | ||||||||||||||
Borrowings | $ | 1,149 | $ | 1,776 | $ | 145 | $ | 6 | ||||||||
Repayment of borrowings | (839 | ) | (2,095 | ) | (190 | ) | (5 | ) | ||||||||
Cash on deposit | — | 275 | ||||||||||||||
Issuance of shares | 110 | 65 | 68 | 29 | ||||||||||||
Repurchase of shares | (1,810 | ) | — | (59 | ) | (213 | ) | |||||||||
Dividends paid | (246 | ) | (124 | ) | (3 | ) | (1 | ) | ||||||||
Net cash used in financing activities | $ | (1,636 | ) | $ | (103 | ) | $ | (39 | ) | $ | (184 | ) | ||||
NetThe decrease in net cash used in financing activities forduring the ninethree months ended March 31,September 30, 2006 was higher than the corresponding period of fiscal 2005 primarily due to stock repurchases. During the implementationfirst quarter of fiscal 2007, the stock repurchase program. The increase was offset by an increase in borrowings net of repaymentsCompany repurchased 3.2 million shares for the nine months ended March 31, 2006,$59 million as compared to repurchases of 13.6 million shares for $213 million during the nine months ended March 31, 2005.first quarter of fiscal 2006.
Debt Instruments
2006 | 2005 | |||||
Issuances | (in millions) | |||||
Notes due 2014 | $ | — | $ | 748 | ||
Notes due 2034 | — | 995 | ||||
Notes due 2035 | 1,133 | — | ||||
All other | 16 | 33 | ||||
$ | 1,149 | $ | 1,776 | |||
In December 2005, the Company issued approximately $1,150 million of 6.40% Senior Notes due 2035. The Company received proceeds of $1,133 million on the issuance of this debt, net of expenses. These notes are issued under the Amended and Restated Indenture, dated as of March 24, 1993, as supplemented, among News America Incorporated, the Company, the subsidiary guarantors named therein and The Bank of New York, as Trustee.
2006 | 2005 | |||||
Repayments | (in millions) | |||||
LYONs | $ | 831 | $ | — | ||
Cruden Group assumed debt | — | 654 | ||||
New Millenium II | — | 659 | ||||
Preferred Perpetual Shares | — | 345 | ||||
All other | 8 | 437 | ||||
$ | 839 | $ | 2,095 | |||
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 were redeemable at the option of the holders on February 28, 2006 at a price of $594.25. The LYONs are also redeemable at the option of the holders on February 28, 2011 and February 28, 2016 at a price of $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.
On February 28, 2006, 92% of the LYONs were redeemed by the Company for cash at the specified redemption amount of $594.25 per LYON. Accordingly, the Company paid an aggregate of approximately $831 million to the holders of the LYONs that had exercised this redemption option. LYONs with a carrying value of approximately $69 million remained outstanding as of March 31, 2006. The pro-rata portion of unamortized deferred financing costs relating to the redeemed LYONs approximating $13 million was recognized and included in Other, net in the unaudited consolidated statement of operations for the three and nine months ended March 31, 2006.
For the three months ended September 30, | 2006 | 2005 | ||||||
(in millions) | ||||||||
Borrowings | ||||||||
RZB loan | $ | 145 | $ | — | ||||
All other | — | 6 | ||||||
Total borrowings | $ | 145 | $ | 6 | ||||
Repayments of borrowings | ||||||||
EBRD loan | $ | (154 | ) | $ | — | |||
All other | (36 | ) | (5 | ) | ||||
Total repayments of borrowings | $ | (190 | ) | $ | (5 | ) | ||
Other
The Company’s $200 million 8.45% Senior Debentures due August 2034 may be put at the option of the holder to the Company in August 2006 at par. The Company’s $240 million, 7.43% Senior Debentures due October 2026 may be put at the option of the holder to the Company in October 2006 at par. Additionally, the Company’s $200 million, 8.50% Senior DebenturesDebenture due February 2025 may be put, at the option of the holder, to the Company in February 2007. These debentures areThis debenture is currently trading above par and the Company believes that under the current U.S. interest rate environment the debentures will not be put to the Company. Accordingly, the Company does not currently believe that these borrowingsthis debenture will impact the Company’s liquidity in the next twelve months.
Stock Repurchase Program
On June 13, 2005, the Company announced that theits Board of Directors (the “Board”) approved a stock repurchase program, under which the Company was authorized to acquire up to an aggregate of $3.0 billion in the Company’s Class A and Class B common stock. In May 2006, the Company announced that the Board authorized increasing the total amount of the stock repurchase program to $6.0 billionbillion.
Ratings of the Public Debt
The table below summarizes the Company’s credit ratings as of March 31,September 30, 2006.
Rating Agency | Senior Debt | Outlook | ||
Moody’s | Stable | |||
Standard & Poor’s | BBB | Stable |
Revolving Credit Agreement
On June 27, 2003, News America Incorporated (“NAI”), aan indirect wholly -owned 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, FEG Holdings, Inc., Fox Entertainment Group, Inc., News America Marketing FSI, LLC,L.L.C., News Publishing Australia Limited and News Australia Holdings Pty Limited are guarantors (collectively the(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 Credit 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 0.15% regardless of facility usage. The Company pays interest of a margin over LIBOR for borrowings and a letter of credit fee of 0.60%. The Company is subject to additional fees 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 March 31,September 30, 2006, letters of credit representing $171$178 million were issued under the Credit Agreement.
Commitments
As a result of the FIM acquisitions that occurred in September and October 2005, the Company has commitments under certain contractual arrangements to make future payments of up to a maximum of $148 million as of March 31, 2006. These commitments are comprised of operating leases, capital expenditures and contractual employee obligations.
In December 2005,July 2006, the Company signed a new broadcastcontract with MLB for rights agreement with NASCAR forto telecast certain racesregular season and post season games, as well as exclusive rights for certain ancillary content for an eight year term, commencing in calendar year 2007, in the amount of $1.7 billion.
Sky Italia entered into a new operating lease agreement in January 2006to telecast MLB’s World Series and All-Star Game for a newly developed property currently under construction in Milan, Italy for an initial 12-year term which is expected to commence in fiscal 2007 with an automatic renewal option for an additional 12-yearseven-year term through fiscal 2031.the 2013 MLB season. The lease includes an annual increase based on a costCompany will pay approximately $1.8 billion over the term of living index as defined by the contract commencingfor these rights.
The Company has commenced a project to upgrade its printing presses with the payment of the rental fee in the second year. Total payments relating to this leasenew automated technology, that once on line, are expected to approximate $375 million.
Other than previously disclosedlower production costs and improve newspaper quality, including expanded color. As part of this initiative, the Company entered into several third party printing contracts in the notes to these unaudited consolidated financial statements, the Company’s commitments have not changed significantly from disclosures includedUnited Kingdom totaling approximately $463 million and expiring in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2005 filed with the SEC on September 1, 2005.2022.
Guarantees
The Company had guaranteed a transponder lease for Innova,Sky Brasil, an equity affiliate of the Company. The Company also guaranteed $46$210 million of the obligationsobligation of InnovaSky Brasil under a credit agreement. Upon the closing of the sale of Innova duringSky Brasil in the thirdfirst quarter of 2006,fiscal 2007, the Company was released from these guarantees.
Other than previously disclosed in the notes to these unaudited consolidated financial statements,transponder lease and will be released from the Company’s guarantees have not changed significantly from disclosures included in the Company’s Annual Reportcredit agreement guarantee on Form 10-K for the fiscal year ended June 30, 2005 filed with the SEC on September 1, 2005.or before January 31, 2007.
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.
The Company currently has one significant arrangement that is exercisable. The Company’s 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. The minority stockholders of Media Support Services Limited currently have In the right to sell their interests to News Out of Home. The Company believes that the exercisenext twelve months none of these sale rights, if any, will not have a material effect on its consolidated financial condition, future results of operations or liquidity.arrangements that become exercisable are material.
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.
The Company’s operations are subject to tax in various domestic and international jurisdictions.jurisdictions and as a matter of course, the Company is regularly audited by federal, state and foreign tax authorities. The Company believes it has appropriately accrued for the expected outcome of all pending tax matters and does not currently anticipate that the ultimate resolution of pending tax matters 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 DBS 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. Demand for the Company’s products is also a factor in determining advertising rates. For example, ratings points for the Company’s television stations and broadcast and cable networks and circulation levels for the Company’s newspapers are factors that are weighed when determining advertising rates, and with respect to the Company’s television stations and broadcast and television networks, when determining the affiliate rates received by the Company. In addition, newer technologies, including new video formats, streaming and downloading capabilities via the Internet, video-on-demand, personal video recorders and other devices and technologies are increasing the number of media and entertainment choices available to audiences. Some of these devices and technologies allow users to view television or motion pictures from a remote location or on a time-delayed basis and provide users the ability for users to fast-forward, rewind, pause and skip programming. These technological developments are increasing the number of media and entertainment choices available to audiences and may cause changes in consumer behavior that could affect the attractiveness of the Company’s offerings to viewers, advertisers and/or distributors. A decrease in advertising expenditures or reduced demand for the Company’s offerings can lead to a reduction in pricing and advertising spending, which could 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 a growing number 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 affect 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 their 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 Signal Theft and Limit the Company’s Ability to Protect Its Intellectual Property Rights.
The Company seeks to limit the threat of content piracy and DBS programming signal theft; 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. In addition, developments in software or devices that circumvent encryption technology increase the threat of unauthorized use and distribution of DBS programming signals. The Company has taken, and will continue to take, a variety of actions to combat piracy and signal theft, both individually and, in some instances, together with industry associations. There can be no assurance that the
Company’s efforts to enforce its rights and protect its products, services and intellectual property will be successful in preventing content piracy or signal theft. Content piracy and signal theft present a threat to the Company’s revenues from products and services, including, but not limited to, films, television shows, books and DBS programming.
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, 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, 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 currently has in place 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 2.8% of the Company’s Class A Common Stock and 30.0% 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 0.8% of the Company’s Class A Common Stock and 1.1% of its Class B Common Stock. Thus, Mr. K. Rupert Murdoch may be deemed to beneficially own in the aggregate 3.5% of the Company’s Class A Common Stock and 31.1% of its Class B Common Stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSUREDISCLOSURES ABOUT MARKET RISK
News CorporationThe Company 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 CorporationThe Company conducts operations in four principal currencies: the U.S. dollar, the British pound sterling, the Australian dollarEuro and the Euro.Australian dollar. These currencies operate as the functional currency for the Company’s U.S., European (including the U.K.), Australian and ItalianAustralian operations, respectively. Cash is managed centrally within each of the four 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 Credit Agreement or from intercompany borrowings. Since earnings of the Company’s Australian and European (including the U.K.) operations are expected to be reinvested in those businesses indefinitely, (excluding amounts that have been or will be repatriated under the American Jobs Creation Act), the Company does not hedge its investment in the net assets of those foreign operations.
At March 31,September 30, 2006, the Company’s outstanding financial instruments with foreign currency exchange rate risk exposure had an aggregate fair value of $116$134 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 $21$17 million at March 31,September 30, 2006.
Interest Rates
The Company’s current financing arrangements and facilities include $11.4$11 billion of outstanding debt which is substantiallywith 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 rate debt will impact interest expense as well as the amount of cash required to service such debt. As of March 31,September 30, 2006, 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 $12.1$12.8 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 $655$623 million at March 31,September 30, 2006.
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 $15,831$17,657 million as of March 31,September 30, 2006. A hypothetical decrease in the market price of these investments of 10% would result in a fair value of approximately $14,248$15,892 million. Such a hypothetical decrease would result in a decrease in comprehensive income of approximately $5$16 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, 2006, the fair value of this conversion feature was $161$200 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 $46$61 million.
PART I
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 15(d)-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 arewere 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 arewere effective in ensuring that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s Chairman and Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Internal Control Over Financial Reporting
There havewere not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) during the Company’s thirdfirst quarter of fiscal 20062007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
See Note 11 to the unaudited consolidated financial statements, which isare incorporated by reference.
See “Risk Factors” beginningProspective 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 page 67,or in its television stations, broadcast and cable networks, newspapers and inserts, websites and DBS 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. Demand for the Company’s products is also a factor in determining advertising rates. For example, ratings points for the Company’s television stations, broadcast and cable networks and circulation levels for the Company’s newspapers are factors that are weighed when determining advertising rates, and with respect to the Company’s television stations and broadcast and television networks, when determining the affiliate rates received by the Company. In addition, newer technologies, including new video formats, streaming and downloading capabilities via the Internet, video-on-demand, personal video recorders and other devices and technologies are increasing the number of media and entertainment choices available to audiences. Some of these devices and technologies allow users to view television or motion pictures from a remote location or on a time-delayed basis and provide users the ability for users to fast-forward, rewind, pause and skip programming. These technological developments are increasing the number of media and entertainment choices available to audiences
and may cause changes in consumer behavior that could affect the attractiveness of the Company’s offerings to viewers, advertisers and/or distributors. A decrease in advertising expenditures or reduced demand for the Company’s offerings can lead to a reduction in pricing and advertising spending, which could 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 incorporateddifficult 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 a growing number 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 affect 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 their 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 reference.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 Signal Theft and Limit the Company’s Ability to Protect Its Intellectual Property Rights.
The Company seeks to limit the threat of content piracy and DBS programming signal theft; 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. In addition, developments in software or devices that circumvent encryption technology increase the threat of unauthorized use and distribution of DBS programming signals. The Company has taken, and will continue to take, a variety of actions to combat piracy and signal theft, both individually and, in some instances, together with industry associations. There can be no assurance that the Company’s efforts to enforce its rights and protect its products, services and intellectual property will be successful in preventing content piracy or signal theft. Content piracy and signal theft present a threat to the Company’s revenues from products and services, including, but not limited to, films, television shows, books and DBS programming.
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, 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, 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 currently has in place 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 the Board. 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 2.8% of the Company’s Class A Common Stock and 30.1% 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 1.1% of its Class B Common Stock. Thus, Mr. K. Rupert Murdoch may be deemed to beneficially own in the aggregate 3.5% of the Company’s Class A Common Stock and 31.2% of its Class B Common Stock.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In June 2005, the Company announced a stock repurchase program under which the Company wasis authorized to acquire from time to time up to an aggregate of $3 billion in Class A Common Stock and Class B Common Stock. In May 2006, the Company announced that the Board increased the total amount of the stock repurchase program to $6 billion.
Below is a summary of the Company’s purchases of its Class A Common Stock and Class B Common Stock during the three months ended March 31,September 30, 2006:
Total Number of Shares Purchased | Average Price per Share | Total Cost of Purchase | ||||||
(in millions) | ||||||||
Common Stock—January Class A | 1,367,900 | $ | 15.61 | $ | 21 | |||
Common Stock—January Class B | 1,141,700 | 16.62 | 19 | |||||
Common Stock—February Class A | 10,217,411 | 16.00 | 164 | |||||
Common Stock—February Class B | 9,225,259 | 16.89 | 156 | |||||
Common Stock—March Class A | 12,197,700 | 16.59 | 202 | |||||
Common Stock—March Class B | 10,311,312 | 17.55 | 181 | |||||
Total | 44,461,282 | $ | 743 |
Common Stock—July Class A Common Stock—July Class B Common Stock—August Class A Common Stock—August Class B Common Stock—September Class A Common Stock—September Class B Total Total Number
of Shares
Purchased Average Price
per Share Total Cost
of Purchase (in millions) 1,000,000 $ 18.83 $ 19 — — — 2,142,564 18.76 40 9,415 19.25 — — — — — — — 3,151,979 $ 59
The remaining authorized amount at March 31,September 30, 2006, excluding commissionscommission under the Company’s stock repurchase program is approximately $658$3,383 million.
In May 2006, the Company announced that the Board had authorized increasing the total amount of the stock repurchase program to $6.0 billion.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Not applicable.
(a) Exhibits.
10.1 | Amendment to the Amended and Restated Employment Agreement between News America Incorporated and Peter Chernin, as of August 3, 2006.* | |
12.1 | Ratio of Earnings to Fixed Charges.* | |
31.1 | Chairman and Chief Executive Officer Certification required by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended.* | |
31.2 | Chief Financial Officer Certification required by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended.* | |
32.1 | Certification of Chairman and Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes Oxley Act of 2002.* |
* | Filed herewith |
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 | |
David F. DeVoe Senior Executive Vice President and Chief Financial Officer |
Date: May 10,November 8, 2006
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