Operating
& Financial Review

Channels

Programme
Distribution

Online &
Interactive

Consumer
Products

OPERATING & FINANCIAL REVIEW

The company changed its fiscal year end from May 31 to June 30 during the period in order to be coterminous with its majority shareholder, Fox Family Worldwide, Inc. Therefore the results are presented for the 13-month period ended June 30, 2001.

REVENUES
Fox Kids Europe generates revenues from multiple sources, including programme distribution fees, subscription fees, advertising revenues and consumer product royalties and commissions.

Total revenues for the 13-month period ended June 30, 2001 were $136.1 million, representing a 36% increase on the previous fiscal year. The major contributor to this growth was the channel group, where revenues grew by 62%*. Within the channel group, subscription revenues were $48.6 million, up 62% from $30.0 million achieved in the previous fiscal year, while advertising revenues were up 61% to $15.8 million. Subscription revenues represented 75% of channel revenues. Advertising represented 25% of channel revenues and 12% of total revenues.

Revenues from our programme distribution division increased by 13%. This year, for the first time, we were able to leverage our pan-European infrastructure to acquire not only European rights, but also other international rights to a number of series, including So Little Time, a live action series of 26 episodes featuring the “tween” superstars Mary-Kate and Ashley Olsen. The other international rights to these series were sold to Fox Family Worldwide, accounting for $5.8 million of our revenues.

EBITDA
EBITDA reached $53.9 million, up 54% compared with the fiscal year ending May 31, 2000.

Our channel group achieved a substantial increase in EBITDA, up $12.0 million to $13.4 million, with every one of our channel operations now EBITDA positive except for the most recent launches in Germany and Israel. EBITDA from programme distribution grew 26% to $51.2 million, as a result of an increase in revenues and a reduction in distribution expenses. EBITDA from our consumer products operations increased by 132% to $5.2 million as a result of increased revenues, partially offset by the full-year operating costs of the new operations in the Netherlands and Spain which were opened in the second half of the last fiscal year. Online & interactive operations showed a negative EBITDA of $6.4 million due to increased expenditure as activities in this new division were expanded. The online & interactive operations remain on track to achieve our target of profitability by fiscal year 2003.

EXPENSES
Operating expenses increased by 14% due to an extra month of expenses, new channel launches in Germany, Hungary, the Middle East and Israel, a full year of technical costs for our Italian channel service which launched in April 2000 and higher investment in our online & interactive division. These increases were partially offset by reduced transponder fees in the channel business, following the migration to digital services in the UK.

As anticipated, a final charge of $1.2 million was incurred in relation to the planned early termination of the analogue transponder sublease used by the Fox Kids UK channel. The final migration of Fox Kids UK from analogue to digital services will have a beneficial impact on technical costs in future years.

Selling, general and administrative expenses increased by 34%, primarily due to the channel launches referred to above, consolidation of seven months of expenses from our channel operation in the Netherlands that was previously equity accounted, increased staff levels in our online & interactive division, one-off professional fees associated with a corporate transaction that did not proceed, and a full year of costs in respect of the newly established consumer products operations in Spain and the Netherlands. Excluding the one-off costs associated with the above transaction of $950,000, and an extra month of expenses, corporate overhead was flat year on year.

Depreciation increased to $1.8 million from $1.3 million in the previous fiscal year. Amortisation increased to $41.4 million from $28.5 million due to the increase in programme distribution and consumer products revenues and higher amortisation rates applied on family films and non-European sales. Our library has been amortised historically over its expected useful life in accordance with FAS53. This has now been replaced by SOP2, which will be adopted for future years. As with other media companies, the adoption of SOP2 is expected to result in a one-off non-cash charge to income in the first half of the new fiscal year.

Net financial income increased to $2.1 million from $1.2 million through interest earned on the company’s cash balances for a longer period than in the previous fiscal year.

JOINT VENTURES
Our share of the profit of affiliates was $1.5 million. This compares favourably to a loss of $2.3 million in the previous fiscal year and is a result of stronger operating performances by our channels in the Netherlands and Spain. Following a restructuring of the business, the financial performance of our channel in the Netherlands was fully consolidated into our results as of December 1, 2000.

The increase in the participation of the minority interest is due to the substantial operating improvement of our channel in Poland, where a subsidiary of UPC has a 20% shareholding.

TAXATION
The majority of our current tax charge for the year relates to withholding taxes payable. With respect to deferred tax, we have historically adopted a conservative approach to the recognition of our deferred tax assets and, given the adverse economic climate and the pending change of ownership of our majority shareholder, Fox Family Worldwide, we have adopted a similar stance in the current year. Accordingly, only $4.4 million has been recognised as a deferred tax asset. There remain significant, unrecognised, carried forward tax losses in most countries.

EARNINGS PER SHARE
Earnings per share (basic) improved to 20.7 cents per share, up from 0.4 cents per share in the previous fiscal year, driven by the improvements in operating and financial performance discussed above.

CASH FLOW
Operating cash flow improved significantly from an outflow of $15.6 million to an outflow of $4.4 million. The underlying improvement in cash flow, driven primarily by increased revenues, was partially offset by increased investment in programming and in our online & interactive operations. The primary factors behind the increase in investment in programming were the acquisition of the US television rights to So Little Time, an increase in the number of episodes produced from 263 to 423 and the acquisition of 17 family films.

Receivables increased by $18.9 million to $56.9 million as at June 30, 2001, mainly as a result of the phasing of the distribution revenues towards the end of the period, whereas in the previous fiscal year they had been phased towards the first half. The newly launched channels and overall increase in revenues also contributed to this increase.

Capital expenditure totalled $4.0 million. The main areas of expenditure were investment in our online & interactive division, leasehold improvements associated with our expansion, general office equipment and equipment required for our new channel launches, primarily in Germany and Israel.

As at June 30, 2001, the company had cash balances of $42.6 million.