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NON-CASH IMPAIRMENT CHARGE
At the time of our IPO in November 1999, we acquired for cost the
European and Middle Eastern rights to the Saban library of children’s
programming (“the Library”), one of the largest libraries
of children’s programming in the world. In accordance with
US GAAP, the net book value of the Library was allocated by title
based on the estimated future revenues that were projected at that
time to be generated by each title.
Under US GAAP(1),
estimates are made of the total future revenues that will be generated
by each title. These estimates are updated periodically and the
company amortises the portion of the net book value of each title
that relates to revenue recognised during the period.
Following the acquisition of our 76% owner
ABCW by Disney, and the subsequent appointment of Disney to service
our programme distribution business, a review(2)
was carried out to update the estimates of the revenues projected
to be earned by each title in the Library. For some titles projected
revenues were increased compared to original estimates, whereas
for other titles projected revenues were decreased. However, in
light of the challenging market conditions and a projected reduction
in the volume of new programming available to the company from ABCW,
the total projected revenues from the Library were reduced.
The titles within our Library are used
interchangeably by our channels as there is typically no cash cost
associated with usage of these rights, therefore usage depends solely
on programme scheduling decisions.
However, under US GAAP we continue to amortise
the Library on a title-by-title basis, and cannot treat it as a
whole. This means that if the projected mix of titles used from
our Library on our channels is significantly different from assumptions
made in previous periods, a significant non-cash impairment charge
can result even though there is no impairment to the Library when
taken as a whole. This is also the case if assumptions of projected
revenues from non-channel usage (i.e. typically sales to free television
broadcasters) are revised by title. This is because for the purpose
of determining impairment under US GAAP, no benefit can be taken
on titles that are being leased or used more frequently than expected
to offset impairment on titles that are leased or used less frequently
than expected.
This exercise has resulted in a non-cash
impairment charge of $26.1 million. As at September 30, 2002, the
net book value of our programme inventory was $128.1 million, substantially
lower than the remaining projected revenues that will be generated
from these titles.
NET FINANCIAL INCOME
Net financial income decreased to $1.0 million from $2.1 million
as a result of a fall in interest rates for the dollar, sterling
and euro in which the company’s cash balances are held.
JOINT VENTURES
Our share of the profit of affiliates reduced from $1.5 million
to $1.2 million. Following a restructuring of the business, our
channel in the Netherlands was fully consolidated into our results
as of December 1, 2000. This channel was previously equity accounted.
The impact of this consolidation was partially offset by a stronger
performance from our Spanish affiliate.
The increase in the participation of the
minority interest is primarily due to an improvement in the profitability
of our channel in Poland where we have a partner holding a 20% equity
interest.
As a direct consequence of the change in
control of our majority shareholder, ABCW, an option held by Middle
East Communication Holdings BV (MECH BV) to sell to the company
its 49.5% stake in Fox Kids Israel Enterprises BV (FKI) became exercisable
during the period. We currently own 50.5% of FKI which, through
a wholly owned local subsidiary, owns and operates the local Fox
Kids pay TV channel and website, excluding any rights to the Saban
library, in the Israeli market. The company is in advanced negotiations
to acquire MECH BV’s stake in FKI, as well as the Israeli rights
to the Saban library and certain other Israeli rights, outside of
the formal process set out in the option agreement. We expect this
acquisition to be concluded very shortly for approximately $20 million.
(1) SOP 00-2, Accounting by Producers
or Distributors of Films.
(2) The review was carried out in order to determine any purchase
price accounting adjustment required to be booked by Disney.
TAXATION
The tax credit for the year comprises a deferred tax credit partially
offset by $1.7 million in taxes payable (primarily withholding,
income and asset taxes). We remain conservative in our approach
to recognition of deferred tax assets and, accordingly, only $5.8
million has been recognised as a deferred tax asset in the period.
The deferred tax asset as at September 30, 2002, stands at $10.2
million.
CUMULATIVE
EFFECT OF ADOPTING NEW ACCOUNTING PRINCIPLE
Our library has been amortised historically over its expected useful
life in accordance with US GAAP (FAS53). FAS53 has now been replaced
by SOP 00-2, which has been adopted by the company with effect from
July 1, 2001. As with other media companies, the adoption of SOP
00-2 has led to a one-off non-cash charge to income, which is the
cumulative effect of the change in accounting principle. The amount
of this charge was $15.1 million.
EARNINGS
PER SHARE
Basic and diluted earnings per share
(before cumulative effect of change in accounting principle) declined
to a loss of 36.2 cents per share from earnings of 20.7 cents per
share in the previous fiscal period due to an increase in amortisation
(which included a material non-cash impairment charge), a deterioration
in the performance of the programme distribution business, partially
offset by improvements in the performance of the channel and online
businesses.
Incorporating the cumulative
effect of the change in accounting principle, the basic and diluted
loss per share was 54.5 cents per share.
CASH FLOW
Operating cash flow improved significantly from an outflow of $4.4
million to an inflow of $20.2 million. The improvement in cash flow
was driven primarily by the improvement in performance of our channel
operation, as well as a reduction in investment in programming,
where the amount of programming added to our library decreased from
423 episodes and 17 family films to 320 episodes and 3 family films.
This was partially offset by a reduction in programme distribution
revenues and an increase in the amount of programming acquired solely
for use on our channels.
Receivables reduced by
$17.0 million mainly as a result of the phasing of the programme
distribution revenues towards the end of the previous fiscal period.
Capital expenditure was
reduced from $3.9 million in the previous fiscal period to $1.7
million due to reduced new channel launch activity, reduced investment
in our online and interactive division and reduced expenditure on
leasehold improvements in the UK office.
As at September 30, 2002,
the company had cash balances of $61.2 million.
CHANNELS
Key distribution agreements were renewed
during the period and our distribution continued to grow with the
increase in the number of subscribers to cable and satellite operators
that distribute our channels. Households reached increased by 24%
to 32.3 million at September 30, 2002 from 26.0 million at September
30, 2001, extending the lead over our competitors(3).
Our agreement with BSkyB in the UK was
extended by three years to October 2007 and our agreement with CanalSatellite
in France was extended by five years to October 2007. As part of
a long-term strategic relationship with UPC, our distribution agreements
in Poland, Romania, Hungary, the Czech Republic and Slovakia were
extended to December 2008.
A significant increase in distribution
was achieved in Poland. A five-year agreement was signed with Cyfra
Plus, the Polish DTH platform resulting from the merger between
the Cyfra Plus and Wizja TV satellite platforms and which reaches
700,000 households. A five-year agreement with Polsat, the rival
Polish DTH satellite platform that reaches 250,000 households also
commenced as well as a five-year agreement with Aster City, Poland’s
second largest cable operator with 300,000 subscribers. This brought
the reach of our Polish channel to 1.9 million households.
We also signed a five-year agreement
with Spanish DTH satellite platform Via Digital, complementing our
existing distribution by Canal Satelite Digital and making Fox Kids
the only children’s channel which is distributed on both DTH
satellite platforms in Spain. In Scandinavia, we entered an agreement
with TeleDenmark Cable, Denmark’s largest cable operator with
600,000 subscribers.
In September 2001, our Israeli channel
was launched on Yes, the Israeli DTH satellite platform, making
the channel available to all digital pay-TV subscribers in the market.
In October 2001, a new local Fox Kids channel was launched in Greece
via the leading DTH satellite platform, Multichoice Hellas.
Three-year distribution agreements were
also signed with the UK’s two cable operators, Telewest and
NTL, in December 2001 and January 2002 respectively, bringing the
total number of households reached in the UK to 7.9 million at September
30, 2002. Through our daily one-hour channel block that is transmitted
free-to-air in Italy, we reach an additional 14 million households.
This block has performed very strongly since its launch in September
2001 and we expect to extend its hours in the near future.
In addition to increasing distribution,
we also continued to perform well in terms of audience share. We
remain the ratings leader among children in multichannel TV households
in many of the markets where we broadcast and ratings are measured.
In the Netherlands, where we reach over 95% of all TV households,
we had a particularly strong performance with an average market
share of 32%(4)
during the period. In the UK we have also improved our position
where ratings have increased(5)
despite the launch of two digital children’s channels by the
BBC.
Our pan-European channel reach has now
achieved a critical mass in terms of attractiveness to advertisers
and, coupled with continued ratings success and sponsorship initiatives
such as the Fox Kids Cup, we anticipate our strong advertising growth
to continue in the coming year.
As at September 30, 2002, the Fox Kids
channels were broadcast in 56 countries, reaching 32.3 million households
in 17 languages via 12 separate feeds.
(3) Competitor information based on available
published data and Fox Kids Europe estimates.
(4) Children 6-12, quarter ended September 30, 2002.
(5) Children 4-15, quarter ended September 30, 2002 versus quarter
ended September 30, 2001.
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