Form 10-Q
Table of Contents

 

 

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 September 30, 2013

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

 

 

TWENTY-FIRST CENTURY FOX, INC.

(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

(Address of Principal Executive Offices)

 

10036

(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of November 1, 2013, 1,483,285,437 shares of Class A Common Stock, par value $0.01 per share, and 798,520,953 shares of Class B Common Stock, par value $0.01 per share, were outstanding.

 

 

 


Table of Contents

TWENTY-FIRST CENTURY FOX, INC.

FORM 10-Q

TABLE OF CONTENTS

 

              

Page

Part I. Financial Information

  
  

Item 1.

  

Financial Statements

  
     

Unaudited Consolidated Statements of Operations for the three months ended September 30, 2013 and 2012

   3
     

Unaudited Consolidated Statements of Comprehensive Income for the three months ended September 30, 2013 and 2012

  

4

     

Consolidated Balance Sheets at September 30, 2013 (unaudited) and June 30, 2013 (audited)

   5
     

Unaudited Consolidated Statements of Cash Flows for the three months ended September 30, 2013 and 2012

   6
     

Notes to the Unaudited Consolidated Financial Statements

   7
  

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

41

  

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

57

  

Item 4.

  

Controls and Procedures

  

59

Part II. Other Information

  
  

Item 1.

  

Legal Proceedings

  

60

  

Item 1A.

  

Risk Factors

  

62

  

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

69

  

Item 3.

  

Defaults Upon Senior Securities

  

69

  

Item 4.

  

Mine Safety Disclosures

  

69

  

Item 5.

  

Other Information

  

69

  

Item 6.

  

Exhibits

  

70

  

Signature

  

71

 

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Table of Contents

TWENTY-FIRST CENTURY FOX, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

 

     For the three months ended
September 30,
 
     2013     2012  

Revenues

   $ 7,061     $ 6,003  

Operating expenses

     (4,447     (3,515

Selling, general and administrative

     (1,018     (920

Depreciation and amortization

     (313     (174

Impairment charges

     —         (35

Equity earnings of affiliates

     92       129  

Interest expense, net

     (272     (261

Interest income

     8       15  

Other, net

     (35     1,369  
  

 

 

   

 

 

 

Income from continuing operations before income tax expense

     1,076       2,611  

Income tax expense

     (300     (304
  

 

 

   

 

 

 

Income from continuing operations

     776       2,307  

Income (loss) from discontinued operations, net of tax

     487       (20
  

 

 

   

 

 

 

Net income

     1,263       2,287  

Less: Net income attributable to noncontrolling interests

     (8     (54
  

 

 

   

 

 

 

Net income attributable to Twenty-First Century Fox, Inc. stockholders

   $ 1,255     $ 2,233  
  

 

 

   

 

 

 

Weighted average shares:

    

Basic

     2,306       2,366  

Diluted

     2,309       2,370  

Income from continuing operations attributable to Twenty-First Century Fox, Inc. stockholders per share:

    

Basic

   $ 0.33     $ 0.95  

Diluted

   $ 0.33     $ 0.95  

Net income attributable to Twenty-First Century Fox, Inc. stockholders per share:

    

Basic

   $ 0.54     $ 0.94  

Diluted

   $ 0.54     $ 0.94  

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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TWENTY-FIRST CENTURY FOX, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(IN MILLIONS)

 

     For the three months ended
September 30,
 
     2013     2012  

Net income

   $ 1,263     $ 2,287  

Other comprehensive income, net of tax:

    

Foreign currency translation adjustments

     390       279  

Unrealized holding losses on securities

     (12     (1

Benefit plan adjustments

     6       14  
  

 

 

   

 

 

 

Other comprehensive income, net of tax

     384       292  
  

 

 

   

 

 

 

Comprehensive income

     1,647       2,579  
  

 

 

   

 

 

 

Less: Net income attributable to noncontrolling interests(a)

     (8     (54

Less: Other comprehensive income attributable to noncontrolling interests

     (93     (1
  

 

 

   

 

 

 

Comprehensive income attributable to Twenty-First Century Fox, Inc. stockholders

   $ 1,546     $ 2,524  
  

 

 

   

 

 

 

 

(a)  Net income attributable to noncontrolling interests includes $23 million and $22 million for the three months ended September 30, 2013 and 2012, respectively, relating to redeemable noncontrolling interests.

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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TWENTY-FIRST CENTURY FOX, INC.

CONSOLIDATED BALANCE SHEETS

(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)

 

     As of September 30,
2013
     As of June 30,
2013
 
     (unaudited)      (audited)  

Assets:

  

Current assets:

  

Cash and cash equivalents

   $ 6,681      $ 6,659  

Receivables, net

     5,605        5,459  

Inventories, net

     3,278        2,784  

Other

     979        665  
  

 

 

    

 

 

 

Total current assets

     16,543        15,567  
  

 

 

    

 

 

 

Non-current assets:

  

Receivables

     452        437  

Investments

     3,802        3,704  

Inventories, net

     5,723        5,371  

Property, plant and equipment, net

     2,875        2,829  

Intangible assets, net

     6,618        5,064  

Goodwill

     16,297        17,255  

Other non-current assets

     715        717  
  

 

 

    

 

 

 

Total assets

   $ 53,025      $ 50,944  
  

 

 

    

 

 

 

Liabilities and Equity:

     

Current liabilities:

     

Borrowings

   $ 140      $ 137  

Accounts payable, accrued expenses and other current liabilities

     4,744        4,434  

Participations, residuals and royalties payable

     1,655        1,663  

Program rights payable

     1,613        1,524  

Deferred revenue

     761        677  
  

 

 

    

 

 

 

Total current liabilities

     8,913        8,435  
  

 

 

    

 

 

 

Non-current liabilities:

     

Borrowings

     17,333        16,321  

Other liabilities

     3,172        3,264  

Deferred income taxes

     2,712        2,280  

Redeemable noncontrolling interests

     518        519  

Commitments and contingencies

     
     

Equity:

     

Class A common stock(a)

     15        15  

Class B common stock(b)

     8        8  

Additional paid-in capital

     15,532        15,840  

Retained earnings and accumulated other comprehensive income

     1,669        1,135  
  

 

 

    

 

 

 

Total Twenty-First Century Fox, Inc. stockholders’ equity

     17,224        16,998  

Noncontrolling interests

     3,153        3,127  
  

 

 

    

 

 

 

Total equity

     20,377        20,125  
  

 

 

    

 

 

 

Total liabilities and equity

   $ 53,025      $ 50,944  
  

 

 

    

 

 

 

 

(a)  Class A common stock, $0.01 par value per share, 6,000,000,000 shares authorized, 1,494,056,538 shares and 1,517,670,765 shares issued and outstanding, net of 123,687,371 treasury shares at par at September 30, 2013 and June 30, 2013, respectively.
(b)  Class B common stock, $0.01 par value per share, 3,000,000,000 shares authorized, 798,520,953 shares issued and outstanding, net of 356,993,807 treasury shares at par at September 30, 2013 and June 30, 2013, respectively.

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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TWENTY-FIRST CENTURY FOX, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN MILLIONS)

 

     For the three months ended
September 30,
 
     2013     2012  

Operating activities:

    

Net income

   $ 1,263     $ 2,287  

Less: Income (loss) from discontinued operations, net of tax

     487       (20
  

 

 

   

 

 

 

Income from continuing operations:

     776       2,307  

Adjustments to reconcile income from continuing operations to cash provided by operating activities:

    

Depreciation and amortization

     313       174  

Amortization of cable distribution investments

     22       21  

Equity earnings of affiliates

     (92     (129

Cash distributions received from affiliates

     13       2  

Impairment charges

     —         35  

Other, net

     35       (1,369

Change in operating assets and liabilities, net of acquisitions:

    

Receivables and other assets

     (150     (139

Inventories, net

     (805     (444

Accounts payable and other liabilities

     233       345  
  

 

 

   

 

 

 

Net cash provided by operating activities from continuing operations

     345       803  
  

 

 

   

 

 

 

Investing activities:

    

Property, plant and equipment

     (171     (112

Acquisitions, net of cash acquired

     (7     —    

Investments in equity affiliates

     (137     70  

Other investments

     (14     (30

Proceeds from dispositions

     3       1,825  
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities from continuing operations

     (326     1,753  
  

 

 

   

 

 

 

Financing activities:

    

Borrowings

     987       987  

Issuance of shares

     66       111  

Repurchase of shares

     (913     (877

Dividends paid

     (58     (41

Purchase of subsidiary shares from noncontrolling interests

     (75     —    

Sale of subsidiary shares to noncontrolling interests

     —         9  

Distribution to News Corporation

     (10     —    
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities from continuing operations

     (3     189  
  

 

 

   

 

 

 

Net (decrease) in cash and cash equivalents from discontinued operations

     (29     (395
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (13     2,350  

Cash and cash equivalents, beginning of year

     6,659       9,626  

Exchange movement on opening cash balance

     35       31  
  

 

 

   

 

 

 

Cash and cash equivalents, end of year

   $ 6,681     $ 12,007  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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Table of Contents

TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1. BASIS OF PRESENTATION

Twenty-First Century Fox, Inc. (formerly known as News Corporation) and its subsidiaries (together, “Twenty-First Century Fox” or the “Company”) is a Delaware corporation. Twenty-First Century Fox is a diversified global media and entertainment company, which manages and reports its businesses in five segments: Cable Network Programming, Television, Filmed Entertainment, Direct Broadcast Satellite Television and Other, Corporate and Eliminations.

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, 2014.

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, 2013 as filed with the Securities and Exchange Commission (“SEC”) on August 19, 2013 (the “2013 Form 10-K”).

The consolidated financial statements include the accounts of Twenty-First Century Fox. 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 designated as available-for-sale if readily determinable fair values are available. If an investment’s fair value is not readily determinable, the Company accounts for its investment under the cost method.

The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts that are reported in the consolidated financial statements and accompanying disclosures. Actual results could differ from those estimates.

On September 19, 2013, the Company changed its fiscal year from a 52-53 week fiscal year ending on the Sunday closest to June 30 to a fiscal year ending on June 30 of each year. The Company’s 2013 fiscal year ended on June 30, 2013. The Company made this change to better align its financial reporting with the media and entertainment assets retained following the separation of its business into two independent publicly traded companies (the “Separation”) by distributing to its stockholders all of the outstanding shares of the new News Corporation (“News Corp”) on June 28, 2013. (See Note 4 – Discontinued Operations)

Certain fiscal 2013 amounts have been reclassified to conform to the fiscal 2014 presentation. As a result of the Separation, News Corp has been classified as discontinued operations for all periods presented (See Note 4 – Discontinued Operations). Unless indicated otherwise, the information in the notes to the unaudited consolidated financial statements relate to the Company’s continuing operations.

Recently Adopted and Recently Issued Accounting Guidance

Adopted

In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU 2013-02”), which requires the Company to provide information about the amounts reclassified out of accumulated other comprehensive income by

 

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

component. In addition, it requires the Company to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, the Company is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. ASU 2013-02 became effective for the Company for interim reporting periods beginning July 1, 2013. The adoption of ASU 2013-02 resulted in the disclosure of additional information within the notes to the consolidated financial statements. (See Note 12 — Stockholders’ Equity)

Issued

In February 2013, the FASB issued ASU 2013-04, “Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date” (“ASU 2013-04”). The objective of ASU 2013-04 is to provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation (within the scope of this guidance) is fixed at the reporting date. Examples of obligations within the scope of ASU 2013-04 include debt arrangements, other contractual obligations, and settled litigation and judicial rulings. ASU 2013-04 is effective for the Company for interim reporting periods beginning July 1, 2014, however, early adoption is permitted. The Company does not expect the adoption of this standard to have any significant impact on the consolidated financial statements.

In March 2013, the FASB issued ASU 2013-05, “Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity,” (“ASU 2013-05”). The objective of ASU 2013-05 is to resolve the diversity in practice regarding the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets or a business within a foreign entity. ASU 2013-05 is effective for the Company for interim reporting periods beginning July 1, 2014, however, early adoption is permitted. The Company is currently evaluating the impact ASU 2013-05 will have on its consolidated financial statements.

NOTE 2. VARIABLE INTEREST ENTITIES

The Company evaluates whether a Twenty-First Century Fox entity or interest is a variable interest entity (“VIE”) and whether the Company is the primary beneficiary. Consolidation is required if both of these criteria are met.

The Company owns an approximate 33% interest in Hulu LLC (“Hulu”) which is considered a VIE. However, the Company is not the primary beneficiary. The Company’s risk of loss related to this investment is $115 million, the portion of Hulu’s debt that it guarantees.

In October 2012, Hulu redeemed Providence Equity Partners’ equity interest for $200 million. In connection with the transaction, Hulu incurred a charge primarily related to employee equity-based compensation. Accordingly, the Company recorded approximately $60 million to reflect its share of the charge in the second quarter of fiscal 2013. The Company has guaranteed $115 million of Hulu’s $338 million five-year term loan which was used by Hulu, in part, to finance the transaction. The fair value of this guarantee was calculated using Level 3 inputs and was included in the consolidated balance sheet in other liabilities. In July 2013, the Company invested an additional $125 million in Hulu and has committed to invest an additional $125 million in Hulu to maintain its ownership percentage of approximately 33%. The Company will continue to account for its interest in Hulu as an equity method investment.

 

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 3. ACQUISITIONS, DISPOSALS AND OTHER TRANSACTIONS

Fiscal 2014

Acquisitions

Latin America Pay Television

In September 2013, the Company acquired the 22% interest it did not already own in Latin America Pay Television (“LAPTV”), an entity that distributes premium and basic television channels in Latin America, for approximately $75 million in cash. As a result of this transaction, the Company now owns 100% of LAPTV. The transaction is accounted for as an equity transaction in the unaudited consolidated financial statements.

Fiscal 2013

Acquisitions

During the fiscal year ended June 30, 2013, the Company completed a number of acquisitions as more fully described below. All of the Company’s acquisitions were accounted for under Accounting Standards Codification (“ASC”) 805, “Business Combinations” (“ASC 805”), which requires, among other things, that an acquirer (i) remeasure any previously held equity interest in an acquiree at its acquisition date fair value and recognize any resulting gains or losses in earnings and (ii) record any non-controlling interests in an acquiree at their acquisition date fair values. Accordingly, several of the transactions described below resulted in the recognition of remeasurement gains since the Company acquired control of an acquiree in stages. Further, other transactions described below involved the Company acquiring control with an ownership stake of less than 100%. In those instances, the allocation of the excess purchase price reflects 100% of the fair value of the acquiree with the non-controlling interests recorded at fair value.

The below acquisitions all support the Company’s strategic priority of increasing its brand presence and reach in key international and domestic markets, acquiring greater control of investments that complement its portfolio of businesses and creating new pay-TV sports franchises. For those acquisitions where the allocation of the excess purchase price is not final, the amounts allocated to intangibles and goodwill, the estimates of useful lives and the related amortization expense are subject to change pending the completion of final valuations of certain assets and liabilities. A change in the purchase price allocations and any estimates of useful lives could result in a change in the value allocated to the intangible assets that could impact amortization expense.

Eredivisie Media & Marketing

In November 2012, the Company acquired a controlling 51% ownership stake in Eredivisie Media & Marketing CV (“EMM”) for approximately $350 million, of which $325 million was cash and $25 million was contingent consideration. EMM is a media company that holds the collective media and sponsorship rights of the Dutch Premier League. The remaining 49% of EMM, which is owned by the Dutch Premier League and the global TV production company Endemol, has been recorded at its acquisition date fair value. In accordance with ASC 805, the excess purchase price, based on a valuation of 100% of EMM, of approximately $670 million has been preliminarily allocated as follows: $325 million to amortizable intangible assets, primarily customer relationships, with useful lives ranging from 6 to 20 years, and approximately $345 million representing the goodwill on the transaction.

Fox Sports Asia (formerly ESPN Star Sports)

In November 2012, the Company acquired the remaining 50% interest in ESPN Star Sports, now operating as Fox Sports Asia, that it did not already own for approximately $220 million, net of cash acquired. Fox Sports

 

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Asia is a leading sports broadcaster in Asia and the Company now, through its wholly owned subsidiaries, owns 100% of Fox Sports Asia. The carrying amount of the Company’s previously held equity interest in Fox Sports Asia was revalued to fair value as of the acquisition date, resulting in a non-taxable gain of approximately $174 million which was included in Other, net in the consolidated statements of operations for the fiscal year ended June 30, 2013. In accordance with ASC 805, the aggregate excess purchase price, including the revalued previously held investment, of approximately $870 million has been preliminarily allocated as follows: $190 million to amortizable intangible assets, primarily Multiple-System Operator (“MSO”) agreements, with useful lives ranging from 8 to 15 years and approximately $680 million representing the goodwill on the transaction.

SportsTime Ohio

In December 2012, the Company acquired SportsTime Ohio, a Regional Sports Network (“RSN”) serving the Cleveland, Ohio market, for an estimated total purchase price, including post-closing costs, of approximately $285 million, of which $135 million was in cash. The balance of the purchase price represents the fair value of deferred payments and payments that are contingent upon achievement of certain performance objectives. In accordance with ASC 805, the excess purchase price of approximately $275 million has been preliminarily allocated as follows: $135 million to amortizable intangible assets, primarily MSO agreements, with useful lives ranging from 8 to 20 years and approximately $140 million representing the goodwill on the transaction.

Sky Deutschland

During the third quarter of fiscal 2013, the Company acquired, through a combination of a private placement and a rights offering, approximately 92 million additional shares of Sky Deutschland AG (“Sky Deutschland”) increasing the Company’s ownership interest to 55%. The remaining 45% of Sky Deutschland not owned by the Company has been recorded at fair value of approximately $2.4 billion, based on the closing price of its shares on the Frankfurt Stock Exchange on the date control was acquired (a Level 1 measurement as defined in Note 8 —Fair Value). The aggregate cost of shares acquired by the Company was approximately €410 million (approximately $550 million). The carrying amount of the Company’s previously held equity interest in Sky Deutschland was revalued to fair value as of the acquisition date, resulting in a gain of approximately $2.1 billion which was included in Other, net in the consolidated statements of operations for the fiscal year ended June 30, 2013. In accordance with ASC 805, the aggregate excess purchase price has been preliminarily allocated as follows: approximately $1.7 billion to intangible assets, consisting of subscriber relationships, with a useful life of 11 years and the indefinite-lived Sky trade name, approximately $4.4 billion representing the goodwill on the transaction that is not being amortized and the related deferred tax liabilities. As of result of these transactions, the Company has the power to control Sky Deutschland and the results of Sky Deutschland are included in the Company’s consolidated results of operations beginning in January 2013. Prior to the acquisition of the additional 5% ownership interest, the Company accounted for its investment in Sky Deutschland under the equity method of accounting and the Company’s investment consisted of common stock, convertible bonds and loans.

The Company has guaranteed Sky Deutschland’s €300 million (approximately $400 million) five-year bank credit facility, of which approximately €225 million (approximately $300 million) has been utilized and is included in borrowings. In connection with the consolidation of Sky Deutschland, the Company assumed $480 million in bank debt, which Sky Deutschland repaid in full during the third quarter of fiscal 2013. Additionally, the Company is the guarantor to the German Football League for Sky Deutschland’s Bundesliga broadcasting license for the 2013/14 to 2016/17 seasons in an amount up to 50% of the license fee per season and the Company has also agreed to extend the maturity of existing shareholder loans that were issued before it became a consolidated subsidiary.

 

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

In January 2011, the Company purchased a convertible bond from Sky Deutschland for approximately $225 million. The Company currently has the right to convert the bonds into 53.9 million underlying Sky Deutschland shares, subject to certain black-out periods. If not converted, the Company will have the option to redeem the bonds for cash upon their maturity in January 2015. The convertible bonds were separated into their host and derivative financial instrument components. Prior to Sky Deutschland becoming a consolidated subsidiary, both the host and derivative financial instrument components were recorded at their estimated fair value in Investments in the consolidated balance sheets. The change in estimated fair value of the derivative instrument resulted in a gain of approximately $58 million which was recorded in Other, net in the Company’s audited consolidated statements of operations for the fiscal year ended June 30, 2013. Subsequent to becoming a consolidated subsidiary, the convertible loan was effectively settled as a pre-existing relationship under the provisions of ASC 805-10-25-21 with the carrying amount of the asset for the derivative component written off as a settlement loss which was included in Other, net in the audited consolidated statements of operations for the fiscal year ended June 30, 2013.

Other

In May 2012, the Company renewed its existing FOX affiliation agreement with a major FOX affiliate group (“Network Affiliate”). As part of the transaction, the Company received cash consideration of $50 million and the Network Affiliate had an option to buy the Company’s Baltimore station. Network Affiliate exercised its option to purchase the Baltimore television station and the Company recognized a loss on the transaction of which $67 million was included in Other, net in the unaudited consolidated statements of operations for the three months ended September 30, 2012. The Company is amortizing the $50 million received from the Network Affiliate over the term of the affiliation agreement.

NOTE 4. DISCONTINUED OPERATIONS

Separation of News Corp

On June 28, 2013, the Company completed the Separation of its business into two independent publicly traded companies by distributing to its stockholders all of the outstanding shares of News Corp. The Company retained its interests in a global portfolio of media and entertainment assets spanning six continents. News Corp holds the Company’s former businesses including newspapers, information services and integrated marketing services, digital real estate services, book publishing, digital education and sports programming and pay-TV distribution in Australia. The Company completed the Separation by distributing to its stockholders one share of News Corp Class A common stock for every four shares of the Company’s Class A common stock held on June 21, 2013, and one share of News Corp Class B common stock for every four shares of the Company’s Class B common stock held on June 21, 2013. The Company’s stockholders received cash in lieu of fractional shares. Following the Separation the Company does not beneficially own any shares of News Corp Class A common stock or News Corp Class B common stock.

Effective June 28, 2013, the Separation qualified for discontinued operations treatment in accordance with ASC 205-20, “Discontinued Operations” (“ASC 205-20”), and accordingly the Company deconsolidated News Corp’s balance sheet as of June 30, 2013, and presented its results for the three months ended September 30, 2012 as discontinued operations on the unaudited statements of operations and cash flows. The footnotes to the financial statements have also been revised accordingly.

The Company entered into a separation and distribution agreement with News Corp (“Separation and Distribution Agreement”) pursuant to which the Company agreed to provide a cash contribution to News Corp immediately prior to the Separation, so that as of the Separation, News Corp would have approximately

 

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$2.6 billion of cash on hand. Accordingly, immediately prior to the Separation, the Company distributed approximately $2.4 billion to News Corp, which was comprised of $1.6 billion in cash funding and approximately $800 million that was held by News Corp’s subsidiaries immediately prior to the Separation. The Company made a final cash distribution of approximately $217 million in September 2013, pursuant to the Separation and Distribution Agreement.

Separation and Distribution Agreement

The Separation and Distribution Agreement sets forth, among other things, the parties’ agreements regarding the principal transactions necessary to effect the Separation.

The Separation and Distribution Agreement provides for the transfers of entities and their related assets and liabilities so that as of the Separation the Company and News Corp each consists of the entities associated with the businesses described above. The Separation and Distribution Agreement also provides that the Company will indemnify News Corp, on an after-tax basis, for payments made after the Separation arising out of civil claims and investigations relating to the U.K. Newspaper Matters (as defined below), as well as legal and professional fees and expenses paid in connection with the related criminal matters, other than fees, expenses and costs relating to employees who are not (i) directors, officers or certain designated employees or (ii) with respect to civil matters, co-defendants with News Corp. U.K. Newspaper Matters refers to ongoing investigations by U.K. and U.S. regulators and governmental authorities relating to phone hacking, illegal data access and inappropriate payments to public officials at The News of the World and The Sun and related matters. In addition, the Separation and Distribution Agreement governs the Company’s and News Corp’s agreements with regard to each party’s ability to comply with certain statutes or rules and regulations promulgated by the Federal Communications Commission. (See Note 14 — Commitments and Contingencies)

Tax Sharing and Indemnification Agreement

The Company entered into a tax sharing and indemnification agreement with News Corp that governs the Company’s and News Corp’s respective rights, responsibilities and obligations with respect to tax liabilities and benefits, tax attributes, tax contests and other matters regarding income taxes, non-income taxes and related tax returns. Under the tax sharing and indemnification agreement, News Corp will generally indemnify the Company against taxes attributable to News Corp’s assets or operations for all tax periods or portions thereof after the Separation. For taxable periods or portions thereof prior to the Separation, the Company will generally indemnify News Corp against U.S. consolidated and combined taxes attributable to such periods, and News Corp will indemnify the Company against News Corp’s separately filed U.S. state and foreign taxes and foreign consolidated and combined taxes for such periods. The tax sharing and indemnification agreement also provides that the proceeds, if any, from the refunds of certain foreign taxes (plus interest) of a subsidiary of News Corp that were claimed prior to the Separation are to be paid to the Company, net of certain taxes.

A subsidiary of News Corp, prior to the Separation, had filed refunds to claim certain losses in a foreign jurisdiction. At June 30, 2013, News Corp did not recognize an asset for the claims since such amounts were being disputed by the foreign tax authority and the resolution was not determinable at that time. In September 2013, the foreign jurisdiction notified News Corp that it had accepted certain claims and would refund a portion of the claims. As of September 30, 2013, pursuant to the tax sharing and indemnification agreement with News Corp, the Company has recorded the net refund of approximately $500 million as a receivable from News Corp and the amount is included in Income (loss) from discontinued operations, net of tax in the unaudited consolidated statement of operations for the three months ended September 30, 2013. In October 2013, News Corp received the refund and the net funds were delivered to the Company in November of 2013. Depending upon the final outcome of the remaining claims, News Corp may receive an additional refund of taxes of $0 to $200 million plus interest, which it would also remit to the Company, net of applicable taxes.

 

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Employee Matters Agreement

The Company entered into an employee matters agreement that governs the Company’s and News Corp’s obligations with respect to employment, compensation, benefits and other related matters for employees of certain of News Corp’s U.S.-based businesses (the “Employee Matters Agreement”). In general, the Employee Matters Agreement addresses matters relating to employees transferring to News Corp’s U.S. businesses and former News Corp employees of those businesses that participated in the Company’s retirement plans (including postretirement benefits) and welfare programs, which were retained by the Company following the distribution. The Employee Matters Agreement also addresses equity compensation matters relating to employees of both companies.

Summarized Financial Information

Revenues and income from discontinued operations related to News Corp were as follows:

 

     For the three months
ended September 30,
 
         2013              2012      
     (in millions)  

Revenues

   $ —        $ 2,133  
  

 

 

    

 

 

 

Income (loss) before income tax benefit(a)

   $ 487      $ (50
  

 

 

    

 

 

 

Income tax benefit

   $ —        $ 45  
  

 

 

    

 

 

 

Income (loss) from discontinued operations, net of tax

   $ 487      $ (20
  

 

 

    

 

 

 

Basic and diluted EPS from discontinued operations

   $ 0.21      $ (0.01
  

 

 

    

 

 

 

 

(a) Includes the net tax refund from News Corp, as stated above, for the three months ended September 30, 2013 of approximately $500 million.

Cash flows from discontinued operations related to News Corp were as follows:

 

     For the three months
ended September 30,
 
         2013             2012      
     (in millions)  

Net cash used in operating activities from discontinued operations

   $ (29   $ (90

Net cash used in investing activities from discontinued operations

     —         (294

Net cash used in financing activities from discontinued operations

     —         (11
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents from discontinued operations

   $ (29   $ (395
  

 

 

   

 

 

 

NOTE 5. RECEIVABLES, NET

Receivables are presented net of an allowance for returns and doubtful accounts, which is an estimate of amounts that may not be collectible. In determining the allowance for returns, management analyzes historical returns, current economic trends and changes in customer demand and acceptance of the Company’s products. Based on this information, management reserves a percentage of each dollar of product sales that provide the customer with the right of return. The allowance for doubtful accounts is estimated based on historical experience, receivable aging, current economic trends and specific identification of certain receivables that are at risk of not being paid.

 

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The Company has receivables with original maturities greater than one year in duration principally related to the Company’s sale of program rights in the television syndication markets within the Filmed Entertainment segment. Allowances for credit losses are established against these non-current receivables as necessary. As of September 30, 2013 and June 30, 2013, these allowances were not material.

Receivables, net consisted of:

 

     As of
September 30,
2013
    As of
June 30,
2013
 
     (in millions)  

Total receivables

   $ 6,967     $ 6,795  

Allowances for returns and doubtful accounts

     (910     (899
  

 

 

   

 

 

 

Total receivables, net

     6,057       5,896  

Less: current receivables, net

     (5,605     (5,459
  

 

 

   

 

 

 

Non-current receivables, net

   $ 452     $ 437  
  

 

 

   

 

 

 

NOTE 6. INVENTORIES

The Company’s inventories were comprised of the following:

 

     As of
September 30,
2013
    As of
June 30,
2013
 
     (in millions)  

Programming rights

   $ 5,471     $ 4,996  

DVDs, Blu-rays, and other merchandise

     83       69  

Filmed entertainment costs:

    

Films:

    

Released

     892       806  

Completed, not released

     32       10  

In production

     1,033       958  

In development or preproduction

     179       193  
  

 

 

   

 

 

 
     2,136       1,967  
  

 

 

   

 

 

 

Television productions:

    

Released

     686       696  

In production

     623       425  

In development or preproduction

     2       2  
  

 

 

   

 

 

 
     1,311       1,123  
  

 

 

   

 

 

 

Total filmed entertainment costs, less accumulated amortization(a)

     3,447       3,090  
  

 

 

   

 

 

 

Total inventories, net

     9,001       8,155  

Less: current portion of inventory, net(b)

     (3,278     (2,784
  

 

 

   

 

 

 

Total non-current inventories, net

   $ 5,723     $ 5,371  
  

 

 

   

 

 

 

 

(a)  Does not include $358 million and $366 million of net intangible film library costs as of September 30, 2013 and June 30, 2013, respectively, which are included in intangible assets subject to amortization in the consolidated balance sheets.

 

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(b)  Current portion of inventories as of September 30, 2013 and June 30, 2013 was comprised of programming rights ($3,195 million and $2,715 million, respectively), DVDs, Blu-rays, and other merchandise.

NOTE 7. INVESTMENTS

The Company’s investments were comprised of the following:

 

            Ownership
percentage
As of
September
30, 2013
  As of
September 30,
2013
     As of
June
30,
2013
 
                (in millions)  

Equity method investments:

          

British Sky Broadcasting Group plc(a)

     U.K. DBS operator       39%   $ 2,142      $ 1,978  

Yankees Entertainment and Sports Network

     Regional sports network       49%     831        825  

Other equity method investments

      various     394        386  

Fair value of available-for-sale investments

      various     249        268  

Other investments

      various     186        247  
       

 

 

    

 

 

 

Total investments

        $ 3,802      $ 3,704  
       

 

 

    

 

 

 

 

(a)  The Company’s investment in British Sky Broadcasting Group plc (“BSkyB”) had a market value of $8,773 million at September 30, 2013 and was valued using the quoted market price on the London Stock Exchange (a Level 1 measurement as described in Note 8 — Fair Value).

BSkyB

BSkyB’s shareholders and board of directors have authorized a share repurchase program. The Company entered into an agreement with BSkyB under which, following any market purchases of shares by BSkyB, the Company will sell to BSkyB sufficient shares to maintain its approximate 39% interest subsequent to those market purchases, for a price equal to the price paid by BSkyB in respect of the relevant market purchases. BSkyB began repurchasing shares as part of this share repurchase program during the second quarter of fiscal 2012. As a result, during the three months ended September 30, 2013 and 2012, the Company received cash considerations of approximately $10 million and $93 million and recognized gains of $8 million and $75 million which were included in Equity earnings of affiliates in the Company’s unaudited consolidated statements of operations for the three months ended September 30, 2013 and 2012, respectively.

Yankees Entertainment and Sports Network

In December 2012, the Company acquired a 49% equity interest in the Yankees Entertainment and Sports Network (“YES Network”), a RSN, for approximately $584 million and simultaneous with the closing of this transaction, the Company paid approximately $250 million of upfront costs on behalf of YES Network. The Company’s investment of approximately $834 million is being allocated between tangible and intangible assets in accordance with ASC 323, “Investments — Equity Investments.” The allocation of the excess cost is not final and is subject to change upon completion of final valuations of certain assets and liabilities. Changes in how the Company allocates excess cost could reduce future equity earnings as a result of additional amortization. Starting in December 2015, the remaining partners can exercise a put option that would require the Company to acquire up to an additional 31% interest. If the put option is not exercised, the Company has a call option beginning in December 2016 that would allow the Company to acquire up to an additional 31% interest. The exercise price of the put and call options approximate fair value.

 

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

NDS

In July 2012, the Company sold its 49% investment in NDS Group Limited (“NDS”) to Cisco Systems Inc. for approximately $1.9 billion, of which approximately $60 million has been set aside in escrow to satisfy any indemnification obligations. The Company recorded a gain of approximately $1.4 billion on this transaction which was included in Other, net in the unaudited consolidated statements of operations for the three months ended September 30, 2012.

Other

In March 2013, the Company sold a portion of its interest in Phoenix Satellite Television Holdings Ltd. (“Phoenix”), for approximately $90 million in cash, decreasing its interest to 12% from the 18% it owned at June 30, 2012. The Company recorded a gain of approximately $81 million on this transaction which was included in Other, net in the consolidated statements of operations for the fiscal year ended June 30, 2013. In November 2013, the Company sold its remaining 12% interest in Phoenix for approximately $210 million. The Company expects to record a gain on the sale of this investment.

Fair value of available-for-sale investments

The cost basis, unrealized gains, unrealized losses and fair market value of available-for-sale investments are set forth below:

 

     As of
September 30,
2013
     As of
June 30,
2013
 
     (in millions)  

Cost basis of available-for-sale investments

   $ 35      $ 36  

Accumulated gross unrealized gain(a)

     214        232  
  

 

 

    

 

 

 

Fair value of available-for-sale investments

   $ 249      $ 268  
  

 

 

    

 

 

 

Net deferred tax liability

   $ 75      $ 81  
  

 

 

    

 

 

 

 

(a)  Approximately $200 million of this unrealized gain relates to the Company’s investment in Phoenix which was sold in November 2013.

NOTE 8. FAIR VALUE

In accordance with ASC 820, “Fair Value Measurement,” fair value measurements are required to be disclosed using a three-tiered fair value hierarchy which distinguishes market participant assumptions into the following categories: (i) inputs that are quoted prices in active markets (“Level 1”); (ii) inputs other than quoted prices included within Level 1 that are observable, including quoted prices for similar assets or liabilities (“Level 2”); and (iii) inputs that require the entity to use its own assumptions about market participant assumptions (“Level 3”). Additionally, in accordance with ASC 815, “Derivatives and Hedging,” the Company has included additional disclosures about the Company’s derivatives and hedging activities (Level 2).

 

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The tables below present information about financial assets and liabilities carried at fair value on a recurring basis:

 

     Fair value measurements  
     As of September 30, 2013  

Description

   Total     Quoted prices in
active markets for
identical instruments

(Level 1)
     Significant
other
observable
inputs

(Level 2)
    Significant
unobservable
inputs

(Level 3)
 
     (in millions)  

Assets

         

Available-for-sale securities(a)

   $ 249     $ 249      $ —       $ —    

Liabilities

         

Derivatives(b)

     (11     —          (11     —    

Redeemable noncontrolling interests(c)

     (518     —          —         (518
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ (280   $ 249      $ (11   $ (518
  

 

 

   

 

 

    

 

 

   

 

 

 
     As of June 30, 2013  

Description

   Total     Quoted prices in
active markets for
identical instruments

(Level 1)
     Significant
other
observable
inputs

(Level 2)
    Significant
unobservable
inputs

(Level 3)
 
     (in millions)  

Assets

         

Available-for-sale securities(a)

   $ 268     $ 268      $ —       $ —    

Derivatives(b)

     3       —          3       —    

Redeemable noncontrolling interests(c)

     (519     —          —         (519
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ (248   $ 268      $ 3     $ (519
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(a)  See Note 7 — Investments.
(b)  Primarily represents derivatives associated with the Company’s foreign currency forward and interest rate swap contracts designated as cash flow hedges.
(c)  The Company accounts for redeemable noncontrolling interests in accordance with ASC 480-10-S99-3A because their exercise is outside the control of the Company and, accordingly, as of September 30, 2013 and June 30, 2013, has included the fair value of the redeemable noncontrolling interests in the consolidated balance sheets. The majority of redeemable noncontrolling interests recorded at fair value are put arrangements held by the noncontrolling interests in the Company’s majority-owned sports networks.

The Company utilizes the market, income or cost approaches or a combination of these valuation techniques for its Level 3 fair value measures. Inputs to such measures could include observable market data obtained from independent sources such as broker quotes and recent market transactions for similar assets. It is the Company’s policy to maximize the use of observable inputs in the measurement of its Level 3 fair value measurements. To the extent observable inputs are not available, the Company utilizes unobservable inputs based upon the assumptions market participants would use in valuing the asset. Examples of utilized unobservable inputs are future cash flows, long term growth rates and applicable discount rates.

Significant unobservable inputs used in the fair value measurement of the Company’s redeemable noncontrolling interests are earnings before interest, taxes, depreciation and amortization (“OIBDA”) growth rates (3%-7% range) and discount rates (8%). Significant increases (decreases) in growth rates and

 

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multiples, assuming no change in discount rates, would result in a significantly higher (lower) fair value measurement. Significant decreases (increases) in discount rates, assuming no changes in growth rates and multiples, would result in a significantly higher (lower) fair value measurement.

The fair value of the redeemable noncontrolling interests in two of the sports networks were primarily determined by (i) applying a multiples-based formula that is intended to approximate fair value for one of the sports networks and (ii) using a discounted OIBDA valuation model, assuming a 8% discount rate for another sports network. As of September 30, 2013, the minority shareholder’s put right in one of the sports networks is currently exercisable.

The remaining redeemable noncontrolling interest is currently not exercisable and is not material.

The changes in redeemable noncontrolling interests classified as Level 3 measurements were as follows:

 

     For the three months ended
September 30,
 
         2013             2012      
     (in millions)  

Beginning of period

   $ (519   $ (641

Net income attributable to redeemable noncontrolling interests

     (23     (22

Distributions

     24       15  
  

 

 

   

 

 

 
  

 

 

   

 

 

 

End of period

   $ (518   $ (648
  

 

 

   

 

 

 

Financial Instruments

The carrying value of the Company’s financial instruments, including cash and cash equivalents, receivables, payables and cost method investments, approximates fair value.

The aggregate fair value of the Company’s borrowings at September 30, 2013 was approximately $19,665 million compared with a carrying value of $17,473 million and, at June 30, 2013, was approximately $18,756 million compared with a carrying value of $16,458 million. Fair value is generally determined by reference to market values resulting from trading on a national securities exchange or in an over-the-counter market (a Level 1 measurement).

Foreign Currency Forward Contracts

The Company uses financial instruments designated as cash flow hedges primarily to hedge certain exposures to foreign currency exchange risks associated with the cost of producing or acquiring films and television programming. The notional amount of foreign currency forward contracts designated as cash flow hedges with foreign currency risk outstanding at September 30, 2013 and June 30, 2013 was $628 million and $578 million, respectively. As of September 30, 2013, the fair value of the foreign currency forward contracts of approximately $(8) million were recorded along with the underlying hedged balances. The Company’s foreign currency forward contracts are valued using an income approach based on the present value of the forward rate less the contract rate multiplied by the notional amount.

Interest Rate Swaps

The Company uses financial instruments designated as cash flow hedges primarily to hedge certain exposures to interest rate risks associated with certain borrowings. During July 2013, the Company entered into interest rate swap contracts to hedge the variability of interest rate payments on Sky Deutschland’s variable rate debt. The

 

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notional amount of the interest rate swap contracts designated as cash flow hedges with interest rate risk outstanding at September 30, 2013 and June 30, 2013 were $304 million and nil, respectively. As of September 30, 2013, the fair values and effective changes in the fair values of the interest rate swaps were not material and were recorded along with the underlying hedged balances. The Company’s interest rate swaps are valued using an income approach.

The following table shows the changes in fair value of derivatives designated as cash flow hedges and other derivatives:

 

     For the three months ended
September 30,
 
         2013             2012      
     (in millions)  

Beginning of period

   $ 3     $ 17  

Changes in fair value recorded in accumulated other comprehensive income

     (9     1  

Reclassified (gains) from accumulated other comprehensive income to net income

     (2     (10

Other

     (3     —    
  

 

 

   

 

 

 

End of period

   $ (11   $ 8  
  

 

 

   

 

 

 

The ineffective changes in fair values of derivatives designated as cash flow hedges were immaterial. Amounts are reclassified from accumulated other comprehensive income to net income when the underlying hedged item is recognized in earnings. Regarding foreign currency forward contracts, the Company expects to reclassify the cumulative changes in fair values included in accumulated other comprehensive income within the next 24 months. For interest rate swaps, the Company expects to reclassify the cumulative changes in fair values included in accumulated other comprehensive income in fiscal 2017 when the interest rate swap contracts expire. Cash flows from the settlement of these derivative contracts offset cash flows from the underlying hedged item and are included in operating activities in the unaudited consolidated statement of cash flows.

Changes in the fair values of derivatives that are not designated as hedges are recorded in earnings each period. The Company uses these financial instruments as economic hedges for certain exposures to foreign currency forward exchange risks. The notional amount of foreign currency forward contracts used as economic hedges with foreign currency risk outstanding at September 30, 2013 and June 30, 2013 was $139 million and $128 million. As of and for the three months ended September 30, 2013 and 2012, the fair values and effective changes in the fair values of those foreign currency forward contracts were immaterial and are presented net within Other in the table above.

Concentrations of Credit Risk

Cash and cash equivalents are maintained with several financial institutions. The Company has deposits held with banks that exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions of reputable credit and, therefore, bear minimal credit risk.

The Company’s receivables did not represent significant concentrations of credit risk as of September 30, 2013 or June 30, 2013 due to the wide variety of customers, markets and geographic areas to which the Company’s products and services are sold.

The Company monitors its positions with, and the credit quality of, the financial institutions which are counterparties to its financial instruments. The Company is exposed to credit loss in the event of nonperformance

 

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by the counterparties to the agreements. At September 30, 2013, the Company did not anticipate nonperformance by any of the counterparties.

NOTE 9. GOODWILL

The changes in the carrying value of goodwill, by segment, are as follows:

 

     Cable
Network
Programming
     Television      Filmed
Entertainment
     Direct Broadcast
Satellite
Television
    Other,
Corporate and
Eliminations
     Total
Goodwill
 
     (in millions)  

Balance, June 30, 2013

   $ 7,753      $ 1,882      $ 1,537      $ 6,052     $ 31      $ 17,255  

Foreign exchange movements

     —          —          30        249       —          279  

Adjustments

     —          —          —          (1,237     —          (1,237
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Balance, September 30, 2013

   $ 7,753      $ 1,882      $ 1,567      $ 5,064     $ 31      $ 16,297  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

The decrease in the carrying value of goodwill during the three months ended September 30, 2013 was primarily due to the preliminary allocation of excess purchase price from goodwill to acquired identifiable intangible assets of approximately $1.7 billion partially offset by deferred tax liabilities of approximately $0.5 billion in connection with the consolidation of Sky Deutschland.

NOTE 10. BORROWINGS

Senior Notes Issued

In September 2013, News America Incorporated (“NAI”), a wholly-owned subsidiary of the Company, issued $300 million of 4.00% Senior Notes due 2023 and $700 million of 5.40% Senior Notes due 2043. The net proceeds of approximately $987 million will be used for general corporate purposes.

In September 2012, NAI issued $1.0 billion of 3.00% Senior Notes due 2022. The net proceeds of approximately $987 million were used for general corporate purposes.

Senior Notes Due 2014

Included in Borrowings within Current liabilities as of September 30, 2013, was 8.625% Senior Notes of A$150 million ($140 million) that is due in February 2014.

Other

In January 2013, Sky Deutschland, a majority owned subsidiary of the Company, entered into a credit agreement, with major financial institutions, that NAI and the Company have both guaranteed. The credit agreement provides a €300 million unsecured credit facility with a sub-limit of €75 million revolving credit facility available for cash drawdowns or the issuance of letters of credit and a maturity date of January 2018. Sky Deutschland may request that the maturity date be extended for one year. The significant terms of the agreement include limitations on liens and indebtedness. Fees under the credit agreement are based on the Company’s long-term senior unsecured non-credit enhanced debt ratings. Given the current debt ratings of the Company, Sky Deutschland pays a facility fee of 0.125% and interest of Eurocurrency Rate plus 1.125%. As of September 30, 2013, €225 million (approximately $300 million) was outstanding under this credit agreement and only €73 million was available for either additional financing or letters of credit. The proceeds were used to repay existing Sky Deutschland debt.

 

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 11. FILM PRODUCTION FINANCING

The Company enters into arrangements with third parties to co-produce certain of its theatrical productions. These arrangements, which are referred to as co-financing arrangements, take various forms. The parties to these arrangements include studio and non-studio entities both domestic and international. In several of these agreements, other parties control certain distribution rights. The Filmed Entertainment segment records the amounts received for the sale of an economic interest as a reduction of the cost of the film, as the investor assumes full risk for that portion of the film asset acquired in these transactions. The substance of these arrangements is that the third-party investors own an interest in the film and, therefore, receive a participation based on the third-party investor’s contractual interest in the profits or losses incurred on the film. Consistent with the requirements of ASC 926, the estimate of the third-party investor’s interest in profits or losses on the film is based on total estimated ultimate revenues.

NOTE 12. STOCKHOLDERS’ EQUITY

The following table summarizes changes in equity:

 

     For the three months ended September 30,  
     2013     2012  
     Twenty-First
Century Fox
stockholders
    Noncontrolling
interests
    Total
equity
    Twenty-First
Century Fox
stockholders
    Noncontrolling
interests
    Total
equity
 
     (in millions)  

Balance, beginning of period

   $ 16,998     $ 3,127      $ 20,125     $ 24,684     $ 501      $ 25,185  

Net income

     1,255       (15 )(a)      1,240       2,233       41 (a)      2,274  

Other comprehensive income

     291       93        384       291       1        292  

Cancellation of shares, net

     (742     —          (742     (687     —          (687

Dividends declared

     (287     —          (287     (201     —          (201

Other

     (291     (52 )(b)      (343     (56     (30 )(b)      (86
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 17,224     $ 3,153      $ 20,377     $ 26,264     $ 513      $ 26,777  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)  Net income attributable to noncontrolling interests excludes $23 million and $22 million for the three months ended September 30, 2013 and 2012, respectively, relating to redeemable noncontrolling interests which are reflected in temporary equity. For the three months ended September 30, 2012, Net income attributable to noncontrolling interests included $9 million relating to Discontinued Operations.
(b)  Other activity attributable to noncontrolling interests excludes $(24) million and $(15) million for the three months ended September 30, 2013 and 2012, respectively, relating to redeemable noncontrolling interests.

Other Comprehensive Income

Comprehensive income is reported in the unaudited consolidated statement of comprehensive income and consists of Net income and other gains and losses affecting shareholders’ equity that, under GAAP, are excluded from Net income. These other gains and losses are known as Other comprehensive income. Other comprehensive income consists primarily of foreign currency translation adjustments, unrealized holding gains and losses on securities, and benefit plan adjustments.

 

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The following table summarizes the activity within Other comprehensive income (loss):

 

     For the three months ended
September 30, 2013
 
     Before tax     Tax (provision)
benefit
    Net of tax  
     (in millions)  

Foreign currency translation adjustments

      

Unrealized gains

   $ 448     $ (57   $ 391  

Amount reclassified on hedging activity(a)

     (2     1       (1
  

 

 

   

 

 

   

 

 

 

Other comprehensive income

   $ 446     $ (56   $ 390  

Unrealized holding losses on securities

      

Unrealized losses

   $ (18   $ 6     $ (12
  

 

 

   

 

 

   

 

 

 

Other comprehensive loss

   $ (18   $ 6     $ (12

Benefit plan adjustments

      

Reclassification adjustments realized in net income(b)

   $ 10     $ (4   $ 6  
  

 

 

   

 

 

   

 

 

 

Other comprehensive income

   $ 10     $ (4   $ 6  

 

     For the three months ended
September 30, 2012
 
     Before tax     Tax (provision)
benefit
     Net of tax  
     (in millions)  

Foreign currency translation adjustments

       

Unrealized gains

   $ 275     $ —        $ 275  

Amount reclassified on the sale of NDS(a)

     10       —          10  

Amount reclassified on hedging activity(a)

     (10     4        (6
  

 

 

   

 

 

    

 

 

 

Other comprehensive income

   $ 275     $ 4      $ 279  

Unrealized holding losses on securities

       

Unrealized losses

   $ (2   $ 1      $ (1
  

 

 

   

 

 

    

 

 

 

Other comprehensive loss

   $ (2   $ 1      $ (1

Benefit plan adjustments

       

Reclassification adjustments realized in net income(b)

   $ 13     $ 1      $ 14  
  

 

 

   

 

 

    

 

 

 

Other comprehensive income

   $ 13     $ 1      $ 14  

 

(a)  Reclassifications related to hedging activity are included in Selling, general and administrative expenses. See Note 8 — Fair Value for additional information regarding hedging activity. Reclassifications related to the sale of NDS are included in Other, net in the unaudited consolidated statements of operations for the three months ended September 30, 2012.
(b)  Reclassifications are included in Selling, general and administrative expenses. See Note 15 — Pension And Other Postretirement Benefits for additional information.

 

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Dividends

The following table summarizes the dividends declared per share on both the Company’s Class A common stock, par value $0.01 per share (“Class A Common Stock”) and the Class B common stock, par value $0.01 per share (“Class B Common Stock”):

 

     For the three months ended
September 30,
 
         2013              2012      

Cash dividend per share

   $ 0.125      $ 0.085  

Stock Repurchase Program

The Board has authorized a stock repurchase program, under which the Company is currently authorized to acquire Class A Common Stock. In August 2013, the Board authorized the repurchase of $4 billion of Class A Common Stock, excluding commissions, which replaced the remaining authorized amount under the stock repurchase program. The Company intends to complete this stock repurchase program by August 2014.

The remaining authorized amount under the Company’s stock repurchase program as of September 30, 2013, excluding commissions, was approximately $3.4 billion.

The program may be modified, extended, suspended or discontinued at any time.

Temporary Suspension of Voting Rights Affecting Non-U.S. Stockholders

On April 18, 2012, the Company announced that it suspended 50% of the voting rights of the Class B Common Stock held by stockholders who are not U.S. citizens (“Non-U.S. Stockholders”) in order to maintain compliance with U.S. law which states that no broadcast station licensee may be owned by a corporation if more than 25% of that corporation’s stock was owned or voted by Non-U.S. Stockholders, their representatives, or by any other corporation organized under the laws of a foreign country. The Company owns broadcast station licensees in connection with its ownership and operation of U.S. television stations. As of October 2013, the suspension of voting rights of shares of Class B Common Stock held by Non-U.S. Stockholders was 35%. This suspension of voting rights will remain in place for as long as the Company deems it necessary to maintain compliance with applicable U.S. law, and may be adjusted by the Audit Committee as it deems appropriate.

Voting Agreement with the Murdoch Family Interests

On April 18, 2012, the Murdoch Family Trust and K. Rupert Murdoch (together the “Murdoch Family Interests”) entered into an agreement with the Company, whereby the Murdoch Family Interests agreed to limit their voting rights during the voting rights suspension period. Under this agreement, the Murdoch Family Interests will not vote or provide voting instructions with respect to a portion of their shares of Class B Common Stock to the extent that doing so would increase their percentage of voting power from what it was prior to the suspension of voting rights. Currently, as a result of the suspension of voting rights, the aggregate percentage vote of the Murdoch Family Interests is at 39.4% of the outstanding shares of Class B Common Stock not subject to the suspension of voting rights, and the percentage vote may be adjusted as provided in the agreement with the Company.

 

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 13. EQUITY BASED COMPENSATION

Separation-Related Adjustments

In connection with the Separation, the Company entered into an Employee Matters Agreement with News Corp, which generally provides that employees of News Corp no longer participate in benefit plans sponsored or maintained by the Company. Pursuant to the Employee Matters Agreement, the Company made certain adjustments to the exercise price and number of our share-based compensation awards, using the closing price of the Company’s Class A Common Stock on the final day of trading prior to the effective date of the Separation and the volumetric weighted-average prices for the first day of trading for the Company immediately following the Separation, with the intention of preserving the intrinsic value of the awards immediately prior to the Separation. These adjustments are summarized as follows:

 

    All equity based awards that have a vesting, payment or expiration date, as applicable, on or prior to December 31, 2013 continue under the Company’s 2005 Plan and will be settled in, or by reference to, the Company’s Class A Common Stock, as adjusted to reflect the Separation. Approximately 1 million shares that vest prior to December 31, 2013 are held by News Corp employees.

 

    All other equity based awards that have a vesting, payment or expiration date, as applicable, after December 31, 2013 were converted to awards over equity of the post-Separation employer, as adjusted to reflect the Separation.

 

    All equity based awards were adjusted in terms of exercise price and number of shares to preserve the intrinsic value of the awards immediately prior to the Separation.

The Separation-related adjustments did not have a material impact on either compensation expense or the potentially dilutive securities to be considered in the calculation of diluted earnings per share of common stock.

The following table summarizes the Company’s equity-based compensation transactions:

 

     For the three months ended
September 30,
 
         2013              2012      
     (in millions)  

Equity-based compensation

   $ 67      $ 82  
  

 

 

    

 

 

 

Cash received from exercise of equity-based compensation

   $ 35      $ 93  
  

 

 

    

 

 

 

As of September 30, 2013, the Company’s total compensation cost related to restricted stock units (“RSUs”) and performance stock units (“PSUs”), not yet recognized, was approximately $262 million, and is expected to be recognized over a weighted average period between one and two years. Compensation expense on all equity-based awards is generally recognized on a straight-line basis over the vesting period of the entire award. However, certain performance based awards are recognized on an accelerated basis.

The intrinsic value of stock options exercised during the three months ended September 30, 2013 and 2012 was $32 million and $20 million, respectively. The intrinsic value of the stock options outstanding as of September 30, 2013 and June 30, 2013 was nil and $29 million, respectively, as the Company’s stock option program expired.

As of September 30, 2013 and June 30, 2013, the liability for cash-settled awards was approximately $145 million and $185 million, respectively. Cash settled awards are marked-to-market at each reporting period.

The Company recognized a tax benefit on vested RSUs and stock options exercised of approximately $35 million and $23 million for the three months ended September 30, 2013 and 2012, respectively.

 

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Performance Stock Units

During the three months ended September 30, 2013 and 2012, approximately 4.8 million and 1.3 million target PSUs were granted, respectively, of which 3.8 million and nil, respectively, will be settled in shares of Class A Common Stock. PSUs granted to executive directors and certain awards granted to employees in certain foreign locations are settled in cash.

During the three months ended September 30, 2013, approximately 2.8 million PSUs vested, of which approximately 0.7 million were settled in shares of Class A Common Stock, before statutory tax withholdings. The fair value of PSUs settled in shares of Class A Common Stock was approximately $21 million for the three months ended September 30, 2013. The remaining 2.1 million PSUs settled during the three months ended September 30, 2013 were settled in cash of approximately $67 million before statutory tax withholdings. There were no PSUs settled during the three months ended September 30, 2012.

Restricted Stock Units

During the three months ended September 30, 2013 and 2012, approximately 0.7 million and 1.2 million RSUs were granted, respectively, and will be settled in shares of Class A Common Stock.

During the three months ended September 30, 2013 and 2012, approximately 5.4 million and 6.7 million RSUs vested, respectively, of which approximately 4.8 million and 5.9 million, respectively, were settled in shares of Class A Common Stock, before statutory tax withholdings. The fair value of RSUs settled in shares of Class A Common Stock was approximately $152 million and $137 million for the three months ended September 30, 2013 and 2012, respectively. The remaining 0.6 million and 0.8 million RSUs settled during the three months ended September 30, 2013 and 2012, respectively, were settled in cash of approximately $18 million in both periods, before statutory tax withholdings.

NOTE 14. COMMITMENTS AND CONTINGENCIES

Commitments

The Company has commitments under certain firm contractual arrangements (“firm commitments”) to make future payments. These firm commitments secure the future rights to various assets and services to be used in the normal course of operations. Except for the issuance of 4.00% and 5.40% Senior Notes due 2023 and 2043, respectively (See Note 10 – Borrowings), the Company’s commitments as of September 30, 2013 have not changed significantly from disclosures included in the 2013 Form 10-K.

Guarantees

The Company’s guarantees as of September 30, 2013 have not changed significantly from disclosures included in the 2013 Form 10-K.

Contingencies

Shareholder Litigation

The following discussion is limited to certain recent developments concerning the Company’s legal proceedings and should be read in conjunction with the disclosure set forth in Part I, Item 3 of the 2013 Form 10-K.

 

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Delaware

Reference is made to the Amalgamated Bank Litigation, the New Orleans Employees’ Retirement Litigation, the Mass. Laborers Litigation and the Cohen Litigation which were purported stockholder derivative actions consolidated in the Delaware Court of Chancery (the “Consolidated Action”) and previously described by the Company in the 2013 Form 10-K. The plaintiffs’ Third Amended Complaint in the Consolidated Action alleged claims against director defendants for breach of fiduciary duty arising from the Company’s purchase of Shine and from their purported failure to investigate alleged acts of voicemail interception at The News of the World (the “NoW Matter”) and allegedly permitting the Company to engage in a cover up related to the NoW Matter. The Third Amended Complaint sought a declaration that the defendants violated their fiduciary duties, damages, pre- and post-judgment interest, fees and costs.

On June 26, 2013, the Court approved the settlement in principle that the parties reached on April 17, 2013, and entered a final judgment dismissing the Consolidated Action. Pursuant to the terms of that settlement, the parties agreed that the director defendants in the Consolidated Action would cause to be paid on their behalf the amount of $139 million to the Company, minus $28 million in attorneys’ fees and expenses awarded by the Court to the plaintiffs’ counsel. No stockholder objected to either the settlement or the proposed fee award. The settlement became effective on August 16, 2013, because as of that date, the dismissal of the Consolidated Action as well as the dismissals of each of the Shields Litigation, the Iron Workers Litigation and the Stricklin Litigation (each as described below under the heading “Shareholder Litigation—Southern District of New York”) were no longer subject to appeal. The above amount was paid from an escrow account created for the benefit of the director defendants pursuant to an agreement reached between the defendants and their directors’ and officers’ liability insurers for the payment of insurance proceeds, subject to a claims release, and accordingly the Company recorded the net settlement of $111 million in Other, net in the unaudited consolidated statements of operations for the three months ended September 30, 2013. In addition to the payment to the Company, the settlement contemplates that the Company will build on corporate governance and compliance enhancements which the Company has implemented in the past year. These shall remain in effect at least through December 31, 2016, and will be applicable to both the Company and News Corp.

Southern District of New York

On July 19, 2011, a purported class action lawsuit captioned Wilder v. News Corp., et al. (“Wilder Litigation”), was filed on behalf of all purchasers of the Company’s common stock between March 3, 2011 and July 11, 2011, in the United States District Court for the Southern District of New York. The plaintiff brought claims under Section 10(b) and Section 20(a) of the Securities Exchange Act, alleging that false and misleading statements were issued regarding the NoW Matter. The suit names as defendants the Company, Rupert Murdoch, James Murdoch and Rebekah Brooks, and seeks compensatory damages, rescission for damages sustained, and costs. On June 5, 2012, the court issued an order appointing the Avon Pension Fund (“Avon”) as lead plaintiff and Robbins Geller Rudman & Dowd as lead counsel. Thereafter, on July 3, 2012, the court issued an order providing that an amended consolidated complaint shall be filed by July 31, 2012. Avon filed an amended consolidated complaint on July 31, 2012, which among other things, added as defendants NI Group Limited (now known as News Corp UK & Ireland Limited) and Les Hinton, and expanded the class period to include February 15, 2011 to July 18, 2011. The defendants have filed motions to dismiss the complaint which are pending. The Company’s management believes the claims in the Wilder Litigation are entirely without merit, and intends to vigorously defend those claims.

Reference is made to the Shields Litigation, the Iron Workers Litigation and the Stricklin Litigation which were purported stockholders derivative actions filed in the United States District Court for the Southern District of New York and previously described by the Company in the 2013 Form 10-K. The plaintiffs alleged violations of

 

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Section 14(a) of the Securities Exchange Act, breach of fiduciary duty, waste of corporate assets, gross mismanagement and unjust enrichment in connection with, among other things, the NoW Matter. The plaintiffs sought various forms of relief including, among other things, an order requiring the Company to take certain specified corporate governance actions, compensatory damages, injunctive relief, fees and costs.

On July 16, 2013, after the dismissal of the Consolidated Action by the Delaware Court of Chancery as discussed above, the court entered uncontested Orders of Dismissal in the Shields Litigation, the Stricklin Litigation and the Iron Workers Litigation, dismissing each of the lawsuits. As described above, the settlement of the Consolidated Action became effective on August 16, 2013, because as of that date, the dismissal of the Consolidated Action as well as the dismissals of each of the Shields Litigation, the Iron Workers Litigation and the Stricklin Litigation were no longer subject to appeal.

On June 7, 2013, Iron Workers brought a second derivative action captioned Iron Workers Mid-South Pension Fund v. Murdoch, et al. (“Second Iron Workers Litigation”), in the United States District Court for the Southern District of New York, which related to the same subject matter as the Consolidated Action and the Shields Litigation, the Stricklin Litigation and the Iron Workers Litigation. The plaintiff brought state law claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment in connection with alleged anti-competitive practices at Company subsidiaries. The action named as defendants current and former directors of the Company. The plaintiff sought various forms of relief including compensatory damages, an order requiring the Company to take certain specified corporate governance actions, injunctive relief, restitution, fees and costs. On June 18, 2013, the plaintiff moved for the dismissal of the Second Iron Workers Litigation, and the court granted the Order of Dismissal on July 24, 2013, dismissing the Second Iron Workers Litigation.

U.K. Newspaper Matters and Related Investigations and Litigation

U.S. regulators and governmental authorities continue to conduct investigations initiated in 2011 with respect to the U.K. Newspaper Matters. The Company is cooperating with these investigations. It is not possible at this time to estimate the liability, if any, of the Company relating to these investigations.

In connection with the Separation, the Company and News Corp agreed in the Separation and Distribution Agreement that the Company will indemnify News Corp, on an after-tax basis, for payments made after the Separation arising out of civil claims and investigations relating to the U.K. Newspaper Matters, as well as legal and professional fees and expenses paid in connection with the related criminal matters, other than fees, expenses and costs relating to employees who are not (i) directors, officers or certain designated employees or (ii) with respect to civil matters, co-defendants with News Corp (the “Indemnity”). As of September 30, 2013 and June 30, 2013, the Company recorded approximately $50 million and $40 million, respectively, related to the amounts accrued by News Corp which are expected to be covered by the Indemnity. As of June 30, 2013 the Company provided an additional $110 million for the fair value of expected future payments under the Indemnity. Pursuant to ASC 460, this amount is being amortized in a systematic pattern that reflects the release from the underlying risks and is included in Income (loss) from discontinued operations, net of tax, in the consolidated statement of operations. The unamortized portion of the Indemnity, as of September 30, 2013, was approximately $90 million. Pursuant to the Indemnity, the Company made payments of $14 million to News Corp during the three months ended September 30, 2013. If additional information becomes available and as payments are made, the Company will update the liability provision for the Indemnity. Any changes to the liability provision for the Indemnity in the future will impact the results of operations for that period. The liability provision for the Indemnity was estimated by probability weighting expected payments to be made to News Corp under such Agreement and discounting probability-weighted expected payments to the valuation date, using a discount rate based on the Company’s cost of debt.

 

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

It is possible that these proceedings and any adverse resolution thereof, including any fines or other penalties associated with any plea, judgment or similar result could damage the Company’s reputation, impair its ability to conduct its business and adversely affect its results of operations and financial condition.

Other

The Company’s operations are subject to tax in various domestic and international 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.

The Company establishes an accrued liability for legal claims when the Company determines that a loss is both probable and the amount of the loss can be reasonably estimated. Once established, accruals are adjusted from time to time, as appropriate, in light of additional information. The amount of any loss ultimately incurred in relation to matters for which an accrual has been established may be higher or lower than the amounts accrued for such matters. Any fees, expenses, fines, penalties, judgments or settlements which might be incurred by the Company in connection with the various proceedings could affect the Company’s results of operations and financial condition. For the contingencies disclosed above for which there is at least a reasonable possibility that a loss may be incurred, other than the accrual provided, the Company was unable to estimate the amount of loss or range of loss.

NOTE 15. PENSION AND OTHER POSTRETIREMENT BENEFITS

The Company participates in and/or sponsors various pension, savings and postretirement benefit plans. The major pension plans and postretirement benefit plans are closed to new participants (with the exception of groups covered by collective bargaining agreements). The Company has a legally enforceable obligation to contribute to some plans and is not required to contribute to others. The Company makes contributions in accordance with applicable laws or contract terms in each jurisdiction in which the Company operates. The Company’s benefit obligation is calculated using several assumptions which the Company reviews on a regular basis. The net periodic benefits costs for pension and postretirement benefits were approximately $30 million and $45 million for the three months ended September 30, 2013 and 2012, respectively.

NOTE 16. SEGMENT INFORMATION

The Company has realigned its reporting segments following the Separation and the Other segment has been renamed Other, Corporate and Eliminations. This segment includes costs not directly associated with an operating segment, such as corporate overhead and eliminations.

The Company is a diversified global media and entertainment company, which manages and reports its businesses in the following five segments:

 

    Cable Network Programming, which principally consists of the production and licensing of programming distributed through cable television systems, direct broadcast satellite operators and telecommunication companies primarily in the U.S., Latin America, Europe and Asia.

 

    Television, which principally consists of the broadcasting of network programming in the U.S. and the operation of 28 full power broadcast television stations, including 10 duopolies, in the U.S. (of these stations, 18 are affiliated with the FOX Broadcasting Company (“FOX”) and 10 are affiliated with Master Distribution Service, Inc. (“MyNetworkTV”)).

 

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

    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 and licensing of television programming worldwide.

 

    Direct Broadcast Satellite Television, which consists of the distribution of programming services via satellite, cable, and broadband directly to subscribers in Italy, Germany and Austria.

 

    Other, Corporate and Eliminations, which principally consists of corporate overhead and eliminations and other businesses.

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 measure is Segment OIBDA.

Segment OIBDA is defined as revenues less operating expenses and selling, general and administrative expenses. Segment OIBDA does not include: depreciation and amortization, amortization of cable distribution investments, impairment charges, equity earnings of affiliates, interest expense, interest income, other, net, income tax expense and net income attributable to noncontrolling interests. Management believes that Segment OIBDA is an appropriate measure for evaluating the operating performance of the Company’s business segments because it is the primary measure used by the Company’s chief operating decision maker to evaluate the performance and allocate resources within the Company’s businesses.

Management believes that information about Total Segment OIBDA assists all users of the Company’s consolidated financial statements by allowing them to evaluate changes in the operating results of the Company’s portfolio of businesses separate from non-operational factors that affect net income, thus providing insight into both operations and the other factors that affect reported results.

Total Segment OIBDA provides management, investors and equity analysts a measure to analyze the operating performance of the Company’s business and its enterprise value against historical data and competitors’ data, although historical results, including Segment OIBDA and Total Segment OIBDA, may not be indicative of future results (as operating performance is highly contingent on many factors, including customer tastes and preferences).

 

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Total Segment OIBDA is a non-GAAP measure and should be considered in addition to, not as a substitute for, net income (loss), cash flow and other measures of financial performance reported in accordance with GAAP. In addition, this measure does not reflect cash available to fund requirements and excludes items, such as depreciation and amortization and impairment charges, which are significant components in assessing the Company’s financial performance.

 

     For the three months ended
September 30,
 
         2013             2012      
     (in millions)  

Revenues:

    

Cable Network Programming

   $ 2,810     $ 2,503  

Television

     1,048       972  

Filmed Entertainment

     2,120       1,937  

Direct Broadcast Satellite Television

     1,390       828  

Other, Corporate and Eliminations

     (307     (237
  

 

 

   

 

 

 

Total revenues

   $ 7,061     $ 6,003  
  

 

 

   

 

 

 

Segment OIBDA:

    

Cable Network Programming

   $ 991     $ 1,015  

Television

     231       178  

Filmed Entertainment

     328       433  

Direct Broadcast Satellite Television

     190       95  

Other, Corporate and Eliminations

     (122     (132
  

 

 

   

 

 

 

Total Segment OIBDA

     1,618       1,589  
  

 

 

   

 

 

 

Depreciation and amortization

     (313     (174

Amortization of cable distribution investments

     (22     (21

Impairment charges

     —         (35

Equity earnings of affiliates

     92       129  

Interest expense, net

     (272     (261

Interest income

     8       15  

Other, net

     (35     1,369  
  

 

 

   

 

 

 

Income from continuing operations before income tax expense

     1,076       2,611  

Income tax expense

     (300     (304
  

 

 

   

 

 

 

Income from continuing operations

     776       2,307  

Income (loss) from discontinued operations, net of tax

     487       (20
  

 

 

   

 

 

 

Net Income

     1,263       2,287  

Less: Net income attributable to noncontrolling interests

     (8     (54
  

 

 

   

 

 

 

Net income attributable to Twenty-First Century Fox, Inc. stockholders

   $ 1,255     $ 2,233  
  

 

 

   

 

 

 

 

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Intersegment revenues, generated by the Filmed Entertainment segment, of approximately $249 million and $192 million for the three months ended September 30, 2013 and 2012, respectively, have been eliminated within the Other, Corporate and Eliminations segment. Segment OIBDA, generated by the Filmed Entertainment segment, of approximately $26 million and nil for the three months ended September 30, 2013 and 2012, respectively, have been eliminated within the Other, Corporate and Eliminations segment.

 

     As of
September 30,
2013
     As of
June 30,
2013
 
     (in millions)  

Total assets:

     

Cable Network Programming

   $ 17,967      $ 17,830  

Television

     6,805        6,415  

Filmed Entertainment

     10,129        9,411  

Direct Broadcast Satellite Television

     9,464        8,636  

Other, Corporate and Eliminations

     4,858        4,948  

Investments

     3,802        3,704  
  

 

 

    

 

 

 

Total assets

   $ 53,025      $ 50,944  
  

 

 

    

 

 

 

Goodwill and Intangible assets, net:

     

Cable Network Programming

   $ 9,419      $ 9,444  

Television

     4,282        4,283  

Filmed Entertainment

     2,460        2,439  

Direct Broadcast Satellite Television

     6,658        6,057  

Other, Corporate and Eliminations

     96        96  
  

 

 

    

 

 

 

Total goodwill and intangible assets, net

   $ 22,915      $ 22,319  
  

 

 

    

 

 

 

Revenues by Component

 

     For the three months ended
September 30,
 
         2013              2012      
     (in millions)  

Revenues

     

Affiliate Fees

   $ 2,102      $ 1,748  

Subscription

     1,305        780  

Advertising

     1,665        1,583  

Content

     1,912        1,776  

Other

     77        116  
  

 

 

    

 

 

 

Total revenues

   $ 7,061      $ 6,003  
  

 

 

    

 

 

 

 

31


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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 17. ADDITIONAL FINANCIAL INFORMATION

Supplemental Cash Flows Information

 

     For the three months ended
September 30,
 
         2013             2012      
     (in millions)  

Supplemental cash flows information:

    

Cash (paid) received for income taxes

   $ (110   $ 125  

Cash paid for interest

     (266     (262

Other, net

The following table sets forth the components of Other, net included in the unaudited consolidated statements of operations:

 

     For the three months ended
September 30,
 
         2013             2012      
     (in millions)  

Gain on sale of investment in NDS(a)

   $ —       $ 1,446  

Loss on sale of Baltimore station(b)

     —         (67

Shareholder litigation settlement(c)

     111       —    

Restructuring(d)

     (82     (3

Investment impairment losses(e)

     (54     —    

Other

     (10     (7
  

 

 

   

 

 

 

Other, net

   $ (35   $ 1,369  
  

 

 

   

 

 

 

 

(a)  See Note 7 — Investments.
(b)  See Note 3 — Acquisitions, Disposals and Other Transactions.
(c)  See Note 14 — Commitments and Contingencies.
(d)  The Company recorded $82 million of restructuring changes in the three months ended September 30, 2013 for contract termination costs primarily related to cost structure efficiency enhancement initiatives at the DBS segment.
(e)  The write-downs of investments were taken as a result of either the deteriorating financial position of the investee or due to a permanent impairment resulting from sustained losses and limited prospects for recovery.

NOTE 18. SUPPLEMENTAL GUARANTOR INFORMATION

In May 2012, NAI entered into a credit agreement (the “Credit Agreement”), among NAI as Borrower, the Company as Parent Guarantor, the lenders named therein, the initial issuing banks named therein, JPMorgan Chase Bank, N.A. (“JPMorgan Chase”) and Citibank, N.A. as Co-Administrative Agents, JPMorgan Chase as Designated Agent and Bank of America, N.A. as Syndication Agent. The Credit Agreement provides a $2 billion unsecured revolving credit facility with a sub-limit of $400 million (or its equivalent in Euros) available for the issuance of letters of credit and a maturity date of May 2017. Under the Credit Agreement, the Company may request an increase in the amount of the credit facility up to a maximum amount of $2.5 billion and the Company may request that the maturity date be extended for up to two additional one-year periods. Borrowings are issuable in U.S. dollars only, while letters of credit are issuable in U.S. dollars or Euros. The significant terms of the

 

32


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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

agreement include the requirement that the Company maintain specific leverage ratios and limitations on secured indebtedness. Fees under the Credit Agreement will be based on the Company’s long-term senior unsecured non-credit enhanced debt ratings. Given the current debt ratings, NAI pays a facility fee of 0.125% and an initial drawn cost of LIBOR plus 1.125%.

The Parent Guarantor presently guarantees the senior public indebtedness of NAI and the guarantee is full and unconditional. The supplemental condensed consolidating financial information of the Parent Guarantor should be read in conjunction with these consolidated financial statements.

In accordance with 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, the Company and the subsidiaries of the Company and the eliminations and reclassifications necessary to arrive at the information for the Company on a consolidated basis.

 

 

33


Table of Contents

TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Supplemental Condensed Consolidating Statement of Operations

For the three months ended September 30, 2013

(in millions)

 

    News America
Incorporated
    Twenty-First
Century Fox
    Non-Guarantor     Reclassifications
and
eliminations
    Twenty-First
Century Fox
and
Subsidiaries
 

Revenues

  $ —       $ —       $ 7,061     $ —       $ 7,061  

Expenses

    (92     —         (5,686     —         (5,778

Equity earnings of affiliates

    —         —         92       —         92  

Interest expense, net

    (385     (136     (5     254       (272

Interest income

    1       1       260       (254     8  

Earnings (losses) from subsidiary entities

    227       903       —         (1,130     —    

Other, net

    278       —         (313     —         (35
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income tax expense

    29       768       1,409       (1,130     1,076  

Income tax (expense) benefit

    (8     —         (392     100       (300
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

    21       768       1,017       (1,030     776  

Income from discontinued operations, net of tax

    —         487       —         —         487  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    21       1,255       1,017       (1,030     1,263  

Less: Net income attributable to noncontrolling interests

    —         —         (8     —         (8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Twenty-First Century Fox stockholders

  $ 21     $ 1,255     $ 1,009     $ (1,030   $ 1,255  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Twenty-First Century Fox stockholders

  $ 153     $ 1,546     $ 1,387     $ (1,540   $ 1,546  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to supplemental guarantor information

 

34


Table of Contents

TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Supplemental Condensed Consolidating Statement of Operations

For the three months ended September 30, 2012

(in millions)

 

    News America
Incorporated
    Twenty-First
Century Fox
    Non-Guarantor     Reclassifications
and
eliminations
    Twenty-First
Century Fox
and
Subsidiaries
 

Revenues

  $ —       $ —       $ 6,003     $ —       $ 6,003  

Expenses

    (123     —         (4,521     —         (4,644

Equity (losses) earnings of affiliates

    (1     —         130       —         129  

Interest expense, net

    (379     (118     (3     239       (261

Interest income

    —         2       252       (239     15  

Earnings (losses) from subsidiary entities

    2,251       2,342        —         (4,593     —    

Other, net

    (12     4       1,377        —         1,369  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income tax expense

    1,736        2,230       3,238        (4,593     2,611  

Income tax (expense) benefit

    (202     —         (376     274       (304
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

    1,534        2,230       2,862        (4,319     2,307  

Income (loss) from discontinued operations, net of tax

    7       3       (30     —          (20
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    1,541        2,233       2,832       (4,319     2,287  

Less: Net income attributable to noncontrolling interests

    —         —         (54     —         (54
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Twenty-First Century Fox stockholders

  $ 1,541      $ 2,233     $ 2,778     $ (4,319   $ 2,233  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Twenty-First Century Fox stockholders

  $ 1,517      $ 2,524     $ 2,857     $ (4,374   $ 2,524  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to supplemental guarantor information

 

35


Table of Contents

TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Supplemental Condensed Consolidating Balance Sheet

At September 30, 2013

(in millions)

 

     News America
Incorporated
     Twenty-First
Century Fox
     Non-Guarantor     Reclassifications
and
eliminations
    Twenty-First
Century Fox
and
Subsidiaries
 

ASSETS:

            

Current assets:

            

Cash and cash equivalents

   $ 511      $ 3,992      $ 2,178     $ —       $ 6,681  

Receivables, net

     21        11        5,596       (23     5,605  

Inventories, net

     —          —          3,278       —         3,278  

Other

     38        492        449       —         979  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current assets

     570        4,495        11,501       (23     16,543  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Non-current assets:

            

Receivables

     15        —          437       —         452  

Inventories, net

     —          —          5,723       —         5,723  

Property, plant and equipment, net

     130        —          2,745       —         2,875  

Intangible assets, net

     —          —          6,618       —         6,618  

Goodwill

     —          —          16,297       —         16,297  

Other

     379        —          336       —         715  

Investments:

            

Investments in associated companies and other investments

     84        55        3,663       —         3,802  

Intragroup investments

     64,425        42,868        —         (107,293     —    
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total investments

     64,509        42,923        3,663       (107,293     3,802  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

TOTAL ASSETS

   $ 65,603      $ 47,418      $ 47,320     $ (107,316   $ 53,025  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

LIABILITIES AND EQUITY

            

Current liabilities:

            

Borrowings

   $ 140      $ —        $ —       $ —       $ 140  

Other current liabilities

     448        225        8,123       (23     8,773  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current liabilities

     588        225        8,123       (23     8,913  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Non-current liabilities:

            

Borrowings

     17,029        —          304       —         17,333  

Other non-current liabilities

     660        9        5,215       —         5,884  

Intercompany

     30,852        29,960        (60,812     —         —    

Redeemable noncontrolling interests

     —          —          518       —         518  

Total equity

     16,474        17,224        93,972       (107,293     20,377  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

TOTAL LIABILITIES AND EQUITY

   $ 65,603      $ 47,418      $ 47,320     $ (107,316   $ 53,025  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See notes to supplemental guarantor information

 

36


Table of Contents

TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Supplemental Condensed Consolidating Balance Sheet

At June 30, 2013

(in millions)

 

     News America
Incorporated
     Twenty-First
Century Fox
     Non-Guarantor     Reclassifications
and
eliminations
    Twenty-First
Century Fox
and
Subsidiaries
 

ASSETS

            

Current Assets:

            

Cash and cash equivalents

   $ 524      $ 3,956      $ 2,179     $ —       $ 6,659  

Receivables, net

     17        —          5,442       —         5,459  

Inventories, net

     —          —          2,784       —         2,784  

Other

     28        209        428       —         665  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current assets

     569        4,165        10,833       —         15,567  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Non-current assets:

            

Receivables

     15        —          422       —         437  

Inventories, net

     —          —          5,371       —         5,371  

Property, plant and equipment, net

     132        —          2,697       —         2,829  

Intangible assets, net

     —          —          5,064       —         5,064  

Goodwill

     —          —          17,255       —         17,255  

Other

     361        —          356       —         717  

Investments:

            

Investments in associated companies and other investments

     86        58        3,560       —         3,704  

Intragroup investments

     64,062        41,775        —         (105,837     —    
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total investments

     64,148        41,833        3,560       (105,837     3,704  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

TOTAL ASSETS

   $ 65,225      $ 45,998      $ 45,558     $ (105,837   $ 50,944  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

LIABILITIES AND EQUITY

            

Current liabilities:

            

Borrowings

   $ 137      $ —        $ —       $ —       $ 137  

Other current liabilities

     551        134        7,613       —         8,298  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current liabilities

     688        134        7,613       —         8,435  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Non-current liabilities:

            

Borrowings

     16,029        —          292       —         16,321  

Other non-current liabilities

     307        16        5,221       —         5,544  

Intercompany

     31,495        28,850        (60,345     —         —    

Redeemable noncontrolling interests

     —          —          519       —         519  

Total equity

     16,706        16,998        92,258       (105,837     20,125  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

TOTAL LIABILITIES AND EQUITY

   $ 65,225      $ 45,998      $ 45,558     $ (105,837   $ 50,944  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See notes to supplemental guarantor information

 

37


Table of Contents

TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Supplemental Condensed Consolidating Statement of Cash Flows

For the three months ended September 30, 2013

(in millions)

 

    News America
Incorporated
    Twenty-First
Century Fox
    Non-Guarantor     Reclassifications
and
eliminations
    Twenty-First
Century Fox
and
Subsidiaries
 

Operating activities:

         

Net cash (used in) provided by operating activities from continuing operations

  $ (969   $ 893     $ 421     $ —       $ 345  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities:

         

Property, plant and equipment

    (1     —         (170     —         (171

Investments

    (1     —         (157     —         (158

Proceeds from dispositions

    —         —         3       —         3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) investing activities from continuing operations

    (2     —         (324     —         (326
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities:

         

Borrowings

    987       —         —         —         987  

Issuance of shares

    —         66       —         —         66  

Repurchase of shares

    —         (913     —         —         (913

Purchase of subsidiary shares from noncontrolling interests

    —         —         (75     —         (75

Dividends paid

    —         —         (58     —         (58

Distribution to News Corporation

    —         (10     —         —         (10
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities from continuing operations

    987       (857     (133     —         (3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) from discontinued operations

    (29     —         —         —         (29
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

    (13     36       (36     —         (13

Cash and cash equivalents, beginning of period

    524       3,956       2,179       —         6,659  

Exchange movement on opening cash balance

    —         —         35       —         35  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

  $ 511     $ 3,992     $ 2,178     $ —       $ 6,681  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to supplemental guarantor information

 

38


Table of Contents

TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Supplemental Condensed Consolidating Statement of Cash Flows

For the three months ended September 30, 2012

(in millions)

 

    News America
Incorporated
    Twenty-First
Century Fox
    Non-Guarantor     Reclassifications
and
eliminations
    Twenty-First
Century Fox
and
Subsidiaries
 

Operating activities:

         

Net cash (used in) provided by operating activities from continuing operations

  $ (990   $ 2,987     $ (1,194   $ —       $ 803  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities:

         

Property, plant and equipment

    —         —         (112     —         (112

Investments

    (1     (15     56       —         40  

Proceeds from dispositions

    —         —         1,825       —         1,825  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities from continuing operations

    (1     (15     1,769       —         1,753  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities:

         

Borrowings

    987       —         —         —         987  

Issuance of shares

    —         111       —         —         111  

Repurchase of shares

    —         (877     —         —         (877

Dividends paid

    —         —         (41     —         (41

Sale of subsidiary shares to noncontrolling interest

    —         —         9       —         9  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities from continuing operations

    987       (766     (32     —         189  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) from discontinued operations

    (3     —         (392     —         (395
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

    (7     2,206       151       —         2,350  

Cash and cash equivalents, beginning of period

    561       6,005       3,060       —         9,626  

Exchange movement on opening cash balance

    —         —         31       —         31  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

  $ 554     $ 8,211     $ 3,242     $ —       $ 12,007  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to supplemental guarantor information

 

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TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Notes to Supplemental Guarantor Information

 

(1) Investments in the Company’s subsidiaries, for purposes of the supplemental consolidating presentation, are accounted for by their parent companies under the equity method of accounting whereby earnings of subsidiaries are reflected in the respective parent company’s investment account and earnings.
(2) The guarantees of NAI’s senior public indebtedness constitute senior indebtedness of the Company, and rank pari passu with all present and future senior indebtedness of the Company. Because the factual basis underlying the obligations created pursuant to the various facilities and other obligations constituting senior indebtedness of the Company differ, it is not possible to predict how a court in bankruptcy would accord priorities among the obligations of the Company.
(3) In November 2013, NAI changed its name to 21st Century Fox America, Inc.

 

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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 (the “Exchange Act”), 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 Twenty-First Century Fox, Inc., its directors or its officers with respect to, among other things, trends affecting Twenty-First Century Fox, Inc.’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 heading Part II “Other Information,” Item 1A “Risk Factors” in this report. Twenty-First Century Fox, Inc. 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 this document and the other documents filed by Twenty-First Century Fox, Inc. with the Securities and Exchange Commission (the “SEC”). This section should be read together with the unaudited consolidated financial statements of Twenty-First Century Fox, Inc. and related notes set forth elsewhere herein and Twenty-First Century Fox, Inc.’s Annual Report on Form 10-K for the fiscal year ended June 30, 2013 as filed with the SEC on August 19, 2013 (the “2013 Form 10-K”).

INTRODUCTION

On June 28, 2013 Twenty-First Century Fox, Inc. and its subsidiaries (formerly known as News Corporation) (together, “Twenty-First Century Fox” or the “Company”) completed the separation of its business into two independent publicly traded companies (the “Separation”) by distributing to its stockholders all of the outstanding shares of the new News Corporation (“News Corp”). The Company retained its interests in a global portfolio of media and entertainment assets spanning six continents. News Corp holds the Company’s former businesses including newspapers, information services and integrated marketing services, digital real estate services, book publishing, digital education and sports programming and pay-TV distribution in Australia. The Company completed the Separation by distributing to its stockholders one share of News Corp Class A common stock for every four shares of the Company’s Class A common stock held on June 21, 2013, and one share of News Corp Class B common stock for every four shares of the Company’s Class B common stock held on June 21, 2013. The Company’s stockholders received cash in lieu of fractional shares. Following the Separation, the Company does not beneficially own any shares of News Corp Class A common stock or News Corp Class B common stock.

Effective June 28, 2013, the Separation qualified for discontinued operations treatment in accordance with ASC 205-20, “Discontinued Operations” (“ASC 205-20”), and accordingly the Company deconsolidated News Corp’s balance sheet as of June 30, 2013, and presented its results for the three months ended September 30, 2012 as discontinued operations on the unaudited statements of operations and cash flows. The footnotes to the financial statements have also been revised accordingly. Management’s discussion and analysis of financial condition and results of operations describes the Company giving effect to the Separation, except where stated otherwise.

Management’s discussion and analysis of financial condition and results of operations is intended to help provide an understanding of the Company’s financial condition, changes in financial condition and results of operations. This 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 developments that have occurred to date during fiscal 2014 that the Company believes are important in understanding its results of operations and financial condition or to disclose known trends.

 

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    Results of Operations This section provides an analysis of the Company’s results of operations for the three months ended September 30, 2013 and 2012. This analysis is presented on both a consolidated and a segment basis. In addition, a brief description is provided of significant transactions and events that impact the comparability of the results being analyzed.

 

    Liquidity and Capital Resources This section provides an analysis of the Company’s cash flows for the three months ended September 30, 2013 and 2012. Included in the discussion of outstanding debt is a discussion of the amount of financial capacity available to fund the Company’s future commitments and obligations, as well as a discussion of other financing arrangements.

OVERVIEW OF THE COMPANY’S BUSINESS

The Company has realigned its reporting segments following the Separation and the Other segment has been renamed; Other, Corporate and Eliminations. This segment includes costs not directly associated with an operating segment, such as corporate overhead and eliminations.

The Company is a diversified global media and entertainment company, which manages and reports its businesses in the following five segments:

 

    Cable Network Programming, which principally consists of the production and licensing of programming distributed through cable television systems, direct broadcast satellite operators and telecommunication companies primarily in the U.S., Latin America, Europe and Asia.

 

    Television, which principally consists of the broadcasting of network programming in the U.S. and the operation of 28 full power broadcast television stations, including 10 duopolies, in the U.S. (of these stations, 18 are affiliated with the FOX Broadcasting Company (“FOX”) and 10 are affiliated with Master Distribution Service, Inc. (“MyNetworkTV”)).

 

    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 and licensing of television programming worldwide.

 

    Direct Broadcast Satellite Television, which consists of the distribution of programming services via satellite, cable and broadband directly to subscribers in Italy, Germany and Austria.

 

    Other, Corporate and Eliminations, which principally consists of corporate overhead and eliminations and other businesses.

Television and Cable Network Programming

The Company’s television operations primarily consist of FOX, MyNetworkTV and the 28 television stations owned by the Company.

The television operations derive revenues primarily from the sale of advertising and to a lesser extent retransmission consent revenue. Adverse changes in general market conditions for advertising may affect revenues. The U.S. television broadcast environment is highly competitive and the primary methods of competition are the development and acquisition of popular programming. Program success is measured by ratings, which are an indication of market acceptance, with the top rated programs commanding the highest advertising prices. FOX is a broadcast network that airs original programming and MyNetworkTV is a programming distribution service that airs original and off-network programming. FOX and MyNetworkTV compete with broadcast networks, such as ABC, CBS, NBC and The CW Television Network, independent television stations, cable and Direct Broadcast Satellite Television program services, as well as other media, including DVDs, Blu-rays, video games, print and the Internet for audiences, programming and advertising revenues. In addition, FOX and MyNetworkTV compete with the other broadcast networks and other programming distribution services to secure affiliations with independently owned television stations in markets across the U.S. ABC, NBC and CBS each broadcasts a greater number of hours of programming than FOX and,

 

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accordingly, may be able to designate or change time periods in which programming is to be broadcast with greater flexibility than FOX. In addition, future technological developments may affect competition within the television marketplace.

U.S. law governing retransmission consent revenue provides a mechanism for the television stations owned by the Company to seek and obtain payment from multi-channel video programming distributors who carry the Company’s broadcast signals. Retransmission consent revenue consists of per subscriber-based compensatory fees paid to the Company by cable and satellite distribution systems that distribute the Company’s television stations affiliated with FOX and MyNetworkTV. The Company also receives compensation from independently-owned television stations that are affiliated with FOX and MyNetworkTV.

The television stations owned and operated by the Company compete for programming, audiences and advertising revenues with other television stations and cable systems 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 quality and strength of FOX and MyNetworkTV programming, and, in particular, their respective prime-time viewership.

The Company’s U.S. cable network programming operations primarily consist of the Fox News Channel (“FOX News”), Fox Sports 1, FX Networks, LLC (“FX”), FXX, Regional Sports Networks (“RSNs”), the National Geographic Channels and the Big Ten Network. The Company’s international cable networks consist of the Fox International Channels (“FIC”) and STAR. FIC produces and distributes entertainment, lifestyle, factual, sports, and movie channels through distribution channels in Europe, Africa, Asia and Latin America using several brands, including Fox, Fox Crime, Fox Life, FX, Fox Sports and National Geographic Channel. STAR’s owned and affiliated channels are distributed in the following countries and regions: India; Greater China; Indonesia; the rest of South East Asia; Pakistan; the Middle East and Africa; the United Kingdom and Europe; and North America.

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 direct broadcast satellite operators based on the number of their subscribers. Affiliate fee revenues are net of the amortization of cable distribution investments (capitalized fees paid to U.S. multi-channel video programming distributors to typically facilitate the carriage of a domestic 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 direct broadcast satellite are currently the predominant means of distribution of the Company’s program services in the U.S. Internationally, distribution technology varies region by region.

The Company’s cable networks compete for carriage on cable television systems, direct broadcast satellite systems and other distribution systems with other program services. A primary focus of competition is for distribution of the Company’s cable network channels that are not already distributed by particular cable television or direct broadcast satellite systems. 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.

The most significant operating expenses of the Television segment and the Cable Network Programming segment are the acquisition and production expenses related to programming and the 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 its programming. Additional expenses include sales commissions paid to the in-house advertising sales force, as well as salaries, employee benefits, rent and other routine overhead expenses.

National sports programming is obtained through license agreements with professional or collegiate sports leagues or organizations. The Company’s current licenses with the National Football League (“NFL”),

 

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Major League Baseball (“MLB”), college football conferences, National Association of Stock Car Auto Racing (“NASCAR”), Ultimate Fighting Championship (“UFC”) and United States Golf Association (“USGA”) are secured by long-term agreements.

While the Company seeks to ensure compliance with federal indecency laws and related Federal Communications Commission (“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.

Filmed Entertainment

The Filmed Entertainment segment derives revenue from the production and distribution of live-action and animated 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 home entertainment, including sale and rental of DVDs and Blu-rays, video-on-demand and pay-per-view television, on-line and mobile distribution, 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 and subsequently released in seasonal DVD and Blu-ray box sets and made available via digital distribution platforms. More successful series are later syndicated in domestic 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 cable channels 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 products and services (including subscription rentals, rental kiosks and Internet streaming services), have been compressing and may continue to change in the future. A further reduction in timing between theatrical and home entertainment releases could adversely affect the revenues and operating results of this segment.

The Company enters into arrangements with third parties to co-produce many of its theatrical productions. These arrangements, which are referred to as co-financing arrangements, take various forms. 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. The Filmed Entertainment segment records the amounts received for the sale of an economic interest as a reduction of the cost of the film, as the investor assumes full risk for that portion of the film asset acquired in these transactions. The substance of these arrangements is that the third-party investors own an interest in the film and, therefore, receive a participation based on the respective third-party investor’s interest in the profits or losses incurred on the film. Consistent with the requirements of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 926 “Entertainment—Films” (“ASC 926”), the estimate of a third-party investor’s interest in profits or losses on the film is based on total estimated ultimate revenues.

Operating costs incurred by the Filmed Entertainment segment include: exploitation costs, primarily theatrical prints and advertising and home entertainment marketing and manufacturing costs; 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.

 

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The Company competes with other film studios, such as Disney, CBS Television Studios, Sony, Universal, Warner Bros. and other independent film producers in the production and distribution of motion pictures, DVDs and Blu-rays. 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 CBS Television Studios, 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.

Direct Broadcast Satellite Television

The Direct Broadcast Satellite Television (“DBS”) segment’s operations consist of SKY Italia and the Company’s majority-owned subsidiary Sky Deutschland AG (“Sky Deutschland”), which provide basic and premium services via satellite, cable and broadband directly to subscribers in Italy (in the case of SKY Italia) and Germany and Austria (in the case of Sky Deutschland). The DBS segment derives revenues principally from subscriber fees. The Company believes that the quality and variety of programming, audio and interactive programming including personal video recorders, quality of picture including high definition channels, access to service, customer service and price are the key elements for gaining and maintaining market share. The DBS segment’s competition includes companies that offer video, audio, interactive programming, telephony, data and other information and entertainment services, including broadcasters of free-to-air television channels, broadband Internet providers, digital terrestrial transmission (“DTT”) services, wireless companies and companies that are developing new media technologies.

The DBS segment’s most significant operating expenses are those related to the acquisition of entertainment, movie and sports programming and subscribers and the 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.

The continued challenging economic environment in Europe has contributed to a reduction in consumer spending and has posed challenges for subscriber retention and growth. If this trend continues, it could have a material effect on the operating results of the DBS segment.

Other, Corporate and Eliminations

The Other, Corporate and Eliminations segment consists primarily of corporate overhead and eliminations and other businesses.

Other Business Developments

In September 2013, the Company acquired the 22% interest it did not already own in Latin America Pay Television (“LAPTV”), an entity that distributes premium and basic television channels in Latin America, for approximately $75 million in cash. As a result of this transaction, the Company now owns 100% of LAPTV. The transaction is accounted for as an equity transaction in the unaudited consolidated financial statements.

In November 2013, the Company sold its remaining 12% interest in Phoenix Satellite Television Holdings Ltd. (“Phoenix”) for approximately $210 million. The Company expects to record a gain on the sale of this investment.

 

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RESULTS OF OPERATIONS

Results of Operations—For the three months ended September 30, 2013 versus the three months ended September 30, 2012

The following table sets forth the Company’s operating results for the three months ended September 30, 2013 as compared to the three months ended September 30, 2012.

 

     For the three months ended September 30,  
         2013             2012             % Change      
     (in millions, except %)  

Revenues:

      

Affiliate Fees

   $ 2,102     $ 1,748       20  % 

Subscription

     1,305       780       67  % 

Advertising

     1,665       1,583       5  % 

Content

     1,912       1,776       8  % 

Other

     77       116       (34 )% 
  

 

 

   

 

 

   

 

 

 

Total Revenues

     7,061       6,003       18  % 

Operating expenses

     (4,447     (3,515     27  % 

Selling, general and administrative

     (1,018     (920     11  % 

Depreciation and amortization

     (313     (174     80  % 

Impairment charges

     —         (35     **   

Equity earnings of affiliates

     92       129       (29 )% 

Interest expense, net

     (272     (261     4  % 

Interest income

     8       15       (47 )% 

Other, net

     (35     1,369       **   
  

 

 

   

 

 

   

 

 

 

Income before income tax expense

     1,076       2,611       (59 )% 

Income tax expense

     (300     (304     (1 )% 
  

 

 

   

 

 

   

 

 

 

Income from continuing operations

     776       2,307       (66 )% 

Income (loss) from discontinued operations, net of tax

     487       (20     **   
  

 

 

   

 

 

   

 

 

 

Net income

     1,263       2,287       (45 )% 

Less: Net income attributable to noncontrolling interests

     (8     (54     (85 )% 
  

 

 

   

 

 

   

 

 

 

Net income attributable to Twenty-First Century Fox, Inc. stockholders

   $ 1,255     $ 2,233       (44 )% 
  

 

 

   

 

 

   

 

 

 

 

** not meaningful

Overview The Company’s revenues increased 18% for the three months ended September 30, 2013 as compared to the corresponding period of fiscal 2013, primarily due to increases in subscription, affiliate and content revenues. The increase in subscription revenues was due to the effect of the consolidation of Sky Deutschland of approximately $480 million and higher subscription revenues at Sky Italia of approximately $40 million. The increase in affiliate revenues was attributable to higher average rates per subscriber across most cable channels, higher retransmission consent revenues, and the acquisition of Eredivisie Media & Marketing CV (“EMM”) and SportsTime Ohio and the consolidation of Fox Sports Asia (formerly ESPN Star Sports) (collectively the “Acquisitions”). The higher content revenues were due to increased digital distribution revenue as a result of additional content made available, higher revenues from delivery of new shows and increased syndication sales. The strengthening of the U.S. dollar against local currencies resulted in a revenue decrease of approximately $29 million for the three months ended September 30, 2013 as compared to the corresponding period of fiscal 2013.

 

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Operating expenses increased 27% for the three months ended September 30, 2013 as compared to the corresponding period of fiscal 2013, primarily due to increased operating expenses at the DBS, Cable Network Programming and Filmed Entertainment segments of $427 million, $274 million and $268 million, respectively. The increase at the DBS segment was primarily the result of the consolidation of Sky Deutschland and the increase at the Cable Network Programming segment was primarily due to higher programming costs, the launch of new channels and the Acquisitions. The increase at the Filmed Entertainment segment was primarily due to higher theatrical marketing costs, production amortization and participation costs.

Selling, general and administrative expenses increased 11% for the three months ended September 30, 2013 as compared to the corresponding period of fiscal 2013, primarily due to increases at the Cable Network Programming and DBS segments of approximately $59 million and $39 million, respectively. The increase at the Cable Network Programming segment was primarily due to the Acquisitions. The increase at the DBS segment was primarily due to the consolidation of Sky Deutschland.

Depreciation and amortization increased 80% for the three months ended September 30, 2013 as compared to the corresponding period of fiscal 2013, primarily due to the amortization of acquired identifiable intangible assets resulting from the consolidation of Sky Deutschland.

Impairment chargesDuring the three months ended September 30, 2013, the Company recorded nil impairment charges.

During the three months ended September 30, 2012, the Company recorded a $35 million non-cash impairment charge related to its assets held for sale to reduce the carrying value of these assets to estimated fair value less cost to sell. This business was sold in fiscal 2013.

Equity earnings of affiliates Equity earnings of affiliates decreased $37 million for the three months ended September 30, 2013 as compared to the corresponding period of fiscal 2013, primarily due to lower results at the DBS equity affiliates of $104 million, partially offset by gains at the other equity affiliates. The decrease in DBS equity affiliates’ results was driven by lower results and gains at British Sky Broadcasting Group plc (“BSkyB”). The Company’s participation in BSkyB’s share repurchase program resulted in lower gains which declined from a $75 million gain in the corresponding period of the prior year to $8 million in the current quarter. This decrease was partially offset by the absence of equity losses due to the consolidation of Sky Deutschland in January 2013 and contributions from the Yankees Entertainment and Sports Network (“YES Network”) which was acquired in December 2012.

 

     For the three months ended September 30,  
         2013             2012         % Change  
     (in millions, except %)  

DBS equity affiliates

   $ 90     $ 194       (54 )% 

Cable channel equity affiliates

     5       (11     **   

Other equity affiliates

     (3     (54     (94 )% 
  

 

 

   

 

 

   

 

 

 

Equity earnings of affiliates

   $ 92     $ 129       (29 )% 
  

 

 

   

 

 

   

 

 

 

 

** not meaningful

Interest expense, net Interest expense, net increased $11 million for the three months ended September 30, 2013 as compared to the corresponding period of fiscal 2013, primarily due to the inclusion of the interest expense related to Sky Deutschland bank credit facility on Sky Deutschland’s consolidation.

 

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Other, net

 

     For the three months ended
September 30,
 
         2013             2012      
     (in millions)  

Gain on sale of investment in NDS(a)

   $ —       $ 1,446  

Loss on sale of Baltimore station(b)

     —         (67

Shareholder litigation settlement(c)

     111       —    

Restructuring(d)

     (82     (3

Investment impairment losses(e)

     (54     —    

Other

     (10     (7
  

 

 

   

 

 

 

Other, net

   $ (35   $ 1,369  
  

 

 

   

 

 

 

 

(a)  See Note 7 — Investments to the accompanying unaudited consolidated financial statements.
(b)  See Note 3 — Acquisitions, Disposals and Other Transactions to the accompanying unaudited consolidated financial statements.
(c)  See Note 14 — Commitments and Contingencies to the accompanying unaudited consolidated financial statements.
(d)  The Company recorded $82 million of restructuring changes in the three months ended September 30, 2013 for contract termination costs primarily related to cost structure efficiency enhancement initiatives at the DBS segment.
(e)  The write-downs of investments were taken as a result of either the deteriorating financial position of the investee or due to a permanent impairment resulting from sustained losses and limited prospects for recovery.

Income tax expense The effective income tax rates for the three months ended September 30, 2013 was 28%, which was lower than the statutory rate of 35%, primarily due to a 6% rate reduction from the Company’s foreign operations due to tax credits and deductions arising from a corporate restructuring.

The Company’s effective income tax rate for the three months ended September 30, 2012 was 12%, which was lower than the statutory rate of 35%, primarily due to an 8% rate reduction as a result of the sale of the remaining investment in NDS Group Limited (“NDS”) and a 7% rate reduction as a result of adjustments to valuation allowances primarily for the utilization of foreign tax credit carryforwards in connection with the NDS transaction, which, in accordance with ASC 740, reduced income tax expense due to the removal of a historical valuation allowance. Also contributing to the lower rate was a 3% rate reduction from the Company’s foreign operations due to tax credits and deductions arising from a corporate restructuring.

Income (loss) from discontinued operations, net of tax — For the three months ended September 30, 2013, the Company recorded income from discontinued operations of $487 million as compared to a loss of $20 million in the corresponding period of fiscal 2013. The change was primarily due to the recognition of a net tax refund from News Corp in accordance with the tax sharing and indemnification agreement.

Net income Net income decreased for the three months ended September 30, 2013 as compared to the corresponding period of fiscal 2013, primarily due to the absence of the gain on sale of NDS in July 2012 partially offset by income from discontinued operations, as noted above. The Company’s share repurchase program resulted in a $0.01 increase to earnings per share.

Net income attributable to noncontrolling interestsNet income attributable to noncontrolling interests decreased for the three months ended September 30, 2013 as compared to the corresponding period of fiscal 2013, primarily due to the inclusion of the noncontrolling interests’ share of Sky Deutschland’s net losses on its consolidation.

 

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Segment Analysis

Segment OIBDA is defined as revenues less operating expenses and selling, general and administrative expenses. Segment OIBDA does not include: depreciation and amortization, amortization of cable distribution investments, impairment charges, equity earnings of affiliates, interest expense, interest income, other, net, income tax expense and net income attributable to noncontrolling interests. Management believes that Segment OIBDA is an appropriate measure for evaluating the operating performance of the Company’s business segments because it is the primary measure used by the Company’s chief operating decision maker to evaluate the performance and allocate resources within the Company’s businesses.

Management believes that information about Total Segment OIBDA assists all users of the Company’s consolidated financial statements by allowing them to evaluate changes in the operating results of the Company’s portfolio of businesses separate from non-operational factors that affect net income, thus providing insight into both operations and the other factors that affect reported results. Total Segment OIBDA provides management, investors and equity analysts a measure to analyze the operating performance of the Company’s business and its enterprise value against historical data and competitors’ data, although historical results, including Segment OIBDA and Total Segment OIBDA, may not be indicative of future results (as operating performance is highly contingent on many factors, including customer tastes and preferences).

Total Segment OIBDA is a non-GAAP measure and should be considered in addition to, not as a substitute for, net income (loss), cash flow and other measures of financial performance reported in accordance with GAAP. In addition, this measure does not reflect cash available to fund requirements and excludes items, such as depreciation and amortization and impairment charges, which are significant components in assessing the Company’s financial performance.

The following table reconciles Total Segment OIBDA to Income from continuing operations before income tax expense for the three months ended September 30, 2013 as compared to the three months ended September 30, 2012.

 

     For the three months ended September 30,  
     2013     2012     Change     % Change  
     (in millions, except %)  

Revenues

   $ 7,061     $ 6,003     $ 1,058       18  % 

Operating expenses

     (4,447     (3,515     (932     27  % 

Selling, general and administrative expenses

     (1,018     (920     (98     11  % 

Amortization of cable distribution investments

     22       21       1       5  % 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Segment OIBDA

     1,618       1,589       29       2  % 

Depreciation and amortization

     (313     (174     (139     80  % 

Amortization of cable distribution investments

     (22     (21     (1     5  % 

Impairment charges

     —         (35     35       **   

Equity earnings of affiliates

     92       129       (37     (29 )% 

Interest expense, net

     (272     (261     (11     4  % 

Interest income

     8       15       (7     (47 )% 

Other, net

     (35     1,369       (1,404     **   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income tax expense

   $ 1,076     $ 2,611     $ (1,535     (59 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

** not meaningful

 

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     For the three months ended
September 30, 2013
 
     Revenues     Segment OIBDA  
     (in millions)  

Cable Network Programming

   $ 2,810     $ 991  

Television

     1,048       231  

Filmed Entertainment

     2,120       328  

Direct Broadcast Satellite Television

     1,390       190  

Other, Corporate and Eliminations

     (307     (122
  

 

 

   

 

 

 

Total

   $ 7,061     $ 1,618  
  

 

 

   

 

 

 

 

     For the three months ended
September 30, 2012
 
     Revenues     Segment OIBDA  
     (in millions)  

Cable Network Programming

   $ 2,503     $ 1,015  

Television

     972       178  

Filmed Entertainment

     1,937       433  

Direct Broadcast Satellite Television

     828       95  

Other, Corporate and Eliminations

     (237     (132
  

 

 

   

 

 

 

Total

   $ 6,003     $ 1,589  
  

 

 

   

 

 

 

Cable Network Programming (40% and 42% of the Company’s consolidated revenues in the first three months of fiscal 2014 and 2013, respectively)

For the three months ended September 30, 2013, revenues at the Cable Network Programming segment increased $307 million, or 12%, as compared to the corresponding period of fiscal 2013, primarily due to higher net affiliate and advertising revenue of approximately $280 million and $75 million, respectively. Partially offsetting these increases was the absence of distributor credits recorded in fiscal 2013. The strengthening of the U.S dollar against the local currencies, primarily in Latin America and India, resulted in a revenue decrease of approximately $50 million for the three months ended September 30, 2013 as compared to the corresponding period of fiscal 2013.

Domestic net affiliate revenues increased 10% for the three months ended September 30, 2013, primarily due to higher average rates per subscribers across most channels, the launch of Fox Sports 1 and FXX and higher subscribers primarily due to the acquisition of SportsTime Ohio. For the three months ended September 30, 2013, domestic advertising revenues increased 6% primarily due to higher MLB advertising sales at the RSNs and higher pricing and ratings at FX and the National Geographic Channels.

For the three months ended September 30, 2013, international net affiliate revenues increased 40% and international advertising revenues increased 21% as compared to the corresponding period of fiscal 2013. The consolidation of Fox Sports Asia and the acquisition of EMM contributed approximately 55% of the affiliate growth and approximately 30% of the advertising growth. The balance of the growth was primarily attributable to the local currency growth at the non-sports channels at FIC and STAR partially offset by an adverse impact from the strengthened U.S. dollar.

For the three months ended September 30, 2013, Segment OIBDA at the Cable Network Programming segment decreased $24 million, or 2%, as compared to the corresponding period of fiscal 2013, primarily due to expense increases of approximately $330 million partially offset by the revenue increases noted above. Almost two-thirds of the expense increase was due to the Acquisitions and new channel launches. The remaining expense increases were due to higher programming and marketing costs as a result of new shows launched on FX and higher MLB rights and production costs.

 

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Television (15% and 16% of the Company’s consolidated revenues in the first three months of fiscal 2014 and 2013, respectively)

For the three months ended September 30, 2013, revenues at the Television segment increased $76 million, or 8%, as compared to the corresponding period of fiscal 2013, primarily due to higher affiliate fee revenues resulting from higher retransmission consent revenues which doubled compared to the corresponding period of fiscal 2013. Advertising revenues were consistent with those from the prior year quarter as the impact from higher rates and increased sports ratings, driven by strong NFL viewership, were offset by the impact from lower primetime ratings led by declines at X-Factor, and lower political advertising.

For the three months ended September 30, 2013, Segment OIBDA at the Television segment increased $53 million, or 30%, as compared to the corresponding period of fiscal 2013, primarily due to the revenue increase noted above, partially offset by an increase of approximately $23 million in expenses. Selling, general and administrative expenses increased approximately $18 million primarily due to higher personnel costs as a result of the purchase of two television stations in the prior year and higher legal expenses for cases relating to the protection of the Company’s intellectual property rights. Operating expenses increased by approximately $5 million primarily related to marketing costs to support the launch of new television series such as Sleepy Hollow partially offset by a decrease in programming costs.

Filmed Entertainment (30% and 32% of the Company’s consolidated revenues in the first three months of fiscal 2014 and 2013, respectively)

For the three months ended September 30, 2013, revenues at the Filmed Entertainment segment increased $183 million, or 9%, as compared to the corresponding period of fiscal 2013, with increases of approximately $150 million due to higher sales of television content. Contributing to this increase was higher syndication sales primarily due to Modern Family, higher digital distribution revenue as a result of additional content being made available primarily due to the release of New Girl and higher revenues from delivery of new shows and distribution revenues primarily due to The Bridge. The three months ended September 30, 2013 included the worldwide theatrical success of The Wolverine, The Heat, Percy Jackson: Sea of Monsters, and Turbo compared to the corresponding period of fiscal 2013 which included the worldwide theatrical release of Ice Age: Continental Drift.

For the three months ended September 30, 2013, Segment OIBDA at the Filmed Entertainment segment decreased $105 million, or 24%, as compared to the corresponding period of fiscal 2013, primarily due to the absence of Ice Age: Continental Drift, with no comparable movie in fiscal 2014, as well as higher operating expenses partially offset by the revenue increase noted above. Operating expenses increased by approximately $270 million primarily due to higher production amortization and participation costs and higher theatrical marketing costs associated with the theatrical releases noted above. Selling, general and administrative expenses increased by approximately $20 million primarily due to higher personnel costs due to the expansion of domestic television production.

Direct Broadcast Satellite Television (20% and 14% of the Company’s consolidated revenues in the first three months of fiscal 2014 and 2013, respectively)

For the three months ended September 30, 2013, revenues at the Direct Broadcast Satellite Television segment increased $562 million, or 68%, as compared to the corresponding period of fiscal 2013, due to the inclusion of $520 million in revenues resulting from the consolidation of Sky Deutschland and revenue increases at SKY Italia. The increases at SKY Italia were primarily due to the weakening of the U.S. dollar against the Euro, which resulted in a revenue increase of approximately $50 million as compared to the corresponding period of 2013.

SKY Italia maintained its subscriber base during the three months ended September 30, 2013 with a total subscriber base of 4.8 million. The total churn for the three months ended September 30, 2013 was approximately 124,000 subscribers on an average subscriber base of 4.8 million, as compared to churn of

 

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approximately 169,000 subscribers on an average subscriber base of 4.9 million in the corresponding period of fiscal 2013. Sky Deutschland had a net increase of approximately 76,000 subscribers during the three months ended September 30, 2013 increasing the total direct subscriber base to 3.5 million. The total churn for the three months ended September 30, 2013 was approximately 109,000 subscribers on an average subscriber base of 3.5 million, as compared to churn of approximately 108,000 subscribers on an average subscriber base of 3.2 million in the corresponding period of fiscal 2013. Subscriber churn for the period represents the number of subscribers whose service was disconnected during the period.

SKY Italia’s average revenue per subscriber (“ARPU”) of approximately €42 in the three months ended September 30, 2013 increased from approximately €41 reported in the corresponding period of fiscal 2013, primarily due to a price increase. Sky Deutschland’s ARPU of approximately €34 in the three months ended September 30, 2013 increased from approximately €32 in the corresponding period of fiscal 2013, primarily due to higher revenues from residential options such as high definition and personal video recorders. ARPU is calculated 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, if any, for the period. Average subscribers are calculated for the respective periods by adding the beginning and ending subscribers for the period and dividing by two.

SKY Italia’s subscriber acquisition costs per subscriber (“SAC”) of approximately €430 in the three months ended September 30, 2013 increased from the corresponding period of fiscal 2013, primarily due to higher marketing costs. SAC is calculated by dividing total subscriber acquisition costs for a period by the number of gross 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 to subscribers and the costs related to installation and acquisition advertising net of any upfront activation fee. SAC excludes the value of equipment capitalized under equipment lease programs, as well as payments and the value of returned equipment related to disconnected lease program subscribers.

For the three months ended September 30, 2013, Segment OIBDA at the Direct Broadcast Satellite Television segment increased $95 million, or 100%, as compared to the corresponding period of fiscal 2013 primarily due to an increase of approximately $39 million from the inclusion of Sky Deutschland and an increase of $57 million primarily due to lower sports programming costs at SKY Italia. Programming costs at Sky Italia were lower during the three months ended September 30, 2013 as compared to the corresponding period of fiscal 2013 due to the absence of costs related to the London Olympics in fiscal 2013 partially offset by increased costs for soccer and Formula One rights for the three months ended September 30, 2013. During the three months ended September 30, 2013, the weakening of the U.S. dollar against the Euro resulted in a Segment OIBDA increase of approximately $9 million as compared to fiscal 2013.

Other, Corporate and Eliminations ((4)% of the Company’s consolidated revenues in the first three months of fiscal 2014 and 2013)

For the three months ended September 30, 2013, revenues at the Other, Corporate and Eliminations segment decreased approximately $70 million, or 30%, as compared to the corresponding period of fiscal 2013, primarily due to the exclusion of revenues from the Company’s digital media business due to its disposition in the third quarter of fiscal 2013.

For the three months ended September 30, 2013, Segment OIBDA results at the Other, Corporate and Eliminations segment improved $10 million, or 8%, as compared to the corresponding period of fiscal 2013 primarily due to lower compensation expenses.

 

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LIQUIDITY AND CAPITAL RESOURCES

Current Financial Condition

The Company’s principal source of liquidity is internally generated funds. The Company also has a five-year unused $2 billion revolving credit facility, which expires in May 2017, and has access to various film co-production alternatives to supplement its cash flows. In addition, the Company has access to the worldwide capital markets, subject to market conditions. As of September 30, 2013, the Company was in compliance with all of the covenants under the revolving credit facility, and it does not anticipate any violation of such covenants. The Company’s internally generated funds are highly dependent upon the state of the advertising markets and public acceptance of its film and television products.

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; operational expenditures including employee costs; capital expenditures; interest expenses; income tax payments; investments in associated entities; dividends; acquisitions; debt repayments; and stock repurchases.

The Company entered into a separation and distribution agreement with News Corp (“Separation and Distribution Agreement”) pursuant to which the Company agreed to provide a cash contribution to News Corp, immediately prior to the Separation, so that as of the Separation News Corp would have approximately $2.6 billion of cash on hand. Accordingly, immediately prior the Separation, the Company distributed approximately $2.4 billion to News Corp, which was comprised of $1.6 billion in cash funding and approximately $800 million that was held by News Corp’s subsidiaries immediately prior to the Separation. The Company made a final cash distribution of approximately $217 million in September 2013, pursuant to the Separation and Distribution Agreement.

In addition to the acquisitions, sales and possible acquisitions disclosed elsewhere, 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.

Sources and Uses of Cash

Net cash provided by operating activities for the three months ended September 30, 2013 and 2012 was as follows (in millions):

 

For the three months ended September 30,

   2013      2012  

Net cash provided by operating activities

   $ 345      $ 803  
  

 

 

    

 

 

 

The decrease in net cash provided by operating activities during the three months ended September 30, 2013 as compared to the corresponding period of fiscal 2013 primarily reflects higher income taxes paid, higher production spending and participation payments at the Film Entertainment segment and international sports rights acquired.

Net cash (used in) provided by investing activities for the three months ended September 30, 2013 and 2012 was as follows (in millions):

 

For the three months ended September 30,

   2013     2012  

Net cash (used in) provided by investing activities

   $ (326   $ 1,753  
  

 

 

   

 

 

 

 

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The change in net cash used in investing activities during the three months ended September 30, 2013 as compared to the corresponding period of fiscal 2013 was primarily due to the absence of cash proceeds from the sale of NDS in July 2012 of approximately $1.9 billion.

Net cash (used in) provided by financing activities for the three months ended September 30, 2013 and 2012 was as follows (in millions):

 

For the three months ended September 30,

   2013     2012  

Net cash (used in) provided by financing activities

   $ (3   $ 189  
  

 

 

   

 

 

 

The change in net cash used in financing activities during the three months ended September 30, 2013 as compared to the corresponding period of fiscal 2013 was primarily due to the Company’s acquisition of the remaining interest in LAPTV for approximately $75 million and an increase in cash used for share repurchases of approximately $35 million. Also contributing to this use of cash was lower cash receipts on share issuances of approximately $45 million. The lower share issuance was due to the expiration of the Company’s stock option program.

In August 2013, the Board authorized the repurchase of $4 billion of Class A Common Stock, excluding commissions, which replaced the remaining authorized amount under the stock repurchase program. The Company intends to complete this stock repurchase program by August 2014.

Debt Instruments

The following table summarizes borrowings and repayment of borrowings for the three months ended September 30, 2013 and 2012.

 

     For the three months ended
September 30,
 
         2013              2012      
     (in millions)  

Borrowings:(a)

     

Notes due September 2022

     —          987  

Notes due September 2023 and due September 2043

     987        —    
  

 

 

    

 

 

 

Total borrowings

   $ 987      $ 987  
  

 

 

    

 

 

 

 

(a)  See Note 10—Borrowings to the accompanying unaudited consolidated financial statements for further discussion.

Ratings of the public debt

The table below summarizes the Company’s credit ratings as of September 30, 2013.

 

Rating Agency

   Senior Debt      Outlook  

Moody’s

     Baa1         Stable   

S&P

     BBB+         Stable   

Revolving Credit Agreement

In May 2012, NAI entered into a credit agreement (the “Credit Agreement”), among NAI as Borrower, the Company as Parent Guarantor, the lenders named therein, the initial issuing banks named therein, JPMorgan Chase Bank, N.A. (“JPMorgan Chase”) and Citibank, N.A. as Co-Administrative Agents, JPMorgan Chase as

 

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Designated Agent and Bank of America, N.A. as Syndication Agent. The Credit Agreement provides a $2 billion unsecured revolving credit facility with a sub-limit of $400 million (or its equivalent in Euros) available for the issuance of letters of credit and a maturity date of May 2017. Under the Credit Agreement, the Company may request an increase in the amount of the credit facility up to a maximum amount of $2.5 billion and the Company may request that the maturity date be extended for up to two additional one-year periods. Borrowings are issuable in U.S. dollars only, while letters of credit are issuable in U.S. dollars or Euros. The significant terms of the agreement include the requirement that the Company maintain specific leverage ratios and limitations on secured indebtedness. Fees under the Credit Agreement will be based on the Company’s long-term senior unsecured non-credit enhanced debt ratings. Given the current debt ratings, NAI pays a facility fee of 0.125% and an initial drawn cost of LIBOR plus 1.125%.

Commitments

The Company has commitments under certain firm contractual arrangements (“firm commitments”) to make future payments. These firm commitments secure the future rights to various assets and services to be used in the normal course of operations. Except for the issuance of 4.00% and 5.40% Senior Notes due 2023 and 2043, respectively (See Note 10 – Borrowings in the accompanying unaudited consolidated financial statements), the Company’s commitments as of September 30, 2013 have not changed significantly from disclosures included in the 2013 Form 10-K.

Guarantees

The Company’s guarantees as of September 30, 2013 have not changed significantly from disclosures included in the 2013 Form 10-K.

Contingencies

Other than as disclosed in the notes to the accompanying unaudited consolidated financial statements, the Company is party to several other purchase and sale arrangements which become exercisable over the next ten years by the Company or the counter-party to the agreement. None of these arrangements that become or are exercisable in the next twelve months are material. Purchase arrangements that are exercisable by the counter-party to the agreement, and that are outside the sole control of the Company, are accounted for in accordance with ASC 480-10-S99-3A, “Distinguishing Liabilities from Equity.” Accordingly, the fair values of such purchase arrangements are classified in redeemable noncontrolling interests.

U.S. regulators and governmental authorities continue to conduct investigations initiated in 2011 with respect to the U.K. Newspaper Matters. The Company is cooperating with these investigations. It is not possible at this time to estimate the liability, if any, of the Company relating to these investigations.

In connection with the Separation, the Company and News Corp agreed in the Separation and Distribution Agreement that the Company will indemnify News Corp, on an after-tax basis, for payments made after the Separation arising out of civil claims and investigations relating to the U.K. Newspaper Matters, as well as legal and professional fees and expenses paid in connection with the related criminal matters, other than fees, expenses and costs relating to employees who are not (i) directors, officers or certain designated employees or (ii) with respect to civil matters, co-defendants with News Corp (the “Indemnity”). If additional information becomes available and as payments are made, the Company will update the liability provision for the Indemnity. Any changes to the liability provision for the Indemnity in the future will impact the results of operations for that period.

It is possible that these proceedings and any adverse resolution thereof, including any fines or other penalties associated with any plea, judgment or similar result could damage the Company’s reputation, impair its ability to conduct its business and adversely affect its results of operations and financial condition.

 

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The Company’s operations are subject to tax in various domestic and international 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.

The Company establishes an accrued liability for legal claims when the Company determines that a loss is both probable and the amount of the loss can be reasonably estimated. Once established, accruals are adjusted from time to time, as appropriate, in light of additional information. The amount of any loss ultimately incurred in relation to matters for which an accrual has been established may be higher or lower than the amounts accrued for such matters. Any fees, expenses, fines, penalties, judgments or settlements which might be incurred by the Company in connection with the various proceedings could affect the Company’s results of operations and financial condition.

Recent Accounting Pronouncements

See Note 1 — Basis of Presentation to the accompanying unaudited consolidated financial statements for discussion of recent accounting pronouncements.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The 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. The Company 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

The Company conducts operations in two principal currencies: the U.S. dollar and the Euro. These currencies operate as the functional currency for the Company’s U.S., and European operations, respectively. Cash is managed centrally within each of the two 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, draw downs in the appropriate local currency are available from intercompany borrowings. Since earnings of the Company’s European operations are expected to be reinvested in those businesses indefinitely, the Company does not hedge its investment in the net assets of those foreign operations.

At September 30, 2013 and June 30, 2013, the Company’s outstanding financial instruments with foreign currency exchange rate risk consisted of foreign currency forward contracts with fair values of approximately $(10) million and $3 million, respectively, and foreign denominated debt with fair values of $(142) million and $(137) million, respectively. In addition, there are certain interest rate swap contracts that were entered into during July 2013 that have immaterial fair values as of September 30, 2013. The aggregate fair value of the foreign denominated debt, interest rate swaps and foreign currency forward contracts with foreign exchange rate risk at September 30, 2013 and June 30, 2013 was $(153) million and $(134) million, respectively. The aggregate notional amount of the foreign denominated debt, interest rate swaps and foreign currency forward contracts with foreign currency exchange rate risk at September 30, 2013 and June 30, 2013 was $1,212 million and $842 million, respectively. The increase in notional amounts is primarily due to (i) the new interest rate swap contracts and (ii) the net impact of entering into new and settling expiring foreign currency forward contracts. The potential change in the fair values of these instruments resulting from a 10% adverse change in quoted foreign currency exchange rates at September 30, 2013 and June 30, 2013 would be approximately $51 million and $79 million, respectively.

Interest Rates

The Company’s current financing arrangements and facilities include approximately $17,473 million of outstanding fixed-rate debt, which includes approximately $300 million of Sky Deutschland’s outstanding five-year bank credit facility which carries variable rate debt and the Credit Agreement, which also carries variable rate interest. As noted above, the Company also entered into interest rate swap contracts during July 2013. 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 market value of such debt, while a change in the interest rate of variable debt will impact interest expense, as well as the amount of cash required to service such debt. As of September 30, 2013, substantially all of the Company’s financial instruments with exposure to interest rate risk were denominated in U.S. dollars and had an aggregate fair value of approximately $19,665 million. The potential change in fair market 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 $910 million at September 30, 2013.

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 method affiliates and had an

 

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aggregate fair value of approximately $9,085 million as of September 30, 2013. A hypothetical decrease in the market price of these investments of 10% would result in a fair value of approximately $8,177 million. Such a hypothetical decrease would result in a before tax decrease in comprehensive income of approximately $25 million, as any changes in fair value of the Company’s equity method affiliates are not recognized unless deemed other-than-temporary.

Credit Risk

Cash and cash equivalents are maintained with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions of reputable credit and, therefore, bear minimal credit risk.

The Company’s receivables did not represent significant concentrations of credit risk at September 30, 2013 or June 30, 2013 due to the wide variety of customers, markets and geographic areas to which the Company’s products and services are sold.

The Company monitors its positions with, and the credit quality of, the financial institutions which are counterparties to its financial instruments. The Company is exposed to credit loss in the event of nonperformance by the counterparties to the agreements. At September 30, 2013, the Company did not anticipate nonperformance by any of the counterparties.

 

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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 were 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 were 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 has been no change 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 first quarter of fiscal 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II

 

ITEM 1. LEGAL PROCEEDINGS

Shareholder Litigation

The following discussion is limited to certain recent developments concerning the Company’s legal proceedings and should be read in conjunction with the disclosure set forth in Part I, Item 3 of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2013.

Delaware

Reference is made to the Amalgamated Bank Litigation, the New Orleans Employees’ Retirement Litigation, the Mass. Laborers Litigation and the Cohen Litigation which were purported stockholder derivative actions consolidated in the Delaware Court of Chancery (the “Consolidated Action”) and previously described by the Company in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2013. The plaintiffs’ Third Amended Complaint in the Consolidated Action alleged claims against director defendants for breach of fiduciary duty arising from the Company’s purchase of Shine and from their purported failure to investigate alleged acts of voicemail interception at The News of the World (the “NoW Matter”) and allegedly permitting the Company to engage in a cover up related to the NoW Matter. The Third Amended Complaint sought a declaration that the defendants violated their fiduciary duties, damages, pre- and post-judgment interest, fees and costs.

On June 26, 2013, the Court approved the settlement in principle that the parties reached on April 17, 2013, and entered a final judgment dismissing the Consolidated Action. Pursuant to the terms of that settlement, the parties agreed that the director defendants in the Consolidated Action would cause to be paid on their behalf the amount of $139 million to the Company, minus $28 million in attorneys’ fees and expenses awarded by the Court to the plaintiffs’ counsel. Such amount was paid from an escrow account created for the benefit of the director defendants pursuant to an agreement reached between the defendants and their directors’ and officers’ liability insurers for the payment of insurance proceeds, subject to a claims release. In addition to the payment to the Company, the settlement contemplates that the Company will build on corporate governance and compliance enhancements which the Company has implemented in the past year. These shall remain in effect at least through December 31, 2016, and will be applicable to both the Company and News Corp.

No stockholder objected to either the settlement or the proposed fee award. The settlement became effective on August 16, 2013, because as of that date, the dismissal of the Consolidated Action as well as the dismissals of each of the Shields Litigation, the Iron Workers Litigation and the Stricklin Litigation (each as described below under the heading “Shareholder Litigation—Southern District of New York”) were no longer subject to appeal.

Southern District of New York

On July 19, 2011, a purported class action lawsuit captioned Wilder v. News Corp., et al. (“Wilder Litigation”), was filed on behalf of all purchasers of the Company’s common stock between March 3, 2011 and July 11, 2011, in the United States District Court for the Southern District of New York. The plaintiff brought claims under Section 10(b) and Section 20(a) of the Securities Exchange Act, alleging that false and misleading statements were issued regarding the NoW Matter. The suit names as defendants the Company, Rupert Murdoch, James Murdoch and Rebekah Brooks, and seeks compensatory damages, rescission for damages sustained, and costs. On June 5, 2012, the court issued an order appointing the Avon Pension Fund (“Avon”) as lead plaintiff and Robbins Geller Rudman & Dowd as lead counsel. Thereafter, on July 3, 2012, the court issued an order providing that an amended consolidated complaint shall be filed by July 31, 2012. Avon filed an amended consolidated complaint on July 31, 2012, which among other things, added as defendants NI Group Limited (now known as News Corp UK & Ireland Limited) and Les Hinton, and expanded the class period to include February 15, 2011 to July 18, 2011. The defendants have filed motions to dismiss the complaint which are pending. The Company’s management believes the claims in the Wilder Litigation are entirely without merit, and intends to vigorously defend those claims.

 

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Reference is made to the Shields Litigation, the Iron Workers Litigation and the Stricklin Litigation which were purported stockholders derivative actions filed in the United States District Court for the Southern District of New York and previously described by the Company in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2013. The plaintiffs alleged violations of Section 14(a) of the Securities Exchange Act, breach of fiduciary duty, waste of corporate assets, gross mismanagement and unjust enrichment in connection with, among other things, the NoW Matter. The plaintiffs sought various forms of relief including, among other things, an order requiring the Company to take certain specified corporate governance actions, compensatory damages, injunctive relief, fees and costs.

On July 16, 2013, after the dismissal of the Consolidated Action by the Delaware Court of Chancery as discussed above, the court entered uncontested Orders of Dismissal in the Shields Litigation, the Stricklin Litigation and the Iron Workers Litigation, dismissing each of the lawsuits. As described above, the settlement of the Consolidated Action became effective on August 16, 2013, because as of that date, the dismissal of the Consolidated Action as well as the dismissals of each of the Shields Litigation, the Iron Workers Litigation and the Stricklin Litigation were no longer subject to appeal.

On June 7, 2013, Iron Workers brought a second derivative action captioned Iron Workers Mid-South Pension Fund v. Murdoch, et al. (“Second Iron Workers Litigation”), in the United States District Court for the Southern District of New York, which related to the same subject matter as the Consolidated Action and the Shields Litigation, the Stricklin Litigation and the Iron Workers Litigation. The plaintiff brought state law claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment in connection with alleged anti-competitive practices at Company subsidiaries. The action named as defendants current and former directors of the Company. The plaintiff sought various forms of relief including compensatory damages, an order requiring the Company to take certain specified corporate governance actions, injunctive relief, restitution, fees and costs. On June 18, 2013, the plaintiff moved for the dismissal of the Second Iron Workers Litigation, and the court granted the Order of Dismissal on July 24, 2013, dismissing the Second Iron Workers Litigation.

U.K. Newspaper Matters and Related Investigations and Litigation

U.S. regulators and governmental authorities continue to conduct investigations initiated in 2011 with respect to the U.K. Newspaper Matters. The Company is cooperating with these investigations. It is not possible at this time to estimate the liability, if any, of the Company relating to these investigations.

In connection with the Separation, the Company and News Corp agreed in the Separation and Distribution Agreement that the Company will indemnify News Corp, on an after-tax basis, for payments made after the Separation arising out of civil claims and investigations relating to the U.K. Newspaper Matters, as well as legal and professional fees and expenses paid in connection with the related criminal matters, other than fees, expenses and costs relating to employees who are not (i) directors, officers or certain designated employees or (ii) with respect to civil matters, co-defendants with News Corp (the “Indemnity”).

It is possible that these proceedings and any adverse resolution thereof, including any fines or other penalties associated with any plea, judgment or similar result could damage the Company’s reputation, impair its ability to conduct its business and adversely affect its results of operations and financial condition.

Other

The Company’s operations are subject to tax in various domestic and international 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.

 

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ITEM 1A. 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 or in its television stations, broadcast and cable networks and direct broadcast satellite 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 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 to fast-forward, rewind, pause and skip programming and advertisements. These technological developments which are increasing the number of media and entertainment choices available to audiences could negatively impact not only consumer demand for our content and services but also could affect the attractiveness of the Company’s offerings to viewers, advertisers and/or distributors. Failure to effectively anticipate or adapt to emerging technologies or changes in consumer behavior could have an adverse effect on our business. Further, 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 and assets.

Global Economic Conditions May Have a Continuing Adverse Effect on the Company’s Business.

The United States and global economies have undergone a period of economic uncertainty, which caused, among other things, a general tightening in the credit markets, limited access to the credit markets, lower levels of liquidity, increases in the rates of default and bankruptcy, lower consumer and business spending and lower consumer net worth. The resulting pressure on the labor and retail markets and the downturn in consumer confidence weakened the economic climate in certain markets in which the Company does business and has had and may continue to have an adverse effect on the Company’s business, results of operations, financial condition and liquidity. A continued decline in these economic conditions could further impact the Company’s business, reduce the Company’s advertising and other revenues and negatively impact the performance of its motion pictures and home entertainment releases, television operations and other consumer products. In addition, these conditions could also impair the ability of those with whom the Company does business to satisfy their obligations to the Company. As a result, the Company’s results of operations may be adversely affected. Although the Company believes that its operating cash flow and current access to capital and credit markets, including the Company’s existing credit facility, will give it the ability to meet its financial needs for the foreseeable future, there can be no assurance that continued or increased volatility and disruption in the global capital and credit markets will not impair the Company’s liquidity or increase its cost of borrowing.

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

 

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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 their effects on consumer spending 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 Company Could Suffer Losses Due to Asset Impairment Charges for Goodwill, Intangible Assets and Programming.

In accordance with applicable generally accepted accounting principles, the Company performs an annual impairment assessment of its recorded goodwill and indefinite-lived intangible assets, including FCC licenses, during the fourth quarter of each fiscal year. The Company also continually evaluates whether current factors or indicators, such as the prevailing conditions in the capital markets, require the performance of an interim impairment assessment of those assets, as well as other investments and other long-lived assets. Any significant shortfall, now or in the future, in advertising revenue and/or the expected popularity of the programming for which the Company has acquired rights could lead to a downward revision in the fair value of certain reporting units. A downward revision in the fair value of a reporting unit, indefinite-lived intangible assets, investments or long-lived assets could result in an impairment and a non-cash charge would be required. Any such charge could be material to the Company’s reported net earnings.

Fluctuations in Foreign Exchange Rates Could Have an Adverse Effect on the Company’s Results of Operations.

The Company has significant operations in a number of foreign jurisdictions and certain of the Company operations are conducted in foreign currencies. The value of these currencies fluctuates relative to the U.S. dollar. As a result, the Company is exposed to exchange rate fluctuations, which could have an adverse effect on its results of operations in a given period or in specific markets.

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’s broadcast stations and 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 broadcast stations and cable networks, which may adversely affect those networks’ revenues from subscriber fees and their ability to sell national and local advertising time. 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 MyNetworkTV and adversely affect the Company’s ability to sell national 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

 

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if escalations in sports programming rights costs are unmatched by increases in advertising rates and, in the case of cable networks, subscriber fees.

The Company Relies on Network and Information Systems and Other Technology That May Be Subject to Disruption or Misuse, Which Could Result in Improper Disclosure of Personal Data or Confidential Information as well as Increased Costs or Loss of Revenue.

Network and information systems and other technologies, including those related to our network management, are important to our business activities. Network and information systems-related events, such as computer hackings, computer viruses, worms or other destructive or disruptive software, process breakdowns, denial of service attacks, malicious social engineering or other malicious activities, or any combination of the foregoing, could result in a disruption of our services or improper disclosure of personal data or confidential information. Improper disclosure of such information could harm our reputation, require us to expend resources to remedy such a security breach or subject us to liability under laws that protect personal data, resulting in increased costs or loss of revenue.

Technological Developments May Increase the Threat of Content Piracy and Signal Theft and Limit the Company’s Ability to Protect Its Intellectual Property Rights.

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, cable and other programming. The Company seeks to limit the threat of content piracy and direct broadcast satellite 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 high-quality pirated material. In addition, developments in software or devices that circumvent encryption technology and the falling prices of devices incorporating such technologies increase the threat of unauthorized use and distribution of direct broadcast satellite programming signals and the proliferation of user-generated content sites and live and stored video streaming sites, which deliver unauthorized copies of copyrighted content, including those emanating from other countries in various languages, may adversely impact the Company’s businesses. The proliferation of unauthorized distribution and use of the Company’s content could have an adverse effect on the Company’s businesses and profitability because it reduces the revenue that the Company could potentially receive from the legitimate sale and distribution of its products and services.

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. However, protection of the Company’s intellectual property rights is dependent on the scope and duration of the Company’s rights as defined by applicable laws in the United States and abroad and the manner in which those laws are construed. If those laws are drafted or interpreted in ways that limit the extent or duration of the Company’s rights, or if existing laws are changed, the Company’s ability to generate revenue from intellectual property may decrease, or the cost of obtaining and enforcing our rights may increase. 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. Further, while piracy and technology tools continue to escalate, if any U.S. or international laws intended to combat piracy and protect intellectual property are repealed or weakened or not adequately enforced, or if the legal system fails to evolve and adapt to new technologies that facilitate piracy, we may be unable to effectively protect our rights and the value of our intellectual property may be negatively impacted and our costs of enforcing our rights could increase.

 

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The Company Must Respond to Changes in Consumer Behavior as a Result of New Technologies in Order to Remain Competitive.

Technology, particularly digital technology used in the entertainment industry, continues to evolve rapidly, leading to alternative methods for the delivery and storage of digital content. These technological advancements have driven changes in consumer behavior and have empowered consumers to seek more control over when, where and how they consume digital content. Content owners are increasingly delivering their content directly to consumers over the Internet, often without charge, and innovations in distribution platforms have enabled consumers to view such Internet-delivered content on televisions and portable devices. There is a risk that the Company’s responses to these changes and strategies to remain competitive, including distribution of its content on a “pay” basis, may not be adopted by consumers. In addition, enhanced Internet capabilities and other new media may reduce television viewership, the demand for DVDs and Blu-rays and the desire to see motion pictures in theaters, which could negatively affect the Company’s revenues. The Company’s failure to protect and exploit the value of its content, while responding to and developing new technology and business models to take advantage of advancements in technology and the latest consumer preferences, could have a significant adverse effect on the Company’s businesses, asset values and results of operations.

Labor Disputes May Have an Adverse Effect on the Company’s Business.

In a variety of the Company’s businesses, the Company and its partners engage the services of writers, directors, actors and other talent, trade employees and others who are subject to collective bargaining agreements, including employees of the Company’s film and television studio operations. If the Company or its partners are unable to renew expiring collective bargaining agreements, it is possible that the affected unions could take action in the form of strikes or work stoppages. Such actions, as well as higher costs in connection with these collective bargaining agreements or a significant labor dispute, could have an adverse effect on the Company’s business by causing delays in production or by reducing profit margins.

Changes in U.S. or Foreign Regulations May Have an Adverse Effect on the Company’s Business.

The Company is subject to a variety of U.S. and foreign regulations in the jurisdictions in which its businesses operate. In general, the television broadcasting and multichannel video programming and distribution industries in the United States are highly regulated by federal laws and regulations issued and administered by various federal agencies, including the FCC. The FCC generally regulates, among other things, the ownership of media, broadcast and multichannel video programming and technical operations of broadcast licensees. Our program services and online properties are subject to a variety of laws and regulations, including those relating to issues such as content regulation, user privacy and data protection, and consumer protection, among others. Further, the United States Congress, the FCC and state legislatures currently have under consideration, and may in the future adopt, new laws, regulations and policies regarding a wide variety of matters, including technological changes and measures relating to privacy and data security, 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.

In addition, changes in tax laws, regulations or the interpretations thereof in the U.S. and other jurisdictions in which the Company has operations could affect the Company’s results of operations.

U.S. Citizenship Requirements May Limit Common Stock Ownership and Voting Rights.

The Company owns broadcast station licensees in connection with its ownership and operation of U.S. television stations. Under U.S. law, no broadcast station licensee may be owned by a corporation if more than 25% of its stock is owned or voted by non-U.S. persons, their representatives, or by any other corporation organized under the laws of a foreign country. The Company’s Restated Certificate of Incorporation authorizes the Board of Directors to prevent, cure or mitigate the effect of stock ownership above the applicable foreign

 

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ownership threshold by taking any action including: refusing to permit any transfer of common stock to or ownership of common stock by a non-U.S. stockholder; voiding a transfer of common stock to a non-U.S. stockholder; suspending rights of stock ownership if held by a non-U.S. stockholder; or redeeming common stock held by a non-U.S. stockholder. In order to maintain compliance with U.S. law, as of October 2013, the suspension of voting rights of the Class B Common Stock held by non-U.S. stockholders was 35%. This suspension will remain in place for as long as the Company deems it necessary to maintain compliance with applicable U.S. law, and may be adjusted by the Audit Committee as it deems appropriate. The Company is not able to predict whether it will need to adjust the suspension or whether additional action pursuant to its Restated Certificate of Incorporation may be necessary. The FCC could review the Company’s compliance with applicable U.S. law in connection with its consideration of the Company’s renewal applications for licenses to operate the broadcast stations the Company owns.

The Company and News Corp Face Investigations Regarding Allegations of Phone Hacking, Illegal Data Access, Inappropriate Payments to Public Officials and Other Related Matters and Related Civil Lawsuits.

U.S. regulators and governmental authorities are conducting investigations relating to the U.K. Newspaper Matters. The Company is cooperating with these investigations. It is not possible at this time to estimate the liability, if any, of the Company relating to these investigations.

In connection with the Separation, the Company and News Corp agreed in the Separation and Distribution Agreement that the Company will indemnify News Corp, on an after-tax basis, for payments made after the Separation arising out of civil claims and investigations relating to the U.K. Newspaper Matters, as well as legal and professional fees and expenses paid in connection with the related criminal matters, other than fees, expenses and costs relating to employees who are not (i) directors, officers or certain designated employees or (ii) with respect to civil matters, co-defendants with News Corp (the “Indemnity”).

It is possible that these proceedings and any adverse resolution thereof, including any fines or other penalties associated with any plea, judgment or similar result could damage the Company’s reputation, impair its ability to conduct its business and adversely affect its results of operations and financial condition.

Risks Related to the Separation

If the Separation, Together with Certain Related Transactions, Were Ultimately Determined to be Taxable Transactions for U.S. Federal Income Tax Purposes, then We Could Be Subject to Significant Tax Liability.

The Company received (i) a private letter ruling from the IRS substantially to the effect that, among other things, the distribution of Class A Common Stock and Class B Common Stock of News Corp qualifies as tax-free under Sections 368 and 355 of the Internal Revenue Code of 1986, as amended (the “Code”) except for cash received in lieu of fractional shares of News Corp stock and (ii) an opinion from the law firm of Hogan Lovells US LLP confirming the tax-free status of the distribution for U.S. federal income tax purposes, including confirming the satisfaction of the requirements under Section 368 and 355 of the Code not specifically addressed in the IRS private letter ruling. The opinion of Hogan Lovells US LLP will not be binding on the IRS or the courts, and there is no assurance that the IRS or a court will not take a contrary position.

The private letter ruling and the opinion rely on certain facts and assumptions, and certain representations from the Company and News Corp regarding the past and future conduct of our respective businesses and other matters. Notwithstanding the receipt of the private letter ruling and the opinion, the IRS could determine on audit that the distribution or the internal transactions should be treated as taxable transactions if it determines that any of these facts, assumptions, representations or undertakings is not correct or has been violated, or that the distribution or the internal transactions should be taxable for other reasons, including as a result of a significant change in stock or asset ownership after the distribution. If the distribution ultimately is determined to be taxable, the distribution could be treated as a taxable dividend or capital gain for U.S. federal income tax purposes, and U.S. stockholders and certain non-U.S. stockholders could incur significant U.S. federal income tax liabilities. In

 

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addition, if the internal reorganization and/or the distribution is ultimately determined to be taxable, the Company would recognize gains on the internal reorganization and/or recognize gain in an amount equal to the excess of the fair market value of shares of the News Corp common stock distributed to our stockholders on the distribution date over our tax basis in such shares of our common stock.

We Could Be Liable for Income Taxes Owed by News Corp.

Each member of our consolidated group, which until June 28, 2013 included News Corp and each of our other subsidiaries, is jointly and severally liable for the U.S. federal income tax liability of each other member of the consolidated group. Consequently, we could be liable in the event any such liability is incurred, and not discharged, by any other member of our consolidated group. Under the terms of the tax sharing and indemnification agreement that we entered into in connection with the Separation, we will be required to indemnify News Corp for any such liability. Disputes or assessments could arise during future audits by the IRS in amounts that we cannot quantify.

We Might Not Be Able to Engage in Desirable Strategic Transactions and Equity Issuances Because of Certain Restrictions Relating to Requirements for Tax-Free Distributions for U.S. Federal Income Tax Purposes.

Our ability to engage in significant strategic transactions and equity issuances may be limited or restricted in order to preserve, for U.S. federal income tax purposes, the tax-free nature of the distribution. Even if the distribution otherwise qualifies for tax-free treatment under Section 355 of the Code, it may result in corporate level taxable gain to us under Section 355(e) of the Code if 50% or more, by vote or value, of shares of our stock or News Corp’s stock are acquired or issued as part of a plan or series of related transactions that includes the distribution.

To preserve the tax-free treatment of the distribution and the internal transactions in connection with the distribution for U.S. federal income tax purposes, under the tax sharing and indemnification agreement that we entered into with News Corp, we will be prohibited from taking or failing to take certain actions that may prevent the distribution and related transactions from being tax-free for U.S. federal income tax purposes. Further, for the two-year period following the distribution, we may be prohibited from:

 

    approving or allowing any transaction that results in a change in ownership of more than a specified percentage of our common stock,

 

    a merger,

 

    a redemption of equity securities exceeding 20% of its outstanding capital stock,

 

    a sale or other disposition of certain businesses or a specified percentage of our assets, or

 

    an acquisition of a business or assets with equity securities to the extent one or more persons would acquire in excess of a specified percentage of our common stock

These restrictions may limit our ability to pursue strategic transactions or engage in new business or other transactions that may maximize the value of our business.

The Separation and Distribution Agreement May Restrict Us From Acquiring or Owning Certain Types of Assets in the U.S.

The FCC has promulgated certain rules and regulations that limit the ownership of radio and television broadcast stations, television broadcast networks and newspapers (the “Broadcast Ownership Rules”). Under the FCC’s rules for determining ownership of the media assets described above, the Murdoch Family Trust’s ownership interest in both News Corp and the Company following the Separation would generally result in each company’s businesses and assets being attributable to the Murdoch Family Trust for purposes of determining compliance with the Broadcast Ownership Rules. Consequently, our future conduct, including the acquisition of

 

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any broadcast networks, or stations or any newspapers, in the same local markets in which News Corp owns or operates newspapers or has acquired television stations, may affect News Corp’s ability to own and operate its newspapers or any television stations it acquires or otherwise comply with the Broadcast Ownership Rules. Therefore, we and News Corp agreed in the Separation and Distribution Agreement that if the Company acquires, after the Separation, newspapers, radio or television broadcast stations or television broadcast networks in the U.S. and such acquisition would impede or be reasonably likely to impede News Corp’s business, then the Company will be required to take certain actions, including divesting assets, in order to permit News Corp to hold its media interests and to comply with such rules. This agreement will effectively limit the activities or strategic business alternatives available to us if such activities or strategic business alternatives implicate the Broadcast Ownership Rules and would impede or be reasonably likely to impede News Corp’s business.

The Indemnification Arrangements We Entered Into With News Corp in Connection With the Separation May Require Us to Divert Cash to Satisfy Indemnification Obligations to News Corp.

Pursuant to the Separation and Distribution Agreement and certain other related agreements, the Company agreed to indemnify News Corp for certain liabilities and News Corp agreed to indemnify the Company for certain liabilities. As a result, we could be required, under certain circumstances, to indemnify News Corp against certain liabilities to the extent such liabilities result from an action we or our affiliates take or from any breach of our or our affiliates’ representations, covenants or obligations under the Separation and Distribution Agreement, tax sharing and indemnification agreement or any other agreement entered into in connection with the Separation.

After the Separation, Certain of Our Directors and Officers May Have Actual or Potential Conflicts of Interest Because of Their Equity Ownership in News Corp, and Certain of Our Officers and Directors May Have Actual or Potential Conflicts of Interest Because They Also Serve as Officers and/or on the Board of Directors of News Corp.

Following the Separation, certain of our directors and executive officers own shares of News Corp’s common stock, and the individual holdings may be significant for some of these individuals compared to their total assets. In addition, following the Separation, certain of our officers and directors also serve as officers and/or as directors of News Corp, including our Chairman and Chief Executive Officer K. Rupert Murdoch, who serves as News Corp Executive Chairman, and our Group General Counsel Gerson Zweifach, who serves as News Corp’s General Counsel. This ownership or service to both companies may create, or may create the appearance of, conflicts of interest when these directors and officers are faced with decisions that could have different implications for News Corp and us.

For example, potential conflicts of interest could arise in connection with the resolution of any dispute that may arise between News Corp and us regarding the terms of the agreements governing the internal reorganization, the distribution and the relationship thereafter between the companies, including with respect to the indemnification of certain matters. In addition to any other arrangements that the Company and News Corp may agree to implement, the Company and News Corp agreed that officers and directors who serve at both companies will recuse themselves from decisions where conflicts arise due to their positions at both companies.

 

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The Board has authorized a stock repurchase program, under which the Company is currently authorized to acquire Class A Common Stock. In August 2013, the Board authorized the repurchase of $4 billion of Class A Common Stock, excluding commissions, which replaced the remaining authorized amount under the stock repurchase program. The Company intends to complete this stock repurchase program by August 2014.

The remaining authorized amount under the Company’s stock repurchase program as of September 30, 2013, excluding commissions, was approximately $3.4 billion.

The program may be modified, extended, suspended or discontinued at any time.

Below is a summary of the Company’s purchases of its Class A Common Stock during the three months ended September 30, 2013:

 

     Total
Number
of Shares
Purchased
     Average
Price per
Share
     Total Cost
of Purchase
 
                   (in millions)  

July

     7,635,377      $ 30.25      $ 231  

August

     10,913,009        31.61        345  

September

     10,430,141        32.31        337  
  

 

 

    

 

 

    

 

 

 

Total

     28,978,527         $ 913  
  

 

 

       

 

 

 

The Company did not purchase any of its Class B Common Stock during the three months ended September 30, 2013.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

ITEM 5. OTHER INFORMATION

Not applicable.

 

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ITEM 6. EXHIBITS

 

(a) Exhibits.

 

  3.1 Restated Certificate of Incorporation of Twenty-First Century Fox, Inc. (Incorporated by reference to Exhibit 3.1 to the Annual Report of Twenty-First Century Fox, Inc. on Form 10-K (File No. 001-32352) filed with the Securities and Exchange Commission on August 19, 2013).

 

  3.2 Amended and Restated By-Laws of the Registrant. (Incorporated by reference to Exhibit 3.1 to the Current Report of the Registrant on Form 8-K (File No. 001-32352) filed with the Securities and Exchange Commission on August 7, 2013).

 

  4.1 Registration Rights Agreement, dated as of September 30, 2013, by and among News America Incorporated, Twenty-First Century Fox, Inc. and J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc., Goldman, Sachs & Co. and Morgan Stanley & Co. LLC.*

 

  4.2 Form of Notes representing $300,000,000 principal amount of 4.00% Senior Notes due 2023, dated September 30, 2013.*

 

  4.3 Form of Notes representing $700,000,000 principal amount of 5.40% Senior Notes due 2043, dated September 30, 2013.*

 

10.1 Letter Agreement, dated as of July 1, 2013, between News America Incorporated and David F. DeVoe.*

 

10.2 Employment Agreement, dated as of July 1, 2013, between News America Incorporated and John P. Nallen.*

 

10.3 Form of Summary of Performance Stock Unit Terms and Conditions for Stock-Settled Performance Stock Units.*

 

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.**

 

101 The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 formatted in eXtensible Business Reporting Language: (i) Unaudited Consolidated Statements of Operations for the three months ended September 30, 2013 and 2012; (ii) Unaudited Consolidated Statements of Comprehensive Income (Loss) for the three months ended September 30, 2013 and 2012; (iii) Consolidated Balance Sheets at September 30, 2013 (unaudited) and June 30, 2013 (audited); (iv) Unaudited Consolidated Statements of Cash Flows for the three months ended September 30, 2013 and 2012; and (v) Notes to the Unaudited Consolidated Financial Statements.*

 

* Filed herewith.
** Furnished herewith.

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

TWENTY-FIRST CENTURY FOX, INC.

(Registrant)

By:   /s/ John Nallen        
  John Nallen
 

Senior Executive Vice President and

 

Chief Financial Officer

Date: November 6, 2013

 

71

EX-4.1

Exhibit 4.1

 

 

$300,000,000 4.00% Senior Notes due 2023

$700,000,000 5.40% Senior Notes due 2043

REGISTRATION RIGHTS AGREEMENT

Dated as of September 30, 2013

by and among

NEWS AMERICA INCORPORATED,

TWENTY-FIRST CENTURY FOX, INC.,

J.P. MORGAN SECURITIES LLC,

MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED

CITIGROUP GLOBAL MARKETS INC.,

GOLDMAN, SACHS & CO.,

and

MORGAN STANLEY & CO. LLC

 

 


REGISTRATION RIGHTS AGREEMENT

THIS REGISTRATION RIGHTS AGREEMENT (this “Agreement”) is made and entered into as of September 30, 2013 by and among NEWS AMERICA INCORPORATED, a Delaware corporation (the “Issuer”), TWENTY-FIRST CENTURY FOX, INC., a Delaware corporation (the “Guarantor”), and J.P. MORGAN SECURITIES LLC (the “Purchaser Representative”), MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, CITIGROUP GLOBAL MARKETS INC., GOLDMAN, SACHS & CO., and MORGAN STANLEY & CO. LLC (collectively, with the Purchaser Representative, the “Initial Purchasers” and each, an “Initial Purchaser”).

This Agreement is made pursuant to the Purchase Agreement, dated as of September 25, 2013, by and among the Issuer, the Guarantor and the Initial Purchasers (the “Purchase Agreement”), which provides for, among other things, the sale by the Issuer to the Initial Purchasers of (i) an aggregate of $300,000,000 principal amount of the Issuer’s 4.00% Senior Notes Due 2023 (the “4.00% Senior Notes”) and (ii) an aggregate of $700,000,000 principal amount of the Issuer’s 5.40% Senior Notes Due 2043 (the “5.40% Senior Notes” and together with the 4.00% Senior Notes, the “Securities”). In order to induce the Initial Purchasers to enter into the Purchase Agreement, the Issuer has agreed to provide to the Initial Purchasers and their direct and indirect transferees the registration rights set forth in this Agreement. The execution and delivery of this Agreement is a condition to the closing under the Purchase Agreement.

In consideration of the foregoing, the parties hereto agree as follows:

1. Definitions. As used in this Agreement, the following capitalized defined terms shall have the following meanings:

4.00% Exchange Notes” shall mean the senior debt securities issued by the Issuer under the Indenture containing terms identical to the 4.00% Senior Notes which terms shall include the guarantee of the Guarantor on the original 4.00% Senior Notes (except that (i) interest thereon shall accrue from the last date on which interest was paid on the 4.00% Senior Notes or, if no such interest has been paid, from September 30, 2013 and (ii) the transfer restrictions thereon shall be eliminated) to be offered to Holders of 4.00% Senior Notes in exchange for 4.00% Senior Notes pursuant to the Exchange Offer.

4.00% Senior Notes” shall have the meaning set forth in the preamble to this Agreement.

5.40% Exchange Notes” shall mean the senior debt securities issued by the Issuer under the Indenture containing terms identical to the 5.40% Senior Notes which terms shall include the guarantee of the Guarantor on the original 5.40% Senior Notes (except that (i) interest thereon shall accrue from the last date on which interest was paid on the 5.40% Senior Notes or, if no such interest has been paid, from September 30, 2013 and (ii) the transfer restrictions thereon shall be eliminated) to be offered to Holders of 5.40% Senior Notes in exchange for 5.40% Senior Notes pursuant to the Exchange Offer.

5.40% Senior Notes” shall have the meaning set forth in the preamble to this Agreement.

Additional Interest” shall have the meaning set forth in Section 2(e) hereof.

Advice” shall have the meaning set forth in the last paragraph of Section 3 hereof.

 

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Applicable Period” shall have the meaning set forth in Section 3(s) hereof.

Business Day” shall mean a day that is not a Saturday, a Sunday, or a day on which banking institutions in New York, New York are required to be closed.

Closing Time” shall mean the Closing Time as defined in the Purchase Agreement.

Depositary” shall mean The Depository Trust Company, or any other depositary appointed by the Issuer; provided, however, that such depositary must have an address in the Borough of Manhattan, in the City of New York.

Effectiveness Period” shall have the meaning set forth in Section 2(b) hereof.

Event Date” shall have the meaning set forth in Section 2(e) hereof.

Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

Exchange Offer” shall mean the exchange offer by the Issuer of Exchange Securities for Securities pursuant to Section 2(a) hereof.

Exchange Offer Registration” shall mean a registration under the Securities Act effected pursuant to Section 2(a) hereof.

Exchange Offer Registration Statement” shall mean an exchange offer registration statement on Form S-1 or S-4 (or, if applicable, on another appropriate form), and all amendments and supplements to such registration statement, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein.

Exchange Period” shall have the meaning set forth in Section 2(a)(ii) hereof.

Exchange Securities” shall mean the 4.00% Exchange Notes and the 5.40% Exchange Notes.

Holder” shall mean each of the Initial Purchasers, for so long as it owns any Registrable Securities, and each of its successors, assigns and direct and indirect transferees who become registered owners of Registrable Securities under the Indenture.

Indenture” shall mean the Amended and Restated Indenture relating to the Securities, dated February 16, 2011, among the Company as issuer of the Securities, the Guarantor, and The Bank of New York Mellon, as trustee (the “Trustee”), as may be amended or supplemented from time to time in accordance with the terms thereof.

Initial Purchaser” and “Initial Purchasers” shall have the meaning set forth in the preamble to this Agreement.

Inspectors” shall have the meaning set forth in Section 3(m) hereof.

Issuer” shall have the meaning set forth in the preamble to this Agreement and also includes the Issuer’s successors and permitted assigns.

Majority Holders” shall mean the Holders of a majority of the aggregate principal amount of outstanding Registrable Securities.

 

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Participating Broker-Dealer” shall have the meaning set forth in Section 3(s) hereof.

Person” shall mean an individual, partnership, corporation, limited liability company, trust or unincorporated organization, or a government or agency or political subdivision thereof.

Private Exchange” shall have the meaning set forth in Section 2(a) hereof.

Private Exchange Securities” shall have the meaning set forth in Section 2(a) hereof.

Prospectus” shall mean the prospectus included in a Registration Statement, including any preliminary prospectus, and any such prospectus as amended or supplemented by any prospectus supplement, including a prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by a Shelf Registration Statement, and by all other amendments and supplements to a prospectus, including post-effective amendments, and in each case including all material incorporated by reference therein.

Purchase Agreement” shall have the meaning set forth in the preamble to this Agreement.

Purchaser Representative” shall have the meaning set forth in the preamble to this Agreement.

Records” shall have the meaning set forth in Section 3(m) hereof.

Registrable Securities” shall mean each Security and, if issued, each Private Exchange Security until (i) the date on which such Security has been exchanged by a Person other than a Participating Broker-Dealer for an Exchange Security in the Exchange Offer, (ii) following the exchange by a Participating Broker-Dealer in the Exchange Offer of a Security for an Exchange Security, the date on which such Exchange Security is sold to a purchaser who receives from such Participating Broker-Dealer on or prior to the date of such sale a copy of the Prospectus contained in the Exchange Offer Registration Statement, as amended or supplemented, (iii) the date on which such Security or Private Exchange Security, as the case may be, has been effectively registered under the Securities Act and disposed of in accordance with the Shelf Registration Statement, (iv) the date such Security or Private Exchange Security, as the case may be, shall have been otherwise transferred by the Holder thereof and a new Security not bearing a legend restricting further transfer shall have been delivered by the Issuer and subsequent disposition of such Security shall not require registration or qualification under the Securities Act or any similar state law then in force or (v) such Security or Private Exchange Security, as the case may be, ceases to be outstanding.

Registration Expenses” shall mean any and all expenses incident to performance of or compliance by the Issuer with this Agreement, including without limitation: (i) all SEC, stock exchange or the Financial Industry Regulatory Authority (the “FINRA”) registration and filing fees, including, if applicable, the reasonable fees and expenses of any “qualified independent underwriter” (and its counsel) that is required to be retained by the Initial Purchasers in accordance with the rules and regulations of the FINRA, (ii) all reasonable fees and expenses incurred in connection with compliance with state securities or “blue sky” laws (including reasonable fees and disbursements of counsel for any underwriters or the Initial Purchasers in connection with “blue sky” qualification of any of the Exchange Securities or Registrable Securities) and compliance with the rules of the FINRA, (iii) all reasonable expenses of any Persons (other than the Holders or Persons acting on the request of the Holders) in preparing or assisting in preparing,

 

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word processing, printing and distributing any Registration Statement, any Prospectus and any amendments or supplements thereto, and in preparing or assisting in preparing, printing and distributing any underwriting agreements and other documents relating to the performance of and compliance with this Agreement, (iv) all rating agency fees, (v) the reasonable fees and disbursements of counsel for the Issuer and the Guarantor and of the independent certified public accountants of the Issuer and the Guarantor, including the expenses of any “cold comfort” letters required by or incident to such performance and compliance, (vi) the reasonable fees and expenses of the Trustee, and any exchange agent or custodian, (vii) all fees and expenses incurred in connection with the listing, if any, of any of the Registrable Securities on any securities exchange or exchanges and (viii) any reasonable fees and disbursements of any underwriter customarily required to be paid by the Issuer or sellers of securities and the reasonable fees and expenses of any special experts retained by the Issuer in connection with any Registration Statement.

Registration Statement” shall mean any registration statement of the Issuer which covers any of the Exchange Securities or Registrable Securities pursuant to the provisions of this Agreement, and all amendments and supplements to any such Registration Statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein.

SEC” shall mean the Securities and Exchange Commission.

Securities” shall have the meaning set forth in the preamble to this Agreement.

Securities Act” shall mean the Securities Act of 1933, as amended.

Shelf Registration” shall mean a registration effected pursuant to Section 2(b) hereof.

Shelf Registration Statement” shall mean a “shelf” registration statement of the Issuer pursuant to the provisions of Section 2(b) hereof which covers all of the Registrable Securities or all of the Private Exchange Securities, as the case may be, on an appropriate form under Rule 415 under the Securities Act, or any similar rule that may be adopted by the SEC, and all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein.

2. Registration Under the Securities Act.

(a) Exchange Offer. To the extent not prohibited by any applicable law or applicable SEC policy, the Issuer shall, for the benefit of the Holders and at the Issuer’s cost (i) file with the SEC within 90 days after the Closing Time an Exchange Offer Registration Statement on an appropriate form under the Securities Act covering the offer by the Issuer to the Holders to exchange all of the Registrable Securities (other than Private Exchange Securities, if issued) for a like principal amount of Exchange Securities, (ii) use its reasonable best efforts to cause such Exchange Offer Registration Statement to be declared effective under the Securities Act by the SEC on or prior to the 180th day after the Closing Time, (iii) use its reasonable best efforts to have such Registration Statement remain effective until the closing of the Exchange Offer and (iv) commence the Exchange Offer and use its reasonable best efforts to issue Exchange Securities in exchange for all Registrable Securities (other than the Private Exchange Securities, if issued) properly tendered prior thereto in the Exchange Offer not later than 225 days after the Closing Time. Upon the effectiveness of the Exchange Offer Registration Statement, the Issuer shall promptly commence the Exchange Offer, it being the objective of such Exchange Offer to enable each Holder eligible and electing to exchange Registrable Securities (other than Private Exchange Securities, if

 

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issued) for Exchange Securities (assuming that such Holder is not an affiliate of the Issuer within the meaning of Rule 405 under the Securities Act and is not a broker-dealer tendering Registrable Securities acquired directly from the Issuer or an affiliate of the Issuer for its own account, acquires the Exchange Securities in the ordinary course of such Holder’s business and has no arrangements or understandings with any Person to participate in the Exchange Offer for the purpose of “distributing” (within the meaning of the Securities Act) the Exchange Securities), with such Exchange Securities, from and after their receipt, having no limitations or restrictions on their transfer under the Securities Act and under state securities or “blue sky” laws.

In connection with the Exchange Offer, the Issuer shall:

(i) mail to each Holder a copy of the Prospectus forming part of the Exchange Offer Registration Statement, together with an appropriate letter of transmittal and related documents;

(ii) keep the Exchange Offer open for acceptance for a period of not less than 20 Business Days after the date notice thereof is mailed to the Holders (or longer if required by applicable law) (such period referred to herein as the “Exchange Period”);

(iii) utilize the services of the Trustee for the Exchange Offer;

(iv) permit Holders to withdraw tendered Securities at any time prior to the close of business, New York time, on the last Business Day of the Exchange Period, by sending to the institution specified in the notice a telegram, telex, facsimile transmission or letter setting forth the name of such Holder, the principal amount of Securities delivered for exchange and a statement that such Holder is withdrawing such Holder’s election to have such Securities exchanged;

(v) notify each Holder that any Security not tendered will remain outstanding and continue to accrue interest, but will not retain any rights under this Agreement (except in the case of the Initial Purchasers and Participating Broker-Dealers as provided herein); and

(vi) otherwise comply in all respects with all applicable laws relating to the Exchange Offer.

If, prior to consummation of the Exchange Offer, an Initial Purchaser holds any Securities acquired by it and such Securities have the status of an unsold allotment in the initial distribution, the Issuer shall, upon the request of such Initial Purchaser, simultaneously with the delivery of the Exchange Securities in the Exchange Offer, issue and deliver to such Initial Purchaser in exchange (the “Private Exchange”) for the Securities held by such Initial Purchaser, a like principal amount of debt securities of the Issuer that are identical (except that such securities shall bear appropriate transfer restrictions) to the Exchange Securities (the “Private Exchange Securities”).

The Private Exchange Securities, if any, shall be issued under the Indenture. The Private Exchange Securities shall be of the same series as, and the Issuer shall use its reasonable best efforts to have the Private Exchange Securities bear the same CUSIP number as the applicable Exchange Securities.

As soon as practicable after the close of the Exchange Offer and/or the Private Exchange, as the case may be, the Issuer shall:

(i) accept for exchange all Securities or portions thereof tendered and not validly withdrawn pursuant to the Exchange Offer;

 

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(ii) accept for exchange all Securities duly tendered pursuant to the Private Exchange; and

(iii) deliver, or cause to be delivered, to the Trustee for cancellation all Securities or portions thereof so accepted for exchange by the Issuer, and issue, and cause the Trustee under the Indenture to promptly authenticate and deliver to each Holder, a new Exchange Security or Private Exchange Security, as the case may be, equal in principal amount to the principal amount of the Securities surrendered by such Holder and accepted for exchange.

To the extent not prohibited by any law or applicable interpretation of the staff of the SEC, the Issuer shall use its reasonable best efforts to complete the Exchange Offer as provided above, and shall comply with the applicable requirements of the Securities Act, the Exchange Act and other applicable laws in connection with the Exchange Offer. The Exchange Offer shall not be subject to any conditions, other than that the Exchange Offer does not violate applicable law or any applicable interpretation of the staff of the SEC. Each Holder of Registrable Securities (other than Private Exchange Securities, if issued) who wishes to exchange such Registrable Securities (other than Private Exchange Securities, if issued) for Exchange Securities in the Exchange Offer will be required to make certain customary representations in connection therewith, including representations that such Holder is not an affiliate of the Issuer within the meaning of Rule 405 under the Securities Act, or if it is such an affiliate, it will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable, that any Exchange Securities to be received by it will be acquired in the ordinary course of business and that at the time of the commencement of the Exchange Offer it has no arrangement with any Person to participate in the distribution (within the meaning of the Securities Act) of the Exchange Securities. The Issuer shall inform the Initial Purchasers, after consultation with the Trustee and the Initial Purchasers, of the names and addresses of the Holders to whom the Exchange Offer is made, and the Initial Purchasers shall have the right to contact such Holders and otherwise facilitate the tender of Registrable Securities in the Exchange Offer.

Upon consummation of the Exchange Offer in accordance with this Section 2(a), the provisions of this Agreement shall continue to apply, mutatis mutandis, solely with respect to Registrable Securities that are Private Exchange Securities, if issued, and Exchange Securities held by Participating Broker-Dealers, and the Issuer shall have no further obligation to register Registrable Securities (other than Private Exchange Securities, if issued) pursuant to Section 2(b) hereof.

(b) Shelf Registration. To the extent not prohibited by any law or applicable SEC policy, in the event that (i) the Issuer is not permitted to file the Exchange Offer Registration Statement or to consummate the Exchange Offer because the Exchange Offer is not permitted by applicable law or SEC policy, (ii) the Exchange Offer is not for any other reason declared effective under the Securities Act by the SEC within 180 days after the Closing Time, (iii) any Holder of Securities notifies the Issuer within 30 days after the commencement of the Exchange Offer that (1) due to a change in law or SEC policy it is not entitled to participate in the Exchange Offer, (2) due to a change in law or SEC policy it may not resell the Exchange Securities acquired by it in the Exchange Offer to the public without delivering a Prospectus and the Prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales by such holder or (3) it is a broker-dealer and owns Securities acquired directly from the Issuer or an affiliate of the Issuer, or (iv) the holders of a majority in aggregate principal amount of the Securities may not resell the Exchange Securities acquired by them in the Exchange Offer to the public without restriction under the Securities Act and without restriction under applicable “blue sky” or state securities laws, then in the case of any of (i) through (iv), the Issuer shall, at the Issuer’s cost, file as promptly as practicable after such determination or date, as the case may be, and, in any event, prior to the later of (A) 90 days after the Closing Time or (B) 30 days after such filing obligation arises (provided, however, that if the Exchange Offer Registration Statement is not declared effective under the Securities

 

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Act by the SEC within 180 days after the Closing Time, then the Issuer shall file the Shelf Registration Statement with the SEC on or prior to the 210th day after the Closing Time, unless the Issuer has consummated the Exchange Offer prior to the 180th day after the Closing Time whereby the Issuer’s obligation to file a Shelf Registration Statement pursuant to clause (b)(ii) above shall be cancelled, provided, that such cancellation shall not relieve the Issuer of any obligation to pay Additional Interest, if Additional Interest is otherwise due and payable), a Shelf Registration Statement providing for the sale by the Holders of all of the Registrable Securities affected thereby, and, to the extent not declared effective automatically by the SEC, shall use its reasonable best efforts to cause such Shelf Registration Statement to be declared effective by the SEC as soon as practicable and, in any event, on or prior to 90 days after the obligation to file the Shelf Registration Statement arises (in the case of (B) above). No Holder of Registrable Securities may include any of its Registrable Securities in any Shelf Registration pursuant to this Agreement unless and until such Holder furnishes to the Issuer in writing, within 10 days after receipt of a request therefor, such information as the Issuer may, after conferring with counsel with regard to information relating to Holders that would be required by the SEC to be included in such Shelf Registration Statement or Prospectus included therein, reasonably request for inclusion in any Shelf Registration Statement or Prospectus included therein. Each Holder as to which any Shelf Registration is being effected agrees to furnish to the Issuer all information with respect to such Holder necessary to make any information previously furnished to the Issuer by such Holder not materially misleading.

The Issuer agrees to use its reasonable best efforts to keep the Shelf Registration Statement continuously effective, supplemented and amended for a period of six months from the Closing Time or such shorter period that will terminate when all the Registrable Securities covered by the Shelf Registration Statement have been sold pursuant thereto (subject to extension pursuant to the last paragraph of Section 3 hereof) (the “Effectiveness Period”), provided, however, that with respect to the Private Exchange Securities, if issued, the Issuer shall only be obligated to keep the Shelf Registration Statement effective, supplemented and amended for a period of 60 days. The Issuer shall not permit any securities other than Registrable Securities to be included in the Shelf Registration. The Issuer further agrees, if necessary, to supplement or amend the Shelf Registration Statement, if required by the rules, regulations or instructions applicable to the registration form used by the Issuer for such Shelf Registration Statement or by the Securities Act or by any other rules and regulations thereunder for shelf registrations, and the Issuer agrees to furnish to the Holders of Registrable Securities copies of any such supplement or amendment promptly after its being used or filed with the SEC.

Notwithstanding the requirements contained in this Section 2(b), solely with respect to the Private Exchange Securities, if issued, the Issuer shall have no obligation to file or effect a Shelf Registration Statement registering such Private Exchange Securities if the aggregate principal amount of such Private Exchange Securities does not exceed $5,000,000.

(c) Expenses. The Issuer shall pay all Registration Expenses in connection with any registration pursuant to Section 2(a) or 2(b) hereof. Except as provided in the preceding sentence, each Holder shall pay all expenses of its counsel, underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of such Holder’s Registrable Securities pursuant to the Shelf Registration Statement.

(d) Effective Registration Statement. An Exchange Offer Registration Statement pursuant to Section 2(a) hereof or a Shelf Registration Statement pursuant to Section 2(b) hereof will not be deemed to have become effective unless it has been declared effective by the SEC; provided, however, that if, after it has been declared effective, the offering of Registrable Securities pursuant to a Shelf Registration Statement is interfered with by any stop order, injunction or other order or requirement of the SEC or any other governmental agency or court, such Shelf Registration Statement will be deemed not to have been effective during the period of such interference, until the offering of Registrable Securities may legally

 

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resume. The Issuer will be deemed not to have used its reasonable best efforts to cause the Exchange Offer Registration Statement or the Shelf Registration Statement, as the case may be, to become, or to remain, effective during the requisite period if they voluntarily take any action that would result in any such Registration Statement not being declared effective or in the Holders of Registrable Securities covered thereby not being able to exchange or offer and sell such Registrable Securities during that period unless such action is required by applicable law. Notwithstanding the foregoing, the only remedy available under this Agreement for the failure of the Issuer to satisfy the obligations set forth in Sections 2(a), 2(b) and 3 hereof shall be payment by the Issuer of the Additional Interest as set forth in Section 2(e) hereof and the remedy of specific enforcement provided by Section 2(f) hereof.

(e) Additional Interest. If (i) the Issuer fails to file an Exchange Offer Registration Statement or the Shelf Registration Statement with respect to the Registrable Securities (other than the Private Exchange Securities, if issued) on or before the date specified herein for such filing, (ii) the Exchange Offer Registration Statement or the Shelf Registration Statement is not declared effective by the SEC on or prior to the date specified herein for such effectiveness (the “Effectiveness Target Date”), (iii) the Exchange Offer is required to be consummated hereunder and the Issuer fails to issue Exchange Securities in exchange for all Securities properly tendered and not withdrawn in the Exchange Offer within 45 days of the Effectiveness Target Date with respect to the Exchange Offer Registration Statement, or (iv) the Exchange Offer Registration Statement or the Shelf Registration Statement required to be filed and declared effective hereunder is declared effective but thereafter ceases to be effective or usable in connection with the Exchange Offer or resales of Securities, as the case may be, during the periods specified herein (each such event referred to in clauses (i) through (iv) above, a “Registration Default”), then the interest rate borne by the Registrable Securities (other than the Private Exchange Securities, if issued, as to which no additional amounts shall be payable under this Section 2(e)) as to which the Registration Default exists shall be increased (the “Additional Interest”), with respect to the first 90-day period (or portion thereof) while a Registration Default is continuing immediately following the occurrence of such Registration Default, by 0.25% per annum, such interest rate increasing by an additional 0.25% per annum at the beginning of each subsequent 90-day period (or portion thereof) while a Registration Default is continuing until all Registration Defaults have been cured, up to a maximum rate of Additional Interest of 0.50% per annum. Upon (1) the filing of the Exchange Offer Registration Statement or the Shelf Registration Statement, as the case may be, required hereunder (in the case of clause (i) of the preceding sentence), (2) the effectiveness of the Exchange Offer Registration Statement or the Shelf Registration Statement, as the case may be, required hereunder (in the case of clause (ii) of the preceding sentence), (3) the issuance of Exchange Securities in exchange for all Securities (other than the Private Exchange Securities, if issued) properly tendered and not withdrawn in the Exchange Offer (in the case of clause (iii) of the preceding sentence), or (4) the effectiveness of the Exchange Offer Registration Statement or the Shelf Registration Statement, as the case may be, required hereunder which had ceased to be effective (in the case of clause (iv) of the preceding sentence), Additional Interest as a result of the Registration Default described in such clause shall cease to accrue (but any accrued amount shall be payable) and the interest rate on the Securities shall revert to the original rate if no other Registration Default has occurred and is continuing.

The Issuer shall notify the Trustee within three Business Days after each and every date on which an event occurs in respect of which Additional Interest is required to be paid (an “Event Date”). Additional Interest shall be paid by depositing with the Trustee, in trust, for the benefit of the Holders of Securities (other than Private Exchange Securities, if issued) on or before the applicable semi-annual interest payment date, immediately available funds in sums sufficient to pay the Additional Interest then due. The Additional Interest due shall be payable on each interest payment date to the record Holder of Securities entitled to receive the interest payment to be paid on such date as set forth in the Indenture. Each obligation to pay Additional Interest shall be deemed to accrue from and including the day following the applicable Event Date.

 

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(f) Specific Enforcement. Without limiting the remedies available to the Initial Purchasers and the Holders, the Issuer acknowledges that any failure by the Issuer to comply with its obligations under Section 2(a) and Section 2(b) hereof may result in material irreparable injury to the Initial Purchasers or the Holders for which there is no adequate remedy at law, that it would not be possible to measure damages for such injuries precisely and that, in the event of any such failure, any Initial Purchaser or any Holder may obtain such relief as may be required to specifically enforce the Issuer’s obligations under Section 2(a) and Section 2(b) hereof.

3. Registration Procedures. In connection with the obligations of the Issuer with respect to the Registration Statements pursuant to Sections 2(a) and 2(b) hereof, the Issuer shall:

(a) prepare and file with the SEC a Registration Statement or Registration Statements as prescribed by Sections 2(a) and 2(b) hereof within the relevant time period specified in Section 2 hereof on the appropriate form under the Securities Act, which form (i) shall be selected by the Issuer, (ii) shall, in the case of a Shelf Registration, be available for the sale of the Registrable Securities by the selling Holders thereof and (iii) shall comply as to form in all material respects with the requirements of the applicable form and include all financial statements required by the SEC to be filed therewith; and use its reasonable best efforts to cause such Registration Statement to become effective and remain effective in accordance with Section 2 hereof; provided, however, that if (1) such filing is pursuant to Section 2(b) or (2) a Prospectus contained in an Exchange Offer Registration Statement filed pursuant to Section 2(a) is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Securities, before filing any Registration Statement or Prospectus or any amendments or supplements thereto, the Issuer shall furnish to and afford the Holders of the Registrable Securities and each such Participating Broker-Dealer, as the case may be, covered by such Registration Statement, their counsel and the managing underwriters, if any, a reasonable opportunity to review copies of all such documents (excluding copies of any documents to be incorporated by reference therein and all exhibits thereto) proposed to be filed (at least five Business Days prior to such filing). The Issuer shall not file any Registration Statement or Prospectus or any amendments or supplements thereto in respect of which the Holders must be afforded an opportunity to review prior to the filing of such document if the Majority Holders or such Participating Broker-Dealer, as the case may be, their counsel or the managing underwriters, if any, shall reasonably object;

(b) prepare and file with the SEC such amendments and post-effective amendments to each Registration Statement as may be necessary to keep such Registration Statement effective for the Effectiveness Period or the Applicable Period, as the case may be; and cause each Prospectus to be supplemented by any required prospectus supplement and as so supplemented to be filed pursuant to Rule 424 (or any similar provision then in force) under the Securities Act, and comply with the provisions of the Securities Act, the Exchange Act and the rules and regulations promulgated thereunder applicable to it with respect to the disposition of all securities covered by each Registration Statement during the Effectiveness Period or the Applicable Period, as the case may be, in accordance with the intended method or methods of distribution by the selling Holders thereof described in this Agreement (including sales by any Participating Broker Dealer);

(c) in the case of a Shelf Registration, (i) notify each Holder of Registrable Securities, at least three Business Days prior to filing, that a Shelf Registration Statement with respect to the Registrable Securities is being filed and advising such Holder that the distribution of Registrable Securities will be made in accordance with the method selected by the Majority Holders, (ii) furnish to each Holder of Registrable Securities and to each underwriter of an underwritten offering of Registrable Securities, if any, without charge, as many copies of each Prospectus, including each preliminary prospectus, and any amendment or supplement thereto and such other documents

 

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as such Holder or underwriter may reasonably request, in order to facilitate the public sale or other disposition of the Registrable Securities, and (iii) subject to the last paragraph of Section 3(s) hereof, hereby consent to the use of the Prospectus or any amendment or supplement thereto by each of the selling Holders of Registrable Securities in connection with the offering and sale of the Registrable Securities covered by the Prospectus or any amendment or supplement thereto;

(d) in the case of a Shelf Registration, use its reasonable best efforts to register or qualify the Registrable Securities under all applicable state securities or “blue sky” laws of such jurisdictions by the time the applicable Registration Statement is declared effective by the SEC as any Holder of Registrable Securities covered by a Registration Statement and each underwriter of an underwritten offering of Registrable Securities shall reasonably request in advance of such date of effectiveness, and do any and all other acts and things which may be reasonably necessary or advisable to enable such Holder and underwriter to consummate the disposition in each such jurisdiction of such Registrable Securities owned by such Holder; provided, however, that the Issuer shall not be required to (i) qualify as a foreign corporation or as a dealer in securities in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (ii) file any general consent to service of process or (iii) subject itself to taxation in any such jurisdiction if it is not so subject;

(e) in the case of (1) a Shelf Registration or (2) notification from Participating Broker-Dealers that they will be utilizing the Prospectus contained in the Exchange Offer Registration Statement as provided in Section 3(s) hereof, notify each Holder of Registrable Securities, or such Participating Broker-Dealers, as the case may be, their counsel and the managing underwriters, if any, promptly and confirm such notice in writing (i) when a Registration Statement has become effective and when any post-effective amendments and supplements thereto become effective, (ii) of any request by the SEC or any state securities authority for amendments and supplements to a Registration Statement or Prospectus or for additional information after the Registration Statement has become effective, (iii) of the issuance by the SEC or any state securities authority of any stop order suspending the effectiveness of, a Registration Statement or the initiation of any proceedings for that purpose, (iv) if the Issuer receives any notification with respect to the suspension of the qualification of the Registrable Securities or the Exchange Securities to be sold by any Participating Broker-Dealer for offer or sale in any jurisdiction or the initiation of any proceeding for such purpose, (v) of the happening of any event or the failure of any event to occur or the discovery of any facts or otherwise during the Effectiveness Period or Applicable Period, as the case may be, which makes any statement made in a Registration Statement or the related Prospectus untrue in any material respect or which causes such Registration Statement or Prospectus to omit to state a material fact necessary to make the statements therein (in the case of the Prospectus, in the light of the circumstances under which they were made) not misleading and (vi) of the Issuer’s reasonable determination that a post-effective amendment to the Registration Statement would be appropriate;

(f) take reasonable efforts to obtain the withdrawal of any order suspending the effectiveness of a Registration Statement as soon as practicable;

(g) in the case of a Shelf Registration, furnish to each Holder of Registrable Securities, without charge, at least one conformed copy of each Registration Statement relating to such Shelf Registration and any post-effective amendment thereto (without documents incorporated therein by reference or exhibits thereto, unless requested);

(h) in the case of a Shelf Registration, cooperate with the selling Holders of Registrable Securities to facilitate the timely preparation and delivery of certificates representing Registrable

 

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Securities sold and not bearing any restrictive legends; and cause such Registrable Securities to be in such denominations (consistent with the provisions of the Indenture) and registered in such names as the selling Holders or the underwriters may reasonably request at least two Business Days prior to the closing of any sale of Registrable Securities;

(i) in the case of a Shelf Registration or an Exchange Offer Registration, upon the occurrence of any circumstance contemplated by Section 3(e)(ii), 3(e)(iii), 3(e)(v) or 3(e)(vi) hereof, use its reasonable best efforts to prepare a supplement or post-effective amendment to a Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document (subject to Section 3(a)) so that, as thereafter delivered to the purchasers of the Registrable Securities or Exchange Securities to whom a Prospectus is being delivered by a Participating Broker-Dealer who has notified the Issuer that it will be utilizing the Prospectus contained in the Exchange Offer Registration Statement as provided in Section 3(s) hereof, such Prospectus will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and to notify each Holder or Participating Broker-Dealer, as the case may be, to suspend use of the Prospectus as promptly as practicable after the occurrence of such an event, and each Holder and Participating Broker-Dealer hereby agrees to suspend use of the Prospectus until the Issuer has amended or supplemented the Prospectus to correct such misstatement or omission;

(j) in the case of a Shelf Registration, upon the filing of any document which is to be incorporated by reference into a Registration Statement or a Prospectus after the initial filing of a Registration Statement, provide a reasonable number of copies of such document to the Holders;

(k) obtain a CUSIP number for all Exchange Securities or Registrable Securities, as the case may be, not later than the effective date of a Registration Statement, and provide the Trustee with certificates for the Exchange Securities or the Registrable Securities, as the case may be, in a form eligible for deposit with the Depositary;

(l) in the case of a Shelf Registration, enter into such agreements (including underwriting agreements) as are customary in underwritten offerings and take all such other appropriate actions as are reasonably requested in order to expedite or facilitate the registration or the disposition of such Registrable Securities, and in such connection, whether or not an underwriting agreement is entered into and whether or not the registration is an underwritten registration, at the time of effectiveness of such Shelf Registration: (i) make such representations and warranties to Holders of such Registrable Securities and the underwriters (if any), with respect to the business of the Issuer and its subsidiaries as then conducted or proposed to be conducted and the Registration Statement, Prospectus and documents, if any, incorporated or deemed to be incorporated by reference therein, in each case, in form and substance similar to the representations and warranties given by the Issuer in the Purchase Agreement and reasonably satisfactory to the managing underwriters (if any) and the Holders of a majority in principal amount of the Registrable Securities being sold, and confirm the same if and when requested; (ii) obtain opinions of counsel to the Issuer and the Guarantor and updates thereof, if appropriate, in form and substance similar to the opinion given by counsel to the Issuer and the Guarantor pursuant to the Purchase Agreement and reasonably satisfactory to the managing underwriters (if any) and the Holders of a majority in principal amount of the Registrable Securities being sold, addressed to each selling Holder and the underwriters (if any); (iii) obtain “cold comfort” letters and updates thereof in form and substance reasonably satisfactory to the managing underwriters (if any) from the independent certified public accountants of the Issuer and the Guarantor (and, if necessary, any other independent certified public accountants of any subsidiary of the Issuer or of any business acquired by the Issuer

 

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for which financial statements and financial data are, or are required to be, included in the Registration Statement), addressed to the selling Holders of Registrable Securities (if appropriate) and to each of the underwriters (if any), such letters to be in customary form and covering matters of the type customarily covered in “cold comfort” letters in connection with underwritten offerings and such other matters as reasonably requested by such selling Holders and underwriters; and (iv) if an underwriting agreement is entered into, the same shall contain indemnification provisions and procedures no less favorable than those set forth in Section 4 hereof (or such other less favorable provisions and procedures acceptable to Holders of a majority in aggregate principal amount of Registrable Securities covered by such Registration Statement and the managing underwriters or agents) with respect to all parties to be indemnified pursuant to said Section (including, without limitation, such underwriters and selling Holders); the above shall be done at each closing under such underwriting agreement, or as and to the extent required thereunder;

(m) if (1) a Shelf Registration is filed pursuant to Section 2(b) or (2) a Prospectus contained in an Exchange Offer Registration Statement filed pursuant to Section 2(a) is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Securities during the Applicable Period, make available for inspection by any selling Holder of such Registrable Securities being sold, or each such Participating Broker Dealer, as the case may be, any underwriter participating in any such disposition of Registrable Securities, if any, and any attorney, accountant or other agent retained by any such selling Holder or each such Participating Broker-Dealer, as the case may be, or underwriter (collectively, the “Inspectors”), at the offices where normally kept, during reasonable business hours, all financial and other records, pertinent corporate documents and properties of the Issuer, the Guarantor and the other subsidiaries of Guarantor (collectively, the “Records”) as shall be reasonably necessary to enable them to exercise any applicable due diligence responsibilities, and cause the officers, directors and employees of the Issuer, the Guarantor and the other subsidiaries of the Guarantor to supply all information in each case reasonably requested by any such Inspector in connection with such Registration Statement. Records which the Issuer or the Guarantor determine to be confidential or any Records which they notify the Inspectors are confidential shall not be disclosed by the Inspectors unless (i) the disclosure of such Records is necessary in connection with the Inspectors’ assertion of any claims or actions or with their establishment of any defense in an action then pending before a court of competent jurisdiction, (ii) the release of such Records is ordered pursuant to a subpoena or other order from a court of competent jurisdiction or (iii) the information in such Records has been made generally available to the public; each selling Holder of such Registrable Securities and each such Participating Broker-Dealer will be required to agree that information obtained by it as a result of such inspections shall be deemed confidential and shall not be used by it as the basis for any market transactions in the securities of the Issuer unless and until such is made generally available to the public; each selling Holder of such Registrable Securities and each such Participating Broker-Dealer will be required to further agree that it will, prior to disclosure of such Records pursuant to clause (i) or (ii) above, give prompt notice to the Issuer and the Guarantor and allow the Issuer and the Guarantor at their expense to undertake appropriate action to prevent disclosure to the public of the Records deemed confidential;

(n) comply with all applicable rules and regulations of the SEC and make generally available to its security holders earnings statements satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder (or any similar rule promulgated under the Securities Act) no later than 180 days after the end of any 12-month period (i) commencing at the end of any fiscal quarter in which Registrable Securities are sold to underwriters in a firm commitment or reasonable best efforts underwritten offering and (ii) if not sold to underwriters in such an offering, commencing on the first day of the first fiscal quarter of the Issuer after the effective date of a Registration Statement, which statements shall cover said 12-month period;

 

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(o) upon consummation of an Exchange Offer or a Private Exchange, obtain an opinion of counsel to the Issuer and the Guarantor addressed to the Trustee for the benefit of all Holders of Registrable Securities participating in the Exchange Offer or the Private Exchange, as the case may be, and which includes an opinion that (i) the Issuer has duly authorized, executed and delivered the Exchange Securities and Private Exchange Securities and the Indenture, and (ii) each of the Exchange Securities or the Private Exchange Securities, as the case may be, and the Indenture constitute a legal, valid and binding obligation of the Issuer and the Guarantor, enforceable against the Issuer and the Guarantor in accordance with its respective terms (in each case, with customary exceptions);

(p) if an Exchange Offer or a Private Exchange is to be consummated, upon delivery of the Registrable Securities by Holders to the Issuer (or to such other Person as directed by the Issuer) in exchange for the Exchange Securities or the Private Exchange Securities, as the case may be, the Issuer shall mark, or cause to be marked, on such Registrable Securities delivered by such Holders that such Registrable Securities are being cancelled in exchange for the Exchange Securities or the Private Exchange Securities, as the case may be; in no event shall such Registrable Securities be marked as paid or otherwise satisfied;

(q) cooperate with each seller of Registrable Securities covered by any Registration Statement and each underwriter, if any, participating in the disposition of such Registrable Securities and their respective counsel in connection with any filings required to be made with the FINRA;

(r) use its reasonable best efforts to take all other steps necessary to effect the registration of the Registrable Securities covered by a Registration Statement contemplated hereby;

(s) (A) in the case of the Exchange Offer Registration Statement (i) include in the Exchange Offer Registration Statement a section entitled “Plan of Distribution,” which section shall be reasonably acceptable to the Purchaser Representative or another representative of the Participating Broker-Dealers, and which shall contain a summary statement of the positions taken or policies made by the staff of the SEC with respect to the potential “underwriter” status of any broker-dealer (a “Participating Broker-Dealer”) that holds Registrable Securities acquired for its own account as a result of market-making activities or other trading activities and that will be the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of Exchange Securities to be received by such broker-dealer in the Exchange Offer, whether such positions or policies have been publicly disseminated by the staff of the SEC or such positions or policies, in the reasonable judgment of the Purchaser Representative or such other representative, represent the prevailing views of the staff of the SEC, including a statement that any such broker-dealer who receives Exchange Securities for Registrable Securities pursuant to the Exchange Offer may be deemed a statutory underwriter and must deliver a Prospectus meeting the requirements of the Securities Act in connection with any resale of such Exchange Securities, (ii) furnish to each Participating Broker-Dealer who has delivered to the Issuer the notice referred to in Section 3(e), without charge, as many copies of each Prospectus included in the Exchange Offer Registration Statement, including any preliminary prospectus, and any amendment or supplement thereto, as such Participating Broker-Dealer may reasonably request, (iii) hereby consent to the use of the Prospectus forming part of the Exchange Offer Registration Statement or any amendment or supplement thereto, by any Person subject to the prospectus delivery requirements of the SEC, including all Participating Broker-Dealers, in connection with the sale or transfer of the Exchange Securities covered by the Prospectus or any amendment or supplement thereto, (iv) use its reasonable best efforts to keep the Exchange Offer Registration Statement effective and to amend and supplement the Prospectus contained therein in order to permit such Prospectus to be lawfully delivered by all

 

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Persons subject to the prospectus delivery requirements of the Securities Act for such period of time as such Persons must comply with such requirements in order to resell the Exchange Securities (provided, however, that such period shall not be required to exceed 180 days (or such longer period if extended pursuant to the last sentence of this Section 3(s) hereof) (the “Applicable Period”)), and (v) include in the transmittal letter or similar documentation to be executed by an exchange offeree in order to participate in the Exchange Offer (x) the following provision:

“If the exchange offeree is a broker-dealer holding Registrable Securities acquired for its own account as a result of marketmaking activities or other trading activities, it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of Exchange Securities received in respect of such Registrable Securities pursuant to the Exchange Offer;”

and (y) a statement to the effect that by a Participating Broker-Dealer making the acknowledgment described in clause (x) and by delivering a Prospectus in connection with the exchange of Registrable Securities, such Participating Broker-Dealer will not be deemed to admit that it is an underwriter within the meaning of the Securities Act; and

(B) in the case of any Exchange Offer Registration Statement, deliver to the Initial Purchasers and the Participating Broker-Dealers upon consummation of the Exchange Offer (i) an opinion of counsel substantially in the form attached hereto as Exhibit A, and (ii) an officers’ certificate containing certifications substantially similar to those set forth in Section 5(c) of the Purchase Agreement and such additional certifications as are customarily delivered in a public offering of debt securities.

The Issuer may require each seller of Registrable Securities as to which any registration is being effected to furnish to the Issuer such information regarding such seller and the proposed distribution of such Registrable Securities, as the Issuer may from time to time reasonably request in writing. The Issuer may exclude from such registration the Registrable Securities of any seller who fails to furnish any such information which the Issuer reasonably requires in order for the Shelf Registration Statement to comply with applicable law and SEC policy within a reasonable time after receiving such request (without the accrual of Additional Interest on such excluded Registrable Securities) and shall be under no obligation to include the Registrable Securities of such seller in the Shelf Registration Statement or to compensate any such seller for any lost income, interest or other opportunity foregone, or any liability incurred, as a result of the Issuer’s decision to exclude such seller.

In the case of (1) a Shelf Registration Statement or (2) Participating Broker-Dealers who have notified the Issuer that they will be utilizing the Prospectus contained in the Exchange Offer Registration Statement as provided in this Section 3(s) that are seeking to sell Exchange Securities and are required to deliver Prospectuses, each Holder or Participating Broker-Dealer, as the case may be, agrees that, upon receipt of any notice from the Issuer of the happening of any event of the kind described in Section 3(e)(ii), 3(e)(iii), 3(e)(v) or 3(e)(vi) hereof, such Holder or Participating Broker-Dealer, as the case may be, will forthwith discontinue disposition of Registrable Securities pursuant to a Registration Statement or Exchange Securities, as the case may be, until such Holder’s or Participating Broker-Dealer’s, as the case may be, receipt of the copies of the supplemented or amended Prospectus contemplated by Section 3(i) hereof or until it is advised in writing (the “Advice”) by the Issuer that the use of the applicable Prospectus may be resumed, and, if so directed by the Issuer, such Holder or Participating Broker-Dealer, as the case may be, will deliver to the Issuer (at the Issuer’s expense) all copies in such Holder’s or Participating Broker-Dealer’s, as the case may be, possession, other than one permanent file copy then in such Holder’s or Participating Broker Dealer’s, as the case may be, possession, of the Prospectus covering such Registrable Securities or Exchange Securities, as the case may be, current at the time of receipt of such notice. If

 

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the Issuer shall give any such notice to suspend the disposition of Registrable Securities or Exchange Securities, as the case may be, pursuant to a Registration Statement: (x) the Issuer shall use its reasonable best efforts to file and have declared effective (if an amendment) as soon as practicable an amendment or supplement to the Registration Statement and, in the case of an amendment, have such amendment declared effective as soon as practicable; provided, however, that the Issuer may postpone the filing of such amendment or supplement for a period not to extend beyond the earlier to occur of (I) 30 days after the date of the determination of the Board of Directors and (II) the day after the cessation of the circumstances upon which such postponement is based, if the members of the Issuer determine reasonably and in good faith that such filing would require disclosure of material information which the Issuer has a bona fide purpose for preserving as confidential; provided, further, however, that the Issuer shall be entitled to such postponement only once during any 12-month period and the exercise by the Issuer of its rights under this provision shall not relieve the Issuer of any obligation to pay Additional Interest under Section 2(e) hereof; and (y) the Issuer shall extend the period during which such Registration Statement shall be maintained effective pursuant to this Agreement by the number of days in the period from and including the date of the giving of such notice to and including the date when the Issuer shall have made available to the Holders or Participating Broker-Dealers, as the case may be, copies of the supplemented or amended Prospectus necessary to resume such dispositions or the Advice.

4. Indemnification and Contribution.

(a) The Issuer agrees to indemnify and hold harmless each Initial Purchaser, each Holder, each Participating Broker-Dealer, each underwriter who participates in an offering of Registrable Securities, their respective affiliates, each Person, if any, who controls any of such parties within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act and each of their respective directors, officers, employees and agents, as follows:

(i) against any and all loss, liability, claim, damage and expense whatsoever, joint or several, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement (or any amendment or supplement thereto), covering Registrable Securities or Exchange Securities, including all documents incorporated therein by reference, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact contained in any Prospectus (or any amendment or supplement thereto) or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading;

(ii) against any and all loss, liability, claim, damage and expense whatsoever, joint or several, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any court or governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, if such settlement is effected with the prior written consent of the Issuer; and

(iii) against any and all expenses whatsoever, as incurred (including reasonable fees and disbursements of one counsel chosen by the Purchaser Representative (on behalf of the Initial Purchasers), such Holder, such Participating Broker-Dealer or any underwriter (except to the extent otherwise expressly provided in Section 4(c) hereof)), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any court or governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under subparagraph (i) or (ii) of this Section 4(a);

 

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provided, however, that this indemnity does not apply to any loss, liability, claim, damage or expense to the extent arising out of an untrue statement or omission or alleged untrue statement or omission (1) made in reliance upon and in conformity with written information furnished in writing to the Issuer or the Guarantor by such Initial Purchaser, such Holder, such Participating Broker-Dealer or an underwriter with respect to such Initial Purchaser, such Holder, such Participating Broker-Dealer or underwriter, as the case may be, expressly for use in the Registration Statement (or any amendment or supplement thereto) or in any Prospectus (or any amendment or supplement thereto) or (2) contained in any preliminary prospectus if such Initial Purchaser, such Holder, such Participating Broker-Dealer or such underwriter failed to send or deliver a copy of the Prospectus (in the form it was first provided to such parties for confirmation of sales or as amended or supplemented pursuant to Section 3(i) hereof prior to such confirmation of sales) to the Person asserting such losses, claims, damages or liabilities on or prior to the delivery of written confirmation of any sale of securities covered thereby to such Person in any case where such delivery is required by the Securities Act and a court of competent jurisdiction in a judgment not subject to appeal or final review shall have determined that such Prospectus would have corrected such untrue statement or omission. Any amounts advanced by the Issuer to an indemnified party pursuant to this Section 4 as a result of such losses shall be returned to the Issuer if it shall be finally determined by such a court in a judgment not subject to appeal or final review that such indemnified party was not entitled to indemnification by the Issuer.

(b) Each Holder agrees, severally and not jointly, to indemnify and hold harmless the Issuer, the Guarantor, each Initial Purchaser, each underwriter who participates in an offering of Registrable Securities and the other selling Holders and each of their respective directors, officers (including each officer of the Issuer who signed the Registration Statement), employees and agents and each Person, if any, who controls the Issuer, the Guarantor, any of the Initial Purchasers, any underwriter or any other selling Holder within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, against any and all loss, liability, claim, damage and expense whatsoever described in the indemnity contained in Section 4(a) hereof, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto) or in any Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Issuer or the Guarantor by such selling Holder with respect to such Holder expressly for use in the Registration Statement (or any supplement thereto), or in any such Prospectus (or any amendment thereto); provided, however, that, in the case of the Shelf Registration Statement, no such Holder shall be liable for any claims hereunder in excess of the amount of net proceeds received by such Holder from the sale or other disposition of Registrable Securities pursuant to the Shelf Registration Statement.

(c) Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. In the case of parties indemnified pursuant to Section 4(a) above, counsel to the indemnified parties shall be selected by the Purchaser Representative, and, in the case of parties indemnified pursuant to Section 4(b) above, counsel to the indemnified parties shall be selected by the Issuer. An indemnifying party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. If it so elects within a reasonable time after receipt of such notice, an indemnifying party, jointly with any other indemnifying parties receiving such notice, may assume the defense of such action

 

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with counsel chosen by it and approved by the indemnified parties defendant in such action, unless such indemnified parties reasonably object to such assumption on the ground that there may be legal defenses available to them which are different from or in addition to those available to such indemnifying party. If an indemnifying party assumes the defense of such action, the indemnifying parties shall not be liable for any fees and expenses of counsel for the indemnified parties incurred thereafter in connection with such action. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with anyone action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 4 (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party.

(d) If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for reasonable fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 4(a)(ii) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. Notwithstanding the immediately preceding sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party shall not be liable for any settlement of the nature contemplated by Section 4(a)(ii) effected without its prior written consent if such indemnifying party (1) reimburses such indemnified party in accordance with such request to the extent it considers such request to be reasonable and (2) provides written notice to the indemnified party substantiating the unpaid balance as unreasonable, in each case prior to the date of such settlement.

(e) In order to provide for just and equitable contribution in circumstances under which any of the indemnity provisions set forth in this Section 4 is for any reason held to be unavailable to the indemnified parties although applicable in accordance with its terms, the Issuer and the Holders shall contribute to the aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by such indemnity agreement incurred by the Issuer, the Guarantor, the Initial Purchasers, the Holders and the Participating Broker-Dealers; provided, however, that no Person guilty of fraudulent misrepresentation (within the meaning of Section 11 (f) of the Securities Act) shall be entitled to contribution from any Person that was not guilty of such fraudulent misrepresentation. As between the Issuer, the Guarantor and the Holders, such parties shall contribute to such aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by such indemnity agreement in such proportion as shall be appropriate to reflect the relative fault of the Issuer and the Guarantor on the one hand and of the Holder of Registrable Securities, the Participating Broker-Dealer or the Initial Purchaser, as the case may be, on the other hand in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations.

The relative fault of the Issuer and the Guarantor on the one hand and the Holder of Registrable Securities, the Participating Broker-Dealer or the Initial Purchaser, as the case may be, on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of

 

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a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Issuer, or the Guarantor, or by the Holder of Registrable Securities, the Participating Broker-Dealer or the Initial Purchaser, as the case may be, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.

The Issuer, the Guarantor, the Holders of the Registrable Securities and the Initial Purchasers agree that it would not be just and equitable if contribution pursuant to this Section 4 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 4.

For purposes of this Section 4, each affiliate of an Initial Purchaser or Holder, and each director, officer, employee, agent and Person, if any, who controls a Holder of Registrable Securities, an Initial Purchaser or a Participating Broker-Dealer within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution as such other Person, and each member or director of the Issuer or the Guarantor, as the case may be, each officer of the Issuer who signed the Registration Statement, and each Person, if any, who controls the Issuer or the Guarantor within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution as the Issuer or the Guarantor, as the case may be.

5. Participation in Underwritten Registrations. No Holder may participate in any underwritten registration hereunder unless such Holder (a) agrees to sell such Holder’s Registrable Securities on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements and (b) completes and executes all reasonable questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements. The Issuer shall be under no obligation to compensate any Holder for lost income, interest or other opportunity foregone, or other liability incurred, as a result of the Issuer’s decision to exclude such Holder from any underwritten registration if such Holder has not complied with the provisions of this Section 5 in all material respects following five business days’ written notice of noncompliance and the Issuer’s decision to exclude such Holder.

6. Selection of Underwriters. The Holders of Registrable Securities covered by the Shelf Registration Statement who desire to do so may sell the securities covered by such Shelf Registration in an underwritten offering. In any such underwritten offering, the underwriter or underwriters and manager or managers that will administer the offering will be selected by the Holders of a majority in aggregate principal amount of the Registrable Securities included in such offering; provided, however, that such underwriters and managers must be reasonably satisfactory to the Issuer.

7. Guarantor. The parties to this Agreement agree and acknowledge that all obligations of the Issuer under this Agreement are joint and several obligations of the Issuer and the Guarantor.

8. Miscellaneous.

(a) Rule 144A. For so long as the Issuer is subject to the reporting requirements of Section 13 or 15 of the Exchange Act and any Registrable Securities remain outstanding, the Issuer covenants that it will file the reports required to be filed by it under the Securities Act and Section 13(a) or 15(d) of the Exchange Act and the rules and regulations adopted by the SEC thereunder, that if it ceases to be so required to file such reports, it will upon the request of any Holder of Registrable Securities (i) deliver such information to a prospective purchaser as is necessary to permit sales of Registrable Securities pursuant to Rule 144A under the Securities Act, and (ii) take such further action that is reasonable in the circumstances, in each case, to the extent required from time to time to enable such Holder to sell its Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided

 

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by Rule 144A under the Securities Act, as such rule may be amended from time to time, or any similar rules or regulations hereafter adopted by the SEC. Upon the reasonable request of any Holder of Registrable Securities, the Issuer will deliver to such Holder a written statement as to whether it has complied with such requirements.

(b) No Inconsistent Agreements. The Issuer has not entered into nor will the Issuer on or after the date of this Agreement enter into any agreement which is inconsistent with the rights granted to the Holders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof. The rights granted to the Holders hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of the Issuer’s other issued and outstanding securities under any such agreements.

(c) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, otherwise than with the prior written consent of the Issuer and the Majority Holders; provided, however, that no amendment, modification, or supplement or waiver or consent to the departure with respect to the provisions of Section 4 hereof shall be effective as against any Holder of Registrable Securities unless consented to in writing by such Holder of Registrable Securities.

(d) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, registered first-class mail, telecopier, or any courier guaranteeing overnight delivery: (i) if to a Holder, at the most current address given by such Holder to the Issuer by means of a notice given in accordance with the provisions of this Section 8(d), which address initially is, with respect to the Initial Purchasers, the addresses set forth in the Purchase Agreement; and (ii) if to the Issuer or the Guarantor, initially at the Issuer’s and the Guarantor’s address set forth in the Purchase Agreement and thereafter at such other address, notice of which is given in accordance with the provisions of this Section 8(d).

All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when receipt is acknowledged, if telecopied; and on the next Business Day, if timely delivered to an air courier guaranteeing overnight delivery.

Copies of all such notices, demands, or other communications shall be concurrently delivered by the Person giving the same to the Trustee, at the address specified in the Indenture.

(e) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors, assigns and transferees of the Initial Purchasers, including, without limitation and without the need for an express assignment, subsequent Holders; provided, however, that nothing herein shall be deemed to permit any assignment, transfer or other disposition of Registrable Securities in violation of the terms of the Purchase Agreement or the Indenture. If any transferee of any Holder shall acquire Registrable Securities, in any manner, whether by operation of law or otherwise, such Registrable Securities shall be held subject to all of the terms of this Agreement, and by taking and holding such Registrable Securities, such Person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement and such Person shall be entitled to receive the benefits hereof.

(f) Third Party Beneficiary. Each of the Initial Purchasers shall be a third party beneficiary of the agreements made hereunder between the Issuer or the Guarantor, on the one hand, and the Holders, on the other hand, and shall have the right to enforce such agreements directly to the extent it deems such enforcement necessary or advisable to protect its rights or the rights of Holders hereunder.

 

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(g) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement by telecopier, facsimile or other electronic transmission (i.e., a “pdf” or “tif”) shall be effective as delivery of a manually executed counterpart thereof.

(h) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.

(i) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ANY PROVISIONS RELATING TO CONFLICTS OF LAWS. Specified times of day refer to New York City time.

(j) Severability. In the event that anyone or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby.

(k) Securities Held by the Issuer or any of its Affiliates. Whenever the consent or approval of Holders of a specified percentage of Registrable Securities is required hereunder, Registrable Securities held by the Issuer or any of its affiliates (as such term is defined in Rule 405 under the Securities Act) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage.

[Signature Pages Follow]

 

-21-


IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

 

NEWS AMERICA INCORPORATED
By:  

/s/ Janet Nova

  Name:   Janet Nova
  Title:   Executive Vice President and Deputy General Counsel
TWENTY-FIRST CENTURY FOX, INC.
By:  

/s/ Janet Nova

  Name:   Janet Nova
  Title:   Executive Vice President and Deputy Group General Counsel

 


CONFIRMED AND ACCEPTED,
as of the date first above written:
J.P. MORGAN SECURITIES LLC
For itself and on behalf of the several Initial Purchasers
By:  

/s/ Maria Sramek

  Name:   Maria Sramek
  Title:   Executive Director

 


Exhibit A

Form of Opinion of Counsel

1. Each of the Exchange Offer Registration Statement and the Prospectus (other than the financial statements and schedules thereto and other financial and statistical information and supplemental schedules included or referred to therein or omitted therefrom, as to which such counsel need express no opinion) complies as to form in all material respects with the applicable requirements of the Securities Act and the applicable rules and regulations promulgated under the Securities Act.

2. In the course of such counsel’s review and discussion of the contents of the Exchange Offer Registration Statement and the Prospectus with certain officers and other representatives of the Issuer and representatives of the independent certified public accountants of the Issuer, but without independent check or verification or responsibility for the accuracy, completeness or fairness of the statements contained therein, on the basis of the foregoing (reasonably relying as to materiality upon representations and opinions of officers and other representatives of the Issuer) no facts have come to such counsel’s attention which cause such counsel to believe that the Exchange Offer Registration Statement (other than the financial statements and schedules thereto and other financial and statistical information and supplemental schedules included or referred to therein or omitted therefrom, as to which such counsel need express no opinion), at the time the Exchange Offer Registration Statement became effective and at the time of the consummation of the Exchange Offer, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements contained therein not misleading, or that the Prospectus (other than the financial statements and schedules thereto and other financial and statistical information and supplemental schedules included or referred to therein or omitted therefrom, as to which such counsel need express no opinion) contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained therein, in the light of the circumstances under which they were made, not misleading.

 

A-1

EX-4.2

Exhibit 4.2

FORM OF 4.00% SENIOR NOTE

UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION (“DTC”), NEW YORK, NEW YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC) ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR’S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE.

THE NOTES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (A)(1) TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (2) IN AN OFFSHORE TRANSACTION COMPLYING WITH RULE 903 OR RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, (3) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE), (4) TO AN INSTITUTIONAL ACCREDITED INVESTOR IN A TRANSACTION EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR (5) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND (B) IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED STATES AND OTHER JURISDICTIONS.


No. A-[    ]    **$[        ]**

NEWS AMERICA INCORPORATED

4.00% SENIOR NOTES DUE OCTOBER 1, 2023

CUSIP 652482 CH1

see reverse for certain definitions

NEWS AMERICA INCORPORATED, a Delaware corporation (“NAI” or the “Company”, which terms include any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to

**CEDE & CO.**

or registered assigns;

the principal amount of **[        ] DOLLARS**

on October 1, 2023 and to pay interest thereon from September 30, 2013 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually on April 1 and October 1 each year, commencing April 1, 2014, at the rate of 4.00% per annum, until the principal hereof is fully paid or made available for payment. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture, be paid to the Person in whose name this Note (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date, which shall be the March 15 or September 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Note (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Notes not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Note may be listed, and upon such notice as may be required by such exchange, all as more fully provided in such Indenture.

This Note is unconditionally guaranteed by Twenty-First Century Fox, Inc., a Delaware corporation (“21st Century Fox”), as set forth in Article Twelve of the Indenture and in the Guarantee endorsed hereon.

Payment of the principal of, and interest on, this Note will be made at the offices or agencies of the Company maintained for that purpose in The City of New York, New York in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public debts; provided, however, that, at the option of the Company, payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register or by wire transfer to an account maintained by the Person entitled thereto as specified in the Security Register.


Reference is hereby made to the further provisions of this Note set forth herein which further provisions shall for all purposes have the same effect as if set forth at this place.

Unless the certificate of authentication hereon has been executed by the Trustee referred to herein by manual signature, this Note shall not be entitled to any benefit under the Indenture, or be valid or obligatory for any purpose.


IN WITNESS WHEREOF, NAI has caused this Note to be signed manually or by facsimile by its duly authorized officers.

Dated: September      , 2013

 

    NEWS AMERICA INCORPORATED
  By:  

 

    By:  

 

    Name:   Paula Wardynski       Name:   Janet Nova
    Title:   Senior Vice President and Treasurer       Title:   Executive Vice President and Deputy General Counsel


TRUSTEE’S CERTIFICATE OF AUTHENTICATION

This is one of the Securities referred

to in the within-mentioned Indenture

 

THE BANK OF NEW YORK MELLON, as Trustee
By:  

 

  Authorized Signatory
  Date: September     , 2013


NEWS AMERICA INCORPORATED

4.00% SENIOR NOTES DUE OCTOBER 1, 2023

Indenture

This Security is one of a duly authorized series (this series being the “Securities”) of debt securities of News America Incorporated, a Delaware corporation (“NAI” or the “Company”), issued under an Indenture dated as of August 25, 2009, as amended and restated on February 16, 2011 (the “Indenture”), among NAI, Twenty-First Century Fox, Inc., (formerly known as News Corporation) a Delaware corporation (“21st Century Fox” or the “Guarantor”), and The Bank of New York Mellon, as Trustee (the “Trustee”, which term includes any successor trustee under the Indenture), which provides for the issuance by NAI from time to time of debt securities (the “Debt Securities”) in one or more series, in which the Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Guarantor, the Trustee and the Holders of the Debt Securities and of the terms upon which the Debt Securities are, and are to be, authenticated and delivered. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as in effect on the date of the Indenture (the “TIA”), and as provided in the Indenture. The terms of the Securities and Guarantee set forth in this certificate are qualified in their entirety by reference to the terms of the Indenture. The Securities are subject to all such terms, and Securityholders are referred to the Indenture and the TIA for a statement of those terms. The Securities are unconditionally guaranteed on a senior basis (the “Guarantee”) by the Guarantor. Capitalized terms used herein and not defined herein have the meanings ascribed thereto in the Indenture.

 

  1. Paying Agent and Security Registrar

Initially, the Trustee will act as Paying Agent and Security Registrar. NAI may appoint and change any Paying Agent or Security Registrar without notice, other than notice to the Trustee. NAI or any Subsidiary or an Affiliate of either of them may act as Paying Agent, Security Registrar or co-registrar.

 

  2. Optional Redemption by the Company

This Note is redeemable, as a whole or in part, at our option, at any time or from time to time, upon mailed notice to the registered address of the Holder at least 30 days but not more than 60 days prior to the redemption. The redemption price will be equal to the greater of (1) 100% of the principal amount of the Notes to be redeemed and (2) the sum of the present values of the Remaining Scheduled Payments (as defined below) on such Notes discounted to the date of redemption, on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months), at a rate equal to the sum of the applicable Treasury Rate (as defined below) plus 25 basis points. Accrued interest will be paid to the date of redemption. All calculations hereunder shall be made by the Company.


“Treasury Rate” means, with respect to any redemption date, the rate per annum equal to the semi-annual equivalent yield to maturity (computed as of the third business day immediately preceding that redemption date) of the Comparable Treasury Issue (as defined below), assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for that redemption date.

“Comparable Treasury Issue” means the United States Treasury security selected by the Reference Treasury Dealer (as defined below) as having a maturity comparable to the remaining term of the Notes, that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the Notes.

“Comparable Treasury Price” means, with respect to any redemption date, the Reference Treasury Dealer Quotations (as defined below) for that redemption date.

“Reference Treasury Dealer” means J.P. Morgan Securities LLC and its successor. If the Reference Treasury Dealer shall cease to be a primary U.S. Government securities dealer, we will substitute another nationally recognized investment banking firm that is a primary U.S. Government securities dealer.

“Reference Treasury Dealer Quotations” means, with respect to the Reference Treasury Dealer and any redemption date, the average, as determined by the Company, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Company by the Reference Treasury Dealer at 3:30 p.m., New York City time, on the third business day preceding that redemption date.

“Remaining Scheduled Payments” means the remaining scheduled payments of principal and interest on the Notes that would be due after the related redemption date but for that redemption. If that redemption date is not an interest payment date with respect to the Notes, the amount of the next succeeding scheduled interest payment on the Notes will be reduced by the amount of interest accrued on the Notes to such redemption date.

On and after the redemption date, interest will cease to accrue on this Note or any portion of this Note called for redemption (unless we default in the payment of the redemption price and accrued interest). On or before the redemption date, the Company will deposit with a paying agent (or the Trustee) money sufficient to pay the redemption price of and accrued interest on the Notes to be redeemed on that date. If less than all of the Notes are to be redeemed, the Notes to be redeemed shall be selected by the Trustee by a method the trustee deems to be fair and appropriate.

 

  3. Repurchase Upon Change of Control Triggering Event

Subject to the terms and conditions of the Indenture, NAI shall become immediately obligated to offer to purchase the Securities pursuant to Section 13.01 of the Indenture upon the occurrence of a Change of Control Triggering Event at a purchase price in cash equal to 101% of aggregate principal amount, plus accrued and unpaid interest, if any, to the date of repurchase.


  4. Denominations; Transfer; Exchange

The Securities are in registered form, without coupons, in denominations of US$1,000 of principal amount and integral multiples thereof. A Holder may transfer or exchange Securities in accordance with the terms of the Indenture. The Security Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Security Registrar need not register the transfer or exchange of any Securities for a period of 15 days before the selection of any Securities for redemption or of any Securities so selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part.

 

  5. Persons Deemed Owners

The registered Holder of this Security may be treated as the owner of the Security for all purposes.

 

  6. Amendment; Waiver

The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of Securities under the Indenture and the waiver of compliance by the Company with certain provisions of the Indenture at any time with the consent of the Holders of a majority in aggregate principal amount of the Debt Securities at the time outstanding (or, in case less than all of the several series of Debt Securities then outstanding are affected, of the Holders of a majority in principal amount of the Debt Securities at the time outstanding of each affected series). The Indenture also permits the Holders of a majority in principal amount of any series of Outstanding Securities, on behalf of the Holders of all the Securities of that series, to waive certain past Defaults under the Indenture and their consequences with respect to that series. Any such consent or waiver by the Holder hereof shall be conclusive and binding upon such Holder and upon all future Holders hereof and of any Securities issued upon the registration of transfer hereof or in exchange hereof or in lieu hereof, whether or not notation of such consent or waiver is made hereon.

 

  7. Discharge and Defeasance

The Indenture contains provisions for discharge and defeasance at any time of (i) the entire indebtedness of the Securities and (ii) certain restrictive covenants and certain Events of Default applicable to the Securities, upon compliance by the Company with certain conditions set forth in the Indenture.

 

  8. Defaults and Remedies

Under the Indenture, Events of Default include (i) default in payment of the principal amount, premium, if any, or interest, in respect of the Securities when the same becomes due and payable subject, in the case of interest, to the grace period contained in the Indenture; (ii) failure by the Company or the Guarantor to perform any other covenant or warranty (other than a covenant included in the Indenture solely for the benefit of another series of Debt Securities), subject to notice and lapse of time; or (iii) certain events of bankruptcy or insolvency of News Corporation, the Company or any Significant Subsidiary of News Corporation. If an Event of Default, other than an Event of Default as a result of certain events of bankruptcy, insolvency or


reorganization, occurs and is continuing, the Holders of at least 25% in aggregate principal amount of the Outstanding Securities of that series may declare all the Securities of that series to be due and payable immediately. If an Event of Default occurs and is continuing as a result of certain events of bankruptcy, insolvency or reorganization, the principal amount and interest, if any, of all the debt securities of that series automatically will become immediately due and payable without any declaration or other act on the part of the Trustee or any holder of such securities.

Holders may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Securities unless it receives indemnity or security satisfactory to the Trustee. Subject to certain limitations, Holders of a majority in aggregate principal amount of the Outstanding Securities of a series may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders notice of any continuing Default (except a Default in payment of amounts specified in clause (i) above) if it determines in good faith that withholding notice is in the interests of the Holders.

 

  9. Trustee Dealings with NAI

Subject to certain limitations imposed by the TIA, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with and collect obligations owed to it by NAI or its Affiliates and may otherwise deal with NAI or its Affiliates with the same rights it would have if it were not Trustee.

 

  10. No Recourse Against Others

A director, officer, employee or stockholder, as such, of NAI shall not have any liability for any obligations of NAI under the Securities or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Security, each Securityholder waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Securities.

 

  11. Abbreviations

Customary abbreviations may be used in the name of a Principal or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the entireties), JT TEN (=joint tenants with right of survivorship and not as tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gifts to Minors Acts).

 

  12. Governing Law

THE INDENTURE, THIS SECURITY AND THE GUARANTEE ENDORSED HEREON SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.


OPTION OF HOLDER TO ELECT PURCHASE

If you wish to have this Security purchased by the Company pursuant to Section 13.01 of the Indenture, check the Box.  ¨

If you wish to have a portion of this Security purchased by the Company pursuant to Section 13.01 of the Indenture, state the amount (in original principal amount):

$            

 

 

 

Date:  

 

    Your Signature  

 

 

 

 

(Sign exactly as your name appears in this Note)

 

 

Signature Guarantee:  

 

   

Signatures must be guaranteed by an “eligible guarantor institution” meeting the requirements of the Security Registrar, which requirements include membership or participation in the Security Transfer Agent Medallion Program (“STAMP”) or such other “signature guarantee program” as may be determined by the Security Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended.


GUARANTEE

Twenty-First Century Fox, Inc. (the “Guarantor”) has unconditionally guaranteed on a senior basis (i) the due and punctual payment of the principal of, premium, if any, and interest (including post-petition interest) on the Securities, when and as the same shall become due and payable, whether at maturity, by acceleration, as a result of redemption, upon a Change of Control Triggering Event, by acceleration or otherwise, (ii) the due and punctual payment of interest on the overdue principal of, premium and interest, if any, on the Securities, to the extent lawful, (iii) the due and punctual performance of all other obligations of NAI to the Holders or the Trustee under the Indenture and (iv) in case of any extension of time of payment or renewal of any Securities or any of such other obligations, that the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at Stated Maturity, by acceleration or otherwise.

The obligations of the Guarantor to the Holders of the Securities and to the Trustee, pursuant to the Guarantee and the Indenture, are expressly set forth to the extent and in the manner provided in Article Twelve of the Indenture and reference is hereby made to such Indenture for the precise terms of the Guarantee therein made.

No stockholder, officer, director or incorporator, as such, past, present or future, of the Guarantor shall have any personal liability under the Guarantee by reason of his or its status as such stockholder, officer, director or incorporator.

The Guarantee shall not be valid or obligatory for any purpose until the certificate of authentication on the Securities upon which this Guarantee is noted shall have been executed by the Trustee under the Indenture by the manual signature of one of its authorized signatories.


GUARANTOR
Twenty First Century Fox, Inc.
By:  

 

  Name:   Janet Nova
  Title:   Executive Vice President and Deputy Group General Counsel
  Date:   September     , 2013


ASSIGNMENT FORM

To assign the Security, fill in the form below:

I or we assign and transfer this security to

INSERT ASSIGNEE’S SOC. SEC. OR TAX ID NO.

             
             
     

 

(Print or type assignee’s name, address and zip code)

 

and irrevocably appoint