Twenty-First Century Fox 2007 Annual Report Download - page 91

NEWS CORPORATION
Notes to the Consolidated Financial Statements (continued)
Note 10 Exchangeable Securities
TOPrS
In November 1996, the Company, through a trust (the “Exchange Trust”) wholly-owned by NAI, issued 10 million 5% TOPrS for
aggregate gross proceeds of $1 billion. Such proceeds were invested in (i) preferred securities representing a beneficial interest of
NAI’s 5% Subordinated Discount Debentures due November 12, 2016 (the “Subordinated Debentures”) and (ii) 10,000,000 war-
rants to purchase from NAI ordinary shares of BSkyB (the “Warrants”). During fiscal 2003, approximately 85% of the Company’s
outstanding TOPrS and related warrants were redeemed. As of June 30, 2007, approximately 1.5 million TOPrS and 1 million war-
rants remain outstanding. These investments represent the sole assets of the Exchange Trust. Cumulative cash distributions are
payable on the TOPrS at an annual rate of 5%. The TOPrS have a mandatory redemption date of November 12, 2016 or earlier to
the extent of any redemption by NAI of any Subordinated Debentures or Warrants. The Company has the right to pay cash equal to
the market value of the BSkyB ordinary shares for which the Warrants are exercisable in lieu of delivering freely tradable shares. The
Company and certain of its direct and indirect subsidiaries have certain obligations relating to the TOPrS, the preferred securities
representing a beneficial interest in the Subordinated Debentures, the Subordinated Debentures and Warrants which amount to a
full and unconditional guarantee of the respective issuer’s obligations with respect thereto.
The total net proceeds from the issuance of the TOPrS were allocated between the fair value of the obligation and the fair value
of the Warrants on their date of issuance. The fair value of the Warrants is determined at the end of each period using the Black-
Scholes method. The original fair value of the obligation has been recorded in non-current borrowings and in accordance with SFAS
No. 133, the Warrants are reported at fair value and in non-current other liabilities. The fair value of the obligation is accreted to its
maturity value through the effective interest method. (See Note 17—Other, net) A significant variance in the price of the underlying
stock could have a material impact on the operating results of the Company.
As of June 30, 2007, $129 million and $35 million of the TOPrS were included in borrowings and non-current liabilities,
respectively, on the consolidated balance sheet. As of June 30, 2006, $128 million and $26 million of the TOPrS were included in
borrowings and non-current liabilities, respectively, on the consolidated balance sheet.
BUCS
During fiscal 2003, News Corporation Finance Trust II (the “Trust”) issued an aggregate of $1.655 billion 0.75% BUCS representing
interests in debentures issued by NAI and guaranteed on a senior basis by the Company and certain of its subsidiaries. The net pro-
ceeds from the BUCS issuance were used to purchase approximately 85% of the Company’s outstanding TOPrS. The BUCS are
exchangeable at the holders’ option into BSkyB ordinary shares based on an exchange ratio of 77.09 BSkyB ordinary shares per
$1,000 original liquidation amount of BUCS. The Trust may pay the exchange market value of each BUCS in cash, by delivering
ordinary shares of BSkyB or a combination of cash and ordinary shares of BSkyB.
The holders also have the right to tender the BUCS for redemption on March 15, 2010, March 15, 2013 or March 15, 2018 for
payment of the adjusted liquidation preference plus accrued and unpaid distributions and any final period distribution in, at the
Company’s election, cash, BSkyB ordinary shares, the Company’s Class A Common Stock or any combination thereof.
The Company may redeem the BUCS for cash, BSkyB ordinary shares or a combination thereof in whole or in part, at any time
on or after March 20, 2010, at the adjusted liquidation preference of the BUCS plus any accrued and unpaid distributions and any
final period distribution thereon.
The total net proceeds from the issuance of the BUCS were allocated between the fair value of the obligation and the fair value
of the exchange feature. The fair values of the obligation and the exchange feature were determined by pricing the issuance with
and without the exchange feature. The original fair value of the obligation has been recorded in non-current borrowings and in
accordance with SFAS No.133, the call option feature of the exchangeable debentures is reported at fair value and in non-current
other liabilities. The fair value of the obligation is being accreted to its maturity value through the effective interest method. (See
Note 17—Other, net) A significant variance in the price of the underlying stock could have a material impact on the operating
results of the Company.
As of June 30, 2007, $1,501 million and $352 million of the BUCS were included in borrowings and non-current liabilities,
respectively, on the consolidated balance sheet. As of June 30, 2006, $1,444 million and $235 million of the BUCS were included in
borrowings and non-current liabilities, respectively, on the consolidated balance sheet.
Note 11 Film Production Financing
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 third-
party investor’s contractual interest in the profits or losses incurred on the film. Consistent with the requirements of SOP 00-2, the
estimate of the third-party investor’s interest in profits or losses incurred on the film is determined by reference to the ratio of actual
revenue earned to date in relation to total estimated ultimate revenues.
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