<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------------
FORM 10-Q
-------------------
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the quarterly period ended December 31, 1998.
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 1- 14595
-------------------
FOX ENTERTAINMENT GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 95-4577574
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1211 Avenue of the Americas, New York, NY 10036
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (212) 852-7111
---------------------
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
--- ---
As of February 10, 1999, 124,800,000 shares of Class A Common Stock, par
value $.01 per share, and 547,500,000 shares of Class B Common Stock, par value
$.01 per share, were outstanding.
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FOX ENTERTAINMENT GROUP, INC.
FORM 10-Q
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements
Unaudited Combined Condensed Statements of Operations for the three and six
months ended December 31, 1998 and 1997........................................... 1
Consolidated Condensed Balance Sheet at December 31, 1998 (unaudited) and Combined
Condensed Balance Sheet at June 30, 1998 ........................................ 2
Unaudited Combined Condensed Statements of Cash Flows for the six months ended
December 31, 1998 and 1997....................................................... 3
Notes to the Unaudited Combined Condensed Financial Statements...................... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................... 6
Signature.............................................................................................. 16
Exhibit Index.......................................................................................... 17
</TABLE>
<PAGE>
FOX ENTERTAINMENT GROUP, INC.
UNAUDITED COMBINED CONDENSED STATEMENTS OF OPERATIONS
(in millions except for per share amounts)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
December 31, December 31,
-------------------------------- -------------------------------
1998 1997 1998 1997
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues $ 2,555 $ 1,977 $ 4,355 $ 3,455
Expenses:
Operating 2,031 1,537 3,376 2,654
Selling, general and administrative 194 175 377 358
Depreciation and amortization 72 60 143 115
------------- ------------- ------------- ------------
Operating income 258 205 459 328
------------- ------------- ------------- ------------
Other expense
Interest expense, net (59) (64) (123) (119)
Equity in losses of affiliates (24) (21) (66) (39)
------------- ------------- ------------- ------------
Income before income taxes 175 120 270 170
Income tax expense on a stand-alone basis (70) (51) (108) (73)
------------- ------------- ------------- ------------
Net income $ 105 $ 69 $ 162 $ 97
============= ============= ============= ============
Basic and diluted earnings per share $0.17 $ 0.13 $0.28 $0.18
============= ============= ============= ============
Basic and diluted weighted average number
of common equivalent shares outstanding 615 548 581 548
============= ============= ============= ============
</TABLE>
The accompanying notes are an integral part of these unaudited combined
condensed financial statements
1
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FOX ENTERTAINMENT GROUP, INC.
COMBINED CONDENSED BALANCE SHEETS
(in millions)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
-------------------------------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 212 $ 101
Accounts receivable, net 2,656 1,949
Filmed entertainment and television programming costs, net 2,712 2,071
Investments in equity affiliates 785 791
Property and equipment, net 1,198 1,111
Intangible assets, net 5,873 5,941
Other assets and investments 713 666
-------------------------------------
Total assets $14,149 $12,630
======================================
LIABILITIES
Accounts payable and accrued liabilities $ 1,699 $ 1,613
Participations, residuals and royalties payable 1,215 1,153
Television programming rights payable 796 513
Deferred revenue 330 238
Borrowings 275 375
Deferred income taxes 948 874
Other liabilities 240 221
-------------------------------------
5,503 4,987
Due to Intercompany affiliates 2,016 3,702
-------------------------------------
Total liabilities 7,519 8,689
-------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock - 1
Common stock 7 -
Paid-in capital 6,599 3,132
Retained earnings and other comprehensive income 24 808
-------------------------------------
Total shareholders' equity 6,630 3,941
-------------------------------------
Total liabilities and shareholders' equity $14,149 $12,630
=====================================
</TABLE>
The accompanying notes are an integral part of these unaudited combined
condensed financial statements
2
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FOX ENTERTAINMENT GROUP, INC.
UNAUDITED COMBINED CONDENSED STATEMENTS OF CASH FLOWS
(in millions)
<TABLE>
<CAPTION>
For the six months ended
December 31,
-----------------------------
1998 1997
-----------------------------
<S> <C> <C>
Operating Activities
Net income $ 162 $ 97
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 143 115
Equity in losses of affiliates 66 39
Change in operating assets and liabilities:
Accounts receivable and other assets (780) (585)
Filmed entertainment and television programming costs (593) (185)
Accounts payable and accrued liabilities 563 349
Participations, residuals and royalties payable 15 51
---------------------------
Net cash used in operating activities (424) (119)
---------------------------
Investing Activities
Purchases of property and equipment (122) (166)
Investments in equity affiliates (65) (49)
Other investments (111) (41)
---------------------------
Net cash used in investing activities (298) (256)
---------------------------
Financing Activities
Borrowings 99 145
Repayment of borrowings (199) (163)
Net proceeds from sale of Class A Common Stock 2,689 -
Advances from affiliates, net (1,756) 443
---------------------------
Net cash provided by financing activities 833 425
---------------------------
Net increase in cash and cash equivalents 111 50
Cash and cash equivalents, beginning of period 101 256
---------------------------
Cash and cash equivalents, end of period $ 212 $ 306
===========================
</TABLE>
The accompanying notes are an integral part of these unaudited combined
condensed financial statements
3
<PAGE>
FOX ENTERTAINMENT GROUP, INC.
NOTES TO THE UNAUDITED COMBINED CONDENSED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
Fox Entertainment Group, Inc. (the "Company") is principally engaged in the
development, production and worldwide distribution of feature films and
television programs, television broadcasting and cable network programming. The
Company was incorporated in Delaware in May 1985 as Twentieth Holdings
Corporation. In 1998, the Company changed its corporate name to Fox
Entertainment Group, Inc.
Prior to the transaction referred to in the following paragraph, The News
Corporation Limited ("News Corporation") effected a reorganization (the
"Reorganization") by contributing to the Company at book value certain of its
assets and subsidiaries engaged in the production and distribution of feature
films, television programming and cable network programming. Included in this
contribution were Twentieth Century Fox Film Corporation, which was acquired by
News Corporation in 1985, News Corporation's interest in Fox Family Worldwide,
Inc., Fox/Liberty Networks, LLC, International Sports Programming Partners,
Fox/Liberty Ventures, LLC and other cable network programming and related
interests. During the period covered by these financial statements these
businesses were under common control as an integral part of News Corporation's
overall operations. These combined condensed financial statements have been
prepared from News Corporation's historical accounting records and present all
of the operations of the businesses that are owned and operated by the Company
after the Reorganization as if the Company had been a separate entity for all
periods presented.
On November 11, 1998, the Company consummated an initial public offering through
the sale and issuance of 124,800,000 shares of Class A Common Stock. The newly
issued shares of Class A Common Stock represent approximately 18.6% of the
Company's outstanding common stock. The net proceeds from the public offering
were approximately $2.7 billion and were used to reduce intercompany
indebtedness. Prior to the initial public offering, the Company effected a
Reorganization and a recapitalization that gave effect to the following
transactions: (i) the elimination of certain outstanding intercompany debt
against Paid-in capital, (ii) the concurrent payment of dividends to a
subsidiary of News Corporation (which reduced Retained earnings and Paid-in
capital) such that after (i) and (ii), $4.5 billion of intercompany debt was
outstanding, (iii) the authorization of the new Class A and Class B Common Stock
and the conversion of the Company's outstanding common stock into 547,500,000
shares of Class B Common Stock, and (iv) the adjustment to increase the interest
rate from 5% to 8% under the terms of the intercompany indebtedness that is
outstanding after the Reorganization. For the six months ended December 31,
1998, after giving effect to the initial public offering, Reorganization and
recapitalization, as if they had occurred on July 1, 1998 rather than on
November 11, 1998, the pro forma net income and earnings per share would have
been $174 million and $0.30, respectively, as a result of a decrease in
intercompany interest expense of $20 million and an increase in income taxes of
$8 million.
In November 1998, for purposes of governing certain on-going relationships
between the Company and News Corporation and to facilitate the Reorganization,
the Company and News Corporation entered into a Master Intercompany Agreement
which includes various agreements relating to cash management and financing,
executive officer services, the provision of services of certain Company
employees to News Corporation and its subsidiaries, facility arrangements,
employee matters, insurance, services, trademarks, indemnities by the Company
and News Corporation. The Company and News Corporation also entered into a Tax
Sharing Agreement. These agreements were negotiated in the context of a parent-
subsidiary relationship and therefore are not the result of arm's length
negotiations between independent parties. There can be no assurance, therefore,
that each of such agreements, or the transactions provided for therein, or any
amendments thereof, will be effected on terms at least as favorable to the
Company as could have been obtained from unaffiliated third parties.
4
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FOX ENTERTAINMENT GROUP, INC.
NOTES TO THE UNAUDITED COMBINED CONDENSED FINANCIAL STATEMENTS
The financial information included herein may not necessarily reflect the
consolidated results of operations, financial position, changes in shareholders'
equity and cash flows of the Company in the future or what they would have been
had it been a separate, stand-alone entity during all the periods presented.
The accompanying unaudited combined condensed financial statements of the
Company have been prepared in accordance with generally accepted accounting
principles 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) considered
necessary for a fair presentation have been reflected in these combined
condensed financial statements. Operating results for the interim periods
presented are not necessarily indicative of the results that may be expected for
the year ending June 30, 1999.
These interim combined condensed financial statements and notes thereto should
be read in conjunction with the audited combined financial statements and notes
thereto included in the Company's Registration Statement on Form S-1 (File No.
333-61515) as declared effective by the Securities and Exchange Commission on
November 9, 1998.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
combined condensed financial statements and the reported amounts of revenues and
expenses during the reporting period. Because of the use of estimates inherent
in the financial reporting process, actual results could differ from those
estimates.
Total comprehensive income for the three months ended December 31, 1998 and 1997
was $107 million and $63 million, respectively. Total comprehensive income for
the six months ended December 31, 1998 and 1997 was $164 million and $91
million, respectively. Total comprehensive income includes net income and
currency translation adjustments of $2 million and ($6) million for the three
and six months ended December 31, 1998 and 1997, respectively.
Note 2 - Guarantees of News Corporation Debt
News Corporation and certain of its subsidiaries, including the Company and
certain subsidiaries of the Company (collectively, the "Fox Guarantors") are
guarantors of various debt obligations of News Corporation and certain of its
subsidiaries. The principal amount of indebtedness outstanding under such debt
instruments at December 31, 1998 was approximately $9.3 billion, which amount
includes approximately $1 billion of obligations under Exchangeable Trust
Originated Preferred Securities SM due 2016. The debt instruments limit the
ability of News Corporation and the Fox Guarantors to subject their properties
to liens, and certain of the debt instruments impose limitations on the ability
of News Corporation and its subsidiaries, including the Fox Guarantors, to incur
indebtedness in certain circumstances. Such debt instruments mature at various
times between 1999 and 2096, with a weighted average maturity of over 20 years.
Additional subsidiaries of the Company may from time to time be required to
become guarantors of certain debt obligations.
In the case of any event of default under such debt obligations the Fox
Guarantors will be directly liable to the creditors or debtholders. News
Corporation has agreed to indemnify the Fox Guarantors from and against any
obligations they may incur by reason of their guarantees of such debt
obligations.
Note 3 - Filmed Entertainment and Television Programming Costs
Filmed entertainment and television programming costs consisted of the
following:
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1998
----------------- -------------
(unaudited)
(in millions)
<S> <C> <C>
Filmed entertainment costs:
Released, less amortization............................ $987 $788
Completed, not released................................ 84 141
In process............................................. 604 564
Television programming cost, less amortization........... 1,037 578
------ ------
$2,712 $2,071
====== ======
</TABLE>
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This document contains statements that constitute "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as amended. The words
"expect," "estimate," "anticipate," "predict," "believe" and similar expressions
and variations thereof are intended to identify forward-looking statements.
These statements appear in a number of places in this document and include
statements regarding the intent, belief or current expectations of the Fox
Entertainment Group, Inc. ("Company"), its directors or its officers with
respect to, among other things, trends affecting the Company's financial
condition or results of operations. The readers of this document are cautioned
that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, those risks and uncertainties
discussed under the headings "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," in the Company's
Registration Statement Form S-1 as declared effective by the Securities and
Exchange Commission on November 9, 1998, as well as the information set forth
below. The Company does not ordinarily make projections of its future operating
results and undertakes no obligation to publicly update or revise any forward-
looking statements, whether as a result of new information, future events or
otherwise. Readers should carefully review the risk factors referred to above
and the other documents filed by the Company with the Securities and Exchange
Commission. This section should be read in conjunction with the unaudited
combined condensed financial statements of the Company and related notes set
forth elsewhere herein.
Prior to the initial public offering of Class A Common Stock of the Company,
News Corporation effected a Reorganization by contributing to the Company, at
book value, certain of its assets and subsidiaries engaged in the production and
distribution of feature films, television programming and cable network
programming. The combined condensed financial statements of the Company, which
are discussed below, reflect the historical results of operations, financial
position and cash flows of the Company's wholly owned subsidiaries prior to the
Reorganization combined with the historical financial information of the
businesses which were contributed to the Company from News Corporation as part
of the Reorganization. Management believes the assumptions underlying the
Company's combined condensed financial statements to be reasonable. The combined
financial information included herein is not necessarily indicative of the
consolidated results of operations, financial position and cash flows of the
Company had the Reorganization occurred as of the beginning of the periods
presented, and had the Company operated as a separate, stand-alone entity during
these periods.
The Company manages and reports its businesses in three segments: Filmed
Entertainment, which principally consists of the production and acquisition of
live-action and animated motion pictures for distribution and licensing in all
formats in all entertainment media worldwide and the production of original
television programming; Television Broadcasting and Related Businesses, which
principally consist of the distribution of network programming, the ownership
and operation of broadcast television stations (the "Fox Television Stations"),
the production and distribution of certain syndicated television programming and
professional sports team ownership; and Cable Network Programming, which
principally consists of the production and licensing of programming distributed
through cable television systems and direct broadcast satellite ("DBS")
operators. The Company's interests in certain cable network programming and
related ventures, including Fox/Liberty Networks, LLC, Fox Family Worldwide
Inc., Fox/Liberty Ventures, LLC and International Sports Programming Partners,
are included in equity in earnings (loss) of affiliates and, accordingly, are
not reported in the segments set forth above.
Sources of Revenue
Filmed Entertainment. The Filmed Entertainment segment derives revenue from
theatrical distribution, home video sales, and distribution through pay-per-
view, pay television services, broadcast and cable television. The revenues and
operating results of the Filmed Entertainment segment are significantly impacted
by the timing of the Company's theatrical and home video releases, the number of
its original and returning television series that are aired by Fox Broadcasting
Company ("FOX") and the other broadcast television networks and the number of
its television series licensed in off-network syndication. Theatrical release
dates are determined by several factors, including timing of vacation and
holiday periods and competition in the marketplace. Each motion picture is a
separate and distinct product with its financial success dependent upon many
factors, including audience acceptance.
Television Broadcasting and Related Businesses. The Television Broadcasting and
Related Businesses segment derives revenues principally from the sale of
advertising time. Generally, advertising time is sold to national advertisers by
FOX and to local advertisers by the Fox Television Stations in their respective
markets. The sale of advertising time is affected by
6
<PAGE>
viewer demographics, program ratings and market conditions. Adverse changes in
general market conditions for advertising may also affect revenues.
Cable Network Programming. The Cable Network Programming segment derives
revenues from monthly subscriber fees as well as from the sale of advertising
time. Monthly subscriber fees are dependent on maintenance of carriage
arrangements with cable television systems and DBS operators. The sale of
advertising time is affected by viewer demographics, program ratings and general
market conditions.
Components of Expenses
Filmed Entertainment. Costs incurred by the Filmed Entertainment segment include
production, certain exploitation costs, primarily including prints and
advertising, capitalized overhead and interest costs, participations and talent
residuals. General and administrative expenses include salaries, employee
benefits, rent and other routine overhead expenses as well as legal, accounting
and consulting fees.
Television Broadcasting and Related Businesses and Cable Network Programming.
Expenses of the Television Broadcasting and Related Businesses segment and the
Cable Network Programming segment include expenses related to producing original
programming and acquiring programming and rights to programming, as well as
general and administrative expenses. Production and technical expenses typically
include expenses related to operating the technical facilities of the
broadcaster or cable network. Marketing expenses include all promotional
expenses related to improving the market visibility and awareness of the
broadcaster or cable network. Advertising expenses include sales commissions
paid to the in-house sales force involved in the sale of advertising and
commissions paid to outside representatives.
7
<PAGE>
Results of Operations - Three months ended December 31, 1998 vs. Three months
ended December 31, 1997
The following table sets forth the Company's operating results, by segment, for
the three months ended December 31, 1998 as compared to the three months ended
December 31, 1997:
<TABLE>
<CAPTION>
Three months ended
------------------------------
December 31,
------------------------------
1998 1997 Change
-------------- -------------- --------------
<S> <C> <C> <C>
(Dollars in Millions)
Revenues:
Filmed Entertainment................................................ $1,470 $1,003 $467
Television Broadcasting and Related Businesses...................... 1,056 959 97
Cable Network Programming........................................... 29 15 14
------ ------ ----
Total Revenues........................................................ $2,555 $1,977 $578
====== ====== ====
Operating Income (Loss):
Filmed Entertainment................................................ $ 164 $ 67 $ 97
Television Broadcasting and Related Businesses...................... 125 171 (46)
Cable Network Programming........................................... (31) (33) 2
------ ------ ----
Total Operating Income................................................ 258 205 53
Interest expense, net................................................. (59) (64) 5
Equity in losses of affiliates........................................ (24) (21) (3)
------ ------ ----
Income before income taxes............................................ 175 120 55
Income tax expense on a stand-alone basis............................. (70) (51) (19)
------ ------ ----
Net Income............................................................ $ 105 $ 69 $ 36
====== ====== ====
Other Data:
Operating Income (Loss) Before Depreciation and Amortization(1):
Filmed Entertainment................................................ $ 173 $ 74 $ 99
Television Broadcasting and Related Businesses...................... 175 213 (38)
Cable Network Programming........................................... (18) (22) 4
------ ------ ----
Total Operating Income Before
Depreciation and Amortization (1)...................... $ 330 $ 265 $ 65
====== ====== ====
</TABLE>
(1) Operating Income Before Depreciation and Amortization is defined as
operating income (loss) before depreciation and amortization. Operating
Income Before Depreciation and Amortization is presented supplementally as
management believes it allows for the most appropriate measure for
evaluating operating performance. The Company believes Operating Income
Before Depreciation and Amortization is a standard measure commonly reported
and widely used by analysts, investors and others associated with the media
and entertainment industry. Operating Income Before Depreciation and
Amortization eliminates the uneven effect across business segments of
considerable amounts of depreciation and amortization primarily resulting
from the value of intangible assets acquired in business combinations
accounted for by the purchase method of accounting. While many in the
financial community consider Operating Income Before Depreciation and
Amortization to be an important measure of comparative operating
performance, it should be considered in addition to, but not as a substitute
for, operating income, net income, cash flow and other measures of financial
performance prepared in accordance with GAAP. Additionally, the Company's
calculation of Operating Income Before Depreciation and Amortization may be
different than the calculation used by other companies and therefore,
comparability may be affected.
Filmed Entertainment. For the second quarter of fiscal 1999, revenues increased
47%, operating income increased 145% and operating income before depreciation
and amortization increased 134% compared to the corresponding period of the
preceding fiscal year. The increase in revenue and operating income from the
corresponding period of the preceding fiscal year can be attributed to the
strong international theatrical performance of There's Something About Mary, Dr.
Dolittle and the international video release of Titanic. Titanic became the
best selling video of all time with approximately 58 million units sold
worldwide and Dr. Dolittle sold over 8 million units through December 31, 1998.
In theatrical release, There's Something About Mary achieved international
success as well, with $179 million in overseas box office receipts bringing its
8
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total worldwide box office receipts to over $355 million to date. Operating
results from the successful films mentioned above were partially offset by the
disappointing results of The Siege. The corresponding period in the preceding
year was negatively impacted by the disappointing results of Home Alone 3, Out
to Sea and A Life Less Ordinary. Subsequent periods will include the worldwide
video release of There's Something About Mary as well as this past Fall's
theatrical releases.
Television Broadcasting and Related Businesses. For the second quarter of fiscal
1999, revenues increased 10% above levels for the corresponding period of the
preceding fiscal year, while operating income decreased by 27% and operating
income before depreciation and amortization decreased by 18%. The second
quarter Fox Television Stations operating results increased as compared to the
corresponding period in the preceding year, primarily reflecting an increased
demand in advertising for the November elections. The strong news and day part
programming of the Fox Television Stations located in Atlanta and Dallas
contributed to an increase in overall market share of Fox Television Stations by
three percent to an average of 20%. Fox Broadcasting Company's earnings
decreased from the corresponding period of the preceding fiscal year due to
increased programming costs related to FOX's National Football League contract
combined with a loss on FOX's Major League Baseball contract due to the New
York Yankees' four game sweep of the 1998 World Series, resulting in a higher
average cost per game.
Cable Network Programming. Fox News Channel reported a second quarter revenue
increase of 93%, a 6% reduction in operating losses and a 18% reduction in
operating losses before depreciation and amortization compared to the
corresponding period of the preceding fiscal year. Fox News Channel continues to
expand its distribution and is currently in 37 million homes, an increase of
over 47% since the end of the second quarter of fiscal 1998. Consistent with
this subscriber increase, combined advertising and affiliate revenues almost
doubled in the fiscal second quarter as compared to the corresponding period in
the preceding year, partially offset by increases in programming, affiliate
newsgathering, and launch support expenses.
Equity in losses of affiliates. In the second quarter of fiscal 1999, equity in
losses of affiliates increased to $24 million from $21 million in the
corresponding period of the preceding fiscal year. The increase in equity in
losses of affiliates was primarily related to the results of the Company's joint
ventures with Liberty Media Corporation, where despite subscriber and
advertising sales growth at certain of the regional sports networks and the FX
network, profits were negatively impacted by the costs of start-up businesses
including certain regional sports networks, Fox Sports News and Fox Sports
Americas. Additionally, results were negatively affected by financing costs
associated with the acquisition of a 40% interest in Regional Programming
Partners, an affiliate of Rainbow Media Sports Holdings, Inc .
Interest expense. Results for the second quarter of fiscal 1999 compared to the
corresponding period of the preceding fiscal year reflect decreased external
interest expense, which was partially offset by increases in intercompany
interest expense, primarily due to higher average intercompany debt balances. In
connection with the Reorganization and recapitalization that occurred prior to
the initial public offering, the interest rate on outstanding intercompany
indebtedness was adjusted from 5% to 8%.
Income tax expense on a stand-alone basis. Income tax expense for the second
quarter of fiscal 1999 increased to $70 million from $51 million in the
corresponding period of the preceding year. The increase was primarily due to
the increase in income before taxes. The effective income tax rate for the
three months ended December 31, 1998 was 40% compared with 43% in the
corresponding period of the preceding fiscal year. The lower effective tax rate
reflects the relationship of non-deductible items to lower income before income
taxes in the corresponding period of the preceding fiscal year as compared to
the current period.
9
<PAGE>
Results of Operations - Six months ended December 31, 1998 vs. Six months ended
December 31, 1997
The following table sets forth the Company's operating results, by segment, for
the six months ended December 31, 1998 as compared to the six months ended
December 31, 1997:
<TABLE>
<CAPTION>
Six months ended
December 31,
--------------------------------
1998 1997 Change
--------------- --------------- ---------------
<S> <C> <C> <C>
(Dollars in Millions)
Revenues:
Filmed Entertainment................................................ $2,530 $1,806 $724
Television Broadcasting and Related Businesses...................... 1,769 1,620 149
Cable Network Programming........................................... 56 29 27
------ ------ ----
Total Revenues........................................................ $4,355 $3,455 $900
====== ====== ====
Operating Income (Loss):
Filmed Entertainment................................................ $ 289 $ 117 $172
Television Broadcasting and Related Businesses...................... 232 282 (50)
Cable Network Programming........................................... (62) (71) 9
------ ------ ----
Total Operating Income................................................ 459 328 131
Interest expense, net................................................. (123) (119) (4)
Equity in losses of affiliates........................................ (66) (39) (27)
------ ------ ----
Income before income taxes............................................ 270 170 100
Income tax expense on a stand-alone basis............................. (108) (73) (35)
------ ------ ----
Net Income............................................................ $ 162 $ 97 $ 65
====== ====== ====
Other Data:
Operating Income (Loss) Before Depreciation and Amortization(1):
Filmed Entertainment................................................ $ 306 $ 130 $176
Television Broadcasting and Related Businesses...................... 332 364 (32)
Cable Network Programming........................................... (36) (51) 15
------ ------ ----
Total Operating Income Before
Depreciation and Amortization (1)...................... $ 602 $ 443 $159
====== ====== ====
</TABLE>
(1) Operating Income Before Depreciation and Amortization is defined as
operating income (loss) before depreciation and amortization. Operating
Income Before Depreciation and Amortization is presented supplementally as
management believes it allows for the most appropriate measure for
evaluating operating performance. The Company believes Operating Income
Before Depreciation and Amortization is a standard measure commonly reported
and widely used by analysts, investors and others associated with the media
and entertainment industry. Operating Income Before Depreciation and
Amortization eliminates the uneven effect across business segments of
considerable amounts of depreciation and amortization primarily resulting
from the value of intangible assets acquired in business combinations
accounted for by the purchase method of accounting. While many in the
financial community consider Operating Income Before Depreciation and
Amortization to be an important measure of comparative operating
performance, it should be considered in addition to, but not as a substitute
for, operating income, net income, cash flow and other measures of financial
performance prepared in accordance with GAAP. Additionally, the Company's
calculation of Operating Income Before Depreciation and Amortization may be
different than the calculation used by other companies and therefore,
comparability may be affected.
Filmed Entertainment. For the first six months of fiscal 1999, revenues
increased 40%, operating income increased 147% and operating income before
depreciation and amortization increased 135% compared to the corresponding
period of the preceding fiscal year. Twentieth Century Fox Film continued to
enjoy the success of several summer releases with strong worldwide theatrical
results from such films as There's Something About Mary, The X-Files, and Dr.
Dolittle. In addition, the domestic video releases of The X-Files and Dr.
Dolittle and the worldwide video release of Titanic occurred in the first half
of fiscal 1999. Titanic became the best selling video of all time with
approximately 58 million units sold worldwide and Dr. Dolittle sold over 8
million units through December 31, 1998. In
10
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theatrical release, There's Something About Mary achieved international success
as well, with $179 million in overseas box office receipts bringing its total
worldwide box office receipts to over $355 million to date. Operating results
from the successful films mentioned above were partially offset by the
disappointing results of The Siege. The corresponding period in the preceding
year was negatively impacted by the disappointing results of Home Alone 3, Out
to Sea and A Life Less Ordinary. Subsequent periods will include the worldwide
video release of There's Something About Mary as well as this past Fall's
theatrical releases.
Television Broadcasting and Related Businesses. For the first six months of
fiscal 1999, revenues increased 9% above levels from the corresponding period of
the preceding fiscal year, while operating income decreased by 18% and operating
income before depreciation and amortization decreased by 9%. Fox's earnings
decreased from the corresponding period of the preceding fiscal year due to
increased programming costs related to FOX's National Football League contract
combined with a loss on FOX's Major League Baseball contract due to the New York
Yankees' four game sweep of the 1998 World Series, resulting in a higher average
cost per game. The results of the Fox Television Stations declined slightly from
the corresponding period in the preceding fiscal year reflecting softness in the
U.S. television advertising market during the first fiscal quarter of 1999 due
in part to significantly reduced General Motors advertising as a result of its
prolonged labor strike during that period. The resumption of historical
automotive advertising levels this fall, in conjunction with the November
elections, raised October and November pacings above year ago levels.
Cable Network Programming. Fox News Channel reported a revenue increase of 93%
for the first six months of fiscal 1999, a 13% reduction in operating losses and
a 29% reduction in operating losses before depreciation and amortization
compared to the corresponding period of the preceding fiscal year. Fox News
Channel continues to expand its distribution and is currently in 37 million
homes, an increase of over 47% since the end of the first six months of fiscal
1998. Consistent with this subscriber increase, combined advertising and
affiliate revenues almost doubled in the fiscal second quarter as compared to
the corresponding period in the preceding year, partially offset by increases in
programming, affiliate newsgathering and launch support expenses.
Equity in losses of affiliates. In the first six months of fiscal 1999, equity
in losses of affiliates increased to $66 million from $39 million in the
corresponding period of the preceding fiscal year. The increase in equity in
losses of affiliates was primarily related to the results of the Company's joint
ventures with Liberty Media Corporation, where despite subscriber and
advertising sales growth at certain of the regional sports networks and the FX
network, profits were negatively impacted by the costs of start-up businesses
including certain regional sports networks, Fox Sports News and Fox Sports
Americas. Additionally, results were negatively affected by financing costs
associated with the acquisition of a 40% interest in Regional Programming
Partners, an affiliate of Rainbow Media Sports Holdings, Inc. In addition, the
increase in equity in losses of affiliates included the cost of the Fox Family
Channel launch in August 1998.
Interest expense. Results for the first six months of fiscal 1999 reflect
decreased external interest expense, compared to the corresponding period of the
preceding fiscal year which was partially offset by increases in intercompany
interest expense, primarily due to higher average intercompany debt balances. In
connection with the reorganization and recapitalization that occurred prior to
the initial public offering, the interest rate on outstanding intercompany
indebtedness was adjusted from 5% to 8%.
Income tax expense on a stand-alone basis. Income tax expense for the first six
months of fiscal 1999 increased to $108 million from $73 million in the
corresponding period of the preceding year. The increase was primarily due to
the increase in income before taxes. The effective income tax rate for the six
months ended December 31, 1998 was 40% compared with 43% in the corresponding
period of the preceding fiscal year. The lower effective tax rate reflects the
relationship of non-deductible items to lower income before income taxes in the
corresponding period of the preceding fiscal year as compared to the current
period.
Liquidity and Capital Resources
The Company's principal sources of cash flow are internally generated funds and
borrowings from News Corporation and its subsidiaries.
Net cash flows used in operating activities during the six months ended December
31, 1998 were $424 million as compared to $119 million in the corresponding
period of the preceding fiscal year. The increase was primarily attributable to
increased payments for filmed entertainment and television programming costs,
primarily reflecting payments on the National Football League contract, which
was partially offset by higher accounts payable and accrued liabilities. In
addition, the net operating cash flows were affected by the build up of accounts
receivable related to the international video release of Titanic, and the
11
<PAGE>
domestic video releases of Dr. Dolittle, Hope Floats and The X-Files. Although
these titles were released in the second quarter, only a portion of the Titanic
receipts and none of the Dr. Dolittle, Hope Floats or The X-Files receipts were
collected in the second quarter. This is compared to the second quarter of
fiscal 1998, which included receipts from the worldwide theatrical release of
The Full Monty and domestic video receipts for Volcano and The Star Wars
Trilogy.
Net cash flows used in investing activities were $298 million and $256 million
during the six months ended December 31, 1998 and 1997, respectively. The
increase was primarily attributable to investments in equity affiliates which
reflects additional funding to Fox/Liberty Ventures, LLC and Fox Studios
Australia which were partially offset by a $60 million decrease in capital
expenditures and other investments.
Net cash flows provided by financing activities were $833 million and $425
million during the six months ended December 31, 1998 and 1997, respectively.
The increase was primarily due to the net effect of advances received from News
Corporation offset by repayment of external borrowings.
In November 1998, the Company consummated an initial public offering through the
issuance of 124,800,000 shares of Class A Common Stock. The newly issued shares
of Class A Common Stock represent approximately 18.6% of the Company's
outstanding common stock. The net proceeds from the initial public offering
were approximately $2.7 billion and were used to reduce intercompany
indebtedness. Prior to the initial public offering, the Company effected a
Reorganization and a recapitalization that gave effect to the following
transactions: (i) the elimination of certain outstanding intercompany debt as of
September 30, 1998 against Paid-in capital, (ii) the concurrent payment of
dividends to a subsidiary of News Corporation (which reduced Retained earnings
and Paid-in capital) such that after (i) and (ii) $4.5 billion of intercompany
debt was outstanding, (iii) the authorization of the new Class A and Class B
Common Stock and the conversion of the Company's outstanding common stock into
547,500,000 shares of Class B Common Stock (which has ten to one supervoting
rights over Class A Common Stock), and (iv) the adjustment to increase the
interest rate from 5% to 8% under the terms of the intercompany indebtedness
after the Reorganization. Subsequent to the Reorganization, recapitalization and
the application of the $2.7 billion of net proceeds from the initial public
offering, total intercompany debt was reduced from $4.5 billion to approximately
$1.8 billion.
In November 1998, for purposes of governing certain on-going relationships
between the Company and News Corporation and to facilitate the Reorganization,
the Company and News Corporation entered into a Master Intercompany Agreement
which includes various agreements relating to cash management and financing,
executive officer services, the provision of services of certain Company
employees to News Corporation and its subsidiaries, facility arrangements,
employee matters, insurance, services, trademarks, indemnities by the Company
and News Corporation. The Company and News Corporation also entered also entered
into a Tax Sharing Agreement. These agreements were negotiated in the context
of a parent-subsidiary relationship and therefore are not the result of arm's
length negotiations between independent parties. There can be no assurance,
therefore, that each of such agreements, or the transactions provided for
therein, or any amendments thereof, will be effected on terms at least as
favorable to the Company as could have been obtained from unaffiliated third
parties
News Corporation and certain of its subsidiaries, including the Company and
certain subsidiaries of the Company (collectively, the "Fox Guarantors") are
guarantors of various debt obligations of News Corporation and certain of its
subsidiaries. The principal amount of indebtedness outstanding under such debt
instruments at December 31, 1998 was approximately $9.3 billion, which amount
includes approximately $1 billion of obligations under Exchangeable Trust
Originated Preferred Securities SM due 2016. The debt instruments limit the
ability of News Corporation and the Fox Guarantors to subject their properties
to liens, and certain of the debt instruments impose limitations on the ability
of News Corporation and its subsidiaries, including the Fox Guarantors, to incur
indebtedness in certain circumstances. Such debt instruments mature at various
times between 1999 and 2096, with a weighted average maturity of over 20 years.
Additional subsidiaries of the Company may from time to time be required to
become guarantors of certain debt obligations.
In the case of any event of default under such debt obligations the Fox
Guarantors will be directly liable to the creditors or debtholders. News
Corporation has agreed to indemnify the Fox Guarantors from and against any
obligations they may incur by reason of their guarantees of such debt
obligations.
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Year 2000
The following disclosure is a Year 2000 readiness disclosure statement pursuant
to the Year 2000 Readiness and Disclosure Act.
The Company is currently working to resolve the potential impact of the Year
2000 on the processing of date-sensitive information by its computerized
information systems. The Year 2000 problem is the result of computer programs
being written using two digits (rather than four) to define the applicable year.
Certain programs may recognize a date using "00" as the year 1900 rather than
the year 2000, which could result in miscalculations or system failures.
The Company has been focused on the Year 2000 issue for several years since its
normal capital spending plan requires it to ensure that significant investments
in technology in the periods prior to December 31, 1999, would be for systems
which would be operational after December 31, 1999. As a result of its
assessment and capital planning, no acceleration of material planned systems
replacements were made due to Year 2000 issues.
Between now and January 1, 2000, the Company will proceed through its various
phases of assessment, strategy, detailed planning, implementation, testing and
management. The Company expects to be fully Year 2000 compliant with respect to
all significant business systems during the first half of calendar 1999.
The Company has in place a Year 2000 program in each of its operating divisions.
These programs, which are executed by project teams, do not rely to a
significant degree on outside consultants. The objectives of these Year 2000
programs are to determine and assess the risks of the Year 2000 issue and to
plan and institute mitigating actions to minimize those risks to acceptable
levels.
The Company's standard for compliance requires that for a computer system or a
business process to be Year 2000 compliant, it must be designed to be used prior
to, on and after January 1, 2000. Such systems or processes must be able to
operate without error in dates and date-related data, including without
limitation, calculating, comparing, indexing and sequencing prior to, on and
after January 1, 2000.
The Company's Year 2000 project teams are focusing on the following major areas:
Core Computer Systems. Information technology systems account for much of the
Year 2000 work and include all computer systems and technology managed by the
Company. All core systems have been assessed, plans are in place and work is
being undertaken to test and implement changes where required. No major
remediation has been identified. In Filmed Entertainment, in-house systems play
a limited role in the development and distribution of product. In Television and
Cable Network Programming, the core systems relate to the broadcasting of
programming and the placement of advertising, with respect to both of which the
Company relies on standard package systems developed by vendors whose products
are widely used in the industry. Information Technology vendors and suppliers
have been contacted as to their Year 2000 compliance and their responses have
been factored into the Company's plans.
Equipment and Facilities. An inventory of all critical broadcast equipment,
office equipment and building infrastructure has been completed for all major
sites including the Company's Los Angeles lot and television stations.
Customers and Vendors. The Company is communicating with its significant
customers and vendors to understand their Year 2000 issues and how they might
prepare themselves to manage those issues as they relate to the Company. To
date, no significant customers or vendors have informed the Company that a
material Year 2000 issue exists which will have a material effect on the
Company.
The Company will continually review its progress against its Year 2000 plans and
conclude on the appropriate and feasible contingency plans to reduce its
exposure to Year 2000 related issues.
Based on the Company's current assessment, the costs of addressing potential
problems are not currently expected to have a material adverse impact on the
Company's financial position, results of operations or cash flows in future
periods. However, if the Company, its customers or vendors identify Year 2000
issues in the future and are unable to resolve such issues in a timely manner,
it could result in a material financial risk. Accordingly, the Company plans to
devote the necessary resources to resolve all significant Year 2000 issues in a
timely manner.
13
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The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third-party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved, or that there will not be a delay in, or increased costs associated
with, the implementation of the Company's Year 2000 compliance project. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, timely responses to and
corrections by third parties and suppliers, the ability to implement interfaces
between the new systems and the systems not being replaced, and similar
uncertainties. Due to the general uncertainty inherent in the Year 2000
readiness of third parties and the interconnection of national and international
businesses, the Company cannot ensure that its ability to timely and cost
effectively resolve problems associated with the Year 2000 issue will not affect
its operations and business, or expose it to third-party liability.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable
14
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings.
Not Applicable
Item 2. Changes in Securities and Use of Proceeds.
Not Applicable
Item 3. Defaults Upon Senior Securities.
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable
Item 5. Other Information.
Not Applicable
Item 6. Exhibits and Reports on Form 8-K.
The exhibit index filed with this Form 10-Q follows on page 17.
15
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 11, 1999 FOX ENTERTAINMENT GROUP, INC.
By: /s/ David F. DeVoe
______________________________
Name: David F. DeVoe
Title: Chief Financial Officer
16
<PAGE>
Exhibit Index
Exhibit
Number Description
27.1 Financial Data Schedule
17
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<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-1999 JUN-30-1998
<PERIOD-START> JUL-01-1998 JUL-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 212 0
<SECURITIES> 0 0
<RECEIVABLES> 2,656 0
<ALLOWANCES> 0 0
<INVENTORY> 2,712 0
<CURRENT-ASSETS> 7,371 0
<PP&E> 1,198 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 14,149 0
<CURRENT-LIABILITIES> 7,519 0
<BONDS> 0 0
0 0
0 0
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<OTHER-SE> 6,623 0
<TOTAL-LIABILITY-AND-EQUITY> 14,149 0
<SALES> 0 0
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<OTHER-EXPENSES> 66 39
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<INCOME-PRETAX> 270 170
<INCOME-TAX> 108 73
<INCOME-CONTINUING> 162 97
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