<PAGE>
- ------------------------------------------------------------------------------
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 September 30, 1999.
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 November 1, 1999, 176,559,834 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.
- -------------------------------------------------------------------------------
<PAGE>
FOX ENTERTAINMENT GROUP, INC.
FORM 10-Q
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Unaudited Consolidated Condensed Statements of Operations for the three months
ended September 30, 1999 and 1998................................................................. 1
Consolidated Condensed Balance Sheets at September 30, 1999 (unaudited) and
at June 30,1999 (audited)......................................................................... 2
Unaudited Consolidated Condensed Statements of Cash Flows for the three months
ended September 30, 1999 and 1998................................................................. 3
Notes to the Unaudited Consolidated Condensed Financial Statements................................. 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................................ 8
Signature................................................................................................. 16
Exhibit Index............................................................................................. 17
</TABLE>
<PAGE>
FOX ENTERTAINMENT GROUP, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in millions except per share amounts)
<TABLE>
<CAPTION>
For the three months ended
September 30,
-------------------------------------------------
1999 1998
--------------------- ---------------------
<S> <C> <C>
Revenues $ 1,801 $ 1,802
Expenses:
Operating 1,297 1,344
Selling, general and administrative 224 185
Depreciation and amortization 106 71
--------------------- ---------------------
Operating income 174 202
--------------------- ---------------------
Other expense:
Interest expense, net (62) (65)
Equity in losses of affiliates (36) (42)
Minority interest in operating profit (1) --
--------------------- ---------------------
Income before income taxes 75 95
Income tax expense (32) (38)
-------------------- --------------------
Net income $ 43 $ 57
==================== ====================
Basic and diluted earnings per share $ 0.06 $ 0.10
===================== =====================
Basic and diluted weighted average
number of common equivalent shares 714 548
outstanding ===================== =====================
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
condensed financial statements.
1
<PAGE>
FOX ENTERTAINMENT GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in millions, except per share data)
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
------------------------ ------------------------
(unaudited) (audited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 180 $ 121
Accounts receivable, net 1,943 1,756
Filmed entertainment and television programming costs, net 3,330 2,621
Investments in equity affiliates 1,543 785
Property and equipment, net 1,392 1,321
Intangible assets, net 8,015 5,818
Other assets and investments 774 741
------------------------ ------------------------
Total assets $17,177 $13,163
======================== ========================
LIABILITIES
Accounts payable and accrued liabilities $ 1,846 $ 1,682
Participations, residuals and royalties payable 1,074 1,321
Television programming rights payable 905 566
Borrowings 888 53
Deferred income taxes 994 975
Deferred revenue and other liabilities 530 508
------------------------ ------------------------
6,237 5,105
Due to intercompany affiliates 2,798 1,389
------------------------ ------------------------
Total liabilities 9,035 6,494
------------------------ ------------------------
Minority Interest 4 1
SHAREHOLDERS' EQUITY
Class A Common stock, $.01 par value per share; 1,000,000,000
authorized; 176,559,834 and 124,800,000 issued and outstanding
at September 30, 1999 and June 30, 1999, respectively. 2 1
Class B Common stock, $.01 par value per share; 650,000,000
authorized; 547,500,000 issued and outstanding at September 30,
1999 and June 30, 1999 6 6
Paid-in capital 8,023 6,599
Retained earnings and other comprehensive income 107 62
------------------------ ------------------------
Total shareholders' equity 8,138 6,668
------------------------ ------------------------
Total liabilities and shareholders' equity $17,177 $13,163
======================== ========================
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
condensed financial statements.
2
<PAGE>
FOX ENTERTAINMENT GROUP, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in millions)
<TABLE>
<CAPTION>
For the three months ended
September 30,
-----------------------------------------
1999 1998
----------------- -----------------
Operating Activities:
<S> <C> <C>
Net income $ 43 $ 57
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 106 71
Equity in losses of affiliates 36 42
Change in operating assets and liabilities, net of acquisition:
Accounts receivable and other assets (54) (80)
Filmed entertainment and television programming costs, net (539) (305)
Accounts payable and accrued liabilities 49 337
Participations, residuals and royalties payable and other (147) (151)
liabilities
----------------- -----------------
Net cash used in operating activities (506) (29)
----------------- -----------------
Investing Activities:
Cash acquired 63 -
Purchases of property and equipment, net of acquisition (52) (68)
Investments in equity affiliates, net of acquisition (182) (46)
Other investments (24) (7)
----------------- -----------------
Net cash used in investing activities (195) (121)
----------------- -----------------
Financing Activities:
Borrowings 55 78
Repayment of borrowings (704) (84)
Advances from affiliates, net 1,409 232
----------------- -----------------
Net cash provided by financing activities 760 226
----------------- -----------------
Net increase in cash and cash equivalents 59 76
Cash and cash equivalents, beginning of period 121 101
------------------- -----------------
Cash and cash equivalents, end of period $ 180 $ 177
=================== =================
Supplemental information on business acquired:
Fair value of assets acquired $ 3,249 $ -
Less: liabilities assumed (1,887) -
Stock issued (1,425) -
------------------- -----------------
Net cash acquired $ 63 $ -
=================== =================
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
condensed financial statements.
3
<PAGE>
FOX ENTERTAINMENT GROUP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED 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.
On November 11, 1998, the Company consummated an initial public offering through
the issuance and sale of 124,800,000 shares of Class A Common Stock. Prior to
the initial public offering, The News Corporation Limited ("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. As of
September 30, 1999, News Corporation's equity and voting interest in the Company
was 82.76% and 97.8%, respectively.
The financial statements prior to November 11, 1998 were presented on a combined
basis. The financial statements presented subsequent to November 11, 1998 are
consolidated to reflect the reorganization. For reporting purposes, the
financial statements for all periods prior to November 11, 1998 are collectively
referred to as consolidated 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 the Company been a separate, stand-alone entity during all the periods
presented.
The accompanying unaudited consolidated 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 unaudited
consolidated condensed financial statements. Operating results for the interim
period presented is not necessarily indicative of the results that may be
expected for the fiscal year ending June 30, 2000.
These interim unaudited consolidated condensed financial statements and notes
thereto should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's Form 10-K filed with the
Securities and Exchange Commission on September 27, 1999.
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
consolidated 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 September 30, 1999 and
1998 was $45 million and $57 million, respectively. Total comprehensive income
includes net income and currency translation adjustments of $2 million for the
three months ended September 30, 1999. There were no adjustments that affected
total comprehensive income for the quarter ended September 30, 1998.
Certain prior year amounts have been reclassified to conform with the fiscal
1999 presentation.
4
<PAGE>
FOX ENTERTAINMENT GROUP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 2 - Acquisition
In July 1999, News Corporation acquired substantially all of Liberty Media
Corporation's ("Liberty") 50% interest in Fox/Liberty Networks, LLC and
Fox/Liberty Ventures, LLC. In exchange for its interest, Liberty received
approximately 51.8 million News Corporation ADRs (representing 207.1 million
preferred limited voting ordinary shares of News Corporation) valued at $1.425
billion.
Upon consummation of this transaction, News Corporation transferred the acquired
interests to the Company in exchange for 51,759,834 shares of the Company 's
Class A Common shares valued at $1.425 billion. This transfer to the Company
increased News Corporation's equity interest to 82.76% from 81.44% while its
voting interest remained at 97.8%. Concurrent with this transaction, the
Company repaid approximately $678 million of Fox/Liberty Networks, LLC's
outstanding bank debt. The repayment of this bank debt was funded through
additional advances from its affiliates. Fox/Liberty Networks, LLC was
subsequently renamed Fox Sports Networks, LLC ("Fox Sports Net"). The
acquisition has been accounted for as a purchase business combination. The
Company has performed a preliminary purchase price allocation and will finalize
this allocation during fiscal 2000.
Note 3 - Segment Information
The Company operates in three business 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
entertainment media, primarily in the United States and Canada and Europe, and
the production of original television programming, in the United States and
Canada; Television, which principally consists of the distribution of network
programming, the operation of broadcast television stations and production and
distribution of certain television programming in the United States and Canada;
and Cable Network Programming, which principally consists of professional sports
team ownership, the production and licensing of programming distributed in the
United States and Canada, through cable television systems and direct broadcast
satellite ("DBS") operators.
In connection with the acquisition of News Corporation's interests in Fox Sports
Net, as described in Note 2, the Company reorganized its business segments. The
segments were reorganized to reflect the Company's internal management structure
subsequent to the acquisition. The most significant change was the addition of
Fox Sports Net and the Los Angeles Dodgers and certain other cable related
properties to the Cable Network Programming business segment. The Los Angeles
Dodgers and certain other cable related properties were previously included in
the Television segment. The segment information for the three months ended
September 30, 1998 has been restated for comparative purposes.
The Company's reportable 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 operating income.
5
<PAGE>
FOX ENTERTAINMENT GROUP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 3 - Segment Information (Continued)
<TABLE>
<CAPTION>
For the three months ended
September 30,
------------------------------------------------------
1999 1998
------------------------ -----------------------
<S> <C> <C>
REVENUES
Filmed Entertainment................................................... $ 789 $1,062
Television............................................................. 710 650
Cable Network Programming.............................................. 302 90
------------------------ -----------------------
$1,801 $1,802
======================== =======================
</TABLE>
<TABLE>
<CAPTION>
OPERATING INCOME
<S> <C> <C>
Filmed Entertainment................................................... $ 49 $125
Television............................................................. 128 106
Cable Network Programming.............................................. (3) (29)
------------------------ -----------------------
$174 $202
======================== =======================
</TABLE>
<TABLE>
<CAPTION>
September 30, June 30,
------------------------ -----------------------
1999 1999
------------------------ -----------------------
<S> <C> <C>
TOTAL ASSETS
Filmed Entertainment................................................... $ 4,273 $ 4,233
Television............................................................. 7,615 7,201
Cable Network Programming.............................................. 3,771 944
Investments in equity affiliates....................................... 1,518 785
------------------------ -----------------------
$17,177 $13,163
======================== =======================
</TABLE>
Equity in losses of affiliates is principally Cable Network Programming
entities. Other expense and income tax expense are not allocated to segments as
they are not under the control of the segment management. There is no material
reliance on any single customer. Revenues from any individual foreign country
were not material in the periods presented.
Note 4 - 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 September 30, 1999 was approximately $9.2 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 2000 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.
6
<PAGE>
FOX ENTERTAINMENT GROUP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 4 - Guarantees of News Corporation Debt (Continued)
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 5 - Filmed Entertainment and Television Programming Costs
Filmed entertainment and television programming costs consisted of the
following:
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
-----------------------
(unaudited)
(in millions)
-----------------------
<S> <C> <C>
Filmed entertainment costs:
Released, less amortization......................................................... $1,138 $1,030
Completed, not released............................................................. 190 169
In process.......................................................................... 725 696
Television programming costs, less amortization......................................... 1,277 726
------ ------
$3,330 $2,621
====== ======
</TABLE>
7
<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. (the "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
are 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 (SEC file no. 333-61515) 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 other documents
filed by the Company with the Securities and Exchange Commission. This section
should be read in conjunction with the unaudited consolidated 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 unaudited consolidated 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 consolidated 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 unaudited consolidated condensed financial
statements to be reasonable. The consolidated financial information prior to the
reorganization 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, which principally consists of the
broadcasting of network programming, the operation of broadcast television
stations and the production and distribution of certain syndicated television
programming to broadcast television stations; 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 and professional sports team ownership. The Company's
interests in certain cable network programming and related ventures, including
Fox Family Worldwide, Inc. and International Sports Programming Partners, are
included in equity in losses 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 the broadcast
television networks and the number of its television series licensed in off-
network syndication. Theatrical release dates are determined by several factors,
8
<PAGE>
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. The Television segment derives revenues principally from the sale
of advertising time. Generally, advertising time is sold to national advertisers
by Fox Broadcasting Company ("FOX") and to national "spot" and local advertisers
by its group of 22 owned and operated television broadcast stations (the "Fox
Television Stations") in their respective markets. The sale of advertising time
is affected by 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 a
significant portion of its 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. Operating 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. Selling, general and administrative expenses include
salaries, employee benefits, rent and other routine overhead expenses.
Television and Cable Network Programming. Expenses of the Television segment
and the Cable Network Programming segment include operating expenses related to
acquiring programming and rights to programming, as well as selling, general and
administrative expenses. Operating expenses typically include production and
technical expenses related to operating the technical facilities of the
broadcaster or cable network. Selling, general and administrative expenses
include all promotional expenses related to improving the market visibility and
awareness of the broadcaster or cable network and sales commissions paid to the
in-house sales force involved in the sale of advertising.
9
<PAGE>
Results of Operations - Three months ended September 30, 1999 vs. Three months
ended September 30, 1998
The following table sets forth the Company's operating results, by segment, for
the three months ended September 30, 1999 as compared to the three months ended
September 30, 1998:
<TABLE>
<CAPTION>
Three months ended
--------------------------------
September 30,
--------------------------------
1999 1998 Change
--------------- --------------- --------------
<S> <C> <C> <C>
(Dollars in Millions)
Revenues:
Filmed Entertainment................................................ $ 789 $1,062 $(273)
Television.......................................................... 710 650 60
Cable Network Programming........................................... 302 90 212
-------------------------------------------------
Total Revenues........................................................ $1,801 $1,802 $ (1)
=================================================
Operating Income (Loss):
Filmed Entertainment................................................ $ 49 $ 125 $ (76)
Television.......................................................... 128 106 22
Cable Network Programming........................................... (3) (29) 26
-------------------------------------------------
Total Operating Income............................................... 174 202 (28)
Interest expense, net................................................. (62) (65) 3
Equity in losses of affiliates........................................ (36) (42) 6
Minority interest in operating profit................................. (1) - (1)
Income before income taxes............................................ 75 95 (20)
Income tax expense.................................................... (32) (38) 6
-------------------------------------------------
Net Income............................................................ $ 43 $ 57 $ (14)
=================================================
Other Data:
Operating Income (Loss) Before Depreciation and Amortization(1):
Filmed Entertainment................................................ $ 62 $ 134 $ (72)
Television.......................................................... 180 154 26
Cable Network Programming........................................... 38 (15) 53
-------------------------------------------------
Total Operating Income Before
Depreciation and Amortization (1)...................... $ 280 $ 273 $ 7
=================================================
</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.
10
<PAGE>
Filmed Entertainment. For the first quarter of fiscal 2000, revenues decreased
26%, operating income decreased 61% and operating income before depreciation and
amortization decreased 54% compared to the corresponding period of the preceding
fiscal year. The decrease in revenues and operating income is attributable to
the fact that the prior year period included the revenues and profits from the
foreign theatrical and domestic video sales of Titanic, one of the most
successful films of all time, and the strong theatrical performances of There's
Something About Mary and Dr. Dolittle. The current quarter contained no major
domestic theatrical releases but did included the revenues and profits from the
international theatrical performance of Star Wars: Episode I and the domestic
video and cable release of There's Something About Mary, which were partially
offset by disappointing results related to Lake Placid and Brokedown Palace. In
addition, Twentieth Century Fox Television experienced a decline in revenues
compared to the first quarter of the prior fiscal year due to the non-recurrence
of certain domestic television syndication revenue.
Television. For the first quarter of fiscal 2000, revenues increased 9% from
the corresponding period of the preceding fiscal year, operating income
increased by 21% and operating income before depreciation and amortization
increased by 17%. The first quarter Fox Television Stations operating income
increased 14% as compared to the corresponding period in the preceding year,
primarily reflecting an increase in market growth and market share due to the
non-recurrence of the General Motors strike and strong spending by e-commerce
companies. FOX's earnings increased over the prior year primarily due to the
new economic arrangement with FOX affiliates and an increase in advertising
revenue stemming from the broadcast of Major League Baseball's All-Star Game,
the 51st Annual Emmy Awards.
Cable Network Programming. In connection with the acquisition of 50% of Fox
Sports Networks, LLC ("Fox Sports Net"), the Company changed the composition of
this segment. This segment now includes the Los Angeles Dodgers and other cable
related properties, which were previously included in the Television segment, as
well as Fox Sports Net. Prior year amounts reflect the new segment composition.
The revenues reported during the first quarter reflect an increase of $212
million, a reduction in operating losses of $26 million and a $53 million
increase in operating income before depreciation and amortization compared to
the corresponding period of the preceding fiscal year. These significant
increases primarily related to the first time inclusion of the consolidated
results of Fox Sports Net as well as a narrowing of losses at the Fox News
Channel. The Fox News Channel continues to expand its distribution and is
currently in 43 million homes.
Equity in losses of affiliates. In the first quarter of fiscal 2000, equity in
losses of affiliates decreased to $36 million from $42 million in the
corresponding period of the preceding fiscal year. The decrease in equity in
losses of affiliates was due to the absence of net losses from Fox Sports Net,
which are consolidated in the current year.
Income tax expense. Income tax expense for the first quarter of fiscal 2000
decreased to $32 million from $38 million in the corresponding period of the
preceding year. The decrease was primarily due to the decrease in income before
income taxes. The effective tax rate for the quarter was 43% compared to 40% in
the corresponding period of the preceding fiscal year. The higher effective tax
rate is primarily due to an increase in non-deductible amortization of
intangiles related to the Fox Sports Net acquisition.
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 three months ended
September 30, 1999 were $506 million as compared to $46 million in the
corresponding period of the preceding fiscal year. The increase was primarily
attributable to a decrease in participations, residuals and royalties payable
combined with an increase in payments for filmed entertainment and television
programming costs. Increased payments to participants, principally relating to
Star Wars Episode I, caused the decline in these liabilities. The increase in
filmed entertainment and television programming costs is related to the
acquisition of the programming rights for the Fox Television Stations related to
3rd Rock from the Sun and The Drew Carey Show.
Net cash flows used in investing activities were $195 million and $123 million
during the three months ended September 30, 1999 and 1998, respectively. The
increase was primarily attributable to investments of approximately $125 million
in Fox Family Worldwide and other investments.
11
<PAGE>
Net cash flows provided by financing activities were $760 million and $245
million during the three months ended September 30, 1999 and 1998, respectively.
The increase was primarily due to advances from affiliates used to fund
operating and investing activities for the period. In connection with the
acquisition of Fox Sports Net, borrowings of approximately $1,478 million were
assumed by the Company. There are certain covenants related to this debt that,
among other things, limit distributions by Fox Sports Net to the Company.
During the quarter, approximately $678 million of these borrowings were repaid.
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 September 30, 1999 was approximately $9.2 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.
Year 2000
The Company, like most large companies, depends on many different computer
systems and other chip-based devices for the continuing conduct of its business.
Many of the computer systems and chip-based devices in use today may be unable
to correctly process data or may not operate at all after December 31, 1999
because those systems recognize the year within a date only by the last two
digits. Some programs may interpret the year "00" as 1900, instead of 2000,
causing errors in calculations or the value "00" may be considered invalid by
the computer program, causing the system to fail.
The Company's exposure to potential Year 2000 ("Y2K") problems exists in two
general areas: technological operations within the Company's sole control and
technological operations dependent in some way on one or more third parties.
These technological operations include information technology ("IT") systems and
non-IT systems, including those with embedded technology, hardware and software.
The Company has substantially completed the process of identifying and assessing
potential Y2K difficulties in its technological operations, including IT
applications, IT technology and support, desktop hardware and software, non-IT
systems and important third party operations, and distinguishing those that may
affect business continuity from those that may not. An item is considered to
have a business continuity impact on the Company if its Y2K-related failure
would significantly impair the ability of one of its major business units to (1)
produce, market and distribute the products or services that generate
significant revenues for that business, (2) meet its obligations to pay its
employees, artists, vendors and other obligations or (3) meet its obligations
under regulatory requirements. Based upon its efforts to date, the Company
believes that all critical IT and non-IT systems will remain up and running
after January 1, 2000.
Most of the Company's potential Y2K exposures, however, are in the area of
technological operations dependent on one or more third parties. The financial
impact on the Company of such third parties not achieving high levels of Y2K
readiness cannot be estimated with any degree of accuracy. In the area of
business continuity, technological operations dependent in some way on one or
more third parties, the situation is much less in the Company's ability to
predict or control. In addition, many of the Company's businesses are dependent
on third parties that are
12
<PAGE>
themselves heavily dependent on technology. In some cases, third party
dependence is on vendors of technology who are themselves working towards
solutions to Y2K problems. In other cases, third party dependence is on
suppliers of products or services that are themselves computer-intensive. The
Company has included in its "mission critical" inventory significant service
providers, vendors, suppliers and customers that are believed to be critical to
business operations. The Company is in various stages of attempting to ascertain
the state of Y2K readiness of significant third parties through questionnaires,
interviews, on-site visits, industry group participation and other available
means. The ability to continue to deliver services to customers is dependent,
like all large companies, on the continued functioning, domestically and
internationally, of basic, heavily computerized services such as banking,
telephony, power, and various distribution mechanisms ranging from the mail,
railroads and trucking to high-speed data and broadcast transmissions. The
Company is taking steps to attempt to ensure that the third parties on which it
is heavily reliant are Y2K ready, but cannot predict the likelihood of such
readiness nor the direct or indirect costs of non-compliance by those third
parties or of securing such services from alternate third parties.
Structure of Year 2000 Program. The Company has been focused on the Y2K issue
for several years since its capital spending policy required that significant
investments made in technology in the periods prior to December 31, 1999 would
be for systems that would be operational after December 31, 1999.
Operating Division Project Teams are the focal point for ensuring that each
division maintains business and technical stability in all Y2K areas, and that
all major issues are properly communicated. The Boards of Directors of the
Company and News Corporation are made aware of the actions being taken to
address Y2K issues.
Definition of Readiness. An item is defined as "Year 2000 Ready" when, after
having undergone an internal review process and having been tested using a set
of representative dates, the risk of material failure due to a date processing
problem is assessed as insignificant.
Area of Focus and Progress. The Company will continue to proceed through its
various phases of assessment, strategy, detailed planning, implementation,
testing and management.
The Company recognizes that system failures resulting from the Y2K problem could
adversely affect operations and financial resources in all of its business
segments. For example:
In the Filmed Entertainment segment, Y2K failures could interfere with critical
systems in such areas as the production, duplication and distribution of motion
picture and home video product.
In the Television and Cable Network Programming segments, at-risk operations
include satellite transmission and communication systems. Y2K failures in such
systems could adversely affect television networks including cable services and
owned and operated television stations.
The Project Teams are focusing their attention in the areas described above as
well as in the following major areas:
Core Computer Systems. Information technology systems account for much of the
Y2K work and include all computer systems and technology managed by the
Company's divisions. All core systems have been assessed, plans are in place,
and work is being undertaken to rectify, test and implement changes where
required. Major IT vendors and suppliers have been contacted as to their Y2K
readiness and their deliverables factored into our plans.
Office and Desktop Computer Systems. Work is in progress to assess and
remediate all office and desktop computer systems, some of which are stand-alone
business unit systems. This includes personal computers, LAN server hardware,
software, and operating and data systems.
Premises. An inventory of all-critical broadcast equipment, office equipment and
building infrastructure has been completed for all major sites.
13
<PAGE>
Goods and Services Providers. The Company recognizes the importance of the
supply chain to its operations. Key suppliers, including technology providers,
are being contacted to assess their Y2K readiness.
Customers. The Company is communicating with many of its customers to share
information and understand Y2K risks and how to manage those risks.
Contingency Planning. The Company believes that it has established an effective
program to resolve all significant Y2K issues in its sole control in a timely
manner. However, the Company has not yet completed all phases of its program
and is depending on third parties whose progress is not within its control.
Therefore, the Y2K projects include procedures to identify and assess the
business interruption that might occur as a result of the dependence on third
parties. Vendors, suppliers, service suppliers, customers and governmental
bodies have been identified and significant progress has been made to ascertain
their stage of Y2K readiness. In the event we do not complete any of the planned
additional remediation prior to the Year 2000 or if third parties on which our
businesses rely experience significant issues related to Y2K, we could
experience significant difficulty in producing and delivering products and
services and conducting our business in the Year 2000 as we have in the past.
The amount of potential liability and lost revenue that might result because of
such difficulty cannot be reasonably estimated at this time.
The Company has been focusing its efforts on identifying and remediating its Y2K
exposures and is developing and will have tested where practical contingency
plans in the event it does not successfully complete all phases of its Y2K
program. These contingency plans include, but are not limited to identification
of alternative suppliers, vendors and service providers.
Potential Costs. The Company has been focused on the Y2K issue for several
years since its capital spending policy required that significant investments
made in technology in the periods prior to December 31, 1999 would be for
systems that would be operational after December 31, 1999. To date, the Company
has incurred approximately $18 million in costs related to its Y2K
readiness program which has been funded from its operating cash flow. The
Company currently estimates that the total costs of its Y2K readiness program
will not exceed $22.5 million. The total cost estimate is based on the current
assessment of the Company's Y2K readiness needs and is subject to change as the
program progresses. These costs have not all been incremental, but rather
reflect redeployment of internal resources from other activities. The Company
does not expect the activities of the Y2K readiness program to have a material
adverse effect on the ongoing business operations of the Company, although it is
possible that certain maintenance and upgrading processes will be delayed as the
result of the priority being given to the Y2K readiness.
The Company has made forward-looking statements regarding its Y2K Program.
Those statements include: the Company's expectations about when it will be Year
2000 Ready; the Company's expectations about the impact of the Y2K problem on
its ability to continue to operate on and after January 1, 2000; the readiness
of its suppliers and the costs associated with the Y2K program. The Company has
described many of the risks associated with those forward-looking statements
above. However, the Company wishes to caution the reader that there are many
factors that could cause its actual results to differ materially from those
stated in the forward-looking statements. This is especially the case because
many aspects of its Y2K program are outside its control such as the performance
of third-party suppliers. All of these factors make it impossible for the
Company to ensure that it will be able to resolve all Y2K problems in a timely
manner to avoid materially adversely affecting its operations or business or
exposing the Company to third-party liability.
14
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable.
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.
The Company filed a Form 8-K with the Securities and Exchange
Commission related to the acquistion of Fox Sports Networks, LLC on
July 15, 1999.
15
<PAGE>
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: November 10, 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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> JUN-30-2000 JUN-30-1999
<PERIOD-START> JUL-01-1999 JUL-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 180 121
<SECURITIES> 0 0
<RECEIVABLES> 1,943 1,756
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 1,392 1,321
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 17,177 13,163
<CURRENT-LIABILITIES> 9,035 6,494
<BONDS> 0 0
0 0
0 0
<COMMON> 8 7
<OTHER-SE> 8,130 6,661
<TOTAL-LIABILITY-AND-EQUITY> 17,177 13,163
<SALES> 0 0
<TOTAL-REVENUES> 1,801 1,802
<CGS> 0 0
<TOTAL-COSTS> 1,739 1,737
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 62 65
<INCOME-PRETAX> 75 95
<INCOME-TAX> 32 38
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 43 57
<EPS-BASIC> 0.06 0.10
<EPS-DILUTED> 0.06 0.10
</TABLE>
