<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, 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 95-4066193
(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 9, 2000, 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.
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<PAGE>
FOX ENTERTAINMENT GROUP, INC.
FORM 10-Q
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
Part I. Financial Information
Item 1. Financial Statements
<S> <C>
Unaudited Consolidated Condensed Statements of Operations for the three and six
months ended December 31, 1999 and 1998................................................................... 1
Consolidated Condensed Balance Sheets at December 31, 1999 (unaudited) and
at June 30, 1999.......................................................................................... 2
Unaudited Consolidated Condensed Statements of Cash Flows for the six months
ended December 31, 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
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................16
Part II. Other Information.....................................................................................16
Signature......................................................................................................17
Exhibit Index..................................................................................................18
</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 For the six months ended
December 31, December 31,
--------------------------------------- ----------------------------------
1999 1998 1999 1998
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $2,436 $2,555 $4,237 $4,355
------------ ----------- ----------- -----------
Expenses:
Operating 1,853 2,031 3,150 3,376
Selling, general and administrative 264 194 488 377
Depreciation and amortization 107 72 213 143
------------ ----------- ----------- -----------
Operating income 212 258 386 459
------------ ----------- ----------- -----------
Other expense:
Interest expense, net (79) (59) (141) (123)
Equity in earnings (losses) of
affiliates 38 (24) 2 (66)
Minority interest (1) - (2) -
------------ ----------- ----------- -----------
Income before income taxes 170 175 245 270
Income tax expense on a
stand-alone basis (76) (70) (108) (108)
------------ ----------- ----------- -----------
Net income $ 94 $ 105 $ 137 $ 162
============ =========== =========== ===========
Basic and diluted earnings per
share $0.13 $0.17 $0.19 $0.28
============ =========== =========== ===========
Basic and diluted weighted
average number of common
equivalent shares outstanding 724 615 719 581
============ =========== =========== ===========
</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)
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
------------------------ ------------------------
(unaudited) (audited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 142 $ 121
Accounts receivable, net 2,326 1,756
Filmed entertainment and television programming costs, net 3,556 2,621
Investments in equity affiliates 1,557 785
Property and equipment, net 1,408 1,321
Intangible assets, net 7,935 5,818
Other assets and investments 853 741
------------------------ ------------------------
Total assets $17,777 $13,163
======================== ========================
LIABILITIES
Accounts payable and accrued liabilities $ 1,777 $ 1,682
Participations, residuals and royalties payable 1,091 1,321
Television programming rights payable 1,058 566
Borrowings 913 53
Deferred income taxes 1,087 975
Deferred revenue and other liabilities 606 508
------------------------ ------------------------
6,532 5,105
Due to intercompany affiliates 3,010 1,389
------------------------ ------------------------
Total liabilities 9,542 6,494
------------------------ ------------------------
Minority Interest 2 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 December 31, 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 December 31,
1999 and June 30, 1999 6 6
Paid-in capital 8,023 6,599
Retained earnings and other comprehensive income 202 62
------------------------ ------------------------
Total shareholders' equity 8,233 6,668
------------------------ ------------------------
Total liabilities and shareholders' equity $17,777 $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 six months ended
December 31,
--------------------------------------------
1999 1998
------------------- ------------------
Operating Activities:
<S> <C> <C>
Net income $ 137 $ 162
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 213 143
Equity in (earnings) losses of affiliates (2) 66
Change in operating assets and liabilities, net of acquisition:
Accounts receivable and other assets (444) (780)
Filmed entertainment and television programming costs, net (827) (593)
Accounts payable and accrued liabilities 382 563
Participations, residuals and royalties payable and other
liabilities (128) 15
------------------- ------------------
Net cash used in operating activities (669) (424)
------------------- ------------------
Investing Activities:
Cash acquired 63 -
Purchases of property and equipment, net of acquisition (107) (122)
Investments in equity affiliates, net of acquisition (139) (65)
Other investments (116) (111)
------------------- ------------------
Net cash used in investing activities (299) (298)
------------------- ------------------
Financing Activities:
Borrowings 98 99
Repayment of borrowings (730) (199)
Net proceeds from sale of Class A Common Stock - 2,689
Advances from (to) affiliates, net 1,621 (1,756)
------------------- ------------------
Net cash provided by financing activities 989 833
------------------- ------------------
Net increase in cash and cash equivalents 21 111
Cash and cash equivalents, beginning of period 121 101
------------------- ------------------
Cash and cash equivalents, end of period $ 142 $ 212
=================== ==================
Supplemental information on business acquired:
Fair value of assets acquired $3,313 $ -
Cash acquired 63 -
Less: Liabilities assumed 1,951 -
------------------- ------------------
Stock issued $1,425 $ -
=================== ==================
</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. and its subsidiaries (the "Company") are
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
December 31, 1999, News Corporation's equity and voting interest in the Company
was 82.76% and 97.80%, 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 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 and six months ended December 31, 1999
was $95 million and $140 million, respectively. It includes net income and
currency translation adjustments of $1 million and $3 million for the three and
six months ended December 31, 1999, respectively. Total comprehensive income
for the three and six months ended December 31, 1998 was $107 million and $164
million, respectively. For the three and six months ended December 31, 1998,
total comprehensive income includes net income and currency translation
adjustments of $2 million.
Certain prior year amounts have been reclassified to conform to the fiscal 2000
presentation.
4
<PAGE>
FOX ENTERTAINMENT GROUP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 2 - Significant Transactions
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 97.80%. 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 an affiliate. 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.
In November 1999, Fox Kids Europe N.V. ("FKE"), a subsidiary of 49.5% owned
equity affiliate Fox Family Worldwide, Inc. ("FFW") completed an initial public
offering of 22% of FKE ordinary shares. The resulting gain for FFW included in
the Company's equity in earnings (loss) of affiliates and net income was
approximately $61 million and $39 million, respectively.
On January 26, 2000, the Company, News Corporation and certain of their
respective affiliates consummated a transaction with Healtheon/Web Corporation
("Healtheon") and certain of its subsidiaries, pursuant to which the Company,
News Corporation and such affiliates were issued equity securities of Healtheon
representing, in the aggregate, approximately 10.8% of Healtheon's fully diluted
common stock as of that date. In connection with the transaction, the Company
transferred to Healtheon 50% of its interest in the Health Network and agreed to
procure or provide media services, including advertising and promotion. This
transaction will be accounted for in the third fiscal quarter.
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, Canada and Europe, and the
production of original television programming in the United States and Canada;
Television, which principally consists of the broadcasting 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 the production and
licensing of programming distributed through cable television systems and direct
broadcast satellite ("DBS") operators and professional sports team ownership.
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, the Los Angeles Dodgers ("Dodgers") and certain other cable
related properties to the Cable Network Programming business segment. The
Dodgers and certain other cable related properties were previously included in
the Television segment. The segment information for the three and six months
ended December 31, 1998 has been restated for comparative purposes.
5
<PAGE>
FOX ENTERTAINMENT GROUP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 3 - Segment Information (Continued)
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.
<TABLE>
<CAPTION>
(in millions) For the three months ended For the six months ended
December 31, December 31,
---------------------------------- --------------------------------------
1999 1998 1999 1998
------------- -------------- ------------------ --------------
<S> <C> <C> <C> <C>
REVENUES
Filmed Entertainment.................. $ 1,073 $ 1,470 $ 1,862 $ 2,530
Television............................ 1,074 1,034 1,784 1,684
Cable Network Programming............. 289 51 591 141
------------- -------------- ------------------ --------------
$ 2,436 $ 2,555 $ 4,237 $ 4,355
============= ============== ================== ==============
OPERATING INCOME
Filmed Entertainment.................. $ 32 $ 164 $ 81 $ 289
Television............................ 192 132 320 238
Cable Network Programming............. (12) (38) (15) (68)
------------- -------------- ------------------ --------------
$ 212 $ 258 $ 386 $ 459
============= ============== ================== ==============
December 31, June 30,
--------------------------------------
TOTAL ASSETS 1999 1999
------------------ --------------
Filmed Entertainment.................. $ 4,456 $ 4,233
Television............................ 8,031 7,201
Cable Network Programming............. 3,733 944
Investments in equity affiliates...... 1,557 785
------------------ --------------
$ 17,777 $ 13,163
================== ==============
</TABLE>
Investments in equity affiliates are 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's management. The Company does
not materially rely 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 December 31, 1999 was approximately $9.7 billion, which includes
obligations under News Corporation's Exchangeable Trust Originated Preferred
SecuritiesSM 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
6
<PAGE>
FOX ENTERTAINMENT GROUP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 4 - Guarantees of News Corporation Debt (Continued)
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 5 - Filmed Entertainment and Television Programming Costs
Filmed entertainment and television programming costs, net consisted of the
following:
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
------------ --------
(unaudited)
(in millions)
----------------------
<S> <C> <C>
Filmed entertainment costs:
Released, less amortization......................................................... $1,174 $1,030
Completed, not released............................................................. 30 169
In process.......................................................................... 836 696
Television programming costs, less amortization.............................. 1,516 726
------ ------
$3,556 $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 heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations", in the Company's Form 10-K for
the fiscal year ended June 30, 1999, 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, 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. 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, or 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 in the United States and Canada; 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. ("FFW") and International Sports Programming
Partners, are included in equity in earnings (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
8
<PAGE>
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. 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 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 expenses incurred by the Filmed Entertainment
segment include the amortization of filmed entertainment costs (which generally
includes capitalized production, prints and advertising, capitalized overhead
and capitalized interest costs), certain exploitation 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. Operating expenses of the Television
segment and the Cable Network Programming segment include amortization of
television programming costs (which includes acquired sports and entertainment
programming rights) as well as selling, general and administrative expenses.
Selling, general and administrative expenses include salaries, sales
commissions, employee benefits, marketing costs, rent and other routine overhead
expenses.
9
<PAGE>
Results of Operations - Three months ended December 31, 1999 vs. Three months
ended December 31, 1998
The following table sets forth the Company's operating results, by segment, for
the three months ended December 31, 1999 as compared to the three months ended
December 31, 1998:
<TABLE>
<CAPTION>
Three months ended
------------------
December 31,
------------
1999 1998 Change
---------------- --------------- --------------
<S> <C> <C> <C>
(Dollars in Millions)
Revenues:
Filmed Entertainment................................................ $1,073 $1,470 $(397)
Television.......................................................... 1,074 1,034 40
Cable Network Programming........................................... 289 51 238
--------------------------------------------------
Total Revenues........................................................ $2,436 $2,555 $(119)
==================================================
Operating Income (Loss):
Filmed Entertainment................................................ $ 32 $ 164 $(132)
Television.......................................................... 192 132 60
Cable Network Programming........................................... (12) (38) 26
--------------------------------------------------
Total Operating Income................................................ 212 258 (46)
Interest expense, net................................................. (79) (59) (20)
Equity in earnings (losses) of affiliates............................. 38 (24) 62
Minority interest..................................................... (1) - (1)
Income before income taxes............................................ 170 175 (5)
Income tax expense.................................................... (76) (70) (6)
--------------------------------------------------
Net Income............................................................ $ 94 $ 105 $ (11)
==================================================
Other Data:
Operating Income (Loss) Before Depreciation and Amortization (1):
Filmed Entertainment................................................ $ 44 $ 172 $(128)
Television.......................................................... 243 182 61
Cable Network Programming........................................... 32 (24) 56
--------------------------------------------------
Total Operating Income Before Depreciation and Amortization (1)....... $ 319 $ 330 $ (11)
==================================================
</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 second quarter of fiscal 2000, revenues decreased
27%, operating income decreased 80% and operating income before depreciation and
amortization decreased 74% compared to the corresponding period of the preceding
fiscal year. The prior year period included the revenues and profits from the
foreign video sales of Titanic, one of the most successful films of all time,
and the strong international theatrical performances of There's Something About
Mary and Dr. Dolittle. The current quarter contained disappointing results from
the domestic theatrical releases of Anna and the King, Light It Up, Bartok and
Anywhere But Here. These losses were partially offset by contributions from
domestic and international pay television agreements covering available films.
Television. For the second quarter of fiscal 2000, revenues increased 4% from
the corresponding period of the preceding fiscal year, operating income
increased by 45% and operating income before depreciation and amortization
increased by 34%. The second quarter Fox Television Stations operating income
increased 11% as compared to the corresponding period in the preceding year,
primarily due to an increase in market growth, strong advertising spending by e-
commerce companies and the automotive industry. FOX's increase in operating
income over the prior year was primarily due to the absence of the loss
recognized on the broadcast of Major League Baseball's ("MLB") World Series
reported in the corresponding period of the prior year, higher pricing of MLB
Playoff games, the new economic arrangement with FOX affiliates and an increase
in advertising revenue. These favorable elements were partially offset by
increased programming costs, higher abandonment costs associated with cancelled
shows and higher license fees incurred for returning series.
Cable Network Programming. In connection with the acquisition of the remaining
50% interest in Fox Sports Networks, LLC ("Fox Sports Net"), the Company changed
the composition of this segment. This segment now includes the Los Angeles
Dodgers ("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
second quarter reflect an increase of $238 million, an increase in operating
income of $26 million and a $56 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 44.6 million homes, up from 37.2
million a year ago.
Equity in earnings (losses) of affiliates. Equity in earnings of affiliates
improved in the quarter to earnings of $38 million from an equity loss in
affiliates of $24 million last year primarily due to the significant increase in
contributions from FFW as a result of a gain related to the Fox Kids Europe N.V.
("FKE") initial public offering and improved results at Fox Sports Net's cable
networks. The FFW gain included in the Company's equity in earnings of
affiliates and net income was approximately $61 million and $39 million,
respectively.
Income tax expense. Income tax expense for the second quarter of fiscal 2000
amounted to $76 million compared to $70 million in the corresponding period of
the preceding year. The increase was primarily due an increase in the effective
tax rate. The effective tax rate for the quarter increased to approximately 44%
compared to 40% in the corresponding period of the preceding fiscal year,
primarily due to an increase in non-deductible intangible amortization related
to the Fox Sports Net acquisition.
11
<PAGE>
Results of Operations - Six months ended December 31, 1999 vs. Six months ended
December 31, 1998
The following table sets forth the Company's operating results, by segment, for
the six months ended December 31, 1999 as compared to the six months ended
December 31, 1998:
<TABLE>
<CAPTION>
Six months ended
----------------
December 31,
------------
1999 1998 Change
--------------- --------------- --------------
<S> <C> <C> <C>
(Dollars in Millions)
Revenues:
Filmed Entertainment................................................ $1,862 $2,530 $(668)
Television.......................................................... 1,784 1,684 100
Cable Network Programming........................................... 591 141 450
-------------------------------------------------
Total Revenues........................................................ $4,237 $4,355 $(118)
=================================================
Operating Income (Loss):
Filmed Entertainment................................................ $ 81 $ 289 $(208)
Television.......................................................... 320 238 82
Cable Network Programming........................................... (15) (68) 53
-------------------------------------------------
Total Operating Income................................................ 386 459 (73)
Interest expense, net................................................. (141) (123) (18)
Equity in earnings (losses) of affiliates............................. 2 (66) 68
Minority interest..................................................... (2) - (2)
Income before income taxes............................................ 245 270 (25)
Income tax expense.................................................... (108) (108) -
-------------------------------------------------
Net Income............................................................ $ 137 $ 162 $ (25)
=================================================
Other Data:
Operating Income (Loss) Before Depreciation and Amortization (1):
Filmed Entertainment................................................ $ 106 $ 306 $(200)
Television.......................................................... 423 335 88
Cable Network Programming........................................... 70 (39) 109
-------------------------------------------------
Total Operating Income Before Depreciation and Amortization (1)....... $ 599 $ 602 $ (3)
=================================================
</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.
12
<PAGE>
Filmed Entertainment. For the first six months of fiscal 2000, revenues
decreased 26%, operating income decreased 72% and operating income before
depreciation and amortization decreased 65% compared to the corresponding period
of the preceding fiscal year. The current six-month period contained
disappointing results from the domestic theatrical releases of Anna and the
King, Brokedown Palace and Light It Up. Partially offsetting these disappointing
results were the revenues and profits from the international theatrical
performance of Star Wars, Episode I: The Phantom Menace, the domestic video and
cable release of There's Something About Mary and contributions from domestic
and international pay television agreements covering available films. In
addition, 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.
Television. For the first six months of fiscal 2000, revenues increased 6% from
the corresponding period of the preceding fiscal year, operating income
increased by 34% and operating income before depreciation and amortization
increased by 26%. Operating income for Fox Television Stations increased 14% as
compared to the corresponding period in the preceding year, primarily due to an
increase in market growth, strong advertising spending by e-commerce companies
and the automotive industry. FOX's earnings increased over the prior year
primarily due to the absence of the loss recognized on the broadcast of MLB's
World Series in the prior year, higher pricing on MLB Playoff games during the
current period, the new economic arrangement with FOX affiliates, an increase in
advertising revenue stemming from the broadcasts of MLB's All-Star Game and the
51st Annual Emmy Awards and the non-recurrence of a loss taken in the prior year
on two broadcast runs of Jurassic Park: The Lost World. These favorable
elements were partially offset by increased prime time programming costs, higher
abandonment costs from cancelled shows, higher license fees from returning
series and costs for newly acquired syndication programming at the Fox
Television Stations.
Cable Network Programming. In connection with the acquisition of the remaining
50% of Fox Sports Net, the Company changed the composition of this segment. This
segment now includes the 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 six months of fiscal 2000 reflect an increase of $450 million, an
increase in operating income of $53 million and a $109 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 44.6
million homes, up from 37.2 million a year ago.
Equity in earnings (losses) of affiliates. Equity in earnings of affiliates
improved in the first six months of fiscal 2000 to earnings of $2 million from
equity in losses of affiliates of $66 million last year primarily due to the
significant increase in contributions from FFW as a result of a gain related to
the FKE initial public offering and improved results at Fox Sports Net's cable
networks. The FFW gain included in the Company's equity in earnings of
affiliates and net income was approximately $61 million and $39 million,
respectively.
Income tax expense. Income tax expense for the first six months of fiscal 2000
remained flat at $108 million compared to the corresponding period of the
preceding year, despite a decrease in pre-tax income. The effective tax rate
for the period increased to 44% 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 intangible amortization related to the Fox Sports Net
acquisition.
13
<PAGE>
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, 1999 were $669 million as compared to $424 million in the corresponding
period of the preceding fiscal year. The increase was primarily attributable to
the seasonal increase in receivables from November television sweeps and
National Football League programming, increased inventory related to acquisition
of new syndicated programming for the Fox Television Stations and sports rights
payments, and increased payments to participants, principally relating to Star
Wars, Episode I: The Phantom Menace.
Net cash flows used in investing activities during the six months ended December
31, 1999 included additional investments in Southwest Sports Group and certain
Fox Sports Net associated companies which were partially offset by the net cash
acquired in acquisition.
Net cash flows provided by financing activities were $989 million and $833
million during the six months ended December 31, 1999 and 1998, respectively.
The increase was primarily due to advances from News Corporation used to fund
operating and investing activities for the period. In connection with the
acquisition of the remaining 50% interest in Fox Sports Net, borrowings of
approximately $1.5 billion were assumed by the Company. There are certain
covenants related to outstanding indebtedness that, among other things, limit
distributions by Fox Sports Net to the Company. During the six months ending
December 31, 1999, approximately $730 million of 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 December 31, 1999 was approximately $9.7 billion, which includes
obligations under News Corporation's Exchangeable Trust Originated Preferred
SecuritiesSM 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.
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 traditionally used 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.
To date, the Company is not aware of any material Year 2000 ("Y2K") problems
within the Company, or with any third party upon which the Company depends in
any significant way, that will result in any material impact on the Company's
results of operations and financial position. The Company, however, will
continue to monitor
14
<PAGE>
computer systems and other chip-based devices to ensure that Y2K issues, if any,
are detected and corrected in a timely manner.
The Company's exposure to potential 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 identified the potential impacts of Y2K and distinguished 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 not experience any
significant Y2K issues.
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 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 themselves heavily dependent on technology. 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 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 has developed practical contingency plans in the event significant
Y2K issues are experienced. The contingency plans include, but are not limited
to identification of alternative suppliers, vendors and service providers. The
Company believes that it has established an effective program to resolve all
significant Y2K issues in its sole control in a timely manner. The Company
recognizes that system failures resulting from the Y2K problem could adversely
affect operations and financial resources in all of its business segments. The
amount of potential liability and lost revenue that might result because of such
difficulty cannot be reasonably estimated at this time.
Through December 1999, the Company has incurred approximately $21 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 $23 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 has made forward-looking statements regarding its Y2K Program.
Those statements include: the Company's expectations about future Year 2000
issues; the Company's expectations about the impact of the Y2K problem on its
ability to continue to operate after January 1, 2000; the impact of Y2K on 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.
15
<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.
On November 23, 1999, the Company held its annual meeting of
stockholders. At this meeting, the Board of Directors was elected and
the appointment of Arthur Andersen, LLP as independent public
accountants of the Company for the fiscal year ended June 30, 2000 was
ratified. Shares were voted for the election of the directors of the
Company as follows: for K. Rupert Murdoch, 5,634,030,714 shares voted
for and 1,839,096 shares withheld; for Peter Chernin, 5,634,050,153
shares voted for and 1,819,657 shares withheld; for Chase Carey,
5,634,049,953 shares voted for and 1,819,857 shares withheld; for
David F. DeVoe, 5,634,050,218 shares voted for and 1,819,592 shares
withheld; for Arthur M. Siskind, 5,633,637,218 shares voted for and
2,232,592 shares withheld; for Christos M. Cotsakos, 5,635,222,281
shares voted for and 647,529 shares withheld; and for Laura D'Andrea
Tyson, 5,635,313,695 shares voted for and 556,115 shares withheld.
There were 5,635,722,130 shares voted in favor of the appointment of
Arthur Andersen, LLP as the independent public accountants of the
Company with 62,987 shares voted against and 84,693 abstentions.
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 18.
The Company filed a Form 8-K on December 7, 1999, in connection with
the series of related transactions to be entered into by the Company,
The News Corporation Limited and Healtheon/WebMD.
16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 9, 2000 FOX ENTERTAINMENT GROUP, INC.
By: /s/ David F. DeVoe
-------------------
Name: David F. DeVoe
Title: Chief Financial Officer
17
<PAGE>
Exhibit Index
Exhibit
Number Description
27.1 Financial Data Schedule
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-2000 JUN-30-1999
<PERIOD-START> JUL-01-1999 JUL-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 142 121
<SECURITIES> 0 0
<RECEIVABLES> 2326 1756
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 1408 1321
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 17,777 13,163
<CURRENT-LIABILITIES> 9542 6494
<BONDS> 0 0
0 0
0 0
<COMMON> 8 7
<OTHER-SE> 8225 6661
<TOTAL-LIABILITY-AND-EQUITY> 17,777 13,163
<SALES> 0 0
<TOTAL-REVENUES> 4237 4355
<CGS> 0 0
<TOTAL-COSTS> 3851 3896
<OTHER-EXPENSES> (2) 66
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 141 123
<INCOME-PRETAX> 245 270
<INCOME-TAX> 108 108
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 137 162
<EPS-BASIC> 0.19 0.28
<EPS-DILUTED> 0.19 0.28
</TABLE>
