-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L9Qth94kvrQ9HmeZGr0EV4TIhGDERbkxd6DbKdy1HE4YtkipyFvmUWD1R5XW5UHV JxmX5T57lC+4b/7JzaEAhg== 0000950130-00-001748.txt : 20000331 0000950130-00-001748.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950130-00-001748 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOX ENTERTAINMENT GROUP INC CENTRAL INDEX KEY: 0001068002 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE PRODUCTION [7812] IRS NUMBER: 954066193 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 001-14595 FILM NUMBER: 585384 BUSINESS ADDRESS: STREET 1: 1211 AVE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10036 BUSINESS PHONE: 2128527000 MAIL ADDRESS: STREET 1: 1211 AVE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10036 10-Q/A 1 FORM 10-Q/A FOR PERIOD ENDED 09/30/1999 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 -------------------- FORM 10-Q/A AMENDMENT NO. 1 --------------- -------------------- {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 95-4066193 (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 March 1, 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. ================================================================================ FOX ENTERTAINMENT GROUP, INC. FORM 10-Q TABLE OF CONTENTS ----------------- Page ---- 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..................................... 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 Item 6. Exhibits and reports on Form 8-K................................ 15 Signature.................................................................... 16 Exhibit Index................................................................ 17 FOX ENTERTAINMENT GROUP, INC. UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (in millions except per share amounts)
For the three months ended September 30, ------------------------------------------ 1999 1998 ------------- -------------- 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 outstanding 714 548 ============= ============== The accompanying notes are an integral part of these unaudited consolidated financial statements.
1 FOX ENTERTAINMENT GROUP, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (in millions)
September 30, June 30, 1999 1999 --------------- ------------- (unaudited) (audited) 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 =============== ============= The accompanying notes are an integral part of these unaudited consolidated financial statements.
2 FOX ENTERTAINMENT GROUP, INC. UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (in millions)
For the three months ended September 30, ------------------------------------- 1999 1998 ------------- ----------- Operating Activities: 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 $ - ============= =========== The accompanying notes are an integral part of these unaudited consolidated financial statements.
3 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 2000 presentation. 4 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 has revised its disclosure to report its activities in five 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 Stations, which principally consists of the operation of broadcast television stations; Television Broadcast Network, which principally consists of the broadcasting of network programming; Other Television Businesses, which represents other broadcast television related activities ; and Cable Network Programming, which principally consists of the production and licensing of programming distributed in the United States and Canada, through cable television systems and direct broadcast satellite ("DBS") operators and professional sports team ownership. The television related segments operate primarily in the United States and Canada. The previously reported television segment has been revised to reflect three separate reportable segments as follows: 1) Television Stations; 2) Television Broadcast Network; and 3) Other Television. This presentation more closely reflects the Company's internal management structure. The segment information for the three months ended September 30, 1998 has been revised for comparative purposes. 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 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 Other Television segment. The segment information for the three months ended September 30, 1998 has been restated for comparative purposes. 5 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. FOX ENTERTAINMENT GROUP, INC. NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Note 3 - Segment Information (Continued)
For the three months ended September 30, ------------------------------------ 1999 1998 -------------- --------------- REVENUES Filmed Entertainment................................................... $ 789 $1,062 Television Stations.................................................... 357 313 Television Broadcast Network........................................... 332 301 Other Television Businesses............................................ 21 36 Cable Network Programming.............................................. 302 90 -------------- --------------- $ 1,801 $ 1,802 ============== =============== OPERATING INCOME (LOSS) Filmed Entertainment................................................... $ 49 $ 125 Television Stations.................................................... 113 97 Television Broadcast Network........................................... 15 3 Other Television Businesses............................................ - 6 Cable Network Programming.............................................. (3) (29) -------------- --------------- Total Operating Income.......................................... 174 202 Interest expense, net................................................... (62) (65) Equity in losses of affiliates.......................................... (36) (42) Minority interest in operating profit................................... (1) - -------------- --------------- Income before income taxes.................................... $ 75 $ 95 ============== =============== September 30, June 30, --------------- --------------- 1999 1999 --------------- --------------- TOTAL ASSETS Filmed Entertainment................................................... $ 4,273 $ 4,233 Television Stations.................................................... 6,503 6,216 Television Broadcast Network........................................... 1,058 934 Other Television Businesses............................................ 54 51 Cable Network Programming.............................................. 3,771 944 Investments in equity affiliates....................................... 1,518 785 --------------- --------------- $ 17,177 $ 13,163 =============== ===============
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. 6 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. 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:
September 30, June 30, 1999 1999 ----------------------- (unaudited) (in millions) ----------------------- 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 ====== ======
7 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 five 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 Stations, which principally consists of the operation of broadcast television stations; Television Broadcast Network, which principally consists of the broadcasting of network programming; Other Television, which represents other broadcast television related activities; 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 8 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, 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 three television segments derive 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 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 Segments and Cable Network Programming. Expenses of the Television segments 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 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:
Three months ended -------------------------------- September 30, -------------------------------- 1999 1998 Change --------------- --------------- -------------- (Dollars in Millions) Revenues: Filmed Entertainment............................................. $ 789 $1,062 $(273) Television Stations............................................ 357 313 44 Television Broadcast Network................................... 332 301 31 Other Television Businesses.................................... 21 36 (15) Cable Network Programming........................................ 302 90 212 ------------------------------------------------- Total Revenues....................................................... $1,801 $1,802 $ (1) ================================================= Operating Income (Loss): Filmed Entertainment............................................. $ 49 $ 125 $ (76) Television Stations............................................ 113 97 16 Television Broadcast Network................................... 15 3 12 Other Television Businesses.................................... - 6 (6) 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 Stations............................................ 160 139 21 Television Broadcast Network................................... 20 7 13 Other Television Businesses.................................... - 8 (8) Cable Network Programming........................................ 38 (15) 53 ------------------------------------------------- Total Operating Income Before Depreciation and Amortization (1)...................... $ 280 $ 273 $ 7 =================================================
(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 10 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 affecte d. 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 include 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, combined revenues of the television related segments 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 operating income in the Television Stations segment 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. The Television Broadcast Network segment's earnings increased $12 million over the prior year primarily due to the new economic arrangement with its affiliates and an increase in advertising revenue stemming from the broadcast of Major League Baseball's All-Star Game and 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 Other 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 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. 11 Net cash flows used in operating activities during the three months ended September 30, 1999 were $506 million as compared to $29 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 $121 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. Net cash flows provided by financing activities were $760 million and $226 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. 12 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 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. 13 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. 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 14 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. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk. Not Applicable. Part II. Other Information Item 1. 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, on July 15, 1999, in connection with the acquisition of the remaining 50% of Fox Sports Networks, LLC. 15 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: March 29, 2000 FOX ENTERTAINMENT GROUP, INC. By: /s/ David F. DeVoe ------------------- Name: David F. DeVoe Title: Chief Financial Officer 16 Exhibit Index Exhibit Number Description 27.1 Financial Data Schedule 17 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000,000 3-MOS 3-MOS JUN-30-2000 JUN-30-1999 JUL-01-1999 JUL-01-1998 SEP-30-1999 SEP-30-1998 180 121 0 0 1,943 1,756 0 0 0 0 0 0 1,392 1,321 0 0 17,177 13,163 9,035 6,494 0 0 0 0 0 0 8 7 8,130 6,661 17,177 13,163 0 0 1,801 1,802 0 0 1,739 1,737 0 0 0 0 62 65 75 95 32 38 0 0 0 0 0 0 0 0 43 57 0.06 0.10 0.06 0.10
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