10-Q 1 d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended December 31, 2009

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 001-32352

 

 

NEWS CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware   26-0075658

(State or Other Jurisdiction

of Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

1211 Avenue of the Americas, New York, New York   10036
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s telephone number, including area code (212) 852-7000

 

 

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x    Accelerated filer  ¨     Non-accelerated filer  ¨    Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of January 29, 2010, 1,821,687,852 shares of Class A Common Stock, par value $0.01 per share, and 798,520,953 shares of Class B Common Stock, par value $0.01 per share, were outstanding.

 

 

 


Table of Contents

NEWS CORPORATION

FORM 10-Q

TABLE OF CONTENTS

 

         Page

Part I. Financial Information

  

Item 1.

 

Financial Statements

  
 

Unaudited Consolidated Statements of Operations for the three and six months ended December  31, 2009 and 2008

   3
 

Unaudited Consolidated Balance Sheets at December 31, 2009 and June 30, 2009

   4
 

Unaudited Consolidated Statements of Cash Flows for the six months ended December 31, 2009 and 2008

   5
 

Notes to the Unaudited Consolidated Financial Statements

   6

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   40

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

   60

Item 4.

 

Controls and Procedures

   62
Part II. Other Information   

Item 1.

 

Legal Proceedings

   62

Item 1A.

 

Risk Factors

   62

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

   65

Item 3.

 

Defaults Upon Senior Securities

   65

Item 4.

 

Submission of Matters to a Vote of Security Holders

   66

Item 5.

 

Other Information

   66

Item 6.

 

Exhibits

   66

Signature

   67

 

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NEWS CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

 

     For the three months
ended December 31,
    For the six months
ended December 31,
 
          2009               2008               2009               2008       

Revenues

   $ 8,684      $ 7,871      $ 15,883      $ 15,380   

Operating expenses

     (5,630     (5,161     (10,035     (9,732

Selling, general and administrative

     (2,043     (1,588     (3,478     (3,269

Depreciation and amortization

     (299     (283     (596     (579

Impairment and restructuring charges

     (10     (8,465     (30     (8,473

Equity earnings (losses) of affiliates

     58        30        90        (329

Interest expense, net

     (269     (231     (514     (452

Interest income

     16        20        41        60   

Other, net

     (86     (98     (98     206   
                                

Income (loss) before income tax expense

     421        (7,905     1,263        (7,188

Income tax (expense) benefit

     (137     1,514        (382     1,333   
                                

Net income (loss)

     284        (6,391     881        (5,855

Less: Net income attributable to noncontrolling interests

     (30     (26     (56     (47
                                

Net income (loss) attributable to News Corporation stockholders

   $ 254      $ (6,417   $ 825      $ (5,902
                                

Dividends declared per share

   $ —        $ —        $ 0.06      $ 0.06   

Weighted average shares:

        

Basic

     2,620        2,614        2,618        2,612   

Diluted

     2,622        2,614        2,620        2,612   

Net income (loss) attributable to News Corporation stockholders per share:

        

Basic

   $ 0.10      $ (2.45   $ 0.32      $ (2.26

Diluted

   $ 0.10      $ (2.45   $ 0.31      $ (2.26

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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NEWS CORPORATION

UNAUDITED CONSOLIDATED BALANCE SHEETS

(in millions, except share and per share amounts)

 

     At
December 31,
2009
   At
June 30,
2009

Assets:

     

Current assets:

     

Cash and cash equivalents

   $ 7,266    $ 6,540

Receivables, net

     7,516      6,287

Inventories, net

     2,995      2,477

Other

     558      532
             

Total current assets

     18,335      15,836
             

Non-current assets:

     

Receivables

     235      282

Investments

     3,162      2,957

Inventories, net

     3,506      3,178

Property, plant and equipment, net

     6,220      6,245

Intangible assets, net

     8,893      8,925

Goodwill

     14,465      14,382

Other non-current assets

     1,317      1,316
             

Total assets

   $ 56,133    $ 53,121
             

Liabilities and Equity:

     

Current liabilities:

     

Borrowings

   $ 1,840    $ 2,085

Accounts payable, accrued expenses and other current liabilities

     5,983      5,279

Participations, residuals and royalties payable

     1,440      1,388

Program rights payable

     1,124      1,115

Deferred revenue

     806      772
             

Total current liabilities

     11,193      10,639
             

Non-current liabilities:

     

Borrowings

     13,435      12,204

Other liabilities

     2,980      3,027

Deferred income taxes

     3,330      3,276

Redeemable noncontrolling interests

     365      343

Commitments and contingencies

     

Equity:

     

Class A common stock (1)

     18      18

Class B common stock (2)

     8      8

Additional paid-in capital

     17,283      17,354

Retained earnings and accumulated other comprehensive income

     7,092      5,844
             

Total News Corporation stockholders’ equity

     24,401      23,224

Noncontrolling interests

     429      408
             

Total equity

     24,830      23,632
             

Total liabilities and equity

   $ 56,133    $ 53,121
             

 

(1)

Class A common stock, $0.01 par value per share, 6,000,000,000 shares authorized, 1,821,526,826 shares and 1,815,449,495 shares issued and outstanding, net of 1,776,859,314 and 1,776,865,809 treasury shares at par at December 31, 2009 and June 30, 2009, respectively.

(2)

Class B common stock, $0.01 par value per share, 3,000,000,000 shares authorized, 798,520,953 shares issued and outstanding, net of 313,721,702 treasury shares at par at December 31, 2009 and June 30, 2009.

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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NEWS CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

 

     For the six months
ended December 31,
 
     2009     2008  

Operating activities:

    

Net income (loss)

   $ 881      $ (5,855

Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:

    

Depreciation and amortization

     596        579   

Amortization of cable distribution investments

     45        42   

Equity (earnings) losses of affiliates

     (90     329   

Cash distributions received from affiliates

     152        140   

Impairment charges (net of tax of $1.7 billion)

     —          6,737   

Other, net

     98        (206

Change in operating assets and liabilities, net of acquisitions:

    

Receivables and other assets

     (1,172     (519

Inventories, net

     (880     (858

Accounts payable and other liabilities

     934        (784
                

Net cash provided by (used in) operating activities

     564        (395
                

Investing activities:

    

Property, plant and equipment, net of acquisitions

     (388     (591

Acquisitions, net of cash acquired

     (93     (462

Investments in equity affiliates

     (139     (34

Other investments

     (64     (33

Proceeds from sale of investments, other non-current assets and business disposals

     36        973   
                

Net cash used in investing activities

     (648     (147
                

Financing activities:

    

Borrowings

     1,010        47   

Repayment of borrowings

     (75     (255

Issuance of shares

     21        4   

Dividends paid

     (183     (177

Purchase of subsidiary shares from noncontrolling interest

     —          (11

Other, net

     2        18   
                

Net cash provided by (used in) financing activities

     775        (374
                

Net increase (decrease) in cash and cash equivalents

     691        (916

Cash and cash equivalents, beginning of period

     6,540        4,662   

Exchange movement of opening cash balance

     35        (125
                

Cash and cash equivalents, end of period

   $ 7,266      $ 3,621   
                

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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NEWS CORPORATION

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1—Basis of Presentation

News Corporation, a Delaware corporation, with its subsidiaries (together “News Corporation” or the “Company”), is a diversified global media company, which manages and reports its businesses in eight segments: Filmed Entertainment, Television, Cable Network Programming (which now includes STAR Group Limited (“STAR”) see Note 15—Segment Information), Direct Broadcast Satellite Television (“DBS”), Integrated Marketing Services (formerly Magazines and Inserts, see Note 15—Segment Information), Newspapers and Information Services, Book Publishing and Other.

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) 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 necessary for a fair presentation have been reflected in these unaudited consolidated financial statements. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2010.

These interim unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2009 as filed with the Securities and Exchange Commission (“SEC”) on August 12, 2009 (the “2009 Form 10-K”).

The consolidated financial statements include the accounts of News Corporation and its subsidiaries. Intercompany transactions and balances have been eliminated. Equity investments in which the Company exercises significant influence but does not exercise control and is not the primary beneficiary are accounted for using the equity method. Investments in which the Company is not able to exercise significant influence over the investee are designated as available-for-sale if readily determinable fair values are available. If an investment’s fair value is not readily determinable, the Company accounts for its investment under the cost method.

The preparation of consolidated financial statements in conformity with GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated 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.

Certain fiscal 2009 amounts have been reclassified to conform to the fiscal 2010 presentation.

The Company maintains a 52-53 week fiscal year ending on the Sunday nearest to each reporting date. As such, all references to December 31, 2009 and December 31, 2008 relate to the three and six month periods ended December 27, 2009 and December 28, 2008, respectively. For convenience purposes, the Company continues to date its financial statements as of December 31.

 

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NEWS CORPORATION

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

In accordance with Accounting Standards Codification (“ASC”) 220 “Comprehensive Income,” total comprehensive income (loss) for the Company consisted of the following:

 

     For the three months
ended December 31,
    For the six months
ended December 31,
 
         2009             2008             2009             2008      
     (in millions)  

Net income (loss), as reported

   $ 284      $ (6,391   $ 881      $ (5,855

Other comprehensive income:

        

Foreign currency translation adjustments

     67        (1,461     459        (2,606

Unrealized holding gains (losses) on securities, net of tax

     13        (17     57        (35

Benefit plan adjustments

     3        (12     12        (10
                                

Total comprehensive income (loss)

     367        (7,881     1,409        (8,506
                                

Less: net income attributable to noncontrolling interests (1)

     (30     (26     (56     (47

Less: foreign currency translation adjustments attributable to noncontrolling interests (1)

     5        27        —          40   
                                

Comprehensive income (loss) attributable to News Corporation stockholders

   $ 342      $ (7,880   $ 1,353      $ (8,513
                                

 

(1)

Includes amounts relating to noncontrolling interests classified as equity and redeemable noncontrolling interests classified as temporary equity.

Recent Accounting Pronouncements

On July 1, 2009, the Company adopted the provisions of ASC 805 “Business Combinations” (“ASC 805”), which significantly changed the Company’s accounting for business combinations on a prospective basis in a number of areas, including the treatment of contingent consideration, preacquisition contingencies, transaction costs and restructuring costs. In addition, under ASC 805, changes in an acquired entity’s deferred tax assets and uncertain tax positions after the measurement period are included in income tax expense.

On July 1, 2009, the Company adopted the new provisions of ASC 810 “Consolidation” (“ASC 810”), which changed the accounting and reporting for minority interests. As a result of the adoption of these provisions, minority interests have been recharacterized as noncontrolling interests and classified as a component of equity, with the exception of redeemable noncontrolling interests. In accordance with ASC 810, the presentation and disclosure requirements for existing noncontrolling interests were applied retrospectively. All other requirements of these provisions were applied prospectively.

The following table summarizes changes in equity (in millions):

 

    For the three months ended December 31,  
    2009     2008  
    News Corporation
Stockholders
  Noncontrolling
Interests
    Total Equity     News Corporation
Stockholders
    Noncontrolling
Interests
    Total Equity  

Balance, beginning of period

  $ 24,053   $ 426      $ 24,479      $ 27,820      $ 642      $ 28,462   

Net income (loss)

    254     26 (a)      280        (6,417     21 (a)      (6,396

Other comprehensive income (loss)

    88     (2 )(b)      86        (1,463     (18 )(b)      (1,481

Issuance of shares

    1     —          1        9        —          9   

Other

    5     (21 )(c)      (16     48        (15 )(c)      33   
                                             

Balance, end of period

  $ 24,401   $ 429      $ 24,830      $ 19,997      $ 630      $ 20,627   
                                             

 

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NEWS CORPORATION

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

    For the six months ended December 31,  
    2009     2008  
    News Corporation
Stockholders
    Noncontrolling
Interests
    Total Equity     News Corporation
Stockholders
    Noncontrolling
Interests
    Total Equity  

Balance, beginning of period

  $ 23,224      $ 408      $ 23,632      $ 28,623      $ 631      $ 29,254   

Net income (loss)

    825        49 (a)      874        (5,902     40 (a)      (5,862

Other comprehensive income (loss)

    528        3 (b)      531        (2,611     (26 )(b)      (2,637

Issuance of shares

    70        —          70        75        —          75   

Dividends declared

    (157     —          (157     (157     —          (157

Other

    (89     (31 )(c)      (120     (31     (15 )(c)      (46
                                               

Balance, end of period

  $ 24,401      $ 429      $ 24,830      $ 19,997      $ 630      $ 20,627   
                                               

 

(a)

Net income attributable to noncontrolling interests excludes $4 million and $5 million for the three months ended December 31, 2009 and 2008, respectively, and $7 million for the six months ended December 31, 2009 and 2008 relating to redeemable noncontrolling interests which are reflected in temporary equity.

(b)

Other comprehensive income (loss) attributable to noncontrolling interests excludes $(3) million and $(9) million for the three months ended December 31, 2009 and 2008, respectively, and $(3) million and $(14) million for the six months ended December 31, 2009 and 2008, respectively, relating to redeemable noncontrolling interests.

(c)

Other activity attributable to noncontrolling interests excludes $22 million and $(148) million for the three months ended December 31, 2009 and 2008, respectively, and $18 million and $(134) million for the six months ended December 31, 2009 and 2008, respectively, relating to redeemable noncontrolling interests.

On July 1, 2009, the Company adopted the new provisions of ASC 350 “Intangibles—Goodwill and Other” (“ASC 350”), which set forth the factors to be considered in developing renewal or extension assumptions used to determine the useful life of a recognizable intangible asset and is intended to improve the consistency between the useful life of a recognizable intangible asset and the period of expected cash flows used to measure the fair value of that asset. This adoption changed the Company’s determination of useful lives for intangible assets on a prospective basis.

On July 1, 2009, the Company adopted the additional provisions of ASC 820 “Fair Value Measurement and Disclosure” (“ASC 820”), which apply to non-recurring fair value measurements of non-financial assets and liabilities, such as measurement of potential impairments of goodwill, other intangible assets, other long-lived assets and non-financial assets held by a pension plan. These additional provisions also apply to the fair value measurements of non-financial assets acquired and liabilities assumed in business combinations. The Company’s adoption of the additional provisions of ASC 820 did not have a material effect on the Company’s consolidated financial statements.

In August 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009-05 “Fair Value Measurements and Disclosures (Topic 820)—Measuring Liabilities at Fair Value” (“ASU 2009-05”). ASU 2009-05 amends Subtopic 820-10 “Fair Value Measurements and Disclosures—Overall” and provides clarification on the methods to be used in circumstances in which a quoted price in an active market for the identical liability is not available.

 

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NEWS CORPORATION

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

In June 2010, the Company will adopt the new provisions of ASC 715 “Compensation—Retirement Benefits,” which expand the disclosure requirements of defined benefit plans. The expanded disclosure requirements include: (i) investment policies and strategies; (ii) the major categories of plan assets; (iii) the inputs and valuation techniques used to measure plan assets; (iv) the effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period; and (v) significant concentrations of risk within plan assets.

Note 2—Acquisitions, Disposals and Other Transactions

Fiscal 2010 Transactions

In December 2009, the Company entered into an agreement to sell its Photobucket subsidiary, a web-based provider of photo- and video-sharing services, to a mobile photo uploading platform in exchange for an equity interest in the acquirer. A loss of approximately $29 million on this transaction was included in other, net in the unaudited consolidated statements of operations for the three and six months ended December 31, 2009. As a result of this transaction, the Company’s interest in the acquirer, which is not material, was recorded at fair value and is now accounted for under the equity method of accounting.

Fiscal 2009 Transactions

Acquisitions

In October 2008, the Company purchased VeriSign Inc.’s minority share of the Jamba joint venture for approximately $193 million in cash, increasing the Company’s interest to 100%.

In January 2009, the Company and Asianet TV Holdings Private Limited (“Asianet”) formed a venture (“Star Jupiter”) to provide general entertainment channels in southern India. The Company paid approximately $235 million in cash and assumed net debt of approximately $20 million for a controlling interest in four of Asianet’s channels which were combined with one of the Company’s existing channels. The Company has a majority interest in this new venture and, accordingly, began consolidating the results in January 2009.

The aforementioned acquisitions were all accounted for in accordance with ASC 805. The excess purchase price that has been allocated or has been preliminarily allocated to goodwill is not being amortized for all of the acquisitions noted above in accordance with ASC 350. Where the allocation of the excess purchase price is not final, the amount allocated to goodwill is subject to change upon completion of final valuations of certain assets and liabilities. A future reduction in goodwill for additional value to be assigned to identifiable finite-lived intangible assets or tangible assets could reduce future earnings as a result of additional amortization.

Disposals

In July 2008, the Company completed the sale of eight of its owned-and-operated FOX network affiliated television stations (the “Stations”) for approximately $1 billion in cash. The Stations included: WJW in Cleveland, OH; KDVR in Denver, CO; KTVI in St. Louis, MO; WDAF in Kansas City, MO; WITI in Milwaukee, WI; KSTU in Salt Lake City, UT; WBRC in Birmingham, AL; and WGHP in Greensboro, NC. In connection with the transaction, the Stations entered into new affiliation agreements with the Company to receive network programming and assumed existing contracts with the Company for syndicated programming. No portion of the sale proceeds were allocated to the new network affiliation agreements as they were negotiated at fair value and are consistent with similar pre-existing contracts with other third party-owned FOX affiliated stations. In addition, the Company recorded a gain of approximately $232 million in other, net in the unaudited consolidated statements of operations during the six months ended December 31, 2008.

 

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NEWS CORPORATION

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

In November 2008, the Company sold its ownership stake in a Polish television broadcaster to the remaining shareholders. The Company recognized a net loss of approximately $100 million on the disposal which was included in other, net in the unaudited consolidated statements of operations during the three and six months ended December 31, 2008.

Other transactions

In February 2009, the Company, two newly incorporated subsidiaries of funds advised by Permira Advisers LLP (the “Permira Newcos”) and the Company’s then majority-owned, publicly-held subsidiary, NDS Group plc (“NDS”), completed a transaction pursuant to which all issued and outstanding NDS Series A ordinary shares, including those represented by American Depositary Shares traded on The NASDAQ Stock Market, were acquired for per-share consideration of $63 in cash (the “NDS Transaction”). As part of the NDS Transaction, approximately 67% of the NDS Series B ordinary shares held by the Company were exchanged for $63 per share in a mix of approximately $1.5 billion in cash, which included $780 million of cash retained upon the deconsolidation of NDS, and a $242 million vendor note. Immediately prior to the consummation of the NDS Transaction, the Company owned approximately 72% of NDS through its ownership of all of the outstanding NDS Series B ordinary shares and, accordingly, included the results of NDS in the consolidated financial statements of the Company. As a result of the NDS Transaction, NDS ceased to be a public company and the Permira Newcos and the Company now own approximately 51% and 49% of NDS, respectively. The Company’s remaining interest in NDS is accounted for under the equity method of accounting. A gain of $1.2 billion was recognized on the sale of the Company’s interest in NDS and was included in other, net in the unaudited consolidated statements of operations in the third quarter of fiscal 2009.

Note 3—Receivables, net

Receivables, net consisted of:

 

     At December 31,
2009
    At June 30,
2009
 
     (in millions)  

Total receivables

   $ 9,136      $ 7,727   

Allowances for returns and doubtful accounts

     (1,385     (1,158
                

Total receivables, net

     7,751        6,569   

Less: current receivables, net

     (7,516     (6,287
                

Non-current receivables, net

   $ 235      $ 282   
                

Note 4—Restructuring Programs

In fiscal 2009, certain of the markets in which the Company’s businesses operate experienced a weakening in the economic climate which adversely affected advertising revenue and other consumer driven spending. As a result, a number of the Company’s businesses implemented a series of operational actions to address the Company’s cost structure, including the Company’s digital media properties, which were restructured to align resources more closely with business priorities. This restructuring program included significant job reductions, both domestically and internationally, to enable the businesses to operate on a more cost effective basis. In conjunction with this project, the Company also eliminated excess facility requirements. Several other businesses of the Company implemented similar plans in fiscal 2009, including its U.K. and Australian newspapers, HarperCollins, MyNetworkTV and the Fox Television Stations. During the fiscal year ended June 30, 2009, the Company recorded restructuring charges in accordance with ASC 420 “Exit or Disposal Cost Obligations” of approximately $312 million which were included in impairment and restructuring charges in the unaudited consolidated statements of operations.

 

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NEWS CORPORATION

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

During the three and six months ended December 31, 2009, the Company recorded additional restructuring charges of approximately $10 million and $30 million, respectively. The restructuring charges for the three months ended December 31, 2009 reflect approximately $10 million recorded at the Other segment related to a restructuring program at the Company’s Fox Mobile Entertainment division and accretion on facility termination obligations. The restructuring charges for the six months ended December 31, 2009 reflect an $18 million charge related to the sales and distribution operations of the STAR channels and a $12 million charge at the Other segment related to the restructuring program at the Company’s Fox Mobile Entertainment division and accretion on facility termination obligations.

Changes in the program liabilities were as follows:

 

     For the three months ended December 31, 2009  
     One time
termination
benefits
    Facility
related costs
    Other costs     Total  
     (in millions)  

Beginning of period

   $ 37      $ 166      $ 8      $ 211   

Additions

     5        3        2        10   

Payments

     (14     (7     (2     (23
                                

End of period

   $ 28      $ 162      $ 8      $ 198   
                                

 

     For the six months ended December 31, 2009  
     One time
termination
benefits
    Facility
related costs
    Other costs     Total  
     (in millions)  

Beginning of period

   $ 65      $ 164      $ 8      $ 237   

Additions

     18        10        2        30   

Payments

     (55     (12     (2     (69
                                

End of period

   $ 28      $ 162      $ 8      $ 198   
                                

The Company expects to record an additional $69 million of restructuring charges principally related to accretion on facility termination obligations through fiscal 2021. At December 31, 2009, restructuring liabilities of approximately $73 million and $125 million were included in the unaudited consolidated balance sheets in other current liabilities and other liabilities, respectively. Facility related costs of $125 million included in other liabilities and additional accretion are expected to be paid through fiscal 2021.

Dow Jones

As a result of the Dow Jones & Company, Inc. (“Dow Jones”) acquisition in fiscal 2008, the Company established and approved plans to integrate the acquired operations into the Newspapers and Information Services segment. The cost to implement these plans consists of separation payments for certain Dow Jones executives under the change in control plan Dow Jones had established prior to the acquisition, non-cancelable lease commitments and lease termination charges for leased facilities that have or will be exited and other contract termination costs associated with the restructuring activities.

 

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Changes in the plan liabilities were as follows (in millions):

 

     For the three months
ended December 31,
    For the six months
ended December 31,
 
         2009             2008             2009             2008      
     (in millions)  

Beginning of period

   $ 107      $ 168      $ 126      $ 180   

Additions

     —          25        —          40   

Payments

     (9     (22     (28     (49
                                

End of period

   $ 98      $ 171      $ 98      $ 171   
                                

The balance of the plan liabilities as of December 31, 2009 primarily includes facility related costs.

Note 5—Inventories, net

The Company’s inventories were comprised of the following:

 

     At December 31,
2009
    At June 30,
2009
 
     (in millions)  

Programming rights

   $ 3,532      $ 3,038   

Books, DVDs, paper and other merchandise

     427        361   

Filmed entertainment costs:

    

Films:

    

Released (including acquired film libraries)

     600        533   

Completed, not released

     46        137   

In production

     874        664   

In development or preproduction

     74        73   
                
     1,594        1,407   
                

Television productions:

    

Released (including acquired libraries)

     643        589   

Completed, not released

     —          —     

In production

     302        256   

In development or preproduction

     3        4   
                
     948        849   
                

Total filmed entertainment costs, less accumulated amortization (a)

     2,542        2,256   
                

Total inventories, net

     6,501        5,655   

Less: current portion of inventory, net (b)

     (2,995     (2,477
                

Total noncurrent inventories, net

   $ 3,506      $ 3,178   
                

 

(a)

Does not include $475 million and $491 million of net intangible film library costs as of December 31, 2009 and June 30, 2009, respectively, which are included in intangible assets subject to amortization in the unaudited consolidated balance sheets.

(b)

Current inventory as of December 31, 2009 and June 30, 2009 was comprised of programming rights ($2,600 million and $2,149 million, respectively), books, DVDs, paper and other merchandise.

 

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Note 6—Investments

The Company’s investments were comprised of the following:

 

        Ownership
Percentage
    At December 31,
2009
  At June 30,
2009
              (in millions)

Equity method investments:

   

British Sky Broadcasting Group plc (1)

  U.K. DBS operator   39   $ 962   $ 877

Sky Deutschland AG (1)

  German pay-TV operator   40 %(2)      311     437

Sky Network Television Ltd. (1)

  New Zealand media company   44     336     305

NDS

  Digital technology company   49     258     232

Other equity method investments

    various        827     707

Fair value of available-for-sale investments

    various        237     150

Other investments

    various        231     249
               
      $ 3,162   $ 2,957
               

 

(1)

The market value of the Company’s investment in British Sky Broadcasting Group plc (“BSkyB”), Sky Deutschland AG (“Sky Deutschland”) and Sky Network Television Ltd. was $6,142 million, $622 million and $590 million at December 31, 2009, respectively.

(2)

During the first quarter of fiscal 2010, the Company entered into a series of purchase transactions resulting in the Company increasing its interest in Sky Deutschland. (See Fiscal Year 2010 Transactions below for further discussion)

The cost basis, unrealized gains, unrealized losses and fair market value of available-for-sale investments are set forth below:

 

     At December 31,
2009
   At June 30,
2009
 
     (in millions)  

Cost basis of available-for-sale investments

   $ 37    $ 38   

Accumulated gross unrealized gain

     200      113   

Accumulated gross unrealized loss

     —        (1
               

Fair value of available-for-sale investments

   $ 237    $ 150   
               

Deferred tax liability

   $ 70    $ 39   
               

Fiscal Year 2010 Transactions

During the first quarter of fiscal 2010, the Company acquired additional shares of Sky Deutschland, increasing its ownership from approximately 38% at June 30, 2009 to approximately 40% at December 31, 2009.

In December 2009, the Company announced that it had entered into an agreement with Sky Deutschland to subscribe to up to 49 million in newly registered shares of Sky Deutschland pursuant to a capital increase. Sky Deutschland completed this capital increase in January 2010 and, accordingly, the Company purchased 49 million newly registered shares of Sky Deutschland at a price of €2.25 per new share for an aggregate cost of approximately $158 million. As a result, News Corporation’s stake in Sky Deutschland increased to approximately 45%.

 

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Fiscal Year 2009 Transactions

Investment in Sky Deutschland

During fiscal 2009, the Company entered into an agreement with Sky Deutschland and the bank syndicate of Sky Deutschland to provide Sky Deutschland with a new financing structure and additional capital through two equity capital increases. As a result of the rights issues and other transactions, the Company invested an aggregate of approximately $300 million in shares of Sky Deutschland during fiscal 2009 and, as of June 30, 2009, the Company had an approximate 38% ownership interest in Sky Deutschland.

Impairment of Investments in Sky Deutschland

On October 2, 2008, Sky Deutschland announced guidance on its earnings before interest, taxes, depreciation and amortization (“EBITDA”) indicating results substantially below prior guidance for calendar 2008. Sky Deutschland also announced that it had adopted a new classification of subscribers at September 30, 2008. The day after this announcement, Sky Deutschland experienced a significant decline in its market value. As a result of this decline, the Company’s carrying value in Sky Deutschland exceeded its market value based upon Sky Deutschland’s closing share price of €4.38 on October 3, 2008. The Company believed that this decline was not temporary based on the assessment described below and, accordingly, recorded an impairment charge of $422 million representing the difference between the Company’s carrying value and the market value. The impairment charge was included in Equity earnings (losses) of affiliates in the Company’s unaudited consolidated statements of operations during the six months ended December 31, 2008.

In determining if the decline in Sky Deutschland’s market value was other-than-temporary, the Company considered a number of factors: (1) the financial condition, operating performance and near term prospects of Sky Deutschland; (2) the reason for the decline in Sky Deutschland’s fair value; (3) analysts’ ratings and estimates of 12 month share price targets for Sky Deutschland; and (4) the length of time and the extent to which Sky Deutschland’s market value had been less than the carrying value of the Company’s investment.

Other

In August 2008, the Company entered into an agreement providing for the restructuring of the Company’s content acquisition agreements with Balaji Telefilms Ltd (“Balaji”). As part of this restructuring agreement, the Company no longer has representation on Balaji’s board of directors and does not have significant influence in management decisions; therefore, the Company believes that it no longer has the ability to exercise significant influence over Balaji. Accordingly, the Company accounts for its investment in Balaji under the cost method of accounting and the carrying value is adjusted to market value each reporting period as required under ASC 320 “Investments.”

In February 2009, the NDS Transaction was completed, resulting in the Permira Newcos and the Company owning approximately 51% and 49% of NDS, respectively. The Company’s remaining interest in NDS is accounted for under the equity method of accounting. (See Note 2—Acquisitions, Disposals and Other Transactions for further discussion)

Note 7—Fair Value

In accordance with ASC 820, fair value measurements are required to be disclosed using a three-tiered fair value hierarchy which distinguishes market participant assumptions into the following categories: (i) inputs that are quoted prices in active markets (“Level 1”); (ii) inputs other than quoted prices included within Level 1 that

 

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are observable, including quoted prices for similar assets or liabilities (“Level 2”); and (iii) inputs that require the entity to use its own assumptions about market participant assumptions (“Level 3”). Additionally, in accordance with ASC 815 “Derivatives and Hedging” (“ASC 815”), the Company has included additional disclosures about the Company’s derivatives and hedging activities (Level 2).

The table below presents information about financial assets and liabilities carried at fair value on a recurring basis as of December 31, 2009:

 

Description

   Total as of
December 31,
2009
    Fair Value Measurements at Reporting Date Using  
     Quoted Prices in
Active Markets
for Identical
Instruments
(Level 1)
   Significant Other
Observable
Inputs (Level 2)
    Significant
Unobservable
Inputs

(Level 3)
 
     (in millions)  

Assets

         

Available-for-sale securities (1)

   $ 237      $ 237    $ —        $ —     

Liabilities

         

Derivatives (2)

     (12     —        (12     —     

Redeemable noncontrolling interests (3)

     (365     —        —          (365
                               

Total

   $ (140   $ 237    $ (12   $ (365
                               

 

(1)

See Note 6—Investments.

(2)

Represents derivatives associated with the Company’s exchangeable securities and foreign exchange forward contracts designated as hedges and other financial instruments. As of December 31, 2009, fair value of warrants related to the TOPrS of approximately $8 million was included in non-current liabilities. In addition to this amount was the fair value of the foreign exchange forward contracts of approximately $4 million which are recorded in the underlying hedged balances. Cash flows from the settlement of foreign exchange forward contracts (which generally occurs within 12 months from the inception of the contracts) offset cash flows from the underlying hedged item and are included in operating activities in the consolidated statements of cash flows. The Company uses financial instruments designated as cash flow hedges primarily to hedge its limited exposures to foreign currency exchange risks associated with the cost for producing or acquiring films and television programming abroad. The effective changes in fair value of derivatives designated as cash flow hedges are recorded in accumulated other comprehensive income with foreign currency translation adjustments. Amounts are reclassified from accumulated other comprehensive income when the underlying hedged item is recognized in earnings. If derivatives are not designated as hedges, changes in fair value are recorded in earnings.

(3)

The Company accounts for redeemable noncontrolling interests in accordance with ASC 480-10-S99-3A “Distinguishing Liabilities from Equity” because their exercise is outside the control of the Company and, accordingly, has included the fair value of the redeemable noncontrolling interests in the unaudited consolidated balance sheets. The redeemable noncontrolling interests recorded at fair value include put arrangements held by the noncontrolling interests in one of the Company’s majority-owned regional sports networks (“RSN”), in a majority-owned outdoor marketing subsidiary of the Company and in one of the Company’s Asian general entertainment television joint ventures.

The fair value of the redeemable noncontrolling interest in the Company’s RSN was determined by using a discounted EBITDA valuation model, assuming a 9.5% discount rate.

The fair value of the redeemable noncontrolling interest in the majority–owned outdoor marketing subsidiary was determined using a discounted cash flow analysis assuming a 5% terminal growth rate and a 15% discount rate.

The fair value of the redeemable noncontrolling interest in the Asian general entertainment television joint venture was determined using discounted cash flow analysis assuming a multiple of eight times terminal year EBITDA.

 

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The changes in fair value of liabilities classified as Level 3 measurements during the six months ended December 31, 2009 were as follows:

 

     For the six months
ended December 31,
2009
 
      (in millions)  

Beginning of period

   $ (343

Total gains (losses) included in Net income

     (7

Other

     (15
        

End of period

   $ (365 ) 
        

Financial Instruments

The carrying value of the Company’s financial instruments, including cash and cash equivalents, receivables, payables and cost investments, approximates fair value.

The aggregate fair value of the Company’s borrowing at December 31, 2009 was approximately $16.3 billion compared with a carrying value of approximately $15.3 billion and, at June 30, 2009, was approximately $13.5 billion compared with a carrying value of approximately $14.3 billion. Fair value is generally determined by reference to market values resulting from trading on a national securities exchange or in an over-the-counter market.

Concentrations of Credit Risk

Cash and cash equivalents are maintained with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions of reputable credit and, therefore, bear minimal credit risk.

The Company’s receivables do not represent significant concentrations of credit risk at December 31, 2009 or June 30, 2009 due to the wide variety of customers, markets and geographic areas to which the Company’s products and services are sold.

The Company monitors its positions with, and the credit quality of, the financial institutions which are counterparties to its financial instruments. The Company is exposed to credit loss in the event of nonperformance by the counterparties to the agreements. At December 31, 2009, the Company did not anticipate nonperformance by any of the counterparties.

Note 8—Goodwill and Other Intangible Assets

During the six months ended December 31, 2009, the change in the carrying value of goodwill was primarily due to foreign currency translation adjustments. The change in the carrying value of intangible assets during the six months ended December 31, 2009 was primarily due to amortization expense partially offset by foreign currency translation adjustments.

During the second quarter of fiscal 2009, the Company performed an interim impairment review in advance of its annual impairment assessment because the Company believed events had occurred and circumstances had changed that would more likely than not reduce the fair value of the Company’s goodwill and indefinite-lived intangible assets below their carrying amounts. These events included: (a) the decline of the price of the

 

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Company’s Class A common stock, par value $0.01 per share (“Class A Common Stock”), and Class B common stock, par value $0.01 per share (“Class B Common Stock”), below the carrying value of the Company’s stockholders’ equity; (b) the reduced growth in advertising revenues; (c) the decline in the operating profit margins in some of the Company’s advertising-based businesses; and (d) the decline in the valuations of other television stations, newspapers and advertising-based companies as determined by the current trading values of those companies.

As a result of the interim impairment review performed, the Company recorded non-cash impairment charges of approximately $8.4 billion ($6.7 billion, net of tax) in the three and six months ended December 31, 2008. The charges consisted of a write-down of the Company’s indefinite-lived intangible assets (primarily Federal Communications Commission licenses in the Television segment) of $4.6 billion, a write-down of $3.6 billion of goodwill and a write-down of the Newspapers and Information Services segment’s fixed assets of $185 million in accordance with ASC 360 “Property, Plant and Equipment.”

Note 9—Borrowings

On August 25, 2009, News America Incorporated (“NAI”), a 100% owned subsidiary of the Company as defined in Rule 3-10(h) of Regulation S-X, entered into an indenture with the Company, as Guarantor, and The Bank of New York Mellon, as Trustee (the “Indenture”). The following notes were issued pursuant to the Indenture:

Notes due 2020 and 2039

In August 2009, NAI issued $400 million of 5.65% Senior Notes due 2020 and $600 million of 6.90% Senior Notes due 2039. The net proceeds received of approximately $989 million will be used for general corporate purposes.

Other

The Company’s $250 million 6.75% Senior Debentures due January 2038 were puttable, at the option of the holder, to the Company in January 2010. The majority of these debentures were not put to the Company in January 2010 and the outstanding debentures which had been classified as current borrowings as of June 30, 2009 were reclassified as non-current borrowings as of December 31, 2009.

NAI’s 0.75% Senior Exchangeable BUCS (“BUCS”) in the amount of $1,641 million are classified as current borrowings. The holders of the BUCS have the right to tender the BUCS for redemption on March 15, 2010 for payment of the adjusted liquidation preference of the BUCS plus accrued and unpaid distributions and any final period distribution in, at the Company’s election, cash, ordinary shares of BSkyB, Class A Common Stock or any combination thereof. The Company may redeem the BUCS for cash, ordinary shares of BSkyB or a combination thereof in whole or in part, at any time on or after March 20, 2010, at the adjusted liquidation preference of the BUCS plus any accrued and unpaid distributions and any final period distribution thereon. On February 1, 2010, the Company announced that NAI gave notice to holders of the BUCS that any BUCS tendered at the option of the holders on the March 15, 2010 holder redemption date would be redeemed for cash at the specified redemption amount equal to $1,013.48 per BUCS, which represents the amount equal to the adjusted liquidation preference of such BUCS plus an amount equal to any accrued and unpaid distributions and any final period distribution.

 

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Note 10—Equity

Dividends

The Company declared a dividend of $0.06 per share on both the Class A Common Stock and the Class B Common Stock in the three months ended September 30, 2009, which was paid in October 2009 to stockholders of record on September 9, 2009. The total aggregate dividend paid to stockholders in October 2009 was approximately $157 million.

Note 11—Equity-Based Compensation

The following table summarizes the Company’s equity-based compensation transactions:

 

     For the three months
ended December 31,
   For the six months
ended December 31,
         2009            2008            2009            2008    
    

(in millions)

Equity-based compensation

   $ 35    $ 33    $ 80    $ 82
                           

Cash received from exercise of equity-based compensation

   $ —      $ —      $ 21    $ 3
                           

At December 31, 2009, the Company’s total compensation cost related to non-vested stock options, restricted stock units (“RSUs”) and stock appreciation rights not yet recognized for all equity-based compensation plans was approximately $204 million, the majority of which is expected to be recognized over the next three fiscal years. Compensation expense on all equity-based awards is generally recognized on a straight-line basis over the vesting period of the entire award.

Stock options exercised during the six months ended December 31, 2009 and 2008 resulted in the Company’s issuance of approximately 1.8 million and 0.2 million shares of Class A Common Stock, respectively. The intrinsic value of the stock options exercised during the three and six months ended December 31, 2009 and 2008 were not material.

During the six months ended December 31, 2009, the Company issued 5.6 million RSUs. These RSUs will be settled in shares of Class A Common Stock upon vesting, except for approximately 0.9 million RSUs that will be settled in cash. RSUs granted to executive directors and certain awards granted to employees in certain foreign locations are settled in cash. At December 31, 2009 and June 30, 2009, the liability for cash-settled RSUs was $39 million and $52 million, respectively.

During the six months ended December 31, 2009 and 2008, approximately 9.2 million and 8.3 million RSUs vested, respectively, of which approximately 7.0 million and 6.7 million, respectively, were settled in Class A Common Stock, before statutory tax withholdings. The fair value of RSUs settled in Class A Common Stock was $76 million and $91 million for the six months ended December 31, 2009 and 2008, respectively. The remaining 2.2 million and 1.6 million RSUs settled during the six months ended December 31, 2009 and 2008, respectively, were settled in cash, before statutory tax withholdings, of approximately $23 million in each period.

The Company recognized a tax expense on vested RSUs and stock options exercised of $9 million and $5 million for the six months ended December 31, 2009 and 2008, respectively.

 

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Note 12—Commitments and Guarantees

Commitments

During the six months ended December 31, 2009, the Company renewed its rights to broadcast Italy’s National League Football matches through fiscal 2012. The Company expects to pay approximately $1.7 billion over the term of the agreement.

During the second quarter of fiscal 2010, the Company entered into a long-term supply contract pursuant to which the Company will purchase ink for its newspaper printing facilities in the United Kingdom from a third party through fiscal 2022. The Company will pay approximately $400 million over the term of the contract.

On January 30, 2010, the Company announced that its News America Marketing unit had settled its litigation with Valassis Communications, Inc. (“Valassis”) for $500 million. The Company expects to pay this amount in fiscal 2010.

Other than as previously disclosed in these notes to the Company’s unaudited consolidated financial statements, the Company’s commitments have not changed significantly from disclosures included in the 2009 Form 10-K.

Guarantees

The Company’s guarantees have not changed significantly from disclosures included in the 2009 Form 10-K.

Note 13 —Contingencies

Intermix

On August 26, 2005 and August 30, 2005, two purported class action lawsuits captioned, respectively, Ron Sheppard v. Richard Rosenblatt et. al., and John Friedmann v. Intermix Media, Inc. et al., were filed in the California Superior Court, County of Los Angeles. Both lawsuits named as defendants all of the then incumbent members of the Intermix Board, including Mr. Rosenblatt, Intermix’s former Chief Executive Officer, and certain entities affiliated with VantagePoint Venture Partners (“VantagePoint”), a former major Intermix stockholder. The complaints alleged that, in pursuing the transaction whereby Intermix was to be acquired by Fox Interactive Media, a subsidiary of the Company (the “FIM Transaction”) and approving the related merger agreement, the director defendants breached their fiduciary duties to Intermix stockholders by, among other things, engaging in self-dealing and failing to obtain the highest price reasonably available for Intermix and its stockholders. The complaints further alleged that the merger agreement resulted from a flawed process and that the defendants tailored the terms of the merger to advance their own interests. The FIM Transaction was consummated on September 30, 2005. The Friedmann and Sheppard lawsuits were subsequently consolidated and, on January 17, 2006, a consolidated amended complaint was filed (the “Intermix Media Shareholder Litigation”). The plaintiffs in the consolidated action sought various forms of declaratory relief, damages, disgorgement and fees and costs. On March 20, 2006, the court ordered that substantially identical claims asserted in a separate state action filed by Brad Greenspan, captioned Greenspan v. Intermix Media, Inc., et al. , be severed and related to the Intermix Media Shareholder Litigation. The defendants filed demurrers seeking dismissal of all claims in the Intermix Media Shareholder Litigation and the severed Greenspan claims. On October 6, 2006, the court sustained the demurrers without leave to amend. On December 13, 2006, the court dismissed the complaints and entered judgment for the defendants. Greenspan and plaintiffs in the Intermix Media Shareholder Litigation filed notices of appeal. The Court of Appeal heard arguments on the fully briefed appeal on October 23, 2008. On November 11, 2008, the Court of Appeal issued an unpublished opinion

 

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affirming the lower court’s dismissal on all counts. On December 19, 2008, shareholder appellants filed a Petition for Review with the California Supreme Court. After the lower court sustained the demurrers in the Intermix Media Shareholder Litigation, co-counsel for certain of the plaintiffs moved for an award of attorneys’ fees and costs under a common law substantial benefit theory. On October 4, 2007, the court granted the motion and denied defendants’ application to tax costs. After defendants filed a notice of appeal, the matter was resolved.

In November 2005, plaintiff in a derivative action captioned LeBoyer v. Greenspan et al. pending against various former Intermix directors and officers in the United States District Court for the Central District of California filed a First Amended Class and Derivative Complaint (the “Amended Complaint”). The original derivative action was filed in May 2003 and arose out of Intermix’s restatement of quarterly financial results for its fiscal year ended March 31, 2003. A substantially similar derivative action filed in Los Angeles Superior Court was dismissed based on the inability of the plaintiffs to plead adequately demand futility. Plaintiff LeBoyer’s November 2005 Amended Complaint added various allegations and purported class claims arising out of the FIM Transaction that are substantially similar to those asserted in the Intermix Media Shareholder Litigation. The Amended Complaint also added as defendants the individuals and entities named in the Intermix Media Shareholder Litigation that were not already defendants in the matter. On October 16, 2006, the court dismissed the fourth through seventh claims for relief, which related to the 2003 restatement, finding that the plaintiff is precluded from relitigating demand futility. At the same time, the court asked for further briefing regarding plaintiffs’ standing to assert derivative claims based on the FIM Transaction, including for alleged violation of Section 14(a) of the Exchange Act, the effect of the state judge’s dismissal of the claims in the Greenspan case and the Intermix Media Shareholder Litigation on the remaining direct class action claims alleging breaches of fiduciary duty and other common law claims leading up to the FIM Transaction. The parties filed the requested additional briefing in which the defendants requested that the court stay the direct LeBoyer claims pending the resolution of any appeal in the Greenspan case and the Intermix Media Shareholder Litigation. By order dated May 22, 2007, the court granted defendants’ motion to dismiss the derivative claims arising out of the FIM Transaction, and denied the defendants’ request to stay the two remaining direct claims. As explained in more detail in the next paragraph, the court subsequently consolidated this case with the Brown v. Brewer action also pending before the court. On July 11, 2007, plaintiffs filed the consolidated first amended complaint under the Brown case title. See the discussion of the Brown case below for the subsequent developments in the consolidated case.

On June 14, 2006, a purported class action lawsuit, captioned Jim Brown v. Brett C. Brewer, et al., was filed against certain former Intermix directors and officers in the United States District Court for the Central District of California. The plaintiff asserted claims for alleged violations of Section 14a of the Exchange Act and SEC Rule 14a-9, as well as control person liability under Section 20a. The plaintiff alleged that certain defendants disseminated false and misleading definitive proxy statements on two occasions: one on December 30, 2003 in connection with the shareholder vote on January 29, 2004 on the election of directors and ratification of financing transactions with certain entities of VantagePoint; and another on August 25, 2005 in connection with the shareholder vote on the FIM Transaction. The complaint named as defendants certain VantagePoint related entities, the former general counsel and the members of the Intermix Board who were incumbent on the dates of the respective proxy statements. Intermix was not named as a defendant, but has certain indemnity obligations to the former officer and director defendants in connection with these claims and allegations. On August 25, 2006, plaintiff amended his complaint to add certain investment banks (the “Investment Banks”) as defendants. Intermix has certain indemnity obligations to the Investment Banks as well. Plaintiff amended his complaint again on September 27, 2006, which defendants moved to dismiss. On February 9, 2007, the case was transferred to Judge George H. King, the judge assigned to the LeBoyer action, on the grounds that it raises substantially related questions of law and fact as LeBoyer, and would entail substantial duplication of labor if heard by

 

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different judges. On June 11, 2007, Judge King ordered the Brown case be consolidated with the LeBoyer action, ordered plaintiffs’ counsel to file a consolidated first amended complaint, and further ordered the parties to file a joint brief on defendants’ contemplated motion to dismiss the consolidated first amended complaint. On July 11, 2007, plaintiffs filed the consolidated first amended complaint, which defendants moved to dismiss. By order dated January 17, 2008, Judge King granted defendants’ motion to dismiss the 2003 proxy claims (concerning VantagePoint transactions) and the 2005 proxy claims (concerning the FIM Transaction), as well as a claim against the VantagePoint entities alleging unjust enrichment. The court found it unnecessary to rule on dismissal of the remaining claims, which are related to the 2005 FIM Transaction, because the dismissal disposed of those claims. On February 8, 2008, plaintiffs filed a consolidated second amended complaint, which defendants moved to dismiss on February 28, 2008. By order dated July 15, 2008, the court granted in part and denied in part defendants’ motion to dismiss. The 2003 claims and the claims against the Investment Banks were dismissed with prejudice. The Section 14a, Section 20a and the breach of fiduciary duty claims related to the FIM Transaction remain against the officer and director defendants and the VantagePoint defendants. On October 6, 2008, defendants filed a partial motion for summary judgment seeking dismissal of the Section 14a, Section 20 and state law disclosure claims. On November 10, 2008, Judge King denied the motion without prejudice. On November 14, 2008, plaintiff filed a motion for class certification to which defendants filed their opposition on January 14, 2009. On June 22, 2009, the court granted plaintiff’s motion for class certification, certifying a class of all holders of Intermix Media, Inc. common stock, from July 18, 2005 through consummation of the FIM Transaction, who were allegedly harmed by defendants’ improper conduct as set forth in the complaint. The parties have completed fact and expert discovery. Defendants’ motion for summary judgment was filed on October 19, 2009. Defendants also filed a motion to exclude plaintiff’s damages expert on November 30, 2009. The court has taken both motions under submission. No trial date has been set yet.

News America Marketing

On January 18, 2006, Valassis filed a complaint against News America Incorporated, News America Marketing FSI, LLC and News America Marketing Services, In-Store, LLC, each of which are subsidiaries of the Company (collectively “News America”), in the United States District Court for the Eastern District of Michigan. Valassis alleges that News America possesses monopoly power in a claimed in-store advertising and promotions market (the “in-store market”) and has used that power to gain an unfair advantage over Valassis in a purported market for coupons distributed by free-standing inserts (“FSIs”). Valassis alleges that News America is attempting to monopolize the purported FSI market by leveraging its alleged monopoly power in the purported in-store market, thereby allegedly violating Section 2 of the Sherman Antitrust Act of 1890, as amended (the “Sherman Act”). Valassis further alleges that News America has unlawfully bundled the sale of in-store marketing products with the sale of FSIs and that such bundling constitutes unlawful tying in violation of Sections 1 and 3 of the Sherman Act. Additionally, Valassis alleges that News America is predatorily pricing its FSI products in violation of Section 2 of the Sherman Act. Valassis also asserts that News America violated various state antitrust statutes and has tortuously interfered with Valassis’ actual or expected business relationships. Valassis’ complaint seeks injunctive relief, damages, fees and costs. On April 20, 2006, News America moved to dismiss Valassis’ complaint in its entirety for failure to state a cause of action. On September 28, 2006, the Magistrate Judge issued a Report and Recommendation granting the motion. On October 16, 2006, Valassis filed an amended complaint, alleging the same causes of action. On November 17, 2006, News America answered the three federal antitrust claims and moved to dismiss the remaining nine state law claims. On March 23, 2007, the court granted News America’s motion and dismissed the nine state law claims. The parties engaged in discovery, which was combined with the California and Michigan state cases discussed below, and is now completed. The parties have exchanged expert reports. On September 3, 2009, the court denied the parties’ cross- motions for summary judgment. Trial was set to commence on February 2, 2010.

 

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On March 9, 2007, Valassis filed a two-count complaint in Michigan state court against News America. That complaint, which was based on the same factual allegations as the federal complaint discussed above and the California state court complaint discussed below, alleged that News America tortuously interfered with Valassis’ business relationships and that News America unfairly competed with Valassis. The complaint sought injunctive relief, damages, fees and costs. On May 4, 2007, News America filed a motion to dismiss or, in the alternative stay, that complaint. On August 14, 2007, the court denied the motion. On July 7, 2008, Valassis filed an amended complaint alleging the same causes of action, based on essentially the same factual allegations and seeking the same relief. News America moved to dismiss the amended complaint and on October 10, 2008, the court denied the motion. The parties completed discovery, which was combined with the federal case discussed above and the California state case discussed below. The court denied News America’s motion for summary judgment in January 2009. Trial commenced on May 27, 2009. On July 23, 2009, a jury in the Michigan state court returned a verdict in the amount of $300 million for Valassis. News America filed a motion for new trial, which was denied. News America filed an appeal and posted a bond for $25 million, the maximum bond required under Michigan law.

On March 12, 2007, Valassis filed a three-count complaint in California state court against News America. That complaint, which is based on the same factual allegations as the federal and Michigan state court complaints discussed above, alleges that News America has violated the Cartwright Act (California’s state antitrust law) by unlawfully tying its FSI products to its in-store products, has violated California’s Unfair Practices Act by predatorily pricing its FSI products, and has unfairly competed with Valassis. Valassis’ California complaint seeks injunctive relief, damages, fees and costs. On May 4, 2007, News America filed a motion to dismiss or, in the alternative stay, that complaint. On June 28, 2007, the court issued a tentative ruling denying the motion and reassigned the case to the Complex Litigation Program. On July 19, 2007, the court denied the motion. The California state court case was stayed until March 2010.

As a result of pretrial proceedings and negotiations that occurred in late January related to the complaint filed against News America in the United States District Court for the Eastern District of Michigan, on January 30, 2010, the Company announced that News America had reached a settlement agreement with Valassis pursuant to which all claims filed by Valassis in all matters listed above will be dismissed with prejudice. The United States District Court for the Eastern District of Michigan oversaw the settlement discussions and approved the terms of the settlement. As part of the settlement, News America will pay Valassis $500 million and enter into a ten-year shared mail distribution agreement with Valassis Direct Mail, a Valassis subsidiary. Additionally, the parties will also agree to mutual business practices that will require the parties to adhere to certain antitrust laws. In connection with the settlement, the judgment in the Michigan state court case from July 2009 will be satisfied with all related appeals dismissed. In addition, the California state court case will be dismissed with prejudice.

As a result of the settlement the Company has recorded a charge of $500 million in the three and six months ended December 31, 2009. The cost of the new distribution agreement, which will be entered into on a fair value basis, will be accounted for prospectively, consistent with the accounting for other similar agreements.

Other

Other than as previously disclosed in the notes to the Company’s unaudited consolidated financial statements, the Company is party to several purchase and sale arrangements which become exercisable over the next ten years by the Company or the counter-party to the agreement. In the next twelve months, none of these arrangements that become exercisable are material to the Company.

 

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The Company experiences routine litigation in the normal course of its business. On January 30, 2010, the Company announced that its News America Marketing unit had settled its previously reported litigation with Valassis for $500 million. The Company believes that none of its other pending litigation will have a material adverse effect on its consolidated financial condition, future results of operations or liquidity.

The Company’s operations are subject to tax in various domestic and international jurisdictions and as a matter of course, the Company is regularly audited by federal, state and foreign tax authorities. The Company believes it has appropriately accrued for the expected outcome of all pending tax matters and does not currently anticipate that the ultimate resolution of pending tax matters will have a material adverse effect on its consolidated financial condition, future results of operations or liquidity.

Note 14—Pension and Other Postretirement Benefits

The Company sponsors non-contributory pension plans and retiree health and life insurance benefit plans covering specific groups of employees. As of January 1, 2008, the Company’s major pension plans are closed to new participants (with the exception of groups covered by collective bargaining agreements). The benefits payable for the Company’s non-contributory pension plans are based primarily on a formula factoring both an employee’s years of service and pay near retirement. Participant employees are vested in the pension plans after five years of service. The Company’s policy for all pension plans is to fund amounts, at a minimum, in accordance with statutory requirements. Plan assets consist principally of common stocks, marketable bonds and government securities. The retiree health and life insurance benefit plans offer medical and/or life insurance to certain full-time employees and eligible dependents that retire after fulfilling age and service requirements.

 

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The components of net periodic benefit costs were as follows:

 

     Pension Benefits     Postretirement Benefits  
     For the three months ended December 31,  
         2009             2008             2009             2008      
     (in millions)  

Service cost benefits earned during the period

   $ 18      $ 18      $ 1      $ 2   

Interest costs on projected benefit obligation

     43        41        5        5   

Expected return on plan assets

     (35     (38     —          —     

Amortization of deferred losses

     10        4        —          —     

Other

     2        1        (4     (1
                                

Net periodic costs

   $ 38      $ 26      $ 2      $ 6   
                                

Cash contributions

   $ 9      $ 13      $ 4      $ 4   
                                
     For the six months ended December 31,  
     2009     2008     2009     2008  
     (in millions)  

Service cost benefits earned during the period

   $ 36      $ 38      $ 2      $ 4   

Interest costs on projected benefit obligation

     86        84        10        10   

Expected return on plan assets

     (70     (77     —          —     

Amortization of deferred losses

     20        8        —          —     

Other

     3        1        (8     (5
                                

Net periodic costs

   $ 75      $ 54      $ 4      $ 9   
                                

Cash contributions

   $ 23      $ 32      $ 8      $ 8   
                                

Note 15—Segment Information

The Company is a diversified global media company, which manages and reports its businesses in eight segments. During the first quarter of fiscal 2010, the Company reclassified STAR, which develops, produces and distributes television programming in Asia, from the Television segment to the Cable Network Programming segment. This reclassification was the result of a restructuring to combine the sales and distribution operations of the STAR channels with those of the Company’s other international cable businesses. In addition, the Magazines and Inserts segment has been renamed the Integrated Marketing Services segment. The Company has revised its segment information for prior fiscal years to conform to the fiscal 2010 presentation. Beginning in fiscal 2010, the Company’s eight segments are:

 

   

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 and licensing of television programming worldwide.

 

   

Television, which principally consists of the broadcasting of network programming in the United States and the operation of 27 full power broadcast television stations, including nine duopolies, in the United States (of these stations, 17 are affiliated with the FOX network and ten are affiliated with the MyNetworkTV network).

 

   

Cable Network Programming, which principally consists of the production and licensing of programming distributed through cable television systems and direct broadcast satellite operators primarily in the United States, Latin America, Europe and Asia.

 

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Direct Broadcast Satellite Television, which consists of the distribution of basic and premium programming services via satellite and broadband directly to subscribers in Italy.

 

   

Integrated Marketing Services, which principally consists of the publication of free-standing inserts, which are promotional booklets containing consumer offers distributed through insertion in local Sunday newspapers in the United States, and the provision of in-store marketing products and services, primarily to consumer packaged goods manufacturers in the United States and Canada.

 

   

Newspapers and Information Services, which principally consists of the publication of four national newspapers in the United Kingdom, the publication of approximately 146 newspapers in Australia, the publication of a metropolitan newspaper and a national newspaper (with international editions) in the United States and the provision of information services.

 

   

Book Publishing, which principally consists of the publication of English language books throughout the world.

 

   

Other, which principally consists of the Company’s digital media properties and News Outdoor, an advertising business which offers display advertising in outdoor locations primarily throughout Russia and Eastern Europe.

The Company’s 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 measures are segment operating income (loss) and segment operating income (loss) before depreciation and amortization.

Segment operating income (loss) does not include: Impairment and restructuring charges, equity earnings (losses) of affiliates, interest expense, net, interest income, other, net, income tax expense and net income attributable to noncontrolling interests. The Company believes that information about segment operating income (loss) assists all users of the Company’s consolidated financial statements by allowing them to evaluate changes in the operating results of the Company’s portfolio of businesses separate from non-operational factors that affect net income, thus providing insight into both operations and the other factors that affect reported results.

Segment operating income (loss) before depreciation and amortization is defined as segment operating income (loss) plus depreciation and amortization and the amortization of cable distribution investments and eliminates the variable effect across all business segments of depreciation and amortization. Depreciation and amortization expense includes the depreciation of property and equipment, as well as amortization of finite-lived intangible assets. Amortization of cable distribution investments represents a reduction against revenues over the term of a carriage arrangement and, as such, it is excluded from segment operating income (loss) before depreciation and amortization.

Total segment operating income and segment operating income (loss) before depreciation and amortization are non-GAAP measures and should be considered in addition to, not as a substitute for, net income (loss), cash flow and other measures of financial performance reported in accordance with GAAP. In addition, these measures do not reflect cash available to fund requirements. These measures exclude items, such as impairment and restructuring charges, which are significant components in assessing the Company’s financial performance. Segment operating income (loss) before depreciation and amortization also excludes depreciation and amortization which are also significant components in assessing the Company’s financial performance.

Management believes that total segment operating income and segment operating income (loss) before depreciation and amortization are appropriate measures for evaluating the operating performance of the

 

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Company’s business. Total segment operating income and segment operating income (loss) before depreciation and amortization provide management, investors and equity analysts measures to analyze operating performance of the Company’s business and its enterprise value against historical data and competitors’ data, although historical results, including total segment operating income and segment operating income (loss) before depreciation and amortization, may not be indicative of future results (as operating performance is highly contingent on many factors, including customer tastes and preferences).

 

     For the three months
ended December 31,
    For the six months
ended December 31,
 
     2009     2008     2009     2008  
    

(in millions)

 

Revenues:

        

Filmed Entertainment

   $ 1,898      $ 1,485      $ 3,419      $ 2,744   

Television

     1,248        1,135        2,013        1,964   

Cable Network Programming

     1,756        1,492        3,362        2,946   

Direct Broadcast Satellite Television

     1,008        922        1,935        1,891   

Integrated Marketing Services

     291        284        558        543   

Newspapers and Information Services

     1,655        1,505        3,058        3,210   

Book Publishing

     381        305        691        620   

Other

     447        743        847        1,462   
                                

Total revenues

   $ 8,684      $ 7,871      $ 15,883      $ 15,380   
                                

Segment operating income (loss):

        

Filmed Entertainment

   $ 324      $ 112      $ 715      $ 363   

Television

     29        (2     67        82   

Cable Network Programming

     604        448        1,117        798   

Direct Broadcast Satellite Television

     (30     10        98        175   

Integrated Marketing Services

     (414     86        (341     154   

Newspapers and Information Services

     259        200        284        341   

Book Publishing

     65        23        85        26   

Other

     (125     (38     (251     (139
                                

Total segment operating income

     712        839        1,774        1,800   
                                

Impairment and restructuring charges

     (10     (8,465     (30     (8,473

Equity earnings (losses) of affiliates

     58        30        90        (329

Interest expense, net

     (269     (231     (514     (452

Interest income

     16        20        41        60   

Other, net

     (86     (98     (98     206   
                                

Income (loss) before income tax expense

     421        (7,905     1,263        (7,188

Income tax (expense) benefit

     (137     1,514        (382     1,333   
                                

Net income (loss)

     284        (6,391     881        (5,855

Less: Net income attributable to noncontrolling interests

     (30     (26     (56     (47
                                

Net income (loss) attributable to News Corporation stockholders

   $ 254      $ (6,417   $ 825      $ (5,902
                                

Intersegment revenues, generated primarily by the Filmed Entertainment segment, of approximately $249 million and $273 million for the three months ended December 31, 2009 and 2008, respectively, and of approximately $389 million and $443 million for the six months ended December 31, 2009 and 2008, respectively, have been eliminated within the Filmed Entertainment segment. Intersegment operating profit

 

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generated primarily by the Filmed Entertainment segment of approximately $17 million and $32 million for the three months ended December 31, 2009 and 2008, respectively, and of approximately $12 and $34 million for the six months ended December 31, 2009 and 2008, respectively, have been eliminated within the Filmed Entertainment segment.

 

     For the three months ended December 31, 2009  
     Segment operating
income (loss)
    Depreciation and
amortization
   Amortization of
cable distribution
investments
   Segment operating
income (loss)
before
depreciation and
amortization
 
     (in millions)  

Filmed Entertainment

   $ 324      $ 23    $ —      $ 347   

Television

     29        20      —        49   

Cable Network Programming

     604        36      22      662   

Direct Broadcast Satellite Television

     (30     72      —        42   

Integrated Marketing Services

     (414     2      —        (412

Newspapers and Information Services

     259        90      —        349   

Book Publishing

     65        4      —        69   

Other

     (125     52      —        (73
                              

Total

   $ 712      $ 299    $ 22    $ 1,033   
                              

 

     For the three months ended December 31, 2008
     Segment operating
income (loss)
    Depreciation and
amortization
   Amortization of
cable distribution
investments
   Segment operating
income before
depreciation and
amortization
     (in millions)

Filmed Entertainment

   $ 112      $ 23    $ —      $ 135

Television

     (2     20      —        18

Cable Network Programming

     448        31      19      498

Direct Broadcast Satellite Television

     10        56      —        66

Integrated Marketing Services

     86        3      —        89

Newspapers and Information Services

     200        76      —        276

Book Publishing

     23        2      —        25

Other

     (38     72      —        34
                            

Total

   $ 839      $ 283    $ 19    $ 1,141
                            

 

     For the six months ended December 31, 2009  
     Segment operating
income (loss)
    Depreciation and
amortization
   Amortization of
cable distribution
investments
   Segment operating
income (loss)
before
depreciation and
amortization
 
     (in millions)  

Filmed Entertainment

   $ 715      $ 46    $ —      $ 761   

Television

     67        41      —        108   

Cable Network Programming

     1,117        78      45      1,240   

Direct Broadcast Satellite Television

     98        138      —        236   

Integrated Marketing Services

     (341     5      —        (336

Newspapers and Information Services

     284        177      —        461   

Book Publishing

     85        8      —        93   

Other

     (251     103      —        (148
                              

Total

   $ 1,774      $ 596    $ 45    $ 2,415   
                              

 

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      For the six months ended December 31, 2008
     Segment operating
income (loss)
    Depreciation and
amortization
   Amortization of
cable distribution
investments
   Segment operating
income before
depreciation and
amortization
     (in millions)

Filmed Entertainment

   $ 363      $ 46    $ —      $ 409

Television

     82        40      —        122

Cable Network Programming

     798        62      42      902

Direct Broadcast Satellite Television

     175        116      —        291

Integrated Marketing Services

     154        5      —        159

Newspapers and Information Services

     341        166      —        507

Book Publishing

     26        4      —        30

Other

     (139     140      —        1
                            

Total

   $ 1,800      $ 579    $ 42    $ 2,421
                            

 

     At December 31,
2009
   At June 30,
2009
     (in millions)

Total assets:

     

Filmed Entertainment

   $ 7,662    $ 7,042

Television

     6,986      6,378

Cable Network Programming

     11,820      11,688

Direct Broadcast Satellite Television

     3,043      2,647

Integrated Marketing Services

     1,364      1,346

Newspapers and Information Services

     11,015      10,741

Book Publishing

     1,654      1,582

Other

     9,427      8,740

Investments

     3,162      2,957
             

Total assets

   $ 56,133    $ 53,121
             

Goodwill and Intangible assets, net:

     

Filmed Entertainment

   $ 1,901    $ 1,917

Television

     4,310      4,310

Cable Network Programming

     6,863      6,912

Direct Broadcast Satellite Television

     629      617

Integrated Marketing Services

     1,036      1,034

Newspapers and Information Services

     6,222      6,050

Book Publishing

     503      511

Other

     1,894      1,956
             

Total goodwill and intangible assets, net

   $ 23,358    $ 23,307
             

 

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Note 16—Additional Financial Information

Supplemental Cash Flows Information

 

     For the six months
ended December 31,
 
       2009         2008    
     (in millions)  

Supplemental cash flows information:

    

Cash paid for income taxes

   $ (482   $ (774

Cash paid for interest

     (468     (439

Sale of other investments

     15        12   

Purchase of other investments

     (79     (45

Supplemental information on businesses acquired:

    

Fair value of assets acquired

     22        228   

Cash acquired

     3        —     

Liabilities assumed

     72        94   

Noncontrolling interest (increase) decrease

     (1     140   

Cash paid

     (96     (462
                

Fair value of stock consideration

   $ —        $ —     
                

Other, net consisted of the following:

 

     For the three months
ended December 31,
    For the six months
ended December 31,
 
         2009             2008             2009             2008      
    

(in millions)

 

Loss on the Photobucket transaction (a)

   $ (29   $ —        $ (29   $ —     

Gain on the sale of the Stations (a)

     —          —          —          232   

Loss on the sale of eastern European television stations (a)

     (19     (100     (19     (100

Change in fair value of exchangeable securities and other financial instruments (b)

     —          14        (4     76   

Other

     (38     (12     (46     (2
                                

Total Other, net

   $ (86   $ (98   $ (98   $ 206   
                                

 

(a)

See Note 2—Acquisitions, Disposals and Other Transactions

(b)

The Company has certain outstanding exchangeable debt securities which contain embedded derivatives. Pursuant to ASC 815, these embedded derivatives require separate accounting and, as such, changes in their fair value are recognized in other, net. A significant variance in the price of underlying stock could have a material impact on the operating results of the Company.

Note 17—Subsequent Events

In preparation of its consolidated financial statements, the Company considered subsequent events through February 3, 2010, which was the date the Company’s consolidated financial statements were issued.

In December 2009, the Company announced that it had entered into an agreement with Sky Deutschland to subscribe to up to 49 million in newly registered shares of Sky Deutschland pursuant to a capital increase. Sky Deutschland completed this capital increase in January 2010 and, accordingly, the Company purchased

 

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49 million newly registered shares of Sky Deutschland at a price of €2.25 per new share for an aggregate cost of approximately $158 million. As a result, News Corporation’s stake in Sky Deutschland increased to approximately 45%.

In January 2010, the Company sold its 33% interest in STOXX, Ltd. (“STOXX”), a European market index provider, for approximately $300 million in cash and additional consideration of up to approximately $40 million conditioned upon STOXX achieving specific performance objectives.

On January 30, 2010, the Company announced that its News America Marketing unit had settled its litigation with Valassis for $500 million.

A dividend of $0.075 per share of Class A Common Stock and Class B Common Stock has been declared and is payable on April 14, 2010. The record date for determining dividend entitlements is March 10, 2010.

Note 18—Supplemental Guarantor Information

In May 2007, NAI, a 100% owned subsidiary of the Company as defined in Rule 3-10(h) of Regulation S-X, entered into a credit agreement, among NAI as Borrower, the Company as Parent Guarantor, the initial lenders named therein (the “Lenders”), Citibank, N. A. as Administrative Agent and JPMorgan Chase Bank, N. A. as Syndication Agent (the “Credit Agreement”). The Credit Agreement provides a $2.25 billion unsecured revolving credit facility with a sub-limit of $600 million available for the issuance of letters of credit. NAI may request an increase in the amount of the credit facility up to a maximum amount of $2.5 billion. Borrowings are in U.S. dollars only, while letters of credit are issuable in U.S. dollars or Euros. The significant terms of the agreement include the requirement that the Company maintain specific leverage ratios and limitations on secured indebtedness. The Company pays a facility fee of 0.08% regardless of facility usage. The Company pays interest for borrowings at LIBOR plus 0.27% and pays commission fees on letters of credit at 0.27%. The Company pays an additional fee of 0.05% if borrowings under the facility exceed 50% of the committed facility. The interest and fees are based on the Company’s current debt rating. The maturity date is in May 2012; however, NAI may request that the Lenders’ commitments be renewed for up to two additional one year periods.

The Company, as Parent Guarantor, presently guarantees the senior public indebtedness of NAI and the guarantee is full and unconditional. The supplemental condensed consolidating financial information of the Parent Guarantor should be read in conjunction with these consolidated financial statements.

In accordance with rules and regulations of the SEC, the Company uses the equity method to account for the results of all of the non-guarantor subsidiaries, representing substantially all of the Company’s consolidated results of operations, excluding certain intercompany eliminations.

The following condensed consolidating financial statements present the results of operations, financial position and cash flows of NAI, the Company and the subsidiaries of the Company and the eliminations and reclassifications necessary to arrive at the information for the Company on a consolidated basis.

 

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NEWS CORPORATION

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Supplemental Condensed Consolidating Statement of Operations

For the three months ended December 31, 2009

(US$ in millions)

 

    News America
Incorporated
    News
Corporation
    Non-Guarantor     Reclassifications
and Eliminations
    News
Corporation
and
Subsidiaries
 

Revenues

  $ —        $ —        $ 8,684      $ —        $ 8,684   

Expenses

    (63     —          (7,919     —          (7,982

Equity earnings of affiliates

    1        —          57        —          58   

Interest expense, net

    (776     (297     373        431        (269

Interest income

    1        —          851        (836     16   

Earnings (losses) from subsidiary entities

    411        551        —          (962     —     

Other, net

    (1     —          (85     —          (86
                                       

Income (loss) before income tax expense

    (427     254        1,961        (1,367     421   

Income tax (expense) benefit

    129        —          (612     346        (137
                                       

Net income (loss)

    (298     254        1,349        (1,021     284   

Less: Net income attributable to noncontrolling interests

    —          —          (30     —          (30
                                       

Net income (loss) attributable to News Corporation stockholders

  $ (298   $ 254      $ 1,319      $ (1,021   $ 254   
                                       

See notes to supplemental guarantor information

 

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NEWS CORPORATION

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Supplemental Condensed Consolidating Statement of Operations

For the three months ended December 31, 2008

(US$ in millions)

 

    News America
Incorporated
    News
Corporation
    Non-Guarantor     Reclassifications
and Eliminations
    News
Corporation
and
Subsidiaries
 

Revenues

  $ 1      $ —        $ 7,870      $ —        $ 7,871   

Expenses

    (82     —          (15,415     —          (15,497

Equity earnings of affiliates

    1        —          29        —          30   

Interest expense, net

    (400     (268     (143     580        (231

Interest income

    187        —          413        (580     20   

Earnings (losses) from subsidiary entities

    321        (6,114     —          5,793        —     

Other, net

    (124     (35     61        —          (98
                                       

(Loss) income before income tax expense

    (96     (6,417     (7,185     5,793        (7,905

Income tax benefit

    25        —          1,422        67        1,514   
                                       

Net (loss) income

    (71     (6,417     (5,763     5,860        (6,391

Less: Net income attributable to noncontrolling interests

    —          —          (26     —          (26
                                       

Net (loss) income attributable to News Corporation stockholders

  $ (71   $ (6,417   $ (5,789   $ 5,860      $ (6,417
                                       

See notes to supplemental guarantor information

 

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NEWS CORPORATION

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Supplemental Condensed Consolidating Statement of Operations

For the six months ended December 31, 2009

(US$ in millions)

 

    News America
Incorporated
    News
Corporation
    Non-Guarantor     Reclassifications
and Eliminations
    News
Corporation
and
Subsidiaries
 

Revenues

  $ —        $ —        $ 15,883      $ —        $ 15,883   

Expenses

    (125     —          (14,014     —          (14,139

Equity earnings of affiliates

    2        —          88        —          90   

Interest expense, net

    (1,516     (587     (8     1,597        (514

Interest income

    2        —          1,636        (1,597     41   

Earnings (losses) from subsidiary entities

    884        1,412        —          (2,296     —     

Other, net

    384        —          (77     (405     (98
                                       

Income (loss) before income tax expense

    (369     825        3,508        (2,701     1,263   

Income tax (expense) benefit

    112        —          (1,062     568        (382
                                       

Net income (loss)

    (257     825        2,446        (2,133     881   

Less: Net income attributable to noncontrolling interests

    —          —          (56     —          (56
                                       

Net income (loss) attributable to News Corporation stockholders

  $ (257   $ 825      $ 2,390      $ (2,133   $ 825   
                                       

See notes to supplemental guarantor information

 

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NEWS CORPORATION

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Supplemental Condensed Consolidating Statement of Operations

For the six months ended December 31, 2008

(US$ in millions)

 

    News America
Incorporated
    News
Corporation
    Non-Guarantor     Reclassifications
and Eliminations
    News
Corporation
and
Subsidiaries
 

Revenues

  $ 3      $ —        $ 15,377      $ —        $ 15,380   

Expenses

    (170     —          (21,883     —          (22,053

Equity earnings (losses) of affiliates

    2        —          (331     —          (329

Interest expense, net

    (740     (531     (143     962        (452

Interest income

    203        —          819        (962     60   

Earnings (losses) from subsidiary entities

    755        (5,300     —          4,545        —     

Other, net

    (43     (71     320        —          206   
                                       

(Loss) income before income tax expense

    10        (5,902     (5,841     4,545        (7,188

Income tax benefit (expense)

    (2     —          1,083        252        1,333   
                                       

Net (loss) income

    8        (5,902     (4,758     4,797        (5,855

Less: Net income attributable to noncontrolling interests

    —          —          (47     —          (47
                                       

Net (loss) income attributable to News Corporation stockholders

  $ 8      $ (5,902   $ (4,805   $ 4,797      $ (5,902
                                       

See notes to supplemental guarantor information

 

34


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NEWS CORPORATION

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Supplemental Condensed Consolidating Balance Sheet

At December 31, 2009

(US$ in millions)

 

    News America
Incorporated
  News
Corporation
  Non-Guarantor     Reclassifications
and Eliminations
    News
Corporation
and
Subsidiaries

ASSETS:

         

Current assets:

         

Cash and cash equivalents

  $ 5,066   $ —     $ 2,200      $ —        $ 7,266

Receivables, net

    21     —       7,495        —          7,516

Inventories, net

    —       —       2,995        —          2,995

Other

    56     —       502        —          558
                                 

Total current assets

    5,143     —       13,192        —          18,335
                                 

Non-current assets:

         

Receivables

    —       —       235        —          235

Inventories, net

    —       —       3,506        —          3,506

Property, plant and equipment, net

    62     —       6,158        —          6,220

Intangible assets, net

    —       —       8,893        —          8,893

Goodwill

    —       —       14,465        —          14,465

Other

    257     —       1,060        —          1,317

Investments

         

Investments in associated companies and other investments

    91     39     3,032        —          3,162

Intragroup investments

    47,774     39,423     —          (87,197     —  
                                 

Total investments

    47,865     39,462     3,032        (87,197     3,162
                                 

TOTAL ASSETS

  $ 53,327   $ 39,462   $ 50,541      $ (87,197   $ 56,133
                                 

LIABILITIES AND EQUITY

         

Current liabilities:

         

Borrowings

  $ 1,793   $ —     $ 47      $ —        $ 1,840

Other current liabilities

    32     —       9,321        —          9,353
                                 

Total current liabilities

    1,825     —       9,368        —          11,193

Non-current liabilities:

         

Borrowings

    13,371     —       64        —          13,435

Other non-current liabilities

    216     —       6,094        —          6,310

Intercompany

    23,172     15,061     (38,233     —          —  

Redeemable noncontrolling interests

    —       —       365        —          365

Equity

    14,743     24,401     72,883        (87,197     24,830
                                 

TOTAL LIABILITIES AND EQUITY

  $ 53,327   $ 39,462   $ 50,541      $ (87,197   $ 56,133
                                 

See notes to supplemental guarantor information

 

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NEWS CORPORATION

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Supplemental Condensed Consolidating Balance Sheet

At June 30, 2009

(US$ in millions)

 

     News America
Incorporated
   News
Corporation
   Non-Guarantor     Reclassifications
and Eliminations
    News
Corporation
and
Subsidiaries

ASSETS:

            

Current Assets:

            

Cash and cash equivalents

   $ 4,479    $ —      $ 2,061      $ —        $ 6,540

Receivables, net

     15      —        6,272        —          6,287

Inventories, net

     —        —        2,477        —          2,477

Other

     40      —        492        —          532
                                    

Total current assets

     4,534      —        11,302        —          15,836
                                    

Non-current assets:

            

Receivables

     —        —        282        —          282

Inventories, net

     —        —        3,178        —          3,178

Property, plant and equipment, net

     75      —        6,170        —          6,245

Intangible assets, net

     —        —        8,925        —          8,925

Goodwill

     —        —        14,382        —          14,382

Other

     241      —        1,075        —          1,316

Investments

            

Investments in associated companies and other investments

     95      41      2,821        —          2,957

Intragroup investments

     46,019      37,577      —          (83,596     —  
                                    

Total investments

     46,114      37,618      2,821        (83,596     2,957
                                    

TOTAL ASSETS

   $ 50,964    $ 37,618    $ 48,135      $ (83,596   $ 53,121
                                    

LIABILITIES AND EQUITY

            

Current liabilities:

            

Borrowings

   $ 2,008    $ —      $ 77      $ —        $ 2,085

Other current liabilities

     22      —        8,532        —          8,554
                                    

Total current liabilities

     2,030      —        8,609        —          10,639

Non-current liabilities:

            

Borrowings

     12,108      —        96        —          12,204

Other non-current liabilities

     235      —        6,068        —          6,303

Intercompany

     21,182      14,394      (35,576     —          —  

Redeemable noncontrolling interests

     —        —        343        —          343

Equity

     15,409      23,224      68,595        (83,596     23,632
                                    

TOTAL LIABILITIES AND EQUITY

   $ 50,964    $ 37,618    $ 48,135      $ (83,596   $ 53,121
                                    

See notes to supplemental guarantor information

 

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NEWS CORPORATION

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Supplemental Condensed Consolidating Statement of Cash Flows

For the six months ended December 31, 2009

(US$ in millions)

 

    News America
Incorporated
    News
Corporation
    Non-Guarantor     Reclassifications
and Eliminations
  News
Corporation
and
Subsidiaries
 

Operating activities:

         

Net cash provided by (used in) operating activities

  $ (391   $ 137      $ 818      $ —     $ 564   
                                     

Investing activities:

         

Property, plant and equipment

    (3     —          (385     —       (388

Investments

    (8     —          (288     —       (296

Proceeds from sale of investments, non-current assets and business disposals

    —          —          36        —       36   
                                     

Net cash used in investing activities

    (11     —          (637     —       (648
                                     

Financing activities:

         

Borrowings

    989        —          21        —       1,010   

Repayment of borrowings

    —          —          (75     —       (75

Issuance of shares

    —          21        —          —       21   

Dividends paid

    —          (158     (25     —       (183

Other, net

    —          —          2        —       2   
                                     

Net cash provided by (used in) financing activities

    989        (137     (77     —       775   
                                     

Net increase in cash and cash equivalents

    587        —          104        —       691   

Cash and cash equivalents, beginning of period

    4,479        —          2,061        —       6,540   

Exchange movement on opening cash balance

    —          —          35        —       35   
                                     

Cash and cash equivalents, end of period

  $ 5,066      $ —        $ 2,200      $ —     $ 7,266   
                                     

See notes to supplemental guarantor information

 

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NEWS CORPORATION

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Supplemental Condensed Consolidating Statement of Cash Flows

For the six months ended December 31, 2008

(US$ in millions)

 

    News America
Incorporated
    News
Corporation
    Non-Guarantor     Reclassifications
and Eliminations
  News
Corporation
and
Subsidiaries
 

Operating activities:

         

Net cash (used in) provided by operating activities

  $ (440   $ 170      $ (125   $ —     $ (395
                                     

Investing and other activities:

         

Property, plant and equipment

    (8     —          (583     —       (591

Investments

    (7     (19     (503     —       (529

Proceeds from sale of investments, non-current assets and business disposals

    —          —          973        —       973   
                                     

Net cash used in investing activities

    (15     (19     (113     —       (147
                                     

Financing activities:

         

Borrowings

    —          —          47        —       47   

Repayment of borrowings

    (200     —          (55     —       (255

Issuance of shares

    —          3        1        —       4   

Dividends paid

    —          (154     (23     —       (177

Purchase of subsidiary shares from noncontrolling interest

    —          —          (11     —       (11

Other, net

    —          —          18        —       18   
                                     

Net cash used in financing activities

    (200     (151     (23     —       (374
                                     

Net decrease in cash and cash equivalents

    (655     —          (261     —       (916

Cash and cash equivalents, beginning of period

    2,275        —          2,387        —       4,662   

Exchange movement on opening cash balance

    —          —          (125     —       (125
                                     

Cash and cash equivalents, end of period

  $ 1,620      $ —        $ 2,001      $ —     $ 3,621   
                                     

See notes to supplemental guarantor information

 

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NEWS CORPORATION

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Notes to Supplemental Guarantor Information

 

(1) Investments in the Company’s subsidiaries, for purposes of the supplemental consolidating presentation, are accounted for by their parent companies under the equity method of accounting whereby earnings of subsidiaries are reflected in the respective parent company’s investment account and earnings.

 

(2) The guarantees of NAI’s senior public indebtedness constitute senior indebtedness of the Company, and rank pari passu with all present and future senior indebtedness of the Company. Because the factual basis underlying the obligations created pursuant to the various facilities and other obligations constituting senior indebtedness of the Company differ, it is not possible to predict how a court in bankruptcy would accord priorities among the obligations of the Company.

 

39


Table of Contents
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 News Corporation, its directors or its officers with respect to, among other things, trends affecting News Corporation’s financial condition or results of operations. The readers of this document are cautioned that any forward-looking statements are not guarantees of future performance and involve risks and uncertainties. More information regarding these risks, uncertainties and other factors is set forth under the heading Part II “Other Information,” Item 1A “Risk Factors” in this report. News Corporation does not ordinarily make projections of its future operating results and undertakes no obligation (and expressly disclaims any obligation) to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Readers should carefully review this document and the other documents filed by News Corporation with the Securities and Exchange Commission (“SEC”). This section should be read together with the unaudited consolidated financial statements of News Corporation and related notes set forth elsewhere herein and News Corporation’s Annual Report on Form 10-K for the fiscal year ended June 30, 2009 as filed with the SEC on August 12, 2009 (the “2009 Form 10-K”).

INTRODUCTION

Management’s discussion and analysis of financial condition and results of operations is intended to help provide an understanding of News Corporation and its subsidiaries’ (together “News Corporation” or the “Company”) financial condition, changes in financial condition and results of operations. This discussion is organized as follows:

 

   

Overview of the Company’s Business—This section provides a general description of the Company’s businesses, as well as developments that have occurred to date during fiscal 2010 that the Company believes are important in understanding its results of operations and financial condition or to disclose known trends.

 

   

Results of Operations—This section provides an analysis of the Company’s results of operations for the three and six months ended December 31, 2009 and 2008. This analysis is presented on both a consolidated and a segment basis. In addition, a brief description is provided of significant transactions and events that have an impact on the comparability of the results being analyzed.

 

   

Liquidity and Capital Resources—This section provides an analysis of the Company’s cash flows for the six months ended December 31, 2009 and 2008. Included in the discussion of outstanding debt is a discussion of the amount of financial capacity available to fund the Company’s future commitments and obligations, as well as a discussion of other financing arrangements.

 

40


Table of Contents

OVERVIEW OF THE COMPANY’S BUSINESS

The Company is a diversified global media company, which manages and reports its businesses in eight segments. During the first quarter of fiscal 2010, the Company reclassified STAR Group Limited (“STAR”), which develops, produces and distributes television programming in Asia, from the Television segment to the Cable Network Programming segment. This reclassification was the result of a restructuring to combine the sales and distribution operations of the STAR channels with those of the Company’s other international cable businesses. In addition, the Magazines and Inserts segment has been renamed the Integrated Marketing Services segment. The Company has revised its segment information for prior fiscal years to conform to the fiscal 2010 presentation. Beginning in fiscal 2010, the Company’s eight segments are:

 

   

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 and licensing of television programming worldwide.

 

   

Television, which principally consists of the broadcasting of network programming in the United States and the operation of 27 full power broadcast television stations, including nine duopolies, in the United States (of these stations, 17 are affiliated with the FOX network and ten are affiliated with the MyNetworkTV network).

 

   

Cable Network Programming, which principally consists of the production and licensing of programming distributed through cable television systems and direct broadcast satellite operators primarily in the United States, Latin America, Europe and Asia.

 

   

Direct Broadcast Satellite Television, which consists of the distribution of basic and premium programming services via satellite and broadband directly to subscribers in Italy.

 

   

Integrated Marketing Services, which principally consists of the publication of free-standing inserts, which are promotional booklets containing consumer offers distributed through insertion in local Sunday newspapers in the United States, and the provision of in-store marketing products and services, primarily to consumer packaged goods manufacturers in the United States and Canada.

 

   

Newspapers and Information Services, which principally consists of the publication of four national newspapers in the United Kingdom, the publication of approximately 146 newspapers in Australia, the publication of a metropolitan newspaper and a national newspaper (with international editions) in the United States and the provision of information services.

 

   

Book Publishing, which principally consists of the publication of English language books throughout the world.

 

   

Other, which principally consists of the Company’s digital media properties and News Outdoor, an advertising business which offers display advertising in outdoor locations primarily throughout Russia and Eastern Europe.

Filmed Entertainment

The Filmed Entertainment segment derives revenue from the production and distribution of feature motion pictures and television series. In general, motion pictures produced or acquired for distribution by the Company are exhibited in U.S. and foreign theaters, followed by home entertainment, video-on-demand and pay-per-view television, on-line and mobile distribution, premium subscription television, network television and basic cable and syndicated television exploitation. Television series initially produced for the networks and first-run syndication are generally licensed to domestic and international markets concurrently and subsequently released in seasonal DVD box sets. More successful series are later syndicated in domestic markets. The length of the revenue cycle for television series will vary depending on the number of seasons a series remains in active production and, therefore, may cause fluctuations in operating results. License fees received for television exhibition (including international and U.S. premium television and basic cable television) are recorded as revenue in the period that licensed films or programs are available for such exhibition, which may cause substantial fluctuations in operating results.

 

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The revenues and operating results of the Filmed Entertainment segment are significantly affected by the timing of the Company’s theatrical and home entertainment releases, the number of its original and returning television series that are aired by television networks and the number of its television series in off-network syndication. Theatrical and home entertainment release dates are determined by several factors, including timing of vacation and holiday periods and competition in the marketplace. The distribution windows for the release of motion pictures theatrically and in various home entertainment formats have been compressing and may continue to change in the future. A further reduction in timing between theatrical and home entertainment releases could adversely affect the revenues and operating results of this segment.

The Company enters into arrangements with third parties to co-produce many of its theatrical productions. These arrangements, which are referred to as co-financing arrangements, take various forms. The parties to these arrangements include studio and non-studio entities, both domestic and foreign. In several of these agreements, other parties control certain distribution rights. The Filmed Entertainment segment records the amounts received for the sale of an economic interest as a reduction of the cost of the film, as the investor assumes full risk for that portion of the film asset acquired in these transactions. The substance of these arrangements is that the third-party investors own an interest in the film and therefore, receive a participation based on the respective third-party investor’s interest in the profits or losses incurred on the film. Consistent with the requirements of Accounting Standards Codification (“ASC”) 926-605 “Entertainment—Films—Revenue Recognition,” the estimate of a third-party investor’s interest in profits or losses incurred on the film is determined by reference to the ratio of actual revenue earned to date in relation to total estimated ultimate revenues.

Operating costs incurred by the Filmed Entertainment segment include: exploitation costs, primarily theatrical prints and advertising and home entertainment marketing and manufacturing costs; amortization of capitalized production, overhead and interest costs; and participations and talent residuals. Selling, general and administrative expenses include salaries, employee benefits, rent and other routine overhead.

The Company competes with other major studios, such as Disney, Paramount, Sony, Universal, Warner Bros. and independent film producers in the production and distribution of motion pictures and DVDs. As a producer and distributor of television programming, the Company competes with studios, television production groups and independent producers and syndicators, such as Disney, Sony, NBC Universal, Warner Bros. and Paramount Television, to sell programming both domestically and internationally. The Company also competes to obtain creative talent and story properties, which are essential to the success of the Company’s filmed entertainment businesses.

Television and Cable Network Programming

The Company’s television operations primarily consist of FOX Broadcasting Company (“FOX”), MyNetworkTV, Inc. (“MyNetworkTV”) and the 27 television stations owned by the Company.

The television operations derive revenues primarily from the sale of advertising. Adverse changes in general market conditions for advertising may affect revenues. The U.S. television broadcast environment is highly competitive and the primary methods of competition are the development and acquisition of popular programming. Program success is measured by ratings, which are an indication of market acceptance, with the top rated programs commanding the highest advertising prices. FOX and MyNetworkTV compete with other broadcast networks, such as CBS, ABC, NBC and The CW, independent television stations, cable program services, as well as other media, including DVDs, video games, print and the Internet for audiences and programming and, in the case of FOX, also for advertising revenues. In addition, FOX and MyNetworkTV compete with the other broadcast networks to secure affiliations with independently owned television stations in markets across the country.

The television stations owned by the Company compete for programming, audiences and advertising revenues with other television stations and cable networks in their respective coverage areas and, in some cases,

 

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with respect to programming, with other station groups, and in the case of advertising revenues, with other local and national media. The competitive position of the television stations owned by the Company is largely influenced by the strength of FOX and MyNetworkTV, and, in particular, the prime-time viewership of the respective network, as well as the quality of the programming of FOX and MyNetworkTV.

The Company’s U.S. cable network operations primarily consist of the Fox News Channel (“FOX News”), the FX Network (“FX”), Regional Sports Networks (“RSNs”), the National Geographic Channels, SPEED and the Big Ten Network. The Company’s international cable networks consist of the Fox International Channels (“FIC”) with channels primarily in Latin America, Europe and Asia and STAR with channels throughout Asia.

Generally, the Company’s cable networks, which target various demographics, derive a majority of their revenues from monthly affiliate fees received from cable television systems and direct broadcast satellite (“DBS”) operators based on the number of their subscribers. Affiliate fee revenues are net of the amortization of cable distribution investments (capitalized fees paid to a cable operator or DBS operator to facilitate the launch of a cable network). The Company defers the cable distribution investments and amortizes the amounts on a straight-line basis over the contract period. Cable television and DBS are currently the predominant means of distribution of the Company’s program services in the United States. Internationally, distribution technology varies region by region.

The Company’s cable networks compete for carriage on cable television systems, DBS systems and other distribution systems with other program services. A primary focus of competition is for distribution of the Company’s cable network channels that are not already distributed by particular cable television or DBS systems. For such program services, distributors make decisions on the use of bandwidth based on various considerations, including amounts paid by programmers for launches, subscription fees payable by distributors and appeal to the distributors’ subscribers.

The most significant operating expenses of the Television segment and the Cable Network Programming segment are the acquisition and production expenses related to programming and the production and technical expenses related to operating the technical facilities of the broadcaster or cable network. Other expenses include promotional expenses related to improving the market visibility and awareness of the broadcaster or cable network and its programming. Additional expenses include sales commissions paid to the in-house advertising sales force, as well as salaries, employee benefits, rent and other routine overhead expenses.

The Company has several multi-year sports rights agreements, including contracts with the National Football League (“NFL”) through fiscal 2014, contracts with the National Association of Stock Car Auto Racing (“NASCAR”) for certain races and exclusive rights for certain ancillary content through calendar year 2014 and a contract with Major League Baseball (“MLB”) through calendar year 2013. These contracts provide the Company with the broadcast rights to certain U.S. national sporting events during their respective terms. The costs of these sports contracts are charged to expense based on the ratio of each period’s operating profit to estimated total operating profit for the remaining term of the contract.

The profitability of these long-term U.S. national sports contracts is based on the Company’s best estimates at December 31, 2009 of directly attributable revenues and costs; such estimates may change in the future and such changes may be significant. Should revenues decline from estimates applied at December 31, 2009, additional amortization of rights may be recorded. Should revenues improve as compared to estimated revenues, the Company may have an improved operating profit related to the contract, which may be recognized over the estimated remaining contract term.

While the Company seeks to ensure compliance with federal indecency laws and related Federal Communications Commission (“FCC”) regulations, the definition of “indecency” is subject to interpretation and there can be no assurance that the Company will not broadcast programming that is ultimately determined by the FCC to violate the prohibition against indecency. Such programming could subject the Company to regulatory review or investigation, fines, adverse publicity or other sanctions, including the loss of station licenses.

 

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Direct Broadcast Satellite Television

The DBS segment’s operations consist of SKY Italia, which provides basic and premium programming services via satellite and broadband directly to subscribers in Italy. SKY Italia derives revenues principally from subscriber fees. The Company believes that the quality and variety of video, audio and interactive programming, quality of picture, access to service, customer service and price are the key elements for gaining and maintaining market share. SKY Italia’s competition includes companies that offer video, audio, interactive programming, telephony, data and other information and entertainment services, including broadband Internet providers, digital terrestrial transmission (“DTT”) services, wireless companies and companies that are developing new media technologies. The Company is currently prohibited from providing a pay DTT service under regulations of the European Commission.

SKY Italia’s most significant operating expenses are those related to the acquisition of entertainment, movie and sports programming and subscribers and the production and technical expenses related to operating the technical facilities. Operating expenses related to sports programming are generally recognized over the course of the related sport season, which may cause fluctuations in the operating results of this segment.

Integrated Marketing Services

The Integrated Marketing Services segment derives revenues from the sale of advertising space in free-standing inserts, in-store marketing products and services, promotional advertising and production fees. Adverse changes in general market conditions for advertising may affect revenues. Operating expenses for the Integrated Marketing Services segment include paper, promotional, printing, retail commissions, distribution and production costs. Selling, general and administrative expenses include salaries, employee benefits, rent and other routine overhead.

Newspapers and Information Services

The Newspapers and Information Services segment derives revenues primarily from the sale of advertising space, the sale of published newspapers, subscriptions and contract printing. Adverse changes in general market conditions for advertising may affect revenues. Circulation revenues can be greatly affected by changes in the cover prices of the Company’s and/or competitors’ newspapers, as well as by promotional activities.

Operating expenses for the Newspapers and Information Services segment include costs related to newsprint, ink, printing, distribution and editorial content. Selling, general and administrative expenses include salaries, employee benefits, rent and other routine overhead.

The Newspapers and Information Services segment’s advertising volume, circulation and the price of newsprint are the key variables whose fluctuations can have a material effect on the Company’s operating results and cash flow. The Company has to anticipate the level of advertising volume, circulation and newsprint prices in managing its businesses to maximize operating profit during expanding and contracting economic cycles. Newsprint is a basic commodity and its price is sensitive to the balance of supply and demand. The Company’s costs and expenses are affected by the cyclical increases and decreases in the price of newsprint. The newspapers published by the Company compete for readership and advertising with local and national newspapers and also compete with television, radio, Internet and other media alternatives in their respective markets. Competition for newspaper circulation is based on the news and editorial content of the newspaper, service, cover price and, from time to time, various promotions. The success of the newspapers published by the Company in competing with other newspapers and media for advertising depends upon advertisers’ judgments as to the most effective use of their advertising budgets. Competition for advertising among newspapers is based upon circulation levels, readership levels, reader demographics, internet reach, advertising rates and advertiser results. Such judgments are based on factors such as cost, availability of alternative media, circulation and quality of readership demographics. In recent years, the newspaper industry has experienced difficulty increasing circulation volume

 

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and revenues. This is due to, among other factors, increased competition from new media formats and sources and shifting preferences among some consumers to receive all or a portion of their news from sources other than a newspaper.

The Newspapers and Information Services segment also derives revenue from the provision of subscriber-based information services and the licensing of products and content to third-parties. Losses in the number of subscribers for these information services may affect revenues. The information services provided by the Company also compete with other media sources (free and subscription-based) and new media formats. Licensing revenues depend on new and renewed customer contracts, and may be affected if the Company is unable to generate new licensing business or if existing customers renew for lesser amounts, terminate early or forego renewal.

The Company believes that competition from new media formats and sources and shifting consumer preferences will continue to pose challenges within the Newspapers and Information Services industries.

Book Publishing

The Book Publishing segment derives revenues from the sale of general and children’s books in the United States and internationally. The revenues and operating results of the Book Publishing segment are significantly affected by the timing of the Company’s releases and the number of its books in the marketplace. The book publishing marketplace is subject to increased periods of demand in the summer months and during the end-of-year holiday season. This market place continues to change due to technical innovations, electronic book devices and other factors. Each book is a separate and distinct product, and its financial success depends upon many factors, including public acceptance.

Major new title releases represent a significant portion of the Company’s sales throughout the fiscal year. Consumer books are generally sold on a fully returnable basis, resulting in the return of unsold books. In the domestic and international markets, the Company is subject to global trends and local economic conditions.

Operating expenses for the Book Publishing segment include costs related to paper, printing, authors’ royalties, editorial, art and design expenses. Selling, general and administrative expenses include promotional expenses, salaries, employee benefits, rent and other routine overhead.

Other

The Other segment consists primarily of:

Digital Media Group

The Company sells advertising, sponsorships and subscription services on the Company’s various digital media properties. Significant expenses associated with the company’s digital media properties include development costs, advertising and promotional expenses, salaries, employee benefits and other routine overhead. The Company’s digital media properties include, among others, MySpace.com, IGN.com and Fox Audience Network.

News Outdoor

News Outdoor sells outdoor advertising space on various media, primarily in Russia and Eastern Europe. Significant expenses associated with the News Outdoor business include site lease costs, direct production, maintenance and installation expenses, salaries, employee benefits and other routine overhead. The Company has announced that it intends to explore strategic options for News Outdoor in connection with News Outdoor’s continued development plans. The strategic options include, but are not limited to, exploring the opportunity to expand News Outdoor’s existing shareholder group through new partners. No agreement has yet been entered into with respect to any transaction.

 

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Other Business Developments

During the first quarter of fiscal 2010, the Company acquired additional shares of Sky Deutschland AG (“Sky Deutschland”), increasing its ownership from approximately 38% at June 30, 2009 to approximately 40% at December 31, 2009.

In December 2009, the Company announced that it had entered into an agreement with Sky Deutschland to subscribe to up to 49 million in newly registered shares of Sky Deutschland pursuant to a capital increase. Sky Deutschland completed this capital increase in January 2010 and, accordingly, the Company purchased 49 million newly registered shares of Sky Deutschland at a price of €2.25 per new share for an aggregate cost of approximately $158 million. As a result, News Corporation’s stake in Sky Deutschland increased to approximately 45%.

In January 2010, the Company sold its 33% interest in STOXX, Ltd. (“STOXX”), a European market index provider, for approximately $300 million in cash and additional consideration of up to approximately $40 million conditioned upon STOXX achieving specific performance objectives.

RESULTS OF OPERATIONS

Results of Operations—For the three and six months ended December 31, 2009 versus the three and six months ended December 31, 2008.

The following table sets forth the Company’s operating results for the three and six months ended December 31, 2009, as compared to the three and six months ended December 31, 2008.

 

     For the three months ended
December 31,
    For the six months ended
December 31,
 
     2009     2008     % Change     2009     2008     % Change  
     (in millions, except %)  

Revenues

   $ 8,684      $ 7,871      10   $ 15,883      $ 15,380      3

Operating expenses

     (5,630     (5,161   9     (10,035     (9,732   3

Selling, general and administrative

     (2,043     (1,588   29     (3,478     (3,269   6

Depreciation and amortization

     (299     (283   6     (596     (579   3

Impairment and restructuring charges

     (10     (8,465   *     (30     (8,473   *

Equity earnings (losses) of affiliates

     58        30      93     90        (329   *

Interest expense, net

     (269     (231   16     (514     (452   14

Interest income

     16        20      (20 )%      41        60      (32 )% 

Other, net

     (86     (98   (12 )%      (98     206      *
                                            

Income (loss) before income tax expense

     421        (7,905   *     1,263        (7,188   *

Income tax (expense) benefit

     (137     1,514      *     (382     1,333      *
                                            

Net income (loss)

     284        (6,391   *     881        (5,855   *

Less: Net income attributable to noncontrolling interests

     (30     (26   15     (56     (47   19
                                            

Net income (loss) attributable to News Corporation stockholders

   $ 254      $ (6,417   *   $ 825      $ (5,902   *
                                            

 

** not meaningful

Overview— The Company’s revenues increased 10% and 3% for the three and six months ended December 31, 2009, respectively, as compared to the corresponding periods of fiscal 2009. The increases were primarily due to revenue increases at the Filmed Entertainment, Television, Cable Network Programming, and Book Publishing segments. The increases at the Filmed Entertainment segment were primarily due to increased worldwide theatrical and home entertainment revenues. Television segment revenues increased primarily due to increased MLB and prime-time advertising revenues. The increases at the Cable Network Programming segment

 

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were primarily due to increases in net affiliate revenues. The increases at the Book Publishing segment were primarily due to strong title offerings in fiscal 2010, with no comparable titles in the corresponding periods of fiscal 2009. These increases were partially offset by the decreased revenues at the Other segment, primarily due to the sale of a portion of the Company’s ownership stake in NDS Group plc (“NDS”) in February 2009. As a result of the sale, the Company’s portion of NDS’s operating results subsequent to February 2009 is included within Equity earnings (losses) of affiliates.

Operating expenses for the three and six months ended December 31, 2009 increased 9% and 3%, respectively, as compared to the corresponding periods of fiscal 2009. The increases were primarily due to increased amortization of production and participation costs and higher home entertainment manufacturing and marketing costs at the Filmed Entertainment segment. Also contributing to these increases were higher entertainment and sports programming at the Television and Cable Network Programming segments, as well as unfavorable foreign currency fluctuations. These increases were partially offset by the absence of costs related to NDS in the Other segment, reflecting the sale of a portion of the Company’s NDS ownership stake in February 2009, as well as the effects of company-wide cost containment initiatives.

Selling, General and Administrative expenses for the three and six months ended December 31, 2009 increased 29% and 6%, respectively, as compared to the corresponding periods of fiscal 2009. These increases were primarily due to the $500 million legal settlement charge with Valassis Communications, Inc. (“Valassis”) at the Integrated Marketing Services segment, as discussed in Note 13 to the accompanying unaudited consolidated financial statements, partially offset by the absence of costs related to NDS and the effects of company-wide cost containment initiatives.

Depreciation and amortization increased 6% and 3% for the three and six months ended December 31, 2009, respectively, as compared to the corresponding periods of fiscal 2009. These increases were primarily due to higher depreciation at the DBS segment resulting from higher volumes of set-top boxes, partially offset by the absence of depreciation and amortization related to NDS.

Impairment and restructuring charges—As discussed in Note 4 to the accompanying unaudited consolidated financial statements, the Company recorded approximately $10 million and $30 million of additional restructuring charges in the unaudited consolidated statements of operations for the three and six months ended December 31, 2009, respectively. The restructuring charges for the three months ended December 31, 2009 reflect approximately $10 million recorded at the Other segment related to a restructuring program at the Company’s Fox Mobile Entertainment division and accretion on facility termination obligations. The restructuring charges for the six months ended December 31, 2009 reflect an $18 million charge related to the sales and distribution operations of the STAR channels and a $12 million charge at the Other segment related to the restructuring program at the Company’s Fox Mobile Entertainment division and accretion on facility termination obligations.

During the three and six months ended December 31, 2008, the Company recorded approximately $21 million and $29 million in restructuring charges, respectively, primarily reflecting restructuring charges recorded at the Newspapers and Information Services segment.

During the second quarter of fiscal 2009, the Company performed an interim impairment review in advance of its annual impairment assessment because the Company believed events had occurred and circumstances had changed that would more likely than not reduce the fair value of the Company’s goodwill and indefinite-lived intangible assets below their carrying amounts. These events included: (a) the decline of the price of the Company’s Class A common stock, par value $0.01 per share (“Class A Common Stock”), and Class B common stock, par value $0.01 per share (“Class B Common Stock”), below the carrying value of the Company’s stockholders’ equity; (b) the reduced growth in advertising revenues; (c) the decline in the operating profit margins in some of the Company’s advertising-based businesses; and (d) the decline in the valuations of other television stations, newspapers and advertising-based companies as determined by the current trading values of those companies.

 

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As a result of the interim impairment review performed, the Company recorded non-cash impairment charges of approximately $8.4 billion ($6.7 billion, net of tax) in the three and six months ended December 31, 2008. The charges consisted of a write-down of the Company’s indefinite-lived intangible assets (primarily FCC licenses in the Television segment) of $4.6 billion, a write-down of $3.6 billion of goodwill and a write-down of the Newspapers and Information Services segment’s fixed assets of $185 million in accordance with ASC 360 “Property, Plant and Equipment.”

Equity earnings (losses) of affiliatesEquity earnings (losses) of affiliates increased $28 million for the three months ended December 31, 2009 as compared to the corresponding period of fiscal 2009, primarily due to higher contributions from British Sky Broadcasting Group plc (“BSkyB”) as a result of higher subscription revenues and the absence of the write-down related to BSkyB’s ITV plc (“ITV”) investment recorded during the three months ended December 31, 2008. Equity earnings (losses) of affiliates increased $419 million during the six months ended December 31, 2009 as compared to the corresponding period of fiscal 2009, primarily due to the absence of a $422 million write-down of the Company’s investment in Sky Deutschland and write-downs related to BSkyB’s ITV investment recorded during the six months ended December 31, 2008.

 

     For the three months ended
December 31,
    For the six months ended
December 31,
 
         2009            2008        % Change         2009            2008         % Change  
     (in millions, except %)  

DBS equity affiliates

   $ 26    $ 17    53   $ 31    $ (376   *

Cable channel equity affiliates

     10      3    *     29      27      7

Other equity affiliates

     22      10    *     30      20      50
                                         

Total equity earnings (losses) of affiliates

   $ 58    $ 30    93   $ 90    $ (329   *
                                         

 

** not meaningful

Interest expense, net— Interest expense, net for the three and six months ended December 31, 2009 increased $38 million and $62 million, respectively, as compared to the corresponding periods of fiscal 2009, primarily due to the issuance of borrowings in February 2009 and August 2009. The increase in interest expense, net for the six months ended December 31, 2009 was partially offset by the retirement of $200 million of the Company’s borrowings in October 2008.

Interest income—Interest income decreased $4 million and $19 million for the three and six months ended December 31, 2009, respectively, as compared to the corresponding periods of fiscal 2009, primarily due to lower interest rates.

Other, net—

 

     For the three months
ended December 31,
    For the six months
ended December 31,
 
         2009             2008             2009             2008      
    

(in millions)

 

Loss on the Photobucket transaction (a)

   $ (29   $ —        $ (29   $ —     

Gain on the sale of the Stations (a)

     —          —          —          232   

Loss on the sale of eastern European television stations (a)

     (19     (100     (19     (100

Change in fair value of exchangeable securities and other financial instruments (b)

     —          14        (4     76   

Other

     (38     (12     (46     (2
                                

Total Other, net

   $ (86   $ (98   $ (98   $ 206   
                                

 

(a)

See Note 2 – Acquisitions, Disposals and Other Transactions to the accompanying unaudited consolidated financial statements.

 

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(b)

The Company has certain outstanding exchangeable debt securities which contain embedded derivatives. Pursuant to ASC 815 “Derivatives and Hedging,” these embedded derivatives require separate accounting and, as such, changes in their fair value are recognized in other, net. A significant variance in the price of underlying stock could have a material impact on the operating results of the Company.

Income tax expense—The effective income tax rate for the three and six months ended December 31, 2009 was 33% and 30%, respectively, which was lower than the statutory tax rate of 35%, primarily due to permanent differences recognized in the six months ended December 31, 2009. The effective income tax rate for the three and six months ended December 31, 2008 was 19%, which was lower than the statutory tax rate of 35%, primarily due to non-deductible goodwill included within the impairment charge taken in the three months ended December 31, 2008 noted above.

Net income (loss)—Net income (loss) for the three and six months ended December 31, 2009 increased as compared to the corresponding periods of fiscal 2009. These increases were primarily due to the absence of impairment charges noted above, partially offset by the charge related to settlement of the Valassis litigation. Also contributing to the increases were higher earnings from equity affiliates noted above. The increase during the six months ended December 31, 2009 was partially offset by the absence of the gain on the sale of eight of the Company’s television stations in July 2008.

Segment Analysis:

The following table sets forth the Company’s revenues and segment operating income for the three and six months ended December 31, 2009 as compared to the three and six months ended December 31, 2008.

 

     For the three months ended
December 31,
    For the six months ended
December 31,
 
     2009     2008     % Change     2009     2008     % Change  
     (in millions, except %)  

Revenues:

            

Filmed Entertainment

   $ 1,898      $ 1,485      28   $ 3,419      $ 2,744