<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
Amendment No. 1
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 1-14595
FOX ENTERTAINMENT GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 95-4066193
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) 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)852-7111
Securities registered pursuant to Section 12 (b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Class A Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.|_|
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As of March 1, 2000 the aggregate market value of common stock held by
non-affiliates of the registrant (based on the closing price on such date as
reported on the New York Stock Exchange - Composite Transactions) was
$3,307,200,000.
As of March 29, 2000, 176,559,834 shares of Class A Common Stock, par
value $.01 per share, and 547,500,000 shares of Class B Common Stock, par value
$.01 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Fox Entertainment Group, Inc.'s Notice of 1999 Annual Meeting
and Proxy Statement to be filed with the Commission pursuant to Regulation 14A
of the Securities Exchange Act of 1934 are incorporated by reference into Part
III of this report.
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial data of the Company
presented below for the years ended June 30, 1999, 1998 and 1997 and at June 30,
1999 and 1998, have been derived from, and are qualified by reference to, the
audited consolidated financial statements of the Company included elsewhere
herein. The selected historical consolidated financial data of the Company
presented below for the years ended June 30, 1996 and 1995 and at June 30, 1996
and 1995 have been derived from unaudited consolidated financial statements of
the Company. The financial statements prior to November 11, 1998 were presented
on a combined basis. The financial statements presented subsequent to
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November 11, 1998 are consolidated to reflect the Reorganization (as defined in
Note 1 of the consolidated financial statements included elsewhere herein). For
reporting purposes, the financial statements for all periods are collectively
referred to as consolidated financial statements. The selected consolidated
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and the related Notes thereto and the other financial
information included elsewhere herein.
The historical financial information may not be indicative of the
Company's future performance and does not necessarily reflect what the financial
position and results of operations of the Company would have been had the
Company operated as a separate, stand-alone entity during the periods covered.
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<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
------------------------------------------------------------
1999 1998 1997(3) 1996(2) 1995(1)
---- ---- ------- ------- -------
(Dollars in Millions, except for Per Share Data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues $ 8,057 $ 7,023 $ 5,847 $ 4,548 $ 3,915
======= ======= ======= ======= =======
Operating income $ 716 $ 663 $ 320 $ 481 $ 391
======= ======= ======= ======= =======
Net income (loss) $ 205 $ 176 $ 30 411 $ (23)
======= ======= ======= ======= =======
Basic and diluted earnings (loss)
per share $ 0.33 $ 0.32 $ 0.05 $ 0.75 $ (0.04)
======= ======= ======= ======= =======
STATEMENT OF CASH FLOWS:
Cash flows provided by operating activities $ 753 $ 306 $ 117 $ 321 $ 183
Cash flows used in investing activities (615) (876) (278) (838) (372)
Cash flows (used in) provided by
Financing activities (118) 415 362 548 201
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30,
----------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars In Millions)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 121 $ 101 $ 256 $ 55 $ 24
Total assets 13,163 12,630 11,697 6,207 5,008
Due to intercompany affiliates 1,389 3,702 2,581 2,587 1,955
Senior Secured Discount Notes and
11% Secured Notes -- 206 714 -- --
Film production financing and other 53 169 351 141 172
Shareholders' equity 6,668 3,941 3,767 1,358 942
</TABLE>
FOOTNOTES:
(1) Effective at the beginning of fiscal 1995, the Company changed its method of
accounting for multi-year programming contracts resulting in a charge of $590
million related to FOX's NFL broadcast contract. Additionally, during fiscal
1995, the Company changed its estimate of the performance of this contract,
resulting in a reversal of the charge of approximately $237 million. The net
effect in fiscal 1995 of these two accounting changes was approximately $353
million and has been presented as other expense to allow for comparable analyses
of the results of operations and trends.
(2) The Company sold its television stations in Dallas and Atlanta in July and
December 1995, respectively, resulting in a $183 million gain in fiscal 1996.
(3) Fiscal 1997 includes the operating performance of the ten television
stations acquired as part of the January 1997 acquisition of New World
Communications Group, Inc.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The following discussion and analysis of the Fox Entertainment Group's
(the "Company") financial condition and results of operations should be read in
conjunction with the Consolidated Financial Statements and the related Notes
thereto included elsewhere in this filing.
The Company manages and reports its businesses in five segments: Filmed
Entertainment, which principally consists of the production and acquisition of
live-action and animated motion pictures for distribution and licensing in all
formats in all entertainment media worldwide and the production of original
television programming; Television Stations,
which principally consists of the
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operation of broadcast television stations; Television Broadcast Network, which
principally consists of the broadcasting of network programming; Other
Television, which represents other broadcast television related activities; and
Cable Network Programming, which principally consists of the production and
licensing of programming distributed through cable television systems and direct
broadcast satellite ("DBS") operators. The Company's interests in certain cable
network programming and related ventures, including Fox/Liberty Networks, LLC
("Fox/Liberty"), Fox Family Worldwide, Inc. ("FFW"), Fox/Liberty Ventures, LLC
and International Sports Programming Partners ("ISPP"), are included in equity
in losses of affiliates and, accordingly, are not reported in the segments set
forth above.
Sources of Revenue
Filmed Entertainment. The Filmed Entertainment segment derives revenue
from theatrical distribution, home video sales, and distribution through
pay-per-view, pay television services, broadcast and cable television. The
revenues and operating results of the Filmed Entertainment segment are
significantly impacted by the timing of the Company's theatrical and home video
releases, the number of its original and returning television series that are
aired by television networks ("Networks") and the number of its television
series licensed in off-network syndication. Theatrical release dates are
determined by several factors, including timing of vacation and holiday periods
and competition in the marketplace. Each motion picture is a separate and
distinct product with its financial success dependent upon many factors,
including audience acceptance.
Television Stations, Television Broadcast Network and Other Television
Businesses. The three reportable television segments derive their revenues
principally from the sale of advertising time. Generally, advertising time is
sold to national advertisers by Fox Broadcasting Company ("FOX") and to national
"spot" and local advertisers by its group of 22 owned and operated television
broadcast stations (the "Fox Television Stations") in their respective markets.
The sale of advertising time is affected by viewer demographics, program ratings
and market conditions. Adverse changes in general market conditions for
advertising may also affect revenues.
Cable Network Programming. The Cable Network Programming segment derives
revenues from monthly subscriber fees as well as from the sale of advertising
time. Monthly subscriber fees are dependent on maintenance of carriage
arrangements with cable television systems and DBS operators. The sale of
advertising time is affected by viewer demographics, program ratings and general
market conditions.
Components of Expenses
Filmed Entertainment. Operating costs incurred by the Filmed Entertainment
segment include production; certain exploitation costs, primarily including
prints and advertising; capitalized overhead and interest costs; participations
and talent residuals. Selling, general and administrative expenses include
salaries, employee benefits, rent and other routine overhead.
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Television Stations, Television Broadcast Network and Other Television
Businesses Segments and Cable Network Programming. Expenses of the three
Television segments and the Cable Network Programming segment include operating
expenses related to acquiring programming and rights to programming, as well as
selling, general and administrative expenses. Operating expenses typically
include production and technical expenses related to operating the technical
facilities of the broadcaster or cable network. Selling, general and
administrative expenses include all promotional expenses related to improving
the market visibility and awareness of the broadcaster or cable network and
sales commissions paid to the in-house sales force involved in the sale of
advertising.
Industry Accounting Practices
Revenue Recognition. Revenues from theatrical distribution of feature
films are recognized on the dates of exhibition. Revenues from home video
distribution, together with related costs, are recognized in the period in which
the product is made widely available for sale by retailers. Revenues from
television distribution are recognized when the motion picture or television
program is available to the licensee for broadcast. Television advertising
revenue is recognized as the commercials are aired. Subscriber fees received
from cable system and DBS operators are recognized as revenue when services are
provided.
Filmed Entertainment and Television Programming Costs. In accordance with
generally accepted accounting principles ("GAAP") and industry practice, the
Company amortizes filmed entertainment and television programming costs using
the individual-film-forecast method under which such costs are amortized for
each film or television program in the ratio that revenue earned in the current
period for such title bears to management's estimate of the total revenues or
operating profits to be realized from all media and markets for such title. The
costs of sports contracts are charged to expense based on the ratio of each
period's operating profits to estimated total operating profit of the contract.
Program rights for entertainment programs and sporting events are amortized over
the license period. Management regularly reviews, and revises when necessary,
its total revenue estimates on a title-by-title and contract basis, which may
result in a change in the rate of amortization and/or a write-down of the film
or television asset to net realizable value.
Use of Operating Income Before Depreciation and Amortization
Management believes that an appropriate measure for evaluating the
operating performance of the Company's business segments is Operating Income
Before Depreciation and Amortization of primarily intangible assets. Operating
Income Before Depreciation and Amortization provides a basis to measure
liquidity and operating performance of each business segment. Although
historical results, including Operating Income Before Depreciation and
Amortization, may not be indicative of future results (as operating performance
is highly contingent on many factors including consumer tastes and preferences),
Operating Income Before Depreciation and Amortization provides management a
measure to analyze operating performance against historical and competitors'
data. Operating Income Before Depreciation and Amortization eliminates the
uneven effect across business segments of considerable amounts of depreciation
and amortization primarily resulting from the value of intangible assets
acquired in business combinations accounted for by the purchase method of
accounting, including the Company's January 1997 acquisition (the "New World
Acquisition") of New World Communications Group, Inc. ("New World"). The
exclusion of amortization charges is consistent with management's belief that
the Company's
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intangible assets, such as broadcast television licenses, film and television
libraries, franchises and the goodwill associated with its brands, are generally
increasing in value as the Company implements its business strategies of
creating, extending and distributing recognizable brands and copyrights
throughout the world. As such, the following comparative discussion of the
results of operations of the Company includes, among other factors, an analysis
of changes in business segment Operating Income Before Depreciation and
Amortization. However, Operating Income Before Depreciation and Amortization
should be considered in addition to, not as a substitute for, operating income,
net income and other measures of financial performance reported in accordance
with GAAP.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------------------------------------
(Dollars in Millions) Other Data
------------------------------
Operating Income Before
Revenues Operating Income Depreciation and Amortization (1)
--------------------------- ----------------------------- ---------------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Filmed Entertainment $ 4,416 $ 3,876 $ 3,112 $ 355 $ 266 $ 113 $ 396 $ 292 $ 138
------- ------- ------- ------- ------- ------- ------- ------- -------
Television Stations 1,469 1,393 1,055 557 539 401 733 696 524
Television Broadcast Network 1,743 1,459 1,474 (32) 21 (39) (15) 31 (32)
Other Television Businesses 300 223 169 (35) (5) (2) (11) -- (2)
Cable Network Programming 129 72 37 (129) (141) (148) (72) (96) (123)
------- ------- ------- ------- ------- ------- ------- ------- -------
8,057 7,023 5,847 716 680 325 1,031 923 505
Other charges -- -- -- -- (17) (5) -- (17) (5)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total $ 8,057 $ 7,023 $ 5,847 $ 716 $ 663 $ 320 $ 1,031 $ 906 $ 500
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- ----------
(1) Operating Income Before Depreciation and Amortization should be considered
in addition to, but not as a substitute for, other measures of financial
performance reported in accordance with GAAP in the Company's audited
consolidated financial statements included elsewhere in this filing. See
"Selected Consolidated Financial Data" for definition of Operating Income
Before Depreciation and Amortization.
[Remainder of page intentionally left blank]
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Results of Operations - Fiscal 1999 vs. Fiscal 1998
The following table sets forth the Company's operating results, by
segment, for fiscal 1999 as compared to fiscal 1998:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------
1999 1998 Change
---- ---- ------
(Dollars in Millions)
<S> <C> <C> <C>
Revenues:
Filmed Entertainment $ 4,416 $ 3,876 $ 540
Television Stations 1,469 1,393 76
Television Broadcast Network 1,743 1,459 284
Other Television Businesses 300 223 77
Cable Network Programming 129 72 57
------- ------- -------
Total revenues $ 8,057 $ 7,023 $ 1,034
======= ======= =======
Operating Income (Loss):
Filmed Entertainment $ 355 $ 266 $ 89
Television Stations 557 539 18
Television Broadcast Network (32) 21 (53)
Other Television Businesses (35) (5) (30)
Cable Network Programming (129) (141) 12
------- ------- -------
716 680 36
Other charges -- (17) 17
------- ------- -------
Total operating income 716 663 53
Interest expense, net (223) (271) 48
Equity in losses of affiliates (146) (81) (65)
------- ------- -------
Income before income taxes 347 311 36
Income tax expense (142) (135) (7)
------- ------- -------
Net income $ 205 $ 176 $ 29
======= ======= =======
Other Data:
Operating Income (Loss) Before Depreciation
and Amortization
Filmed Entertainment $ 396 $ 292 $ 104
Television Stations 733 696 37
Television Broadcast Network (15) 31 (46)
Other Television Businesses (11) -- (11)
Cable Network Programming (72) (96) 24
------- ------- -------
1,031 923 108
------- ------- -------
Other charges -- (17) (17)
------- ------- -------
Total Operating Income Before
Depreciation and Amortization $ 1,031 $ 906 $ 91
======= ======= =======
Depreciation and Amortization:
Filmed Entertainment 41 26 15
Television Stations 176 157 19
Television Broadcast Network 17 10 7
Other Television Businesses 24 5 19
Cable Network Programming 57 45 12
------- ------- -------
Total depreciation and amortization $ 315 $ 243 $ 72
======= ======= =======
</TABLE>
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Filmed Entertainment. For fiscal 1999, revenues increased approximately 14% to
$4.4 billion. During fiscal 1999, the Company released 22 new feature films as
compared to 25 films released during fiscal 1998. The increase in revenues can
be attributed to the strong theatrical releases of Never Been Kissed, Entrapment
and the much anticipated Star Wars Episode I: The Phantom Menace, which, with
its accumulated domestic box office receipts of $416 million, ranks as the third
highest grossing film in history behind two other FOX releases, Titanic and the
original Star Wars. Also contributing were the worldwide theatrical and video
releases of the highly successful There's Something About Mary and Dr. Dolittle
as well as Titanic's worldwide video release.
For fiscal 1999, operating expenses increased primarily as a result of the
increase in the amortization of film costs and in the number of full season
series produced by Twentieth Century Fox Television ("TCFTV") and related
entities for the Networks.
For fiscal 1999, operating income increased approximately 33% to $355
million. Operating results from the successful films mentioned above were
partially offset by the lower than expected results of The Siege, The Thin Red
Line, Ravenous, Office Space and Pushing Tin, for which ultimate losses were
recognized during fiscal 1999 in accordance with GAAP. TCFTV also contributed to
the increase in operating income as a result of its syndication of network
series to cable networks. Partially offsetting these factors was the increase in
production costs of three new dramas as compared to two in the prior fiscal
year.
For fiscal 1999, Operating Income Before Depreciation and Amortization
increased approximately 36% to $396 million representing significantly improved
operating performance primarily as a result of the factors described above.
Television Stations, Television Broadcast Network and Other Television
Businesses. For fiscal 1999, combined revenues from all television related
segments increased approximately 14% to $3.5 billion. The Fox Television
Stations experienced continued revenue growth due to increases in market share,
up 1.1 percentage points to 19.4%, and advertising sales, up 4.7%. For fiscal
1999, operating expenses of the Fox Television Stations increased primarily as a
result of the costs associated with the investment in local programming and news
expansion. Total revenues of the Television Broadcast Network segment increased
by $299 million to $1.7 billion in fiscal 1999. At FOX, base revenue was
positively affected by its programming lineup, resulting in strong ratings in
the key targeted audience, adults aged 18-49 years old. As a result of FOX's
ratings, advertising revenues increased as FOX was able to obtain higher rates
for advertising targeted at adults aged 18-49 years old. Additionally, revenues
increased in fiscal 1999 from the broadcast of Super Bowl XXXIII; the Super Bowl
was not broadcast by FOX in fiscal 1998.
At FOX, increased programming costs related to FOX's National Football
League ("NFL")
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contract, including the costs of Super Bowl XXXIII, combined with a loss on
FOX's Major League Baseball contract due to the New York Yankees' four game
sweep of the 1998 World Series, resulting in a higher average cost per game,
also contributed to the rise in operating expenses. FOX recently implemented a
new agreement with its affiliate stations to increase FOX's share of future
advertising revenue. In the Other Television segment, the increase in revenues,
operating expenses and operating losses in fiscal 1999 principally results from
the inclusion of the full year results of operations of the Los Angeles Dodgers
as compared to the prior year which only included results of operations from the
April 1998 acquisition.
For fiscal 1999, combined operating income of the television related
segments decreased approximately 12% to $490 million primarily as a result of
the factors described above.
For fiscal 1999, combined Operating Income Before Depreciation and
Amortization of the television related segments decreased approximately 3% to
$707 million primarily as a result of the factors described above.
Cable Network Programming. For fiscal 1999, this segment's revenues
increased approximately 79% to $129 million, primarily due to the addition of 9
million new subscribers to the Fox News Channel ("Fox News") and a 200% increase
in ratings from the prior fiscal year yielding higher affiliate and advertising
revenues.
For fiscal 1999, operating expenses increased as a result of increased
marketing, newsgathering and launch support expenses.
For fiscal 1999, operating losses decreased approximately 9%, or $12
million, to a loss of $129 million from a loss of $141 million in fiscal 1998.
Fox News continues to experience losses but has increased subscriber revenues as
a result of its strengthened distribution base.
For fiscal 1999, Operating Loss Before Depreciation and Amortization
narrowed by approximately 25%, or $24 million, to a loss of $72 million from a
loss of $96 million in fiscal 1998. These results represent an improvement in
operating performance as described above.
Interest Expense. For fiscal 1999, interest expense decreased
approximately 18% to $223 million from $271 million in fiscal 1998, principally
reflecting the repayment of external debt and the decrease in average balances
due to The News Corporation Limited and its affiliates ("News Corporation").
Equity in Losses of Affiliates. For fiscal 1999, equity in losses of
affiliates increased approximately 80% to $146 million as compared to a loss of
affiliates of $81 million in fiscal 1998. These losses resulted primarily from
additional interest expense related to a full year of financing costs associated
with the acquisitions of Regional Programming Partners ("RPP") and International
Family Entertainment, Inc. ("IFE").
Income Tax Expense. Income tax expense represents the federal, state and
foreign taxes on earnings before income taxes. The increase in income tax
expense is attributable to the increase in income before income taxes. The
effective income tax rate for fiscal 1999 was
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41% compared with 43% in the prior year. The lower effective tax rate resulted
primarily from reduced state and local taxes provided partially offset by higher
non-deductible amortization and expense compared to fiscal 1998.
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Results of Operations - Fiscal 1998 vs. Fiscal 1997
The following table sets forth the Company's operating results, by
segment, for fiscal 1998 as compared to fiscal 1997:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------
1998 1997 Change
---- ---- ------
(Dollars in Millions)
<S> <C> <C> <C>
Revenues:
Filmed Entertainment $ 3,876 $ 3,112 $ 764
Television Stations 1,393 1,055 338
Television Broadcast Network 1,459 1,474 (15)
Other Television Businesses 223 169 54
Cable Network Programming 72 37 35
------- ------- -------
Total revenues $ 7,023 $ 5,847 $ 1,176
======= ======= =======
Operating Income (Loss):
Filmed Entertainment $ 266 $ 113 $ 153
Television Stations 539 401 138
Television Broadcast Network 21 (39) 60
Other Television Businesses (5) (2) (3)
Cable Network Programming (141) (148) 7
------- ------- -------
680 325 355
Other charges (17) (5) (12)
------- ------- -------
Total operating income 663 320 343
Interest expense, net (271) (191) (80)
Equity in losses of affiliates (81) (50) (31)
------- ------- -------
Income before income taxes 311 79 232
Income tax expense (135) (49) (86)
------- ------- -------
Net income $ 176 $ 30 $ 146
======= ======= =======
Other Data:
Operating Income (Loss) Before Depreciation and Amortization
Filmed Entertainment $ 292 $ 138 $ 154
Television Stations 696 524 172
Television Broadcast Network 31 (32) 63
Other Television Businesses -- (2) 2
Cable Network Programming (96) (123) 27
923 505 418
------- ------- -------
Other charges (17) (5) (12)
------- ------- -------
Total Operating Income Before Depreciation
and Amortization $ 906 $ 500 $ 406
======= ======= =======
Depreciation and Amortization:
Filmed Entertainment $ 26 $ 25 $ 1
Television Stations 157 123 34
Television Broadcast Network 10 7 3
Other Television Businesses 5 -- 5
Cable Network Programming 45 25 20
------- ------- -------
Total depreciation and amortization $ 243 $ 180 $ 63
======= ======= =======
</TABLE>
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Filmed Entertainment. For fiscal 1998, revenues increased approximately
25% to $3.9 billion. During fiscal 1998, the Company released 25 new feature
films as compared to 23 films released during fiscal 1997. The increase in
revenues was primarily attributable to the international box office success of
Titanic, the highest grossing motion picture of all time, the successful
worldwide theatrical release of The Full Monty and the successful home video
releases of The Star Wars Trilogy Special Edition and William Shakespeare's
Romeo + Juliet. The late fiscal 1998 domestic theatrical releases of The X-Files
and Dr. Dolittle have also contributed to these revenues, although a substantial
percentage of these films' successes will be reflected in fiscal 1999 results.
For fiscal 1998, operating expenses increased primarily as a result of the
increased amortization of filmed entertainment costs related to the production
of Titanic. Operating expenses also increased due to the increase in the number
of full season series produced by TCFTV for FOX and the other Networks to 11.5
hours in fiscal 1998 from 5.5 hours in fiscal 1997. In addition, operating
expenses increased in fiscal 1998 due to increased costs relating to marketing
and distribution initiatives for home video sales in certain targeted
international markets.
For fiscal 1998, operating income increased approximately 135% to $266
million. Operating results from the successful films mentioned above were
partially offset by the disappointing results of Out to Sea, Home Alone 3,
Bulworth and The Newton Boys, for which ultimate losses were recognized during
fiscal 1998 in accordance with GAAP and industry practice. The growth in
operating income was partially offset by the increase in the number of full
season series produced by TCFTV for FOX and the other Networks because original
series license fees paid by broadcast networks generally do not fully recover
production costs. Generally, a series must be broadcast for at least three to
four television seasons for there to be a sufficient number of episodes to offer
the series in syndication where additional revenues will be generated.
For fiscal 1998, Operating Income Before Depreciation and Amortization
increased approximately 112% to $292 million representing significantly improved
operating performance primarily as a result of the factors described above.
Television Stations, Television Broadcast Network and Other Television
Businesses. For fiscal 1998, combined revenues of the television related
segments increased approximately 14% to $3.1 billion. The Television Stations
segment experienced revenue growth as a result of a full-year's contribution
from the 10 television stations acquired as part of the New World Acquisition,
as well as revenue growth at both the group's 12 base owned and operated
television stations and the New World stations. This revenue growth was
attributed to increases in market share and advertising rates. For fiscal 1998,
operating expenses of the Fox Television Stations increased primarily as a
result of operating the New World stations for a full year in fiscal 1998, as
well as the costs associated with the investment in local programming. Total
revenues of the Television Broadcast Network segment decreased by $15 million to
$1,459 million in fiscal 1998. At FOX, base revenue increased due to a strong
programming line-up, resulting in strong ratings in the key targeted audience,
adults aged 18-49 years old. As a result of FOX's strong ratings, advertising
revenues increased as FOX was able to obtain higher rates for advertising
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targeted at adults aged 18-49 years old. Offsetting this advertising revenue
increase was the absence of revenues from the Super Bowl which was not broadcast
by FOX in fiscal 1998. For fiscal 1998, operating expenses at FOX decreased
resulting from a reduction of general advertising and promotion costs, coupled
with the absence of the development and production costs associated with the
series 13 Bourbon Street, which was abandoned during fiscal 1997, and
amortization related to the fiscal 1997 Super Bowl broadcast. In the Other
Television segment, the increase in revenues, operating expenses and operating
losses primarily results from the inclusion of the results of operations of the
Los Angeles Dodgers since the April 1998 acquisition.
For fiscal 1998, combined operating income of the television related
segments increased approximately 54% to $555 million. Despite increased costs,
operating margins at the Fox Television Stations improved under the Company's
management. In addition, the operating performance of FOX in fiscal 1998 did not
reflect the contribution from the broadcast of the Super Bowl, which was
broadcast by FOX in fiscal 1997.
For fiscal 1998, combined Operating Income Before Depreciation and
Amortization of the television related segments increased approximately 48% to
$727 million representing significantly improved operating performance primarily
as a result of the factors described above, as well as the increase in
depreciation and amortization. Depreciation and amortization reflects a full
year's amortization of intangible assets relating to the New World Acquisition
versus five months in fiscal 1997.
Cable Network Programming. For fiscal 1998, Fox News' revenues increased
approximately 95% to $72 million, reflecting a full year of operations as well
as a larger subscriber base. Fox News was launched on October 7, 1996.
For fiscal 1998, operating expenses increased as a result of the increased
costs of news gathering and the operation of Fox News for a full year as
compared to only nine months in fiscal 1997.
For fiscal 1998, operating losses decreased approximately 5%, or $7
million, to a loss of $141 million from a loss of $148 million in fiscal 1997.
Fox News continues to experience losses but has increased subscriber revenues as
a result of its strengthened distribution base. Current subscribers now
constitute approximately 34 million with future commitments above 41 million
subscribers.
For fiscal 1998, Operating Income Before Depreciation and Amortization
increased approximately 22% or $27 million, to a loss of $96 million from a loss
of $123 million in fiscal 1997 primarily as a result of the factors described
above, as well as the increase in depreciation and amortization. These results
represent an increase in operating performance. Depreciation and amortization
principally represents a full year depreciation of Fox News' studio facilities
and additional amortization of cable carriage fees.
Other Charges. In fiscal 1998, the Company closed one of its film
divisions resulting in a non-recurring charge.
Page 13
<PAGE>
Interest Expense. For fiscal 1998, intercompany interest expense increased
approximately 21% to $174 million from $144 million in fiscal 1997, principally
reflecting the increase in average balances due to News Corporation and its
affiliates.
The increase in external interest expense reflects increases in the full
year average balances of New World debt and production financing associated with
feature films.
Equity in Losses of Affiliates. For fiscal 1998, equity in losses of
affiliates increased approximately 62% to $81 million as compared to equity in
losses of affiliates of $50 million in fiscal 1997. These losses resulted
primarily from additional interest expenses related to the expansion of
Fox/Liberty including its acquisition of a 40% interest in RPP and expanded
services at ISPP. FFW also reported losses resulting primarily from interest
expense incurred in connection with its acquisition of IFE in fiscal 1998.
Income Tax Expense. The Company has not provided for or paid current
income taxes due to its net taxable losses. Deferred income tax expense
represents the federal, state and foreign taxes on earnings before income taxes.
The effective income tax rate for fiscal 1998 was 43% compared with 62% in the
prior year. The lower effective tax rate resulted from the relationship of
non-deductible items to lower taxable income in fiscal 1997.
Liquidity and Capital Resources
The Company's principal sources of cash flow are from internally generated
funds and borrowings from News Corporation.
Net cash flows from operating activities in fiscal 1999 increased to $745
million from $306 million in fiscal 1998. This increase was primarily
attributable to improvements in operating income and a decrease in other
elements of working capital.
Net cash flows used in investing activities were $607 million and $876
million in fiscal 1999 and 1998, respectively. Capital expenditures during this
period were principally for construction of facilities and renovations at the
Company's Los Angeles Fox Studios lot and for digital technology equipment at
the Fox Television Stations. During fiscal 1999, the Company's major investments
included additional investments in Fox Studios Australia and the Company's joint
ventures with Liberty Media Corporation ("Liberty").
Future minimum payments under the Company's eight-year contract for
program rights to broadcast certain NFL games aggregated approximately $4.2
billion at June 30, 1999, and are payable over the remaining seven-year term.
The Company's minimum commitments and guarantees under certain programming,
production, licensing, artists, athletes, franchise and other agreements
aggregated approximately $2.2 billion at June 30, 1999, which are payable
principally over a five-year period. The NFL contract's impact on the Company's
results over the remaining contract term is dependent upon a number of factors,
including the strength of advertising markets, effectiveness of marketing
efforts and the size of viewer audiences.
Financing activities reflect advances received from News Corporation and
the repayments of outstanding indebtedness. The net proceeds of approximately
$2.7 billion from the consummation of the Company's initial public offering were
used to repay intercompany indebtedness. The cash provided by News Corporation
was primarily used to fund capital expenditures and to repay external debt.
Page 14
<PAGE>
On July 15, 1999, News Corporation acquired substantially all of Liberty's
50% interest in Fox/Liberty. In exchange for its interest, Liberty received
approximately 51.8 million ADRs (representing 207.1 million preferred limited
voting ordinary shares of News Corporation) valued at $1.425 billion.
Upon consummation of this transaction, News Corporation transferred the
acquired interests to the Company in exchange for 51,759,834 shares of the
Company's Class A Common shares valued at $1.425 billion. This transfer to the
Company increased News Corporation's equity interest to 82.67% from 81.44% while
its voting interest remained at 97.8%. Concurrent with this transaction, the
Company repaid approximately $678 million of Fox/Liberty's bank debt. The
repayment of this bank debt was funded through additional advances from its
affiliates.
Due to increased competition and costs associated with film production,
film studios constantly evaluate the risks and rewards of production. Companies
use various strategies to balance this risk with their capital needs, including,
among other methods, co-production, contingent profit participations,
acquisition of distribution rights only, and insurance. Pursuant to a series of
film rights agreements with New Millennium, the Company has agreed to sell
completed feature films produced over the period 1997 through 2001 to New
Millennium at amounts, which approximate cost. The Company is the distributor of
these films. Additionally, the Company has the option to reacquire the films
after a period when significantly all of the ultimate revenues have been earned
based on a formula which considers the remaining projected ultimate revenues,
net of cost, as defined at the time of reacquisition. Through this arrangement,
New Millennium provides the Company with an external source of capital willing
to share in the risks of motion picture production. In cases where the Company
fully produces, retains and distributes motion pictures, the Company has the
full risk and reward from such films. Under the arrangement with New Millennium,
it participates in certain of the risks and rewards from the portfolio of films
it has acquired. Although following the expiration of the New Millennium
arrangement in 2001 the Company expects to be able to extend the existing
arrangements or enter into alternative arrangements, there can be no assurance
that such extension or alternative arrangements will be effected or, if
effected, will be effected on similar terms to the existing arrangements. Unless
this arrangement is extended or an alternate arrangement is entered into prior
to the expiration of the film rights agreements in 2001, the Company expects
that the funding of its film production activities will be met through
internally generated funds or from other external sources of funds, which could
include funds made available to the Company from News Corporation or its
affiliates.
The Company does not record any revenue or expense from the sale of the
films, at cost, to New Millennium. Thereafter, the Company accrues
participations due to New Millennium in the same manner that the Company has
historically amortized film costs under Statement of Financial Accounting
Standards ("SFAS") No. 53, "Financial Reporting by Producers and Distributors of
Motion Picture Films". As the participation payments due to New Millennium are
payable over a two-to-three year period, amounts included in interest expense
primarily reflect the direct pass through cost that New Millennium charges the
Company for interest and related costs on its credit facility. Cumulatively,
through June 30, 1999 and 1998, 63 and 45 films had been sold, respectively. No
films have been reacquired as of June 30, 1999. As of June 30, 1999 and 1998,
$432 million and $455 million of amounts due under these agreements were
included in participations, residuals and royalties payable, respectively.
Page 15
<PAGE>
The Company is funded primarily by loans from other subsidiaries and
affiliates of News Corporation. The Company used the entire net proceeds from
its initial public offering to repay a portion of the amounts due to
intercompany affiliates. Immediately following consummation of the initial
public offering and the application of the net proceeds therefrom, the aggregate
amount outstanding due to intercompany affiliates was approximately $1.8
billion. From November 11, 1998, interest on outstanding intercompany balances
has been charged at commercial market rates not to exceed News Corporation's
average cost of borrowing as set forth in the Master Intercompany Agreement. At
June 30, 1999, the intercompany interest rate approximated 8%. The Company
anticipates that cash provided by future operations will be sufficient to meet
its working capital requirements.
Year 2000
The Company, like most large companies, depends on many different computer
systems and other chip-based devices for the continuing conduct of its business.
Many of the computer systems and chip-based devices in use today may be unable
to correctly process data or may not operate at all after December 31, 1999
because those systems recognize the year within a date only by the last two
digits. Some programs may interpret the year "00" as 1900, instead of 2000,
causing errors in calculations or the value "00" may be considered invalid by
the computer program, causing the system to fail.
The Company's exposure to potential Year 2000 ("Y2K") problems exists in
two general areas: technological operations within the Company's sole control
and technological operations dependent in some way on one or more third parties.
These technological operations include information technology ("IT") systems and
non-IT systems, including those with embedded technology, hardware and software.
The Company has substantially completed the process of identifying and
assessing potential Y2K difficulties in its technological operations, including
IT applications, IT technology and support, desktop hardware and software,
non-IT systems and important third party operations, and distinguishing those
that may affect business continuity from those that may not. An item is
considered to have a business continuity impact on the Company if its
Y2K-related failure would significantly impair the ability of one of its major
business units to (1) produce, market and distribute the products or services
that generate significant revenues for that business, (2) meet its obligations
to pay its employees, artists, vendors and other obligations or (3) meet its
obligations under regulatory requirements. Based upon its efforts to date, the
Company believes that all IT and non-IT systems will remain up and running after
January 1, 2000. The Company has substantially completed the assessment and
remediation phases for these potential exposures and expects that testing with
respect to technological operations in its sole control will be substantially
completed in all material respects by the end of the third quarter of calendar
1999.
Most of the Company's potential Y2K exposures, however, are in the area of
technological operations dependent on one or more third parties. The financial
impact on the Company of such third parties not achieving high levels of Y2K
readiness cannot be estimated with any degree of accuracy. In the area of
business continuity, technological operations dependent in some way on one or
more third parties, the situation is much less in the Company's ability to
predict or control. In addition, many of the Company's businesses are dependent
on third parties that are themselves heavily dependent on technology. In some
cases, third party dependence is on vendors of technology who are themselves
working towards solutions to Y2K problems. In other cases, third party
dependence is on suppliers of
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<PAGE>
products or services that are themselves computer-intensive. The Company has
included in its "mission critical" inventory significant service providers,
vendors, suppliers and customers that are believed to be critical to business
operations. The Company is in various stages of attempting to ascertain the
state of Y2K readiness of significant third parties through questionnaires,
interviews, on-site visits, industry group participation and other available
means. The ability to continue to deliver services to customers is dependent,
like all large companies, on the continued functioning, domestically and
internationally, of basic, heavily computerized services such as banking,
telephony, power, and various distribution mechanisms ranging from the mail,
railroads and trucking to high-speed data and broadcast transmissions. The
Company is taking steps to attempt to ensure that the third parties on which it
is heavily reliant are Y2K ready, but cannot predict the likelihood of such
readiness nor the direct or indirect costs of non-compliance by those third
parties or of securing such services from alternate third parties.
Structure of Year 2000 Program. The Company has been focused on the Y2K
issue for several years since its capital spending policy required that
significant investments made in technology in the periods prior to December 31,
1999, would be for systems which would be operational after December 31, 1999.
Operating Division Project Teams are the focal point for ensuring that
each division maintains business and technical stability in all Y2K areas, and
that all major issues are communicated to the Audit Committee. The Boards of
Directors of the Company and News Corporation are made aware of the actions
being taken to address Y2K issues.
Definition of Readiness. An item is defined as "Year 2000 Ready" when,
after having undergone an internal review process and having been tested using a
set of representative dates, the risk of material failure due to a date
processing problem is assessed as insignificant.
Area of Focus and Progress. The Company will continue to proceed through
its various phases of assessment, strategy, detailed planning, implementation,
testing and management. The Company expects to be Y2K ready in respect of
substantially all "mission critical" technology systems during the third quarter
of calendar 1999.
The Company recognizes that system failures resulting from the Y2K problem
could adversely affect operations and financial resources in all of its business
segments. For example:
In the Filmed Entertainment segment, Y2K failures could interfere with
critical systems in such areas as the production, duplication and distribution
of motion picture and home video product.
In the Television Segments and Cable Network Programming segment, at-risk
operations include satellite transmission and communication systems. Y2K
failures in such systems could adversely affect television networks including
cable services and owned and operated television stations.
The Project Teams are focusing their attention in the areas described
above as well as in the following major areas:
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<PAGE>
Core Computer Systems. Information technology systems account for much of
the Y2K work and include all computer systems and technology managed by the
Company's divisions. All core systems have been assessed, plans are in place,
and work is being undertaken to rectify, test and implement changes where
required. Major IT vendors and suppliers have been contacted as to their Y2K
readiness and their deliverables factored into our plans.
Office and Desktop Computer Systems. Work is in progress to assess and
remediate all office and desktop computer systems, some of which are stand-alone
business unit systems. This includes personal computers, LAN server hardware,
software, and operating and data systems.
Premises. An inventory of all-critical broadcast equipment, office
equipment and building infrastructure has been completed for all major sites.
Goods and Services Providers. The Company recognizes the importance of the
supply chain to its operations. Key suppliers, including technology providers,
are being contacted to assess their Y2K readiness.
Customers. The Company is communicating with many of its customers to
assist them in understanding Y2K risks and how they might prepare themselves to
manage those risks.
Contingency Planning. The Company believes that it has established an
effective program to resolve all significant Y2K issues in its sole control in a
timely manner. However, the Company has not yet completed all phases of its
program and is depending on third parties whose progress is not within its
control. Therefore, the Y2K projects include procedures to identify and assess
the business interruption that might occur as a result of the dependence on
third parties. Vendors, suppliers, service suppliers, customers and governmental
bodies have been identified and significant progress has been made to ascertain
their stage of Y2K readiness. In the event we do not complete any of the planned
additional remediation prior to the Year 2000 or if third parties on which our
businesses rely experience significant issues related to Y2K, we could
experience significant difficulty in producing and delivering products and
services and conducting our business in the Year 2000 as we have in the past.
The amount of potential liability and lost revenue that might result because of
such difficulty cannot be reasonably estimated at this time.
The Company has been focusing its efforts on identifying and remediating
its Y2K exposures and is developing and will have tested where practical
contingency plans in the event it does not successfully complete all phases of
its Y2K program. These contingency plans include, but are not limited to
identification of alternative suppliers, vendors and service providers.
Potential Costs. The Company has been focused on the Y2K issue for several
years since its capital spending policy required that significant investments
made in technology in the periods prior to December 31, 1999 would be for
systems which would be operational after December 31, 1999. To date, the Company
has incurred approximately $ 13 million in costs related to its Y2K readiness
program which has been funded from its operating cash flow. The Company
currently estimates that the total costs of its Y2K readiness program will not
exceed $ 20 million. The total cost estimate is based on the current assessment
of the Company's Y2K readiness needs and is subject to change as the program
progresses. These costs have not all been incremental, but rather reflect
redeployment of internal resources from other activities. The Company does not
expect the activities of the Y2K readiness
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<PAGE>
program to have a material adverse effect on the ongoing business operations of
the Company, although it is possible that certain maintenance and upgrading
processes will be delayed as the result of the priority being given to the Y2K
readiness.
The Company has made forward-looking statements regarding its Y2K Program.
Those statements include: the Company's expectations about when it will be Year
2000 Ready; the Company's expectations about the impact of the Y2K problem on
its ability to continue to operate on and after January 1, 2000; the readiness
of its suppliers and the costs associated with the Y2K program. The Company has
described many of the risks associated with those forward-looking statements
above. However, the Company wishes to caution the reader that there are many
factors that could cause its actual results to differ materially from those
stated in the forward-looking statements. This is especially the case because
many aspects of its Y2K program are outside its control such as the performance
of third-party suppliers. All of these factors make it impossible for the
Company to ensure that it will be able to resolve all Y2K problems in a timely
manner to avoid materially adversely affecting its operations or business or
exposing the Company to third-party liability.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART III
ITEM 8. FINANCIAL STATEMEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
FOX ENTERTAINMENT GROUP, INC.
Report of Independent Public
Accountants.................................................................41
Consolidated Balance Sheets as of June 30, 1999 and 1998....................42
Consolidated Statements of Operations for the years ended
June 30, 1999, 1998 and 1997.............................................43
Consolidated Statements of Cash Flows for the years ended
June 30, 1999, 1998 and 1997.............................................44
Consolidated Statements of Shareholders' Equity for the
years ended June 30, 1999, 1998 and 1997.................................45
Notes to Consolidated Financial Statements..................................46
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<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Fox Entertainment Group, Inc.
We have audited the accompanying consolidated balance sheets of Fox
Entertainment Group, Inc., a Delaware corporation, and Subsidiaries (the
"Company"), as of June 30, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended June 30, 1999 (as revised - see note 13). These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements (as revised - see note 13)
referred to above present fairly, in all material respects, the financial
position of Fox Entertainment Group, Inc. and Subsidiaries as of June 30, 1999
and 1998, and the results of its operations and its cash flows for each of the
three years in the period ended June 30, 1999, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Los Angeles, California
August 18,1999 (except
with respect to the items
referred to in Note 13, as to
which the date is March 29, 2000)
Page 20
<PAGE>
FOX ENTERTAINMENT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30,
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
1999 1998
ASSETS
Cash and cash equivalents .......................... $ 121 $ 101
Accounts receivable, net .......................... 1,756 1,949
Filmed entertainment and television
programming costs, net ............................. 2,621 2,071
Investments in equity affiliates ................... 785 791
Property and equipment, net ........................ 1,321 1,111
Intangible assets, net ............................. 5,818 5,941
Other assets and investments ....................... 741 666
------- -------
Total assets .................................... $13,163 $12,630
======= =======
LIABILITIES
Accounts payable and accrued liabilities ........... $ 1,682 $ 1,613
Participations, residuals and royalties
payable ............................................ 1,321 1,153
Television programming rights payable .............. 566 513
Deferred revenue ................................... 293 238
Borrowings ......................................... 53 375
Deferred income taxes .............................. 975 874
Other liabilities .................................. 216 221
------- -------
5,106 4,987
Due to intercompany affiliates ..................... 1,389 3,702
------- -------
Total liabilities ............................... 6,495 8,689
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, $100 par value per share;
0 and 10,000 shares authorized; 0
and 7,600 shares issued and outstanding
at June 30, 1999 and 1998, respectively ............ -- 1
Class A Common stock, $.01 par value
per share; 1,000,000,000 and 0 shares
authorized; 124,800,000 and 0 shares
issued and outstanding at June 30, 1999
and 1998, respectively ............................. 1 --
Class B Common stock, $.01 par value per
share; 650,000,000 and 0 shares authorized;
547,500,000 and 0 shares issued
and outstanding at June 30, 1999 and 1998,
respectively ....................................... 6 --
Paid-in capital .................................... 6,599 3,132
Retained earnings and other comprehensive
income ............................................. 62 808
------- -------
Total shareholders' equity ..................... 6,668 3,941
------- -------
Total liabilities and shareholders' equity .... $13,163 $12,630
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
FOX ENTERTAINMENT GROUP, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30,
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
1999 1998 1997
---- ---- ----
Revenues ................................... $ 8,057 $ 7,023 $ 5,847
Expenses:
Operating ................................ 6,220 5,332 4,667
Selling, general and administrative ...... 806 768 675
Depreciation and amortization ............ 315 243 180
Other charges ............................ -- 17 5
------- ------- -------
Operating income ........................... 716 663 320
Other expense:
Interest expense, net .................... (223) (271) (191)
Equity in losses of affiliates ........... (146) (81) (50)
------- ------- -------
Income before income taxes ................. 347 311 79
Income tax expense ......................... (142) (135) (49)
------- ------- -------
Net income ................................. $ 205 $ 176 $ 30
======= ======= =======
Basic and diluted earnings per share
$ 0.33 $ 0.32 $ 0.05
======= ======= =======
Basic and diluted weighted average
number of common equivalent shares
outstanding (in millions) .................. 626 548 548
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
FOX ENTERTAINMENT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30,
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ................................................. $ 205 $ 176 $ 30
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization ........................... 315 243 180
Equity in losses of affiliates .......................... 146 81 50
Changes in operating assets and liabilities:
Accounts receivable and other assets ................. 161 (458) (280)
Filmed entertainment and television programming costs (513) (30) (176)
Accounts payable and accrued liabilities ............. 252 236 291
Participations, residuals and royalties payables ..... 187 58 22
------- ------- -------
Net cash provided by operating activities ........ 753 306 117
INVESTING ACTIVITIES
Acquisitions, net of cash acquired ......................... -- (328) 306
Investments in equity affiliates ........................... (140) (141) (2)
Other investments .......................................... (168) (199) (244)
Purchases of property and equipment ........................ (307) (208) (338)
------- ------- -------
Net cash used in investing activities ............. (615) (876) (278)
FINANCING ACTIVITIES
Borrowings ................................................. 110 282 623
Repayment of borrowings .................................... (432) (972) (959)
Proceeds from Initial Public Offering ...................... 2,689 -- --
(Repayments to) advances from affiliates, net .............. (2,485) 1,105 698
------- ------- -------
Net cash (used in) provided by financing activities (118) 415 362
Net increase (decrease) in Cash and Cash Equivalents ....... 20 (155) 201
Cash and Cash Equivalents, Beginning of Year ............... 101 256 55
------- ------- -------
Cash and Cash Equivalents, End of Year ..................... $ 121 $ 101 $ 256
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
FOX ENTERTAINMENT GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30,
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
RETAINED
EARNINGS AND OTHER
PREFERRED COMMON PAID-IN COMPREHENSIVE
STOCK STOCK CAPITAL INCOME TOTAL
--------- ------ ------- ----------------- -----
<S> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1996 ... $ 1 $ -- $ 756 $ 601 $ 1,358
Net income ................. -- -- -- 30 30
Foreign currency
translation adjustments .... -- -- -- 3 3
Capital contributions, net . -- -- 2,376 -- 2,376
------- ------- ------- ------- -------
BALANCE AT JUNE 30, 1997 ... 1 -- 3,132 634 3,767
Net income ................. -- -- -- 176 176
Foreign currency
translation adjustments .... -- -- -- (2) (2)
------- ------- ------- ------- -------
BALANCE AT JUNE 30, 1998 ... 1 -- 3,132 808 3,941
Redemption of preferred
stock in connection with
reorganization ............. (1) -- -- -- (1)
Issuance of Class A Common
Stock ...................... -- 1 2,688 -- 2,689
Conversion of Class B Common
Stock in connection with
recapitalization ........... -- 6 (6) -- --
Elimination of certain
Intercompany debt and
payment of dividends ....... -- -- 785 (948) (163)
Net Income ................. -- -- -- 205 205
Foreign currency
translation adjustments .... -- -- -- (3) (3)
------- ------- ------- ------- -------
BALANCE AT JUNE 30, 1999 ... $ -- $ 7 $ 6,599 $ 62 $ 6,668
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 24
<PAGE>
FOX ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Fox Entertainment Group, Inc. and its subsidiaries (the "Company") is a
diversified entertainment company with operations in five business segments.
These business 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 of original television programming; Television Stations,
which principally consists of the operation of broadcast television stations;
Television Broadcast Network, which principally consists of the broadcasting of
network programming; Other Television, which represents other broadcast
television related activities; and Cable Network Programming, which principally
consists of the distribution of network and cable television programming. The
Company was incorporated in Delaware in May 1985 as Twentieth Holdings
Corporation. In 1998, the Company changed its corporate name to Fox
Entertainment Group, Inc.
Prior to the transactions referred to in Note 3, The News Corporation Limited
and its subsidiaries ("News Corporation") effected a reorganization (the
"Reorganization") by contributing to the Company at book value certain of its
assets and subsidiaries engaged in the production and distribution of feature
films and television programming. Included in this contribution was Twentieth
Century Fox Film Corporation, which was acquired by News Corporation in 1985,
News Corporation's interest in Fox Family Worldwide, Inc. and Fox/Liberty
Networks, LLC, International Sports Programming Partners, Fox/Liberty Ventures,
LLC and other cable network programming and related interests.
In connection with the Reorganization in fiscal 1999, the outstanding voting
preferred stock of the Company was acquired from an executive of the Company for
its par value of $760,000 plus accrued dividends. Contemporaneous with this
transaction, the executive acquired the voting preferred stock of a subsidiary
of the Company, Fox Television Holdings, Inc. ("FTH") for the identical par
value and dividend rate (see Note 2). The voting preferred stock of the Company
had been acquired by the executive in accordance with a 1985 order of the
Federal Communications Commission in connection with the Company's acquisition
of television stations.
The financial statements prior to November 11, 1998 were presented on a combined
basis. The financial statements presented subsequent to November 11, 1998 are
consolidated to reflect the Reorganization. For reporting purposes, the
financial statements for all periods are collectively referred to as
consolidated financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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<PAGE>
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
consolidated with the accounts of its majority-owned and controlled subsidiaries
(See Note 1). For financial reporting purposes, control generally means
ownership of a majority interest in an entity but may, in certain instances,
result from other considerations, including a company's capacity to dominate
decision making in relation to the financial and operating policies of the
consolidated entity. Fox Television Holdings, Inc. ("FTH") a subsidiary of the
Company has 7,600 shares of voting preferred stock issued and outstanding with a
liquidation value of $760,000 and cumulative dividends at the rate of 12% per
annum, which are included in Other liabilities. Such shares are held by an
executive of the Company and represent 76% of the voting power of FTH.
FTH is included in these consolidated financial statements because the Company
is deemed to control FTH for financial reporting purposes. Among the reasons why
the Company has a controlling financial interest in FTH are (i) the Company has
the ability to redeem the voting preferred stock, at any time, at the
liquidation value of $760,000 plus accrued dividends, (ii) the dividends on, and
amounts to be paid on redemption of, the voting preferred stock are fixed, and
not related to the performance of FTH, and, (iii) senior management of FTH,
including its Board of Directors, consists solely of persons employed by the
Company. As a result, the controlling financial interest in FTH rests with the
Company through its common stock ownership of FTH.
The Company uses the equity basis of accounting for investments in affiliates
where it exercises significant influence but not control.
All material intercompany accounts and transactions have been eliminated in the
consolidated financial statements of the Company.
FISCAL YEAR
The Company maintains a 52-53 week fiscal year ending on the Sunday nearest to
June 30 in each year. Each of the periods presented is a 52 week year.
BALANCE SHEET PRESENTATION
As an entertainment company which complies with the provisions of the Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting Standards
("SFAS") No. 53, "Financial Reporting by Producers and Distributors of Motion
Picture Films", the Company has elected to present unclassified balance sheets.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and marketable securities with
original maturities of three months or less.
REVENUE RECOGNITION
Filmed Entertainment
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<PAGE>
In accordance with SFAS No. 53, revenues from the theatrical distribution of
motion pictures are recognized when motion pictures are exhibited. Revenues from
video sales, net of a reserve for returns, are recognized on the date that video
units are made widely available for sale by retailers. Revenues from the
licensing of feature films and television programming are recorded when the
material is available for telecasting by the licensee and when certain other
conditions are met.
License agreements for the telecast of theatrical and television product in the
broadcast network, syndicated television and cable television markets are
routinely entered into in advance of their available date for telecast. Cash
received in connection with such contractual rights for which revenue is not yet
recognizable is classified as deferred revenue. Because deferred revenue
generally relates to contracts for the licensing of theatrical and television
product which have already been produced, the recognition of revenue for such
completed product is principally only dependent upon the commencement of the
availability period for telecast under the terms of the related licensing
agreement.
Television Stations, Television Broadcast Network, Other Television Businesses
and Cable Network Programming
In accordance with SFAS No. 63, "Financial Reporting by Broadcasters",
television advertising revenue is recognized as the commercials are aired.
Subscriber fees received from cable system operators and direct broadcast
satellite are recognized as revenue when services are provided.
FILMED ENTERTAINMENT AND TELEVISION PROGRAMMING COSTS
Filmed Entertainment Costs
In accordance with SFAS No. 53, filmed entertainment costs include production,
certain exploitation costs expected to benefit future periods and capitalized
overhead and interest costs, net of any allocated amounts received from outside
investors. These costs, as well as participations and talent residuals, are
charged as operating expenses on an individual film basis in the ratio that the
current year's gross revenues bear to management's estimate of total ultimate
gross revenues from all sources.
Film costs are stated at the lower of unamortized cost or estimated net
realizable value on an individual film or television series basis. Revenue
forecasts for both motion picture and television products are continually
reviewed by management and revised when warranted by changing conditions. When
estimates of total revenues indicate that a motion picture or television
production will result in an ultimate loss, additional amortization is provided
to currently recognize such loss.
Pursuant to a series of film rights agreements with an independent third party,
the Company has agreed to sell completed feature films produced over the period
1997-2001 to the third party at amounts which approximate cost. The Company is
the distributor of these films. Additionally, the Company has the option to
re-acquire the films after a period when significantly all of the ultimate
revenues have been earned, based on a formula which considers the remaining
projected ultimate revenues net of costs, as defined, at the time of
re-acquisition. Cumulatively, through June 30, 1999 and 1998, sixty-three and
forty-five films had been sold, respectively. No films have
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<PAGE>
been re-acquired as of June 30, 1999. As a distributor, the Company has
recorded, in its statements of operations, the revenues received from and
operating expenses related to the exploitation of the films in all markets, and,
in interest expense, net, certain other costs relating to the agreements of $64
million and $67 million in 1999 and 1998, respectively. As of June 30, 1999 and
1998, $432 million and $455 million, respectively, of amounts due under these
agreements were included in participations, residuals and royalties payable.
Television Programming Costs
In accordance with SFAS No. 63, program rights for entertainment programs and
sporting events are amortized over their license periods. The Company has single
and multi-year contracts for broadcast rights of programs and sporting events.
At the inception of these contracts and periodically thereafter, the Company
evaluates the recoverability of the costs associated therewith against the
revenues directly associated with the program material and related expenses.
Where an evaluation indicates that a programming contract will result in an
ultimate loss, additional amortization is provided to currently recognize that
loss. The costs of sports contracts are charged to expense based on the ratio of
each period's operating profits to estimated total operating profit of the
contract. Estimates of total operating profit can change significantly and
accordingly, are reviewed periodically and amortization is adjusted as
necessary.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization for
financial statement purposes is provided using the straight-line method over an
estimated useful life of three to forty years. Leasehold improvements are
depreciated using the straight-line method over the shorter of their useful
lives or the life of the lease. Costs associated with the repair and maintenance
of property are expensed as incurred.
INTANGIBLE ASSETS
As a creator and distributor of branded information and entertainment
copyrights, the Company has a significant and growing amount of intangible
assets, including goodwill, free and cable television networks and stations,
film and television libraries, sports franchises, entertainment franchises, and
other copyright products and trademarks. In accordance with generally accepted
accounting principles, the Company does not record the fair value of these
internally generated intangible assets. However, intangible assets acquired in
business combinations are recorded as the difference between the cost of
acquiring entities and amounts assigned to their tangible net assets. Such
intangible assets are amortized using the straight line method over the
following lives: goodwill (40 years); FCC licenses (40 years); Franchises and
other (4 - 40 years).
The Company periodically reviews the propriety of the carrying amount of
long-lived assets and the related intangible assets as well as the related
amortization period to determine whether current events or circumstances warrant
adjustments to the carrying value and/or the estimates of useful lives. This
evaluation consists of the Company's projection of undiscounted operating income
before depreciation, amortization and interest over the remaining lives of the
intangible assets, in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to
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<PAGE>
Be Disposed of." Based on its review, the Company believes that no significant
impairment of its long-lived assets or related intangible assets has occurred.
FINANCIAL INSTRUMENTS
The fair value of financial instruments, including cash and cash equivalents,
investments and long-term borrowings, is generally determined by reference to
market values resulting from trading on national securities exchanges. In cases
where quoted market prices are not available, fair value is based on estimates
using present value or other valuation techniques.
INCOME TAXES
The Company accounts for income taxes using SFAS No. 109, "Accounting for Income
Taxes". SFAS No. 109 requires an asset and liability approach for financial
accounting and reporting for income taxes and allows recognition and measurement
of deferred tax assets based upon the likelihood of realization of tax benefits
in future years. Under the asset and liability approach, deferred taxes are
provided for the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Deferred taxes have not been provided on
the cumulative undistributed earnings of foreign subsidiaries since amounts are
expected to be reinvested indefinitely.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenues and expenses during
the reporting period. The Company uses significant estimates in determining the
amortization of film costs and programming contracts. Because of the use of
estimates inherent in the financial reporting process, especially for
entertainment companies, actual results could differ from those estimates. These
differences could be material.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with fiscal 1999
presentation.
3. INITIAL PUBLIC OFFERING
On November 11, 1998, the Company consummated an initial public offering through
the issuance and sale of 124,800,000 shares of Class A Common Stock. The newly
issued shares of Class A Common Stock represent approximately 18.6% of the
Company's outstanding common stock. The net proceeds from the public offering
were approximately $2.7 billion and were used to reduce intercompany
indebtedness. Prior to the initial public offering, News Corporation effected a
Reorganization and a recapitalization that gave effect to the following
transactions: (i) contributing to the Company at book value certain of its
assets and subsidiaries engaged in the production and distribution of feature
films, television programming and cable network
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<PAGE>
programming, (ii) the elimination of certain outstanding intercompany debt
against Paid-in capital, (iii) the concurrent payment of dividends to a
subsidiary of News Corporation (which reduced Retained earnings and Paid-in
capital) such that after (ii) and (iii), $4.5 billion of intercompany debt was
outstanding, (iv) the authorization of the new Class A and Class B Common Stock
and the conversion of the Company's outstanding common stock into 547,500,000
shares of Class B Common Stock, and (v) the adjustment to increase the interest
rate from 5% to 8% under the terms of the intercompany indebtedness that was
outstanding after the Reorganization. For the year ended June 30, 1999, after
giving effect to the initial public offering, Reorganization and
recapitalization, as if they had occurred on July 1, 1998 rather than on
November 11, 1998, the pro forma net income and earnings per share would have
been $246 million and $0.37, respectively, as a result of a decrease in
intercompany interest expense of $69 million, an increase in income taxes of $28
million and an increase of 46 million shares in the weighted average number of
shares outstanding.
In November 1998, for purposes of governing certain on-going relationships
between the Company and News Corporation and to facilitate the Reorganization,
the Company and News Corporation entered into a Master Intercompany Agreement
which includes various agreements relating to cash management and financing,
executive officer services, the provision of services of certain Company
employees to News Corporation and its subsidiaries, facility arrangements,
employee matters, insurance, administrative services, trademarks and indemnities
by the Company and News Corporation. The Company and a subsidiary of News
Corporation also entered into a Tax Sharing Agreement (See Note 8). These
agreements were negotiated in the context of a parent-subsidiary relationship
and, therefore, are not the result of arm's length negotiations between
independent parties. There can be no assurance, therefore, that each of such
agreements, or the transactions provided for therein, or any amendments thereof,
will be effected on terms at least as favorable to the Company as could have
been obtained from unaffiliated third parties.
4. FILMED ENTERTAINMENT AND TELEVISION PROGRAMMING COSTS
Filmed entertainment and television programming costs consisted of the following
at June 30:
1999 1998
---- ----
Filmed entertainment costs:
Released, less accumulated amortization ................. $1,030 $ 788
Completed, not released ................................. 169 141
In process .............................................. 696 564
Television programming costs, less accumulated amortization 726 578
------ ------
$2,621 $2,071
====== ======
As of June 30, 1999, the Company estimated that approximately 87% of released
unamortized filmed entertainment costs will be amortized within the next three
years.
5. INVESTMENTS
INVESTMENTS IN EQUITY AFFILIATES
FOX FAMILY WORLDWIDE, INC.
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<PAGE>
In November 1995, the Company and Saban Entertainment Inc. formed a joint
venture, Fox Kids Worldwide, LLC, to jointly develop and acquire appealing
family programming that can be commercially exploited worldwide. In connection
with the acquisition of International Family Entertainment, Inc., in August
1997, this venture was reorganized pursuant to which it became a wholly owned
subsidiary of Fox Family Worldwide, Inc. The Company has a 49.5% interest in
this venture.
FOX/LIBERTY JOINT VENTURES (FOX/LIBERTY NETWORKS, LLC, INTERNATIONAL SPORTS
PROGRAMMING PARTNERS AND FOX/LIBERTY VENTURES, LLC)
Beginning in April 1996, the Company and Liberty Media Corporation and its
related companies ("Liberty"), formed various 50/50 joint ventures to own and
operate programming services featuring predominantly sports and sports-related
programming for distribution in the United States and internationally. Liberty
primarily contributed its regional and national sports programming services and
the Company contributed cash, its FX cable programming service and certain other
assets. In July 1999, the Company acquired Liberty's interest in Fox/Liberty
Networks, LLC. (see Note 16).
OTHER
In addition, the Company has an investment in Regency Television.
SUMMARIZED FINANCIAL DATA
Summarized financial data for equity affiliates at June 30 is presented below:
1999 1998 1997
---- ---- ----
Total assets ...................... $ 4,641 $ 4,702 $ 1,568
Total liabilities ................. 4,324 4,070 1,071
Revenues .......................... 1,404 1,317 661
Operating income (loss) ........... 38 63 (55)
Net Income (loss) ................. (291) (162) (101)
6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30:
1999 1998
Machinery and equipment ..................... $ 718 $ 570
Buildings and leaseholds ..................... 821 681
Land ......................................... 168 143
------- -------
1,707 1,394
Less accumulated depreciation ............... (386) (283)
------- -------
$ 1,321 $ 1,111
======= =======
Included in buildings and leaseholds were cumulative capital expenditures for
construction in progress of approximately $171 million and $314 million, as of
June 30, 1999 and 1998, respectively, principally relating to the construction
of new office buildings and improvements at the Company's Los Angeles Fox
Studios lot.
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7. BORROWINGS
Borrowings consisted of the following at June 30:
1999 1998
---- ----
New World Senior Secured Discount Notes .............. $ -- $206
Film production financing ............................ 53 147
Other ................................................ -- 22
---- ----
$ 53 $375
==== ====
During June 1999, the Company redeemed the outstanding balance of the New World
Senior Secured Discount Notes.
The Company has various single-film production financing arrangements which are
secured by the film assets and bear interest at approximately 6% in each of the
fiscal years presented. The film production financing is due to mature in fiscal
2000.
External interest paid, net of amounts capitalized, was $60 million, $100
million and $41 million for the years ended June 30, 1999, 1998 and 1997,
respectively.
The Company capitalizes interest on filmed entertainment and television
productions in process. The total interest capitalized was $19 million, $26
million and $34 million in fiscal 1999, 1998 and 1997, respectively.
8. INCOME TAXES
Although, during the periods presented, the Company and certain of its
subsidiaries filed a separate tax return and other subsidiaries of the Company
were included in the consolidated tax returns of another News Corporation
entity, the Company has provided for income taxes as if it were a stand-alone
taxpayer, in accordance with SFAS No. 109.
Income before income taxes was attributable to the following jurisdictions for
the year ended June 30:
1999 1998 1997
---- ---- ----
United States (including exports) ............ $271 $225 $ 60
International ................................. 76 86 19
---- ---- ----
$347 $311 $ 79
==== ==== ====
Components of the provision for income taxes on income before income taxes for
the year ended June 30 were as follows:
1999 1998 1997
---- ---- ----
Current -
Federal - pursuant to the Tax Sharing Agreement ... $ 60 $ -- --
Foreign ........................................... 22 11 --
---- ---- ----
$ 82 $ 11 $ --
==== ==== ====
Deferred -
Federal ........................................... $ 56 $100 $ 38
State and local ................................. 4 18 6
---- ---- ----
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<PAGE>
Foreign ........................................... -- 6 5
---- ---- ----
$ 60 $124 $ 49
==== ==== ====
A reconciliation of the U.S. Federal statutory tax rate on income to the
Company's effective tax rate on earnings before income taxes for the year ended
June 30 is summarized as follows:
1999 1998 1997
---- ---- ----
U.S. Federal income tax rate ........................... 35% 35% 35%
State and local taxes (net of federal tax benefit) ..... 1 5 6
Effect of foreign operations ............................ (1) 1 17
Non-deductible amortization and expenses ................ 4 2 5
Other ................................................... 2 -- (1)
--- --- ---
Effective tax rate ...................................... 41% 43% 62%
=== === ===
The following is a summary of the components of the deferred tax accounts at
June 30:
1999 1998
---- ----
Deferred tax assets (liabilities):
Amortization and basis difference
on intangible assets ..................................... $(1,575) $(1,539)
Revenue recognition ...................................... 163 166
Accrued liabilities ...................................... 201 195
Other .................................................... (98) (63)
Net operating loss carryforwards ......................... 402 367
------- -------
Net deferred tax liability ............................... (907) (874)
Income tax payable ....................................... (68) --
------- -------
$ (975) $ (874)
======= =======
As of June 30, 1999, the Company had approximately $1 billion of combined unused
tax net operating loss carryforwards , expiring between 2001 and 2012.
Realization of these net operating losses is dependent on generating sufficient
taxable income prior to the expiration of the loss carryforwards, subject to any
limitations on their use. Although realization is not assured, management
believes it is more likely than not that the deferred tax assets relating to
these loss carryforwards will be realized; accordingly, no valuation allowance
has been provided. The amount of the deferred tax assets could be reduced
through a charge to income, however, if estimates of future taxable income
during the carryforward period are reduced.
As noted above, certain subsidiaries of the Company are included in the
consolidated group of News Publishing Australia Limited ("NPAL"), the principal
U.S. subsidiary of News Corporation, for U.S. federal income tax purposes (the
"Consolidated Group") as well as in certain consolidated, combined or unitary
groups which include NPAL and/or certain of its subsidiaries (the "Combined
Group") for state and local income tax purposes. The Company and NPAL have
entered into a tax sharing agreement (the "Tax Sharing Agreement"). Pursuant to
the Tax Sharing Agreement (See Note 3), the Company and NPAL generally will make
payments between them such that, with respect to tax returns for any taxable
period in which the Company or any of its subsidiaries are included in the
Consolidated Group or any Combined Group, the amount of such consolidated or
combined taxes to be paid by the Company will be determined, subject to certain
adjustments, as if the Company and each of its
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<PAGE>
subsidiaries included in the Consolidated Group or Combined Group filed their
own consolidated, combined or unitary tax return. Net operating losses and other
future tax benefits actually availed of to reduce the tax liabilities of the
Consolidated Group or Combined Group and any taxes actually paid by the
Company's subsidiaries included in such groups will be taken into account for
this purpose. The Company will be responsible for any taxes with respect to tax
returns that include only the Company and its subsidiaries.
Income taxes paid for the years ended June 30, 1999, 1998 and 1997 were not
significant.
9. SHARE OPTION PLAN
The Company does not have a share option plan.
Certain of the Company's employees have been granted News Corporation stock
options under News Corporation's Share Option Plan (the "Plan"). The price of
options granted under the Plan is the weighted average market price of the
shares sold on the Australian Stock Exchange during the five trading days
immediately prior to the date of the option being granted. Stock options are
exercisable at a ratio of four options per American Depositary Receipt (ADR).
Options issued under the Plan have a term of ten years, but are exercisable only
after they have been vested in the option holder. The options granted vest and
become exercisable as to one quarter on each anniversary of the grant until all
options have vested.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock Based
Compensation," which requires certain disclosures for those companies that will
continue to use an intrinsic value based method for measuring compensation cost
in connection with employee stock compensation plans in accordance with
Accounting Principles Board ("APB") No. 25, "Accounting for Stock Issued to
Employees." The Company will continue to use such method, under which no
compensation cost has been recognized.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model, with the following assumptions used for
grants in fiscal years 1999, 1998 and 1997, respectively: risk free interest
rates in the range from 4.81% to 8.44%; expected dividend yields of
approximately 1.5%; expected lives of 7 years; expected volatility in the range
from 24% to 35%.
On a pro forma basis, compensation cost determined in accordance with SFAS No.
123 would have reduced net income by approximately $10 million, $6 million and
$2 million for the years ended June 30, 1999, 1998 and 1997, respectively, with
a decrease of $0.02, $0.01 and $0.0 in basic and diluted earnings per share for
the years ended June 30, 1999, 1998 and 1997, respectively.
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A summary of the option scheme activity for the years ended June 30, was as
follows (in thousands of shares and Australian dollars):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
WTD. WTD. WTD
AVG. EX. AVG. EX. AVG. EX.
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 31,481 A$5.22 15,627 A$5.63 3,500 A$7.06
Granted ............................ 14,567 A$8.28 16,915 A$4.79 12,739 A$5.21
Exercised .......................... (2,849) A$5.62 (529) A$5.31 (300) A$7.05
Cancelled .......................... (921) A$4.96 (532) A$5.02 (312) A$5.17
------ ------ ------ ----- ------ ------
Outstanding at the end of the year.. 42,278 A$6.32 31,481 A$5.22 15,627 A$5.63
====== ====== ====== ====== ====== ======
Exercisable at end of year ......... 11,204 5,494 2,038
Weighted average fair value
of options granted ............... A$3.25 A$1.99 A$2.08
</TABLE>
At June 30, 1999, 25,881 of the outstanding options have exercise prices between
A$2.31 and A$6.96, a weighted average exercise price of A$4.99 and a weighted
average remaining contractual life of 6.24 years. Of these, 9,374 are
exercisable with a weighted average exercise price of A$5.09. The remaining
outstanding options, 16,397 have exercise prices between A$7.22 and A$10.97,
with a weighted average exercise price of A$8.43 and a weighted average
remaining contractual life of 6.07 years. Of these, 1,830 were exercisable, with
a weighted average exercise price of A$9.44.
10. PENSION PLANS, OTHER POSTRETIREMENT BENEFITS AND POSTEMPLOYMENT BENEFITS
PENSION PLANS
The Company has non-contributory pension plans covering specific groups of
employees. The benefits for these plans are based primarily on an employee's
years of service and pay near retirement. Participant employees are vested in
the plans after five years of service. The Company's policy for all pension
plans is to fund amounts in accordance with the Employee Retirement Income
Security Act of 1974. Plan assets consist principally of common stocks,
marketable bonds and government securities.
The Company adopted SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits - an amendment of FASB Statements No. 87, 88 and
106" in fiscal 1999.
The following table sets forth the change in benefit obligation for the
Company's benefit plans for the year ended June 30:
1999 1998
---- ----
Benefit obligation, beginning of year .............. $ 222 $ 120
Service cost ....................................... 15 10
Interest cost ...................................... 16 14
Benefits paid ...................................... (8) (6)
Actuarial (gain) / loss ............................ (3) 14
Business Combinations .............................. -- 70
----- -----
Benefit obligation, end of year .................... $ 242 $ 222
===== =====
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The following table sets forth the change in the fair value of plan assets for
the Company's benefit plans for the year ended:
1999 1998
---- ----
Fair value of plan assets, beginning of year ......... $ 204 $ 126
Actual return on plan assets ......................... 24 18
Employer contributions ............................... 1 3
Benefits paid ........................................ (8) (6)
Business Combinations ................................ -- 63
----- -----
Fair value of plan assets, end of year ............... $ 221 $ 204
===== =====
The components of net periodic pension costs for the years ended June 30, were
as follows:
1999 1998 1997
---- ---- ----
Service cost-benefits earned during the period ..... $ 15 $ 10 $ 8
Interest cost on projected benefit obligation ...... 16 14 10
Expected return on plan assets ..................... (20) (18) (10)
Net amortization and deferral ...................... -- -- (2)
---- ---- ----
Net periodic pension cost ........................... $ 11 $ 6 $ 6
==== ==== ====
The funded status of the pension plans as of June 30 was as follows:
1999 1998
---- ----
Funded status ...................................... $(21) $(18)
Unrecognized net loss .............................. 3 9
Unrecognized prior service cost .................... (4) (3)
---- ----
Accrued pension liability at year end .............. $(22) $(12)
==== ====
The following assumptions were used in accounting for the pension plans for the
year ended June 30:
1999 1998 1997
---- ---- ----
Discount rate .................................. 7.25% 7.25% 7.75%
Expected return on plan assets ................. 10% 10% 10%
Rate of increase in future compensation ........ 4%-6% 6% 4%-6%
11. RELATED PARTY TRANSACTIONS
As a subsidiary of News Corporation, the Company has used and expects that it
will continue to use, pursuant to the Master Intercompany Agreement with News
Corporation (see Note 3), various cash management, financial, tax, legal and
other services provided by News Corporation or its subsidiaries. All costs
relating to direct intercompany services have been reflected in the accompanying
consolidated financial statements.
The Company and its subsidiaries sell broadcast rights to certain of its filmed
entertainment products to other subsidiaries of News Corporation. Management
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believes that the pricing of these transactions results from arms length
negotiations between the parties and are reflective of the market value for
these rights. The revenues associated with these sales were not significant in
the periods presented.
The Company is funded primarily by loans from other subsidiaries and affiliates
of News Corporation. Intercompany interest expense of $164 million, $174 million
and $144 million for the years ended June 30, 1999, 1998 and 1997, respectively,
is included in interest expense, net in the consolidated statements of
operations and reflects the net interest expense associated with the aggregate
borrowings from subsidiaries or affiliates of News Corporation. From November
11, 1998, interest on outstanding intercompany balances has been charged at
commercial market rates not to exceed News Corporation's average cost of
borrowings as set forth in the Master Intercompany Agreement. At June 30, 1999,
the intercompany interest rate approximated 8%.
The Company, through the normal course of business, is involved in transactions
with its equity affiliates that have not been significant in any of the periods
presented.
12. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases transponders, office facilities, equipment and microwave
channels used to carry its broadcast signals. These leases, which are classified
as operating leases, expire at various dates through 2006. Future minimum
payments under non-cancelable long-term operating leases aggregate $234 million,
of which $188 million is payable over the next five years.
Total operating lease expense was approximately $67 million, $54 million and $50
million for the years ended June 1999, 1998 and 1997, respectively.
COMMITMENTS AND CONTINGENCIES
Under the Company's eight year contract with the National Football League, which
contains certain termination clauses, future minimum payments for program rights
to broadcast certain football games aggregated approximately $4 billion at June
30, 1999, and are payable over the eight year term.
The Company's minimum commitments and guarantees under certain other
programming, production, licensing, artists, athletes, franchise and other
agreements aggregated approximately $2 billion at June 30, 1999, which are
payable principally over a five year period.
In the ordinary course of business, the Company has become involved in disputes
or litigation. While the result of such disputes cannot be predicted with
certainty, in management's opinion, based in part on the advice of counsel, the
ultimate resolution of these disputes will not have a material adverse effect on
the Company's financial position or the results of its operations.
GUARANTEES OF NEWS CORPORATION DEBT
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News Corporation and certain of its subsidiaries, including certain subsidiaries
of the Company (the "Fox Guarantors") are guarantors of various debt obligations
of News Corporation and certain of its subsidiaries. The principal amount of
indebtedness outstanding under such debt instruments at June 30, 1999 was
approximately $9.2 billion, which amount includes approximately $1 billion of
obligations under Exchangeable Trust Originated Preferred Securities SM due
2016. The debt instruments limit the ability of News Corporation and the Fox
Guarantors, to subject their properties to liens, and certain of the debt
instruments impose limitations on the ability of News Corporation and its
subsidiaries, including the Fox Guarantors, to incur indebtedness in certain
circumstances. Such debt instruments mature at various times between 2000 and
2096, with a weighted average maturity of over 20 years. Additional subsidiaries
of the Company may from time to time be required to become guarantors of certain
debt obligations.
In the case of any event of default under such debt obligations, the Fox
Guarantors will be directly liable to the creditors or debtholders. News
Corporation has agreed to indemnify the Fox Guarantors from and against any
obligations they may incur by reason of their guarantees of such debt
obligations.
13. SEGMENT INFORMATION
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS No. 131 established revised standards
for public companies relating to the reporting of financial and descriptive
information about their operating segments in financial statements.
The Company manages and reports its activities in five business segments: Filmed
Entertainment, which principally consists of the production and acquisition of
live-action and animated motion pictures for distribution and licensing in all
formats in entertainment media, primarily in the United States and Canada and
Europe, and the production of original television programming, in the United
States and Canada; Television Stations, which principally consists of the
operation of broadcast television stations; Television Broadcast Network, which
principally consists of the broadcasting of network programming; Other
Television Business, which represents other broadcast television related
activities; and Cable Network Programming, which principally consists of the
production and licensing of programming distributed through cable television
systems and DBS operators in the United States and Canada. The television
related segments operate primarily in the United States and Canada.
The previously reported television segment has been revised to reflect three
separate reportable segments as follows: 1) Television Stations; 2) Television
Broadcast Network; and 3) Other Television Businesses. This presentation more
closely reflects the Company's internal management structure. The comparative
segment information for the periods presented has been revised.
The Company's reportable operating segments have been determined in accordance
with the Company's internal management structure, which is organized based on
operating activities. The accounting policies of the operating segments are the
same as those described in the summary of significant accounting policies (see
Note 2). The Company evaluates performance based upon several factors, of which
the primary financial measure is segment operating income.
Page 38
<PAGE>
<TABLE>
<CAPTION>
BUSINESS SEGMENTS 1999 1998 1997
<S> <C> <C> <C>
REVENUES
Filmed Entertainment ............................. $ 4,416 $ 3,876 $ 3,112
Television Stations .............................. 1,469 1,393 1,055
Television Broadcast Network .................... 1,743 1,459 1,474
Other Television Businesses ....................... 300 223 169
Cable Network Programming ....................... 129 72 37
------- ------- -------
$ 8,057 $ 7,023 $ 5,847
======= ======= =======
OPERATING INCOME AND RECONCILIATION TO INCOME BEFORE
INCOME TAXES
Filmed Entertainment ............................. $ 355 $ 266 $ 113
Television Stations .............................. 557 539 401
Television Broadcast Network .................... (32) 21 (39)
Other Television Businesses ....................... (35) (5) (2)
Cable Network Programming ......................... (129) (141) (148)
------- ------- -------
716 680 325
Other charges ..................................... -- (17) (5)
------- ------- -------
Total operating income ..................... 716 663 320
Interest expense, net ............................ (223) (271) (191)
Equity in losses of affiliates ................... (146) (81) (50)
------- ------- -------
Income before income taxes ................. $ 347 $ 311 $ 79
======= ======= =======
DEPRECIATION AND AMORTIZATION
Filmed Entertainment .............................. $ 41 $ 26 $ 25
Television Stations .............................. 176 157 123
Television Broadcast Network ..................... 17 10 7
Other Television Businesses ........................ 24 5 --
Cable Network Programming .......................... 57 45 25
------- ------- -------
$ 315 $ 243 $ 180
======= ======= =======
CAPITAL EXPENDITURES
Filmed Entertainment .............................. $ 116 $ 120 $ 88
Television Stations .............................. 133 33 81
Television Broadcast Network .................... 49 44 102
Other Television Businesses ....................... 6 -- 1
Cable Network Programming ......................... 3 11 66
------- ------- -------
$ 307 $ 208 $ 338
======= ======= =======
</TABLE>
Page 39
<PAGE>
TOTAL ASSETS
Filmed Entertainment .......................... $ 4,233 $ 3,969
Television Stations ........................... 6,267 6,259
Television Broadcast Network ................. 934 717
Other Television Businesses ................... 520 508
Cable Network Programming .................... 424 386
Investments in equity affiliates .............. 785 791
------- -------
$13,163 $12,630
======= =======
INTANGIBLES, NET
Filmed Entertainment .......................... $ 479 $ 489
Television Stations ........................... 5,045 5,187
Television Broadcast Network ................. -- --
Other Television Businesses .................... 294 265
Cable Network Programming .................... -- --
------- -------
$ 5,818 $ 5,941
======= =======
Equity in losses of affiliates are principally Cable Network Programming
entities. Other expenses and income tax expense are not allocated to segments as
they are not under the control of the segment management.
GEOGRAPHIC SEGMENTS 1999 1998 1997
REVENUES
United States and Canada ........... $ 6,150 $ 5,657 $ 4,940
Europe ............................. 1,173 830 549
Other .............................. 734 536 358
------- ------- -------
$ 8,057 $ 7,023 $ 5,847
======= ======= =======
LONG-LIVED ASSETS
United States and Canada ............ $10,488 $ 9,981 $ 9,535
Europe .............................. 13 15 11
Other ............................... 187 95 49
------- ------- -------
$10,688 $10,091 $ 9,595
======= ======= =======
Revenues are attributed to geographic segment based on the origin of the sale.
There is no material reliance on any single customer. Revenues from any
individual foreign country were not material in the periods presented.
Page 40
<PAGE>
14. DETAIL OF OTHER FINANCIAL STATEMENT ACCOUNTS
1999 1998 1997
---- ---- ----
ALLOWANCE FOR RETURNS AND DOUBTFUL ACCOUNTS
Beginning balance ............................... $ 204 $ 106 $ 104
Charged to costs and expenses ................... 185 243 158
Actual returns/write-offs/recoveries/other ...... (264) (145) (156)
----- ----- -----
Ending Balance .................................. $ 125 $ 204 $ 106
===== ===== =====
1999 1998
---- ----
INTANGIBLE ASSETS
Goodwill ............................................ $ 1,011 $ 961
FCC licenses ........................................ 5,505 5,503
Franchises & other .................................. 212 212
------- -------
Page 41
<PAGE>
------- --------
6,728 6,676
Accumulated amortization ............................ (910) (735)
------- -------
$ 5,818 $ 5,941
======= =======
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
Three Months Ended
-----------------------------------------------
September 30 December 31 March 31 June 30
----------- ----------- ------- ------
Fiscal 1999
- -----------------------------
Revenues $1,802 $2,555 $1,733 $1,967
Operating Income $ 202 $ 258 $ 100 $ 156
Net Income $ 57 $ 105 $ 8 $ 35
====== ====== ====== ======
Basic and diluted
earnings per share $ 0.10 $ 0.17 $ 0.01 $ 0.05
====== ====== ====== ======
Fiscal 1998
- -----------------------------
Revenues $1,478 $1,977 $1,814 $1,754
Operating Income $ 123 $ 205 $ 206 $ 129
Net Income $ 28 $ 69 $ 76 $ 3
====== ====== ====== ======
Basic and diluted
earnings per share(1) $ 0.05 $ 0.13 $ 0.14 $ 0.01
====== ====== ====== ======
(1) The earnings per share for the year ended June 30, 1998 does not equal the
sum of the quarters as it is calculated independently each quarter.
16. SUBSEQUENT EVENTS
On July 15, 1999, News Corporation acquired substantially all of Liberty's 50%
interest in Fox/Liberty Networks, LLC. In exchange for its interest, Liberty
received approximately 51.8 million ADRs (representing 207.1 million preferred
limited voting ordinary shares of News Corporation) valued at $1.425 billion.
Upon consummation of this transaction, News Corporation transferred the acquired
interests to the Company in exchange for 51,759,834 shares of the Company's
Class A Common shares valued at $1.425 billion. This transfer to the Company
increased News Corporation's equity interest to 82.76% from 81.44% while its
voting interest remained at 97.8%. Concurrent with this transaction, the Company
repaid approximately $678 million of Fox/Liberty Networks, LLC's bank debt. The
repayment of this bank debt was funded through additional advances from its
affiliates.
Page 42
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information contained in the Company's Proxy Statement for the 1999
Annual Meeting of Stockholders (the "1999 Proxy Statement") under the caption
"Executive Officers of the Company" is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the 1999 Proxy Statement under the captions
"Executive Compensation" and "Compensation of Directors" is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the 1999 Proxy Statement under the caption
"Compliance with Section 16(A) of the Exchange Act" is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained in the 1999 Proxy Statement under the captions
"Remuneration Committee Interlocks and Insider Participation" and "Certain
Relationships and Related Transactions" is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) and (d) Financial Statements and Schedules
(b) Reports on Form 8-K
(i) Current Report on Form 8-K of the registrant with a report date of
April 5, 1999 relating to the acquisition by News Corporation of
substantially all of Liberty Media Corporation's 50% interest in
Fox/Liberty Networks and other related businesses and the transfer
to the Company by News Corporation of such acquired interests in
exchange for 51,759,834 shares of the Company's Class A Common Stock
(valued at approximately $1.425 billion).
(ii) Current Report on Form 8-K of the registrant with a report date of
May 20, 1999 relating to the election to the Company's Board of
Directors of Mr. Christos M. Cotsakos and Dr. Laura D'Andrea Tyson.
Page 43
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.
By /s/ K. RUPERT MURDOCH
--------------------------------------
K. Rupert Murdoch,
Chairman and
Chief Executive Officer
(Principal Executive Officer)
By /s/ DAVID F. DeVOE
--------------------------------------
David F. DeVoe,
Senior Executive Vice President,
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Date: March 29, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
Page 44
<PAGE>
Signature Title Date
--------- ----- ----
/s/ K. RUPERT MURDOCH Director March 29, 2000
- ------------------------
K. Rupert Murdoch
/s/ DAVID DeVOE Director March 29, 2000
- ------------------------
David F. DeVoe
/s/ ARTHUR M. SISKIND Director March 29, 2000
- ------------------------
Arthur M. Siskind
/s/ PETER CHERNIN Director March 29, 2000
- ------------------------
Peter Chernin
/s/ CHASE CAREY Director March 29, 2000
- ------------------------
Chase Carey
Director March 29, 2000
- ------------------------
Christos M. Cotsakos
Director March 29, 2000
- ------------------------
Laura D'Andrea Tyson
Page 45
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 1999, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> JUN-30-1999 JUN-30-1998
<PERIOD-START> JUL-01-1998 JUL-01-1997
<PERIOD-END> JUN-30-1999 JUN-30-1998
<CASH> 121 101
<SECURITIES> 0 0
<RECEIVABLES> 1,756 1,949
<ALLOWANCES> 0 0
<INVENTORY> 2,651 2,071
<CURRENT-ASSETS> 0 0
<PP&E> 1,321 1,111
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 13,163 12,630
<CURRENT-LIABILITIES> 6,495 8,689
<BONDS> 0 0
0 0
0 1
<COMMON> 7 0
<OTHER-SE> 6,661 3,940
<TOTAL-LIABILITY-AND-EQUITY> 13,163 12,630
<SALES> 0 0
<TOTAL-REVENUES> 8,057 7,023
<CGS> 0 0
<TOTAL-COSTS> 7,341 6,360
<OTHER-EXPENSES> 146 81
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 223 271
<INCOME-PRETAX> 347 311
<INCOME-TAX> 142 135
<INCOME-CONTINUING> 205 176
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 205 176
<EPS-BASIC> .33 .32
<EPS-DILUTED> .33 .32
</TABLE>
