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Fox Entertainment Group Inc – ‘10-K/A’ for 6/30/99

On:  Thursday, 3/30/00   ·   For:  6/30/99   ·   Accession #:  950130-0-1746   ·   File #:  1-14595

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 3/30/00  Fox Entertainment Group Inc       10-K/A      6/30/99    2:115K                                   Donnelley R R & S… 02/FA

Amendment to Annual Report   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K/A      Amendment No. 1 to Form 10-K                          47    197K 
 2: EX-27       Financial Data Schedule                                2      8K 


10-K/A   —   Amendment No. 1 to Form 10-K
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
3Item 6. Selected Consolidated Financial Data
5Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
7Revenue recognition
21Item 7A. Quantitative and Qualitative Disclosures About Market Risk
"Item 8. Financial Statemements and Supplementary Data
27Notes to Consolidated Financial Statements
33Other
45Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
"Item 10. Directors and Executive Officers of the Company
"Item 11. Executive Compensation
"Item 12. Security Ownership of Certain Beneficial Owners and Management
"Item 13. Certain Relationships and Related Transactions
"Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
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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.
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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 Page 1
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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. Page 2
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[Enlarge/Download Table] FISCAL YEAR ENDED JUNE 30, ------------------------------------------------------------ 1999 1998 1997(3) 1996(2) 1995(1) ---- ---- ------- ------- ------- (Dollars in Millions, except for Per Share Data) 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 [Enlarge/Download Table] AT JUNE 30, ---------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (Dollars In Millions) BALANCE SHEET DATA: 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 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 Page 3
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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. Page 4
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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 Page 5
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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. [Enlarge/Download Table] 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 ------- ------- ------- ------- ------- ------- ------- ------- ------- 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 ======= ======= ======= ======= ======= ======= ======= ======= ======= ---------- (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] Page 6
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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: [Download Table] Year Ended June 30, ------------------- 1999 1998 Change ---- ---- ------ (Dollars in Millions) 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 ======= ======= ======= Page 7
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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") Page 8
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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 Page 9
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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. Page 10
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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: [Enlarge/Download Table] Year Ended June 30, ------------------- 1998 1997 Change ---- ---- ------ (Dollars in Millions) 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 ======= ======= ======= Page 11
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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 Page 12
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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
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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
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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
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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 Page 16
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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: Page 17
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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 Page 18
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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 Page 19
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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
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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. Page 21
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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. Page 22
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FOX ENTERTAINMENT GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, (DOLLARS IN MILLIONS) [Enlarge/Download Table] 1999 1998 1997 ---- ---- ---- 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 ======= ======= ======= The accompanying notes are an integral part of these consolidated financial statements. Page 23
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FOX ENTERTAINMENT GROUP, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED JUNE 30, (DOLLARS IN MILLIONS) [Enlarge/Download Table] RETAINED EARNINGS AND OTHER PREFERRED COMMON PAID-IN COMPREHENSIVE STOCK STOCK CAPITAL INCOME TOTAL --------- ------ ------- ----------------- ----- 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 ======= ======= ======= ======= ======= The accompanying notes are an integral part of these consolidated financial statements. Page 24
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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 Page 25
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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 Page 26
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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 Page 27
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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 Page 28
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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 Page 29
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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. Page 30
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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. Page 31
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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 ---- ---- ---- Page 32
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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 Page 33
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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. Page 34
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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): [Enlarge/Download Table] 1999 1998 1997 ---- ---- ---- WTD. WTD. WTD AVG. EX. AVG. EX. AVG. EX. OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ------- ----- ------- ----- ------- ----- 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 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 ===== ===== Page 35
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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 Page 36
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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 Page 37
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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
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[Download Table] BUSINESS SEGMENTS 1999 1998 1997 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 ======= ======= ======= Page 39
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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
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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
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------- -------- 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
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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
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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
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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

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