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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------------
FORM 10-K
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. { }
As of September 1, 1999 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
$2,955,668,358.
As of September 27, 1999, 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.
PART I
ITEM 1. BUSINESS
Background
Fox Entertainment Group, Inc. (together with its direct and indirect
subsidiaries, and their respective predecessors, unless the content otherwise
requires, the "Company") is a vertically integrated entertainment company with
operations in three business segments: (i) Filmed Entertainment; (ii) Television
Broadcasting and Related Businesses; and (iii) Cable Network Programming.
In November 1998, the Company sold 124,800,000 shares of its Class A Common
Stock in an initial public offering. The News Corporation Limited ("News
Corporation") is the beneficial owner of 51,759,834 shares of Class A Common
Stock and 547,500,000 shares of Class B Common Stock, which in the aggregate
represent approximately 82.7% of the equity and 97.8% of the voting power of the
Company.
The address of the Company's principal executive offices is 1211 Avenue of
the Americas, New York, New York 10036, and the telephone number is (212) 852-
7111. The Company maintains a 52-53 week fiscal year ending on the Sunday
nearest to June 30 in each year. At June 30, 1999, the Company had approximately
11,000 full-time and part-time employees.
Special Note Regarding Forward-Looking Statements
This document contains statements that constitute "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The
words "expect," "estimate," "anticipate," "predict," "believe" and similar
expressions and variations thereof are intended to identify forward-looking
statements. These statements appear in a number of places in this document and
include statements regarding the intent, belief or current expectations of the
Company, its directors or its officers with respect to, among other things,
trends affecting the Company's financial condition or results of operations. The
readers of this document are cautioned that any such forward-looking statements
are not guarantees of future performance and involve risks and uncertainties,
those risks and uncertainties discussed under the headings "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," in the Company's Registration Statement Form S-1 (SEC file no.
333-61515) as declared effective by the Securities and Exchange Commission on
November 9, 1998, as well as the information set forth below. The Company does
not ordinarily make projections of its future operating results and undertakes
no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. Readers
should carefully review the risk factors referred to above and the other
documents filed by the Company with the Securities and Exchange Commission. This
section should be read in conjunction with the unaudited combined condensed
financial statements of the Company and related notes set forth elsewhere
herein.
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Business
Filmed Entertainment
The Company engages in feature film and television production and
distribution principally through the following businesses: Fox Filmed
Entertainment ("FFE"), a leading producer and distributor of feature films;
Twentieth Century Fox Television, a leading producer of network television
programming; and Fox Television Studios ("FtvS"), a producer and distributor of
syndicated programming.
Fox Filmed Entertainment
One of the world's largest producers and distributors of motion pictures,
FFE produces, finances, acquires and distributes motion pictures throughout the
world under a variety of arrangements. During fiscal 1997, 1998 and 1999, FFE
placed 23, 25 and 21 films, respectively, in general release in the United
States. Those motion pictures were produced or acquired by the following units
of FFE: Twentieth Century Fox and Fox 2000, which produce motion pictures for
mainstream audiences; Fox Searchlight Pictures, which produces and acquires
specialized motion pictures; and Fox Animation Studios, which produces feature
length animated motion pictures. Successful motion pictures produced and/or
distributed by FFE since the beginning of fiscal 1997 include Hope Floats, The
X-Files, Dr. Dolittle, There's Something About Mary, Ever After, How Stella Got
Her Groove Back, Titanic (together with Paramount Pictures Corporation),
Entrapment, Never Been Kissed and Star Wars, Episode 1: The Phantom Menace. The
Company currently plans to release approximately 24 films in fiscal 2000
including Anna and the King, The Beach, X-Men, Navy Diver, Me, Myself and Irene,
and Titan A.E.
In addition, pursuant to an agreement that became effective at the end of
May 1998 with Monarchy Enterprises Holdings B.V. ("MEH"), the parent company of
Regency Entertainment, Inc. ("New Regency"), FFE will distribute certain New
Regency films and all films co-financed by FEG and New Regency produced over a
15-year term in all media worldwide, excluding certain international territories
with respect to theatrical and home video rights and most international
territories with respect to television rights. The Company expects to release
approximately 3-5 New Regency Films during fiscal 2000. In connection with this
distribution arrangement, the Company acquired a 20% interest in MEH. The
parties also agreed to enter into certain motion picture financing arrangements
and have formed Regency Television, a 50/50 joint venture to produce television
programming.
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 an independent third party ("New Millenium"), the
Company has agreed to sell completed feature films released during the period
fiscal 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.
Page 2
Motion picture companies, such as FFE, typically seek to generate revenues
from various distribution channels. FFE derives its worldwide motion picture
revenues primarily from four basic sources (set forth in general chronology of
exploitation): (i) distribution of motion pictures for theatrical exhibition in
the United States and Canada and markets outside of the United States and Canada
("International" markets); (ii) distribution of motion pictures in various home
media formats; (iii) distribution of motion pictures for exhibition on pay-per-
view and premium pay television programming services; and (iv) distribution of
motion pictures for exhibition on free television networks, other broadcast
program services, independent television stations and basic cable programming
services, including certain services which are affiliates of the Company and
News Corporation. The Company does not always have rights in all media of
exhibition to all motion pictures which it releases, and does not necessarily
distribute a given motion picture in all of the foregoing media in all markets.
The Company distributes and markets its films worldwide principally through
its own distribution and marketing companies. The Company believes that the pre-
release marketing of a feature film is an integral part of its motion picture
distribution strategy and generally begins marketing efforts three to six months
in advance of a film's release date in any given territory.
Through Twentieth Century Fox Home Entertainment, Inc., the Company
distributes motion pictures and other programming produced by units of FFE, its
affiliates and other producers in the United States, Canada and International
markets in all home media formats including rental and sell-through titles.
Approximately 240 produced and acquired titles were released or re-released to
the domestic home entertainment market in fiscal 1999. In International markets,
the Company distributes both directly and through foreign distribution channels
and approximately 110 produced and acquired titles were made available to the
Company for distribution to the international home entertainment market in
fiscal 1999.
Units of FFE license motion pictures and other programs in the United
States, Canada and International markets to various third-parties and certain
affiliated, premium pay television services pursuant to license agreements
which generally provide for a specified number of exhibitions of the program
during a fixed term in exchange for a license fee which is based on a variety of
factors, including the number of subscribers to the service or system. Among
third-party license agreements that units of FFE have in place in the United
States for pay television exhibition of its motion pictures are exclusive
agreements with Home Box Office ("HBO"), providing for the licensing of films
initially released for theatrical exhibition through the year 2003, as well as
arrangements with Encore and American Movie Classics. Units of FFE also license
motion pictures in the United States to cable pay-per-view services such as
Viewer's Choice and DBS pay-per-view services operated by DirecTV and EchoStar.
In addition, in International markets, units of FFE license motion pictures to
leading third-party pay television operators as well as to programming services
operated by various affiliated entities.
Units of FFE also license motion pictures to broadcast television networks,
including the Fox Broadcasting Company ("FOX"), independent broadcast television
stations and basic cable networks, pursuant to agreements which generally allow
a fixed number of telecasts of a motion picture over a stated period of time in
exchange for a specified license fee.
Page 3
Twentieth Century Fox Television
During the past three fiscal years, Twentieth Century Fox Television
produced television programs for the Fox, ABC, CBS, NBC and WB broadcast
television networks and the USA cable network. Twentieth Century Fox Television
currently produces or has orders to produce episodes of the following network
television series: Dharma & Greg, Then Came You, Two Guys and a Girl, The
Practice and Snoops for ABC; Judging Amy, Martial Law (each co-produced with CBS
Productions) and Chicago Hope for CBS; Ally McBeal, Family Guy, Futurama, Get
Real, Harsh Realm, King of the Hill, The Simpsons, Titus and The X-Files for
Fox; The Pretender (co-produced with NBC Studios) and Stark Raving Mad for NBC;
and Angel, Buffy the Vampire Slayer and Roswell for the WB. Generally, a network
will license a specified number of episodes for exhibition on the network during
the license period. All other distribution rights, including international and
off-network syndication rights, are typically retained by Twentieth Century Fox
Television.
Generally, television programs are produced under contracts that provide
for license fees which may cover only a portion of the anticipated production
costs. As these costs have increased in recent years, the resulting deficit
between production costs and license fees for domestic first-run programming has
also increased. Successful network television series are licensed (i) for first-
run exhibition in International and Canadian markets, (ii) for off-network
exhibition in the United States (including in syndication or to cable
programmers) and (iii) for syndication in International markets. Such additional
licensing is often critical to the financial success of a series since the
license fee paid by a network generally does 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 in the United States or to cable and direct broadcast satellite
("DBS") programmers in the United States. The decision of a television network
to continue a series through an entire television season or to renew a series
for another television season depends largely on the series' audience ratings.
Fox Television Studios
FtvS is organized as a "co-op" of independent television production units,
grouped under four basic lines of business: (i) network primetime programming
through The Greenblatt Janollari Studio ("TGJS") and Regency Television, (ii)
"alternative," cable and low-cost entertainment programming through FtvS
Productions, (iii) movies and mini-series through FtvS Pictures and (iv) non-
fiction programming through Foxstar and Natural History New Zealand. FtvS
currently produces or has orders to produce the following series, movies and
specials: The Hughleys and Oh Grow Up for ABC; Malcolm in the Middle, The
Badland, Kiss Tomorrow Goodbye, Now or Never, Olive the Other Reindeer, and The
Headless Horseman for FOX; Roswell (co-production with Twentieth Century Fox
Television) for the WB; The X-Show, Fast Food Films and Sons of the Beach for
FX; The Ultimate Fan League for Fox Sports Net; World Gone Wild and Famous
Families for Fox Family Channel; Hollywood Reel to Reel for American Movie
Classics; Biography episodes for A&E; Adventure Central for Travel Channel and
Twisted Tales for Animal Planet.
Motion Picture and Television Libraries
- ---------------------------------------
The Company's motion picture and television library (the "Fox Library")
consists of varying rights to over 2,500 previously released films, of which
almost 300 have been
Page 4
released since 1980, and many well-known television series. The motion pictures
in the Fox Library include many successful, well-known and well-loved titles,
such as The Sound of Music and Miracle on 34th Street, and six of the top 10
domestic box office grossing films of all time, including the Star Wars trilogy
(Star Wars, The Empire Strikes Back, Return of the Jedi), Home Alone,
Independence Day, and most recently, Titanic. The Company earns significant
revenues through the licensing of titles in the Fox Library in many media,
including television and home entertainment formats, and through licensing and
merchandising of films and characters in films.
In addition, the Fox Library contains varying rights to certain television
series and made-for-television motion pictures. The television library contains
such classic series as Batman, The Mary Tyler Moore Show, M*A*S*H, Hill Street
Blues, Doogie Howser, M.D., L.A. Law, The Wonder Years, Picket Fences, Room 222,
Trapper John, M.D. and Daniel Boone, and such recent hits as The Simpsons, The
X-Files, NYPD Blue, Chicago Hope, Ally McBeal, The Practice and King of the
Hill.
Licensing and Merchandising
- ---------------------------
The Company capitalizes on its motion picture and television characters and
properties by entering into licensing agreements for merchandising, literary
publishing and commercial tie-ins. Programs and films which have experienced
success throughout the world in licensing and merchandising include The
Simpsons, The X-Files, the Alien series of motion pictures and Anastasia. See
"-- Cable Network Programming--Fox Family Worldwide."
Fox Interactive
- ---------------
Fox Interactive develops and markets entertainment computer software and
video game titles. By leveraging the name recognition of Company properties such
as Die Hard, The Simpsons and the Alien series of motion pictures, Fox
Interactive continues to experience significant growth and has created a strong
and diverse line of interactive games. In addition, Fox Interactive has expanded
its line by acquiring new properties that can be leveraged to other divisions of
the Company, such as Croc: The Legend of Gobbos, a game now being considered for
an animated television series. Most recently, Fox Interactive has launched a
line of Fox Sports Interactive games, including the two titles to be offered
this fall, NHL Championship 2000 and NBA Basketball 2000.
Fox Music and Music Publishing
- ------------------------------
Fox Music produces and licenses for distribution through third parties
soundtracks of the Company's film and television productions. The Company's
successful film and television soundtracks include Titanic, Back to Titanic,
Soul Food, Hope Floats, Ally McBeal, The X-Files, Dr. Dolittle and How Stella
Got Her Groove Back. In addition, Fox Music Publishing generally owns the
publishing rights for songs and scores commissioned for the Company's film and
television programming. Fox Music Publishing licenses these rights to third
parties for many uses in different media.
Page 5
Television Broadcasting and Related Businesses
The Company is engaged in the distribution of network programming and the
operation of broadcast television stations. Fox Broadcasting Company, the Fox
Television Stations and Twentieth Television, Inc. ("Twentieth Television") are
the principal operating units in this segment.
Fox Broadcasting Company
FOX has 203 affiliated stations, including the 22 television stations that
are owned by subsidiaries of the Company (the "Fox Television Stations"), which
reach, during prime time, approximately 99% of all U.S. television households.
Each week, FOX regularly delivers to its affiliates generally 15 hours of prime
time programming and one hour of late-night programming on Saturday. Through the
Fox Kids Network, programmed by FFW, FOX regularly delivers to its affiliates 14
hours of children's daytime programming. FOX's prime time programming features
such series as The Simpsons, The X-Files, Ally McBeal, King of the Hill, Beverly
Hills 90210, Party of Five and various movies and specials. In addition, a
significant component of FOX's programming consists of Fox Sports programming,
with FOX providing live coverage of the National Football Conference of the
National Football League ("NFL") and Major League Baseball ("MLB") to its
affiliates.
FOX derives its revenues from sales in the national advertising marketplace
of commercial advertising time. FOX's programming line-up is intended to appeal
primarily to target audiences of 18 to 49-year old adults, the demographic group
that advertisers seek to reach most often. Since the creation of FOX, FOX's
ratings have increased substantially. With respect to household ratings and
shares for FOX and ABC, CBS and NBC based on viewership of adults aged 18-49,
FOX improved from fourth place for the 1987-1988 broadcast season (with a 2.8
rating and a 7 share in total prime time for all U.S. television households) to
second place for the 1998-1999 broadcast season (with a 5.0 rating and a 14
share in total prime time for all U.S. television households). The median age of
the FOX viewer is 33 years, as compared to 41 years for ABC, 43 years for NBC
and 53 years for CBS.
The Company obtains programming for FOX from major television studios and
independent television production companies pursuant to license agreements. The
terms of such agreements generally provide the Company with the right to
broadcast a television series for four seasons. FOX licenses its film
programming from major film studios and independent film production companies
and licenses made-for-television films from a number of sources. National sports
programming, such as NFL and MLB programming, is obtained under license
agreements with professional sports leagues. The Company's current licenses with
the NFL and MLB extend until 2006 and 2000, respectively.
FOX provides programming to each of its television station affiliates in
accordance with affiliation agreements of varying durations, which grant to each
affiliate the right to broadcast network television programming on the
affiliated station (the "Fox Affiliates"). Such agreements typically run for
five to ten years and have staggered expiration dates. These affiliation
agreements generally require FOX's full - time television station affiliates to
carry FOX programming in all time periods in which FOX programming is offered to
such affiliates, subject to certain exceptions stated in affiliation agreements.
In 1999, FOX entered into an arrangement with most of its television station
affiliates relating to the amount of commercial advertising time in FOX
programming that FOX provides to each affiliate for the affiliate to sell to
advertisers ("local commercial advertising time"). Under that arrangement,
which
Page 6
runs until 2002, the affiliate pays FOX for additional local commercial
advertising time.
Fox Television Stations
The 22 Fox Television Stations are located in nine of the top 10 largest
designated market areas ("DMAs"), and all are affiliates of FOX. The Fox
Television Stations have the broadest coverage of any television station group
in the United States. Fox Television Stations are located in markets
representing, in the aggregate, approximately 50% of local television market
advertising revenues.
The following table lists certain information as of September 1999 about
each Fox Television Station.
PERCENTAGE OF U.S. TELEVISION
DMA/RANK STATION CHANNEL/TYPE HOUSEHOLDS REACHED (4)
-------- ------- ------------ ----------------------
New York, NY 1 WNYW 5 VHF 6.8%
Los Angeles, CA 2 KTTV 11 VHF 5.2%
Chicago, IL 3 WFLD 32 UHF 3.2%
Philadelphia, PA 4 WTXF 29 UHF 2.7%
Boston, MA 6 WFXT 25 UHF 2.2%
Dallas, TX(1) 7 KDFW 4 VHF 2.0%
Washington, DC 8 WTTG 5 VHF 2.0%
Detroit, MI 9 WJBK 2 VHF 1.8%
Atlanta, GA 10 WAGA 5 VHF 1.8%
Houston, TX 11 KRIV 26 UHF 1.7%
Tampa, FL 13 WTVT 13 VHF 1.5%
Cleveland, OH 15 WJW 8 VHF 1.5%
Phoenix, AZ 17 KSAZ 10 VHF 1.4%
Denver, CO(2) 18 KDVR 31 UHF 1.3%
St. Louis, MO 21 KTVI 2 VHF 1.1%
Kansas City, MO 31 WDAF 4 VHF 0.8%
Milwaukee, WI 33 WITI 6 VHF 0.8%
Salt Lake City, UT 36 KSTU 13 VHF 0.7%
Birmingham, AL 39 WBRC 6 VHF 0.7%
Memphis, TN 40 WHBQ 13 VHF 0.6%
Greensboro, NC 47 WGHP 8 VHF 0.6%
Austin, TX(3) 61 KTBC 7 VHF 0.5%
Total: 40.69%
(1) The Company also has an operating agreement with KDFI, Channel 27, Dallas,
TX.
(2) The Company also owns and operates KFCT, Channel 22, Fort Collins, CO, as a
satellite station of KDVR, Channel 31, Denver, CO.
(3) The Company also owns and operates KVC, Channel 13, Austin, TX, an LPTV
(low power television) station.
(4) VHF stations transmit on Channels 2 through 13 and UHF stations on Channels
14 through 69. UHF television stations in many cases have a weaker signal
and therefore do not achieve the same coverage as VHF stations. To address
this disparity, the Federal Communications Commission's ("FCC") ownership
rule applies a UHF discount (the "UHF Discount") which attributes only 50%
of the television households in a local television market to the audience
reach of a UHF station for purposes of calculating whether that station's
owner complies with the 35% national audience reach cap imposed by FCC
regulations. The percentages listed do not take into account the UHF
Discount. The FCC is currently reviewing whether the
Page 7
35% cap should be raised and whether the UHF Discount should be retained,
modified or eliminated. See "--Regulation."
The Fox Television Stations derive substantially all of their revenues
from national spot and local advertising. Advertising rates are determined by
each Fox Television Station in response to market conditions in the area which
it serves. In addition to cash sales, the Fox Television Stations enter into
customary barter agreements with syndicators, pursuant to which the Fox
Television Stations acquire programming and the rights to sell a specified
amount of advertising time for use in national spot and local advertising
markets in exchange for allowing the syndicator to retain a specified amount of
advertising time for sale in the national advertising market in lieu of cash
consideration.
Twentieth Television
The Company is also engaged in television programming, production,
distribution and licensing through Twentieth Television. Twentieth Television
produces and distributes television programs and distributes feature motion
pictures for first-run syndication and on basic cable television in the United
States. Twentieth Television also licenses programming which it, Twentieth
Century Fox Television or third parties have produced and which has previously
been exhibited on network television. Twentieth Television produces and
distributes for first-run syndication Forgive or Forget (in association with
Jonathan Goodson Productions) and Divorce Court.
FXM: Movies From Fox
Launched in November 1994 and currently reaching approximately 8 million
U.S. cable and DBS households, FXM, wholly-owned by the Company, is the only
Hollywood-based movie network exclusively featuring the films of the Fox
Library.
Los Angeles Dodgers
The Company owns and operates the Los Angeles Dodgers MLB franchise (the
"Dodgers") along with Dodger Stadium and other related real estate including
Dodgertown, the home of the Dodgers' spring training facilities in Vero Beach,
Florida. The Company acquired its interest in the Los Angeles Dodgers, Inc. in
April 1998. The Dodgers are currently in their 109th year in the National League
and in each of the last three seasons have achieved attendance of over three
million fans at Dodger Stadium.
Cable Network Programming
The Company holds interests in cable network programming businesses in
the areas of news, sports, general entertainment, family entertainment and
movies.
Fox News Channel ("Fox News")
Fox News a 24-hour all news cable channel which is currently available
to over 41 million U.S. cable and DBS households.
Fox News also produces programming, including a news magazine, Fox Files,
and a weekend political commentary show, Fox News Sunday, for broadcast on FOX.
Fox News, through its Fox News Edge service, licenses a news feed to Fox
Affiliates to use as part of their local news broadcasts.
Page 8
In addition, as of June 30, 1999 the Company had interests in the
following unconsolidated subsidiaries.
Fox Sports Networks
In July 1999, News Corporation acquired from Liberty Media Corporation
("Liberty") substantially all of Liberty's 50 percent interests in Fox/Liberty
Networks, LLC (together with its subsidiaries, "Fox Sports Networks") and
Fox/Liberty Ventures, LLC (together with its subsidiaries, "Fox Sports
Ventures"). News Corporation transferred the acquired interests in Fox Sports
Networks and Fox Sports Ventures to the Company in exchange for $1.425 billion
(51,759,834 shares) of Class A Common Stock. As a result of these transactions
the Company owns substantially all of Fox Sports Networks and Fox Sports
Ventures and has changed the names of these entities to Fox Sports Networks, LLC
and Fox Sports Ventures, LLC.
Fox Sports Networks operates two principal business units: (i) cable
sports programming and (ii) general entertainment programming.
Cable Sports Programming. Fox Sports Networks is the largest regional
sports network ("RSN") programmer in the United States, focusing on live
professional and major collegiate home team sports events. Fox Sports Networks'
sports programming business consists of equity interests in 21 RSNs (the "Fox
Sports RSNs") and Fox Sports Net, a national sports programming service, which
is owned in a 50/50 partnership between Fox Sports Networks and Rainbow Media
Sports Holdings, Inc. ("Rainbow"), an indirect subsidiary of Cablevision Systems
Corporation ("Cablevision"). Fox Sports Net provides its affiliated RSNs with
24-hour national sports programming featuring live and replay sporting events
and original programming and a national sports news program, Fox Sports News.
Fox Sports Networks owns an equity interest in, or through Fox Sports Net
is affiliated with, 25 RSNs. These RSNs reach over 62 million households and
have rights to telecast live games of 73 professional sports teams in the MLB,
National Basketball Association ("NBA") and National Hockey League ("NHL") (out
of a total of 76 such teams in the United States) and numerous collegiate sports
teams. The average term of the Fox Sports RSNs' rights agreements (from
commencement to scheduled termination) is approximately seven years. Because of
their home team programming, RSNs have strong local appeal in their respective
markets, generating high prime time ratings and attractive subscriber fees from
cable operators. Fox Sports Networks' strategy is to utilize its RSNs and Fox
Sports Net to build a national cable sports network under the Fox brand name.
Page 9
Fox Sports Net has been structured based on the "broadcast network
affiliate" model, in which each RSN airs a slate of local programming, which is
supplemented by a schedule of network-provided national programming consistent
across all regions. Unlike the typical "broadcast network affiliate" model,
however, Fox Sports Net's programming is anchored by local programming during
prime time, with national Fox Sports Net programming during the balance of the
schedule. All of the Fox Sports RSNs are represented by one national advertising
firm that is owned in a 50/50 joint venture between Fox Sports Networks and
Rainbow.
RSNs enter into affiliation agreements with multiple system operators
("MSOs") and/or individual cable system operators and DBS distributors. Such
agreements typically run for five to seven years and generally provide for
annual rate increases. The Fox Sports RSNs' affiliation agreements have
staggered expiration dates, with an average maturity of six years (from
commencement to scheduled termination). Under affiliation agreements, cable
system operators must distribute the network service to a certain number of
subscribers and/or maintain a certain subscriber base penetration level. The
same criteria are generally used as the basis for calculating the monthly fees
paid by the cable operator to Fox Sports Networks for its programming.
Fox Sports Networks owns a 40% interest in Regional Programming Partners
("RPP"), a partnership with Rainbow which owns various interests in RSNs
(including two in which Fox Sports Networks owns 50% interests), the New York
Knickerbockers NBA franchise, the New York Rangers NHL franchise, the Madison
Square Garden entertainment complex, and Radio City Music Hall.
General Entertainment Programming. Fox Sports Networks owns FX, a leading
general entertainment cable network, that currently reaches approximately 43
million U.S. cable and DBS households.
Fox Sports Ventures
Fox Sports Ventures owns approximately 34% of each of the Speedvision
programming service, which focuses exclusively on the world of racing,
including cars, motorcycles, airplanes and boats, and the Outdoor Life
programming service, which provides information and entertainment on nature, the
environment and outdoor recreation. Speedvision and Outdoor Life currently reach
approximately 16 million and 15 million cable and DBS households, respectively.
Fox Sports Ventures' partners in Speedvision and Outdoor Life are Cox
Communications, Comcast Corporation, Media One, Roger Werner and Daniels
Programming.
Fox Sports Ventures owns a 40% interest in an entity that is developing the
Staples Center, a new sports and entertainment complex in downtown Los Angeles,
California. The Staples Center is scheduled to be the home of the Los Angeles
Kings NHL franchise and the Los Angeles Lakers and the Los Angeles Clippers NBA
franchises beginning in October 1999.
International Sports Programming Partners ("ISPP")
The Company and Liberty Media International, Inc. (formerly known as Tele-
Communications International, Inc. or "TINTA") each own a 50% interest in ISPP.
ISPP
Page 10
holds interests in the following programming services: Fox Sports Americas (a
Spanish language sports network which airs throughout the Americas), Fox Sports
World (a U.S. sports network featuring 24-hour international sports in the
English language) and Fox Sports World-Middle East (an English-language sports
network which airs in the Middle East).
Fox Family Worldwide ("FFW")
FFW is owned 49.5% by the Company and 49.5% by Haim Saban and certain
limited partnerships controlled by Mr. Saban.
FFW is an integrated family and children's entertainment company that
develops, acquires, produces, broadcasts and distributes live-action and
animated family and children's television programming on a global basis. FFW's
principal operations are comprised of (i) International Family Entertainment,
Inc. ("IFE"), which operates the Fox Family Channel; (ii) Fox Kids International
Networks, a portfolio of Fox Kids branded cable and DTH satellite channels
operating in approximately 39 countries and 13 languages worldwide; (iii) the
Fox Kids Network; and (iv) Saban Entertainment International ("SEI"), which owns
and manages an extensive and growing library of family and children's
programming.
The Fox Family Channel is a basic cable network that currently provides
family oriented programming reaching approximately 95% of all cable and DBS
households in the United States. The Fox Family Channel is the successor to The
Family Channel, which FFW acquired as part of its acquisition of IFE in 1997. In
August 1998, FFW reintroduced The Family Channel as the Fox Family Channel with
a new programming schedule, marketing campaign and on-air packaging. The Fox
Family Channel's programming format includes daytime programming for children
followed by evening programming targeted towards adults aged 18-49. Evening
programming consists principally of original series, specials and movies
produced or licensed by FFW. The Fox Family Channel earns revenue through the
sale of advertising time and through subscriber fees.
The Fox Kids Network, one of the leading U.S. children's broadcasting
television networks, broadcasts 14 hours of children's programming each week to
97% of U.S. television households, the broadest reach of any network targeting
children. The Fox Kids Network affords advertisers the opportunity to reach
children in a cost effective manner, in part by ensuring consistent nationwide
placement of their advertisements by generally broadcasting its programming at
the same local time and on the same day ("day and date") in each television
market.
FFW, through SEI, creates, produces and acquires animated and live-action
children's television programming with brand-name characters and elements which
are either widely known to children, such as the Mighty Morphin Power Rangers
and X-Men, or which are or have been developed or purchased due to their
likelihood of maturing into popular brands. FFW will produce, finance or co-
finance approximately 432 episodes of children's television programming for the
1999/2000 broadcast season. FFW generally retains worldwide rights to its brands
and currently has over 300 licensees worldwide. FFW currently distributes its
children's programming in most major television markets throughout the world.
Over the past two years, FFW has aggressively pursued a strategy of
launching Fox Kids branded cable and direct to home ("DTH") channels in Europe
and Latin America. These channels are either fully owned and operated by FFW or
in conjunction with local partners. The Fox Kids International Networks
currently reach in the aggregate over 22
Page 11
million subscribers in Europe and Latin America. The Fox Kids International
Networks earn revenue through the sale of advertising time and through
subscriber fees. FFW will be launching two new U.S. digital cable networks, the
boyzChannel and the girlzChannel in fiscal 2000. These two networks will offer
original programming and will be directed at boys and girls, respectively. In
June 1999, FFW launched two web sites catering specifically to boys
(www.bchannel.com) and girls (www.gchannel.com).
National Geographic Channel
In May 1999, the Company acquired a 50% interest in National Geographic
Channels Worldwide (the "National Geographic Channel"). After giving effect to
the Company's acquisition, National Broadcasting Company ("NBC") and National
Geographic Television ("NGT") each own 25% interests in the National Geographic
Channel. The National Geographic Channel airs documentary programming on such
topics as natural history, adventure, science, exploration and culture. The
National Geographic Channel is currently shown in approximately 54 countries
outside of the United States. In addition, the Company, NGT and NBC have the
right to launch the National Geographic Channel in the United States. National
Geographic programming is provided in Australia, certain countries in Europe and
Scandinavia by a partnership in which British Sky Broadcasting, NBC and NGT are
currently partners.
The Golf Channel
The Company owns a 33.33% interest in TGC, Inc., which owns and operates
The Golf Channel. The Golf Channel broadcasts studio shows and has rights to
broadcast certain Professional Golf Association ("PGA") tournaments and other
European PGA, Australian PGA, LPGA and Nike Tour events. The Golf Channel
currently reaches approximately 24 million U.S. cable and DBS households. The
Company's partners in The Golf Channel include Comcast Corporation, Times Mirror
Co. and Arnold Palmer.
The Health Network
In May 1999, the Company formed a 50/50 joint venture with AHN Partners,
L.P. ("AHN"), to create both a 24-hour cable television network and an Internet
site, each exclusively devoted to health and fitness programming. In connection
with the formation of the joint venture, the Company and AHN each contributed
assets related to health and fitness programming businesses. The cable network,
which operates under the name "The Health Network", launched on July 15, 1999.
Competition
The Company faces competition from companies within the motion picture and
television industry and alternative forms of leisure and entertainment
activities. The entertainment industry is also subject to rapid developments in
technology and shifting consumer tastes.
Filmed Entertainment
Motion picture and television production and distribution are highly
competitive businesses. The Company competes with other film studios,
independent production companies and others for the acquisition of artistic
properties, the services of creative and
Page 12
technical personnel, exhibition outlets and the public's interest in its
products. The number of films released by the Company's competitors,
particularly the other major film studios, in any given period may create an
oversupply of product in the market, and that may reduce the Company's shares of
gross box office admissions and may make it more difficult for the Company's
films to succeed.
The commercial success of the motion pictures produced and/or distributed
by the Company is substantially affected by the public's often unpredictable
response to the motion pictures produced and distributed by it. In addition,
television networks are now producing more programs internally and thus may
reduce such networks' demand for programming from other parties.
Television Broadcasting and Related Businesses
The network television broadcasting business is highly competitive. FOX
directly competes for programming and for viewers with ABC, NBC, CBS, and the WB
and UPN networks. ABC, NBC and CBS each broadcasts a significantly greater
number of hours of programming than FOX and accordingly, may be able to
designate or change time periods in which programming is to be broadcast with
greater flexibility than FOX. FOX also competes with other non-network sources
of television service, including cable television and DBS services. Other
sources of competition may include home video exhibition and home computer
usage. In addition, future technological developments may affect competition
within the television marketplace.
FOX also competes with other television networks to secure affiliations
with independently owned television stations in markets across the country,
which are necessary to ensure the effective distribution of network programming
to a nationwide audience. In recent years, competition among the networks for
affiliates has intensified.
FOX competes for advertising revenues with the other broadcast networks, as
well as with all other forms of advertising. Each of ABC, NBC and CBS has a
greater number of affiliates with VHF signals, which are generally considered to
have greater reach in their markets and, therefore, more appealing to
advertisers. ABC, NBC and CBS also realize greater advertising revenues than FOX
for most of their programming in various time periods. In addition, each of the
Fox Television Stations competes for audiences and advertising revenues with
radio and television stations and cable systems in its market area and with
other advertising media such as newspapers, magazines, outdoor advertising and
direct mail. All of the Fox Television Stations are located in highly
competitive markets. Additional elements which are material to the competitive
position of television stations include management experience, authorized power
and assigned frequency. Competition for sales of broadcast advertising time is
based primarily on the anticipated and actually delivered size and demographic
characteristics of audiences as determined by various rating services, price,
the time of day when the advertising is to be broadcast, competition from the
other broadcast networks, cable television systems, DBS services and other media
and general economic conditions. Competition for audiences is based primarily
on the selection of programming, the acceptance of which is dependent on the
reaction of the viewing public which is often difficult to predict.
Page 13
Cable Network Programming
General
- -------
The cable network programming business is another highly competitive field.
Cable programming services compete for distribution and, when distribution is
obtained, compete for viewers and advertisers with over-the-air broadcast
television, radio, print media, motion picture theaters, videocassettes and
other sources of information and entertainment. Important competitive factors
are the prices charged for programming, the quantity, quality and variety of
programming offered and the effectiveness of marketing efforts. More generally,
the Company's cable networks compete with various other leisure-time activities
such as home videos, movie theaters, personal computers and other alternative
sources of entertainment and information.
Sports Programming
- ------------------
A number of basic and pay television programming services (such as ESPN) as
well as free over-the-air broadcast networks provide programming that targets
the Fox Sports RSNs' audience. Fox Sports Networks is currently the only
programming service distributing a full range of sports programming on both a
national and regional level. On a national level, Fox Sports Networks' primary
competitor is ESPN.
In addition, the Fox Sports RSNs and Fox Sports Net compete, to varying
degrees, for sports programming rights. The Fox Sports RSNs compete for local
and regional rights with local broadcast television stations, other local and
regional sports networks and the owners of distribution outlets such as cable
television systems. Fox Sport Net competes for national rights principally with
the national broadcast television networks, a number of national cable services
that specialize in or carry sports programming, and television "superstations,"
which distribute sports and other programming to cable television systems by
satellite, and with independent syndicators that acquire and resell such rights
nationally, regionally and locally. The owners of distribution outlets such as
cable television systems may also contract directly with the sports teams in
their service area for the right to distribute a number of such teams' games on
their systems. The owners of teams may also launch their own regional sports
network and contract with cable television systems for carriage.
FX
- --
A number of basic and pay television programming services (such as the USA
cable network and Turner Network Television) as well as free over-the-air
broadcast networks provide programming that targets the same viewing audience as
FX. FX faces competition in the acquisition of distribution rights to
programming produced by other diversified media companies, due to industry
consolidation and the elimination of the financial interest and syndication
rules. With the repeal of certain governmental regulations which formerly
prohibited the broadcast networks from acquiring financial interests in, and
syndication rights to, television programming, competition in the industry is
expected to increase.
Fox Family Worldwide
- --------------------
FFW currently competes and expects to continue to compete, through the Fox
Kids Network and the Fox Family Channel, with the other broadcast television
networks, public television and cable television channels, such as Nickelodeon,
the USA cable network, the
Page 14
Disney Channel, Turner Network Television and the Cartoon Network, for market
acceptance of its programming and for viewership ratings and advertising
revenues. To the extent that FFW produces original programming for distribution
outlets it does not own, it competes with other producers of children's
programming. Internationally, FFW competes with a large number of U.S.-based and
international distributors of children's programming, including The Walt Disney
Company, Warner Bros. and Nickelodeon, in the development or acquisition of
programming expected to appeal to international audiences. Such programming
often must comply with foreign broadcast rules and regulations, which may
stipulate certain minimum local content requirements.
Regulation
Filmed Entertainment
FFE is subject to the provisions of so-called "trade practice laws" in
effect in 25 states relating to theatrical distribution of motion pictures.
These laws substantially restrict the licensing of motion pictures unless
theater owners are first invited to attend a screening of such motion pictures
and, in certain instances, also prohibit payment of advances and guarantees to
motion picture distributors by exhibitors. Further, pursuant to various consent
judgments, FFE and certain other motion picture companies are subject to certain
restrictions on their trade practices in the U.S., including a requirement to
offer motion pictures for exhibition to theaters on a theater-by-theater basis
and, in some cases, a prohibition against the ownership of theaters.
Television Broadcasting and Related Businesses
In general, the television broadcast industry in the U.S. is highly
regulated by Federal laws and regulations issued and administered by various
Federal agencies, including the FCC. The FCC regulates television broadcast
stations pursuant to the Communications Act of 1934, as amended (the
"Communications Act"). The Communications Act permits the operation of
television broadcast stations only in accordance with a license issued by the
FCC upon a finding that grant of the license would serve the public interest,
convenience and necessity. The FCC grants television broadcast station licenses
for specific periods of time and, upon application, may renew the licenses for
additional terms. Under the Communications Act, television broadcast licenses
may be granted for a maximum permitted term of eight years. Generally, the FCC
renews broadcast licenses upon finding that (i) the television station has
served the public interest, convenience and necessity, (ii) there have been no
serious violations by the licensee of the Communications Act or FCC rules and
regulations; and (iii) there have been no other violations by the licensee of
the Communications Act or FCC rules and regulations which, taken together,
indicate a pattern of abuse. After considering these factors, the FCC may grant
the license renewal application with or without conditions, including renewal
for a term lesser than the maximum otherwise permitted, or hold an evidentiary
hearing.
In February 1998, the FCC adopted a final table of digital channel
allotments and rules for the implementation of digital television ("DTV")
service (including high-definition television) in the United States. The digital
table of allotments provides each existing full power television station
licensee or permittee, including the 22 Fox Television Stations, with a second
broadcast channel in order to facilitate a transition from analog to digital
transmission, conditioned upon the surrender of one of the channels at the end
of the DTV transition period. Nine of the Fox Television Stations have launched
digital facilities. The FCC will
Page 15
require completion of digital facilities in six additional Fox Television
Stations by November 1, 1999, and in the seven remaining Fox Television Stations
by May 1, 2002. Under FCC rules, television stations may use their second
channel to broadcast either one or two streams of "high definition" digital
programming or to "multicast" several streams of standard definition digital
programming or mixture of both. Broadcasters may also deliver data over these
channels, provided that such supplemental services do not derogate the mandated,
free over-the-air program service. The Company is currently formulating plans
for use of its digital channels. It is difficult to assess how digital
television will affect the Company's broadcast business with respect to other
broadcasters and video program providers.
Under the Communications Act, a broadcast license may not be granted to or
held by any corporation that has more than one-fifth of its capital stock owned
or voted by non-U.S. citizens or entities or their representatives, by foreign
governments or their representatives, or by non-U.S. corporations. The
Communications Act further provides that no FCC broadcast license may be granted
to any corporation directly or indirectly controlled by any other corporation of
which more than one-fourth of its capital stock is owned of record or voted by
non-U.S. citizens if the FCC finds the public interest will be served by the
refusal of such license. In 1995, the FCC acknowledged that News Corporation
owns the vast preponderance of equity of the corporate parent of the Fox
Television Stations. The FCC also concluded that Mr. K. Rupert Murdoch,
Chairman and Chief Executive of News Corporation, a U.S. citizen, controls the
corporate licensee and thus found the level of alien equity to be consistent
with the public interest. Mr. Murdoch has 76% voting control of the corporate
parent of the Fox Television Stations and News Corporation will continue to hold
indirectly stock representing the majority of equity of the corporate licensee.
The Restated Certificate of Incorporation of Fox Television Holdings, Inc.
provides that the voting capital stock of the company shall only be owned by
persons who are citizens of, or incorporated entities formed in, the United
States, or would not otherwise disqualify such company or any subsidiary of such
company from being issued a television broadcast license by the FCC.
On August 6, 1999 the FCC amended the rules that determine what constitutes
a "cognizable interest" in applying its media cross-ownership restrictions (the
"Attribution Rules"), as well as the rules that govern the ownership of two
television stations, or a television station and a radio station, located in the
same market (the "Local Restriction"). Under the new Attribution Rules, a party
will be deemed to have a cognizable interest in a television or radio station,
cable system or daily newspaper ("Media Outlet") that triggers the FCC's cross-
ownership restrictions if (i) it owns 5% or more of the voting stock in the
Media Outlet; (ii) its interest exceeds 33% of the total asset value (equity
plus debt) of the Media Outlet and it either (x) supplies at least 15% of a
station's weekly broadcast hours or (y) has an interest in another Media Outlet
in the same market. Under the new Attribution Rules, Local Marketing Agreements
("LMAs") are cognizable interests if the brokering station provides more than
15% of the brokered station's broadcast hours per week. The FCC also eliminated
its "cross interest" policy, which had prohibited common ownership of a
cognizable interest in one Media Outlet and a "meaningful" non-cognizable
interest in another Media Outlet serving essentially the same market.
The FCC relaxed the Local Restriction to (i) permit the ownership of two
television stations with overlapping coverage areas if the stations are in
separate markets ("DMAs"); (ii) permit common ownership of two stations in the
same DMA if their Grade B coverage areas do not overlap or if eight
independently owned full power television stations will remain after the
stations which had been independently owned become commonly owned (which is
referred to by the FCC as a "merger"), and one of the stations is not among the
top four-
Page 16
ranked stations in the market, based on audience share. The remaining Local
Restriction can be waived if one of the stations is "failed" or "failing," or
where the merger would result in the construction and operation of an "unbuilt"
station. The FCC's action has the effect of permitting LMAs located in the same
market as the brokering station (such as the Company's operating agreement with
KDFI, Dallas), even if more than 15% of the station's time is brokered. The FCC
also relaxed its radio-television cross-ownership rule to permit some degree of
same-market radio and television joint ownership. It is difficult to assess how
these changes in the FCC ownership restrictions will affect the Company's
broadcast business.
FCC rules permit a party to have an attributable interest in an unlimited
number of television stations nationally so long as such stations do not exceed,
in the aggregate and after application of the UHF Discount, the current 35%
national audience reach limit (calculated as 100% of VHF station coverage and
50% of UHF station coverage) (the "National Restriction"). Pursuant to
Congressional directive, the FCC is conducting a formal inquiry of all its
broadcast ownership rules, including the National Restriction, the UHF Discount
and the dual network rule. It is not possible to predict the extent to which the
National Restrictions may be modified or the timing or effect of other changes
in FCC rules or policies pursuant to the 1996 Telecom Act or pending FCC
proceedings.
The FCC has adopted rules requiring closed captioning of most broadcast and
cable programming on a phased-in basis, beginning in the year 2000. The
broadcast and cable industries have adopted, and the FCC has approved, a
voluntary content ratings system which, when used in conjunction with so-called
"V-Chip" technology, will permit the blocking of programs with a common rating.
The FCC has directed that all television receiver models with picture screens 13
inches or greater be equipped with "V-Chip" technology under a phased
implementation which began July 1, 1999.
FCC regulations implementing the 1992 Cable Act require each television
broadcaster to elect, at three-year intervals beginning June 17, 1993, either to
(i) require carriage of its signal by cable systems in the station's market
("must carry") or (ii) negotiate the terms on which such broadcast station would
permit transmission of its signal by the cable systems within its market
("retransmission consent"). The constitutionality of the analog must-carry
provisions was upheld by the U.S. Supreme Court. The FCC recently has initiated
a rulemaking proceeding to determine carriage requirements for digital broadcast
television systems on cable systems, including carriage during the period of
transition from analog to digital signals.
Legislation enacted in 1990 limits the amount of commercial matter that may
be broadcast during programming designed for children 12 years of age and
younger. In addition, under FCC license renewal processing guidelines,
television stations are generally required to broadcast a minimum of three hours
per week of programming, which, among other requirements, must have, as a
"significant purpose," the educational and informational needs of children 16
years of age and under. A television station found not to have complied with the
programming requirements or commercial limitations could face sanctions,
including monetary fines and the possible non-renewal of its license. The FCC
has indicated its intent to enforce its children's television rules strictly.
The FCC continues to enforce strictly its regulations concerning
"indecent" programming, political advertising, environmental concerns,
technical operating matters and antenna tower maintenance. The FCC also has
traditionally enforced its equal employment opportunity rules vigorously, with
respect both to compliance with numerical employment
Page 17
guidelines and recruitment efforts and recordkeeping requirements. The FCC's
employment rules were struck down as unconstitutional by the U.S. Court of
Appeals for the D.C. Circuit in 1998. In addition, FCC regulations governing
network affiliation agreements mandate that television broadcast station
licensees retain the right to reject or refuse network programming in certain
circumstances or to substitute programming that the licensee reasonably believes
to be of greater local or national importance. Violation of FCC regulations can
result in substantial monetary forfeitures, periodic reporting conditions,
short-term license renewals and, in egregious cases, denial of license renewal
or revocation of license.
Cable Network Programming
The 1992 Cable Act subjected all cable television operators not subject to
"effective competition" to rate regulation. Rate regulation under the 1992 Cable
Act resulted in a reduction of rates to some subscribers in some markets. The
1996 Telecom Act completely eliminated cable rate regulation, except with
respect to the "basic" tier (which must include all local broadcast stations and
public, educational and governmental access channels, and must be provided to
all subscribers) as of March 31, 1999. In response to the 1992 Cable Act and the
FCC's implementing regulations, many cable systems retiered channels to create
an attractively priced "basic" tier, while offering satellite-delivered
programming services such as the Company's on a different service tier or on an
a la carte basis. To the extent such retiering or repricing of the Company's
cable networks induced customers to discontinue their subscriptions, the
Company's financial performance might have been adversely affected. Deregulation
of rates pursuant to the 1996 Telecom Act may reverse such tiering and pricing
decisions by cable system operators and, correspondingly, reverse or ameliorate
any adverse effects of the 1992 Cable Act. On the other hand, to the extent that
rate deregulation causes a material increase in cable rates, the individual
subscriber base of the Company's could be decreased, potentially affecting the
Company's subscriber revenues.
FCC regulations adopted pursuant to the 1992 Cable Act prevent a cable
operator that has an attributable interest (including voting or non-voting stock
ownership of 5% or more or limited partnership equity interests of 5% or more)
in a programming vendor from exercising undue or improper influence over the
vendor in its dealings with competitors to cable. The regulations also prohibit
a cable programmer in which a cable operator has an attributable interest from
entering into exclusive contracts with any cable operator or from discriminating
among competing multichannel program distributors in the price, terms and
conditions of sale or delivery of programming. With respect to cable systems
having channel capacity of less than 76 channels, the FCC's regulations limit to
40% the number of programming channels that may be occupied by video programming
services in which the cable operator has an attributable interest. As a result
of Liberty Media's ownership interest in The News Corporation Limited, the Fox
Family Channel, cable networks owned by Fox Sports Networks and Fox Sports
Ventures, Fox News Channel, The Health Network, FXM and The Golf Channel are
subject to these requirements. Similarly, Cablevision is deemed to have an
attributable interest in RPP. The FCC's program access and non-discrimination
regulations therefore restrict the ability of these cable programming services
to enter into exclusive contracts. The rules also permit multichannel video
programming distributors (such as multi-channel multi-point distribution
services ("MMDS"), satellite master antenna televisions ("SMATV"), DBS and DTH
operators) to bring complaints against the Company to the FCC charging they are
unable to obtain the affected programming networks on nondiscriminatory terms.
While cable systems are expanding their capacity, there may be instances in
which AT&T Cable Services or a Cablevision system with 75 channels or less will
not be able to
Page 18
carry one or more of the Company's cable channels (or in the case of
Cablevision, an RPP channel) or will have to remove another affiliated channel.
The FCC's regulations concerning the commercial limits in children's
programs and political advertising also apply to certain cable television
programming services carried by cable system operators. The Company must provide
program ratings information and increased closed captioning of its cable
programming services to comply with FCC regulations, which could increase its
operating expenses.
The Children's Online Privacy Protection Act ("COPPA") prohibits web sites
from collecting personally identifiable information online from children under
age 13 without prior parental consent. The Federal Trade Commission is expected
to adopt final rules implementing COPPA by late 1999. Online services provided
by FFW may be subject to COPPA requirements. Congress may also consider online
privacy legislation that would apply to personal information collected from
teens and adults.
ITEM 2. PROPERTIES
The Company maintains executive offices and certain of its operations, as
well as the Fox News studios at 1211 Avenue of the Americas, New York, New York.
These offices cover approximately 115,000 square feet and are provided by News
Corporation, which maintains executive offices at such location.
The Company owns the Fox Studios Lot at 10201 West Pico Boulevard, Los
Angeles, California, which consists of approximately 53 acres containing sound
stages, production facilities, administrative, technical and dressing room
structures, screening theaters and machinery and equipment facilities. The
company also leases approximately 320,000 square feet of office space at Fox
Plaza, located adjacent to the Fox Studios Lot. The Company owns a studio
facility in Rosarito, Mexico, which consists of approximately 37 acres
containing office space, production facilities and the largest fresh and
saltwater tanks used in motion picture production in the world. Fox Studios
Australia, a 50/50 joint venture between the Company and Lend Lease Corporation,
has entered into a 40-year lease, with a 10-year renewal option, with respect to
integrated film and television production and public entertainment facilities in
Sydney, Australia, which consists of approximately 60 acres.
The Company owns Dodger Stadium which is situated on approximately 275
acres of property in Los Angeles and Dodgertown, the Dodger's Spring training
facility, which is located on 467 acres of property in Vero Beach, Florida.
The Company also owns and leases office space, broadcast and production
facilities and other ancillary support properties in various cities in the
United States and several countries around the world for its businesses. The
Company considers its properties adequate for its present needs.
ITEM 3. LEGAL PROCEEDINGS
The Company experiences routine litigation in the normal course of its
business. The Company believes that none of its pending litigation will have a
material adverse effect on its consolidated financial condition, future results
of operations or liquidity.
Page 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Executive Officers of the Company
Set forth below is certain information concerning the executive officers of
the Company as of September 1, 1999, which information is hereby included in
Part I of this report.
The Executive Officers of the Company are as follows:
NAME AGE POSITION
---- --- --------
K. Rupert Murdoch 68 Chairman and Chief Executive Officer
Peter Chernin 48 President, Chief Operating Officer
Chase Carey 45 Co-Chief Operating Officer
David F. DeVoe 52 Senior Executive Vice President, Chief
Financial Officer
Arthur M. Siskind 60 Senior Executive Vice President, General
Counsel
All of the Executive Officers of the Company are also executive officers of
News Corporation. As executive officers of News Corporation, the Executive
Officers of the Company continue to render services to News Corporation.
The Senior Executives of the Company (in addition to persons identified as
Executive Officers above) are as follows:
NAME AGE POSITION
---- --- --------
David Hill 53 Chairman and Chief Executive Officer of Fox
Sports Television Group
William Mechanic 49 Chairman and Chief Executive Officer of Fox
Filmed Entertainment
Mitchell Stern 45 Chairman and Chief Executive Officer of Fox
Television Stations
Backgrounds of Executive Officers and Senior Executives
- -------------------------------------------------------
K. Rupert Murdoch has been a Director of the Company since 1985, Chairman
since 1992 and Chief Executive Officer of the Company since 1995. Mr. Murdoch
has been Chairman of the Board of Directors of News Corporation since 1991, and
an Executive
Page 20
Director and Chief Executive of News Corporation since its formation in 1979.
Mr. Murdoch has served as a Director of News Limited, News Corporation's
principal subsidiary in Australia since 1953, a Director of News International
plc, News Corporation's principal subsidiary in the United Kingdom, since 1969,
and a Director of News America Incorporated, News Corporation's principal
subsidiary in the United States, since 1973. Mr. Murdoch has served as a
Director of STAR TV since 1993 and served as Chairman from 1993 to 1998, and has
served as a Director of BSkyB since 1990 and Chairman since June 1999, and as a
Director of FFW since 1996. Mr. Murdoch is also a member of the board of
directors of Philip Morris Companies, Inc.
Peter Chernin has been a Director and President and Chief Operating Officer
of the Company since August 1998. Mr. Chernin has been an Executive Director,
President and Chief Operating Officer of News Corporation and a Director,
Chairman and Chief Executive Officer of NAI, since 1996. Mr. Chernin was
Chairman and Chief Executive Officer of FFE from 1994 until 1996, Chairman of
Twentieth Century Fox Film Corporation from 1992 until 1994 and President of FOX
from 1989 until 1992. Mr. Chernin has served as a Director of TV Guide, Inc.
since March 1999 and has served on the Advisory Board of PUMA AG since May 1999,
and as a Director of Tickets.com, Inc. since September 1999.
Chase Carey has been a Director of the Company since 1992 and Co-Chief
Operating Officer of the Company since August 1998. Mr. Carey was President of
the Company from 1995 to 1998, Executive Vice President and Chief Operating
Officer from 1991 to 1995 and Senior Vice President from 1988 to 1991. Mr. Carey
is an Executive Director and has been the Co-Chief Operating Officer of News
Corporation and a Director and Executive Vice President of News America
Incorporated since 1996. Mr. Carey has served as the Chairman and Chief
Executive Officer of Fox Television since July 1994. Mr. Carey joined Fox, Inc.
(predecessor of the Company) in 1988 as Executive Vice President, served as
Chief Financial Officer, and assumed the title of Chief Operating Officer in
February 1992. Mr. Carey has been a Director of STAR TV since 1993. Mr. Carey
is a member of the Boards of Directors of FFW, TV Guide, Inc. Gateway 2000 and
Colgate University.
David F. DeVoe has been a Director of the Company since 1991 and Senior
Executive Vice President and Chief Financial Officer of the Company since August
1998. Mr. DeVoe has been an Executive Director, Chief Financial Officer and
Finance Director of News Corporation since 1990 and Senior Executive Vice
President of News Corporation since 1996. Mr. DeVoe was an Executive Vice
President of News Corporation from 1990 until 1996, and has been a Director of
News America Incorporated since July 1991 and a Senior Executive Vice President
since January 1998. Mr. DeVoe served as Executive Vice President of News America
Incorporated from 1991 to 1997. Mr. DeVoe has also been a Director of STAR TV
since 1993 and a Director of BSkyB since 1994.
Arthur M. Siskind has been a Director and Senior Executive Vice President
and General Counsel of the Company since August 1998. Mr. Siskind has been an
Executive Director and Group General Counsel of News Corporation since 1991 and
a Senior Executive Vice President of News Corporation since 1996. Mr. Siskind
served as Executive Vice President of News Corporation from 1991 until 1996. Mr.
Siskind has been a Director of News America Incorporated since 1991 and a Senior
Executive Vice President since January 1998. Mr. Siskind served as an Executive
Vice President of News America Incorporated from 1991 to 1997. Mr. Siskind has
been a Director of BSkyB since 1992 and a Director of STAR TV since 1993. Mr.
Siskind has been a member of the Bar of the State of New York since 1962.
Page 21
David Hill has served as Chairman and Chief Executive Officer of Fox Sports
Television Group since June 1999. Mr. Hill served as Chairman and Chief
Executive Officer of FOX from October 1997 until June 1999 and served as
President of Fox Sports, a division of Fox Television, from December 1993 to
June 1999. From July 1996 until October 1997, Mr. Hill served as Chief Operating
Officer of Fox Television. In addition, Mr. Hill served as Chairman of Fox
Sports Networks from April 1996 until June 1999. From April 1996 through October
1997, Mr. Hill also served as Fox Sports Networks' Chief Executive Officer.
William Mechanic has been Chairman and Chief Executive Officer of FFE since
December 1996. Mr. Mechanic was President and Chief Operating Officer of FFE
from 1994 until 1996 and President and Chief Operating Officer of Twentieth
Century Fox from 1993 until 1994.
Mitchell Stern has been Chairman and Chief Executive Officer of Fox
Television Stations since June 1998. Mr. Stern was President and Chief Operating
Officer of Fox Television Stations, Inc. from 1993 to 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class A Common Stock is listed and traded on the New York
Stock Exchange under the symbol "FOX". Public trading of the Class A Common
Stock commenced on November 11, 1998. Prior to that, there was no public market
for the Company's Common Stock. As of September 1, 1999, there were
approximately 745 holders of record of the Company's Class A Common Stock.
The following table sets forth, for the periods indicated, the high and low
closing sale prices per share of the Company's Class A Common Stock.
1998 High Low
- ---- -------- --------
Fourth Quarter (from November 11, 1998) $25 3/16 $19 11/16
1999 High Low
- ---- -------- --------
First Quarter $29 11/16 $22 1/2
Second Quarter $29 5/8 $24 1/2
Third Quarter (through September 1, 1999) $26 13/16 $21 9/16
The Company has never declared or paid cash dividends on its Class A Common
Stock and it is the Company's present intention to retain earnings to finance
the expansion of its business.
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
Page 22
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 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 23
FISCAL YEAR ENDED JUNE 30,
---------------------------------------------------------------------------
1999 1998 1997(3) 1996 1995
---- ---- ------- ---- ----
(Dollars in Millions, except for Per Share Data)
STATEMENT OF OPERATIONS DATA:
- ----------------------------
Filmed Entertainment $ 4,416 $ 3,876 $ 3,112 $ 2,324 $2,215
Television Broadcasting and
Related Businesses 3,512 3,075 2,698 2,224 1,700
Cable Network Programming 129 72 37 -- --
-------- ---------- -------- --------- ------
Total revenues 8,057 7,023 5,847 4,548 3,915
Operating expenses 6,220 5,351 4,667 3,442 2,945
Selling, general and administrative
Expenses 806 749 675 528 498
Depreciation and amortization 315 243 180 97 81
Other charges -- 17 5 -- --
-------- ---------- -------- -------- ------
Operating income 716 663 320 481 391
Interest expense, net (223) (271) (191) (97) (77)
Equity in earnings (losses) of
affiliates (146) (81) (50) 18 --
Other income (expense) -- -- -- 183 (2) (353) (1)
-------- ---------- -------- -------- -------
Income (loss) before income taxes 347 311 79 585 (39)
Income tax benefit (expense) (142) (135) (49) (174) 16
-------- ---------- -------- -------- -------
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)
======== ========== ======== ======== =======
OTHER OPERATING DATA:
- --------------------
Segment Operating Income:
Filmed Entertainment $ 355 $ 266 $ 113 $ 118 $ 117
Television Broadcasting and
Related Businesses 490 555 360 363 274
Cable Network Programming (129) (141) (148) -- --
Other charges -- (17) (5) -- --
-------- ---------- ------- ------- -------
Total operating income $ 716 $ 663 $ 320 $ 481 $ 391
======== ========== ======= ======= =======
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
Capital expenditures $ 307 $ 208 $ 338 $ 85 $ 108
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
Page 24
FISCAL YEAR ENDED JUNE 30,
---------------------------------------------------------------------
1999 1998 1997(3) 1996 1995
---- ---- ---- ---- ----
(Dollars In Millions)
OTHER DATA:
- -----------
Segment Operating Income Before
Depreciation and Amortization(4):
Filmed Entertainment $ 396 $ 292 $ 138 $ 142 $ 139
Television Broadcasting and
Related Businesses 707 727 490 436 333
Cable Network Programming (72) (96) (123) -- --
Other charges -- (17) (5) -- --
----------- ----------- ----------- ----------- -----------
Total Operating Income
Before Depreciation
and Amortization(4) $ 1,031 $ 906 $ 500 $ 578 $ 472
=========== =========== =========== =========== ===========
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.
(4) Operating Income Before Depreciation and Amortization is defined as
operating income (loss) before depreciation and amortization. Operating Income
Before Depreciation and Amortization is presented supplementally as management
believes it allows for the most appropriate measure for evaluating operating
performance. The Company believes Operating Income Before Depreciation and
Amortization is a standard measure commonly reported and widely used by
analysts, investors and others associated with the media and entertainment
industry. Operating Income Before Depreciation and Amortization eliminates the
uneven effect across business segments of considerable amounts of depreciation
and amortization primarily resulting from the value of intangible assets
acquired in business combinations accounted for by the purchase method of
accounting. While many in the financial community consider Operating Income
Before Depreciation and Amortization to be an important measure of comparative
operating performance, it should be considered in addition to, but not as a
substitute for, operating income, net income, cash flow and other measures of
financial performance prepared in accordance with GAAP which are presented in
the audited financial statements included elsewhere in this filing.
Additionally, the Company's calculation of Operating Income Before Depreciation
and Amortization may be different than the calculation used by other companies
and therefore, comparability may be affected.
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 three segments: Filmed
Entertainment, which principally consists of the production and acquisition of
live-action and animated motion pictures for distribution and licensing in all
formats in all entertainment media worldwide and the production of original
television programming; Television Broadcasting and Related Businesses, which
principally consists of the broadcasting of network programming, the operation
of broadcast television stations, the production and distribution of certain
syndicated television programming to broadcast television stations and
professional sports team ownership; 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
Page 25
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 Broadcasting and Related Businesses. The Television Broadcasting
and Related Businesses segment derives revenues principally from the sale of
advertising time. Generally, advertising time is sold to national advertisers by
Fox Broadcasting Company ("FOX") and to national "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.
Television Broadcasting and Related Businesses and Cable Network
Programming. Expenses of the Television Broadcasting and Related Businesses
segment 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.
Page 26
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 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.
Page 27
Year Ended June 30,
------------------------------------------------------------------------------------
(Dollars in Millions)
Revenues Operating Income
------------------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
----------- ----------- ----------- ----------- ----------- -----------
Filmed Entertainment $ 4,416 $ 3,876 $ 3,112 $ 355 $ 266 $ 113
Television Broadcasting and
Related Businesses 3,512 3,075 2,698 490 555 360
Cable Network Programming 129 72 37 (129) (141) (148)
----------- ----------- ----------- ----------- ----------- -----------
8,057 7,023 5,847 716 680 325
Other charges - - - - (17) (5)
----------- ----------- ----------- ----------- ----------- -----------
Total $ 8,057 $ 7,023 $ 5,847 $ 716 $ 663 $ 320
=========== =========== =========== =========== =========== ===========
---------------------------------------
Other Data
---------------------------------------
Operating Income Before
Depreciation and Amortization (1)
---------------------------------------
1999 1998 1997
----------- ----------- -----------
Filmed Entertainment $ 396 $ 292 $ 138
Television Broadcasting and
Related Businesses 707 727 490
Cable Network Programming (72) (96) (123)
----------- ----------- -----------
1,031 923 505
Other charges - (17) (5)
----------- ----------- -----------
Total $ 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 28
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:
Year Ended June 30,
-------------------------
1999 1998 Change
---------- ---------- ----------
(Dollars in Millions)
Revenues:
Filmed Entertainment $ 4,416 $ 3,876 $ 540
Television Broadcasting and Related Businesses 3,512 3,075 437
Cable Network Programming 129 72 57
---------- ---------- ----------
Total revenues $ 8,057 $ 7,023 $ 1,034
========== ========== ==========
Operating Income (loss):
Filmed Entertainment $ 355 $ 266 $ 89
Television Broadcasting and Related Businesses 490 555 (65)
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 Broadcasting and Related Businesses 707 727 (20)
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 Broadcasting and Related Businesses 217 172 45
Cable Network Programming 57 45 12
---------- ---------- ----------
Total depreciation and amortization $ 315 $ 243 $ 72
========== ========== ==========
Page 29
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 Broadcasting and Related Businesses. For fiscal 1999, revenues
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%. At FOX, 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.
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. At FOX, increased programming costs related to
FOX's National Football League ("NFL") contract 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.
For fiscal 1999, operating income decreased approximately 12% to $490
million primarily as a result of the factors described above. FOX recently
implemented a new agreement with its affiliate stations to increase FOX's share
of future advertising revenue.
For fiscal 1999, Operating Income Before Depreciation and Amortization
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
Page 30
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 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 31
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:
Year Ended June 30,
---------------------------------
1998 1997 Change
-------------- ------------- ------------
(Dollars in Millions)
Revenues:
Filmed Entertainment $ 3,876 $ 3,112 $ 764
Television Broadcasting and Related Businesses 3,075 2,698 377
Cable Network Programming 72 37 35
-------------- ------------- ------------
Total revenues $ 7,023 $ 5,847 $ 1,176
============== ============= ============
Operating Income (Loss):
Filmed Entertainment $ 266 $ 113 $ 153
Television Broadcasting and Related Businesses 555 360 195
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 Broadcasting and Related Businesses 727 490 237
Cable Network Programming (96) (123) 27
-------------- ------------- ------------
923 505 418
Other charges (17) (5) (12)
-------------- ---