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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997.
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR TRANSITION PERIOD FROM TO .
COMMISSION FILE NO. 333-38689
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FOX/LIBERTY NETWORKS, LLC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-460947
(I.R.S. EMPLOYER IDENTIFICATION NO.)
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
1440 SOUTH SEPULVEDA BOULEVARD, LOS ANGELES, CA 90025
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 444-8123
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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Indicate by check mark whether the Registrant has (1) 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) been subject to such
filing requirements for the past 90 days.
Yes X No
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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. [X].
Aggregate market value of Registrant's voting stock held by non-
affiliates: NOT APPLICABLE
Number of shares of common stock outstanding as of the close of the period
covered by this report: NONE
Documents incorporated by reference: NONE
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In addition to historical information, this report contains forward-looking
statements which are subject to risks and uncertainties, including those that
are discussed in this report. Accordingly, the Company's actual results could
differ materially from those anticipated in such forward-looking statements.
PART I
ITEM 1. BUSINESS
BACKGROUND
Fox/Liberty Networks, LLC (together with its subsidiaries, the "Company") is
the largest regional sports network ("RSN") programmer in the United States,
focusing on live professional and major collegiate home team sports events.
Fox/Liberty Networks, LLC is a holding company with ownership interests in two
principal business units: (i) a sports programming business, consisting of
interests in RSNs and Fox Sports Net ("FSN"), a national sports programming
service that provides its affiliated RSNs with 24 hour per day national sports
programming featuring live and replay sporting events and original
programming, a national sports news program, Fox Sports News, and other
national sports programming services; and (ii) FX Network ("FX"), a general
entertainment network.
The Company was formed in April 1996 pursuant to a 50%/50% domestic joint
venture (the "Fox/Liberty Joint Venture") between Fox, Inc. ("Fox"), an
indirect subsidiary of The News Corporation Limited ("News Corporation"), and
Liberty Media Corporation ("Liberty"), a wholly-owned subsidiary of Tele-
Communications, Inc. ("TCI"). In establishing the Fox/Liberty Joint Venture,
Fox contributed $244 million in cash, certain assets related to the operation
of a regional sports business and all of the assets and liabilities of FX, and
Liberty contributed its interests in regional sports programming businesses
(which then operated under the name "Prime Sports"), interests in non-managed
sports businesses, satellite distribution services and technical facilities.
In December 1997, the Company consummated a transaction (the "Rainbow
Transaction") with Rainbow Media Sports Holdings, Inc. ("Rainbow"), an
indirect subsidiary of Cablevision Systems Corporation ("Cablevision"),
pursuant to which (i) the Company acquired a 40% interest in Regional
Programming Partners ("RPP") which was formed to hold interests in Rainbow's
then existing RSNs and Madison Square Garden, L.P. (which, in addition to
owning two RSNs, owns the Madison Square Garden entertainment complex, Radio
City Productions LLC, the New York Rangers, a professional hockey team, and
the New York Knicks, a professional basketball team), (ii) the Company and
Rainbow formed National Sports Partners (the "National Sports Partnership") as
a 50%/50% partnership to operate FSN and (iii) the Company and Rainbow formed
National Advertising Partners (the "National Advertising Partnership") as a
50%/50% partnership to act as a national advertising sales representative for
the RSNs which are affiliated with FSN. RPP is managed by Rainbow, while the
National Sports Partnership and the National Advertising Partnership are
managed by the Company.
After giving effect to the Rainbow Transaction, the Company's interests in
the sports programming business are derived through its 99% ownership
interests in Fox Sports Net, LLC ("Fox/Liberty Sports") and Fox Sports RPP
Holdings, LLC ("Fox Sports RPP"), and its interest in FX is derived through
its 99% ownership interest in FX Networks, LLC ("Fox/Liberty FX").
OVERVIEW
The Company owns and operates 12 RSNs (the "O&O RSNs") and has direct or
indirect equity interests ranging from 12% to 70% in an additional nine RSNs
(together with the O&O RSNs, the "Company's RSNs"). The Company's RSNs are
complemented by FSN, which provides national programming for distribution by
RSNs. The O&O RSNs have rights to telecast live games of 36 professional
sports teams in the National Basketball Association (the "NBA"), the National
Hockey League (the "NHL"), Major League Baseball ("MLB") and numerous
collegiate sports teams. Because of their home team programming, RSNs have
strong
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local appeal in their respective markets, generating high prime time ratings
and attractive subscriber fees from cable operators. The Company's strategy is
to utilize its RSNs to build a national cable sports network under the "FOX"
brand name based on a "broadcast network affiliate" model. The Company
believes that telecasting local sports events, together with network quality
programming and production, will provide a powerful 24 hour per day
advertising vehicle for national as well as local, advertisers.
FSN 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, the Company's
programming is anchored by highly rated local programming during prime time,
with national FSN programming during the balance of the schedule. FSN's model
is designed to increase the number of viewers before and after, as well as
during, local sports events. The Company believes that an increased viewership
base is likely to command both higher advertising rates and absolute audience
delivery. By providing national programming that is consistent across all
regions, the Company believes that it will be able to penetrate the
approximately $5 billion national advertising market in which the Company's
RSNs have not traditionally participated. In so doing, the Company plans to
allocate advertising units between national and local inventories to optimize
price and increase the likelihood of selling all of its advertising units. The
Company's approach offers national advertisers the opportunity to purchase
national and local advertising from one source in each of the top designated
market areas ("DMAs") in the United States. The Company believes that sports
programming is extremely attractive to both national and local advertisers due
to the high ratings such programming generally achieves in the key male 18-49
demographic.
The Company owns interests in, or is affiliated with, 26 RSNs. These RSNs
have rights to telecast live games of 70 professional sports teams in the NBA,
NHL and MLB (out of a total of 75 such teams in the United States) and
numerous collegiate sports teams to approximately 61 million households out of
a total of approximately 70 million households receiving basic cable or direct
to home satellite ("DTH") service.
The Company is also engaged in the ownership and operation of FX, a general
entertainment network with approximately 32 million subscribers. The Company
also owns interests in various other entertainment and programming related
businesses which it believes are complementary to its principal businesses.
Currently the largest owner and operator of RSNs in the United States, the
Company's strategic objective is to be the leading national provider of
regional sports programming in the United States. In order to achieve this
objective, the Company plans to focus on the following strategies: (i) the
Company will seek to increase the distribution of Fox Sports Net through
increasing penetration in geographic regions adjacent to existing markets and
affiliating with, acquiring or launching networks in unserved markets; (ii)
the Company will seek to increase advertising revenues by offering national
advertisers the opportunity to purchase national and local advertising from
one source in each of the top DMAs; (iii) the Company will consider
opportunities to acquire interests in those RSNs that it does not already own
and operate or increase its interests in those in which it currently owns a
minority interest; and (iv) FSN will seek to realize economies of scale by
centralizing management and administrative tasks as well as certain
programming, marketing and public relations functions.
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REGIONAL SPORTS NETWORKS
The following table lists the O&O RSNs, the Company's ownership interests in
such RSNs, such RSNs' primary DMAs, the approximate number of subscribers for
each of the O&O RSNs (as of December 31, 1997), and the professional sports
teams with which each O&O RSN has sports programming rights agreements.
<TABLE>
<CAPTION>
OWNERSHIP SUBSCRIBERS TEAM
RSN INTEREST(1) DMA (IN MILLIONS) (LEAGUE)
---------- ----------- ------------------ ------------- -----------------------------
<S> <C> <C> <C> <C>
Fox Sports 100% Dallas/ 4.9 Dallas Mavericks (NBA)
Southwest Ft. Worth; Dallas Stars (NHL)
Houston; Houston Astros (MLB)
San Antonio Houston Rockets (NBA)
San Antonio Spurs (NBA)
Texas Rangers (MLB)
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Fox Sports 100% Los Angeles; 4.0 Los Angeles Lakers (NBA)
West San Diego Anaheim Angels (MLB)
Los Angeles Kings (NHL)
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Fox Sports 100% Los Angeles; 2.0 Los Angeles Clippers (NBA)
West2 San Diego Mighty Ducks of Anaheim (NHL)
Los Angeles Dodgers (MLB)
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Fox Sports 100% Pittsburgh 2.0 Pittsburgh Pirates (MLB)
Pittsburgh Pittsburgh Penguins (NHL)(2)
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Fox Sports 100% Denver; 1.9 Denver Nuggets (NBA)
Rocky Kansas City Colorado Avalanche (NHL)
Mountain Colorado Rockies (MLB)
Kansas City Royals (MLB)
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Fox Sports 100% Seattle/Tacoma; 2.1 Seattle Mariners (MLB)
Northwest Portland Seattle SuperSonics (NBA)
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Fox Sports 100% Salt Lake City 0.6
Utah Utah Jazz (NBA)
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Fox Sports 100% St. Louis; 1.4 St. Louis Cardinals (MLB)
Midwest Indianapolis St. Louis Blues (NHL)
Indiana Pacers (NBA)
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Fox Sports 100% Phoenix/Tucson 0.9 Arizona Diamondbacks (MLB)
Arizona Phoenix Coyotes (NHL)
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Fox Sports 100%(3) Detroit 2.2 Detroit Red Wings (NHL)
Detroit Detroit Pistons (NBA)
Detroit Tigers (MLB)
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Fox Sports 88% Atlanta; Charlotte 5.7 Atlanta Braves (MLB)
South Atlanta Hawks (NBA)
Charlotte Hornets (NBA)
Carolina Hurricanes (NHL)
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Sunshine 53.7%(4) Tampa/ 3.8 Tampa Bay Lightning (NHL)
Network St. Petersburg/ Miami Heat (NBA)
Sarasota; Miami/ Orlando Magic (NBA)
Ft. Lauderdale;
Orlando
</TABLE>
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(1) The Fox/Liberty Joint Venture consists of numerous limited liability
companies, general and limited partnerships and corporations. For a
variety of tax and corporate reasons, the equity ownership of individual
entities in the chain of entities holding interests in RSNs and FX include
interests held directly by affiliates of Liberty and Fox. See "Business--
Certain Arrangements Regarding Ownership Interests."
(2) In March 1998, Pittsburgh Hockey Associates purported to terminate its
telecast rights agreement with Fox Sports Pittsburgh relating to games of
the Pittsburgh Penguins. The Company has obtained a judicial order
enjoining the Pittsburgh Hockey Associates from implementing its purported
termination of such agreement until a final hearing is held on the matter
as soon as possible following the 1997-98 hockey season.
(3) It is anticipated that a 50% ownership interest in Fox Sports Detroit will
be transferred to RPP, thereby reducing the Company's aggregate direct and
indirect ownership interest in this RSN to 70%. The Company will continue
to manage Fox Sports Detroit upon the consummation of such transfer.
(4) In January 1998, the Company provided notice to Time Warner Entertainment
to exercise its option to purchase additional ownership interests in the
Sunshine RSN from Time Warner Entertainment. However, such option is
subject to a right of first refusal held by various parties.
In addition, a contract with MLB allows the Company to nationally telecast
26 games per year on each of FX and FSN.
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The following table lists the RSNs in which the Company owns equity
interests, but does not manage, the Company's ownership interests in such
RSNs, the primary DMAs in which such RSNs operate, the approximate number of
subscribers of such RSNs (as of December 31, 1997), and the professional
sports teams with which each RSN has sports programming rights agreements.
<TABLE>
<CAPTION>
OWNERSHIP SUBSCRIBERS TEAM
RSN INTEREST(1) DMA (IN MILLIONS) (LEAGUE)
--- ----------- --- ------------- --------
<S> <C> <C> <C> <C>
Fox Sports 70% Chicago 3.0 Chicago Bulls (NBA)
Chicago Chicago Blackhawks (NHL)
Chicago White Sox (MLB)
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Home Team 34.3% Washington, DC; 4.1 Washington Capitals (NHL)
Sports Baltimore Washington Wizards (NBA)
Baltimore Orioles (MLB)
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Fox Sports 70% San Francisco/ 2.7 San Francisco Giants (MLB)
Bay Area Oakland/San Jose; Oakland A's (MLB)
Sacramento/ Golden State Warriors (NBA)
Stockton/Modesto San Jose Sharks (NHL)
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Fox Sports 40%(2) Boston; 2.6 Boston Celtics (NBA)
New England Providence;
Hartford
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SportsChannel 12% Tampa/ 2.7 Florida Marlins (MLB)
Florida St. Petersburg/Sarasota; Florida Panthers (NHL)
Miami/Ft. Tampa Bay Devil Rays (MLB)
Lauderdale;
Orlando/Daytona/
Melbourne
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Fox Sports 40% Cleveland; 1.9 Cleveland Indians (MLB)
Ohio Columbus Cleveland Cavaliers (NBA)
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Fox Sports 40% Cincinnati 2.2 Cincinnati Reds (MLB)
Cincinnati
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Fox Sports 36.9% New York City 3.6 New York Mets (MLB)
New York New Jersey Nets (NBA)
New York Islanders (NHL)
New Jersey Devils (NHL)
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MSG Network 36.9% New York City 6.6 New York Yankees (MLB)
New York Knicks (NBA)
New York Rangers (NHL)
</TABLE>
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(1) All ownership interests are indirect.
(2) It is anticipated that a 50% ownership interest in Fox Sports New England
will be transferred to Media One, Inc., pursuant to an option which has
been exercised by Media One, Inc.
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The following table lists, as of December 31, 1997, third-party-owned RSNs
currently affiliated with FSN, the primary DMAs in which such RSNs operate and
the professional sports teams currently associated with such RSNs.
<TABLE>
<CAPTION>
TEAM
RSN DMA (LEAGUE)
- ------------------- ------------------------------- ------------------------------------
<S> <C> <C>
Comcast Philadelphia Philadelphia Phillies (MLB)
SportsNet Philadelphia 76ers (NBA)
Philadelphia Flyers (NHL)
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Midwest Sports Minneapolis/ Minnesota Twins (MLB)
Channel St. Paul Minnesota Timberwolves (NBA)
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Wisconsin Milwaukee Milwaukee Bucks (NBA)
Sports Channel Milwaukee Brewers (MLB)
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Empire Buffalo Buffalo Sabres (NHL)
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New England Boston Boston Red Sox (MLB)
Sports Network(1) Boston Bruins (NHL)
</TABLE>
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(1) It is anticipated that FSN will enter into an affiliation agreement with
Fox Sports New England upon the expiration or earlier termination of its
existing affiliation agreement with New England Sports Network.
Owned and Operated RSNs
The Company manages, and, together with affiliates of Fox and Liberty, owns
100% of, the following FSN-affiliated RSNs:
Southwest. Launched in 1983, the Southwest RSN's coverage area includes
Texas, Oklahoma, Arkansas, Louisiana and parts of New Mexico. As of
December 31, 1997, there were approximately 4.9 million subscribers,
representing 94% penetration of total basic cable subscribers in the
region. The Southwest RSN currently has professional rights agreements with
the Dallas Mavericks (NBA), the Houston Astros (MLB), the Dallas Stars
(NHL), the San Antonio Spurs (NBA), the Houston Rockets (NBA) and the Texas
Rangers (MLB) and collegiate contracts covering the Big 12.
West/West2. Launched in 1985, the West RSN's coverage area includes
southern California, Nevada and Hawaii. As of December 31, 1997, there were
approximately 4.0 million subscribers, representing 99% penetration of
total basic subscribers in the region. The West RSN currently has
professional rights agreements with the Los Angeles Lakers (NBA), the Los
Angeles Kings (NHL) and the Anaheim Angels (MLB) as well as collegiate
contracts covering the University of Southern California, the University of
California/Los Angeles and other PAC-10 teams.
The West2 RSN, a second channel in the southern California region, was
launched by the Company on January 31, 1997. As of December 31, 1997, there
were approximately 2.0 million subscribers, representing 63% penetration of
total basic subscribers in the region. The West2 RSN currently has
professional rights agreements with the Los Angeles Dodgers (MLB), the
Anaheim Mighty Ducks (NHL) and the Los Angeles Clippers (NBA).
Pittsburgh. Launched in 1986, the Pittsburgh RSN's coverage area includes
Pennsylvania, eastern Ohio, West Virginia and parts of New York and
Maryland. As of December 31, 1997, there were approximately 2.0 million
subscribers, representing 88% penetration of total basic subscribers in the
region. The Pittsburgh RSN currently has professional rights agreements
with the Pittsburgh Pirates (MLB) and the Pittsburgh Penguins (NHL) and
collegiate sublicenses for games of the University of Pittsburgh and The
5
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Pennsylvania State University. In March 1998, Pittsburgh Hockey Associates
purported to terminate its telecast rights agreement with Fox Sports
Pittsburgh relating to games of the Pittsburgh Penguins. As a result, the
Company filed a motion for preliminary or special injunctive relief
requesting that the Pittsburgh Hockey Associates be enjoined from
implementing its purported termination of such agreement. Such injunctive
relief was granted to the Company until a final hearing is held on the
matter as soon as possible following the 1997-98 hockey season. Although
the Company cannot predict with certainty the outcome of this proceeding,
it believes that the outcome, if adverse to the Company, could have a
material adverse effect on the Pittsburgh RSN's financial position or
results of operations.
Rocky Mountain. Launched in 1988, the Rocky Mountain RSN's coverage area
includes Colorado, Kansas, Missouri, Nebraska, New Mexico, South Dakota and
Wyoming. As of December 31, 1997, there were approximately 1.9 million
subscribers, representing 94% penetration of total basic subscribers in the
region. The Rocky Mountain RSN currently has professional rights agreements
with the Denver Nuggets (NBA), the Colorado Avalanche (NHL), the Colorado
Rockies (MLB) and the Kansas City Royals (MLB) and collegiate contracts
covering the Big 12 and Western Athletic Conferences.
Northwest. Launched in 1988, the Northwest RSN's coverage area includes
Washington, Oregon, Idaho, Alaska and western Montana. As of December 31,
1997, there were approximately 2.1 million subscribers, representing 94%
penetration of total basic subscribers in the region. The Northwest RSN
currently has professional rights agreements with the Seattle Mariners
(MLB) and the Seattle SuperSonics (NBA) and collegiate contracts covering
University of Washington, Washington State University, the University of
Oregon, Oregon State University and the Big Sky Conference.
Utah. Launched in 1989, the Utah RSN's coverage area includes Utah,
southern Idaho, Montana, Nevada and western Wyoming. As of December 31,
1997, there were approximately 0.6 million subscribers, representing 96%
penetration of total basic subscribers in the region. The Utah RSN
currently has a professional rights agreement with the only professional
sports team in the region, the Utah Jazz (NBA), and collegiate contracts
covering the Western Athletic and Big Sky Conferences.
Midwest. Although it was launched in 1989, the Midwest RSN's coverage
area was recently expanded from Missouri to include Indiana, Kentucky,
Ohio, eastern Wisconsin and southern Illinois. As of December 31, 1997,
there were approximately 1.4 million subscribers, representing 96%
penetration of total basic subscribers in this expanded region. The Midwest
RSN currently has professional rights agreements with the St. Louis
Cardinals (MLB), the Indiana Pacers (NBA) and the St. Louis Blues (NHL) and
collegiate contracts covering the Big 12 Conference.
Arizona. Launched in 1996, the Arizona RSN's coverage area includes
Arizona and parts of Nevada. As of December 31, 1997, there were
approximately 0.9 million subscribers, representing 99% penetration of
total basic subscribers in the region. The Arizona RSN has professional
rights agreements with the Phoenix Coyotes (NHL) and the Arizona
Diamondbacks (an expansion MLB team starting in 1998) and collegiate
contracts covering the University of Arizona, Arizona State University and
other PAC-10 teams.
Detroit. Launched in September 1997, the Detroit RSN, as of December 31,
1997, had approximately 2.2 million subscribers, representing 99%
penetration of total basic subscribers in the region. The Detroit RSN's
coverage area includes Michigan and northern Ohio. The Detroit RSN has
professional rights agreements with the Detroit Red Wings (NHL), the
Detroit Pistons (NBA) and the Detroit Tigers (MLB) and collegiate contracts
covering teams from the Big 10 Conference.
The Company manages, and, together with affiliates of Fox and Liberty, owns
substantial equity interests in, the following RSNs:
South. The Company owns 88% of the South RSN and the remaining 12% of the
South RSN is owned by E.W. Scripps Company. Launched in 1990, the South
RSN's coverage area includes Georgia, Alabama, Kentucky, Mississippi, North
Carolina, South Carolina and Tennessee. As of December 31, 1997,
6
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there were approximately 5.7 million total subscribers, representing 99%
penetration of total basic subscribers in the region. The South RSN
currently has professional rights agreements with the Atlanta Braves (MLB),
the Atlanta Hawks (NBA), the Charlotte Hornets (NBA) and the Carolina
Hurricanes (NHL) and collegiate contracts covering the South East and
Atlantic Coast Conferences.
Sunshine. The Company owns 53.7% of the Sunshine RSN and the remaining
46.3% of the Sunshine RSN is owned by various Multiple System Operators
("MSOs") operating in the region, such as Comcast Corporation and Time
Warner Entertainment. In January 1998, the Company provided notice to Time
Warner Entertainment to exercise its option to purchase additional
ownership interests in the Sunshine RSN from Time Warner Entertainment.
However, such option is subject to a right of first refusal held by various
parties. Launched in 1988, the Sunshine RSN coverage area includes most of
Florida. As of December 31, 1997, there were approximately 3.8 million
subscribers, representing 98% penetration of total basic subscribers in the
region. The Sunshine RSN currently has professional rights agreements with
the Orlando Magic (NBA), the Miami Heat (NBA) and the Tampa Bay Lightning
(NHL) and collegiate contracts covering the University of Florida, Florida
State University and the University of Miami. See "Business--Certain
Arrangements Regarding Ownership Interests."
Non-Managed RSNs
The Company owns equity interests in, but does not manage, the following
RSNs:
Chicago. The Company directly owns 50% of the Chicago RSN and owns an
additional 20% of the Chicago RSN indirectly through RPP. A subsidiary of
RPP currently owns 50% of the Chicago RSN and is the managing partner.
Launched in 1986, the Chicago RSN's coverage area includes Illinois, Iowa,
Indiana and Wisconsin. Following the consummation of the Rainbow
Transaction, the Chicago RSN became an FSN affiliate, and was re-branded as
Fox Sports Chicago. As of December 31, 1997, there were approximately 3.0
million subscribers, representing 97% penetration of total basic
subscribers in the region. Featured teams in this region include the
Chicago Bulls (NBA), the Chicago Blackhawks (NHL) and the Chicago White Sox
(MLB). Collegiate contracts cover DePaul University as well as the Big 10
Conference.
D.C./Baltimore. The Company owns 34.3% of the D.C./Baltimore RSN, which
operates under the name Home Team Sports ("HTS"), and the remaining 65.7%
of the D.C./Baltimore RSN is owned by Group W. Launched in 1984 and
affiliated with FSN since 1996, the D.C./Baltimore RSN's coverage area
includes Maryland, parts of Washington, D.C., Delaware and Virginia. As of
December 31, 1997, there were approximately 4.1 million subscribers,
representing 85% penetration of total basic subscribers in the region.
Featured teams include the Baltimore Orioles (MLB), the Washington Capitals
(NHL) and the Washington Wizards, formerly known as the Washington Bullets
(NBA), and college contracts covering teams in the Big East Conference and
Atlantic Coast Conference.
Bay Area. The Company directly owns 50% of the Bay Area RSN and owns an
additional 20% of the Bay Area RSN through RPP. A subsidiary of RPP
currently owns 50% of the Bay Area RSN and is the managing partner.
Launched in 1990, the Bay Area RSN's coverage area includes northern
California, southern Oregon, Hawaii and northern Nevada. Following the
consummation of the Rainbow Transaction, the Bay Area RSN was re-branded
Fox Sports Bay Area. As of March 30, 1998, Fox Sports Bay Area will become
an FSN affiliate and will carry all FSN programming, with the exception of
PAC-10 football and basketball. The PAC-10 programming will continue to be
broadcast by Bay TV, a third-party-owned broadcast station in the region,
currently affiliated with FSN. As of December 31, 1997, there were
approximately 2.7 million subscribers, representing 89% penetration of
total basic subscribers in the region. Featured professional teams include
the San Francisco Giants (MLB), the Oakland A's (MLB), the Golden State
Warriors (NBA) and the San Jose Sharks (NHL), while collegiate contracts
cover Stanford University and the University of California, Berkeley.
7
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Upon the consummation of the Rainbow Transaction, the Company acquired
indirect ownership interest, through its 40% ownership interest in RPP, in the
following RSNs previously owned by Rainbow:
New England. RPP manages and owns 100% of the New England RSN. It is
anticipated that a 50% ownership interest in the New England RSN will be
transferred to Media One, Inc. pursuant to an option which has been
exercised by Media One, Inc. Launched in 1984, the New England RSN's
coverage area includes Massachusetts, Rhode Island, Vermont, New Hampshire,
Maine and parts of Connecticut. It is anticipated that, upon the expiration
or earlier termination of FSN's existing affiliation agreement with New
England Sports Network, a third-party-owned RSN in this region, the New
England RSN will become an affiliate of FSN. Following the consummation of
the Rainbow Transaction, the New England RSN, formerly SportsChannel New
England, was re-branded Fox Sports New England. As of December 31, 1997,
there were approximately 2.6 million subscribers, representing 73%
penetration of total basic subscribers in the region. The featured
professional team is the Boston Celtics (NBA). See "Business--Certain
Arrangements Regarding Ownership Interests."
Florida. RPP owns 30% of the Florida RSN and the remaining 70% of the
Florida RSN is owned by Front Row Communications, Inc. ("Front Row"). Front
Row is the managing partner of the Florida RSN. Launched in 1993, the
Florida RSN's coverage area includes northern and southern Florida. As of
December 31, 1997, there were approximately 2.7 million subscribers,
representing 99% penetration of total basic subscribers in the region.
Featured professional teams include the Florida Marlins (MLB), the Florida
Panthers (NHL) and the Tampa Bay Devil Rays (an expansion MLB team starting
in 1998). The Tampa Bay Devil Rays, Inc. has an option to acquire 10% of
the Florida RSN.
Ohio. RPP manages and owns 100% of the Ohio RSN. Launched in 1989, the
Ohio RSN's coverage area includes Ohio, western Pennsylvania, northwest New
York, West Virginia and Kentucky. Following the consummation of the Rainbow
Transaction, the Ohio RSN, formerly SportsChannel Ohio, became an affiliate
of FSN and was re-branded Fox Sports Ohio. As of December 31, 1997, there
were approximately 1.9 million subscribers, representing 89% penetration of
total basic subscribers in the region. Featured professional teams include
the Cleveland Indians (MLB) and the Cleveland Cavaliers (NBA).
Cincinnati. RPP manages and owns 100% of the Cincinnati RSN. Launched in
1989, the Cincinnati RSN's coverage area includes Ohio, Kentucky and
Indiana. Following the consummation of the Rainbow Transaction, the
Cincinnati RSN, formerly SportsChannel Cincinnati, became an affiliate of
FSN and was re-branded Fox Sports Cincinnati. As of December 31, 1997,
there were approximately 2.2 million subscribers, representing 94%
penetration of total basic subscribers in the region. The featured
professional team is the Cincinnati Reds (MLB).
New York. RPP owns and operates two RSNs in the New York region: The
Madison Square Garden Network ("MSG") and Fox Sports New York, formerly
SportsChannel New York. RPP manages and owns 92.2% of, each of MSG and Fox
Sports New York. The remaining 7.8% of each of MSG and Fox Sports New York
is owned by ITT, through its 7.8% ownership interest in Madison Square
Garden, L.P. ("MSG, L.P.). ITT has exercised an option to require the
purchase of one-half of its interest in MSG, L.P. effective as of June 17,
1998. ITT has an option, expiring on June 17, 1999, to require the purchase
of its remaining interest in MSG, L.P. If ITT does not exercise its option,
commencing on June 17, 2000, Cablevision will have an option to purchase
ITT's interest in MSG. The acquisitions of ITT's interests will be
structured as redemptions of ITT's interests by MSG, L.P. A subsidiary of
RPP is the managing partner of the New York RSNs. See "Certain
Relationships and Related Transactions."
Acquired in 1994 as Madison Square Garden Network, MSG's coverage area
includes New York and parts of New Jersey and Connecticut. As of December
31, 1997, there were approximately 6.6 million subscribers in the region.
Featured professional teams include the New York Knicks (NBA), the New York
Rangers (NHL) and the New York Yankees (MLB).
Launched in 1982 as SportsChannel New York, Fox Sports New York's
coverage area includes New York and parts of New Jersey and Connecticut. As
of December 31, 1997, there were approximately 3.6 million subscribers in
the region. Featured professional teams include the New Jersey Nets (NBA),
the New York Islanders (NHL), the New Jersey Devils (NHL) and the New York
Mets (MLB).
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Through its ownership of MSG, L.P., RPP has an 92.2% ownership interest
in the New York Knicks (NBA), the New York Rangers (NHL), the Madison
Square Garden facilities and Radio City Productions LLC ("RCP"). RPP also
has a 100% ownership interest in Metro Channel LLC, a company established
by Rainbow to own and operate the Metro Channel. The Metro Channel is
intended to provide programming of particular interest to a region, such as
local news, business, entertainment and sports.
Rights Agreements
The right to broadcast professional sports events is obtained through rights
agreements entered into between an RSN and an individual professional sports
team. Rights agreements are generally for a specified number of games per
season at specified locations (i.e., either at the team's home arena and/or
away), for a specified number of years and for a specified market area as
determined by the respective leagues. The acquisition of programming rights
pursuant to a rights agreement allows an RSN to broadcast those games which
are subject to the agreement on an exclusive basis. The average term of the
O&O RSNs' rights agreements (from commencement to scheduled termination) has
historically been approximately 6 years; however, in its more recent
negotiations, the Company is attempting to acquire longer-term rights
agreements. The average term of rights agreements (from commencement to
scheduled termination) entered into by the O&O RSNs in 1997, and to date in
1998, is 7.6 years. Certain of the rights agreements contain provisions for
early termination or renegotiation of the terms therein prior to their
scheduled termination. In addition, the O&O RSNs' rights agreements generally
contain forward-looking rights such as rights of first refusal, rights of
first negotiation or rights to match offers made by third parties. The
Company's objective is to renew O&O RSN rights contracts on favorable terms,
however, the O&O RSNs could be outbid for such rights contracts and/or the
renewal costs could substantially exceed the original contract cost. The loss
of rights could impact the extent of the Company's regional sports coverage,
which could adversely affect the Company's ability to sell national
advertising time and, in some cases, to maintain affiliate fees. See
"Business--Advertising" and "Business--Affiliated Cable Systems and
Subscribers."
The O&O RSNs' collection of rights agreements is well-diversified, with a
total of 36 professional rights contracts. These contracts include rights to
12 MLB teams, 14 NBA teams and 10 NHL teams. The O&O RSNs, through affiliation
with FSN, also have rights to three of the country's top collegiate football
conferences, the PAC-10, Big 12 and Conference USA. This rights contract
portfolio establishes the Company as the leading regional sports network
programming provider in the United States. This large base of professional and
collegiate rights allows the Company to provide its viewing audience with more
than 1,800 live professional and collegiate games per year and more than 5,000
hours of live and local event programming annually. In the NBA alone, the O&O
RSNs deliver more than 500 games per year. See "Business--Competition."
Fox Sport Direct
Formerly launched as Liberty Satellite Sports in 1988, Fox Sports Direct
distributes via satellite sports programming packages produced by various
RSNs. In addition to providing sports programming produced by the Company's
RSNs, Fox Sports Direct also distributes sports programming produced by third-
party-owned RSNs pursuant to arrangements with such RSNs. The Company is
currently the nation's largest provider of sports programming for the DTH
market, reaching approximately five million DTH households. Fox Sports Direct
distributes two packages of regional sports networks to the residential and
commercial C-band marketplace. In addition, Fox Sports Direct handles the
distribution of Ku-Band sports programming services offered by DTH
distributors Primestar and DirecTV.
Fox Sports Net
FSN was formerly operated by the Company. Since the consummation of the
Rainbow Transaction, it has been operated by the National Sports Partnership,
which is managed by the Company. FSN 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
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the typical "broadcast network affiliate" model, the Company's programming is
anchored by highly rated local programming during prime time, with national
FSN programming during the balance of the schedule. Hence, the primary
function of FSN is to complement regional sports programs with a synchronized
schedule of quality national programming, the cornerstone of which is Fox
Sports News. Fox Sports News is broadcast to the RSNs from its studio in Los
Angeles. Fox Sports News provides comprehensive coverage of all sports news
nationwide, presenting a consistent brand image with high quality on-air
graphics. Fox Sports News consists of a half hour pre-game news show aired at
6:30 p.m. and a two hour wrap-up news program aired at 10:00 p.m., each of
which is shown locally in each time zone. Fox Sports News further attracts
viewers by providing in-depth analysis by popular retired professional
athletes such as James Worthy and Craig Simpson before and immediately
following the regional games. FSN also provides other sports programming
events, including nationally televised MLB games, NCAA college football and
basketball, boxing, PGA golf, Formula One racing, classic sports, volleyball,
surfing, and other outdoor programming events. In addition to providing
national programming, FSN also supplies corporate, marketing and technical
operations to the Company's RSNs, helping to create one cohesive network.
After giving effect to the Rainbow Transaction, FSN's distribution increased,
thereby enabling the creation of greater advertising opportunities for
national advertisers. Providing national programming such as Fox Sports News
consistently across all regions is intended to further allow FSN to penetrate
the over $5 billion national advertising market in which the Company's RSNs
have not traditionally participated.
In achieving the Company's objective to establish FSN as a national provider
of sports programming based upon a "broadcast network affiliate" model, FSN
must maintain affiliation agreements with RSNs across the country which reach
a large percentage of cable subscribers through distribution arrangements with
cable system operators. FSN has entered into affiliation agreements with the
Company's O&O RSNs, as well as with RSNs that RPP owns and operates including
the Ohio RSN, the Cincinnati RSN, the Chicago RSN and one of the New York RSNs
(Fox Sports New York) and, in certain regions where the Company does not hold
interests in RSNs, with third-party-owned RSNs. These agreements allow the
RSNs to carry certain programming and promotions in exchange for a per
subscriber fee or other arrangement. Furthermore, pursuant to separate and
representation agreements, the National Advertising Partnership is permitted
to sell advertising time for the RSN during a portion of the RSN's regional
sports programming. The affiliation agreements also permit FSN to market and
sell advertising time during the national portions of the RSN's programming
schedule. FSN is currently party to affiliation agreements with certain of the
Company's RSNs and party to affiliation agreements with the following third-
party-owned RSNs: New England Sports Network (Boston); Empire (Buffalo);
Comcast Sports Net (Philadelphia); Wisconsin Sports Channel (Milwaukee); and
Midwest Sports Channel (Minneapolis). Effective March 30, 1998 Fox Sports Bay
Area will become an FSN affiliate and will carry FSN programming, with the
exception of PAC-10 football and basketball. The PAC-10 programming will
continue to be broadcast by Bay TV, a third party owned broadcast station in
the region, currently affiliated with FSN. Furthermore, it is anticipated that
FSN will enter into an affiliation agreement with Fox Sports New England upon
the expiration or earlier termination of FSN's existing affiliation agreement
with New England Sports Network.
Affiliated Cable Systems and Subscribers
During fiscal year 1997, the O&O RSNs generated approximately 62% of their
revenues, excluding DTH revenues, from subscriber fees paid by affiliated
cable systems. As of December 31, 1997, the Company's O&O RSNs transmitted
programming to approximately 4,800 local affiliated systems in 35 states.
Each of the Company's RSNs enters into affiliation agreements with Multiple
System Operators ("MSOs") and/or individual cable system operators. Such
agreements typically run for five to seven years and generally provide for
annual rate increases. 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 the Company for its programming. As advertiser supported networks,
the RSNs depend on achieving and maintaining carriage within the basic cable
programming package, as the subscriber penetration rate for pay-per-view or a
la carte programming packages is substantially less than the penetration rate
achieved by basic programming packages.
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At present, the affiliation agreements between the Company's RSNs and MSOs
and/or individual cable system operators stipulate monthly subscriber fees
with annual increases. The Company's RSNs command license fees in excess of
average fees charged by basic cable networks overall, but generally consistent
with fees charged by other cable network providers of live sports programming.
The Company's affiliation agreements have staggered expiration dates, with an
average maturity of six years (from commencement to scheduled termination).
The Company's RSNs' programming meets many subscribers' demands for
increased local and national sports programming. Current industry trends
suggest that many new channels offered by cable system operators will be on a
pay-per-view, a la carte basis or digital tier as the operators seek to
compete against the extensive choices offered by DTH distribution systems.
However, the strong demand for the Company's RSNs' unique sports programming
has allowed the Company's RSNs to either maintain or establish a presence on
the basic programming package while expanding within the DTH market.
Advertising
FSN and the Company's RSNs derive significant revenues from selling a fixed
supply of advertising inventory, comprised of advertising time slots ("units")
shown during the Company's national and regional programming. The inventory is
divided between national network, national spot and local advertising.
Regional professional sports events such as basketball, hockey and baseball,
as well as other local sports programming, currently carry both national spot
and local advertising. Upon consummation of the Rainbow Transaction, the
Company commenced sales of national network advertising during local team
programming. Network programming such as Fox Sports News, nationally televised
MLB games and PGA golf includes national network, national spot and local
advertising. The Company's approach offers national advertisers the unique
ability to purchase national and local advertising from one source in each of
the top DMAs.
Local advertising is sold at the RSN level, and national network and
national spot units are sold at the national level by the National Advertising
Partnership. The Company is the managing partner of the National Advertising
Partnership.
In general, basic cable programming services generate over half of their
revenues from advertising. Advertising agency media buyers generally require
cable networks to have at least 25 million subscribers as well as coverage of
major markets before they will recommend to their clients that such clients'
national advertising budgets be directed to a particular network. As of
December 31, 1997, the Company's RSNs and other FSN affiliates had
approximately 61 million subscribers. While FSN met both the subscriber
threshold and market coverage criteria prior to consummation of the Rainbow
Transaction, affiliation with the Rainbow RSNs has strengthened FSN's ability
to sell national advertising. However, should FSN and the Company's RSNs
advertising revenues not materialize as anticipated, or if any escalation in
sports programming rights costs is unmatched by an increase in advertising
rates, then the Company's business, financial condition and results of
operations could be materially adversely affected.
Total advertising revenues are a function of the audience viewing level, the
average cost of each incremental viewer and the number of advertising units
sold. The audience viewing level, or audience delivery, is determined by the
number of subscribers to whom the programming is available and the portion of
those subscribers who are tuned into the programming, as measured by ratings
achieved by FSN and the RSNs. FSN uses A.C. Nielsen, Inc. ("Nielsen") to
provide metered estimates of audience viewing levels which are widely accepted
by advertisers as a basis for measuring audience delivery. The cost of each
incremental viewer is quantified by the cost per thousand homes ("CPM") or the
cost per point ("CPP"). The CPM or CPP is negotiated by the advertiser and the
telecaster, and will vary depending on the type and schedule of the program
that will carry the advertisement and the overall reach or ubiquity of the
network (i.e. cable networks with more subscribers are generally able to
command higher CPMs). CPMs are used in selling national network and national
spot advertising while CPPs are used in the local advertising market.
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The National Advertising Partnership centralized inventory management for
the national network, national spot and local advertising categories of
inventory will enable the Company to maximize revenue by responding to supply
and demand, and allocating inventory across advertising categories, such that
units are sold to the advertiser willing to pay the highest rate, regardless
of market. Accordingly, the split of advertising time between national
network, national spot and local advertising varies across markets dictated by
pricing conditions in each specific market at any point in time. This ability
to buy units across advertising categories and across regions from one source
also provides advertisers with a more efficient purchasing mechanism.
The Company's advertising revenues are derived primarily from sales of
advertising units, and to a lesser extent, from 30 to 60 minute program
advertising. Advertisers on FSN include nationally known companies in the
entertainment, beverage, packaged goods, fast food, automotive, retail,
insurance and travel industries.
Production and Distribution
Distribution of live sporting events is accomplished by a combination of
satellite and fiber transmissions. A production crew in a mobile remote
facility is stationed at the venue to produce and direct the event. The
various camera shots, pre-produced tape elements and graphics packages are
integrated by the mobile remote facility and then formatted to be delivered to
a technical operations center ("Master Control"). The telecast is delivered to
the Master Control via remote satellite uplink, direct fiber transmission, or
a microwave network depending upon the location of the event.
After receiving the remote feed, the Master Control "traffics" the event,
inserting commercial inventory and on-air promotion spots in formatted
positions. The signal is then uplinked from the Master Control to the RSN's
transponder, where the local cable system operator, or MSO, can downlink the
signal. After accessing the feed from the transponder, the cable system
operator delivers the signal to the cable subscriber via hard-wired coaxial
cable.
FSN provides 24 hours of national programming each day, which is made
available for all RSNs. Each RSN has the opportunity to receive and deliver
the national programming when no regional professional sports event or
locally-produced programming is available. This national service is treated
like a separate RSN with its own Master Control and technical operations.
Fox Sports News, the cornerstone of FSN's programming, is produced live
daily from 3:00 p.m. until 12:00 a.m. Pacific time. The show is delivered to
the Company's uplink facility located in Houston via a direct fiber optic
connection. A separate news integration control studio, which uses technology
similar to a Master Control, brings each RSN into and out of the live news
telecast. Once a professional sports event or other regularly scheduled
program ends, the RSN joins the news telecast. The integration studio makes
sure that each RSN joins Fox Sports News during a commercial break only, and
never during the program in progress. Commercial inserts and on-air
promotional materials are handled through each RSN's Master Control.
FX
FX was launched in June 1994, with the objective of becoming a leading cable
network. As of December 31, 1997, FX had approximately 32 million subscribers
and has quickly become a popular choice among cable viewers. FX's strength has
been derived from its ability to bring award-winning television series to
cable and from its access to the Twentieth Century Fox film library. In
addition, FX has leading cable sports programming with coverage of MLB,
college football and basketball and the World Cup of Hockey.
FX's line-up for the Fall 1997 season included "In Living Color," "The X-
Files" and "NYPD Blue." Recently, as FX continues to increase its presence as
a leading general entertainment cable network, the cable rights to "Beverly
Hills 90210" and "Buffy The Vampire Slayer" have been acquired. FX's extensive
programming library also includes television hits like "M*A*S*H," "Batman,"
"The A-Team" and "Mission: Impossible." FX also draws from a wide selection of
more than 2,200 films from the Twentieth Century Fox film library, including
"Alien," "Independence Day," "Predator" and "Star Wars."
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FX also provides cable viewers with a line-up of sports coverage. MLB was
introduced in 1997, with live coverage of national games airing one night per
week. FX also airs live coverage of college football games for the PAC-10, Big
12 and Conference USA. During the 1997-1998 regular season, FX also has live
coverage of PAC-10 college basketball on Thursday nights. The World Cup of
Hockey was shown live on FX during August 1996.
FX has an excellent ratings performance history and continues to be a strong
leader in cable ratings. A.C. Nielsen Inc. began providing ratings for FX in
December 1994 with a 0.6 average prime time rating, one of the strongest sign-
on performances of any cable network. For calendar 1997 FX received a 0.8
average prime time rating. The Company expects FX's ratings will continue to
strengthen and build upon its strong subscriber base as its competitive
position is enhanced by the addition of "The X-Files," "NYPD Blue" and MLB. As
measured by A.C. Nielsen Inc., FX's ratings in the prime time Monday to Friday
time period increased by 65% in the quarter ended December 1997, as compared
to the same period in 1996.
The "X-Files" debuted in August 1997 with a 3.3 rating. "The X-Files" was
the critically-acclaimed winner of the Golden Globe Award for Outstanding
Drama Series in 1995, 1997 and 1998, and has been the recipient of 29 Emmy
Award nominations, including Outstanding Drama Series. Collectively, the
series during its broadcast run has garnered 9 Emmy Awards and 5 Golden Globe
Awards from its 38 total nominations.
Additionally, NYPD Blue, which debuted on FX in August 1997 as well, opened
with a 2.2 rating. In its first season on broadcast television, "NYPD Blue"
was nominated for 26 Emmy Award nominations and was the Golden Globe award
winner for Outstanding Drama Series. This program has collected 14 Emmy Awards
from its 62 nominations during its broadcast run.
FX is distributed from a Master Control located in Los Angeles. FX has two
transponders to provide alternate programming feeds for the east and west
coast time zones. Each feed has its own dedicated transponder which cable
system operators access via their system head-ends and distribute to
subscribers via co-axial cable. Overall, FX's distribution functions just like
an RSN, with the exception of the dual feeds for the two different time zones.
COMPETITION
General
The business of distributing sports programming for cable television is
highly competitive. 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 Company's RSNs' audience. The business of
distributing general entertainment programming for cable television is also
highly competitive. A number of basic and pay television programming services
(such as USA Network and Turner Network Television) as well as free over-the-
air broadcast networks provide programming that targets the same viewing
audience as FX.
The Company's RSNs and FX directly compete with other programming services
for distribution and, when distribution is obtained, the Company's RSNs and FX
compete, in varying degrees, for viewers and advertisers with other cable
programming services and over-the-air broadcast television, radio, print
media, motion picture theaters, video cassettes and other sources of
information and entertainment. Important competitive factors are the prices
charged for programming, the quantity, quality and variety of the programming
offered and the effectiveness of marketing efforts.
RSNs
The Company is currently the only national network distributing a full range
of sports programming on both a national and regional level. On a national
level, the Company's primary competitor is ESPN, and to a lesser extent,
ESPN2. However, while ESPN and ESPN2 currently focus exclusively on the
national television and cable market, national programming is only a part of
the Company's overall objective. The Company's major
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focus is regional sports programming. Since ESPN and ESPN2 do not currently
program specifically for local audiences or solicit regional or local
advertisers, they do not directly compete with the Company's RSNs. In December
1997, ESPN announced that it will enter the regional sports programming market
with the expected launch of ESPN West in October 1998. ESPN West has announced
that it will launch with carriage of the Anaheim Mighty Ducks (NHL) on an
exclusive basis beginning in October 1998 and with the Anaheim Angels (MLB) on
an exclusive basis in April 2000. Anaheim Angels' games will be broadcast on a
non-exclusive basis in 1999 by both Fox Sports West 2 and ESPN West. Given the
Company's extensive, long-term and diversified portfolio of sports rights
contracts, the Company believes that it is unlikely that ESPN, ESPN2 or any
other potential sports programmer could, in the near term, acquire a
sufficient number of sports rights contracts to effectively compete with the
Company as a national provider of regional sports programming. However,
ESPNews and CNN/SI, basic cable networks launched in the last year, each offer
a 24 hour sports news format which competes directly with Fox Sports News.
In addition to competition for cable distribution, viewers and advertisers,
the Company's RSNs also compete, to varying degrees, for programming. With
respect to the acquisition of sports programming rights, FSN 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 Company's RSNs also compete for local and regional rights with
those independent syndicators, with local broadcast television stations and
with other local and regional sports networks. 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.
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. Many of FX's competitors are larger and have financial and other
resources substantially greater than those of the Company. Certain of these
organizations are "vertically integrated" (i.e., producing, distributing and
exhibiting their own programming). Industry integration may impact FX's
ability to acquire programming distribution rights, as it is likely that
vertically integrated media companies will sell programming distribution
rights to their cable network subsidiaries. The effect of such distribution
patterns would be to reduce the availability of such programming and to
increase the cost of programming that is available for acquisitions by FX.
With the repeal of certain governmental regulations which formerly prohibited
the broadcast networks from acquiring financial interests in, and syndication
rights to, television programming, this trend towards vertical integration
and, accordingly, competition in the industry, is expected to increase. See
"Business--Regulation and Legislation."
Increased competition for viewers in the cable industry may result from
technological advances, such as digital compression technology, which allows
cable systems to expand channel capacity; the further deployment of fiber
optic cable, which has the capacity to carry a much greater number of channels
than co-axial cable; and "multiplexing," in which programming services offer
more than one feed of their programming. The increased number of choices
available to the Company's viewing audience as a result of such technological
advances may lead to a reduction in the Company's market share. The Company
competes or expects to compete in the future for advertising revenue with the
television programming services described above, as well as with other
national television programming services, superstations, broadcast television
networks, local over-the-air television stations, radio and print media. More
generally, the Company competes with various other leisure-time activities
such as home videos, movie theaters, personal computers and other alternative
sources of entertainment and information.
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SATELLITE DISTRIBUTION
All programming for the Company is transmitted from the Company's facilities
located in Houston, Los Angeles, Pittsburgh and Seattle. Local teleports near
each facility provide uplink services to deliver the Company's programming to
transponders on various geosynchronous satellites which, in turn, are received
by cable system operators, DTH services and other customers.
Presently, each regional sports network has a dedicated feed which is
transmitted to a transponder as an analog signal. In addition, a network feed
is transmitted to a transponder as a means of distributing certain programming
(including Fox Sports News) to the Company's RSNs. Each cable system head-end
has equipment which is controlled remotely from the Company's Houston
location. This provides the Company with substantial flexibility to "switch"
the programming for an individual region or sub-region to alternative
programming in order to accommodate regional variations in broadcast rights
for certain teams and events.
Programming for FX is distributed using two separate feeds on two separate
satellite transponders, one for the Eastern, Central and certain Mountain time
zones and one for all other Mountain time zones and the Pacific time zones.
The Company's business depends upon the launch and operation of satellites
by third parties. As of December 31, 1997, the Company leased 20 full-time
transponders. Fifteen of the 20 transponders, with leases expiring between
1998 and 2005, are used by its domestic sports networks. Of these 15
transponders, 11 are on Satcom C-1, with six leases direct from GE Americom
("GE"), three leases from GE via a WTCI sublease, one lease from GE via a Fox
Broadcasting sublease, and one lease from GE via a Keystone/Globecast
sublease. With respect to the remaining four full-time domestic sports
transponders, three are also leased from GE (one on GE-1, one on Satcom C-3
and one on SpaceNet 3) and one from Primestar on its Ku-band service. The
remaining five of the 20 transponders are used by entities other than the
Company's domestic sports networks. Of these five transponders, one is leased
from GE on SpaceNet 3 and subleased to Fox Sports International, three are
leased from PanAmSat Corporation on the Hughes Galaxy VII satellite and one is
leased from Broadcast Development, Inc. on the Hughes Galaxy VII satellite. FX
uses two of these transponders and two are subleased to each of Fox News
Channel and FXM (both cable programming services affiliated with Fox). See
"Certain Relationships and Related Transactions."
Commencing in 1998, the Company began to digitally compress its
transmissions to three of the four transponders on Galaxy VII and to one of
the Satcom C-3 transponders. This transition to digital transponder equipment
will continue into 1999. Through compression, the Company will be able to
combine up to eight services on one transponder, using bit rates ranging from
4-7 megabits per second. This will improve signal quality programming and
"switching" capability, growth opportunities, and will also result in
significant cost savings due to the reduced transponder requirements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operatons" and "Certain Relationships and Related Transactions."
Satellites are subject to significant risks that may prevent or impair
proper commercial operations, including satellite defects, launch failure,
destruction and damage and incorrect orbital placement. Because the Company's
primary satellites (Galaxy VII and Satcom C-1) are already in orbit, the
Company does not expect to face any significant launch risks over the medium
term. In 2006, which is the projected end of useful life for Galaxy VII, the
Company might again face satellite launch risk, depending on the selected
transponder migration plans at that time. Failure or disruption of satellites
that are already operational, such as Satcom C-1 and Galaxy VII, could have a
material adverse effect on the Company. The Satcom C-1 transponder leases have
minimal back-up in the event of transponder or satellite failure, and the
Company would have to rely on spare transponder capacity (available internally
as well as via third parties) and alternative program scheduling methods in
the event of loss of one or more Satcom C-1 transponders. The Galaxy VII and
Satcom C-3 transponder leases are "protected," in that these leases provide
for transmission on a back-up satellite should a serious transmission or
reception fault occur. With the full implementation of the Company's digital
compression plans during 1998-1999, all of the Company's services will be
either on Galaxy VII or Satcom C-3 and, thus "protected."
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REGULATION AND LEGISLATION
Certain aspects of the Company's sports programming and FX operations are
subject, directly or indirectly, to federal, state, and local regulation. At
the federal level, the operations of cable television systems, satellite
distribution systems, other multichannel distribution systems, broadcast
television stations, and, in some respects, vertically integrated cable
programmers are subject to the Communications Act of 1934, as amended, by the
Cable Communications Policy Act of 1984 (the "1984 Act"), the Cable Television
Consumer Protection and Competition Act of 1992 (the "1992 Act"), which
amended the 1984 Act, and the Telecommunications Act of 1996 (the "1996 Act")
and regulations promulgated thereunder by the Federal Communications
Commission (the "FCC"). Cable television systems are also subject to
regulation at the state and local level.
The following does not purport to be a summary of all present and proposed
federal, state, and local regulations and legislation relating to the cable
television industry and other industries involved in the video marketplace.
Other existing legislation and regulations, copyright licensing, and, in many
jurisdictions, state and local franchise requirements are currently the
subject of a variety of judicial proceedings, legislative hearings, and
administrative and legislative proposals which could change, in varying
degrees, the manner in which the cable television industry and other
industries involved in the video marketplace operate.
Federal Regulation and Legislation
The 1996 Act. The 1996 Act took effect in February 1996, altering the
network of federal, state, and local laws and regulations pertaining to
telecommunications providers and services. The following is a summary of
certain provisions of the 1996 Act that affect the cable television industry,
and particularly the cable and telecommunications services provided by the
Company. The FCC is in the process of promulgating rules interpreting and
implementing the provisions of the 1996 Act. At this time, it is impossible to
state with precision the full impact the 1996 Act will have on the Company.
The 1996 Act seeks to promote facilities-based competition between telephone
companies and cable operators. To this end, it eliminates the FCC's cable-
telco cross-ownership prohibition, which barred the common ownership of
telephone companies and cable systems serving overlapping areas. It also
preempts and prohibits state and local regulations that prevent cable
operators from providing telephone service, and it requires telephone
companies to interconnect with cable operators and other alternative providers
of telecommunications service. While telephone companies and cable operators
are now permitted to offer competing services, the 1996 Act generally
prohibits telephone companies from acquiring existing cable systems operating
in their telephone service areas, and vice versa.
The 1996 Act eliminates the FCC's rule prohibiting broadcast networks from
owning cable systems. It removes the statutory ban on common ownership of
broadcast television stations and cable systems in overlapping areas.
Nevertheless, the FCC has in effect a regulatory restriction barring common
station/cable system ownership.
The 1996 Act phases out 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). Rate regulation of all non-basic services (including the
"expanded basic" tiers that commonly include satellite-delivered programming
networks) is scheduled to be completely eliminated on March 31, 1999. The 1996
Act eliminated such regulation for small cable operators immediately upon
enactment. In the interim, the 1996 Act liberalizes the 1992 Act's definition
of "effective competition" to expand the circumstances under which rate
regulation will cease immediately. The local franchising authorities ("LFAs")
remain primarily responsible for regulating the basic tier of cable service.
Furthermore, the 1996 Act eliminates the right of an individual subscriber to
bring a rate complaint, providing that any rate complaint must be filed by an
LFA, and then only after the LFA has received multiple subscriber complaints
regarding the rate adjustment in question. Thus, beyond the basic tier of
cable service, which continues to be regulated by the LFAs, rate regulation of
other cable services between now and 1999 will only be triggered by a valid
rate complaint by an LFA, and only in an area where no effective competition
exists.
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The 1996 Act addresses obscenity, indecency, and violence in connection with
telecommunications services in several respects, including the establishment
of a television rating code to be created voluntarily by the industry, or, in
the event a voluntary industry agreement is not reached, by an FCC advisory
committee. In January 1997, industry representatives submitted a joint
proposal to the FCC describing a voluntary rating system for video
programming, which was subsequently implemented by the industry. On March 13,
1998, this rating system was approved by the FCC. In addition, the 1996 Act
addresses the need to create wider availability of access to
telecommunications services for persons with disabilities. As required by the
Act, the FCC has promulgated rules on the closed captioning of television and
cable programming.
To the extent the 1996 Act fosters greater competition for the provision of
cable programming network services to individual subscribers, the Company
should generally be impacted either neutrally or advantageously, as additional
providers are additional potential customers for the Company. To the extent,
however, that rate deregulation causes a material increase in cable rates, the
individual subscriber base could be decreased, potentially affecting the
Company's subscriber revenues. Further, the Company must provide increased
closed captioning to comply with rules promulgated under the 1996 Act and may
be required to provide assistance or information to establish ratings for its
programming. Both of these undertakings could increase the Company's operating
expenses.
The 1992 Act Rate Regulation. The 1992 Act subjected all cable television
operators not subject to "effective competition" to rate regulation. Under the
1992 Act, effective competition was deemed to exist where (i) fewer than 30%
of households in the franchise area subscribe to a cable service, (ii) at
least 50% of the homes in the franchise area are passed by at least two
unaffiliated multichannel video programming distributors, where the
penetration of at least one distributor, other than the largest, is at least
15%, or (iii) a multichannel video programming distributor operated by the LFA
for that area passes at least 50% of the households in the franchise area. The
1996 Act expanded this definition by providing that effective competition
would also be deemed to exist where a local exchange carrier or its affiliate
offers comparable video programming services in the franchise area of an
unaffiliated cable operator.
The basic tier of cable service is subject to rate regulation by LFAs that
certify to the FCC their intention and ability to regulate rates. The basic
tier consists, at a minimum, of all local broadcast signals carried by the
system, all non-satellite-delivered distant broadcast signals that the system
chooses to carry, and all public, educational, and governmental access
channels. Under the 1992 Act, the rates of "non-basic" programming service
tiers (other than per-channel or per-program services) were regulated by the
FCC in response to complaints by a subscriber or by an LFA. The 1996 Act
eliminated non-basic rate regulation of small cable operators' systems. Non-
basic rate regulation of all other systems is scheduled to terminate on March
31, 1999, although legislation has been introduced that if enacted would
postpone rate deregulation for an additional two years. In the interim, the
FCC will review rates only upon complaint by an LFA. An LFA may only file such
a complaint if it receives complaints from subscribers. The 1996 Act thus
eliminates the power of one individual subscriber to bring a rate complaint
and trigger rate regulation.
The FCC's initial rules implementing the 1992 Act's rate regulation
provisions became effective on September 1, 1993. The FCC's existing
regulations contain standards for the regulation of basic tier and non- basic
tier cable service rates (other than per-channel or per-program services). The
rate regulations adopt a benchmark price cap system for measuring the
reasonableness of existing rates and a formula for evaluating future rate
increases. Alternatively, cable operators have the opportunity to make cost-
of-service showings, which, in some cases, may justify rates above the
applicable benchmarks. The rules also require that charges for cable-related
equipment (e.g., converter boxes and remote control devices) and installation
services be unbundled from the provision of cable service and based upon
actual costs plus a reasonable profit. LFAs and/or the FCC are empowered to
order a reduction of existing rates that exceed the maximum permitted level
for cable services and associated equipment.
Once a system's rates are initially set the rules permit subsequent
increases that reflect inflation and increases in programming costs and
certain other costs. The rules thus permit cable operators that carried a
given
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programming service when their rates were initially regulated to pass through
to subscribers any subsequent increases in licensing fees, subject to a cap
which will expire this year. Systems may also increase rates when they add new
channels to regulated tiers, but there is a cap on such increases.
Alternatively, systems may create "new product tiers," and these new product
tiers will generally not be subject to rate regulations provided certain
conditions are met.
Rate regulation under the 1992 Act resulted in a reduction of rates to some
subscribers in some markets. The deregulation under the 1996 Act may, however,
result in an immediate increase in rates in some markets. In response to the
1992 Act and the FCC's implementing regulations, many cable systems retiered
channels to create an attractively priced basic tier consisting exclusively of
broadcast and public, educational, and governmental access channels, 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 that such
retiering or repricing of the Company's networks induces customers to
discontinue their subscriptions, the Company's financial performance could be
adversely affected. Deregulation of rates pursuant to the 1996 Act may reverse
such tiering and pricing decisions by cable system operators and,
correspondingly, reverse or ameliorate any adverse effects of the 1992 Act.
Must-Carry and Retransmission Consent. The 1992 Act subjects cable systems
to "must carry" rules, pursuant to which local broadcast stations may elect to
demand carriage. It also provides favorable channel positioning rights for
broadcasters electing to exercise their must carry rights. The 1992 Act also
gives television broadcast stations the right to withhold consent to be
carried by a cable system, which may result in the station receiving
consideration for carriage. Under the 1996 Act, the FCC will consider whether
to give must carry status to high definition television broadcasts or advanced
television services.
Regulation of Cable System Operators Affiliated With Video Programming
Vendors. The 1992 Act prohibits a cable operator from engaging in unfair
methods of competition that prevent or significantly hinder competing
multichannel video programming distributors such as MMDS, satellite master
antenna televisions ("SMATV") services, Direct Broadcast Satellite ("DBS") and
DTH operators from providing cable programming to their subscribers. The
stated purpose of this law is to increase competition in the multichannel
video programming market. The FCC has adopted regulations to prevent a cable
operator that has an "attributable interest" (including voting or non-voting
stock ownership of at least 5%) in a programming vendor from exercising
improper influence over the programming vendor in the latter's dealings with
competitors to cable, and to prevent a programmer in which a cable operator
has an "attributable interest" from discriminating between cable operators and
their competitors, or among cable operators.
The FCC's rules may have the effect, in some cases, of requiring vertically
integrated programmers to offer their programming to MMDS, SMATV, DBS, DTH,
and other competitors of cable television, and of prohibiting exclusive
contracts between such programmers and cable system operators. The rules also
permit multichannel video programming distributors (such as MMDS, SMATV, DBS
and DTH operators) to bring complaints before the FCC if they are unable to
obtain cable programming on non-discriminatory terms, or are subject to
"unfair practices" by the programmer.
With respect to cable systems having channel capacity of less than 76
channels, the FCC, acting pursuant to the 1992 Act, has limited to 40% the
number of programming channels that may be occupied by video services in which
the cable operator has an "attributable interest." As a result of TCI's
ownership of Liberty, TCI will be deemed to have an attributable interest in
the Company. Similarly, Cablevision will be deemed to have an attributable
interest in RPP. Accordingly, any cable system in which TCI has a 5% or
greater ownership interest will be restricted with respect to the carriage of
channels offered by the Company, and any cable television system in which
Cablevision has a 5% or greater ownership interest will be restricted with
respect to the carriage of any channel in which Rainbow has an interest. While
cable systems are expanding their capacity, there may be instances in which a
TCI or a Cablevision system with 75 channels or less will not be able to carry
one or more of the Company's channels (or in the case of Cablevision, an RPP
channel) or will have to remove another affiliated channel.
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State and Local Regulation
Cable television systems are generally constructed and operated under non-
exclusive franchises granted by a municipality or other state or local
governmental entity. Franchises are granted for fixed terms and are subject to
periodic renewal. The 1984 Act places certain limitations on an LFA's ability
to control the operations of a cable operator, and the courts from time to
time have reviewed the constitutionality of several franchise requirements,
often with inconsistent results. The 1992 Act prohibits exclusive franchises,
and allows LFAs to exercise greater control over the operation of franchised
cable television systems, especially in the areas of customer service and rate
regulation. The 1992 Act also allows LFAs to operate their own multichannel
video distribution systems without having to obtain franchises. Moreover, LFAs
are immunized from monetary damage awards arising from their regulation of
cable television systems or their decisions on franchise grants, renewals,
transfers, and amendments.
The terms and conditions of franchises vary materially from jurisdiction to
jurisdiction. Cable franchises generally contain provisions governing time
limitations on the commencement and completion of construction, and governing
conditions of service, including the number of channels, the types of
programming (but not the actual cable programming channels to be carried), and
the provision of free service to schools and certain other public
institutions. The specific terms and conditions of a franchise and the laws
and regulations under which it is granted directly affect the profitability of
the cable television system, and thus the cable television system's financial
ability to carry programming. Local governmental authorities also may certify
to regulate basic cable rates. Local rate regulation for a particular system
could result in resistance on the part of the cable operator to the amount of
subscriber fees charged by the Company for its programming.
Various proposals have been introduced at the state and local level with
regard to the regulation of cable television systems, and a number of states
have enacted legislation subjecting cable television systems to the
jurisdiction of centralized state governmental agencies.
PATENTS, TRADEMARKS AND LICENSES
In connection with the formation of the Company and the Rainbow Transaction,
Twentieth Century Fox Film Corporation and Fox Broadcasting Company agreed to
grant the Company a non-exclusive, royalty free license, with the right to
sublicense to RSNs, to use the "FOX" name and certain related artwork. See
"Certain Relationships and Related Transactions."
In their telecast rights agreements with the professional sports teams in
their markets, RSNs are granted certain rights to use the name, logos,
symbols, seals, emblem, and insignia and other trademarks of the team and its
opponents. Generally, such agreements restrict such usage to the actual game
telecasts, and for other purposes incident thereto (news and highlight shows
and on-air promotional spots), and for other purposes (e.g., print
advertisements) so long as the use is limited to the marketing and promotion
of the teams and the RSNs. Generally, such promotional usages may be
"sponsored" (e.g., a particular company sponsoring a particular RSN's telecast
of a professional sports team with the visual use of team and sponsor logos),
but such promotional uses cannot imply endorsements by the team. Typically the
RSNs also have the contractual right to use the pictorial representations and
the names and likenesses of the players, managers, coaches and officials of
the team, its opponents, and the applicable league in the telecasts and for
promotional purposes incident thereto. As a protection of their proprietary
property, the teams generally reserve certain approval rights of trademark
usages and other rights reservations. Because the telecast rights agreements
are limited to the "home territories" of the teams, and the RSNs only operate
within such territories, the rights to use a teams logo are generally limited
to such territories.
The Company has an agreement with MLB to telecast certain of its games on a
national basis on FSN and FX, and has the same general rights under the
agreement for use of the MLB logo and those of its teams as are in the team
contracts, but such usages are permitted on a national basis.
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EMPLOYEES
As of December 31, 1997, the Company, together with its O&O RSNs and other
subsidiaries, had 1,226 full-time employees. The Company also regularly
engages freelance creative staff and other part-time employees. None of the
Company's employees are covered by collective bargaining agreements. The
Company believes its relations with its employees are good.
CERTAIN ARRANGEMENTS REGARDING OWNERSHIP INTERESTS
Fox/Liberty Joint Venture
Fox/Liberty Networks, LLC. Fox/Liberty Networks, LLC is the principal
holding company for the Fox/Liberty Joint Venture. Liberty/Fox Sports
Financing LLC, an entity in which LMC Newco U.S., Inc. ("LMCI") and News
America Incorporated ("NAI"), each hold 50% membership interests, holds a
38.314% membership interest and each of LMC Newco and Fox Regional Sports
Holdings, Inc., an affiliate of Fox, holds 30.843% membership interests.
Fox/Liberty Sports. Fox/Liberty Sports is a holding company which holds the
Company's interests in certain cable sports telecasting businesses, including
its interests in certain RSNs. The Company holds a 99% membership interest in
Fox/Liberty Sports, Liberty Sports Member, Inc. ("LSM"), an affiliate of
Liberty, holds a .5% membership interest in Fox/Liberty Sports and Fox
Regional Sports Member ("FRSM"), an affiliate of Fox, holds a .5% membership
interest in Fox/Liberty Sports.
Fox/Liberty FX. Fox/Liberty FX owns and operates FX. The Company holds a 99%
membership interest in Fox/Liberty FX. Liberty FX, Inc., an affiliate of
Liberty, holds a .5% membership interest and FX Holdings, Inc., an affiliate
of Fox, holds a .5% membership interest.
Fox Sports RPP. Fox/Liberty RPP is a holding company which holds the
Company's interest in RPP. The Company holds a 99% membership interest in
Fox/Liberty RPP. LSM holds a .5% membership interest in Fox/Liberty RPP and
FRSM holds a .5% interest in Fox/Liberty RPP.
Owned and Operated RSNs
Southwest. The Southwest RSN is operated through ARC Holding, Ltd. ("ARC
Holding"). Affiliated Regional Communications, Ltd. ("ARC Ltd.") holds a 99%
limited partnership interest in ARC Holding and Sports Holding Inc., a wholly-
owned subsidiary of ARC Ltd. holds a 1% limited partnership interest.
Liberty/Fox ARC L.P. ("ARC L.P.") holds a 100% equity interest and 62.6799%
capital limited partnership interest in ARC Ltd. and LMC Regional Sports,
Inc., an affiliate of Liberty, holds a 37.3201% capital general partnership
interest. Fox/Liberty Sports holds a 98% limited partnership interest in ARC
L.P., New LMC ARC, Inc., an affiliate of Liberty, holds a 1% general
partnership interest and FRSM holds a 1% limited partnership interest.
West. The West RSN is operated through Prime Ticket Networks, L.P. ("West
LP"). Liberty/Fox West LLC holds a 99% limited partnership interest in West
LP, LMC West Sports Inc., an affiliate of Liberty, holds a .5% general
partnership interest and Fox West Sports Member, Inc., an affiliate of Fox,
holds a .5% general partnership interest.
West2. The West2 RSN is operated through West2 LLC. West LP holds a 100%
membership interest in West2 LLC.
Pittsburgh. The Pittsburgh RSN is operated through Liberty/Fox KBL L.P.
("Pittsburgh LP"). Fox/Liberty Sports holds a 60% limited partnership interest
in Pittsburgh LP, New LMC KBL, Inc., an affiliate of Liberty, holds a 20%
general partnership interest and FRSM holds a 20% limited partnership
interest.
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Rocky Mountain. The Rocky Mountain RSN is operated through Rocky Mountain
Prime Sports Network ("Rocky Mountain Network"). ARC Ltd. holds a 66.67%
general partnership interest in Rocky Mountain Network and ARC L.P. holds a
33.33% general partnership interest.
Northwest. The Northwest RSN is operated through Prime Sports Northwest
Network ("Northwest Network"). Liberty/Fox Northwest L.P. holds an 89.9%
capital general partnership interest and a 100% equity interest in Northwest
Network. LMC Northwest Cable Sports, Inc., an affiliate of Liberty, holds a
10.1% capital general partnership interest in Northwest Network. Fox/Liberty
Sports holds a 98% limited partnership interest in Liberty/Fox Northwest L.P.,
New LMC Northwest, Inc., an affiliate of Liberty, holds a 1% general
partnership interest and FRSM holds a 1% limited partnership interest.
Utah. The Utah RSN is operated through Liberty/Fox Utah LLC ("Utah LLC").
Fox/Liberty Sports holds a 99% membership interest in Utah LLC, New LMC Utah
Sports, Inc., an affiliate of Liberty, holds a .5% membership interest and
FRSM holds a .5% membership interest.
Midwest. The Midwest RSN is operated through ARC Holding. ARC Ltd. holds a
99% limited partnership interest in ARC Holding and Sports Holding Inc., a
wholly-owned subsidiary of ARC Ltd., holds a 1% general partnership interest.
Arizona. The Arizona RSN is operated through Liberty/Fox Arizona LLC
("Arizona LLC"). Fox/Liberty Sports holds a 99% membership interest in Arizona
LLC, LMC Arizona Sports, Inc., an affiliate of Liberty, holds a .5% membership
interest and FRSM holds a .5% membership interest.
Detroit. The Detroit RSN is operated through Fox Sports Detroit, LLC
("Detroit LLC"). Fox/Liberty Sports holds a 99% membership interest in Detroit
LLC, an affiliate of Liberty holds a .5% membership interest and FRSM holds a
.5% membership interest. Pursuant to the terms of the Rainbow Transaction,
Rainbow has the right to acquire a 50% interest in the Detroit RSN. It is
anticipated that a 50% ownership interest in Fox Sports Detroit will be
transferred to RPP, thereby reducing the Company's aggregate direct and
indirect ownership interest in this RSN to 70%. The Company will continue to
manage Fox Sports Detroit upon the consummation of such transfer.
South. The South RSN is operated through SportSouth Network, Ltd. ("South
Ltd."). Each of LMC Southeast Sports, Inc. ("LMC Southeast") and Liberty
SportSouth, Inc., a wholly-owned subsidiary of LMC Southeast, hold 1% limited
partnership and 43% general partnership interests in South Ltd. The remaining
12% general partnership interest in South Ltd. is held by E.W. Scripps
Company. Liberty/Fox Southeast LLC holds 100% of the equity interest and 49%
of the voting interest of LMC Southeast and Liberty Sports, Inc., an affiliate
of Liberty, holds 51% of the voting interest. Fox/Liberty Sports holds a 99%
membership interest in Liberty/Fox Southeast LLC, New LMC Southeast, Inc., an
affiliate of Liberty, holds a .5% membership interest and FRSM holds a .5%
membership interest.
The partners of South Ltd. are subject to a buy/sell procedure which may be
initiated at any time by any general partner of South Ltd. The partner
initiating the buy/sell procedure (the "Initiating Partner") must notify the
other general partner (the "Responding Partner") of South Ltd. of its
intention to initiate the buy/sell procedure, such notification to include a
statement by the Initiating Partner of the value of South Ltd. Within 90 days
after receipt of such notice, the Responding Partner shall notify the
Initiating Partner of its election to either purchase the Initiating Partner's
interest in South Ltd. or sell its interest in South Ltd. to the Initiating
Partner. If the Responding Partner does not respond within 90 days, it shall
be deemed to be an election of the Responding Partner to sell its interest in
South Ltd. to the Initiating Partner.
Sunshine. The Sunshine RSN is operated through Sunshine Network ("Sunshine
Network"), a joint venture with ARC Ltd. holding a 49% interest and Sunshine
Network of Florida, Ltd. ("SNFL") holding a 51% interest. LMC Sunshine, Inc.
holds a 9.064% limited partnership interest in Sunshine Network of Florida,
Ltd., Sunshine Network, Inc. ("SNI"), an entity in which LMC Sunshine, Inc.
holds a 9.176% interest, holds a 1%
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<PAGE>
general partnership interest. The remaining interests in Sunshine Network of
Florida, Ltd. are held by various regional cable MSOs. Liberty/Fox Sunshine
LLC holds 100% of the equity interest and 49% of the voting interest of LMC
Sunshine, Inc. and Liberty Sports, Inc., an affiliate of Liberty, holds 51% of
the voting interest. Fox/Liberty Sports holds a 99% membership interest in
Liberty/Fox Sunshine LLC, New LMC Sunshine, Inc., an affiliate of Liberty,
holds a .5% membership interest and FRSM holds a .5% membership interest. In
January 1998, the Company provided notice to Time Warner Entertainment to
exercise its option to purchase Time Warner Entertainment's 29.647% limited
partnership interest in SNFL (the "SNFL Option") and 29.946% interest in SNI
(the "SNI Option"). Each of the SNFL Option and SNI Option is subject to a
right of first refusal held by the partners of SNFL and the shareholders of
SNI, respectively.
The joint venturers of Sunshine Network are subject to a buy/sell procedure
which may be initiated at any time by either joint venturer. The venturer
initiating the buy/sell procedure (the "Initiating Venturer") must notify the
other venturer (the "Responding Venturer") of Sunshine Network of its
intention to initiate the buy/sell procedure, such notification to include a
statement by the Initiating Venturer of the value of Sunshine Network. Either
within 60 days after receipt of such notice if Sunshine Network of Florida,
Ltd. is the Initiating Venturer, or, if ARC Ltd. is the Initiating Venturer,
within 120 days of the date that Sunshine Network of Florida, Ltd. receives an
appraisal of Sunshine Network (provided that such appraisal is requested by
Sunshine Network of Florida, Ltd. within 10 days of the receipt of the
buy/sell notice and such appraisal is completed no later than 21 days after
such request), the Responding Venturer shall notify the Initiating Venturer of
its election to either purchase the Initiating Venturer's interest in Sunshine
Network or sell its interest in Sunshine Network to the Initiating Venturer.
If the Responding Venturer fails to timely notify the Initiating Venturer of
its election, the Initiating Venturer shall have the right, at its option, to
either purchase the Responding Venturer's interest in Sunshine Network or
require the Responding Venturer to purchase its interest in Sunshine Network.
Non-Managed RSNs
Chicago. The Chicago RSN is operated through SportsChannel Chicago
Associates ("Chicago Associates"). Prior to the Rainbow Transaction, Rainbow
held a 50% interest in Chicago Associates and Fox/Liberty Chicago, LLC held a
50% interest. Fox/Liberty Sports holds a 98% membership interest in
Fox/Liberty Chicago, LLC, New LMC Chicago, Inc., an affiliate of Liberty,
holds a 1% membership interest and FRSM holds a 1% membership interest.
Upon consummation of the Rainbow Transaction, Rainbow contributed its 50%
interest in Chicago Associates to RPP. Rainbow holds a 60% general partnership
interest in RPP and Fox Sports RPP holds a 40% general partnership interest.
The Company holds a 99% membership interest in Fox Sports RPP, Liberty Sports
Member, Inc., an affiliate of Liberty, holds a .5% membership interest and
FRSM holds a .5% membership interest.
D.C./Baltimore. The D.C. Baltimore RSN is operated through Home Team Sports
Limited Partnership ("D.C./Baltimore LP"). ARC Ltd. holds a 34.3% limited
partnership interest in D.C./Baltimore LP and the remaining interest is held
by Group W.
Bay Area. The Bay Area RSN is operated through SportsChannel Pacific
Associates ("San Francisco Associates"). Prior to the Rainbow Transaction,
Rainbow held a 50% interest in San Francisco Associates and Fox/Liberty Bay
Area, LLC held a 50% interest. Fox/Liberty Sports holds a 98% membership
interest in Fox/Liberty Bay Area, LLC, New LMC Bay Area, Inc., an affiliate of
Liberty, holds a 1% membership interest and FRSM holds a 1% membership
interest.
Upon consummation of the Rainbow Transaction, Rainbow contributed its 50%
interest in San Francisco Associates to RPP.
Regional Programming Partners
New England. The New England RSN is operated through SportsChannel New
England, a wholly owned subsidiary of RPP. Upon consummation of the Rainbow
Transaction, Rainbow contributed its 100% interest in
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SportsChannel New England to RPP. It is anticipated that a 50% ownership
interest in the New England RSN will be transferred to Media One, Inc.
pursuant to an option which has been exercised by Media One, Inc.
Florida. The Florida RSN is operated through SportsChannel Florida
Associates ("Florida Associates"). RPP holds a 30% interest in Florida
Associates and the remaining 70% of Florida Associates is held by Front Row.
Upon consummation of the Rainbow Transaction, Rainbow contributed its 30%
interest in Florida Associates to RPP. The Tampa Bay Devil Rays, Inc. has an
option to purchase 10% of the Florida RSN.
Ohio. The Ohio RSN is operated through SportsChannel Ohio Associates ("Ohio
Associates"), a wholly-owned subsidiary of RPP. Upon consummation of the
Rainbow Transaction, Rainbow contributed its 100% interest in Ohio Associates
to RPP.
Cincinnati. The Cincinnati RSN is operated through SportsChannel Cincinnati
Associates ("Cincinnati Associates"), a wholly-owned subsidiary of RPP. Upon
consummation of the Rainbow Transaction, Rainbow contributed its 100% interest
in Cincinnati Associates to RPP.
New York. RPP currently owns and operates two RSNs in the New York region:
The Madison Square Garden Network, operated through Madison Square Garden,
L.P. ("MSG, L.P."), and Fox Sports New York, operated through SportsChannel
Associates ("SportsChannel New York Associates"). RPP holds a 92.2% interest
in MSG, L.P. and ITT holds the remaining 7.8% interest. ITT has exercised an
option to require the purchase of one-half of its interest in MSG, L.P.
effective as of June 17, 1998. ITT has an option, expiring on June 17, 1999,
to require the purchase of its remaining interest in MSG, L.P. If ITT does not
exercise its option, commencing on June 17, 2000, Cablevision will have an
option to purchase ITT's interest in MSG, L.P. Upon consummation of the
Rainbow Transaction, Rainbow contributed an 89.8% interest in MSG, L.P. to
RPP. The acquisitions of ITT's interest in MSG, L.P. will be structured as a
redemption of such interest by MSG, L.P.
SportsChannel New York Associates is a wholly-owned subsidiary of MSG, L.P.
ITEM 2. PROPERTIES
The Company's corporate facilities are located in Los Angeles, California
where it leases approximately 62,600 square feet of office space from New
World Communications Group Incorporated, an indirect, wholly-owned subsidiary
of News Corporation. See "Certain Relationships and Related Transactions."
In addition to the corporate facilities, the Company also leases office
facilities located in the market of each of the Company's RSNs, technical and
uplink facilities located in Houston, Texas and Los Angeles, California and
various sales offices located throughout the United States. The Company has
national ad sales offices in New York, Atlanta, Detroit, Chicago, Dallas, Los
Angeles and San Francisco. The Company's RSNs have sales offices in Ft.
Lauderdale, Kansas City, Tallahassee, Tampa and Tulsa. The O&O RSNs lease
office space within the market that they serve and are summarized as follows:
<TABLE>
<CAPTION>
RSN LOCATION
--- --------
<S> <C>
Southwest......................................... Irving, Texas
West/West2........................................ Los Angeles, California
Pittsburgh........................................ Pittsburgh, Pennsylvania
Rocky Mountain.................................... Denver, Colorado
Northwest......................................... Bellevue, Washington
Utah.............................................. Salt Lake City, Utah
Midwest........................................... St. Louis, Missouri
Arizona........................................... Phoenix, Arizona
Detroit........................................... Detroit, Michigan
South............................................. Atlanta, Georgia
Sunshine.......................................... Orlando, Florida
</TABLE>
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Fox Sports Direct leases its corporate office space in Irving, Texas. FX
also leases sales offices in Atlanta, Chicago and New York.
The Company does not own any real property. The Company believes that its
current office and production space, together with space readily available in
the markets in which it operates, are adequate to meet its needs for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 1997 there are no material pending legal proceedings
against the Company, other than routine litigation incidental to the Company's
business, except as described below.
On October 27, 1997, Echostar Communications Corporation ("Echostar") filed
a complaint with the FCC against the Company alleging that the Company had
violated Section 548 of the Communications Act of 1934, as amended (the "1934
Act") and Sections 76.1000 et seq. of the FCC's Rules (the "FCC Rules") by
discriminating against Echostar in the prices and other terms and conditions
for distribution of regional sports programming to Echostar's subscribers by
direct broadcast satellite. Echostar's claim is based on allegations that the
Company licenses cable operators to distribute regional sports programming at
lower prices and on more favorable terms than those contained in Echostar's
contract with the Company. Echostar's complaint requests the FCC to order the
Company to offer Echostar regional sports programming at rates and on terms
that are no worse than those offered to other cable operators, to award
damages in an unspecified amount, and to impose future reporting requirements
to ensure non-discrimination. On December 10, 1997, the Company filed a
response to the Echostar complaint denying any violation of the 1934 Act or
the FCC Rules. Although the Company cannot predict with certainty the outcome
of this proceeding, it intends to vigorously defend this action and believes
that the ultimate outcome will not have a material adverse effect on its
consolidated financial position or results of operations.
On November 24, 1997, Echostar filed another complaint with the FCC against
the Company alleging that the Company had violated Section 548 of the 1934 Act
and Sections 76.1000 et seq. of the FCC Rules by refusing to provide other
programming to Echostar due to exclusive distribution rights it had previously
granted cable operators. The complaint alleges that even though the exclusive
contracts were valid when executed, such contracts cannot be enforced because
the Company became a "vertically integrated programming vendor" and is
therefore obligated by law to make its programming available to all
distributors. Echostar requests the FCC to declare that the Company's
exclusive contracts violate the 1934 Act and the FCC Rules, to immediately
require the Company to make its programming available to Echostar on
nondiscriminatory terms and conditions, and for damages in an unspecified
amount. On December 24, 1997, the Company filed a response to the Echostar
complaint denying any violation of the 1934 Act and the FCC Rules. Although
the Company cannot predict with certainty the outcome of the proceeding it
intends to vigorously defend this proceeding and it believes that the ultimate
outcome will not have a material adverse effect on its consolidated financial
position or results of operations.
The Company is from time to time involved in litigation incidental to the
conduct of its business. Except as described above, the Company was not, as of
December 31, 1997, a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
24
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Not Applicable
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data of the Company as of December 31, 1996 and for
the eight months ended December 31, 1996 and as of December 31, 1997 and for
the year ended December 31, 1997 are derived from the Company's consolidated
financial statements audited by Arthur Andersen LLP, independent auditors,
included elsewhere in this report.
The selected financial data of Liberty Sports, Inc. and subsidiaries--
Domestic Operations set forth below for the year ended December 31, 1995 and
for the period January 1, 1996 to April 29, 1996 are derived from the combined
financial statements of Liberty Sports, Inc. and subsidiaries--Domestic
Operations ("LSI Domestic") audited by KPMG Peat Marwick LLP, independent
auditors, included elsewhere in this report.
The selected financial data of Fox/Liberty FX set forth below for the year
ended June 30, 1995 and the ten month period ended April 29, 1996 are derived
from Fox/Liberty FX's financial statements audited by Arthur Andersen LLP,
independent auditors, included elsewhere in this report.
The selected financial data presented below and under "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
should be read in conjunction with the financial statements, including the
notes thereto, appearing elsewhere in this report.
25
<PAGE>
THE COMPANY
<TABLE>
<CAPTION>
APRIL 30 TO
DECEMBER 31, YEAR ENDED
1996 DECEMBER 31, 1997
------------ -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
STATEMENT OF OPERATIONS:
Revenues........................................ $ 144,792 $ 471,792
--------- ----------
Expenses:
Operating..................................... 117,445 420,888
Additional amortization of program rights..... 80,000 --
General and administrative.................... 31,609 65,558
Depreciation and amortization................. 8,507 18,968
--------- ----------
237,561 505,414
--------- ----------
Operating (loss) income......................... (92,769) (33,622)
--------- ----------
Other (income) expenses:
Interest, net................................. 3,819 34,142
Subsidiaries' income tax expense.............. 3,437 (1,590)
Loss on sale of assets........................ 4,913 --
Equity income of affiliates, net.............. (16,976) 9,018
Equity in loss of affiliates related to
additional amortization of program rights.... 29,000 --
Other, net.................................... -- 401
Minority interest............................. 187 2,864
--------- ----------
Net (loss) income............................... $(117,149) $ (78,457)
========= ==========
Deficiency of earnings available to cover fixed
charges........................................ $(117,149) $ (78,457)
BALANCE SHEET DATA (END OF PERIOD):
Total assets.................................... $ 610,982 $1,817,758
Long-term debt.................................. 145,304 1,246,291
Stockholders' equity............................ 230,728 152,271
</TABLE>
26
<PAGE>
LIBERTY SPORTS, INC. AND SUBSIDIARIES--DOMESTIC OPERATIONS (PREDECESSOR)
<TABLE>
<CAPTION>
JANUARY 1, 1996
YEAR ENDED TO
DECEMBER 31, APRIL 29,
1995 1996
------------ ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
STATEMENT OF OPERATIONS:
Revenues.......................................... $224,373 $99,753
-------- -------
Expenses:
Operating expenses.............................. 133,804 60,664
General and administrative expenses............. 73,389 27,993
Depreciation and amortization................... 39,006 10,788
-------- -------
246,199 99,445
-------- -------
Operating income (loss)........................... (21,826) 308
-------- -------
Other income (expenses):
Interest expense................................ (4,921) (1,963)
Interest income................................. 1,343 91
Equity in earnings of affiliates................ 7,852 219
Minority interest in earnings of subsidiaries... (705) (1,076)
Other, net...................................... (204) 1,467
-------- -------
3,365 (1,262)
-------- -------
Loss before income taxes........................ (18,461) (954)
Income tax benefit................................ 6,086 217
-------- -------
Net loss...................................... $(12,375) $ (737)
======== =======
Deficiency of earnings available to cover fixed
charges.......................................... $(18,461) $ (954)
</TABLE>
27
<PAGE>
FX NETWORKS, LLC (PREDECESSOR)
<TABLE>
<CAPTION>
YEAR TEN MONTHS
ENDED ENDED
JUNE 30, 1995 APRIL 29, 1996
------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
STATEMENT OF OPERATIONS:
Revenues.......................................... $ 68,271 $ 75,401
-------- --------
Expenses:
Operating....................................... 83,579 63,369
General and administrative...................... 23,677 19,936
Depreciation and amortization................... 436 480
-------- --------
Total operating expenses...................... 107,692 83,785
-------- --------
Interest expense.................................. 3,497 7,898
-------- --------
Net loss...................................... $(42,918) $(16,282)
======== ========
Deficiency of earnings available to cover fixed
charges.......................................... $(42,918) $(16,282)
</TABLE>
28
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
In April 1996, Fox and Liberty entered into the Fox/Liberty Joint Venture,
pursuant to which the Company was formed as a holding company with ownership
interests in two principal business units: (i) a sports programming business,
consisting of interests in RSNs and a national sports programming service, and
(ii) FX, a general entertainment network. After giving effect to the Rainbow
Transaction, the Company's interests in the sports programming business are
derived through its 99% ownership interests in Fox/Liberty Sports and Fox
Sports RPP, while its interests in FX are derived through its 99% ownership
interest in Fox/Liberty FX. In establishing the Fox/Liberty Joint Venture, Fox
contributed $244 million in cash, certain assets related to the operation of a
regional sports business and all of the assets and liabilities of FX. Liberty
contributed its interests in regional sports programming businesses (which
then operated under the name "Prime Sports"), interests in non-managed sports
businesses, satellite distribution services and technical facilities.
In December 1997, the Company consummated the Rainbow Transaction, pursuant
to which (i) RPP was formed to hold interests in Rainbow's then existing RSNs
and certain other businesses, (ii) the National Sports Partnership was formed
to operate FSN and other national sports programming services, and (iii) the
National Advertising Partnership was formed to act as a national advertising
sales representative for the RSNs which are affiliated with FSN. RPP is
managed by Rainbow, while the National Sports Partnership and the National
Advertising Partnership are managed by the Company. In connection with the
consummation of the Rainbow Transaction, (i) the Company contributed $850
million to RPP in exchange for a 40% partnership interest held by Fox Sports
RPP and Rainbow contributed its interests in certain RSNs, the Madison Square
Garden entertainment complex, Radio City Productions LLC, the New York Rangers
and the New York Knicks to RPP in exchange for a 60% partnership interest,
(ii) the parties each contributed certain business interests and other assets
related to national sports programming to the National Sports Partnership in
exchange for 50% partnership interests, and (iii) the parties each contributed
certain assets related to advertising sales to the National Advertising
Partnership in exchange for 50% partnership interests.
In August 1997, the Company privately sold $500,000,000 aggregate principal
amount of its 8 7/8% Senior Notes due 2007 and $405,000,000 aggregate
principal amount at maturity ($252.3 million gross proceeds) of its 9 3/4%
Senior Discount Notes due 2007 (collectively the "Old Notes") in a transaction
exempt from registration under the Securities Act of 1933, as amended ("1933
Act"), pursuant to Rule 144A promulgated thereunder (the "Offering"). The net
proceeds from the Offering were used, along with proceeds from the Bank
Facility (as hereinafter defined), to finance the Rainbow Transaction. In
January 1998, pursuant to an exchange offer (the "Exchange Offer"), the
Company exchanged all of the Old Notes for new notes (the "Notes") which were
registered by the Company under the 1933 Act. The terms of the Notes are
substantially identical to the terms of the Old Notes. The Company received no
proceeds from the issuance of the Notes in the Exchange Offer.
In connection with the consummation of the Rainbow Transaction, the Company
and a group of banks led by Chase Manhattan Bank, amended and restated an
existing credit agreement to permit borrowings by Fox/Liberty Sports, Fox
Sports RPP and Fox/Liberty FX, each a subsidiary of the Company (together, the
"Co-Borrowers"), in the amount of $800 million (the "Bank Facility"). The Bank
Facility is comprised of a $400 million revolving credit facility and a $400
million term loan facility. The proceeds of the loans under the Bank Facility
were used to finance, in part, the Rainbow Transaction. The Company currently
expects that remaining availability will primarily be used for investments in
certain subsidiaries of the Company and for working capital purposes.
Borrowings under the Bank Facility are unconditionally guaranteed by each
RSN that is wholly owned, directly or indirectly, by the Co-Borrowers and by
each of the Co-Borrowers' subsidiaries that hold the direct interest in an RSN
that is not wholly owned, directly or indirectly, by the Co-Borrowers. The
Company also provides a downstream guarantee. In addition, borrowings under
the Bank Facility and the guarantees are secured by substantially all of the
equity interests of the Co-Borrowers (other than Fox Sports RRP) and the
equity interests held by the Co-Borrowers (other than Fox Sports RPP) and
their subsidiaries in certain related entities.
29
<PAGE>
Included in this Report are: (i) the consolidated financial statements of
the Company for the eight months ended December 31, 1996 and for the year
ended December 31, 1997, (ii) the combined financial statements of Liberty
Sports, Inc.--Domestic Operations for the years ended December 31, 1994 and
1995 and the period from January 1, 1996 to April 29, 1996, and (iii) the
financial statements of Fox/Liberty FX for the two years ended June 30, 1994
and 1995 and for the ten months ended April 29, 1996.
GENERAL PROGRAMMING OPERATIONS
Basic cable networks generally recognize revenue from two principle sources:
the payment of affiliate fees from pay television distributors and the sale of
advertising time.
Basic cable networks typically enter into long-term contracts with pay
television distributors such as cable system operators, DTH operators,
multisystem multipoint distribution systems ("MMDS") operators and other
hybrid pay television platforms. These operators provide for the delivery of
the network's programming to subscribers. Contracts between networks and
distributors generally vary in length and provide for a monthly programming
fee ("affiliate license fee") to be paid by the distributor, on a per
subscriber basis, to the cable network for the right to distribute programming
on a non-exclusive basis. Affiliate license fees are generally based on the
popularity of the cable network and the cost of its programming, and
distribution contracts will generally set forth the manner in which fees will
change throughout the life of the contract. The affiliate license fee schedule
during the contract term typically varies based on the number of subscribers
to whom the distributor delivers the network (volume) and/or penetration of
the network among a distributor's total subscriber base. Affiliate license
fees paid by a distributor will typically increase in aggregate as the number
of subscribers served by the distributor increases, and will increase, on a
per subscriber basis, by an escalator, such as the consumer price index
("CPI") for a fixed number of years until the contract expiration date. Upon
the contract's expiration, the parties can renegotiate the license fee to the
extent that market forces will allow. In exchange for distribution and
affiliate license fees, distribution contracts often require the cable network
to provide its distributor with various forms of consideration, including
advertising time that the operator may sell locally, marketing programs and
materials, and in recent years, substantial per subscriber launch funds.
Basic cable networks also receive revenues from the sale of advertising time
on the network. Advertising is sold in time increments and is priced primarily
on the basis of a program's popularity among the specific audience that the
advertiser desires to reach. Advertising rates are affected by the number of
advertisers competing for available time, the total audience reached, as
measured by the number of subscribers to the network, and to the extent that
the network is targeted to a particular audience, the size and demographic
makeup of the subscriber base targeted by the network. Generally, most
advertising contracts are short-term in nature. Cable networks generally pay a
commission both to advertising agencies for placement of local or national
advertising and to their in-house sales force (or the national sales
representative for national advertising).
Cable networks expenses primarily include five general types of expenses:
programming expenses, production and technical expenses, marketing expenses,
advertising expenses and general and administrative expenses.
Programming expenses are generally the largest component of a cable
programmer's expenses and include expenses related to originally produced
programming, acquired programming and rights to programming obtained by
contract. Production and technical expenses typically include expenses related
to operating the technical facilities of the network, the equipment required
to uplink the signal to the satellite and, in the case of RSNs, the production
crews who film and announce the games. Marketing expenses include all
promotional expenses related to improving the market visibility and awareness
of the network. Advertising expenses include sales commissions paid to the in-
house sales force involved in the sale of advertising and commissions paid to
outside representatives. General and administrative expenses include salaries,
employee benefits, rent and other routine overhead expenses as well as legal,
accounting and consulting fees.
30
<PAGE>
THE COMPANY'S PROGRAMMING OPERATIONS
Each of the Company's RSNs receive revenues from both affiliate license fees
and from the sale of air time to local and national spot advertisers. The
Company's RSN's have rights agreements with professional sports teams and
colleges, within its region of operation. For professional teams, these rights
agreements generally grant the RSN the exclusive right to air a specified
number of games of the professional team per season, plus playoff games, for a
specified fixed fee. The average term of these contracts (from commencement to
scheduled termination) has historically been approximately six years for the
Company's O&O RSNs and such contracts have specified mechanisms for the
increase of the rights fee per game over the term of the contract.
FSN, the Company's national programming service, also receives revenue from
both affiliate license fees and from the sale of advertising time to national
network advertisers. FSN's affiliate license fees are received from affiliated
RSNs or broadcast stations for the right to distribute FSN's national
programming within their region of operations. Similar to the RSNs, FSN has
various rights agreements for its national sports programming, most notably
national rights from MLB and various college conferences for football and
basketball. FSN also produces its own daily sports news program, Fox Sports
News. Upon consummation of the Rainbow Transaction, FSN became a service of
the National Sports Partnership.
Fox Sports Direct, the Company's satellite services operation, provides
sports programming from the RSN's to residential and commercial C-band
satellite owners and to the direct broadcast service providers, such as
DirecTV and PRIMESTAR, for Ku-band satellite owners. Fox Sports Direct's
revenues are received generally through an up-front annual subscription fee
from C-band customers and from a monthly per subscriber fee to the direct
broadcast service providers. Fox Sports Direct acquires its sports programming
through a license agreement with the RSNs whereby Fox Sports Direct splits a
percentage of its revenues received from its subscribers with the "home
territory" RSN in which the specific satellite subscriber resides.
Prior to the consummation of the Rainbow Transaction, Fox Sports Ad Sales,
LLC, the Company's advertising sales subsidiary received commissions from the
sale of air time on behalf of RSNs, both the Company's and third party RSNs,
as well as on behalf of FSN. Expenses consist of sales personnel and other
sales-related costs. Upon consummation of the Rainbow Transaction, sales of
national advertising became a function of the National Advertising
Partnership.
FX receives revenue from both affiliate license fee contracts and the sale
of advertising time and acquires programming from various sources. FX has
entered into contracts with various Hollywood studios, including Twentieth
Century Fox, an affiliate of News Corporation, for the exclusive cable rights
to telecast specific programming, including both feature films and off network
television programming, within a specified term. These contracts are generally
long-term in nature. Under generally accepted accounting principles, FX
capitalizes its film rights and amortizes the asset over the life of the
contract. As a result, the amount of cash payments made for a film contract in
a particular reporting period may differ from the amount amortized.
SIGNIFICANT ACCOUNTING PRACTICES
Basis of Presentation
The Company's ownership interests in the RSNs are held either directly or
indirectly and have different voting rights attached thereto. The Company
consolidates all subsidiaries in which it has a majority interest and voting
control. The percentage of ownership, together with the degree to which the
Company controls the management and operation of an RSN, determines the
appropriate accounting treatment for the Company's interest in that particular
RSN. If the Company owns a majority interest in a particular RSN, but does not
have voting control, the ownership interest is accounted for using the equity
method of accounting. Under the equity method of accounting, the financial
condition and results of operations of entities are not reflected on a
consolidated basis and, accordingly, the consolidated revenues and expenses of
the Company, as reported on its consolidated statements of operations, do not
include revenues and expenses related to the entities accounted for under the
equity method.
31
<PAGE>
As of December 31, 1996, the following RSNs, together with Fox Sports
Direct, are accounted for using the equity method of accounting: Southwest
RSN, Pittsburgh RSN, Rocky Mountain RSN, Midwest RSN, Sunshine RSN, Chicago
RSN, Bay Area RSN and D.C./Baltimore RSN, as well as certain operations within
Fox Sports Net. Prior to the formation of the Company, the Southwest RSN,
Pittsburgh RSN, Rocky Mountain RSN and Midwest RSN, as well as Fox Sports
Direct, were consolidated in Liberty Sports, Inc.'s financial statements,
while the others have historically always been accounted for under the equity
method.
Entities that are consolidated in the financial statements of the Company,
at December 31, 1996, include subsidiary entities which own Fox/Liberty FX,
West RSN, West 2 RSN, Northwest RSN, Utah RSN, Arizona RSN, South RSN and Fox
Sports Ad Sales, as well as certain operations within Fox Sports Net.
On March 13, 1997, upon the acquisition of the remaining interests in
Affiliated Regional Communications, Ltd. and affiliates ("ARC") by Liberty/Fox
ARC LP, the Company assumed management control of the consolidated
subsidiaries of Liberty/Fox ARC LP, and from that date the consolidated
subsidiaries of ARC and their operations were consolidated.
In connection with the consummation of the Rainbow Transaction, the Company
contributed certain business interests and other assets related to national
sports programming to the National Sports Partnership and certain assets
related to advertising sales to the National Advertising Partnership. The
Company holds 50% partnership interests in each partnership. Whereas the
assets and liabilities, and the results of operations of FSN, the national
sports programming business and the national advertising sales representation
business were consolidated, the National Sports Partnership and the National
Advertising Partnership are each accounted for under the equity method. Fox
Sports RPP's 40% interest in RPP is also accounted for under the equity
method.
The following RSNs, together with Fox Sports Direct and Fox/Liberty FX, are
consolidated in the financial statements of the Company, at December 31, 1997:
West RSN, West 2 RSN, Northwest RSN, Utah RSN, Arizona RSN, South RSN,
Southwest RSN, Rocky Mountain RSN, Midwest RSN and Detroit RSN.
As of December 31, 1997, the following are accounted for using the equity
method of accounting: Pittsburgh RSN, Sunshine RSN, Chicago RSN, Bay Area RSN,
D.C./Baltimore RSN, RPP, National Sports Partnership and National Advertising
Partnership.
Because the Company reports the results of a significant number of its
subsidiary entities on the equity method, its financial results do not
represent the total combined revenues and expenses of the entire Company. As a
result of the various acquisitions and sales in recent years, which in turn
impact the accounting treatment of many of the Company's subsidiary entities,
comparability of the Company's historical financial results is not possible.
Program Rights
The Company has multi-year contracts for telecast rights of syndicated
entertainment programs and sporting events. Program rights for entertainment
programs are amortized over the term of the contract using the straight-line
method. Program rights for sporting events which are for a specified number of
games are amortized on an event-by-event basis, and those which are for a
specified season are amortized over the term of the season on a straight-line
basis.
At the inception of these contracts and periodically thereafter, the Company
evaluates the recoverability of the costs associated therewith against the
advertising revenues directly associated with the program material and related
expenses. Where an evaluation indicates that a multi-year contract will result
in an ultimate loss, additional amortization is provided to currently
recognize that loss.
Excess Cost
Excess cost represents the difference between the cost of acquiring
programming entities and amounts assigned to their tangible and intangible
assets. Such amounts are amortized on a straight-line basis over 40 years.
The Company periodically reviews the propriety of the carrying amount of its
excess cost as well as the related amortization period to determine whether
current events or circumstances warrant adjustments to the carrying value
and/or the estimates of useful lives. This evaluation consists of the
Company's projection of undiscounted operating income before depreciation,
amortization and interest over the remaining lives of the excess cost.
32
<PAGE>
RESULTS OF OPERATIONS
FOX/LIBERTY NETWORKS, LLC
Year ended December 31, 1997
The Company was formed in April, 1996 pursuant to the Fox/Liberty Joint
Venture. The consolidated statement of operations of the Company reflects the
RSNs and other sports businesses, formerly owned by Liberty and its affiliates
and Fox.
The Company has certain subsidiaries that are consolidated and others which
are accounted for on the equity method of accounting. On March 13, 1997, upon
the acquisition of the remaining interests in ARC by Liberty/Fox ARC LP, the
Company assumed management control of the consolidated subsidiaries of
Liberty/Fox ARC LP, and from that date the consolidated subsidiaries of ARC
and their operations were consolidated. Had the additional 12.78% interest
been acquired at the beginning of the period (January 1, 1997), the Company's
consolidated revenue and income would have increased by $29.9 million and $0.3
million, respectively.
Total revenue for the year ended December 31, 1997 was $471.8 million.
Programming revenue is the largest source of revenue, representing 48% of
total revenues, or $226.5 million. Advertising revenue represents 25% of total
revenues, or $117.9 million. For the eight months ended December 31, 1996,
programming revenue was $85.3 million and advertising revenue was $37.7
million, or 59% and 26% of total revenues, respectively. The primary reason
for this change in the mix of revenues as compared to total revenue is due to
the consolidation of ARC in which direct broadcast revenue represents 52% of
ARC's total revenues. For the year ended December 31, 1997, direct broadcast
revenue represented 19% of total revenues, or $91.7 million. For the eight
months ended December 31, 1996, direct broadcast revenue was $5.7 million, or
4% of total revenues reflecting the impact of ARC being accounted for on the
equity method during this period.
Operating expenses totaled $420.9 million for the year ended December 31,
1997, which represented 89% of total revenues. These expenses consist
primarily of programming and production costs. Operating expenses for the
eight months ended December 31, 1996 totaled $117.4 million, or 81% of total
revenues. The increase can be attributed to acquisition and renewals of
programming rights during the first half of 1997 and direct telecast rights to
third party RSNs that were not previously consolidated. The Company also
incurred significant expenses throughout the year related to the launch of
West2 in January 1997. As West2 has not yet achieved full distribution,
operating expenses substantially exceeded revenues during the year. The
Company also made a significant investment in programming in conjunction with
the continued development of FSN, which launched in November 1996.
General and administrative expenses totaled $65.6 million for the year ended
December 31, 1997, which represented 14% of total revenues. General and
administrative expenses for the eight months ended December 31, 1996 totaled
$31.6 million, or 22% of total revenues. In 1996, the Company incurred
significant costs relative to severance and relocation expenses in connection
with the Company's decision to relocate its corporate offices from Dallas,
Texas to Los Angeles, California. The Company offered a severance package
based upon years of service to those employees who elected not to transfer,
and a relocation package to those employees who elected to relocate to Los
Angeles. Similar costs were not incurred in 1997.
Depreciation and amortization expenses totaled $19.0 million and $8.5
million for the year ended December 31, 1997 and for the eight months ended
December 31, 1996, respectively. Of these amounts, $11.8 million and $5.2
million were related to amortization of excess cost from acquisitions of
programming entities. The increases are primarily due to the consolidation of
ARC in 1997, as discussed above.
Interest expense for the year ended December 31, 1997 totaled $49.2 million
as a result of $1.3 billion of debt outstanding as of December 31, 1997.
Interest expense for the eight months ended December 31, 1996 totaled $4.2
million which related to $171.7 million of outstanding indebtedness as of
December 31, 1997. The increase in the amount of debt is attributable to (i)
the Offering, pursuant to which the Company incurred $752.3 million of debt;
(ii) the consolidation of ARC's consolidated subsidiaries, pursuant to which
the Company incurred $9.0 million of debt; (iii) the purchase of the remaining
interest in ARC pursuant to which the Company
33
<PAGE>
incurred $40.0 million of debt; (iv) the arrangement of an advertising sales
and carriage agreement pursuant to which the Company incurred $30.0 million of
debt; (v) the Bank Facility and indebtedness thereunder in the amount of
$460.0 million; (vi) the acquisition of certain assets in connection with the
commencement of operations of the Detroit RSN, pursuant to which the Company
incurred $25.7 million of debt; and (vii) additional borrowings of
approximately $39.5 million to fund operations for the year ended December 31,
1997, net of the extinguishment of debt of $201.7 million during the period.
Eight months ended December 31, 1996
The Company was formed pursuant to a 50%-50% joint venture in April 1996
from the contribution of assets from Liberty and Fox. The consolidated
statement of operations of the Company reflects the RSNs and other sports
businesses, formerly owned by Liberty and Fox.
The Company has certain subsidiaries that are consolidated and others which
are accounted for under the equity method of accounting. The key criteria used
to determine the accounting treatment are ownership and voting control. For
comparative purposes to a pro forma combined Liberty Sports and Fox/Liberty FX
statement of operations prior to the formation of the Company, it is important
to realize that certain subsidiary entities were accounted for under the
equity method after formation of the Company in April 1996 which were
previously consolidated in Liberty Sports, Inc. financial statements. These
significant subsidiary entities are Liberty/Fox KBL LP (Pittsburgh RSN),
Liberty/Fox ARC LP (Southwest, Midwest and Rocky Mountain RSNs, and Fox Sports
Direct), and Liberty/Fox Distribution LP (primarily national rights for
college football).
If these operating subsidiaries had been consolidated for the eight months
ended December 31, 1996, as they were under Liberty Sports, Inc. prior to the
formation of the Company, the effect on total consolidated revenues and
expenses would have been significant. For the eight months ended December 31,
1996, total revenues for these operating subsidiaries were $138.6 million,
consisting of the following: programming--$40.7 million, advertising--$19.3
million, direct broadcast--$55.1 million and other--$23.5 million. Total
expenses for the same period were $163.3 million, consisting of the following:
operating--$150.0 million, general and administrative--$10.4 million, and
depreciation and amortization--$2.9 million. The operating loss for these non-
consolidated subsidiaries was $24.7 million, which is included on the
Company's financial statements as equity income of affiliates, net and equity
in loss of affiliates related to additional amortization of program rights.
For comparability purposes, the following discussion will make reference to
comparisons between calendar 1996 and 1995 for the O&O RSNs. To achieve
comparability, these calculations were made by summing the specific revenues
and expenses for all owned and operated regional sports networks, whether
consolidated or accounted for under the equity method for financial statement
purposes, for 1996 and 1995.
Total revenues for the eight months ended December 31, 1996 were $144.8
million. Programming revenue is the largest revenue source, representing 59%
of total revenue or $85.3 million. Programming revenues for RSNs increased 30%
in calendar 1996 compared to calendar 1995 due to rate increases and
increasing subscribers. Advertising revenue totaled $37.7 million or 26% of
total revenues. For RSNs, advertising revenues increased 15% in calendar 1996
due to new sports contracts and higher advertising rates and sell-out
percentages in certain events. Direct satellite broadcast revenue represented
only 4% of total revenues or $5.7 million due to the Company's direct
satellite broadcast division, Fox Sports Direct, not being consolidated. The
remaining revenue sources account for 11% of total revenues and consist of
infomercials, merchandising, and other.
Operating expenses totaled $117.4 million for the eight months ended
December 31, 1996, which represented 81% of total revenues. These expenses
consisted primarily of programming and production costs. For RSNs, programming
and production costs increased 17% in calendar 1996 from calendar 1995 due
primarily to escalating and/or renegotiated costs in certain existing sports
contracts, and, to a lesser extent, new sports contracts.
In 1996 the Company finalized a long-term agreement with MLB for national
cable rights. In accordance with the Company's accounting policies as
described above, an evaluation of the recoverability of the costs
34
<PAGE>
associated with this agreement was performed. Additional amortization of
program rights totaling $80.0 million was recorded associated with this
contract, as a result of the evaluation of projected future advertising
revenues in comparison to future program rights. Depreciation and amortization
expenses totaled $8.5 million for the period. Of this amount, $5.2 million was
related to amortization of excess cost from acquisitions of programming
entities. An additional amortization of program rights totaling $29.0 million
was also recorded with respect to a projected loss to an affiliate on college
football contracts.
General and administrative expenses totaled $31.6 million, or 22% of total
revenues, for the eight months ended December 31, 1996. Included in this total
for the period was $1.3 million for deferred compensation to certain employees
and $1.2 million in severance costs associated with the announced relocation
in August 1996 of the Company's corporate offices from Dallas to Los Angeles.
The actual relocation was completed in March 1997.
Interest expense was $4.2 million for the period with substantially all of
the Company's debt bearing interest at floating rates.
Subsidiaries income tax expense totaled $3.4 million for the period which
related to estimated federal and state tax liabilities.
In September 1996, the Company sold its merchandising division for $3.8
million to a company owned by former executives of Liberty. A loss on sale of
$4.9 million was realized in conjunction with this transaction.
The Company has numerous significant investments accounted for under the
equity method. For the eight months ended December 31, 1996, net equity income
of affiliates was $17.0 million.
LIBERTY SPORTS, INC.--DOMESTIC OPERATIONS
Period from January 1, 1996 to April 29, 1996
Revenues for the four months ended April 29, 1996 totaled $99.8 million.
Programming, advertising, and direct broadcast revenues were 38%, 28%, and
24%, respectively, of total revenues for the four month period compared to
38%, 30%, and 23%, respectively, of total revenues for the calendar year ended
December 31, 1995 ("Liberty Calendar 1995"). The slight percentage decrease in
advertising revenues was offset by an increase in the percentage of other
revenues as other revenues were 10% of total revenues for the four month
period compared to 9% for Liberty Calendar 1995.
Operating expenses for the four months ended April 29, 1996 were $60.7
million, or 61% of total revenues for the period. Operating expenses for
Liberty Calendar 1995, as a percentage of total revenues, were comparable at
60%.
General and administrative expenses for the four months ended April 29, 1996
were $28.0 million, or 28% of total revenues for the period. General and
administrative expenses for the preceding fiscal year, as a percentage of
total revenues, were 33%. The decreased percentage cost is attributable to the
sale of certain unprofitable business divisions in January 1996 and overall
efficiencies in Liberty Sports, Inc.--Domestic Operations' existing
operations.
Year ended December 31, 1995 ("Liberty Calendar 1995") compared with the year
ended December 31, 1994 ("Liberty Calendar 1994")
Revenues for Liberty Calendar 1995 increased 67% to $224.4 million from
$134.7 million for the prior calendar year. Approximately 54%, or $49 million,
of the increase is due to the acquisition of Prime Ticket Networks, L.P.
("Prime Ticket," the owner of the West RSN) in August 1994. The remainder of
the revenue increase is attributed to the result of more subscribers, higher
subscriber rates, no major sports league strikes,
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<PAGE>
and new sports contracts. The primary revenue sources consisting of
programming, advertising, and direct broadcast increased 59%, 119%, and 56%,
respectively, in 1995 compared to 1994.
Operating expenses for Liberty Calendar 1995 increased 58% to $133.8 million
from $84.7 million in Liberty Calendar 1994. This increase is attributable to
the Prime Ticket acquisition, new sports programming, higher costs for
existing sports contracts, and no major sports leagues strikes during 1995. As
a percentage of total revenues, operating expenses declined in 1995 to 60%
compared to 63% of revenues in 1994.
General and administrative expenses for Liberty Calendar 1995 increased 68%
to $73.4 million from $43.7 million for the prior calendar year. This increase
is primarily attributable to the Prime Ticket acquisition and to increased
costs associated with the growth of Liberty Sports, Inc.--Domestic Operations.
Depreciation and amortization expenses increased 74% to $39.0 million from
$22.4 million in the prior year. This increase is related to a full year of
depreciation and amortization of fixed assets and intangible assets related to
Prime Ticket.
Interest expense for 1995 totaled $4.9 million which was a decrease of 3%
from the prior year as lower interest rates offset the increase in the level
of outstanding indebtedness during 1995. Interest income increased to $1.3
million from $0.6 million in the prior year due to interest earned on a note
receivable with a sports franchise.
In 1995, Liberty Sports, Inc.--Domestic Operations had an income tax benefit
of $6.1 million due to loss carryforwards generated for income tax purposes.
FX
Ten Months ended April 29, 1996
Revenues for the ten months ended April 29, 1996 totaled $75.4 million, of
which approximately 74% represented revenues attributable to programming
revenue, as compared to 77% of FX's total revenue for the fiscal year ended
June 30, 1995 ("FX Fiscal 1995"). Increased advertising revenues due to the
maturing of the programming service and increased awareness among viewers and
advertisers since the June 1994 launch resulted in a decrease in the
percentage. Advertising revenue (net of commissions) contributed approximately
23% of revenues for the ten month period, and infomercial revenue contributed
3%.
Operating expenses for the ten months ended April 29, 1996 were $63.4
million, or 84% of total revenues for the period. Operating expenses for FX
Fiscal 1995, as percentage of total revenues, was 122%. This improvement in
operating expenses as a percentage of revenues is attributable to a decrease
in original programming production.
General and administrative expenses for the ten months ended April 29, 1996
were $19.9 million, or approximately 26% of revenues for the period. General
and administrative expenses for FX Fiscal 1995 were approximately 35% of
revenues. This decrease in general and administrative expenses as a percentage
of revenues is attributable to an overall increase in programming and
advertising revenues as compared to FX Fiscal 1995.
Year ended June 30, 1995 ("FX Fiscal 1995") compared with the year ended June
30, 1994 ("FX Fiscal 1994")
FX Fiscal 1995 is not comparable to FX Fiscal 1994 due to FX launching June
1, 1994. Startup costs leading up to launch were amortized as incurred during
FX Fiscal 1994.
Revenues for FX Fiscal 1995 increased 1,561% to $68.3 million from $4.1
million for the prior fiscal year. This increase is primarily attributable to
only one month of revenue during FX Fiscal 1994. During FX Fiscal
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<PAGE>
1995 programming revenue increased to $52.2 million from $3.7 million,
accounting for 76% of the increase in total revenues for the year. Advertising
revenue (net of commissions) contributed approximately 20% of revenues for the
FX Fiscal 1995, and infomercial revenue contributed 4%.
Fox Sport Direct expenses in FX Fiscal 1995 increased 186% to $83.6 million
from $29.2 million for the prior year. This increase is primarily attributable
to a full year of programming production and amortization.
General and administrative expenses for FX Fiscal 1995 increased 129% to
$23.7 million from $10.3 million for the prior year. This increase is
primarily attributable to the fact that the majority of FX Fiscal 1994 general
and administrative costs did not start until January 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise from (i) the funding of operating
losses and other general working capital needs, (ii) its strategic plan to
secure national distribution for its network programming, either through the
acquisition of existing third party-owned RSNs or through the launch of new
RSNs, (iii) the acquisition of additional programming rights, and (iv) its
capital expenditure requirements, which include the Company's plans to convert
to digital transmission.
Net cash provided by (used in) operating activities of the Company for the
year ended December 31, 1997 and for the eight months ended December 31, 1996
was ($76.7 million) and $14.3 million, respectively.
Net cash used in investing activities of the Company for the year ended
December 31, 1997 and for the eight months ended December 31, 1996 was $932.4
million and $38.8 million, respectively.
Net cash provided by financing activities of the Company for the year ended
December 31, 1997 and for the eight months ended December 31, 1996 was
$1,050.8 million and $25.2 million, respectively.
In June 1997, the Company entered into an agreement with Rainbow to acquire
a 40% interest in Rainbow's sports properties, including economic interests in
eight RSNs, Madison Square Garden entertainment complex, Radio City
Productions LLC, the New York Knicks, and the New York Rangers in exchange for
$850 million in cash from the Company. In December 1997 the Rainbow
Transaction was consummated and the net proceeds from the Offering, along with
available proceeds under the Bank Facility, were used to fund the Company's
cash contribution of $850 million to RPP.
In August 1997, the Company consummated the Offering. The net proceeds from
the Offering were used in part, to finance the Rainbow Transaction. The
indentures pursuant to which the Notes were issued in connection with the
Offering contain certain restrictive covenants that, among other things,
restrict the Company's ability to incur additional indebtedness, pay
dividends, transfer assets and engage in transactions with affiliates.
The Company has several credit facilities with different banks. The credit
facilities restrict the payment of dividends, and contain certain restrictive
covenants regarding, among other things, the maintenance of certain financial
ratios and restrictions on the distribution of assets. At December 31, 1997,
the total amounts borrowed under these credit facilities were $472.5 million.
The total commitments pursuant to these credit facilities were $812.5 million
as of December 31, 1997. In September 1997, the Company entered into a credit
agreement which permitted borrowings of up to $450 million. The proceeds of
such credit agreement were used to retire amounts borrowed under previously
existing credit facilities and for working capital purposes. Upon consummation
of the Rainbow Transaction, the Company amended and restated this $450 million
credit agreement to permit borrowings of up to $800 million under the Bank
Facility. The Bank Facility was used to finance, in part, the Rainbow
Transaction.
Future capital requirements are substantial. At December 31, 1997, the
Company has future minimum payments on operating leases, including
transponders totaling $100.0 million, and commitments under long-term program
rights contracts totaling $1,237.3 million. The Company has also made
substantial investments in FSN and West2 in the year ended December 31, 1997.
FSN, which launched in November 1996, required significant
37
<PAGE>
working capital for programming, due primarily to the agreement with MLB and
the development of Fox Sports News. West2, which launched in January 1997, did
not achieve a significant level of distribution until the end of the year.
Also, within the next several years, the Company has plans to transition from
analog transponder equipment to digital transponder equipment. Obligations
under operating leases for the Company's fleet of transponders currently in
use total $1.8 million per month, with varying expiration dates through 2002.
Upon transition to the digital transponder equipment, the Company will use
four transponders at a cost of approximately $0.6 million per month. Upon
completion of the transition to digital transponder equipment, the Company
anticipates savings of approximately $0.9, $1.0 and $1.1 million per month in
2000, 2001 and 2002, respectively. In order to transition to the digital
system, the Company will purchase four signal compression systems. In
addition, the Company anticipates purchasing satellite receivers which will
allow cable operators to convert the digital signal back into a single channel
feed for distribution across their system. The total cost of this equipment
will be approximately $20 million. The transition to digital transponder
equipment commenced in 1998 and will continue into 1999. In addition, the cost
of acquiring sports programming rights continues to escalate. Furthermore, the
Company intends to continue to explore opportunities to expand its
distribution.
The Company is a holding company and its assets consist solely of
investments in its subsidiaries and affiliates. As a holding company, the
Company's ability to meet its financial obligations, including its obligations
under the Notes and the Bank Facility and its funding and other commitments to
its subsidiaries and affiliates, is dependent on the earnings of such
subsidiaries and affiliates and the distribution or other payment of such
earnings to the Company in the form of dividend distributions, loans or other
advances, payment or reimbursement for management fees and expenses, and
repayment of loans and advances from the Company. Accordingly, the Company's
ability to pay interest on the Notes and to otherwise meet its liquidity
requirements may be limited as a result of its dependence upon the
distribution of earnings and advances of funds by its subsidiaries and
affiliates. The payment of dividends or the making of loans or advances to the
Company by its subsidiaries and its affiliates may be subject to statutory,
regulatory or contractual restrictions, are contingent upon the earnings of
those subsidiaries and affiliates, and are subject to various business
considerations. Although the agreements between the Company and its partners
contemplate the payment of distributions, the Company may not be able to cause
its subsidiaries or affiliates to make distributions when it may have a need
for distributions, and the Company may not be able to dispose of its
investments in any of its RSNs if required for financial or other reasons.
Sources of funding for the Company's future financing requirements, if any,
may include public or private offerings of equity and/or debt securities,
commercial bank loans, and partner capital contributions. The extent of the
additional financing required, if any, will depend on the success of the
Company's business. There can be no assurance that additional financing, if
needed, will be available to the Company or, if available, that such financing
can be obtained on terms acceptable to the Company and within the limitations
contained in the terms of any future financing arrangements. Failure to obtain
any such financing could delay or prevent the Company's development and growth
plans, impair the Company's ability to meet its debt service requirements, and
have a material adverse effect on the Company's business.
The Company believes that the net proceeds from the Offering, together with
existing funds and the proceeds from borrowings under the proposed Bank
Facility, will be sufficient to meet its plan to secure national distribution,
maintain and/or acquire programming, make anticipated capital expenditures,
and meet its projected working capital requirements, although no assurances
can be given in this regard.
YEAR 2000
The Company has begun to develop plans to address the changes that need to
be made to its computer systems and applications for the implications of the
Year 2000 date change. These changes are necessary to ensure that the systems
and applications will recognize and process dates with the Year 2000 and
beyond. The Company is also communicating with its application vendors,
suppliers, financial institutions and others with which it is doing business
to address the impact of the Year 2000. The Company does not anticipate that
the
38
<PAGE>
financial impact of making the required changes to its systems and
applications will be material to the Company's consolidated financial position
or results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Reports of Independent Public Accountants, Financial Statements and
Notes to the Financial Statements appear in a separate section of this Form
10-K (beginning on page F-1) following Part IV. The index to Financial
Statements is included in Item 14.
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
39
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS
The current executive officers of the Company and/or certain of its
subsidiaries are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
David Hill.................. 51 Chairman
Anthony F.E. Ball........... 42 President and Chief Executive Officer
Jeff Shell.................. 32 Executive Vice President and Chief Financial
Officer
James A. Martin............. 43 Executive Vice President, Head of Business
Operations
Louis LaTorre............... 44 Senior Vice President
Tracy Dolgin................ 38 Joint Chief Operating Officer of Fox/Liberty
Sports
Robert L. Thompson.......... 40 Executive Vice President of Fox/Liberty
Sports
</TABLE>
David Hill has served as Chairman of the Company since April 1996. From
April 1996 through October 1997, Mr. Hill also served as the Company's Chief
Executive Officer. In addition, since October 1997 he has served as Chairman
and Chief Executive Officer of Fox Broadcasting Company. Prior thereto, from
July 1996 until October 1997, Mr. Hill served as Chief Operating Officer of
Fox Television and from December 1993 until October 1997 as President of Fox
Sports, a division of Fox Television. From April 1988 until October 1993, Mr.
Hill was employed at Sky Television and its successor company, British Sky
Broadcasting Group plc ("BSkyB"), in various capacities, including Head of Sky
Sports, a subsidiary of BSkyB.
Anthony F.E. Ball has served as President of the Company since March 1997
and additionally as its Chief Executive Officer since October 1997. From March
1997 until October 1997, Mr. Ball also served as Chief Operating Officer of
the Company. Mr. Ball has also served as President and Chief Executive Officer
of Fox/Liberty Sports and Fox/Liberty FX since October 1997. In addition,
since June 1996 he has served as President and Chief Operating Officer of
International Sports Programming Partners, an international sports programming
joint venture between News Corporation and TCI. From December 1993 until June
1996, Mr. Ball was employed by BSkyB in various capacities, including as its
General Manager/Broadcasting and as Head of Production and Operations of Sky
Sports. Prior thereto, from March 1991 until December 1993, Mr. Ball served as
Senior International Vice President and Head of European Productions at
TransWorld International, a subsidiary of International Management Group.
Jeff Shell has served as Executive Vice President and Chief Financial
Officer of the Company since February 1998. Prior thereto, Mr. Shell served as
Senior Vice President, Finance and Development of the Company from June 1996
until February 1998. From October 1994 until November 1996, he served as Vice
President of Business Development for Fox, Inc. Prior thereto, from September
1991 until October 1994, Mr. Shell served in various capacities in the
Strategic Planning and Corporate Development Group at The Walt Disney Company.
James A. Martin has served as Executive Vice President, Head of Business
Operations of each of the Company, Fox/Liberty Sports and Fox/Liberty FX since
June 1997. From September 1996 until June 1997, he served as Executive Vice
President and Chief Operating Officer of Fox/Liberty Sports. From January 1995
until September 1996, Mr. Martin served as Executive Vice President and
President of Regional Network Operations of Liberty Sports, Inc. Prior
thereto, from September 1991 until December 1994 Mr. Martin served as Vice
President and Chief Operating Officer of Liberty.
Louis LaTorre has served as Senior Vice President of the Company, President,
Advertising Sales of Fox/Liberty Sports and President, Advertising Sales of
Fox/Liberty FX since January 1997. From July 1994 until December 1996, he
served as President and Chief Operating Officer for the Sales and Marketing
Division of
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New World Communications, Inc. From October 1993 until June 1994, Mr. LaTorre
served as President, Sales and Marketing for Pro Star Entertainment Inc., a
satellite encryption and entertainment company. From March 1993 until
September 1993, he served as President of Platinum Productions, Inc., a pay-
per-view entertainment company. Prior thereto, from June 1981 until February
1993, Mr. LaTorre served in various capacities at Turner Broadcasting System,
Inc. including, most recently, as Executive Vice President, Advertising Sales
and Marketing, for the Turner Entertainment Group, a subsidiary of Turner
Broadcasting System, Inc.
Tracy Dolgin has served as Joint Chief Operating Officer of Fox/Liberty
Sports since July 1997. In addition, he has served as Executive Vice
President, Marketing for Fox Sports, a division of Fox Broadcasting Company,
since December 1993. Prior thereto, from December 1992 until December 1993,
Mr. Dolgin served as Executive Vice President, Marketing of Fox Broadcasting
Company, and from May 1989 until December 1992, Mr. Dolgin served as Senior
Vice President, Marketing of Home Box Office, a subsidiary of Time Warner Inc.
Robert L. Thompson has served as Executive Vice President of Fox/Liberty
Sports since October 1997 and from July 1996 through October 1997 he served as
its Senior Vice President, Rights and Acquisitions and Regional Network
Operations. From October 1994 through July 1996, Mr. Thompson served as Senior
Vice President, Regional Network Operations for Liberty Sports, Inc. and from
January 1994 until October 1994 he served as Group Vice President of Liberty
Sports, Inc. Prior thereto, from February 1989 until October 1994. Mr.
Thompson served as Vice President/General Manager of the Rocky Mountain Prime
Sports Network.
There are no family relationships between any of the executive officers.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid for the eight months
ended December 31, 1996 and for the year ended December 31, 1997 to those
persons who were, at December 31, 1997, the Company's Chief Executive Officer
and the next four most highly compensated executive officers of the Company
and/or its subsidiaries (the "Named Executives").
41
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-------------------------------
AWARDS PAYOUTS
--------------------- ---------
ANNUAL COMPENSATION
----------------------------------------- RESTRICTED SECURITIES INCENTIVE
NAME AND PRINCIPAL OTHER ANNUAL STOCK UNDERLYING PLAN ALL OTHER
OCCUPATION YEAR SALARY BONUS COMPENSATION AWARDS OPTION PAYOUTS COMPENSATION
------------------ ---- -------- -------- ------------ ---------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David Hill.............. 1997 $500,000(2) $150,000(2) -- -- -- -- --
Chairman and Former 1996 $333,333(2) $100,000(2) -- -- -- -- --
Chief Executive
Officer(1)
Anthony F.E. Ball....... 1997 $250,000(3) $ 75,000(3) -- -- -- -- --
Chief Executive Officer 1996 -- -- -- -- -- -- --
James A. Martin......... 1997 $358,333(2) $125,000 -- -- -- -- $300,000(6)
Executive Vice President 1996 $215,625(5) $ 63,333(5) -- -- -- -- $300,000(6)
and Former Chief
Operating Officer of
Fox/Liberty Sports(4)
Louis LaTorre........... 1997 $391,026 $200,000 $20,148 -- -- -- --
Senior Vice President 1996 -- -- -- -- -- -- --
Robert L. Thompson...... 1997 $325,488 $100,000 -- -- -- -- $180,000(6)
Executive Vice President 1996 $193,282(8) $ 55,000(8) -- -- -- -- $180,000(6)
and Former Senior Vice
President, Rights and
Acquisitions and
Regional Network
Operations of
Fox/Liberty Sports(8)
</TABLE>
- -------
(1) In October 1997, Mr. Ball succeeded Mr. Hill as Chief Executive Officer of
the Company.
(2) Reflects the compensation received by Mr. Hill for the services he
rendered to the Company from the Company's inception in April 1996 through
the year ended December 31, 1997. During fiscal years 1997 and 1996, Mr.
Hill was, and currently remains employed by Fox Broadcasting Company. Fox
Broadcasting Company grants the Company the right to utilize Mr. Hill's
services. The above disclosure does not include compensation information
for Mr. Hill with respect to the services he performed at Fox Broadcasting
Company. See "Certain Transactions."
(3) Reflects compensation received by Mr. Ball for services he rendered to the
Company for a portion of fiscal year 1997. The Company has been granted
the right to utilize Mr. Ball's services through March 1, 2001.
(4) Mr. Martin served as Executive Vice President and Chief Operating Officer
of Fox/Liberty Sports until June 1997.
(5) Reflects compensation received by Mr. Martin for the services he rendered
to the Company from the Company's inception in April 1996 through December
1996. During fiscal year 1996, Mr. Martin was employed by Liberty Sports,
Inc., which granted the Company the right to utilize Mr. Martin's
services. Mr. Martin became an employee of the Company on January 1, 1997.
See "Certain Transactions."
(6) In connection with the formation of the Company, a deferred compensation
incentive plan (the "Plan") with an effective date of January 1, 1996, was
approved and adopted by the Company. A substantially similar plan existed
at Liberty Sports, Inc. ("LSI"), then a subsidiary of Liberty (the "LSI
Plan"), prior to the formation of the Company. The Plan was adopted by the
Company in anticipation of certain LSI employees performing services for
the Company. Such employees, including Messrs. Martin and Thompson, were
beneficiaries under the LSI Plan. Pursuant to the Plan, deferred
compensation vests annually at a 20% rate and will be fully vested in
1998. Upon full vesting of the deferred compensation under the Plan, the
Company will have incurred charges against earnings in the amounts of
$900,000 and $540,000 with respect to Messrs. Martin and Thompson,
respectively.
(7) Mr. Thompson served as Senior Vice President, Rights and Acquisitions and
Regional Network Operations of Fox/Liberty Sports from July 1996 until
October 1997, at which time he was appointed as one of its Executive Vice
Presidents.
(8) Reflects compensation received by Mr. Thompson for the services he
rendered to the Company from the Company's inception in April 1996 through
December 1996. During fiscal year 1996 Mr. Thompson was employed by LSI,
which granted the Company the right to utilize Mr. Thompson's services.
Mr. Thompson became an employee of Fox/ Liberty Sports in 1997. See
"Certain Transactions."
The Company does not have a stock option plan and no long term compensation
awards were made in the fiscal year ended 1997, except as disclosed above.
42
<PAGE>
In October 1997, the Company adopted the Fox/Liberty Networks, LLC Equity
Appreciation Rights Plan for Management and Key Employees (the "Plan"). The
Plan is designed to provide a flexible mechanism to permit management and key
employees of the Company and its subsidiaries to obtain significant interests
in the equity of the Company, thereby increasing their proprietary interest in
the growth and success of the Company. During fiscal year 1997, grants under
the Plan have been awarded to the Named Executives as follows:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
- -----------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL PRICE APPRECIATION
UNDERLYING OPTIONS/SARS EXERCISE OF FOR OPTION TERM
OPTION/SARS TO EMPLOYEES BASE PRICE EXPIRATION ----------------------
NAME GRANTED (#) IN FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
---- ------------ -------------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Anthony F.E. Ball....... 50,100 27% $135 5/1/2006 $4,253,490 $10,779,516
James A. Martin......... 18,000 10% $135 5/1/2006 $1,528,200 $ 3,872,880
Louis LaTorre........... 18,000 10% $135 5/1/2006 $1,528,200 $ 3,872,880
Robert L. Thompson...... 9,000 5% $135 5/1/2006 $ 764,100 $ 1,936,440
</TABLE>
- --------
(1) David Hill did not receive grants during fiscal year 1997.
EMPLOYMENT ARRANGEMENTS
During fiscal years 1996 and 1997 Mr. Hill was, and currently remains,
employed by Fox Broadcasting Company, which grants the Company the right to
utilize Mr. Hill's services. For fiscal year 1997 Fox Broadcasting Company
allocated to the Company $650,000 for the services Mr. Hill rendered to
Company for that period. See "Certain Relationships and Related Transactions."
The Company entered into an agreement granting to the Company the exclusive
right to utilize Mr. Ball's services for a term of four years, which commenced
on March 1, 1997. Pursuant to the agreement, Mr. Ball renders services to the
Company and to International Sports Programming Partners ("ISPP"), the
international sports programming joint venture between News Corporation and
TCI. The agreement provides that the Company will pay a pro rata share of Mr.
Ball's compensation, based on the number of days services are provided to the
Company and its affiliates during the contract year. The portion of Mr. Ball's
salary and bonus which is allocable to the Company for fiscal year 1997 is
$325,000. Mr. Ball is eligible to participate in all employee benefit plans
available to other comparable executives of the Company, including vacation,
personal travel, and medical, disability and life insurance. The agreement
also provides for additional benefits, including the reimbursement of certain
expenses and an annual bonus similar to the bonus of comparable executives.
Further, the agreement provides that in the event of the termination of Mr.
Ball's services by the Company, the Company shall be obligated to make
payments under the agreement to pay for the balance of the term, reduced by
the amount Mr. Ball earns upon finding new employment. The agreement contains
provisions prohibiting the disclosure of confidential or proprietary
information of the Company. In addition, Mr. Ball is prohibited during the
term of the agreement and for a period of two years thereafter, from inducing
any managerial, sales or supervisory employee of the Company or its affiliates
to render services to another entity.
The Company entered into a two year employment agreement with Mr. Jeff Shell
in February 1998 which will terminate on September 30, 1999, unless the
Company exercises an option for an additional eleven month period. Although
such agreement was entered into in February 1998, it has an effective date of
September 1997. Pursuant to his employment agreement, Mr. Shell is entitled to
receive an annual salary of $330,000 for the period of September 1, 1997 to
August 31, 1998, $360,000 for the period of September 1, 1998 to September 30,
1999 and $400,000 for the period October 1, 1999 to August 31, 2000, if the
option is exercised. During 1997, Mr. Shell was
43
<PAGE>
employed with the Company under a prior employment agreement, however, during
fiscal year 1996 Mr. Shell was employed by Fox, Inc., which granted the
Company the right to utilize Mr. Shell's services as its Senior Vice
President, Finance and Development from June 1996 through December 1996.
Commencing in January 1997, Mr. Shell became an employee of the Company.
Pursuant to the current agreement, Mr. Shell is entitled to participate in all
employee benefit plans available to other comparable executives of the
Company. The agreement contains provisions prohibiting the disclosure of
confidential or proprietary information of the Company. In addition, Mr. Shell
is prohibited during the term of his employment and for a period of two years
thereafter, from inducing any managerial, sales or supervisory employee of the
Company or its affiliates to render services to another entity.
The Company entered into an employment agreement with Mr. Louis LaTorre,
which commenced on January 27, 1997 and will end on April 30, 1999. Pursuant
to the agreement, Mr. LaTorre is entitled to receive an annual base salary
will be $400,000 for the period of January 27, 1997 to April 30, 1997,
$425,000 for the period of May 1, 1997 to April 30, 1998 and $450,000 for the
period of May 1, 1998 to April 30, 1999. In addition, upon achieving certain
goals, Mr. LaTorre is entitled to receive an annual bonus (as specified in the
agreement) based on the performance of the Company, Fox/Liberty Sports and
Fox/Liberty FX. The agreement provides for additional benefits, including
vacation, medical benefits, and long-term disability. Further, the agreement
provides that in the event Mr. LaTorre is terminated without cause (as defined
in the agreement), or if the Company breaches the agreement, the Company shall
pay Mr. LaTorre an amount equal to the sum of (i) all earned but unpaid
amounts of base salary and bonuses to the date of termination, (ii) the
applicable bonus amount, if any, with respect to the year in which termination
occurs, and (iii) the lessor of (a) one year's base salary calculated at the
then prevailing rate or (b) the remaining base salary to be paid for the
balance of the term as then in effect. The agreement contains provisions
requiring Mr. LaTorre not to disclose confidential or proprietary information
of the Company. In addition, the agreement prohibits him from competing or
inducing others to compete with the Company, its subsidiaries or affiliates,
during the term of his employment and for a period of twelve months following
termination.
Fox/Liberty Sports entered into a two year employment agreement with Mr.
Tracy Dolgin which commenced on July 1, 1997. Pursuant to the agreement, Mr.
Dolgin is entitled to receive an annual salary of $500,000 for the period of
July 1, 1997 to June 30, 1998 and $537,500 for the period of July 1, 1998 to
June 30, 1999. The agreement provides for participation in all employee
benefit plans available to other comparable executives. The agreement contains
provisions prohibiting the disclosure of confidential or proprietary
information of Fox/Liberty Sports. In addition, Mr. Dolgin is prohibited
during the term of his employment and for a period of one year thereafter,
from inducing any managerial, sales or supervisory employee of Fox/Liberty
Sports or its affiliates to render services to another entity.
The Company entered into an employment agreement, as amended, with Mr.
Robert Thompson, which commenced on July 23, 1996 and extends to August 31,
1999, unless the Company exercises an option for an additional one-year
period. Pursuant to the agreement, Mr. Thompson is entitled to receive an
annual salary of $310,000 for the period of July 23, 1996 to July 22, 1997,
$330,000 for the period of July 23, 1997 to August 31, 1997, $350,000 for the
period of September 1, 1997 to August 31, 1998, $370,000 for the period of
September 1, 1998 to August 31, 1999 and $370,000, increased by an amount
equal to the percentage increase in the consumer price index, for the period
of September 1, 1999 to August 31, 2000, if the option period is exercised.
Mr. Thompson is eligible to participate in all employee benefit plans
available to other comparable executives. The agreement contains provisions
prohibiting the disclosure of confidential or proprietary information of the
Company. In addition, Mr. Thompson is prohibited during the term of his
employment and for a period of two years thereafter, from inducing any
managerial, sales or supervisory employee of the Company or its affiliates to
render services to another entity.
OPERATING AGREEMENT
The Company is a limited liability company organized under the Delaware
Limited Liability Company Act. The Company is governed by an operating
agreement (the "Operating Agreement") dated April 29, 1996 among
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its members, LMC Newco U.S., Inc. ("LMCI") (a wholly-owned subsidiary of
Liberty), Fox Regional Sports Holdings, Inc. ("FRSH") (an indirect wholly-
owned subsidiary of News America Incorporated ("NAI")) and Fox/Liberty Sports
Financing LLC (a 50%/50% Delaware limited liability company owned by each of
LMCI and NAI) (LMCI, FRSH and Fox/Liberty Sports Financing LLC are
collectively, the "Members"). See "Business--Certain Arrangements Regarding
Ownership Interests."
The Company is managed by the Members. The day-to-day activities of the
Company are directed by its officers, subject to the supervision of the
Members. The Company's chief executive officer, chief financial officer and
chief operating officer are nominated and elected by the Members of the
Company at the direction of FRSH and subject to the approval of LMCI. The
chief executive officer has the authority to select such other officers as may
be necessary or desirable to carry out the day-to-day operations of the
Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Not applicable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
FOX/LIBERTY TRANSACTION
The Company was formed on April 29, 1996, through the Fox/Liberty Joint
Venture, to own and operate programming services featuring predominantly
sports and sports-related programming for distribution in the United States.
NAI, a wholly-owned subsidiary of News Corporation, and LMCI, a wholly-owned
subsidiary of Liberty, each own 50% of the Company. The Company owns a 99%
interest in each of Fox/Liberty Sports and Fox/Liberty FX. The remaining 1%
interests in each of Fox/Liberty Sports and Fox/Liberty FX are owned by
affiliates of Fox and Liberty.
In accordance with the Fox/Liberty Joint Venture Formation and Contribution
Agreement, Fox contributed $244 million in cash, certain assets related to the
operation of a regional sports business and all of the assets and liabilities
of FX to the Fox/Liberty Joint Venture in exchange for a 50% ownership
interest. Liberty contributed its interests in the RSNs, programming assets
and rights in return for a 50% ownership interest.
Pursuant to the Fox/Liberty Joint Venture formation documents, at any time
after October 3, 2000, if the members of the Company fail to approve an annual
budget for Fox/Liberty Sports and Fox Sports RPP or Fox/Liberty FX for two
consecutive fiscal years or fail to appoint a chief executive officer of the
Company for such period, or at any time after April 20, 2002, either Fox or
Liberty may initiate a buy/sell procedure. Upon a Change of Control (as
defined in the Agreement Regarding Ownership Interests dated as of April 29,
1996, as amended, by and among Liberty, NAI, FRSH, LMCI and FX Holdings,
Inc.), the party not experiencing the Change of Control has a call option on
all the interests held by the other party.
RAINBOW TRANSACTION
On June 22, 1997, Rainbow and the Company entered into a Formation Agreement
pursuant to which they agreed to form RPP, to hold various programming
interests in connection with the operation of certain RSNs. In accordance with
the terms of the Formation Agreement, upon consummation of the Rainbow
Transaction on December 18, 1997, Rainbow contributed various interests in
RSNs to the partnership in exchange for a 60% partnership interest in RPP and
the Company contributed $850 million in cash for a 40% partnership interest in
RPP. Rainbow serves as managing partner of RPP.
Pursuant to the partnership agreement of RPP (the "RPP Agreement"), after
the third anniversary of the closing of the Rainbow Transaction, upon the
occurrence of a Buy-Out Trigger (as defined in the RPP
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Agreement), or upon the date on which Fox Sports RPP, a subsidiary of the
Company, submits a notice, pursuant to the RPP Agreement, to remove the
managing partner of RPP following a Change of Control of RPP (as defined in
the RPP Agreement), Rainbow Regional Holdings, Inc. ("RRH"), a subsidiary of
Rainbow, has the right to purchase from Fox Sports RPP all of Fox Sports RPP's
interests in RPP.
Additionally, for each of the (i) 30 days following the fifth anniversary of
the closing of the Rainbow Transaction, (ii) 30 days following each third year
anniversary of the fifth anniversary of the closing of the Rainbow Transaction
and (iii) 30 days following receipt of a notice initiating the buy-out
procedure described above, so long as RPP has not commenced an initial public
offering of its securities, RPP has the right to cause RRH, at RRH's option,
to either (i) purchase all of its interests in Fox Sports RPP or (ii)
consummate an initial public offering of RPP's securities.
In connection with the Rainbow Transaction, Rainbow National Sports
Holdings, Inc. ("RNSH"), a subsidiary of Cablevision, and Fox Sports NSP
Holdings LLC ("Fox Sports NSP"), a subsidiary of the Company, agreed to form
the National Sports Partnership to operate FSN. The National Sports
Partnership is owned 50% by RNSH and 50% by Fox Sports NSP. Fox Sports NSP is
the managing partner of the National Sports Partnership. For the 30 days
following the fifth anniversary of the closing of the Rainbow Transaction and
for the 30 days following each third year anniversary of the first anniversary
of the closing of the Rainbow Transaction, so long as the National Sports
Partnership has not consummated an initial public offering of its securities,
RNSH has the right to cause Fox Sports NSP, at Fox Sports NSP's option, to
either (i) purchase all of its interests in the National Sports Partnership or
(ii) consummate an initial public offering of the National Sports
Partnership's securities. Further, upon a Change of Control (as defined in the
Partnership Agreement of the National Sports Partnership), the party not
experiencing the Change of Control has a call option on all the interests held
by the other party.
Also in connection with the Rainbow Transaction, a subsidiary of Rainbow and
Fox Sports Ad Sales agreed to form the National Advertising Partnership to act
as the national advertising sales representative for the O&O RSNs and the RPP-
owned and managed RSNs. The National Advertising Partnership is owned 50% by a
subsidiary of Rainbow ("Rainbow Ad Sales") and 50% by Fox Sports Ad Sales. Fox
Sports Ad Sales is the managing partner of the National Advertising
Partnership.
For the 30 days following the fifth anniversary of the closing of the
Rainbow Transaction and for the 30 days following each third year anniversary
of the fifth anniversary of the closing of the Rainbow Transaction, so long as
the National Advertising Partnership has not consummated an initial public
offering of its securities, Rainbow Ad Sales has the right to cause Fox Sports
Ad Sales, at Fox Sports Ad Sales' option, to either (i) purchase all of its
interests in the National Advertising Partnership or (ii) consummate an
initial public offering of the National Advertising Partnership's securities.
Further, upon a Change of Control (as defined in the Partnership Agreement of
the National Advertising Partnership), the party not experiencing the Change
of Control has a call option on all the interests held by the other party.
OTHER TRANSACTIONS
Under agreements with the Company in connection with its formation, Fox,
Liberty, and their respective affiliates provide technical, administrative,
financial, treasury, accounting, tax, legal and other services to the Company
and may make available certain of their respective employee benefit plans to
officers and other employees of the Company. To date, except as disclosed
below, the charges for any such services have been immaterial. In addition,
Fox, Liberty, and their respective affiliates, and the Company have entered
into a number of intercompany agreements covering matters such as lending
arrangements, tax sharing, and the use of trade names and service marks by the
Company. To date, except as disclosed below, the charges for any such
arrangements have been immaterial. The terms of many of these agreements were
not the result of arms' length negotiation. See "Business."
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The Company, News Corporation, TCI and Cablevision, through their respective
subsidiaries and affiliates, each own or have interests in television
programming entities. The presence of all such companies in the television
programming business could give rise to potential conflicts of interest
between them, including conflicts which may arise with respect to business
dealings between them and when more than one of them may be pursuing the same
business opportunity. Although News Corporation and TCI have agreed to conduct
all of their future cable television sports programming activities in the
United States through the Company so long as they both maintain their
interests therein, Cablevision is not contractually obligated to do so, and
such arrangements between News Corporation and TCI may be waived or modified
at any time without the Company's consent.
The Company has had, and continues to have, a close strategic relationship
with News Corporation and certain of its subsidiaries and affiliates,
including Fox Broadcasting Company ("Fox Broadcasting"), and believes that
this relationship is materially important to its business and business
strategies. However, except as may be provided in the agreements between them,
or in the agreements between News Corporation and TCI, or their respective
subsidiaries or affiliates, which are discussed elsewhere in this report,
neither News Corporation or its subsidiaries and affiliates, nor the Company
are obligated to engage in any business transactions or jointly participate in
any opportunities with the other, and the possibility exists that the current
strategic relationships between the parties could materially change in the
future.
The Company is currently utilizing three transponders it subleases from
WTCI, a subsidiary of TCI and one transponder it subleases from Fox
Broadcasting. The rental payment for the three transponders subleased from
WTCI is approximately $270,000 per month and the rental payment for the
transponder subleased from Fox Broadcasting is $125,000 per month. Two of the
WTCI subleases expire on December 31, 1999 and the remaining WTCI sublease
expires on December 31, 2000. The Fox Broadcasting sublease expires May 30,
1999. In addition, the Company currently subleases one transponder to each of
Fox News Channel, FXM and Fox Sports International (all of which are
affiliates of Fox). The monthly rental payment paid to the Company pursuant to
each of these subleases is $185,000, $135,000 and $98,500 respectively. The
Company believes that the sublease arrangements described above are on terms
no less favorable than could have been obtained from an unaffiliated third
party. See "Business--Satellite Distribution."
Fox Broadcasting Company and certain affiliates render marketing, public
relations, promotional, management and other business services to the Company
for which the Company pays an allocated fee. The expenses recognized by the
Company for the provision of the above services for the eight months ended
December 31, 1996 and the year ended December 31, 1997 were approximately
$1,184,900 and $1,706,100, respectively. Included in these amounts are
salaries, benefits and other related costs charged to the Company in
connection with the services rendered to it by Mr. Hill and other individuals.
Certain individuals, including Messrs. Martin, Shell and Thompson, rendering
services to the Company for the eight months ended December 31, 1996 were
employed by either News Corporation or its affiliates or TCI or its
affiliates. Compensation and benefits paid to such individuals and related
payroll costs were charged to the Company at cost. In addition, Fox, Inc.
provides legal services to the Company, for which the Company pays an
allocated fee. There was no expense recognized by the Company for the
provision of legal services for the eight months ended December 31, 1996. For
the year ended December 31, 1997 the expense recognized by the Company for the
provision of legal services was approximately $300,000. Similarly, the Company
and certain of its affiliates provide production, programming, accounting,
legal, marketing, public relations, promotional, management and other business
services to an affiliate of Fox Broadcasting Company. The charges for these
services to this affiliate for the eight months ended December 31, 1996 and
the year ended December 31, 1997 were approximately $750,000 and $1,000,000,
respectively. The Company believes that all of the above-described
arrangements are on terms no less favorable to the Company than could have
been obtained from unaffiliated third parties. See "Directors and Executive
Officers of the Company" and "Executive Compensation."
Fox Broadcasting Company and certain of its affiliates provide production
facilities, production and post production related services and technical
operations to the Company in connection with the Company's
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<PAGE>
production of Fox Sports News and other original programming. The services are
provided at competitive market rates and the Company believes that the
arrangements are on terms no less favorable than could have been obtained from
an unaffiliated third party. Expenses related to these services for the eight
months ended December 31, 1996 and the year ended December 31, 1997 were
approximately $8,545,000 and $20,416,800, respectively.
Fox, Inc. and its affiliates collect certain revenues and pay certain
expenses on behalf of the Company. The Company charges interest to Fox, Inc.
on amounts due the Company which have been collected by Fox, Inc., and, in
turn, Fox, Inc. and its affiliates charge interest to the Company on amounts
paid by Fox, Inc. in connection with expenses of the Company. All interest
rates pursuant to these arrangements are at market rate. Interest income
recognized by the Company for the eight month period ended December 31, 1996
and the year ended December 31, 1997 was approximately $785,500 and
$2,719,100, respectively, and interest expense incurred by the Company during
these periods was $451,300 and $1,569,600, respectively.
Certain of the O&O RSNs have entered into affiliation agreements with
various MSOs and/or individual cable systems which are either owned or
operated by TCI. For the eight months ended December 31, 1996 and the year
ended December 31, 1997 revenue recognized from such MSOs and/or individual
cable systems pursuant to these affiliation agreements was approximately
$28,788,000 and $43,687,400, respectively. FX has also entered into
affiliation agreements with various MSOs and/or individual cable systems which
are either owned or operated by TCI. For the eight months ended December 31,
1996 and the year ended December 31, 1997 revenue recognized from such MSOs
and/or individual cable systems pursuant to these affiliation agreements was
approximately $21,388,000 and $41,720,300, respectively. The Company believes
that all of the above described affiliation agreements contain terms no less
favorable than could have been obtained from an unaffiliated third party.
Twentieth Century Fox Film Corporation and its affiliates purchase
advertising time which is shown during the Company's programming. The
advertising revenues recognized for the eight months ended December 31, 1996
and for the year ended December 31, 1997 were approximately $408,200 and
$1,213,100, respectively.
The Company licenses television and feature film programming from Twentieth
Century Fox and affiliates. Expense recognized by the Company related to
program rights amortization for the eight months ended December 31, 1996 and
the year ended December 31, 1997 was approximately $7,624,000 and $17,963,000,
respectively. Additionally, the Company has a non exclusive, royalty-free
license from Twentieth Century Fox Film Corporation and Fox Broadcasting
Company to use the "FOX" brand name and certain related artwork in connection
with the Company's business.
The Company leases its corporate facilities in Los Angeles from New World
Communications Group Incorporated, an indirect wholly-owned subsidiary of News
Corporation. The Company has the ability to increase office space in this
facility as the need arises. As of December 31, 1997 the Company rented a
total of 62,605 square feet at a rental rate of $4.18 per square foot per
month for a total of $261,689. Commencing on December 1, 1997, the Company
began sub-leasing 22,869 square feet of office space in New York from News
Corporation. Pursuant to this sublease, the Company has also subleased back to
News Corporation 7,368 square feet at the same rate. The net monthly rental
for the New York office space is approximately $50,120. See "Properties."
The Company and International Family Entertainment, Inc. ("IFE"), a related
party, are currently in discussions regarding potential transactions pursuant
to which the Company would acquire from an affiliate of IFE a 72% profits
interest and an 80% capital interest in Fit TV Partnership ("Fit TV"), a
Delaware general partnership, which develops health and fitness related
programming, and would acquire from another affiliate of IFE a 20% interest in
Body by Jake Enterprises, L.L.C., a Delaware limited liability company, which
markets related products. If such transactions are consummated, the aggregate
amount payable by the Company to IFE's affiliates for such interest would be
approximately $15 million. In addition, the Company is acquiring a 10%
interest in Fit TV from each of an affiliate of Liberty and an affiliate of
Reebok International Limited, each for a purchase price of approximately $1.8
million.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The Following documents are filed as part of this Annual Report on Form
10-K for the fiscal year ended December 31, 1997.
1.Financial Statements:
Financial Statements to this form are listed in the "Index to
Consolidated Financial Statements" at page F-1.
2.Schedules:
Financial statement schedules to this form are listed in the
"Index to Consolidated Financial Statements" at page F-1 herein.
3.Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
3.1* Certificate of Formation of Fox/Liberty Networks, LLC (f/k/a
Liberty/Fox U.S. Sports LLC), as amended.
4.1* Form of Notes (included in Exhibits 4(b) & 4(c)).
4.2* Senior Notes Indenture, dated as of August 25, 1997 (the "Senior
Notes Indenture"), among Fox/Liberty Networks, LLC and FLN
Finance, Inc. as co-obligors, and the Bank of New York, as
Trustee.
4.3* Senior Discount Notes Indenture, dated as of August 25, 1997 (the
"Senior Discount Notes Indenture"), among Fox/Liberty Networks,
LLC and FLN Finance, Inc., as co-obligors and The Bank of New
York, as Trustee.
4.4* Senior Notes Registration Rights Agreement, dated as of August 25,
1997, among Fox/Liberty Networks, LLC and FLN Finance, Inc., as
Issuers and Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Bear, Stearns & Co. Inc., as Initial Purchasers.
4.5* Senior Discount Notes Registration Rights Agreement, dated as of
August 25, 1997, among Fox/Liberty Networks, LLC and FLN Finance,
Inc., as Issuers and Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Bear, Stearns & Co. Inc., as Initial Purchasers.
4.6* Senior Notes Liquidated Damages Agreement, dated as of August 25,
1997, among Fox/Liberty Networks, LLC and FLN Finance, Inc., as
Issuers and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated and Bear, Stearns & Co. Inc., as Initial
Purchasers.
4.7* Senior Discount Notes Liquidated Damages Agreement, dated as of
August 25, 1997, among Fox/Liberty Networks, LLC and FLN Finance,
Inc., as Issuers and Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Bear, Stearns & Co. Inc., as
Initial Purchasers. Senior Notes Deposit Agreement, dated as of
August 25, 1997, among Fox/Liberty Networks, LLC and FLN Finance,
Inc., and The Bank of New York, as Securities Intermediary and as
Trustee.
4.8* Senior Notes Deposit Agreement, dated as of August 25, 1997, among
Fox/Liberty Networks, LLC and FLN Finance, Inc., and The Bank of
New York, as Securities Intermediary and as Trustee.
4.9* Senior Discount Notes Deposit Agreement, dated as of August 25,
1997, among Fox/Liberty Networks, LLC and FLN Finance, Inc., and
The Bank of New York, as Securities Intermediary and as Trustee.
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
10.1(a)* Agreement Regarding Ownership Interests, dated April 29, 1996, by
and among Liberty Media Corporation, News America Holdings
Incorporated, Fox Regional Sports Holdings, Inc., LMC Newco U.S.,
Inc., and Liberty/Fox Sports Financing LLC.
(b)* First Amended and Restated Agreement Regarding Ownership
Interests, dated as of December 15, 1997, by and among Liberty
Media Corporation, News America Holdings Incorporated, Fox
Regional Sports Holdings, Inc., LMC Newco U.S., Inc., and
Liberty/Fox
10.2* Operating Agreement of Fox Sports RPP Holdings, LLC, dated June
20, 1997, by and among Fox/Liberty Networks LLC, Liberty Sports
Member, Inc. and Fox Regional Sports Member, Inc.
10.3* Operating Agreement of FX Networks, LLC (f/k/a Liberty/Fox FX
Operations LLC), dated April 29, 1996, by and among Liberty/Fox
U.S. Sports LLC, Liberty FX, Inc. and FX Holdings, Inc.
10.4(a)* Operating Agreement of Fox/Liberty Networks, LLC (f/k/a
Liberty/Fox U.S. Sports LLC), dated April 29, 1996, by and among
LMC Newco U.S., Inc., Fox Regional Sports Holdings, Inc. and
Liberty/Fox Sports Financing LLC.
(b)* First Amended and Restated Operating Agreement of Fox/Liberty
Networks, LLC, dated December 15, 1997 by and among LMC Newco
U.S., Inc., Fox Regional Sports Holdings, Inc. and Liberty/Fox
Sports Financing LLC.
10.5* Operating Agreement of Fox Sports Net, LLC (f/k/a Liberty/Fox
Regional Sports LLC), dated April 29, 1996, by and among
Liberty/Fox U.S. Sports LLC, Liberty Sports Member, Inc. and Fox
Regional Sports Member, Inc.
10.6* Formation Agreement, dated June 22, 1997, among Rainbow Media
Sports Holdings, Inc. and Fox Sports Net, LLC.
10.7* Form of General Partnership Agreement of Regional Programming
Partners between Rainbow Regional Holdings, Inc. and Fox Sports
RPP Holdings, LLC.
10.8* Form of General Partnership Agreement of National Sports Partners
between Rainbow National Sports Holdings, Inc. and Fox Sports
National Holdings, LLC.
10.9* Form of General Partnership Agreement of National Advertising
Partners between Rainbow Advertising Holdings, Inc. and Fox
Sports Ad Sales Holdings, LLC.
10.10(a)* Credit Agreement, dated as of September 12, 1997, among Fox
Sports Net, LLC and FX Networks, LLC, as Borrowers, and
Fox/Liberty Networks, LLC and Subsidiary Guarantors, as
Guarantors, and The Chase Manhattan Bank, as Administrative
Agent, and Chase Securities Inc., as Syndication Agent, and TD
Securities (USA) Inc., as Documentation Agent.
(b)* Form of Amendment and Restated Credit Agreement, among Fox Sports
Net, Networks, LLC and Fox Sports RPP Holdings, LLC, as
Borrowers, and Fox Networks, LLC and The Chase Manhattan Bank, as
Administrative Agent a Securities Inc., as Syndication Agent, and
TD Securities (USA) Inc., as Documentation Agent.
10.11*+ Employment Agreement among Fox/Liberty Networks, LLC, Anthony
F.E. Ball and T Entertainment Limited, dated April, 1997.
10.12+ Employment Agreement between Fox/Liberty Networks, LLC (f/k/a
Liberty/Fox U.S. Sports LLC) and Jeff Shell, dated February 4,
1998.
10.13*+ Employment Agreement between Fox/Liberty Networks, LLC and Louis
LaTorre, dated January 27, 1997.
10.14*+ Employment Agreement between Fox/Liberty Networks, LLC and Robert
L. Thompson, dated July 25, 1996, as amended on September 26,
1997.
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
10.15*+ Employment Agreement between Fox Sports Net, LLC and Tracy Dolgin,
dated as of July 1, 1997.
10.16++ Fox/Liberty Networks, LLC Equity Appreciation Rights Plan for
Management and Key Employees, effective as of May 1, 1996.
21 Subsidiaries of Registrant.
27 Financial Data Schedule.
</TABLE>
- --------
* Incorporated by reference to the Company's Registration Statement on Form S-
4, as amended (File No. 333-38689).
+ Denotes an employment contract.
++ Denotes a compensation plan.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the last quarter of the period
covered by this report.
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SIGNATURES
PURSUANT TO THE REQUIREMENT OF SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNDER DULY AUTHORIZED.
FOX/LIBERTY NETWORKS, LLC
Dated: March 31, 1998 /s/ Jeff Shell
By: _________________________________
JEFF SHELL
EXECUTIVE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON
THE DATES STATED:
SIGNATURE TITLE DATE
/s/ Anthony F.E. Ball President and Chief March 31,
_____________________________________ Executive Officer 1998
ANTHONY F.E. BALL (Principal Executive
Officer)
/s/ Jeff Shell Executive Vice March 31,
_____________________________________ President and Chief 1998
JEFF SHELL Financial Officer
(Principal Financial
Officer and Principal
Accounting Officer)
LMC Newco U.S., Inc. Member of Fox/Liberty March 31,
Networks, LLC 1998
/s/ David J.A. Flowers
By: _________________________________
DAVID J.A. FLOWERS, VICE PRESIDENT
Fox Regional Sports Holdings, Inc. Member of Fox/Liberty March 31,
Networks, LLC 1998
/s/ Jay Itzkowitz
By: _________________________________
JAY ITZKOWITZ, SENIOR VICE PRESIDENT
Liberty/Fox Sports Financing, LLC Member of Fox/Liberty March 31,
Networks, LLC 1998
By: LMC Newco U.S., Inc. Member of Liberty/Fox March 31,
Sports Financing, LLC 1998
/s/ David J.A. Flowers
By: _________________________________
DAVID J.A. FLOWERS, VICE PRESIDENT
52
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SIGNATURE TITLE DATE
By: News America Incorporated Member of Liberty/Fox March 31,
Sports Financing, LLC 1998
/s/ Jay Itzkowitz
By: _________________________________
JAY ITZKOWITZ, SENIOR VICE
PRESIDENT
53
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FOX/LIBERTY NETWORKS, LLC
INDEX TO
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
FOX/LIBERTY NETWORKS, LLC
<S> <C>
Consolidated Financial Statements....................................... F-2
Report of Independent Public Accountants................................ F-3
Consolidated Balance Sheets as of December 31, 1997 and December 31,
1996................................................................... F-4
Consolidated Statements of Operations for the year ended December 31,
1997 and the eight months ended December 31, 1996...................... F-5
Consolidated Statements of Shareholder's Equity for the year ended
December 31, 1997 and the eight months ended December 31, 1996......... F-6
Consolidated Statements of Cash Flows for the year ended December 31,
1997 and the eight months ended December 31, 1996...................... F-7
Notes to Consolidated Financial Statements.............................. F-8
LIBERTY SPORTS, INC. AND SUBSIDIARIES--DOMESTIC OPERATIONS
Financial Statements.................................................... F-22
Independent Auditors' Report............................................ F-23
Combined Balance Sheet as of December 31, 1995.......................... F-24
Combined Statements of Operations and Equity for the period January 1,
1996 to April 29, 1996 and the years ended December 31, 1994 and 1995.. F-25
Combined Statements of Cash Flows for the period January 1, 1996 to
April 29, 1996 and the years ended December 31, 1994 and 1995.......... F-26
Notes to Combined Financial Statements.................................. F-27
FX NETWORKS, LLC
Financial Statements.................................................... F-36
Report of Independent Public Accountants................................ F-37
Balance Sheet as of June 30, 1995....................................... F-38
Statements of Operations for the ten months ended April 29, 1996, the
four months ended April 29, 1996 (unaudited), the year ended June 30,
1995 and the period from inception (July 1, 1993) to June 30, 1994..... F-39
Statements of Accumulated Deficit for the period from inception (July 1,
1993) to June 30, 1994, and the year ended June 30, 1995............... F-40
Statements of Cash Flows for the ten months ended April 29, 1996, the
four months ended April 29, 1996 (unaudited), the year ended June 30,
1995 and the period from inception (July 1, 1993) to June 30, 1994..... F-41
Notes to Financial Statements........................................... F-42
LIBERTY/FOX ARC, L.P.
Consolidated Financial Statements....................................... F-45
Consolidated Balance Sheet as of December 31, 1996 (unaudited).......... F-46
Consolidated Statement of Operations for the period from Inception
(April 30, 1996) to
December 31, 1996 (unaudited).......................................... F-47
Statement of Shareholders' Equity for the period from Inception (April
30, 1996) to
December 31, 1996 (unaudited).......................................... F-48
Consolidated Statement of Cash Flows for the period from Inception
(April 30, 1996) to
December 31, 1996 (unaudited).......................................... F-49
Notes to Consolidated Financial Statements.............................. F-50
REGIONAL PROGRAMMING PARTNERS
Consolidated Financial Statements....................................... F-57
Report of Independent Public Accountants................................ F-58
Consolidated Balance Sheet as of December 31, 1997...................... F-59
Statement of Operations for the period from December 18, 1997 to
December 31, 1997...................................................... F-60
Statement of Changes in Partners' Equity from December 18, 1997 to
December 31, 1997...................................................... F-61
Statement of Cash Flows for the period from December 18, 1997 to
December 31, 1997...................................................... F-62
Notes to Consolidated Financial Statements.............................. F-63
CONDENSED FINANCIAL STATEMENTS OF THE COMPANY ON SCHEDULE
Report of Independent Public Accountants on Schedule.................... S-2
Schedule I--Balance Sheets as of December 31, 1997 and 1996............. S-3
Schedule I--Statements of Operations for the periods ended December 31,
1997 and 1996.......................................................... S-4
Schedule I--Statements of Cash Flows for the periods ended December 31,
1997 and 1996.......................................................... S-5
</TABLE>
F-1
<PAGE>
FOX/LIBERTY NETWORKS, LLC
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996
WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Shareholders of
Fox/Liberty Networks, LLC:
We have audited the accompanying consolidated balance sheets of FOX/LIBERTY
NETWORKS, LLC and subsidiaries, a Delaware limited liability company (the
"Company") as of December 31, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the year
ended December 31, 1997 and the period from inception (April 30, 1996) to
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Fox/Liberty Networks, LLC and subsidiaries as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for the year ended
December 31, 1997 and the period from inception to December 31, 1996 in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Los Angeles, California
February 20, 1998
F-3
<PAGE>
FOX/LIBERTY NETWORKS, LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
---------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 49,560 $ 7,964
Trade and other receivables, net of allowance for
doubtful accounts of $1,714 and $957 at December 31,
1997 and 1996......................................... 136,661 65,313
Receivables from equity affiliates, net................ 37,858 33,800
Program rights......................................... 50,373 28,942
Notes receivable, current.............................. 3,376 2,829
Prepaid expenses and other current assets.............. 7,886 1,292
---------- --------
Total current assets................................. 285,714 140,140
Property and equipment, net.............................. 46,531 23,333
Investments in affiliates................................ 850,201 77,699
Note receivable, long-term............................... 4,432 3,800
Program rights........................................... 78,110 17,511
Excess cost, net of accumulated amortization of $72,170
and $5,340 at December 31, 1997 and 1996................ 510,104 347,239
Other assets............................................. 42,666 1,260
---------- --------
Total Assets......................................... $1,817,758 $610,982
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.................. $ 176,241 $100,217
Program rights payable................................. 23,232 25,519
Current portion of long-term debt...................... 80,216 26,410
Accrued interest....................................... 17,413 2,208
Other current liabilities.............................. 11,515 3,459
---------- --------
Total current liabilities............................ 308,617 157,813
Non-current program rights payable....................... 110,693 78,135
Long-term debt, net of current portion................... 1,246,291 145,304
Minority interest........................................ (114) (998)
Commitments and contingencies
Shareholders' equity..................................... 152,271 230,728
---------- --------
Total Liabilities and Shareholders' Equity........... $1,817,758 $610,982
========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE>
FOX/LIBERTY NETWORKS, LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30 TO
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Revenues:
Programming........................................ $226,469 $ 85,288
Advertising........................................ 117,874 37,685
Direct broadcast................................... 91,663 5,711
Infomercial........................................ 16,420 4,261
Merchandising...................................... -- 3,226
Other.............................................. 19,366 8,621
-------- ---------
471,792 144,792
-------- ---------
Expenses:
Operating.......................................... 420,888 117,445
Additional amortization of program rights.......... -- 80,000
General and administrative......................... 65,558 31,609
Depreciation and amortization...................... 18,968 8,507
-------- ---------
505,414 237,561
-------- ---------
Operating loss....................................... (33,622) (92,769)
-------- ---------
Other (income) expenses:
Interest, net...................................... 34,142 3,819
Subsidiaries' income tax expense, net.............. (1,590) 3,437
Loss on sale of assets............................. -- 4,913
Equity loss (income) of affiliates, net............ 9,018 (16,976)
Equity in loss of affiliates related to additional
amortization of program rights.................... -- 29,000
Other.............................................. 401 --
Minority interest.................................. 2,864 187
-------- ---------
44,835 24,380
-------- ---------
Net loss............................................. $(78,457) $(117,149)
======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
FOX/LIBERTY NETWORKS, LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE PERIODS ENDED DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOX/LIBERTY FOX REGIONAL TOTAL
LMC NEWCO FINANCING, SPORTS SHAREHOLDERS'
US, INC. LLC HOLDINGS, INC. EQUITY
--------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
BALANCE, APRIL 30, 1996..... $ 8,000 $243,577 $ 96,300 $ 347,877
(representing the initial
contributions of the
shareholders)
Net loss.................. (36,132) (44,885) (36,132) (117,149)
-------- -------- -------- ---------
BALANCE, DECEMBER 31, 1996.. (28,132) 198,692 60,168 230,728
Net loss.................. (24,199) (30,059) (24,199) (78,457)
-------- -------- -------- ---------
BALANCE, DECEMBER 31, 1997.. $(52,331) $168,633 $ 35,969 $ 152,271
======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
FOX/LIBERTY NETWORKS, LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30 TO
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................... $ (78,457) $(117,149)
Adjustments to reconcile net loss to net cash (used
in) provided by operating activities:
Additional amortization of program rights........ -- 80,000
Depreciation and amortization.................... 18,968 8,507
Interest accretion and amortization of debt issu-
ance costs...................................... 9,431 --
Loss on sale of assets........................... -- 4,913
Equity loss (income) of affiliates............... 9,018 (16,976)
Equity in loss of affiliates related to addi-
tional amortization............................. -- 29,000
Minority interests............................... 2,864 187
Changes in operating assets and liabilities:
Trade and other receivables...................... (47,296) (8,029)
Program rights................................... (77,266) (3,205)
Prepaid expenses and other operating assets...... (10,715) (239)
Accounts payable and accrued expenses............ 51,462 33,939
Program rights payable........................... 26,749 (1,149)
Other operating liabilities...................... 18,517 4,512
---------- ---------
Net cash (used in) provided by operating activ-
ities......................................... (76,725) 14,311
---------- ---------
Cash flows from investing activities:
Advances from equity affiliates.................... 102,497 56,666
Advances to equity affiliates...................... (106,555) (78,651)
Notes receivable collected from (issued to) third
parties........................................... 540 (1,700)
Purchases of property and equipment................ (31,321) (11,202)
Distributions from equity affiliates............... 4,704 563
Investments in equity affiliates................... (857,325) (4,046)
Purchase of program rights and related assets...... (45,000) --
Cash sold upon sale of merchandising assets........ -- (429)
---------- ---------
Net cash used in investing activities.......... (932,460) (38,799)
---------- ---------
Cash flows from financing activities:
Cash overdraft, included in accounts payable....... -- 2,133
Borrowings of long-term debt....................... 1,720,078 48,448
Repayment of long-term debt........................ (648,960) (24,800)
Deferred debt issuance costs....................... (18,357) --
Distribution to minority shareholder of subsidiary. (1,980) (600)
---------- ---------
Net cash provided by financing activities...... 1,050,781 25,181
---------- ---------
Net increase in cash and cash equivalents............ 41,596 693
Cash and cash equivalents, beginning of period....... 7,964 7,271
---------- ---------
Cash and cash equivalents, end of period............. $ 49,560 $ 7,964
========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
FOX/LIBERTY NETWORKS, LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(1) ORGANIZATION
Fox/Liberty Networks, LLC (the "Company"), a Delaware limited liability
company, was formed in April 1996, to own and operate programming services
featuring predominantly sports and sports related programming, as well as a
national general entertainment programming service.
The Company's shareholders as of December 31, 1997 and 1996, were:
<TABLE>
<CAPTION>
INTEREST
--------
<S> <C>
LMC Newco U.S., Inc. ("LMCI")...................................... 30.843%
(a wholly-owned subsidiary of Liberty Sports, Inc. ("LSI"), a
wholly-owned subsidiary of Liberty Media Corporation ("LMC"))
Fox Regional Sports Holdings, Inc. ("FRSH")........................ 30.843%
(a wholly-owned subsidiary of Fox, Inc. ("Fox"), a wholly-owned
subsidiary of News America Incorporated ("NAI"))
Fox/Liberty Sports Financing LLC................................... 38.314%
(50% owned by each of LMCI and NAI)
-------
100.000%
=======
</TABLE>
Liberty Sports, Inc. (a predecessor operation) contributed its interest in
regional sports programming businesses (which then operated under the name
"Prime Sports"), interests in non-managed sports businesses, satellite
distribution services and technical facilities. Fox and its subsidiaries
contributed cash, all of its assets and liabilities in the FX cable network (a
predecessor operation), and certain assets related to regional sports
programming.
(2) SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The accompanying consolidated financial statements include the operations of
the Company and those majority-owned subsidiaries and entities for which there
is a controlling voting interest. All significant intercompany accounts and
transactions have been eliminated in consolidation. The subsidiaries
consolidated include the following intermediary holding companies (and their
subsidiaries):
Fox Sports Net, LLC, which is comprised of the following:
--Liberty/Fox West LLC --Liberty/Fox ARC LP
--Liberty/Fox Central --Liberty/Fox Southeast LLC
Services LLC --Liberty/Fox Utah LLC
--Liberty/Fox Northwest LP --Liberty/Fox Arizona LLC
--Liberty/Fox Sunshine LLC --Fox/Liberty Network
--Fox Sports Detroit, LLC Programming LLC
FX Networks, LLC
Fox Sports RPP Holdings, LLC
F-8
<PAGE>
FOX/LIBERTY NETWORKS, LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
On March 13, 1997, upon the acquisition of the remaining interests in
Affiliated Regional Communications, Ltd. and affiliates ("ARC") by Liberty/Fox
ARC LP, the Company assumed management control of the consolidated
subsidiaries of Liberty/Fox ARC LP, and from that date the consolidated
subsidiaries of ARC and their operations were consolidated.
In September 1997, Fox Sports Detroit, LLC a majority-owned subsidiary of
the Company, was formed for the purpose of providing sports and sports related
programming in the Detroit, Michigan area (See Note 3).
In December 1997, the Company consummated a transaction with Rainbow Media
Sports Holdings, Inc. ("Rainbow"), a subsidiary of CSC Holdings, Inc.
(formerly Cablevision Systems Corporation) ("Cablevision"), pursuant to which
(i) Fox Sports RPP Holdings, LLC was formed to hold an interest in Regional
Programming Partners ("RPP"), which in turn was formed to hold interests in
Rainbow's existing regional sports networks ("RSN's") and certain other
businesses, (ii) National Sports Partners ("NSP") was formed to operate Fox
Sports Net ("FSN") a national programming service, and (iii) National
Advertising Partners ("NAP") was formed to act as the national advertising
sales representative for the RSNs which are affiliated with FSN. The Company
contributed $850,000 for its 40 percent interest in RPP, which exceeded its
equity in the underlying net assets of RPP by an amount initially estimated to
be $334,472 (See Note 6(b)). Purchase accounting will be completed within the
timeframe allowed by Accounting Principles Board Opinion No. 16 "Business
Combinations." Had the investment occurred at the beginning of the year ended
December 31, 1997 (January 1, 1997) and the eight month period December 31,
1996 (April 30, 1996), pro-forma net loss would have increased by $2,234 and
$9,099, respectively. The pro-forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the investment occurred on the dates
indicated, or which may result in the future.
(b) Cash Equivalents
Cash equivalents consist of short-term investments with an original maturity
of less than 90 days. The carrying amounts of cash and cash equivalents
approximate their fair values due to their short maturities. The Company had
cash equivalents of $22,444 and $6,989 at December 31, 1997 and 1996,
respectively.
(c) Program Rights
The Company has multi-year contracts for the cable telecast rights of
syndicated entertainment programs and sporting events. Pursuant to these
contracts, an asset is recorded for the rights acquired and a liability is
recorded for the obligation incurred, at the gross amount of the liability
when the programs or sporting events are available for telecast. Program
rights for entertainment programs are amortized over the term of the contract
using the straight-line method. Program rights for sporting events which are
for a specified number of games are amortized on an event-by-event basis, and
those which are for a specified season are amortized over the term of the
season on a straight-line basis.
At the inception of these contracts and periodically thereafter, the Company
evaluates the recoverability of the costs associated therewith against the
advertising revenues directly associated with the program material and related
expenses. Where an evaluation indicates that a multi-year contract will result
in an ultimate loss, additional amortization is provided to currently
recognize that loss.
The Company and its predecessor, Liberty Sports, Inc., have entered into or
committed to contracts for program rights to telecast college football and
Major League Baseball games, respectively. In 1996, the Company
F-9
<PAGE>
FOX/LIBERTY NETWORKS, LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
performed an in-depth evaluation and determined that these contracts would
produce losses over the term of the respective contracts. Accordingly, the
Company and its affiliates recorded $109,000 in additional amortization
related to these contracts during the period from inception (April 30, 1996)
to December 31, 1996.
(d) Property and Equipment
Property and equipment are stated at cost, which includes acquisition costs
allocated to tangible assets acquired. Depreciation and amortization for
financial statement purposes are provided using the straight-line method over
an estimated useful life of five to ten years.
(e) Other Assets
At December 31, 1997 other assets included $17,896 of debt issuance costs
related to the issuance of Senior Notes and Senior Discount Notes (the
"Notes"--See Note 7(d)). These costs are amortized using the effective
interest method over the term of the Notes. Amortization expense was $461 for
the year ended December 31, 1997 and is included in interest expense.
(f) Income Taxes
No provision has been made for federal, state or foreign income taxes, as
the liability for such income taxes is the responsibility of the shareholders.
(g) Investments in Affiliates
The consolidated financial statements include the operations of subsidiary
companies more than 50% owned. Investments in and advances to affiliates in
which the Company has a substantial ownership interest of approximately 20 to
50 percent, or for which the Company owns more than 50% but does not control
policy decisions, are accounted for by the equity method. Under this method of
accounting, the original investment is increased or decreased by the Company's
share of income or losses and dividends.
Partnerships in which the Company acts as a limited partner, but in which
the third party general partner exercises management control, are not
consolidated regardless of the ownership interest. If these investments meet
the conditions outlined in the paragraph above then the partnerships are
accounted for under the equity method.
(h) Excess Cost
Excess cost represents the difference between the cost of acquiring
programming entities and amounts assigned to their tangible and intangible
assets. Such amounts are amortized on a straight-line basis over 40 years.
Amortization expense was $11,776 and $5,241 for the year ended December 31,
1997 and the period from inception (April 30, 1996) to December 31, 1996,
respectively.
The Company periodically reviews the propriety of the carrying amount of its
excess cost as well as the related amortization period to determine whether
current events or circumstances warrant adjustments to the carrying value
and/or the estimates of useful lives. This evaluation consists of the
Company's projection of undiscounted operating cash flows over the remaining
lives of the excess cost. Based on its review, the Company believes that no
significant impairment of its excess cost has occurred.
F-10
<PAGE>
FOX/LIBERTY NETWORKS, LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(i) Revenue
Revenue from programming represents monthly subscriber fees received from
cable system operators and is recognized as earned. Advertising revenue is
recognized upon airing of commercials. The Company has sold advance
subscriptions to its direct broadcast satellite customers. Such amounts are
amortized to revenue monthly as revenue is earned. Infomercial revenue is
recognized when the program is aired.
(j) Non-Monetary Transactions
The Company trades commercial advertising spots in return for other
services, primarily programming. These trades are recorded at the fair value
of the asset surrendered or the fair value of the asset obtained, whichever is
more clearly evident. These transactions resulted in the recording of
approximately $8,539 and $2,512 in both advertising revenue and programming
expenses during the year ended December 31, 1997 and the period from inception
(April 30, 1996) to December 31, 1996.
(k) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements, and the reported amounts of revenues and
expenses during the reporting period. Because of the use of estimates inherent
in the financial reporting process, actual results could differ from those
estimates.
(l) Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement No.
121 (the "Statement") on accounting for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to assets to be held and
used. The Statement also establishes accounting standards for long-lived
assets and certain identifiable intangibles to be disposed of. The Company
adopted the Statement from inception (April 30, 1996). See Note 2(h) for the
policy on excess cost.
(m) New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which is effective for the year ended December 31,
1998. This statement establishes standards for the reporting and display of
comprehensive income and its components in financial statements and thereby a
measure of all changes in equity of an enterprise that result from
transactions and other economic events other than transactions with owners.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information," which is effective for the year ended
December 31, 1998. This statement changes the requirements under which
publicly held companies report disaggregated information.
The Company will adopt these statements on their respective dates.
Management of the Company does not expect that the adoption of these
statements will have a material impact on the financial statements.
F-11
<PAGE>
FOX/LIBERTY NETWORKS, LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(3) SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental disclosure of cash flow information and non-cash investing and
financing activities for the period from inception (April 30, 1996) to
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------
ACQUISITION DISPOSAL
-------------------------- ----------------
PRIME SPORTS
NORTHWEST(A) SPORTSOUTH(B) MERCHANDISING(C) TOTAL
------------ ------------- ---------------- --------
<S> <C> <C> <C> <C>
Fair value of net assets
acquired/(disposed):
Cash.................. $ 1,328 $ 3,626 $ (429) $ 4,525
Accounts receivable... 4,663 10,691 (600) 14,754
Prepaid program
rights............... 425 -- -- 425
Prepaid expenses and
other current assets. 304 84 (10) 378
Inventory............. -- -- (3,064) (3,064)
Investment............ -- (2,135) -- (2,135)
Excess cost........... -- -- (5,771) (5,771)
Other assets.......... 46 102 (105) 43
Property, plant and
equipment, net....... 2,832 259 (1,064) 2,027
Notes receivable...... 40 -- -- 40
Accounts payable and
accrued expenses..... (809) (1,640) 2,330 (119)
Program rights
payable.............. (91) -- -- (91)
Notes payable......... -- (18,002) -- (18,002)
------- -------- ------- --------
8,738 (7,015) (8,713) (6,990)
Less: Existing
investment in
affiliates............. (6,427) 471 -- (5,956)
------- -------- ------- --------
2,311 (6,544) (8,713) (12,946)
Satisfied by:
Cash.................. (9,000) -- -- (9,000)
Note payable.......... -- (65,334) -- (65,334)
Note receivable....... -- -- 3,800 3,800
------- -------- ------- --------
Subtotal................ -- -- -- (83,480)
------- -------- ------- --------
Excess cost............. $(6,689) $(71,878) $(78,567)
======= ======== ========
Loss on sale............ $(4,913) $ (4,913)
======= ========
</TABLE>
(a) In July 1996, the Company paid $9,000 to Viacom, Inc. to purchase an
additional 40% interest in its affiliate, Prime Sports Northwest Network.
Subsequent to the purchase, Prime Sports Northwest Network was
consolidated with the Company. Had the additional 40% interest been
acquired at inception (April 30, 1996), the consolidated pro forma revenue
and income would have increased by $5,886 and $648, respectively. These
pro forma results have been prepared for comparative purposes only and do
not purport to be indicative of the results of operations which actually
would have resulted had the acquisitions occurred on the date indicated,
or which may result in the future.
(b) In October 1996, the Company purchased an additional 44% interest in its
affiliate, SportSouth Network, Ltd. ("SportSouth"), through the issuance
of a note in the amount of $65,334. SportSouth was then consolidated with
the Company. Had the additional 44% interest been acquired at inception
(April 30, 1996), the consolidated pro forma revenue and income would have
increased by $19,490 and $5,072, respectively. These pro forma results
have been prepared for comparative purposes only and do not purport to be
indicative of the results of operations which actually would have resulted
had the acquisitions occurred on the date indicated, or which may result
in the future.
(c) In September 1996, the Company received a note receivable for
approximately $3,800 in connection with the sale of its merchandising
assets.
F-12
<PAGE>
FOX/LIBERTY NETWORKS, LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
Supplemental disclosure of cash flow information and non-cash investing and
financing activities for the year ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997(e)(f)
------------
ARC LTD(d)
------------
<S> <C>
Fair value of net assets acquired:
Cash.......................................................... $ --
Accounts receivable........................................... 26,793
Prepaid program rights........................................ 4,764
Prepaid expenses and other current assets..................... 19,249
Investment.................................................... 6,739
Excess cost................................................... 103,806
Other assets.................................................. 305
Property, plant and equipment, net............................ 11,818
Notes receivable.............................................. 6,869
Accounts payable and accrued expenses......................... (25,520)
Program rights payable........................................ (3,522)
Unearned revenue.............................................. (4,744)
Notes payable................................................. (49,000)
--------
97,557
Satisfied by:
Original investment........................................... (97,557)
--------
Excess cost..................................................... $ --
========
</TABLE>
(d) In March 1997, Liberty/Fox ARC LP, an affiliate of the Company, paid
$40,000 to Group W to purchase the remaining 12.78% interest in Affiliated
Regional Communications, LTD and Affiliates (ARC). This transaction
resulted in Liberty/Fox ARC LP recording $25,785 in excess costs. In
conjunction with this transaction, the Company assumed management control
of the consolidated subsidiaries of Liberty/Fox ARC LP. Subsequent to the
purchase, the consolidated subsidiaries of ARC were consolidated with the
Company (see Note 2a). Had the additional 12.78% interest been acquired at
January 1, 1997 with respect to the year ended December 31, 1997 and April
30, 1996 with respect to the eight months ended December 31, 1996, the pro
forma consolidated revenue would have increased by $29,913 and $107,531,
respectively, and pro forma consolidated income would have increased by
$372 and $482, respectively. These pro forma results have been prepared
for comparative purposes only and do not purport to be indicative of the
results of operations which actually would have resulted had the
acquisitions occurred on the date indicated, or which may result in the
future.
(e) In September 1997, the Company formed Fox Sports Detroit, LLC for the
purpose of providing sports and sports related programming to the Detroit,
Michigan area. Fox Sports Detroit, LLC entered into agreements to pay cash
of $45,000 and issue notes payable totaling $25,558 to secure certain
sports programming rights and other assets. Purchase accounting will be
completed within the timeframe allowed by Accounting Principle Opinion
Board No. 16 "Business Combinations." Amounts remaining as excess cost
will be amortized over 40 years.
Had the acquisition occurred at the beginning of the period (January 1,
1997), and assuming that the full $70,558 is recorded as excess cost and
amortized over 40 years, the pro-forma consolidated revenue would have
increased, and loss would have decreased, by $17,940 and $2,140,
respectively. These pro-forma
F-13
<PAGE>
FOX/LIBERTY NETWORKS, LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
results have been prepared for comparative purposes only and do not purport
to be indicative of the results of operations which actually would have
resulted had the acquisitions occurred on the date indicated, or which may
result in the future.
(f) In December 1997, the Company contributed net assets of $14,926 and $2,741
to NSP and NAP, respectively, for a 50% interest in each partnership. The
net assets contributed were comprised of certain accounts receivables,
fixed assets, investments and accrued liabilities.
Cash paid for interest was $24,848 and $5,330 for the year ended December 31,
1997 and the period from inception (April 30, 1996) to December 31, 1996,
respectively.
(4) RELATED PARTY TRANSACTIONS
For the year ended December 31, 1997 and the period from inception (April
30, 1996) to December 31, 1996, the Company recognized the following revenue
and expenses as a result of arms-length transactions with affiliates of LMCI
and NAI:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30, TO
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Revenue:
Programming...................................... $92,244 $23,229
Advertising...................................... 3,183 326
Direct broadcast................................. 26,149 3,836
Interest income.................................. 2,719 108
Other............................................ -- 3,358
Expenses:
Operating........................................ 65,736 12,631
General and administrative....................... 4,156 2,340
Interest expense................................. 1,570 293
</TABLE>
At December 31, 1997 and 1996, a majority of the trade receivables from
related parties of $34,329 and $19,578, respectively, was related to
programming revenue. At December 31, 1997 and 1996, trade payables to related
parties were $19,570 and $7,670, respectively.
The Company has a non exclusive, royalty-free license from affiliates of Fox
to use the "FOX" brand name and certain related artwork in connection with the
Company's business.
(5) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1996 consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- -------
<S> <C> <C>
Studio and production equipment........................... $ 26,958 $13,042
Office equipment.......................................... 14,823 13,956
Construction in progress.................................. 21,357 1,786
Other..................................................... 5,614 1,919
-------- -------
68,752 30,703
Accumulated depreciation.................................. (22,221) (7,370)
-------- -------
$ 46,531 $23,333
======== =======
</TABLE>
F-14
<PAGE>
FOX/LIBERTY NETWORKS, LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(6) INVESTMENTS ACCOUNTED FOR UNDER THE EQUITY METHOD
(a) Significant Subsidiaries
Summarized unaudited financial information for significant subsidiaries, as
defined in Rule 1-02(w) of Regulation S-X, accounted for under the equity
method is as follows:
COMBINED FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
------------ ------------
<S> <C> <C>
Current Assets..................................... $ 14,822 $744,781
Non-current Assets................................. 16,310 95,171
-------- --------
Total Assets..................................... $ 31,132 $839,952
======== ========
Current Liabilities................................ $151,244 $155,028
Non-Current Liabilities............................ -- 10,229
Minority Interest.................................. -- 2,740
Partners' Equity................................... (120,112) 671,955
-------- --------
Total Liabilities and Equity..................... $ 31,132 $839,952
======== ========
COMBINED OPERATIONS
<CAPTION>
YEAR ENDED APRIL 30, TO
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Gross Revenue...................................... $ 9,210 $125,373
Operating (Loss) Profit............................ (36,157) 14,270
Net (Loss) Income.................................. (36,153) 1,691
</TABLE>
Liberty/Fox ARC LP was formed on April 30, 1996 and was accounted for under
the equity method for the period until March 1997. In March 1997, the Company
assumed management control of the consolidated subsidiaries of Liberty/Fox ARC
LP and, subsequent to this event, the consolidated subsidiaries of ARC were
consolidated with the Company.
F-15
<PAGE>
FOX/LIBERTY NETWORKS, LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(b) Unconsolidated Affiliates
The following table reflects the carrying value of the Company's investments,
accounted for under the equity method (except where cost method is indicated),
including related receivables, and the Company's equity in earnings (losses) of
each of these affiliates:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1997
--------------------- -----------------
OWNERSHIP EQUITY IN
ENTITY PERCENTAGE INVESTMENT EARNINGS (LOSSES)
------ ---------- ---------- -----------------
<S> <C> <C> <C>
Majority Owned Affiliates
Liberty/Fox Chicago LP.............. 98.0% $ 46,062 $ 9,192
Liberty/Fox KBL LP.................. 60.0% 19,045 3,336
Liberty/Fox Bay Area LP............. 98.0% 150 266
Liberty/Fox Upper Midwest LP........ 98.0% 105 --
Liberty/Fox ARC LP.................. 98.0% -- 365
Liberty/Fox Distribution LP......... 98.0% (86,207) (15,447)
-------- --------
(20,845) (2,288)
-------- --------
Minority Owned Affiliates
Liberty/Fox Sunshine LLC............ 4.7% 882 181
Cable Ad Partners-cost method....... 8.0% 357 --
Sunshine Network Joint Venture...... 49.0% 5,767 2,313
Prime Sports Network--Upper Midwest
Joint Venture...................... 33.0% (8) (2)
Home Team Sports Limited
Partnership........................ 34.3% 4,204 (22)
Prime Sports Channel Prism
Associates......................... 33.3% 665 125
Prime Sports Channel Network
Associates......................... 50.0% -- (109)
Mountain Mobile TV.................. 33.3% 955 226
Regional Programming Partners....... 40.0% 850,653 653
National Sports Partners............ 50.0% 4,833 (10,093)
National Advertising Partners....... 50.0% 2,738 (2)
-------- --------
871,046 (6,730)
-------- --------
$850,201 $ (9,018)
======== ========
</TABLE>
F-16
<PAGE>
FOX/LIBERTY NETWORKS, LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(APRIL 30, 1996) TO
DECEMBER 31, 1996 DECEMBER 31, 1996
--------------------- ---------------------
OWNERSHIP EQUITY IN
ENTITY PERCENTAGE INVESTMENT EARNINGS (LOSSES)
------ ---------- ---------- ---------------------
<S> <C> <C> <C>
Majority Owned Affiliates
Liberty/Fox Chicago LP........... 98% $ 36,870 $ 5,404
Liberty/Fox KBL LP............... 60% 13,346 3,812
Liberty/Fox Bay Area LP.......... 98% (116) --
Liberty/Fox Upper Midwest LP..... 98% 105 (9)
Liberty/Fox ARC LP............... 98% 97,192 23,565
Liberty/Fox Distribution LP...... 98% (70,761) (21,908)
Liberty/Fox Northwest LP......... 98% -- 973
-------- --------
76,636 11,837
-------- --------
Minority Owned Affiliates
Global Music Channel............. -- -- (59)
Liberty/Fox Sunshine LLC......... 4.7% 706 125
Liberty/Fox Southeast LLC........ -- -- 5,073
Cable Ad Partners--cost method... 8.0% 357 --
-------- --------
1,063 5,139
-------- --------
$ 77,699 $ 16,976
======== ========
</TABLE>
Prior to the contribution of the above majority owned entities to the
Company (see Note 1), there were certain regional networks that were wholly
owned and consolidated by Liberty Sports, Inc. (a predecessor company and a
Company shareholder). Upon contribution of these entities to the Company,
Liberty Sports, Inc. retained management control through a general partnership
minority interest. Hence, these operations are not consolidated by the
Company, although it owns the majority of the limited partnership interests.
The Company's investment in several of its affiliates exceeded its equity in
the underlying net assets by a total of $362,004 and $20,232 at December 31,
1997 and 1996, respectively. These excess amounts are being amortized on a
straight-line basis over 40 years. The amortization aggregated $1,025 and $574
during the year ended December 31, 1997 and the period from inception (April
30, 1996) to December 31, 1996, respectively, and is included in the Company's
share of equity income of affiliates.
F-17
<PAGE>
FOX/LIBERTY NETWORKS, LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(7) DEBT
Debt at December 31, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
---------- --------
<S> <C> <C>
Prime Sports West--Revolving Credit Facility(a)...... $ -- $ 86,800
Turner Note Payable(b)............................... 65,334 65,334
Chase Manhattan Bank--Term(c)........................ 400,000 --
Chase Manhattan Bank--Revolver(c).................... 60,000 --
Senior Notes(d)...................................... 500,000 --
Senior Discount Notes(d)............................. 260,828 --
Other................................................ 40,345 19,580
---------- --------
1,326,507 171,714
Less current portion................................. (80,216) (26,410)
---------- --------
$1,246,291 $145,304
========== ========
Annual future minimum maturities of debt are as fol-
lows:
1998............................................... $ 80,216
1999............................................... 15,402
2000............................................... 22,392
2001............................................... 85,052
2002............................................... 97,723
Thereafter......................................... 1,025,722
----------
$1,326,507
==========
</TABLE>
(a) Prime Sports West, LP ("PSW"), was a party to a credit agreement, as
amended, that provided for $130,000 of borrowings at December 31, 1996.
Borrowings bore interest at the agent bank's prime rate, the London
Interbank Offered Rate (LIBOR), a CD rate or a combination thereof as
selected by PSW plus a margin depending on PSW's ratio of total debt to
cash flow (as defined). The weighted-average effective rate at December
31, 1996 was 6.65%. Beginning September 30, 1996, the commitment amount
was reduced in equal quarterly amounts to achieve annual reductions in the
credit agreement ranging from 8% in 1996 to the final 15% at maturity on
June 30, 2002. PSW must pay an annual commitment fee of 0.375% of the
unfunded portion of the commitment. The loans were secured by a pledge of
PSW's ownership interest. On September 12, 1997, the Company repaid the
outstanding principal balance.
The credit agreement contains, among other things, requirements as to
indebtedness obligations and restrictions on distributions and capital
expenditures, as well as maintenance of certain specified financial ratios.
PSW was in compliance with the debt covenants as of December 31, 1996.
(b) On October 10, 1996, LMC Southeast Sports, Inc. purchased Turner Sports
Programming, Inc.'s 44% partnership interest in SportSouth. LMC Southeast
Sports, Inc. signed a promissory note to Turner Broadcasting Company for
$65,334, plus interest at a rate of 7.5% per annum. The Note is payable in
full on October 10, 1998. The Company has pledged the interest purchased
as collateral for the note. As amounts due under this agreement bear
interest at current market rates, the carrying amounts of borrowings
outstanding at December 31, 1997 and 1996 approximate estimated fair
value.
(c) On December 15, 1997, Fox Sports Net, LLC, FX Networks, LLC and Fox Sports
RPP Holdings, LLC (together, the "Co-Borrowers"), entered into a credit
agreement (the "Credit Agreement") with a group of
F-18
<PAGE>
FOX/LIBERTY NETWORKS, LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
banks. The Credit Agreement provides for a $400,000 term loan and a
$400,000 revolving credit facility ("the Facilities"). Borrowings under the
Facilities are guaranteed by the Company, the Co-Borrowers and certain
subsidiaries of Fox Sports Net, LLC and are secured by substantially all of
the assets of the Company. Borrowings under the facilities bear interest,
at the option of the Co-Borrowers, at a rate based upon the prime rate of
interest or eurodollar rates. The Co-Borrowers also pay a commitment fee on
the unused and available amounts under the revolving credit facility. The
revolving credit commitments will reduce on a quarterly basis commencing
December 31, 2000; principal payments under the term loan will also be
required quarterly commencing December 31, 2000. The Credit Agreement
provides for the maintenance of several financial and other covenants,
including a leverage ratio, an interest coverage ratio and a fixed charge
coverage ratio, among others. The Company was in compliance with the debt
covenants as of December 31, 1997.
(d) In August 1997, the Company privately sold $500,000 aggregate principal
amount of its 8 7/8% Senior Notes due 2007 and $405,000 aggregate
principal amount at maturity ($252.3 million gross proceeds) of its 9 3/4%
Senior Discount Notes due 2007 (collectively the "Old Notes") in a
transaction (the "Offering") exempt from registration under the Securities
Act of 1933, as amended ("1933 Act"). In January 1998, pursuant to an
exchange offer (the "Exchange Offer"), the Company exchanged all of the
Old Notes for new notes (the "Notes") which were registered by the Company
under the 1933 Act. The terms of the Notes are substantially identical to
the terms of the Old Notes. The Company received no proceeds from the
issuance of the Notes in the Exchange Offer. Interest on the Senior Notes
is payable semi-annually. Interest payments on the Senior Discount Notes
commence in February 2003. Interest accretes to principal prior to the
commencement of interest payments. At December 31, 1997 the unamortized
discount on the Senior Discount Notes was $144,669. Amortization expense
was $8,053 for the year ended December 31, 1997. The indentures pursuant
to which the Notes were issued include certain covenants regarding, among
other things, limitations on the incurrence of debt and distributions to
partners. The Notes are unsecured.
Interest expense was $49,183 and $4,235 for the year ended December 31, 1997
and the eight months ended December 31, 1996, respectively. Interest income
was $15,041 and $416 for the year ended December 31, 1997 and the eight months
ended December 31, 1996, respectively.
(8) ADDITIONAL INTERESTS EARNED BY COMPANY'S SHAREHOLDERS
The Company consists of numerous limited liability companies, general and
limited partnerships and corporations. The equity ownership of individual
entities in the chain of entities holding interests in regional sports
networks and FX Networks, LLC include interests held directly by affiliates of
LMC and Fox. Generally, each regional sports network is owned by the Company
through a chain of entities in which the Company has a direct or indirect
interest of approximately 98%, with the remaining fractional interests being
held equally by the affiliates of Fox and LMC.
The following tables reflects the ownership interests of LMC and Fox in
addition to the ownership interests of the Company in the earnings of
subsidiaries for the year ended December 31, 1997 and the period from
inception (April 30, 1996) to December 31, 1996 that, although not
consolidated in the Company, are ultimately earned by the Company's
shareholders.
The Fox column reflects earnings of Fox Regional Sports Members ("FRSM"), a
wholly-owned subsidiary of Fox. The LMC column reflects earnings of Liberty
Media Corp. ("LMC"), through its wholly-owned subsidiary of LSI.
F-19
<PAGE>
FOX/LIBERTY NETWORKS, LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
--------------------------------
ENTITY % FOX % LMC
------ ------ -------- ------ --------
<S> <C> <C> <C> <C>
Liberty/Fox Chicago LP................... 1% $ 94 1% $ 94
Liberty/Fox KBL LP....................... 20% 1,111 20% 1,111
Liberty/Fox Bay Area LP.................. 1% 3 1% 3
Liberty/Fox Upper Midwest LP............. 1% -- 1% --
Liberty/Fox ARC LP....................... 1% 4 1% 4
Liberty/Fox Distribution LP.............. 1% (158) 1% (158)
-------- --------
$ 1,054 $ 1,054
======== ========
<CAPTION>
EIGHT MONTH PERIOD ENDED
DECEMBER 31, 1996
--------------------------------
ENTITY % FOX % LMC
------ ------ -------- ------ --------
<S> <C> <C> <C> <C>
Liberty/Fox Chicago LP................... 1% $ 55 1% $ 55
Liberty/Fox KBL LP....................... 20% 1,271 20% 1,271
Liberty/Fox Bay Area LP.................. 1% -- 1% --
Liberty/Fox Upper Midwest LP............. 1% -- 1% --
Liberty/Fox ARC LP....................... 1% 240 1% 240
Liberty/Fox Distribution LP.............. 1% (775) 1% (775)
-------- --------
$ 791 $ 791
======== ========
</TABLE>
(9) 401(K) PLAN
During 1997, the Company implemented a defined contribution plan under
section 401(k) of the Internal Revenue Code (the "401(k) Plan") covering most
of the employees of the Company. Under the 401(k) Plan, participating
employees may elect to defer a portion of their compensation. The Company
makes contributions to the 401(k) Plan based on a percentage of employee
contributions. Maximum employee and Company contributions are limited by
Internal Revenue Code regulations and by specific 401(k) Plan provisions. For
the year ended December 31, 1997, the Company contributed $4,013 to the 401(k)
Plan.
(10) EQUITY APPRECIATION RIGHTS PLAN
In October 1997, the Company adopted the Fox/Liberty Networks, LLC Equity
Appreciation Rights Plan for management and key employees (the "Plan"), with
an effective date of May 1, 1996. A committee has been appointed by the
Company to administer and interpret this Plan. The maximum number of
Appreciation Rights available for grant under this plan is 300,000. Unless
otherwise determined by the committee, the rights vest over five years and can
be exercised over a period ending on the tenth anniversary of the granting of
the rights. The amount payable by the Company with respect to any Appreciation
Right exercised will equal the excess, if any, of the value at December 31 of
the preceding year over the original grant value. The valuation may be
performed by the Company or by a third party.
During 1997, the Company granted 185,100 rights at $135, the initial value
determined by the Company's shareholders. At December 31, 1997, 70,440 rights
had vested, with a weighted average exercise period of 8.4 years. A valuation
at December 31, 1997 has not been completed. Management does not believe the
obligation, if any, at December 31, 1997, with respect to vested Appreciation
Rights would be material to the financial position or operations of the
Company and consequently, no compensation expense has been recorded in the
year ended December 31, 1997.
F-20
<PAGE>
FOX/LIBERTY NETWORKS, LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(11) COMMITMENTS AND CONTINGENCIES
(a) Operating Leases
The Company leases transponders, office facilities, and equipment and
microwave channels used to carry its broadcast signals. These leases, which
are classified as operating leases, expire at various dates through 2010.
Future minimum payments, by year under noncancelable operating leases with a
term of one year or more consist of the following at December 31, 1997:
<TABLE>
<S> <C>
1998............................................................... $ 24,124
1999............................................................... 17,863
2000............................................................... 12,169
2001............................................................... 10,148
2002............................................................... 9,132
Thereafter......................................................... 26,574
--------
Total minimum lease payments....................................... $100,010
========
</TABLE>
Total lease expense was approximately $17,137 and $7,881 for the year ended
December 31, 1997 and the period from inception (April 30, 1996) to December
31, 1996, respectively.
(b) Long-term Sports Program Rights Contracts
The Company has long-term sports program rights contracts which require
payments through 2009. Future minimum payments, including unrecorded amounts,
by year are as follows at December 31, 1997:
<TABLE>
<S> <C>
1998............................................................. $ 215,266
1999............................................................. 211,518
2000............................................................. 207,498
2001............................................................. 144,440
2002............................................................. 116,977
Thereafter....................................................... 341,631
----------
Total minimum program rights payments............................ $1,237,330
==========
</TABLE>
(c) Capital Expenditures
The Company has made commitments for substantial capital expenditures over
the next several years in connection with a planned transition from analog
transponder equipment to digitally compressed transponder equipment.
(d) Litigation
In the ordinary course of business, the Company has become involved in
disputes or litigation. While the result of such disputes cannot be predicted
with certainty, in management's opinion, based in part on the advice of
counsel, the ultimate resolution of these disputes will not have a material
effect on the Company's financial position or results of operations.
F-21
<PAGE>
LIBERTY SPORTS, INC. AND SUBSIDIARIES--DOMESTIC OPERATIONS
FINANCIAL STATEMENTS
WITH INDEPENDENT AUDITORS' REPORT
F-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Fox/Liberty Networks, LLC:
We have audited the accompanying combined balance sheet of Liberty Sports,
Inc. and subsidiaries--Domestic Operations as of December 31, 1995, and the
related combined statements of operations and equity, and cash flows for each
of the years in the two-year period ended December 31, 1995 and for the period
from January 1, 1996 to April 29, 1996. These combined financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Liberty Sports,
Inc. and subsidiaries--Domestic Operations as of December 31, 1995, and the
results of their operations and their cash flows for each of the years in the
two-year period ended December 31, 1995 and for the period from January 1,
1996 to April 29, 1996, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Dallas, Texas
June 28, 1996
F-23
<PAGE>
LIBERTY SPORTS, INC. AND SUBSIDIARIES--DOMESTIC OPERATIONS
COMBINED BALANCE SHEET
DECEMBER 31, 1995
(AMOUNTS IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 10,453
Trade accounts receivable, net of allowance of $517:
Related party (note 4)............................................ 7,496
Other............................................................. 46,049
Inventories......................................................... 2,404
Prepaid program rights.............................................. 4,084
Prepaid expenses.................................................... 4,237
--------
Total current assets............................................ 74,723
Property and equipment, net (note 5).................................. 49,148
Investments in affiliates and related receivables (note 6)............ 47,741
Excess cost over acquired net assets, net (note 7).................... 82,648
Other intangible assets, net (note 8)................................. 186,883
Other assets (note 9)................................................. 3,043
--------
$444,186
========
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable.................................................... $ 29,471
Accrued expenses (note 11).......................................... 13,610
Program rights payable.............................................. 10,853
Current portion of long-term debt (note 12)......................... 1,761
Unearned revenue.................................................... 5,130
--------
Total current liabilities....................................... 60,825
Deferred income taxes (note 10)....................................... 55,320
Long-term debt, excluding current portion (note 12)................... 75,806
Minority interest in subsidiaries..................................... 15,447
Equity................................................................ 236,788
Commitments and contingencies (note 13)...............................
--------
$444,186
========
</TABLE>
See accompanying notes to combined financial statements.
F-24
<PAGE>
LIBERTY SPORTS, INC. AND SUBSIDIARIES--DOMESTIC OPERATIONS
COMBINED STATEMENTS OF OPERATIONS AND EQUITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 1,
DECEMBER 31 1996 TO
----------------- APRIL 29,
1994 1995 1996
-------- ------- ----------
<S> <C> <C> <C>
Revenues (note 4):
Programming..................................... $ 53,155 84,512 37,484
Advertising..................................... 30,675 67,066 27,696
Direct broadcast................................ 33,326 51,889 23,709
Network support................................. 5,744 7,594 2,471
Other........................................... 11,795 13,312 8,393
-------- ------- -------
134,695 224,373 99,753
-------- ------- -------
Operating costs and expenses (notes 4 and 13):
Operating....................................... 84,710 133,804 60,664
General and administrative...................... 43,709 73,389 27,993
Depreciation and amortization................... 22,412 39,006 10,788
-------- ------- -------
150,831 246,199 99,445
-------- ------- -------
Operating income (loss) (16,136) (21,826) 308
-------- ------- -------
Other income (expense):
Interest expense................................ (5,090) (4,921) (1,963)
Interest income (note 9)........................ 629 1,343 91
Equity in earnings of affiliates (note 6)....... 7,430 7,852 219
Minority interest in earnings of subsidiaries... (464) (705) (1,076)
Other, net...................................... 21 (204) 1,467
-------- ------- -------
2,526 3,365 (1,262)
-------- ------- -------
Loss before income taxes...................... (13,610) (18,461) (954)
Income tax benefit (note 10)...................... 5,220 6,086 217
-------- ------- -------
Net loss...................................... (8,390) (12,375) (737)
Equity, beginning of period....................... 76,171 289,046 236,788
Net change in Parent's investment................. 221,265 (39,883) (11,570)
-------- ------- -------
Equity, end of period............................. $289,046 236,788 224,481
======== ======= =======
</TABLE>
See accompanying notes to combined financial statements.
F-25
<PAGE>
LIBERTY SPORTS, INC. AND SUBSIDIARIES--DOMESTIC OPERATIONS
COMBINED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 1,
DECEMBER 31 1996 TO
---------------- APRIL 29,
1994 1995 1996
------- ------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................ $(8,390) (12,375) (737)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization................. 22,412 39,006 10,788
Equity in earnings of affiliates.............. (7,430) (7,852) (219)
Minority interest............................. 464 705 1,076
Deferred income taxes......................... (7,304) (9,977) (1,176)
Changes in operating assets and liabilities,
net of acquisitions:
Receivables................................. (5,017) (23,316) (9,198)
Inventories................................. (1,013) (1,391) (167)
Prepaid program rights...................... (3) (2,052) 1,197
Other assets................................ (4,208) 366 (1,906)
Payables, accruals and unearned revenue..... 13,523 24,656 (2,881)
Non-cash interest expense................... 1,010 74 --
------- ------- -------
Net cash provided by (used in) operating
activities............................... 4,044 7,844 (3,223)
------- ------- -------
Cash flows from investing activities:
Capital expended for property and equipment..... (6,970) (31,720) (4,544)
Additional investments in and loans to
affiliates..................................... (835) (8,294) (2,500)
Return of capital from affiliates............... 9,880 20,009 1,000
Proceeds from (loan to) third party............. (3,000) 3,000 --
Other investing activities, net................. (1,291) (13) --
------- ------- -------
Net cash used in investing activities..... (2,216) (17,018) (6,044)
------- ------- -------
Cash flows from financing activities:
Borrowings of long-term debt.................... 24,588 62,114 28,600
Repayments of long-term debt.................... (21,783) (26,537) (8,956)
Distribution to minority shareholder of
subsidiary..................................... (400) (810) --
Change in Parent's investment................... 13,660 (39,883) (11,570)
------- ------- -------
Net cash provided by (used in) financing
activities............................... 16,065 (5,116) 8,074
Increase (decrease) in cash and cash equivalents.. 17,893 (14,290) (1,193)
Cash and cash equivalents at beginning of period.. 6,850 24,743 10,453
------- ------- -------
Cash and cash equivalents at end of period........ $24,743 10,453 9,260
======= ======= =======
</TABLE>
See accompanying notes to combined financial statements.
F-26
<PAGE>
LIBERTY SPORTS, INC. AND SUBSIDIARIES--DOMESTIC OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS
(1) ORGANIZATION
Liberty Sports, Inc. was incorporated on November 13, 1989 as TCI Sports,
Inc., a wholly-owned subsidiary of Tele-Communications, Inc. ("TCI"). On March
29, 1991, the name was changed to Liberty Sports, Inc. and the ownership was
transferred to Liberty Media Corporation ("LMC"), an affiliate of TCI. On
August 4, 1994, LMC became a wholly-owned subsidiary of TCI.
Liberty Sports, Inc. and subsidiaries--Domestic Operations primarily provide
television sports programming services to customers throughout the United
States, sell advertising time in such programming and provide management and
technical services to other sports networks.
(2) SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The accompanying combined financial statements include the accounts of
Liberty Sports, Inc. and its domestic majority-owned subsidiaries and other
entities in which it has a controlling voting interest (collectively, "LSI--
Domestic" or the "Company"). All significant intercompany accounts and
transactions have been eliminated in combination.
(b) Cash Equivalents
Cash equivalents consist of investments which are readily convertible into
cash and have original maturities of three months or less. At December 31,
1995, cash equivalents were comprised of overnight repurchase agreements that
totaled $8,380,000.
(c) Inventories
Merchandise inventories are valued at the lower of cost (first-in, first-
out) or market.
(d) Prepaid Program Rights
The Company enters into sports rights contracts with various professional
and college athletic teams to televise certain games. These agreements require
the Company to make payments before and during each season. Prepaid program
rights for a specified number of games are amortized on an event-by-event
basis, and prepaid program rights for a specified season are amortized over
the term of the contract using the straight-line method.
(e) Property and Equipment
Property and equipment are stated at cost which includes acquisition costs
allocated to tangible assets acquired. Depreciation is computed on a straight-
line basis using estimated useful lives of 3 to 10 years.
(f) Investments in Affiliates
Investments in affiliates are accounted for under the equity method. Under
this method, the investment, originally recorded at cost, is adjusted to
recognize LSI-Domestic's share of net earnings or losses of the affiliate as
they occur rather than as dividends or other distributions are received,
limited to the extent of LSI-Domestic's investment in, advances to and
guarantees on behalf of, the investee. LSI's share of net earnings or losses
of affiliates includes the amortization of purchase adjustments.
F-27
<PAGE>
LIBERTY SPORTS, INC. AND SUBSIDIARIES--DOMESTIC OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(g) Excess Cost Over Acquired Net Assets
Excess cost over acquired net assets consists of the difference between the
cost of acquiring programming entities and amounts assigned to their tangible
and identifiable intangible assets. Such amounts are amortized on a straight-
line basis over 30 years. Accumulated amortization was $4,940,000 as of
December 31, 1995.
The Company assesses the recoverability of excess cost over acquired assets
by determining whether the amortization of the balance over its remaining life
can be recovered through undiscounted future operating cash flows of the
acquired operation. The amount of impairment, if any, is measured based on
projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. The assessment of the
recoverability of goodwill will be impacted if estimated future operating cash
flows are not achieved.
(h) Other Intangible Assets
Other intangible assets include amounts assigned to covenants not to compete
and amounts assigned to sports program rights agreements, affiliate agreements
and distribution agreements. The amounts assigned to these agreements are
amortized over the respective lives of the agreements ranging from 1 to 11
years.
(i) Long-Lived Assets
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
on January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell. The adoption of this Statement did not have a
material impact on the Company's financial position, results of operations, or
liquidity.
The Company's estimates of future gross revenues and operating cash flows,
the remaining estimated lives of long-lived assets, or both could be reduced
in the future due to changes in, among other things, technology, government
regulation, available financing or competition. As a result, the carrying
amounts of long-lived assets, including excess cost over acquired assets,
could be reduced by amounts which would be material to the financial
statements.
(j) Revenues
Revenue from programming represents affiliate fees received from cable
system operators and is recognized monthly as earned. Advertising revenue is
recognized upon airing of commercials.
Network support revenue is received from related parties for network,
traffic and master control operation services provided by the Company. Such
revenue is recognized as earned.
The Company has sold advance subscriptions to its direct broadcast satellite
customers. Such amounts are amortized to revenue monthly as revenue is earned.
(k) Nonmonetary Transactions
The Company trades commercial advertising spots in return for other
services, primarily programming. These trades are recorded at the fair value
of the asset surrendered or the fair value of the asset obtained, whichever is
more clearly evident. These transactions resulted in the recording of
approximately $4,842,000 and
F-28
<PAGE>
LIBERTY SPORTS, INC. AND SUBSIDIARIES--DOMESTIC OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
$6,006,000 in both advertising revenue and expenses during the years ended
December 31, 1994 and 1995, respectively, and approximately $2,050,000 for the
period January 1, 1996 to April 29, 1996.
(l) Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Because of the use of estimates inherent
in the financial reporting process, actual results could differ from those
estimates.
(m) Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value because of the short maturities of
these instruments. The carrying amount of LSI-Domestic's indebtedness
approximates fair value as it bears interest at current market rates.
(3) SUPPLEMENTAL DISCLOSURES TO COMBINED STATEMENTS OF CASH FLOWS
Cash paid for interest was $3,644,000 and $4,260,000 for the years ended
December 31, 1994 and 1995, respectively, and $1,805,000 for the period
January 1, 1996 to April 29, 1996. Cash paid for income taxes during the years
ended December 31, 1994 and 1995 and the period January 1, 1996 to April 29,
1996 was not material.
Significant noncash investing and financing activities are as follows:
<TABLE>
<S> <C>
Cash paid for acquisition during 1994 (see note 7) (amounts
in thousands):
Fair value of assets acquired.............................. $302,043
Net liabilities assumed.................................... (21,350)
Deferred tax liability recorded upon acquisition........... (69,897)
Contributions from Parent.................................. (210,796)
--------
$ --
========
</TABLE>
During 1995, the Company entered into capital leases of
approximately $1,004,000 for office equipment.
(4) RELATED PARTY TRANSACTIONS
For the years ended December 31, 1994 and 1995, and the period January 1,
1996 to April 29, 1996, the Company recognized the following revenue and
expenses as a result of transactions with related parties, primarily TCI and
its affiliates (amounts in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Revenues and other:
Programming..................................... $18,863 $18,472 $12,213
Direct broadcast................................ 864 7,631 5,908
Network support................................. 5,744 6,204 2,375
Other........................................... -- 425 824
Interest income................................. 84 -- -
Expenses:
Programming fees................................ 7,230 9,372 2,865
Advertising commissions......................... 5,465 169 -
Direct broadcast programming fees............... 6,019 10,250 3,094
</TABLE>
F-29
<PAGE>
LIBERTY SPORTS, INC. AND SUBSIDIARIES--DOMESTIC OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1995, accounts receivable-trade included approximately
$7,496,000 for subscriber revenue from related parties.
(5) PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1995 is summarized as follows
(amounts in thousands):
<TABLE>
<S> <C>
Building, land and improvements................................. $33,087
Studio, production and support equipment........................ 20,565
Furniture and fixtures.......................................... 6,953
-------
60,605
Less accumulated depreciation................................... 11,457
-------
$49,148
=======
</TABLE>
(6) INVESTMENTS IN AFFILIATES
The following table reflects the carrying value of LSI Domestic's
investments in affiliates (principally accounted for under the equity method)
including related receivables and LSI Domestic's share of earnings (losses) of
each of these affiliates (amounts in thousands):
<TABLE>
<CAPTION>
SHARE OF EARNINGS (LOSS)
--------------------------
CARRYING YEAR ENDED JANUARY 1,
VALUE AT DECEMBER 31 1996 TO
DECEMBER 31, -------------- APRIL 29,
ENTITY 1995 1994 1995 1996
------ ------------ ---- ------ ----------
<S> <C> <C> <C> <C>
SportsChannel Chicago Associates ("SC--
CHI")................................. $ 29,722 $5,800 $6,559 $2,877
Prime SportsChannel Network Associates. 1,207 (3,435) (5,513) (2,169)
Sunshine Network Joint Venture ("Sun-
shine")............................... 8,223 1,376 2,572 669
SportsSouth Network Ltd................ 1,605 3,569 5,358 2,026
Prime Sports Network--Upper Midwest
Joint Venture......................... 517 (182) 148 --
SportsChannel Prism Associates......... 683 (277) 393 139
Rocky Mountain Mobile TV............... 527 48 119 93
Home Team Sports Limited Partnership
("HTS")............................... 3,511 531 741 397
SportsChannel Pacific.................. (117) -- -- --
Global Music Channel................... 1,506 -- (2,525) (3,813)
-------- ------ ------ ------
47,384 7,430 7,852 219
Cable Ad Partners (at cost)............ 357 -- -- --
-------- ------ ------ ------
$ 47,741 $7,430 $7,852 $ 219
======== ====== ====== ======
</TABLE>
The Company's investment in three of these affiliates (Sunshine, HTS, and
SC-CHI) exceeded its equity in the underlying net assets by a total of
$21,003,000 at December 31, 1995. These excess amounts are being amortized
over the estimated useful lives of the investment affiliate agreements and
sports contracts. This amortization aggregated $2,635,000 and $1,414,000
during 1994 and 1995, respectively, and $222,000 for the period January 1,
1996 to April 29, 1996 and is included in LSI Domestic's share of earnings
(losses).
F-30
<PAGE>
LIBERTY SPORTS, INC. AND SUBSIDIARIES--DOMESTIC OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Summarized financial information for affiliates accounted for under the
equity method is as follows:
COMBINED FINANCIAL POSITION
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Cash and other assets....................................... $17,304
Trade and other receivables, net............................ 54,729
Property and equipment, net................................. 14,234
Prepaid expenses............................................ 9,067
Other assets................................................ 1,529
-------
Total assets.............................................. $96,863
=======
Current liabilities......................................... $49,693
Debt........................................................ 20,586
Owners' equity.............................................. 26,584
-------
Total liabilities and equity.............................. $96,863
=======
</TABLE>
COMBINED OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 1,
DECEMBER 31, 1996 TO
-------------------- APRIL 29,
1994 1995 1996
--------- --------- ----------
<S> <C> <C> <C>
Revenues................................. $ 190,705 $ 229,833 $ 90,170
Operating, general and administrative
expenses................................ (171,316) (202,753) (80,772)
Depreciation and amortization............ (2,775) (3,481) (1,290)
--------- --------- --------
Operating income....................... 16,614 23,599 8,108
Interest income.......................... 590 1,868 (144)
Other, net............................... (777) (1,736) (30)
--------- --------- --------
Net income............................. $ 16,427 $ 23,731 $ 7,934
========= ========= ========
</TABLE>
(7) ACQUISITION
On August 8, 1994, a wholly-owned subsidiary of TCI purchased 100% of the
stock of CVN, Inc., which held an 83.333% general partnership interest in
Prime Sports-West (formerly Prime Ticket Networks, L.P.) ("PSW"), for shares
of TCI Series C preferred stock and paid cash for the remaining 16.667%
interest in PSW. Concurrently, the CVN, Inc. ownership interest was
contributed to LSI-Domestic. In 1995, the remaining 16.67% interest was
contributed to Liberty Sports, Inc.--Domestic Operations. As this transaction
was a transfer between entities under common control, the Company has
presented the transfer of 100% of PSW as if it occurred on August 8, 1994.
The acquisition by TCI was accounted for as a purchase and the results of
operations have been consolidated with those of the Company since the date of
acquisition.
F-31
<PAGE>
LIBERTY SPORTS, INC. AND SUBSIDIARIES--DOMESTIC OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(8) OTHER INTANGIBLE ASSETS
Other intangible assets, net of accumulated amortization of $85,309,000 as
of December 31, 1995 follow (amounts in thousands):
<TABLE>
<S> <C>
Sports program rights agreements............................... $ 99,495
Affiliate agreements........................................... 85,098
Distribution agreements........................................ 1,270
Other.......................................................... 1,020
--------
$186,883
========
</TABLE>
The Company continually reevaluates the propriety of the carrying amount of
its intangibles as well as the related amortization period to determine
whether current events and circumstances warrant adjustments to the carrying
values and/or revised estimates of useful lives. This evaluation is based on
the Company's projection of the undiscounted operating income before
depreciation, amortization and interest over the remaining lives of the
related intangible assets. At this time, the Company believes that no
significant impairment of the intangible assets has occurred and that no
reduction of the estimated useful lives is warranted.
(9) OTHER ASSETS
On December 1, 1994, in connection with a new program rights agreement, the
Company made a $6 million term loan to a third party. The note bore interest
at prime plus 1/2%. The amount outstanding under this credit agreement at
December 31, 1994 was $3,000,000. The credit agreement was amended in 1995 and
an additional $4,000,000 was lent by the Company to the third party. In
October 1995, the $7,000,000 outstanding balance was paid in full and the loan
agreement was terminated.
(10) INCOME TAXES
The Company accounts for income taxes using Statement of Financial
Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes."
SFAS No. 109 requires the use of the asset and liability method of accounting
for income taxes. Under the asset and liability method, deferred tax assets
and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates in effect for
the year in which those temporary differences are expected to be recovered or
settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date.
The Company is included in the consolidated federal income tax returns filed
by TCI. Federal income taxes are calculated on a separate return basis in the
accompanying consolidated financial statements.
Income tax benefit (expense) attributable to loss before income taxes for
the years ended December 31, 1994 and 1995 and for the period January 1, 1996
to April 29, 1996 consists of the following:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- ------
<S> <C> <C> <C>
Current:
Federal.................................... $(1,764) $(3,133) $ (921)
State...................................... (320) (758) (38)
Deferred..................................... 7,304 9,977 1,176
------- ------- ------
Total........................................ $ 5,220 $ 6,086 $ 217
======= ======= ======
</TABLE>
F-32
<PAGE>
LIBERTY SPORTS, INC. AND SUBSIDIARIES--DOMESTIC OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Actual income tax benefit differs from the "expected" income tax benefit for
the years ended December 31, 1994 and 1995 and for the period January 1, 1996
to April 29, 1996 (computed by applying the U.S. federal corporate tax rate of
35% to loss before income taxes) as follows (amounts in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------ ----- ----
<S> <C> <C> <C>
Computed "expected" tax benefit..................... $4,764 6,461 334
Minority interest in earnings of consolidated
subsidiary......................................... (118) (495) (640)
Other, net.......................................... 574 120 523
------ ----- ----
$5,220 6,086 217
====== ===== ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of
December 31, 1995 are as follows (amounts in thousands):
<TABLE>
<S> <C>
Deferred tax assets:
Intangible assets, property and equipment, principally due to
differences in depreciation and amortization.................. $ 2,047
Investment in affiliates, principally due to undistributed
earnings
and differences in depreciation and amortization.............. 14,924
Other.......................................................... 415
-------
Total gross deferred tax assets.............................. 17,386
Deferred tax liability--investments in affiliates, principally
due to undistributed earnings and differences in depreciation
and amortization................................................ 72,706
-------
Net deferred tax liability................................... $55,320
=======
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. The Company
has not established a valuation allowance for deferred tax assets because
management believes that they will more likely than not be realized in the
future based on the Company's operating history and the reversal of deferred
tax liabilities during the carryforward period.
(11) ACCRUED EXPENSES
Accrued expenses as of December 31, 1995 is summarized as follows:
<TABLE>
<S> <C>
Accrued payroll................................................. $ 2,307
Accrued interest................................................ 981
Accrued production costs........................................ 6,700
Other........................................................... 3,622
-------
$13,610
=======
</TABLE>
(12) LONG-TERM DEBT
Long-term debt at December 31, 1995 is summarized as follows (amounts in
thousands):
<TABLE>
<S> <C>
Bank credit facility (a)....................................... $20,000
Bank credit facility (b)....................................... 51,600
Group W (c).................................................... 5,118
Other.......................................................... 849
-------
77,567
Less current portion........................................... (1,761)
-------
$75,806
=======
</TABLE>
F-33
<PAGE>
LIBERTY SPORTS, INC. AND SUBSIDIARIES--DOMESTIC OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(a) ARC Holding, Ltd. ("Holding"), a wholly-owned subsidiary of Affiliated
Regional Communications, Ltd., a majority-owned consolidated subsidiary,
is a party to a credit agreement, as amended, that provides for
$40,500,000 of borrowings at December 31, 1995. Borrowings bear interest
at the agent bank's base rate, LIBOR, a CD rate or a combination thereof
as selected by Holding plus a margin depending on Holding's ratio of total
debt to cash flow (as defined). The effective interest rate at December
31, 1995 was 8.5%. Beginning June 30, 1995, and quarterly thereafter
through December 31, 2000, the commitment amount will be reduced in equal
quarterly amounts to achieve annual reductions in the credit facility
ranging from 11% in 1996 to the final 17% in 2000. LSI Domestic must pay
an annual commitment fee of .375% of the unfunded portion of the
commitment. Borrowings under the credit agreement are secured by the
assets of Holding, including joint venture interests, and the stock and
assets of its existing and future subsidiaries. The proceeds from the
initial borrowings under this credit agreement were used to make the final
payment on a note payable by ARC.
The credit agreement contains certain provisions which limit Holding as to
additional indebtedness, sale of assets, liens, guarantees and
distributions. Additionally, Holding must maintain certain specified
financial ratios.
(b) PSW is a party to a credit agreement, as amended, that provides for
$65,000,000 of borrowings at December 31, 1995. Borrowings bear interest
at the agent bank's prime rate, LIBOR, a CD rate or a combination thereof
as selected by PSW plus a margin depending on PSW's ratio of total debt to
cash flow (as defined). The weighted average effective interest rate at
December 31, 1995 was 7.1%. Beginning September 30, 1996 and quarterly
thereafter through June 30, 2002, the commitment amount is reduced in
equal quarterly amounts to achieve annual reductions in the credit
agreement ranging from 8% in 1996 to the final 15% in 2002. PSW must pay
an annual commitment fee of .0375% of the unfunded portion of the
commitment. The loans are secured by a pledge of the partnership
interests.
The credit agreement contains, among other things, requirements as to
indebtedness, obligations and restrictions on distributions and capital
expenditures, as well as maintenance of certain specified financial ratios.
PSW was in compliance with the debt covenants or obtained waivers from the
bank as of December 31, 1995.
(c) In 1994, ARC and PSW each terminated their advertising agreements with
Group W Services, Inc., a limited partner in ARC. At December 31, 1994, it
was determined that a termination penalty was owed to Group W, as well as
commissions for past services rendered by Group W, although the terms of
repayment were uncertain. At December 31, 1994, ARC and PSW had $3,200,000
and $4,086,000, respectively, accrued based on their best estimate of
amounts owed to Group W.
During 1995, a termination agreement was finalized and it was determined
that ARC would pay Group W $3,200,000, plus interest at a specified bank's
prime rate, over a three year period, with the final payment due on March
31, 1998. Under the same agreement, it was determined that PSW would pay
Group W $4,300,000 plus interest at a specified bank's prime rate, over a
four year period, with the final payment due on March 31, 1999.
Accordingly, PSW recorded an additional $214,000 charge to advertising
expense during 1995.
Annual maturities of total debt for each of the next five years are
$1,761,000 in 1996, $3,390,000 in 1997, $14,788,520 in 1998, $19,973,000 in
1999 and $17,654,500 in 2000.
F-34
<PAGE>
LIBERTY SPORTS, INC. AND SUBSIDIARIES--DOMESTIC OPERATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(13) COMMITMENTS AND CONTINGENCIES
The Company leases transponders, office facilities, and equipment and
microwave channels used to carry its broadcast signals. These leases, which
are classified as operating leases, expire at various dates through 2000.
Future minimum lease payments under noncancellable operating leases for each
of the next five years are summarized as follows (amounts in thousands):
<TABLE>
<S> <C>
1996...................................... $15,791
1997...................................... 15,196
1998...................................... 15,073
1999...................................... 13,561
2000...................................... 10,177
Thereafter................................ 5,500
</TABLE>
Total lease expense was approximately $8,040,000, $12,337,000 and $4,049,000
for the years ended December 31, 1994 and 1995, and the period January 1, 1996
to April 29, 1996, respectively.
The Company has long-term sports program rights contracts which require
payments through 2005. Future minimum payments by calendar year are as follows
(amounts in thousands):
<TABLE>
<S> <C>
1996..................................... $ 58,051
1997..................................... 59,854
1998..................................... 56,999
1999..................................... 53,166
2000..................................... 45,736
Thereafter............................... 128,187
</TABLE>
The Company has guaranteed obligations of certain equity affiliates under
program rights agreements aggregating $3,331,000 in 1996; $3,598,000 in 1997;
and $2,857,000 in 1998.
Liberty Sports, Inc. and its domestic affiliates are parties to various
lawsuits and claims arising in the ordinary course of business. While the
outcome of such claims, lawsuits or other proceedings against the Company
cannot be predicted with certainty, management expects that such liability, to
the extent not provided through insurance or otherwise, will not have a
material adverse effect on the operating results or financial condition of the
Company.
(14) SUBSEQUENT EVENT
Effective April 29, 1996, Liberty Sports, Inc. contributed substantially all
of its domestic assets and liabilities to certain limited liability companies
and limited partnerships (collectively, the "Domestic Venture"). The members
of the Domestic Venture are certain affiliates of Liberty Sports, Inc. and
certain affiliates of The News Corporation Limited, each of which owns,
through its affiliates, 50% of the Domestic Venture. The Domestic Venture was
formed to provide sports programming services in the United States and Canada.
F-35
<PAGE>
FX NETWORKS, LLC
(A LIMITED LIABILITY COMPANY)
FINANCIAL STATEMENTS
AS OF JUNE 30, 1995 AND 1994
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
F-36
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Fox/Liberty Networks, LLC:
We have audited the accompanying balance sheet of FX NETWORKS, LLC (the
Company, a Delaware limited liability company) as of June 30, 1995 and the
related statements of operations, accumulated deficit, and cash flows for the
ten months ended April 29, 1996, the year ended June 30, 1995, and the year
from inception (July 1, 1993) through June 30, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The financial statements of FX Networks, LLC for the four months
ended April 29, 1996 were not audited by us and, accordingly, we do not
express an opinion on them.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of FX Networks, LLC as of
June 30, 1995 and the results of its operations and its cash flows for the ten
months ended April 29, 1996, the year ended June 30, 1995, and the year from
inception (July 1, 1993) through June 30, 1994 in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Los Angeles, California
August 4, 1997
F-37
<PAGE>
FX NETWORKS, LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
BALANCE SHEET
JUNE 30, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Current assets:
Cash................................................................ $ --
Accounts receivable ................................................ 14,434
Program rights...................................................... 14,621
Other current assets................................................ 147
--------
Total current assets.............................................. 29,202
Property and equipment, net........................................... 1,894
Program rights, long-term............................................. 21,194
Other assets.......................................................... 472
--------
Total Assets...................................................... $ 52,762
========
LIABILITIES AND ACCUMULATED DEFICIT
Current liabilities:
Accounts payable and accrued expenses............................... $ 19,267
Program rights payable, short-term.................................. 14,715
Other current liabilities........................................... 1,435
--------
Total current liabilities......................................... 35,417
Program rights payable, long-term..................................... 21,194
Due to related parties................................................ 74,949
Commitments and contingencies.........................................
Accumulated deficit................................................... (78,798)
--------
Total Liabilities and Accumulated Deficit......................... $ 52,762
========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-38
<PAGE>
FX NETWORKS, LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED APRIL 29, 1996,
JUNE 30, 1995 AND JUNE 30, 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
INCEPTION
(JULY 1,
FOUR MONTHS 1993)
ENDED APRIL 29, TEN MONTHS YEAR ENDED TO JUNE
1996 ENDED APRIL 29, JUNE 30, 30,
(UNAUDITED) 1996 1995 1994
--------------- --------------- ---------- ---------
<S> <C> <C> <C> <C>
Revenue:
Programming............. $ 24,291 $ 55,934 $ 52,238 $ 3,659
Advertising............. 8,287 17,358 13,454 309
Infomercial............. 947 2,109 2,579 142
-------- -------- -------- --------
33,525 75,401 68,271 4,110
-------- -------- -------- --------
Expenses:
Operating............... 26,220 63,369 83,579 29,194
General and
administrative......... 7,941 19,936 23,677 10,331
Depreciation and
amortization........... 201 480 436 58
-------- -------- -------- --------
34,362 83,785 107,692 39,583
-------- -------- -------- --------
Interest expense.......... 3,354 7,898 3,497 407
-------- -------- -------- --------
Net Loss.............. $ (4,191) $(16,282) $(42,918) $(35,880)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE>
FX NETWORKS, LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
STATEMENTS OF ACCUMULATED DEFICIT
FOR THE PERIODS ENDED JUNE 30, 1995 AND JUNE 30, 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Balance at Inception (July 1, 1993).................................. $ --
Net loss........................................................... (35,880)
--------
Balance at June 30, 1994............................................. (35,880)
Net loss........................................................... (42,918)
--------
Balance at June 30, 1995............................................. $(78,798)
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE>
FX NETWORKS, LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED APRIL 29, 1996, JUNE 30, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOUR MONTHS INCEPTION
ENDED APRIL 29, TEN MONTHS YEAR ENDED (JULY 1, 1993)
1996 ENDED APRIL 29, JUNE 30, TO JUNE 30,
(UNAUDITED) 1996 1995 1994
--------------- --------------- ---------- --------------
<S> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net income........... $(4,191) $(16,282) $(42,918) $(35,880)
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation........ 201 480 436 58
Changes in operating
assets and
liabilities:
Accounts
receivables....... (3,998) (9,110) (10,622) (3,812)
Program rights..... (6,785) (7,194) 11,799 (47,614)
Other assets....... 359 (167) 34 (653)
Accounts payable
and accrued
expenses.......... (1,136) (927) (3,547) 24,249
Program rights
payable........... 6,263 6,254 (11,522) 47,431
------- -------- -------- --------
Net cash used in
operating
activities...... (9,287) (26,946) (56,340) (16,221)
------- -------- -------- --------
Cash Flows from
Investing Activities:
Purchases of property
and equipment....... (191) (521) (1,185) (1,203)
------- -------- -------- --------
Net cash used in
investing
activities...... (191) (521) (1,185) (1,203)
------- -------- -------- --------
Cash Flows from
Financing Activities:
Related Party
Payable............. 9,478 27,467 57,525 17,424
------- -------- -------- --------
Net cash provided
by financing
activities...... 9,478 27,467 57,525 17,424
------- -------- -------- --------
Net Increase (Decrease)
in Cash and Cash
Equivalents........... 0 0 0 0
Cash and Cash
Equivalents, beginning
of year............... 0 0 0 0
------- -------- -------- --------
Cash and Cash
Equivalents, end of
year.................. $ 0 $ 0 $ 0 $ 0
======= ======== ======== ========
Supplemental Cash Flow
Information
Cash paid for
interest............ $ 3,354 $ 7,898 $ 3,497 $ 407
======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE>
FX NETWORKS, LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED APRIL 29, 1996 IS UNAUDITED)
JUNE 30, 1995
(DOLLARS IN THOUSANDS)
(1) ORGANIZATION
FX Networks, LLC was formed on July 1, 1993 as a division of Fox, Inc.
("Fox"), a subsidiary of The News Corporation Limited, as a basic cable
exclusive service distributed on a per subscriber basis, to provide general
entertainment and sports programming services and sell commercial advertising
time during its programming.
(2) SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The accompanying financial statements of the Company present the operations
and cash flows for the interim four month period ended April 29, 1996
(unaudited) for the purpose of comparison to the six months ended June 30,
1997 for its successor company, Fox/Liberty Networks.
(b) Program Rights
The Company has multi-year contracts for broadcast rights of syndicated
entertainment programs. Program rights are amortized over the term of the
contract using the straight-line method.
At the inception of these contracts and periodically thereafter, the Company
evaluates the recoverability of the costs associated therewith against the
advertising revenues directly associated with the program material and related
expenses. Where an evaluation indicates that a multi-year contract will result
in an ultimate loss, additional amortization is provided to recognize that
loss currently.
(c) Property and Equipment
Property and equipment are stated at cost. Depreciation for financial
statement purposes is provided using the straight-line method over estimated
useful lives of 3 to 5 years.
(d) Income Taxes
No provision has been made for income tax expense or benefit in the
accompanying consolidated financial statements as the income or losses of the
Company are reported in the respective income tax returns of the partners.
(e) Revenue
Programming revenue represents monthly subscriber fees received from cable
system operations and is recognized as earned. Advertising revenue is
recognized as earned.
(f) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Because of the use of estimates inherent in the financial
reporting process, actual results could differ from those estimates.
F-42
<PAGE>
FX NETWORKS, LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE PERIOD ENDED APRIL 29, 1996 IS UNAUDITED)
JUNE 30, 1995
(DOLLARS IN THOUSANDS)
(g) Allocation of expenses
Fox allocates costs, such as rent and payroll, incurred on behalf of the
Company based on the percentage of services rendered to the Company. These
allocated expenses are included in general and administrative expenses in the
Statements of Operations. Management believes the allocation method used is
reasonable.
(h) Interim Financial Data (unaudited)
The interim financial data for the period ended April 29, 1996 has been
prepared by the Company and is unaudited; however, in the opinion of the
Company, the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the results of
operations and cash flows for the interim period. Results for the interim
period are not necessarily indicative of the results to be achieved for the
full year.
(3) RELATED PARTY TRANSACTIONS
The Company recognized the following revenue and expenses as a result of
arms-length transactions with related parties (amounts in thousands):
<TABLE>
<CAPTION>
YEAR
FOUR MONTHS ENDED
ENDED APRIL 29, TEN MONTHS JUNE JULY 1, 1993
1996 ENDED APRIL 29, 30, TO JUNE 30,
(UNAUDITED) 1996 1995 1994
--------------- --------------- ------- ------------
<S> <C> <C> <C> <C>
Revenue:
Advertising.............. $ 159 $ 248 $ 244 $ 56
Expenses:
Interest expense......... 3,354 7,898 3,497 407
Production............... 7,932 23,068 43,215 4,677
Programming fees......... 3,604 7,695 5,967 528
</TABLE>
At June 30, 1995, trade and other receivables include approximately $4,008
for programming revenue from related parties of the partners. TCI, which
became a related party as a result of the Joint Venture (see Note 7), had
transactions with the Company resulting in revenues of $25,310 for the ten
month period ended April 29, 1996 and receivables of $4,008 as of June 30,
1995.
(4) PROPERTY AND EQUIPMENT
Property and equipment at June 30, 1995 consisted of the following:
<TABLE>
<CAPTION>
1995
------
<S> <C>
Office equipment.................................................. $2,206
Other............................................................. 182
Accumulated depreciation.......................................... (494)
------
$1,894
======
</TABLE>
(5) RELATED PARTY LOAN
At June 30, 1995, the Company borrowed $74,949 from Twentieth Century Fox
and Fox, Inc. under a revolving loan facility. Borrowings bear interest at the
prime rate (9% and 7.25% at June 30, 1995, and 1994) and have an unspecified
maturity. For the years ended June 30, 1995 and 1994, the Company incurred
interest expense related to this borrowing totaling $3,497 and $407. This
borrowing was not contributed to Fox/Liberty Networks, LLC (see note 7).
F-43
<PAGE>
FX NETWORKS, LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE PERIOD ENDED APRIL 29, 1996 UNAUDITED)
JUNE 30, 1995
(DOLLARS IN THOUSANDS)
(6) COMMITMENTS AND CONTINGENCIES
(a) Leases
The Company leases transponders and equipment used to carry its broadcast
signals. These leases, which are classified as operating leases, expire at
various dates through 2006. Future minimum payments, by year under cancelable
and non-cancelable operating leases with a term of one year or more consist of
the following at June 30, 1995:
<TABLE>
<S> <C>
1995................................. 2,342
1996................................. 4,694
1997................................. 4,749
1998................................. 4,793
1999................................. 4,684
Thereafter........................... 20,790
-------
$42,052
=======
</TABLE>
Total lease expenses were approximately $3,912, $1,564, $4,662, and $694,
respectively, for the ten months and four months ended April 29, 1996, the
years ended June 30, 1995 and 1994.
(b) Long-term Program Rights Contracts
The Company has long-term program rights contracts which require payments
through 1999. Future minimum payments including unrecorded amounts by year are
as follows at June 30, 1995:
<TABLE>
<S> <C>
1995................................. $ 8,767
1996................................. 20,014
1997................................. 15,885
1998................................. 9,315
1999................................. 4,095
-------
$58,076
=======
</TABLE>
(c) Litigation
The Company is a party to various lawsuits and claims arising in the
ordinary course of business. While the outcome of such claims, lawsuits or
other proceedings against the Company cannot be predicted with certainty,
management expects that such liability will not have a material adverse effect
on the operating results or financial position of the Company.
(7) SUBSEQUENT EVENT
On May 1, 1996, The News Corporation Limited contributed a majority of the
assets and liabilities of the Company to Fox/Liberty Networks, LLC as part of
a joint venture formed by The News Corporation Limited and Tele-
Communications, Inc.
F-44
<PAGE>
LIBERTY/FOX ARC L.P.
(A DELAWARE LIMITED PARTNERSHIP)
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996
(UNAUDITED)
F-45
<PAGE>
LIBERTY/FOX ARC L.P.
(A DELAWARE LIMITED PARTNERSHIP)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996
(UNAUDITED)
-----------
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................................ $ 11,275
Trade and other receivables, net of allowance for doubtful
accounts of $527 (unaudited) at December 31, 1996............... 39,379
Prepaid expenses and other current assets........................ 1,172
Current portion of long-term note receivable..................... 800
--------
Total current assets........................................... 52,626
Property and equipment, net........................................ 11,779
Investments in affiliates.......................................... 8,223
Notes receivable................................................... 5,200
Excess cost, net................................................... 67,016
Other assets....................................................... 1,810
--------
Total Assets................................................... $146,654
========
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses............................ $ 23,434
Program rights payable........................................... 6,487
Unearned revenue................................................. 4,697
Current portion of lease payable................................. 104
--------
Total current liabilities...................................... 34,722
Long-term debt..................................................... 10,000
Long-term lease payable, excluding current portion................. 229
Minority interest.................................................. 2,740
Commitments and contingencies......................................
Partners' equity................................................... 98,963
--------
Total Liabilities and Partners' Equity......................... $146,654
========
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-46
<PAGE>
LIBERTY/FOX ARC L.P.
(A DELAWARE LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (APRIL 30, 1996) TO DECEMBER 31, 1996 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 30 TO
DECEMBER 31,
1996
(UNAUDITED)
------------
<S> <C>
Revenue:
Programming...................................................... $27,895
Advertising...................................................... 9,598
Infomercial...................................................... 1,763
Direct broadcast................................................. 57,319
Other............................................................ 10,956
-------
107,531
-------
Expenses:
Operating........................................................ 73,074
General and administrative....................................... 7,171
Depreciation and amortization.................................... 2,407
-------
82,652
-------
Operating Income................................................... 24,879
-------
Other (income) expense:
Interest, net.................................................... 267
Loss on sale of assets........................................... 34
Equity income of affiliates, net................................. (1,148)
Other............................................................ 211
Minority interest................................................ 1,468
-------
832
-------
Net Income......................................................... $24,047
=======
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F-47
<PAGE>
LIBERTY/FOX ARC L.P.
(A DELAWARE LIMITED PARTNERSHIP)
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (APRIL 30, 1996) TO DECEMBER 31, 1996 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOX REGIONAL
NEW LMC FOX SPORTS SPORTS
ARC, INC. NET, LLC MEMBER, INC.
(UNAUDITED) (UNAUDITED) (UNAUDITED) TOTAL
----------- ----------- ------------ -------
<S> <C> <C> <C> <C>
BALANCE, APRIL 30, 1996............ $1,289 $73,626 $ 1 $74,916
Net income....................... 241 23,565 241 24,047
------ ------- ---- -------
BALANCE, DECEMBER 31, 1996......... $1,530 $97,191 $242 $98,963
====== ======= ==== =======
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F-48
<PAGE>
LIBERTY/FOX ARC L.P.
(A DELAWARE LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (APRIL 30, 1996) TO DECEMBER 31, 1996 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 30 TO
DECEMBER 31,
1996
(UNAUDITED)
------------
<S> <C>
Cash flows from operating activities:
Net income...................................................... $ 24,047
Adjustments to reconcile net income to net cash provided by
operating activities:
Bad debt expense ............................................. 240
Depreciation and amortization................................. 2,407
Loss on sale of assets........................................ 34
Equity income of affiliates................................... (1,148)
Minority interest............................................. 1,468
Changes in operating assets and liabilities:
Trade and other receivables................................... (7,983)
Prepaid program rights........................................ 278
Prepaid expenses and other current assets..................... 889
Other assets.................................................. 49
Accounts payable and accrued expenses......................... (14,290)
Program rights payable........................................ 4,422
Unearned revenue.............................................. (733)
--------
Net cash provided by operating activities................... 9,680
--------
Cash flows from investing activities:
Purchases of property and equipment............................. (1,886)
Note receivable issued to third parties......................... (4,381)
Distribution from affiliates.................................... 4,759
Additional investment in affiliates............................. (1,160)
Advances to related parties..................................... (18,608)
Advances from related parties................................... 35,569
--------
Net cash provided by operating activities................... 14,293
--------
Cash flows from financing activities:
Repayment of long-term debt..................................... (22,275)
Principal payments on capital lease obligations................. (71)
Cash overdraft, included in accounts payable.................... 3,529
--------
Net cash used in financing activities....................... (18,817)
--------
Net increase in cash and cash equivalents......................... 5,156
Cash and cash equivalents, at inception........................... 6,119
--------
Cash and cash equivalents, end of year............................ $ 11,275
========
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F-49
<PAGE>
LIBERTY/FOX ARC L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--
(INFORMATION AS OF AND FOR THE PERIOD ENDED DECEMBER 31, 1996 IS UNAUDITED)
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
1. ORGANIZATION
On April 30, 1996, Liberty/Fox ARC L.P. (the "Partnership"), a Delaware
limited partnership, was formed to own and operate programming services
featuring predominantly sports and sports related programming.
The partnership interests for the Partnership as of December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
PARTNERSHIP INTEREST
--------------------
<S> <C>
Fox Sports Net, LLC.................................. 98%(l.p.)
Fox Regional Sports Member, Inc. .................... 1%(1.p.)
New LMC ARC, Inc. ................................... 1%(g.p.)
</TABLE>
Fox/Liberty Networks, LLC, a Delaware limited liability company, through its
subsidiary Fox Sports Net, LLC, and New LMC ARC, Inc., a Delaware corporation,
each contributed interests in Affiliated Regional Communications, Ltd., a
Colorado limited partnership, and Rocky Mountain Prime Sports Network, a
Colorado general partnership. Fox Regional Sports Member, Inc. contributed
cash.
The Partnership provides television sports programming services, sells
advertising time in its programming, provides management services to other
sports networks, and provides technical services to other networks.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The accompanying consolidated financial statements include the operations of
the Partnership and its domestic majority owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
(b) Cash Equivalents
Cash equivalents consist of short-term investments with an original maturity
of less than 90 days.
(c) Program Rights
The Partnership has multi-year contracts for broadcast rights of sporting
events. Pursuant to these contracts, an asset is recorded for the rights
acquired and a liability is recorded for the obligation incurred, at the gross
amount of the liability when the programs of sporting events are available for
broadcast. Program rights which are for a specified number of games are
amortized on an event-by-event basis, and those which are for a specified
season are amortized over the term of the season on a straight-line basis. At
the inception of these contracts and periodically thereafter, the Partnership
evaluates the recoverability of the costs associated therewith against the
advertising revenues directly associated with the program material and related
expenses. Where an evaluation indicates that a multi-year contract will result
in an ultimate loss, additional amortization is provided to currently
recognize that loss.
(d) Property and Equipment
Property and equipment are stated at cost, which include acquisition costs
allocated to tangible assets acquired. Depreciation and amortization for
financial statement purposes are provided using the straight-line method over
an estimated useful life of five to ten years.
F-50
<PAGE>
LIBERTY/FOX ARC L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE PERIOD ENDED DECEMBER 31, 1996 IS UNAUDITED)
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
(e) Excess Cost
Excess cost represents the difference between the costs of acquiring
programming entities and amounts assigned to their tangible assets. Such
amounts are amortized on a straight-line basis over 40 years. Amortization
expense for the period from inception (April 30, 1996) to December 31, 1996
was $1,468 (Unaudited).
The Partnership continually reevaluates the propriety of the carrying amount
of its intangible assets as well as the related amortization period to
determine whether current events or circumstances warrant adjustments to the
carrying value and/or the estimates of useful lives. This evaluation consists
of the Partnership's projection of undiscounted operating income before
interest over the remaining lives of the related intangible assets. Based on
its review, the Partnership believes that no significant impairment of the
intangible assets has occurred and that no reduction of the estimated useful
lives is warranted.
(f) Income Taxes
No provision has been made for income tax expense or benefit in the
accompanying consolidated financial statements as the income or losses of the
Partnership are reported in the respective income tax returns of the partners.
(g) Allocation of Partnership of Net Income or Net Losses
Income or losses from the Partnership are allocated to the partners in
accordance with their respective profit interests.
(h) Investments in Affiliates
Investments in affiliates are accounted for under the equity method. Under
this method, the investment originally recorded at cost is adjusted to
recognize the Partnership's share of net income or losses of the affiliate as
they occur, rather than as dividends or other distributions are received,
limited to the extent of the Partnership's investment, advances to and
guarantees on behalf of the investee. The Partnership's share of net income or
losses of affiliates includes the amortization of excess cost.
(i) Revenue
Revenue from programming represents monthly subscriber fees received from
cable system operations and is recognized as earned. Advertising revenue is
recognized as earned. The Partnership has sold advance subscriptions to its
direct broadcast satellite customers. Such amounts are amortized to revenue in
the month such revenue is earned.
Network support revenue is received from related parties for network,
traffic, and master control operation services provided by the Partnership.
Such revenue is recognized as earned.
(j) Nonmonetary Transactions
The Partnership trades commercial advertising sports in return for other
services, primarily programming. These trades are recorded at the fair value
of the asset surrendered or the fair value of the asset obtained, whichever is
more clearly evident. These transactions resulted in the recording of
approximately $2,322 (Unaudited) in both advertising revenue and programming
expenses during the period from inception (April 30, 1996) to December 31,
1996.
F-51
<PAGE>
LIBERTY/FOX ARC L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE PERIOD ENDED DECEMBER 31, 1996 IS UNAUDITED)
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
(k) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements, and the reported amounts of revenues and
expenses during the reporting period. Because of the use of estimates inherent
in the financial reporting process, actual results could differ from those
estimates.
(l) Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement No.
121 (the "Statement") on accounting for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to assets to be held and
used. The Statement also establishes accounting standards for long-lived
assets and certain identifiable intangibles to be disposed of. The Partnership
adopted the Statement from inception (April 30, 1996). The adoption of the
statement did not have any material impact on the Partnership's financial
statements.
3. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest for the period from inception (April 30, 1996) to
December 31, 1996 was $983 (Unaudited).
4. RELATED PARTY TRANSACTIONS
For the period from inception (April 30, 1996) to December 31, 1996 the
Partnership recognized the following revenue and expenses as a result of arms-
length transactions with related parties:
<TABLE>
<CAPTION>
APRIL 30 TO
DECEMBER 31,
1996
(UNAUDITED)
------------
<S> <C>
Revenue:
Programming............................................... $13,117
Network support, which is included in other revenue on the
statement of operations.................................. 2,456
Expenses:
Interest expense.......................................... 32
DBS....................................................... 546
Production................................................ 24
Advertising commissions................................... 974
Programming fees.......................................... 1,735
</TABLE>
At December 31, 1996, trade and other receivables include approximately
$4,072 (Unaudited) for programming revenue from related parties of the
partners and $10,994 (Unaudited) for amounts due from affiliates for payroll
and other general and administrative costs incurred on behalf of the
affiliates.
In addition, trade and other receivables also include a $750 (Unaudited)
note receivable and approximately $150 (Unaudited) in related interest from a
general partner at December 31, 1996. This note receivable bears interest at
8.5 percent (Unaudited) and is due on demand.
F-52
<PAGE>
LIBERTY/FOX ARC L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE PERIOD ENDED DECEMBER 31, 1996 IS UNAUDITED)
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
5. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
(UNAUDITED)
------------
<S> <C>
Leasehold improvements....................................... $ 2,823
Studio and production equipment.............................. 11,704
Earth station and gathering equipment........................ 1,099
Vehicles..................................................... 829
Office equipment............................................. 5,285
-------
21,740
Accumulated depreciation..................................... (9,961)
-------
$11,779
=======
</TABLE>
6. INVESTMENTS IN AFFILIATES
The following table reflects the carrying value of the Partnership's
investments, accounted for under the equity method, including related
receivables and the Partnership's equity in income (losses) of each of these
affiliates as of, and for the period from inception (April 30, 1996) to
December 31, 1996 (Unaudited):
<TABLE>
<CAPTION>
OWNERSHIP CARRYING EQUITY IN
ENTITY PERCENTAGE VALUE INCOME (LOSSES)
------ ---------- -------- ---------------
<S> <C> <C> <C>
Sunshine Network Joint Venture.......... 49.0% $ 3,877 $ 1,306
Prime Sports Network--Upper Midwest
Joint Venture.......................... 33.0% 268 5
Home Team Sports Limited Partnership.... 34.3% 3,327 699
Prime Sports Channel Prism Associates... 33.3% 1,691 869
Prime Sports Channel Network Associates. 50.0% (1,782) (1,953)
Rocky Mountain Mobile TV................ 33.3% 842 222
------- -------
$ 8,223 $ 1,148
======= =======
</TABLE>
The Partnership's investment in Sunshine Network Joint Venture exceeded its
equity in the underlying net assets by a total of $6,691 (Unaudited) at
December 31, 1996. These excess amounts are being amortized on a straight-line
basis over 40 years. The amortization aggregated $67 (Unaudited) for the
period from inception (April 30, 1996) to December 31, 1996 and is included in
the Partnership's share of equity in income of affiliates.
F-53
<PAGE>
LIBERTY/FOX ARC L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE PERIOD ENDED DECEMBER 31, 1996 IS UNAUDITED)
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
7. NOTE RECEIVABLE
At June 10, 1996, the Partnership had a note receivable of $6,000
(Unaudited) from Lighting Partners, Ltd. due in 2002. The interest rate on the
note is the 90-day London Interbank Offered Rate plus 1.5 percent (Unaudited).
Annual maturities of the note for each of the next five years are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
(UNAUDITED)
------------
<S> <C>
1997......................................................... $ 800
1998......................................................... 800
1999......................................................... 800
2000......................................................... 800
2001......................................................... 1,800
Thereafter................................................... 1,000
------
Total...................................................... $6,000
======
</TABLE>
8. EXCESS COSTS
Excess costs at December 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
(UNAUDITED)
------------
<S> <C>
Excess cost........................................................ $121,468
Accumulated amortization........................................... (54,452)
--------
$ 67,016
========
</TABLE>
9. DEBT
ARC Holding, Ltd., a wholly-owned subsidiary of the Partnership ("Holding"),
is a party to a credit agreement, as amended, that provides for $35,555
(Unaudited) of borrowings at December 31, 1996. Borrowings bear interest at
the agent bank's base rate, the London Interbank Offered Rate, a CD rate or a
combination thereof as selected by Holding plus a margin depending on
Holding's ratio of total debt to cash flow (as defined). The effective
interest rate at December 31, 1996 was 6.45 percent (Unaudited). Beginning
June 30, 1995, and quarterly thereafter through December 31, 2000, the
commitment amount is reduced in equal quarterly amounts. Holding must pay an
annual commitment fee of .375 percent of the unfunded portion of the
commitment. Borrowings under the credit agreement are secured by the assets of
Holding, including affiliate interests, and the stock and assets of its
existing and future subsidiaries.
The credit agreement contains certain provisions which limit Holding as to
additional indebtedness, sale of assets, liens, guarantees and distributions.
Additionally, Holding must attain certain specified financial ratios. Holding
was in compliance with the debt covenants as of December 31, 1996 (Unaudited).
F-54
<PAGE>
LIBERTY/FOX ARC L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE PERIOD ENDED DECEMBER 31, 1996 IS UNAUDITED)
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
Annual maturities of debt for each of the next five years are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
(UNAUDITED)
------------
<S> <C>
1997......................................................... $ --
1998......................................................... --
1999......................................................... 2,345
2000......................................................... 7,655
2001......................................................... --
-------
Total...................................................... $10,000
=======
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
(a) Leases
The Partnership leases transponders, office facilities, equipment and
microwave channels used to carry its broadcast signals. These leases, which
are classified as operating leases, expire at various dates through 2001.
Future minimum payments by year under noncancelable operating leases with a
term of one year or more consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
(UNAUDITED)
------------
<S> <C>
1997......................................................... $ 7,095
1998......................................................... 7,733
1999......................................................... 7,273
2000......................................................... 5,114
2001......................................................... 690
-------
Total minimum lease payments............................... $27,905
=======
</TABLE>
The Partnership has a capital lease related to equipment, which expires in
1999.
Future minimum payments by year under the capital lease consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
(UNAUDITED)
------------
<S> <C>
1997......................................................... $104
1998......................................................... 114
1999......................................................... 115
----
Total minimum lease payments............................... $333
====
</TABLE>
Total lease expense was approximately $2,012 (Unaudited) for the period from
inception (April 30, 1996) to December 31, 1996.
F-55
<PAGE>
LIBERTY/FOX ARC L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE PERIOD ENDED DECEMBER 31, 1996 IS UNAUDITED)
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
(b) Long-term Sports Program Rights Contracts
The Partnership has long-term sports program rights contracts which require
payments through 2001. Future minimum payments by year are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
(UNAUDITED)
------------
<S> <C>
1997......................................................... $25,780
1998......................................................... 24,559
1999......................................................... 21,658
2000......................................................... 13,365
2001......................................................... 4,566
-------
Total minimum program rights payments...................... $89,928
=======
</TABLE>
The Partnership has guaranteed obligations of certain equity affiliates
under program rights agreements of:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
(UNAUDITED)
------------
<S> <C>
1997......................................................... $3,598
1998......................................................... 2,857
------
Total guaranteed obligations............................... $6,455
======
</TABLE>
(c) Litigation
The Partnership and its affiliates are parties to various lawsuits and
claims arising in the ordinary course of business. While the outcome of such
claims, lawsuits or other proceedings against the Partnership cannot be
predicted with certainty, management expects that such liability will not have
a material adverse effect on the operating results or financial position of
the Partnership.
11. SUBSEQUENT EVENT
In March 1997, the partnership paid $40,000 (Unaudited) to Group W to
purchase the 12.78% partnership interest in ARC.
The Partnership amended the credit agreement in March 1997, and June 1997,
which increased the borrowings ceiling to $75,000 (Unaudited). The Company
repaid the outstanding principal balance on September 12, 1997.
F-56
<PAGE>
REGIONAL PROGRAMMING PARTNERS AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM DECEMBER 18, 1997 (INCEPTION)
TO DECEMBER 31, 1997
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
F-57
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
Regional Programming Partners
We have audited the accompanying consolidated balance sheet of Regional
Programming Partners and subsidiaries as of December 31, 1997, and the related
consolidated statements of income, partners' capital and cash flows for the
period from December 18, 1997 (Inception) to December 31, 1997. These
consolidated financial statements are the responsibility of the partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Regional
Programming Partners and subsidiaries at December 31, 1997, and the results of
their operations and their cash flows for the period from December 18, 1997
(Inception) to December 31, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
March 20, 1998
Jericho, New York
F-58
<PAGE>
REGIONAL PROGRAMMING PARTNERS
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 402,978
Trade accounts receivable (less allowance for doubtful accounts of
$9,943).......................................................... 93,568
Trade accounts receivable-affiliates.............................. 26,674
Notes and other receivables....................................... 4,082
Inventory......................................................... 3,486
Prepaid expenses and other current assets......................... 34,497
----------
Total current assets............................................ 565,285
Notes receivable.................................................. 44,085
Property and equipment, net....................................... 245,395
Investments in affiliates......................................... 8,410
Other assets...................................................... 7,163
Deferred financing costs, net of accumulated amortization of $826. 22,453
Intangible assets, net of accumulated amortization of $149,695.... 1,434,388
----------
$2,327,179
==========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable.................................................. $ 21,532
Accrued expenses.................................................. 60,356
Accrued payroll and related benefits.............................. 49,393
Deferred revenue.................................................. 104,347
Accounts payable-affiliates,net................................... 7,338
Contractual rights obligations.................................... 6,776
----------
Total current liabilities....................................... 249,742
Long-term debt.................................................... 380,000
Deferred compensation............................................. 11,079
Contractual rights obligations.................................... 153,317
Other liabilities................................................. 44,485
Minority interest................................................. 129,495
----------
Total liabilities................................................... 968,118
Commitments and contingencies
Partners' capital................................................. 1,359,061
----------
$2,327,179
==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-59
<PAGE>
REGIONAL PROGRAMMING PARTNERS
CONSOLIDATED STATEMENT OF INCOME
PERIOD FROM DECEMBER 18, 1997 (INCEPTION) TO DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Revenues, net (including affiliate amounts of $3,305).............. $56,957
Operating expenses:
Technical (including affiliate amounts of $529).................. 32,091
Selling, general and administrative (including affiliate amounts
of $295)........................................................ 9,472
Depreciation and amortization.................................... 3,884
-------
45,447
-------
Operating income................................................. 11,510
-------
Other income (expense):
Share of affiliates' net loss.................................... (359)
Interest income.................................................. 973
Interest expense................................................. (1,395)
Write-off of deferred financing fees............................. (6,538)
Minority interest................................................ (561)
Miscellaneous, net............................................... (1,520)
-------
(9,400)
-------
Net income....................................................... $ 2,110
=======
</TABLE>
See accompanying notes to consolidated financial statements.
F-60
<PAGE>
REGIONAL PROGRAMMING PARTNERS
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
PERIOD FROM DECEMBER 18, 1997 (INCEPTION) TO DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
RMHI FOX TOTAL
-------- --------- ----------
<S> <C> <C> <C>
Balance, December 18, 1997...................... $ -- $ -- $ --
Net assets contributed........................ 506,951 -- 506,951
Capital contributions......................... -- 850,000 850,000
Adjustment of partnership capital............. 307,220 (307,220) --
Net income.................................... 1,266 844 2,110
-------- --------- ----------
Balance, December 31, 1997...................... $815,437 $ 543,624 $1,359,061
======== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-61
<PAGE>
REGIONAL PROGRAMMING PARTNERS
CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD FROM DECEMBER 18, 1997 (INCEPTION) TO DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income......................................................... $ 2,110
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization.................................... 3,884
Share of affiliates net loss..................................... 359
Minority interest................................................ 561
Write off of deferred financing costs............................ 6,538
Amortization of deferred costs and other liabilities............. (195)
Changes in assets and liabilities:
Trade accounts receivable....................................... 6,160
Trade accounts receivable--affiliates........................... (7,072)
Notes and other receivables..................................... 232
Prepaid expenses and other current assets....................... (641)
Accounts payable and accrued liabilities........................ 35,189
Deferred revenue................................................ (39,377)
Accounts payable--affiliates.................................... (8,770)
--------
Net cash used in operating activities.......................... (1,022)
--------
Cash flows from financing activities:
Debt repayments.................................................... (812,000)
Proceeds from debt................................................. 366,000
Cash capital contributions from partners........................... 850,000
--------
Net cash provided by financing activities...................... 404,000
--------
Net increase in cash and cash equivalents............................ 402,978
Cash and cash equivalents at beginning of period..................... --
--------
Cash and cash equivalents at end of year............................. $402,978
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-62
<PAGE>
REGIONAL PROGRAMMING PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. THE PARTNERSHIP AND NATURE OF OPERATIONS
Regional Programming Partners (the "Partnership") is a general partnership
organized as of December 18, 1997, under the provisions of the New York State
Partnership Law. In exchange for a 60% interest in the Partnership issued to a
subsidiary of Rainbow Media Holdings, Inc. ("RMHI"), affiliates of RMHI,
through various indirect transfers, contributed to the Partnership their
interests in Madison Square Garden, L.P. ("MSG"), six additional regional
sports networks, and Metro Channel LLC. MSG is a sports and entertainment
company that owns and operates the Madison Square Garden arena and the
adjoining Theater at MSG, the New York Knickerbockers professional basketball
team, the New York Rangers professional hockey team, the Madison Square Garden
Network, SportsChannel New York and Radio City Productions. The regional
sports networks in which the Partnership owns interests provide regional
sports programming to the New York, New England, Chicago, Cincinnati,
Cleveland, San Francisco and Florida areas. Metro Channel LLC is currently
developing networks which will provide regional and local sports, news and
educational programming. A subsidiary of Fox/Liberty Networks, LLC ("Fox")
contributed $850,000 in cash to the Partnership in exchange for a 40% interest
in the Partnership.
RMHI is a 75% owned subsidiary of CSC Holdings, Inc. (formerly Cablevision
Systems Corporation) ("CSC") and Fox is a joint venture between subsidiaries
of The News Corporation Limited and Liberty Media Corporation ("Liberty"). A
subsidiary of RMHI is the managing partner of the Partnership. Summary
financial information (at historical cost) for the net assets contributed to
the Partnership by affiliates of RMHI is as follows:
<TABLE>
<S> <C>
Current assets................................................... $ 138,086
Other assets..................................................... 316,997
Intangible assets, net........................................... 1,437,338
Current liabilities.............................................. (259,400)
Bank debt........................................................ (826,000)
Other liabilities................................................ (209,136)
Minority interest................................................ (90,934)
----------
$ 506,951
==========
</TABLE>
In order to align the partners' capital accounts to balances in accordance
with their ownership percentages after the initial contributions, an
adjustment was made to transfer $307,220 from Fox's capital account to RMHI's
capital account.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the
Partnership and its majority-owned partnership interests. The Partnership's
interests in less than majority-owned entities are carried on the equity
method. All significant intercompany transactions and balances are eliminated
in consolidation. Minority interest represents ITT Corporation's ("ITT") share
of net equity of MSG.
Revenue Recognition
The Partnership derives revenues principally from programming services
provided by its cable television networks, ticket sales and distributions of
league-wide revenue from its sports teams, and advertising and event
sponsorships related to the MSG arena. Programming revenue is recognized as
services are provided to cable television systems. Network advertising revenue
is recognized as commercials are telecast. Ticket sales and league-wide
revenue are recognized as each team plays its games. Revenues from the sale of
advertising in the form of signage and license fees from rental of MSG's
luxury suites are recognized ratably over the term of the respective
agreements. Event-related revenues are recognized as the underlying event
occurs.
F-63
<PAGE>
REGIONAL PROGRAMMING PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Long-Lived Assets
Property and equipment are carried at cost and depreciated on the straight-
line basis over the estimated useful lives of the assets or, with respect to
leasehold improvements, amortized over the shorter of the lease term or the
assets' useful lives.
The Partnership reviews its long-lived assets (property and equipment, and
intangible assets) for impairment whenever events or circumstances indicate
that the carrying amount of an asset may not be recoverable. If the sum of the
expected future cash flows, undiscounted and without interest, is less than
the carrying amount of the asset, an impairment loss is recognized as the
amount by which the carrying amount of the asset exceeds its fair value.
Income Taxes
The Partnership operates as a general partnership; accordingly, its taxable
income or loss is included in the tax returns of the individual partners and
no provision for income taxes is made by the Partnership.
Cash Equivalents
The Partnership considers temporary cash investments with original
maturities of three months or less at the time of purchase to be cash
equivalents. There was no cash paid for interest during the period from
December 18, 1997 (Inception) to December 31, 1997. On December 31, 1997, ITT
made a capital contribution to MSG of transportation equipment valued at
$38,000.
Contractual Rights Obligations
Contractual rights obligations represent the remaining reserves established
in prior periods on unfavorable contracts. Such reserves are being amortized
to technical expense over the life of the contracts.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from these estimates.
3. NOTES RECEIVABLE
Notes receivable includes a $40,000 loan made by Garden Programming, Inc.
("Garden Programming"), a wholly owned subsidiary of MSG, to a broadcast
content provider entered into on July 11, 1997. The loan matures on November
1, 2011, and bears interest at a rate which approximates MSG's borrowing rate.
The loan is secured by certain assets of the borrower and a guarantee by an
affiliate of the borrower.
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997, consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
-------------
<S> <C> <C>
Land.................................................. $ 22,746
Building.............................................. 115,476 23 years
Program, service and test equipment................... 9,346 2 to 9 years
Microwave and other equipment......................... 7,323 2 to 9 years
Furniture and fixtures................................ 87,046 1 to 8 years
Leased assets and leasehold improvements.............. 11,793 Life of lease
Transportation equipment.............................. 38,525 5 to 15 years
--------
Less accumulated depreciation......................... 46,860
--------
$245,395
========
</TABLE>
F-64
<PAGE>
REGIONAL PROGRAMMING PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
5. INTANGIBLE ASSETS
At December 31, 1997, intangible assets consist of the following:
<TABLE>
<S> <C>
Player contracts, net of accumulated amortization of $74,747..... $ 112,420
Franchises, broadcast rights and affiliation agreements, net of
accumulated amortization of $5,991.............................. 198,918
Excess costs over fair value of net assets acquired, net of
accumulated amortization of $68,957............................. 1,123,050
----------
$1,434,388
==========
</TABLE>
Player contracts, which represent the value assigned to the total compliment
of players included on the professional hockey and basketball teams, are
amortized over a six-year period on the straight-line basis. Costs incurred to
acquire individual players, including signing bonuses, are amortized over the
contract period of the respective player.
Franchises, broadcast rights and affiliation agreements represent the value
assigned to MSG's professional hockey and basketball franchises, telecast
rights to certain sporting events and agreements with cable systems to carry a
certain programming service of the Partnership. These assets are being
amortized over a weighted average period of approximately thirty one years on
the straight-line basis.
Excess costs over the fair value of net assets acquired resulting from
RMHI's pre-inception purchases of interests in MSG, Radio City Productions and
a sports network are being amortized over a weighted average period of
approximately thirty seven years on a straight-line basis.
6. ACCRUED EXPENSES
Included in accrued expenses at December 31, 1997 are the following:
<TABLE>
<S> <C>
Production and programming costs.................................... $22,944
Litigation reserves................................................. 15,112
Other............................................................... 22,300
-------
Total............................................................... $60,356
=======
</TABLE>
7. LONG-TERM DEBT
Long-term debt at December 31, 1997, consists of borrowings made by MSG as
follows:
<TABLE>
<S> <C>
MSG Credit Facility:
Due December 31, 2004............................................ $360,000
Garden Programming Promissory Notes:
Due July 11, 2002................................................ 20,000
--------
Total.............................................................. $380,000
========
</TABLE>
MSG's initial credit facility with various lending institutions consisted of
a $650 million term loan (the "Term Loan") and a $200 million revolving
facility (the "Revolver") which expires on December 31, 2004. On December 10,
1997, MSG amended the credit facility whereby MSG may borrow principal amounts
up to $500 million under the Revolver (the "Amended Credit Facility"). On
December 18, 1997, MSG prepaid the Term Loan portion of the credit facility,
without penalty. Loans under the Amended Credit Facility bear interest at
current market rates plus a margin (6.785% at December 31, 1997) based on
MSG's consolidated leverage
F-65
<PAGE>
REGIONAL PROGRAMMING PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
ratio. Borrowings outstanding as of December 31, 1997 of $360,000 are
classified as long term debt. MSG may prepay outstanding loans or reduce the
unutilized commitment at any time. MSG is required to pay a fee based on the
unutilized commitment. The unutilized commitment as of December 31, 1997, was
$131,392. The carrying amount of the debt approximates fair value.
Deferred financing costs of $6,538 associated with the Term Loan were
expensed and the portion related to the Revolver of approximately $10,743 is
being amortized over the term of the Amended Credit Facility.
The Amended Credit Facility contains certain covenants and restrictions
including the maintenance of certain financial ratios. MSG was in compliance
with these covenants and restrictions as of December 31, 1997.
Additionally, Garden Programming borrowed $20,000 under promissory notes
with various lending institutions (the "Promissory Notes"). The Promissory
Notes bear interest at a margin above LIBOR (7.85% at December 31, 1997).
These funds were used to partially finance a $40,000 secured loan to a
broadcast content provider (see Note 3).
MSG is party to letters of credit totaling $8,608 as of December 31, 1997,
which have been issued against the Revolver to guarantee certain insurance and
other operating activities. Management does not expect performance to be
required.
8. LEASES
The Partnership has various long term noncancelable operating lease
agreements with nonaffiliates for office space and practice facilities for its
professional sports teams which expire at various dates through 2023. The
leases generally provide for fixed annual rentals plus certain other costs.
Rent expense for the period from December 18, 1997 (Inception) to December 31,
1997 approximated $275. The following is a schedule of future minimum payments
for these operating leases (with initial or remaining terms in excess of one
year) as of December 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1998.............................................................. $ 8,444
1999.............................................................. 18,129
2000.............................................................. 16,846
2001.............................................................. 15,421
2002.............................................................. 16,715
Thereafter........................................................ 283,544
--------
Total minimum lease payments....................................... $359,099
========
</TABLE>
9. AFFILIATE TRANSACTIONS
The Partnership distributes certain programming to the cable television
industry under contracts called affiliation agreements. For the period
December 18, 1997 (Inception) to December 31, 1997, approximately $3,305 was
earned under affiliation agreements with companies owned or managed by
affiliates of the partners in the Partnership.
National Sports Partners, which is managed by Fox and in which Fox and RMHI
each indirectly own a 50% interest, provides certain programming to the
Partnership. The Partnership was charged approximately $130 for the period
from December 18, 1997 (Inception) to December 31, 1997, for this programming.
F-66
<PAGE>
REGIONAL PROGRAMMING PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Rainbow Network Communications, an affiliate of the Partnership, provides
certain transmission and production services to the Partnership. The
Partnership was charged approximately $263 for the period from December 18,
1997 (Inception) to December 31, 1997, for these services.
RMHI and certain of its subsidiaries provide the Partnership with certain
administrative, computer, and creative services. The Partnership was charged
approximately $295 for the period from December 18, 1997 (Inception) to
December 31, 1997, for such services.
The Partnership has an arrangement with National Advertising Partners
("NAP"), which is managed by Fox and in which Fox and RMHI each indirectly own
a 50% interest, to provide national advertising services to the Partnership in
exchange for a fee of 15% of the gross revenue, net of agency commissions,
from advertising sold by this partnership. Fees charged by NAP on advertising
revenues amounted to approximately $136 for the period from December 18, 1997
(Inception) to December 31, 1997.
The Partnership has non-majority ownership interests in several regional
sports networks as follows: 50% interest in SportsChannel Chicago Associates,
50% interest in SportsChannel Pacific Associates and a 30% interest in
SportsChannel Florida Associates. The Partnership's investments in these
entities are accounted for on the equity method of accounting. Accordingly,
the Partnership recorded a loss of $359 representing its percentage interests
in the results of operations of these entities for the period from December
18, 1997 (Inception) to December 31, 1997.
10. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
CSC maintains a pension plan and 401(k) savings plan (collectively, the
"Plan") for each of the regional sports networks and the Metro Channel
pursuant to which the Partnership contributes 1 1/2% of eligible employees'
annual compensation, as defined, to the defined contribution portion of the
Plan and an equivalent amount to the Section 401(k) portion of the Plan. The
Partnership also makes matching contributions for employee voluntary
contributions to the 401(k) portion of the Plan. The cost associated with the
Plan was approximately $7 for the period from December 18, 1997 (Inception) to
December 31, 1997.
MSG sponsors several non-contributory pension plans covering the
Partnerships non-union employees and certain union employees. Benefits payable
to retirees under these plans are based upon years of service and
participant's compensation and are funded through trusts established under the
plans. MSG's funding policy is to meet the minimum funding requirements of the
Employee Retirement Income Security Act of 1974. Plan assets are invested in
common stocks, bonds, United States government securities and cash.
Components of MSG's net periodic pension cost for defined benefit plans for
the period from December 18, 1997 (Inception) to December 31, 1997, are as
follows:
<TABLE>
<S> <C>
Service cost........................................................... $ 52
Interest cost.......................................................... 63
Actual return on plan assets........................................... (78)
Net amortization and deferral.......................................... 25
----
Net periodic pension cost.............................................. $ 62
====
</TABLE>
F-67
<PAGE>
REGIONAL PROGRAMMING PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
The funded status and the amounts recorded for the defined pension plans at
December 31, 1997, were as follows:
<TABLE>
<S> <C>
Plan assets at fair value......................................... $ 17,173
Projected benefit obligation...................................... (25,518)
--------
Plan assets less than projected benefit obligation................ (8,345)
Unrecognized net loss............................................. 516
Unrecognized prior service cost................................... 33
--------
Accrued pension liability......................................... $ (7,796)
========
Accumulated benefit obligation.................................... $ 18,777
========
Vested benefit obligation......................................... $ 16,947
========
</TABLE>
Assumptions used to determine pension costs and the projected benefit
obligation are as follows:
<TABLE>
<S> <C>
Discount rate......................................................... 7.25%
Rate of return on plan assets......................................... 10.00%
Rate of increase in future compensation levels........................ 5.00%
</TABLE>
A discount rate of 7.5% was used to determine pension costs from December
18, 1997 (Inception) to December 31, 1997.
In addition, MSG contributes to various multiemployer defined benefit
pension plans. Pension expense recognized for these multiemployer plans for
the period from December 18, 1997 (Inception) to December 31, 1997 was
approximately $63.
MSG also sponsors a welfare plan which provides certain postretirement
health care and life insurance benefits to certain non-union employees and
their dependents who are eligible for early or normal retirement under MSG's
retirement plan. The welfare plan is insured through a managed care provider
and MSG funds these benefits with premium payments.
Components of MSG's cost for postretirement benefits for the period from
December 18, 1997 (Inception) to December 31, 1997, are as follows:
<TABLE>
<S> <C>
Service cost............................................................ $ 6
Interest cost........................................................... 6
Amortization of unrecognized prior service benefit...................... (7)
---
Periodic postretirement benefit cost.................................... $ 5
===
</TABLE>
Components of the liability recognized as of December 31, 1997, with respect
to the MSG sponsored welfare plans are as follows:
<TABLE>
<S> <C>
Current retirees..................................................... $ 761
Eligible active participants......................................... 309
Other active participants............................................ 1,376
------
Accumulated postretirement benefit obligation........................ 2,446
Unrecognized prior service benefit................................... 3,225
Unrecognized net gain................................................ 365
------
Accrued postretirement benefit obligation............................ $6,036
======
</TABLE>
F-68
<PAGE>
REGIONAL PROGRAMMING PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
The discount rate used in determining the accumulated postretirement benefit
obligation was 7.25% for 1997. The assumed health care cost trend rates used
in measuring the accumulated postretirement benefit obligation was 7% for
1997, decreasing to an ultimate rate of 5% by the year 2004. If the health
care cost trend assumptions were increased by 1%, the accumulated
postretirement benefit obligation as of December 31, 1997, would be increased
by approximately 14%. The effect of this change on the estimated aggregate of
service and interest cost for the period from December 18, 1997 (Inception) to
December 31,1997, would be an increase of 24%.
In 1996, MSG amended its postretirement health care programs, principally to
reflect a change from a traditional reimbursement program to a managed care
program. These amendments resulted in a reduction of MSG's accumulated
postretirement benefit obligation, which created an unrecognized prior service
benefit. The unrecognized service benefit is being amortized over
approximately 17 years.
MSG contributes to multiemployer plans which provide health and welfare
benefits to active as well as retired employees. MSG incurred costs of $116
related to those plans for the period from December 18, 1997 (Inception) to
December 31, 1997.
11. COMMITMENTS
Subsidiaries of the Partnership have entered into long-term agreements with
several professional sports teams and others which provide such subsidiaries,
among other things, exclusive pay telecast rights to certain live sporting
events and obligate such subsidiaries to make minimum contractual payments
when the events are provided for telecast. Certain of these contracts provide
for payments which are guaranteed. MSG also has employment agreements with
players and coaches of its professional sports teams. Certain of these
contracts provide for payments which are guaranteed regardless of employee
injury or termination. MSG has obtained disability insurance on certain
players which provide benefits payable to MSG in the event of injury. The
approximate aggregate minimum contractual payments under these agreements as
of December 31, 1997, are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
------------
<S> <C>
1998.............................................................. $ 213,131
1999.............................................................. 193,414
2000.............................................................. 163,735
2001.............................................................. 108,007
2002.............................................................. 80,842
Thereafter........................................................ 1,029,489
----------
$1,788,618
==========
</TABLE>
12. CONTINGENCIES
The Partnership is a party to various lawsuits arising out of the ordinary
conduct of its business. Management believes that the final outcome of these
matters will not have a material adverse effect on the financial position of
the Partnership.
ITT has the right to require CSC to repurchase one-half of ITT's remaining
interest in MSG on June 17, 1998 for $94,000, and its remaining interest in
MSG on June 17, 1999 for $94,000 (the "ITT Put Options"). On March 9, 1998,
ITT notified CSC of its intention to exercise the first option. CSC may
satisfy its obligations
F-69
<PAGE>
REGIONAL PROGRAMMING PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
under the ITT Put Options by requiring MSG to redeem ITT's interests in cash.
CSC has the right on June 17, 2000, if ITT does not exercise the ITT Put
Options in full, to purchase ITT's remaining interests for the greater of the
then fair value of ITT's interest or the amount that ITT would have received
had it exercised the ITT Put Options (the "CSC Call"). If the CSC Call expires
unexercised, ITT's interest in MSG will increase, causing a reduction in the
Partnership's interest in MSG.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Partnership's financial instruments principally consist of cash and cash
equivalents, trade accounts receivable, notes receivable, accounts payable,
accrued expenses, long-term debt and contractual rights obligations. For all
instruments other than notes receivable, long-term debt and contractual rights
obligations, the carrying value of the instruments approximate their fair
value due to their short maturities. For notes receivable, long-term debt and
contractual rights obligations, carrying value approximates fair value as the
underlying instruments earn or bear interest at rates which approximate market
rates for the same or similar instruments.
14. SUBSEQUENT EVENT
On January 14, 1998, MediaOne Inc. exercised an option to acquire 50% of
SportsChannel New England Limited Partnership, and a partnership agreement is
currently being negotiated.
F-70
<PAGE>
FOX/LIBERTY NETWORKS, LLC
CONDENSED FINANCIAL STATEMENTS OF THE COMPANY
WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
S-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To The Shareholders of Fox/Liberty Networks, LLC:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of FOX/LIBERTY NETWORKS, LLC (the
"Company") included elsewhere in this registration statement and have issued
our report thereon dated February 20, 1998. Our audit was made for the purpose
of forming an opinion on the basic financial statements taken as a whole.
Schedule I is the responsibility of the Company's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. These schedules have been
subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly state in all material
respects the financial data required to be set forth therein in relation to
the basic financial statements taken as a whole.
Arthur Andersen LLP
Los Angeles, California
February 20, 1998
S-2
<PAGE>
FOX/LIBERTY NETWORKS, LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF COMPANY
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Investments in subsidiaries.................................. $152,271 $230,728
-------- --------
Total Assets............................................... $152,271 $230,728
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Shareholders' Equity......................................... $152,271 $230,728
-------- --------
Total Liabilities and Shareholders' Equity................. $152,271 $230,728
======== ========
</TABLE>
S-3
<PAGE>
FOX/LIBERTY NETWORKS, LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF COMPANY
STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30 TO
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Equity in loss of subsidiaries........................ $(78,457) $(117,149)
-------- ---------
Net loss.............................................. $(78,457) $(117,149)
======== =========
</TABLE>
S-4
<PAGE>
FOX/LIBERTY NETWORKS, LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF COMPANY
STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30 TO
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................ $(78,457) $(117,149)
Equity in loss of subsidiaries.................... 78,457 117,149
-------- ---------
Net cash provided by operating activities....... -- --
-------- ---------
Cash and cash equivalents, from inception............. -- --
-------- ---------
Cash and cash equivalents, end of year................ $ -- $ --
======== =========
Cash dividends paid to the Company by subsidiaries.... $ -- $ --
======== =========
</TABLE>
S-5
<PAGE>
Exhibit 10.12
Jeff Shell
Los Angeles, California
Dear Mr. She11:
This letter, when executed by both you and Fox/Liberty Networks, LLC
(hereinafter referred to as "the Company"), will confirm the agreement between
you and the Company relating to your employment by the Company, and will
supersede all prior agreements between you and the Company relative to your
employment with the Company.
1. (a) The Company hereby employs you for a period commencing September 1,
1997 and ending September 30, 1999. In addition, the Company shall have an
irrevocable option exercisable at its discretion to employ you for an additional
twelve month period pursuant to this agreement, commencing on October 1, l999
and ending September 30, 2000. The exercise of such option shall be on not less
than 120 days written notice to you prior to the expiration of the term set
forth above.
(b) If you continue in the employ of the Company after the end of the
above term or the additional period, your employment shall be on an at will
basis, subject to the provision of Paragraph 13. hereof, at the weekly salary
rate paid during your last regular pay period hereunder.
2. You shall perform such duties consistent with your position set forth in
paragraph 3.(a), as are assigned to you from time to time (and agree to take
such trips both within and outside the United States as shall be determined to
be desirable) by the Company's Board of Directors, its Executive Committee,
Chairman of the Board, Vice Chairman of the Board, and President, Executive Vice
President or persons occupying substantially identical positions thereto.
3. (a) You shall serve as Chief Financial Officer and Executive Vice
President. You shall report to the President and Chief Executive
Officer.
(b) If you are elected a member of the Board of Directors or to any
other office of the Company or any of its affiliates, you agree to serve
in such capacity or capacities without additional compensation.
4. You hereby accept such employment and agree to devote the time and
attention necessary to fulfill the duties of your employment hereunder.
5. You shall render your services in Los Angeles, California and at such
places as the Company shall designate from time to time on a temporary basis.
1
<PAGE>
6. For your services hereunder, the Company will, during the term of your
employment described in Paragraph 1.(a) hereof, on regular pay dates as then
in effect under applicable Company policy, pay you at rate of:
(a) $330,000 per annum for the twelve month period from September 1,
l997 through August 31, 1998;
(b) $360,000 per annum for the thirteen month period from September l,
1998 through September 30, 1999:
(c) $400,000 per annum for the twelve month option period, if exercised,
commencing October 1, 1999 through September 30, 2000.
7. (a) You agree that during the term of your employment, you will have
no interest, directly or indirectly, in any motion picture or television
program producing, distributing or exhibiting business, or in any
broadcasting, cable or film laboratory business or in any related business
other than the Company and its affiliates, and you will perform no services
for any person, firm or corporation engaged in any such business. The
foregoing does not prohibit your ownership of less than one percent (1%) of
the outstanding common stock of any company whose shares are publicly
traded.
(b) Enclosed is a copy of the News Corporation Limited Standard of
Business Conduct Statement. You agree to abide by the provisions of this
statement at all times during your employment by the Company.
8. You will not during the term of your employment and for a period of two
years thereafter, directly or indirectly, induce or attempt to induce any
managerial, sales or supervisory employee of the Company or its affiliates to
render services to any other person, firm or corporation.
9. (a) You acknowledge that the relationship between the parties hereto is
exclusively that of employer and employee and that the Company's
obligations to you are exclusively contractual in nature. The Company
shall be the sole owner of all the fruits and proceeds of your services
hereunder, including, but not limited to, all ideas, concepts, formats,
suggestions, developments, arrangements, designs, packages, programs,
promotions and other intellectual properties which you may create in
connection with and during the term of your employment hereunder, free
and clear of any claims by you (or anyone claiming under you) of any kind
or character whatsoever (other than your right to compensation
hereunder). You shall, at the request of the Company, execute such
2
<PAGE>
assignments, certificates or other instruments as the Company may from
time to time deem necessary or desirable to evidence, establish,
maintain, perfect, protect, enforce or defend its right, title and
interest in or to any such properties.
(b) A11 memoranda, notes, records and other documents made or compiled
by you, or made available to you during the term of this Agreement
concerning the business of the Company or its affiliates shall be the
Company's property and shall be delivered to the Company on the
termination of this Agreement or at any other time on request. You
shall keep in confidence and shall not use for yourself or others, or
divulge to others, any information concerning the business of the
Company or its affiliates which is not otherwise publicly available and
which is obtained by you as a result of your employment, including but
not limited to, trade secrets or processes and information deemed by the
Company to be proprietary in nature, unless disclosure is permitted by
the Company or required by law.
(c) The Company shall have the right to use your name, approved
biography and approved likeness in connection with its business,
including in advertising its products and services, and may grant this
right to others, but not for use as a direct endorsement.
(d) The covenants set forth above in this paragraph shall survive the
termination of this Agreement.
10. You shall be eligible to participate in all employee benefit plans of
the Company including, without limitation, stock appreciation plan and bonus
available to other comparable executives of the Company and your eligibility to
participate in such plans shall be governed by the rules applicable to
comparable executives.
11. The services to be furnished by you hereunder and the rights and
privileges granted to the Company by you are of a special, unique, unusual,
extraordinary, and intellectual character which gives them a peculiar value, the
loss of which cannot be reasonably or adequately compensated in damages in any
action at law, and a breach by you of any of the provisions contained herein
will cause the Company irreparable injury and damage. You expressly agree that
the Company shall be entitled to seek injunctive and other equitable relief to
prevent a breach of this Agreement by you. Resort to such equitable relief,
however, shall not be construed as a waiver of any preceding or succeeding
breach of the same or any other term or provision. The various rights and
remedies of the Company hereunder shall be construed to be cumulative and no one
of them shall be exclusive of any other or of any right or remedy allowed by
law.
3
<PAGE>
12. The Company's engagement of you hereunder is subject to your compliance
with the terms and provisions of the Federal Immigration and Naturalization Act.
You shall provide the Company or its designee with such proof of your United
States citizenship or authorization to work in the United States and to complete
all forms required by the Immigration and Naturalization Services, you
acknowledge that this Agreement shall not become effective and you shall not be
entitled to any compensation hereunder unless and until you comply with the
provisions of this Paragraph 12.
13. In consideration of the making of this Agreement, as well as of the
other consideration stated herein, you expressly agree that any contract,
agreement or understanding between you and the Company with respect to severance
or termination pay, notice of severance or termination, or pay in lieu of notice
of severance or termination previously extended to you whether by way of
contract, letter, or Company termination policy, is hereby rescinded. You
further agree that if continue in the employ of the Company after the end of
this Agreement, your employment will be at-will and may be terminated in
accordance with the provisions of such then existing Company policies as may
then be in effect applicable to comparable executives of the Company.
14. All notices either party is required or desires to give to the other
shall be in writing and addressed as follows:
(a) To Employee: Mr. Jeff Shell
c/o Fox/Liberty Networks, L.L.C.
1440 S. Sepulveda Blvd.
Los Angeles, CA 90025
With copy to: Mr. Jason C. Sloane
Hansen, Jacobson, Teller & Hoberman
450 N. Roxbury Dr., 9th Floor
Beverly Hills, CA 90210-4222
(b) To the Company: Ms. Gloria Dickey
Fox Liberty Networks, L.L.C.
1440 S. Sepulveda Blvd.
Los Angeles, CA 90025
15. This Agreement shall be governed by the laws of the State of California
applicable to contracts performed entirely therein.
4
<PAGE>
16. This Agreement shall inure to the benefit of the successors and general
assigns of the Company and to the benefit of any other corporation or entity
which is a parent, subsidiary or affiliate of the Company to which this
Agreement is assigned, and any other corporation or entity into which the
Company may be merged or with which it may be consolidated. Except as herein
provided, this Agreement shall be nonassignable.
Sincerely,
FOX/LIBERTY NETWORKS, LLC
By /s/ Anthony Ball
-------------------------------------
Anthony Ball
President & Chief Executive Officer
2/4/98
-------------------------------------
Date
THE FOREGOING IS AGREED TO:
/s/ Jeff Shell
- --------------------------------
Jeff Shell
2/3/98
- --------------------------------
Date
5
<PAGE>
EXHIBIT 10.16
FOX/LIBERTY NETWORKS, LLC
EQUITY APPRECIATION RIGHTS PLAN
FOR MANAGEMENT AND KEY EMPLOYEES
- --------------------------------------------------------------------------------
Fox/Liberty Networks, LLC (the "Company") and its Controlled
Affiliates hereby establish an Equity Appreciation Rights Plan (this "Plan") for
management and key employees, to secure the loyalty and continued services of
and to provide a long term incentive to such personnel, and to promote
profitability and efficiency in the operations of the Company and its Controlled
Affiliates. This Plan is effective as of May 1, 1996.
1. DEFINITIONS:
------------
The terms set forth below have the definitions indicated whenever used in
this Plan.
1.1 "Affiliate": With respect to any Person, any other Person Controlling,
Controlled by, or under common Control with, such Person.
1.2 "Appreciation Right": A right to receive, subject to the terms and
conditions of this Plan, a payment made with respect to any vested Appreciation
Right, in an amount equal to the
<PAGE>
excess, if any, of the Value of an Incentive Unit on the relevant Valuation Date
over the Grant Value. Each Appreciation Right will reflect the increase in the
value of one Incentive Unit.
1.3 "Appreciation Rights Account": An account established by the Company
under Section 3.2 for each Eligible Employee who is granted Appreciation Rights.
1.4 "Beneficiary": The Person or Persons designated by the Employee in
the Grant Agreement to receive the amount, if any, that becomes payable under
this Plan upon the death of the participating Employee. The Employee may change
or revoke a Beneficiary designation at any time by filing a new designation or
notice of revocation with the Committee. No notice to, or consent by, any
Beneficiary will be required to effect any change or revocation of designation.
If an Employee does not designate a Beneficiary, the Employee's Beneficiary will
be deemed to be the Employee's estate and payments required hereunder will be
made accordingly.
1.5 "Code": The Internal Revenue Code of 1986, as amended.
1.6 "Committee": The committee, consisting of two or more Persons,
appointed Company to administer and interpret this Plan.
-2-
<PAGE>
1.7 "Company": Fox/Liberty Networks, LLC, or any Successor thereto. Any
reference to determinations or decisions made by the Company will be made by the
Member Representatives (as defined in the Company Agreement).
1.8 "Company Agreement": The Operating Agreement of the Company dated
April 29, 1996, as in effect from time to time.
1.9 "Control": The possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities or voting interests, by
contract or otherwise.
1.10 "Controlled Affiliate": Any Person in which all the ownership
interests are owned, directly or indirectly, by the Company or by (i) the
Company and (ii) Members of the Company (as defined in the Company Agreement) or
Affiliates of Members of the Company.
1.11 "Disabled": An Employee's permanent and total disability, as defined
under the long term disability plan of the Employer in which the Employee
participates or, if the Employee does not participate in such a plan,
"Disabled" will have the meaning set forth in Section 72(m)(7) of the Code. This
definition also will apply to the term "Disability," as the context requires.
1. 12 "Effective Date": May 1, 1996.
-3-
<PAGE>
1.13 "Employee": (i) An employee or officer of any Employer or (ii) any
other Person designated from time to time by the Committee as an Employee for
purposes of this Plan, provided that in each case such employee, officer or
other Person is part of a select group of management or highly-compensated
Persons.
1.14 "Employer": Each of the Company and any Controlled Affiliate
designated from time to time by the Committee as an Employer which has adopted
this Plan.
1.15 "Eligible Employees": Those Employees who are designated by the
Committee eligible to receive the grant of Appreciation Rights.
1.16 "Expiration Date": The tenth anniversary of the Effective Date, or
such other date as the Committee shall determine.
1.17 "Fair Market Value": With respect to any asset, the price at which a
willing buyer would purchase and a willing seller would sell such asset, each
having full knowledge of all relevant facts and neither being under any
compulsion to purchase or sell, as the case may be.
1.18 "Firm": A nationally recognized investment banking firm or "Big-Six"
certified public accounting firm retained by the Company under Section 6 to
determine the Venture Value.
-4-
<PAGE>
1.19 "Fox Group": Any one or more of (i) The News Corporation Limited
("News Corp"), any Successor to News Corp or any Affiliate of News Corp or any
such Successor, (ii) News America Holdings Incorporated ("NAHI"), any Successor
to NAHI or any Affiliate of NAHI or any such Successor or (iii) Fox Inc.
("Fox"), any Successor to Fox or any Affiliate of Fox or any such Successor.
1.20 "Grant Agreement": The Equity Appreciation Rights Grant Agreement to
be entered into by each Eligible Employee who is granted Appreciation Rights
under this Plan, the initial form of which is attached as Exhibit A.
1.21 "Grant Date": Any date, as determined by the Committee, as of which
Appreciation Rights are granted to an Eligible Employee.
1.22 "Grant Value": As determined with respect to any Appreciation Right,
the Value of an Incentive Unit as of the relevant Valuation Date, except that
the Grant Value of any Appreciation Right granted prior to January 1, 1998 will
be the Initial Value of an Incentive Unit.
1.23 "Incentive Unit": A "phantom" interest representing, solely for
purposes of the computation of the value of an Appreciation Right under this
Plan, a percentage interest in the Venture equal to .00001 percent of the
interests in the Venture (i.e., three percent divided by 300,000, the total
number of Appreciation Rights available for grant under this Plan).
-5-
<PAGE>
1.24 "Initial Value of Incentive Unit": The Value of an Incentive Unit as
of the Effective Date, which is determined to be $135.00.
1.25 "Liberty Group": Any one or more of (i) Tele-Communications, Inc.
("TCI"), any Successor to TCI or any Affiliate of TCI or any such Successor,
(ii) Liberty Media Corporation ("Liberty"), any Successor to Liberty or any
Affiliate of Liberty or any such Successor or (iii) Liberty Sports, Inc.
("Liberty Sports"), any Successor to Liberty Sports or any Affiliate of Liberty
Sports or any such Successor.
1.26 "Payment Date": September 30 of each calendar year and any other date
designated by the Committee as a Payment Date under this Plan.
1.27 "Person": Any human being or any corporation, partnership, trust,
unincorporated organization, association, limited liability company or other
entity.
1.28 "Successor": With respect to any Person, the successor in interest to
that Person, as determined by the Committee.
1.29 "Termination": With respect to any Employee, the complete cessation
of the employment of such Employee for or on behalf of any Employer, whether by
reason of the death, Disability, resignation or removal of the Employee or for
any other reason, including the expiration
-6-
<PAGE>
of any applicable employment agreement. This definition also will apply to the
term "Terminated," as the context requires.
1.30 "Termination for Cause": With respect to any Employee, the
Termination of such Employee on account of (i) the engaging by the Employee in
intentional conduct not taken in good faith which has caused demonstrable injury
to the Company or any Controlled Affiliate, as determined by the Committee; (ii)
conviction of a felony, as evidenced by binding and final judgment, order or
decree of a court of competent jurisdiction; or (iii) willful and unreasonable
refusal by the Employee to perform the Employee's duties or responsibilities,
unless such duties or responsibilities are changed without the Employee's
consent.
1.31 "Valuation Date": Each of the Effective Date, December 31, 1997,
each December 31 thereafter and any other date designated by the Committee as a
Valuation Date.
1.32 "Value of an Incentive Unit": As of any date of determination, an
amount equal to the Venture Value as of such date multiplied by .0000001.
1.33 "Venture": The Company and the Controlled Affiliates, considered as a
single enterprise.
-7-
<PAGE>
1.34 "Venture Value": As of any date of determination, the Fair Market
Value of the Venture as determined under Section 6.
1.35 Other Definitions. The following terms will have the meanings set
-----------------
forth in the Section indicated:
Term Section
---- -------
Exchange Act 5.2(a)
Market Price 5.2(c)
Transfer 7.2
Year of Active Employment 4.2(b)
2. APPRECIATION RIGHTS
-------------------
2.1 General: This Plan provides the terms and conditions for the grant of,
-------
and payment with respect to, Appreciation Rights to Eligible Employees.
2.2 Number of Appreciation Rights Available for Grant: The maximum number
-------------------------------------------------
of Appreciation Rights available for grant under this Plan is 300,000
Appreciation Rights.
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<PAGE>
2.3 Appreciation Rights Granted to Eligible Employees:
-------------------------------------------------
(a) The Committee will determine the criteria for eligibility for the
award of Appreciation Rights under this Plan. Such criteria may be amended from
time to time by the Committee, provided that no such amendment will adversely
affect any Appreciation Rights granted before such amendment.
(b) The Committee will determine the Appreciation Rights to be
granted, if any, to those Eligible Employees selected by the Committee each
year, in accordance with the criteria described in subsection (a). Such
Appreciation Rights will be granted to such Eligible Employees on or as of a
Grant Date. The Committee will give notice to Employees who have been awarded
Appreciation Rights within a reasonable time after such award. The Committee may
make any Appreciation Rights granted under this Plan subject to any
restrictions, limitations, terms or conditions, in addition to those set forth
herein, as it may determine and which are not inconsistent with the specific
terms of this Plan.
(c) No Employee will have any right to receive any Appreciation Rights
in any year, irrespective of the grant of any Appreciation Rights to such
Employee in any past or succeeding year or the grant of any Appreciation Rights
to any other Employee in such year or any other year.
-9-
<PAGE>
(d) Each grant of Appreciation Rights to an Eligible Employee will be
made pursuant to a Grant Agreement executed by the Eligible Employee and the
Committee, which Grant Agreement will specify the number of Appreciation Rights
granted to such Employee, the Grant Date, the Grant Value and such other
information as the Committee may prescribe. Only Appreciation Rights granted
pursuant to a Grant Agreement, the form of which has been approved by the
Committee, will be considered validly granted under this Plan. The initial form
of Grant Agreement approved by the Committee is attached as Exhibit A.
(e) Only vested Appreciation Rights will entitle an Eligible Employee
to receive payments under this Plan. Vested Appreciation Rights will represent
only the right to receive the payments provided for in Section 5 at the time,
in the amount and subject to the terms and conditions of this Plan, and neither
the existence of this Plan nor the grant or holding of any Appreciation Rights
will result in any Employee, Beneficiary or other Person being considered as or
possessing any of the rights of a member of the Company or possessing any other
rights or claims against the Company, any Controlled Affiliate, any member of
the Company, any Affiliate of any member of the Company or any Successor of any
such Person. No Employee or other Person will have any claim or right to be
granted Appreciation Rights under this Plan.
(f) All Appreciation Rights granted under this Plan will be subject to
the requirement that if, at any time the Committee determines that the
registration or qualification of any such Appreciation Rights under any state or
federal law, or the consent or approval of any governmental
-10-
<PAGE>
or regulatory body or agency or any Person with whom any Employer has any
contractual relationship is necessary or desirable as a condition of, or in
connection with, the grant, election to be paid or transfer of any such
Appreciation Rights, such Appreciation Rights may not be granted, paid or
transferred in whole or in part unless such registration, qualification, consent
or approval has been effected or obtained free of any conditions not acceptable
to the Committee. The Committee will not be obligated to grant, make payment
with respect to or recognize any transfer of any Appreciation Rights if such
grant, payment or transfer would be in contravention of the Securities Act of
1933, as amended, any state securities law or any other applicable federal,
state or local law. The Committee may, in connection with the granting of any
Appreciation Rights, require the Employee to whom such Appreciation Rights are
to be granted to enter into an agreement with the Company as a condition
precedent to such grant, in whole or in part, pursuant to which he will
represent to the Company that he is acquiring such Appreciation Rights for his
own account for investment only and not with a view to distribution, and also
setting forth such other representations, terms and conditions as the Committee
may prescribe.
(g) The Company will have the right to deduct and withhold from all
amounts payable to any Employee pursuant to this Plan or otherwise any taxes and
other amounts required by law to be deducted and withheld.
-11-
<PAGE>
3. NATURE OF INTERESTS; ACCOUNTING:
--------------------------------
3.1 Nature of Interests: The Plan will be entirely unfunded, and nothing
-------------------
contained in, and no action taken pursuant to, this Plan will create or be
construed to create a trust or funded benefit of any kind in favor of any
Person, or a fiduciary relationship between or among the Employers, the
Committee, any Employee, any designated Beneficiary or any other Person. Title
to and beneficial ownership of all assets, if any, whether cash or investments,
that an Employer may designate to pay the vested Appreciation Rights granted
under this Plan, will at all times remain in such Employer's general asset
account, and neither any Employee nor any other Person will have any right or
property interest whatsoever in any such asset of the Employer until such
Appreciation Rights are paid to the Employee in accordance with this Plan. No
Employer will be required to pre-fund its obligations under this Plan in any
manner, whether by purchase of insurance contracts, contributions to a trust
fund, deposits in an escrow account or otherwise. If any Employer in its
discretion does purchase any such contract or deposit funds in any such fund or
account, no Employee or Beneficiary will have any right or interest in or to
such contract, trust or account, and such Employee or Beneficiary will have only
the rights of a general unsecured creditor with respect to such Employer's
unsecured promise to pay the vested Appreciation Rights in accordance with this
Plan.
3.2 Appreciation Rights Account: The Company will establish and maintain a
---------------------------
separate Appreciation Rights Account for each Eligible Employee who is granted
an Appreciation Right under this Plan. The Appreciation Rights Accounts will be
updated on an annual basis, and will specify the
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<PAGE>
Appreciation Rights held by each Employee, the Grant Dates of such Appreciation
Rights, the Grant Values attributable to such Appreciation Rights, the vested
percentage of the Employee in such Appreciation Rights and such other
information as may be prescribed by the Committee.
3.3 Plan Expenses and Allocation of Costs of Appreciation Rights: Vested
------------------------------------------------------------
Appreciation Rights granted to Eligible Employees under this Plan, and other
expenses associated with the establishment, administration and termination of
this Plan, as determined by the Committee, will be paid by the Company in
accordance with the terms and conditions set forth herein and, if so determined
by the Company, the costs of such payments and expenses, or a portion thereof,
will be charged by the Company to the Employers under such method of allocation
as the Company deems appropriate.
4. VESTING:
--------
4.1 Vesting: Except as otherwise provided by this Section 4, an Employee's
-------
interest in Appreciation Rights granted under this Plan is nonvested and
forfeitable at all times.
4.2 Vesting While in the Employ of an Employer:
-------------------------------------------
(a) An Employee will become 20 percent vested in the Appreciation
Rights granted to such Employee in any calendar year for each Year of Active
Employment completed by
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<PAGE>
the Employee in such year and each subsequent year. Notwithstanding the
preceding sentence, the Committee may shorten the period for the vesting of any
Appreciation Rights granted to any Employee under this Plan. Unless specifically
provided to the contrary by the Committee, service by an Employee prior to the
effective date of the grant of Appreciation Rights will not be credited toward
vesting in the Appreciation Rights.
(b) A Year of Active Employment will be any calendar year in which the
Employee completes at least 1,500 hours of service (1,000 hours of service in
calendar year 1996) (but in no event shall more than 40 hours of service be
earned in any week) for or on behalf of an Employer; provided that such Employee
is an Employee on the last day of such calendar year. Hours of service for
purposes of determining the Employee's vested percentage under this Plan will be
determined by reference to the number of hours of employment devoted by an
Employee for or on behalf of an Employer during any year, and in accordance with
criteria analogous to the provisions of 29 C.F.R. (S)2530.200b-2. Credit for
hours of service for any absence by reason of the Employee's short-term
disability, layoff or any other reason may be granted by the Committee. If an
Employee is Terminated for any reason not approved by the Committee, vesting of
any Appreciation Rights held by such Employee on the date of such Termination
will cease and if such Terminated Employee subsequently returns to the employ of
an Employer, the percentage of vesting in any Appreciation Rights then held by
such Employee, determined as of the date of such Termination, will not be
increased by reason of any service performed after the date of the Employee's
reemployment; provided that Appreciation Rights granted to such Employee after
such Employee's reemployment, if any, will vest in accordance
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<PAGE>
with this Section 4.2. An Employee's employment with or on behalf of an Employer
will be deemed to be continuous and uninterrupted if the Employee is employed by
any Employer, even if such employment changes from one Employer to a different
Employer.
4.3 Vesting Credit Upon Death or Disability: An Employee who dies or
---------------------------------------
becomes Disabled during a period in which he is an Employee will be deemed to
have completed a Year of Active Employment under Section 4.2 for the calendar
year in which such death or Disability occurs.
4.4 Termination.
------------
(a) In the event of the Termination of an Employee, whether such
Termination is initiated by the Employee or the Employer, but not including a
Termination for Cause, prior to such Employee becoming 100% vested in his
Appreciation Rights, any nonvested Appreciation Rights held by such Employee on
the date of such Termination will be canceled, such Employee will have no
further right or interest under this Plan with respect to such canceled
Appreciation Rights and the Company and the Controlled Affiliates will have no
further obligation with respect thereto.
(b) In the event of the Termination for Cause of an Employee, all
Appreciation Rights held by such Employee, whether vested or nonvested,
exercised or nonexercised, will be canceled, such Employee will have no further
right or interest under this Plan with respect to any of
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<PAGE>
such Appreciation Rights or payments with respect thereto and the Company and
the Controlled Affiliates will have no further obligation with respect thereto.
4.5 Acceleration of Vesting: Notwithstanding Section 4.2, Appreciation
-----------------------
Rights held by an Eligible Employee will become 100 percent vested, and will
become eligible for payment under Section 5, in accordance with this Section 4.5
upon the occurrence of either of the following events:
(a) The sale, exchange or other disposition (other than by reason of
the pledge or assignment of such assets as security for a loan) of all or
substantially all of the assets of the Venture;
or
(b) The sale, exchange or other disposition (other than by reason of
the pledge or assignment of such interests as security for a loan) of all of the
beneficial ownership interests in the Company or one or more Controlled
Affiliates owning, in the aggregate, all or substantially all of the assets of
the Venture,
if in either case immediately after such transaction substantially all of such
assets are not owned by the Liberty Group or the Fox Group or by one or more
Persons Controlled by the Liberty Group, the Fox Group or both of the Liberty
Group and the Fox Group or any combination of the foregoing.
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<PAGE>
4.6 Reissuance of Forfeited Appreciation Rights. Appreciation Rights which
-------------------------------------------
are forfeited under this Plan may be reissued by the Committee.
5. PAYMENT OF APPRECIATION RIGHTS
------------------------------
5.1 Time and Amount of Payment:
--------------------------
(a) Except as otherwise provided in this Section 5, the value
of vested Appreciation Rights will be paid to Eligible Employees as follows:
(i) During the 60-day period beginning on June 1 of each calendar
year beginning after December 31, 1997, an Employee who has not been Terminated
may elect to exchange all or a portion of his vested Appreciation Rights for the
amount payable by the Company under Section 5.1(b).
(ii) An Employee whose employment has been Terminated, whether
such Termination is initiated by the Employee or the Employer, but not including
a Termination for Cause, will be deemed to have elected on the date of such
Termination to exchange all of his vested Appreciation Rights held on such date
for the amount payable by the Company under Section 5.1(b) utilizing the
Venture Value as of the Valuation Date immediately preceding the date of
Termination
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<PAGE>
if such date of Termination is no later than 183 days following such Valuation
Date or, alternatively, the Venture Value as of the first Valuation Date
following such date of Termination.
(iii) On the Expiration Date, all Employees holding vested
Appreciation Rights on such date will be deemed to have elected to exchange all
of such vested Appreciation Rights for the amounts payable under Section
5.1(b) utilizing the Venture Value as of the Valuation Date immediately
preceding the Expiration Date.
(iv) Upon the tenth anniversary of the Grant Date of any
Appreciation Rights held by any Employee, such Employee will be deemed to have
elected to exchange all of the Appreciation Rights that have been held by such
Employee for the ten year period preceding the date of such tenth anniversary
and are vested on such date for the amount payable by the Company under Section
5.1(b) utilizing the Venture Value as of the Valuation Date immediately
preceding such tenth anniversary.
(v) Upon the death of an Employee, such Employee will be
deemed to have elected to exchange all of his vested Appreciation Rights held on
the date of such death for the amount payable by the Company under Section
5.1(b) utilizing the Venture Value as of the Valuation Date on or immediately
preceding such date of death. Payment of such deceased Employee's vested
Appreciation Rights will be made to the Employee's Beneficiary under Section
5.1(b) only after the receipt by the Company of documentation satisfactory to
the Company evidencing such death.
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<PAGE>
(vi) The form of the consideration payable by the Company under this
Section will be as set forth in Section 5.2. Payments will be made to the
Employee under this Section on the first Payment Date following the Valuation
Date with respect to which a valid election is made or deemed made under this
Section or, if such election occurs after such Payment Date, within 90 days of
the occurrence of such election; provided that (x) the aggregate payments made
to all Employees under this Plan in any calendar year shall not exceed the
lesser of $5,000,000 or 50 percent of the annual free cash flow of the Company
for such year; (y) in the event that the limitation described in the preceding
clause (x) is applicable in any calendar year, payment will be made (subject to
such limitation) to the Employees (A) in the order of the calendar years in
which the payment obligations arose with respect to such Employees and (B) with
respect to payment obligations arising in any calendar year, pro rata to such
Employees in proportion to the amount payable to each of them with respect to
such year; and (z) any amounts not payable to any Employee under the preceding
clause (y) in any calendar year shall be paid to such Employee in the succeeding
calendar year subject to the foregoing limitations set forth in this Section
5.1(a)(vi).
(vii) If payment of the value of any vested Appreciation Rights under
this Section in any year to any Employee would cause the applicable employee
remuneration of such Employee to exceed the limit imposed under Code Section
162(m)(1) for such year, and that Code Section would apply to the Company or any
Controlled Affiliate to limit the amount deducted for federal income tax
purposes with respect to such payment, the Committee may elect to pay to such
Employee only so much of such value as would not cause the Employee's applicable
employee
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<PAGE>
remuneration in such year to exceed the Code Section 162(m)(1) limit, and such
remaining value, increased for interest at the prime rate of interest charged by
the Bank of New York on the applicable Payment Date, compounded annually, will
be paid in subsequent years in accordance with this Section until the total
value of the vested Appreciation Rights elected to be exchanged by such Employee
in such year has been paid to such Employee. Notwithstanding anything to the
contrary in this Section 5. 1 (a)(vi), the Committee may make payments of any or
all vested Appreciation Rights in accordance with this Plan without regard to
the deductibility of any applicable remuneration under Section 162(m)(1) of the
Code or any other Code provision.
(b) The amount payable by the Company to any Employee under this
Section with respect to an Appreciation Right will be equal in value to the
excess, if any, of (1) the Value of an Incentive Unit on the relevant Valuation
Date over (2) the Grant Value. The Company, and no other Person, will have sole
liability to Employees in respect of the payment of vested Appreciation Rights
under this Section.
(c) Any Employee holding vested Appreciation Rights must elect to
exchange such vested Appreciation Rights for payment under this Section within
ten years after the Grant Date of such Appreciation Rights. If such election is
not made within such ten-year period, the Employee will be deemed to have made
the election described in Section 5. 1(a)(iv). All nonvested Appreciation Rights
held at the expiration of such ten-year period will be canceled, such Employee
will have no
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<PAGE>
right to payment under this Plan with respect to such canceled Appreciation
Rights and the Company and the Controlled Affiliates will have no further
obligation to any Person with respect thereto.
5.2 Form of Payment: Payment of Appreciation Rights under Section 5.1 will
-----------------
be in cash, except as provided below:
(a) Whole shares of any class or series of common stock of TCI,
Liberty, News Corp, Fox or any other Person designated by the Committee, or any
Successor to any such Person, which class or series is registered under Section
12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), may
be made available for payment, in the sole discretion of the Company and with
the consent of TCI, Liberty, News Corp, Fox, such other Person or any such
Successor, as applicable.
(b) Whole shares of common stock of the Company or any Successor
thereto, in the event the Company or such Successor becomes a reporting company
under Section 13 or 15(d) of the Exchange Act, may be made available for
payment, in the sole discretion of the Company or such Successor, as the case
may be.
(c) The Committee may determine that any shares of common stock made
available for payment under Section 5.2(a) or 5.2(b) will be delivered to an
Employee in lieu of all or any portion of the cash payment such Employee is
eligible to receive under this Section. For
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<PAGE>
purposes of determining the number of shares of common stock to be delivered
under this Section, such shares of common stock will be deemed to have a per
share value equal to the average of the Market Prices of such common stock for
the 20 consecutive trading days ending on the third trading day preceding the
date shares are to be delivered to an Employee. The Market Price of such common
stock for any trading date will be determined as follows:
(1) if the common stock is listed on any established stock exchange (as
designated by the Committee) or a national market system that reports sales
prices, including the National Market System of the National Association of
Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, the Market Price
of a share of the common stock will be the closing sale price for such stock (or
the closing bid, if no sales were reported) on such exchange or system, as
reported in The Wall Street Journal or such other source as the Committee deems
-----------------------
reliable;
(2) if the common stock is quoted on the Nasdaq System (but not on the
National Market Quotation System thereof) or is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Market Price of a
share of the common stock will be the mean between the high bid and high asked
prices of the common stock, as reported in such source as the Committee deems
reliable; and
(3) in the absence of an established market for the common Market Price of
a share of the common stock will be determined by the Committee.
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<PAGE>
(d) Any shares of common stock made available for payment under this
Section will not be paid until the Committee is satisfied that the delivery of
such shares will not violate the registration requirements of any applicable
securities laws and that the recipient of such shares will have the right to
transfer such shares without any material restriction pursuant to such
securities laws. No fractional shares of stock will be issued or paid under this
Section. To the extent any portion of an Appreciation Right is not paid in the
form of stock under this Section, such portion of such Appreciation Right, if
any, will be paid in cash.
5.3 Payment to Minors or Incapacitated Persons: If the Committee determines
------------------------------------------
that any Person to whom any payment is to be made under this Plan is unable to
care for his affairs because of illness or accident, or is a minor, any payment
due will be paid to the duly appointed guardian or other legal representative of
such Person. Payment will be made under this Section 5.3 only after the receipt
by the Company of documentation satisfactory to the Company evidencing such
legal status.
5.4 Expiration of Appreciation Rights. Appreciation Rights granted under
---------------------------------
this Plan to any Employee will terminate, and the Company will have no further
obligation to such Employee, upon the earlier to occur of (a) the exchange of
such Appreciation Rights for cash or other property under this Section 5 or (b)
the expiration, cancellation or forfeiture of such Appreciation Rights under the
terms of this Plan.
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<PAGE>
6. VALUATION.
---------
6.1 Retention of the Firm. The Company may, through its own employees or
---------------------
agents or, in its complete and sole discretion, through retention of a Firm, on
such terms and conditions as the Company may determine in its sole discretion,
ascertain the Venture Value as of each Valuation Date occurring after the
Effective Date.
6.2 Valuation Guidelines.
--------------------
(a) The Committee will prescribe from time to time specific guidelines to
be considered by the Company or the Firm in its determination of the Venture
Value, which guidelines may be changed from time to time, in the complete and
sole discretion of the Committee. In determining the Venture Value the Company
or the Firm, as the case may be, may consider the business of the Venture and
its financial performance for all periods ending after the Effective Date,
including an analysis of (i) earnings; (ii) cash flows; (iii) financial
forecasts and business plans, if available; (iv) the assets of and prospects for
the Venture; (v) the performance of comparable Persons engaged in similar
businesses; and (vi) such other factors as are commonly considered in the
determination of the valuation of a similarly situated entity.
(b) Notwithstanding anything contained in this Section 6.2 to the contrary,
the Venture Value will be no less than (i) the value based upon a capitalization
of the then Market Price
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<PAGE>
of the Venture as determined pursuant to Section 5.2(c) provided that no
less than ten percent of the equity of the Venture is then owned by persons
other than the Liberty Group or the Fox Group or their transferees and is
publicly traded on any national securities exchange or (ii) the valuation based
upon any sale of one-third or more of the equity of the Venture other than a
sale to either the Liberty Group or the Fox Group, by determining the Venture
Value based upon such sale.
7. MISCELLANEOUS.
--------------
7.1 Modification and Termination of Plan: The Company reserves the right to
------------------------------------
amend or terminate this Plan, and to suspend the grant of Appreciation Rights
under this Plan, at any time and from time to time in any manner it determines;
provided that any termination, amendment or suspension will not adversely affect
the vested Appreciation Rights granted prior to the effective date of such
amendment, termination or suspension; provided further that the Company reserves
the right to deem the vested Appreciation Rights granted as of such date of
amendment, termination or suspension to have been exchanged for the payments
provided in Section 5 as of the most recent Valuation Date preceding such date,
and, unless determined otherwise by the Committee, to deem the nonvested
Appreciation Rights forfeited. Notwithstanding any other provision of this Plan,
this Plan will terminate on the Expiration Date, and all vested Appreciation
Rights outstanding on the Expiration Date will be paid in compliance with the
terms of this Plan. Immediately upon the payment of vested Appreciation Rights
after any termination of this Plan, no Person will have any
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<PAGE>
further interest under this Plan and no Employee of Beneficiary will be entitled
to any further payment under this Plan.
7.2 Interest in this Plan Nonassignable: No Employee will have any right to
-----------------------------------
sell, assign, dispose of, transfer, convey or otherwise alienate ("Transfer")
any Appreciation Right granted under this Plan or the right to receive payment
for any vested Appreciation Right, other than by designation of a Beneficiary
under the applicable Grant Agreement or by will or the laws of descent and
distribution, and all Appreciation Rights and the right to payment therefore are
expressly declared nonassignable and nontransferable. Any purported Transfer in
violation of this Section will be void and will be given no effect by the
Company or any other Employer.
7.3 Termination of Service: Neither this Plan nor any action taken under
----------------------
this Plan will be construed as giving any Employee any right to be retained in
the employ of any Employer, and the right to dismiss any Employee at any time
with or without cause is specifically reserved to each Employer (subject to the
terms of any separate written employment agreement between such Employee and his
Employer).
7.4 Authority to Interpret this Plan: The Committee will have the complete
--------------------------------
and final authority to administer and interpret the provisions of this Plan, and
the Committee's determination will be binding and conclusive on all parties. All
interpretations, decisions and determinations required or permitted to be made
or taken by the Committee will be made or taken by the Committee
-26-
<PAGE>
in its reasonable discretion. All interpretations, decisions and determinations
taken by the Committee which are made in good faith and are not inconsistent
with the terms of this Plan will be final, binding and conclusive on the
Employers, Employees, Beneficiaries and all other Persons having dealings with
this Plan.
7.5 Effect of this Plan: This Plan will be binding upon and inure to the
-------------------
benefit of the Employers, their Successors, the Employees and the Beneficiaries.
7.6 APPLICABLE LAW: THIS PLAN WILL BE CONSTRUED IN ACCORDANCE WITH AND
--------------
GOVERNED BY THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO PRINCIPLES OF
CONFLICTS OF LAWS.
7.7 Counterparts: This Plan may be executed in any number of counterparts,
------------
each of which will be deemed to be an original instrument, but all of which
taken together will constitute but one instrument.
7.8 Complete Agreement: This Plan, along with any Grant Agreement entered
------------------
into by the Employer and an Employee, will constitute the entire understanding
and agreement between an Employer and such Employee with respect to the subject
matter hereof. The provisions of this Plan will govern in the event of any
inconsistency between any Grant Agreement and this Plan.
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<PAGE>
7.9 Waiver of Breach: The waiver by any Employer or the Committee of a
----------------
breach or violation of any provision of this Plan will not operate as, or be
construed to be, a waiver of any subsequent breach of the same or the provisions
hereof.
7.10 Severability: If any provision of this Plan, or the application of
------------
such provision to any Person or circumstance, is found by a court of competent
jurisdiction to be unenforceable for any reason, such provision may be modified
or severed from this Plan to the extent necessary to make such provision
enforceable against such Person or in such circumstance. Neither the
unenforceability of such provision nor the modification or severance of such
provision will affect (i) the enforceability of any other provision of this Plan
or (ii) the enforceability of such provision against any Person or in any
circumstance other than those against or in which such provision is found to be
unenforceable.
7.11 Arbitration: Any dispute arising under this Plan will be submitted to
-----------
binding arbitration in New York, New York under the Commercial Arbitration Rules
of the American Arbitration Association or such other arbitral body as the
Committee may select. Judgment on the award of the arbitrators may be entered in
any court of competent jurisdiction. The prevailing party in any such
arbitration will be entitled to recover, in addition to any other relief
awarded, its reasonable costs of preparing for and participating in the
arbitration, including reasonable attorneys' fees.
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<PAGE>
7.12 Headings. The headings of the Sections of this Plan are solely for
--------
convenience and reference and will not limit or otherwise affect the meaning of
any of the terms or provisions of this Plan.
7.13 Terms. Terms used with initial capital letters will have the
-----
meanings specified, applicable to both singular and plural forms, for all
purposes of this Plan. All pronouns (and any variation) will be deemed to refer
to the masculine, feminine or neuter, as the identity of the Person may require.
The singular or plural includes the other, as the context requires or permits.
The word include (and any variation) is used in an illustrative sense rather
than a limiting sense. The word day means a calendar day. The word year means a
calendar year.
7.14 Notices. All notices, claims, requests, demands and other
-------
communications required or given hereunder will be in writing and will be deemed
to be duly given if (a) personally delivered (including delivery by Federal
Express or other nationally recognized overnight carrier) or (b) sent by
telecopy as follows:
(a) If to the Company or a Controlled Affiliate, to the address set forth
on the signature page attached hereto.
(b) If to an Employee, to the address maintained for such Employee on the
books and records of the Employer of such Employee.
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<PAGE>
(c) Any person may change the address(es) to which notices are required to
be sent by giving notice of such changes in the manner provided in this Section;
provided that such notice will not be effective until actual receipt by the
addressee.
7.15 Confidentiality. Employees shall keep all information with respect to
---------------
this Plan confidential, including, but not limited to, information concerning
the financial value of the Venture.
IN WITNESS WHEREOF, the Company has caused this Plan to be executed this
23rd day of October, 1997.
FOX/LIBERTY NETWORKS, LLC
By: /s/
----------------------------
Title: Senior Vice President
------------------------
-30-
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF FOX/LIBERTY NETWORKS, LLC AS OF MARCH 31, 1998
Fox Sports Net, LLC
FX Networks, LLC
Prime Philadelphia Sports LLC
Fox/Liberty Ad Sales, LLC
Affiliated Regional Communications, Ltd.
Fox/Liberty Network Sales, Inc.
Fox/Liberty SportsCom, LLC
Fox Sports Ad Sales Holdings, LLC
Fox Sports Detroit, LLC
Fox Sports National Holdings, LLC
Prime Network LLC
Sports Holding Inc.
Fox Sports Net Baseball, LLC
Fox Sports RPP Holdings, LLC
Foxwatch Productions, Inc.
Liberty/Fox ARC L.P.
Liberty/Fox Bay Area L.P.
Liberty/Fox Canada LLC
Liberty/Fox Chicago L.P.
Liberty/Fox Distribution L.P.
Liberty/Fox KBL L.P.
Liberty/Fox Network Programming, LLC
Liberty/Fox Northwest L.P.
Liberty/Fox Southeast LLC
Liberty/Fox Sunshine LLC
Liberty/Fox Upper Midwest L.P.
Liberty/Fox Utah LLC
Liberty/Fox West LLC
MASN Holdings, L.L.C.
Professional Sports Services, LLC
Prime Sports Northwest Network
ARC Holding, Ltd.
LMC Southeast Sports, Inc.
Liberty SportSouth, Inc.
LMC Sunshine, Inc.
Prime Sports Network - Upper Midwest
Upper Midwest Cable Partners
Liberty/Fox Arizona LLC
Prime Ticket Networks, L.P.
Rocky Mountain Prime Sports Network
SportSouth Network, Ltd.
SportsChannel Chicago Associates
SportsChannel Bay Area Associates
SportsChannel Prism Associates
Sunshine Network
Fox/Liberty West II, LLC
National Sports Partners
National Advertising Partners
Regional Programming Partners
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001048002
<NAME> FOX/LIBERTY NETWORKS, LLC
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 8-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> APR-30-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 DEC-31-1997
<CASH> 7,964 49,560
<SECURITIES> 0 0
<RECEIVABLES> 102,899 179,609
<ALLOWANCES> (957) (1,714)
<INVENTORY> 0 0
<CURRENT-ASSETS> 140,140 285,714
<PP&E> 30,703 68,752
<DEPRECIATION> (7,370) (22,221)
<TOTAL-ASSETS> 610,982 1,817,758
<CURRENT-LIABILITIES> 157,813 308,617
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 230,728 152,271
<TOTAL-LIABILITY-AND-EQUITY> 610,982 1,817,758
<SALES> 144,792 471,792
<TOTAL-REVENUES> 144,792 471,792
<CGS> 117,445 420,888
<TOTAL-COSTS> 237,561 505,414
<OTHER-EXPENSES> 37,537 12,283
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3,819 34,142
<INCOME-PRETAX> (117,149) (78,457)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (117,149) (78,457)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (117,149) (78,457)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
