<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------
Form 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the quarterly period ended March 31, 1999.
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
---------
FOX/LIBERTY NETWORKS, LLC
(Exact name of registrant as specified in its charter)
Delaware 95-4577574
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1440 South Sepulveda Boulevard, Los Angeles, CA 90025
(Address of principal executive offices)
Registrant's telephone number, including area code: (310) 444-8123
---------
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
--- ---
================================================================================
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
FOX/LIBERTY NETWORKS, LLC
(A Delaware Limited Liability Company)
Condensed Consolidated Balance Sheets
March 31, 1999 and December 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................................................ $ 34,269 $ 42,918
Trade and other receivables, net of allowance for doubtful accounts of $11,657 at
March 31, 1999 and $ 9,324 at December 31, 1998.................................... 129,651 138,139
Receivables from equity affiliates, net.............................................. 52,181 33,577
Program rights....................................................................... 103,479 88,620
Notes receivable, current............................................................ 1,950 1,928
Prepaid expenses and other current assets............................................ 13,491 9,939
---------- ----------
Total current assets.............................................................. 335,021 315,121
Property and equipment, net............................................................ 50,177 49,306
Investments in affiliates.............................................................. 873,375 871,432
Note receivable, long-term............................................................. -- 24
Program rights......................................................................... 104,028 106,459
Excess cost, net of accumulated amortization of $90,032 at March 31, 1999 and
$86,470 at December 31, 1998....................................................... 517,571 521,133
Other assets........................................................................... 27,846 28,460
---------- ----------
Total Assets...................................................................... $1,908,018 $1,891,935
========== ==========
Liabilities and Members' Equity
Current liabilities:
Accounts payable and accrued expenses................................................ $ 167,388 $ 164,329
Program rights payable............................................................... 57,344 56,651
Current portion of long-term debt.................................................... 13,115 15,450
Accrued interest..................................................................... 13,162 24,833
Other current liabilities............................................................ 10,151 13,806
---------- ----------
Total current liabilities......................................................... 261,160 275,069
Non-current program rights payable..................................................... 114,761 123,581
Long-term debt, net of current portion................................................. 1,451,012 1,401,891
Minority interest...................................................................... 1,150 1,191
Commitments and contingencies
Members' equity........................................................................ 79,935 90,203
---------- ----------
Total Liabilities and Members' Equity............................................. $1,908,018 $1,891,935
========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
2
<PAGE>
FOX/LIBERTY NETWORKS, LLC
(A Delaware Limited Liability Company)
Condensed Consolidated Statements Of Operations
For the Three Months Ended March 31, 1999 and 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
-------- --------
(unaudited) (unaudited)
<S> <C> <C>
Revenues:
Programming........................................................................ $ 84,815 $ 74,045
Advertising........................................................................ 40,931 37,273
Direct broadcast................................................................... 29,489 29,735
Infomercial........................................................................ 6,722 5,808
Other.............................................................................. 9,986 9,748
-------- --------
171,943 156,609
-------- --------
Expenses:
Operating.......................................................................... 120,484 113,183
General and administrative......................................................... 18,352 20,968
Depreciation and amortization...................................................... 5,991 5,199
-------- --------
144,827 139,350
-------- --------
Operating income..................................................................... 27,116 17,259
-------- --------
Other (income) expenses:
Interest, net...................................................................... 26,804 27,482
Subsidiaries' income tax expense................................................... 94 535
Equity loss (income) of affiliates, net............................................ 9,784 (5,925)
Other, net......................................................................... 23 --
Minority interest.................................................................. 679 614
-------- --------
37,384 22,706
-------- --------
Net loss............................................................................. $(10,268) $ (5,447)
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
FOX/LIBERTY NETWORKS, LLC
(A Delaware Limited Liability Company)
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1999 and 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
-------- --------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss.......................................................................... $(10,268) $ (5,447)
Adjustments to reconcile net loss to net cash (used in) provided by operating
activities:
Depreciation and amortization.................................................. 5,991 5,199
Interest accretion and amortization of debt issuance costs..................... 7,779 7,436
Equity loss (income) of affiliates............................................. 9,784 (5,925)
Minority interests............................................................. 679 614
Changes in operating assets and liabilities:
Trade and other receivables.................................................... 8,488 (20,441)
Program rights................................................................. (12,428) 5,120
Prepaid expenses and other operating assets.................................... (3,509) (1,581)
Accounts payable and accrued expenses.......................................... 3,059 37,522
Program rights payable......................................................... (8,127) (7,675)
Other operating liabilities.................................................... (15,326) (3,333)
-------- --------
Net cash (used in) provided by operating activities......................... (13,878) 11,489
-------- --------
Cash flows from investing activities:
Advances from equity affiliates................................................... 2,203 12,127
Advances to equity affiliates..................................................... (20,807) (60,978)
Notes receivable collected from third parties..................................... 2 621
Purchases of property and equipment............................................... (3,300) (1,320)
Investments in equity affiliates.................................................. (11,727) (10,226)
-------- --------
Net cash used in investing activities....................................... (33,629) (59,776)
-------- --------
Cash flows from financing activities:
Borrowings of long-term debt...................................................... 62,000 20,000
Repayment of long-term debt....................................................... (22,422) (12,422)
Distribution to minority shareholder of subsidiary................................ (720) --
-------- --------
Net cash provided by financing activities................................... 38,858 7,578
-------- --------
Net decrease in cash and cash equivalents........................................... (8,649) (40,709)
Cash and cash equivalents, beginning of period...................................... 42,918 49,560
-------- --------
Cash and cash equivalents, end of period............................................ $ 34,269 $ 8,851
======== ========
Supplemental Cash Flow disclosure:
Cash paid for interest $ 31,446 $ 26,414
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
FOX/LIBERTY NETWORKS, LLC
(A Delaware Limited Liability Company)
Notes to Condensed Consolidated Financial Statements
March 31, 1999 (unaudited)
(Dollars in thousands)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Fox/Liberty Networks, LLC (the "Company") have been prepared by the Company
pursuant to the instructions for Form 10-Q and, accordingly, certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted where permitted by regulation. In management's opinion, the
accompanying unaudited condensed consolidated financial statements reflect all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the consolidated results of operations for the interim periods
presented. The condensed consolidated results of operations for such interim
periods are not necessarily indicative of the results that may be expected for
future interim periods or for the year ended December 31, 1999. These interim
condensed consolidated financial statements and the notes thereto should be read
in conjunction with the audited consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
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.
(2) Debt
Debt at March 31, 1999 and December 31, 1998 is summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ------------
(unaudited)
<S> <C> <C>
Chase Manhattan Bank--Term loan...... $ 400,000 $ 400,000
Chase Manhattan Bank--Revolver....... 247,000 205,000
Senior Notes......................... 500,000 500,000
Senior Discount Notes................ 293,787 286,878
Other................................ 23,340 25,463
---------- ----------
1,464,127 1,417,341
Less current portion................. (13,115) (15,450)
---------- ----------
$1,451,012 $1,401,891
========== ==========
</TABLE>
5
<PAGE>
FOX/LIBERTY NETWORKS, LLC
(A Delaware Limited Liability Company)
Notes to Condensed Consolidated Financial Statements -- (Continued)
March 31, 1999 (unaudited)
(Dollars in thousands)
(3) Summarized Financial Information
Summarized unaudited income statement information for subsidiaries
accounted for under the equity method for which separate financial information
would be required for annual periods, is as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1999 1998
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Revenue $233,650 $208,631
Operating profit (loss) (16,897) (4,586)
Net (loss) income (9,857) 19,025
</TABLE>
(4) 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 amount payable by the Company with
respect to any Appreciation Rights exercised will equal the excess, if any, of
the value at December 31 of the preceding year over the original grant value.
The Company has recognized a non-cash charge to earnings of approximately $2,292
in the three months ended March 31, 1999 to reflect its estimated liability
under the Plan for the period.
(5) Subsequent Events
(a) In May 1999, the Company sold its investment in Fit TV to an affiliate
of Fox Entertainment Group, Inc. ("Fox") for $14.5 million. At the
date of sale, the Company recorded a loss from the sale of this
investment in the amount of the excess of the Company's carrying value
of the investment, including any related unamortized excess cost, over
the selling price.
(b) On April 5, 1999, The News Corporation Limited ("News Corporation")
announced that it would acquire substantially all of Liberty Media
Corporation's interest in the Company. Upon consummation of this
transaction, News Corporation has indicated that it will transfer the
acquired interests to Fox. This transaction is expected to close on or
about June 30, 1999 upon fulfillment of certain customary conditions,
including regulatory approvals.
6
<PAGE>
This document contains statements that constitute "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as amended. The words
"expect," "estimate," "anticipate," "predict," "believe" and similar expressions
and variations thereof are intended to identify forward-looking statements.
These statements appear in a number of places in this document and include
statements regarding the intent, belief or current expectations of the Company,
its members or its officers with respect to, among other things, trends
affecting the Company's financial condition or results of operations. The
readers of this document are cautioned that any such forward-looking statements
are not guarantees of future performance and involve risks and uncertainties,
including those risks and uncertainties discussed in this document under the
heading "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 under the headings "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
Company does not ordinarily make projections of its future operating results and
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
Readers should carefully review the risk factors discussed herein and in the
other documents filed by the Company with the Securities and Exchange
Commission. This report should be read in conjunction with the unaudited
condensed consolidated financial statements of the Company and related notes set
forth elsewhere herein.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with the
Management's Discussion and Analysis included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998.
Introduction
Fox/Liberty Networks, LLC (together with its subsidiaries, the "Company")
was formed to provide cable programming through its interests in regional sports
networks ("RSNs") and Fox Sports Net ("FSN"), a national sports programming
service, and through FX Network ("FX"), a general entertainment network. 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"), while its interest in FX is derived
through its 99% ownership interest in FX Networks, LLC ("Fox/Liberty FX"). The
Company was formed in April 1996, pursuant to a 50%/50% joint venture (the
"Fox/Liberty Joint Venture") between Fox Entertainment Group, Inc. ("Fox"), a
majority owned subsidiary of The News Corporation Limited ("News Corporation")
and Liberty Media Corporation ("Liberty"), a wholly-owned subsidiary of Tele-
Communications, Inc. ("TCI").
On April 5, 1999, News Corporation announced that it would acquire
substantially all of Liberty's interest in the Company. Upon consummation of
this transaction, News Corporation has indicated that it will transfer the
acquired interests to Fox. This transaction is expected to close on or about
June 30,1999 upon fulfillment of certain customary conditions, including
regulatory approvals.
In August 1997, the Company issued $500.0 million aggregate principal
amount of its 8 7/8% Senior Notes due 2007 and $405.0 million aggregate
principal amount at maturity ($252.3 million gross proceeds) of its 9 3/4 %
Senior Discount Notes due 2007 (together, the "Offering"). The net proceeds from
these notes were used, along with proceeds from the Bank Facility (as defined
below), to finance the Company's acquisition of a 40% interest in Regional
Programming Partners ("RPP") which was formed to hold interests in RSNs and
related businesses then owned by Rainbow Media Sports Holdings, Inc.
("Rainbow"). In connection with this transaction ("the Rainbow Transaction"),
the Company and Rainbow also formed National Sports Partners (the "National
Sports Partnership") as a 50%/50% partnership to operate FSN, and 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.
7
<PAGE>
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 $800.0 million (the "Bank Facility"). The Bank
Facility is comprised of a $400.0 million revolving credit facility and a $400.0
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
certain RSNs that are wholly owned, directly or indirectly, by the Co-Borrowers
and by certain of the Co-Borrowers' subsidiaries that hold the direct interest
in RSNs that are not wholly owned, directly or indirectly, by the Co-Borrowers.
The Company also provides a parent company guarantee of the borrowings under the
Bank Facility. 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 RPP) and the equity interests held by the Co-
Borrowers (other than Fox Sports RPP) and their subsidiaries in certain related
entities.
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.
The following RSNs, together with Fox Sports Direct and Fox/Liberty FX, are
consolidated in the financial statements of the Company, at March 31, 1999 and
1998: 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 March 31, 1999 and 1998, 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 all the businesses in which the
Company holds ownership interests.
Results of Operations
Three months ended March 31, 1999 as compared with the three months ended
March 31, 1998
Total revenues for the three months ended March 31, 1999 were $171.9
million, an increase of $15.3 million, or 10%, over the three months ended March
31, 1998. Programming revenue was the largest source of revenue, representing
49% of total revenue, or $84.8 million, for the three months ended March 31,
1999. Advertising and direct broadcast revenue represented 24% and 17%,
respectively, of total revenue, or $40.9 million and $29.5 million,
respectively, for the three months ended March 31, 1999. For the three months
ended March 31, 1998, programming revenue was $74.0 million and advertising and
direct broadcast revenue were $37.3 and $29.7 million, respectively, or 47%, 24%
and 19% of total revenues.
Programming and advertising revenue increased by $10.8 million and $3.7
million, respectively in the three months ended March 31, 1999 as compared to
the three months ended March 31, 1998. These increases represent a
8
<PAGE>
15% and 10% increase in programming and advertising revenue, respectively,
between the periods. The increase in programming revenue is comprised primarily
of an increase in subscribers at West 2 RSN, a combined 5% subscriber growth in
other RSNs and the continued subscriber growth of FX, which reached 39.1 million
households as of March 31, 1999, a 14% increase over March 31, 1998. Rate
increases comprised the balance of the increase between periods. The increase in
advertising revenue of 10% is comprised of a net 45% increase in advertising
revenue by FX partially offset by a 5% decrease by the RSNs. Total day Monday
through Sunday ratings on FX increased by 8% as compared to the same period in
the prior year. The increased total day ratings together with increased
subscribers provided the basis for the 45% increase in advertising revenue. The
RSNs decline in advertising revenue is due primarily to the impact of the NBA
lockout. The number of NBA events decreased in the three months ended March 31,
1999 by 30% as compared to the three months ended March 31, 1998. Total
professional events decreased by 11% over this period as compared to the prior
year. Increased advertising revenue for NHL events and other programming
substantially offset the decline in advertising revenue generated for NBA
events.
Operating expenses totaled $120.5 million for the three months ended March
31, 1999, representing 70% of total revenues and an increase of $7.3 million, or
6%, over the same period in the prior year. These expenses consist primarily of
programming and production costs. Operating expenses for the three months ended
March 31, 1998 totaled $113.2 million, or 72% of total revenues. Production
expenses of the RSNs decreased as compared to the three months ended March 31,
1998 due to the decrease in the number of professional events as described
above. Decreases in rights fees resulting from fewer NBA events were offset by
increases in rights fees on NHL events and increased programming rights fees
arising from renegotiated and newly entered into sports rights agreements.
General and administrative expenses totaled $18.4 million for the three
months ended March 31, 1999, which represented 11% of total revenues. General
and administrative expenses for the three months ended March 31, 1998 totaled
$21.0 million, or 13% of total revenues. Non-cash charges to earnings were taken
in the three months ended March 31, 1999 and 1998 with respect to an equity
appreciation rights plan in the amount of $2.3 million and $6.5 million,
respectively.
Depreciation and amortization expenses totaled $6.0 million and $5.2
million for the three months ended March 31, 1999 and 1998, respectively. Of
these amounts, $3.6 million and $3.5 million were related to amortization of
excess cost from acquisitions of programming entities consolidated with the
Company.
Interest expense for the three months ended March 31, 1999 totaled $26.8
million as a result of $1,464.1 million of debt outstanding as of March 31,
1999. Interest expense for the three months ended March 31, 1998 totaled $27.5
million, which related to $1,340.8 million of outstanding indebtedness as of
March 31, 1998. The decrease in interest expense is primarily due to lower
interest rates on debt outstanding under the Bank Facility. The increase in the
amount of debt is primarily attributable to additional borrowings used to fund
investments in the Company's equity affiliates and working capital uses.
Equity loss of affiliates for the three months ended March 31, 1999 was
$9.8 million, while the Company recognized equity income of affiliates of $5.9
million for the three months ended March 31, 1998. For the three months ended
March 31, 1998, equity income of affiliates included a gain on the sale of 50%
of RPP's investment in New England RSN in the amount of $7.1 million. In the
three months ended March 31, 1999, RPP was negatively impacted by the NBA
lockout, Pittsburgh RSN was adversely affected by the Pittsburgh Penguins
bankruptcy and the Company recognized start up losses from its Canadian joint
venture.
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 used in operating activities of the Company for the three months
ended March 31, 1999 was $13.9 million. Net cash provided by operating
activities of the Company for the three months ended March 31, 1998 was $11.5
million.
9
<PAGE>
Net cash used in investing activities of the Company for the three months
ended March 31, 1999 and for the three months ended March 31, 1998 was $33.6
million and $59.8 million, respectively.
Net cash provided by financing activities of the Company for the three
months ended March 31, 1999 and for the three months ended March 1998 was $38.9
million and $7.6 million, respectively.
In August 1997, the Company issued $500.0 million aggregate principal
amount of its 8 7/8 % Senior Notes due 2007 and $405.0 million aggregate
principal amount at maturity ($252.3 million gross proceeds) of its 9 3/4 %
Senior Discount Notes due 2007 through a public debt offering. 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 Company has credit facilities with different banks. The credit
facilities restrict the amount of distributions that can be made to Members, and
contain certain restrictive covenants regarding, among other things, the
maintenance of certain financial ratios and restrictions on the distribution of
assets. During the three months ended March 31, 1999, the Company incurred net
borrowings of $40.4 million bringing the total amount borrowed under these
credit facilities to $651.7 million as of March 31, 1999. The total unused
commitments pursuant to these credit facilities were $153.0 million as of March
31, 1999.
Future capital requirements will be substantial as the Company continues to
invest in developing networks, acquire sports programming rights, explore
opportunities to expand its distribution and complete its transition from analog
transponder equipment to digital transponder equipment. Although no assurances
can be given in this regard, the Company believes that its existing funds and
the proceeds from borrowings under its credit facilities, 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.
Year 2000
The following disclosure is a Year 2000 readiness disclosure statement
pursuant to the Year 2000 Readiness and Disclosure Act.
The Company is devoting significant resources throughout its business
operations to resolve the potential impact of the Year 2000 (Y2K) on the
processing of date-sensitive information by its computerized information
technology ("IT") systems. The Y2K problem is the result of computer programs
being written using two digits (rather than four) to define the applicable year.
Certain programs may recognize a date using "00" as the year 1900 rather than
the year 2000, which could result in miscalculations or system failures. The
problem also extends to non-IT systems including: operating and control systems
that rely on embedded chip systems.
The Company's standard for compliance requires that for a computer system
or a business process to be Year 2000 compliant, it must be designed to be used
prior to, on and after January 1, 2000. Such systems or processes must be able
to operate without error in dates and date-related data, including without
limitation, calculating, comparing, indexing and sequencing prior to, on and
after January 1, 2000. The Company expects to be Y2K compliant with respect to
all significant business systems during the second half of calendar 1999.
The Company has established a dedicated Y2K Steering Committee to oversee
the Company's Y2K internal IT application and infrastructure readiness
activities. The Y2K Steering Committee is charged with raising awareness
throughout the Company, developing tools and methodologies for addressing the
Y2K issue, monitoring the development and implementation of business and
infrastructure plans to bring non-compliant applications into compliance on a
timely basis and identifying and assisting in resolving high risk issues. The
Y2K Steering Committee is focused on the following major areas:
Internal IT Systems. The Company is approaching its Y2K internal readiness
program in the following five phases: (1) assessment, (2) strategy, (3)
planning, (4) implementation and (5) testing and management. The assessment
phase involves taking an inventory of the Company's internal IT applications.
The strategy phase
10
<PAGE>
involves prioritizing risk, identifying failure dates, defining a solution
strategy, estimating repair costs and communicating across the Company the
magnitude of the problem and the need to address Y2K issues. The planning phase
consists of identifying the tasks necessary to ensure readiness, scheduling
remediation plans for applications and infrastructure, and determining resource
requirements and allocations. The fourth phase, implementation, involves
readying the development and testing environments, and piloting the remediation
process. Testing and management, the last phase, consists of executing the
Company's plan to fix, test and implement critical applications and associated
infrastructure, and putting in place contingency plans for processes that have a
high impact on the Company's business.
Internal Non-IT Systems. The Company has also focused on internal non-IT
systems. Non-IT systems include those systems that are not commonly thought of
as IT systems, such as broadcast equipment, satellite transmission equipment,
telephone/PBX systems, fax machines, facilities systems regulating alarms,
building access and other miscellaneous systems that depend on date related
processing. The Company's Y2K Steering Committee is providing standardized tools
and is monitoring the progress of these readiness efforts to ensure business
continuity.
Material Third Party Relationships. The Company has developed a Y2K process
for dealing with its key suppliers, contract manufacturing, distributors,
vendors and partners. The process generally involves the following steps: (i)
initial supplier survey, (ii) risk assessment and contingency planning, (iii)
follow-up supplier reviews and escalation, if necessary, and where relevant,
(iv) testing. To date, the Company has received responses from many of its
critical suppliers, most of whom responded that they expect to address all their
significant Y2K issues on a timely basis. The Company is following up with those
significant vendors and service providers that either did not respond initially
or whose responses were unsatisfactory. The company is working to identify and
analyze the most reasonably likely worst case scenarios for third party
relationships affected by Y2K.
The Company expects to successfully implement the systems and programming
changes necessary to address internal IT and non-IT readiness issues. The
Company has been focusing its efforts on identifying and remediating its Y2K
exposures and is developing and will have tested where practical contingency
plans in the event it does not successfully complete all phases of its Y2K
program. These contingency plans include, but are not limited to identification
of alternative suppliers, vendors and service providers.
Based on the Company's current assessment, the costs of addressing
potential problems are not currently expected to have a material adverse impact
on the Company's financial position, results of operations or cash flows in
future periods. However, if the Company, its customers or vendors identify Y2K
issues in the future and are unable to resolve such issues in a timely manner,
it could result in a material financial risk. Accordingly, the Company plans to
devote the necessary resources to resolve all significant Y2K issues in a timely
manner. The estimated costs for the project are currently expected to be
approximately $2.5 million in the aggregate.
Based upon its efforts to date, the Company continues to believe that the
vast majority of its systems will be able to process date-related data without
error after January 1, 2000. Accordingly, the Company does not currently
anticipate that internal systems failures will result in any material adverse
effect to its operations or financial condition. At this time, the Company
continues to believe that the most likely "worst-case" scenario involves
potential disruptions in areas in which the Company's operations must rely on
third parties whose systems may not work properly after January 1, 2000. While
such failures could affect important operations of the Company and its
subsidiaries, either directly or indirectly, in a significant manner, the
Company cannot, at present, estimate either the likelihood or the potential cost
of such failures.
The costs of the project and the date on which the Company believes it will
complete the Y2K modifications are based on management's best estimates, which
were derived utilizing numerous assumptions of future events, including the
continued availability of certain resources, third-party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved, or that there will not be a delay in, or increased costs associated
with, the implementation of the Company's Y2K compliance project. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, timely responses to and
correction by third parties and suppliers, the ability to implement interfaces
between the new systems and the systems not being replaced, and similar
uncertainties. Due to the general uncertainty inherent in the Y2K readiness of
third parties and the interconnection of national businesses, the Company cannot
ensure that its ability to timely and cost effectively
11
<PAGE>
resolve problems associated with the Y2K issue will not affect its operations
and business, or expose it to third party liability.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to interest rate changes is primarily related to its
variable rate debt under its Bank Facility. The Bank Facility is comprised of a
$400 million seven-year revolving credit facility and a $400 million seven year
term loan which were entered into in conjunction with the Rainbow Transaction.
Because the interest rates on these facilities are variable, based upon the
bank's prime rate or LIBOR, the Company's interest expense and cash flow are
affected by interest rate fluctuations. At March 31, 1999, the Company had $247
million outstanding under the revolving credit facility and $400 million
outstanding under the term loan. If interest rates were to increase or decrease
by 100 basis points, the result, based upon the existing outstanding debt, would
be an increase or decrease of $1.6 million in interest expense and a
corresponding decrease or increase of $1.6 million in the Company's cash flow
for a three month period.
12
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable.
Item 2. Changes in Securities and Use of Proceeds
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibit is filed as part of this report:
27 Financial Data Schedule (for SEC purposes only).
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the period covered by
this report.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FOX/LIBERTY NETWORKS, LLC
Dated: May 14, 1999
By: /s/ Jeff Shell
-----------------------
Jeff Shell
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
14
<PAGE>
EXHIBIT INDEX
Exhibit No.
- -----------
27 Financial Data Schedule (for SEC purposes only).
15
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