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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 June 30, 2000.
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 SPORTS NETWORKS, LLC
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 95-4577574
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
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 [_]
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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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 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
audited consolidated financial statements of the Company and related notes set
forth elsewhere herein.
PART I
Item 1. Business
Background
Fox Sports Networks, LLC, a limited liability company organized under the
laws of the State of Delaware in April 1996, (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 Sports Networks, LLC is a holding company which
provides cable programming through (i) its sports programming operations,
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, the National Sports
Report, and other national sports programming services and through (ii) FX
Network ("FX"), a general entertainment network.
The Company is an indirect wholly-owned subsidiary of Fox Entertainment
Group, Inc. ("Fox"), a majority-owned subsidiary of The News Corporation
Limited ("News Corporation"). The Company was formed in April 1996 as a
50%/50% joint venture between Fox and Liberty Media Corporation ("Liberty"), a
wholly-owned subsidiary of A T & T Corporation ("AT&T"). In July 1999, News
Corporation acquired from Liberty substantially all of Liberty's 50% interest
in the Company and its businesses. News Corporation transferred the acquired
interests to Fox in exchange for common stock of Fox.
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
FSN and 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.
The Company's interests in the sports programming business are derived
through its 99.5% ownership interests in Fox Sports Net, LLC 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. The remainder of the interests
in these entities are held by affiliates of Fox.
2
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Overview
The Company currently owns and operates 12 RSNs (the "O&O RSNs") and
currently has direct or indirect equity interests ranging from 20% 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 38 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 local appeal in their respective markets,
generating high prime time ratings and attractive subscriber fees from cable
operators.
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 comprising 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's programming 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 currently owns interests in, or is affiliated with, 24 RSNs.
These RSNs and the Company have rights to telecast live games of 73
professional sports teams in the NBA, NHL and MLB (out of a total of 79 such
teams in the United States) and numerous collegiate sports teams to
approximately 70 million households (out of a total of approximately 78
million households receiving basic cable or direct to home ("DTH") satellite
service).
The Company also owns and operates FX, a general entertainment network
currently reaching approximately 53 million cable and DTH households. The
Company also owns interests in various other entertainment and programming
related businesses which it believes are complementary to its principal
businesses.
3
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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 cable
subscribers for each of the O&O RSNs (as of June 30, 2000), and the
professional sports teams with which each O&O RSN has sports programming
rights agreements.
<TABLE>
<CAPTION>
Subscribers
Ownership (in
RSN Interest(1) DMA millions) Team (League)
--- ---------- --- ----------- ------------
<C> <C> <C> <C> <S>
Fox Sports Net 100% Dallas/ 5.3 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 Net 100% Los Angeles; 4.3 Los Angeles Lakers (NBA)
West San Diego; Anaheim Angels (MLB)
Las Vegas Los Angeles Kings (NHL)
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Los Angeles Clippers
Fox Sports Net 100% Los Angeles; 2.7 (NBA)
Mighty Ducks of Anaheim
West 2 San Diego (NHL)
Los Angeles Dodgers
(MLB)
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Fox Sports Net 100% Pittsburgh 2.0 Pittsburgh Pirates (MLB)
Pittsburgh Pittsburgh Penguins (NHL)
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Fox Sports Net 100% Denver; 1.0 Denver Nuggets (NBA)
Rocky Mountain Kansas City Colorado Avalanche (NHL)
Colorado Rockies (MLB)
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Fox Sports Net 100% Seattle/Tacoma; 2.2 Seattle Mariners (MLB)
Northwest Portland Seattle SuperSonics (NBA)
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Fox Sports Net Utah 100% Salt Lake City 0.6 Utah Jazz (NBA)
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Fox Sports Net 100% St. Louis; 3.2 St. Louis Cardinals (MLB)
Midwest Indianapolis; St. Louis Blues (NHL)
Kansas City Indiana Pacers (NBA)
Kansas City Royals (MLB)
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Arizona Diamondbacks
Fox Sports Net 100% Phoenix/Tucson 1.1 (MLB)
Arizona Phoenix Coyotes (NHL)
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Fox Sports Net 100% Detroit 2.4 Detroit Red Wings (NHL)
Detroit Detroit Pistons (NBA)
Detroit Tigers (MLB)
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Fox Sports Net 88% Atlanta; Charlotte; 6.7 Atlanta Braves (MLB)
South Raleigh/Durham; Atlanta Hawks (NBA)
Nashville Charlotte Hornets (NBA)
Carolina Hurricanes
(NHL)
Nashville Predators
(NHL)
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Sunshine 56.4% Tampa/ 3.8 Tampa Bay Lightning (NHL)
Network St. Petersburg/ Miami Heat (NBA)
Sarasota; Miami/ Orlando Magic (NBA)
Ft. Lauderdale;
Orlando
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</TABLE>
(1) All ownership interests are indirect. The Company consists of numerous
limited liability companies, general and limited partnerships and
corporations. For a variety of tax and corporate reasons, the equity
ownership of certain individual entities in the chain of entities holding
interests in RSNs and FX include interests held directly by affiliates of
Fox and, in certain instances, Liberty. See "Business--Certain
Arrangements Regarding Ownership Interests."
The Company also has a professional rights agreement with the Minnesota Wild
(NHL), an expansion hockey club that will debut with the 2000-01 NHL season.
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In addition, a contract with MLB, expiring after the conclusion of the 2000
MLB season, allows the Company to nationally telecast 26 MLB games per year on
each of FX and FSN. The Company has entered into a new 6-year agreement with
MLB, which allows the Company to nationally telecast, or sublicense the right
to nationally telecast, 52 MLB games per year. This agreement, which begins
with the 2001 MLB season, is subject to the approval of MLB's team owners.
The following table lists the non-managed RSNs in which the Company owns
equity interests, 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 June 30, 2000), and the professional sports teams with which each
RSN has sports programming rights agreements.
<TABLE>
<CAPTION>
Ownership Subscribers
RSN Interest(1) DMA (in millions) Team (League)
--- ----------- --- ------------- -------------
<S> <C> <C> <C> <C>
Fox Sports Net 70% Chicago 3.3 Chicago Bulls (NBA)
Chicago Chicago Blackhawks (NHL)
Chicago White Sox (MLB)
Chicago Cubs (MLB)
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Home Team 34.3% Washington, DC; 4.8 Washington Capitals (NHL)
Sports(2) Baltimore Washington Wizards (NBA)
Baltimore Orioles (MLB)
Carolina Hurricanes (NHL)
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Fox Sports Net 70% San Francisco/ 3.0 San Francisco Giants (MLB)
Bay Area Oakland/San Jose; Oakland A's (MLB)
Sacramento/ Golden State Warriors (NBA)
Stockton/Modesto San Jose Sharks (NHL)
Sacramento Kings(NBA)
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Fox Sports Net 20% Boston; 3.4 Boston Celtics (NBA)
New England Providence;
Hartford
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Fox Sports Net 40% Tampa/ 3.1 Florida Marlins (MLB)
Florida St. Petersburg/Sarasota; Florida Panthers (NHL)
Miami/ Tampa Bay Devil Rays (MLB)
Ft. Lauderdale;
Orlando/Daytona/
Melbourne
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Fox Sports Net 40% Cleveland; 2.2 Cleveland Indians (MLB)
Ohio Columbus Cleveland Cavaliers (NBA)
Columbus Blue Jackets (NHL)
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Fox Sports Net 40% Cincinnati 2.6 Cincinnati Reds (MLB)
Cincinnati
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Fox Sports Net 40% New York City 4.7 New York Mets (MLB)
New York New Jersey Nets (NBA)
New York Islanders (NHL)
New Jersey Devils (NHL)
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MSG Network 40% New York City 6.6 New York Yankees (MLB)
New York Knicks (NBA)
New York Rangers (NHL)
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</TABLE>
(1) All ownership interests are indirect. The Company 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 include interests held by affiliates of Fox and, in
certain instances, Liberty. See "Business--Certain Arrangements Regarding
Ownership Interests."
5
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(2) On August 28, 2000, the Company entered into an agreement (the
"Comcast/Viacom Agreement") with Comcast Corporation ("Comcast") and
Viacom Inc. ("Viacom"), pursuant to which the Company agreed to sell its
interest in Home Team Sports to Comcast and agreed to purchase the
regional sports programming business known as Midwest Sports Channel
("Midwest Sports Channel") from Viacom. On the closing of the sale, the
affiliation agreement between Home Team Sports and FSN will be extended
through October 30, 2009. The closing under the Comcast/Viacom Agreement,
which is conditioned upon receipt of regulatory approvals, is expected to
take place in late 2000.
The following table lists 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>
RSN DMA Team (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(1) St. Paul; Milwaukee Brewers (MLB)
Milwaukee Minnesota Timberwolves (NBA)
Milwaukee Bucks (NBA)
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Empire Buffalo Buffalo Sabres (NHL)
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</TABLE>
(1) Pursuant to the Comcast/Viacom Agreement, the Company has agreed to buy
Midwest Sports Channel from Viacom.
Owned and Operated RSNs
Southwest. Launched in 1983, the Southwest RSN's coverage area includes
Texas, Oklahoma, Arkansas, Louisiana and parts of New Mexico. As of June
30, 2000, there were approximately 5.3 million subscribers, representing
92% 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. Launched in 1985, the West RSN's coverage area includes southern
California, Nevada and Hawaii. As of June 30, 2000, there were
approximately 4.3 million subscribers, representing 96% 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.
West2. Launched in 1997, the West2 RSN is a second channel in the
southern California region. As of June 30, 2000, there were approximately
2.7 million subscribers, representing 94% penetration of total basic
subscribers in the region. The West2 RSN currently has professional rights
agreements with the Los Angeles Dodgers (MLB), the Mighty Ducks of Anaheim
(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 June 30, 2000, there were approximately 2.0 million
subscribers, representing 87% 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
Pennsylvania State University.
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 June 30, 2000, there were
6
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approximately 1.0 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), and the Colorado Rockies (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 June 30, 2000,
there were approximately 2.2 million subscribers, representing 92%
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 June 30, 2000,
there were approximately 0.6 million subscribers, representing 93%
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. Launched in 1989, the Midwest RSN's coverage area includes
Missouri, Indiana, Kentucky, Ohio, eastern Wisconsin and southern Illinois.
As of June 30, 2000, there were approximately 3.2 million subscribers,
representing 96% penetration of total basic subscribers in the region. The
Midwest RSN currently has professional rights agreements with the St. Louis
Cardinals (MLB), the Indiana Pacers (NBA), the St. Louis Blues (NHL) and
the Kansas City Royals (MLB) 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 June 30, 2000, there were approximately
1.1 million subscribers, representing 96% penetration of total basic
subscribers in the region. The Arizona RSN has professional rights
agreements with the Phoenix Coyotes (NHL) and the Arizona Diamondbacks
(MLB) and collegiate contracts covering the University of Arizona and
Arizona State University.
Detroit. Launched in September 1997, the Detroit RSN, as of June 30,
2000, had approximately 2.4 million subscribers, representing 95%
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.
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 June 30, 2000, there were
approximately 6.7 million total subscribers, representing 97% 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), the Nashville Predators (NHL) and
the Carolina Hurricanes (NHL) and collegiate contracts covering the South
East and Atlantic Coast Conferences. See "Business--Certain Arrangements
Regarding Ownership Interests."
Sunshine. The Company currently owns 56.4% of the Sunshine RSN and the
remaining 43.6% of the Sunshine RSN is owned by various Multiple System
Operators ("MSOs") operating in the region, including Comcast, Cox,
Adelphia and AT&T. Launched in 1988, the Sunshine RSN coverage area
includes most of Florida. As of June 30, 2000, there were approximately 3.8
million subscribers, representing 95% 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."
7
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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 and affiliated with FSN since January 1998, the Chicago
RSN's coverage area includes Illinois, Iowa, Indiana and Wisconsin. As of
June 30, 2000, there were approximately 3.3 million subscribers,
representing 94% penetration of total basic subscribers in the region.
Featured teams in this region include the Chicago Bulls (NBA), the Chicago
Blackhawks (NHL), the Chicago White Sox (MLB), and the Chicago Cubs (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 Viacom Inc. 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, Virginia and parts
of North Carolina. As of June 30, 2000, there were approximately 4.8
million subscribers, representing 98% penetration of total basic
subscribers in the region. Featured teams include the Baltimore Orioles
(MLB), the Washington Capitals (NHL), the Washington Wizards (NBA) and the
Carolina Hurricanes (NHL), and college contracts covering teams in the Big
East Conferences, Atlantic Coast Conference and Colonial Athletic
Association. The Company has entered into the Comcast/Viacom Agreement
regarding, among other things, the sale of the Company's interest in the
D.C./Baltimore RSN to Comcast. The sale, which is conditional on the
receipt of regulatory approvals, is expected to close in late 2000.
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 and affiliated with FSN since January 1998, the Bay Area
RSN's coverage area includes northern California, southern Oregon, Hawaii
and northern Nevada. As of June 30, 2000, there were approximately 3.0
million subscribers, representing 91% 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), the Sacramento Kings (NBA) and the San Jose Sharks (NHL), while
collegiate contracts cover Stanford University and the University of
California, Berkeley.
Through its 40% ownership interest in RPP, the Company holds indirect
ownership interests, in the following RSNs:
New England. RPP manages and owns 50% of the New England RSN. Launched in
1984 and affiliated with FSN since January 2000, the New England RSN's
coverage area includes Massachusetts, Rhode Island, Vermont, New Hampshire,
Maine and parts of Connecticut. As of June 30, 2000, there were
approximately 3.4 million subscribers, representing 87% penetration of
total basic subscribers in the region. The featured professional team is
the Boston Celtics (NBA).
Florida. RPP manages and owns 100% of the Florida RSN. In January 2000,
RPP increased its ownership interest in the Florida RSN to 100% by
purchasing Front Row Communications, Inc.'s 70% ownership interest.
Launched in 1993 and affiliated with FSN since March 2000, the Florida
RSN's coverage area includes the State of Florida. As of June 30, 2000,
there were approximately 3.1 million subscribers, representing 94%
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 (MLB).
Ohio. RPP manages and owns 100% of the Ohio RSN. Launched in 1989 and
affiliated with FSN since January 1998, the Ohio RSN's coverage area
includes Ohio, western Pennsylvania, northwest New York, West Virginia and
Kentucky. As of June 30, 2000, there were approximately 2.2 million
subscribers, representing 90% penetration of total basic subscribers in the
region. Featured professional
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teams include the Cleveland Indians (MLB), the Cleveland Cavaliers (NBA)
and, commencing with the 2000-01 NHL season, the Columbus Blue Jackets
(NHL).
Cincinnati. RPP manages and owns 100% of the Cincinnati RSN. Launched in
1989 and affiliated with FSN since January 1998, the Cincinnati RSN's
coverage area includes Ohio, Kentucky and Indiana. As of June 30, 2000,
there were approximately 2.6 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 Net New York. RPP
manages and owns 100% of each of MSG and Fox Sports Net New York.
Acquired in 1994 as Madison Square Garden Network, MSG's coverage area
includes New York and parts of New Jersey and Connecticut. As of June 30,
2000, 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 and an affiliate of FSN since January 1998, Fox Sports
Net New York's coverage area includes New York and parts of New Jersey and
Connecticut. As of June 30, 2000, there were approximately 4.7 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).
Through its ownership of MSG, L.P., RPP has a 100% ownership interest in
the New York Knicks (NBA), the New York Rangers (NHL), the Madison Square
Garden entertainment complex 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 Channels. The Metro
Channels are intended to provide programming of particular interest to the
regions in which they operate, such as local news, business, entertainment
and sports.
Rights Agreements
The right to telecast professional sports events is obtained through rights
agreements between an RSN and an individual professional sports team. Rights
agreements are generally for a specified number of games per season 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 telecast those games which are subject to the
agreement on an exclusive basis. The average term of rights agreements (from
commencement to scheduled termination) entered into by the O&O RSNs during the
year ended June 30, 2000 is 8.9 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 certain rights with respect to a subsequent term
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 renewal costs could
substantially exceed the original contract cost, the O&O RSNs could be outbid
for such rights contracts or rights holders could elect to retain the rights
for their own use. 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 local and national advertising time and, in some cases, to maintain
affiliate fees. See "Business--Competition," "Business--Advertising" and
"Business--Affiliated Cable Systems and Subscribers."
The collection of rights agreements of the Company and its O&O RSNs is
diversified, with a total of 38 professional rights contracts. These contracts
include rights to 12 MLB teams, 14 NBA teams and 12 NHL teams. The O&O RSNs,
through their affiliation with FSN, also have rights to three of the country's
top collegiate football conferences, the PAC-10, Big 12 and Conference USA and
two of the country's top collegiate basketball conferences, the PAC-10 and,
beginning in November 2001, the Atlantic Coast Conference.
9
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Fox Sports Direct
Fox Sports Direct packages and distributes via satellite the programming of
various RSNs. In addition to providing sports programming produced by the O&O
RSNs, Fox Sports Direct also distributes sports programming produced by
certain third-party-owned RSNs pursuant to agreements with such RSNs. Fox
Sports Direct's sports programming is currently distributed to approximately
6.7 million DTH households. Fox Sports Direct packages the programming of
various RSNs for distribution to the Ku-Band marketplace by DirecTV, Inc.
("DirecTV") and EchoStar Communications Corporation's Dish network ("Dish
Network").
Fox Sports Net
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. The primary
function of FSN is to complement regional sports programs with a synchronized
schedule of national programming, the cornerstone of which is the National
Sports Report. The National Sports Report provides detailed coverage of sports
news nationwide. The National Sports Report, which airs at 10:00 pm and 12:00
am locally in each time zone, is complimented by the Regional Sports Report.
The Regional Sports Report is a half hour sports news program, broadcast at
11:00 pm locally in each RSN's region, dedicated to providing coverage of the
local professional and collegiate teams within the RSN's region, as well as
other sports news of interest within the region. FSN also provides other
sports programming events, including nationally televised MLB games, NCAA
college football and basketball, boxing, PGA golf, Formula One racing, and
other sporting events, as well as original sports-related programming such as
The Last Word, You Gotta See This! and Goin' Deep. In addition to providing
national programming, FSN also supplies corporate and marketing support, as
well as technical operations to the Company's RSNs.
FSN has entered into affiliation agreements with RSNs across the country
including the Company's RSNs, 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 of FSN in exchange for a per
subscriber fee. The affiliation agreements also permit FSN to market and sell
advertising time during the national portions of the RSN's programming
schedule. Pursuant to separate advertising representation agreements, the
National Advertising Partnership is permitted to sell advertising time for the
RSN during portions of the RSN's regional sports programming.
Affiliated Cable Systems and Subscribers
During the year ended June 30, 2000, the O&O RSNs generated approximately
65% of their revenues, excluding DTH revenues, from subscriber fees paid by
affiliated cable systems. As of June 30, 2000, the O&O RSNs transmitted
programming to approximately 5,800 local affiliated cable systems in
35 states.
Each of the O&O RSNs enters into affiliation agreements with MSOs and/or
individual cable system operators. In certain instances, the Company has
entered into agreements with MSOs that encompass more than one RSN. Such
agreements typically run for five to seven years and generally provide for
annual rate increases. Under these affiliation agreements, cable system
operators must distribute the RSN 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. 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 regional sports programming. The Company's affiliation
agreements have staggered expiration dates, with an average maturity of
approximately six years (from commencement to scheduled termination).
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The Company's RSNs' programming meets many subscribers' demands for
increased local and national sports programming. Current industry trends
suggest that many new channels to be offered by cable system operators will be
offered on a pay-per-view, a la carte or digital tier basis as the operators
seek to compete against the extensive choices offered by DTH distribution
systems. As advertiser supported networks, 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. To date, the strong demand for the Company's RSNs' local
and national 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 among 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. Network programming such as the National Sports Report,
nationally televised MLB games and PGA golf includes national network,
national spot and local advertising.
Commencing in July 2000, the O&O RSNs' local advertising sales force
combined with the advertising sales force of FEG's Fox Television Stations
Group ("FTS"). On behalf of the O&O RSNs, and under the direction of the FTS
local owned and operated television stations, this combined advertising sales
force began to sell all of the local and national spot advertising inventory
within the Company's regional and national programming shown on the RSNs. The
Company believes that using the combined FTS advertising sales force will
enhance the value of its advertising inventory. The National Advertising
Partnership continues to sell the national network advertising inventory.
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 while CPPs are
used in the national spot and local advertising markets.
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, communications,
automotive, retail, insurance, banking 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.
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After receiving the remote feed, the Master Control "traffics" the event,
inserting commercial inventory and on-air promotion spots in formatted
positions. The signal of the RSN, including such event, 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 RSN signal from
the transponder, the cable system operator delivers the signal to the cable
subscriber via hard-wired coaxial cable. In the case of DTH distribution,
DirecTV and Dish Network downlink the RSN's signal and re-uplink to their
satellites, where their subscribers downlink the signal to Ku-Band dishes at
their homes or establishments.
FSN provides 24 hours of national programming each day, which is made
available for all affiliated 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.
The National Sports Report 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 affiliated 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
the National Sports Report 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. FX currently reaches approximately 53 million
cable and DTH households and has become a popular choice among viewers. FX's
strength has been derived from its ability to bring award-winning television
series to cable, its access to the Fox film library and its development of
original programming. In addition, FX carries sports programming with live
coverage of national MLB games airing one night per week, and NASCAR events,
including both Winston Cup and Busch series races, beginning in February 2001.
FX's line-up for the Fall 2000 season includes such syndicated hits as
"M*A*S*H," "Beverly Hills 90210," "The X-Files," "NYPD Blue," and "Married
With Children," and original programming, including "Son of the Beach," a
Howard Stern production, "The X-Show," a 5 night a week, one hour talk show,
and "The Toughman World Championship" series. FX also debuted its first
original movie, "Deliberate Intent," in August 2000. Current network hits
"Ally McBeal," "The Practice" and "Buffy the Vampire Slayer" will be added to
FX's programming schedule upon their cable availability. FX also continues to
increase its presence as a leading general entertainment cable network by
having recently acquired the cable rights to "That '70s Show" as well as a
slate of recently released feature films including "The Green Mile," "Sixth
Sense," "American Pie" and "The Insider."
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 much 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 and satellite
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 and
satellite television is also highly competitive. A number of basic and
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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, Internet,
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.
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, Internet, radio and print
media.
RSNs
The Company distributes a full range of sports programming on both a
national and regional level, with the Company's major focus being on regional
sports programming. On a national level, the Company's primary competitor is
ESPN, and to a lesser extent, ESPN2. In addition, ESPNews and CNN/SI, each
offer a 24 hour sports news format which competes directly with the National
Sports Report. In regional markets, the Company's RSNs compete with other
regional sports networks, including those operated by team owners and other
sports programming providers and distributors.
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. The owners of teams may also launch their
own regional sports networks and contract with cable television systems for
carriage. In certain markets, the owners of distribution outlets, such as
cable television systems, also own one or more of the professional teams in
the region, increasing their ability to launch competing networks.
FX
FX faces competition in the acquisition of distribution rights to
programming. FX competes for programming with other cable networks and
broadcast networks.
Satellite Distribution
All programming for the Company is transmitted from the Company's facilities
located in Houston and Los Angeles. 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.
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Presently, each regional sports network has a dedicated feed which is
transmitted to a transponder as either a digital or an analog signal. In
addition, a network feed is transmitted to a transponder as a means of
distributing FSN programming (including the National Sports Report) 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 portions of
the Mountain time zone and one for all other portions of the Mountain time
zone and the Pacific time zone.
The Company's business depends upon the launch and operation of satellites
by third parties. As of June 30, 2000, the Company leased 12 full-time
transponders. Six of these 12 transponders, with leases expiring between
August 2001 and 2006, are used by its domestic sports networks. Of these six
transponders, three are on the Hughes Galaxy XI satellite and are leased from
PanAmSat Corporation. With respect to the remaining three full-time domestic
sports transponders, all three are leased from GE Americom ("GE") (one on GE-
1, one on Satcom C-3 and one on GE-3). The remaining six of the 12
transponders are used by entities other than the Company's domestic sports
networks. Of these six transponders, one each is leased from Broadcast
Development, Inc. on the Hughes Galaxy XI satellite, from GE on Satcom C-1,
from GE via a WTCI sublease on Satcom C-1, from GE on Satcom C-3, from
PanAmSat on the Hughes Galaxy XI satellite and one is leased from Unlimited
Satellite Services on GE-3. FX uses one of these transponders and shares a
transponder on the Hughes Galaxy XI Satellite with two domestic sports
networks. The others are subleased to Fox News Channel and Fox Movie Channel
(both affiliates of Fox) and NDTC (an affiliate of Liberty) and two
transponders will be used as existing transponder leases expire. See "Certain
Relationships and Related Transactions."
The Company has successfully completed the digital compression of its
transmissions to three of the four transponders on Galaxy XI. Through
compression, the Company is able to combine up to eight services on one
transponder, using bit rates ranging from 4 to 7 megabits per second. This has
improved signal quality, programming and "switching" capability, growth
opportunities, and has also resulted in significant cost savings due to the
reduced transponder requirements. See "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 XI and Satcom C-1) are already in orbit, the
Company does not expect to face any significant launch risks over the next
several years. In 2014, which is the projected end of useful life for
Galaxy XI, 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-3 and Galaxy XI,
could have an adverse effect on the Company. The Galaxy XI 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. As a result of full implementation of the Company's digital
compression plan in 1999, all of the Company's services are either on Galaxy
XI or Satcom C-3, and, thus are "protected," or the capacity exists to allow
all of the services to be on these protected transponders.
Regulation and Legislation
Certain aspects of the Company's programming 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.
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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
FCC regulations adopted pursuant to the 1992 Act prevent a cable operator
that has an attributable interest (including voting or non-voting stock
ownership of 5% or more or limited partnership equity interests of 5% or more)
in a programming vendor from exercising undue or improper influence over the
vendor in its dealings with competitors to cable. The regulations also
prohibit a cable programmer in which a cable operator has an attributable
interest from entering into exclusive contracts with any cable operator or
from discriminating among competing multichannel program distributors in the
price, terms and conditions of sale or delivery of programming. With respect
to cable systems having channel capacity of less than 76 channels, the FCC's
regulations limit to 40% the number of programming channels that may be
occupied by video programming services in which the cable operator has an
attributable interest. As a result of Liberty's ownership interest in News
Corporation, the Company's programming services are subject to these
requirements. Similarly, Cablevision is deemed to have an attributable
interest in the programming services of RPP. The FCC's program access and non-
discrimination regulations therefore restrict the ability of these cable
programming services to enter into exclusive contracts. The rules also permit
multichannel video programming distributors (such as multichannel multipoint
distribution services ("MMDS"), satellite master antenna televisions
("SMATV"), DBS and DTH operators) to bring complaints against the Company to
the FCC charging they are unable to obtain the affected programming networks
on nondiscriminatory terms. While cable systems are expanding their capacity,
there may be instances in which an AT&T cable system or a Cablevision system
with 75 channels or less will not be able to carry one or more of the
Company's services (or in the case of Cablevision, an RPP service) or will
have to remove another affiliated channel.
The FCC's regulations concerning political advertising also apply to certain
cable television programming services carried by cable system operators. The
Company must provide program ratings information and increased closed
captioning of its cable programming services to comply with FCC regulations,
and may have to provide video descriptions on some of its services, which
could increase its operating expenses.
FCC regulations implementing the 1992 Act require each television
broadcaster to elect, at three year intervals, either to (i) require carriage
of its signal by cable systems in the station's market ("must carry") or (ii)
negotiate the terms on which such broadcast station would permit transmission
of its signal by the cable systems within its market ("retransmission
consent"). The FCC recently has initiated a rulemaking proceeding to determine
carriage requirements for digital broadcast television signals on cable
systems, including carriage during the period of transition from analog to
digital signals.
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 a local
franchising authorities ("LFAs") 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.
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The terms and conditions of franchises vary materially from jurisdiction to
jurisdiction. 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 are responsible
for regulating the rates charged for the basic tier of service. Local rate
regulation for a particular system could result in resistance on the part of
the cable operator pay 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, its O&O RSNs and the RSNs managed by RPP a non-exclusive,
royalty free license to use the "FOX" brand 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. 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.
Employees
As of June 30, 2000, the Company, together with its O&O RSNs and other
subsidiaries, had 1,376 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
South. The South RSN is operated through SportSouth Network, Ltd. ("South
Ltd."). LMC Southeast Sports, Inc. ("LMC Southeast") holds a 1% limited
partnership capital interest and a 43% general partnership capital interest in
South Ltd. SportSouth Holdings, LLC (jointly owned by LMC Southeast and LMC
Southeast's direct parent) holds a 1% general partnership profits interest and
a 43% limited partnership profits interest and Liberty SportSouth Inc. (a
wholly-owned subsidiary of LMC Southeast) holds a 1% general partnership
capital and profits interest and a 43% limited partnership capital and profits
interest in South Ltd. The remaining 12% general partnership interest in South
Ltd. is held by E.W. Scripps Company. Liberty/Fox Southeast LLC, a subsidiary
of Fox Sports Net, 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.
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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, 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 14.362%
limited partnership interest in SNFL and Sunshine Network, Inc. ("SNI"), an
entity in which LMC Sunshine, Inc. holds a 14.507% interest, holds a 1%
general partnership interest. The remaining interests in SNFL, Ltd. are held
by various regional cable MSOs. Liberty/Fox Sunshine LLC, a subsidiary of Fox
Sports Net, 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. In October 1998, the Company,
together with certain other partners in SNFL and shareholders of SNI, acquired
Time Warner Entertainment's 29.647% limited partnership interest in SNFL and
29.946% interest in 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.
Chicago. The Chicago RSN is operated through SportsChannel Chicago
Associates ("Chicago Associates"). RPP holds a 50% interest in Chicago
Associates and Fox Sports Net Chicago Holdings, LLC holds a 50% interest.
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, FRSM holds a .5% membership interest and FRSM II
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"). Affiliated Regional Communications,
Ltd. ("ARC Ltd.') holds a 34.3% limited partnership interest in D.C./Baltimore
LP and the remaining interest is held by Viacom Inc. 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.
Liberty/Fox ARC L.P. ("ARC L.P.") holds a 100% equity interest and 62.6799%
capital limited partnership interest in ARC Ltd. and Liberty ARC, Inc., wholly
owned by LMC Regional Sports, Inc., an affiliate of Liberty, holds a 37.3201%
capital general partnership interest. Fox Sports Net, LLC holds a 98% limited
partnership interest in ARC L.P., New LMC ARC, Inc., a subsidiary of Liberty,
holds a 1% general partnership interest and FRSM holds a 1% limited
partnership interest. The Company has entered into the Comcast/Viacom
Agreement regarding, among other things, the sale of the Company's interest in
the D.C./Baltimore RSN to Comcast. The sale, which is conditioned on the
receipt of regulatory approvals, is expected to close in late 2000.
17
<PAGE>
Bay Area. The Bay Area RSN is operated through SportsChannel Pacific
Associates ("San Francisco Associates"). RPP holds a 50% interest in San
Francisco Associates and Fox Sports Net Bay Area Holdings, LLC holds a 50%
interest.
New England. The New England RSN is operated through SportsChannel New
England Limited Partnership. RPP holds a 50% ownership interest in the New
England RSN and AT&T holds a 50% interest.
Florida. The Florida RSN is operated through SportsChannel Florida
Associates ("Florida Associates"), a wholly owned subsidiary of RPP.
Ohio. The Ohio RSN is operated through SportsChannel Ohio Associates ("Ohio
Associates"), a wholly-owned subsidiary of RPP.
Cincinnati. The Cincinnati RSN is operated through SportsChannel Cincinnati
Associates ("Cincinnati Associates"), a wholly-owned subsidiary of 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 Net New York, operated through
SportsChannel Associates ("SportsChannel New York Associates"), a wholly-owned
subsidiary of MSG, L.P. MSG, L.P. is a wholly-owned subsidiary of RPP.
Item 2. Properties
The Company's corporate facilities are located in Los Angeles, California
where it leases approximately 64,000 square feet of office space from New
World Communications Group Incorporated, an indirect, wholly-owned subsidiary
of Fox. 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 O&O 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, Boston, Atlanta, Detroit, Chicago, Dallas, Los
Angeles and San Francisco. The Company's RSNs have sales offices in Hollywood
(Florida), Kansas City, Indianapolis, Charlotte, and St. Petersburg and a
public affairs office in Tallahassee. 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>
Fox Sports Direct leases its corporate office space in Irving, Texas. FX
also leases sales offices in Los Angeles, 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.
18
<PAGE>
Item 3. Legal Proceedings
As of June 30, 2000 there are no material pending legal proceedings against
the Company, other than routine litigation incidental to the Company's
business, except as described below.
U.S. v. ASCAP--Virtually every cable network is involved in this "rate
court" proceeding in the Southern District of New York to set a formula for
assessing music performance license fees on cable programming. The Company's
cable services pay ASCAP license fees under the current interim rate
structure, which is calculated as a percentage of each network's gross
revenues, and ASCAP is seeking an increase in those fees. The interim rate is
subject to upward or downward adjustment in future rate court proceedings. The
other major copyrighted music performance society, BMI, is assessing a
negotiated interim license fee, and the final rate will be determined either
by negotiation after the conclusion of the ASCAP rate court proceeding or in
another rate court proceeding. The Company cannot predict the final outcome of
these disputes, but does not believe that it will suffer any material
liability as a result therof.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
19
<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 June 30, 2000 and 1999,
December 31, 1998 and 1997 and for the year ended June 30, 2000, the six
months ended June 30, 1999, the years ended December 31, 1998 and 1997 and the
eight months ended December 31, 1996 are derived from the Company's
consolidated financial statements audited by Arthur Andersen LLP, independent
public accountants. The selected financial data of the Company as of June 30,
1998 and for the twelve months ended June 30, 1999 and the six months ended
June 30, 1998 are unaudited.
The selected financial data of Liberty Sports, Inc. and subsidiaries--
Domestic Operations set forth below for the period January 1, 1996 to April
29, 1996 is derived from the combined financial statements of Liberty Sports,
Inc. and subsidiaries--Domestic Operations ("LSI Domestic") as audited by KPMG
LLP, independent auditors.
The selected financial data of FX Networks, LLC set forth below for the ten
month period ended April 29, 1996 is derived from the financial statements as
audited by Arthur Andersen LLP, independent public accountants.
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.
THE COMPANY
(Dollars in thousands)
<TABLE>
<CAPTION>
Twelve
months Six months Six months
Year ended ended ended ended Year ended Year ended April 30 to
June 30, June 30, June 30, June 30, December 31, December 31, December 31,
2000 1999 1999 1998 1998 1997 1996
---------- ---------- ---------- ---------- ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations:
Revenues................ $ 871,666 $693,424 $ 364,253 $326,023 $ 655,194 $ 471,792 $ 144,792
---------- -------- ---------- -------- ---------- ---------- ---------
Expenses:
Operating.............. 614,980 528,791 296,059 250,300 485,276 420,888 197,445
General and
administrative........ 75,834 88,583 39,264 41,343 90,662 65,558 31,609
Depreciation and
amortization.......... 48,094 25,108 12,239 11,094 21,662 18,968 8,507
---------- -------- ---------- -------- ---------- ---------- ---------
738,908 642,482 347,562 302,737 597,600 505,414 237,561
---------- -------- ---------- -------- ---------- ---------- ---------
Operating income
(loss)................. 132,758 50,942 16,691 23,286 57,594 (33,622) (92,769)
---------- -------- ---------- -------- ---------- ---------- ---------
Other (income) expenses:
Interest, net.......... 129,640 110,685 54,781 54,521 110,425 34,142 3,819
Subsidiaries' income
tax expense (benefit),
net................... 2,039 789 233 900 1,456 (1,590) 3,437
Loss on sale of
assets................ 604 2,888 2,767 -- 121 -- 4,913
Equity loss (income) of
affiliates, net....... 6,345 23,417 11,160 (6,400) 5,913 9,018 12,024
Other, net............. (137) (1,204) 471 197 (1,478) 401 --
Minority interest...... 5,320 3,595 1,736 1,366 3,225 2,864 187
---------- -------- ---------- -------- ---------- ---------- ---------
Net loss................ $ (11,053) $(89,228) $ (54,457) $(27,298) $ (62,068) $ (78,457) $(117,149)
========== ======== ========== ======== ========== ========== =========
Deficiency of earnings
available to cover
fixed charges.......... $ (11,053) $(89,228) $ (54,457) $(27,298) $ (62,068) $ (78,457) $(117,149)
Balance Sheet Data (end
of period):
Total assets............ $2,026,397 $1,932,498 $1,891,935 $1,817,758 $ 610,982
Long-term debt.......... 1,588,914 1,488,178 1,401,891 1,246,291 145,304
Members' equity......... 24,693 35,746 90,203 152,271 230,728
</TABLE>
20
<PAGE>
LIBERTY SPORTS, INC. AND SUBSIDIARIES--DOMESTIC OPERATIONS (PREDECESSOR)
<TABLE>
<CAPTION>
January 1 to
April 29,
1996
------------
(Dollars in
thousands)
<S> <C>
Statement of Operations:
Revenues........................................................ $99,753
-------
Expenses:
Operating..................................................... 60,664
General and administrative.................................... 27,993
Depreciation and amortization................................. 10,788
-------
99,445
-------
Operating income................................................ 308
-------
Other income (expenses):
Interest expense.............................................. (1,963)
Interest income............................................... 91
Equity in earnings of affiliates.............................. 219
Minority interest in earnings of subsidiaries................. (1,076)
Other, net.................................................... 1,467
-------
(1,262)
-------
Loss before income taxes...................................... (954)
Income tax benefit.............................................. 217
-------
Net loss...................................................... $ (737)
=======
Deficiency of earnings available to cover fixed charges......... $ (954)
</TABLE>
FX NETWORKS, LLC (PREDECESSOR)
<TABLE>
<CAPTION>
Ten months
ended
April 29,
1996
-----------
(Dollars in
thousands)
<S> <C>
Statement of Operations:
Revenue.......................................................... $ 75,401
--------
Expenses:
Operating...................................................... 63,369
General and administrative..................................... 19,936
Depreciation and amortization.................................. 480
--------
83,785
--------
Operating loss................................................... (8,384)
--------
Interest expense................................................. (7,898)
--------
Net loss....................................................... $(16,282)
========
Deficiency of earnings available to cover fixed charges.......... $(16,282)
</TABLE>
21
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
In April 1996, Fox and Liberty entered into a 50%/50% joint venture,
pursuant to which the Company was formed to provide cable programming through
its sports programming operations, consisting of interests in RSNs and FSN, a
national sports programming service, and through FX, a general entertainment
network. In July 1999, News Corporation acquired substantially all of
Liberty's 50% ownership interest in the Company and transferred that interest
to Fox in exchange for common stock. The Company's interests in the sports
programming business are derived through its 99.5% ownership interests in Fox
Sports Net, LLC and Fox Sports RPP while its interests in FX are derived
through its 99% ownership interest in FX Networks, LLC.
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 FSN and 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 $850.0
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 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 Rainbow Transaction. In January 1998, pursuant to an
Exchange Offer, the Company exchanged all of these notes for new notes (the
"Notes"), the terms of which were substantially identical to the original
notes, which were registered by the Company under the Securities and Exchange
Act of 1933, as amended. 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 Sports Net, LLC, Fox
Sports RPP and FX Networks, LLC, each a subsidiary of the Company (together,
the "Co-Borrowers"), in the amount of $800.0 million (the "Bank Facility").
The Bank Facility was 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.
In July 1999, 19/th/ Holdings Corporation, a wholly-owned subsidiary of Fox,
acquired the debt outstanding under the Bank Facility from the group of banks,
and in so doing, assumed the rights and obligations of the group of banks
under the Bank Facility. The Company and 19/th/ Holdings Corporation
subsequently amended and restated the Bank Facility to provide, among other
things, a fixed rate of interest, determined by 19/th/ Holdings Corporation on
an annual basis, and eliminated substantially all of the affirmative and
negative covenants other than with respect to the payment of principal and
interest (the "19/th/ Facility"). The Company currently expects that remaining
availability under the 19/th/ Facility will primarily be used for investments in
certain subsidiaries of the Company and for working capital purposes.
Included in this Report are the consolidated financial statements of the
Company for the year ended June 30, 2000, the six months ended June 30, 1999
and the years ended December 31, 1998 and 1997.
22
<PAGE>
General Programming Operations
Basic cable networks generally recognize revenue from two principal 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, 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.
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 advertisers. The Company's
RSNs 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.
23
<PAGE>
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 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, the National Sports Report. 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 RSNs to DTH providers, such as DirecTV, Inc. and
the Dish Network, for Ku-band satellite owners. Fox Sports Direct's revenues
are received from a monthly per subscriber fee from the DTH providers. Fox
Sports Direct acquires its sports programming through a license agreement with
the RSNs whereby Fox Sports Direct splits its revenues received from the DTH
providers with the "home territory" RSN in which the specific satellite
subscriber resides.
The National Advertising Partnership receives 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. Prior to consummation of the Rainbow Transaction, sales of
national advertising were a function of Fox Sports Ad Sales, LLC, the
Company's advertising sales subsidiary.
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, a subsidiary of Fox, 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 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.
On March 13, 1997, upon the acquisition of the remaining interests in
Affiliated Regional Communications, Ltd. ("ARC Ltd.") by Liberty/Fox ARC LP
("ARC LP"), the Company assumed management control of the consolidated
subsidiaries of ARC LP, and from that date the consolidated subsidiaries of
ARC Ltd. and their operations were consolidated by the Company.
In connection with 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
prior to the
24
<PAGE>
Rainbow Transaction, 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.
In July 1999, News Corporation acquired from Liberty substantially all of
Liberty's 50% interest in the Company and transferred that interest to Fox in
exchange for common stock of Fox. In connection with this transaction, voting
control of certain majority-owned subsidiaries of the Company, previously held
by Liberty, was acquired by Fox and, accordingly, these subsidiaries are
consolidated for the year ended June 30, 2000. These majority-owned
subsidiaries which were previously accounted for using the equity method of
accounting include, most significantly, the Pittsburgh RSN.
The following RSNs, together with Fox Sports Direct and FX Networks, LLC,
are consolidated in the financial statements of the Company at December 31,
1997 and 1998 and at June 30, 1999 and 2000: West RSN, West 2 RSN, Northwest
RSN, Utah RSN, Arizona RSN, South RSN, Southwest RSN, Rocky Mountain RSN,
Midwest RSN and Detroit RSN. The Pittsburgh RSN is consolidated in the
financial statements of the Company for the year ended June 30, 2000.
As of December 31, 1997 and 1998 and as of June 30, 1999 and 2000, the
following are accounted for using the equity method of accounting: Sunshine
RSN, Chicago RSN, Bay Area RSN, D.C./Baltimore RSN, RPP, National Sports
Partnership and National Advertising Partnership. The Pittsburgh RSN is
accounted for using the equity method of accounting at December 31, 1997 and
1998 and as of June 30, 1999.
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 meaningful.
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
revenues 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 interest over the
remaining lives of the excess cost.
Results of Operations
Year Ended June 30, 2000
For comparability purposes, the following discussion will make reference to
comparisons between the year ended June 30, 2000 ("Fiscal 2000") and both i)
the year ended December 31, 1998 and ii) the twelve month
25
<PAGE>
period ended June 30, 1999 ("Fiscal 1999"). The comparison to the year ended
December 31, 1998 is required pursuant to Item 303 of Regulation S-K. Although
both represent twelve month periods, the Company believes that a comparison to
Fiscal 1999 is meaningful as: i) it is a more recent period, ii) it represents
an identical year on year comparison and eliminates the impact of seasonal
variations, e.g. January 2000 is compared to January 1999 as opposed to
January 1998, and iii) the NBA lockout during the 1998-99 NBA season makes the
December 31, 1998 comparison less meaningful.
The Fiscal 1999 period is unaudited. The Company changed its fiscal year end
to June 30 subsequent to December 31, 1998 and reported audited results for
the six month period ended June 30, 1999, in its Transition Report on Form 10-
K. The amounts for Fiscal 1999 referenced below were derived by combining the
final six months of the year ended December 31, 1998 with the six month period
ended June 30, 1999.
Total revenues for Fiscal 2000 were $871.7 million, an increase of $216.5
million, or 33%, over the year ended December 31, 1998. Total revenues for
Fiscal 2000 increased $178.2 million, or 26%, over Fiscal 1999.
Programming revenue was the largest source of revenue, representing 49% of
total revenue, or $424.4 million, for Fiscal 2000. Advertising revenue
represented 28% of total revenue, or $241.3 million, for Fiscal 2000. For the
year ended December 31, 1998, programming revenue was $301.7 million and
advertising revenue was $160.5 million, representing 46% and 24% of total
revenues, respectively. For Fiscal 1999, programming revenue was $324.6
million and advertising revenue was $173.9 million, representing 47% and 25%
of total revenues, respectively.
Programming and advertising revenue increased by $122.7 million and $80.8
million, respectively in Fiscal 2000 as compared to the year ended December
31, 1998. These represent a 41% and 50% increase in programming and
advertising revenue, respectively, between the periods. As compared to Fiscal
1999, programming and advertising revenue increased in Fiscal 2000 by $99.8
million and $67.4 million, respectively. These increases represent a 31%
increase and 39% increase in programming and advertising revenue,
respectively, over Fiscal 1999.
The increase in programming revenue of 31% over Fiscal 1999 is comprised
primarily of increases in the average rate per subscriber at the RSNs. Also
contributing to the increase is the continued subscriber growth of FX, which
achieved an 18% increase in average subscribers over Fiscal 1999, and the
RSNs, which experienced a 5% growth in average subscribers between the
periods. The increase in advertising revenue of 39% over Fiscal 1999 is
comprised of a 56% increase in advertising revenue for FX and a 30% increase
for the RSNs. Increased total day ratings on FX, together with the increased
subscribers, resulted in a 25% increase in total day average audience, and a
35% increase in the average audience within a demographic audience profile,
during Fiscal 2000 as compared to Fiscal 1999. The increased ratings,
increased subscribers and resulting increase in average audience provide the
ability to command higher CPMs from advertisers; as a result CPMs increased
significantly over Fiscal 1999. These factors all contributed to the
significant increase in advertising revenue for FX. The RSNs growth in
advertising revenue is primarily due to an increase in the number of
professional events in Fiscal 2000, as compared to Fiscal 1999, and increased
local advertising rates per game. The number of local professional events
increased by 43% over Fiscal 1999, comprised primarily of NBA events, due to a
full NBA schedule in the 1999-2000 season after the lockout shortened season
of the prior year, and MLB events.
Operating expenses were $615.0 million for Fiscal 2000, which represented
71% of total revenues. Operating expenses for the year ended December 31, 1998
were $485.3 million, or 74% of total revenues and for Fiscal 1999, operating
expenses were $528.8 million, or 76% of total revenues. These expenses consist
primarily of rights fees, programming and production costs. The increase in
operating expenses of $86.2 million over Fiscal 1999 is primarily attributable
to the increase in rights fees and production expenses of the RSNs associated
with the increase in the number of local professional events in Fiscal 2000.
General and administrative expenses were $75.8 million for Fiscal 2000,
which represented 9% of total revenues. General and administrative expenses
for the year ended December 31, 1998 were $90.7 million, or 14% of total
revenues, and for Fiscal 1999, were $88.6 million, or 13% of total revenues.
The decrease in general
26
<PAGE>
and administrative expenses in Fiscal 2000, as compared to Fiscal 1999, is
primarily due to a decrease in the charge to earnings with respect to an
equity appreciation rights plan and a decrease in the provision for
potentially unrealizable accounts between the periods.
Depreciation and amortization expenses were $48.1 million in Fiscal 2000 and
$21.7 million for the year ended December 31, 1998. In Fiscal 1999,
depreciation and amortization expense was $25.1 million. The increase of $23.0
million in Fiscal 2000, as compared to Fiscal 1999, is related to increased
amortization of cable carriage fees in the current year.
Interest expense for Fiscal 2000 was $130.9 million, for the year ended
December 31, 1998, $113.0 million, and for Fiscal 1999, $113.4 million. The
increase in interest expense, net in Fiscal 2000, as compared to Fiscal 1999,
is primarily due to higher interest rates on debt outstanding under the 19th
Facility and additional borrowings.
Equity loss of affiliates for Fiscal 2000 and the year ended December 31,
1998 were $6.3 million and $5.9 million, respectively. In Fiscal 1999, equity
loss of affiliates was $23.4 million. The improvements in equity loss of
affiliates of $17.1 million in Fiscal 2000, as compared to Fiscal 1999, are
primarily at RPP. In Fiscal 1999, RPP was negatively impacted by the NBA
lockout. In Fiscal 2000, RPP experienced increased programming and advertising
revenues at its RSNs and improved performance of certain of its start up
businesses, and the National Sports Partnership and the Canadian joint venture
both showed improved results.
Six Months Ended June 30, 1999
Total revenues for the six months ended June 30, 1999 were $364.3 million,
an increase of $38.2 million, or 12%, over the six months ended June 30, 1998.
Programming revenue was the largest source of revenue, representing 47% of
total revenue, or $171.1 million, for the six months ended June 30, 1999.
Advertising revenue represented 26% of total revenue, or $95.6 million, for
the six months ended June 30, 1999. For the six months ended June 30, 1998,
programming revenue was $148.2 million and advertising revenue was $82.1
million and represented 45% and 25% of total revenues, respectively.
Programming and advertising revenue increased by $22.9 million and $13.5
million, respectively in the six months ended June 30, 1999 as compared to the
six months ended June 30, 1998. These represent a 15% increase and 16%
increase in programming and advertising revenue, respectively, between the
periods. The increase in programming revenue of 15% is comprised primarily of
an increase in average subscribers at the consolidated O&O RSNs and FX of 7%
and 15%, respectively, between the periods. Rate increases comprised the
balance of the increase between periods. The increase in advertising revenue
of 16% is comprised of a 46% increase in advertising revenue for FX and a 5%
increase for the RSNs. Increased total day ratings on FX, together with the
increased subscribers, resulted in a 24% increase in total day average
audience during the six months ended June 30, 1999 over the same period in the
previous year. The increase is due primarily to the strengthening of the
program schedule throughout all dayparts. The increased ratings together with
increased subscribers resulted in the significant increase in advertising
revenue. The RSNs growth in advertising revenue is due to increased
advertising rates and the number of professional events, primarily NHL.
Advertising rates per game increased for MLB and NHL events in the six months
ended June 30, 1999 as compared to the same period in the previous year, while
rates for NBA events were negatively impacted due to the NBA lockout. The
limited amount of time between the settlement of the lockout and the
commencement of the NBA season impaired the Company's ability to sell
advertising, as did the reduced number of games in the season.
Operating expenses totaled $296.1 million for the six months ended June 30,
1999, which represented 81% of total revenues. These expenses consist
primarily of rights fees, programming and production costs. Operating expenses
for the six months ended June 30, 1998 totaled $250.3 million, or 77% of total
revenues. The increase in operating expenses is primarily attributable to
increased programming rights fees of RSNs due to renegotiated and newly
entered into sports rights agreements and increased programming expenses of FX
relating to newly launched programs during or subsequent to the period ended
June 30, 1998.
27
<PAGE>
General and administrative expenses totaled $39.3 million for the six months
ended June 30, 1999, which represented 11% of total revenues. General and
administrative expenses for the six months ended June 30, 1998 totaled $41.3
million, or 13% of total revenues. A non-cash charge to earnings was taken in
the six months ended June 30, 1999 and 1998 with respect to an equity
appreciation rights plan. Excluding this non-cash charge, general and
administrative expenses would have been $34.1 million and $32.4 million, or
each 10% of total revenues for the six months ended June 30, 1999 and 1998,
respectively.
Depreciation and amortization expenses totaled $12.2 million and $11.1
million for the six months ended June 30, 1999 and 1998, respectively. Of
these amounts, $7.0 million and $7.2 million were related to amortization of
excess cost from acquisitions of programming entities consolidated with the
Company.
Interest expense for the six months ended June 30, 1999 totaled $56.1
million in relation to $1.5 billion of debt outstanding as of June 30, 1999.
The amount of debt is primarily attributable to (i) the Offering, pursuant to
which $800.8 million of debt is outstanding at June 30, 1999, (ii) the Bank
Facility and indebtedness thereunder in the amount of $677.0 million; and
(iii) the acquisition of certain assets in connection with the commencement of
operations of Fox Sports Net Detroit.
Equity loss of affiliates for the six months ended June 30, 1999 was $11.2
million, while the Company recognized equity income of affiliates of $6.4
million for the six months ended June 30, 1998. For the six months ended June
30, 1998, equity income of affiliates included a $7.1 million gain on the sale
of 50% of RPP's investment in Fox Sports Net New England. In the six months
ended June 30, 1999, RPP was negatively impacted by the NBA lockout,
Pittsburgh RSN was adversly affected by the Pittsburgh Penquins bankruptcy and
the Company recognized start-up losses from its Canadian joint venture.
Year ended December 31, 1998
The Company has certain subsidiaries that are consolidated and others, which
are accounted for under the equity method of accounting. The comparability of
the year ended December 31, 1998 to the year ended December 31, 1997 is
affected significantly by three events: (i) on March 13, 1997, upon the
acquisition of the remaining interests in ARC Ltd. by ARC LP, the Company
assumed management control of the consolidated subsidiaries of ARC LP and from
that date the consolidated subsidiaries of ARC Ltd. and their operations were
consolidated by the Company, (ii) Fox Sports Detroit was launched in September
1997 and (iii) the operations of FSN were contributed to the National Sports
Partnership in December 1997 and subsequent to the date of such contribution
were accounted for under the equity method.
Total revenues for the year ended December 31, 1998 were $655.2 million, an
increase of $183.4 million, or 39%, over the year ended December 31, 1997. The
increase in total revenue between the years ended 1998 and 1997 would have
been $128.3 million, or 27%, had ARC Ltd. been consolidated for the entire
period, and excluding Fox Sports Detroit and the impact of FSN.
Programming revenue was the largest source of revenue, representing 46% of
total revenue, or $301.7 million, for the year ended December 31, 1998.
Advertising revenue represents 24% of total revenue, or $160.5 million, for
the year ended December 31, 1998. For the year ended December 31, 1997,
programming revenue was $226.5 million and advertising revenue was $117.9
million. Had ARC been consolidated for the entire period ended December 31,
1997 and excluding the impact of FSN, programming and advertising revenue
would have been $223.6 million and $115.2 million in the year ended December
31, 1997. On this basis, as a percentage of total revenue for the year ended
December 31, 1997, programming and advertising revenue represented 46% and
24%, respectively. Excluding Fox Sports Detroit and the impact of FSN,
programming and advertising revenue for the year ended December 31, 1998
represented 44% and 25%, respectively, of total revenue.
Had ARC Ltd. been consolidated for the entire year ended December 31, 1997,
and excluding Fox Sports Detroit and the impact of FSN, programming and
advertising revenue would have increased by $48.0 million and $39.5 million,
respectively in the year ended December 31, 1998 as compared to the year ended
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<PAGE>
December 31, 1997. These represent a 21% increase and 34% increase in
programming and advertising revenue, respectively, between the periods. The
increase in programming revenue of 21% is comprised primarily of an increase
in subscribers at Fox Sports West 2 which launched on January 31, 1997,
subscriber growth in other RSNs and the continued subscriber growth of FX.
Rate increases comprised the balance of the increase between periods. The
increase in advertising revenue of 34% is comprised of a 48% increase in
advertising revenue for FX and a 31% increase for RSNs, other than Fox Sports
Detroit. Increased ratings on FX, together with the increased subscribers,
resulted in a 17% increase in average audience during primetime, in the year
ended December 31, 1998 over the same period in the previous year. The
increase is due primarily to the addition of The X-Files and NYPD Blue to the
primetime schedule in the fall of 1997. The increased ratings together with
increased subscribers resulted in the significant increase in advertising
revenue. The RSNs growth in advertising revenue is due to increased
advertising rates and an increase in the number of professional events,
primarily MLB. Advertising rates per game increased for MLB, NBA and NHL
events in the year ended December 31, 1998 as compared to the same period in
the previous year. The number of local professional events increased by 27%
over these same periods.
Operating expenses totaled $485.3 million for the year ended December 31,
1998, which represented 74% of total revenues. These expenses consist
primarily of rights fees, programming and production costs. Operating expenses
for the year ended December 31, 1997 totaled $420.9 million, or 89% of total
revenues. Had ARC Ltd. been consolidated for the entire year ended December
31, 1997, and excluding Fox Sports Detroit and the impact of FSN, operating
expenses for the year ended December 31, 1998 and 1997 would have been $441.9
million and $372.6 million, respectively. On this basis, operating expenses
represent 72% and 77% of total revenues for the year ended December 31, 1998
and 1997, respectively. The increase in operating expenses is attributable to
an increase in the number of professional events, primarily MLB games, as well
as increased programming rights fees of RSNs due to renegotiated and newly
entered into sports rights agreements. Additionally, programming expenses of
FX increased relating to newly launched programs during or subsequent to the
year ended December 31, 1997.
General and administrative expenses totaled $90.7 million for the year ended
December 31, 1998, which represented 14% of total revenues. General and
administrative expenses for the year ended December 31, 1997 totaled $65.6
million, or 14% of total revenues. A non-cash charge to earnings was taken in
the year ended December 31, 1998 with respect to an equity appreciation rights
plan in the amount of $13.5 million. Excluding this non-cash charge, general
and administrative expenses would have been $77.2 million, or 12% of total
revenues.
Depreciation and amortization expenses totaled $21.7 million and $19.0
million for the years ended December 31, 1998 and 1997, respectively. Of these
amounts, $14.3 million and $11.8 million were related to amortization of
excess cost from acquisitions of programming entities consolidated with the
Company. The increase is primarily due to the consolidation of ARC and the
acquisition of an RSN in Detroit.
Interest expense for the year ended December 31, 1998 totaled $113.0 million
as a result of $1.4 billion of debt outstanding as of December 31, 1998. The
amount of debt is primarily attributable to (i) the Offering, pursuant to
which $786.9 million of debt is outstanding at December 31, 1998, (ii) the
Bank Facility and indebtedness thereunder in the amount of $605.0 million; and
(iii) the acquisition of certain assets in connection with the commencement of
operations of Fox Sports Detroit, pursuant to which the Company incurred
$25.7 million of debt.
Equity loss of affiliates for the year ended December 31, 1998 was $5.9
million, a decrease of $3.1 million, from an equity loss of $9.0 million for
the year ended December 31, 1997. For the year ended December 31, 1998, equity
income of affiliates includes the Company's equity interests in the operations
of the National Sports Partnership and the National Advertising Partnership,
whose operations were consolidated prior to the Rainbow Transaction, RPP and
certain RSNs. For the year ended December 31, 1997, equity income of
affiliates included the Company's equity interests in ARC Ltd. and its related
subsidiaries through March 13, 1997, certain RSNs and equity losses of the
National Sports Partnership and the National Advertising Partnership for the
period from
29
<PAGE>
December 18, 1997 through December 31, 1997. For the year ended December 31,
1998, equity income of affiliates includes the effect of $7.9 million in
amortization of excess cost relating to the Company's investment in several of
its affiliates and a $7.1 million gain on the sale of 50% of RPP's investment
in Fox Sports New England.
Liquidity and Capital Resources
The Company's liquidity requirements arise from (i) funding general working
capital needs, (ii) its strategic plan to invest in and secure national
distribution for its network sports and general entertainment programming,
(iii) the acquisition of programming rights, and (iv) capital expenditure
requirements.
Net cash flows used in operating activites for Fiscal 2000 were $30.7
million, a decrease of $1.3 million over the year ended December 31, 1998. Net
cash flows used in operating activities decreased by $10.5 million over Fiscal
1999. The decrease in Fiscal 2000 as compared to Fiscal 1999 was primarily
attributed to improvements in operating income.
Net cash flows used in investing activities for Fiscal 2000 were $59.1
million, an increase of $23.1 million over the year ended December 31, 1998.
Net cash flows used in investing activities increased by $47.9 million over
Fiscal 1999. The increase in Fiscal 2000 over Fiscal 1999 of cash used in
investing activities was primarily due to lower net advances from equity
affiliates, collection of a promissory note in Fiscal 1999 and issuance of a
promissory note in Fiscal 2000.
Net cash flows provided by financing activities for Fiscal 2000 were $56.5
million, a decrease of $4.9 million over the year ended December 31, 1998. Net
cash flows provided by financing activities decreased by $38.3 million from
Fiscal 1999. The decrease in cash provided by financing activities in Fiscal
2000 as compared to Fiscal 1999 was primarily due to an increase in cash
provided by operations.
In June 1997, the Company entered into an agreement with Rainbow to acquire
a 40% interest in Rainbow's sports properties, which included economic
interests in eight RSNs, the Madison Square Garden entertainment complex,
Radio City Productions LLC, the New York Knicks, and the New York Rangers in
exchange for $850.0 million. 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 $850.0 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, as amended, 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. As of
June 30, 2000, the Company was in compliance with these restrictive covenants.
In September 1997, the Company entered into a credit agreement which
permitted borrowings of up to $450.0 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 $450.0 million
credit agreement to permit borrowings of up to $800.0 million under the Bank
Facility. The Bank Facility was used, in part, to finance the Rainbow
Transaction.
In July 1999, 19/th/ Holdings Corporation, a wholly-owned subsidiary of Fox,
acquired the debt outstanding under the Bank Facility, and assumed the rights
and obligations of the banks under the facility. At June 30, 2000, the total
amount borrowed under the 19th Facility was $750.0 million. The total
commitment pursuant to the 19th Facility was $800.0 million as of June 30,
2000.
Future capital requirements are substantial. At June 30, 2000, the Company
has future minimum payments on operating leases, including transponders
totaling $109.7 million, and commitments under long-term program rights
contracts totaling $3,479.3 million. The Company has also made a substantial
investment in the National
30
<PAGE>
Sports Partnership. The National Sports Partnership, which was formed in
December 1997, required a significant investment to fund operating losses,
primarily related to the agreement with MLB and the development of the
National Sports Report. Investment in the National Sports Partnership will
continue as the network continues to develop. Also, the Company has committed
to significant capital expenditures with regard to its technical
infrastructure, including enhancing its Master Control suites with digital
capabilities. In addition, the cost of acquiring sports programming rights
continues to escalate. See "Business--Rights Agreements." 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 19th 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, which may be subject to
statutory, regulatory or contractual restrictions, are contingent upon the
earnings of those subsidiaries and affiliates, and 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 capital contributions from its parent. 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 its existing funds and the proceeds from
borrowings under the 19th 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.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
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.
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PART III
Item 10. Directors and Executive Officers of the Registrant
Executive Officers
The current executive officers of the Company and their current positions for
the Company and/or its divisions are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
David Hill................................ 54 Chairman
Jeff Shell................................ 34 Chief Executive Officer
Robert Thompson........................... 42 President
Tracy Dolgin.............................. 40 President, Fox Sports Net
Louis LaTorre............................. 46 President, Advertising Sales
</TABLE>
David Hill has served as Chairman of the Company since April 1996. In
addition, since June 1999, he has served as Chairman and Chief Executive
Officer of Fox Sports Television Group and prior thereto, from October 1997 to
June 1999, he served as Chairman and Chief Executive Officer of Fox
Broadcasting Company. From April 1996 through October 1997, Mr. Hill also
served as the Company's Chief Executive Officer. 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.
Jeff Shell has served as Chief Executive Officer of the Company since
January 2000 and served as President of the Company from June 1999 to June
2000. In addition, since January 2000, he has served as President of Fox Cable
Networks Group, a division of Fox. Prior thereto, Mr. Shell served as
Executive Vice President and Chief Financial Officer of the Company from
February 1998 to June 1999. In addition, 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.
Robert Thompson has served as President of the Company since July 2000 and,
additionally, he has served as President of Fox Sports Cable Networks, a
division of Fox, and as President of International Sports Programming LLC, an
international sports programming joint venture between Fox and TCI ("ISP")
since May 2000. Prior thereto, Mr. Thompson served as Executive Vice President
and Chief Operating Officer of Fox Sports Net, LLC from June 1999 to April
2000. Prior thereto, from October 1997 to June 1999, he served as its
Executive Vice President and, from July 1996 through October 1997, he served
as its Senior Vice President, Rights and Acquisitions and Regional Network
Operations. From June 1999 to April 2000, he also served as Executive Vice
President and Chief Operating Officer of ISP. From October 1994 through July
1996, Mr. Thompson served as Senior Vice President, Regional Network
Operations for Liberty Sports, Inc.
Tracy Dolgin has served as President, Fox Sports Net for the Company since
February 2000. Prior thereto, Mr. Dolgin served as Chief Operating Officer of
the Company from September 1998 to January 2000. From July 1997 to September
1998 Mr. Dolgin served as Joint Chief Operating Officer of Fox Sports Net,
LLC. In addition, he served as Executive Vice President, Marketing for Fox
Sports, a division of Fox Broadcasting Company, from December 1993 until
September 1998.
Louis LaTorre has served as President, Advertising Sales since July 1999 and
as Senior Vice President of the Company since January 1997. In addition, Mr.
LaTorre served as President, Advertising Sales of Fox Sports Net, LLC and
President, Advertising Sales of FX Networks, LLC from January 1997 to June
1999. From July 1994 until December 1996, he served as President and Chief
Operating Officer for the Sales and Marketing Division of New World
Communications, Inc.
There are no family relationships between any of the executive officers.
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Item 11. EXECUTIVE COMPENSATION
Executive Compensation
The following table sets forth the compensation paid for the years ended
December 31, 1997 and 1998, the six months ended June 30, 1999 and the year
ended June 30, 2000, to those persons who were, at June 30, 2000, the
Company's Chairman and the next four most highly compensated executive
officers of the Company and/or its divisions (the "Named Executives").
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
-------------------------------
Annual Compensation Awards Payouts
------------------------------------ --------------------- ---------
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.............. 2000 $500,000(1) $500,000(1) $ 4,620 -- -- -- --
Chairman 1999 $250,000(1) $ 75,000(1) -- -- -- -- --
1998 $500,000(1) $150,000(1) -- -- -- -- --
1997 $500,000(1) $150,000(1) -- -- -- -- --
Jeff Shell.............. 2000 $652,082(3) $120,000(3) $13,200 -- -- -- $1,242,000(4)
Chief Executive 1999 $207,084 $120,000 -- -- -- -- --
Officer(2) 1998 $362,315 $100,000 -- -- -- -- --
1997 $254,582 $100,000 -- -- -- -- --
Robert Thompson......... 2000 $153,124(6) $ 25,000(6) $ 3,300 -- -- -- $1,710,000(4)(7)
President(5) 1999 $233,333(6) $150,000(6) -- -- -- -- --
1998 $416,667 $100,000 -- -- -- -- --
1997 $325,447 $ 82,500 -- -- -- -- --
Tracy Dolgin............ 2000 $757,292 $310,000 $13,200 -- -- -- $1,242,000(4)
President, Fox Sports 1999 $350,000 $160,000 -- -- -- -- --
Net(8) 1998 $472,234 $200,000 -- -- -- -- --
1997 $256,597(9) $100,000(9) -- -- -- -- --
Louis LaTorre........... 2000 $620,000 $160,000 $13,200 -- -- -- $1,242,000(4)
President, Advertising 1999 $233,333 $160,000 $13,601 -- -- -- --
Sales(10) 1998 $464,636 $200,000 $30,714 -- -- -- --
1997 $391,026 $200,000 $20,148 -- -- -- --
</TABLE>
--------
(1) 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 June 30, 2000. During fiscal year 2000, 1999,
1998 and 1997, 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."
(2) In January 2000, Mr. Shell became Chief Executive Officer of the Company
and, prior thereto, served as President of the Company from June 1999 to
June 2000. Mr. Shell served as Executive Vice President and Chief
Financial Officer of the Company from February 1998 until June 1999.
Prior thereto, from June 1996 to February 1998, Mr. Shell served as
Senior Vice President, Finance and Development.
(3) Reflects the compensation received by Mr. Shell for the services he
rendered to the Company for the year ended June 30, 2000 and the six
months ended June 30, 1999. Effective during fiscal year 2000, Mr. Shell
became, and currently remains, employed by News America Incorporated.
News America Incorporated grants the Company the right to utilize Mr.
Shell's services. The above disclosure does not include compensation
information for Mr. Shell with respect to the services he performed at
News America Incorporated. See "Certain Transactions."
(4) In October 1997, the Company adopted the Fox/Liberty Networks Equity
Appreciation Rights Plan for Management and Key Employees (the "Plan").
In August 1999, the Plan was amended to provide that no further
appreciation rights could be granted under the Plan and the value of the
appreciation rights was fixed. All participants with outstanding
appreciation rights will continue to vest over time, provided that as
the
33
<PAGE>
appreciation rights vest, the participant shall be deemed to have exercised
his or her right to receive cash payments equal to the excess of the fixed
value over the grant value of such vested appreciation rights. Payments
made under the Plan are reflected as "All Other Compensation."
(5) In July 2000, Mr. Thompson became President of the Company, and,
additionally in May 2000, he became President of Fox Sports Cable
Networks, a division of Fox, and President of ISP. Prior thereto,
Mr. Thompson served as Executive Vice President and Chief Operating
Officer of Fox Sports Net, LLC from June 1999 to April 2000. Prior
thereto, from October 1997 to June 1999, he served as its Executive Vice
President and from July 1996 through October 1997, he served as its
Senior Vice President, Rights and Acquisitions and Regional Network
Operations. Additionally, from June 1999 to April 2000, Mr. Thompson
served as Executive Vice President and Chief Operating Officer of ISP.
(6) Reflects the compensation received by Mr. Thompson for the services he
rendered to the Company for the year ended June 30, 2000 and the six
months ended June 30, 1999. Mr. Thompson rendered services for ISP and
the Company during these periods. The above disclosure does not include
compensation information for Mr. Thompson with respect to the services
he performed at ISP for these periods.
(7) In connection with the formation of the Company, a deferred compensation
incentive plan (the "1996 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"), a subsidiary of Liberty
(the "LSI Plan"), prior to the formation of the Company. The 1996 Plan
was adopted by the Company in anticipation of certain LSI employees
performing services for the Company. Such employees, including
Mr. Thompson, were beneficiaries under the LSI Plan. Mr. Thompson
received payments under the 1996 Plan of $972,000 in the year ended
June 30, 2000.
(8) In February 2000, Mr. Dolgin became President, Fox Sports Net for the
Company. Mr. Dolgin served as Chief Operating Officer of the Company
from September 1998 to January 2000, and, prior thereto, served as Joint
Chief Operating Officer of Fox Sports Net, LLC from July 1997 to
September 1998.
(9) Reflects compensation received by Mr. Dolgin for services he rendered to
the Company for a portion of fiscal year 1997.
(10) In July 1999, Mr. LaTorre became President, Advertising Sales for the
Company and, in addition, has served as Senior Vice President of the
Company since January 1997.
The Company does not have a stock option plan and no long term compensation
awards were made in the fiscal years covered by the table above, except as
disclosed above.
In October 1997, the Company adopted the Fox/Liberty Networks, LLC Equity
Appreciation Rights Plan for Management and Key Employees (the "Plan"). The
Plan was amended effective as of June 10, 1999. 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 2000, there were no grants under
the Plan to the Named Executives.
Employment Arrangements
During fiscal years 1997, 1998, 1999 and 2000 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 2000, Fox Broadcasting
Company allocated to the Company $1,054,620 for the services Mr. Hill rendered
to the Company for that period. See "Certain Relationships and Related
Transactions."
In January 2000, Mr. Shell became employed by News America Incorporated,
which grants the Company the right to utilize Mr. Shell's services. Mr. Shell
was employed by The Fox Group from June 1999 to December 1999, which granted
the Company the right to utilize Mr. Shell's services. From January 1997 to
June 1999, Mr. Shell was employed with the Company under various employment
agreements. 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
34
<PAGE>
Senior Vice President, Finance and Development from June 1996 through December
1996. For fiscal 2000 News America Incorporated, allocated to the Company
$785,282 for the services Mr. Shell rendered to the Company for that period.
A subsidiary of the Company, Fox Channels Services, LLC entered into a two
year, eight month employment agreement with Mr. Robert Thompson which
commenced on May 1, 2000 and replaced the Company's prior agreement with Mr.
Thompson. Pursuant to the agreement, Mr. Thompson renders services to the
Company and to ISP and is entitled to receive an annual base salary of
$700,000 for the period May 1, 2000 to April 30, 2001, $725,000 for the period
May 1, 2001 to April 30, 2002 and $750,000 for the period from May 1, 2002 to
December 31, 2002. Mr. Thompson serves as President of ISP. 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.
Fox Sports Net, LLC entered into a two year, eleven month employment
agreement with Mr. Tracy Dolgin which commenced on February 1, 2000. This
agreement replaced the Company's prior agreement with Mr. Dolgin. Pursuant to
the current agreement, Mr. Dolgin is entitled to receive an annual salary of
$787,500 for the period February 1, 2000 to December 31, 2000, $800,000 for
the period January 1, 2001 to December 31, 2001 and $830,000 for the period
January 1, 2002 to December 31, 2002. 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 Sports Net, LLC. In addition, Mr. Dolgin 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 Fox
Sports Net, LLC or its affiliates to render services to another entity.
A subsidiary of the Company, Fox Channels Services, LLC, entered into a five
year employment agreement with Mr. Louis LaTorre which commenced on July 1,
1999. Pursuant to the agreement, Mr. LaTorre serves as President, Fox Channels
Group Sales and is entitled to receive an annual base salary of $620,000 for
the period July 1, 1999 to June 30, 2000, $665,000 for the period July 1, 2000
to June 30, 2001, $720,000 for the period July 1, 2001 to June 30, 2002,
$800,000 for the period July 1, 2002 to June 30, 2003, and $900,000 for the
period July 1, 2003 to June 30, 2004. Mr. LaTorre is entitled to receive an
annual bonus (as specified in the agreement) based on the performance of the
Company. 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 the Company. In addition, Mr. LaTorre 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 Fox Channels
Services, LLC or its affiliates to render services to another entity.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Not Applicable.
Item 13. Certain Relationships and Related Transactions
Rainbow Transaction
On June 22, 1997, Rainbow and the Company entered into a Formation Agreement
pursuant to which they agreed to form RPP and 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.
35
<PAGE>
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 Agreement), or upon the
date on which Fox Sports RPP submits a notice, pursuant to the RPP Agreement,
to remove the managing partner of RPP following a certain Change of Control of
RMH (as defined in the RPP Agreement), Rainbow Regional Holdings, LLC ("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, Fox Sports RPP has the right to cause RRH, at
RRH's option, to either (i) purchase all of its interests in 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 Rainbow, and Fox Sports Net National
Network Holdings, LLC (formerly Fox Sports National 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 fifth 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 FSN, 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
Fox, and certain of its 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. 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."
The Company, News Corporation, 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
36
<PAGE>
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.
The Company currently subleases one transponder to each of Fox News Channel
and Fox Movie Channel, both of which are affiliates of Fox. The monthly rental
payment paid to the Company pursuant to these subleases is $190,000 and
$150,500, 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 and certain affiliates render marketing, public relations,
legal, 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 years ended December
31, 1997 and 1998, the six months ended June 30, 1999 and the year ended June
30, 2000 were approximately $2,006,100, $1,939,000, $1,359,200, and
$3,755,200, 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. Compensation and benefits
paid to such individuals and related payroll costs were charged to the Company
at cost. Mr. Shell is employed by News America Incorporated. The Company's
pro-rata share of Mr. Shell's compensation and benefits is charged to the
Company at cost. 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
years ended December 31, 1997 and 1998, the six months ended June 30, 1999,
and the year ended June 30, 2000 were approximately $1,000,000, $1,000,000,
$511,000, and $0, 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 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 production of the
National Sports Report 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 years
ended December 31, 1997 and 1998, the six months ended June 30, 1999, and the
year ended June 30, 2000 were approximately $20,416,800, $5,939,000,
$7,480,000, and $17,551,700, respectively.
Fox and its affiliates collect certain revenues and pay certain expenses on
behalf of the Company. The Company charges Fox interest on amounts due to the
Company which have been collected by Fox and, in turn, Fox and its affiliates
charge the Company interest on amounts paid by Fox 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 years ended
December 31, 1997 and 1998, the six months ended June 30, 1999 and the year
ended June 30, 2000 was approximately $2,719,100, $351,000, $165,100, and
$77,000 respectively, and interest expense incurred by the Company during
these periods was $1,569,600, $25,000, $0, and $0, respectively.
A portion of the consideration to be received in connection with the
Company's sale of its interest in Home Team Sports to Comcast includes new or
amended carriage agreements for certain programming services owned by
affiliates of the Company. The Company will enter into inter-company
arrangements with these affiliates pursuant to which the Company will be
compensated for including these arrangements under the Comcast/Viacom
Agreement.
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 years ended December 31, 1997 and
37
<PAGE>
1998, the six months ended June 30, 1999 and the year ended June 30, 2000 were
approximately $1,213,100, $1,523,000, $1,080,000 and $1,948,000, respectively.
The Company licenses television and feature film programming from Twentieth
Century Fox Film Corporation and affiliates. Expense recognized by the Company
relating to program rights amortization for the years ended December 31, 1997
and 1998 and for the six months ended June 30, 1999 and the year ended
June 30, 2000 was approximately $17,963,000, $30,674,000, $20,598,000 and
$63,294,000, 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 Fox.
The Company has the ability to increase office space in this facility as the
need may arise. As of June 30, 2000 the Company rented a total of 76,422
square feet and the monthly rental was $320,000. See "Properties."
In July 1999, 19/th/ Holdings Corporation, a wholly-owned subsidiary of Fox,
acquired the debt outstanding under the Bank Facility from the group of banks,
and, in so doing, assumed the rights and obligations of the group of banks
under the Bank Facility. The Company and 19/th/ Holdings Corporation
subsequently amended and restated the Bank Facility to provide, among other
things, a fixed rate of interest, determined by 19/th/ Holdings Corporation on
an annual basis, and eliminated substantially all of the affirmative and
negative covenants other than with respect to the payment of principal and
interest (the "19/th/ Facility"). Interest expense incurred by the Company under
the 19/th/ Facility was $51,940,000 for the year ended June 30, 2000. The
Company currently expects that remaining availability under the 19/th/ Facility
will primarily be used for investments in certain subsidiaries of the Company
and for working capital purposes.
In May 1999, the Company sold its investment in Fit TV to an affiliate of
Fox for $14.5 million in cash and recognized a loss on sale of $2,572,000.
38
<PAGE>
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 June 30, 2000.
1. Financial Statements:
Financial Statements filed herewith are listed in the "Index to
Consolidated Financial Statements" at page F-1. In addition, the
following financial statements are incorporated by reference to
Amendment No. 1 to the Company's Transition Report on Form 10-K for
the fiscal year ended June 30, 1999:
Financial Statements of Regional Programming Partners as of December
31, 1999, 1998 and 1997 and for the years ended December 31, 1999
and 1998, and the period from December 18, 1997 (Inception) to
December 31, 1997,
Financial Statements of National Sports Partners as of December 31,
1999, 1998 and 1997 and for the years ended December 31, 1999 and
1998, and the period from Inception (December 18, 1997) to December
31, 1997.
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(a)* 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.
(b)** First Supplemental Indenture, dated as of March 31, 1998, among
Fox/Liberty Networks, LLC,
FLN Finance, Inc. and the Bank of New York, as Trustee.
4.3(a)* 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.
(b)** First Supplemental Indenture, dated as of March 31, 1998, among
Fox/Liberty Networks, LLC,
FLN Finance, Inc. 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.
</TABLE>
39
<PAGE>
<TABLE>
<C> <S>
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.
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 Sports Financing, LLC.
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, dated as of
December 15, 1997, among Fox Sports Net, LLC, FX Networks, LLC
and Fox Sports RPP Holdings, LLC, as Borrowers, and Fox/Liberty
Networks, LLC and The Chase Manhattan Bank, as Administrative
Agent, Chase Securities Inc., as Syndication Agent, and TD
Securities (USA) Inc., as Documentation Agent.
(c)** First Amendment to the Credit Agreement, dated as of April 20,
1998, among Fox Sports Net, LLC, FX Networks, LLC, Fox Sports RPP
Holdings, LLC, as Borrowers and Fox/Liberty Networks, LLC and The
Chase Manhattan Bank, as Administrative Agent, Chase Securities
Inc., as Syndication Agent and TD Securities (USA) Inc., as
Documentation Agent.
</TABLE>
40
<PAGE>
<TABLE>
<C> <S>
(d)** Second Amendment to the Credit Agreement, dated as of April
24, 1998, among Fox Sports Net, LLC, FX Networks, LLC, Fox
Sports RPP Holdings, LLC, as Borrowers and Fox/Liberty
Networks, LLC and The Chase Manhattan Bank, as Administrative
Agent, Chase Securities Inc., as Syndication Agent and TD
Securities (USA) Inc., as Documentation Agent.
(e)**** Third Amendment to the Credit Agreement, dated as of March 9,
1999, among Fox Sports Net, LLC, FX Networks, LLC, Fox Sports
RPP Holdings, LLC, as Borrowers and Fox/Liberty Networks, LLC
and The Chase Manhattan Bank, as Administrative Agent, Chase
Securities Inc., as Syndication Agent and TD Securities (USA)
Inc., as Documentation Agent.
(f)# Amended and Restated Credit Agreement, dated as of July 15,
1999, among Fox Sports Net, LLC, FX Networks, LLC, Fox Sports
RPP Holdings, LLC, as Borrowers and Fox Sports Networks, LLC
and 19/th/ Holdings Corporation, as Lender.
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 Channels Services, LLC and
Louis LaTorre, dated effective July 1, 1999.
10.14+ Employment Agreement, dated effective May 1, 2000, between Fox
Channels Services, LLC and Robert Thompson.
10.15+ Employment Agreement, dated effective February 1, 2000,
between Fox Sports Net, LLC and Tracy Dolgin.
10.16(a)***++ Fox/Liberty Networks, LLC Equity Appreciation Rights Plan for
Management and Key Employees, effective as of May 1, 1996.
(b)#++ Amendment to Fox Sports Networks, LLC Equity Appreciation
Rights Plan for Management and Key Employees, effective as of
June 30, 1999.
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).
** Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1998.
*** Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997.
**** Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998.
# Incorporated by reference to the Company's Transition Report on Form 10-K
for the fiscal year ended June 30, 1999.
+ 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.
41
<PAGE>
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 SPORTS NETWORKS, LLC
Dated: September 28, 2000
/s/ Jeff Shell
By: _________________________________
Jeff Shell
Chief Executive Officer
(Principal Executive Officer)
/s/ Dennis Farrell
By: _________________________________
Dennis Farrell
Senior Vice President, Finance
(Principal Financial Officer and
Principal Accounting 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:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
Fox Regional Sports Holdings, Inc. Member of Fox Sports September 28, 2000
Networks, LLC
</TABLE>
/s/ Raymond L. Parrish
By: _____________________________
Raymond L. Parrish
Vice President
<TABLE>
<S> <C> <C>
Fox Regional Sports Holdings II, Inc. Member of Fox Sports September 28, 2000
Networks, LLC
/s/ Raymond L. Parrish
By: _____________________________
Raymond L. Parrish
Vice President
Fox Sports Net Financing, LLC Member of Fox Sports September 28, 2000
Networks, LLC
By: Fox Regional Sports Holdings II, Member of Fox Sports Net September 28, 2000
Inc. Financing, LLC
/s/ Raymond L. Parrish
By: _____________________________
Raymond L. Parrish
Vice President
By: Fox Regional Sports Holdings, Inc. Member of Fox Sports Net September 28, 2000
Financing, LLC
</TABLE>
/s/ Raymond L. Parrish
By: _____________________________
Raymond L. Parrish
Vice President
42
<PAGE>
FOX SPORTS NETWORKS, LLC
INDEX TO
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Fox Sports Networks, LLC
Consolidated Financial Statements....................................... F-2
Report of Independent Public Accountants................................ F-3
Consolidated Balance Sheets as of June 30, 2000 and 1999................ F-4
Consolidated Statements of Operations for the Periods Ended June 30,
2000 and 1999 and December 31, 1998 and 1997........................... F-5
Consolidated Statements of Members' Equity for the Periods Ended June
30, 2000 and 1999 and December 31, 1998 and 1997....................... F-6
Consolidated Statements of Cash Flows for the Periods Ended June 30,
2000 and 1999 and December 31, 1998 and 1997........................... F-7
Notes to Consolidated Financial Statements.............................. F-8
Financial Statement Schedules
Report of Independent Public Accountants on Schedules................... S-2
Schedule I--Balance Sheets as of June 30, 2000 and 1999................. S-3
Schedule I--Statements of Operations for the Periods Ended June 30, 2000
and 1999 and December 31, 1998 and 1997................................ S-4
Schedule I--Statements of Cash Flows for the Periods Ended June 30, 2000
and 1999 and December 31, 1998 and 1997................................ S-5
Schedule I--Notes to Condensed Financial Statements..................... S-6
Schedule II--Valuation and Qualifying Accounts for the Year Ended June
30, 2000, the Six Months Ended June 30, 1999 and the years Ended
December 31, 1998 and 1997............................................. S-7
</TABLE>
F-1
<PAGE>
FOX SPORTS NETWORKS, LLC
CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2000 and 1999
With Report of Independent Public Accountants
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of Fox Sports Networks, LLC:
We have audited the accompanying consolidated balance sheets of Fox Sports
Networks, LLC and subsidiaries, a Delaware limited liability company (the
"Company") as of June 30, 2000 and 1999, and the related consolidated
statements of operations, members' equity and cash flows for the year ended
June 30, 2000, the six months ended June 30, 1999, and the years ended
December 31, 1998 and 1997. 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 auditing standards generally
accepted in the United States. 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 Sports
Networks, LLC and subsidiaries as of June 30, 2000 and 1999, and the results
of their operations and their cash flows for the year ended June 30, 2000, the
six months ended June 30, 1999, and the years ended December 31, 1998 and 1997
in conformity with accounting principles generally accepted in the United
States.
Arthur Andersen LLP
Los Angeles, California
August 16, 2000
F-3
<PAGE>
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
CONSOLIDATED BALANCE SHEETS
June 30, 2000 and 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, June 30,
2000 1999
---------- ----------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 25,891 $ 59,145
Trade and other receivables, net of allowance for
doubtful accounts of $9,621 and $21,925 at June 30,
2000 and 1999 165,010 164,739
Receivables from equity affiliates, net................ 5,616 43,892
Program rights......................................... 127,667 106,790
Notes receivable, current.............................. 1,935 1,935
Prepaid expenses and other current assets.............. 29,314 13,968
---------- ----------
Total current assets................................. 355,433 390,469
Property and equipment, net.............................. 58,186 53,794
Investments in affiliates................................ 952,723 856,948
Note receivable, long-term............................... 6,007 12
Program rights........................................... 138,262 103,567
Excess cost, net......................................... 480,087 493,965
Other assets............................................. 35,699 33,743
---------- ----------
Total Assets......................................... $2,026,397 $1,932,498
========== ==========
<CAPTION>
LIABILITIES AND MEMBERS' EQUITY
-------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses.................. $ 169,390 $ 195,961
Program rights payable................................. 79,688 73,061
Current portion of long-term debt...................... 2,470 13,253
Accrued interest....................................... 16,988 18,903
Other current liabilities.............................. 11,532 9,168
---------- ----------
Total current liabilities............................ 280,068 310,346
Non-current program rights payable....................... 107,310 96,021
Long-term debt, net of current portion................... 1,588,914 1,488,178
Minority interest........................................ 25,412 2,207
Commitments and contingencies............................
Members' equity.......................................... 24,693 35,746
---------- ----------
Total Liabilities and Members' Equity................ $2,026,397 $1,932,498
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE>
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Periods Ended June 30, 2000 and 1999
and December 31, 1998 and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Six months
Year ended ended Year ended Year ended
June 30, June 30, December 31, December 31,
2000 1999 1998 1997
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Programming.................. $424,401 $171,085 $301,734 $226,469
Advertising.................. 241,313 95,583 160,499 117,874
Direct broadcast............. 137,420 56,725 121,759 91,663
Other........................ 68,532 40,860 71,202 35,786
-------- -------- -------- --------
871,666 364,253 655,194 471,792
-------- -------- -------- --------
Expenses:
Operating.................... 614,980 296,059 485,276 420,888
General and administrative... 75,834 39,264 90,662 65,558
Depreciation and
amortization................ 48,094 12,239 21,662 18,968
-------- -------- -------- --------
738,908 347,562 597,600 505,414
-------- -------- -------- --------
Operating income (loss)........ 132,758 16,691 57,594 (33,622)
-------- -------- -------- --------
Other (income) expenses:
Interest, net................ 129,640 54,781 110,425 34,142
Subsidiaries' income tax
expense (benefit), net...... 2,039 233 1,456 (1,590)
Loss on sale of assets....... 604 2,767 121 --
Equity loss of affiliates,
net......................... 6,345 11,160 5,913 9,018
Other........................ (137) 471 (1,478) 401
Minority interest............ 5,320 1,736 3,225 2,864
-------- -------- -------- --------
143,811 71,148 119,662 44,835
-------- -------- -------- --------
Net loss....................... $(11,053) $(54,457) $(62,068) $(78,457)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
For the Periods Ended June 30, 2000 and 1999
and December 31, 1998 and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Fox Regional Fox Sports Fox Regional Total
Sports Net Financing, Sports Members'
Holdings II, Inc. LLC Holdings, Inc. Equity
----------------- -------------- -------------- --------
<S> <C> <C> <C> <C>
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
Net loss.............. (19,144) (23,780) (19,144) (62,068)
-------- -------- -------- --------
BALANCE, DECEMBER 31,
1998................... (71,475) 144,853 16,825 90,203
Net loss.............. (16,796) (20,865) (16,796) (54,457)
-------- -------- -------- --------
BALANCE, JUNE 30, 1999.. (88,271) 123,988 29 35,746
Net loss.............. (3,409) (4,235) (3,409) (11,053)
-------- -------- -------- --------
BALANCE, JUNE 30, 2000.. $(91,680) $119,753 $ (3,380) $ 24,693
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Periods Ended June 30, 2000 and 1999
and December 31, 1998 and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Six months
Year ended ended Year ended Year ended
June 30, June 30, December 31, December 31,
2000 1999 1998 1997
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss..................... $(11,053) $(54,457) $(62,068) $ (78,457)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating
activities:
Depreciation and
amortization.............. 48,094 12,239 21,662 18,968
Interest accretion and
amortization of debt
issuance costs............ 33,247 15,660 29,868 9,431
Loss on sale of assets..... 604 2,767 121 --
Equity loss of affiliates.. 6,345 11,160 5,913 9,018
Minority interest.......... 5,320 1,736 3,225 2,864
Changes in operating assets
and liabilities:
Trade and other
receivables............... 5,980 (13,441) (1,373) (47,296)
Program rights............. (54,149) (16,578) (65,871) (77,266)
Prepaid expenses and other
operating assets.......... (36,029) (7,130) (4,812) (10,715)
Accounts payable and
accrued expenses.......... (43,764) 37,417 (14,529) 51,462
Program rights payable..... 14,314 (10,872) 46,278 26,749
Other operating
liabilities............... 431 (10,568) 9,553 18,517
-------- -------- -------- ---------
Net cash used in
operating activities.... (30,660) (32,067) (32,033) (76,725)
-------- -------- -------- ---------
Cash flows from investing
activities:
Advances from equity
affiliates.................. 33,006 3,883 96,084 102,497
Advances to equity
affiliates.................. (41,901) (14,198) (92,913) (106,555)
Notes receivable (issued to)
collected from third
parties..................... (5,995) 16,005 5,856 540
Purchases of property and
equipment................... (20,188) (9,942) (14,665) (31,321)
Distributions from equity
affiliates.................. 11,892 6,752 40,051 4,704
Investments in equity
affiliates.................. (35,940) (23,063) (67,671) (857,325)
Purchase of program rights
and related assets.......... -- -- -- (45,000)
Acquisition of FIT TV, net of
cash acquired............... -- -- (3,618) --
Proceeds from sale of
investment.................. -- -- 900 --
-------- -------- -------- ---------
Net cash used in
investing activities.... (59,126) (20,563) (35,976) (932,460)
-------- -------- -------- ---------
Cash flows from financing
activities:
Borrowings of long-term
debt........................ 491,875 92,000 155,000 1,720,078
Repayment of long-term debt.. (432,823) (22,423) (91,713) (648,960)
Deferred debt issuance
costs....................... -- -- -- (18,357)
Distribution to minority
shareholder of subsidiary... (2,520) (720) (1,920) (1,980)
-------- -------- -------- ---------
Net cash provided by
financing activities.... 56,532 68,857 61,367 1,050,781
-------- -------- -------- ---------
Net (decrease) increase in cash
and cash equivalents.......... (33,254) 16,227 (6,642) 41,596
Cash and cash equivalents,
beginning of period........... 59,145 42,918 49,560 7,964
-------- -------- -------- ---------
Cash and cash equivalents, end
of period..................... $ 25,891 $ 59,145 $ 42,918 $ 49,560
======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(Dollars in thousands)
(1) Organization
Fox Sports Networks, LLC, a Delaware limited liability company, (together
with its subsidiaries, the "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.
Liberty Sports, Inc. ("LSI") (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.
In July 1999, TNCL acquired substantially all of LSI's interest in the
Company and then transferred this interest to Fox in exchange for common
stock.
The Company's members as of June 30, 2000 are:
<TABLE>
<CAPTION>
Interest
--------
<S> <C>
Fox Regional Sports Holdings, Inc. ("FRSH") ...................... 30.843%
(a wholly-owned subsidiary of Fox Entertainment Group, Inc.
("Fox"), a majority owned subsidiary of News America Incorporated
("NAI"), a wholly-owned subsidiary of The News Corporation
Limited "TNCL")
Fox Regional Sports Holdings II, Inc. ("FRSH II")................. 30.843%
(a wholly-owned subsidiary of Fox) (formerly LMC Newco U.S.,
Inc.)
Fox Sports Net Financing, LLC..................................... 38.314%
-------
(50% owned by each of FRSH and FRSH II)
100.000%
=======
</TABLE>
(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:
<TABLE>
<S> <C>
--Fox Sports Net West Holdings,
LLC --Liberty/Fox ARC, LP
--Fox Sports Net Ad Sales
Holdings, LLC --Liberty/Fox Southeast, LLC
--Fox Sports Net Northwest
Holdings, LP --Fox Sports Net Utah, LLC
--Liberty/Fox Sunshine, LLC --Fox Sports Net Arizona, LLC
--Fox Sports Net Detroit, LLC --Fox Channels Services, LLC
--Fox Sports Net Canada Holdings,
LLC --Fox Sports Net Pittsburgh, LP
--Fox Sports Net Distribution, LP --Fox Sports Net Chicago Holdings, LLC
--Fox Sports Net Bay Area
Holdings, LLC --Fox Sports Net Minnesota Holdings, LP
--Fox Sports Net Canada Holdings,
LLC
</TABLE>
FX Networks, LLC
Fox Sports RPP Holdings, LLC
F-8
<PAGE>
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
(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 Net 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(b)).
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% interest in RPP, which exceeded its equity in
the underlying net assets of RPP by $314,420 (See Note 6(b)). Had the
investment occurred at the beginning of the year ended December 31, 1997, pro-
forma net loss would have increased by $2,234. 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.
In July 1999, in connection with Fox's acquisition of LSI's interest in the
Company (See Note 1), voting control of certain majoriy-owned subsidiaries of
the Company, previously held by Liberty, was acquired by Fox and, accordingly,
these subsidiaries, are consolidated for the year ended June 30, 2000 (See
Note 3(g)). These majority-owned subsidiaries, which were previously accounted
for using the equity method of accounting, are:
Fox Sports Net Pittsburgh, LP (formerly Liberty/Fox KBL LP)
Fox Sports Net Chicago Holdings, LLC (formerly Fox/Liberty Chicago LP)
Fox Sports Net Bay Area Holdings, LLC (formerly Fox/Liberty Bay Area LP)
Fox Sports Net Minnesota Holdings, LP (formerly Fox/Liberty Upper Midwest
LP)
Fox Sports Net Distribution, LP (formerly Fox/Liberty Distribution LP)
(b) Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and 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.
(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.
F-9
<PAGE>
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
(Dollars in thousands)
At the inception of these contracts, and periodically thereafter, the
Company evaluates the recoverability of the costs associated therewith against
the revenues 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 includes acquisition costs
allocated to tangible assets acquired. Depreciation for financial statement
purposes is provided using the straight-line method over an estimated useful
life of three to five years.
(e) Other Assets
At June 30, 2000 and 1999 other assets included $14,845, and $16,342,
respectively, of debt issuance costs related to the issuance of Senior Notes
and Senior Discount Notes (see Note 7(b)) and $3,789 and $4,639, respectively,
of debt issuance costs related to a credit facility (see Note 7(a)). These
costs are amortized using the effective interest method over the term of the
respective debt instrument. Amortization expense was $2,346, $1,147, $2,321
and $461 in the aggregate for the year ended June 30, 2000, the six months
ended June 30, 1999 and the years ended December 31, 1998 and 1997,
respectively, and is included in interest expense.
(f) 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%, 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 such affiliates income or losses and decreased by 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.
(g) 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 $13,878, $7,037, $14,300, and $11,776 for the year
ended June 30, 2000, the six months ended June 30, 1999, and the years ended
December 31, 1998 and 1997, respectively. At June 30, 2000 and 1999 excess
cost, net included accumulated amortization of $106,691 and $92,813,
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
impairment of its excess cost has occurred.
F-10
<PAGE>
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
(Dollars in thousands)
(h) Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement No.
121 ("SFAS 121") on accounting for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to assets to be held and
used. SFAS 121 also establishes accounting standards for long-lived assets and
certain identifiable intangibles to be disposed of. The Company adopted the
SFAS 121 from inception (April 30, 1996). See Note 2(g) for the policy on
excess cost.
(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.
(j) Non-Monetary Transactions
The Company trades commercial advertising spots in return for programming
and other consideration. 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
$9,254, $5,798, $4,173, and $8,539 in both advertising revenue and programming
expenses during the year ended June 30, 2000, the six months ended June 30,
1999, and the years ended December 31, 1998 and 1997, respectively.
(k) 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 members.
(l) Segment Reporting
In June 1997, the Financial Accounting Standards Board issued Statement No.
131 ("SFAS 131") on the disclosure of segments of an enterprise. SFAS 131
establishes guidelines for determining operating segments within public
business enterprises. Based on these guidelines, the Company reports
information under a single cable programming segment. The Company adopted SFAS
131 as of January 1, 1998.
(m) Major Customers
The Company recognized revenue from one customer which represented 14.5%,
11.8%, 14.3%, and 18.1% of consolidated revenues for the year ended June 30,
2000, the six months ended June 30, 1999, and the years ended December 31,
1998 and 1997, respectively. Revenue recognized from a second customer
represented 11.4% for the year ended June 30, 2000.
(n) Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States 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.
F-11
<PAGE>
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
(Dollars in thousands)
(o) Reclassifications
Certain reclassifications have been made to the prior year balances in order
to conform to the current year presentation.
(p) Fiscal Year
Beginning in the current year, the Company maintains a 52-53 week fiscal
year ending on the Sunday nearest to June 30. The year ended June 30, 2000
comprises a 53-week period.
(3) Supplemental Disclosures to Consolidated Statements of Cash Flows
Supplemental disclosure of cash flow information and non-cash investing and
financing activities for the year ended December 31, 1997(b) (c) is as
follows:
<TABLE>
<CAPTION>
ARC Ltd(a)
----------
<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 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>
--------
(a) 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 2(a)). Had the additional 12.78% interest been acquired
at January 1, 1997 with respect to the year ended December 31, 1997, the
pro forma consolidated revenue would have increased by $29,913 and pro
forma consolidated income would have increased by $372. 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.
F-12
<PAGE>
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
(Dollars in thousands)
(b) In September 1997, the Company formed Fox Sports Net Detroit, LLC for the
purpose of providing sports and sports related programming to the Detroit,
Michigan area. Fox Sports Net 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. 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
$70,713 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 $2,143, 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 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.
Supplemental disclosure of cash flow information and non-cash investing and
financing activities for the year ended December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Fit TV(d)
---------
<S> <C>
Fair value of net assets acquired:
Cash............................................................. $ 132
Accounts receivable.............................................. 650
Prepaid program rights........................................... 725
Prepaid expenses................................................. 200
Property and equipment, net...................................... 11
Other assets..................................................... 156
Accounts payable and accrued expenses............................ (3,762)
Program rights payable........................................... (29)
Other current liabilities........................................ (158)
-------
(2,075)
Satisfied by:
Cash............................................................. 18,750
-------
Excess cost........................................................ $20,825
=======
</TABLE>
--------
(d) In April 1998, the Company completed the acquisition of Fit TV
Partnership, with an effective date as of January 1, 1998, in which the
Company paid $15,000 to Cable Health TV, Inc. in 1997 and $1,875 each to
Reebok CHC, Inc. and Liberty CHC, Inc., representing 100% capital interest
and a 92% profit interest in Fit TV Partnership, and accordingly, has been
consolidated with the Company. An 8% minority profit interest in Fit TV
Partnership was acquired by a third party. Had the capital interest been
acquired at January 1, 1997 with respect to the year ended December 31,
1997, the pro forma revenue would have increased by $4,074 and net loss
would have increased by $7,561. 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
acquisition occurred on the date indicated, or which may result in the
future.
F-13
<PAGE>
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
(Dollars in thousands)
Supplemental disclosure of cash flow information and non-cash investing and
financing activities for the six months ended June 30, 1999 (f) is as follows:
<TABLE>
<CAPTION>
Fit TV(e)
---------
<S> <C>
Fair value of net assets disposed:
Accounts receivable............................................ $ (1,341)
Prepaid program rights......................................... (1,300)
Prepaid expenses............................................... (274)
Property and equipment, net.................................... (57)
Excess cost.................................................... (20,131)
Other assets................................................... (32)
Accounts payable and accrued expenses.......................... 5,785
Program rights payable......................................... 278
--------
(17,072)
Satisfied by:
Receivable..................................................... 14,500
--------
Loss on sale..................................................... $ (2,572)
========
</TABLE>
--------
(e) In May 1999, the Company recorded a receivable from an afffilitate of Fox
in connection witht the sale of Fit TV Partnership.
(f) In April 1999, the Company received notes receivable of $19,635 as a
distribution from Liberty/Fox KBL LP.
Supplemental disclosure of cashflow information and non-cash investing and
financing activities for the year ended June 30, 2000 (g)(h) is as follows:
(g) The consolidation of certain majority-ownded subsidiaries previously
accounted for using the equity method (see Note 2(a)) is a non-cash
investing activity that resulted in increases to various assets and
liabilities on the Company's consolidated balance sheet that are not
reflected in the consolidated statements of cash flows for the year ended
June 30, 2000. Such increases primarily consisted of a $78,072 increase in
investments in equity affiliates, a $47,171 decrease in receivables from
equity affiliates, a $483 increase in property and equipment, net and a
$20,405 increase in minority interest.
(h) Debt increased by $51,940 related to accrued interest on the 19th Holdings
Corporation (a wholly-owned subsidiary of Fox) note (see Note 7(a)).
Cash paid for interest was $47,598, $46,426, $76,154,and $24,848 for the
year ended June 30, 2000, the six months ended June 30, 1999, and the years
ended December 31, 1998 and 1997, respectively.
F-14
<PAGE>
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
(Dollars in thousands)
(4) Related Party Transactions
For the year ended June 30, 2000, the Company recognized the following
revenue and expenses as a result of arms-length transactions with affiliates
of Fox and for the six months ended June 30, 1999, and the years ended
December 31, 1998 and 1997, the Company recognized the following revenue and
expenses as a result of arms-length transactions with affiliates of LSI and
Fox:
<TABLE>
<CAPTION>
Six months
Year ended ended Year ended Year ended
June 30, June 30, December 31, December 31,
2000 1999 1998 1997
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Programming.............. $ 3,845 $43,521 $93,922 $92,244
Advertising.............. 1,948 895 1,523 3,183
Direct broadcast......... -- -- -- 2,082
Interest income.......... 77 165 351 2,719
Other.................... 21,976 14,240 19,606 --
Expenses:
Operating................ 108,788 31,997 62,216 65,736
General and
administrative.......... 4,691 3,202 2,775 4,156
Interest expense......... -- -- 25 1,570
</TABLE>
At June 30, 2000 and 1999 receivables from related parties were $7,713 and
$23,012, respectively, and payables to related parties were $9,364 and $7,690,
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 June 30, 2000 and 1999 consisted of the following:
<TABLE>
<CAPTION>
June 30, June 30,
2000 1999
-------- --------
<S> <C> <C>
Studio and production equipment.......................... $ 79,720 $ 55,832
Office equipment......................................... 21,989 17,986
Construction in progress................................. 2,154 16,164
Other.................................................... 11,092 4,200
-------- --------
114,955 94,182
Accumulated depreciation................................. (56,769) (40,388)
-------- --------
$ 58,186 $ 53,794
======== ========
</TABLE>
F-15
<PAGE>
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
(Dollars in thousands)
(6) Investments Accounted for Under the Equity Method
(a) Summarized Data for Significant Equity Affiliates
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>
June 30, June 30,
2000 1999
---------- ----------
<S> <C> <C>
Current assets........................................ $ 433,293 $ 395,827
Non-current assets.................................... 2,072,169 1,857,925
---------- ----------
Total assets.......................................... $2,505,462 $2,253,752
========== ==========
Current liabilities................................... $ 291,272 $ 246,878
Non-current liabilities............................... 705,773 634,259
Minority interest..................................... -- --
Members' equity....................................... 1,508,417 1,372,615
---------- ----------
Total liabilities and equity.......................... $2,505,462 $2,253,752
========== ==========
</TABLE>
Combined Operations
<TABLE>
<CAPTION>
Six months
Year ended ended Year ended Year ended
June 30, June 30, December 31, December 31,
2000 1999 1998 1997
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues.................... $1,334,965 $454,885 $783,156 $ 66,167
Operating loss.............. (33,237) (27,904) (65,062) (24,647)
Net loss.................... (22,764) (21,634) (29,834) (24,663)
</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-16
<PAGE>
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
(Dollars in thousands)
(b) Unconsolidated Affiliates
The following table reflects the Company's ownership interests in majority
and minority owned affiliates as of:
<TABLE>
<CAPTION>
June 30, June 30,
Entity 2000 1999
------ -------- --------
<S> <C> <C>
Majority Owned Affiliates
Fox Sports Net Chicago Holdings LLC...................... N/A 98.0%
Fox Sports Net Pittsburgh LP............................. N/A 60.0%
Fox Sports Net Bay Area Holdings LLC..................... N/A 98.0%
Fox Sports Net Minnesota Holdings LP..................... N/A 98.0%
Fox Sports Net Distribution LP........................... N/A 98.0%
Minority Owned Affiliates
LMC Sunshine Inc......................................... 48.5% 48.5%
Sunshine Network Joint Venture........................... 49.0% 49.0%
Home Team Sports Limited Partnership..................... 34.3% 34.3%
Mountain Mobile TV....................................... 33.3% 33.3%
Regional Programming Partners............................ 40.0% 40.0%
National Sports Partners................................. 50.0% 50.0%
Sports Channel Pacific Associates........................ 50.0% N/A
Sports Channel Chicago Associates........................ 50.0% N/A
National Advertising Partners............................ 50.0% 50.0%
CTV Sports Net........................................... 20.0% 20.0%
Carolina Hurricanes Programming Joint Venture............ 33.3% 33.3%
</TABLE>
The following table reflects the carrying value of the Company's investments
accounted for under the equity method and the Company's equity in earnings
(losses) of its majority and minority owned affiliates:
<TABLE>
<CAPTION>
Investment
-----------------
June 30, June 30,
Entity 2000 1999
------ -------- --------
<S> <C> <C>
Majority Owned Affiliates............ $ -- $(21,163)
Minority Owned Affiliates............ 952,723 878,111
-------- --------
$952,723 $856,948
======== ========
</TABLE>
<TABLE>
<CAPTION>
Equity in Earnings (Losses)
-----------------------------------------------
Six months
Year ended ended Year ended Year ended
June 30, June 30, December 31, December 31,
Entity 2000 1999 1998 1997
------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Majority Owned
Affiliates............. $ -- $ 6,205 $13,111 $(2,288)
Minority Owned
Affiliates............. (6,345) (17,365) (19,024) (6,730)
-------- -------- ------- -------
$ (6,345) $(11,160) $(5,913) $(9,018)
======== ======== ======= =======
</TABLE>
F-17
<PAGE>
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
(Dollars in thousands)
Prior to the contribution of the above majority owned entities to the
Company in connection with the formation of the Company (see Note 1), there
were certain regional networks that were wholly owned and consolidated by LSI
(a predecessor company). Upon contribution of these entities to the Company,
LSI retained management control through a general partnership minority
interest. Until July 1999, these operations were not consolidated by the
Company, although it owned the majority of the limited partnership interests.
In connection with Fox's acquisition of LSI's interests in the Company in July
1999, Fox assumed management control of these partnerships and has
consolidated these partnerships from that date. (See Notes 2(a) and 3(g)).
The Company's investment in several of its affiliates exceeded its equity in
the underlying net assets by a total of $328,949 and $332,988 at June 30, 2000
and 1999, respectively. These excess amounts are being amortized on a
straight-line basis over 40 years. The amortization aggregated to $9,252,
$4,777, $7,876, and $1,025 during the year ended June 30, 2000, the six months
ended June 30, 1999, and the years ended December 31, 1998 and 1997,
respectively, and is included in the Company's share of equity loss of
affiliates.
(7) Debt
Debt at June 30, 2000 and 1999 is summarized as follows:
<TABLE>
<CAPTION>
June 30, June 30,
2000 1999
---------- ----------
<S> <C> <C>
19th Holdings Corporation (a)........................ $ 749,990 $ --
Chase Manhattan Bank--Term(a)........................ -- 400,000
Chase Manhattan Bank--Revolver(a).................... -- 277,000
Senior Notes(b)...................................... 500,000 500,000
Senior Discount Notes(b)............................. 331,002 300,786
Other................................................ 10,392 23,645
---------- ----------
1,591,384 1,501,431
Less current portion................................. (2,470) (13,253)
---------- ----------
$1,588,914 $1,488,178
========== ==========
</TABLE>
Annual future minimum maturities of debt are as follows:
<TABLE>
<S> <C>
Year ending June 30:
2001............................................................ $ 2,470
2002............................................................ 2,636
2003............................................................ 2,813
2004............................................................ 752,463
2005............................................................ --
Thereafter...................................................... 831,002
----------
$1,591,384
==========
</TABLE>
The fair value of the Company's debt is estimated based on the quoted market
prices for the same or similar issues or on the current rates offered to the
Company for debt of the same remaining maturities. Rates on the Company's debt
approximate current market rates, and, as such, the carrying amount of
borrowings outstanding approximates fair value.
F-18
<PAGE>
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
(Dollars in thousands)
(a) 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 banks. In July 1999,
19/th/ Holdings Corporation, (a wholly-owned subsidiary of Fox) acquired the
debt outstanding under the Credit Agreement and assumed the rights and
obligations of the group of banks thereunder. The Company and 19/th/
Holdings Corporation subsequently amended and restated the Credit
Agreement and eliminated substantially all of the affirmative and negative
covenants other than with respect to the payment of principal and interest
(the "19/th/ Agreement"). The 19/th/ 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 a fixed rate determined on an annual basis by
19/th/ Holdings Corporation. 19th Holdings Corporation has determined that
the rate of interest on this debt through June 2001 shall be 8%. Unpaid
interest is added to principal on a monthly basis. The amount of interest
added to principal for the year ended June 30, 2000 was $51,940. Amounts
outstanding under the revolving credit facility and principal under the
term loan are due September 30, 2004.
(b) In August 1997, Fox Sports Networks, LLC (formerly Fox/Liberty Networks,
LLC) (the "Issuer") 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") that was 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 Issuer exchanged all of the Old Notes
for new notes (the "Notes"), which were registered by the Issuer under the
1933 Act. The terms of the Notes are substantially identical to the terms
of the Old Notes. The Issuer 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 June 30, 2000 and 1999 and December 31, 1998 and
1997, the unamortized discount on the Senior Discount Notes was $73,998,
$104,214, $118,122, and $144,669, respectively. Interest expense,
resulting from the amortization of the discount, was $30,216, $13,908,
$26,547, and $8,053 for the year ended June 30, 2000, the six months ended
June 30, 1999, and the years ended December 31, 1998 and 1997,
respectively. 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 $130,870, $56,052, $112,961, and $49,183 for the year
ended June 30, 2000, the six months ended June 30, 1999, and the years ended
December 31, 1998 and 1997, respectively. Interest income was $1,230, $1,271,
$2,536, and $15,041 for the year ended June 30, 2000, the six months ended
June 30, 1999, and the years ended December 31, 1998 and 1997, respectively.
(8) Additional Interests Earned by Company's Members
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
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 by the
affiliates of Fox.
F-19
<PAGE>
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
(Dollars in thousands)
(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 June 30, 2000, the six months ended June 30, 1999, and the
years ended December 31, 1998 and 1997, the Company contributed $5,771,
$3,186, $4,757 and $4,013, respectively, 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 was appointed by the Company to
administer and interpret this Plan. The maximum number of Appreciation Rights
available for grant under this plan was 300,000. The rights vest over five
years and require a minimum number of hours worked per year of vesting.
In August 1999, the Plan was amended, with an effective date of June 10,
1999, to provide that no further Appreciation Rights could be granted under
the Plan after such effective date, and the value of Appreciation Rights was
fixed at $250 as of the effective date and as of December 31, 1998. All
participants with outstanding Appreciation Rights will continue to vest over
time, provided that as Appreciation Rights vest, the participant shall be
deemed to have exercised their right to receive cash payments equal to the
excess of $250 over the grant value of such vested Appreciation Rights.
There were no grants under the Plan during the year ended June 30, 2000.
During 1999, the Company granted 18,000 rights at $185. During 1998, the
Company granted 28,000 and 18,000 rights at $185 and $135, respectively.
During 1997, the Company granted 185,100 rights at $135. The value of the 1999
and 1998 grants were based on an independent valuation and the value of the
1997 grants were based on the initial value determined by the Company's
members. At June 30, 2000 and 1999, 28,800 and 118,260 unexercised rights had
vested respectively, with a weighted average exercise period of 5.8 years at
June 30, 2000. Compensation expense was $2,329, $5,150 and $13,526 with
respect to vested Appreciation Rights for the year ended June 30, 2000, the
six months ended June 30, 1999 and the year ended December 31, 1998,
respectively.
(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 June 30, 2000:
<TABLE>
<S> <C>
Year ending June 30:
2001............................................................. $ 20,252
2002............................................................. 16,365
2003............................................................. 15,496
2004............................................................. 14,995
2005............................................................. 14,496
Thereafter....................................................... 28,055
--------
Total minimum lease payments..................................... $109,659
========
</TABLE>
F-20
<PAGE>
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
(Dollars in thousands)
Total lease expense was approximately $27,017, $15,030, $27,396 and, $17,137
for the year ended June 30, 2000, the six months ended June 30, 1999, and the
years ended December 31, 1998 and 1997, respectively.
(b) Long-term Program Rights Contracts
The Company has long-term program rights contracts which require payments
through 2010. Future minimum payments, including unrecorded amounts, by year
are as follows at June 30, 2000:
<TABLE>
<S> <C>
Year ending June 30:
2001........................................................... $ 403,030
2002........................................................... 374,168
2003........................................................... 377,301
2004........................................................... 372,237
2005........................................................... 372,019
Thereafter..................................................... 1,580,575
----------
Total minimum program rights payments.......................... $3,479,330
==========
</TABLE>
The Company licenses television and feature film programming on a long-term
basis from various related parties, and accordingly records a program rights
asset and payable for the contractual amounts. At June 30, 2000 and 1999, the
unamortized program rights were $125,284 and $168,240, respectively, and the
program rights payable were $124,462 and $144,256, respectively.
(c) 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.
(12) Supplemental Condensed Financial Information (unaudited)
<TABLE>
<CAPTION>
Six months
ended
June 30, 1998
-------------
<S> <C>
Revenues .................................................... $326,023
Operating income............................................. 23,286
</TABLE>
F-21
<PAGE>
FOX SPORTS NETWORKS, LLC
FINANCIAL STATEMENT SCHEDULES
WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
S-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
To the Members of Fox Sports Networks, LLC:
We have audited, in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of Fox Sports
Networks, LLC (the "Company") included elsewhere in this Form 10-K and have
issued our report thereon dated August 16, 2000. Our audit was made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. Schedules I and II are the responsibility of the Company's management
and are 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
August 16, 2000
S-2
<PAGE>
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF COMPANY
BALANCE SHEETS
June 30, 2000 and 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, June 30,
2000 1999
-------- --------
<S> <C> <C>
ASSETS
------
Cash......................................................... $ 38 $ 151
Investments in subsidiaries.................................. 863,072 856,045
Other assets................................................. 14,845 16,342
-------- --------
Total Assets............................................... $877,955 $872,538
======== ========
LIABILITIES AND MEMBERS' EQUITY
-------------------------------
Accrued liabilities.......................................... $ 22,260 $ 36,006
Long-term debt............................................... 831,002 800,786
Members' equity.............................................. 24,693 35,746
-------- --------
Total Liabilities and Members' Equity...................... $877,955 $872,538
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed balance sheets.
S-3
<PAGE>
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF COMPANY
STATEMENTS OF OPERATIONS
For the Periods Ended June 30, 2000 and 1999
and December 31, 1998 and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Six months
Year ended ended Year ended Year ended
June 30, June 30, December 31, December 31,
2000 1999 1998 1997
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Interest expense, net......... $ 76,089 $ 36,817 $ 71,783 $ 12,914
Other expenses................ 1,261 5,150 13,531 --
Equity in (income) loss of
subsidiaries................. (66,297) 12,490 (23,246) 65,543
-------- -------- -------- --------
Net loss...................... $(11,053) $(54,457) $(62,068) $(78,457)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
S-4
<PAGE>
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF COMPANY
STATEMENTS OF CASH FLOWS
For the Periods Ended June 30, 2000 and 1999
and December 31, 1998 and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Six months
Year ended ended Year ended Year ended
June 30, June 30, December 31, December 31,
2000 1999 1998 1997
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss...................... $(11,053) $(54,457) $ (62,068) $ (78,457)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Interest accretion........... 30,216 13,908 26,050 8,550
Equity in (income) loss of
affiliates.................. (66,297) 12,490 (23,246) 65,543
Changes in operating assets
and liabilities:
Other assets................. 1,497 721 1,020 (18,083)
Accrued liabilities.......... (13,746) 4,881 14,652 16,473
-------- -------- --------- ---------
Net cash used in operating
activities................ (59,383) (22,457) (43,592) (5,974)
-------- -------- --------- ---------
Cash flows from investing
activities:
Distributions from equity
affiliates................... 59,270 42,871 144,267 58,040
Investments in equity
affiliates................... -- (20,400) (100,538) (804,344)
-------- -------- --------- ---------
Net cash provided by (used
in) investing activities.. 59,270 22,471 43,729 (746,304)
-------- -------- --------- ---------
Cash flows from financing
activities:
Proceeds from notes........... -- -- -- 752,278
-------- -------- --------- ---------
Net cash provided by
financing activities...... -- -- -- 752,278
-------- -------- --------- ---------
Net (decrease) increase in cash
and cash equivalents.......... (113) 14 137 --
Cash and cash equivalents,
beginning of period........... 151 137 -- --
-------- -------- --------- ---------
Cash and cash equivalents, end
of period..................... $ 38 $ 151 $ 137 $ --
======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
S-5
<PAGE>
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF COMPANY
NOTES TO CONDENSED FINANCIAL INFORMATION
June 30, 2000
(Dollars in thousands)
(1) Debt
Annual future minimum maturities of debt are as follows:
<TABLE>
<S> <C>
Year ending June 30:
2001.............................................................. $ --
2002.............................................................. --
2003.............................................................. --
2004.............................................................. --
2005.............................................................. --
Thereafter........................................................ 831,002
--------
$831,002
========
</TABLE>
(2) Commitments and Contingencies
The Company has guaranteed certain obligations of its subsidiaries.
S-6
<PAGE>
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Costs and End of
of Period Expenses Deductions Other Period
---------- ---------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 2000
Allowance for doubtful
accounts............. $(21,925) $ (8,797) $19,493 $ 1,608 (1) $ (9,621)
Program rights
reserve.............. (5,058) -- 5,058 -- --
SIX MONTHS ENDED JUNE
30, 1999
Allowance for doubtful
accounts............. (9,324) (10,991) 2,253 (3,863)(1) (21,925)
Program rights
reserve.............. (18,727) -- 13,669 -- (5,058)
YEAR ENDED DECEMBER 31,
1998
Allowance for doubtful
accounts............. (1,714) (9,109) 1,570 (71)(1) (9,324)
Program rights
reserve.............. (38,344) -- 19,617 -- (18,727)
YEAR ENDED DECEMBER 31,
1997
Allowance for doubtful
accounts............. (957) (1,586) 1,029 (200)(1) (1,714)
Program rights
reserve.............. (80,000) -- 41,656 -- (38,344)
</TABLE>
--------
(1) Represents balances from businesses sold or acquired during the period and
balances transferred from other accounts.
S-7
