10-K405 1 0001.txt FORM 10-K ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ---------------- 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 ---------------- FOX SPORTS NETWORKS, LLC (Exact name of registrant as specified in its charter) Delaware 95-4577574 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
1440 South Sepulveda Boulevard, Los Angeles, CA 90025 (Address of principal executive offices) Registrant's telephone number, including area code: (310) 444-8123 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None ---------------- 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 ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- 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 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 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.
Subscribers Ownership (in RSN Interest(1) DMA millions) Team (League) --- ---------- --- ----------- ------------ 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) -------------------------------------------------------------------------------------------- Fox Sports Net 100% Los Angeles; 4.3 Los Angeles Lakers (NBA) West San Diego; Anaheim Angels (MLB) Las Vegas Los Angeles Kings (NHL) -------------------------------------------------------------------------------------------- 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) -------------------------------------------------------------------------------------------- Fox Sports Net 100% Pittsburgh 2.0 Pittsburgh Pirates (MLB) Pittsburgh Pittsburgh Penguins (NHL) -------------------------------------------------------------------------------------------- Fox Sports Net 100% Denver; 1.0 Denver Nuggets (NBA) Rocky Mountain Kansas City Colorado Avalanche (NHL) Colorado Rockies (MLB) -------------------------------------------------------------------------------------------- Fox Sports Net 100% Seattle/Tacoma; 2.2 Seattle Mariners (MLB) Northwest Portland Seattle SuperSonics (NBA) -------------------------------------------------------------------------------------------- Fox Sports Net Utah 100% Salt Lake City 0.6 Utah Jazz (NBA) -------------------------------------------------------------------------------------------- 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) -------------------------------------------------------------------------------------------- Arizona Diamondbacks Fox Sports Net 100% Phoenix/Tucson 1.1 (MLB) Arizona Phoenix Coyotes (NHL) -------------------------------------------------------------------------------------------- Fox Sports Net 100% Detroit 2.4 Detroit Red Wings (NHL) Detroit Detroit Pistons (NBA) Detroit Tigers (MLB) -------------------------------------------------------------------------------------------- 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) -------------------------------------------------------------------------------------------- Sunshine 56.4% Tampa/ 3.8 Tampa Bay Lightning (NHL) Network St. Petersburg/ Miami Heat (NBA) Sarasota; Miami/ Orlando Magic (NBA) Ft. Lauderdale; Orlando --------------------------------------------------------------------------------------------
(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. 4 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.
Ownership Subscribers RSN Interest(1) DMA (in millions) Team (League) --- ----------- --- ------------- ------------- Fox Sports Net 70% Chicago 3.3 Chicago Bulls (NBA) Chicago Chicago Blackhawks (NHL) Chicago White Sox (MLB) Chicago Cubs (MLB) ---------------------------------------------------------------------------------------------- Home Team 34.3% Washington, DC; 4.8 Washington Capitals (NHL) Sports(2) Baltimore Washington Wizards (NBA) Baltimore Orioles (MLB) Carolina Hurricanes (NHL) ---------------------------------------------------------------------------------------------- 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) ---------------------------------------------------------------------------------------------- Fox Sports Net 20% Boston; 3.4 Boston Celtics (NBA) New England Providence; Hartford ---------------------------------------------------------------------------------------------- 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 ---------------------------------------------------------------------------------------------- Fox Sports Net 40% Cleveland; 2.2 Cleveland Indians (MLB) Ohio Columbus Cleveland Cavaliers (NBA) Columbus Blue Jackets (NHL) ---------------------------------------------------------------------------------------------- Fox Sports Net 40% Cincinnati 2.6 Cincinnati Reds (MLB) Cincinnati ---------------------------------------------------------------------------------------------- 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) ---------------------------------------------------------------------------------------------- MSG Network 40% New York City 6.6 New York Yankees (MLB) New York Knicks (NBA) New York Rangers (NHL) ----------------------------------------------------------------------------------------------
(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 (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.
RSN DMA Team (League) --- --- ------------ Comcast Philadelphia Philadelphia Phillies (MLB) SportsNet Philadelphia 76ers (NBA) Philadelphia Flyers (NHL) ------------------------------------------------------------------------------------------ Midwest Sports Minneapolis/ Minnesota Twins (MLB) Channel(1) St. Paul; Milwaukee Brewers (MLB) Milwaukee Minnesota Timberwolves (NBA) Milwaukee Bucks (NBA) ------------------------------------------------------------------------------------------ Empire Buffalo Buffalo Sabres (NHL) ------------------------------------------------------------------------------------------
(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 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 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 8 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 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). 10 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. 11 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 12 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. 13 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. 14 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. 15 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. 16 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 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:
RSN Location --- -------- 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
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 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 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)
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) 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
20 LIBERTY SPORTS, INC. AND SUBSIDIARIES--DOMESTIC OPERATIONS (PREDECESSOR)
January 1 to April 29, 1996 ------------ (Dollars in thousands) 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)
FX NETWORKS, LLC (PREDECESSOR)
Ten months ended April 29, 1996 ----------- (Dollars in thousands) 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)
21 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 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 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 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 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 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 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 28 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 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 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. 31 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:
Name Age Position ---- --- -------- 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
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. 32 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
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 ------------------ ---- -------- -------- ------------ ---------- ---------- --------- ------------ 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 -- -- -- --
-------- (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 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 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 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 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 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 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:
Exhibit No Description of Exhibit ---------- ---------------------- 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.
39 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.
40 (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.
-------- * 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 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:
Signature Title Date --------- ----- ---- Fox Regional Sports Holdings, Inc. Member of Fox Sports September 28, 2000 Networks, LLC
/s/ Raymond L. Parrish By: _____________________________ Raymond L. Parrish Vice President 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
/s/ Raymond L. Parrish By: _____________________________ Raymond L. Parrish Vice President 42 FOX SPORTS NETWORKS, LLC INDEX TO FINANCIAL STATEMENTS
Page ---- 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
F-1 FOX SPORTS NETWORKS, LLC CONSOLIDATED FINANCIAL STATEMENTS As of June 30, 2000 and 1999 With Report of Independent Public Accountants F-2 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 FOX SPORTS NETWORKS, LLC (A Delaware Limited Liability Company) CONSOLIDATED BALANCE SHEETS June 30, 2000 and 1999 (Dollars in thousands)
June 30, June 30, 2000 1999 ---------- ---------- ASSETS ------ 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 ========== ========== LIABILITIES AND MEMBERS' EQUITY ------------------------------- 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 ========== ==========
The accompanying notes are an integral part of these consolidated balance sheets. F-4 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)
Six months Year ended ended Year ended Year ended June 30, June 30, December 31, December 31, 2000 1999 1998 1997 ---------- ---------- ------------ ------------ 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) ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-5 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)
Fox Regional Fox Sports Fox Regional Total Sports Net Financing, Sports Members' Holdings II, Inc. LLC Holdings, Inc. Equity ----------------- -------------- -------------- -------- 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 ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-6 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)
Six months Year ended ended Year ended Year ended June 30, June 30, December 31, December 31, 2000 1999 1998 1997 ---------- ---------- ------------ ------------ 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 ======== ======== ======== =========
The accompanying notes are an integral part of these consolidated financial statements. F-7 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:
Interest -------- 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% =======
(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: --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
FX Networks, LLC Fox Sports RPP Holdings, LLC F-8 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 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 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 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:
ARC Ltd(a) ---------- 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....................................................... $ -- =======
-------- (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 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:
Fit TV(d) --------- 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 =======
-------- (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 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:
Fit TV(e) --------- 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) ========
-------- (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 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:
Six months Year ended ended Year ended Year ended June 30, June 30, December 31, December 31, 2000 1999 1998 1997 ---------- ---------- ------------ ------------ 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
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:
June 30, June 30, 2000 1999 -------- -------- 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 ======== ========
F-15 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
June 30, June 30, 2000 1999 ---------- ---------- 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 ========== ==========
Combined Operations
Six months Year ended ended Year ended Year ended June 30, June 30, December 31, December 31, 2000 1999 1998 1997 ---------- ---------- ------------ ------------ 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)
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 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:
June 30, June 30, Entity 2000 1999 ------ -------- -------- 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%
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:
Investment ----------------- June 30, June 30, Entity 2000 1999 ------ -------- -------- Majority Owned Affiliates............ $ -- $(21,163) Minority Owned Affiliates............ 952,723 878,111 -------- -------- $952,723 $856,948 ======== ========
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 ------ ---------- ---------- ------------ ------------ 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) ======== ======== ======= =======
F-17 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:
June 30, June 30, 2000 1999 ---------- ---------- 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 ========== ==========
Annual future minimum maturities of debt are as follows: Year ending June 30: 2001............................................................ $ 2,470 2002............................................................ 2,636 2003............................................................ 2,813 2004............................................................ 752,463 2005............................................................ -- Thereafter...................................................... 831,002 ---------- $1,591,384 ==========
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 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 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: 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 ========
F-20 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: 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 ==========
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)
Six months ended June 30, 1998 ------------- Revenues .................................................... $326,023 Operating income............................................. 23,286
F-21 FOX SPORTS NETWORKS, LLC FINANCIAL STATEMENT SCHEDULES WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS S-1 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 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)
June 30, June 30, 2000 1999 -------- -------- 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 ======== ========
The accompanying notes are an integral part of these condensed balance sheets. S-3 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)
Six months Year ended ended Year ended Year ended June 30, June 30, December 31, December 31, 2000 1999 1998 1997 ---------- ---------- ------------ ------------ 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) ======== ======== ======== ========
The accompanying notes are an integral part of these condensed financial statements. S-4 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)
Six months Year ended ended Year ended Year ended June 30, June 30, December 31, December 31, 2000 1999 1998 1997 ---------- ---------- ------------ ------------ 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 $ -- ======== ======== ========= =========
The accompanying notes are an integral part of these condensed financial statements. S-5 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: Year ending June 30: 2001.............................................................. $ -- 2002.............................................................. -- 2003.............................................................. -- 2004.............................................................. -- 2005.............................................................. -- Thereafter........................................................ 831,002 -------- $831,002 ========
(2) Commitments and Contingencies The Company has guaranteed certain obligations of its subsidiaries. S-6 FOX SPORTS NETWORKS, LLC (A Delaware Limited Liability Company) SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (Dollars in thousands)
Balance at Charged to Balance at Beginning Costs and End of of Period Expenses Deductions Other Period ---------- ---------- ---------- ------- ---------- 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)
-------- (1) Represents balances from businesses sold or acquired during the period and balances transferred from other accounts. S-7