- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 December 31, 1998. or [_]Transition report pursuant to Section 13 of 15(d) of the Securities Exchange Act of 1934 for transition period from to . Commission File No. 333-38689 ---------------- FOX/LIBERTY NETWORKS, LLC (Exact name of registrant as specified in its charter) Delaware 95-4577574 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1440 South Sepulveda Boulevard, Los Angeles, CA 90025 (Address of principal executive offices) Registrant's telephone number, including area code: (310) 444-8123 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/Liberty 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/Liberty Networks, LLC is a holding company which provides cable programming through 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, Fox Sports News, and other national sports programming services and through FX Network ("FX"), a general entertainment network. The Company is a 50%/50% joint venture (the "Fox/Liberty Joint Venture") between Fox Entertainment Group, Inc. ("Fox"), a majority-owned subsidiary of The News Corporation Limited ("News Corporation"), and Liberty Media Corporation ("Liberty"), a wholly-owned subsidiary of Tele-Communications, Inc. ("TCI"). The Fox/Liberty Joint Venture was formed in April 1996. In December 1997, the Company consummated a transaction (the "Rainbow Transaction") with Rainbow Media Sports Holdings, Inc. ("Rainbow"), an indirect subsidiary of Cablevision Systems Corporation ("Cablevision"), pursuant to which (i) the Company acquired a 40% interest in Regional Programming Partners ("RPP") which was formed to hold interests in Rainbow's then existing RSNs and Madison Square Garden, L.P. (which, in addition to owning two RSNs, owns the Madison Square Garden entertainment complex, Radio City Productions LLC, the New York Rangers, a professional hockey team, and the New York Knicks, a professional basketball team), (ii) the Company and Rainbow formed National Sports Partners (the "National Sports Partnership") as a 50%/50% partnership to operate FSN and (iii) the Company and Rainbow formed National Advertising Partners (the "National Advertising Partnership") as a 50%/50% partnership to act as a national advertising sales representative for the RSNs which are affiliated with FSN. RPP is managed by Rainbow, while the National Sports Partnership and the National Advertising Partnership are managed by the Company. The Company's interests in the sports programming business are derived through its 99% ownership interests in Fox Sports Net, LLC ("Fox/Liberty Sports") and Fox Sports RPP Holdings, LLC ("Fox Sports RPP"), and its interest in FX is derived through its 99% ownership interest in FX Networks, LLC ("Fox/Liberty FX"). The remainder of the interests in these entities are held by affiliates of Fox and Liberty. 2 Overview The Company owns and operates 12 RSNs (the "O&O RSNs") and has direct or indirect equity interests ranging from 12% to 70% in an additional nine RSNs (together with the O&O RSNs, the "Company's RSNs"). The Company's RSNs are complemented by FSN, which provides national programming for distribution by RSNs. The O&O RSNs have rights to telecast live games of 37 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. The Company's strategy is to utilize its RSNs to build a national cable sports network under the "FOX" brand name based on a "broadcast network affiliate" model. FSN has been structured based on the "broadcast network affiliate" model, in which each RSN airs a slate of local programming, which is supplemented by a schedule of network-provided national programming, consistent across all regions. Unlike the typical "broadcast network affiliate" model, the Company's programming is anchored by highly rated local programming during prime time, with national FSN programming during the balance of the schedule. FSN's model is designed to increase the number of viewers before and after, as well as during, local sports events. The Company offers national advertisers the opportunity to purchase national and local advertising from one source in each of the top designated market areas ("DMAs") in the United States. The Company believes that sports programming is extremely attractive to both national and local advertisers due to the high ratings such programming generally achieves in the key male 18-49 demographic. The Company owns interests in, or is affiliated with, 25 RSNs. These RSNs have rights to telecast live games of 73 professional sports teams in the NBA, NHL and MLB (out of a total of 76 such teams in the United States) and numerous collegiate sports teams to approximately 62 million households out of a total of approximately 75 million households receiving basic cable or direct to home ("DTH") satellite service. The Company also owns and operates FX, a general entertainment network reaching approximately 37.9 million cable 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 December 31, 1998), and the professional sports teams with which each O&O RSN has sports programming rights agreements. Ownership Subscribers RSN Interest(1) DMA (in millions) Team (League) --- ----------- --- ------------- ------------- Fox Sports 100% Dallas/ 5.1 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 100% Los Angeles; 4.0 Los Angeles Lakers (NBA) West San Diego Anaheim Angels (MLB) Los Angeles Kings (NHL) - ------------------------------------------------------------------------------- Fox Sports 100% Los Angeles; 2.5 Los Angeles Clippers (NBA) West2 San Diego Mighty Ducks of Anaheim (NHL) Los Angeles Dodgers (MLB) - ------------------------------------------------------------------------------- Fox Sports 100% Pittsburgh 2.0 Pittsburgh Pirates (MLB) Pittsburgh Pittsburgh Penguins (NHL) - ------------------------------------------------------------------------------- Fox Sports 100% Denver; 2.1 Denver Nuggets (NBA) Rocky Kansas City Colorado Avalanche (NHL) Mountain Colorado Rockies (MLB) Kansas City Royals (MLB) - ------------------------------------------------------------------------------- Fox Sports 100% Seattle/Tacoma; 2.1 Seattle Mariners (MLB) Northwest Portland Seattle SuperSonics (NBA) - ------------------------------------------------------------------------------- Fox Sports Utah 100% Salt Lake City 0.6 Utah Jazz (NBA) - ------------------------------------------------------------------------------- Fox Sports 100% St. Louis; 1.5 St. Louis Cardinals (MLB) Midwest Indianapolis St. Louis Blues (NHL) Indiana Pacers (NBA) - ------------------------------------------------------------------------------- Fox Sports 100% Phoenix/Tucson 1.1 Arizona Diamondbacks (MLB) Arizona Phoenix Coyotes (NHL) - ------------------------------------------------------------------------------- Fox Sports 100% Detroit 2.3 Detroit Red Wings (NHL) Detroit Detroit Pistons (NBA) Detroit Tigers (MLB) - ------------------------------------------------------------------------------- Fox Sports 88% Atlanta; Charlotte 6.3 Atlanta Braves (MLB) South Atlanta Hawks (NBA) 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) The Fox/Liberty Joint Venture consists of numerous limited liability companies, general and limited partnerships and corporations. For a variety of tax and corporate reasons, the equity ownership of individual entities in the chain of entities holding interests in RSNs and FX include interests held directly by affiliates of Liberty and Fox. See "Business--Certain Arrangements Regarding Ownership Interests." In addition, a contract with MLB allows the Company to nationally telecast 26 MLB games per year on each of FX and FSN. 4 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 December 31, 1998), 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 70% Chicago 3.1 Chicago Bulls (NBA) Chicago Chicago Blackhawks (NHL) Chicago White Sox (MLB) Chicago Cubs (MLB) (2) - -------------------------------------------------------------------------------- Home Team 34.3% Washington, DC; 4.3 Washington Capitals (NHL) Sports Baltimore Washington Wizards (NBA) Baltimore Orioles (MLB) - -------------------------------------------------------------------------------- Fox Sports 70% San Francisco/ 2.8 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 20% Boston; 2.9 Boston Celtics (NBA) New England Providence; Hartford - -------------------------------------------------------------------------------- SportsChannel 12% Tampa/ 3.0 Florida Marlins (MLB) Florida St. Petersburg/Sarasota; Florida Panthers (NHL) Miami/ Tampa Bay Devil Rays (MLB) Ft. Lauderdale; Orlando/Daytona/ Melbourne - -------------------------------------------------------------------------------- Fox Sports 40% Cleveland; 2.1 Cleveland Indians (MLB) Ohio Columbus Cleveland Cavaliers (NBA) - -------------------------------------------------------------------------------- Fox Sports 40% Cincinnati 2.4 Cincinnati Reds (MLB) Cincinnati - -------------------------------------------------------------------------------- Fox Sports 38.5% New York City 4.3 New York Mets (MLB) New York New Jersey Nets (NBA) New York Islanders (NHL) New Jersey Devils (NHL) - -------------------------------------------------------------------------------- MSG Network 38.5% New York City 7.1 New York Yankees (MLB) New York Knicks (NBA) New York Rangers (NHL) - -------------------------------------------------------------------------------- (1) All ownership interests are indirect. (2) Rights to telecast games beginning in the 1999 season. 5 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 St. Paul; Milwaukee Brewers (MLB) Milwaukee Minnesota Timberwolves (NBA) Milwaukee Bucks (NBA) - ------------------------------------------------------------------------------- Empire Buffalo Buffalo Sabres (NHL) - ------------------------------------------------------------------------------- New England Boston Boston Red Sox (MLB) Sports Network(1) Boston Bruins (NHL) - ------------------------------------------------------------------------------- (1) It is anticipated that FSN will enter into a primary affiliation agreement with Fox Sports New England upon the expiration (December 31, 1999) or earlier termination of its existing affiliation agreement with New England Sports Network. Owned and Operated RSNs The Company manages, and, together with affiliates of Fox and Liberty, owns 100% of, the following FSN-affiliated RSNs: Southwest. Launched in 1983, the Southwest RSN's coverage area includes Texas, Oklahoma, Arkansas, Louisiana and parts of New Mexico. As of December 31, 1998, there were approximately 5.1 million subscribers, representing 91% penetration of total basic cable subscribers in the region. The Southwest RSN currently has professional rights agreements with the Dallas Mavericks (NBA), the Houston Astros (MLB), the Dallas Stars (NHL), the San Antonio Spurs (NBA), the Houston Rockets (NBA) and the Texas Rangers (MLB) and collegiate contracts covering the Big 12. West/West2. Launched in 1985, the West RSN's coverage area includes southern California, Nevada and Hawaii. As of December 31, 1998, there were approximately 4.0 million subscribers, representing 99% penetration of total basic subscribers in the region. The West RSN currently has professional rights agreements with the Los Angeles Lakers (NBA), the Los Angeles Kings (NHL) and the Anaheim Angels (MLB) as well as collegiate contracts covering the University of Southern California, the University of California/Los Angeles and other PAC-10 teams. The West2 RSN, a second channel in the southern California region, was launched by the Company on January 31, 1997. As of December 31, 1998, there were approximately 2.5 million subscribers, representing 99% penetration of total basic subscribers in the region. The West2 RSN currently has professional rights agreements with the Los Angeles Dodgers (MLB), the Anaheim Mighty Ducks (NHL) and the Los Angeles Clippers (NBA). Pittsburgh. Launched in 1986, the Pittsburgh RSN's coverage area includes Pennsylvania, eastern Ohio, West Virginia and parts of New York and Maryland. As of December 31, 1998, there were approximately 2.0 million subscribers, representing 86% 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. In October 1998, Pittsburgh Hockey Associates, the owner of the Pittsburgh Penguins, filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code. A reorganization plan has not yet been approved. The Company believes that the Pittsburgh RSN will maintain its rights to telecast Pittsburgh Penguins games throughout and following the reorganization process either under its current telecast rights agreement, or under a new telecast rights agreement with the current or any new ownership group. However, because of uncertainties inherent in the bankruptcy process, there is no assurance that the Pittsburgh RSN will maintain its current rights, the loss of which could have a material adverse effect on the Pittsburgh RSN's business, financial position and results of operations. 6 Rocky Mountain. Launched in 1988, the Rocky Mountain RSN's coverage area includes Colorado, Kansas, Missouri, Nebraska, New Mexico, South Dakota and Wyoming. As of December 31, 1998, there were approximately 2.1 million subscribers, representing 94% penetration of total basic subscribers in the region. The Rocky Mountain RSN currently has professional rights agreements with the Denver Nuggets (NBA), the Colorado Avalanche (NHL), the Colorado Rockies (MLB) and the Kansas City Royals (MLB) and collegiate contracts covering the Big 12 and Western Athletic Conferences. Northwest. Launched in 1988, the Northwest RSN's coverage area includes Washington, Oregon, Idaho, Alaska and western Montana. As of December 31, 1998, there were approximately 2.1 million subscribers, representing 94% penetration of total basic subscribers in the region. The Northwest RSN currently has professional rights agreements with the Seattle Mariners (MLB) and the Seattle SuperSonics (NBA) and collegiate contracts covering University of Washington, Washington State University, the University of Oregon, Oregon State University and the Big Sky Conference. Utah. Launched in 1989, the Utah RSN's coverage area includes Utah, southern Idaho, Montana, Nevada and western Wyoming. As of December 31, 1998, there were approximately 0.6 million subscribers, representing 94% 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 December 31, 1998, there were approximately 1.5 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) and the St. Louis Blues (NHL) and collegiate contracts covering the Big 12 Conference. Arizona. Launched in 1996, the Arizona RSN's coverage area includes Arizona and parts of Nevada. As of December 31, 1998, there were approximately 1.1 million subscribers, representing essentially 100% 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, Arizona State University and other PAC-10 teams. Detroit. Launched in September 1997, the Detroit RSN, as of December 31, 1998, had approximately 2.3 million subscribers, representing 97% penetration of total basic subscribers in the region. The Detroit RSN's coverage area includes Michigan and northern Ohio. The Detroit RSN has professional rights agreements with the Detroit Red Wings (NHL), the Detroit Pistons (NBA) and the Detroit Tigers (MLB) and collegiate contracts covering teams from the Big 10 Conference. The Company manages, and, together with affiliates of Fox and Liberty, owns substantial equity interests in, the following RSNs: South. The Company owns 88% of the South RSN and the remaining 12% of the South RSN is owned by E.W. Scripps Company. Launched in 1990, the South RSN's coverage area includes Georgia, Alabama, Kentucky, Mississippi, North Carolina, South Carolina and Tennessee. As of December 31, 1998, there were approximately 6.3 million total subscribers, representing 98% 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 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 Corporation and Media One. In October 1998, the Company purchased additional ownership interests in the Sunshine RSN from Time Warner Entertainment. Launched in 1988, the Sunshine RSN coverage area includes most of Florida. As of December 31, 1998, there were approximately 3.8 million subscribers, representing 98% penetration of total basic subscribers in the region. The Sunshine RSN currently has 7 professional rights agreements with the Orlando Magic (NBA), the Miami Heat (NBA) and the Tampa Bay Lightning (NHL) and collegiate contracts covering the University of Florida, Florida State University and the University of Miami. See "Business--Certain Arrangements Regarding Ownership Interests." Non-Managed RSNs The Company owns equity interests in, but does not manage, the following RSNs: Chicago. The Company directly owns 50% of the Chicago RSN and owns an additional 20% of the Chicago RSN indirectly through RPP. A subsidiary of RPP currently owns 50% of the Chicago RSN and is the managing partner. Launched in 1986 and affiliated with FSN since January 1998, the Chicago RSN's coverage area includes Illinois, Iowa, Indiana and Wisconsin. As of December 31, 1998, there were approximately 3.1 million subscribers, representing 96% penetration of total basic subscribers in the region. Featured teams in this region include the Chicago Bulls (NBA), the Chicago Blackhawks (NHL) and the Chicago White Sox (MLB). The Chicago RSN recently entered into a telecast rights agreement with the Chicago Cubs (MLB) which commences in the 1999 season. Collegiate contracts cover DePaul University as well as the Big 10 Conference. D.C./Baltimore. The Company owns 34.3% of the D.C./Baltimore RSN, which operates under the name Home Team Sports ("HTS"), and the remaining 65.7% of the D.C./Baltimore RSN is owned by Group W. Launched in 1984 and affiliated with FSN since 1996, the D.C./Baltimore RSN's coverage area includes Maryland, parts of Washington, D.C., Delaware and Virginia. As of December 31, 1998, there were approximately 4.3 million subscribers, representing 97% penetration of total basic subscribers in the region. Featured teams include the Baltimore Orioles (MLB), the Washington Capitals (NHL) and the Washington Wizards (NBA), and college contracts covering teams in the Big East Conferences, Atlantic Coast Conference and Colonial Athletic Association. 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. The Bay RSN area carries all FSN programming, with the exception of PAC-10 football and basketball. The PAC-10 programming will continue to be broadcast by Bay TV, a third-party-owned broadcast station in the region formerly affiliated with FSN, through December 31, 1999. As of December 31, 1998, there were approximately 2.8 million subscribers, representing 90% 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, the New England RSN's coverage area includes Massachusetts, Rhode Island, Vermont, New Hampshire, Maine and parts of Connecticut. It is anticipated that, upon the expiration (December 31, 1999) or earlier termination of FSN's existing affiliation agreement with New England Sports Network, the New England RSN will become an affiliate of FSN. As of December 31, 1998, there were approximately 2.9 million subscribers, representing 80% penetration of total basic subscribers in the region. The featured professional team is the Boston Celtics (NBA). Florida. RPP owns 30% of the Florida RSN and the remaining 70% of the Florida RSN is owned by Front Row Communications, Inc. ("Front Row"). Front Row is the managing partner of the Florida RSN. Launched in 1993, the Florida RSN's coverage area includes northern and southern Florida. As of December 31, 1998, there were approximately 3.0 million subscribers, representing 95% penetration of total 8 basic subscribers in the region. Featured professional teams include the Florida Marlins (MLB), the Florida Panthers (NHL) and the Tampa Bay Devil Rays (MLB). The Tampa Bay Devil Rays, Inc. has an option to acquire 10% of the Florida RSN. Ohio. RPP manages and owns 100% of the Ohio RSN. Launched in 1989 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 December 31, 1998, there were approximately 2.1 million subscribers, representing 91% penetration of total basic subscribers in the region. Featured professional teams include the Cleveland Indians (MLB) and the Cleveland Cavaliers (NBA). Cincinnati. RPP manages and owns 100% of the Cincinnati RSN. Launched in 1989 and affiliated with FSN since January 1998, the Cincinnati RSN's coverage area includes Ohio, Kentucky and Indiana. As of December 31, 1998, there were approximately 2.4 million subscribers, representing 94% penetration of total basic subscribers in the region. The featured professional team is the Cincinnati Reds (MLB). New York. RPP owns and operates two RSNs in the New York region: The Madison Square Garden Network ("MSG") and Fox Sports New York, formerly SportsChannel New York. RPP manages and owns 96.3% of each of MSG and Fox Sports New York. The remaining 3.7% of each of MSG and Fox Sports New York is owned by ITT Corporation ("ITT"), through its 3.7% ownership interest in Madison Square Garden, L.P. ("MSG, L.P."). ITT and Cablevision have entered into an agreement pursuant to which ITT's remaining interest in MSG, L.P. will be redeemed. A subsidiary of RPP is the managing partner of the New York RSNs. See "Certain Relationships and Related Transactions." Acquired in 1994 as Madison Square Garden Network, MSG's coverage area includes New York and parts of New Jersey and Connecticut. As of December 31, 1998, there were approximately 7.1 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 New York's coverage area includes New York and parts of New Jersey and Connecticut. As of December 31, 1998, there were approximately 4.3 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 96.3% ownership interest in the New York Knicks (NBA), the New York Rangers (NHL), the Madison Square Garden facilities and Radio City Productions LLC ("RCP"). RPP also has a 100% ownership interest in Metro Channel LLC, a company established by Rainbow to own and operate the Metro Channel. The Metro Channel is intended to provide programming of particular interest to a region, such as local news, business, entertainment and sports. Rights Agreements The right to telecast professional sports events is obtained through rights agreements entered into between an RSN and an individual professional sports team. Rights agreements are generally for a specified number of games per season 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 in 1998, and to date in 1999, is 6.9 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 9 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 O&O RSNs' collection of rights agreements is diversified, with a total of 37 professional rights contracts. These contracts include rights to 12 MLB teams, 14 NBA teams and 11 NHL teams. The O&O RSNs, through affiliation with FSN, also have rights to three of the country's top collegiate football conferences, the PAC-10, Big 12 and Conference USA. 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 arrangements with such RSNs. The Company is currently the nation's largest provider of sports programming for the DTH market, reaching approximately 5.6 million DTH households. Fox Sports Direct packages the programming of various RSNs for distribution to the Ku- Band marketplace by DirecTV, Inc. and EchoStar Communications Corporation's Dish network. In addition, Fox Sports Direct distributes certain programming to the residential C-band marketplace. 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. Hence, the primary function of FSN is to complement regional sports programs with a synchronized schedule of quality national programming, the cornerstone of which is Fox Sports News. Fox Sports News provides comprehensive coverage of all sports news nationwide, presenting a consistent brand image with high quality on-air graphics. Fox Sports News consists of a half hour pre-game news show aired at 6:30 p.m. and a two hour wrap-up news program aired at 10:00 p.m., each of which is shown locally in each time zone. 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 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, helping to create one cohesive network. FSN has entered into affiliation agreements with RSNs across the country including the Company's O&O RSNs, certain RSNs that RPP owns and operates 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 a portion of the RSN's regional sports programming. Affiliated Cable Systems and Subscribers During fiscal year 1998, the O&O RSNs generated approximately 62% of their revenues, excluding DTH revenues, from subscriber fees paid by affiliated cable systems. As of December 31, 1998, the Company's O&O RSNs transmitted programming to approximately 5,150 local affiliated cable systems in 35 states. Each of the Company's RSNs enters into affiliation agreements with MSOs and/or individual cable system operators. Such agreements typically run for five to seven years and generally provide for annual rate increases. Under affiliation agreements, cable system operators must distribute the RSN service to a certain number of 10 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). 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 Fox Sports News, nationally televised MLB games and PGA golf includes national network, national spot and local advertising. The Company's approach offers national advertisers the unique ability to purchase national network, national spot and local advertising from one source in each of the top DMAs. Local advertising is sold at the RSN level, and national network and national spot units are sold at the national level by the National Advertising Partnership. The National Advertising Partnership's centralized inventory management for the national network, national spot and local advertising categories of inventory enables the Company to respond to supply and demand, and to allocate inventory across advertising categories, such that units are sold to the advertiser willing to pay the highest rate, regardless of market. Accordingly, the split of advertising time between national network, national spot and local advertising varies across markets and is dictated by pricing conditions in each specific market at any point in time. The Company believes that this ability to buy units across advertising categories and across regions from one source also provides advertisers with a more efficient purchasing mechanism. 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, automotive, retail, insurance and travel industries. 11 Production and Distribution Distribution of live sporting events is accomplished by a combination of satellite and fiber transmissions. A production crew in a mobile remote facility is stationed at the venue to produce and direct the event. The various camera shots, pre-produced tape elements and graphics packages are integrated by the mobile remote facility and then formatted to be delivered to a technical operations center ("Master Control"). The telecast is delivered to the Master Control via remote satellite uplink, direct fiber transmission, or a microwave network depending upon the location of the event. After receiving the remote feed, the Master Control "traffics" the event, inserting commercial inventory and on-air promotion spots in formatted positions. The signal is then uplinked from the Master Control to the RSN's transponder, where the local cable system operator, or MSO, can downlink the signal. After accessing the feed from the transponder, the cable system operator delivers the signal to the cable subscriber via hard-wired coaxial cable. FSN provides 24 hours of national programming each day, which is made available for all 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. Fox Sports News, the cornerstone of FSN's programming, is produced live daily from 3:00 p.m. until 12:00 a.m. Pacific time. The show is delivered to the Company's uplink facility located in Houston via a direct fiber optic connection. A separate news integration control studio, which uses technology similar to a Master Control, brings each 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 Fox Sports News during a commercial break only, and never during the program in progress. Commercial inserts and on-air promotional materials are handled through each RSN's Master Control. FX FX was launched in June 1994. As of December 31, 1998, FX reached approximately 37.9 million cable households and has become a popular choice among cable viewers. FX's strength has been derived from its ability to bring award-winning television series to cable and from its access to the Twentieth Century Fox film library. In addition, FX carries sports programming with coverage of MLB, college football and college basketball. FX's line-up for the Fall 1998 season included "M*A*S*H," "Beverly Hills 90210," "The X-Files" and "NYPD Blue." Recently, as FX continues to increase its presence as a leading general entertainment cable network, the cable rights to "Millenium" and "Married With Children" have been acquired as well as a slate of feature films including "The Full Monty," "The X-Files" and "Jackie Brown." FX's extensive programming library also includes television hits like "Batman," "The A-Team" and "Mission: Impossible." In addition, FX provides cable viewers with a line-up of sports coverage. MLB was introduced in 1997, with live coverage of national games airing one night per week. FX also airs live coverage of various college football and basketball games. FX is distributed from a Master Control located in Los Angeles. FX has two transponders to provide alternate programming feeds for the east and west coast time zones. Each feed has its own dedicated transponder which cable system operators access via their system head-ends and distribute to subscribers via co-axial cable. Overall, FX's distribution functions just like an RSN, with the exception of the dual feeds for the two different time zones. 12 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 pay television programming services (such as USA Network and Turner Network Television) as well as free over-the-air broadcast networks provide programming that targets the same viewing audience as FX. The Company's RSNs and FX directly compete with other programming services for distribution and, when distribution is obtained, the Company's RSNs and FX compete, in varying degrees, for viewers and advertisers with other cable programming services and over-the-air broadcast television, radio, print media, motion picture theaters, video cassettes and other sources of information and entertainment. Important competitive factors are the prices charged for programming, the quantity, quality and variety of the programming offered and the effectiveness of marketing efforts. Increased competition for viewers in the cable industry may result from technological advances, such as digital compression technology, which allows cable systems to expand channel capacity; the further deployment of fiber optic cable, which has the capacity to carry a much greater number of channels than co-axial cable; and "multiplexing," in which programming services offer more than one feed of their programming. The increased number of choices available to the Company's viewing audience as a result of such technological advances may lead to a reduction in the Company's market share. The Company competes or expects to compete in the future for advertising revenue with the television programming services described above, as well as with other national television programming services, superstations, broadcast television networks, local over-the-air television stations, radio and print media. RSNs The Company is currently the only national network distributing a full range of sports programming on both a national and regional level. On a national level, the Company's primary competitor is ESPN, and to a lesser extent, ESPN2. However, while ESPN and ESPN2 currently focus exclusively on the national television and cable market, national programming is only a part of the Company's overall objective. The Company's major focus is regional sports programming. Since ESPN and ESPN2 do not currently program specifically for local audiences or solicit regional or local advertisers, they do not directly compete with the Company's RSNs. However, team owners and other sports programming providers and distributors such as Time Warner, Inc. and Southwest Sports Group, have recently announced plans to distribute events of teams owned by them on a regional basis. Companies such as these, or others, may seek to establish regional sports programming services that are competitive with the Company's RSNs. In addition, ESPNews and CNN/SI, each offer a 24 hour sports news format which competes directly with Fox Sports News. In addition to competition for cable distribution, viewers and advertisers, the Company's RSNs also compete, to varying degrees, for programming. With respect to the acquisition of sports programming rights, FSN competes for national rights principally with the national broadcast television networks, a number of national cable services that specialize in or carry sports programming, and television "superstations," which distribute sports and other programming to cable television systems by satellite, and with independent syndicators that acquire and resell such rights nationally, regionally and locally. The Company's RSNs also compete for local and regional rights with those independent syndicators, with local broadcast television stations and with other local and regional sports networks. The owners of distribution outlets such as cable television systems may also contract directly with the sports teams in their service area for the right to distribute a number of such teams' games on their systems. The owners of teams may also launch their own regional sports network and contract with cable television systems for carriage. 13 FX FX faces competition in the acquisition of distribution rights to programming produced by other diversified media companies, due to industry consolidation and the elimination of the financial interest and syndication rules. Many of FX's competitors are larger and have financial and other resources substantially greater than those of the Company. Certain of these organizations are "vertically integrated" (i.e., producing, distributing and exhibiting their own programming). Industry integration may impact FX's ability to acquire programming distribution rights, as it is likely that vertically integrated media companies will sell programming distribution rights to their cable network subsidiaries. The effect of such distribution patterns would be to reduce the availability of such programming and to increase the cost of programming that is available for acquisition by FX. With the repeal of certain governmental regulations which formerly prohibited the broadcast networks from acquiring financial interests in, and syndication rights to, television programming, this trend towards vertical integration and, accordingly, competition in the industry, is expected to increase. See "Business--Regulation and Legislation." Satellite Distribution All programming for the Company is transmitted from the Company's facilities located in Houston, Los Angeles and Seattle. Local teleports near each facility provide uplink services to deliver the Company's programming to transponders on various geosynchronous satellites which, in turn, are received by cable system operators, DTH services and other customers. Presently, each regional sports network has a dedicated feed which is transmitted to a transponder as an analog signal. In addition, a network feed is transmitted to a transponder as a means of distributing certain programming (including Fox Sports News) to the Company's RSNs. Each cable system head-end has equipment which is controlled remotely from the Company's Houston location. This provides the Company with substantial flexibility to "switch" the programming for an individual region or sub-region to alternative programming in order to accommodate regional variations in broadcast rights for certain teams and events. Programming for FX is distributed using two separate feeds on two separate satellite transponders, one for the Eastern, Central and certain 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. During 1998, the Company leased 22 full-time transponders, however leases on 3 of these transponders expired on December 31, 1998. Twelve of the 19 continuing transponders, with leases expiring between 1999 and 2006, are used by its domestic sports networks. Of these 12 transponders, 6 are on Satcom C-1, with three leases direct from GE Americom ("GE"), two leases from GE via a WTCI sublease and one lease from GE via a Fox Broadcasting sublease. With respect to the remaining six full-time domestic sports transponders, three are also leased from GE (one on GE-1, one on Satcom C-3 and one on GE- 3), one from Primestar on its Ku-band service and two from PanAmSat Corporation on the Hughes Galaxy VII satellite. The remaining seven of the 19 continuing transponders are used by entities other than the Company's domestic sports networks. Of these seven transponders, one is leased from GE on GE-3, one is leased from PanAmSat Corporation and one from Broadcast Development, Inc. on the Hughes Galaxy VII satellite, one is leased from GE via a WTCI sublease on Satcom C-1, one is leased from GE on Satcom C-3, one is leased from Unlimited Satellite Services on GE-3 and one is leased from Fox Family Worldwide on the Hughes Galaxy V satellite. FX uses two of these transponders. The others are subleased to Fox News Channel, FXM, FIT-TV, Fox Sports World and NDTC (all affiliates of Fox). See "Certain Relationships and Related Transactions." Commencing in 1998, the Company began to digitally compress its transmissions to three of the four transponders on Galaxy VII. This transition to digital transponder equipment will continue in 1999. Through compression, the Company will be able to combine up to eight services on one transponder, using bit rates ranging from 4 to 7 megabits per second. This will improve signal quality, programming and "switching" 14 capability, growth opportunities, and will also result in significant cost savings due to the reduced transponder requirements. See "Management's Discussion and Analysis of Financial Condition and Results of Operatons" and "Certain Relationships and Related Transactions." Satellites are subject to significant risks that may prevent or impair proper commercial operations, including satellite defects, launch failure, destruction and damage and incorrect orbital placement. Because the Company's primary satellites (Galaxy VII and Satcom C-1) are already in orbit, the Company does not expect to face any significant launch risks over the next several years. In 2006, which is the projected end of useful life for Galaxy VII, the Company might again face satellite launch risk, depending on the selected transponder migration plans at that time. Failure or disruption of satellites that are already operational, such as Satcom C-1 and Galaxy VII, could have a material adverse effect on the Company. The Satcom C-1 transponder leases have minimal back-up in the event of transponder or satellite failure, and the Company would have to rely on spare transponder capacity (available internally as well as via third parties) and alternative program scheduling methods in the event of loss of one or more Satcom C-1 transponders. The Galaxy VII and Satcom C-3 transponder leases are "protected," in that these leases provide for transmission on a back-up satellite should a serious transmission or reception fault occur. With the full implementation of the Company's digital compression plans during 1998- 1999, all of the Company's services will be either on Galaxy VII or Satcom C-3 and, thus "protected." 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. The following does not purport to be a summary of all present and proposed federal, state, and local regulations and legislation relating to the cable television industry and other industries involved in the video marketplace. Other existing legislation and regulations, copyright licensing, and, in many jurisdictions, state and local franchise requirements are currently the subject of a variety of judicial proceedings, legislative hearings, and administrative and legislative proposals which could change, in varying degrees, the manner in which the cable television industry and other industries involved in the video marketplace operate. Federal Regulation and Legislation The 1992 Act subjected all cable television operators not subject to "effective competition" to rate regulation. Rate regulation under the 1992 Act resulted in a reduction of rates to some subscribers in some markets. The 1996 Act phases out cable rate regulation, except with respect to the "basic" tier (which must include all local broadcast stations and public, educational and governmental access channels, and must be provided to all subscribers). Rate regulation of all non-basic services will be completely eliminated on March 31, 1999. In response to the 1992 Act and the FCC's implementing regulations, many cable systems retiered channels to create an attractively priced "basic" tier, while offering satellite-delivered programming services such as the Company's on a different service tier. To the extent such retiering or repricing of the Company's networks induces customers to discontinue their subscriptions, the Company's financial performance could be adversely affected. Deregulation of rates pursuant to the 1996 Act may reverse such tiering and pricing decisions by cable system operators and, correspondingly, reverse or ameliorate any adverse effects of the 1992 Act. On the other hand, to the extent that rate deregulation causes a material increase in cable rates, the individual subscriber base of the Company could be decreased, potentially affecting the Company's subscriber revenues. 15 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 TCI's ownership of Liberty, the Company's programming services are subject to these requirements. The FCC has recently adopted regulations to speed the processing of program access complaints, and Congress is considering legislation, which, if enacted, would extend program access rules to terrestrially-delivered programming. Similarly, Cablevision is deemed to have an attributable interest in Regional Programming Partners ("RPP"). The FCC's program access and non-discrimination regulations therefore affect 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 a TCI 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, 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. 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. 16 Various proposals have been introduced at the state and local level with regard to the regulation of cable television systems, and a number of states have enacted legislation subjecting cable television systems to the jurisdiction of centralized state governmental agencies. Patents, Trademarks and Licenses In connection with the formation of the Company and the Rainbow Transaction, Twentieth Century Fox Film Corporation and Fox Broadcasting Company agreed to grant the Company a non-exclusive, royalty free license, with the right to sublicense to RSNs, to use the "FOX" 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. Generally, such promotional usages may be "sponsored" (e.g., a particular company sponsoring a particular RSN's telecast of a professional sports team with the visual use of team and sponsor logos), but such promotional uses cannot imply endorsements by the team. Typically the RSNs also have the contractual right to use the pictorial representations and the names and likenesses of the players, managers, coaches and officials of the team, its opponents, and the applicable league in the telecasts and for promotional purposes incident thereto. As a protection of their proprietary property, the teams generally reserve certain approval rights of trademark usages and other rights reservations. Because the telecast rights agreements are limited to the "home territories" of the teams, and the RSNs only operate within such territories, the rights to use a teams logo are generally limited to such territories. The Company has an agreement with MLB to telecast certain of its games on a national basis on FSN and FX, and has the same general rights under the agreement for use of the MLB logo and those of its teams as are in the team contracts, but such usages are permitted on a national basis. Employees As of December 31, 1998, the Company, together with its O&O RSNs and other subsidiaries, had 1,268 full-time employees. The Company also regularly engages freelance creative staff and other part-time employees. None of the Company's employees are covered by collective bargaining agreements. The Company believes its relations with its employees are good. Certain Arrangements Regarding Ownership Interests Fox/Liberty Joint Venture Fox/Liberty Networks, LLC. Fox/Liberty Networks, LLC is the principal holding company for the Fox/Liberty Joint Venture. Liberty/Fox Sports Financing LLC (an entity in which LMC Newco U.S., Inc. ("LMCI"), a subsidiary of Liberty, and Fox each hold 50% membership interests) holds a 38.314% membership interest and each of LMCI and Fox Regional Sports Holdings, Inc., a subsidiary of Fox, hold 30.843% membership interests. Fox/Liberty Sports. Fox/Liberty Sports is a holding company which holds the Company's interests in certain cable sports telecasting businesses, including its interests in certain RSNs. The Company holds a 99% membership interest in Fox/Liberty Sports. Liberty Sports Member, Inc. ("LSM"), an affiliate of Liberty, holds a .5% membership interest in Fox/Liberty Sports and Fox Regional Sports Member ("FRSM"), an affiliate of Fox, holds a .5% membership interest in Fox/Liberty Sports. 17 Fox/Liberty FX. Fox/Liberty FX owns and operates FX. The Company holds a 99% membership interest in Fox/Liberty FX. Liberty FX, Inc., an affiliate of Liberty, holds a .5% membership interest and FX Holdings, Inc., an affiliate of Fox, holds a .5% membership interest. Fox Sports RPP. Fox Sports RPP is a holding company which holds the Company's interest in RPP. The Company holds a 99% membership interest in Fox Sports RPP. LSM holds a .5% membership interest in Fox Sports RPP and FRSM holds a .5% interest in Fox Sports RPP. Owned and Operated RSNs Southwest. The Southwest RSN is operated through ARC Holding, Ltd. ("ARC Holding"). Affiliated Regional Communications, Ltd. ("ARC Ltd.") holds a 99% limited partnership interest in ARC Holding and Sports Holding Inc., a wholly- owned subsidiary of ARC Ltd. holds a 1% limited partnership interest. Liberty/Fox ARC L.P. ("ARC L.P.") holds a 100% equity interest and 62.6799% capital limited partnership interest in ARC Ltd. and LMC Regional Sports, Inc., an affiliate of Liberty, holds a 37.3201% capital general partnership interest. Fox/Liberty Sports holds a 98% limited partnership interest in ARC L.P., New LMC ARC, Inc., a subsidiary of Liberty, holds a 1% general partnership interest and FRSM holds a 1% limited partnership interest. West. The West RSN is operated through Prime Ticket Networks, L.P. ("West LP"). Liberty/Fox West LLC holds a 99% limited partnership interest in West LP, LMC West Sports Inc., an affiliate of Liberty, holds a .5% general partnership interest and Fox West Sports Member, Inc., an affiliate of Fox, holds a .5% general partnership interest. West2. The West2 RSN is operated through West2 LLC. West LP holds a 100% membership interest in West2 LLC. Pittsburgh. The Pittsburgh RSN is operated through Liberty/Fox KBL L.P. ("Pittsburgh LP"). Fox/Liberty Sports holds a 60% limited partnership interest in Pittsburgh LP, New LMC KBL, Inc., an affiliate of Liberty, holds a 20% general partnership interest and FRSM holds a 20% limited partnership interest. Rocky Mountain. The Rocky Mountain RSN is operated through Rocky Mountain Prime Sports Network ("Rocky Mountain Network"). ARC Ltd. holds a 66.67% general partnership interest in Rocky Mountain Network and ARC L.P. holds a 33.33% general partnership interest. Northwest. The Northwest RSN is operated through Prime Sports Northwest Network ("Northwest Network"). Liberty/Fox Northwest L.P. holds an 89.9% capital general partnership interest and a 100% equity interest in Northwest Network. LMC Northwest Cable Sports, Inc., an affiliate of Liberty, holds a 10.1% capital general partnership interest in Northwest Network. Fox/Liberty Sports holds a 98% limited partnership interest in Liberty/Fox Northwest L.P., New LMC Northwest, Inc., an affiliate of Liberty, holds a 1% general partnership interest and FRSM holds a 1% limited partnership interest. Utah. The Utah RSN is operated through Liberty/Fox Utah LLC ("Utah LLC"). Fox/Liberty Sports holds a 99% membership interest in Utah LLC, New LMC Utah Sports, Inc., an affiliate of Liberty, holds a .5% membership interest and FRSM holds a .5% membership interest. Midwest. The Midwest RSN is operated through ARC Holding. ARC Ltd. holds a 99% limited partnership interest in ARC Holding and Sports Holding Inc., a wholly-owned subsidiary of ARC Ltd., holds a 1% general partnership interest. Arizona. The Arizona RSN is operated through Liberty/Fox Arizona LLC ("Arizona LLC"). Fox/Liberty Sports holds a 99% membership interest in Arizona LLC, LMC Arizona Sports, Inc., an affiliate of Liberty, holds a .5% membership interest and FRSM holds a .5% membership interest. 18 Detroit. The Detroit RSN is operated through Fox Sports Detroit, LLC ("Detroit LLC"). Fox/Liberty Sports holds a 99% membership interest in Detroit LLC, an affiliate of Liberty holds a .5% membership interest and FRSM holds a .5% membership interest. 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 holds 100% of the equity interest and 49% of the voting interest of LMC Southeast and Liberty Sports, Inc., an affiliate of Liberty, holds 51% of the voting interest. Fox/Liberty Sports holds a 99% membership interest in Liberty/Fox Southeast LLC, New LMC Southeast, Inc., an affiliate of Liberty, holds a .5% membership interest and FRSM holds a .5% membership interest. The partners of South Ltd. are subject to a buy/sell procedure which may be initiated at any time by any general partner of South Ltd. The partner initiating the buy/sell procedure (the "Initiating Partner") must notify the other general partner (the "Responding Partner") of South Ltd. of its intention to initiate the buy/sell procedure, such notification to include a statement by the Initiating Partner of the value of South Ltd. Within 90 days after receipt of such notice, the Responding Partner shall notify the Initiating Partner of its election to either purchase the Initiating Partner's interest in South Ltd. or sell its interest in South Ltd. to the Initiating Partner. If the Responding Partner does not respond within 90 days, it shall be deemed to be an election of the Responding Partner to sell its interest in South Ltd. to the Initiating Partner. Sunshine. The Sunshine RSN is operated through Sunshine Network ("Sunshine Network"), a joint venture with ARC Ltd. holding a 49% interest and Sunshine Network of Florida, Ltd. ("SNFL") holding a 51% interest. LMC Sunshine, Inc. holds a 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 holds 100% of the equity interest and 49% of the voting interest of LMC Sunshine, Inc. and Liberty Sports, Inc., an affiliate of Liberty, holds 51% of the voting interest. Fox/Liberty Sports holds a 99% membership interest in Liberty/Fox Sunshine LLC, New LMC Sunshine, Inc., an affiliate of Liberty, holds a .5% membership interest and FRSM holds a .5% membership interest. In 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. 19 Non-Managed RSNs Chicago. The Chicago RSN is operated through SportsChannel Chicago Associates ("Chicago Associates"). RPP holds a 50% interest in Chicago Associates and Fox/Liberty Chicago, LLC holds a 50% interest. Fox/Liberty Sports holds a 98% membership interest in Fox/Liberty Chicago, LLC, New LMC Chicago, Inc., an affiliate of Liberty, holds a 1% membership interest and FRSM holds a 1% membership interest. Rainbow holds a 60% general partnership interest in RPP and Fox Sports RPP holds a 40% general partnership interest. The Company holds a 99% membership interest in Fox Sports RPP, Liberty Sports Member, Inc., an affiliate of Liberty, holds a .5% membership interest and FRSM holds a .5% membership interest. D.C./Baltimore. The D.C. Baltimore RSN is operated through Home Team Sports Limited Partnership ("D.C./Baltimore LP"). ARC Ltd. holds a 34.3% limited partnership interest in D.C./Baltimore LP and the remaining interest is held by Group W. Bay Area. The Bay Area RSN is operated through SportsChannel Pacific Associates ("San Francisco Associates"). RPP holds a 50% interest in San Francisco Associates and Fox/Liberty Bay Area, LLC holds a 50% interest. Fox/Liberty Sports holds a 98% membership interest in Fox/Liberty Bay Area, LLC, New LMC Bay Area, Inc., an affiliate of Liberty, holds a 1% membership interest and FRSM holds a 1% membership interest. Regional Programming Partners New England. The New England RSN is operated through SportsChannel New England, a wholly owned subsidiary of RPP. RPP holds a 50% ownership interest in the New England RSN and Media One, Inc. holds a 50% interest. Florida. The Florida RSN is operated through SportsChannel Florida Associates ("Florida Associates"). RPP holds a 30% interest in Florida Associates and the remaining 70% of Florida Associates is held by Front Row. The Tampa Bay Devil Rays, Inc. has an option to purchase 10% of the Florida RSN. Ohio. The Ohio RSN is operated through SportsChannel Ohio Associates ("Ohio Associates"), a wholly-owned subsidiary of RPP Associates. 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 New York, operated through SportsChannel Associates ("SportsChannel New York Associates"), a wholly-owned subsidiary of MSG, L.P. RPP holds a 96.3% interest in MSG, L.P. and ITT holds the remaining 3.7% interest. ITT and Cablevision have entered into an agreement pursuant to which ITT's remaining interest in MSG, L.P. will be redeemed. Item 2. Properties The Company's corporate facilities are located in Los Angeles, California where it leases approximately 66,600 square feet of office space from New World Communications Group Incorporated, an indirect, wholly-owned subsidiary of Fox. See "Certain Relationships and Related Transactions." 20 In addition to the corporate facilities, the Company also leases office facilities located in the market of each of the Company's RSNs, technical and uplink facilities located in Houston, Texas and Los Angeles, California and various sales offices located throughout the United States. The Company has national ad sales offices in New York, Boston, Atlanta, Detroit, Chicago, Dallas, Los Angeles and San Francisco. The Company's RSNs have sales offices in Houston, Ft. Lauderdale, Kansas City, Tallahassee, Tampa and Salt Lake City. 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. Item 3. Legal Proceedings As of December 31, 1998 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. Echostar--On October 27, 1997, Echostar Communications Corporation ("Echostar") filed a complaint with the FCC against the Company alleging that the Company had violated Section 548 of the Communications Act of 1934, as amended (the "1934 Act") and Sections 76.1000 et seq. of the FCC's Rules (the "FCC Rules") by discriminating against Echostar in the prices and other terms and conditions for distribution of regional sports programming to Echostar's subscribers by direct broadcast satellite. Echostar's claim is based on allegations that the Company licenses cable operators to distribute regional sports programming at lower prices and on more favorable terms than those contained in Echostar's contract with the Company. Echostar's complaint requests the FCC to order the Company to offer Echostar regional sports programming at rates and on terms that are no worse than those offered to other cable operators, to award damages in an unspecified amount, and to impose future reporting requirements to ensure non-discrimination. On December 10, 1997, the Company filed a 21 response to the Echostar complaint denying any violation of the 1934 Act or the FCC Rules. On October 28, 1998, the FCC dismissed Echostar's complaint with prejudice on the grounds that the statute of limitations had expired. On November 27, 1998 Echostar filed a petition for the FCC to reconsider its decision in this matter. Item 4. Submission of Matters to a Vote of Security Holders Not Applicable. 22 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Not Applicable Item 6. Selected Financial Data The selected financial data of the Company as of December 31, 1998 and 1997 and for the years ended December 31, 1998 and 1997 and for the eight months ended December 31, 1996 are derived from the Company's consolidated financial statements audited by Arthur Andersen LLP, independent public accountants, included elsewhere in this report. 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") audited by KPMG LLP, independent auditors, included elsewhere in this report. The selected financial data of Fox/Liberty FX set forth below for the ten month period ended April 29, 1996 is derived from Fox/Liberty FX's financial statements audited by Arthur Andersen LLP, independent public accountants, included elsewhere in this report. The selected financial data presented below and under "Management's Discussion and Analysis of Financial Condition and Results of Operations" should be read in conjunction with the financial statements, including the notes thereto, appearing elsewhere in this report. THE COMPANY Year Ended Year Ended April 30 to December 31, December 31, December 31, 1998 1997 1996 ------------ ------------ ------------ (Dollars in thousands) Statement of Operations: Revenues............................... $ 655,194 $ 471,792 $ 144,792 ---------- ---------- --------- Expenses: Operating............................ 485,276 420,888 197,445 General and administrative........... 90,662 65,558 31,609 Depreciation and amortization........ 21,662 18,968 8,507 ---------- ---------- --------- 597,600 505,414 237,561 ---------- ---------- --------- Operating income (loss)................ 57,594 (33,622) (92,769) ---------- ---------- --------- Other (income) expenses: Interest, net........................ 110,425 34,142 3,819 Subsidiaries' income tax expense (benefit)........................... 1,456 (1,590) 3,437 Loss on sale of assets............... 121 -- 4,913 Equity loss of affiliates, net....... 5,913 9,018 12,024 Other, net........................... (1,478) 401 -- Minority interest.................... 3,225 2,864 187 ---------- ---------- --------- Net loss............................... $ (62,068) $ (78,457) $(117,149) ========== ========== ========= Deficiency of earnings available to cover fixed charges................... $ (62,068) $ (78,457) $(117,149) Balance Sheet Data (end of period): Total assets........................... $1,891,935 $1,817,758 Long-term debt......................... 1,401,891 1,246,291 Stockholders' equity................... 90,203 152,271 23 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 expenses................................................. 60,664 General and administrative expenses................................ 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: Revenues............................................................ $ 75,401 -------- Expenses: Operating......................................................... 63,369 General and administrative........................................ 19,936 Depreciation and amortization..................................... 480 -------- Total operating expenses........................................ 83,785 -------- Interest expense.................................................... 7,898 -------- Net loss.......................................................... $(16,282) ======== Deficiency of earnings available to cover fixed charges............. $(16,282) 24 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction In April 1996, Fox and Liberty entered into the Fox/Liberty Joint Venture, pursuant to which the Company was formed to provide cable programming through its sports programming operations, consisting of interests in RSNs and a national sports programming service, and through FX, a general entertainment network. The Company's interests in the sports programming business are derived through its 99% ownership interests in Fox/Liberty Sports and Fox Sports RPP, while its interests in FX are derived through its 99% ownership interest in Fox/Liberty FX. In establishing the Fox/Liberty Joint Venture, Fox contributed $244 million in cash, certain assets related to the operation of a regional sports business and all of the assets and liabilities of FX. Liberty contributed its interests in regional sports programming businesses (which then operated under the name "Prime Sports"), interests in non-managed sports businesses, satellite distribution services and technical facilities. In December 1997, the Company consummated the Rainbow Transaction, pursuant to which (i) RPP was formed to hold interests in Rainbow's then existing RSNs and certain other businesses, (ii) the National Sports Partnership was formed to operate FSN and other national sports programming services, and (iii) the National Advertising Partnership was formed to act as a national advertising sales representative for the RSNs which are affiliated with FSN. RPP is managed by Rainbow, while the National Sports Partnership and the National Advertising Partnership are managed by the Company. In connection with the consummation of the Rainbow Transaction, (i) the Company contributed $850 million to RPP in exchange for a 40% partnership interest held by Fox Sports RPP and Rainbow contributed its interests in certain RSNs, the Madison Square Garden entertainment complex, Radio City Productions LLC, the New York Rangers and the New York Knicks to RPP in exchange for a 60% partnership interest, (ii) the parties each contributed certain business interests and other assets related to national sports programming to the National Sports Partnership in exchange for 50% partnership interests, and (iii) the parties each contributed certain assets related to advertising sales to the National Advertising Partnership in exchange for 50% partnership interests. In August 1997, the Company 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 terms of which were are 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/Liberty Sports, Fox Sports RPP and Fox/Liberty FX, each a subsidiary of the Company (together, the "Co-Borrowers"), in the amount of $800.0 million (the "Bank Facility"). The Bank Facility is comprised of a $400.0 million revolving credit facility and a $400.0 million term loan facility. The proceeds of the loans under the Bank Facility were used to finance, in part, the Rainbow Transaction. The Company currently expects that remaining availability will primarily be used for investments in certain subsidiaries of the Company and for working capital purposes. Borrowings under the Bank Facility are unconditionally guaranteed by certain RSNs that are wholly owned, directly or indirectly, by the Co-Borrowers and by certain of the Co-Borrowers' subsidiaries that hold the direct interest in RSNs that are not wholly owned, directly or indirectly, by the Co-Borrowers. The Company also provides a parent company guarantee of the borrowing under the Bank Facility. In addition, borrowings under the Bank Facility and the guarantees are secured by substantially all of the equity interests of the Co- Borrowers (other than Fox Sports RRP) and the equity interests held by the Co- Borrowers (other than Fox Sports RPP) and their subsidiaries in certain related entities. 25 Included in this Report are: (i) the consolidated financial statements of the Company for the eight months ended December 31, 1996 and for the years ended December 31, 1997 and 1998, (ii) the combined financial statements of Liberty Sports, Inc.--Domestic Operations for the period from January 1, 1996 to April 29, 1996, and (iii) the financial statements of Fox/Liberty FX for the ten months ended April 29, 1996. General Programming Operations Basic cable networks generally recognize revenue from two principle sources: the payment of affiliate fees from pay television distributors and the sale of advertising time. Basic cable networks typically enter into long-term contracts with pay television distributors such as cable system operators, DTH operators, multisystem multipoint distribution systems ("MMDS") operators and other hybrid pay television platforms. These operators provide for the delivery of the network's programming to subscribers. Contracts between networks and distributors generally vary in length and provide for a monthly programming fee ("affiliate license fee") to be paid by the distributor, on a per subscriber basis, to the cable network for the right to distribute programming on a non-exclusive basis. Affiliate license fees are generally based on the popularity of the cable network and the cost of its programming, and distribution contracts will generally set forth the manner in which fees will change throughout the life of the contract. The affiliate license fee schedule during the contract term typically varies based on the number of subscribers to whom the distributor delivers the network (volume) and/or penetration of the network among a distributor's total subscriber base. Affiliate license fees paid by a distributor will typically increase in aggregate as the number of subscribers served by the distributor increases, and will increase, on a per subscriber basis, by an escalator, such as the consumer price index ("CPI") for a fixed number of years until the contract expiration date. Upon the contract's expiration, the parties can renegotiate the license fee to the extent that market forces will allow. In exchange for distribution and affiliate license fees, distribution contracts often require the cable network to provide its distributor with various forms of consideration, including advertising time that the operator may sell locally, marketing programs and materials, and in recent years, substantial per subscriber launch funds. Basic cable networks also receive revenues from the sale of advertising time on the network. Advertising is sold in time increments and is priced primarily on the basis of a program's popularity among the specific audience that the advertiser desires to reach. Advertising rates are affected by the number of advertisers competing for available time, the total audience reached, as measured by the number of subscribers to the network, and to the extent that the network is targeted to a particular audience, the size and demographic makeup of the subscriber base targeted by the network. Generally, most advertising contracts are short-term in nature. Cable networks generally pay a commission both to advertising agencies for placement of local or national advertising and to their in-house sales force (or the national sales representative for national advertising). Cable networks expenses primarily include five general types of expenses: programming expenses, production and technical expenses, marketing expenses, advertising expenses and general and administrative expenses. Programming expenses are generally the largest component of a cable programmer's expenses and include expenses related to originally produced programming, acquired programming and rights to programming obtained by contract. Production and technical expenses typically include expenses related to operating the technical facilities of the network, the equipment required to uplink the signal to the satellite and, in the case of RSNs, the production crews who film and announce the games. Marketing expenses include all promotional expenses related to improving the market visibility and awareness of the network. Advertising expenses include sales commissions paid to the in- house sales force involved in the sale of advertising and commissions paid to outside representatives. General and administrative expenses include salaries, employee benefits, rent and other routine overhead expenses as well as legal, accounting and consulting fees. 26 The Company's Programming Operations Each of the Company's RSNs receive revenues from both affiliate license fees and from the sale of air time to local and national spot advertisers. The Company's RSN's have rights agreements with professional sports teams and colleges, within its region of operation. For professional teams, these rights agreements generally grant the RSN the exclusive right to air a specified number of games of the professional team per season, plus playoff games, for a specified fixed fee. The average term of these contracts (from commencement to scheduled termination) has historically been approximately six years for the Company's O&O RSNs and such contracts have specified mechanisms for the increase of the rights fee per game over the term of the contract. FSN, the Company's national programming service, also receives revenue from both affiliate license fees and from the sale of advertising time to national network advertisers. FSN's affiliate license fees are received from affiliated RSNs or broadcast stations for the right to distribute FSN's national programming within their region of operations. Similar to the RSNs, FSN has various rights agreements for its national sports programming, most notably national rights from MLB and various college conferences for football and basketball. FSN also produces its own daily sports news program, Fox Sports News. Upon consummation of the Rainbow Transaction, FSN became a service of the National Sports Partnership. Fox Sports Direct, the Company's satellite services operation, provides sports programming from the RSN's to C-band satellite owners and to the direct broadcast service providers, such as DirecTV, Inc. and EchoStar's Dish network, for Ku-band satellite owners. Fox Sports Direct's revenues are received generally through an up-front annual subscription fee from C-band customers and from a monthly per subscriber fee to the direct broadcast service providers. Fox Sports Direct acquires its sports programming through a license agreement with the RSNs whereby Fox Sports Direct splits a percentage of its revenues received from its subscribers with the "home territory" RSN in which the specific satellite subscriber resides. Prior to the consummation of the Rainbow Transaction, Fox Sports Ad Sales, LLC, the Company's advertising sales subsidiary received commissions from the sale of air time on behalf of RSNs, both the Company's and third party RSNs, as well as on behalf of FSN. Expenses consist of sales personnel and other sales-related costs. Upon consummation of the Rainbow Transaction, sales of national advertising became a function of the National Advertising Partnership. FX receives revenue from both affiliate license fee contracts and the sale of advertising time and acquires programming from various sources. FX has entered into contracts with various Hollywood studios, including Twentieth Century Fox, 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 a majority interest and voting control. The percentage of ownership, together with the degree to which the Company controls the management and operation of an RSN, determines the appropriate accounting treatment for the Company's interest in that particular RSN. If the Company owns a majority interest in a particular RSN, but does not have voting control, the ownership interest is accounted for using the equity method of accounting. Under the equity method of accounting, the financial condition and results of operations of entities are not reflected on a consolidated basis and, accordingly, the consolidated revenues and expenses of the Company, as reported on its consolidated statements of operations, do not include revenues and expenses related to the entities accounted for under the equity method. 27 As of December 31, 1996, the following RSNs, together with Fox Sports Direct, are accounted for using the equity method of accounting: Southwest RSN, Pittsburgh RSN, Rocky Mountain RSN, Midwest RSN, Sunshine RSN, Chicago RSN, Bay Area RSN and D.C./Baltimore RSN, as well as certain operations within Fox Sports Net. Prior to the formation of the Company, the Southwest RSN, Pittsburgh RSN, Rocky Mountain RSN and Midwest RSN, as well as Fox Sports Direct, were consolidated in Liberty Sports, Inc.'s financial statements, while the others have historically always been accounted for under the equity method. Entities that are consolidated in the financial statements of the Company, at December 31, 1996, include subsidiary entities which own Fox/Liberty FX, West RSN, West 2 RSN, Northwest RSN, Utah RSN, Arizona RSN, South RSN and Fox Sports Ad Sales, as well as certain operations within Fox Sports Net. On March 13, 1997, upon the acquisition of the remaining interests in Affiliated Regional Communications, Ltd. and affiliates ("ARC") by Liberty/Fox ARC LP, the Company assumed management control of the consolidated subsidiaries of Liberty/Fox ARC LP, and from that date the consolidated subsidiaries of ARC and their operations were consolidated. In connection with the Rainbow Transaction, the Company contributed certain business interests and other assets related to national sports programming to the National Sports Partnership and certain assets related to advertising sales to the National Advertising Partnership. The Company holds 50% partnership interests in each partnership. Whereas the assets and liabilities, and the results of operations of FSN, the national sports programming business and the national advertising sales representation business were consolidated, the National Sports Partnership and the National Advertising Partnership are each accounted for under the equity method. Fox Sports RPP's 40% interest in RPP is also accounted for under the equity method. The following RSNs, together with Fox Sports Direct and Fox/Liberty FX, are consolidated in the financial statements of the Company, at December 31, 1997 and 1998: West RSN, West 2 RSN, Northwest RSN, Utah RSN, Arizona RSN, South RSN, Southwest RSN, Rocky Mountain RSN, Midwest RSN and Detroit RSN. As of December 31, 1997 and 1998, the following are accounted for using the equity method of accounting: Pittsburgh RSN, Sunshine RSN, Chicago RSN, Bay Area RSN, D.C./Baltimore RSN, RPP, National Sports Partnership and National Advertising Partnership. Because the Company reports the results of a significant number of its subsidiary entities on the equity method, its financial results do not represent the total combined revenues and expenses of the entire Company. As a result of the various acquisitions and sales in recent years, which in turn impact the accounting treatment of many of the Company's subsidiary entities, comparability of the Company's historical financial results is not possible. Program Rights The Company has multi-year contracts for telecast rights of syndicated entertainment programs and sporting events. Program rights for entertainment programs are amortized over the term of the contract using the straight-line method. Program rights for sporting events which are for a specified number of games are amortized on an event-by-event basis, and those which are for a specified season are amortized over the term of the season on a straight-line basis. At the inception of these contracts and periodically thereafter, the Company evaluates the recoverability of the costs associated therewith against the advertising revenues directly associated with the program material and related expenses. Where an evaluation indicates that a multi-year contract will result in an ultimate loss, additional amortization is provided to currently recognize that loss. Excess Cost Excess cost represents the difference between the cost of acquiring programming entities and amounts assigned to their tangible and intangible assets. Such amounts are amortized on a straight-line basis over 40 years. 28 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 FOX/LIBERTY NETWORKS, LLC 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 by 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, (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 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 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 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. 29 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 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 period 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 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 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. Year ended December 31, 1997 The Company has certain subsidiaries that are consolidated and others which are accounted for on the equity method of accounting. On March 13, 1997, upon the acquisition of the remaining interests in ARC by Liberty/Fox ARC LP, the Company assumed management control of the consolidated subsidiaries of Liberty/Fox ARC LP, and from that date the consolidated subsidiaries of ARC and their operations were consolidated. Had the additional 12.78% interest been acquired at the beginning of the period (January 1, 1997), the Company's consolidated revenue and income would have increased by $29.9 million and $0.3 million, respectively. 30 Total revenue for the year ended December 31, 1997 was $471.8 million. Programming revenue is the largest source of revenue, representing 48% of total revenues, or $226.5 million. Advertising revenue represents 25% of total revenues, or $117.9 million. For the eight months ended December 31, 1996, programming revenue was $85.3 million and advertising revenue was $37.7 million, or 59% and 26% of total revenues, respectively. The primary reason for this change in the mix of revenues as compared to total revenue is due to the consolidation of ARC in which direct broadcast revenue represents 52% of ARC's total revenues. For the year ended December 31, 1997, direct broadcast revenue represented 19% of total revenues, or $91.7 million. For the eight months ended December 31, 1996, direct broadcast revenue was $5.7 million, or 4% of total revenues reflecting the impact of ARC being accounted for on the equity method during this period. Operating expenses totaled $420.9 million for the year ended December 31, 1997, which represented 89% of total revenues. These expenses consist primarily of programming and production costs. Operating expenses for the eight months ended December 31, 1996 totaled $117.4 million, or 81% of total revenues. The increase can be attributed to acquisition and renewals of programming rights during the first half of 1997 and direct telecast rights to third party RSNs that were not previously consolidated. The Company also incurred significant expenses throughout the year related to the launch of West2 in January 1997. As West2 has not yet achieved full distribution, operating expenses substantially exceeded revenues during the year. The Company also made a significant investment in programming in conjunction with the continued development of FSN, which launched in November 1996. General and administrative expenses totaled $65.6 million for the year ended December 31, 1997, which represented 14% of total revenues. General and administrative expenses for the eight months ended December 31, 1996 totaled $31.6 million, or 22% of total revenues. In 1996, the Company incurred significant costs relative to severance and relocation expenses in connection with the Company's decision to relocate its corporate offices from Dallas, Texas to Los Angeles, California. The Company offered a severance package based upon years of service to those employees who elected not to transfer, and a relocation package to those employees who elected to relocate to Los Angeles. Similar costs were not incurred in 1997. Depreciation and amortization expenses totaled $19.0 million and $8.5 million for the year ended December 31, 1997 and for the eight months ended December 31, 1996, respectively. Of these amounts, $11.8 million and $5.2 million were related to amortization of excess cost from acquisitions of programming entities. The increases are primarily due to the consolidation of ARC in 1997, as discussed above. Interest expense for the year ended December 31, 1997 totaled $49.2 million as a result of $1.3 billion of debt outstanding as of December 31, 1997. Interest expense for the eight months ended December 31, 1996 totaled $4.2 million which related to $171.7 million of outstanding indebtedness as of December 31, 1997. The increase in the amount of debt is attributable to (i) the Offering, pursuant to which the Company incurred $752.3 million of debt; (ii) the consolidation of ARC's consolidated subsidiaries, pursuant to which the Company incurred $9.0 million of debt; (iii) the purchase of the remaining interest in ARC pursuant to which the Company incurred $40.0 million of debt; (iv) the arrangement of an advertising sales and carriage agreement pursuant to which the Company incurred $30.0 million of debt; (v) the Bank Facility and indebtedness thereunder in the amount of $460.0 million; (vi) the acquisition of certain assets in connection with the commencement of operations of the Detroit RSN, pursuant to which the Company incurred $25.7 million of debt; and (vii) additional borrowings of approximately $39.5 million to fund operations for the year ended December 31, 1997, net of the extinguishment of debt of $201.7 million during the period. Eight months ended December 31, 1996 The Company was formed pursuant to a 50%/50% joint venture in April 1996 from the contribution of assets from Liberty and Fox. The consolidated statement of operations of the Company reflects the RSNs and other sports businesses, formerly owned by Liberty and Fox. 31 The Company has certain subsidiaries that are consolidated and others which are accounted for under the equity method of accounting. The key criteria used to determine the accounting treatment are ownership and voting control. For comparative purposes to a pro forma combined Liberty Sports and Fox/Liberty FX statement of operations prior to the formation of the Company, it is important to realize that certain subsidiary entities were accounted for under the equity method after formation of the Company in April 1996 which were previously consolidated in Liberty Sports, Inc. financial statements. These significant subsidiary entities are Liberty/Fox KBL LP (Pittsburgh RSN), Liberty/Fox ARC LP (Southwest, Midwest and Rocky Mountain RSNs, and Fox Sports Direct), and Liberty/Fox Distribution LP (primarily national rights for college football). If these operating subsidiaries had been consolidated for the eight months ended December 31, 1996, as they were under Liberty Sports, Inc. prior to the formation of the Company, the effect on total consolidated revenues and expenses would have been significant. For the eight months ended December 31, 1996, total revenues for these operating subsidiaries were $138.6 million, consisting of the following: programming--$40.7 million, advertising--$19.3 million, direct broadcast--$55.1 million and other--$23.5 million. Total expenses for the same period were $163.3 million, consisting of the following: operating--$150.0 million, general and administrative--$10.4 million, and depreciation and amortization--$2.9 million. The operating loss for these non- consolidated subsidiaries was $24.7 million, which is included on the Company's financial statements as equity income of affiliates, net and equity in loss of affiliates related to additional amortization of program rights. For comparability purposes, the following discussion will make reference to comparisons between calendar 1996 and 1995 for the O&O RSNs. To achieve comparability, these calculations were made by summing the specific revenues and expenses for all owned and operated regional sports networks, whether consolidated or accounted for under the equity method for financial statement purposes, for 1996 and 1995. Total revenues for the eight months ended December 31, 1996 were $144.8 million. Programming revenue is the largest revenue source, representing 59% of total revenue or $85.3 million. Programming revenues for RSNs increased 30% in calendar 1996 compared to calendar 1995 due to rate increases and increasing subscribers. Advertising revenue totaled $37.7 million or 26% of total revenues. For RSNs, advertising revenues increased 15% in calendar 1996 due to new sports contracts and higher advertising rates and sell-out percentages in certain events. Direct satellite broadcast revenue represented only 4% of total revenues or $5.7 million due to the Company's direct satellite broadcast division, Fox Sports Direct, not being consolidated. The remaining revenue sources account for 11% of total revenues and consist of infomercials, merchandising, and other. Operating expenses totaled $117.4 million for the eight months ended December 31, 1996, which represented 81% of total revenues. These expenses consisted primarily of programming and production costs. For RSNs, programming and production costs increased 17% in calendar 1996 from calendar 1995 due primarily to escalating and/or renegotiated costs in certain existing sports contracts, and, to a lesser extent, new sports contracts. In 1996 the Company finalized a long-term agreement with MLB for national cable rights. In accordance with the Company's accounting policies as described above, an evaluation of the recoverability of the costs associated with this agreement was performed. Additional amortization of program rights totaling $80.0 million was recorded associated with this contract, as a result of the evaluation of projected future advertising revenues in comparison to future program rights. Depreciation and amortization expenses totaled $8.5 million for the period. Of this amount, $5.2 million was related to amortization of excess cost from acquisitions of programming entities. An additional amortization of program rights totaling $29.0 million was also recorded with respect to a projected loss to an affiliate on college football contracts. General and administrative expenses totaled $31.6 million, or 22% of total revenues, for the eight months ended December 31, 1996. Included in this total for the period was $1.3 million for deferred compensation to certain employees and $1.2 million in severance costs associated with the announced relocation in August 1996 of the Company's corporate offices from Dallas to Los Angeles. The actual relocation was completed in March 1997. 32 Interest expense was $4.2 million for the period with substantially all of the Company's debt bearing interest at floating rates. Subsidiaries income tax expense totaled $3.4 million for the period which related to estimated federal and state tax liabilities. In September 1996, the Company sold its merchandising division for $3.8 million to a company owned by former executives of Liberty. A loss on sale of $4.9 million was realized in conjunction with this transaction. The Company has numerous significant investments accounted for under the equity method. For the eight months ended December 31, 1996, net equity income of affiliates was $17.0 million. LIBERTY SPORTS, INC.--DOMESTIC OPERATIONS Period from January 1, 1996 to April 29, 1996 Revenues for the four months ended April 29, 1996 totaled $99.8 million. Programming, advertising, and direct broadcast revenues were 38%, 28%, and 24%, respectively, of total revenues for the four month period compared to 38%, 30%, and 23%, respectively, of total revenues for the calendar year ended December 31, 1995 ("Liberty Calendar 1995"). The slight percentage decrease in advertising revenues was offset by an increase in the percentage of other revenues as other revenues were 10% of total revenues for the four month period compared to 9% for Liberty Calendar 1995. Operating expenses for the four months ended April 29, 1996 were $60.7 million, or 61% of total revenues for the period. Operating expenses for Liberty Calendar 1995, as a percentage of total revenues, were comparable at 60%. General and administrative expenses for the four months ended April 29, 1996 were $28.0 million, or 28% of total revenues for the period. General and administrative expenses for the preceding fiscal year, as a percentage of total revenues, were 33%. The decreased percentage cost is attributable to the sale of certain unprofitable business divisions in January 1996 and overall efficiencies in Liberty Sports, Inc.--Domestic Operations' existing operations. FX Ten Months ended April 29, 1996 Revenues for the ten months ended April 29, 1996 totaled $75.4 million, of which approximately 74% represented revenues attributable to programming revenue, as compared to 77% of FX's total revenue for the fiscal year ended June 30, 1995 ("FX Fiscal 1995"). Increased advertising revenues due to the maturing of the programming service and increased awareness among viewers and advertisers since the June 1994 launch resulted in a decrease in the percentage. Advertising revenue (net of commissions) contributed approximately 23% of revenues for the ten month period, and infomercial revenue contributed 3%. Operating expenses for the ten months ended April 29, 1996 were $63.4 million, or 84% of total revenues for the period. Operating expenses for FX Fiscal 1995, as percentage of total revenues, was 122%. This improvement in operating expenses as a percentage of revenues is attributable to a decrease in original programming production. General and administrative expenses for the ten months ended April 29, 1996 were $19.9 million, or approximately 26% of revenues for the period. General and administrative expenses for FX Fiscal 1995 were approximately 35% of revenues. This decrease in general and administrative expenses as a percentage of revenues is attributable to an overall increase in programming and advertising revenues as compared to FX Fiscal 1995. 33 Liquidity and Capital Resources The Company's liquidity requirements arise from (i) the funding of operating losses and other general working capital needs, (ii) its strategic plan to secure national distribution for its network programming, either through the acquisition of existing third party-owned RSNs or through the launch of new RSNs, (iii) the acquisition of additional programming rights, and (iv) its capital expenditure requirements, which include the Company's plans to convert to digital transmission. Net cash (used in) provided by operating activities of the Company for the years ended December 31, 1998 and 1997 and for the eight months ended December 31, 1996 was ($32 million), ($76.7 million) and $14.3 million, respectively. Net cash used in investing activities of the Company for the years ended December 31, 1998 and 1997 and for the eight months ended December 31, 1996 was $36.1 million, $932.4 million and $38.8 million, respectively. Net cash provided by financing activities of the Company for the years ended December 31, 1998 and 1997 and for the eight months ended December 31, 1996 was $61.4 million, $1,050.8 million and $25.2 million, respectively. In June 1997, the Company entered into an agreement with Rainbow to acquire a 40% interest in Rainbow's sports properties, including economic interests in eight RSNs, Madison Square Garden entertainment complex, Radio City Productions LLC, the New York Knicks, and the New York Rangers in exchange for $850 million. In December 1997 the Rainbow Transaction was consummated and the net proceeds from the Offering, along with available proceeds under the Bank Facility, were used to fund the Company's cash contribution of $850 million to RPP. In August 1997, the Company consummated the Offering. The net proceeds from the Offering were used in part, to finance the Rainbow Transaction. The indentures, 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 December 31, 1998 the Company was in compliance with these restrictive covenants. At December 31, 1998, the total amounts borrowed under these credit facilities were $611.3 million. The total commitments pursuant to these credit facilities were $806.3 million as of December 31, 1998. 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 to finance, in part, the Rainbow Transaction. At December 31, 1998, the total amount borrowed under the Bank Facility was $605.0 million. South Ltd. also has a credit facility (the "South Credit Facility") with permitted borrowings of $6.3 million. At December 31, 1998, the total amount borrowed under the South Credit Facility was $6.3 million. The Bank Facility and the South Credit Facility restrict the payment of dividends, and contain certain restrictive covenants regarding, among other things, the maintenance of certain financial ratios and restrictions on the distribution of assets. Future capital requirements are substantial. At December 31, 1998, the Company has future minimum payments on operating leases, including transponders totaling $91.3 million, and commitments under long-term program rights contracts totaling $1,654.0 million. The Company has also made a substantial investment in the National Sports Partnership in the year ended December 31, 1998. 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 Fox Sports News. Investment in the National Sports Partnership will continue as the network continues to develop. Also, within the next several years, the Company will complete its transition from analog transponder equipment to digital transponder equipment. Obligations under operating leases for the Company's fleet of transponders currently in use total $1.6 million per month, with varying expiration dates through 2006. Upon completion of the transition to digital transponder equipment, the Company anticipates savings of approximately $1.0 million per month, as compared to current obligations. In 34 order to transition to the digital system, the Company will purchase five signal compression systems. In addition, the Company is purchasing satellite receivers which will allow cable operators to convert the digital signal back into a single channel feed for distribution across their system. The total cost of the compression systems and receivers will be approximately $22 million, of which approximately $17 million has been spent to date. The transition to digital transponder equipment commenced in 1998 and will continue into 1999. In addition, the cost of acquiring sports programming rights continues to escalate. 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 Bank Facility and its funding and other commitments to its subsidiaries and affiliates, is dependent on the earnings of such subsidiaries and affiliates and the distribution or other payment of such earnings to the Company in the form of dividend distributions, loans or other advances, payment or reimbursement for management fees and expenses, and repayment of loans and advances from the Company. Accordingly, the Company's ability to pay interest on the Notes and to otherwise meet its liquidity requirements may be limited as a result of its dependence upon the distribution of earnings and advances of funds by its subsidiaries and affiliates. The payment of dividends or the making of loans or advances to the Company by its subsidiaries and its affiliates, which may be subject to statutory, regulatory or contractual restrictions, are contingent upon the earnings of those subsidiaries and affiliates, and are subject to various business considerations. Although the agreements between the Company and its partners contemplate the payment of distributions, the Company may not be able to cause its subsidiaries or affiliates to make distributions when it may have a need for distributions, and the Company may not be able to dispose of its investments in any of its RSNs if required for financial or other reasons. Sources of funding for the Company's future financing requirements, if any, may include public or private offerings of equity and/or debt securities, commercial bank loans, and partner capital contributions. The extent of the additional financing required, if any, will depend on the success of the Company's business. There can be no assurance that additional financing, if needed, will be available to the Company or, if available, that such financing can be obtained on terms acceptable to the Company and within the limitations contained in the terms of any future financing arrangements. Failure to obtain any such financing could delay or prevent the Company's development and growth plans, impair the Company's ability to meet its debt service requirements, and have a material adverse effect on the Company's business. The Company believes that its existing funds and the proceeds from borrowings under the Bank Facility, will be sufficient to meet its plan to secure national distribution, maintain and/or acquire programming, make anticipated capital expenditures, and meet its projected working capital requirements, although no assurances can be given in this regard. Year 2000 The following disclosure is a Year 2000 readiness disclosure statement pursuant to the Year 2000 Readiness and Disclosure Act. The Company is devoting significant resources throughout its business operations to resolve the potential impact of the Year 2000 (Y2K) on the processing of date-sensitive information by its computerized information technology ("IT") systems. The Y2K problem is the result of computer programs being written using two digits (rather than four) to define the applicable year. Certain programs may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations or system failures. The problem also extends to non-IT systems including: operating and control systems that rely on embedded chip systems. The Company's standard for compliance requires that for a computer system or a business process to be Year 2000 compliant, it must be designed to be used prior to, on and after January 1, 2000. Such systems or processes must be able to operate without error in dates and date-related data, including without limitation, calculating, comparing, indexing and sequencing prior to, on and after January 1, 2000. 35 The Company has established a dedicated Y2K Steering Committee to oversee the Company's Y2K internal IT application and infrastructure readiness activities. The Y2K Steering Committee is charged with raising awareness throughout the Company, developing tools and methodologies for addressing the Y2K issue, monitoring the development and implementation of business and infrastructure plans to bring non-compliant applications into compliance on a timely basis and identifying and assisting in resolving high risk issues. The Y2K Steering Committee is focused on the following major areas: Internal IT Systems. The Company is approaching its Y2K internal readiness program in the following five phases: (1) assessment, (2) strategy, (3) planning, (4) implementation and (5) testing and management. The assessment phase involves taking an inventory of the Company's internal IT applications. The strategy phase involves prioritizing risk, identifying failure dates, defining a solution strategy, estimating repair costs and communicating across the Company the magnitude of the problem and the need to address Y2K issues. The planning phase consists of identifying the tasks necessary to ensure readiness, scheduling remediation plans for applications and infrastructure, and determining resource requirements and allocations. The fourth phase, implementation, involves readying the development and testing environments, and piloting the remediation process. Testing and management, the last phase, consists of executing the Company's plan to fix, test and implement critical applications and associated infrastructure, and putting in place contingency plans for processes that have a high impact on the Company's business. The Company is targeting its efforts so that its IT applications will be Y2K compliant on or about September 30, 1999. Internal Non-IT Systems. The Company has also focused on internal non-IT systems. Non-IT systems include those systems that are not commonly thought of as IT systems, such as broadcast equipment, satellite transmission equipment telephone/PBX systems, fax machines, facilities systems regulating alarms, building access and other miscellaneous systems that depend on date related processing. The Company's Y2K Steering Committee is providing standardized tools and is monitoring the progress of these readiness efforts to ensure business continuity. Material Third Party Relationships. The Company has developed a Y2K process for dealing with its key suppliers, contract manufacturing, distributors, vendors and partners. The process generally involves the following steps: (i) initial supplier survey, (ii) risk assessment and contingency planning, (iii) follow-up supplier reviews and escalation, if necessary, and where relevant, (iv) testing. To date, the Company has received responses from many of its critical suppliers, most of whom responded that they expect to address all their significant Y2K issues on a timely basis. The Company is following up with those significant vendors and service providers that either did not respond initially or whose responses were unsatisfactory. The company is working to identify and analyze the most reasonably likely worst case scenarios for third party relationships affected by Y2K. The Company expects to successfully implement the systems and programming changes necessary to address internal IT and non-IT readiness issues.The Company has been focusing its efforts on identifying and remediating its Y2K exposures and is developing and will have tested where practical contingency plans in the event it does not successfully complete all phases of its Y2K program. These contingency plans include, but are not limited to identification of alternative suppliers, vendors and service providers. Based on the Company's current assessment, the costs of addressing potential problems are not currently expected to have a material adverse impact on the Company's financial position, results of operations or cash flows in future periods. However, if the Company, its customers or vendors identify Y2K issues in the future and are unable to resolve such issues in a timely manner, it could result in a material financial risk. Accordingly, the Company plans to devote the necessary resources to resolve all significant Y2K issues in a timely manner. The estimated costs to complete the project are currently expected to be approximately $2.5 million. The costs of the project and the date on which the Company believes it will complete the Y2K modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third-party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved, or that there will not be a delay in, or 36 increased costs associated with, the implementation of the Company's Y2K compliance project. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, timely responses to and correction by third parties and suppliers, the ability to implement interfaces between the new systems and the systems not being replaced, and similar uncertainties. Due to the general uncertainty inherent in the Y2K readiness of third parties and the interconnection of national businesses, the Company cannot ensure that its ability to timely and cost effectively resolve problems associated with the Y2K issue will not affect its operations and business, or expose it to third party liability. Item 7a. Quantitative and Qualitative Disclosures About Market Risk The Company's exposure to interest rate changes is primarily related to its variable rate debt under its Bank Facility. The Bank Facility is comprised of a $400 million seven-year revolving credit facility and a $400 million seven year term loan which were entered into in conjunction with the Rainbow Transaction. Because the interest rates on these facilities are variable, based upon the bank's prime rate or LIBOR, the Company's interest expense and cash flow are affected by interest rate fluctuations. At December 31, 1998, the Company had $205 million outstanding under the revolving credit facility and $400 million outstanding under the term loan. If interest rates were to increase or decrease by 100 basis points, the result, based upon the existing outstanding debt, would be an annual increase or decrease of $6.0 million in interest expense and a corresponding decrease or increase of $6.0 million in the Company's cash flow. 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. PART III Item 10. Directors and Executive Officers of the Registrant Executive Officers The current executive officers of the Company and/or certain of its subsidiaries are as follows: Name Age Position ---- --- -------- David Hill.......... 52 Chairman Anthony F.E. Ball... 43 President and Chief Executive Officer Executive Vice President and Chief Financial Jeff Shell.......... 33 Officer Tracy Dolgin........ 39 Chief Operating Officer Executive Vice President, Head of Business James A. Martin..... 44 Operations Louis LaTorre....... 45 Senior Vice President Robert L. Thompson.. 41 Executive Vice President of Fox/Liberty Sports David Hill has served as Chairman of the Company since April 1996. From April 1996 through October 1997, Mr. Hill also served as the Company's Chief Executive Officer. In addition, since October 1997 he has served as Chairman and Chief Executive Officer of Fox Broadcasting Company. Prior thereto, from July 1996 until October 1997, Mr. Hill served as Chief Operating Officer of Fox Television and from December 1993 until 37 October 1997 as President of Fox Sports, a division of Fox Television. From April 1988 until October 1993, Mr. Hill was employed at Sky Television and its successor company, British Sky Broadcasting Group plc ("BSkyB"), in various capacities, including Head of Sky Sports, a subsidiary of BSkyB. Anthony F.E. Ball has served as President of the Company since March 1997 and additionally as its Chief Executive Officer since October 1997. From March 1997 until October 1997, Mr. Ball also served as Chief Operating Officer of the Company. Mr. Ball has also served as President and Chief Executive Officer of Fox/Liberty Sports and Fox/Liberty FX since October 1997. In addition, since June 1996 he has served as President and Chief Operating Officer of International Sports Programming Partners ("ISPP"), an international sports programming joint venture between Fox and TCI. From December 1993 until June 1996, Mr. Ball was employed by BSkyB in various capacities, including as its General Manager/Broadcasting and as Head of Production and Operations of Sky Sports. Prior thereto, from March 1991 until December 1993, Mr. Ball served as Senior International Vice President and Head of European Productions at TransWorld International, a subsidiary of International Management Group. Jeff Shell has served as Executive Vice President and Chief Financial Officer of the Company since February 1998. Prior thereto, Mr. Shell served as Senior Vice President, Finance and Development of the Company from June 1996 until February 1998. From October 1994 until November 1996, he served as Vice President of Business Development for Fox, Inc. Prior thereto, from September 1991 until October 1994, Mr. Shell served in various capacities in the Strategic Planning and Corporate Development Group at The Walt Disney Company. Tracy Dolgin has served as Chief Operating Officer of the Company since September 1998. Prior thereto, Mr. Dolgin served as Joint Chief Operating Officer of Fox/Liberty Sports from July 1997 to September 1998. In addition, he served as Executive Vice President, Marketing for Fox Sports, a division of Fox Broadcasting Company, from December 1993 until September 1998. Prior thereto, from December 1992 until December 1993, Mr. Dolgin served as Executive Vice President, Marketing of Fox Broadcasting Company, and from May 1989 until December 1992, Mr. Dolgin served as Senior Vice President, Marketing of Home Box Office, a subsidiary of Time Warner, Inc. James A. Martin has served as Executive Vice President, Head of Business Operations of each of the Company, Fox/Liberty Sports and Fox/Liberty FX since June 1997. From September 1996 until June 1997, he served as Executive Vice President and Chief Operating Officer of Fox/Liberty Sports. From January 1995 until September 1996, Mr. Martin served as Executive Vice President and President of Regional Network Operations of Liberty Sports, Inc. Prior thereto, from September 1991 until December 1994, Mr. Martin served as Vice President and Chief Operating Officer of Liberty. Louis LaTorre has served as Senior Vice President of the Company, President, Advertising Sales of Fox/Liberty Sports and President, Advertising Sales of Fox/Liberty FX since January 1997. From July 1994 until December 1996, he served as President and Chief Operating Officer for the Sales and Marketing Division of New World Communications, Inc. From October 1993 until June 1994, Mr. LaTorre served as President of Pro Star Entertainment Inc., a satellite encryption and entertainment company. From March 1993 until September 1993, he served as President of Platinum Productions, Inc., a pay-per-view entertainment company. Prior thereto, from June 1981 until February 1993, Mr. LaTorre served in various capacities at Turner Broadcasting System, Inc. including, most recently, as Executive Vice President, Advertising Sales and Marketing, for the Turner Entertainment Group, a subsidiary of Turner Broadcasting System, Inc. Robert L. Thompson has served as Executive Vice President of Fox/Liberty Sports since October 1997 and, from July 1996 through October 1997, he served as its Senior Vice President, Rights and Acquisitions and Regional Network Operations. In addition, since December 1998 he has also served as Chief Operating Officer of ISPP. From October 1994 through July 1996, Mr. Thompson served as Senior Vice President, Regional Network Operations for Liberty Sports, Inc. and from January 1994 until October 1994 he served as Group Vice President of Liberty Sports, Inc. Prior thereto, from February 1989 until October 1994, Mr. Thompson served as Vice President/General Manager of the Rocky Mountain Prime Sports Network. There are no family relationships between any of the executive officers. 38 Item 11. EXECUTIVE COMPENSATION Executive Compensation The following table sets forth the compensation paid for the eight months ended December 31, 1996 and for the years ended December 31, 1997 and 1998 to those persons who were, at December 31, 1998, the Company's Chief Executive Officer and the next four most highly compensated executive officers of the Company and/or its subsidiaries (the "Named Executives"). 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.............. 1998 $500,000(2) $150,000(2) -- -- -- -- -- Chairman(1) 1997 $500,000(2) $150,000(2) -- -- -- -- -- 1996 $333,333(2) $100,000(2) -- -- -- -- -- Anthony F.E. Ball....... 1998 $538,888 $400,000 -- -- -- -- -- President and Chief 1997 $250,000(3) $ 75,000(3) -- -- -- -- -- Executive Officer(1) 1996 -- -- -- -- -- -- -- Tracy Dolgin............ 1998 $472,234 $200,000 -- -- -- -- -- Chief Operating 1997 $256,597(5) $100,000(5) -- -- -- -- -- Officer(4) 1996 -- -- -- -- -- -- -- James A. Martin......... 1998 $382,762 $125,000 -- -- -- -- $300,000(8) Executive Vice 1997 $358,333 $125,000 -- -- -- -- $300,000(8) President(6) 1996 $215,625(7) $ 63,333(7) -- -- -- -- $300,000(8) Louis LaTorre........... 1998 $464,636 $200,000 $30,714 -- -- -- -- Senior Vice President 1997 $391,026 $200,000 $20,148 -- -- -- -- 1996 -- -- -- -- -- -- -- - ------- (1) In October 1997, Mr. Ball succeeded Mr. Hill as Chief Executive Officer of the Company. (2) Reflects the compensation received by Mr. Hill for the services he rendered to the Company from the Company's inception in April 1996 through the year ended December 31, 1998. During fiscal years 1998, 1997 and 1996, Mr. Hill was, and currently remains employed by Fox Broadcasting Company. Fox Broadcasting Company grants the Company the right to utilize Mr. Hill's services. The above disclosure does not include compensation information for Mr. Hill with respect to the services he performed at Fox Broadcasting Company. See "Certain Transactions." (3) Reflects compensation received by Mr. Ball for services he rendered to the Company for a portion of fiscal year 1997. The Company has been granted the right to utilize Mr. Ball's services through March 1, 2001. (4) Mr. Dolgin served as Joint Chief Operating Officer of Fox/Liberty Sports until September 1998. (5) Reflects compensation received by Mr. Dolgin for services he rendered to the Company for a portion of fiscal year 1997. (6) Mr. Martin served as Executive Vice President and Chief Operating Officer of Fox/Liberty Sports until June 1997. (7) Reflects compensation received by Mr. Martin for the services he rendered to the Company from the Company's inception in April 1996 through December 1996. During fiscal year 1996, Mr. Martin was employed by Liberty Sports, Inc., which granted the Company the right to utilize Mr. Martin's services. Mr. Martin became an employee of the Company on January 1, 1997. See "Certain Transactions." (8) In connection with the formation of the Company, a deferred compensation incentive plan (the "Plan") with an effective date of January 1, 1996, was approved and adopted by the Company. A substantially similar plan existed at Liberty Sports, Inc. ("LSI"), then a subsidiary of Liberty (the "LSI Plan"), prior to the formation of the Company. The Plan was adopted by the Company in anticipation of certain LSI employees performing services for the Company. Such employees, including Mr. Martin, were beneficiaries under the LSI Plan. Pursuant to the Plan, deferred compensation vests annually at a 20% rate and was fully vested in 1998. Upon full vesting of the deferred compensation under the Plan, the Company has incurred charges against earnings in the amount of $900,000 with respect to Mr. Martin. The Company does not have a stock option plan and no long term compensation awards were made in the fiscal year ended 1997, except as disclosed above. 39 In October 1997, the Company adopted the Fox/Liberty Networks, LLC Equity Appreciation Rights Plan for Management and Key Employees (the "Plan"). The Plan is designed to provide a flexible mechanism to permit management and key employees of the Company and its subsidiaries to obtain significant interests in the equity of the Company, thereby increasing their proprietary interest in the growth and success of the Company. During fiscal year 1998, grants under the Plan have been awarded to the Named Executives as follows. Option/SAR Grants in Last Fiscal Year Individual Grants(1) Potential Realizable -------------------------- Value at Assumed Number of Percent Of Annual Rates of Stock Securities Total Exercise Price Appreciation Underlying Options/SARs Of Base For Option Term Option/SARs To Employees Price Expiration --------------------- Name Granted (#) In Fiscal Year ($/Sh) Date 5% ($) 10% ($) ---- ----------- -------------- -------- ---------- --------- ----------- Anthony F.E. Ball....... 10,000 22% $185 5/1/2006 850,753 2,025,511 - -------- (1) Messrs. Hill, Dolgin, Martin and LaTorre did not receive grants during fiscal year 1998. Employment Arrangements During fiscal years 1996, 1997 and 1998 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 1998 Fox Broadcasting Company allocated to the Company $650,000 for the services Mr. Hill rendered to Company for that period. See "Certain Relationships and Related Transactions." The Company entered into an agreement granting to the Company the exclusive right to utilize Mr. Ball's services for a term of four years, which commenced on March 1, 1997. Pursuant to the agreement, Mr. Ball renders services to the Company and to ISPP, the international sports programming joint venture between Fox and Liberty. The agreement provides that the Company will pay a pro rata share of Mr. Ball's compensation, based on the number of days services are provided to the Company and its affiliates during the contract year. The portion of Mr. Ball's salary and bonus which is allocable to the Company for fiscal year 1998 is $938,888. Mr. Ball is eligible to participate in all employee benefit plans available to other comparable executives of the Company, including vacation, personal travel, and medical, disability and life insurance. The agreement also provides for additional benefits, including the reimbursement of certain expenses and an annual bonus similar to the bonus of comparable executives. Further, the agreement provides that in the event of the termination of Mr. Ball's services by the Company, the Company shall be obligated to make payments under the agreement to pay for the balance of the term, reduced by the amount Mr. Ball earns upon finding new employment. The agreement contains provisions prohibiting the disclosure of confidential or proprietary information of the Company. In addition, Mr. Ball is prohibited during the term of the agreement and for a period of two years thereafter, from inducing any managerial, sales or supervisory employee of the Company or its affiliates to render services to another entity. The Company entered into an employment agreement with Mr. Jeff Shell in February 1998 with an effective date of September 1997, which will terminate on August 31, 2000. Pursuant to his employment agreement, Mr. Shell is entitled to receive an annual salary of $330,000 for the period of September 1, 1997 to August 31, 1998, $360,000 for the period of September 1, 1998 to September 30, 1999 and $400,000 for the period October 1, 1999 to August 31, 2000. From January to September 1997, Mr. Shell was employed with the Company under a prior employment agreement. During fiscal year 1996 Mr. Shell was employed by Fox, Inc., which granted the Company the right to utilize Mr. Shell's services as its Senior Vice President, Finance and Development from June 1996 through December 1996. Commencing in January 1997, Mr. Shell became an employee of the Company. Pursuant to the current agreement, Mr. Shell is entitled to participate in all employee benefit plans available to other comparable executives of the Company. The agreement contains provisions prohibiting the disclosure of confidential or proprietary information of the Company. In addition, Mr. Shell is prohibited during the term of his employment and for a period of two years thereafter, from inducing any managerial, sales or supervisory employee of the Company or its affiliates to render services to another entity. 40 The Company entered into a two year, four month employment agreement with Mr. Tracy Dolgin which commenced on September 1, 1998. This agreement replaced Fox/Liberty Sports' prior agreement with Mr. Dolgin, under which Mr. Dolgin was entitled to receive $339,600 during the period from January 1, 1998 to August 31, 1998. Pursuant to the current agreement, Mr. Dolgin is entitled to receive an annual salary of $700,000 for the period September 1, 1998 to August 31, 1999, $750,000 for the period September 1, 1999 to August 31, 2000 and $787,500 for the period September 1, 2000 to December 31, 2000. The agreement provides for participation in all employee benefit plans available to other comparable executives. The agreement contains provisions prohibiting the disclosure of confidential or proprietary information of Fox/Liberty Sports. In addition, Mr. Dolgin is prohibited during the term of his employment and for a period of one year thereafter, from inducing any managerial, sales or supervisory employee of Fox/Liberty Sports or its affiliates to render services to another entity. The Company entered into an employment agreement with Mr. Louis LaTorre which commenced on January 27, 1997 and will end on April 30, 1999. Pursuant to the agreement, Mr. LaTorre is entitled to receive an annual base salary of $400,000 for the period January 27, 1997 to April 30, 1997, $425,000 for the period May 1, 1997 to April 30, 1998 and $450,000 for the period May 1, 1998 to April 30, 1999. In addition, upon achieving certain goals, Mr. LaTorre is entitled to receive an annual bonus (as specified in the agreement) based on the performance of the Company, Fox/Liberty Sports and Fox/Liberty FX. The agreement provides for additional benefits, including vacation, medical benefits, and long-term disability. Further, the agreement provides that in the event Mr. LaTorre is terminated without cause (as defined in the agreement), or if the Company breaches the agreement, the Company shall pay Mr. LaTorre an amount equal to the sum of (i) all earned but unpaid amounts of base salary and bonuses to the date of termination, (ii) the applicable bonus amount, if any, with respect to the year in which termination occurs, and (iii) the lesser of (a) one year's base salary calculated at the then prevailing rate or (b) the remaining base salary to be paid for the balance of the term as then in effect. The agreement contains provisions requiring Mr. LaTorre not to disclose confidential or proprietary information of the Company. In addition, the agreement prohibits him from competing or inducing others to compete with the Company, its subsidiaries or affiliates, during the term of his employment and for a period of twelve months following termination. The Company entered into an employment agreement with Mr. Robert Thompson for a term of two years, unless the Company exercises an option for an additional one year period. The agreement commenced May 1, 1998. Pursuant to the agreement, Mr. Thompson renders services to the Company and to ISPP and provides that the Company will pay a pro rata share of Mr. Thompson's compensation, based on the number of days services are provided to the Company and its affiliates during the contract year. The portion of Mr. Thompson's salary and bonus which is allocable to the Company for fiscal year 1998 is $411,736. Mr. Thompson is eligible to participate in all employee benefit plans available to other comparable executives. The agreement contains provisions prohibiting the disclosure of confidential or proprietary information of the Company. In addition, Mr. Thompson is prohibited during the term of his employment and for a period of two years thereafter, from inducing any managerial, sales or supervisory employee of the Company or its affiliates to render services to another entity. Operating Agreement The Company is a limited liability company organized under the Delaware Limited Liability Company Act. The Company is governed by an operating agreement (the "Operating Agreement") dated April 29, 1996 among its members, LMC Newco U.S., Inc. ("LMCI") (a wholly-owned subsidiary of Liberty), Fox Regional Sports Holdings, Inc. ("FRSH") (a wholly-owned subsidiary of Fox) and Fox/Liberty Sports Financing LLC (a 50%/50% Delaware limited liability company owned by each of LMCI and Fox) (LMCI, FRSH and Fox/Liberty Sports Financing LLC are collectively, the "Members"). See "Business--Certain Arrangements Regarding Ownership Interests." The Company is managed by the Members. The day-to-day activities of the Company are directed by its officers, subject to the supervision of the Members. The Company's chief executive officer, chief financial officer 41 and chief operating officer are nominated and elected by the Members of the Company at the direction of FRSH and subject to the approval of LMCI. The chief executive officer has the authority to select such other officers as may be necessary or desirable to carry out the day-to-day operations of the Company. Item 12. Security Ownership of Certain Beneficial Owners and Management Not applicable. Item 13. Certain Relationships and Related Transactions Fox/Liberty Transaction The Company was formed on April 29, 1996, through the Fox/Liberty Joint Venture, to own and operate programming services featuring predominantly sports and sports-related programming for distribution in the United States. Fox, a majority-owned subsidiary of News Corporation, and LMCI, a wholly- owned subsidiary of Liberty, each own 50% of the Company. The Company owns a 99% interest in each of Fox/Liberty Sports, Fox Sports RPP and Fox/Liberty FX. The remaining 1% interests in each of Fox/Liberty Sports, Fox Sports RPP and Fox/Liberty FX are owned by affiliates of Fox and Liberty. Pursuant to the Fox/Liberty Joint Venture formation documents, at any time after October 3, 2000, if the Members of the Company fail to approve an annual budget for Fox/Liberty Sports and Fox Sports RPP or Fox/Liberty FX for two consecutive fiscal years or fail to appoint a chief executive officer of the Company for such period, or at any time after April 20, 2002, either Fox or Liberty may initiate a buy/sell procedure. Upon a Change of Control (as defined in the Agreement Regarding Ownership Interests dated as of April 29, 1996, as amended, by and among Liberty, News America Incorporated, FRSH, LMCI and FX Holdings, Inc.), the party not experiencing the Change of Control has a call option on all the interests held by the other party. Rainbow Transaction On June 22, 1997, Rainbow and the Company entered into a Formation Agreement pursuant to which they agreed to form RPP, to hold various programming interests in connection with the operation of certain RSNs. In accordance with the terms of the Formation Agreement, upon consummation of the Rainbow Transaction on December 18, 1997, Rainbow contributed various interests in RSNs to the partnership in exchange for a 60% partnership interest in RPP and the Company contributed $850 million in cash for a 40% partnership interest in RPP. Rainbow serves as managing partner of RPP. Pursuant to the partnership agreement of RPP (the "RPP Agreement"), after the third anniversary of the closing of the Rainbow Transaction, upon the occurrence of a Buy-Out Trigger (as defined in the RPP Agreement), or upon the date on which Fox Sports RPP, a subsidiary of the Company, submits a notice, pursuant to the RPP Agreement, to remove the managing partner of RPP following a Change of Control of RPP (as defined in the RPP Agreement), Rainbow Regional Holdings, Inc. ("RRH"), a subsidiary of Rainbow, has the right to purchase from Fox Sports RPP all of Fox Sports RPP's interests in RPP. Additionally, for each of the (i) 30 days following the fifth anniversary of the closing of the Rainbow Transaction, (ii) 30 days following each third year anniversary of the fifth anniversary of the closing of the Rainbow Transaction and (iii) 30 days following receipt of a notice initiating the buy-out procedure described 42 above, so long as RPP has not commenced an initial public offering of its securities, RPP has the right to cause RRH, at RRH's option, to either (i) purchase all of its interests in Fox Sports RPP or (ii) consummate an initial public offering of RPP's securities. In connection with the Rainbow Transaction, Rainbow National Sports Holdings, Inc. ("RNSH"), a subsidiary of Cablevision, and Fox Sports NSP Holdings LLC ("Fox Sports NSP"), a subsidiary of the Company, agreed to form the National Sports Partnership to operate FSN. The National Sports Partnership is owned 50% by RNSH and 50% by Fox Sports NSP. Fox Sports NSP is the managing partner of the National Sports Partnership. For the 30 days following the fifth anniversary of the closing of the Rainbow Transaction and for the 30 days following each third year anniversary of the first anniversary of the closing of the Rainbow Transaction, so long as the National Sports Partnership has not consummated an initial public offering of its securities, RNSH has the right to cause Fox Sports NSP, at Fox Sports NSP's option, to either (i) purchase all of its interests in the National Sports Partnership or (ii) consummate an initial public offering of the National Sports Partnership's securities. Further, upon a Change of Control (as defined in the Partnership Agreement of the National Sports Partnership), the party not experiencing the Change of Control has a call option on all the interests held by the other party. Also in connection with the Rainbow Transaction, a subsidiary of Rainbow and Fox Sports Ad Sales agreed to form the National Advertising Partnership to act as the national advertising sales representative for the O&O RSNs and the RPP- owned and managed RSNs. The National Advertising Partnership is owned 50% by a subsidiary of Rainbow ("Rainbow Ad Sales") and 50% by Fox Sports Ad Sales. Fox Sports Ad Sales is the managing partner of the National Advertising Partnership. For the 30 days following the fifth anniversary of the closing of the Rainbow Transaction and for the 30 days following each third year anniversary of the fifth anniversary of the closing of the Rainbow Transaction, so long as the National Advertising Partnership has not consummated an initial public offering of its securities, Rainbow Ad Sales has the right to cause Fox Sports Ad Sales, at Fox Sports Ad Sales' option, to either (i) purchase all of its interests in the National Advertising Partnership or (ii) consummate an initial public offering of the National Advertising Partnership's securities. Further, upon a Change of Control (as defined in the Partnership Agreement of the National Advertising Partnership), the party not experiencing the Change of Control has a call option on all the interests held by the other party. Other Transactions Under agreements with the Company in connection with its formation, Fox, Liberty, and their respective affiliates provide technical, administrative, financial, treasury, accounting, tax, legal and other services to the Company and may make available certain of their respective employee benefit plans to officers and other employees of the Company. To date, except as disclosed below, the charges for any such services have been immaterial. In addition, Fox, Liberty, and their respective affiliates, and the Company have entered into a number of intercompany agreements covering matters such as lending arrangements, tax sharing, and the use of trade names and service marks by the Company. To date, except as disclosed below, the charges for any such arrangements have been immaterial. The terms of many of these agreements were not the result of arms' length negotiation. See "Business." The Company, News Corporation, TCI and Cablevision, through their respective subsidiaries and affiliates, each own or have interests in television programming entities. The presence of all such companies in the television programming business could give rise to potential conflicts of interest between them, including conflicts which may arise with respect to business dealings between them and when more than one of them may be pursuing the same business opportunity. Although News Corporation and TCI have agreed to conduct all of their future cable television sports programming activities in the United States through the Company so long as they both maintain their interests therein, Cablevision is not contractually obligated to do so, and such arrangements between News Corporation and TCI may be waived or modified at any time without the Company's consent. 43 The Company has had, and continues to have, a close strategic relationship with News Corporation and certain of its subsidiaries and affiliates, including Fox Broadcasting Company ("Fox Broadcasting"), and believes that this relationship is materially important to its business and business strategies. However, except as may be provided in the agreements between them, or in the agreements between News Corporation and TCI, or their respective subsidiaries or affiliates, which are discussed elsewhere in this report, neither News Corporation or its subsidiaries and affiliates, nor the Company are obligated to engage in any business transactions or jointly participate in any opportunities with the other, and the possibility exists that the current strategic relationships between the parties could materially change in the future. The Company is currently utilizing three transponders it subleases from WTCI, a subsidiary of TCI, one transponder it subleases from Fox Broadcasting and one it subleases from Fox Family Worldwide ("Fox Family"). The rental payment for the three transponders subleased from WTCI is approximately $285,000 per month and the rental payments for the transponders subleased from Fox Broadcasting and Fox Family are $130,000 and $41,600 per month, respectively. Two of the WTCI subleases expire on December 31, 1999 and the remaining WTCI sublease expires on December 31, 2000. The Fox Broadcasting sublease expires May 30, 1999 and the Fox Family sublease expires in June 2003. In addition, the Company currently subleases one transponder to each of Fox News Channel, FXM, NDTC, Fit-TV and Fox Sports International (all of which are affiliates of Fox). The monthly rental payment paid to the Company pursuant to each of these subleases is $185,000, $90,000, $180,000, $41,600 and $88,000, 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, promotional, management and other business services to the Company for which the Company pays an allocated fee. The expenses recognized by the Company for the provision of the above services for the eight months ended December 31, 1996 and the years ended December 31, 1997 and 1998 were approximately $1,184,900, $1,706,100 and $1,939,000, respectively. Included in these amounts are salaries, benefits and other related costs charged to the Company in connection with the services rendered to it by Mr. Hill and other individuals. Certain individuals, including Messrs. Martin, Shell and Thompson, rendering services to the Company for the eight months ended December 31, 1996 were employed by either News Corporation or its affiliates or TCI or its affiliates. Compensation and benefits paid to such individuals and related payroll costs were charged to the Company at cost. In addition, Fox provides legal services to the Company, for which the Company pays an allocated fee. There was no expense recognized by the Company for the provision of legal services for the eight months ended December 31 , 1996 and the year ended December 31, 1998. For the year ended December 31, 1997 the expense recognized by the Company for the provision of legal services was approximately $300,000. Similarly, the Company and certain of its affiliates provide production, programming, accounting, legal, marketing, public relations, promotional, management and other business services to an affiliate of Fox Broadcasting Company. The charges for these services to this affiliate for the eight months ended December 31, 1996 and the years ended December 31, 1997 and 1998 were approximately $750,0000, $1,000,000 and $1,000,000, respectively. The Company believes that all of the above-described arrangements are on terms no less favorable to the Company than could have been obtained from unaffiliated third parties. See "Directors and Executive Officers of the Company" and "Executive Compensation." Fox Broadcasting 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 Fox Sports News and other original programming. The services are provided at competitive market rates and the Company believes that the arrangements are on terms no less favorable than could have been obtained from an unaffiliated third party. Expenses related to these services for the eight months ended December 31, 1996 and the years ended December 31, 1997 and 1998 were approximately $8,545,000, $20,416,800 and $5,939,000, respectively. 44 Fox and its affiliates collect certain revenues and pay certain expenses on behalf of the Company. The Company charges interest to Fox on amounts due the Company which have been collected by Fox and, in turn, Fox and its affiliates charge interest to the Company 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 eight month period ended December 31, 1996 and the years ended December 31, 1997 and 1998 was approximately $785,500, $2,719,100 and $351,000, respectively, and interest expense incurred by the Company during these periods was $451,300, $1,569,600 and $25,000, respectively. Certain of the O&O RSNs have entered into affiliation agreements with various MSOs and/or individual cable systems which are either owned or operated by TCI. For the eight months ended December 31, 1996 and the years ended December 31, 1997 and 1998 revenue recognized from such MSOs and/or individual cable systems pursuant to these affiliation agreements was approximately $28,788,000, $43,687,400 and $56,761,000, respectively. FX has also entered into affiliation agreements with various MSOs and/or individual cable systems which are either owned or operated by TCI. For the eight months ended December 31, 1996 and the years ended December 31, 1997 and 1998 revenue recognized from such MSOs and/or individual cable systems pursuant to these affiliation agreements was approximately $21,388,000, $41,720,300 and $37,161,000, respectively. The Company believes that all of the above described affiliation agreements contain terms no less favorable than could have been obtained from an unaffiliated third party. Twentieth Century Fox Film Corporation and its affiliates purchase advertising time which is shown during the Company's programming. The advertising revenues recognized for the eight months ended December 31, 1996 and for the years ended December 31, 1997 and 1998 were approximately $408,200, $1,213,100 and $1,523,000, respectively. The Company licenses television and feature film programming from Twentieth Century Fox Film Corporation and affiliates. Expense recognized by the Company related to program rights amortization for the eight months ended December 31, 1996 and the years ended December 31, 1997 and 1998 was approximately $7,624,000, $17,963,000 and $30,674,000, 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 arises. As of December 31, 1998 the Company rented a total of 66,583 square feet at a rental rate of $4.18 per square foot per month. As of December 31, 1998, the monthly rental was $278,317. See "Properties." In March 1999, the Company agreed to sell its investment in Fit TV to an affiliate of Fox for $6 million in cash. The Company expects to record a loss from the sale of this investment in the amount of the excess of the Company's carrying value of the investment at the date of sale, including any related unamortized excess cost, over the selling price. The Company believes that the terms of this transaction were no less favorable to the Company than it could have obtained in a transaction with a non-affiliated third party. 45 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) The Following documents are filed as part of this Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 1.Financial Statements: Financial Statements to this form are listed in the "Index to Consolidated Financial Statements" at page F-1. 2.Schedules: Financial statement schedules to this form are listed in the "Index to Consolidated Financial Statements" at page F-1 herein. 3.Exhibits: 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. 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. 46 (b)* First Amended and Restated Agreement Regarding Ownership Interests, dated as of December 15, 1997, by and among Liberty Media Corporation, News America Holdings Incorporated, Fox Regional Sports Holdings, Inc., LMC Newco U.S., Inc., and Liberty/Fox 10.2* Operating Agreement of Fox Sports RPP Holdings, LLC, dated June 20, 1997, by and among Fox/Liberty Networks LLC, Liberty Sports Member, Inc. and Fox Regional Sports Member, Inc. 10.3* Operating Agreement of FX Networks, LLC (f/k/a Liberty/Fox FX Operations LLC), dated April 29, 1996, by and among Liberty/Fox U.S. Sports LLC, Liberty FX, Inc. and FX Holdings, Inc. 10.4(a)* Operating Agreement of Fox/Liberty Networks, LLC (f/k/a Liberty/Fox U.S. Sports LLC), dated April 29, 1996, by and among LMC Newco U.S., Inc., Fox Regional Sports Holdings, Inc. and Liberty/Fox Sports Financing LLC. (b)* First Amended and Restated Operating Agreement of Fox/Liberty Networks, LLC, dated December 15, 1997 by and among LMC Newco U.S., Inc., Fox Regional Sports Holdings, Inc. and Liberty/Fox Sports Financing LLC. 10.5* Operating Agreement of Fox Sports Net, LLC (f/k/a Liberty/Fox Regional Sports LLC), dated April 29, 1996, by and among Liberty/Fox U.S. Sports LLC, Liberty Sports Member, Inc. and Fox Regional Sports Member, Inc. 10.6* Formation Agreement, dated June 22, 1997, among Rainbow Media Sports Holdings, Inc. and Fox Sports Net, LLC. 10.7* Form of General Partnership Agreement of Regional Programming Partners between Rainbow Regional Holdings, Inc. and Fox Sports RPP Holdings, LLC. 10.8* Form of General Partnership Agreement of National Sports Partners between Rainbow National Sports Holdings, Inc. and Fox Sports National Holdings, LLC. 10.9* Form of General Partnership Agreement of National Advertising Partners between Rainbow Advertising Holdings, Inc. and Fox Sports Ad Sales Holdings, LLC. 10.10(a)* Credit Agreement, dated as of September 12, 1997, among Fox Sports Net, LLC and FX Networks, LLC, as Borrowers, and Fox/Liberty Networks, LLC and Subsidiary Guarantors, as Guarantors, and The Chase Manhattan Bank, as Administrative Agent, and Chase Securities Inc., as Syndication Agent, and TD Securities (USA) Inc., as Documentation Agent. (b)* Form of Amendment and Restated Credit Agreement 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. (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. 10.11*+ Employment Agreement among Fox/Liberty Networks, LLC, Anthony F.E. Ball and T Entertainment Limited, dated April, 1997. 10.12***+ Employment Agreement between Fox/Liberty Networks, LLC (f/k/a Liberty/Fox U.S. Sports LLC) and Jeff Shell, dated February 4, 1998. 47 10.13*+ Employment Agreement between Fox/Liberty Networks, LLC and Louis LaTorre, dated January 27, 1997. 10.14(a)*+ Employment Agreement between Fox/Liberty Networks, LLC and Robert L. Thompson, dated July 25, 1996, as amended on September 26, 1997. (b)+ Employment Agreement between Fox/Liberty Networks, LLC and Robert L. Thompson, dated June 1, 1998. 10.15(a)*+ Employment Agreement between Fox Sports Net, LLC and Tracy Dolgin, dated as of July 1, 1997. (b)+ Employment Agreement between Fox/Liberty Networks, LLC and Tracy Dolgin, dated February 12, 1999. 10.16***++ Fox/Liberty Networks, LLC Equity Appreciation Rights Plan for Management and Key Employees, effective as of May 1, 1996. 21 Subsidiaries of Registrant. 27 Financial Data Schedule. - -------- * 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. + 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. 48 SIGNATURES Pursuant to the requirement of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunder duly authorized. FOX/LIBERTY NETWORKS, LLC Dated: March 30, 1999 By: /s/ Jeff Shell ------------------------------ Jeff Shell Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates stated: Signature Title Date --------- ----- ---- /s/ Anthony F.E. Ball President and Chief March 30, 1999 ____________________________________ Executive Officer (Principal Anthony F.E. Ball Executive Officer) /s/ Jeff Shell Executive Vice President and March 30, 1999 ____________________________________ Chief Financial Officer Jeff Shell (Principal Financial Officer and Principal Accounting Officer) LMC Newco U.S., Inc. Member of Fox/Liberty March 30, 1999 Networks, LLC By: /s/ David J.A. Flowers ____________________________________ David J.A. Flowers Vice President Fox Regional Sports Holdings, Inc. Member of Fox/Liberty March 30, 1999 Networks, LLC By: /s/ Jay Itzkowitz ____________________________________ Jay Itzkowitz Senior Vice President Liberty/Fox Sports Financing, LLC Member of Fox/Liberty March 30, 1999 Networks, LLC By: LMC Newco U.S., Inc. Member of Liberty/Fox Sports March 30, 1999 Financing, LLC By: /s/ David J.A. Flowers ____________________________________ David J.A. Flowers Vice President By: Fox Entertainment Group, Inc. Member of Liberty/Fox Sports March 30, 1999 Financing, LLC By: /s/ Jay Itzkowitz ____________________________________ Jay Itzkowitz Senior Vice President 49 FOX/LIBERTY NETWORKS, LLC INDEX TO FINANCIAL STATEMENTS Page ---- Fox/Liberty Networks, LLC Consolidated Financial Statements....................................... F-2 Report of Independent Public Accountants................................ F-3 Consolidated Balance Sheets as of December 31, 1998 and 1997............ F-4 Consolidated Statements of Operations for the years ended December 31, 1998 and 1997 and the eight months ended December 31, 1996............. F-5 Consolidated Statements of Members' Equity for the years ended December 31, 1998 and 1997 and the eight months ended December 31, 1996......... F-6 Consolidated Statements of Cash Flows for the years ended December 31, 1998 and 1997 and the eight months ended December 31, 1996............. F-7 Notes to Consolidated Financial Statements.............................. F-8 Liberty Sports, Inc. and subsidiaries--Domestic Operations Financial Statements.................................................... F-22 Independent Auditors' Report............................................ F-23 Combined Statements of Operations and Equity for the period January 1, 1996 to April 29, 1996................................................. F-24 Combined Statements of Cash Flows for the period January 1, 1996 to April 29, 1996......................................................... F-25 Notes to Combined Financial Statements.................................. F-26 FX Networks, LLC Financial Statements.................................................... F-30 Report of Independent Public Accountants................................ F-31 Statements of Operations for the periods ended April 29, 1996........... F-32 Statements of Cash Flows for the periods ended April 29, 1996........... F-33 Notes to Financial Statements........................................... F-34 Liberty/Fox ARC, L.P. Consolidated Financial Statements....................................... F-37 Consolidated Statement of Operations for the period from Inception (April 30, 1996) to December 31, 1996 (unaudited)...................... F-38 Consolidated Statement of Cash Flows for the period from Inception (April 30, 1996) to December 31, 1996 (unaudited)...................... F-39 Notes to Consolidated Financial Statements.............................. F-40 Regional Programming Partners Consolidated Financial Statements....................................... F-46 Report of Independent Public Accountants................................ F-47 Consolidated Balance Sheet as of December 31, 1998 and December 31, 1997................................................................... F-48 Consolidated Statements of Income for the year ended December 31, 1998 and the period from December 18, 1997 (Inception) to December 31, 1997................................................................... F-49 Consolidated Statements of Partners' Capital for the year ended December 31, 1998 and the period from December 18, 1997 (Inception) to December 31, 1997............................................................... F-50 Statements of Cash Flows for the year ended December 31, 1998 and the period from December 18, 1997 (Inception) to December 31, 1997......... F-51 Notes to Consolidated Financial Statements.............................. F-52 Condensed Financial Statements of the Company on Schedule Report of Independent Public Accountants on Schedule.................... S-2 Schedule I--Balance Sheets as of December 31, 1998 and 1997............. S-3 Schedule I--Statements of Operations for the periods ended December 31, 1998, 1997 and 1996.................................................... S-4 Schedule I--Statements of Cash Flows for the periods ended December 31, 1998, 1997 and 1996.................................................... S-5 Schedule I--Notes to Condensed Financial Statements..................... S-6 Schedule II--Valuation and Qualifying Accounts for the periods ended December 31, 1998, 1997 and 1996....................................... S-7 F-1 FOX/LIBERTY NETWORKS, LLC CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 1998 and 1997 With Report of Independent Public Accountants F-2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Members of Fox/Liberty Networks, LLC: We have audited the accompanying consolidated balance sheets of FOX/LIBERTY NETWORKS, LLC and subsidiaries, a Delaware limited liability company (the "Company") as of December 31, 1998 and 1997, and the related consolidated statements of operations, members' equity and cash flows for the years ended December 31, 1998 and 1997 and the period from inception (April 30, 1996) to December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fox/Liberty Networks, LLC and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for the years ended December 31, 1998 and 1997 and the period from inception (April 30, 1996) to December 31, 1996 in conformity with generally accepted accounting principles. Arthur Andersen LLP Los Angeles, California February 19, 1999 F-3 FOX/LIBERTY NETWORKS, LLC (A Delaware Limited Liability Company) CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1997 (Dollars in thousands) December 31, --------------------- 1998 1997 ---------- ---------- ASSETS ------ Current assets: Cash and cash equivalents............................. $ 42,918 $ 49,560 Trade and other receivables, net of allowance for doubtful accounts of $9,324 and $1,714 at December 31, 1998 and 1997.................................... 138,139 136,661 Receivables from equity affiliates, net............... 33,577 37,858 Program rights........................................ 88,620 50,373 Notes receivable, current............................. 1,928 3,376 Prepaid expenses and other current assets............. 9,939 7,886 ---------- ---------- Total current assets................................ 315,121 285,714 Property and equipment, net............................. 49,306 42,027 Investments in affiliates............................... 871,432 850,201 Note receivable, long-term.............................. 24 4,432 Program rights.......................................... 106,459 78,110 Excess cost, net of accumulated amortization of $86,470 and $72,170 at December 31, 1998 and 1997.............. 521,133 514,608 Other assets............................................ 28,460 42,666 ---------- ---------- Total Assets........................................ $1,891,935 $1,817,758 ========== ========== LIABILITIES AND MEMBERS' EQUITY ------------------------------- Current liabilities: Accounts payable and accrued expenses................. $ 164,329 $ 176,241 Program rights payable................................ 56,651 23,232 Current portion of long-term debt..................... 15,450 80,216 Accrued interest...................................... 24,833 17,413 Other current liabilities............................. 13,806 11,515 ---------- ---------- Total current liabilities........................... 275,069 308,617 Non-current program rights payable...................... 123,581 110,693 Long-term debt, net of current portion.................. 1,401,891 1,246,291 Minority interest....................................... 1,191 (114) Commitments and contingencies Members' equity......................................... 90,203 152,271 ---------- ---------- Total Liabilities and Members' Equity............... $1,891,935 $1,817,758 ========== ========== The accompanying notes are an integral part of these consolidated balance sheets. F-4 FOX/LIBERTY NETWORKS, LLC (A Delaware Limited Liability Company) CONSOLIDATED STATEMENTS OF OPERATIONS For the Periods Ended December 31, 1998, 1997 and 1996 (Dollars in thousands) Year ended Year ended April 30 to December 31, December 31, December 31, 1998 1997 1996 ------------ ------------ ------------ Revenues: Programming........................... $301,734 $226,469 $ 85,288 Advertising........................... 160,499 117,874 37,685 Direct broadcast...................... 121,759 91,663 5,711 Infomercial........................... 23,270 16,420 4,261 Merchandising......................... -- -- 3,226 Other................................. 47,932 19,366 8,621 -------- -------- --------- 655,194 471,792 144,792 -------- -------- --------- Expenses: Operating............................. 485,276 420,888 197,445 General and administrative............ 90,662 65,558 31,609 Depreciation and amortization......... 21,662 18,968 8,507 -------- -------- --------- 597,600 505,414 237,561 -------- -------- --------- Operating income (loss)................. 57,594 (33,622) (92,769) -------- -------- --------- Other (income) expenses: Interest, net......................... 110,425 34,142 3,819 Subsidiaries' income tax expense (benefit), net....................... 1,456 (1,590) 3,437 Loss on sale of assets................ 121 -- 4,913 Equity loss of affiliates, net........ 5,913 9,018 12,024 Other................................. (1,478) 401 -- Minority interest..................... 3,225 2,864 187 -------- -------- --------- 119,662 44,835 24,380 -------- -------- --------- Net loss................................ $(62,068) $(78,457) $(117,149) ======== ======== ========= The accompanying notes are an integral part of these consolidated financial statements. F-5 FOX/LIBERTY NETWORKS, LLC (A Delaware Limited Liability Company) CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY For the Periods Ended December 31, 1998, 1997 and 1996 (Dollars in thousands) LMC Liberty/Fox Fox Regional Total Newco Sports Financing, Sports Members' US, Inc. LLC Holdings, Inc. Equity -------- ----------------- -------------- --------- BALANCE, APRIL 30, 1996.. $ 8,000 $243,577 $ 96,300 $ 347,877 (representing the initial contributions of the members) Net loss............... (36,132) (44,885) (36,132) (117,149) -------- -------- -------- --------- BALANCE, DECEMBER 31, 1996.................... (28,132) 198,692 60,168 230,728 Net loss............... (24,199) (30,059) (24,199) (78,457) -------- -------- -------- --------- BALANCE, DECEMBER 31, 1997.................... (52,331) 168,633 35,969 152,271 Net loss............... (19,144) (23,780) (19,144) (62,068) -------- -------- -------- --------- BALANCE, DECEMBER 31, 1998.................... $(71,475) $144,853 $ 16,825 $ 90,203 ======== ======== ======== ========= The accompanying notes are an integral part of these consolidated financial statements. F-6 FOX/LIBERTY NETWORKS, LLC (A Delaware Limited Liability Company) CONSOLIDATED STATEMENTS OF CASH FLOWS For the Periods Ended December 31, 1998, 1997 and 1996 (Dollars in thousands) Year ended Year ended April 30 to December 31, December 31, December 31, 1998 1997 1996 ------------ ------------ ------------ Cash flows from operating activities: Net loss.............................. $(62,068) $ (78,457) $(117,149) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Additional amortization of program rights............................. -- -- 80,000 Depreciation and amortization....... 21,662 18,968 8,507 Interest accretion and amortization of debt issuance costs............. 29,868 9,431 -- Loss on sale of assets.............. 121 -- 4,913 Equity loss of affiliates........... 5,913 9,018 12,024 Minority interests.................. 3,225 2,864 187 Changes in operating assets and liabilities: Trade and other receivables......... (1,373) (47,296) (8,029) Program rights...................... (65,871) (77,266) (3,205) Prepaid expenses and other operating assets............................. (4,812) (10,715) (239) Accounts payable and accrued expenses........................... (14,529) 51,462 33,939 Program rights payable.............. 46,278 26,749 (1,149) Other operating liabilities......... 9,553 18,517 4,512 -------- ---------- --------- Net cash (used in) provided by operating activities............. (32,033) (76,725) 14,311 -------- ---------- --------- Cash flows from investing activities: Advances from equity affiliates....... 96,084 102,497 56,666 Advances to equity affiliates......... (92,913) (106,555) (78,651) Notes receivable collected from (issued to) third parties............ 5,856 540 (1,700) Purchases of property and equipment... (14,665) (31,321) (11,202) Distributions from equity affiliates.. 40,051 4,704 563 Investments in equity affiliates...... (67,671) (857,325) (4,046) 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 -- -- Cash sold upon sale of merchandising assets............................... -- -- (429) -------- ---------- --------- Net cash used in investing activities....................... (35,976) (932,460) (38,799) -------- ---------- --------- Cash flows from financing activities: Cash overdraft, included in accounts payable.............................. -- -- 2,133 Borrowings of long-term debt.......... 155,000 1,720,078 48,448 Repayment of long-term debt........... (91,713) (648,960) (24,800) Deferred debt issuance costs.......... -- (18,357) -- Distribution to minority shareholder of subsidiary........................ (1,920) (1,980) (600) -------- ---------- --------- Net cash provided by financing activities....................... 61,367 1,050,781 25,181 -------- ---------- --------- Net (decrease) increase in cash and cash equivalents............................ (6,642) 41,596 693 Cash and cash equivalents, beginning of period................................. 49,560 7,964 7,271 -------- ---------- --------- Cash and cash equivalents, end of period................................. $ 42,918 $ 49,560 $ 7,964 ======== ========== ========= The accompanying notes are an integral part of these consolidated financial statements. F-7 FOX/LIBERTY NETWORKS, LLC (A Delaware Limited Liability Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 (Dollars in thousands) (1) Organization Fox/Liberty 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. The Company's members as of December 31, 1998 and 1997, were: Interest -------- LMC Newco U.S., Inc. ("LMCI") .................................... 30.843% (a wholly-owned subsidiary of Liberty Sports, Inc. ("LSI"), a wholly-owned subsidiary of Liberty Media Corporation ("LMC")) Fox Regional Sports Holdings, Inc. ("FRSH")....................... 30.843% (a wholly-owned subsidiary of Fox Entertainment Group, Inc. ("Fox"), a majority owned subsidiary of News America Incorporated ("NAI"), a wholly-owned subsidiary of The News Corporation Limited) Liberty/Fox Sports Financing, LLC................................. (50% owned by each of LMCI and Fox) 38.314% ------- 100.000% ======= Liberty Sports, Inc. (a predecessor operation) contributed its interest in regional sports programming businesses (which then operated under the name "Prime Sports"), interests in non-managed sports businesses, satellite distribution services and technical facilities. Fox and its subsidiaries contributed cash, all of its assets and liabilities in the FX cable network (a predecessor operation), and certain assets related to regional sports programming. (2) Significant Accounting Policies (a) Basis of Presentation The accompanying consolidated financial statements include the operations of the Company and those majority-owned subsidiaries and entities for which there is a controlling voting interest. All significant intercompany accounts and transactions have been eliminated in consolidation. The subsidiaries consolidated include the following intermediary holding companies (and their subsidiaries): Fox Sports Net, LLC, which is comprised of the following: --Liberty/Fox West LLC --Liberty/Fox ARC LP --Fox/Liberty Ad Sales LLC --Liberty/Fox Southeast LLC --Liberty/Fox Northwest LP --Liberty/Fox Utah LLC --Liberty/Fox Sunshine LLC --Liberty/Fox Arizona LLC --Fox Sports Detroit, LLC --Fox/Liberty Network Programming LLC FX Networks, LLC Fox Sports RPP Holdings, LLC 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. F-8 FOX/LIBERTY NETWORKS, LLC (A Delaware Limited Liability Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 (Dollars in thousands) In September 1997, Fox Sports Detroit, LLC a majority-owned subsidiary of the Company, was formed for the purpose of providing sports and sports related programming in the Detroit, Michigan area (See Note 3(e)). In December 1997, the Company consummated a transaction with Rainbow Media Sports Holdings, Inc. ("Rainbow"), a subsidiary of CSC Holdings, Inc. (formerly Cablevision Systems Corporation) ("Cablevision"), pursuant to which (i) Fox Sports RPP Holdings, LLC was formed to hold an interest in Regional Programming Partners ("RPP"), which in turn was formed to hold interests in Rainbow's existing regional sports networks ("RSN's") and certain other businesses, (ii) National Sports Partners ("NSP") was formed to operate Fox Sports Net ("FSN") a national programming service, and (iii) National Advertising Partners ("NAP") was formed to act as the national advertising sales representative for the RSNs which are affiliated with FSN. The Company contributed $850,000 for its 40 percent interest in RPP, which exceeded its equity in the underlying net assets of RPP by $314,420 (See Note 6(b)). Had the investment occurred at the beginning of the year ended December 31, 1997 (January 1, 1997) and the eight month period December 31, 1996 (April 30, 1996), pro-forma net loss would have increased by $2,234 and $9,099, respectively. The pro-forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the investment occurred on the dates indicated, or which may result in the future. (b) Cash Equivalents Cash equivalents consist of short-term investments with an original maturity of less than 90 days. The carrying amounts of cash and cash equivalents approximate their fair values due to their short maturities. (c) Program Rights The Company has multi-year contracts for the cable telecast rights of syndicated entertainment programs and sporting events. Pursuant to these contracts, an asset is recorded for the rights acquired and a liability is recorded for the obligation incurred, at the gross amount of the liability when the programs or sporting events are available for telecast. Program rights for entertainment programs are amortized over the term of the contract using the straight-line method. Program rights for sporting events which are for a specified number of games are amortized on an event-by-event basis, and those which are for a specified season are amortized over the term of the season on a straight-line basis. At the inception of these contracts and periodically thereafter, the Company evaluates the recoverability of the costs associated therewith against the advertising revenues directly associated with the program material and related expenses. Where an evaluation indicates that a multi-year contract will result in an ultimate loss, additional amortization is provided to currently recognize that loss. The Company and its predecessor, Liberty Sports, Inc., have entered into or committed to contracts for program rights to telecast college football and Major League Baseball games, respectively. In 1996, the Company performed an in-depth evaluation and determined that these contracts would produce losses over the term of the respective contracts. Accordingly, the Company and its affiliates recorded $109,000 in additional amortization related to these contracts during the period from inception (April 30, 1996) to December 31, 1996. (d) Property and Equipment Property and equipment are stated at cost, which includes acquisition costs allocated to tangible assets acquired. Depreciation and amortization for financial statement purposes are provided using the straight-line method over an estimated useful life of five to ten years. F-9 FOX/LIBERTY NETWORKS, LLC (A Delaware Limited Liability Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 (Dollars in thousands) (e) Other Assets At December 31, 1998 and 1997 other assets included $17,063 and $17,896, respectively, of debt issuance costs related to the issuance of Senior Notes and Senior Discount Notes (the "Notes"--See Note 7(c)). These costs are amortized using the effective interest method over the term of the Notes. Amortization expense was $1,358 and $461 for the years ended December 31, 1998 and 1997 and is included in interest expense. (f) Income Taxes No provision has been made for federal, state or foreign income taxes, as the liability for such income taxes is the responsibility of the members. (g) Investments in Affiliates The consolidated financial statements include the operations of subsidiary companies more than 50% owned. Investments in and advances to affiliates in which the Company has a substantial ownership interest of approximately 20 to 50%, or for which the Company owns more than 50% but does not control policy decisions, are accounted for by the equity method. Under this method of accounting, the original investment is increased or decreased by the Company's share of income or losses and dividends. Partnerships in which the Company acts as a limited partner, but in which the third party general partner exercises management control, are not consolidated regardless of the ownership interest. If these investments meet the conditions outlined in the paragraph above then the partnerships are accounted for under the equity method. (h) Excess Cost Excess cost represents the difference between the cost of acquiring programming entities and amounts assigned to their tangible and intangible assets. Such amounts are amortized on a straight-line basis over 40 years. Amortization expense was $14,300, $11,776 and $5,241 for the years ended December 31, 1998 and 1997 and the period from inception (April 30, 1996) to December 31, 1996, respectively. The Company periodically reviews the propriety of the carrying amount of its excess cost as well as the related amortization period to determine whether current events or circumstances warrant adjustments to the carrying value and/or the estimates of useful lives. This evaluation consists of the Company's projection of undiscounted operating cash flows over the remaining lives of the excess cost. Based on its review, the Company believes that no significant impairment of its excess cost has occurred. (i) Revenue Revenue from programming represents monthly subscriber fees received from cable system operators and is recognized as earned. Advertising revenue is recognized upon airing of commercials. The Company has sold advance subscriptions to its direct broadcast satellite customers. Such amounts are amortized to revenue monthly as revenue is earned. Infomercial revenue is recognized when the program is aired. (j) Non-Monetary Transactions The Company trades commercial advertising spots in return for other services, primarily programming. These trades are recorded at the fair value of the asset surrendered or the fair value of the asset obtained, whichever is more clearly evident. These transactions resulted in the recording of approximately $4,173, $8,539 F-10 FOX/LIBERTY NETWORKS, LLC (A Delaware Limited Liability Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 (Dollars in thousands) and $2,512 in both advertising revenue and programming expenses during the years ended December 31, 1998 and 1997 and the period from inception (April 30, 1996) to December 31, 1996, respectively. (k) Use of Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates. (l) Long-Lived Assets In March 1995, the Financial Accounting Standards Board issued Statement No. 121 ("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(h) for the policy on excess cost. (m) 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. (n) Major Customers The Company recognized revenue from one customer which represented 14.3% of consolidated revenues. (o) Reclassifications Certain reclassifications have been made to the prior year balances in order to conform to the current year presentation. F-11 FOX/LIBERTY NETWORKS, LLC (A Delaware Limited Liability Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 (Dollars in thousands) (3) Supplemental Disclosures to Consolidated Statements of Cash Flows Supplemental disclosure of cash flow information and non-cash investing and financing activities for the period from inception (April 30, 1996) to December 31, 1996 are as follows: December 31, 1996 ---------------------------------------------------- Acquisition Disposal Total -------------------------- ---------------- -------- Prime Sports Northwest(a) SportSouth(b) Merchandising(c) ------------ ------------- ---------------- Fair value of net assets acquired/(disposed): Cash.................. $ 1,328 $ 3,626 $ (429) $ 4,525 Accounts receivable... 4,663 10,691 (600) 14,754 Prepaid program rights............... 425 -- -- 425 Prepaid expenses and other current assets............... 304 84 (10) 378 Inventory............. -- -- (3,064) (3,064) Investment............ -- (2,135) -- (2,135) Excess cost........... -- -- (5,771) (5,771) Other assets.......... 46 102 (105) 43 Property, plant and equipment, net....... 2,832 259 (1,064) 2,027 Notes receivable...... 40 -- -- 40 Accounts payable and accrued expenses (809) (1,640) 2,330 (119) Program rights payable.............. (91) -- -- (91) Notes payable......... -- (18,002) -- (18,002) ------- -------- ------- -------- 8,738 (7,015) (8,713) (6,990) Less: existing investment in affiliates............. (6,427) 471 -- (5,956) ------- -------- ------- -------- 2,311 (6,544) (8,713) (12,946) Satisfied by: Cash.................. (9,000) -- -- (9,000) Note payable.......... -- (65,334) -- (65,334) Note receivable....... -- -- 3,800 3,800 ------- -------- ------- -------- Subtotal................ -- -- -- (83,480) ------- -------- ------- -------- Excess cost............. $(6,689) $(71,878) $(78,567) ======= ======== ======== Loss on sale............ $(4,913) $ (4,913) ======= ======== (a) In July 1996, the Company paid $9,000 to Viacom, Inc. to purchase an additional 40% interest in its affiliate, Prime Sports Northwest Network. Subsequent to the purchase, Prime Sports Northwest Network was consolidated with the Company. Had the additional 40% interest been acquired at inception (April 30, 1996), the consolidated pro forma revenue and income would have increased by $5,886 and $648, respectively. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the acquisitions occurred on the date indicated, or which may result in the future. (b) In October 1996, the Company purchased an additional 44% interest in its affiliate, SportSouth Network, Ltd. ("SportSouth"), through the issuance of a note in the amount of $65,334. SportSouth was then F-12 FOX/LIBERTY NETWORKS, LLC (A Delaware Limited Liability Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 (Dollars in thousands) consolidated with the Company. Had the additional 44% interest been acquired at inception (April 30, 1996), the consolidated pro forma revenue and income would have increased by $19,490 and $5,072, respectively. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of results of operations which actually would have resulted had the acquisitions occurred on the date indicated, or which may result in the future. (c) In September 1996, the Company received a note receivable for approximately $3,800 in connection with the sale of its merchandising assets. Supplemental disclosure of cash flow information and non-cash investing and financing activities for the year ended December 31, 1997 is as follows: December 31, 1997(e)(f) ARC Ltd(d) ------------ Fair value of net assets acquired: Cash.......................................................... $ -- Accounts receivable........................................... 26,793 Prepaid program rights........................................ 4,764 Prepaid expenses and other current assets..................... 19,249 Investment.................................................... 6,739 Excess cost................................................... 103,806 Other assets.................................................. 305 Property, plant and equipment, net............................ 11,818 Notes receivable.............................................. 6,869 Accounts payable and accrued expenses......................... (25,520) Program rights payable........................................ (3,522) Unearned revenue.............................................. (4,744) Notes payable................................................. (49,000) -------- 97,557 Satisfied by: Original investment........................................... (97,557) -------- Excess cost..................................................... $ -- ======== (d) In March 1997, Liberty/Fox ARC LP, an affiliate of the Company, paid $40,000 to Group W to purchase the remaining 12.78% interest in Affiliated Regional Communications, LTD and Affiliates ("ARC"). This transaction resulted in Liberty/Fox ARC LP recording $25,785 in excess costs. In conjunction with this transaction, the Company assumed management control of the consolidated subsidiaries of Liberty/Fox ARC LP. Subsequent to the purchase, the consolidated subsidiaries of ARC were consolidated with the Company (see Note 2(a)). Had the additional 12.78% interest been acquired at January 1, 1997 with respect to the year ended December 31, 1997 and April 30, 1996 with respect to the eight months ended December 31, 1996, the pro forma consolidated revenue would have increased by $29,913 and $107,531, respectively, and pro forma consolidated income would have increased by $372 and $482, respectively. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the acquisitions occurred on the date indicated, or which may result in the future. (e) In September 1997, the Company formed Fox Sports Detroit, LLC for the purpose of providing sports and sports related programming to the Detroit, Michigan area. Fox Sports Detroit, LLC entered into agreements to pay cash of $45,000 and issue notes payable totaling $25,558 to secure certain sports programming rights F-13 FOX/LIBERTY NETWORKS, LLC (A Delaware Limited Liability Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 (Dollars in thousands) 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. (f) In December 1997, the Company contributed net assets of $14,926 and $2,741 to NSP and NAP, respectively, for a 50% interest in each partnership. The net assets contributed were comprised of certain accounts receivables, fixed assets, investments and accrued liabilities. 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(g) --------- Fair value of net assets acquired: Cash............................................................. $ 132 Accounts receivable.............................................. 650 Prepaid program rights........................................... 725 Prepaid expenses................................................. 200 Fixed assets..................................................... 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 ======= (g) 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, and April 30, 1996 with respect to the eight months ended December 31, 1996, the pro forma revenue would have increased by $4,074 and $2,855, respectively, and net loss would have increased by $7,561 and $4,429, 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 acquisition occurred on the date indicated, or which may result in the future. Cash paid for interest was $76,154, $24,848 and $5,330 for the years ended December 31, 1998 and 1997 and the period from inception (April 30, 1996) to December 31, 1996, respectively. F-14 FOX/LIBERTY NETWORKS, LLC (A Delaware Limited Liability Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 (Dollars in thousands) (4) Related Party Transactions For the years ended December 31, 1998 and 1997 and the period from inception (April 30, 1996) to December 31, 1996, the Company recognized the following revenue and expenses as a result of arms-length transactions with affiliates of LMCI and Fox: Year ended Year ended April 30, to December 31, December 31, December 31, 1998 1997 1996 ------------ ------------ ------------ Revenue: Programming......................... $93,922 $92,244 $23,229 Advertising......................... 1,523 3,183 326 Direct broadcast.................... -- 2,082 5,711 Interest income..................... 351 2,719 108 Other............................... 19,606 -- 3,358 Expenses: Operating........................... 62,216 65,736 12,631 General and administrative.......... 2,775 4,156 2,340 Interest expense.................... 25 1,570 293 At December 31, 1998 and 1997, receivables from related parties were $19,962 and $29,293, respectively, and payables to related parties were $19,631 and $21,476, respectively. The Company has a non exclusive, royalty-free license from affiliates of Fox to use the "FOX" brand name and certain related artwork in connection with the Company's business. (5) Property and Equipment Property and equipment at December 31, 1998 and 1997 consisted of the following: December 31, ------------------ 1998 1997 -------- -------- Studio and production equipment.......................... $ 50,455 $ 26,847 Office equipment......................................... 16,733 14,823 Construction in progress................................. 11,450 21,357 Other.................................................... 6,518 5,614 -------- -------- 85,156 68,641 Accumulated depreciation................................. (35,850) (26,614) -------- -------- $ 49,306 $ 42,027 ======== ======== F-15 FOX/LIBERTY NETWORKS, LLC (A Delaware Limited Liability Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 (Dollars in thousands) (6) Investments Accounted for Under the Equity Method (a) Significant Subsidiaries Summarized unaudited financial information for significant subsidiaries, as defined in Rule 1-02(w) of Regulation S-X, accounted for under the equity method is as follows: Combined Financial Position December 31, --------------------- 1998 1997 ---------- ---------- Current Assets........................................ $ 523,347 $ 584,433 Non-Current Assets.................................... 1,883,399 1,820,560 ---------- ---------- Total Assets.......................................... $2,406,746 $2,404,993 ========== ========== Current Liabilities................................... $ 356,004 $ 400,986 Non-Current Liabilities............................... 573,111 588,881 Minority Interest..................................... 64,117 129,495 Partners' Equity...................................... 1,413,514 1,285,631 ---------- ---------- Total Liabilities and Equity.......................... $2,406,746 $2,404,993 ========== ========== Combined Operations Year ended Year ended April 30, to December 31, December 31, December 31, 1998 1997 1996 ------------ ------------ ------------ Gross Revenue......................... $783,156 $ 66,167 $125,373 Operating (Loss) Profit............... (65,062) (24,647) 14,270 Net (Loss) Income..................... (29,834) (24,663) 7,205 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/LIBERTY NETWORKS, LLC (A Delaware Limited Liability Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 (Dollars in thousands) (b) Unconsolidated Affiliates The following table reflects the Company's ownership interests in majority and minority owned affiliates as of: December 31, ------------- Entity 1998 1997 ------ ------ ------ Majority Owned Affiliates Liberty/Fox Chicago LP....................................... 98.0% 98.0% Liberty/Fox KBL LP........................................... 60.0% 60.0% Liberty/Fox Bay Area LP...................................... 98.0% 98.0% Liberty/Fox Upper Midwest LP................................. 98.0% 98.0% Liberty/Fox Distribution LP.................................. 98.0% 98.0% Minority Owned Affiliates LMC Sunshine Inc............................................. 48.5% 48.5% Cable Ad Partners-cost method................................ 0.0% 8.0% Sunshine Network Joint Venture............................... 49.0% 49.0% Prime Sports Network-Upper Midwest Joint Venture............. 33.0% 33.0% Home Team Sports Limited Partnership......................... 34.3% 34.3% Prime Sports Channel Prism Associates........................ 0.0% 33.3% Mountain Mobile TV........................................... 33.3% 33.3% Regional Programming Partners................................ 40.0% 40.0% National Sports Partners..................................... 50.0% 50.0% National Advertising Partners................................ 50.0% 50.0% CTV Sports Net............................................... 20.0% 0.0% 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 ------------------------- December 31, December 31, Entity 1998 1997 ------ ------------ ------------ Majority Owned Affiliates............................. $( 7,734) $(20,845) Minority Owned Affiliates............................. 879,166 871,046 -------- -------- $871,432 $850,201 ======== ======== Equity in Earnings (Losses) --------------------------------------------- Period from Year ended Year ended Inception December 31, December 31, (April 30, 1996) to Entity 1998 1997 December 31, 1996 ------ ------------ ------------ ------------------- Majority Owned Affiliates........ $ 13,111 $(2,288) $(17,163) Minority Owned Affiliates........ (19,024) (6,730) 5,139 -------- ------- -------- $ (5,913) $(9,018) $(12,024) ======== ======= ======== F-17 FOX/LIBERTY NETWORKS, LLC (A Delaware Limited Liability Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 (Dollars in thousands) Prior to the contribution of the above majority owned entities to the Company (see Note 1), there were certain regional networks that were wholly owned and consolidated by Liberty Sports, Inc. (a predecessor company and a Company shareholder). Upon contribution of these entities to the Company, Liberty Sports, Inc. retained management control through a general partnership minority interest. Hence, these operations are not consolidated by the Company, although it owns the majority of the limited partnership interests. The Company's investment in several of its affiliates exceeded its equity in the underlying net assets by a total of $334,096 and $342,302 at December 31, 1998 and 1997, respectively. These excess amounts are being amortized on a straight-line basis over 40 years. The amortization aggregated $7,876, $1,025 and $574 during the years ended December 31, 1998 and 1997 and the period from inception (April 30, 1996) to December 31, 1996, respectively, and is included in the Company's share of equity income of affiliates. (7) Debt Debt at December 31, 1998 and 1997 is summarized as follows: December 31, ------------------------ 1998 1997 ------------ ---------- Turner Note Payable(a)........................... $ -- $ 65,334 Chase Manhattan Bank--Term(b).................... 400,000 400,000 Chase Manhattan Bank--Revolver(b)................ 205,000 60,000 Senior Notes(c).................................. 500,000 500,000 Senior Discount Notes(c)......................... 286,878 260,828 Other............................................ 25,463 40,345 ------------ ---------- 1,417,341 1,326,507 Less current portion............................. (15,450) (80,216) ------------ ---------- $ 1,401,891 $1,246,291 ============ ========== Annual future minimum maturities of debt are as follows: 1999........................................... $ 15,450 2000........................................... 22,344 2001........................................... 85,052 2002........................................... 100,223 2003........................................... 227,394 Thereafter..................................... 966,878 ------------ $ 1,417,341 ============ 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. (a) On October 10, 1996, LMC Southeast Sports, Inc. purchased Turner Sports Programming, Inc.'s 44% partnership interest in SportSouth. LMC Southeast Sports, Inc. signed a promissory note to Turner Broadcasting Company for $65,334, plus interest at a rate of 7.5% per annum. The Note was paid in full at maturity on October 10, 1998. F-18 FOX/LIBERTY NETWORKS, LLC (A Delaware Limited Liability Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 (Dollars in thousands) (b) 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. The Credit Agreement provides for a $400,000 term loan and a $400,000 revolving credit facility ("the Facilities"). Borrowings under the Facilities are guaranteed by the Company, the Co-Borrowers and certain subsidiaries of Fox Sports Net, LLC and are secured by substantially all of the assets of the Company. Borrowings under the facilities bear interest, at the option of the Co-Borrowers, at a rate based upon the prime rate of interest or eurodollar rates. The Co-Borrowers also pay a commitment fee on the unused and available amounts under the revolving credit facility. The revolving credit commitments will reduce on a quarterly basis commencing December 31, 2000; principal payments under the term loan will also be required quarterly commencing December 31, 2000. The Credit Agreement provides for the maintenance of several financial and other covenants, including a leverage ratio, an interest coverage ratio and a fixed charge coverage ratio, among others. The Company was in compliance with the debt covenants as of December 31, 1998. (c) In August 1997, 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") 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 December 31, 1998 and 1997 the unamortized discount on the Senior Discount Notes was $118,122 and $144,669, respectively. Interest expense, resulting from the amortization of the discount, was $26,547 and $8,053 for 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 $112,961, $49,183 and $4,235 for the years ended December 31, 1998 and 1997 and the period from inception (April 30, 1996) to December 31, 1996, respectively. Interest income was $2,536, $15,041 and $416 for the years ended December 31, 1998 and 1997 and the period from inception (April 30, 1996) to December 31, 1996, 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 LMC and Fox. Generally, each regional sports network is owned by the Company through a chain of entities in which the Company has a direct or indirect interest of approximately 98%, with the remaining fractional interests being held equally by the affiliates of Fox and LMC. F-19 FOX/LIBERTY NETWORKS, LLC (A Delaware Limited Liability Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 (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 years, ended December 31, 1998 and 1997, the Company contributed $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 has been appointed by the Company to administer and interpret this Plan. The maximum number of Appreciation Rights available for grant under this plan is 300,000. Unless otherwise determined by the committee, the rights vest over five years and can be exercised over a period ending on the tenth anniversary of the granting of the rights. The amount payable by the Company with respect to any Appreciation Right exercised will equal the excess, if any, of the value at December 31 of the preceding year over the original grant value. The valuation may be performed by the Company or by a third party. During 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 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 December 31, 1998 and 1997, 118,260 and 74,040 rights had vested, respectively, with a weighted average exercise period of 7.3 years at December 31, 1998. A valuation at December 31, 1998 has not been completed. Compensation expense of $13,526 has been recorded through December 31, 1998 with respect to vested Appreciation Rights. (11) Commitments and Contingencies (a) Operating Leases The Company leases transponders, office facilities, and equipment and microwave channels used to carry its broadcast signals. These leases, which are classified as operating leases, expire at various dates through 2010. Future minimum payments, by year under noncancelable operating leases with a term of one year or more consist of the following at December 31, 1998: 1999............................................................ $ 20,291 2000............................................................ 13,794 2001............................................................ 11,768 2002............................................................ 10,752 2003............................................................ 10,193 Thereafter...................................................... 24,481 -------- Total minimum lease payments.................................... $ 91,279 ======== Total lease expense was approximately $27,396, $17,137 and $7,881 for the years ended December 31, 1998 and 1997 and the period from inception (April 30, 1996) to December 31, 1996, respectively. F-20 FOX/LIBERTY NETWORKS, LLC (A Delaware Limited Liability Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 (Dollars in thousands) (b) Long-term Program Rights Contracts The Company has long-term program rights contracts which require payments through 2009. Future minimum payments, including unrecorded amounts, by year are as follows at December 31, 1998: 1999.......................................................... $ 258,529 2000.......................................................... 262,390 2001.......................................................... 211,470 2002.......................................................... 208,479 2003.......................................................... 182,773 Thereafter.................................................... 530,380 ---------- Total minimum program rights payments......................... $1,654,021 ========== 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 December 31, 1998 and 1997, the unamortized program rights were $150,771 and $108,672, respectively, and the program rights payable were $134,652 and $103,444, respectively. (c) Employment Agreements The Company has employment agreements with certain executives providing for compensation payable through 2001. (d) Litigation In the ordinary course of business, the Company has become involved in disputes or litigation. While the result of such disputes cannot be predicted with certainty, in management's opinion, based in part on the advice of counsel, the ultimate resolution of these disputes will not have a material effect on the Company's financial position or results of operations. (12) Subsequent Events In March 1999, the Company agreed to sell its investment in Fit TV to an affiliate of Fox for $6 million in cash. The Company expects to record a loss from the sale of this investment in the amount of the excess of the Company's carrying value of the investment in these net assets at the date of sale, including any related unamortized excess cost, over the selling price. F-21 LIBERTY SPORTS, INC. AND SUBSIDIARIES--DOMESTIC OPERATIONS FINANCIAL STATEMENTS F-22 LIBERTY SPORTS, INC. AND SUBSIDIARIES--DOMESTIC OPERATIONS FINANCIAL STATEMENTS With Independent Auditors' Report INDEPENDENT AUDITORS' REPORT The Board of Directors Fox/Liberty Networks, LLC: We have audited the accompanying combined statements of operations and equity and cash flows of Liberty Sports, Inc. and subsidiaries--Domestic Operations for the period from January 1, 1996 to April 29, 1996. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Liberty Sports, Inc. and subsidiaries--Domestic Operations for the period from January 1, 1996 to April 29, 1996, in conformity with generally accepted accounting principles. KPMG LLP Dallas, Texas June 28, 1996 F-23 LIBERTY SPORTS, INC. AND SUBSIDIARIES--DOMESTIC OPERATIONS COMBINED STATEMENT OF OPERATIONS AND EQUITY (amounts in thousands) January 1, 1996 to April 29, 1996 -------- Revenues (note 4): Programming......................................................... $ 37,484 Advertising......................................................... 27,696 Direct broadcast.................................................... 23,709 Network support..................................................... 2,471 Other............................................................... 8,393 -------- 99,753 -------- Operating costs and expenses (notes 4 and 7): Operating........................................................... 60,664 General and administrative.......................................... 27,993 Depreciation and amortization....................................... 10,788 -------- 99,445 -------- Operating income (loss)........................................... 308 -------- Other income (expense): Interest expense.................................................... (1,963) Interest income..................................................... 91 Equity in earnings of affiliates (note 5)........................... 219 Minority interest in earnings of subsidiaries....................... (1,076) Other, net.......................................................... 1,467 -------- (1,262) -------- Loss before income taxes.......................................... (954) Income tax benefit (note 6)........................................... 217 -------- Net loss.......................................................... (737) Equity, beginning of period........................................... 236,788 Net change in Parent's investment..................................... (11,570) -------- Equity, end of period................................................. $224,481 ======== See accompanying notes to combined financial statements. F-24 LIBERTY SPORTS, INC. AND SUBSIDIARIES--DOMESTIC OPERATIONS COMBINED STATEMENT OF CASH FLOWS (amounts in thousands) January 1, 1996 to April 29, 1996 ------------ Cash flows from operating activities: Net loss........................................................ $ (737) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization................................. 10,788 Equity in earnings of affiliates.............................. (219) Minority interest............................................. 1,076 Deferred income taxes......................................... (1,176) Changes in operating assets and liabilities: Receivables................................................. (9,198) Inventories................................................. (167) Prepaid program rights...................................... 1,197 Other assets................................................ (1,906) Payables, accruals and unearned revenue..................... (2,881) -------- Net cash used in operating activities..................... (3,223) -------- Cash flows from investing activities: Capital expended for property and equipment..................... (4,544) Additional investments in and loans to affiliates............... (2,500) Return of capital from affiliates............................... 1,000 -------- Net cash used in investing activities..................... (6,044) -------- Cash flows from financing activities: Borrowings of long-term debt.................................... 28,600 Repayments of long-term debt.................................... (8,956) Change in Parent's investment................................... (11,570) -------- Net cash provided by financing activities................. 8,074 -------- Decrease in cash and cash equivalents............................. (1,193) Cash and cash equivalents at beginning of period.................. 10,453 -------- Cash and cash equivalents at end of period........................ $ 9,260 ======== See accompanying notes to combined financial statements. F-25 LIBERTY SPORTS, INC. AND SUBSIDIARIES--DOMESTIC OPERATIONS NOTES TO COMBINED FINANCIAL STATEMENTS (1) Organization Liberty Sports, Inc. was incorporated on November 13, 1989 as TCI Sports, Inc., a wholly-owned subsidiary of Tele-Communications, Inc. ("TCI"). On March 29, 1991, the name was changed to Liberty Sports, Inc. and the ownership was transferred to Liberty Media Corporation ("LMC"), an affiliate of TCI. On August 4, 1994, LMC became a wholly-owned subsidiary of TCI. Liberty Sports, Inc. and subsidiaries--Domestic Operations primarily provide television sports programming services to customers throughout the United States, sell advertising time in such programming and provide management and technical services to other sports networks. (2) Significant Accounting Policies (a) Basis of Presentation The accompanying combined financial statements include the accounts of Liberty Sports, Inc. and its domestic majority-owned subsidiaries and other entities in which it has a controlling voting interest (collectively, "LSI-- Domestic" or the "Company"). All significant intercompany accounts and transactions have been eliminated in combination. (b) Investments in Affiliates Investments in affiliates are accounted for under the equity method. Under this method, the investment, originally recorded at cost, is adjusted to recognize LSI-Domestic's share of net earnings or losses of the affiliate as they occur rather than as dividends or other distributions are received, limited to the extent of LSI-Domestic's investment in, advances to and guarantees on behalf of, the investee. LSI's share of net earnings or losses of affiliates includes the amortization of purchase adjustments. (c) Revenues Revenue from programming represents affiliate fees received from cable system operators and is recognized monthly as earned. Advertising revenue is recognized upon airing of commercials. Network support revenue is received from related parties for network, traffic and master control operation services provided by the Company. Such revenue is recognized as earned. The Company has sold advance subscriptions to its direct broadcast satellite customers. Such amounts are amortized to revenue monthly as revenue is earned. (d) Nonmonetary Transactions The Company trades commercial advertising spots in return for other services, primarily programming. These trades are recorded at the fair value of the asset surrendered or the fair value of the asset obtained, whichever is more clearly evident. These transactions resulted in the recording of approximately $2,050,000 in both advertising revenue and expenses during the period January 1, 1996 to April 29, 1996. (e) Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the 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-26 LIBERTY SPORTS, INC. AND SUBSIDIARIES--DOMESTIC OPERATIONS NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) (3) Supplemental Disclosures to Combined Statements of Cash Flows Cash paid for interest was $1,805,000 for the period January 1, 1996 to April 29, 1996. Cash paid for income taxes during the period January 1, 1996 to April 29, 1996 was not material. (4) Related Party Transactions For the period January 1, 1996 to April 29, 1996, the Company recognized the following revenue and expenses as a result of transactions with related parties, primarily TCI and its affiliates (amounts in thousands): Revenues and other: Programming....................................................... $12,213 Direct broadcast.................................................. 5,908 Network support................................................... 2,375 Other............................................................. 824 Expenses: Programming fees.................................................. 2,865 Direct broadcast programming fees................................. 3,094 (5) Investments in Affiliates The following table reflects LSI Domestic's share of earnings (losses) (principally accounted for under the equity method) of each of these affiliates (amounts in thousands): Entity ------ SportsChannel Chicago Associates ("SC--CHI")........................ $ 2,877 Prime SportsChannel Network Associates.............................. (2,169) Sunshine Network Joint Venture ("Sunshine")......................... 669 SportsSouth Network Ltd............................................. 2,026 Prime Sports Network--Upper Midwest Joint Venture................... -- SportsChannel Prism Associates...................................... 139 Rocky Mountain Mobile TV............................................ 93 Home Team Sports Limited Partnership ("HTS")........................ 397 SportsChannel Pacific............................................... -- Global Music Channel................................................ (3,813) ------- $ 219 ======= The Company's investment in three of these affiliates (Sunshine, HTS, and SC-CHI) exceeded its equity in the underlying net assets. These excess amounts are being amortized over the estimated useful lives of the investment affiliate agreements and sports contracts. This amortization aggregated $222,000 for the period January 1, 1996 to April 29, 1996 and is included in LSI Domestic's share of earnings. F-27 LIBERTY SPORTS, INC. AND SUBSIDIARIES--DOMESTIC OPERATIONS NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) Summarized financial operating results for affiliates accounted for under the equity method is as follows: Combined Operations (amounts in thousands) January 1, 1996 to April 29, 1996 ---------- Revenues.......................................................... $ 90,170 Operating, general and administrative expenses.................... (80,772) Depreciation and amortization..................................... (1,290) -------- Operating income................................................ 8,108 Interest income................................................... (144) Other, net........................................................ (30) -------- Net income...................................................... $ 7,934 ======== (6) Income Taxes The Company accounts for income taxes using Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes." SFAS No. 109 requires the use of the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company is included in the consolidated federal income tax returns filed by TCI. Federal income taxes are calculated on a separate return basis in the accompanying consolidated financial statements. Income tax benefit (expense) attributable to loss before income taxes for the period January 1, 1996 to April 29, 1996 consists of the following: Current: Federal............................................................. $(921) State............................................................... (38) Deferred.............................................................. 1,176 ----- Total................................................................. $ 217 ===== Actual income tax benefit differs from the "expected" income tax benefit for the period January 1, 1996 to April 29, 1996 (computed by applying the U.S. federal corporate tax rate of 35% to loss before income taxes) as follows (amounts in thousands): Computed "expected" tax benefit...................................... $ 334 Minority interest in earnings of consolidated subsidiary............. (640) Other, net........................................................... 523 ----- $ 217 ===== (7) Commitments and Contingencies The Company leases transponders, office facilities, and equipment and microwave channels used to carry its broadcast signals. These leases, which are classified as operating leases, expire at various dates through 2000. F-28 LIBERTY SPORTS, INC. AND SUBSIDIARIES--DOMESTIC OPERATIONS NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) Future minimum lease payments under noncancellable operating leases by calendar year are summarized as follows (amounts in thousands): 1996................................................................. $15,791 1997................................................................. 15,196 1998................................................................. 15,073 1999................................................................. 13,561 2000................................................................. 10,177 Thereafter........................................................... 5,500 Total lease expense was approximately $4,049,000 for the period January 1, 1996 to April 29, 1996. The Company has long-term sports program rights contracts which require payments through 2005. Future minimum payments by calendar year are as follows (amounts in thousands): 1996................................................................ $ 58,051 1997................................................................ 59,854 1998................................................................ 56,999 1999................................................................ 53,166 2000................................................................ 45,736 Thereafter.......................................................... 128,187 The Company has guaranteed obligations of certain equity affiliates under program rights agreements aggregating $3,331,000 in 1996; $3,598,000 in 1997; and $2,857,000 in 1998. Liberty Sports, Inc. and its domestic affiliates are parties to various lawsuits and claims arising in the ordinary course of business. While the outcome of such claims, lawsuits or other proceedings against the Company cannot be predicted with certainty, management expects that such liability, to the extent not provided through insurance or otherwise, will not have a material adverse effect on the operating results or financial condition of the Company. (8) Subsequent Event Effective April 29, 1996, Liberty Sports, Inc. contributed substantially all of its domestic assets and liabilities to certain limited liability companies and limited partnerships (collectively, the "Domestic Venture"). The members of the Domestic Venture are certain affiliates of Liberty Sports, Inc. and certain affiliates of The News Corporation Limited, each of which owns, through its affiliates, 50% of the Domestic Venture. The Domestic Venture was formed to provide sports programming services in the United States and Canada. F-29 FX NETWORKS, LLC (A Limited Liability Company) FINANCIAL STATEMENTS For the Ten Months Ended April 29, 1996 Together with Report of Independent Public Accountants F-30 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Fox/Liberty Networks, LLC: We have audited the accompanying statements of Operations and Cash Flows of FX NETWORKS, LLC (the Company, a Delaware limited liability company) for the ten months ended April 29, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of FX Networks, LLC for the four months ended April 29, 1996 were not audited by us and, accordingly, we do not express an opinion on them. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of FX NETWORKS, LLC's operations and its cash flows for the ten months ended April 29, 1996 in conformity with generally accepted accounting principles. Arthur Andersen LLP Los Angeles, California August 4, 1997 F-31 FX NETWORKS, LLC (A Delaware Limited Liability Company) STATEMENTS OF OPERATIONS For the Periods Ended April 29, 1996 (Dollars in thousands) Four Ten Months Ended Months Ended April April 29, 29, 1996 1996 ------------ ------------ (unaudited) Revenue: Programming......................................... $24,291 $ 55,934 Advertising......................................... 8,287 17,358 Infomercial......................................... 947 2,109 ------- -------- 33,525 75,401 ------- -------- Expenses: Operating........................................... 26,220 63,369 General and administrative.......................... 7,941 19,936 Depreciation and amortization....................... 201 480 ------- -------- 34,362 83,785 ------- -------- Interest expense...................................... 3,354 7,898 ------- -------- Net Loss.......................................... $(4,191) $(16,282) ======= ======== The accompanying notes are an integral part of these financial statements. F-32 FX NETWORKS, LLC (A Delaware Limited Liability Company) STATEMENTS OF CASH FLOWS For the Periods Ended April 29, 1996 (Dollars in thousands) Four months Ten months ended April 29, Ended April 29, 1996 1996 --------------- --------------- (unaudited) Cash Flows from Operating Activities: Net income................................... $(4,191) $(16,282) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.............. 201 480 Changes in operating assets and liabilities: Accounts receivables....................... (3,998) (9,110) Program rights............................. (6,785) (7,194) Other assets............................... 359 (167) Accounts payable and accrued expenses...... (1,136) (927) Program rights payable..................... 6,263 6,254 ------- -------- Net cash used in operating activities.... (9,287) (26,946) ------- -------- Cash Flows from Investing Activities: Purchases of property and equipment.......... (191) (521) ------- -------- Net cash used in investing activities.... (191) (521) ------- -------- Cash Flows from Financing Activities: Related Party Payable........................ 9,478 27,467 ------- -------- Net cash provided by financing activities.............................. 9,478 27,467 ------- -------- Net Increase (Decrease) in Cash and Cash Equivalents................................... -- -- Cash and Cash Equivalents, beginning of year... -- -- ------- -------- Cash and Cash Equivalents, end of year......... $ -- $ -- ======= ======== Supplemental Cash Flow Information Cash paid for interest....................... $ 3,354 $ 7,898 ======= ======== The accompanying notes are an integral part of these financial statements. F-33 FX NETWORKS, LLC (A Delaware Limited Liability Company) NOTES TO FINANCIAL STATEMENTS (Information for the four month period ended April 29, 1996 is unaudited) For the Ten Months Ended April 29, 1996 (Dollars in thousands) (1) Organization FX Networks, LLC was formed on July 1, 1993 as a division of Fox, Inc. ("Fox"), a subsidiary of The News Corporation Limited, as a basic cable exclusive service distributed on a per subscriber basis, to provide general entertainment and sports programming services and sell commercial advertising time during its programming. (2) Significant Accounting Policies (a) Basis of Presentation The accompanying financial statements of the Company present the operations and cash flows for the interim four month period ended April 29, 1996 (unaudited) for the purpose of comparison to the year ended December 31, 1997 for its successor company, Fox/Liberty Networks, LLC. (b) Program Rights The Company has multi-year contracts for broadcast rights of syndicated entertainment programs. Program rights are amortized over the term of the contract using the straight-line method. At the inception of these contracts and periodically thereafter, the Company evaluates the recoverability of the costs associated therewith against the advertising revenues directly associated with the program material and related expenses. Where an evaluation indicates that a multi-year contract will result in an ultimate loss, additional amortization is provided to recognize that loss currently. (c) Property and Equipment Property and equipment are stated at cost. Depreciation for financial statement purposes is provided using the straight-line method over estimated useful lives of 3 to 5 years. (d) Income Taxes No provision has been made for income tax expense or benefit in the accompanying consolidated financial statements as the income or losses of the Company are reported in the respective income tax returns of the partners. (e) Revenue Programming revenue represents monthly subscriber fees received from cable system operations and is recognized as earned. Advertising revenue is recognized as earned. (f) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates. F-34 FX NETWORKS, LLC (A Delaware Limited Liability Company) NOTES TO FINANCIAL STATEMENTS--(Continued) (Information for the four month period ended April 29, 1996 is unaudited) For the Ten Months Ended April 29, 1996 (Dollars in thousands) (g) Allocation of expenses Fox allocates costs, such as rent and payroll, incurred on behalf of the Company based on the percentage of services rendered to the Company. These allocated expenses are included in general and administrative expenses in the Statements of Operations. Management believes the allocation method used is reasonable. (h) Interim Financial Data (unaudited) The interim financial data for the period ended April 29, 1996 has been prepared by the Company and is unaudited; however, in the opinion of the Company, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results of operations and cash flows for the interim period. Results for the interim period are not necessarily indicative of the results to be achieved for the full year. (3) Related Party Transactions The Company recognized the following revenue and expenses as a result of arms-length transactions with related parties (amounts in thousands): Four Months Ten Months Ended April 29, Ended April 29, 1996 1996 --------------- --------------- (unaudited) Revenue: Advertising.............................. $ 159 $ 248 Expenses: Interest expense......................... 3,354 7,898 Production............................... 7,932 23,068 Programming fees......................... 3,604 7,695 TCI, which became a related party as a result of the Joint Venture (see Note 5), had transactions with the Company resulting in revenues of $25,310 for the ten month period ended April 29, 1996. (4) Commitments and Contingencies (a) Leases The Company leases transponders and equipment used to carry its broadcast signals. These leases, which are classified as operating leases, expire at various dates through 2006. Total lease expense was approximately $3,912, and $1,564, for the ten months and four months ended April 29, 1996 (unaudited). (b) Long-term Program Rights Contracts The Company has long-term program rights contracts which require payments through 1999. F-35 FX NETWORKS, LLC (A Delaware Limited Liability Company) NOTES TO FINANCIAL STATEMENTS--(Continued) (Information for the four month period ended April 29, 1996 is unaudited) For the Ten Months Ended April 29, 1996 (Dollars in thousands) (c) Litigation The Company is a party to various lawsuits and claims arising in the ordinary course of business. While the outcome of such claims, lawsuits or other proceedings against the Company cannot be predicted with certainty, management expects that such liability will not have a material adverse effect on the operating results or financial position of the Company. (5) Subsequent Event On April 30, 1996, The News Corporation Limited contributed a majority of the assets and liabilities of the Company to Fox/Liberty Networks, LLC as part of a joint venture formed by The News Corporation Limited and Tele- Communications, Inc. F-36 LIBERTY/FOX ARC L.P. (A Delaware Limited Partnership) CONSOLIDATED FINANCIAL STATEMENTS For the period from inception (April 30, 1996) to December 31, 1996 (Unaudited) F-37 LIBERTY/FOX ARC L.P. (A Delaware Limited Partnership) CONSOLIDATED STATEMENT OF OPERATIONS For the Period from Inception (April 30, 1996) to December 31, 1996 (Unaudited) (Dollars in thousands) April 30 to December 31, 1996 ------------ (Unaudited) Revenue: Programming...................................................... $ 27,895 Advertising...................................................... 9,598 Infomercial...................................................... 1,763 Direct broadcast................................................. 57,319 Other............................................................ 10,956 -------- 107,531 -------- Expenses: Operating........................................................ 73,074 General and administrative....................................... 7,171 Depreciation and amortization.................................... 2,407 -------- 82,652 -------- Operating Income................................................... 24,879 -------- Other (income) expense: Interest, net.................................................... 267 Loss on sale of assets........................................... 34 Equity income of affiliates, net................................. (1,148) Other............................................................ 211 Minority interest................................................ 1,468 -------- 832 -------- Net Income......................................................... $ 24,047 ======== The accompanying notes are an integral part of this consolidated financial statement. F-38 LIBERTY/FOX ARC L.P. (A Delaware Limited Partnership) CONSOLIDATED STATEMENT OF CASH FLOWS For the Period from Inception (April 30, 1996) to December 31, 1996 (Unaudited) (Dollars in thousands) April 30 to December 31, 1996 ------------ (Unaudited) Cash flows from operating activities: Net income...................................................... $ 24,047 Adjustments to reconcile net income to net cash provided by operating activities: Bad debt expense.............................................. 240 Depreciation and amortization................................. 2,407 Loss on sale of assets........................................ 34 Equity income of affiliates................................... (1,148) Minority interest............................................. 1,468 Changes in operating assets and liabilities: Trade and other receivables................................... (7,983) Prepaid program rights........................................ 278 Prepaid expenses and other current assets..................... 889 Other assets.................................................. 49 Accounts payable and accrued expenses......................... (14,290) Program rights payable........................................ 4,422 Unearned revenue.............................................. (733) -------- Net cash provided by operating activities................... 9,680 -------- Cash flows from investing activities: Purchases of property and equipment............................. (1,886) Note receivable issued to third parties......................... (4,381) Distribution from affiliates.................................... 4,759 Additional investment in affiliates............................. (1,160) Advances to related parties..................................... (18,608) Advances from related parties................................... 35,569 -------- Net cash provided by operating activities................... 14,293 -------- Cash flows from financing activities: Repayment of long-term debt..................................... (22,275) Principal payments on capital lease obligations................. (71) Cash overdraft, included in accounts payable.................... 3,529 -------- Net cash used in financing activities....................... (18,817) -------- Net increase in cash and cash equivalents......................... 5,156 Cash and cash equivalents, at inception........................... 6,119 -------- Cash and cash equivalents, end of year............................ $ 11,275 ======== The accompanying notes are an integral part of this consolidated financial statement. F-39 LIBERTY/FOX ARC L.P. (A Delaware Limited Partnership) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information as of and for the period ended December 31, 1996 is unaudited) December 31, 1996 (Dollars in thousands) 1. Organization On April 30, 1996, Liberty/Fox ARC L.P. (the "Partnership"), a Delaware limited partnership, was formed to own and operate programming services featuring predominantly sports and sports related programming. The partnership interests for the Partnership as of December 31, 1996 are as follows: Partnership Interest ----------- Fox Sports Net, LLC.............................................. 98%(l.p.) Fox Regional Sports Member, Inc.................................. 1%(1.p.) New LMC ARC, Inc................................................. 1%(g.p.) Fox/Liberty Networks, LLC, a Delaware limited liability company, through its subsidiary Fox Sports Net, LLC, and New LMC ARC, Inc., a Delaware corporation, each contributed interests in Affiliated Regional Communications, Ltd., a Colorado limited partnership, and Rocky Mountain Prime Sports Network, a Colorado general partnership. Fox Regional Sports Member, Inc. contributed cash. The Partnership provides television sports programming services, sells advertising time in its programming, provides management services to other sports networks, and provides technical services to other networks. 2. Significant Accounting Policies (a) Basis of Presentation The accompanying consolidated financial statements include the operations of the Partnership and its domestic majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. (b) Cash Equivalents Cash equivalents consist of short-term investments with an original maturity of less than 90 days. (c) Program Rights The Partnership has multi-year contracts for broadcast rights of sporting events. Pursuant to these contracts, an asset is recorded for the rights acquired and a liability is recorded for the obligation incurred, at the gross amount of the liability when the programs of sporting events are available for broadcast. Program rights which are for a specified number of games are amortized on an event-by-event basis, and those which are for a specified season are amortized over the term of the season on a straight-line basis. At the inception of these contracts and periodically thereafter, the Partnership evaluates the recoverability of the costs associated therewith against the advertising revenues directly associated with the program material and related expenses. Where an evaluation indicates that a multi-year contract will result in an ultimate loss, additional amortization is provided to currently recognize that loss. F-40 LIBERTY/FOX ARC L.P. (A Delaware Limited Partnership) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information as of and for the period ended December 31, 1996 is unaudited) December 31, 1996 (Dollars in thousands) (d) Property and Equipment Property and equipment are stated at cost, which include acquisition costs allocated to tangible assets acquired. Depreciation and amortization for financial statement purposes are provided using the straight-line method over an estimated useful life of five to ten years. (e) Excess Cost Excess cost represents the difference between the costs of acquiring programming entities and amounts assigned to their tangible assets. Such amounts are amortized on a straight-line basis over 40 years. Amortization expense for the period from inception (April 30, 1996) to December 31, 1996 was $1,468 (Unaudited). The Partnership continually reevaluates the propriety of the carrying amount of its intangible assets as well as the related amortization period to determine whether current events or circumstances warrant adjustments to the carrying value and/or the estimates of useful lives. This evaluation consists of the Partnership's projection of undiscounted operating income before interest over the remaining lives of the related intangible assets. Based on its review, the Partnership believes that no significant impairment of the intangible assets has occurred and that no reduction of the estimated useful lives is warranted. (f) Income Taxes No provision has been made for income tax expense or benefit in the accompanying consolidated financial statements as the income or losses of the Partnership are reported in the respective income tax returns of the partners. (g) Allocation of Partnership of Net Income or Net Losses Income or losses from the Partnership are allocated to the partners in accordance with their respective profit interests. (h) Investments in Affiliates Investments in affiliates are accounted for under the equity method. Under this method, the investment originally recorded at cost is adjusted to recognize the Partnership's share of net income or losses of the affiliate as they occur, rather than as dividends or other distributions are received, limited to the extent of the Partnership's investment, advances to and guarantees on behalf of the investee. The Partnership's share of net income or losses of affiliates includes the amortization of excess cost. (i) Revenue Revenue from programming represents monthly subscriber fees received from cable system operations and is recognized as earned. Advertising revenue is recognized as earned. The Partnership has sold advance subscriptions to its direct broadcast satellite customers. Such amounts are amortized to revenue in the month such revenue is earned. Network support revenue is received from related parties for network, traffic, and master control operation services provided by the Partnership. Such revenue is recognized as earned. F-41 LIBERTY/FOX ARC L.P. (A Delaware Limited Partnership) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information as of and for the period ended December 31, 1996 is unaudited) December 31, 1996 (Dollars in thousands) (j) Nonmonetary Transactions The Partnership trades commercial advertising sports in return for other services, primarily programming. These trades are recorded at the fair value of the asset surrendered or the fair value of the asset obtained, whichever is more clearly evident. These transactions resulted in the recording of approximately $2,322 (Unaudited) in both advertising revenue and programming expenses during the period from inception (April 30, 1996) to December 31, 1996. (k) Use of Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates. (l) Long-Lived Assets In March 1995, the Financial Accounting Standards Board issued Statement No. 121 ("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 Partnership adopted SFAS 121 from inception (April 30, 1996). The adoption of the statement did not have any material impact on the Partnership's financial statements. 3. Supplemental Cash Flow Information Cash paid for interest for the period from inception (April 30, 1996) to December 31, 1996 was $983 (Unaudited). 4. Related Party Transactions For the period from inception (April 30, 1996) to December 31, 1996 the Partnership recognized the following revenue and expenses as a result of arms- length transactions with related parties: April 30 to December 31, 1996 (Unaudited) ------------ Revenue: Programming................................................. $13,117 Network support, which is included in other revenue on the statement of operations.................................... 2,456 Expenses: Interest expense............................................ 32 DBS......................................................... 546 Production.................................................. 24 Advertising commissions..................................... 974 Programming fees............................................ 1,735 F-42 LIBERTY/FOX ARC L.P. (A Delaware Limited Partnership) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information as of and for the period ended December 31, 1996 is unaudited) December 31, 1996 (Dollars in thousands) 5. Investments in Affiliates The following table reflects the Partnership's equity in income (losses) of these affiliates, accounted for under the equity method, for the period from inception (April 30, 1996) to December 31, 1996 (Unaudited): Equity in Ownership income Entity percentage (losses) ------ ---------- --------- Sunshine Network Joint Venture......................... 49.0% $ 1,306 Prime Sports Network--Upper Midwest Joint Venture...... 33.0% 5 Home Team Sports Limited Partnership................... 34.3% 699 Prime Sports Channel Prism Associates.................. 33.3% 869 Prime Sports Channel Network Associates................ 50.0% (1,953) Mountain Mobile TV..................................... 33.3% 222 ------- $ 1,148 ======= The Partnership's investment in Sunshine Network Joint Venture exceeded its equity in the underlying net assets. These excess amounts are being amortized on a straight-line basis over 40 years. The amortization aggregated $67 (Unaudited) for the period from inception (April 30, 1996) to December 31, 1996 and is included in the Partnership's share of equity in income of affiliates. 6. Debt ARC Holding, Ltd., a wholly-owned subsidiary of the Partnership ("Holding"), is a party to a credit agreement, as amended, at December 31, 1996. Borrowings bear interest at the agent bank's base rate, the London Interbank Offered Rate, a CD rate or a combination thereof as selected by Holding plus a margin depending on Holding's ratio of total debt to cash flow (as defined). The effective interest rate at December 31, 1996 was 6.45 percent (Unaudited). Beginning June 30, 1995, and quarterly thereafter through December 31, 2000, the commitment amount is reduced in equal quarterly amounts. Holding must pay an annual commitment fee of .375 percent of the unfunded portion of the commitment. Borrowings under the credit agreement are secured by the assets of Holding, including affiliate interests, and the stock and assets of its existing and future subsidiaries. The credit agreement contains certain provisions which limit Holding as to additional indebtedness, sale of assets, liens, guarantees and distributions. Additionally, Holding must attain certain specified financial ratios. Holding was in compliance with the debt covenants as of December 31, 1996 (Unaudited). 7. Commitments and Contingencies (a) Leases The Partnership leases transponders, office facilities, equipment and microwave channels used to carry its broadcast signals. These leases, which are classified as operating leases, expire at various dates through 2001. F-43 LIBERTY/FOX ARC L.P. (A Delaware Limited Partnership) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information as of and for the period ended December 31, 1996 is unaudited) December 31, 1996 (Dollars in thousands) Future minimum payments by year under noncancelable operating leases with a term of one year or more consist of the following: December 31, 1996 ------------ (Unaudited) 1997........................................................... $ 7,095 1998........................................................... 7,733 1999........................................................... 7,273 2000........................................................... 5,114 2001........................................................... 690 ------- Total minimum lease payments................................. $27,905 ======= The Partnership has a capital lease related to equipment, which expires in 1999. Future minimum payments by year under the capital lease consist of the following: December 31, 1996 ----------- (Unaudited) 1997............................................................. $104 1998............................................................. 114 1999............................................................. 115 ---- Total minimum lease payments................................... $333 ==== Total lease expense was approximately $2,012 (Unaudited) for the period from inception (April 30, 1996) to December 31, 1996. (b) Long-term Sports Program Rights Contracts The Partnership has long-term sports program rights contracts which require payments through 2001. Future minimum payments by year are as follows: December 31, 1996 ------------ (Unaudited) 1997............................................................ $25,780 1998............................................................ 24,559 1999............................................................ 21,658 2000............................................................ 13,365 2001............................................................ 4,566 ------- Total minimum program rights payments......................... $89,928 ======= F-44 LIBERTY/FOX ARC L.P. (A Delaware Limited Partnership) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information as of and for the period ended December 31, 1996 is unaudited) December 31, 1996 (Dollars in thousands) The Partnership has guaranteed obligations of certain equity affiliates under program rights agreements of: December 31, 1996 ------------ (Unaudited) 1997............................................................ $3,598 1998............................................................ 2,857 ------ Total guaranteed obligations.................................. $6,455 ====== (c) Litigation The Partnership and its affiliates are parties to various lawsuits and claims arising in the ordinary course of business. While the outcome of such claims, lawsuits or other proceedings against the Partnership cannot be predicted with certainty, management expects that such liability will not have a material adverse effect on the operating results or financial position of the Partnership. 11. Subsequent Event In March 1997, the partnership paid $40,000 (Unaudited) to Group W to purchase the 12.78% partnership interest in ARC. The Partnership amended the credit agreement in March 1997, and June 1997, which increased the borrowings ceiling to $75,000 (Unaudited). The Company repaid the outstanding principal balance on September 12, 1997. F-45 REGIONAL PROGRAMMING PARTNERS AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 31, 1998 and Period from December 18, 1997 (Inception) to December 31, 1997 (With Independent Auditors' Report Thereon) F-46 INDEPENDENT AUDITORS' REPORT The Partners Regional Programming Partners: We have audited the accompanying consolidated balance sheets of Regional Programming Partners and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, partners' capital and cash flows for the year ended December 31, 1998 and for the period from December 18, 1997 (Inception) to December 31, 1997. These consolidated financial statements are the responsibility of the partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Regional Programming Partners and subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for year ended December 31, 1998 and for the period from December 18, 1997 (Inception) to December 31, 1997, in conformity with generally accepted accounting principles. March 12, 1999 Melville, New York F-47 REGIONAL PROGRAMMING PARTNERS AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1997 (Dollars in thousands) ASSETS 1998 1997 ------ ---------- ---------- Current assets: Cash and cash equivalents.............................. $ 148,852 $ 402,978 Trade accounts receivable (less allowance for doubtful accounts of $9,067 and $9,943)........................ 75,364 93,568 Trade accounts receivable-affiliates................... 18,329 26,674 Notes and other receivables-affiliates................. 180,519 450 Notes and other receivables............................ 1,734 3,632 Inventory.............................................. 2,483 3,486 Prepaid expenses and other current assets.............. 30,725 25,922 ---------- ---------- Total current assets................................. 458,006 556,710 Notes receivable....................................... 41,320 44,085 Property and equipment, net............................ 259,175 245,395 Investments in affiliates.............................. 19,006 8,410 Other assets........................................... 4,905 7,163 Deferred costs, net of accumulated amortization of $2,249 and $826....................................... 32,492 31,028 Intangible assets, net of accumulated amortization of $249,700 and $149,695................................. 1,475,270 1,434,388 ---------- ---------- $2,290,174 $2,327,179 ========== ========== LIABILITIES AND PARTNERS' CAPITAL --------------------------------- Current liabilities: Accounts payable....................................... $ 30,897 $ 21,532 Accrued expenses....................................... 69,794 60,356 Accrued payroll and related benefits................... 39,974 49,393 Deferred revenue....................................... 121,135 104,347 Accounts payable-affiliates, net....................... 10,114 7,338 Contractual rights obligations......................... 28,451 28,676 ---------- ---------- Total current liabilities............................ 300,365 271,642 Long-term debt......................................... 330,000 380,000 Deferred compensation.................................. 8,747 11,079 Contractual rights obligations......................... 103,041 131,417 Other liabilities...................................... 117,442 44,485 Minority interest...................................... 64,117 129,495 ---------- ---------- Total liabilities........................................ 923,712 968,118 Commitments and contingencies Partners' capital...................................... 1,366,462 1,359,061 ---------- ---------- $2,290,174 $2,327,179 ========== ========== See accompanying notes to consolidated financial statements. F-48 REGIONAL PROGRAMMING PARTNERS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31, 1998 and the Period from December 18, 1997 (Inception) to December 31, 1997 (Dollars in thousands) 1998 1997 -------- ------- Revenues, net (including affiliate amounts of $93,811 and $3,305).................................................... $708,043 $56,957 Expenses: Technical and operating (including affiliate amounts of $12,853 and $529)........................................ 479,550 32,091 Selling, general and administrative (including affiliate amounts of $12,104 and $295)............................. 122,276 9,472 Depreciation and amortization............................. 123,410 3,884 -------- ------- 725,236 45,447 -------- ------- Operating (loss) income................................... (17,193) 11,510 -------- ------- Other income (expense): Share of affiliates' net income (loss).................... 11,839 (359) Interest income........................................... 24,318 973 Interest expense.......................................... (29,876) (1,395) Gain on sale of partnership interest...................... 17,648 -- Write-off of deferred financing fees...................... -- (6,538) Minority interest......................................... 758 (561) Miscellaneous, net........................................ (93) (1,520) -------- ------- 24,594 (9,400) -------- ------- Net income................................................ $ 7,401 $ 2,110 ======== ======= See accompanying notes to consolidated financial statements. F-49 REGIONAL PROGRAMMING PARTNERS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL Year Ended December 31, 1998 and the Period from December 18, 1997 (Inception) to December 31, 1997 (Dollars in thousands) RMHI FOX TOTAL -------- --------- ---------- Balance, December 18, 1997...................... $ -- $ -- $ -- Net assets contributed........................ 506,951 -- 506,951 Capital contributions......................... -- 850,000 850,000 Adjustment of partnership capital............. 307,220 (307,220) -- Net income.................................... 1,266 844 2,110 -------- --------- ---------- Balance, December 31, 1997...................... 815,437 543,624 1,359,061 Net income.................................... 4,441 2,960 7,401 -------- --------- ---------- Balance, December 31, 1998...................... $819,878 $ 546,584 $1,366,462 ======== ========= ========== See accompanying notes to consolidated financial statements. F-50 REGIONAL PROGRAMMING PARTNERS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 1998 and the Period from December 18, 1997 (inception) to December 31, 1997 (Dollars in thousands) 1998 1997 --------- --------- Cash flows from operating activities: Net income............................................. $ 7,401 $ 2,110 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Amortization of deferred costs........................ 1,423 (195) Depreciation and amortization......................... 123,410 3,884 Share of affiliates net income (loss)................. (11,839) 359 Minority interest..................................... (758) 561 Gain on sale of partnership interest.................. (17,648) -- Write off of deferred financing costs................. -- 6,538 Loss on sales of equipment............................ 100 -- Changes in assets and liabilities: Trade accounts receivable, net...................... 16,106 6,160 Trade accounts receivable-affiliates................ 6,709 (7,072) Notes and other receivables-affiliates.............. (69) -- Notes and other receivables......................... 3,899 232 Prepaid expenses and other current assets........... (5,359) (641) Deferred costs and other assets..................... (1,263) -- Accounts payable and accrued liabilities............ (13,950) 35,189 Deferred revenue.................................... 16,788 (39,377) Accounts payable-affiliates, net.................... 3,496 (8,770) Deferred compensation............................... (2,332) -- Contractual rights obligations...................... (28,601) -- Other liabilities................................... (3,887) -- --------- --------- Net cash provided by (used in) operating activities....................................... 93,626 (1,022) --------- --------- Cash flows from investing activities: Capital expenditures................................... (32,812) -- Loan to affiliates..................................... (180,000) -- Decrease in investments in affiliates, net............. 170 -- Partial redemption of partnership interest............. (94,000) -- Net proceeds from sale of partnership interest......... 19,884 -- Proceeds from sale of equipment........................ 16 -- Additions to intangible assets......................... (11,010) -- --------- --------- Net cash used in investing activities............. (297,752) -- --------- --------- Cash flows from financing activities: Debt repayments........................................ (50,000) (812,000) Proceeds from debt..................................... -- 366,000 Cash capital contributions from partners............... -- 850,000 --------- --------- Net cash (used in) provided by financing activities....................................... (50,000) 404,000 --------- --------- Net (decrease) increase in cash and cash equivalents..... (254,126) 402,978 Cash and cash equivalents at beginning of period......... 402,978 -- --------- --------- Cash and cash equivalents at end of year................. $ 148,852 $ 402,978 ========= ========= See accompanying notes to consolidated financial statements. F-51 REGIONAL PROGRAMMING PARTNERS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 and 1997 (Dollars in thousands) 1. The Partnership and Nature of Operations Regional Programming Partners (the "Partnership") is a general partnership organized as of December 18, 1997, under the provisions of the New York State Partnership Law. In exchange for a 60% interest in the Partnership issued to a subsidiary of Rainbow Media Holdings, Inc. ("RMHI"), affiliates of RMHI, through various indirect transfers, contributed to the Partnership their interests in Madison Square Garden, L.P. ("MSG"), six additional regional sports networks, and Metro Channel LLC. MSG is a sports and entertainment company that owns and operates the Madison Square Garden arena and the adjoining Theater at Madison Square Garden, the New York Knickerbockers professional basketball team, the New York Rangers professional hockey team, the New York Liberty professional women's basketball team, the New England Seawolves professional arena football team, the Hartford Wolf Pack professional hockey team, the Madison Square Garden Network, Fox Sports New York and Radio City Entertainment (which operates Radio City Music Hall in New York City). The regional sports networks in which the Partnership owns interests provide regional sports programming to the New York, New England, Chicago, Cincinnati, Cleveland, San Francisco and Florida areas. Metro Channel LLC provides regional and local sports, news and educational programming to the New York metropolitan area. A subsidiary of Fox/Liberty Networks, LLC ("Fox") contributed $850,000 in cash to the Partnership in exchange for a 40% interest in the Partnership. RMHI is a 75% owned subsidiary of CSC Holdings, Inc. (formerly Cablevision Systems Corporation) ("CSC") and Fox is a joint venture between subsidiaries of The News Corporation Limited and Liberty Media Corporation ("Liberty"). A subsidiary of RMHI is the managing partner of the Partnership. Summary financial information (at historical cost) for the net assets contributed to the Partnership by affiliates of RMHI is as follows: Current assets.............................................. $ 138,086 Other assets................................................ 316,997 Intangible assets, net...................................... 1,437,338 Current liabilities......................................... (259,400) Bank debt................................................... (826,000) Other liabilities........................................... (209,136) Minority interest........................................... (90,934) ---------- $ 506,951 ========== In order to align the partners' capital accounts to balances in accordance with their ownership percentages after the initial contributions, an adjustment was made to transfer $307,220 from Fox's capital account to RMHI's capital account. 2. Summary of Significant Accounting Policies Principles of Consolidation and Basis of Presentation The consolidated financial statements include the accounts of the Partnership and its majority-owned partnership interests. The Partnership's interests in less than majority-owned entities are accounted for under the equity method. All significant intercompany transactions and balances are eliminated in consolidation. Minority interest represents ITT Corporation's ("ITT") share of net equity of MSG. F-52 REGIONAL PROGRAMMING PARTNERS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands) Revenue Recognition The Partnership derives revenues principally from programming services provided by its pay television networks, ticket sales and distributions of league-wide revenue from its sports teams, advertising on its other sports network and advertising and event sponsorships related to the MSG arena. Programming revenue is recognized as services are provided to pay television systems. Network advertising revenue is recognized as commercials are telecast. Ticket sales and league-wide revenue are recognized as each team plays its games. Revenues from the sale of advertising in the form of signage and license fees from rental of MSG's luxury suites are recognized ratably over the term of the respective agreements. Event-related revenues are recognized as the underlying event occurs. Inventory Inventory consists of retail merchandise carried on a FIFO basis and stated at the lower of cost or market. Deferred Financing Costs Costs incurred to obtain debt financing are deferred and amortized, on a straight-line basis, over the life of the related debt. Long-Lived Assets Property and equipment are carried at cost and depreciated on the straight- line basis over the estimated useful lives of the assets or, with respect to leasehold improvements, amortized over the shorter of the lease term or the assets' useful lives. The Partnership reviews its long-lived assets (property and equipment, and intangible assets) for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected future cash flows, undiscounted and without interest, is less than the carrying amount of the asset, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value. Income Taxes The Partnership operates as a general partnership; accordingly, its taxable income or loss is included in the tax returns of the individual partners and no provision for income taxes is made by the Partnership. Cash Equivalents The Partnership considers temporary cash investments with original maturities of three months or less at the time of purchase to be cash equivalents. The Partnership paid cash interest expense of approximately $26,464 for the year ended December 31, 1998. There was no cash paid for interest during the period from December 18, 1997 (Inception) to December 31, 1997. On December 31, 1997, ITT made a capital contribution to MSG of transportation equipment valued at $38,000. Contractual Rights Obligations Contractual rights obligations represent the remaining reserves on unfavorable contracts established prior to the formation of the Partnership. Such reserves are being amortized as a reduction of technical expense over the life of the contracts. Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Reclassifications Certain reclassifications have been made to the prior year financial statements to conform to the 1998 presentation. F-53 REGIONAL PROGRAMMING PARTNERS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands) 3. Acquisitions and Dispositions In June 1998, the Partnership redeemed one-half of ITT Corporation's remaining 7.8% limited partnership interest in Madison Square Garden, L.P. for $94 million. Such redemption was accounted for as a purchase whereby the excess of redemption price paid over the equity redeemed of $29,400 was allocated based upon an independent appraisal as follows: Property, plant and equipment.................................... $ 3,200 Player contracts................................................. 5,600 Franchises....................................................... 7,500 Excess costs over fair value of net assets acquired.............. 13,100 -------- $ 29,400 ======== On January 29, 1998, the Partnership sold a 50% interest in SportsChannel New England Limited Partnership for $19,884. The Partnership recognized a gain, net of expenses, of $17,648. 4. Notes Receivable Notes receivable includes a $40,000 loan made by Garden Programming, Inc. ("Garden Programming"), a wholly owned subsidiary of MSG, to a broadcast content provider entered into on July 11, 1997. The loan matures on November 1, 2011, and bears interest at a rate which approximates MSG's borrowing rate. The loan is secured by certain assets of the borrower and a guarantee by an affiliate of the borrower. 5. Property and Equipment Property and equipment at December 31, 1998 and 1997, consist of the following: Estimated 1998 1997 Useful Lives --------- -------- ------------- Land...................................... $ 23,193 $ 22,746 Building.................................. 117,809 115,476 23 years Program, service and test equipment....... 14,182 9,346 2 to 9 years Microwave and other equipment............. 6,664 7,323 2 to 9 years Furniture and fixtures.................... 102,109 87,046 1 to 8 years Leased assets and leasehold improvements.. 22,239 11,793 Life of lease Transportation equipment.................. 39,166 38,525 5 to 15 years --------- -------- 325,362 292,255 Less accumulated depreciation and amortization............................. 66,187 46,860 --------- -------- $ 259,175 $245,395 ========= ======== F-54 REGIONAL PROGRAMMING PARTNERS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands) 6. Investment in Affiliates The Partnership has a 50% ownership interest in each of SportsChannel Chicago Associates, SportChannel New England Limited Partnership, SportsChannel Pacific Associates and the broadway production of the Scarlet Pimpernel, a 30% partnership interest in SportsChannel Florida Associates and a 10% interest in the broadway production of Footloose. The investment balance and income (loss) of investees is comprised of the following: Investment Income (Loss) December 31, December 31, --------------- -------------- Investments 1998 1997 1998 1997 ----------- ------- ------- ------- ----- SportsChannel Chicago Associates........... $12,149 $ 9,416 $10,233 $ 219 SportsChannel Pacific Associates........... 5,853 2,461 2,142 (443) Other...................................... 1,004 (3,467) (536) (135) ------- ------- ------- ----- $19,006 $ 8,410 $11,839 $(359) ======= ======= ======= ===== Several of the partnership agreements governing the operations of the Partnership's investees contain buy-sell arrangements (generally providing for a fair market determination of value) that may be initiated by one or more of the partners under certain circumstances (as described in the partnership agreements). Therefore, the Partnership's ownership interests in these entities are subject to change. 7. Intangible Assets At December 31, 1998 and 1997, intangible assets consist of the following: 1998 1997 ---------- ---------- Player contracts, net of accumulated amortization of $106,444 and $74,747......................................... $ 86,287 $ 112,420 Franchises, broadcast rights and affiliation agreements, net of accumulated amortization of $17,269 and $5,991.................................. 195,150 198,918 Excess costs over fair value of net assets acquired, net of accumulated amortization of $125,987 and $68,957.... 1,193,833 1,123,050 ---------- ---------- $1,475,270 $1,434,388 ========== ========== Player contracts, which represent the value assigned to the total compliment of players included on the professional hockey and basketball teams, are amortized over a six-year period on the straight-line basis. Costs incurred to acquire individual players, including signing bonuses, are amortized over the contract period of the respective player. Franchises, broadcast rights and affiliation agreements represent the value assigned to MSG's professional hockey and basketball franchises, telecast rights to certain sporting events and agreements with cable systems to carry a certain programming service of the Partnership. These assets are being amortized over a weighted average period of approximately thirty one years on the straight-line basis. Excess costs over fair value of net assets acquired resulting from RMHI's pre-inception purchases of interests in MSG, Radio City Entertainment and a sports network are being amortized over a weighted average period of approximately thirty seven years on a straight-line basis. During 1998, an independent appraisal was completed of the assets and liabilities of Radio City Entertainment. The valuation resulted in additional excess costs of approximately $93 million being recorded, principally related to unfavorable leaseholds. F-55 REGIONAL PROGRAMMING PARTNERS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands) 8. Accrued Expenses Included in accrued expenses at December 31, 1998 and 1997, are the following: 1998 1997 ------- ------- Production and programming costs............................ $ 4,800 $22,944 Litigation reserves......................................... 3,967 15,112 Other....................................................... 61,027 22,300 ------- ------- Total....................................................... $69,794 $60,356 ======= ======= 9. Long-Term Debt Long-term debt at December 31, 1998 and 1997, consists of borrowings made by MSG as follows: 1998 1997 -------- -------- MSG Credit Facility: Due December 31, 2004..................................... $310,000 $360,000 Garden Programming Promissory Notes: Due July 11, 2002......................................... 20,000 20,000 -------- -------- Total..................................................... $330,000 $380,000 ======== ======== MSG's has a credit facility with various lending institutions consisting of a $500 million revolving facility (the "Revolver") which expires on December 31, 2004. Loans under the Revolver bear interest at current market rates plus a margin (6.038% at December 31, 1998 and 6.875% at December 31, 1997) based on MSG's consolidated leverage ratio. Borrowings outstanding as of December 31, 1998 and 1997 of $310,000 and $360,000, respectively. MSG is required to pay a fee based on the unutilized commitment which as of December 31, 1998 and 1997, was $185,278 and $131,392, respectively. The carrying amount of the debt approximates fair value. Deferred financing costs of $6,538 associated with a term loan of $650 million which was repaid on December 18, 1997 were expensed. The deferred financing costs related to the Revolver of approximately $10,800 and $10,743 as of December 31, 1998 and 1997, respectively, are being amortized over the term of the Revolver. The Revolver contains certain covenants and restrictions including the maintenance of certain financial ratios. MSG was in compliance with these covenants and restrictions as of December 31, 1998 and 1997. Additionally, Garden Programming borrowed $20,000 under promissory notes with various lending institutions (the "Promissory Notes"). The Promissory Notes bear interest at a margin above LIBOR (7.22% and 7.85% at December 31, 1998 and 1997). These funds were used to partially finance a $40,000 secured loan to a broadcast content provider (see Note 3). MSG is party to letters of credit totaling $4,722 and $8,608 as of December 31, 1998 and 1997, respectively, which have been issued against the Revolver to guarantee certain insurance and other operating activities. Management does not expect performance to be required. F-56 REGIONAL PROGRAMMING PARTNERS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands) 10. Leases The Partnership has various long term noncancelable operating lease agreements with nonaffiliates for office space and practice facilities for its professional sports teams and Radio City Music Hall which expire at various dates through 2023. The leases generally provide for fixed annual rentals plus certain other costs. Rent expense, net of amortization of the liability established for unfavorable leaseholds, for the year ended December 31, 1998 and for the period from December 18, 1997 (Inception) to December 31, 1997 approximated $16,559 and $275, respectively. The following is a schedule of future minimum payments for these operating leases (with initial or remaining terms in excess of one year) as of December 31, 1998: Year ending December 31, ------------ 1999............................................................ $ 19,788 2000............................................................ 17,431 2001............................................................ 15,514 2002............................................................ 16,808 2003............................................................ 16,803 Thereafter...................................................... 267,502 -------- Total minimum lease payments..................................... $353,846 ======== 11. Affiliate Transactions Notes and other receivables--affiliates includes a $180,000 loan made on June 1, 1998 by the Partnership to its parent, Rainbow Media Holdings, Inc. Such loan is due on the earlier of demand by the Partnership or March 31, 2002, and bears interest at a rate of LIBOR plus 7/8% per annum. The Partnership distributes certain programming to the pay television industry under contracts called affiliation agreements. For the year ended December 31, 1998 and for the period December 18, 1997 (Inception) to December 31, 1997, approximately $93,811 and $3,305, respectively, was earned under affiliation agreements with companies owned or managed by affiliates of the partners in the Partnership. National Sports Partners, which is managed by Fox and in which Fox and RMHI each indirectly own a 50% interest, provides certain programming to the Partnership. The Partnership was charged approximately $3,783 and $130 for the year ended December 31, 1998 and for the period from December 18, 1997 (Inception) to December 31, 1997, respectively, for this programming. Rainbow Network Communications, an affiliate of the Partnership, provides certain transmission and production services to the Partnership. The Partnership was charged approximately $7,114 and $263 for the year ended December 31, 1998 and for the period from December 18, 1997 (Inception) to December 31, 1997, respectively, for these services. CSC, RMHI and certain of its subsidiaries provide the Partnership with certain administrative, advertising billing, computer, and creative services. The Partnership was charged approximately $12,104 and $295 for the year ended December 31, 1998 and for the period from December 18, 1997 (Inception) to December 31, 1997, respectively, for such services. The Partnership has an arrangement with National Advertising Partners ("NAP"), which is managed by Fox and in which Fox and RMHI each indirectly own a 50% interest, to provide national advertising services to the Partnership in exchange for a fee of 15% of the gross revenue, net of agency commissions, from advertising F-57 REGIONAL PROGRAMMING PARTNERS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands) sold by this partnership. Fees charged by NAP on advertising revenues amounted to approximately $1,956 and $136 for the year ended December 31 and for the period from December 18, 1997 (Inception) to December 31, 1997, respectively. The Partnership has non-majority ownership interests in several regional sports networks as follows: 50% interest in SportsChannel Chicago Associates, 50% interest in SportsChannel Pacific Associates, 50% interest in SportsChannel New England Limited Partnership (see note 1) and a 30% interest in SportsChannel Florida Associates. A subsidiary of the Partnership has non- majority ownership interests in several Broadway theater productions. The Partnership's and subsidiary's investments in these entities are accounted for on the equity method of accounting. Accordingly, the Partnership recorded income of $11,838 for the year ended December 31, 1998 and a loss of $359 for the period from December 18, 1997 (Inception) to December 31, 1997, representing its share of the results of operations of these entities. 12. Pension and Other Postretirement Benefit Plans CSC maintains a pension plan and 401(k) savings plan (collectively, the "Plan") for each of the regional sports networks and Metro Channel, LLC pursuant to which the Partnership contributes a percent of eligible employees' annual compensation, as defined, to the defined contribution portion of the Plan and prior to April 1998, an equivalent amount to the Section 401(k) portion of the Plan. The Partnership also makes matching contributions for employee voluntary contributions to the 401(k) portion of the Plan. The cost associated with the Plan was approximately $130 and $7 for the year ended December 31, 1998 and for the period from December 18, 1997 (Inception) to December 31, 1997, respectively. MSG sponsors several non-contributory pension plans covering the Partnership's non-union employees and certain union employees. Benefits payable to retirees under these plans are based upon years of service and participant's compensation and are funded through trusts established under the plans. MSG's funding policy is to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974. Plan assets are invested in common stocks, bonds, United States government securities and cash. Components of MSG's net periodic pension cost for defined benefit plans for the year ended December 31, 1998 and for the period from December 18, 1997 (Inception) to December 31, 1997, are as follows: 1998 1997 ------- ---- Service cost.................................................. $ 2,126 $ 52 Interest cost................................................. 1,796 63 Actual return on plan assets.................................. (1,707) (78) Net amortization and deferral................................. 8 25 Recognized loss............................................... 31 -- ------- ---- Net periodic pension cost..................................... $ 2,254 $ 62 ======= ==== F-58 REGIONAL PROGRAMMING PARTNERS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands) The funded status and the amounts recorded for the defined pension plans at December 31, 1998 and 1997, were as follows: 1998 1997 Change in benefit obligation -------- ------- Benefit obligation at beginning of year/period........ $25,518 $25,370 Service cost.......................................... 2,126 52 Interest cost......................................... 1,796 63 Actuarial loss........................................ 2,415 33 Benefit paid.......................................... (667) -- -------- ------- Benefit obligation at year end........................ $31,188 $25,518 ======== ======= 1998 1997 Change in plan assets -------- ------- Fair value of plan assets at beginning of year/period.......................................... $17,172 $17,094 Actual return on plan assets.......................... 2,065 78 Employer contributions................................ 1,166 -- Benefits paid......................................... (667) -- -------- ------- Fair value of plan assets at end of year.............. $19,736 $17,172 ======== ======= Funded status......................................... $(11,452) $(8,346) Unrecognized transition amount........................ (43) (47) Unrecognized prior service cost....................... 21 34 Unrecognized net actuarial loss....................... 2,591 564 -------- ------- Accrued benefit cost.................................. $ (8,883) $(7,795) ======== ======= Assumptions used to determine pension costs and the projected benefit obligation are as follows: 1998 1997 ----- ----- Discount rate.................................................. 6.75% 7.25% Rate of return on plan assets.................................. 10.00% 10.00% Rate of increase in future compensation levels................. 5.00% 5.00% In addition, MSG contributes to various multiemployer defined benefit pension plans. Pension expense recognized for these multiemployer plans for the year ended December 31, 1998 and for the period from December 18, 1997 (Inception) to December 31, 1997 was approximately $3,083 and $63, respectively. MSG also sponsors a welfare plan which provides certain postretirement health care and life insurance benefits to certain non-union employees and their dependents who are eligible for early or normal retirement under MSG's retirement plan. The welfare plan is insured through a managed care provider and MSG funds these benefits with premium payments. Components of MSG's cost for postretirement benefits for the year ended December 31, 1998 and for the period from December 18, 1997 (Inception) to December 31, 1997, are as follows: 1998 1997 ----- ---- Service cost.................................................... $ 160 $ 6 Interest cost................................................... 140 6 Amortization of unrecognized prior service benefit.............. (179) (7) Recognized gain................................................. (37) -- ----- ---- Periodic postretirement benefit cost............................ $ 84 $ 5 ===== ==== F-59 REGIONAL PROGRAMMING PARTNERS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands) The funded status and the amounts recorded on the Partnership's balance sheet with respect to MSG's sponsored welfare plans are as follows: 1998 1997 ------- ------- Benefit obligation at beginning of year/period............ $ 2,446 $ 2,430 Service cost.............................................. 160 6 Interest cost............................................. 140 6 Actuarial (gain)/loss..................................... (472) 4 Amendments................................................ 163 -- Plan participant contributions............................ 14 -- Benefit paid.............................................. (47) -- ------- ------- Benefit obligation at end of year......................... $ 2,404 $ 2,446 ======= ======= Plan assets............................................... -- -- Funded status............................................. $(2,404) $(2,446) Unrecognized prior service cost........................... (2,884) (3,225) Unrecognized net actuarial gain........................... (799) (365) ------- ------- Accrued benefit cost...................................... $(6,087) $(6,036) ======= ======= The discount rate used in determining the accumulated postretirement benefit obligation was 6.75% and 7.25% for 1998 and 1997, respectively. For measurement purposes, a 6.1% annual rate of increase in the cost of covered health care benefits was assumed for 1999. The rate was assumed to decrease gradually to 5% for 2004 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effect: 1-Percentage-Point 1-Percentage-Point Increase Decrease ------------------ ------------------ Effect on the total of service and interest cost components........... $ 55 $ (45) Effect on postretirement benefit obligations........................ $348 $(292) In addition, MSG contributes to multiemployer plans which provide health and welfare benefits to active as well as retired employees. MSG incurred costs of $5,006 and $116 related to those plans for the year ended December 31, 1998 and for the period from December 18, 1997 (Inception) to December 31, 1997, respectively. F-60 REGIONAL PROGRAMMING PARTNERS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands) 13. Commitments Subsidiaries of the Partnership have entered into long-term agreements with several professional sports teams and others which provide such subsidiaries, among other things, certain exclusive distribution rights to certain live sporting events and obligate such subsidiaries to make minimum contractual payments when the events are provided for distribution. Certain of these contracts provide for payments which are guaranteed. MSG also has employment agreements with players and coaches of its professional sports teams. Certain of these contracts provide for payments which are guaranteed regardless of employee injury or termination. MSG has obtained disability insurance on certain players which provide benefits payable to MSG in the event of injury. The approximate aggregate minimum contractual payments under these agreements as of December 31, 1998, are as follows: Years ending December 31, ------------ 1999.......................................................... $ 229,933 2000.......................................................... 217,752 2001.......................................................... 153,717 2002.......................................................... 113,925 2003.......................................................... 98,150 Thereafter..................................................... 1,093,373 ---------- $1,906,850 ========== 14. Contingencies The Partnership is a party to various lawsuits arising out of the ordinary conduct of its business. Management believes that the final outcome of these matters will not have a material adverse effect on the financial position of the Partnership. In March, 1999, ITT Corporation and CSC entered into an agreement under which ITT Corporation would exercise its right to require CSC to repurchase its remaining interest in MSG for a purchase price of $87,000. Consummation of this transaction is subject to league and regulatory approvals. 15. Fair Value of Financial Instruments The Partnerships' financial instruments principally consist of cash and cash equivalents, trade accounts receivable, notes receivable, accounts payable, accrued expenses, long-term debt and contractual rights obligations. For all instruments other than notes receivable, long-term debt and contractual rights obligations, the carrying value of the instruments approximate their fair value due to their short maturities. For notes receivable, long-term debt and contractual rights obligations, carrying value approximates fair value as the underlying instruments earn or bear interest at rates which approximate market rates for the same or similar instruments. F-61 FOX/LIBERTY NETWORKS, LLC CONDENSED FINANCIAL STATEMENTS OF THE COMPANY WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE S-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES To the Members of Fox/Liberty Networks, LLC: We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements of FOX/LIBERTY NETWORKS, LLC (the "Company") included elsewhere in this Form 10-K and have issued our report thereon dated February 19, 1999. 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 February 19, 1999 S-2 FOX/LIBERTY NETWORKS, LLC (A Delaware Limited Liability Company) SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF COMPANY BALANCE SHEETS December 31, 1998 and 1997 (Dollars in thousands) December 31, ------------------- 1998 1997 -------- ---------- (Restated) ---------- ASSETS ------ Cash........................................................ $ 137 $ -- Investments in subsidiaries................................. 891,006 911,489 Other assets................................................ 17,063 18,083 -------- -------- Total Assets.............................................. $908,206 $929,572 ======== ======== LIABILITIES AND MEMBERS' EQUITY ------------------------------- Accrued liabilities......................................... $ 31,125 $ 16,473 Long-term debt.............................................. 786,878 760,828 Members' Equity............................................. 90,203 152,271 -------- -------- Total Liabilities and Members' Equity..................... $908,206 $929,572 ======== ======== The accompanying notes are an integral part of these combined balance sheets. S-3 FOX/LIBERTY NETWORKS, LLC (A Delaware Limited Liability Company) SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF COMPANY STATEMENTS OF OPERATIONS For the Periods ended December 31, 1998, 1997 and 1996 (Dollars in thousands) Year ended Year Ended April 30 To December 31, December 31, December 31, 1998 1997 1996 ------------ ------------ ------------ (Restated) ------------ Interest expense, net.................. $ 71,783 $ 12,914 $ -- Other expenses......................... 13,531 -- -- Equity in (income) loss of subsidiaries.......................... (23,246) 65,543 117,149 -------- -------- --------- Net loss............................... $(62,068) $(78,457) $(117,149) ======== ======== ========= The accompanying notes are an integral part of these condensed financial statements. S-4 FOX/LIBERTY NETWORKS, LLC (A Delaware Limited Liability Company) SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF COMPANY STATEMENTS OF CASH FLOWS For the Periods ended December 31, 1998, 1997 and 1996 (Dollars in thousands) Year ended Year ended April 30 to December 31, December 31, December 31, 1998 1997 1996 ------------ ------------ ------------ (Restated) ------------ Cash flows from operating activities: Net loss.............................. $(62,068) $ (78,457) $(117,149) Adjustments to reconcile net loss to net cash used in operating activities: Interest accretion.................. 26,050 8,550 -- Equity in (income) loss of affiliates......................... (23,246) 65,543 117,149 Changes in operating assets and liabilities: Other assets........................ 1,020 (18,083) -- Accrued liabilities................. 14,652 16,473 -- -------- --------- --------- Net cash used in operating activities....................... (43,592) (5,974) -- -------- --------- --------- Cash flows from investing activities: Distributions from equity affiliates.. 144,267 58,040 -- Investments in equity affiliates...... (100,538) (804,344) -- -------- --------- --------- Net cash provided by (used in) investing activities............. 43,729 (746,304) -- -------- --------- --------- Cash flows from financing activities: Proceeds from notes................... -- 752,278 -- -------- --------- --------- Net cash provided by financing activities....................... -- 752,278 -- -------- --------- --------- Net increase in cash and cash equivalents............................ 137 -- -- Cash and cash equivalents, beginning of period................................. -- -- -- -------- --------- --------- Cash and cash equivalents, end of period................................. $ 137 $ -- $ -- ======== ========= ========= The accompanying notes are an integral part of these condensed financial statements. S-5 FOX/LIBERTY NETWORKS, LLC (A Delaware Limited Liability Company) SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF COMPANY NOTES TO CONDENSED FINANCIAL INFORMATION December 31, 1998 and 1997 (Dollars in thousands) (1) Restatement of Financial Information The December 31, 1997 condensed financial information has been restated to be comparative with December 31, 1998. This restatement had no effect on net loss. (2) Debt Annual future minimum maturities of debt are as follows: 1999................................................................ $ -- 2000................................................................ -- 2001................................................................ -- 2002................................................................ -- 2003................................................................ -- Thereafter.......................................................... 786,878 -------- $786,878 ======== (3) Commitments and Contingencies The Company has guaranteed certain obligations of its subsidiaries. S-6 FOX/LIBERTY NETWORKS, LLC (A Delaware Limited Liability Company) SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (Dollars in thousands) Balance at Balance Beginning Charged to at of Costs and End of Period Expenses Deductions Other Period --------- ---------- ---------- ----- -------- 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) EIGHT MONTHS ENDED DECEMBER 31, 1996 Allowance for doubtful accounts.............. (454) (535) 32 -- (957) Program rights reserve............... -- (80,000) -- -- (80,000) - -------- (1) Represents balances acquired during the period. S-7