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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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Form 10-K
[X]Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended June 30, 2001.
or
[_]Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for transition period from to .
Commission File No. 333-38689
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FOX SPORTS NETWORKS, LLC
(Exact name of registrant as specified in its charter)
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
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Indicate by check mark whether the Registrant has (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of Registrant's voting stock held by non-
affiliates: Not applicable
Number of shares of common stock outstanding as of the close of the period
covered by this report: None
Documents incorporated by reference: None
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This document contains statements that constitute "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act
of 1934, as amended, and Section 27A of the Securities Act of 1933, as
amended. The words "expect," "estimate," "anticipate," "predict," "believe"
and similar expressions and variations thereof are intended to identify
forward-looking statements. These statements appear in a number of places in
this document and include statements regarding the intent, belief or current
expectations of the Company, its members or its officers with respect to,
among other things, trends affecting the Company's financial condition or
results of operations. The readers of this document are cautioned that any
such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, including those risks and uncertainties
discussed in this document under the headings "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
Company does not ordinarily make projections of its future operating results
and undertakes no obligation to publicly update or revise any forward-looking
statements, except as required by law, whether as a result of new information,
future events or otherwise. Readers should carefully review the risk factors
discussed herein and in the other documents filed by the Company with the
Securities and Exchange Commission. This report should be read in conjunction
with the audited consolidated financial statements of the Company and related
notes set forth elsewhere herein.
PART I
Item 1. Business
Background
Fox Sports Networks, LLC, a limited liability company organized under the
laws of the State of Delaware in April 1996, (together with its subsidiaries,
the "Company") is the largest regional sports network ("RSN") programmer in
the United States, focusing on live professional and major collegiate home
team sports events. Fox Sports Networks, LLC is a holding company which
provides cable programming through (i) its sports programming operations,
consisting of interests in RSNs and Fox Sports Net ("FSN"), a national sports
programming service that provides its affiliated RSNs with 24 hour per day
national sports programming featuring live and replay sporting events and
original programming, a national sports news program, the National Sports
Report, and other national sports programming services and through (ii) FX
Network ("FX"), a general entertainment network.
The Company is an indirect wholly-owned subsidiary of Fox Entertainment
Group, Inc. ("Fox" or "FEG"), a majority-owned subsidiary of The News
Corporation Limited ("News Corporation"). The Company was formed in April 1996
as a 50%/50% joint venture between Fox and Liberty Media Corporation
("Liberty"). In July 1999, News Corporation acquired from Liberty
substantially all of Liberty's 50% interest in the Company and its businesses.
News Corporation transferred the acquired interests to Fox in exchange for
common stock of Fox.
In December 1997, the Company consummated a transaction (the "Rainbow
Transaction") with Rainbow Media Sports Holdings, Inc. ("Rainbow"), an
indirect subsidiary of Cablevision Systems Corporation ("Cablevision"),
pursuant to which (i) the Company acquired a 40% interest in Regional
Programming Partners ("RPP") which was formed to hold interests in Rainbow's
then existing RSNs, Madison Square Garden, LP ("MSG") (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, the
New York Knicks, a professional basketball team and Metro Channel LLC), (ii)
the Company and Rainbow formed National Sports Partners (the "National Sports
Partnership") as a 50%/50% partnership to operate FSN and (iii) the Company
and Rainbow formed National Advertising Partners (the "National Advertising
Partnership") as a 50%/50% partnership to act as a national advertising sales
representative for FSN and the RSNs which are affiliated with FSN. RPP is
managed by Rainbow, while the National Sports Partnership and the National
Advertising Partnership are managed by the Company.
2
The Company's interests in the sports programming business are derived
through its 99.5% ownership interests in Fox Sports Net, LLC and Fox Sports
RPP Holdings, LLC ("Fox Sports RPP") and its interest in FX is derived through
its 99% ownership interest in FX Networks, LLC. The remainder of the interests
in these entities are held by affiliates of Fox.
Overview
The Company currently owns and operates 13 RSNs (the "O&O RSNs") and
currently has direct or indirect equity interests ranging from 20% to 70% in
an additional seven 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 41 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 primetime ratings and attractive subscriber fees from cable
operators.
FSN has been structured based on the "broadcast network affiliate" model, in
which each RSN airs a slate of local programming, which is supplemented by a
schedule of network-provided national programming, consistent across all
regions. Unlike the typical "broadcast network affiliate" model, the Company's
programming is anchored by highly rated local programming during primetime.
FSN's model is designed to increase the number of viewers before and after, as
well as during, local sports events. The Company's programming offers national
advertisers the opportunity to purchase national and local advertising from
one source in each of the top designated market areas ("DMAs") in the United
States. The Company believes that sports programming is extremely attractive
to both national and local advertisers due to the high ratings such
programming generally achieves in the key male 18-49 demographic.
The Company currently owns interests in, or is affiliated with, 23 RSNs.
These RSNs and the Company have rights to telecast live games of 72
professional sports teams in the NBA, NHL and MLB (out of a total of 80 such
teams in the United States) and numerous collegiate sports teams to
approximately 73 million households (out of a total of approximately 82
million households receiving basic cable or direct to home ("DTH") satellite
service).
The Company also owns and operates FX, a general entertainment network
currently reaching approximately 71 million cable and DTH households. The
Company also owns interests in various other entertainment and programming
related businesses which it believes are complementary to its principal
businesses.
3
Regional Sports Networks
The following table lists the O&O RSNs, the Company's ownership interests in
such RSNs, such RSNs' primary DMAs, the approximate number of subscribers for
each of the O&O RSNs (as of June 30, 2001), 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 Net 100% Dallas/ 5.3 Dallas Mavericks (NBA)
Southwest Ft. Worth; Dallas Stars (NHL)
Houston; Houston Astros (MLB)
San Antonio Houston Rockets (NBA)
San Antonio Spurs (NBA)
Texas Rangers (MLB)
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Fox Sports Net 100% Los Angeles; 4.5 Los Angeles Lakers (NBA)
West San Diego; Anaheim Angels (MLB)
Las Vegas Los Angeles Kings (NHL)
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Fox Sports Net 100% Los Angeles 3.1 Los Angeles Clippers (NBA)
West2 Mighty Ducks of Anaheim (NHL)
Los Angeles Dodgers (MLB)
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Fox Sports Net 100% Pittsburgh 2.1 Pittsburgh Pirates (MLB)
Pittsburgh Pittsburgh Penguins (NHL)
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Fox Sports Net 100% Denver; 1.0 Denver Nuggets (NBA)
Rocky Mountain Kansas City Colorado Avalanche (NHL)
Colorado Rockies (MLB)
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Fox Sports Net 100% Seattle/Tacoma; 2.2 Seattle Mariners (MLB)
Northwest Portland
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Fox Sports Net Utah 100% Salt Lake City 0.6 Utah Jazz (NBA)
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Fox Sports Net 100% St. Louis; 3.2 St. Louis Cardinals (MLB)
Midwest Indianapolis; St. Louis Blues (NHL)
Kansas City Indiana Pacers (NBA)
Kansas City Royals (MLB)
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Fox Sports Net 100% Phoenix/Tucson 1.2 Arizona Diamondbacks (MLB)
Arizona Phoenix Coyotes (NHL)
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Fox Sports Net 100% Detroit 2.4 Detroit Red Wings (NHL)
Detroit Detroit Pistons (NBA)
Detroit Tigers (MLB)
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Fox Sports Net 100% Minneapolis; 2.3 Minnesota Wild (NHL)
North Milwaukee Minnesota Twins (MLB)
Milwaukee Brewers (MLB)
Milwaukee Bucks (NBA)
Minnesota Timberwolves (NBA)
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Fox Sports Net 88% Atlanta; Charlotte; 6.8 Atlanta Braves (MLB)
South Raleigh/Durham; Atlanta Hawks (NBA)
Nashville Charlotte Hornets (NBA)
Carolina Hurricanes (NHL)
Nashville Predators (NHL)
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Sunshine 60.1% Tampa/ 3.9 Tampa Bay Lightning (NHL)
Network St. Petersburg/ Miami Heat (NBA)
Sarasota; Miami/ Orlando Magic (NBA)
Ft. Lauderdale;
Orlando
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(1) All ownership interests are indirect. The Company consists of numerous
limited liability companies, general and limited partnerships and
corporations. For a variety of tax and corporate reasons, the equity
ownership of certain individual entities in the chain of entities holding
interests in RSNs and FX include interests held directly by affiliates of
Fox and, in certain instances, Liberty. See "Business--Certain
Arrangements Regarding Ownership Interests."
4
In addition, a contract with MLB allows the Company to nationally telecast
26 MLB games per year through the 2007 season on each of FX and Fox Family
Channel, a programming service of Fox Family Worldwide, a joint venture 49.5%
owned by FEG. In connection with the consummation of a pending sale of Fox
Family Worldwide to The Walt Disney Company ("Disney"), the Company's rights
and obligations under this agreement will be assigned to Disney commencing
with the 2002 season. Such assignment is subject to the approval of MLB.
The following table lists the non-managed RSNs in which the Company owns
equity interests, the Company's ownership interests in such RSNs, the primary
DMAs in which such RSNs operate, the approximate number of subscribers of such
RSNs (as of June 30, 2001), and the professional sports teams with which each
RSN has sports programming rights agreements.
Ownership Subscribers
RSN Interest(1) DMA (in millions) Team (League)
--- ----------- --- ------------- -------------
Fox Sports Net 70% Chicago 3.5 Chicago Bulls (NBA)
Chicago Chicago Blackhawks (NHL)
Chicago White Sox (MLB)
Chicago Cubs (MLB)
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Fox Sports Net 70% San Francisco/ 3.2 San Francisco Giants (MLB)
Bay Area Oakland/San Jose; Oakland A's (MLB)
Sacramento/ Golden State Warriors (NBA)
Stockton/Modesto San Jose Sharks (NHL)
Sacramento Kings (NBA)
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Fox Sports Net 20% Boston; 3.6 Boston Celtics (NBA)
New England Providence;
Hartford
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Fox Sports Net 40% Tampa/ 3.2 Florida Marlins (MLB)
Florida St. Petersburg/Sarasota; Florida Panthers (NHL)
Miami/ Tampa Bay Devil Rays (MLB)
Ft. Lauderdale;
Orlando/Daytona/
Melbourne
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Fox Sports Net 40% Cleveland; 4.3 Cleveland Indians (MLB)
Ohio Columbus; Cleveland Cavaliers (NBA)
Cincinnati Columbus Blue Jackets (NHL)
Cincinnati Reds (MLB)
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Fox Sports Net 40% New York City 4.8 New York Mets (MLB)
New York New Jersey Nets (NBA)
New York Islanders (NHL)
New Jersey Devils (NHL)
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MSG Network 40% New York City 6.7 New York Yankees (MLB)
New York Knicks (NBA)
New York Rangers (NHL)
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(1) All ownership interests are indirect. The Company consists of numerous
limited liability companies, general and limited partnerships and
corporations. For a variety of tax and corporate reasons, the equity
ownership of certain individual entities in the chain of entities holding
interests in RSNs include interests held by affiliates of Fox and, in
certain instances, Liberty. See "Business--Certain Arrangements Regarding
Ownership Interests."
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)
Sports Net Philadelphia 76ers (NBA)
Philadelphia Flyers (NHL)
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Comcast Washington DC; Washington Capitals (NHL)
Sports Net Baltimore Washington Wizards (NBA)
Baltimore Orioles (MLB)
Carolina Hurricanes (NHL)
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Empire Buffalo Buffalo Sabres (NHL)
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Owned and Operated RSNs
Southwest. Launched in 1983, the Southwest RSN's coverage area includes
Texas, Oklahoma, Arkansas, Louisiana and parts of New Mexico. As of June
30, 2001, there were approximately 5.3 million subscribers. The Southwest
RSN currently has professional rights agreements with the Dallas Mavericks
(NBA), the Houston Astros (MLB), the Dallas Stars (NHL), the San Antonio
Spurs (NBA), the Houston Rockets (NBA) and the Texas Rangers (MLB) and
collegiate contracts covering the Big 12.
West. Launched in 1985, the West RSN's coverage area includes southern
California, Nevada and Hawaii. As of June 30, 2001, there were
approximately 4.5 million subscribers. 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 and the University
of California, Los Angeles.
West2. Launched in 1997, the West2 RSN is a second channel in the
southern California region. As of June 30, 2001, there were approximately
3.1 million subscribers. The West2 RSN currently has professional rights
agreements with the Los Angeles Dodgers (MLB), the Mighty Ducks of Anaheim
(NHL) and the Los Angeles Clippers (NBA).
Pittsburgh. Launched in 1986, the Pittsburgh RSN's coverage area includes
Pennsylvania, eastern Ohio, West Virginia and parts of New York and
Maryland. As of June 30, 2001, there were approximately 2.1 million
subscribers. The Pittsburgh RSN currently has professional rights
agreements with the Pittsburgh Pirates (MLB) and the Pittsburgh Penguins
(NHL) and collegiate sublicenses for games of the University of Pittsburgh
and The Pennsylvania State University.
Rocky Mountain. Launched in 1988, the Rocky Mountain RSN's coverage area
includes Colorado, Kansas, Missouri, Nebraska, New Mexico, South Dakota and
Wyoming. As of June 30, 2001, there were approximately 1.0 million
subscribers. The Rocky Mountain RSN currently has professional rights
agreements with the Denver Nuggets (NBA), the Colorado Avalanche (NHL), and
the Colorado Rockies (MLB) and collegiate contracts covering the Big 12 and
Western Athletic Conferences.
Northwest. Launched in 1988, the Northwest RSN's coverage area includes
Washington, Oregon, Idaho, Alaska and western Montana. As of June 30, 2001,
there were approximately 2.2 million subscribers. The Northwest RSN
currently has professional rights agreements with the Seattle Mariners
(MLB) and collegiate contracts covering the University of Washington,
Washington State University, the University of Oregon, Oregon State
University and the Big Sky Conference.
Utah. Launched in 1989, the Utah RSN's coverage area includes Utah,
southern Idaho, Montana, Nevada and western Wyoming. As of June 30, 2001,
there were approximately 0.6 million subscribers. The
6
Utah RSN currently has a professional rights agreement with the only
professional sports team in the region, the Utah Jazz (NBA), and collegiate
contracts covering the Western Athletic and Big Sky Conferences.
Midwest. Launched in 1989, the Midwest RSN's coverage area includes
Missouri, Indiana, Kentucky, Ohio, eastern Wisconsin and southern Illinois.
As of June 30, 2001, there were approximately 3.2 million subscribers. The
Midwest RSN currently has professional rights agreements with the St. Louis
Cardinals (MLB), the Indiana Pacers (NBA), the St. Louis Blues (NHL) and
the Kansas City Royals (MLB) and collegiate contracts covering the Big 12
Conference.
Arizona. Launched in 1996, the Arizona RSN's coverage area includes
Arizona and parts of Nevada. As of June 30, 2001, there were approximately
1.2 million subscribers. The Arizona RSN has professional rights agreements
with the Phoenix Coyotes (NHL) and the Arizona Diamondbacks (MLB) and
collegiate contracts covering the University of Arizona and Arizona State
University.
Detroit. Launched in September 1997, the Detroit RSN's coverage area
includes Michigan and northern Ohio. As of June 30, 2001, there were
approximately 2.4 million subscribers. 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.
North. Launched in 1989 and acquired by the Company and rebranded in
2001, the North RSN's coverage area includes Minnesota and Wisconsin. As of
June 30, 2001, there were approximately 2.3 million subscribers. The North
RSN currently has professional rights agreements with the Minnesota Twins
(MLB), the Milwaukee Brewers (MLB), the Milwaukee Bucks (NBA), the
Minnesota Timberwolves (NBA), and the Minnesota Wild (NHL) and collegiate
contracts covering the University of Wisconsin and the University of
Minnesota.
South. The Company owns 88% of the South RSN and the remaining 12% of the
South RSN is owned by E.W. Scripps Company. Launched in 1990, the South
RSN's coverage area includes Georgia, Alabama, Kentucky, Mississippi, North
Carolina, South Carolina and Tennessee. As of June 30, 2001, there were
approximately 6.8 million subscribers. The South RSN currently has
professional rights agreements with the Atlanta Braves (MLB), the Atlanta
Hawks (NBA), the Charlotte Hornets (NBA), the Nashville Predators (NHL) and
the Carolina Hurricanes (NHL) and collegiate contracts covering the South
East and Atlantic Coast Conferences. See "Business--Certain Arrangements
Regarding Ownership Interests."
Sunshine. The Company currently owns 60.1% of the Sunshine RSN and the
remaining 39.9% of the Sunshine RSN is owned by affiliates of the Company
and various Multiple System Operators ("MSOs") operating in the region,
including Comcast Corporation ("Comcast"), Cox Communications, Inc. ("Cox")
and Adelphia Communications Corp. ("Adelphia"). In August 2001, the
Company, together with certain of its affiliates and Comcast, acquired
AT&T's 14.616% interest in the Sunshine RSN. Launched in 1988, the Sunshine
RSN coverage area includes most of Florida. As of June 30, 2001, there were
approximately 3.9 million subscribers. The Sunshine RSN currently has
professional rights agreements with the Orlando Magic (NBA), the Miami Heat
(NBA) and the Tampa Bay Lightning (NHL) and collegiate contracts covering
the University of Florida, Florida State University and the University of
Miami. See "Business--Certain Arrangements Regarding Ownership Interests."
Non-Managed RSNs
The Company owns equity interests in, but does not manage, the following
RSNs:
Chicago. The Company directly owns 50% of the Chicago RSN and owns an
additional 20% of the Chicago RSN indirectly through RPP. A subsidiary of
RPP currently owns 50% of the Chicago RSN and is the managing partner.
Launched in 1986 and affiliated with FSN since January 1998, the Chicago
RSN's coverage area includes Illinois, Iowa, Indiana and Wisconsin. As of
June 30, 2001, there were approximately 3.5 million subscribers.
Professional teams in this region include the Chicago Bulls (NBA), the
Chicago Blackhawks (NHL), the Chicago White Sox (MLB), and the Chicago Cubs
(MLB). Collegiate contracts cover DePaul University as well as the Big 10
Conference.
7
Bay Area. The Company directly owns 50% of the Bay Area RSN and owns an
additional 20% of the Bay Area RSN through RPP. A subsidiary of RPP
currently owns 50% of the Bay Area RSN and is the managing partner.
Launched in 1990 and affiliated with FSN since January 1998, the Bay Area
RSN's coverage area includes northern California, southern Oregon, Hawaii
and northern Nevada. As of June 30, 2001, there were approximately 3.2
million subscribers. Professional teams include the San Francisco Giants
(MLB), the Oakland A's (MLB), the Golden State Warriors (NBA), the
Sacramento Kings (NBA) and the San Jose Sharks (NHL), while collegiate
contracts cover Stanford University and the University of California,
Berkeley.
Through its 40% ownership interest in RPP, the Company holds indirect
ownership interests, in the following RSNs:
New England. RPP manages and owns 50% of the New England RSN. Launched in
1984 and affiliated with FSN since January 2001, the New England RSN's
coverage area includes Massachusetts, Rhode Island, Vermont, New Hampshire,
Maine and parts of Connecticut. As of June 30, 2001, there were
approximately 3.6 million subscribers. The professional team is the Boston
Celtics (NBA).
Florida. RPP manages and owns 100% of the Florida RSN. In January 2000,
RPP increased its ownership interest in the Florida RSN to 100% by
purchasing Front Row Communications, Inc.'s 70% ownership interest.
Launched in 1993 and affiliated with FSN since March 2000, the Florida
RSN's coverage area includes the State of Florida. As of June 30, 2001,
there were approximately 3.2 million subscribers. Professional teams
include the Florida Marlins (MLB), the Florida Panthers (NHL) and the
Tampa Bay Devil Rays (MLB).
Ohio. RPP manages and owns 100% of the Ohio RSN. Launched in 1989 and
affiliated with FSN since January 1998, the Ohio RSN's coverage area
includes Ohio, western Pennsylvania, northwest New York, West Virginia,
Kentucky and Indiana. As of June 30, 2001, there were approximately 4.3
million subscribers. Professional teams include the Cleveland Indians
(MLB), the Cleveland Cavaliers (NBA), the Cincinnati Reds (MLB) and the
Columbus Blue Jackets (NHL).
New York. RPP owns and operates two RSNs in the New York region: The
Madison Square Garden Network ("MSG") and Fox Sports Net New York. RPP
manages and owns 100% of each of MSG and Fox Sports Net New York.
Acquired in 1994 as Madison Square Garden Network, MSG's coverage area
includes New York and parts of New Jersey and Connecticut. As of June 30,
2001, there were approximately 6.7 million subscribers in the region.
Professional teams include the New York Knicks (NBA), the New York Rangers
(NHL) and the New York Yankees (MLB).
Launched in 1982 and an affiliate of FSN since January 1998, Fox Sports
Net New York's coverage area includes New York and parts of New Jersey and
Connecticut. As of June 30, 2001, there were approximately 4.8 million
subscribers in the region. 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, LP, RPP has a 100% ownership interest in
the New York Knicks (NBA), the New York Rangers (NHL), the Madison Square
Garden entertainment complex and Radio City Productions LLC ("RCP"). RPP
also has a 100% ownership interest in Metro Channel LLC, a company
established by Rainbow to own and operate the Metro Channels. The Metro
Channels are intended to provide programming of particular interest to the
regions in which they operate, such as local news, business, entertainment
and sports.
Rights Agreements
The right to telecast professional sports events is obtained through rights
agreements between an RSN and an individual professional sports team. Rights
agreements are generally for a specified number of games
8
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 currently in place (from commencement to scheduled termination)
entered into by the O&O RSNs exceeds eight years and the average remaining
term of these agreements (to scheduled termination) exceeds six years. Certain
of the rights agreements contain provisions for early termination or
renegotiation of the terms therein prior to their scheduled termination. In
addition, the O&O RSNs' rights agreements generally contain certain rights
with respect to a subsequent term such as rights of first refusal, rights of
first negotiation or rights to match offers made by third parties. The
Company's objective is to renew O&O RSN rights contracts on favorable terms.
However, the renewal costs could substantially exceed the original contract
cost, the O&O RSNs could be outbid for such rights contracts or rights holders
could elect to retain the rights for their own use. The loss of rights could
impact the extent of the Company's regional sports coverage, which could
adversely affect the Company's ability to sell local and national advertising
time and, in some cases, to maintain affiliate fees. See "Business--
Competition," "Business--Advertising" and "Business--Affiliated Cable Systems
and Subscribers."
The rights agreements of the Company and its O&O RSNs is diversified, with a
total of 41 professional rights contracts. These contracts include rights to
14 MLB teams, 15 NBA teams and 12 NHL teams. The O&O RSNs, through their
affiliation with FSN, also have rights to two of the country's top collegiate
football conferences, the PAC-10 and the Big 12 and two of the country's top
collegiate basketball conferences, the PAC-10 and the Atlantic Coast
Conference.
Fox Sports Direct
Fox Sports Direct packages and distributes via satellite the programming of
various RSNs. In addition to providing sports programming produced by the O&O
RSNs, Fox Sports Direct also distributes sports programming produced by
certain third-party-owned RSNs pursuant to agreements with such RSNs. Fox
Sports Direct's sports programming is currently distributed to approximately
8.1 million DTH households. Fox Sports Direct packages the programming of
various RSNs for distribution to the Ku-Band marketplace by DirecTV, Inc.
("DirecTV") and EchoStar Communications Corporation's Dish network ("Dish
Network").
Fox Sports Net
FSN has been structured based on the "broadcast network affiliate" model, in
which each RSN airs a slate of local programming, which is supplemented by a
schedule of network-provided national programming, consistent across all
regions. Unlike the typical "broadcast network affiliate" model, the Company's
programming is anchored by highly rated local programming during prime time.
The primary function of FSN is to complement local sports programming with a
synchronized schedule of national programming, the cornerstone of which is the
National Sports Report. The National Sports Report provides detailed coverage
of sports news nationwide and airs at 10:30 pm in each time zone. FSN also
provides other sports programming events, National Collegiate Athletic
Association ("NCAA") college football and basketball, boxing, Professional
Golfers' Association of America ("PGA") golf and other sporting events, as
well as original sports-related programming such as The Last Word, Totally
NASCAR, You Gotta See This! and Beyond the Glory.
FSN has entered into program license agreements with RSNs across the country
including the Company's RSNs and third-party-owned RSNs. These agreements
allow the RSNs to carry certain programming of FSN in exchange for a per
subscriber fee. The program license 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
RSNs during portions of the RSN's regional sports programming.
Affiliated Cable Systems and Subscribers
During the year ended June 30, 2001, the O&O RSNs generated approximately
64% of their revenues, excluding DTH revenues, from subscriber fees paid by
affiliated cable systems. As of June 30, 2001, the O&O RSNs transmitted
programming to approximately 6,900 local affiliated cable systems in 35
states.
9
Each of the O&O RSNs enters into affiliation agreements with MSOs and/or
individual cable system operators. In certain instances, the Company has
entered into agreements with MSOs that encompass more than one RSN. Such
agreements typically run for five to seven years and generally provide for
annual rate increases. Under these affiliation agreements, cable system
operators must distribute the RSN service to a certain number of subscribers
and/or maintain a certain subscriber base penetration level. The same criteria
are generally used as the basis for calculating the monthly fees paid by the
cable operator to the Company for its programming. The Company's RSNs command
license fees in excess of average fees charged by basic cable networks
overall, but generally consistent with fees charged by other cable network
providers of live regional sports programming. The Company's affiliation
agreements have staggered expiration dates, with an average maturity of
approximately six years (from commencement to scheduled termination).
The Company's RSNs' programming meets many subscribers' demands for
increased local and national sports programming. Current industry trends
suggest that many new channels to be offered by cable system operators will be
offered on a pay-per-view, a la carte or digital tier basis as the operators
seek to compete against the extensive choices offered by DTH distribution
systems. As advertiser supported networks, RSNs depend on achieving and
maintaining carriage within the basic cable programming package, as the
subscriber penetration rate for pay-per-view or a la carte programming
packages is substantially less than the penetration rate achieved by basic
programming packages. To date, the strong demand for the Company's RSNs' local
and national sports programming has allowed the Company's RSNs to either
maintain or establish a presence on the basic programming package while
expanding within the DTH market.
Advertising
FSN and the Company's RSNs derive significant revenues from selling a fixed
supply of advertising inventory, comprised of advertising time slots ("units")
shown during the Company's national and regional programming. The inventory is
divided among national network, national spot and local advertising. Regional
professional sports events such as basketball, hockey and baseball, as well as
other local sports programming, currently carry both national spot and local
advertising. Network programming such as the National Sports Report, Totally
NASCAR and PGA golf includes national network, national spot and local
advertising.
In July 2000, the O&O RSNs' local advertising sales force combined with the
advertising sales force of FEG's Fox Television Stations Group ("FTS"). On
behalf of the O&O RSNs, and under the direction of the FTS local owned and
operated television stations, this combined advertising sales force sells all
of the local and national spot advertising inventory within the Company's
regional and national programming shown on the RSNs. The Company believes that
using the combined FTS advertising sales force enhances the value of its
advertising inventory. The National Advertising Partnership continues to sell
the national network advertising inventory.
Total advertising revenues are a function of the audience viewing level, the
average cost of each incremental viewer and the number of advertising units
sold. The audience viewing level, or audience delivery, is determined by the
number of subscribers to whom the programming is available and the portion of
those subscribers who are tuned into the programming, as measured by ratings
achieved by FSN and the RSNs. FSN uses A.C. Nielsen, Inc. ("Nielsen") to
provide metered estimates of audience viewing levels which are widely accepted
by advertisers as a basis for measuring audience delivery. The cost of each
incremental viewer is quantified by the cost per thousand homes ("CPM") or the
cost per point ("CPP"). The CPM or CPP is negotiated by the advertiser and the
telecaster, and will vary depending on the type and schedule of the program
that will carry the advertisement and the overall reach or ubiquity of the
network (i.e. cable networks with more subscribers are generally able to
command higher CPMs). CPMs are used in selling national network while CPPs are
used in the national spot and local advertising markets.
The Company's advertising revenues are derived primarily from sales of
advertising units, and to a lesser extent, from 30 to 60 minute program
advertising, also known as infomercials. Advertisers on FSN include
10
nationally known companies in the entertainment, beverage, packaged goods,
fast food, communications, automotive, retail, insurance, banking and travel
industries.
Production and Distribution
Distribution of live sporting events is accomplished by a combination of
satellite and fiber optic 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, via a digital file server, commercial inventory and on-air
promotion spots in formatted positions. The signal of the RSN, including such
event, is then uplinked from the Master Control to a digitally compressed
satellite transponder, where the local cable system operator, or MSO, can
downlink the signal. After accessing the RSN signal from the transponder, the
cable system operator delivers the signal to the cable subscriber via hard-
wired coaxial cable, or in some cases, fiber optic cable. In the case of DTH
distribution, DirecTV and Dish Network downlink the RSN's signal and re-uplink
to their satellites, where their subscribers downlink the signal to Ku-band
dishes at their homes or establishments.
FSN distributes 24 hours of national programming each day, which is made
available for all affiliated RSNs. Each RSN has the opportunity to receive and
deliver the national programming when no regional professional sports event or
locally-produced programming is available. This national service is treated
like a separate RSN with its own Master Control and technical operations.
The National Sports Report is produced by FSN live daily from the production
facilities of an affiliate of the Company. The show is delivered to the
Company's uplink facility located in Houston via a direct fiber optic
connection. Commercial inserts and on-air promotional materials are inserted
through each RSN's Master Control.
The Regional Sports Report is a half hour sports news program unique to each
RSN. Dedicated to providing coverage of the local professional and collegiate
teams within the RSN's region, as well as other sports news of interest within
the region, the Regional Sports Report is broadcast at 10:00 pm locally, or
immediately following a professional event, in each RSN's region. The Regional
Sports Report is produced live by an affiliate of the Company either locally
or, for certain RSN's, at satellite studio hubs. Distribution of the programs
is accomplished in a manner comparable to the National Sports Report.
FX
FX was launched in June 1994 and currently reaches approximately 71 million
cable and DTH households. FX's strength has been derived from its ability to
bring award-winning television series to cable, its access to the Fox film
library and its development of original programming. In addition, FX carries
sports programming with live coverage of National Association of Stock Car
Auto Racing ("NASCAR") events, including both Winston Cup and Busch series
races, and national MLB games airing one night per week through the 2001
season.
FX's line-up for the Fall 2001 season includes syndicated hits Ally McBeal,
The Practice, and Buffy the Vampire Slayer, and original programming,
including Son of the Beach, a Howard Stern production, and The Toughman World
Championship series. FX, which aired three original movies in fiscal 2001, is
in production on Sins of the Father, its first original movie for fiscal 2002.
FX also continues to increase its presence as a leading
11
general entertainment cable network by having acquired the cable rights to
King of the Hill as well as a slate of recently released feature films
including X-Men, Planet of the Apes, Big Momma's House, Me, Myself and Irene
and Crouching Tiger, Hidden Dragon.
FX is distributed from a Master Control located in Los Angeles. FX has two
digital channel feeds on one transponder to provide alternate programming
feeds for the east and west coast time zones. Cable system operators access
this transponder via their system head-ends and distribute to subscribers via
co-axial cable, or in some cases fiber optic cable. Overall, FX's distribution
functions much like an RSN, with the exception of the dual feeds for the two
different time zones. Additionally, FX has an analog feed of the east coast
time zone for the backyard market.
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, Internet,
print media, motion picture theaters, video cassettes, DVDs and other sources
of information and entertainment. Important competitive factors are the prices
charged for programming, the quantity, quality and variety of the programming
offered and the effectiveness of marketing efforts.
Increased competition for viewers in the cable industry may result from
technological advances, such as digital compression technology, which allows
cable systems to expand channel capacity; the further deployment of fiber
optic cable, which has the capacity to carry a much greater number of channels
than co-axial cable; and "multiplexing," in which programming services offer
more than one feed of their programming. The increased number of choices
available to the Company's viewing audience as a result of such technological
advances may lead to a reduction in the Company's market share. The Company
competes or expects to compete in the future for advertising revenue with the
television programming services described above, as well as with other
national television programming services, superstations, broadcast television
networks, local over-the-air television stations, Internet, radio and print
media.
RSNs
The Company distributes a full range of sports programming on both a
national and regional level, with the Company's major focus being on regional
sports programming. On a national level, the Company's primary competitor is
ESPN, and to a lesser extent, ESPN2. In addition, ESPNews and CNN/SI, each
offer a 24 hour sports news format which competes directly with the National
Sports Report. In regional markets, the Company's RSNs compete with other
regional sports networks, including those operated by team owners and other
sports programming providers and distributors.
In addition to competition for cable distribution, viewers and advertisers,
the Company's RSNs also compete, to varying degrees, for programming. With
respect to the acquisition of sports programming rights, FSN competes for
national rights principally with the national broadcast television networks, a
number of national cable services that specialize in or carry sports
programming, and television "superstations," which distribute sports and other
programming to cable television systems by satellite, and with independent
syndicators that acquire and resell such rights nationally, regionally and
locally. The Company's RSNs also compete for local
12
and regional rights with those independent syndicators, with local broadcast
television stations and with other local and regional sports networks. The
owners of distribution outlets such as cable television systems may also
contract directly with the sports teams in their service area for the right to
distribute a number of such teams' games on their systems. The owners of teams
may also launch their own regional sports networks and contract with cable
television systems for carriage. In certain markets, the owners of
distribution outlets, such as cable television systems, also own one or more
of the professional teams in the region, increasing their ability to launch
competing networks and thereby limiting the professional sports rights
available for acquisition by the Company's RSNs.
FX
FX faces competition in the acquisition of distribution rights to
programming. FX competes for programming with other cable networks and
broadcast networks.
Satellite Distribution
All programming for the Company is transmitted from the Company's facilities
located in Houston and Los Angeles. Local teleports near each facility provide
uplink services to deliver the Company's programming to transponders on
various geosynchronous satellites which, in turn, are received by cable system
operators, DTH services and other customers.
Presently, each regional sports network has a dedicated feed which is
transmitted to a transponder as either a digital or an analog signal. In
addition, a network feed is transmitted to a transponder as a means of
distributing FSN programming (including the National Sports Report) to the
Company's RSNs. Each cable system head-end has equipment which is controlled
remotely from the Company's Houston location. This provides the Company with
substantial flexibility to "switch" the programming for an individual region
or sub-region to alternative programming in order to accommodate regional
variations in broadcast rights for certain teams and events.
Programming for FX is distributed using two digital channel feeds on one
transponder, 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. Additionally, FX has an analog feed of the east coast time
zone for the backyard market.
The Company's business depends upon the launch and operation of satellites
by third parties. As of June 30, 2001, the Company leased 12 full-time
transponders. One of these transponders is leased from an affiliate of the
Company. Six of these 12 transponders, with leases expiring between January
2002 and 2012, are used by its domestic sports networks and another
transponder is shared among the domestic sports networks and FX. The remaining
transponders are used by entities other than the Company's domestic sports
networks. FX uses two of these transponders, including one it shares with two
domestic sports networks. Three other transponders are subleased to other
programming services including, in certain instances, affiliates of the
Company. Lastly, one transponder lease expired in August 2001. See "Certain
Relationships and Related Transactions."
The Company has digitally compressed its transmissions on Galaxy XI and
Satcom C-3. Through compression, the Company is able to combine up to six
services on one transponder, using bit rates ranging from 6 to 10 megabits per
second. This has improved signal quality, programming and "switching"
capability, growth opportunities, and has also resulted in significant cost
savings due to the reduced transponder requirements.
13
Satellites are subject to significant risks that may prevent or impair
proper commercial operations, including satellite defects, launch failure,
destruction and damage and incorrect orbital placement. Because the Company's
primary satellites (Galaxy XI and Satcom C-3) are already in orbit, the
Company does not expect to face any significant launch risks over the next
several years. In 2014, which is the projected end of useful life for Galaxy
XI, the Company might again face satellite launch risk, depending on the
selected transponder migration plans at that time. Failure or disruption of
satellites that are already operational, such as Satcom C-3 and Galaxy XI,
could have an adverse effect on the Company. The Galaxy XI and Satcom C-3
transponder leases are "protected," in that these leases provide for
transmission on a back-up satellite should a serious transmission or reception
fault occur. As a result of full implementation of the Company's digital
compression plan in 1999, all of the Company's services are either on Galaxy
XI or Satcom C-3, and thus are "protected," or the capacity exists to allow
all of the services to be on these protected transponders.
Regulation and Legislation
Certain aspects of the Company's programming operations are subject,
directly or indirectly, to federal, state, and local regulation. At the
federal level, the operations of cable television systems, satellite
distribution systems, other multichannel distribution systems, broadcast
television stations, and, in some respects, vertically integrated cable
programmers are subject to the Communications Act of 1934, as amended by the
Cable Communications Policy Act of 1984 (the "1984 Act"), the Cable Television
Consumer Protection and Competition Act of 1992 (the "1992 Act"), which
amended the 1984 Act, the Satellite Home Viewer Improvement Act of 1999
("SHVIA") 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
FCC regulations adopted pursuant to the 1992 Act prevent a cable operator
that has an attributable interest (including voting or non-voting stock
ownership of 5% or more or limited partnership equity interests of 5% or more)
in a programming vendor from exercising undue or improper influence over the
vendor in its dealings with competitors to cable. The regulations also
prohibit a cable programmer in which a cable operator has an attributable
interest from entering into exclusive contracts with any cable operator or
from discriminating among competing multichannel program distributors in the
price, terms and conditions of sale or delivery of programming. With respect
to cable systems having channel capacity of less than 76 channels, the FCC's
regulations limit to 40% the number of programming channels that may be
occupied by video programming services in which the cable operator has an
attributable interest. As a result of Liberty's ownership interest in News
Corporation, the Company's programming services are subject to these
requirements. Similarly, Cablevision is deemed to have an attributable
interest in the programming services of RPP. The FCC's program access and non-
discrimination regulations therefore restrict the ability of these cable
programming services to enter into exclusive contracts. The rules also permit
multichannel video programming distributors (such as multichannel multipoint
distribution services ("MMDS"), satellite master antenna televisions
("SMATV"), DBS and DTH operators) to bring complaints against the Company to
the FCC charging they are unable to obtain the affected programming networks
on nondiscriminatory terms. While cable systems are expanding their capacity,
there may be instances in which a Cablevision cable system with 75 channels or
less will not be able to carry an RPP service or will have to remove another
affiliated channel.
14
The FCC's regulations concerning political advertising also apply to certain
cable television programming services carried by cable system operators. The
Company must provide program ratings information and increased closed
captioning of its cable programming services to comply with FCC regulations,
and may have to provide video descriptions on some of its services, which
could increase its operating expenses.
FCC regulations implementing the 1992 Act require each television
broadcaster to elect, at three year intervals, either to (i) require carriage
of its signal by cable systems in the station's market ("must carry") or (ii)
negotiate the terms on which such broadcast station would permit transmission
of its signal by the cable systems within its market ("retransmission
consent"). The FCC recently has initiated a rulemaking proceeding to determine
carriage requirements for digital broadcast television signals on cable
systems, including carriage during the period of transition from analog to
digital signals. The SHVIA requires satellite carriers, by January 1, 2002, to
carry upon request all television stations located in markets in which the
satellite carrier retransmits at least one local station pursuant to the
statutory copyright license provided by SHVIA. FCC regulations implementing
this statutory provision require affected stations to either elect mandatory
carriage at the same three year intervals applicable to cable must carry or
negotiate carriage terms.
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.
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 ("FBC")
agreed to grant the Company, its O&O RSNs and the RSNs managed by RPP a non-
exclusive, royalty free license to use the "FOX" brand name and certain
related artwork. See "Certain Relationships and Related Transactions."
In their telecast rights agreements with the professional sports teams in
their markets, RSNs are granted certain rights to use the name, logos,
symbols, seals, emblem, and insignia and other trademarks of the team and its
opponents. Generally, such agreements restrict such usage to the actual game
telecasts, and for other purposes incident thereto (news and highlight shows
and on-air promotional spots), and for other purposes (e.g., print
advertisements) so long as the use is limited to the marketing and promotion
of the teams and the RSNs. Typically the RSNs also have the contractual right
to use the pictorial representations and the names and likenesses of the
players, managers, coaches and officials of the team, its opponents, and the
applicable league in
15
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 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.
The Company has an agreement with the National Association of Stock Car Auto
Racing ("NASCAR") to telecast certain events on a national basis on FBC, FSN
and FX and has certain rights to use the name, logos, symbols and other
trademarks of NASCAR and its members.
Employees
As of June 30, 2001, the Company, together with its O&O RSNs and other
subsidiaries, had 1,468 full-time employees. The Company also regularly
engages freelance creative staff and other part-time employees. None of the
Company's employees are covered by collective bargaining agreements. The
Company believes its relations with its employees are good.
Certain Arrangements Regarding Ownership Interests
South. The South RSN is operated through SportSouth Network, Ltd. ("South
Ltd."). LMC Southeast Sports, Inc. ("LMC Southeast") holds a 1% limited
partnership capital interest and a 43% general partnership capital interest in
South Ltd. SportSouth Holdings, LLC (jointly owned by LMC Southeast and LMC
Southeast's direct parent) holds a 1% general partnership profits interest and
a 43% limited partnership profits interest and Liberty SportSouth Inc. (a
wholly-owned subsidiary of LMC Southeast) holds a 1% general partnership
capital and profits interest and a 43% limited partnership capital and profits
interest in South Ltd. The remaining 12% general partnership interest in South
Ltd. is held by E.W. Scripps Company. Liberty/Fox Southeast LLC, a subsidiary
of Fox Sports Net, LLC, holds 100% of the equity interest and 49% of the
voting interest of LMC Southeast and Liberty Sports, Inc., an affiliate of
Liberty, holds 51% of the voting interest.
The partners of South Ltd. are subject to a buy/sell procedure which may be
initiated at any time by any general partner of South Ltd. The partner
initiating the buy/sell procedure (the "Initiating Partner") must notify the
other general partner (the "Responding Partner") of South Ltd. of its
intention to initiate the buy/sell procedure, such notification to include a
statement by the Initiating Partner of the value of South Ltd. Within 90 days
after receipt of such notice, the Responding Partner shall notify the
Initiating Partner of its election to either purchase the Initiating Partner's
interest in South Ltd. or sell its interest in South Ltd. to the Initiating
Partner. If the Responding Partner does not respond within 90 days, it shall
be deemed to be an election of the Responding Partner to sell its interest in
South Ltd. to the Initiating Partner.
Sunshine. The Sunshine RSN is operated through Sunshine Network, a joint
venture with ARC Ltd. holding a 49% interest and Sunshine Network of Florida,
Ltd. ("SNFL") holding a 51% interest. LMC Sunshine, Inc. holds a 21.474%
limited partnership interest in SNFL and Sunshine Network, Inc. ("SNI"), an
entity in which LMC Sunshine, Inc. holds a 21.691% interest, holds a 1%
general partnership interest. The remaining interests in SNFL, Ltd. are held
by an affiliate of Fox and various regional cable MSOs. Liberty/Fox Sunshine
LLC, a subsidiary of Fox Sports Net, LLC, holds 100% of the equity interest
and 49% of the voting interest of LMC Sunshine, Inc. and Liberty Sports, Inc.,
an affiliate of Liberty, holds 51% of the voting interest. In August 2001, the
Company, together with certain of its affiliates and Comcast, acquired AT&T's
14.616% interest in the Sunshine RSN.
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
16
notify the other venturer (the "Responding Venturer") of Sunshine Network of
its intention to initiate the buy/sell procedure, such notification to include
a statement by the Initiating Venturer of the value of Sunshine Network.
Either within 60 days after receipt of such notice if Sunshine Network of
Florida, Ltd. is the Initiating Venturer, or, if ARC Ltd. is the Initiating
Venturer, within 120 days of the date that Sunshine Network of Florida, Ltd.
receives an appraisal of Sunshine Network (provided that such appraisal is
requested by Sunshine Network of Florida, Ltd. within 10 days of the receipt
of the buy/sell notice and such appraisal is completed no later than 21 days
after such request), the Responding Venturer shall notify the Initiating
Venturer of its election to either purchase the Initiating Venturer's interest
in Sunshine Network or sell its interest in Sunshine Network to the Initiating
Venturer. If the Responding Venturer fails to timely notify the Initiating
Venturer of its election, the Initiating Venturer shall have the right, at its
option, to either purchase the Responding Venturer's interest in Sunshine
Network or require the Responding Venturer to purchase its interest in
Sunshine Network.
Chicago. The Chicago RSN is operated through SportsChannel Chicago
Associates ("Chicago Associates"). RPP holds a 50% interest in Chicago
Associates and Fox Sports Net Chicago Holdings, LLC holds a 50% interest.
Rainbow holds a 60% general partnership interest in RPP and Fox Sports RPP
holds a 40% general partnership interest. The Company holds a 99.5% membership
interest in Fox Sports RPP and FRSM II holds a .5% membership interest.
Bay Area. The Bay Area RSN is operated through SportsChannel Pacific
Associates ("San Francisco Associates"). RPP holds a 50% interest in San
Francisco Associates and Fox Sports Net Bay Area Holdings, LLC holds a 50%
interest.
New England. The New England RSN is operated through SportsChannel New
England Limited Partnership. RPP holds a 50% ownership interest in the New
England RSN and AT&T holds a 50% interest.
Florida. The Florida RSN is operated through SportsChannel Florida
Associates ("Florida Associates"), a wholly owned subsidiary of RPP.
Ohio. The Ohio RSN is operated through SportsChannel Ohio Associates ("Ohio
Associates"), a wholly-owned subsidiary of RPP, and 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, LP,
and Fox Sports Net New York, operated through SportsChannel Associates
("SportsChannel New York Associates"), a wholly-owned subsidiary of MSG, which
is a wholly-owned subsidiary of RPP.
Item 2. Properties
The Company's corporate facilities are located in Los Angeles, California
where it leases approximately 70,000 square feet of office space from New
World Communications Group Incorporated, an indirect, wholly-owned subsidiary
of Fox. See "Certain Relationships and Related Transactions." The Company is
currently relocating in Los Angeles, California, leasing approximately 75,000
square feet of office space from an unrelated third party.
17
In addition to the corporate facilities, the Company also leases office
facilities located in the market of each of the O&O RSNs, technical and uplink
facilities located in Houston, Texas and Los Angeles, California and various
sales offices located throughout the United States. The Company has national
ad sales offices in New York, Boston, Atlanta, Detroit, Chicago, Dallas, Los
Angeles and San Francisco. The Company's RSNs have sales offices in Hollywood
(Florida), Kansas City, Indianapolis, Charlotte, Houston, Dallas, Milwaukee,
and St. Petersburg and a public affairs office in Tallahassee. The O&O RSNs
lease office space within the market that they serve and are summarized as
follows:
RSN Location
--- --------
Southwest........................................... Irving, Texas
West/West2.......................................... Los Angeles, California
Pittsburgh.......................................... Pittsburgh, Pennsylvania
Rocky Mountain...................................... Denver, Colorado
Northwest........................................... Bellevue, Washington
Utah................................................ Salt Lake City, Utah
Midwest............................................. St. Louis, Missouri
Arizona............................................. Phoenix, Arizona
Detroit............................................. Detroit, Michigan
North............................................... Minneapolis, Minnesota
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 June 30, 2001 there are no material pending legal proceedings against
the Company, other than routine litigation incidental to the Company's
business, except as described below.
U.S. v. ASCAP--Virtually every cable network is involved in this "rate
court" proceeding in the Southern District of New York to set a formula for
assessing music performance license fees on cable programming. The Company's
cable services pay ASCAP license fees under the current interim rate
structure, which is calculated as a percentage of each network's gross
revenues, and ASCAP is seeking an increase in those fees. The interim rate is
subject to upward or downward adjustment in future rate court proceedings. The
other major copyrighted music performance society, BMI, is assessing a
negotiated interim license fee, and the final rate will be determined either
by negotiation after the conclusion of the ASCAP rate court proceeding or in
another rate court proceeding. The Company cannot predict the final outcome of
these disputes, but does not believe that it will suffer any material
liability as a result therof.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
18
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 for the years ended June 30, 2001
and 2000, the six months ended June 30, 1999, the years ended December 31,
1998 and 1997 and the eight months ended December 31, 1996 and as of June 30,
2001, 2000 and 1999, December 31, 1998, 1997 and 1996 are derived from the
Company's consolidated financial statements audited by Arthur Andersen LLP,
independent public accountants. The selected financial data of the Company for
the twelve months ended June 30, 1999 and the six months ended June 30, 1998
are unaudited.
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.
(Dollars in thousands)
Twelve Six
months months Year Year
Year ended Year ended ended Six months ended ended ended April 30 to
June 30, June 30, June 30, ended June June 30, December 31, December 31, December 31,
2001 2000 1999 30, 1999 1998 1998 1997 1996
---------- ---------- ----------- ---------- ----------- ------------ ------------ ------------
(unaudited) (unaudited)
Statement of Operations
Data:
Revenues.............. $1,006,104 $ 871,666 $693,424 $ 364,253 $326,023 $ 655,194 $ 471,792 $ 144,792
---------- ---------- -------- ---------- -------- ---------- ---------- ---------
Expenses:
Operating............ 713,019 614,980 528,791 296,059 252,544 485,276 420,888 197,445
General and
administrative...... 91,073 75,834 88,583 39,264 41,343 90,662 65,558 31,609
Depreciation and
amortization........ 59,850 48,094 25,108 12,239 8,793 21,662 18,968 8,507
---------- ---------- -------- ---------- -------- ---------- ---------- ---------
863,942 738,908 642,482 347,562 302,680 597,600 505,414 237,561
---------- ---------- -------- ---------- -------- ---------- ---------- ---------
Operating income
(loss)............... 142,162 132,758 50,942 16,691 23,343 57,594 (33,622) (92,769)
---------- ---------- -------- ---------- -------- ---------- ---------- ---------
Other (income)
expenses:
Interest, net........ 145,349 129,640 110,685 54,781 54,521 110,425 34,142 3,819
Subsidiaries' income
tax expense
(benefit), net...... 391 2,039 789 233 900 1,456 (1,590) 3,437
Loss on sale of
assets.............. 140 604 2,888 2,767 -- 121 -- 4,913
Equity loss (income)
of affiliates, net.. (494) 6,345 23,417 11,160 (6,344) 5,913 9,018 12,024
Gain on sale of
equity affiliate.... (40,805) -- -- -- -- -- -- --
Other, net........... (280) (137) (1,204) 471 197 (1,478) 401 --
Minority interest.... 3,929 5,320 3,595 1,736 1,366 3,225 2,864 187
---------- ---------- -------- ---------- -------- ---------- ---------- ---------
Net income (loss)..... $ 33,932 $ (11,053) $(89,228) $ (54,457) $(27,297) $ (62,068) $ (78,457) $(117,149)
========== ========== ======== ========== ======== ========== ========== =========
Balance Sheet Data
(end of period):
Total assets.......... $2,178,295 $2,041,162 $1,932,498 $1,891,935 $1,817,758 $ 610,982
Long-term debt........ 1,676,859 1,588,914 1,488,178 1,401,891 1,246,291 145,304
Members' equity....... 58,625 24,693 35,746 90,203 152,271 230,728
19
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
In April 1996, Fox and Liberty entered into a 50%/50% joint venture,
pursuant to which the Company was formed to provide cable programming through
its sports programming operations, consisting of interests in RSNs and FSN, a
national sports programming service, and through FX, a general entertainment
network. In July 1999, News Corporation acquired substantially all of
Liberty's 50% ownership interest in the Company and transferred that interest
to Fox in exchange for common stock. The Company's interests in the sports
programming business are derived through its 99.5% ownership interests in Fox
Sports Net, LLC and Fox Sports RPP while its interests in FX are derived
through its 99% ownership interest in FX Networks, LLC.
In December 1997, the Company consummated the Rainbow Transaction, pursuant
to which (i) RPP was formed to hold interests in Rainbow's then existing RSNs
and certain other businesses, (ii) the National Sports Partnership was formed
to operate FSN and other national sports programming services, and (iii) the
National Advertising Partnership was formed to act as a national advertising
sales representative for FSN and the RSNs which are affiliated with FSN. RPP
is managed by Rainbow, while the National Sports Partnership and the National
Advertising Partnership are managed by the Company. In connection with the
consummation of the Rainbow Transaction, (i) the Company contributed $850.0
million to RPP in exchange for a 40% partnership interest held by Fox Sports
RPP and Rainbow contributed its interests in certain RSNs, the Madison Square
Garden entertainment complex, RCP, the New York Rangers and the New York
Knicks to RPP in exchange for a 60% partnership interest, (ii) the parties
each contributed certain business interests and other assets related to
national sports programming to the National Sports Partnership in exchange for
50% partnership interests, and (iii) the parties each contributed certain
assets related to advertising sales to the National Advertising Partnership in
exchange for 50% partnership interests.
In August 1997, the Company issued $500.0 million aggregate principal amount
of its 8 7/8% Senior Notes due 2007 and $405.0 million aggregate principal
amount at maturity ($252.3 million gross proceeds) of its 9 3/4% Senior
Discount Notes due 2007 (together, the "Offering"). The net proceeds from
these notes were used, along with proceeds from the Bank Facility (as defined
below), to finance the Rainbow Transaction. In January 1998, pursuant to an
Exchange Offer, the Company exchanged all of these notes for new notes (the
"Notes"), the terms of which were substantially identical to the original
notes, which were registered by the Company under the Securities Act of 1933,
as amended. The Company received no proceeds from the issuance of the Notes in
the Exchange Offer.
In connection with the consummation of the Rainbow Transaction, the Company
and a group of banks led by Chase Manhattan Bank, amended and restated an
existing credit agreement to permit borrowings by Fox Sports Net, LLC, Fox
Sports RPP and FX Networks, LLC, each a subsidiary of the Company (together,
the "Co-Borrowers"), in the amount of $800.0 million (the "Bank Facility").
The Bank Facility was comprised of a $400.0 million revolving credit facility
and a $400.0 million term loan facility. The proceeds of the loans under the
Bank Facility were used to finance, in part, the Rainbow Transaction.
In July 1999, 19th Holdings Corporation, a wholly-owned subsidiary of Fox,
acquired the debt outstanding under the Bank Facility from the group of banks,
and in so doing, assumed the rights and obligations of the group of banks
under the Bank Facility. The Company and 19th Holdings Corporation
subsequently amended and restated the Bank Facility to provide, among other
things, a fixed rate of interest, determined by 19th Holdings Corporation on
an annual basis, and eliminated substantially all of the affirmative and
negative covenants other than with respect to the payment of principal and
interest (the "19th Facility"). In July 2000, the Company and 19th Holdings
amended the 19th Facility to increase the revolving facility to $500.0 million
and the total facility to $900.0 million. The Company currently expects that
remaining availability under the 19th Facility will primarily be used for
investments in certain subsidiaries of the Company and for working capital
purposes.
Included in this Report are the consolidated financial statements of the
Company for the years ended June 30, 2001 and 2000, the six months ended June
30, 1999 and the year ended December 31, 1998.
20
General Programming Operations
Basic cable networks generally recognize revenue from two principal sources:
the payment of affiliate license fees (or "programming fees") from pay
television distributors and the sale of advertising time.
Basic cable networks typically enter into long-term contracts with pay
television distributors such as cable system operators, DTH operators, MMDS
operators and other hybrid pay television platforms. These operators provide
for the delivery of the network's programming to subscribers. Contracts
between networks and distributors generally vary in length and provide for a
monthly programming fee 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 three general types of expenses:
operating expenses (including programming, production, technical, marketing
and advertising), general and administrative expenses and depreciation and
amortization (including amortization of cable distribution investments).
Programming expenses are generally the largest component of a cable
programmer's expenses and include expenses related to originally produced
programming, acquired programming and rights to programming obtained by
contract. Production and technical expenses typically include expenses related
to operating the technical facilities of the network, the equipment required
to uplink the signal to the satellite and, in the case of RSNs, the production
crews who film and announce the games. Marketing expenses include all
promotional expenses related to improving the market visibility and awareness
of the network. Advertising expenses include sales commissions paid to the in-
house sales force involved in the sale of advertising and commissions paid to
outside representatives. General and administrative expenses include salaries,
employee benefits, rent and other routine overhead expenses as well as legal,
accounting and consulting fees.
The Company's Programming Operations
Each of the Company's RSNs receive revenues from both affiliate license fees
and from the sale of air time to local and national advertisers. The Company's
RSNs have rights agreements with professional sports teams and colleges,
within its region of operation. For professional teams, these rights
agreements generally grant the RSN the exclusive right to air a specified
number of games of the professional team per season, plus playoff games, for a
specified fixed fee. The average term of these contracts (from commencement to
scheduled
21
termination) exceeds eight 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. The average remaining term of these contracts (to
scheduled termination) exceeds six years.
FSN, the Company's national programming service, also receives revenue from
both affiliate license fees and from the sale of advertising time to national
network advertisers. FSN's affiliate license fees are received from affiliated
RSNs for the right to distribute FSN's national programming within their
region of operations. Similar to the RSNs, FSN has various rights agreements
for its national sports programming, most notably NCAA college football and
basketball. FSN also produces its own daily sports news program, the National
Sports Report.
Fox Sports Direct, the Company's satellite services operation, provides
sports programming from the RSNs to DTH providers, such as DirecTV and the
Dish Network, for Ku-Band satellite owners. Fox Sports Direct's revenues are
received from a monthly per subscriber fee from the DTH providers. Fox Sports
Direct acquires its sports programming through a license agreement with the
RSNs whereby Fox Sports Direct splits its revenues received from the DTH
providers with the "home territory" RSN in which the specific satellite
subscriber resides.
The National Advertising Partnership receives commissions from the sale of
air time on behalf of RSNs, both the Company's and third party RSNs, as well
as on behalf of FSN. Expenses consist of sales personnel and other sales-
related costs. Prior to consummation of the Rainbow Transaction, sales of
national advertising were a function of Fox Sports Ad Sales, LLC, the
Company's advertising sales subsidiary.
FX receives revenue from both affiliate license fee contracts and the sale
of advertising time and acquires programming from various sources. FX has
entered into contracts with various Hollywood studios, including Twentieth
Century Fox, a subsidiary of Fox, for the exclusive cable rights to telecast
specific programming, including both feature films and off network television
programming, within a specified term. These contracts are generally long-term
in nature. Under accounting principles generally accepted in the United
States, FX capitalizes its film rights and amortizes the asset over the life
of the contract. As a result, the amount of cash payments made for a film
contract in a particular reporting period may differ from the amount
amortized.
Significant Accounting Practices
Basis of Presentation
The Company's ownership interests in the RSNs are held either directly or
indirectly and have different voting rights attached thereto. The Company
consolidates all subsidiaries in which it has voting control. The percentage
of ownership, together with the degree to which the Company controls the
management and operation of an RSN, determines the appropriate accounting
treatment for the Company's interest in that particular RSN. If the Company
owns a majority interest in a particular RSN, but does not have voting
control, the ownership interest is accounted for using the equity method of
accounting. Under the equity method of accounting, the financial condition and
results of operations of entities are not reflected on a consolidated basis
and, accordingly, the consolidated revenues and expenses of the Company, as
reported on its consolidated statements of operations, do not include revenues
and expenses related to the entities accounted for under the equity method.
In connection with the Rainbow Transaction, the Company contributed certain
business interests and other assets related to national sports programming to
the National Sports Partnership and certain assets related to advertising
sales to the National Advertising Partnership. The Company holds 50%
partnership interests in each partnership. Whereas the assets and liabilities,
and the results of operations of FSN, the national sports programming business
and the national advertising sales representation business were consolidated
prior to the Rainbow Transaction, the National Sports Partnership and the
National Advertising Partnership are each accounted for under the equity
method. Fox Sports RPP's 40% interest in RPP is also accounted for under the
equity method.
22
In July 1999, News Corporation acquired from Liberty substantially all of
Liberty's 50% interest in the Company and transferred that interest to Fox in
exchange for common stock of Fox. In connection with this transaction, voting
control of certain majority-owned subsidiaries of the Company, previously held
by Liberty, was acquired by Fox and, accordingly, these subsidiaries are
consolidated for the year ended June 30, 2000. These majority-owned
subsidiaries which were previously accounted for using the equity method of
accounting include, most significantly, the Pittsburgh RSN.
The following RSNs, together with Fox Sports Direct and FX Networks, LLC,
are consolidated in the financial statements of the Company at December 31,
1998 and at June 30, 1999, 2000, and 2001: West RSN, West 2 RSN, Northwest
RSN, Utah RSN, Arizona RSN, South RSN, Southwest RSN, Rocky Mountain RSN,
Midwest RSN and Detroit RSN. The Pittsburgh RSN is consolidated in the
financial statements of the Company for the years ended June 30, 2000 and 2001
and the North RSN is consolidated from the date of its acquisition during the
year ended June 30, 2001.
As of December 31, 1998 and as of June 30, 1999, 2000, and 2001 the
following are accounted for using the equity method of accounting: Sunshine
RSN, Chicago RSN, Bay Area RSN, RPP, National Sports Partnership and National
Advertising Partnership. The Pittsburgh RSN is accounted for using the equity
method of accounting at December 31, 1998 and as of June 30, 1999. The
D.C./Baltimore RSN was accounted for using the equity method of accounting
until its disposition during the year ended June 30, 2001.
Because the Company reports the results of a significant number of its
subsidiary entities on the equity method, its financial results do not
represent the total combined revenues and expenses of the entire Company. As a
result of the various acquisitions and sales in recent years, which in turn
impact the accounting treatment of many of the Company's subsidiary entities,
comparability of the Company's historical financial results is not meaningful.
Program Rights
The Company has multi-year contracts for telecast rights of syndicated
entertainment programs and sporting events. Program rights for entertainment
programs are amortized over the term of the contract using the straight-line
method. Program rights for sporting events which are for a specified number of
games are amortized on an event-by-event basis, and those which are for a
specified season are amortized over the term of the season on a straight-line
basis.
At the inception of these contracts and periodically thereafter, the Company
evaluates the recoverability of the costs associated therewith against the
revenues associated with the program material and related expenses. Where an
evaluation indicates that a multi-year contract will result in an ultimate
loss, additional amortization is provided to currently recognize that loss.
Excess Cost
Excess cost represents the difference between the cost of acquiring
programming entities and amounts assigned to their tangible and intangible
assets. Such amounts are amortized on a straight-line basis over 40 years.
The Company periodically reviews the propriety of the carrying amount of its
excess cost as well as the related amortization period to determine whether
current events or circumstances warrant adjustments to the carrying value
and/or the estimates of useful lives. This evaluation consists of the
Company's projection of undiscounted operating income before interest over the
remaining lives of the excess cost.
In June 2000, the Financial Accounting Standards Board issued Statement No.
142, "Goodwill and Other Intangible Assets" ("SFAS 142"). This statement
changes the accounting rules that apply to goodwill and intangible assets.
Under SFAS 142, new goodwill and intangible assets with indefinite lives
acquired after June 30, 2001 should no longer be amortized. Existing goodwill
and intangible assets with indefinite lives
23
acquired prior to June 30, 2001 should no longer be amortized in fiscal years
starting after December 15, 2001. The Company plans to adopt SFAS 142 on July
1, 2002. The Company is in the process of evaluating the impact SFAS 142 will
have on the consolidated statement of operations.
Results of Operations
Year Ended June 30, 2001
Total revenues for the year ended June 30, 2001 ("Fiscal 2001") were
$1,006.1 million, an increase of $134.4 million, or 15%, over the year ended
June 30, 2000 ("Fiscal 2000").
Programming revenue was the largest source of revenue, representing 50% of
total revenue, or $505.2 million, for Fiscal 2001. Advertising revenue
represented 28% of total revenue, or $281.0 million, for Fiscal 2001. Direct
broadcast revenue represented 16% of total revenue, or $165.9 million, for
Fiscal 2001. For Fiscal 2000, programming revenue was $424.4 million,
advertising revenue was $262.2 million and direct broadcast revenue was $137.4
million, representing 49%, 30% and 16% of total revenues, respectively.
Programming, advertising and direct broadcast revenues increased by $80.8
million, $18.8 and $28.4 million, respectively in Fiscal 2001 as compared to
Fiscal 2000. These represent a 19%, 7% and 21% increase in programming,
advertising and direct broadcast revenues, respectively, between the periods.
The increase in programming revenue of 19% in Fiscal 2001 is comprised
primarily of increases at FX, as a result of significant subscriber growth,
increases in the average rate per subscriber at the O&O RSNs, and the
acquisition of FSN North. In Fiscal 2001, FX achieved a 27% increase in
average subscribers over Fiscal 2000. The increase in advertising revenue of
7% over Fiscal 2000 is comprised of a 23% increase in advertising revenue for
FX with a 2% decline at the RSNs. During Fiscal 2001 as compared to Fiscal
2000, FX generated a 29% increase in total day average audience, and a 33%
increase in the average audience within a demographic audience profile. The
increased subscribers and resulting increase in average audience provide the
ability to command higher CPMs from advertisers; as a result CPMs increased 7%
over Fiscal 2000. These factors all contributed to the significant increase in
advertising revenue for FX. Despite an increase in the number of professional
events over Fiscal 2000, advertising revenues at the RSNs excluding FSN North,
declined 5% in Fiscal 2001, primarily a result of the soft advertising market.
The increase in direct broadcast revenue of 21% is comprised primarily of
increases at FX, as a result of a 79% increase in average direct broadcast
subscribers over Fiscal 2000.
Operating expenses were $713.0 million for Fiscal 2001, which represented
71% of total revenues. Operating expenses for Fiscal 2000 were $615.0 million,
or 71% of total revenues. These expenses consist primarily of rights fees,
programming and production costs. The increase in operating expenses of $98.0
million over Fiscal 2000 is primarily attributable to higher rights fees and
production expenses at FX associated with the inaugural season of NASCAR,
three original movies and acquired and original series. Additionally,
increases in rights fees and production expenses of the RSNs were associated
with the increase in the number of local professional events in Fiscal 2001.
The increase in the number of professional events is attributable to the
acquisition of FSN North and an 8% increase across the other RSNs.
General and administrative expenses were $91.1 million for Fiscal 2001,
which represented 9% of total revenues. General and administrative expenses
for Fiscal 2000 were $75.8 million, or 9% of total revenues. The increase in
general and administrative expenses in Fiscal 2001, as compared to Fiscal
2000, is primarily due to additional management costs and higher facilities
expenses incurred in connection with the relocation of corporate office space.
Depreciation and amortization expenses were $59.9 million in Fiscal 2001 and
$48.1 million for Fiscal 2000. The increase of $11.8 million in Fiscal 2001,
as compared to Fiscal 2000, is primarily related to increased amortization of
cable distribution investments in the current year and higher depreciation
associated with the Company's expansion and upgrade of its technical
facilities.
24
Interest expense in Fiscal 2001 and Fiscal 2000 was $149.6 million and
$130.9 million, respectively. The increase in interest expense in Fiscal 2001,
as compared to Fiscal 2000, is primarily due to additional borrowings under
the 19th Facility.
Equity income from affiliates for Fiscal 2001 was $0.5 million. In Fiscal
2000, equity loss of affiliates was $6.3 million. RPP generated improved
earnings due to higher affiliate revenues across its RSNs from both increased
subscribers and rates, and a one time revenue recognition of $30.0 million
from the New York Yankees in connection with the team's buy back of MSG's
remaining telecast rights beyond the 2001 MLB season. These RPP improvements
were partially offset by the negative impact at MSG of the New York Knicks
early exit in the 2001 NBA playoffs and the losses associated with the
continued investment in the New York City based Metro Channels. CTV Sports
Net, a Canadian sports network in which the Company owns a 20% interest,
experienced higher affiliate and advertising revenues, resulting from
continued distribution growth as well as decreases in professional rights,
production and marketing expenses. The National Sports Partnership experienced
decreased revenues due to the soft advertising market and incurred higher
programming and production expenses, as part of its commitment to developing
high quality programming, while the National Advertising Partnership had
increased commission revenues, mostly due to its representation of FX.
Additionally, the Company recorded a $40.8 million gain on the sale of its
approximate 34% equity interest in Home Team Sports during the year.
Year Ended June 30, 2000
For comparability purposes, the following discussion will make reference to
comparisons between fiscal 2000 and both i) the year ended December 31, 1998
and ii) the twelve month period ended June 30, 1999 ("Fiscal 1999"). The
comparison to the year ended December 31, 1998 is required pursuant to Item
303 of Regulation S-K. Although both represent twelve month periods, the
Company believes that a comparison to Fiscal 1999 is meaningful as: i) it is a
more recent period, ii) it represents an identical year on year comparison and
eliminates the impact of seasonal variations, e.g. January 2000 is compared to
January 1999 as opposed to January 1998, and iii) the NBA lockout during the
1998-99 NBA season makes the December 31, 1998 comparison less meaningful.
The Fiscal 1999 period is unaudited. The Company changed its fiscal year end
to June 30 subsequent to December 31, 1998 and reported audited results for
the six month period ended June 30, 1999, in its Transition Report on Form 10-
K. The amounts for Fiscal 1999 referenced below were derived by combining the
final six months of the year ended December 31, 1998 with the six month period
ended June 30, 1999.
Total revenues for Fiscal 2000 were $871.7 million, an increase of $216.5
million, or 33%, over the year ended December 31, 1998. Total revenues for
Fiscal 2000 increased $178.3 million, or 26%, over Fiscal 1999.
Programming revenue was the largest source of revenue, representing 49% of
total revenue, or $424.4 million, for Fiscal 2000. Advertising revenue
represented 30% of total revenue, or $262.2 million, for Fiscal 2000. For the
year ended December 31, 1998, programming revenue was $301.7 million and
advertising revenue was $183.8 million, representing 46% and 28% of total
revenues, respectively. For Fiscal 1999, programming revenue was $324.6
million and advertising revenue was $198.5 million, representing 47% and 29%
of total revenues, respectively.
Programming and advertising revenue increased by $122.7 million and $78.4
million, respectively in Fiscal 2000 as compared to the year ended December
31, 1998. These represent a 41% and 43% increase in programming and
advertising revenue, respectively, between the periods. As compared to Fiscal
1999, programming and advertising revenue increased in Fiscal 2000 by $99.8
million and $63.7 million, respectively. These increases represent a 31%
increase and 32% increase in programming and advertising revenue,
respectively, over Fiscal 1999.
25
The increase in programming revenue of 31% over Fiscal 1999 is comprised
primarily of increases in the average rate per subscriber at the RSNs. Also
contributing to the increase is the continued subscriber growth of FX, which
achieved an 18% increase in average subscribers over Fiscal 1999, and the
RSNs, which experienced a 5% growth in average subscribers between the
periods. The increase in advertising revenue of 32% over Fiscal 1999 is
comprised of a 41% increase in advertising revenue for FX and a 27% increase
for the RSNs. Increased total day ratings on FX, together with the increased
subscribers, resulted in a 25% increase in total day average audience, and a
35% increase in the average audience within a demographic audience profile,
during Fiscal 2000 as compared to Fiscal 1999. The increased ratings,
increased subscribers and resulting increase in average audience provide the
ability to command higher CPMs from advertisers; as a result CPMs increased
significantly over Fiscal 1999. These factors all contributed to the
significant increase in advertising revenue for FX. The RSNs growth in
advertising revenue is primarily due to an increase in the number of
professional events in Fiscal 2000, as compared to Fiscal 1999, and increased
local advertising rates per game. The number of local professional events
increased by 43% over Fiscal 1999, comprised primarily of NBA events, due to a
full NBA schedule in the 1999-2000 season after the lockout shortened season
of the prior year, and MLB events.
Operating expenses were $615.0 million for Fiscal 2000, which represented
71% of total revenues. Operating expenses for the year ended December 31, 1998
were $485.3 million, or 74% of total revenues and for Fiscal 1999, operating
expenses were $528.8 million, or 76% of total revenues. These expenses consist
primarily of rights fees, programming and production costs. The increase in
operating expenses of $86.2 million over Fiscal 1999 is primarily attributable
to the increase in rights fees and production expenses of the RSNs associated
with the increase in the number of local professional events in Fiscal 2000.
General and administrative expenses were $75.8 million for Fiscal 2000,
which represented 9% of total revenues. General and administrative expenses
for the year ended December 31, 1998 were $90.7 million, or 14% of total
revenues, and for Fiscal 1999, were $88.6 million, or 13% of total revenues.
The decrease in general and administrative expenses in Fiscal 2000, as
compared to Fiscal 1999, is primarily due to a decrease in the charge to
earnings with respect to an equity appreciation rights plan and a decrease in
the provision for potentially unrealizable accounts between the periods.
Depreciation and amortization expenses were $48.1 million in Fiscal 2000 and
$21.7 million for the year ended December 31, 1998. In Fiscal 1999,
depreciation and amortization expense was $25.1 million. The increase of $23.0
million in Fiscal 2000, as compared to Fiscal 1999, is related to increased
amortization of cable carriage fees in the current year.
Interest expense for Fiscal 2000 was $130.9 million, for the year ended
December 31, 1998, $113.0 million, and for Fiscal 1999, $113.4 million. The
increase in interest expense, net in Fiscal 2000, as compared to Fiscal 1999,
is primarily due to higher interest rates on debt outstanding under the 19th
Facility and additional borrowings.
Equity loss of affiliates for Fiscal 2000 and the year ended December 31,
1998 were $6.3 million and $5.9 million, respectively. In Fiscal 1999, equity
loss of affiliates was $23.4 million. The improvements in equity loss of
affiliates of $17.1 million in Fiscal 2000, as compared to Fiscal 1999, are
primarily at RPP. In Fiscal 1999, RPP was negatively impacted by the NBA
lockout. In Fiscal 2000, RPP experienced increased programming and advertising
revenues at its RSNs and improved performance of certain of its start up
businesses, and the National Sports Partnership and the Canadian joint venture
both showed improved results.
Six Months Ended June 30, 1999
Total revenues for the six months ended June 30, 1999 were $364.3 million,
an increase of $38.2 million, or 12%, over the six months ended June 30, 1998.
Programming revenue was the largest source of revenue, representing 47% of
total revenue, or $171.1 million, for the six months ended June 30, 1999.
Advertising revenue represented 30% of total revenue,
26
or $108.3 million, for the six months ended June 30, 1999. For the six months
ended June 30, 1998, programming revenue was $148.2 million and advertising
revenue was $93.6 million and represented 45% and 29% of total revenues,
respectively.
Programming and advertising revenue increased by $22.9 million and $14.7
million, respectively in the six months ended June 30, 1999 as compared to the
six months ended June 30, 1998. These represent a 15% increase and 16%
increase in programming and advertising revenue, respectively, between the
periods. The increase in programming revenue of 15% is comprised primarily of
an increase in average subscribers at the consolidated O&O RSNs and FX of 7%
and 15%, respectively, between the periods. Rate increases comprised the
balance of the increase between periods. The increase in advertising revenue
of 16% is comprised of a 36% increase in advertising revenue for FX and a 7%
increase for the RSNs. Increased total day ratings on FX, together with the
increased subscribers, resulted in a 24% increase in total day average
audience during the six months ended June 30, 1999 over the same period in the
previous year. The increase is due primarily to the strengthening of the
program schedule throughout all dayparts. The increased ratings together with
increased subscribers resulted in the significant increase in advertising
revenue. The RSNs growth in advertising revenue is due to increased
advertising rates and the number of professional events, primarily NHL.
Advertising rates per game increased for MLB and NHL events in the six months
ended June 30, 1999 as compared to the same period in the previous year, while
rates for NBA events were negatively impacted due to the NBA lockout. The
limited amount of time between the settlement of the lockout and the
commencement of the NBA season impaired the Company's ability to sell
advertising, as did the reduced number of games in the season.
Operating expenses totaled $296.1 million for the six months ended June 30,
1999, which represented 81% of total revenues. These expenses consist
primarily of rights fees, programming and production costs. Operating expenses
for the six months ended June 30, 1998 totaled $250.3 million, or 77% of total
revenues. The increase in operating expenses is primarily attributable to
increased programming rights fees of RSNs due to renegotiated and newly
entered into sports rights agreements and increased programming expenses of FX
relating to newly launched programs during or subsequent to the period ended
June 30, 1998.
General and administrative expenses totaled $39.3 million for the six months
ended June 30, 1999, which represented 11% of total revenues. General and
administrative expenses for the six months ended June 30, 1998 totaled $41.3
million, or 13% of total revenues. A non-cash charge to earnings was taken in
the six months ended June 30, 1999 and 1998 with respect to an equity
appreciation rights plan. Excluding this non-cash charge, general and
administrative expenses would have been $34.1 million and $32.4 million, or
each 10% of total revenues for the six months ended June 30, 1999 and 1998,
respectively.
Depreciation and amortization expenses totaled $12.2 million and $11.1
million for the six months ended June 30, 1999 and 1998, respectively. Of
these amounts, $7.0 million and $7.2 million were related to amortization of
excess cost from acquisitions of programming entities consolidated with the
Company.
Interest expense for the six months ended June 30, 1999 totaled $56.1
million in relation to $1.5 billion of debt outstanding as of June 30, 1999.
The amount of debt is primarily attributable to (i) the Offering, pursuant to
which $800.8 million of debt is outstanding at June 30, 1999, (ii) the Bank
Facility and indebtedness thereunder in the amount of $677.0 million; and
(iii) the acquisition of certain assets in connection with the commencement of
operations of Fox Sports Net Detroit.
Equity loss of affiliates for the six months ended June 30, 1999 was $11.2
million, while the Company recognized equity income of affiliates of $6.4
million for the six months ended June 30, 1998. For the six months ended June
30, 1998, equity income of affiliates included a $7.1 million gain on the sale
of 50% of RPP's investment in Fox Sports Net New England. In the six months
ended June 30, 1999, RPP was negatively impacted by the NBA lockout,
Pittsburgh RSN was adversely affected by the Pittsburgh Penguins bankruptcy
and the Company recognized start-up losses from its Canadian joint venture.
27
Year ended December 31, 1998
The Company has certain subsidiaries that are consolidated and others, which
are accounted for under the equity method of accounting. The comparability of
the year ended December 31, 1998 to the year ended December 31, 1997 is
affected significantly by three events: (i) on March 13, 1997, upon the
acquisition of the remaining interests in ARC Ltd. by ARC LP, the Company
assumed management control of the consolidated subsidiaries of ARC LP and from
that date the consolidated subsidiaries of ARC Ltd. and their operations were
consolidated by the Company, (ii) Fox Sports Detroit was launched in September
1997 and (iii) the operations of FSN were contributed to the National Sports
Partnership in December 1997 and subsequent to the date of such contribution
were accounted for under the equity method.
Total revenues for the year ended December 31, 1998 were $655.2 million, an
increase of $183.4 million, or 39%, over the year ended December 31, 1997. The
increase in total revenue between the years ended 1998 and 1997 would have
been $128.3 million, or 27%, had ARC Ltd. been consolidated for the entire
period, and excluding Fox Sports Detroit and the impact of FSN.
Programming revenue was the largest source of revenue, representing 46% of
total revenue, or $301.7 million, for the year ended December 31, 1998.
Advertising revenue represents 28% of total revenue, or $183.8 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 $134.3
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 $132.1 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
27%, respectively. Excluding Fox Sports Detroit and the impact of FSN,
programming and advertising revenue for the year ended December 31, 1998
represented 44% and 29%, respectively, of total revenue.
Had ARC Ltd. been consolidated for the entire year ended December 31, 1997,
and excluding Fox Sports Detroit and the impact of FSN, programming and
advertising revenue would have increased by $48.0 million and $44.9 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 47% increase in
advertising revenue for FX and a 28% increase for RSNs, other than Fox Sports
Detroit. Increased ratings on FX, together with the increased subscribers,
resulted in a 17% increase in average audience during primetime, in the year
ended December 31, 1998 over the same period in the previous year. The
increase is due primarily to the addition of The X-Files and NYPD Blue to the
primetime schedule in the fall of 1997. The increased ratings together with
increased subscribers resulted in the significant increase in advertising
revenue. The RSNs growth in advertising revenue is due to increased
advertising rates and an increase in the number of professional events,
primarily MLB. Advertising rates per game increased for MLB, NBA and NHL
events in the year ended December 31, 1998 as compared to the same period in
the previous year. The number of local professional events increased by 27%
over these same periods.
Operating expenses totaled $485.3 million for the year ended December 31,
1998, which represented 74% of total revenues. These expenses consist
primarily of rights fees, programming and production costs. Operating expenses
for the year ended December 31, 1997 totaled $420.9 million, or 89% of total
revenues. Had ARC Ltd. been consolidated for the entire year ended December
31, 1997, and excluding Fox Sports Detroit and the impact of FSN, operating
expenses for the year ended December 31, 1998 and 1997 would have been $441.9
million and $372.6 million, respectively. On this basis, operating expenses
represent 72% and 77% of total revenues for the year ended December 31, 1998
and 1997, respectively. The increase in operating expenses is attributable to
an increase in the number of professional events, primarily MLB games, as well
as increased programming rights
28
fees of RSNs due to renegotiated and newly entered into sports rights
agreements. Additionally, programming expenses of FX increased relating to
newly launched programs during or subsequent to the year ended December 31,
1997.
General and administrative expenses totaled $90.7 million for the year ended
December 31, 1998, which represented 14% of total revenues. General and
administrative expenses for the year ended December 31, 1997 totaled $65.6
million, or 14% of total revenues. A non-cash charge to earnings was taken in
the year ended December 31, 1998 with respect to an equity appreciation rights
plan in the amount of $13.5 million. Excluding this non-cash charge, general
and administrative expenses would have been $77.2 million, or 12% of total
revenues.
Depreciation and amortization expenses totaled $21.7 million and $19.0
million for the years ended December 31, 1998 and 1997, respectively. Of these
amounts, $14.3 million and $11.8 million were related to amortization of
excess cost from acquisitions of programming entities consolidated with the
Company. The increase is primarily due to the consolidation of ARC and the
acquisition of an RSN in Detroit.
Interest expense for the year ended December 31, 1998 totaled $113.0 million
as a result of $1.4 billion of debt outstanding as of December 31, 1998. The
amount of debt is primarily attributable to (i) the Offering, pursuant to
which $786.9 million of debt is outstanding at December 31, 1998, (ii) the
Bank Facility and indebtedness thereunder in the amount of $605.0 million; and
(iii) the acquisition of certain assets in connection with the commencement of
operations of Fox Sports Detroit, pursuant to which the Company incurred
$25.7 million of debt.
Equity loss of affiliates for the year ended December 31, 1998 was $5.9
million, a decrease of $3.1 million, from an equity loss of $9.0 million for
the year ended December 31, 1997. For the year ended December 31, 1998, equity
income of affiliates includes the Company's equity interests in the operations
of the National Sports Partnership and the National Advertising Partnership,
whose operations were consolidated prior to the Rainbow Transaction, RPP and
certain RSNs. For the year ended December 31, 1997, equity income of
affiliates included the Company's equity interests in ARC Ltd. and its related
subsidiaries through March 13, 1997, certain RSNs and equity losses of the
National Sports Partnership and the National Advertising Partnership for the
period from December 18, 1997 through December 31, 1997. For the year ended
December 31, 1998, equity income of affiliates includes the effect of $7.9
million in amortization of excess cost relating to the Company's investment in
several of its affiliates and a $7.1 million gain on the sale of 50% of RPP's
investment in Fox Sports New England.
Liquidity and Capital Resources
The Company's liquidity requirements arise from (i) funding general working
capital needs, (ii) its strategic plan to invest in and secure national
distribution for its network sports and general entertainment programming,
(iii) the acquisition of programming rights, and (iv) capital expenditure
requirements.
Net cash flows used in operating activities for Fiscal 2001 were $12.5
million, a decrease of $29.3 million over Fiscal 2000. The decrease is
primarily attributed to improvements in operating income. Net cash flows used
in operating activities for Fiscal 2000 were $41.8 million, an increase of
$15.6 million over the year ended December 31, 1998. Net cash flows used in
Fiscal 2000 operating activities increased by $21.8 million over Fiscal 1999.
The decrease in Fiscal 2000 as compared to Fiscal 1999 was primarily
attributed to contractual rights prepayments on certain long-term rights
deals.
Net cash flows used in investing activities for Fiscal 2001 were $52.1
million, an increase of $4.1 million over Fiscal 2000. In FY 2001, the Company
sold its interest in Home Team Sports and acquired certain assets and assumed
certain liabilities of Midwest Sports Channel. Net cash flows used in
investing activities for Fiscal 2000 were $48.0 million, an increase of $6.2
million over the year ended December 31, 1998. Net cash flows used in
investing activities increased by $15.6 million over Fiscal 1999. The increase
in Fiscal 2000 over Fiscal
29
1999 of cash used in investing activities was primarily due to lower net
advances from equity affiliates, collection of a promissory note in Fiscal
1999 and issuance of a promissory note in Fiscal 2000.
Net cash flows provided by financing activities for Fiscal 2001 were $49.9
million, a decrease of $6.6 million as compared to Fiscal 2000. The decrease
in cash provided by financing activities is primarily due to an increase in
cash provided by operations. Net cash flows provided by financing activities
for Fiscal 2000 were $56.5 million, a decrease of $4.9 million over the year
ended December 31, 1998. Net cash flows provided by financing activities
decreased by $38.3 million from Fiscal 1999. The decrease in cash provided by
financing activities in Fiscal 2000 as compared to Fiscal 1999 was primarily
due to an increase in cash provided by operations.
In June 1997, the Company entered into an agreement with Rainbow to acquire
a 40% interest in Rainbow's sports properties, which included economic
interests in eight RSNs, the Madison Square Garden entertainment complex, RCP,
the New York Knicks, and the New York Rangers in exchange for $850.0 million.
In December 1997, the Rainbow Transaction was consummated and the net proceeds
from the Offering, along with available proceeds under the Bank Facility, were
used to fund the Company's cash contribution of $850.0 million to RPP.
In August 1997, the Company consummated the Offering. The net proceeds from
the Offering were used in part to finance the Rainbow Transaction. The
indentures, as amended, pursuant to which the Notes were issued in connection
with the Offering contain certain restrictive covenants that, among other
things, restrict the Company's ability to incur additional indebtedness, pay
dividends, transfer assets and engage in transactions with affiliates. As of
June 30, 2001, the Company was in compliance with these restrictive covenants.
In September 1997, the Company entered into a credit agreement which
permitted borrowings of up to $450.0 million. The proceeds of such credit
agreement were used to retire amounts borrowed under previously existing
credit facilities and for working capital purposes. Upon consummation of the
Rainbow Transaction, the Company amended and restated this $450.0 million
credit agreement to permit borrowings of up to $800.0 million under the Bank
Facility. The Bank Facility was used, in part, to finance the Rainbow
Transaction.
In July 1999, 19th Holdings Corporation, a wholly-owned subsidiary of Fox,
acquired the debt outstanding under the Bank Facility, and assumed the rights
and obligations of the banks under the facility. In July 2000, the Company and
19th Holdings Corporation amended the 19th Facility to increase the revolving
facility to $500.0 million and the total facility to $900.0 million. At June
30, 2001, the total amount borrowed under the 19th Facility was $807.6
million. The total unused commitment pursuant to the 19th Facility was
$92.4 million as of June 30, 2001.
Future capital requirements are substantial. At June 30, 2001, the Company
has future minimum payments on operating leases, including transponders,
totaling $133.9 million, and commitments under long-term program rights
contracts totaling $4,375.6 million through 2012. The Company has also made a
substantial investment in the National Sports Partnership. The National Sports
Partnership, which was formed in December 1997, required a significant
investment to fund operating losses, primarily related to the agreement with
MLB and the development of the National Sports Report. Investment in the
National Sports Partnership will continue as the network continues to develop.
Also, the Company has committed to significant capital expenditures with
regard to its technical infrastructure, including enhancing its Master Control
suites with digital capabilities. In addition, the cost of acquiring sports
programming rights continues to escalate. See "Business--Rights Agreements."
Furthermore, the Company intends to continue to explore opportunities to
expand its distribution.
The Company is a holding company and its assets consist solely of
investments in its subsidiaries and affiliates. As a holding company, the
Company's ability to meet its financial obligations, including its obligations
under the Notes and the 19th Facility and its funding and other commitments to
its subsidiaries and affiliates, is dependent on the earnings of such
subsidiaries and affiliates and the distribution or other payment of such
earnings to the Company in the form of dividend distributions, loans or other
advances, payment or reimbursement for management fees and expenses, and
repayment of loans and advances from the Company.
30
Accordingly, the Company's ability to pay interest on the Notes and to
otherwise meet its liquidity requirements may be limited as a result of its
dependence upon the distribution of earnings and advances of funds by its
subsidiaries and affiliates. The payment of dividends or the making of loans
or advances to the Company by its subsidiaries and its affiliates, which may
be subject to statutory, regulatory or contractual restrictions, are
contingent upon the earnings of those subsidiaries and affiliates, and various
business considerations. Although the agreements between the Company and its
partners contemplate the payment of distributions, the Company may not be able
to cause its subsidiaries or affiliates to make distributions when it may have
a need for distributions, and the Company may not be able to dispose of its
investments in any of its RSNs if required for financial or other reasons.
Sources of funding for the Company's future financing requirements, if any,
may include public or private offerings of equity and/or debt securities,
commercial bank loans, and capital contributions from its parent. The extent
of the additional financing required, if any, will depend on the success of
the Company's business. There can be no assurance that additional financing,
if needed, will be available to the Company or, if available, that such
financing can be obtained on terms acceptable to the Company and within the
limitations contained in the terms of any future financing arrangements.
Failure to obtain any such financing could delay or prevent the Company's
development and growth plans, impair the Company's ability to meet its debt
service requirements, and have a material adverse effect on the Company's
business.
The Company believes that its existing funds and the proceeds from
borrowings under the 19th Facility will be sufficient to meet its plan to
secure national distribution, maintain and/or acquire programming, make
anticipated capital expenditures, and meet its projected working capital
requirements, although no assurances can be given in this regard.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
Item 8. Financial Statements and Supplementary Data
The Reports of Independent Public Accountants, Financial Statements and
Notes to the Financial Statements appear in a separate section of this Form
10-K (beginning on page F-1) following Part IV. The index to Financial
Statements is included in Item 14.
Item 9. Disagreements With Accountants on Accounting and Financial Disclosure
None.
31
PART III
Item 10. Directors and Executive Officers of the Registrant
Executive Officers
The current executive officers of the Company and their current positions
for the Company and/or its divisions are as follows:
Name Age Position
---- --- --------
David Hill.................................. 55 Chairman
Jeff Shell.................................. 35 Chief Executive Officer
Robert Thompson............................. 43 President
Tracy Dolgin................................ 41 President, Fox Sports Net
Louis LaTorre............................... 47 President, Advertising Sales
David Hill has served as Chairman of the Company since April 1996. In
addition, since June 1999, he has served as Chairman and Chief Executive
Officer of Fox Sports Television Group and prior thereto, from October 1997 to
June 1999, he served as Chairman and Chief Executive Officer of FBC. From
April 1996 through October 1997, Mr. Hill also served as Chief Executive
Officer. Prior thereto, from July 1996 until October 1997, Mr. Hill served as
Chief Operating Officer of Fox Television and from December 1993 until October
1997 as President of Fox Sports, a division of Fox Television.
Jeff Shell has served as Chief Executive Officer of the Company since
January 2000 and served as President of the Company from June 1999 to June
2000. In addition, since January 2000, he has served as President of Fox Cable
Networks Group, a division of Fox. Prior thereto, Mr. Shell served as
Executive Vice President and Chief Financial Officer of the Company from
February 1998 to June 1999. In addition, Mr. Shell served as Senior Vice
President, Finance and Development of the Company from June 1996 until
February 1998. From October 1994 until November 1996, he served as Vice
President of Business Development for Fox, Inc.
Robert Thompson has served as President of the Company since July 2000 and,
additionally, he has served as President of Fox Sports Cable Networks, a
division of Fox, and as President of International Sports Programming LLC, an
international sports programming joint venture between Fox and TCI ("ISP")
since May 2000. Prior thereto, Mr. Thompson served as Executive Vice President
and Chief Operating Officer of Fox Sports Net, LLC from June 1999 to April
2000. Prior thereto, from October 1997 to June 1999, he served as its
Executive Vice President and , from July 1996 through October 1997, he served
as its Senior Vice President, Rights and Acquisitions and Regional Network
Operations. From June 1999 to April 2000, he also served as Executive Vice
President and Chief Operating Officer of ISP. From October 1994 through July
1996, Mr. Thompson served as Senior Vice President, Regional Network
Operations for Liberty Sports, Inc.
Tracy Dolgin has served as President, Fox Sports Net for the Company since
February 2000. Prior thereto, Mr. Dolgin served as Chief Operating Officer of
the Company from September 1998 to January 2000. From July 1997 to September
1998 Mr. Dolgin served as Joint Chief Operating Officer of Fox Sports Net,
LLC. In addition, he served as Executive Vice President, Marketing for Fox
Sports, a division of FBC, from, December 1993 until September 1998.
Louis LaTorre has served as President, Advertising Sales since July 1999 and
as Executive Vice President of the Company since November 2000. In addition,
Mr. LaTorre served as President, Advertising Sales of Fox Sports Net, LLC and
President, Advertising Sales of FX Networks, LLC from January 1997 to June
1999 and as Senior Vice President of the Company from January 1997 to November
2000. From July 1994 until December 1996, he served as President and Chief
Operating Officer for the Sales and Marketing Division of New World
Communications, Inc.
There are no family relationships between any of the executive officers.
32
Item 11. Executive Compensation
Executive Compensation
The following table sets forth the compensation paid for the year ended
December 31, 1998, the six months ended June 30, 1999 and the years ended June
30, 2000 and 2001, to those persons who were, at June 30, 2001, the Company's
Chairman and the next four most highly compensated executive officers of the
Company and/or its divisions (the "Named Executives").
Summary Compensation Table
Long Term Compensation
-------------------------------
Annual Compensation Awards Payouts
------------------------------------ --------------------- ---------
Restricted Securities Incentive
Name and Principal Other Annual Stock Underlying Plan All Other
Occupation Year Salary Bonus Compensation Awards Option Payouts Compensation
------------------ ---- -------- -------- ------------ ---------- ---------- --------- ------------
David Hill.............. 2001 $525,000(1) $612,500(1) $16,594 -- -- -- --
Chairman 2000 $500,000(1) $500,000(1) $ 4,620 -- -- -- --
1999 $250,000(1) $ 75,000(1) -- -- -- -- --
1998 $500,000(1) $150,000(1) -- -- -- -- --
Jeff Shell.............. 2001 $850,000(3) $500,000(3) $13,200 -- -- -- $ 414,000(4)
President and Chief 2000 $652,082(3) $120,000(3) $13,200 -- -- -- $1,242,000(4)
Executive Officer(2) 1999 $207,084 $120,000 -- -- -- -- --
1998 $362,315 $100,000 -- -- -- -- --
Robert Thompson......... 2001 $179,167(6) $ 62,500(6) $ 3,300 -- -- -- $ 324,000(4)
President, Fox Sports 2000 $153,124(6) $ 25,000(6) $ 3,300 -- -- -- $1,710,000(4)(7)
Cable Networks(5) 1999 $233,333(6) $150,000(6) -- -- -- -- --
1998 $416,667 $100,000 -- -- -- -- --
Tracy Dolgin............ 2001 $811,361 $275,000 $13,200 -- -- -- $ 414,000(4)
President, Fox Sports 2000 $757,292 $310,000 $13,200 -- -- -- $1,242,000(4)
Net(8) 1999 $350,000 $160,000 -- -- -- -- --
1998 $472,234 $200,000 -- -- -- -- --
Louis LaTorre........... 2001 $665,000 $275,000 $21,296 -- -- -- $ 414,000(4)
President, Advertising 2000 $620,000 $160,000 $13,200 -- -- -- $1,242,000(4)
Sales(10) 1999 $233,333 $160,000 $13,601 -- -- -- --
1998 $464,636 $200,000 $30,714 -- -- -- --
--------
(1) Reflects the compensation received by Mr. Hill for the services he
rendered to the Company from the Company's inception in April 1996
through the year ended June 30, 2001. During fiscal years 2001, 2000,
1999, 1998 and 1997, Mr. Hill was, and currently remains, employed by
FBC. FBC 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 FBC. See "Certain
Transactions."
(2) In January 2000, Mr. Shell became Chief Executive Officer of the Company
and, prior thereto, served as President of the Company from June 1999
until June 2000. Mr. Shell served as Executive Vice President and Chief
Financial Officer of the Company from February 1998 until June 1999.
Prior thereto, from June 1996 to February 1998, Mr. Shell served as
Senior Vice President, Finance and Development.
(3) Reflects the compensation received by Mr. Shell for the services he
rendered to the Company for the years ended June 30, 2001 and 2000 and
the six months ended June 30, 1999. Effective during fiscal year 2000,
Mr. Shell became, and currently remains, employed by News America
Incorporated. News America Incorporated grants the Company the right to
utilize Mr. Shell's services. The above disclosure does not include
compensation information for Mr. Shell with respect to the services he
performed at News America Incorporated. See "Certain Transactions."
(4) In October 1997, the Company adopted the Fox/Liberty Networks Equity
Appreciation Rights Plan for Management and Key Employees (the "Plan").
In August 1999, the Plan was amended to provide that no further
appreciation rights could be granted under the Plan and the value of the
appreciation rights was fixed. All participants with outstanding
appreciation rights will continue to vest over time, provided that as
33
the appreciation rights vest, the participant shall be deemed to have
exercised their right to receive cash payments equal to the excess of the
fixed value over the grant value of such vested appreciation rights.
Payments made under the Plan are reflected as "All Other Compensation."
(5) In July 2000, Mr. Thompson became President of the Company, and,
additionally in May 2000, he became President of Fox Sports Cable
Networks, a division of Fox, and President of ISP. Prior thereto,
Mr. Thompson served as Executive Vice President and Chief Operating
Officer of Fox Sports Net, LLC from June 1999 to April 2000. Prior
thereto, from October 1997 to June 1999, he served as Executive Vice
President and from July 1996 through October 1997, he served as its
Senior Vice President, Rights and Acquisitions and Regional Network
Operations. Additionally, from June 1999 to April 2000, Mr. Thompson
served as Executive Vice President and Chief Operating Officer of ISP.
(6) Reflects compensation received by Mr. Thompson for services he rendered
to the Company for the years ended June 30, 2001 and 2000 and the six
months ended June 30, 1999. Mr. Thompson rendered services for ISP and
the Company during these periods. The above disclosure does not include
compensation information for Mr. Thompson with respect to the services
he performed at ISP for these periods.
(7) In connection with the formation of the Company, a deferred compensation
incentive plan (the "1996 Plan") with an effective date of January 1,
1996, was approved and adopted by the Company. A substantially similar
plan existed at Liberty Sports, Inc. ("LSI"), a subsidiary of Liberty
(the "LSI Plan"), prior to the formation of the Company. The 1996 Plan
was adopted by the Company in anticipation of certain LSI employees
performing services for the Company. Such employees, including Mr.
Thompson, were beneficiaries under the LSI Plan. Mr. Thompson received
payments under the 1996 Plan of $972,000 in the year ended June 30,
2000.
(8) In February 2000, Mr. Dolgin became President of Fox Sports Net. Mr.
Dolgin served as Chief Operating Officer of the Company from September
1998 to January 2000, and, prior thereto, served as Joint Chief
Operating Officer of FSN from July 1997 to September 1998.
(9) Reflects compensation received by Mr. Dolgin for services he rendered to
the Company for a portion of fiscal year 1997.
(10) In July 1999, Mr. LaTorre became President, Advertising Sales for the
Company and, in addition, has served as Executive Vice President of the
Company since November 2000. Prior thereto, Mr. LaTorre served as
President, Advertising Sales of Fox Sports Net, LLC and President,
Advertising Sales of FX Networks, LLC from January 1997 to June 1999 and
as Senior Vice President of the Company from January 1997 to November
2000.
The Company does not have a stock option plan and no long term compensation
awards were made in the fiscal years covered by the table above, except as
disclosed above.
In October 1997, the Company adopted the Fox/Liberty Networks, LLC Equity
Appreciation Rights Plan for Management and Key Employees (the "Plan"). The
Plan was amended effective as of June 10, 1999. The Plan is designed to
provide a flexible mechanism to permit management and key employees of the
Company and its subsidiaries to obtain significant interests in the equity of
the Company, thereby increasing their proprietary interest in the growth and
success of the Company. During fiscal year 2000, there were no grants under
the Plan to the Named Executives.
Employment Arrangements
During fiscal years 1997, 1998, 1999, 2000 and 2001 Mr. Hill was, and
currently remains, employed by FBC, which grants the Company the right to
utilize Mr. Hill's services. For fiscal year 2001, FBC allocated to the
Company $1,154,094 for the services Mr. Hill rendered to the Company for that
period. See "Certain Relationships and Related Transactions."
In January 2000, Mr. Shell became employed by News America Incorporated,
which grants the Company the right to utilize Mr. Shell's services. Mr. Shell
was employed by The Fox Group from June 1999 to December 1999, which granted
the Company the right to utilize Mr. Shell's services. From January 1997 to
June 1999, Mr. Shell was employed with the Company under various employment
agreements. During fiscal year 1996 Mr. Shell was employed by Fox, Inc., which
granted the Company the right to utilize Mr. Shell's services
34
as its Senior Vice President, Finance and Development from June 1996 through
December 1996. For fiscal 2001 News America Incorporated, allocated to the
Company $1,363,200 for the services Mr. Shell rendered to the Company for that
period.
A subsidiary of the Company, Fox Cable Networks Services, LLC entered into a
two year, eight month employment agreement with Mr. Robert Thompson which
commenced on May 1, 2000 and replaced the Company's prior agreement with Mr.
Thompson. Pursuant to the agreement, Mr. Thompson renders services to the
Company and to ISP and is entitled to receive an annual base salary of
$700,000 for the period May 1, 2000 to April 30, 2001, $725,000 for the period
May 1, 2001 to April 30, 2002 and $750,000 for the period from May 1, 2002 to
December 31, 2002. Mr. Thompson serves as President of ISP. Mr. Thompson is
eligible to participate in all employee benefit plans available to other
comparable executives. The agreement contains provisions prohibiting the
disclosure of confidential or proprietary information of the Company. In
addition, Mr. Thompson is prohibited during the term of his employment and for
a period of two years thereafter, from inducing any managerial, sales or
supervisory employee of the Company or its affiliates to render services to
another entity.
Fox Sports Net, LLC entered into a two year, eleven month employment
agreement with Mr. Tracy Dolgin which commenced on February 1, 2000. This
agreement replaced the Company's prior agreement with Mr. Dolgin. Pursuant to
the current agreement, Mr. Dolgin was entitled to receive an annual salary of
$787,500 for the period February 1, 2000 to December 31, 2000, $800,000 for
the period January 1, 2001 to December 31, 2001 and $830,000 for the period
January 1, 2002 to December 31, 2002. The agreement provides for participation
in all employee benefit plans available to other comparable executives. The
agreement contains provisions prohibiting the disclosure of confidential or
proprietary information of Fox Sports Net, LLC. In addition, Mr. Dolgin is
prohibited during the term of his employment, and for a period of two years
thereafter, from inducing any managerial, sales or supervisory employee of the
Company or its affiliates to render services to another entity.
A subsidiary of the Company, Fox Cable Networks Services, LLC entered into a
four year, eight month employment agreement with Mr. Louis LaTorre which
commenced on November 1, 2000. Pursuant to the agreement, Mr. LaTorre serves
as President, Advertising Sales and is entitled to receive a base salary of
$665,000 per annum for the period November 1, 2000 to June 30, 2001, $720,000
for the period July 1, 2001 to June 30, 2002, $850,000 for the period July 1,
2002 to June 30, 2003, $950,000 for the period July 1, 2003 to June 30, 2004
and $1,050,000 for the period July 1, 2004 to June 30, 2005. Mr. LaTorre is
entitled to receive an annual bonus (as specified in the agreement) based on
the performance of the Company. The agreement provides for participation in
all employee benefit plans available to other comparable executives. The
agreement contains provisions prohibiting the disclosure of confidential or
proprietary information of the Company. In addition, Mr. LaTorre is prohibited
during the term of his employment, and for a period of two years thereafter,
from inducing any managerial, sales or supervisory employee of the Company or
its affiliates to render services to another entity.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Not Applicable.
Item 13. Certain Relationships and Related Transactions
Rainbow Transaction
In June 1997, Rainbow and the Company entered into a Formation Agreement
pursuant to which they agreed to form RPP and to hold various programming
interests in connection with the operation of certain RSNs. In accordance with
the terms of the Formation Agreement, upon consummation of the Rainbow
Transaction on December 18, 1997, Rainbow contributed various interests in
RSNs to the partnership in exchange for a 60% partnership interest in RPP, and
the Company contributed $850 million in cash for a 40% partnership interest in
RPP. Rainbow serves as managing partner of RPP.
35
Pursuant to the partnership agreement of RPP (the "RPP Agreement"), after
the third anniversary of the closing of the Rainbow Transaction, upon the
occurrence of a Buy-Out Trigger (as defined in the RPP Agreement), or upon the
date on which Fox Sports RPP submits a notice, pursuant to the RPP Agreement,
to remove the managing partner of RPP following a certain Change of Control of
RMH (as defined in the RPP Agreement), Rainbow Regional Holdings, LLC ("RRH"),
a subsidiary of Rainbow, has the right to purchase from Fox Sports RPP all of
Fox Sports RPP's interests in RPP.
Additionally, for each of the (i) 30 days following the fifth anniversary of
the closing of the Rainbow Transaction, (ii) 30 days following each third year
anniversary of the fifth anniversary of the closing of the Rainbow Transaction
and (iii) 30 days following receipt of a notice initiating the buy-out
procedure described above, so long as RPP has not commenced an initial public
offering of its securities, Fox Sports RPP has the right to cause RRH, at
RRH's option, to either (i) purchase all of its interests in RPP or (ii)
consummate an initial public offering of RPP's securities.
In connection with the Rainbow Transaction, Rainbow National Sports
Holdings, Inc. ("RNSH"), a subsidiary of Rainbow, and Fox Sports Net National
Network Holdings, LLC (formerly Fox Sports National Holdings, LLC) ("Fox
Sports NSP"), a subsidiary of the Company, agreed to form the National Sports
Partnership to operate FSN. The National Sports Partnership is owned 50% by
RNSH and 50% by Fox Sports NSP. Fox Sports NSP is the managing partner of the
National Sports Partnership. For the 30 days following the fifth anniversary
of the closing of the Rainbow Transaction and for the 30 days following each
third year anniversary of the fifth anniversary of the closing of the Rainbow
Transaction, so long as the National Sports Partnership has not consummated an
initial public offering of its securities, RNSH has the right to cause
Fox Sports NSP, at Fox Sports NSP's option, to either (i) purchase all of its
interests in the National Sports Partnership or (ii) consummate an initial
public offering of the National Sports Partnership's securities. Further, upon
a Change of Control (as defined in the Partnership Agreement of the National
Sports Partnership), the party not experiencing the Change of Control has a
call option on all the interests held by the other party.
Also in connection with the Rainbow Transaction, a subsidiary of Rainbow and
Fox Sports Ad Sales agreed to form the National Advertising Partnership to act
as the national advertising sales representative for FSN, the O&O RSNs and the
RPP-owned and managed RSNs. The National Advertising Partnership is owned 50%
by a subsidiary of Rainbow ("Rainbow Ad Sales") and 50% by Fox Sports Ad
Sales. Fox Sports Ad Sales is the managing partner of the National Advertising
Partnership.
For the 30 days following the fifth anniversary of the closing of the
Rainbow Transaction and for the 30 days following each third year anniversary
of the fifth anniversary of the closing of the Rainbow Transaction, so long as
the National Advertising Partnership has not consummated an initial public
offering of its securities, Rainbow Ad Sales has the right to cause Fox Sports
Ad Sales, at Fox Sports Ad Sales' option, to either (i) purchase all of its
interests in the National Advertising Partnership or (ii) consummate an
initial public offering of the National Advertising Partnership's securities.
Further, upon a Change of Control (as defined in the Partnership Agreement of
the National Advertising Partnership), the party not experiencing the Change
of Control has a call option on all the interests held by the other party.
Other Transactions
Fox, and certain of its affiliates, provide technical, administrative,
financial, treasury, accounting, tax, legal and other services to the Company
and may make available certain of their respective employee benefit plans to
officers and other employees of the Company. To date, except as disclosed
below, the charges for any such services have been immaterial. The terms of
many of these agreements were not the result of arms' length negotiation. See
"Business."
The Company, News Corporation, and Cablevision, through their respective
subsidiaries and affiliates, each own or have interests in television
programming entities. The presence of all such companies in the television
programming business could give rise to potential conflicts of interest
between them, including conflicts which
36
may arise with respect to business dealings between them and when more than
one of them may be pursuing the same business opportunity.
The Company currently subleases one transponder to Fox Movie Channel, an
affiliate of Fox. The monthly rental payment paid to the Company pursuant to
this sublease is $0.2 million. In addition the Company currently subleases a
transponder from Fox Family Worldwide, an affiliate of the Company. The
monthly rental payment paid by the Company under this sublease is $0.1
million. 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. "
FBC and certain affiliates render legal, travel 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 year
ended June 30, 2001 was approximately $1.5 million. Included in these amounts
are salaries, benefits and other related costs charged to the Company in
connection with the services rendered to it by Mr. Hill and other individuals.
Compensation and benefits paid to such individuals and related payroll costs
were charged to the Company at cost. Mr. Shell is employed by News America
Incorporated, a related party. The Company's pro-rata share of Mr. Shell's
compensation and benefits is charged to the Company at cost. Beginning July 1,
2000, certain services previously rendered by FBC were assumed by the Company
and, in certain cases, allocated back to FBC. The charges to FBC by the
Company for the above services for the year ended June 30, 2001 was $5.7
million. 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.
FBC and certain of its affiliates provide production facilities, production
and post production related services and technical operations to the Company
in connection with the Company's production of the National Sports Report and
other original programming. The services are provided at competitive market
rates and the Company believes that the arrangements are on terms no less
favorable than could have been obtained from an unaffiliated third party.
Expenses related to these services for the year ended June 30, 2001 were $15.5
million. With respect to the Regional Sports Report, an affiliate of the
Company produces the programming in exchange for the advertising inventory
within such programming.
In connection with the Company's sale of its interest in Home Team Sports,
$30.0 million of the consideration received related to new or amended carriage
agreements for certain programming services owned by an affiliate of the
Company. The Company entered into an inter-company arrangement with this
affiliate and subsequently received payment for this consideration.
Twentieth Century Fox and its affiliates purchase advertising time which is
shown during the Company's programming. The advertising revenues recognized
for the year ended June 30, 2001 were $3.9 million.
The Company licenses television and feature film programming from Twentieth
Century Fox and affiliates. Expense recognized by the Company relating to
program rights amortization for the year ended June 30, 2001 was $61.6
million.
The Company licenses cable telecast rights to certain NASCAR programming
from an affiliate of Fox, which includes programming rights and production
costs. Expense recognized by the Company relating to program rights
amortization and production costs for year ended June 30, 2001 was $20.3
million.
The Company has a non exclusive, royalty-free license from Twentieth Century
Fox Film Corporation and FBC to use the "FOX" brand name and certain related
artwork in connection with the Company's business.
The Company leases its corporate facilities in Los Angeles from New World
Communications Group Incorporated, an indirect wholly-owned subsidiary of Fox.
The Company has the ability to increase office space in this facility as the
need may arise. As of June 30, 2001 the Company rented a total of
approximately 70,000 square feet and the monthly rental was $0.2 million. (See
"Properties.")
The Company renders marketing, public relations, legal, promotional,
management and other business services to the National Geographic Channel
(domestic), Fox Movie Channel, Fox Sports World and other affiliates of Fox.
The charges by the Company to these companies for the year ended June 30, 2001
were $12.3 million.
37
In July 2000, the O&O RSNs' local advertising sales force combined with the
advertising sales force of Fox's FTS. In connection with this, FTS allocates
charges for rent and management services to the O&O RSNs. The total expense
recognized by the O&O RSNs for the year ended June 30, 2001 was $1.0 million.
The Company sublicenses certain MLB and NHL broadcasting rights to
affiliates of FTS. Rights fees charged by the Company to the FTS affiliates
for the sublicensed games during the year ended June 30, 2001 is $7.1 million.
In July 1999, 19th Holdings Corporation, a wholly-owned subsidiary of Fox,
acquired the debt outstanding under the Bank Facility from the group of banks,
and, in so doing, assumed the rights and obligations of the group of banks
under the Bank Facility. The Company and 19th Holdings Corporation
subsequently amended and restated the Bank Facility to provide, among other
things, a fixed rate of interest, determined by 19th Holdings Corporation on
an annual basis, and eliminated substantially all of the affirmative and
negative covenants other than with respect to the payment of principal and
interest (the "19th Facility") and increased the facility to $900 million.
Interest expense incurred by the Company under the 19th Facility was $68.5
million for the year ended June 30, 2001. The Company currently expects that
remaining availability under the 19th Facility will primarily be used for
investments in certain subsidiaries of the Company and for working capital
purposes.
38
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as part of this Annual Report on Form
10-K for the fiscal year ended June 30, 2001.
1. Financial Statements:
Financial Statements filed herewith are listed in the "Index to
Consolidated Financial Statements" at page F-1. In addition, the
following financial statements are incorporated by reference to
Amendment No. 1 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 2000:
Financial Statements of Regional Programming Partners as of December
31, 2000 and 1999 and for the years ended December 31, 2000, 1999
and 1998,
Combined Financial Statements of SportsChannel Chicago Associates
and SportsChannel Pacific Associates as of December 31, 2000 and
1999 and for the years ended December 31, 2000, 1999, and 1998.
Combined Financial Statements of National Sports Partners and
National Advertising Partners as of December 31, 2000 and 1999 and
for the years ended December 31, 2000, 1999, and 1998.
Financial Statements of Sunshine Network Joint Venture as of
December 31, 2000 and 1999 and for the years ended December 31,
2000, 1999, and 1998.
Financial Statements of Home Team Sports, LP as of December 31, 1999
and for the years ended December 31, 1999 and 1998.
Financial Statements of Home Team Sports, LP as of December 31, 2000
and for the year ended December 31, 2000.
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 Sports Networks, LLC (f/k/a
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 Sports Networks, LLC (f/k/a
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
Sports Networks, LLC (f/k/a 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 Sports Networks, LLC
(f/k/a 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
Sports Networks, LLC (f/k/a 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 Sports Networks, LLC (f/k/a 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 Sports Networks, LLC (f/k/a 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.
39
Exhibit No Description of Exhibit
---------- ----------------------
4.6* Senior Notes Liquidated Damages Agreement, dated as of August 25,
1997, among Fox Sports Networks, LLC (f/k/a 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 Sports Networks, LLC (f/k/a 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 Sports Networks,
LLC (f/k/a 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 Sports Networks, LLC (f/k/a 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 Sports Networks, LLC (f/k/a Fox/Liberty Networks,
LLC) and FLN Finance, Inc., and The Bank of New York, as Securities
Intermediary and as Trustee.
10.1(a)* Agreement Regarding Ownership Interests, dated April 29, 1996, by
and among Liberty Media Corporation, News America Holdings
Incorporated, Fox Regional Sports Holdings, Inc., LMC Newco U.S.,
Inc., and Liberty/Fox Sports Financing LLC.
(b)* First Amended and Restated Agreement Regarding Ownership Interests,
dated as of December 15, 1997, by and among Liberty Media
Corporation, News America Holdings Incorporated, Fox Regional
Sports Holdings, Inc., LMC Newco U.S., Inc., and Liberty/Fox Sports
Financing, LLC.
10.2* Operating Agreement of Fox Sports RPP Holdings, LLC, dated June 20,
1997, by and among Fox Sports Networks, LLC (f/k/a 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 Sports Networks, LLC (f/k/a 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 Sports
Networks, LLC (f/k/a 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 Sports
Networks, LLC (f/k/a 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.
40
Exhibit No Description of Exhibit
---------- ----------------------
(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 Sports
Networks, LLC (f/k/a 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 Sports Networks, LLC
(f/k/a 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 Sports Networks, LLC
(f/k/a 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 Sports Networks, LLC
(f/k/a Fox/Liberty Networks, LLC) and The Chase Manhattan Bank,
as Administrative Agent, Chase Securities Inc., as Syndication
Agent and TD Securities (USA) Inc., as Documentation Agent.
(f)# Amended and Restated Credit Agreement, dated as of July 15,
1999, among Fox Sports Net, LLC, FX Networks, LLC, Fox Sports
RPP Holdings, LLC, as Borrowers and Fox Sports Networks, LLC and
19th Holdings Corporation, as Lender.
(g)### Amendment No. 1 to the Amended and Restated Credit Agreement,
dated as of July 3, 2000, among Fox Sports Net, LLC, FX
Networks, LLC, Fox Sports RPP Holdings, LLC, as Borrowers, Fox
Sports Networks, LLC and 19TH Holdings Corporation as Lender.
10.12***+ Employment Agreement between Fox Sports Networks, LLC (f/k/a
Fox/Liberty Networks, LLC f/k/a Liberty/Fox U.S. Sports LLC) and
Jeff Shell, dated February 4, 1998.
10.14##+ Employment Agreement, dated effective May 1, 2000, between Fox
Cable Networks Services, LLC (f/k/a Fox Cable Networks Services,
LLC) and Robert Thompson.
10.15##+ Employment Agreement, dated effective February 1, 2000, between
Fox Sports Net, LLC and Tracy Dolgin.
10.16(a)***++ Fox Sports Networks, LLC (f/k/a Fox/Liberty Networks, LLC)
Equity Appreciation Rights Plan for Management and Key
Employees, effective as of May 1, 1996.
(b)#++ Amendment to Fox Sports Networks, LLC Equity Appreciation Rights
Plan for Management and Key Employees, effective as of June 30,
1999.
10.17(a)@ Purchase Agreement dated as of August 28, 2000 by and among ARC,
Comcast and Fox Entertainment Group.
(b)@ Asset Purchase Agreement dated as of June 30, 2000 between
Viacom and Comcast.
(c)@ Amendment No. 1 to the Asset Purchase Agreement dated as of June
30, 2000.
(d)@ Amendment No. 2 to the Asset Purchase Agreement dated as of June
30, 2000.
(e)@ Assignment and Assumption Agreement, dated as of August 28, 2000
among Viacom, Comcast, Fox Sports Net Minnesota and Fox
Entertainment Group.
10.18+ Employment Agreement, dated effective November 1, 2000, between
Fox Cable Networks Services, LLC and Louis LaTorre.
21 Subsidiaries of Registrant.
41
--------
* Incorporated by reference to the Company's Registration Statement on Form
S-4, as amended (File No. 333-38689).
** Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1998.
*** Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997.
**** Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998.
# Incorporated by reference to the Company's Transition Report on Form 10-K
for the fiscal year ended June 30, 1999.
## Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 2000.
### Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2000.
@ Incorporated by reference to the Company's Current Report on Form 8-K as of
February 14, 2001.
+ Denotes an employment contract.
++ Denotes a compensation plan.
(b) Reports on Form 8-K
The Company filed a Form 8-K/A with the Securities and Exchange Commission
on April 27, 2001 related to the acquisition of certain assets and
liabilities of Midwest Sports Channel. The Form 8-K/A includes the audited
financial statements of Midwest Sports Channel for the years ended December
31, 2000, 1999, and 1998.
42
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunder duly authorized.
FOX SPORTS NETWORKS, LLC
Dated: September 28, 2001
/s/ Jeff Shell
By: _________________________________
Jeff Shell
Chief Executive Officer
(Principal Executive Officer)
/s/ Andrew R. Hubsch
By: _________________________________
Andrew R. Hubsch
Vice President, Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates stated:
Signature Title Date
--------- ----- ----
Fox Regional Sports Holdings, Inc. Member of Fox Sports September 28, 2001
Networks, LLC
/s/ Raymond L. Parrish
By: _____________________________
Raymond L. Parrish
Vice President
Fox Regional Sports Holdings II, Inc. Member of Fox Sports September 28, 2001
Networks, LLC
/s/ Raymond L. Parrish
By: _____________________________
Raymond L. Parrish
Vice President
Fox Sports Net Financing, LLC Member of Fox Sports September 28, 2001
Networks, LLC
By: Fox Regional Sports Holdings II, Inc. Member of Fox Sports Net September 28, 2001
Financing, LLC
/s/ Raymond L. Parrish
By: _____________________________
Raymond L. Parrish
Vice President
By: Fox Regional Sports Holdings, Inc. Member of Fox Sports Net September 28, 2001
Financing, LLC
/s/ Raymond L. Parrish
By: _____________________________
Raymond L. Parrish
Vice President
43
FOX SPORTS NETWORKS, LLC
INDEX TO
FINANCIAL STATEMENTS
Page
----
Fox Sports Networks, LLC
Consolidated Financial Statements....................................... F-2
Report of Independent Public Accountants................................ F-3
Consolidated Balance Sheets as of June 30, 2001 and 2000................ F-4
Consolidated Statements of Operations for the Periods ended June 30,
2001, 2000 and 1999 and December 31, 1998.............................. F-5
Consolidated Statements of Members' Equity for the Periods ended June
30, 2001, 2000 and 1999 and December 31, 1998.......................... F-6
Consolidated Statements of Cash Flows for the Periods ended June 30,
2001, 2000 and 1999 and December 31, 1998.............................. F-7
Notes to Consolidated Financial Statements as of June 30, 2001.......... F-8
Financial Statement Schedules
Report of Independent Public Accountants on Schedules................... S-2
Schedule I--Condensed Balance Sheets as of June 30, 2001 and 2000....... S-3
Schedule I--Condensed Statements of Operations for the Periods ended
June 30, 2001, 2000 and 1999 and December 31, 1998..................... S-4
Schedule I--Condensed Statements of Cash Flows for the Periods ended
June 30, 2001, 2000 and 1999 and December 31, 1998..................... S-5
Schedule I--Notes to Condensed Financial Information as of June 30,
2001................................................................... S-6
Schedule II--Valuation and Qualifying Accounts for the Periods ended
June 30, 2001, 2000, and 1999 and December 31, 1998.................... S-7
F-1
FOX SPORTS NETWORKS, LLC
CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2001 and 2000
With Report of Independent Public Accountants
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of Fox Sports Networks, LLC:
We have audited the accompanying consolidated balance sheets of Fox Sports
Networks, LLC and subsidiaries, (a Delaware limited liability company) as of
June 30, 2001 and 2000, and the related consolidated statements of operations,
members' equity and cash flows for the years ended June 30, 2001 and 2000, the
six months ended June 30, 1999, and the year ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Fox Sports
Networks, LLC and subsidiaries as of June 30, 2001 and 2000, and the results
of their operations and their cash flows for the years ended June 30, 2001 and
2000, the six months ended June 30, 1999, and the year ended December 31, 1998
in conformity with accounting principles generally accepted in the United
States.
Arthur Andersen LLP
Los Angeles, California
August 16, 2001
F-3
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
CONSOLIDATED BALANCE SHEETS
June 30, 2001 and 2000
(Dollars in thousands)
June 30, June 30,
2001 2000
---------- ----------
ASSETS
------
Current assets:
Cash and cash equivalents.............................. $ 11,162 $ 25,891
Trade and other receivables, net of allowance for
doubtful accounts of $8,789 and $9,621 at June 30,
2001 and 2000......................................... 230,483 184,906
Receivables from equity affiliates, net................ 22,402 485
Program rights, net.................................... 177,397 127,667
Prepaid expenses and other current assets.............. 32,366 29,322
---------- ----------
Total current assets................................. 473,810 368,271
Property and equipment, net.............................. 72,119 58,186
Investments in affiliates................................ 934,797 952,723
Program rights........................................... 160,397 138,262
Excess cost, net......................................... 476,795 480,087
Other assets............................................. 60,377 43,633
---------- ----------
Total Assets......................................... $2,178,295 $2,041,162
========== ==========
LIABILITIES AND MEMBERS' EQUITY
-------------------------------
Current liabilities:
Accounts payable and accrued expenses.................. $ 180,060 $ 184,155
Program rights payable................................. 142,915 79,688
Current portion of long-term debt...................... 2,636 2,470
Accrued interest....................................... 18,188 16,988
Other current liabilities.............................. 9,925 11,532
---------- ----------
Total current liabilities............................ 353,724 294,833
Non-current program rights payable....................... 86,613 107,310
Long-term debt, net of current portion................... 1,676,859 1,588,914
Minority interest........................................ 2,474 25,412
Commitments and contingencies
Members' equity.......................................... 58,625 24,693
---------- ----------
Total Liabilities and Members' Equity................ $2,178,295 $2,041,162
========== ==========
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Periods Ended June 30, 2001, 2000 and 1999
and December 31, 1998
(Dollars in thousands)
Six months
Year ended Year ended ended Year ended
June 30, June 30, June 30, December 31,
2001 2000 1999 1998
---------- ---------- ---------- ------------
Revenues:
Programming................... $ 505,227 $424,401 $171,085 $301,734
Advertising................... 281,006 262,174 108,318 183,769
Direct broadcast.............. 165,863 137,420 56,725 121,759
Other......................... 54,008 47,671 28,125 47,932
---------- -------- -------- --------
1,006,104 871,666 364,253 655,194
---------- -------- -------- --------
Expenses:
Operating..................... 713,019 614,980 296,059 485,276
General and administrative.... 91,073 75,834 39,264 90,662
Depreciation and
amortization................. 59,850 48,094 12,239 21,662
---------- -------- -------- --------
863,942 738,908 347,562 597,600
---------- -------- -------- --------
Operating income................ 142,162 132,758 16,691 57,594
---------- -------- -------- --------
Other (income) expenses:
Interest, net................. 145,349 129,640 54,781 110,425
Subsidiaries' income tax
expense, net................. 391 2,039 233 1,456
Loss on sale of assets........ 140 604 2,767 121
Equity (income) loss of
affiliates, net.............. (494) 6,345 11,160 5,913
Gain on sale of equity
affiliate.................... (40,805) -- -- --
Other, net.................... (280) (137) 471 (1,478)
Minority interest............. 3,929 5,320 1,736 3,225
---------- -------- -------- --------
108,230 143,811 71,148 119,662
---------- -------- -------- --------
Net income (loss)............... $ 33,932 $(11,053) $(54,457) $(62,068)
========== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
For the Periods Ended June 30, 2001, 2000 and 1999
and December 31, 1998
(Dollars in thousands)
Fox Regional Fox Sports Fox Regional Total
Sports Net Financing, Sports Members'
Holdings II, Inc. LLC Holdings, Inc. Equity
----------------- -------------- -------------- --------
BALANCE, DECEMBER 31,
1997................... $(52,331) $168,633 $ 35,969 $152,271
Net loss.............. (19,144) (23,780) (19,144) (62,068)
-------- -------- -------- --------
BALANCE, DECEMBER 31,
1998................... (71,475) 144,853 16,825 90,203
Net loss.............. (16,796) (20,865) (16,796) (54,457)
-------- -------- -------- --------
BALANCE, JUNE 30, 1999.. (88,271) 123,988 29 35,746
Net loss.............. (3,409) (4,235) (3,409) (11,053)
-------- -------- -------- --------
BALANCE, JUNE 30, 2000.. (91,680) 119,753 (3,380) 24,693
Net income............ 10,466 13,000 10,466 33,932
-------- -------- -------- --------
BALANCE, JUNE 30,
2001................... $(81,214) $132,753 $ 7,086 $ 58,625
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Periods Ended June 30, 2001, 2000 and 1999
and December 31, 1998
(Dollars in thousands)
Year ended Year ended Six months Year ended
June 30, June 30, ended June December 31,
2001 2000 30, 1999 1998
---------- ---------- ---------- ------------
Cash flows from operating
activities:
Net income (loss).............. $ 33,932 $ (11,053) $(54,457) $(62,068)
Adjustments to reconcile net
income (loss) to net cash used
in operating activities:
Depreciation and
amortization................ 59,850 48,094 12,239 21,662
Interest accretion and
amortization of debt
issuance costs.............. 35,839 33,247 15,660 29,868
Loss on sale of assets....... 140 604 2,767 121
Equity (income) loss of
affiliates.................. (494) 6,345 11,160 5,913
Gain on sale of equity
affiliate................... (40,805) -- -- --
Minority interest............ 3,929 5,320 1,736 3,225
Changes in operating assets and
liabilities:
Trade and other receivables.. (37,085) (13,916) (13,441) (1,373)
Program rights............... (69,542) (54,149) (16,578) (65,871)
Prepaid expenses and other
operating assets............ (30,945) (42,024) 8,875 1,044
Accounts payable and accrued
expenses.................... (9,402) (28,999) 37,417 (14,529)
Program rights payable....... 42,530 14,314 (10,872) 46,278
Other operating liabilities.. (407) 431 (10,568) 9,553
--------- --------- -------- --------
Net cash used in operating
activities................ (12,460) (41,786) (16,062) (26,177)
--------- --------- -------- --------
Cash flows from investing
activities:
Advances from equity
affiliates.................... 12,805 33,006 3,883 96,084
Advances to equity affiliates.. (35,304) (36,770) (14,198) (92,913)
Proceeds from sale of equity
affiliate..................... 31,030 -- -- --
Proceeds from sale of property
and equipment................. 1,011 -- -- --
Purchases of property and
equipment..................... (35,010) (20,188) (9,942) (14,665)
Distributions from equity
affiliates.................... 35,370 11,892 6,752 40,051
Investments in equity
affiliates.................... (22,175) (35,940) (23,063) (67,671)
Acquisitions, net of cash
acquired...................... (39,874) -- -- (3,618)
Proceeds from sale of
investment.................... -- -- -- 900
--------- --------- -------- --------
Net cash used in investing
activities................ (52,147) (48,000) (36,568) (41,832)
--------- --------- -------- --------
Cash flows from financing
activities:
Borrowings of long-term debt... 698,448 491,875 92,000 155,000
Repayment of long-term debt.... (643,830) (432,823) (22,423) (91,713)
Distribution to minority
shareholder of subsidiary..... (4,740) (2,520) (720) (1,920)
--------- --------- -------- --------
Net cash provided by
financing activities...... 49,878 56,532 68,857 61,367
--------- --------- -------- --------
Net (decrease) increase in cash
and cash equivalents............ (14,729) (33,254) 16,227 (6,642)
Cash and cash equivalents,
beginning of period............. 25,891 59,145 42,918 49,560
--------- --------- -------- --------
Cash and cash equivalents, end of
period.......................... $ 11,162 $ 25,891 $ 59,145 $ 42,918
========= ========= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
(Dollars in thousands)
(1) Organization
Fox Sports Networks, LLC (formerly 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.
Liberty Sports, Inc. ("LSI") (a predecessor operation) contributed its
interest in regional sports programming businesses (which then operated under
the name "Prime Sports"), interests in non-managed sports businesses,
satellite distribution services and technical facilities. Fox Entertainment
Group, Inc. ("Fox") and its subsidiaries contributed cash, all of its assets
and liabilities in the FX cable network (a predecessor operation), and certain
assets related to regional sports programming.
In July 1999, The News Corporation Limited ("TNCL") acquired substantially
all of LSI's interest in the Company and then transferred this interest to Fox
in exchange for common stock.
The Company's members as of June 30, 2001 are:
Interest
--------
Fox Regional Sports Holdings, Inc. ("FRSH") ..................... 30.843%
(a wholly-owned indirect subsidiary of Fox, a majority owned
subsidiary of News America Incorporated ("NAI"), a wholly-owned
subsidiary of TNCL
Fox Regional Sports Holdings II, Inc. ("FRSH II")................ 30.843%
(a wholly-owned subsidiary of Fox) (formerly LMC Newco U.S.,
Inc.)
Fox Sports Net Financing, LLC.................................... 38.314%
-------
(50% owned by each of FRSH and FRSH II)
100.000%
=======
(2) Significant Accounting Policies
(a) Basis of Presentation
The accompanying consolidated financial statements include the operations of
the Company and those majority-owned subsidiaries and entities for which there
is a controlling interest. All significant intercompany accounts and
transactions have been eliminated in consolidation. The subsidiaries
consolidated include the following intermediary holding companies and their
subsidiaries:
Fox Sports Net, LLC, which is comprised of the following:
--Fox Sports Net West, LLC --Liberty/Fox ARC, LP
--Fox Sports Net Northwest, LLC --Liberty/Fox Southeast, LLC
--Liberty/Fox Sunshine, LLC --Fox Sports Net Utah, LLC
--Fox Sports Net Detroit, LLC --Fox Sports Net Arizona, LLC
--Fox Sports Net Canada Holdings,
LLC --Fox Cable Networks Services, LLC
--Fox Sports Net Bay Area
Holdings, LLC --Fox Sports Net Pittsburgh, LLC
--Fox Sports Net Minnesota
Holdings, LLC --Fox Sports Net Chicago Holdings, LLC
--Fox Sports Digital Nets, LLC --Fox Sports Net Distribution, LLC
FX Networks, LLC
Fox Sports RPP Holdings, LLC
F-8
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2001
(Dollars in thousands)
In July 1999, in connection with Fox's acquisition of LSI's interest in the
Company (See Note 1), voting control of certain majoriy-owned subsidiaries of
the Company, previously held by Liberty Media Corporation ("Liberty"), was
acquired by Fox and, accordingly, these subsidiaries, are consolidated
commencing in the year ended June 30, 2000 (See Note 3(d)). These majority-
owned subsidiaries, which were previously accounted for using the equity
method of accounting, are:
Fox Sports Net Pittsburgh, LLC (formerly Liberty/Fox KBL LP)
Fox Sports Net Chicago Holdings, LLC (formerly Fox/Liberty Chicago LP)
Fox Sports Net Bay Area Holdings, LLC (formerly Fox/Liberty Bay Area LP)
Fox Sports Net Minnesota Holdings, LLC (formerly Fox/Liberty Upper Midwest
LP)
Fox Sports Net Distribution, LLC (formerly Fox/Liberty Distribution LP)
(b) Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and short-term investments
with an original maturity of less than 90 days. The carrying amounts of cash
and cash equivalents approximate their fair values due to their short
maturities.
(c) Program Rights
The Company has multi-year contracts for the cable telecast rights of
syndicated entertainment programs and sporting events. Pursuant to these
contracts, an asset is recorded for the rights acquired and a liability is
recorded for the obligation incurred at the gross amount of the liability when
the programs or sporting events are available for telecast. Program rights for
entertainment programs are amortized over the term of the contract using the
straight-line method. Program rights for sporting events which are for a
specified number of games are amortized on an event-by-event basis, and those
which are for a specified season are amortized over the term of the season on
a straight-line basis.
At the inception of these contracts, and periodically thereafter, the
Company evaluates the recoverability of the costs associated therewith against
the revenues associated with the program material and related expenses. Where
an evaluation indicates that a multi-year contract will result in an ultimate
loss, additional amortization is provided to currently recognize that loss.
(d) Property and Equipment
Property and equipment are stated at cost, which includes acquisition costs
allocated to tangible assets acquired. Depreciation is provided using the
straight-line method over an estimated useful life of three to five years.
Leasehold improvements are amortized using the straight-line method over the
shorter of their useful lives or the life of the lease. Costs associated with
the repair and maintenance of property are expensed as incurred.
(e) Other Assets
At June 30, 2001 and 2000 other assets included $13,473 and $14,845,
respectively, of debt issuance costs related to the issuance of Senior Notes
and Senior Discount Notes (see Note 7(b)) and $2,815 and $3,789 respectively,
of debt issuance costs related to a credit facility (see Note 7(a)). These
costs are amortized using
F-9
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2001
(Dollars in thousands)
the effective interest method over the term of the respective debt instrument.
Amortization expense was $2,346, $2,346, $1,147 and $2,321 in the aggregate
for the years ended June 30, 2001 and 2000, the six months ended June 30, 1999
and the year ended December 31, 1998 respectively, and is included in interest
expense.
(f) Investments in Affiliates
Investments in and advances to affiliates in which the Company has a
substantial ownership interest of approximately 20 to 50%, or for which the
Company owns more than 50% but does not control policy decisions, are
accounted for by the equity method. Under this method of accounting, the
original investment is increased or decreased by the Company's share of such
affiliates income or losses and decreased by dividends.
Partnerships in which the Company acts as a limited partner, but in which
the third party general partner exercises management control, are not
consolidated regardless of the ownership interest. If these investments meet
the conditions outlined in the paragraph above then the partnerships are
accounted for under the equity method.
(g) Excess Cost
Excess cost represents the difference between the cost of acquiring
programming entities and amounts assigned to their tangible and intangible net
assets. Such amounts are amortized on a straight-line basis over 40 years.
Amortization expense was $14,197, $13,878, $7,037, and $14,300, for the years
ended June 30, 2001 and 2000, the six months ended June 30, 1999, and the year
ended December 31, 1998, respectively. At June 30, 2001 and 2000 excess cost,
net included accumulated amortization of $120,888 and $106,691 respectively.
(h) Long-Lived Assets
In accordance with Statement of Financial Accounting Standard ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," the Company evaluates the recoverability of the
carrying amount of its long-lived assets and certain identifiable intangibles
to be held and used by the Company. Such reviews are performed periodically or
whenever events or changes in circumstances indicate full recoverability is
questionable and on an individual business-entity basis. The recoverable
amount is defined by the net amount expected to be recovered from operating
cash inflows and outflows arising from an asset's continued use and subsequent
disposal.
Assessment of any impairment would include a comparison of undiscounted
estimated future cash flows anticipated to be generated during the remaining
amortization period to the net carrying value. If the Company determines that
impairment has occurred, the measurement of the impairment will be equal to
the excess of the carrying amount over, but not limited to, the amount of the
discounted estimated operating cash flows. Certain other factors used in
ascertaining the estimated fair market value of such assets include operating
income before interest and taxes, television ratings and subscriber numbers.
Should the review determine impairment, the loss will be recognized through
the statement of operations as part of income from continuing operations and
the corresponding asset value will be reduced.
(i) Revenues
Revenue from programming represents monthly subscriber fees received from
cable system operators and is recognized as earned. Revenue from direct
broadcast represents monthly subscriber fees received from direct-
F-10
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2001
(Dollars in thousands)
to-home satellite operators and is recognized as earned. Advertising revenue
is recognized upon airing of commercials.
(j) Non-Monetary Transactions
The Company trades commercial advertising spots in return for programming
and other consideration. These trades are recorded at the fair value of the
asset surrendered or the fair value of the asset obtained, whichever is more
clearly evident. These transactions resulted in the recording of approximately
$1,033, $9,254, $5,798, and $4,173, in both advertising revenue and
programming expenses during the years ended June 30, 2001 and 2000, the six
months ended June 30, 1999, and the year ended December 31, 1998,
respectively.
(k) Income Taxes
No provision has been made for federal, state or foreign income taxes, as
the liability for such income taxes is the responsibility of the members.
(l) Segment Reporting
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS No. 131 established revised
standards for public companies relating to the reporting of financial and
descriptive information about their operating segments in financial
statements.
The Company manages and reports its activities in one business segment,
Cable Network Programming, which principally consists of the production and
licensing of programming distributed through cable television systems and DBS
operators in the United States and Canada.
The Company's reportable operating segment has been determined in accordance
with the Company's internal management structure, which is organized based on
operating activities. Should the internal management structure of the Company
change, the reportable operating segments of the Company will likewise change.
(m) Major Customers
The Company recognized revenue from one customer which represented 13.4%,
14.5%, 11.8%, and 14.3%, of consolidated revenues for the years ended June 30,
2001 and 2000, the six months ended June 30, 1999, and the year ended December
31, 1998. Revenue recognized from a second customer represented 11.3% and
11.4% for the years ended June 30, 2001 and 2000.
(n) Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and liabilities at
the date of the consolidated financial statements, and the reported amounts of
revenues and expenses during the reporting period. Because of the use of
estimates inherent in the financial reporting process, actual results could
differ from those estimates.
F-11
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2001
(Dollars in thousands)
(o) Reclassifications
Certain reclassifications have been made to the prior year balances in order
to conform to the current year presentation.
(p) Fiscal Year
Beginning in the year ended June 30, 2000, the Company maintains a 52-53
week fiscal year ending on the Sunday nearest to June 30. The years ended June
30, 2001 and 2000 represent a 52-week period and a 53-week period,
respectively.
(q) New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement No.
141, "Business Combinations" ("SFAS 141"). This statement changes the
accounting rules that apply to business combinations and is applicable to
acquisitions subsequent to June 30, 2001. The Company does not expect SFAS 141
to have a material effect on the consolidated financial statements.
In June 2001, the Financial Accounting Standards Board issued Statement No.
142, "Goodwill and Other Intangible Assets" ("SFAS 142"). This statement
changes the accounting rules that apply to goodwill and intangible assets.
Under SFAS 142, new goodwill and intangible assets with indefinite lives
acquired after June 30, 2001 should no longer be amortized. Existing goodwill
and intangible assets with indefinite lives acquired prior to June 30, 2001
should no longer be amortized in fiscal years starting after December 15,
2001. The Company plans to adopt SFAS 142 on July 1, 2002. The Company is in
the process of evaluating the impact SFAS 142 will have on the consolidated
statement of operations.
F-12
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2001
(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 year ended December 31, 1998 is as follows:
Fit TV(a)
---------
Fair value of net assets acquired:
Cash............................................................. $ 132
Accounts receivable.............................................. 650
Prepaid program rights........................................... 725
Prepaid expenses................................................. 200
Property and equipment, net...................................... 11
Other assets..................................................... 156
Accounts payable and accrued expenses............................ (3,762)
Program rights payable........................................... (29)
Other current liabilities........................................ (158)
-------
(2,075)
Satisfied by:
Cash............................................................. 18,750
-------
Excess cost........................................................ $20,825
=======
--------
(a) In April 1998, the Company completed the acquisition of Fit TV
Partnership, with an effective date as of January 1, 1998, in which the
Company paid $15,000 to Cable Health TV, Inc. in 1997 and $1,875 each to
Reebok CHC, Inc. and Liberty CHC, Inc., representing 100% capital interest
and a 92% profit interest in Fit TV Partnership, and accordingly, has been
consolidated with the Company. An 8% minority profit interest in Fit TV
Partnership was acquired by a third party. Had the capital interest been
acquired at January 1, 1997 with respect to the year ended December 31,
1997, the pro forma revenue would have increased by $4,074 respectively,
and net loss would have increased by $7,561. These pro forma results have
been prepared for comparative purposes only and do not purport to be
indicative of the results of operations which actually would have resulted
had the acquisition occurred on the date indicated, or which may result in
the future.
F-13
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2001
(Dollars in thousands)
Supplemental disclosure of cash flow information and non-cash investing and
financing activities for the six months ended June 30, 1999 is as follows:
Fit TV(b)
---------
Fair value of net assets disposed:
Accounts receivable............................................. $ (1,341)
Prepaid program rights.......................................... (1,300)
Prepaid expenses................................................ (274)
Property and equipment, net..................................... (57)
Excess cost..................................................... (20,131)
Other assets.................................................... (32)
Accounts payable and accrued expenses........................... 5,785
Program rights payable.......................................... 278
--------
(17,072)
Satisfied by:
Receivable...................................................... 14,500
--------
Loss on sale ..................................................... $ (2,572)
========
--------
(b) In May 1999, the Company recorded a receivable from an afffilitate of Fox
in connection with the sale of Fit TV Partnership.
(c) In April 1999, the Company received notes receivable of $19,635 as a
distribution from Liberty/Fox KBL LP.
Supplemental disclosure of cashflow information and non-cash investing and
financing activities for the year ended June 30, 2000 is as follows:
(d) The consolidation of certain majority-owned subsidiaries previously
accounted for using the equity method (see Note 2(a)) is a non-cash
investing activity that resulted in increases to various assets and
liabilities on the Company's consolidated balance sheet that are not
reflected in the consolidated statements of cash flows for the year ended
June 30, 2000. Such increases primarily consisted of a $78,072 increase in
investments in equity affiliates, a $47,171 decrease in receivables from
equity affiliates, a $483 increase in property and equipment, net and a
$20,405 increase in minority interest.
(e) Debt increased by $51,940 related to accrued interest on the 19th Holdings
Corporation (a wholly owned subsidiary of Fox) note (see Note 7(a)).
Supplemental disclosure of cash flow information and non-cash investing and
financing activities for the year ended June 30, 2001 is as follows:
(f) In July 2000, Fox contributed the minority interest it held in certain
subsidiaries consolidated by the Company. As a result, the Company
recorded a decrease in excess cost, net and minority interest of $22,127.
(g) Included in other assets is a non-cash amount of $15,000 related to cable
carriage arrangements for the distribution of programming services of the
Company, received in conjunction with the sale of Home Team Sports Limited
Partnership ("HTS") (see Note 10).
(h) Debt increased by $68,487 for the year ended June 30, 2001, related to
accrued interest on the debt outstanding under the 19th Facility.
F-14
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2001
(Dollars in thousands)
(i) In February 2001, the Company acquired certain assets and assumed certain
liabilities of Midwest Sports Channel ("MSC") (see Note 10). This
transaction resulted in increases of $8,492 in trade and other
receivables, net, $582 in advances to equity affiliates, $2,323 in program
rights, $1,496 in property and equipment, net, $33,032 in excess cost,
$420 in Other assets, and $5,307 in accounts payable and accrued expenses.
Had the transaction occurred at July 1, 2000 with respect to the year
ended June 30, 2001, the pro forma revenue would have increased by
approximately $26,000 (unaudited) and net income would have increased by
$4,300 (unaudited). 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 $44,375, $47,598, $46,426, and $76,154, for the
years ended June 30, 2001 and 2000, the six months ended June 30, 1999, and
the year ended December 31, 1998, respectively.
(4) Related Party Transactions
For the years ended June 30, 2001 and 2000, the Company recognized the
following revenue and expenses as a result of arms-length transactions with
affiliates of Fox and for the six months ended June 30, 1999, and the year
ended December 31, 1998 the Company recognized the following revenue and
expenses as a result of arms-length transactions with affiliates of LSI and
Fox:
Year ended Year ended Six months ended Year ended
June 30, June 30, June 30, December 31,
2001 2000 1999 1998
---------- ---------- ---------------- ------------
Revenues:
Programming........... $ -- $ 3,845 $43,521 $93,922
Advertising........... 3,922 1,948 895 1,523
Other................. 19,606 21,976 14,240 19,606
Expenses:
Operating............. 123,400 108,788 31,997 62,216
General and
administrative....... 2,411 4,691 3,202 2,775
Interest:
Interest income....... -- 77 165 351
Interest expense...... -- -- -- 25
At June 30, 2001 and 2000 receivables from related parties were $15,922 and
$23,138, respectively, and payables to related parties were $23,838 and
$14,794, 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.
F-15
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2001
(Dollars in thousands)
(5) Property and Equipment
Property and equipment at June 30, 2001 and 2000 consisted of the following:
June 30, June 30,
2001 2000
-------- --------
Studio and production equipment.......................... $105,245 $ 79,720
Office equipment......................................... 25,610 21,989
Construction in progress................................. -- 2,154
Other.................................................... 17,147 11,092
-------- --------
148,002 114,955
Accumulated depreciation................................. (75,883) (56,769)
-------- --------
$ 72,119 $ 58,186
======== ========
(6) Investments Accounted for Under the Equity Method
(a) Summarized Data for Significant Equity Affiliates
Summarized unaudited financial information for significant equity
affiliates, as defined in Rule 1-02(w) of Regulation S-X, accounted for under
the equity method is as follows:
Combined Financial Position
June 30, June 30,
2001 2000
---------- ----------
Current assets........................................ $ 451,171 $ 471,501
Non-current assets.................................... 1,900,196 2,001,236
---------- ----------
Total assets.......................................... $2,351,367 $2,472,737
========== ==========
Current liabilities................................... $ 322,187 $ 322,500
Non-current liabilities............................... 579,245 643,125
Members' equity....................................... 1,449,935 1,507,112
---------- ----------
Total liabilities and equity.......................... $2,351,367 $2,472,737
========== ==========
Combined Operations
Six months
Year ended Year ended ended Year ended
June 30, June 30, June 30, December 31,
2001 2000 1999 1998
---------- ---------- ---------- ------------
Revenues...................... $1,448,091 $1,373,492 $454,885 $783,156
Operating income (loss)....... 11,944 25,868 (27,904) (65,062)
Net income (loss)............. 433 15,583 (21,634) (29,834)
F-16
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2001
(Dollars in thousands)
(b) Unconsolidated Affiliates
The Company's investments in equity affiliates consist principally of the
following: 40% of Regional Programming Partners ("RPP"), 50% of National
Sports Partners ("NSP"), 50% of Sports Channel Pacific Associates ("Bay
Area"), 50% of Sports Channel Chicago Associates ("Chicago"), 48.5% of LMC
Sunshine Inc. and 49% of Sunshine Network Joint Venture (together,
"Sunshine").
As of June 30, 2001, the investment in these affiliates was as follows:
RPP - $836,636; NSP - $18,322; Bay Area - $9,962; Chicago - $58,660; and
Sunshine-$9,356.
Prior to the contribution of certain majority owned entities to the Company
in connection with the formation of the Company (see Note 1), there were
certain regional networks that were wholly owned and consolidated by LSI. Upon
contribution of these entities to the Company, LSI retained management control
through a general partnership minority interest. Until July 1999, these
operations were not consolidated by the Company, although it owned the
majority of the limited partnership interests. In connection with Fox's
acquisition of LSI's interests in the Company in July 1999, Fox assumed
management control of these partnerships and has consolidated these
partnerships from that date. (See Notes 2(a) and 3(d)).
The Company recorded income from its equity in earnings of majority owned
affiliates of $6,205 and $13,111 in the six months ended June 30, 1999 and the
year ended December 31, 1998, respectively.
The Company's investment in several of its affiliates exceeded its equity in
the underlying net assets by a total of $324,418 and $328,949 at June 30, 2001
and 2000, respectively. These excess amounts are being amortized on a
straight-line basis over 40 years. The amortization aggregated to $9,124,
$9,252, $4,777, and $7,876, during the years ended June 30, 2001 and 2000, the
six months ended June 30, 1999, and the year ended December 31, 1998,
respectively, and is included in the Company's share of equity loss of
affiliates.
(7) Debt
Debt at June 30, 2001 and 2000 is summarized as follows:
June 30, June 30,
2001 2000
---------- ----------
19th Holdings Corporation(a)......................... $ 807,608 $ 749,990
Senior Notes(b)...................................... 500,000 500,000
Senior Discount Notes(b)............................. 363,965 331,002
Other................................................ 7,922 10,392
---------- ----------
1,679,495 1,591,384
Less current portion................................. (2,636) (2,470)
---------- ----------
$1,676,859 $1,588,914
========== ==========
F-17
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2001
(Dollars in thousands)
Annual future minimum maturities of debt are as follows:
Year ending June 30:
2002............................................................ $ 2,636
2003............................................................ 2,813
2004............................................................ 2,473
2005............................................................ 807,608
2006............................................................ --
Thereafter...................................................... 863,965
----------
$1,679,495
==========
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. Based on closing prices on
June 30, 2001, the fair value of the Company's debt exceeded its carrying
amount by approximately $51,000 as of June 30, 2001.
(a) In December 1997, Fox Sports Net, LLC, FX Networks, LLC and Fox Sports RPP
Holdings, LLC (together, the "Co-Borrowers"), entered into a credit
agreement (the "Credit Agreement") with a group of banks. In July 1999,
19th Holdings Corporation, (a wholly-owned subsidiary of Fox) acquired the
debt outstanding under the Credit Agreement and assumed the rights and
obligations of the group of banks thereunder. The Company and 19th
Holdings Corporation subsequently amended and restated the Credit
Agreement and eliminated substantially all of the affirmative and negative
covenants other than with respect to the payment of principal and interest
(the "19th Agreement"). The 19th Agreement provided for a $400,000 term
loan and a $400,000 revolving credit facility ("the Facilities"). In July
2000, the Company and 19th Holdings Corporation amended the 19th Facility
to increase the revolving facility to $500,000 and the total facility to
$900,000. Borrowings under the Facilities are guaranteed by the Company,
the Co-Borrowers and certain subsidiaries of Fox Sports Net, LLC, and are
secured by substantially all of the assets of the Company. Borrowings
under the facilities bear interest at a fixed rate determined on an annual
basis by 19th Holdings Corporation. 19th Holdings Corporation has
determined that the rate of interest on this debt through June 2002 shall
be 8%. Unpaid interest is added to principal on a monthly basis. The
amount of interest added to principal during the years ended June 30, 2001
and 2000 was $68,487 and $51,940, respectively. Amounts outstanding under
the revolving credit facility and principal under the term loan are due
September 30, 2004.
(b) In August 1997, Fox Sports Networks, LLC (formerly Fox/Liberty Networks,
LLC) (the "Issuer") privately sold $500,000 aggregate principal amount of
its 8 7/8% Senior Notes due 2007 and $405,000 aggregate principal amount
at maturity ($252.3 million gross proceeds) of its 9 3/4% Senior Discount
Notes due 2007 (collectively the "Old Notes") in a transaction (the
"Offering") that was exempt from registration under the Securities Act of
1933, as amended ("1933 Act"). In January 1998, pursuant to an exchange
offer (the "Exchange Offer"), the Issuer exchanged all of the Old Notes
for new notes (the "Notes"), which were registered by the Issuer under the
1933 Act. The terms of the Notes are substantially identical to the terms
of the Old Notes. The Issuer received no proceeds from the issuance of the
Notes in the Exchange Offer. Interest on the Senior Notes is payable semi-
annually. Interest payments on the Senior Discount Notes commence in
February 2003. Interest accretes to principal prior to the commencement of
interest payments. At June 30, 2001, 2000 and 1999 and December 31, 1998,
the unamortized discount on the Senior Discount Notes was $41,035,
$73,998, $104,214, and $118,122, respectively. Interest expense, resulting
from the amortization of the discount, was $32,963, $30,216, $13,908, and
$26,547, for the years ended June 30,
F-18
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2001
(Dollars in thousands)
2001 and 2000, the six months ended June 30, 1999, and the year ended
December 31, 1998, 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 $149,618, $130,870, $56,052 and $112,961, for the years
ended June 30, 2001 and 2000, the six months ended June 30, 1999, and the year
ended December 31, 1998, respectively. Interest income was $4,269, $1,230,
$1,271, and $2,536, for the years ended June 30, 2001 and 2000, the six months
ended June 30, 1999, and the year ended December 31, 1998, 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 certain regional sports
networks and FX Networks, LLC include interests held directly by affiliates of
Fox. Certain regional sports networks and FX Networks, LLC are owned by the
Company through a chain of entities in which the Company has a direct or
indirect interest of approximately 99%, with the remaining fractional
interests being held by the affiliates of Fox.
(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 June 30, 2001 and 2000, the six months ended June 30, 1999,
and the year ended December 31, 1998, the Company contributed $6,101, $5,771,
$3,186, and $4,757, respectively, to the 401(k) Plan.
(10) Acquisition and Disposal
In February 2001, the Company acquired certain assets and assumed certain
liabilities of Midwest Sports Channel ("MSC"), a regional sports network
serving the Minneapolis, Minnesota and Milwaukee, Wisconsin areas, from Viacom
Inc. ("Viacom") pursuant to an Assignment and Assumption Agreement (the
"Agreement") between the Company, Viacom and Comcast Corporation ("Comcast").
The Agreement assigned Comcast's rights and obligations to purchase MSC from
Viacom to the Company. The Company paid a total of $34,874 of cash to Viacom
and Comcast for the acquired net assets of MSC and incurred other costs of
$5,000 which were capitalized, the source of which was borrowings under the
19th Facility.
Concurrent with the above transaction, the Company sold its 34.298% interest
in HTS to Comcast for $31,030 in cash and $15,000 in cable distribution
arrangements related to the distribution of the Company's programming
services, which resulted in recording a gain on sale of affiliate of $40,805
in other income. The excess of the net purchase price over the net assets
acquired of $33,032 is reflected within excess cost, net.
Subsequent to the completion of the MSC transaction, the Company rebranded
the regional sports network as Fox Sports Net and has continued to operate the
regional network under the name Fox Sports Net North. The acquisition has been
accounted for as a purchase business combination. The Company has performed a
preliminary purchase price allocation and will finalize this allocation within
twelve months from the date of acquisition.
F-19
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2001
(Dollars in thousands)
(11) Equity Appreciation Rights Plan
In October 1997, the Company adopted the Fox/Liberty Networks, LLC Equity
Appreciation Rights Plan for management and key employees (the "Plan"), with
an effective date, of May 1, 1996. A committee was appointed by the Company to
administer and interpret this Plan. The maximum number of Appreciation Rights
available for grant under this plan was 300,000. The rights vest over five
years and require a minimum number of hours worked per year of vesting.
In August 1999, the Plan was amended, with an effective date of June 10,
1999, to provide that no further Appreciation Rights could be granted under
the Plan after such effective date, and the value of Appreciation Rights was
fixed at $250 as of the effective date and as of December 31, 1998. All
participants with outstanding Appreciation Rights will continue to vest over
time, provided that as Appreciation Rights vest, the participant shall be
deemed to have exercised their right to receive cash payments equal to the
excess of $250 over the grant value of such vested Appreciation Rights.
There were no grants under the Plan during the years ended June 30, 2001 and
2000. During 1999, the Company granted 18,000 rights at $185. During 1998, the
Company granted 28,000 and 18,000 rights at $185 and $135, respectively.
During 1997, the Company granted 185,100 rights at $135. The value of the 1999
and 1998 grants were based on an independent valuation and the value of the
1997 grants were based on the initial value determined by the Company's
members. At June 30, 2001 and 2000, 23,400 and 28,800 unexercised rights had
vested respectively, with a weighted average exercise period of 4.8 years at
June 30, 2001. Compensation expense was $1,630, $2,329, $5,150 and $13,526
with respect to vested Appreciation Rights for the years ended June 30, 2001
and 2000, the six months ended June 30, 1999 and the year ended December 31,
1998, respectively.
(12) Commitments and Contingencies
(a) Operating Leases
The Company leases transponders, office facilities, and equipment and
microwave channels used to carry its broadcast signals. These leases, which
are classified as operating leases, expire at various dates through 2010.
Future minimum payments by year under noncancelable operating leases with a
term of one year or more consist of the following at June 30, 2001:
Year ending June 30:
2002.............................................................. $ 26,057
2003.............................................................. 22,261
2004.............................................................. 20,695
2005.............................................................. 19,212
2006.............................................................. 16,040
Thereafter........................................................ 29,594
--------
$133,859
========
Total lease expense was approximately $28,938, $27,017, $15,030, and $27,396
for the years ended June 30, 2001 and 2000, the six months ended June 30,
1999, and the year ended December 31, 1998, respectively.
F-20
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2001
(Dollars in thousands)
(b) Long-term Program Rights Contracts
The Company has long-term program rights contracts which require payments
through 2010. Future minimum payments, including unrecorded amounts, by year
are as follows at June 30, 2001:
Year ending June 30:
2002............................................................ $ 451,218
2003............................................................ 439,736
2004............................................................ 423,935
2005............................................................ 415,788
2006............................................................ 412,648
Thereafter...................................................... 2,065,587
----------
$4,208,912
==========
The Company licenses television and feature film programming on a long-term
basis from various related parties, and accordingly records a program rights
asset and payable for the contractual amounts. At June 30, 2001 and 2000, the
unamortized program rights were $156,029 and $125,284, respectively, and the
program rights payable were $154,952 and $124,462, respectively.
(c) Litigation
In the ordinary course of business, the Company has become involved in
disputes or litigation. While the result of such disputes cannot be predicted
with certainty, in management's opinion, based in part on the advice of
counsel, the ultimate resolution of these disputes will not have a material
effect on the Company's financial position or results of operations.
(13) Supplemental Condensed Financial Information (unaudited)
Six months
ended
June 30, 1998
-------------
Revenues..................................................... $326,023
Operating income............................................. 23,286
Net loss..................................................... 27,298
F-21
FOX SPORTS NETWORKS, LLC
FINANCIAL STATEMENT SCHEDULES
As of June 30, 2001 and 2000
With Report of Independent Public Accountants
S-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
To the Members of Fox Sports Networks, LLC:
We have audited, in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of Fox Sports
Networks, LLC and subsidiaries included elsewhere in this Form 10-K and have
issued our report thereon dated August 16, 2001. 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 are not part of the basic financial statements. These
schedules have been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Los Angeles, California
August 16, 2001
S-2
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF COMPANY
BALANCE SHEETS
June 30, 2001 and 2000
(Dollars in thousands)
June 30, June 30,
2001 2000
-------- --------
ASSETS
------
Cash......................................................... $ -- $ 38
Investments in subsidiaries.................................. 929,548 863,072
Other assets................................................. 13,486 14,845
-------- --------
Total Assets............................................... $943,034 $877,955
======== ========
LIABILITIES AND MEMBERS' EQUITY
-------------------------------
Accrued liabilities.......................................... $ 20,444 $ 22,260
Long-term debt............................................... 863,965 831,002
Members' equity.............................................. 58,625 24,693
-------- --------
Total Liabilities and Members' Equity...................... $943,034 $877,955
======== ========
The accompanying notes are an integral part of these condensed balance sheets.
S-3
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF COMPANY
STATEMENTS OF OPERATIONS
For the Periods Ended June 30, 2001, 2000 and 1999
and December 31, 1998
(Dollars in thousands)
Year ended Year ended Six months Year ended
June 30, June 30, ended June December 31,
2001 2000 30, 1999 1998
---------- ---------- ---------- ------------
Interest expense, net.......... $ 78,834 $ 76,089 $ 36,817 $ 71,783
Other expenses................. 1,621 1,261 5,150 13,531
Equity (income) loss of
subsidiaries.................. (114,387) (66,297) 12,490 (23,246)
--------- -------- -------- --------
Net income (loss).............. $ 33,932 $(11,053) $(54,457) $(62,068)
========= ======== ======== ========
The accompanying notes are an integral part of these condensed financial
statements.
S-4
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF COMPANY
STATEMENTS OF CASH FLOWS
For the Periods Ended June 30, 2001, 2000 and 1999
and December 31, 1998
(Dollars in thousands)
Year ended Year ended Six months Year ended
June 30, June 30, ended June December 31,
2001 2000 30, 1999 1998
---------- ---------- ---------- ------------
Cash flows from operating
activities:
Net income (loss)............... $ 33,932 $(11,053) $(54,457) $ (62,068)
Adjustments to reconcile net
income (loss) to net cash used
in operating activities:
Interest accretion and
amortization of debt issuance
costs......................... 34,459 30,216 13,908 26,050
Equity (income) loss of
affiliates.................... (114,387) (66,297) 12,490 (23,246)
Changes in operating assets and
liabilities:
Other assets................... (137) 1,497 721 1,020
Accrued liabilities............ (1,816) (13,746) 4,881 14,652
--------- -------- -------- ---------
Net cash used in operating
activities.................. (47,949) (59,383) (22,457) (43,592)
--------- -------- -------- ---------
Cash flows from investing
activities:
Distributions from equity
affiliates..................... 47,911 59,270 42,871 144,267
Investments in equity
affiliates..................... -- -- (20,400) (100,538)
--------- -------- -------- ---------
Net cash provided by (used
in) investing activities.... 47,911 59,270 22,471 43,729
--------- -------- -------- ---------
Net (decrease) increase in cash
and cash equivalents............ (38) (113) 14 137
Cash and cash equivalents,
beginning of period............. 38 151 137 --
--------- -------- -------- ---------
Cash and cash equivalents, end of
period.......................... $ -- $ 38 $ 151 $ 137
========= ======== ======== =========
The accompanying notes are an integral part of these condensed financial
statements.
S-5
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF COMPANY
NOTES TO CONDENSED FINANCIAL INFORMATION
June 30, 2001
(Dollars in thousands)
(1) Debt
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. Based on closing prices on
June 30, 2001, the fair value of the Company's debt exceeded its carrying
amount by approximately $51 million as of June 30, 2001.
In August 1997, Fox Sports Networks, LLC (the "Issuer") privately sold
$500,000 aggregate principal amount of its 8 7/8% Senior Notes due 2007 and
$405,000 aggregate principal amount at maturity ($252.3 million gross
proceeds) of its 9 3/4% Senior Discount Notes due 2007 (collectively the "Old
Notes") in a transaction (the "Offering") that was exempt from registration
under the Securities Act of 1933, as amended ("1933 Act"). In January 1998,
pursuant to an exchange offer (the "Exchange Offer"), the Issuer exchanged all
of the Old NOtes for new notes (the "Notes"), which were registered by the
Issuer under the 1933 Act. The terms of the Notes are substantially identical
to the terms of the Old Notes. The Issuer received no proceeds from the
issuance of the Notes in the Exchange Offer. Interest on the Senior Notes is
payable semi-annually. Interest payments on the Senior Discount Notes commence
in February 2003. Interest accretes to principal prior to the commencement of
interest payments. At June 30, 2001, 2000 and 1999 and December 31, 1998, the
unamortized discount on the Senior Discount Notes was $41,035, $73,998,
$104,214 and $118,122, respectively. Interest expense, resulting from the
amortization of the discount, was $32,963, $30,216, $13,908 and $26,547 for
the years ended June 30, 2001 and 2000, the six months ended June 30, 1999,
and the year ended December 31, 1998, 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.
Annual future minimum maturities of debt are as follows:
Year ending June 30:
2002.............................................................. $ --
2003.............................................................. --
2004.............................................................. --
2005.............................................................. --
2006.............................................................. --
Thereafter........................................................ 863,965
--------
$863,965
========
(2) Commitments and Contingencies
The Company has guaranteed certain obligations of its subsidiaries.
S-6
FOX SPORTS NETWORKS, LLC
(A Delaware Limited Liability Company)
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
Balance at Charged to Balance at
Beginning Costs and End of
of Period Expenses Deductions Other Period
---------- ---------- ---------- ------- ----------
YEAR ENDED JUNE 30, 2001
Allowance for doubtful
accounts............. $ (9,621) $ (2,677) $ 4,408 $ (899)(1) $ (8,789)
YEAR ENDED JUNE 30, 2000
Allowance for doubtful
accounts............. (21,925) (8,797) 19,493 1,608 (1) (9,621)
Program rights
reserve.............. (5,058) -- 5,058 -- --
SIX MONTHS ENDED JUNE
30, 1999
Allowance for doubtful
accounts............. (9,324) (10,991) 2,253 (3,863)(1) (21,925)
Program rights
reserve.............. (18,727) -- 13,669 -- (5,058)
YEAR ENDED DECEMBER 31,
1998
Allowance for doubtful
accounts............. (1,714) (9,109) 1,570 (71)(1) (9,324)
Program rights
reserve.............. (38,344) -- 19,617 -- (18,727)
--------
(1) Represents balances from businesses sold or acquired during the period and
balances transferred from other accounts.
S-7