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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 333-12995
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FOX FAMILY WORLDWIDE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 95-4596247
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
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10960 WILSHIRE BOULEVARD, LOS ANGELES, CALIFORNIA 90024
(ADDRESS OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
(310) 235-5100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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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 (1) has 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) has 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 September 24, 1998:
15,840,000 shares of Class B Common Stock; 160,000 shares of Class A Common
Stock.
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FOX FAMILY WORLDWIDE, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PART I
Item 1 Business.................................................... 2
Item 2 Properties.................................................. 12
Item 3 Legal Proceedings........................................... 12
Item 4 Submission of Matters to a Vote of Security-Holders......... 12
PART II
Market for Registrant's Common Equity and Related
Item 5 Stockholder Matters......................................... 13
Item 6 Selected Financial Data..................................... 13
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 17
Item 7A Quantitative and Qualitative Disclosures about Market Risk.. 29
Item 8 Consolidated Financial Statements and Supplementary Data.... 29
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 29
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 30
Item 11 Executive Compensation...................................... 33
Security Ownership of Certain Beneficial Owners and
Item 12 Management.................................................. 35
Item 13 Certain Relationships and Related Transactions.............. 37
PART IV
Exhibits, Financial Statement Schedules and Reports on Form
Item 14 8-K......................................................... 40
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FORWARD-LOOKING STATEMENTS
This Report contains statements which constitute forward-looking statements.
These statements appear in a number of places in this Report and include
statements regarding the intent, belief or current expectations of the Company
with respect to (i) the Company's reprogramming of The Family Channel, (ii)
trends affecting the Company's financial condition or results of operations,
(iii) the impact of competition and (iv) the expansion of the Company's
international channels and certain other operations. Such forward-looking
statements may be identified by the use of words such as "believe,"
"anticipate," "intend," and "expect." Readers are cautioned that any such
forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and that actual results may differ materially
from those in the forward-looking statements as a result of various factors.
The accompanying information contained in this Report, including, without
limitation, the information set forth in Item 7, "Management's Discussion and
Analysis of Results of Operations and Financial Condition--Factors That Could
Impact Future Results" identifies important factors that could cause such
differences. The Company does not ordinarily make projections of its future
operating results and undertakes no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise.
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PART I
ITEM 1. BUSINESS
OVERVIEW
The Company is an integrated global family and children's entertainment
company which develops, acquires, produces, broadcasts and distributes quality
television programming. The Company's principal operations comprise (i) the
Fox Family Channel, one of the top 10 most widely distributed cable television
networks in the United States and one which provides family-oriented
entertainment programming reaching approximately 95% of all cable and
satellite television households, (ii) the Fox Kids Network--one of the top-
rated children's (ages 2-11) oriented broadcast television networks in the
United States, (iii) Saban Entertainment, Inc. ("Saban"), whose library of
approximately 5,600 half-hours of completed and in-production children's
programming is among the largest in the world (the "Fox Kids Library"), and
(iv) a growing portfolio of Fox Kids branded cable and direct-to-home ("DTH")
satellite channels operating in approximately 28 countries worldwide. By
combining a widely distributed cable platform, a top-rated broadcast network,
one of the world's largest children's programming libraries and the Fox Kids
branded international channels, the Company has the ability to manage family
and children's properties and brands from their creation through production,
distribution and the merchandising of related consumer products.
The Company is the result of the joint venture launched in 1995 by Fox
Broadcasting Company ("Fox Broadcasting") and Saban to match the complementary
programming and broadcasting strengths of the Fox Kids Network and the
international reach of Fox Broadcasting's parent company, The News Corporation
Limited ("News Corp."), with the development, production, distribution and
merchandising strengths of Saban. In September 1997, the Company completed the
acquisition (the "IFE Acquisition") of International Family Entertainment,
Inc. ("IFE"), whose principal business is the Fox Family Channel, the
successor to The Family Channel. The IFE Acquisition provides the Company with
several strategic advantages, including (i) a widely distributed cable
platform, which reaches approximately 73 million U.S. cable and direct
broadcast satellite ("DBS") homes, providing an effective means for more
vigorous competition with other family- and children's- oriented cable
services, (ii) an additional outlet for Saban's existing children's
programming library, (iii) increased awareness in the children's (ages 2-11)
target market through expanded hours, increased brand exposure and additional
licensing and merchandising opportunities and (iv) cross-promotional
opportunities with the Fox Kids Network.
While maintaining the family image and general entertainment format of the
channel, the Company reintroduced The Family Channel on August 15, 1998 as the
"Fox Family Channel" with a new schedule, look, marketing campaign and logo
designed to appeal to families with children or teens at home. From 7 a.m. to
6 p.m., the Fox Family Channel carries a total of 67.5 hours of programming
each week targeted principally to children. From 6 p.m. to 11 p.m., the Fox
Family Channel broadcasts programming intended to appeal to the entire family
and carries advertising to be sold on the basis of adult demographics. Prime
time programming consists principally of new original productions produced or
co-produced by the Company and original and library product licensed from
independent suppliers. Some of the original programming developed for prime
time includes Ohh, Nooo! Mr. Bill Presents, a weekday series starring the clay
figure from Saturday Night Live, Impact Television, Life, Camera, Action, and
Show Me The Funny. Additionally, The New Addams Family Series is scheduled to
debut in October. Children's programming for the Fox Family Channel is taken
principally from the Company's library, much of which has not previously been
broadcast in the United States.
The Company also owns and operates the Fox Kids Network, one of the leading
U.S. children's broadcast television networks, which broadcasts 19 hours of
children's programming each week to 97% of U.S. television households, the
broadest reach of any network targeting children. The Fox Kids Network was
formed by Fox Broadcasting and most of Fox Broadcasting's affiliates to
provide children's programming weekdays and Saturday mornings. The Fox Kids
Network has had the highest broadcast television viewership among children
Monday through Friday and Saturday in its time period during 21 of 23
consecutive quarterly "sweeps" periods
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through July 1998. The Fox Kids Network affords advertisers the opportunity to
reach children in a cost-effective manner, in part by ensuring consistent
nationwide placement of their advertisements by generally broadcasting its
programming at the same local time and on the same day ("day-and-date") in
each television market. The Fox Kids Network's advertising customers include
virtually every major children's advertiser.
The Company, through its Saban subsidiary, creates, produces and acquires
quality animated and live-action children's television programming with brand-
name characters and elements which are either widely known to children, such
as the Mighty Morphin Power Rangers ("Power Rangers"), Casper, Spider-Man and
Goosebumps, or which are or have been developed or purchased due to their
likelihood of maturing into popular brands. The Company produced, financed or
co-financed 14 children's series for each of the 1996-1997 and the 1997-1998
broadcast seasons. The Company generally retains worldwide rights to its
brands, and currently has approximately 400 licensees worldwide, including toy
companies Bandai America, Inc. ("Bandai"), Playmates Toys, Inc., Hasbro, Inc.
("Hasbro") and Tiger Electronics, Inc. The Company also produces direct-to-
video feature films, in addition to granting home video distribution rights to
manufacture and distribute video cassettes based upon its television
programming. One of the most attractive attributes of the Company's children's
programming is its "portability," in that it generally can be modified at
modest cost and resold for exhibition in other countries through editing and
dubbing into other languages. The Company currently distributes its children's
programming over terrestrial broadcast services in most major television
markets throughout the world.
PROGRAMMING
The Company creates, produces and acquires quality family and children's
television programming. The Company has a library of approximately 4,000 hours
of completed family programming and made-for-television-movies. In addition,
the Company's Fox Kids Library of approximately 5,600 half-hour episodes of
completed and in-production children's television programming is one of the
largest children's libraries in the world. The principal programming objective
of the Company is to develop or acquire appealing characters and concepts that
can be commercially exploited throughout the world through broadcast network
and cable television exhibition, home video sales, licensing and
merchandising.
Programming Library
Fox Family Channel Programming. On August 15, 1998 the Company debuted the
Fox Family Channel with a completely revamped programming schedule. Monday
through Friday programming is divided into six blocks: "Morning Scramble" from
7 a.m.-9 a.m., includes programming from the Fox Kids Library of cartoons;
programming from 11:00 a.m.-1 p.m., offers entertainment for preschoolers and
parents; programming from 1 p.m.-3 p.m., highlights more cartoons from the Fox
Kids Library; programming from 3 p.m.-6 p.m., includes a block of programming
for 8 to 14-year-olds hosted by the improvisation comedy troupe Block Jocks
and Freaks. During family prime time, from 6 p.m.-9 p.m. each day, programming
includes such shows as Ooohhh, Noooo!!! Mr. Bill Presents, a weekday series
starring the clay figure from Saturday Night Live, Impact Television, Life,
Camera, Action, and Show Me The Funny. Additionally, The New Addams Family
Series is scheduled to debut in October. Each evening from 9 p.m.-11 p.m., the
Fox Family Channel features a movie. The weekend schedules include kids'
programming from 7 a.m.-5 p.m. and comedy series, original movies and specials
from 5 p.m.-midnight. Under an agreement with The Christian Broadcasting
Network, Inc. ("CBN"), the Company will continue to air, as was done prior to
the Company's acquisition of The Family Channel, The 700 Club with Pat
Robertson, during three time slots Monday-Friday, currently 9:30 a.m-11:00
a.m., 11 p.m.-midnight and 2 a.m.-3 a.m.
Children's Programming. The two principal sources of the Fox Kids Library
are (i) television series that have been originally produced by the Company
through its Saban subsidiary for broadcast in the United States and
internationally (approximately 2,200 half-hours) and (ii) children's
programming produced by others for which the Company has acquired various
distribution rights (approximately 3,400 half-hours), of which approximately
38% have been updated or "freshened" with new scripts, voices and music prior
to distribution.
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Of the Company's Fox Kids Library, including episodes in production as of June
30, 1998, approximately 1,500 half-hours are original co-produced programming
that meet applicable European content requirements and are intended for
initial broadcast in Europe. In January 1997, the Company obtained from FOX
Television, a division of Fox, Inc. ("FOX Television") the distribution rights
to the New World Communications Group Incorporated's ("New World") animation
library of approximately 500 half-hour episodes. In July 1998, the Company
agreed to acquire the New World animation library from FOX Television. See
Note 11 of the Notes to Financial Statements.
The Company's international programming includes worldwide distribution
rights to a 445 half-hour episode library of family oriented programming
acquired in the April 1996 acquisition of Paris-based Creativite &
Developpement, S.A. ("C&D"), a leading European producer of family
entertainment, and a 712 half-hour episode library of animated children's
programming acquired in the April 1996 acquisition of Vesical Limited, a
library of international rights to programming originally produced by DIC
Entertainment, Inc. The Vesical library includes non-U.S. rights to classic
series such as Inspector Gadget, Heathcliff and Dennis the Menace.
Creation and Development of Programming
The Company has and will continue to pursue ideas and properties for
original production from a number of sources. For example, the Company may
acquire production, distribution and possibly other rights to an existing
property (such as Marvel's X-Men, Francine Pascal's Sweet Valley High and Ohh,
Nooo! Mr. Bill Presents) or series (such as Scholastic/Protocol's Goosebumps),
develop internally a new property based on an existing public domain property
(such as Saban's Adventures of Oliver Twist) or create or acquire an entirely
new idea or character (such as Mad Jack, the Pirate and The Secret Files of
the Spy Dogs).
The Company also maintains a state-of-the-art post-production facility in
Los Angeles, California. The Company records all of the music for its
programming and edits and adds audio and sound effects to its programming. The
Company also produces most of the on-air promotions, sales films and public
service announcements for the Fox Family Channel and Fox Kids Network.
The Company owns a full-service animation studio in Paris which develops
children's programming containing content that meets the local content
requirements of various European countries for local broadcast television. The
Paris studio has produced approximately 269 half-hours of children's
programming since its inception in 1990 through June 30, 1998. In general, the
Company enters into strategic co-production alliances to develop its French
and European content programming.
International Sales of Programming
Much of the Company's children's programming is distributed on a worldwide
basis. The Company believes that by owning and controlling the international
distribution rights to its programming, in addition to generating significant
revenue from the sale of its programming, it can also establish an
international presence for the Company and its properties.
The Company is currently party to distribution arrangements with
international television broadcasters and distributors to exhibit and
distribute the Company's children's programming to over 375 terrestrial, cable
and satellite distribution platforms in approximately 100 countries. These
distribution arrangements accounted for approximately $99 million, or 15% of
the Company's consolidated revenues for the fiscal year ended June 30, 1998.
For example, in January 1996, the Company entered into a distribution
agreement with Arbeitsgemeinschaft der Oeffentlichen Rechtlichen
Rundfunkanstalten Deutschlands ("ARD"), the largest broadcaster in Germany,
pursuant to which the Company granted rights to at least 24 two-hour movies
for television ("telefilms"), six co-produced animated children's program
series (consisting of Jim Button, Wunschpunsch, Walter Melon, The Why Why
Family, Princess Sissi and Saban's Adventures of Oliver Twist), any coproduced
series based on German author Michel Ende's stories for which the Company
controls the rights and 390 half-hour episodes of other children's animated
programs. In addition, in September 1997, a separate
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agreement was entered into with ARD to co-produce four disaster genre
television motion pictures, including Earthquake in New York, Voyage of
Terror, Free Fall, and a fourth title to be announced.
DISTRIBUTION
The Company distributes its own programming, as well as the programming of
others, throughout the United States and in major markets throughout the
world. The Company is uniquely positioned as a distributor as a result of its
strategic relationship with Fox Broadcasting and News Corp. and by reason of
its large programming library. The Company owns three distribution outlets:
the Fox Family Channel, the Fox Kids Network and Fox Kids branded
international channels.
The Fox Family Channel
The Fox Family Channel is a basic cable network that provides family-
oriented entertainment and informational programming to approximately 95% of
all U.S. cable and satellite television households. The Company debuted the
Fox Family Channel in August 1998 with a new schedule, look, marketing
campaign and logo. The new format includes day-time programming for children
followed by evening programming which is suitable for the entire family and is
designed to appeal to families with children or teens at home. Evening
programming includes original series, specials and movies produced and
licensed to the Fox Family Channel, as well as programs originally televised
on the major broadcast networks. Currently, the Fox Family Channel's programs
are transmitted 24 hours a day via satellite from the Fox Television Network
Broadcast Center's uplink facility in Los Angeles, California.
In general, pursuant to the Fox Family Channel's affiliation agreements,
each cable system operator or other delivery service distributing the Fox
Family Channel agrees to pay the Company a monthly fee per subscriber. The Fox
Family Channel affiliation agreements are generally three, five or ten years
in duration and provide for annual per subscriber rate increases. Increases in
per subscriber fees and, to a lesser extent, increased household penetration
have generated growth in the Fox Family Channel subscriber fee revenue. In
addition, the Fox Family Channel earns revenue through the sale of advertising
spots.
Programming. From Monday-Friday, the Company airs children's programming on
the Fox Family Channel from 7 a.m.-9 a.m. and 11:00 a.m.-6 p.m., with
programming gradually targeted to older children during the day. The Company
targets programming toward the entire family from 6 p.m.-9 p.m. and features a
movie each weekday evening from 9 p.m.-11 p.m. The weekend schedules include
children's programming from 7 a.m.-5 p.m. and comedy series, original movies
and specials from 5 p.m.-midnight. Under an agreement with CBN, the Company
will continue to air, as was done prior to the Company's acquisition of The
Family Channel, The 700 Club during three time slots Monday-Friday, currently
9:30 a.m-11:00 a.m., 11 p.m.-midnight and 2 a.m.-3 a.m.
Transmission Facilities. With the debut of the Fox Family Channel in August
1998, the Company began transmitting all programming for the Fox Family
Channel from the Fox Television Network Broadcast Center located in Los
Angeles, California, by means of an earth station transmitting antenna (an
"uplink"). The uplink facility transmits the programming signal to a
transponder on an orbiting satellite, which in turn retransmits the signal to
cable systems operators, DBS services and other alternative delivery services.
Programming is transmitted using two separate "feeds" (one for the eastern,
central and certain mountain time zones and another for all other mountain
time zones and the pacific time zones) which are transmitted to two different
satellite transponders. The Company owns the transponders for these two feeds
as well as a transponder on a third satellite. All of the Company's owned
transponders have "protected" status. "Protected" status means that should the
transponder fail, service will be transferred to a spare transponder.
Fox Kids Network
The Fox Kids Network, launched in September 1990, was the first television
network to broadcast children's programs during the week (Monday through
Friday) as well as on Saturday. The guiding philosophy of the Fox Kids Network
is to provide a diverse slate of quality entertainment targeted toward
children. Of its 19 hours of
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children's programming per week, the Fox Kids Network broadcasts four hours on
Saturday mornings, one hour each weekday morning and two hours each weekday
afternoon. At least three hours of programming each week are dedicated to
educational programming for children.
Now in its ninth broadcast season, the Fox Kids Network currently is carried
by 180 television stations affiliated with the Fox Kids Network (the "Fox Kids
Network Affiliates"), 165 of which are affiliated with the FOX Television
Member Stations including 11 currently owned and operated by FOX Television
(the "Fox O&O's"). The Fox Kids Network Affiliates reach approximately 97% of
all U.S. television households. The Fox Kids Network produces and acquires
programs, markets and promotes these programs, makes its schedule available to
its Fox Kids Network Affiliates and sells network advertising. The Company
cross-promotes the Fox Kids Network through the Fox Family Channel, the Fox
Kids Club, Totally Fox Kids quarterly magazine, Fox Kids Countdown radio show
and Fox Kids website.
Under an Administration Agreement between Fox Broadcasting and Fox
Children's Network, Inc. ("FCN"), Fox Broadcasting agreed to administer
certain of FCN's activities, including network national advertising sales and
the administration thereof, commercial trafficking and broadcast operations
(including the delivery of programming to the Fox Kids Network Affiliates) and
overhead charges related to Fox Broadcasting's in-house administrative support
in the areas of research, promotion, business affairs, legal affairs and
accounting. In exchange for these services, FCN agreed to pay Fox Broadcasting
an administrative fee, currently equal to 15% of the net advertising revenues
derived from Fox Kids Network national commercials and other advertising.
Effective June 1, 1995, Fox Broadcasting assigned all of its rights under this
agreement to the Company, and has agreed to continue to provide the Company,
for a one-time fee (which has been paid), all uplink, transponder and other
facilities necessary to deliver via satellite Fox Kids Network programming for
broadcast to the Fox Kids Network Affiliates, as well as certain other
services.
Ratings. The Fox Kids Network is measured by Nielsen in terms of ratings and
share points. For the 1997-1998 broadcast season, the potential viewing
universe of children in the United States was estimated to be 39 million. Each
ratings point represents 1.0% of these children who are watching television
during a particular time slot. For the 1997-1998 broadcast season to date
(September 6, 1997-September 6, 1998), the Fox Kids Network averaged a 2.2
rating Monday-Friday, a 3.2 rating on Saturday mornings and a 2.4 rating
Monday-Saturday during the hours it broadcasts.
Fox Kids Affiliation Agreements. The Company's affiliation agreements with
the Fox Kids Network Affiliates expire over the next one to ten years and
there can be no assurance that they will be renewed.
In July 1998, the Company reached an agreement with the Affiliate Board,
which represents the Fox Kids Network Affiliates, to modify the financial
arrangements between the Fox Kids Network and the Fox Kids Network Affiliates.
The agreement provides that all of the Fox Kids Network Affiliates would
receive beginning July 1, 1998 an aggregate amount of approximately $15.0
million per year for five years in exchange for (i) guaranteed clearance of
Fox Kids programming in its current time period for ten years, (ii)
relinquishment of any participation in the current or future profits of the
Fox Kids Network, and (iii) additional allocation of promotional advertising
spots for the next three and one-half years. The Affiliate Board has
recommended that each of the Fox Kids Network Affiliates accept the Company's
proposal. As of September 15, 1998, 140 or approximately 85% of the Fox Kids
Network primary Affiliates accepted the proposal. There can be no assurance
that all of the affiliated stations will approve the agreement.
International Channels
The Company believes that it is positioned strategically, particularly
through its relationship with News Corp., to take advantage of growth in
international DTH satellite and cable television services and the resulting
increase in demand for television programming. To date, the Company has
launched eight branded Fox Kids channels in 28 countries, which are
distributed via DTH satellite and cable in the United Kingdom, the Republic
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of Ireland, Latin America, including Central and South America and the
Caribbean, France, Poland, Spain, Scandinavia, the Netherlands and Australia.
The Company is in active discussions and negotiations to launch additional Fox
branded family oriented channels and Fox Kids branded children's oriented
channels in other countries throughout the world, with particular emphasis in
Italy, Central and Eastern Europe, Belgium, Switzerland, Israel and Iceland.
The Company's objective is to become the leading operator of international
family and children's channels by creating fully localized Fox Kids or Fox
branded channels in every major territory.
ADVERTISING
The extensive reach of the Fox Family Channel and Fox Kids Network affords
advertisers substantial day-and-date capacity to conduct nationwide
advertising campaigns. Substantially all of the revenues of the Fox Kids
Network are derived from national network advertising sales, and approximately
52% of the Fox Family Channel's revenues are derived from national advertising
sales. For the year ended June 30, 1998, the Company's revenues from
advertising were approximately $280 million, or 42% of consolidated revenues.
One of the Company's objectives with the new schedule on the Fox Family
Channel is to reach viewers in demographics that are attractive to
advertisers. The Company also derives revenues from program sales which
consist of sales of program length periods of time for infomercials which
currently air during certain portions of the 1:00 a.m. to 7:00 a.m. time
block on the Fox Family Channel.
MERCHANDISING AND LICENSING
The Company capitalizes on its popular characters and properties by entering
into licensing agreements with manufacturers and retailers of children's
products. Under these agreements, the Company seeks to earn revenue from the
sale of products while limiting the costs and risks associated with
manufacturing, distributing and marketing merchandise. For the year ended June
30, 1998, the Company's licensing and merchandising activities represented
approximately 4% of the Company's consolidated revenues. The revenue derived
from licensing and merchandising depends not only on the success, recognition
and appeal of a character, but also on the quality and extent of the
marketing, product development and retail efforts of the Company and its
licensees. Sales of licensed products also help the Company's shows by
promoting the Company's characters.
The Company has entered into merchandise license agreements with a number of
toy manufacturers pursuant to which the manufacturers are given the right to
create, manufacture and develop products representing characters from the
Company's series. For example, the Company has toy licenses with Bandai,
covering Power Rangers, BeetleBorgs and Mystic Knights of Tir Na Nog, and with
Hasbro, covering NASKIDS (a NASCAR-based property). These licenses generally
grant the exclusive right to manufacture and sell toys based upon the
characters and other creative elements in the licensed series. Pursuant to
these agreements, the Company generally receives an up-front advance that is
non-refundable but is credited against royalties, generally based on a
percentage of net sales of the licensed product. The Company also retains
approval rights regarding advertising, packaging and the quality of its
licensed product, as well as continued ownership of the copyright and
trademark. The Company has licensing arrangements in place with approximately
400 different licensees worldwide for consumer products targeting children,
such as toys, apparel, publishing, software, dinnerware/lunch boxes, watches,
bedding and soft vinyl goods, such as boots, backpacks and raincoats.
Merchandise based on the Company's characters and properties is sold in
approximately 60 countries throughout the world.
HOME VIDEO AND TELEFILMS
Home Video. The Company produces direct-to-video feature films, in addition
to granting home video distribution rights to manufacture and distribute video
cassettes based upon its television programming. For example, the Company
released in September 1997 the direct-to-video film, Casper--A Spirited
Beginning, and in September 1998 a second direct-to-video film, Casper: A
Magical Friendship based upon the character "Casper." The Company also
recently completed production on a film based on the character "Richie Rich"
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scheduled to be released in November 1998. In addition, the Company has
acquired rights and is in production on a live-action television series based
upon "The Addams Family" characters and released in September 1998 a live-
action television special based upon the "The Addams Family" characters.
Through a separate agreement with Twentieth Century Fox Home Entertainment,
Inc. ("Fox Video"), the Company distributes throughout the United States and
Canada all of its television programs produced for children and owned or
controlled by Saban or FCN. The Company receives royalties from the sale of
home video cassettes of its television programming.
Telefilms. Historically, the Company acquired international distribution
rights to several telefilms ranging from 12 to 15 motion pictures per year
over the past three years. While the Company occasionally acquired U.S. rights
to these films, the primary objective of acquiring telefilms was to complement
the Company's international children's programming sales activities. With the
acquisition of The Family Channel, the Company increased the number of
telefilms produced or acquired to 25 or more motion pictures each year.
Further, whenever possible, the Company will acquire worldwide rights to these
features. These films are typically targeted at prime time audiences and
consist of family films, dramas, thrillers and action/adventure features. The
Company intends to air these features on the Fox Family Channel and to
distribute these features internationally to television broadcasters and home
video distributors.
THE STRATEGIC ALLIANCE WITH FOX/NEWS CORP.
News Corp., along with its subsidiaries, including Fox Broadcasting, is a
diversified international communications company principally engaged in the
production and distribution of motion pictures and television programming;
television broadcasting; the publication of newspapers, magazines, books and
free standing inserts; computer information services; and digital broadcasting
systems. As of September 14, 1998, FOX Television had 178 prime time primary
television station affiliates and one prime time secondary television station
affiliate across the United States, including 22 Fox O&O's, reaching over 97%
of U.S. television households. Each television station affiliate is a party
with Fox Broadcasting to an affiliation agreement which governs the terms of
the relationship between them.
The Fox Kids Network is distributed over the same broadcast facilities as
FOX Television. In December 1995, Fox Broadcasting and certain of its
affiliates (the "Fox Parties") entered into a long-term strategic alliance
with the Company for the mutual support of the Fox Parties and the Company in
the children's entertainment business. Set forth below is a summary of certain
of the material portions of the relevant strategic alliance provisions
contained in the Asset Assignment Agreement (the "Asset Assignment
Agreement"), pursuant to which the Fox Parties assigned, effective as of June
1, 1995, certain assets and interests to the Company.
License of "Fox" Name. The Fox Parties granted to the Company the perpetual
worldwide exclusive right to use the name "Fox" in conjunction with the words
"Kids," "Kid" or "Children," and agreed not to use or license the name "Fox"
to others for similar purposes.
New Services and other Noncompetition Provisions. The Fox Parties agreed not
to operate in the United States any broadcast, cable or non-standard
programming service targeted at children ages 2-11 (a "kids' service") other
than the Fox Kids Network. If the Fox Parties at any time determine to acquire
a new kids' service anywhere else in the world, which kids' service would bear
the "Fox" name, they are required to provide the Company with a right of first
refusal to acquire and own that new kids' service. Moreover, should the Fox
Parties or any of their affiliates at any time acquire a television, cable or
satellite network or any other business which includes a kids' programming
service, the Fox Parties will be required to offer the Company the right to
acquire and own that kids' service.
First Right to Fox Parties Originated Programming. The Fox Parties have
agreed to provide the Company with the first right to acquire first run
exhibition rights to any new programming suitable for a kids' service ("kids'
programming") prior to its sale or license to any third party; however, the
Fox Parties may freely license kids' programming to any broad based
entertainment network (which is not a kids' service) for prime time or
8
<PAGE>
late night broadcast and programming derived from properties (such as The
Simpsons) not originally launched on the Fox Kids Network.
COMPETITION
The businesses in which the Company engages are highly competitive. Each of
the Company's primary business operations is subject to competition from
companies which, in some instances, have greater production, distribution and
capital resources than those of the Company.
Programming. The Company competes on the basis of relationships and pricing
for access to a limited supply of facilities and talented creative personnel
to produce its programs. The Company competes with major motion picture
studios, such as Warner Bros. and The Walt Disney Company, and animation
production companies, including Hanna Barbera and Film Roman, for the services
of writers, producers, animators, actors and other creative personnel and
specialized production facilities.
Distribution. In the United States, the Company competes for ratings and
related advertising revenues. The Company currently competes through the Fox
Kids Network and the Fox Family Channel, with the other broadcast television
networks, public television and cable television channels, such as USA Cable
Network, Turner Network Television ("TNT"), Disney Channel, The Cartoon
Network and Nickelodeon for market acceptance of its programming and for
viewership ratings and related advertising revenues. To the extent that the
Company produces original programming for distribution outlets it does not
own, it competes with other producers of children's programming.
Internationally, the Company competes with a large number of U.S.-based and
international distributors of children's programming, including The Walt
Disney Company, Warner Bros. and Nickelodeon, in the development or
acquisition of programming expected to appeal to international audiences. Such
programming often must comply with foreign broadcast rules and regulations,
which may stipulate certain minimum local content requirements.
More generally, the Company competes with various other leisure-time
activities such as home videos, movie theaters, personal computers and other
alternative sources of entertainment and information.
GOVERNMENT REGULATION
Certain aspects of the Company's 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, the Cable Communications Policy Act of
1984 (the "1984 Act"), the Cable Television Consumer Protection and
Competition Act (the "1992 Act"), and the Telecommunications Act of 1996 (the
"1996 Act") and regulations promulgated thereunder by the Federal
Communications Commission (the "FCC"). Cable television systems are also
subject to regulation at the state and local level. See "--State and Local
Regulation."
The following does not purport to be a summary of all present and proposed
federal, state and local regulations and legislation relating to the
broadcasting and cable television industries and other industries involved in
the video marketplace; rather it attempts to identify those requirements that
could affect the Company's business. Also, 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 affect, in varying degrees, the manner in which the broadcasting
and cable television industries and other industries involved in the video
marketplace operate.
Federal Regulations and Legislation
The broadcast stations and cable systems that distribute the Company's
programming must comply with the provisions of the Children's Television Act
of 1990 ("CTA") and the rules and policies of the FCC pertaining to television
programs directed to children, particularly with respect to the amount and
type of commercial matter broadcast during such programs. Failure to comply
with the children's television commercial limitations can result in the
imposition of sanctions, including substantial monetary fines, on a broadcast
television station or cable system, which could adversely impact the Company.
9
<PAGE>
Under FCC license renewal "processing guidelines" promulgated under the CTA,
broadcast television stations are required to broadcast at least three hours
per week, averaged over a six-month period, of programming that furthers the
educational and informational needs of children 16 and under
("Core Programming"). Core Programming has been defined as educational and
informational programming that, among other things, (i) has serving the
educational and informational needs of children "as a significant purpose,"
(ii) has a specified educational and informational objective and a specified
target child audience, (iii) is regularly scheduled, weekly programming, (iv)
is at least 30 minutes in length and (v) airs between 7:00 a.m. and 10:00 p.m.
Any station that satisfies the processing guideline will receive FCC staff-
level approval of the portion of its license renewal application pertaining to
the CTA. Alternatively, a station may qualify for staff-level approval even if
it broadcasts "somewhat less" than three hours per week of Core Programming by
demonstrating that it has aired a weekly package of different types of
educational and informational programming that is "at least equivalent" to
three hours of Core Programming. At the present time, the Company provides at
least three hours per week of Core Programming to the Fox Kids Network
Affiliates, thereby enabling them to fulfill their obligations under the CTA.
The 1996 Act took effect in February 1996, altering the network of federal,
state, and local laws and regulations pertaining to telecommunications
providers and services. To the extent the 1996 Act fosters greater competition
for the provision of multichannel video services to individual subscribers,
the Company should generally be impacted either neutrally or advantageously,
as additional providers are additional potential customers for the Company.
The FCC is in the process of promulgating rules interpreting and implementing
the provisions of the 1996 Act. At this time, it is impossible to state with
precision the full impact the 1996 Act will have on the Company.
The 1992 Act subjected all cable television operators not subject to
"effective competition" to rate regulation. Rate regulation under the 1992 Act
resulted in a reduction of rates to some subscribers in some markets. The 1996
Act phases out cable rate regulation, except with respect to the "basic" tier
(which must include all local broadcast stations and public, educational and
governmental access channels, and must be provided to all subscribers). Rate
regulation of all non-basic services is scheduled to be completely eliminated
on March 31, 1999. In response to the 1992 Act and the FCC's implementing
regulations, many cable systems retiered channels to create an attractively
priced basic tier, while offering satellite-delivered programming services
such as the Company's on a different service tier or on an a la carte basis.
To the extent such retiering or repricing of the Company's network induced
customers to discontinue their subscriptions, the Company's financial
performance might have been adversely affected. Deregulation of rates pursuant
to the 1996 Act may reverse such tiering and pricing decisions by cable system
operators and, correspondingly, reverse or ameliorate any adverse effects of
the 1992 Act. On the other hand, to the extent that rate deregulation causes a
material increase in cable rates, the individual subscriber base of the
Company could be decreased, potentially affecting the Company's subscriber
revenues.
FCC regulations adopted pursuant to the 1992 Act prevent a cable operator
that has an attributable interest (including voting or non-voting stock
ownership of 5% or more or limited partnership equity interests of 5% or more)
in a programming vendor from exercising undue or improper influence over the
vendor in its dealings with competitors to cable. The regulations also
prohibit a cable programmer in which a cable operator has an attributable
interest from entering into exclusive contracts with any cable operator or
from discriminating among competing multichannel program distributors in the
price, terms and conditions of sale or delivery of programming. With respect
to cable systems having channel capacity of less than 76 channels, the
FCC's regulations limit to 40% the number of programming channels that may be
occupied by video programming services in which the cable operator has an
attributable interest. As a result of TCI's ownership of Liberty, the Fox
Family Channel is subject to these requirements. The FCC's program access and
non-discrimination regulations therefore affect the ability of Fox Family
Channel to enter into exclusive contracts. The rules also permit multichannel
video programming distributors (such as 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. The FCC has recently adopted regulations
to speed the processing of program access complaints, and Congress is
10
<PAGE>
considering legislation which, if enacted, would extend program access rules
to terrestrially-delivered programming. While cable systems are expanding
their capacity, there may be instances in which a TCI system with 75 channels
or less will not be able to carry the Fox Family Channel or will have to
remove another affiliated channel.
The 1992 Act subjects cable systems to "must carry" rules, pursuant to which
local broadcast stations elect to demand carriage. It also provides favorable
channel positioning rights for broadcasters electing to exercise their must
carry rights. The 1992 Act also gives television broadcast stations the right
to withhold consent to be carried by a cable system which may result in a
station receiving compensation for carriage.
The FCC has adopted rules requiring closed captioning of most broadcast and
cable programming on a phased-in basis, beginning in the year 2000. The
broadcast and cable industries have adopted, and the FCC has approved, a
voluntary content ratings system which, when used in conjunction with so-
called "V-Chip" technology, will permit the blocking of programs with a common
rating. The FCC has directed that all television receiver models with picture
screens 13 inches or greater be equipped with "V-Chip" technology under a
phased implementation beginning July 1, 1999. The Company may be called upon
to provide increased closed captioning to assist in complying with rules
promulgated under the 1996 Act and may be required to provide assistance or
information to establish ratings for its programming. Either of these
undertakings could increase the Company's operating expenses.
Congress and the FCC have under consideration, and in the future may
consider and adopt, new laws, regulations and policies regarding a wide
variety of matters that may affect, directly or indirectly, the operation,
ownership and profitability of the Company's business. These proposed changes
include, for example, expansion of program access requirements and potential
must-carry rights for digital television broadcast signals (which could limit
multi video program distributions ("MVPDs"') channel capacity available for
the Company's programming). In the Fourth Annual Cable Competition Report,
released January 13, 1998, the Commission expressed concern regarding recent
cable rate increases and increases in programming costs. The Chairman of the
FCC has directed the Cable Services Bureau to commence an inquiry into, among
other things, the reasons for increases in programming costs and whether such
cost increases should be passed through to subscribers. The Company is unable
to predict the outcome of future federal legislation or the impact of any such
laws or regulations on its operations.
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 authority's ("LFA") 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. Cable franchises generally contain provisions governing time
limitations on the commencement and completion of construction, and governing
conditions of service, including the number of channels, the types of
programming (but not the actual cable programming channels to be carried), and
the provision of free service to schools and certain other public
institutions. 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 also may certify
to regulate basic cable rates, and will continue to exercise rate regulation
authority over the basic tier after regulation of other tiers is phased out on
March 31, 1999. Local rate regulation for a particular system could result in
resistance on the part of the cable operator to pay the amount of subscriber
fees charged by the Company for its programming.
11
<PAGE>
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.
International
The Company is also subject to local content and quota requirements in
international markets which, although a significant portion of the Company's
library meets such current requirements in Europe, effectively limit access to
particular markets.
INTELLECTUAL PROPERTY
The Company generally holds copyrights to its owned programming in its
library. Additionally, the Company holds registered trademarks on the various
characters and series contained in its owned programming. The Company also
holds significant rights as licensee of other productions, programming,
characters and series, most of which are subject to copyrights and trademarks
owned by the respective licensors of such properties. The Company considers
its owned and licensed copyrights and trademarks to be of significant value
and importance to the Company's business. Accordingly, the Company's policy is
to vigorously enforce copyrights and trademarks with respect to owned and
licensed programming against unlawful infringement by third parties.
EMPLOYEES
As of June 30, 1998, the Company had 884 full-time and five part-time
employees in the United States. Outside the United States, the Company had 147
full-time and six part-time employees. The Company also regularly engages
freelance creative staff and other independent contractors on a project-by-
project basis. The Company believes its relations with its employees are good.
ITEM 2. PROPERTIES
The Company currently leases a total of approximately 217,000 square feet of
office and production space in its headquarters building in Los Angeles,
California under a lease expiring in April 2006, subject to two separate five-
year extension options. The Company also leases a multi-purpose production
facility in Valencia, California under a lease that expires in January 2000.
The Company's Paris operations currently lease 18,430 square feet of office
and production space under a lease expiring February 28, 2005; this lease may
be cancelled by the Company with six months prior notice on February 28, 1999
or February 28, 2002. The Company also leases approximately 14,500 square feet
of office space for its European headquarters in London, England under a lease
expiring September 30, 2007. This lease may be cancelled after the fifth year
with nine months advance notice. In connection with IFE Acquisition, the
Company acquired IFE's executive and administrative offices, a sales office
and an affiliate relations office in Virginia Beach, Virginia. The Company
continues to lease from CBN a portion of a corporate support building. The
lease is scheduled to expire in December 1998. The Company also leases office
facilities in other locations throughout the world, none of which are
considered material. The Company believes that its current office and
production space, together with space readily available without material cost
in the markets in which it operates, are adequate to meet its needs for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company currently and from time to time is engaged in litigation in the
ordinary course of its business. The Company is not currently a party to any
lawsuit or proceeding which, in the opinion of management, if decided
adversely to the Company, would be likely to have a material adverse effect on
the Company's financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not Applicable.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND STOCKHOLDER MATTERS
Not Applicable.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data of the Company set forth below as of June 30,
1998 and for the fiscal year ended June 30, 1998 are derived from the
Company's consolidated financial statements audited by Arthur Andersen LLP,
independent public accountants, included elsewhere in this Report. The
selected financial data of the Company set forth below as of June 30, 1997,
and for the eight months ended June 30, 1996 and the fiscal year ended June
30, 1997 are derived from the Company's combined financial statements audited
by Ernst & Young LLP, independent auditors.
The selected financial data of Saban set forth below as of May 31, 1995 and
as of October 31, 1995 and for the year ended May 31, 1995 and for the five
months ended October 31, 1995 are derived from Saban's consolidated financial
statements audited by Ernst & Young LLP, independent auditors. The selected
financial data of Saban presented below as of and for the year ended May 31,
1994 are derived from Saban's consolidated financial statements audited by
Ernst & Young LLP, independent auditors.
The selected financial data of FCN Holding set forth below as of July 2,
1995 and as of October 31, 1995 and for the year ended July 2, 1995 and for
the four months ended October 31, 1995 are derived from FCN Holding's
consolidated financial statements audited by Ernst & Young LLP, independent
auditors, included elsewhere in this Report. The selected financial data of
FCN Holding presented below at July 3, 1994 and for the year ended July 3,
1994 are derived from FCN Holding's consolidated financial statements audited
by Ernst & Young LLP, independent auditors.
The financial statements of the Company for the year ended June 30, 1997 are
not comparable to the eight month period ended June 30, 1996 due to the
different lengths of the time periods compared and because neither period
includes the operations of IFE. In addition, the financial statements of the
Company as of and for the year ended June 30, 1998 (which includes the results
of operations of IFE from August 1, 1997) are not comparable to the year ended
June 30, 1997 as the prior period did not include the operations of IFE.
13
<PAGE>
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 consolidated and combined financial
statements, including the notes thereto, appearing elsewhere in this Report.
THE COMPANY
<TABLE>
<CAPTION>
EIGHT MONTHS
ENDED YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30, JUNE 30,
1996 1997 1998(1)
(COMBINED) (COMBINED) (CONSOLIDATED)
------------ ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues................................ $191,621 $307,820 $664,458
Costs and expenses:
Production and programming............ 98,937 180,381 361,215
Selling, general and administrative... 23,072 62,466 146,213
Fox Kids Network affiliate
participations....................... 8,853 6,194 --
Amortization of intangible assets..... -- -- 37,557
-------- -------- --------
Operating income........................ 60,759 58,779 119,473
Investment advisory fee................. 10,000 -- --
Equity in loss of unconsolidated
affiliate.............................. -- 1,546 6,790
Other expense, net...................... -- -- 8
Interest expense........................ 885 2,226 134,002
-------- -------- --------
Income (loss) before income tax expense. 49,874 55,007 (21,327)
Income tax expense...................... 18,274 14,567 3,446
-------- -------- --------
Net income (loss)....................... $31,600 $ 40,440 $(24,773)
======== ======== ========
Net income (loss) attributable to common
shareholders........................... $ 31,600 $ 40,440 $(53,185)
======== ======== ========
OTHER DATA:
Ratio of earnings to fixed charges...... 22:1 11:1 --
Deficiency of earnings available to
cover fixed charges.................... -- -- $(26,656)
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1997 1998
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 28,877 $ 82,313
Programming costs, less accumulated amortization............ 235,575 453,608
Total assets................................................ 412,401 2,516,024
Long-term obligations (including current maturities)........ 116,264 1,749,464
Mandatorily redeemable preferred stock...................... -- 345,000
Stockholders' equity........................................ 132,687 30,396
</TABLE>
14
<PAGE>
SABAN ENTERTAINMENT, INC.
<TABLE>
<CAPTION>
YEAR ENDED MAY FIVE MONTHS
31, ENDED
---------------- OCTOBER 31,
1994 1995 1995
------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues(2)........................................ $84,372 $242,468 $105,130
Costs and expenses:
Production and programming....................... 48,101 117,557 42,022
Selling, general and administrative.............. 8,933 51,894 11,538
------- -------- --------
Operating income................................... 27,338 73,017 51,570
Interest expense................................... 2,337 1,315 539
------- -------- --------
Income before provision for income taxes........... 25,001 71,702 51,031
Provision for income taxes......................... 8,201 27,027 14,289
------- -------- --------
Net income......................................... $16,800 $ 44,675 $ 36,742
======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF MAY 31, AS OF
----------------- OCTOBER 31,
1994 1995 1995
-------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 3,849 $ 14,584 $ 16,207
Programming costs, less accumulated amortization. 85,079 115,873 118,210
Total assets..................................... 136,967 218,197 207,479
Long-term obligations (including current
maturities)..................................... 34,023 5,623 5,605
Stockholders' equity............................. 53,253 58,112 94,971
</TABLE>
15
<PAGE>
FCN HOLDING, INC.
<TABLE>
<CAPTION>
YEAR ENDED FOUR MONTHS
----------------- ENDED
JULY 3, JULY 2, OCTOBER 31,
1994 1995 1995
-------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues(2)....................................... $130,600 $168,871 $46,286
Costs and expenses:
Production and programming...................... 98,725 109,259 29,698
Fees and costs to a related party............... 20,861 24,713 7,313
Selling, general and administrative............. 3,579 5,202 2,566
Fox Kids Network affiliate participations....... -- 11,523 6,883
-------- -------- -------
Operating income (loss)(3)........................ 7,435 18,174 (174)
Interest expense.................................. 2,218 1,630 145
-------- -------- -------
Income (loss) before provision for income taxes... 5,217 16,544 (319)
Provision for income taxes........................ -- -- --
-------- -------- -------
Net income (loss)................................. $ 5,217 $ 16,544 $ (319)
======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
AS OF
------------------------------
JULY 3, JULY 2, OCTOBER 31,
1994 1995 1995
-------- ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 268 $ -- $ 317
Programming costs, less accumulated
amortization................................... 17,084 26,143 27,085
Total assets.................................... 35,950 49,816 52,807
Long-term obligations (including current
maturities).................................... 27,163 10,686 8,727
Stockholders' deficit........................... (20,356) (3,811) (4,130)
</TABLE>
NOTES TO SELECTED HISTORICAL FINANCIAL DATA
- --------
(1) Includes the results of operations of IFE from the date of the acquisition
of a majority interest (August 1, 1997) through June 30, 1998.
(2) Includes revenues recognized by Saban from FCN and by FCN from Saban as
set forth below:
<TABLE>
<CAPTION>
FIVE MONTHS FOUR MONTHS
FISCAL YEAR ENDED ENDED
--------------- OCTOBER 31, OCTOBER 31,
1994 1995 1995 1995
------- ------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Saban revenues from FCN.............. $10,483 $16,228 $9,651 n/a
FCN revenues from Saban.............. 885 14,662 n/a $973
</TABLE>
(3) Under agreements between FCN and Fox Broadcasting, for periods prior to
June 1, 1995, FCN paid administrative and other fees to Fox Broadcasting.
Effective June 1, 1995, Fox Broadcasting assigned to the Company its
rights to such payments accrued thereafter. Amounts expensed under these
agreements were $19.8 million, $26.9 million and $9.1 million, for the
years ended June 30, 1994 and 1995 and the four months ended October 31,
1995, respectively.
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The Company's current principal operations are conducted through IFE, FCN
and Saban. IFE operates the Fox Family Channel, one of the top 10 most widely
distributed cable television networks in the United States, reaching
approximately 95% of all cable and satellite television households. FCN
commenced operations with the launch, in September 1990, of the Fox Kids
Network, which is currently one of the top-rated children's-oriented broadcast
television networks in the United States. Saban, which commenced business in
the mid-1980s, is currently one of the largest suppliers of children's
television programming in the world.
FCN Holding, Inc. ("FCN Holding"), which indirectly owns FCN, and Saban
entered into a strategic alliance, which included the formation of Fox Kids
Worldwide, LLC ("the LLC") pursuant to agreements entered into on November 1,
1995 (the "Effective Date"). Under the terms of the agreements relating to the
strategic alliance, between November 1, 1995 and August 1, 1997 (the date of
the Reorganization described below), each of Saban and FCN was operated by its
respective management subject to the overall supervision of a governing
committee comprised of an equal number of representatives of each of FCN and
Saban. As a result of the formation of the joint venture and the common
management of the joint venture business, the respective assets, liabilities
and operations of Saban, FCN Holding and the LLC have been combined at
historical cost from and after November 1, 1995.
Fox Kids Worldwide, Inc. was incorporated in August 1996 under Delaware law
as a holding company of FCN Holding, Saban and the LLC. Between August 1996
and August 1997, the Company conducted no business or operations. On August 1,
1997, in connection with the Company's acquisition of a controlling interest
in IFE, (i) Fox Broadcasting Sub, Inc., a wholly owned indirect subsidiary of
Fox Broadcasting ("Fox Broadcasting Sub"), exchanged its capital stock in FCN
Holding, which indirectly owns FCN, for 7,920,000 shares of Class B Common
Stock of the Company, (ii) the other stockholder of FCN Holding exchanged its
capital stock in FCN Holding for an aggregate of 160,000 shares of Class A
Common Stock of the Company, (iii) Haim Saban and the other stockholders of
Saban (together, the "Saban Stockholders") exchanged their capital stock of
Saban for an aggregate of 7,920,000 shares of Class B Common Stock of the
Company, and (iv) all outstanding management options to purchase Saban capital
stock became options to purchase an aggregate of 646,548 shares of Class A
Common Stock of the Company (together, the "Reorganization"). In addition, Fox
Broadcasting exchanged its preferred, non-voting interest in the LLC and its
$50 million contingent note receivable from the LLC for a new subordinated
pay-in-kind note (the "Fox Subordinated Note") from the Company, which accrues
interest at the rate of 10.42%. The payment of principal and interest under
the Fox Subordinated Note is subordinated in right to the obligations of the
Company and its subsidiaries under the Second Amended and Restated Credit
Agreement dated as of October 28, 1997 between certain subsidiaries of the
Company and certain banks (as amended, supplemented or otherwise modified from
time to time, the "Amended Credit Facility") and the indentures relating to
the Company's 9 1/4% Senior Notes and 10 1/4% Senior Discount Notes
(collectively, the "Company Notes"), each dated as of October 28, 1997 between
the Company and the Bank of New York, as Trustee (collectively, the
"Indentures").
The Company acquired a controlling interest in IFE on August 1, 1997 and
completed the IFE Acquisition on September 4, 1997. The IFE Acquisition was
accounted for using the purchase accounting method, and, consequently, the
historical financial statements included herein do not reflect the results of
operations of IFE prior to the date the Company first acquired a controlling
interest in IFE. In connection with the IFE Acquisition, the Company decided
that IFE's production and live action entertainment businesses, as well as
certain other businesses, were not strategic to the Company. The Company has
sold, licensed or otherwise discontinued use of the majority of these assets
which generated $72.8 million in revenues and $116.5 million in costs and
expenses in the twelve month period ended June 30, 1997. The operations of
such businesses will be excluded from future operating results.
17
<PAGE>
Included in this Report are (i) the consolidated financial statements of
Saban covering the two year period ended May 31, 1995 and the five month
period ended October 31, 1995 (the close of business on the date prior to the
Effective Date), (ii) the consolidated financial statements of FCN Holding
covering the two year period ended July 2, 1995, and the four month period
ended October 31, 1995, and (iii) the financial statements of the Company for
the eight month period commencing on the Effective Date and ending June 30,
1996, and for the years ended June 30, 1997 and June 30, 1998.
The financial statements of the Company for the year ended June 30, 1997 are
not comparable to the eight month period ended June 30, 1996 due to the
different lengths of the time periods compared and because neither period
includes the operations of IFE. In addition, the financial statements of the
Company as of and for the year ended June 30, 1998 (which includes the results
of operations of IFE from August 1, 1997) are not comparable to the year ended
June 30, 1997 as the prior period did not include the operations of IFE. The
Company has made significant changes to the programming of Fox Family Channel.
For example, each week the Fox Family Channel now carries a total of 76.5
hours of programming targeted principally to children; at the time of its
acquisition by the Company, The Family Channel did not carry any material
amounts of programming targeted to this audience. Because of these changes,
results of operations of IFE in prior periods may not be comparable to results
of operations for future periods.
The following discussion provides information and analysis with respect to
the results of operations reflected in the financial statements included in
this Report, as well as the liquidity and capital resources of the Company.
This discussion should be read in conjunction with the financial statements
and related notes and Item 6, "Selected Financial Data" included elsewhere in
this Report.
SIGNIFICANT ACCOUNTING FACTORS
Use of Estimates
As is industry practice, management has made a number of estimates and
assumptions relating to the amortization of programming costs and the
reporting of assets and liabilities in the preparation of the financial
statements discussed herein. Actual results could differ materially from these
estimates. Management periodically reviews and revises its estimates of future
airings and revenues as necessary, which may result in revised amortization of
its programming costs. Results of operations may be significantly affected by
the periodic adjustments in such amortization.
Revenue Recognition and Seasonality
Revenues from television programming lease agreements are recognized when
the lease period begins, collectibility is reasonably assured and the product
is available pursuant to the terms of the lease agreement. Advertising revenue
is recognized as earned in the period in which the advertising commercials are
broadcast. For this reason, significant fluctuations in the Company's revenues
and net income can occur from period to period depending upon the availability
dates of programs and advertising revenues. In the United States, revenues
from advertising are normally significantly higher in the fourth calendar
quarter, and in the international markets, a significant portion of revenues
are recognized in April and October. The Company expects that its second and
fourth fiscal quarters may contribute a disproportionate share of the revenues
and net income for any fiscal year. During the fiscal year ended June 30,
1998, 32% and 27% of the Company's consolidated revenues were recognized in
the second fiscal quarter and fourth fiscal quarter, respectively, of that
year.
Increased International Focus
In recent years, revenues derived from international operations have become
increasingly significant to the Company, representing 21% of the Company's
consolidated revenues for the fiscal year ended June 30, 1998. As part of its
business strategy, the Company intends to expand its international program
production and distribution activities. Certain of these activities, such as
the rollout of new international channels, may require
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material marketing and other expenses in advance of the receipt of related
revenues, thereby adversely affecting the Company's results of operations as
these activities are expanded and the international markets are developed.
RESULTS OF OPERATIONS
THE COMPANY
The following tables set forth, for the periods indicated, certain data with
respect to revenues, and costs and expenses of the Company as a percentage of
total revenues:
REVENUE SUMMARY
<TABLE>
<CAPTION>
EIGHT
MONTHS ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1998
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Children's programming:
U.S. television distribution(1).... $ 85,883 $126,796 $127,064
Foreign television distribution(2). 29,389 58,844 74,942
Merchandising and licensing, home
video and other Ancillary
revenues.......................... 60,541 96,766 121,057
-------- -------- --------
Total............................ 175,813 282,406 323,063
Telefilms/Family programming:
U.S. distribution.................. 4,474 3,574 29,495
Foreign distribution............... 11,334 21,840 34,010
-------- -------- --------
Total............................ 15,808 25,414 63,505
Domestic cable:
Fox Family Channel(3).............. -- -- 277,890
-------- -------- --------
Total Revenues................... $191,621 $307,820 $664,458
======== ======== ========
</TABLE>
- --------
(1) Television distribution in the United States consists principally of
advertising sales generated by FCN and Saban.
(2) Foreign television distribution consists principally of cash transactions
with foreign broadcasters and advertising revenues and subscriber fees
generated by the international channels.
(3) Domestic cable consists principally of advertising revenues and subscriber
fees.
COSTS AND EXPENSES AS A PERCENTAGE OF TOTAL REVENUES
<TABLE>
<CAPTION>
EIGHT
MONTHS ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Costs and expenses:
Production and programming......... 51.6% 58.6% 54.3%
Selling, general and
administrative.................... 12.0 20.3 22.0
Fox Kids Network affiliate
participations.................... 4.6 2.0 --
Amortization of intangible assets.. -- -- 5.7
---- ---- ----
Total costs and expenses......... 68.2% 80.9% 82.0%
Operating income .................... 31.8% 19.1% 18.0%
</TABLE>
Year ended June 30, 1998 compared with the year ended June 30, 1997
Revenues for the year ended June 30, 1998 were $664.5 million as compared to
$307.8 million for the year ended June 30, 1997, an increase of 116%. The
revenue increase is primarily due to eleven months activity of
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IFE, a controlling interest in which was acquired on August 1, 1997, which
contributed revenues of $321.5 million for the year ended June 30, 1998. In
addition, home video revenues for Casper: A New Beginning and Turbo: A Power
Ranger Movie contributed $62.1 million in revenues for the year ended June 30,
1998. There were no comparable video releases in the prior year. In addition,
syndication and other revenues increased for the year ended June 30, 1998
offsetting the $20.0 million recognized in the prior year in connection with
the settlement and termination of an output agreement with Warner Bros. Home
Video. Power Rangers revenue (including Turbo: A Power Rangers Movie) was
$50.5 million for the year ended June 30, 1998 as compared to $70.8 million
for the year ended June 30, 1997. As a result of the acquisition of IFE, the
Company expects that Power Rangers will represent a smaller percentage of the
Company's total revenue in the future.
Production and programming costs increased $180.8 million or 100.0% for the
year ended June 30, 1998 as compared to the prior year. This increase is
attributable to the inclusion of eleven months' activity for IFE which
accounted for $112.4 million of the increase and the significantly higher
amortization expense associated with the two home video releases described
above. Production and programming expenses as a percentage of total revenues
decreased to 54.3% for the year ended June 30, 1998 from 58.6% for the year
ended June 30, 1997. This decrease is principally due to the inclusion of IFE
which has lower production and programming costs as a percentage of revenues
than the Company has historically experienced. The Company expects this trend
to continue.
Selling, general and administrative expenses for the year ended June 30,
1998 increased $83.7 million or 134.1% as compared to the year ended June 30,
1997. As a percentage of total revenues, selling, general and administrative
expenses increased to 22.0% in the current year from 20.3% in the prior year.
This increase is primarily due to the inclusion of eleven months of activity
of IFE ($71.8 million) and expenses associated with the Company's
international channels ($6.0 million).
Fox Kids Network affiliate participation expenses decreased $6.2 million for
the twelve months ended June 30, 1998 as compared to the prior year. This
decrease is due to lower profits, as defined in the affiliation agreements, as
a result of lower ratings and higher marketing costs for the Fox Kids Network.
The Company has reached an agreement with the majority of the Fox Kids
Network Affiliates to modify the financial arrangements between the Fox Kids
Network and the Fox Kids Network Affiliates. Commencing July 1, 1998, all of
the affiliated stations will be paid an aggregate amount of approximately
$15.0 million per year for five years in exchange for (i) guaranteed clearance
of Fox Kids programming in its current time period for ten years, (ii)
relinquishment of any participation in the current or future profits of the
Fox Kids Network and (iii) additional allocation of promotional advertising
spots for the next three and one-half years. As of September 15, 1998, 140 or
approximately 85% of the Fox Kids Network primary Affiliates accepted the
proposal. There can be no assurance that all of the individual affiliated
stations will approve the agreement.
Amortization of intangible assets results from the acquisition of a
controlling interest in IFE in August 1997. Eleven months of amortization was
taken for the year ended June 30, 1998.
The equity in loss of unconsolidated affiliate represents the Company's
portion of the loss generated by TV10, a cable network based in The
Netherlands. The Company acquired its initial interest in TV10 in March 1997.
The Company is currently negotiating a sale of 50% of its interest in TV10 to
a subsidiary of Fox Broadcasting.
Interest expenses increased by $131.8 million for the year ended June 30,
1998 as compared to the year ended June 30, 1997. The increase is due to
interest on the debt incurred in connection with the acquisition of IFE.
The Company's provision for income taxes for the twelve months ended June
30, 1998 reflects foreign withholding taxes and U.S. federal and state income
taxes related to IFE for the period before IFE became part
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<PAGE>
of the Company's U.S. consolidated income tax return. The effective tax rate,
excluding the amortization of intangible assets, is 21% as compared to 27% for
the twelve months ended June 30, 1997. The decrease in income tax expense from
the prior year is largely due to interest expense on the acquisition debt
incurred by certain domestic subsidiaries of the Company.
Year ended June 30, 1997 compared with the eight months ended June 30, 1996
Revenues for the year ended June 30, 1997 were $307.8 million as compared to
$191.6 million for the eight months ended June 30, 1996. For the year ended
June 30, 1997, 23% of revenues were derived from Power Rangers as compared
with 38% for the eight months ended June 30, 1996. The decrease in revenues
from Power Rangers was offset by an increase in revenues from Big Bad
BeetleBorgs and by $20 million of previously deferred revenue recognized
during the year ended June 30, 1997 in connection with the settlement and
termination of an output agreement with Warner Bros. Home Video. The Company
has replaced the Warner Bros. Home Video agreement with a long term output
agreement with Fox Video.
Production and programming costs (including costs in connection with the
settlement and termination of an output agreement with Warner Bros. Home
Video) as a percentage of total revenues increased to approximately 59% for
the year ended June 30, 1997 as compared with 52% for the eight months ended
June 30, 1996. This increase in production and programming costs as a
percentage of revenues resulted principally from the reduction in Power
Rangers revenues described above which have historically had a high profit
margin.
Selling, general and administrative expenses increased to 20% of total
revenues for the year ended June 30, 1997 as compared to 12% for the eight
months ended June 30, 1996. This increase resulted from overhead associated
with the start-up of the Company's international channels. To a lesser extent,
selling, general and administrative expenses increased at the Fox Kids Network
as a result of greater marketing, promotional and publicity activities at the
network and these expenses increased at the Company's Paris office as a result
of the acquisition of the Paris-based C&D and Vesical Limited programming
libraries.
Fox Kids Network affiliate participation costs were approximately 2% of
total revenues for the year ended June 30, 1997 as compared to approximately
5% of total revenues for the eight months ended June 30, 1996. The decrease in
such costs can be attributed to lower profits at FCN Holding resulting
principally from the increased selling, general and administrative expenses
described above.
The Company's effective tax rate for the year ended June 30, 1997 was 26%.
The Company's effective tax rate for the eight months ended June 30, 1996 was
37%. This change is attributable to the non-deductible investment advisory fee
in the eight months ended June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
In September 1997, the Company completed the IFE Acquisition. The total
consideration for the IFE Acquisition was approximately $1.9 billion,
including assumption of debt, and was financed by (i) the borrowing of $1.25
billion under a credit facility (the "Old Credit Facility"), (ii) the issuance
of approximately $345 million of Series A Preferred Stock to Liberty IFE, Inc.
("Liberty IFE") and (iii) the issuance of a note to News America Incorporated
in the amount of $345.5 million (the "NAHI Bridge Note"). In October 1997, the
Company completed an offering (the "Offering") of the Company Notes,
generating net proceeds to the Company of approximately $830 million. Of the
net proceeds from the Offering, $215 million was used to repay a portion of
the NAHI Bridge Note and the balance of $615 million was used to repay
indebtedness under the Company's Old Credit Facility. Approximately $108
million (including accreted interest) was outstanding under the NAHI Bridge
Note at June 30, 1998; however, no payments are due under the NAHI Bridge Note
until March 2008.
21
<PAGE>
In October 1997, as part of the Offering, the Company amended the Old Credit
Facility to the Amended Credit Facility which includes a $710 million
facility, comprised of a seven-year amortizing term loan and a seven-year
reducing revolving credit facility. The Amended Credit Facility is scheduled
to terminate September 29, 2004. Borrowings under the Amended Credit Facility
bear interest, through November 30, 1998, at the Company's option at a rate
per annum equal to either LIBOR plus a 1.5% interest rate margin or a base
rate plus a .5% interest rate margin. As of June 30, 1998, $75 million was
available under the Amended Credit Facility for additional borrowings.
As a result of the IFE Acquisition and the financing transactions described
above, the Company's principal liquidity requirements arise from interest
payments. The Company further anticipates certain seasonal working capital
needs related to the development, production and acquisition of programming,
the financing of accounts receivable and other related operating costs. The
Company on a regular basis has had, and intends to continue to engage in,
exploratory discussions concerning programming and other acquisition
opportunities, and any such acquisition could result in additional capital
requirements. The Company expects to incur capital expenditures of
approximately $19 million over the next 12 months, primarily due to one-time
costs associated with the Company's consolidation of its broadcast, on-air
promotion and post-production facilities in Los Angeles. In addition, the
Company expects to require approximately $12 million of capital over the next
12 months to support its existing international channels, as well as the
launch of future international channels. The Company's amendment to the
affiliation agreements has been approved by a majority of the individual
affiliated stations. Commencing July 1, 1998, the Company will be obligated to
pay to the affiliates an aggregate of approximately $15.0 million per year for
five years in exchange for (i) guaranteed clearance of Fox Kids programming in
its current time period for ten years, (ii) relinquishment of any
participation in the current or future profits of the Fox Kids Network, and
(iii) additional allocation of promotional advertising spots for the next
three and one-half years.
Net cash provided by operating activities of the Company for the year ended
June 30, 1998 was $318.3 million as compared to $196.8 million for the year
ended June 30, 1997, reflecting the acquisition of IFE described above. During
the year ended June 30, 1997, the Company distributed an aggregate of $708,000
to non-Fox O&O Affiliates, and during the year ended June 30, 1998, the
Company distributed an aggregate of $100,000 to non-Fox O&O Affiliates.
Net cash used in investing activities of the Company during the years ended
June 30, 1997 and 1998 was $215.9 million and $1.6 billion respectively. The
Company's net cash flow used in investing activities for the year ended June
30, 1997 included $13.6 million incurred in connection with the purchase of
U.S. and international programming and libraries and the purchase of a 90%
interest in TV10, a cable network in The Netherlands, as well as additions to
production and programming costs. The majority of the investing activity for
the year ended June 30, 1998 was related to the IFE Acquisition as described
above and additions to production and programming costs.
Net cash provided by financing activities of the Company during the years
ended June 30, 1997 and 1998 was $31.9 million and $1.36 billion,
respectively. The financing activities for the year ended June 30, 1997
consisted primarily of proceeds from bank borrowings, while the activities for
the year ended June 30, 1998 related to bank and other borrowings in
connection with the IFE Acquisition.
The Company's total unrestricted cash balances at June 30, 1998 were $82.3
million.
The Company believes that the $75 million of available borrowings under the
Amended Credit Facility, together with cash flow from operations and cash on
hand, should be sufficient to fund its operations and service its debt for the
foreseeable future.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income. The Statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of
22
<PAGE>
general purpose financial statements. The Statement applies to all enterprises
that provide a full set of general-purpose financial statements. The Statement
becomes effective for all financial statements for fiscal years beginning
after December 15, 1997, with earlier application permitted.
Further, in June 1997, the FASB issued Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information. The Statement changes the
way public companies report segment information in annual financial statements
and also requires those companies to report selected segment information in
interim financial reports to shareholders. The proposal supersedes FASB
Statement No. 14 on segments and does not apply to nonpublic enterprises or to
not-for-profit organizations. The Statement becomes effective for all
financial statements for fiscal years beginning after December 15, 1997, with
earlier adoption permitted.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which is effective for all quarters of
fiscal years beginning after June 15, 1999. This statement establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities.
The Company is currently reviewing those Statements and will apply such
provisions as it deems appropriate.
IMPACT OF YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits instead of four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software or facilities or equipment
containing embedded micro-controllers may recognize a date using "00" as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing potential disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
The Company is in the process of completing an assessment of significant
software and equipment used in the Company's operations and has determined
that it will be required to modify or replace portions of its software so that
its computer systems will function properly with respect to dates in the year
2000 and thereafter. The Company has established a management team to review
all core computer systems, as well as equipment and facilities. Plans are
being formulated to test and implement both software and hardware changes
where required. In addition, the Company is contacting its key vendors and
customers to determine if there are any significant Year 2000 exposures which
would have a material effect on the Company. The Year 2000 project cost has
not been material to date and, based on preliminary information, is not
currently anticipated to have a material adverse effect on the Company's
financial condition, results of operations or cash flow in future periods.
However, if the Company, its customers or vendors are unable to resolve any
Year 2000 compliance problems in a timely manner, it could result in a
material financial risk. Accordingly, management plans to devote the resources
it concludes are appropriate to resolve all significant Year 2000 problems in
a timely manner.
The project is estimated to be completed not later than the first quarter of
1999. After completion of its Year 2000 assessment, the Company will develop
contingency plans to reduce its Year 2000 exposure.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes and similar uncertainties.
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<PAGE>
FACTORS THAT COULD IMPACT FUTURE RESULTS
Substantial Leverage; Ability to Service Indebtedness
As of June 30, 1998, the Company's total amount of consolidated debt
outstanding was approximately $1.7 billion, or 82% of total capitalization.
The Company is a holding company and its ability to obtain funds from its
subsidiaries and affiliates could be limited.
The degree to which the Company is leveraged could have important
consequences, including, but not limited to, the following: (i) the Company's
ability to obtain financing in the future for working capital, capital
expenditures or general corporate purposes may be impaired; (ii) a substantial
portion of cash flows from the operation of the Company's subsidiaries will be
dedicated to the payment of the principal of and interest on its debt and will
not be available for other purposes; and (iii) certain of the Company's
borrowings are at variable rates of interest, which could result in higher
interest expense in the event of increases in interest rates. Further, the
Company's Amended Credit Facility and the Indentures contain certain
restrictive financial and operating covenants which affect, and in many
respects significantly limit or prohibit, among other things, the ability of
the Company to incur indebtedness, make prepayments of certain indebtedness,
pay dividends, make investments, engage in transactions with affiliates,
create liens, sell assets and engage in mergers and consolidations. These
covenants may significantly limit the operating and financial flexibility of
the Company and may limit its ability to respond to changes in its business or
competitive activities. The failure by the Company to comply with such
covenants could result in an event of default under the applicable instrument,
which could permit acceleration of the debt under the instrument and in some
cases acceleration of debt under other instruments containing cross-default or
cross-acceleration provisions.
The Company's ability to make scheduled payments of principal of, or to pay
interest on or to refinance, its debt depends on its future financial
performance, which, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors beyond its
control. Although management believes that cash from operations, together with
available borrowings pursuant to the Company's credit facility, will be
adequate to meet the Company's anticipated future requirements for working
capital, capital expenditures and scheduled payments of interest on its debt
for the foreseeable future, this is a forward-looking statement and there can
be no assurance that the Company's business will generate sufficient cash flow
from operations or that future working capital borrowings will be available in
an amount sufficient to enable the Company to service its debt or to make
necessary capital expenditures or other expenditures. Furthermore, there can
be no assurance that the Company will be able to raise additional capital for
any required refinancing in the future. See Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
Risks Associated with Holding Company Structure
The Company is a holding company and its assets consist solely of
investments in its subsidiaries. As a holding company, the Company's ability
to meet its financial obligations and its funding and other commitments to its
subsidiaries is dependent upon the earnings of the subsidiaries and the
distribution or other payment of such earnings to the Company in the form of
dividend distributions, loans or other advances, payment or reimbursement for
management fees and expenses and repayment of loans and advances from the
Company. Accordingly, the Company's ability to pay interest on its debt and
otherwise to 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. The payment of dividends or the making of loans or advances to
the Company by its subsidiaries may be subject to statutory, regulatory or
contractual restrictions, are contingent upon the earnings of those
subsidiaries and are subject to various business considerations. Certain of
the Company's subsidiaries may in the future be subject to loan or other
agreements prohibiting or limiting the transfer of funds to the Company, or
requiring that any indebtedness of such subsidiaries or affiliates to the
Company be subordinate to the indebtedness under such agreements.
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Acquisition of IFE
No Prior Cable Television Operations History. The IFE Acquisition expanded
the Company's operations into the cable television business, a business in
which it had never before operated. The cable television business is highly
competitive, subject to government regulation and at risk to technological
change. As of August 1998, cable television reached 70.2% of the United
States' television households ("TVHH") compared to 98% for broadcast
television and 7.2% for DTH satellite television. Cable television reaches
approximately 29 million of U.S. children between the ages of 2-11. In the
cable television market the Company is subject to competition from other cable
television companies which, in many instances, have greater production,
distribution and capital resources than the cable television operations of the
Company.
Programming Changes at The Family Channel. The Company reprogrammed The
Family Channel as the Fox Family Channel in August 1998. There is no guarantee
that the reprogrammed channel will retain its existing viewers or attract new
viewers. If the ratings of the Fox Family Channel fail to meet the Company's
expectations, the Company could be materially adversely affected. The Company
acquired IFE with the expectation that the acquisition would result in
synergies for the combined business. These include the potential to realize a
greater return on its children's programming library through distribution on
the Fox Family Channel and operational synergies through the sale of "packaged
advertising," cross-promotional opportunities with the Fox Kids Network,
consolidation of duplicative functions and the elimination of excess overhead.
Achieving these anticipated business benefits will depend in part on whether
the operations of IFE can be integrated with the operations of the Company in
an efficient, effective and timely manner and the success of the programming
changes. In addition, the integration of operations of IFE into the Company
will require the dedication of management resources, which may affect
management's attention regarding the day-to-day business of the Company. The
inability of management to integrate successfully the operations of the
companies could have a material adverse effect on the business, results of
operations and financial condition of the Company.
International Channels
The Company is spending considerable resources on the development of
international DTH and cable children's channels. The launch of channels
throughout the world is particularly capital intensive. In many markets a
number of the Company's competitors already have well established children's
channels. Not only does the Company have to negotiate to obtain channel
capacity (which is limited in many markets), but the Company must also acquire
additional programming or adapt existing programming so that it appeals to
local viewers.
Possible Decline in Popularity of Current Programs and Uncertainty of
Acceptance of New Programs
A significant portion of the Company's revenues are derived from the
creation, development, production, acquisition, international distribution,
merchandising and other exploitation of children's television properties. For
the fiscal year ended June 30, 1998, revenues from these sources represented
approximately 49% of the Company's consolidated revenues. As a result of
reprogramming The Family Channel as the Fox Family Channel to emphasize
children's programming during the day, it can be anticipated that in the near
future revenues from children's programming as a percentage of total revenues
may increase. The success of any series depends upon unpredictable and
volatile factors beyond the Company's control, such as children's preferences,
competing programming and the availability of other entertainment activities
for children. A shift in children's interests could cause the Company's
current television programming to decline in popularity, which could
materially and adversely affect the Company's results of operations and
financial condition. The ability of the Company to continue successfully to
exploit the merchandising opportunities afforded by its programs will also be
dependent on the favorable ratings of the programs and the ability of the
Company's characters to continue to provide attractive merchandising
opportunities for its licensees. There can be no assurance as to the
continuing
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<PAGE>
commercial success of any of the Company's currently distributed properties,
or that the Company will be successful in generating sufficient demand and
market acceptance for its new properties.
Decline in Ratings of Fox Kids Network
Ratings for the Fox Kids Network among children ages 2-11 decreased 12% from
the 1995-1996 broadcast season to the 1996-1997 broadcast season and, based on
figures available to date for the 1997-1998 season, ratings have decreased 17%
from the 1996-1997 season to the 1997-1998 season. The Company believes that
part of the decline is due to the fact that children have many entertainment
options, which are likely to continue, including more hours of children's
programming on cable, new video games, computers and home videos. Material
declines in the ratings of the Fox Kids Network could materially and adversely
affect the Company's results of operations and financial condition.
Possibility of Non-Renewal of Affiliation Agreements by FOX Television Member
Stations
Over 92% of the affiliation agreements with Fox Broadcasting's member
stations ("FOX Television Member Stations") require the affiliates also to
carry the Fox Kids Network. Fox Broadcasting currently expects to continue to
be able to renew its affiliation agreements with the FOX Television Member
Stations as they mature. A FOX Television Member Station may choose not to
renew its affiliation agreement with Fox Broadcasting and at the same time
discontinue carriage of the Fox Kids Network. If a FOX Television Member
Station decides not to renew its status as such, it is less likely that it
would continue to carry Fox Kids Network programming. If the Company fails to
renew its affiliation agreements, there could be a material and adverse effect
on the results of operations and financial condition of the Company. See,
however, "Results of Operations--Year ended June 30, 1998 compared with the
year ended June 30, 1997."
Possible Reduction in Distribution or Non-Renewal of the Fox Family Channel
by Cable Operators
The Company distributes the Fox Family Channel to cable operators pursuant
to affiliation agreements whereby the cable operator agrees to provide
carriage for a specified per subscriber fee. Currently, the Fox Family Channel
has affiliation agreements covering approximately 13,000 affiliates. Pursuant
to these agreements, the Fox Family Channel has approximately 73 million cable
and satellite subscribers out of a potential audience reach of approximately
75 million households at August 15, 1998. Under these agreements, cable
operators and other distributors may discontinue carriage of the Fox Family
Channel or move the Fox Family Channel to a more narrowly distributed level of
service or tier. Such discontinuance or movement, if it involved a significant
number of subscribers, could limit the Fox Family Channel's ability to
generate national advertising revenues, as these depend on broad distribution,
particularly by cable operators. Subsequent to the debut of the new
programming on the Fox Family Channel, no cable operators have discontinued
carriage of the Fox Family Channel service. The Company currently expects to
continue to be able to renew its affiliation agreements as they mature or to
maintain its carriage on an "expanded basic," the most widely distributed
level of service. However, there can be no assurance that these affiliation
agreements will be renewed or that they will be renewed on the same or more
favorable terms.
Dependence Upon Key Personnel
The Company's success depends to a significant extent upon the expertise and
services of certain key executives, including Haim Saban, the Company's
Chairman and Chief Executive Officer and the founder of Saban. The Company has
entered into employment agreements with Mr. Saban and certain of its other key
executives. The Company does not maintain "key person" life insurance policies
on any of its executives. The loss of the services of Mr. Saban or any of the
key personnel could have a material adverse effect on the results of
operations and financial condition of the Company.
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Competition
The businesses in which the Company engages are highly competitive. Each of
the Company's primary business operations is subject to competition from
companies which, in some instances, have greater production, distribution and
capital resources than the Company.
Programming. The Company competes on the basis of relationships and pricing
for access to a limited supply of facilities and creative personnel to produce
its programs. The Company competes with major motion picture studios, such as
Warner Bros. and The Walt Disney Company, and animation production companies,
including Hanna Barbera and Film Roman, for the services of writers,
producers, animators, actors and other creative personnel and specialized
production facilities.
Distribution. In the United States, the Company competes for ratings and
related advertising revenues. The Company currently competes through its Fox
Kids Network and the Fox Family Channel, with the other broadcast television
networks, public television and cable television channels, such as USA Cable
Network, TNT, Disney Channel, The Cartoon Network and Nickelodeon, for market
acceptance of its programming, viewership ratings and related advertising
revenues. To the extent that the Company produces original programming for
distribution outlets it does not own, it competes with other producers of
children's programming. Internationally, the Company contends with a large
number of U.S.-based and international distributors of children's programming,
including The Walt Disney Company, Warner Bros. and Nickelodeon in the
development or acquisition of programming expected to appeal to international
audiences. Such programming often must comply with foreign broadcast rules and
regulations which may stipulate certain local content requirements.
More generally, the Company competes with various other leisure-time
activities such as home videos, movie theaters, personal computers and other
alternative sources of entertainment and information.
Overestimation of Revenues or Underestimation of Costs
The Company follows Financial Accounting Standards Board Statement No. 53,
"Financial Reporting by Producers and Distributors of Motion Picture Films,"
regarding revenue recognition and amortization of production costs for
programs and films in which the Company owns or controls all applicable
rights. All costs incurred in connection with an individual program or film,
including acquisition, development, production and allocable production
overhead costs and interest, are capitalized as television and film costs.
These costs are stated at the lower of unamortized cost or estimated net
realizable value. Estimated total production costs for an individual program
or film are amortized in the proportion that revenue realized relates to
management's estimate of the total revenues expected to be received from such
program or film. For programs in which the Company acquires only network
broadcast rights, the Company amortizes such program costs over the estimated
number of broadcasts in accordance with Financial Accounting Standards Board
Statement No. 63, "Financial Reporting by Broadcasters." If revenue or cost
estimates change with respect to a program or film, the Company may be
required to write down all or a portion of the unamortized costs for such
program or film. No assurance can be given that such write-downs, if they
occur, will not have a material adverse effect on the Company's results of
operations or financial condition.
Seasonality
All of the Company's television programming revenues are recognized either
when the program is available for broadcast or when advertising spots are
broadcast during a program. For this reason, significant fluctuations in the
Company's total revenues and net income can occur from period to period
depending upon availability dates of programs and advertising revenues. In the
United States, revenues from advertising targeted at children are concentrated
in the fourth calendar quarter of each year. In the international television
market, a significant portion of revenues are recognized in connection with
sales at the international sales trade shows (principally MIP in April and
MIP-COM in October). As a result, the second and fourth quarters of each
calendar year have generally contributed a substantial portion of the
Company's total revenues. Due, in part, to these seasonality factors, the
results of any one quarter are not necessarily indicative of results for
future periods, and cash flows may not correlate with revenue recognition.
27
<PAGE>
Dependence Upon Satellite Transponders
Distribution of the Fox Family Channel depends upon the operation of
satellites by third parties. Since August 15, 1998, the Company has been
transmitting all programming for the Fox Family Channel from the FOX
Television Broadcast Center in Los Angeles, California. 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. At present, there are a limited number of
domestic communications satellites available for the transmission of cable
television programming to cable system operators. If satellite transmission is
interrupted or terminated due to the failure or unavailability of a
transponder, the termination or interruption could have a material adverse
effect on the Company. The availability of additional transponders in the
future is dependent on a number of factors over which the Company has no
control. These factors include the future authorization of additional domestic
satellites, future competition among prospective users for available
transponder space, the uncertain status of the United States' Space Shuttle
Program (including priority allocations of future shuttle cargo space to
military rather than commercial payloads) and the uncertain availability of
satellites launching by private entities in the United States and by private
or governmental entities in other countries.
International Sales
For the fiscal year ended June 30, 1998, the Company derived approximately
21% of its consolidated revenues from international operations. As part of its
business strategy, the Company intends to expand its international program
production and distribution activities, as well as its worldwide
merchandising, licensing and ancillary activities, including the launch of
children's channels on DTH satellite and cable platforms throughout the world.
The Company is subject to the special risks inherent in international business
activities, including (i) general economic, social and political conditions in
each country, (ii) currency fluctuations, (iii) double taxation, (iv)
unexpected changes in applicable regulatory requirements and (v) compliance
with a variety of international laws and regulations. The operations of the
Company's international entities are measured in part in local currencies. For
reporting purposes, assets and liabilities are translated into U.S. dollars
using exchange rates in effect at the end of each reporting period. Revenues
and expenses are translated into U.S. dollars at the average exchange rates
prevailing during the period. As a result, the Company can expect to record
foreign exchange losses and gains in the future.
Potential Adverse Impact of Regulation
The United States Congress and the FCC currently have under consideration,
and may in the future consider and adopt, new laws, regulations and policies
regarding a wide variety of matters that may affect, directly or indirectly,
the operation, ownership and profitability of the Company's business. These
proposed changes include, for example, expansion of program access
requirements and potential must-carry rights for digital television broadcast
stations (which could limit the capacity of multichannel video programming
distributors available for the Company's programming). It is impossible to
predict the outcome of federal legislation or administrative action currently
under consideration or the potential effect thereof on the Company's business.
In addition, certain aspects of the Company's cable operations are subject,
directly or indirectly, to regulation at the state and/or local level. State
and/or local authorities could adopt laws or regulations in this area that
could further restrict the operations of the Company.
Potential for Deadlocks
The holders of the Class B Common Stock of the Company have agreed, so long
as neither Fox Broadcasting nor Haim Saban and the other former stockholders
of Saban as a group have disposed of more than one-third of their respective
initial Class B Common Stock beneficial holdings, to vote their shares
together on all matters presented to the stockholders, and if they cannot
agree as to how to vote on a matter, to abstain from voting with respect
thereto. There is no mechanism for breaking a deadlock among the holders of
Class B Common Stock. With respect to the election of directors, the holders
of the Class B Common Stock have agreed to vote their shares for three
directors selected by Haim Saban and three directors selected by Fox
Broadcasting. Because the charter documents provide that no Board action may
be taken without a vote of at least three-quarters of the directors, the
possibility exists that, as a result of differences which may in the future
arise
28
<PAGE>
between Fox Broadcasting and Mr. Saban, the Company may experience
difficulties in defining and meeting its business objectives, or in effecting
a transaction which would be in the best interests of the Company, which could
materially adversely affect the results of operations and financial condition
of the Company.
Strategic Relationships with News Corp. and Fox
The Company has had, and continues to have, a close strategic relationship
with News Corp. and its affiliated entities, including Fox Broadcasting, and
believes that this relationship is materially important to its business and
business strategies. However, except as may be provided in the agreements
between them which are discussed elsewhere in this Report, neither News Corp.
or its affiliated companies nor the Company are obligated to engage in any
business transactions or jointly participate in any opportunities with the
other, and the possibility exists that the current strategic relationships
between the parties could materially change in the future.
Transactions With Stockholders and their Affiliates
The Company has in the past entered into transactions and agreements, some
of which are ongoing, with Haim Saban and with Fox Broadcasting and News Corp.
and their affiliated companies. In addition, the Company may in the future
enter into additional agreements and other transactions with certain of these
affiliates. Although the Company has adopted a policy that future transactions
between the Company and any of these affiliates or family members must be
approved by a majority of the Board of Directors of the Company, there can be
no assurance that any such future transactions will prove to be favorable to
the Company. In addition, the Indentures provide, with certain exceptions,
that the Company may not enter into any transactions with affiliates except on
terms that are no less favorable to the Company than the Company would obtain
in a comparable arm's-length transaction.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risks include fluctuations in interest rates,
variability in interest rate spread relationships (i.e., prime to LIBOR
spreads) and exchange rate variability. The Company manages these market risks
by using derivative financial instruments in accordance with established
policies and procedures. The Company does not use derivative financial
instruments for trading purposes.
When the Company licenses its programming outside the United States, the
majority of transactions are denominated in U.S. dollars. Channel subscription
fees are denominated in local currencies. For those transactions denominated
in foreign currencies, to the extent possible, sales and purchases in specific
currencies are offset against each other. The foreign currencies in which the
Company has the most significant exchange rate exposure are the British pound,
French franc, German mark and Canadian dollar. To manage these exposures, the
Company periodically initiates hedging activities by entering into currency
exchange agreements, consisting primarily of currency forward contracts, to
minimize cost variations which could result from fluctuations in currency
exchange rates. The currency exchange agreements which provide hedge coverage
typically mature within one year of origination, consistent with the
underlying purchase or sales commitment.
The Company maintains a mix of fixed and floating debt to mitigate its
exposure to interest rate fluctuations.
The Company's management believes that fluctuations in interest rates and
currency exchange rates in the near term would not materially affect the
Company's consolidated operating results, financial position or cash flows as
the Company has limited risks related to interest rate and currency exchange
rate fluctuations.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Index to Financial Statements, 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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
29
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company, and their ages at June
30, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Haim Saban................ 53 Chairman of the Board and Chief Executive
Officer of the Company; Chairman and Chief
Executive Officer of Saban; Co-Chairman of
IFE
Mel Woods................. 46 President, Chief Operating Officer, Chief
Financial Officer and Director of the
Company; President and Chief Operating
Officer of Saban; Executive Vice President
and Chief Operating Officer of IFE
Shuki Levy................ 52 Executive Vice President and Director of the
Company
Donna Cunningham.......... 37 Executive Vice President, Business and Legal
Affairs and General Counsel of the Company
Mark Ittner............... 46 Chief Accounting Officer of the Company and
Senior Vice President of Finance of Saban
K. Rupert Murdoch......... 67 Director
Chase Carey............... 44 Director
Lawrence Jacobson......... 39 Director
</TABLE>
Haim Saban, the founder of Saban, has served as the Chairman of the Board
and Chief Executive Officer of the Company since its inception in August 1996,
and Chairman and Chief Executive Officer of Saban since the establishment of
Saban in 1983. Mr. Saban is a creator and executive producer of the Company's
live-action series, Power Rangers.
Mel Woods has served as President, Chief Operating Officer, Chief Financial
Officer and a director of the Company since its inception in August 1996. Mr.
Woods has also been the President and Chief Operating Officer and a director
of Saban since 1991. From 1987 to 1991, Mr. Woods served as Senior Vice
President and Chief Financial Officer of DIC Enterprises, an animation
production company. Prior. to joining DIC, Mr. Woods was Senior Vice
President, Chief Financial Officer and Treasurer of Orion Pictures Corp. and
served as a member of its board of directors. Mr. Woods is a member of the
board of directors of On Stage Entertainment, Inc., a producer of live
entertainment shows.
Shuki Levy became the Executive Vice President and a director of the Company
in 1996 and is responsible for productions. Mr. Levy has served as an
independent contractor performing production related assignments for Saban
since 1983. Mr. Levy is executive producer of the Company's live-action
series, Power Rangers, and also serves as executive producer for Big Bad
BeetleBorgs and Masked Rider.
Donna Cunningham became the Executive Vice President of the Company in June
of 1998 and is responsible for overseeing the business and legal affairs of
the Company. From March 1996 to December 1996, Ms. Cunningham served as Vice
President, Business and Legal Affairs for the Fox Kids Network, and from
December 1996 to June 1998, she served as Senior Vice President of Business
and Legal Affairs for Fox Kids Worldwide, overseeing all business and legal
affairs for both the Fox Kids Network and the Fox Family Channel. From
September 1995 through March 1996, Ms. Cunningham was Vice President of
Business and Legal Affairs for Hanna-Barbera, Inc., a full service animation
production and distribution company. From March 1991 through September 1995,
she served as Director, Vice President and Consultant of Business and Legal
Affairs for animation production company DIC Entertainment, Inc. (formerly
known as DIC Animation City, Inc.).
30
<PAGE>
Mark Ittner has served as Chief Accounting Officer of the Company since
September 1997, and as Senior Vice President of Finance of Saban since March
1995 and as Vice President of Finance from February 1993 to March 1995. From
1990 to 1993, Mr. Ittner served as Vice President and Controller of Imagine
Films, a motion picture and television production company. Prior to joining
Imagine Films, Mr. Ittner was the acting Co-Chief Financial Officer of
Weintraub Entertainment Group, after joining Weintraub as a Vice President and
Controller in January 1988. From 1979 to 1984, Mr. Ittner was first Assistant
Controller and then in 1984, Vice President and Controller, of Hanna-Barbera
Productions, Inc. and its parent company, The Taft Entertainment Company.
K. Rupert Murdoch has served as a director of the Company since August 1996.
Mr. Murdoch is an Executive Director and has been the Chief Executive of News
Corp. since its formation in 1979 and has served as its Chairman since 1991.
From 1969 to 1979, Mr. Murdoch served as Chief Executive of News International
plc, which is now News Corp.'s principal operating subsidiary in the United
Kingdom. From 1953 to 1969, Mr. Murdoch served as Chief Executive of News
Limited, which is now News Corp.'s principal operating subsidiary in
Australia. Mr. Murdoch has served as Chairman of the Star Television Group
since 1993 and as a Director of BSkyB since 1990. Mr. Murdoch is also a member
of the board of directors of Philip Morris Companies, Inc.
Chase Carey has served as a director of the Company since August 1996. Mr.
Carey is an Executive Director and has been the Co-Chief Operating Officer of
News Corp. since October 1996. Mr. Carey has served as the Chairman and Chief
Executive Officer of FOX Television since July 1994. Mr. Carey is responsible
for all divisions of FOX Television including Fox Broadcasting, Fox Television
Stations, Twentieth Television's domestic syndication unit and FOX
Television's cable interests. Mr. Carey joined Fox Inc. in 1988 as Executive
Vice President, served as Chief Financial Officer, and assumed the title of
Chief Operating Officer in February 1992. Prior to joining FOX Television, Mr.
Carey worked at Columbia Pictures in several executive positions, including
President of Pay/Cable and Home Entertainment and Executive Vice President of
Columbia Pictures International. Mr. Carey is a member of the boards of
directors of Gateway 2000 and Colgate University.
Lawrence Jacobson has served as a director of the Company since November
1997. Mr. Jacobson was named President of FOX Television Network, in September
1997. Mr. Jacobson had been Executive Vice President of Fox Television since
May 1996, and was named Executive Vice President and Chief Financial Officer
of Fox Broadcasting Company in July 1994. Mr. Jacobson joined Fox Inc. in
December 1990 as Vice President, Finance, and became Senior Vice President,
Finance in July 1992.
Election of Directors; Change in Control
Pursuant to the terms of an Amended and Restated Strategic Stockholders
Agreement dated as of August 1, 1997 between, among others, Fox Broadcasting
and Haim Saban and the former Saban Stockholders (the "Amended and Restated
Strategic Stockholders Agreement"), Fox Broadcasting and Mr. Saban have agreed
to vote all of the shares of Class B Common Stock beneficially owned by each
of them to the election of three directors designated by Fox Broadcasting and
three directors designated by Mr. Saban. If in the future the Company becomes
subject to any requirement that the Company's Board of Directors include
independent directors, Fox Broadcasting and Mr. Saban are each to include
among their respective slates of nominees the number of independent directors
necessary to satisfy such requirement. Fox Broadcasting and Mr. Saban will
mutually agree on two independent directors. If they are unable to mutually
agree, Fox Broadcasting will nominate one independent director and Mr. Saban
will nominate the other and they will each vote for both nominees.
If either Haim Saban or Fox Broadcasting transfers more than one-third of
its initial holdings of Class B Common Stock (Mr. Saban's holdings to include
the shares of the former Saban Stockholders), then Fox Broadcasting or Mr.
Saban, as the case may be, has the right to designate the remaining two-thirds
of the authorized number of directors.
31
<PAGE>
As part of the voting provisions of the Amended and Restated Strategic
Stockholders Agreement, both Mr. Saban and Fox Broadcasting have agreed to a
standstill whereby neither of them will, without the consent of the other,
among other things, (i) purchase, acquire, offer or agree to purchase or
acquire any shares of capital stock or other voting securities of the Company;
(ii) solicit stockholders for the approval of stockholder proposals; or (iii)
otherwise act, alone or in concert with others, to assert or encourage any
other person or entity in seeking to control the management, board of
directors or policies of the Company or to propose or effect a business
combination, restructuring, recapitalization, liquidation, dissolution or
similar transaction.
Fox Broadcasting's designees are currently K. Rupert Murdoch, Chase Carey
and Lawrence Jacobson. Haim Saban, Mel Woods and Shuki Levy are the designees
of Haim Saban.
Under an agreement among Fox Broadcasting, Haim Saban and the former Saban
Stockholders, Fox Broadcasting has the right and option, commencing in
December 2002 or earlier in certain circumstances, to acquire all of the
shares of Class B Common Stock of the Company then held by Mr. Saban and the
former Saban Stockholders, and pursuant to the Amended and Restated Strategic
Stockholders Agreement, Mr. Saban has the right and option, commencing in
December 2000, or earlier in the event of a change in control of Fox
Broadcasting or certain limited circumstances, to cause Fox Broadcasting to
purchase all of these shares. See Item 13, "Certain Relationships and Related
Transactions."
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Not Applicable.
32
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the aggregate cash and non-cash compensation
paid or accrued by the Company to the Chief Executive Officer and the other
four most highly compensated executive officers ("Named Executive Officers")
compensated in excess of $100,000 for the fiscal year ended June 30, 1998.
Compensation decisions are currently made by the President and the Chief
Executive Officer.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------ OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
--------------------------- ---- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Haim Saban ..................... 1996 $1,000,000 $ -- (1)
Chairman of the Board and Chief 1997 1,000,000 -- (1)
Executive Officer 1998 1,000,000 -- (1)
Mel Woods....................... 1996 $ 428,000 $ 624,000 (1)
President, Chief Operating 1997 452,100 650,000 (1)
Officer and 1998 476,500 2,528,700(2) (1)
Chief Financial Officer
Shuki Levy...................... 1996 $ 500,000(3) $ -- (1)
Executive Vice President 1997 500,000 700,000 (1)
1998 500,000 -- (1)
William Josey(4)................ 1996 $ 238,700 $ 15,000 (1)
Senior Vice President, Business 1997 256,300 10,000 (1)
Affairs 1998 284,800 12,000 (1)
and General Counsel--Saban
Donna Cunningham(5) ............ 1996 $ 46,500 $ -- (1)
Executive Vice President, 1997 199,300 10,000 (1)
Business and 1998 246,200 130,000 (1)
Legal Affairs and General
Counsel
Mark Ittner..................... 1996 $ 167,300 $ 20,000 (1)
Chief Accounting Officer and 1997 198,600 10,000 (1)
Senior Vice 1998 222,900 27,500 (1)
President of Finance--Saban
</TABLE>
- --------
(1) Less than either $50,000 or 10% of total annual salary and bonus.
(2) See Item 13, "Certain Relationships and Related Transactions--Transactions
between Haim Saban, other Executive Officers and Saban."
(3) Includes amounts paid to Mr. Levy as a consultant during the fiscal year
ended June 30, 1996.
(4) Terminated employment with the Company effective May 22, 1998.
(5) Commenced employment with the Company effective March 25, 1996.
See Item 13, "Certain Relationships and Related Transactions--Transactions
between Haim Saban, other Executive Officers and Saban" for information with
respect to certain loans, forgiveness of loans and other transactions for the
benefit of certain of the Named Executive Officers.
STOCK OPTIONS
The following table summarizes information with respect to the number of
shares of Class A Common Stock underlying stock options held by each of the
Named Executive Officers at June 30, 1998, and the value of unexercised
options, assuming a value of $62.50 per share of Class A Common Stock at June
30, 1998.
33
<PAGE>
AGGREGATED FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR- IN-THE-MONEY OPTIONS
END AT FISCAL YEAR-END
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Haim Saban................. -- -- $ -- $ --
Mel Woods(1)............... 129,310 32,327 4,882,746 1,220,667
Shuki Levy(2).............. 129,310 32,327 6,482,310 1,620,553
William Josey.............. -- -- -- --
Mark Ittner................ -- -- -- --
Donna Cunningham........... -- -- -- --
</TABLE>
- --------
(1) The value of unexercised in-the-money options at fiscal year end is based
on the difference between the Company's estimate of $62.50 for the fair
market value of the Class A Common Stock and the exercise price of $24.74
for the options. See "--Employment Agreements".
(2) The value of unexercised in-the-money options at fiscal year end is based
on the difference between the Company's estimate of $62.50 for the fair
market value of the Class A Common Stock and the exercise price of $12.37
for the options.
Under the terms of the option agreements, an executive whose employment is
terminated must sell his or her stock options (together with any shares
acquired pursuant to the exercise of such options, the "Option Shares") to the
Company for an amount equal to the fair market value of such Option Shares
plus the fair market value of the shares with respect to which the executive's
option has vested but has not been exercised, less the executive's purchase
price. Such amount is to be paid to the executive 10% in cash and 90% by a
promissory note to be payable in nine equal annual installments.
In addition, in the event Haim Saban, any member of his immediate family or
any of his affiliated entities (Haim Saban and such family members, the "Saban
Entities") sells to a third party any shares of common stock of the Company
(the "Saban Company Shares"), each executive must sell the "applicable
percentage" of his or her Option Shares for the same per share consideration
paid by the third party for the Saban Company Shares. The "applicable
percentage" is equal to the percentage of the Saban Company Shares sold to the
third party out of the total shares of the Company owned by the Saban Entities
immediately prior to the sale. The Company must purchase such shares for cash
consideration equal to the applicable percentage of the per share
consideration paid by the third party for the Saban Company Shares multiplied
by the number of Option Shares with respect to which such executives' options
have vested but have not been exercised, less the purchase price.
EMPLOYMENT AGREEMENTS
Haim Saban has an employment agreement with the Company which extends
through June 30, 2002. Pursuant to the terms of the agreement, Mr. Saban is to
be paid an annual salary of $1.0 million. Mr. Saban may not be removed or
replaced with or without cause until he and the other stockholders of the
Company whose shares he controls collectively transfer more than one-third of
the number of shares of Class B Common Stock they currently beneficially own.
If Mr. Saban is terminated following such an event, he will be entitled to
receive an amount equal to his annual base salary from the date of his
termination through June 30, 2002. Under the agreement, Mr. Saban may engage
in certain activities for his own account, including music publishing,
investments and charity. The agreement generally provides that Mr. Saban will
not, during the term of his employment and for a period of five years
thereafter, compete with the Company.
34
<PAGE>
The Company has an employment agreement with Mel Woods. The term of Mr.
Woods' employment agreement with the Company extends through May 31, 1999. Mr.
Woods is to be paid an annual base salary of $475,000 and $500,000 for each of
the 1997-98 and the 1998-99 periods, respectively, and an annual contingent
bonus which is limited to $675,000 and $700,000 for each of the 1997-98 and
1998-99 periods, respectively. The Company may terminate Mr. Woods' employment
at any time with or without cause, and Mr. Woods may terminate his or her
employment upon the Company's material breach of the employment agreement. If
Mr. Woods is terminated by the Company with cause, he will be entitled to
receive (i) his annual base salary for the period in which the date of
termination falls, pro-rated to the date of such termination and (ii) vested
rights with respect to certain stock options granted in connection with the
employment agreement. Should Mr. Woods terminate his employment or should his
employment be terminated by the Company without cause, he will be entitled to
receive (i) his annual base salary for the period in which the date of
termination falls, pro-rated to the date of such termination, (ii) severance
pay for the balance of the term of the employment agreement, subject to offset
against future earnings, (iii) bonus compensation for the period in which the
date of termination falls, pro-rated to the date of such termination and (iv)
vested rights with respect to certain stock options granted in connection with
the employment agreement. On May 20, 1998, the Company amended Mr. Wood's
employment agreement and paid Mr. Woods compensation of $2,000,000 in the form
of an advance (the "Advance") against amounts to be paid to Mr. Woods upon
termination of this employment. The Advance bears no interest and is included
in Mr. Woods' taxable income as a bonus for the year ended June 30, 1998.
Further, if Mr. Woods exercises any stock options to acquire shares of the
Company's Class A Common Stock, Mr. Woods shall concurrently repay the Advance
through an increase in the purchase price in connection with the exercise.
The Company has an employment agreement with Shuki Levy. Mr. Levy's
employment agreement with the Company extends through May 31, 1999. Mr. Levy
is to be paid an annual base salary of $500,000 for each of the 1997-98 and
1998-99 periods and is eligible to receive additional benefits. The Company
may terminate Mr. Levy's employment at any time with or without cause, and Mr.
Levy may terminate his employment upon the Company's material breach of the
employment agreement. If Mr. Levy is terminated by the Company with cause, he
will be entitled to receive his annual base salary for the period in which the
date of termination falls, pro-rated to the date of such termination. Should
Mr. Levy terminate his employment or should his employment be terminated by
the Company without cause, Mr. Levy will be entitled to receive (i) his annual
base salary for the period in which the date of termination falls, pro-rated
to the date of such termination and (ii) severance pay for the balance of the
term of the employment agreement, subject to offset against Mr. Levy's future
earnings.
The Company has an employment agreement with Donna Cunningham to serve as
Executive Vice President, Business and Legal Affairs and General Counsel of
the Company. The term of the employment agreement extends through June 1,
2001. The Company has two consecutive one year options to extend the term.
Ms. Cunningham is to be paid an annual base salary of $300,000 for each of the
one year periods from June 1, 1998 through May 31, 2000 and a base salary of
$315,000 from June 1, 2000 through May 31, 2001. The employment agreement
provides that the Company may terminate Ms. Cunningham's employment for cause.
The Company has an employment agreement with Mark Ittner to serve as Senior
Vice President of Finance of Saban. The term of the employment agreement
extends through March 31, 2000. Mr. Ittner is to be paid an annual base salary
of $225,000 for the period from April 1, 1998 through March 31, 1999 and
$235,000 for the period from April 1, 1999 through March 31, 2000. The
employment agreement provides that the Company may terminate Mr. Ittner's
employment for cause.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of June 30, 1998 with
respect to the shares of Class A Common Stock and Class B Common Stock
beneficially owned by (i) each director of the Company; (ii) each person known
to the Company to be the beneficial owner of more than 5% of either class of
Common Stock; (iii) each Named Executive Officer; and (iv) all directors and
executive officers of the Company as a group. Except as may be indicated in
the footnotes to the table, each of such persons has sole voting and
investment
35
<PAGE>
power with respect to the shares owned, subject to applicable community
property laws. The address of each person listed is in care of the Company,
10960 Wilshire Boulevard, Los Angeles, California 90024.
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK(1) COMMON STOCK(1)
--------------------- ----------------------
NUMBER OF PERCENT OF NUMBER OF PERCENT OF
SHARES CLASS OWNED SHARES CLASS OWNED
--------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Haim Saban(2)(3)............... -- -- 15,840,000 100.0%
Silverlight Enterprises,
L.P.(2)(3).................... -- -- 2,759,724 17.4
Fox Broadcasting(2)(3)......... -- 15,840,000 100.0
Allen & Co. Incorporated....... 160,000 100.0% -- --
Mel Woods(5)................... 129,310 44.7 -- --
Shuki Levy(5).................. 129,310 44.7 -- --
Donna Cunningham............... -- -- -- --
Mark Ittner.................... -- -- -- --
William Josey.................. -- -- -- --
K. Rupert Murdoch(4)........... -- -- 15,840,000 100.0
Chase Carey(4)................. -- -- 15,840,000 100.0
Lawrence Jacobson.............. -- -- -- --
All of the Company's executive
officers and directors as a
group (eight persons)......... 258,620 61.8% 15,840,000 100.0%
</TABLE>
- --------
(1) Under Rule 13d-3 of the Exchange Act, certain shares may be deemed to be
beneficially owned by more than one person (if, for example, persons share
the power to vote or the power to dispose of the shares). In addition,
shares are deemed to be beneficially owned by a person if the person has
the right to acquire the shares (for example, upon exercise of an option)
within 60 days of the date as of which the information is provided. In
computing the percentage ownership of any person, the amount of shares
outstanding is deemed to include the amount of shares beneficially owned
by that person (and only that person) by reason of these acquisition
rights. As a result, the percentage of outstanding shares of any person as
shown in this table does not necessarily reflect the person's actual
ownership or voting power with respect to the number of shares of Common
Stock actually outstanding at June 30, 1998.
(2) Pursuant to Rule 13d-3 under the Exchange Act, Haim Saban and Fox
Broadcasting may be deemed to beneficially own all shares of Class B
Common Stock held by each of them, and by the other stockholders
identified in the table, as the result of an agreement (the "Voting
Agreement") pursuant to which Mr. Saban and Fox Broadcasting have the
right to direct the voting of such shares with respect to all matters
submitted to a vote of stockholders, including the election of directors
of the Company. With regard to the election of directors, Fox Broadcasting
has agreed to vote in favor of three nominees designated by Haim Saban and
Haim Saban has agreed to vote in favor of three nominees designated by Fox
Broadcasting. If either Haim Saban, together with the entities he
controls, or Fox Broadcasting owns less than 2,640,000 shares of Class B
Common Stock, then, at the option of the other, the Voting Agreement will
terminate. As part of the Voting Agreement, both Mr. Saban and Fox
Broadcasting have agreed to a standstill whereby neither of them will,
without the consent of the other, among other things, (i) purchase,
acquire, offer or agree to purchase or acquire any shares of capital stock
or other voting securities of the Company; (ii) solicit stockholders for
the approval of stockholder proposals; or (iii) otherwise act, alone or in
concert with others, to assert or encourage any other person or entity in
seeking to control the management, board of directors or policies of the
Company or to propose or effect a business combination, restructuring,
recapitalization, liquidation, dissolution or similar transaction. See "--
Election of Directors; Change in Control."
(3) Pursuant to Rule 13d-3 under the Exchange Act, Haim Saban may be deemed to
beneficially own all shares of Class B Common Stock held by Silverlight
Enterprises, L.P. as the result of the Voting Agreement pursuant to which
Mr. Saban has the right to direct the voting of these shares with respect
to all matters submitted to a vote of the stockholders, including the
election of directors of the Company.
36
<PAGE>
Under agreements between Mr. Saban, the other Saban Stockholders and Fox
Broadcasting, Fox Broadcasting has the right and option, commencing in
December 2002 or earlier in certain circumstances, to acquire all of the
shares of Class B Common Stock of the Company held by Mr. Saban and the
other Saban Stockholders and Mr. Saban has the right and option, commencing
in December 2000, or earlier in the event of a change in control of Fox
Broadcasting or certain limited circumstances, to cause Fox Broadcasting to
purchase all of such shares.
As of June 30, 1998, the total number of shares of Class B Common Stock
and the percentage of Class B Common Stock beneficially owned by Mr. Saban,
the entities which he controls, and Fox Broadcasting over which each had
sole investment power was as follows:
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE
SHARES VOTING POWER
--------- ------------
<S> <C> <C>
Haim Saban.............................. 3,737,844 23.6%
Quartz Enterprises, L.P. ............... 760,320 4.8
Merlot Investments, a California general
partnership............................ 645,381 4.1
Silverlight Enterprises, L.P. .......... 2,759,724 17.4
Celia Enterprises, L.P. ................ 16,731 0.1
Fox Broadcasting........................ 7,920,000 50.0%
</TABLE>
(4) Because of their positions with Fox Broadcasting, each of Messrs. Murdoch
and Carey may be deemed to beneficially own all of the shares of Class B
Common Stock owned or controlled by Fox Broadcasting. Each of Messrs.
Murdoch and Carey disclaims any pecuniary interest in such securities.
(5) Represents shares reserved for issuance upon exercise of stock options
exercisable within 60 days of June 30, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Reorganization
The Company was incorporated in August 1996 under Delaware law as a holding
company of FCN Holding, Saban and the LLC. Between August 1996 and August
1997, the Company conducted no business or operations. On August 1, 1997, in
connection with the Company's acquisition of a controlling interest in IFE,
(i) Fox Broadcasting Sub, a wholly owned indirect subsidiary of Fox
Broadcasting, exchanged its capital stock in FCN Holding, which indirectly
owns FCN, for 7,920,000 shares of Class B Common Stock of the Company,
(ii) the other stockholder of FCN Holding exchanged its capital stock in FCN
Holding for an aggregate of 160,000 shares of Class A Common Stock of the
Company, (iii) Haim Saban and the Saban Stockholders exchanged their capital
stock of Saban for an aggregate of 7,920,000 shares of Class B Common Stock of
the Company, and (iv) all outstanding management options to purchase Saban
capital stock became options to purchase an aggregate of 646,548 shares of
Class A Common Stock of the Company (together, the "Reorganization"). In
addition, Fox Broadcasting exchanged its preferred, non-voting interest in the
LLC and its $50 million contingent note receivable from the LLC for the Fox
Subordinated Note from the Company, which accrues interest at the rate of
10.42%. The payment of principal and interest under the Fox Subordinated Note
are subordinated in right to the obligations of the Company and its
subsidiaries under the Amended Credit Facility and the Indentures.
On August 29, 1997, in connection with the acquisition of IFE, the Company
issued the NAHI Bridge Note to NAHI upon substantially the same terms and
conditions as the Fox Subordinated Note, except that the NAHI Bridge Note had
a principal amount of $345.5 million. In connection with the Offering, $215
million of the net proceeds was used to repay a portion of the NAHI Bridge
Note. The NAHI Bridge Note was restated on May 19, 1998 to reflect a change in
the interest rate, effective as of the date of issuance. As restated, the
37
<PAGE>
NAHI Bridge Note accretes interest at a rate of approximately 10.427% per
annum. The Company may repay the NAHI Bridge Note in whole or in part, subject
to the terms of the Amended Credit Facility and the Indentures. The payment of
principal and interest under the NAHI Bridge Note will be subordinated in
right to the obligations of the Company under the Amended Credit Facility and
the Indentures.
As part of the formation of the LLC, Saban, the Saban Stockholders, Fox
Broadcasting, FCN Holding and one of its subsidiaries entered into a Strategic
Stockholders Agreement dated December 22, 1995, which provided, among other
things, for restrictions on transfer of the stock held by the parties, certain
voting rights between them, as well as the terms of the Reorganization. The
parties to the Strategic Stockholders Agreement also agreed to provide Haim
Saban and the Saban Stockholders and Fox Broadcasting certain registration
rights. On August 1, 1997, the Strategic Stockholders Agreement was amended
and restated (the "Amended and Restated Strategic Stockholders Agreement") to
add provisions regarding voting between Fox Broadcasting and the former Saban
Stockholders. See Item 10, "Directors and Executive Officers of the
Registrant--Election of Directors; Change in Control."
As part of the Amended and Restated Strategic Stockholders Agreement, Haim
Saban agreed with Fox Broadcasting Sub as follows: if the Company is unable to
meet its obligations (i) to pay any dividend under the terms of the Series A
Preferred Stock or to redeem the Series A Preferred Stock, (ii) under its
lease of 10960 Wilshire Boulevard, Los Angeles, California, or any obligation
guaranteed by News Corp., or (iii) under the Funding Agreement, and either
News Corp. or NPAL provides funds to the Company, the advance will be treated
as a loan, or if Citibank, in its sole discretion as administrative agent
under the Amended Credit Facility, determines it is unacceptable to treat the
advance as a loan, the advance will be treated as preferred stock. To the
extent the advance is treated as a loan and the amount exceeds $50 million, if
the advance is not repaid after 18 months (or 12 months for all advances after
the third anniversary of the agreement), all or any portion of the advance in
excess of $50 million may be converted into shares of Class B Common Stock. If
Fox Broadcasting Sub elects to convert any portion of the advance into Class B
Common Stock, Haim Saban will have the right to purchase from Fox Broadcasting
Sub up to 50% of the number of shares of Class B Common Stock issued pursuant
to the conversion. If instead, the advance is treated as preferred stock, the
first $50 million of the advance shall be applied to the issuance of shares of
Series B Preferred Stock, and the remainder of the advance shall be applied to
the issuance of Series C Convertible Preferred Stock, which is convertible
into Class B Common Stock at the election of the holder. Each of the Series B
and Series C Preferred Stock will have a liquidation preference equal to its
issue price of $100,000 per share. The Series B and Series C Preferred Stock
will be entitled to dividends at an annual rate of 11.7% of its liquidation
value. If Fox Broadcasting Sub elects to convert the Series C Convertible
Preferred Stock into Class B Common Stock, Haim Saban will have the right to
purchase up to 50% of the number of shares of Class B Common Stock issued
pursuant to the conversion. Notwithstanding the agreements, News Corp. has no
obligation to make any advances, and the Company has no obligation to accept
any amounts from News Corp.
In connection with the formation of the LLC and pursuant to a Stock
Ownership Agreement dated December 22, 1995, the LLC was granted an option to
purchase, upon the occurrence of certain events, all of the Class B Common
Stock held by the Saban Stockholders, and any of their transferees. The LLC
paid to the Saban Stockholders an aggregate of $80.1 million for the grant of
the option. In September 1996 the LLC distributed the Stock Ownership
Agreement to FCN Holding, which immediately transferred the agreement to Fox
Broadcasting Sub, a wholly owned subsidiary of Fox Broadcasting. Accordingly,
the option may be exercised by Fox Broadcasting Sub as follows: (i) for a
period of one year following the death of Haim Saban, if he dies prior to
December 22, 2012; (ii) on December 22, 2000, upon receipt by Fox Broadcasting
of written notice from Haim Saban of his desire to cause Fox Broadcasting to
purchase all of the shares of Class B Common Stock held by the Saban
Stockholders; or (iii) upon delivery of written notice by Fox Broadcasting at
any time on or after December 22, 2002, or before December 22, 2012.
The purchase price formula under the option is based on the fair market value
of the Company. In addition, Haim Saban has the right and option, commencing
in December 2002, or earlier in the event of a change in control of Fox
Broadcasting or certain other limited circumstances, to cause Fox Broadcasting
to purchase all of the Class B Common Stock held by the Saban Stockholders.
38
<PAGE>
In connection with the acquisition of IFE, the Company issued to Liberty
IFE, Inc. $345 million of Series A Preferred Stock which receives cash
dividends of 9% per annum, in arrears, paid quarterly. Any accrued and unpaid
dividends are added to the liquidation price and until such accrued and unpaid
dividends are paid in full, the dividend rate increases to 11.5%. The Series A
Preferred Stock will be redeemed by the Company in 2027 at a price equal to
the liquidation price as of the date of redemption, payable in cash. Holders
of the Series A Preferred Stock can require the Company to redeem the Series A
Preferred Stock in years 2017 and 2022 and the Company has an option to
repurchase the Series A Preferred Stock at any time following August 1, 2007.
Pursuant to a Funding Agreement among News Corp., News Publishing Australia
Limited ("NPAL") and the Company (the "Funding Agreement"), each of News Corp.
and NPAL, jointly and severally, agreed to provide the Company with the funds
necessary to redeem in full or pay the liquidation distribution on all other
amounts owing in respect of the Series A Preferred Stock in the event of an
event of default under the provisions governing the Series A Preferred Stock
contained in the Company's Certificate of Incorporation or a liquidation,
dissolution or similar event of the Company. In addition, pursuant to an
Exchange Agreement among NPAL, Liberty Media Corporation and Liberty IFE,
Inc., each holder of the Series A Preferred Stock has the right, in the event
of an event of default under the provisions governing the Series A Preferred
Stock contained in the Company's Certificate of Incorporation or a
liquidation, dissolution or similar event of the Company, to exchange its
shares for an equivalent number of shares of preferred stock of NPAL.
Certain Transactions Between the Company and the Fox Parties
The Company, on the one hand, and News Corp. and the Fox Parties, on the
other hand, are engaged in a broad range of transactions in the ordinary
course of business, including agreements with Fox Video to produce and/or
distribute live action feature films and other family and children's
programming for the home video market, both domestic and international;
agreements with Twentieth Century Fox Film Corporation for the licensing of
certain library programming; agreements with Fox Broadcasting for barter
advertising sales; and agreements with certain of the Fox Parties with respect
to owning and operating the Company's international channels. Although the
terms of these agreements were determined by negotiation and not by third
parties or by competitive bid, the Company believes that the terms and
conditions of these transactions are comparable to that which could have been
obtained in transactions with unaffiliated parties. For a description of these
transactions, see Note 11 of the Notes to Fox Family Worldwide, Inc. Financial
Statements.
The Company, on the one hand, and Tele-Communications, Inc. ("TCI") and its
subsidiaries and affiliates, on the other hand, are engaged in a broad range
of transactions in the ordinary course of business, including agreements with
Encore Media for the sale of air time and agreements with TCI, Liberty
Communications, Inc. and Netlink International for subscriber fees. Although
the terms of these agreements were determined by negotiation and not by third
parties or by competitive bid, the Company believes that the terms and
conditions of these transactions are comparable to that which could have been
obtained in transactions with unaffiliated parties. For a description of these
transactions, see Note 11 of the Notes to Fox Family Worldwide, Inc. Financial
Statements.
Transactions between Haim Saban, other Executive Officers and Saban
From time to time, the Company has loaned and advanced funds and entered
into certain agreements with its executive officers and directors. For a
description of these loans, advances and agreements, see Note 11 of the Notes
to Fox Family Worldwide, Inc. Financial Statements.
39
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form
10-K for the fiscal year ended June 30, 1998.
1. Financial Statements:
Financial Statements are listed in the "Index to Financial Statements
and Schedules" at page F-1.
2. Schedules:
Financial Statements schedules are listed in the "Index to Financial
Statements and Schedules" at page F-1 herein.
3. Exhibits: (numbered in accordance with Item 601 of Regulation S-K)
(a) The Exhibits listed below are filed or incorporated by reference
as part of this Report.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
**2.1 Agreement and Plan of Merger dated as of June 11, 1997 by and among
Fox Kids Worldwide, Inc., Fox Kids Merger Corporation and
International Family Entertainment, Inc.
**2.2 Amended and Restated Agreement dated as of August 1, 1997 by and among
Fox Kids Worldwide, Inc., Saban Entertainment, Inc., Fox Broadcasting
Sub, Inc., Allen & Company Incorporated, Haim Saban and certain
entities listed on Schedule A thereto.
**3.1 Corrected Restated Certificate of Incorporation of the Registrant, as
amended.
**3.2 Amended and Restated Bylaws of the Registrant.
**4.1 Senior Notes Indenture dated as of October 28, 1997 between Fox Kids
Worldwide, Inc., as obligor, and The Bank of New York, as trustee,
and form of Notes.
**4.2 Senior Discount Notes Indenture dated as of October 28, 1997 between
Fox Kids Worldwide, Inc., as obligor, and The Bank of New York, as
trustee, and form of Notes.
**10.1 Amended and Restated Strategic Stockholders Agreement dated as of
August 1, 1997 by and among Haim Saban, certain entities listed on
Schedule A thereto, Fox Broadcasting Company, Fox Broadcasting Sub,
Inc., and Allen & Company Incorporated.
**10.2 Form of Indemnification Agreement and Schedule of Indemnified Parties.
**10.3 Employment Agreement dated as of April 1, 1997 between Saban
Entertainment, Inc. and William Josey.
*10.4 Employment Agreement dated as of December 22, 1995 between Fox Kids
Worldwide, L.L.C. and Haim Saban.
**10.5 Employment Agreement dated as of September 1, 1996 between Fox Kids
Worldwide, Inc. and Shuki Levy; Stock Option Agreement dated as of
June 1, 1994 between Saban Entertainment, Inc. and Shuki Levy, as
amended by Amendment No. 1.
**10.6 Employment Agreement dated as of June 1, 1994 between Saban
Entertainment, Inc. and Mel Woods, as amended by Amendment No. 1 to
Employment Agreement dated as of September 26, 1996.
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.7 Amendment No. 2 to Employment Agreement between Saban Entertainment,
Inc. and Mel Woods dated as of May 20, 1998.
10.8 Employment Agreement dated as of September 15, 1997 between Fox Kids
Worldwide, Inc. and Donna Cunningham, as amended by Amendment to
Employment Agreement dated May 18, 1998.
10.9 Employment Agreement dated as of April 1, 1997 between Saban
Entertainment, Inc. and Mark Ittner.
**10.10 Operating Agreement for Fox Kids Worldwide, L.L.C. dated as of
December 22, 1995 by and among Saban Entertainment, Inc., FCN
Holding, Inc. and Fox Broadcasting Company.
*10.11 Amendment No. 1 to Operating Agreement dated as of September 26,
1996, by and among Saban Entertainment, Inc., FCN Holding, Inc. and
Fox Broadcasting Company.
**10.12 Amendment No. 2 to Operating Agreement dated as of July 31, 1997 by
and among Saban Entertainment, Inc., FCN Holding, Inc., Fox
Broadcasting Company and Fox Kids Worldwide, Inc.
**10.13 Agreement Re Transfer of LLC Interests dated as of July 31, 1997 by
and among Fox Kids Worldwide, Inc., Fox Kids Worldwide, L.L.C. and
Fox Broadcasting Company.
*10.14 Management Agreement dated as of December 22, 1995 by and among Fox
Kids Worldwide, L.L.C., Saban Entertainment, Inc. and FCNH Sub,
Inc.
**10.15 Stock Ownership Agreement dated as of December 22, 1995 by and among
Haim Saban, certain entities listed on Schedule 1.1(a) thereto and
Fox Kids Worldwide, L.L.C.
**10.16 Amendment No. 1 to Stock Ownership Agreement dated as of September
26, 1996 by and among Haim Saban, certain entities listed on
Schedule "A" thereto, Fox Broadcasting Sub, Inc., and Fox
Broadcasting Company.
***10.17 Home Video Rights Acquisition Agreement dated as of August 8, 1996
among Saban Entertainment, Inc., Ventura Film Distributors, B.V.
and Twentieth Century Fox Home Entertainment.+
**10.18 Form of Fox Broadcasting Company Station Affiliate Agreement.
**10.19 Registration Agreement (the "Saban/Fox Registration Agreement")
dated as of December 22, 1995 among Saban Entertainment, Inc., Haim
Saban, certain entities listed on Schedule A thereto, Fox
Broadcasting Company, Inc., and FCN Holding, Inc.
**10.20 Amendment No. 1 to Saban/Fox Registration Agreement dated as of
September 27, 1996.
**10.21 Guarantee dated as of December 22, 1995 by The News Corporation
Limited.
**10.22 10960 Wilshire Boulevard Office Lease dated as of July 17, 1995
between 10960 Property Corporation and Saban Entertainment, Inc.
**10.23 First Amendment to 10960 Wilshire Boulevard Lease dated as of August
1, 1997.
**10.24 Guaranty of Lease by The News Corporation Limited and News
Publishing Australia Limited in favor of Beacon Properties, L.P.,
dated as of August 1, 1997.
**10.25 Production Facility Agreements dated as of June 7, 1994 and January
5, 1994 between Magic Movie Studios of Valencia, Ltd. and Saban
Entertainment, Inc.
****10.26 Second Amended and Restated Credit Agreement dated as of October 28,
1997 among FCN Holding, Inc., International Family Entertainment,
Inc. and Saban Entertainment, Inc., as Borrowers, and Fox Kids
Holdings, LLC, as Guarantor, and the initial lenders named therein,
as Initial Lenders, and Citicorp U.S.A., Inc., as Administrative
Agent, and Citicorp Securities, Inc. and Bank Boston, N.A., as Co-
Arrangers.
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
***10.27 Letter Amendment No. 1 to the Second Amended and Restated Credit
Agreement dated as of November 18, 1997.
*****10.28 Letter Amendment No. 2 to the Second Amended and Restated Credit
Agreement dated as of April 16, 1998.
10.29 Letter Amendment and Waiver No. 3 to the Loan Documents dated as of
June 29, 1998.
10.30 Amended and Restated Subordinated Note Agreement dated as of May
19, 1998 by and among Fox Broadcasting Company, as lender, Fox
Family Worldwide, Inc., f/k/a Fox Kids Worldwide, Inc., as
borrower, and Citicorp USA, Inc., as the Senior Representative for
the Senior Creditors.
10.31 Amended and Restated Subordinated Note Agreement dated as of May
19, 1998 by and among Fox Family Worldwide, Inc. f/k/a Fox Kids
Worldwide, Inc., as borrower, News America Incorporated f/k/a News
American Holdings Incorporated, as lender, and Citicorp USA, Inc.,
as the Senior Representative for the Senior Creditors.
**10.32 Funding Agreement dated as of June 11, 1997 by and among The News
Corporation Limited, News Publishing Australia Limited and Fox
Kids Worldwide, Inc.
**10.33 Guaranty dated as of June 11, 1997 by The News Corporation Limited
in favor of International Family Entertainment, Inc.
**10.34 Distribution Agreement dated as of August 21, 1992, as amended,
between Saban International N.V. and Saban International Services,
Inc. on the one hand and Toei Company Ltd.+
**10.35 Memorandum of Agreement dated as of January 19, 1996 between Saban
Merchandising, Inc. and Ventura Film Distributors, B.V. on the one
hand and Bandai America Incorporated, on the other hand.+
**10.36 Letter Agreement dated as of January 1, 1995 between Saban
International, N.V. and Duveen Trading Ltd.
**10.37 Barter Syndication Agreement dated as of January 5, 1996 between
Saban Entertainment, Inc. and Fox Broadcasting Company, Inc.
**10.38 Agreement Re Registration Rights dated as of August 1, 1997 by and
among Saban Entertainment, Inc., Haim Saban, certain entities
listed on Schedule A to the Saban/Fox Registration Agreement, Fox
Broadcasting Company, FCN Holding, Inc., Fox Kids Worldwide, Inc.,
Liberty Media Corporation and Liberty IFE, Inc.
***10.39 Amendment to Affiliation Agreement dated June 11, 1997, between
International Family Entertainment, Inc. and Satellite Services,
Inc. (Filed as Exhibit 99.4.1 to International Family
Entertainment's Report on Form 8-K, dated June 11, 1997, and
incorporated herein by reference).+
****10.40 Letter of Amendment dated as of May 16, 1996, amending the
International Family Entertainment, Inc. Family Channel
Affiliation Agreement dated as of December 28, 1989, between
Satellite Services, Inc. and International Family Entertainment,
Inc. (Filed as Exhibit 10.28 to International Family
Entertainment's Annual Report on Form 10-K/A for the year ended
December 31, 1996, and incorporated herein by reference).+
***10.41 Program Time Agreement dated as of January 5, 1990, between The
Christian Broadcasting Network, Inc. and International Family
Entertainment, Inc. and Amendment No. 1 to Program Time Agreement
dated as of June 11, 1997.
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
***10.42 International Family Entertainment, Inc. Family Channel Affiliation
Agreement, dated as of December 28, 1989, between Satellite
Services, Inc. and International Family Entertainment, Inc. (Filed
as Exhibit 10.8 to International Family Entertainment's
Registration Statement on Form S-1 (No. 33-45967), and incorporated
herein by reference).+
***10.43 Amendment, dated as of January 1, 1994, amending the International
Family Entertainment, Inc. Family Channel Affiliation Agreement,
dated as of December 28, 1989, between Satellite Services, Inc. and
International Family Entertainment Inc.
**10.44 Registration Rights Agreement dated August 1, 1997 by and among Fox
Kids Worldwide, Inc., Liberty Media Corporation and Liberty IFE,
Inc.
***10.45 Galaxy V Transponder Purchase Agreement, dated as of January 23,
1992, between Hughes Communications Galaxy, Inc. and International
Family Entertainment, Inc. (Filed as Exhibit 10.8 to International
Family Entertainment's Annual Report on Form 10-K for the year
ended December 31, 1994, and incorporated herein by reference).+
***10.46 GE C-3/C-4 Satellite Transponder Sales Agreement dated as of July 7,
1989 between GE American Communications and The Christian
Broadcasting Network Inc. (Filed as an exhibit to International
Family Entertainment's Registration Statement on Form S-1 (No. 33-
45967), and incorporated herein by reference).+
***10.47 C-3/C-4 Satellite Transponder Sales Agreement Amendment Number One
dated as of December 15, 1989, between GE American Communications,
Inc. and The Christian Broadcasting Network, Inc.
****10.48 C3/C4 Satellite Transponder Sales Agreement Amendment Number Two
dated as of December 15, 1989, between GE American Communications,
Inc. and The Christian Broadcasting Network, Inc.
***10.49 Letter of Amendment dated September 30, 1991, re: C-3/C-4 Satellite
Transponder Sales Agreement by and between GE American
Communications, Inc. and The Christian Broadcasting Network, Inc.
as predecessor in interest to International Family Entertainment,
Inc.
***10.50 C3/C4 Satellite Transponder Sales Agreement Amendment Number Four
dated as of November 24, 1992 by and between GE American
Communications, Inc. and International Family Entertainment, Inc.
License Agreement dated as of June 26, 1998 among Twentieth Century
Fox Film Corporation and MTM Holding Company, Inc., MTM
Enterprises, Inc. and certain of their respective subsidiaries.
12.1 Ratio of Earnings (Deficiency) to Fixed Charges.
**21.1 Subsidiaries of the Registrant.
27.1 Financial Data Schedule.
</TABLE>
- --------
* Previously filed as an exhibit to the Registrant's Form S-1 on September
27, 1996
** Previously filed as an exhibit to the Registrant's Amendment No. 1 to
Form S-1 on January 26, 1998.
*** Previously filed as an exhibit to the Registrant's Amendment No. 2 to
Form S-1 on February 20, 1998.
**** Previously filed as an exhibit to the Registrant's Amendment No. 4 to
Form S-4 on March 25, 1998.
***** Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998.
+ Portions of exhibits deleted and granted confidential treatment by the
Securities and Exchange Commission pursuant to a request for
confidentiality.
43
<PAGE>
(b) Reports on Form 8-K:
The following Current Reports on Form 8-K were filed by the Company during
the quarter ended June 30, 1998:
(i) Current Report on Form 8-K filed May 8, 1998. Item 5 was reported.
(ii) Current Report on Form 8-K filed May 27, 1998. Item 4 was reported.
44
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunder duly authorized.
FOX FAMILY WORLDWIDE, INC.
By: /s/ Mel Woods
Dated: September 25, 1998 __________________________________
Mel Woods
President, Chief Operating
Officer
and Chief Financial Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates stated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ Haim Saban Chairman of the Board and September 25, 1998
____________________________________ Chief Executive Officer
Haim Saban (Principal
Executive Officer)
/s/ Mel Woods President, Chief Operating September 25, 1998
____________________________________ Officer, Chief Financial
Mel Woods Officer and Director
(Principal Financial
Officer)
/s/ Mark Ittner Chief Accounting Officer September 25, 1998
____________________________________ (Principal Accounting
Mark Ittner Officer)
/s/ Shuki Levy Director September 25, 1998
____________________________________
Shuki Levy
/s/ Chase Carey Director September 25, 1998
____________________________________
Chase Carey
/s/ Lawrence Jacobson Director September 25, 1998
____________________________________
Lawrence Jacobson
</TABLE>
45
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<S> <C>
FOX FAMILY WORLDWIDE, INC.
Report of Independent Public Accountants................................ F-2
Report of Independent Auditors.......................................... F-3
Balance Sheets as of June 30, 1997 and 1998............................. F-4
Statements of Operations for the eight months ended June 30, 1996, and
for the years ended June 30, 1997 and June 30, 1998.................... F-5
Statements of Stockholders' Equity for the eight months ended June 30,
1996, and for the years ended June 30, 1997 and June 30, 1998.......... F-6
Statements of Cash Flows for the eight months ended June 30, 1996 and
for the years ended June 30, 1997 and June 30, 1998.................... F-7
Notes to Financial Statements........................................... F-9
FCN HOLDING, INC.
Report of Independent Auditors.......................................... F-32
Consolidated Balance Sheets as of July 2, 1995 and October 31, 1995..... F-33
Consolidated Statements of Operations for the periods ended July 2, 1995
and October 31, 1995................................................... F-34
Consolidated Statements of Stockholder's Equity for the periods ended
July 2, 1995 and October 31, 1995...................................... F-35
Consolidated Statements of Cash Flows for the periods ended July 2, 1995
and October 31, 1995................................................... F-36
Notes to Consolidated Financial Statements.............................. F-37
SABAN ENTERTAINMENT, INC.
Report of Independent Auditors.......................................... F-42
Consolidated Balance Sheets as of May 31, 1995 and October 31, 1995..... F-43
Consolidated Statements of Operations for the year ended May 31, 1995
and for the five months ended October 31, 1995......................... F-44
Consolidated Statements of Stockholders' Equity for the year ended May
31, 1995 and for the five months ended October 31, 1995................ F-45
Consolidated Statements of Cash Flows for the year ended May 31, 1995
and for the five months ended October 31, 1995......................... F-46
Notes to Consolidated Financial Statements.............................. F-47
FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants................................ F-57
SCHEDULE I: CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT............. F-58
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS AND RESERVES............... F-62
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Fox Family Worldwide, Inc.:
We have audited the accompanying consolidated balance sheet of Fox Family
Worldwide, Inc. (the "Company" - formerly known as Fox Kids Worldwide, Inc.)
and its subsidiaries as of June 30, 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Company and its subsidiaries as of June 30, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Los Angeles, California
September 15, 1998
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
FCN Holding, Inc., Saban Entertainment, Inc. and Fox Kids Worldwide, L.L.C.
We have audited the combined financial statements of FCN Holding, Inc.,
Saban Entertainment, Inc. and Fox Kids Worldwide, L.L.C. (from and after the
date of the Reorganization (Note 1), Fox Kids Worldwide, Inc.) as of June 30,
1997 and the related combined statements of operations, stockholders' equity,
and cash flows for the eight months ended June 30, 1996 and the year ended
June 30, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of FCN Holding,
Inc., Saban Entertainment, Inc. and Fox Kids Worldwide, L.L.C. (from and after
the date of the Reorganization (Note 1), Fox Kids Worldwide, Inc.) at June 30,
1997 and the combined results of their operations and their cash flows for the
eight months ended June 30, 1996 and the year ended June 30, 1997, in
conformity with generally accepted accounting principles.
Ernst & Young, LLP
September 29, 1997
F-3
<PAGE>
FOX FAMILY WORLDWIDE, INC.
(FORMERLY FOX KIDS WORLDWIDE, INC.)
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 30, 1998
(COMBINED) (CONSOLIDATED)
--------------- ----------------
IN THOUSANDS, EXCEPT SHARE DATA
<S> <C> <C>
ASSETS:
Cash and cash
equivalents............. $ 28,877 $ 82,313
Restricted cash.......... 8,000 8,000
Accounts receivable, net
of allowance for
doubtful accounts of
$1,410 and $1,594 at
June 30, 1997 and 1998,
respectively............ 63,316 132,053
Amounts receivable from
related parties......... 29,037 58,043
Programming costs, net... 235,575 453,608
Property and equipment,
net..................... 8,921 60,805
Deferred income taxes.... 17,651 39,779
Intangible assets, net... -- 1,594,286
Other assets, net........ 21,024 87,137
-------------- ----------------
Total assets............ $ 412,401 $ 2,516,024
============== ================
LIABILITIES AND STOCK-
HOLDERS' EQUITY:
Accounts payable......... $ 19,481 $ 37,668
Accrued liabilities...... 52,787 194,353
Deferred revenue......... 40,794 74,518
Accrued residuals and
participations.......... 45,881 52,601
Income taxes payable..... 3,257 10,326
Deferred income taxes.... 1,250 21,698
Bank and other debt...... 57,592 1,746,510
Amounts payable to
related parties......... 58,672 2,954
-------------- ----------------
Total liabilities....... 279,714 2,140,628
-------------- ----------------
COMMITMENTS AND
CONTINGENCIES
Series A Mandatorily
Redeemable Preferred
Stock, $0.001 par value;
500,000 shares
authorized; 345,000
shares issued and
outstanding ($1,000 per
share liquidation
value).................. -- 345,000
-------------- ----------------
STOCKHOLDERS' EQUITY:
Preferred Stock, $0.001
par value; 19,500,000
shares authorized; no
shares issued or
outstanding............ -- --
Preferred Class A
Members' Interest...... 50,000 --
Common Stock, no par
value, 1,000 shares
authorized, 816.16
shares issued and
outstanding (June 30,
1997) (FCN Holding).... 1 --
Common Stock, $.01 par
value, 10,000 shares
authorized; 800 shares
issued and outstanding
(June 30, 1997) (Saban
Entertainment, Inc.)... -- --
Class A Common Stock,
$0.001 par value;
16,000,000 shares
authorized, .02 and
160,000 shares issued
and outstanding at June
30, 1997 and 1998,
respectively........... -- --
Class B Common Stock,
$0.001 par value;
16,000,000 shares
authorized, 2 and
15,840,000 shares
issued and outstanding
at June 30, 1997 and
1998, respectively..... -- 16
Contributed capital..... 59,454 60,731
Cumulative translation
adjustment............. (803) (1,201)
Retained earnings
(deficit).............. 24,035 (29,150)
-------------- ----------------
Total stockholders'
equity................. 132,687 30,396
-------------- ----------------
Total liabilities and
stockholders' equity... $ 412,401 $ 2,516,024
============== ================
</TABLE>
See accompanying notes.
F-4
<PAGE>
FOX FAMILY WORLDWIDE, INC.
(FORMERLY FOX KIDS WORLDWIDE, INC.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
EIGHT
MONTHS ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1998
(COMBINED) (COMBINED) (CONSOLIDATED)
------------- ------------- --------------
IN THOUSANDS
<S> <C> <C> <C>
Revenues............................ $191,621 $307,820 $664,458
Costs and expenses:
Production and programming........ 98,937 180,381 361,215
Selling, general and
administrative................... 23,072 62,466 146,213
Fox Kids Network affiliate
participations................... 8,853 6,194 --
Amortization of intangibles....... -- -- 37,557
-------- -------- --------
Operating income.................... 60,759 58,779 119,473
Investment advisory fee............. 10,000 -- --
Equity in loss of unconsolidated
affiliate.......................... -- 1,546 6,790
Other expense, net.................. -- -- 8
Interest expense.................... 885 2,226 134,002
-------- -------- --------
Income (loss) before provision for
income taxes....................... 49,874 55,007 (21,327)
Provision for income taxes.......... 18,274 14,567 3,446
-------- -------- --------
Net income (loss)................... $ 31,600 $ 40,440 $(24,773)
======== ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
FOX FAMILY WORLDWIDE, INC.
(FORMERLY FOX KIDS WORLDWIDE, INC.)
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED CLASS A
MEMBERS INTEREST COMMON STOCK CUMULATIVE RETAINED
-------------------- -------------- CONTRIBUTED TRANSLATION EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT (DEFICIT) TOTAL
-------- ----------- ------ ------ ----------- ----------- --------- --------
IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at November 1,
1995 (combined)........ -- $ -- 2 $ 2 $ -- $ -- $ (4,132) $ (4,130)
Transactions at
November 1, 1995:
Capital contributions.. -- -- -- -- 29,344 -- -- 29,344
Forgiveness of debt.... -- -- -- -- 5,124 -- -- 5,124
Distribution........... -- -- -- -- -- -- (2,700) (2,700)
Saban Entertainment,
Inc................... -- -- 1 -- 11,751 46 83,174 94,971
Elimination of certain
amounts between FCN
Holding, Inc. and
Saban Entertainment,
Inc................... -- -- -- -- -- -- (4,247) (4,247)
Payment to a related
party for a stock
purchase option........ -- -- -- -- -- -- (80,100) (80,100)
Related party tax
obligation............. -- -- -- -- 3,026 -- -- 3,026
Exchange loss on
translation of foreign
subsidiaries' financial
statements............. -- -- -- -- -- (57) -- (57)
Net income.............. -- -- -- -- -- -- 31,600 31,600
Amount attributable to
Preferred Class A
Members Interest....... -- 40,000 -- -- -- -- (40,000) --
------ ----------- ------ ---- ------- ------- -------- --------
Balance at June 30, 1996
(combined)............. -- 40,000 3 2 49,245 (11) (16,405) 72,831
Issuance of Preferred
Class A Members
Interest.............. -- 10,000 -- -- -- -- -- 10,000
Capital contribution... -- -- (1) (1) 1 -- -- --
Capital contributions.. -- -- -- -- 5,376 -- -- 5,376
Exchange loss on
translation of foreign
subsidiaries'
financial statements.. -- -- -- -- -- (792) -- (792)
Related party tax
obligation............ -- -- -- -- 4,832 -- -- 4,832
Net income............. -- -- -- -- -- -- 40,440 40,440
------ ----------- ------ ---- ------- ------- -------- --------
Balance at June 30, 1997
(combined)............. -- 50,000 2 1 59,454 (803) 24,035 132,687
Transactions related to
reorganization:
Exchange of Preferred
Class A Members
Interest.............. -- (50,000) -- -- -- -- -- (50,000)
Issuance of Class A
Common Stock.......... -- -- 160 -- -- -- -- --
Issuance of Class B
Common Stock.......... -- -- 15,840 16 (5) -- -- 11
Exchange of Common
Stock................. -- -- (2) (1) -- -- (1)
Capital contributions.. -- -- -- -- 1,282 -- -- 1,282
Exchange loss on
translation of foreign
subsidiaries financial
statements............ -- -- -- -- -- (398) -- (398)
Dividends on Series A
Mandatorily Redeemable
Preferred Stock....... -- -- -- -- -- -- (28,412) (28,412)
Net loss............... -- -- -- -- -- -- (24,773) (24,773)
------ ----------- ------ ---- ------- ------- -------- --------
Balance June 30, 1998
(consolidated)......... -- $ -- 16,000 $ 16 $60,731 $(1,201) $(29,150) $ 30,396
====== =========== ====== ==== ======= ======= ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
FOX FAMILY WORLDWIDE, INC.
(FORMERLY FOX KIDS WORLDWIDE, INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
EIGHT MONTHS
ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1998
(COMBINED) (COMBINED) (CONSOLIDATED)
------------- ------------- --------------
IN THOUSANDS
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................... $ 31,600 $ 40,440 $ (24,773)
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Amortization of programming costs.. 83,485 144,713 291,878
Depreciation and amortization...... 1,585 3,226 11,829
Amortization of intangible assets.. -- -- 37,557
Cumulative translation adjustment.. (57) (792) (398)
Equity in loss of unconsolidated
affiliate......................... -- 1,546 6,790
Investment advisory fee............ 10,000 -- --
Non-cash interest expense.......... -- -- 50,410
Changes in operating assets and
liabilities:
Accounts receivable................ 16,035 (10,210) 61,957
Amounts receivable from related
parties........................... (11,791) 3,860 (29,836)
Other assets....................... 2,194 (872) (56,153)
Accounts payable and accrued
liabilities....................... (18,595) 17,882 (47,876)
Accrued residuals and
participations.................... 1,089 10,103 (11,442)
Income taxes payable and deferred
income taxes...................... (9,583) 14,038 15,046
Deferred revenue................... 23,437 (27,088) 13,309
--------- --------- -----------
Net cash provided by operating
activities......................... 129,399 196,846 318,298
INVESTING ACTIVITIES
Purchase of property and equipment.. (3,053) (3,435) (10,515)
Proceeds from sale of property and
equipment and assets held for sale,
net................................ -- -- 3,376
Additions to production and
programming costs.................. (120,706) (203,837) (328,551)
Acquisition of International Family
Entertainment, Inc................. -- -- (1,370,076)
Cash acquired in acquisitions....... 19,358 -- 19,296
Sale of marketable securities....... -- -- 61,396
Other............................... (4,722) (8,648) (4,390)
--------- --------- -----------
Net cash used in investing
activities......................... (109,123) (215,920) (1,629,464)
FINANCING ACTIVITIES
Proceeds from bank borrowings....... 15,880 52,569 1,282,063
Payments on bank borrowings......... (11,606) (9,917) (837,924)
Payment to a related party for a
stock purchase option.............. (80,100) -- --
Dividends on Preferred Stock........ -- -- (28,412)
Proceeds from issuance of Preferred
Class A Members interest........... -- 10,000 --
Proceeds from NAHI Bridge loan...... -- -- 345,514
Paydown on NAHI Bridge loan......... -- -- (250,886)
Issuance of Senior Notes............ -- -- 475,000
Issuance of Senior Discount Notes... -- -- 375,001
Issuance of Common Stock............ -- -- 10
Advances from (to) related parties.. 67,967 (20,285) 4,236
Capital contributions from
(distribution to) related parties.. 3,310 (460) --
--------- --------- -----------
Net cash provided by (used in)
financing activities............... (4,549) 31,907 1,364,602
--------- --------- -----------
Increase in cash and cash
equivalents........................ 15,727 12,833 53,436
Cash and cash equivalents at
beginning of period................ 317 16,044 28,877
--------- --------- -----------
$ 16,044 $ 28,877 $ 82,313
========= ========= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for:
Interest (net of amounts
capitalized)...................... $ 414 $ 1,466 $ 65,860
========= ========= ===========
Income taxes....................... $ 27,796 $ 3,553 $ 2,202
========= ========= ===========
</TABLE>
See accompanying notes.
F-7
<PAGE>
FOX FAMILY WORLDWIDE, INC.
(FORMERLY FOX KIDS WORLDWIDE, INC.)
STATEMENTS OF CASH FLOWS--(CONTINUED)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTMENT ACTIVITIES
Eight months ended June 30, 1996
Amounts payable to a related party of $5,124,000 were forgiven and recorded
as contributed capital.
The Company accrued $10,000,000 in other assets and amounts payable to
related parties in connection with the formation of the L.L.C.
A receivable from a related party of $2,700,000 was forgiven and charged to
retained earnings.
The Company recorded $3,026,000 arising under a tax sharing obligation which
was deemed to be contributed capital by the related party.
Year ended June 30, 1997
Amounts payable to a related party of $5,835,000 were forgiven and recorded
as contributed capital.
The Company recorded $4,832,000 arising under a tax sharing obligation which
was deemed to be contributed capital by the related party.
Year ended June 30, 1998
Amounts payable to a related party of $1,282,000 were forgiven and recorded
to contributed capital.
The Company issued a subordinated note to Fox Broadcasting ("Fox") in the
amount of $108,672,000 in exchange for Fox's $50,000,000 Preferred Class A
Members Interest in the LLC, its $50,000,000 contingent note receivable and
certain other Company obligations.
Preferred Stock in the amount of $345,000,000 was issued in connection with
the acquisition of International Family Entertainment, Inc.
Certain assets held for sale were sold by the Company. In connection with
the sale, the Company agreed to assume a $10,000,000 bank loan, the Company's
$6,720,000 note payable to an outside party was forgiven and marketable
securities of $1,737,000 were transferred to the Company.
See accompanying notes.
F-8
<PAGE>
FOX FAMILY WORLDWIDE, INC.
(FORMERLY FOX KIDS WORLDWIDE, INC.)
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF FINANCIAL STATEMENT PRESENTATION AND ORGANIZATION
On November 1, 1995 (the "Effective Date"), FCN Holding, Inc. ("FCN
Holding") and Saban Entertainment, Inc. ("Saban") formed a joint venture, Fox
Kids Worldwide, L.L.C. (the "LLC"), a limited liability company, for the
purpose of jointly expanding the worldwide children's businesses of FCN
Holding and Saban. On August 1, 1997, a reorganization referred to below was
effected pursuant to which Saban, FCN Holding and the LLC became wholly-owned
subsidiaries of Fox Family Worldwide, Inc. (formerly Fox Kids Worldwide, Inc.)
("Fox Family Worldwide" or the "Company"). As a result of the formation of the
joint venture and the common management of the joint venture businesses, the
respective assets, liabilities and operations of Saban, FCN Holding and the
LLC have been combined at historical cost from and after the Effective Date.
The combined financial statements of the Company (as the deemed successor to
Saban, FCN Holding and the LLC) included herein represent the historical
financial statements of FCN Holdings (after giving effect to such combination
as of the Effective Date).
The Company is an integrated global children's and family entertainment
company, which develops, acquires, produces, broadcasts and distributes
quality television programming. The Company's principal operations comprise
(i) International Family Entertainment, Inc. ("IFE"), which operates the Fox
Family Channel, (ii) Saban, whose library of approximately 5,600 half-hours of
completed and in-production children's programming is among the largest in the
world, (iii) the Fox Kids Network ("Fox Kids"), one of the leading U.S.
children's broadcast television network, and (iv) a growing business of Fox
Kids'-branded cable and DTH satellite channels operating in approximately 28
countries worldwide. Through these operating units, the Company has the
ability to manage properties and brands from their creation through
production, distribution and merchandizing of related consumer products. As
the distributor of Fox Kids programming on FOX and owner and operator of the
Fox Family Channel, the Company controls the distribution of programming on
both a major broadcast network and a widely distributed cable network.
Television production, distribution and broadcast are speculative and
inherently risky. There can be no assurance of the economic success of
television programming since the revenues derived from the production,
distribution and broadcast (which do not necessarily bear a direct correlation
to the production or distribution costs incurred) depend primarily upon its
acceptance by the public, which cannot be predicted. The commercial success of
programming also depends upon the quality and acceptance of other competing
programming released into the marketplace at or near the same time, the
availability of alternative forms of entertainment and leisure time
activities, general economic conditions and other tangible and intangible
factors, all of which can change and cannot be predicted with certainty. The
success of the Company's television programming also may be impacted by
prevailing advertising rates, which are subject to fluctuation. Therefore,
there is a risk that not all of the Company's television projects will be
commercially successful, resulting in costs not being recouped or anticipated
profits not being realized.
The financial statements of the Company as of June 30, 1996 and 1997
together with the results of operations for the eight month period ended June
30, 1996 and for the year ended June 30, 1997, reflect the combined financial
statements of FCN Holding, Saban and the LLC. The financial statements of the
Company as of and for the year ended June 30, 1998 reflect the consolidated
financial statements of Fox Family Worldwide and subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Unaudited pro forma statement of operations for the period from July 3, 1995
to June 30, 1996, which combine the results of operations of FCN Holding,
Saban and the LLC from the beginning of the respective periods are presented
below (in thousands):
<TABLE>
<CAPTION>
JULY 3, 1995 TO
JUNE 30, 1996
---------------
<S> <C>
Pro forma revenues........................................... $327,105
Pro forma net income......................................... $ 71,370
</TABLE>
F-9
<PAGE>
FOX FAMILY WORLDWIDE, INC.
(FORMERLY FOX KIDS WORLDWIDE, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Reorganization
The Company was incorporated in August 1996 under Delaware law as a holding
company of FCN Holding, Saban and the LLC. Between August 1996 and August
1997, the Company conducted no business or operations. On August 1, 1997, in
connection with the Company's acquisition of IFE (see Note 3), (i) a wholly
owned indirect subsidiary of Fox Broadcasting Company ("Fox Broadcasting"),
exchanged its capital stock in FCN Holding, which indirectly owns Fox
Children's Network, Inc. ("FCN") for 7,920,000 shares of Class B Common Stock
of the Company, (ii) the other stockholder of FCN Holding exchanged its
capital stock in FCN Holding for an aggregate of 160,000 shares of Class A
Common Stock of the Company, (iii) Haim Saban and the Saban Stockholders
exchanged their capital stock of Saban for an aggregate of 7,920,000 shares of
Class B Common Stock of the Company, and (iv) all outstanding management
options to purchase Saban capital stock became options to purchase an
aggregate of 646,548 shares of Class A Common Stock of the Company (together,
the "Reorganization"). In addition, Fox Broadcasting exchanged its preferred,
non-voting interest in the LLC and its $50 million contingent note receivable
from the LLC for the Fox Subordinated Note.
In connection with the acquisition of IFE, the Company issued the NAHI
Bridge Note to News America Holding, Inc. ("NAHI") upon substantially the same
terms and conditions as the Fox Subordinated Note. In addition, the Company
issued to Liberty IFE, Inc. $345,000,000 of Series A Mandatorily Redeemable
Preferred Stock.
As part of the formation of the LLC, Saban, the Saban Stockholders, Fox
Broadcasting, FCN Holding and one of its subsidiaries entered into a Strategic
Stockholders Agreement dated December 22, 1995, which provided, among other
things, for restrictions on transfer of the stock held by the parties, certain
voting rights between them, as well as the terms of the Reorganization. The
parties to the Strategic Stockholders Agreement also agreed to provide Haim
Saban and the Saban Stockholders and Fox Broadcasting certain registration
rights. On August 1, 1997, the Strategic Stockholders Agreement was amended
and restated (the "Amended and Restated Strategic Stockholders Agreement") to
add provisions regarding voting between Fox Broadcasting and the former Saban
Stockholders.
As part of the Amended and Restated Strategic Stockholders Agreement, Haim
Saban agreed with Fox Broadcasting Sub as follows: if the Company is unable to
meet its obligations (i) to pay any dividend under the terms of the Series A
Mandatorily Redeemable Preferred Stock or to redeem the Series A Mandatorily
Redeemable Preferred Stock, (ii) under its lease of 10960 Wilshire Boulevard,
Los Angeles, California, or any obligation guaranteed by News Corp., or (iii)
under the Funding Agreement, and either News Corp. or News Publishing
Australia Limited ("NPAL"), a wholly owned subsidiary of News Corp., provides
funds to the Company, the advance will be treated as a loan, or if Citibank,
in its sole discretion as administrative agent under the Amended Credit
Facility, determines it is unacceptable to treat the advance as a loan, the
advance will be treated as preferred stock. To the extent the advance is
treated as a loan and the amount exceeds $50,000,000, if the advance is not
repaid after 18 months (or 12 months for all advances after the third
anniversary of the agreement), all or any portion of the advance in excess of
$50,000,000 may be converted into shares of Class B Common Stock. If Fox
Broadcasting Sub elects to convert any portion of the advance into Class B
Common Stock, Haim Saban will have the right to purchase from Fox Broadcasting
up to 50% of the number of shares of Class B Common Stock issued pursuant to
the conversion. If instead, the advance is treated as preferred stock, the
first $50,000,000 of the advance shall be applied to the issuance of shares of
Series B Preferred Stock, and the remainder of the advance shall be applied to
the issuance of Series C Convertible Preferred Stock, which is convertible
into Class B Common Stock at the election of the holder. Each of the Series B
and Series C Preferred Stock will have a liquidation preference equal to its
issue price of $100,000 per share. The Series B and Series C Preferred Stock
will be entitled to dividends at an annual rate of 11.7% of its liquidation
value. If Fox
F-10
<PAGE>
FOX FAMILY WORLDWIDE, INC.
(FORMERLY FOX KIDS WORLDWIDE, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Broadcasting elects to convert the Series C Convertible Preferred Stock into
Class B Common Stock, Haim Saban will have the right to purchase up to 50% of
the number of shares of Class B Common Stock issued pursuant to the
conversion. Notwithstanding the agreements, News Corp. has no obligation to
make any advances, and the Company has no obligation to accept any amounts
from News Corp.
In connection with the formation of the LLC and pursuant to a Stock
Ownership Agreement dated December 22, 1995, the LLC was granted an option to
purchase, upon the occurrence of certain events, all of the Class B Common
Stock held by the Saban Stockholders, and any of their transferees. The option
may be exercised as follows: (i) for a period of one year following the death
of Haim Saban, if he dies prior to December 22, 2012; (ii) upon delivery of
written notice by Fox Broadcasting at any time on or after December 22, 2002,
or before December 22, 2012; or (iii) upon receipt by Fox Broadcasting of
written notice (which generally cannot be delivered prior to December 22,
2000) from Haim Saban of his desire to cause Fox Broadcasting to purchase all
of the shares of Class B Common Stock held by the Saban Stockholders. The LLC
paid to the Saban Stockholders an aggregate of $80,100,000 for the grant of
the option. The purchase price formula under the option is based on the fair
market value of the Company. In September 1996 the LLC distributed the Stock
Ownership Agreement to FCN Holding, which immediately distributed that
agreement to Fox Broadcasting.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements for the year ended June 30, 1998
include the accounts of FCN Holding, Fox Kids Worldwide LLC, Saban, IFE and
all of their majority-owned and controlled subsidiaries. The Company's
investments in related companies which represent a 20% to 50% ownership
interest over which the Company has significant influence but not control are
accounted for using the equity method. All significant intercompany balances
have been eliminated.
As permitted by Statement of Financial Accounting Standards ("SFAS") No. 53,
"Financial Reporting by Producers and Distributors of Motion Pictures," the
Company has presented an unclassified consolidated balance sheet.
Revenue Recognition
Revenues from television, music, and merchandising lease agreements, which
provide for the receipt by the Company of nonrefundable guaranteed amounts,
are recognized when the lease period begins, collectibility is reasonably
assured and the product is available pursuant to the terms of the lease
agreement. Amounts in excess of minimum guarantees under these lease
agreements are recognized when earned. Amounts received in advance of
recognition of revenue are recorded as deferred revenue. Advertising revenue
is recognized as earned in the period in which the advertising commercials are
telecast. The Company generally provides advertisers with guaranteed ratings
in connection with its domestic network broadcasts. Revenue is recorded net of
estimated shortfalls, which are settled either by additional advertising time
("make goods") or cash refunds to the advertiser. Subscriber revenue is
recognized based upon the reported level of subscribers. Barter revenues,
representing the exchange of programming for advertising time on a television
station, are recognized upon the airing of an advertisement during such
advertising time.
Production and Programming Costs
Programming costs, consisting of direct production costs, acquisition of
story rights, costs to acquire distribution rights, allocable production
overhead, interest and exploitation costs which are expected to benefit
F-11
<PAGE>
FOX FAMILY WORLDWIDE, INC.
(FORMERLY FOX KIDS WORLDWIDE, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
future periods are capitalized as incurred. The individual film forecast
method is used to amortize programming costs in which the Company owns or
controls distribution rights. Under such method, costs accumulated in the
production of a program are amortized in the proportion that gross revenues
realized bear to management's estimate of the total gross revenues expected to
be received. Estimated liabilities for residuals and participations are
accrued and expensed in the same manner as programming cost inventories are
amortized.
For programs in which the Company acquires only broadcast rights, the
Company amortizes such program costs over the estimated number of telecasts.
The Company evaluates its programming rights for possible changes in the
estimated number of telecasts or the possibility of impairment.
Revenue estimates on a program-by-program basis are reviewed periodically by
management and are revised, if warranted, based upon management's appraisal of
current market conditions. Based on this review, if estimated future gross
revenues from a program are not sufficient to recover the unamortized costs,
the unamortized programming cost will be written down to net realizable value.
Production and programming costs also include the use of satellite
transponders and costs associated with engineering and technical support
services.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of temporary cash investments and trade
receivables. The Company places its temporary cash investments with high
credit quality financial institutions or in a mutual fund which invests in
government securities and therefore are subject to reduced risk. The Company
has not incurred any losses relating to these investments.
The Company leases its product to distributors and broadcasters and sells
advertising time throughout the world. The Company performs periodic credit
evaluations of its customers' condition and generally does not require
collateral. Generally, payment is received in full or in part prior to the
Company's release of product to such distributors and broadcasters. At June
30, 1997 and June 30, 1998, substantially all of the Company's trade
receivables were from customers in the entertainment or broadcast industries
or from advertising agencies. Receivables generally are due within 30 days.
Credit losses relating to customers in the entertainment and broadcast
industries or advertising agencies consistently have been within management's
expectations.
Cash and Cash Equivalents
For the purposes of balance sheet classification and the statement of cash
flows, the Company considers all highly liquid investments that are both
readily convertible into cash with maturities when purchased of three months
or less to be cash equivalents.
Restricted Cash
Restricted cash represents amounts held by financial institutions as
collateral on outstanding debt.
Financial Instruments
Financial instruments are carried at historical cost which approximates fair
value.
F-12
<PAGE>
FOX FAMILY WORLDWIDE, INC.
(FORMERLY FOX KIDS WORLDWIDE, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Property and Equipment
Except for purchase accounting adjustments, property and equipment are
stated at cost. Property and equipment acquired as part of the acquisition of
IFE is stated at estimated fair market value. Depreciation of property and
equipment is computed under the straight-line method over the expected useful
lives of applicable assets, ranging from three to eight years. Leasehold
improvements are amortized under the straight-line method over the shorter of
the estimated useful lives of the assets or the terms of the related leases.
When property is sold or otherwise disposed of, the cost and related
accumulated depreciation is removed from the accounts, and any resulting gain
or loss is included in income. The costs of normal maintenance, repairs and
minor replacements are charged to expense when incurred.
Intangible Assets
The intangible assets resulting from the acquisition of IFE are amortized
over an estimated useful life of 40 years using the straight-line method. The
Company has adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets to be Disposed of." This statement establishes accounting standards for
the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used for long-lived assets and
certain identifiable intangibles to be disposed of. The carrying value of
existing assets are reviewed when events or changes in circumstances indicate
that an impairment test is necessary in order to determine if an impairment
has occurred. When factors indicate that such assets should be evaluated for
possible impairment, the Company will estimate the future cash flows expected
to result from the use of the assets and their eventual disposition, and
compare the amounts to the carrying value of the assets to determine if an
impairment loss has occurred. Accumulated amortization of intangibles was
$37,557,000 as of June 30, 1998.
Other Assets, net
Included within other assets, net are debt issuance costs and deferred loan
fees incurred in connection with the issuance of the Senior Notes and the
Senior Discount Notes and the Amended Credit Facility (see Note 6). Such costs
and fees are being amortized over the term of the debt using the effective
interest method. Accumulated amortization of debt issuance costs and deferred
loan fees was $2,453,000 as of June 30, 1998.
Foreign Currency Translation and Cumulative Adjustment
Saban International N.V. (SINV), which after the Effective Date is deemed to
be a wholly-owned subsidiary of the Company, uses the U.S. dollar as the
functional currency. All other foreign subsidiaries of the Company use local
currency as the functional currency. Assets and liabilities are translated
into U.S. dollars at current exchange rates. Revenue and expenses have been
translated into U.S. dollars based generally on the average rates prevailing
during the period.
Gains and losses arising from foreign currency transactions are included in
determining net income for the period. The aggregate transaction (losses)
gains for the eight months ended June 30, 1996 and the years ended June 30,
1997 and 1998, were $132,000, $(643,000) and $(1,442,000), respectively.
The cumulative translation adjustment in stockholders' equity at June 30,
1997 and 1998, represents the Company's net unrealized exchange losses on the
translation of foreign subsidiaries' financial statements.
Income Taxes
In accordance with SFAS No. 109 "Accounting for Income Taxes," deferred tax
assets and liabilities are recognized with respect to the tax consequences
attributable to differences between the financial statement
F-13
<PAGE>
FOX FAMILY WORLDWIDE, INC.
(FORMERLY FOX KIDS WORLDWIDE, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
carrying values and tax bases of existing assets and liabilities. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which these temporary differences are
expected to be recovered or settled. Further, the effect on deferred tax
assets and liabilities of changes in tax rates is recognized in income in the
period that included the enactment date.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes including amortization of programming costs. Actual results
could differ from those estimates. Management periodically reviews and revises
its estimates of future airings and revenues, as necessary, which may result
in revised amortization of its programming costs. Results of operations may be
significantly affected by the periodic adjustments in such amortization.
Stock-Based Compensation
The Company accounts for its stock compensation arrangements under the
provisions of Accounting Principles Board ("APB") No. 25, "Accounting for
Stock Issued to Employees." As such, compensation expense would be recorded on
the date of grant only if the current market price of the underlying stock
exceeded the exercise price.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires entities
to recognize as expense over the vesting period the fair value of all stock-
based awards on the date of grant or allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma disclosures for
employee stock option grants as if the fair-value-based method defined in SFAS
No. 123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130, "Reporting Comprehensive Income." The Statement establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. The
Statement applies to all enterprises that provide a full set of general
purpose financial statements. The Statement becomes effective for all
financial statements for fiscal years beginning after December 15, 1997, with
earlier application permitted.
In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments
of an Enterprise and Related Information." The Statement changes the way
public companies report segment information in annual financial statements and
also requires those companies to report selected segment information in
interim financial reports to shareholders. The Statement supersedes FASB
Statement No. 14 on segments and does not apply to nonpublic enterprises or to
not-for-profit organizations. The Statement becomes effective for all
financial statements for fiscal years beginning after December 15, 1997, with
earlier adoption permitted.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for all quarters of
fiscal years beginning after June 15, 1999. This statement establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities.
The Company is currently reviewing those Statements and will apply such
provisions as deemed appropriate.
F-14
<PAGE>
FOX FAMILY WORLDWIDE, INC.
(FORMERLY FOX KIDS WORLDWIDE, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Reclassifications
Certain reclassifications have been made to prior years' financial
statements to conform with current classifications.
3. ACQUISITION OF INTERNATIONAL FAMILY ENTERTAINMENT, INC.
On August 1, 1997, the Company acquired a 50.7% interest in IFE through the
purchase for $35 per share of the stock owned by M.G. "Pat" Robertson, Tim
Robertson and certain trusts of which they are trustees, The Christian
Broadcasting Network, Inc. ("CBN") and Regent University (together, the
"Privately Owned Shares") and the exchange by Liberty IFE, Inc. ("Liberty
IFE") of all of the IFE stock owned by it and $23,000,000 principal amount of
6% Convertible Secured Notes due 2004 of IFE (the "Convertible Notes") (which
have since been retired) for shares of Series A Mandatorily Redeemable
Preferred Stock of the Company. On September 4, 1997, the Company consummated
a merger to acquire the remaining shares of IFE from the public shareholders.
Total consideration for the IFE Acquisition was approximately $1.9 billion
including assumption of liabilities. The Company paid approximately
$545,000,000 for the Privately Owned Shares and issued $345,000,000 of its
Series A Mandatorily Redeemable Preferred Stock to Liberty IFE as payment for
the IFE stock and the Notes. The balance of the consideration was paid to
acquire the publicly traded shares through the merger, to cash out existing
options to acquire shares of IFE stock held by IFE senior executives and
employees, and to assume IFE's existing bank debt, which has since been
retired.
The Company financed the IFE Acquisition, in part, by borrowing $1.25
billion pursuant to the Existing Credit Facility as described below. On August
1, 1997, the Company borrowed $602,000,000 under the Existing Credit Facility
to finance the purchase price of the Privately Owned Shares (and to refinance
certain indebtedness of Saban outstanding on the closing date of the
acquisition of the Privately Owned Shares). On September 4, 1997, the Company
borrowed $648,000,000 million under the Existing Credit Facility in order to
finance in part the cash consideration payable to the remaining former public
holders of the outstanding shares of IFE stock for their shares in the merger,
to cash out existing options held by IFE senior executives and employees, to
refinance certain indebtedness of IFE and to pay certain related fees and
expenses.
The IFE Acquisition has been accounted for as a purchase. IFE's assets and
liabilities have been recorded in the Company's financial statements at their
estimated fair values at the acquisition date allocated as follows (in
thousands):
<TABLE>
<S> <C>
Accounts receivable............................................. $ 130,694
Film and television costs....................................... 181,360
Other assets.................................................... 135,877
Intangible assets............................................... 1,631,843
Liabilities assumed, including severance and related reserves of
$36,500........................................................ (383,994)
Cash on hand.................................................... 19,296
Preferred stock issuance........................................ (345,000)
----------
Cash purchase price............................................. $1,370,076
==========
</TABLE>
The Company has made severance and related payments of $19,850,000 from the
date of acquisition to June 30, 1998. The results of operations of IFE since
the purchase date of August 1, 1997 have been included with the Company's
results of operations for the year ended June 30, 1998.
F-15
<PAGE>
FOX FAMILY WORLDWIDE, INC.
(FORMERLY FOX KIDS WORLDWIDE, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following unaudited pro forma information for the two years ended June
30, 1997 and 1998 reflect the results of the Company's consolidated operations
as if the acquisition and related financing occurred at the beginning of each
period presented. The unaudited pro forma consolidated financial results are
not necessarily indicative of the actual results that would have occurred had
the acquisition occurred at the beginning of each period presented (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1998
------------- -------------
<S> <C> <C>
Revenues......................................... $614,618 $688,943
Operating income................................. 124,793 123,798
Net loss......................................... (32,129) (45,610)
</TABLE>
4. PROGRAMMING COSTS
Programming costs, net of accumulated amortization, are comprised of the
following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------------------------
ACCUMULATED NET PROGRAMMING
COST AMORTIZATION COSTS
---------- ------------ ---------------
<S> <C> <C> <C>
Children's programming.............. $ 860,582 $ 723,751 $136,831
Family programming, movies and mini-
series............................. 135,685 99,162 36,523
Projects in production.............. 58,167 -- 58,167
Development......................... 4,054 -- 4,054
---------- ---------- --------
$1,058,488 $ 822,913 $235,575
========== ========== ========
<CAPTION>
JUNE 30, 1998
---------------------------------------
ACCUMULATED NET PROGRAMMING
COST AMORTIZATION COSTS
---------- ------------ ---------------
<S> <C> <C> <C>
Children's programming.............. $1,081,397 $ 900,785 $180,612
Family programming, movies and mini-
series............................. 413,507 214,006 199,501
Projects in production.............. 67,070 -- 67,070
Development......................... 6,425 -- 6,425
---------- ---------- --------
$1,568,399 $1,114,791 $453,608
========== ========== ========
</TABLE>
Future estimated program commitments at June 30, 1998 are approximately $196
million.
Based on the Company's estimate of future revenues, approximately 70% of
unamortized released programming costs at June 30, 1998 will be amortized
during the three years ending June 30, 2001. Interest amounting to $1,146,000
and $3,160,000 was capitalized to programming costs for the years ended June
30, 1997 and 1998, respectively. No interest was capitalized for the eight
months ended June 30, 1996.
F-16
<PAGE>
FOX FAMILY WORLDWIDE, INC.
(FORMERLY FOX KIDS WORLDWIDE, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 30, 1998
------------- -------------
<S> <C> <C>
Studio and other equipment....................... $10,997 $19,087
Satellite transponders........................... -- 39,596
Office furniture and fixtures.................... 3,417 15,743
Leasehold improvements........................... 2,957 6,161
Other............................................ 179 201
------- -------
17,550 80,788
Less accumulated depreciation.................... 8,629 19,983
------- -------
$ 8,921 $60,805
======= =======
</TABLE>
6. BANK AND OTHER DEBT
Bank and other debt is comprised of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 30, 1998
------------- -------------
<S> <C> <C>
Senior Notes................................... $ -- $ 475,000
Senior Discount Notes, net of unamortized dis-
count of $217,038............................. -- 401,632
NAHI Bridge Note............................... -- 107,631
Fox Subordinated Note.......................... -- 119,448
Citicorp USA; secured revolving line of credit;
interest at prime rate (8.5% at June 30, 1998)
plus 1.25% or six month LIBOR (5.75% at June
30, 1998) plus 2.25%; maximum borrowings of
$355,000...................................... -- 280,000
Citicorp USA; secured term loan facility; in-
terest at prime rate (8.5% at June 30, 1998)
plus 1.25% or six month LIBOR (5.75% at June
30, 1998) plus 2.25%; maximum borrowings of
$340,000...................................... -- 340,000
Imperial Bank; secured revolving line of cred-
it; interest at prime rate plus .5% or one
month LIBOR plus 2% paid in full and termi-
nated in August 1997.......................... 43,000 --
Secured lines of credit with varying due dates
between December 31, 1998 and April 18, 1999;
maximum borrowing availability $21,333 at
June 30, 1998; varying interest rates between
4.175% and 8.60%.............................. 10,972 20,323
Other.......................................... 3,620 2,476
------- ----------
$57,592 $1,746,510
======= ==========
</TABLE>
Payments of bank and other debt in future periods are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
--------------------
<S> <C>
1999.............................................................. $ 21,972
2000.............................................................. 26,327
2001.............................................................. 59,500
2002.............................................................. 99,500
2003.............................................................. 122,750
Thereafter........................................................ 1,416,461
----------
$1,746,510
==========
</TABLE>
F-17
<PAGE>
FOX FAMILY WORLDWIDE, INC.
(FORMERLY FOX KIDS WORLDWIDE, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In August 1997, the Company, FCN Holding, Saban and IFE entered into a
credit facility ("Old Credit Facility") with a group of banks led by Citicorp
in the amount of $1.25 billion. The Old Credit Facility comprised a
$602,000,000 seven-year secured reducing revolving credit facility, a
$298,000,000 seven-year secured reducing revolving credit facility and a
$350,000,000 nine-year secured term loan facility.
The proceeds of the loans under the old Credit Facility were used to
finance, in part, the IFE Acquisition and to repay certain obligations of
subsidiaries of the Company.
In October 1997, upon consummation of the Company's Offering, the Old Credit
Facility was amended (the "Amended Credit Facility") to provide a $355,000,000
seven-year term loan, subsequently reduced to $340,000,000, and a $355,000,000
seven-year reducing revolving credit facility. The Company is not a borrower
under the Amended Credit Facility but is a guarantor. A wholly-owned
subsidiary of the Company, FK Holding, LLC was created by the Company to hold
the equity interests of FCN Holding, Saban and IFE (which will remain
borrowers) and guarantee the Amended Credit Facility.
The collateral for the Amended Credit Facility is limited to the equity
interests of FK Holdings, the borrowers and their subsidiaries (subject to
certain limitations for foreign and less than wholly owned subsidiaries) and
intercompany indebtedness. Scheduled payments on the term loan will begin
September 28, 2000, with 10% of the term loan being reduced in year 3 of the
loan, 20% in each of years 4 and 5 and 25% in each of years 6 and 7. Scheduled
quarterly reductions to the revolving credit commitment will begin
September 27, 2002, with 15% of the commitment being reduced in each of years
5 and 6 and 70% in year 7.
The borrowings under the Amended Credit Facility bear interest at the
Company's option at a rate per annum equal to either LIBOR or a base rate
plus, in each case, an applicable interest rate margin. In addition, the
Company pays a commitment fee on the unused and available amounts under the
Amended Credit Facility.
The Amended Credit Facility contains a number of significant covenants that,
among other things, limit the ability of the co-borrowers and their respective
subsidiaries to incur additional indebtedness, create liens and other
encumbrances, make certain payments and investments, make capital
expenditures, make distributions to owners and repurchase debt and equity. In
addition, the Amended Credit Facility requires the maintenance of certain
specified financial and operating covenants, including, without limitation,
capital expenditure limitations and ratios of EBITDA to fixed charges, total
debt to EBITDA and EBITDA to interest expense. The Amended Credit Facility
also contains representations, warranties, covenants, conditions and events of
default customary for senior credit facilities of similar size and nature.
On October 28, 1997, the Company issued $475,000,000 aggregate principal
amount of 9 1/4% Senior Notes Due 2007 ("Senior Notes") and $618,670,000
aggregate principal amount at maturity of 10 1/4% Senior Discount Notes Due
2007 ("Senior Discount Notes" and collectively the "Notes") in a transaction
not registered under the Securities Act in reliance upon an exemption from the
registration requirements of the Securities Act. Gross proceeds from the
offering amounted to $850,000,000. The discount on the Senior Discount Notes
is being accreted under the effective interest method.
Cash interest on the Senior Notes will be payable semi-annually in arrears
on each May 1 and November 1, commencing May 1, 1998. Cash interest will not
accrue or be payable on the Senior Discount Notes prior to November 1, 2002.
Thereafter, cash interest on the Senior Discount Notes will be payable semi-
annually in arrears on each May 1 and November 1, commencing on May 1, 2003.
However, at any time prior to November 1, 2002, the Company may elect (the
"Cash Interest Election") on any interest payment date (the date of such Cash
Interest Election, the "Cash Interest Election Date") to commence the accrual
of cash interest from and after the Cash Interest Election Date, in which case
the principal amount at maturity of each Senior
F-18
<PAGE>
FOX FAMILY WORLDWIDE, INC.
(FORMERLY FOX KIDS WORLDWIDE, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Discount Note will on such interest payment date be reduced to the accreted
value of such Senior Discount Note as of such interest payment date, and cash
interest (accruing at a rate of 10 1/4% per annum from the Cash Interest
Election Date) shall be payable with respect to such Senior Discount Note on
each interest payment date thereafter.
The Senior Notes will be redeemable at the option of the Company, in whole
or in part, at any time on or after November 1, 2002, at the redemption prices
(expressed as percentages of principal amount) set forth below, plus accrued
and unpaid interest, if any, to the redemption date, if redeemed during the
12-month period beginning on November 1 of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2002.............................................................. 104.625%
2003.............................................................. 103.083%
2004.............................................................. 101.542%
2005 and thereafter............................................... 100.000%
</TABLE>
In addition, at any time, or from time to time, on or prior to November 1,
2000, the Company may, at its option, use the net cash proceeds of (a) one or
more public equity offerings or (b) sales of qualified equity interests to
strategic equity investors resulting in gross cash proceeds to the Company of
at least $100,000,000 to redeem, on a pro rata basis, up to an aggregate of
35% of the principal amount of the Senior Notes originally issued, at a
redemption price equal to 109.25% of the principal amount thereof plus accrued
and unpaid interest, if any, to the redemption date; provided that at least
65% of the originally issued principal amount of Senior Notes remains
outstanding immediately after the occurrence of such redemption.
The Senior Discount Notes will be redeemable at the option of the Company,
in whole or in part, at any time on or after November 1, 2002, at the
redemption prices (expressed as a percentage of principal amount at maturity)
set forth below, plus accrued and unpaid interest thereon, if any, to the
redemption date, if redeemed during the 12-month period beginning on November
1 of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2002.............................................................. 105.125%
2003.............................................................. 103.417%
2004.............................................................. 101.708%
2005 and thereafter............................................... 100.000%
</TABLE>
In addition, prior to November 1, 2000, the Company may redeem up to 35% of
the originally issued principal amount at maturity of the Senior Discount
Notes at a redemption price equal to 110.25% of the accreted value of the
Senior Discount Notes so redeemed at the redemption date or, if a Cash
Interest Election has been made, 110.25% of the principal amount at maturity
of the Senior Discount Notes so redeemed, plus accrued and unpaid interest
thereon, if any, to the redemption date, with the net cash proceeds of (a) one
or more public equity offerings or (b) sales of qualified equity interests of
the Company to one or more strategic equity investors resulting in gross cash
proceeds to the Company of at least $100,000,000 in the aggregate; provided,
however, that at least 65% of the originally issued principal amount at
maturity of the Senior Discount Notes would remain outstanding immediately
after giving effect to any such redemption.
Upon the occurrence of a change of control, the Company shall be obligated
to make an offer to purchase (a "Change of Control Offer"), on a business day
(the "Change of Control Purchase Date") not more than 60
F-19
<PAGE>
FOX FAMILY WORLDWIDE, INC.
(FORMERLY FOX KIDS WORLDWIDE, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
nor less than 30 days following the occurrence of the change of control, all
of the then outstanding Notes tendered at a purchase price in cash (the
"Change of Control Purchase Price") equal to (x) with respect to the Senior
Notes, 101% of the principal amount thereof plus accrued and unpaid interest,
if any, to the Change of Control Purchase Date and (y) with respect to the
Senior Discount Notes, 101% of the accreted value on the Change of Control
Purchase Date, unless the Change of Control Purchase Date is on or after the
earlier to occur of November 1, 2002 and the Cash Interest Election Date, in
which case such Change of Control Purchase Price shall be equal to 101% of the
aggregate principal amount at maturity thereof, plus accrued and unpaid
interest thereon, if any, to the Change of Control Purchase Date. The Company
shall be required to purchase all Notes tendered into the Change of Control
Offer and not withdrawn. The Change of Control Offer is required to remain
open for at least 20 business days and until the close of business on the
Change of Control Purchase Date.
The Notes will be senior unsecured obligations of the Company and will rank
senior in right of payment to all future subordinated indebtedness of the
Company. Claims of the holders of the Notes will effectively be subordinated
to the claims of creditors of the Company's subsidiaries, including the banks
under the Bank Facility.
The Company is subject to certain covenants in connection with the issuance
of the Notes which include for example limitation on indebtedness, restricted
payments, liens, dividends, transactions with affiliates and disposition of
assets.
The Fox Subordinated Note accrues interest at the rate of 10.42%. The
payment of principal and interest under the Fox Subordinated Note are
subordinated in right to the obligations of the Company and its subsidiaries
under the Amended Credit Facility and the Indentures.
On August 29, 1997, in connection with the acquisition of IFE, the Company
issued the NAHI Bridge Note to NAHI upon substantially the same terms and
conditions as the Fox Subordinated Note, except that the NAHI Bridge Note has
a principal amount of $345,500,000. The NAHI Bridge Note was restated on May
19, 1998 to reflect a change in the interest rate, effective as of the date of
issuance. As restated, the NAHI Bridge Note accretes interest at a rate of
approximately 10.427% per annum. The Company may repay the NAHI Bridge Note in
whole or in part, subject to the terms of the Amended Credit Facility and the
Indentures. The payment of principal and interest under the NAHI Bridge Note
will be subordinated in right to the obligations of the Company under the
Amended Credit Facility and the Indentures.
F-20
<PAGE>
FOX FAMILY WORLDWIDE, INC.
(FORMERLY FOX KIDS WORLDWIDE, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets are as follows (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 30, 1998
------------- -------------
<S> <C> <C>
Deferred tax liabilities:
Accounts receivable............................ $ 1,250 $ 1,224
Property and equipment......................... -- 11,670
Contract discount.............................. -- 7,120
Other.......................................... -- 1,684
------- -------
Total deferred tax liabilities................... 1,250 21,698
------- -------
Deferred tax assets:
State taxes.................................... 483 --
Deferred revenue............................... 5,978 6,008
Programming costs.............................. 17,696 34,909
Accrued expenses and reserves.................. 7,625 34,955
Loss carryforwards............................. -- 20,496
Other.......................................... 807 3,796
------- -------
Total deferred tax assets........................ 32,589 100,164
Valuation allowance for deferred tax assets...... (14,938) (60,385)
------- -------
Deferred tax assets.............................. 17,651 39,779
------- -------
Net deferred tax assets.......................... $16,401 $18,081
======= =======
</TABLE>
The Company currently has approximately $51,240,000 of operating loss
carryforwards which will expire at various dates through June 30, 2018.
Approximately $23,000,000 of the operating loss carryforwards are separate
return year losses. As such federal and state income tax law and regulations
might limit utilization.
Management has determined that as of June 30, 1998, $60,385,000 of deferred
tax assets do not satisfy the recognition criteria set forth in SFAS No. 109.
Accordingly, a valuation allowance has been recorded for this amount.
Approximately $35,000,000 of the valuation allowance relates to deferred tax
assets acquired in the IFE acquisition. (See Note 3--Acquisition of
International Family Entertainment, Inc.) Accordingly, no benefit to the
income statement will be recorded if these deferred tax assets are realized.
For financial reporting purposes, income before income taxes includes the
following components (in thousands):
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1998
------------------ ------------- -------------
<S> <C> <C> <C>
Pretax income (loss):
United States............... $33,149 $31,605 $(45,733)
Foreign..................... 16,725 23,402 24,406
------- ------- --------
$49,874 $55,007 $(21,327)
======= ======= ========
</TABLE>
F-21
<PAGE>
FOX FAMILY WORLDWIDE, INC.
(FORMERLY FOX KIDS WORLDWIDE, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Significant components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1998
------------------ ------------- -------------
<S> <C> <C> <C>
Current:
Federal..................... $14,316 $ 3,430 $ --
State....................... 3,964 (508) --
Foreign..................... 586 1,881 1,766
------- ------- ------
18,866 4,803 1,766
Deferred:
Federal..................... (431) 6,970 1,470
State....................... (161) 2,794 210
Foreign..................... -- -- --
------- ------- ------
(592) 9,764 1,680
------- ------- ------
$18,274 $14,567 $3,446
======= ======= ======
</TABLE>
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is:
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1998
------------------ ------------- -------------
<S> <C> <C> <C>
Tax at U.S. statutory rates.. 35% 35% (35)%
State taxes, net of federal
benefit..................... 5 3 (5)
Earnings from foreign
operations taxed at a lower
rate than the U.S. rate..... (12) (12) (38)
U.S. operating loss for which
no federal or state benefit
derived..................... -- -- 23
Other........................ 1 -- --
Non-deductible intangible
asset amortization.......... -- -- 71
Non-deductible investment
advisory fees............... 8 -- --
--- --- ---
37% 26% 16%
=== === ===
</TABLE>
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $106,000,000 at June 30, 1998. Those earnings are considered to
be indefinitely reinvested and, accordingly, no provision for U.S. federal and
state income taxes has been provided thereon. Upon distribution of those
earnings in the form of dividends or otherwise, the Company would be subject
to both U.S. income taxes (subject to an adjustment for foreign tax credits)
and withholding taxes payable to the various foreign countries. Determination
of the amount of unrecognized deferred U.S. income tax liability is not
practicable because of the complexities associated with its hypothetical
calculation; however, unrecognized foreign tax credit carryforwards would be
available to reduce some portion of the U.S. liability. It is possible that
the Internal Revenue Service could under certain theories attempt to tax the
foreign subsidiaries' income. Currently, management of the Company believe
that any such theories would be without merit.
F-22
<PAGE>
FOX FAMILY WORLDWIDE, INC.
(FORMERLY FOX KIDS WORLDWIDE, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
Leases
In July 1995, the Company entered into a 10 year written lease commencing on
April 1, 1996 for office space in Los Angeles, California subject to two
separate five year extension options. The lease provides for early termination
at the end of the sixth and eighth years upon payment of a termination fee.
The lease calls for monthly payments plus maintenance and property tax
payments. The Company also leases throughout the world other facilities on an
as needed basis expiring at various dates.
Noncancellable future minimum payments for the remainder of the initial,
noncancellable lease periods are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
--------------------
<S> <C>
1999................................................................. $ 8,640
2000................................................................. 8,873
2001................................................................. 8,406
2002................................................................. 8,683
2003................................................................. 7,982
Thereafter........................................................... 25,224
-------
$67,808
=======
</TABLE>
Rent expense for the eight months ended June 30, 1996 and for the years
ended June 30, 1997 and 1998, net of amounts capitalized, was approximately
$1,006,000, $2,573,000 and $5,098,000, respectively.
Legal Matters
The Company is involved in various lawsuits, both as a plaintiff and
defendant, in the ordinary course of its business. Based on an evaluation
which included consultation with counsel concerning legal and factual issues
involved, management is of the opinion that the foregoing claims and lawsuits
will not have a material adverse effect on the Company's consolidated
financial position or results of operations.
Employment Agreements
The Company has entered into employment agreements with certain key members
of management. Such agreements are for terms originally ranging from one to
six and one-half years and generally include bonus provisions. Future minimum
payments under these agreements approximate $30,636,000 of which $14,978,000
is due in 1999, $6,744,000 is due in 2000, $4,821,000 is due in 2001,
$2,292,000 is due in 2002, $933,000 is due in 2003 and $868,000 is due
thereafter.
10. PROFIT SHARING PLAN
The Company has a qualified tax deferred profit sharing plan (the Plan) for
all of its eligible employees. Under the Plan, employees become eligible on
the first January 1 following such employees' completion of six months of
service with The Company. Each participant is permitted to make voluntary
contributions, not to exceed 15% of his or her respective compensation and the
applicable statutory limitations, which are immediately 100% vested. The
Company, at the discretion of the Board of Directors, may make matching
contributions to the Plan. Related expense for the eight months ended June 30,
1996 and the years ended June 30, 1997 and 1998, was approximately $43,000,
$101,000 and $122,000, respectively.
F-23
<PAGE>
FOX FAMILY WORLDWIDE, INC.
(FORMERLY FOX KIDS WORLDWIDE, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
IFE has a 401(k) retirement savings plan (the "401(k) Plan") which covers
the majority of its employees. Subject to certain limitations, employees may
contribute up to 15% of their compensation to the 401(k) Plan. IFE's
contribution to the 401(k) Plan is discretionary as determined annually by the
Company's Board of Directors. IFE contributed $349,000 to the 401(k) Plan for
the year ended June 30, 1998.
11. OTHER RELATED PARTY TRANSACTIONS
The following amounts are included within the statements of operations and
balance sheets in relation to related party transactions (in thousands):
<TABLE>
<CAPTION>
EIGHT
MONTHS ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1998
------------- ------------- -------------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS
Revenues.......................... $5,498 $21,316 $ 80,258
Production and programming
costs(1)......................... -- 4,301 6,456
Selling, general and administra-
tive expenses.................... 1,114 2,322 4,687
Fox Kids Network affiliate partic-
ipations......................... 8,853 6,194 --
Interest expense.................. 170 854 23,871
<CAPTION>
JUNE 30, 1997 JUNE 30, 1998
------------- -------------
<S> <C> <C> <C>
BALANCE SHEETS
Accounts receivable from related
parties.......................... $29,037 $ 58,043
Other assets...................... 1,284 652
Accounts payable.................. 3,088 4,984
Accrued liabilities............... 4,576 15,984
Deferred revenue.................. 6,962 5,577
Amounts payable to related par-
ties............................. 58,672 2,954
NAHI Bridge Note.................. -- 107,631
Fox Subordinated Note............. -- 119,448
</TABLE>
- --------
(1) Comprises satellite transponder, engineering and technical support costs.
Receivables from related parties include advances of $1,329,000 and
$4,174,000 at June 30, 1997 and 1998, respectively, to certain non-stockholder
officers and directors of the Company.
The Company distributes product to related parties in the normal course of
business, and accordingly, included in accounts receivable from related
parties are $12,965,000 and $39,578,000 due from those related parties at June
30, 1997 and 1998, respectively.
The Company and Fox Broadcasting were parties to a Barter Syndication
Agreement dated as of January 5, 1996, pursuant to which the Company engaged
Fox Broadcasting to provide barter advertising sales for the 1996-1997 and
1997-1998 broadcast season for the Company's syndicated programming. In
consideration for the services rendered by Fox Broadcasting to the Company,
the Company has agreed to pay Fox Broadcasting a barter advertising sales fee
of $800,000 for the 1996-1997 broadcast season and $840,000 for the 1997-1998
broadcast season.
Related companies of Fox Broadcasting have funded certain of the operations
of the Company from its inception through loans to the Company. Amounts due to
the related companies of Fox Broadcasting in
F-24
<PAGE>
FOX FAMILY WORLDWIDE, INC.
(FORMERLY FOX KIDS WORLDWIDE, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
connection therewith, including interest, totaled $8,672,000 and $2,954,000 at
June 30, 1997 and 1998, respectively.
The Company broadcasts Fox Kids U.K., a cable and satellite channel via
analogue transponder. The channel is distributed as part of British Sky
Broadcasting, Group plc's ("BSkyB") Sky Multichannels DTH package. News Corp.
holds a 40% interest in BSkyB, a public company. As part of its agreement with
BSkyB, the Company acquired for approximately $3,100,000, certain of BSkyB's
United Kingdom license rights to children's programming which had been
previously acquired by BSkyB. Additionally, the Company will enter into an
analog transponder sublease agreement with BSkyB through February 1, 2001
subject to extension in certain circumstances requiring a financial commitment
of approximately $28,000,000 and a five-year digital transponder and uplink
sublease agreement, commencing in late 1998, requiring a financial commitment
of approximately $5,600,000. In addition, BSkyB provides support services for
the Company for a fee equal to 15% of net revenue, as defined in the
agreement.
The Company broadcasts Fox Kids Latin America, a Fox Kids branded pan-
regional Latin American channel. The Company has entered into a cost sharing
arrangement for employees and service support in connection with the operation
of the channel with Canal Fox, a related party. The Company believes that such
arrangement for employees and service support are at rates which approximate
fair market value.
Foxtel, an Australian-based cable service, has carried a Fox Kids Network
children's channel segment since 1994 under a license agreement between Foxtel
and an affiliate of Fox Broadcasting. This license was assigned to the
Company. Foxtel is a 50/50 partnership between News Corp. and the Australian
telephone company, Telstra.
From time to time, the Company has loaned and advanced funds to Haim Saban.
In connection with the formation of the LLC on December 22, 1995, the Company
forgave in full the loan plus accrued interest owing from Haim Saban in the
amount of approximately $2,700,000. This amount was treated as a distribution
and charged to retained earnings in the eight months ended June 30, 1996. In
connection with Haim Saban's employment agreement, the Company agreed to
reimburse Haim Saban for all out-of-pocket costs and expenses for domestic and
international travel, including private air charter which may include aircraft
owned directly or indirectly by Haim Saban. The Company has entered into a
contract to charter Haim Saban's or another similar airplane for a minimum of
fifty charter hours during a twelve month period. For the eight months ended
June 30, 1996 and the twelve months ended June 30, 1997 and 1998, the Company
has paid approximately $370,000, $875,000 and $730,000, respectively, for such
services.
The Company currently leases and distributes its entertainment properties
(e.g., motion pictures, television programs, merchandising and licensing
rights) in Israel through Duveen Trading Ltd. (Distributor), a corporation
wholly-owned by Haim Saban's brother. The term of the agreement extends
through December 31, 1997, subject to extension by the Company for an
additional three years. The Company currently intends to extend this
relationship. At June 30, 1997 and 1998, the Company was due $500,000 under
this agreement.
The Company is party to a music services agreement (the "Music Agreement")
with 5161 Corporation ("5161"), a corporation wholly owned by Haim Saban, the
Chief Executive Officer of the Company. Under the terms of the Music
Agreement, the Company acquires substantially all of the original theme music,
F-25
<PAGE>
FOX FAMILY WORLDWIDE, INC.
(FORMERLY FOX KIDS WORLDWIDE, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
underscores, cues and songs it uses in programming produced by the Company
from 5161. In addition, the Company has the royalty-free right to use the
compositions in articles of merchandise such as home video units, video games
and interactive toys and has been granted the non-exclusive, worldwide, and
perpetual license to use the music to (i) synchronize and perform compositions
in theatrical motion pictures and (ii) synchronize compositions in all other
forms of programming. The Company creates and owns all right, title and
interest in master recordings of compositions for use in the Company's
programming, and the Company owns the proceeds derived from all forms of
exploitation thereof. In consideration for providing the compositions to the
Company, 5161 receives no payment from the Company but is entitled to receive
all publishing income derived from the exploitation of such compositions. 5161
does reimburse the Company for certain costs associated with the creation of
the compositions, which amounted to $374,000 and $451,000, respectively, in
fiscal 1997 and 1998. For the eight months ended June 30, 1996, 5161 made no
payments for reimbursement of costs to the Company. At June 30, 1997, 5161
owed the Company approximately $211,000 pursuant to the Music Agreement and at
June 30, 1998, approximately $378,000 was owed to 5161 by the Company pursuant
to the Music Agreement.
The Company is party to a distribution agreement with Fox Family Films, Inc.
("Distributor") for Turbo: A Power Rangers Movie, which was released
theatrically in the United States in Spring 1997 and in home video in late
Summer 1997. Distributor holds in perpetuity worldwide theatrical, non-
theatrical, home video, and television rights in the movie (except for the
territories of Japan and certain Asian territories and Israel). The Company
holds the copyright as well as certain rights including merchandising,
television series, stage, publication, radio, theme park and touring, music
publishing and soundtrack. Commercial tie-in rights are mutually controlled by
the Company and Distributor. The Company will receive 100% of gross receipts
after certain distribution fees and expenses are deducted, based upon a
formula set forth in the agreement.
In April 1998, the Company sold its ownership interest in Fit TV and certain
other assets to Fox/Liberty Networks, LLC, a joint venture between News Corp.
and Liberty Media Corporation, a wholly owned subsidiary of Tele-
Communications, Inc. for $15,000,000. The Company acquired Fit TV in August
1997 as part of the IFE Acquisition.
In January 1997, the Company obtained from Fox Television, a division of
Fox, Inc. ("Fox Television"), distribution rights to the New World
Communications Group Incorporated's ("New World") animation library of
children's programming, which Fox Television acquired as part of its purchase
of New World. In July 1998, the Company agreed to acquire the New World
animation library from Fox Television for approximately $14.1 million.
The Company entered into a long-term license agreement effective October 1,
1997 with Twentieth Century Fox Film Corp. ("Twentieth Century Fox"), pursuant
to which Twentieth Century Fox will distribute certain products in the
Company's programming library.
Pursuant to a Guaranty of Lease entered into on August 1, 1997 (the
"Guaranty"), News Corp. and NPAL have guaranteed certain of the Company's
obligations under the lease of its corporate headquarters. Under the Guaranty,
News Corp. and NPAL are liable, jointly and severally, for any amounts not
paid by the Company. News Corp.'s and NPAL's aggregate liability under the
Guaranty is limited to approximately $8.6 million, to be reduced annually over
five years on a straight-line basis.
In May 1996, the Company entered into an agreement with Fox Video (the "Fox
Video Agreement") for the production and distribution of a live-action feature
film for the home video market based upon the animated character of Casper
(the "Film") which was released by Fox Video in the United States on September
9, 1997.
F-26
<PAGE>
FOX FAMILY WORLDWIDE, INC.
(FORMERLY FOX KIDS WORLDWIDE, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company and Fox Video each contributed one-half of the production costs of
the Film subject to the rights of both parties to recoup certain of these
costs. The Company and Fox Video will share the television net income 55% and
45%, respectively, and the home video net income 45% and 55%, respectively,
subject to the participation rights of the Harvey Entertainment Company, which
holds the copyright to Casper.
The Company has entered into an agreement in principle with Fox Video for
the production and distribution of, a second live-action feature film (Casper:
A Magical Friendship) for the home video market to be released in fiscal 1999.
Saban and Fox Video each will contribute one-half of the production costs
subject to the rights of both parties to recoup certain of these costs. The
Company and Fox Video will share the combined television, non-theatrical,
airline, and home video receipts equally, subject to the participation rights
of Harvey.
In August 1996, Fox Video and the Company entered into a Home Video Rights
Acquisition Agreement pursuant to which the Company granted to Fox Video the
exclusive home video rights to distribute English and Spanish language
versions throughout the United States and to distribute English language
versions throughout Canada of certain of its programs, all television programs
produced for children and owned or controlled by the Company or FCN, all
television programs produced or to be produced pursuant to an agreement with
Marvel and all television programs which are owned or controlled first by
Marvel and subsequently by the Company. In consideration for the grant of the
distribution rights, Fox Video has agreed to pay the Company 50% of gross
receipts from these home videos, after deduction of certain expenses. In
connection with this Agreement the Company has received $8,000,000 through
June 30, 1998.
12. SIGNIFICANT CUSTOMERS AND PROPERTIES AND GEOGRAPHICAL INFORMATION
The Company operates in one business segment which is the acquisition,
production and worldwide broadcast, distribution and leasing of entertainment
properties. For the eight months ended June 30, 1996 and the year ended June
30, 1997, the Company earned revenues from one significant customer of
approximately $32,148,000 (17%) and $35,500,000 (12%), respectively. The
Company earned revenues of $72,668,000 (38%), $70,810,000 (23%) for the eight
months ended June 30, 1996 and for the year ended June 30, 1997 from one
significant property (Power Rangers). The Company had no significant customer
or significant property for the year ended June 30, 1998.
F-27
<PAGE>
FOX FAMILY WORLDWIDE, INC.
(FORMERLY FOX KIDS WORLDWIDE, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Geographical information concerning the Company's operations is as follows
(in thousands):
<TABLE>
<CAPTION>
EIGHT
MONTHS ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Domestic........................ $129,645 $199,575 $ 522,592
International, principally
Europe(2)...................... 61,976 108,245 141,866
-------- -------- ----------
191,621 307,820 664,458
Operating profit:(1)
Domestic........................ 67,970 84,295 268,532
International, principally
Europe(2)...................... 24,714 43,144 34,711
-------- -------- ----------
92,684 127,439 303,243
Selling, general and
administrative expense........... 23,072 62,466 146,213
Fox Kids Network affiliate
participations................... 8,853 6,194 --
Amortization of intangibles....... -- -- 37,557
Equity in loss of unconsolidated
affiliate (Europe)............... -- 1,546 6,790
Investment advisory fee........... 10,000 -- --
Other expense, net................ -- -- 8
Interest expense.................. 885 2,226 134,002
-------- -------- ----------
Income (loss) before provision for
income taxes..................... $ 49,874 $ 55,007 $ (21,327)
======== ======== ==========
<CAPTION>
JUNE 30, 1997 JUNE 30, 1998
------------- -------------
<S> <C> <C> <C>
Identifiable assets:
Domestic........................ $164,481 $2,238,864
International, principally
Europe(2)...................... 247,920 277,160
-------- ----------
$412,401 $2,516,024
======== ==========
</TABLE>
- --------
(1) For purposes of this presentation, operating profit is total revenues less
production and programming costs.
(2) International amounts relate principally to Western Europe in connection
with the Company's subsidiary, SINV, a Netherlands Antilles company with
offices in Switzerland.
13. CAPITAL STOCK
Common Stock
The authorized capital stock of the Company consists of 16,000,000 shares of
Class A Common Stock, 16,000,000 shares of Class B Common Stock and 20,000,000
shares of Preferred Stock, of which 500,000 shares have been designated as
Series A Preferred Stock. As of June 30, 1998, 160,000 shares of Class A
Common Stock and 15,840,000 shares of Class B Common Stock were outstanding.
The holders of Class A Common Stock (the "Class A Stockholders") are
entitled to one vote per share and the holders of Class B Common Stock (the
"Class B Stockholders") are entitled to ten votes per share. Both classes vote
together as a single class. A majority vote (or any other greater percentage)
for stockholder action requires a majority of the aggregate number of votes
entitled to be cast as such vote. The Company's Corrected Restated Certificate
of Incorporation does not prove for cumulative voting rights.
Subject to the rights of the holders of shares of any series of Preferred
Stock, the Class A and Class B Stockholders are to receive like dividends and
other similar distributions of the Company. In the case of any
F-28
<PAGE>
FOX FAMILY WORLDWIDE, INC.
(FORMERLY FOX KIDS WORLDWIDE, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
split, subdivision, combination or reclassification of shares of Class A or
Class B Common Stock, an equivalent split, subdivision, combination or
reclassification must be made to the shares of Class B or Class A Common
Stock, as the case may be.
The Class A and Class B Stockholders have equivalent rights to distributions
in the event of any liquidation, dissolution or winding up (either voluntary
or involuntary) of the Company, in proportion to the number of shares held by
them without regard to class.
In the event of any corporate merger, consolidating purchase or acquisition,
the Class A and Class B Stockholders are to receive the same consideration on
a per share basis, and if the consideration in such transaction consists in
any part of voting securities, the Class B Stockholders are to receive, on a
per share basis, voting securities with ten times the number of votes per
share as those voting securities to be received by the Class A Stockholders.
The shares of Class A Common Stock are freely transferable, but the shares
of Class B Common Stock are subject to transfer restrictions as set forth more
fully in the Company's charter. The Class B Stockholders may only transfer
their shares to a "Permitted Transferee" and any unauthorized transfer will
cause an automatic conversion of such shares into shares of Class A Common
Stock. Regardless of the transfer restriction on the Class B Common Stock, any
Class B Stockholder may pledge its shares as collateral security for any
indebtedness or other obligation.
Each share of Class B Common Stock is convertible, at the option of its
holder, at any time into one validly issued, fully paid and non-assessable
share of Class A Common Stock.
Stock Options
Effective June 1994, the Company issued stock options to three employees. In
connection with the Reorganization as described in Note 1, the options became
options to purchase an aggregate of 484,911 shares of Class A Common Stock,
387,929 of which were exercisable at June 30, 1998. These options vest ratably
over five years and are exercisable at prices ranging from $12.37 to $24.74
per share. No options have been exercised at June 30, 1998. With respect to
termination for any reason, so long as the Company is not public, the Company
will purchase from the employee and the employee will sell to the Company any
and all option shares owned by the employee and the option granted to the
employee for an amount equal to the fair market value of the option shares
owned by the employee plus the fair market value of the option shares with
respect to which the employee's option has vested but not exercised less the
exercise price.
In May 1998, the Company provided two employees compensation of $2,000,000
each in the form of an advance (the "Advances"). The Advances were included in
the employees' taxable income and bear no interest. Further, if the two
employees exercise any stock options to acquire shares of the Company's Class
A Common Stock, the two employees shall concurrently repay the Advances
through an increase in the purchase price in connection with the exercise.
Included in selling, general and administrative expenses for the eight
months ended June 30, 1996 and the years ended June 30, 1997 and June 30, 1998
is $3,800,000 and $3,760,000 and $0, respectively, and in accrued liabilities
at June 30, 1997 and June 30, 1998 is $20,960,000 and $16,040,000
respectively, related to compensation recorded in connection with these
options.
As of June 30, 1998, 646,548 shares of Class A Common Stock are reserved for
future issuance related to options.
F-29
<PAGE>
FOX FAMILY WORLDWIDE, INC.
(FORMERLY FOX KIDS WORLDWIDE, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company issued to an investment banker 160,000 shares of Class A Common
Stock as compensation for certain financial advisory and other investment
banking services rendered in connection with the negotiations, structuring,
formation and capitalization of the LLC. In connection therewith, $10,000,000
is included in the combined statement of operations for the eight months ended
June 30, 1996. The Company has reserved 160,000 shares of Class A Common Stock
for future issuances.
Mandatorily Redeemable Preferred Stock
In connection with the acquisition of IFE, the Company issued 345,000 shares
of Series A Mandatorily Redeemable Preferred Stock to Liberty IFE. The holders
of the Series A Mandatorily Redeemable Preferred Stock (or the "Liberty
Preferred") will receive cash dividends of 9% per annum in arrears, paid
quarterly. Any accrued or unpaid dividends will be added to the liquidation
price and until such accrued and unpaid dividends are paid in full, the
dividend rate will increase to 11.5% of the liquidation price. The liquidation
price is $1,000 per share plus any accrued and unpaid dividends.
Pursuant to the Funding Agreement among News Corp., NPAL, and the Company
(the "Funding Agreement"), each of News Corp. and NPAL has unconditionally
agreed that, upon the occurrence and during the continuation of an event of
default under the provisions governing the Series A Mandatorily Redeemable
Preferred Stock in the Company's Corrected Restated Certificate of
Incorporation or liquidation, dissolution, winding up or other similar event
of the Company, News Corp. or NPAL, as the case may be, will provide the
Company with the funds necessary to redeem in full, or pay the liquidation
distribution on all of the outstanding Series A Mandatorily Redeemable
Preferred Stock and to pay any other amounts owing in respect of such shares.
Pursuant to the Amended and Restated Strategic Stockholders Agreement (as
defined), such funds will be, except under certain circumstances, in the form
of an advance or loan to the Company. The following constitute events of
default with respect to the Series A Mandatorily Redeemable Preferred Stock
under the Corrected Restated Certificate of Incorporation: (i) the failure of
the Company to mandatorily redeem Series A Mandatorily Redeemable Preferred
Stock at the redemption dates indicated below; (ii) a breach for thirty days
of any of the covenants contained in the provisions governing the Series A
Mandatorily Redeemable Preferred Stock; and (iii) an event of default under
the terms of the preferred stock of NPAL, if any shares of which are
outstanding. In addition, pursuant to the Exchange Agreement among NPAL,
Liberty Media Corporation ("Liberty Media") and Liberty IFE (the "Exchange
Agreement"), each of the holders of the Series A Mandatorily Redeemable
Preferred Stock has the right, upon the occurrence and during the continuation
of an event of default under the Corrected Restated Certificate of
Incorporation or the liquidation, winding up or other similar event of the
Company, to exchange their shares for an equivalent number of shares of
preferred stock of NPAL.
The Series A Mandatorily Redeemable Preferred Stock issued to Liberty IFE
will rank senior as to dividend, redemption and liquidation rights to all
other classes and series of capital stock of the Company authorized on the
date of issuance, or to any other class or series of capital stock issued
while any shares of the Series A Mandatorily Redeemable Preferred Stock remain
outstanding. The Series A Mandatorily Redeemable Preferred Stock does not have
voting rights, except as required by law, nor will stockholders of Series A
Mandatorily Redeemable Preferred Stock have preemptive rights over any stock
or securities that may be issued by the Company.
Stock Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and related Interpretations in
accounting for its employee stock options.
F-30
<PAGE>
FOX FAMILY WORLDWIDE, INC.
(FORMERLY FOX KIDS WORLDWIDE, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Pro forma information regarding net income and earnings per share as
required by FASB Statement No. 123, "Accounting for Stock-Based Compensation,"
has been determined as if the Company had accounted for its employee stock
options under the fair value method of that Statement. The fair value for
these options was estimated at the date of grant in January 1996 to be
$2,623,000 using the minimum value method with the following weighted-average
assumptions, respectively: risk-free interest rate of 5.86%; dividend yields
of 0%; and a weighted-average expected life of the option of 5 years. The
remaining contractual life of these options is 7.5 years.
The minimum value valuation method was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
The pro forma net income (loss) determined as if the Company had accounted
for its employee stock options under the fair value method would be
$31,338,000, $39,915,000 and $(25,298,000) for the eight months ended June 30,
1996 and the years ended June 30, 1997 and 1998, respectively.
F-31
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
FCN Holding, Inc.
We have audited the accompanying consolidated balance sheets of FCN Holding,
Inc., as of July 2, 1995 and October 31, 1995, and the related consolidated
statements of operations, stockholder's equity, and cash flows for the period
from July 4, 1994 to July 2, 1995 and the period from July 3, 1995 to October
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of FCN Holding, Inc. and the results of its operations and its cash flows for
the period from July 4, 1994 to July 2, 1995 and the period from July 3, 1995
to October 31, 1995, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Los Angeles, California
September 27, 1996, except for
the second paragraph
of Note 10 as to which
the date is September 29, 1997
F-32
<PAGE>
FCN HOLDING, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 2, OCTOBER 31,
1995 1995
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents............................ $ -- $ 317,000
Accounts receivable, including $2,265,000 (July 2,
1995) and $2,341,000 (October 31, 1995) from related
parties............................................. 23,539,000 24,195,000
Programming costs, less accumulated amortization..... 26,143,000 27,085,000
Property and equipment, at cost, less accumulated
depreciation ....................................... 85,000 103,000
Other assets......................................... 49,000 1,107,000
----------- -----------
Total assets......................................... $49,816,000 $52,807,000
=========== ===========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Accounts payable..................................... $ 1,991,000 1,718,000
Accrued liabilities.................................. 876,000 1,291,000
Deferred revenue..................................... 1,763,000 791,000
Fox Kids Network affiliate participation payable..... 11,523,000 18,421,000
Accrued programming expenditures..................... 21,960,000 19,816,000
Administrative fee payable to a related party........ 4,828,000 6,173,000
Amounts payable to related parties................... 10,686,000 8,727,000
----------- -----------
Total liabilities.................................... 53,627,000 56,937,000
Commitments and contingencies -- --
Stockholder's deficit:
Common stock, no par value, 2,000 authorized,
issued and outstanding 2,000 shares............... 2,000 2,000
Retained deficit................................... (3,813,000) (4,132,000)
----------- -----------
Total stockholder's deficit.......................... (3,811,000) (4,130,000)
----------- -----------
Total liabilities and stockholder's deficit.......... $49,816,000 $52,807,000
=========== ===========
</TABLE>
See accompanying notes.
F-33
<PAGE>
FCN HOLDING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JULY 4, 1994 JULY 3, 1995
TO TO
JULY 2, 1995 OCTOBER 31, 1995
------------ ----------------
<S> <C> <C>
Net revenues (including $8,443,000 (July 2, 1995)
and $2,822,000 (October 31, 1995) from related
parties)........................................ $168,871,000 $46,286,000
Costs and expenses:
Production and programming .................... 109,259,000 29,698,000
Ancillary market distribution costs to a
related party ................................ 3,255,000 1,140,000
Administrative fee to a related party.......... 21,458,000 6,173,000
Selling, general and administrative (including
$1,075,000 (July 2, 1995) and $448,000
(October 31, 1995) to related parties)........ 5,202,000 2,566,000
Fox Kids Network affiliate participations...... 11,523,000 6,883,000
------------ -----------
Operating income (loss).......................... 18,174,000 (174,000)
------------ -----------
Interest expense to a related party.............. 1,630,000 145,000
------------ -----------
Income (loss) before provision for income taxes.. 16,544,000 (319,000)
Provision for income taxes....................... -- --
------------ -----------
Net income (loss)................................ $ 16,544,000 $ (319,000)
============ ===========
</TABLE>
See accompanying notes.
F-34
<PAGE>
FCN HOLDING, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------- RETAINED
SHARES AMOUNT DEFICIT TOTAL
------ ------ ------------- ------------
<S> <C> <C> <C> <C>
Balance at July 3, 1994............. 1,000 $1,000 $ (20,357,000) $(20,356,000)
Net income........................ -- -- 16,544,000 16,544,000
Issuance of stock................. 1,000 1,000 -- 1,000
----- ------ ------------- ------------
Balance at July 2, 1995............. 2,000 2,000 (3,813,000) (3,811,000)
Net loss.......................... -- -- (319,000) (319,000)
----- ------ ------------- ------------
Balance at October 31, 1995......... 2,000 $2,000 $ (4,132,000) $ (4,130,000)
===== ====== ============= ============
</TABLE>
See accompanying notes.
F-35
<PAGE>
FCN HOLDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JULY 4, 1994 JULY 3, 1995
TO TO
JULY 2, 1995 OCTOBER 31, 1995
------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................. $ 16,544,000 $ (319,000)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Amortization of programming costs........... 98,309,000 27,942,000
Depreciation................................ 17,000 13,000
Provision for doubtful accounts............. 480,000 --
Changes in operating assets and liabilities:
Accounts receivable....................... (5,528,000) (656,000)
Additions to programming costs ........... (107,368,000) (28,884,000)
Other assets.............................. 48,000 (1,058,000)
Accounts payable.......................... (376,000) (273,000)
Accrued liabilities....................... (219,000) 415,000
Administration fee payable to a related
party.................................... 199,000 1,345,000
Deferred revenue.......................... 1,763,000 (972,000)
Fox Kids Network affiliate participation
payable.................................. 11,523,000 6,898,000
Accrued programming expenditures.......... 908,000 (2,144,000)
------------- ------------
Net cash provided by operating activities..... 16,300,000 2,307,000
INVESTING ACTIVITIES
Purchase of property and equipment............ (91,000) (31,000)
------------- ------------
Net cash used in investing activities......... (91,000) (31,000)
FINANCING ACTIVITIES
Proceeds from related parties................. 180,765,000 68,308,000
Payments to related parties................... (197,242,000) (70,267,000)
------------- ------------
Net cash used in financing activities......... (16,477,000) (1,959,000)
------------- ------------
(Decrease) increase in cash and cash
equivalents.................................. (268,000) 317,000
Cash and cash equivalents at beginning of
period....................................... 268,000 --
------------- ------------
Cash and cash equivalents at end of period.... $ -- $ 317,000
============= ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for:
Interest.................................... $ 2,053,000 $ 201,000
============= ============
Income taxes................................ $ -- $ --
============= ============
</TABLE>
See accompanying notes.
F-36
<PAGE>
FCN HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1995
1. BASIS OF FINANCIAL STATEMENT PRESENTATION AND ORGANIZATION
The accompanying consolidated financial statements include the accounts of
FCN Holding, Inc. and its wholly-owned subsidiaries, Fox Kids Club, Fox Kids
Countdown and Fox Storymakers (collectively "FCN Holding"). All significant
intercompany transactions and accounts have been eliminated.
FCN Holding is an indirect subsidiary of Fox Broadcasting Company ("Fox
Broadcasting"), itself an indirect subsidiary of The News Corporation Limited.
FCN Holding's largest operating entity is an indirect wholly-owned subsidiary,
Fox Children's Network, Inc. ("FCN"), which began primary operations on
September 8, 1990. FCN Holding produces and licenses children's animated and
live-action television shows with initial exploitation on the Fox Broadcasting
television network followed by distribution in ancillary markets when such
rights exist.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR-END
FCN Holding's fiscal year ends on the Sunday closest to June 30.
REVENUE RECOGNITION
Advertising revenue is recognized as earned in the period in which the
advertising commercials are telecast and are net of agency commission fees of
$25,429,000 and $7,305,000 for the periods ended July 2, 1995 and October 31,
1995, respectively. Revenues from foreign and merchandising license
agreements, which provide for the receipt by FCN Holding of nonrefundable
guaranteed amounts, are recognized when the license period begins and the
product is available pursuant to the terms of the license agreement. Amounts
in excess of minimum guarantees under these license agreements are recognized
when earned. Amounts received in advance of recognition of revenue are
recorded as deferred revenue. FCN Holding generally provides advertisers with
guaranteed ratings in connection with its domestic network broadcasts. Revenue
is recorded net of estimated shortfalls, which are settled either by
additional advertising time ("make goods") or cash refunds to the advertiser.
FCN Holding accounts for the full amount of the estimated shortfall.
PROGRAMMING COSTS
Program licenses and rights include exhibition and exploitation rights
acquired under license agreements and costs of developing and producing
original programming for use by FCN Holding on its network. The individual
film forecast method is used to amortize programming costs in which FCN
Holding owns or controls distribution rights. Costs accumulated in the
production of a program are amortized in the proportion that gross revenues
realized bear to management's estimate of the total gross revenues expected to
be received. Estimated liabilities for residuals and participations are
accrued and expensed in the same manner as programming cost inventories are
amortized.
For programs in which the Company acquires only broadcast network rights,
the Company amortizes such program costs over the estimated number of
telecasts. The Company evaluates its programming rights for possible changes
in the estimated number of telecasts or the possibility of impairment.
Revenue estimates on a program-by-program basis are reviewed periodically by
management and are revised, if warranted, based upon management's appraisal of
current market conditions, such as changes in the
F-37
<PAGE>
FCN HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
distribution marketplace or changes in expected usage of a program on the
network. Based on this review, if estimated future gross revenues from a
program are not sufficient to recover the unamortized costs, the unamortized
programming cost will be written down to net realizable value.
CONCENTRATION OF CREDIT RISKS
Financial instruments which potentially subject FCN Holding to concentration
of credit risk consist principally of temporary cash investments and trade
receivables. FCN Holding places its temporary cash investments with high
credit quality financial institutions and therefore is subject to reduced
risk. FCN Holding has not incurred any losses relating to these investments.
At October 31, 1995, substantially all of FCN Holding's trade receivables
were from advertising agencies. FCN Holding performs periodic credit
evaluations of its customers' financial condition and generally does not
require collateral. Receivables generally are due within 30 days. Credit
losses relating to advertising agencies consistently have been within
management's expectations.
CASH AND CASH EQUIVALENTS
For the purposes of balance sheet classification and the statement of cash
flows, FCN Holding considers all highly liquid investments that are both
readily convertible into cash with original maturities when purchased of three
months or less to be cash equivalents.
FINANCIAL INSTRUMENTS
Financial instruments are carried at historical cost which approximates fair
value.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost and depreciation is computed
using the straight-line method over their estimated useful lives of three to
five years. Leasehold improvements are amortized over the lesser of the term
of the lease or the estimated useful lives of the improvements using the
straight-line method.
INCOME TAXES
FCN Holding provides for income taxes based on the liability method under
Statement of Financial Accounting Standards No. 109. Under this method,
deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes including amortization of programming costs. Actual results
could differ from those estimates. Management periodically reviews and revises
its estimates of future airings and revenues for program costs, as necessary,
which may result in revised amortization of its program costs and may be
significantly affected by the periodic adjustments in such amortization.
ADVERTISING COSTS
Included in selling, general and administrative expenses are advertising
expenses amounting to $1,639,000 and $1,350,000 for the year ended July 2,
1995 and for the four months ended October 31, 1995, respectively.
F-38
<PAGE>
FCN HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. PROGRAMMING COSTS
Programming costs, net of accumulated amortization, are comprised of the
following:
<TABLE>
<CAPTION>
JULY 2, OCTOBER 31,
1995 1995
------------ ------------
<S> <C> <C>
Programming costs, broadcast.................... $244,599,000 $261,078,000
Programming costs, produced..................... 89,493,000 99,730,000
Programming costs in development and
production..................................... 1,298,000 3,466,000
------------ ------------
335,390,000 364,274,000
------------ ------------
Accumulated amortization........................ 309,247,000 337,189,000
------------ ------------
$ 26,143,000 $ 27,085,000
============ ============
</TABLE>
Based on FCN Holding's estimate of future revenues, substantially all of the
unamortized released programming costs at October 31, 1995 will be amortized
during the three year period ending October 31, 1998.
4. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
JULY 2, OCTOBER 31,
1995 1995
------- -----------
<S> <C> <C>
Computer equipment..................................... $93,000 $100,000
Office furniture and fixtures.......................... 4,000 28,000
Machinery and equipment................................ 41,000 41,000
Leasehold improvements................................. 32,000 32,000
------- --------
170,000 201,000
Less accumulated depreciation.......................... 85,000 98,000
------- --------
$85,000 $103,000
======= ========
</TABLE>
5. RELATED PARTY TRANSACTIONS
FCN and Twentieth Century Fox Licensing and Merchandising, a unit of Fox,
Inc. ("Twentieth Fox Licensing") are parties to a Merchandising Rights
Acquisition Agreement, dated as of July 1, 1990, pursuant to which FCN
licenses to Twentieth Fox Licensing the worldwide merchandising and licensing
rights, in perpetuity, to programming owned or controlled by FCN. In
consideration for the rights granted, Twentieth Fox Licensing agreed to pay to
FCN an amount equal to 100% of net profits, which equaled gross receipts less
distribution fees and expenses.
FCN and Twentieth Century Fox Film Corporation ("Twentieth Century Fox") are
parties to a Distribution Rights Acquisition Agreement, dated as of September
1, 1990, pursuant to which FCN licensed to Twentieth Century Fox the worldwide
distribution rights, in perpetuity, with respect to programming owned or
controlled by FCN. In consideration for the rights granted, Twentieth Century
Fox agreed to pay to FCN 100% of net profits as defined in the agreement.
FCN and Fox Broadcasting are parties to an Administration Agreement, dated
as of February 7, 1990, pursuant to which Fox Broadcasting agreed to provide
the following services to FCN: network national advertising sales and the
administration thereof, commercial trafficking and broadcast operations
(including program delivery to Fox Kids Network Affiliates (see Note 8--"Fox
Kids Network Affiliate Participation
F-39
<PAGE>
FCN HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Payable")) and overhead charges related to Fox Broadcasting in-house
administrative support in the areas of research, promotion, business affairs,
legal affairs and accounting. FCN agreed to pay to Fox Broadcasting a fee
equal to 15% of 100% of the net advertising revenue (gross advertising revenue
less advertising agency commissions) derived with respect to national
commercials, commercial material or other advertising matter included or used
in connection with any of the programs exhibited on the Fox Kids Network.
FCN Holding leases office space on a month to month basis from a company
related to Fox Broadcasting. Rent expense to this related party was $231,000
and $88,000 for the periods ended July 2, 1995 and October 31, 1995.
Related companies of Fox Broadcasting have funded the operation of FCN
Holding from its inception through loans to FCN Holding. All amounts derived
by the operations of FCN Holding are used to reduce such outstanding
borrowings. Amounts outstanding bear interest at the prime rate (8.75% at
October 31, 1995). Amounts due to the related companies of Fox Broadcasting
including interest totalled $10,686,000 and $8,727,000 at July 2, 1995 and
October 31, 1995, respectively.
6. INCOME TAXES
FCN Holding, together with other related companies of Fox Broadcasting,
files consolidated federal and state income tax returns. No deferred tax
assets or liabilities arising from FCN Holding's activities have been
allocated.
FCN Holding did not incur any current or deferred tax expense due to the
utilization of prior year net operating loss carryforwards.
The actual tax expense differs from the "expected" federal tax rate of 35%
as follows:
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JULY 4, 1994 JULY 3, 1995
TO TO
JULY 2, 1995 OCTOBER 31, 1995
------------ ----------------
<S> <C> <C>
Computed "expected" tax expense............... 35 % -- %
Impact of utilized net operating loss
carryforward................................. (35)% -- %
--- ---
-- --
=== ===
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
Future estimated program commitments are approximately $58,648,000.
FCN Holding is involved in certain legal proceedings arising from the normal
course of operations. Management believes that the ultimate resolution of
these matters will not have a material effect on its financial position or
results of operations.
FCN Holding has entered into employment agreements with several key
employees extending through fiscal year 1999 requiring future payments of
$1,135,000 in the one year period ended October 31, 1996, $788,000 in the one
year period ended October 31, 1997 and $257,000 in the one year period ended
October 31, 1998.
8. FOX KIDS NETWORK AFFILIATE PARTICIPATION PAYABLE
Pursuant to the terms of the affiliation agreements ("Agreement") among Fox
Broadcasting and substantially all of its affiliated television stations ("Fox
Kids Network Affiliates"), the Fox Kids Network Affiliates in total are
entitled to compensation which is equal to 100% of FCN's programming Net
Profits (as
F-40
<PAGE>
FCN HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
defined below). Amounts payable under these compensation arrangements are due
quarterly in amounts derived pursuant to the provisions in the Agreement. Net
profits are defined on a cumulative basis to include amounts actually received
by FCN from the exhibition, distribution and other exploitation of FCN
Holding's programs and the merchandising and other rights relating thereto,
less amounts paid for administrative fees, production/license fees,
distribution and merchandising fees (including those payable to FCN Holding),
overhead and other expenses and reserves.
9. MAJOR CUSTOMERS AND PROPERTIES
For the period ended July 2, 1995, FCN Holding earned net revenues from two
significant customers of approximately $16,662,000 (10%) and $16,061,000
(10%). For the period ended October 31, 1995, FCN earned net revenues from
three significant customers of approximately $5,527,000 (12%), $5,706,000
(12%) and $4,724,000 (10%). For the periods ended July 2, 1995 and October 31,
1995, FCN Holding earned net revenues from one significant property (Power
Rangers) of $55,805,000 (33%) and $10,847,000 (23%), respectively.
10. SUBSEQUENT EVENT
On November 1, 1995 (the "Effective Date") FCN Holding and Saban
Entertainment, Inc. ("Saban") formed Fox Kids Worldwide, L.L.C. (the "LLC"), a
limited liability company, for the purpose of jointly expanding the worldwide
childrens' businesses of FCN Holding and Saban. Since the Effective Date, FCN
Holding and Saban have been operated by their respective managements subject
to the overall supervision of the members committee of the LLC.
THE REORGANIZATION
Fox Kids Worldwide Inc. was incorporated in August 1996 to act as a holding
company of FCN Holding, Saban and the LLC. Between August 1996 and August
1997, it conducted no business or operations. On August 1, 1997, in connection
with Fox Kids Worldwide Inc.'s acquisition of a controlling interest in
International Family Entertainment, Inc., (i) Fox Broadcasting Sub, Inc., a
wholly owned indirect subsidiary of Fox Broadcasting, exchanged its capital
stock in FCN Holding, which indirectly owned the FCN, for 7,920,000 shares of
Class B Common Stock of Fox Kids Worldwide Inc., (ii) the other stockholder of
FCN Holding exchanged its capital stock in FCN Holding for an aggregate of
160,000 shares of Class A Common Stock of Fox Kids Worldwide Inc., (iii) Haim
Saban and the other stockholders of Saban exchanged their capital stock of
Saban for an aggregate of 7,920,000 shares of Class B Common Stock of Fox Kids
Worldwide Inc. and (iv) all outstanding management options to purchase Saban
capital stock became options to purchase an aggregate of 646,548 shares of
Class A Common Stock of Fox Kids Worldwide Inc. In addition, Fox Broadcasting
exchanged its preferred, non-voting interest in the LLC and its $50 million
contingent note receivable from the LLC for a new approximately $108.6 million
subordinated note from Fox Kids Worldwide Inc. (which also included
approximately $8.6 million of intercompany indebtedness). As a result of these
transactions, FCN Holding, FCN, Saban and the LLC became direct or indirect
wholly owned subsidiaries of Fox Kids Worldwide Inc.
F-41
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Saban Entertainment, Inc.
We have audited the accompanying consolidated balance sheets of Saban
Entertainment, Inc. as of May 31, 1995 and as of October 31, 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year ended May 31, 1995 and for the five months ended October
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Saban Entertainment, Inc. at May 31, 1995, and at October 31, 1995 and the
results of its operations and its cash flows for the year ended May 31, 1995
and for the five months ended October 31, 1995, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Los Angeles, California
September 27, 1996 except for
the third paragraph of
Note 11 as to which the
date is September 29, 1997.
F-42
<PAGE>
SABAN ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31, OCTOBER 31,
1995 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents........................... $ 14,584,000 $ 16,207,000
Restricted cash..................................... 5,000,000 5,000,000
Accounts receivable, net of allowance for doubtful
accounts of $1,385,000 at May 31, 1995 and
$1,385,000 at October 31, 1995..................... 37,338,000 30,157,000
Amounts receivable from related parties............. 3,796,000 3,832,000
Programming costs, less accumulated amortization.... 115,873,000 118,210,000
Property and equipment, at cost, less accumulated
depreciation ...................................... 3,630,000 7,079,000
Deferred income taxes............................... 35,473,000 26,186,000
Other assets........................................ 2,503,000 808,000
------------ ------------
Total assets........................................ $218,197,000 $207,479,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable.................................... $ 6,818,000 $ 8,817,000
Accrued liabilities................................. 29,606,000 23,411,000
Deferred revenue.................................... 62,755,000 48,155,000
Accrued residuals and participations................ 9,672,000 10,074,000
Income taxes payable................................ 36,378,000 15,680,000
Deferred income taxes............................... 9,233,000 766,000
Debt................................................ 5,623,000 5,605,000
Amounts payable to related parties.................. -- --
------------ ------------
160,085,000 112,508,000
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 10,000 shares
authorized, 800 shares issued and outstanding at
May 31, 1995 and October 31, 1995 ............... -- --
Contributed capital............................... 11,751,000 11,751,000
Cumulative translation adjustment................. (71,000) 46,000
Retained earnings................................. 46,432,000 83,174,000
------------ ------------
Total stockholders' equity.......................... 58,112,000 94,971,000
------------ ------------
Total liabilities and stockholders' equity.......... $218,197,000 $207,479,000
============ ============
</TABLE>
See accompanying notes.
F-43
<PAGE>
SABAN ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FIVE MONTHS ENDED
YEAR ENDED OCTOBER 31,
MAY 31, 1995 1995
------------ -----------------
<S> <C> <C>
Revenues......................................... $242,468,000 $105,130,000
Costs and expenses:
Production and programming..................... 117,557,000 42,022,000
Selling, general and administrative............ 51,894,000 11,538,000
------------ ------------
Operating income................................. 73,017,000 51,570,000
Interest expense................................. 1,315,000 539,000
------------ ------------
Income before provision for income taxes......... 71,702,000 51,031,000
Provision for income taxes....................... 27,027,000 14,289,000
------------ ------------
Net income....................................... $ 44,675,000 $ 36,742,000
============ ============
</TABLE>
See accompanying notes.
F-44
<PAGE>
SABAN ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK CUMULATIVE
-------------- CONTRIBUTED TRANSLATION RETAINED
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS TOTAL
------ ------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1994....... 1,067 $-- $11,751,000 $(255,000) $ 41,757,000 $ 53,253,000
Exchange gain on translation
of foreign subsidiaries'
financial statements....... -- -- -- 184,000 -- 184,000
Purchase of minority
stockholder shares......... (267) -- -- -- (40,000,000) (40,000,000)
Net income.................. -- -- -- -- 44,675,000 44,675,000
----- ---- ----------- --------- ------------ ------------
Balance at May 31, 1995....... 800 -- 11,751,000 (71,000) 46,432,000 58,112,000
Exchange gain on translation
of foreign subsidiaries'
financial statements....... -- -- -- 117,000 -- 117,000
Net income.................. -- -- -- -- 36,742,000 36,742,000
----- ---- ----------- --------- ------------ ------------
Balance at October 31, 1995... 800 $-- $11,751,000 $ 46,000 $ 83,174,000 $ 94,971,000
===== ==== =========== ========= ============ ============
</TABLE>
See accompanying notes.
F-45
<PAGE>
SABAN ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FIVE MONTHS
ENDED
YEAR ENDED OCTOBER 31,
MAY 31, 1995 1995
------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income....................................... $ 44,675,000 $ 36,742,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of programming costs.............. 84,109,000 32,651,000
Depreciation................................... 1,296,000 571,000
Cumulative translation adjustment.............. 184,000 117,000
Provision for doubtful accounts................ 1,000,000
Changes in operating assets and liabilities:
Restricted cash.............................. (4,701,000) --
Accounts receivable.......................... (100,000) 7,181,000
Amounts receivable from related parties...... (2,649,000) (36,000)
Additions to programming costs............... (114,903,000) (34,988,000)
Other assets................................. (1,752,000) 1,695,000
Accounts payable............................. 2,610,000 1,999,000
Accrued liabilities.......................... 26,127,000 (6,195,000)
Accrued residuals and participations......... (2,663,000) 402,000
Accrued interest to related parties.......... (2,359,000) --
Income taxes payable and deferred income
taxes....................................... 153,000 (19,878,000)
Deferred revenue............................. 47,991,000 (14,600,000)
------------- ------------
Net cash (used in) provided by operating
activities...................................... 79,018,000 5,661,000
INVESTING ACTIVITIES
Purchase of property and equipment............... (2,242,000) (4,020,000)
------------- ------------
Net cash used in investing activities............ (2,242,000) (4,020,000)
FINANCING ACTIVITIES
Proceeds from bank borrowings.................... 7,395,000 11,000,000
Payments on bank borrowings...................... (21,663,000) (11,018,000)
Proceeds from related parties.................... 1,000,000 --
Payments to related parties...................... (12,773,000) --
Purchase of minority stockholder shares.......... (40,000,000) --
------------- ------------
Net cash provided by (used in) financing
activities...................................... (66,041,000) (18,000)
------------- ------------
Increase in cash and cash equivalents............ 10,735,000 1,623,000
Cash and cash equivalents at beginning of year... 3,849,000 14,584,000
------------- ------------
Cash and cash equivalents at end of year......... $ 14,584,000 $ 16,207,000
============= ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest (net of amounts capitalized).......... $ 3,280,000 $ 347,000
============= ============
Income taxes................................... $ 26,884,000 $ 34,156,000
============= ============
</TABLE>
See accompanying notes.
F-46
<PAGE>
SABAN ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1995
1. BASIS OF FINANCIAL STATEMENTS PRESENTATION AND ORGANIZATION
Saban Entertainment, Inc. and its subsidiaries (collectively "Saban"), is a
broad-based entertainment company specializing in the creation, production,
acquisition, distribution, merchandising and licensing of animated and live-
action children's programming in the worldwide entertainment marketplace.
Saban is one of the largest independent suppliers of children's programming
in the world and its library of children's television programming is one of
the largest children's libraries in the world. Saban provides programming in
all dayparts for network, first-run syndication and cable television for both
domestic and international television. In the United States, Saban syndicates
its programming under the Saban Kids Network name.
In addition, Saban is involved in the creation and production of music and
the acquisition of international distribution rights to telefilms and mini
series. Saban's operations are conducted through offices in the United States,
France, Switzerland, Germany, Italy and the United Kingdom.
The accompanying consolidated financial statements include the accounts of
Saban Entertainment, Inc. and subsidiaries. All significant intercompany
transactions and accounts have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenues from television, music and merchandising lease agreements, which
provide for the receipt by the Company of nonrefundable guaranteed amounts,
are recognized when the lease period begins, collectibility is reasonably
assured and the product is available pursuant to the terms of the lease
agreement. Amounts in excess of minimum guarantees under these lease
agreements are recognized when earned. Amounts received in advance of
recognition of revenue are recorded as deferred revenue. Barter revenues,
representing the exchange of programming for advertising time on a television
station, are recognized upon the airing of an advertisement during such
advertising time and related programming costs are amortized in accordance
with the individual film forecast method.
PROGRAMMING COSTS
Programming costs, consisting of direct production costs, acquisition of
story rights, costs to acquire distribution rights, allocable production
overhead, interest and exploitation costs (which benefit future periods) are
capitalized as incurred. The individual film forecast method is used to
amortize programming costs in which Saban owns or controls distribution
rights. Costs accumulated in the production of a program are amortized in the
proportion that gross revenues realized bear to management's estimate of the
total gross revenues expected to be received. Estimated liabilities for
residuals and participations are accrued and expensed in the same manner as
programming cost inventories are amortized.
Revenue estimates on a program-by-program basis are reviewed periodically by
management and are revised, if warranted, based upon management's appraisal of
current market conditions. Based on this review, if estimated future gross
revenues from a program are not sufficient to recover the unamortized costs,
the unamortized programming cost will be written down to net realizable value.
CONCENTRATION OF CREDIT RISKS
Financial instruments which potentially subject Saban to concentration of
credit risk consist principally of temporary cash investments and trade
receivables. Saban places its temporary cash investments principally in a
F-47
<PAGE>
SABAN ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
mutual fund which invests in government securities and therefore are subject
to reduced risk. Saban has not incurred any losses relating to these
investments.
Saban leases its product to distributors and broadcasters throughout the
world. Saban performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Generally, payment is
received in full or in part prior to Saban's release of product to such
distributors and broadcasters. At October 31, 1995, substantially all of
Saban's trade receivables were from customers in the entertainment or
broadcast industries. Receivables generally are due within 30 days. Credit
losses relating to customers in the entertainment and broadcast industries
consistently have been within management's expectations.
CASH AND CASH EQUIVALENTS
For the purposes of balance sheet classification and the statement of cash
flows, Saban considers all highly liquid investments that are both readily
convertible into cash with original maturities when purchased of three months
or less to be cash equivalents.
RESTRICTED CASH
Restricted cash represents amounts held by financial institutions as
collateral on outstanding debt.
FINANCIAL INSTRUMENTS
Financial instruments are carried at historical cost which approximates fair
value.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost and depreciation is computed
using the straight-line method over their estimated useful lives of five
years. Leasehold improvements are amortized over the lesser of the term of the
lease or the estimated useful lives of the improvement using the straight-line
method.
FOREIGN CURRENCY TRANSLATION AND CUMULATIVE ADJUSTMENT
Saban International N.V. ("SINV"), a wholly-owned subsidiary of Saban uses
the U.S. dollar as the functional currency. Saban International Paris S.A.R.L.
("SIP"), Saban Entertainment Germany GmbH and Saban Merchandising and
Licensing GmbH and Saban Entertainment (UK) Limited, all foreign subsidiaries
of Saban, use local currency as the functional currency. Assets and
liabilities are translated into U.S. dollars at current exchange rates.
Revenue and expenses have been translated into U.S. dollars based generally on
the average rates prevailing during the period.
Gains and losses arising from foreign currency transactions are included in
determining net income for the period. The aggregate transaction gains for the
years ended May 31, 1995, and for the five months ended October 31, 1995 were
$577,000 and $135,000, respectively.
The cumulative translation adjustment in stockholders' equity at May 31,
1994 and 1995, and at October 31, 1995, represents Saban's net unrealized
exchange (losses) gains on the translation of foreign subsidiaries' financial
statements.
INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("FAS") No. 109, "Accounting for Income
Taxes." Saban adopted the provisions of the new
F-48
<PAGE>
SABAN ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
standard in its financial statements for the year ended May 31, 1994. As
permitted by the FAS, prior year financial statements have not been restated
to reflect the change in accounting method. The cumulative effect as of June
1, 1993, of adopting FAS 109 was not material to Saban's financial statements.
Under FAS 109, the liability method is used in accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. Prior to the adoption
of FAS 109, income tax expense was determined using the deferred method.
Deferred tax expense was based on items of income and expense that were
reported in different years in the financial statements and the tax returns
and were measured at the tax rate in effect in the year the difference
originated.
STOCK-BASED COMPENSATION
Saban accounts for its stock compensation arrangements under the provisions
of Accounting Principles Board No. 25, "Accounting for Stock Issued to
Employees" and intends to continue to do so.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes including amortization of programming costs. Actual results
could differ from those estimates. Management periodically reviews and revises
its estimates of future airings and revenues for program costs, as necessary,
which may result in revised amortization of its program costs and may be
significantly affected by the periodic adjustments in such amortization.
3. PROGRAMMING COSTS
Programming costs, net of accumulated amortization, is comprised of the
following:
<TABLE>
<CAPTION>
MAY 31, 1995
-----------------------------------------
ACCUMULATED NET PROGRAMMING
COST AMORTIZATION COSTS
------------ ------------ ---------------
<S> <C> <C> <C>
Children's programming................ $203,765,000 $147,813,000 $ 55,952,000
Movies and mini-series................ 101,656,000 76,211,000 25,445,000
Projects in production................ 33,008,000 -- 33,008,000
Development........................... 1,468,000 -- 1,468,000
------------ ------------ ------------
$339,897,000 $224,024,000 $115,873,000
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31, 1995
-----------------------------------------
ACCUMULATED NET PROGRAMMING
COST AMORTIZATION COSTS
------------ ------------ ---------------
<S> <C> <C> <C>
Children's programming................ $237,286,000 $177,232,000 $ 60,054,000
Movies and mini-series................ 112,554,000 79,443,000 33,111,000
Projects in production................ 24,177,000 -- 24,177,000
Development........................... 868,000 -- 868,000
------------ ------------ ------------
$374,885,000 $256,675,000 $118,210,000
============ ============ ============
</TABLE>
F-49
<PAGE>
SABAN ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Based on Saban's estimate of future revenues, approximately 70% of
unamortized released programming costs at October 31, 1995 will be amortized
during the three years ending October 31, 1998. Interest in the amount of
$304,000 and $32,000 was capitalized to programming costs during the years
ended May 31, 1995 and for the five months ended October 31, 1995,
respectively.
4. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
MAY 31, OCTOBER 31,
1995 1995
---------- -----------
<S> <C> <C>
Studio equipment ....................................... $5,280,000 $ 5,832,000
Office furniture and fixtures........................... 907,000 1,505,000
Leasehold improvements.................................. 1,095,000 3,965,000
Other................................................... 64,000 64,000
---------- -----------
7,346,000 11,366,000
Less accumulated depreciation........................... 3,716,000 4,287,000
---------- -----------
$3,630,000 $ 7,079,000
========== ===========
</TABLE>
5. DEBT
Debt is comprised of the following:
<TABLE>
<CAPTION>
MAY 31, OCTOBER 31,
1995 1995
---------- -----------
<S> <C> <C>
Imperial Bank; secured revolving line of credit;
interest at prime rate (8.75% at October 31, 1995) plus
.5% due monthly; maximum borrowings of $25,000,000
(terminated on December 4, 1995)....................... $ -- $ --
DeNationale Investeringsbank N.V.; secured line of
credit due
July 31, 1997; interest at three month or six month
LIBOR (5.94% and 5.88%, respectively, at October 31,
1995) plus 0.4% paid quarterly; maximum borrowings of
$5,000,000............................................. 5,000,000 5,000,000
Coficine; secured revolving credit facility due March
28, 1996; interest at the bank's basis rate (8.1% at
October 31, 1995) plus 1% paid quarterly; maximum
borrowings of FF 7,200,000............................. 623,000 605,000
---------- ----------
$5,623,000 $5,605,000
========== ==========
</TABLE>
In July 1995, Saban and SINV separately entered into credit agreements with
Imperial Bank ("Imperial"), as agent, and a group of lenders for secured
revolving credit facilities ("Credit Facilities") aggregating $50 million
maturing on July 31, 1998. Interest on the borrowings is at either the prime
rate (8.75% at October 31, 1995) plus .5% or .25% depending on Saban's and
SINV's tangible net worth or at three month or six month LIBOR (5.94% and
5.88%, respectively, at October 31, 1995) plus 2.25% or 2% depending on
Saban's and SINV's tangible net worth. Interest is payable at the end of the
interest period which is either one, three or six months. Saban and SINV are
required to pay a quarterly commitment fee of .25% per annum of the average
daily unused portion of the commitment. Saban and SINV also paid a loan fee
amounting to .75% of the commitment. The combined amount available for
borrowing under the Credit Facilities at any time is limited in accordance
with a formula based upon the value of collateral in Saban's and SINV's
borrowing bases. The borrowing bases include on and off balance sheet
receivables and amounts attributable to the value of Saban's
F-50
<PAGE>
SABAN ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and SINV's film library. Saban's credit facility is secured by substantially
all of the assets of Saban and its subsidiaries (excluding SINV and other
foreign subsidiaries of Saban) and SINV's credit facility is secured by
substantially all of the assets of Saban and its subsidiaries. The Credit
Facilities restrict the payment of dividends. The Credit Facilities contain
restrictive covenants regarding, among other things, additional indebtedness,
payments and advances for product, the maintenance of certain financial ratios
and restrictions on the disposition of assets. At October 31, 1995 Saban and
SINV were in compliance or had obtained waivers for those covenants. At
October 31, 1995 no amounts have been borrowed under the Credit Facilities.
In June 1993, SINV entered into a credit agreement with Imperial as agent
and DeNationale Investeringsbank N.V. (the "Bank Facility"). An additional
bank, Banque Nationale de Paris was added to the Bank Facility in March 1994.
SINV paid a quarterly commitment fee of .5% per annum of the average daily
unused portion of the commitment. Substantially all of SINV's cash collections
were paid into accounts controlled by Imperial and applied to repayment of
borrowings under the Bank Facility. The restricted cash balance of $299,000 at
May 31, 1994, represented cash held by Imperial and not yet transferred to
Saban. The amount that SINV borrowed was based upon the value of collateral in
the borrowing base which consists principally of accounts receivable. All
borrowings were collateralized by substantially all of the assets of Saban.
Further, Saban agreed to maintain, on a quarterly average basis, $1,000,000 in
compensating balances at Imperial. The Bank Facility contained restrictive
covenants regarding, among other things, additional indebtedness, payments and
advances for product, the maintenance of certain financial ratios and
restrictions on the disposition of assets. On December 4, 1995, the Bank
Facility was replaced by the Credit Facilities and any outstanding obligation
plus interest was paid.
SIP has a revolving credit facility with Coficine bank which provides for
borrowings against project receivables up to a maximum of FF 7,200,000
($1,475,000 at October 31, 1995). In March 1996 the outstanding obligation
plus interest was paid in full.
In September 1994, SIP entered into a credit agreement with DeNationale
Investeringsbank N.V. ("NIB"). The facility provides for maximum borrowings of
$5,000,000. The facility is secured by a $5,000,000 deposit at NIB pledged by
SINV. Such $5,000,000 deposit is included in restricted cash at October 31,
1995 and at May 31, 1995. In April 1996 the outstanding obligation plus
interest was paid in full and SIP and NIB entered into a new agreement for a
facility with similar terms, providing maximum borrowings of $8,000,000. The
new facility is secured by an $8,000,000 deposit at NIB pledged by SINV.
6. RELATED PARTY TRANSACTIONS
In March 1995, Saban purchased all of the outstanding shares of Saban held
by a former minority stockholder.
Receivables from stockholders and related parties consist of the following:
<TABLE>
<CAPTION>
MAY 31 OCTOBER 31
1995 1995
---------- ----------
<S> <C> <C>
Advances due from the Chairman and Chief Executive
Officer of Saban ("Haim Saban"), or entities controlled
by Haim Saban, interest at prime rate (8.75% at October
31, 1995) plus 1% and due on demand.................... $2,649,000 $2,610,000
Advances to certain non-stockholder officers and
directors of Saban ($885,000 at 5% and $337,000
noninterest bearing with varying due dates)............ 1,147,000 1,222,000
---------- ----------
$3,796,000 $3,832,000
========== ==========
</TABLE>
F-51
<PAGE>
SABAN ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
An outside director of Saban acts as a legal consultant to Saban. Fees paid
to this director were approximately $153,000 and $62,000 for the years ended
May 31, 1995 and for the five months ended October 31, 1995, respectively.
In September 1994, Saban entered into a music services agreement (the "Music
Agreement") with Haim Saban. The Music Agreement remains in effect until
August 31, 2001. Under the terms of the Music Agreement, all original theme
music, underscore, cues and songs for use in all programming produced by Saban
will be supplied through Haim Saban. Saban has been granted the non-exclusive,
worldwide, perpetual license to (i) synchronize and perform compositions in
theatrical motion pictures and (ii) synchronize composition in all other forms
of programming and has the royalty-free right to use the compositions in
articles of merchandise such as home video units, video games and interactive
toys. All music publishing income earned in connection with such musical
compositions is retained by Haim Saban. As of October 31, 1995, no amounts
were owed to Haim Saban pursuant to the terms of the Music Agreement.
Saban currently licenses and distributes its entertainment properties (e.g.,
motion pictures, television programs, merchandising and licensing rights) in
Israel through Duveen Trading Ltd. ("Distributor"), a corporation owned wholly
by Haim Saban's brother. The term of the agreement extends through
December 31, 1997, subject to extension by Saban for an additional three
years. Duveen Trading Ltd. is not obligated to make any payments to Saban
under this agreement.
7. COMMITMENTS AND CONTINGENCIES
Saban leased office space in Burbank, California, under a ten year lease
which was terminated in December 1995, and a lease termination fee of $305,000
was paid. Saban also leases office space in New York City under a three year
lease which is cancelable after the end of each year by payment of a
termination fee. In addition, Saban leases office space in Paris, France,
Cologne, Germany and London, England under nine year, five year and three year
operating leases, respectively. The Paris, France lease provides for
termination on February 28, 1999 and February 28, 2002, both upon six months
advance written notice. The London, England lease provides for early
termination upon six months advance written notice.
In July 1995, Saban entered into a 10 year lease which commenced on April 1,
1996 for office space in Los Angeles, California. The lease contains two
separate five-year extension options and provides for early termination at the
end of the sixth and eighth years upon payment of a termination fee. The lease
calls for monthly payments plus maintenance and property tax payments. Saban
also has two leases for production facilities, one is a short-term lease in
Los Angeles, California originally expiring in November 1995 and subsequently
extended to March 1997, and the other is a two year lease in Valencia,
California expiring in January 1997 and subject to two separate one-year
extension options.
Noncancelable future minimum payments for the remainder of the initial,
noncancelable lease periods are as follows:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
OCTOBER 31,
- -------------------
<S> <C>
1996.......................................................... $ 2,449,000
1997.......................................................... 2,921,000
1998.......................................................... 1,838,000
1999.......................................................... 2,589,000
2000.......................................................... 3,157,000
Thereafter.................................................... 20,105,000
-----------
$33,059,000
===========
</TABLE>
F-52
<PAGE>
SABAN ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Rent expense for the years ended May 31, 1995 and for the five months ended
October 31, 1995, net of amounts capitalized, was approximately $797,000 and
$365,000, respectively.
Saban is involved in various lawsuits, both as a plaintiff and defendant, in
the ordinary course of its business. Based on an evaluation which included
consultation with counsel concerning legal and factual issues involved,
management is of the opinion that the foregoing claims and lawsuits will not
have a material adverse effect on Saban's consolidated financial position.
Saban has entered into employment agreements with certain key members of
management including Haim Saban. Such agreements are for terms ranging from
one to seven years and generally include bonus provisions. Future minimum
payments under these agreements approximate $20,939,000 of which $5,184,000 is
due for the twelve months ended October 31, 1996, $5,104,000 is due in the
twelve months ended October 31, 1997, $4,434,000 is due in the twelve months
ended October 31, 1998 and $6,216,000 is due thereafter.
Effective June 1994, Saban issued to two employees and a consultant options
to purchase an aggregate of 48.981 shares of common stock, 9.796 of which were
exercisable at October 31, 1995. These options vest ratably over five years
and are exercisable at $122,496 per share, which approximates the fair market
value at the time of grant. No options have been exercised at October 31,
1995. With respect to termination for any reason, so long as the Company is
not public, the Company will purchase from the employee and the employee will
sell to the Company any and all option shares owned by the employee and the
option granted to the employee for an amount equal to the fair market value of
the option shares owned by the employee plus the fair market value of the
option shares with respect to which the employee's option has vested but not
exercised less the exercise price. Included in selling, general and
administrative expenses is $11,000,000 and $2,400,000 for the year ended
May 31, 1995 and the five months ended October 31, 1995, respectively, and in
accrued liabilities is $11,000,000 and $13,400,000 at May 31, 1995 and October
31, 1995, respectively, related to compensation recorded in connection with
these options.
As of October 31, 1995, 48.981 shares of common stock are reserved for
future issuance related to options.
8. PROFIT SHARING PLAN
Saban has a qualified tax deferred profit sharing plan (the "Plan") for all
of its eligible employees. Under the Plan, employees become eligible on the
first January 1 following such employees' completion of six months of service
with Saban. Each participant is permitted to make voluntary contributions, not
to exceed 15% of his or her respective compensation and the applicable
statutory limitation, which are immediately 100% vested. Saban, at the
discretion of the Board of Directors, may make matching contributions to the
Plan. Related expense for the years ended May 31, 1995, and for the five
months ended October 31, 1995 was approximately $40,000 and $10,000,
respectively.
9. INCOME TAXES
Effective June 1, 1993, Saban changed its method of accounting for income
taxes from the deferred method to the liability method required by FAS 109,
"Accounting for Income Taxes" (see Note 2 "Income Taxes"). As permitted under
the new rules, prior years' financial statements have not been restated.
The cumulative effect of adopting FAS 109 as of June 1, 1993, was not
material to Saban's financial statements.
F-53
<PAGE>
SABAN ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of Saban's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
MAY 31, OCTOBER 31,
1995 1995
------------ ------------
<S> <C> <C>
Deferred tax liabilities:
Accounts receivable................................ $ 3,181,000 $ 563,000
Tax over book amortization......................... 6,052,000 --
State taxes........................................ -- 203,000
------------ ------------
Total deferred tax liabilities..................... $ 9,233,000 $ 766,000
Deferred tax assets:
State taxes........................................ $ 1,511,000 $ --
Deferred revenue................................... 20,268,000 18,244,000
Accrued expenses and reserves...................... 12,015,000 4,590,000
Tax over book amortization......................... -- 2,299,000
Other.............................................. 1,679,000 1,053,000
------------ ------------
Total deferred tax assets.......................... 35,473,000 26,186,000
Valuation allowance for deferred tax assets........ -- --
------------ ------------
Net deferred tax assets............................ 35,473,000 26,186,000
------------ ------------
Net deferred tax liabilities (assets).............. $(26,240,000) $(25,420,000)
============ ============
For financial reporting purposes, income before income taxes includes the
following components:
<CAPTION>
FIVE MONTHS
YEAR ENDED ENDED
MAY 31, OCTOBER 31,
1995 1995
------------ ------------
<S> <C> <C>
Pretax income:
United States.................................... $ 56,193,000 $ 33,872,000
Foreign.......................................... 15,509,000 17,159,000
------------ ------------
$ 71,702,000 $ 51,031,000
============ ============
</TABLE>
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED FIVE MONTHS ENDED
MAY 31, OCTOBER 31,
1995 1995
------------ -----------------
<S> <C> <C>
Current:
Federal....................................... $ 47,213,000 $11,514,000
State......................................... 8,777,000 2,802,000
Foreign....................................... 1,539,000 489,000
------------ -----------
57,529,000 14,805,000
Deferred:
Federal....................................... $(25,776,000) $ (301,000)
State......................................... (4,726,000) (215,000)
Foreign....................................... -- --
------------ -----------
(30,502,000) (516,000)
------------ -----------
$ 27,027,000 $14,289,000
============ ===========
</TABLE>
F-54
<PAGE>
SABAN ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is:
<TABLE>
<CAPTION>
YEAR ENDED FIVE MONTHS ENDED
MAY 31, 1995 OCTOBER 31, 1995
------------ -----------------
<S> <C> <C>
Tax at U.S. statutory rates..................... 35% 35%
State taxes, net of federal benefit............. 6 5
Foreign subsidiary's income not subject to state
or federal tax................................. (7) (13)
Foreign taxes................................... 2 1
Other........................................... 2 0
--- ---
38% 28%
=== ===
</TABLE>
Undistributed earnings of Saban's foreign subsidiaries amounted to
approximately $61,000,000 at October 31, 1995. Those earnings are considered
to be indefinitely reinvested and, accordingly, no provision for U.S. federal
and state income taxes has been provided thereon. Upon distribution of those
earnings in the form of dividends or otherwise, Saban would be subject to both
U.S. income taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to the various foreign countries. Determination of
the amount of unrecognized deferred U.S. income tax liability is not
practicable because of the complexities associated with its hypothetical
calculation; however, unrecognized foreign tax credit carryforwards would be
available to reduce some portion of the U.S. liability.
10. SIGNIFICANT CUSTOMERS AND PROPERTIES AND GEOGRAPHICAL INFORMATION
Saban operates in one business segment which is the acquisition, production
and worldwide distribution and leasing of entertainment properties. For the
year ended May 31, 1995, Saban earned revenues from one significant customer
of $26,308,000 (11%). For the five months ended October 31, 1995, Saban earned
revenues from one significant customer of approximately $33,332,000 (32%). For
the year ended May 31 1995, and for the five months ended October 31, 1995,
Saban earned revenues from one significant property (Power Rangers) of
$174,389,000 (72%) and $68,975,000 (66%), respectively.
Geographic information concerning Saban's operations is as follows:
<TABLE>
<CAPTION>
FIVE MONTHS
ENDED
YEAR ENDED OCTOBER 31,
MAY 31, 1995 1995
------------ ------------
<S> <C> <C>
Revenues:
Domestic........................................... $172,239,000 $ 61,671,000
International, principally Europe(/2/)............. 70,229,000 43,459,000
------------ ------------
Total................................................ 242,468,000 105,130,000
Operating profit:(/1/)
Domestic........................................... 97,433,000 42,128,000
International, principally Europe(/2/)............. 27,478,000 20,980,000
------------ ------------
Total................................................ 124,911,000 63,108,000
Selling, general and administrative expenses......... 51,894,000 11,538,000
Interest expense..................................... 1,315,000 539,000
------------ ------------
Income before provision for income taxes............. $ 71,702,000 $ 51,031,000
============ ============
Identifiable assets:
Domestic........................................... $ 89,772,000 $ 82,145,000
International, principally Europe(/2/)............. 128,425,000 125,334,000
------------ ------------
Total................................................ $218,197,000 $207,479,000
============ ============
</TABLE>
- --------
(1) For purposes of this presentation, operating profit is total revenues less
amortization of programming costs, residuals and profit participations.
(2) International amounts relate principally to Western Europe in connection
with the Company's subsidiary, SINV, a Netherlands Antilles company with
offices in Switzerland.
F-55
<PAGE>
SABAN ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. SUBSEQUENT EVENTS
On April 16, 1996, Saban acquired the stock of Creativite & Developpement SA
("C&D"), a leading Paris-based producer of family entertainment for
$2,869,000, payable $1,721,000 upon closing (April 16, 1996) and $1,148,000
payable on April 16, 1997 and is secured by a letter of credit. Saban
accounted for the acquisition as a purchase. No goodwill was recorded as the
purchase price was allocated to the respective assets and liabilities. The
acquisition included the international distribution rights to over 400 half-
hour episodes of children's programming.
In December 1995, Saban purchased from Vesical Limited ("Vesical") its
interest and rights to certain television programming and certain account
receivable balances for $12,000,000, payable $7,200,000 upon closing (April
18, 1996) and $4,800,000 payable on April 18, 1997 and is secured by a letter
of credit. Saban allocated the purchase price between the account receivable
balances and the television programming rights based upon the respective
assets fair market values using a discounted cash flow analysis.
THE REORGANIZATION
Fox Kids Worldwide, Inc. was incorporated in August 1996 to act as a holding
company of FCN Holding, Saban and the LLC. Between August 1996 and August
1997, it conducted no business or operations. On August 1, 1997, in connection
with Fox Kids Worldwide, Inc.'s acquisition of a controlling interest in
International Family Entertainment, Inc., (i) Fox Broadcasting Sub, Inc., a
wholly owned indirect subsidiary of Fox Broadcasting, exchanged its capital
stock in FCN Holding, which indirectly owned the Fox Children's Network, Inc.
("FCN"), for 7,920,000 shares of Class B Common Stock of Fox Kids Worldwide,
Inc., (ii) the other stockholder of FCN Holding exchanged its capital stock in
FCN Holding for an aggregate of 160,000 shares of Class A Common Stock of Fox
Kids Worldwide, Inc., (iii) Haim Saban and the other stockholders of Saban
exchanged their capital stock of Saban for an aggregate of 7,920,000 shares of
Class B Common Stock of Fox Kids Worldwide, Inc. and (iv) all outstanding
management options to purchase Saban capital stock became options to purchase
an aggregate of 646,548 shares of Class A Common Stock of Fox Kids Worldwide,
Inc. In addition, Fox Broadcasting exchanged its preferred, non-voting
interest in the LLC and its $50 million contingent note receivable from the
LLC for a new approximately $108.6 million subordinated note from Fox Kids
Worldwide, Inc. (which also included approximately $8.6 million of
intercompany indebtedness). As a result of these transactions, FCN Holding,
FCN, Saban and the LLC became direct or indirect wholly owned subsidiaries of
Fox Kids Worldwide, Inc.
OTHER RELATED PARTY TRANSACTIONS
From time to time, Saban has loaned and advanced funds to Haim Saban. In
connection with the formation of the LLC and as inducement to Haim Saban to
enter into certain documentation in connection with the formation of the LLC,
on December 22, 1995, Saban forgave in full the loan plus accrued interest
owing from Haim Saban in the amount of approximately $2,700,000. In connection
with Haim Saban's employment agreement, dated December 22, 1995, with the LLC,
the LLC agreed to reimburse Haim Saban for all out-of-pocket costs and
expenses for domestic and international travel, including private air charter
which may include aircraft owned directly or indirectly by Haim Saban.
F-56
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Fox Family Worldwide, Inc.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements as of and for the year ended June 30,
1998 included in this Report on Form 10-K and have issued our report thereon
dated September 15, 1998. Our audit was made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The accompanying
schedules 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
subject 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 financial
statements taken as a whole.
Arthur Andersen LLP
Los Angeles, California
September 15, 1998
F-57
<PAGE>
SCHEDULE 1--CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
FOX FAMILY WORLDWIDE, INC.
(FORMERLY FOX KIDS WORLDWIDE, INC.)
(PARENT ONLY)
BALANCE SHEET
AS OF JUNE 30, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Cash and cash equivalents.......................................... $ 6,939
Investments in subsidiaries........................................ 1,454,652
Property and equipment, at cost, net............................... 711
Other assets, net.................................................. 27,840
----------
Total assets..................................................... $1,490,142
==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accrued liabilities................................................ $ 11,036
NAHI Bridge Note................................................... 107,631
Fox Subordinated Note.............................................. 119,448
Senior Notes....................................................... 475,000
Senior Discount Notes, net of unamortized discount of $217,038..... 401,631
----------
Total liabilities................................................ 1,114,746
COMMITMENTS AND CONTINGENCIES
Series A Mandatorily Redeemable Preferred Stock $0.001 par value;
500,000 shares authorized; 345,000 shares issued and outstanding
($1,000 per share liquidation value).............................. 345,000
----------
STOCKHOLDERS' EQUITY:
Preferred Stock, $0.001 par value; 19,500,000 shares authorized;
no shares issued and outstanding.................................. --
Class A Common Stock, $0.001 par value; 16,000,000 shares autho-
rized, 160,000 shares issued and outstanding...................... --
Class B Common Stock, $0.001 par value; 16,000,000 shares autho-
rized, 16,000,000 shares issued and outstanding................... 16
Contributed capital................................................ 60,731
Cumulative translation adjustment.................................. (1,201)
Retained deficit................................................... (29,150)
----------
Total stockholders' equity....................................... 30,396
----------
Total liabilities and stockholder's equity....................... $1,490,142
==========
</TABLE>
See accompanying notes.
F-58
<PAGE>
FOX FAMILY WORLDWIDE, INC.
(FORMERLY FOX KIDS WORLDWIDE, INC.)
(PARENT ONLY)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
Revenues:
Equity in income of subsidiaries................................... $ 86,382
Other.............................................................. 861
---------
Total revenue.................................................... 87,243
Costs and expenses:
Selling, general and administrative................................ 8,627
Interest expense................................................... 99,943
---------
Loss before provision for income taxes............................... (21,327)
Provision for income taxes........................................... 3,446
---------
Net loss............................................................. ($24,773)
=========
</TABLE>
See accompanying notes.
F-59
<PAGE>
FOX FAMILY WORLDWIDE, INC.
(FORMERLY FOX KIDS WORLDWIDE, INC.)
(PARENT ONLY)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
OPERATING ACTIVITIES:
Net loss.......................................................... $ (24,773)
Adjustments to reconcile net loss to net cash used by operating
activities:
from operating activities:
Equity gains on investments, net................................ (86,382)
Amortization of debt issuance costs............................. 2,453
Depreciation expense............................................ 157
Non-cash interest expense....................................... 50,410
Cumulative translation adjustment............................... (398)
Increase in other assets........................................ (30,293)
Increase in accrued liabilities................................. 11,036
-----------
Net cash used in operating activities......................... (77,790)
-----------
INVESTING ACTIVITIES:
Purchase of property and equipment.............................. 868
Acquisition of International Family Entertainment, Inc.......... (1,370,076)
Cash acquired in acquisition.................................... 19,296
-----------
Net cash used in investing activities......................... (1,349,912)
-----------
FINANCING ACTIVITIES:
Proceeds from NAHI Bridge Loan.................................. 345,514
Paydown of NAHI Bridge Loan..................................... (250,886)
Issuance of Senior Notes........................................ 475,000
Issuance of Senior Discount Notes............................... 375,001
Issuance of Common Stock........................................ 10
Dividends on Preferred Stock.................................... (28,412)
Net intercompany advances....................................... 518,414
-----------
Net cash provided by financing activities..................... 1,434,641
-----------
Increase in cash and cash equivalents............................. 6,939
Cash and cash equivalents, beginning of year...................... --
-----------
Cash and cash equivalents, end of year............................ $ 6,939
===========
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTMENT ACTIVITIES (IN
THOUSANDS):
The Company issued a subordinated note to Fox Broadcasting
("Fox") in the amount of $108,672 in exchange for Fox's $50,000
Preferred Class A Members Interest in the LLC, its $50,000
contingent note receivable and certain other Company
obligations.
Preferred Stock in the amount of $345,000 was issued in
connection with the acquisition of International Family
Entertainment, Inc.
</TABLE>
See accompanying notes.
F-60
<PAGE>
FOX FAMILY WORLDWIDE, INC.
(FORMERLY FOX KIDS WORLDWIDE, INC.)
NOTES TO PARENT ONLY FINANCIAL STATEMENTS
JUNE 30, 1998
1.BASIS OF PRESENTATION
The accompanying financial statements include the accounts of Fox Family
Worldwide, Inc. (formerly Fox Kids Worldwide, Inc., "the Company") presented
on a separate company (parent only) basis. The Company is a Delaware
corporation formed in August, 1996 as a holding company. Between August 1996
and August 1997, the Company conducted no business or operations. On August 1,
1997 the Company underwent a Reorganization in connection with its acquisition
of International Family Entertainment, Inc. This Reorganization is more fully
explained in Note 1 to the Financial Statements.
2.DEBT
Information relating to the NAHI Bridge Loan, Fox Subordinated Note, Senior
Notes and Senior Discount Notes is contained in Note 6 to the Financial
Statements. Payments of principal in future periods are all due subsequent to
June 30, 2003. The Company is a guarantor under the Amended Credit Facility,
as described in Note 6 to the Financial Statements.
F-61
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
-------------------
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ---------- ---------- -------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FOX FAMILY WORLDWIDE, INC.
(FORMERLY FOX KIDS WORLD-
WIDE, INC.)
Eight months ended June
30, 1996
Allowance for doubtful
accounts............... $1,865 $ -- $ -- $(175) $1,690
FY ended June 30, 1997
Allowance for doubtful
accounts............... 1,690 200 -- (480) 1,410
FY ended June 30, 1998
Allowance for doubtful
accounts............... 1,410 (27) 211 -- 1,594
FCN HOLDING, INC.
FY ended July 3, 1994
Allowance for doubtful
accounts............... -- -- -- -- --
FY ended July 2, 1995
Allowance for doubtful
accounts............... -- 480 -- -- 480
Four months ended October
29, 1995
Allowance for doubtful
accounts............... 480 -- -- -- 480
SABAN ENTERTAINMENT, INC.
FY ended May 1994
Allowance for doubtful
accounts............... 385 -- -- -- 385
FY ended May 1995
Allowance for doubtful
accounts............... 385 1,000 -- -- 1,385
Five months ended October
1995
Allowance for doubtful
accounts............... 1,385 -- -- -- 1,385
</TABLE>
F-62
<PAGE>
EXHIBIT 10.7
[SABAN LETTERHEAD]
May 20, 1998
Mr. Mel Woods
Saban Entertainment, Inc.
10960 Wilshire Blvd.
Los Angeles, California 90024
Re: Amendment No. 2 to Employment Agreement
Dear Mel:
Reference is made to the Employment Agreement entered into as of June 1,
1994 between Saban Entertainment, Inc. ("Saban") and you, as amended by
Amendment No. 1 to Employment Agreement dated as of September 26, 1996 (the
Employment Agreement, as so amended, is referred to herein as the "Agreement").
Capitalized terms used herein without definition shall have the meanings
ascribed to them in or pursuant to the Agreement.
As additional compensation for your services performed to date, Saban
hereby agrees to advance to you the aggregate principal amount of Two Million
Dollars ($2,000,000) (the "Advance"). The Advance shall bear no interest.
Except if otherwise repaid by you at your election, as set forth herein, the
Advance will be payable solely by recourse against the amount otherwise payable
as the Termination Purchase Price that Saban purchases from you pursuant to
Paragraph 5(f)(ix) of the Agreement.
Any exercise by you of the option to purchase Option Shares pursuant to the
terms and conditions of paragraph 5(f) of the Agreement shall be conditioned
upon your concurrent repayment in full of the Advance. You may, at your
election, make all or any portion of such repayment by increasing the purchase
price in connection with such exercise (subject to the satisfaction of all
applicable requirements in connection with such increase set forth in that
certain Second Amended and Restated Credit Agreement dated as of October 28,
1997 among FCN Holding, Inc., International Family Entertainment, Inc., Saban
Entertainment, Inc., Fox Kids Holdings, LLC, the initial lenders named therein,
Citicorp USA, Inc., Citicorp Securities, Inc., Chase Securities, Inc. and
BankBoston, N.A.) by an aggregate amount equal to all or such portion of the
Advance.
You and Saban agree to report the Advance on all applicable federal and
state tax returns (including, without limitation, all income tax, employment tax
and information tax returns) (hereafter "Returns") as compensation for services
rendered and to treat the Advance accordingly for all tax purposes. You and
Saban agree that Saban shall withhold from the payment of the Advance all
amounts required to be withheld therefrom in accordance with the preceding
sentence. If you exercise the option to purchase Option Shares pursuant to
paragraph 5(f) of the
<PAGE>
Mr. Mel Woods
May 20, 1998
Page 2
Agreement, you and Saban agree to treat the repayment of the Advance for all tax
purposes as an increase in the purchase price of the Option Shares and to
report, when required, such repayment accordingly on all Returns. If you do not
exercise the option to purchase Option Shares pursuant to paragraph 5(f) of the
Agreement, you and Saban agree to treat the repayment of the Advance for all tax
purposes as a reduction in the Termination Purchase Price and to report, when
required, such repayment accordingly on all Returns.
The Advance shall be due and payable, if and to the extent not earlier
repaid, upon the termination of your employment with Saban for any reason (the
"Termination"), by offset against the amount otherwise payable as the
Termination Purchase Price.
Except as expressly modified herein, all terms of the Agreement remain in
full force and effect. This letter shall be governed by the laws of the State
of California, excluding any rule of law that would cause application of the
laws of any jurisdiction other than the State of California.
Please execute and return the enclosed copy of this letter, whereupon this
letter shall constitute Amendment No. 2 to the Agreement.
Very Truly Yours,
SABAN ENTERTAINMENT, INC.
By: /s/ Haim Saban
---------------------------------------
Haim Saban
Chief Executive Officer
Agreed and accepted this
20th day of May, 1998
/s/ Mel Woods
- -----------------------------
Mel Woods
<PAGE>
EXHIBIT 10.8
AMENDMENT TO EMPLOYMENT AGREEMENT
This shall constitute an amendment to the employment agreement between Fox Kids
Worldwide, L.L.C. ("FKW") and Donna Grandy Cunningham ("Employee") dated
September 15, 1997. The employment agreement between FKW and Employee dated
September 17, 1997 is hereinafter referenced as "the Agreement." The date of
this amendment is May 18, 1998. The parties agree as follows:
1. Paragraph one of the Agreement shall be amended to provide that the Initial
Term shall be extended such that it expires on June 1, 2001, and that FKW shall
have two consecutive, dependent one year options to continue the term of
Employee's employment, exerciseable as set forth in paragraph one of the
Agreement.
2. Paragraph 2a of the Agreement shall be amended to provide that Employee will
be employed as Executive Vice President, Business and Legal Affairs and General
Counsel of Fox Family Worldwide, Inc.
3. Subparagraphs (a) (1) - (a) (3) of paragraph 3 of the Agreement shall be
replaced with the following language:
3(a)(1) Two Hundred Fifty Thousand Dollars ($250,000) for the period
September 15, 1997 through May 31, 1998;
3(a)(2) Three Hundred Thousand Dollars ($300,000) for the period June 1,
1998 through May 31, 1999; Three Hundred Thousand Dollars for the period June 1,
1999 through May 31, 2000; and Three Hundred Fifteen Thousand Dollars ($315,000)
for the period June 1, 2000 through May 31, 2001;
3(a)(3) If FKW extends the Employment Period for one additional year as
set forth in paragraph 1 hereof, Three Hundred Thirty Thousand Dollars
($330,000) for the period June 1, 2001 through May 31, 2002.
3(a)(4) If FKW extends the Employment Period for one additional year as
set forth in paragraph 1 hereof, Three Hundred Thirty Thousand Dollars
($330,000) for the period June 1, 2002 through May 31, 2003.
4. A new paragraph 3(d) shall be added to the Agreement which provides that
upon execution of this amendment, Employee shall receive a signing bonus of
$100,000.
1
<PAGE>
Except as set forth above, all other terms and conditions of the Agreement are
hereby ratified.
AGREED AND ACCEPTED:
FOX KIDS WORLDWIDE, L.L.C.
/s/ Donna Cunningham BY: /s/ Mel Woods
- ---------------------------- -------------------------
DONNA GRANDY CUNNINGHAM ITS:________________________
2
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made September 15, 1997, between FOX
KIDS WORLDWIDE L.L.C. ("FKW"), and DONNA GRANDY CUNNINGHAM ("Employee"). This
agreement supersedes the employment agreement between FKW and Employee dated
February 27, 1996, and all amendments thereto ("the Original Employment
Agreement.") The parties agree that the Original Employment Agreement is hereby
terminated.
In consideration of the mutual covenants and agreements hereinafter set forth,
the parties agree as follows:
1. TERM OF EMPLOYMENT. Subject to the prior termination of this Agreement as
provided in paragraph 5 hereinbelow, FKW hereby employs Employee, and Employee
hereby accepts employment, for an "Initial Term" of three (3) years, commencing
on September 15, 1997, on the terms and conditions stated in this Agreement.
Thereafter, FKW shall have the irrevocable option to continue the term of
Employee's employment hereunder for one additional year ("Additional Term") by
delivering written notice to Employee at least 90 days before the last day of
the Initial Term. The actual period of time that Employee remains in the
employment of FKW pursuant to this Agreement is referred to herein as the
"Employment Period".
2. TITLE; DUTIES; RESPONSIBILITIES; REPORTING
a. TITLE; DUTIES; PLACE OF EMPLOYMENT. Employee will be employed as Senior
Vice President, Business and Legal Affairs, Fox Kids Networks duties shall be
those customarily rendered by persons similarly employed in the television
industry. Employee agrees to take such trips both within and outside the
United States as Company determines to be desirable. During the Employment
Period, Employee shall be based at the offices of FKW in the county of Los
Angeles, California, except for required business travel.
b. RESPONSIBILITIES. In view of the significant responsibilities imposed on
Employee hereunder, Employee agrees that at all times during the Employment
Period, Employee will use Employee's best efforts to further FCN's and FKWs
business objectives and perform such additional services as may be reasonably
requested from time to time. Employee shall devote all of Employee's business
time and efforts to the performance of Employee's duties hereunder and will
comply with all policies, orders and directives as may be issued from time to
time. Employee's employment is full time, and Employee shall not engage in any
other business or employment.
c. APPOINTMENT AS DIRECTOR OR OFFICER. If Employee is elected a member of
the Board of Directors or to any other office of FCN, FKW, or any of its or
their affiliates, Employee agrees to serve in such capacity or capacities
without additional compensation.
d. REPORTING. Employee shall report to FKW's President.
3. COMPENSATION
a. SALARY. If Employee is not in breach of any material term of this
Agreement and subject to all customary withholdings and other deductions as
may be required by applicable laws, FKW will pay
1
<PAGE>
Employee a gross annual salary, exclusive of benefits and bonuses, during the
Employment Period, paid in equal installments on FKW's regular payday, of:
(1) Two Hundred Fifty Thousand Dollars ($250,000) for the first year of the
Employment Period;
(2) Two Hundred Sixty Five Thousand Dollars ($265,000) for the second year
of the Employment Period; and,
(3) Two Hundred Eighty Thousand Dollars ($280,000) for the third year of
the Employment Period.
(4) If FKW extends the Employment Period as set forth in paragraph 1
hereof, Three Hundred And Five Thousand Dollars ($305,000) for the fourth
year of the Employment Period.
b. BENEFITS. During the Employment Period, Employee will be entitled to
participate in all employee benefit plans offered by that FKW owner (as
designated by FKW) to comparable executives employed thereby. Such benefits
shall become available in accordance with such FKW owner's customary policies,
which benefits are subject to change at any time at FKW's sole and exclusive
at FKW's sole and exclusive discretion. To the extent that FKW establishes any
stock option plan which covers FKW's executives generally, Employee shall be
entitled to participate in such plan pursuant to the terms thereof. Employee
shall be entitled to reasonable periods of paid vacation during the Employment
Period, the length and timing of which shall be subject to Employee's direct
supervisor's prior written approval in each instance.
c. SIGNING BONUS AND DISCRETIONARY BONUS. Along with Employee's first
-----------------
paycheck, Employee shall receive a signing bonus of $30,000. At such times
During the Employment Period that FKW considers and pays bonus compensation to
FKW's employees at the vice president level or above, FKW also will give due
consideration to paying bonus compensation to Employee. FKW will have no
obligation to continue its current bonus compensation policy, to give Employee
any bonus compensation, or, if bonus compensation is given to Employee, to
make Employee's bonus compensation comparable to that given to any other FKW
employee. Employee acknowledges that no person acting (or purporting to act)
on behalf of FCN or FKW has in the past made any promise of any bonus
compensation as an inducement to Employee to accept employment hereunder and
that, in the future, only an FKW senior executive officer, and no other
person, is authorized to determine when and whether any bonus compensation
will be payable to Employee and the amount(s) thereof.
4. EXPENSES; TRAVEL. Employee will be entitled to reimbursement during the
Employment Period for travel and other out-of-pocket expenses reasonably or
necessarily incurred in the performance of Employee's duties hereunder,
including reimbursement for Employee's cellular telephone charges (both basic
monthly fee plus airtime charges for business calls), in accordance with FKW's
regular practices and procedures. FKW shall provide Employee with a cellular
phone for Employee's sole use during the Employment Period. If international
travel is required, Employee shall be entitled to a minimum of business class
air transportation and lodging.
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5. TERMINATION
a. TERMINATION FOR CAUSE. Notwithstanding anything in this Agreement to the
contrary, FKW may immediately terminate Employee's employment if: (i) Employee
is convicted of or pleads guilty or nolo contendere to any felony; (ii)
Employee embezzles any FKW funds or assets; (iii) Employee becomes physically
or mentally disabled and, as such, has utilized any and all benefits available
to Employee pursuant to state and federal family and medical leave laws and is
either (a) unable to reasonably and effectively carry out Employee's duties
with reasonable accommodations by FKW, or (b) unable to reasonably and
effectively carry out Employee's duties because any reasonable accommodations
which may be required would cause FKW undue hardship; or (iv) Employee fails
or refuses to perform Employee's reasonable and customary duties hereunder,
fails to comply with any lawful order or directive of Employee's superiors, or
materially breaches any of the promises, covenants, obligations,
representations, or warranties made or imposed upon Employee as set forth in
this Agreement. If FKW terminates the Employment Period pursuant to this
paragraph 5a and subsequently is adjudicated to have improperly terminated the
Employment Period, Employee's right to any accrued and unpaid amounts owed to
Employee will constitute Employee's sole and exclusive remedy regarding
Employee's termination, and, to the maximum extent permitted by law, Employee
irrevocably waives the right to claim any other damages or compensation of any
nature whatsoever by reason of Employee's termination.
b. TERMINATION BY REASON OF DEATH. Notwithstanding anything set forth herein
to the contrary, the Employment Period will automatically terminate upon
Employee's death, and Employee's estate shall be entitled to any accrued and
unpaid amounts owing to Employee pursuant to paragraph 3a and 3b hereof as of
the effective date of termination.
6. EMPLOYEE REPRESENTATIONS AND WARRANTIES. Employee represents and warrants
to FKW as follows:
a. AUTHORITY. Employee has all necessary right, power, and authority to enter
into this Agreement and to carry out the transactions contemplated by this
Agreement. Employee is under no legal or other disability which would make
this Agreement void or voidable.
b. NO PENDING LITIGATION. There are no actions, suits, or proceedings pending
or, to the best of Employee's knowledge, threatened against or affecting
Employee before any court or administrative law office or agency which may
materially and adversely affect Employee's ability to perform Employee's
duties pursuant to this Agreement.
c. NO PROMISES NOT EXPRESSLY CONTAINED HEREIN. No person acting or purporting
to act on behalf of FKW has made any promise not expressly set forth in this
Agreement to Employee as an inducement to Employee to accept employment
hereunder.
d. BINDING AGREEMENT. This Agreement has been duly signed and delivered to
FKW by Employee, and is a legal, valid, and binding obligation of Employee,
enforceable in accordance with its terms. Neither the execution or delivery of
this Agreement constitutes a breach of any contract or any obligation to which
Employee is a party and Employee is under no contractual or restriction or
limitation which is inconsistent with the execution and delivery of this
Agreement, with the performance of Employee's obligations hereunder or with
FKW's rights hereunder.
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7. COMPETITION. Employee represents and warrants that Employee will not at any
time during the Employment Period, directly or indirectly participate or engage
in any business, or organize any business or venture, which is competitive with
or similar to the business of FKVV, its parent, or any subsidiary or affiliate
of FKW or its parent by becoming an owner, officer, director, shareholder,
partner, associate, employer, or agent with respect to any such business or
venture. The foregoing does not prohibit your ownership of less than one percent
(1%) of the outstanding common stock of any company whose shares are publicly
traded.
8. CONFIDENTIALITY. Unless expressly authorized by FKW, Employee shall not, at
any time during or after the Employment Period, directly or indirectly disclose
to any third party, or authorize any third party to use, any confidential or
proprietary information relating to FKW's business, including without
limitation, ownership of FKW, all sources of financing or proposed financing,
all methods of production, all details concerning the methods by which FKW
operates its business, all plans for future development, and all other
information not readily available to the public. At the termination of the
Employment Period, Employee agrees to deliver to FKW all confidential
information in Employee's possession, including, without limitation, all discs,
materials, equipment, and any other document, medium, property, reproduction or
other item belonging to (or containing information belonging to) FKW, its
successors or assigns, and . will not retain any copies of such items.
9. NO SOLICITATION. Employee shall not, at any time during the Employment
Period or within two (2) years after termination of employment hereunder,
regardless of the reason for the termination, directly or indirectly solicit any
employee of FKW, its owners, or any subsidiary or affiliate of FKW or its
owners, to leave its employ or join the employ of or render services to any
other person, firm, or corporation.
10. UNIQUE SERVICES; INJUNCTIVE RELIEF. The services to be furnished by
Employee hereunder and the rights and privileges granted to Company by Employee
are of a special, unique, unusual, extraordinary, and intellectual character
which gives them a peculiar value, the loss of which cannot be reasonably or
adequately compensated in damages in any action at law, and a breach by Employee
of any of the provisions contained herein will cause Company irreparable injury
and damage. Accordingly, to prevent any such breach or threatened breach, and in
addition to any other relief to which FKW may otherwise be entitled, FKW will be
entitled to seek immediate temporary, preliminary, and permanent injunctive
relief through appropriate legal proceedings in any court with jurisdiction.
11. NOTICES. All notices, requests, demands, or other communication
(collectively "Notice") given to any party pursuant to this Agreement will not
be effective unless given in writing to the parties at their respective
addresses as set forth below:
If to FKW, at: 10960 Wilshire Blvd.
Los Angeles, CA 90024
Attention: Mel Woods
If to Employee, at:
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Notice will be deemed duly given (i) when delivered personally or when actually
delivered by telegram or courier, or (ii) if mailed, seventy-two (72) hours
after deposit in the United States mail, certified mail, postage prepaid, or
(iii) sent by facsimile one business day after the facsimile is properly sent,
provided that a copy of the notice is concurrently sent to the intended
recipient by United States mail, certified mail, postage prepaid. The addresses
of the parties for the purposes of providing Notice pursuant to this Section may
be changed from time-to-time, by Notice to the other party duly given in the
foregoing manner.
12. RELATIONSHIP OF PARTIES; RESULTS AND PROCEEDS; NAME AND LIKENESS. Employee
acknowledges that the relationship between the parties hereto is exclusively
that of employer and employee and that Company's obligations to Employee are
exclusively contractual in nature. Company shall be the sole owner of all the
results and proceeds of Employee's services hereunder, including, but not
limited to, all ideas, concepts, formats, suggestions, developments,
arrangements, designs, packages, programs, promotions, and other intellectual
properties which Employee may create in connection with and during the Term of
employment hereunder, free and clear of any claims by Employee (or anyone
claiming under you) or any kind or character whatsoever (other than Employee's
right to compensation hereunder). Employee shall execute such assignments,
certificates, or other instruments as the Company may deem necessary or
desirable from time to time to evidence, establish, maintain, perfect, protect,
enforce, or defend its right, title, and interest in or to any such properties.
Company shall have the right to use your name, biography, and likeness in
connection with its business, including advertising its products and services,
and may grant this right to others, but not for use as a direct endorsement.
13. AMENDMENT; WAIVER. This Agreement may be amended, supplemented, modified,
or rescinded only through an express written instrument signed both by FKW's
President and by Employee. Each party may specifically and expressly waive in
writing any portion of this Agreement or any breach hereof, but no such waiver
will constitute a further or continuing waiver of any proceeding or succeeding
breach of the same or any other provision. Employee may not assign any
obligation or right of Employee hereunder. The consent by one party to any act
for which such consent was required will not be deemed to imply consent, or a
waiver of the necessity of obtaining such consent, for the same or similar acts
in the future.
14. SEVERABILITY. Each provision of this Agreement is intended to be severable
and if any term or provision hereof is determined invalid or unenforceable for
any reason, such unenforceability or invalidity will not effect the
enforceability or validity of the remainder of this Agreement.
15. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which will be deemed to be an original, but all of which
together will constitute one and the same instrument.
16. INTERPRETATION. The language and all parts of this Agreement will in all
cases be construed simply according to its fair meaning and not strictly for or
against any party. Wherever the context requires, all words used in the singular
will be construed to have been used in the plural and vice versa, and each
gender will include the other gender. The captions of the sections of this
Agreement are for convenience only and will not effect the construction or
interpretation of any of the provisions herein. This Agreement will be governed
by the laws of the State of California applicable to agreements executed and
fully performed in California, regardless of where actually executed or
performed.
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17. ENTIRE AGREEMENT. This Agreement contains the entire and complete
understanding between the parties concerning this subject matter and all
representations, agreements, arrangements or understandings between or among the
parties, whether oral or written have been fully and completely merged herein
and are superseded hereby.
18. SUCCESSORS. This Agreement will be binding upon and inure to the benefit
of the parties and their respective heirs, legacies, legal representatives,
personal representatives, successors, and permitted assigns.
IN WITNESS HEREOF, the parties have entered into this Agreement as of the date
set forth above.
FOX KIDS WORLDWIDE L.L.C.
/s/ Donna Grandy Cunningham BY: /s/ Mel Woods
- --------------------------- --------------------------
DONNA GRANDY CUNNINGHAM ITS:
--------------------------
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EXHIBIT 10.9
EMPLOYMENT CONTRACT
This is a contract between SABAN ENTERTAINMENT, INC. ("we", "us", and "our"),
and MARK ITTNER ("you" and "your"). You and we have entered into this contract
as of April 1, 1997.
This contract supercedes and replaces all other prior oral and written
employment agreements between you and us, including that fully-executed
Employment Contract entered into as of March 13, 1997, excepting only the Mutual
Agreement to Arbitrate between you and us, which will remain in full force and
effect.
We agree to continue to employ you, and you accept such continued employment
with us, on the following terms and conditions:
1. EMPLOYMENT PERIOD. Your employment pursuant to the terms of this contract
will begin on April 1, 1997, and will continue for a period of three (3) years
through March 31, 2000 ("Term"). The actual period of time that you remain in
our employ pursuant to this contract is the "Employment Period". Your continued
employment with us, if you remain in our employ after expiration of the Term
will be on an "at-will" basis and will otherwise be in accordance with the
provisions of our then-existing policies applicable to other comparable
executives we employ on an at-will basis.
2. TITLE; DUTIES; RESPONSIBILITIES; REPORTING
a. TITLE. We are employing you, and you agree to serve, as Senior Vice
President of Finance, or in any other similar capacity or capacities that we
designate during the Employment Period.
b. DUTIES. Your duties will be those customarily performed by others
similarly employed in the entertainment industry. We may modify, add to, or
subtract from your duties at any time, subject only to the terms of this
contract. You agree to make business trips at our request both within and
outside the United States.
c. FULL TIME EMPLOYMENT. Your employment with us is full time and,
therefore, during the Employment Period you will not engage in any other
business or employment.
d. RESPONSIBILITIES. You will always use your best efforts to further our
business objectives and protect our business interests. You will follow our
policies, orders, and directives. As with all companies, we reserve the
right to change our policies from time to time to reflect different
business, financial, and legal conditions.
e. APPOINTMENT AS DIRECTOR OR OFFICER. If you are elected a member of the
Board of Directors or appointed as a corporate officer or Saban
Entertainment, Inc., our parent, or any of our affiliates, you agree to
serve in such capacity or capacities without additional compensation.
f. REPORTING. You will report to the person or persons we designate from
time to time. Only our Chief Executive Officer or Chief Operating Officer
may designate the person or persons to whom you report.
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3. SALARY AND OTHER COMPENSATION
a. SALARY
(1) During the first year of the Term, we will pay you a gross annual
salary of $215,000.
(2) During the second year of the Term, we will pay you a gross annual
salary of $225,000.
(3) During the third year of the Term we will pay you a gross annual
salary of $235,000.
(4) Your salary (i) will be paid in equal, pro-rated installments
every other week on our regular company-wide payday, (ii) will be
subject to all withholdings and deductions, such as social security,
Medicare, and state disability insurance, that are required by law or
which you ask us to make, and (iii) is exclusive of employment benefits
and discretionary bonuses, if any.
b. BENEFIT PLANS. You will be entitled to participate in all employee
benefit plans we offer to comparable executives that we employ. These
benefits will be available in accordance with our customary policies and are
subject to change at any time in our sole discretion. To the extent that we
or our parent establish any stock option plan which covers our executives
generally, you will be entitled to participate in such plan pursuant to the
terms thereof. You will be entitled to reasonable periods of paid vacation
during the Employment Period, the length and timing of which will be subject
to your direct supervisor's prior written approval in each instance.
4. EXPENSES; TRAVEL. We will reimburse you for travel and other out-of-pocket
expenses that you reasonably or necessarily incur during the Employment Period
to perform your duties hereunder, in accordance with our Travel and
Entertainment Expense Policy.
5. TERMINATION
a. TERMINATION FOR CAUSE. We expect all of our employees to be honest and
conduct their personal and professional affairs lawfully. Therefore, we may
terminate the Employment Period at any time, effectively immediately upon
notice to you, if you:
(1) are convicted of, plead guilty to, or enter a "no plea" (nolo
contendere) to any felony;
(2) embezzle funds or assets from us or any of our subsidiaries,
affiliates, or related companies;
(3) become physically or mentally disabled and have used all disability
benefits available to you pursuant to state and federal family and
medical leave laws and are either unable to reasonably and effectively
carry out your duties (i) with reasonable accommodations that we
provide, or (ii) because the accommodations we would have to provide
would cause us undue hardship; or,
(4) fail or refuse to perform your reasonable and customary duties
hereunder, fail
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to comply with any lawful order or directive of your superiors, or
violate any of our policies (such as our non-harassment policy and
Conflict of Interest Statement) which if violated would expose us to
civil and/or criminal liability; or,
(5) materially breach any of the promises, covenants, obligations,
representations, or warranties made by or imposed you upon as set forth
in this Agreement.
b. TERMINATION UPON DEATH. The Employment Period will terminate
automatically upon your death, and we will pay your estate all earned and
accrued but previously unpaid salary through the date of termination of the
Employment Period.
6. YOUR REPRESENTATIONS AND WARRANTIES. You represent and warrant to us as
follows:
a. AUTHORITY. You have the right, power, and authority to enter into and
perform this contract. You are under no legal or other disability which
would make this contract void or voidable.
b. NO PENDING LITIGATION. You are not presently being sued, nor has any
judgment been entered against you, nor have you received any threats of any
lawsuits against you which would materially and adversely affect your
ability to perform your duties pursuant to this contract.
c. NO PROMISES NOT CONTAINED IN THIS CONTRACT. No person acting or
purporting to act on our behalf has made any promise to you that is not
contained in this contract nor induced you to enter into this contract by
making any promise to you that is not contained in this contract.
d. BINDING CONTRACT. You have personally read, understood, agreed to, and
signed, and delivered to us this contract. You are not breaching any other
agreement to which you a party by signing and delivering to us this
contract. No other contract to which you are a party is inconsistent with
the terms of this agreement.
e. INDEPENDENT COUNSEL. You have had an opportunity to consult with legal
counsel with respect to the negotiations, drafting, and execution of this
contract. You acknowledge that you have had ample opportunity to have this
contract reviewed by legal counsel of your choice, that you fully understand
the legal significance of your representation that you have had the
opportunity to consult with legal counsel.
7. NON-COMPETITION. Because your employment is full time, you agree that you
will not at any time during the Employment Period engage or participate,
directly or indirectly, in any business, or organize any business or venture,
which is competitive with or substantially similar to the business of Saban
Entertainment, Inc., or any of its subsidiary or affiliated companies, by
becoming an owner, officer, director, shareholder, partner, associate, employer,
or agent with respect to any such business or venture. The foregoing does not
prohibit your ownership of less than one percent (1%) of the outstanding common
stock of any company whose shares are publicly traded.
8. CONFIDENTIALITY. You acknowledge that our business arrangements, methods,
and procedures, projects in development or production, and other information
about us are
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not generally known to the public. You agree that you will not at any time
during the Employment Period and for five (5) years thereafter, disclose to any
third party or use for any purpose outside the scope of your employment
hereunder any information which you obtain as a result of your status as our
employee, unless (i) authorized to make such disclosure or use by an authorized
corporate officer of Saban Entertainment, Inc., (ii) we have publicly disclosed
the information, or (iii) the information is generally known by the public
through sources other than you. At the termination of the Employment Period or
whenever demanded by a corporate officer of Saban Entertainment, Inc., you will
return all information (in whatever form, including without limitation
documents, sound and audiovisual recordings, and computer diskettes) belonging
to us or containing information, belonging to us, and you will not retain any
copies of such information.
9. NO SOLICITATION OF OUR EMPLOYEES. You will not at any time during the
Employment Period and for one (1) year thereafter, yourself or through any
intermediary or third party, solicit or induce, or attempt to solicit or induce,
any of our employees to leave our employ or render services to any third party.
10. INJUNCTIVE RELIEF. You acknowledge that your breach or threatened breach of
any of the provisions set forth in paragraphs 7, 8, and 9 hereof will cause
substantial and irreparable damage to us and that the amount and character of
such damage will be difficult to ascertain. Therefore, to prevent any such
breach or threatened breach, and in addition to any other remedies to which we
would be entitled at law or in equity, you agree that we will be entitled to
immediate, temporary, preliminary, and permanent injunctive relief through
appropriate legal actions in any court with jurisdiction, without proof of
actual damages that we have incurred or may incur. You expressly agree that we
will not be required to post any bond or other security as a condition to
obtaining any injunctive relief pursuant to this paragraph 10 and you expressly
waive any right to the contrary.
11. EMPLOYEE HANDBOOK AND POLICIES. You acknowledge receipt of our employee
handbook ("Handbook") and that your employment is conditioned on your review and
adherence to the policies and requirements set forth in the Handbook. If there
is a conflict between a term set forth in this contract and a provision of the
Handbook, this contract will control. We may change any of our policies at any
time, in our sole discretion, by giving you written notice thereof.
12. NOTICES. Notices that we give to you hereunder, and notices that you give
to us hereunder, will be given at the addresses set forth below. You and we each
may change your and our respective address for purposes of notice by giving
notice thereof.
a. ADDRESS FOR NOTICE TO YOU
b. ADDRESS FOR NOTICE TO US
Saban Entertainment, Inc.
Saban Plaza
10960 Wilshire Boulevard
Los Angeles, CA 90024
Telephone: (310) 235-5100; facsimile: (310) 235-5195
Attention: General Counsel
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A notice is deemed given hereunder when (i) personally given to the intended
recipient, (ii) if mailed, 48 hours after deposit with the U.S. Postal Service,
postage prepaid, from within the metropolitan Los Angeles area, (iii) if mailed,
72 hours after deposit with the U.S. Postal Service, by certified mail, postage
prepaid, from outside the metropolitan Los Angeles area but within the United
States, (iv) if mailed, when received by the intended recipient if sent from
outside the United States, and (v) if sent by facsimile, one business day after
the recipient's receipt of a clearly readable transmission.
13. RELATIONSHIP OF PARTIES; RESULTS AND PROCEEDS; NAME AND LIKENESS. You
acknowledge that the relationship between you and us is exclusively that of
employer and employee and that our obligations to your are exclusively
contractual in nature. We will be the sole owner of all the results and proceeds
of your services hereunder, including, but not limited to, all ideas, concepts,
formats, suggestions, developments, arrangements, designs, packages, programs,
promotions, and other intellectual properties which you may create within the
scope of your employment hereunder, free and dear of any claims by you (or
anyone claiming under you) or any kind or character whatsoever (other than your
right to your salary hereunder). We will have the right to use your name,
biography, and likeness in connection with our business, including advertising
our products and services, and may grant this right to others, but not for use
as a direct endorsement.
14. AMENDMENT; WAIVER. This contract may be amended, supplemented, modified, or
rescinded only through an express written instrument signed both by you and by
our Chief Operating Officer, Chief Executive Officer, or General Counsel. You
and we each may specifically and expressly waive in writing any portion of this
contract or any breach hereof, but no such waiver will be a further or
continuing waiver of any proceeding or succeeding breach of the same or any
other provision. You may not assign any obligation or right hereunder. The
consent by either you or us to any act for which such consent was required will
not be deemed to imply consent, or a waiver of the necessity of obtaining such
consent, for the same or similar acts in the future.
15. SEVERABILITY. Each provision of this contract is intended to be severable
and if any term or provision hereof is determined invalid or unenforceable for
any reason, such unenforceability or invalidity will not effect the
enforceability or validity of the remainder of this contract.
16. COUNTERPARTS. This contract may be executed in any number of counterparts,
each of which will be deemed to be an original, but all of which together will
constitute one and the same instrument.
17. INTERPRETATION. The language and all parts of this contract will in all
cases be construed simply according to its fair meaning and not strictly for or
against any party. Wherever the context requires, all words used in the singular
will be construed to have been used in the plural and vice versa, and each
gender will include the other gender. The captions of the sections of this
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contract are for convenience only and will not effect the construction or
interpretation of any of the provisions herein. This contract will be governed
by the laws of the State of California applicable to agreements executed and
fully performed in California, regardless of where actually executed or
performed.
18. ENTIRE AGREEMENT. This Agreement contains the entire and complete
understanding between the parties concerning this subject matter and all
representations, agreements, arrangements or understandings between or among the
parties, whether oral or written have been fully and completely merged herein
and are superseded hereby.
19. SUCCESSORS. This contract will be binding upon and inure to the benefit of
both you and us and your and our respective heirs, legacies, legal
representatives, personal representatives, successors, and permitted assigns.
IN WITNESS HEREOF, you and we have entered into this contract as of the date set
forth above.
SABAN ENTERTAINMENT, INC.
/s/ Mark Ittner By /s/ Mel Woods
- --------------- ---------------
MARK ITTNER Its
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EXHIBIT 10.29
AMENDMENT AND WAIVER NO. 3 TO THE LOAN DOCUMENTS
AMENDMENT AND WAIVER dated as of June 29, 1998 to (a) the Second
Amended and Restated Credit Agreement dated as of October 28, 1997 (as amended
by Letter Amendment No. 1 dated as of November 18, 1997, the "CREDIT AGREEMENT")
among FCN Holding, Inc., a Delaware corporation ("FCN HOLDING"), International
Family Entertainment, Inc., a Delaware corporation ("IFE"), Saban Entertainment,
Inc., a Delaware corporation (together with FCN Holding and IFE, the "EXISTING
BORROWERS"), Fox Kids Holdings, LLC, a Delaware limited liability company
("HOLDINGS"), as Guarantor, the banks, financial institutions and other
institutional lenders (collectively, the "LENDERS") parties to the Credit
Agreement referred to below, Citicorp USA, Inc., as administrative agent (the
"ADMINISTRATIVE AGENT") for such Lenders and the other Secured Parties referred
to therein, and Citicorp Securities, Inc., Chase Securities, Inc. and
BankBoston, N.A., as Co-Arrangers for the Facilities referred to therein, (b)
the Fox Kids Guarantee dated as of October 28, 1997 (as amended by Letter
Amendment No. 2 dated as of April 16, 1998, the "FOX KIDS GUARANTEE") made by
Fox Family Worldwide, Inc. (formerly known as Fox Kids Worldwide, Inc.), a
Delaware corporation and the owner of all of the member interests in Holdings
("FOX KIDS"), in favor of the Secured Parties referred to therein and (c) the
other Loan Documents referred to therein. Capitalized terms not otherwise
defined in this Amendment and Waiver have the same meanings as specified
therefor in the Credit Agreement.
PRELIMINARY STATEMENTS
(1) The Existing Borrowers, Holdings and Fox Kids have requested that
the Lenders agree to amend and otherwise modify the Credit Agreement and the Fox
Kids Guarantee in order to:
(a) (i) waive any and all of the Defaults and Events of Default under
Section 7.01(c) of the Credit Agreement that have occurred and are
continuing as a result of the failure of Holdings to comply with the
requirements of Section 5.02(j) of the Credit Agreement prior to the date
of this Amendment and Waiver in connection with the creation and
incorporation of two new direct Subsidiaries of Holdings, Fox Family
Properties, Inc., a Delaware corporation ("FOX PROPERTIES"), and Fox Family
Management, LLC, a Delaware limited liability company ("FOX MANAGEMENT"),
and (ii) permit both Fox Properties and Fox Management to be and become
"Borrowers" under the Loan Documents on and after the Amendment No. 3
Effective Date (as hereinafter defined) having all of the rights and
Obligations of the Existing Borrowers under and in respect of the Loan
Documents (including, without limitation, all of the Obligations under
Article VI of the Credit Agreement);
(b) waive any and all of the Defaults and Events of Default under
Section 7.01(c) of the Credit Agreement that have occurred and are
continuing as a result of the pledge by Fox Kids of the 58,000 Class A
Shares (the "CINE-GROUP SHARES") of Distribution Internationale Cine-Groupe
J.P. Inc., a corporation organized under the laws of Quebec, Canada,
acquired thereby as security for the loan (the "A FAIRE LOAN") in the
aggregate amount of three million Canadian dollars (C$3,000,000) that was
made to Fox Kids by A Faire Aujourd'hui Inc., a corporation organized under
the laws of Canada ("A FAIRE"), under a loan agreement dated as of June 23,
1998 (the "A FAIRE LOAN AGREEMENT");
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(c) waive any and all of the Defaults and Events of Default under
Section 7.01(c) of the Credit Agreement that have occurred and are
continuing as a result of the sale (the "CAROLINA OPRY SALE") by Calvin
Gilmore Productions, Inc., a Delaware corporation and a Subsidiary of IFE
("CGP"), of the Carolina Opry Theater to Gilmore Entertainment Group, LLC
in consideration for the cancellation of the Indebtedness owing by IFE and
Gilmore Acquisition Corp., a Delaware corporation and a wholly owned
Subsidiary of IFE ("GAC"), to Mr. Calvin Gilmore in an aggregate principal
amount of $6,700,000 (as evidenced by the promissory notes dated December
12, 1993);
(d) permit CGP to sell the Legends Theater and the lease of the Eddie
Miles Theater (collectively, the "THEATERS DISPOSITIONS") to On Stage
Entertainment, Inc., a Nevada corporation ("OSE"), in consideration for
shares of common stock ("OSE SHARES") of OSE having a Fair Market Value of
approximately $1,000,000 and approximately $750,000 in cash, with the cash
portion of the aggregate consideration for the Theaters Dispositions being
used by CGP promptly following its receipt thereof to purchase additional
OSE Shares;
(e) permit CGP to pledge (the "OSE SHARES PLEDGE") not more than 66%
of the OSE Shares acquired thereby as part of the Theaters Dispositions to
OSE as security for the indemnification obligations of CGP set forth in
Section 9.1 of the Theaters Disposition Sale Agreement dated as of June 30,
1998 (the "THEATERS DISPOSITION SALE AGREEMENT") by and among OSE, the
other buyers referred to therein and CGP, which pledge will automatically
be released and terminated no later than May 31, 2000 if no claims for
payment under such Section 9.1 have been made prior to such time; and
(f) permit Fox Kids to amend its Corrected Restated Certificate of
Incorporation (the "FOX KIDS CHARTER AMENDMENT") in order to reduce the
number of authorized shares of certain classes of its capital stock.
The creation of Fox Properties and Fox Management and the issuance of all of the
outstanding Equity Interests therein to Holdings and the execution and delivery
of all of the applicable Loan Documents by Fox Properties and Fox Management are
hereinafter collectively referred to as the "PROPERTIES/MANAGEMENT
TRANSACTIONS". The acquisition by Fox Kids of the Cine-Groupe Shares and the
entering into by Fox Kids of the related put and sale and other equity rights
documentation and the entering into by Fox Kids of the A Faire Loan Agreement
and related loan and collateral documentation are hereinafter collectively
referred to as the "CINE-GROUPE TRANSACTIONS". The Carolina Opry Sale, the
Theaters Dispositions and the OSE Shares Pledge are hereinafter collectively
referred to as the "GILMORE TRANSACTIONS". The Properties/Management
Transactions, the Cine-Groupe Transactions, the Gilmore Transactions and the
adoption and filing of the Fox Kids Charter Amendment are hereinafter
collectively referred to as the "AMENDMENT NO. 3 TRANSACTIONS".
(2) The Lenders have indicated their willingness to agree to amend the
Credit Agreement and the other Loan Documents in order, among other things, to
permit the Amendment No. 3 Transactions on terms and subject to the satisfaction
of the conditions set forth herein.
SECTION 1. Amendments to Certain Provisions of the Credit Agreement.
--------------------------------------------------------
The Credit Agreement is, upon the occurrence of the Amendment No. 3 Effective
Date, hereby amended to read as follows:
<PAGE>
3
(a) The recital of parties to the Credit Agreement is hereby amended
to delete the phrase "together with FCN Holding and IFE," in the fourth
line thereof and to substitute therefor the new phrase "together with FCN
Holding, IFE, Fox Management and Fox Properties (both as hereinafter
defined),".
(b) The definition of "Appropriate Borrowers" set forth in Section
1.01 of the Credit Agreement is hereby amended and restated in its entirety
to read as follows:
""APPROPRIATE BORROWERS" means (a) with respect to the Revolving
Credit Facility, FCN Holding, IFE, Saban, Fox Management and Fox
Properties and (b) with respect to the Term Facility, IFE.".
(c) The definition of "Appropriate Borrower's Account" set forth in
Section 1.01 of the Credit Agreement is hereby amended (i) to delete the
word "and" in the fifth line thereof and (ii) to delete the language "or
(d)" in the eighth line thereof and to substitute therefor the following
new language:
"(d) with respect to Fox Management, the account of Fox Management
maintained thereby with Imperial Bank at its office at 9777 Wilshire
Boulevard, Beverly Hills, California 90212, ABA# , Account No.
, and (e) with respect to Fox Properties, the account of Fox
Properties maintained thereby with Imperial Bank at its office at 9777
Wilshire Boulevard, Beverly Hills, California 90212, ABA# ,
Account No. , or (f)".
(d) The definition of "Related Documents" set forth in Section 1.01
of the Credit Agreement is hereby amended (i) to delete the word "and"
after the phrase "NAHI Subordinated Notes Documents" in the third line
thereof and to substitute therefor the punctuation "," and (ii) to add
after the phrase "to the Refinancing" at the end of such definition the new
phrase ", the A Faire Loan Agreement, the A Faire Pledge Agreement, the
Theaters Disposition Sale Agreement, the Theaters Disposition Pledge
Agreement and each of the other instruments, agreements or documents (other
than correspondence) setting forth the terms of the Cine-Groupe
Transactions or the Gilmore Transactions.".
(e) Section 1.01 of the Credit Agreement is hereby further amended to
add the following new definitions:
""A FAIRE LOAN" means the loan made to Fox Kids by A Faire
Aujourd'hui Inc. in the aggregate principal amount of three million
Canadian dollars (C$3,000,000) under the A Faire Loan Agreement.
"A FAIRE LOAN AGREEMENT" means the Loan Agreement dated as of
June 23, 1998 between Fox Kids and A Faire Aujourd'hui Inc., as such
agreement may be amended, supplemented or otherwise modified from time to
time after the Amendment No. 3 Effective Date in accordance with the terms
thereof, but to the extent permitted under the terms of the Loan Documents.
<PAGE>
4
"A FAIRE PLEDGE AGREEMENT" means the Pledge Agreement dated as of
June 23, 1998 made by Fox Kids in favor of A Faire Aujourd'hui Inc.,
as secured party thereunder, as such agreement may be amended,
supplemented or otherwise modified from time to time after the
Amendment No. 3 Effective Date in accordance with the terms thereof,
but to the extent permitted under the terms of the Loan Documents.
"AMENDMENT AND WAIVER NO. 3" means Amendment and Waiver No. 3
dated as of June 29, 1998 to the Loan Documents.
"AMENDMENT NO. 3 EFFECTIVE DATE" means the first date on which
all of the conditions precedent to the effectiveness of Amendment and
Waiver No. 3 were satisfied.
"CGP" means Calvin Gilmore Productions, Inc., a Delaware
corporation and, on and after the Amendment No. 3 Effective Date, a wholly
owned Subsidiary of IFE.
"CINE-GROUPE SHARES" means the 58,000 Class A Shares of
Distribution Internationale Cine-Groupe J.P., Inc., a corporation organized
under the laws of Quebec, Canada, acquired by Fox Kids in the Cine-Groupe
Transactions.
"CINE-GROUPE TRANSACTIONS" has the meaning specified in the
Preliminary Statement (1) to Amendment and Waiver No. 3.
"FOX MANAGEMENT" means Fox Family Management, LLC, a Delaware
limited liability company and a direct wholly owned Subsidiary of
Holdings.
"FOX PROPERTIES" means Fox Family Properties, Inc., a Delaware
corporation and a direct wholly owned Subsidiary of Holdings.
"GILMORE TRANSACTIONS" has the meaning specified in Preliminary
Statement (1) to Amendment and Waiver No. 3.
"OSE" means On Stage Entertainment, Inc., a Nevada corporation.
"OSE SHARES" means the common stock of On Stage Entertainment,
Inc., a Nevada corporation, received or acquired by CGP as part of the
Gilmore Transactions.
"THEATERS DISPOSITION PLEDGE AGREEMENT" means the Pledge
Agreement dated as of June 30, 1998 made by CGP in favor of OSE, as
such agreement may be amended, supplemented or otherwise modified from
time to time after the Amendment No. 3 Effective Date in accordance
with the terms thereof, but to the extent permitted under the terms of
the Loan Documents.
"THEATERS DISPOSITION SALE AGREEMENT" means the Asset Purchase
Agreement dated as of June 30, 1998 by and among On Stage Theaters
Surfside Beach Inc., On Stage Theaters North Myrtle Beach Inc. and On
Stage Entertainment, Inc., each a Nevada corporation, and CGP, as such
agreement may be amended, supplemented or otherwise
<PAGE>
5
modified from time to time after the Amendment No. 3 Effective Date in
accordance with the terms thereof, but to the extent permitted under
the terms of the Loan Documents."
(f) Section 5.02(a) of the Credit Agreement is hereby amended (i) to
delete the word "and" at the end of subclause (ii)(M) thereof, (ii) to
delete the punctuation "." at the end of subclause (ii)(N) thereof and
substitute therefor the phrase "; and" and (iii) to add the following new
subclause (ii)(O) thereof:
"(O) Liens on not more than 66% of the OSE Shares received by CGP
as part of (or in connection with) the Theaters Dispositions, any
substitutions and replacements thereof, any dividends and other
distributions thereon and any proceeds therefrom, in favor of OSE as
collateral solely for the indemnification obligations of CGP set forth
in Section 9.1 of the Theaters Disposition Sale Agreement, until the
earlier of (1) the first date on which the lien and security interest
of OSE in such OSE Shares is released or terminated and (2) May 31,
2000."
(g) Section 5.02(d) of the Credit Agreement is hereby amended (i) to
delete the word "and" at the end of clause (viii) thereof, (ii) to delete
the punctuation "." at the end of clause (ix) thereof and to substitute
therefor the new language "; and" and (iii) to add the following new clause
(x) thereof:
"(x) CGP shall sell, transfer or otherwise dispose of all of the
OSE Shares owned or otherwise held thereby no later than June 15, 2000
for cash consideration at least equal to the Fair Market Value of OSE
Shares and shall apply the Net Cash Proceeds therefrom on the date of
receipt thereof by CGP to reduce the Commitments in accordance with,
and to the extent required under, Section 2.04(b)(iv) and to prepay
the Advances outstanding at such time in accordance with, and to the
extent required under, Section 2.05(b)."
(h) Section 5.02(g) of the Credit Agreement is hereby amended (i) to
delete the word "and" at the end of subclause (i)(D) thereof, (ii) to add
the word and after the punctuation ";" at the end of subclause (i)(E)
thereof and (iii) to add the following new subclause (i)(F) thereof:
"(F) the prepayment of advances outstanding under the Credit
Agreement dated as of January 5, 1995, as amended, between CGP and The
Bank of Boston and described on Schedule 4.01(jj) hereto in an
aggregate amount not to exceed $5,250,000";
(i) Section 5.03(c)(ii) of the Credit Agreement is hereby amended and
restated in its entirety to read as follows:
"(ii) unaudited Consolidated balance sheets of each of FCN Holding and
its Subsidiaries, Saban and its Subsidiaries, IFE and its
Subsidiaries, Fox Management and its Subsidiaries and Fox Properties
and its Subsidiaries as of the end of such Fiscal Year and unaudited
Consolidated statements of operations, stockholders' equity and cash
flows of each of FCN Holding and its Subsidiaries, Saban and its
Subsidiaries, IFE and its Subsidiaries, Fox Management and its
Subsidiaries and Fox Properties and its Subsidiaries for such Fiscal
Year, in each case under this Section 5.03(c)".
<PAGE>
6
(j) Section 5.03(d)(ii) of the Credit Agreement is hereby amended and
restated in its entirety to read as follows:
"(ii) in the case of any such financial statements delivered to
the Lenders pursuant to Section 5.03(c)(ii), duly certifying that the
Consolidated financial statements delivered with such certificate
fairly present the Consolidated financial condition of FCN Holding and
its Subsidiaries, Saban and its Subsidiaries, IFE and its
Subsidiaries, Fox Management and its Subsidiaries or Fox Properties
and its Subsidiaries, as appropriate, as of the last day of such
Fiscal Year and the Consolidated results of operations and cash flows
of FCN Holding and its Subsidiaries, Saban and its Subsidiaries, IFE
and its Subsidiaries, Fox Management and its Subsidiaries or Fox
Properties and its Subsidiaries, as appropriate, for the Fiscal Year
ended on such date";
SECTION 2. Amendments to Certain Provisions of the Fox Kids
------------------------------------------------
Guarantee. The Fox Kids Guarantee is, upon the occurrence of the Amendment No.
3 Effective Date, hereby amended to read as follows:
(a) Section 8(a) of the Fox Kids Guarantee is hereby amended (i) to
delete the word "and" at the end of clause (ii) thereof, (ii) to delete the
punctuation "." at the end of clause (iii) thereof and to substitute
therefor the phrase "; and" and (iii) to add the following new subsection
(iv) thereof:
"(iv) Liens created under the A Faire Loan Pledge Agreement
solely on the Cine-Groupe Shares, any substitutions and replacement
thereof, any dividends and other distributions thereon and any
proceeds therefrom".
(b) Section 8(f) of the Fox Kids Guarantee is hereby amended to
delete clause (i) thereof in its entirety and to substitute therefor the
following new clause (i) thereof:
"(i) amend its Corrected Restated Certificate of Incorporation (A) to
include certificates of designation for one or more series of
preferred stock thereof that, in each case, will qualify as Permitted
Preferred Stock, (B) to reduce or to increase the number of authorized
shares of any class of its common stock and (C) to reduce the number
of authorized shares of any class or series of its Preferred Stock, in
each case under subclauses (i)(B) and (i)(C) of this Section 8(f), in
such a manner as, either individually or in the aggregate, could not
reasonably be expected to have a Material Adverse Effect or to
adversely affect the Administrative Agent or the Lenders in any
manner, and".
SECTION 3. Amendments to Certain Provisions of the Pledge and
--------------------------------------------------
Assignment Agreement. The Pledge and Assignment Agreement is, upon the
- --------------------
occurrence of the Amendment No. 3 Effective Date, hereby amended to read as
follows:
(a) Preliminary Statement (6) to the Pledge and Assignment Agreement
is hereby amended to delete the first sentence thereof in its entirety and
to substitute therefor the following new sentence:
<PAGE>
7
"(a) FCN Holding has opened a non-interest bearing cash collateral
account (the "FCN HOLDING CASH COLLATERAL ACCOUNT") with Citibank at
its offices at 399 Park Avenue, New York, New York 10043, Account No.
, (b) IFE has opened a non-interest bearing cash collateral
account (the "IFE CASH COLLATERAL ACCOUNT") with Citibank at its
offices at 399 Park Avenue, New York, New York 10043, Account No.
, (c) Saban has opened a non-interest bearing cash collateral
account (the "SABAN CASH COLLATERAL ACCOUNT") with Citibank at its
offices at 399 Park Avenue, New York, New York 10043, Account No.
, (d) Fox Management has opened a non-interest bearing cash
collateral account (the "FOX MANAGEMENT CASH COLLATERAL ACCOUNT") with
Citibank at its offices at 399 Park Avenue, New York, New York 10043,
Account No. , and (e) Fox Properties has opened a non-
interest bearing cash collateral account (the "FOX PROPERTIES CASH
COLLATERAL ACCOUNT" and, together with the FCN Holding Cash Collateral
Account, the IFE Cash Collateral Account, the Saban Cash Collateral
Account and the Fox Management Cash Collateral Account, the "CASH
COLLATERAL ACCOUNTS") with Citibank at its offices at 399 Park Avenue,
New York, New York 10043, Account No. ".
(b) Section 1(b) of the Pledge and Assignment Agreement is hereby
amended (i) to add the following new clauses (iv) and (v) immediately
following the existing clause (iii) thereof:
"(iv) in the case of Fox Management, the Fox Management Cash
Collateral Account, all of the funds held therein and all of the
certificates and instruments, if any, from time to time representing
or evidencing the Fox Management Cash Collateral Account;
(v) in the case of Fox Properties, the Fox Properties Cash
Collateral Account, all of the funds held therein and all of the
certificates and instruments, if any, from time to time representing
or evidencing the Fox Properties Cash Collateral Account;"
and (ii) to renumber the existing clauses (iv), (v) and (vi) of such
Section 1(c) as clauses (vi), (vii) and (viii), respectively.
SECTION 4. Waiver to Certain Provisions of the Credit Agreement. (a)
----------------------------------------------------
All of the Defaults and Events of Default under Section 7.01(c) of the Credit
Agreement that have occurred and are continuing as a result of the failure of
Holdings to comply with the requirements of Section 5.02(j) of the Credit
Agreement in connection with the creation and incorporation of Fox Management
and Fox Properties are, on and as of the Amendment No. 3 Effective Date, hereby
waived by the Lenders.
(b) Each of the Lenders hereby agrees to waive, on and as of the
Amendment No. 3 Effective Date but solely in connection with each of the
Carolina Opry Sale and the Theaters Dispositions, the requirements of Section
5.02(d)(vii)(2) of the Credit Agreement that CGP have received or receive at
least 90% of the value of the consideration from each of the Carolina Opry Sale
and the Theaters Dispositions in cash and Section 2.04(b)(iv) of the Credit
Agreement that the Facilities be automatically and permanently reduced by the
amount of the Net Cash Proceeds from the Theaters Dispositions on the date of
the receipt thereof by CGP; provided that:
(i) all of the Indebtedness of IFE and GAC owing to Mr. Calvin Gilmore
on the Amendment No. 3 Effective Date have been canceled and forgiven in
full in consideration for the
<PAGE>
8
Carolina Opry Sale, the aggregate principal amount of which shall not be
less than $6,700,000 on such date; and
(ii) CGP shall receive OSE Shares having a Fair Market Value on the
date of consummation of the Theaters Dispositions of not less than
$1,000,000 and at least $750,000 in cash in consideration for the Theaters
Dispositions (it being understood and agreed that such cash consideration
will be used by CGP promptly following the receipt thereof to acquire
additional OSE Shares); and
provided, further that, by its execution and delivery of this Amendment and
Waiver, IFE agrees to cause CGP to sell all of the OSE Shares acquired by it as
part of (or in connection with) the Theaters Dispositions for not less than the
Fair Market Value thereof on or prior to the earlier of (i) the third Business
Day following date on which the lien and security interest of OSE in such OSE
Shares is released or terminated and (ii) June 15, 2000, and to apply the Net
Cash Proceeds therefrom on the date of receipt thereof by CGP to reduce the
Commitments in accordance with, and to the extent required under, Section
2.04(b)(iv) and to prepay the Advances outstanding at such time in accordance
with, and to the extent required under, Section 2.05(b).
(c) All of the Defaults and Events of Default under Section 7.01(c) of
the Credit Agreement that have occurred and are continuing as a result of the
pledge by Fox Kids of the 58,000 Cine-Group Shares owned thereby on the date of
this Amendment and Waiver as security for the A Faire Loan are, on and as of the
Amendment No. 3 Effective Date, hereby waived by the Lenders.
SECTION 5. Consent to Substitution of Independent Public Accountants.
---------------------------------------------------------
The Lenders hereby consent, in accordance with the terms of Section 5.03(c) of
the Credit Agreement and Section 7(i)(ii) of the Fox Kids Guarantee, to the
appointment of Arthur Andersen LLP as the accountant of Holdings and its
Subsidiaries and Fox Kids and its Subsidiaries in lieu of Ernst & Young LLP.
SECTION 6. Acknowledgments by Fox Management and Fox Properties.
----------------------------------------------------
Each of Fox Management and Fox Properties, by its execution and delivery of this
Amendment and Waiver, acknowledge and agree that, as of the Amendment No. 3
Effective Date, (a) it will have all of the Obligations (including, without
limitation, all of the Obligations set forth in Article VI of the Credit
Agreement) of a Borrower under and in respect of the Loan Documents to the same
extent as each of the Existing Borrowers, (b) it will have all of the
Obligations (including, without limitation, all of the Obligations set forth in
the applicable Collateral Documents) of a Loan Party under and in respect of the
Loan Documents to the same extent as each of the other Loan Parties and (c) each
reference in the Loan Documents to a "Borrower" or a "Loan Party" shall also
mean and be a reference to it.
SECTION 7. Conditions of Effectiveness to this Amendment and Waiver.
--------------------------------------------------------
This Amendment and Waiver shall become effective as of the first date (the
"AMENDMENT NO. 3 EFFECTIVE DATE") on which, and only if, each of the following
conditions precedent shall have been satisfied:
(a) The Administrative Agent shall have received (i) counterparts of
this Amendment and Waiver executed by the Existing Borrowers, Fox
Management, Fox Properties, Fox Kids, Holdings and the Required Lenders or,
as to any of the Lenders, advice satisfactory to the Administrative Agent
that such Lender has executed this Amendment and Waiver, and (ii) the
<PAGE>
9
Consent attached hereto executed by each of the Loan Parties (other than
Holdings, Fox Kids and the Borrowers).
(b) The Lenders shall be reasonably satisfied with the organizational
and legal structure and capitalization of Fox Management and Fox Properties
(collectively, the "ADDITIONAL BORROWERS"), including, without limitation,
the terms and conditions of the Constitutive Documents of, and each class
of Equity Interests in, each of the Additional Borrowers and of each
agreement or instrument relating to such structure or capitalization.
Neither Fox Management nor Fox Properties shall have any Subsidiaries or
any Indebtedness or other liabilities (whether direct or indirect, matured
or unmatured, fixed or contingent) immediately prior to their execution and
delivery of the Loan Documents thereby other than de minimus liabilities
incidental to the creation and incorporation thereof.
(c) The Lenders shall be reasonably satisfied with the A Faire Loan
Agreement, the A Faire Pledge Agreement, the Theaters Disposition Sale
Agreement, the Theaters Disposition Pledge Agreement and all of the other
agreements, instruments and other documents related to the Cine-Groupe
Transactions, the Gilmore Transactions and the Fox Kids Charter Amendment
(collectively, the "AMENDMENT NO. 3 TRANSACTION DOCUMENTS"); and all of the
Amendment No. 3 Transaction Documents shall be in full force and effect in
the form delivered to the Administrative Agent on or prior to the Amendment
No. 3 Effective Date.
(d) All of the Governmental Authorizations, and all of the consents,
approvals and authorizations of, notices and filings to or with, and other
actions by, any other Person necessary in connection with any aspect of the
Amendment No. 3 Transactions, the Amendment No. 3 Transaction Documents or
any of the other transactions contemplated thereby shall have been obtained
(without the imposition of any conditions that are not reasonably
acceptable to the Lenders) and shall remain in full force and effect; all
applicable waiting periods shall have expired without any action being
taken by any competent authority; and no Requirement of Law shall be
applicable in the reasonable judgment of the Lenders that restrains,
prevents or imposes materially adverse conditions upon any aspect of the
Amendment No. 3 Transactions, the Amendment No. 3 Transaction Documents or
any of the other transactions contemplated thereby. Each aspect of the
Amendment No. 3 Transactions shall have been consummated or shall be
consummated on the Amendment No. 3 Effective Date in compliance with all
applicable Requirements of Law.
(e) The Administrative Agent shall have received on or before the
Amendment No. 3 Effective Date the following, each dated such date (unless
otherwise specified), in form and substance reasonably satisfactory to the
Lenders (unless otherwise specified) and (unless otherwise specified) in
sufficient copies for each of the Lenders:
(i) The Revolving Credit Notes of each of Fox Management and Fox
Properties, payable to the order of the Revolving Credit Lenders.
(ii) Certified copies of the resolutions of each of the board of
directors of Fox Properties and the members (or persons performing similar
functions) of Fox Management approving each of the Loan Documents to which
it is or is to be a party, the consummation of each aspect of the
Properties/Management Transactions involving or affecting such Person and
the other transactions contemplated by any of the foregoing, and of all
<PAGE>
10
documents evidencing necessary Governmental Authorizations, or other
necessary consents, approvals, authorizations, notices, filings or actions,
with respect to any of the Loan Documents to which it is or is to be a
party, the consummation of any aspect of the Properties/Management
Transactions involving or affecting such Person or any of the other
transactions contemplated by any of the foregoing.
(iii) Certified copies of the resolutions of the board of
directors of Fox Kids approving each of the Amendment No. 3 Transaction
Documents to which it is or is to be a party, the Fox Kids Charter
Amendment and the consummation of each aspect of the Amendment No. 3
Transactions involving or affecting Fox Kids and the other transactions
contemplated by any of the foregoing, and all documents evidencing
necessary Governmental Authorizations, or other necessary consents,
approvals, authorizations, notices, filings or actions, with respect to any
of the Amendment No. 3 Transaction Documents to which it is or is to be a
party, the Fox Kids Charter Amendment or the consummation any aspect of the
Amendment No. 3 Transactions involving or affecting Fox Kids or any of the
other transactions contemplated by any of the foregoing.
(iv) Certified copies of the resolutions of the board of
directors of CGP (A) approving each of the Amendment No. 3 Transaction
Documents to which it is or is to be a party and the consummation of each
aspect of the Amendment No. 3 Transactions involving or affecting CGP and
the other transactions contemplated by any of the foregoing, and all
documents evidencing necessary Governmental Authorizations, or other
necessary consents, approvals, authorizations, notices, filings or actions,
with respect to any of the Amendment No. 3 Transaction Documents to which
it is or is to be a party or the consummation of any aspect of the
Amendment No. 3 Transactions involving or affecting CGP or any of the other
transactions contemplated by any of the foregoing and (B) determining in
good faith that the consideration being received thereby in each of the
Carolina Opry Sale and the Theaters Dispositions is at least equal to the
Fair Market Value of the property and assets being sold, leased or
otherwise disposed of in such transactions.
(v) A copy of the certificate or articles of incorporation or
the operating agreement (or similar Constitutive Document) of each of the
Additional Borrowers, and each amendment thereto, certified (as of a date
reasonably near the Amendment No. 3 Effective Date) as being a true and
complete copy thereof by the Secretary of State of the State of Delaware.
(vi) A copy of a certificate of the Secretary of State of the
State of Delaware, dated reasonably near the Amendment No. 3 Effective
Date, listing the certificate or articles of incorporation or the operating
agreement (or similar Constitutive Document) of each of the Additional
Borrowers and each amendment thereto on file in the office of such
Secretary of State and certifying that (A) such amendments are the only
amendments to the certificate or articles of incorporation or the operating
agreement (or similar Constitutive Document) of such Additional Borrower on
file in its office, (B) such Additional Borrower has paid all franchise
taxes (or the equivalent thereof) to the date of such certificate and (C)
such Additional Borrower is duly organized and is in good standing under
the laws of the State of Delaware.
<PAGE>
11
(vii) A copy of the certificate of the Secretary of State (or
the equivalent Governmental Authority) of each jurisdiction in which
any of the Additional Borrowers is (or is required under Section
5.01(a) of the Credit Agreement to be) qualified or licensed as a
foreign corporation or limited liability company, as the case may be,
in each case dated reasonably near the Amendment No. 3 Effective Date
and stating that such Additional Borrower is duly qualified and in
good standing as a foreign corporation or limited liability company in
such jurisdiction and has filed all annual reports required to be
filed, and has paid all franchise taxes (or the equivalent thereof)
required to be paid, in such jurisdiction to the date of such
certificate.
(viii) A certified copy of the amendment to the Corrected
Restated Certificate of Incorporation of Fox Kids effecting the Fox
Kids Charter Amendment, in the form to be filed with the Secretary of
State of the State of Delaware;
(ix) A certificate of Fox Kids, signed on behalf of Fox Kids by
a Responsible Officer thereof, dated the Amendment No. 3 Effective
Date (the statements made in which certificate shall be true on and as
of the Amendment No. 3 Effective Date), certifying as to:
(A) the accuracy and completeness of each of the Amendment
No. 3 Transaction Documents relating to the Cine-Groupe
Transactions (copies of all of which shall be attached thereto);
(B) the absence of any amendments to the Corrected
Restated Certificate of Incorporation of Fox Kids since May 7,
1998, or any steps taken by the board of directors or the
shareholders of Fox Kids to effect or authorize any further
amendment, supplement or other modification thereto other than
the Fox Kids Charter Amendment;
(C) the accuracy in all material respects of the
representations and warranties made by Fox Kids in the Loan
Documents and the Amendment No. 3 Transaction Documents to which
Fox Kids is or is to be a party as though made on and as of the
Amendment No. 3 Effective Date, before and after giving effect to
this Amendment and Waiver and the Amendment No. 3 Transactions;
and
(D) the absence of any event occurring and continuing, or
resulting from this Amendment and Waiver or any of the Amendment
No. 3 Transactions, that would constitute a Default, other than
the Defaults that are or are to be expressly waived by the
Lenders pursuant to Section 4.
(x) A certificate of GAC, signed on behalf of GAC by a
Responsible Officer thereof, dated the Amendment No. 3 Effective Date
(the statements made in which certificate shall be true on and as of
the Amendment No. 3 Effective Date), certifying as to:
(A) the satisfaction of each of the conditions precedent to
the Carolina Opry Sale and each of the Theaters Dispositions set
forth in Section 5.02(d)(vii) of the Credit Agreement and not
expressly waived by the Lenders under Section 4;
<PAGE>
12
(B) the absence of any amendments to the certificate or
articles of incorporation of GAC since October 28, 1997 or any steps
taken by the board of directors or the shareholders of GAC to effect or
authorize any further amendment, supplement or other modification
thereto;
(C) the accuracy and completeness of the bylaws of GAC as in
effect on the Amendment No. 3 Effective Date (a copy of which, if
different from the bylaws previously delivered to the Lenders, shall be
attached to such certificate);
(D) the legal and beneficial ownership by GAC of all of the
Collateral in which GAC is purported to have granted a lien and security
interest to the Administrative Agent, on behalf of the Secured Parties,
under the Collateral Documents, free and clear of all Liens, except for
the liens and security interests created under the Loan Documents;
(E) the accuracy in all material respects of the
representations and warranties made by GAC in the Loan Documents and the
Amendment No. 3 Transaction Documents to which it is or is to be a party
as though made on and as of the Amendment No. 3 Effective Date, before
and after giving effect to this Amendment and Waiver and the Amendment
No. 3 Transactions; and
(F) the absence of any event occurring and continuing, or
resulting from this Amendment and Waiver or any of the Amendment No. 3
Transactions, that would constitute a Default, other than the Defaults
that are or are to be expressly waived by the Lenders pursuant to
Section 4.
(xi) A certificate of each of the Additional Borrowers, signed on
behalf of such Additional Borrower by a Responsible Officer thereof, dated
the Amendment No. 3 Effective Date (the statements made in which certificate
shall be true on and as of the Amendment No. 3 Effective Date), certifying as
to:
(A) the absence of any amendments to the certificate or
articles of incorporation or the operating agreement (or similar
Constitutive Document) of such Additional Borrower since the date of the
Secretary of State's certificate delivered pursuant to clause (vi) of
this Section 7 or any steps taken by the board of directors or the
shareholders or the members (or the persons performing similar
functions) of such Additional Borrower to effect or authorize any
further amendment, supplement or other modification thereto;
(B) the accuracy and completeness of the bylaws (or the
equivalent Constitutive Documents, if any) of such Additional Borrower
as in effect on the date on which the resolutions of the board of
directors or the members (or the persons performing similar functions)
of such Additional Borrower referred to in clause (ii) of this Section 7
were adopted and on the Amendment No. 3 Effective Date (a copy of which
shall be attached to such certificate);
<PAGE>
13
(C) the due organization and good standing of such Additional
Borrower as a corporation or limited liability company, as the case may
be, organized under the laws of the State of Delaware, and the absence
of any proceeding (either pending or contemplated) for the dissolution,
liquidation or other termination of the existence of such Additional
Borrower;
(D) the legal and beneficial ownership by such Additional
Borrower of all of the Collateral in which such Additional Borrower is
purported to have granted a lien and security interest to the
Administrative Agent, on behalf of the Secured Parties, under the
Collateral Documents, free and clear of all Liens, except for the liens
and security interests created under the Loan Documents;
(E) the accuracy in all material respects of the
representations and warranties made by such Additional Borrower in the
Loan Documents and the Amendment No. 3 Transaction Documents to which it
is or is to be a party as though made on and as of the Amendment No. 3
Effective Date, before and after giving effect to this Amendment and
Waiver and the Amendment No. 3 Transactions; and
(F) the absence of any event occurring and continuing, or
resulting from this Amendment and Waiver or any of the Amendment No. 3
Transactions, that would constitute a Default, other than the Defaults
that are or are to be expressly waived by the Lenders pursuant to
Section 4.
(xii) A certificate of the Secretary or an Assistant Secretary of
each of the Additional Borrowers certifying the names and true signatures of
the officers of such Additional Borrower authorized to sign each of the Loan
Documents to which it is or is to be a party and the other agreements,
instruments and documents to be delivered hereunder and thereunder.
(xiii) A certificate of CGP, signed on behalf of CGP by a Responsible
Officer thereof, dated the Amendment No. 3 Effective Date (the statements
made in which certificate shall be true on and as of the Amendment No. 3
Effective Date), certifying as to (i) the accuracy and completeness of each
of the Amendment No. 3 Transaction Documents relating to the Gilmore
Transactions (copies of all of which shall be attached thereto) and (ii) the
satisfaction of each of the conditions precedent to the Carolina Opry Sale
and each of the Theaters Dispositions set forth in Section 5.02(d)(vii) of
the Credit Agreement and not expressly waived by the Lenders under Section 4.
(xiv) Certificates representing the Pledged Interests comprised of
all of the Equity Interests in the Additional Borrowers and all of the OSE
Shares received by CGP as part of (or in connection with) the Theaters
Dispositions and not pledged to OSE as collateral for the indemnification
obligations of CGP set forth in Section 9.1 of the Theaters Disposition Sale
Agreement in accordance with Section 5.02(a)(ii)(O) of the Credit Agreement,
as amended hereby, in each case accompanied by undated stock powers or other
appropriate powers duly executed in blank, and instruments evidencing Pledged
Indebtedness, if any,
<PAGE>
14
comprised of intercompany Indebtedness of any of the Additional Borrowers
owing to any of the other Loan Parties, together with:
(A) proper amendments to existing financing statements (Form
UCC-3 or a comparable form) under the Uniform Commercial Code of all
jurisdictions that may be necessary or that the Administrative Agent
may reasonably deem desirable in order to perfect and protect the
liens and security interests created or purported to be created by the
Pledge and Assignment Agreement, covering such Pledged Interests and
Pledged Indebtedness, in each case completed in a manner satisfactory
to the Administrative Agent; and
(B) evidence that all of the other actions (including,
without limitation, the completion of all of the other recordings and
filing of or with respect to the Pledge and Assignment Agreement) that
may be necessary or that the Administrative Agent may reasonably deem
desirable in order to perfect and protect the liens and security
interests created under the Pledge and Assignment Agreement have been
taken or will be taken in accordance with the terms of the Loan
Documents.
(xv) One or more pledge agreement supplements, in substantially
the form of Exhibit B to the Pledge and Assignment Agreement (collectively,
the "PLEDGE AGREEMENT SUPPLEMENTS"), duly executed by each of the
Additional Borrowers, together with:
(A) certificates representing the Pledged Interests
referred to therein, if any, accompanied by undated stock powers
or other appropriate powers, duly executed in blank;
(B) instruments evidencing the Pledged Indebtedness
referred to therein, if any, duly endorsed in blank;
(C) proper financing statements (Form UCC-1 or a comparable
form) under the Uniform Commercial Code of all jurisdictions that
may be necessary or that the Administrative Agent may reasonably
deem desirable in order to perfect and protect the liens and
security interests created or purported to be created under the
Pledge Agreement Supplements and the Pledge and Assignment
Agreement, covering the Collateral of the Additional Borrowers
described therein, in each case completed in a manner
satisfactory to the Administrative Agent and duly executed by the
applicable Additional Borrower;
(D) the Cash Collateral Account Letter of each of Fox
Management and Fox Properties, duly executed by such Person and
Citibank; and
(E) evidence that all of the other actions (including,
without limitation, the completion of all of the other recordings
and filings of or with respect to the Pledge Agreement
Supplements and the Pledge and Assignment Agreement) that may be
necessary or that the Administrative Agent may reasonably deem
desirable in order to perfect and protect the liens and security
interests created under the
<PAGE>
15
Pledge Agreement Supplements and the Pledge and Assignment
Agreement have been taken or will be taken in accordance with the
terms of the Loan Documents.
(xvi) A favorable opinion of Troop Meisinger Steuber & Pasich,
LLP, special counsel for the Loan Parties, in form and substance
satisfactory to the Lenders.
(xvii) A favorable opinion of Squadron, Ellenoff, Plesent &
Sheinfeld, LLP, New York counsel for the Loan Parties, in form and
substance satisfactory to the Lenders.
(f) The representations and warranties contained in each of the Loan
Documents shall be correct in all material respects on and as of the date
first above written and the Amendment No. 3 Effective Date, before and
after giving effect to this Amendment and Waiver and the Amendment No. 3
Transactions, as though made on and as of such date (other than any such
representation and warranty that, by its terms, refers to a specific date
other than such date, in which case as of such specific date). No event
shall have occurred and be continuing, or shall result from the
effectiveness of this Amendment and Waiver or any of the Amendment No. 3
Transactions, that constitutes a Default, other than the Defaults that are
or are to be expressly waived by the Lenders pursuant to Section 4.
The effectiveness of this Amendment and Waiver is further conditioned upon the
accuracy of all of the factual matters described herein. This Amendment and
Waiver is subject to the provisions of Section 9.01 of the Credit Agreement.
SECTION 8. Reference to and Effect on the Loan Documents. (a) On
---------------------------------------------
and after the Amendment No. 3 Effective Date, (i) each reference in the Credit
Agreement to "this Agreement", "hereunder", "hereof" or words of like import
referring to the Credit Agreement, and each reference in the Notes and each of
the other Loan Documents to "the Credit Agreement", "thereunder", "thereof" or
words of like import referring to the Credit Agreement, shall mean and be a
reference to the Credit Agreement, as amended and otherwise modified by this
Amendment and Waiver, (ii) each reference in the Fox Kids Guarantee to "this
Guarantee", "hereunder", "hereof" or words of like import referring to the Fox
Kids Guarantee, and each reference in each of the other Loan Documents to "the
Fox Kids Guarantee", "hereunder", "hereof" or words of like import referring to
the Fox Kids Guarantee, shall mean and be a reference to the Fox Kids Guarantee,
as amended and otherwise modified by this Amendment and Waiver, and (iii) each
reference in the Pledge and Assignment Agreement to "this Agreement" ,
"hereunder", "hereof" or words of like import referring to the Pledge and
Assignment Agreement, and each reference in each of the other Loan Documents to
"the Pledge and Assignment Agreement", "hereunder", "hereof" or words of like
import referring to the Pledge and Assignment Agreement, shall mean and be a
reference to the Pledge and Assignment Agreement, as amended and otherwise
modified by this Amendment and Waiver.
(b) The Credit Agreement, the Notes and each of the other Loan
Documents, except to the extent of the amendments and waivers specifically
provided above, are and shall continue to be in full force and effect and are
hereby in all respects ratified and confirmed. Without limiting the generality
of the foregoing, each of the Collateral Documents and all of the Collateral
described therein do and shall continue to secure the payment of all Obligations
of the Loan Parties under the Loan Documents, in each case as amended and
otherwise modified in accordance with this Amendment and Waiver.
<PAGE>
16
(c) The execution, delivery and effectiveness of this Amendment and
Waiver shall not, except as expressly provided herein, operate as a waiver of
any right, power or remedy of any of the Secured Parties or the Administrative
Agent under any of the Loan Documents, nor constitute a waiver of any provision
of any of the Loan Documents.
(d) Upon the occurrence of the Amendment No. 3 Effective Date, each of
the Loan Parties and each of the Lenders hereby authorize the Administrative
Agent to supplement and revise each of the Schedules to the Pledge and
Assignment Agreement, as appropriate, to reflect the supplements to such
Schedules attached to the Pledge Agreement Supplements.
SECTION 9. Costs and Expenses. Each of the Borrowers hereby
-------------------
severally agrees to pay, upon demand, all of the reasonably and properly
documented costs and expenses of the Administrative Agent (including, without
limitation, the reasonable fees and expenses of counsel for the Administrative
Agent) in connection with the preparation, execution, delivery, administration,
modification and amendment of this Amendment and Waiver and all of the
instruments, agreements and other documents delivered or to be delivered in
connection herewith, all in accordance with the terms of Section 9.05 of the
Credit Agreement.
SECTION 10. Execution in Counterparts. This Amendment and Waiver may
-------------------------
be executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute one and the same
agreement. Delivery of an executed counterpart of a signature page to this
Amendment and Waiver by telecopier shall be effective as delivery of a manually
executed counterpart of this Amendment and Waiver.
SECTION 11. Governing Law. This Amendment and Waiver shall be
-------------
governed by, and construed in accordance with, the laws of the State of New
York.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment and
Waiver to be executed by their respective officers, thereunto duly authorized,
as of the date first written above.
THE LOAN PARTIES
FCN HOLDING, INC.
By /s/ Mel Woods
---------------------
Name:
Title:
<PAGE>
17
INTERNATIONAL FAMILY
ENTERTAINMENT, INC.
By /s/ Mel Woods
-------------------
Name:
Title:
SABAN ENTERTAINMENT, INC.
By /s/ Mel Woods
--------------
Name:
Title:
FOX FAMILY MANAGEMENT LLC
/s/ Maureen Smith
-----------------
Name: Maureen Smith
Title: Manager
FOX FAMILY PROPERTIES, INC.
By /s/ Mel Woods
--------------------
Name:
Title:
FOX FAMILY WORLDWIDE, INC.
By /s/ Mel Woods
---------------
Name:
Title:
<PAGE>
18
FOX KIDS HOLDINGS, LLC
By: Fox Family Worldwide, Inc.
as its Managing Member
By /s/ Mel Woods
-------------
Name:
Title:
THE AGENTS AND THE LENDERS
CITICORP USA, INC., as Agent and as Lender
By /s/ Judith Fishlow Minter
-------------------------
Name: Judith Fishlow Minter
Title: Attorney-in-Fact
CITICORP SECURITIES, INC., as Agent
By /s/ Judith Fishlow Minter
-------------------------
Name: Judith Fishlow Minter
Title: Attorney-in-Fact
BANKBOSTON, N.A., as Agent and as Lender
By /s/ David B. Herter
---------------------
Name: David B. Herter
Title: Managing Director
THE CHASE MANHATTAN BANK, as Lender
By /s/ John P. Haltmaier
---------------------
Name: John P. Haltmaier
Title: Vice President
<PAGE>
19
CHASE SECURITIES, INC., as Agent
By /s/ Joan M. Fitzgibbon
----------------------
Name: Joan M. Fitzgibbon
Title: Managing Director
BANK OF AMERICA NT & SA, as Lender
By /s/ Carl F. Salas
----------------------
Name: Carl F. Salas
Title: Vice President
THE BANK OF NOVA SCOTIA, as Lender
By /s/ Vincent J. Fitzgerald, Jr.
---------------------------------
Name: Vincent J. Fitzgerald, Jr.
Title: Authorized Signatory
FLEET BANK, N.A., as Lender
By /s/ Tanya M. Crossley
-------------------------
Name: Tanya M. Crossley
Title: Vice President
THE INDUSTRIAL BANK OF JAPAN
LIMITED, LOS ANGELES AGENCY, as Lender
By /s/ Vicente L. Timiraos
-----------------------
Name: Vicente L. Timiraos
Title: SVP & SDGM
<PAGE>
20
NationsBank, N.A. as successor by merger to
NATIONSBANK OF TEXAS, N.A., as Lender
By /s/ Pamela S. Kurtzman
------------------------------
Name: Pamela S. Kurtzman
Title: Vice President
TORONTO-DOMINION (TEXAS), INC., as Lender
By /s/ Jeffery R. Lents
------------------------------
Name: Jeffery R. Lents
Title: Vice President
SOCIETE GENERALE, NEW YORK BRANCH, as Lender
By /s/ Elaine Khalil
------------------------------
Name: Elaine Khalil
Title: Vice President
THE BANK OF NEW YORK, as Lender
By /s/ Stephen M. Nettler
------------------------------
Name: Stephen M. Nettler
Title: Assistant Vice President
BANQUE NATIONALE DE PARIS, as Lender
By /s/ Lynn Hillman
------------------------------
Name: Lynn Hillman
Title: Assistant Treasurer
By /s/ Nuala Marley
------------------------------
Name: Nuala Marley
Title: Vice President
<PAGE>
21
THE MITSUBISHI TRUST AND BANKING
CORPORATION, LOS ANGELES AGENCY,
as Lender
By /s/ Yasushi Satomi
------------------------------
Name: Yasushi Satomi
Title: Senior Vice President
THE SUMITOMO BANK, LIMITED, as
Lender
By______________________________
Name:
Title:
CRESTAR BANK, as Lender
By /s/ J. Eric Millhorn
------------------------------
Name: J. Eric Millhorn
Title: Vice President
THE DAI-ICHI KANGYO BANK, LIMITED,
as Lender
By /s/ Nancy Stengel
------------------------------
Name: Nancy Stengel
Title: AVP
<PAGE>
22
THE FUJI BANK, LIMITED, LOS ANGELES
AGENCY, as Lender
By /s/ Masahito Fukuda
------------------------------
Name: Masahito Fukuda
Title: Joint General Manager
LONG TERM CREDIT BANK OF
JAPAN, as Lender
By /s/ Noboru Akahane
------------------------------
Name: Noboru Akahane
Title: Deputy General Manager
FIRST HAWAIIAN BANK, as Lender
By /s/ Donald C. Young
-------------------------------
Name: Donald C. Young
Title: Vice President
<PAGE>
CONSENT
Reference is made to Amendment and Waiver No. 3 dated as of June 29,
1998 (the "AMENDMENT AND WAIVER"; capitalized terms not otherwise defined herein
being used herein as defined in the Amendment and Waiver and in the Credit
Agreement referred to therein) to (a) the Amended and Restated Credit Agreement
among FCN Holding, Inc., International Family Entertainment, Inc. and Saban
Entertainment, Inc., as Existing Borrowers, Fox Kids Holdings, LLC, as
Guarantor, Fox Kids Worldwide, Inc., as Guarantor, the Lenders party thereto,
Citicorp USA, Inc., as Administrative Agent for the Lenders and the other
Secured Parties referred to therein, and Citicorp Securities, Inc., Chase
Securities, Inc. and BankBoston, N.A., as Co-Arrangers for the Facilities
referred to therein, (b) the Fox Kids Guarantee dated as of October 28, 1997 (as
amended by Letter Amendment No. 2 dated as of April 16, 1998, the "FOX KIDS
GUARANTEE") made by Fox Family Worldwide, Inc. (formerly known as Fox Kids
Worldwide, Inc.), a Delaware corporation and the owner of all of the member
interests in Holdings ("FOX KIDS"), in favor of the Secured Parties referred to
therein and (c) the other Loan Documents referred to therein.
Each of the undersigned, in its capacity as (a) a Guarantor under the
Second Amended and Restated Subsidiaries Guarantee dated October 28, 1997 (the
"SUBSIDIARIES GUARANTEE") in favor of the Secured Parties referred to therein
and a Pledgor under the Pledge and Assignment Agreement and/or (b) a Pledgor
under the Pledge and Assignment Agreement and/or under one or more of (i) the
Amended and Restated Memorandum of Deposit of Shares of Equity Interests dated
October 28, 1997 (the "U.K./SABAN U.K. PLEDGE AGREEMENT") between Saban and the
Administrative Agent, (ii) the Amended and Restated Memorandum of Deposit of
Shares of Equity Interests dated October 28, 1997 (the "U.K./FKE PLEDGE
AGREEMENT"), among FKE Holdings, Fox Kids Network and the Administrative Agent,
(iii) the Deeds of Pledge dated September 4, 1997 and June 24, 1998
(collectively, the "NETHERLANDS PLEDGE AGREEMENT"), among FKE Holdings, T.V.10
and the Administrative Agent, (iv) the Amended and Restated Pledge Agreement of
Shares dated September 4, 1997 (the "NETHERLANDS ANTILLES PLEDGE AGREEMENT"),
among Saban, Saban International, N.V. and the Administrative Agent, (v) the
Pledge Agreement dated September 4, 1997 (the "GERMAN PLEDGE AGREEMENT") among
Saban and the Administrative Agent, (vi) the Deed of Pledge of Shares dated
September 4, 1997 (the "FRENCH/FOX KIDS SARL PLEDGE AGREEMENT"), among FKE
Holdings, Fox Kids Network, Fox Kids France SARL and the Administrative Agent,
and (vii) the Deed of Pledge of Shares dated September 4, 1997 (together with
the U.K./Saban U.K. Pledge Agreement, the U.K./FKE Pledge Agreement, the
Netherlands Pledge Agreement, the Netherlands Antilles Pledge Agreement, the
German Pledge Agreement and the French/Fox Kids SARL Pledge Agreement, the
"FOREIGN SUBSIDIARY PLEDGE AGREEMENTS"), among Saban, Saban International Paris
SARL and the Administrative Agent, hereby consents to the execution, delivery
and performance of the Amendment and Waiver and agrees that:
(A) each of the Subsidiaries Guarantee, the Pledge and Assignment
Agreement and the Foreign Subsidiary Pledge Agreements to which it is a
party is, and shall continue to be, in full force and effect and is hereby
in all respects ratified and confirmed, except that, on and after the
Amendment No. 3 Effective Date, (1) each reference to the "Credit
Agreement", "thereunder", "thereof", "therein" or words of like import
referring to the Credit Agreement shall mean and be a reference to the
Credit Agreement, as amended and otherwise modified by the Amendment and
Waiver, (2) each reference to "the Fox Kids Guarantee", "thereunder",
"thereof", "therein" or words of like import referring to the Fox Kids
Guarantee shall mean and be a reference to the Fox Kids Guarantee, as
amended and otherwise modified by the Amendment and Waiver, and (3) each
reference in the Pledge and Assignment Agreement to "this Agreement" ,
"hereunder", "hereof" or
<PAGE>
2
words of like import referring to the Pledge and Assignment Agreement, and
each reference in each of the other Loan Documents to "the Pledge and
Assignment Agreement", "hereunder", "hereof" or words of like import
referring to the Pledge and Assignment Agreement, shall mean and be a
reference to the Pledge and Assignment Agreement, as amended and otherwise
modified by this Amendment and Waiver; and
(B) the Pledge and Assignment Agreement and the Foreign Subsidiary
Pledge Agreements to which it is a party and all of the Collateral of such
Person described therein do, and shall continue to, secure the payment of
all of the Secured Obligations.
This Consent shall be governed by, and construed in accordance with,
the laws of the State of New York, excluding (to the fullest extent a New York
court would permit) any rule of law that would cause application of the laws of
any jurisdiction other than the State of New York.
Delivery of an executed counterpart of a signature page of this
Consent by telecopier shall be effective as the delivery of a manually executed
counterpart of this Consent.
ANGEL GROVE PRODUCTIONS, INC.
By /s/ Mel Woods
------------------------------
Name:
Title:
BUGBOY PRODUCTIONS, INC.
By /s/ Mel Woods
------------------------------
Name:
Title:
CYBERPROD, INC.
By /s/ Mel Woods
------------------------------
Name:
Title:
<PAGE>
3
FOX KIDS EUROPE HOLDINGS, INC.
By /s/ Mel Woods
-------------------------------
Name:
Title:
ERIK PRODUCTIONS
By /s/ Mel Woods
-------------------------------
Name:
Title:
FOX KIDS (LATIN AMERICA), INC.
By /s/ Mel Woods
-------------------------------
Name:
Title:
FOX KIDS EUROPE LIMITED
By /s/ Mel Woods
-------------------------------
Name:
Title:
FOX KIDS WORLDWIDE, L.L.C.
By: Fox Kids Holdings, LLC,
as Managing Member
By: Fox Family Worldwide, Inc.,
as Managing Member
By /s/ Mel Woods
------------------------------
Name:
Title:
<PAGE>
4
IAN PRODUCTIONS, INC.
By /s/ Mel Woods
-------------------------------
Name:
Title:
INTERPROD, INC.
By /s/ Mel Woods
-------------------------------
Name:
Title:
KIDS ROCK, INC.
By /s/ Mel Woods
-------------------------------
Name:
Title:
LAUREL WAY PRODUCTIONS, INC.
By /s/ Mel Woods
-------------------------------
Name:
Title:
<PAGE>
5
MMPR PRODUCTIONS, INC.
By /s/ Mel Woods
-------------------------------
Name:
Title:
FOX KIDS NETWORKS-EUROPE, INC.
By /s/ Mel Woods
-------------------------------
Name:
Title:
POCKET PRODUCTIONS, INC.
By /s/ Mel Woods
-------------------------------
Name:
Title:
SABAN DOMESTIC SERVICES, INC.
By /s/ Mel Woods
-------------------------------
Name:
Title:
SABAN FOODS, INC.
By /s/ Mel Woods
-------------------------------
Name:
Title:
SABAN INTERNATIONAL SERVICES, INC.
By /s/ Mel Woods
-------------------------------
Name:
Title:
<PAGE>
6
SABAN MERCHANDISING, INC.
By /s/ Mel Woods
-------------------------------
Name:
Title:
SABAN/SCHERICK PRODUCTIONS, INC.
By /s/ Mel Woods
------------------------------
Name:
Title:
SANDSCAPE, INC.
By /s/ Mel Woods
-------------------------------
Name:
Title:
TEEN DREAM PRODUCTIONS, INC.
By /s/ Mel Woods
-------------------------------
Name:
Title:
MELVILLE PRODUCTIONS, INC.
By /s/ Mel Woods
-------------------------------
Name:
Title:
<PAGE>
7
FCNH SUB, INC.
By /s/ Mel Woods
-------------------------------
Name:
Title:
FOX CHILDREN'S PRODUCTIONS, INC.
By /s/ Mel Woods
-------------------------------
Name:
Title:
FOX CHILDREN'S NETWORK, INC.
By /s/ Mel Woods
-------------------------------
Name:
Title:
STORYMAKERS, INC.
By /s/ Mel Woods
-------------------------------
Name:
Title:
FOX KID'S MUSIC, INC.
By /s/ Mel Woods
-------------------------------
Name:
Title:
<PAGE>
8
FOX CHILDREN'S MUSIC, INC.
By /s/ Mel Woods
-------------------------------
Name:
Title:
APOLLO PRODUCTIONS, INC.
By /s/ Mel Woods
-------------------------------
Name:
Title:
BLANKET SHOW PRODUCTIONS, INC.
By /s/ Mel Woods
-------------------------------
Name:
Title:
CAPE PRODUCTIONS, INC.
By /s/ Mel Woods
-------------------------------
Name:
Title:
COMPANY SIX, LTD.
By /s/ Mel Woods
-------------------------------
Name:
Title:
<PAGE>
9
DITCHDIGGERS PRODUCTIONS, INC.
By /s/ Mel Woods
----------------------------
Name:
Title:
EARTH PRODUCTIONS, INC.
By /s/ Mel Woods
----------------------------
Name:
Title:
FAMILY CHALLENGE PRODUCTIONS, INC.
By /s/ Mel Woods
----------------------------
Name:
Title:
FAMILY CHANNEL PICTURES, INC.
By /s/ Mel Woods
----------------------------
Name:
Title:
FAMILY DEVELOPMENT CORP.
By /s/ Mel Woods
----------------------------
Name:
Title:
<PAGE>
10
FAMILY GAME SHOWS, INC.
By /s/ Mel Woods
----------------------------
Name:
Title:
GAME TV, INC.
By /s/ Mel Woods
----------------------------
Name:
Title:
GILMORE ACQUISITION CORP.
By /s/ Mel Woods
----------------------------
Name:
Title:
GOOD NEWS PRODUCTIONS, INC.
By /s/ Mel Woods
----------------------------
Name:
Title:
HOME PRODUCTIONS, INC.
By /s/ Mel Woods
----------------------------
Name:
Title:
<PAGE>
11
IFE CHINA, INC.
By /s/ Mel Woods
----------------------------
Name:
Title:
IFE DIRECT MARKETING, INC.
By /s/ Mel Woods
----------------------------
Name:
Title:
IFE JAKE ACQUISITION CORP.
By /s/ Mel Woods
----------------------------
Name:
Title:
IFE LATIN AMERICA, INC.
By /s/ Mel Woods
----------------------------
Name:
Title:
KIPPER PRODUCTIONS, INC.
By /s/ Mel Woods
----------------------------
Name:
Title:
<PAGE>
12
LYNNHAVEN ACQUISITION CORP.
By /s/ Mel Woods
----------------------------
Name:
Title:
MELODY TO MELODY, INC.
By /s/ Mel Woods
----------------------------
Name:
Title:
MIMSEY MUSIC, INC.
By /s/ Mel Woods
----------------------------
Name:
Title:
MOBILINK PARTNERS, INC.
By /s/ Mel Woods
----------------------------
Name:
Title:
MTM ACQUISITION COMPANY, INC.
By /s/ Mel Woods
----------------------------
Name:
Title:
<PAGE>
13
MTM CONSUMER PRODUCTS, INC.
By /s/ Mel Woods
----------------------------
Name:
Title:
MTM ENTERPRISES, INC.
By /s/ Mel Woods
----------------------------
Name:
Title:
MTM ENTERTAINMENT, INC.
By /s/ Mel Woods
----------------------------
Name:
Title:
MTM HOLDING COMPANY, INC.
By /s/ Mel Woods
----------------------------
Name:
Title:
MTM MUSIC, INC.
By /s/ Mel Woods
----------------------------
Name:
Title:
<PAGE>
14
MUSIC TO MUSIC, INC.
By /s/ Mel Woods
----------------------------
Name:
Title:
PRETENDER PRODUCTIONS, INC.
By /s/ Mel Woods
----------------------------
Name:
Title:
QUEENS PRODUCTIONS, INC.
By /s/ Mel Woods
----------------------------
Name:
Title:
SPARKS PRODUCTIONS, INC.
By /s/ Mel Woods
----------------------------
Name:
Title:
TREASURE PRODUCTIONS, INC.
By /s/ Mel Woods
----------------------------
Name:
Title:
<PAGE>
15
UNITED STATES FAMILY
ENTERTAINMENT, INC.
By /s/ Mel Woods
----------------------------
Name:
Title:
RED CHECK, INC.
By /s/ Mel Woods
----------------------------
Name:
Title:
PLAZA PICTURES, INC.
By /s/ Mel Woods
----------------------------
Name:
Title:
PAPER GARDENS, INC.
By /s/ Mel Woods
----------------------------
Name:
Title:
WEBSTER PARK, INC.
By /s/ Mel Woods
----------------------------
Name:
Title:
<PAGE>
16
APRIL PARK, INC.
By /s/ Mel Woods
----------------------------
Name:
Title:
<PAGE>
EXHIBIT 10.30
THE OBLIGATIONS EVIDENCED HEREBY ARE SUBORDINATED IN THE MANNER AND TO THE
EXTENT SET FORTH IN ARTICLE 8 HEREOF. EACH HOLDER OF THIS NOTE, BY ITS
ACCEPTANCE HEREOF, SHALL BE BOUND BY THE SUBORDINATION PROVISIONS OF THIS
AGREEMENT.
AMENDED AND RESTATED SUBORDINATED NOTE AGREEMENT
------------------------------------------------
THIS AMENDED AND RESTATED SUBORDINATED NOTE AGREEMENT is made as of the 19
day of May 1998 by and among FOX BROADCASTING COMPANY, a Delaware Corporation
("Lender"), FOX FAMILY WORLDWIDE, INC. f/k/a FOX KIDS WORLDWIDE, INC., a
Delaware corporation, (together with any successors or assigns, the "Borrower"),
and CITICORP USA, INC., as the Senior Representative for the Senior Creditors
(each as hereinafter defined).
WHEREAS, the parties hereto are parties to a certain Subordinated Note
Agreement, dated July 31, 1997 as amended by the First Amendment thereto dated
September 4, 1997 and the Second Amendment thereto dated October 28, 1997 (the
"Original Note Agreement") pursuant to which Note A (as defined in the Original
Note Agreement) was issued in the original principal amount of $104,573,000 and
Note B (as defined in the Original Note Agreement) was issued in the original
principal amount of $4,099,000; and
WHEREAS, the parties hereto have agreed to adjust the Note B Closing Date
(as defined in the Original Note Agreement amount (as defined in the Original
Note Agreement) to provide that the Note B Principal was deemed advanced as of
July 31, 1997 and consolidate the Note A Principal Amount (as defined in the
Original Note Agreement) and the Note B Principal Amount and to retroactively
lower the interest rate provided under the Original Note Agreement; and
WHEREAS, the parties hereto desire to amend and restate the Original Note
Agreement to evidence such changes,
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the parties hereto agree as follows:
ARTICLE 1. GENERAL DEFINITIONS
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1.1 Defined Terms. All capitalized terms used herein which are defined in
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the Credit Agreement and not otherwise defined herein shall have their meanings
as defined in the Credit Agreement. When used herein, the following terms shall
have the following meanings:
Administrative Agent - means Citicorp USA, Inc., as the administrative
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agent and the collateral agent for the Senior Lenders and the other Secured
Parties, together with any successor thereto appointed pursuant to Article VIII
of the Credit Agreement.
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Affiliate - when used in reference to any specified Person, any Person that
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directly or indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with, the specified Person.
Agreement - this Amended and Restated Subordinated Note Agreement, as the
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same may be amended, supplemented or otherwise modified from time to time.
Business Day - a day on which the Federal Reserve Bank of New York is open
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for business in New York, New York.
Closing Date - July 31, 1997.
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Code - the Internal Revenue Code of 1986, as amended.
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Credit Agreement - means the Second Amended and Restated Credit Agreement
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dated as of October 28, 1997 among FCN Holding, Inc., International Family
Entertainment, Inc. and Saban Entertainment, Inc., as the Borrowers thereunder,
Fox Kids Holdings, LLC, as a guarantor thereunder, the Senior Lenders, Citicorp
Securities, Inc., Chase Securities, Inc. and BankBoston, N.A., as the Co-
Arrangers for the Facilities referred to therein, and the Administrative Agent,
as such agreement may be amended, supplemented or otherwise modified from time
to time.
Dollars and the symbol $ - lawful money of the United States of America.
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Effective Date - May __, 1998.
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Event of Default - as defined in Section 7.1 of this Agreement.
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GAAP - U.S. generally accepted accounting principles, consistently applied.
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Indebtedness - as applied to any Person, means: (a) all indebtedness for
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borrowed money; (b) that portion of obligations with respect to capital leases
that is properly classified as a liability on a balance sheet in conformity with
GAAP; (c) notes payable and drafts accepted representing extensions of credit
whether or not representing obligations for borrowed money; (d) any obligation
owed for all or any part of the deferred purchase price of property or services
if the purchase price is due more than six (6) months from the date the
obligation is incurred or is evidenced by a note or similar written instrument;
and (e) all indebtedness secured by any Lien on any property or asset owned or
held by that Person regardless of whether the indebtedness secured thereby shall
have been assumed by that Person or is nonrecourse to the credit of that Person.
Indemnities - as defined in Section 9.1 of this Agreement.
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Indentures - means, collectively, (a) the Indenture dated as of October 28,
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1997 between Fox Kids and The Bank of New York, as Trustee, relating to the 9
1/4% Senior Notes due 2007, and (b) the Indenture dated as of October 28, 1997
between Fox Kids and The Bank of New York, as Trustee, relating to the 10 1/4%
Senior Discount Notes due 2007, in each case as such agreement may be amended,
supplemented or otherwise modified from time to time.
Interest - as defined in Section 3.1(A) of this Agreement.
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Insolvency Laws - as defined in Section 8.1 of this Agreement.
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Insolvency Proceedings - as defined in Section 8.1 of this Agreement.
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Interest Payment Date - commencing on September 30, 1997, and each
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successive December 31, March 31, June 30 and September 30 on which the Loan is
outstanding.
Lien - any mortgage, deed of trust, pledge, lien, security interest, charge
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or other encumbrance or security arrangement of any nature whatsoever, including
but not limited to any conditional sale or title retention arrangement, and any
assignment, deposit arrangement or lease intended as, or having the effect of,
security.
Loan - as defined in Section 2.1 of this Agreement.
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Loan Documents - this Agreement, the Note, and any and all agreements,
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instruments and documents executed therewith.
Maturity Date - as defined in Section 2.2 of this Agreement.
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Note - the subordinated promissory note or notes to be made by Borrower on
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the Closing Date in favor of Lender to evidence the Loan, which shall be in the
form of Exhibit A annexed hereto, and any note or notes issued in replacement or
substitution therefor, as any such note or notes may be further amended,
modified, or supplemented from time to time after the execution and delivery
hereof.
Obligations - (i) the obligations of Borrower to pay, as and when due and
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payable (by scheduled maturity or otherwise), all amounts from time to time
owing by it in respect of any Loan Document, whether for principal, Interest
(including, without limitation, all Interest that accrues after the commencement
of any case, proceeding or other action relating to any Insolvency Proceeding of
Borrower), fees, indemnification payments, contract causes of action, costs,
expenses or otherwise and (ii) the obligations of Borrower to perform or observe
all of its other obligations from time to time existing under any Loan Document.
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Person - an individual, partnership, association, corporation, limited
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liability company, joint stock or other company, entity, trust or unincorporated
organization, or a government or agency or political subdivision thereof.
Prepayment Date - any date upon which the Loan is being prepaid, in whole
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or in part, pursuant to Section 3.2 of this Agreement.
Principal Amount - as defined in Section 2.1 of this Agreement.
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Senior Creditors - means, collectively, the Senior Secured Creditors, the
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Senior Notes Creditors and the other holders, if any, of any of the Senior
Indebtedness.
Senior Indebtedness - means, collectively, the Senior Secured Indebtedness
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and the Senior Notes Indebtedness.
Senior Lenders - means the banks, financial institutions and other
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institutional lenders from time to time party to the Credit Agreement.
Senior Loan Documents - the Senior Loan Agreement and any and all
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agreements, instruments and documents executed in connection with the Senior
Loan Agreement, as the same may be further modified, amended or supplemented
after the execution and delivery thereof.
Senior Notes - means, collectively, the 9/1//4% Senior Notes due 2007 and
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the 10/1//4% Senior Discount Notes due 2007 issued under the Indentures, in each
case as amended, supplemented or otherwise modified from time to time.
Senior Notes Creditors - means, collectively, the trustees under each of
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the Indentures and the holders from time to time of Senior Notes Indebtedness.
Senior Notes Indebtedness - means (i) all Obligations of Fox Kids, whether
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now or hereafter existing, under or in respect of the Indentures and the Senior
Notes, whether direct or indirect, absolute or contingent, and whether for
principal, interest (including, without limitation, interest accruing after the
filing of a petition initiating any Insolvency Proceeding (as hereinafter
defined), whether or not such interest accrues after the filing of such petition
for purposes of any applicable Insolvency Laws (as hereinafter defined), or is
an allowed claim in such Insolvency Proceeding), premium, fees, indemnification
payments, contract causes of action, costs, expenses or otherwise and (ii) any
and all extensions, modifications, substitutions, amendments, renewals,
refinancings, replacements and refundings of any or all of the Obligations
referred to in clause (i) of this definition, and any instrument or agreement
evidencing or otherwise setting forth the terms of any Indebtedness or other
Obligations incurred in any such extension, modification, substitution,
amendment, renewal, refinancing, replacement or refunding.
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Senior Representative - means (i) the Administrative Agent or (ii) after
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the payment in full of all of the Senior Secured Indebtedness and the
termination or expiration of all of the commitments of the Senior Secured
Creditors in respect thereof, either of the trustees for the Senior Notes or the
holders of a majority in aggregate principal amount of the outstanding Senior
Notes of either issue.
Senior Secured Creditors - means, collectively, the Administrative Agent,
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the Senior Lenders and the other Secured Parties and any other holder of any of
the Senior Secured Indebtedness.
Senior Secured Indebtedness - means (i) all Obligations of Fox Kids,
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whether now or hereafter existing, under or in respect of the Credit Agreement,
the Notes (as defined in the Credit Agreement) and the other Loan Documents (as
defined in the Credit Agreement), whether direct or indirect, absolute or
contingent, and whether for principal, interest (including, without limitation,
interest accruing after the filing of a petition initiating any Insolvency
Proceeding, whether or not such interest accrues after the filing of such
petition for purposes of any applicable Insolvency Laws, or is an allowed claim
in such Insolvency Proceeding), premium, fees, indemnification payments,
contract causes of action, costs, expenses or otherwise and (ii) any and all
extensions, modifications, substitutions, amendments, renewals, refinancings,
replacements and refundings of any or all of the Obligations referred to in
clause (i) of this definition, and any instrument or agreement evidencing or
otherwise setting forth the terms of any Indebtedness or other Obligations
incurred in any such extension, modification, substitution, amendment, renewal,
refinancing, replacement or refunding."
Subsidiary - with respect to any Person, any other Person of which such
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Person owns or controls the voting of, directly or indirectly through one or
more intermediaries, more than fifty percent (50%) of the voting stock or other
ownership interests representing more than fifty percent (50%) of the ordinary
voting power of such entity at the time of determination.
Tax - any tax, levy, impost, duty, withholding, assessment, fee or other
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charge which is assessed, levied or imposed or calculated for any government,
governmental, semi-governmental administrative, fiscal or judicial body,
department, commission, authority, tribunal, agency or entity (including without
limitation any penalty, addition to tax or interest payable in connection or
with any failure to pay or any delay in paying any of the same).
Voided Payment - as defined in Section 8.5 of this Agreement.
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1.2 Certain Matters of Construction. Terms defined herein in the singular
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shall have the correlative meaning when used in the plural and vice versa. The
terms "herein," "hereof" and "hereunder" and other words of similar import refer
to this Agreement as a whole and not to any particular section, paragraph or
subdivision. Any pronoun used shall be deemed to refer to the masculine,
feminine and neuter genders. The Section titles, table of contents and list of
exhibits appear as a matter of convenience only and shall not affect the
interpretation of this Agreement. All
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references to the knowledge of Borrower (and phrases of similar import) shall
include the knowledge of each of the Subsidiaries of Borrower.
1.3 Time References. Unless otherwise indicated herein, all references to
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time of day refer to Pacific standard time or Pacific daylight savings time, as
in effect in Los Angeles, California on such day. For purposes of the
computation of a period of time from a specified date to a later specified date,
the word "from" means "from and including" and the words "to" and "until" each
means "to but excluding"; provided, however, that with respect to a computation
of fees or interest payable to Lender, such period shall in any event consist of
at least one (1) full day.
ARTICLE 2. THE LOAN
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2.1 Loan A: Lender has made a loan ("Loan A") to Borrower in the
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original principal amount of One Hundred and Four Million, Five Hundred and
Seventy-Three Thousand Dollars and Zero Cents ($104,573,000.00) (the "Note A
Principal Amount"), which was funded in full on the Closing Date. Lender shall
not have any responsibility as to the use of any of the proceeds of Loan A.
2.2 Loan B: Lender has made an additional loan ("Loan B") to Borrower in
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the amount of Four Million Ninety-Nine Thousand Dollars and Zero Cents
($4,099,000.00) (the "Note B Principal Amount" and together with the Note A
Principal Amount, the "Principal Amount") which has been deemed funded in full
on the Closing Date. Lender shall not have any responsibility as to the use of
any of the proceeds of Loan B. On the Effective Date, Note A and Note B (each
as defined in the Original Note Agreement) delivered by the Borrower pursuant to
the Original Note Agreement shall be returned to the Borrower in exchange for a
Note executed by the Borrower in favor of the Lender which Note shall be treated
in the same manner as if such Note were executed and delivered on the Closing
Date.
2.3 Repayment of the Loan. The Principal Amount shall be repaid on May 1,
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2008 (the "Maturity Date").
ARTICLE 3. INTEREST, FEES, PREPAYMENTS AND REPAYMENT
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3.1 Interest.
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(A) Interest ("Interest") shall accrue from and after the Closing Date on
the Principal Amount, at the rate of ten and /427/1000/ percent (10.427%) per
annum, compounded quarterly, on the basis of a three hundred sixty-four (364)
day year.
(B) At the option of Borrower, and subject to the provisions of the Credit
Agreement, the Fox Kids Guarantee and the Indentures and the subordination
provisions set forth in Article 8
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hereof, Borrower may on any Interest Payment Date elect to (i) pay any portion
or all of the accrued and unpaid interest on the principal amount or (ii) elect
to defer such payment until the Maturity Date as provided in Section 3.1(C).
(C) If, on any Interest Payment Date, Borrower elects to defer the payment
of interest until the Maturity Date as provided in Section 3.1(B) or is not
permitted to pay interest as a result of the provisions of the Credit Agreement,
the Fox Kids Guarantee or the Indentures or the subordination provisions set
forth in Article 8 hereof, an amount equal to the Interest which accrued on the
Principal Amount from the immediately preceding Interest Payment Date (or in the
case of the first Interest Payment Date, which accrued from the Closing Date)
through such Interest Payment Date shall be added automatically to the Principal
Amount and become a part thereof (such amount of Interest being referred to as
"Deferred Interest").
3.2 Optional Prepayment.
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(A) After the Senior Indebtedness have been paid in full, or at any
earlier time to the extent otherwise expressly permitted under the Credit
Agreement and the other agreements, instruments or other documents evidencing or
otherwise setting forth the terms of all of the Senior Indebtedness, Borrower
may prepay the Loan, in whole or in part, at any time, upon at least five (5)
Business Days' prior written notice to Lender. Any partial prepayment of the
Principal Amount shall be in the amount of Five Hundred Thousand Dollars
($500,000) or in integral multiples of Five Hundred Thousand Dollars ($500,000).
Any prepayment of the Principal Amount on a Prepayment Date pursuant to this
Section 3.2 shall be accompanied by payment of the amount of:
(i) all Obligations (other than principal and Interest) due and payable on
the Prepayment Date; and
(ii) all Interest accrued (and not yet paid and added to the Principal
Amount as Deferred Interest) on the Principal Amount being prepaid from the
applicable Closing Date through the Prepayment Date.
(B) Subject to the provisions of the Credit Agreement, the Fox Kids
Guarantee and the Indentures and the subordination provisions contained herein,
the prepayment of the Loan pursuant to this Section 3.2 shall be without premium
or penalty.
3.3 Payments. The Obligations shall be payable as set forth in this Section
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3.3.
(A) The Principal Amount shall be due and payable as provided in Sections
2.2, 3.2 or 7.1 hereof, as applicable.
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(B) Interest accrued on the Principal Amount shall be due and payable in
arrears on the earliest of (i) each successive Interest Payment Date, (ii) the
occurrence of an Event of Default in consequence of which Lender elects to
accelerate the maturity and payment of the Obligations, (iii) the Prepayment
Date (but only with respect to the amount of principal being prepaid at such
date) or (iv) the Maturity Date. Notwithstanding the foregoing, Borrower may
elect not to pay Interest on any Interest Payment Date and defer such payment as
provided in Section 3.1(C) above.
(C) Except as may be otherwise provided in Section 3.2 hereof, costs,
fees, expenses and any Obligations payable pursuant to this Agreement other than
Principal Amount and Interest shall be due and payable by Borrower to Lender or
to any other Person designated by Lender in writing (i) on demand, or (ii)
whether or not any demand has been made, upon (a) the occurrence of an Event of
Default in consequence of which Lender elects to accelerate the maturity and
payment of the Obligations or (b) the Maturity Date.
3.4 Payment Procedures. Each payment payable by Borrower to Lender under
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this Agreement, the Note or any of the other Loan Documents shall be made
directly to Lender, not later than 11:00 a.m., on the due date of each such
payment, by wire transfer of immediately available federal funds in United
States Dollars. If any sum would, but for the provisions of this Section 3.4,
the Note or any of the other Loan Documents, become due and payable to Lender on
any day which is not a Business Day, then such sum shall become due and payable
on the Business Day next succeeding the day on which such sum would otherwise
have become due and payable hereunder or thereunder.
3.5 Taxes.
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(A) Gross-up and Other Taxes. All payments made by the Borrower
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hereunder, and under the Note or any other Loan Document shall be made without
setoff, counterclaim, deduction or other defense. All such payments shall be
made free and clear of and without deduction for any present or future income,
franchise, sales, use, excise, stamp or other Taxes, levies, imposts,
deductions, charges, fees, withholdings, restrictions or conditions of any
nature now or hereafter imposed, levied, collected, withheld or assessed by any
jurisdiction (whether pursuant to United States Federal, state, local or foreign
law) or by any political subdivision or taxing authority thereof or therein, and
all interest, penalties or similar liabilities, excluding taxes on the net
income of, and branch profit taxes of, any Lender imposed by the jurisdiction in
which such Lender is organized or any political subdivision thereof or taxing
authority thereof or any jurisdiction in which such Person's principal office or
relevant lending office is located or any political subdivision thereof or
taxing authority thereof (other than any such Taxes with respect to additional
net income arising from the receipt of payments under this Section 3.5) (such
non-excluded taxes being hereinafter collectively referred to as "Non-Excluded
Taxes"). If the Borrower shall be required by law to deduct or to withhold any
Non-Excluded Taxes from or in respect of any amount payable hereunder, (i) the
amount so payable shall be increased to the extent necessary so that after
making all required deductions and withholdings (including Taxes on amounts
payable to Lender pursuant to this sentence) Lender
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receives an amount equal to the sum it would have received had no such
deductions or withholdings been made, (ii) the Borrower shall make such
deductions or withholdings, and (iii) the Borrower shall pay the full amount
deducted or withheld to the relevant taxation authority in accordance with
applicable law. Whenever any Non-Excluded Taxes are payable by the Borrower, as
promptly as possible thereafter, the Borrower shall send Lender an official
receipt (or, if an official receipt is not available, such other documentation
as shall be reasonably satisfactory to Lender) showing payment. In addition, the
Borrower shall pay any present or future stamp, documentary, excise, property or
similar Taxes, charges or levies that arise from any payment made under the Loan
Documents by Borrower or from the execution, delivery, performance, release,
discharge, amendment, enforcement, attempted enforcement or registration of, or
otherwise with respect to, this Agreement, any other Loan Document or any
transaction contemplated by this Agreement or any other Loan Document as any and
all of the foregoing relate to Borrower (hereinafter referred to as "Other
Taxes").
(B) Tax Indemnity. Borrower shall indemnify Lender for the full
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amount of Non-Excluded Taxes and Other Taxes, including, without limitation, any
Non-Excluded Taxes or Other Taxes imposed by any jurisdiction on amounts payable
under this Section 3.5 (such Taxes being hereinafter referred to as "Gross-Up
Taxes") with respect to which Borrower has made a deduction from any payment
required to be made to Lender or which are paid by Lender in respect of either
the Loan Documents or payments made by Borrower under the Loan Documents (as the
case may be) and any liability (including penalties, additions to tax, interest
and expenses) arising therefrom or with respect thereto, whether or not such
Non-Excluded Taxes or Other Taxes were correctly or legally asserted. This
indemnification shall be made within thirty (30) days from the date Lender makes
written demand therefor.
(C) Survival of Obligations. Without prejudice to the survival of
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any other agreement of Borrower hereunder, the agreements and obligations of
Borrower contained in this Section 3.5 shall survive the payment in full by
Borrower of all principal and Interest hereunder, until six (6) months after the
expiration of the applicable statute of limitation with respect to any Gross-Up
Taxes, Non-Excluded Taxes and Other Taxes.
(D) Filings by Lender. (i) Borrower shall use reasonable efforts in
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good faith to file (or update the filing of) any certificate or document
provided or requested by Lender or take any reasonable action requested by
Lender if the filing of such certificate or document or the taking of such
action would avoid the need for, reduce the amount of, or assist in the recovery
of any payment of Taxes, or avoid the circumstances giving rise to the need for
such payment, and (ii) in the event Borrower fails to exercise the reasonable
efforts in good faith described in Section 3.5(D)(i) above, the Taxes arising
from such failure shall be considered Non-Excluded Taxes and Borrower shall
indemnify Lender in accordance with Section 3.5(B).
3.6 Application of Payments and Collections. Borrower irrevocably waives
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the right to direct the application of any and all payments and collections at
any time or times hereafter
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received by Lender from or on behalf of Borrower, and Borrower does hereby
irrevocably agree that Lender shall have the continuing exclusive right to apply
and reapply any and all such payments and collections received at any time or
times hereafter by Lender or any Person designated by Lender against the
Obligations, in such manner as Lender may deem advisable consistent with the
terms of this Agreement, notwithstanding any entry by Lender upon any of its
books and records. Notwithstanding the foregoing provisions of this Section 3.6,
unless otherwise specified by Lender, any payment or collection in respect of
any of the Obligations (other than quarterly payments of Interest pursuant to
Section 3.1 hereof) shall be applied by Lender (a) first, to the payment of all
Obligations (if any) other than the principal and Interest due and payable at
such time, (b) next, to the payment of all Interest which shall then be due and
payable on the Principal Amount and (c) next, to the payment of the outstanding
Principal Amount.
ARTICLE 4. REPRESENTATIONS AND WARRANTIES
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To induce Lender to enter into this Agreement and to make advances
hereunder, Borrower represents and warrants to Lender, on the Closing Date,
that:
4.1 Organization, Good Standing, Etc. Borrower (i) is a corporation, duly
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organized, validly existing and in good standing under the laws of the State of
Delaware, and (ii) has all requisite corporate power and authority to conduct
its business as now conducted and to make the borrowings hereunder and to
consummate the transactions contemplated by the Loan Documents to which it is a
party.
4.2 Authorization, Etc. The execution, delivery and performance by
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Borrower of each of the Loan Documents to which it is a party (i) have been duly
authorized by all necessary corporate action on the part of Borrower, (ii) do
not and will not contravene the charter and by-laws of Borrower, or any
applicable law or any contractual restriction binding on or otherwise affecting
it or any of its properties, except where such conflict would not have a
material adverse effect on the business, condition (financial or otherwise)
operations or assets of the Borrower and its Subsidiaries taken as a whole (a
"Material Adverse Effect"), (iii) do not and will not result in the violation,
breach of, conflict with, accelerate the due date of any payments under, or
(without the giving of notice or the passage of time or both) entitle any party
to terminate or call a default under any contract to which the Borrower or any
of its Subsidiaries is a party, or to which any of their respective assets are
subject or otherwise bound which would not have a Material Adverse Effect, and
(iv) do not and will not result in or require the creation of any Lien, upon or
with respect to any of its properties.
4.3 Governmental Approvals. No authorization or approval or other action
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by, and no notice to or filing with, any governmental authority or other
regulatory body is required in connection with the due execution, delivery and
performance by each of Borrower or any Subsidiary of each of the Loan Documents
to which it is a party.
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4.4 Enforceability of Loan Documents. This Agreement is, and each other
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Loan Document to which each of Borrower or any Subsidiary is a party, when
delivered hereunder, will be, legal, valid and binding obligations of Borrower
and each Subsidiary, as the case may be, enforceable against Borrower and each
Subsidiary in accordance with their respective terms, except to the extent that
the enforceability thereof may be limited by any applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance or similar laws
from time to time in effect affecting generally the enforcement of creditors'
rights and remedies and by general principles of equity.
ARTICLE 5. COVENANTS AND CONTINUING AGREEMENTS
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So long as any amount owing in respect of the Obligations (whether or not
due) shall remain unpaid, Borrower covenants that, unless otherwise consented to
by Lender in writing, it shall:
5.1 Compliance with Laws, Etc. Comply, and cause each of its Subsidiaries
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to comply, with all applicable laws, rules, regulations and orders, except where
such failure to comply would not, either in any case or in the aggregate,
reasonably be likely to result in a Material Adverse Effect.
5.2 Preservation of Existence, Etc. Maintain and preserve, and cause each
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of its Subsidiaries to maintain and preserve, its existence, rights and
privileges, and become or remain duly qualified and in good standing in each
jurisdiction in which the character of the properties owned or leased by them or
in which the transaction of their business makes such qualification necessary,
except (i) where the failure to maintain and preserve the existence, rights and
privileges of Borrower or its Subsidiaries would not, either in any single case
or in the aggregate, reasonably be likely to result in a Material Adverse
Effect, or (ii) where such failure to qualify would not, either in any case or
in the aggregate, reasonably be likely to result in a Material Adverse Effect.
5.3 Keeping of Records and Books of Account. Keep, and cause each of its
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Subsidiaries to keep, adequate records and books of account, with complete
entries made in accordance with GAAP.
5.4 Further Assurances. Shall, and shall cause each Subsidiary to, do,
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execute, acknowledge and deliver, at the sole cost and expense of Borrower or
any such Subsidiary, all such further acts and assurances as Lender may
reasonably require from time to time in order to better assure and confirm unto
Lender the rights now or hereafter intended to be granted to it under this
Agreement, any Loan Document or any other instrument under which Borrower or any
of its Subsidiaries may be or may hereafter become bound for carrying out the
intention or facilitating the performance of the terms of the Agreement.
5.5 Characterization of Note. Lender and Borrower shall at all times
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characterize the Notes as "indebtedness" rather than "stock" for all purposes
whatsoever and will not take any
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position or action to the contrary thereto unless required by law. Neither
Lender nor Borrower will disclose treatment of the Note in a manner inconsistent
with the characterization of the Note as "indebtedness" within the meaning of
the Code Section 385(c) in any return, information statement or other filing
with the Internal Revenue Service.
ARTICLE 6. CONDITIONS PRECEDENT
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As a condition precedent to the amendment and restatement hereunder, the
following conditions, as the case may be, shall be fulfilled in a manner
reasonably satisfactory to Lender:
6.1 Delivery of Documents. Lender shall have received the following
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documents on or prior to the Effective Date:
(A) the Note, duly executed and delivered by Borrower, and any other
instruments, documents or certificates executed by Borrower or any of its
Subsidiaries in respect of the transactions contemplated by this Agreement or
which are reasonably requested by Lender;
(B) evidence that Borrower and its Subsidiaries are in full
compliance with all of their respective representations, warranties, covenants
and agreements set forth in the Senior Loan Documents, that neither Borrower nor
its Subsidiaries are in breach of, or default under, any of the Senior Loan
Documents and that the Senior Loan Documents are in full force and effect in
accordance with their respective terms; and
(C) such other documents, instruments and agreements as Lender shall
reasonably request in connection with the foregoing matters.
6.2 Additional Conditions Precedent. The following conditions shall be
-------------------------------
satisfied on the Closing Date, in the sole discretion, reasonably exercised, of
Lender:
(A) no action, proceeding, investigation, regulation or legislation
shall have been instituted, threatened or proposed before any court,
governmental agency or legislative body to enjoin, restrain or prohibit, or to
obtain damages in respect of, or which is related to or arises out of this
Agreement, the other Loan Documents, any Senior Loan Documents or the
consummation of the transactions contemplated hereby or thereby or which, in
Lender's sole discretion, would make it inadvisable to consummate the
transactions contemplated by this Agreement or any of the other Loan Documents;
and
(B) all legal matters in connection with the transactions
contemplated by the Loan Documents shall be reasonably satisfactory to Lender
and its counsel in their sole discretion.
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ARTICLE 7. EVENTS OF DEFAULT: RIGHTS AND REMEDIES ON DEFAULT
-------------------------------------------------
7.1 Events of Default. The existence of any one or more of the following
-----------------
events shall constitute an Event of Default:
(A) Borrower shall fail to pay any (i) principal when due (whether by
scheduled maturity, required prepayment, acceleration, demand or otherwise)
under the Loan Documents and such failure shall continue unremedied for fifteen
(15) days or (ii) any Interest, any fee, indemnity or other amounts due or other
Obligations under any Loan Document when due (unless deferred pursuant to
Section 3.1(C) hereof) and such failure shall continue unremedied for thirty
(30) days;
(B) any representation or warranty made by Borrower or any officer of
Borrower under or in connection with any Loan Document shall have been or shall
be incorrect in any material respect when made;
(C) Borrower shall fail to perform or observe any of its Obligations
under any Loan Document, including but not limited to any covenant contained in
Article 5 hereof (other than occurrences referred to or embodied in other
provisions of this Section 7.1), and such failure shall continue unremedied for
a period of thirty (30) days after the earlier of (i) Borrower's receipt of
notice from Lender or (ii) actual knowledge of such breach by Borrower;
(D) Borrower or any Subsidiary (i) shall institute any proceeding or
voluntary case seeking to adjudicate it a bankrupt or insolvent, or seeking
dissolution, liquidation, winding up, reorganization, arrangement, adjustment,
protection, relief or composition of it or its debts under any law relating to
bankruptcy, insolvency, reorganization or relief of debtors, or seeking the
entry of an order for relief or the appointment of a receiver, trustee,
custodian or other similar official for such party or for any substantial part
of its property, (ii) shall be generally not paying its debts as such debts
become due, or shall admit in writing its inability to pay its debts generally,
(iii) shall make a general assignment for the benefit of creditors or (iv) shall
take any action to authorize or effect any of the actions set forth above in
this subsection (D);
(E) any proceeding shall be instituted against Borrower or any
Subsidiary seeking to adjudicate it a bankrupt or insolvent, or seeking
dissolution, liquidation, winding up, reorganization, arrangement, adjustment,
protection, relief of debtors, or seeking the entry of an order for relief or
the appointment of a receiver, trustee, custodian or other similar official for
Borrower or any Subsidiary or for any substantial part of its property, and
either such proceeding shall remain undismissed or unstayed for a period of
seventy (70) days or any of the actions sought in such proceeding (including,
without limitation, the entry of an order for relief against it or the
appointment of a receiver, trustee, custodian or other similar official for it
or for any substantial part of its property) shall occur; and
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(F) any material provision of any Loan Document shall at any time for
any reason be declared to be null and void, or the validity or enforceability
thereof shall be contested by Borrower, or a proceeding shall be commenced by
Borrower or any governmental authority or other regulatory body having
jurisdiction over Borrower, seeking to establish the invalidity or
unenforceability thereof, or Borrower shall deny in writing that Borrower has
any material liability or obligation purported to be created under any Loan
Document;
then, and in any such event, and except as otherwise provided in the
subordination provisions set forth in Article 8 hereof, Lender may by written
notice to Borrower, (i) declare the Loan, all Interest thereon and all other
amounts payable under this Agreement to be forthwith due and payable, whereupon
the Loan, all such Interest and all such amounts shall become and be forthwith
due and payable, without presentment, demand, protest or further notice of any
kind, all of which are hereby expressly waived by Borrower; provided, however,
that upon the occurrence and during the continuance of any Event of Default
described in Section 7.1 (c) or (D), the Loan, all such Interest and all such
amounts shall become and be forthwith due and payable, without presentment,
demand, protest or further notice of any kind, all of which are expressly waived
by Borrower, and (ii) exercise any and all of its other rights under applicable
law, hereunder and under the other Loan Documents.
7.2 Remedies Cumulative; No Waiver. All covenants, conditions,
------------------------------
provisions, warranties, guaranties, indemnities, and other undertakings of
Borrower contained in this Agreement and the other Loan Documents, or in any
document referred to herein or contained in any agreement supplementary hereto
or thereto or contained in any other agreement between Lender and Borrower,
heretofore, concurrently, or hereafter entered into, shall be deemed cumulative
to, and not in derogation or substitution of, any of the terms, covenants,
conditions, or agreements of Borrower herein contained. The failure or delay of
Lender to exercise or enforce any rights, powers, or remedies hereunder or under
any of the aforesaid agreements or other documents shall not operate as a waiver
of such rights, powers and remedies, but all such rights, powers, and remedies
shall continue in full force and effect until the outstanding Principal Amount,
all Interest and all other Obligations owing or to become owing from Borrower to
Lender shall have been fully satisfied, and all rights, powers, and remedies
herein provided for are cumulative and none are exclusive.
ARTICLE 8. SUBORDINATION
-------------
8.1 The aggregate principal amount owing to the Lender from time to time
under this Subordinated Note Agreement, the Note and the other Loan Documents
all accrued and unpaid interest thereon, and any other indebtedness evidenced by
or otherwise owing in respect of this Subordinated Note Agreement, the Note and
the other Loan Documents (collectively, the "Subordinated Indebtedness") is and
shall be subordinate and junior in right of payment and otherwise, to the extent
and in the manner hereinafter set forth, to the prior payment in full of all of
the Senior Indebtedness (an hereinafter defined), whether now or hereafter
existing. For all purposes of this Subordinated Note Agreement, the Senior
Indebtedness shall not be deemed to have been paid
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in full until the latest of (A) the payment in full in cash of all of the Senior
Indebtedness and the expiration or termination of all of the commitments of the
Secured Parties and the other holders of any of the Senior Indebtedness
thereunder, (B) the expiration or termination of all of the Bank Hedge
Agreements and (C) the Termination Date.
8.2 In the event of any dissolution, winding up, liquidation, arrangement,
reorganization, adjustment, protection, relief or composition of Borrower or its
debts, whether voluntary or involuntary, in any bankruptcy, insolvency,
arrangement, reorganization, receivership, relief or other similar action or
proceeding under the United States Federal Bankruptcy Code or any other federal
or state bankruptcy or insolvency laws or any similar Requirements of Law of any
other jurisdiction covering the protection of creditors' rights or the relief of
debtors (collectively, the "Insolvency Laws"), or upon an assignment for the
benefit of creditors or any other marshaling of the property, assets and
liabilities of Borrower or otherwise (each, an "Insolvency Proceeding"), the
Senior Creditors shall be entitled to receive payment in full of all of the
Senior Indebtedness before the Lender is entitled to receive any payment or
distribution of any kind or character on account of all or any of the
Subordinated Indebtedness, and, to that end, any payment or distribution of any
kind or character (whether in cash, property or securities) that otherwise would
be payable or deliverable upon or with respect to the Subordinated Indebtedness
in any such Insolvency Proceeding (including, without limitation, any payment
that may be payable by reason of any other Indebtedness of Borrower being
subordinated to payment of the Subordinated Indebtedness) shall be paid or
delivered forthwith directly to the Senior Representative, for the ratable
account of the Senior Secured Creditors and the Senior Notes Creditors, in the
same form as so received (with any necessary endorsement or assignment), for
application (in the case of cash) to, or to be held as collateral (in the case
of noncash property or securities) for, the payment or prepayment of the Senior
Indebtedness until all of the Senior Indebtedness shall have been paid in full.
8.3 No payment or distribution of any property or assets of Borrower of
any kind or character (including, without limitation, any payment that may be
payable by reason of any other Indebtedness of Borrower being subordinated to
payment of the Subordinated Indebtedness) shall be made by or on behalf of
Borrower for or on account of any Subordinated Indebtedness, unless and until
all of the Senior Indebtedness shall have been paid in full or unless such
payment is expressly permitted to be made under Section 8(d)(i)(D) of the Fox
Kids Guarantee and Sections 10.8 and 10.9 of the Indentures. Furthermore, so
long as the Senior Indebtedness shall not have been paid in full, the Lender
shall not (a) ask, demand, sue for, take or receive from Borrower, directly or
indirectly, in cash or other property or by setoff or in any manner (including,
without limitation, from or by way of collateral), payment of all or any of the
Subordinated Indebtedness, except to the extent that such payment is expressly
permitted to be made under Section 8(d)(i)(D) of the Fox Kids Guarantee and
Sections 10.8 and 10.9 of the Indentures, (b) commence, or join with any
creditor other than the Senior Representative in commencing, or directly or
indirectly cause Borrower to commence, or assist Borrower in commencing, any
Insolvency Proceeding, or (c) request or accept any collateral or other security
for the Subordinated Indebtedness. If the Subordinated Lender, in
15
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contravention hereof, shall commence, prosecute or participate in any Insolvency
Proceeding, then the Senior Representative may intervene and interpose as a
defense or plea the terms of this Subordinated Note Agreement in its own name or
in the name of the Subordinated Lender.
8.4 Until such time as all of the Senior Indebtedness has been paid in
full, if any Insolvency Proceeding is commenced by or against Borrower:
(A) the Senior Representative is hereby irrevocably authorized and
empowered (in its own name or in the name of the Lender or otherwise), but
shall have no obligation, to demand, sue for, collect and receive every
payment or distribution otherwise payable to the Lender in respect of this
Subordinated Note Agreement and give acquittance therefor, and to file claims
and proofs of claim and take such other actions (including, without
limitation, voting the Subordinated Indebtedness or enforcing any security
interest or other lien securing payment of the Subordinated Indebtedness) as
it may deem necessary or advisable for the exercise or enforcement of any of
the rights or interests of the Senior Representative or any of the other
Senior Creditors under this Subordinated Note Agreement; and
(B) the Lender shall duly and promptly take such action as the Senior
Representative may reasonably request (i) to collect the Subordinated
Indebtedness for the account of the Senior Representative, for the ratable
benefit of the Senior Secured Creditors and the Senior Notes Creditors, and to
file appropriate claims or proofs of claim in respect of the Subordinated
Indebtedness, (ii) to execute and deliver to the Senior Representative such
powers of attorney, assignments or other instruments as the Senior
Representative may reasonably request in order to enable the Senior
Representative to enforce any and all claims with respect to, and any security
interests and other liens securing payment of, the Subordinated Indebtedness
and (iii) to collect and receive any and all payments or distributions that
may be payable or deliverable upon or with respect to the Subordinated
Indebtedness.
8.5 All payments or distributions upon or with respect to the Subordinated
Indebtedness that are received by the Lender contrary to the provisions of this
Subordinated Note Agreement shall be received in trust for the benefit of the
Senior Representative and the other Senior Creditors, shall be segregated from
other property or funds of the Lender and shall be paid or delivered forthwith
directly to the Senior Representative, for the account of the Senior Secured
Creditors and the Senior Notes Creditors, in the same form as so received (with
any necessary endorsement or assignment), to be applied (in the case of cash)
to, or held as collateral (in the case of noncash property or securities) for,
the payment or prepayment of the Senior Indebtedness until all of the Senior
Indebtedness shall have been paid in full.
8.6 To the extent that Borrower, the Lender or any of their respective
Subsidiaries or any other guarantor of or provider of collateral for the Senior
Indebtedness shall make any payment on
16
<PAGE>
the Senior Indebtedness that is subsequently invalidated, declared to be
fraudulent or preferential or set aside or is required to be repaid to a
trustee, receiver or any other party under any applicable Insolvency Law or
equitable cause (any such payment being a "Voided Payment"), then to the extent
of such Voided Payment, that portion of the Senior Indebtedness that had been
previously satisfied by such Voided Payment shall be reinstated and continue in
full force and effect as if such Voided Payment had never been made. To the
extent that the Lender shall have received any payments subsequent to the date
of the initial receipt of such Voided Payment by the Senior Representative or
any of the other Senior Creditors and such payments have not been invalidated,
declared to be fraudulent or preferential or set aside or required to be repaid
to a trustee, receiver or any other party under any applicable Insolvency Law or
equitable cause, the Lender shall be obligated and hereby agrees that any such
payment so made or received shall be deemed to have been received in trust for
the benefit of the Senior Representative and the other Senior Creditors, and the
Lender hereby agrees to pay to the Senior Representative, upon demand, the full
amount so received by the Lender during such period of time to the extent
necessary to fully restore to the Senior Representative and the other Senior
Creditors the amount of such Voided Payment, which amount shall be applied as
set forth in Section 8.5.
8.7 The Senior Representative is hereby authorized to demand specific
performance of the subordination provisions of this Subordinated Note Agreement,
whether or not Borrower shall have complied with any of the provisions hereof
applicable to it, at any time when the Lender shall have failed to comply with
any of the subordination provisions of this Subordinated Note Agreement. The
Lender hereby irrevocably waives any defense based on the adequacy of a remedy
at law which might be asserted as a bar to such remedy of specific performance.
8.8 The Lender will not:
(A) (i) Cancel or otherwise discharge any of the Subordinated
Indebtedness (except upon payment in full of all of the Senior Indebtedness
or, at any time and from time to time prior thereto, to the extent that such
payment is expressly permitted to be made under Section 8(d)(i)(D) of the Fox
Kids Guarantee and under Sections 10.8 and 10.9 of the Indentures), (ii)
convert or exchange any of the Subordinated Indebtedness into or for any other
Indebtedness (except to the extent expressly permitted by the Indentures),
(iii) convert or exchange any of the Subordinated Indebtedness into or for any
Equity Interest in Borrower or otherwise (except to the extent expressly
permitted by the Indentures) or (iv) subordinate any of the Subordinated
Indebtedness to any Indebtedness of Borrower other than the Senior
Indebtedness (except that no consent of the holders of the Senior Notes or
either of the trustees for the Senior Notes shall be required to subordinate
any of the Subordinated Indebtedness to any other Indebtedness of Borrower
(although nothing herein shall limit the obligation of any holder of
Indebtedness of Borrower to turn over or otherwise subordinate itself to any
or all of the Senior Creditors in accordance with any subordination provisions
applicable to such Indebtedness);
17
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(B) Sell, assign, pledge, encumber or otherwise dispose of any of the
Subordinated Indebtedness; or
(C) Permit the terms of any of the Subordinated Indebtedness to be
amended, waived, supplemented or otherwise modified in such a manner as
could have an adverse effect upon the rights or interests of the Senior
Representative or any of the other Senior Creditors under this Subordinated
Note Agreement, any of the Loan Documents (as defined in the Credit
Agreement), either of the Indentures or any of the other agreements,
instruments or other documents evidencing or otherwise setting forth the
terms of any of the Senior Indebtedness.
8.9 No payment or distribution to the Senior Representative or any of the
other Senior Creditors pursuant to the provisions of this Subordinated Note
Agreement shall entitle the Lender to exercise any rights of subrogation in
respect thereof, nor shall the Lender have any right of reimbursement,
restitution, exoneration, contribution or indemnification whatsoever from any
property or assets of Borrower or any of the other guarantors, sureties or
providers of collateral security for the Senior Indebtedness, or any right to
participate in any claim or remedy of the Senior Representative or any of the
other Senior Creditors against Borrower or any of the Collateral, whether or not
such claim, remedy or right arises in equity or under contract, statute or
common law (including, without limitation, the right to take or receive from
Borrower, directly or indirectly, in cash or other property or by setoff or in
any other manner, payment or security on account of such claim, remedy or
right), until (i) all of the Senior Indebtedness shall have been paid in full
and all of the commitments of the Secured Parties and the other holders thereof
shall have expired or been terminated, (ii) all of the Bank Hedge Agreements
shall have expired or been terminated and (iii) the Termination Date shall have
occurred.
8.10 The holders of the Senior Indebtedness may, at any time and from time
to time, without any consent of or notice to the Lender or any other holder of
the Subordinated Indebtedness and without impairing or releasing the obligations
of the Lender hereunder:
(A) change the manner, place or terms of payment of, or change or
extend the time of payment of, or renew payment or change or extend the
time or payment of, or renew or alter, the Senior Indebtedness (including
any change in the rate of interest thereon), or amend, supplement or
otherwise modify in any manner any instrument, agreement or other document
under which any of the Senior Indebtedness is outstanding;
(B) sell, exchange, release, not perfect and otherwise deal with any
of the property or assets of any Person at any time pledged, assigned or
mortgaged to secure the Senior Indebtedness;
18
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(C) release any Person liable in any manner under or in respect of the
Senior Indebtedness;
(D) exercise or refrain from exercising any rights against Borrower,
any of the other Loan Parties or any of their respective Subsidiaries or
any other Person;
(E) apply to the Senior Indebtedness any sums from time to time
received by or on behalf of the Senior Representative or any of the other
Senior Creditors; and
(F) sell, assign, transfer or exchange any of the Senior Indebtedness.
8.11 Each of Borrower and the Lender will, if reasonably requested by the
Senior Representative or either of the trustees for the Senior Notes, further
mark their respective books of account in such a manner as shall be effective to
give proper notice of the effect of the subordination provisions of this
Subordinated Note Agreement. Each of Borrower and the Lender will, at its sole
expense and at any time and from time to time, promptly execute and deliver all
further instruments and documents, and take all further actions, that may be
necessary or that the Senior Representative or either of the trustees for the
Senior Notes may reasonably deem desirable and may request in order to protect
any right or interest granted or purported to be granted under the subordination
provisions of this Subordinated Note Agreement or to enable the Senior
Representative or any of the other Senior Creditors to exercise and enforce its
rights and remedies hereunder.
8.12 The foregoing provisions regarding subordination are and are intended
solely for the purpose of defining the relative rights of the holders of the
Senior Indebtedness, on the one hand, and the holders of the Subordinated
Indebtedness, on the other hand. Such provisions are for the benefit of the
holders of the Senior Indebtedness and shall inure to the benefit of, and shall
be enforceable by, the Senior Representative, on behalf of itself and the other
Senior Creditors, directly against the holders of the Subordinated Indebtedness,
and no holder of the Senior Indebtedness shall be prejudiced in its right to
enforce the subordination of any of the Subordinated Indebtedness by any act or
failure to act by Borrower or any Person in custody of its property or assets.
The subordination provisions herein shall constitute a continuing offer to each
and every holder of Senior Indebtedness from time to time and such holders are
intended third party beneficiaries hereof. Nothing contained in the foregoing
provisions is intended to or shall impair, as between Borrower and the holders
of the Subordinated Indebtedness, the obligations of Borrower to such holders.
8.13 (A) Borrower agrees to pay, upon demand therefor, all of the
reasonable and properly documented out-of-pocket costs and expenses (including,
without limitation, reasonable fees and expenses of counsel) incurred by the
Senior Representative or any of the other Senior Creditors in enforcing the
provisions of this Subordinated Note Agreement.
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(B) Borrower hereby waives promptness, diligence, presentment for
payment, demand, notice of dishonor and protest and any other notice with
respect to this Subordinated Note Agreement.
(C) None of the rights or interests of the Lender in this Subordinated
Note Agreement may be assigned or otherwise transferred thereby to any Person
other than a member of the TNCL Group or the Saban Group without the prior
written consent of Borrower and the Senior Representative.
(D) No amendment, waiver or modification of this Subordinated Note
Agreement (including, without limitation, the subordination provisions hereof),
and no consent to any departure herefrom, shall be effective unless the same
shall be in writing and signed by the Lender and, if any such amendment, waiver
or modification of this Subordinated Note Agreement (including, without
limitation, the subordination provisions hereof) could adversely affect the
rights or interests of the Senior Representative or any of the other Senior
Creditors under or in respect of this Subordinated Note Agreement, any of the
Loan Documents (as defined in the Credit Agreement), either of these Indentures
or any of the other agreements, instruments or other documents evidencing or
otherwise setting forth the terms of any of the Senior Indebtedness in any
manner, signed by the Senior Representative and/or each of the trustees for the
Senior Notes, and then, in each case, such waiver, modification or consent shall
be effective only in the specific instance and for the specific purpose for
which given; provided that neither of the trustees for the Senior Notes shall be
required to consent to any such amendment, waiver or modification that would not
adversely affect the rights or interests of any of the Senior Notes Creditors.
(E) No failure on the part of the Lender or the Senior Representative
or any of the other Senior Creditors to exercise, and no delay in exercising,
any right, power or privilege hereunder shall operate as a waiver thereof or a
consent thereto; nor shall a single or partial exercise of any such right, power
or privilege preclude any other or further exercise thereof or the exercise of
any other right, power or privilege. The remedies provided herein are
cumulative and are not exclusive of any remedies provided by applicable law."
ARTICLE 9. MISCELLANEOUS
-------------
9.1 Indemnification. In addition to all of Borrower's other Obligations
---------------
under this Agreement, Borrower agrees to defend, protect, indemnify and hold
harmless Lender and all of its officers, directors, employees, attorneys,
consultants and agents (collectively called the "Indemnities") from and against
any and all losses, damages, liabilities, obligations, penalties, fees,
reasonable costs and expenses (including, without limitation, reasonable
attorneys' fees, costs and expenses) incurred by such Indemnities, whether prior
to or from and after the Closing Date, whether direct, indirect or
consequential, as a result of or arising from or relating to or in connection
with any
20
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of the following: (i) the negotiation, preparation, execution or performance or
enforcement of this Agreement or of any document executed in connection with the
transactions contemplated by this Agreement; (ii) the furnishing of funds to
Borrower under this Agreement; (iii) any document executed in connection with
the transactions contemplated by this Agreement or (iv) any claim, litigation,
investigation or proceeding relating to any of the foregoing, whether or not any
Indemnitee is a party thereto (collectively, the "Indemnified Matters");
provided, however, that Borrower shall not have any obligation to any Indemnitee
hereunder for any Indemnified Matter caused by or resulting from the gross
negligence or willful misconduct of such Indemnitee, as determined by a final
judgment of a court of competent jurisdiction. To the extent that the
undertaking to indemnify, pay and hold harmless set forth in this Section 9.1
may be unenforceable because it is violative of any law or public policy,
Borrower shall contribute the maximum portion which it is permitted to pay and
satisfy under applicable law, to the payment and satisfaction of all Indemnified
Matters incurred by the Indemnities. The foregoing indemnity shall survive the
repayment of the Obligations.
9.2 Amendments, Etc. No amendment or waiver of any provision of this
----------------
Agreement or the other Loan Documents, and no consent to any departure therefrom
by Borrower, shall in any event be effective unless the same shall be in writing
and signed by Borrower and Lender, and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given; provided, however, that no amendment, waiver or consent shall, unless in
writing and signed by Lender, (i) reduce the principal of, or interest on, the
Loan or Obligations, (ii) postpone any date fixed for any payment of principal
of, or interest or fees on, the Loan or the amount of any other Obligations,
(iii) change the percentage of the aggregate unpaid principal amount of the
Note, which shall be required for Lender to take any action hereunder or (iv)
amend, modify or waive this Section 9.2; and provided further that no such
amendment or waiver or consent to any departure therefrom of Article 8 or any
other provision that could adversely affect the rights and interests of the
Senior Agent or any of the Senior Lenders (under or in respect of the Loan
Documents or any of the Senior Loan Documents) in any manner shall be effective
without the written consent of the Senior Agent.
9.3 Expenses; Attorneys' Fees. Borrower agrees to pay or cause to be
-------------------------
paid, on demand, and to save Lender harmless against liability for the payment
of, all reasonable out-of-pocket expenses, including but not limited to
reasonable fees and expenses of counsel for Lender, periodic field audits, from
time to time arising from or relating to (other than when arising from the gross
negligence or willful misconduct of Lender, as the case may be): (i) any
amendments, waivers or consents to this Agreement or the other Loan Documents
requested by Borrower whether or not such documents become effective or are
given; (ii) upon the occurrence and during the continuance of any Event of
Default, the preservation and protection of any of Lender's rights under this
Agreement or the other Loan Documents; (iii) the defense of any claim or action
asserted or brought against Lender by any Person that arises from this
Agreement, any other Loan Document, Lender's claims against Borrower, or any and
all matters in connection therewith; (iv) the commencement (other than by
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Lender, except upon the occurrence and during the continuance of any Event of
Default) or defense of, or intervention in, any court proceeding arising from or
related to this Agreement or any other Loan Document; (v) upon the occurrence
and during the continuance of any Event of Default, the filing of a petition,
complaint, answer, motion or other pleading by Lender, or the taking of any
action in connection with this Agreement or any other Loan Document; (vi) upon
the occurrence and during the continuance of any Event of Default, any attempt
to collect from Borrower; and (vii) the receipt of any advice with respect to
any of the foregoing.
9.4 Indulgences Not Waivers. The failure, at any time or times hereafter,
-----------------------
to require strict performance by Borrower of any provision of this Agreement
shall not waive, affect or diminish any right of Lender thereafter to demand
strict compliance and performance therewith. Any suspension or waiver of an
Event of Default under this Agreement or any of the other Loan Documents shall
not suspend, waive or affect any other Event of Default under this Agreement or
any of the other Loan Documents, whether the same is prior or subsequent thereto
and whether of the same or of a different type. None of the undertakings,
agreements, warranties, covenants and representations of Borrower contained in
this Agreement or any of the other Loan Documents and no Event of Default under
this Agreement or any of the other Loan Documents shall be deemed to have been
suspended or waived by Lender, unless such suspension or waiver is by an
instrument in writing specifying such suspension or waiver and is signed by a
duly authorized representative of Lender and directed to Borrower.
9.5 Severability. Wherever possible, each provision of this Agreement or
------------
any other Loan Document shall be interpreted in such manner as to be effective
and valid under applicable law, but if any provision of this Agreement or any
other Loan Document shall be prohibited by or invalid under applicable law, such
provision shall be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of such agreement.
9.6 Cumulative Effect; Conflict of Terms. The provisions of the other
------------------------------------
Loan Documents are hereby made cumulative with the provisions of this Agreement.
Except as specifically otherwise provided in this Agreement or in any of the
other Loan Documents by specific reference to the applicable provision of this
Agreement, if any provision contained in this Agreement is in direct conflict
with, or inconsistent with, any provision in any of the other Loan Documents,
the provision contained in this Agreement shall govern and control.
9.7 Execution in Counterparts. This Agreement may be executed in any
-------------------------
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed to be an original
and all of which counterparts taken together shall constitute but one and the
same instrument.
22
<PAGE>
9.8 Notices. Except as otherwise provided herein, all notices, requests
-------
and demands to or upon a party hereto to be effective shall be in writing, shall
be sent by certified or registered mail, return receipt requested), or by
telecopier or delivered by hand or by a recognized overnight courier service
and, unless otherwise expressly provided herein, shall be deemed to have been
validly served, given or delivered when delivered against receipt or, in the
case of telecopy notice, when sent, or, in the case of telex, when the
appropriate answerback received, addressed as follows:
(A) If to Lender:
Fox Broadcasting Company
10201 West Pico Boulevard
Los Angeles, CA 90035
Attention: Chase Carey
With a copy to:
Squadron, Ellenoff, Plesent & Sheinfeld, LLP
551 Fifth Avenue
New York, NY 10176
Attention: Jeffrey W. Rubin, Esq.
(B) If to Borrower, at:
Fox Family Worldwide, Inc.
10960 Wilshire Boulevard
Los Angeles, CA 90024
Attention: Mel Woods
With a copy to:
Troop Meisinger Steuber & Pasich, LLP
10940 Wilshire Boulevard
Los Angeles, CA 90024
Attention: C.N. Franklin Reddick, III, Esq.
23
<PAGE>
(C) If to Senior Representative, at:
Citicorp USA, Inc.
399 Park Avenue
New York, NY 10043
Attention: Andrew Sriubas, Vice President
With a copy to:
Shearman & Sterling
599 Lexington Avenue
New York, NY 10022
Attention: William Hirschberg, Esq.
or to such other address as each party may designate for itself by like notice
given in accordance with this Section 9.8.
9.9 Demand. Nothing in this Agreement shall affect or abrogate the demand
------
nature of any portion of the Obligations expressly made payable on demand by
this Agreement or by any instrument evidencing same, and the occurrence of an
Event of Default shall not be a prerequisite for requiring payment of such
Obligations, except as provided for in this Agreement.
9.10 Entire Agreement; Headings. This Agreement, and the other Loan
--------------------------
Documents, together with all other instruments, agreements and certificates
executed by the parties in connection therewith or with reference thereto,
embody the entire understanding and agreement between the parties hereto and
thereto with respect to the subject matter hereof and thereof and supersede all
prior agreements, understandings and inducements, whether express or implied,
oral or written. Section headings herein are included for convenience of
reference only and shall not constitute a part of this Agreement for any other
purpose.
9.11 Governing Law; Consent To Forum. This Agreement, the Note and the
-------------------------------
other Loan Documents shall be governed by, and construed in accordance with, the
law of the State of New York applicable to contracts made and to be performed in
the State of New York without regard to conflicts of law principles. Any legal
action or proceeding with respect to this Agreement or any other Loan Document
may be brought in the courts of the State of New York or of the United States
for the Southern District of New York, and, by execution and delivery of this
Agreement, Borrower hereby irrevocably accepts in respect of its property,
generally and unconditionally, the jurisdiction of the aforesaid courts.
Borrower further irrevocably consents to the service of process out of any of
the aforementioned courts and in any such action or proceeding by the mailing of
copies thereof by registered or certified mail, postage prepaid, at its address
for notices contained in Section 9.8, such service to become effective ten (10)
days after such mailing. Nothing herein shall affect the
24
<PAGE>
right of Lender to service of process in any other manner permitted by law or to
commence legal proceedings or otherwise proceed against Borrower in any other
jurisdiction.
9.12 Right of Set-Off. Upon the occurrence and during the continuance of
----------------
any Event of Default, Lender may, and is hereby authorized to, at any time and
from time to time, without notice to Borrower (any such notice being expressly
waived by Borrower) and to the fullest extent permitted by law, and subject to
the rights of the Senior Agent and the Senior Lenders hereunder, to set off and
apply any and all deposits (general or special, time or demand, provisional or
final) at any time held and other indebtedness at any time owing by Lender to or
for the credit or the account of Borrower against any and all obligations of
Borrower now or hereafter existing under any Loan Document to the extent such
obligations have become due. Lender agrees to notify Borrower promptly after
any such set-off and application made by such Bank; provided that the failure to
give such notice shall not affect the validity of such set-off and application.
The rights of Lender under this Section 9.12 are in addition to the other rights
and remedies (including, without limitation, other rights of set-off) which
Lender may have.
9.13 No Party Deemed Drafter. Borrower and Lender agree that no party
-----------------------
hereto shall be deemed to be the drafter of this Agreement, and Borrower and
Lender, further agree that, in the event this Agreement is ever construed by a
court of law, such court shall not construe this Agreement or any provision of
this Agreement against any party hereto as the drafter of this Agreement.
9.14 Reinstatement; Certain Payments. If claim is ever made upon Lender
-------------------------------
for repayment or recovery of any amount or amounts received by Lender in payment
or on account of any of the Obligations under this Agreement, Lender shall give
prompt notice of such claim to Borrower, and if Lender repays all or part of
said amount by reason of (i) any judgment, decree or order of any court or
administrative body having jurisdiction over Lender or any of its property or
(ii) any good faith settlement or compromise of any such claim effected by
Lender with any such claimant, then and in such event, Borrower agrees that (a)
any such judgment, decree, order, settlement or compromise shall be binding upon
Borrower notwithstanding the cancellation of the Note or other instrument
evidencing the Obligations under this Agreement or the other Loan Documents or
the termination of this Agreement or the other Loan Documents and (b) it shall
be and remain liable to Lender hereunder for the amount so repaid or recovered
to the same extent as if such amount had never originally been received by
Lender.
9.15 Assignment. Lender may assign to one or more Persons all or a portion
----------
of its rights and obligations under this Agreement; provided, however, that,
without the prior written consent of Borrower, Lender may not assign its rights
and obligations under this Agreement to any Person who is not (a) an individual
who is a citizen or resident of the United States, (b) a corporation,
partnership or other entity created or organized in or under the laws of the
United States, any State or any political subdivision thereof, (c) an estate the
income of which is subject to United States Federal income taxation regardless
of its source or (d) a trust whose administration is subject to the primary
25
<PAGE>
supervision of a United States court and which has one or more United States
fiduciaries who have the authority to control all substantial decisions of such
trust.
9.16 Confidentiality. Lender agrees to exercise all reasonable efforts to
---------------
keep any information delivered or made available by Borrower to it which has not
been publicly disclosed confidential from anyone other than persons employed or
retained by Lender who are or are expected to become engaged in evaluating,
approving, structuring or administering the Loan; provided, however, that
nothing herein shall prevent Lender from disclosing such information (i) to its
officers, directors, employees, agents, attorneys and accountants who have a
need to know such information in accordance with customary practices and who
receive such information having been made aware of the restrictions set forth in
this Section, (ii) upon the order of any court or administrative agency, (iii)
upon the request or demand of any regulatory agency or authority having
jurisdiction over Lender, (v) to the extent reasonably required in connection
with any litigation to which Lender, Borrower, or any Subsidiary or their
respective affiliates may be a party, (vi) to the extent reasonably required in
connection with the exercise of any remedy hereunder, (vii) to Lender's legal
counsel and independent auditors, and (viii) to any actual or proposed
participant or assignee of all or part of its rights hereunder which has agreed
in writing to be bound by the provisions of this Section 9.15.
26
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed on the day and
year specified at the beginning hereof.
Borrower: FOX FAMILY WORLDWIDE, INC.
By: /S/Mel Woods
-----------------------------
Name: Mel Woods
-----------------------
Title: President
-----------------------
Lender: FOX BROADCASTING COMPANY
By: /S/Jay Itzkowitz
-----------------------------
Name: Jay Itzkowitz
-----------------------
Title: Senior Vice President
-----------------------
Senior Representative: CITICORP USA, INC.
By: /S/Judith Fishlow Minter
-----------------------------
Name: Judith Fishlow Minter
-----------------------
Title: Attorney-in-Fact
-----------------------
27
<PAGE>
Exhibit A - Form of Note
- ---------
THIS NOTE AND THE OBLIGATIONS EVIDENCED HEREBY
ARE SUBORDINATED IN THEMANNER AND TO THE EXTENT
SET FORTH IN THE AMENDED AND RESTATED SUBORDINATED
NOTE AGREEMENT (THE "NOTE AGREEMENT"), DATED AS
OF MAY __, 1998. EACH HOLDER OF THIS NOTE, BY ITS
ACCEPTANCE HEREOF, SHALL BE BOUND BY THE PROVISIONS
OF THE NOTE AGREEMENT.
SUBORDINATED PROMISSORY NOTE
----------------------------
No. A-1
$108,672,000 as of July 31, 1997
FOR VALUE RECEIVED, the undersigned, Fox Family Worldwide Inc. f/k/a Fox
Kids Worldwide, Inc., a Delaware corporation, having an office at 10960 Wilshire
Boulevard, Los Angeles, CA 90024 ("Borrower"), hereby promises to pay to the
order of Fox Broadcasting Company, a Delaware corporation (the "Lender"), having
an office at c/o Fox Broadcasting Company, 10201 West Pico Boulevard, Los
Angeles, CA 90035, or registered assigns, in lawful money of the United States,
by wire transfer in immediately available federal funds, the principal amount of
One Hundred Eight Million Six Hundred Seventy Two Thousand Dollars
($108,672,000), loaned by Lender to Borrower pursuant to the Amended and
Restated Subordinated Note Agreement dated as of February __, 1998, among
Borrower, Lender and Citicorp USA, Inc. (as amended and modified from time to
time, the "Note Agreement"), together with additions to such principal amount
and interest thereon as set forth in the Note Agreement, which interest shall
accrue from and after the date hereof on the outstanding principal amount of
this Note, and such principal amount and interest thereon shall be payable at
such times as set forth in the Note Agreement.
Lender is hereby authorized by Borrower to record on Schedule A to this
Note (or on a supplemental Schedule thereto) the amount of the Loan and the
amount of each payment or prepayment of principal thereof received by Lender, it
being understood, however, that failure to make any such notation shall not
affect the rights of Lender or the obligations of Borrower hereunder
28
<PAGE>
in respect of this Note. At Lender's option, Lender may record such matters in
their internal records rather than recording such matters on such Schedule.
This Note is referred to in, and is issued pursuant to, the Note Agreement
and is entitled to all of the benefits of the Note Agreement and the Loan
Documents. All of the terms, covenants and conditions of the Note Agreement and
all other instruments evidencing the indebtedness hereunder (including, without
limitation, the Loan Documents), are hereby made a part of this Note and are
deemed incorporated herein in full. The Note Agreement, among other things,
provides for the acceleration of the then outstanding indebtedness hereunder
during the existence of an Event of Default, upon the terms and conditions
specified therein. All capitalized terms used herein, unless otherwise
specifically defined in this Note, shall have the meanings ascribed to them in
the Note Agreement. The Loan and all of the Obligations shall be subordinate to
the Senior Indebtedness, in the manner and to the extent set forth in the Note
Agreement. Each transferee of this Note (or any Note or Notes issued in
exchange or substitution therefor), by acceptance of this Note (or any Note or
Notes issued in exchange or substitution therefor), agrees to such
subordination.
To the fullest extent permitted by applicable law, Borrower, for itself and
its legal representatives, successors and assigns, expressly waives presentment,
demand, protest, notice of dishonor, notice of nonpayment, notice of maturity,
notice of protest, presentment for the purpose of accelerating maturity and
diligence in collection, and consents that Lender may (with the consent of
Borrower) extend the time for payment or otherwise modify the terms of payment
of any part or the whole of the debt evidenced hereby.
This Note shall be governed by, and construed and enforced in accordance
with, the laws of the State of New York, without regard to conflicts of laws
principles.
IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed as of
the date first above written.
FOX FAMILY WORLDWIDE, INC.
By: /S/Mel Woods
-------------------
Name: Mel Woods
Title: President
29
<PAGE>
Schedule A
----------
<TABLE>
<CAPTION>
Payments Unpaid Name of
-------------------- Principal Person
Current Balance of Making
Date Amount Principal Interest Note Notation
- ---- ------ --------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
</TABLE>
<PAGE>
EXHIBIT 10.31
THE OBLIGATIONS EVIDENCED HEREBY ARE SUBORDINATED IN THE
MANNER AND TO THE EXTENT SET FORTH IN ARTICLE 8 HEREOF.
EACH HOLDER OF THIS NOTE, BY ITS ACCEPTANCE HEREOF, SHALL BE
BOUND BY THE SUBORDINATION PROVISIONS OF THIS AGREEMENT.
AMENDED AND RESTATED SUBORDINATED NOTE AGREEMENT
------------------------------------------------
THIS AMENDED AND RESTATED SUBORDINATED NOTE AGREEMENT is made as of the
19th day of May, 1998, by and among NEWS AMERICA INCORPORATED f/k/a News America
Holdings Incorporated, a Delaware corporation ("Lender"), FOX FAMILY WORLDWIDE,
INC. f/k/a FOX KIDS WORLDWIDE, INC., a Delaware corporation (together with any
successors or assigns, the "Borrower"), and CITICORP USA, INC., as the Senior
Representative for the Senior Creditors (each as hereinafter defined).
WHEREAS, the parties hereto are parties to a certain Subordinated Note
Agreement, dated August 29, 1997 as amended by the First Amendment thereto dated
October 28, 1997 (the "Original Note Agreement" or the "Subordinated Note
Agreement"); and
WHEREAS, the parties hereto have agreed to retroactively lower the interest
rate provided under the Original Note Agreement; and
WHEREAS, the parties hereto desire to amend and restate the Original Note
Agreement to evidence such changes;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the parties hereto agree as follows:
ARTICLE 1. GENERAL DEFINITIONS
-------------------
1.1 Defined Terms. All capitalized terms used herein which are defined
-------------
in the Credit Agreement and not otherwise defined herein shall have their
meanings as defined in the Credit Agreement. When used herein, the following
terms shall have the following meanings:
Administrative Agent - means Citicorp USA, Inc., as the administrative
--------------------
agent and the collateral agent for the Senior Lenders and the other Secured
Parties, together with any successor thereto appointed pursuant to Article VIII
of the Credit Agreement.
Affiliate - when used in reference to any specified Person, any Person that
---------
directly or indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with, the specified Person.
<PAGE>
Agreement - this Subordinated Note Agreement, as the same may be modified
---------
or amended from time to time.
Business Day - a day on which the Federal Reserve Bank of New York is open
------------
for business in New York, New York.
Closing Date - August 31, 1997.
------------
Code - the Internal Revenue Code of 1986, as amended.
----
Credit Agreement - means the Second Amended and Restated Credit Agreement
----------------
dated as of October 28, 1997 among FCN Holding, Inc., International Family
Entertainment, Inc. and Saban Entertainment, Inc., as the Borrowers thereunder,
Fox Kids Holdings, LLC, as a guarantor thereunder, the Senior Lenders, Citicorp
Securities, Inc., Chase Securities, Inc. and BankBoston, N.A., as the Co-
Arrangers for the Facilities referred to therein, and the Administrative Agent,
as such agreement may be amended, supplemented or otherwise modified from time
to time.
Dollars and the symbol $ - lawful money of the United States of America.
------- -
Effective Date - May __, 1998
--------------
Event of Default - as defined in Section 7.1 of this Agreement.
----------------
GAAP - U.S. generally accepted accounting principles, consistently applied.
----
Indebtedness - as applied to any Person, means: (a) all indebtedness for
------------
borrowed money; (b) that portion of obligations with respect to capital leases
that is properly classified as a liability on a balance sheet in conformity with
GAAP; (c) notes payable and drafts accepted representing extensions of credit
whether or not representing obligations for borrowed money; (d) any obligation
owed for all or any part of the deferred purchase price of property or services
if the purchase price is due more than six (6) months from the date the
obligation is incurred or is evidenced by a note or similar written instrument;
and (e) all indebtedness secured by any Lien on any property or asset owned or
held by that Person regardless of whether the indebtedness secured thereby shall
have been assumed by that Person or is nonrecourse to the credit of that Person.
Indemnities - as defined in Section 9.1 of this Agreement.
-----------
Indentures - means, collectively, (a) the Indenture dated as of October 28,
----------
1997 between Fox Kids and The Bank of New York, as Trustee, relating to the 9
1/4% Senior Notes due 2007, and (b) the Indenture dated as of October 28, 1997
between Fox Kids and The Bank of New York, as
2
<PAGE>
Trustee, relating to the 10 1/4% Senior Discount Notes due 2007, in each case as
such agreement may be amended, supplemented or otherwise modified from time to
time.
Interest - as defined in Section 3.1(A) of this Agreement.
--------
Insolvency Laws - as defined in Section 8.1 of this Agreement.
---------------
Insolvency Proceedings - as defined in Section 8.1 of this Agreement.
----------------------
Interest Payment Date - commencing on September 30, 1997, and each
---------------------
successive December 31, March 31, June 30 and September 30 on which the Loan is
outstanding.
Lien - any mortgage, deed of trust, pledge, lien, security interest, charge
----
or other encumbrance or security arrangement of any nature whatsoever, including
but not limited to any conditional sale or title retention arrangement, and any
assignment, deposit arrangement or lease intended as, or having the effect of,
security.
Loan - as defined in Section 2.1 of this Agreement.
----
Loan Documents - this Agreement, the Note, and any and all agreements,
--------------
instruments and documents executed therewith.
Maturity Date - as defined in Section 2.2 of this Agreement.
-------------
Note - the subordinated promissory note to be made by Borrower on the
----
Closing Date in favor of Lender to evidence the Loan, which shall be in the form
of Exhibit A annexed hereto, and any note or notes issued in replacement or
substitution therefor, as any such note or notes may be further amended,
modified, or supplemented from time to time after the execution and delivery
hereof.
Obligations - (i) the obligations of Borrower to pay, as and when due and
-----------
payable (by scheduled maturity or otherwise), all amounts from time to time
owing by it in respect of any Loan Document, whether for principal, Interest
(including, without limitation, all Interest that accrues after the commencement
of any case, proceeding or other action relating to any Insolvency Proceeding of
Borrower), fees, indemnification payments, contract causes of action, costs,
expenses or otherwise and (ii) the obligations of Borrower to perform or observe
all of its other obligations from time to time existing under any Loan Document.
Person - an individual, partnership, association, corporation, limited
------
liability company, joint stock or other company, entity, trust or unincorporated
organization, or a government or agency or political subdivision thereof.
3
<PAGE>
Prepayment Date - any date upon which the Loan is being prepaid, in whole
---------------
or in part, pursuant to Section 3.2 of this Agreement.
Principal Amount - as defined in Section 2.1 of this Agreement.
----------------
Senior Creditors - means, collectively, the Senior Secured Creditors, the
----------------
Senior Notes Creditors and the other holders, if any, of any of the Senior
Indebtedness.
Senior Indebtedness - means, collectively, the Senior Secured Indebtedness
-------------------
and the Senior Notes Indebtedness.
Senior Lenders - means the banks, financial institutions and other
--------------
institutional lenders from time to time party to the Credit Agreement.
Senior Loan Documents - the Senior Loan Agreement and any and all
---------------------
agreements, instruments and documents executed in connection with the Senior
Loan Agreement, as the same may be further modified, amended or supplemented
after the execution and delivery thereof.
Senior Notes - means, collectively, the 9/1//4% Senior Notes due 2007 and
------------
the 10/1//4% Senior Discount Notes due 2007 issued under the Indentures, in each
case as amended, supplemented or otherwise modified from time to time.
Senior Notes Creditors - means, collectively, the trustees under each of
----------------------
the Indentures and the holders from time to time of Senior Notes Indebtedness.
Senior Notes Indebtedness - means (i) all Obligations of Fox Kids, whether
-------------------------
now or hereafter existing, under or in respect of the Indentures and the Senior
Notes, whether direct or indirect, absolute or contingent, and whether for
principal, interest (including, without limitation, interest accruing after the
filing of a petition initiating any Insolvency Proceeding (as hereinafter
defined), whether or not such interest accrues after the filing of such petition
for purposes of any applicable Insolvency Laws (as hereinafter defined), or is
an allowed claim in such Insolvency Proceeding), premium, fees, indemnification
payments, contract causes of action, costs, expenses or otherwise and (ii) any
and all extensions, modifications, substitutions, amendments, renewals,
refinancings, replacements and refundings of any or all of the Obligations
referred to in clause (i) of this definition, and any instrument or agreement
evidencing or otherwise setting forth the terms of any Indebtedness or other
Obligations incurred in any such extension, modification, substitution,
amendment, renewal, refinancing, replacement or refunding.
Senior Representative - means (i) the Administrative Agent or (ii) after
---------------------
the payment in full of all of the Senior Secured Indebtedness and the
termination or expiration of all of the commitments
4
<PAGE>
of the Senior Secured Creditors in respect thereof, either of the trustees for
the Senior Notes or the holders of a majority in aggregate principal amount of
the outstanding Senior Notes of either issue.
Senior Secured Creditors - means, collectively, the Administrative Agent,
------------------------
the Senior Lenders and the other Secured Parties and any other holder of any of
the Senior Secured Indebtedness.
Senior Secured Indebtedness - means (i) all Obligations of Fox Kids,
---------------------------
whether now or hereafter existing, under or in respect of the Credit Agreement,
the Notes (as defined in the Credit Agreement) and the other Loan Documents (as
defined in the Credit Agreement), whether direct or indirect, absolute or
contingent, and whether for principal, interest (including, without limitation,
interest accruing after the filing of a petition initiating any Insolvency
Proceeding, whether or not such interest accrues after the filing of such
petition for purposes of any applicable Insolvency Laws, or is an allowed claim
in such Insolvency Proceeding), premium, fees, indemnification payments,
contract causes of action, costs, expenses or otherwise and (ii) any and all
extensions, modifications, substitutions, amendments, renewals, refinancings,
replacements and refundings of any or all of the Obligations referred to in
clause (i) of this definition, and any instrument or agreement evidencing or
otherwise setting forth the terms of any Indebtedness or other Obligations
incurred in any such extension, modification, substitution, amendment, renewal,
refinancing, replacement or refunding
Subsidiary - with respect to any Person, any other Person of which such
----------
Person owns or controls the voting of, directly or indirectly through one or
more intermediaries, more than fifty percent (50%) of the voting stock or other
ownership interests representing more than fifty percent (50%) of the ordinary
voting power of such entity at the time of determination.
Tax - any tax, levy, impost, duty, withholding, assessment, fee or other
---
charge which is assessed, levied or imposed or calculated for any government,
governmental, semi-governmental administrative, fiscal or judicial body,
department, commission, authority, tribunal, agency or entity (including without
limitation any penalty, addition to tax or interest payable in connection or
with any failure to pay or any delay in paying any of the same).
Voided Payment - as defined in Section 8.5 of this Agreement.
--------------
1.2 Certain Matters of Construction. Terms defined herein in the singular
-------------------------------
shall have the correlative meaning when used in the plural and vice versa. The
terms "herein," "hereof" and "hereunder" and other words of similar import refer
to this Agreement as a whole and not to any particular section, paragraph or
subdivision. Any pronoun used shall be deemed to refer to the masculine,
feminine and neuter genders. The Section titles, table of contents and list of
exhibits appear as a matter of convenience only and shall not affect the
interpretation of this Agreement. All references to the knowledge of Borrower
(and phrases of similar import) shall include the knowledge of each of the
Subsidiaries of Borrower.
5
<PAGE>
1.3 Time References. Unless otherwise indicated herein, all references to
---------------
time of day refer to Pacific standard time or Pacific daylight savings time, as
in effect in Los Angeles, California on such day. For purposes of the
computation of a period of time from a specified date to a later specified date,
the word "from" means "from and including" and the words "to" and "until" each
means "to but excluding"; provided, however, that with respect to a computation
of fees or interest payable to Lender, such period shall in any event consist of
at least one (1) full day.
ARTICLE 2. THE LOAN
--------
2.1 The Loan. Lender has made a loan (the "Loan") to Borrower in the
--------
principal amount of Three Hundred Forty Five Million Five Hundred Thirteen
Thousand Eight Hundred Sixty Four Dollars and Thirty One Cents ($345,513,864.31)
(the "Principal Amount"), which was funded in full on the Closing Date. Lender
shall not have any responsibility as to the use of any of the proceeds of the
Loan. On the Effective Date, the Note delivered by the Borrower pursuant to the
Original Note Agreement shall be returned to the Borrower in exchange for a Note
in favor of Lender substantially in the form of Exhibit A annexed hereto which
Note shall be treated in the same manner as if such Note were executed and
delivered on the Closing Date.
2.2 Repayment of the Loan. The Principal Amount shall be repaid on May 1,
---------------------
2008 (the "Maturity Date").
ARTICLE 3. INTEREST, FEES, PREPAYMENTS AND REPAYMENT
-----------------------------------------
3.1 Interest.
--------
(A) Interest ("Interest") shall accrue from and after the Closing
Date, on the Principal Amount, at the rate of ten and /427/100/ percent
(10.427%) per annum, compounded quarterly, on the basis of a three hundred
sixty-four (364) day year.
(B) At the option of Borrower, and subject to the subordination
provisions set forth in Article 8 hereof, Borrower may on any Interest Payment
Date elect to (i) pay any portion or all of the accrued and unpaid interest on
the principal amount or (ii) elect to defer such payment until the Maturity Date
as provided in Section 3.1(C).
(C) If, on any Interest Payment Date, Borrower elects to defer the
payment of interest until the Maturity Date as provided in Section 3.1(B) or is
not permitted to pay interest as a result of the subordination provisions set
forth in Article 8 hereof, an amount equal to the Interest which accrued on the
Principal Amount from the immediately preceding Interest Payment Date (or in the
case of the first Interest Payment Date, which accrued from the Closing Date)
through such Interest Payment Date shall be added automatically to the Principal
Amount and become a part thereof (such amount of Interest being referred to as
"Deferred Interest").
6
<PAGE>
3.2 Optional Prepayment.
-------------------
(A) After the Senior Indebtedness have been paid in full, or at any
earlier time to the extent otherwise expressly permitted under the Senior Loan
Agreement, Borrower may prepay the Loan, in whole or in part, at any time, upon
at least five (5) Business Days' prior written notice to Lender. Any partial
prepayment of the Principal Amount shall be in the amount of Five Hundred
Thousand Dollars ($500,000) or in integral multiples of Five Hundred Thousand
Dollars ($500,000). Any prepayment of the Principal Amount on a Prepayment Date
pursuant to this Section 3.2 shall be accompanied by payment of the amount of:
(i) all Obligations (other than principal and Interest) due and
payable on the Prepayment Date; and
(ii) all Interest accrued (and not yet paid and added to the Principal
Amount as Deferred Interest) on the Principal Amount being prepaid from the
Closing Date through the Prepayment Date.
(B) The prepayment of the Loan pursuant to this Section 3.2 shall be
without premium or penalty.
3.3 Payments. The Obligations shall be payable as set forth in this
--------
Section 3.3.
(A) The Principal Amount shall be due and payable as provided in
Sections 2.2, 3.2 or 7.1 hereof, as applicable.
(B) Interest accrued on the Principal Amount shall be due and payable
in arrears on the earliest of (i) each successive Interest Payment Date, (ii)
the occurrence of an Event of Default in consequence of which Lender elects to
accelerate the maturity and payment of the Obligations, (iii) the Prepayment
Date (but only with respect to the amount of principal being prepaid at such
date) or (iv) the Maturity Date. Notwithstanding the foregoing, Borrower may
elect not to pay Interest on any Interest Payment Date and defer such payment as
provided in Section 3.1(C) above.
(C) Except as may be otherwise provided in Section 3.2 hereof, costs,
fees, expenses and any Obligations payable pursuant to this Agreement other than
Principal Amount and Interest shall be due and payable by Borrower to Lender or
to any other Person designated by Lender in writing (i) on demand, or (ii)
whether or not any demand has been made, upon (a) the occurrence of an Event of
Default in consequence of which Lender elects to accelerate the maturity and
payment of the Obligations or (b) the Maturity Date.
3.4 Payment Procedures. Each payment payable by Borrower to Lender under
------------------
this Agreement, the Note or any of the other Loan Documents shall be made
directly to Lender, not later
7
<PAGE>
than 11:00 a.m., on the due date of each such payment, by wire transfer of
immediately available federal funds in United States Dollars. If any sum would,
but for the provisions of this Section 3.4, the Note or any of the other Loan
Documents, become due and payable to Lender on any day which is not a Business
Day, then such sum shall become due and payable on the Business Day next
succeeding the day on which such sum would otherwise have become due and payable
hereunder or thereunder.
3.5 Taxes.
-----
(A) Gross-up and Other Taxes. All payments made by the Borrower
------------------------
hereunder, and under the Note or any other Loan Document shall be made without
setoff, counterclaim, deduction or other defense. All such payments shall be
made free and clear of and without deduction for any present or future income,
franchise, sales, use, excise, stamp or other Taxes, levies, imposts,
deductions, charges, fees, withholdings, restrictions or conditions of any
nature now or hereafter imposed, levied, collected, withheld or assessed by any
jurisdiction (whether pursuant to United States Federal, state, local or foreign
law) or by any political subdivision or taxing authority thereof or therein, and
all interest, penalties or similar liabilities, excluding taxes on the net
income of, and branch profit taxes of, any Lender imposed by the jurisdiction in
which such Lender is organized or any political subdivision thereof or taxing
authority thereof or any jurisdiction in which such Person's principal office or
relevant lending office is located or any political subdivision thereof or
taxing authority thereof (other than any such Taxes with respect to additional
net income arising from the receipt of payments under this Section 3.5) (such
non-excluded taxes being hereinafter collectively referred to as "Non-Excluded
Taxes"). If the Borrower shall be required by law to deduct or to withhold any
Non-Excluded Taxes from or in respect of any amount payable hereunder, (i) the
amount so payable shall be increased to the extent necessary so that after
making all required deductions and withholdings (including Taxes on amounts
payable to Lender pursuant to this sentence) Lender receives an amount equal to
the sum it would have received had no such deductions or withholdings been made,
(ii) the Borrower shall make such deductions or withholdings, and (iii) the
Borrower shall pay the full amount deducted or withheld to the relevant taxation
authority in accordance with applicable law. Whenever any Non-Excluded Taxes
are payable by the Borrower, as promptly as possible thereafter, the Borrower
shall send Lender an official receipt (or, if an official receipt is not
available, such other documentation as shall be reasonably satisfactory to
Lender) showing payment. In addition, the Borrower shall pay any present or
future stamp, documentary, excise, property or similar Taxes, charges or levies
that arise from any payment made under the Loan Documents by Borrower or from
the execution, delivery, performance, release, discharge, amendment,
enforcement, attempted enforcement or registration of, or otherwise with respect
to, this Agreement, any other Loan Document or any transaction contemplated by
this Agreement or any other Loan Document as any and all of the foregoing relate
to Borrower (hereinafter referred to as "Other Taxes").
8
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(B) Tax Indemnity. Borrower shall indemnify Lender for the full
-------------
amount of Non-Excluded Taxes and Other Taxes, including, without limitation, any
Non-Excluded Taxes or Other Taxes imposed by any jurisdiction on amounts payable
under this Section 3.5 (such Taxes being hereinafter referred to as "Gross-Up
Taxes") with respect to which Borrower has made a deduction from any payment
required to be made to Lender or which are paid by Lender in respect of either
the Loan Documents or payments made by Borrower under the Loan Documents (as the
case may be) and any liability (including penalties, additions to tax, interest
and expenses) arising therefrom or with respect thereto, whether or not such
Non-Excluded Taxes or Other Taxes were correctly or legally asserted. This
indemnification shall be made within thirty (30) days from the date Lender makes
written demand therefor.
(C) Survival of Obligations. Without prejudice to the survival of
-----------------------
any other agreement of Borrower hereunder, the agreements and obligations of
Borrower contained in this Section 3.5 shall survive the payment in full by
Borrower of all principal and Interest hereunder, until six (6) months after the
expiration of the applicable statute of limitation with respect to any Gross-Up
Taxes, Non-Excluded Taxes and Other Taxes.
(D) Filings by Lender. (i) Borrower shall use reasonable efforts in
-----------------
good faith to file (or update the filing of) any certificate or document
provided or requested by Lender or take any reasonable action requested by
Lender if the filing of such certificate or document or the taking of such
action would avoid the need for, reduce the amount of, or assist in the recovery
of any payment of Taxes, or avoid the circumstances giving rise to the need for
such payment, and (ii) in the event Borrower fails to exercise the reasonable
efforts in good faith described in Section 3.5(D)(i) above, the Taxes arising
from such failure shall be considered Non-Excluded Taxes and Borrower shall
indemnify Lender in accordance with Section 3.5(B).
3.6 Application of Payments and Collections. Borrower irrevocably waives
---------------------------------------
the right to direct the application of any and all payments and collections at
any time or times hereafter received by Lender from or on behalf of Borrower,
and Borrower does hereby irrevocably agree that Lender shall have the continuing
exclusive right to apply and reapply any and all such payments and collections
received at any time or times hereafter by Lender or any Person designated by
Lender against the Obligations, in such manner as Lender may deem advisable
consistent with the terms of this Agreement, notwithstanding any entry by Lender
upon any of its books and records. Notwithstanding the foregoing provisions of
this Section 3.6, unless otherwise specified by Lender, any payment or
collection in respect of any of the Obligations (other than quarterly payments
of Interest pursuant to Section 3.1 hereof) shall be applied by Lender (a)
first, to the payment of all Obligations (if any) other than the principal and
Interest due and payable at such time, (b) next, to the payment of all Interest
which shall then be due and payable on the Principal Amount and (c) next, to the
payment of the outstanding Principal Amount.
9
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ARTICLE 4. REPRESENTATIONS AND WARRANTIES
------------------------------
To induce Lender to enter into this Agreement and to make advances
hereunder, Borrower represents and warrants to Lender, on the Closing Date,
that:
4.1 Organization, Good Standing, Etc. Borrower (i) is a corporation, duly
---------------------------------
organized, validly existing and in good standing under the laws of the State of
Delaware, and (ii) has all requisite corporate power and authority to conduct
its business as now conducted and to make the borrowings hereunder and to
consummate the transactions contemplated by the Loan Documents to which it is a
party.
4.2 Authorization, Etc. The execution, delivery and performance by
-------------------
Borrower of each of the Loan Documents to which it is a party (i) have been duly
authorized by all necessary corporate action on the part of Borrower, (ii) do
not and will not contravene the charter and by-laws of Borrower, or any
applicable law or any contractual restriction binding on or otherwise affecting
it or any of its properties, except where such conflict would not have a
material adverse effect on the business, condition (financial or otherwise)
operations or assets of the Borrower and its Subsidiaries taken as a whole (a
"Material Adverse Effect"), (iii) do not and will not result in the violation,
breach of, conflict with, accelerate the due date of any payments under, or
(without the giving of notice or the passage of time or both) entitle any party
to terminate or call a default under any contract to which the Borrower or any
of its Subsidiaries is a party, or to which any of their respective assets are
subject or otherwise bound which would not have a Material Adverse Effect, and
(iv) do not and will not result in or require the creation of any Lien, upon or
with respect to any of its properties.
4.3 Governmental Approvals. No authorization or approval or other action
----------------------
by, and no notice to or filing with, any governmental authority or other
regulatory body is required in connection with the due execution, delivery and
performance by each of Borrower or any Subsidiary of each of the Loan Documents
to which it is a party.
4.4 Enforceability of Loan Documents. This Agreement is, and each other
--------------------------------
Loan Document to which each of Borrower or any Subsidiary is a party, when
delivered hereunder, will be, legal, valid and binding obligations of Borrower
and each Subsidiary, as the case may be, enforceable against Borrower and each
Subsidiary in accordance with their respective terms, except to the extent that
the enforceability thereof may be limited by any applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance or similar laws
from time to time in effect affecting generally the enforcement of creditors'
rights and remedies and by general principles of equity.
10
<PAGE>
ARTICLE 5. COVENANTS AND CONTINUING AGREEMENTS
-----------------------------------
So long as any amount owing in respect of the Obligations (whether or not
due) shall remain unpaid, Borrower covenants that, unless otherwise consented to
by Lender in writing, it shall:
5.1 Compliance with Laws, Etc. Comply, and cause each of its Subsidiaries
--------------------------
to comply, with all applicable laws, rules, regulations and orders, except where
such failure to comply would not, either in any case or in the aggregate,
reasonably be likely to result in a Material Adverse Effect.
5.2 Preservation of Existence, Etc. Maintain and preserve, and cause each
-------------------------------
of its Subsidiaries to maintain and preserve, its existence, rights and
privileges, and become or remain duly qualified and in good standing in each
jurisdiction in which the character of the properties owned or leased by them or
in which the transaction of their business makes such qualification necessary,
except (i) where the failure to maintain and preserve the existence, rights and
privileges of Borrower or its Subsidiaries would not, either in any single case
or in the aggregate, reasonably be likely to result in a Material Adverse
Effect, or (ii) where such failure to qualify would not, either in any case or
in the aggregate, reasonably be likely to result in a Material Adverse Effect.
5.3 Keeping of Records and Books of Account. Keep, and cause each of its
---------------------------------------
Subsidiaries to keep, adequate records and books of account, with complete
entries made in accordance with GAAP.
5.4 Further Assurances. Shall, and shall cause each Subsidiary to, do,
------------------
execute, acknowledge and deliver, at the sole cost and expense of Borrower or
any such Subsidiary, all such further acts and assurances as Lender may
reasonably require from time to time in order to better assure and confirm unto
Lender the rights now or hereafter intended to be granted to it under this
Agreement, any Loan Document or any other instrument under which Borrower or any
of its Subsidiaries may be or may hereafter become bound for carrying out the
intention or facilitating the performance of the terms of the Agreement.
5.5 Characterization of Note. Lender and Borrower shall at all times
------------------------
characterize the Note as "indebtedness" rather than "stock" for all purposes
whatsoever and will not take any position or action to the contrary thereto
unless required by law. Neither Lender nor Borrower will disclose treatment of
the Note in a manner inconsistent with the characterization of the Note as
"indebtedness" within the meaning of the Code Section 385(c) in any return,
information statement or other filing with the Internal Revenue Service.
11
<PAGE>
ARTICLE 6. CONDITIONS PRECEDENT
--------------------
As a condition precedent to the amendment and restatement hereunder, the
following conditions, as the case may be, shall be fulfilled in a manner
reasonably satisfactory to Lender:
6.1 Delivery of Documents. Lender shall have received the following
---------------------
documents on or prior to the Effective Date:
(A) the Note, duly executed and delivered by Borrower, and any other
instruments, documents or certificates executed by Borrower or any of its
Subsidiaries in respect of the transactions contemplated by this Agreement or
which are reasonably requested by Lender;
(B) evidence that Borrower and its Subsidiaries are in full
compliance with all of their respective representations, warranties, covenants
and agreements set forth in the Senior Loan Documents, that neither Borrower nor
its Subsidiaries are in breach of, or default under, any of the Senior Loan
Documents and that the Senior Loan Documents are in full force and effect in
accordance with their respective terms; and
(C) such other documents, instruments and agreements as Lender shall
reasonably request in connection with the foregoing matters.
6.2 Additional Conditions Precedent. The following conditions shall be
-------------------------------
satisfied on the Closing Date, in the sole discretion, reasonably exercised, of
Lender:
(A) no action, proceeding, investigation, regulation or legislation
shall have been instituted, threatened or proposed before any court,
governmental agency or legislative body to enjoin, restrain or prohibit, or to
obtain damages in respect of, or which is related to or arises out of this
Agreement, the other Loan Documents, any Senior Loan Documents or the
consummation of the transactions contemplated hereby or thereby or which, in
Lender's sole discretion, would make it inadvisable to consummate the
transactions contemplated by this Agreement or any of the other Loan Documents;
and
(B) all legal matters in connection with the transactions
contemplated by the Loan Documents shall be reasonably satisfactory to Lender
and its counsel in their sole discretion.
ARTICLE 7. EVENTS OF DEFAULT: RIGHTS AND REMEDIES ON DEFAULT
-------------------------------------------------
7.1 Events of Default. The existence of any one or more of the following
-----------------
events shall constitute an Event of Default:
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<PAGE>
(A) Borrower shall fail to pay any (i) principal when due (whether by
scheduled maturity, required prepayment, acceleration, demand or otherwise)
under the Loan Documents and such failure shall continue unremedied for fifteen
(15) days or (ii) any Interest, any fee, indemnity or other amounts due or other
Obligations under any Loan Document when due (unless deferred pursuant to
Section 3.1(C) hereof) and such failure shall continue unremedied for thirty
(30) days;
(B) any representation or warranty made by Borrower or any officer of
Borrower under or in connection with any Loan Document shall have been or shall
be incorrect in any material respect when made;
(C) Borrower shall fail to perform or observe any of its Obligations
under any Loan Document, including but not limited to any covenant contained in
Article 5 hereof (other than occurrences referred to or embodied in other
provisions of this Section 7.1), and such failure shall continue unremedied for
a period of thirty (30) days after the earlier of (i) Borrower's receipt of
notice from Lender or (ii) actual knowledge of such breach by Borrower;
(D) Borrower or any Subsidiary (i) shall institute any proceeding or
voluntary case seeking to adjudicate it a bankrupt or insolvent, or seeking
dissolution, liquidation, winding up, reorganization, arrangement, adjustment,
protection, relief or composition of it or its debts under any law relating to
bankruptcy, insolvency, reorganization or relief of debtors, or seeking the
entry of an order for relief or the appointment of a receiver, trustee,
custodian or other similar official for such party or for any substantial part
of its property, (ii) shall be generally not paying its debts as such debts
become due, or shall admit in writing its inability to pay its debts generally,
(iii) shall make a general assignment for the benefit of creditors or (iv) shall
take any action to authorize or effect any of the actions set forth above in
this subsection (D);
(E) any proceeding shall be instituted against Borrower or any
Subsidiary seeking to adjudicate it a bankrupt or insolvent, or seeking
dissolution, liquidation, winding up, reorganization, arrangement, adjustment,
protection, relief of debtors, or seeking the entry of an order for relief or
the appointment of a receiver, trustee, custodian or other similar official for
Borrower or any Subsidiary or for any substantial part of its property, and
either such proceeding shall remain undismissed or unstayed for a period of
seventy (70) days or any of the actions sought in such proceeding (including,
without limitation, the entry of an order for relief against it or the
appointment of a receiver, trustee, custodian or other similar official for it
or for any substantial part of its property) shall occur; and
(F) any material provision of any Loan Document shall at any time for
any reason be declared to be null and void, or the validity or enforceability
thereof shall be contested by Borrower, or a proceeding shall be commenced by
Borrower or any governmental authority or other regulatory body having
jurisdiction over Borrower, seeking to establish the invalidity or
13
<PAGE>
unenforceability thereof, or Borrower shall deny in writing that Borrower has
any material liability or obligation purported to be created under any Loan
Document;
then, and in any such event, and except as otherwise provided in the
subordination provisions set forth in Article 8 hereof, Lender may by written
notice to Borrower, (i) declare the Loan, all Interest thereon and all other
amounts payable under this Agreement to be forthwith due and payable, whereupon
the Loan, all such Interest and all such amounts shall become and be forthwith
due and payable, without presentment, demand, protest or further notice of any
kind, all of which are hereby expressly waived by Borrower; provided, however,
that upon the occurrence and during the continuance of any Event of Default
described in Section 7.1 (C) or (D), the Loan, all such Interest and all such
amounts shall become and be forthwith due and payable, without presentment,
demand, protest or further notice of any kind, all of which are expressly waived
by Borrower, and (ii) exercise any and all of its other rights under applicable
law, hereunder and under the other Loan Documents.
7.2 Remedies Cumulative; No Waiver. All covenants, conditions,
------------------------------
provisions, warranties, guaranties, indemnities, and other undertakings of
Borrower contained in this Agreement and the other Loan Documents, or in any
document referred to herein or contained in any agreement supplementary hereto
or thereto or contained in any other agreement between Lender and Borrower,
heretofore, concurrently, or hereafter entered into, shall be deemed cumulative
to, and not in derogation or substitution of, any of the terms, covenants,
conditions, or agreements of Borrower herein contained. The failure or delay of
Lender to exercise or enforce any rights, powers, or remedies hereunder or under
any of the aforesaid agreements or other documents shall not operate as a waiver
of such rights, powers and remedies, but all such rights, powers, and remedies
shall continue in full force and effect until the outstanding Principal Amount,
all Interest and all other Obligations owing or to become owing from Borrower to
Lender shall have been fully satisfied, and all rights, powers, and remedies
herein provided for are cumulative and none are exclusive.
ARTICLE 8. SUBORDINATION
-------------
8.1 The aggregate principal amount owing to the Lender from time to time
under this Subordinated Note Agreement, the Note and the other Loan Documents
all accrued and unpaid interest thereon, and any other indebtedness evidenced by
or otherwise owing in respect of this Subordinated Note Agreement, the Note and
the other Loan Documents (collectively, the "Subordinated Indebtedness") is and
shall be subordinate and junior in right of payment and otherwise, to the extent
and in the manner hereinafter set forth, to the prior payment in full of all of
the Senior Indebtedness (an hereinafter defined), whether now or hereafter
existing. For all purposes of this Subordinated Note Agreement, the Senior
Indebtedness shall not be deemed to have been paid in full until the latest of
(A) the payment in full in cash of all of the Senior Indebtedness and the
expiration or termination of all of the commitments of the Secured Parties and
the other holders of
14
<PAGE>
any of the Senior Indebtedness thereunder, (B) the expiration or termination of
all of the Bank Hedge Agreements and (C) the Termination Date.
8.2 In the event of any dissolution, winding up, liquidation, arrangement,
reorganization, adjustment, protection, relief or composition of Borrower or its
debts, whether voluntary or involuntary, in any bankruptcy, insolvency,
arrangement, reorganization, receivership, relief or other similar action or
proceeding under the United States Federal Bankruptcy Code or any other federal
or state bankruptcy or insolvency laws or any similar Requirements of Law of any
other jurisdiction covering the protection of creditors' rights or the relief of
debtors (collectively, the "Insolvency Laws"), or upon an assignment for the
benefit of creditors or any other marshaling of the property, assets and
liabilities of Borrower or otherwise (each, an "Insolvency Proceeding"), the
Senior Creditors shall be entitled to receive payment in full of all of the
Senior Indebtedness before the Lender is entitled to receive any payment or
distribution of any kind or character on account of all or any of the
Subordinated Indebtedness, and, to that end, any payment or distribution of any
kind or character (whether in cash, property or securities) that otherwise would
be payable or deliverable upon or with respect to the Subordinated Indebtedness
in any such Insolvency Proceeding (including, without limitation, any payment
that may be payable by reason of any other Indebtedness of Borrower being
subordinated to payment of the Subordinated Indebtedness) shall be paid or
delivered forthwith directly to the Senior Representative, for the ratable
account of the Senior Secured Creditors and the Senior Notes Creditors, in the
same form as so received (with any necessary endorsement or assignment), for
application (in the case of cash) to, or to be held as collateral (in the case
of noncash property or securities) for, the payment or prepayment of the Senior
Indebtedness until all of the Senior Indebtedness shall have been paid in full.
8.3 No payment or distribution of any property or assets of Borrower of
any kind or character (including, without limitation, any payment that may be
payable by reason of any other Indebtedness of Borrower being subordinated to
payment of the Subordinated Indebtedness) shall be made by or on behalf of
Borrower for or on account of any Subordinated Indebtedness, unless and until
all of the Senior Indebtedness shall have been paid in full or unless such
payment is expressly permitted to be made under Section 8(d)(i)(D) of the Fox
Kids Guarantee and Sections 10.8 and 10.9 of the Indentures. Furthermore, so
long as the Senior Indebtedness shall not have been paid in full, the Lender
shall not (a) ask, demand, sue for, take or receive from Borrower, directly or
indirectly, in cash or other property or by setoff or in any manner (including,
without limitation, from or by way of collateral), payment of all or any of the
Subordinated Indebtedness, except to the extent that such payment is expressly
permitted to be made under Section 8(d)(i)(D) of the Fox Kids Guarantee and
Sections 10.8 and 10.9 of the Indentures, (b) commence, or join with any
creditor other than the Senior Representative in commencing, or directly or
indirectly cause Borrower to commence, or assist Borrower in commencing, any
Insolvency Proceeding, or (c) request or accept any collateral or other security
for the Subordinated Indebtedness. If the Subordinated Lender, in contravention
hereof, shall commence, prosecute or participate in any Insolvency Proceeding,
then
15
<PAGE>
the Senior Representative may intervene and interpose as a defense or plea
the terms of this Subordinated Note Agreement in its own name or in the name of
the Subordinated Lender.
8.4 Until such time as all of the Senior Indebtedness has been paid in
full, if any Insolvency Proceeding is commenced by or against Borrower:
(A) the Senior Representative is hereby irrevocably authorized and
empowered (in its own name or in the name of the Lender or otherwise), but
shall have no obligation, to demand, sue for, collect and receive every
payment or distribution otherwise payable to the Lender in respect of this
Subordinated Note Agreement and give acquittance therefor, and to file
claims and proofs of claim and take such other actions (including, without
limitation, voting the Subordinated Indebtedness or enforcing any security
interest or other lien securing payment of the Subordinated Indebtedness)
as it may deem necessary or advisable for the exercise or enforcement of
any of the rights or interests of the Senior Representative or any of the
other Senior Creditors under this Subordinated Note Agreement; and
(B) the Lender shall duly and promptly take such action as the Senior
Representative may reasonably request (i) to collect the Subordinated
Indebtedness for the account of the Senior Representative, for the ratable
benefit of the Senior Secured Creditors and the Senior Notes Creditors, and
to file appropriate claims or proofs of claim in respect of the
Subordinated Indebtedness, (ii) to execute and deliver to the Senior
Representative such powers of attorney, assignments or other instruments as
the Senior Representative may reasonably request in order to enable the
Senior Representative to enforce any and all claims with respect to, and
any security interests and other liens securing payment of, the
Subordinated Indebtedness and (iii) to collect and receive any and all
payments or distributions that may be payable or deliverable upon or with
respect to the Subordinated Indebtedness.
8.5 All payments or distributions upon or with respect to the Subordinated
Indebtedness that are received by the Lender contrary to the provisions of this
Subordinated Note Agreement shall be received in trust for the benefit of the
Senior Representative and the other Senior Creditors, shall be segregated from
other property or funds of the Lender and shall be paid or delivered forthwith
directly to the Senior Representative, for the account of the Senior Secured
Creditors and the Senior Notes Creditors, in the same form as so received (with
any necessary endorsement or assignment), to be applied (in the case of cash)
to, or held as collateral (in the case of noncash property or securities) for,
the payment or prepayment of the Senior Indebtedness until all of the Senior
Indebtedness shall have been paid in full.
8.6 To the extent that Borrower, the Lender or any of their respective
Subsidiaries or any other guarantor of or provider of collateral for the Senior
Indebtedness shall make any payment on the Senior Indebtedness that is
subsequently invalidated, declared to be fraudulent or preferential or
16
<PAGE>
set aside or is required to be repaid to a trustee, receiver or any other party
under any applicable Insolvency Law or equitable cause (any such payment being a
"Voided Payment"), then to the extent of such Voided Payment, that portion of
the Senior Indebtedness that had been previously satisfied by such Voided
Payment shall be reinstated and continue in full force and effect as if such
Voided Payment had never been made. To the extent that the Lender shall have
received any payments subsequent to the date of the initial receipt of such
Voided Payment by the Senior Representative or any of the other Senior Creditors
and such payments have not been invalidated, declared to be fraudulent or
preferential or set aside or required to be repaid to a trustee, receiver or any
other party under any applicable Insolvency Law or equitable cause, the Lender
shall be obligated and hereby agrees that any such payment so made or received
shall be deemed to have been received in trust for the benefit of the Senior
Representative and the other Senior Creditors, and the Lender hereby agrees to
pay to the Senior Representative, upon demand, the full amount so received by
the Lender during such period of time to the extent necessary to fully restore
to the Senior Representative and the other Senior Creditors the amount of such
Voided Payment, which amount shall be applied as set forth in Section 8.5.
8.7 The Senior Representative is hereby authorized to demand specific
performance of the subordination provisions of this Subordinated Note Agreement,
whether or not Borrower shall have complied with any of the provisions hereof
applicable to it, at any time when the Lender shall have failed to comply with
any of the subordination provisions of this Subordinated Note Agreement. The
Lender hereby irrevocably waives any defense based on the adequacy of a remedy
at law which might be asserted as a bar to such remedy of specific performance.
8.8 The Lender will not:
(A) (i) Cancel or otherwise discharge any of the Subordinated
Indebted ness (except upon payment in full of all of the Senior
Indebtedness or, at any time and from time to time prior thereto, to the
extent that such payment is expressly permitted to be made under Section
8(d)(i)(D) of the Fox Kids Guarantee and under Sections 10.8 and 10.9 of
the Indentures), (ii) convert or exchange any of the Subordinated
Indebtedness into or for any other Indebtedness (except to the extent
expressly permitted by the Indentures), (iii) convert or exchange any of
the Subordinated Indebtedness into or for any Equity Interest in Borrower
or otherwise (except to the extent expressly permitted by the Indentures)
or (iv) subordinate any of the Subordinated Indebtedness to any
Indebtedness of Borrower other than the Senior Indebtedness (except that no
consent of the holders of the Senior Notes or either of the trustees for
the Senior Notes shall be required to subordinate any of the Subordinated
Indebtedness to any other Indebtedness of Borrower (although nothing herein
shall limit the obligation of any holder of Indebtedness of Borrower to
turn over or otherwise subordinate itself to any or all of the Senior
Creditors in accordance with any subordination provisions applicable to
such Indebtedness);
17
<PAGE>
(B) Sell, assign, pledge, encumber or otherwise dispose of any of the
Subordinated Indebtedness; or
(C) Permit the terms of any of the Subordinated Indebtedness to be
amended, waived, supplemented or otherwise modified in such a manner as
could have an adverse effect upon the rights or interests of the Senior
Representative or any of the other Senior Creditors under this Subordinated
Note Agreement, any of the Loan Documents (as defined in the Credit
Agreement), either of the Indentures or any of the other agreements,
instruments or other documents evidencing or otherwise setting forth the
terms of any of the Senior Indebtedness.
8.9 No payment or distribution to the Senior Representative or any of the
other Senior Creditors pursuant to the provisions of this Subordinated Note
Agreement shall entitle the Lender to exercise any rights of subrogation in
respect thereof, nor shall the Lender have any right of reimbursement,
restitution, exoneration, contribution or indemnification whatsoever from any
property or assets of Borrower or any of the other guarantors, sureties or
providers of collateral security for the Senior Indebtedness, or any right to
participate in any claim or remedy of the Senior Representative or any of the
other Senior Creditors against Borrower or any of the Collateral, whether or not
such claim, remedy or right arises in equity or under contract, statute or
common law (including, without limitation, the right to take or receive from
Borrower, directly or indirectly, in cash or other property or by setoff or in
any other manner, payment or security on account of such claim, remedy or
right), until (i) all of the Senior Indebtedness shall have been paid in full
and all of the commitments of the Secured Parties and the other holders thereof
shall have expired or been terminated, (ii) all of the Bank Hedge Agreements
shall have expired or been terminated and (iii) the Termination Date shall have
occurred.
8.10 The holders of the Senior Indebtedness may, at any time and from time
to time, without any consent of or notice to the Lender or any other holder of
the Subordinated Indebtedness and without impairing or releasing the obligations
of the Lender hereunder:
(A) change the manner, place or terms of payment of, or change or
extend the time of payment of, or renew payment or change or extend the
time or payment of, or renew or alter, the Senior Indebtedness (including
any change in the rate of interest thereon), or amend, supplement or
otherwise modify in any manner any instrument, agreement or other document
under which any of the Senior Indebtedness is outstanding;
(B) sell, exchange, release, not perfect and otherwise deal with any
of the property or assets of any Person at any time pledged, assigned or
mortgaged to secure the Senior Indebtedness;
18
<PAGE>
(C) release any Person liable in any manner under or in respect of the
Senior Indebtedness;
(D) exercise or refrain from exercising any rights against Borrower,
any of the other Loan Parties or any of their respective Subsidiaries or
any other Person;
(E) apply to the Senior Indebtedness any sums from time to time
received by or on behalf of the Senior Representative or any of the other
Senior Creditors; and
(F) sell, assign, transfer or exchange any of the Senior Indebtedness.
8.11 Each of Borrower and the Lender will, if reasonably requested by the
Senior Representative or either of the trustees for the Senior Notes, further
mark their respective books of account in such a manner as shall be effective to
give proper notice of the effect of the subordination provisions of this
Subordinated Note Agreement. Each of Borrower and the Lender will, at its sole
expense and at any time and from time to time, promptly execute and deliver all
further instruments and documents, and take all further actions, that may be
necessary or that the Senior Representative or either of the trustees for the
Senior Notes may reasonably deem desirable and may request in order to protect
any right or interest granted or purported to be granted under the subordination
provisions of this Subordinated Note Agreement or to enable the Senior
Representative or any of the other Senior Creditors to exercise and enforce its
rights and remedies hereunder.
8.12 The foregoing provisions regarding subordination are and are intended
solely for the purpose of defining the relative rights of the holders of the
Senior Indebtedness, on the one hand, and the holders of the Subordinated
Indebtedness, on the other hand. Such provisions are for the benefit of the
holders of the Senior Indebtedness and shall inure to the benefit of, and shall
be enforceable by, the Senior Representative, on behalf of itself and the other
Senior Creditors, directly against the holders of the Subordinated Indebtedness,
and no holder of the Senior Indebtedness shall be prejudiced in its right to
enforce the subordination of any of the Subordinated Indebtedness by any act or
failure to act by Borrower or any Person in custody of its property or assets.
The subordination provisions herein shall constitute a continuing offer to each
and every holder of Senior Indebtedness from time to time and such holders are
intended third party beneficiaries hereof. Nothing contained in the foregoing
provisions is intended to or shall impair, as between Borrower and the holders
of the Subordinated Indebtedness, the obligations of Borrower to such holders.
8.13 (A) Borrower agrees to pay, upon demand therefor, all of the
reasonable and properly documented out-of-pocket costs and expenses (including,
without limitation, reasonable fees and expenses of counsel) incurred by the
Senior Representative or any of the other Senior Creditors in enforcing the
provisions of this Subordinated Note Agreement.
19
<PAGE>
(B) Borrower hereby waives promptness, diligence, presentment for
payment, demand, notice of dishonor and protest and any other notice with
respect to this Subordinated Note Agreement .
(C) None of the rights or interests of the Lender in this Subordinated
Note Agreement may be assigned or otherwise transferred thereby to any Person
other than a member of the TNCL Group or the Saban Group without the prior
written consent of Borrower and the Senior Representative.
(D) No amendment, waiver or modification of this Subordinated Note
Agreement (including, without limitation, the subordination provisions hereof),
and no consent to any departure herefrom, shall be effective unless the same
shall be in writing and signed by the Lender and, if any such amendment, waiver
or modification of this Subordinated Note Agreement (including, without
limitation, the subordination provisions hereof) could adversely affect the
rights or interests of the Senior Representative or any of the other Senior
Creditors under or in respect of this Subordinated Note Agreement, any of the
Loan Documents (as defined in the Credit Agreement), either of these Indentures
or any of the other agreements, instruments or other documents evidencing or
otherwise setting forth the terms of any of the Senior Indebtedness in any
manner, signed by the Senior Representative and/or each of the trustees for the
Senior Notes, and then, in each case, such waiver, modification or consent shall
be effective only in the specific instance and for the specific purpose for
which given; provided that neither of the trustees for the Senior Notes shall be
required to consent to any such amendment, waiver or modification that would not
adversely affect the rights or interests of any of the Senior Notes Creditors.
(E) No failure on the part of the Lender or the Senior Representative
or any of the other Senior Creditors to exercise, and no delay in exercising,
any right, power or privilege hereunder shall operate as a waiver thereof or a
consent thereto; nor shall a single or partial exercise of any such right, power
or privilege preclude any other or further exercise thereof or the exercise of
any other right, power or privilege. The remedies provided herein are
cumulative and are not exclusive of any remedies provided by applicable law."
ARTICLE 9. MISCELLANEOUS
-------------
9.1 Indemnification. In addition to all of Borrower's other Obligations
---------------
under this Agreement, Borrower agrees to defend, protect, indemnify and hold
harmless Lender and all of its officers, directors, employees, attorneys,
consultants and agents (collectively called the "Indemnities") from and against
any and all losses, damages, liabilities, obligations, penalties, fees,
reasonable costs and expenses (including, without limitation, reasonable
attorneys' fees, costs and expenses) incurred by such Indemnities, whether prior
to or from and after the Closing Date, whether direct, indirect or
consequential, as a result of or arising from or relating to or in connection
with any of the following: (i) the negotiation, preparation, execution or
performance or enforcement of this
20
<PAGE>
Agreement or of any document executed in connection with the transactions
contemplated by this Agreement; (ii) the furnishing of funds to Borrower under
this Agreement; (iii) any document executed in connection with the transactions
contemplated by this Agreement or (iv) any claim, litigation, investigation or
proceeding relating to any of the foregoing, whether or not any Indemnitee is a
party thereto (collectively, the "Indemnified Matters"); provided, however, that
Borrower shall not have any obligation to any Indemnitee hereunder for any
Indemnified Matter caused by or resulting from the gross negligence or willful
misconduct of such Indemnitee, as determined by a final judgment of a court of
competent jurisdiction. To the extent that the undertaking to indemnify, pay and
hold harmless set forth in this Section 9.1 may be unenforceable because it is
violative of any law or public policy, Borrower shall contribute the maximum
portion which it is permitted to pay and satisfy under applicable law, to the
payment and satisfaction of all Indemnified Matters incurred by the Indemnities.
The foregoing indemnity shall survive the repayment of the Obligations.
9.2 Amendments, Etc. No amendment or waiver of any provision of this
----------------
Agreement or the other Loan Documents, and no consent to any departure therefrom
by Borrower, shall in any event be effective unless the same shall be in writing
and signed by Borrower and Lender, and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given; provided, however, that no amendment, waiver or consent shall, unless in
writing and signed by Lender, (i) reduce the principal of, or interest on, the
Loan or Obligations, (ii) postpone any date fixed for any payment of principal
of, or interest or fees on, the Loan or the amount of any other Obligations,
(iii) change the percentage of the aggregate unpaid principal amount of the
Note, which shall be required for Lender to take any action hereunder or (iv)
amend, modify or waive this Section 9.2; and provided further that no such
amendment or waiver or consent to any departure therefrom of Article 8 or any
other provision that could adversely affect the rights and interests of the
Senior Agent or any of the Senior Lenders (under or in respect of the Loan
Documents or any of the Senior Loan Documents) in any manner shall be effective
without the written consent of the Senior Agent.
9.3 Expenses; Attorneys' Fees. Borrower agrees to pay or cause to be
-------------------------
paid, on demand, and to save Lender harmless against liability for the payment
of, all reasonable out-of-pocket expenses, including but not limited to
reasonable fees and expenses of counsel for Lender, periodic field audits, from
time to time arising from or relating to (other than when arising from the gross
negligence or willful misconduct of Lender, as the case may be): (i) any
amendments, waivers or consents to this Agreement or the other Loan Documents
requested by Borrower whether or not such documents become effective or are
given; (ii) upon the occurrence and during the continuance of any Event of
Default, the preservation and protection of any of Lender's rights under this
Agreement or the other Loan Documents; (iii) the defense of any claim or action
asserted or brought against Lender by any Person that arises from this
Agreement, any other Loan Document, Lender's claims against Borrower, or any and
all matters in connection therewith; (iv) the commencement (other than by
Lender, except upon the occurrence and during the continuance of any Event of
Default) or defense
21
<PAGE>
of, or intervention in, any court proceeding arising from or related to this
Agreement or any other Loan Document; (v) upon the occurrence and during the
continuance of any Event of Default, the filing of a petition, complaint,
answer, motion or other pleading by Lender, or the taking of any action in
connection with this Agreement or any other Loan Document; (vi) upon the
occurrence and during the continuance of any Event of Default, any attempt to
collect from Borrower; and (vii) the receipt of any advice with respect to any
of the foregoing.
9.4 Indulgences Not Waivers. The failure, at any time or times hereafter,
-----------------------
to require strict performance by Borrower of any provision of this Agreement
shall not waive, affect or diminish any right of Lender thereafter to demand
strict compliance and performance therewith. Any suspension or waiver of an
Event of Default under this Agreement or any of the other Loan Documents shall
not suspend, waive or affect any other Event of Default under this Agreement or
any of the other Loan Documents, whether the same is prior or subsequent thereto
and whether of the same or of a different type. None of the undertakings,
agreements, warranties, covenants and representations of Borrower contained in
this Agreement or any of the other Loan Documents and no Event of Default under
this Agreement or any of the other Loan Documents shall be deemed to have been
suspended or waived by Lender, unless such suspension or waiver is by an
instrument in writing specifying such suspension or waiver and is signed by a
duly authorized representative of Lender and directed to Borrower.
9.5 Severability. Wherever possible, each provision of this Agreement or
------------
any other Loan Document shall be interpreted in such manner as to be effective
and valid under applicable law, but if any provision of this Agreement or any
other Loan Document shall be prohibited by or invalid under applicable law, such
provision shall be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of such agreement.
9.6 Cumulative Effect; Conflict of Terms. The provisions of the other
------------------------------------
Loan Documents are hereby made cumulative with the provisions of this Agreement.
Except as specifically otherwise provided in this Agreement or in any of the
other Loan Documents by specific reference to the applicable provision of this
Agreement, if any provision contained in this Agreement is in direct conflict
with, or inconsistent with, any provision in any of the other Loan Documents,
the provision contained in this Agreement shall govern and control.
9.7 Execution in Counterparts. This Agreement may be executed in any
-------------------------
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed to be an original
and all of which counterparts taken together shall constitute but one and the
same instrument.
9.8 Notices. Except as otherwise provided herein, all notices, requests
-------
and demands to or upon a party hereto to be effective shall be in writing, shall
be sent by certified or registered mail,
22
<PAGE>
return receipt requested), or by telecopier or delivered by hand or by a
recognized overnight courier service and, unless otherwise expressly provided
herein, shall be deemed to have been validly served, given or delivered when
delivered against receipt or, in the case of telecopy notice, when sent, or, in
the case of telex, when the appropriate answerback received, addressed as
follows:
(A) If to Lender:
News America Incorporated
1211 Avenue of the Americas
New York, NY 10036
Attention: Arthur M. Siskind, Esq.
With a copy to:
Squadron, Ellenoff, Plesent & Sheinfeld, LLP
551 Fifth Avenue
New York, NY 10176
Attention: Jeffrey W. Rubin, Esq.
(B) If to Borrower, at:
Fox Family Worldwide, Inc.
10960 Wilshire Boulevard
Los Angeles, CA 90024
Attention: Mel Woods
With a copy to:
Troop Meisinger Steuber & Pasich, LLP
10940 Wilshire Boulevard
Los Angeles, CA 90024
Attention: C.N. Franklin Reddick, III, Esq.
(C) If to Senior Representative, at:
Citicorp USA, Inc.
399 Park Avenue
New York, NY 10043
Attention: Andrew Sriubas, Vice President
With a copy to:
23
<PAGE>
Shearman & Sterling
599 Lexington Avenue
New York, NY 10022
Attention: William Hirschberg, Esq.
or to such other address as each party may designate for itself by like notice
given in accordance with this Section 9.8.
9.9 Demand. Nothing in this Agreement shall affect or abrogate the demand
------
nature of any portion of the Obligations expressly made payable on demand by
this Agreement or by any instrument evidencing same, and the occurrence of an
Event of Default shall not be a prerequisite for requiring payment of such
Obligations, except as provided for in this Agreement.
9.10 Entire Agreement; Headings. This Agreement, and the other Loan
--------------------------
Documents, together with all other instruments, agreements and certificates
executed by the parties in connection therewith or with reference thereto,
embody the entire understanding and agreement between the parties hereto and
thereto with respect to the subject matter hereof and thereof and supersede all
prior agreements, understandings and inducements, whether express or implied,
oral or written. Section headings herein are included for convenience of
reference only and shall not constitute a part of this Agreement for any other
purpose.
9.11 Governing Law; Consent To Forum. This Agreement, the Note and the
-------------------------------
other Loan Documents shall be governed by, and construed in accordance with, the
law of the State of New York applicable to contracts made and to be performed in
the State of New York without regard to conflicts of law principles. Any legal
action or proceeding with respect to this Agreement or any other Loan Document
may be brought in the courts of the State of New York or of the United States
for the Southern District of New York, and, by execution and delivery of this
Agreement, Borrower hereby irrevocably accepts in respect of its property,
generally and unconditionally, the jurisdiction of the aforesaid courts.
Borrower further irrevocably consents to the service of process out of any of
the aforementioned courts and in any such action or proceeding by the mailing of
copies thereof by registered or certified mail, postage prepaid, at its address
for notices contained in Section 9.8, such service to become effective ten (10)
days after such mailing. Nothing herein shall affect the right of Lender to
service of process in any other manner permitted by law or to commence legal
proceedings or otherwise proceed against Borrower in any other jurisdiction.
9.12 Right of Set-Off. Upon the occurrence and during the continuance of
----------------
any Event of Default, Lender may, and is hereby authorized to, at any time and
from time to time, without notice to Borrower (any such notice being expressly
waived by Borrower) and to the fullest extent permitted by law, and subject to
the rights of the Senior Agent and the Senior Lenders hereunder, to set off and
apply any and all deposits (general or special, time or demand, provisional or
final) at
24
<PAGE>
any time held and other indebtedness at any time owing by Lender to or for the
credit or the account of Borrower against any and all obligations of Borrower
now or hereafter existing under any Loan Document to the extent such obligations
have become due. Lender agrees to notify Borrower promptly after any such set-
off and application made by such Bank; provided that the failure to give such
notice shall not affect the validity of such set-off and application. The rights
of Lender under this Section 9.12 are in addition to the other rights and
remedies (including, without limitation, other rights of set-off) which Lender
may have.
9.13 No Party Deemed Drafter. Borrower and Lender agree that no party
-----------------------
hereto shall be deemed to be the drafter of this Agreement, and Borrower and
Lender, further agree that, in the event this Agreement is ever construed by a
court of law, such court shall not construe this Agreement or any provision of
this Agreement against any party hereto as the drafter of this Agreement.
9.14 Reinstatement; Certain Payments. If claim is ever made upon Lender
-------------------------------
for repayment or recovery of any amount or amounts received by Lender in payment
or on account of any of the Obligations under this Agreement, Lender shall give
prompt notice of such claim to Borrower, and if Lender repays all or part of
said amount by reason of (i) any judgment, decree or order of any court or
administrative body having jurisdiction over Lender or any of its property or
(ii) any good faith settlement or compromise of any such claim effected by
Lender with any such claimant, then and in such event, Borrower agrees that (a)
any such judgment, decree, order, settlement or compromise shall be binding upon
Borrower notwithstanding the cancellation of the Note or other instrument
evidencing the Obligations under this Agreement or the other Loan Documents or
the termination of this Agreement or the other Loan Documents and (b) it shall
be and remain liable to Lender hereunder for the amount so repaid or recovered
to the same extent as if such amount had never originally been received by
Lender.
9.15 Assignment. Lender may assign to one or more Persons all or a portion
----------
of its rights and obligations under this Agreement; provided, however, that,
without the prior written consent of Borrower, Lender may not assign its rights
and obligations under this Agreement to any Person who is not (a) an individual
who is a citizen or resident of the United States, (b) a corporation,
partnership or other entity created or organized in or under the laws of the
United States, any State or any political subdivision thereof, (c) an estate the
income of which is subject to United States Federal income taxation regardless
of its source or (d) a trust whose administration is subject to the primary
supervision of a United States court and which has one or more United States
fiduciaries who have the authority to control all substantial decisions of such
trust.
9.16 Confidentiality. Lender agrees to exercise all reasonable efforts to
---------------
keep any information delivered or made available by Borrower to it which has not
been publicly disclosed confidential from anyone other than persons employed or
retained by Lender who are or are expected to become engaged in evaluating,
approving, structuring or administering the Loan; provided, however, that
nothing herein shall prevent Lender from disclosing such information (i) to its
officers,
25
<PAGE>
directors, employees, agents, attorneys and accountants who have a need to know
such information in accordance with customary practices and who receive such
information having been made aware of the restrictions set forth in this
Section, (ii) upon the order of any court or administrative agency, (iii) upon
the request or demand of any regulatory agency or authority having jurisdiction
over Lender, (v) to the extent reasonably required in connection with any
litigation to which Lender, Borrower, or any Subsidiary or their respective
affiliates may be a party, (vi) to the extent reasonably required in connection
with the exercise of any remedy hereunder, (vii) to Lender's legal counsel and
independent auditors, and (viii) to any actual or proposed participant or
assignee of all or part of its rights hereunder which has agreed in writing to
be bound by the provisions of this Section 9.15.
IN WITNESS WHEREOF, this Agreement has been duly executed on the day and
year specified at the beginning hereof.
Borrower: FOX FAMILY WORLDWIDE, INC.
By: /s/ Mel Woods
------------------------------
Name: Mel Woods
----------------------
Title: President
----------------------
Lender: NEWS AMERICA INCORPORATED
By: /s/ Lawrence A. Jacobs
------------------------------
Name: Lawrence A. Jacobs
----------------------
Title: Senior Vice President
----------------------
Senior Representative: CITICORP USA, INC.
By: /s/ Judith Fishlow Minter
------------------------------
Name: Judith Fishlow Minter
------------------------
Title: Attorney-in-Fact
------------------------
26
<PAGE>
Exhibit A - Form of Note
- ---------
THIS NOTE AND THE OBLIGATIONS EVIDENCED HEREBY ARE
SUBORDINATED IN THE MANNER AND TO THE EXTENT SET FORTH IN
THE AMENDED AND RESTATED SUBORDINATED NOTE AGREEMENT (THE
"NOTE AGREEMENT"), DATED AS OF MAY __, 1998. EACH HOLDER OF
THIS NOTE, BY ITS ACCEPTANCE HEREOF, SHALL BE BOUND BY THE
PROVISIONS OF THE NOTE AGREEMENT.
SUBORDINATED PROMISSORY NOTE
----------------------------
No. A-1
$345,513,864.31 as of August 29, 1997
FOR VALUE RECEIVED, the undersigned, Fox Family Worldwide, Inc. f/k/a Fox
Kids Worldwide, Inc., a Delaware corporation, having an office at 10960 Wilshire
Boulevard, Los Angeles, CA 90024 ("Borrower"), hereby promises to pay to the
order of News America Incorporated, f/k/a News America Holdings, Incorporated, a
Delaware corporation (the "Lender"), having an office at 1211 Avenue of the
Americas, New York, NY 10036, or registered assigns, in lawful money of the
United States, by wire transfer in immediately available federal funds, the
principal amount of Three Hundred Forty Five Million Five Hundred Thirteen
Thousand Eight Hundred Sixty Four Dollars and Thirty One Cents
($345,513,864.31), loaned by Lender to Borrower pursuant to the Amendment and
Restated Subordinated Note Agreement dated as of May __, 1998 among Borrower,
Lender and Citicorp USA, Inc. (as amended and modified from time to time, the
"Note Agreement"), together with additions to such principal amount and interest
thereon as set forth in the Note Agreement, which interest shall accrue from and
after the date hereof on the outstanding principal amount of this Note, and such
principal amount and interest thereon shall be payable at such times as set
forth in the Note Agreement.
Lender is hereby authorized by Borrower to record on Schedule A to this
Note (or on a supplemental Schedule thereto) the amount of the Loan and the
amount of each payment or prepayment of principal thereof received by Lender, it
being understood, however, that failure to
27
<PAGE>
make any such notation shall not affect the rights of Lender or the obligations
of Borrower hereunder in respect of this Note. At Lender's option, Lender may
record such matters in their internal records rather than recording such matters
on such Schedule.
This Note is referred to in, and is issued pursuant to, the Note Agreement
and is entitled to all of the benefits of the Note Agreement and the Loan
Documents. All of the terms, covenants and conditions of the Note Agreement and
all other instruments evidencing the indebtedness hereunder (including, without
limitation, the Loan Documents), are hereby made a part of this Note and are
deemed incorporated herein in full. The Note Agreement, among other things,
provides for the acceleration of the then outstanding indebtedness hereunder
during the existence of an Event of Default, upon the terms and conditions
specified therein. All capitalized terms used herein, unless otherwise
specifically defined in this Note, shall have the meanings ascribed to them in
the Note Agreement. The Loan and all of the Obligations shall be subordinate to
the Senior Indebtedness, in the manner and to the extent set forth in the Note
Agreement. Each transferee of this Note (or any Note or Notes issued in
exchange or substitution therefor), by acceptance of this Note (or any Note or
Notes issued in exchange or substitution therefor), agrees to such
subordination.
To the fullest extent permitted by applicable law, Borrower, for itself and
its legal representatives, successors and assigns, expressly waives presentment,
demand, protest, notice of dishonor, notice of nonpayment, notice of maturity,
notice of protest, presentment for the purpose of accelerating maturity and
diligence in collection, and consents that Lender may (with the consent of
Borrower) extend the time for payment or otherwise modify the terms of payment
of any part or the whole of the debt evidenced hereby.
This Note shall be governed by, and construed and enforced in accordance
with, the laws of the State of New York, without regard to conflicts of laws
principles.
IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed as of
the date first above written.
FOX FAMILY WORLDWIDE, INC.
By: /s/ Mel Woods
-------------------------------------
Name: Mel Woods
Title: President
28
<PAGE>
Schedule A
----------
<TABLE>
<CAPTION>
Payments
-------------------- Unpaid Name of
Principal Person
Current Balance of Making
Date Amount Principal Interest Note Notation
- ---- ------ --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
</TABLE>
<PAGE>
EXHIBIT 12.1
FOX FAMILY WORLDWIDE, INC.
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
EIGHT MONTHS JUNE 30, 1997 JUNE 30, 1998
ENDED ------------- -------------
JUNE 30, 1996 ACTUAL ACTUAL
------------- ------------- -------------
<S> <C> <C> <C>
FIXED CHARGES
INTEREST EXPENSE, NET OF CAPITALIZED INTEREST 624,000 1,938,000 131,552,000
INTEREST CAPITALIZED DURING THE PERIOD 471,000 1,923,000 4,328,000
AMORTIZATION OF DEBT ISSUE COSTS 261,000 288,000 2,450,000
PORTION OF RENT EXPENSE CONSIDERED INTEREST 994,000 1,411,000 3,308,000
------------- ------------- ------------
2,350,000 5,560,000 141,638,000
EARNINGS
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 49,874,000 55,007,000 (21,327,000)
FIXED CHARGES, LESS CAPITALIZED INTEREST 1,879,000 3,637,000 137,309,000
------------ ------------- ------------
51,753,000 58,644,000 115,982,000
RATIO OF EARNINGS TO FIXED CHARGES 22.02 10.55 --
DEFICIENCY OF EARNINGS AVAILABLE TO COVER FIXED CHARGES 0 0 (25,656,000)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FOX FAMILY
WORLDWIDE, INC.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1998
<PERIOD-START> JUL-01-1996 JUL-01-1997
<PERIOD-END> JUN-30-1997 JUN-30-1998
<CASH> 36,877,000<F1> 90,313,000<F1>
<SECURITIES> 0 0
<RECEIVABLES> 93,763,000 191,690,000
<ALLOWANCES> (1,410,000) (1,594,000)
<INVENTORY> 235,575,000 453,608,000
<CURRENT-ASSETS> 0<F2> 0<F2>
<PP&E> 17,550,000 80,788,000
<DEPRECIATION> (8,629,000) (19,983,000)
<TOTAL-ASSETS> 412,401,000 2,516,024,000
<CURRENT-LIABILITIES> 0<F2> 0<F2>
<BONDS> 0 876,632,000
0 345,000,000
50,000,000 0
<COMMON> 1,000 16,000
<OTHER-SE> 82,686,000 30,380,000
<TOTAL-LIABILITY-AND-EQUITY> 412,401,000 2,516,024,000
<SALES> 307,820,000 664,458,000
<TOTAL-REVENUES> 307,820,000 664,458,000
<CGS> (180,381,000) (361,215,000)
<TOTAL-COSTS> (249,041,000) (544,985,000)
<OTHER-EXPENSES> (1,546,000) (6,798,000)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (2,226,000) (134,002,000)
<INCOME-PRETAX> 55,007,000 (21,327,000)
<INCOME-TAX> (14,567,000) (3,446,000)
<INCOME-CONTINUING> 40,440,000 (24,773,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 40,440,000 (24,773,000)
<EPS-PRIMARY> 2.53 (1.55)
<EPS-DILUTED> 2.53 (1.55)
<FN>
<F1>INCLUDES RESTRICTED CASH OF $8,000,000.
<F2>THE COMPANY HAS ELECTED TO PRESENT AN UNCLASSIFIED BALANCE SHEET.
</FN>
</TABLE>
