<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 333-12995
FOX FAMILY WORLDWIDE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4596247
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10960 WILSHIRE BOULEVARD
LOS ANGELES, CALIFORNIA 90024
(Address of principal executive offices)
Registrant's Telephone Number, Including Area Code: (310) 235-5100
FOX KIDS WORLDWIDE, INC.
Former name, address and fiscal year, if changed since last report
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: As of May 14, 1998, there
were 160,000 shares of Class A Common Stock outstanding and 15,840,000 shares of
Class B Common Stock outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOX FAMILY WORLDWIDE, INC.
(FORMERLY FOX KIDS WORLDWIDE, INC.)
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
Combined Consolidated
---------- ------------
June 30, March 31,
1997 1998
(unaudited)
---------- ------------
(In thousands)
<S> <C> <C>
Assets:
Cash and cash equivalents.................................................................... $ 28,877 $ 82,311
Restricted cash.............................................................................. 8,000 8,000
Accounts receivable, net..................................................................... 63,316 137,161
Amounts receivable from related parties...................................................... 29,037 35,364
Programming costs, less accumulated amortization............................................. 235,575 413,083
Property and equipment, at cost, less accumulated depreciation............................... 8,921 73,637
Deferred income taxes........................................................................ 17,651 35,981
Intangible assets, less accumulated amortization............................................. -- 1,646,052
Other assets, net............................................................................ 21,024 84,872
-------- ----------
Total assets................................................................................ $412,401 $2,516,461
======== ==========
Liabilities and stockholders' equity:
Accounts payable............................................................................. $ 19,481 $ 30,671
Accrued liabilities.......................................................................... 42,991 139,529
Deferred revenue............................................................................. 40,794 81,777
Accrued programming expenditures............................................................. 9,796 73,069
Accrued residuals and participations......................................................... 45,881 53,086
Income taxes payable......................................................................... 3,257 3,246
Deferred income taxes........................................................................ 1,250 11,981
Debt......................................................................................... 57,592 1,728,016
Amounts payable to related parties........................................................... 58,672 --
-------- ----------
Total liabilities........................................................................... $279,714 $2,121,375
Commitments and contingencies:
Series A 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, 1000 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 shares issued and outstanding (June 30, 1997);
160,000 shares issued and outstanding (March 31, 1998)................................... -- --
Class B Common Stock, $0.001 par value; 16,000,000 shares
authorized, 2 shares issued and outstanding (June 30, 1997);
15,840,000 shares issued and outstanding (March 31, 1998)................................ -- 16
Contributed capital....................................................................... 59,454 61,032
Cumulative translation adjustment......................................................... (803) (758)
Retained earnings (deficit)............................................................... 24,035 (10,204)
-------- ----------
Total stockholders' equity................................................................ 132,687 50,086
-------- ----------
Total liabilities and stockholders' equity.................................................. $412,401 $2,516,461
======== ==========
</TABLE>
See accompanying notes.
2
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FOX FAMILY WORLDWIDE, INC.,
(FORMERLY FOX KIDS WORLDWIDE, INC.)
STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED
MARCH 31, 1997 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1997 1998 1997 1998
combined consolidated combined consolidated
------------- ----------- ------------- ------------
(In thousands, except per share data) (In thousands, except per share data)
<S> <C> <C> <C> <C>
Net revenues....................................... $59,288 $153,441 $233,078 $486,412
Costs and expenses:
Production and programming....................... 38,331 79,660 135,133 274,957
Selling, general and administrative.............. 14,888 33,459 41,720 95,894
Fox Kids Network affiliate
participations................................. (976) (500) 6,097 (335)
Amortization of intangible assets................ -- 10,463 -- 27,899
------- -------- -------- --------
Operating income................................... 7,045 30,359 50,128 87,997
Equity in loss of unconsolidated affiliate......... 638 1,174 638 3,562
Other expense...................................... -- 122 -- 184
Interest expense................................... 716 37,972 2,244 96,360
------- -------- -------- --------
Income (loss) before provision for income
taxes............................................ 5,691 (8,909) 47,246 (12,109)
Provision (benefit) for income taxes.............. 1,042 ( 944) 12,557 1,459
------- -------- -------- --------
Net income (loss).................................. $ 4,649 $ (7,965) $ 34,689 $(13,568)
======== ======== ========
Net income (loss) attributable to common
shareholders..................................... $ 4,649 $(15,621) $ 34,689 $(34,239)
======= ======== ======== ========
Net income (loss) per common share -- basic and
diluted.......................................... $ .29 $ (.98) $ 2.17 $ (2.14)
======= ======== ======== =========
Weighted average shares outstanding -- basic and
diluted.......................................... 16,000 16,000 16,000 16,000
======= ======== ======== =========
</TABLE>
See accompanying notes.
3
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FOX FAMILY WORLDWIDE, INC.
(FORMERLY FOX KIDS WORLDWIDE, INC.)
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
MARCH 31, 1997 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Combined Consolidated
1997 1998
-------- ------------
(In thousands)
OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss)........................................................................... $ 34,689 $ (13,568)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating
activities:
Amortization of programming costs........................................................ 106,039 220,213
Depreciation............................................................................. 2,355 9,362
Amortization of intangible assets........................................................ -- 28,204
Cumulative translation adjustment........................................................ (67) 45
Equity in loss of unconsolidated affiliate............................................... 638 3,562
Non cash interest expense................................................................ -- 34,361
Changes in operating assets and liabilities:
Accounts receivable.................................................................. (6,149) (7,637)
Amounts receivable from related parties.............................................. 10,142 (5,817)
Additions to programming costs....................................................... (147,321) (260,135)
Other assets......................................................................... (1,838) (21,747)
Accounts payable and accrued liabilities............................................. 12,373 20,692
Accrued residuals and participations................................................. 8,988 6,731
Income taxes payable and deferred income taxes....................................... 9,732 12,847
Deferred revenue..................................................................... (31,721) 22,541
Accrued programming expenditures..................................................... (3,379) (17,153)
--------- -----------
Net cash (used in) provided by operating activities......................................... (5,519) 32,501
INVESTING ACTIVITIES
Purchase of property and equipment.......................................................... (2,421) (7,841)
Acquisition of TV10......................................................................... (8,550) (1,349)
Acquisition of International Family Entertainment, Inc., net of preferred stock............. -- (1,350,677)
Sale of marketable securities............................................................... -- 61,396
Increase in assets held for sale............................................................ -- (51,014)
--------- -----------
Net cash (used in) provided by investing activities......................................... (10,971) (1,349,485)
FINANCING ACTIVITIES
Proceeds from bank borrowings............................................................... 26,126 1,282,063
Payments on bank borrowings................................................................. (3,415) (836,753)
Dividends on preferred stock................................................................ -- (20,671)
Proceeds from issuance of Preferred Class A Members' interest............................... 10,000 --
Proceeds from NAHI Bridge Loan.............................................................. -- 345,514
Paydown on NAHI Bridge Loan................................................................. -- (250,819)
Issuance of Senior Notes.................................................................... -- 475,000
Issuance of Senior Discount Notes........................................................... -- 375,001
Issuance of common stock.................................................................... -- 10
Advances (to) from related parties.......................................................... (22,724) 1,073
--------- -----------
Net cash provided by financing activities................................................... 9,987 1,370,418
--------- -----------
(Decrease) Increase in cash and cash equivalents............................................ (6,503) 53,434
Cash and cash equivalents at beginning of period............................................ 16,044 28,877
--------- -----------
$ 9,541 $ 82,311
========= ===========
</TABLE>
See accompanying notes.
4
<PAGE>
FOX FAMILY WORLDWIDE, INC.
(FORMERLY FOX KIDS WORLDWIDE, INC.)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
Note 1--Preparation of Consolidated Financial Statements
The accompanying unaudited consolidated financial statements of Fox Family
Worldwide, Inc. (formerly Fox Kids Worldwide, Inc.) (the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three and nine
month periods ended March 31, 1998 are not necessarily indicative of the results
that may be expected for the year ended June 30, 1998.
The financial statements as of June 30, 1997 and for the three and nine
months ended March 31, 1997 reflect the combined financial statements of Saban
Entertainment, Inc., a Delaware corporation ("Saban"), FCN Holding, Inc., a
Delaware corporation ("FCN Holding") and Fox Kids Worldwide, LLC, a Delaware
limited liability ("LLC"). On August 1, 1997, the Company effected a
reorganization pursuant to which Saban, FCN Holding and the LLC became wholly
owned subsidiaries of the Company. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's registration statement on Form S-4 (File No. 333-12995), as amended,
filed with the Securities and Exchange Commission.
Note 2--Significant Accounting Policies
Net Income (Loss) per Common Share
The Company has adopted Statement of Financial Accounting Standards No. 128
(SFAS No. 128), Earnings Per Share, which is effective for annual and interim
financial statements issued for periods ending after December 15, 1997. In
accordance with this new statement, prior years' earnings per share ("EPS") is
restated, if applicable. SFAS No. 128 was issued to simplify the standards for
calculating EPS previously found in APB No. 15, Earnings Per Share. SFAS No.
128 replaces the presentation of primary EPS with a presentation of basic EPS.
The new rules also require dual presentation of basic and diluted EPS on the
face of the statement of operations for companies with a complex capital
structure. Basic EPS will exclude the dilutive effects of stock options and
warrants. Diluted EPS for the Company will reflect all potential dilutive
securities.
The per share data is based upon 16,000,000 shares deemed to be outstanding
during each period. Common equivalent shares, consisting of outstanding stock
options, are included in the calculation to the extent they are dilutive. For
the three and nine month periods ended March 31, 1998 (unaudited), the net loss
per common share gives effect to dividends on the Series A Preferred Stock
amounting to $7,656,000 and $20,671,000, respectively.
5
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Note 3--Programming Costs
Programming costs, less accumulated amortization, are comprised of the
following:
<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------------------------------------------------
(in thousands)
PROGRAMMING
COSTS, LESS
ACCUMULATED ACCUMULATED
COST AMORTIZATION AMORTIZATION
----------- ------------- -------------
<S> <C> <C> <C>
Children's programming............................ $ 860,582 $ 723,751 $136,831
Movies and mini-series/Family programming......... 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
=========== ============= =============
MARCH 31, 1998
-----------------------------------------------------------
(in thousands)
PROGRAMMING
COSTS, LESS
ACCUMULATED ACCUMULATED
COST AMORTIZATION AMORTIZATION
---------- ------------- -------------
<S> <C> <C> <C>
Children's programming............................ $1,018,497 $ 867,208 $151,289
Movies and mini-series/Family programming......... 370,515 175,918 194,597
Projects in production............................ 61,526 -- 61,526
Development....................................... 5,671 -- 5,671
----------- ------------- -------------
$1,456,209 $1,043,126 $413,083
=========== ============= =============
</TABLE>
Note 4--Acquisition of International Family Entertainment, Inc.
In September 1997, the Company completed the acquisition of International
Family Entertainment, Inc. ("IFE"). The following unaudited pro forma
information for the nine months ended March 31, 1997 and 1998 reflect the
results of the Company's consolidated operations as if the acquisition 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 been reported had the acquisition occurred at the beginning of each
period presented.
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
----------------------------------------------
1997 1998
-------------- --------------
<S> <C> <C>
(in thousands, except per share data)
Revenues.......................................................................... $ 466,533 $510,897
Net loss.......................................................................... (23,961) (27,081)
Net loss per common share -- basic and diluted.................................... (2.95) (3.15)
</TABLE>
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This filing contains statements that constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. The
words "expect", "estimate", "anticipate", "predict", "believe" and similar
expressions and variations thereof are intended to identify forward-looking
statements. These statements appear in a number of places in this filing and
include statements regarding the intent, belief or current expectations of the
Company, its directors or its officers with respect to, among other things: (a)
trends affecting the Company's financial condition or results of operations; (b)
the Company's programming of The Family Channel; (c) the impact of competition;
and (d) the expansion of the Company's international channels and certain other
operations. The readers of this filing 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
projected in this filing, including, without limitation, those risks and
uncertainties discussed under the headings "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," in
the Company's Registration Statement on Form S-4 as well as the information set
forth below. Factors that may affect the Company's results and financial
condition are discussed under the caption "Future Operating Results" below.
RESULTS OF OPERATIONS
Revenues increased 159% to $153.4 million and 109% to $486.4 million for the
three and nine month periods ended March 31, 1998, respectively, from $59.3
million and $233.1 million for the same prior year periods. The increase is
principally due to the inclusion of $79.0 million and $213.4 million of revenues
from IFE for the three and nine month periods, respectively. The Company
acquired a controlling interest in IFE on August 1, 1997. Revenues were also
positively impacted by the home video releases of "Casper: A Spirited
Beginning" and "Turbo: A Power Rangers Movie" during the nine months ended
March 31, 1998. Power Ranger revenues (including "Turbo: A Power Rangers
Movie") were $15.8 million and $40.6 million for the three and nine months ended
March 31, 1998 as compared to $16.8 million and $54.3 million for the three and
nine months ended March 31, 1997. As a result of the acquisition of IFE, the
Company expects that although Power Rangers will remain an important component
of the Fox Kids Network business, it will represent a smaller percentage of the
Company's overall revenues. The Company is currently in production of three new
direct to video movies for release in the first half of fiscal 1999, including a
sequel to "Casper: A Spirited Beginning," "Addams Family Reunion" and "Richie
Rich: A Christmas Wish".
Production and programming costs increased 108% to $79.7 million and 103% to
$275.0 million for the three and nine month periods ended March 31, 1998,
respectively, from $38.3 million and $135.1 million for the same prior year
periods. These increases were driven not only by the inclusion of IFE, but also
by significantly higher amortization rates on the home video releases referred
to above. Production and programming costs as a percentage of total revenues
decreased to 52% for the three month period ended March 31, 1998 from 65% for
the same period in 1997 and to 57% for the nine month period ended March 31,
1998 from 58% for the same period in 1997. These decreases are due primarily to
the inclusion of eight months of activity of IFE which has lower production and
programming costs as a percentage of revenues than the Company has historically
experienced. This trend is expected to continue.
Selling, general and administrative expenses increased 125% to $33.5 million
and 130% to $95.9 million for the three and nine month periods ended March 31,
1998, respectively, from $14.9 million and $41.7 million for same prior year
periods. The nine month increase of $54.2 million is due primarily to expenses
associated with the Company's international channels ($10.8 million) and the
inclusion of eight months of activity of IFE ($41.2 million). For the three
months ended March 31, 1998, the increase of $18.6 million is due principally to
expenses associated with the Company's international channels ($5.2 million) and
the inclusion of IFE activity ($13.3 million).
Fox Kids Network affiliate participation expense decreased 49% to $(0.5)
million and 105% to $(0.3) million for the three and nine month periods ended
March 31, 1998, respectively, from $(1.0) million and $6.1 million for the same
prior year periods. The decrease in both periods is due to lower net profits,
as defined in the affiliation agreements, resulting from lower ratings and
higher marketing costs for the Fox Kids Network.
In February 1998, the Company reached an agreement in principle with the
Board of Governors representing the non-Fox owned and operated Fox Kids Network
Affiliates (the "Affiliate Board") to modify the financial arrangements between
the Fox Kids Network and its 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
7
<PAGE>
the Fox Kids Network and (iii) increased allocation of advertising inventory for
approximately three and one-half years to be used principally for cross-
promotion. This agreement is subject to approval by the individual affiliated
stations. There can be no assurance that the individual affiliated stations will
approve the agreement.
Amortization of intangible assets results from the acquisition of IFE.
These intangible assets are being amortized over 40 years.
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.
Interest expense increased by $37.3 million and $94.1 million for the three
and nine month periods ended March 31, 1998, respectively, as compared to the
same periods in 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 three and nine month
periods ended March 31, 1998 reflects the non-deductibility for tax purposes of
amortization of intangible assets as well as foreign withholding taxes. The
effective tax rate, excluding the amortization of intangible assets, is 9% as
compared to 27% for the nine months ended March 31, 1997. The decrease is
largely due to interest on acquisition debt and losses generated by the
Company's international channels.
Due primarily to the amount of interest expense and amortization of
intangible assets, the Company does not expect to report net income for fiscal
1998.
LIQUIDITY AND CAPITAL RESOURCES
In September 1997, the Company completed the acquisition of IFE. The total
consideration for the acquisition of IFE was approximately $1.9 billion,
including assumption of debt, and was financed by $1.25 billion borrowed under a
credit facility dated September 4, 1997 between the Company and Citicorp USA,
Inc., among others (the "Old Credit Facility"), approximately $345 million
through the issuance of Series A Preferred Stock to Liberty IFE, Inc. and the
balance through a subordinated note issued to News America Holdings Incorporated
(the "NAHI Bridge Note"). In October 1997, the Company effected an offering
(the "Offering") of 10.25% Senior Discount Notes due 2007 and 9.25% Senior Notes
due 2007 (the "Debentures") resulting in net proceeds to the Company of
approximately $830 million. Of the net proceeds, $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 Old Credit Facility. Approximately $105 million
(including accreted interest) was outstanding under the NAHI Bridge Note at
March 31, 1998; however, no payments are due under the NAHI Bridge Note until
March 2008.
As part of the Offering, the Company amended the Old Credit Facility to
include a $710 million facility, comprised of a seven-year amortizing term loan
and a seven-year reducing revolving credit facility (the "Amended 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, after which the rate adjusts based on a leverage ratio. As of March 31,
1998, $90 million was available for additional borrowings under the Amended
Credit Facility.
As a result of the acquisition of IFE and the financing transactions
described above, the Company's principal liquidity requirements arise from
interest and preferred stock dividend payments. The Company also 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 acquisitions could result in additional
capital requirements. In addition to the foregoing, the Company expects to
incur expenditures of approximately $28 million over the next 12 months to
support its existing international channels as well as the launch of future
international channels. If the Company's agreement in principle with the
Affiliate Board is approved by the individual affiliated stations, commencing
July 1, 1998 the Company will be obligated to pay all of the affiliates an
aggregate of approximately $15 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) increased allocation of advertising
inventory for approximately three and one-half years to be used principally for
cross-promotion.
Net cash provided by operating activities of the Company during the nine
month period ended March 31, 1998 was $32.5 million.
8
<PAGE>
Net cash used in investing activities of the Company during the nine month
periods ended March 31, 1998 and March 31, 1997 was $1,349.5 million and $11.0
million, respectively. The Company's net cash flow used in investing activities
for the nine months ended March 31, 1998 primarily related to the acquisition of
IFE. The Company's net cash flow used in investing activities for the nine
months ended March 31, 1997 included $8.6 million incurred in connection with
the purchase in March 1997 of a 90% interest in TV10, a cable network in The
Netherlands.
Net cash provided by financing activities of the Company during the nine
month period ended March 31, 1998 and March 31, 1997 was $1,370.4 million and
$10.0 million, respectively. The financing activities for the nine months ended
March 31, 1998 related to bank and other borrowings in connection with the IFE
acquisition, while the financing activities for the nine months ended March 31,
1997 consisted of proceeds from bank borrowings and the issuance of Preferred
Class A Members' interest, less paydowns of related party borrowings.
The Company's total unrestricted cash balances at March 31, 1998 were $82.3
million.
The Company believes that the $90 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 at
least the next 12 months.
FUTURE OPERATING RESULTS
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.
In the United States, the Company currently competes through The Family
Channel and Fox Kids Network, and will compete through the Fox Family Channel
and Fox Kids Network, with the other broadcast television networks, public
television and cable television channels, such as USA Cable Network, TNT,
Lifetime, The Cartoon Network and Nickelodeon, for market acceptance of its
programming, viewership ratings and related advertising revenues. Further, the
Company vies for audiences with independent television stations, suppliers of
cable television programs, radio and other forms of media. The Company intends
to differentiate itself from its competition by cross-promoting programming
between the Fox Family Channel and the Fox Kids Network. As a result of
heightened competition for the children ages 2-11 category, the broadcast
networks suffered a decline in ratings of their children's programming during
the last two television seasons, and there can be no assurance that the decline
will not continue. In addition, increased competition for viewers in the cable
industry may result from technological advances, such as digital compression
technology, which allow cable systems to expand channel capacity; the further
deployment of fiber optic cable, which has the capacity to carry a much greater
number of channels than coaxial cable; and "multiplexing," in which
programming services offer more than one feed of their programming. The
increased number of choices available to the Fox Family Channel's and Fox Kids
Network's viewing audiences as a result of technological advances may lead to a
reduction in the Company's market share.
The Company competes for advertising revenue with the television programming
services described above, as well as with other national and international
television programming services, superstations, broadcast television networks,
local over-the-air television stations, radio and print media, in addition to
alternative delivery services that now exist or are expected to develop in the
future. 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.
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, with whom the Company must also compete
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.
The Company expects this competition to continue and intensify throughout 1998
and beyond. The Company's future operating results will depend, in part, on its
ability to compete in the development or acquisition of programming, for
advertising revenue, ratings and clearances.
The Company's future operating results also will depend to a considerable
extent on its ability to integrate IFE. The IFE acquisition expanded the
Company's operations into the cable television business, a business in which it
had never before
9
<PAGE>
operated. The cable television business is highly competitive, subject to
government regulation and at risk to technological change. 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. The Company intends to change the programming of The Family Channel and
there is no guarantee that the reprogrammed channel will retain its existing
viewers or attract new viewers. If the ratings of The Family Channel when
reprogrammed as the Fox Family Channel were to 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. 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 at The Family Channel currently
anticipated to be introduced in August 1998. In addition, the integration of
operations of IFE into the Company will require the dedication of management
resources. 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.
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. The Company
competes with major motion picture studios, such as Warner Bros. Television
Distribution, Inc. 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. 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. The Company
intends to continue to produce or acquire new properties, the success of which
depends entirely upon market acceptance. There can be no assurance as to the
continuing 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. While the Company is
committed to the ongoing development and acquisition of children's television
programming, the inability of the Company to develop or acquire new programs
that are capable of achieving commercial success could materially and adversely
affect the Company's results of operations and financial condition.
Currently, approximately 20% of the Company's revenues are derived 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 launch of channels throughout the world is
particularly capital intensive. In many markets a number of the Company's
competitors already have well established 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. 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. The impact of any of the foregoing factors could have an adverse
effect on the Company's financial condition and operating results.
While the Company can not predict what effect these various factors may have
on its financial results, the aggregate effect of these and other factors could
result in significant volatility in the Company's future performance.
10
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On May 11, 1998, the Company's exchange offer of registered
debentures for the privately placed Debentures issued in the
Offering in October 1997 expired. $616,670,000 of the 10.25% Senior
Discount Notes due 2007 and $473,500,000 of the 9.25% Senior Notes
due 2007 were exchanged.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
--------
10.1 Letter Amendment No. 2 to the Second Amended and Restated
Credit Agreement dated as of April 16, 1998.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
-------------------
None.
11
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FOX KIDS WORLDWIDE, INC.
Date: May 14, 1998 /s/ Mel Woods
--------------------------------------
Mel Woods
President, Chief Operating Officer and
Chief Financial Officer
12
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
ITEM EXHIBIT PAGE
- ---- ------- ----
<S> <C> <C>
10.1 Letter Amendment No. 2 to the Second Amended and Restated Credit
Agreement dated as of April 16, 1998.
27.1 Financial Data Schedule
</TABLE>
13
<PAGE>
EXHIBIT 10.1
EXECUTION COPY
LETTER AMENDMENT NO. 2
Dated as of April 16, 1998
To the banks, financial institutions
and other institutional lenders
(collectively, the "LENDERS") parties
to the Credit Agreement referred to
below, to Citicorp USA, Inc., as administrative
agent (the "ADMINISTRATIVE AGENT") for such
Lenders and the other Secured Parties referred
to therein, and to Citicorp Securities, Inc.,
Chase Securities, Inc. and BankBoston, N.A.,
as Co-Arrangers for the Facilities referred to therein.
Ladies and Gentlemen:
We refer to (a) the 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 "BORROWERS"), Fox Kids Holdings, LLC, a Delaware limited liability company,
and you and (b) the Fox Kids Guarantee dated October 28, 1997 (the "FOX KIDS
GUARANTEE") made by Fox Kids Worldwide, Inc., a Delaware corporation ("FOX
KIDS"), in favor of the Secured Parties referred to therein. Capitalized terms
not otherwise defined in this Letter Amendment shall have the same meanings as
specified therefor in the Credit Agreement.
We hereby request that the Lenders amend Section 8(f) of the Fox Kids
Guarantee solely to permit Fox Kids to amend its Restated Certificate of
Incorporation (the "FOX KIDS CHARTER AMENDMENT") in order to change its name
from "Fox Kids Worldwide, Inc." to "Fox Family Worldwide, Inc." In connection
with such request, we hereby agree that, without any further amendment or
modification of, or other action by any of the Loan Parties or the
Administrative Agent or any of the other Secured Parties, as of the date on
which this Letter Amendment becomes effective, each reference to "Fox Kids
Worldwide, Inc." or "Fox Kids" in the Credit Agreement, the Fox Kids Guarantee
or any other Loan Document shall mean and be a reference to "Fox Family
Worldwide, Inc."
This Letter Amendment shall become effective as of the date first above
written when, and only when, the following conditions precedent shall have been
satisfied:
(a) The Administrative Agent shall have received (i) counterparts of
this Letter Amendment executed by the Borrowers, Fox Kids and the Required
Lenders or, as to any of the Lenders, advice satisfactory to the
Administrative Agent that such Lender has
<PAGE>
2
executed this Letter Amendment, and (ii) the consent attached hereto
executed by each Loan Party (other than Fox Kids and the Borrowers).
(b) The Administrative Agent shall have received the following, in
each case in form and substance reasonably satisfactory to the Lenders and
in sufficient copies for each of the Lenders:
(i) Certified copies of the resolutions of the board of
directors of Fox Kids approving the Fox Kids Charter Amendment, and of
all documents evidencing necessary Governmental Authorizations, or
other necessary consents, approvals, authorizations, notices, filings
or actions, with respect to the Fox Kids Charter Amendment;
(ii) A certified copy of the amendment to the 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;
(iii) Financing statements (Form UCC-3) 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 and Assignment Agreement, covering the
Collateral of Fox Kids described therein, in each case completed in a
manner satisfactory to the Administrative Agent;
(iv) 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 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 in the Collateral of Fox Kids under the Pledge and
Assignment Agreement have been taken.
(c) 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 date on which this Letter Amendment shall
become effective, before and after giving effect to this Letter Amendment,
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).
(d) No event shall have occurred and be continuing, or shall result
from the effectiveness of this Letter Amendment, that constitutes a
Default.
The execution and delivery of this Letter Amendment by the Borrowers and Fox
Kids shall constitute a representation and warranty by each of them that all of
the statements set forth in clauses (b), (c) and (d) above are true on and as of
the date first above written and the date on which this Letter Amendment becomes
effective. This Letter Amendment is subject to the
<PAGE>
3
provisions of Section 9 of the Fox Kids Guarantee and Section 9.01 of the Credit
Agreement.
On and after the effectiveness of this Letter Amendment, 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 the
Credit Agreement and each of the other Loan Documents to "the Fox Kids
Guarantee", "thereunder", "thereof" or words of like import referring to the Fox
Kids Guarantee, shall mean and be a reference to the Fox Kids Guarantee, as
amended by this Letter Amendment.
The Fox Kids Guarantee and each other Loan Document, as specifically
amended by this Letter Amendment, 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, 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 or in respect of the Loan Documents, in
each case as amended by this Letter Amendment. The execution, delivery and
effectiveness of this Letter Amendment shall not, except as expressly provided
herein, operate as a waiver of any right, power or remedy of any Lender or the
Administrative Agent under any of the Loan Documents, nor constitute a waiver of
any provision of any of the Loan Documents.
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 Letter
Amendment, the consent attached hereto 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.
If you agree to the terms and provisions hereof, please evidence such
agreement by executing and returning at least one counterpart of this Letter
Amendment via facsimile, and at least six original counterparts of this Letter
Amendment via hand delivery or courier, in each case to the attention of Anna
Dodson Csuti, c/o Shearman & Sterling, 599 Lexington Avenue, New York, NY 10022-
6069, facsimile no. (212) 848-7179.
This Letter Amendment 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 Letter Amendment by telecopier shall be effective as
delivery of a manually executed counterpart of this Letter Amendment.
<PAGE>
4
This Letter Amendment 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 applicants of the laws
of any jurisdiction other than the State of New York.
Very truly yours,
FOX KIDS WORLDWIDE, INC., as
Guarantor
By /s/ Mel Woods
------------------
Name: Mel Woods
Title:
FCN HOLDING, INC., as Borrower
By /s/ Mel Woods
------------------
Name: Mel Woods
Title:
INTERNATIONAL FAMILY
ENTERTAINMENT, INC., as Borrower
By /s/ Mel Woods
------------------
Name: Mel Woods
Title:
SABAN ENTERTAINMENT, INC., as
Borrower
By /s/ Mel Woods
------------------
Name: Mel Woods
Title:
<PAGE>
5
Agreed as of the date first above written:
CITICORP USA, INC.
By /s/ Judith Fislow Minter
---------------------------------
Name: Judith Fislow Minter
Title: Attorney-in-fact
BANKBOSTON, N.A.
By /s/ David B. Herter
---------------------------------
Name: David B. Herter
Title: Managing Director
THE CHASE MANHATTAN BANK
By /s/ John P. Haltmaier
---------------------------------
Name: John P. Haltmaier
Title: Vice President
BANK OF AMERICA NT & SA
By /s/ Carl F. Salas
---------------------------------
Name: Carl F. Salas
Title: Vice President
THE BANK OF NOVA SCOTIA
By /s/ Vincent J. Fitzgerald, Jr.
---------------------------------
Name: Vincent J. Fitzgerald, Jr.
Title: Authorized Signatory
<PAGE>
6
FLEET BANK, N.A.
By /s/ Tanya M. Crossley
-------------------------
Name: Tanya M. Crossley
Title: Vice President
THE INDUSTRIAL BANK OF JAPAN,
LIMITED, LOS ANGELES AGENCY
By /s/ Steven Savoldelli
-------------------------
Name: Steven Savoldelli
Title: Vice President
NATIONSBANK OF TEXAS, N.A.,
By /s/ Pamela S. Kurtzman
-------------------------
Name: Pamela S. Kurtzman
Title: Vice President
TORONTO-DOMINION (TEXAS), INC.,
By /s/ Debbie A. Greene
-------------------------
Name: Debbie A. Greene
Title: Vice President
SOCIETE GENERALE, NEW YORK BRANCH
By /s/ Elaine Khalil
-------------------------
Name: Elaine Khalil
Title: Vice President
<PAGE>
7
THE BANK OF NEW YORK
By /s/ Stephen M. Nettler
-------------------------------
Name: Stephen M. Nettler
Title: Assistant Vice President
BANQUE NATIONALE DE PARIS
By /s/ Nuala Marley
-------------------------------
Name: Nuala Marley
Title: Vice President
By /s/ Brian M. Foster
-------------------------------
Name: Briam M. Foster
Title: Vice President
THE MITSUBISHI TRUST & BANKING
CORPORATION, LOS ANGELES AGENCY
By /s/ Yasushi Satomi
-------------------------------
Name: Yasushi Satomi
Title: Senior Vice President
LONG TERM CREDIT BANK OF JAPAN
By /s/ Hiro Negi
-------------------------------
Name: Hiro Negi
Title: Vice President
<PAGE>
8
FIRST HAWAIIAN BANK
By
--------------------------------
Name:
Title:
THE SUMITOMO BANK, LIMITED
By /s/ Goro Hirai
--------------------------------
Name: Goro Hirai
Title: Joint General Manager
CRESTAR BANK
By /s/ J.Eric Millham
--------------------------------
Name: J.Eric Millham
Title: Vice President
THE DAI-ICHI KANGYO BANK, LIMITED
By /s/ Nancy Stengel
--------------------------------
Name: Nancy Stengel
Title: Assistant Vice President
THE FUJI BANK, LIMITED, LOS ANGELES AGENCY
By /s/ Masahito Fukuda
--------------------------------
Name: Masahito Fukuda
Title: Joint General Manager
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS. (AMOUNTS IN THOUSANDS)
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1997
<PERIOD-START> JUL-01-1996 JUL-01-1997
<PERIOD-END> JUN-30-1997 MAR-31-1998
<CASH> 36,877<F1> 90,311<F1>
<SECURITIES> 0 0
<RECEIVABLES> 93,763 173,935
<ALLOWANCES> (1,410) (1,410)
<INVENTORY> 235,575 413,083
<CURRENT-ASSETS> 0<F2> 0<F2>
<PP&E> 17,550 91,628
<DEPRECIATION> (8,629) (17,991)
<TOTAL-ASSETS> 412,401 2,516,461
<CURRENT-LIABILITIES> 0<F2> 0<F2>
<BONDS> 0 886,341
0 345,000
50,000 0
<COMMON> 1 16
<OTHER-SE> 82,686 50,070
<TOTAL-LIABILITY-AND-EQUITY> 412,401 2,516,461
<SALES> 307,820 486,412
<TOTAL-REVENUES> 307,820 486,412
<CGS> (180,381) (274,957)
<TOTAL-COSTS> (249,041) (398,415)
<OTHER-EXPENSES> (1,546) (3,746)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (2,226) (96,360)
<INCOME-PRETAX> 55,007 (12,109)
<INCOME-TAX> (14,567) (1,459)
<INCOME-CONTINUING> 40,440 (13,568)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 40,440 (13,568)
<EPS-PRIMARY> 2.53<F3> (2.14)<F3>
<EPS-DILUTED> 2.53<F3> (2.14)<F3>
<FN>
<F1>INCLUDES RESTRICTED CASH OF $8,000
<F2>THE COMPANY HAS ELECTED TO PRESENT AN UNCLASSIFIED BALANCE SHEET
<F3>REPRESENTS EPS AFTER DEDUCTION OF DIVIDENDS ON PREFERRED STOCK
</FN>
</TABLE>
