<PAGE>
As filed with the Securities and Exchange Commission on March 12, 1998
REGISTRATION NO. 333-12995
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------
FOX KIDS WORLDWIDE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 7812 95-4596247
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
10960 WILSHIRE BOULEVARD
LOS ANGELES, CALIFORNIA 90024
(310) 235-5100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S
PRINCIPAL EXECUTIVE OFFICE)
-------------
MEL WOODS
PRESIDENT, CHIEF OPERATING OFFICER AND CHIEF FINANCIAL OFFICER
FOX KIDS WORLDWIDE, INC.
10960 WILSHIRE BOULEVARD
LOS ANGELES, CALIFORNIA 90024
(310) 235-5100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
-------------
WITH COPIES TO:
<TABLE>
<CAPTION>
<S> <C> <C>
ARTHUR M. SISKIND, ESQ. JEFFREY W. RUBIN, ESQ. RICHARD E. TROOP, ESQ.
THE NEWS CORPORATION LIMITED SQUADRON, ELLENOFF, PLESENT & LINDA GIUNTA MICHAELSON, ESQ.
1211 AVENUE OF THE AMERICAS SHEINFELD, LLP TROOP MEISINGER STEUBER & PASICH, LLP
NEW YORK, NEW YORK 10036 551 FIFTH AVENUE 10940 WILSHIRE BOULEVARD
(212) 852-7000 NEW YORK, NEW YORK 10176 LOS ANGELES, CALIFORNIA 90024
(212) 661-6500 (310) 824-7000
</TABLE>
-------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
-------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
-------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES
AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Registration Statement on Form S-4 is the third amendment to the
Company's Registration Statement on Form S-1 which was amended by Amendment No.
1 and Amendment No. 2 to Registration Statement on Form S-1.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE NOTES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE NOTES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+NOTES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MARCH 12, 1998
PROSPECTUS
FOX KIDS WORLDWIDE, INC.
OFFER FOR ANY AND ALL OUTSTANDING
9 1/4% SENIOR NOTES DUE 2007 AND
10 1/4% SENIOR DISCOUNT NOTES DUE 2007
IN EXCHANGE FOR, RESPECTIVELY,
9 1/4% SENIOR NOTES DUE 2007 AND
10 1/4% SENIOR DISCOUNT NOTES DUE 2007
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON , 1998, UNLESS EXTENDED .
Fox Kids Worldwide, Inc., a Delaware corporation (the "Company"), hereby
offers (the "Exchange Offer"), upon the terms and subject to the conditions set
forth herein and in the related Letter of Transmittal, to exchange up to
$475,000,000 aggregate principal amount of 9 1/4% Senior Notes Due 2007 (the
"Senior Notes") of the Company for a like amount of the privately placed 9 1/4%
Senior Notes Due 2007 (the "Old Senior Notes") of the Company issued on October
28, 1997, from the holders thereof (together with the holders of Senior Notes,
"Senior Noteholders") and to exchange up to $618,670,000 aggregate principal
amount at maturity of 10 1/4% Senior Discount Notes Due 2007 (the "Senior
Discount Notes") of the Company for a like amount of the privately placed 10
1/4% Senior Discount Notes Due 2007 (the "Old Senior Discount Notes") of the
Company issued on October 28, 1997, from the holders thereof (together with the
holders of Senior Discount Notes, "Discount Noteholders"). The Senior Notes and
the Senior Discount Notes have been registered under the Securities Act of
1933, as amended (the "Securities Act"), pursuant to a Registration Statement
of which this Prospectus is a part. The Old Senior Notes and the Old Senior
Discount Notes are referred to collectively herein as the "Old Notes" and the
Senior Notes and the Senior Discount Notes are referred to collectively herein
as the "Notes."
The Notes are being offered hereunder in order to satisfy the obligations of
the Company under two separate and substantially identical Registration Rights
Agreements with respect to the Senior Notes and the Senior Discount Notes,
respectively, each dated October 28, 1997 (together, the "Registration Rights
Agreement"), and each by and among the Company, Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Citicorp Securities, Inc.,
(cover continued on following page)
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 14 HEREIN FOR A DISCUSSION OF CERTAIN
RISKS THAT HOLDERS OF OLD NOTES SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE
OFFER AND AN INVESTMENT IN THE NOTES OFFERED HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MARCH , 1998.
<PAGE>
[INSIDE FRONT COVER]
Fox Kids Worldwide logo along with artwork of characters from various of the
Company's programs. The artwork includes characters from Power Rangers, Silver
Surfer, X-Men, Fantastic Four, Spider-Man, Teenage Mutant Ninja Turtles, Sweet
Valley High and Life With Louie.
<PAGE>
(cover continued from previous page)
Bear, Stearns & Co. Inc., Donaldson, Lufkin & Jenrette Securities Corporation,
and Morgan Stanley & Co. Incorporated (together the "Initial Purchasers").
Upon consummation of the Exchange Offer, certain rights under the Registration
Rights Agreement, including registration rights and the right to receive the
contingent increases in interest rates, will terminate, except under certain
circumstances. The Exchange Offer is designed to provide to Senior Noteholders
and Discount Noteholders (collectively, "Holders" or "Noteholders") an
opportunity to acquire the Notes which, unlike the Old Notes, are expected to
be freely transferable at all times, subject to state "blue sky" law
restrictions and provided that the Holder is not an "affiliate" of the Company
within the meaning of the Securities Act, and represents that the Notes are
being acquired in the ordinary course of such Holder's business and the Holder
is not engaged in, and does not intend to engage in, a distribution of the
Notes. With the exception of the freely transferable nature of the Notes, the
Notes are substantially identical to the Old Notes. See "The Exchange Offer--
Purpose of the Exchange Offer."
The Company will accept for exchange any and all validly tendered Old Notes
on or prior to 5:00 p.m., New York City time, on , 1998,
unless extended by the Company in its sole discretion (the "Expiration Date").
Tenders of the Old Notes made pursuant to the Exchange Offer may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date
unless previously accepted for exchange by the Company. The Exchange Offer is
not conditioned upon any minimum principal amount of the Old Notes being
tendered for exchange. However, the Exchange Offer is subject to certain
conditions which may be waived by the Company and to the terms and provisions
of the Registration Rights Agreement. In the event the Company terminates the
Exchange Offer and does not accept any Old Notes with respect to the Exchange
Offer, the Company will promptly return such Old Notes to the Holders thereof.
The Old Notes may be tendered for exchange only in integral multiples of
$1,000 principal amount at maturity. See "The Exchange Offer."
Any waiver, extension or termination of the Exchange Offer will be publicly
announced by the Company through a release to the Dow Jones News Service and
as otherwise required by applicable law or regulations.
The Notes will be senior unsecured obligations of the Company and will rank
pari passu in right of payment to all future subordinated indebtedness of the
Company. The Notes will not be guaranteed by any of the Company's subsidiaries
or any third parties (including affiliates of the Company). The Notes will be
effectively subordinated to all secured indebtedness of the Company and to all
existing and future indebtedness of the Company's subsidiaries. As of December
31, 1997, the Company and its subsidiaries had an aggregate of approximately
$1.7 billion of indebtedness outstanding, including the Notes, of which
approximately $641 million of indebtedness would have been effectively senior
to the Notes and the balance of which (other than the Notes) would have been
subordinated in right of payment to the Notes. See "Description of Other
Indebtedness" and "Description of the Notes."
Cash interest on the Senior Notes will accrue at a rate of 9 1/4% per annum
and will be payable semiannually in arrears on each May 1 and November 1,
commencing May 1, 1998. The Old Senior Discount Notes were issued at a
substantial discount from their principal amount. Accordingly, 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 accrue at
a rate of 10 1/4% per annum and will be payable semiannually in arrears on
each May 1 and November 1, commencing May 1, 2003; provided, however, that at
any time on or prior to November 1, 2002, the Company may make a Cash Interest
Election (as defined herein), in which case the outstanding principal amount
at maturity of each Senior Discount Note will on such interest payment date be
reduced to the Accreted Value (as defined herein) 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) will be payable with
respect to such Senior Discount Note on each interest payment date thereafter.
The Old Notes were sold by the Company on October 28, 1997 to the Initial
Purchasers in a transaction not registered under the Securities Act in
reliance upon an exemption from the registration requirements of the
Securities Act (the "Offering"). The Initial Purchasers subsequently placed
the Old Notes with qualified institutional buyers in reliance upon Rule 144A
promulgated under the Securities Act and with a limited number
i
<PAGE>
of accredited investors that agreed to comply with certain transfer
restrictions and other conditions. Accordingly, the Old Notes may not be
reoffered, resold or otherwise transferred in the United States unless
registered under the Securities Act or unless an applicable exemption from the
registration requirements of the Securities Act is available.
The Notes are 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 set forth
herein, plus accrued and unpaid interest thereon to the date of redemption. In
addition, on or prior to November 1, 2000, the Company may redeem up to 35% of
the originally issued aggregate principal amount of the Senior Notes at a
redemption price of 109.25% of the principal amount thereof, plus accrued and
unpaid interest thereon to the date of redemption, and 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 at the
redemption date of the Senior Discount Notes so redeemed (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 to
the redemption date), in each case with the net cash proceeds of one or more
Public Equity Offerings (as defined herein) or sales of Qualified Equity
Interests (as defined herein) to Strategic Equity Investors (as defined
herein); provided, however, that not less than 65% of the originally issued
principal amount of Senior Notes and 65% of the originally issued principal
amount at maturity of the Senior Discount Notes is outstanding immediately
after giving effect to such redemption.
Following the occurrence of a Change of Control (as defined herein), each
Holder will have the right to require the Company to purchase all or a portion
of such Holder's Notes at a purchase price equal to 101% of the aggregate
principal amount of the Senior Notes, plus accrued and unpaid interest thereon
to the date of purchase, and at a purchase price equal to 101% of the Accreted
Value of the Senior Discount Notes at the date of purchase (unless the date of
purchase is on or after the earlier to occur of November 1, 2002 or the Cash
Election Date in which case such purchase price shall be equal to 101% of the
aggregate principal amount at maturity thereof, plus accrued and unpaid
interest thereon to the date of purchase). The Company may not, however, have
sufficient funds upon a Change of Control to redeem the Notes at the premium,
or at all. See "Description of the Notes."
The Notes will be senior unsecured obligations of the Company entitled to
the benefits of the Indentures (as defined herein). The form and terms of the
Notes will be identical in all material respects to the form and terms of the
Old Notes except that the Notes will be registered under the Securities Act.
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding and will be entitled to all the rights and preferences, and will
be subject to all the limitations applicable thereto, under the Indentures
(except for those rights which terminate upon consummation of the Exchange
Offer). Following consummation of the Exchange Offer, any Holders of the Old
Notes will continue to be subject to the existing restrictions upon transfers
thereof, and the Company will have no further obligation to such Holders
(other than under certain limited circumstances) to provide for the
registration under the Securities Act of the Old Notes held by them. Following
completion of the Exchange Offer, none of the Notes will be entitled to the
contingent increase in interest rate provided pursuant to the Indentures, the
Registration Rights Agreement and the Old Notes. See "The Exchange Offer."
The Company is making the Exchange Offer in reliance on the position of the
staff of the Securities and Exchange Commission (the "Commission") as set
forth in no-action letters issued to third parties in other transactions.
However, the Company has not sought its own no-action letter and there can be
no assurance that the staff of the Commission would make a similar
determination with respect to the Exchange Offer as in such other
circumstances. Based on those interpretations by the staff of the Commission,
the Company believes that the Notes issued pursuant to the Exchange Offer in
exchange for the Old Notes may be offered for resale, resold and otherwise
transferred by any Holder thereof (other than broker-dealers, as set forth
below, and any such Holder that is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery requirements of the Securities Act,
provided that such Notes are acquired in the ordinary course of such Holder's
business and that such Holder is not participating, (cover continued from
previous page)
ii
<PAGE>
(cover continued from previous page)
does not intend to participate and has no arrangement or understanding with
any person to participate, in the distribution of such Notes. Any Holder who
participates in the Exchange Offer with the intention to participate, or for
the purpose of participating, in a distribution of the Notes may not rely upon
the position of the staff ofthe Commission as set forth in these no-action
letters and, in the absence of an exemption therefrom, must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any secondary resale transaction, and any such secondary
resale transaction must be covered by an effective registration statement
containing the selling securityholder information required by Item 507 of
Regulation S-K promulgated under the Securities Act. Holders of Old Notes
wishing to accept the Exchange Offer must represent to the Company in the
Letter of Transmittal that such conditions have been met.
Each broker-dealer (other than an affiliate of the Company) that receives
the Notes for its own account pursuant to the Exchange Offer must acknowledge
that it acquired the Old Notes as the result of market-making activities or
other trading activities and will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such
Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act. This Prospectus,
as it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of Notes received in exchange for Old
Notes where such Old Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Company has agreed
that, for a period of 90 days after the Expiration Date, it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution." Any broker-dealer who is an affiliate of
the Company may not participate in the Exchange Offer and may not rely on the
no-action letters referred to above and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction. See "The Exchange Offer."
The Notes constitute new issues of securities with no established trading
market. Although the Old Notes have been approved for trading in The Private
Offerings, Resale and Trading through Automatic Linkages ("PORTAL") market of
The Nasdaq Stock Market, Inc., there has been no public market for the Old
Notes and it is not currently anticipated that an active public market for the
Notes will develop. The Company does not intend to apply for the listing of
the Notes on any securities exchange or to seek approval for quotation through
any automated quotation system. The Initial Purchasers have advised the
Company that each of the Initial Purchasers currently intends to make a market
in the Notes; however, none are obligated to do so and any market-making may
be discontinued by any Initial Purchaser at any time without notice.
Accordingly, no assurance can be given as to the liquidity or the trading
market for the Notes. The Notes will settle through the book-entry facilities
of The Depository Trust Company. See "Description of the Notes."
This Prospectus, together with the Letter of Transmittal, is being sent to
all registered holders of the Old Notes as of , 1998. As of such date,
there was one registered Holder of the Old Senior Notes and one registered
Holder of the Old Senior Discount Notes.
The Company will not receive any proceeds from the Exchange Offer. No
dealer-manager is being used in connection with the Exchange Offer. See "Use
of Proceeds" and "Plan of Distribution."
iii
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(cover continued from previous page)
FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS CONTAINS STATEMENTS WHICH CONSTITUTE FORWARD-LOOKING
STATEMENTS. THESE STATEMENTS APPEAR IN A NUMBER OF PLACES IN THIS PROSPECTUS
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.
PROSPECTIVE INVESTORS 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 PROSPECTUS, INCLUDING, WITHOUT LIMITATION, THE
INFORMATION UNDER "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AND "BUSINESS" IDENTIFIES
IMPORTANT FACTORS THAT COULD CAUSE SUCH DIFFERENCES.
AVAILABLE INFORMATION
The Company has filed with the Commission a registration statement on Form
S-1 which has been amended by this registration statement on Form S-4 relating
to the Notes offered hereby (together with all amendments, exhibits, schedules
and supplements thereto, the "Registration Statement") under the Securities
Act. This Prospectus, which constitutes a part of the Registration Statement,
does not contain all of the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information with respect to the
Company, the Exchange Offer and the Notes, reference is hereby made to the
Registration Statement. Statements contained in this Prospectus as to the
contents of any contract, agreement or other document referred to accurately
describe all material terms so referred to, but are not necessarily a complete
description of the contents of any such contract, agreement or other document.
The Registration Statement and the exhibits and schedules thereto and any
periodic reports or other information filed by the Company pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), may be
inspected without charge and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices at Seven World Trade
Center, Suite 1300, New York, New York 10048 and at Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
of such materials can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, Washington, D.C. 20549, at prescribed rates.
The Commission maintains a website at http://www.sec.gov that contains
reports, proxy and information statements and other information filed
electronically with the Commission.
Upon effectiveness of the Registration Statement, the Company will be
subject to the reporting requirements of Section 15(d) the Exchange Act, and
in accordance therewith, the Company will initially be required to file
periodic reports and other information with the Commission. If the Company
ceases to be subject to the informational requirements of the Exchange Act,
the Company will be required under the Indentures to continue to file with the
Commission the annual and quarterly reports, information, documents or other
reports, including, without limitation, reports on Forms 10-K, 10-Q and 8-K,
which would be required pursuant to the informational requirements of the
Exchange Act. The Company will also furnish such other reports as may be
required by law. In addition, for so long as any of the Notes are restricted
securities within the meaning of Rule 144(a)(3) under
iv
<PAGE>
the Securities Act, the Company has agreed to make available to any
prospective purchaser of the Notes or beneficial owner of the Notes, in
connection with any sale thereof, the information required by Rule 144(d)(4)
under the Securities Act.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS OF OLD NOTES FOR EXCHANGE FROM, HOLDERS IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE
HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED STATUTES WITH
THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY
REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A
FINDING BY THE SECRETARY OF STATE OF NEW HAMPSHIRE THAT ANY DOCUMENT FILED
UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT
NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A
TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE
MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON,
SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY
PROSPECTIVE PURCHASER, CUSTOMER, OR CLIENT, ANY REPRESENTATION INCONSISTENT
WITH THE PROVISIONS OF THIS PARAGRAPH.
----------------
Mighty Morphin Power Rangers, Power Rangers and Saban are registered
trademarks of Saban Entertainment, Inc. and Saban International N.V. Big Bad
BeetleBorgs, BeetleBorgs Metallix, Breaker High, Jim Knopf, Power Rangers In
Space, Power Rangers Zeo, Power Rangers Turbo, Princess Sissi, Saban's
Adventures of Oliver Twist, Space Goofs, The Why Why Family, Walter Melon and
Wunschpunsch are trademarks of Saban Entertainment, Inc. and Saban
International N.V. Bobby's World, The Tick, Life With Louie, Eek! Stravaganza
and Eek! The Cat are trademarks of Fox Children's Network, Inc. The Family
Channel and International Family Entertainment are registered U.S. service
marks of International Family Entertainment, Inc. All other trademarks and
trade names referred to in this Prospectus are the property of their
respective owners.
v
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SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial data, including
the financial statements and notes thereto, included elsewhere in this
Prospectus. Unless otherwise indicated herein, the term the "Company" refers
collectively to Fox Kids Worldwide, Inc. and its subsidiaries. All references
in this Prospectus to ratings refer to ratings compiled and published by
Nielsen Media Research ("Nielsen").
THE COMPANY
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) Saban
Entertainment, Inc. ("Saban"), whose library of over 5,400 half-hours of
completed and in-production children's programming is among the largest in the
world, (ii) International Family Entertainment, Inc. ("IFE"), which operates
The Family Channel, a leading basic cable television network that provides
family-oriented entertainment programming in the United States, reaching
approximately 95% of all cable and satellite television households, (iii) the
Fox Kids Network--the top-rated children's (ages 2-11) oriented broadcast
television network in the United States and (iv) a growing portfolio of Fox
Kids branded cable and direct-to-home ("DTH") satellite channels operating in
approximately 25 countries worldwide. By combining one of the world's largest
children's programming libraries with a widely distributed cable platform, a
top-rated broadcast network and the Fox Kids branded international channels,
the Company has the ability to manage 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 finalized the
acquisition of IFE (the "IFE Acquisition"), whose principal business is The
Family Channel. The IFE Acquisition provides the Company with several strategic
advantages, including (i) a widely distributed cable platform, which reaches
approximately 71 million homes, providing an effective means for more vigorous
competition with other children's- and family-oriented cable services, (ii) an
additional outlet for the Company's existing children's programming library,
(iii) increased awareness in the Company's primary target market (children ages
2-11) through expanded hours, increased brand exposure and additional licensing
and merchandising opportunities and (iv) cross-promotional opportunities with
the Fox Kids Network.
The Company 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, X-Men, Goosebumps and Bobby's World, 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
shows for each of the 1996-1997 and the 1997-1998 broadcast seasons, including
Power Rangers, which since shortly after its launch in 1993 has been the
highest rated children's weekday strip broadcast television program in the
United States among boys ages 2-11. The Company generally retains worldwide
rights to its brands, and currently has approximately 375 licensees worldwide,
including toy companies Bandai, Playmates and Tiger. 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 programming over terrestrial broadcast services in
most major television markets throughout the world.
1
<PAGE>
While maintaining the family image and general entertainment format of the
channel, the Company intends to reprogram The Family Channel in August 1998 as
the "Fox Family Channel" with a new schedule, look, marketing campaign and
logo. From 6 a.m. to 6 p.m., the Fox Family Channel will carry a total of 76.5
hours of weekly programming targeted principally to children. From 6 p.m. to 11
p.m., the Fox Family Channel will broadcast programming intended to appeal to
the entire family and will carry advertising to be sold on the basis of adult
demographics. Programming will be selected from the Company's existing library,
new original productions produced or co-produced by the Company and original
and library product licensed from independent suppliers.
The Company also owns and operates the Fox Kids Network, the leading U.S.
children's broadcast television network, 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 only in its time period during 20 consecutive quarterly
"sweeps" periods through November 1997. In February 1998, the Fox Kids Network
finished first in the Monday through Friday quarterly "sweeps" and second in
the Saturday only quarterly "sweeps", just behind ABC. According to Nielsen,
during the 1996-1997 broadcast season, approximately 19 million children--50%
of all children (ages 2-11) in the United States--watched the Fox Kids Network
at least once each month. 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 advertiser to children.
To capitalize on the Company's extensive library of children's programming,
since 1996 the Company has launched Fox Kids branded DTH satellite and cable
channels in approximately 25 countries throughout Europe and Latin America. The
Company intends to leverage its relationship with News Corp., which has
significant equity interests in cable and satellite services in most major
international markets, to further its international presence. For example,
since October 1996, the Company has operated a Fox Kids branded channel as part
of News Corp.'s 40%-owned British Sky Broadcasting Group Plc's ("BSkyB") Sky
Multi-Channels package, which through DTH currently reaches 3.5 million viewers
in the United Kingdom and the Republic of Ireland.
The Company intends to continue to increase its presence in the children's
and family television entertainment business, with the goal of becoming the
leading worldwide producer, broadcaster and distributor of children's and
family television programming.
The Company intends to focus on the following strategies to achieve its
objective:
. Capitalize on U.S. Cable Platform. While maintaining the family image and
general entertainment format of the channel, the Company plans to
reprogram The Family Channel as the Fox Family Channel in August 1998
with a new schedule, image and promotional campaign intended to enhance
ratings among the approximately 71 million subscribers of The Family
Channel. The Fox Family Channel will feature children's programming seven
days per week during the daytime hours and family-oriented programming
during prime time. The Company also currently has plans to add original
series to The Family Channel's prime time schedule and to double the
number of original prime time movies premiering annually on the Fox
Family Channel from the current level of approximately 12 to 24 or more
original features. The Company believes that the availability of original
and exclusive features should enhance ratings, improve demographics and
build audience loyalty to the Fox Family Channel.
. Continue to Strengthen U.S. Broadcasting Operations. The Company strives
to maintain and improve the ratings, reach and penetration of its U.S.
broadcasting network, the Fox Kids Network. The Fox Kids Network is the
top-rated children's-oriented broadcast television network, currently
reaching approximately 97% of the television households in the United
States. The Company plans to improve its ratings for the Fox Kids Network
by continuing to develop, acquire or license quality programming which is
attractive to children. The Company, which has created such "hit"
programs as the Power Rangers
2
<PAGE>
and Bobby's World, currently owns most of the underlying rights to seven
of the 14 different programs broadcast on the Fox Kids Network and will
strive to increase the number of its owned programs broadcast.
. Develop Strong Branded Characters and Properties. The Company intends to
continue to create and develop new entertainment properties with
potential franchise value and to build on its existing and widely
recognized institutional and programming brands in order to increase
viewership on its networks and maximize revenue from the licensing and
merchandising of its branded characters and properties. Some of the
Company's programming, such as the Power Rangers, have already achieved
franchise status, and high consumer awareness should provide
opportunities to generate revenues from multiple sources on a long-term
basis. The Company intends to capitalize on the relationships it has
built with major retailers, toy companies and more than 500 licensees
worldwide to exploit the merchandising and other ancillary revenue
potential of its entertainment properties.
. Continue to Develop and Produce Cost-Effective Programming. The Company
intends to continue its practice of obtaining contractual upfront
commitments from networks, independent television stations, international
broadcasters and merchandisers prior to commencing production. The
Company also intends to continue to produce programming in a cost-
effective manner while maintaining control over critical parts of the
production process to ensure continued high quality.
. Launch Additional International Channels. The Company believes that
significant expansion opportunities exist in the international television
markets, where the children's market has been relatively underserved.
With its library of over 5,400 half-hour episodes of completed and in-
production children's programming, many of which meet the local content
requirement of various European countries, the Company intends to focus
significant resources on the expansion of its international operations.
The Company has an important strategic advantage through its relationship
with News Corp., whose equity interests in international television
distribution platforms and reputation throughout the world have been
helpful in securing carriage agreements on those platforms. The Company
intends to expand the Fox Kids Network globally by launching additional
Fox Kids branded cable and DTH satellite channels targeting children in
many major international territories. The Company's objective is to
create synergies across the base of these channels and thereby reduce
programming costs while marketing and localizing the channels to
distinguish Fox Kids from its competitors.
The principal executive offices of the Company are located at 10960 Wilshire
Boulevard, Los Angeles, California 90024. The Company's telephone number at
such address is (310) 235-5100.
FINANCING PLAN
The purpose of the Offering was to repay $615 million of the $1.25 billion
borrowed under a Credit Agreement dated September 4, 1997, between the Company
and Citicorp USA, Inc. ("Citibank"), among others (the "Old Credit Facility"),
and to repay $215 million of the $345.5 million principal amount of the
subordinated note issued to News America Holdings Incorporated ("NAHI") on
September 4, 1997 (the "NAHI Bridge Note"). All of this indebtedness was
incurred in connection with the IFE Acquisition. Upon consummation of the
Offering and the application of the net proceeds therefrom, there was
approximately $635 million of indebtedness under the Amended Credit Facility
(as defined below) and approximately $94.8 million remaining under the NAHI
Bridge Note, which also reflects the reduction of $35.7 million from a portion
of the net proceeds received on the sale of the Company's equity stake in
Flextech plc (the "Flextech Transaction"). In connection with the Offering, the
Old Credit Facility was amended to allow, among other things, the repayment of
a portion of the NAHI Bridge Note. The Amended Credit Facility consists of a
$710 million facility, comprised of a seven-year amortizing term loan and a
seven-year reducing revolving credit facility (the "Amended Credit Facility").
See "Description of Other Indebtedness," and "Business--Acquisition of
International Family Entertainment, Inc."
3
<PAGE>
THE OFFERING
The Company consummated the Offering on October 28, 1997. The Old Notes were
sold to the Initial Purchasers in reliance upon an exemption from the
registration requirements of the Securities Act. The net proceeds to the
Company from the Offering were used to repay $615 million of the $1.25 billion
borrowed under the Old Credit Facility and to repay $215 million of the $345.5
million principal amount of the NAHI Bridge Note.
THE EXCHANGE OFFER
The Notes Offered........... $475,000,000 aggregate principal amount of 9 1/4%
Senior Notes due 2007.
$618,670,000 aggregate principal amount at
maturity of 10 1/4% Senior Discount Notes due
2007. The yield to maturity on the Senior
Discount Notes is 10 1/4% (computed on a semi-
annual bond equivalent basis), calculated from
October 28, 1997. See "Certain United States
Federal Income Tax Considerations."
Maturity.................... November 1, 2007.
The Exchange Offer.......... Pursuant to the Exchange Offer, the Notes are
being offered in exchange for a like principal
amount of the Old Notes. The Old Notes may be
exchanged only in integral multiples of $1,000
principal amount at maturity. The issuance of the
Notes is intended to satisfy obligations of the
Company contained in the Registration Rights
Agreement. Upon consummation of the Exchange
Offer, certain rights under the Registration
Rights Agreement, including registration rights
and the right to receive the contingent increases
in interest rates, will terminate, except under
certain limited circumstances. As of ,
1998, there was one registered Holder of the Old
Senior Notes and one registered Holder of the Old
Senior Discount Notes. On that date, $475,000,000
aggregate principal amount of Old Senior Notes
were outstanding and $618,670,000 aggregate
principal amount at maturity of Old Senior
Discount Notes were outstanding. See "The
Exchange Offer."
The Holders of the Old Notes whose Old Notes are
not tendered and accepted in the Exchange Offer
will continue to hold their Old Notes and will be
entitled to all the rights and preferences
(except for those rights which terminate upon
consummation of the Exchange Offer) and will be
subject to all the limitations applicable thereto
under the Indentures governing the Old Notes and
the Notes, each dated as of October 28, 1997, and
each between the Company and The Bank of New
York, as trustee (together the "Indentures").
Following consummation of the Exchange Offer, the
holders of Old Notes will continue to be subject
to the existing restrictions upon transfer
thereof, and the Company will have no further
obligation to such holders (other than under
certain limited circumstances) to provide for the
registration under the Securities Act of the Old
Notes held by them. The Notes will not be
entitled to certain contingent increases in
interest rates which were available under the Old
Notes if the Company failed to timely file this
Registration Statement.
4
<PAGE>
Resale...................... Based on interpretations by the staff of the
Commission set forth in no-action letters issued
to third parties, the Company believes the Notes
issued pursuant to the Exchange Offer in exchange
for the Old Notes may be offered for resale,
resold and otherwise transferred by any Holder
(other than broker-dealers, as set forth below,
and any such Holder that is an "affiliate" of the
Company within the meaning of Rule 405
promulgated under the Securities Act) without
compliance with the registration and prospectus
delivery requirements of the Securities Act,
provided that such Notes are acquired in the
ordinary course of such Holder's business and
that such Holder is not participating, does not
intend to participate, and has no arrangement or
understanding with any person to participate, in
the distribution of such Notes. Any Holder of Old
Notes who tenders in the Exchange Offer with the
intention to participate, or for the purpose of
participating, in a distribution of the Notes may
not rely upon such interpretations by the staff
of the Commission and, in the absence of an
exemption therefrom, must comply with the
registration and prospectus delivery requirements
of the Securities Act in connection with any
secondary resale transaction, and any such
secondary resale transaction must be covered by
an effective registration statement containing
the selling security holder information required
by Item 507 of Regulation S-K promulgated under
the Securities Act. Failure to comply with these
requirements in such instance may result in the
Holder incurring liabilities under the Securities
Act for which the Holder is not indemnified by
the Company. Each broker-dealer (other than an
affiliate of the Company) that receives Notes for
its own account pursuant to the Exchange Offer
must acknowledge that it will deliver a
prospectus in connection with any resale of such
Notes. The Letter of Transmittal states that by
so acknowledging and by delivering a prospectus,
a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the
Securities Act. The Company has agreed that, for
a period of 90 days after the Expiration Date, it
will make this Prospectus available to any
broker-dealer for use in connection with any such
resale. See "Plan of Distribution." Any broker-
dealer who is an affiliate of the Company may not
participate in the Exchange Offer, may not rely
on the no-action letters referred to above and
must comply with the registration and prospectus
delivery requirements of the Securities Act in
connection with a secondary resale transaction.
See "The Exchange Offer."
Expiration Date............. The Exchange Offer will expire at 5:00 p.m., New
York City time, on , 1998 (20 business
days after the Exchange Offer documents are
mailed to the Holders), unless extended by the
Company in its sole discretion, in which case the
term "Expiration Date" shall mean the latest date
and time to which the Exchange Offer is extended.
Any extension, if made, will be publicly
announced through a release to the Dow Jones News
Service and as otherwise required by applicable
law or regulations.
5
<PAGE>
Conditions to the Exchange
Offer....................... The Exchange Offer is subject to certain
conditions, any of which may be waived by the
Company. See "The Exchange Offer--Conditions of
the Exchange Offer." The Exchange Offer is not
conditioned upon any minimum principal amount of
the Old Notes being tendered for exchange.
Procedures for Tendering
the Old Notes.............. Brokers, dealers, commercial banks, trust
companies and other nominees who hold the Old
Notes through The Depository Trust Company
("DTC") may effect tenders by book-entry transfer
in accordance with DTC's Automated Tender Offer
Program ("ATOP"). The Holders of Old Notes
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
are urged to contact such record holder promptly
if they wish to tender the Old Notes. In order
for the Old Notes to be tendered by a means other
than by book-entry transfer, a Holder of the Old
Notes must complete, sign and date the Letter of
Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver the
Letter of Transmittal, or a facsimile thereof,
together with such Old Notes and any other
documents required by the Letter of Transmittal
to The Bank of New York, the Exchange Agent, at
the address set forth herein and therein. By
executing a Letter of Transmittal, a Holder will
represent to the Company that, among other
things, the Notes acquired pursuant to the
Exchange Offer are being obtained in the ordinary
course of business of the person receiving such
Notes, whether or not such person is the Holder,
that neither the Holder nor any such other person
has an arrangement or understanding with any
person to participate in the distribution of such
Notes, if the Holder is not a broker-dealer, or
is a broker-dealer but will not receive the Notes
for its own account in exchange for the Old
Notes, neither the Holder nor any such other
person is engaged in or intends to participate in
the distribution of such Notes and that neither
the Holder nor any such other person is an
"affiliate" of the Company within the meaning of
Rule 405 promulgated under the Securities Act.
See "The Exchange Offer--Terms of the Exchange
Offer--Procedures for Tendering Old Notes" and
"The Exchange Offer--Terms of the Exchange
Offer--Guaranteed Delivery Procedures."
Guaranteed Delivery
Procedures................. The Holders of the Old Notes who wish to tender
their Old Notes and whose Old Notes are not
immediately available or who cannot deliver their
Old Notes, the Letter of Transmittal or any other
documents required by such Letter of Transmittal
to the Exchange Agent prior to the Expiration
Date, must tender their Old Notes according to
the guaranteed delivery procedures set forth in
"The Exchange Offer--Terms of the Exchange
Offer--Guaranteed Delivery Procedures."
6
<PAGE>
Acceptance of the Old Notes
and Delivery of the
Notes...................... Subject to certain conditions (as described more
fully in "The Exchange Offer--Conditions of the
Exchange Offer"), the Company will accept for
exchange any and all Old Notes which are properly
tendered in the Exchange Offer and not withdrawn,
prior to 5:00 p.m., New York City time, on the
Expiration Date. The Notes issued pursuant to the
Exchange Offer will be delivered as promptly as
practicable following the Expiration Date.
Withdrawal Rights........... Except as otherwise provided herein, tenders of
the Old Notes may be withdrawn at any time prior
to 5:00 p.m., New York City time, on the
Expiration Date. See "The Exchange Offer--Terms
of the Exchange Offer."
Taxation.................... There will be no United States federal income tax
consequences to a U.S. Holder exchanging an Old
Note for a Note. Each Note will be treated as
having been issued at the time the Old Note
exchanged therefor was originally issued, and
therefore a U.S. Holder will have the same
adjusted basis and holding period in the Note as
it had in the Old Note immediately before the
exchange. See "Certain United States Federal
Income Tax Considerations."
Exchange Agent.............. The Bank of New York is the Exchange Agent. The
address, telephone number and facsimile number of
the Exchange Agent are set forth in "The Exchange
Offer--Exchange Agent."
SUMMARY OF TERMS OF THE NOTES
Interest Payment Dates:
The Senior Notes............ May 1 and November 1 of each year, commencing May
1, 1998.
The Senior Discount Notes... 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 accrue at a rate of 10 1/4%
per annum and will be payable semi-annually in
arrears on each May 1 and November 1, commencing
May 1, 2003; provided, however, that at any time
on or prior to November 1, 2002, the Company may
make a Cash Interest Election on any interest
payment date to commence the accrual of cash
interest from and after the Cash Interest
Election Date, in which case the outstanding
principal amount at maturity of each Senior
Discount Note will on that interest payment date
be reduced to the Accreted Value of such Senior
Discount Note as of that interest payment date,
and cash interest (accruing at a rate of 10 1/4%
per annum from the Cash Interest Election Date)
shall thereafter be payable with respect to each
Senior Discount Note.
Optional Redemption......... The 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
set forth herein, plus accrued and unpaid
interest thereon to the date of redemption. See
"Description of the Notes--Optional Redemption."
7
<PAGE>
In addition, on or prior to November 1, 2000, the
Company may redeem up to 35% of the originally
issued aggregate principal amount of the Senior
Notes at a redemption price of 109.25% of the
principal amount thereof, plus accrued and unpaid
interest thereon to the date of redemption, and
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 at the redemption
date of the Senior Discount Notes so redeemed
(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 to the redemption
date), in each case with the net cash proceeds of
one or more Public Equity Offerings or sales of
Qualified Equity Interests to Strategic Equity
Investors; provided, however, that not less than
65% of the originally issued aggregate principal
amount of the Senior Notes and not less than 65%
of the originally issued principal amount at
maturity of the Senior Discount Notes is
outstanding immediately after giving effect to
such redemption. See "Description of the Notes--
Optional Redemption."
Ranking..................... The Notes will be senior unsecured obligations of
the Company and will rank pari passu in right of
payment with all existing and future unsecured
and unsubordinated indebtedness of the Company
and senior in right of payment to all future
subordinated indebtedness of the Company. The
Notes will be effectively subordinated to all
secured indebtedness of the Company to the extent
of the assets securing such indebtedness and all
existing and future indebtedness of the
subsidiaries of the Company, including
indebtedness under the Amended Credit Facility.
As of December 31, 1997, the Company and its
subsidiaries had approximately $1.7 billion in
indebtedness outstanding, including the Notes, of
which approximately $641 million would have been
effectively senior to the Notes and the balance
(other than the Notes) would have been
subordinated in right of payment to the Notes.
See "Description of Other Indebtedness."
Change of Control........... Following the occurrence of a Change of Control,
each Holder will have the right to require the
Company to purchase all or a portion of such
Holder's Notes at a purchase price equal to (i)
with respect to the Senior Notes, 101% of the
aggregate principal amount thereof, plus accrued
and unpaid interest thereon to the date of
purchase, and (ii) with respect to the Senior
Discount Notes, 101% of the Accreted Value on the
date of purchase (unless the date of purchase is
on or after the earlier to occur of November 1,
2002 or the Cash Interest Election Date, in which
case such purchase price shall be equal to 101%
of the aggregate principal amount at maturity
thereof, plus accrued and unpaid interest to the
date of purchase). The Company may not, however,
have sufficient funds upon a Change of Control to
redeem the Notes at a premium or at all. See
"Description of the Notes--Change of Control."
8
<PAGE>
Certain Covenants........... The Indentures pursuant to which the Old Notes
were issued and the Notes will be issued contain
certain covenants, including (i) limitations on
indebtedness, (ii) limitations on restricted
payments, (iii) limitations on liens, (iv)
limitations on dividends and other payment
restrictions affecting Restricted Subsidiaries
(as defined under "Description of the Notes--
Certain Definitions"), (v) limitations on
preferred stock of Restricted Subsidiaries,
(vi) limitations on transactions with affiliates,
(vii) limitations on sale leaseback transactions,
(viii) limitations on the disposition of proceeds
of asset sales and (ix) limitations on
designations of Unrestricted Subsidiaries (as
defined under "Description of the Notes--Certain
Definitions"). In addition, the Indentures limit
the ability of the Company to consolidate, merge
or sell all or substantially all of its assets.
These covenants are subject to important
exceptions and qualifications. See "Description
of the Notes--Certain Covenants."
Absence of Public Market
for Notes................... The Notes will constitute new issues of
securities for which there is no established
public trading market. Although the Old Notes
have been designated for trading in the PORTAL
market, there has been no public market for the
Old Notes and it is not currently anticipated
that an active public market for the Notes will
develop. The Company does not intend to apply for
the listing of the Notes on any securities
exchange or to seek approval for quotation
through any automated quotation system. Although
the Initial Purchasers have informed the Company
that they currently intend to make a market in
the Notes, they are not obligated to do so and
any such market making may be discontinued at any
time without notice. Accordingly, there can be no
assurance as to the development or liquidity of
any market for the Notes. See "Risk Factors--
Absence of Public Market for the Notes" and "Plan
of Distribution."
For additional information regarding the Notes, see "Description of the
Notes" and "Certain United States Federal Income Tax Considerations."
USE OF PROCEEDS
The Company will not receive any proceeds from the issuance of the Notes
pursuant to this Prospectus. See "Use of Proceeds."
RISK FACTORS
An investment in the Notes involves a high degree of risk. Prospective
investors should carefully consider the matters set forth under "Risk Factors"
beginning on page 14.
9
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA
CONSOLIDATED FINANCIAL DATA
Fox Kids Worldwide, Inc. was incorporated to effect the Reorganization of Fox
Kids Worldwide, L.L.C. (the "LLC"), a joint venture between Saban and FCN
Holding, Inc. ("FCN Holding"). As a result of the Reorganization, Fox Kids
Worldwide, Inc. became the owner of (i) all of the outstanding capital stock of
FCN Holding, which was an indirect subsidiary of Fox Broadcasting, (ii) all of
the outstanding capital stock of Saban and (iii) Fox Broadcasting's direct and
indirect member's interests in the LLC and, consequently, Saban, FCN Holding
and the LLC became wholly owned subsidiaries of Fox Kids Worldwide, Inc. Prior
to the Reorganization, the Company did not engage in any business activities.
The Reorganization was consummated on August 1, 1997. From November 1, 1995
(the "Effective Date") until August 1, 1997, each of Saban and FCN Holding had
been operated by its respective management subject to the overall supervision
of a governing committee of the LLC comprised of an equal number of
representatives of each of Saban and FCN Holding. 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 the Effective Date.
See "Formation of the Company."
The following tables set forth, for the periods and on the dates indicated,
summary historical and pro forma consolidated financial data of the Company
derived from the financial statements included elsewhere in this Prospectus.
The unaudited pro forma financial data for the Company give effect to the IFE
Acquisition and related financing and the Reorganization as though they had
occurred at the beginning of each period presented (with respect to the
statements of operations data and other data). The unaudited pro forma as
adjusted information gives effect to the IFE Acquisition and related financing
and the Reorganization, as adjusted for the Offering, the Exchange Offer and
the reduction of the NAHI Bridge Note from the Flextech Transaction. The
information presented below should be read together with the historical
financial statements and pro forma financial information included elsewhere
herein. The pro forma information, as well as the Company financial
information, are not necessarily indicative of actual results of operations and
the financial position that would have been achieved had the transactions been
consummated on the dates indicated, and are not necessarily indicative of
future results of operations or financial position.
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
DATA:
EIGHT MONTHS SIX MONTHS SIX MONTHS
ENDED YEAR ENDED ENDED ENDED
JUNE 30, 1996 JUNE 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1997
------------- ------------- ----------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenues............ $191,621 $307,820 $173,790 $332,971
Amortization of
intangible assets...... -- -- -- 17,436
Operating income........ 60,759 58,779 43,083 57,638
Interest expense........ 885 2,226 1,528 58,388
Net income (loss)....... 31,600 40,440 30,040 (5,603)
Net income (loss)
attributable to common
shares ................ 31,600 40,440 30,040 (18,618)
Net income (loss) per
common share--basic and
diluted................ $ 1.98 $ 2.53 $ 1.88 $ (1.16)
Weighted average shares
outstanding--basic and
diluted................ 16,000 16,000 16,000 16,000
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
AS ADJUSTED PRO FORMA
PRO FORMA FOR THE YEAR FOR SIX MONTHS
FOR THE YEAR ENDED ENDED ENDED
JUNE 30, 1997(1) JUNE 30, 1997(2) DECEMBER 31, 1997(3)
------------------ ---------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues............ $614,618 $614,618 $357,456
Amortization of
intangible assets...... 41,819 41,819 20,923
Operating income........ 118,548 118,548 61,427
Interest expense........ 148,966 159,251 81,901
Net loss................ (29,884) (36,055) (18,832)
Net loss attributable to
common shares.......... (60,934) (67,105) (34,485)
Net loss per common
share--basic and
diluted................ $ (3.81) $ (4.19) $ (2.16)
Weighted average shares
outstanding--basic and
diluted................ 16,000 16,000 16,000
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
OTHER DATA:
EIGHT MONTHS SIX MONTHS SIX MONTHS
ENDED YEAR ENDED ENDED ENDED
JUNE 30, 1996 JUNE 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1997
------------- ------------- ----------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
EBITDA (4).............. $61,269 $58,436 $43,592 $ 77,566
Amortization of
intangible assets...... -- -- -- 17,436
Net cash provided by
(used in) operations... 15,893 (2,015) 6,878 (15,911)
Net cash provided by
(used in) investing
activities............. 4,383 (17,059) (1,667) (1,336,230)
Net cash provided by
(used in) financing
activities............. (4,549) 31,907 (4,711) 1,378,673
Capital expenditures.... 3,053 3,435 1,667 4,504
Amortization of
programming costs...... 83,485 144,713 75,383 158,427
Investment in
programming ........... 113,506 198,861 101,220 139,614
Ratio of earnings to
fixed charges.......... 22:1 11:1 17:1 --
Deficiency of earnings
available to cover
fixed charges.......... -- -- -- (3,952)
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
AS ADJUSTED PRO FORMA
PRO FORMA FOR THE YEAR FOR SIX MONTHS
FOR THE YEAR ENDED ENDED ENDED
JUNE 30, 1997(1) JUNE 30, 1997(2) DECEMBER 31, 1997(3)
------------------ ---------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C>
EBITDA (4).............. $172,018 $172,018 $85,901
Amortization of
intangible assets...... 41,819 41,819 20,923
Capital expenditures.... 12,510 12,510 4,727
Amortization of
programming costs...... 249,620 249,620 167,128
Investment in
programming ........... 312,088 312,088 148,959
Deficiency of earnings
available to cover
fixed charges.......... (32,442) (42,727) (23,309)
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA:
AS OF
DECEMBER 31, 1997
-----------------
(IN THOUSANDS)
<S> <C>
Cash and cash equivalents..................................... $ 55,409
Programming costs, less accumulated amortization.............. 354,348
Total assets.................................................. 2,504,376
Long-term obligations (including current maturities).......... 1,713,572
Series A preferred stock...................................... 345,000
Stockholders' equity.......................................... 66,049
</TABLE>
- -------
(1) The pro forma information gives effect to the IFE Acquisition and related
financing and the Reorganization as if they had occurred at the beginning
of each period presented (with respect to the Statements of Operations Data
and Other Data).
(2) The pro forma as adjusted information gives effect to the IFE Acquisition
and related financing and the Reorganization described in footnote (1), as
adjusted for the Offering, the Exchange Offer and the reduction of the NAHI
Bridge Note from the Flextech Transaction.
(3) The pro forma information gives effect to the IFE Acquisition and related
financing and the Reorganization, as well as the Offering, the Exchange
Offer and the reduction of the NAHI Bridge Note from the Flextech
Transaction.
(4) EBITDA represents income from operations before interest, taxes,
depreciation and amortization (excluding capitalized depreciation and
amortization of programming costs). Capitalized depreciation was $1,075,000
for the eight months ended June 30, 1996, $2,023,000 for the year ended
June 30, 1997 and $992,000 and $1,100,000 for the six months ended December
31, 1996 and 1997, respectively. EBITDA is presented because the Company
believes it is a standard financial statistic commonly reported and widely
used by analysts and other interested parties in the television industry.
EBITDA, as determined by the Company, may not be comparable to similarly
titled measures reported by other companies. The Company believes that
EBITDA, while providing useful information, should not be considered in
isolation or as a substitute measure for net income or loss, as an
indicator of operating performance or as an alternative to cash flow as a
measure of liquidity as determined under GAAP. EBITDA also does not
represent funds available for interest, dividends, reinvestment or other
discretionary uses.
11
<PAGE>
FORMATION OF THE COMPANY
In June 1995, FCN Holding and Saban formed the LLC, a strategic alliance
limited liability company, to match the complementary programming and
broadcasting strengths of the Fox Kids Network and the international reach of
Fox Broadcasting's parent company, News Corp., with the development,
production, distribution and merchandising strengths of Saban. Between
November 1, 1995 and August 1, 1997, each of Saban and FCN Holding was
operated by its respective management subject to the overall supervision of a
governing committee of the LLC comprised of an equal number of representatives
of each of FCN Holding and Saban.
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, Inc., a wholly owned indirect subsidiary of Fox
Broadcasting ("Fox Broadcasting Sub"), exchanged its capital stock in FCN
Holding, which indirectly owns the 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 other stockholders of Saban (together, the "Saban Stockholders")
(none of whom is affiliated with News Corp.) 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. 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 from the
Company ("Fox Subordinated Note"), which currently has an outstanding
principal amount of approximately $108.6 million. See "Description of
Indebtedness--Fox Subordinated Note" and "Certain Transactions--Formation of
the LLC and the Reorganization." As a result of these transactions, which are
referred to in this Prospectus as the "Reorganization," FCN Holding, FCN,
Saban and the LLC became direct or indirect wholly owned subsidiaries of the
Company.
The charts on the following page illustrate a simplified ownership structure
of the parties to the Reorganization (i) before the Reorganization, IFE
Acquisition and the Offering and (ii) after the Reorganization, IFE
Acquisition and the Offering. Certain intermediate subsidiary corporations
have not been included in these charts.
12
<PAGE>
Before the Reorganization, IFE Acquisition and the Offering:
[BEFORE THE REORGANIZATION GRAPH APPEARS HERE]
After the Reorganization, IFE Acquisition and the Offering:
[AFTER THE REORGANIZATION GRAPH APPEARS HERE]
13
<PAGE>
RISK FACTORS
Prospective investors should consider carefully the following factors, in
addition to the other information contained in this Prospectus, in evaluating
the Company and its business.
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS
As of December 31, 1997, the Company's total amount of consolidated debt
outstanding was approximately $1.7 billion, or 80% of total capitalization.
The Company's deficiency of earnings available to cover fixed charges would
have been approximately $23.3 million for the six months ended December 31,
1997 after giving pro forma effect to the Offering, the IFE Acquisition and
the related financing, the Reorganization (as defined) and the Flextech
Transaction (collectively, the "Transactions"). In addition, the Company does
not expect to have net income for the fiscal year ending June 30, 1998 due
primarily to the amount of interest expense and amortization of intangible
assets. The Indentures will permit the Company and its subsidiaries to incur
additional debt, subject to certain limitations. See "Capitalization,"
"Selected Historical Consolidated Financial Data" and "Description of the
Notes--Certain Covenants--Limitation on Indebtedness." The Company is a
holding company and its ability to obtain funds from its subsidiaries and
affiliates could be limited. See "--Risks Associated with Holding Company
Structure."
The degree to which the Company is leveraged following the Exchange Offer
could have important consequences to the Holders, 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 Indentures and the Amended Credit Facility
contain certain restrictive financial and operating covenants which will
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. See "Description of
the Notes--Certain Covenants--Limitation on Indebtedness" and "--Events of
Default."
The Company's ability to make scheduled payments of principal of, or to pay
interest on or to refinance, its debt (including the Notes) 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 Amended 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 (including the Notes) 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 (including the Notes) 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 "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
PAYMENT OF NOTES NOT GUARANTEED
The Notes will not be guaranteed by any of the Company's subsidiaries or any
third parties (including any affiliates of the Company). Therefore, there
should be no expectation that any person other than the Company will in the
future make payments of principal, interest or premium (if any) with respect
to the Notes. See "Description of the Notes."
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<PAGE>
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, including its obligations under the Notes
and the Amended Credit Facility 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 the Notes 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.
In addition, because the Company is a holding company, the Notes will be
effectively subordinated to all existing and future liabilities, including
those under the Amended Credit Facility, and trade payables of the Company's
subsidiaries, except to the extent that the Company may itself be a creditor
with recognized claims against such subsidiary. Any right of the Company as an
equity holder to participate in the distribution of the assets of any
subsidiary upon the subsidiary's liquidation or reorganization will be subject
to the prior claims of the creditors (including trade creditors) of that
subsidiary. As of December 31, 1997, the Company and its subsidiaries had an
aggregate of approximately $1.7 billion of indebtedness outstanding, including
the Notes, of which approximately $641 million would have been effectively
senior to the Notes and the balance of which (other than the Notes) would have
been subordinated in right of payment to the Notes.
RISK OF INABILITY TO REDEEM NOTES
Following the occurrence of a Change of Control, each Holder will have the
right to require the Company to purchase all or a portion of such Holder's
Notes at a purchase price equal to 101% of the aggregate principal amount of
the Senior Notes, plus accrued and unpaid interest thereon to the date of
purchase, and at a purchase price equal to 101% of the Accreted Value of the
Senior Discount Notes at the date of purchase (unless the date of purchase is
on or after the earlier to occur of November 1, 2002 or the Cash Election Date
in which case such purchase price shall be equal to 101% of the aggregate
principal amount at maturity thereof, plus accrued and unpaid interest thereon
to the date of purchase). The Company may not, however, have sufficient funds
upon a Change of Control to redeem the Notes at a premium or at all.
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. Cable television only reaches 70.1% of the United States' television
households ("TVHH") compared to 98% for broadcast television and 6.8% for
direct-to-home satellite television. Cable television reaches approximately 26
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 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
15
<PAGE>
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 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, 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. See "Business--Acquisition of
International Family Entertainment, Inc."
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. See "Business--Distribution--International Channels."
POWER RANGERS
Since its introduction in the United States in 1993, the Power Rangers
series has been materially important to the success and growth of the Company
and accounted for a significant portion of the Company's revenues and
operating profits for the fiscal year ended June 30, 1997, as well as a
substantial portion of the historical revenues and operating profits of Saban
and FCN. For the fiscal year ended June 30, 1997 and the six months ended
December 31, 1997, revenues derived from the Company's production,
distribution and worldwide exploitation of Power Rangers accounted for
approximately 23% and 7% of the Company's consolidated revenues and, giving
effect to the IFE Acquisition as if it had occurred on July 1, 1996, 12% and
7% of pro forma consolidated revenues for the fiscal year ended June 30, 1997
and the six months ended December 31, 1997, respectively.
Although Power Rangers' ratings among children ages 2-11 have declined over
the past three broadcast seasons from an 8.9 rating in the 1994-1995 broadcast
season to a 4.9 rating in the 1995-1996 broadcast season and to a 3.8 rating
in the 1996-1997 broadcast season, Power Rangers has, according to Nielsen
Media Research, been the most watched children's weekday broadcast television
program among boys ages 2-11 in the United States in two of the past three
broadcast seasons. The corresponding broadcast ratings for Power Rangers among
boys ages 2-11 for the 1994-1995, 1995-1996 and 1996-1997 broadcast seasons
were 11.1, 7.5 and 6.0, respectively. At its peak, near the beginning of the
1994-1995 broadcast season, Power Rangers hit a 14.3 rating, which makes Power
Rangers the highest rated children's program ever broadcast on the Fox Kids
Network to date. However, children's preferences change fairly frequently, and
there can be no assurance the television viewership of Power Rangers will be
maintained or that related revenues will not be affected adversely. In
addition, the carriage of a highly rated program such as Power Rangers tends
to enhance the viewership, and ratings, of other programs broadcast on the Fox
Kids Network. During the four "sweeps" periods for the same 1994-1995, 1995-
1996 and 1996-1997 broadcast seasons, the Fox Kids Network had the highest
average rating among all broadcast network children's programming in every
sweeps period except one which was a tie for first with ABC. The Fox Kids
Network averaged a 5.725 rating for the 1994-1995 broadcast season sweeps
periods, a 3.45 rating for the 1995-1996 broadcast season sweeps periods and a
2.9 rating for the 1996-1997 broadcast season sweeps periods. Thus, although
having the highest broadcast network average ratings, the Fox Kids Network's
ratings overall have followed the trend of the Power Rangers' ratings. Any
material decline in the viewership of Power Rangers could also lead to a
decline in the ratings of other programs broadcast on the Fox Kids Network.
Therefore, material declines in the ratings of Power Rangers, or the failure
by the Company
16
<PAGE>
to create competitive replacement programs for Power Rangers could materially
and adversely affect the Company's results of operations and financial
condition. See "--Decline in Ratings of Fox Kids Network, --Key Contracts,"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Results of Operations.
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, 1997, revenues from these sources represented
approximately 91% of the Company's consolidated revenues, and, giving effect
to the IFE Acquisition as if it had occurred on July 1, 1996, 45% of pro forma
consolidated revenues. For the six months ended December 31, 1997, which
included IFE from August 1, 1997, revenues from these sources represented
approximately 41% of the Company's consolidated revenues, and giving effect to
the IFE Acquisition as if it had occurred on July 1, 1996, 38% of pro forma
consolidated revenues. As a result of the planned reprogramming of The 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 will 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. 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. See "Business--
Competition."
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, it is possible that
ratings may decrease from the 1996-1997 season to the 1997-1998 season. As a
result, the Company ordered nine new series in addition to the returning shows
for the 1997-1998 season. No assurance can be given that the new series will
perform better than the cancelled series. Although the Fox Kids Network still
leads in ratings among the children's broadcast television networks, certain
children's oriented cable channels have seen ratings increase. 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 93% 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
17
<PAGE>
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 "Business--Distribution--Fox Kids
Network" and "Business--The Strategic Alliance with Fox/News Corp."
POSSIBLE REDUCTION IN DISTRIBUTION OR NON-RENEWAL OF THE FAMILY CHANNEL BY
CABLE OPERATORS
The Company distributes The Family Channel to cable operators pursuant to
affiliation agreements whereby the cable operator agrees to provide carriage
for a specified per subscriber fee. At December 31, 1997, The Family Channel
had affiliation agreements with approximately 850 affiliated cable operators,
terminating on various dates from 1998 to 2006. Pursuant to these agreements,
The Family Channel currently has 71 million cable and satellite subscribers
out of a potential audience reach of 74 million households at December 31,
1997. Under these agreements, cable operators and other distributors may
discontinue carriage of The Family Channel or move The Family Channel to a
more narrowly distributed level of service or tier. Any such discontinuance or
movement would greatly limit The Family Channel's ability to generate national
advertising revenues, as these depend on broad distribution, particularly by
cable operators. The Company currently expects to continue to be able to renew
its affiliation agreements as they mature or to maintain its carriage on
"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. See "--Acquisition
of IFE" and "Business--Acquisition of International Family Entertainment,
Inc."
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. See "Management."
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.
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.
Television Distribution, Inc. ("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.
In the United States, the Company currently competes through its Fox Kids
Network and The Family Channel, and will compete through its Fox Kids Network
and the Fox Family Channel, with the other broadcast television networks,
public television and cable television channels, such as Nickelodeon, USA
Cable Network and The Cartoon Network, 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. 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
18
<PAGE>
"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 family viewing audience as a result of technological advances may
lead to a reduction in the Company's market share.
When The Family Channel's reprogramming as the Fox Family Channel is
complete, the cable channels with which the Fox Family Channel will compete
head-on include Nickelodeon (an MTV Networks company), the Disney Channel and
the Cartoon Network. In addition to these direct cable competitors, the Fox
Family Channel will also compete with its Fox Kids Network sister, the WB,
ABC, UPN, CBS and PBS. The Company intends to differentiate itself from this
competition by cross-promoting programming with the Fox Kids Network. In
addition, the Fox Family Channel will also serve as an additional outlet for
Fox Kids original programming.
The Company will compete 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. See "--Potential Adverse Impact of Regulation" and "Business--
Competition."
KEY CONTRACTS
The Company has master toy license agreements with Bandai America
Incorporated ("Bandai") pursuant to which the Company has granted to Bandai
worldwide toy manufacturing and distribution rights to three existing series,
including Power Rangers, and to as many as two new series each year through
the end of the year 2002. For the fiscal year ended June 30, 1997, and the six
months ended December 31, 1997, 12% and 1%, respectively, of the Company's
consolidated revenues and, giving effect to the IFE Acquisition as if it had
occurred on July 1, 1996, 6% and 1% of the Company's pro forma consolidated
revenues, for the fiscal year ended June 30, 1997 and six months ended
December 31, 1997, respectively, were derived from its license agreements with
Bandai. Should the Company's agreements with Bandai terminate, there can be no
assurance that the Company would be able to enter into license agreements with
other toy manufacturers on the same or more favorable terms. See "Business--
Merchandising and Licensing." In addition, two of the Company's 16 series for
the 1997-98 broadcast season are based on programs originally developed by
Toei Company, Ltd. ("Toei"), which is currently one of Japan's largest film
companies. The Company has been granted rights in perpetuity to each of these
series, including Power Rangers. Toei is obligated to provide the Company with
an exclusive option to acquire additional children's programming through at
least 2006. While the Company believes that its ability to successfully
develop future programming is not materially dependent on its relationship
with Toei, the possibility nonetheless exists that any change in the Company's
relationship with Toei, or the failure of Toei to perform its obligations
under its agreements with the Company, could have a material adverse effect on
the business, results of operations and financial condition of the Company.
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
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<PAGE>
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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Significant
Accounting Factors--Use of Estimates."
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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Significant Accounting Factors--Revenue Recognition and
Seasonality."
DEPENDENCE UPON SATELLITE TRANSPONDERS
Distribution of The Family Channel depends upon the operation of satellites
by third parties. The Company currently owns three full-time transponders on
three different satellites for use by The Family Channel. The Company
transmits The Family Channel programming using two separate "feeds" which are
uplinked to two of its satellites. All of the Company-owned transponders have
"protected" status. "Protected" status means that should the transponder fail,
service will be transferred, subject to availability, to a spare transponder,
and, if one is not available, then to a transponder with "preemptable status"
on the same satellite and/or another satellite owned by the same seller or
lessor, subject to certain limitations. "Preemptable" status means that the
transponder can be preempted in the event of a failure of a "protected"
transponder.
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. See "Business--Distribution--The
Family Channel/Fox Family Channel--Transmission Facilities."
INTERNATIONAL SUBCONTRACTING OF ANIMATION
As with other producers of animated programming, the Company subcontracts
some of the more labor-intensive components of its animation production
process to animation studios located in countries with relatively low-cost
labor, primarily in the Far East. With an increasing number of animated
feature films and animated television programs being produced in recent years,
the demand for the services of overseas studios has increased
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substantially. This increased demand may lead overseas studios to increase
their fees, which could result in increased animated programming production
costs incurred by the Company or the inability of the Company to contract with
its preferred overseas studios. No assurance can be given that future
subcontracting arrangements will be obtainable on terms which are as favorable
to the Company as its current arrangements.
INTERNATIONAL SALES
For the fiscal year ended June 30, 1997 and for the six months ended
December 31, 1997, the Company derived approximately 35% and 20% of its
consolidated revenues, respectively, and, giving effect to the IFE Acquisition
as if it had occurred on July 1, 1996, 19% and 19%, respectively, of its pro
forma 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.
See "Business--Business Strategies." 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. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Results of Operations."
POTENTIAL ADVERSE IMPACT OF REGULATION
The United States Congress and the Federal Communications Commission (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 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. See "Business--Government Regulation."
POTENTIAL FOR DEADLOCKS
The holders of the Class B Common Stock of the Company have agreed, so long
as neither Fox Broadcasting nor the former Saban Stockholders 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 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.
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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 Prospectus, 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. See "Business--The
Strategic Alliance with Fox/News Corp."
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. See "Certain Transactions."
ORIGINAL ISSUE DISCOUNT CONSEQUENCES
The Senior Discount Notes will be issued at a discount from their principal
amount at maturity. Although cash interest is not expected to accrue on the
Senior Discount Notes prior to November 1, 2002, and there are not expected to
be any periodic payments of interest on the Senior Discount Notes prior to May
1, 2003 (unless a Cash Interest Election has been made), original issue
discount (the difference between the "stated redemption price at maturity" and
the "issue price," as such terms are defined in the Internal Revenue Code of
1986, as amended (the "Code"), and Treasury Regulations thereunder) ("OID") of
the Senior Discount Notes will accrete from the issue date of such Notes up to
the maturity date. Consequently, Holders of the Senior Discount Notes
generally will be required to include amounts in gross income for United
States federal income tax purposes in advance of their receipt of the cash
payments to which the income is attributable. Such amounts in the aggregate
will be equal to the difference between the "stated redemption price at
maturity" (inclusive of stated interest on the Senior Discount Notes) and the
"issue price" of the Senior Discount Notes. See "Certain United States Federal
Income Tax Considerations" for a more detailed discussion of the federal
income tax consequences of the purchase, ownership and disposition of the
Senior Discount Notes.
In the event a bankruptcy case is commenced by or against the Company under
the United States Bankruptcy Code (the "Bankruptcy Code"), the claim of a
Holder of the Senior Discount Notes may be limited to an amount equal to the
sum of (i) the initial offering price and (ii) that portion of the OID which
is not deemed to constitute "unmatured interest" for purposes of the
Bankruptcy Code. Any OID that was not amortized as of the date of any such
bankruptcy filing would constitute "unmatured interest." To the extent that
the Bankruptcy Code differs from the Code in determining the method of
amortization of OID, a Holder of the Senior Discount Notes may realize taxable
gain or loss on payment of such holder's claim in bankruptcy.
ABSENCE OF PUBLIC MARKET FOR THE NOTES
The Notes will constitute new issues of securities for which there is no
established public trading market. Although the Old Notes are eligible for
trading on PORTAL, the Company does not intend to apply for listing of the
Notes on a national securities exchange or quotation of the Notes on any
automated quotation system. The Initial Purchasers have advised the Company
that they currently intend to make a market in the Notes, although the Initial
Purchasers are not obligated to do so, and any such market making with respect
to the Notes may be discontinued at any time without notice. Accordingly,
there can be no assurance as to the development or
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liquidity of any market that may develop for the Notes, the ability of the
holders of the Notes to sell their Notes or the price at which such holders
would be able to sell their Notes. If a market were to exist, the Notes could
trade at prices that may be lower than the initial offering price thereof,
depending on many factors, including prevailing interest rates and the markets
for similar securities, general economic conditions and the financial
condition and performance of, and prospects for, the Company. See "Plan of
Distribution."
CONSEQUENCES OF FAILURE TO EXCHANGE
The Notes will be issued in exchange for the Old Notes only after timely
receipt by the Exchange Agent of such Old Notes or a book-entry confirmation
of a book-entry transfer of the Old Notes into the Exchange Agent's account at
DTC, including an Agent's Message (as defined herein) if the tendering Holder
does not deliver a properly completed and duly executed Letter of Transmittal,
or, in the case of book-entry transfer, an Agent's Message in lieu of the
Letter of Transmittal, including all other documents required by such Letter
of Transmittal. Therefore, the Holders of the Old Notes desiring to tender
such Old Notes in exchange for the Notes should allow sufficient time to
ensure timely delivery. Neither the Exchange Agent nor the Company is under
any duty to give notification of defects or irregularities with respect to
tenders of the Old Notes for exchange. The Old Notes that are not tendered or
are tendered but not accepted will, following consummation of the Exchange
Offer, continue to be subject to the existing restrictions upon transfer
thereon (as set forth in the legend thereon). Subject to the obligation of the
Company to file a shelf registration statement covering resales of the Old
Notes in certain limited circumstances, the Company does not intend to
register the Old Notes under the Securities Act and, after consummation of the
Exchange Offer, will not be obligated to do so. Upon consummation of the
Exchange Offer, certain rights under the Registration Rights Agreement,
including registration rights and the right to receive the contingent
increases in interest rates, will terminate, except under limited
circumstances. In addition, any holder of the Old Notes who tenders in the
Exchange Offer for the purpose of participating in a distribution of the Notes
will be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer who holds the Old Notes acquired for its own account as a
result of market-making or other trading activities and who receives the Notes
for its own account in exchange for such Old Notes pursuant to the Exchange
Offer, must acknowledge that it will deliver a prospectus in connection with
any resale of such Notes. To the extent that the Old Notes are tendered and
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Old Notes could be adversely affected due to the limited
amount, or "float," of the Old Notes that are expected to remain outstanding
following the Exchange Offer. Generally, a lower "float" of a security could
result in less demand to purchase such security and could, therefore, result
in lower prices for such security. For the same reason, to the extent that a
large amount of the Old Notes are not tendered or are tendered and not
accepted in the Exchange Offer, the trading market for the Notes could be
adversely affected. See "The Exchange Offer."
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. In connection with the
original issue and sale of the Old Notes, the Company agreed to file with the
Commission a registration statement covering the exchange by the Company of
the Notes for the Old Notes. The Registration Rights Agreement provides, among
other things, that (i) the Company will file the Registration Statement with
the Commission on or prior to January 26, 1998, (ii) the Company will use its
best efforts to cause the Registration Statement to become effective under the
Securities Act on or prior to March 27, 1998 and to effect the Exchange Offer
before April 26, 1998, (iii) if the Exchange Offer is not effected before
April 26, 1998, or if certain holders of the Old Notes notify the Company they
are not permitted to participate in, or would not receive freely tradeable
Notes pursuant to the Exchange Offer, the Company will use its best efforts to
cause to become effective a registration statement (the "Shelf Registration
Statement") with respect to the resale of the Old Notes and to keep the Shelf
Registration Statement effective until up to two years after the effective
date thereof, or such shorter period as the Old Notes may become eligible for
sale to the public without volume or manner of sale restrictions under Rule
144(k) promulgated under the Securities Act.
If (i) the Company fails to file any of the registration statements required
by the Registration Rights Agreement on or before the date specified for such
filing, (ii) any of such registration statements is not declared effective by
the Commission on or prior to the date specified for such effectiveness (the
"Effectiveness Target Date"), (iii) the Exchange Offer is required to be
consummated under the Registration Rights Agreement and the Company fails to
issue the Notes in exchange for all Old Notes properly tendered and not
withdrawn in the Exchange Offer within 45 days of the Effectiveness Target
Date with respect to the Registration Statement, or (iv) the Shelf
Registration Statement or the Registration Statement is declared effective but
thereafter ceases to be effective or usable in connection with the Exchange
Offer or resales of Transfer Restricted Notes, as the case may be, during the
periods specified in the Registration Rights Agreement (each such event
referred to in clauses (i) through (iv) above, a "Registration Default"), then
the Company will be required to pay as liquidated damages additional interest
("Additional Interest") on the Notes as to which the Registration Default
exists. If a Registration Default exists with respect to the Senior Notes (or
with respect to the Senior Discount Notes if it occurs after the Cash Interest
Election Date), the interest rate on such Transfer Restricted Notes will
increase, with respect to the first 90-day period (or portion thereof) while a
Registration Default is continuing immediately following the occurrence of
such Registration Default, .25% per annum, such interest rate increasing by an
additional .25% per annum at the beginning of each subsequent 90-day period
(or portion thereof) while a Registration Default is continuing until all
Registration Defaults have been cured, up to a maximum rate of Additional
Interest of 1.00% per annum. If a Registration Default exists with respect to
the Senior Discount Notes prior to the Cash Interest Election Date, the
Company will make cash payments of Additional Interest on each interest
payment date on the Senior Discount Notes which are Transfer Restricted Notes
at the rates set forth in the preceding sentence multiplied by the Accreted
Value of the Senior Discount Notes as of the interest payment date on which
such payment is made. Upon (w) the filing of the applicable registration
statement (in the case of clause (i) of this paragraph), (x) the effectiveness
of the applicable registration statement (in the case of clause (ii) of this
paragraph), (y) the issuance of Notes in exchange for all Old Notes properly
tendered and not withdrawn in the Exchange Offer (in the case of clause (iii)
of this paragraph) or (z) the effectiveness of the Registration Statement or
the Shelf Registration Statement, as the case may be, which had ceased to be
effective (in the case of clause (iv) of this paragraph), Additional Interest
as a result of the Registration Default described will cease to accrue (but
any accrued amount shall be payable) and the interest rate on the Notes will
revert to the original rate if no other Registration Default has occurred and
is continuing. Except under certain limited circumstances, registration rights
and the right to receive additional interest will terminate upon consummation
of the Exchange Offer.
For purposes of the foregoing, "Transfer Restricted Notes" means each Old
Note until (i) the date on which the Old Note has been exchanged by a person
other than a broker-dealer referred to in clause (ii) below for a Note in the
Exchange Offer, (ii) following the exchange by a broker-dealer in the Exchange
Offer of an Old
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Note for a Note, the date on which the Note is sold to a purchaser who
receives from a broker-dealer on or prior to the date of such sale a copy of
the prospectus contained in the Exchange Offer Registration Statement, as
amended or supplemented, (iii) the date on which the Old Note has been
effectively registered under the Securities Act and disposed of in accordance
with the Shelf Registration Statement, (iv) the date on which the Old Note is
eligible for distribution to the public pursuant to Rule 144(k) under the
Securities Act (or any similar provision then in force, but not Rule 144A
under the Securities Act), (v) the date on which the Old Note shall have been
otherwise transferred by the holder thereof and a Note not bearing a legend
restricting further transfer will have been delivered by the Company and
subsequent disposition of the Note will not require registration or
qualification under the Securities Act or any similar state law then in force
or (vi) the Note ceases to be outstanding.
The outstanding Old Senior Notes in the aggregate principal amount at
maturity of $475,000,000 and the Old Senior Discount Notes in the aggregate
principal amount at maturity of $618,670,000 were originally issued and sold
on October 28, 1997 (the "Issue Date"). The original sale to the Initial
Purchasers was not registered under the Securities Act in reliance upon the
exemption provided by Section 4(2) of the Securities Act and the concurrent
resale of the Old Notes to investors was not registered under the Securities
Act in reliance upon the exemption provided by Rule 144A under the Securities
Act. The Old Notes may not be reoffered, resold or transferred other than
pursuant to a registration statement filed pursuant to the Securities Act or
unless an exemption from the registration requirements of the Securities Act
is available. Pursuant to Rule 144 promulgated under the Securities Act, the
Old Notes may generally be resold (a) commencing one year after the Issue
Date, in an amount up to, for any three-month period, the greater of 1% of the
Old Notes then outstanding or the average weekly trading volume of the Old
Notes during the four calendar weeks immediately preceding the filing of the
required notice of sale with the Commission and (b) commencing two years after
the Issue Date, in any amount and otherwise without restriction by a Holder
who is not, and has not been for the preceding 90 days, an affiliate of the
Company. The Old Notes are eligible for trading in the PORTAL market, and may
be resold to certain Qualified Institutional Buyers pursuant to Rule 144A
promulgated under the Securities Act. Certain other exemptions may also be
available under other provisions of the federal securities laws for the resale
of the Old Notes.
Under existing interpretations by the Staff of the Commission as set forth
in no-action letters issued to third parties in other transactions, the Notes
will, in general, be freely transferable after the Exchange Offer without
further registration under the Securities Act, subject to any restrictions on
transfer imposed by state "blue sky" laws and provided that the Holder is not
an affiliate of the Company and that, in the case of broker-dealers
participating in the Exchange Offer, a prospectus meeting the requirements of
the Securities Act must be delivered by such broker-dealers in connection with
resales of the Notes. The Company has agreed, for a period of 90 days after
consummation of the Exchange Offer, to make available a prospectus meeting the
requirements of the Securities Act to any such broker-dealer for use in
connection with any resale of any Notes acquired in the Exchange Offer. A
broker-dealer which delivers such a prospectus to purchasers in connection
with resales will be subject to certain of the civil liability provisions
under the Securities Act and will be bound by the provisions of the
Registration Rights Agreement (including certain indemnification rights and
obligations). Any broker-dealer who is an affiliate of the Company may not
participate in the Exchange Offer and may not rely on the no-action letters
referred to above and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. Subject to the minimum denomination requirements
of the Notes, the Notes are being offered in exchange for a like principal
amount of Old Notes. Old Notes may be exchanged only in integral multiples of
$1,000 principal amount at maturity.
The form and terms of the Notes will be identical in all material respects
to the form and terms of the Old Notes except that the Notes will be
registered under the Securities Act and, therefore, will not bear legends
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restricting the transfer thereof. The Notes will evidence the same debt as the
the Old Notes and will be entitled to the benefits of the Indentures. The
Notes will be treated as a single class under the Indentures with any Old
Notes that remain outstanding. The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Old Notes being tendered for exchange.
As of December 31, 1997, $475,000,000 aggregate principal amount of Old
Senior Notes were outstanding and $618,670,000 aggregate principal amount at
maturity of Old Senior Discount Notes were outstanding. The Initial Purchasers
do not currently hold any of the Old Senior Notes or Old Senior Discount
Notes. This Prospectus, the Letter of Transmittal and Notice of Guaranteed
Delivery are being sent to all registered Holders of the Old Notes as of that
date. Tendering Holders will not be required to pay brokerage commissions or
fees or, subject to the instructions in the Letter of Transmittal, transfer
taxes with respect to the exchange of the Old Notes pursuant to the Exchange
Offer. The Company will pay all charges and expenses, other than certain
transfer taxes which may be imposed, in connection with the Exchange Offer.
See "--Payment of Expenses."
Holders of Old Notes do not have any appraisal or dissenters' rights under
the Delaware General Corporation Law in connection with the Exchange Offer.
EXPIRATION DATE; EXTENSIONS; TERMINATION
The Exchange Offer will expire at 5:00 P.M., New York City time, on ,
1998 (20 business days following the date notice of the Exchange Offer was
mailed to the Holders). The Company reserves the right to extend the Exchange
Offer at its discretion, in which event the term "Expiration Date" will mean
the time and date on which the Exchange Offer as so extended will expire. The
Company will notify the Exchange Agent of any extension by written notice and
will mail to the registered Holders of the Old Notes an announcement thereof,
each prior to 9:00 A.M., New York City time, on the next business day after
the previously scheduled Expiration Date.
The Company reserves the right to extend or terminate the Exchange Offer and
not accept for exchange any Old Notes if any of the events set forth below
under the caption "Conditions to the Exchange Offer" occur and are not waived
by the Company, by giving written notice of such delay or termination to the
Exchange Agent. See "--Conditions to the Exchange Offer." The rights reserved
by the Company in this paragraph are in addition to the Company's rights set
forth below under the caption "--Conditions to the Exchange Offer."
PROCEDURES FOR TENDERING
The tender to the Company of the Old Notes by a Holder thereof pursuant to
one of the procedures set forth below and the acceptance thereof by the
Company will constitute an agreement between the Holder and the Company in
accordance with the terms and subject to the conditions set forth herein and
in the Letter of Transmittal.
Except as set forth below, a Holder who wishes to tender the Old Notes for
exchange pursuant to the Exchange Offer must transmit an Agent's Message (as
defined below) or a properly completed and duly executed Letter of
Transmittal, including all other documents required by such Letter of
Transmittal, to the Exchange Agent at the address set forth below under
"Exchange Agent" on or prior to the Expiration Date. In addition, either (i)
certificates for Old Notes must be received by the Exchange Agent along with
the Letter of Transmittal, (ii) a timely confirmation of a book-entry transfer
(a "Book-Entry Confirmation") of Old Notes, if such procedure is available,
into the Exchange Agent's account at DTC pursuant to the procedure of book-
entry transfer described below, must be received by the Exchange Agent prior
to the Expiration Date, or (iii) the Holder must comply with the guaranteed
delivery procedures described below. LETTERS OF TRANSMITTAL AND THE OLD NOTES
SHOULD NOT BE SENT TO THE COMPANY.
The term "Agent's Message" means a message, transmitted by DTC to and
received by the Exchange Agent and forming a part of a Book-Entry
Confirmation, which states that DTC has received an express acknowledgement
from the tendering participant, which acknowledgment states that the
participant has received and agrees to be bound by the Letter of Transmittal
and that the Company may enforce the Letter of Transmittal against the
participant.
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Signatures on a Letter of Transmittal must be guaranteed unless the Old
Notes tendered pursuant thereto are tendered (i) by a registered Holder of Old
Notes who has not completed the box entitled "Special Issuance and Delivery
Instructions" on the Letter of Transmittal or (ii) for the account of any firm
that is a member of a registered national securities exchange or a member of
the National Association of Securities Dealers, Inc. (the "NASD") or a
commercial bank or trust company having an office in the United States (an
"Eligible Institution"). In the event that signatures on a Letter of
Transmittal are required to be guaranteed, the guarantee must be by an
Eligible Institution.
The method of delivery of Old Notes and other documents to the Exchange
Agent is at the election and risk of the Holder, but if delivery is by mail it
is suggested that the mailing be made sufficiently in advance of the
Expiration Date to permit delivery to the Exchange Agent before the Expiration
Date.
If the Letter of Transmittal is signed by a person other than a registered
Holder of an Old Note tendered therewith, such Old Note must be endorsed or
accompanied by appropriate bond powers, in either case signed exactly as the
name of the registered Holder appears on the Old Note.
If the Letter of Transmittal or an Old Note or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by the Company,
proper evidence satisfactory to the Company of their authority to so act must
be submitted.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of tendered Old Notes will be resolved by the Company,
whose determination will be final and binding. The Company reserves the
absolute right to reject any or all tenders that are not in proper form or the
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any irregularities or
conditions of tender as to particular Old Notes. The Company's interpretation
of the terms and conditions of the Exchange Offer (including the instructions
in the Letter of Transmittal) will be final and binding. Unless waived, any
irregularities in connection with tenders must be cured within such time as
the Company shall determine. Neither the Company nor the Exchange Agent shall
be under any duty to give notification of defects in such tenders or shall
incur liabilities for failure to give such notification. Tenders of the Old
Notes will not be deemed to have been made until such irregularities have been
cured or waived. Any Old Notes received by the Exchange Agent that are not
properly tendered and as to which the irregularities have not been cured or
waived will be returned by the Exchange Agent to the tendering Holder, unless
otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
The Company's acceptance for exchange of Old Notes tendered pursuant to the
Exchange Offer will constitute a binding agreement between the tendering
person and the Company upon the terms and subject to the conditions of the
Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at DTC for purposes of the Exchange Offer within two business
days after the date of this Prospectus, and any financial institution that is
a participant in DTC's book-entry transfer facility systems may make book-
entry delivery of Old Notes by causing DTC to transfer the Old Notes into the
Exchange Agent's account at DTC in accordance with DTC's ATOP procedures for
transfer. However, although delivery of Old Notes may be effected through
book-entry transfer into the Exchange Agent's account at DTC, an Agent's
Message or a duly executed Letter of Transmittal, including all other
documents required by such Letter of Transmittal, must in any case be
transmitted to and received by the Exchange Agent at one of the addresses set
forth below under the caption "Exchange Agent" on or prior to the Expiration
Date or the guaranteed delivery procedures described below must be complied
with.
DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH DTC'S PROCEDURES DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
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GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date, or (iii) the procedures for delivery by book-entry transfer
cannot be completed on a timely basis, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from the
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder of the Old Notes, the
certificate number or numbers of such Old Notes and the principal amount of
the Old Notes tendered, stating that the tender is being made thereby and
guaranteeing that, within three New York Stock Exchange trading days after
the Expiration Date, the Letter of Transmittal (or facsimile thereof)
together with the certificate(s) representing the Old Notes, or a Book-
Entry Confirmation, as the case may be, and any other documents required by
the Letter of Transmittal will be deposited by the Eligible Institution
with the Exchange Agent; and
(c) the properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Old Notes in proper form for transfer, or a Book-Entry Confirmation, as the
case may be, and all other documents required by the Letter of Transmittal
are received by the Exchange Agent within three New York Stock Exchange
trading days after the Expiration Date.
Upon request of the Exchange Agent, a Notice of Guaranteed Delivery (as well
as a copy of this Prospectus and the Letter of Transmittal) will be sent to
Holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer, or any extension
of the Exchange Offer, the Company will not be required to accept for
exchange, or to exchange, any Old Notes for any Notes, and, as described
below, may terminate the Exchange Offer (whether or not any Old Notes have
theretofore been accepted for exchange) or may waive any conditions to or
amend the Exchange Offer, if any of the following conditions have occurred or
exists or have not been satisfied:
(a) there shall have occurred a change in the current interpretation by
the staff of the Commission which permits the Notes issued pursuant to the
Exchange Offer in exchange for the Old Notes to be offered for resale,
resold and otherwise transferred by the Holders thereof (other than broker-
dealers and any such Holder which is an "affiliate" of the Company within
the meaning of Rule 405 promulgated under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that the Notes are acquired in the ordinary course
of the Holders' business and the Holders have no arrangement or
understanding with any person to participate in the distribution of the
Notes; or
(b) any law, statute, rule or regulation shall have been adopted or
enacted which, in the judgment of the Company, would reasonably be expected
to impair its ability to proceed with the Exchange Offer; or
(c) a stop order shall have been issued by the Commission or any state
securities authority suspending the effectiveness of the Registration
Statement, or proceedings shall have been initiated or, to the knowledge of
the Company, threatened for that purpose, or any governmental approval has
not been obtained, which approval the Company shall, in its sole
discretion, deem necessary for the consummation of the Exchange Offer as
contemplated hereby; or
(d) the Company shall have received an opinion of counsel experienced in
such matters to the effect that there exists any actual or threatened legal
impediment (including a default or prospective default under an agreement,
indenture or other instrument or obligation to which the Company is a party
or by which it is bound) to the consummation of the transactions
contemplated by the Exchange Offer.
If the Company determines in its sole and absolute discretion that any of
the foregoing events or conditions has occurred or exists or has not been
satisfied, it may, subject to applicable law, terminate the Exchange Offer
28
<PAGE>
(whether or not any Old Notes have theretofore been accepted for exchange) or
waive any condition or otherwise amend the terms of the Exchange Offer in any
respect. If a waiver or amendment constitutes a material change to the
Exchange Offer, the Company will promptly disclose the waiver or amendment by
means of a prospectus supplement that will be distributed to the registered
Holders of the Old Notes and will extend the Exchange Offer to the extent
required by Rule 14e-1 promulgated under the Exchange Act.
The foregoing conditions are for the sole benefit of the Company and may be
waived by the Company, in whole or in part, in its reasonable discretion. Any
determination made by the Company concerning an event, development or
circumstance described or referred to above will be final and binding on all
parties.
ACCEPTANCE OF THE OLD NOTES FOR EXCHANGE; DELIVERY OF THE NOTES
Upon the terms and subject to the conditions of the Exchange Offer, the
Company will accept all Old Notes validly tendered and not withdrawn prior to
5:00 P.M., New York City time, on the Expiration Date. The Company will
deliver the Notes in exchange for the Old Notes promptly following the
Expiration Date.
Subject to the conditions set forth under the caption "--Conditions to the
Exchange Offer," delivery of Notes in exchange for Old Notes tendered and
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of certificates for the Old Notes or a
Book-Entry Confirmation of a book-entry transfer of Old Notes into the
Exchange Agent's account at DTC, including an Agent's Message if the tendering
Holder does not deliver a Letter of Transmittal, a completed Letter of
Transmittal, or, in the case of a book-entry transfer, an Agent's Message in
lieu of the Letter of Transmittal and any other documents required by such
Letter of Transmittal. Accordingly, the delivery of Notes might not be made to
all tendering Holders at the same time, and will depend upon when certificates
for the Old Notes, Book-Entry Confirmations with respect to the Old Notes and
other required documents are received by the Exchange Agent.
Subject to the terms and conditions of the Exchange Offer, the Company will
be deemed to have accepted for exchange, and thereby exchanged, any Old Notes
validly tendered and not withdrawn as, if and when the Company gives oral or
written notice to the Exchange Agent of the Company's acceptance of the Old
Notes for exchange pursuant to the Exchange Offer. The Exchange Agent will act
as agent for the Company for the purpose of receiving tenders of the Old
Notes, the Letters of Transmittal and related documents, and as agent for the
tendering Holders for the purpose of receiving the Old Notes, the Letters of
Transmittal and related documents and transmitting Notes which will not be
held in global form by DTC or a nominee of DTC to validly tendered Holders.
The exchange will be made promptly after the Expiration Date. If for any
reason whatsoever, acceptance for exchange or the exchange of any Old Notes
tendered pursuant to the Exchange Offer is delayed (whether before or after
the Company's acceptance for exchange of Old Notes) or the Company extends the
Exchange Offer or is unable to accept for exchange or exchange the Old Notes
tendered pursuant to the Exchange Offer, then, without prejudice to the
Company's rights set forth herein, the Exchange Agent may, nevertheless, on
behalf of the Company and subject to Rule 14e-1(c) promulgated under the
Exchange Act, retain the tendered Old Notes and such Old Notes may not be
withdrawn except to the extent tendering holders are entitled to withdrawal
rights as described under the caption "--Withdrawal Rights."
Pursuant to an Agent's Message or a Letter of Transmittal, a Holder of the
Old Notes will represent, warrant and agree in the Letter of Transmittal that
it has full power and authority to tender, exchange, sell, assign and transfer
Old Notes, that the Company will acquire good, marketable and unencumbered
title to the tendered Old Notes, free and clear of all liens, restrictions,
charges and encumbrances, and the Old Notes tendered for exchange are not
subject to any adverse claims or proxies. The Holder also will warrant and
agree that it will, upon request, execute and deliver any additional documents
deemed by the Company or the Exchange Agent to be necessary or desirable to
complete the exchange, sale, assignment, and transfer of the Old Notes
tendered pursuant to the Exchange Offer.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, any unaccepted Old Notes will be returned, at the
29
<PAGE>
Company's expense, to the tendering Holder thereof as promptly as practicable
after the expiration or termination of the Exchange Offer.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New
York City time on the Expiration Date. For a withdrawal to be effective, a
written notice of withdrawal must be received by the Exchange Agent at the
address set forth below under the caption "--Exchange Agent." Any notice of
withdrawal must specify the name of the person having tendered the Old Notes
to be withdrawn, identify the Old Notes to be withdrawn (including the
principal amount of such Old Notes), and (where certificates for Old Notes
have been transmitted) specify the name in which such Old Notes are
registered, if different from that of the withdrawing Holder. If certificates
for Old Notes have been delivered or otherwise identified to the Exchange
Agent, then, prior to the release of certificates the withdrawing Holder must
also submit the serial numbers of the particular certificates to be withdrawn
and a signed notice of withdrawal with signatures guaranteed by an Eligible
Institution unless such Holder is an Eligible Institution. If the Old Notes
have been tendered pursuant to the procedure for book-entry transfer described
above, any notice of withdrawal must specify the name and number of the
account at DTC to be credited with the withdrawn Old Notes and otherwise
comply with the procedures of such facility. All questions as to the validity,
form and eligibility (including time of receipt) of notices will be determined
by the Company, whose determination shall be final and binding on all parties.
Any Old Notes so withdrawn will be deemed not to have been validly tendered
for exchange for purposes of the Exchange Offer. Any Old Notes which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the Holder thereof without cost to such Holder (or in the case of
the Old Notes tendered by book-entry transfer into the Exchange Agent's
account at DTC pursuant to the book-entry transfer procedures described above,
such Old Notes will be credited to an account maintained with DTC for the Old
Notes) as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Old Notes may be
retendered by following one of the procedures described above under the
caption "--Procedures for Tendering" above at any time on or prior to the
Expiration Date.
EXCHANGE AGENT
The Bank of New York has been appointed as Exchange Agent for the Exchange
Offer. All correspondence in connection with the Exchange Offer and the Letter
of Transmittal should be addressed to the Exchange Agent as follows:
By Registered or Certified Mail, or
Hand Delivery or Overnight Courier
101 Barclay Street
Reorganization Section/7E
New York, New York 10286
Facsimile Transmission:
(212)
Confirm by Telephone:
(212)
Requests for additional copies of the Prospectus or the Letter of
Transmittal should be directed to the Exchange Agent.
PAYMENT OF EXPENSES
The Company has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others for soliciting acceptances of the Exchange Offer.
30
<PAGE>
The Company, however, will pay reasonable and customary fees and reasonable
out-of-pocket expenses to the Exchange Agent in connection therewith. The
Company will also pay all cash expenses it incurs in connection with the
Exchange Offer, including accounting, legal, printing, and related fees and
expenses.
CONSEQUENCES OF FAILURE TO EXCHANGE
Upon consummation of the Exchange Offer, certain rights under the
Registration Rights Agreement, including registration rights and the right to
receive the contingent increases in interest rate, will terminate. Old Notes
that are not exchanged for Notes pursuant to the Exchange Offer will remain
restricted securities within the meaning of Rule 144 under the Securities Act.
Accordingly, such Old Notes may be resold only (i) to the Company or any
subsidiary thereof, (ii) to a qualified institutional buyer in compliance with
Rule 144A under the Securities Act, (iii) to an institutional accredited
investor that, prior to such transfer, furnishes to the Trustee a signed
letter containing certain representations and agreements relating to the
restrictions on transfer of the Old Notes (the form of which letter can be
obtained from the Trustee) and, if such transfer is in respect of an aggregate
principal amount of Old Notes in the time of transfer of less than $100,000,
an opinion of counsel acceptable to the Company that such transfer is in
compliance with the Securities Act, (iv) pursuant to the exemption from
registration provided by Rule 144 under the Securities Act (if available) or
(v) pursuant to an effective registration statement under the Securities Act.
The liquidity of the Old Notes could be adversely affected by the Exchange
Offer. See "Risk Factors--Consequences of Failure to Exchange."
ACCOUNTING TREATMENT
The Notes will be recorded at the same carrying value as the Old Notes, as
reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized. See
"Certain United States Federal Income Tax Considerations."
31
<PAGE>
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
Notes in the Exchange Offer. In consideration for issuing the Notes as
contemplated in this Prospectus, the Company will receive Old Notes in like
principal amount. The form and terms of the Notes are identical in all
material respects to the form and terms of the Old Notes, except for certain
transfer restrictions and registration rights relating to the Old Notes and
except for certain provisions providing for an increase in the interest rate
on the Old Notes under certain circumstances relating to the timing of the
Exchange Offer. The Old Notes surrendered in exchange for the Notes will be
retired and canceled and cannot be reissued. Accordingly, issuance of the
Notes will not result in any increase in the outstanding debt of the Company.
The net proceeds to the Company from the Offering were $465,500,000 with
respect to the Old Senior Notes and approximately $365,629,948 with respect to
the Old Senior Discount Notes, in each case, after deducting selling
discounts, commissions and estimated offering expenses. The net proceeds to
the Company from the Offering were used to repay $615 million of the $1.25
billion borrowed under the Old Credit Facility and to repay $215 million of
the $345.5 million principal amount of the NAHI Bridge Note.
32
<PAGE>
CAPITALIZATION
The following table sets forth the combined capitalization of the Company at
December 31, 1997.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
(IN THOUSANDS)
<S> <C>
CASH AND CASH EQUIVALENTS................................... $ 55,409
==========
LONG-TERM DEBT (INCLUDING CURRENT PORTION):
Other debt (1)............................................ $ 20,745
Amended Credit Facility................................... 620,000
Senior Notes.............................................. 475,000
Senior Discount Notes .................................... 381,853
NAHI Bridge Note.......................................... 102,471
Fox Subordinated Note..................................... 113,503
----------
Total long-term obligations............................. $1,713,572
----------
Series A Preferred Stock, $0.001 par value; 500,000 shares
authorized; 345,000 shares issued and outstanding (2)...... $ 345,000
STOCKHOLDERS' EQUITY:
Preferred Stock, $0.001 par value; 19,500,000 shares
authorized; no shares issued or outstanding.............. --
Class A Common Stock, $0.001 par value; 16,000,000 shares
authorized; 160,000 shares issued and outstanding (3).... --
Class B Common Stock, $0.001 par value; 16,000,000 shares
authorized; 15,840,000 shares issued and outstanding..... 16
Contributed capital....................................... 61,032
Cumulative translation adjustment......................... (416)
Retained earnings......................................... 5,417
----------
Total stockholders' equity.............................. $ 66,049
----------
Total capitalization.................................. $2,124,621
==========
</TABLE>
- --------
(1) Includes $14.4 million of indebtedness of Saban and its subsidiaries and
$6.3 million of indebtedness owed by IFE.
(2) News Corp. and News Publishing Australia Limited ("NPAL") have jointly and
severally agreed that, upon the occurrence and during the continuation of
an event of default under the Series A Preferred Stock or liquidation,
dissolution, winding up or other similar event of the Company, News Corp.
or NPAL will advance the Company all amounts necessary to redeem in full,
or pay the liquidation distribution on, all of the outstanding Series A
Preferred Stock. See "Ownership and Control of the Company--The Series A
Preferred Stock."
(3) Does not include an aggregate of 484,911 shares of Class A Common Stock
reserved for issuance upon the exercise of options granted to certain
members of management of the Company.
33
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated condensed statement of
operations for the twelve months ended June 30, 1997 reflects, on a
consolidated basis, the results of operations of the Company as if the IFE
Acquisition and related financing and the Reorganization had occurred as of
the beginning of the period presented. The pro forma as adjusted statement of
operations reflects the IFE Acquisition and related financing and the
Reorganization as adjusted for the Offering, the Exchange Offer and the
reduction of the NAHI Bridge Note from the Flextech transaction. The unaudited
pro forma condensed statement of operations for the six months ended December
31, 1997 gives effect to the results of operations of the Company as if the
IFE Acquisition and the related financing and the Reorganization as well as
the Offering, the Exchange Offer and the reduction of the NAHI Bridge Note
from the Flextech transaction had occurred at the beginning of the period
presented. The pro forma consolidated statements of operations, prepared by
the Company's management, are based on the historical financial statements of
the Company and IFE giving effect to the adjustments described in the
accompanying notes to the unaudited pro forma consolidated statements of
operations. IFE's fiscal year end was December 31; accordingly, included in
the pro forma consolidated statement of operations for the year ended June 30,
1997 are the consolidated statements of operations of IFE for the four fiscal
quarters ended June 30, 1997. These pro forma consolidated statements of
operations may not be indicative of the results that actually would have
occurred if the IFE Acquisition and Reorganization had occurred on the dates
indicated or which may be obtained in the future. The pro forma consolidated
financial statements should be read in conjunction with the audited financial
statements and notes thereto of the Company and IFE contained elsewhere
herein.
A preliminary allocation of the purchase price of IFE has been made to major
categories of assets and liabilities for purposes of the pro forma financial
statements based upon available information and assumptions that the Company's
management believes are reasonable. However, such amounts are subject to
change and final amounts may differ although such changes are not expected to
be material from the preliminary allocations. The Company's management expects
the final allocation of the purchase price of IFE to be completed by June 30,
1998.
PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE TWELVE MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA AS
THE COMPANY IFE PRO FORMA PRO FORMA AS ADJUSTED ADJUSTED
ACTUAL ACTUAL ADJUSTMENTS CONSOLIDATED ADJUSTMENTS CONSOLIDATED
----------- -------- ----------- ------------ ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net revenues............ $307,820 $379,242 $(72,444)(1) $614,618 -- $614,618
Costs and expenses:
Production and
programming.......... 180,381 218,804 (96,751)(1) 306,557 -- 306,557
4,123 (2)
Selling, general and
administrative....... 62,466 99,128 (20,094)(1) 141,500 -- 141,500
Fox Kids Network
affiliate
participations....... 6,194 -- -- 6,194 --
Amortization of
intangible assets.... -- 2,204 (2,204)(1) 41,819 -- 41,819
41,819 (2)
-------- -------- -------- -------- ------- --------
Operating (loss)
income................. 58,779 59,106 663 118,548 -- 118,548
Equity in loss of
unconsolidated
affiliate.............. 1,546 -- -- 1,546 -- 1,546
Other (income) expense.. -- 10,443 (10,742)(1) (299) -- (299)
Interest expense........ 2,226 12,445 (11,503)(1) 148,966 10,285 (5) 159,251
11,782 (3)
134,016 (4)
-------- -------- -------- -------- ------- --------
Income (loss) before
provision for income
taxes.................. 55,007 36,218 (122,890) (31,665) (10,285) (41,950)
Provision (benefit) for
income taxes........... 14,567 15,811 (32,159)(6) (1,781) (4,114)(6) (5,895)
-------- -------- -------- -------- ------- --------
Net income (loss)....... $ 40,440 $ 20,407 $(90,731) $(29,884) $(6,171) $(36,055)
======== ======== ======== ======== ======= ========
Net loss attributable to
common shares.......... $ 40,440 $(60,934) $(67,105)
======== ======== ========
Net loss per common
share--basic and
diluted................ $ 2.53 $ (3.81) $ (4.19)
======== ======== ========
Weighted average shares
outstanding--basic and
diluted................ 16,000 16,000 16,000
======== ======== ========
</TABLE>
34
<PAGE>
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
THE COMPANY PRO FORMA PRO FORMA
ACTUAL ADJUSTMENTS CONSOLIDATED
----------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues.......................... $332,971 $ 24,485(7) $357,456
Costs and Expenses:
Production and programming.......... 195,297 10,805(7) 206,102
Selling, general and
administrative..................... 62,435 6,404(7) 68,839
Fox Kids Network affiliate
participations..................... 165 -- 165
Amortization of intangible assets .. 17,436 3,487(2) 20,923
-------- -------- --------
Operating income...................... 57,638 3,789 61,427
Equity in loss of unconsolidated
affiliate............................ 2,388 -- 2,388
Other expense......................... 62 -- 62
Interest expense...................... 58,388 74(7) 81,901
23,439(5)
-------- -------- --------
Loss before provision for income
taxes................................ (3,200) (19,724) (22,924)
Provision (benefit) for income taxes.. 2,403 (6,495)(6) (4,092)
-------- -------- --------
Net loss.............................. $ (5,603) $(13,229) $(18,832)
======== ======== ========
Net loss attributable to common
shares............................... $(18,618) $(34,485)
======== ========
Net loss per common share--basic and
diluted.............................. $ (1.16) $ (2.16)
======== ========
Weighted average shares outstanding--
basic and diluted.................... 16,000 16,000
======== ========
</TABLE>
35
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(1) The Company plans to dispose of IFE's production and live entertainment
businesses and IFE's interests in cable and international networks not
directly related to The Family Channel. The operations of these businesses
have been eliminated from the pro forma consolidated condensed statements
of operations and will be excluded from future operating results; assets of
these businesses are reflected in historical financial statements as assets
held for sale.
(2) The IFE Acquisition was accounted for under the purchase method of
accounting. The total purchase price of approximately $1.9 billion
(including payoff of existing IFE credit facilities) was allocated to the
tangible and intangible assets acquired and liabilities assumed by the
Company based upon their respective fair values as of the acquisition date.
The pro forma statements of operations reflect the amortization of
intangible assets using a 40-year life and additional depreciation expense
resulting from the valuation of property and equipment acquired from IFE.
(3) In connection with the Reorganization, the Company issued the Fox
Subordinated Note in exchange for a $50 million interest in the LLC and
$58.6 million of amounts receivable from the LLC. The pro forma statements
of operations reflect the interest expense on the Fox Subordinated Note
using the interest rate of 10.427% as if the Reorganization had occurred as
of the beginning of each period presented.
(4) In connection with the IFE Acquisition, the Company incurred indebtedness
under the Old Credit Facility of $1.25 billion and issued the NAHI Bridge
Note in the amount of $345.5 million. Debt issue costs of $8.8 million were
incurred in connection with the establishment of the Old Credit Facility.
The proceeds from those borrowings were used to finance the IFE Acquisition
and repay certain indebtedness of the Company and IFE. The pro forma
consolidated statements of operations reflect the interest expense on those
borrowings, the amortization of the debt issue costs and the elimination of
interest expense associated with the obligations repaid as if the IFE
Acquisition had occurred as of the beginning of each period presented.
The pro forma interest charge was based on the 10.427% interest rate for
the NAHI Bridge Note and the 7.63% interest rate in effect at the time of
the IFE Acquisition for the Old Credit Facility. A change of 100 basis
points in the interest rate for the Old Credit Facility would change the
pro forma interest charge by $12.5 million.
(5) The pro forma interest expense adjustment gives effect to the IFE
Acquisition and related financing and the Reorganization described in
footnote (4) as adjusted for the Offering, the Exchange Offer and the
reduction of the NAHI Bridge Note from the Flextech Transaction.
(6) Reflects the income tax effect of the pro forma adjustments.
(7) Reflects the on-going results of operations for IFE for the period July 1,
1997 to July 31, 1997. The operations of IFE's production and live
entertainment businesses and IFE's interests in cable and international
networks not directly related to The Family Channel have been excluded.
IFE's on-going results of operations subsequent to July 31, 1997 are
consolidated with the results of the Company.
36
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The selected financial data of the Company set forth below as of June 30,
1996 and June 30, 1997, 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,
included elsewhere in this Prospectus. The selected financial data of the
Company set forth below as of September 30, 1997 and for the three months
ended September 30, 1996 and 1997 are derived from the Company's unaudited
combined financial statements.
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, included
elsewhere in this Prospectus. The selected financial data of Saban presented
below as of May 31, 1993 and 1994 and for each of the two years in the period
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 Prospectus. 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 selected financial data of FCN
Holding presented below at June 27, 1993, and for the year ended June 27,
1993, are derived from FCN Holding's unaudited consolidated financial
statements. The unaudited consolidated financial statements from which such
selected financial data are derived include all adjustments, consisting of
only normal recurring accruals, which management considers necessary for a
fair presentation.
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
Prospectus.
37
<PAGE>
THE COMPANY
<TABLE>
<CAPTION>
EIGHT
MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED
JUNE 30, YEAR ENDED DECEMBER 31, DECEMBER 31,
1996 JUNE 30, 1997 1996 1997
-------- ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net revenues................. $191,621 $307,820 $173,790 $332,971
Costs and expenses:
Production and
programming............... 98,937 180,381 96,802 195,297
Selling, general and
administrative............ 23,072 62,466 26,832 62,435
Fox Kids Network affiliate
participations............ 8,853 6,194 7,073 165
Amortization of intangible
assets.................... -- -- -- 17,436
-------- -------- -------- --------
Operating income............. 60,759 58,779 43,083 57,638
Investment advisory fee...... 10,000 -- -- --
Equity in loss of
unconsolidated affiliate.... -- 1,546 -- 2,388
Other expense................ -- -- -- 62
Interest expense............. 885 2,226 1,528 58,388
-------- -------- -------- --------
Income before income tax
expense..................... 49,874 55,007 41,555 (3,200)
Income tax expense........... 18,274 14,567 11,515 2,403
-------- -------- -------- --------
Net income (loss)............ $ 31,600 $ 40,440 $ 30,040 $ (5,603)
======== ======== ======== ========
Net income (loss)
attributable to common
shareholders................ $ 31,600 $ 40,440 $ 30,040 $(18,618)
======== ======== ======== ========
Net income (loss) per common
share--basic and diluted.... $ 1.98 $ 2.53 $ 1.88 $ (1.16)
======== ======== ======== ========
Weighted average shares
outstanding--basic and
diluted..................... 16,000 16,000 16,000 16,000
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
----------------- DECEMBER 31,
1996 1997 1997
-------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 16,044 $ 28,877 $ 55,409
Programming costs, less accumulated
amortization.................................. 181,427 235,575 354,348
Total assets................................... 336,270 412,401 2,504,376
Long-term obligations (including current
maturities)................................... 101,487 116,264 1,713,572
Stockholders' equity........................... 72,831 132,687 66,049
</TABLE>
38
<PAGE>
SABAN ENTERTAINMENT, INC.
<TABLE>
<CAPTION>
FIVE MONTHS
YEAR ENDED MAY 31, ENDED
------------------------- OCTOBER 31,
1993 1994 1995 1995
------- -------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues(1)............................. $57,244 $ 84,372 $242,468 $105,130
Costs and expenses:
Production and programming............ 39,703 48,101 117,557 42,022
Selling, general and administrative... 6,255 8,933 51,894 11,538
------- -------- -------- --------
Operating income........................ 11,286 27,338 73,017 51,570
Interest expense........................ 1,279 2,337 1,315 539
------- -------- -------- --------
Income before provision for income
taxes.................................. 10,007 25,001 71,702 51,031
Provision for income taxes.............. 1,600 8,201 27,027 14,289
------- -------- -------- --------
Net income.............................. $ 8,407 $ 16,800 $ 44,675 $ 36,742
======= ======== ======== ========
<CAPTION>
AS OF MAY 31, AS OF
------------------------- OCTOBER 31,
1993 1994 1995 1995
------- -------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............... $ 1,554 $ 3,849 $ 14,584 $ 16,207
Programming costs, less accumulated am-
ortization............................. 60,279 85,079 115,873 118,210
Total assets............................ 94,916 136,967 218,197 207,479
Long-term obligations (including current
maturities)............................ 28,933 34,023 5,623 5,605
Stockholders' equity.................... 36,648 53,253 58,112 94,971
</TABLE>
39
<PAGE>
FCN HOLDING, INC.
<TABLE>
<CAPTION>
FOUR
YEAR ENDED MONTHS
---------------------------- ENDED
JUNE 27, JULY 3, JULY 2, OCTOBER 31,
1993 1994 1995 1995
-------- -------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues(1)..................... $ 85,729 $130,600 $168,871 $46,286
Costs and expenses:
Production and programming........ 67,804 98,725 109,259 29,698
Fees and costs to a related
party............................ 14,682 20,861 24,713 7,313
Selling, general and
administrative................... 3,810 3,579 5,202 2,566
Fox Kids Network affiliate
participations................... -- -- 11,523 6,883
-------- -------- -------- -------
Operating income (loss)(2).......... (567) 7,435 18,174 (174)
Interest expense.................... 2,017 2,218 1,630 145
-------- -------- -------- -------
Income (loss) before provision for
income taxes....................... (2,584) 5,217 16,544 (319)
Provision for income taxes.......... -- -- -- --
-------- -------- -------- -------
Net income (loss)................... $ (2,584) $ 5,217 $ 16,544 $ (319)
======== ======== ======== =======
<CAPTION>
AS OF
-----------------------------------------
JUNE 27, JULY 3, JULY 2, OCTOBER 31,
1993 1994 1995 1995
-------- -------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 304 $ 268 $ -- $ 317
Programming costs, less accumulated
amortization....................... 22,245 17,084 26,143 27,085
Total assets........................ 39,476 35,950 49,816 52,807
Long-term obligations (including
current maturities)................ 41,416 27,163 10,686 8,727
Stockholders' deficit............... (25,575) (20,356) (3,811) (4,130)
</TABLE>
NOTES TO SELECTED HISTORICAL FINANCIAL DATA
- --------
(1) Includes revenues recognized by Saban from FCN and by FCN from Saban as set
forth below:
<TABLE>
<CAPTION>
FIVE FOUR
MONTHS MONTHS
FISCAL YEAR ENDED ENDED
---------------------- OCTOBER 31, OCTOBER 31,
1993 1994 1995 1995 1995
------ ------- ------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Saban revenues from FCN..... $2,535 $10,483 $16,228 $9,651 n/a
FCN revenues from Saban..... -- 885 14,662 n/a $973
</TABLE>
(2) 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 $13.5 million, $19.8 million, $26.9 million and $9.1
million, for the years ended June 30, 1993, 1994 and 1995 and the four
months ended October 31, 1995, respectively.
40
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The Company's current principal operations are conducted through FCN, Saban
and IFE. FCN commenced operations with the launch, in September 1990, of the
Fox Kids Network, which is currently the top-rated children's-oriented
broadcast television network 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. IFE operates The Family
Channel, one of the largest cable television networks in the United States,
reaching approximately 95% of all U.S. cable and satellite television
households. FCN Holding (a parent of FCN) and Saban formed a joint venture
pursuant to agreements entered into on November 1, 1995. Under the terms of
the agreements relating to the joint venture, between November 1, 1995 (the
Effective Date) and August 1, 1997 (the date of the Reorganization), 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.
The Company was incorporated in August 1996 as a holding company of FCN
Holding, Saban and their respective subsidiaries. The Reorganization was
effected on August 1, 1997. 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 on August 1, 1997. In connection with
the IFE Acquisition, the Company decided that IFE's production and live
entertainment businesses are not strategic to the Company. The Company intends
to sell or otherwise discontinue use of certain of these assets which
generated $111.5 million in revenues and $150.4 million in expenses in the
twelve month period ended June 30, 1997. These assets include certain of the
assets of MTM Entertainment, Inc. and its subsidiaries ("MTM"), FiT TV
Partnership ("FiT TV") and certain other assets unrelated to the operations of
The Family Channel, and are reflected in financial statements for the three
months ended December 31, 1997 as assets held for sale; the operations of such
businesses will be excluded from future operating results.
Included in this Prospectus are (i) pro forma consolidated statements of
operations of the Company for the year ended June 30, 1997 and the six months
ended December 31, 1997, which on a hypothetical basis reflect the accounts of
the Company and IFE as if the IFE Acquisition had occurred at the beginning of
each period presented, (ii) 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), (iii) 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, (iv) the combined financial statements of the Company
for the eight month period commencing on the Effective Date and ending June
30, 1996, and for the year ended June 30, 1997 and the consolidated financial
statements of the Company for the six months ended December 31, 1997, and (v)
the consolidated financial statements of IFE for the three year period ended
December 31, 1996 and the six month period ended June 30, 1997.
The financial statements of the Company for the eight months ended June 30,
1996 are not comparable to the financial statements of FCN Holding or Saban
prior to the Effective Date. Subsequent to the Effective Date, the operations
of the Company for the first time included both FCN Holding and Saban, and
thus the combined profit for that period can be attributable to the results of
both operations. In addition, commencing on the Effective Date, all revenues
between FCN and Saban have been eliminated in the combined financial
statements. 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 six
41
<PAGE>
months ended December 31, 1997 (which included the results of operations of
IFE from August 1, 1997) are not comparable to the six month period ended
December 31, 1996 as the prior period did not include the operations of IFE.
As noted in "Risk Factors--Acquisition of IFE--Programming Changes to The
Family Channel," the Company intends to make significant changes to the
programming of The Family Channel. For example, it is planned that each week
the Fox Family Channel will carry 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 Prospectus, as well as the liquidity and capital resources of the
Company. This discussion should be read in conjunction with the historical and
pro forma financial statements and related notes, "Selected Historical
Consolidated Financial Data" and "Formation of the Company," included
elsewhere in this Prospectus.
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
Children's television programming revenues have historically represented a
significant portion of the Company's total revenues, and, for the fiscal year
ended June 30, 1997 and the six months ended December 31, 1997, accounted for
approximately 90% and 41%, respectively, of the Company's consolidated
revenues. See "--Results of Operations." Giving effect to the IFE Acquisition
as if it had occurred on July 1, 1996, children's television programming
revenues accounted for approximately 45% and 38% of the Company's pro forma
consolidated revenues for the fiscal year ended June 30, 1997 and the six
months ended December 31, 1997, respectively. As a result of the planned
reprogramming of The 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 will increase.
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 targeted at children are concentrated in the fourth calendar
quarter, and in the international markets, a significant portion of revenues
are recognized in April and October. While 21% of the Company's consolidated
revenues and 28% of the Company's net income for the fiscal year ended June
30, 1997 ("Fiscal 1997") were recognized in the first fiscal quarter in part
as the result of significant revenues from merchandising realized by the
Company in that quarter, the Company expects that its second and fourth fiscal
quarters may contribute a disproportionate share of total revenues and net
income for any fiscal year. During the fiscal year ended June 30, 1997, 36%
and 24% of the Company's consolidated revenues were recognized in the second
fiscal quarter and fourth fiscal quarter, respectively, of that year. See
"Risk Factors--Seasonality."
42
<PAGE>
Increased International Focus
In recent years, revenues derived from international operations have become
increasingly significant to the Company (representing 35% and 20%,
respectively, of the Company's consolidated revenues for the fiscal year ended
June 30, 1997 and the six months ended December 31, 1997). As part of its
business strategy, the Company intends to expand its international program
production and distribution activities. See "Business--Business Strategies"
and "--Distribution--International Channels." Certain of these activities,
such as the rollout of new international channels, may require 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.
43
<PAGE>
RESULTS OF OPERATIONS
THE COMPANY
The following tables set forth, for the periods indicated, certain data with
respect to revenues, and costs and expenses as a percentage of total revenues:
REVENUE SUMMARY
<TABLE>
<CAPTION>
SABAN ENTERTAINMENT, INC. FCN HOLDING, INC.
------------------------------------ --------------------------------------
FIVE FOUR
YEAR ENDED MAY 31, MONTHS YEAR ENDED MONTHS
------------------------ ENDED -------------------------- ENDED
OCTOBER 31, JUNE 27, JULY 3, JULY 2, OCTOBER 31,
1993 1994 1995 1995 1993 1994 1995 1995
------- ------- -------- ----------- -------- -------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Children's programming:
U.S. television
distribution(1)....... $ 8,837 $11,995 $ 31,529 $ 14,823 $80,008 $124,666 $148,725 $42,845
Foreign television
distribution(2)....... 27,060 16,367 29,944 19,931 -- -- -- --
Merchandising and
licensing, home
video and other
ancillary revenues.... 4,037 32,274 164,273 65,772 5,721 5,934 20,146 3,441
------- ------- -------- -------- ------- -------- -------- -------
Total.................. 39,934 60,636 225,746 100,526 85,729 130,600 168,871 46,286
------- ------- -------- -------- ------- -------- -------- -------
Telefilms/Family
programming:
U.S. distribution...... 8,156 13,954 1,196 26 -- -- -- --
Foreign distribution... 9,154 9,782 15,526 4,578 -- -- -- --
------- ------- -------- -------- ------- -------- -------- -------
Total.................. 17,310 23,736 16,722 4,604 -- -- -- --
------- ------- -------- -------- ------- -------- -------- -------
Total Revenues.......... $57,244 $84,372 $242,468 $105,130 $85,729 $130,600 $168,871 $46,286
======= ======= ======== ======== ======= ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
THE COMPANY
------------------------------------------------------------------
EIGHT PRO FORMA SIX SIX PRO FORMA
MONTHS YEAR YEAR MONTHS MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1997 1996 1997 1997
-------- -------- --------- ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Children's programming:
U.S. television
distribution(1)....... $ 85,883 $126,796 $126,796 $ 77,725 $ 78,819 $ 78,819
Foreign television
distribution(2)....... 29,389 58,844 58,844 24,681 45,227 45,227
Merchandising and
licensing, home
video and other
ancillary revenues.... 60,541 96,766 96,766 60,048 63,786 63,786
-------- -------- -------- -------- -------- --------
Total.................. 175,813 282,406 282,406 162,454 187,832 187,832
-------- -------- -------- -------- -------- --------
Telefilms/Family
programming:
U.S. distribution...... 4,474 3,574 30,828 1,115 7,270 8,616
Foreign distribution... 11,334 21,840 30,714 10,221 16,077 17,674
-------- -------- -------- -------- -------- --------
Total.................. 15,808 25,414 61,542 11,336 23,347 26,290
-------- -------- -------- -------- -------- --------
Domestic cable:
Fox Family Channel(3).. -- -- 270,670 -- 121,792 143,334
-------- -------- -------- -------- -------- --------
Total Revenues.......... $191,621 $307,820 $614,618 $173,790 $332,971 $357,456
======== ======== ======== ======== ======== ========
</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.
(3) Domestic cable consists principally of advertising revenues and subscriber
fees.
44
<PAGE>
COSTS AND EXPENSES AS A PERCENTAGE OF TOTAL REVENUES
<TABLE>
<CAPTION>
SABAN ENTERTAINMENT, INC. FCN HOLDING, INC.
----------------------------------- ------------------------------------
FIVE FOUR
YEAR ENDED MAY 31, MONTHS YEAR ENDED MONTHS
---------------------- ENDED ------------------------ ENDED
OCTOBER 31, JUNE 27, JULY 3, JULY 2, OCTOBER 31,
1993 1994 1995 1995 1993 1994 1995 1995
------ ------ ------ ----------- -------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Costs and expenses:
Production and
programming........... 69.4% 57.0% 48.5% 40.0% 79.1% 75.6% 64.7% 64.2%
Affiliate
participations........ -- -- -- -- -- -- 6.8 14.9
Fees and costs to a
related party......... -- -- -- -- 17.1 16.0 14.6 15.8
Selling, general and
administrative........ 10.9 10.6 21.4 11.0 4.4 2.7 3.1 5.5
Amortization of
intangible assets..... -- -- -- -- -- -- -- --
------ ------ ------ ---- ----- ---- ---- -----
Total costs and
expenses.............. 80.3% 67.6% 69.9% 51.0% 100.6% 94.3% 89.2% 100.4%
Operating income
(loss)................. 19.7% 32.4% 30.1% 49.0% (0.6)% 5.7% 10.8% (0.4)%
</TABLE>
<TABLE>
<CAPTION>
THE COMPANY
-------------------------------------------------------------------------
PRO FORMA
EIGHT MONTHS PRO FORMA SIX MONTHS SIX MONTHS SIX MONTHS
ENDED YEAR ENDED YEAR ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1997 1996 1997 1997
------------ ---------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Costs and expenses:
Production and
programming........... 51.6% 58.6% 49.9% 55.7% 58.7% 57.7%
Affiliate
participations........ 4.6 2.0 1.0 4.1 -- --
Selling, general and
administrative........ 12.0 20.3 23.0 15.4 18.8 19.3
Amortization of
intangible assets..... -- -- 6.8 -- 5.2 5.9
---- ---- ---- ---- ---- ----
Total costs and
expenses.............. 68.2% 80.9% 80.7% 75.2% 82.7% 82.9%
Operating income ....... 31.8% 19.1% 19.3% 24.8% 17.3% 17.1%
</TABLE>
Six months ended December 31, 1997 compared with the six months ended
December 31, 1996
Revenues for the six months ended December 31, 1997 were $333.0 million as
compared to $173.8 million for the six months ended December 31, 1996, an
increase of $159.2 million. This increase in revenues is due principally to
the inclusion of $134.4 million of revenues from IFE for the five months ended
December 31, 1997. The Company acquired a controlling interest in IFE on
August 1, 1997. Revenues for the six months ending December 31, 1997 also
included the home video releases of the direct to video movie "Casper: A New
Beginning", which contributed $35.8 million in revenues during the period and
"Turbo: A Power Ranger Movie" which contributed $10.1 million in revenues.
Revenues for the six months ended December 31, 1997 were also positively
impacted by the television series Sweet Valley High and Breaker High which
commenced broadcast on UPN in the fall of 1997 and generated combined revenues
of $14.2 million. These increases in revenue were offset by a decrease of
$22.9 million in revenues related to the television series Power Rangers for
the six months ended December 31, 1997 as compared to the same six month
period of the prior year. Also, the six months ended December 31, 1996
included $20 million of revenue in connection with the settlement and
termination of an output agreement with Warner Bros. Home Video.
For the six months ended December 31, 1997, Power Rangers related revenues
represented 7% of the Company's total consolidated revenues as compared to 22%
for the six months ended December 31, 1996. This decrease in Power Rangers
revenues as a percentage of total revenues results primarily from the addition
of revenues from IFE to the Company's revenue base. For the six months ended
December 31, 1997, Power Rangers related revenues aggregated approximately
$24.8 million as compared to $37.5 million for the six months ended
December 31, 1996. While Power Rangers revenues no longer represent a material
percentage of the company's revenue base, the series continues as a strong
ratings performer on the Fox Kids Network and the Company has seen a recent
resurgence in both toy and merchandising related revenues. For the first two
months of calendar 1998, Bandai, the Power Rangers' master toy licensee, has
reported that Power Rangers toy sales are up 11.3% as compared to the first
two months of 1997.
Production and programming costs as a percentage of total revenues increased
to 59% for the six months ended December 31, 1997 from 56% for the six months
ended December 31, 1996. This increase in production and programming costs as
a percentage of revenues results primarily from the reduction in Power Rangers
related revenues discussed above. Due to the long term success of Power
Rangers, the property enjoys a significantly greater profit margin than the
Company's other programming.
45
<PAGE>
Selling, general and administrative expenses increased to $62.4 million or
19% of total revenues for the six months ended December 31, 1997 as compared
to $26.8 million or 15% for the six months ended December 31, 1996. The
increase of $35.6 million is due primarily to expenses associated with the
company's international channels ($3.2 million), higher costs, primarily
marketing and promotion, at Fox Children's Network ($3.2 million) and the
inclusion of five months activity of IFE ($27.8 million).
Fox Kids Network affiliate participation expense decreased from $7.1 million
or 4.1% of revenue for the six months ended December 31, 1996 to $.2 million
for the six months ended December 31, 1997. This decrease results from lower
revenue levels, higher production costs and increased selling, general and
administrative expenses for Fox Kids Network for the six months ended
December 31, 1997 as compared to the six months ended December 31, 1996.
In February 1998 the Company reached an agreement in principle with the
Affiliates' Board of Governors (the "Affiliate Board") for the Fox Kids
Network 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 $5.6 million per year for five
years in exchange for an increased allocation of advertising inventory for
approximately three and one-half years. In addition, beginning July 1, 1998
the non-owned-and-operated affiliated stations will be paid approximately $9.4
million per year for five years in exchange for (i) guaranteed clearance of
Fox Kids programming in its current time period for ten years and
(ii) relinquishment of any participation in the current or future profits of
the Fox Kids Network. This agreement is subject to approval by the individual
affiliated stations.
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 Holland. The
Company acquired its initial interest in TV10 in March 1997.
Interest expense for the six month period ended December 31, 1997 was
$58.4 million as compared to $1.5 for the six months ended December 31, 1996.
The increase is due to interest on the debt incurred in connection with the
acquisition of IFE. 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.
The Company's provision for taxes for the period ended December 31, 1997
results from the non-deductibility of amortization of excess costs over net
assets acquired and foreign withholding taxes. The effective tax rate
excluding the amortization of excess costs over net assets acquired would have
been 17% as compared to 28% for the six months ended December 31, 1997. The
decrease is due to losses generated by the Company's international channels.
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 Twentieth Century Fox Home Entertainment, Inc. ("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 Creativite & Developpement ("C&D") and
Vesical Limited programming libraries.
46
<PAGE>
Fox Kids Network affiliate participation costs were approximately 2% for the
year ended June 30, 1997 as compared to approximately 5% 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.
SABAN ENTERTAINMENT, INC.
Five months ended October 31, 1995
Revenues for the five months ended October 31, 1995 were $105.1 million, of
which approximately 66% represented revenues attributable to Power Rangers, as
compared to 72% of Saban total revenues for the fiscal year ended May 31, 1995
("Saban Fiscal 1995"). VR Troopers, Masked Rider and the European co-
production Iznogoud each contributed approximately 6% of revenues for the five
month period, and X-Men contributed just over 3%.
Production and programming costs for the five months ended October 31, 1995
were $42.0 million, or 40% of total revenues for the period. Cost of sales for
Saban Fiscal 1995, as a percentage of total revenues, was 48%. This
improvement in production and programming costs as a percentage of revenues is
attributable to an improvement in the gross profit margin on Power Rangers.
Gross profit from Power Rangers in Saban Fiscal 1995 had been negatively
impacted by costs of litigation which was resolved during Saban Fiscal 1995.
Selling, general and administrative expenses for the five months ended
October 31, 1995 were $11.5 million, or approximately 11% of total revenues
for the period. Selling, general and administrative expenses for Saban Fiscal
1995, as a percentage of total revenues, were approximately 21%. This
improvement in selling, general and administrative expenses as a percentage of
revenues was attributable to the elimination of the contractual bonus payable
to Haim Saban and to a significant reduction in non-cash charges related to
stock options, both of which are discussed further below. Excluding the effect
of these items, selling, general and administrative expenses would have been
approximately 9% of revenues for Saban Fiscal 1995.
Saban's effective tax rate for the five months ended October 31, 1995 was
28%. The effective tax rate for Saban Fiscal 1995 was 38%. This change is
attributable to an increase in foreign source revenues as a percentage of
total revenues.
Year ended May 31, 1995 ("Saban Fiscal 1995") compared with the year ended
May 31, 1994 ("Saban Fiscal 1994")
Revenues for Saban Fiscal 1995 increased 187% to $242.5 million from $84.4
million for Saban Fiscal 1994. This increase was primarily attributable to the
success of Power Rangers, in particular, significant increases (687%) in toy,
merchandising and licensing royalties and, to a lesser extent, increases in
broadcast related revenues, home video royalties and ancillary revenues.
During Saban Fiscal 1995, toy, merchandising and licensing royalties increased
to $115.1 million from $13.4 million for the prior fiscal year, accounting for
64% of the increase in total revenues for the year. Home video royalties
generated by Power Rangers in Saban Fiscal 1995 increased by $9.9 million,
broadcast related revenues increased by $8.2 million, and ancillary revenues
from the Power Rangers live stage tour (all of the revenues of which were
realized in 1995), and the Power Rangers fan club, contributed another $13.0
million and $3.1 million, respectively, to the increase in revenues for the
year. The series VR Troopers and Sweet Valley High, which began broadcast in
the Fall of 1994, contributed another $22.7 million and $5.1 million,
respectively, of revenues for Saban Fiscal 1995.
Production and programming costs for Saban Fiscal 1995 decreased as a
percentage of total revenues to 48% from 57% in Saban Fiscal 1994. Production
and programming costs in Saban Fiscal 1995 increased 144% to $117.6 million
from $48.1 million for Saban Fiscal 1994. Approximately 63% of this increase
is attributable to increases in the amortization of production costs and
accrual of profit participations in connection with the
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significant increase in revenues from the Power Rangers, described above. To a
lesser extent, production and programming costs increased as a result of
amortization of production costs related to the series VR Troopers and Sweet
Valley High.
Selling, general and administrative expenses for Saban Fiscal 1995 increased
483% to $51.9 million from $8.9 million for Saban Fiscal 1994. This increase
is primarily attributable to $18.1 million in bonus compensation paid to Haim
Saban pursuant to his previous employment agreement and the recognition of a
non-cash $11 million charge related to stock options granted by Saban to
certain of its executive officers. On December 22, 1995, Mr. Saban entered
into a new employment agreement with the LLC pursuant to which his
compensation has been fixed, commencing July 1, 1995, at $1.0 million per
year. The charge with respect to options was required because of a provision
in the option agreements which obligates Saban, so long as it remains private,
to repurchase the option shares, and vested options, at fair market value upon
termination of the optionee's employment.
The balance of the increase in selling, general and administrative expenses
for Saban Fiscal 1995 as compared to Saban Fiscal 1994 can be attributed to
increased legal and personnel costs associated with the growth of Saban.
Excluding the effect of Mr. Saban's bonus, and charges with respect to the
options, selling, general and administrative expenses would have decreased as
a percentage of total revenues from 11% in Saban Fiscal 1994 to 9% in Saban
Fiscal 1995.
Saban's effective tax rate for Saban Fiscal 1995 increased to 38% from 33%
for Saban Fiscal 1994. This increase in the effective tax rate resulted from
an increase in income generated in the United States as a percentage of total
revenues. As noted in the notes to Saban's consolidated financial statements,
earnings from Saban's foreign subsidiaries are considered to be indefinitely
reinvested. Accordingly, no provision for U.S. Federal or state income taxes
has been recorded in connection with foreign earnings. To the extent that
Saban's international operations continue to expand, it can be expected that
the effective tax rate would decline.
Year ended May 31, 1994 ("Saban Fiscal 1994") compared with the year ended
May 31, 1993 ("Saban Fiscal 1993")
Revenues for Saban Fiscal 1994 increased 48% to $84.4 million from $57.2
million for Saban Fiscal 1993. Of this increase, $41.7 million is attributable
to the initial release in August 1993 of Power Rangers, and $6.4 million is
attributable to an increase in revenues from telefilms, offset by a reduction
in sales of library programming. During Saban Fiscal 1994, Saban realized
significant increases in revenues generated by Power Rangers from worldwide
home video sales, worldwide licensing and merchandising royalties and
broadcast fees for Germany.
Production and programming costs for Saban Fiscal 1994 decreased as a
percentage of total revenues to 57% from 69% in Saban Fiscal 1993, but
increased in dollars by 21% to $48.1 million from $39.7 million for Saban
Fiscal 1993. Amortization of film costs and the accrual of profit
participations related to Power Rangers increased $11.7 million in Saban
Fiscal 1994 and amortization on telefilms increased by $6.1 million as a
result of the increase in related revenues. The reduction in library revenues
resulted in a decrease in amortization related thereto.
Selling, general and administrative expenses for Saban Fiscal 1994 increased
41% to $8.9 million from $6.3 million for Saban Fiscal 1993, but as a
percentage of total revenues remained relatively constant. This increase is
the result primarily of increased personnel costs associated with Saban's
revenue growth.
Saban's effective tax rate for Saban Fiscal 1994 increased to 33% from 16%
for Saban Fiscal 1993. This increase is primarily related to an increase in
U.S. revenues resulting from the release of Power Rangers in September 1993.
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FCN HOLDING, INC.
Four months ended October 31, 1995
Revenues for the four months ended October 31, 1995 were $46.3 million and
cost of sales as a percentage of revenues was 64%.
Production and programming costs as a percentage of revenues for the four
month period are comparable to production and programming costs as a
percentage of revenues for Fiscal 1995. The administrative fee payable to Fox
Broadcasting is based upon a percentage of net advertising revenues, and thus
varied in direct proportion to revenues.
Selling, general and administrative expenses for the four month period
increased from the prior year, both on a pro rata basis and as a percentage of
revenues. This increase in selling, general and administrative expenses is
attributable primarily to increased promotion costs of FCN.
Year ended July 2, 1995 ("FCN Fiscal 1995") compared with the year ended July
3, 1994 ("FCN Fiscal 1994")
Revenues for FCN Fiscal 1995 increased 29% to $168.9 million from $130.6
million for FCN Fiscal 1994. This increase of $38.3 million is attributable to
an increase in net revenues from advertising sales of $24.0 million, with the
balance related to an increase in ancillary revenues. This increase in revenue
was primarily a result of the success of Power Rangers, and to a lesser
extent, to the strength of the advertising market.
Production and programming costs as a percentage of revenues were 65% for
FCN Fiscal 1995 as compared to 76% for FCN Fiscal 1994. Cost of sales for FCN
Fiscal 1995 increased 11% to $109.3 million from $98.7 million for FCN Fiscal
1994. While the overall increase in production and programming costs for FCN
Fiscal 1995 is attributable to the 29% increase in revenues described above,
the improvement in gross margin is attributable principally to the increase in
revenues related to Power Rangers, which generated significantly higher gross
margins than other FCN programming, as well as to a reduction in the number of
Warner Bros.-supplied programming hours.
The administrative and other fees payable to Fox Broadcasting for FCN Fiscal
1995 increased 20% to $21.5 million from $17.9 million for FCN Fiscal 1994.
The administrative fee is based, in part, upon net advertising revenues and
the increase for the year is directly attributable to the increase in net
advertising revenues for the year.
The Fox Kids Network affiliation agreements provide that FCN is to pay to
each of the Fox Kids Network affiliates (including Fox's owned and operated
stations ("Fox O&O's")) participations, based upon the cumulative "net
profits" (as defined) of FCN. FCN Fiscal 1995 was the first year in which FCN
reached a level of defined net profits on a cumulative basis. Therefore, FCN
Fiscal 1994 did not reflect a charge for affiliate participations.
Since the net profits of FCN are distributed to the affiliates, no taxes
have been provided on the income of FCN.
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 $1.25 billion borrowed under
the Old Credit Facility, approximately $345 million through the issuance of
Series A Preferred Stock to Liberty IFE and the balance through the NAHI
Bridge Note. Of the net proceeds from the Offering of approximately $830
million, $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 $102.5 million (including accreted interest)
was outstanding under the NAHI Bridge Note at December 31, 1997; however, no
payments are due under the NAHI Bridge Note until March 2008.
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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 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
December 31, 1997, $90 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 $16 million over the next 24 months, including amounts 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 $5.6 million per year for five years in exchange
for an increased allocation of advertising inventory for approximately three
and one-half years. In addition, beginning July 1, 1998, the non-owned-and-
operated affiliated stations will be paid approximately $9.4 million per year
for five years in exchange for (i) guaranteed clearance of Fox Kids
programming in its current time period for ten years and (ii) relinquishment
of any participation in the current or future profits of the Fox Kids Network.
Net cash used in operating activities of the Company during the year ended
June 30, 1997, was $2.0 million and for the six months ended December 31,
1997, was $15.9 million. During the year ended June 30, 1997, the Company
distributed an aggregate of $708,000 to non-Fox O&O Affiliates, and during the
six months ended December 31, 1997, 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 year ended
June 30, 1997 and during the six months ended December 31, 1997, was $17.0
million and $1.336 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
Holland. The majority of the investing activity for the six months ended
December 31, 1997 was related to the IFE Acquisition.
Net cash provided by financing activities of the Company during the year
ended June 30, 1997 and during the six months ended December 31, 1997, was
$31.9 million and $1.379 billion, respectively. The financing activities for
the year ended June 30, 1997 consisted primarily of proceeds from bank
borrowings, while the activities for the six months ended December 31, 1997
related to bank and other borrowings in connection with the IFE Acquisition.
The Company's total unrestricted cash balances at December 31, 1997 were
$55.4 million.
The Company believes that the $90 million of available borrowings under the
Amended Credit Facility, together with cash flow from operations, 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 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
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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. The Company is currently reviewing those
Statements and will apply such provisions as deemed 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 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 has completed an assessment 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 Year 2000 project cost is not anticipated to have a material
effect on the results of operations.
The project is estimated to be completed not later than December 31, 1998
and the Company believes that with modifications to existing software and
conversions to new software, the Year 2000 Issue will not pose significant
operational problems for its computer systems. However, if such modifications
and conversions are not made or are not completed timely, the Year 2000 issue
could have an impact on the operations of the Company.
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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BUSINESS
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) Saban,
whose library of over 5,400 half-hours of completed and in-production
children's programming is among the largest in the world, (ii) IFE, which
operates The Family Channel, a leading basic cable television network that
provides family-oriented entertainment programming in the United States,
reaching approximately 95% of all cable and satellite television households,
(iii) the Fox Kids Network--the top-rated children's (ages 2-11) oriented
broadcast television network in the United States and (iv) a growing portfolio
of Fox Kids branded cable and DTH satellite channels operating in
approximately 25 countries worldwide. By combining one of the world's largest
children's programming libraries with a widely distributed cable platform, a
top-rated broadcast network and the Fox Kids branded international channels,
the Company has the ability to manage 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 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, News Corp., with the development, production,
distribution and merchandising strengths of Saban. In September 1997, the
Company finalized the acquisition of IFE, whose principal business is The
Family Channel. The IFE Acquisition provides the Company with several
strategic advantages, including (i) a widely distributed cable platform, which
reaches approximately 71 million homes, providing an effective means for more
vigorous competition with other children's- and family-oriented cable
services, (ii) an additional outlet for the Company's existing children's
programming library, (iii) increased awareness in the Company's primary target
market (children ages 2-11) through expanded hours, increased brand exposure
and additional licensing and merchandising opportunities and (iv) cross-
promotional opportunities with the Fox Kids Network.
The Company 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 Power Rangers, Casper,
Spider-Man, X-Men, Goosebumps and Bobby's World, 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 shows for each of the
1996-1997 and the 1997-1998 broadcast seasons, including Power Rangers, which
since shortly after its launch in 1993 has been the highest rated children's
weekday strip broadcast television program in the United States among boys
ages 2-11. The Company generally retains worldwide rights to its brands, and
currently has approximately 375 licensees worldwide, including toy companies
Bandai, Playmates and Tiger. 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 programming over terrestrial broadcast services in most major
television markets throughout the world.
While maintaining the family image and general entertainment format of the
channel, the Company intends to reprogram The Family Channel in August 1998 as
the "Fox Family Channel" with a new schedule, look, marketing campaign and
logos. From 6 a.m. to 6 p.m., the Fox Family Channel will carry a total of
76.5 hours of weekly programming targeted principally to children. From 6 p.m.
to 11 p.m., the Fox Family Channel will broadcast programming intended to
appeal to the entire family and will carry advertising to be sold on adult
demographics. Programming will be selected from the Company's existing
library, new original productions produced or co-produced by the Company and
original and library product licensed from independent suppliers.
The Company also owns and operates the Fox Kids Network, the leading U.S.
children's broadcast television network, 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
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Monday through Friday and Saturday only in its time period during 20
consecutive quarterly "sweeps" periods through November 1997. In February
1998, the Fox Kids Network finished first in the Monday through Friday
quarterly "sweeps" and second in the Saturday only quarterly "sweeps", just
behind ABC. According to Nielsen, during the 1996-1997 broadcast season,
approximately 19 million children--50% of all children (ages 2-11) in the
United States--watched the Fox Kids Network at least once each month. 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 advertiser
to children.
To capitalize on the Company's extensive library of children's programming,
since 1996 the Company has launched Fox Kids branded DTH satellite and cable
channels in approximately 25 countries throughout Europe and Latin America.
The Company intends to leverage its relationship with News Corp., which has
significant equity interests in cable and satellite services in most major
international markets, to further its international presence. For example,
since October 1996, the Company has operated a Fox Kids branded channel as
part of BSkyB's Sky Multi-Channels package, which through DTH currently
reaches 3.5 million viewers in the United Kingdom and the Republic of Ireland.
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 of all of the IFE
stock owned by it and $23 million principal amount of 6% Convertible Secured
Notes due 2004 of IFE (the "Convertible Notes") (which have since been
retired) for shares of Series A 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. The Company paid approximately $545 million
for the Privately Owned Shares and issued $345 million worth of its Series A
Preferred Stock to Liberty IFE as payment for the IFE stock and the
Convertible Notes. The balance of the consideration was paid to acquire the
publicly traded shares through the merger, to cash out existing options 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 Old Credit Facility. On August 1, 1997, the Company
borrowed $602 million under the Old 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 million under
the Old 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. See "Description of Other
Indebtedness."
IFE historically operated in three business segments: the operation of
advertiser-supported cable networks, the production ("Production") and
distribution of entertainment programming and the production of live
entertainment shows ("Live Entertainment"). The Company contemplates that it
will continue to operate The Family Channel as the Fox Family Channel but will
sell all of IFE's interests in its other cable and international networks not
directly related to The Family Channel. In addition, the Company intends to
dispose or otherwise discontinue IFE's Production and Live Entertainment
businesses.
INDUSTRY OVERVIEW
Broadcast and Cable Television
The U.S. television market is served principally by network-affiliated
stations, independent stations and cable or satellite television operators.
Because network affiliates generally broadcast network programming
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nationwide at the same local time and on the same day, the formation of a
children's network, such as the Fox Kids Network, has allowed advertisers to
efficiently plan and execute their national advertising campaigns. In order to
reach the children's market, companies devote significant dollars to
advertising. From 1993 to 1996 alone, advertising in kid-specific media grew
more than 50% to $1.5 billion. Spending by these advertisers is concentrated
on television commercials, and over 80% of children report learning about new
products through watching television.
The growth in the number of international television outlets has created
additional global demand for children's programming. The increasing
privatization of the international television industry has encouraged a
ratings/revenue-oriented focus among international broadcasters, thereby
increasing the demand for high-quality television entertainment. Children's
programs produced in the United States have enjoyed wide acceptance
internationally. In addition, the number of cable and satellite programming
services addressing the international community has grown significantly in
recent years. These added programming services have created an opportunity for
distributors, including the Company, to generate significant revenue from
international markets. International television, cable, satellite and home
video sales of a children's program produced in the United States can account
for half or more of the revenue for a given program.
Suppliers and Distributors
Suppliers of children's television programming include the production
divisions and affiliated companies of the major motion picture studios,
independent production companies, syndicators, broadcast television networks,
station owners and advertising agencies. These suppliers sell programming to
broadcast networks or television stations for a fixed cash fee per episode, by
barter or a combination of cash and barter.
Distributors of children's television programming in the United States
consist primarily of networks (both broadcast television networks and basic
cable programming services) and independent television stations. Distributors
of children's programming generally sell television series to networks on a
cash basis and sell to independent television stations on a barter basis.
Networks typically pay a distributor a fixed cash license fee which entitles
the networks to a number of runs of a series over a defined period of time.
Networks are generally entitled to retain 100% of the advertising revenues
generated by the broadcast of a series and sell advertising spots to national
advertisers on the basis of guaranteed ratings.
Licensing and Merchandising
Children's programming provides broad licensing and merchandising
opportunities. Characters developed in a popular series, and often the series
themselves, may achieve a high level of recognition and popularity among
children, making them valuable assets for the licensing and merchandising
market, where they provide attractive "branding" opportunities. The children's
market is one of the fastest growing segments in licensed merchandising sales.
It is estimated that children 14 and under will directly spend approximately
$20 billion in 1997, and they will influence another $200 billion in spending.
Of the nearly $110 billion in all licensed products sold in 1996 worldwide,
$72 billion were licensed in the United States and Canada, the majority of
which were children's products. Of the $20.7 billion spent in 1996 on toys in
the United States, $7.8 billion was for licensed toys, and $10 billion was for
licensed and movie tie-in toys combined. Among the most popular licensed items
are toys, apparel, dinnerware/lunch boxes, watches, bedding and soft vinyl
goods such as boots, backpacks and raincoats.
BUSINESS STRATEGIES
The Company intends to continue to increase its presence in the children's
and family television entertainment business, with the goal of becoming the
leading worldwide producer, broadcaster and distributor of children's and
family television programming.
The Company intends to focus on the following strategies to achieve its
objective:
Capitalize on U.S. Cable Platform. While maintaining the family image and
general entertainment format of the channel, the Company plans to reprogram
The Family Channel as the Fox Family Channel in August 1998
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with a new schedule, image and promotional campaign intended to enhance
ratings among the approximately 71 million subscribers of The Family Channel.
The Fox Family Channel will feature children's programming seven days per week
during the daytime hours and family-oriented programming during prime time.
The Company also has plans to add original series to The Family Channel's
prime time schedule and to double the number of original prime time movies
premiering annually on the Fox Family Channel from the current level of
approximately 12 to 24 or more original features. The Company believes that
the availability of original and exclusive features will enhance ratings,
improve demographics and build audience loyalty to the Fox Family Channel.
Continue to Strengthen U.S. Broadcasting Operations. The Company strives to
maintain and improve the ratings, reach and penetration of its U.S.
broadcasting network, the Fox Kids Network. The Fox Kids Network is the top-
rated children's-oriented broadcast television network, currently reaching
approximately 97% of the television households in the United States. The
Company plans to further improve its ratings for the Fox Kids Network by
continuing to develop, acquire or license quality programming which is
attractive to children. The Company, which has created such "hit" programs as
the Power Rangers and Bobby's World, currently owns most of the underlying
rights to seven of the 14 different programs broadcast on the Fox Kids Network
and will strive to increase the number of its owned programs broadcast.
Develop Strong Branded Characters and Properties. The Company intends to
continue to create and develop new entertainment properties with potential
franchise value and to build on its existing and widely recognized
institutional and programming brands in order to increase viewership on its
networks and maximize revenue from the licensing and merchandising of its
branded characters and properties. Some of the Company's programming, such as
the Power Rangers, have already achieved franchise status, and their high
consumer awareness should provide opportunities to generate revenues from
multiple sources on a long-term basis. The Company intends to capitalize on
the relationships it has built with major retailers, toy companies and more
than 500 licensees worldwide to exploit the merchandising and other ancillary
revenue potential of its entertainment properties.
Continue to Develop and Produce Cost-Effective Programming. The Company
intends to continue its practice of obtaining contractual upfront commitments
from networks, independent television stations, international broadcasters and
merchandisers prior to commencing production. The Company also intends to
continue to produce programming in a cost-effective manner while maintaining
control over critical parts of the production process to ensure continued high
quality.
Launch Additional International Channels. The Company believes that
significant expansion opportunities exist in the international television
markets, where the children's market has been relatively underserved. With its
library of over 5,400 half-hour episodes of completed and in-production
children's programming, many of which meet the local content requirement of
various European countries, the Company intends to focus significant resources
on the expansion of its international operations. The Company has an important
strategic advantage through its relationship with News Corp., whose equity
interests in international television distribution platforms and reputation
throughout the world have been helpful in securing carriage agreements on
those platforms. The Company intends to expand the Fox Kids Network globally
by launching Fox Kids branded cable and DTH satellite channels targeting
children in many major international territories. The Company's objective is
to create synergies across the base of these channels and thereby reduce
programming costs while marketing and localizing the channels to distinguish
Fox Kids from its competitors.
PROGRAMMING
The Company creates, produces and acquires quality animated and live-action
children's television programming. The Company's library of approximately
5,400 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. One of the most
attractive attributes of quality children's programming
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is its "portability." Children's programming produced for exhibition in a
particular country is considered "portable" because it can generally be
modified through editing and dubbing into other languages at a modest cost and
resold for exhibition in other countries.
Programming Library
The two principal sources of the Company's programming library are (i)
television series that have been originally produced by the Company for
broadcast in the United States and internationally (approximately 2,094 half-
hours) and (ii) programming produced by others for which the Company has
acquired various distribution rights (approximately 3,334 half-hours), of
which approximately 38% have been updated or "freshened" with new scripts,
voices and music prior to distribution. Of the Company's library, including
episodes in production as of December 31, 1997, 1,458 half-hours are original
co-produced programming that meet applicable European content requirements and
are intended for initial broadcast in Europe.
Approximately 81% of the completed and in-production programming library is
animated programming, and the balance is live-action. The Company believes
that its distribution rights are broad enough as to territory to permit it to
meet broadcasters' requirements in markets throughout the world. Of the
episodes in the Company's library of children's programming, approximately 86%
are parts of series consisting of 26 or more episodes, facilitating their
distribution as complete series in the United States and international
markets. 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 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. The Vesical library includes non-U.S.
rights to classic series such as Inspector Gadget, Heathcliff and Dennis the
Menace.
In January 1997, the Company obtained from FOX Television, a division of
Fox, Inc. ("FOX Television") the distribution rights to the New World
Communication Group Incorporated's ("New World") animation library of 515
half-hour episodes. The rights are terminable by FOX Television upon 30 days
written notice to the Company. See "Certain Transactions."
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 and Francine Pascal's Sweet Valley High) or
series (such as DragonBall Z and Saban's Adventures of Little Mermaid),
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 Eek!Stravaganza). 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 its Fox
Kids Network.
The Company owns a full-service animation studio in Paris which develops
programming containing content that meets the local content requirements of
various European countries for local broadcast television. The Paris studio
has produced approximately 243 half-hours of programming since its inception
in 1990 through December 31, 1997, and has an additional 222 half-hours for
broadcast in 1998 and beyond. In general, the Company enters into strategic
co-production alliances to develop its French and European content
programming. Among the Company's European co-production partners are Canal
Plus, France 2, M6 and Television Francaise 1 in France, Radio Television
Luxembourg 4 in Holland, Compagnie Luxembourgois de Telediffusion in
Luxemburg, British Broadcasting Company in the United Kingdom, Television
Suisse Romande in Switzerland, Radio-Television Belge de la Communaute in
Belgium, Radiotelevisione Italiana in Italy, Tele 5 in Spain and
Arbeitsgemeinschaft der Oeffentlichen Rechtlichen Rundfunkanstalten
Deutschlands ("ARD") in Germany.
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Following are examples of the programs currently being broadcast in the
United States for the 1997-1998 broadcast season for which the Company owns or
controls most of the underlying property and distribution rights, and the
program schedule commencing in February 1998.
<TABLE>
<CAPTION>
EPISODES IN
PRODUCTION FOR
1997-98 PROGRAM
SERIES SEASON SCHEDULE YEARS ON AIR PROGRAM DESCRIPTION
------ -------------- -------- ------------ -------------------
<S> <C> <C> <C> <C>
FOX KIDS NETWORK:
BeetleBorgs Metallix+ 35 Monday-Thursday 2 Three kids become comic book
superheroes in this comedy
adventure series.
Bobby's World* 10 Monday-Thursday 8 Combines point of view of a 4-
year old with spirit of Howie
Mandel.
Power Rangers Turbo+ and 91 Monday-Thursday 5 The next generations of the
Power Rangers in Space+ Saturday Power Rangers adventure.
Life With Louie* 13 Monday-Thursday 3 Comedian Louie Anderson's
childhood ups 'n downs of
dodging bullies, eating pies
and going on family vacations.
Ninja Turtles: The Next 26 Friday P.M. premiere Based on the Teenage Mutuant
Mutation+ Ninja Turtles series, the
world's favorite party reptiles
use slapstick humor and high-
tech hardware to reach a new
generation of fans.
Silver Surfer* 13 Saturday A.M. premiere Marvel comic book action
adventure.
Space Goofs*(1) 26 Saturday A.M. premiere Adventures of alien monsters
who crash-land on earth and
hide out in a house for rent
until they get back home.
OTHER DISTRIBUTION OUTLETS:
Saban's Adventures of 13 Weekend A.M. 2 Inspired by Charles Dickens'
Oliver Twist* timeless classic.
DragonBall Z*(2) 26 Weekend A.M. 2 A mystical adventure series of
riveting stories, driven by
extraordinary characters who
embody the essence of good and
evil.
X-Men . . . And Marvel 52 Weekday 5 One hour of Marvel comic book
Superheroes* heroes including X-Men, Ironman
and Fantastic Four.
The All New Captain 26 Weekend A.M. premiere The classic children's program,
Kangaroo+ updated for a new generation.
Sweet Valley High+(3) 22 Sunday 4 Twins living the California
dream.
Breaker High+ 44 Sunday premiere The adventures of high school
on a cruise ship.
Incredible Hulk*(4) 8 Sunday 2 Based on the Marvel comic book
superhero.
</TABLE>
- --------
+ Live-action.
* Animation.
(1) The Company has U.S. television and U.S. and Canadian home video and
merchandising rights through 2002. Gaumont Multimedia owns the copyrights
and trademarks.
(2) The Company has exclusive U.S. distribution rights on a year-to-year basis
through 2001, although FUNimation and Toei Animation own the copyrights
and trademarks.
(3) Pursuant to an agreement dated November 27, 1996, UPN has agreed to
purchase from the Company the exclusive rights to Francine Pascal's Sweet
Valley High, committing to a 22-episode order for the 1997-1998 broadcast
season and acquiring all 66 previously aired episodes.
(4) Produced by New World Animation; the Company has worldwide distribution
rights, excluding merchandising.
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International Sales of Programming
Much of the Company'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 programming to over 375 terrestrial, cable and
satellite distribution platforms in approximately 100 countries. These
distribution arrangements accounted for approximately $81 million, or 26% of
the Company's consolidated revenues for the fiscal year ended June 30, 1997
and approximately $61 million, or 18% of the Company's consolidated revenues
for the six months ended December 31, 1997, and, giving effect to the IFE
Acquisition as if it had occurred on July 1, 1996, 15% and 18% of its pro
forma consolidated revenues for the respective periods.
In January 1996, the Company entered into a distribution agreement with ARD,
the largest broadcaster in Germany, pursuant to which the Company agreed to
grant rights to at least 24 two-hour movies for television ("telefilms"), six
co-produced animated children's program series (consisting of Jim Knopf,
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. The territory is limited
to German-speaking Europe. ARD's rights include the right to transmit (with
unlimited runs), broadcast, exhibit, dub and sublease within its territory
each telefilm and series, and to receive a profit participation, as defined in
the agreement, based upon net revenues, from the distribution of certain
properties covered by the agreement. The terms are ten years for the
telefilms, thirteen years for the six co-produced series and seven years for
the other half hour episodes. The Company is currently negotiating an
extension of its distribution agreement with ARD.
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. See "--The Strategic Alliance with Fox/News
Corp." and "--Programming." The Company owns three distribution outlets: The
Family Channel/Fox Family Channel, the Fox Kids Network and Fox Kids branded
international channels.
The Family Channel/Fox Family Channel
The 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 intends to reprogram
The Family Channel in August 1998 as the Fox Family Channel with a new
schedule, look, marketing campaign and logo. The new format will include day-
time programming for children followed by evening programming which will be
suitable for the entire family. Evening programming is intended to include
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 Family Channel's programs are transmitted 24 hours a
day via satellite from the Company's uplink facility in Virginia Beach.
In general, pursuant to The Family Channel's affiliation agreements, each
cable system operator or other delivery service distributing The Family
Channel agrees to pay the Company a monthly fee per subscriber. The 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 Family Channel subscriber fee revenue. In
addition, The Family Channel earns revenue through the sale of advertising
spots.
Ratings and Programming. The Company plans to air 76.5 hours of children's
programming from 6 a.m.-6 p.m. each week, and programming suitable for the
entire family from 6 p.m.-11 p.m. Throughout the course of
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the day, the Company intends to gradually target programming to more mature
audiences. Under an agreement with CBN, the Company will continue to air The
700 Club with Pat Robertson, an inspirational news and talk show, during three
time slots Monday-Friday, currently 10:00 a.m-11:30 a.m., 11 p.m.-midnight,
and 2 a.m.-3 a.m.
As of December 1997, The Family Channel billed cable systems for
approximately 65 million subscribers, as compared to Nielsen's estimate that
the network is available in 71 million households. The discrepancy may be
explained in part by sampling error, but more significantly by subscriber
theft, a common occurrence in the cable industry. According to Nielsen, The
Family Channel's prime time ratings averaged 1.11, or 759,000 of the 71
million households, for the nine months ended September 1997. For purposes of
reporting ratings, The Family Channel defines prime time as 7 p.m.-10 p.m.
Monday-Friday, 8:00 p.m.-midnight Saturday and 7:00 p.m.-11:00 p.m. Sunday.
Transmission Facilities. The Company transmits all programming for The
Family Channel from its facilities located in Virginia Beach, Virginia, 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, subject to availability, to a spare
transponder and, if one is not available, then to a transponder with
"preemptable" status on the same satellite or on another satellite owned by
the same seller or lessor, subject to certain limitations. "Preemptable"
status means that the transponder can be preempted in the event of a failure
of a "protected" transponder. See "Risk Factors--Dependence Upon Satellite
Transponders."
Fox Kids Network
The Fox Kids Network, launched in September 1990, is the result of an
arrangement between Fox Broadcasting and participating FOX Television Member
Stations to form a broadcast television network focused on children (ages 2-
11). The Fox Kids Network 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 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. See "--Government Regulation."
Now in its eighth broadcast season, the Fox Kids Network currently is
carried by 179 Fox Kids Network Affiliates, 164 of which are affiliated with
the FOX Television Member Stations and 12 of which are currently 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 its 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 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
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<PAGE>
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.
The Fox Kids Network schedule commencing in February 1998 is set forth
below. The Company believes that the programming designated below as
"educational" complies with the FCC's requirement that broadcast television
stations show at least three hours of "educational" programming per week.
SATURDAY MORNING PROGRAMMING
<TABLE>
<CAPTION>
TIME PERIOD CONSECUTIVE YEARS
(EST) PROGRAM ON AIR PROGRAM DESCRIPTION
- ----------- ------- ----------------- -------------------
<S> <C> <C> <C>
8:00-8:30 a.m. Mowgli: The New Adventures of the Jungle Book premiere Live action series inspired by
the Rudyard Kipling book "The
Jungle Book."
8:30-9:00 a.m. Ned's Newt premiere Animated comedy adventure
series of a young boy with his
7-foot tall pet salamander.
9:00-9:30 a.m. Goosebumps 3 Based on the best-selling
suspense novels by R.L. Stine.
9:30-10:00 a.m. Toonsylvania premiere Animated adventures of Dr.
Frankenstein's long-suffering
assistant, Igor.
10:00-10:30 a.m. Ultimate Goosebumps 3 Based on the best-selling
suspense novels by R.L. Stine.
10:30-11:00 a.m. Space Goofs premiere Adventures of alien monsters
who crash-land on earth and
hide out in a house for rent
until they get back home.
11:00-11:30 a.m. Eerie, Indiana: The Other Dimension premiere Spin-off series from the
original, following the
adventures of 2 kids
investigating strange going ons
in their home town.
11:30-Noon Silver Surfer premiere Based on the Marvel comic book
action adventures.
MONDAY-THURSDAY PROGRAMMING
<CAPTION>
TIME PERIOD CONSECUTIVE YEARS
(EST) PROGRAM ON AIR PROGRAM DESCRIPTION
- ----------- ------- ----------------- -------------------
<S> <C> <C> <C>
7:00-7:30 a.m. Bobby's World (educational) 8 Combines point-of-view of a 4-
year-old with the spirit of
comedian Howie Mandel.
and
7:30-8:00 a.m.
3:00-3:30 p.m. BeetleBorgs Metallix 2 The next generation of the Big
Bad BeetleBorgs.
3:30-4:00 p.m. Spider-Man 4 Based on the most popular
Marvel comic book hero in
history.
4:00-4:30 p.m. Power Rangers Turbo 5(1) The next generation of the
Power Rangers saga.
4:30-5:00 p.m. Life With Louie (educational) 3 Comedian Louie Anderson's
childhood ups 'n downs of
dodging bullies, eating pies
and going on family vacations.
</TABLE>
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<PAGE>
FRIDAY PROGRAMMING
<TABLE>
<CAPTION>
TIME PERIOD CONSECUTIVE YEARS
(EST) PROGRAM ON AIR PROGRAM DESCRIPTION
- ----------- ------- ----------------- -------------------
<S> <C> <C> <C>
7:00-7:30 a.m. C-Bear & Jamal (educational) 2 Life of Jamal Wingo, a 10-year
old African American boy whose
thrift store teddy bear comes
to life.
7:30-8:00 a.m. Casper 2 The friendly ghost.
and
3:00-3:30 p.m.
3:30-4:00 p.m. Sam & Max premiere In the frenetic world of tough
as nails cops, none is more
dysfunctional than the duo of
Sam, the dog, and Max, the
wild, psycho rabbit.
4:00-4:30 p.m. Power Rangers In Space premiere(1) The newest generation of the
Power Rangers Saga.
4:30-5:00 p.m. Ninja Turtles: The Next Mutation premiere Based on the Teenage Mutant
Ninja Turtles series, the
world's favorite party reptiles
use slapstick humor and high-
tech hardware to reach a new
generation of fans.
</TABLE>
- --------
(1) Power Rangers, as a franchise, has been on the air for five consecutive
years. Power Rangers Turbo has been on the air for approximately two years
and Power Rangers In Space premiered this season.
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 is 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 1996-1997 broadcast season, the Fox
Kids Network averaged a 2.4 rating and 16% share, Monday-Friday, and a 4.5
rating and 21% share Saturday mornings during the hours it broadcasts. The Fox
Kids Network's ratings for Saturday morning were almost twice that of its
closest broadcast competitor, ABC (2.6 rating and 12% share). For the 1997-
1998 broadcast season to date (September 22, 1997-February 28, 1998), the Fox
Kids Network averaged a 2.3 rating Monday-Friday and a 3.7 rating on Saturday
mornings during the hours it broadcasts.
Fox Kids Affiliation Agreements. Currently, more than 93% of the FOX
Television Member Stations, including 12 of the 22 Fox O&O's, carry the Fox
Kids Network pursuant to their affiliation agreements with Fox Broadcasting.
These affiliation agreements expire over the next one to ten years and there
can be no assurance that they will be renewed.
The affiliation agreements currently provide that FCN is to pay to each of
the Fox Kids Network Affiliates (including the Fox O&O's) participations based
upon the "net profits" (as defined) of FCN, with the participations allocated
among the Fox Kids Network Affiliates based upon each Affiliate's percentage
of cumulative audience delivery as compared to the other Fox Kids Network
Affiliates. "Net profits" is defined on a cumulative basis to include amounts
actually received by FCN from the exhibition, distribution and other
exploitation of Fox Kids programs and the merchandising and other rights
relating thereto, less administrative fees, production/license fees,
distribution and merchandising fees (including those payable to the Company),
overhead and other expenses and reserves. Certain of the Fox O&O's have waived
in favor of the Company their rights to receive these participations, which
instead are retained by the Company. As a result of this waiver, through
December 31, 1997, $4.7 million, or approximately 30% of the total amounts
paid ($15.7 million) to all Fox Kids Network Affiliates, has been retained by
the Company.
The non-Fox O&O Fox Kids Network Affiliates are represented by the Affiliate
Board, which was convened for the purpose of facilitating communications
between the non-Fox O&O Affiliates and FCN. On behalf of the Company, Fox
Broadcasting from time to time meets with the Affiliate Board to review the
operations and
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operating policies of FCN and the Fox Kids Network. In February 1998, the
Company reached an agreement in principle with the Affiliate Board for the Fox
Kids Network 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 $5.6 million per year for five years in exchange for
an increased allocation of advertising inventory for approximately three and
one-half years. In addition, beginning July 1, 1998, the non owned-and-
operated affiliated stations will be paid approximately $9.4 million per year
for five years in exchange for (i) guaranteed clearance of Fox Kids
programming in its current time period for ten years and (ii) relinquishment
of any participation in the current or future profits of the Fox Kids Network.
The Affiliate Board has recommended that each of the Fox Kids Network
Affiliates accept the Company's proposal. The Fox Kids Network Affiliates are
currently considering the proposal.
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. The Company has launched
branded Fox Kids channels, owned and operated by the Company, which are
distributed via DTH satellite and cable in the United Kingdom, the Republic of
Ireland, Latin America, France, Holland and Australia. The Company also has
signed agreements to launch Fox Kids branded channels in Scandinavia in early
April 1998 and Poland in mid-April 1998, and is in active discussions and
negotiations to launch additional Fox Kids branded channels in other countries
throughout the world, with particular emphasis in Germany, Spain, Italy,
Austria, Belgium, Switzerland and Turkey. The Company's objective is to become
the leading operator of international children's channels by creating fully
localized Fox Kids branded channels in every major territory.
United Kingdom and Republic of Ireland. The Company operates a Fox Kids
channel that is distributed to over 3.7 million subscribers in the United
Kingdom and the Republic of Ireland. The channel is distributed as part of
BSkyB's Sky Multi-Channels DTH package to over 3.5 million subscribers, and
over a number of cable systems to approximately 250,000 viewers. The Company
expects to grow significantly its subscriber base by increased distribution
through BSkyB, in which News Corp. owns a 40% interest, and through increased
cable distribution.
Latin America. Since November 1996, the Company has operated Fox Kids Latin
America ("FKLA"), a pan-regional Latin American channel, which simultaneously
broadcasts animated and live-action programming in Spanish, Portuguese and
English. The 24-hour service is transmitted via the PanAm Sat 5 satellite and
currently reaches 3.9 million cable and multi-channel multi-point distribution
system ("MMDS") homes in 19 countries throughout the region. In addition, the
Fox Kids channel is carried on two emerging Sky-branded DTH platforms
currently operating in Mexico and Brazil, which reach an additional 160,000
homes.
In October 1997, the Company launched FKLA on Brazil's largest multi-system
operator, NET (a subsidiary of Globo, Brazil's largest media company with a
potential reach of approximately 1.7 million subscribers). The Company also
has recently launched on Brazil's second largest multi-system operator, TV
Abril, making FKLA available up to an additional 450,000 homes in Brazil. The
Company is aggressively positioning FKLA in the Brazilian marketplace in
anticipation of 1,500 new cable licenses to be auctioned by the government,
which should expand Brazil's multi-channel universe to more than 6 million
subscribers by the year 2000.
Holland. The Company acquired 100% of TV10 from Arcade Media Group B.V. and
Wegener N.V. (90% in March 1997 and 10% in December 1997). TV10 is distributed
in Holland via cable to 89% of all television households. Before the Company's
purchase of its interest in TV10, the channel did not broadcast any children's
programming. On August 2, 1997, a Fox Kids service was launched on TV10,
broadcasting between the hours of 6:30 a.m. and 6:00 p.m. on weekdays and 5:00
p.m. on Saturday and Sunday. The Fox Kids block currently has a weekly average
of 10% market share for children 6-11, and a 12% market share for children
Monday through Friday.
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France. A new Fox Kids channel was launched in France in November 1997. The
channel is distributed as part of the basic package of the Canal Satellite DTH
platform to approximately 700,000 subscribers. The channel currently is
broadcasting 15 hours per day, seven days per week. The Company is in
discussions with all major cable operators to broaden distribution, although
there currently is limited channel capacity on most of the analog cable
systems in France.
Australia. 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. As of December 31, 1997, Foxtel had over 275,000 subscribers.
Foxtel is a 50/50 partnership between News Corp. and the Australian state-
owned telephone company, Telstra.
Scandinavia. The Company plans to launch a Fox Kids channel in Sweden,
Norway, Denmark and Finland on the new digital DTH platform of Canal Digital,
a joint venture between Telenor and Canal PLUS in early April 1998. Canal
Digital will act as agent in maximizing the distribution of the channel to
cable and satellite master antenna television ("SMATV") operators. The channel
will be operated from the United Kingdom and will broadcast children's
programming 12 hours per day, fully dubbed into Norwegian, Swedish and Danish.
Discussions are taking place to obtain analog DTH distribution as well as with
all major cable and SMATV operators for distribution of the Fox Kids
throughout Scandinavia, including distribution in Iceland.
Poland. The Company plans to launch a Fox Kids channel in Poland in mid-
April 1998, as part of @Entertainment's cable network (PTK) and new digital
DTH platform. @Entertainment is the largest provider of multi-channel
television services in Poland. Based on @Entertainment's projections, Fox Kids
is expected to reach 750,000 subscribers at launch and 1.2 million subscribers
by the end of 1998. @Entertainment will act as agent in maximizing the
distribution of the channel to cable operators in Poland. The channel will be
operated from the United Kingdom and will broadcast children's programming
12 hours per day, fully dubbed into the Polish language.
ADVERTISING
The extensive reach of The 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 and the merchandising of
its characters and related series elements. For the year ended June 30, 1997
and the six months ended December 31, 1997, the Company's revenues from
advertising were approximately $125 million or 41% and $141 million or 42% of
consolidated revenues, respectively, and, giving effect to the IFE Acquisition
as if it had occurred on July 1, 1996, $279 million, or 45%, and $152 million,
or 43%, respectively, of the Company's pro forma consolidated revenues. One of
the Company's objectives in its planned reprogramming of The Family Channel as
the Fox Family Channel is to reach viewers that are attractive to advertisers.
See "Risk Factors--Acquisition of IFE." 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 12 a.m. to 6
a.m. time block on The Family Channel and will continue to air 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, 1997 and the six months ended December 31, 1997, the Company's licensing
and merchandising activities represented approximately 18% and 4% of the
Company's consolidated revenues, respectively, and giving effect to the IFE
Acquisition as if it had occurred on July 1, 1996, approximately 9% and 3%,
respectively, of pro forma 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.
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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 and BeetleBorgs, and with Playmates, Inc., covering
Captain Kangaroo. 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 375 different licensees worldwide for
other 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 is in production on a second film based upon the character
"Casper." The Company also is in pre-production on a film based on the
character "Richie Rich," and has acquired rights to produce new live-action
television specials and series programs based upon the "The Addams Family"
characters. Through a separate agreement with 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. See "Certain Transactions--Certain Transactions
Between the Company and the Fox Parties."
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 has made a decision to increase
the number of telefilms produced or acquired each year to 25 or more motion
pictures. Further, whenever possible, the Company will acquire worldwide
rights to these features. These films are typically targeted at prime time
audiences and consist of 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 December 1, 1997, FOX Television had 175 prime time primary
television station affiliates and three prime time secondary television
station affiliates across the United States, including 22 Fox O&O's, reaching
over 96% 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. See "Risk Factors--Strategic
Relationships with News Corp. and Fox."
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
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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. See "Certain
Transactions--Certain Transactions Between the Company and the Fox Parties."
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 late night broadcast and programming derived from properties (such as
The Simpsons) not originally launched on the Fox Kids Network.
The Company has historically maintained a close working relationship with
the Fox Parties, pursuant to which the Company and its operating subsidiaries
have been granted access to the Fox Parties' motion picture studio and other
ancillary facilities, as well as their distribution and administrative
services (see "Certain Transactions"), and, although the Fox Parties are not
generally obligated to provide such services in the future, the Company
intends to seek access to these services where the Company believes that they
may be beneficial to the Company. Should the Fox Parties decide not to provide
these services, the Company believes similar services are readily available to
the Company at competitive prices.
COMPETITION
The businesses in which the Company engages are highly competitive. Each of
the Company's primary market 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 pictures
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 and expects to
continue to compete, through the Fox Kids Network and the Fox Family Channel,
with the other broadcast television networks, public television and cable
television channels, such as Nickelodeon, USA Cable Network, Turner Network
Television and The Cartoon Network for market acceptance of its programming
and for viewership ratings and 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.
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Cable. When The Family Channel's reprogramming as the Fox Family Channel is
complete, the cable channels with which the Fox Family Channel will compete
head-on include Nickelodeon (an MTV Networks company), the Disney Channel and
the Cartoon Network. In addition to these direct cable competitors, the Fox
Family Channel will also compete with its Fox Kids Network sister, the WB,
ABC, UPN, CBS and PBS. The Company intends to differentiate itself from this
competition by cross-promoting programming with the Fox Kids Network. In
addition, the Fox Family Channel will also serve as an additional outlet for
Fox Kids original programming.
GOVERNMENT 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 cable
television industry and other industries involved in the video marketplace
operate.
Federal Regulations and Legislation
The distribution of the Company's programming by broadcast stations and
cable systems must comply with the provisions of the Children's Television Act
of 1990 ("CTA") and the rules and policies of the FCC pertaining to the
production and distribution of television programs directed to children,
particularly with respect to the amount and type of commercial matter
broadcast during programs directed at children. 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.
FCC rules also establish a "processing guideline" for broadcast television
stations of 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 in any respect, including the child's
intellectual/cognitive or social/emotional needs." "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
by broadcasting at least three weekly hours of Core Programming 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 three hours per week of Core Programming to affiliates of
FCN, thereby enabling them to fulfill their obligations under the CTA. The
Company believes that two additional programs, Life With Louie and The All New
Captain Kangaroo, also qualify as Core Programming under the new rules.
Certain aspects of the Company's cable 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."
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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. 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 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). Beyond the basic tier of cable service, which continues to be
regulated by the local franchising authorities ("LFAs"), rate regulation of
other cable services between now and 1999 will only be triggered by a valid
rate complaint by a LFA, and only in an area where no effective competition
exists. Once a system's rates are initially set, the rules permit subsequent
increases that reflect inflation and increases in existing programming costs
and certain other costs. The rules thus permit cable operators that carried,
for example, The Family Channel when their rates were initially regulated to
pass through to subscribers any subsequent increases in licensing fees,
subject to a cap which will expire this year. Systems may also increase rates
when they add new channels to regulated tiers, but there is a cap on such
increases. Alternatively, systems may create "new product tiers" consisting
entirely of services not previously offered on regulated tiers, and these new
product tiers will generally not be subject to rate regulations.
Rate regulation under the 1992 Act resulted in a reduction of rates to some
subscribers in some markets. The deregulation under the 1996 Act may, however,
result in an increase in rates in some markets. In response to the 1992 Act
and the FCC's implementing regulations, many cable systems retiered channels
to create an attractively priced basic tier consisting exclusively of
broadcast and public, educational, and governmental access channels, while
offering satellite-delivered programming services such as The Family Channel
on a different service tier or on an a la carte basis. To the extent that such
retiering or repricing of the Company's networks induces customers to
discontinue their subscriptions, the Company's financial performance could be
adversely affected. Deregulation of rates pursuant to the 1996 Act may reverse
such tiering and pricing decisions by cable system operators and,
correspondingly, reverse or ameliorate any adverse effects of the 1992 Act,
although the impact of the 1996 Act and its implementing regulations cannot be
predicted at this time.
The 1996 Act addresses obscenity, indecency and violence in connection with
telecommunications services in several respects, including the establishment
of an encrypted rating in all video programming that, when used in conjunction
with so-called "V-Chip" technology, would permit the blocking of programs with
a common rating. On January 17, 1997, an industry proposal, as revised, was
submitted to the FCC describing a voluntary ratings system for all video
programming. The industry proposal was revised and resubmitted to the FCC on
August 1, 1997. Pursuant to the 1996 Act, the FCC is conducting separate
proceedings (i) to determine whether to accept the industry proposal or
establish and implement an alternative system for rating and blocking video
programming and (ii) addressing technical issues relating to the "V-Chip." The
Company cannot predict whether the FCC will accept the industry proposal
regarding the rating and blocking of video programming, or how changes in this
proposal or the implementation of "V-Chip" technology could affect the
Company's business.
Under the FCC's closed captioning rules, which became effective January 1,
1998, program distributors, and not producers, are generally responsible for
compliance with captioning rules. However, program distributors--defined to
include entities that distribute programming to subscribers--may demand
certifications from program producers that programming meets the minimum
captioning requirements. The rules divide programming into two groups: pre-
rule programming (which is defined to be programming that was first published
or exhibited on or before January 1, 1998 by any distribution method) and new
programming (programming that was first published or exhibited after that
date). Pre-rule programming is subject to no specific requirements until the
first calendar quarter of 2008. In that quarter, 75% of all pre-rule
programming actually aired or shown by a distributor is required to be
captioned. Compliance is measured on a per-channel basis, as averaged per
calendar quarter. Beginning in the first calendar quarter of 2000, new
programming that is not otherwise exempt from captioning requirements is
subject to a series of quarterly benchmarks, until by January 1, 2006, 95% of
all new, non-exempt programming is to be captioned. The rules exempt new
networks (cable
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and non-cable) for four years from launch date; networks with less than $3
million in annual gross revenues (not counting affiliate revenues); and
companies which have already devoted 2% of annual gross revenues to closed
captioning expenses. The FCC also may grant waivers on a case by case basis.
The FCC's rules are subject to petitions for reconsideration and the extent to
which the Company, as both a producer and distributor of programming, will be
required to comply with captioning requirements is not clear.
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. To the extent,
however, that rate deregulation causes a material increase in cable rates, the
subscriber base could be decreased potentially affecting the Company's
subscriber revenues. Further, 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.
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.
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 stations (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 LFA's 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. Local rate regulation for a particular system
could result in resistance on the part of the cable operator to the amount of
subscriber fees charged by the Company for its programming.
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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.
FACILITIES
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. As of April 1, 1997, certain of the Fox Kids Network
employees and other Company employees relocated to a new facility in Los
Angeles which FOX Television recently acquired from New World. The Fox Kids
Network leases approximately 24,123 square feet in such facility. No rent has
been paid yet for this lease and the rate has not been negotiated. The Company
also leases a multi-purpose production facility in Valencia, California under
a lease that expires in January 1999. The Company's Paris animation studio
currently leases 1,379 square meters 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 also continues to
lease from CBN a portion of a corporate support building for its master
control, satellite uplink and postproduction facilities. 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.
EMPLOYEES
As of December 31, 1997, the Company (excluding IFE) had 500 full-time and 5
part-time employees in the United States and 121 full-time employees outside
the United States. In connection with the IFE Acquisition, the Company added
430 full-time and 150 part-time employees in the United States. As part of the
Company's planned sale or disposition of certain of IFE's businesses, the
number of IFE employees will be reduced. 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.
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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 following table
lists some the Company's children's network and syndication programming for
the 1997-1998 season, the nature of the ownership of the copyrights and
trademarks associated with such programming and certain restrictions
applicable to such licensed copyrights and trademarks.
<TABLE>
<CAPTION>
INTELLECTUAL PROPERTY DISTRIBUTION RIGHTS
--------------------- ----------------------------------------------------------------------
HOME NON-
COPYRIGHTS TRADEMARKS TERRITORY TELEVISION VIDEO THEATRICAL THEATRICAL MERCHANDISING
---------- ---------- ---------------- ---------- ----- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Saban's Adventures of
Oliver Twist * * Worldwide * * * * *
BeetleBorgs Metallix * * Worldwide * * * * *
(except Asia)
Bobby's World * * Worldwide * * * * *
Breaker High *(1) * Worldwide * * * * *
(except Canada)
DragonBall Z --(2) --(2) United States * -- -- -- --
Eek!Stravaganza * * Worldwide * * * * *
Life With Louie * * Worldwide * * * * *
Power Rangers in Space * * Worldwide * * * * *
(except Asia)
Power Rangers Turbo * * Worldwide * * * * *
(except Asia)
Sweet Valley High * -- Worldwide * * * * *
(except
publishing)
The Tick * * Worldwide * * * * *
X-Men --(3) --(3) Worldwide * * -- -- --
Casper -- -- United States, *(4) -- -- -- --
Latin America,
United Kingdom
Goosebumps -- -- Worldwide, * -- -- -- --
except Canada
Sam & Max -- -- United States, * *(5) -- -- --
United Kingdom,
Australia,
New Zealand,
Mexico,
Central America,
South America
Silver Surfer -- -- United States * * -- -- --
Space Goofs --(6) --(6) United States, * * -- -- *
Canada
Stickin' Around -- -- United States * -- -- -- --
The All New
Captain Kangaroo * *(7) Worldwide * * * * *
Marvel Superheroes --(8) --(8) Worldwide * * -- -- --
Toonsylvania -- -- United States, *(4) -- -- -- --
Latin America,
United Kingdom
Ninja Turtles: The Next * --(9) Worldwide * * -- -- --
Mutation (except Canada)
</TABLE>
- --------
("*" Company owns the intellectual property rights or programming distribution
rights; "--" Company does not own the intellectual property rights or
programming distribution rights)
(1) The Company owns worldwide copyrights, except in Canada.
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(2) FUNimation and Toei Animation own copyrights and trademarks. The Company
has exclusive U.S. distribution rights on a year-to-year basis through
2001.
(3) Marvel owns copyrights and trademarks. The Company has exclusive
distribution rights for 15 years.
(4) Company controls all forms of television in the United States, but only
cable and satellite rights in the United Kingdom and Latin America.
(5) Home Video rights are worldwide, excluding the United States.
(6) Gaumont Multimedia owns the copyrights and trademarks. The Company has
exclusive U.S. and Canadian distribution rights through 2002.
(7) The Company uses the trademarks under license from Robert Keeshan
Associates, Inc.
(8) New World and Marvel own the copyrights and trademarks. The Company has
exclusive worldwide distribution rights.
(9) The Company owns worldwide copyrights, except in Canada. Trademarks are
used under a license from Mirage Studios.
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.
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.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company, and their ages at
January 1, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
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.............. 51 Executive Vice President and Director of the Company
William Josey........... 51 Senior Vice President, Business Affairs and General
Counsel of Saban, Secretary of the Company
Mark Ittner............. 45 Chief Accounting Officer of the Company and Senior
Vice President of Finance of Saban
K. Rupert Murdoch....... 66 Director
Chase Carey............. 44 Director
Lawrence Jacobson....... 38 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.
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.
WILLIAM JOSEY has served as Secretary of the Company since its inception in
August 1996, and Senior Vice President, Business Affairs and General Counsel
of Saban since joining Saban in 1991. Prior to joining Saban, Mr. Josey served
as Senior Vice President of MGM/UA Telecommunications, supervising business
and legal matters. During the past 20 years, Mr. Josey has also held a number
of executive positions, including Vice President of Business and Legal Affairs
for The Disney Channel; Vice President of Business Affairs for Lorimar
Television and Vice President of Business Affairs for Polygram Television.
MARK ITTNER has served as Chief Accounting Officer of the Company since its
inception in August 1996, and as Senior Vice President of Finance of Saban
since 1995 and as Vice President of Finance from 1993 to 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.
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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. Prior to Fox Inc., Mr. Jacobson had been Vice President
of Corporate Finance and Strategic Planning for Weintraub Entertainment Group
since December 1989. He joined the company as Vice President, Motion Picture
Division, in May 1987. He previously served as Manager, Pay Cable and Home
Entertainment Group, Columbia Pictures, from 1985 to 1987.
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.
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.
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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 "Certain Transactions--Formation of the LLC
and the Reorganization."
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, 1997.
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................................ 1997 $1,000,000 -- (1)
Chairman of the Board and Chief Executive
Officer
Mel Woods................................. 1997 452,100 650,000 (1)
President, Chief Operating Officer and
Chief Financial Officer
Margaret Loesch(2)........................ 1997 562,500 455,400 (1)
Shuki Levy................................ 1997 500,000 700,000 (1)
Executive Vice President
William Josey............................. 1997 256,300 10,000 (1)
Senior Vice President, Business Affairs
and General Counsel of Saban
</TABLE>
- --------
(1) Less than either $50,000 or 10% of total annual salary and bonus.
(2) Ms. Loesch's employment with the Company was terminated effective November
21, 1997.
See "Certain 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.
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<PAGE>
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, 1997, and the value of unexercised
options, assuming a value of $50 per share, based on the difference between
the Company's estimate of the fair market of the Class A Common Stock and the
exercise price of the options.
AGGREGATED FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR-END OPTIONS AT FISCAL YEAR-END
------------------------------------------- ---------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ---------------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Haim Saban.............. -- -- $ -- $ --
Mel Woods............... 96,982 64,655 4,849,100 3,232,750
Margaret Loesch(1)...... 32,327 129,310 1,616,350 6,465,500
Shuki Levy.............. 96,982 64,655 4,849,100 3,232,750
William Josey........... -- -- -- --
</TABLE>
- --------
(1) Upon the termination of Margaret Loesch's employment with the Company in
November 1997, all of her options were terminated.
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 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 (with 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
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.
William Josey
William Josey has an employment agreement with Saban that extends through
March 31, 2000. Mr. Josey is to be paid an annual base salary of $300,000,
$315,000 and $330,000 for each of the 1997-98, 1998-99 and 1999-2000 periods,
respectively. The employment agreement provides that the Company may terminate
Mr. Josey's employment only for cause.
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<PAGE>
The Company has employment agreements with each of Mel Woods and Shuki Levy.
Each such agreement contains substantially the same terms and conditions as
the others. The Company may terminate each such executive's employment at any
time with or without cause, and the executive may terminate his or her
employment upon the Company's material breach of the employment agreement. If
the executive is terminated by the Company with cause, he or she will be
entitled to receive (i) annual base salary for the period in which the date of
termination falls, prorated to the date of such termination and (ii) vested
rights with respect to certain stock options granted in connection with the
employment agreement. Should the executive terminate his or her employment or
should his or her employment be terminated by the Company without cause, the
executive will be entitled to receive (i) his or her 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 the executive's 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.
Summarized below are terms of the employment agreements that are different
for each executive.
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.
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.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of January 1, 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 the sole voting and
investment 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) COMMOM STOCK (1)
----------------- ------------------
PERCENT PERCENT
OF NUMBER OF
NUMBER CLASS OF CLASS
OF SHARES OWNED SHARES OWNED
--------- ------- ---------- -------
<S> <C> <C> <C> <C>
Haim Saban(2)............................ 15,840,000 100.0%
Silverlight Enterprises, L.P.(2)(3)...... 2,759,724 17.4
Fox Broadcasting(2)...................... 15,840,000 100.0
Allen & Co. Incorporated................. 160,000 100.0%
Mel Woods................................ 96,982 37.7
Margaret Loesch.......................... -- -- -- --
Shuki Levy............................... 96,982 37.7
William Josey............................ -- -- -- --
K. Rupert Murdoch........................ 15,840,100 100.0
Chase Carey.............................. 15,840,000 100.0
Lawrence Jacobson........................ -- -- -- --
All of the Company's executive officers
and directors as a group (seven
persons)................................ 193,964 54.8% 15,840,000 100.0%
</TABLE>
- --------
* Less than one percent
(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 January 1, 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 following 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
77
<PAGE>
or policies of the Company or to propose or effect a business combination,
restructuring, recapitalization, liquidation, dissolution or similar
transaction. See "Management--Agreement Regarding 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.
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 January 1, 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 member
thereof had sole investment power was as follows:
<TABLE>
<CAPTION>
NUMBER AGGREGATE
OF 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 the Company, 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.
78
<PAGE>
DESCRIPTION OF EQUITY SECURITIES
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 January 23, 1998, 160,000 shares of Class A
Common Stock, 15,840,000 shares of Class B Common Stock and 345,000 shares of
Series A Preferred Stock were outstanding.
The following descriptions contain material provisions of the securities of
the Company and certain provisions of the Company's Corrected Restated
Certificate of Incorporation and Amended and Restated Bylaws (the "Bylaws").
THE COMMON STOCK
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 at such vote. The Company's Corrected Restated Certificate
of Incorporation does not provide 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 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.
THE SERIES A PREFERRED STOCK
The holders of the Series A Preferred Stock 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.
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<PAGE>
Pursuant to the Funding Agreement among News Corp., NPAL, a wholly owned
subsidiary of News Corp., and the Company (the "Funding Agreement"), each of
News Corp. and NPAL has, jointly and severally, agreed that, upon the
occurrence and during the continuation of an event of default under the
provisions governing the Series A 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 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. See "Certain Transactions--Formation of the
LLC and the Reorganization." The following constitute events of default with
respect to the Series A Preferred Stock under the Corrected Restated
Certificate of Incorporation of the Company: (i) the failure by the Company to
mandatorily redeem Series A 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 Preferred Stock (which may include a breach
of the Funding Agreement, including a net worth covenant therein); and (iii)
an event of default under the terms of the preferred stock of NPAL, if any
shares of which are outstanding. Upon an event of default, the Series A
Preferred Stock may be redeemed, at the holder's option, at a specified
redemption price (which may include a penalty under certain circumstances). In
addition, pursuant to the Exchange Agreement among NPAL, Liberty Media
Corporation ("Liberty Media") and Liberty IFE, each of the holders of the
Series A 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 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
Preferred Stock remain outstanding. The Series A Preferred Stock does not have
voting rights, except as required by law, nor will holders of Series A
Preferred Stock have preemptive rights over any stock or securities that may
be issued by the Company.
The Series A Preferred Stock will be redeemed in 2027 at a price equal to
the liquidation price as of the date of such redemption, payable in cash. In
years 2017 and 2022, holders of the Series A Preferred Stock have a thirty day
period commencing August 2 of such years in which they can require the Company
to redeem the Series A Preferred Stock at a price equal to the liquidation
price, payable in cash. At any time after August 1, 2007, the Company may, at
its option, repurchase all shares of Series A Preferred Stock, again at a
price equal to the liquidation price, payable in cash. Under such redemption
requirements, any failure by the Company to redeem the Series A Preferred
Stock will obligate News Corp. and NPAL to perform under the Funding
Agreement.
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<PAGE>
CERTAIN TRANSACTIONS
FORMATION OF THE LLC AND THE REORGANIZATION
In connection with the formation of the LLC, Haim Saban, Saban and the Fox
Parties entered into a series of agreements. As a result of the
Reorganization, the LLC became a subsidiary of the Company and the Company is
entitled to the benefits of and subject to these agreements.
On November 1, 1995, Saban, FCN Holding and Fox Broadcasting entered into a
LLC Formation Agreement pursuant to which the parties agreed to cause the
formation of the LLC. Pursuant thereto, Fox Broadcasting agreed to enter into
an Asset Assignment Agreement (described below) with the LLC, and to deliver
all cash, documents and other assets at the closing of the formation. In
addition, FCN Holding and Saban each paid and contributed $100,000 to the LLC.
In consideration for their respective contributions to the LLC, Fox
Broadcasting received a non-voting Class A Members Interest and each of Saban
and FCN Holding received a Class B Members Interest.
As a Class A Member of the LLC, Fox Broadcasting was granted a priority
right to receive distributions of Distributable Cash (defined below) and other
distributions until it had received aggregate distributions in an amount equal
to $40 million. "Distributable Cash" generally means the amount of cash
available for distribution by the LLC (including cash available from Saban and
FCN Holding and their respective subsidiaries), taking into account all cash,
debts, liabilities and obligations of the LLC then due and after setting aside
reserves to provide for the LLC's capital expenditures, debt service, working
capital and expansion plans. As described below, in September 1996, Fox
Broadcasting purchased, for $10 million cash, an additional $10 million of
Class A Members Interests. Fox Broadcasting also made a $64.5 million interest
free loan to the LLC, of which $14.5 million was repaid in September 1996. The
$50 million remainder of this loan was to be repaid from time to time out of
Distributable Cash of the LLC before any distributions were made on the Class
A and Class B Members Interests.
In connection with the Reorganization, Fox Broadcasting contributed to the
Company, pursuant to an Agreement Re Transfer of LLC Interests, the Class A
Members Interest and the $50 million remainder of the loan in exchange for the
Fox Subordinated Note. In addition, as part of the Agreement Re Transfer of
LLC Interests, the Company agreed to convert the Class A Members Interest into
a Class B Members Interest, as a result of which the Class B Members Interests
are held one-third by each of FCN Holding, Saban and the Company.
Pursuant to the Asset Assignment Agreement (which survived the
Reorganization), the Fox Parties agreed to provide the LLC certain business
opportunities (see "Business--The Strategic Alliance with Fox/News Corp."),
and the parties further agreed to the following:
Programming. The LLC agreed to make programming available at market rates
to any program services which were offered to and rejected by the LLC and
thereafter operated by the Fox Parties or their affiliates.
Distribution Services. The Fox Parties and their affiliates were granted
a right of first negotiation and first refusal, with certain exceptions, to
provide any of the distribution services which the Fox Parties typically
provide and which the LLC decides to obtain from a third party. If the Fox
Parties or their affiliates do not accept the offer, the LLC may obtain the
services from a third party. In the event of any material change in terms,
the LLC must reoffer the opportunity to the Fox Parties.
Other Agreements. The Fox Parties also assigned to the LLC most of their
other agreements with FCN, including agreements which had granted the Fox
Parties the right, for a fee, to provide programming, distribution and
merchandising services for FCN (discussed below). The Fox Parties also
assigned to the LLC all of their rights in an Administration Agreement
(discussed below) between Fox Broadcasting and FCN pursuant to which Fox
Broadcasting agreed to provide for a fee certain administrative services to
FCN, including network national advertising sales, commercial trafficking
and broadcast operations and certain in-house administrative support in the
areas of research, promotions, business affairs, legal affairs and
accounting. See "Business--Distribution--Fox Kids Network."
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<PAGE>
In addition to assigning to the LLC the agreements referred to above, the
Fox Parties agreed to pay to the LLC (i) an amount equal to the aggregate of
the distribution fees and commissions received by or credited to the Fox
Parties in connection with the merchandising and distribution agreements
described under "Other Strategic Relationships," (ii) certain "net" revenues
with respect to the existing series properties and (iii) fees and commissions
under the Administration Agreement, in each case for the period from June 1,
1995 through December 22, 1995. All of the payments were due on or before July
15, 1996, with interest on the amount in excess of $14.5 million at a rate of
7% per annum. Fox Broadcasting also agreed to contribute to the LLC an amount
equal to the difference, if any, between approximately $35.8 million and the
amount of actual cash payments made to the LLC pursuant to the Asset
Assignment Agreement plus certain dividends paid to a subsidiary of FCN
Holding pursuant to the terms of the LLC's Operating Agreement. In September
1996, Fox Broadcasting paid $31 million to satisfy its obligations to the LLC
pursuant to these provisions.
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, 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 to add
provisions regarding voting between Fox Broadcasting and the former Saban
Stockholders. See "Ownership and Control of the Company."
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 September 1996, the LLC paid to Fox Broadcasting $10 million,
representing the unpaid balance of a fee for providing all uplink, transponder
and other facilities necessary to deliver via satellite Fox Kids Network
programming for broadcast to the Fox Kids Network Affiliates, and certain
other services. Immediately upon receipt of this $10 million payment, Fox
Broadcasting made a contribution to the LLC of $10 million in exchange for the
additional Class A Members Interest described above.
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
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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 $80.1 million 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 Sub.
CERTAIN TRANSACTIONS BETWEEN THE COMPANY AND THE FOX PARTIES
In October 1997, the Company reached an agreement in principle with
Fox/Liberty Networks, LLC ("Fox/Liberty"), a joint venture between News Corp.
and Liberty Media, a wholly owned subsidiary of Tele-Communications, Inc., to
sell a majority ownership interest in FiT TV to Fox/Liberty (or an affiliate
of Fox/Liberty). The Company acquired FiT TV in September 1997 as part of the
IFE Acquisition.
In October 1997, the Company entered into an interim agreement with
Twentieth Century Fox Film Corp. ("Twentieth Century Fox"), pursuant to which
Twentieth Century Fox agreed to distribute the programming library of MTM, one
of the assets acquired in the IFE Acquisition. The Company is in discussions
to sell certain MTM assets to Twentieth Century Fox.
As part of the Reorganization, on July 31, 1997, the Company issued the Fox
Subordinated Note to Fox Broadcasting in the principal amount of approximately
$104.6 million, which amount was increased to $108.6 million (exclusive of any
capitalized interest) on October 28, 1997, and which is to be repaid in May
2008. The parties recently have agreed to restate the Fox Subordinated Note to
reflect a change in the interest rate, effective as of the date of issuance.
As restated, interest on the original principal amount on the Fox Subordinated
Note will accrete quarterly at the rate of 10.427% per annum and interest on
the increased principal amount of the Fox Subordinated Note will accrete
quarterly at the rate of 10.427% per annum. The Company may prepay the Fox
Subordinated Note in whole or in part, subject to the terms of the Amended
Credit Facility and the Indentures.
On August 29, 1997, in connection with the IFE Acquisition, 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 $345.5 million. The parties recently have agreed to
restate the NAHI Bridge Note to reflect a change in the interest rate,
effective as of the date of issuance. As restated, the NAHI Bridge Note will
accrete 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 Old Credit Facility or the Amended Credit
Facility, as applicable, and the Notes.
On August 1, 1997, Saban entered into an amendment to the lease for its
corporate headquarters at 10960 Wilshire Boulevard in Los Angeles (the
original lease dated July 17, 1995 together with the amendment, the "Lease").
Pursuant to a Guaranty of Lease entered into on August 1, 1997 (the
"Guaranty"), News Corp. and NPAL have guaranteed certain of Saban's
obligations under the Lease. The Guaranty continues until Saban has paid all
obligations due under the Lease. Under the Guaranty, News Corp. and NPAL are
liable, jointly and severally, for any amounts not paid by Saban. 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 January 1997, the Company obtained from FOX Television, a division of
Fox, Inc. ("FOX Television") distribution rights to New World's animation
library of children's programming, which FOX Television acquired as part of
its purchase of New World. During the year ended June 30, 1997, the Company
spent approximately $1,218,000 in distribution costs in connection with this
programming which will be recoupable against New World's share of revenues.
The Company is in discussions with FOX Television to acquire the New World
programming.
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In May 1996, Saban 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. See "Business--Home Video and Telefilms." The distribution term runs
through September 8, 2004. Saban has the right and obligation to market,
distribute (for no fee) and exploit the Film in all forms of television, non-
theatrical and airline markets. Fox Video has the right and obligation to
market, manufacture, package, distribute (for no fee) and exploit the Film in
home video formats, and will release the Film in major international
territories during the next six months. Saban 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. Saban 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 ("Harvey"), which holds the copyright to Casper.
Saban has entered into an agreement in principle with Fox Video for the
production and distribution of, and currently is in production on, a second
live-action feature film for the home video market based upon Casper (the
"Sequel"), which Fox Video presently intends to release in the U.S. during
September 1998 and in certain major international territories within six
months thereafter. The distribution term runs for seven years following
initial U.S. release. Saban has the right and obligation to market,
distribute, and exploit the Sequel in all forms of television, non-theatrical
and airline markets. Fox Video has the right and obligation to market,
manufacture, package, distribute, and exploit the Sequel in home video
formats. Distribution fees which Saban is entitled to retain in its Casper
rights agreement with Harvey are to be contributed by Fox Video and Saban to
the gross income to be distributed between Fox Video and Saban. Saban and Fox
Video each will contribute one-half of the production costs of the Sequel
subject to the rights of both parties to recoup certain of these costs. Saban
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 Saban entered into a Home Video Rights
Acquisition Agreement pursuant to which Saban 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, including Sweet Valley
High, all television programs produced for children and owned or controlled by
Saban 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 Saban, the LLC or the Company.
The beginning of the term of this agreement varies by type of program, but the
term ends as to all programs between seven and nine years from September 11,
1996. Saban is required to make available for release by Fox Video a minimum
of six video titles each year, at least two of which will not have been
previously released for home video distribution in any of the territories
covered by the agreement. In consideration for the grant of the distribution
rights, Fox Video has agreed to pay Saban 50% of gross receipts from these
home videos, after deduction of certain expenses.
In January 1998, Fox Video and Saban concluded a Home Video Rights
Acquisition Agreement which was effective as of May 1997 pursuant to which
Saban International N.V. granted to Fox Video the exclusive home video rights
to distribute local language versions in the "Fox Territories" of certain of
Saban's television programs produced for children and owned or controlled by
Saban or FCN. The "Fox Territories" are Australia, Denmark, Finland, France,
Germany, Italy, Japan, Korea, Mexico, New Zealand, Norway, Spain, Sweden, and
the United Kingdom. The term of this agreement began as of May 5, 1997, and
ends as to all programs between four and seven years thereafter. Each year
during the term, Saban is required to make available for release by Fox Video
a minimum of 24 one-hour videocassettes selected from among all children's
series not previously licensed in the Fox Territories in home video and which
have been broadcast in at least five key Fox Territories. In consideration for
the grant of the distribution rights, Fox Video has agreed to pay Saban a $3
million minimum guarantee against 50% of receipts from these home videos,
after deduction of the minimum guarantee and certain expenses.
Saban and Fox Broadcasting are parties to a Barter Syndication Agreement
dated as of January 5, 1996, pursuant to which Saban engaged Fox Broadcasting
to provide barter advertising sales for the 1996-1997 and 1997-
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1998 broadcast seasons for the Saban Kids Network. Fox Broadcasting's services
include advertising sales, sales administration, account maintenance, ratings
processing, credit and collection, sales data entry and reporting and
commercials broadcast standards and practices. In consideration for the
services rendered by Fox Broadcasting to Saban, Saban 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.
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) 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 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. For the fiscal years ended June
30, 1994 and 1995, FCN paid to Fox Broadcasting approximately $16.2 million
and $21.3 million, respectively, in fees pursuant to this agreement. On
December 22, 1995, in connection with the terms of the LLC's Operating
Agreement, this agreement, and all rights of Fox Broadcasting to receive
management fees on or subsequent to June 1, 1995, were assigned to the LLC by
the Fox Parties.
Saban is party to an agreement with Fox Family Films, Inc. ("Distributor")
for the distribution of Turbo: A Power Rangers Movie, a "PG-rated" sequel to
the original Mighty Morphin Power Rangers motion picture (the "Sequel"), which
was released theatrically in the United States in Spring 1997 and in home
video in late Summer 1997. Under the terms of the agreement, Saban produced
and delivered the Sequel to Distributor for worldwide distribution and granted
to Distributor all rights necessary to advertise, promote, publicize and
distribute the Sequel. Distributor will hold in perpetuity worldwide
theatrical, non-theatrical, home video, and television rights in the movie
(except for Israel and the territory reserved to Toei Company Ltd.). Saban
will hold the copyright to the Sequel as well as certain rights including,
without limitation, merchandising, television series, live stage, publication,
radio, theme park and touring, music publishing and soundtrack. Commercial
tie-in rights will be mutually controlled by Saban and Distributor. Saban will
receive 100% of gross receipts after certain distribution fees and expenses
are deducted, based upon a formula set forth in the agreement.
Saban is party to various program exhibition agreements for the 1996-1997
and 1997-1998 broadcast seasons with FOX Television and one with FoxNet, both
subsidiaries of Fox Broadcasting, pursuant to which Saban licenses certain of
FOX Television's owned and operated stations and the FoxNet cable television
service the right to broadcast certain series. All series are licensed on a
barter basis.
In January 1997, the Company obtained from FOX Television distribution
rights to the New World animation library of 515 half-hour episodes of
children's programming, which FOX Television acquired as part of its purchase
of New World. The Company is in discussions with FOX Television to acquire the
New World animation library.
In October 1996, the Company commenced the operations of Fox Kids U.K., a
cable and satellite channel broadcasting from 6 a.m. to 7 p.m. each day. The
channel is currently broadcast via analog transponder. The channel is
distributed as part of BSkyB's Sky Multichannels DTH package in the United
Kingdom and the Republic of Ireland. News Corp. holds a 40% interest in BSkyB,
a public company, which operates the leading pay television broadcasting
service in the United Kingdom and the Republic of Ireland. As part of its
agreement with BSkyB, the Company acquired for approximately $3.7 million, all
of BSkyB's United Kingdom license rights to children's programming which had
been acquired for broadcast by BSkyB prior to the launch of this channel.
Additionally, as part of the agreement with BSkyB, the Company has entered
into an analog transponder sublease agreement whereby the Company will lease
the analog transponder from BSkyB through February 1,
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2001 subject to extension in certain circumstances requiring a financial
commitment of approximately $28,188,000. The Company has also entered into a
digital transponder and uplink sublease agreement with BSkyB whereby the
Company will lease the digital transponder from BSkyB for eight years from the
analog launch date for approximately $1,115,000 per year per channel subject
to reduction in certain circumstances. Further, as part of this arrangement
with BSkyB, BSkyB will provide support services for the sale by the Company of
programming, sponsorship, advertising and other air-time for broadcast on the
channel as well as other operational and facilities support services. In
consideration for the services being provided to the Company, BSkyB will be
entitled to receive a fee equal to 15% of Net Revenue, as defined in the
agreement, plus a 5% bonus commission where Net Revenue exceeds mutually pre-
agreed annual targets plus an annual fee of approximately $326,000, subject to
adjustment in certain circumstances.
In November 1996, the Company launched Fox Kids Latin America ("FKLA"), a
Fox Kids branded pan-regional Latin American channel, which simultaneously
broadcasts animated and live-action programming in Spanish, Portuguese and
English. 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 the 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.
TRANSACTIONS BETWEEN HAIM SABAN, OTHER EXECUTIVE OFFICERS AND SABAN
From time to time, Saban has loaned and advanced funds to Haim Saban, the
Company's Chairman and Chief Executive Officer. The highest aggregate amounts
outstanding from Mr. Saban to Saban were approximately $2.7 million for the
fiscal year ended June 30, 1995, and $2.7 million for the fiscal year ended
June 30, 1996. In connection with the formation of the LLC, on December 22,
1995, Saban forgave in full all amounts then owing from Haim Saban,
aggregating $2,649,000. All of these loans accrued interest at the rate of one
percent over City National Bank's prime rate. The Company does not currently
intend to make below market loans to members of management outside a
negotiation of employment or compensation or to make loans and then forgive
them.
Haim Saban has in the past loaned and advanced funds to Saban to cover the
working capital needs of Saban. The highest aggregate amounts outstanding from
Saban to Mr. Saban were approximately $13.3 million for the fiscal year ended
June 30, 1994 and $9.0 million for the fiscal year ended June 30, 1995. The
balance of these loans was repaid in full in October 1994. All of the loans
owing to Mr. Saban accrued interest at the rate of one percent over City
National Bank's prime rate.
From time to time, Saban has loaned and advanced funds to Shuki Levy, the
Company's Executive Vice President. For the past four fiscal years, the
highest aggregate amounts outstanding from Mr. Levy to Saban were $1.0 million
for the fiscal year ended June 30, 1995, $1.2 million for the fiscal years
ended June 30, 1996 and June 30, 1997 and the six months ended December 31,
1997. As of December 31, 1997, the total amount outstanding, including accrued
and unpaid interest, was $1.2 million. All of the amounts outstanding under
these loans accrued interest at rates ranging from 5% to 9% per annum.
Saban currently leases and distributes certain of its properties (e.g.,
motion pictures, television programs, merchandising and licensing rights) in
Israel through Duveen Trading Ltd., a corporation wholly owned by Haim Saban's
brother. The term of the agreement extends through December 31, 2000. $500,000
is currently owed to Saban by Duveen Trading Ltd. under this agreement.
In connection with Mr. Saban's employment agreement, the LLC agreed to
reimburse Mr. Saban for all out-of-pocket costs and expenses for domestic and
international travel, including private air charter which may
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include aircraft owned by Mr. Saban. Saban has entered into a contract with
the agency which leases Mr. Saban's airplane to charter from that agency Mr.
Saban's or another similar airplane for a minimum of fifty charter hours
during a twelve-month period. From July 1, 1996 through June 30, 1997, Saban
paid approximately $875,000 for such services. For the six months ended
December 31, 1997, Saban paid approximately $280,000 for such services.
In September 1994, Saban entered into a music services agreement (the "Music
Agreement") with Haim Saban, which agreement was amended in June 1995 and
assigned to a corporation wholly owned by Mr. Saban in January 1996. Under the
terms of the Music Agreement, all original theme music, underscores, cues and
songs for use in all programming produced by Saban will be supplied to Saban
through Mr. Saban. Saban is entitled to license third party musical
compositions for use in its programming so long as such compositions neither
are used as opening or closing themes nor constitute more than 15% of the
total musical content of any program or episode, without Mr. Saban's prior
written consent. Saban has the royalty-free right to use the compositions in
articles of merchandise such as home video units, video games and interactive
toys. Saban has been granted the non-exclusive, worldwide and perpetual
license to (i) synchronize and perform compositions in theatrical motion
pictures and (ii) synchronize compositions in all other forms of programming.
Saban creates and owns all right, title and interest in master recordings of
compositions for use in Saban's programming, and Saban owns the proceeds
derived from all forms of exploitation thereof. In consideration for the
provision of the compositions to Saban, Mr. Saban is entitled to receive all
publishing income, directly or through Saban, in connection with the
exploitation of such compositions. Saban is entitled to reimbursement from Mr.
Saban of certain costs associated with the creation of the compositions. For
the year ended June 30, 1997, and for the six months ended December 31, 1997,
Mr. Saban paid approximately $374,000 and $296,000, respectively, to Saban for
reimbursement of costs to Saban. For the eight months ended June 30, 1996, Mr.
Saban made no payments for reimbursement of costs to Saban. At June 30, 1997
and December 31, 1997, approximately $211,000 and $66,000, respectively, was
owed to Saban by Mr. Saban pursuant to the Music Agreement.
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DESCRIPTION OF OTHER INDEBTEDNESS
Amended Credit Facility. On October 28, 1997, upon consummation of the
Offering, the Old Credit Facility was amended to provide for a $710 million
facility comprised of a seven-year amortizing term loan and a seven-year
reducing revolving credit facility under which FCN Holding, Saban and IFE are
borrowers (the "Co-borrowers"). Fox Kids Worldwide, Inc. is not a borrower
under the Amended Credit Facility but is a guarantor. Fox Kids Holdings, LLC,
a newly created, wholly owned subsidiary of Fox Kids Worldwide, Inc. ("FK
Holdings"), holds the equity interests of the Co-Borrowers and also guarantees
the obligations under the Amended Credit Facility. The following summary does
not purport to be a complete description of the Amended Credit Facility.
Borrowings under the Amended Credit Facility are unconditionally guaranteed
by each Co-borrower and each subsidiary that is wholly owned, directly or
indirectly, by any of the Co-borrowers (subject to certain limitations for
foreign subsidiaries). In addition, borrowings under the Amended Credit
Facility and the guarantees are secured by 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.
Under the Amended Credit Facility, subject to certain conditions, the Co-
borrowers will be required to make certain mandatory prepayments. The
borrowings under the Amended Credit Facility will 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 connection with the
Amended Credit Facility, 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 FK Holdings and 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.
Fox Subordinated Note. As part of the Reorganization, on July 31, 1997, the
Company issued the Fox Subordinated Note to Fox Broadcasting in the principal
amount of approximately $104.6 million, which amount was increased to $108.6
million (exclusive of any capitalized interest) on October 28, 1997, and which
is to be repaid in May 2008. The parties recently have agreed to restate the
Fox Subordinated Note to reflect a change in the interest rate, effective as
of the date of issuance. As restated, interest on the original principal
amount on the Fox Subordinated Note will accrete quarterly at the rate of
10.427% per annum and interest on the increased principal amount of the Fox
Subordinated Note will accrete quarterly at the rate of 10.427% per annum. The
Company may prepay the Fox Subordinated 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 Fox Subordinated Note will be subordinated in
right to the obligations of the Company under the Old Credit Facility or the
Amended Credit Facility, as applicable, and the Notes. Approximately
$113.5 million (including accreted interest) was outstanding as of
December 31, 1997.
NAHI Bridge Note. On August 29, 1997, in connection with the IFE
Acquisition, 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 $345.5 million. The
parties recently have agreed to restate the NAHI Bridge Note to reflect a
change in the interest rate, effective as of the date of issuance. As
restated, the NAHI Bridge Note will accrete 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 Old
Credit Facility or the Amended Credit Facility, as applicable, and the Notes.
Approximately $102.5 million (including accreted interest) was outstanding
under the NAHI Bridge Note as of December 31, 1997; however, no payments are
due until March 2008.
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DESCRIPTION OF THE NOTES
THE TERMS OF THE NOTES ARE IDENTICAL IN ALL MATERIAL RESPECTS TO THE OLD
NOTES, EXCEPT FOR CERTAIN TRANSFER RESTRICTIONS AND REGISTRATION RIGHTS
RELATING TO THE OLD NOTES. THE DESCRIPTION OF THE NOTES CONTAINED HEREIN
ASSUMES THAT ALL OLD NOTES ARE EXCHANGED FOR NOTES IN THE EXCHANGE OFFER. TO
THE EXTENT THAT OLD NOTES REMAIN OUTSTANDING AFTER THE CONSUMMATION OF THE
EXCHANGE OFFER, THE OLD NOTES AND THE NOTES WILL BE REDEEMED OR REPURCHASED
PRO RATA PURSUANT TO THE PROVISIONS CONTAINED IN THE INDENTURES AND DESCRIBED
HEREIN. IN ADDITION, AS THE OLD NOTES WERE, AND THE NOTES WILL BE, ISSUED
UNDER THE INDENTURES, TO THE EXTENT THAT OLD NOTES REMAIN OUTSTANDING AFTER
CONSUMMATION OF THE EXCHANGE OFFER, ANY ACTION DESCRIBED HEREIN AS PERMITTED
OR REQUIRED TO BE TAKEN THEREUNDER BY A SPECIFIED PORTION OF THE HOLDERS OF
THE NOTES MAY ONLY BE TAKEN BY SUCH PORTION OF THE HOLDERS OF THE OLD NOTES
AND THE NOTES, COUNTED AS A SINGLE SERIES.
The Old Senior Notes were issued, and the Senior Notes will be issued, under
an Indenture dated as of October 28, 1997 (the "Senior Notes Indenture")
between the Company and The Bank of New York, as trustee (the "Trustee"). The
Old Senior Discount Notes were issued, and the Senior Discount Notes will be
issued, under an Indenture dated as of October 28, 1997 (the "Senior Discount
Notes Indenture" and, together with the Senior Notes Indenture, the
"Indentures"), between the Company and The Bank of New York, as Trustee. The
Indentures are not and will not be qualified under the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"), except upon effectiveness of a
registration statement for the Exchange Offer. By their terms, however, the
Indentures will incorporate certain provisions of the Trust Indenture Act and,
upon consummation of the Exchange Offer, the Indentures will be subject to and
governed by the Trust Indenture Act. The following summary of the material
provisions of the Indentures and the Notes does not purport to be complete and
is subject to, and qualified in its entirety by, reference to the provisions
of the Indentures and the Notes, including the definitions of certain terms
contained therein and those terms made part of the Indentures by reference to
the Trust Indenture Act. A copy of each of the Indentures is attached as an
exhibit to the Registration Statement. The definition of certain capitalized
terms used in the following summary are set forth below under "--Certain
Definitions." References in this section to the Company refer to Fox Kids
Worldwide, Inc. without its subsidiaries.
GENERAL
The Notes will be issued only in registered form without coupons, in
denominations of $1,000 and integral multiples thereof. The Company has
appointed The Bank of New York to serve as registrar and paying agent under
the Indentures at its offices at 101 Barclay Street, New York, New York. No
service charge will be made for any transfer, exchange or redemption of Notes,
except in certain circumstances for any tax or other governmental charge that
may be imposed in connection therewith.
RANKING
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.
MATURITY, INTEREST AND PRINCIPAL OF THE SENIOR NOTES
The Senior Notes will be limited to $475,000,000 aggregate principal amount
and will mature on November 1, 2007. Cash interest on the Senior Notes will
accrue at the rate of 9 1/4% per annum and will be payable semi-annually in
arrears on each May 1 and November 1, commencing May 1, 1998, to the holders
of record of the Senior Notes at the close of business on the April 15 and
October 15 immediately preceding such interest payment date. Interest on the
Senior Notes will accrue from the most recent date to which interest has been
paid
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or, if no interest has been paid, from the original date of issuance (the
"Issue Date"). Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
MATURITY, INTEREST AND PRINCIPAL OF THE SENIOR DISCOUNT NOTES
The Senior Discount Notes will be limited to $618,670,000 aggregate
principal amount at maturity and will mature on November 1, 2007. The Senior
Discount Notes will be issued in exchange for the Old Senior Discount Notes
which were issued at a discount to their aggregate principal amount at
maturity and generated gross proceeds of approximately $375,000,000. Based on
the issue price thereof, the yield to maturity of the Senior Discount Notes is
10 1/4% (computed on a semi-annual bond equivalent basis), calculated from
October 28, 1997. See "Certain United States Federal Income Tax
Considerations."
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 accrue at a rate of 10 1/4% per annum and will be payable semi-
annually in arrears on each May 1 and November 1, commencing on May 1, 2003,
to the holders of record of the Senior Discount Notes at the close of business
on the April 15 and October 15, respectively, immediately preceding such
interest payment date; provided, however, that 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 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. Cash interest will accrue from
the most recent interest payment date to which interest has been paid or, if
no interest has been paid, from the earlier of November 1, 2002 or the Cash
Interest Election Date. Interest will be computed on the basis of a 360-day
year of twelve 30-day months.
OPTIONAL REDEMPTION
Optional Redemption of Senior Notes. 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 (as defined below) 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.
"Public Equity Offering" means an underwritten public offering of Qualified
Equity Interests of the Company pursuant to a registration statement filed
with the Commission in accordance with the Securities Act, which public equity
offering results in gross cash proceeds to the Company of not less than
$100,000,000.
Optional Redemption of Senior Discount Notes. 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
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(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.
Selection and Notice. In the event that less than all of an issue of Notes
are to be redeemed at any time, selection of such Notes for redemption will be
made by the applicable Trustee in compliance with the requirements of the
principal national securities exchange, if any, on which the Notes are listed
or, if the Notes are not then listed on a national securities exchange, on a
pro rata basis, by lot or by such method as the Trustee shall deem fair and
appropriate; provided, however, that Notes shall only be redeemable in
principal amounts of $1,000 or an integral multiple of $1,000, provided,
further, that any redemption following one or more Public Equity Offerings or
sales of Qualified Equity Interests shall be made on a pro rata basis or as
nearly a pro rata basis as practicable (subject to the procedures of DTC).
Notice of redemption shall be mailed by or on behalf of the Company by first-
class mail at least 30 but not more than 60 days before the redemption date to
each holder of Notes to be redeemed at its registered address. In order to
effect a redemption with the proceeds of any Public Equity Offering or sales
of Qualified Equity Interests to one or more Strategic Equity Investors, the
Company shall send a redemption notice to the applicable Trustee not later
than 60 days after the consummation of any such Public Equity Offering or sale
of Qualified Equity Interests to one or more Strategic Equity Investors, as
the case may be. If any Note is to be redeemed in part only, the notice of
redemption that relates to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in a principal amount equal to the
unredeemed portion thereof will be issued in the name of the holder thereof
upon surrender for cancellation of the original Note. On and after the
redemption date, interest will cease to accrue on Notes or portions thereof
called for redemption, unless the Company defaults in the payment of the
redemption price.
SINKING FUND
The Notes will not be entitled to the benefit of any mandatory sinking fund.
CHANGE OF CONTROL
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 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
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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.
In order to effect such Change of Control Offer, the Company shall, not
later than the 30th day after the Change of Control, mail to each holder of
Notes notice of the Change of Control Offer, which notice shall govern the
terms of the Change of Control Offer and shall state, among other things, the
procedures that holders of Notes must follow to accept the Change of Control
Offer. Prior to mailing a notice of a Change of Control Offer, but in any
event within 30 days following a Change of Control, the Company shall either
permanently repay all outstanding amounts under the Bank Facility and
terminate all commitments of the lenders thereunder or offer to permanently
repay in full all outstanding amounts under the Bank Facility and permanently
repay the Obligations held by each lender who has accepted such offer or
obtain the requisite consents, if any, under the Bank Facility to permit the
repurchase of the Notes required hereby. The failure to mail notice of the
Change of Control Offer when required will nonetheless constitute a Default
under the Indentures.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
Purchase Price for all of the Notes that might be delivered by holders of
Notes seeking to accept the Change of Control Offer. The Company shall not be
required to make a Change of Control Offer upon a Change of Control if a third
party makes the Change of Control Offer in the manner, at the times and
otherwise in compliance with the requirements applicable to a Change of
Control Offer made by the Company and purchases all Notes validly tendered and
not withdrawn under such Change of Control Offer.
The definition of "Change of Control" excludes certain transactions by
Permitted Holders, including a direct or indirect sale, lease, exchange or
other transfer of all or substantially all of the assets of the Company to
Permitted Holders. The provisions of the Indentures may not afford Noteholders
protection in the event of a highly leveraged transaction, reorganization,
restructuring, merger or similar transaction involving the Company if such
transaction is not a transaction defined as a "Change of Control."
The use of the term "all or substantially all" in provisions of the
Indentures such as clause (b) of the definition of "Change of Control" and
under "--Consolidation, Mergers, Sale of Assets, Etc." has no clearly
established meaning under New York law (which governs the Indentures) and has
been the subject of limited judicial interpretation in only a few
jurisdictions. Accordingly, there may be a degree of uncertainty in
ascertaining whether any particular transaction would involve a disposition of
"all or substantially all" of the assets of a person, which uncertainty should
be considered by prospective purchasers of Notes.
The Company will comply with Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder, to the extent such laws or
regulations are applicable, in the event that a Change of Control occurs and
the Company is required to purchase Notes as described above.
CERTAIN COVENANTS
The Indentures contain the following covenants, among others; provided
however, that if no Default shall have occurred and be continuing, after the
Notes are rated by both Moody's Investor Services, Inc. (or its successors)
and Standard & Poor's Rating Group (or its successors) in one of its generic
rating categories which signifies investment grade (which at the date hereof
are the four highest rating categories (within which there are sub-categories
indicating relative standing)) the limitations set forth below under the
captions "Limitation on Indebtedness," "Limitation on Restricted Payments,"
"Disposition of Proceeds of Asset Sales," "Limitation on Preferred Stock of
Subsidiaries," "Limitation on Transactions with Affiliates," "Limitation on
Dividends and other Payment Restrictions Affecting Restricted Subsidiaries,"
"Limitation on Sale-Leaseback Transactions" and "Limitation on Designation of
Unrestricted Subsidiaries" and in clause (c) under "Consolidation, Merger,
Sale of Assets, etc." shall no longer be applicable.
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Limitation on Indebtedness. The Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur,
issue, assume, guarantee or in any manner become directly or indirectly
liable, contingently or otherwise (in each case, to "incur"), for the payment
of any Indebtedness (including any Acquired Indebtedness) other than Permitted
Indebtedness, unless the ratio of (i) the aggregate consolidated principal
amount of Indebtedness of the Company and its Restricted Subsidiaries
outstanding as of the most recently available quarterly or annual consolidated
balance sheet, after giving pro forma effect to the incurrence of such
Indebtedness and any other Indebtedness incurred since such balance sheet date
and the receipt and application of the proceeds thereof, to (ii) Consolidated
Cash Flow of the Company and its Restricted Subsidiaries for the four full
fiscal quarters next preceding the incurrence of such Indebtedness for which
consolidated financial statements are available, determined on a pro forma
basis as if any such Indebtedness had been incurred and the proceeds thereof
had been applied at the beginning of such four fiscal quarters, would be less
than 6.0 to 1.
Limitation on Restricted Payments. The Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly:
(a) declare or pay any dividend or make any other distribution or payment
on or in respect of Capital Stock of the Company or any of its Restricted
Subsidiaries or make any payment to the direct or indirect holders (in
their capacities as such) of Capital Stock of the Company or any of its
Restricted Subsidiaries (other than dividends or distributions payable
solely in Capital Stock of the Company (other than Redeemable Capital
Stock) or in options, warrants or other rights to purchase Capital Stock of
the Company (other than Redeemable Capital Stock)) (other than the
declaration or payment of dividends or other distributions to the extent
declared or paid to the Company or any Restricted Subsidiary),
(b) purchase, redeem, defease or otherwise acquire or retire for value
any Capital Stock (other than Redeemable Capital Stock) of the Company (or
of any Restricted Subsidiary of the Company if such Capital Stock is owned
by an Affiliate of the Company) or any options, warrants, or other rights
to purchase any such Capital Stock (other than any such securities owned by
a Restricted Subsidiary),
(c) make any principal payment on, or purchase, defease, repurchase,
redeem or otherwise acquire or retire for value, prior to any scheduled
maturity, scheduled repayment, scheduled sinking fund payment or other
Stated Maturity, any Redeemable Capital Stock or Subordinated Indebtedness
of the Company (other than any such Redeemable Capital Stock or
Subordinated Indebtedness owned by the Company or a Restricted Subsidiary),
(d) make any Investment (other than any Permitted Investment) in any
person, or
(e) (i) make any principal, interest or other payments on or in respect
of Deeply Subordinated Shareholder Loans or (ii) make any principal,
interest (other than interest payments after November 1, 2002) or other
payments on or in respect of the Existing Subordinated Notes or any
Existing Subordinated Note Refinancing Debt
(such payments or Investments described in the preceding clauses (a), (b),
(c), (d) and (e) are collectively referred to as "Restricted Payments"),
unless, at the time of and after giving effect to the proposed Restricted
Payment (the amount of any such Restricted Payment, if other than cash, shall
be the Fair Market Value of the asset(s) proposed to be transferred by the
Company or such Restricted Subsidiary, as the case may be, pursuant to such
Restricted Payment), (A) no Default or Event of Default shall have occurred
and be continuing, (B) immediately prior to and after giving effect to such
Restricted Payment, the Company would be able to incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) and (C) the aggregate amount
of all Restricted Payments declared or made from and after the Issue Date
would not exceed the sum of:
(1) the excess of the aggregate Consolidated Cash Flow of the Company
minus the product of 1.5 times the Consolidated Interest Expense of the
Company accrued on a cumulative basis during the period beginning on the
Issue Date and ending on the last day of the fiscal quarter of the Company
immediately preceding the date of such proposed Restricted Payment;
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<PAGE>
(2) the aggregate net cash proceeds received by the Company as capital
contributions to the Company after the Issue Date and which constitute
shareholders' equity of the Company in accordance with GAAP;
(3) the aggregate net cash proceeds received by the Company from the
issuance or sale of Capital Stock (excluding Redeemable Capital Stock) of
the Company to any person (other than to a Subsidiary of the Company) after
the Issue Date;
(4) the aggregate net cash proceeds received by the Company from any
person (other than a Subsidiary of the Company) upon the exercise of any
options, warrants or rights to purchase shares of Capital Stock (other than
Redeemable Capital Stock) of the Company after the Issue Date;
(5) the aggregate net cash proceeds received after the Issue Date by the
Company from any person (other than a Subsidiary of the Company) for debt
securities that have been converted or exchanged into or for Capital Stock
of the Company (other than Redeemable Capital Stock) (to the extent such
debt securities were originally sold for cash) plus the aggregate amount of
cash received by the Company (other than from a Subsidiary of the Company)
in connection with such conversion or exchange;
(6) the aggregate net cash proceeds received after the Issue Date by the
Company from the issuance of Deeply Subordinated Shareholder Loans to a
Permitted Holder (other than a Subsidiary of the Company);
(7) in the case of the disposition or repayment of any Investment
constituting a Restricted Payment after the Issue Date, an amount equal to
the lesser of the return of capital with respect to such Investment and the
initial amount of such Investment, in either case, less the cost of the
disposition of such Investment; and
(8) so long as the Designation thereof was treated as a Restricted
Payment made after the Issue Date, with respect to any Unrestricted
Subsidiary that has been redesignated as a Restricted Subsidiary after the
Issue Date in accordance with "--Limitation on Designations of Unrestricted
Subsidiaries" below, the Fair Market Value of the Company's interest in
such Subsidiary calculated in accordance with GAAP, provided that such
amount shall not in any case exceed the Designation Amount with respect to
such Restricted Subsidiary upon its Designation,
minus:
the Designation Amount (measured as of the date of Designation) with
respect to any Subsidiary of the Company which has been designated as an
Unrestricted Subsidiary after the Issue Date in accordance with "--
Limitations on Designations of Unrestricted Subsidiaries" below.
For purposes of the preceding clause (C)(4), the value of the aggregate net
proceeds received by the Company upon the issuance of Capital Stock upon the
exercise of options, warrants or rights will be the net cash proceeds received
upon the issuance of such options, warrants or rights plus the incremental
amount received by the Company upon the exercise thereof.
None of the foregoing provisions will prohibit, so long, in the case of
clauses (ii) through (v) and (viii) below, as there is no Default or Event of
Default continuing, (i) the payment of any dividend or distribution within 60
days after the date of its declaration, if at the date of declaration such
payment would be permitted by the foregoing paragraph; (ii) the redemption,
repurchase or other acquisition or retirement of any shares of any class of
Capital Stock in exchange for, or out of the net cash proceeds of, a
substantially concurrent issue and sale of other shares of Capital Stock
(other than Redeemable Capital Stock) of the Company to any person (other than
to a Subsidiary of the Company); provided, however, that such net cash
proceeds are excluded from clause (C) of the preceding paragraph; (iii) any
redemption, repurchase or other acquisition or retirement of Subordinated
Indebtedness by exchange for, or out of the net cash proceeds of, a
substantially concurrent issue and sale of (1) Capital Stock (other than
Redeemable Capital Stock) of the Company to any person (other than to a
Subsidiary of the Company); provided, however, that any such net cash proceeds
are excluded from clause (C) of the preceding paragraph; or (2) Indebtedness
of the Company so long as such Indebtedness is Subordinated Indebtedness which
(w) has no Stated Maturity earlier than the 91st day after the Maturity Date,
(x) has an Average Life to Stated Maturity greater than the remaining Average
Life to Stated Maturity of the Notes, (y) is subordinated to the Notes in the
same manner and to the same extent as the Subordinated Indebtedness so
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<PAGE>
purchased, exchanged, redeemed, acquired or retired and (z) if the proceeds of
such Indebtedness is to purchase, redeem, acquire or retire all of the
Existing Subordinated Notes ("Existing Subordinated Note Refinancing Debt"),
such Existing Subordinated Note Refinancing Debt provides for no cash payments
of interest prior to November 1, 2002 other than cash payments otherwise
permitted by this covenant; (iv) any redemption, repurchase or other
acquisition or retirement of Deeply Subordinated Shareholder Loans by exchange
for, or out of the net cash proceeds of, a substantially concurrent issue and
sale of (1) Capital Stock (other than Redeemable Capital Stock) of the Company
to any person (other than a Subsidiary of the Company) or (2) other Deeply
Subordinated Shareholder Loans to any Permitted Holder, provided, however,
that, in either case, such net cash proceeds are excluded from clause (C) of
the preceding paragraph; (v) Investments constituting Restricted Payments made
as a result of the receipt of non-cash consideration from any Asset Sale made
pursuant to and in compliance with the Indentures; (vi) payments to purchase
Capital Stock of the Company from management or employees of the Company or
any of its Subsidiaries, or their authorized representatives, upon the
happening of an event which provides for payment under any applicable plan, or
upon the death, disability or termination of employment of such employees, in
aggregate amounts under this clause (vi) not to exceed $8,000,000 in any
fiscal year of the Company; (vii) the payment of pro rata dividends to holders
of Capital Stock of Restricted Subsidiaries; (viii) the payment of dividends
on the Existing Preferred in accordance with its terms as in effect on the
Issue Date (or payments in comparable amounts to such dividends and at
comparable times in respect of claims by News Corp. or NPAL arising from News
Corp. or NPAL having cured or avoided a default by the Company in respect of
the Existing Preferred or the Company's Wilshire Boulevard lease; provided
amounts contributed to the Company by News Corp. or NPAL for such purpose
shall not be included in the calculation of clause (C) above); (ix) the
payment of in-kind interest in respect of Deeply Subordinated Shareholder
Loans and in respect of Existing Subordinated Notes; and (x) the repayment of
the Existing Subordinated Notes contemplated under "Use of Proceeds" in this
Prospectus. Any payments made pursuant to clauses (i), (v) and (vi) (to the
extent that such dividends are not included in Consolidated Interest Expense)
of this paragraph shall, without duplication, be taken into account in
calculating the amount of Restricted Payments made from and after the Issue
Date.
Limitation on Liens. The Company will not, and will not permit any of its
Subsidiaries to, create, incur, assume or suffer to exist any Liens of any
kind against or upon any of its property or assets, or any proceeds therefrom,
unless the Notes are equally and ratably secured (except that Liens securing
Subordinated Indebtedness shall not be permitted in any circumstances), except
for (a) Liens securing the Notes; (b) Liens securing Indebtedness which is (i)
incurred to refinance Indebtedness which has been secured by a Lien permitted
under the Indenture and (ii) incurred in accordance with the provisions of the
Indenture; provided, however, that such Liens do not extend to or cover any
property or assets of the Company or any of its Restricted Subsidiaries not
securing the Indebtedness so refinanced; and (c) Permitted Liens.
Disposition of Proceeds of Asset Sales. The Company will not, and will not
permit any of its Restricted Subsidiaries to, make any Asset Sale unless (a)
the Company or such Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the Fair Market
Value of the shares or assets sold or otherwise disposed of and (b) at least
75% of such consideration consists of cash or Cash Equivalents or properties
or assets that will be used in the business of the Company and its Restricted
Subsidiaries provided that the amount of any liabilities (other than
Subordinated Indebtedness or Indebtedness of a Restricted Subsidiary that
would not constitute Restricted Subsidiary Indebtedness) that are assumed by
the transferee of any such assets pursuant to an agreement that
unconditionally releases the Company or such Restricted Subsidiary, as the
case may be, from further liability shall be treated as cash for purposes of
this covenant. The Company or the applicable Restricted Subsidiary, as the
case may be, shall, at the Company's option, (i) apply the Net Cash Proceeds
from any such Asset Sale within 365 days of the receipt thereof to repay
Indebtedness under the Bank Facility and elect to permanently reduce the
commitments thereunder by the amount of Indebtedness so repaid, (ii) apply the
Net Cash Proceeds from any such Asset Sale within 365 days of the receipt
thereof to repay an amount of other Indebtedness (other than Subordinated
Indebtedness) of the Company in an amount not exceeding the Other Senior Debt
Pro Rata Share and, in such case, elect to permanently reduce the amount of
the commitments thereunder by the amount of the Indebtedness so repaid, (iii)
apply the Net Cash
95
<PAGE>
Proceeds from any such Asset Sale by the Company or a Restricted Subsidiary to
repay any Restricted Subsidiary Indebtedness and elect to permanently reduce
the commitments thereunder by the amount of the Indebtedness so repaid and/or
(iv) apply the Net Cash Proceeds from any Asset Sale by the Company or a
Restricted Subsidiary, (x) to repay Indebtedness incurred not more than 90
days before such Asset Sale to purchase, or (y) to the purchase price for an
acquisition consummated not more than 90 days before such Asset Sale of, or
(z) within 365 days after such Asset Sale to an investment in, properties and
assets that replace the properties and assets that were the subject of such
Asset Sale or in properties and assets that will be used in the business of
the Company and its Restricted Subsidiaries existing on the Issue Date or in
businesses reasonably related thereto ("Replacement Assets"). Pending the
final application of any such Net Cash Proceeds, the Company or such
Restricted Subsidiary may temporarily reduce Indebtedness under a revolving
credit facility, if any, or otherwise invest such Net Cash Proceeds in Cash
Equivalents. Any Net Cash Proceeds from any Asset Sale that are neither used
to repay, and permanently reduce the commitments under, any Restricted
Subsidiary Indebtedness as set forth in clause (iii) of the second preceding
sentence or invested in Replacement Assets within the 365-day period as set
forth in clause (iv) shall constitute "Excess Proceeds." Any Excess Proceeds
not used as set forth in clause (i) or (ii) of the third preceding sentence
shall constitute "Offer Excess Proceeds" subject to disposition as provided
below.
When the aggregate amount of Offer Proceeds equals or exceeds $15,000,000,
the Company shall make an offer to purchase (an "Asset Sale Offer"), from all
holders of the Notes, an aggregate principal amount of Notes equal to such
Excess Proceeds, at a price (the "Asset Sale Purchase Price") in cash equal to
(x) with respect to the Senior Notes, 100% of the outstanding principal amount
thereof plus accrued and unpaid interest, if any, to the purchase date and (y)
with respect to the Senior Discount Notes, 100% of the Accreted Value on the
purchase date, unless the purchase date is on or after the earlier to occur of
November 1, 2002 and the Cash Interest Election Date, in which case such
purchase price shall be equal to 100% of the principal amount at maturity
thereof, plus accrued and unpaid interest, if any, to the purchase date. To
the extent that the aggregate principal amount of Notes tendered pursuant to
an Asset Sale Offer is less than the Offer Proceeds, the Company may use such
deficiency for any purpose not prohibited hereunder. The Notes shall be
purchased by the Company, at the option of the holder thereof, in whole or in
part in integral multiples of $1,000 of principal amount, on a date that is
not earlier than 30 days and not later than 60 days from the date the notice
is given to holders, or such later date as may be necessary for the Company to
comply with the requirements under the Exchange Act. If the aggregate purchase
price of Notes validly tendered and not withdrawn by holders thereof exceeds
the Offer Proceeds, Notes to be purchased will be selected on a pro rata
basis, based on the Asset Sale Purchase Price thereof. Upon completion of such
Asset Sale Offer, the amount of Excess Proceeds shall be reset to zero.
Notwithstanding the two immediately preceding paragraphs, the Company and
its Restricted Subsidiaries will be permitted to consummate an Asset Sale
without complying with such paragraphs to the extent (i) at least 75% of the
consideration of such Asset Sale constitutes Replacement Assets, cash or Cash
Equivalents (including obligations deemed to be cash under this covenant) and
(ii) such Asset Sale is for Fair Market Value; provided that (i) any
consideration constituting (or deemed to constitute) cash or Cash Equivalents
received by the Company or any of its Restricted Subsidiaries in connection
with any Asset Sale permitted to be consummated under this paragraph shall
constitute Net Cash Proceeds subject to the provisions of the two preceding
paragraphs and (ii) to the extent such replacement Assets include any Capital
Stock of any person, such person becomes a Restricted Subsidiary.
The Company will comply with Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder, to the extent such laws and
regulations are applicable, in the event that an Asset Sale occurs and the
Company is required to purchase Notes as described above.
Limitation on Preferred Stock of Restricted Subsidiaries. The Company will
not permit any Restricted Subsidiary to issue any Preferred Stock other than
Preferred Stock issued to the Company or a Restricted Subsidiary. The Company
will not sell, transfer or otherwise dispose of Preferred Stock issued by a
Restricted Subsidiary of the Company or permit a Restricted Subsidiary to
sell, transfer or otherwise dispose of Preferred Stock issued by a Restricted
Subsidiary, other than to the Company or a Restricted Subsidiary.
Notwithstanding
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the foregoing, nothing in such covenant will prohibit the ownership of
Preferred Stock issued by a person prior to the time (A) such person becomes a
Restricted Subsidiary of the Company, (B) such person merges with or into a
Restricted Subsidiary of the Company or (C) a Restricted Subsidiary of the
Company merges with or into such person; provided, further, that such
Preferred Stock was not issued or incurred by such person in anticipation of a
transaction contemplated by subclause (A), (B), or (C) above.
Limitation on Transactions with Affiliates. The Company will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly,
enter into any transaction or series of related transactions (including,
without limitation, the sale, transfer, disposition, purchase, exchange or
lease of assets, property or services) with, or for the benefit of, any of its
Affiliates (other than Restricted Subsidiaries), except (a) on terms that are
no less favorable to the Company or such Restricted Subsidiary, as the case
may be, than those which could have been obtained in a comparable transaction
at such time from persons who are not Affiliates of the Company, (b) with
respect to a transaction or series of related transactions involving aggregate
payments or value equal to or greater than $25,000,000, the Company shall have
delivered an officer's certificate to the Trustee certifying that such
transaction or transactions comply with the preceding clause (a) and that such
transaction or transactions have been approved by a majority of the
Disinterested Members of the Board of Directors of the Company, and (c) with
respect to a transaction or series of related transactions involving aggregate
payments or value equal to or greater than $50,000,000 (other than agreements
whereby the Company or a Restricted Subsidiary of the Company obtains or
grants a license or other rights to syndicated entertainment programs in the
ordinary course of business), the Company shall have obtained a written
opinion from an Independent Financial Advisor stating that the terms of such
transaction or series of transactions are fair, from a financial point of
view, to the Company or the Restricted Subsidiary involved, as the case may
be.
Notwithstanding the foregoing, the restrictions set forth in this covenant
shall not apply to (i) transactions with or among the Company and the
Restricted Subsidiaries, (ii) customary directors' fees, indemnification and
similar arrangements, consulting fees, employee salaries, bonuses or
employment agreements, compensation or employee benefit arrangements and
incentive arrangements with any officer, director or employee of the Company
or any Restricted Subsidiary entered into in the ordinary course of business,
(iii) any dividends made in compliance with "--Limitation on Restricted
Payments" above, (iv) Permitted Investments, (v) loans and advances to
officers, directors and employees of the Company or any Restricted Subsidiary
for travel, entertainment, moving and other relocation expenses, in each case
made in the ordinary course of business, (vi) transactions pursuant to
agreements existing on the date of the Indentures or amendment thereto so long
as not disadvantageous to the holders of the Notes, (vii) Deeply Subordinated
Shareholder Loans and loans and advances in the same terms as the Existing
Subordinated Notes, or (viii) the incurrence of intercompany Indebtedness
which constitutes Permitted Indebtedness.
Limitation on Dividends and other Payment Restrictions Affecting Restricted
Subsidiaries. The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer
to exist or become effective any consensual encumbrance or restriction on the
ability of any Restricted Subsidiary of the Company to (a) pay dividends, in
cash or otherwise, or make any other distributions on or in respect of its
Capital Stock or any other interest or participation in, or measured by, its
profits, (b) pay any Indebtedness owed to the Company or any other Restricted
Subsidiary of the Company, (c) make loans or advances to the Company or any
other Restricted Subsidiary of the Company, (d) transfer any of its properties
or assets to the Company or any other Restricted Subsidiary of the Company or
(e) guarantee any Indebtedness of the Company or any other Restricted
Subsidiary of the Company, except for such encumbrances or restrictions
existing under or by reason of (i) applicable law, (ii) customary non-
subletting, non-assignment or other non-transfer provisions of any license,
contract or any lease governing a leasehold interest of the Company or any
Restricted Subsidiary of the Company, (iii) customary restrictions on
transfers of property subject to a Lien permitted under the Indenture, (iv)
the Bank Facility, but only if the Bank Facility permits payments to the
Company by its Restricted Subsidiaries in amounts sufficient to make interest
payments on the Notes unless there is a continuing default under the Bank
Facility or the making of any such interest payment would (with or without the
giving of notice or passage of time or both) result in a default under the
Bank Facility, (v) any
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agreement or other instrument of a person acquired by the Company or any
Restricted Subsidiary of the Company in existence at the time of such
acquisition (but not created in contemplation thereof), which encumbrance or
restriction is not applicable to any person or any of its Subsidiaries, or the
properties or assets of any person or any of its Subsidiaries, other than the
person, or the property or assets of the person, so acquired, (vi) an
agreement entered into for the sale or disposition of all or substantially all
of the Capital Stock or assets of a Restricted Subsidiary or an agreement
entered into for the sale of specified assets (in either case, so long as such
encumbrance or restriction, by its terms, terminates on the earlier of the
termination of such agreement or the consummation of such agreement and so
long as such restriction applies only to the Capital Stock or assets to be
sold), (vii) any encumbrance or restriction in effect on the Issue Date and
(viii) any agreement that amends, extends, refinances, renews or replaces any
agreement described in the foregoing clauses, provided that the terms and
conditions of any such agreement are not materially less favorable to the
holders of the Notes than those under or pursuant to the agreement amended,
extended, refinanced, renewed or replaced.
Limitation on Designations of Unrestricted Subsidiaries. The Company may
designate after the Issue Date any Restricted Subsidiary as an "Unrestricted
Subsidiary" under the Indentures (a "Designation") only if:
(i) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation;
(ii) the Company would be permitted to make an Investment (other than a
Permitted Investment) at the time of Designation (assuming the
effectiveness of such Designation) pursuant to the "--Limitation on
Restricted Payments" above in an amount (the "Designation Amount") equal to
the Fair Market Value of the Company's interest in such Subsidiary on such
date calculated in accordance with GAAP; and
(iii) the Company would be permitted under the Indenture to incur $1.00
of additional Indebtedness (other than Permitted Indebtedness) pursuant to
the covenant described under "--Limitation on Indebtedness" at the time of
such Designation (assuming the effectiveness of such Designation).
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant
"--Limitation on Restricted Payments" for all purposes of the Indenture in the
Designation Amount. Each of the Subsidiaries conducting the businesses
identified as assets held for disposition or discontinuance in this Prospectus
shall constitute "Unrestricted Subsidiaries" on the Issue Date.
The Company shall not, and shall not cause or permit any Restricted
Subsidiary to, at any time (x) provide credit support (other than guarantees
or pledges under the Bank Facility) for or subject any of its property or
assets (other than the Capital Stock of any Unrestricted Subsidiary) to the
satisfaction of, any Indebtedness of any Unrestricted Subsidiary (including
any undertaking, agreement or instrument evidencing such Indebtedness), (y) be
directly or indirectly liable for any Indebtedness of any Unrestricted
Subsidiary or (z) be directly or indirectly liable for any Indebtedness which
provides that the holder thereof may (upon notice, lapse of time or both)
declare a default thereon or cause the payment thereof to be accelerated or
payable prior to its final scheduled maturity upon the occurrence of a default
with respect to any Indebtedness of any Unrestricted Subsidiary (including any
right to take enforcement action against such Unrestricted Subsidiary), except
any non-recourse guarantee given solely to support the pledge by the Company
or any Restricted Subsidiary of the Capital Stock of an Unrestricted
Subsidiary. No Unrestricted Subsidiary shall at any time guarantee or
otherwise provide credit support for any obligation of the Company or any
Restricted Subsidiary, except as provided in the Bank Facility. All
Subsidiaries of Unrestricted Subsidiaries shall automatically be deemed to be
Unrestricted Subsidiaries.
The Company may revoke any Designation of a Subsidiary as an Unrestricted
Subsidiary (a "Revocation") if:
(i) no Default shall have occurred and be continuing at the time of and
after giving effect to such Revocation;
(ii) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if incurred at
such time, have been permitted to be incurred for all purposes of the
Indenture; and
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(iii) any transaction (or series of related transactions) between such
Subsidiary and any of its Affiliates that occurred on or after the Issue
Date while such Subsidiary was an Unrestricted Subsidiary would be
permitted by "--Limitation on Transactions with Affiliates" above as if
such transaction (or series of related transactions) had occurred at the
time of such Revocation.
In the event the Company or a Restricted Subsidiary makes any Investment in
any person which was not previously a Subsidiary and such person thereby
becomes a Subsidiary, such person shall automatically be an Unrestricted
Subsidiary and the Company may designate such Subsidiary as a Restricted
Subsidiary only if it meets the foregoing requirements of clauses (i) and
(ii).
All Designations and Revocations must be evidenced by Board Resolutions of
the Company delivered to the Trustee certifying compliance with the foregoing
provisions.
Limitation on Sale-Leaseback Transactions. The Company will not, and will
not permit any of its Restricted Subsidiaries to, enter into any Sale-
Leaseback Transaction with respect to any property of the Company or any of
its Restricted Subsidiaries. Notwithstanding the foregoing, the Company and
its Restricted Subsidiaries may enter into Sale-Leaseback Transactions,
provided, that (a) the Attributable Value of such Sale-Leaseback Transaction
shall be deemed to be Indebtedness of the Company or a Restricted Subsidiary
and (b) after giving pro forma effect to any such Sale-Leaseback Transaction
and the foregoing clause (a), the Company or a Restricted Subsidiary would be
able to incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) pursuant to the covenant described under "Limitation on
Indebtedness" above.
Reporting Requirements. For so long as the Notes are outstanding, whether or
not the Company is subject to Section 13(a) or 15(d) of the Exchange Act, or
any successor provision thereto, the Company shall file with the Commission
(if permitted by Commission practice and applicable law and regulations) the
annual reports, quarterly reports and other documents which the Company would
have been required to file with the Commission (if permitted by Commission
practice and applicable law and regulations) pursuant to such Section 13(a) or
15(d) or any successor provision thereto if the Company were so subject, such
documents to be filed with the Commission on or prior to the respective dates
(the "Required Filing Dates") by which the Company would have been required so
to file such documents if the Company were so subject. The Company shall also
in any event (a) within 15 days after each Required Filing Date (whether or
not permitted or required to be filed with the Commission) (i) transmit (or
cause to be transmitted) by mail to all holders of Notes, as their names and
addresses appear in the Note register, without cost to such Holders, and (ii)
file with the Trustee, copies of the annual reports, quarterly reports and
other documents which the Company is required to file with the Commission
pursuant to the preceding sentence, or, if such filing is not so permitted,
information and data of a similar nature, and (b) if, notwithstanding the
preceding sentence, filing such documents by the Company with the Commission
is not permitted by Commission practice or applicable law or regulations,
promptly upon written request supply copies of such documents to any holder of
Notes. In addition, for so long as any Notes remain outstanding, the Company
will furnish to the holders of Notes and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act, and, to any
beneficial holder of Notes, if not obtainable from the Commission, information
of the type that would be filed with the Commission pursuant to the foregoing
provisions upon the request of any such holder.
CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
The Company will not, in any transaction or series of transactions, merge or
consolidate with or into, or sell, assign, convey, transfer, lease or
otherwise dispose of all or substantially all of its properties and assets as
an entirety to, any person or persons, and the Company will not permit any of
its Restricted Subsidiaries to enter into any such transaction or series of
transactions if such transaction or series of transactions, in the aggregate,
would result in a sale, assignment, conveyance, transfer, lease or other
disposition of all or substantially all of the properties and assets of the
Company or the Company and its Restricted Subsidiaries, taken as a whole, to
any other person or persons, unless at the time and after giving effect
thereto (a) either (i) if the transaction or transactions is a merger or
consolidation, the Company or such Restricted Subsidiary, as the case may be,
shall
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be the surviving person of such merger or consolidation, or (ii) the person
formed by such consolidation or into which the Company, or such Restricted
Subsidiary, as the case may be, is merged or to which the properties and
assets of the Company or such Restricted Subsidiary, as the case may be,
substantially as an entirety, are transferred (any such surviving person or
transferee person being the "Surviving Entity") shall be a corporation
organized and existing under the laws of the United States of America, any
state thereof or the District of Columbia and shall expressly assume by
supplemental indentures executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of the Company under the
Notes and the Indentures and the Registration Rights Agreement, and in each
case, the Indentures shall remain in full force and effect; (b) immediately
before and immediately after giving effect to such transaction or series of
transactions on a pro forma basis (including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction or series of transactions), no Default or Event of
Default shall have occurred and be continuing; and (c) the Company or the
Surviving Entity, as the case may be, after giving effect to such transaction
or series of transactions on a pro forma basis (including, without limitation,
any Indebtedness incurred or anticipated to be incurred in connection with or
in respect of such transaction or series of transactions), could incur $1.00
of additional Indebtedness (other than Permitted Indebtedness) under the
covenant described under "--Certain Covenants--Limitation on Indebtedness"
above.
In connection with any consolidation, merger, transfer, lease, assignment or
other disposition contemplated hereby, the Company shall deliver, or cause to
be delivered, to the Trustee, in form and substance reasonably satisfactory to
the Trustee, an officers' certificate and an opinion of counsel, each stating
that such consolidation, merger, transfer, lease, assignment or other
disposition and the supplemental indenture in respect thereof comply with the
requirements under the Indenture.
Upon any consolidation or merger, or any sale, assignment, conveyance,
transfer, lease or disposition of all or substantially all of the properties
and assets of the Company in accordance with the immediately preceding
paragraphs, the successor person formed by such consolidation or into which
the Company or a Restricted Subsidiary, as the case may be, is merged or the
successor person to which such sale, assignment, conveyance, transfer, lease
or disposition is made shall succeed to, and be substituted for, and may
exercise every right and power of the Company under the Notes, Indentures
and/or the Registration Rights Agreement, as the case may be, with the same
effect as if such successor had been named as the Company in the Notes, the
Indentures and/or in the Registration Rights Agreement, as the case may be.
EVENTS OF DEFAULT
The following will be "Events of Default" under each Indenture with respect
to the Notes issued under such Indenture:
(i) default in the payment of the principal of or premium, if any, when
due and payable, on any of the Notes (at Stated Maturity, upon optional
redemption, required purchase or otherwise); or
(ii) default in the payment of an installment of interest on any of the
Notes, when due and payable, for 30 days; or
(iii) (a) default in the performance, or breach, of any covenant or
agreement of the Company under the applicable Indenture (other than a
default in the performance or breach of a covenant or agreement which is
specifically dealt with in clauses (i) or (ii) or subclauses (b), (c) or
(d) of this clause (iii)) and such default or breach shall continue for a
period of 45 days after written notice has been given, by certified mail,
(x) to the Company by the applicable Trustee or (y) to the Company and the
applicable Trustee by the holders of at least 25% in aggregate principal
amount of the outstanding Senior Notes or at least 25% in aggregate
principal amount at maturity of the Senior Discount Notes, as the case may
be; (b) there shall be a default in the performance or breach of the
provisions of "Consolidation, Merger and Sale of Assets, etc."; (c) the
Company shall have failed to make or consummate an Offer in accordance with
the provisions of the applicable Indenture described under "--Certain
Covenants--Dispositions of Proceeds of Asset Sales"; or (d) the Company
shall have failed to make or consummate a Change of Control Offer in
accordance with the provisions of the Indenture described under "Change of
Control"; or
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(iv) default or defaults under one or more agreements, instruments,
mortgages, bonds, debentures or other evidences of Indebtedness under which
the Company or any Significant Subsidiary of the Company then has
outstanding Indebtedness in excess of $20,000,000, individually or in the
aggregate, and either (a) such Indebtedness is already due and payable in
full or (b) such default or defaults have resulted in the acceleration of
the maturity of such Indebtedness; or
(v) one or more judgments, orders or decrees of any court or regulatory
or administrative agency of competent jurisdiction for the payment of money
in excess of $20,000,000 (net of any amounts covered by insurance therefor
which the insurance provider has been notified and not challenged coverage)
either individually or in the aggregate, shall be entered against the
Company or any Significant Subsidiary of the Company or any of their
respective properties and shall not be discharged and there shall have been
a period of 60 days after the date on which any period for appeal has
expired and during which a stay of enforcement of such judgment, order or
decree, shall not be in effect; or
(vi) the entry of a decree or order by a court having jurisdiction in the
premises (A) for relief in respect of the Company or any Significant
Subsidiary in an involuntary case or proceeding under the Federal
Bankruptcy Code or any other federal, state or foreign bankruptcy,
insolvency, reorganization or similar law or (B) adjudging the Company or
any Significant Subsidiary bankrupt or insolvent, or seeking
reorganization, arrangement, adjustment or composition of or in respect of
the Company or any Significant Subsidiary under the Federal Bankruptcy Code
or any other similar federal, state or foreign law, or appointing a
custodian, receiver, liquidator, assignee, trustee, sequestrator (or other
similar official) of the Company or any Significant Subsidiary or of any
substantial part of any of their properties, or ordering the winding up or
liquidation of any of their affairs, and the continuance of any such decree
or order unstayed and in effect for a period of 60 consecutive days; or
(vii) the institution by the Company or any Significant Subsidiary of a
voluntary case or proceeding under the Federal Bankruptcy Code or any other
similar federal, state or foreign law or any other case or proceedings to
be adjudicated a bankrupt or insolvent, or the consent by the Company or
any Significant Subsidiary to the entry of a decree or order for relief in
respect of the Company or any Significant Subsidiary in any involuntary
case or proceeding under the Federal Bankruptcy Code or any other similar
federal, state or foreign law or to the institution of bankruptcy or
insolvency proceedings against the Company or any Significant Subsidiary,
or the filing by the Company or any Significant Subsidiary of a petition or
answer or consent seeking reorganization or relief under the Federal
Bankruptcy Code or any other similar federal, state or foreign law, or the
consent by it to the filing of any such petition or to the appointment of
or taking possession by a custodian, receiver, liquidator, assignee,
trustee or sequestrator (or other similar official) of any of the Company
or any Significant Subsidiary or of any substantial part of its property,
or the making by it of an assignment for the benefit of creditors, or the
admission by it in writing of its inability to pay its debts generally as
they become due or the taking of corporate action by the Company or any
Significant Subsidiary in furtherance of any such action.
If an Event of Default with respect to the Senior Notes or the Senior
Discount Notes (other than those covered by clause (vi) or (vii) above with
respect to the Company) shall occur and be continuing, the Trustee under the
applicable Indenture, by notice to the Company, or the holders of at least 25%
in aggregate principal amount of the Senior Notes then outstanding, or the
holders of at least 25% in aggregate principal amount at maturity of the
Senior Discount Notes then outstanding, as the case may be, by notice to the
applicable Trustee and the Company, may declare the Default Amount on all of
the outstanding Senior Notes or Senior Discount Notes, as the case may be, due
and payable immediately, upon which declaration, the Default Amount shall be
immediately due and payable; provided, however, that so long as the Bank
Facility shall be in full force and effect, if any acceleration arising from
any Event of Default (other than an Event of Default with respect to the
Company described in clause (vi) or (vii) of the preceding paragraph) shall
not become effective until the earlier to occur of (x) five Business Days
following delivery of written notice of such acceleration of the Notes to the
agent under the Bank Facility and (y) the acceleration (ipso facto or
otherwise) of any Indebtedness under the Bank Facility. If an Event of Default
specified in clause (vi) or (vii) above with respect to the Company occurs
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and is continuing, then the Default Amount on the outstanding Notes shall ipso
facto become and be immediately due and payable without any declaration or
other act on the part of the Trustee or any holder of Notes.
"Default Amount" means, with respect to (i) the Senior Discount Notes prior
to the earlier to occur of the Cash Interest Election Date and November 1,
2002, the Accreted Value thereof as of the payment date, (ii) the Senior
Notes, the principal amount thereof, and (iii) the Senior Discount Notes after
the earlier to occur of the Cash Interest Election Date and November 1, 2002,
the principal amount at maturity thereof, plus, in the case of clause (ii) and
clause (iii), accrued and unpaid interest thereon, if any, to the payment
date.
After a declaration of acceleration under the applicable Indenture, but
before a judgment or decree for payment of the money due has been obtained by
the Trustee thereunder, the holders of a majority in aggregate principal
amount of the outstanding Senior Notes, or the holders of a majority in
aggregate principal amount at maturity of the outstanding Senior Discount
Notes, as the case may be, by written notice to the Company and the applicable
Trustee, may rescind such declaration if (a) the Company has paid or deposited
with the applicable Trustee a sum sufficient to pay (i) all sums paid or
advanced by the applicable Trustee under the applicable Indenture and the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel, (ii) all overdue interest on all Senior Notes or
Senior Discount Notes, as the case may be, (iii) the principal of and premium,
if any, on any Senior Notes or Senior Discount Notes which have become due
otherwise than by such declaration of acceleration and interest thereon at the
rate borne by such Notes, and (iv) to the extent that payment of such interest
is lawful, interest upon overdue interest and overdue principal at the rate
borne by such Notes which has become due otherwise than by such declaration of
acceleration; (b) the rescission would not conflict with any judgment or
decree of a court of competent jurisdiction; and (c) all Events of Default,
other than the non-payment of principal of, premium, if any, and interest on
the Senior Notes or Senior Discount Notes, as the case may be, that has become
due solely by such declaration of acceleration, have been cured or waived.
In the event of a declaration of acceleration under the Indentures because
of an Event of Default set forth in clause (iv) above has occurred and is
continuing as a result of the failure of the Company or any of its Significant
Subsidiaries to pay the principal of any Indebtedness upon the final maturity
thereof or the acceleration of such maturity, such declaration of acceleration
shall be automatically rescinded and annulled if either (i) the failure to pay
any such Indebtedness at the final maturity thereof shall have been waived or
the acceleration of the maturity thereof shall have been rescinded within 30
days of such maturity or declaration of acceleration, as the case may be, or
(ii) such Indebtedness shall have been discharged, or the underlying default
has been cured, within 30 days of such maturity or declaration of
acceleration, as the case may be.
The holders of not less than a majority in aggregate principal amount of the
outstanding Senior Notes or the Senior Discount Notes, as the case may be, may
on behalf of the holders of all Senior Notes or Senior Discount Notes, as the
case may be, waive any past defaults under the applicable Indenture, except a
default in the payment of the principal of, premium, if any, or interest on
any Note, or in respect of a covenant or provision which under such Indenture
cannot be modified or amended without the consent of the holder of each Senior
Note or Senior Discount Note outstanding.
No holder of any of the Notes has any right to institute any proceeding with
respect to an Indenture or any remedy thereunder, unless the holders of at
least 25% in aggregate principal amount of the outstanding Senior Notes, or
the holders of at least 25% in aggregate principal amount at maturity of the
outstanding Senior Discount Notes, as the case may be, have made written
request, and offered reasonable indemnity, to the applicable Trustee to
institute such proceeding as Trustee under such Notes and the applicable
Indenture, the applicable Trustee has failed to institute such proceeding
within 15 days after receipt of such notice and the applicable Trustee, within
such 15-day period, has not received directions inconsistent with such written
request by holders of a majority in aggregate principal amount of the
outstanding Senior Notes or, in the case of the Senior Discount Notes, the
holders of a majority in aggregate principal amount at maturity. Such
limitations do not apply, however, to a suit instituted by a holder of a Note
for the enforcement of the payment of the principal of, premium, if any, or
interest on such Note on or after the respective due dates expressed in such
Note.
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During the existence of an Event of Default, each Trustee is required to
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a prudent person
would exercise under the circumstances in the conduct of such person's own
affairs. Subject to the provisions of an Indenture relating to the duties of
the Trustee thereunder, whether or not an Event of Default shall occur and be
continuing, such Trustee is not under any obligation to exercise any of its
rights or powers under the applicable Indenture at the request or direction of
any of the holders unless such holders shall have offered to the applicable
Trustee reasonable security or indemnity. Subject to certain provisions
concerning the rights of the Trustee, the holders of a majority in aggregate
principal amount of the outstanding Senior Notes or, with respect to the
Senior Discount Notes, the holders of a majority in aggregate principal amount
at maturity, have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee, or exercising any
trust or power conferred on the Trustee under the applicable Indenture.
If a Default or an Event of Default occurs and is continuing and is known to
the Trustee, the Trustee shall mail to each holder of the Notes affected
notice of the Default or Event of Default within 30 days after obtaining
knowledge thereof. Except in the case of a Default or an Event of Default in
payment of principal of, premium, if any, or interest on any Notes, the
applicable Trustee may withhold the notice to the holders of such Notes if a
committee of its trust officers in good faith determines that withholding the
notice is in the interest of the Noteholders.
The Company is required to furnish to each Trustee annual and quarterly
statements as to the performance by the Company of its obligations under the
Indentures and as to any default in such performance. The Company is also
required to notify each Trustee within five days of any event which is, or
after notice or lapse of time or both would become, an Event of Default.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, terminate its obligations
with respect to the outstanding Notes issued under the Indentures
("defeasance") to the extent set forth below are satisfied. Such defeasance
means that the Company shall be deemed to have paid and discharged the entire
Indebtedness represented by the outstanding Notes issued under such Indenture,
except for (i) the rights of holders of outstanding Notes to receive payment
in respect of the principal of, premium, if any, and interest on such Notes
when such payments are due, (ii) the Company's obligations to issue temporary
Notes, register the transfer or exchange of any Notes, replace mutilated,
destroyed, lost or stolen Notes and maintain an office or agency for payments
in respect of the Notes, (iii) the rights, powers, trusts, duties and
immunities of the Trustee, and (iv) the defeasance provisions of such
Indentures. In addition, in connection with defeasance, the Company may, at
its option and at any time, elect to terminate the obligations of the Company
with respect to certain covenants ("covenant defeasance") that are set forth
in the Indentures, and are described under "--Certain Covenants" above. Upon
the exercise of the covenant of defeasance, the Company shall be released from
all obligations with respect to such covenants, and any subsequent failure to
comply with such obligations shall not constitute a Default or an Event of
Default with respect to the Notes issued under the Indentures.
In order to exercise either defeasance or covenant defeasance with respect
to an Indenture, (i) the Company must irrevocably deposit with the Trustee, in
trust, for the benefit of the holders of the Notes issued thereunder, cash in
United States dollars, U.S. Government Obligations (as defined in the
Indenture), or a combination thereof, in such amounts as will be sufficient,
in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest on the
outstanding Notes to redemption or maturity (except lost, stolen or destroyed
Notes which have been replaced or paid); (ii) the Company shall have delivered
to the applicable Trustee an opinion of counsel to the effect that the holders
of the outstanding Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such defeasance or covenant defeasance and
will be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such defeasance or
covenant defeasance had not occurred (in the case of defeasance, such opinion
must refer to and be based upon a ruling of the Internal Revenue Service or a
change in applicable federal income tax laws); (iii) no Default or Event of
Default shall have occurred and be continuing on the date of such deposit;
(iv) such defeasance or covenant defeasance shall not cause the applicable
Trustee to have a conflicting interest with respect to any securities of the
Company; (v) such defeasance or covenant
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defeasance shall not result in a breach or violation of, or constitute a
default under, any agreement or instrument to which the Company is a party or
by which it is bound; (vi) the Company shall have delivered to the applicable
Trustee an opinion of counsel to the effect that after the 91st day following
the deposit, the trust funds will not be subject to the effect of any
applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally; (vii) the Company shall have delivered to the
applicable Trustee an officers' certificate stating that the deposit was not
made by the Company with the intent of preferring the holders of the Notes
over the other creditors of the Company with the intent of hindering, delaying
or defrauding creditors of the Company or others; (viii) no event or condition
shall exist that would prevent the Company from making payments of the
principal of, premium, if any, and interest on the Notes on the date of such
deposit or at any time ending on the 91st day after the date of such deposit;
and (ix) the Company shall have delivered to the applicable Trustee an
officers' certificate and an opinion of counsel, each stating that all
conditions precedent under the applicable Indenture to either defeasance or
covenant defeasance, as the case may be, have been complied with.
SATISFACTION AND DISCHARGE
Each Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
issued under such Indenture when (i) either (a) all the Notes theretofore
authenticated and delivered thereunder (except lost, stolen or destroyed Notes
which have been replaced or repaid and Notes for whose payment money has
theretofore been deposited in trust or segregated and held in trust by the
Company and thereafter repaid to the Company or discharged from such trust)
have been delivered to the Trustee for cancellation or (b) all Notes issued
thereunder not theretofore delivered to the applicable Trustee for
cancellation (except lost, stolen or destroyed Notes which have been replaced
or paid) have become due and payable and the Company has irrevocably deposited
or caused to be deposited with the applicable Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the applicable Trustee for cancellation, for
principal of, premium, if any, and interest on the Notes to the date of
deposit together with irrevocable instructions from the Company directing the
applicable Trustee to apply such funds to the payment thereof at maturity or
redemption, as the case may be; (ii) the Company has paid all other sums
payable under the Indenture by the Company; and (iii) the Company has
delivered to the applicable Trustee an officers' certificate and an opinion of
counsel stating that all conditions precedent under such Indenture relating to
the satisfaction and discharge of the Indenture have been complied with.
AMENDMENTS AND WAIVERS
From time to time, the Company, when authorized by a resolution of its Board
of Directors, and the Trustee under the Indenture may, without the consent of
the holders of any outstanding Notes, amend, waive or supplement an Indenture
or the Notes issued thereunder for certain specified purposes, including,
among other things, curing ambiguities, defects or inconsistencies,
qualifying, or maintaining the qualification of, the Indenture under the Trust
Indenture Act of 1939, or making any change that does not adversely affect the
rights of any holder of Notes issued thereunder. Other amendments and
modifications of each Indenture or the Notes issued thereunder may be made by
the Company and the applicable Trustee with the consent of the holders of not
less than a majority of the aggregate principal amount of the outstanding
Senior Notes or, in the case of the Senior Discount Notes, the holders of a
majority of the aggregate principal amount at maturity; provided, however,
that no such modification or amendment may, without the consent of the holder
of each outstanding Note issued under such Indenture affected thereby, (i)
reduce the principal amount of, extend the fixed maturity of or alter the
redemption provisions of, such Notes, (ii) change the currency in which such
Notes or any premium or the interest thereon is payable, (iii) reduce the
percentage in principal amount of outstanding Notes issued thereunder that
must consent to an amendment, supplement or waiver or consent to take any
action under such Indenture or Notes, (iv) impair the right to institute suit
for the enforcement of any payment on or with respect to such Notes, (v) waive
a default in payment with respect to such Notes, (vi) following the occurrence
of a Change of Control or an Asset Sale, amend, change or modify the
obligation of the Company to make and consummate a Change of Control Offer or
make and consummate the offer with respect to any Asset Sale or modify any of
the provisions or definitions with respect thereto, (vii) reduce or change the
rate or time for
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payment of interest on such Notes or, in the case of the Senior Discount
Notes, amend or modify the definition of Accreted Value or (viii) modify or
change any provision of the Indenture affecting the ranking of such Notes in a
manner adverse to the holders of such Notes.
THE TRUSTEE
Each Indenture provides that, except during the continuance of an Event of
Default, the Trustee thereunder will perform only such duties as are
specifically set forth in the Indenture. If an Event of Default has occurred
and is continuing, the Trustee will exercise such rights and powers vested in
it under the Indenture and use the same degree of care and skill in its
exercise as a prudent person would exercise under the circumstances in the
conduct of such person's own affairs.
The Indentures and provisions of the Trust Indenture Act of 1939, as
amended, incorporated by reference therein contain limitations on the rights
of the Trustee thereunder, should it become a creditor of the Company, to
obtain payment of claims in certain cases or to realize on certain property
received by it in respect of any such claims, as security or otherwise. The
Trustee is permitted to engage in other transactions; provided, however, that
if it acquires any conflicting interest (as defined in such Act) it must
eliminate such conflict or resign. Such a conflicting interest could occur if
the Company were to default on the Senior Notes and not on the Senior Discount
Notes or on the Senior Discount Notes and not on the Senior Notes.
GOVERNING LAW
The Indentures and the Notes are and will be governed by the laws of the
State of New York, without regard to the principles of conflicts of law.
CERTAIN DEFINITIONS
"Accreted Value" means (a) as of any date prior to the Cash Interest
Election Date, if any (the "Specified Date"), with respect to each $1,000
principal face amount at maturity of Senior Discount Notes:
(i) if the Specified Date is one of the following dates (each a "Semi-
Annual Accrual Date"), the amount set forth opposite such date below:
<TABLE>
<CAPTION>
SEMI-ANNUAL ACCRETED
ACCRUAL DATE VALUE
------------ ---------
<S> <C>
Issue Date...................................................... $ 606.14
November 1, 1997................................................ 606.65
May 1, 1998..................................................... 637.74
November 1, 1998................................................ 670.43
May 1, 1999..................................................... 704.79
November 1, 1999................................................ 740.91
May 1, 2000..................................................... 778.88
November 1, 2000................................................ 818.80
May 1, 2001..................................................... 860.76
November 1, 2001................................................ 904.87
May 1, 2002..................................................... 951.25
November 1, 2002................................................ $1,000.00;
</TABLE>
(ii) if the Specified Date occurs between two Semi-Annual Accrual Dates,
the sum of (a) the Accreted Value for the Semi-Annual Accrual Date
immediately preceding the Specified Date and (b) an amount equal to the
product of (x) the Accreted Value for the Semi-Annual Accrual Date
immediately following the Specified Date less the Accreted Value for the
Semi-Annual Accrual Date immediately preceding the Specified Date and (y) a
fraction, the numerator of which is the number of days actually elapsed
from the immediately preceding Semi-Annual Accrual Date to the Specified
Date, using a 360-day year of twelve 30-day months, and the denominator of
which is 180; and
(iii) if the Specified Date is after November 1, 2002, $1,000; and
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(b) on and after the Cash Interest Election Date, with respect to each
$1,000 principal face amount of Senior Discount Notes, the Accreted Value
determined in accordance with the foregoing as of such Cash Interest Election
Date (without any further accretion).
"Acquired Indebtedness" means Indebtedness of a person (a) assumed in
connection with an Asset Acquisition from such person or (b) existing at the
time such person becomes a Subsidiary of any other person and not incurred in
connection with, or in contemplation of, such Asset Acquisition or such person
becoming a Subsidiary.
"Affiliate" means, with respect to any specified person, (i) any other
person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified person, (ii) any other person that
owns, directly or indirectly, 10% or more of such specified person's Capital
Stock, (iii) any officer or director of (A) any such specified person, (B) any
Subsidiary of such specified person or (C) any person described in clauses (i)
or (ii) above or (iv) the spouse of any natural person described in clauses
(i), (ii) or (iii) above or any person directly or indirectly controlling or
controlled by or under direct or indirect common control with such spouse.
"Asset Acquisition" means (a) an Investment by the Company or any Restricted
Subsidiary of the Company in any other person pursuant to which such person
shall become a Restricted Subsidiary of the Company or any Restricted
Subsidiary of the Company, or shall be merged with or into the Company or any
Restricted Subsidiary of the Company, or (b) the acquisition by the Company or
any Restricted Subsidiary of the Company of the assets of any person which
constitute all or substantially all of the assets of such person, any division
or line of business of such person or any other properties or assets of such
person other than in the ordinary course of business.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition by the Company or any Restricted Subsidiary of the Company to any
person other than the Company or a Restricted Subsidiary of the Company, in
one or a series of related transactions for an aggregate consideration of more
than $1,000,000, of (a) any Capital Stock of any Subsidiary of the Company;
(b) all or substantially all of the properties and assets of any division or
line of business of the Company or any Restricted Subsidiary of the Company;
or (c) any other properties or assets of the Company or any Restricted
Subsidiary of the Company other than in the ordinary course of business
including any disposition of obsolete or worn-out assets. For purposes of the
covenant "Limitation on Disposition of Proceeds of Asset Sales," the following
shall not be deemed an Asset Sale: (i) any sale or other disposition by the
Company or a Restricted Subsidiary of the Company of the assets held for
disposition or discontinuance of IFE identified in this Prospectus for Fair
Market Value or (ii) an Investment of cash not prohibited by the Indentures.
For the purposes of this definition, the term "Asset Sale" shall not include
any sale, issuance, conveyance, transfer, lease or other disposition of
properties or assets that is governed by the provisions described under "--
Consolidation, Merger, Sale of Assets, Etc."
"Attributable Value" means, as to any particular lease under which any
person is at the time liable other than a Capitalized Lease Obligation, and at
any date as of which the amount thereof is to be determined, the total net
amount of rent required to be paid by such person under such lease during the
remaining term thereof (whether or not such lease is terminable at the option
of the lessee prior to the end of such term), including any period for which
such lease has been, or may, at the option of the lessor, be extended,
discounted from the last date of such term to the date of determination at a
rate per annum equal to the discount rate which would be applicable to a
Capitalized Lease Obligation with like term in accordance with GAAP. The net
amount of rent required to be paid under any lease for any such period shall
be the aggregate amount of rent payable by the lessee with respect to such
period after excluding amounts required to be paid on account of insurance,
taxes, assessments, utility, operating and labor costs and similar charges.
"Attributable Value" means, as to a Capitalized Lease Obligation under which
any person is at the time liable and at any date as of which the amount
thereof is to be determined, the capitalized amount thereof that would appear
on the face of a balance sheet of such person in accordance with GAAP.
"Average Life to Stated Maturity" means, with respect to any Indebtedness,
as at any date of determination, the quotient obtained by dividing (i) the sum
of the products of (a) the number of years from such date to the
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date or dates of each successive scheduled principal payment (including,
without limitation, any sinking fund requirements) of such Indebtedness and
(b) the amount of each such principal payment by (ii) the sum of all such
principal payments.
"Bank Facility" means the Second Amended and Restated Credit Agreement dated
as of October 28, 1997 among FCN Holding, IFE and Saban, as borrowers, and FK
Holdings, as guarantor, and the initial lenders named therein, as initial
lenders, and Citicorp USA, Inc., as administrative agent, and Citicorp
Securities, Inc. and BankBoston N.A., as co-arrangers, including any initial
or successive deferrals, renewals, waivers, extensions, replacements,
refinancings (in whole or part) or refundings thereof, or any amendments,
modifications or supplements, thereto and including any related notes,
guarantees, security agreements, pledge agreements, mortgages and other
collateral documents executed in connection therewith.
"Board of Directors" means the board of directors of a company or its
equivalent, including managers of a limited liability company (or members of a
member managed limited liability company), general partners of a partnership
or trustees of a business trust, or any duly authorized committee thereof.
"Capital Stock" means, with respect to any person, any and all shares,
interests, participations, rights in or other equivalents (however designated)
of such person's capital stock or equity participations, and any rights (other
than debt securities convertible into capital stock), warrants or options
exchangeable for or convertible into such capital stock and, including,
without limitation, with respect to partnerships, limited liability companies
or business trusts, ownership interests (whether general or limited) and any
other interest or participation that confers on a Person the right to receive
a share of the profits and losses of, or distributions of assets of, such
partnerships, limited liability companies or business trusts.
"Capitalized Lease Obligation" means any obligation under a lease of (or
other agreement conveying the right to use) any property (whether real,
personal or mixed) that is required to be classified and accounted for as a
capital lease obligation under GAAP, and, for the purpose of the Indentures,
the amount of such obligation at any date shall be the capitalized amount
thereof at such date, determined in accordance with GAAP.
"Cash Equivalents" means, at any time, (i) any evidence of Indebtedness with
a maturity of 365 days or less issued or directly and fully guaranteed or
insured by the United States of America or any agency or instrumentality
thereof (provided that the full faith and credit of the United States of
America is pledged in support thereof); (ii) certificates of deposit or
acceptances with a maturity of 365 days or less of any financial institution
that is a member of the Federal Reserve System having combined capital and
surplus and undivided profits of not less than $500,000,000, whose debt is
rated at least A-1 by S&P or at least P-1 by Moody's or at least an equivalent
rating category of another nationally recognized rating agency; (iii)
commercial paper with a maturity of 365 days or less issued by a corporation
that is not an Affiliate of the Company organized under the laws of any state
of the United States or the District of Columbia and rated at least A-1 by S&P
or at least P-1 by Moody's or at least an equivalent rating category of
another nationally recognized securities rating agency; (iv) repurchase
agreements and reverse repurchase agreements relating to marketable direct
obligations issued or unconditionally guaranteed by the government of the
United States of America or issued by any agency thereof and backed by the
full faith and credit of the United States of America, in each case maturing
within 365 days
from the date of acquisition; and (v) money market instruments which are
principally invested in Cash Equivalents referred to in the preceding clauses
(i) through (iv).
"Change of Control" means the occurrence of any of the following events:
(a)(i) the Permitted Holders cease to own at least 50% of the total Voting
Stock of the Company or (ii) The News Corporation Limited, the Murdoch Family
or any of their respective Affiliates cease to own at least 30% of the total
Voting Stock of the Company; (b) the Company consolidates with, or merges with
or into, another person or sells, assigns, conveys, transfers, leases or
otherwise disposes of all or substantially all of its assets to any person, or
any person consolidates with, or merges with or into, the Company, in any such
event pursuant to a transaction in which the outstanding Voting Stock of the
Company is converted into or exchanged for cash, securities or other property,
other than any such transaction where (i) the outstanding Voting Stock of the
Company is converted into or exchanged for Voting Stock (other than Redeemable
Capital Stock) of the surviving or transferee corporation
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and immediately after such transaction (i) the Permitted Holders own at least
50% of the total Voting Stock of the surviving or transferee corporation and
(ii) The News Corporation Limited, the Murdoch Family or any of their
respective Affiliates own at least 30% of the total Voting Stock of the
surviving or transferee corporation; (c) during any consecutive two-year
period, individuals who at the beginning of such period constituted the Board
of Directors of the Company (together with any new directors whose election by
such Board of Directors or whose nomination for election by the stockholders
of the Company was approved by a vote of 66 2/3% of the directors then still
in office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for any
reason to constitute at least 50% of the Board of Directors of the Company
then in office; or (d) the Company is liquidated or dissolved or adopts a plan
of liquidation or any order, judgment or decree shall be entered against the
Company decreeing the dissolution or splitup of the Company and such order
shall remain undischarged or unstayed for a period in excess of 60 days.
"Consolidated Cash Flow" means, with respect to any person for any period,
(i) the sum of, without duplication, the amounts for such period, taken as a
single accounting period, of (a) Consolidated Net Income, (b) Consolidated
Non-cash Charges, (c) Consolidated Interest Expense, (d) Consolidated Income
Tax Expense (other than income tax expense (either positive or negative)
attributable to extraordinary and nonrecurring gains or losses), (e) an amount
equal to any extraordinary and nonrecurring losses (to the extent such losses
were deducted in computing Consolidated Net Income), less (ii) non-cash items
increasing Consolidated Net Income; provided, however, that if, during such
period, such person or any of its Restricted Subsidiaries shall have made any
Asset Sales or Asset Acquisitions, Consolidated Cash Flow for such person and
its Restricted Subsidiaries for such period shall be adjusted to give pro
forma effect to the Consolidated Cash Flow directly attributable to the assets
which are the subject of such Asset Sales or Asset Acquisitions during such
period.
"Consolidated Income Tax Expense" means, with respect to any person for any
period, the provision for federal, state, local and foreign income taxes of
such person and its Restricted Subsidiaries for such period as determined on a
consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to any person for any
period, without duplication, the sum of (i) the interest expense of such
person and its Restricted Subsidiaries for such period as determined on a
consolidated basis in accordance with GAAP, including, without limitation, (a)
any amortization of debt discount, (b) the net cost under Interest Rate
Protection Obligations (including any amortization of discounts), (c) the
interest portion of any deferred payment obligation, excluding accretion
recorded based upon liabilities arising from purchase accounting adjustments
from the acquisition of IFE, (d) all commissions, discounts and other fees and
charges owed with respect to letters of credit, bankers' acceptance financing
or similar facilities and (e) all capitalized and accrued interest and (ii)
the interest component of Capitalized Lease Obligations paid, accrued and/or
scheduled to be paid or accrued by such person and its Restricted Subsidiaries
during such period and (iii) the aggregate amount of dividends and other
distributions paid or accrued during such period in respect of Redeemable
Capital Stock (other than payments made in respect of the redemption of such
Redeemable Capital Stock (other than accrued and unpaid dividends thereon)) of
such person and its Restricted Subsidiaries on a consolidated basis, as
determined on a consolidated basis in accordance with GAAP. In no event shall
Consolidated Interest Expense include interest expense associated with Deeply
Subordinated Shareholder Loans.
"Consolidated Net Income" means, with respect to any person for any period,
the consolidated net income (or loss) of such person and its Restricted
Subsidiaries for such period as determined in accordance with GAAP, adjusted,
to the extent included in calculating such net income, by excluding, without
duplication, (i) all extraordinary gains or losses (net of fees and expenses
relating to the transaction giving rise thereto), (ii) the portion of net
income of such person and its Restricted Subsidiaries derived from or in
respect of Investments in persons other than Restricted Subsidiaries except to
the extent that cash dividends or distributions have not actually been
received by such person or one of its Restricted Subsidiaries, (iii) net
income (or loss) of any person combined with such person or one of its
Restricted Subsidiaries on a "pooling of interests" basis attributable to any
period prior to the date of combination, (iv) gains or losses in respect of
any Asset Sales by such person or one of its Restricted Subsidiaries (net of
fees and expenses relating to the transaction giving rise thereto), on an
after-tax basis, (v) the net income of any Restricted Subsidiary of such
person to the extent that
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the declaration of dividends or similar distributions by that Restricted
Subsidiary of that income is not at the time permitted, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulations
applicable to that Restricted Subsidiary or its stockholders and (vi) any gain
or loss realized as a result of the cumulative effect of a change in
accounting principles.
"Consolidated Net Tangible Assets" of any person means, as of any date, (a)
all amounts that would be shown as assets on a consolidated balance sheet of
such person and its Restricted Subsidiaries prepared in accordance with GAAP,
less (b) the amount thereof constituting goodwill and other intangible assets
as calculated in accordance with GAAP.
"Consolidated Non-cash Charges" means, with respect to any person for any
period, the aggregate depreciation, amortization (excluding amortization of
programming costs) and other non-cash expenses of such person and its
Restricted Subsidiaries reducing Consolidated Net Income of such person and
its Restricted Subsidiaries for such period, determined on a consolidated
basis in accordance with GAAP (excluding any such charges constituting an
extraordinary item or loss or any such charge which requires an accrual of or
a reserve for cash charges for any future period).
"control" when used with respect to any specified person means the power to
direct the management and policies of such person, directly or indirectly,
whether through ownership of voting securities, by contract or otherwise; and
the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any of its Restricted Subsidiaries against fluctuations in currency
values.
"Deeply Subordinated Shareholder Loans" means any Indebtedness of the
Company for money borrowed from and held by either (x) a Permitted Holder or
(y) another person whose obligations have been guaranteed by a Permitted
Holder, provided that, except to the extent expressly permitted by the
covenant "Limitation on Restricted Payments," such Indebtedness of the Company
(i) has been expressly subordinated in right of payment as to all payments of
interest and principal to the Notes, (ii) provides for no payments of interest
(other than payments in-kind) or principal prior to the earlier of (a) the end
of the sixth month after the final maturity of the Notes and (b) the payment
in full cash of all Notes (or due provision therefor which results in the
discharge of all obligations under the Indenture); provided, further, that the
terms of any such Indebtedness shall be evidenced by a note in the form
annexed to the Indenture and the Company shall have delivered the specified
Opinions of Counsel as to the validity and enforceability of the subordination
terms thereof.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disinterested Member of the Board of Directors of the Company" means, with
respect to any transaction or series of transactions, a member of the Board of
Directors of the Company other than a member who has any material direct or
indirect financial interest in or with respect to such transaction or series
of transactions or who is an officer, director or an employee of any person
who has any direct or indirect financial interest in or with respect to such
transaction or series of transactions (other than the Company or a Restricted
Subsidiary of the Company).
"Entertainment/Programming Business" means a business engaged primarily in
the ownership, operation, acquisition, development, production, distribution
or syndication of general entertainment or children's programming including,
without limitation, any business engaged in by the Company and its Restricted
Subsidiaries on the Issue Date.
"Event of Default" has the meaning set forth under "Events of Default"
herein.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
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"Existing Preferred" means the Series A Preferred Stock outstanding on the
Issue Date.
"Existing Subordinated Notes" means (i) the Subordinated Note of the Company
issued to News America Holdings Incorporated in the principal amount
(excluding accreted interest) of approximately $345.5 million outstanding on
the Issue Date (before giving effect to the use of proceeds from the Offering
and the Flextech Transaction) and (ii) the Subordinated Note of the Company
issued to Fox Broadcasting Company in the principal amount (excluding accreted
interest) of approximately $108.6 million outstanding on the Issue Date
(before giving effect to the use of proceeds from the Offering).
Notwithstanding anything herein to the contrary, the Company may amend the
term of the Existing Subordinated Notes to make them Deeply Subordinated
Shareholder Loans.
"Fair Market Value" means, with respect to any asset, the price which could
be negotiated in an arm's-length free market transaction, for cash, between a
willing seller and a willing buyer, neither of which is under pressure or
compulsion to complete the transaction; provided, however, that, except with
respect to any Asset Sale which involves an asset or assets constituting less
than $25,000,000, the determination of the Fair Market Value of any asset or
assets shall be approved by the Board of Directors of the Company, acting in
good faith and shall be evidenced by resolutions of the Board of Directors of
the Company delivered to the Trustee.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States of America, which are applicable at the date
of the Indenture.
"guarantee" means, as applied to any obligation, (i) a guarantee (other than
by endorsement of negotiable instruments for collection in the ordinary course
of business), direct or indirect, in any manner, of any part or all of such
obligation and (ii) an agreement, direct or indirect, contingent or otherwise,
the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of nonperformance) of all or
any part of such obligation, including, without limiting the foregoing, the
payment of amounts available to be drawn down under letters of credit of
another person.
"Indebtedness" means, with respect to any person, without duplication, (a)
all liabilities of such person for borrowed money or for the deferred purchase
price of property or services, excluding any trade payables and other accrued
current liabilities and liabilities for entertainment programming,
participations or residuals incurred in the ordinary course of business, but
including, without limitation, all obligations, contingent or otherwise, of
such person in connection with any letters of credit, banker's acceptance or
other similar credit transaction, (b) all obligations of such person evidenced
by bonds, notes, debentures or other similar instruments, (c) all indebtedness
created or arising under any conditional sale or other title retention
agreement with respect to property acquired by such person (even if the rights
and remedies of the seller or lender under such agreement in the event of
default are limited to repossession or sale of such property), but excluding
trade accounts payable arising in the ordinary course of business, (d) all
Capitalized Lease Obligations of such person, (e) all Indebtedness referred to
in the preceding clauses of other persons and all dividends of other persons,
the payment of which is secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by)
any Lien upon property (including, without limitation, accounts and contract
rights) owned by such person, even though such person has not assumed or
become liable for the payment of such Indebtedness, (f) all guarantees of
Indebtedness referred to in this definition by such person, (g) all Redeemable
Capital Stock of such person valued at the greater of its voluntary or
involuntary maximum fixed repurchase price plus accrued dividends, (h) all
obligations under or in respect of Interest Rate Protection Obligations of
such person, and (i) any amendment, supplement, modification, deferral,
renewal, extension, refinancing or refunding of any liability of the types
referred to in clauses (a) through (h) above. For purposes hereof, the
"maximum fixed repurchase price" of any Redeemable Capital Stock which does
not have a fixed repurchase price shall be calculated in accordance with the
terms of such Redeemable Capital Stock as if such Redeemable Capital Stock
were purchased on any date on which Indebtedness shall be required to be
determined pursuant to
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the Indenture, and if such price is based upon, or measured by, the fair
market value of such Redeemable Capital Stock, such fair market value shall be
approved in good faith by the board of directors of the issuer of such
Redeemable Capital Stock. In the case of Indebtedness of other persons, the
payment of which is secured by a Lien on property owned by a person as
referred to in clause (e) above, the amount of the Indebtedness of such person
attributable to such Lien at any date shall be the lesser of the Fair Market
Value at such date of any asset subject to such Lien and the amount of the
Indebtedness secured. In no event shall "Indebtedness" include (i) Deeply
Subordinated Shareholder Loans so long as they are issued to and held by a
Permitted Holder or (ii) the Existing Preferred to the extent the terms
thereof are as in effect on the Issue Date.
"Independent Financial Advisor" means a nationally recognized accounting,
appraisal or investment banking firm (i) which does not, and whose directors,
officers and employees or Affiliates do not have, a direct or indirect
financial interest in the Company and (ii) which, in the judgment of the Board
of Directors of the Company, is otherwise independent and qualified to perform
the task for which it is to be engaged.
"Interest Rate Protection Agreement" means, with respect to any person, any
arrangement with any other person whereby, directly or indirectly, such person
is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such person calculated by
applying a fixed or a floating rate of interest on the same notional amount
and shall include, without limitation, interest rate swaps, caps, floors,
collars and similar agreements.
"Interest Rate Protection Obligations" means the obligations of any person
pursuant to any Interest Rate Protection Agreements.
"Investment" means, with respect to any person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness
issued by, any other person.
"Lien" means any mortgage, charge, pledge, lien (statutory or other),
security interest, hypothecation, assignment for security, claim, or
preference or priority or other encumbrance upon or with respect to any
property of any kind. A person shall be deemed to own subject to a Lien any
property which such person has acquired or holds subject to the interest of a
vendor or lessor under any conditional sale agreement, capital lease or other
title retention agreement.
"Maturity Date" means November 1, 2007.
"Murdoch Family" means one or more of (a) K. Rupert Murdoch, his wife,
parents, children or more remote issue, or brothers or sisters or children or
more remote issue of a brother or sister, (b) any person directly or
indirectly controlled by one or more of the persons referred to in clause (a)
of this definition or (c) a trust in which the majority of the trustees are
persons referred to in clause (a) or (b) of this definition or can be removed
or replaced by one or more of the persons referred to in clause (a) or (b) of
this definition.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
thereof in the form of cash or Cash Equivalents including payments in respect
of deferred payment obligations when received in the form of cash or Cash
Equivalents (except to the extent that such obligations are financed or sold
with recourse to the Company or any Restricted Subsidiary of the Company) net
of (i) brokerage commissions and other fees and expenses (including, without
limitation, fees and expenses of legal counsel and investment bankers) related
to such Asset Sale, (ii) provisions for all taxes payable as a result of such
Asset Sale and relocation costs, (iii) amounts required to be paid to any
person (other than the Company or any Restricted Subsidiary of the Company)
owning a beneficial interest in or a Lien upon the assets subject to the Asset
Sale, (iv) payments made to retire Indebtedness where payment of such
Indebtedness is secured by the assets or properties the subject of
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such Asset Sale, and (v) appropriate amounts to be provided by the Company or
any Restricted Subsidiary of the Company, as the case may be, as a reserve
required in accordance with GAAP against any liabilities associated with such
Asset Sale and retained by the Company or any Restricted Subsidiary of the
Company, as the case may be, after such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale, all as reflected in an officers'
certificate delivered to the Trustee.
"Offer" has the meaning set forth in the definition of "Offer to Purchase"
below.
"Offer to Purchase" means a written offer (the "Offer") sent by or on behalf
of the Company by first-class mail, postage prepaid, to each holder at his
address appearing in the register for the Notes on the date of the Offer
offering to purchase up to the principal amount or Accreted Value of Notes
specified in such Offer at the purchase price specified in such Offer (as
determined pursuant to the applicable Indenture). Unless otherwise provided
for in the Indentures or otherwise required by applicable law, the Offer shall
specify an expiration date (the "Expiration Date") of the Offer to Purchase,
which shall be not less than 20 Business Days nor more than 60 days after the
date of such Offer, and a settlement date (the "Purchase Date") for purchase
of Notes to occur no later than five Business Days after the Expiration Date.
The Company shall notify the applicable Trustee at least 15 Business Days
(or such shorter period as is acceptable to the applicable Trustee) prior to
the mailing of the Offer of the Company's obligation to make an Offer to
Purchase, and the Offer shall be mailed by the Company or, at the Company's
request, by the Trustee in the name and at the expense of the Company. The
Offer shall contain all the information required by applicable law to be
included therein. The Offer shall also contain information concerning the
business of the Company and its Subsidiaries which the Company in good faith
believes will enable such Holders to make an informed decision with respect to
the Offer to Purchase (which at a minimum will include (i) the most recent
annual and quarterly financial statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained in the
document required to be filed with the Trustee pursuant to the Indenture
(which requirements may be satisfied by delivery of such documents together
with the Offer), (ii) a description of material developments in the Company's
business subsequent to the date of the latest of such financial statements
referred to in clause (i) (including a description of the events requiring the
Company to make the Offer to Purchase), (iii) if applicable, appropriate pro
forma financial information concerning the Offer to Purchase and the events
requiring the Company to make the Offer to Purchase and (iv) any other
information required by applicable law to be included therein). The Offer
shall contain all instructions and materials necessary to enable such Holders
to tender Notes pursuant to the Offer to Purchase. The Offer shall also state:
(1) the Section of the Indenture pursuant to which the Offer to Purchase
is being made;
(2) the Expiration Date and the Purchase Date;
(3) the aggregate principal amount of the outstanding Notes offered to be
purchased by the Company pursuant to the Offer to Purchase (including, if
less than 100%, the manner by which such amount has been determined
pursuant to the Section of the Indenture requiring the Offer to Purchase)
(the "Purchase Amount");
(4) in the case of the Senior Notes, the purchase price to be paid by the
Company for each $1,000 aggregate principal amount of Notes accepted for
payment (as specified pursuant to the Senior Notes Indenture) (the
"Purchase Price" with respect to the Senior Notes) and (b) in the case of
the Senior Discount Notes, the purchase price to be paid by the Company for
each $1,000 of Accreted Value (if the Purchase Date is prior to the earlier
of November 1, 2002 or the Cash Interest Election Date) or $1,000 aggregate
principal amount at maturity (if the Purchase Date is on or after such
earlier date) of Notes accepted for payment (as specified pursuant to the
Senior Discount Notes Indenture) (the "Purchase Price" with respect to the
Senior Discount Notes);
(5) that the holder may tender all or any portion of the Notes registered
in the name of such holder and that any portion of a Note tendered must be
tendered in an integral multiple of $1,000 principal face amount;
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(6) the place or places where Notes are to be surrendered for tender
pursuant to the Offer to Purchase;
(7) that interest on any Note not tendered or tendered but not purchased
by the Company pursuant to the Offer to Purchase will continue to accrue;
(8) that on the Purchase Date the Purchase Price will become due and
payable upon each Note being accepted for payment pursuant to the Offer to
Purchase and that interest thereon shall cease to accrue on and after the
Purchase Date;
(9) that each holder electing to tender all or any portion of a Note
pursuant to the Offer to Purchase will be required to surrender such Note
at the place or places specified in the Offer prior to the close of
business on the Expiration Date (such Note being, if the Company or the
Trustee so requires, duly endorsed by, or accompanied by a written
instrument of transfer in form satisfactory to the Company and the Trustee
duly executed by, the holder thereof or his attorney duly authorized in
writing);
(10) that holders will be entitled to withdraw all or any portion of
Notes tendered if the Company (or its paying agent) receives, not later
than the close of business on the fifth Business Day next preceding the
Expiration Date, a telegram, telex, facsimile transmission or letter
setting forth the name of the holder, the principal amount of the Note the
holder tendered, the certificate number of the Note the holder tendered and
a statement that such holder is withdrawing all or a portion of his tender;
(11) that (a) if Notes in an aggregate principal amount less than or
equal to the Purchase Amount are duly tendered and not withdrawn pursuant
to the Offer to Purchase, the Company shall purchase all such Notes and (b)
if Notes in an aggregate principal amount in excess of the Purchase Amount
are tendered and not withdrawn pursuant to the Offer to Purchase, the
Company shall purchase Notes having an aggregate principal amount equal to
the Purchase Amount on a pro rata basis (with such adjustments as may be
deemed appropriate so that only Notes in denominations of $1,000 principal
amount at maturity or integral multiples thereof shall be purchased); and
(12) that in the case of any holder whose Note is purchased only in part,
the Company shall execute and the Trustee shall authenticate and deliver to
the holder of such Note without service charge, a new Note or Notes, of any
authorized denomination as requested by such holder, in an aggregate
principal amount equal to and in exchange for the unpurchased portion of
the Note so tendered.
An Offer to Purchase shall be governed by and effected in accordance with
the provisions pertaining to the type of Offer to which it relates. References
above to principal amount shall mean and refer to principal amount at maturity
with respect to the Senior Discount Notes, unless the context otherwise
requires.
"Other Senior Debt Pro Rata Share" means under an Indenture the amount of
the applicable Excess Proceeds obtained by multiplying the amount of such
Excess Proceeds by a fraction, (i) the numerator of which is the aggregate
accreted value and/or principal amount, as the case may be, of all
Indebtedness (other than (x) the Notes issued thereunder and (y) Subordinated
Indebtedness) of the Company outstanding at the time of the applicable Asset
Sale with respect to which the Company is required to use Exceed Proceeds to
repay or make an offer to purchase or repay and (ii) the denominator of which
is the sum of (a) the aggregate principal amount of all Notes issued
thereunder that are outstanding at the time of the offer to purchase or repay
with respect to the applicable Asset Sale and (b) the aggregate principal
amount or the aggregate accreted value, as the case may be, of all other
Indebtedness (other than Subordinated Indebtedness) of the Company outstanding
at the time of the applicable Asset Sale Offer with respect to which the
Company is required to use the applicable Excess Proceeds to offer to repay or
make an offer to purchase or repay.
"Permitted Holder" means any member of the Murdoch Family, The News
Corporation Limited, Haim Saban and their respective controlled Affiliates.
"Permitted Indebtedness" means, without duplication:
(a) Indebtedness of the Company evidenced by the Notes;
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(b) Indebtedness of the Company and Restricted Subsidiaries under the
Bank Facility in an aggregate principal amount at any one time outstanding
not to exceed $725 million, less any amounts permanently repaid in
accordance with the covenant described under "Disposition of Proceeds of
Asset Sales";
(c) Indebtedness of the Company or any Restricted Subsidiary outstanding
on the date of the Indenture;
(d) Indebtedness to third parties for the production of television
programming by one or more special purpose partnerships, corporations,
joint ventures or similar structures (in which any interest of the Company
or any of its Restricted Subsidiaries is held through a Special Purpose
Vehicle), the production decisions in respect of which are controlled by
the Company or a Restricted Subsidiary;
(e) Indebtedness consisting of the liabilities and obligations,
contingent or otherwise, incurred by the Company or its Restricted
Subsidiaries in the ordinary course of business (other than for borrowed
money) to acquire, produce, license or distribute television programming;
(f) Indebtedness of the Company or any Restricted Subsidiary of the
Company incurred in respect of performance bonds, bankers' acceptances and
letters of credit in the ordinary course of business, including
Indebtedness evidenced by letters of credit issued in the ordinary course
of business to support the insurance or self-insurance obligations of the
Company or any of its Restricted Subsidiaries (including to secure workers'
compensation and other similar insurance coverages), in the aggregate
amount not to exceed $10 million at any time; but excluding letters of
credit issued to secure money borrowed;
(g)(i) Interest Rate Protection Obligations of the Company covering
Indebtedness of the Company and (ii) Interest Rate Protection Obligations
of any Restricted Subsidiary covering Indebtedness of such Restricted
Subsidiary provided that, in the case of either clause (i) or (ii), the
notional principal amount of any such Interest Rate Protection Obligations
that exceeds the principal amount of the Indebtedness to which such
Interest Rate Protection Obligations relate is otherwise permitted to be
incurred under the Indenture;
(h) Indebtedness of the Company or any Restricted Subsidiaries under
Currency Agreements; provided that (x) such Currency Agreements relate to
Indebtedness or the purchase price of goods purchased or sold by the
Company or any Restricted Subsidiary in the ordinary course of its business
and (y) such Currency Agreements do not increase the Indebtedness or other
obligations of the Company or a Restricted Subsidiary outstanding other
than as a result of fluctuations in foreign currency exchange rates or by
reason of fees, indemnities and compensation payable thereunder;
(i) Indebtedness of a Restricted Subsidiary owed to and held by the
Company or another Restricted Subsidiary, except that (i) any transfer of
such Indebtedness by the Company or a Restricted Subsidiary (other than to
the Company or another Restricted Subsidiary) and (ii) the sale, transfer
or other disposition by the Company or any Restricted Subsidiary of the
Company of Capital Stock of a Restricted Subsidiary (other than to the
Company or a Restricted Subsidiary) which is owed Indebtedness of another
Restricted Subsidiary shall, in each case, be an incurrence of Indebtedness
by such Restricted Subsidiary subject to the other provisions of the
Indentures;
(j) Indebtedness of the Company owed to and held by a Restricted
Subsidiary which is unsecured and subordinated in right of payment to the
payment and performance of the obligations of the Company under the
Indentures and the Notes, except that (i) any transfer of such Indebtedness
by the Company or a Restricted Subsidiary (other than to another Restricted
Subsidiary) and (ii) the sale, transfer or other disposition by the Company
or any Restricted Subsidiary of the Company of Capital Stock of a
Restricted Subsidiary (other than to the Company or a Restricted
Subsidiary) which is owed Indebtedness of the Company shall, in each case,
be an incurrence of Indebtedness by the Company, subject to the other
provisions of the Indentures;
(k) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instruments inadvertently (except
in the case of daylight overdrafts) drawn against insufficient funds in the
ordinary course of business; provided, however, that such Indebtedness is
extinguished within five business days of incurrence;
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(l) Indebtedness of the Company, in addition to that described in clauses
(a) through (k) of this definition, in an aggregate principal amount
outstanding at any time not to exceed $150 million;
(m) Indebtedness represented by obligations to purchase Capital Stock of
the Company pursuant to agreements, as in effect on the Issue Date, with
employees of the Company and its Restricted Subsidiaries upon the
termination of their employment in an aggregate principal amount not to
exceed $30 million during the term of the Indenture; and
(n) (i) Indebtedness of the Company the proceeds of which are used solely
to refinance (whether by amendment, renewal, extension or refunding)
Indebtedness of the Company or any of its Restricted Subsidiaries and (ii)
Indebtedness of any Restricted Subsidiary of the Company the proceeds of
which are used solely to refinance (whether by amendment, renewal,
extension or refunding) Indebtedness of any Restricted Subsidiary (in each
case other than the Indebtedness to be refinanced, redeemed or retired as
described under "Use of Proceeds" herein, and Indebtedness under clause (b)
or (g) through (m) of this definition); provided, however, that (x) the
principal amount of Indebtedness incurred pursuant to this clause (n) (or,
if such Indebtedness provides for an amount less than the principal amount
thereof to be due and payable upon a declaration of acceleration of the
maturity thereof, the original issue price of such Indebtedness) shall not
exceed the sum of the principal amount of Indebtedness so refinanced, plus
the amount of any premium required to be paid in connection with such
refinancing pursuant to the terms of such Indebtedness or the amount of any
premium reasonably determined by the Company as necessary to accomplish
such refinancing by means of a tender offer or privately negotiated
purchase, plus the amount of expenses in connection therewith, and (y) in
the case of Indebtedness incurred by the Company pursuant to this clause
(n) to refinance Subordinated Indebtedness, such Indebtedness (A) has no
scheduled principal payment prior to the 91st day after the Maturity Date,
(B) has an Average Life to Stated Maturity of the Notes and (C) is
subordinated to the Notes in the same manner and to the same extent that
the Subordinated Indebtedness being refinanced is subordinated to the
Notes.
"Permitted Investments" means any of the following: (i) Investments in the
Company or in a Restricted Subsidiary; (ii) Investments in another person, if
as a result of such Investment (A) such other person becomes a Restricted
Subsidiary or (B) such other person is merged or consolidated with or into, or
transfers or conveys all or substantially all of its assets to the Company or
a Restricted Subsidiary; (iii) Investments representing Capital Stock or
obligations issued to the Company or any of its Restricted Subsidiaries in
settlement of claims against any other person by reason of a composition or
readjustment of debt or a reorganization of any debtor of the Company or such
Restricted Subsidiary; (iv) Investments in Interest Rate Protection Agreements
on commercially reasonable terms entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business in connection with
the operations of the business of the Company or its Restricted Subsidiaries
to hedge against fluctuations in interest rates on its outstanding
Indebtedness; (v) Investments in the Notes; (vi) Investments in Cash
Equivalents; (vii) Investments acquired by the Company or any Restricted
Subsidiary in connection with an Asset Sale permitted under "--Certain
Covenants--Disposition of Proceeds of Asset Sales" to the extent such
Investments are non-cash proceeds as permitted under such covenant; (viii)
advances to employees or officers of the Company in the ordinary course of
business; (ix) any Investment to the extent that the consideration therefor is
Capital Stock (other than Redeemable Capital Stock) of the Company; and
(x) Investments in any person engaged in the Entertainment/Programming
Business not to exceed $65,000,000 at any time outstanding.
"Permitted Liens" means the following types of Liens:
(a) any Lien existing as of the date of the Indenture;
(b) Liens securing Indebtedness and other amounts owing under the Bank
Facility;
(c) any Lien securing Acquired Indebtedness created prior to (and not
created in connection with, or in contemplation of) the incurrence of such
Indebtedness by the Company or any Restricted Subsidiary, if such Lien does
not attach to any property or assets of the Company or any Restricted
Subsidiary other than the property or assets subject to the Lien prior to
such incurrence;
(d) Liens in favor of the Company or a Restricted Subsidiary;
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(e) Liens on and pledges of the Capital Stock of any Unrestricted
Subsidiary securing any Indebtedness of such Unrestricted Subsidiary;
(f) Liens for taxes, assessments or governmental charges or claims either
(i) not delinquent for 90 days or more or (ii) contested in good faith by
appropriate proceedings and as to which the Company or its Restricted
Subsidiaries shall have set aside on its books such reserves as may be
required pursuant to GAAP;
(g) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent for
90 days or more or being contested in good faith and as to which reserves
or other appropriate provisions, if any, as shall be required by GAAP shall
have been made in respect thereof;
(h) Liens incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other
types of social security, or to secure the performance of tenders,
statutory obligations, surety and appeal bonds, bids, leases, government
contracts, performance and return-of-money bonds and other similar
obligations (exclusive of obligations for the payment of borrowed money);
(i) judgment Liens not giving rise to an Event of Default so long as such
Lien is adequately bonded and any appropriate legal proceedings which may
have been duly initiated for the review of such judgment shall not have
been finally terminated or the period within which such proceedings may be
initiated shall not have expired;
(j) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the Company
or any of its Restricted Subsidiaries;
(k) any interest or title of a lessor or sublessor and any restriction or
encumbrance to which the interest or title of such lessor or sublessor may
be subject;
(l) purchase money Liens to finance property or assets of the Company or
any Restricted Subsidiary of the Company acquired in the ordinary course of
business; provided, however, that (i) the related purchase money
Indebtedness shall not be secured by any property or assets of the Company
or any Restricted Subsidiary of the Company other than the property and
assets so acquired and (ii) the Lien securing such Indebtedness shall be
created within 180 days of such acquisition;
(m) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to
such letters of credit and products and proceeds thereof;
(n) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the Company
or any of its Restricted Subsidiaries, including rights of offset and set-
off;
(o) Liens securing Interest Rate Protection Obligations which Interest
Rate Protection Obligations relate to Indebtedness that is secured by Liens
otherwise permitted under this Indenture;
(p) Liens on assets of Unrestricted Subsidiaries;
(q) Liens securing Capitalized Lease Obligations or incurred in
connection with Sale-Leaseback Transactions;
(r) Liens securing other Indebtedness in an aggregate amount not to
exceed 10% of the Company's Consolidated Net Tangible Assets as of the last
day of the Company's most recently completed fiscal period for which
financial information is available;
(s) Liens in favor of the Screen Actors Guild, the Writers Guild of
America, the Directors Guild of America or any other unions, guilds or
collective bargaining units under the collective bargaining agreements,
which Liens are incurred in the ordinary course of business solely to
secure the payment of residuals and other collective bargaining obligations
required to be paid by the Company or any of its Restricted Subsidiaries
under any such collective bargaining agreement;
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(t) Liens arising in connection with completion guarantees entered into
in the ordinary course of business and consistent with then current
industry practices, securing obligations (other than Indebtedness for
borrowed money) of the Company or any of its Restricted Subsidiaries not
yet due and payable;
(u) Liens in favor of suppliers and/or producers of any programming that
are incurred in the ordinary course of business solely to secure the
purchase price of such programming and such directly related rights or the
rendering of services necessary for the production of such programming;
provided, however, that no such Lien shall extend to or cover any property
or assets other than the programming and the rights directly related
thereto being so acquired or produced; and provided further that any
payment obligations secured by such Liens shall by their terms be payable
solely from the revenues that are derived directly from the exhibition,
syndication, exploitation, distribution or disposition of such item of
programming and/or such directly related rights;
(v) Liens upon any item of programming and rights directly relating
thereto in favor of distributors of such item of programming that are
incurred in each case in the ordinary course of business solely to secure
delivery of such item of programming and the licensing of the rights in
such item of programming directly related thereto; provided, however, that
no such Lien shall extend to or cover any property or assets other than the
item of programming being so delivered and the rights directly related
thereto; and provided further that any payment obligations secured by such
Liens shall by their terms be payable solely from the revenues that are
derived directly from the exhibition, syndication, exploitation,
distribution or disposition of such item of Product and/or such directly
related rights; and
(w) Liens on assets or Capital Stock of a Special Purpose Vehicle.
"person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivision thereof.
"Preferred Stock," as applied to any person, means Capital Stock of any
class or classes (however designated) which is preferred as to the payment of
dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such person, over
shares of Capital Stock of any other class of such person.
"principal amount at maturity" means, with respect to the Senior Discount
Notes, $1,000 per $1,000 face amount of Senior Discount Notes; provided,
however, that if the Company shall have made a Cash Interest Election, the
principal amount at maturity with respect to each Senior Discount Note shall
be the Accreted Value of such Senior Discount Note as of the Cash Interest
Election Date.
"Qualified Equity Interest" in a person means any interest in Capital Stock
of such person, other than Redeemable Capital Stock.
"Redeemable Capital Stock" means any class or series of Capital Stock that,
either by its terms, by the terms of any security into which it is convertible
or exchangeable or by contract or otherwise, is or upon the happening of an
event or passage of time would be, required to be redeemed prior to the
Maturity Date or is redeemable at the option of the holder thereof at any time
prior to the Maturity Date, or is convertible into or exchangeable for debt
securities at any time prior to the Maturity Date.
"Restricted Subsidiary" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
"Restricted Subsidiary Indebtedness" means Indebtedness of any Restricted
Subsidiary (i) which is not subordinated to any other Indebtedness of such
Restricted Subsidiary and (ii) in respect of which the Company is not also
obligated (by means of a guarantee or otherwise) other than, in the case of
this clause (ii), Indebtedness under the Bank Facility.
"Sale-Leaseback Transaction" of any person means an arrangement with any
lender or investor or to which such lender or investor is a party providing
for the leasing by such person of any property or asset of such person
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which has been or is being sold or transferred by such Person after the
acquisition thereof or the completion of construction or commencement of
operation thereof to such lender or investor or to any person to whom funds
have been or are to be advanced by such lender or investor on the security of
such property or asset. The stated maturity of such arrangement shall be the
date of the last payment of rent or any other amount due under such
arrangement prior to the first date on which such arrangement may be
terminated by the lessee without payment of a penalty.
"Significant Subsidiary" of any person means a Restricted Subsidiary of such
person which would be a significant subsidiary of such person as determined in
accordance with the definition in Section 210.1-02(w) of Regulation S-X
promulgated by the Commission and as in effect on the date of the Indenture.
"Special Purpose Vehicle" means a person which is, or was, established: (i)
with separate legal identity and limited liability; (ii) as an Affiliate of
the Company; and (iii) for the sole purpose of a single transaction, or series
of related transactions, and which has no assets and liabilities other than
those directly acquired or incurred in connection with such transaction(s).
"Stated Maturity" means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which the principal of such Note or such installment of interest is
due and payable, and when used with respect to any other Indebtedness, means
the date specified in the instrument governing such Indebtedness as the fixed
date on which the principal of such Indebtedness, or any installment of
interest thereon, is due and payable.
"Strategic Equity Investor" means a corporation or entity with an equity
market capitalization, a net asset value or annual revenues of at least $1.0
billion that primarily owns and operates businesses in the entertainment,
cable television, programming or similar or related industries.
"Subordinated Indebtedness" means, with respect to the Company, Indebtedness
of the Company which is expressly subordinated in right of payment to the
Notes.
"Subsidiary" means, with respect to any person, (i) a corporation at least
50% of whose Voting Stock is at the time, directly or indirectly, owned by
such person, by one or more Subsidiaries of such person or by such person and
one or more Subsidiaries thereof and (ii) any other person (other than a
corporation), including, without limitation, a partnership, limited liability
company, business trust or joint venture, in which such person, one or more
Subsidiaries thereof or such person and one or more Subsidiaries thereof,
directly or indirectly, at the date of determination thereof, has at least a
50% ownership interest entitled to vote in the election of directors, managers
or trustees thereof (or other person performing similar functions). For
purposes of this definition, any directors' qualifying shares or investments
by foreign nationals mandated by applicable law shall be disregarded in
determining the ownership of a Subsidiary.
"Unrestricted Subsidiary" means each Subsidiary of the Company designated as
such pursuant to and in compliance with the covenant described under "--
Certain Covenants--Limitation on Designations of Unrestricted Subsidiaries."
"Voting Stock" means any class or classes of Capital Stock pursuant to which
the holders thereof have the general voting power under ordinary circumstances
to elect at least 50% of the board of directors, managers or trustees of any
person (irrespective of whether or not, at the time, stock of any other class
or classes shall have, or might have, voting power by reason of the happening
of any contingency).
BOOK-ENTRY; DELIVERY AND FORM
The Notes will be represented by a single, permanent global note in
definitive, fully registered book-entry form for each of the Senior Notes and
Senior Discount Notes (a "Global Security") which will be registered in the
name of a nominee of DTC and deposited on behalf of purchasers of the Notes
represented thereby with a custodian for DTC for credit to the respective
accounts of the purchasers (or to such other accounts as they may direct) at
DTC.
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The Global Securities. The Company expects that pursuant to procedures
established by DTC (a) upon deposit of the Global Securities, DTC or its
custodian will credit on its internal system portions of the Global Securities
which shall be comprised of the corresponding respective amounts of the Global
Securities to the respective accounts of persons who have accounts with such
depositary and (b) ownership of the Notes will be shown on, and the transfer
of ownership thereof will be effected only through, records maintained by DTC
or its nominee (with respect to interests of Participants (as defined below))
and the records of Participants (with respect to interests of persons other
than Participants). Ownership of beneficial interests in the Global Securities
will be limited to persons who have accounts with DTC ("Participants") or
persons who hold interests through Participants. Investors may hold their
interests in the Global Security directly through DTC if they are Participants
in such system, or indirectly through organizations which are Participants in
such system.
So long as DTC or its nominee is the registered owner or holder of any of
the Notes, DTC or such nominee will be considered the sole owner or holder of
such Notes represented by the Global Securities for all purposes under the
Indentures and under the Notes represented thereby. No beneficial owner of an
interest in the Global Securities will be able to transfer such interest
except in accordance with the applicable procedures of DTC in addition to
those provided for under the Indentures.
Payments of the principal of, premium, if any, and interest (including
Additional Interest) on the Notes represented by the Global Securities will be
made to DTC or its nominee, as the case may be, as the registered owner
thereof. None of the Company, the Trustee or any paying agent under the
Indenture will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the Global Securities or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
the principal of, premium, if any, and interest (including Additional
Interest) on the Notes represented by the Global Securities, will credit
Participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the Global Securities as shown in the
records of DTC or its nominee. The Company also expects that payments by
Participants to owners of beneficial interests in the Global Securities held
through such Participants will be governed by standing instructions and
customary practice as is now the case with securities held for the accounts of
customers registered in the names of nominees for such customers. Such payment
will be the responsibility of such Participants.
Transfers between Participants in DTC will be effected in accordance with
DTC rules and will be settled in immediately available funds. If a holder
requires physical delivery of a Certificated Security for any reason,
including to sell Notes to persons in states which require physical delivery
of such securities or to pledge such securities, such holder must transfer its
interest in the Global Securities in accordance with the normal procedures of
DTC and in accordance with the procedures set forth in the Indenture.
Any beneficial interest in one of the Global Securities that is transferred
to a person who takes delivery in the form of an interest in the other Global
Security will, upon transfer, cease to be an interest in such Global Security
and, accordingly, will thereafter be subject to all transfer restrictions, if
any, and other procedures applicable to beneficial interests in such other
Global Security with respect to the applicable notes for as long as it remains
such an interest.
DTC has advised the Company that DTC will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange
as described below) only at the direction of one or more Participants to whose
account the DTC interests in the Global Securities are credited and only in
respect of the aggregate principal amount as to which such Participant or
Participants has or have given such direction. However, if there is an Event
of Default under the Indenture, DTC will exchange the Global Securities for
Certificated Securities, which it will distribute to its Participants and
which will be legended as set forth under the heading "Notice to Investors."
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the
119
<PAGE>
meaning of the Uniform Commercial Code and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its Participants and facilitate the clearance and
settlement of securities transactions between Participants through electronic
book-entry changes in accounts of its Participants, thereby eliminating the
need for physical movement of certificates. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations and
certain other organizations. Indirect access to the DTC system is available to
others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants").
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interests in the Global Securities among Participants
of DTC, it is under no obligation to perform such procedures, and such
procedures may be discontinued at any time. Neither the Company nor the
Trustee will have any responsibility for the performance by DTC, or its
respective direct or indirect participants of their respective obligations
under the rules and procedures governing their operations.
Certificated Securities. Interests in the Global Securities will be
exchanged for Certificated Securities if (i) DTC notifies the Company that it
is unwilling or unable to continue as depositary for the Global Securities, or
DTC ceases to be a "Clearing Agency" registered under the Exchange Act, and a
successor depositary is not appointed by the Company within 40 days, or (ii)
an Event of Default has occurred and is continuing with respect to the Notes.
Upon the occurrence of any of the events described in the preceding sentence,
the Company will cause the appropriate Certificated Securities to be
delivered.
120
<PAGE>
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
THE FOLLOWING SUMMARY OF THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTES IS APPLICABLE IN ALL
MATERIAL RESPECTS TO THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE OLD NOTES.
UNLESS THE CONTEXT OTHERWISE REQUIRES, FOR PURPOSES OF THIS SUMMARY REFERENCES
TO THE "NOTES" ARE TO THE NOTES AND THE OLD NOTES, COLLECTIVELY, REFERENCES TO
THE "SENIOR NOTES" ARE TO THE SENIOR NOTES AND THE OLD SENIOR NOTES,
COLLECTIVELY, AND REFERENCES TO THE "SENIOR DISCOUNT NOTES" ARE TO THE SENIOR
DISCOUNT NOTES AND THE OLD SENIOR DISCOUNT NOTES, COLLECTIVELY.
The following is a summary of the material United States federal income tax
consequences of the purchase, ownership and disposition of the Notes. It is
intended only as a descriptive summary and does not purport to be a complete
technical analysis or listing of all potential tax effects to Holders. Unless
otherwise stated, this summary only deals with Notes held as capital assets by
U.S. Holders (as defined herein) who purchased such Notes upon original
issuance at the issue price therefor. As used herein, "U.S. Holder" means a
beneficial owner of the Notes that is (a) an individual citizen or resident of
the United States or any political subdivision thereof, (b) a corporation or
partnership organized in or under the laws of the United States or a state,
(c) an estate the income of which is subject to United States federal income
taxation regardless of its source, or (d) a trust if (i) a court within the
United States is able to exercise primary supervision over the administration
of the trust and (ii) one or more United States persons have the authority to
control all substantial decisions of the trust. This discussion does not deal
with all classes of holders, such as banks, thrifts, real estate investment
trusts, regulated investment companies, dealers in securities or currencies,
tax-exempt investors, persons that have a functional currency other than the
U.S. dollar or persons that will hold the Notes as part of a "synthetic
security," "hedge," "straddle," "conversion transaction," or other than as a
capital asset. This summary is based upon the Internal Revenue Code of 1986,
as amended, Treasury Regulations thereunder and administrative and judicial
interpretations thereof, as of the date hereof, all of which are subject to
change, possibly on a retroactive basis. Prospective purchasers of the Notes
should consult with their tax advisors concerning issues including (i) the
application of United States federal income tax laws to them stemming from an
investment in the Notes, (ii) any consequences to them arising under the laws
of any other taxing jurisdiction, including, without limitation, the laws of
any state, local or foreign taxing jurisdiction, and (iii) the consequences of
purchasing the Notes at a price other than the issue price.
INTEREST
It is not expected that the Senior Notes will be issued with OID in excess
of a de minimis amount. Accordingly, interest on the Senior Notes will be
taxable to a U.S. Holder as ordinary interest income in accordance with the
U.S. Holder's method of tax accounting at the time that such interest is
accrued or (actually or constructively) received.
ORIGINAL ISSUE DISCOUNT
For United States federal income tax purposes, the Senior Discount Notes
will be considered to be issued with OID. The amount of OID will be the excess
of a Senior Discount Note's stated redemption price at maturity over its issue
price. The issue price of a Senior Discount Note will equal the first price at
which a substantial amount of the Senior Discount Notes are sold. The stated
redemption price at maturity of a Senior Discount Note will equal the amount
payable at maturity (i.e., 100% of the initial principal amount of the Senior
Discount Note) plus all stated interest thereon.
A U.S. Holder of a Senior Discount Note will be required to include OID in
its gross taxable income (as ordinary income) periodically over the term of
the Senior Discount Note before receipt of the cash attributable to such
income, using a constant yield method that takes into account the compounding
of interest. Such
121
<PAGE>
treatment will continue to apply whether or not the Company makes the Cash
Interest Election. The Company's exercise of the Cash Interest Election and
reduction of the principal amount at maturity of the Senior Discount Notes
will not represent a taxable event to a U.S. Holder of a Senior Discount Note.
The receipt of cash interest payments under a Senior Discount Note will not be
taxable to a holder; rather such payments will be treated as payments of OID
which will reduce the holder's adjusted tax basis in the Senior Discount Note.
The Company will furnish annually to the U.S. Internal Revenue Service and
to U.S. Holders (other than with respect to certain exempt holders, including,
in particular, corporations) information with respect to the OID accruing
while the Senior Discount Notes were held by the U.S. Holders. Such
information will be based on the accruals of OID as if the holder were the
original holder of the Senior Discount Note.
SALE, EXCHANGE AND RETIREMENT OF NOTES
A U.S. Holder will recognize gain or loss equal to the difference between
the amount realized upon the sale, exchange or retirement of the Notes and the
U.S. Holder's adjusted tax basis in the Notes. A U.S. Holder's adjusted tax
basis in a Senior Discount Note will generally equal the issue price of such
Senior Discount Note, increased by the amount of any OID previously included
in income by such U.S. Holder with respect to such Senior Discount Note and
reduced by any principal and interest payments received by the U.S. Holder
with respect to such Senior Discount Note. Except with respect to accrued but
unpaid interest, such gain or loss will be capital gain or loss. Under the
recently enacted Taxpayer Relief Act of 1997, net capital gain (i.e.,
generally, capital gain in excess of capital loss) recognized by an individual
upon the sale or exchange of a capital asset that has been held for more than
18 months will generally be subject to tax at a rate not to exceed 20%. Net
capital gain recognized by an individual from the sale or exchange of a
capital asset that has been held for more than 12 months but not for more than
18 months will continue to be subject to tax at a rate not to exceed 28%, and
net capital gain recognized from the sale or exchange of a capital asset that
has been held for 12 months or less will continue to be subject to tax at
ordinary income tax rates. In addition, net capital gain recognized by a
corporate taxpayer will continue to be subject to tax at the ordinary income
tax rates applicable to corporations.
EXCHANGE OFFER
The exchange of Old Notes for Notes pursuant to the Exchange Offer will not
be taxable to the U.S. Holders of the Notes.
BACKUP WITHHOLDING
The backup withholding rules require the Company to deduct and withhold
federal income tax at the rate of 31% with respect to payments made to
noncorporate holders who are not otherwise exempt if (a) the holder fails to
furnish a taxpayer identification number ("TIN") to the Company, (b) the IRS
notifies the Company that the TIN furnished by the holder is incorrect, (c)
there has been notified payee underpaying, or (d) there has been payee
certification failure. Any amounts withheld from a payment to a holder under
the backup withholding rules will be allowed as a refund or credit against
such holder's federal income tax, provided that the required information is
furnished to the IRS.
NON-UNITED STATES HOLDERS
Payments of interest and OID on the Notes to a Holder who is not a U.S.
Holder (a "Non-U.S. Holder") may, if certain conditions are met, be exempt
from United States federal income tax, including withholding tax, unless the
interest and OID is effectively connected with the conduct of a trade or
business of the Non-U.S. Holder in the Untied States or, if a treaty applies,
the interest and OID is generally attributable to the United States permanent
establishment maintained by the Non-U.S. Holder.
A Non-U.S. Holder of the Notes will not be subject to United States federal
income tax, including withholding tax, on gain realized on the sale or other
disposition of the Notes unless (i) such gain is effectively connected with
the conduct by the Non-U.S. Holder of a trade or business within the United
States or, if a treaty applies, the gain is generally attributable to the
United States permanent establishment maintained by the Non-U.S. Holder, or
(ii) in the case of gain realized by an individual holder, the Holder is
present in the United States for at least 183 days in the taxable year of the
disposition and certain other conditions are met.
122
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives the Notes for its own account pursuant to
the Exchange Offer (a "Participating Broker") must acknowledge that it will
deliver a prospectus in connection with any resale of such Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be
used by a Participating Broker in connection with resales of the Notes
received in exchange for the Old Notes where such Old Notes were acquired as a
result of market-making activities or other trading activities. The Company
has agreed that for a period of 90 days after the Expiration Date, it will
make this Prospectus, as amended or supplemented, available to any
Participating Broker for use in connection with any such resale. In addition,
until , 1998 (90 days after the date of this Prospectus), all dealers
effecting transactions in the Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of the Notes by
broker-dealers. The Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related
to such prevailing market prices or negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such Notes. Any broker-dealer that
resells Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of Notes and any commissions
or concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that,
by acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act.
For a period of 90 days after the Expiration Date, the Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any Participating Broker that requests such documents in
the Letter of Transmittal. The Company has agreed to pay all expenses incident
to the Exchange Offer (including the expenses of one counsel for the holders
of the Old Notes) other than commissions or concessions of any brokers or
dealers and will indemnify the holders of the Old Notes (including any
Participating Broker) against certain liabilities, including liabilities under
the Securities Act.
LEGAL MATTERS
The validity of the Notes will be passed upon for the Company by Squadron,
Ellenoff, Plesent & Sheinfeld, LLP, New York, New York. The Company has been
advised by Troop Meisinger Steuber & Pasich, LLP, Los Angeles, California and
Squadron, Ellenoff, Plesent & Sheinfeld, LLP, New York, New York with respect
to the Exchange Offer.
EXPERTS
The consolidated financial statements of Saban Entertainment, Inc. at May
31, 1995 and at October 31, 1995, and for the year ended May 31, 1995 and the
five month period ended October 31, 1995, appearing in this Prospectus and
Registration Statement, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
The consolidated financial statements of FCN Holding, Inc. at July 2, 1995
and October 29, 1995, and for the year ended July 2, 1995 and for the four
months ended October 29, 1995 appearing in this Prospectus and Registration
Statement, have been audited by Ernst & Young LLP, independent auditors, as
set forth in their report thereon appearing elsewhere herein, and are included
in reliance upon such report given upon the authority of such firm as experts
in accounting and auditing.
123
<PAGE>
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, Fox Kids Worldwide, Inc.) at June 30, 1996 and 1997 and for
the eight months ended June 30, 1996 and for the year ended June 30, 1997,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of International Family Entertainment,
Inc. at December 31, 1995 and 1996 and for each of the years in the three year
period ended December 31, 1996 have been included herein and in the
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm, as experts in accounting and auditing.
124
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
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.)
<S> <C>
Report of Independent Auditors.......................................... F-2
Combined Balance Sheets as of June 30, 1996 and 1997 and Consolidated
Balance Sheet as of December 31, 1997 (unaudited)...................... F-3
Combined Statements of Operations for the eight months ended June 30,
1996, for the year ended June 30, 1997 and for the six months ended
December 31, 1996 (unaudited) and Consolidated Statement of Operations
for the six months ended December 31, 1997 (unaudited)................. F-4
Combined Statements of Stockholders' Equity for the eight months ended
June 30, 1996, for the year ended June 30, 1997 and Consolidated
Statement of Stockholders' Equity for the six months ended December 31,
1997 (unaudited)....................................................... F-5
Combined Statements of Cash Flows for the eight months ended June 30,
1996 and for the year ended June 30, 1997 and for the six months ended
December 31, 1996 (unaudited) and Consolidated Statement of Cash Flows
for the six months ended December 31, 1997 (unaudited)................. F-6
Notes to Combined Financial Statements.................................. F-8
FCN HOLDING, INC.
Report of Independent Auditors.......................................... F-34
Consolidated Balance Sheets as of July 2, 1995 and October 31, 1995..... F-35
Consolidated Statements of Operations for the periods ended July 2, 1995
and October 31, 1995................................................... F-36
Consolidated Statements of Stockholder's Equity for the periods ended
July 2, 1995 and October 31, 1995...................................... F-37
Consolidated Statements of Cash Flows for the period ended July 2, 1995
and October 31, 1995................................................... F-38
Notes to Consolidated Financial Statements.............................. F-39
SABAN ENTERTAINMENT, INC.
Report of Independent Auditors.......................................... F-44
Consolidated Balance Sheets as of May 31, 1995 and October 31, 1995..... F-45
Consolidated Statements of Operations for the years ended May 31, 1995
and for the five months ended October 31, 1995......................... F-46
Consolidated Statements of Stockholders' Equity for the years ended May
31, 1995 and for the five months ended October 31, 1995................ F-47
Consolidated Statements of Cash Flows for the years ended May 31, 1995
and for the five months ended October 31, 1995......................... F-48
Notes to Consolidated Financial Statements.............................. F-49
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
Consolidated Balance Sheets as of December 31, 1996 and June 30, 1997
(unaudited)............................................................ F-59
Consolidated Statements of Operations for the six months ended June 30,
1996 and 1997 (unaudited).............................................. F-60
Consolidated Statements of Cash Flows for the six months ended June 30,
1996 and 1997 (unaudited).............................................. F-61
Notes to Consolidated Financial Statements (unaudited).................. F-62
Independent Auditors' Report............................................ F-66
Consolidated Balance Sheets as of December 31, 1995 and 1996............ F-67
Consolidated Statements of Operations for the years ended December 31,
1994, 1995 and 1996.................................................... F-68
Consolidated Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996 ................................................... F-69
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1994, 1995 and 1996....................................... F-70
Notes to Consolidated Financial Statements.............................. F-71
</TABLE>
F-1
<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,
1996 and 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,
1996 and 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
Los Angeles, California
September 29, 1997,
except for the 2nd, 3rd, 6th,
and 7th sentence of the 35th
paragraph of Note 1, as to
which the date is January 21,
1998.
F-2
<PAGE>
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.)
BALANCE SHEETS
<TABLE>
<CAPTION>
COMBINED CONSOLIDATED
-------------------------- --------------
DECEMBER 31,
JUNE 30, JUNE 30, 1997
1996 1997 (UNAUDITED)
------------ ------------ --------------
<S> <C> <C> <C>
Assets
Cash and cash equivalents......... $ 16,044,000 $ 28,877,000 $ 55,409,000
Restricted cash................... 8,000,000 8,000,000 8,000,000
Accounts receivable, net of
allowance for doubtful accounts
of $1,690,000 (June 30, 1996) and
$1,410,000 (June 30, 1997 and
December 31, 1997)............... 53,106,000 63,316,000 166,406,000
Amounts receivable from related
parties.......................... 28,908,000 29,037,000 71,720,000
Income tax refund receivable...... -- -- 8,471,000
Programming costs, less
accumulated amortization......... 181,427,000 235,575,000 354,348,000
Property and equipment, at cost,
less accumulated depreciation.... 8,711,000 8,921,000 73,798,000
Deferred income taxes............. 27,023,000 17,651,000 32,478,000
Investment in and advances to
affiliates....................... -- 7,102,000 7,356,000
Assets held for sale, net......... -- -- 20,434,000
Intangible assets, less
accumulated amortization......... -- -- 1,656,515,000
Other assets, including $1,284,000
(June 30, 1997) associated with
related parties.................. 13,051,000 13,922,000 49,441,000
------------ ------------ --------------
Total assets...................... $336,270,000 $412,401,000 $2,504,376,000
============ ============ ==============
Liabilities and stockholders'
equity
Accounts payable (including
$3,088,000 (June 30, 1997) due to
related parties)................. $ 10,706,000 $ 19,481,000 $ 38,926,000
Accrued liabilities (including
$236,000 (June 30, 1996) and
$4,576,000 (June 30, 1997) due to
related parties)................. 27,733,000 42,991,000 127,998,000
Deferred revenue (including
$6,962,000 (June 30, 1997) from
related parties)................. 67,882,000 40,794,000 73,595,000
Fox Kids Network affiliate
participation payable............ 13,738,000 21,853,000 21,867,000
Accrued programming expenditures.. 15,179,000 9,796,000 72,456,000
Accrued residuals and
participations................... 22,040,000 24,028,000 36,576,000
Income taxes payable.............. 3,884,000 3,257,000 3,246,000
Deferred income taxes............. 790,000 1,250,000 5,091,000
Debt.............................. 19,916,000 57,592,000 640,745,000
Amounts payable to related
parties.......................... 81,571,000 58,672,000 --
Senior Notes...................... -- -- 475,000,000
Senior Discount Notes............. -- -- 381,853,000
NAHI Bridge Note.................. -- -- 102,471,000
Fox Subordinated Note............. -- -- 113,503,000
------------ ------------ --------------
Total liabilities................. 263,439,000 279,714,000 2,093,327,000
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)............... -- -- 345,000,000
Stockholders' equity: -- -- --
Preferred Stock, $0.001 par
value; 19,500,000 shares
authorized; no shares issued or
outstanding.................... -- -- --
Preferred class A members
interest....................... 40,000,000 50,000,000 --
Common stock, $.01 par value:
10,000 shares authorized
800 shares issued and
outstanding (Saban
Entertainment, Inc.)......... -- -- --
Common stock, no par value:
2,000 (June 30, 1996) and
1,000 (June 30, 1997) shares
authorized
2,000 (June 30, 1996) and
816.16 (June 30, 1997) shares
issued and outstanding (FCN
Holding, Inc.)............... 2,000 800 --
Class A Common Stock, $0.001 par
value; 16,000,000 shares
authorized; 160,000 shares
issued and outstanding......... -- -- 160
Class B Common Stock, $0.001 par
value; 16,000,000 shares
authorized; 15,840,000 shares
issued and outstanding......... 15,840
Contributed capital............. 49,245,000 59,454,200 61,032,000
Cumulative translation
adjustment..................... (11,000) (803,000) (416,000)
Retained (deficit) earnings..... (16,405,000) 24,035,000 5,417,000
------------ ------------ --------------
Total stockholders' equity........ 72,831,000 132,687,000 66,049,000
------------ ------------ --------------
Total liabilities and
stockholders' equity............. $336,270,000 $412,401,000 $2,504,376,000
============ ============ ==============
</TABLE>
See accompanying notes.
F-3
<PAGE>
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.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
COMBINED CONSOLIDATED
----------------------------------------- -------------
SIX MONTHS SIX MONTHS
ENDED ENDED
EIGHT MONTHS DECEMBER 31, DECEMBER 31,
ENDED JUNE 30, YEAR ENDED 1996 1997
1996 JUNE 30, 1997 (UNAUDITED) (UNAUDITED)
-------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net revenues (including
$5,498,000 (1996) and
$21,316,000 (1997) from
related parties)....... $191,621,000 $307,820,000 $173,790,000 $ 332,971,000
Costs and expenses:
Production and
programming
(including $4,301,000
(1997) to a related
party)............... 98,937,000 180,381,000 96,802,000 195,297,000
Selling, general and
administrative
(including $1,114,000
(1996) and $2,322,000
(1997) to a related
party)............... 23,072,000 62,466,000 26,832,000 62,435,000
Fox Kids Network
affiliate
participations....... 8,853,000 6,194,000 7,073,000 165,000
Amortization of
intangible assets ... -- -- -- 17,436,000
------------ ------------ ------------ -------------
Operating income........ 60,759,000 58,779,000 43,083,000 57,638,000
Investment advisory
fee.................... 10,000,000 -- -- --
Equity in loss of
unconsolidated
affiliate.............. -- 1,546,000 -- 2,388,000
Other expense........... -- -- -- 62,000
Interest expense
(including $170,000
(1996) and $854,000
(1997) to a related
party)................. 885,000 2,226,000 1,528,000 58,388,000
------------ ------------ ------------ -------------
Income (loss) before
provision for income
taxes.................. 49,874,000 55,007,000 41,555,000 (3,200,000)
Provision for income
taxes.................. 18,274,000 14,567,000 11,515,000 2,403,000
------------ ------------ ------------ -------------
Net income (loss)....... $ 31,600,000 $ 40,440,000 $ 30,040,000 $ (5,603,000)
============ ============ ============ =============
Net income (loss)
attributable to common
shareholders........... $ 31,600,000 $ 40,440,000 $ 30,040,000 $ (18,618,000)
============ ============ ============ =============
Net income (loss) per
common share basic and
diluted................ $ 1.98 $ 2.53 $ 1.88 $ (1.16)
============ ============ ============ =============
Weighted average shares
outstanding basic and
diluted................ 16,000,000 16,000,000 16,000,000 16,000,000
============ ============ ============ =============
</TABLE>
See accompanying notes.
F-4
<PAGE>
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.)
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
------ ----------- ---------- ------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at November 1, 1995
(combined)................ -- $ -- 2,000 $ 2,000 $ -- $ -- $(4,132,000) $ (4,130,000)
Transactions at November
1, 1995:
Capital contributions.... -- -- -- -- 29,344,000 -- -- 29,344,000
Forgiveness of debt...... -- -- -- -- 5,124,000 -- -- 5,124,000
Distribution............. -- -- -- -- -- -- (2,700,000) (2,700,000)
Saban Entertainment,
Inc..................... -- -- 800 -- 11,751,000 46,000 83,174,000 94,971,000
Elimination of certain
amounts between FCN
Holding, Inc. and Saban
Entertainment, Inc...... -- -- -- -- -- -- (4,247,000) (4,247,000)
Payment to a related party
for a stock purchase
option................... -- -- -- -- -- -- (80,100,000) (80,100,000)
Related party tax
obligation............... -- -- -- -- 3,026,000 -- -- 3,026,000
Exchange loss on
translation of foreign
subsidiaries' financial
statements............... -- -- -- -- -- (57,000) -- (57,000)
Net income................ -- -- -- -- -- -- 31,600,000 31,600,000
Amount attributable to
Preferred Class A Members
Interest................. -- 40,000,000 -- -- -- -- (40,000,000) --
--- ----------- ---------- ------- ----------- --------- ----------- ------------
Balance at June 30, 1996
(combined)................ -- 40,000,000 2,800 2,000 49,245,000 (11,000) (16,405,000) 72,831,000
Issuance of Preferred
Class A Members
Interest................. -- 10,000,000 -- -- -- -- -- 10,000,000
Capital contribution...... (1,183.84) (1,200) 1,200
Capital contributions..... -- -- -- -- 5,376,000 -- -- 5,376,000
Exchange loss on
translation of foreign
subsidiaries' financial
statements............... -- -- -- -- -- (792,000) -- (792,000)
Related party tax
obligation............... -- -- -- -- 4,832,000 -- -- 4,832,000
Net income................ -- -- -- -- -- -- 40,440,000 40,440,000
--- ----------- ---------- ------- ----------- --------- ----------- ------------
Balance at June 30, 1997
(combined)................ -- $50,000,000 1,616.16 $ 800 $59,454,200 $(803,000) $24,035,000 $132,687,000
Transactions related to
the reorganization:
Exchange of Preferred
Class A Members
Interest................ (50,000,000) (50,000,000)
Issuance of Class A
Common Stock............ 160,000 160 160
Issuance of Class B
Common Stock............ 15,840,000 15,840 (5,200) 10,640
Exchange of Common
Stock................... (1,616.16) (800) (800)
Capital contributions..... 1,583,000 1,583,000
Exchange loss on
translation of foreign
subsidiaries' financial
statements............... 387,000 387,000
Dividends on Series A
Preferred Stock.......... (13,015,000) (13,015,000)
Net loss.................. (5,603,000) (5,603,000)
--- ----------- ---------- ------- ----------- --------- ----------- ------------
Balance at December 31,
1997
(consolidated)(unaudited).. $ -- 16,000,000 $16,000 $61,032,000 $(416,000) $ 5,417,000 $ 66,049,000
=== =========== ========== ======= =========== ========= =========== ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
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.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
COMBINED CONSOLIDATED
---------------------------------------------------- -----------------
EIGHT MONTHS YEAR ENDED SIX MONTHS ENDED SIX MONTHS ENDED
ENDED JUNE 30, 1996 JUNE 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1997
------------------- ------------- ----------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)....... $ 31,600,000 $ 40,440,000 $ 30,040,000 $ (5,603,000)
Adjustments to reconcile
net income to net cash
provided by (used in)
operating activities:
Amortization of
programming costs..... 83,485,000 144,713,000 75,383,000 158,427,000
Depreciation........... 1,585,000 3,226,000 1,501,000 6,043,000
Amortization of
intangible assets..... -- -- -- 17,436,000
Cumulative translation
adjustment............ (57,000) (792,000) 146,000 387,000
Equity in loss of
unconsolidated
affiliate............. -- 1,546,000 -- 2,388,000
Investment advisory
fee................... 10,000,000 -- -- --
Non-cash interest
expense............... -- -- -- 19,320,000
Changes in operating
assets and
liabilities:
Accounts receivable.. 16,035,000 (10,210,000) (11,824,000) (36,882,000)
Amounts receivable
from related
parties............. (11,791,000) 3,860,000 25,936,000 (42,174,000)
Income tax refund
receivable.......... -- -- -- (8,471,000)
Additions to
programming costs... (113,506,000) (198,861,000) (101,220,000) (139,614,000)
Other assets......... 2,194,000 (872,000) (903,000) (22,725,000)
Accounts payable..... (5,495,000) 8,775,000 2,990,000 (1,612,000)
Accrued liabilities.. (2,290,000) 15,259,000 6,144,000 19,027,000
Accrued residuals and
participations...... 5,771,000 1,988,000 734,000 12,075,000
Administration fee
payable to a related
party............... (6,173,000) (769,000) 2,018,000 --
Income taxes payable
and deferred income
taxes............... (9,583,000) 14,038,000 8,944,000 9,460,000
Deferred revenue..... 23,437,000 (27,088,000) (37,217,000) 14,359,000
Fox Kids Network
affiliate
participation
payable............. (4,682,000) 8,115,000 7,073,000 14,000
Accrued programming
expenditures........ (4,637,000) (5,383,000) (2,867,000) (17,766,000)
------------ ------------ ------------ ---------------
Net cash (used in)
provided by operating
activities............. 15,893,000 (2,015,000) 6,878,000 (15,911,000)
INVESTING ACTIVITIES
Purchase of property and
equipment.............. (3,053,000) (3,435,000) (1,667,000) (4,504,000)
Proceeds from sale of
property and
equipment.............. -- -- -- 1,100,000
Acquisition of
programming rights..... (7,200,000) (4,800,000) -- --
Acquisition of
Creativite &
Developpement SA....... (1,722,000) (176,000) -- --
Acquisition of TV10..... -- (8,648,000) -- (950,000)
Acquisition of
International Family
Entertainment, Inc.,
net of preferred
stock.................. -- -- -- (1,369,918,000)
Sale of marketable
securities............. -- -- -- 61,396,000
Increase in assets held
for sale............... -- -- -- (42,595,000)
Increase in restricted
cash................... (3,000,000) -- -- --
Cash acquired in
acquisition of
Creativite &
Developpement SA....... 3,151,000 -- -- --
Cash acquired in deemed
acquisition of Saban
Entertainment, Inc..... 16,207,000 -- -- --
Cash acquired in
acquisition of
International Family
Entertainment, Inc. ... -- -- -- 19,241,000
------------ ------------ ------------ ---------------
Net cash (used in)
provided by investing
activities............. 4,383,000 (17,059,000) (1,667,000) (1,336,230,000)
FINANCING ACTIVITIES
Proceeds from bank
borrowings............. 15,880,000 52,569,000 9,145,000 1,281,674,000
Payments on bank
borrowings............. (11,606,000) (9,917,000) (1,968,000) (835,906,000)
Payment to a related
party for a stock
purchase option........ (80,100,000) -- -- --
Dividends on preferred
stock.................. -- -- -- (13,015,000)
Proceeds from issuance
of Preferred Class A
Members interest....... -- 10,000,000 10,000,000 --
Proceeds from NAHI
Bridge loan............ -- -- -- 345,514,000
Paydown on NAHI Bridge
Loan................... -- -- -- (250,679,000)
Issuance of Senior
Notes.................. -- -- -- 475,000,000
Issuance of Senior
Discount Notes......... -- -- -- 375,001,000
Issuance of common
stock.................. -- -- -- 10,000
Advances from related
parties................ 67,967,000 (20,285,000) (21,888,000) 1,074,000
Capital contributions
from related parties... 3,310,000 -- -- --
Capital distribution to
related party.......... -- (460,000) -- --
------------ ------------ ------------ ---------------
Net cash provided by
(used in) financing
activities............. (4,549,000) 31,907,000 (4,711,000) 1,378,673,000
------------ ------------ ------------ ---------------
Increase in cash and
cash equivalents....... 15,727,000 12,833,000 500,000 26,532,000
Cash and cash
equivalents at
beginning of period.... 317,000 16,044,000 16,044,000 28,877,000
------------ ------------ ------------ ---------------
$ 16,044,000 $ 28,877,000 $ 16,544,000 $ 55,409,000
============ ============ ============ ===============
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION
Cash paid during the
period for:
Interest (net of
amounts
capitalized).......... $ 414,000 $ 1,466,000 $ 458,000 $ 22,994,000
============ ============ ============ ===============
Income taxes........... $ 27,796,000 $ 3,553,000 $ 2,571,000 $ 1,086,000
============ ============ ============ ===============
</TABLE>
See accompanying notes.
F-6
<PAGE>
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.)
STATEMENTS OF CASH FLOW--(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.
Six months ended December 31, 1997
Amounts payable to a related party of $1,583,000 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.
Interest of $4,831,000, $7,636,000 and $6,852,000 was accreted on the Fox
Subordinated Note, NAHI Bridge Note, and Senior Discount Notes, respectively,
during the period.
See accompanying notes.
F-7
<PAGE>
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.)
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND TO THE SIX MONTH PERIODS
ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
1. BASIS OF FINANCIAL STATEMENT PRESENTATION, ORGANIZATION AND RELATED PARTY
TRANSACTIONS
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. 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. On August 1, 1997, a reorganization (the Reorganization)
referred to below was effected pursuant to which Saban, FCN Holding and the
LLC became wholly-owned subsidiaries of Fox Kids Worldwide, Inc. (Fox Kids
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 combined financial statements of the Company include the balance sheets
of FCN Holding, Saban and the LLC at June 30, 1996 and 1997 together with the
combined results of operations of FCN Holding, Saban and the LLC since
November 1, 1995. The operations of certain foreign subsidiaries of Saban have
been combined at May 31, 1996 and 1997 and eight month period ended May 31,
1996 and 1997. Unaudited pro forma combined statements 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.
<TABLE>
<CAPTION>
PERIOD FROM
JULY 3, 1995 TO
JUNE 30, 1996
---------------
<S> <C>
Pro forma revenues..................... $327,105,000
Pro forma net income................... $ 71,370,000
</TABLE>
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 are
comprised of (i) Saban, whose library of over 5,300 half-hours of completed
and in-production children's programming is among the largest in the world,
(ii) the Fox Children's Network, Inc. (FCN), the-top-rated children's (ages 2-
11) oriented broadcast television network in the United States, and (iii) a
growing business of Fox Kids-branded cable and direct-to-home (DTH) satellite
international channels operating in approximately 25 countries worldwide. The
Company is the result of the joint venture (the LLC) formed in 1995 by Fox
Broadcasting Company (Fox Broadcasting) and Saban. All significant
intercompany transactions and accounts have been eliminated.
The Reorganization
Fox Kids Worldwide was incorporated in August 1996 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 International
Family Entertainment, Inc. (IFE), see Note 12, (i) Fox Broadcasting Sub, Inc,
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
F-8
<PAGE>
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.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND TO THE SIX MONTH PERIODS
ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
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 the 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 the Class A Common Stock of the Company. In addition, as
described more fully below under Other Related Party Transactions --the "FBC
Subordinated Note," Fox Broadcasting exchanged its preferred, non-voting
interest in the LLC and its $50 million contingent note receivable from the
LLC for a new $108.6 million subordinated pay in kind note from the Company
due March 2008 bearing interest at 11.8%. As a result of these transactions,
which are referred to as the "Reorganization," FCN Holding, FCN, Saban and the
LLC became direct or indirect wholly-owned subsidiaries of the Company.
Acquisition of International Family Entertainment, Inc.
On August 1, 1997, the Company acquired a 50.7% interest in IFE through the
purchase for $35.00 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 million principal amount of
6% Convertible Secured Notes due 2004 of IFE (the "Convertible Notes") (which
have since been retired) for shares of Series A 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 million for the Privately
Owned Shares and issued $345 million of its Series A 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 million 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 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.
IFE historically operated in three business segments: the operation of
advertiser-supported cable networks ("Cable Networks"), the production and
distribution of entertainment programming ("Production & Distribution"), and
the production of live entertainment shows ("Live Entertainment"). The Company
contemplates that it will continue to operate IFE's The Family Channel as the
Fox Family Channel but will sell all of IFE's interests in its other cable and
international networks not directly related to The Family Channel. In
addition, the Company intends to sell IFE's Production and Distribution and
Live Entertainment businesses.
Related Party Transactions in Connection with the Formation of the LLC and
the Subsequent Reorganization
As described more fully below, in connection with the formation of the LLC
and the subsequent Reorganization, various corporate affiliates of Fox
Broadcasting transferred certain distribution rights and other
F-9
<PAGE>
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.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND TO THE SIX MONTH PERIODS
ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
contractual rights to the LLC, made a cash loan to the LLC and committed to
provide certain administrative services to FCN Holding on an on-going basis.
In consideration, Fox Broadcasting is entitled to receive payment of its loan
and certain other cash distributions in priority to the common stockholders of
the Company.
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 broadcasting operations
(including all uplink, transponder and other facilities necessary to deliver
via satellite Fox Kids Network programming for broadcast to the Fox Kids
Network Affiliates (defined below)) and overhead charges related to Fox
Broadcasting's 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
material included or used in connection with any of the programs exhibited on
the Fox Kids Network. On December 22, 1995, in connection with the terms of
the LLC, this agreement, and all rights of Fox Broadcasting to receive
management fees on or subsequent to June 1, 1995, were assigned to the LLC by
the Fox Parties. Concurrently, the Company agreed to pay to Fox Broadcasting a
fee of $10 million for providing these services and such amount is included in
other assets. In September 1996, the Company paid this fee and, immediately
upon receipt of this $10 million payment, Fox Broadcasting made a contribution
to the LLC of $10 million in exchange for additional Preferred Class A Members
Interest, described above. Fox Broadcasting continues to be obligated to
provide the services described above and estimates the incremental costs for
providing these services to the Company to be $2,200,000 per annum.
Accordingly, the Company is amortizing the $10 million fee over approximately
five years, representing the period over which the value of the services is
estimated to be incurred, and has recorded amortization expense of $1,467,000
and $2,200,000 for the eight months ended June 30, 1996 and the twelve months
ended June 30, 1997, respectively. Fox Broadcasting believes that these
estimates were made on a reasonable basis. However, these estimates may not
necessarily be indicative of the level of expenses that might have been
incurred had the Company operated on a stand-alone basis. Fox Broadcasting has
not made a study or any attempt to obtain quotes from third parties to
determine what the costs of obtaining such services from third parties would
have been.
Pursuant to terms of the affiliation agreements (Agreements) among the
Company, Fox Broadcasting and substantially all of its affiliated television
stations (Fox Kids Network Affiliates), the Fox Kids Network Affiliates,
including owned and operated television stations of certain affiliates of Fox
Broadcasting (Fox O&O's) are entitled to compensation which is equal to 100%
of FCN's programming Net Profits (as defined below). Amounts payable under
these compensation arrangements are due quarterly in amounts derived pursuant
to the provisions in the Agreements. "Net Profits" is defined on a cumulative
basis to include amounts actually received by FCN from the exhibition,
distribution and other exploitation of the Company's programs and the
merchandising and other rights relating thereto, less administrative fees,
production/license fees, distribution and merchandising fees (including those
payable to the Company), overhead and other expenses and reserves. Certain of
the Fox O&O's have waived in favor of the Company their rights to receive
these participations.
In addition to assigning to the LLC the agreements and Net Profit
participations referred to above, Fox Broadcasting agreed that the net cash
flow to the LLC from such agreements and participations for the twelve months
ended June 30, 1996 would be a minimum of $35,755,000. For the eight months
ended June 30, 1996, the Company recorded $16,611,000 as a decrease in
expenses. The remaining balance of $19,144,000 was recorded as a capital
contribution. Subsequent to June 30, 1996, the outstanding balance was paid.
For the year ended June 30, 1997 such amounts totaled $20,508,000 and was
recorded as a decrease in expenses.
F-10
<PAGE>
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.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND TO THE SIX MONTH PERIODS
ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
In connection with the formation of the LLC, Fox Broadcasting made a $64.5
million interest free loan to the LLC, of which $14.5 million of the loan was
repaid in September 1996. The $50 million balance of this loan must be paid
out of Distributable Cash (as defined below) of the LLC before any
distributions are made on the Class A and Class B Members Interest.
Distributable Cash means the amount of cash available for distribution by the
LLC (including cash available from Saban and FCN Holding), taking into account
all cash, debts, liabilities and obligations of the LLC then due and after
setting aside reserves to provide for the LLC's capital expenditures, debt
service, working capital and expansion plans (Distributable Cash).
In addition to the priority distributions described in the paragraph above,
in connection with the formation of the LLC, Fox Broadcasting was also granted
a priority right to receive distributions of Distributable Cash and other
distributions until it receives aggregate distributions in an amount equal to
$40 million. As described above, in September 1996, Fox Broadcasting
purchased, for $10 million cash, an additional $10 million of Class A Members
Interest. In connection with the Reorganization, Fox Broadcasting contributed
to the Company, pursuant to an Agreement regarding Transfer of LLC Interests,
the note receivable from the LLC representing the $50 million remainder of the
loan and the Class A Members Interest in exchange for a note from the Company
(see Other Related Party Transactions--the "Fox Subordinated Note"). The $40
million difference between the carrying value of the Class A Members Interest
and the liquidation value has been charged against retained earnings.
Pursuant to an agreement, dated December 22, 1995, between the LLC and the
stockholders of Saban, the LLC was granted an option to purchase, upon the
occurrence of certain events, all of the Class B Common Stock held by the
stockholders of Saban, and any of their transferees (Stock Ownership
Agreement). 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 former
stockholders of Saban. The LLC paid to the stockholders of Saban an aggregate
of $80.1 million for payment under the Stock Ownership Agreement. 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 Sub.
As part of the closing 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 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 to add provisions regarding voting rights between Fox
Broadcasting and the former Saban Stockholders.
As part of the Amended and Restated Strategic Stockholders Agreement, dated
August 1, 1997, 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 The News Corporation Limited (News
Corp.), the parent of Fox Broadcasting, or (iii) under the Funding Agreement
dated
F-11
<PAGE>
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.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND TO THE SIX MONTH PERIODS
ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
as of June 11, 1997, and either News Corp. or News Publishing Australia
Limited ("NPAL") provides funds to the Company, the advance shall be treated
as a loan, or if Citicorp USA, Inc., in its sole discretion, as administrative
agent under the Existing 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 Sabam shall 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. The Series B and Series C
Preferred Stock shall be entitled to dividends at an annual rate of 11.7% of
its liquidation preference. Each of the Series B and Series C Preferred Stock
shall have a liquidation preference equal to $100,000 per share. The Series B
and Series C Preferred Stock shall 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
shall 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.
Other Related Party Transactions
Receivables from related parties include advances of $1,329,000 at June 30,
1996 and 1997 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 Amounts Receivable from Related Parties
are $3,119,000 (1996) and $12,965,000 (1997) due from those related parties.
Saban and Fox Broadcasting are parties to a Barter Syndication Agreement
dated as of January 5, 1996, pursuant to which Saban engaged Fox Broadcasting
to provide barter advertising sales for the 1996-1997 and 1997-1998 broadcast
season for the Saban Kids Network. Fox Broadcasting's services include
advertising sales, sales administration, account maintenance, ratings,
processing, credit and collection, sales data entry and reporting, and
commercials broadcast standards and practices. In consideration for the
services rendered by Fox Broadcasting to Saban, Saban 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 connection therewith, including
interest, totaled $7,071,000 and $8,672,000 at June 30, 1996 and 1997,
respectively.
F-12
<PAGE>
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.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND TO THE SIX MONTH PERIODS
ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
In October 1996, the Company commenced operations of Fox Kids U.K., a cable
and satellite channel broadcasting from 6 a.m. to 7 p.m. each day. The channel
is currently broadcast via analogue transponder. The channel is distributed as
part of British Sky Broadcasting, Group plc's ("BSkyB") Sky Multichannels DTH
package in the United Kingdom and the Republic of Ireland. News Corp. holds a
40% interest in BSkyB, a public company, which operates the leading pay
television broadcasting service in the United Kingdom and the Republic of
Ireland. The Fox Kids U.K. channel is also distributed via cable over a number
of systems, the largest of which are the systems operated by Comcast.
Discussions are also at an advanced stage with other major cable operators.
However, due to lack of capacity and the pre-existence of four other
children's channels, carriage is not guaranteed. As part of its agreement with
BSkyB, the Company acquired for approximately $3.7 million, all of BSkyB's
United Kingdom license rights to children's programming which had been
acquired for broadcast by BSkyB prior to the launch of this channel.
Additionally, as part of the agreement with BSkyB, the Company has entered
into an analog transponder sublease agreement whereby the Company will lease
the analog transponder from BSkyB through February 1, 2001 subject to
extension in certain circumstances requiring a financial commitment of
approximately $28,188,000. The Company has also entered into a digital
transponder and uplink sublease agreement with BSkyB whereby the Company will
lease the digital transponder from BSkyB for eight years from the analog
launch date requiring an annual financial commitment of approximately
$1,115,000 per channel subject to reduction in certain circumstances. Further,
as part of this arrangement with BSkyB, BSkyB shall provide support services
for the sale by the Company of programming sponsorship, advertising and other
air-time for broadcast on the channel as well as other operational and
facilities support services. In consideration for the services being provided
to the Company, BSkyB shall be entitled to receive a fee equal to 15% of Net
Revenue, as defined in the agreement, plus a 5% bonus commission where Net
Revenue exceeds mutually pre-agreed annual targets plus an annual fee of
approximately $326,000, subject to adjustment in certain circumstances.
In November 1996, the Company launched Fox Kids Latin America ("FKLA"), a
Fox Kids branded pan-regional Latin American channel, which simultaneously
broadcasts animated and live-action programming in Spanish, Portuguese and
English. 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, Saban has loaned and advanced funds to Haim Saban. 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. 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, 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. Saban has entered into a contract with the agency which leases Mr.
Saban's airplane to charter from that agency Mr. Saban's or another similar
airplane for a minimum of fifty
F-13
<PAGE>
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.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND TO THE SIX MONTH PERIODS
ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
charter hours during a twelve month period. For the eight months ended June
30, 1996 and the twelve months ended June 30, 1997, Saban has paid
approximately $370,000 and $875,000, respectively, for such services.
Saban 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 Saban for an additional three years. The
Company currently intends to extend this relationship. At June 30, 1996 and
1997, the Company was due $500,000 under this agreement.
In September 1994, Saban entered into a music services agreement (the "Music
Agreement") with Haim Saban, which agreement was amended in June 1995 and
assigned to a corporation wholly-owned by Mr. Saban in January 1996. Under the
terms of the Music Agreement, all original theme music, underscores, cues and
songs for use in all programming produced by Saban will be supplied to Saban
through Mr. Saban. Saban is entitled to license third-party musical
compositions for use in its programming so long as such compositions neither
are used as opening or closing themes nor constitute more than 15% of the
total musical content of any program or episode, without Mr. Saban's prior
written consent. Saban has the royalty-free right to use the compositions in
articles of merchandise such as home video units, video games and interactive
toys. Saban has been granted the non-exclusive, worldwide, and perpetual
license to (i) synchronize and perform compositions in theatrical motion
pictures and (ii) synchronize compositions in all other forms of programming.
Saban creates and owns all right, title and interest in master recordings of
compositions for use in Saban's programming, and Saban owns the proceeds
derived from all forms of exploitation thereof. In consideration for the
provision of the compositions to Saban, Mr. Saban is entitled to receive all
publishing income, directly or through Saban, in connection with the
exploitation of such compositions. Saban is entitled to reimbursement from Mr.
Saban of certain costs associated with the creation of the compositions. For
the year ended June 30, 1997, Mr. Saban paid approximately $374,000 to Saban
for reimbursement of costs to Saban. For the eight months ended June 30, 1996,
Mr. Saban made no payments for reimbursement of costs to Saban. At June 30,
1996, Saban owed Mr. Saban approximately $262,000 pursuant to the Music
Agreement. At June 30, 1997, approximately $211,000 was owed to Saban by Mr.
Saban pursuant to the Music Agreement.
Saban is party to an agreement with Fox Family Films, Inc. ("Distributor")
for the distribution in Spring 1997 of Turbo: A Power Rangers Movie, a "PG-
rated" sequel to the original Mighty Morphin Power Rangers motion picture (the
"Sequel"), which was released theatrically in the United States in Spring 1997
and in home video in late Summer 1997. Under the terms of the agreement, Saban
produced and delivered the Sequel to Distributor for worldwide distribution
and granted to Distributor all rights necessary to advertise, promote,
publicize and distribute the Sequel. Distributor will hold 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). Saban will hold the copyright to the Sequel as well as certain rights
including, without limitation, merchandising, television series, stage,
publication, radio, theme park and touring, music publishing and soundtrack.
Commercial tie-in rights will be mutually controlled by Saban and Distributor.
Saban will receive 100% of gross receipts after certain distribution fees and
expenses are deducted, based upon a formula set forth in the agreement.
Saban is party to six program exhibition agreements for the 1996-1997
broadcast season with FOX Television and one with FoxNet, both subsidiaries of
Fox Broadcasting, pursuant to which Saban licenses certain of FOX Television's
owned and operated stations and the FoxNet cable television service the right
to broadcast certain series which are part of the Saban Kids Network. All
series are licensed on a barter basis.
F-14
<PAGE>
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.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND TO THE SIX MONTH PERIODS
ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
In October 1997, the Company reached an agreement in principle with
Fox/Liberty Networks, LLC a joint venture between News Corp. and Liberty Media
Corporation, a wholly owned subsidiary of Tele-Communications, Inc., to sell a
majority ownership interest in Fit TV to Fox/Liberty Networks, LLC. The
Company acquired Fit TV in September 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. During the year ended June 30, 1997, the Company spent
approximately $726,000 in distribution costs in connection with this product
which will be recoupable against New World's share of revenues. At June 30,
1997, such amount is included in accounts receivable from related parties. The
Company is in discussions with FOX Television to acquire the New World
animation library.
In October 1997, the Company entered into an interim agreement with
Twentieth Century Fox Film Corp. ("Twentieth Century Fox"), pursuant to which
Twentieth Century Fox will distribute the programming library of MTM
Entertainment, one of the assets acquired in the IFE Acquisition. The Company
is in discussions with Twentieth Century Fox to sell MTM to Twentieth Century
Fox.
As part of the Reorganization, on July 31, 1997, the Company issued a
subordinated promissory pay in kind note (the "Fox Subordinated Note") to Fox
Broadcasting in the principal amount of approximately $104 million, which
amount will be increased to $108.6 million (exclusive of any capitalized
interest) and which is to be repaid in May 2008. The parties recently have
agreed to restate the Fox Subordinated Note to reflect a change in the
interest rate, effective as of the date of issuance. As restated, interest on
the Fox Subordinated Note will accrete quarterly at the rate of 10.427% per
annum. At any time after the Existing Credit Facility or the Amended Credit
Facility, as applicable, has been paid in full, the Company may prepay the Fox
Subordinated Note in whole or in part, subject to the terms of the Indentures.
On August 29, 1997, in connection with the IFE Acquisition, the Company issued
a subordinated promissory pay in kind note to News America Holdings
Incorporated (the "NAHI Bridge Note"), upon substantially the same terms and
conditions as the Fox Subordinated Note including maturity dates, except that
the NAHI Bridge Note has a principal amount of $345.5 million. The parties
recently have agreed to restate the NAHI Bridge Note to reflect a change in
the interest rate, effective as of the date of issuance. As restated, the NAHI
Bridge Note will accrete interest at a rate of approximately 10.427% per
annum. The payment of principal and interest under both the Fox Subordinated
Note and the NAHI Bridge Note is subordinated in right to the obligations of
the Company under the Existing Credit Facility.
On August 1, 1997, Saban entered into an amendment to the lease for its
corporate headquarters at 10960 Wilshire Boulevard in Los Angeles (the
original lease dated July 17, 1995 together with the amendment, the "Lease").
The amendment provides for an annual base rent for the entire premises of
$620,505 through February 15, 2002 and $676,915 from February 16, 2002 through
March 31, 2006. Pursuant to a Guaranty of Lease entered into on August 1, 1997
(the "Guaranty"), News Corp. and NPAL have guaranteed certain of Saban's
obligations under the Lease. The Guaranty continues until Saban has paid all
obligations due under the Lease. Under the Guaranty, News Corp. and NPAL are
liable, jointly and severally, for any amounts not paid by Saban. 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, Saban entered into an agreement in principle 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
F-15
<PAGE>
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.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND TO THE SIX MONTH PERIODS
ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
animated character of Casper (the "Film") which was released by Fox Video in
the United States on September 9, 1997. The distribution term runs through
September 8, 2004. Pursuant to the Fox Video Agreement, Saban developed,
produced and delivered the Film to Fox Video. Saban has the right and
obligation to market, distribute (for no fee) and exploit the Film in all
forms of television, non-theatrical and airline markets. Fox Video has the
right and obligation to market, manufacture, package, distribute (for no fee)
and exploit the Film in home video formats, and will release the Film in major
international territories during the next six months. Saban 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. Saban 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.
In August 1996, Fox Video and Saban entered into a Home Video Rights
Acquisition Agreement pursuant to which Saban 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 Saban 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 Saban, the LLC or the Company. The beginning of the term of
this agreement varies by type of program, but the term ends as to all programs
between seven and nine years from September 11, 1996. Saban is required to
make available for release by Fox Video a minimum of six video titles each
year, at least two of which will not have been previously released for home
video distribution in any of the territories covered by the agreement. In
consideration for the grant of the distribution rights, Fox Video has agreed
to pay Saban 50% of gross receipts from these home videos, after deduction of
certain expenses. In connection with this Agreement Saban received $8,000,000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year-End
The Company's fiscal year ends on June 30.
Interim Financial Information
The unaudited consolidated financial statements as of September 30, 1997,
and for the three months ended September 30, 1997 and the unaudited combined
financial statements for the three months ended September 30, 1996, include,
in the opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the Company's consolidated/combined
financial position, results of operations and cash flows. Operating results
for the three months ended September 30, 1997, are not necessarily indicative
of the results that may be expected for the year ended June 30, 1998.
Revenue Recognition
Advertising revenue is recognized as earned in the period in which the
advertising commercials are telecast. 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
F-16
<PAGE>
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.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND TO THE SIX MONTH PERIODS
ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
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. Subscriber revenue is recognized by the international
channels monthly based upon the reported level of subscribers.
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 benefit 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. 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. Production and programming costs
also include the use of satellite transponders and costs associated with
engineering and technical support services in connection with the
international channels.
For programs in which the Company acquires only network 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.
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 throughout
the world. The Company 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 the Company's release of
product to such distributors and broadcasters. At June 30, 1997 and June 30,
1996, 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.
F-17
<PAGE>
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.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND TO THE SIX MONTH PERIODS
ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
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 compounded
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 improvement using the
straight-line method.
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 year ended June 30,
1997 were $132,000 and $(643,000), respectively.
The cumulative translation adjustment in stockholders' equity at June 30,
1996 and 1997, represents the Company's net unrealized exchange losses on the
translation of foreign subsidiaries' financial statements.
Income Taxes
The Company provides for income taxes based on the liability method. 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, 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 No. 25, "Accounting for Stock Issued
to Employees," and intends to continue to do so.
F-18
<PAGE>
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.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND TO THE SIX MONTH PERIODS
ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
Advertising Costs
Included in selling, general and administrative expenses are advertising
expenses amounting to $2,401,000 and $9,732,000 for the eight months ended
June 30, 1996 and the year ended June 30, 1997, respectively.
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 the 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 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 which represents the number of shares of common stock that
would have been outstanding had the Reorganization described in Note 1
occurred on November 1, 1995. Common equivalent shares consisting of
outstanding stock options are included in the calculation to the extent they
are dilutive. For the six months ended December 31, 1997 (unaudited), the net
loss per common share gives effect to dividends on the Series A Preferred
Stock which amounted to $13,015,000.
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 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. The
Company is currently reviewing those Statements and will apply such provisions
as deemed appropriate.
F-19
<PAGE>
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.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND TO THE SIX MONTH PERIODS
ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
3. PROGRAMMING COSTS
Programming costs, net of accumulated amortization, are comprised of the
following:
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------------------------
NET
ACCUMULATED PROGRAMMING
COST AMORTIZATION COSTS
-------------- ------------ ------------
<S> <C> <C> <C>
Children's programming............ $ 694,690,000 $589,160,000 $105,530,000
Movies and mini-series/Family pro-
gramming......................... 121,642,000 88,642,000 33,000,000
Projects in production............ 40,647,000 -- 40,647,000
Development....................... 2,648,000 398,000 2,250,000
-------------- ------------ ------------
$ 859,627,000 $678,200,000 $181,427,000
============== ============ ============
<CAPTION>
JUNE 30, 1997
----------------------------------------
NET
ACCUMULATED PROGRAMMING
COST AMORTIZATION COSTS
-------------- ------------ ------------
<S> <C> <C> <C>
Children's programming............ $ 860,582,000 $723,751,000 $136,831,000
Movies and mini-series/Family pro-
gramming......................... 135,685,000 99,162,000 36,523,000
Projects in production............ 58,167,000 -- 58,167,000
Development....................... 4,054,000 -- 4,054,000
-------------- ------------ ------------
$1,058,488,000 $822,913,000 $235,575,000
============== ============ ============
<CAPTION>
DECEMBER 31, 1997 (UNAUDITED)
----------------------------------------
NET
ACCUMULATED PROGRAMMING
COST AMORTIZATION COSTS
-------------- ------------ ------------
<S> <C> <C> <C>
Children's programming............ $ 953,177,000 $830,237,000 $122,940,000
Movies and mini-series/Family
programming...................... 323,903,000 151,102,000 172,801,000
Projects in production............ 53,255,000 -- 53,255,000
Development....................... 5,352,000 -- 5,352,000
-------------- ------------ ------------
$1,335,687,000 $981,339,000 $354,348,000
============== ============ ============
</TABLE>
Based on the Company's estimate of future revenues, approximately 73% of
unamortized released programming costs at June 30, 1997 will be amortized
during the three years ending June 30, 2000. Interest amounting to $1,146,000
and $368,000 was capitalized to programming costs for the year ended June 30,
1997 and the six months ended December 31, 1997, respectively.
4. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Studio equipment.................................... $ 8,338,000 $10,997,000
Office furniture and fixtures....................... 3,257,000 3,417,000
Leasehold improvements.............................. 2,455,000 2,957,000
Other............................................... 64,000 179,000
----------- -----------
14,114,000 17,550,000
Less accumulated depreciation....................... 5,403,000 8,629,000
----------- -----------
$ 8,711,000 $ 8,921,000
=========== ===========
</TABLE>
F-20
<PAGE>
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.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND TO THE SIX MONTH PERIODS
ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
5. DEBT
Debt is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997 1997
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
DeNationale Investeringsbank N.V.;
secured line of credit due April 18,
1999; interest at three month LIBOR
(5.78% at June 30, 1997; 5.94% at
December 31, 1997) plus 0.4% paid
quarterly; maximum borrowings of
$8,000,000.......................... $ 6,862,000 $ 7,093,000 $ 7,332,000
Secured lines of credit with varying
due dates between December 31, 1997
and April 13, 1998; maximum
borrowing availability varying
between FF 3,500,000 ($607,000 at
June 30, 1997) and FF 16,462,000
($2,855,000 at June 30, 1997);
varying interest rates (between
3.98% and 8.60% at June 30, 1997;
between 4.29% and 8.60% at December
31, 1997) paid quarterly............ 3,554,000 3,879,000 3,773,000
Secured promissory notes with varying
due dates between April 16, 1997 and
August 5, 1999; original principal
amounts paid quarterly or at
maturity; notes are non-interest
bearing............................. 6,484,000 1,280,000 949,000
Promissory note due February 1, 2002;
principal amounts paid annually
starting February 1999; interest at
6%.................................. -- -- 6,351,000
Norwest Equipment Finance, Inc.;
secured promissory note due February
9, 2000 and principal paid annually;
original principal of $3,912,000;
interest at 7.5% per annum and paid
annually............................ 3,016,000 2,340,000 2,340,000
Imperial Bank; secured revolving line
of credit; interest at prime rate
(8.5% at June 30, 1997 and December
31, 1997) plus .5% or one month
LIBOR (5.69% at June 30, 1997) plus
2% paid monthly; maximum borrowings
of $50,000,000 (paid in full -
August 1997)........................ -- 43,000,000 --
Citicorp USA; secured revolving line
of credit; interest at prime rate
(8.5% at December 31, 1997) plus
1.25% or six month LIBOR (5.91% at
December 31, 1997) plus 2.25%;
maximum borrowings of $355,000,000.. -- -- 265,000,000
Citicorp USA; secured term loan
facility; interest at prime rate
(8.5% at December 31, 1997) plus
1.25% or six month LIBOR (5.91% at
December 31, 1997) plus 2.25%;
maximum borrowings of $355,000,000.. -- -- 355,000,000
----------- ----------- ------------
$19,916,000 $57,592,000 $640,745,000
=========== =========== ============
</TABLE>
F-21
<PAGE>
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.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND TO THE SIX MONTH PERIODS
ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
Payments of principal on promissory notes in future periods are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30
-------------------
<S> <C>
1998........................................................... $ 1,924,000
1999........................................................... 892,000
2000........................................................... 804,000
2001........................................................... --
-----------
$ 3,620,000
===========
</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 (8.5% at June 30, 1997) plus .5% or .25% depending on Saban's and SINV's
tangible net worth or three month or six month LIBOR (5.78% and 5.91%,
respectively, at June 30, 1997) plus 2.25% or 2% (2% at June 30, 1997)
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 and SINV's film
libraries. 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 June 30, 1997, the Company and SINV were in compliance or had
obtained waivers for these covenants. In August 1997, the Credit Facilities
were paid in full and terminated.
6. 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:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Deferred tax liabilities:
Accounts receivable........................... $ 581,000 $ 1,250,000
State taxes................................... 209,000 --
------------ ------------
Total deferred tax liabilities.................. 790,000 1,250,000
Deferred tax assets:
State taxes................................... -- 483,000
Deferred revenue.............................. 18,813,000 5,978,000
Book over tax amortization.................... 665,000 17,696,000
Accrued expenses and reserves................. 6,095,000 7,625,000
Other......................................... 1,450,000 807,000
------------ ------------
Total deferred tax assets....................... 27,023,000 32,589,000
Valuation allowance for deferred tax assets..... -- (14,938,000)
------------ ------------
Deferred tax assets............................. 27,023,000 17,651,000
------------ ------------
Net deferred tax assets......................... $(26,233,000) $(16,401,000)
============ ============
</TABLE>
F-22
<PAGE>
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.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND TO THE SIX MONTH PERIODS
ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
For financial reporting purposes, income before income taxes includes the
following components:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Pretax income:
United States....................................... $31,149,000 $31,605,000
Foreign............................................. 16,725,000 23,402,000
----------- -----------
$49,874,000 $55,007,000
=========== ===========
</TABLE>
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Current:
Federal.......................................... $14,316,000 $ 3,430,000
State............................................ 3,964,000 (508,000)
Foreign.......................................... 586,000 1,881,000
----------- -----------
18,866,000 4,803,000
Deferred:
Federal.......................................... (431,000) 6,970,000
State............................................ (161,000) 2,794,000
Foreign.......................................... -- --
----------- -----------
(592,000) 9,764,000
----------- -----------
$18,274,000 $14,567,000
=========== ===========
</TABLE>
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Tax at U.S. statutory rates..................................... 35% 35%
State taxes, net of federal benefit............................. 5 3
Foreign subsidiary's income not subject to state or federal
tax............................................................ (13) (15)
Foreign taxes................................................... 1 3
Other........................................................... 1 --
Non-deductible investment advisory fees......................... 8 --
--- ---
37% 26%
=== ===
</TABLE>
A liability attributable to the tax provision of FCN Holding was deemed to
be contributed to capital by a related party.
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $79,700,000 at June 30, 1997. 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-23
<PAGE>
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.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND TO THE SIX MONTH PERIODS
ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES
The Company 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 leases provide for early termination on
February 28, 1999 or February 28, 2002, upon six months advance written
notice. The London, England lease provides for early termination upon six
months advance written notice.
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 has a two-year lease for production facilities in
Valencia, California expiring in January 1998 and subject to a one-year
extension.
In August 1997, the Company entered into a 10 year lease for office space in
London, England. The lease provides for early termination at the end of the
fifth year upon nine months advance written notice.
Noncancelable future minimum payments for the remainder of the initial,
noncancelable lease periods are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30
-------------------
<S> <C>
1998.......................................................... $ 4,546,000
1999.......................................................... 5,391,000
2000.......................................................... 6,442,000
2001.......................................................... 6,652,000
2002.......................................................... 7,618,000
Thereafter.................................................... 23,532,000
-----------
$54,181,000
===========
</TABLE>
Rent expense for the eight months ended June 30, 1996 and for the year ended
June 30, 1997, net of amounts capitalized, was approximately $1,006,000 and
$2,573,000, respectively.
The Fox Kids Network occupies approximately 6,134 square feet in a facility
subleased from FOX Television Stations, Inc. (FOX Television) on a month to
month arrangement. The Fox Kids Network currently pays to FOX Television an
annual rate of $25.17 per square foot for use of this space. As of April 1,
1997, the other Fox Kids Network employees and certain other of the Company's
employees relocated to a new facility in Los Angeles which FOX Television
recently acquired from New World. The Fox Kids Network leases 36,450 square
feet. No rent has been paid yet for this lease and the rate has not been
negotiated.
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.
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. Additionally,
one key member of management has entered into a five-year, non-exclusive
consulting agreement pursuant to which, among other things, the Company agreed
that if the employment agreement is not extended beyond the current five-year
term, the Company would, on the terms set forth therein, be obligated to
F-24
<PAGE>
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.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND TO THE SIX MONTH PERIODS
ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
pay this individual over a five-year period an annual consulting fee at a rate
not exceeding $250,000 per year. Future minimum payments under these
agreements approximate $21,949,000 of which $10,795,000 is due in 1998,
$4,800,000 is due in 1999, $2,671,000 is due in 2000, $1,559,000 is due in
2001, and $1,250,000 is due in 2002 and $875,000 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, 29.388 of which
were exercisable at June 30, 1997. These options vest ratably over five years
and are exercisable at $122,496 per share, which approximates the fair value
at the time of grant. Effective January 1996, Saban issued to one key employee
options to purchase 16.327 shares of common stock, 6.531 of which were
exercisable at June 30, 1997. These options vest ratably over five years and
are exercisable at $612,500 per share, which approximates the fair market
value at the time of grant. No options have been exercised at June 30, 1997.
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 for the eight months ended June 30, 1996 and the year
ended June 30, 1997 is $3,800,000 and $3,760,000, respectively, and in accrued
liabilities at June 30, 1996 and June 30, 1997 is $17,200,000 and $20,960,000,
respectively, related to compensation recorded in connection with these
options.
In connection with the Reorganization as described in Note 1, all options
became options to purchase 646,548 shares of the Class A Common Stock at
exercise prices of $12.37 and $61.87 and will have a term of 10 years from the
date of grant, unless terminated earlier as provided in the agreement granting
the options.
As of June 30, 1997, 65.308 shares (646,548 shares of Class A Common Stock)
of Saban common stock are reserved for future issuance related to options.
Future estimated program commitments are approximately $32,611,000.
FCN Holding issued to an investment banker 16.16 shares of common stock of
FCN Holding (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. FCN Holding
has reserved 16.16 shares (160,000 shares of Class A Common Stock) for future
issuances.
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
limitations, 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 eight months ended June 30, 1996 and the year ended June 30,
1997 was approximately $43,000 and $101,000, respectively.
F-25
<PAGE>
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.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND TO THE SIX MONTH PERIODS
ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
9. ACQUISITIONS
On April 6, 1996, the Company acquired the stock of Creativite &
Developpement SA (C&D), a leading Paris-based producer of family
entertainment, for $2,869,000, $1,721,000 paid upon closing and $1,148,000
payable approximately one year later subject to certain specified conditions
and is secured by letters of credit. The acquisition was accounted for as a
purchase and the entire purchase price was allocated principally to
international distribution rights to children's programming. The results of
operations of C&D since the purchase date of April 16, 1996, have been
included with the Company's results of operations for the eight months ended
June 30, 1997 and for the year ended June 30, 1997. Unaudited pro forma
combined statements of operations for the years ended July 2, 1995 and June
30, 1996, which would combine the results of operations of the Company and
C&D, are not presented herein as such information is not material to the
combined results of operations.
In December 1996, the Company purchased from Vesical Limited (Vesical) its
interest and rights to certain television programming and related accounts
receivable balances for $12,000,000, $7,200,000 paid upon closing (April 18,
1996) and $4,800,000 paid in April 1997. The Company 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.
In March 1997, the Company acquired 90% of the shares in TV10 from Arcade
Media Group B.V. and Wegener N.V. TV10 operates a channel in Holland that is
distributed via cable. The Company intends to sell 50% of its interest in TV10
to a third party. Since the Company's control of TV10 is only temporary, the
Company has accounted for its investment under the equity method of accounting
and has recorded its share of TV10 operations since the acquisition date.
During the year ended June 30, 1997, the Company advanced TV10 approximately
$830,000 to fund operations.
10. 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%) and $70,810,000 (23%) for the
eight months ended June 30, 1996 and for the year ended June 30, 1997,
respectively, from one significant property (Power Rangers).
F-26
<PAGE>
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.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND TO THE SIX MONTH PERIODS
ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
Geographical information concerning the Company's operations is as follows:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Revenues:
Domestic....................................... $129,645,000 $199,575,000
International, principally Europe(2)........... 61,976,000 108,245,000
------------ ------------
191,621,000 307,820,000
Operating profit(1)
Domestic....................................... 67,970,000 84,295,000
International, principally Europe(2)........... 24,714,000 43,144,000
------------ ------------
92,684,000 127,439,000
Selling, general and administrative expense...... 23,072,000 62,466,000
Fox Kids Network affiliate participants.......... 8,853,000 6,194,000
Equity in loss of unconsolidated affiliate
(Europe)........................................ -- 1,546,000
Investment advisory fee.......................... 10,000,000 --
Interest expense................................. 885,000 2,226,000
------------ ------------
Income before provision for income taxes......... $ 49,874,000 $ 55,007,000
============ ============
Identifiable assets:
Domestic....................................... $197,315,000 $164,481,000
International, principally Europe(2)........... 138,955,000 247,920,000
------------ ------------
$336,270,000 $412,401,000
============ ============
</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.
11. STOCK BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25), and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and 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
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 fair value of the options granted in January 1996 is $2,623,000 and the
remaining contractual life of these options is 8.5 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
F-27
<PAGE>
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.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND TO THE SIX MONTH PERIODS
ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
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 determined as if the Company had accounted for its
employee stock options under the fair value method would be $31,338,000 and
$41,389,000 for the eight months ended June 30, 1996 and the year ended June
30, 1997, respectively.
12. SUBSEQUENT EVENTS
Description of Bank Facility
Existing Credit Facility. Fox Kids Worldwide Inc., FCN Holding, Saban and
IFE currently are borrowers (the co-borrowers) under the Existing Credit
Facility with a group of banks led by Citicorp in the amount of $1.25 billion.
The Existing Credit Facility comprises a $602 million seven-year secured
reducing revolving credit facility, a $298 million seven-year secured reducing
revolving credit facility and a $350 million nine year secured term loan
facility. The proceeds of the loans under the Existing Credit Facility were
used to finance, in part, the IFE Acquisition and to repay certain obligations
of subsidiaries of the Company and will be used, in part, for working capital
purposes.
Borrowings under the Existing Credit Facility are unconditionally guaranteed
by each Co-borrower and each subsidiary that is wholly-owned, directly or
indirectly, by any of the Co-borrowers. In addition, borrowings under the
Existing Credit Facility and the guarantees are secured by substantially all
of the assets of the Co-borrowers and their subsidiaries, who guaranteed the
obligations.
Revolving credit commitments will reduce on a quarterly basis commencing the
quarter ending December 28, 2000, and will continue through the quarter ending
September 29, 2004. Under the Existing Credit Facility, subject to certain
conditions, the Co-borrowers will be required to make certain mandatory
prepayments.
The borrowings under the Existing Credit Facility will 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 connection with the Existing Credit Facility, the Company will pay a
commitment fee on the unused and available amounts under the Existing Credit
Facility.
The Existing 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 Existing 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 Existing Credit Facility
also contains representations, warranties, covenants, conditions and events of
default customary for senior credit facilities of similar size and nature.
Amended Credit Facility. Upon consummation from an offering that the Company
plans to consummate in the latter part of calendar 1997, the Existing Credit
Facility will be amended (as amended, the "Amended Credit Facility") to
consist of a $355 million seven-year term loan and a $355 million seven-year
reducing revolving credit facility. Fox Kids Worldwide, Inc. will not be a
borrower under the Amended Credit Facility.
F-28
<PAGE>
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.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND TO THE SIX MONTH PERIODS
ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
Instead, Fox Kids Worldwide, Inc. will create a wholly-owned subsidiary
organized as a limited liability company ("FK Holdings"), which will hold the
equity interests of FCN Holding, Saban and IFE (which will remain borrowers)
and which will guarantee the Amended Credit Facility.
The collateral for the Amended Credit Facility will be 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. Certain of the baskets and exceptions to the negative
covenants in the Existing Credit Facility will be broadened in the Amended
Credit Facility to allow more flexibility. Additionally, certain financial
covenants will be adjusted to reflect the new structure.
Equity Ownership
After the Reorganization as described above and the IFE acquisition as
described below, the equity ownership of the Company is as follows: Haim Saban
and the former Saban Stockholders collectively own 7,920,000 shares (50%) of
the Class B Common Stock, par value $.001 per share ("Class B Common Stock"),
and an indirect wholly-owned subsidiary of Fox Broadcasting Company (itself a
subsidiary of News Corp.) owns 7,920,000 shares (50%) of the Class B Common
Stock. Allen & Company Incorporated owns 160,000 shares (100%) of the Class A
Common Stock, par value $.001 (the "Class A Common Stock"). Liberty IFE owns
345,000 shares (100%) of Series A Preferred Stock.
The Common Stock
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 at such vote. The Company's Certificate of
Incorporation does not provide 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 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.
F-29
<PAGE>
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.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND TO THE SIX MONTH PERIODS
ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
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
shares of Class A Common Stock.
The Series A Preferred Stock
The holders of the Series A 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., News Publishing
Australia Limited ("NPAL"), a wholly-owned subsidiary of News Corp., 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 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 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 Preferred Stock
under the Corrected Restated Certificate of Incorporation: (i) the failure of
the Company to mandatorily redeem Series A 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 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 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 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
Preferred Stock remain outstanding. The Series A Preferred Stock does not have
voting rights, except as required by law, nor will stockholders of Series A
Preferred Stock have preemptive rights over any stock or securities that may
be issued by the Company.
The Series A Preferred Stock will be redeemed in 2027 at a price equal to
the liquidation price as of the date of such redemption, payable in cash. In
years 2017 and 2022, holders of the Series A Preferred Stock have a thirty day
period commencing August 2 of such years in which they can require the Company
to redeem the
F-30
<PAGE>
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.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND TO THE SIX MONTH PERIODS
ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
Series A Preferred Stock at a price equal to the liquidation price, payable in
cash. At any time after August 1, 2007, the Company may, at its option,
repurchase all shares of Series A Preferred Stock, again at a price equal to
the liquidation price, payable in cash. Under such redemption requirements,
any failure by the Company to redeem the Series A Preferred Stock will
obligate News Corp. and NPAL to perform under the Funding Agreement.
13. EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITOR'S
REPORT
The acquisition of IFE was accounted for as a purchase by the Company of
IFE. Based upon a preliminary review by management, the aggregate purchase
price of IFE in excess of the fair value of the identifiable assets of IFE at
the date of acquisition was approximately $1.7 billion and is being amortized
over 40 years. These intangible assets are reviewed periodically to determine
if the facts and circumstances suggest that it may be impaired. If this review
indicates that these intangible assets will not be recoverable, as determined
based upon discounted cash flows of the acquired business over the remaining
amortization period, then the carrying value of the related intangible assets
will be reduced by the estimated shortfalls of cash flows. 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 six months ended December 31,
1997.
Certain operations and assets of IFE are intended to be sold by the Company.
Accordingly, such assets have been reflected as assets held for sale in the
December 31, 1997 balance sheet.
The following unaudited pro forma information for the six months ended
December 31, 1996 and 1997 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 occurred had the
acquisition occurred at the beginning of each period presented.
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Revenues.................................. 327,057,000 $357,456,000
Net loss.................................. (10,408,000) (18,832,000)
Net loss per common share--basic and
diluted.................................. (1.63) (2.16)
</TABLE>
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.
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, that 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 Discount Note will
on such interest payment date be reduced to the accreted value of such Senior
Discount Note
F-31
<PAGE>
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.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND TO THE SIX MONTH PERIODS
ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
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-32
<PAGE>
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.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND TO THE SIX MONTH PERIODS
ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
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.
In February 1998, the Company reached an agreement in principle with the
Affiliates' Board of Governors (the "Affiliate Board") for the Fox Kids
Network to modify the financial arrangements between the Fox Kids Network and
its affiliates. Commencing July 1, 1998, the affiliated stations will be paid
approximately $5.6 million per year for five years in exchange for an
increased allocation of advertising inventory for approximately three and a
half years. In addition, commencing July 1, 1998, the non owned and operated
affiliated stations will be paid approximately $9.4 million per year for five
years in exchange for, (i) guaranteed clearance of Fox Kids programming in its
current time period for ten years and (ii) relinquishment of any participation
in the current or future profits of Fox Kids Network. This agreement to
subject to approval by the individual affiliated stations. The Affiliate Board
has recommended that each of the Fox Kids Network Affiliates accept the
Company's proposal. The Fox Kids Network Affiliates are currently considering
the proposal.
F-33
<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-34
<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-35
<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-36
<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-37
<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-38
<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-39
<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-40
<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-41
<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-42
<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-43
<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-44
<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-45
<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-46
<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-47
<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-48
<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-49
<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-50
<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-51
<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-52
<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-53
<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-54
<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-55
<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-56
<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-57
<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-58
<PAGE>
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, 1996 JUNE 30, 1997
----------------- -------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.................... $ 4,997,000 $ 4,275,000
Investment in marketable securities.......... 9,053,000 5,554,000
Accounts receivable, net of allowances of
$4,662,000 and $4,579,000................... 121,359,000 127,465,000
Film rights, current portion................. 97,441,000 92,037,000
Prepaid expenses and other................... 7,005,000 13,692,000
------------ ------------
Total current assets....................... 239,855,000 243,023,000
Property and equipment, net of accumulated
depreciation and amortization of $29,860,000
and $34,398,000............................... 62,877,000 61,139,000
Film rights.................................... 144,680,000 121,660,000
Long-term accounts receivable, net of allow-
ances of $126,000 and $81,000................. 17,530,000 13,142,000
Investment in equity securities--related par-
ty............................................ 35,458,000 65,160,000
Other investments, net of deferred gain of
$2,616,000.................................... 14,889,000 14,729,000
Goodwill, net of accumulated amortization of
$8,830,000 and $9,970,000..................... 48,517,000 47,377,000
Deferred tax benefit........................... 1,076,000 1,076,000
Other assets................................... 3,801,000 4,076,000
------------ ------------
$568,683,000 $571,382,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable............................. $ 12,874,000 $ 8,980,000
Accrued liabilities.......................... 11,756,000 16,022,000
Accrued participations and residuals......... 15,613,000 12,303,000
Current portion of film rights payable....... 44,050,000 48,117,000
Current maturities of debt................... 1,205,000 2,110,000
Income taxes payable......................... 9,214,000 1,675,000
Current portion of deferred income taxes..... 6,544,000 8,582,000
Deferred income.............................. 7,927,000 9,443,000
------------ ------------
Total current liabilities.................. 109,183,000 107,232,000
Film rights payable............................ 50,643,000 34,794,000
Long-term debt................................. 171,251,000 155,739,000
Accrued interest--related party................ 273,000 246,000
Convertible Notes--related party............... 23,000,000 23,000,000
Other liabilities, including participations and
residuals..................................... 11,079,000 10,943,000
Deferred income taxes.......................... -- 12,326,000
Commitments and contingencies (Note E)
Minority interests............................. 2,062,000 1,254,000
Stockholders' equity
Class A Common Stock, $.01 par value,
convertible, 10,000,000 shares authorized,
5,000,000 shares issued and outstanding..... 143,000 143,000
Class B Common Stock, $.01 par value,
100,000,000 shares authorized, 32,786,538
and 32,781,545 shares issued and
outstanding................................. 101,456,000 101,368,000
Class C Common Stock, $.01 par value,
convertible, 20,000,000 shares authorized,
7,088,732 shares issued and outstanding..... 50,717,000 50,717,000
Unearned compensation--Stock Plan............ (562,000) (288,000)
Unrealized gain on marketable securities..... 351,000 17,376,000
Retained earnings............................ 49,087,000 56,532,000
------------ ------------
Total stockholders' equity................. 201,192,000 225,848,000
------------ ------------
$568,683,000 $571,382,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-59
<PAGE>
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
Operating revenues................................ $149,965,000 $196,397,000
------------ ------------
Operating expenses
Production and programming...................... 73,097,000 113,139,000
Selling and marketing........................... 31,589,000 33,805,000
New business development........................ 1,091,000 1,466,000
General and administrative...................... 14,806,000 15,737,000
Amortization of goodwill........................ 1,214,000 1,140,000
------------ ------------
Total operating expenses...................... 121,797,000 165,287,000
------------ ------------
Operating income.............................. 28,168,000 31,110,000
------------ ------------
Other income (expense)
Investment income............................... 2,246,000 874,000
Interest expense--related parties............... (934,000) (660,000)
Interest expense--other......................... (5,599,000) (5,767,000)
Minority interests in losses.................... 1,701,000 808,000
Gain on disposition of assets--related party.... 13,685,000 --
Share of losses of affiliates................... (192,000) (1,582,000)
Other expense, net.............................. (5,059,000) (11,409,000)
------------ ------------
Total other income (expense).................. 5,848,000 (17,736,000)
------------ ------------
Income before income taxes.................... 34,016,000 13,374,000
Provision for income taxes........................ (14,853,000) (5,929,000)
------------ ------------
Net income.................................... $ 19,163,000 $ 7,445,000
============ ============
Primary and fully diluted earnings per common
share............................................ $ 0.41 $ 0.16
============ ============
Primary and fully diluted average common and com-
mon equivalent shares............................ 47,990,954 48,457,984
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-60
<PAGE>
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net income....................................... $ 19,163,000 $ 7,445,000
------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities
Amortization of film rights.................... 55,526,000 99,420,000
Depreciation and amortization of property and
equipment, goodwill, and other assets......... 5,629,000 6,110,000
Allowances against investments................. 4,750,000 9,700,000
Share of losses of affiliates.................. 192,000 1,582,000
Minority interests in losses................... (1,701,000) (808,000)
Gain on sale of marketable securities.......... (1,630,000) (292,000)
Gain on disposition of assets--related party... (13,685,000) --
Compensation--Stock Plan....................... 345,000 260,000
Deferred income tax expense.................... 6,134,000 2,964,000
Changes in assets and liabilities, net of
effect of 1996 disposition.................... (10,868,000) (8,764,000)
------------ ------------
Total adjustments............................ 44,692,000 110,172,000
------------ ------------
Net cash provided by operating activities....... 63,855,000 117,617,000
------------ ------------
Cash flows from investing activities
Acquisitions of original programming............. (41,051,000) (64,301,000)
Other investments, including advances............ (12,102,000) (11,110,000)
Sales of marketable securities................... 4,865,000 3,584,000
Additions to property and equipment.............. (2,846,000) (3,266,000)
------------ ------------
Net cash used in investing activities........... (51,134,000) (75,093,000)
------------ ------------
Cash flows from financing activities
Payments on film rights.......................... (25,709,000) (28,565,000)
Proceeds from debt issuances..................... 10,650,000 17,000,000
Principal payments on debt....................... (22,088,000) (31,607,000)
Cash provided by minority partners............... 3,000,000 --
Repurchases of Common Stock...................... (2,815,000) (74,000)
------------ ------------
Net cash used in financing activities........... (36,962,000) (43,246,000)
------------ ------------
Effect of foreign currency rate changes............ (253,000) --
------------ ------------
Decrease in cash and cash equivalents.............. (24,494,000) (722,000)
Cash and cash equivalents at beginning of period... 32,865,000 4,997,000
------------ ------------
Cash and cash equivalents at end of period......... $ 8,371,000 $ 4,275,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-61
<PAGE>
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
NOTE A--PRESENTATION OF INTERIM FINANCIAL STATEMENTS
In management's opinion, the accompanying unaudited consolidated financial
statements of International Family Entertainment, Inc. (together with its
consolidated subsidiaries "IFE" or the "Company") reflect all adjustments,
consisting of normal recurring accruals, necessary for a fair presentation of
the consolidated results of operations for the interim periods presented. The
consolidated results of operations for such interim periods are not
necessarily indicative of the results that may be expected for future interim
periods or for the year ended December 31, 1997. These interim consolidated
financial statements and the notes thereto should be read in conjunction with
the audited consolidated financial statements and the notes thereto for the
year ended December 31, 1996. Certain amounts have been reclassified for
comparability with the 1997 financial statement presentation.
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these interim consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
As discussed in Note G, the Company has entered into the Merger Agreement
with FKWW. The effects of the Merger, when consummated, on management's
estimates and assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities cannot be estimated
with any degree of certainty at this time, although such effects could be
substantial.
NOTE B--EARNINGS PER SHARE
The 6% Convertible Secured Notes due 2004 (the "Convertible Notes") are
considered to be common stock equivalents and, accordingly, the computations
of primary and fully diluted earnings per share assume conversion of the
Convertible Notes if the effect of such conversion is dilutive. Stock options
are also included in the computations of primary and fully diluted earnings
per share if their effect is dilutive.
For the six months ended June 30, 1996 and 1997, primary and fully diluted
earnings per common share were computed by increasing net income by the
interest on the Convertible Notes, net of related tax effect, and dividing the
result by the average number of common and common equivalent shares
outstanding during such periods.
NOTE C--MINORITY INTERESTS
THE FAMILY CHANNEL (UK)
Prior to April 22, 1996, minority interests were primarily attributable to a
minority partner's 39% interest in The Family Channel (UK) which was operated
as a joint venture. IFE and Flextech plc, the holder of the minority 39%
interest, funded the operations of The Family Channel (UK) through capital
investments and loans. On April 22, 1996, the Company consummated the sale of
its 61% interest in The Family Channel (UK) to Flextech, as described in Note
F.
The minority partner's share of the net loss resulting from the operations
of The Family Channel (UK), through the date of sale, amounted to $1,419,000
for the six month period ended June 30, 1996.
F-62
<PAGE>
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FIT TV
On April 30, 1996, the Company, an affiliate of Liberty Media Corporation
("Liberty Media"), and an affiliate of Reebok International Limited ("Reebok")
entered into a definitive partnership agreement forming a partnership (the
"FiT TV Partnership"), effective January 1, 1996, to own and operate the FiT
TV cable network. FiT TV had previously been owned and operated by Cable
Health TV, Inc. ("CHTV"), a 90%-owned subsidiary of IFE. Prior to August 1,
1997, another affiliate of Liberty Media was the holder of the Convertible
Notes and all of the Company's outstanding Class C Common Stock. Liberty Media
is an affiliate of Tele-Communications, Inc. ("TCI"), one of the largest cable
television system operators in the United States and, as such, a major
provider of carriage for FiT TV.
The minority partners' combined 20% share of the net loss resulting from the
operations of the FiT TV Partnership, since its formation on April 30, 1996,
is reflected in the accompanying Consolidated Statements of Operations. The
minority partners' combined 20% share of the net loss of FiT TV amounted to
$280,000 and $808,000 for the six month periods ended June 30, 1996 and 1997,
respectively.
NOTE D--SUPPLEMENTAL CASH FLOW INFORMATION
Total interest costs paid were approximately $4,666,000 and $6,600,000
during the six months ended June 30, 1996 and 1997, respectively. Income taxes
paid during the six months ended June 30, 1996 and 1997 were approximately
$2,915,000 and $11,107,000, respectively.
Non-cash investing and financing activities included the acquisition of film
rights under license agreements, which aggregated approximately $26,937,000,
and $14,994,000 for the six months ended June 30, 1996 and 1997, respectively.
As described in Note F, on April 22, 1996, the Company consummated the sale
of its television production studio in Maidstone, England and its 61% interest
in The Family Channel (UK) to a related party. This sale was primarily a non-
cash transaction in which the Company received equity securities. Cash
received in the transaction amounting to approximately $4,600,000 was offset
by the cash balances of the businesses sold (which were transferred to the
buyer) and cash outlays for expenses of the sale.
NOTE E--COMMITMENTS AND CONTINGENCIES
The Company has commitments under program contracts for film rights related
to the production, exhibition, or distribution of programming, which was not
available as of June 30, 1997. The commitments under these program contracts
as well as commitments under program development agreements and employment
agreements totaled approximately $209,000,000 as of June 30, 1997. The unpaid
balance under program contracts for film rights (as well as the aggregate
future estimated payments of accrued participations and residuals) related to
the production, exhibition, or distribution of programming that was available
as of June 30, 1997 is reflected as a liability in the accompanying
consolidated financial statements.
The Company has guaranteed a $12,000,000 bank credit facility for a certain
sports marketing enterprise in which the Company holds convertible notes.
These notes will be convertible, beginning in 1998, at the option of the
Company, into a majority interest in such enterprise (which purchased the Ice
Capades from the Company in December 1995). The Company has a valuation
allowance in connection with its investment in the aforementioned convertible
notes. Increases in this valuation allowance, which amounted to $2,000,000 and
$9,700,000 for the six month periods ended June 30, 1996 and 1997,
respectively, are reflected in the determination of other expense in the
accompanying Consolidated Statements of Operations.
F-63
<PAGE>
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company leases office facilities and certain other property and
equipment under non-cancelable operating leases.
In addition, the Company has contingent liabilities related to legal
proceedings and other matters arising from the normal course of operations.
Management does not expect that amounts, if any, which may be required to
satisfy such contingencies will be material in relation to the accompanying
consolidated financial statements.
NOTE F--GAIN ON DISPOSITION OF ASSETS--RELATED PARTY
On April 22, 1996, the Company consummated the sale of its television
production studio in Maidstone, England and its 61% interest in The Family
Channel (UK) to Flextech pursuant to agreements dated as of March 20, 1996.
Flextech previously owned a 39% interest in The Family Channel (UK).
Flextech's majority owner is Tele-Communications International, Inc., a
majority-owned subsidiary of TCI. Prior to August 1, 1997, another affiliate
of TCI was the holder of the Convertible Notes and all of the Company's
outstanding Class C Common Stock.
As consideration for this transaction, the Company received pound sterling
3,000,000 (approximately $4,600,000) in cash and 5,792,008 shares of
Flextech's convertible, redeemable, non-voting common stock. This common stock
was convertible, under certain circumstances, into Flextech's voting ordinary
shares which are listed on the London Stock Exchange. The underlying market
value of the voting ordinary shares as of the date of the agreement was
$46,100,000. The shares were recorded, for financial statement purposes, at
approximately pound sterling 23,000,000 ($35,458,000 based on the exchange
rate on the date of closing), which amount reflects a discount determined by
an independent valuation.
In April 1997, the aforementioned 5,792,008 shares of Flextech's
convertible, redeemable, non-voting common stock were converted on a share-
for-share basis into Flextech's voting ordinary common stock, which is listed
on the London Stock Exchange. As a result of this conversion, the Company's
investment in Flextech common stock is classified as "available-for-sale"
securities and, accordingly, the carrying value of such investment has been
adjusted to fair value (although the unrealized gain is excluded from the
determination of net income). The unrealized gain is reported, net of related
tax effect, as a separate component of stockholders' equity.
NOTE G--PROPOSED MERGER
On June 11, 1997, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Fox Kids Worldwide, Inc., a Delaware corporation
("FKWW"), and Fox Kids Merger Corporation, a Delaware corporation and a
wholly-owned subsidiary of FKWW ("FKW Sub"), providing for the merger (the
"Merger") of FKW Sub into the Company, with the Company as the surviving
corporation, pursuant to which each share of Common Stock of the Company
issued and outstanding immediately prior to the effective time of the Merger
(other than shares owned by FKWW, FKW Sub or the Company, or any of their
respective subsidiaries, or by stockholders who have validly perfected their
appraisal rights under the Delaware General Corporation Law) will be converted
into the right to receive a cash payment equal to $35 per share (the "Merger
Consideration"), without interest. Stockholders of the Company who
collectively held a majority of the outstanding voting power of the Company's
Common Stock approved the Merger by written consent delivered to the Company
on June 11, 1997 following the execution of the Merger Agreement.
Concurrently with the execution of the Merger Agreement, (i) certain
stockholders of the Company entered into stock purchase agreements
(collectively, the "Stock Purchase Agreements") with FKWW providing for the
sale to FKWW of an aggregate of 15,587,427 shares of Class B Common Stock,
including 5,000,000 shares of
F-64
<PAGE>
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Class B Common Stock issuable upon conversion of all of the Company's
outstanding Class A Common Stock and 1,250,000 shares of Class B Common Stock
issuable upon the exercise of certain stock options, for $35 per share in
cash; and (ii) Liberty IFE, Inc. ("LIFE"), a Colorado corporation and a wholly
owned subsidiary of Liberty Media, which at the time held 7,088,732 shares of
Class C Common Stock and the Convertible Notes, convertible into 2,587,500
shares of Class C Common Stock, entered into a Contribution and Exchange
Agreement (the "Contribution Agreement") with FKWW pursuant to which LIFE
agreed to contribute such shares of Class C Common Stock and the Convertible
Notes to FKWW in exchange for shares of a new series of preferred stock of
FKWW. This series of preferred stock has a liquidation preference of $35 per
share or share equivalent of Class C Common Stock, plus $6.33 million designed
to compensate LIFE for foregone interest on the Convertible Notes and for
certain tax consequences.
NOTE H--SUBSEQUENT EVENT
On August 1, 1997, the Stock Purchase Agreements and the Contribution
Agreement described in Note G were consummated. The Merger Agreement provides
that, upon the consummation of the Stock Purchase Agreements, FKWW shall be
entitled to designate, at its option upon notice to the Company, up to a
majority of the Company's Board of Directors. In this event, the Company will
either increase the size of the Board of Directors and/or obtain the
resignation of such number of its current directors as is necessary to enable
FKWW's designees to be elected.
The Merger will be consummated upon the expiration of twenty days from the
date a definitive information statement pursuant to Section 14(c) of the
Securities Exchange Act of 1934, as amended, is first sent or given to the
Company's stockholders.
F-65
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
International Family Entertainment, Inc.:
We have audited the accompanying consolidated balance sheets of
International Family Entertainment, Inc. and subsidiaries (the "Company") as
of December 31, 1995 and 1996, and the related consolidated statements of
operations, cash flows and stockholders' equity for each of the years in the
three-year period ended December 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
International Family Entertainment, Inc. and subsidiaries as of December 31,
1995 and 1996, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Norfolk, Virginia
March 17, 1997
F-66
<PAGE>
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........................ $ 32,865,000 $ 4,997,000
Investment in marketable securities.............. 8,290,000 9,053,000
Accounts receivable, net of allowances of
$5,780,000 and $4,662,000....................... 95,699,000 121,359,000
Film rights, current portion..................... 56,355,000 97,441,000
Prepaid expenses and other....................... 11,511,000 4,401,000
------------ ------------
Total current assets........................... 204,720,000 237,251,000
Property and equipment, net........................ 73,028,000 62,877,000
Film rights........................................ 105,094,000 144,680,000
Long-term accounts receivable, net of allowances of
$520,000 and $126,000............................. 24,754,000 17,530,000
Investment in equity securities--related party..... -- 35,458,000
Other investments, net of deferred gain of
$2,616,000........................................ 16,575,000 14,889,000
Goodwill, net of accumulated amortization of
$6,552,000 and $8,830,000......................... 54,795,000 48,517,000
Deferred tax benefit............................... -- 1,076,000
Other assets....................................... 2,461,000 6,405,000
------------ ------------
$481,427,000 $568,683,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable................................. $ 14,598,000 $ 12,874,000
Accrued liabilities.............................. 13,121,000 11,756,000
Accrued participations and residuals............. 11,615,000 15,613,000
Current portion of film rights payable........... 38,161,000 44,050,000
Current maturities of debt....................... 181,000 1,205,000
Income taxes payable............................. -- 9,214,000
Current portion of deferred income taxes......... 611,000 6,544,000
Deferred income.................................. 5,891,000 7,927,000
------------ ------------
Total current liabilities...................... 84,178,000 109,183,000
Film rights payable................................ 32,714,000 50,643,000
Long-term debt..................................... 153,752,000 171,251,000
Accrued interest--related party.................... 327,000 273,000
Convertible Notes--related party................... 23,000,000 23,000,000
Other liabilities, including participations and
residuals......................................... 10,347,000 11,079,000
Deferred income taxes.............................. 2,676,000 --
Commitments and contingencies (Note N)
Minority interests................................. 3,130,000 2,062,000
Stockholders' equity
Class A Common Stock, $.01 par value,
convertible, 10,000,000 shares authorized,
5,000,000 shares issued and outstanding......... 143,000 143,000
Class B Common Stock, $.01 par value, 100,000,000
shares authorized, 33,039,831 and 32,786,538
shares issued and outstanding................... 104,886,000 101,456,000
Class C Common Stock, $.01 par value,
convertible, 20,000,000 shares authorized,
7,088,732 shares issued and outstanding......... 50,717,000 50,717,000
Unearned compensation--Stock Plan................ (1,697,000) (562,000)
Cumulative foreign currency translation adjust-
ment............................................ 665,000 --
Unrealized gain (loss) on marketable securities.. (373,000) 351,000
Retained earnings................................ 16,962,000 49,087,000
------------ ------------
Total stockholders' equity..................... 171,303,000 201,192,000
------------ ------------
$481,427,000 $568,683,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-67
<PAGE>
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Operating revenues.................. $242,050,000 $294,858,000 $332,810,000
------------ ------------ ------------
Operating expenses
Production and programming........ 137,294,000 155,685,000 178,762,000
Selling and marketing............. 49,819,000 61,122,000 64,544,000
New business development.......... 4,991,000 9,908,000 2,317,000
General and administrative........ 21,967,000 27,088,000 28,745,000
Amortization of goodwill.......... 2,532,000 2,657,000 2,278,000
------------ ------------ ------------
Total operating expenses........ 216,603,000 256,460,000 276,646,000
------------ ------------ ------------
Operating income................ 25,447,000 38,398,000 56,164,000
------------ ------------ ------------
Other income (expense)
Investment income (loss).......... (2,522,000) 1,883,000 2,843,000
Interest expense--related par-
ties............................. (1,754,000) (2,134,000) (1,606,000)
Interest expense--other........... (9,280,000) (10,855,000) (10,945,000)
Minority interests in losses...... 5,277,000 4,916,000 2,359,000
Gain on disposition of assets--re-
lated party...................... -- -- 13,685,000
Other income (expense), net (Note
B)............................... 7,789,000 522,000 (5,640,000)
------------ ------------ ------------
Total other income (expense).... (490,000) (5,668,000) 696,000
------------ ------------ ------------
Income before income taxes...... 24,957,000 32,730,000 56,860,000
Provision for income taxes.......... (10,165,000) (14,066,000) (24,735,000)
------------ ------------ ------------
Net income...................... 14,792,000 18,664,000 32,125,000
Dividend requirement on Preferred
Stock.............................. (2,200,000) -- --
Distribution--exchange of Preferred
Stock.............................. -- (12,163,000) --
------------ ------------ ------------
Net income available for Common
Stock.......................... $ 12,592,000 $ 6,501,000 $ 32,125,000
============ ============ ============
Primary and fully diluted earnings
per common share................... $ 0.30 $ 0.16 $ 0.69
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-68
<PAGE>
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1994 1995 1996
------------ ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activi-
ties
Net income........................ $ 14,792,000 $ 18,664,000 $ 32,125,000
------------ ------------- -------------
Adjustments to reconcile net
income to net cash provided by
operating activities
Amortization of film rights..... 103,231,000 120,277,000 145,047,000
Depreciation and amortization of
property and equipment,
goodwill, and other assets..... 9,611,000 10,840,000 11,270,000
Write-downs of marketable secu-
rities......................... 3,706,000 -- --
Allowances against investments.. -- -- 5,250,000
Share of losses of affiliates,
net............................ -- 1,345,000 514,000
Minority interests in losses.... (5,277,000) (4,916,000) (2,359,000)
Gain on marketable securities... -- -- (1,924,000)
Gain on disposition of assets--
related party.................. -- -- (13,685,000)
Compensation--Stock Plan........ 1,127,000 1,351,000 686,000
Deferred income tax expense..... 1,206,000 11,654,000 5,477,000
Changes in assets and
liabilities, net of effect of
acquisitions and dispositions
Accounts receivable, net of
allowances................... 1,093,000 (29,048,000) (23,257,000)
Marketable securities,
prepaids, and other.......... 9,020,000 (5,837,000) (14,264,000)
Accounts payable and accrued
liabilities.................. (15,211,000) (1,304,000) 1,440,000
Income taxes payable.......... 6,202,000 (10,428,000) 8,702,000
Deferred income............... 3,451,000 (6,278,000) 1,537,000
------------ ------------- -------------
Total adjustments............... 118,159,000 87,656,000 124,434,000
------------ ------------- -------------
Net cash provided by operating
activities................... 132,951,000 106,320,000 156,559,000
------------ ------------- -------------
Cash flows from investing activi-
ties
Acquisitions of original pro-
gramming....................... (82,806,000) (57,184,000) (133,527,000)
Acquisitions of original pro-
gramming--related parties...... (457,000) (2,747,000) (2,197,000)
Cash paid for acquisition....... -- (3,060,000) --
Other investments, including ad-
vances......................... -- (6,102,000) (21,506,000)
Repayment of advances........... -- -- 17,494,000
Purchases of marketable securi-
ties........................... (12,217,000) (858,000) --
Sales of marketable securities.. 3,689,000 1,089,000 4,954,000
Additions to property and equip-
ment........................... (9,443,000) (10,182,000) (9,775,000)
Proceeds from sales of property
and equipment.................. 2,504,000 -- --
------------ ------------- -------------
Net cash used in investing ac-
tivities..................... (98,730,000) (79,044,000) (144,557,000)
------------ ------------- -------------
Cash flows from financing activi-
ties
Payments on film rights......... (42,428,000) (46,167,000) (58,142,000)
Proceeds from debt issuances.... 5,000,000 313,250,000 59,150,000
Principal payments on debt...... (31,201,000) (285,417,000) (40,703,000)
Cash provided by minority part-
ners........................... 2,774,000 4,523,000 3,000,000
Payment of Preferred Stock divi-
dends.......................... (2,200,000) (1,109,000) --
Repurchases of Common Stock..... (2,661,000) (4,357,000) (2,981,000)
Repurchases of Common Stock--re-
lated parties.................. -- (13,819,000) --
------------ ------------- -------------
Net cash used in financing ac-
tivities..................... (70,716,000) (33,096,000) (39,676,000)
------------ ------------- -------------
Effect of foreign currency rate
changes.......................... 1,094,000 (31,000) (194,000)
------------ ------------- -------------
Decrease in cash and cash equiva-
lents............................ (35,401,000) (5,851,000) (27,868,000)
Cash and cash equivalents at be-
ginning of year.................. 74,117,000 38,716,000 32,865,000
------------ ------------- -------------
Cash and cash equivalents at end
of year.......................... $ 38,716,000 $ 32,865,000 $ 4,997,000
============ ============= =============
</TABLE>
See accompanying notes to consolidated financial statements
F-69
<PAGE>
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
<TABLE>
<CAPTION>
10% CUMULATIVE UNREALIZED
CONVERTIBLE FOREIGN GAIN
CUMULATIVE CLASS A CLASS B CLASS C UNEARNED CURRENCY (LOSS) ON RETAINED
PREFERRED COMMON COMMON COMMON COMPENSATION TRANSLATION MARKETABLE EARNINGS
STOCK STOCK STOCK STOCK STOCK PLAN ADJUSTMENT SECURITIES (DEFICIT)
------------ -------- ------------ ----------- ------------ ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT
JANUARY 1,
1994........... $ 21,670,000 $150,000 $146,198,000 $ -- $(1,701,000) $ (11,000) $ -- $(13,089,000)
Conversion of
Class A Common
Stock, 500,000
shares......... -- (17,000) 17,000 -- -- -- -- --
Issuance of
Class B Common
Stock under the
Stock Plan,
140,482
shares......... -- -- 2,258,000 -- (2,257,000) -- -- --
Forfeiture of
Class B
Common Stock
under the Stock
Plan,
14,000 shares.. -- -- (148,000) -- 147,000 -- -- --
Compensation--
Stock Plan..... -- -- -- -- 1,127,000 -- -- --
Repurchase and
retirement of
Class B Common
Stock,
176,033
shares......... -- -- (2,661,000) -- -- -- -- --
Increase in
deferred tax
benefit
related to
initial basis
differences
(Note K)....... -- -- 6,000,000 -- -- -- -- --
Foreign currency
translation
adjustment..... -- -- -- -- -- 989,000 -- --
Unrealized loss
on
marketable
securities..... -- -- -- -- -- -- (156,000) --
Net income...... -- -- -- -- -- -- -- 14,792,000
Preferred Stock
dividends
paid........... -- -- -- -- -- -- -- (2,200,000)
------------ -------- ------------ ----------- ----------- --------- --------- ------------
BALANCES AT
DECEMBER 31,
1994........... 21,670,000 133,000 151,664,000 -- (2,684,000) 978,000 (156,000) (497,000)
Exchange of
Preferred Stock
for Class B
Common Stock,
4,000,000
shares......... (21,670,000) -- 21,670,000 -- -- -- -- --
Exchange of
Class B Common
Stock for Class
C Common
Stock,
5,670,986
shares (Note
H)............. -- -- (50,703,000) 50,703,000 -- -- -- --
Issuance of
Class B Common
Stock under the
Stock
Plan, 37,637
shares......... -- -- 578,000 -- (578,000) -- -- --
Forfeiture of
Class B Common
Stock under the
Stock
Plan, 15,280
shares......... -- -- (214,000) -- 214,000 -- -- --
Compensation--
Stock Plan..... -- -- -- -- 1,351,000 -- -- --
Repurchase and
retirement of
Class B Common
Stock,
1,357,456
shares......... -- -- (18,176,000) -- -- -- -- --
Five-for-four
stock split,
including
$5,000 paid for
fractional
shares (Note
I)............. -- 10,000 67,000 14,000 -- -- -- (96,000)
Foreign currency
translation
adjustments.... -- -- -- -- -- (313,000) -- --
Unrealized loss
on
marketable
securities..... -- -- -- -- -- -- (217,000) --
Net income...... -- -- -- -- -- -- -- 18,664,000
Preferred Stock
dividends
paid........... -- -- -- -- -- -- -- (1,109,000)
------------ -------- ------------ ----------- ----------- --------- --------- ------------
BALANCES AT
DECEMBER 31,
1995........... -- 143,000 104,886,000 50,717,000 (1,697,000) 665,000 (373,000) 16,962,000
Issuance of
Class B Common
Stock under the
Stock
Plan, 812
shares......... -- -- 11,000 -- (11,000) -- -- --
Forfeiture of
Class B Common
Stock under the
Stock
Plan, 31,936
shares......... -- -- (460,000) -- 460,000 -- -- --
Exercise of
options to
purchase
Class B Common
Stock under the
Stock Plan,
19,333 shares.. -- -- 266,000 -- -- -- -- --
Compensation--
Stock Plan..... -- -- -- -- 686,000 -- -- --
Repurchase and
retirement of
Class B Common
Stock,
241,502
shares......... -- -- (3,247,000) -- -- -- -- --
Foreign currency
translation
adjustment..... -- -- -- -- -- (665,000) -- --
Unrealized gain
on marketable
securities..... -- -- -- -- -- -- 724,000 --
Net income...... -- -- -- -- -- -- -- 32,125,000
------------ -------- ------------ ----------- ----------- --------- --------- ------------
BALANCES AT
DECEMBER 31,
1996........... $ -- $143,000 $101,456,000 $50,717,000 $ (562,000) $ -- $ 351,000 $ 49,087,000
============ ======== ============ =========== =========== ========= ========= ============
<CAPTION>
TOTAL
-------------
<S> <C>
BALANCES AT
JANUARY 1,
1994........... $153,217,000
Conversion of
Class A Common
Stock, 500,000
shares......... --
Issuance of
Class B Common
Stock under the
Stock Plan,
140,482
shares......... 1,000
Forfeiture of
Class B
Common Stock
under the Stock
Plan,
14,000 shares.. (1,000)
Compensation--
Stock Plan..... 1,127,000
Repurchase and
retirement of
Class B Common
Stock,
176,033
shares......... (2,661,000)
Increase in
deferred tax
benefit
related to
initial basis
differences
(Note K)....... 6,000,000
Foreign currency
translation
adjustment..... 989,000
Unrealized loss
on
marketable
securities..... (156,000)
Net income...... 14,792,000
Preferred Stock
dividends
paid........... (2,200,000)
-------------
BALANCES AT
DECEMBER 31,
1994........... 171,108,000
Exchange of
Preferred Stock
for Class B
Common Stock,
4,000,000
shares......... --
Exchange of
Class B Common
Stock for Class
C Common
Stock,
5,670,986
shares (Note
H)............. --
Issuance of
Class B Common
Stock under the
Stock
Plan, 37,637
shares......... --
Forfeiture of
Class B Common
Stock under the
Stock
Plan, 15,280
shares......... --
Compensation--
Stock Plan..... 1,351,000
Repurchase and
retirement of
Class B Common
Stock,
1,357,456
shares......... (18,176,000)
Five-for-four
stock split,
including
$5,000 paid for
fractional
shares (Note
I)............. (5,000)
Foreign currency
translation
adjustments.... (313,000)
Unrealized loss
on
marketable
securities..... (217,000)
Net income...... 18,664,000
Preferred Stock
dividends
paid........... (1,109,000)
-------------
BALANCES AT
DECEMBER 31,
1995........... 171,303,000
Issuance of
Class B Common
Stock under the
Stock
Plan, 812
shares......... --
Forfeiture of
Class B Common
Stock under the
Stock
Plan, 31,936
shares......... --
Exercise of
options to
purchase
Class B Common
Stock under the
Stock Plan,
19,333 shares.. 266,000
Compensation--
Stock Plan..... 686,000
Repurchase and
retirement of
Class B Common
Stock,
241,502
shares......... (3,247,000)
Foreign currency
translation
adjustment..... (665,000)
Unrealized gain
on marketable
securities..... 724,000
Net income...... 32,125,000
-------------
BALANCES AT
DECEMBER 31,
1996........... $201,192,000
=============
</TABLE>
See accompanying notes to consolidated financial statements
F-70
<PAGE>
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations
International Family Entertainment, Inc. (together with its consolidated
subsidiaries, "IFE" or the "Company") produces, exhibits, and distributes
entertainment and informational programming as well as related products
targeted at families worldwide. IFE's principal business is The Family
Channel, an advertiser-supported cable television network that provides
family-oriented entertainment and informational programming in the United
States.
In addition, IFE owns MTM Entertainment, Inc. ("MTM"), a producer and
worldwide distributor of television series and made-for-television movies and
the owner of a significant library of television programming; FiT TV, an
advertiser-supported health and fitness cable network which operates
principally in the United States; and Calvin Gilmore Productions, Inc., a
producer of live musical variety shows. IFE also operated The Family Channel
(UK), an advertiser-supported network in the United Kingdom, through its
disposition on April 22, 1996, and The Family Channel De Las Americas, which
provided Spanish-language, family-oriented entertainment programming, as well
as fitness programming, to Mexico, Central America, and portions of South
America, through the discontinuance of its operations in November 1996.
Additionally, in 1995, IFE operated the Ice Capades, a touring ice show.
Basis of Presentation
The accompanying consolidated financial statements for the years ended
December 31, 1994, 1995, and 1996 include the accounts of the Company and all
majority-owned subsidiaries (including joint ventures). All significant
intercompany accounts and transactions have been eliminated in consolidation.
Cash Equivalents
All highly-liquid debt instruments purchased with original maturities of
three months or less are classified as cash equivalents.
Marketable Securities
Marketable securities consist of investments in U.S. Government bonds and
notes and other marketable debt or equity securities. Debt and equity
securities that are bought and held principally for the purpose of selling
them in the near term are classified as "trading" securities and reported at
fair value, with unrealized gains and losses included in the determination of
net income. Gains and losses on transactions involving futures contracts or
other derivative securities are also included in the determination of net
income. Debt and equity securities not classified as trading securities are
classified as "available-for-sale" securities and reported at fair value, with
unrealized gains and losses excluded from the determination of net income
(unless an other-than-temporary impairment shall have occurred) and reported,
net of related tax effect, as a separate component of stockholders' equity.
The cost of securities sold is determined using the specific identification
method.
Property and Equipment
Property and equipment is stated at cost. Buildings and equipment under
capital leases are stated at the present value of minimum lease payments.
Depreciation is computed on a straight-line basis over the estimated useful
lives of the assets: buildings and building improvements--20 to 40 years;
satellite transponders--12 years; broadcasting and production equipment--3 to
5 years; and furniture and other equipment--3 to 10 years. Leasehold
improvements are amortized on a straight-line basis over the shorter of the
lease terms or estimated useful lives of the assets.
F-71
<PAGE>
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Film Rights
Film rights include exhibition and exploitation rights acquired under
license agreements for the Company's own use on its cable networks and for
relicensing to others. Also included in film rights are costs of programming,
including films-in-progress, produced for exhibition by the Company on its
cable networks or produced for others. These costs, including allocated
overhead, are capitalized as incurred. Rights acquired under license
agreements, along with the related obligations, are recorded at the face
amount of the contract at the time the programming is made available.
Film rights, other than films-in-progress (which are stated at cost), are
stated at the lower of cost, less related amortization, or net realizable
value. Exhibition rights are amortized on a straight-line basis over the
estimated number of airings. Production and exploitation costs related to
programs produced for others are amortized based on the percentage that
current year revenues bear to estimated future revenues on a program-by-
program basis. Estimates of future airings and revenues are periodically
reviewed by management and revised when warranted by changing conditions, such
as changes in expected usage of a program on the Company's cable networks or
changes in the distribution marketplace.
The current portion of film rights is based upon the estimated portion of
these assets which is expected to be amortized over the next year.
Other Investments
Other investments in which the Company's voting interest is less than 20%
are carried at cost.
Investments in affiliates in which the Company's voting interest is 20% to
50% are accounted for under the equity method. Under this method, the
investment, originally recorded at cost, is adjusted to recognize the
Company's share of the net earnings or losses of the affiliates as they occur.
The excess of the cost of the stock of those affiliates over the Company's
share of net assets at the acquisition date is amortized on a straight-line
basis over the expected period to be benefited, generally 25 years.
Goodwill
Goodwill, which represents the excess of purchase price over the fair value
of net assets acquired, is amortized on a straight-line basis over the
expected period to be benefited, generally 25 years. At each balance sheet
date, the Company evaluates the realizability of goodwill based upon
expectations of nondiscounted future operating cash flows for each subsidiary
having a material goodwill balance. The evaluation of goodwill will be
impacted if estimated future operating cash flows are not achieved. Based upon
its most recent analysis, the Company believes that no material impairment of
goodwill existed at December 31, 1996.
Foreign Currency Translation
All balance sheet accounts of foreign investments were translated at the
current exchange rate as of the end of the accounting period. The resulting
translation adjustment was recorded as a separate component of stockholders'
equity. Income statement items are translated at average currency exchange
rates.
Revenue Recognition
Advertising revenue is recognized in the period in which the advertising
commercials or programs are telecast. Subscriber fees are recognized in the
period during which the network services are provided to a cable system
operator or other distributor.
F-72
<PAGE>
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Production and distribution revenues are recognized in the period in which
programming becomes available for telecast by others. Long-term receivables
arising from distribution arrangements are recorded at their net present
values when revenue is recognized. Amounts received in advance of recognition
of revenue are recorded as deferred income. Costs of profit participations and
residual payments are accrued, based upon amounts expected to be payable, at
the time revenue is recognized.
Income Taxes
The Company utilizes the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to be applicable to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in the period that includes the
enactment date.
Stock Options
Prior to January 1, 1996, the Company accounted for stock options in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25. Accounting for Stock Issued to Employees, and related interpretations.
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.
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, which
permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS No.
123 also allows entities to continue to apply the provisions of APB Opinion
No. 25 and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future years 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.
Earnings Per Share
The Convertible Notes, as described in Note F, are considered to be common
stock equivalents and, accordingly, the computations of primary and fully
diluted earnings per share assume conversion of the Convertible Notes if the
effect of such conversion is dilutive. Stock options are also included in the
computations of primary and fully diluted earnings per share if their effect
is dilutive.
For the years ended December 31, 1994 and 1995, primary and fully diluted
earnings per common share were computed by dividing net income available for
Common Stock by the average number of common shares (41,820,072 and
40,754,635, respectively) outstanding during such years. In 1995, the impact
of the Exchange Agreement, as described in Note H, on earnings per common
share was a reduction of $0.24 per common share.
For the year ended December 31, 1996, primary and fully diluted earnings per
common share were computed by increasing net income available for Common Stock
by the interest on the Convertible Notes, net of the related tax effect, and
dividing the result by the average number of common shares (48,022,327)
outstanding during 1996.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
F-73
<PAGE>
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Reclassifications
Certain amounts have been reclassified for comparability with the 1996
financial statement presentation.
NOTE B--ACQUISITIONS AND OTHER INVESTMENTS
Body By Jake Enterprises
In July 1995, the Company acquired a 20% interest in Body By Jake
Enterprises, LLC ("BBJE"), a fitness licensing and television production
company, for $4,000,000 in cash.
China Entertainment Television Broadcast Limited
In June 1995, the Company acquired a 33 1/3% interest in an entity which
held convertible demand notes, which were convertible into an 80% equity
interest in China Entertainment Television Broadcast Limited. This entity
recorded a valuation allowance in 1995 of which the Company's share was
approximately $1,500,000, which is reflected in the determination of other
income and expense in the 1995 Consolidated Statement of Operations. In
November 1996, these convertible demand notes were sold to a third party for
approximately 77.5% of their face value.
Ice Capades
In February 1995, the Company acquired the assets of the Ice Capades for
consideration, consisting principally of assumed liabilities, amounting to
approximately $10,200,000. The liabilities assumed in the transaction included
$6,728,000 of cash advances by IFE prior to closing.
On December 31, 1995, the Company sold its interest in the Ice Capades to a
certain sports marketing enterprise in exchange for 7 1/2% convertible notes,
due in 2005, in the principal amount of $10,200,000 and the assumption of cash
advances due to the Company amounting to $4,090,000 at December 31, 1995.
These notes will be convertible, beginning in 1998, at the option of the
Company, into a majority interest in the acquiring entity. Accordingly, the
gain on this transaction amounting to $2,616,000 was deferred. In addition, on
this same date, the Company and the acquiring entity entered into a revolving
credit agreement whereby the Company agreed to advance the acquiring entity up
to $12,000,000 (including the aforementioned $4,090,000 in cash advances).
During 1996, this revolving credit agreement was replaced by a bank credit
facility which is guaranteed by IFE. In 1996, the Company recorded a valuation
allowance in connection with its investment in the aforementioned 7 1/2%
convertible notes. Such valuation allowance, which amounted to $5,300,000, is
reflected in the determination of other income and expense in the 1996
Consolidated Statement of Operations.
TVS ENTERTAINMENT PLC
During 1993, the Company acquired all of the outstanding capital stock of
TVS ENTERTAINMENT PLC ("TVS"), which was the parent company of MTM at that
time. Upon consummation of the acquisition of TVS, several contingencies
existed and the amounts related thereto were included in the allocation of the
purchase price, based upon management estimates utilizing the best available
information. Such estimates are periodically reviewed by management and
revised when warranted. Generally, after the first twelve months following an
acquisition, changes in estimates are included in the determination of net
income. Accordingly, the effects of the final resolution in 1994 and 1995 of
certain pre-acquisition contingencies recorded in the acquisition of TVS were
included in the determination of net income. Such effects, which amounted to
$7,291,000 and $2,521,000, were included in the determination of other income
and expense in the 1994 and 1995 Consolidated Statements of Operations,
respectively.
F-74
<PAGE>
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
United Family Communications
In November 1996, the Company and a third party formed United Family
Communications, LLC ("UFC") to operate and distribute satellite-delivered
television programming services in Mexico, Central America, and South America.
The Company has agreed to make an initial cash contribution of $5,200,000 and
has contributed certain assets of The Family Channel De Las Americas (subject
to the joint venture's assumption of related liabilities) in exchange for a
50% interest in UFC. It is the current intent of UFC to launch one or more
advertiser-supported, satellite-delivered television programming services in
1997.
NOTE C--MARKETABLE SECURITIES
Marketable securities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
---------- ----------
<S> <C> <C>
Available-for-sale securities, at fair value..... $6,271,000 $4,072,000
Trading securities, at fair value................ 2,019,000 4,981,000
---------- ----------
$8,290,000 $9,053,000
========== ==========
</TABLE>
Available-for-sale securities, consisting primarily of equity securities,
had an amortized cost of $6,904,000 and $3,477,000 at December 31, 1995 and
1996, respectively. As of December 31, 1995, the unrealized loss related to
securities classified as available-for-sale amounted to $633,000 ($373,000
after related tax effect). As of December 31, 1996, the unrealized gain
related to securities classified as available-for-sale amounted to $595,000
($351,000 after related tax effect). For the years ended December 31, 1995 and
1996, proceeds from the disposition of available-for-sale securities amounted
to $1,089,000 and $4,954,000, respectively, and gross realized gains and
losses were $29,000 and $(119,000) in 1995 and $1,093,000 and $(22,000) in
1996.
As of December 31, 1996, the unrealized gain related to trading securities
(with a cost of $4,129,000) amounted to $852,000, which amount is included in
the determination of investment income. For the year ended December 31, 1996,
proceeds from the disposition of trading securities amounted to $952,000, and
gross realized gains and losses were $164,000 and $(49,000) in 1996.
The Company recognized a $3,691,000 loss in 1994 on the impairment of
certain equity securities classified as available-for-sale securities. This
loss for 1994 was accounted for as a realized loss in the determination of
investment income. Also included in the determination of investment income for
1994 were realized losses aggregating $2,338,000 on transactions which
involved futures contracts or other derivative securities.
NOTE D--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
----------- -----------
<S> <C> <C>
Land and buildings............................... $21,010,000 $14,156,000
Satellite transponders........................... 36,415,000 36,415,000
Broadcasting and production equipment............ 16,857,000 12,248,000
Furniture and other equipment.................... 16,584,000 24,494,000
Leasehold and building improvements.............. 5,993,000 5,424,000
----------- -----------
96,859,000 92,737,000
Less accumulated depreciation and amortization... 23,831,000 29,860,000
----------- -----------
$73,028,000 $62,877,000
=========== ===========
</TABLE>
F-75
<PAGE>
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE E--LONG-TERM DEBT
Long-term debt, other than the Convertible Notes described in Note F,
consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
------------ ------------
<S> <C> <C>
Revolving Credit Facility...................... $133,000,000 $150,500,000
Subsidiary Credit Agreement.................... 8,850,000 10,000,000
6% notes payable, subordinated................. 6,720,000 6,720,000
Capital lease obligations...................... 5,363,000 5,236,000
------------ ------------
153,933,000 172,456,000
Less current maturities........................ 181,000 1,205,000
------------ ------------
$153,752,000 $171,251,000
============ ============
</TABLE>
Revolving Credit Facility
The Company has a long-term bank credit facility (the "Revolving Credit
Facility") with a group of banks with a maximum loan commitment thereunder of
$250,000,000. The Revolving Credit Facility provides for semi-annual
reductions of one-tenth of the loan commitment, beginning in December 1997,
with a final expiration in June 2002. Interest on borrowings under the
Revolving Credit Facility is payable quarterly at the prime rate or, at the
option of the Company, at a Eurodollar-based interest rate (5 9/16% at
December 31, 1996), plus a margin of 7/8% to 1 3/8%, depending on the
Company's overall leverage. In addition, the Company pays a fee of 1/4% to
3/8% per annum, depending on leverage, on the average unborrowed portion of
the total amount available for borrowings. The Revolving Credit Facility
contains (i) a negative pledge of substantially all of the Company's assets
and (ii) various restrictive covenants which, among other things, obligate the
Company to maintain certain financial ratios and limit the ability of the
Company to incur additional indebtedness, liens, and guarantees. Under the
terms of the Revolving Credit Facility, the aggregate amount of future
dividends on, and future redemptions of, the Company's common stock cannot
exceed approximately $50,000,000 as of December 31, 1996.
Interest Rate Exchange Agreement
In August 1996, the Company entered into an interest rate exchange agreement
pursuant to which it will make payments based upon a fixed rate of interest (5
7/8% per annum) on a notional amount of $25,000,000 and, in exchange, receive
payments based upon a variable rate of interest using a Eurodollar-based
interest rate determined on a quarterly basis. The initial term of this
agreement is two years, with an additional term of one year at the option of
the counterparty. Although the Company does not anticipate nonperformance by
the counterparty, the Company is exposed to credit losses for the periodic
settlement of amounts due under this interest rate exchange agreement in the
event of such party's nonperformance.
Subsidiary Credit Agreement
In January 1995, a subsidiary of the Company entered into a $10,000,000
credit agreement with a certain bank (the "Subsidiary Credit Agreement"). The
terms of the Subsidiary Credit Agreement are substantially the same as those
of the Revolving Credit Facility.
F-76
<PAGE>
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future Minimum Payments
The December 31, 1996 balance of long-term debt, other than the Convertible
Notes, is payable as follows:
<TABLE>
<CAPTION>
REVOLVING SUBSIDIARY CAPITAL
CREDIT CREDIT 6% NOTES LEASE
YEARS ENDED DECEMBER 31 FACILITY AGREEMENT PAYABLE OBLIGATIONS TOTAL
- ----------------------- ------------ ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
1997.................... $ -- $ 1,000,000 $ -- $ 581,000 $ 1,581,000
1998.................... -- 2,000,000 -- 450,000 2,450,000
1999.................... 25,500,000 2,000,000 1,680,000 425,000 29,605,000
2000.................... 50,000,000 2,000,000 1,680,000 435,000 54,115,000
2001.................... 50,000,000 2,000,000 1,680,000 480,000 54,160,000
Thereafter.............. 25,000,000 1,000,000 1,680,000 8,283,000 35,963,000
Less amounts
representing interest
on capital lease
obligations............ -- -- -- (5,418,000) (5,418,000)
------------ ----------- ---------- ---------- ------------
$150,500,000 $10,000,000 $6,720,000 $5,236,000 $172,456,000
============ =========== ========== ========== ============
</TABLE>
NOTE F--CONVERTIBLE NOTES
The Company's 6% Convertible Secured Notes due 2004 (the "Convertible
Notes") were issued to a related party. The Convertible Notes provide for a
security interest in the Company's rights in two satellite transponders, and
contain restrictive covenants which, among other things, require the Company
to maintain certain financial ratios and limit the ability of the Company to
incur additional indebtedness. In addition, no dividends may be declared or
paid on any shares of the Company's capital stock (other than dividends
payable solely in shares of the capital stock of the Company) at any time when
payments of principal, interest or other amounts are past due under the
Convertible Notes or while any event of default is continuing under the
Convertible Notes or would result from such dividend.
The $23,000,000 in principal amount of the Convertible Notes is payable in
five equal annual installments beginning December 31, 2000. The Convertible
Notes are subordinated to borrowings under the Revolving Credit Facility
described in Note E. Each $1,000 in principal amount of the Convertible Notes
may be converted into 112 1/2 shares of Class C Common Stock. Each share of
Class C Common Stock is convertible, at the option of the holder, into one
share of Class B Common Stock. Accordingly, the Company has reserved 2,587,500
shares of Class C Common Stock for potential future conversion of the
Convertible Notes (and, in addition, 2,587,500 shares of Class B Common Stock
for potential future conversion of the resulting Class C Common Stock).
NOTE G--MINORITY INTERESTS
The Family Channel (UK)
Prior to April 22, 1996, minority interests were primarily attributable to a
minority partner's 39% interest in The Family Channel (UK) which was operated
as a joint venture. IFE and Flextech plc, the holder of the minority 39%
interest, funded the operations of The Family Channel (UK) through capital
investments and loans. On April 22, 1996, the Company consummated the sale of
its 61% interest in The Family Channel (UK) to Flextech, as described in Note
P.
The minority partner's 39% share of the net loss resulting from the
operations of The Family Channel (UK) amounted to $5,107,000 and $4,954,000
for the years ended December 31, 1994 and 1995, respectively. The minority
partner's 39% share of the net loss of this joint venture, through the date of
sale, amounted to $1,419,000 for 1996.
F-77
<PAGE>
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FiT TV
On April 30, 1996, the Company, an affiliate of Liberty Media Corporation
("Liberty Media"), and an affiliate of Reebok International Limited ("Reebok")
entered into a definitive partnership agreement (the "FiT TV Partnership
Agreement") forming a partnership (the "FiT TV Partnership"), effective
January 1, 1996, to own and operate the FiT TV cable network. FiT TV had
previously been owned and operated by Cable Health TV, Inc. ("CHTV"), a 90%-
owned subsidiary of IFE. Another affiliate of Liberty Media is the holder of
the Convertible Notes and all of the Company's outstanding Class C Common
Stock. Liberty Media is an affiliate of Tele-Communications, Inc. ("TCI"), one
of the largest cable television system operators in the United States and, as
such, a major provider of carriage for FiT TV.
In accordance with the terms of the FiT TV Partnership Agreement, CHTV
contributed all of the assets and liabilities of FiT TV to the FiT TV
Partnership in exchange for an 80% partnership interest and functions as the
FiT TV Partnership's managing partner. Reebok contributed cash of $2,000,000
and other consideration agreed upon by the parties in exchange for a 10%
partnership interest. Liberty Media contributed cash of $1,000,000 and other
consideration agreed upon by the parties in exchange for a 10% partnership
interest.
In conjunction with this transaction, CHTV and Liberty Media entered into an
agreement whereby Liberty Media was granted a five-year option to purchase an
additional 10% partnership interest from CHTV. The exercise price for this
option varies (up to a maximum of $5,000,000) depending on the number of
domestic subscribers receiving FiT TV from delivery systems owned or managed
by Liberty Media or an affiliate of Liberty Media (including TCI) at the time
of exercise.
The minority partners' combined 20% share of the net loss resulting from the
operations of the FiT TV Partnership, since its formation on April 30, 1996,
is reflected in the 1996 Consolidated Statement of Operations. The minority
partners' combined 20% share of the net loss of FiT TV amounted to $938,000
for the year ended December 31, 1996.
NOTE H--EXCHANGE OF PREFERRED STOCK
On December 15, 1995, the Company and Liberty IFE, Inc., an affiliate of
Liberty Media, the then holder of the 10% Convertible Cumulative Preferred
Stock (the "Preferred Stock"), and holder of the Convertible Notes, entered
into an exchange agreement (the "Exchange Agreement") whereby Liberty IFE (i)
exchanged its holdings of all of the Preferred Stock for shares of Class B
Common Stock, (ii) exchanged all of its holdings of Class B Common Stock
(including the shares of Class B Common Stock received in exchange for the
Preferred Stock) for an equal number of shares of non-voting Class C Common
Stock, (iii) amended the terms of the Convertible Notes to provide, among
other things, for conversion of such notes into shares of non-voting Class C
Common Stock in lieu of shares of Class B Common Stock and for the elimination
of provisions which required the Company to issue Class C Common Stock in the
event of the occurrence of certain payment defaults, and (iv) amended the
terms of certain other agreements, including the shareholder agreement among
the Company and certain of its principal shareholders.
The Exchange Agreement had no impact on the determination of net income for
the year ended December 31, 1995. However, net income available for Common
Stock for the year ended December 31, 1995 has been reduced by a distribution
of $12,163,000 (or $0.30 per common share), which amount represents the excess
of (i) the fair value of the shares of Class B Common Stock which were
transferred in the transaction by the Company to the former holder of the
Preferred Stock over (ii) the fair value of the Class B Common Stock which was
issuable pursuant to the original conversion terms. The amount of this
distribution approximates the present value of the dividend payments for 1995
and future years that would have been required on the Preferred Stock.
Excluding the effect of the dividend which would have been required for 1995,
the impact of the Exchange
F-78
<PAGE>
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Agreement on earnings per common share was a reduction of $0.24 per common
share for the year ended December 31, 1995.
NOTE I--CAPITAL STOCK
Preferred Stock
Prior to the consummation of the Exchange Agreement described in Note H, the
Preferred Stock was entitled to a dividend at an annual rate of 10% of the
$22,000,000 original liquidation preference, payable semiannually in January
and July. The liquidation preference was increased by cumulative dividends,
whether or not they were declared. At December 31, 1994, undeclared dividends
totaled $1,109,000, which was the amount of the dividend declared and paid in
January 1995.
Common Stock
The Company has two classes of voting common stock. The Class A Common Stock
has ten votes per share and the Class B Common Stock has one vote per share.
Each share of Class A Common Stock is convertible, at the option of the
holder, into one share of Class B Common Stock. Each share of Class C Common
Stock is non-voting and is convertible, at the option of the holder, into one
share of Class B Common Stock.
The Class A Common Stock and Class B Common Stock vote together as a single
class on all matters except that (i) so long as the outstanding Class A Common
Stock has more than 40% of the total outstanding voting power of all common
stock entitled to vote, the holders of Class A Common Stock, voting separately
as a class, are entitled to elect a majority of the Company's directors, with
the remainder of the directors being elected by the holders of the Class B
Common Stock, voting separately as a class, and (ii) the approval of a
majority of each of the Class A Common Stock and the Class B Common Stock is
required for certain extraordinary corporate actions.
Stock Split
On November 16, 1995, the Company's Board of Directors approved a five-for-
four stock split which was effected in the form of a 25% stock dividend and
payable on January 5, 1996 to the shareholders of record at the close of
business on December 15, 1995. In connection with the stock split, all classes
of common stock were credited and retained earnings was charged for the
aggregate par value of the shares that were issued. A total of 1,000,000
shares of Class A Common Stock, 6,607,657 shares of Class B Common Stock, and
1,417,746 shares of Class C Common Stock were issued in connection with the
stock split.
Shareholder Agreement
Pursuant to the amended shareholder agreement (the "Shareholder Agreement")
among the Company and certain of its principal stockholders, each of the
parties to the Shareholder Agreement will, in the event of any future offering
of capital stock by the Company, be entitled to purchase additional shares of
such capital stock in order to maintain its percentage ownership of each class
of capital stock. The Shareholder Agreement also provides that, under certain
circumstances, Liberty IFE has a right of first refusal with respect to
certain sales, conversions or transfers of Class A Common Stock.
NOTE J--SUPPLEMENTAL CASH FLOW INFORMATION
Total interest costs paid during the years ended December 31, 1994, 1995,
and 1996 were $9,172,000, $12,087,000, and $12,045,000, respectively. Income
taxes paid during the years ended December 31, 1994, 1995, and 1996 amounted
to $2,757,000, $13,397,000, and $10,018,000, respectively.
F-79
<PAGE>
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Non-cash investing and financing activities included the acquisition of film
rights under license agreements which aggregated approximately $30,343,000,
$37,221,000, and $73,893,000 for the years ended December 31, 1994, 1995, and
1996, respectively.
As described in Note P, on April 22, 1996, the Company consummated the sale
of its television production studio in Maidstone, England and its 61% interest
in The Family Channel (UK) to a related party. This sale was primarily a non-
cash transaction in which the Company received equity securities. Cash
received in the transaction amounting to approximately $4,600,000 was offset
by the cash balances of the businesses sold (which were transferred to the
buyer) and cash outlays for expenses of the sale.
Non-cash investing and financing activities for the year ended December 31,
1995 included approximately $7,140,000 of liabilities assumed in the
acquisition of the Ice Capades. Non-cash purchases of property and equipment
under capital leases amounted to $5,380,000 and $76,000 for the years ended
December 31, 1995 and 1996, respectively. The exchange of Preferred Stock for
Common Stock with a related party during the year ended December 31, 1995 was
a non-cash transaction. Non-cash investing and financing activities also
included the sale of the Ice Capades in December 1995, in exchange for
$10,200,000 in notes receivable and other consideration, as described in Note
B.
NOTE K--INCOME TAXES
In January 1990, the Company acquired the assets of The Family Channel from
The Christian Broadcasting Network, Inc. ("CBN"). For income tax purposes, the
Company established the basis of the assets it acquired from CBN at the
respective fair market values of the assets as determined by the negotiated
sales price and an independent appraisal. IFE and CBN are considered to be
related parties for financial reporting purposes and, accordingly, the net
assets acquired were recorded at CBN's book value at the date of acquisition.
Therefore, the tax basis of the assets acquired exceeds the amount reflected
in the accompanying consolidated financial statements. This initial basis
difference reduces the amount of the Company's income subject to income taxes
to the extent that it is amortizable for income tax purposes.
The Company's income tax return for 1990, the year in which the Company
acquired the assets of The Family Channel from CBN, is currently under
examination by the Internal Revenue Service ("IRS"). As discussed in the
preceding paragraph, this acquisition gave rise to the initial difference
between the basis of the assets acquired from CBN for financial statement
purposes and the basis of those assets for tax purposes. In May 1994, the
Company and the IRS entered into a closing agreement (the "Closing Agreement")
settling all outstanding issues regarding the method and amounts of
amortization in respect of the assets acquired from CBN. These amounts had
previously been estimated by the Company. As a result of the Closing
Agreement, the amount of deferred tax benefit recorded by the Company was
increased in 1994 by $6,000,000 with a corresponding increase in stockholders'
equity. The Company's reported earnings were not affected by the Closing
Agreement.
Income before income taxes, as shown in the Consolidated Statements of
Operations, is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Domestic............................ $20,120,000 $36,737,000 $63,882,000
Foreign............................. 4,837,000 (4,007,000) (7,022,000)
----------- ----------- -----------
$24,957,000 $32,730,000 $56,860,000
=========== =========== ===========
</TABLE>
F-80
<PAGE>
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal............................ $ 4,593,000 $ 2,775,000 $14,969,000
State.............................. 1,064,000 668,000 3,564,000
Foreign............................ 3,302,000 (752,000) 926,000
----------- ----------- -----------
8,959,000 2,691,000 19,459,000
----------- ----------- -----------
Deferred:
Federal............................ (410,000) 6,032,000 4,261,000
State.............................. (70,000) 1,691,000 1,015,000
Foreign............................ 1,686,000 3,652,000 --
----------- ----------- -----------
1,206,000 11,375,000 5,276,000
----------- ----------- -----------
$10,165,000 $14,066,000 $24,735,000
=========== =========== ===========
</TABLE>
Domestic and foreign income before income taxes include all income derived
from operations in the respective U.S. and foreign geographic areas, whereas
provisions for taxes on income include all income taxes payable to U.S.,
foreign, and other governments, as applicable, regardless of the location in
which the taxable income is generated.
The actual provision for income taxes differs from the expected tax expense
(computed by applying the U.S. Federal corporate tax rate of 35% to income
before income taxes) as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Computed expected income tax
expense........................... $ 8,735,000 $11,456,000 $19,901,000
State income taxes, net of Federal
benefit........................... 646,000 1,637,000 2,967,000
Effect of amortization of
nondeductible goodwill............ 677,000 744,000 588,000
Effect of liquidation of foreign
subsidiary........................ 800,000 -- --
Other, net......................... (693,000) 229,000 1,279,000
----------- ----------- -----------
$10,165,000 $14,066,000 $24,735,000
=========== =========== ===========
</TABLE>
F-81
<PAGE>
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
------------ ------------
<S> <C> <C>
Deferred tax assets
Initial basis differences..................... $ 9,821,000 $ 5,800,000
Accrued liabilities, participations, and
residuals.................................... 7,199,000 12,131,000
Film rights................................... 18,372,000 13,434,000
Other......................................... 7,527,000 7,006,000
------------ ------------
Total gross deferred tax assets.............. 42,919,000 38,371,000
Less valuation allowance...................... (9,599,000) (9,408,000)
------------ ------------
Net deferred tax assets...................... 33,320,000 28,963,000
------------ ------------
Deferred tax liabilities
Accounts receivable, principally due to
differences in revenue recognition........... (27,735,000) (24,779,000)
Property and equipment, principally due to
differences in depreciation and capitalized
interest..................................... (7,203,000) (7,991,000)
Other......................................... (1,669,000) (1,661,000)
------------ ------------
Total deferred tax liabilities............... (36,607,000) (34,431,000)
------------ ------------
Net deferred tax liability................... $ (3,287,000) $ (5,468,000)
============ ============
</TABLE>
Based on the Company's historical levels of income before income taxes and
its anticipated future levels of income before income taxes, management
considers it more likely than not that the Company will have sufficient
taxable income to realize the full amount of its net deferred tax assets at
December 31, 1996, although realization is not assured.
NOTE L--RELATED PARTY TRANSACTIONS
The Chairman of the Company is also the Chairman of the Board of CBN. During
the year ended December 31, 1995, the Company repurchased shares of Class B
Common Stock in transactions with CBN and an affiliate of CBN for an aggregate
consideration of $13,819,000. Also, in December 1995, the Company and Liberty
IFE entered into an exchange agreement whereby Liberty IFE exchanged its
holdings of all of the Preferred Stock for shares of Common Stock, as
described in Note H.
The Company provides specified program time to CBN at charges equal to the
Company's cost, pursuant to an agreement which extends through 2004 and
automatically renews at CBN's option. Also, the Company leases certain office
space and other operational facilities from CBN and, from time to time, enters
into various other transactions with CBN and its subsidiaries.
The Company holds a 20% interest in BBJE. BBJE provides certain services,
including television production, for FiT TV and pays an annual dividend to the
Company. Cash dividends received from BBJE amounted to $343,000 and $125,000
in 1995 and 1996, respectively.
The Company and TCI have entered into a cable affiliation agreement,
extending to 2006, with respect to The Family Channel. Under the terms of the
agreement, the Company has granted TCI and its affiliates the right
F-82
<PAGE>
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
to carry The Family Channel on certain cable television systems in exchange
for subscriber fees. The Company has also entered into a long-term agreement
granting TCI and its affiliates the right to carry FiT TV.
The Company subleased a transponder for The Family Channel (UK), until its
disposition on April 22, 1996, from Flextech. On such date, the Company sold
its 61% interest in The Family Channel (UK) to Flextech, as described in Note
P.
Related party transactions and balances, not otherwise disclosed, are
summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Operating revenues..................... $15,662,000 $17,863,000 $23,176,000
=========== =========== ===========
Operating expenses..................... $ 6,402,000 $ 8,028,000 $ 5,191,000
=========== =========== ===========
Accounts receivable.................... $ 3,798,000 $ 4,632,000 $12,114,000
=========== =========== ===========
Accounts payable....................... $ 855,000 $ 588,000 $ 1,195,000
=========== =========== ===========
</TABLE>
NOTE M--EMPLOYEE BENEFIT PLANS
Stock Plan
The Company has a stock incentive plan (the "Stock Plan") covering 6,200,000
shares of Class B Common Stock. There were 142,226 shares and 569,100 shares
available for grant as of December 31, 1995 and 1996, respectively. Prior to
May 1996, awards could be made separately or in any combination of stock
options and restricted stock. Beginning May 1996, awards under the Stock Plan
may only be made in the form of stock options. The number of awards granted
under the Stock Plan to individual employees is determined by a committee of
the Company's Board of Directors.
Issuances and forfeitures of restricted stock under the Stock Plan are
reflected in the accompanying Consolidated Statements of Stockholders' Equity.
The shares of restricted stock issued during the years ended December 31,
1994, 1995, and 1996 were sold to the employees at the par value of $.01 per
share. The difference between the market value and the amount paid for
restricted stock is reflected as a reduction of stockholders' equity. This
unearned compensation is recognized as expense over a five-year vesting
period. At December 31, 1996, 126,794 shares of restricted stock were subject
to forfeiture under the Stock Plan.
Stock options may be granted for the purchase of Class B Common Stock at a
price not less than fair market value on the date of grant. The 1994 option
awards were granted at an exercise price higher than the fair market value on
the date of grant. The options are generally exercisable after one or more
years and expire no later than 10 years from the date of grant.
The Company has elected to continue to use the intrinsic value-based method
to account for all of its employee stock-based compensation plans. Under APB
Opinion No. 25, Accounting for Stock Issued to Employees, the Company has
recorded no compensation costs related to its stock option plans for the years
ended December 31, 1994, 1995, and 1996 because the exercise price of each
option equals or exceeds the fair value of the underlying common stock as of
the grant date for each stock option.
Pursuant to SFAS No. 123, Accounting for Stock-Based Compensation, the
Company is required to disclose the pro forma effects on net income and
earnings per share data as if the Company had elected to use the fair value
approach to account for all its employee stock-based compensation plans. If
compensation cost for the
F-83
<PAGE>
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company's plans had been determined consistent with the fair value approach
set forth in SFAS No. 123, the Company's pro forma net income and pro forma
earnings per share for the years ended December 31, 1995 and 1996 would have
been decreased as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1995 1996
------------ ------------
<S> <C> <C>
Net income
As reported.................................. $ 18,664,000 $ 32,125,000
============ ============
Pro forma.................................... $ 18,002,000 $ 30,486,000
============ ============
Primary and fully diluted earnings per common
share
As reported.................................. $ 0.16 $ 0.69
============ ============
Pro forma.................................... $ 0.14 $ 0.66
============ ============
</TABLE>
Pro forma net income reflects only options granted in 1995 and 1996.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options'
vesting periods and compensation cost for options granted prior to January 1,
1995 is not considered.
The fair value of options granted was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996, respectively: risk-free interest
rates of 6.23% and 5.96%; expected lives of 5.8 years and 4.6 years; expected
volatility of 31.0% and 34.5%; and no dividends.
A summary of stock options to purchase Class B Common Stock, as of December
31, 1994, 1995, and 1996, and changes during the years then ended, is
presented below:
<TABLE>
<CAPTION>
1994 1995 1996
----------------- --------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options at beginning of
year................... 166,250 $16.70 350,000 $14.30 2,106,250 $12.44
Granted................. 183,750 $12.13 1,812,500 $12.14 298,000 $15.70
Exercised............... -- -- (19,333) $15.16
Forfeited............... -- (56,250) $14.30 (49,417) $15.50
------- ---------- ----------
Options at end of year.. 350,000 $14.30 2,106,250 $12.44 2,335,500 $12.81
======= ========== ==========
Options exercisable at
year-end............... 36,250 $16.70 114,250 $14.48 653,560 $12.61
======= ========== ==========
Weighted-average
estimated fair value of
options granted during
the year............... $ 5.11 $ 6.08
========== ==========
</TABLE>
F-84
<PAGE>
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about stock options to purchase
Class B Common Stock which are outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED- WEIGHTED-
WEIGHTED-AVE. AVE. AVE.
REMAINING EXERCISE EXERCISE
RANGE OF EXERCISE PRICES SHARES CONTRACTUAL LIFE PRICE SHARES PRICE
- ------------------------ --------- ---------------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$12.00 to $13.10........ 1,918,750 8.9 years $12.11 582,810 $ 12.11
$15.00 to $17.75........ 416,750 9.2 years $15.99 70,750 $ 16.70
--------- ----------
$12.00 to $17.75........ 2,335,500 9.0 years $12.81 653,560 $ 12.61
========= ==========
</TABLE>
Subsidiary Stock Option Plan
The Company has adopted a separate stock option plan for a certain
subsidiary. This stock option plan was created as a means of attracting and
retaining employees and to stimulate the personal and active interest of such
individuals in the Company's (and such subsidiary's) development and financial
success.
During 1995, this subsidiary granted an employee an option to purchase
shares of its common stock. The effect of this option has been included in the
calculation of pro forma net income and pro forma primary and fully diluted
earnings per common share.
401(k) Plan
The Company 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.
The Company's contribution to the 401(k) Plan is discretionary as determined
annually by the Company's Board of Directors. The Company contributed
$405,000, $486,000, and $629,000 to the 401(k) Plan for the years ended
December 31, 1994, 1995, and 1996, respectively.
Employment Agreements
The Company has employment agreements with its Chairman, its President &
Chief Executive Officer, and most other members of its senior management.
NOTE N--COMMITMENTS AND CONTINGENCIES
The unpaid balance under program contracts for film rights related to the
production, exhibition, or distribution of programming that was available as
of the end of the year is reflected as a liability in the 1996 Consolidated
Balance Sheet. The balance due as of December 31, 1996 is payable as follows:
$44,050,000 in 1997; $32,692,000 in 1998; $13,721,000 in 1999; $2,551,000 in
2000; $265,000 in 2001; and $1,414,000 thereafter.
The Company has commitments under various program contracts for film rights
related to the production, exhibition, or distribution of programming which
was not available as of December 31, 1996. The commitments under these program
contracts as well as commitments under program development agreements and
employment agreements totaled approximately $93,000,000 as of December 31,
1996. Subsequent to December 31, 1996, the Company made additional commitments
under long-term program contracts, for the exhibition rights to certain
television series and movies, totaling approximately $75,000,000.
F-85
<PAGE>
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Aggregate future estimated payments of accrued participations and residuals
as of December 31, 1996 are as follows: $15,613,000 in 1997; $6,731,000 in
1998; $1,704,000 in 1999; $499,000 in 2000; and $844,000 in 2001.
The Company leases office facilities and certain other property and
equipment under noncancelable operating leases with future minimum lease
payments as follows: $3,275,000 in 1997; $2,917,000 in 1998; $2,825,000 in
1999; $2,449,000 in 2000; $2,275,000 in 2001; and $22,765,000 thereafter.
Total rent expense under operating leases amounted to approximately
$7,770,000, $8,942,000, and $5,193,000 for the years ended December 31, 1994,
1995, and 1996, respectively.
The Company has guaranteed a $12,000,000 bank credit facility for the entity
that purchased the Ice Capades from the Company, as described in Note B. In
addition, the Company has contingent liabilities related to legal proceedings
and other matters arising from the normal course of operations. Management
does not expect that amounts, if any, which may be required to satisfy such
contingencies will be material in relation to the accompanying consolidated
financial statements.
NOTE O--DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Investment in Equity Securities--Related Party
As described in Note P, on April 22, 1996, the Company received 5,792,008
shares of Flextech's convertible redeemable non-voting common stock. This
common stock is convertible, under certain circumstances, into Flextech's
voting common stock which is listed on the London Stock Exchange. Based upon
the market value of the underlying voting common stock (and the applicable
foreign currency exchange rate), as of December 31, 1996, and after applying
the same rate of discount as was determined by an independent valuation when
the shares were received, the estimated fair value of the Company's investment
in Flextech is $53,750,000.
Film Rights Payable
The amount reflected as film rights payable at December 31, 1996 represents
future payments to be made under program contract agreements. The fair value
of film rights payable is the present value of these future payments. At
December 31, 1996, the present value of these future payments is approximately
$85,000,000.
Revolving Credit Facility and Subsidiary Credit Agreement
The Company's borrowings under the Revolving Credit Facility and Subsidiary
Credit Agreement are at floating rates of interest. Since the cost of carrying
this indebtedness fluctuates with current market conditions, it is assumed
that the carrying values would approximate fair value.
Convertible Notes
The Company has $23,000,000 in principal amount of Convertible Notes
outstanding. These notes are convertible into 2,587,500 shares of non-voting
Class C Common Stock, which Class C Common Stock is convertible, at the option
of the holder, into Class B Common Stock, on a share-for-share basis, as
described in Note F. The Company estimates that the fair value of the
Convertible Notes approximates the trading value of the underlying shares.
Accordingly, based on the average closing price of the Class B Common Stock
for December 1996, the estimated fair value of the Convertible Notes is
$39,783,000.
Limitations
Fair value estimates are made at a specific point in time based on relevant
market information and information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and
F-86
<PAGE>
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect these estimates.
NOTE P--GAIN ON DISPOSITION OF ASSETS--RELATED PARTY
On April 22, 1996, the Company consummated the sale of its television
production studio in Maidstone, England and its 61% interest in The Family
Channel (UK) to Flextech pursuant to agreements dated as of March 20, 1996.
Flextech previously owned a 39% interest in The Family Channel (UK).
Flextech's majority owner is Tele-Communications International, Inc. ("TCI
International"), a majority-owned subsidiary of TCI. Another affiliate of TCI
is the holder of the Convertible Notes and all of the Company's outstanding
Class C Common Stock.
As consideration for this transaction, the Company received
(Pounds)3,000,000 (approximately $4,600,000) in cash and 5,792,008 shares of
Flextech's convertible redeemable non-voting common stock. This common stock
is convertible, under certain circumstances, into Flextech's voting common
stock which is listed on the London Stock Exchange. The market value of the
underlying voting common stock as of the date of the aforementioned agreements
was $46,100,000. The shares were recorded, for financial statement purposes,
at approximately (Pounds)23,000,000 ($35,458,000 based on the applicable
foreign currency exchange rate on the date of closing), which reflects a
discount determined by an independent valuation to allow for the lack of
marketability during the required holding period.
The Company received the right to "put" its holdings of Flextech's non-
voting stock to TCI International, beginning in June 1997 (if the shares do
not first become convertible). Upon exercise of the put, TCI International has
the option of redeeming the stock for cash at the then-market value of
Flextech's voting common stock. If the shares are not redeemed for cash, the
Company has the option of either (i) converting 50% of the shares on a share-
for-share basis into Flextech's voting common stock and 50% of the shares into
common stock of the same value of TCI International, or (ii) converting 100%
of the shares into common stock of the same value of TCI International.
NOTE Q--INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in three business segments: the operation of
advertiser-supported cable networks ("Cable Networks"), the production and
distribution of entertainment programming ("Production & Distribution"), and
the production of live entertainment shows ("Live Entertainment").
Within the Cable Networks business segment, the Company operates The Family
Channel, an advertiser-supported cable television network that provides
family-oriented entertainment and informational programming in the United
States and FiT TV, an advertiser-supported health and fitness cable network
which operates principally in the United States. IFE also operated The Family
Channel (UK), an advertiser-supported network in the United Kingdom, through
its disposition on April 22, 1996, and The Family Channel De Las Americas,
launched on July 1, 1995, which provided Spanish-language, family-oriented
entertainment programming, as well as fitness programming, to Mexico, Central
America, and portions of South America, through the discontinuance of its
operations in November 1996.
Within the Production & Distribution business segment, the Company produces
and distributes television programming in the United States and throughout
many other parts of the world ("MTM Operations"), co-
F-87
<PAGE>
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
produced a motion picture through Family Channel Pictures, and operated a
television production studio in Maidstone, England (the "UK Studio") until its
disposition on April 22, 1996.
Within the Live Entertainment business segment, the Company produces live
musical variety shows and, in 1995, operated the Ice Capades, a touring ice
show.
The following table sets forth comparative information regarding operating
revenues, operating income or loss, total assets, depreciation and
amortization, and capital expenditures by business segment.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Operating Revenues
Cable Networks...................... $178,746,000 $213,775,000 $249,620,000
Production & Distribution........... 70,340,000 86,990,000 104,519,000
Live Entertainment.................. 8,951,000 10,481,000 7,751,000
Intersegment Eliminations........... (15,987,000) (16,388,000) (29,080,000)
------------ ------------ ------------
$242,050,000 $294,858,000 $332,810,000
============ ============ ============
Operating Income (Loss)
Cable Networks...................... $ 31,482,000 $ 42,899,000 $ 77,635,000
Production & Distribution........... (1,066,000) 1,155,000 (19,029,000)
Live Entertainment.................. (1,880,000) (5,012,000) (2,782,000)
Intersegment Eliminations........... (3,089,000) (644,000) 340,000
------------ ------------ ------------
$ 25,447,000 $ 38,398,000 $ 56,164,000
============ ============ ============
Total Assets
Cable Networks...................... $276,875,000 $286,738,000 $338,188,000
Production & Distribution........... 174,078,000 171,892,000 211,402,000
Live Entertainment.................. 22,305,000 27,783,000 26,392,000
Intersegment Eliminations........... (4,986,000) (4,986,000) (7,299,000)
------------ ------------ ------------
$468,272,000 $481,427,000 $568,683,000
============ ============ ============
Depreciation and Amortization
Cable Networks...................... $ 74,044,000 $ 79,313,000 $ 83,415,000
Production & Distribution........... 48,832,000 63,367,000 100,885,000
Live Entertainment.................. 1,035,000 1,772,000 1,488,000
Intersegment Eliminations........... (11,069,000) (13,335,000) (29,471,000)
------------ ------------ ------------
$112,842,000 $131,117,000 $156,317,000
============ ============ ============
Capital Expenditures
Cable Networks...................... $ 7,049,000 $ 7,418,000 $ 7,622,000
Production & Distribution........... 1,962,000 2,037,000 1,808,000
Live Entertainment.................. 432,000 6,107,000 421,000
------------ ------------ ------------
$ 9,443,000 $ 15,562,000 $ 9,851,000
============ ============ ============
</TABLE>
F-88
<PAGE>
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth comparative information regarding operating
revenues, operating income or loss, total assets, depreciation and
amortization, and capital expenditures by geographic area.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Operating Revenues
Domestic............................ $229,848,000 $281,143,000 $327,415,000
International....................... 13,771,000 16,285,000 6,070,000
Interarea Eliminations.............. (1,569,000) (2,570,000) (675,000)
------------ ------------ ------------
$242,050,000 $294,858,000 $332,810,000
============ ============ ============
Operating Income (Loss)
Domestic............................ $ 39,982,000 $ 53,045,000 $ 65,047,000
International....................... (14,495,000) (14,268,000) (9,042,000)
Interarea Eliminations.............. (40,000) (379,000) 159,000
------------ ------------ ------------
$ 25,447,000 $ 38,398,000 $ 56,164,000
============ ============ ============
Total Assets
Domestic............................ $419,051,000 $438,843,000 $532,305,000
International....................... 49,547,000 43,735,000 36,378,000
Interarea Eliminations.............. (326,000) (1,151,000) --
------------ ------------ ------------
$468,272,000 $481,427,000 $568,683,000
============ ============ ============
Depreciation and Amortization
Domestic............................ $109,350,000 $126,452,000 $152,312,000
International....................... 5,021,000 6,551,000 4,797,000
Interarea Eliminations.............. (1,529,000) (1,886,000) (792,000)
------------ ------------ ------------
$112,842,000 $131,117,000 $156,317,000
============ ============ ============
Capital Expenditures
Domestic............................ $ 7,883,000 $ 14,890,000 $ 9,810,000
International....................... 1,560,000 672,000 41,000
------------ ------------ ------------
$ 9,443,000 $ 15,562,000 $ 9,851,000
============ ============ ============
</TABLE>
Included in domestic operating revenues are export sales of $15,320,000,
$18,091,000, and $15,355,000 for the years ended December 31, 1994, 1995, and
1996, respectively.
F-89
<PAGE>
[INSIDE BACK COVER]
Fox Kids Worldwide logo.
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE EXCHANGE OFFER MADE
HEREBY TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS OR IN THE ACCOMPANYING LETTER OF TRANSMITTAL,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED. NEITHER THIS PROSPECTUS NOR THE ACCOMPANYING
LETTER OF TRANSMITTAL NOR BOTH OF THEM TOGETHER CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES
TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES BY ANY PERSON IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR THE
ACCOMPANYING LETTER OF TRANSMITTAL NOR BOTH OF THEM TOGETHER NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Forward-Looking Statements................................................. iv
Available Information...................................................... iv
Summary.................................................................... 1
Formation of Company....................................................... 12
Risk Factors............................................................... 14
The Exchange Offer......................................................... 24
Use of Proceeds............................................................ 32
Capitalization............................................................. 33
Unaudited Pro Forma Consolidated Financial Information..................... 34
Selected Historical Consolidated Financial Data............................ 37
Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................... 41
Business................................................................... 52
Management................................................................. 72
Principal Stockholders..................................................... 77
Description of Equity Securities........................................... 79
Certain Transactions....................................................... 81
Description of Other Indebtedness.......................................... 88
Description of the Notes................................................... 89
Book-Entry; Delivery and Form.............................................. 118
Certain United States Federal Income Tax Considerations.................... 121
Plan of Distribution....................................................... 123
Legal Matters.............................................................. 123
Experts.................................................................... 123
Index to Financial Statements.............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$1,093,670,000
[LOGO OF FOX KIDS WORLDWIDE, INC.]
$475,000,000
9 1/4% SENIOR NOTES DUE 2007
$618,670,000
10 1/4% SENIOR DISCOUNT NOTES
DUE 2007
---------------
PROSPECTUS
---------------
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
With respect to the Company, Section 145 of the General Corporation Law of
the State of Delaware empowers a Delaware corporation to indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
the corporation) by reason of the fact that such person is or was a director,
officer, employee or agent of such corporation or is or was serving at the
request of such corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise.
The indemnity may include expenses (including attorney's fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by such
person in connection with such action, suit or proceeding, provided that such
person acted in good faith and in a manner such person reasonably believed to
be in or not opposed to the best interests of the corporation and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe such person's conduct was unlawful. A Delaware corporation may
indemnify directors, officers, employees and other agents of such corporation
in an action by or in the right of the corporation under the same conditions,
except that no indemnification is permitted without judicial approval if the
person to be indemnified has been adjudged to be liable to the corporation.
Where a director, officer, employee or agent of the corporation is successful
on the merits or otherwise in the defense of any action, suit or proceeding
referred to above or in defense of any claim, issue or matter therein, the
corporation must indemnify such person against the expenses (including
attorney's fees) which he or she actually and reasonably incurred in
connection therewith.
The Company's Bylaws contain provisions that provide for indemnification of
officers and directors to the fullest extent permitted by, and in the manner
permissible under, the General Corporation Law of the State of Delaware.
As permitted by Section 102(b)(7) of the General Corporation Law of the
State of Delaware, the Company's Corrected and Restated Certificate of
Incorporation contains a provision eliminating the personal liability of a
director to the Company's or its stockholders for monetary damages for breach
of fiduciary duty as a director, subject to certain exceptions.
The Company maintains policies insuring its respective officers, directors
or members and managers, as the case may be, against certain civil
liabilities, including liabilities under the Securities Act.
Pursuant to the Registration Rights Agreement, the Company has agreed to
indemnify the holders of the registrable Notes against certain liabilities.
Also pursuant to the Registration Rights Agreement, the Company and certain
broker-dealers, including certain persons associated with such broker-dealers,
have agreed to indemnify each other against certain liabilities.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
**1.1 Purchase Agreement dated October 22, 1997 among Fox Kids
Worldwide, Inc., as issuer, and Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Citicorp Securities,
Inc., Bear, Stearns & Co. Inc., Donaldson, Lufkin & Jenrette
Securities Corporation, and Morgan Stanley & Co. Incorporated, as
initial purchasers.
**2.1 Share Transfer Agreement dated as of April 15, 1996 by and among
Saban International Paris, as Purchaser and certain parties as
Sellers relating to Creativite & Developpement.(1)
**2.2 Agreement for the Purchase of Film Assets dated as of December 31,
1995 by and between Vesical Limited and Saban International
N.V.(1)
**2.3 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.
**2.4 Stock Purchase Agreement dated as of June 11, 1997 by and between
Fox Kids Worldwide, Inc., M.G. "Pat" Robertson, individually and
as trustee of certain trusts named therein, Lisa N. Robertson and
Timothy B. Robertson, as joint tenants, and Tim Robertson,
individually, as trustee of certain trusts named therein, and as
custodian to and for each of Abigail H. Robertson, Laura N.
Robertson, Elizabeth C. Robertson, Willis H. Robertson and
Caroline S. Robertson.
**2.5 Stock Purchase Agreement dated as of June 11, 1997 by and between
Fox Kids Worldwide, Inc. and The Christian Broadcasting Network,
Inc.
**2.6 Stock Purchase Agreement dated as of June 11, 1997 by and between
Fox Kids Worldwide, Inc. and Regent University.
**2.7 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.
**3.2 Amended and Restated Bylaws of the Registrant.
**4.1 Senior Notes Indenture dated as of October 28, 1997 (the "Senior
Notes Indenture") 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 (the
"Senior Discount Notes Indenture") between Fox Kids Worldwide,
Inc., as obligor, and The Bank of New York, as trustee, and form
of Notes.
**4.3 Senior Notes Registration Rights Agreement dated as of October 28,
1997 between Fox Kids Worldwide, Inc., as issuer, and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Citicorp Securities,
Inc., Bear, Stearns & Co. Inc., Donaldson, Lufkin & Jenrette
Securities Corporation, and Morgan Stanley & Co. as initial
purchasers.
**4.4 Senior Discount Notes Registration Rights Agreement dated as of
October 28, 1997 between Fox Kids Worldwide, Inc., as issuer, and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citicorp
Securities, Inc., Bear, Stearns & Co. Inc., Donaldson, Lufkin &
Jenrette Securities Corporation, and Morgan Stanley & Co., as
initial purchasers.
**4.5 Senior Notes Liquidated Damages Agreement dated as of October 28,
1997 between Fox Kids Worldwide, Inc., as issuer, and Merrill
Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Citicorp Securities, Inc., Bear, Stearns & Co. Inc., Donaldson,
Lufkin & Jenrette Securities Corporation, and Morgan Stanley &
Co., as initial purchasers.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
**4.6 Senior Discount Notes Liquidated Damages Agreement dated as of
October 28, 1997 between Fox Kids Worldwide, Inc., as issuer, and
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Citicorp Securities, Inc., Bear, Stearns & Co. Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation, and Morgan
Stanley & Co., as initial purchasers.
5.1 Opinion of Squadron, Ellenoff, Plesent & Sheinfeld, LLP regarding
the validity of the 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 Employment Assumption Agreement dated as of July 31, 1997 by and
among Saban Entertainment, Inc., Fox Kids Worldwide, Inc. and Mel
Woods.
**10.3 Employment Assumption Agreement dated as of July 31, 1997 by and
among Fox Kids Worldwide, L.L.C., Fox Kids Worldwide, Inc. and
Haim Saban.
10.4 Reserved.
**10.5 Form of Indemnification Agreement and Schedule of Indemnified
Parties.
**10.6 Employment Agreement dated as of April 1, 1997 between Saban
Entertainment, Inc. and William Josey.
*10.7 Employment Agreement dated as of December 22, 1995 between Fox
Kids Worldwide, L.L.C. and Haim Saban.
**10.8 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.
**10.9 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.
10.10 Reserved.
*10.11 LLC Formation Agreement dated as of November 1, 1995 among Saban
Entertainment, Inc., FCN Holding Company and Fox Broadcasting
Company, Inc.
**10.12 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.
*10.13 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.
**10.14 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.
*10.15 Asset Assignment Agreement dated as of December 22, 1995 by and
between Fox Kids Worldwide, L.L.C., on the one hand, and Fox,
Inc., Fox Broadcasting Company, Twentieth Century Fox Film
Corporation, Fox Television Stations, Inc., and FCN Holding, Inc.,
on the other hand.+
*10.16 Management Agreement dated as of December 22, 1995 by and among
Fox Kids Worldwide, L.L.C., Saban Entertainment, Inc. and FCNH
Sub, Inc.
**10.17 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.
**10.18 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.
***10.19 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, Inc.+
**10.20 Form of Fox Broadcasting Company Station Affiliate Agreement.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
**10.21 Merchandising Rights Acquisition Agreement dated as of July 1,
1990 between Twentieth Century Fox Licensing and Merchandising, a
unit of Fox Inc. and Fox Children's Network, Inc.+
**10.22 Indemnification Agreement dated as of December 22, 1995 between
Fox Broadcasting Company and Fox Children's Network, Inc.
**10.23 Distribution Rights Acquisition Agreement dated as of September 1,
1990 between Twentieth Century Fox Film Corporation and Fox
Children's Network, Inc.+
**10.24 Administration Agreement dated as of February 7, 1990 between Fox
Broadcasting Company and Fox Children's Network, Inc.
**10.25 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.
**10.26 Amendment No. 1 to Saban/Fox Registration Agreement dated as of
September 27, 1996.
**10.27 Contribution and Exchange Agreement dated June 11, 1997 by and
among Liberty Media Corporation, Liberty IFE, Inc. and Fox Kids
Worldwide, Inc.
**10.28 Guarantee dated as of December 22, 1995 by The News Corporation
Limited.
**10.29 First Amendment to 10960 Wilshire Boulevard Lease dated as of
August 1, 1997.
**10.30 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.
***10.31 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.+
***10.32 Letter Amendment No. 1 to the Second Amended and Restated Credit
Agreement dated as of November 18, 1997.
**10.33 Funding Agreement dated as of June 11, 1997 by and among The News
Corporation Limited, News Publishing Australia Limited and Fox
Kids Worldwide, Inc.
**10.34 Guaranty dated as of June 11, 1997 by The News Corporation Limited
in favor of International Family Entertainment, Inc.
**10.35 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.+
**10.36 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.+
10.37 Reserved.
**10.38 10960 Wilshire Boulevard Office Lease dated as of July 17, 1995
between 10960 Property Corporation and Saban Entertainment, Inc.
**10.39 Production Facility Agreements dated as of June 7, 1994 and
January 5, 1994 between Magic Movie Studios of Valencia, Ltd. and
Saban Entertainment, Inc.
**10.40 Letter Agreement dated as of January 1, 1995 between Saban
International, N.V. and Duveen Trading Ltd.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
**10.41 Barter Syndication Agreement dated as of January 5, 1996 between
Saban Entertainment, Inc. and Fox Broadcasting Company, Inc.
**10.42 Letter Agreement dated as of September 26, 1996 but effective as
of April 3, 1996 by and among Stanley S. Shuman, FCN Holding,
Inc., and Allen & Company Incorporated, as amended by that certain
Side Letter Agreement dated as of September 26, 1996 but effective
as of April 3, 1996.
**10.43 First Amendment to the Contribution and Exchange Agreement dated
as of August 1, 1997 by and among Liberty Media Corporation,
Liberty IFE, Inc. and Fox Kids Worldwide, Inc.
**10.44 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.
***10.45 Exchange Agreement dated August 1, 1997 among News Publishing
Australia Limited, Liberty Media Corporation and Liberty IFE, Inc.
**10.46 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.
***10.47 Subordinated Note Agreement dated July 31, 1997 by and among Fox
Broadcasting Company, as lender, Fox Kids Worldwide, Inc., as
borrower, and Citicorp USA, Inc.; Subordinated Promissory
Note dated July 31, 1997 made by Fox Kids Worldwide, Inc., as
borrower, in favor of Fox Broadcasting Company, as lender; First
Amendment to Subordinated Note Agreement dated September 4, 1997;
Second Amendment to Subordinated Note Agreement dated October 28,
1997 and Subordinated Promissory Note dated October 28, 1997 made
by Fox Kids Worldwide Inc., as borrower in favor of Fox
Broadcasting Company, as lender.
**10.48 Subordinated Note dated August 29, 1997 between Fox Kids
Worldwide, Inc., as borrower, and News America Holdings
Incorporated, as lender, and Subordinated Note Agreement dated
August 9, 1997 between Fox Kids Worldwide, Inc., as borrower, News
America Holdings Incorporated, as lender, and Citicorp USA, Inc.
and First Amendment to Subordinated Note Agreement dated
October 28, 1997.
***10.49 Amendment to Affiliation Agreement dated June 11, 1997, between
International Family Entertainment, Inc. and Satellite Services,
Inc.+
***10.50 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.+
***10.51 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.
***10.52 International Family Entertainment, Inc. Family Channel
Affiliation Agreement, dated as of December 28, 1989, between
Satellite Services, Inc. and International Family Entertainment,
Inc.+
***10.53 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.
**10.54 Registration Rights Agreement dated August 1, 1997 by and among
Fox Kids Worldwide, Inc., Liberty Media Corporation and Liberty
IFE, Inc.
***10.55 Galaxy V Transponder Purchase Agreement, dated as of January 23,
1992, between Hughes Communications Galaxy, Inc. and International
Family Entertainment, Inc.+
***10.56 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.+
***10.57 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.
***10.58 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.+
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
***10.59 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.
***10.60 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.
12.1 Ratio of Earnings to Fixed Charges.
**21.1 Subsidiaries of the Registrant.
23.1 Consent of Squadron, Ellenoff, Plesent & Sheinfeld, LLP (included
in Exhibit 5.1 hereto).
23.2 Consent of Ernst & Young LLP regarding Saban Entertainment, Inc.,
regarding FCN Holding, Inc., and regarding FCN Holding, Inc.,
Saban Entertainment, Inc., and Fox Kids Worldwide, L.L.C.
23.3 Consent of KPMG Peat Marwick LLP regarding International Family
Entertainment, Inc.
*24.1 Power of Attorney.
**24.2 Power of Attorney of Lawrence Jacobson dated January 22, 1998.
**25.1 Statement of Eligibility of The Bank of New York, as Trustee.
27.1 Financial Data Schedule.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Exchange Agent Agreement.
99.4 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees.
99.5 Form of Letter to Clients.
</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.
+ Portions of exhibits deleted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidentiality.
(1) Upon request, the Registrant will furnish supplementally to the Securities
and Exchange Commission a copy of omitted schedules.
(b) Financial Statement Schedules.
FCN Holding, Inc., Saban Entertainment, Inc., and Fox Kids Worldwide,
L.L.C. (from and after the date of the Reorganization, Fox Kids Worldwide,
Inc.)
Schedule II-- Valuation and Qualifying Accounts
FCN Holding, Inc.
Schedule II--Valuation and Qualifying Accounts
Saban Entertainment, Inc.
Schedule II--Valuation and Qualifying Accounts
All other schedules for which provisions is made in the applicable
accounting regulations of the Commission are either not required under the
related instructions or are inapplicable, and therefore have been omitted.
II-6
<PAGE>
ITEM 22. UNDERTAKINGS
1. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, members, officers and controlling
persons, as the case may be, of the registrant pursuant to the foregoing
provisions or otherwise, the registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person, as the case may be, of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person, as the case may be, in connection
with the securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjustment of such issue.
2. The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
3. The undersigned registrant hereby undertakes to respond to requests for
information that are incorporated by reference into the prospectus pursuant to
item 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
4. The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
5. The undersigned registrant hereby undertakes to file an application for
the purposes of determining the eligibility of the trustee to act under
subsection (a) of section 310 of the Trust Indenture Act in accordance with
the rules and regulations prescribed by the Commission under section 305(b)(2)
of the Trust Indenture Act.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of Los
Angeles, State of California, on the 11th day of March, 1998.
Fox Kids Worldwide, Inc.
By: /s/ Mel Woods
____________________________________
MEL WOODS
PRESIDENT, CHIEF OPERATING OFFICER
AND CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed by the following persons in
the capacities and on the dates stated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Haim Saban Chairman of the Board March 11, 1998
____________________________________ and Chief Executive
HAIM SABAN Officer (Principal
Executive Officer)
/s/ Mel Woods President, Chief March 11, 1998
____________________________________ Operating Officer,
MEL WOODS Chief Financial
Officer and Director
(Principal Financial
Officer)
/s/ Mark Ittner Chief Accounting March 11, 1998
____________________________________ Officer (Principal
MARK ITTNER Accounting Officer)
* Director March 11, 1998
____________________________________
SHUKI LEVY
* Director March 11, 1998
____________________________________
K. RUPERT MURDOCH
* Director March 11, 1998
____________________________________
CHASE CAREY
** Director March 11, 1998
____________________________________
LAWRENCE JACOBSON
</TABLE>
- --------
* Executed by Mel Woods as attorney-in-fact pursuant to a power of attorney
included in the Registration Statement as originally filed on September 26,
1996.
** Executed by Mel Woods as attorney-in-fact pursuant to a power of attorney
included as Exhibit 24.2 in Amendment No. 1 to Registration Statement, filed
on January 26, 1998.
II-8
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
------------------
BALANCE CHARGED
AT TO COSTS CHARGED BALANCE
BEGINNING AND TO OTHER AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- --------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
SABAN ENTERTAINMENT, INC.
FY ended May 1994
Allowance for doubtful
accounts.................. 385,000 0 0 0 385,000
FY ended May 1995
Allowance for doubtful
accounts.................. 385,000 1,000,000 0 0 1,385,000
Five months ended October
1995
Allowance for doubtful
accounts.................. 1,385,000 0 0 0 1,385,000
</TABLE>
S-1
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
-------------------
BALANCE AT CHARGED TO CHARGED BALANCE AT
BEGINNING COSTS AND TO OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
FCN HOLDING, INC.
FY ended July 3, 1994
Allowance for doubtful
accounts............... 0 0 0 0 0
FY ended July 2, 1995
Allowance for doubtful
accounts............... 0 480,000 0 0 480,000
Four months ended October
29, 1995
Allowance for doubtful
accounts............... 480,000 0 0 0 480,000
</TABLE>
S-2
<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
----------- --------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
FCN HOLDING, INC., SABAN
ENTERTAINMENT, INC. AND
FOX KIDS WORLDWIDE, L.L.C.
(FROM AND AFTER THE DATE
OF THE REORGANIZATION, FOX
KIDS WORLDWIDE, INC.)
Eight months ended June 30,
1996
Allowance for doubtful
accounts................ 1,865,000 0 0 (175,000) 1,690,000
FY ended June 30, 1997
Allowance for doubtful
accounts................ 1,690,000 200,000 0 (480,000) 1,410,000
</TABLE>
S-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
**1.1 Purchase Agreement dated October 22, 1997 among Fox Kids
Worldwide, Inc., as issuer, and Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Citicorp Securities,
Inc., Bear, Stearns & Co. Inc., Donaldson, Lufkin & Jenrette
Securities Corporation, and Morgan Stanley & Co. Incorporated, as
initial purchasers.
**2.1 Share Transfer Agreement dated as of April 15, 1996 by and among
Saban International Paris, as Purchaser and certain parties as
Sellers relating to Creativite & Developpement.(1)
**2.2 Agreement for the Purchase of Film Assets dated as of December 31,
1995 by and between Vesical Limited and Saban International
N.V.(1)
**2.3 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.
**2.4 Stock Purchase Agreement dated as of June 11, 1997 by and between
Fox Kids Worldwide, Inc., M.G. "Pat" Robertson, individually and
as trustee of certain trusts named therein, Lisa N. Robertson and
Timothy B. Robertson, as joint tenants, and Tim Robertson,
individually, as trustee of certain trusts named therein, and as
custodian to and for each of Abigail H. Robertson, Laura N.
Robertson, Elizabeth C. Robertson, Willis H. Robertson and
Caroline S. Robertson.
**2.5 Stock Purchase Agreement dated as of June 11, 1997 by and between
Fox Kids Worldwide, Inc. and The Christian Broadcasting Network,
Inc.
**2.6 Stock Purchase Agreement dated as of June 11, 1997 by and between
Fox Kids Worldwide, Inc. and Regent University.
**2.7 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.
**3.2 Amended and Restated Bylaws of the Registrant.
**4.1 Senior Notes Indenture dated as of October 28, 1997 (the "Senior
Notes Indenture") 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 (the
"Senior Discount Notes Indenture") between Fox Kids Worldwide,
Inc., as obligor, and The Bank of New York, as trustee, and form
of Notes.
**4.3 Senior Notes Registration Rights Agreement dated as of October 28,
1997 between Fox Kids Worldwide, Inc., as issuer, and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Citicorp Securities,
Inc., Bear, Stearns & Co. Inc., Donaldson, Lufkin & Jenrette
Securities Corporation, and Morgan Stanley & Co. as initial
purchasers.
**4.4 Senior Discount Notes Registration Rights Agreement dated as of
October 28, 1997 between Fox Kids Worldwide, Inc., as issuer, and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citicorp
Securities, Inc., Bear, Stearns & Co. Inc., Donaldson, Lufkin &
Jenrette Securities Corporation, and Morgan Stanley & Co., as
initial purchasers.
**4.5 Senior Notes Liquidated Damages Agreement dated as of October 28,
1997 between Fox Kids Worldwide, Inc., as issuer, and Merrill
Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Citicorp Securities, Inc., Bear, Stearns & Co. Inc., Donaldson,
Lufkin & Jenrette Securities Corporation, and Morgan Stanley &
Co., as initial purchasers.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
**4.6 Senior Discount Notes Liquidated Damages Agreement dated as of
October 28, 1997 between Fox Kids Worldwide, Inc., as issuer, and
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Citicorp Securities, Inc., Bear, Stearns & Co. Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation, and Morgan
Stanley & Co., as initial purchasers.
5.1 Opinion of Squadron, Ellenoff, Plesent & Sheinfeld, LLP regarding
the validity of the 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 Employment Assumption Agreement dated as of July 31, 1997 by and
among Saban Entertainment, Inc., Fox Kids Worldwide, Inc. and Mel
Woods.
**10.3 Employment Assumption Agreement dated as of July 31, 1997 by and
among Fox Kids Worldwide, L.L.C., Fox Kids Worldwide, Inc. and
Haim Saban.
10.4 Reserved.
**10.5 Form of Indemnification Agreement and Schedule of Indemnified
Parties.
**10.6 Employment Agreement dated as of April 1, 1997 between Saban
Entertainment, Inc. and William Josey.
*10.7 Employment Agreement dated as of December 22, 1995 between Fox
Kids Worldwide, L.L.C. and Haim Saban.
**10.8 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.
**10.9 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.
10.10 Reserved.
*10.11 LLC Formation Agreement dated as of November 1, 1995 among Saban
Entertainment, Inc., FCN Holding Company and Fox Broadcasting
Company, Inc.
**10.12 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.
*10.13 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.
**10.14 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.
*10.15 Asset Assignment Agreement dated as of December 22, 1995 by and
between Fox Kids Worldwide, L.L.C., on the one hand, and Fox,
Inc., Fox Broadcasting Company, Twentieth Century Fox Film
Corporation, Fox Television Stations, Inc., and FCN Holding, Inc.,
on the other hand.+
*10.16 Management Agreement dated as of December 22, 1995 by and among
Fox Kids Worldwide, L.L.C., Saban Entertainment, Inc. and FCNH
Sub, Inc.
**10.17 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.
**10.18 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.
***10.19 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, Inc.+
**10.20 Form of Fox Broadcasting Company Station Affiliate Agreement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
**10.21 Merchandising Rights Acquisition Agreement dated as of July 1,
1990 between Twentieth Century Fox Licensing and Merchandising, a
unit of Fox Inc. and Fox Children's Network, Inc.+
**10.22 Indemnification Agreement dated as of December 22, 1995 between
Fox Broadcasting Company and Fox Children's Network, Inc.
**10.23 Distribution Rights Acquisition Agreement dated as of September 1,
1990 between Twentieth Century Fox Film Corporation and Fox
Children's Network, Inc.+
**10.24 Administration Agreement dated as of February 7, 1990 between Fox
Broadcasting Company and Fox Children's Network, Inc.
**10.25 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.
**10.26 Amendment No. 1 to Saban/Fox Registration Agreement dated as of
September 27, 1996.
**10.27 Contribution and Exchange Agreement dated June 11, 1997 by and
among Liberty Media Corporation, Liberty IFE, Inc. and Fox Kids
Worldwide, Inc.
**10.28 Guarantee dated as of December 22, 1995 by The News Corporation
Limited.
**10.29 First Amendment to 10960 Wilshire Boulevard Lease dated as of
August 1, 1997.
**10.30 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.
***10.31 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.+
***10.32 Letter Amendment No. 1 to the Second Amended and Restated Credit
Agreement dated as of November 18, 1997.
**10.33 Funding Agreement dated as of June 11, 1997 by and among The News
Corporation Limited, News Publishing Australia Limited and Fox
Kids Worldwide, Inc.
**10.34 Guaranty dated as of June 11, 1997 by The News Corporation Limited
in favor of International Family Entertainment, Inc.
**10.35 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.+
**10.36 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.+
10.37 Reserved.
**10.38 10960 Wilshire Boulevard Office Lease dated as of July 17, 1995
between 10960 Property Corporation and Saban Entertainment, Inc.
**10.39 Production Facility Agreements dated as of June 7, 1994 and
January 5, 1994 between Magic Movie Studios of Valencia, Ltd. and
Saban Entertainment, Inc.
**10.40 Letter Agreement dated as of January 1, 1995 between Saban
International, N.V. and Duveen Trading Ltd.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
**10.41 Barter Syndication Agreement dated as of January 5, 1996 between
Saban Entertainment, Inc. and Fox Broadcasting Company, Inc.
**10.42 Letter Agreement dated as of September 26, 1996 but effective as
of April 3, 1996 by and among Stanley S. Shuman, FCN Holding,
Inc., and Allen & Company Incorporated, as amended by that certain
Side Letter Agreement dated as of September 26, 1996 but effective
as of April 3, 1996.
**10.43 First Amendment to the Contribution and Exchange Agreement dated
as of August 1, 1997 by and among Liberty Media Corporation,
Liberty IFE, Inc. and Fox Kids Worldwide, Inc.
**10.44 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.
***10.45 Exchange Agreement dated August 1, 1997 among News Publishing
Australia Limited, Liberty Media Corporation and Liberty IFE, Inc.
**10.46 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.
***10.47 Subordinated Note Agreement dated July 31, 1997 by and among Fox
Broadcasting Company, as lender, Fox Kids Worldwide, Inc., as
borrower, and Citicorp USA, Inc.; Subordinated Promissory
Note dated July 31, 1997 made by Fox Kids Worldwide, Inc., as
borrower, in favor of Fox Broadcasting Company, as lender; First
Amendment to Subordinated Note Agreement dated September 4, 1997;
Second Amendment to Subordinated Note Agreement dated October 28,
1997 and Subordinated Promissory Note dated October 28, 1997 made
by Fox Kids Worldwide Inc., as borrower in favor of Fox
Broadcasting Company, as lender.
**10.48 Subordinated Note dated August 29, 1997 between Fox Kids
Worldwide, Inc., as borrower, and News America Holdings
Incorporated, as lender, and Subordinated Note Agreement dated
August 29, 1997 between Fox Kids Worldwide, Inc., as borrower,
News America Holdings Incorporated, as lender, and Citicorp USA,
Inc., and First Amendment to Subordinated Note Agreement dated
October 28, 1997.
***10.49 Amendment to Affiliation Agreement dated June 11, 1997, between
International Family Entertainment, Inc. and Satellite Services,
Inc.+
***10.50 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.+
***10.51 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.
***10.52 International Family Entertainment, Inc. Family Channel
Affiliation Agreement, dated as of December 28, 1989, between
Satellite Services, Inc. and International Family Entertainment,
Inc.+
***10.53 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.
**10.54 Registration Rights Agreement dated August 1, 1997 by and among
Fox Kids Worldwide, Inc., Liberty Media Corporation and Liberty
IFE, Inc.
***10.55 Galaxy V Transponder Purchase Agreement, dated as of January 23,
1992, between Hughes Communications Galaxy, Inc. and International
Family Entertainment, Inc.+
***10.56 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.+
***10.57 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.
***10.58 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.+
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
***10.59 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.
***10.60 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.
12.1 Ratio of Earnings to Fixed Charges.
**21.1 Subsidiaries of the Registrant.
23.1 Consent of Squadron, Ellenoff, Plesent & Sheinfeld, LLP (included
in Exhibit 5.1 hereto).
23.2 Consent of Ernst & Young LLP regarding Saban Entertainment, Inc.,
regarding FCN Holding, Inc., and regarding FCN Holding, Inc.,
Saban Entertainment, Inc., and Fox Kids Worldwide, L.L.C.
23.3 Consent of KPMG Peat Marwick LLP regarding International Family
Entertainment, Inc.
*24.1 Power of Attorney.
**24.2 Power of Attorney of Lawrence Jacobson dated January 22, 1998.
**25.1 Statement of Eligibility of The Bank of New York, as Trustee.
27.1 Financial Data Schedule.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Exchange Agent Agreement.
99.4 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees.
99.5 Form of Letter to Clients.
</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.
+ Portions of exhibits deleted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidentiality.
(1) Upon request, the Registrant will furnish supplementally to the Securities
and Exchange Commission a copy of omitted schedules.
<PAGE>
EXHIBIT 5.1
Squadron, Ellenoff, Plesent & Sheinfeld, LLP
551 Fifth Avenue
New York, New York 10176-0001
(212) 661-6500
___________ __, 1998
Fox Kids Worldwide, Inc.
10960 Wilshire Boulevard
Los Angeles, California 90024
Re: Registration Statement on Form S-4
File No. 333-12995
----------------------------------
Ladies and Gentlemen:
We have acted as counsel for Fox Kids Worldwide, Inc., a Delaware
corporation (the "Company"), in connection with the preparation and filing with
the Securities and Exchange Commission (the "Commission") of the Company's
Registration Statement on Form S-4, as amended (Registration Number 333-12995
the "Registration Statement"), under the Securities Act of 1933, as amended (the
"Securities Act"), relating to the proposed issuance of (i) up to $475,000,000
aggregate principal amount of the Company's 9 1/4% Senior Notes due 2007 (the
"Exchange Senior Notes") in exchange for a like amount of the Company's
privately placed 9 1/4% Senior Notes due 2007 (the "Original Senior Notes") and
(ii) up to $618,670,000 aggregate principal amount at maturity of the Company's
10 1/4% Senior Discount Notes due 2007 (the "Exchange Senior Discount Notes" and
together with the Exchange Senior Notes, the "Exchange Notes") in exchange for a
like amount of the Company's privately placed 10 1/4% Senior Discount Notes (the
"Original Senior Discount Notes" and together with the Original Senior Notes,
the "Original Notes"). The Original Senior Notes were issued and the Exchange
Senior Notes will be issued pursuant to that certain Indenture, dated as of
October 28, 1997 (the "Senior Notes Indenture"), by and among the Company and
The Bank of New York, as trustee (the "Senior Notes Trustee"), and the Original
Senior Discount Notes were issued and the Exchange Senior Discount Notes will be
issued, pursuant to that certain Indenture, dated as of October 28, 1997 (the
"Senior Discount Notes Indenture" and together with the Senior Notes Indenture,
the "Indentures"), by and among the Company and The Bank of New York, as trustee
(the "Senior Discount Notes Trustee" and together with the Senior Notes Trustee,
the "Trustee").
We have examined originals or copies, certified or otherwise identified
to our satisfaction, of the Registration Statement, the Indentures, and such
corporate records, agreements, documents and other instruments, and such
certificates or comparable documents of public officials and of officers and
representatives of the Company, and have made such inquiries of such officers
and
<PAGE>
Fox Kids Worldwide, Inc.
_________ __, 1998
Page 2
representatives as we have deemed relevant and necessary as a basis for the
opinion hereinafter set forth.
In such examination, we have assumed the genuineness of all signatures,
the authenticity of all documents submitted to us as originals, the conformity
to original documents of documents submitted to us as certified or photostatic
copies and the authenticity of the originals of such latter documents. As to all
questions of fact material to this opinion that have not been independently
established, we have relied upon certificates or comparable documents of
officers and representatives of the Company. The opinion set forth below is also
based on the assumption that the Registration Statement, as amended (including
any necessary post-effective amendments), has become effective under the
Securities Act and that the Indentures have been qualified under the Trust
Indenture Act of 1939, as amended, and have been duly executed and delivered by
the Trustee.
Based on the foregoing, and subject to the qualifications stated herein,
we are of the opinion that the Exchange Notes, when duly issued and
authenticated by the Trustee in accordance with the provisions of the Indentures
and delivered in exchange for the Original Notes pursuant to the Registration
Statement, will be validly issued and will constitute legal and binding
obligations of the Company in accordance with their terms (subject in each case
to applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer and other similar laws affecting creditors' rights generally from time
to time in effect and to general principles of equity, including, without
limitation, concepts of materiality, reasonableness, good faith and fair
dealing, regardless of whether considered in a proceeding in equity or at law).
The opinion herein is limited to the laws of the State of New York, the
corporate laws of the State of Delaware and the federal laws of the United
States, and we express no opinion as to the effect on the matters covered by
this opinion of the laws of any other jurisdiction.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Registration Statement. In so doing, we do not admit that we are
in the category of persons whose consent is required under Section 7 of the
Securities Act or the rules and regulations of the Commission promulgated
thereunder.
Sincerely,
<PAGE>
EXHIBIT 12.1
FOX KIDS WORLDWIDE, INC.
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
12/30/96 6/30/97 12/31/97
-------- EIGHT MONTHS ---------------------------------- ---------------------
ENDED PROFORMA
ACTUAL JUNE 30,1996 ACTUAL PROFORMA AS ADJUSTED ACTUAL PROFORMA
-------- -------------- -------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
FIXED CHARGES
INTEREST EXPENSE, NET OF CAPITALIZED
INTEREST 1,411,000 624,000 1,938,000 147,497,000 155,769,000 57,590,000 80,296,000
INTEREST CAPITALIZED DURING THE PERIOD 393,000 471,000 1,923,000 777,000 777,000 753,000 385,000
AMORTIZATION OF DEBT ISSUE COSTS 117,000 261,000 288,000 1,469,000 3,482,000 799,000 1,605,000
PORTION OF RENT EXPENSE CONSIDERED INTEREST 608,000 994,000 1,411,000 2,034,000 2,034,000 1,084,000 1,189,000
--------- --------- --------- ----------- ----------- ---------- ----------
2,529,000 2,350,000 5,560,000 151,777,000 162,062,000 60,226,000 83,475,000
EARNINGS
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES 41,555,000 49,874,000 55,007,000 (31,665,000) (41,950,000) (3,200,000) (22,924,000)
FIXED CHARGES, LESS CAPITALIZED INTEREST 2,136,000 1,879,000 3,637,000 151,000,000 161,285,000 59,474,000 83,090,000
---------- ---------- ---------- ----------- ----------- ---------- -----------
43,691,000 51,753,000 58,644,000 119,335,000 119,335,000 56,274,000 60,166,000
RATIO OF EARNINGS TO FIXED CHARGES 17.28 22.02 10.55 0.79 0.74 0.93 0.72
EARNINGS DEFICIENCY 0 0 0 (32,442,000) (42,727,000) (3,952,000) (23,309,000)
</TABLE>
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts," and
"Selected Historical Consolidated Financial Data" and to the use of our
reports dated September 29, 1997, except for the 2nd, 3rd, 6th, and 7th
sentence of the 35th paragraph of Note 1, as to which the date is January 21,
1998, with respect to FCN Holding, Inc., Saban Entertainment, Inc. and Fox
Kids Worldwide, L.L.C. (from and after the date of the Reorganization, Fox
Kids Worldwide, Inc.), September 27, 1996, except for the second paragraph of
Note 10 as to which the date is September 29, 1997 with respect to FCN
Holding, Inc. and September 27, 1996 except for the third paragraph of Note 11
as to which the date is September 29, 1997 with respect to Saban
Entertainment, Inc., in Amendment No. 3 to the Registration Statement
(Form S-1 No. 333-12995) and related Prospectus of Fox Kids Worldwide, Inc. for
the registration of 9 1/4% Senior Notes Due 2007 and 10 1/4% Senior Discount
Notes Due 2007.
Our audits also included the financial statement schedules listed in Item
16(b). These schedules are the responsibility of the company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
the financial statement schedules referred to above, when considered in
relation to the basic financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
Ernst & Young LLP
Los Angeles, California
March 11, 1998
<PAGE>
EXHIBIT 23.3
The Board of Directors
International Family Entertainment, Inc.:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Norfolk, Virginia
March 11, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FCN HOLDING,
INC., SABAN ENTERTAINMENT, INC. AND FOX KIDS WORLDWIDE, LLC
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1998
<PERIOD-START> JUL-01-1996 JUL-01-1997
<PERIOD-END> JUN-30-1997 DEC-31-1997
<CASH> 36,877,000<F1> 63,409,000<F1>
<SECURITIES> 0 0
<RECEIVABLES> 93,763,000 239,536,000
<ALLOWANCES> (1,410,000) (1,410,000)
<INVENTORY> 235,575,000 354,348,000
<CURRENT-ASSETS> 0<F2> 0<F2>
<PP&E> 17,550,000 88,470,000
<DEPRECIATION> (8,629,000) (14,672,000)
<TOTAL-ASSETS> 412,401,000 2,508,640
<CURRENT-LIABILITIES> 0<F2> 0<F2>
<BONDS> 0 856,853,000
0 345,000,000
50,000,000 0
<COMMON> 800 16,000
<OTHER-SE> 82,686,200 66,033,000
<TOTAL-LIABILITY-AND-EQUITY> 412,401,000 2,508,640
<SALES> 307,820,000 332,971,000
<TOTAL-REVENUES> 307,820,000 332,971,000
<CGS> (180,381,000) (195,297,000)
<TOTAL-COSTS> (249,041,000) (275,333,000)
<OTHER-EXPENSES> (1,546,000) (2,450,000)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (2,226,000) (58,388,000)
<INCOME-PRETAX> 55,007,000 (3,200,000)
<INCOME-TAX> (14,567,000) (2,403,000)
<INCOME-CONTINUING> 40,440,000 (5,603,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 40,440,000 (5,603,000)<F3>
<EPS-PRIMARY> 2.53 (1.16)
<EPS-DILUTED> 2.53 (1.16)
<FN>
<F1>Includes restricted cash of $8,000,000.
<F2>The Company has elected to present an unclassified Balance Sheet.
<F3>Represents EPS after deduction of dividends on preferred stock.
</FN>
</TABLE>
<PAGE>
EXHIBIT 99.1
FOX KIDS WORLDWIDE, INC.
LETTER OF TRANSMITTAL
FOR
TENDER OF ANY AND ALL OUTSTANDING
9 1/4% SENIOR NOTES DUE 2007 AND
-----
10 1/4% SENIOR DISCOUNT NOTES DUE 2007
------
IN EXCHANGE FOR
9 1/4% SENIOR NOTES DUE 2007 AND
-----
10 1/4% SENIOR DISCOUNT NOTES DUE 2007
------
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND SUBJECT TO THE TERMS AND CONDITIONS OF THE PROSPECTUS DATED MARCH __, 1998
- -----------------------------------------------------------------------------
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON _____, 1998, UNLESS THE OFFER IS EXTENDED BY THE COMPANY IN
ITS SOLE DISCRETION (THE "EXPIRATION DATE"). TENDERS MAY BE WITHDRAWN PRIOR
TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
- -----------------------------------------------------------------------------
The Exchange Agent For The Exchange Offer Is:
THE BANK OF NEW YORK
By Registered or By Hand or Overnight
Certified Mail: Facsimile Transmissions: Delivery:
The Bank of New York (Eligible Institutions Only) The Bank of New York
101 Barclay Street (212) 815-____ 101 Barclay Street
Reorganization Section/7E Reorganization Section/7E
New York, New York 10286 To Confirm by Telephone or New York, New York 10286
Attention: ______ for Information Call: Attention:_____
(212) 815-_____
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF THIS LETTER OF TRANSMITTAL VIA FACSIMILE TO A NUMBER
OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY.
THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS
LETTER OF TRANSMITTAL IS COMPLETED.
1
<PAGE>
Capitalized terms used but not defined herein shall have the same meaning
given them in the Prospectus (as defined below).
The Letter of Transmittal is to be completed by holders (which term, for
purposes of this document, shall include any participant in The Depository
Trust Company ("DTC")) either if (a) certificates are to be forwarded herewith
or (b) tenders are to be made pursuant to the procedures for tender by book-
entry transfer set forth under "The Exchange Offer--Procedures for Tendering"
in the Prospectus and an Agent's Message (as defined below) is not delivered.
Certificates, or book-entry confirmation of a book-entry transfer of such Old
Notes into the Exchange Agent's account at DTC, as well as this Letter of
Transmittal (or facsimile thereof or delivery of an Agent's Message in lieu
thereof), properly completed and duly executed, with any required signature
guarantees, and any other documents required by this Letter of Transmittal
must be received by the Exchange Agent at its address set forth herein on or
prior to the Expiration Date. Tenders by book-entry transfer may also be made
by delivering an Agent's Message in lieu of this Letter of Transmittal. The
term "book-entry confirmation" means a timely confirmation of a book-entry
transfer of Old Notes into the Exchange Agent's account at DTC. The term
"Agent's Message" means a message, transmitted by DTC to and received by the
Exchange Agent and forming part of a book-entry confirmation, which states
that DTC has received an express acknowledgment from the tendering
participant, which acknowledgment states that such participant has received
and agrees to be bound by this Letter of Transmittal and that the Company may
enforce this Letter of Transmittal against such participant.
Holders of Old Notes whose certificates (the "Certificates") for such Old
Notes are not immediately available or who cannot deliver their Certificates
and all other required documents to the Exchange Agent on or prior to the
Expiration Date or who cannot complete the procedures for book-entry transfer
on a timely basis, must tender their Old Notes according to the guaranteed
delivery procedures set forth in "The Exchange Offer--Guaranteed Delivery
Procedures" in the Prospectus.
DELIVERY OF DOCUMENTS TO THE BOOK-ENTRY TRANSFER FACILITY DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY.
2
<PAGE>
ALL TENDERING HOLDERS COMPLETE THIS BOX:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
DESCRIPTION OF OLD NOTES
- --------------------------------------------------------------------------------------------------------------
IF BLANK, PLEASE FILL
IN NAME(S) AND ADDRESS(ES) OLD NOTES TENDERED
OF REGISTERED HOLDERS (ATTACH ADDITIONAL LIST IF NECESSARY)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AGGREGATE PRINCIPAL
AGGREGATE PRINCIPAL PRINCIPAL AMOUNT AT
PRINCIPAL AMOUNT AMOUNT AT MATURITY OF OLD
AMOUNT OF OF OLD SENIOR MATURITY OF OLD SENIOR DISCOUNT
CERTIFICATE OLD SENIOR NOTES TENDERED SENIOR DISCOUNT NOTES TENDERED
NUMBER(S)* NOTES (IF LESS THAN ALL)** NOTES (IF LESS THAN ALL)**
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
TOTAL
AMOUNT
TENDERED
- --------------------------------------------------------------------------------------------------------------
* Need not be completed by book-entry holders.
** Old Notes may be tendered in whole or in part in integral multiples of
$1,000 principal amount at maturity, provided that if any Old Notes are
tendered for exchange in part, the untendered amount thereof must be in
integral multiples of $1,000 principal amount at maturity. All Old Notes
held shall be deemed tendered unless a lesser number is specified in
this column. See Instruction 4.
- --------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
(BOXES BELOW TO BE CHECKED BY ELIGIBLE INSTITUTIONS ONLY)
[_]CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH DTC AND COMPLETE
THE FOLLOWING:
Name of Tendering Institution: _____________________________________________
DTC Account Number: ________________________________________________________
Transaction Code Number: ___________________________________________________
[_]CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED DELIVERY IF
TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED
DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING:
Name of Registered Holder(s): ______________________________________________
Window Ticket Number (if any): _____________________________________________
Date of Execution of Notice of Guaranteed Delivery: ________________________
Name of Institution which Guaranteed Delivery: _____________________________
If Guaranteed Delivery is to be made By Book-Entry Transfer:
Name of Tendering Institution: _____________________________________________
DTC Account Number: ________________________________________________________
Transaction Code Number: ___________________________________________________
[_]CHECK HERE IF TENDERED BY BOOK-ENTRY TRANSFER AND NON-EXCHANGED OLD NOTES
ARE TO BE RETURNED BY CREDITING THE DTC ACCOUNT NUMBER SET FORTH ABOVE.
[_]CHECK HERE IF YOU ARE A BROKER-DEALER WHO ACQUIRED THE OLD NOTES FOR ITS
OWN ACCOUNT AS A RESULT OF MARKET-MAKING OR OTHER TRADING ACTIVITIES (A
"PARTICIPATING BROKER-DEALER") AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF
THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO.
Name: ______________________________________________________________________
Address: ___________________________________________________________________
4
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to Fox Kids Worldwide, Inc. (the "Company"),
-----------------------
the above described principal amount of Old Notes in exchange for the like
principal amount of the above described notes which have been registered under
the Securities Act of 1933, as amended (the "Securities Act"), upon the terms
and subject to the conditions set forth in the Prospectus dated March , 1998
--------
(as the same may be amended or supplemented from time to time, the
"Prospectus"), receipt of which is hereby acknowledged, and in this Letter of
Transmittal (which, together with the Prospectus, constitute the "Exchange
Offer").
Subject to and effective upon the acceptance for exchange of all or any
portion of the Old Notes tendered herewith in accordance with the terms and
conditions of the Exchange Offer (including, if the Exchange Offer is extended
or amended, the terms and conditions of any such extension or amendment), the
undersigned hereby sells, assigns and transfers to or upon the order of the
Company all right, title and interest in and to such Old Notes as are being
tendered herewith. The undersigned hereby irrevocably constitutes and appoints
the Exchange Agent as its agent and attorney-in-fact (with full knowledge that
the Exchange Agent is also acting as agent of the Company in connection with
the Exchange Offer) with respect to the tendered Old Notes, with full power of
substitution (such power of attorney being deemed to be an irrevocable power
coupled with an interest) subject only to the right of withdrawal described in
the Prospectus, to (i) deliver certificates for Old Notes (the "Certificates")to
the Company together with all accompanying evidences of transfer and
authenticity to, or upon the order of, the Company, upon receipt by the Exchange
Agent, as the undersigned's agent, of the Notes to be issued in exchange for
such Old Notes, (ii) present Certificates for transfer, and to transfer the Old
Notes on the books of the Company, and (iii) receive for the account of the
Company all benefits and otherwise exercise all rights of beneficial ownership
of such Old Notes, all in accordance with the terms and conditions of the
Exchange Offer.
THE UNDERSIGNED HEREBY REPRESENTS AND WARRANTS THAT THE UNDERSIGNED HAS FULL
POWER AND AUTHORITY TO TENDER, EXCHANGE, SELL, ASSIGN AND TRANSFER THE OLD
NOTES TENDERED HEREBY AND THAT, WHEN THE SAME ARE ACCEPTED FOR EXCHANGE, THE
COMPANY WILL ACQUIRE GOOD, MARKETABLE AND UNENCUMBERED TITLE THERETO, FREE AND
CLEAR OF ALL LIENS, RESTRICTIONS, CHARGES AND ENCUMBRANCES, AND THAT THE OLD
NOTES TENDERED HEREBY ARE NOT SUBJECT TO ANY ADVERSE CLAIMS OR PROXIES. THE
UNDERSIGNED WILL, UPON REQUEST, EXECUTE AND DELIVER ANY ADDITIONAL DOCUMENTS
DEEMED BY THE COMPANY OR THE EXCHANGE AGENT TO BE NECESSARY OR DESIRABLE TO
COMPLETE THE EXCHANGE, ASSIGNMENT AND TRANSFER OF THE OLD NOTES TENDERED
HEREBY, AND THE UNDERSIGNED WILL COMPLY WITH ITS OBLIGATIONS UNDER THE
REGISTRATION RIGHTS AGREEMENTS. THE UNDERSIGNED HAS READ AND AGREES TO ALL OF
THE TERMS OF THE EXCHANGE OFFER.
The name(s) and address(es) of the registered holder(s) (which term, for
purposes of this document, shall include any participant in DTC) of the Old
Notes tendered hereby should be printed above, if they are not already set
forth above, as they appear on the Certificates. The Certificate number(s) and
the Old Notes that the undersigned wishes to tender should be indicated in the
appropriate boxes above.
If any tendered Old Notes are not exchanged pursuant to the Exchange Offer
for any reason, or if Certificates are submitted for more Old Notes than are
tendered or accepted for exchange, Certificates for such nonexchanged or
nontendered Old Notes will be returned (or, in the case of Old Notes tendered
by book-entry transfer, such Old Notes will be credited to an account
maintained at DTC), without expense to the tendering holder, promptly
following the expiration or termination of the Exchange Offer.
The undersigned understands that tenders of Old Notes pursuant to any one of
the procedures described in "The Exchange Offer--Procedures for Tendering" in
the Prospectus and in the instructions attached hereto will, upon the
Company's acceptance for exchange of such tendered Old Notes, constitute a
binding agreement between the undersigned and the Company upon the terms and
subject to the conditions of the Exchange Offer. The
5
<PAGE>
undersigned recognizes that, under certain circumstances set forth in the
Prospectus, the Company may not be required to accept for exchange any of the
Old Notes tendered hereby.
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" below, the undersigned hereby directs that the Notes be issued
in the name(s) of the undersigned or, in the case of a book-entry transfer of
Old Notes, that such Notes be credited to the account indicated above
maintained at DTC. If applicable, substitute Certificates representing Old
Notes not exchanged or not accepted for exchange will be issued to the
undersigned or, in the case of a book-entry transfer of Old Notes, will be
credited to the account indicated above maintained at DTC. Similarly, unless
otherwise indicated under "Special Delivery Instructions," please deliver the
Notes to the undersigned at the address shown below the undersigned's
signature.
BY TENDERING OLD NOTES AND EXECUTING THIS LETTER OF TRANSMITTAL, OR EFFECTING
DELIVERY OF AN AGENT'S MESSAGE IN LIEU THEREOF, THE UNDERSIGNED HEREBY
REPRESENTS AND AGREES THAT (I) THE UNDERSIGNED IS NOT AN "AFFILIATE" OF THE
COMPANY, (II) ANY NOTES TO BE RECEIVED BY THE UNDERSIGNED ARE BEING ACQUIRED IN
THE ORDINARY COURSE OF ITS BUSINESS, (III) THE UNDERSIGNED HAS NO ARRANGEMENT OR
UNDERSTANDING WITH ANY PERSON TO PARTICIPATE IN A DISTRIBUTION (WITHIN THE
MEANING OF THE SECURITIES ACT) OF NOTES TO BE RECEIVED IN THE EXCHANGE OFFER,
AND (IV) IF THE UNDERSIGNED IS NOT A BROKER-DEALER, THE UNDERSIGNED IS NOT
ENGAGED IN, AND DOES NOT INTEND TO ENGAGE IN, A DISTRIBUTION (WITHIN THE MEANING
OF THE SECURITIES ACT) OF SUCH NOTES. BY TENDERING OLD NOTES PURSUANT TO THE
EXCHANGE OFFER AND EXECUTING THIS LETTER OF TRANSMITTAL, OR EFFECTING DELIVERY
OF AN AGENT'S MESSAGE IN LIEU THEREOF, A HOLDER OF OLD NOTES WHICH IS A BROKER-
DEALER REPRESENTS AND AGREES, CONSISTENT WITH CERTAIN INTERPRETIVE LETTERS
ISSUED BY THE STAFF OF THE DIVISION OF CORPORATION FINANCE OF THE SECURITIES AND
EXCHANGE COMMISSION TO THIRD PARTES, THAT (A) SUCH OLD NOTES HELD BY THE BROKER-
DEALER ARE HELD ONLY AS A NOMINEE, OR (B) SUCH OLD NOTES WERE ACQUIRED BY SUCH
BROKER-DEALER FOR ITS OWN ACCOUNT AS A RESULT OF MARKET-MAKING ACTIVITIES OR
OTHER TRADING ACTIVITIES AND IT WILL DELIVER THE PROSPECTUS (AS AMENDED OR
SUPPLEMENTED FROM TIME TO TIME) MEETING THE REQUIREMENTS OF THE SECURITIES ACT
IN CONNECTION WITH ANY RESALE OF SUCH NOTES (PROVIDED THAT, BY SO ACKNOWLEDGING
AND BY DELIVERING A PROSPECTUS, SUCH BROKER-DEALER WILL NOT BE DEEMED TO ADMIT
THAT IT IS AN "UNDERWRITER" WITHIN THE MEANING OF THE SECURITIES ACT).
THE COMPANY HAS AGREED THAT, SUBJECT TO THE PROVISIONS OF THE REGISTRATION
---
RIGHTS AGREEMENTS, THE PROSPECTUS, AS IT MAY BE AMENDED OR SUPPLEMENTED FROM
TIME TO TIME, MAY BE USED BY A PARTICIPATING BROKER-DEALER (AS DEFINED BELOW)
IN CONNECTION WITH RESALES OF NOTES RECEIVED IN EXCHANGE FOR OLD NOTES, WHERE
SUCH OLD NOTES WERE ACQUIRED BY SUCH PARTICIPATING BROKER-DEALER FOR ITS OWN
ACCOUNT AS A RESULT OF MARKET-MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES,
FOR A PERIOD ENDING 90 DAYS AFTER THE EXPIRATION DATE (SUBJECT TO EXTENSION
UNDER CERTAIN LIMITED CIRCUMSTANCES DESCRIBED IN THE PROSPECTUS) OR, IF
EARLIER, WHEN ALL SUCH NOTES HAVE BEEN DISPOSED OF BY SUCH PARTICIPATING
BROKER-DEALER. IN THAT REGARD, EACH BROKER-DEALER WHO ACQUIRED OLD NOTES FOR
ITS OWN ACCOUNT AS A RESULT OF MARKET-MAKING OR OTHER TRADING ACTIVITIES (A
"PARTICIPATING BROKER-DEALER"), BY TENDERING SUCH OLD NOTES AND EXECUTING THIS
LETTER OF TRANSMITTAL, OR EFFECTING DELIVERY OF AN AGENT'S MESSAGE IN LIEU
THEREOF, AGREES THAT, UPON RECEIPT OF NOTICE FROM THE COMPANY OF THE
OCCURRENCE OF ANY EVENT OR THE DISCOVERY OF ANY FACT WHICH MAKES ANY STATEMENT
CONTAINED OR INCORPORATED BY REFERENCE IN THE PROSPECTUS UNTRUE IN ANY
MATERIAL RESPECT OR WHICH CAUSES THE PROSPECTUS TO OMIT TO STATE A
6
<PAGE>
MATERIAL FACT NECESSARY IN ORDER TO MAKE THE STATEMENTS CONTAINED OR
INCORPORATED BY REFERENCE THEREIN, IN LIGHT OF THE CIRCUMSTANCES UNDER WHICH
THEY WERE MADE, NOT MISLEADING OR OF THE OCCURRENCE OF CERTAIN OTHER EVENTS
SPECIFIED IN THE REGISTRATION RIGHTS AGREEMENTS, SUCH PARTICIPATING BROKER-
DEALER WILL SUSPEND THE SALE OF NOTES PURSUANT TO THE PROSPECTUS UNTIL THE
COMPANY HAS AMENDED OR SUPPLEMENTED THE PROSPECTUS TO CORRECT SUCH
---
MISSTATEMENT OR OMISSION AND HAS FURNISHED COPIES OF THE AMENDED OR
SUPPLEMENTED PROSPECTUS TO THE PARTICIPATING BROKER-DEALER OR THE COMPANY HAS
GIVEN NOTICE THAT THE SALE OF THE NOTES MAY BE RESUMED, AS THE CASE MAY BE. IF
THE COMPANY GIVES SUCH NOTICE TO SUSPEND THE SALE OF THE NOTES, THEY SHALL
EXTEND THE 90-DAY PERIOD REFERRED TO ABOVE DURING WHICH PARTICIPATING BROKER-
DEALERS ARE ENTITLED TO USE THE PROSPECTUS IN CONNECTION WITH THE RESALE OF
NOTES BY THE NUMBER OF DAYS DURING THE PERIOD FROM AND INCLUDING THE DATE OF
THE GIVING OF SUCH NOTICE TO AND INCLUDING THE DATE WHEN PARTICIPATING BROKER-
DEALERS SHALL HAVE RECEIVED COPIES OF THE SUPPLEMENTED OR AMENDED PROSPECTUS
NECESSARY TO PERMIT RESALES OF THE NOTES OR TO AND INCLUDING THE DATE ON WHICH
THE COMPANY HAS GIVEN NOTICE THAT THE SALE OF NOTES MAY BE RESUMED, AS THE
CASE MAY BE.
AS A RESULT, A PARTICIPATING BROKER-DEALER WHO INTENDS TO USE THE PROSPECTUS
IN CONNECTION WITH RESALES OF NOTES RECEIVED IN EXCHANGE FOR OLD NOTES
PURSUANT TO THE EXCHANGE OFFER MUST NOTIFY THE COMPANY, OR CAUSE THE COMPANY
TO BE NOTIFIED, ON OR PRIOR TO THE EXPIRATION DATE, THAT IT IS A PARTICIPATING
BROKER-DEALER. SUCH NOTICE MAY BE GIVEN IN THE SPACE PROVIDED ABOVE OR MAY BE
DELIVERED TO THE EXCHANGE AGENT AT THE ADDRESS SET FORTH IN THE PROSPECTUS
UNDER "THE EXCHANGE OFFER--EXCHANGE AGENT."
Holders of Old Notes whose Old Notes are accepted for exchange will not
receive accrued interest on such Old Notes for any period from and after the
last Interest Payment Date to which interest has been paid or duly provided
for on such Old Notes prior to the original issue date of the Notes or, if no
such interest has been paid or duly provided for, will not receive any accrued
interest on such Old Notes, and the undersigned waives the right to receive
any interest on such Old Notes accrued from and after such Interest Payment
Date or, if no such interest has been paid or duly provided for, from and
after October 28, 1997.
----------
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Company to be necessary or desirable to complete the
sale, assignment and transfer of the Old Notes tendered hereby. All authority
herein conferred or agreed to be conferred in this Letter of Transmittal shall
survive the death or incapacity of the undersigned and any obligation of the
undersigned hereunder shall be binding upon the heirs, executors,
administrators, personal representatives, trustees in bankruptcy, legal
representatives, successors and assigns of the undersigned. Except as stated
in the Prospectus, this tender is irrevocable.
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OLD NOTES"
ABOVE AND SIGNING THIS LETTER, WILL BE DEEMED TO HAVE TENDERED THE OLD NOTES
AS SET FORTH IN SUCH BOX.
7
<PAGE>
HOLDER(S) SIGN HERE
(SEE INSTRUCTIONS 2, 5 AND 6)
(PLEASE COMPLETE SUBSTITUTE FORM W-9 ON PAGE 15)
(NOTE: SIGNATURE(S) MUST BE GUARANTEED IF REQUIRED BY INSTRUCTION 2)
Must be signed by registered holder(s) (which term, for purposes of this
document, shall include any participant in DTC) exactly as name(s) appear(s) on
Certificate(s) hereby tendered or on the register of holders maintained by the
Company, or by any person(s) authorized to become the registered holder(s) by
endorsements and documents transmitted herewith (including such opinions of
counsel, certifications and other information as may be required by the Company
for the Old Notes to comply with the restrictions on transfer applicable to the
Old Notes). If signature is by an attorney-in-fact, executor, administrator,
trustee, guardian, officer of a corporation or another acting in a fiduciary
capacity or representative capacity, please set forth the signer's full title.
See Instruction 5.
_____________________________________________________________________________
_____________________________________________________________________________
(Signature(s) of Holder(s))
Date: ___________________, 1998
Name(s): ____________________________________________________________________
_____________________________________________________________________________
(Please Print)
Capacity (full title): ______________________________________________________
Address: ____________________________________________________________________
_____________________________________________________________________________
(Include Zip Code)
Area Code and Telephone Number: _____________________________________________
_____________________________________________________________________________
(Tax Identification or Social Security Number(s))
GUARANTEE OF SIGNATURE(S)
(SEE INSTRUCTIONS)
_____________________________________________________________________________
(Authorized Signature)
Date: ___________________, 1998
Name of Firm: _______________________________________________________________
Capacity (full title): ______________________________________________________
(Please Print)
Address: ____________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
(Include Zip Code)
Area Code and Telephone Number: _____________________________________________
8
<PAGE>
SPECIAL ISSUANCE INSTRUCTIONS (SEE SPECIAL DELIVERY INSTRUCTIONS (SEE
INSTRUCTIONS 1, 5 AND 6) INSTRUCTIONS 1, 5 AND 6)
To be completed ONLY if Notes or To be completed ONLY if Notes or
Old Notes not tendered are to be Old Notes not tendered are to be
issued in the name of someone sent to someone other than the
other than the registered holder registered holder of the Old Notes
of the Old Notes whose name(s) ap- whose names(s) appear(s) at an ad-
pear(s) above. dress other than that shown above.
Issue Mail
[_] Old Notes not tendered to: [_] Old Notes not tendered to:
[_] Notes to: [_] Notes to:
Name(s)____________________________
Name(s) ___________________________ (PLEASE PRINT)
(PLEASE PRINT) Address ___________________________
Address ___________________________ ___________________________________
___________________________________ (INCLUDE ZIP CODE)
(INCLUDE ZIP CODE)
Area Code and Telephone Number ____
Area Code and Telephone Number ____ ___________________________________
___________________________________ (TAX IDENTIFICATION OR SOCIAL
(TAX IDENTIFICATION OR SOCIAL SECURITY NUMBER(S))
SECURITY NUMBER(S))
9
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES; GUARANTEED DELIVERY
PROCEDURES.
This Letter of Transmittal is to be completed either if (a) Certificates are
to be forwarded herewith or (b) tenders are to be made pursuant to the
procedures for tender by book-entry transfer set forth in "The Exchange
Offer--Procedures for Tendering" in the Prospectus. Certificates, or timely
confirmation of a book-entry transfer of such Old Notes into the Exchange
Agent's account at DTC, as well as this Letter of Transmittal (or facsimile
thereof), properly completed and duly executed, with any required signature
guarantees, or an Agent's Message in lieu thereof, and any other documents
required by this Letter of Transmittal, must be received by the Exchange Agent
at its address set forth herein on or prior to the Expiration Date. Old Notes
may be tendered in whole or in part in integral multiples of $1,000 principal
amount at maturity, provided that, if any Old Notes are tendered for exchange
in part, the untendered amount thereof must be in integral multiples of $1,000
principal amount at maturity.
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, this Letter
of Transmittal and all other required documents to the Exchange Agent on or
prior to the Expiration Date or (iii) who cannot complete the procedures for
delivery by book-entry transfer on a timely basis, may tender their Old Notes
by properly completing and duly executing a Notice of Guaranteed Delivery
pursuant to the guaranteed delivery procedures set forth in "The Exchange
Offer--Procedures for Tendering" in the Prospectus. Pursuant to such
procedures: (i) such tender must be made by or through an Eligible Institution
(as defined below); (ii) a properly completed and duly executed Notice of
Guaranteed Delivery, substantially in the form made available by the Company,
must be received by the Exchange Agent on or prior to the Expiration Date; and
(iii) the Certificates (or a book-entry confirmation (as defined in the
Prospectus)) representing all tendered Old Notes, in proper form for transfer,
together with a Letter of Transmittal (or facsimile thereof), properly
completed and duly executed, with any required signature guarantees, or an
Agent's Message in lieu thereof, and any other documents required by this
Letter of Transmittal, must be received by the Exchange Agent within three New
York Stock Exchange trading days after the date of execution of such Notice of
Guaranteed Delivery, all as provided in "The Exchange Offer--Procedures for
Tendering" in the Prospectus.
The Notice of Guaranteed Delivery may be delivered by hand or transmitted by
facsimile or mail to the Exchange Agent, and must include a guarantee by an
Eligible Institution in the form set forth in such Notice. For Old Notes to be
properly tendered pursuant to the guaranteed delivery procedure, the Exchange
Agent must receive a Notice of Guaranteed Delivery on or prior to the
Expiration Date. As used herein and in the Prospectus, "Eligible Institution"
means a firm or other entity identified in Rule 17Ad-15 under the Exchange Act
as "an eligible guarantor institution," including (as such terms are defined
therein) (i) a bank; (ii) a broker, dealer, municipal securities broker,
municipal securities dealer, government securities broker or governmental
- -------------------- ------------
securities dealer; (iii) a credit union; (iv) a national securities exchange,
- -----------------
registered securities association or clearing agency; or (v) a savings
association, with membership in an approved signature medallion guarantee
program, that is a participant in a Securities Transfer Association.
THE METHOD OF DELIVERY OF CERTIFICATES, THIS LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING HOLDER
AND THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE
AGENT. IF DELIVERY IS TO BE MADE OTHER THAN BY HAND OR FACSIMILE, REGISTERED
MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, OR OVERNIGHT DELIVERY
SERVICE IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ENSURE TIMELY DELIVERY.
The Company will not accept any alternative, conditional or contingent
tenders. Each tendering holder, by execution of a Letter of Transmittal (or
facsimile thereof), or delivery of an Agent's Message in lieu thereof, waives
any right to receive any notice of the acceptance of such tender.
10
<PAGE>
2. GUARANTEE OF SIGNATURES. No signature guarantee on this Letter of
Transmittal is required if:
(i) This Letter of Transmittal is signed by the registered holder (which
term, for purposes of this document, shall include any participant in
DTC whose name appears on a security position listing as the owner of
the Old Notes) of Old Notes tendered herewith, unless such holder(s)
has completed either the box entitled "Special Issuance Instructions"
or the box entitled "Special Delivery Instructions" above, or
(ii) such Old Notes are tendered for the account of a firm that is an
Eligible Institution.
In all other cases, an Eligible Institution must guarantee the signature(s)
on this Letter of Transmittal. See Instruction 5.
3. INADEQUATE SPACE. If the space provided in the box captioned "Description
of Old Notes" is inadequate, the Certificate number(s) and/or the principal
amount of Old Notes and any other required information should be listed on a
separate signed schedule which is attached to this Letter of Transmittal.
4. PARTIAL TENDERS AND WITHDRAWAL RIGHTS. Tenders of Old Notes will be
accepted only in integral multiples of $1,000 principal amount at maturity,
provided that if any Old Notes are tendered for exchange in part, the untendered
amount thereof must be in integral multiples of $1,000 principal amount at
maturity. If less than all the Old Notes evidenced by any Certificate submitted
are to be tendered, fill in the principal amount of Old Notes which are to be
tendered in the boxes entitled "Principal Amount of Old Senior Notes Tendered"
and "Principal Amount at Maturity of Old Senior Discount Notes Tendered." In
such case, new Certificate(s) for the remainder of the Old Notes that were
evidenced by your old Certificate(s) will only be sent to the holder of the Old
Note, promptly after the Expiration Date. All Old Notes represented by
Certificates delivered to the Exchange Agent will be deemed to have been
tendered unless otherwise indicated.
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time on or prior to the Expiration Date. In order for a withdrawal to
be effective on or prior to that time, a written, telegraphic, telex or
facsimile transmission of such notice of withdrawal must be timely received by
the Exchange Agent at one of its addresses set forth above or in the
Prospectus on or prior to the Expiration Date. Any such notice of withdrawal
must specify the name of the person who tendered the Old Notes to be
withdrawn, the aggregate principal amount of Old Notes to be withdrawn, and
(if Certificates for Old Notes have been tendered) the name of the registered
holder of the Old Notes as set forth on the Certificate for the Old Notes, if
different from that of the person who tendered such Old Notes. If Certificates
for the Old Notes have been delivered or otherwise identified to the Exchange
Agent, then prior to the physical release of such Certificates for the Old
Notes, the tendering holder must submit the serial numbers shown on the
particular Certificates for the Old Notes to be withdrawn and the signature on
the notice of withdrawal must be guaranteed by an Eligible Institution, except
in the case of Old Notes tendered for the account of an Eligible Institution.
If Old Notes have been tendered pursuant to the procedures for book-entry
transfer set forth in the Prospectus under "The Exchange Offer--Procedures for
Tendering," the notice of withdrawal must specify the name and number of the
account at DTC to be credited with the withdrawal of Old Notes, in which case
a notice of withdrawal will be effective if delivered to the Exchange Agent by
written, telegraphic, telex or facsimile transmission. Withdrawals of tenders
of Old Notes may not be rescinded. Old Notes properly withdrawn will not be
deemed validly tendered for purposes of the Exchange Offer, but may be
retendered at any subsequent time on or prior to the Expiration Date by
following any of the procedures described in the Prospectus under "The
Exchange Offer--Procedures for Tendering."
All questions as to the validity, form and eligibility (including time of
receipt) of withdrawal notices will be determined by the Company, in its
sole discretion, which determination shall be final and binding on all
parties. Neither the Company, any affiliates or assigns of the Company, the
Exchange Agent nor any other person shall be under any duty to give any
notification of any irregularities in any notice of withdrawal or incur any
liability for failure to give any such notification. Any Old Notes which have
been tendered but which are withdrawn will be returned to the holder thereof
without cost to such holder promptly after withdrawal.
11
<PAGE>
5. SIGNATURES ON LETTER OF TRANSMITTAL, ASSIGNMENTS AND ENDORSEMENTS. If
this Letter of Transmittal is signed by the registered holder(s) of the Old
Notes tendered hereby, the signature(s) must correspond exactly with the
name(s) as written on the face of the Certificate(s) without alteration,
enlargement or any change whatsoever.
If any of the Old Notes tendered hereby are owned of record by two or more
joint owners, all such owners must sign this Letter of Transmittal.
If any tendered Old Notes are registered in different name(s) on several
Certificates, it will be necessary to complete, sign and submit as many
separate Letters of Transmittal (or facsimiles thereof) as there are different
registrations of Certificates.
If this Letter of Transmittal or any Certificates or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing and must submit proper evidence
satisfactory to the Company, in its sole discretion, of each such person's
authority so to act.
When this Letter of Transmittal is signed by the registered owner(s) of the
Old Notes listed and transmitted hereby, no endorsement(s) of Certificate(s)
or separate bond power(s) are required unless Notes are to be issued in the
name of a person other than the registered holder(s). Signature(s) on such
Certificate(s) or bond power(s) must be guaranteed by an Eligible Institution.
If this Letter of Transmittal is signed by a person other than the registered
owner(s) of the Old Notes listed, the Certificates must be endorsed or
accompanied by appropriate bond powers, signed exactly as the name or names of
the registered owner(s) appear(s) on the Certificates, and also must be
accompanied by such opinions of counsel, certifications and other information as
the Company or the Trustee for the Old Notes may require in accordance with the
restrictions on transfer applicable to the Old Notes. Signatures on such
Certificates or bond powers must be guaranteed by an Eligible Institution.
6. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. If Notes are to be issued in
the name of a person other than the signer of this Letter of Transmittal, or
if Notes are to be sent to someone other than the signer of this Letter of
Transmittal or to an address other than that shown above, the appropriate
boxes on this Letter of Transmittal should be completed. Certificates for Old
Notes not exchanged will be returned by mail or, if tendered by book-entry
transfer, by crediting the account indicated above maintained at DTC. See
Instruction 4.
7. IRREGULARITIES. The Company will determine, in its sole discretion, all
questions as to the form of documents, validity, eligibility (including time of
receipt) and acceptance for exchange of any tender of Old Notes, which
determination shall be final and binding on all parties. The Company reserves
the absolute right to reject any and all tenders determined by it not to be in
proper form or the acceptance of which, or exchange for which, may, in the view
of counsel to the Company, be unlawful. The Company also reserves the absolute
right, subject to applicable law, to waive satisfaction of any of the conditions
of the Exchange Offer set forth in the Prospectus under "The Exchange Offer--
Conditions to the Exchange Offer" or irregularities in any tender of Old Notes
of any particular holder whether or not similar conditions or irregularities are
waived in the case of other holders. The Company's interpretation of the terms
and conditions of the Exchange Offer (including this Letter of Transmittal and
the instructions hereto) will be final and binding. No tender of Old Notes will
be deemed to have been validly made until all irregularities with respect to
such tender have been cured or waived. The Company, any affiliates or assigns of
the Company, the Exchange Agent, or any other person shall not be under any duty
to give notification of any irregularities in tenders or incur any liability for
failure to give such notification.
8. QUESTIONS, REQUESTS FOR ASSISTANCE AND ADDITIONAL COPIES. Questions and
requests for assistance may be directed to the Exchange Agent at its address
and telephone number set forth on the front of this Letter of Transmittal.
Additional copies of the Prospectus, the Notice of Guaranteed Delivery and
this Letter of
12
<PAGE>
Transmittal may be obtained from the Exchange Agent or from your broker,
dealer, commercial bank, trust company or other nominee.
9. 31% BACKUP WITHHOLDING; SUBSTITUTE FORM W-9. Under U.S. Federal income
tax law, a holder whose tendered Old Notes are accepted for exchange is
required to provide the Exchange Agent with such holder's correct taxpayer
identification number ("TIN") on Substitute Form W-9 below. If the Exchange
Agent is not provided with the correct TIN, the Internal Revenue Service (the
"IRS") may subject the holder or other payee to a $50 penalty. In addition,
payments to such holders or other payees with respect to Old Notes exchanged
pursuant to the Exchange Offer may be subject to 31% backup withholding.
The box in Part 2 of the Substitute Form W-9 may be checked if the tendering
holder has not been issued a TIN and has applied for a TIN or intends to apply
for a TIN in the near future. If the box in Part 2 is checked, the holder or
other payee must also complete the Certificate of Awaiting Taxpayer
Identification Number below in order to avoid backup withholding.
Notwithstanding that the box in Part 2 is checked and the Certificate of
Awaiting Taxpayer Identification Number is completed, the Exchange Agent will
withhold 31% of all payments made prior to the time a properly certified TIN
is provided to the Exchange Agent. The Exchange Agent will retain such amounts
withheld during the 60-day period following the date of the Substitute Form W-
9. If the holder furnishes the Exchange Agent with its TIN within 60 days
after the date of the Substitute Form W-9, the amounts retained during the 60-
day period will be remitted to the holder and no further amounts shall be
retained or withheld from payments made to the holder thereafter. If, however,
the holder has not provided the Exchange Agent with its TIN within such 60-day
period, amounts withheld will be remitted to the IRS as backup withholding. In
addition, 31% of all payments made thereafter will be withheld and remitted to
the IRS until a correct TIN is provided.
The holder is required to give the Exchange Agent the TIN (e.g., social
security number or employer identification number) of the registered owner of
the Old Notes or of the last transferee appearing on the transfers attached
to, or endorsed on, the Old Notes. If the Old Notes are registered in more
than one name or are not in the name of the actual owner, consult the enclosed
"Guidelines for Certification of Taxpayer Identification Number on Substitute
Form W-9" for additional guidance on which number to report.
Certain holders (including, among others, corporations, financial
institutions and certain foreign persons) may not be subject to these backup
withholding and reporting requirements. Such holders should nevertheless
complete the attached Substitute Form W-9 below, and write "exempt" on the
face thereof, to avoid possible erroneous backup withholding. A foreign person
may qualify as an exempt recipient by submitting a properly completed IRS Form
W-8, signed under penalties of perjury, attesting to that holder's exempt
status. Please consult the enclosed "Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9" for additional guidance on which
holders are exempt from backup withholding.
Backup withholding is not an additional U.S. Federal income tax. Rather, the
U.S. Federal income tax liability of a person subject to backup withholding
will be reduced by the amount of tax withheld. If withholding results in an
overpayment of taxes, a refund may be obtained.
10. WAIVER OF CONDITIONS. The Company reserves the absolute right to waive
satisfaction of any or all conditions enumerated in the Prospectus.
11. NO CONDITIONAL TENDERS. No alternative, conditional or contingent
tenders will be accepted. All tendering holders of Old Notes, by execution of
this Letter of Transmittal, shall waive any right to receive notice of the
acceptance of Old Notes for exchange.
Neither the Company, the Exchange Agent nor any other person is obligated to
give notice of any irregularity with respect to any tender of Old Notes nor
shall any of them incur any liability for failure to give any such notice.
13
<PAGE>
12. LOST, DESTROYED OR STOLEN CERTIFICATES. If any Certificate(s)
representing Old Notes have been lost, destroyed or stolen, the holder should
promptly notify the Exchange Agent. The holder will then be instructed as to
the steps that must be taken in order to replace the Certificate(s). This
Letter of Transmittal and related documents cannot be processed until the
procedures for replacing lost, destroyed or stolen Certificate(s) have been
followed.
13. SECURITY TRANSFER TAXES. Holders who tender their Old Notes for exchange
will not be obligated to pay any transfer taxes in connection therewith. If,
however, Notes are to be delivered to, or are to be issued in the name of, any
person other than the registered holder of the Old Notes tendered, or if a
transfer tax is imposed for any reason other than the exchange of Old Notes in
connection with the Exchange Offer, then the amount of any such transfer tax
(whether imposed on the registered holder or any other persons) will be
payable by the tendering holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted with the Letter of Transmittal,
the amount of such transfer taxes will be billed directly to such tendering
holder.
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR FACSIMILE THEREOF) AND ALL OTHER
REQUIRED DOCUMENTS MUST BE RECEIVED BY THE EXCHANGE AGENT ON OR
PRIOR TO THE EXPIRATION DATE.
14
<PAGE>
- -------------------------------------------------------------------------------
TO BE COMPLETED BY ALL TENDERING SECURITY HOLDERS
(SEE INSTRUCTION 9)
PAYOR'S NAME: THE BANK OF NEW YORK
PART 1--PLEASE PROVIDE YOUR
TIN IN THE BOX AT RIGHT AND TIN: ____________
CERTIFY BY SIGNING AND DATING Social security
BELOW. number
SUBSTITUTE
FORM W-9
DEPARTMENT OF
THE TREASURY OR
INTERNAL REVENUE
SERVICE -----------------
Employer
identification
number
PAYER'S REQUEST FOR TAXPAYER
IDENTIFICATION NUMBER (TIN)
AND CERTIFICATION -----------------------------------------------------
PART 2--TIN Applied For [_]
-----------------------------------------------------
CERTIFICATION--UNDER THE PENALTIES OF PERJURY, I
CERTIFY THAT:
(1) The number shown on this form is my correct
taxpayer identification number (or I am
waiting for a number to be issued to me).
(2) I am not subject to backup withholding either
because (i) I am exempt from backup
withholding, (ii) I have not been notified by
the Internal Revenue Service ("IRS") that I am
subject to backup withholding as a result of a
failure to report all interest or dividends,
or (iii) the IRS has notified me that I am no
longer subject to backup withholding, and
(3) any other information provided on this form is
true and correct.
Signature: ________________________ Date: _______
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
You must cross out all of Part 2 above if you have been notified by the
IRS that you are subject to backup withholding because of underreporting
interest or dividends on your tax return and you have not been notified by
the IRS that you are no longer subject to backup withholding.
- -------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY IN CERTAIN CIRCUMSTANCES
RESULT IN BACKUP WITHHOLDING OF 31% OF ANY AMOUNTS PAID TO YOU PURSUANT
TO THE EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR
CERTIFICATION OR TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9
FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX
IN PART 2 OF THE SUBSTITUTE FORM W-9
- -------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (1) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or
(2) I intend to mail or deliver an application in the near future. I
understand that if I do not provide a taxpayer identification number by the
time of payment, 31% of all payments made to me on account of the Notes
shall be retained until I provide a taxpayer identification number to the
Exchange Agent and that, if I do not provide my taxpayer identification
number within 60 days, such retained amounts shall be remitted to the
Internal Revenue Service as backup withholding and 31% of all reportable
payments made to me thereafter will be withheld and remitted to the Internal
Revenue Service until I provide a taxpayer identification number.
Signature(s): ____________________________________ Date: ___________________
- -------------------------------------------------------------------------------
15
<PAGE>
EXHIBIT 99.2
FOX KIDS WORLDWIDE, INC.
NOTICE OF GUARANTEED DELIVERY
FOR
TENDER OF ANY AND ALL OUTSTANDING
9 1/4% SENIOR NOTES DUE 2007 AND
10 1/4% SENIOR DISCOUNT NOTES DUE 2007
IN EXCHANGE FOR
9 1/4% SENIOR NOTES DUE 2007 AND
10 1/4% SENIOR DISCOUNT NOTES DUE 2007
This Notice of Guaranteed Delivery, or one substantially equivalent to this
form, must be used to accept the Exchange Offer (as defined below) if (i)
certificates for the Company's (as such term is defined below) 9 1/4% Senior
Notes due 2007 (the "Old Senior Notes") and 10 1/4% Senior Discount Notes due
2007 (the "Old Senior Discount Notes" and, together with the Old Senior Notes,
the "Old Notes") are not immediately available, or (ii) the Old Notes, the
Letter of Transmittal and all other required documents cannot be delivered to
The Bank of New York (the "Exchange Agent") on or prior to 5:00 P.M. on the
Expiration Date (as defined in the Prospectus referred to below) or (iii) the
procedures for delivery by book-entry transfer cannot be completed on a timely
basis. This Notice of Guaranteed Delivery may be delivered by hand, overnight
courier or mail, or transmitted by facsimile transmission, to the Exchange
Agent. See "The Exchange Offer--Procedures for Tendering" in the Prospectus. In
addition, in order to utilize the guaranteed delivery procedure to tender Old
Notes pursuant to the Exchange Offer, a completed, signed and dated Letter of
Transmittal relating to the Old Notes (or facsimile thereof) must also be
received by the Exchange Agent within three New York Stock Exchange trading days
after the Expiration Date. Capitalized terms not defined herein have the
meanings assigned to them in the Prospectus.
The Exchange Agent For The Exchange Offer Is:
THE BANK OF NEW YORK
<TABLE>
<CAPTION>
By Registered or Certified Mail: Facsimile Transmission: By Hand or Overnight Delivery:
<S> <C> <C>
The Bank of New York (Eligible Institutions Only)
101 Barclay Street (212) 815- The Bank of New York
Reorganization Section/7E 101 Barclay Street
New York, New York 10286 To Confirm by Telephone or Reorganization Section/7E
Attention: for Information Call: New York, New York 10286
Attention:
(212) 815-
</TABLE>
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS
SET FORTH ABOVE OR TRANSMISSION OF THIS NOTICE OF GUARANTEED DELIVERY VIA
FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
This Notice of Guaranteed Delivery is not to be used to guarantee
signatures. If a signature on a Letter of Transmittal is required to be
guaranteed by an "Eligible Institution" under the instructions thereto, such
signature guarantee must appear in the applicable space provided in the
signature box on the Letter of Transmittal.
1
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to Fox Kids Worldwide, Inc. (the "Company")
upon the terms and subject to the conditions set forth in the Prospectus dated
March , 1998 (as the same may be amended or supplemented from time to time,
the "Prospectus"), and the related Letter of Transmittal (which together
constitute the "Exchange Offer"), receipt of which is hereby acknowledged, the
aggregate principal amount of Old Notes set forth below pursuant to the
guaranteed delivery procedures set forth in the Prospectus under the caption
"The Exchange Offer--Procedures for Tendering."
The undesigned understands that tenders of Old Notes will be accepted only
in integral multiples of $1,000 in principal amount at maturity. The
undersigned understands that tenders of Old Notes pursuant to the Exchange
Offer may not be withdrawn after 5:00 P.M., New York City time on the
Expiration Date. Tenders of Old Notes may also be withdrawn if the Exchange
Offer is terminated without any such Old Notes being purchased thereunder or
as otherwise provided in the Prospectus.
All authority herein conferred or agreed to be conferred by this Notice of
Guaranteed Delivery shall survive the death or incapacity of the undersigned
and every obligation of the undersigned under this Notice of Guaranteed
Delivery shall be binding upon the heirs, personal representatives, successors
and assigns of the undersigned.
- --------------------------------------------------------------------------------
PLEASE SIGN AND COMPLETE
Signature(s) of Registered Owner(s) Name(s) of Registered Holder(s):
or Authorized Signatory: ___________ ____________________________________
____________________________________ ____________________________________
Principal Amount of Old Senior Address: ___________________________
Notes Tendered: ____________________ ____________________________________
Principal Amount at Maturity of Old Area Code and Telephone No.: _______
Senior Discount Notes Tendered: ____
Date: ______________________________
Certificate No(s). of Old Notes
(if available): ____________________
____________________________________
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This Notice of Guaranteed Delivery must be signed by the holder(s) of Old
Notes as their name(s) appear on certificates for Old Notes, or on a
security position listing, or by person(s) authorized to become registered
holder(s) by endorsements and documents transmitted with this Notice of
Guaranteed Delivery. If a signature is by a trustee, executor,
administrator, guardian, attorney-in-fact, officer or other person acting in
a fiduciary or such representative capacity, such person must provide his or
her full title below.
PLEASE PRINT NAME(S) AND ADDRESS(ES)
Name(s): ____________________________________________________________________
_____________________________________________________________________________
Capacity: ___________________________________________________________________
Address(es): ________________________________________________________________
_____________________________________________________________________________
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm or other entity identified in Rule 17Ad-15 under
the Securities Exchange Act of 1934, as amended, as an "eligible guarantor
institution," including (as such terms are defined therein): (i) a bank;
(ii) a broker, dealer, municipal securities broker, municipal securities
dealer, government securities broker or government securities dealer; (iii)
a credit union; (iv) a national securities exchange, registered securities
association or clearing agency; or (v) a savings association that is a
participant in a Securities Transfer Association recognized program (each of
the foregoing being referred to as an "Eligible Institution"), hereby
guarantees to deliver to the Exchange Agent, at one of its addresses set
forth above, either the Old Notes tendered hereby in proper form for
transfer, or confirmation of the book-entry transfer of such Old Notes to
the Exchange Agent's account at The Depository Trust Company, pursuant to the
procedures for book-entry transfer set forth in the Prospectus, in either case
together with one or more properly completed and duly executed Letter(s) of
Transmittal (or facsimile thereof) and any other required documents within
three business days after the date of execution of this Notice of Guaranteed
Delivery.
The undersigned acknowledges that it must deliver the Letter(s) of
Transmittal and the Old Notes tendered hereby to the Exchange Agent within
the time period set forth above and that failure to do so could result in a
financial loss to the undersigned.
(PLEASE TYPE OR PRINT)
Name of Firm: ______________________ ____________________________________
Authorized Signature
Address: ___________________________
Title: _____________________________
____________________________________
Zip Code
Dated: _____________________________
____________________________________
Area Code and Telephone No.
- --------------------------------------------------------------------------------
NOTE: DO NOT SEND CERTIFICATES FOR OLD NOTES WITH THIS FORM. CERTIFICATES FOR
OLD NOTES SHOULD ONLY BE SENT WITH YOUR LETTER OF TRANSMITTAL.
3
<PAGE>
EXHIBIT 99.3
March __, 1998
EXCHANGE AGENT AGREEMENT
------------------------
The Bank of New York
Corporate Trust Trustee Administration
101 Barclay Street - 21st Floor
New York, New York 10286
Ladies and Gentlemen:
Fox Kids Worldwide, Inc. (the "Company") proposes to make an offer
(the "Exchange Offer") to exchange its 9 1/4% Senior Notes Due 2007 and 10 1/4%
Senior Discount Notes Due 2007 (collectively, the "Old Notes") for its 9 1/4%
Senior Notes Due 2007 and 10 1/4% Senior Discount Notes Due 2007 (collectively,
the "New Notes"), respectively. The terms and conditions of the Exchange Offer
as currently contemplated are set forth in a prospectus, dated March __, 1998
(the "Prospectus"), proposed to be distributed to all record holders of the Old
Notes. The Old Notes and the New Notes are collectively referred to herein as
the "Notes".
The Company hereby appoints The Bank of New York to act as exchange
agent (the "Exchange Agent") in connection with the Exchange Offer. References
hereinafter to "you" shall refer to The Bank of New York.
The Exchange Offer is expected to be commenced by the Company on or
about March __, 1998. The Letter of Transmittal accompanying the Prospectus (or
in the case of book entry securities, the ATOP system) is to be used by the
holders of the Old Notes to accept the Exchange Offer and contains instructions
with respect to the delivery of certificates for Old Notes tendered in
connection therewith.
The Exchange Offer shall expire at 5:00 P.M., New York City time, on
April __, 1998 or on such later date or time to which the Company may extend the
Exchange Offer (the "Expiration Date"). Subject to the terms and conditions set
forth in the Prospectus, the Company expressly reserves the right to extend the
Exchange Offer from time to time and may extend the Exchange Offer by giving
oral (confirmed in writing) or written notice to you before 9:00 A.M., New York
City time, on the business day
<PAGE>
following the previously scheduled Expiration Date.
The Company expressly reserves the right to amend or terminate the
Exchange Offer, and not to accept for exchange any Old Notes not theretofore
accepted for exchange, upon the occurrence of any of the conditions of the
Exchange Offer specified in the Prospectus under the caption "The Exchange
Offer -- Conditions to the Exchange Offer." The Company will give oral
(confirmed in writing) or written notice of any amendment, termination or
nonacceptance to you as promptly as practicable.
In carrying out your duties as Exchange Agent, you are to act in
accordance with the following instructions:
1. You will perform such duties and only such duties as are
specifically set forth in the section of the Prospectus captioned "The Exchange
Offer" or as specifically set forth herein; provided, however, that in no way
-------- -------
will your general duty to act in good faith be discharged by the foregoing.
2. You will establish an account with respect to the Old Notes at The
Depository Trust Company (the "Book-Entry Transfer Facility") for purposes of
the Exchange Offer within two business days after the date of the Prospectus,
and any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of the Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into your account in
accordance with the Book-Entry Transfer Facility's procedure for such transfer.
3. You are to examine each of the Letters of Transmittal and
certificates for Old Notes (or confirmation of book-entry transfer into your
account at the Book-Entry Transfer Facility) and any other documents delivered
or mailed to you by or for holders of the Old Notes to ascertain whether: (i)
the Letters of Transmittal and any such other documents are duly executed and
properly completed in accordance with instructions set forth therein and (ii)
the Old Notes have otherwise been properly tendered. In each case where the
Letter of Transmittal or any other document has been improperly completed or
executed or any of the certificates for Old Notes are not in proper form for
transfer or some other irregularity in connection with the acceptance of the
Exchange Offer exists, you will endeavor to inform the presenters of the need
for fulfillment of all requirements and to take any other action as may be
necessary or advisable to cause such irregularity to be corrected.
<PAGE>
4. With the approval of the President, Senior Vice President,
Executive Vice President, or any Vice President of the Company (such approval,
if given orally, to be confirmed in writing) or any other party designated by
such an officer in writing, you are authorized to waive any irregularities in
connection with any tender of Old Notes pursuant to the Exchange Offer.
5. Tenders of Old Notes may be made only as set forth in the Letter
of Transmittal and in the section of the Prospectus captioned "The Exchange
Offer -- Procedures for Tendering" and Old Notes shall be considered properly
tendered to you only when tendered in accordance with the procedures set forth
therein.
Notwithstanding the provisions of this paragraph 5, Old Notes
which the President, Senior Vice President, Executive Vice President, or any
Vice President of the Company shall approve as having been properly tendered
shall be considered to be properly tendered (such approval, if given orally,
shall be confirmed in writing).
6. You shall advise the Company with respect to any Old Notes
received subsequent to the Expiration Date and accept its instructions with
respect to disposition of such Old Notes.
7. You shall accept tenders:
(a) in cases where the Old Notes are registered in two or more names
only if signed by all named holders;
(b) in cases where the signing person (as indicated on the Letter of
Transmittal) is acting in a fiduciary or a representative capacity only when
proper evidence of his or her authority so to act is submitted; and
(c) from persons other than the registered holder of Old Notes provided
that customary transfer requirements, including any applicable transfer taxes,
are fulfilled.
You shall accept partial tenders of Old Notes where so indicated and
as permitted in the Letter of Transmittal and deliver certificates for Old Notes
to the transfer agent for split-up and return any untendered Old Notes to the
holder (or such other person as may be designated in the Letter of Transmittal)
as promptly as practicable after expiration or termi-
<PAGE>
nation of the Exchange Offer.
8. Upon satisfaction or waiver of all of the con ditions to the
Exchange Offer, the Company will notify you (such notice if given orally, to be
confirmed in writing) of its acceptance, promptly after the Expiration Date, of
all Old Notes properly tendered and you, on behalf of the Company, will exchange
such Old Notes for New Notes and cause such Old Notes to be cancelled. Delivery
of New Notes will be made on behalf of the Company by you at the rate of $1,000
principal amount of New Notes for each $1,000 principal amount of the
corresponding series of Old Notes tendered promptly after notice (such notice if
given orally, to be confirmed in writing) of acceptance of said Old Notes by the
Company; provided, however, that in all cases, Old Notes tendered pursuant to
the Exchange Offer will be exchanged only after timely receipt by you of
certificates for such Old Notes (or confirmation of book-entry transfer into
your account at the Book-Entry Transfer Facility), a properly completed and duly
executed Letter of Transmittal (or facsimile thereof) with any required
signature guarantees and any other required documents. You shall issue New Notes
only in denominations of $1,000 or any integral multiple thereof.
9. Tenders pursuant to the Exchange Offer are irrevocable, except
that, subject to the terms and upon the conditions set forth in the Prospectus
and the Letter of Transmittal, Old Notes tendered pursuant to the Exchange
Offer may be withdrawn at any time prior to the Expiration Date.
10. The Company shall not be required to exchange any Old Notes
tendered if any of the conditions set forth in the Exchange Offer are not met.
Notice of any decision by the Company not to exchange any Old Notes tendered
shall be given (and confirmed in writing) by the Company to you.
11. If, pursuant to the Exchange Offer, the Company does not accept
for exchange all or part of the Old Notes tendered because of an invalid
tender, the occurrence of certain other events set forth in the Prospectus under
the caption "The Exchange Offer -- Conditions to the Exchange Offer" or
otherwise, you shall as soon as practicable after the expiration or termination
of the Exchange Offer return those certificates for unaccepted Old Notes (or
effect appropriate book-entry transfer), together with any related required
documents and the Letters of Transmittal relating thereto that are in your
possession, to the persons who deposited them.
12. All certificates for reissued Old Notes, unac-
<PAGE>
cepted Old Notes or for New Notes shall be forwarded by first-class mail.
13. You are not authorized to pay or offer to pay any concessions,
commissions or solicitation fees to any broker, dealer, bank or other persons or
to engage or utilize any person to solicit tenders.
14. As Exchange Agent hereunder you:
(a) shall have no duties or obligations other than those
specifically set forth herein or as may be subsequently agreed to in writing by
you and the Company;
(b) will be regarded as making no representations and having
no responsibilities as to the validity, sufficiency, value or genuineness of
any of the certificates or the Old Notes represented thereby deposited with you
pursuant to the Exchange Offer, and will not be required to and will make no
representation as to the validity, value or genuineness of the Exchange Offer;
(c) shall not be obligated to take any legal action hereunder
which might in your reasonable judgment involve any expense or liability, unless
you shall have been furnished with reasonable indemnity;
(d) may reasonably rely on and shall be protected in acting in
reliance upon any certificate, instrument, opinion, notice, letter, telegram or
other document or security delivered to you and reasonably believed by you to be
genuine and to have been signed by the proper party or parties;
(e) may reasonably act upon any tender, statement, request,
comment, agreement or other instrument whatsoever not only as to its due
execution and validity and effectiveness of its provisions, but also as to the
truth and accuracy of any information contained therein, which you shall in good
faith believe to be genuine or to have been signed or represented by a proper
person or persons;
(f) may rely on and shall be protected in acting upon written
or oral instructions from any officer of the Company;
(g) may consult with your counsel with respect
<PAGE>
to any questions relating to your duties and responsibilities and the advice or
opinion of such counsel shall be full and complete authorization and protection
in respect of any action taken, suffered or omitted to be taken by you hereunder
in good faith and in accordance with the advice or opinion of such counsel; and
(h) shall not advise any person tendering Old Notes pursuant to
the Exchange Offer as to the wisdom of making such tender or as to the market
value or decline or appreciation in market value of any Old Notes.
15. You shall take such action as may from time to time be requested
by the Company or its counsel (and such other action as you may reasonably deem
appropriate) to furnish copies of the Prospectus, Letter of Transmittal and the
Notice of Guaranteed Delivery (as defined in the Prospectus) or such other forms
as may be approved from time to time by the Company, to all persons requesting
such documents and to accept and comply with telephone requests for information
relating to the Exchange Offer, provided that such information shall relate only
to the procedures for accepting (or withdrawing from) the Exchange Offer. The
Company will furnish you with copies of such documents at your request. All
other requests for information relating to the Exchange Offer shall be directed
to the Company, Attention: Mel Woods.
16. You shall advise by facsimile transmission or telephone, and
promptly thereafter confirm in writing to Mel Woods of the Company and such
other person or persons as it may request, daily (and more frequently during the
week immediately preceding the Expiration Date and if otherwise requested) up to
and including the Expiration Date, as to the number of Old Notes which have been
tendered pursuant to the Exchange Offer and the items received by you pursuant
to this Agreement, separately reporting and giving cumulative totals as to items
properly received and items improperly received. In addition, you will also
inform, and cooperate in making available to, the Company or any such other
person or persons upon oral request made from time to time prior to the
Expiration Date of such other information as it or he or she reasonably
requests. Such cooperation shall include, without limitation, the granting by
you to the Company and such person as the Company may request of access to those
persons on your staff who are responsible for receiving tenders, in order to
ensure that immediately prior to the Expiration Date the Company shall have
received information in sufficient detail to enable it to decide whether to
extend the Exchange Offer. You shall prepare a final list of all persons
<PAGE>
whose tenders were accepted, the aggregate principal amount of Old Notes
tendered, the aggregate principal amount of Old Notes accepted and deliver said
list to the Company.
17. Letters of Transmittal and Notices of Guaranteed Delivery shall be
stamped by you as to the date and the time of receipt thereof and shall be
preserved by you for a period of time at least equal to the period of time you
preserve other records pertaining to the transfer of securities. You shall
dispose of unused Letters of Transmittal and other surplus materials by
returning them to the Company.
18. You hereby expressly waive any lien, encumbrance or right of set-
off whatsoever that you may have with respect to funds deposited with you for
the payment of transfer taxes by reasons of amounts, if any, borrowed by the
Company, or any of its subsidiaries or affiliates pursuant to any loan or credit
agreement with you or for compensation owed to you hereunder.
19. For services rendered as Exchange Agent hereunder, you shall be
entitled to such compensation as set forth on Schedule I attached hereto.
20. You hereby acknowledge receipt of the Prospectus and the Letter of
Transmittal and further acknowledge that you have examined each of them. Any
inconsistency between this Agreement, on the one hand, and the Prospectus and
the Letter of Transmittal (as they may be amended from time to time), on the
other hand, shall be resolved in favor of the latter two documents, except with
respect to the duties, liabilities and indemnification of you as Exchange Agent,
which shall be controlled by this Agreement.
21. The Company covenants and agrees to indemnify and hold you
harmless in your capacity as Exchange Agent hereunder against any loss,
liability, cost or expense, including attorneys' fees and expenses, arising out
of or in connection with any act, omission, delay or refusal made by you in
reliance upon any signature, endorsement, assignment, certificate, order,
request, notice, instruction or other instrument or document reasonably believed
by you to be valid, genuine and sufficient and in accepting any tender or
effecting any transfer of Old Notes reasonably believed by you in good faith to
be authorized, and in delaying or refusing in good faith to accept any tenders
or effect any transfer of Old Notes; provided, however, that the Company shall
not be liable for indemnification or otherwise for
<PAGE>
any loss, liability, cost or expense to the extent arising out of your gross
negligence or willful misconduct. In no case shall the Company be liable under
this indemnity with respect to any claim against you unless the Company shall be
notified by you, by letter or by facsimile confirmed by letter, of the written
assertion of a claim against you or of any other action commenced against you,
promptly after you shall have received any such written assertion or notice of
commencement of action. The Company shall be entitled to participate at its own
expense in the defense of any such claim or other action, and, if the Company so
elects, the Company shall assume the defense of any suit brought to enforce any
such claim. In the event that the Company shall assume the defense of any such
suit, the Company shall not be liable for the fees and expenses of any
additional counsel thereafter retained by you so long as the Company shall
retain counsel satisfactory to you to defend such suit, and so long as you have
not determined, in your reasonable judgment, that a conflict of interest exists
between you and the Company.
22. You shall arrange to comply with all requirements under the tax
laws of the United States, including those relating to missing Tax
Identification Numbers, and shall file any appropriate reports with the Internal
Revenue Service. The Company understands that you are required to deduct 31% on
payments to holders who have not supplied their correct Taxpayer Identification
Number or required certification. Such funds will be turned over to the Internal
Revenue Service in accordance with applicable regulations.
23. You shall deliver or cause to be delivered, in a timely manner to
each governmental authority to which any transfer taxes are payable in respect
of the exchange of Old Notes, your check in the amount of all transfer taxes so
payable, and the Company shall reimburse you for the amount of any and all
transfer taxes payable in respect of the exchange of Old Notes; provided,
however, that you shall reimburse the Company for amounts refunded to you in
respect of your payment of any such transfer taxes, at such time as such refund
is received by you.
24. This Agreement and your appointment as Exchange Agent hereunder
shall be construed and enforced in accordance with the laws of the State of New
York applicable to agreements made and to be performed entirely within such
state, and without regard to conflicts of law principles, and shall inure to the
benefit of, and the obligations created hereby shall be binding upon, the
successors and assigns of each of the parties hereto.
<PAGE>
25. This Agreement may be executed in two or more counterparts, each
of which shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement.
26. In case any provision of this Agreement shall be invalid, illegal
or unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
27. This Agreement shall not be deemed or construed to be modified,
amended, rescinded, cancelled or waived, in whole or in part, except by a
written instrument signed by a duly authorized representative of the party to be
charged. This Agreement may not be modified orally.
28. Unless otherwise provided herein, all notices, requests and other
communications to any party hereunder shall be in writing (including facsimile
or similar writing) and shall be given to such party, addressed to it, at its
address or telecopy number set forth below:
<PAGE>
If to the Company:
Fox Kids Worldwide, Inc.
10960 Wilshire Boulevard
Los Angeles, CA 90024
Facsimile: 310-235-5100
Attention: Mel Woods
With copies to:
The News Corporation Limited
1211 Avenue of the Americas, 3rd Floor
New York, New York 10036
Facsimile: 212-852-7145
Attention: Arthur M. Siskind, Esq.
Troop Meisinger Steuber & Pasich, LLP
10940 Wilshire Boulevard
Los Angeles, California 90024
Facsimile: 310-443-7512
Attention: C.N. Franklin Reddick III, Esq.
and
Squadron, Ellenoff, Plesent & Sheinfeld, LLP
551 Fifth Avenue
New York, New York 10176
Facsimile: 212-697-6686
Attention: Jeffrey W. Rubin
If to the Exchange Agent:
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Facsimile: (212) 815-5915
Attention: Corporate Trust Trustee
Administration
<PAGE>
29. Unless terminated earlier by the parties hereto, this Agreement
shall terminate 90 days following the Expiration Date. Notwithstanding the
foregoing, Paragraphs 19, 21 and 23 shall survive the termination of this
Agreement. Upon any termination of this Agreement, you shall promptly deliver to
the Company any certificates for Notes, funds or property then held by you as
Exchange Agent under this Agreement.
30. This Agreement shall be binding and effective as of the date
hereof.
<PAGE>
Please acknowledge receipt of this Agreement and confirm the
arrangements herein provided by signing and re turning the enclosed copy.
FOX KIDS WORLDWIDE, INC.
By:______________________
Name:
Title:
Accepted as of the date
first above written:
THE BANK OF NEW YORK, as Exchange Agent
By:_____________________
Name:
Title:
<PAGE>
SCHEDULE I
FEES
$_______ for Exchange Offer
<PAGE>
EXHIBIT 99.4
FOX KIDS WORLDWIDE, INC.
TENDER OF ANY AND ALL OUTSTANDING
9 1/4% SENIOR NOTES DUE 2007 AND
10 1/4% SENIOR DISCOUNT NOTES DUE 2007
IN EXCHANGE FOR
9 1/4% SENIOR NOTES DUE 2007 AND
10 1/4% SENIOR DISCOUNT NOTES DUE 2007
To: Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees:
Fox Kids Worldwide, Inc. (the "Company") is offering, upon and subject to
the terms and conditions set forth in a prospectus dated March __, 1998 (the
"Prospectus"), and the enclosed letter of transmittal (the "Letter of
Transmittal"), to exchange (the "Exchange Offer") its 9 1/4% Senior Notes due
2007 and its 10 1/4% Senior Discount Notes due 2007 which have been registered
under the Securities Act of 1933, as amended, for a like principal amount of the
Company's issued and outstanding 9 1/4% Senior Notes due 2007 (the "Old Senior
Notes") and 10 1/4% Senior Discount Notes due 2007 (the "Old Senior Discount
Notes" and, together with the Old Senior Notes, the "Old Notes"). The Exchange
Offer is being made in order to satisfy certain obligations of the Company
contained in two separate and substantially identical Registration Rights
Agreements, each dated October 28, 1997, and each among the Company and the
initial purchasers referred to therein.
We are requesting that you contact your clients for whom you hold Old Notes
regarding the Exchange Offer. For your information and for forwarding to your
clients for whom you hold Old Notes registered in your name or in the name of
your nominee, or who hold Old Notes registered in their own names, we are
enclosing the following documents:
1. Prospectus dated March , 1998;
2. The Letter of Transmittal for your use and for the information (or the
use, where relevant) of your clients;
3. A Notice of Guaranteed Delivery to be used to accept the Exchange
Offer if certificates for Old Notes are not immediately available or time
will not permit all required documents to reach the Exchange Agent (as
defined below) prior to the Expiration Date (as defined below) or if the
procedure for book-entry transfer cannot be completed on a timely basis;
4. A form of letter which may be sent to your clients for whose account
you hold Old Notes registered in your name or the name of your nominee,
with space provided for obtaining such clients' instructions with regard to
the Exchange Offer; and
5. Return envelopes addressed to The Bank of New York, the exchange
agent, for Old Notes (the "Exchange Agent").
YOUR PROMPT ACTION IS REQUESTED. THE EXCHANGE OFFER WILL EXPIRE AT 5:00
P.M., NEW YORK CITY TIME, ON _____ , 1998, UNLESS EXTENDED BY THE COMPANY IN
ITS SOLE DISCRETION (THE "EXPIRATION DATE"). THE OLD NOTES TENDERED PURSUANT
TO THE EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME BEFORE THE EXPIRATION DATE.
1
<PAGE>
To participate in the Exchange Offer, a duly executed and properly completed
Letter of Transmittal (or facsimile thereof or an Agent's Message (as defined
in the Prospectus) in lieu thereof), with any required signature guarantees
and any other required documents, should be sent to the Exchange Agent and
certificates representing the Old Notes should be delivered to the Exchange
Agent, all in accordance with the instructions set forth in the Letter of
Transmittal and the Prospectus.
If holders of Old Notes wish to tender, but it is impracticable for them to
forward their certificates for Old Notes prior to the expiration of the
Exchange Offer or to comply with the book-entry transfer procedures on a
timely basis, a tender may be effected by following the guaranteed delivery
procedures described in the Prospectus under "The Exchange Offer--Guaranteed
Delivery Procedures."
The Company will, upon request, reimburse brokers, dealers, commercial banks
and trust companies for reasonable and necessary costs and expenses incurred
by them in forwarding the Prospectus and the related documents to the
beneficial owners of Old Notes held by them as nominee or in a fiduciary
capacity. The Company will pay or cause to be paid all stock transfer taxes
applicable to the exchange of Old Notes pursuant to the Exchange Offer, except
as set forth in Instruction 13 of the Letter of Transmittal.
Any inquiries you may have with respect to the Exchange Offer, or requests
for additional copies of the enclosed materials, should be directed to The
Bank of New York, the Exchange Agent for the Old Notes, at its address and
telephone number set forth on the front of the Letter of Transmittal.
Very truly yours,
FOX KIDS WORLDWIDE, INC.
NOTHING HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY
PERSON AS AN AGENT OF THE COMPANY OR THE EXCHANGE AGENT, OR AUTHORIZE YOU OR
ANY OTHER PERSON TO USE ANY DOCUMENT OR MAKE ANY STATEMENTS ON BEHALF OF
EITHER OF THEM WITH RESPECT TO THE EXCHANGE OFFER, EXCEPT FOR STATEMENTS
EXPRESSLY MADE IN THE PROSPECTUS OR THE LETTER OF TRANSMITTAL.
Enclosures
2
<PAGE>
EXHIBIT 99.5
FOX KIDS WORLDWIDE, INC.
TENDER OF ANY AND ALL OUTSTANDING
9 1/4% SENIOR NOTES DUE 2007 AND
10 1/4% SENIOR DISCOUNT NOTES DUE 2007
IN EXCHANGE FOR
9 1/4% SENIOR NOTES DUE 2007 AND
10 1/4% SENIOR DISCOUNT NOTES DUE 2007
To Our Clients:
Enclosed for your consideration is a prospectus dated March , 1998 (the
"Prospectus"), and the related letter of transmittal (the "Letter of
Transmittal"), relating to the offer (the "Exchange Offer") of Fox Kids
Worldwide, Inc. (the "Company") to exchange its 9 1/4% Senior Notes due 2007 and
its 10 1/4 % Senior Discount Notes due 2007 which have been registered under the
Securities Act of 1933, as amended, for a like principal amount of the issued
and outstanding 9 1/4% Senior Notes due 2007 (the "Old Senior Notes") and 10
1/4% Senior Discount Notes due 2007 (the "Old Senior Discount Notes" and,
together with the Old Senior Notes, the "Old Notes"), upon the terms and subject
to the conditions described in the Prospectus. The Exchange Offer is being made
in order to satisfy certain obligations of the Company contained in two separate
and substantially identical Registration Rights Agreements, dated October 28,
1997 each among the Company and the initial purchasers referred to therein.
This material is being forwarded to you as the beneficial owner of the Old
Notes carried by us in your account but not registered in your name. A TENDER
OF SUCH OLD NOTES MAY ONLY BE MADE BY US AS THE HOLDER OF RECORD AND PURSUANT
TO YOUR INSTRUCTIONS.
Accordingly, we request instructions as to whether you wish us to tender on
your behalf the Old Notes held by us for your account, pursuant to the terms
and conditions set forth in the enclosed Prospectus and Letter of Transmittal.
Your instructions should be forwarded to us as promptly as possible in order
to permit us to tender the Old Notes on your behalf in accordance with the
provisions of the Exchange Offer. The Exchange Offer will expire at 5:00 P.M.,
New York City time, on _____ , 1998, unless extended by the Company in its
sole discretion. Any Old Notes tendered pursuant to the Exchange Offer may be
withdrawn at any time before the Expiration Date.
Your attention is directed to the following:
1. The Exchange Offer is for any and all Old Notes.
2. The Exchange Offer is subject to certain conditions set forth in the
Prospectus in the section captioned "The Exchange Offer--Conditions to the
Exchange Offer."
3. Any transfer taxes incident to the transfer of Old Notes from the
holder to the Company will be paid by the Company, except as otherwise
provided in the Instructions in the Letter of Transmittal.
4. The Exchange Offer expires at 5:00 P.M., New York City time, on
_____ , 1998, unless extended by the Company in its sole discretion.
If you wish to have us tender your Old Notes, please so instruct us by
completing, executing and returning to us the instruction form on the back of
this letter. THE LETTER OF TRANSMITTAL IS FURNISHED TO YOU FOR INFORMATION
ONLY AND MAY NOT BE USED DIRECTLY BY YOU TO TENDER OLD NOTES.
1
<PAGE>
INSTRUCTIONS WITH RESPECT TO
THE EXCHANGE OFFER
The undersigned acknowledge(s) receipt of your letter and the enclosed
material referred to therein relating to the Exchange Offer made by Fox Kids
Worldwide, Inc. respect to the Old Notes.
This will instruct you to tender the Old Notes held by you for the account
of the undersigned, upon and subject to the terms and conditions set forth in
the Prospectus and the related Letter of Transmittal.
Please tender the Old Notes held by you for my account as indicated below:
- --------------------------------------------------------------------------------
Old Senior Notes _____________________________________________________________
AGGREGATE PRINCIPAL AMOUNT OF OLD SENIOR NOTES TENDERED
Old Senior Discount Notes ____________________________________________________
AGGREGATE PRINCIPAL AMOUNT AT MATURITY OF OLD SENIOR
DISCOUNT NOTES TENDERED
[_] Please do not tender any Old Notes held by you for my account.
Dated: _________________________________________________________________, 1998
Signature(s): ________________________________________________________________
Please print name(s) here: ___________________________________________________
Address(es): _________________________________________________________________
Area Code and Telephone Number(s): ___________________________________________
Tax Identification or Social Security Number(s): _____________________________
- --------------------------------------------------------------------------------
None of the Old Notes held by us for your account will be tendered unless we
receive written instructions from you to do so. Unless a specific contrary
instruction is given in the space provided, your signature(s) hereon shall
constitute an instruction to us to tender all the Old Notes held by us for
your account.
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