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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/ X / Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1996.
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________________ to ______________
COMMISSION FILE NO. 1-11121
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 54-1522360
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2877 GUARDIAN LANE, VIRGINIA BEACH, VIRGINIA 23452
(Address of principal executive offices) (Zip Code)
(757) 459-6000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES / X / NO / /
As of November 1, 1996, there were outstanding 5,000,000 shares of the
Registrant's Class A Common Stock, par value $.01 per share, convertible (the
"Class A Common Stock"); 32,787,038 shares of the Registrant's Class B Common
Stock, par value $.01 per share (the "Class B Common Stock"); and 7,088,732
shares of the Registrant's Class C Common Stock, par value $.01 per share,
non-voting and convertible (the "Class C Common Stock" and, together with the
Class A Common Stock and Class B Common Stock, the "Common Stock").
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INTERNATIONAL FAMILY ENTERTAINMENT, INC.
INDEX TO FORM 10-Q
For the quarterly period ended September 30, 1996
<TABLE>
<CAPTION>
Page No.
---------
<S> <C>
Part I - Financial Information
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Item 1. Financial Statements:
Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 3
Consolidated Statements of Operations -
For the Three Months Ended September 30, 1996 and 1995 5
Consolidated Statements of Operations -
For the Nine Months Ended September 30, 1996 and 1995 6
Consolidated Statements of Cash Flows -
For the Nine Months Ended September 30, 1996 and 1995 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Part II - Other Information
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K 25
</TABLE>
Other items in Part II have been omitted because they are not applicable for
the quarterly period ended September 30, 1996.
2
<PAGE> 3
Part I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
Consolidated Balance Sheets
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
September 30 December 31
1996 1995
---- ----
<S> <C> <C>
Current assets
Cash and cash equivalents $ 8,545,000 $ 32,865,000
Investment in marketable securities 9,220,000 8,290,000
Accounts receivable, net of allowances of
$5,344,000 and $5,780,000 91,828,000 95,699,000
Film rights, current portion 116,483,000 56,355,000
Prepaid expenses and other 7,873,000 11,511,000
--------------- ---------------
Total current assets 233,949,000 204,720,000
Property and equipment, net of accumulated
depreciation and amortization of
$27,944,000 and $23,831,000 63,324,000 73,028,000
Film rights 108,888,000 105,094,000
Long-term accounts receivable, net of allowances of
$2,205,000 and $520,000 21,324,000 24,754,000
Investment in equity securities - related party 35,458,000 -
Other investments, net 14,331,000 16,575,000
Goodwill, net of accumulated amortization of
$8,381,000 and $6,552,000 52,966,000 54,795,000
Other assets 1,982,000 2,461,000
--------------- ---------------
$ 532,222,000 $ 481,427,000
=============== ===============
</TABLE>
(continued)
See accompanying notes to consolidated financial statements.
3
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INTERNATIONAL FAMILY ENTERTAINMENT, INC.
Consolidated Balance Sheets, continued
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30 December 31
1996 1995
---- ----
<S> <C> <C>
Current liabilities
Accounts payable $ 9,958,000 $ 14,598,000
Accrued liabilities 15,361,000 13,121,000
Accrued participations and residuals 9,681,000 11,615,000
Current portion of film rights payable 49,927,000 38,161,000
Current maturities of debt 209,000 181,000
Income taxes payable 3,249,000 -
Current portion of deferred income taxes 2,516,000 611,000
Deferred income 8,017,000 5,891,000
-------------- --------------
Total current liabilities 98,918,000 84,178,000
Film rights payable 47,933,000 32,714,000
Long-term debt 140,740,000 153,752,000
Accrued interest - related party 286,000 327,000
Convertible Notes - related party 23,000,000 23,000,000
Deferred income taxes 10,062,000 2,676,000
Other liabilities, including participations and residuals 13,518,000 10,347,000
Minority interests 2,419,000 3,130,000
Commitments and contingencies (Note G)
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, 32,788,662 and
33,039,831 shares issued and outstanding 101,486,000 104,886,000
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 (777,000) (1,697,000)
Cumulative foreign currency translation adjustment (59,000) 665,000
Unrealized gain (loss) on investments in securities 484,000 (373,000)
Retained earnings 43,352,000 16,962,000
-------------- --------------
Total stockholders' equity 195,346,000 171,303,000
-------------- --------------
$532,222,000 $481,427,000
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
4
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INTERNATIONAL FAMILY ENTERTAINMENT, INC.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended September 30
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1996 1995
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<S> <C> <C>
Operating revenues $78,661,000 $77,962,000
------------- -------------
Operating expenses
Production and programming 43,566,000 42,727,000
Selling and marketing 11,363,000 14,524,000
New business development 412,000 2,132,000
General and administrative 6,936,000 6,119,000
Amortization of goodwill 615,000 683,000
------------- -------------
Total operating expenses 62,892,000 66,185,000
------------- -------------
Operating income 15,769,000 11,777,000
------------- -------------
Other income (expense)
Investment income 207,000 992,000
Interest expense - related parties (336,000) (549,000)
Interest expense - other (2,556,000) (2,672,000)
Minority interests in losses 301,000 1,350,000
Other income (expense), net (624,000) 150,000
------------- -------------
Total other (expense) (3,008,000) (729,000)
------------- -------------
Income before income taxes 12,761,000 11,048,000
Provision for income taxes (5,534,000) (4,818,000)
------------- -------------
Net income 7,227,000 6,230,000
Dividend requirement on Preferred Stock in 1995 - (541,000)
------------- -------------
Net income available for Common Stock $ 7,227,000 $ 5,689,000
============= =============
Primary and fully diluted earnings per common share $0.15 $0.14
============= =============
Primary and fully diluted average common and
common equivalent shares 48,058,250 43,007,123
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
5
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INTERNATIONAL FAMILY ENTERTAINMENT, INC.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30
------------------
1996 1995
---- ----
<S> <C> <C>
Operating revenues $228,626,000 $202,825,000
-------------- --------------
Operating expenses
Production and programming 116,663,000 107,417,000
Selling and marketing 42,952,000 41,805,000
New business development 1,503,000 5,087,000
General and administrative 21,742,000 18,265,000
Amortization of goodwill 1,829,000 2,017,000
-------------- --------------
Total operating expenses 184,689,000 174,591,000
-------------- --------------
Operating income 43,937,000 28,234,000
-------------- --------------
Other income (expense)
Investment income 2,453,000 1,586,000
Interest expense - related parties (1,270,000) (1,578,000)
Interest expense - other (8,155,000) (8,087,000)
Minority interests in losses 2,002,000 3,458,000
Gain on disposition of assets - related party 13,685,000 -
Other expense, net (5,875,000) (345,000)
-------------- --------------
Total other income (expense) 2,840,000 (4,966,000)
-------------- --------------
Income before income taxes 46,777,000 23,268,000
Provision for income taxes (20,387,000) (9,910,000)
-------------- --------------
Net income 26,390,000 13,358,000
Dividend requirement on Preferred Stock in 1995 - (1,623,000)
-------------- --------------
Net income available for Common Stock $ 26,390,000 $ 11,735,000
============== ==============
Primary and fully diluted earnings per common share $0.56 $0.29
============== ==============
Primary and fully diluted average common and
common equivalent shares 48,013,205 43,168,462
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
6
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INTERNATIONAL FAMILY ENTERTAINMENT, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30
------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $ 26,390,000 $ 13,358,000
-------------- --------------
Adjustments to reconcile net income to
net cash provided by operating activities
Amortization of film rights 92,653,000 81,609,000
Depreciation and amortization of property and
equipment, goodwill, and other assets 8,426,000 7,881,000
Allowances against investments 5,541,000 -
Minority interests in losses (2,002,000) (3,458,000)
Gain on sale of marketable securities (1,752,000) -
Gain on disposition of assets - related party (13,685,000) -
Compensation - Stock Plan 496,000 1,153,000
Deferred income tax expense 8,194,000 4,028,000
Changes in assets and liabilities, net of effect
of 1996 disposition and 1995 acquisition (3,287,000) (21,409,000)
-------------- --------------
Total adjustments 94,584,000 69,804,000
-------------- --------------
Net cash provided by operating activities 120,974,000 83,162,000
-------------- --------------
Cash flows from investing activities
Acquisitions of original programming (87,386,000) (32,214,000)
Cash paid for acquisition in 1995 - (8,310,000)
Other investments, including advances (16,002,000) -
Repayment of advances 12,494,000 -
Purchases of marketable securities - (730,000)
Sales of marketable securities 4,865,000 788,000
Additions to property and equipment (8,054,000) (6,855,000)
-------------- --------------
Net cash used in investing activities (94,083,000) (47,321,000)
-------------- --------------
Cash flows from financing activities
Payments on film rights (37,998,000) (48,672,000)
Proceeds from debt issuances 24,150,000 35,150,000
Principal payments on debt (37,134,000) (19,400,000)
Cash provided by minority partners 3,000,000 3,963,000
Payment of Preferred Stock dividends - (2,191,000)
Repurchases of Class B Common Stock (2,976,000) (14,272,000)
-------------- --------------
Net cash used in financing activities (50,958,000) (45,422,000)
-------------- --------------
Effect of foreign currency rate changes (253,000) (106,000)
-------------- --------------
Decrease in cash and cash equivalents (24,320,000) (9,687,000)
Cash and cash equivalents at beginning of period 32,865,000 38,716,000
-------------- --------------
Cash and cash equivalents at end of period $ 8,545,000 $ 29,029,000
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
7
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INTERNATIONAL FAMILY ENTERTAINMENT, INC.
Notes to Consolidated Financial Statements
September 30, 1996
(Unaudited)
NOTE A - PRESENTATION OF INTERIM FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements of International
Family Entertainment, Inc. (together with its consolidated subsidiaries "IFE"
or the "Company") have been prepared by the Company pursuant to the
instructions for Form 10-Q and, accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
where permitted by regulation. In management's opinion, the accompanying
unaudited consolidated financial statements 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, 1996. These interim consolidated financial
statements and the notes thereto should be read in conjunction with the audited
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
Certain amounts have been reclassified for comparability with the 1996
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.
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 three and nine months ended September 30, 1996 and 1995, 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
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
1996. The minority partner's share amounted to $1,350,000 and $3,458,000 for
the three and nine month periods ended September 30, 1995, respectively.
8
<PAGE> 9
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
Notes to Consolidated Financial Statements, continued
NOTE C - MINORITY INTERESTS, 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 accompanying Consolidated Statements of Operations. The
minority partners' combined 20% share of the net loss of FiT TV amounted to
$301,000 and $581,000 for the three and nine month periods ended September 30,
1996, respectively.
NOTE D - CAPITAL STOCK
On December 15, 1995, the Company and the holder of the 10% Convertible
Cumulative Preferred Stock (the "Preferred Stock") entered into an exchange
agreement (the "Exchange Agreement") whereby the holder of the Preferred Stock
(which is also the holder of the Convertible Notes) agreed to (i) exchange its
holdings of all of the Preferred Stock for shares of Class B Common Stock, (ii)
exchange 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) amend 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) amend the terms of certain other agreements, including the
shareholder agreement among the Company and certain of its principal
shareholders. Prior to the consummation of the Exchange Agreement on December
15, 1995, 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.
On November 16, 1995, the Company's Board of Directors approved a five-for-four
stock split of the Common Stock 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. Accordingly, all share and per share
amounts presented for prior periods have been restated to retroactively reflect
the stock split.
9
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INTERNATIONAL FAMILY ENTERTAINMENT, INC.
Notes to Consolidated Financial Statements, continued
NOTE E - SUPPLEMENTAL CASH FLOW INFORMATION
Total interest costs paid were approximately $7,825,000 and $8,543,000 during
the nine months ended September 30, 1996 and 1995, respectively. Income taxes
paid during the nine months ended September 30, 1996 and 1995 were
approximately $8,617,000 and $7,353,000, respectively.
Non-cash investing and financing activities included the acquisition of film
rights under license agreements which aggregated approximately $66,066,000 and
$26,700,000 for the nine months ended September 30, 1996 and 1995,
respectively. Non-cash investing and financing activities during the nine
months ended September 30, 1995 also included approximately $7,140,000 of
liabilities assumed in the acquisition of the Ice Capades and a non-cash
purchase of property and equipment under a capital lease amounting to
$5,000,000.
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 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. ("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 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 is
convertible, under certain circumstances, beginning in June 1997 at the
Company's option, 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 ($35,457,000 based on the 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 ordinary shares. 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 ordinary shares 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 G - 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 September 30, 1996. 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 September 30, 1996 is
reflected as a liability in the accompanying consolidated financial statements.
10
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INTERNATIONAL FAMILY ENTERTAINMENT, INC.
Notes to Consolidated Financial Statements, continued
NOTE G - COMMITMENTS AND CONTINGENCIES, CONTINUED
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.
The Company is party to a memorandum of understanding regarding the formation
of a joint venture 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 to
contribute 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 the joint venture. It is intended that the joint venture will
launch at least three advertiser-supported, satellite-delivered television
programming services in 1997. The formation of this joint venture is subject
to, among other things, the negotiation and execution of a definitive joint
venture agreement and there can be no assurance that the parties will be able
to reach a final agreement.
The Company leases office facilities, a satellite transponder, and certain
other property and equipment under non-cancellable 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.
11
<PAGE> 12
PART I - FINANCIAL INFORMATION, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
In addition to historical information, this report contains forward-looking
statements which are subject to risks and uncertainties. Accordingly, the
Company's actual results could differ materially from those anticipated in
these forward-looking statements. Undue reliance should not be placed on these
forward-looking statements, which reflect management's analysis only as of the
date hereof.
The following discussion and analysis should be read in conjunction with the
Management's Discussion and Analysis included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1995.
MATERIAL CHANGES IN FINANCIAL CONDITION
Film Rights
The Company produces, acquires, and distributes a variety of programs,
including original series, specials, and movies, as well as syndicated programs
originally broadcast by others, to be aired on the Company's cable networks, or
to be licensed to others. Film rights (including the current portion) were
$225,371,000 at September 30, 1996 as compared to $161,449,000 at December 31,
1995, an increase of $63,922,000. This increase is primarily attributable to
(i) the acquisition of domestic distribution rights to Dr. Quinn, Medicine
Woman, (ii) production of programs, such as The Pretender, for the major
broadcast networks and international distribution, (iii) production of The Cape
for domestic and international distribution, and (iv) programming produced for
The Family Channel, such as Panic in the Skies and Apollo 11.
Common Stock Repurchases
During the nine months ended September 30, 1996, the Company repurchased
225,994 shares of Class B Common Stock for $2,976,000 (an average price of
$13.17 per share). These repurchases were funded from available cash and cash
equivalents. It is expected that any further repurchases of Class B Common
Stock will also be funded from available cash and cash equivalents or will be
funded from bank borrowings.
Investment in Equity Securities - Related Party
As described in Note F of Notes to Consolidated Financial Statements, 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. This sale was primarily a non-cash transaction in which the Company
received 5,792,008 shares of Flextech's non-voting stock. The Company received
the right to "put" its holdings of Flextech's non-voting stock to TCI
International, under certain circumstances, beginning in June 1997. 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 ordinary shares. 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
ordinary shares 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.
Liquidity
As of September 30, 1996, the Company had cash and cash equivalents of
$8,545,000, and borrowings available from banks of $131,000,000. The Company
believes that funds from operations, borrowings available from banks, and
existing cash balances and investments will provide adequate sources of
short-term and long-term liquidity for its current operations, including the
operations of FiT TV and the international networks, as well as payments for
film rights. However, the Company may pursue additional capital-raising
activities if it believes that market conditions or acquisition opportunities
warrant such activities.
12
<PAGE> 13
Liquidity, continued
The Company expects that the total amount to be spent on programming for 1996
will substantially exceed the total amount for 1995. A significant portion of
the Company's film rights are currently acquired from others and there can be
no assurance that the Company will be able to acquire such rights at a
comparable cost in the future.
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. If the Company becomes
obligated under this guarantee, it is expected that any such obligation will be
funded from available cash and cash equivalents or from bank borrowings.
Future Opportunities
The Company has explored and continues to explore opportunities to develop
international versions of The Family Channel's or FiT TV's programming concepts
through the acquisition or development of cable networks and other distribution
outlets in foreign countries. The Company is also exploring the possibility of
launching additional domestic cable networks or pay-per-view services and, from
time to time, considers the acquisition of other television programming
distribution and production companies, entertainment companies, and film
libraries.
As discussed in Note G of Notes to Consolidated Financial Statements, the
Company is party to a memorandum of understanding regarding the formation of a
joint venture to operate and distribute satellite-delivered television
programming services in Mexico, Central America, and South America.
The Company cannot estimate with any degree of certainty the amount of
expenditures it may make in the future in connection with such investments and
acquisitions; although, if many of the Company's plans in this regard
materialize, such expenditures could be substantial. The Company anticipates
funding such investments and acquisitions from internally generated cash flow,
additional borrowings, or additional issuances of Class B Common Stock.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
GENERAL
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 musical variety shows ("Live Entertainment").
Within the Cable Networks business segment, the Company operated four
advertiser-supported, satellite-delivered cable television networks: The
Family Channel, which provides family-oriented entertainment and informational
programming; FiT TV, which provides healthy lifestyle and fitness programming;
The Family Channel (UK), which provided family-oriented entertainment
programming to the United Kingdom, until sold on April 22, 1996; and The Family
Channel De Las Americas, launched on July 1, 1995, which provides
Spanish-language, family-oriented entertainment programming, as well as fitness
programming, to Mexico, Central America, and portions of South America.
Within the Production & Distribution business segment, the Company produces and
distributes programming in the United States and throughout many other parts of
the world ("MTM Operations"), co-produces theatrical motion pictures through
Family Channel Pictures, and operated a television production studio in
Maidstone, England (the "UK Studio") until sold 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 business.
13
<PAGE> 14
General, continued
The following table sets forth comparative information regarding operating
revenues, operating income or loss, and depreciation and amortization by
business segment.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenues
Cable Networks
The Family Channel $55,738,000 $45,192,000 $173,439,000 $138,279,000
FiT TV 956,000 660,000 3,260,000 2,078,000
International Networks - 3,183,000 5,045,000 9,225,000
Intrasegment Eliminations (166,000) 400,000 (638,000) 189,000
------------- ------------- -------------- --------------
56,528,000 49,435,000 181,106,000 149,771,000
Production & Distribution 22,512,000 27,057,000 50,460,000 50,299,000
Live Entertainment 2,223,000 2,694,000 5,219,000 5,924,000
Intersegment Eliminations (2,602,000) (1,224,000) (8,159,000) (3,169,000)
------------- ------------- -------------- --------------
$78,661,000 $77,962,000 $228,626,000 $202,825,000
============= ============= ============== ==============
Operating Income (Loss)
Cable Networks
The Family Channel $23,279,000 $12,173,000 $ 69,413,000 $ 44,268,000
FiT TV (1,253,000) (1,334,000) (4,007,000) (3,748,000)
International Networks (2,113,000) (4,196,000) (7,526,000) (9,613,000)
Intrasegment Eliminations - 243,000 - 244,000
------------- ------------- -------------- --------------
19,913,000 6,886,000 57,880,000 31,151,000
Production & Distribution (4,102,000) 6,480,000 (12,482,000) 246,000
Live Entertainment (339,000) (1,443,000) (2,631,000) (3,604,000)
Intersegment Eliminations 297,000 (146,000) 1,170,000 441,000
------------- ------------- -------------- --------------
$15,769,000 $11,777,000 $ 43,937,000 $ 28,234,000
============= ============= ============== ==============
Depreciation and Amortization
Cable Networks
The Family Channel $18,591,000 $17,512,000 $ 56,168,000 $ 49,071,000
FiT TV 353,000 316,000 1,115,000 938,000
International Networks 1,319,000 1,925,000 4,547,000 4,596,000
Intrasegment Eliminations - 157,000 - (55,000)
------------- ------------- -------------- --------------
20,263,000 19,910,000 61,830,000 54,550,000
Production & Distribution 22,208,000 16,102,000 46,779,000 35,895,000
Live Entertainment 352,000 469,000 1,084,000 1,236,000
Intersegment Eliminations (2,899,000) (725,000) (8,614,000) (2,191,000)
------------- ------------- -------------- --------------
$39,924,000 $35,756,000 $101,079,000 $ 89,490,000
============= ============= ============== ==============
</TABLE>
14
<PAGE> 15
CABLE NETWORKS SEGMENT INFORMATION
THE FAMILY CHANNEL
The following table sets forth comparative information relating to the
operations of The Family Channel.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues
Advertising revenue $30,377,000 $24,506,000 $ 97,696,000 $ 77,835,000
Subscriber fees 25,232,000 20,394,000 75,353,000 59,908,000
Other revenue 129,000 292,000 390,000 536,000
------------- ------------- -------------- --------------
Total revenues 55,738,000 45,192,000 173,439,000 138,279,000
------------- ------------- -------------- --------------
Operating expenses*
Production and programming 20,809,000 18,674,000 62,142,000 52,720,000
Selling and marketing 8,469,000 11,095,000 31,272,000 30,224,000
New business development - 655,000 - 1,828,000
General and administrative 3,181,000 2,595,000 10,612,000 9,239,000
------------- ------------- -------------- --------------
Total operating expenses 32,459,000 33,019,000 104,026,000 94,011,000
------------- ------------- -------------- --------------
Operating income $23,279,000 $12,173,000 $ 69,413,000 $ 44,268,000
============= ============= ============== ==============
- ----------------
*Includes depreciation and amortization:
Amortization of film rights
Original programming $ 7,767,000 $ 8,419,000 $ 23,354,000 $ 23,006,000
License agreements 9,007,000 7,505,000 27,534,000 21,496,000
------------- ------------- -------------- --------------
16,774,000 15,924,000 50,888,000 44,502,000
Depreciation and amortization
of property and equipment
and other assets 1,817,000 1,588,000 5,280,000 4,569,000
------------- ------------- -------------- --------------
$18,591,000 $17,512,000 $ 56,168,000 $ 49,071,000
------------- ------------- -------------- --------------
</TABLE>
Operating Revenues
Advertising revenue increased $5,871,000 (or 24.0%) for the third quarter of
1996 as compared to the third quarter of 1995. Advertising revenue increased
$19,861,000 (or 25.5%) for the nine months ended September 30, 1996 over the
nine months ended September 30, 1995. These increases in advertising revenue
are attributable to increases in advertising rates, households reached, and
ratings in 1996 as compared to 1995.
Subscriber fees increased $4,838,000 (or 23.7%) for the third quarter of 1996
over the third quarter of 1995. Subscriber fees increased $15,445,000 (or
25.8%) for the nine months ended September 30, 1996 as compared to the nine
months ended September 30, 1995. These increases are primarily due to
subscriber fee rate increases resulting from renewals of affiliation agreements
(including the renewal of a long-term contract with a major cable operator at
the beginning of 1996), rate increases in existing contracts, and the
continuing growth of subscribers. During the first nine months of 1996, the
average number of U.S. households reached by The Family Channel increased 5.7%
to 65.0 million from 61.5 million for the first nine months of 1995. The
average number of billed subscribers, including home television receive-only
satellite dish subscribers, increased 5.6% to 61.9 million for the first nine
months of 1996 from 58.6 million for the first nine months of 1995. The
difference between total households reached and billed subscribers is
attributable to a variety of factors, including cable service theft and
sampling error inherent in projecting estimates.
15
<PAGE> 16
THE FAMILY CHANNEL, CONTINUED
Operating Revenues, continued
The Family Channel currently reaches approximately 69% of all television
households in the United States. The Company expects that cable television
system penetration will continue to grow as cable operators construct new
systems and extend existing cable television distribution facilities to new
service areas, as well as the continued development of direct broadcast
satellite and other alternative delivery services. These options may afford
the Company additional opportunities to increase carriage of The Family Channel
on cable systems or otherwise to increase the number of subscribers to The
Family Channel, and thus have an impact on advertising and subscriber fee
revenues. There can be no assurance, however, that these technological
advances will be effected or that, if effected, they will have the anticipated
beneficial impact on future results of operations. In addition, certain of
these trends also have the potential to benefit competitors of the Company.
Industry regulation may also have an impact on such trends.
Production and Programming Expense
Production and programming expense includes the amortization of film rights,
the use of satellite transponders, and costs associated with engineering and
technical support services. Production and programming expense increased
$2,135,000 (or 11.4%) for the third quarter of 1996 as compared to the third
quarter of 1995. Production and programming expense increased $9,422,000 (or
17.9%) for the nine months ended September 30, 1996 over the nine months ended
September 30, 1995. These increases are primarily due to increases in the
amortization of film rights. As a percentage of The Family Channel's total
revenues, production and programming expense amounted to 37.3% and 35.8% for
the three and nine month periods ended September 30, 1996, respectively, as
compared with 41.3% and 38.1% for the corresponding periods of the prior year.
Selling and Marketing Expense
Selling and marketing expense includes costs associated with the sale of
advertising time, the marketing of The Family Channel to cable operators, and
advertising and promotion. Selling and marketing expense decreased $2,626,000
(or 23.7%) for the third quarter of 1996 as compared to the third quarter of
1995. This decrease is primarily attributable to decreased marketing
expenditures during the third quarter of 1996 in anticipation of a major
marketing campaign to be undertaken in the fourth quarter of 1996. For the
nine months ended September 30, 1996, selling and marketing expense increased
$1,048,000 (or 3.5%) over the nine months ended September 30, 1995. As a
percentage of The Family Channel's total revenues, selling and marketing
expense amounted to 15.2% and 18.0% for the three and nine month periods ended
September 30, 1996, respectively, as compared with 24.6% and 21.9% for the
corresponding periods of the prior year.
New Business Development Expense
New business development expense in 1995 was due to costs associated with the
development of a program block centered around interactive game shows, which
has since been discontinued.
General and Administrative Expense
General and administrative expense includes costs associated with the
corporate, legal, finance, information services, and human resources divisions.
General and administrative expense increased $586,000 (or 22.6%) for the third
quarter of 1996 as compared to the third quarter of 1995. General and
administrative expense increased $1,373,000 (or 14.9%) for the nine months
ended September 30, 1996 over the nine months ended September 30, 1995. As a
percentage of The Family Channel's total revenues, general and administrative
expense amounted to 5.7% and 6.1% for the three and nine month periods ended
September 30, 1996, respectively, as compared with 5.7% and 6.7% for the
corresponding periods of the prior year.
16
<PAGE> 17
THE FAMILY CHANNEL, CONTINUED
Operating Income
Operating income increased $11,106,000 (or 91.2%) for the third quarter of 1996
as compared to the third quarter of 1995. Operating income increased
$25,145,000 (or 56.8%) for the nine months ended September 30, 1996 over the
nine months ended September 30, 1995. As a percentage of The Family Channel's
total revenues, operating income increased to 41.8% and 40.0% for the three and
nine month periods ended September 30, 1996, respectively, as compared with
26.9% and 32.0% for the corresponding periods of the prior year.
Operating income before depreciation and amortization of property and equipment
and other assets increased $11,335,000 (or 82.4%) for the third quarter of 1996
as compared to the third quarter of 1995. During the nine months ended
September 30, 1996, operating income before depreciation and amortization of
property and equipment and other assets increased $25,856,000 (or 52.9%) over
the nine months ended September 30, 1995. As a percentage of The Family
Channel's total revenues, operating income before depreciation and amortization
of property and equipment and other assets for the three and nine month periods
ended September 30, 1996 increased to 45.0% and 43.1%, respectively, as
compared to 30.5% and 35.3% for the corresponding periods of the prior year.
17
<PAGE> 18
FiT TV
The following table sets forth comparative information relating to the
operations of the FiT TV cable network.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues
Advertising revenue $ 602,000 $ 380,000 $ 1,857,000 $ 939,000
Merchandise revenue 354,000 280,000 1,403,000 1,139,000
------------- ------------- ------------- -------------
Total revenues 956,000 660,000 3,260,000 2,078,000
------------- ------------- ------------- -------------
Operating expenses*
Production and programming 896,000 854,000 2,746,000 2,549,000
Selling and marketing 770,000 671,000 2,878,000 2,075,000
New business development 42,000 9,000 150,000 28,000
General and administrative 501,000 460,000 1,493,000 1,174,000
------------- ------------- ------------- -------------
Total operating expenses 2,209,000 1,994,000 7,267,000 5,826,000
------------- ------------- ------------- -------------
Operating loss $(1,253,000) $(1,334,000) $(4,007,000) $(3,748,000)
============= ============= ============= =============
- ------------
*Includes depreciation and amortization:
Amortization of film rights
Original programming $ 345,000 $ 313,000 $ 1,092,000 $ 931,000
License agreements - - - -
------------- ------------- ------------- -------------
345,000 313,000 1,092,000 931,000
------------- ------------- ------------- -------------
Depreciation and amortization
of property and equipment
and other assets 8,000 3,000 23,000 7,000
------------- ------------- ------------- -------------
$ 353,000 $ 316,000 $ 1,115,000 $ 938,000
============= ============= ============= =============
</TABLE>
Note--Beginning April 30, 1996, the Company records a minority interest
representing the minority partners' combined 20% share of the net loss of
FiT TV. See "Other Income and Expense Information".
The FiT TV cable network was launched in October 1993. The operations of FiT
TV have generated operating losses and, as a start-up operation, could generate
operating losses for a significant period of time.
As of September 30, 1996, FiT TV was available, on a full-time or part-time
basis, via local cable systems and home television receive-only satellite
dishes, to approximately 11.2 million households as compared to approximately
9.2 million households as of September 30, 1995. The Company intends to
broaden the carriage of FiT TV through, among other things, increased marketing
and promotional activities. However, in light of the number of new cable
programming services and the existence of limited channel capacity, there can
be no assurance that these activities will be successful, that current
subscriber levels can be maintained, or that FiT TV will become profitable in
the future.
The Company expects cable system penetration will continue to grow as cable
operators construct new systems, enhance existing systems to increase channel
capacity and extend existing cable television distribution facilities to new
service areas. Furthermore, certain technological advances that are
anticipated to expand the channel capacity of cable television systems
(including the development of digital compression technology and the deployment
of fiber optic cable) or to provide the potential for reaching new subscribers
(such as direct broadcast satellite and other alternative delivery services)
may afford the Company additional opportunities to increase carriage of FiT TV
on cable systems or otherwise to increase the number of subscribers to FiT TV
and thus have an impact on advertising and merchandise revenues.
18
<PAGE> 19
FiT TV, CONTINUED
There can be no assurance, however, that these technological advances will be
effected or that, if effected, they will have the anticipated beneficial impact
on future results of operations. In addition, certain of these trends also
have the potential to benefit competitors of the Company. Industry regulation
may also have an impact on such trends.
Total revenues increased $296,000 (or 44.8%) for the third quarter of 1996 as
compared to the third quarter of 1995. Total revenues increased $1,182,000 (or
56.9%) during the nine month period ending September 30, 1996 as compared to
the corresponding period of the prior year. These increases are due to higher
advertising rates and merchandise sales.
Production and programming expense includes the amortization of film rights and
an intercompany charge for transponder usage (at the rate of $150,000 per
month). Production and programming expense increased $42,000 (or 4.9%) for the
third quarter of 1996 as compared to the third quarter of 1995. Production and
programming expense increased $197,000 (or 7.7%) during the nine month period
ended September 30, 1996 as compared to the corresponding period of the prior
year.
Selling and marketing expense increased $99,000 (or 14.8%) for the third
quarter of 1996 as compared to the third quarter of 1995. Selling and
marketing expense increased $803,000 (or 38.7%) during the nine month period
ending September 30, 1996 as compared to the corresponding period of the prior
year. These increases are due primarily to increased advertising expenses. The
Company expects to increase its expenditures related to FiT TV's marketing and
promotional activities.
General and administrative expense includes, among other things, intercompany
charges for services and support provided to FiT TV. General and
administrative expense increased $41,000 (or 8.9%) for the third quarter of
1996 as compared to the third quarter of 1995. General and administrative
expense increased $319,000 (or 27.2%) during the nine month period ending
September 30, 1996 as compared to the corresponding period of the prior year.
These increases are primarily due to increases in personnel costs in 1996.
As described in Note C of Notes to Consolidated Financial Statements, on April
30, 1996, the Company, Liberty Media, and Reebok formed the FiT TV Partnership
to own and operate the FiT TV cable network. FiT TV had previously been owned
and operated by CHTV.
In accordance with the terms of the FiT TV Partnership Agreement, CHTV
contributed all of the assets and liabilities of the FiT TV cable network 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. Reebok and Liberty Media have no further obligations
to make capital contributions to the FiT TV Partnership.
19
<PAGE> 20
INTERNATIONAL NETWORKS
The following table sets forth comparative information relating to the
operations of The Family Channel (UK) and The Family Channel De Las Americas,
as well as international new business development costs.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues $ - $ 3,183,000 $ 5,045,000 $ 9,225,000
------------- ------------- ------------- -------------
Operating expenses*
Production and programming 1,355,000 4,532,000 7,924,000 11,765,000
Selling and marketing 55,000 1,478,000 1,815,000 3,661,000
New business development 379,000 531,000 1,380,000 1,329,000
General and administrative 324,000 838,000 1,452,000 2,083,000
------------- ------------- ------------- -------------
Total operating expenses 2,113,000 7,379,000 12,571,000 18,838,000
------------- ------------- ------------- -------------
Operating loss $(2,113,000) $(4,196,000) $(7,526,000) $(9,613,000)
============= ============= ============= =============
The Family Channel (UK) $ - $(2,977,000) $(2,841,000) $(7,596,000)
The Family Channel De Las Americas (1,734,000) (688,000) (3,305,000) (688,000)
New business development (379,000) (531,000) (1,380,000) (1,329,000)
------------- ------------- ------------- -------------
Operating loss $(2,113,000) $(4,196,000) $(7,526,000) $(9,613,000)
============= ============= ============= =============
- ------------
*Includes depreciation and amortization:
Amortization of film rights
Original programming $ 97,000 $ 261,000 $ 244,000 $ 704,000
License agreements 1,221,000 1,644,000 4,275,000 3,834,000
------------- ------------- ------------- -------------
1,318,000 1,905,000 4,519,000 4,538,000
Depreciation and amortization
of property and equipment
and other assets 1,000 20,000 28,000 58,000
------------- ------------- ------------- -------------
$ 1,319,000 $ 1,925,000 $ 4,547,000 $ 4,596,000
============= ============= ============= =============
</TABLE>
As previously discussed in Note F of Notes to Consolidated Financial
Statements, on April 22, 1996, the Company sold its 61% interest in The Family
Channel (UK).
The operations of The Family Channel De Las Americas will cease on November 8,
1996. It is anticipated that certain assets of this network will be
contributed to the proposed joint venture described below.
The Company is party to a memorandum of understanding regarding the formation
of a joint venture 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 to
contribute 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 the joint venture. It is intended that the joint venture will
launch at least three advertiser-supported, satellite-delivered television
programming services in 1997. The formation of this joint venture is subject
to, among other things, the negotiation and execution of a definitive joint
venture agreement and there can be no assurance that the parties will be able
to reach a final agreement.
20
<PAGE> 21
INTERNATIONAL NETWORKS, CONTINUED
In June 1995, the Company acquired a 33 1/3% interest in an entity which holds
demand notes that are convertible into an 80% equity interest in China
Entertainment Television Broadcast Limited. The Company's share of losses of
this venture is reflected in the determination of other income and expense.
See "Other Income and Expense Information".
PRODUCTION & DISTRIBUTION SEGMENT INFORMATION
The following table sets forth comparative information relating to the domestic
and international operations of the Company's Production & Distribution
business segment.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues
MTM Operations $22,512,000 $26,007,000 $ 48,899,000 $47,115,000
UK Studio - 1,050,000 1,561,000 3,184,000
------------- ------------- -------------- -------------
Total revenues 22,512,000 27,057,000 50,460,000 50,299,000
------------- ------------- -------------- -------------
Operating expenses*
Production and programming 22,249,000 17,650,000 49,812,000 39,922,000
Selling and marketing 1,929,000 1,156,000 6,646,000 5,614,000
General and administrative 1,971,000 1,306,000 5,104,000 3,122,000
Amortization of goodwill 465,000 465,000 1,380,000 1,395,000
------------- ------------- -------------- -------------
Total operating expenses 26,614,000 20,577,000 62,942,000 50,053,000
------------- ------------- -------------- -------------
Operating income (loss) $(4,102,000) $ 6,480,000 $(12,482,000) $ 246,000
============= ============= ============== =============
MTM Operations $(3,116,000) $ 6,717,000 $(10,739,000) $ 814,000
Family Channel Pictures (986,000) - (1,603,000) -
UK Studio - (237,000) (140,000) (568,000)
------------- ------------- -------------- -------------
Operating income (loss) $(4,102,000) $ 6,480,000 $(12,482,000) $ 246,000
============= ============= ============== =============
- ------------
*Includes depreciation and amortization:
Amortization of film rights
Original programming $16,370,000 $ 2,413,000 $ 30,497,000 $18,363,000
License agreements 5,219,000 13,006,000 14,271,000 15,521,000
------------- ------------- -------------- -------------
21,589,000 15,419,000 44,768,000 33,884,000
------------- ------------- -------------- -------------
Depreciation and amortization
of property and equipment,
goodwill, and other assets
MTM Operations 619,000 506,000 1,779,000 1,503,000
UK Studio - 177,000 232,000 508,000
------------- ------------- -------------- -------------
619,000 683,000 2,011,000 2,011,000
------------- ------------- -------------- -------------
$22,208,000 $16,102,000 $ 46,779,000 $35,895,000
============= ============= ============== =============
</TABLE>
Operating revenue for MTM Operations decreased $3,495,000 (or 13.4%) and
increased $1,784,000 (or 3.8%) for the three and nine month periods ended
September 30, 1996, respectively, as compared to the corresponding periods of
the prior year. Operating revenues in 1996 were derived primarily from the
syndication of the television series America's Funniest Home Videos and Rescue
911 and the production and licensing of programs such as The Pretender, Sparks,
Home & Family, Orleans, and Night of the Twisters. Operating revenues in 1995
were derived primarily from the syndication of the television series America's
Funniest Home Videos and Rescue 911 as well as the production and licensing of
the television series Christy and the made-for-television movie Face on the
Milk Carton.
21
<PAGE> 22
PRODUCTION & DISTRIBUTION SEGMENT INFORMATION, CONTINUED
With respect to programming sold on a cash basis, contracted revenue is
recognized when such programming becomes available for telecast by others.
With respect to programs sold on a barter basis, revenue is recognized upon
sales of the advertising time within such programs as they air. As a result,
significant fluctuations in revenue and income may occur from period to period
depending on the availability dates of programs and whether such programs were
sold on a cash or barter basis. Accordingly, year-to-year comparisons of
quarterly results may not be meaningful, and quarterly operating results during
the course of a fiscal year may not be indicative of results that may be
expected for the entire fiscal year. In 1996, The Cape was sold on a barter
basis; Dr. Quinn, Medicine Woman and Rescue 911 were sold on a cash and barter
basis; and America's Funniest Home Videos was sold on a cash basis. In 1995,
Rescue 911 was sold on a cash and barter basis and America's Funniest Home
Videos was sold on a cash basis.
Operating revenue, net of amortization expense, recognized from the sale of
America's Funniest Home Videos and Rescue 911 on a cash basis was approximately
$1,500,000 and $4,300,000 for the three and nine month periods ended September
30, 1996, respectively, as compared to approximately $7,000,000 for both of the
corresponding periods of the prior year.
Production and programming expense increased $4,599,000 (or 26.1%) and
$9,890,000 (or 24.8%) for the three and nine month periods ended September 30,
1996, respectively, as compared to the corresponding periods of the prior year.
Production and programming expense in 1996 was derived primarily from the
amortization of film rights of the television programs America's Funniest Home
Videos, The Cape, The Pretender, Rescue 911, Sparks, Home & Family, Orleans,
and Night of the Twisters. Production and programming expense in 1995 was
derived primarily from the amortization of the television series America's
Funniest Home Videos, Christy, and Rescue 911 and the made-for-television movie
Face on the Milk Carton.
The Company's Production & Distribution business has increased its production
of original programming for license to the major broadcast networks,
syndication to local broadcast stations, distribution in the international
marketplace, and license to The Family Channel. The production costs of these
original programs represent a substantial investment. Recoverability of this
investment is dependent upon, among other factors, the ratings success of these
programs.
Selling and marketing expense increased $773,000 (or 66.9%) and $1,032,000 (or
18.4%) for the three and nine month periods ended September 30, 1996,
respectively, as compared to the corresponding periods of the prior year.
These increases are primarily attributable to increased sales bonuses and
increased marketing costs related to the syndicated series.
General and administrative expense increased $665,000 (or 50.9%) and $1,982,000
(or 63.5%) for the three and nine month periods ended September 30, 1996,
respectively, as compared to the corresponding periods of the prior year.
These increases are due to increased personnel and related costs, as well as
the creation of the music publishing and consumer products divisions and Family
Channel Pictures.
Family Channel Pictures has co-produced a motion picture which has not yet been
released. The Company's share of the production costs of this film amounted to
approximately $6,000,000 in exchange for which the Company received the
domestic distribution rights. Recoverability of the aggregate costs of this
motion picture will be dependent upon a variety of factors, including the
domestic box office results as well as revenues generated from pay-per-view,
home video, and licensing to The Family Channel and others.
Future results of operations of the Company's Production & Distribution
business are primarily dependent upon the Company's ability to distribute
programming (i) obtained in the acquisition of film libraries, (ii) produced
for licensing to the major broadcast networks and others, (iii) produced for
The Family Channel, and (iv) acquired under license agreements or otherwise.
As previously discussed in Note F of Notes to Consolidated Financial
Statements, on April 22, 1996, the Company sold the UK Studio.
22
<PAGE> 23
LIVE ENTERTAINMENT SEGMENT INFORMATION
The following table sets forth comparative information relating to the
operations of the Company's Live Entertainment business segment.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues $2,223,000 $ 2,694,000 $ 5,219,000 $ 5,924,000
------------ ------------- ------------- -------------
Operating expenses*
Production and programming 1,904,000 2,529,000 5,721,000 5,856,000
Selling and marketing 338,000 322,000 935,000 825,000
New business development - 809,000 - 1,532,000
General and administrative 170,000 259,000 745,000 693,000
Amortization of goodwill 150,000 218,000 449,000 622,000
------------ ------------- ------------- -------------
Total operating expenses 2,562,000 4,137,000 7,850,000 9,528,000
------------ ------------- ------------- -------------
Operating loss $ (339,000) $(1,443,000) $(2,631,000) $(3,604,000)
============ ============= ============= =============
Calvin Gilmore Productions $ (339,000) $ (566,000) $(2,631,000) $(1,900,000)
Ice Capades - (877,000) - (1,704,000)
------------ ------------- ------------- -------------
$ (339,000) $(1,443,000) $(2,631,000) $(3,604,000)
============ ============= ============= =============
- ------------
*Includes depreciation and amortization:
Depreciation and amortization
of property and equipment,
goodwill, and other assets $ 352,000 $ 469,000 $ 1,084,000 $ 1,236,000
============ ============= ============= =============
</TABLE>
The results of the Company's Live Entertainment business are subject to
seasonal fluctuations. Operating revenues and, accordingly, operating income
are usually higher during the summer months and during holiday vacation
periods, such as Christmas.
New business development in 1995 related to expenses associated with the
operation of the Ice Capades. The Company sold its interest in the Ice Capades
on December 31, 1995.
The live musical variety shows, located in Myrtle Beach, have sustained
operating losses since their acquisition by the Company in December 1993. In
addition, during 1995, the Company opened a new musical venue, located in
Charleston, South Carolina. As a start-up operation, this new venue could
generate significant losses for an extended period of time.
Future results of operations of the Company's Live Entertainment business are
primarily dependent upon, among other factors, (i) achieving sufficient
attendance, (ii) the ability to raise ticket prices without adversely affecting
attendance, (iii) opportunities to secure talent at a reasonable cost, and (iv)
increased competition in the Myrtle Beach market. There can be no assurance
that the Company's Live Entertainment business will become profitable in the
future.
23
<PAGE> 24
OTHER INCOME AND EXPENSE INFORMATION
Investment income decreased to $207,000 for the third quarter of 1996 from
$992,000 for the third quarter of 1995, a decrease of $785,000. This decrease
is primarily attributable to a substantial decrease in the amount of investable
funds. Investment income increased to $2,453,000 for the nine months ended
September 30, 1996, from $1,586,000 for the nine months ended September 30,
1995, an increase of $867,000. This increase is primarily attributable to the
pre-tax profit of $1,090,000 related to the sale of a portion of the Company's
investment in a certain media enterprise during the second quarter of 1996.
Total interest expense decreased to $2,892,000 for the third quarter of 1996
from $3,221,000 for the third quarter of 1995, a decrease of $329,000 (or
10.2%). Total interest expense decreased to $9,425,000 for the first nine
months of 1996 from $9,665,000 for the first nine months of 1995, a decrease of
$240,000 (or 2.5%). These decreases were attributable to the effect of lower
bank borrowings and interest rates during 1996 as compared to 1995.
Prior to April 22, 1996, minority interests were primarily attributable to a
minority partner's 39% interest in The Family Channel (UK). On April 22, 1996,
the Company consummated the sale of its 61% interest in The Family Channel
(UK). The minority partner's 39% 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 1996. The minority partner's share amounted to $1,350,000 and
$3,458,000 for the three and nine month periods ended September 30, 1995,
respectively.
As described in Note C of Notes to Consolidated Financial Statements, on April
30, 1996, the Company, Liberty Media, and Reebok formed the FiT TV Partnership
to own and operate the FiT TV cable network. 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, amounted to $301,000 and
$581,000 for the three and nine month periods ended September 30, 1996,
respectively.
As previously discussed in Note F of Notes to Consolidated Financial
Statements, 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 resulted in a pre-tax gain
on disposition of assets amounting to $13,685,000 for the nine month period
ended September 30, 1996.
Other investments include investments in and advances to affiliates and others.
Management of the Company periodically reviews the recoverability of these
investments and records allowances against their carrying value, as
appropriate, based on the operations of the entities and other factors. Other
expense of $5,875,000 in 1996 is composed of such adjustments, including an
adjustment of $3,320,000 relating to the Company's investment in China
Entertainment Television Broadcast Limited.
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 interim consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
Management periodically reviews and revises its estimates of future airings and
revenues for film rights, as necessary, which may result in revised
amortization rates for film rights and, when applicable, write-downs to net
realizable value. Net income in future periods is affected by the Company's
amortization of its film rights and may be significantly affected by the
periodic adjustments in such amortization.
24
<PAGE> 25
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Description
----------- -----------
27 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K (filed during the third quarter of 1996):
None.
25
<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 5, 1996
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
(Registrant)
By: /s/ Larry W. Dantzler
------------------------------------
Larry W. Dantzler,
Senior Vice President
and Chief Financial Officer
26
<PAGE> 27
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27 Financial Data Schedule (for SEC use only).
27
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
INTERNATIONAL FAMILY ENTERTAINMENT, INC.'S CONSOLIDATED FINANCIAL STATEMENTS AS
OF AND FOR THREE AND NINE MONTHS ENDING SEPTEMBER 30, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN
THE COMPANY'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 8,545
<SECURITIES> 9,220
<RECEIVABLES> 120,701
<ALLOWANCES> 7,549
<INVENTORY> 0
<CURRENT-ASSETS> 233,949
<PP&E> 91,268
<DEPRECIATION> 27,944
<TOTAL-ASSETS> 532,222
<CURRENT-LIABILITIES> 98,918
<BONDS> 140,740
0
0
<COMMON> 152,346
<OTHER-SE> 43,000
<TOTAL-LIABILITY-AND-EQUITY> 532,222
<SALES> 0
<TOTAL-REVENUES> 228,626
<CGS> 0
<TOTAL-COSTS> 184,689
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 400
<INTEREST-EXPENSE> 9,425
<INCOME-PRETAX> 46,777
<INCOME-TAX> 20,387
<INCOME-CONTINUING> 26,390
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,390
<EPS-PRIMARY> .56
<EPS-DILUTED> .56
</TABLE>
