<PAGE> 1
SCHEDULE 14C
INFORMATION REQUIRED IN INFORMATION STATEMENT
SCHEDULE 14C INFORMATION
INFORMATION STATEMENT PURSUANT TO SECTION 14(c)
OF THE SECURITIES EXCHANGE ACT OF 1934
Check the appropriate box:
[X] Preliminary Information Statement [X] Confidential, for Use of
the Commission Only (as
permitted by Rule
14c-5(d)(2))
[ ] Definitive Information Statement
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
-------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Rules 14c-5(g) and 0-11 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
(1) Title of each class of securities to which transaction applies: Class B
Common Stock ("Class B Stock"), par value $0.01 per share.
(2) Aggregate number of securities to which transaction applies:
24,676,099, being the minimum number of shares of Class B Stock to be
acquired by Fox Kids Worldwide, Inc. in the Merger.
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: $35.00
(4) Proposed maximum aggregate value of transaction: $863,663,465.00
(5) Total fee paid: $172,733.00
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
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INTERNATIONAL FAMILY ENTERTAINMENT, INC.
---------------------
INFORMATION STATEMENT
---------------------
July ___, 1997
---------------------
This Information Statement is furnished by the Board of Directors (the
"Board of Directors") of International Family Entertainment, Inc., a Delaware
corporation (the "Company"), to holders of the outstanding shares of Class B
common stock, $.01 par value per share, of the Company (the "Class B Stock" and,
together with the Class A common stock, $.01 par value per share (the "Class A
Stock"), and the Class C common stock, $.01 par value per share (the "Class C
Stock"), of the Company, the "Common Stock") in connection with an Agreement and
Plan of Merger, dated as of June 11, 1997 (the "Merger Agreement"), by and among
the Company, 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 with and
into the Company. As a result of the Merger, the Company, as the surviving
corporation in the Merger (the "Surviving Corporation"), will become a
wholly-owned subsidiary of FKWW, and each issued and outstanding share of Common
Stock (other than shares owned by FKWW, FKW Sub, the Company or any of their
respective subsidiaries, or by stockholders who have validly perfected their
appraisal rights under the Delaware General Corporation Law (the "DGCL")) will
be converted into the right to receive $35.00 in cash, without interest, subject
to adjustment as provided in the Merger Agreement (the "Merger Consideration")
(see "THE MERGER AGREEMENT-Consideration to be Paid in the Merger"). A copy of
the Merger Agreement is attached hereto as Annex I.
Concurrently with the parties' execution of the Merger Agreement,
pursuant to separate Stock Purchase Agreements with FKWW (collectively, the
"Stock Purchase Agreements"), M.G. "Pat" Robertson, the Company's Chairman,
Timothy B. Robertson, the Company's President and Chief Executive Officer, and
related trusts and family members (such persons and entities, collectively, the
"Robertson Sellers") agreed to sell all shares of the Company's Class A Stock
(in the form of Class B Stock into which such shares are convertible) and Class
B Stock held by them or issuable to them upon exercise of outstanding stock
options, and each of The Christian Broadcasting Network, Inc. ("CBN"), and
Regent University ("Regent") agreed to sell all their shares of Class B Stock,
to FKWW for $35.00 per share in cash, subject to adjustment in the same manner
as the Merger Consideration. In a separate transaction intended to be a tax-free
exchange, Liberty IFE, Inc. ("LIFE"), a subsidiary of Liberty Media Corporation
("Liberty") that holds non-voting Class C Stock and $23 million principal amount
of 6% Convertible Notes due 2004 (the "Convertible Notes") of the Company,
convertible into Class C Stock, agreed, pursuant to a Contribution and Exchange
Agreement with FKWW (the "Contribution and Exchange Agreement"), to contribute
its Class C Stock and Convertible Notes to FKWW, in exchange for a new series of
nonconvertible 8.5% preferred stock of FKWW. Such FKWW preferred stock will have
a liquidation preference equivalent to $35.00 per share or share equivalent of
Class C Stock, subject to adjustment in the same manner as the Merger
Consideration, plus an amount designed to compensate LIFE for foregone interest
on the Convertible Notes and for certain tax consequences. Upon consummation of
the Stock Purchase Agreements and the Contribution and Exchange Agreement, which
is expected to occur prior to the Merger, FKWW will own a majority of the
Company's outstanding voting Common Stock, assuming FKWW converts all Class C
Stock and Convertible Notes to Class B Stock. Consummation of such agreements is
not, however, a condition to the Merger. See "THE MERGER-Ancillary Agreements."
Immediately following execution of the Merger Agreement, the Robertson
Sellers, CBN and Regent, which hold of record, in the aggregate, 5,000,000
shares of Class A Stock (entitled to ten votes per share) and 9,337,427 shares
of Class B Stock (entitled to one vote per share), representing a majority of
the votes entitled to be cast at a meeting to consider the Merger Agreement and
the Merger, executed and delivered to the Company, on June 11, 1997, a written
consent in lieu of a meeting of stockholders (the "Consent") approving the
Merger Agreement and the Merger and adopting the Merger Agreement. THE MERGER
AGREEMENT PROVIDES THAT THE MERGER WILL BECOME EFFECTIVE NO EARLIER THAN 20
CALENDAR DAYS AFTER THIS INFORMATION STATEMENT IS FIRST SENT OR GIVEN TO
STOCKHOLDERS OF THE COMPANY. THE COMPANY CURRENTLY ANTICIPATES THAT THE
EFFECTIVE DATE OF THE MERGER WILL BE ON OR ABOUT AUGUST ___, 1997.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US
A PROXY. PLEASE DO NOT SEND IN ANY OF YOUR STOCK CERTIFICATES AT THIS TIME.
This Information Statement is first being mailed to stockholders on or
about July ___, 1997.
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TABLE OF CONTENTS
<TABLE>
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PAGE
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Summary.......................................................................................................... i
General.......................................................................................................... 1
Required Vote; Written Consent in Lieu of Meeting................................................................ 1
Procedure for Receipt of Merger Consideration.................................................................... 2
Appraisal Rights................................................................................................. 2
The Merger....................................................................................................... 5
Background of the Merger..................................................................................... 5
Opinions of the Company's Financial Advisors................................................................. 14
Interests of Certain Persons in the Merger................................................................... 19
Purpose of the Merger........................................................................................ 21
Certain Effects of the Merger................................................................................ 21
Certain Federal Income Tax Consequences of the Merger........................................................ 21
Accounting Treatment......................................................................................... 22
Regulatory Matters........................................................................................... 22
Ancillary Agreements......................................................................................... 23
The Merger Agreement............................................................................................. 25
Consideration to be Paid in the Merger....................................................................... 25
Treatment of Options......................................................................................... 26
Representations and Warranties............................................................................... 26
Conduct of Business Pending the Merger....................................................................... 27
Other Agreements............................................................................................. 28
Board Representation......................................................................................... 28
Costs and Expenses........................................................................................... 29
Conditions to the Merger..................................................................................... 29
Termination.................................................................................................. 29
Amendment.................................................................................................... 30
No Liability for Breaches of Representations and Warranties.................................................. 30
Delaware Law................................................................................................. 30
Specific Performance......................................................................................... 30
Guaranty..................................................................................................... 30
Estimated Fees and Expenses; Sources of Funds.................................................................... 30
Certain Information Regarding the Company........................................................................ 31
Introduction................................................................................................. 31
Business Segments............................................................................................ 33
Production and Distribution.................................................................................. 36
Live Entertainment........................................................................................... 39
Other Opportunities.......................................................................................... 39
Competition.................................................................................................. 39
Satellite Distribution....................................................................................... 40
Regulation and Legislation................................................................................... 41
Patents, Trademarks & Licenses............................................................................... 45
Employees.................................................................................................... 46
Properties................................................................................................... 46
Legal Proceedings............................................................................................ 47
Information Concerning FKWW and FKW Sub.......................................................................... 47
</TABLE>
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<TABLE>
<S> <C>
Selected Consolidated Historical Financial Data.................................................................. 48
Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 49
Principal Stockholders and Stock Ownership of Management......................................................... 50
Market Price and Dividends....................................................................................... 53
Available Information............................................................................................ 54
Index to Financial Statements.................................................................................... F-1
Annex I - Agreement and Plan of Merger........................................................................... I-1
Annex II - Section 262 of the General Corporation Law of the State of Delaware................................... II-1
Annex III - Opinion of Goldman, Sachs & Co....................................................................... III-1
Annex IV - Opinion of Bear, Stearns & Co. Inc.................................................................... IV-1
</TABLE>
<PAGE> 5
SUMMARY
The following is a summary of the more detailed information contained
in this Information Statement with respect to the Merger and certain related
transactions which are discussed herein. This Summary is not intended to be
complete and is qualified in its entirety by the more detailed information
contained elsewhere in this Information Statement, in the Annexes hereto and
other documents referred to herein. Terms used but not defined in this Summary
have the meanings ascribed to them elsewhere in this Information Statement.
Cross references in this Summary are to the captions of sections in the
Information Statement. Stockholders are urged to read this Information Statement
and the Annexes hereto in their entirety. This Information Statement, including
the Annexes hereto, contains "forward-looking statements" within the meaning of
the Private Securities Reform Act of 1995, which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward looking statements as a result of certain factors,
including, without limitation, actual and potential competition, risks
associated with acquisitions and international expansion, and certain technology
and regulatory risks.
GENERAL.
This Information Statement is being delivered in connection with the
Merger of FKW Sub with and into the Company pursuant to the Merger Agreement. As
a result of the Merger, the Company will become a wholly-owned subsidiary of
FKWW, and each issued and outstanding share of Common Stock (other than shares
that are owned by FKWW, FKW Sub, the Company or any of their respective
subsidiaries, or by stockholders who have validly perfected their appraisal
rights under the DGCL) will be converted into the right to receive the Merger
Consideration (i.e., $35.00 in cash, as the same may be adjusted as provided in
the Merger Agreement), and the equity interest of all pre-Merger stockholders in
the Company (other than FKWW, if applicable) will be terminated.
Concurrently with the parties' execution of the Merger Agreement
pursuant to the Stock Purchase Agreements, the Robertson Sellers agreed to sell
all shares of the Company's Class A Stock (in the form of Class B Stock into
which such shares are convertible) and Class B Stock held by them or issuable to
them upon exercise of outstanding stock options, and each of CBN and Regent
agreed to sell all their shares of Class B Stock, to FKWW for $35.00 per share
in cash, subject to adjustment in the same manner as the Merger Consideration.
In a separate transaction intended to be a tax-free exchange, LIFE, which holds
non-voting Class C Stock and $23 million principal amount of Convertible Notes
of the Company, convertible into Class C Stock, agreed, pursuant to the
Contribution and Exchange Agreement, to contribute its Class C Stock and
Convertible Notes to FKWW, in exchange for a new series of nonconvertible 8.5%
preferred stock of FKWW with a liquidation preference equivalent to $35.00 per
share or share equivalent of Class C Stock, subject to adjustment in the same
manner as the Merger Consideration, plus an amount designed to compensate LIFE
for foregone interest on the Convertible Notes and for certain tax consequences.
Upon consummation of the Stock Purchase
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Agreements and the Contribution and Exchange Agreement, which is expected to
occur prior to the Merger, FKWW will own a majority of the Company's outstanding
voting Common Stock, assuming FKWW converts all Class C Stock and Convertible
Notes to Class B Stock. Consummation of such agreements is not, however, a
condition to the Merger. See "THE MERGER-Ancillary Agreements."
THE PARTIES.
The Company. The Company produces, exhibits and distributes
entertainment and informational programming, as well as related products,
targeted at families worldwide. The Company'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, the Company 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. The
Company also owns a majority interest in FiT TV, an advertiser-supported health
and fitness cable network which operates principally in the United States, and
Calvin Gilmore Productions, Inc. ("Calvin Gilmore Productions"), a producer of
live musical variety shows. See "INFORMATION CONCERNING THE COMPANY."
FKWW and FKW Sub.
FKWW is a fully integrated global children's television entertainment
company which develops, acquires, produces, broadcasts and distributes quality
animated and live action children's television programs. FKWW's principal
operations are conducted by (i) Fox Children's Network, Inc. ("FCN"), which
operates the Fox Kids Network - the top rated children's (ages 2-11) oriented
broadcast television network in the United States, and (ii) Saban Entertainment,
Inc. ("Saban"), whose library of more than 3,700 half hours of children's
programming is among the largest in the world. FKWW is the result of the joint
venture launched in 1995 by Fox Broadcasting Company ("Fox Broadcasting"), an
indirect wholly owned subsidiary of The News Corporation Limited ("News Corp."),
and Saban to match the complementary programming and broadcasting strengths of
the Fox Kids Network and the international reach of News Corp. with the
development, production, distribution and merchandising strengths of Saban. This
combination has created a company with the ability to manage children's
properties and brands from the initial creative concept through production,
broadcast and the merchandising of related consumer products.
FKW Sub was organized in May 1997, by FKWW to acquire all the
outstanding shares of Common Stock of the Company pursuant to the Merger
Agreement, the Contribution and Exchange Agreement and the Stock Purchase
Agreements and has not conducted any unrelated activities since its
organization. All of the outstanding capital stock of FKW Sub is owned by FKWW.
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<PAGE> 7
News Corp., which indirectly holds 49.9% of the voting rights of FKWW
and has the right to designate 50% of its board of directors, has given a
guaranty to the Company (the "Guaranty") and to each of the Robertson Sellers,
CBN and Regent guaranteeing performance of FKWW's and FKW Sub's obligations
under the Merger Agreement and the Stock Purchase Agreements, respectively, and,
together with News Publishing Australia Limited, the primary U.S. holding
company for News Corp. ("NPAL"), has entered into a Funding Agreement supporting
the obligations of FKWW and NPAL under the preferred stock issuable to LIFE
pursuant to the Contribution and Exchange Agreement.
See "INFORMATION CONCERNING FKWW AND FKW SUB," "INFORMATION CONCERNING
FKWW AND FKW SUB" and "ESTIMATED FEES AND EXPENSES; SOURCES OF FUNDS."
REQUIRED VOTE; WRITTEN CONSENT IN LIEU OF MEETING.
Under the DGCL and the Company's Amended and Restated Certificate of
Incorporation (the "Certificate of Incorporation"), the affirmative vote of
holders of a majority of the voting power of the outstanding shares of Class A
Stock (having 10 votes per share) and Class B Stock (having one vote per share),
voting as a single class, is required to approve and adopt the Merger Agreement
and Merger. On June 11, 1997, immediately following execution of the Merger
Agreement, the Robertson Sellers, CBN and Regent, which hold of record, in the
aggregate, 5,000,000 shares of Class A Stock and 9,337,427 shares of Class B
Stock, representing a majority of the votes entitled to be cast at a meeting to
consider the Merger Agreement and the Merger, executed and delivered to the
Company the Consent in lieu of a meeting of stockholders approving the Merger
Agreement and the Merger and adopting the Merger Agreement. On June 11, 1997,
there were issued and outstanding 5,000,000 shares of Class A Stock and
32,781,545 shares of Class B Stock. The Merger Agreement provides that the
Merger will become effective no earlier than 20 calendar days after this
Information Statement is first sent or given to stockholders of the Company. See
"REQUIRED VOTE; WRITTEN CONSENT IN LIEU OF MEETING."
PROCEDURE FOR RECEIPT OF MERGER CONSIDERATION.
Upon consummation of the Merger, each holder of a certificate or
certificates representing shares of Common Stock of the Company ("Certificates")
outstanding immediately prior to the Effective Time will, upon the surrender
thereof, duly endorsed, if required, to a bank or trust company to be designated
by FKW Sub and reasonably acceptable to the Company (the "Exchange Agent"), be
entitled to receive the Merger Consideration into which such shares of Common
Stock of the Company represented thereby will have been automatically converted
as a result of the Merger. The Merger Agreement provides that FKW Sub will
deposit with the Exchange Agent, at or prior to the Effective Time, the amount
necessary to enable the Exchange Agent to exchange the Merger Consideration for
Certificates received by the Exchange Agent. A Letter of Transmittal with
instructions will be sent to all stockholders of the Company of
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<PAGE> 8
record as of the Effective Time (as defined below) under separate cover,
promptly after the Effective Time for use in surrendering their Common Stock.
The Letter of Transmittal must be completed and returned as directed therein,
along with certificates representing the Common Stock covered thereby, or the
Common Stock covered thereby must be delivered by book entry transfer.
CERTIFICATES SHOULD NOT BE SURRENDERED UNTIL THE LETTER OF TRANSMITTAL AND
INSTRUCTIONS ARE RECEIVED. Checks representing the Merger Consideration payable
to each stockholder will be sent to such stockholder as soon as practicable
after the receipt of Letters of Transmittal and certificates for Common Stock,
as applicable. Detailed instructions concerning the procedure for completing the
Letter of Transmittal, surrendering certificates and receiving payment of Merger
Consideration will be set forth in the Letter of Transmittal. See "PROCEDURE FOR
RECEIPT OF MERGER CONSIDERATION."
APPRAISAL RIGHTS.
Under Section 262 of the DGCL, holders of Common Stock at the Effective
Time (other than those executing the Consent if the Stock Purchase Agreements
are not consummated prior thereto) who strictly comply with the applicable
requirements of the DGCL may dissent from the Merger and demand payment in cash
from the Company of the fair value of their Common Stock.
See "THE MERGER-Appraisal Rights" and Annex II hereto.
THE MERGER.
Background to the Merger. For a description of the events leading to
the approval of the Merger Agreement by the Board of Directors of the Company,
see "THE MERGER-Background to the Merger."
Approval of the Board of Directors. On June 11, 1997, the Board of
Directors of the Company determined that the Merger Agreement and the Merger are
fair to and in the best interests of the stockholders of the Company and
approved and adopted the Merger Agreement.
See "THE MERGER-Background to the Merger."
Opinions of the Company's Financial Advisors.
At the June 11, 1997 meeting of the Company's Board of Directors,
Goldman, Sachs & Co. ("Goldman Sachs") delivered its oral opinion (which was
subsequently confirmed by written opinion dated June 11, 1997) that, as of such
date, the Merger Consideration to be received by the holders of shares of Common
Stock pursuant to the Merger Agreement is fair to such holders. The full text of
the written opinion of Goldman Sachs, which sets forth assumptions made, matters
considered and limitations on the review undertaken in connection with the
opinion, is attached hereto as Annex III and is incorporated herein by
reference. HOLDERS OF SHARES OF COMMON STOCK ARE URGED TO, AND SHOULD, READ SUCH
OPINION IN ITS ENTIRETY.
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At the June 11, 1997 meeting of the Company's Board of Directors, Bear,
Stearns & Co. Inc. ("Bear Stearns" and, together with Goldman Sachs, the
"Financial Advisors") delivered its oral opinion (which was subsequently
confirmed by written opinion dated June 11, 1997) to the effect that, as of the
date thereof, and subject to the assumptions and qualifications set forth
therein, the Merger Consideration is fair, from a financial point of view, to
the stockholders of the Company ("Bear Stearns' Opinion"). The full text of Bear
Stearns' Opinion, which is set forth as Annex IV to this Information Statement,
describes the assumptions made, matters considered and limits on the review
undertaken by Bear Stearns in connection with its opinion. THE COMPANY'S
STOCKHOLDERS ARE URGED TO READ THE OPINION IN ITS ENTIRETY. THE SUMMARY OF BEAR
STEARNS' OPINION SET FORTH IN THIS INFORMATION STATEMENT IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
See "THE MERGER-Opinions of the Company's Financial Advisors."
Interests of Certain Persons in the Merger. Certain members of the
Company's management and the Board of Directors have certain interests in the
Merger in addition to the interests of the Company's stockholders generally. The
Board of Directors considered these interests in evaluating the Merger Agreement
and the Merger. See "THE MERGER-Interests of Certain Persons in the Merger."
Purpose of the Merger. The principal purposes for the Merger are for
FKWW to acquire all of the equity interests in the Company and to obtain the
benefits available under the Ancillary Agreements (as defined below). See "THE
MERGER-Purpose of the Merger."
Certain Effects of the Merger. Following the Effective Time, FKWW will
own 100% of the Surviving Corporation's outstanding capital stock. FKWW will be
the sole beneficiary of any future earnings and growth of the Surviving
Corporation (until shares of capital stock, if any, are issued to other
stockholders) and will have the ability to benefit from any divestitures,
strategic acquisitions or other corporate opportunities that may be pursued by
the Surviving Corporation in the future. Upon consummation of the Merger, the
holders of the Common Stock of the Company immediately prior to the Effective
Time ("Existing Stockholders") will cease to have ownership interests in the
Company or rights as stockholders. The Existing Stockholders will no longer
benefit from any increases in the value of the Company or any payment of
dividends on the Common Stock and will no longer bear the risk of any decreases
in the value of the Company. No cash dividends have ever been paid on the
Company's Common Stock.
As a result of the Merger, the Surviving Corporation will be privately
held and there will be no public market for its Common Stock. Upon consummation
of the Merger, the Class B Stock will cease to be quoted on the New York Stock
Exchange ("NYSE"). In addition, registration of the Class B Stock under the
Exchange Act will be terminated, and, accordingly, the Company will no longer be
required to file periodic reports with the Securities and Exchange Commission
(the "Commission").
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Pursuant to the Merger Agreement, the Company has agreed to use its
reasonable good faith efforts to cause all outstanding stock options to be
cancelled at the Effective Time for an amount in cash equal to the Merger
Consideration, less the per share option exercise price, except as otherwise
agreed. Such cancellation cannot be effected without the consent of the option
holders. See "THE MERGER-Treatment of Stock Options."
Conditions to the Merger. The obligation of each party to effect the
Merger is subject to the satisfaction prior to the Effective Time of certain
conditions, some of which will no longer be applicable following the purchase of
shares of Class A Stock from the Robertson Sellers pursuant to the Robertson
Stock Purchase Agreement. See "THE MERGER AGREEMENT-Conditions to the Merger."
Regulatory Matters. The Company does not believe that any material
federal or state regulatory approvals, filings or notices are required by the
Company in connection with the Merger other than (i) such approvals, filings or
notices required pursuant to federal and state securities laws, (ii) such
filings required pursuant to the Hart-Scott-Rodino Antitrust Improvement Act of
1976, as amended (the "HSR Act"), and (iii) the filing of the certificate of
merger with the Secretary of State of the State of Delaware. See "THE
MERGER-Regulatory Matters."
Effective Time. As used in this Information Statement, the "Effective
Time" means the date and time a certificate of merger is filed with the
Secretary of State of the State of Delaware in accordance with the DGCL or such
later time as may be mutually agreed by the parties and designated in such
filing. The Merger Agreement provides that the certificate of merger will be
filed on the later of (i) two business days after the satisfaction or waiver of
the conditions then applicable to the Merger or (ii) the 20th calendar day after
this Information Statement is first sent or given to the Company's stockholders.
Termination, Amendment and Waiver. Notwithstanding the approval by the
stockholders of the Merger Agreement and the Merger by execution and delivery of
the Consent, under certain circumstances the Merger Agreement may be terminated
and the Merger abandoned prior to the Effective Time. At any time prior to the
Effective Time, the Company, FKWW and FKW Sub may (i) extend the time for the
performance of any of the obligations or other acts to be performed by any other
party or (ii) waive compliance with any of the agreements of any other party or
with any conditions to its own obligations, but only by an instrument in writing
signed on behalf of such party agreeing to such extension or waiver. The Merger
Agreement may be amended by a written instrument signed by all of the parties
thereto. No waiver or amendment will require approval of the stockholders of the
Company unless otherwise required by the DGCL. Any action taken by the Company,
if taken after the election or appointment of FKWW's designees to the Company's
Board of Directors as permitted by the Merger Agreement, shall require the
approval of the directors of the Company not then designated by FKWW. See "THE
MERGER AGREEMENT-Termination, Amendment and Waiver" and "-Board Representation."
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Certain Income Tax Consequences. The receipt of cash by a stockholder
of the Company in exchange for shares of Common Stock pursuant to the Merger
will be a taxable transaction for federal income tax purposes under the Internal
Revenue Code of 1986, as amended, and also may be a taxable transaction under
applicable state, local, foreign and other tax laws. See "THE MERGER-Certain
Income Tax Consequences." EACH STOCKHOLDER IS URGED TO CONSULT HIS, HER OR ITS
OWN TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES OF THE MERGER IN HIS, HER
OR ITS INDIVIDUAL CIRCUMSTANCES, INCLUDING THE APPLICABILITY AND THE EFFECT OF
FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
Accounting Treatment. The Merger will be accounted for under the
"purchase" method of accounting.
Ancillary Agreements. The Company and certain other parties entered
into certain ancillary agreements (collectively, the "Ancillary Agreements") in
connection with the transactions contemplated by the Merger Agreement. See "THE
MERGER-Ancillary Agreements."
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SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA
The summary consolidated financial data presented below for, and, as of
the end of, each of the years in the five-year period ended December 31, 1996
are derived from the consolidated financial statements of the Company, which
financial statements have been audited by KPMG Peat Marwick LLP, independent
certified public accountants. The consolidated financial statements of the
Company as of December 31, 1996 and 1995, and for each of the years in the
three-year period ended December 31, 1996, are included herein.
The summary consolidated financial data presented below for the
three-month periods ended March 31, 1996 and 1997 and as of March 31, 1997 are
derived from the unaudited consolidated financial statements of the Company
included herein. In management's opinion, the unaudited information has been
prepared on a basis consistent with the audited consolidated financial
statements of the Company. The results of operations for the three months ended
March 31, 1997 are not indicative of results which may be expected for the
entire year.
<TABLE>
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Quarter Ended Years Ended December 31,
March 31, ----------------------------------------------------
1997 1996 1996 1995 1994 1993
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(dollar amounts in thousands, except per share data)
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STATEMENT OF OPERATIONS DATA
Operating Revenues $ 97,183 $ 74,492 $ 332,810 $ 294,858 $ 242,050 $ 208,216
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Operating Expenses
Production and programming 55,820 37,664 178,762 155,685 137,294 112,269
Selling and marketing 17,926 15,733 64,544 61,122 49,819 43,281
New business development 594 488 2,317 9,908 4,991 7,868
General and administrative 7,946 7,588 28,745 27,088 21,967 14,615
Amortization of goodwill 570 609 2,278 2,657 2,532 1,562
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Total operating expenses 82,856 62,082 276,646 256,460 216,603 179,595
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Operating income 14,327 12,410 56,164 38,398 25,447 28,621
Investment income (loss) 105 891 2,843 1,883 (2,522) 8,037
Interest expense (3,194) (3,639) (12,551) (12,989) (11,034) (11,792)
Minority interests in losses 402 1,028 2,359 4,916 5,277 3,475
Gain on disposition of assets 0 0 13,685 0 0 0
Other income (expense) (3,218) (2,347) (5,640) 522 7,789 0
Provision for income taxes (3,684) (3,655) (24,735) (14,066) (10,165) (11,048)
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Income before extraordinary item 4,738 4,688 32,125 18,664 14,792 17,293
Extraordinary item
Loss on early extinguishment of debt 0 0 0 0 0 $(52,087)
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Net income (loss) 4,738 4,688 32,125 18,664 14,792 (34,794)
Dividend requirement on Preferred Stock 0 0 0 0 (2,200) (2,197)
Distribution - exchange of Preferred Stock 0 0 0 (12,163) 0 0
-------------------------------------------------------------------------------
Net income (loss) available
for Common Stock $ 4,738 $ 4,688 $ 32,125 $ 6,501 $ 12,592 $(36,991)
===============================================================================
PER SHARE DATA:
Primary earnings (loss) per common share
Income before extraordinary item $ 0.10 $ 0.10 $ 0.69 $ 0.16 $ 0.30 $ 0.39
Extraordinary item 0.00 0.00 0.00 0.00 0.00 (1.05)
-------------------------------------------------------------------------------
$ 0.10 $ 0.10 $ 0.69 $ 0.16 $ 0.30 $ (0.66)
===============================================================================
Fully diluted earnings (loss) per common share
Income before extraordinary item $ 0.10 $ 0.10 $ 0.69 $ 0.16 $ 0.30 $ 0.39
Extraordinary item 0.00 0.00 0.00 0.00 0.00 (1.05)
-------------------------------------------------------------------------------
$ 0.10 $ 0.10 $ 0.69 $ 0.16 $ 0.30 $ (0.66)
===============================================================================
OTHER FINANCIAL DATA
Operating income before depreciation and
amortization of property and equipment,
goodwill, and other assets $ 17,363 $ 15,272 $ 67,434 $ 49,238 $ 35,058 $ 35,855
Capital expenditures 1,869 2,225 9,851 15,562 9,443 11,012
BALANCE SHEET DATA (AT END OF PERIOD)
Cash and cash equivalents $ 14,961 $ 29,075 $ 4,997 $ 32,865 $ 38,716 $ 74,117
Total assets 563,813 492,495 568,683 481,427 468,272 497,416
Long-term film rights payable 37,040 31,119 50,643 32,714 34,530 43,109
Long-term debt (excluding current maturities) 172,745 154,854 171,251 153,752 120,720 146,509
Convertible Notes 23,000 23,000 23,000 23,000 23,000 23,000
Stockholders' equity 205,574 173,818 201,192 171,303 171,108 153,217
</TABLE>
<PAGE> 13
<TABLE>
<CAPTION>
Years Ended
December 31,
-------------
1992
-------------
<S> <C>
STATEMENT OF OPERATIONS DATA
Operating Revenues $ 133,301
---------
Operating Expenses
Production and programming 57,393
Selling and marketing 28,140
New business development 2,258
General and administrative 6,838
Amortization of goodwill 0
---------
Total operating expenses 94,629
---------
Operating income 38,672
Investment income (loss) 1,219
Interest expense (10,315)
Minority interests in losses 0
Gain on disposition of assets 0
Other income (expense) 0
Provision for income taxes (11,228)
---------
Income before extraordinary item 18,348
Extraordinary item
Loss on early extinguishment of debt 0
---------
Net income (loss) 18,348
Dividend requirement on Preferred Stock (2,203)
Distribution - exchange of Preferred Stock 0
---------
Net income (loss) available
for Common Stock $ 16,145
=========
PER SHARE DATA:
Primary earnings (loss) per common share
Income before extraordinary item $ 0.56
Extraordinary item 0.00
---------
$ 0.56
=========
Fully diluted earnings (loss) per common share
Income before extraordinary item $ 0.55
Extraordinary item 0.00
---------
$ 0.55
=========
OTHER FINANCIAL DATA
Operating income before depreciation and
amortization of property and equipment,
goodwill, and other assets $ 40,210
Capital expenditures 26,493
BALANCE SHEET DATA (AT END OF PERIOD)
Cash and cash equivalents $ 32,249
Total assets 253,272
Long-term film rights payable 19,733
Long-term debt (excluding current maturities) 27,282
Convertible Notes 123,000
Stockholders' equity 41,674
</TABLE>
viii
<PAGE> 14
GENERAL
This Information Statement is being delivered in connection with the
Merger of FKW Sub with and into the Company pursuant to the Merger Agreement. As
a result of the Merger, the Company will become a wholly-owned subsidiary of
FKWW, each issued and outstanding share of Common Stock (other than shares that
are owned by FKWW, FKW Sub, the Company or any of their respective subsidiaries,
or by stockholders who have validly perfected their appraisal rights under the
DGCL) will be converted into the right to receive the Merger Consideration, and
the equity interest of all pre-Merger stockholders in the Company (other than
FKWW, if applicable) will be terminated.
Concurrently with the parties' execution of the Merger Agreement,
pursuant to the Stock Purchase Agreements, the Robertson Sellers agreed to sell
all shares of the Company's Class A Stock (in the form of Class B Stock into
which such shares are convertible) and Class B Stock held by them or issuable to
them upon exercise of outstanding stock options, and each of CBN and Regent
agreed to sell all their shares of Class B Stock, to FKWW for $35.00 per share
in cash, subject to adjustment in the same manner as the Merger Consideration.
In a separate transaction intended to be a tax-free exchange, LIFE, which holds
non-voting Class C Stock and $23 million principal amount of Convertible Notes
of the Company, convertible into Class C Stock, agreed, pursuant to the
Contribution and Exchange Agreement, to contribute its Class C Stock and
Convertible Notes to FKWW, in exchange for a new series of nonconvertible 8.5%
preferred stock of FKWW with a liquidation preference equivalent to $35.00 per
share or share equivalent of Class C Stock, subject to adjustment in the same
manner as the Merger Consideration, plus an amount designed to compensate LIFE
for foregone interest on the Convertible Notes and for certain tax consequences.
Upon consummation of the Stock Purchase Agreements and the Contribution and
Exchange Agreement, which is expected to occur prior to the Merger, FKWW will
own a majority of the Company's outstanding voting Common Stock, assuming FKWW
converts all Class C Stock and Convertible Notes to Class B Stock. Consummation
of such agreements is not, however, a condition to the Merger. See "THE
MERGER-Ancillary Agreements."
The information contained in this Information Statement with respect to
FKWW, FKWW Sub, News Corp. and their respective affiliates has been furnished to
the Company by FKWW, and the Company assumes no responsibility for the accuracy
or completeness of such information.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS WITH RESPECT TO THE MERGER AND RELATED TRANSACTIONS DESCRIBED
HEREIN, OTHER THAN THOSE CONTAINED IN THIS INFORMATION STATEMENT, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OTHER PERSON.
REQUIRED VOTE; WRITTEN CONSENT IN LIEU OF MEETING
Under the DGCL, and the Company's Certificate of Incorporation, the
affirmative vote of holders of a majority of the voting power of the outstanding
shares of Class A Stock (having 10 votes per share) and Class B Stock (having
one vote per share), voting as a single class, is required to approve and adopt
the Merger Agreement and Merger at a duly convened meeting of the stockholders
of the Company called for such purpose.
1
<PAGE> 15
Pursuant to Section 228(a) of the DGCL, any action required by the DGCL
to be taken at any meeting of stockholders of the Company may be taken without a
meeting, without prior notice and without a vote of the stockholders of the
Company if a written consent, setting forth the action to be taken, is signed by
the holders of a majority of the votes entitled to be cast at such meeting of
stockholders. On June 11, 1997, immediately following execution of the Merger
Agreement, the Robertson Sellers, CBN and Regent, which hold of record, in the
aggregate, 5,000,000 shares of Class A Stock and 9,337,427 shares of Class B
Stock, representing a majority of the votes entitled to be cast at a meeting to
consider the Merger Agreement and the Merger, executed and delivered to the
Company the Consent in lieu of a meeting of stockholders, approving the Merger
Agreement and the Merger and adopting the Merger Agreement.
As used in this Information Statement, the "Effective Time" means the
date and time a certificate of merger is filed with the Secretary of State of
the State of Delaware in accordance with the DGCL or such later time as may be
mutually agreed by the parties and designated in such filing. The Merger
Agreement provides that the certificate of merger will be filed on the later of
(i) two business days after the satisfaction or waiver of the conditions then
applicable to the Merger or (ii) the 20th calendar day after this Information
Statement is first sent or given to the Company's stockholders, in accordance
with Rule 14c-2(b) under the Exchange Act.
PROCEDURE FOR RECEIPT OF MERGER CONSIDERATION
Upon consummation of the Merger, each holder of a Certificate or
Certificates representing shares of Common Stock of the Company outstanding
immediately prior to the Effective Time will, upon the surrender thereof, duly
endorsed, if required, to the Exchange Agent, be entitled to receive the Merger
Consideration into which such shares of Common Stock of the Company represented
thereby will have been automatically converted as a result of the Merger. The
Merger Agreement provides that FKW Sub will deposit with the Exchange Agent, at
or prior to the Effective Time, the amount necessary to enable the Exchange
Agent to exchange the Merger Consideration for Certificates received by the
Exchange Agent. A Letter of Transmittal will be sent to all stockholders of the
Company of record as of the Effective Time under separate cover, promptly after
the Effective Time for use in surrendering their Common Stock. Detailed
instructions concerning the procedure for completing the Letter of Transmittal,
surrendering certificates and the payment of Merger Consideration will be set
forth in the Letter of Transmittal. For Common Stock to be validly surrendered
pursuant to the Merger, a Letter of Transmittal (or a manually signed facsimile
thereof), properly completed and duly executed, with any required signature
guarantees, must be received by the Exchange Agent at one of its addresses set
forth in the Letter of Transmittal and either (i) certificates representing
Common Stock must be received by the Exchange Agent or (ii) such Common Stock
must be delivered by book-entry transfer. Checks representing the Merger
Consideration payable to each stockholder will be sent to such stockholder as
soon as practicable after the receipt of the Letters of Transmittal and
certificates for Common Stock, as applicable. CERTIFICATES SHOULD NOT BE
SURRENDERED UNTIL THE LETTER OF TRANSMITTAL AND INSTRUCTIONS ARE RECEIVED.
APPRAISAL RIGHTS
Stockholders of the Company (other than stockholders who executed the
Consent) are entitled to appraisal rights under Section 262 of the DGCL
("Section 262") as to shares of Common Stock owned
2
<PAGE> 16
by them. Set forth below is a summary description of Section 262, which is
reprinted in its entirety as Annex II to this Information Statement. All
references in Section 262 and in this summary to a "stockholder" are to the
record holder of the Common Stock as to which appraisal rights are asserted. A
person having a beneficial interest in shares of Common Stock that are held of
record in the name of another person, such as a broker or nominee, must act
promptly to cause the record holder to follow the steps summarized below
properly and in a timely manner to perfect whatever appraisal rights the
beneficial owner may have.
THE FOLLOWING SUMMARY IS NOT A COMPLETE STATEMENT OF THE LAW RELATING
TO APPRAISAL RIGHTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO ANNEX II.
THIS SUMMARY AND ANNEX II SHOULD BE REVIEWED CAREFULLY BY ANY HOLDER WHO WISHES
TO EXERCISE STATUTORY APPRAISAL RIGHTS OR WHO WISHES TO PRESERVE THE RIGHT TO DO
SO BECAUSE FAILURE TO COMPLY STRICTLY WITH THE PROCEDURES SET FORTH HEREIN AND
THEREIN WILL RESULT IN THE LOSS OF APPRAISAL RIGHTS.
This Information Statement constitutes notice to stockholders of
appraisal rights pursuant to Section 262(d)(2). In accordance with Section 262,
any stockholder entitled to appraisal rights may, within 20 days after the date
of mailing of this Information Statement, demand in writing from the Company,
the appraisal of the fair value of such stockholder's Common Stock. Such demand
must reasonably inform the Company of the identity of the stockholder and that
the stockholder intends thereby to demand the appraisal of the fair value of
such stockholder's Common Stock. A stockholder who elects to exercise appraisal
rights must mail or deliver such stockholder's written demand to the Secretary
of the Company at 2877 Guardian Lane, Virginia Beach, Virginia 23452.
A demand for appraisal must be executed by or for the stockholder of
record, fully and correctly, as such stockholder's name appears on the
certificate or certificates representing his, her or its shares of Common Stock.
If the shares are owned of record in a fiduciary capacity, such as by a trustee,
guardian, or custodian, such demand must be executed by the fiduciary. If the
shares are owned of record by more than one person, as in a joint tenancy or
tenancy in common, such demand must be executed by all joint owners. An
authorized agent, including an agent for two or more joint owners, may execute
the demand for appraisal for a stockholder of record; however, the agent must
identify the record owner and expressly disclose the fact that, in exercising
the demand, such person is acting as agent for the record owner.
A record owner, such as a broker, who holds Common Stock as a nominee
for others, may exercise appraisal rights with respect to shares held for all or
less than all beneficial owners of Common Stock as to which such person is the
record owner. In such case, the written demand must set forth the number of
shares of Common Stock covered by such demand. Where the number of shares of
Common Stock is not expressly stated, the demand will be presumed to cover all
shares of Common Stock outstanding in the name of such record owner. Beneficial
owners who are not record owners and who intend to exercise appraisal rights
should instruct the record owner to comply strictly with the statutory
requirements with respect to the exercise of appraisal rights.
Within 120 days after the Effective Time, either the Company, as the
surviving corporation in the Merger (the "Surviving Corporation"), or any
stockholder who has complied with the required conditions of Section 262, may
file a petition in the Delaware Court of Chancery (the "Delaware Chancery
Court") demanding a determination of the fair value of the shares of Common
Stock of the
3
<PAGE> 17
dissenting stockholders. If a petition for an appraisal is timely filed, after a
hearing on such petition, the Delaware Chancery Court will determine which
stockholders are entitled to appraisal rights and will appraise the shares of
Common Stock formerly owned by such stockholders, determining the fair value of
such shares, exclusive of any element of value arising from the accomplishment
or expectation of the Merger, together with a fair rate of interest from the
Effective Time to be paid upon the amount determined to be the fair value. In
determining such fair value, the Delaware Chancery Court is to take into account
all relevant factors. Accordingly, such determination could be based upon
consideration other than or in addition to the market value of the shares of
Common Stock, including, among other things, asset values of the shares of
Common Stock. In Weinberger v. UOP, Inc., the Delaware Supreme Court stated that
"proof of value by any techniques or methods which are generally considered
acceptable in the financial community and otherwise admissible in court" should
be considered in an appraisal proceeding and that "elements of future value,
including the nature of the enterprise which are known or susceptible of proof
as of the date of the merger and not the product of speculation, may be
considered." In Cede & Co. v. Technicolor, the Delaware Supreme Court stated:
"The 'accomplishment or expectation' of the merger exception in Section 262 is
very narrow, 'designed to eliminate use of pro forma data and projections of a
speculative variety relating to the completion of a merger.' [citing Weinberger]
That narrow exclusion does not encompass elements of value, including those
which exist on the date of the merger because of a majority acquiror's interim
action in a 2-step cash-out transaction." The value determined in any appraisal
proceeding could be more than, the same as or less than the Merger
Consideration. The cost of the appraisal proceeding may be determined by the
Delaware Chancery Court and taxed against the parties as the Delaware Chancery
Court deems equitable in the circumstances. Upon application of a dissenting
stockholder, the Delaware Chancery Court may order that all or a portion of the
expenses incurred by any dissenting stockholder in connection with the appraisal
proceeding, including without limitation, reasonable attorneys' fees and the
fees and expenses of experts, be charged pro rata against the value of all
shares of Common Stock entitled to appraisal.
From and after the Effective Time, no stockholder who has duly demanded
appraisal in compliance with Section 262 will be entitled to vote for any
purpose the shares of Common Stock subject to such demand or to receive payment
of dividends or other distributions on such shares of Common Stock, except for
dividends or distributions payable to stockholders of record at a date prior to
the Effective Time.
At any time within 60 days after the Effective Time, any stockholder
who has demanded appraisal of his, her or its shares of Common stock has the
right to withdraw such demand for appraisal and to accept the Merger
Consideration; after this period, a stockholder may withdraw such demand for
appraisal only with the consent of the Surviving Corporation. If no petition for
appraisal is filed with the Delaware Chancery Court within 120 days after the
Effective Time, stockholders' rights to appraisal shall cease, and all
stockholders who had previously demanded appraisal shall thereafter be entitled
to receive the Merger Consideration in cash, without interest thereon, upon
surrender of the certificates that formerly represented their Common Stock. The
Company has no obligation to file such a petition, and has no present intention
to do so; thus, any stockholder who desires such a petition to be filed is
advised to file it on a timely basis. However, no petition timely filed in the
Delaware Chancery Court demanding appraisal shall be dismissed as to any
stockholder without the approval of the Delaware Chancery Court, and such
approval may be conditioned upon such terms as the Delaware Chancery Court deems
just.
4
<PAGE> 18
THE MERGER
BACKGROUND OF THE MERGER.
Set forth below is a description of the background of the Merger,
including a brief description of the material contacts between the Company, FKWW
and FKW Sub, and a summary of material meetings of the Board of Directors of the
Company, regarding the transactions described herein.
Commencing in January 1996, members of the Company's senior management
and Goldman Sachs discussed possible strategic alternatives to enable the
Company to meet and respond to major shifts in its industry. Vertical and
horizontal integration within the industry was increasing through mergers and
strategic alliances as a result of the changing regulatory and technological
framework for, and globalization of the delivery of, entertainment and
information. In particular, vertical integration between content providers,
packagers and distributors was continuing, raising concerns that the Company
would be at a disadvantage without an affiliation with a strong global partner.
The Company's management and the Board of Directors were also concerned that the
development of an increasingly competitive multichannel environment, under which
there would be increased competition for high-quality programming, could result
in a reduction of The Family Channel viewership and an erosion of the value of
its programming assets. In addition, CBN and Regent, which owned Class B Stock
representing approximately 8.6% and 9.4%, respectively, of the currently
outstanding economic interest in the Company, had indicated to the Company an
interest in diversifying their investment portfolios through the sale of at
least a portion of such holdings.
Following such discussions, the Company retained Goldman Sachs in early
February to advise on strategic alternatives. Goldman Sachs, together with
members of the Company's senior management, held preliminary discussions with
four potential strategic partners that had been identified as potential partners
by Goldman Sachs and the Company (including News Corp., whose Chairman had
contacted the Company's Chairman in early January and expressed an interest in
an investment in The Family Channel). At a meeting on February 19, 1996, Goldman
Sachs discussed with the Company's Board of Directors and members of the
Company's senior management possible strategic and financial scenarios to
respond to the changing environment, including the following: (i) maintain and
enhance, through internal growth, the Company's programming business and to
globalize its existing family-oriented brand names, without the assistance of a
strategic partner, (ii) aggressively grow by means of an alliance with a
strategic partner or a merger with or acquisition of one or more companies that
complemented, through either horizontal or vertical integration, the Company's
current business, (iii) pursue an outright sale of the Company, or (iv) engage
in a recapitalization, to allow current stockholders to monetize all or a
portion of their holdings or to purchase and redistribute all or a portion of
the Class B Stock held by CBN and Regent.
Goldman Sachs discussed with the Board of Directors potential strategic
fits with a number of identified programming providers and studios and broadcast
and cable networks, focusing on the strategic objectives identified by both
management in its 1996 goals and by the Board: to continue to strengthen the
"Family" brand identity, to fortify the Company's programming position through
new channels and production, to enhance the Company's access to content, to
globalize its existing products and to expand both its channels of distribution
and categories of media. Representatives of Goldman Sachs also discussed
possible structures for a strategic alliance with each of such identified
entities, through such entity's purchase of newly issued Class B Common Stock,
all or a portion of CBN's and Regent's holdings, or both, and the entry into
various strategic arrangements, depending upon the identity of the
5
<PAGE> 19
investor. In addition to such an alliance, Goldman Sachs discussed with the
Board a possible acquisition by the Company of a mid-size entertainment company
involved in cable network programming, utilizing the funding provided by a
strategic investor.
Goldman Sachs also discussed with the Board that a decision to seek to
grow the Company internally without the benefit of any acquisitions or strategic
alliance might confront significant hurdles in the form of increasing
competition and industry consolidation and that a sale of the Company or a
"drive for growth" strategy through acquisition or alliance was the alternative
most likely to maximize value. However, a strategic alliance might be the
preferred approach, inasmuch as the existing holders of Class A Stock had
indicated that they were not prepared to give up their current control of the
Company, and LIFE had indicated it was not prepared to give up its rights under
the Shareholder Agreement (as defined herein, see "THE MERGER-Ancillary
Agreements"), including rights of first refusal on sales of Class A Stock and
preemptive rights, which could impact the timing or availability of certain
strategies, including those involving a change of control. The Board ratified
the retention of Goldman Sachs and also retained Bear Stearns to assist in
identifying potential strategic relationships and the steps necessary to remove
impediments to growth in order to enhance the value of the Company, along the
lines discussed with the Board.
Following the Board meeting and through late March 1996, the Financial
Advisors discussed a variety of possible transaction structures with the holders
of Class A Stock and with LIFE, held additional discussions with the four
potential strategic partners previously contacted and, with the Company's senior
management, held preliminary discussions with three additional potential
strategic partners. The Financial Advisors reported to certain members of senior
management and to the Company's outside counsel at a meeting on April 15, 1996,
that, based upon the information provided to the Financial Advisors during such
discussions, the interest of any new strategic investor in pursuing an
investment in the Company would be dependent upon such party's being able to
acquire a significant economic stake. In addition, LIFE had stated its desire to
increase its ownership to a 40% economic interest and its unwillingness, in any
event, to support a transaction in which it was not able to increase its stake
to the level of any new investor. The Class A stockholders had indicated that
they were unwilling to consider a transaction in which they did not continue to
control the Company, although they indicated a willingness to negotiate certain
governance provisions which would afford LIFE and any new strategic investor
certain additional protections with respect to extraordinary board actions and
issuances of additional equity following their investment. Based upon this
understanding of the views of the various parties necessary to consummate a
transaction, the Financial Advisors were instructed to continue discussions with
potential strategic partners on the basis of one of the structures previously
discussed with the Company's Board of Directors: a "going private" merger of a
newly formed entity ("Newco") with and into the Company, in which (i) the public
stockholders (as well as CBN and Regent) would receive cash for their shares of
Class B Stock and (ii) shares of Newco to be held by the Class A stockholders,
LIFE and the new strategic investor would be converted to shares of the Company,
as the surviving corporation, resulting in LIFE and the new strategic investor
each owning 40%, and the holders of Class A Stock owning an aggregate of 20%, of
the economic interest in the surviving corporation, with the Class A
stockholders maintaining voting control through supermajority voting stock (the
"Newco Transaction"). A possible Newco Transaction was discussed whereby a new
strategic partner would contribute $350 million for its equity stake, LIFE would
invest $110 million in addition to its present investment in Class C Stock and
Convertible Notes, and the Company would borrow approximately $183 million in
connection with the merger. Although neither the Class A stockholders nor LIFE
stated a firm intention to engage in such a transaction, each indicated to the
Company that it was prepared to undertake discussions to determine whether an
acceptable transaction could be negotiated.
6
<PAGE> 20
From April into June 1996, the Financial Advisors, with members of the
Company's senior management, engaged in discussions with various of the
potential investors with respect to the strategic, structural, valuation and
governance aspects of such a transaction. Contacts between Company management,
alone or with the Financial Advisors, and three of the potential investors,
including News Corp., intensified during June and July, following the withdrawal
of the other potential investors over issues of price, control or strategic
direction for the Company. Following a discussion of the Company's progress, and
a review of the three potential investors, by senior management with the Board
of Directors at its meeting on July 15, 1996, it was determined that News Corp.,
through its recently formed joint venture FKWW, offered the best opportunity for
the Company to achieve the types of strategic benefits it was seeking from a
transaction within parameters believed acceptable to the Class A stockholders
and LIFE.
The Company and its legal counsel and the Financial Advisers thus
commenced negotiations with FKWW in early August on documentation for a Newco
Transaction involving FKWW, including a strategic agreement that would govern
the business relationships between the Company and FKWW and various affiliates
of News Corp. following the Newco merger. Such strategic agreement would have
provided for, among other things, FKWW's right to program a "children's block"
on The Family Channel from 6 a.m. to 6 p.m., Mondays through Fridays, and 6 a.m.
to noon on Saturdays and Sundays, cross promotion of networks, production of
programming by the Company, access by the Company to the Fox library and certain
agreements with respect to new channels and international distribution. In
addition, the parties discussed a stand-by capital agreement under which FKWW
would agree to provide up to $150 million of additional capital to the Company,
after the Newco merger, in the form of subordinated debt or convertible
preferred stock, and a shareholders agreement governing the rights of the Class
A stockholders, FKWW and LIFE, as the stockholders of the Company, as the
surviving corporation in the Newco merger. The proposed shareholders agreement
included provisions as to board composition and action, restrictions on
transferability of stock, and purchase rights with respect to new issuances of
stock and sales of certain types of assets. It was contemplated, but not
discussed with CBN and Regent at that time, that CBN and Regent would agree to
vote their Class B Stock in favor of the Newco merger, in which they would
receive the same per share consideration as the public stockholders. Negotiation
and revision of such documents continued among representatives of the Company,
FKWW and LIFE, and their respective counsels, through the fall of 1996, with the
Board of Directors remaining apprised of the process of such negotiations at
meetings or through informal telephone conferences over such period.
Management and the Financial Advisors updated the Board of Directors on
the status of negotiations at its meeting on December 3, 1996. They discussed
with the Board the Company's stated objectives and the continuation of the
industry trends which had precipitated the Company's interest in pursuing a
transaction along the lines being negotiated, the various potential investors
considered and contacted and the various transaction structures considered, and
discussed the reasons why the indicated objectives of the Class A stockholders,
LIFE, CBN, Regent and FKWW had led to the focus on the Newco Transaction. The
perceived potential strategic benefits of a transaction with FKWW were also
discussed. Although a number of significant open issues remained, it was
determined that the various parties (the Company, the Class A stockholders, LIFE
and FKWW) were sufficiently close to reaching agreement that receipt of a formal
proposal was likely. Since a condition to any proposal by FKWW to engage in a
transaction would be that such transaction was acceptable to and approved by the
Company's Board of Directors prior to any public announcement thereof, the Board
of Directors appointed the three directors elected by the holders of Class B
Stock, William L. Armstrong, Lowell W. Morse and Robert M. Wallace
(collectively, the "Class B Directors"), to serve on a special committee of the
Board (the
7
<PAGE> 21
"Special Committee"). The Special Committee was authorized to retain its own
legal counsel and financial advisor, and to commence review of existing
documentation, in order to be able to respond promptly and on a fully informed
basis once a proposal was received. The Special Committee met, appointed Mr.
Morse as chairman, and selected legal counsel and a financial advisor after
interviewing several alternatives for each. The Special Committee, together with
its counsel and financial advisor, met with the Company's outside counsel and
Financial Advisors on December 20, 1996, at which meeting certain members of
management were available by telephone, to discuss the status and terms, as
negotiated to date, of a possible Newco Transaction.
For the remainder of the year and continuing through early February
1997, the Company, FKWW and LIFE continued to negotiate the terms of a Newco
Transaction, while the Special Committee and its counsel reviewed drafts of the
transaction documents and negotiated changes to certain terms affecting the
public stockholders, and its financial advisor performed a financial due
diligence review of the Company. Although, based upon the status of discussions
with potentially interested parties, a price to the public for the Class B Stock
in the range of $20.00-21.00 per share had been discussed by the Financial
Advisors with the Special Committee and its financial advisor (which had
expressed preliminary concerns with respect thereto), no party ever made a
proposal, with or without a specific price, to the Special Committee or the
Board of Directors for their consideration. By mid-February, it had become
apparent to the various parties to the possible Newco Transaction that they
would not be able to reach agreement as to the terms of the investment and
merger and the subsequent relationship among the stockholders of the surviving
corporation. However, management of the Company and the Class A stockholders
continued to believe that the Company should pursue a strategic alliance with
FKWW providing the benefits incorporated in the proposed strategic agreement
negotiated with FKWW in connection with the possible Newco Transaction. In
furtherance of such an alliance, the Company's Chairman spoke with the Chairman
of LIFE's ultimate parent, Tele-Communications, Inc. ("TCI"), who then indicated
that LIFE would be prepared to consider a sale of its Class C Stock and
Convertible Notes in a tax-free transaction.
In a telephone conversation during mid-February, 1997, between M.G.
Robertson, Chairman of the Company and trustee of the charitable trust holding a
majority of the Class A Stock, and K. Rupert Murdoch, Chairman of News Corp.,
the parties discussed whether FKWW would be prepared to enter into the strategic
agreement in connection with a significant investment in the Company, through
the purchase of the Class B Stock owned by CBN and Regent and the Class C Stock
and Convertible Notes owned by LIFE. In connection therewith, the Class A
stockholders would negotiate certain governance rights for FKWW, similar to but
not as extensive as those previously being negotiated in connection with the
Newco Transaction, and some arrangement for the future purchase, for
consideration of $350 million (or $70.00 per share), of the Class A Stock. FKWW
indicated that it was prepared to consider such a transaction, provided that
LIFE's affiliate, Satellite Services, Inc. ("SSI"), would agree to enter into an
amendment to its agreement with respect to carriage of The Family Channel
guaranteeing a minimum number of subscribers.
Discussions proceeded on such a transaction on the basis of the
following: CBN would receive $26.00 per share of Class B Stock in cash; LIFE
would receive $26.00 per share of Class C Stock that it owned or had the right
to acquire upon conversion of the Convertible Notes, in the form of preferred
stock of FKWW or another entity affiliated with News Corp.; Regent would receive
$24.00 per share of Class B Stock in cash; and the holders of the Class A Stock
would have a right for three years to put their stock to FKWW at a per share
price of $24.00 in the first year, $35.00 in the second year and $70.00 in the
third year. The possibility was also discussed of FKWW making a cash offer to
purchase
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<PAGE> 22
all or a portion of the Class B Stock held by the public at $24.00 per share. At
about the same time as such discussions were continuing, the Company's Chairman
and President had discussions with another potential investor who had shown
interest in the Newco Transaction to ascertain whether such entity would be
interested in a transaction similar to that then being discussed with FKWW.
Negotiations then proceeded with both parties through the end of March, at which
time the second potential investor determined that it was not interested in
pursuing an investment on the terms being discussed.
On April 8, 1997, the Board of Directors met with members of the
Company's senior management and its outside counsel and the Financial Advisors
to discuss the status of discussions on a revised transaction. The Company's
Chief Financial Officer presented information concerning management's view of
the value to the Company of the proposed strategic arrangements with FKWW. M.G.
Robertson reviewed the proposed transaction from the perspective of the Class A
stockholders, indicating that they were not prepared to sell their Class A
Stock, and thus relinquish control of the Company, at that time, but required
the protection of the put in order to agree to the corporate governance
arrangements required by FKWW as part of its investment and the strategic
agreement. It was noted that the Company's involvement was not required, and no
Board approval was necessary, to consummate the contemplated stock sales, other
than with respect to the Company's entry into the strategic agreement. Senior
members of FKWW's management were invited into the meeting to present FKWW's
view of the strategic arrangements and related plans for the relationship
between FKWW and its affiliates and the Company. The meeting was then recessed
to allow Messrs. Armstrong and Wallace (two of the three members of the Special
Committee, Mr. Morse having recused himself due to the fact that the
contemplated transaction involved the purchase of all shares held by Regent, of
whose Board of Trustees Mr. Morse serves as Chairman, at a premium which might
not be offered for all shares held by the public) to discuss the transaction
with the Special Committee's counsel, who had also been present at the meeting.
Upon reconvening, Messrs. Armstrong and Wallace expressed concern over the
structure of the proposed stock sales and the potential premium attached to the
put, but indicated a willingness to consider (as a reconstituted Special
Committee, once a transaction were closer to being proposed), as a separate
matter, the entry by the Company into a strategic agreement with FKWW along the
lines being negotiated.
Through April, the parties continued to discuss a proposed FKWW
investment and strategic agreement, including a new form of shareholder
agreement between FKWW and the Class A stockholders. As a result of such
discussions and the Class A stockholders' stated desire to be fair to all
stockholders of the Company, the holders of the Class A Stock considered several
alternative transaction structures providing for the outright sale of the Class
A Stock at varying premiums and subject to varying terms and conditions. One
alternative contemplated that the Class A stockholders would receive $40.00 per
share in cash, plus an additional $30.00 in the form of an earn-out over a
period of time based on subscriber levels for The Family Channel; Regent would
receive $24.00 per share in cash for its Class B Stock; and CBN would receive
$26.00 per share in cash for its Class B Stock, and LIFE would receive $26.00
per share or share equivalent in preferred stock for its Class C Stock and
Convertible Notes, due to certain rights which they would relinquish as part of
the transaction. As part of the transaction, the Class A stockholders also
demanded that FKWW make a cash offer, structured to be non-coercive, to purchase
the public's shares of Class B Stock at $24.00 per share, assuming that the
Special Committee found such price to be fair to the public stockholders. On May
2, 1997, a meeting was held among FKWW, the holders of the Class A Stock and CBN
and their respective counsel to attempt to finalize the structure of a
transaction. At the meeting, the Class A stockholders offered to forego the
$30.00 per share earn-out for their Class A Stock in exchange for a commensurate
($150 million in the aggregate) increase in the per share price to be paid to
the other stockholders of the Company, including the public
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<PAGE> 23
stockholders (although it was still contemplated that the holders of Class B
Stock would receive cash while LIFE would receive equivalent value per share or
share equivalent in preferred stock for its Class C Stock and Convertible
Notes).
During the week of May 12, 1997, several news articles reported rumors
of a possible transaction with FKWW. The Class A stockholders determined that,
rather than receiving a control premium for the Class A Stock, they would prefer
that all stockholders receive the same per share value. After further
discussions among the parties, the Company issued a press release on May 16,
1997 confirming that it was in discussions with respect to a possible
transaction and stating, at the request of the holders of the Class A Stock,
that in the event a transaction was proposed the Class A Stock would receive
equivalent treatment to that of the Class B Stock held by the public. As a
result of this determination by the holders of Class A Stock to give up any
control premium upon a sale of their shares, the parties agreed to seek to
negotiate a merger in which FKWW would acquire all of the Company for a price of
$28.50 per share or share equivalent, representing a sharing of the premium
previously proposed for the Class A Stock. As negotiations continued, four other
companies, three of which had previously been contacted by the Financial
Advisors with respect to a possible Newco Transaction, expressed possible
interest in an acquisition of the Company at a price in excess of the $28.50 per
share being discussed with FKWW. Based upon preliminary discussions with such
parties, two of the companies (including the one which had not previously been
contacted), were provided with access to the Company's documents and management
for the purpose of conducting a due diligence review commencing the week of May
19.
As a result of the foregoing events, all potential bidders were
informed that the Company was prepared to consider, on an exclusive basis, the
first unconditional proposal to acquire all of the capital stock of the Company
at a price at or above $35.00 per share which provided for the waiver by LIFE
and CBN of their relevant rights under the Shareholder Agreement. In order to
induce an offer at such level, the Robertson Sellers indicated that they would
be prepared to support a structure whereby they, together with CBN and Regent,
would approve the necessary merger agreement by written consent immediately
following its execution, thereby assuring the winning bidder that the
transaction could be completed, subject only to the limited conditions contained
in such agreement. The Company and the Class A stockholders noted, however, that
any such transaction would require the concurrence of LIFE, by reason of its
right of first refusal on the Class A Stock, and that LIFE had earlier indicated
that it would sell its Class C Stock and Convertible Notes only in a tax-free
transaction. While negotiations continued between FKWW and each of the parties
to the contemplated merger agreement and the various other documents required
for such a transaction (see "-Ancillary Agreements") on the terms thereof, the
Company provided the two other potential bidders with suggested documentation to
assist them in preparing a bid.
Given the status of the negotiations with FKWW, which had indicated a
willingness to consider making an offer at the $35.00 price and an intention to
complete negotiation of the documents as quickly as possible and to make a firm
proposal on June 2, 1997, the Company requested FKWW and the other two potential
bidders to provide fully negotiated documents (other than as to price) by 5:00
p.m. on May 30, in order to facilitate Board review and action, and to provide
their final bids prior to 5:00 p.m. on June 2. As a result of the changes in the
structure of the potential transaction, a reconstituted Special Committee with
its own financial advisor was no longer considered necessary, although the Board
of Directors determined that it would nevertheless make its decision only with
the support of Messrs. Armstrong and Wallace. Thereafter, one of the potential
bidders, although expressing a continuing interest in a transaction, indicated
that it would not be prepared to make a bid at the $35.00 level. The other,
after suggesting that it might be prepared to consider a price above $35.00 per
share if given an
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<PAGE> 24
exclusive period in which to negotiate, informed the Company that, in light of
the stage of the Company's negotiations with FKWW, it would wait to proceed with
negotiations on documents or preparation of a bid to see whether the Company
reached an agreement with FKWW on June 2. The Board considered and rejected
entering into exclusive negotiations with such party as not being in the best
interests of the Company and its stockholders in light of all of the
circumstances then existing, including the advanced status of negotiations
between the Company and FKWW, and between FKWW and each of CBN and LIFE, and
concerns regarding the ability of such party to reach separate agreements with
CBN and LIFE on a timely basis. Both potential bidders also indicated a
continuing interest in an acquisition of the Company if agreement were not
reached with FKWW at the suggested price level.
The Board convened informally with its legal counsel and the Financial
Advisors at 6:30 p.m. on June 2, 1997, at which time the Board was informed that
FKWW had indicated that it was not yet in a position to make an unconditional
offer. While the various parties and their counsel continued to work on
documents for a transaction with FKWW, the Company and its advisers resumed
discussions with the remaining potential bidder, who also proceeded to speak
with LIFE about the terms of the consideration to be exchanged for its Class C
Stock and Convertible Notes, and with CBN about a buy-out of CBN's program time
under the Program Time Agreement providing for carriage of The 700 Club with Pat
Robertson and related telethons. Discussions with the remaining potential bidder
were again terminated by such party, due to concerns about reaching agreement
with CBN and LIFE. Such party reiterated its interest in an acquisition of the
Company but indicated that it would likely be at a price of no more than $35.00
per share, despite having earlier suggested the possibility of a higher price.
On June 11, 1997, the Company received an unconditional offer from FKWW
to acquire the Company at $35.00 per share pursuant to the terms and subject to
the conditions set forth in the draft Merger Agreement, as previously
negotiated. The Company was advised that the Robertson Sellers, CBN and Regent
were prepared to enter into the Stock Purchase Agreements and to execute a
written consent approving the Merger Agreement and the Merger, if recommended by
the Board of Directors, that LIFE was prepared to enter into the Contribution
and Exchange Agreement and the Amended Affiliation Agreement, and that the
parties to the other Ancillary Agreements were prepared to enter into such
agreements.
The Board of Directors met, commencing at 12 noon on June 11, to
consider the FKWW offer, having previously received copies of the various
agreements proposed to be entered into by the parties and analyses by the
Financial Advisors in connection with the fairness of the $35.00 per share
Merger price. Counsel to the Company reviewed with the Board the structure and
components of the transaction and the terms of the various agreements, and the
Financial Advisors discussed their analyses as to the fairness of the $35.00
price to stockholders and delivered their respective oral fairness opinions
(subsequently confirmed by delivery of their respective written opinions dated
June 11, 1997) as described under "-Opinion of the Company's Financial
Advisors." The meeting was then recessed in order for Messrs. Armstrong and
Wallace to speak separately with their counsel. Upon reconvening and after
further discussion, during which Messrs. Armstrong and Wallace indicated their
support for the Merger, the Board of Directors approved and adopted the Merger
Agreement and approved its execution and delivery by the Company, as fair to and
in the best interests of the Company and its stockholders, directed that the
Merger Agreement and the Merger be submitted to the Company's stockholders for
their approval and recommended adoption of the Merger Agreement and approval of
the Merger. In addition, the Board approved and authorized execution and
delivery by the Company of the Termination to Shareholder Agreement, Amendment
to Program Time Agreement and Amended Affiliation Agreement. In recognition of
the contribution of the holders of the Class A Stock and their counsel to the
negotiation
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<PAGE> 25
of, and the consideration to be received by the Company's stockholders under,
the Merger Agreement for the benefit of the Company and all of its stockholders,
the Board also approved the payment of the reasonable fees and expenses of such
holders' separate legal counsel, in an amount to be determined by the Class B
Directors, after consultation with the Company's General Counsel, but not to
exceed $500,000. The Board's actions were taken by vote of all directors other
than M.G. Robertson and Tim Robertson, who stated that they supported approval
of the Merger but were abstaining on the vote in light of their positions at the
Company and the ancillary agreements to which one or both or their affiliates
would be a party. See "-Interests of Certain Persons in the Merger." Immediately
following Board approval, the various agreements were executed by the parties
thereto, and the Consent was executed and delivered to the Company.
The Board of Directors, in approving the Merger Agreement and the
Merger and adopting the Merger Agreement, considered a number of factors,
including, but not limited to, the following, all of which they believe support
such approval and adoption:
(i) the Company's business, its current financial condition
and results of operations, its future prospects and the current and
anticipated developments in the Company's industry;
(ii) the relationship between the Merger Consideration and the
historical market prices and recent trading activity of the Class B
Stock, including the fact that the $35.00 per share price represents a
premium of more than 190% over the initial public offering ("IPO")
price of the Class B Stock in April 1992 of $12.00 per share, as
adjusted for the Company's 5 for 4 stock split ( or a compound annual
growth rate of over 23%), a premium of more than 130% over the market
price of the Class B Stock at the time the Company commenced
discussions with possible strategic partners in mid-February 1996 and
an approximately 59% premium over the average market price of the Class
B Stock for the 90 trading days prior to receipt of FKWW's offer (See
"MARKET PRICE AND DIVIDENDS");
(iii) the oral opinion of Goldman Sachs delivered to the Board
on June 11, 1997 (and subsequently confirmed by delivery of a written
opinion dated June 11, 1997) to the effect that, as of such date, the
Merger Consideration to be received by the holders of the Company's
Common Stock pursuant to the Merger Agreement is fair to such holders,
and the oral opinion of Bear Stearns delivered to the Board on June 11,
1997 (and subsequently confirmed by delivery of a written opinion dated
June 11, 1997) to the effect that, as of such date, the Merger
Consideration to be received by the holders of the Company's Common
Stock pursuant to the Merger Agreement is fair, from a financial point
of view, to such holders (see "-Opinions of the Company's Financial
Advisors" and Annexes III and IV hereto);
(iv) the fact that the holders of a majority of the voting
power of the Company were prepared to support the Merger and to receive
$35.00 per share for their Common Stock, including the Class A Stock.
In that connection, the Board reviewed the terms of the preferred stock
to be received by LIFE in exchange for its Class C Stock and
Convertible Notes, assuming consummation of the Contribution and
Exchange Agreement, and the fact that LIFE would receive preferred
stock having an aggregate liquidation preference equal to $35.00 per
share times the number of shares of Class C Stock owned, or receivable
upon conversion of the Convertible Notes owned, by LIFE plus $6.83
million to compensate LIFE for foregone interest on the Convertible
Notes and certain tax consequences. The Board noted that LIFE's
agreement to waive certain rights under the Shareholder Agreement,
including rights of first refusal on the
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<PAGE> 26
Class A Stock, was a condition to the Company being able to negotiate a
transaction acceptable to the Class A stockholders, whose approval was
required for any merger (see "-Ancillary Agreements");
(v) the other terms and conditions of the Merger Agreement,
including the facts that (a) the Merger Agreement was structured as
much as possible to be the equivalent of the immediate sale of the
Company, with limited representations and warranties by the Company and
limited conditions to FKWW's obligation to consummate the Merger,
including no "material adverse change" condition, most of which
representations, warranties and conditions would no longer be
applicable once FKWW purchased Class A Stock (in the form of the Class
B Stock into which it is convertible) pursuant to the Robertson Stock
Purchase Agreement, and (b) FKWW's and FKW Sub's obligations to
consummate the Merger would not be subject to any financing condition,
and all of FKWW's and FKW Sub's obligations would be guaranteed by News
Corp. In considering the terms of the Merger Agreement, the Board noted
that the Agreement did not provide for any "fiduciary out" for a higher
proposal, in light of the fact that stockholder approval by written
consent would be received by the Company concurrently with or
immediately following execution of the Merger Agreement by FKWW (See
"THE MERGER AGREEMENT-Representations and Warranties, "-Conditions to
the Merger," "-Guaranty" and "-Other Agreements" and "REQUIRED VOTE;
WRITTEN CONSENT IN LIEU OF MEETING");
(vi) the fact that the Merger Consideration is all cash, and
the amount will be adjusted if FKWW or any of its affiliates pays or
agrees to pay any greater amount for shares of Common Stock or
securities convertible into Common Stock from the Robertson Sellers,
CBN, Regent or LIFE (through an amendment of the terms of the Stock
Purchase Agreements or Contribution and Exchange Agreement, as
applicable, as in effect on the date of the Merger Agreement) or from
certain other holders (see "THE MERGER AGREEMENT-Consideration to be
Paid in the Merger");
(vii) the fact that the Company and its Financial Advisors had
previously identified and contacted the parties believed most likely to
be interested in a transaction with the Company in connection with a
Newco Transaction; that thereafter it was widely reported that a change
of control transaction was available; and that several other parties,
including companies previously contacted, did emerge as possible
bidders, but that no firm proposal at $35.00 per share or higher was
received from any other party; and
(viii) the fact that stockholders at the Effective Time (other
than those executing the Consent if the Stock Purchase Agreements are
not consummated prior thereto) have the right to dissent from the
Merger and to demand appraisal of the fair value of their Common Stock
under the DGCL (see "APPRAISAL RIGHTS").
In view of the wide variety of factors considered, neither the Class B
Directors nor the Board found it practicable to, and did not, quantify, or
otherwise attempt to assign relative weights to, the specific factors
considered.
On June 3, 1997, in recognition of the substantial time committed and
additional duties and responsibilities performed and to be performed by the
Company's Class B Directors in connection with their consideration of various
strategic alternatives, including the transaction then being negotiated with
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<PAGE> 27
FKWW and potentially with other parties, the Board of Directors (with such Class
B Directors abstaining) voted additional compensation in the amount of $100,000
to each such Class B Director for his services through the consummation of any
transaction recommended by the Board. All of the Directors of the Company are
indemnified under the Company's Certificate of Incorporation and by-laws and, in
addition, have separate indemnification agreements with the Company as permitted
by Delaware law. See "-Interests of Certain Persons in the Merger."
OPINIONS OF THE COMPANY'S FINANCIAL ADVISORS.
Goldman Sachs. At the June 11, 1997 meeting of the Company's Board of
Directors, Goldman Sachs delivered its oral opinion (which was subsequently
confirmed by written opinion dated June 11, 1997) that, as of such date, the
Merger Consideration to be received by the holders of shares of Common Stock
pursuant to the Merger Agreement is fair to such holders.
THE FULL TEXT OF THE WRITTEN OPINION OF GOLDMAN SACHS DATED JUNE 11,
1997, WHICH SETS FORTH ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON
THE REVIEW UNDERTAKEN IN CONNECTION WITH THE OPINION, IS ATTACHED HERETO AS
ANNEX III TO THIS INFORMATION STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE.
STOCKHOLDERS OF THE COMPANY ARE URGED TO, AND SHOULD, READ SUCH OPINION IN ITS
ENTIRETY.
In connection with its opinion, Goldman Sachs reviewed, among other
things, (i) the Merger Agreement; (ii) the Stock Purchase Agreements; (iii) the
Contribution and Exchange Agreement; (iv) the Amended and Restated Certificate
of Incorporation of the Company; (iv) the Restated By-laws of the Company; (v)
the Shareholders Agreement; (vi) Annual Reports to Stockholders and Annual
Reports on Form 10-K of the Company for the five years ended December 31, 1996;
(vii) certain interim reports to stockholders and Quarterly Reports on Form
10-Q; (viii) certain other communications from the Company to its stockholders;
and (ix) certain other internal financial analyses and forecasts for the Company
prepared by its management. Goldman Sachs also held discussions with members of
the senior management of the Company regarding its past and current business
operations, financial condition, and future prospects. In addition, Goldman
Sachs reviewed the reported price and trading activity for the Class B Stock,
compared certain financial and stock market information for the Company with
similar information for certain other companies the securities of which are
publicly traded, reviewed the financial terms of certain recent business
combinations in the cable programming industry specifically and performed such
other studies and analyses as it considered appropriate.
Goldman Sachs did not opine as to the fairness of the Stock Purchase
Agreements or the Contribution and Exchange Agreement or the consideration to be
paid thereunder to the stockholders of the Company party thereto. In addition,
certain rights held by and obligations of certain of such stockholders may have
had an impact on the sale process. Goldman Sachs' opinion is directed only to
the fairness of the Merger Consideration to be received by the holders of the
shares of Common Stock in the Merger pursuant to the Merger Agreement and its
opinion does not address the relative merits of the Merger as compared to any
alternative business transactions that might be available to the Company.
Goldman Sachs relied upon the accuracy and completeness of all of the
financial and other information reviewed by it and has assumed such accuracy and
completeness for purposes of rendering its opinion. Goldman Sachs has not made
an independent evaluation or appraisal of the assets and liabilities of the
Company or any of its subsidiaries and has not been furnished with any such
evaluation or appraisal. In addition, Goldman Sachs relied without independent
verification upon the accuracy and
14
<PAGE> 28
completeness of all of the financial and other information reviewed by it for
purposes of its opinion. Goldman Sachs' advisory services and opinion are
provided for the information and assistance of the Board of Directors of the
Company in connection with its consideration of the transaction contemplated by
the Agreement and such opinion does not constitute a recommendation as to how
any holder of shares of Common Stock should vote with respect to such
transaction.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth below, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying Goldman Sachs' opinion. In arriving at its fairness determination,
Goldman Sachs considered the results of all such analyses. No company or
transaction used in the below analyses as a comparison is directly comparable to
the Company or the contemplated transaction. The analyses were prepared solely
for purposes of Goldman Sachs' providing its opinion to the Company's Board of
Directors as to the fairness of the Merger Consideration and do not purport to
be appraisals or necessarily reflect the prices at which businesses or
securities actually may be sold. Analyses based upon forecasts of future results
are not necessarily indicative of actual future results, which may be
significantly more or less favorable than suggested by such analyses. Because
such analyses are inherently subject to uncertainty, being based upon numerous
factors or events beyond the control the parties or their respective advisors,
none of the Company, Goldman Sachs or any other person assumes responsibility if
future results are materially different from those forecast. As described above,
Goldman Sachs' opinion to the Board of Directors of the Company was one of many
factors taken into consideration by the Company's Board of Directors in making
its determination to approve the Merger. The summary below does not purport to
be a complete description of the analyses performed by Goldman Sachs and is
qualified by reference to the written opinion of Goldman Sachs set forth in
Annex III hereto.
Goldman Sachs, as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements, and valuations for estate, corporate and other purposes. It is
familiar with the Company having acted as its financial advisor in connection
with the Merger. It also has provided certain investment banking services to the
Company from time to time. Goldman Sachs has also provided certain investment
banking services to affiliates of FKWW from time to time, including acting as
underwriter in the offering of public securities issued by certain of FKWW's
affiliates, and may provide investment banking services to FKWW and its
affiliates in the future.
Bear Stearns. At the June 11, 1997 meeting of the Company's Board of
Directors, Bear Stearns delivered its oral opinion (which was subsequently
confirmed by written opinion dated June 11, 1997) to the effect that, as of the
date thereof, and subject to the assumptions and qualifications set forth
therein, the Merger Consideration is fair, from a financial point of view, to
the stockholders of the Company.
THE FULL TEXT OF BEAR STEARNS' OPINION, WHICH IS SET FORTH AS ANNEX IV
TO THIS INFORMATION STATEMENT, DESCRIBES THE ASSUMPTIONS MADE, MATTERS
CONSIDERED AND LIMITS ON THE REVIEW UNDERTAKEN BY BEAR STEARNS IN CONNECTION
WITH ITS OPINION. THE COMPANY'S STOCKHOLDERS ARE URGED TO READ THE OPINION IN
ITS ENTIRETY. THE SUMMARY OF BEAR STEARNS' OPINION SET FORTH IN THIS INFORMATION
STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH
OPINION.
In the course of performing its reviews and analyses for rendering its
opinion, Bear Stearns: (i) reviewed the Merger Agreement; (ii) reviewed drafts
of the Stock Purchase Agreements and
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<PAGE> 29
Contribution and Exchange Agreement among FKWW and certain stockholders of the
Company (the "Other Transaction Agreements") pursuant to which, among other
things, such stockholders have agreed to sell or contribute to FKWW Class B
Stock and securities convertible into Class B Stock representing a majority of
the outstanding voting securities of the Company; (iii) reviewed drafts of
certain other Ancillary Agreements proposed to be executed by the parties to the
Merger Agreement, the Other Transaction Agreements and their respective
affiliates in connection with the transactions contemplated by the Merger
Agreement and the Other Transaction Agreements; (iv) reviewed the Company's
Annual Report to Shareholders and Annual Report on Form 10-K for the year ended
December 31, 1996 and its Quarterly Report on Form 10-Q for the period ended
March 31, 1997; (v) reviewed certain operating and financial information,
including estimates and projections, provided to it by the senior management of
the Company, relating to the Company's business and prospects; (vi) met with
certain members of the Company's senior management to discuss the Company's
operations, historical financial statements and future prospects; (vii) reviewed
the historical price, trading volume and valuation parameters of the Common
Stock; (viii) reviewed publicly available financial data, stock market
performance data and valuation parameters of companies which Bear Stearns deemed
generally comparable to the Company; (ix) reviewed the terms of recent mergers
and acquisitions involving companies which Bear Stearns deemed generally
comparable to the Company; and (x) conducted such other studies, analyses,
inquiries and investigations as Bear Stearns deemed appropriate.
Bear Stearns' Opinion is intended for the benefit and use of the Board
of Directors of the Company and does not constitute a recommendation to any
holder of shares of Common Stock. Bear Stearns' Opinion does not address the
relative merits of the Merger and any other proposals or offers discussed or
considered by the Board of Directors and the holders of Class A Stock as
alternatives to the Merger or the decisions by the Board of Directors and the
holders of Class A Stock with respect to the Merger. Further, Bear Stearns'
Opinion does not address the fairness of the terms of the Other Transaction
Agreements and Ancillary Agreements to the stockholders of the Company or the
positive or negative impact of such agreements on the terms of the Merger.
In the course of its review, Bear Stearns has relied upon and assumed,
without independent verification, the accuracy and completeness of the financial
and other information provided to it by the Company. With respect to the
Company's projected financial results, Bear Stearns has assumed that they have
been reasonably prepared on bases reflecting the best currently available
estimates and judgments of the senior management of the Company as to the
expected future performance of the Company. Bear Stearns has not assumed any
responsibility for the independent verification of any such information or of
the projections provided to it and it has further relied upon the assurances of
the senior management of the Company that they are unaware of any facts that
would make the information or projections provided to it incomplete or
misleading. In arriving at its opinion, Bear Stearns has not performed or
obtained any independent appraisal of the assets or liabilities of the Company,
nor has it been furnished with such appraisals. Bear Stearns' Opinion does not
address the Company's underlying business decision to pursue the Merger. Bear
Stearns' Opinion was necessarily based on economic, market and other conditions,
and the information made available to it, as of the date thereof.
In connection with preparing and rendering its opinion, Bear Stearns
performed a variety of valuation, financial and comparative analyses. The
summary of such analyses, as set forth below, does not purport to be a complete
description of the analyses underlying Bear Stearns' Opinion. The preparation of
a fairness opinion is a complex process and is not necessarily susceptible to
summary description. Bear Stearns believes that its analyses must be considered
as a whole, and that selecting portions of this analyses and the factors
considered by it, without considering all such factors and
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<PAGE> 30
analyses, could create an incomplete view of the processes underlying Bear
Stearns' Opinion. Moreover, the estimates contained in such analyses are not
necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than those suggested
by such analyses. In addition, analyses relating to the value of businesses or
securities do not purport to be appraisals or necessarily reflect the prices at
which businesses or securities actually may be sold. Accordingly, such estimates
are inherently subject to substantial uncertainties.
Bear Stearns is an internationally recognized investment banking firm
and was selected as financial advisor to the Company in connection with the
Merger and asked to render its opinion based on Bear Stearns' qualifications,
expertise and reputation in providing advice to companies in the media and
entertainment industries as well as its familiarity with the Company and FKWW.
As part of its investment banking business, Bear Stearns is regularly engaged in
the valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive bidding, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes.
Financial Analyses. The following is a summary of the material
financial analyses used by each of the Financial Advisors in connection with
providing their respective written opinions dated June 11, 1997 to the Company's
Board of Directors.
(i) Stock Price Performance. The Financial Advisors reviewed the
historical trading prices for the Class B Stock from February 1, 1996 through
June 9, 1997, which ranged during the period from $14.00 to $32.00. In addition,
the Financial Advisors reviewed the historical trading prices for the Class B
Stock from the first day of trading during the period after the Company's IPO on
April 29, 1992 (the "IPO Date"), through June 9, 1997, which ranged from $7.60
to $32.00. The Financial Advisors also compared the relative indexed stock price
performance of the Class B Stock with the Large Capitalization Entertainment
Index (which includes The Walt Disney Company, News Corp., Time Warner Inc. and
Viacom Inc.) and the S&P 400 index from the IPO Date through June 9, 1997.
(ii) Valuation. The Financial Advisors calculated the aggregate equity
consideration (the "Equity Value") for the Company to be approximately $1.715
billion based on a cash price per share of $35.00 to be paid in the Merger and
assuming, among other things, 5,000,000 outstanding shares of Class A Stock,
34,334,602 outstanding shares of Class B Stock (assuming exercise of all
outstanding options on a treasury stock basis), 7,088,732 outstanding shares of
Class C Stock and 2,587,500 shares of Class C Stock issuable upon conversion of
the Convertible Notes and taking into account certain interest foregone upon the
conversion of the Convertible Notes. The Financial Advisors also calculated the
adjusted levered aggregate consideration (the "Enterprise Value") to be
approximately $1.820 billion by adding to the Equity Value the amount of
outstanding net debt of the Company equal to $151.1 million as of March 31,
1997, and then subtracting $46.5 million representing the approximate after-tax
value of the Common Stock of Flextech PLC held by the Company as of June 9,
1997.
(iii) Selected Precedent Cable Programming M&A Transactions. The
Financial Advisors analyzed certain information relating to the following four
selected transactions in the cable programming industry (the "Selected
Transactions"): Westinghouse Electric Corporation's acquisition of The Nashville
Network; Time Warner Inc.'s acquisition of certain cable programming businesses
of Turner Broadcasting System Inc. (including CNN, CNN International, Headline
News, TBS Superstation and TNT); Hearst Corporation's and CapCities/ABC, Inc.'s
acquisition of 33.3% of Lifetime Television; and Cablevision Systems
Corporation's acquisition of 50% of American Movie Classics. Such analysis
indicated that for
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the Selected Transactions: (i) levered aggregate consideration as a multiple of
latest twelve months ("LTM") earnings before interest, taxes, depreciation and
amortization ("EBITDA") ranged from 10.8x to 14.2x, with a mean of 12.9x, as
compared to a multiple of LTM March 31, 1997 EBITDA of 24.3x for the Enterprise
Value in the Merger and of 16.3x for the adjusted Enterprise Value (the "AEV")
in the Merger of approximately $1.720 billion, calculated by subtracting from
the Enterprise Value an assumed value of $100 million for the Company's assets
that do not currently generate EBITDA; and (ii) the value of levered aggregate
consideration paid per subscriber ranged from $9.07 to $42.30, with a mean of
$22.06, as compared to a value paid per March 31, 1997 subscribers of $25.38 for
the Enterprise Value in the Merger and of $25.07 for the AEV in the Merger. The
multiples and values (a) for LTM March 31, 1997 EBITDA and March 31, 1997
subscribers were based on public filings of the Company, as adjusted to reflect
the Company's 72% ownership in FiT TV; and (b) for projected 1997 EBITDA were
based on the Company's management estimates. The Financial Advisors also
compared the projected five-year compound annual EBITDA growth rate for the
Company provided by the Company's management and the EBITDA transaction multiple
in the Merger to similar information derived from publicly available sources for
the Selected Transactions and the acquired entities therein.
(iv) Discounted Cash Flow Analysis. The Financial Advisors performed a
discounted cash flow analysis using the Company's management projections in two
scenarios: (i) the first case (the "Consolidated Case") was for the consolidated
Company; and (ii) the second case (the "Family Channel Case") was for the
consolidated Company excluding its current non-EBITDA generating assets (the
"Family Channel"), which non-EBITDA generating assets included MTM, FiT TV,
United Family Communications LLC and Calvin Gilmore Productions. The Financial
Advisors calculated a net present value of free cash flows for the years 1997
through 2001 using discount rates ranging from 9.0% to 13.0%. The Financial
Advisors calculated the terminal values in the year 2001 based on multiples
ranging from 8.0x projected 2001 EBITDA to 10.0x projected 2001 EBITDA. These
terminal values were then discounted to present value using discount rates from
9.0% to 13.0% The various ranges for discount rates and terminal value multiples
were chosen to reflect theoretical analyses of the Company's cost of capital.
In the Consolidated Case, these analyses indicated aggregate Enterprise
Values ranging from approximately $935 million to approximately $1.331 billion,
multiples of aggregate Enterprise Values to LTM March 31, 1997 consolidated
EBITDA ranging from 12.5x to 17.8x, values of Enterprise Value paid per
consolidated Company subscriber (including full-time equivalent subscribers)
ranging from $13.04 to $18.57 and implied per share values ranging from $16.00
to $24.08.
In the Family Channel Case, these analyses indicated enterprise values
for the Family Channel ranging from approximately $927 million to approximately
$1.291 billion, multiples of Family Channel enterprise values to LTM March 31,
1997 Family Channel EBITDA ranging from 8.8x to 12.3x and values of Family
Channel enterprise value paid per Family Channel subscriber ranging from $13.52
to $18.83.
(v) Valuation Comparison. The Financial Advisors calculated and
compared various financial multiples and ratios for the Company using the Equity
Value, the Enterprise Value and the AEV. The Financial Advisors compared the per
share Equity Value of $35.00 to a calculated per share discounted cash flow
value of $19.76; the Enterprise Value of approximately $1.820 billion to a
calculated discounted cash flow value for the consolidated Company of
approximately $1.119 billion; and the AEV of approximately $1.720 billion to a
calculated discounted cash flow value for the Family Channel of approximately
$1.097 billion. The calculated discounted cash flow values were mid-points of
the
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discounted cash flow values noted in (iv) above and were based on five-year
projected cash flows provided by Company management and an exit multiple of 9.0x
projected terminal EBITDA and used a discount rate of 11.0%.
(vi) Multiples at Various Assumed Private Market Values. The Financial
Advisors calculated alternative values for the Equity Value, the Enterprise
Value and the AEV based upon per share values for the Merger Consideration
ranging from $30.00 to $40.00 per share, including the $35.00 per share to be
paid the Merger. The multiples and values for LTM March 31, 1997 EBITDA and
March 31, 1997 subscribers were based on public filings of the Company as
adjusted to reflect the Company's 72% ownership in FiT TV and for projected 1997
EBITDA were based on the Company's management estimates.
The Financial Advisors considered the Enterprise Values as a multiple
of LTM March 31, 1997 consolidated EBITDA and of projected 1997 consolidated
EBITDA. The Financial Advisors also considered the Enterprise Values as a value
paid per consolidated Company subscriber. The Financial Advisors' analyses
indicated a multiple to LTM March 31, 1997 consolidated EBITDA of 24.3x and to
projected 1997 consolidated EBITDA of 22.3x for the Enterprise Value in the
Merger. The Financial Advisors' analyses also indicated a value paid per
consolidated Company subscriber of $25.41 for the Enterprise Value in the
Merger. In addition, the Financial Advisors considered the AEVs as a multiple of
LTM March 31, 1997 Family Channel EBITDA and of projected 1997 Family Channel
EBITDA. The Financial Advisors also considered the AEVs as a value paid per
Family Channel subscriber. The Financial Advisors' analyses indicated a multiple
to LTM March 31, 1997 Family Channel EBITDA of 16.3x and to projected 1997
Family Channel EBITDA of 15.7x for the AEV in the Merger. The Financial
Advisors' analyses also indicated a value paid per Family Channel subscriber of
$25.10 for the AEV in the Merger.
Engagement Letter. Pursuant to a letter agreement dated June 6, 1997,
amending and supplementing an engagement letter among the Financial Advisors and
the Company dated July 3, 1996 (the "Engagement Letter"), the Company agreed to
pay the Financial Advisors, upon consummation of an acquisition of the Company,
a transaction fee equal to 0.5% of the value of the total consideration paid by
the acquiror. If the acquisition is consummated in one or more steps, including
a second-step merger, any additional consideration paid in or to be paid in
subsequent steps is included for purposes of calculating the transaction fee.
The Company has agreed to reimburse the Financial Advisors for their reasonable
out-of-pocket expenses, including attorney's fees, of up to $300,000 (of which
not more than $100,000 may be applied to legal expenses), and to indemnify the
Financial Advisors against certain liabilities, including certain liabilities
under the federal securities laws.
INTERESTS OF CERTAIN PERSONS IN THE MERGER. Information with respect to certain
contracts, agreements, arrangements, or understandings with certain of the
Company's executive officers, directors or affiliates is set forth below. See,
also, "-Ancillary Agreements" and "-Background of the Merger."
Consulting Agreement. As a condition to FKWW entering into the Merger
Agreement, FKWW and M.G. Robertson, the Company's Chairman, executed a letter
agreement (the "Robertson Letter Agreement") by and between FKWW and M.G.
Robertson, providing for termination of the existing employment agreement
between the Company and M.G. Robertson upon consummation of the Merger and the
waiver by M.G. Robertson of all severance pay thereunder, and providing for M.G.
Robertson to thereafter serve as a consultant to the Company for a term of 5
years for compensation of $400,000 in the first year, reducing in each
subsequent year by a specified commitment percentage to $160,000 in
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the fifth year. His duties as a consultant will include (i) serving as
Co-Chairman of the Company, (ii) advising the Company on its strategic
direction, (iii) serving, on an occasional basis, as spokesperson for The Family
Channel with its cable affiliates and other business partners, (iv) using
reasonable efforts to assist the Company in maintaining and expanding its
subscriber base, (v) continuing to serve as host of The 700 Club with Pat
Robertson, subject to certain conditions, and (vi) appearing on The 700 Club
with Pat Robertson as frequently as in the past, with such appearances
decreasing in each subsequent year by the same commitment percentage as his
compensation.
Treatment of Stock Options. The Company has outstanding options to
purchase shares of Class B Stock which are held by officers of the Company,
including M.G. Robertson and Tim Robertson. Pursuant to the Merger Agreement,
the Company has agreed to use its reasonable good faith efforts to cause all
outstanding stock options to be cancelled at the Effective Time for an amount in
cash equal to the Merger Consideration, less the per share option exercise
price, except as otherwise agreed. See "THE MERGER AGREEMENT-Conditions to the
Merger." Pursuant to the Robertson Stock Purchase Agreement, M.G. Robertson and
Tim Robertson have each agreed to exercise their respective options to purchase
625,000 shares of Class B Stock and to sell such shares to FKWW at the same per
share price as, and following the initial sale of Common Stock by, the Robertson
Sellers. See "-Ancillary Agreements."
Director Liability and Indemnification. Under the DGCL, a corporation
may adopt a provision in its certificate of incorporation that eliminates or
limits the personal liability of a director to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director;
provided, however, that such provision may not eliminate or limit director
monetary liability for: (i) breaches of the director's duty of loyalty to the
corporation or its stockholders; (ii) acts or omissions not in good faith or
involving intentional misconduct or knowing violations of laws; (iii) the
payment of unlawful dividends or unlawful stock repurchases or redemptions; or
(iv) transactions in which the director received an improper personal benefit.
The Company's Certificate of Incorporation includes such a provision. The
Company's by-laws provide that the Company shall indemnify each present and
former director and officer of the Company or any of its subsidiaries to the
fullest extent permitted by applicable law.
Under the DGCL, a corporation has the power to indemnify any director
or officer against expenses, judgments, fines, and settlements incurred in a
proceeding, other than an action by or in the right of the corporation, if the
person acted in good faith and in a manner that the person reasonably believed
to be in the best interests of the corporation or not opposed to the best
interests of the corporation, and, in the case of a criminal proceeding, had no
reasonable cause to believe the conduct of the person was unlawful. In the case
of an action by or in the right of the corporation, the corporation has the
power to indemnify any officer or director against expenses incurred in
defending or settling the action if 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; provided, however, that no indemnification may be
made when a person is adjudged liable to the corporation, unless a court
determines such person is entitled to indemnity for expenses, and then such
indemnification may be made only to the extent such court shall determine. The
DGCL requires that to the extent an officer or director of a corporation is
successful on the merits or otherwise in defense of any third-party or
derivative proceeding, or in defense of any claim, issue, or matter therein, the
corporation must indemnify the officer or director against expenses incurred in
connection therewith.
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The Merger Agreement provides that the indemnification and exculpation
provisions in favor of the past and present directors or officers of the Company
currently in effect will remain in effect for at least six years from the
Effective Time and that the current directors' and officers' liability insurance
policies (or other policies providing, subject to certain conditions, at least
the same coverage as the current policies), or as much coverage as may be
available upon payment of 200% of current premiums, will be maintained in effect
for six years from the Effective Time. Effective December 3, 1996, the Company
entered into Indemnification Agreements with each of its directors providing for
indemnification to the fullest extent permitted by the DGCL and containing
provisions with respect to continuation of directors' and officers' liability
insurance that are comparable to such provisions in the Merger Agreement.
PURPOSE OF THE MERGER. The principal purposes for the Merger are for FKWW to
acquire all of the equity interests in the Company and to obtain the benefits
available under the Ancillary Agreements.
CERTAIN EFFECTS OF THE MERGER. Following the Merger, FKWW will own 100% of the
Surviving Corporation's outstanding capital stock. FKWW will be the sole
beneficiary of any future earnings and growth of the Surviving Corporation
(until shares of capital stock, if any, are issued to other stockholders) and
will have the ability to benefit from any divestitures, strategic acquisitions
or other corporate opportunities that may be pursued by the Surviving
Corporation in the future. Upon the consummation of the Merger, the Existing
Stockholders will cease to have any ownership interests in the Company or rights
of shareholders. The Existing Stockholders will no longer benefit from any
increases in the value of the Company or any payment of dividends on the Common
Stock of the Company and will no longer bear the risk of any decreases in value
of the Company. No cash dividends have ever been paid on the Company's Common
Stock.
As a result of the Merger, the Surviving Corporation will be privately
held and there will be no public market for its Common Stock. Upon consummation
of the Merger, the Class B Stock of the Company will cease to be quoted on the
NYSE. In addition, registration of the Class B Stock of the Company under the
Exchange Act will be terminated, and, accordingly, the Company will no longer be
required to file periodic reports with the Commission.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER.
The following is a summary of certain federal income tax consequences
of the Merger to stockholders who receive the Merger Consideration for their
shares of Common Stock pursuant to the Merger. This summary is based on the
Internal Revenue Code of 1986, as amended, Treasury Regulations (including
Proposed Regulations and Temporary Regulations) promulgated thereunder, official
pronouncements and judicial decisions, all as in effect on the date hereof and
all of which are subject to change, possibly with retroactive effect. This
summary does not purport to discuss all tax consequences of the Merger to all
stockholders. In particular, the summary does not discuss the tax consequences
of the Merger to any stockholder that is an insurance company, tax-exempt
organization, financial institution, foreign person or broker dealer or who has
acquired his, her or its shares upon the exercise of options or otherwise as
compensation.
The receipt of cash by a stockholder of the Company in exchange for
shares of Common Stock pursuant to the Merger will be a taxable transaction for
federal income tax purposes and may also be a taxable transaction under
applicable state, local, foreign or other tax laws. In general, a stockholder
will recognize a gain or loss equal to the difference, if any, between the
amount of cash received for his, her
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or its stock in the Merger (i.e., $35.00 per share, subject to adjustment as
provided in the Merger Agreement) and the stockholder's adjusted tax basis in
such stock. A stockholder will recognize such gain or loss as of the Effective
Time. In general, such gain or loss will be a capital gain or loss, provided the
stock is a capital asset in the hands of the holder at the Effective Time, and
will be a long-term capital gain or loss if the stock has been held for more
than one year at such time.
Backup Withholding. The Company or the Exchange Agent will be required
to withhold 31% of the gross proceeds payable to a stockholder or other payee in
the Merger unless the stockholder or payee provides, in a properly completed
substitute Form W-9 included with the Letter of Transmittal (see "PROCEDURE FOR
RECEIPT OF MERGER CONSIDERATION"), his, her or its taxpayer identification
number and certifies under penalties of perjury that such number is correct and
that the stockholder is not subject to backup withholding, unless an exemption
applies under applicable law and regulations. Therefore, unless such an
exemption exists and is demonstrated in a manner satisfactory to the Company or
the Exchange Agent, in accordance with the instructions that will accompany the
substitute Form W-9, each stockholder should complete and sign the substitute
Form W-9 that will be made available to the stockholder with the Letter of
Transmittal, so as to provide the information and certification necessary to
avoid backup withholding.
EACH STOCKHOLDER SHOULD CONSULT HIS, HER OR ITS OWN TAX ADVISOR WITH
RESPECT TO THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER IN HIS, HER OR ITS
INDIVIDUAL CIRCUMSTANCES AND WITH RESPECT TO THE STATE, LOCAL OR OTHER INCOME
TAX CONSEQUENCES OF THE MERGER. FURTHER, ANY STOCKHOLDER WHO IS A CITIZEN OF A
COUNTRY OTHER THAN THE UNITED STATES SHOULD CONSULT HIS, HER OR ITS OWN TAX
ADVISOR WITH RESPECT TO THE TAX TREATMENT IN SUCH COUNTRY OF THE MERGER AND WITH
RESPECT TO THE QUESTION OF WHETHER THE TAX CONSEQUENCES DESCRIBED ABOVE MAY BE
ALTERED BY REASON OF THE PROVISIONS OF THE INTERNAL REVENUE CODE APPLICABLE TO
FOREIGN PERSONS OR THE PROVISIONS OF ANY TAX TREATY APPLICABLE TO SUCH
STOCKHOLDER.
ACCOUNTING TREATMENT. The Merger will be accounted for under the "purchase"
method of accounting.
REGULATORY MATTERS.
General. The Company does not believe that any material federal or
state regulatory approvals, filings or notices are required by the Company in
connection with the Merger other than (i) such approvals, filings or notices
required pursuant to federal and state securities laws, (ii) such filings
required pursuant to the HSR Act and (iii) the filing of the certificate of
merger with the Secretary of State of the State of Delaware.
Antitrust. Under the HSR Act and the rules that have been promulgated
thereunder by the Federal Trade Commission ("FTC"), certain acquisition
transactions may not be consummated unless certain information has been
furnished to the Antitrust Division of the Department of Justice (the "Antitrust
Division") and the FTC and certain waiting period requirements have been
satisfied. The consummation of the Merger, the purchase of Common Stock by FKWW
pursuant to the Stock Purchase Agreements, and the acquisition by FKWW of the
Class C Stock and Convertible Notes from LIFE pursuant to the Contribution and
Exchange Agreement are conditioned upon the expiration or termination
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of all applicable HSR waiting periods. See "THE MERGER AGREEMENT-Conditions to
the Merger" and "THE MERGER-Ancillary Agreements."
Pursuant to the HSR Act, on June 19, 1997, Haim Saban and K. Rupert
Murdoch, as the "ultimate parent entities" of FKWW under the HSR Act, and the
Company (collectively, the "Filers"), filed Premerger Notification and Report
Forms with the Antitrust Division and the FTC in connection with the acquisition
by FKWW of voting securities of the Company (the Class B Stock) pursuant to the
Merger and the Stock Purchase Agreements and FKWW's conversion of the Class C
Stock and Convertible Notes acquired from LIFE pursuant to the Contribution and
Exchange Agreement into shares of Class B Stock. Under the provisions of the HSR
Act applicable thereto, such transactions may not be consummated until the
expiration of a 30-calendar day waiting period following such filings.
Accordingly, such waiting period will expire at 11:59 p.m., New York City time,
on July 19, 1997, unless it is earlier terminated by the FTC and the Antitrust
Division or extended by a request from the FTC or the Antitrust Division for
additional information or documentary material prior to such time and date.
Pursuant to the HSR Act, the Filers have requested early termination of the
waiting period applicable to such transactions. There can be no assurance,
however, that the 30-day HSR Act waiting period will be terminated early. If
either the FTC or the Antitrust Division were to request additional information
or documentary material from the Filers, the waiting period with respect to such
transactions would expire at 11:59 p.m., New York City time, on the twentieth
calendar day after the date of substantial compliance by the Filers with such
request. Thereafter, the waiting period could be extended only by court order or
with consent of the Filers.
The FTC and the Antitrust Division frequently scrutinize the legality
under the antitrust laws of transactions such as FKWW's acquisition of the
Company. At any time, the Antitrust Division or the FTC could take such action
under the antitrust laws as it deems necessary or desirable in the public
interest, including seeking to enjoin the consummation of the Merger or seeking
the divestiture of Common Stock acquired by FKWW or the divestiture of
substantial assets of one or more of the Filers or their respective affiliates.
Private parties may also bring legal action under certain circumstances.
Although FKWW and the Company do not believe that the acquisition of voting
securities of the Company by FKWW as contemplated by the Merger Agreement, the
Stock Purchase Agreements and the Contribution and Exchange Agreement, will
violate the antitrust laws, there can be no assurance that a challenge to the
Merger or such other transactions on antitrust grounds will not be made or, if
such a challenge is made, of the result thereof.
ANCILLARY AGREEMENTS.
Amendment to Affiliation Agreement. As a condition to FKWW's entering
into the Merger Agreement, the Company and SSI, an affiliate of LIFE, entered
into an amendment to the Affiliation Agreement dated December 28, 1989, as such
agreement was previously amended, by and between SSI and The Family Channel, a
division of the Company, providing for specified guarantees as to carriage of
The Family Channel and specifying certain content restrictions for programming
on The Family Channel. The amendment to the Affiliation Agreement will become
effective on the first to occur of (i) the closing under the Contribution and
Exchange Agreement and (ii) the Effective Time, and will terminate, if not then
effective, upon the expiration or termination of the Merger Agreement.
Amendment to Program Time Agreement. The Program Time Agreement between
the Company and CBN requires the Company to carry certain programming produced
by CBN. See "CERTAIN INFORMATION REGARDING THE COMPANY-Introduction." As a
condition to FKWW's entering
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into the Merger Agreement and the CBN Stock Purchase Agreement, the Company and
CBN entered into Amendment No. 1 to Program Time Agreement, which will amend the
Program Time Agreement to (i) allow extension of the Program Time Agreement
irrespective of CBN's ownership of Common Stock, (ii) require CBN to deliver,
pursuant to specified terms and conditions, episodes of The 700 Club with Pat
Robertson or a program with similar content hosted by M.G. Robertson, and
provides for exclusivity of such program with respect to cable broadcasts (with
certain exceptions) and (iii) clarify the rights of the parties to pre-empt
certain programming. The amendment to the Program Time Agreement will become
effective on the first to occur of (i) the closing under the CBN Stock Purchase
Agreement, (ii) the purchase by FKWW of all shares of Class B Stock owned by CBN
and (iii) the Effective Time and will terminate, if not then effective, upon the
expiration or termination of the Merger Agreement.
Waiver and Termination of Shareholder Agreement. In connection with the
execution of the Merger Agreement and the Stock Purchase Agreement, CBN and LIFE
executed a waiver of their rights, including rights of first refusal and tag
along rights, under the current Amended and Restated Shareholder Agreement dated
September 1, 1995 (the "Shareholder Agreement"), and all parties to the
Shareholder Agreement, including certain of the Robertson Sellers, CBN, LIFE and
the Company, entered into a Termination to Shareholder Agreement dated as of
June 11, 1997, terminating the Shareholder Agreement upon the earlier of (i) the
closing under the Contribution and Exchange Agreement and (ii) the Effective
Time.
Stock Purchase Agreements. Concurrently with the parties' execution of
the Merger Agreement, the Robertson Sellers executed a Stock Purchase Agreement
dated as of June 11, 1997, with FKWW (the "Robertson Stock Purchase Agreement")
pursuant to which the Robertson Sellers agreed, subject to the terms and
conditions thereof, to sell to FKWW all 5,000,000 shares of Class A Stock owned
by them, in the form of the 5,000,000 shares of Class B Stock into which such
Class A Stock is convertible, and 1,231,981 shares of Class B Stock for $35.00
per share in cash, subject to adjustment in the same manner as the Merger
Consideration. Pursuant to the Robertson Stock Purchase Agreement, FKWW has
agreed to lend to M.G. Robertson and Tim Robertson sufficient funds to permit
each of them to exercise options to purchase 625,000 shares of Class B Common
Stock held by each of them following the sale described above, and, upon
receiving such funds, each of M.G. Robertson and Tim Robertson will immediately
exercise his options and sell to FKWW the shares of Class B Stock received upon
such exercise for a cash purchase price equal to $35.00 per share, subject to
adjustment in the same manner as the Merger Consideration, less the amount of
such loan.
In addition, concurrently with the parties' execution of the Merger
Agreement, CBN, pursuant to a Stock Purchase Agreement dated as of June 11,
1997, with FKWW (the "CBN Stock Purchase Agreement") and Regent, pursuant to a
Stock Purchase Agreement dated as of June 11, 1997, with FKWW, each agreed,
subject to the terms and conditions thereof, to sell to FKWW all shares of Class
B Common Stock held by them (3,891,121 shares and 4,214,325 shares,
respectively) for $35.00 per share in cash, subject to adjustment in the same
manner as the Merger Consideration.
The purchase of Common Stock by FKWW pursuant to each Stock Purchase
Agreement is conditioned upon the expiration or termination of all applicable
HSR waiting periods and the simultaneous or prior consummation of the other
Stock Purchase Agreements and the Contribution and Exchange Agreement. The
Merger, however, is not conditioned upon any of such purchases. If the purchase
of Common Stock under any Stock Purchase Agreement is not consummated prior to
the Effective Time, such Common Stock will be converted into the right to
receive the Merger Consideration in the Merger.
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News Corp. has given a guaranty to each of the Robertson Sellers, CBN
and Regent guaranteeing performance of FKWW's and FKW Sub's obligations under
the Stock Purchase Agreements.
Contribution and Exchange Agreement. Concurrently with the parties'
execution of the Merger Agreement, LIFE agreed, in a separate transaction
pursuant to the Contribution and Exchange Agreement, to contribute its 7,088,732
shares of Class C Stock and $23 million in aggregate principal amount of
Convertible Notes, convertible into 2,587,500 shares of Class C Stock, to FKWW
in exchange for a new series of preferred stock of FKWW, in a transaction
intended to constitute a tax free exchange. Such FKWW preferred stock will be
exchangeable at the holder's option, upon the happening of certain events, into
shares of a new series of preferred stock of NPAL. Each such series of preferred
stock will have a liquidation preference of $35.00 per share or share equivalent
of Class C Stock, subject to adjustment in the same manner as the Merger
Consideration, plus $6.33 million representing interest income foregone on the
Convertible Notes and partial compensation for certain tax consequences, and be
entitled to receive cumulative dividends at a rate of 8.5% per annum of the
liquidation price, payable quarterly, increasing to 11% if any quarterly
dividend is not declared and paid in full when due. Each such series is
mandatorily redeemable on June 30, 2027 and is redeemable at the option of the
issuer at any time after June 30, 2007 or, at the option of the holder, for a
thirty day period every five years commencing on June 30, 2002. News Corp.,
together with NPAL, has entered into a Funding Agreement supporting the
obligations of FKWW and NPAL under the preferred stock issuable to LIFE pursuant
to the Contribution and Exchange Agreement.
The contribution of Class C Stock and Convertible Notes pursuant to the
Contribution and Exchange Agreement is conditioned upon the expiration or
termination of all applicable HSR waiting periods. The Merger, however, is not
conditioned upon such contribution. FKWW has agreed to use its best efforts to
effect such contribution prior to the consummation of the Merger and to
indemnify Liberty and LIFE against any monetary damages suffered as a result of
the failure to do so. If the contribution of Class C Stock and Notes is not
consummated prior to the Effective Time, the Class C Stock will be converted
into the right to receive the Merger Consideration in the Merger, and the
Convertible Notes, unless converted into Class C Stock prior to the Effective
Time, will thereafter be convertible into an amount, in cash, equal to the
amount the holder would have received if such Convertible Notes had been
converted into Class C Stock immediately prior to the Merger.
THE MERGER AGREEMENT
The following is a summary of the material terms of the Merger
Agreement. This summary is not a complete description of the terms and
conditions thereof and is qualified in its entirety by reference to the full
text thereof, a copy of which is attached hereto as Annex I.
CONSIDERATION TO BE PAID IN THE MERGER. Each share of Class A Stock, Class B
Stock and Class C Stock of the Company (other than shares held by FKWW, FKW Sub,
the Company or any of their respective subsidiaries and shares held by
stockholders who have validly perfected their appraisal rights under the DGCL)
issued and outstanding immediately prior to the Effective Time will be converted
into the right to receive the Merger Consideration, without interest. Upon
conversion, each such share of Common Stock will no longer be outstanding and
will automatically be cancelled and retired and cease to exist, and Certificates
previously evidencing such shares of Common Stock immediately prior to the
Effective Time will thereafter represent only the right to receive the Merger
Consideration. Shares of Common Stock held by FKWW, FKW Sub, the Company or any
of their respective subsidiaries will be
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cancelled and extinguished, and all shares of capital stock of FKW Sub, in the
aggregate, will be converted into a total number of shares of Class B Stock of
the Surviving Corporation equal to the total number of shares of Class A Stock
and Class B Stock (on a fully diluted basis) of the Company outstanding prior to
the Merger. The Merger Consideration will be increased to equal the highest
amount, if any, paid or agreed to be paid by FKWW or any of its affiliates
between January 1, 1997 and the Effective Time to purchase shares of Common
Stock or securities convertible into shares of Common Stock from any of the
Robertson Sellers, LIFE, CBN, Regent, any other holder of more than 2.5% of the
outstanding shares of Class B Stock, or any other holder or holders if the
purchases from such holder or holders by FKWW or its affiliates after the date
hereof and through the Effective Time aggregate more than 5% of the shares of
Common Stock of the Company outstanding at such time.
TREATMENT OF OPTIONS. The Company has outstanding options to purchase shares of
Class B Stock which are held by officers of the Company, including M.G.
Robertson and Tim Robertson. Pursuant to the Merger Agreement, the Company has
agreed to use its reasonable good faith efforts to cause all outstanding stock
options to be cancelled at the Effective Time for an amount in cash equal to the
Merger Consideration, less the per share option exercise price, except as
otherwise agreed. Such cancellation cannot be effected without the consent of
the option holders. It is a condition to FKWW's obligation to consummate the
Merger that options to purchase no more than 350,000 shares of Class B Stock be
outstanding at the Effective Time. Pursuant to the Robertson Stock Purchase
Agreement, M.G. Robertson and Tim Robertson have each agreed to exercise their
respective options to purchase 625,000 shares of Class B Stock and to sell such
shares to FKWW at the same per share price as, and following the initial sale of
Common Stock by, the Robertson Sellers. See "THE MERGER-Ancillary Agreements."
REPRESENTATIONS AND WARRANTIES.
FKWW. The Merger Agreement provides for various representations and
warranties with respect to FKWW (which representations and warranties are
subject, in certain cases, to specified exceptions, and, generally, apply to
facts and circumstances existing at the date of the Merger Agreement), including
representations pertaining to: (i) the due organization of FKWW and due
authorization, execution, delivery and enforceability of the Merger Agreement,
(ii) no required consents of appropriate governmental regulatory authorities,
domestic or foreign (each, a "Government Entity"), (iii) the compliance of the
Merger Agreement with the charter, by-laws, organizational documents and
material agreements of, and laws applicable to, FKWW, (iv) the absence of
material litigation, (v) the truthfulness and completeness of information
supplied by FKWW to the Company for inclusion in this Information Statement,
(vi) the due organization of News Corp. and (vii) the execution, delivery and
enforceability of News Corp.'s Guaranty of FKWW's and FKW Sub's obligations
under the Merger Agreement. The accuracy of these representations and warranties
will no longer be a condition to the Company's obligation to effect the Merger
once FKWW purchases the Class A Stock from the Robertson Sellers pursuant to the
Robertson Stock Purchase Agreement.
FKW Sub. The Merger Agreement provides for various representations and
warranties with respect to FKW Sub (which representations and warranties are
subject, in certain cases, to specified exceptions, and, generally, apply to
facts and circumstances existing at the date of the Merger Agreement), including
representations pertaining to: (i) the due organization of FKW Sub and due
authorization, execution, delivery and enforceability of the Merger Agreement,
(ii) no required consents of Government Entities, (iii) the compliance of the
Merger Agreement with the charter, by-laws, organizational documents and
material agreements of, and laws applicable to, FKW Sub, (iv) the absence
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of material litigation, (v) the truthfulness of information supplied by FKW Sub
to the Company for inclusion in this Information Statement and (vi) the solvency
of the Surviving Corporation immediately following the Effective Time. The
accuracy of these representations and warranties will no longer be a condition
to the Company's obligation to effect the Merger once FKWW purchases the Class A
Stock from the Robertson Sellers pursuant to the Robertson Stock Purchase
Agreement.
The Company. The Merger Agreement provides for various representations
and warranties with respect to the Company (which representations and warranties
are subject, in certain cases, to specified exceptions, and, generally, apply to
facts and circumstances existing at the date of the Merger Agreement), including
representations pertaining to: (i) the due organization of the Company and due
authorization, execution, delivery and enforceability of the Merger Agreement,
(ii) the ownership, organization and valid conduct of business of the
subsidiaries of the Company, (iii) the approval by the Board of Directors of the
Merger Agreement and the Merger, (iv) the capitalization of the Company, (v) no
required consents of Government Entities, (vi) the proper and timely filing and
accuracy of SEC Reports and financial statements for the period January 1, 1994
through the date of the Merger Agreement, (vii) the absence of material changes
or events from December 31, 1996 through the date of the Merger Agreement,
(viii) the absence, to the actual knowledge of specified officers of the
Company, of breaches of material contracts and commitments through the date of
the Merger Agreement, (ix) the absence of related party agreements over a
certain dollar threshold, (x) the absence of notices of certain cancellations or
terminations of, or intentions to reduce carriage under, any of the top 25
agreements with cable carriers relating to carriage of The Family Channel
(determined by reference to subscriber count) through the date of the Merger
Agreement and (xi) the truthfulness and completeness of information supplied to
the Company for inclusion in the Information Statement. The accuracy of these
representations and warranties other than as to capitalization (with exceptions
as provided) no longer will be conditions to FKW Sub's obligation to effect the
Merger once FKWW purchases the Class A Stock from the Robertson Sellers pursuant
to the Robertson Stock Purchase Agreement.
CONDUCT OF BUSINESS PENDING THE MERGER. The Merger Agreement provides that,
unless FKWW and FKW Sub otherwise consent in writing or unless otherwise
previously disclosed to FKWW, the Company and its subsidiaries will: (i)
continue to conduct their business in the ordinary course, (ii) refrain from
authorizing or selling additional shares of capital stock of the Company, (iii)
refrain from changing certain compensation arrangements or hiring additional new
employees with salaries above $100,000, (iv) refrain from intentionally and
knowingly breaching any of the Company's representations and warranties or
failing to perform any of its covenants under the Merger Agreement, (v) refrain
from submitting any matters, other than the Merger, to the stockholders of the
Company prior to the Merger, (vi) refrain from selling or disposing any material
portion of the assets of the Company and its subsidiaries taken as a whole,
except in the ordinary course of business and consistent with past practice,
(vii) refrain from acquiring any corporation, partnership or other business
organization or division thereof or any material interest therein other than
marketable securities in the ordinary course of business consistent with past
practice, (viii) refrain from incurring additional indebtedness (as defined
therein) beyond refinancing of current indebtedness, additional indebtedness
under the Company's existing revolving credit facilities and other indebtedness
aggregating no more than $1 million, (ix) refrain from making material capital
expenditures in excess of $10 million in the aggregate over expenditures as
contemplated in the Company's existing business plan without approval from FKWW,
subject to specified exceptions, (x) refrain from making any expenditures in
excess of $10 million in the aggregate for television or motion picture
productions or programming other than expenditures included in the Company's
programming budget, (xi) refrain from entering into related party transactions
other than in the ordinary course of business consistent with past practice, or
under existing agreements, (xii) refrain, subject to certain
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exceptions, from entering into programming arrangements that would grant to
others the right to program any block of time on The Family Channel, (xiii)
refrain from launching a new cable channel without consulting with FKWW and
(xiv) refrain from cancelling, revoking or failing to renew any of its
affiliation agreements.
OTHER AGREEMENTS.
Preparation of Information Statement. The Company has agreed to prepare
and file this Information Statement with the Commission and to respond to
comments from the Commission and to cause this Information Statement to be
mailed to the Company's stockholders at the earliest practicable time.
Other Filings. The Company, FKWW and FKW Sub have agreed to file
notification reports under the HSR Act and request early termination of the
waiting period under the HSR Act. See "THE MERGER-Regulatory Matters."
Further Assurances. The Company, FKWW and FKW Sub have agreed to use
reasonable good faith efforts to (i) obtain all necessary waivers and consents
from third parties necessary to consummate the Merger, (ii) defend all lawsuits
challenging the Merger Agreement or the transactions contemplated thereby, (iii)
lift or rescind any injunction adversely affecting the parties' ability to
consummate the transactions contemplated by the Merger Agreement, (iv) effect
all necessary filings with respect to the transactions contemplated by the
Merger Agreement and (v) fulfill all conditions in the Merger Agreement. In
addition, each of the parties has agreed not to take any action with the
intention and knowledge that such action would make any of their representations
and warranties untrue or would prevent or disable it from performing any of
their obligations under the Merger Agreement.
Acquisition Proposals. The Merger Agreement provides that the Company
(i) will not initiate any proposals or offers with respect to a merger,
acquisition or purchase of any significant portion of the assets or any equity
securities of the Company (an "Acquisition Proposal"), (ii) will cease any
existing discussions (other than with FKWW and FKW Sub) and (iii) will inform
FKWW of any proposals received by it; provided that, the Company may furnish
information to or enter into discussions or negotiations with any person or
entity that makes an unsolicited bona fide proposal to acquire the Company
pursuant to a merger, purchase of a substantial portion of its assets or other
similar transaction, if, and only to the extent that the Board of Directors
determines in good faith that the failure to take such action would involve a
substantial risk of breach of fiduciary duty to the Company's stockholders
imposed by applicable law, subject to providing FKWW and FKW Sub certain
information with respect thereto, and may comply with Rules 14d-9 and 14e-2
under the Exchange Act, if applicable; provided, further that the foregoing
rights shall not (a) permit any party to the Merger Agreement to terminate the
Merger Agreement other than as otherwise specified therein, (b) permit any party
to enter into any other agreement with respect to an Acquisition Proposal during
the term of the Merger Agreement or (c) affect any other obligation of any party
under the Merger Agreement.
BOARD REPRESENTATION. The Merger Agreement provides that after the purchase of
Class A Stock from the Robertson Sellers pursuant to the Robertson Stock
Purchase Agreement, FKWW will be entitled to designate, subject to certain
conditions, up to the number of directors equal to the aggregate voting power of
the shares then held by it (assuming conversion of the Class C Stock and
Convertible Notes acquired from LIFE). FKWW has also agreed that, prior to the
Effective Time or the termination of the Merger Agreement, the Company will
continue to have at least two directors who are Class B Directors as of the
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date of the Merger Agreement (such directors, the "Continuing Directors") and
that it will not exercise any rights which it may have as a stockholder to
otherwise change the composition of the Board of Directors. Following the
election or appointment of FKWW's designees and prior to the Effective Time, any
amendment, or waiver of any term or condition, of the Merger Agreement or the
Certificate of Incorporation or by-laws of the Company, any termination of the
Merger Agreement by the Company, any extension by the Company of the time for
the performance of any of the obligations or other acts of FKWW or FKW Sub or
waiver or assertion of any of the Company's rights thereunder, or any other
consents or actions by the Board of Directors with respect to the Merger
Agreement or News Corp.'s related Guaranty, will require, and will require only,
the concurrence of a majority of the Continuing Directors, except to the extent
that applicable law requires that such action be acted upon by the full Board of
Directors, in which case such action will require the concurrence of a majority
of the Directors, which majority shall include each of the Continuing Directors.
COSTS AND EXPENSES. The Merger Agreement provides that all costs and expenses
incurred in connection with the Merger Agreement and the Merger will be paid by
the party incurring such cost or expense, except that the prevailing party in
any litigation to enforce or seek damages for breach of the Merger Agreement
shall recover all costs and reasonable attorneys' fees.
CONDITIONS TO THE MERGER. The obligations of each party to effect the Merger are
subject to the following conditions: (i) the absence of any temporary or
permanent injunction that would prohibit the consummation of the Merger, (ii)
the absence of any banking moratorium or general limitation on the extension of
credit by lending institutions in the United States, (iii) the expiration or
termination of HSR Act waiting periods relating to (A) FKWW's acquisition of
shares of Common Stock from the Robertson Sellers, CBN and Regent, (B) the
conversion by FKWW into shares of Class B Stock of the Class C Stock and
Convertible Notes to be acquired from LIFE and (C) the Merger, (iv) the receipt
by the Company of all consents and approvals from Government Entities required
to be obtained by the Company and (v) the absence of any statute, rule,
regulation or order that would make the Merger illegal.
In addition, the obligation of the Company to effect the Merger is
subject to the following conditions: (i) the representations and warranties of
FKWW and FKW Sub being true in all material respects on and as of the Effective
Time (except those made as of another date which shall be true and correct as of
such date) and (ii) FKWW and FKW Sub having performed all of their respective
obligations required to be performed on or before the Effective Time. THE
CONDITION SET FORTH IN CLAUSE (I) SHALL NO LONGER BE APPLICABLE UPON THE
PURCHASE OF SHARES OF CLASS A STOCK FROM THE ROBERTSON SELLERS PURSUANT TO THE
ROBERTSON STOCK PURCHASE AGREEMENT.
In addition, the obligation of FKW Sub to effect the Merger is subject
to the following conditions: (i) the representations and warranties of the
Company being true in all material respects on and as of the Effective Time
(except those made as of another date which shall be true and correct as of such
date), (ii) the Company having performed all of its obligations required to be
performed on or before the Effective Time and (iii) the capitalization of the
Company having remained unchanged, except as a result of exercise of options or
conversion of securities. THE CONDITIONS SET FORTH IN CLAUSES (I) AND (II) SHALL
NO LONGER BE APPLICABLE UPON THE PURCHASE OF SHARES OF CLASS A STOCK FROM THE
ROBERTSON SELLERS PURSUANT TO THE ROBERTSON STOCK PURCHASE AGREEMENT.
TERMINATION. The Merger Agreement can be terminated: (i) by written consent of
FKW Sub, FKWW and the Company, (ii) by FKW Sub or FKWW if the Merger has not
been consummated on or prior to
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November 30, 1997 due to a failure of any of the conditions to closing
applicable to FKW Sub to effect the Merger, (iii) by the Company if the Merger
has not been consummated on or prior to November 30, 1997 due to a failure of
any of the conditions to closing applicable to the Company to effect the Merger
and (iv) by the Company if News Corp. purports to revoke or withdraw its
Guaranty of FKWW's and FKW Sub's obligations under the Merger Agreement or a
court finds such Guaranty invalid or unenforceable; provided, however, that in
the case of clauses (ii) and (iii) above, that the November 30, 1997 date shall
be extended for (A) any period that a party is subject to a non-final order,
injunction or decree prohibiting consummation of the Merger and (B) the
continuation of any banking moratorium or general limitation on the extension of
credit by lending institutions in the United States. Upon termination of the
Merger Agreement, there shall be no further liabilities or obligations,
including monetary liabilities, other than with respect to certain fees and
expenses and breaches of confidentiality as to information provided by the
Company to FKWW.
AMENDMENT. The Merger Agreement provides that it may not be amended except by
action of the Board of Directors of each of the parties hereto.
NO LIABILITY FOR BREACHES OF REPRESENTATIONS AND WARRANTIES. The Merger
Agreement provides that the respective warranties of the Company, FKWW and FKW
Sub contained in the Merger Agreement will expire with, and will be terminated
and extinguished at the Effective Time. Neither the Company, FKWW nor FKW Sub
will be under any monetary or other liability with respect to any breach of a
representation and warranty contained in the Merger Agreement or other
certificates and documents delivered pursuant to the Merger Agreement. The sole
consequence of any such breach will be limited to the failure to satisfy a
condition to effect the Merger and the termination right, both as described
above.
DELAWARE LAW. The Merger Agreement is governed by the laws of the State of
Delaware, without giving effect to the choice of law provisions thereof.
SPECIFIC PERFORMANCE. Each of the parties shall be entitled to the remedy of
specific performance of the other parties' covenants and agreements under the
Merger Agreement.
GUARANTY. News Corp., in a separate agreement, has unconditionally and
irrevocably guaranteed to the Company the due and punctual observance,
performance and discharge by FKWW of each item, provision, duty, obligation and
agreement contained in the Merger Agreement and the due and punctual payment of
any amount which FKWW or FKW Sub may be obligated to pay under the Merger
Agreement.
ESTIMATED FEES AND EXPENSES; SOURCES OF FUNDS
The total amount of funds required to pay the Merger Consideration
(including approximately $545,000,000 required for FKWW's purchase of Common
Stock pursuant to the Stock Purchase Agreements but not any cash funds required
for the purchase of shares of Class C Stock in the Merger, since such Class C
Stock is expected to be exchanged, prior to the Merger, for preferred stock of
FKWW pursuant to the Contribution and Exchange Agreement; see "THE
MERGER-Ancillary Agreements"), the consideration to be paid to option holders,
and the expenses incident to the Merger Agreement and the consummation of the
transactions contemplated thereby, including financial advisory fees and
expenses and legal fees and expenses, estimated to be approximately
$_________________, will be contributed by
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FKWW to the Surviving Corporation. FKWW has established, pursuant to a letter of
commitment dated as of June 6, 1997, a $500,000,000 seven-year Secured Reducing
Revolving Credit Facility (the "Tranche A Revolving Credit"), a $400,000,000
seven-year Secured Reducing Revolving Credit Facility (the "Tranche B Revolving
Credit") and a $350,000,000 nine-year Secured Term Loan Facility (the "Term
Loan" and, together with the Tranche A Revolving Credit and the Tranche B
Revolving Credit, the "Facilities") with Citibank, N.A. acting as the sole agent
for a syndicate of financial institutions providing the facility. In addition,
FKWW will be advanced approximately $250,000,000 to $350,000,000 from Fox
Broadcasting or an affiliate thereof in exchange for a new series of 12.5%
preferred stock of FKWW. These funds, and any additional funds that are required
to pay the Merger Consideration for shares of Class C Stock in the event that
the Contribution and Exchange Agreement is not consummated prior to the Merger,
will come from the working capital of News Corp. or an affiliate thereof.
The obligations of FKWW under the Merger Agreement are guaranteed by
News Corp. For the fiscal year ended June 30, 1996, and the nine months ended
March 31, 1997, News Corp. had consolidated revenues of approximately A$13,088
million and A$10,799 million, respectively, consolidated net income of
approximately A$1,020 million and A$1,020 million, respectively. As of March 31,
1997, News Corp. held cash and marketable securities of A$3,252 million. News
Corp. publishes its consolidated financial statements in Australian dollars, and
all references to "A$" are to Australian dollars. (The rate of exchange of
A$1.00 into United States Dollars, based upon the noon buying rate in New York
City for cable transfers in Australian dollars as certified for customs purposes
by The Federal Reserve Bank of New York (the "Noon Buying Rate"), (i) for the
fiscal year ended June 30, 1996, was .7485 at June 30, 1996, with a high for the
fiscal year of .8137 and a low of .7485, (ii) for the fiscal year ended June 30,
1997, was .____ at June 30, 1997, with a high for the fiscal year of .____ and a
low of .____, and (iii) as of July __, 1997, was .____.) FKWW and News Corp.
have informed the Company that News Corp. has sufficient cash resources to pay
the Merger Consideration, the consideration to be paid to option holders, and
the expenses incident to the Merger Agreement and the consummation of the
transactions contemplated thereby. Such resources may include cash on hand or a
variety of debt financing arrangements, additional contributions, equity capital
or a combination of the foregoing.
Each party shall pay its own expenses if the Merger is not consummated.
See "THE MERGER-Costs and Expenses."
CERTAIN INFORMATION REGARDING THE COMPANY
INTRODUCTION.
The Company produces, exhibits, and distributes entertainment and
informational programming as well as related products targeted at families
worldwide. The Company'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,
the Company owns MTM, a producer and worldwide distributor of television series
and made-for-television movies and the owner of a significant library of
television programming. The Company also owns a majority interest in 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.
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The Family Channel was founded in 1977 as a division of CBN. In 1989,
the Company was formed by M.G. Robertson and Tim Robertson to purchase the
assets of The Family Channel. In 1990, the Company, in a management-led buyout,
acquired The Family Channel from CBN in exchange for an aggregate of $250
million in principal amount of the Convertible Notes plus the assumption of
certain liabilities associated with The Family Channel and an agreement to carry
certain programming produced by CBN. As part of this transaction, a subsidiary
of TCI invested $45 million in the Company by purchasing $22 million of the
Company's 10% Convertible Cumulative Preferred Stock, par value $.001 per share
(the "Preferred Stock"), from the Company and by acquiring $23 million in
principal amount of the Convertible Notes from CBN. TCI subsequently transferred
its investment in the Company to LIFE, one of its affiliates and an affiliate of
Liberty Media Corporation. M.G. Robertson subsequently transferred all of his
shares of Class A Stock, to a charitable remainder trust established by him.
Prior to the IPO in April 1992, CBN converted $127 million in principal
amount of the Convertible Notes into 14,287,500 shares of Class B Stock. In the
IPO, the Company sold 4,166,666 shares of Class B Stock and CBN sold 8,333,334
shares. In June 1992, CBN donated the remaining $100 million in principal amount
of its Convertible Notes to its affiliate, Regent University.
In November 1993, the Company entered into an agreement (the
"Redemption Agreement") with Regent University and CBN to repurchase from Regent
University (the "Regent Repurchase") a portion of the $100 million in principal
amount of the Convertible Notes held by Regent University. Under the terms of
the Redemption Agreement, the Company agreed to pay Regent University
$107,501,000 in cash, plus accrued interest to the date of repurchase, as
provided by the terms of the Convertible Notes, to repurchase $55,556,000 in
principal amount of the Convertible Notes, and Regent University agreed to
convert the remaining portion of its Convertible Notes into 4,999,950 shares of
Class B Stock. The Redemption Agreement was consummated in December 1993.
In order to finance the Regent Repurchase, the Company entered into a
$150 million long-term bank credit facility (the "Revolving Credit Facility").
In March 1994, the Revolving Credit Facility was syndicated to a group of banks
and the commitment thereunder was increased to $175 million. Initial borrowings
of $138 million under the Revolving Credit Facility were used to finance the
Regent Repurchase and to refinance the Company's existing bank indebtedness. In
December 1995, the Company amended the Revolving Credit Facility to, among other
things, increase the commitment thereunder to $250 million; provide for a
reduced rate of interest; and extend final maturity of amounts due thereunder to
June 30, 2002.
In connection with the Regent Repurchase, LIFE, which holds all of the
remaining $23 million in principal amount of the Convertible Notes, entered into
an agreement with the Company which, among other things, amended the purchase
agreement relating to the Convertible Notes and the related security agreement
to provide that the security interest in substantially all of the assets of the
Company which previously secured payment of the Convertible Notes would
thereafter be limited to a security interest in the Company's rights in two
satellite transponders. Also, in connection with the Regent Repurchase, the
Shareholder Agreement was amended to limit the preemptive rights granted
thereunder to provide that in the event of any future offering of capital stock
by the Company each of the shareholders party to the Shareholder Agreement would
be entitled to purchase such additional shares of capital stock as may be
required to maintain its percentage ownership of each class of capital stock,
rather than being entitled to acquire all of the capital stock offered in any
future offering by the Company. In connection with the execution of the Merger
Agreement and the Stock Purchase Agreement, CBN and LIFE executed a waiver of
their rights, including rights of first refusal and tag along rights, under the
Shareholder
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Agreement and all parties to the Shareholder Agreement, including certain of the
Robertson Sellers, CBN, Life and the Company entered into a Termination to
Shareholder Agreement dated as of June 11, 1997, terminating the Shareholder
Agreement upon the earlier of (i) the closing of the contribution by LIFE of its
Class C Stock and Convertible Notes to FKWW pursuant to the Contribution and
Exchange Agreement and (ii) the Effective Time. See "THE MERGER-Ancillary
Agreements."
In December 1995, the Company and LIFE entered into an exchange
agreement (the "Exchange Agreement") whereby LIFE exchanged all of its holdings
of the Company's Preferred Stock for 5,000,000 shares of the Company's Class B
Stock and exchanged an additional 2,088,732 of Class B Stock it then held, along
with the aforementioned 5,000,000 shares, for 7,088,732 shares of the Company's
Class C Stock. Also in connection with the Exchange Agreement, the terms of the
Convertible Notes were amended to provide, among other things, for the
conversion of such notes into shares of Class C Stock in lieu of Class B Stock.
Additionally, certain terms of the Shareholder Agreement were amended pursuant
to the Exchange Agreement.
On matters submitted to a vote of the Company's shareholders, the Class
A Stock has ten votes per share and the Class B Stock has one vote per share.
The Class C Stock is non-voting. Each share of Class A Stock and Class C Stock
is convertible, at the option of the holder, into one share of Class B Stock.
The Company's Class A Stock and Class B Stock vote together as a single class on
all matters except that (i) so long as the outstanding Class A Stock represents
more than 40% of the total outstanding voting power of all Stock entitled to
vote, the holders of Class A 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 Stock, voting separately
as a class, and (ii) the affirmative vote of a majority of each of the Class A
Stock and the Class B Stock is required for the following actions: (A) any
merger or consolidation of the Company with and into any other corporation; (B)
any dissolution or liquidation of the Company; (C) any sale or other disposition
of all or substantially all of the assets of the Company; (D) any amendment to
the Certificate of Incorporation increasing the number of authorized shares of
capital stock of the Company; or (E) any other action upon which class voting is
required by law.
BUSINESS SEGMENTS.
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").
Cable Networks. The Company operates The Family Channel and FiT TV,
and, through United Family Communications LLC ("UFC"), has an interest in
certain international networks that are planned to be launched in 1997.
The Family Channel. The Family Channel is one of the largest
cable television networks in the United States, reaching approximately
70% of all television households in the United States. Originally
launched in 1977, The Family Channel was the first satellite-delivered
basic cable television network in the United States. TCI is one of the
largest cable television system operators in the United States and, as
such, is a major customer of The Family Channel. TCI and its affiliates
hold a substantial ownership interest in the Company.
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The Family Channel has positioned itself as a "destination"
channel (i.e., a channel with a distinctive programming format designed
to attract and retain a particular segment of the cable television
viewing audience) for cable viewers who seek high quality television
programming that is suitable for the entire family. The Company
develops, acquires, and exhibits a variety of dramas, comedies,
children's shows, westerns, informational, and other programs on The
Family Channel. These programs include original series, specials, and
movies produced for The Family Channel, as well as programs originally
televised on the major broadcast networks. The Family Channel's
programs are transmitted 24 hours a day via satellite from the
Company's uplink facilities 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's 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's subscriber fee revenue. Although the Company believes that
opportunities to further increase the number of subscribers exist in
light of the continued growth in the market penetration of cable
television systems and the potential for distribution of The Family
Channel via direct broadcast satellite ("DBS") services and other
alternative delivery services to customers not presently served by
cable systems, management does not anticipate that the number of
subscribers will continue to grow at rates comparable to prior periods.
The Company's advertising revenue is derived primarily from
sales of advertising time within programs aired on the Company's cable
networks and from program sales. Program sales consist of sales of
program-length periods of time for infomercials and for inspirational
programs. In keeping with its role as a provider of high quality
entertainment that promotes traditional and mainstream family values,
The Family Channel does not carry advertisements for alcohol, "R"-rated
movies, or certain other products and services that are inconsistent
with The Family Channel's programming strategy.
Over the past decade, cable television has captured an
increasing share of advertising expenditures. During this period, the
viewing shares for three of the major broadcast networks (ABC, CBS, and
NBC) and their local broadcast affiliate stations have declined, while
the viewing shares for advertiser-supported cable television
programming services have increased. The Company believes that this
trend will continue throughout the 1990s. Furthermore, cable
advertising revenues have grown significantly faster during this period
than those of broadcast networks. The Company believes that The Family
Channel has benefited, and will continue to benefit, from this trend.
Notwithstanding the foregoing, in the event cable technology advances
to the point where substantially more channels are available for
delivery by cable system operators, the Company's advertising revenue
could be adversely affected as advertisers would have a greater number
of options available to them.
Nielsen Media Research ("Nielsen") provides the Company with
audience measurements. Nielsen's estimates are widely accepted by
advertisers as a basis for determining the number of impressions that
an advertisement makes on the viewing audience. However, Nielsen's
estimate of the number of homes in which The Family Channel is
available generally exceeds the number
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of subscribers for which the Company is paid by cable system operators
under its affiliation agreements. The difference between Nielsen's
estimates of total households reached and billed subscribers is
attributable to a variety of factors, including cable service theft and
sampling error inherent in projecting estimates. As of December 31,
1996, The Family Channel's billed subscribers totaled approximately
61.9 million, as compared to the Nielsen estimate of approximately 68.1
million subscribers. According to Nielsen's prime-time audience
measurements for the year ended December 31, 1996, The Family Channel's
ratings averaged approximately 1.2. This signifies that, of the
approximately 68.1 million homes in which Nielsen estimated The Family
Channel was available at December 31, 1996, approximately 817,000 homes
were tuned in to The Family Channel, on average, during prime time. For
purposes of reporting ratings, The Family Channel defines "prime time"
as 7:00 p.m. to 10:00 p.m. Monday through Friday, 8:00 p.m. to midnight
Saturday, and 7:00 p.m. to 11:00 p.m. Sunday.
FIT TV. The Company launched FiT TV in October of 1993 as an
advertiser-supported cable network that offers viewers fitness,
aerobics, lifestyle, and healthy living programming segments. On April
30, 1996, the Company, Liberty CHC, Inc., an affiliate of TCI, and
Reebok CHC, Inc., an affiliate of Reebok International, Ltd. ("Reebok
International"), formed the FiT TV Partnership to own and operate the
FiT TV cable network.
FiT TV currently telecasts 24 hours per day. In addition, FiT
TV programming is carried Monday through Friday on The Family Channel
for two and one-half hours each day. The format of the programming on
FiT TV consists of a one hour "program wheel" divided into four
segments, including aerobics, healthy living, fitness, and a
shop-at-home opportunity for health-related equipment and other
merchandise.
FiT TV does not currently charge cable system operators a
subscriber fee for carriage of its programming in the United States.
One of the reasons FiT TV is able to offer programming without charge
is that its cost of programming is significantly lower than that of a
traditional cable network such as The Family Channel.
Currently, FiT TV programming is delivered via analog
satellite transmission, which enables the programming to be received by
home television receive-only dish owners without subscription. FiT TV
intends to begin delivering its programming via digital satellite
transmission during 1997. In such event, in order to continue to
receive FiT TV programming, home television receive-only dish owners
will be required to acquire digital decoding equipment and subscribe to
a package of programming services which includes FiT TV. There can be
no assurance that such decoding equipment will be available to home
consumers or that FiT TV will be offered in such a package of services.
As of December 31, 1996, FiT TV was available, on a full-time
or part-time basis, to approximately 11.7 million households via cable
and home television receive-only dishes. In addition, FiT TV
programming is seen, on a part-time basis, on The Family Channel. FiT
TV intends to broaden the carriage of its program service through,
among other things, marketing and promotional activities. However, in
light of limited channel capacity and the competitive nature of the
marketplace, there can be no assurance that these activities will be
successful.
Pursuant to an agreement entered into between the Company and
FiT TV in connection with the formation of the FiT TV Partnership,
advertising time on FiT TV is marketed and sold
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by the Company's domestic advertising sales force. Often, advertising
time on FiT TV is sold in conjunction with advertising time on The
Family Channel. One of FiT TV's major advertisers is Reebok
International, a world-wide designer, marketer and distributor of
sports, fitness and casual footwear and apparel. Reebok International
has signed an agreement with FiT TV which provides, among other things,
for the grant to Reebok International of product category exclusivity
and placement, and the grant to FiT TV of certain promotional tie-ins
and use of Reebok International's roster of celebrity fitness experts.
International Networks-The Family Channel (UK).
During 1993, the Company acquired all of the outstanding
capital stock of TVS ENTERTAINMENT PLC ("TVS"), an English
public limited company which at the time owned, among other
things, a significant program library and the UK Studio. The
UK Studio provided the Company with production and satellite
uplinking capabilities and served as the base of operations
for The Family Channel (UK).
The Company launched The Family Channel (UK) in the
United Kingdom in September 1993 through a joint venture in
which the Company had a 61% interest and Flextech had a 39%
interest. On April 22, 1996, the Company consummated an
agreement to sell its 61% interest in The Family Channel (UK)
to Flextech.
-The Family Channel De Las Americas. On July 1, 1995,
the Company launched The Family Channel De Las Americas, an
advertiser-supported cable network that provided
Spanish-language, family-oriented entertainment programming,
as well as fitness programming, in Mexico, Central America,
and portions of South America. In November 1996, the Company
discontinued operations of The Family Channel De Las Americas.
-United Family Communications. On November 18, 1996,
the Company and a third party formed UFC to operate and
distribute satellite-delivered programming services in Mexico,
Central America, and South America.
PRODUCTION AND DISTRIBUTION.
During the first quarter of 1993, the Company acquired all of the
outstanding capital stock of TVS, which, at the time, owned MTM. MTM's
television programming division has been an independent television production
company since 1970, producing such series as The Mary Tyler Moore Show, The Bob
Newhart Show, WKRP in Cincinnati, Hill Street Blues, St. Elsewhere, Lou Grant,
Remington Steele, Evening Shade, and Newhart. MTM productions have received many
honors and awards, including numerous Emmy Awards, as well as several Humanitas
Prizes and Peabody Awards.
MTM's television programming division produces original programming
primarily for license to the broadcast networks, syndication to local broadcast
stations, distribution in the international marketplace, and license to The
Family Channel. The Company intends to make many of MTM's future original
programs available for exhibition on The Family Channel, either on a first-run
basis or immediately following network airing, or following a period of
syndication to local broadcast stations or other cable networks. MTM's
distribution division distributes MTM's network and first-run syndicated
programming as well as programming produced by others, such as Rescue 911,
America's Funniest Home Videos, and Dr. Quinn, Medicine Woman.
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Production.
Broadcast Network Programming. The Company develops and
produces programming for the broadcast networks through MTM's
television programming division. This programming is produced by MTM
either alone or in conjunction with a joint venture partner. Scripts
for potential programs are usually developed in conjunction with one of
the domestic broadcast networks. If the network accepts the script, it
will typically order production of a pilot, for which it will pay a
negotiated, fixed license fee. If the network decides to order episodes
of the series, the license agreement generally provides for a minimum
number of episodes to be delivered, with the network having certain
rights to order additional episodes. The license agreement normally
grants the network the right to exhibit the episodes a limited number
of times in the United States during the license period. All other
ownership and distribution rights are generally retained by the
producer.
Network license fees are normally less than MTM's costs of
producing the related programming, resulting in deficits for MTM. MTM
attempts to reduce these deficits with revenue generated from the
international distribution of this programming. Additionally, MTM has
further opportunities to generate revenue related to this programming
through domestic syndication (including sales to cable networks) of
such programming following the network's license period and through the
exploitation of ancillary rights.
First-Run Syndicated Programming. First-run syndicated
television series are produced and sold by MTM directly to television
stations without any prior network broadcast. These programs are
licensed to individual or groups of television stations, on a
market-by-market basis, in contrast to network distribution, which
provides centralized access to a national audience.
In first-run syndication, once-a-week hourly programming is
licensed domestically in exchange for advertising time (referred to as
"barter"). When programming is licensed on a barter basis, MTM receives
a specified amount of advertising time during the broadcast of the
programming and subsequently sells this advertising time for cash.
As compared to programming produced for the broadcast
networks, MTM exercises greater control over the creative and
production decisions related to its first-run syndicated programming.
However, there is much greater financial risk associated with such
programming, as there is no third-party to share the production costs.
While the license fees paid by a broadcast network for programming are
fixed by contract, barter revenue derived from distribution of
first-run syndicated programming is not fixed in amount, but varies
depending on the ratings success of the programming. Even when a
first-run syndicated program is ultimately successful, during the
initial years of the program its revenue is often less than the costs
of production.
Programming for The Family Channel. The Company utilizes MTM's
production expertise to produce programming for license to The Family
Channel. During the 1996-97 season, MTM is producing Home & Family, a
daily, two-hour talk show; three original game show series; and several
two-hour original movies.
Development and Production Risks. There are a number of
factors outside MTM's control which may affect the timely completion on
a cost-effective basis of the development,
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production, and/or delivery of MTM's programming. These include the
availability and relative cost of talent and other resources integral
to these processes.
Distribution. In addition to its production activities, MTM is actively
engaged in the worldwide distribution of television programming. MTM's
distribution division distributes programming originally produced by it for
license to the broadcast networks, first-run syndication, or license to The
Family Channel, as well as programming produced by others. This programming is
distributed domestically on a cash basis, on a barter basis, or for some
combination of both. Internationally, MTM distributes this programming on a cash
basis. In the case of programming produced by others, revenue generated by such
programming is divided between MTM and the owner of the programming on the basis
of a negotiated agreement.
MTM's distribution activities are enhanced by its film library which
consists of over 2,000 episodes of various television series and several
made-for-television movies. In the United States, MTM's distribution division
distributes most of MTM's library. The library is primarily distributed
internationally by MTM International, an affiliate of MTM based in London,
England. Substantially all of MTM's library has been or is being distributed by
MTM domestically and internationally.
Demand for American-made television programming in international
markets has increased in recent years due to the increase in the number of
foreign television stations and cable systems, as well as the continued
development of DBS and other alternative delivery systems in those markets. In
some territories, the privatization of the local television industry has also
contributed to this trend. Typically, MTM begins to earn international
television revenue from the television programming it produces for the broadcast
networks or for first-run syndication during the same season such programming is
originally exhibited domestically, or soon thereafter.
The success of MTM's television programming business depends, in large
part, upon the exhibition of its television series over a sufficient number of
years to allow for further domestic exhibition opportunities. This success in
achieving multiple years of network or first-run exhibition of programming is
dependent upon unpredictable factors such as the viewing public's acceptance of
such programming as reflected in ratings and critical reviews, the time and day
of the week the programming is exhibited, and the amount of promotion and
support offered the programming.
Expected revenue per episode in the domestic syndication marketplace
normally increases for longer-running series. Generally, at least four broadcast
seasons of a series are required to successfully market repeat showings of a
series in the domestic syndication market. Episodes from a series normally
become available for secondary syndication distribution four or five years after
the series' initial telecast.
In recent years, domestic basic cable networks have represented an
increasingly significant market for the MTM library, especially the "classic"
series such as The Mary Tyler Moore Show, The Bob Newhart Show, Lou Grant, and
Hill Street Blues. Cable exhibition has effectively developed as an alternative
market, although traditionally a less lucrative one than domestic syndication.
Each year, a greater number of relatively successful broadcast network series
are being licensed to cable networks in lieu of domestic syndication.
Additionally, in some instances, cable networks have purchased rights to
short-running television series which do not include sufficient episodes to
allow for traditional off-network syndication distribution. The majority of
MTM's film library is currently licensed to several major cable networks for
domestic exhibition over the next several years, pursuant to contracts providing
for cash payments to MTM.
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LIVE ENTERTAINMENT.
Calvin Gilmore Productions produces live musical variety shows
featuring new country, patriotic, early rock and roll, gospel, show tunes, and
comedy. Calvin Gilmore Productions currently operates in Myrtle Beach, South
Carolina and in Charleston, South Carolina. During 1995, the Company also
operated the Ice Capades, a touring ice show.
OTHER OPPORTUNITIES.
IFE has explored and continues to explore various opportunities to
develop international versions of The Family Channel's and 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 acquiring or 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. 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.
COMPETITION.
There is intense competition for viewers among companies providing
programming services via cable television and other video delivery systems. A
number of basic and pay television programming services (such as Nickelodeon,
Turner Network Television and The Disney Channel) provide programming that
targets family audiences. In addition, increased competition for viewers in the
cable industry may result from technological advances, such as digital
compression technology, which allow cable systems to expand channel capacity;
the further deployment of fiber optic cable, which has the capacity to carry a
much greater number of channels than coaxial cable; and "multiplexing", in which
programming services offer more than one feed of their programming. The
increased number of choices available to The Family Channel's family viewing
audience as a result of such technological advances may lead to a reduction in
the Company's market share.
The Company competes or expects to compete in the future for
advertising revenue with the television programming services described above, as
well as with other national and international television programming services,
superstations, broadcast television networks, local over-the-air television
stations, DBS, multi-channel multi-point distribution services ("MMDS"), radio,
print media, as well as other 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.
The Company also competes with other cable programming services for
carriage by cable operators. The availability of The Family Channel and FiT TV
to cable subscribers is dependent upon the maintenance by the Company of
satisfactory contractual relations with cable system operators and extensions
and renewals of the affiliation agreements providing for program carriage. The
business environment for cable programmers, such as the Company, who seek to
place programming upon the limited number of cable channels controlled by cable
system operators, is highly competitive. The Company and its direct competitors
seek affiliation agreements with cable operators who also consider alternative
programming supplied by a variety of other well established sources, including
the news, public affairs, entertainment, and sports industries.
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MTM competes in a global marketplace. Television production and
distribution are highly competitive businesses with many companies competing for
the available literary properties, creative personnel, talent, production
personnel, distribution channels, and financing which are essential to the
acquisition, development, production, and distribution of television
programming. MTM's competitors include the major motion picture and television
companies as well as a broad range of independent production and distribution
companies. Certain of these organizations are "vertically integrated" (i.e.,
producing, distributing, and exhibiting their own programming). Moreover, with
the repeal of certain governmental regulations which formerly prohibited the
broadcast networks from acquiring financial interests in, and syndication rights
to, television programming, this trend towards vertical integration, and,
accordingly, competition in the industry, is expected to increase. See
"Regulation and Legislation." Many of MTM's competitors are larger and have
financial and other resources substantially greater than those of the Company.
In addition to its originally produced programming, MTM faces increased
competition in the acquisition of distribution rights to programming produced by
others due to industry consolidation and the elimination of the financial
interest and syndication rules. See "Regulation and Legislation."
Licensing television programming to local broadcast stations and cable
networks has also become increasingly competitive as new programming continually
enters the market and certain of MTM's competitors attempt to develop their own
programming production capabilities and/or align themselves with the existing
broadcast networks. Additionally, certain movie studios have formed domestic
broadcast networks through affiliation with traditionally independent local
broadcast television stations. A reduction in the number of independent stations
could have a material adverse effect on MTM's ability to syndicate programming.
SATELLITE DISTRIBUTION.
The Company transmits all programming for The Family Channel and FiT TV
from its facilities located in Virginia Beach, Virginia, by means of an earth
station transmitting antenna (an "uplink"). The uplink facility transmits The
Family Channel's and FiT TV's programming signal to a transponder on an orbiting
satellite, which in turn retransmits the signal to cable system operators, DBS
services, and other alternative delivery services. The Company transmits The
Family Channel's programming 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 Family Channel's east coast feed is on a transponder which the
Company exercised its option to purchase in November 1993. The Company purchased
a transponder on a separate satellite for The Family Channel's west coast feed.
The Company also purchased a transponder on a third satellite, which is
currently being used by FiT TV. 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 "preemptible" status on
the same satellite or on another satellite owned by the same seller or lessor,
subject to certain limitations. "Preemptible" status means that the transponder
can be preempted in the event of a failure of a "protected" transponder.
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
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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 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 allocation of future
shuttle cargo space to military rather than commercial payloads), and the
uncertain availability of satellites launching through private entities in the
United States and through private or governmental entities in other countries.
REGULATION AND LEGISLATION.
Certain aspects of the Company's operations are subject, directly or
indirectly, to federal, state, and local regulation. At the federal level, the
operations of cable television systems, satellite distribution systems, other
multichannel distribution systems, broadcast television program distribution
companies, and, in some respects, vertically integrated cable programmers are
subject to the Communications Act of 1934, as amended by the Cable
Communications Policy Act of 1984 (the "1984 Act") the Cable Television Consumer
Protection and Competition Act (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.
The following does not purport to be a summary of all present and
proposed federal, state, and local regulations and legislation relating to the
cable television industry and other industries involved in the video
marketplace. Other existing legislation and regulations, copyright licensing,
and, in many jurisdictions, state and local franchise requirements are currently
the subject of a variety of judicial proceedings, legislative hearings, and
administrative and legislative proposals which could change, in varying degrees,
the manner in which the cable television industry and other industries involved
in the video marketplace operate.
Federal Regulation and Legislation
The 1996 Act. 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 following
is a summary of certain provisions of the 1996 Act that affect the
cable television industry, and particularly the cable and
telecommunications services provided by the Company. The FCC is in the
process of promulgating rules interpreting and implementing the
provisions of the 1996 Act. At this time, it is impossible to state
with precision the full impact the 1996 Act will have on the Company.
The 1996 Act seeks to promote facilities-based competition
between telephone companies and cable operators. To this end, it
eliminates the cable-telco cross-ownership prohibition, which barred
the common ownership of telephone companies and cable systems serving
overlapping areas. It also preempts and prohibits state and local
regulations that prevent cable operators from providing telephone
service, and it requires telephone companies to interconnect with cable
operators and other alternative providers of telecommunications
service. While telephone companies and cable operators are now
permitted to offer competing services, the 1996 Act generally prohibits
telephone companies from acquiring existing cable operators in their
service areas, and vice versa.
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The 1996 Act eliminates the FCC's rule prohibiting broadcast
networks from owning cable systems. It removes the statutory ban on
common ownership of broadcast television stations and cable systems in
overlapping areas, and it directs the FCC to decide whether or not to
retain its rule prohibiting such cross-ownership. The 1996 Act
eliminates the previous limit on the number of television stations that
broadcasters may own, and it extends to 35% the limit on the percentage
of viewers that may be reached nationwide by commonly owned television
stations.
The 1996 Act phases out cable rate regulation, except with
respect to the "basic" tier (which must include all local broadcast
stations and public, educational, and governmental access channels and
must be provided to all subscribers). Rate regulation of all non-basic
services (including the "expanded basic" tiers that commonly include
satellite-delivered programming networks) will be completely eliminated
on March 31, 1999. The 1996 Act eliminated such regulation for small
cable operators immediately upon enactment. Even in the interim, the
1996 Act liberalizes the 1992 Act's definition of "effective
competition" to expand the circumstances under which rate regulation
will cease immediately. The local franchising authorities ("LFAs")
remain primarily responsible for regulating the basic tier of cable
service. Furthermore, the 1996 Act eliminates the power of an
individual subscriber to bring a rate complaint, leaving such authority
only in the hands of LFAs. Thus, beyond the basic tier of cable
service, which continues to be regulated by the LFAs, rate regulation
of other cable services between now and 1999 will only be triggered by
a rate complaint by an LFA, and only in an area where no effective
competition exists.
The 1996 Act addresses obscenity, indecency, and violence in
connection with telecommunications services in several respects,
including the establishment of a television rating code to be created
by an FCC advisory committee or, voluntarily, by the industry. In
addition, the 1996 Act addresses the need to create wider availability
of access to telecommunications services for persons with disabilities.
Specifically, the FCC is directed to study and promulgate rules on
closed captioning services.
To the extent the 1996 Act fosters greater competition for the
provision of cable 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 individual subscriber base could
be decreased, and therefore the Company's subscriber revenues could be
adversely affected. 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 determine appropriate ratings for its
programming, which in turn could increase the Company's operating
expenses.
The 1992 Act. Rate Regulation. The 1992 Act subjected all
cable television operators not subject to "effective competition" to
rate regulation. Under the 1992 Act, effective competition was deemed
to exist where (i) fewer than 30% of households in the franchise area
subscribe to a cable service, (ii) at least 50% of the homes in the
franchise area are passed by at least two unaffiliated multichannel
video programming distributors, where the penetration of at least one
distributor other than the largest is at least 15%, or (iii) a
multichannel video programming distributor operated by the LFA for that
area passes at least 50% of the households in the franchise area. The
1996 Act expanded this definition by providing that effective
competition would also be deemed to exist where a local exchange
carrier or its affiliate offers
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comparable video programming services in the franchise area of an
unaffiliated cable operator that is providing cable service in that
franchise area.
The basic tier of cable service is subject to rate regulation
by LFAs that certify to the FCC their intention and ability to regulate
rates. The basic tier consists, at a minimum, of all local broadcast
signals carried by the system, all non-satellite-delivered distant
broadcast signals that the system chooses to carry, and all public,
education, and governmental access channels. Under the 1992 Act, the
rates of "non-basic" programming service tiers (other than per-channel
or per-program services) were regulated by the FCC in response to
complaints by a subscriber or by an LFA. Under the 1996 Act, however,
non-basic rate regulation of small cable operators' systems was
eliminated, and non-basic rate regulation of all other systems will
terminate on March 31, 1999. In the interim, the FCC will review rates
only upon complaint by an LFA, which may only file such a complaint if
it receives complaints from subscribers. The 1996 Act thus eliminates
the power of one individual subscriber to bring a rate complaint and
trigger rate regulation.
The FCC adopted rules designed to implement the 1992 Act's
rate regulation provisions on April 1, 1993, and then significantly
amended them upon reconsideration on February 22 and November 10, 1994.
The original rules became effective on September 1, 1993; the February
22, 1994 amendments became effective on May 15, 1994; and the November
10, 1994 amendments became effective on January 1, 1995. Additional
regulations to implement the provisions of the 1996 Act are
anticipated. The FCC's existing regulations contain standards for the
regulation of basic tier and non-basic tier cable service rates (other
than per-channel or per-program services). The rate regulations adopt a
benchmark price cap system for measuring the reasonableness of existing
rates and a formula for evaluating future rate increases.
Alternatively, cable operators have the opportunity to make
cost-of-service showings, which, in some cases, may justify rates above
the applicable benchmarks. The rules also require that charges for
cable-related equipment (e.g., converter boxes and remote control
devices) and installation services be unbundled from the provision of
cable service and based upon actual costs plus a reasonable profit.
LFAs and/or the FCC are empowered to order a reduction of existing
rates that exceed the maximum permitted level for cable services and
associated equipment.
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 The Family Channel or FiT TV when their rates
were initially regulated to pass through to subscribers any subsequent
increases in licensing fees. 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 immediate 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 or
FiT TV 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
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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.
Must-Carry and Retransmission Consent. The 1992 Act imposes on
cable system operators "must carry" rules requiring them to carry most
or all local broadcast stations. It also provides favorable channel
positioning rights for broadcasters electing to be carried by cable
systems. The 1992 Act also requires cable operators in some instances
to compensate local broadcast stations for the retransmission of their
programming.
Regulation of Cable System Operators Affiliated With Video
Programming Vendors. The 1992 Act prohibits a cable operator from
engaging in unfair methods of competition that prevent or significantly
hinder competing multichannel video programming distributors such as
MMDS, satellite master antenna televisions ("SMATV") services, and DBS
operators from providing cable programming to their subscribers. The
stated purpose of this law is to increase competition in the
multichannel video programming market. The FCC has adopted regulations
to prevent a cable operator that has an "attributable interest"
(including voting or non-voting stock ownership of at least 5%) in a
programming vendor from exercising improper influence over the
programming vendor in the latter's dealings with competitors to cable,
and to prevent a programmer in which a cable operator has an
"attributable interest" from discriminating between cable operators and
their competitors, or among cable operators.
The FCC's rules may have the effect, in some cases, of
requiring vertically integrated programmers to offer their programming
to MMDS, SMATV, DBS, and other competitors of cable television, and of
prohibiting certain exclusive contracts between such programmers and
cable system operators. The rules will also permit multichannel video
programming distributors (such as MMDS, SMATV, and DBS operators) to
bring complaints before the FCC if they are unable to obtain cable
programming on non-discriminatory terms because of "unfair practices"
by the programmer. It is unclear whether these rules presently apply to
the Company; however, the Company operates its business as if these
rules apply.
Pursuant to the 1992 Act, the FCC set a 40% limit on the
number of programming channels on a cable system that may be occupied
by video programmers in which the cable operator has an "attributable
interest". The Company could be affected by the 1992 Act as a
consequence of TCI's ownership interests, through its affiliates such
as Liberty, in both cable systems and cable programming services,
including, among others, The Family Channel and FiT TV. Channels that
are controlled by a single majority stockholder are not "attributable"
to cable system operators that hold a minority interest in such
channels. Therefore, it is unlikely that the vertical ownership limits
will have an effect on carriage of The Family Channel or FiT TV by
TCI-affiliated cable systems if the Company is deemed to be controlled
by a single majority stockholder as determined in accordance with the
1992 Act. The Company does not expect any immediate impact from these
regulations, and following the Effective Time, neither TCI nor any of
its affiliates will have any ownership interest in the Company.
Financial Interest and Syndication Rules. Until recently,
under FCC regulations and a 1980 consent decree entered in the United
States District Court for the Central District of California, the major
broadcast networks (ABC, CBS, and NBC) were severely restricted in the
extent to which they could acquire financial interests in non-network
produced television
44
<PAGE> 58
programs, as well as their rights to "syndicate" or distribute to local
television stations in the United States and abroad the programming
they produced. In 1995, the FCC eliminated the last of these rules.
Although the lifting of restrictions on the financial interest and
syndication rules may create a greater demand by the networks for
co-production of programs with independent producers such as MTM, MTM
may be adversely affected by the elimination of the rules.
Specifically, these changes may materially adversely affect MTM's
future syndication revenue if the networks substantially decrease the
amount of outside-produced programming they purchase, or if the
networks elect to discontinue use of third- party syndicators (like
MTM) to distribute their programming. Moreover, the elimination of the
rules may result in new levels of competition from the networks in the
program production and syndication industries that may have a material
adverse affect on MTM's future revenues.
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 an 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.
Various proposals have been introduced at the state and local
level with regard to the regulation of cable television systems, and a
number of states have enacted legislation subjecting cable television
systems to the jurisdiction of centralized state governmental agencies.
PATENTS, TRADEMARKS & LICENSES.
The Company has received United States service mark registration of
"The Family Channel," the related design logo, "FAM," and "International Family
Entertainment." FiT TV has applied for United States service mark registration
of "FiT TV" and the related design logo. MTM has received United States service
mark registration of "MTM" and the related design logos, including the MTM cat
logo. Calvin Gilmore Productions has received United States trademark
registration of "The Great American
45
<PAGE> 59
Music Show" and "Carolina Opry." In addition, the Company or its subsidiaries
has received or applied for registration of numerous other marks relating to its
entertainment products and services in the United States and various foreign
countries. The Company registers, and endeavors to take the necessary actions to
protect, the marks created and acquired in its businesses.
The Company generally obtains copyright protection for each episode of
its television programs. Certain of the Company's copyrights, trademarks, and
service marks may be considered material to the Company's business.
EMPLOYEES.
As of December 31, 1996, the Company had 837 employees. Certain of the
Company's subsidiaries have entered into collective bargaining agreements with
certain entertainment industry guilds with respect to certain personnel hired in
connection with the production of programming. The Company believes that its
relations with its employees are good.
PROPERTIES.
In December 1993, the Company consummated the purchase of a facility
located in Virginia Beach, Virginia, where it relocated its executive and
certain administrative offices, a sales office, and an affiliate relations
office during 1994. The Company's master control, satellite uplink, and
postproduction facilities are located in a portion of a corporate support
building at CBN Center, Virginia Beach, Virginia, which the Company leases from
CBN. Prior to 1994, the Company's headquarters were also located at this site.
In addition, The Family Channel leases from unaffiliated parties office
space for its sales offices in New York, Atlanta, Chicago, Detroit, and Los
Angeles, and for affiliate relations offices in Atlanta; Boston; Chicago;
Dallas; Denver; Newport Beach, California; and Jackson, Mississippi. MTM leases
space for its main operations in Los Angeles and for its sales offices in
Chicago, New York, and London.
Calvin Gilmore Productions owns or leases three theaters (two of which
have been leased to third parties) and a recording studio in Myrtle Beach, South
Carolina, and leases a fourth theater in Charleston, South Carolina.
The Company's principal physical assets include various television
post-production and editing equipment and certain earth station transmitting and
receiving facilities. The Company has also acquired satellite transmission and
retransmission capacity, including three domestic satellite transponders and an
uplink facilities lease agreement with CBN.
46
<PAGE> 60
LEGAL PROCEEDINGS.
From time to time the Company is involved in litigation relating to
claims arising out of its normal business operations. The Company is not now
engaged in any such legal proceedings that are expected, individually or in the
aggregate, to have a material adverse effect on the Company.
INFORMATION CONCERNING FKWW AND FKW SUB
FKWW is a fully integrated global children's television entertainment
company which develops, acquires, produces, broadcasts and distributes quality
animated and live action children's television programs. FKWW's principal
operations are conducted by (i) FCN, which operates the Fox Kids Network - the
top rated children's (ages 2-11) oriented broadcast television network in the
United States, and (ii) Saban, whose library of more than 3,700 half hours of
children's programming is among the largest in the world. FKWW 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.
This combination has created a company with the ability to manage children's
properties and brands from the initial creative concept through production,
broadcast and the merchandising of related consumer products.
FKWW 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 Power Rangers, The Tick, X-Men and
Bobby's World, or which or have been developed or acquired due to their
likelihood of maturing into popular brands. FKWW produced 13 series in the
1995-1996 broadcast season and produced 16 series for the 1996-1997 broadcast
season, including Power Rangers, which since shortly after its launch in 1993
has been the highest rated children's television program in the United States
among boys ages 2-11, as well as in most of the international markets in which
it broadcasts.
FKWW operates the Fox Kids Network, the leading U.S. children's
broadcast over the air television network, and Saban Kids Network, a recently
launched ad hoc syndicated distribution network. Collectively, these outlets
broadcasted 26 1/2 hours of children's programming per week during the 1996-
1997 broadcast season, more than double the number of hours broadcasted over the
air by its nearest competitor, the Walt Disney Company (excluding cable). The
Fox Kids Network, launched in 1990, broadcasted 19 hours of children's programs
each week during the 1996-1997 broadcast season to 97% of U.S. television
households, the broadest reach of any network targeting children. Fox Kids
Network was formed by Fox Broadcasting and most of the Fox Television Network
member stations to provide children's programming weekday mornings and
afternoons, and Saturday mornings. The Fox Kids Network has been the number one
rated children's broadcaster for each of the past three seasons, and has the
highest viewership among children in its time period during 15 consecutive
"sweeps" periods.
The principal offices of FKWW are located at 10960 Wilshire Boulevard,
Los Angeles, California 90024, and the telephone number is (310) 235-5100.
47
<PAGE> 61
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The selected consolidated financial data presented below for, and, as
of the end of, each of the years in the five-year period ended December 31, 1996
are derived from the consolidated financial statements of the Company, which
financial statements have been audited by KPMG Peat Marwick LLP, independent
certified public accountants. The consolidated financial statements of the
Company as of December 31, 1996 and 1995, and for each of the years in the
three-year period ended December 31, 1996, are included herein.
The selected consolidated financial data presented below for the
three-month periods ended March 31, 1996 and 1997 and as of March 31, 1997 are
derived from the unaudited consolidated financial statements of the Company
included herein. In management's opinion, the unaudited information has been
prepared on a basis consistent with the audited consolidated financial
statements of the Company. The results of operations for the three months ended
March 31, 1997 are not indicative of results which may be expected for the
entire year.
<PAGE> 62
<TABLE>
<CAPTION>
Quarter Ended Years Ended December 31,
March 31, ----------------------------------------------------
1997 1996 1996 1995 1994 1993
-------------------------------------------------------------------------------
(dollar amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Operating Revenues $ 97,183 $ 74,492 $ 332,810 $ 294,858 $ 242,050 $ 208,216
-------------------------------------------------------------------------------
Operating Expenses
Production and programming 55,820 37,664 178,762 155,685 137,294 112,269
Selling and marketing 17,926 15,733 64,544 61,122 49,819 43,281
New business development 594 488 2,317 9,908 4,991 7,868
General and administrative 7,946 7,588 28,745 27,088 21,967 14,615
Amortization of goodwill 570 609 2,278 2,657 2,532 1,562
-------------------------------------------------------------------------------
Total operating expenses 82,856 62,082 276,646 256,460 216,603 179,595
-------------------------------------------------------------------------------
Operating income 14,327 12,410 56,164 38,398 25,447 28,621
Investment income (loss) 105 891 2,843 1,883 (2,522) 8,037
Interest expense (3,194) (3,639) (12,551) (12,989) (11,034) (11,792)
Minority interests in losses 402 1,028 2,359 4,916 5,277 3,475
Gain on disposition of assets 0 0 13,685 0 0 0
Other income (expense) (3,218) (2,347) (5,640) 522 7,789 0
Provision for income taxes (3,684) (3,655) (24,735) (14,066) (10,165) (11,048)
-------------------------------------------------------------------------------
Income before extraordinary item 4,738 4,688 32,125 18,664 14,792 17,293
Extraordinary item
Loss on early extinguishment of debt 0 0 0 0 0 $(52,087)
-------------------------------------------------------------------------------
Net income (loss) 4,738 4,688 32,125 18,664 14,792 (34,794)
Dividend requirement on Preferred Stock 0 0 0 0 (2,200) (2,197)
Distribution - exchange of Preferred Stock 0 0 0 (12,163) 0 0
-------------------------------------------------------------------------------
Net income (loss) available
for Common Stock $ 4,738 $ 4,688 $ 32,125 $ 6,501 $ 12,592 $(36,991)
===============================================================================
PER SHARE DATA:
Primary earnings (loss) per common share
Income before extraordinary item $ 0.10 $ 0.10 $ 0.69 $ 0.16 $ 0.30 $ 0.39
Extraordinary item 0.00 0.00 0.00 0.00 0.00 (1.05)
-------------------------------------------------------------------------------
$ 0.10 $ 0.10 $ 0.69 $ 0.16 $ 0.30 $ (0.66)
===============================================================================
Fully diluted earnings (loss) per common share
Income before extraordinary item $ 0.10 $ 0.10 $ 0.69 $ 0.16 $ 0.30 $ 0.39
Extraordinary item 0.00 0.00 0.00 0.00 0.00 (1.05)
-------------------------------------------------------------------------------
$ 0.10 $ 0.10 $ 0.69 $ 0.16 $ 0.30 $ (0.66)
===============================================================================
OTHER FINANCIAL DATA
Operating income before depreciation and
amortization of property and equipment,
goodwill, and other assets $ 17,363 $ 15,272 $ 67,434 $ 49,238 $ 35,058 $ 35,855
Capital expenditures 1,869 2,225 9,851 15,562 9,443 11,012
BALANCE SHEET DATA (AT END OF PERIOD)
Cash and cash equivalents $ 14,961 $ 29,075 $ 4,997 $ 32,865 $ 38,716 $ 74,117
Total assets 563,813 492,495 568,683 481,427 468,272 497,416
Long-term film rights payable 37,040 31,119 50,643 32,714 34,530 43,109
Long-term debt (excluding current maturities) 172,745 154,854 171,251 153,752 120,720 146,509
Convertible Notes 23,000 23,000 23,000 23,000 23,000 23,000
Stockholders' equity 205,574 173,818 201,192 171,303 171,108 153,217
</TABLE>
<TABLE>
<CAPTION>
Years Ended
December 31,
-------------
1992
-------------
<S> <C>
STATEMENT OF OPERATIONS DATA
Operating Revenues $ 133,301
---------
Operating Expenses
Production and programming 57,393
Selling and marketing 28,140
New business development 2,258
General and administrative 6,838
Amortization of goodwill 0
---------
Total operating expenses 94,629
---------
Operating income 38,672
Investment income (loss) 1,219
Interest expense (10,315)
Minority interests in losses 0
Gain on disposition of assets 0
Other income (expense) 0
Provision for income taxes (11,228)
---------
Income before extraordinary item 18,348
Extraordinary item
Loss on early extinguishment of debt 0
---------
Net income (loss) 18,348
Dividend requirement on Preferred Stock (2,203)
Distribution - exchange of Preferred Stock 0
---------
Net income (loss) available
for Common Stock $ 16,145
=========
PER SHARE DATA:
Primary earnings (loss) per common share
Income before extraordinary item $ 0.56
Extraordinary item 0.00
---------
$ 0.56
=========
Fully diluted earnings (loss) per common share
Income before extraordinary item $ 0.55
Extraordinary item 0.00
---------
$ 0.55
=========
OTHER FINANCIAL DATA
Operating income before depreciation and
amortization of property and equipment,
goodwill, and other assets $ 40,210
Capital expenditures 26,493
BALANCE SHEET DATA (AT END OF PERIOD)
Cash and cash equivalents $ 32,249
Total assets 253,272
Long-term film rights payable 19,733
Long-term debt (excluding current maturities) 27,282
Convertible Notes 123,000
Stockholders' equity 41,674
</TABLE>
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<PAGE> 63
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Information regarding the Company's financial condition, changes in
financial condition, and results of operations for the fiscal year ended
December 31, 1996 and the three months ended March 31, 1997, is set forth under
the caption entitled "Management's Discussion and Analysis" on pages F-29
through F-41 and F-48 through F-61, respectively, hereof.
49
<PAGE> 64
PRINCIPAL STOCKHOLDERS AND STOCK OWNERSHIP
OF MANAGEMENT
The following table sets forth certain information concerning the
ownership of voting Common Stock by each of the directors, the Company's Chief
Executive Officer, the Company's officers meeting the criteria set forth in 17
CFR 229.402(a)(3)(the "Named Executive Officers"), all directors and executive
officers as a group, and each stockholder who is known by the Company to own
beneficially more than 5% of the outstanding Class A Stock or Class B Stock, as
of June 20, 1997. Except as otherwise indicated, shares issuable upon exercise
of options that are or will become exercisable within 60 days of June 20, 1997,
or upon conversion of convertible securities are deemed to be outstanding for
the purpose of computing the percentage ownership of persons beneficially owning
such options or convertible securities, but are not deemed to be outstanding for
the purpose of computing the percentage ownership of any other person. Except as
otherwise indicated, each person listed below has informed the Company that he
has (i) sole voting and investment power with respect to his shares of stock,
except to the extent that authority is shared by spouses under applicable law,
and (ii) record and beneficial ownership with respect to his shares of stock.
<TABLE>
<CAPTION>
Class A Common Stock Class B Common Stock Percent of
-------------------- -------------------- Vote of All
Common
Stock
Outstanding
Number of -----------
Number of % of Shares % of
Beneficial Owner Shares Owned Class Owned Class
- ---------------- ------------ ----- ----- -----
<S> <C> <C> <C> <C> <C>
M.G. Robertson, individually 3,125,000(c) 62.5 756,375 (d)(e)(f) 2.3 38.6
and as trustee (a)(b)
Tim Robertson, individually and 1,875,000(h) 37.5 983,586 (d)(f)(i) 3.0 23.8
as trustee (b)(g)
Louis A. Isakoff (b) - - 91,311 (f) (j) (j)
William L. Armstrong (k) - - 1,250 (j) (j)
Lowell W. Morse (l) - - - - -
Robert M. Wallace (m) - - - - -
Anthony D. Thomopoulos (b) - - 195,312 (f) (j) (j)
Richard L. Sirvaitis (b) - - 35,625 (f)(n) (j) (j)
K.J. "Gus" Lucas (b) - - 30,000 (f) (j) (j)
Stephen D. Lentz (b) - - 23,484 (f) (j) (j)
All directors and executive 5,000,000 100 2,308,525 (d)(f)(n) 6.9 62.6
officers as a group (15 persons)
CBN (o)(p) - - 3,891,121 (q) 11.9 4.7
Regent (o) - - 4,214,325 (r) 12.9 5.1
LIFE (s) - - 9,676,232 (t) 22.8 10.5
The Capital Group Companies, - - 4,835,250 (u) 14.8 5.8
Inc. (u)
SMALLCAP World Fund, Inc. (v) - - 1,768,750 (v) 5.4 2.1
Mario J. Gabelli and affiliated - - 8,499,728 (w) 25.9 10.3
entities (w)
</TABLE>
--------------
50
<PAGE> 65
(a) Does not include shares of Common Stock owned by Tim Robertson, as to
which M.G. Robertson disclaims beneficial ownership. (M.G. Robertson
and Tim Robertson are sometimes hereinafter referred to as the
"Robertsons.")
(b) The business address for these persons is c/o International Family
Entertainment, Inc., 2877 Guardian Lane, Virginia Beach, Virginia
23452.
(c) All of these shares of Class A Stock are held of record by a charitable
remainder trust (the "Charitable Remainder Trust") established by M.G.
Robertson. As trustee of the Charitable Remainder Trust, M.G. Robertson
has voting and investment power with respect to, and thus beneficial
ownership of, these shares. The assets of the Charitable Remainder
Trust, including any shares of Class A Stock that have not been
previously sold, will be transferred to CBN on January 22, 2010.
(d) Excludes shares of Class B Stock issuable upon conversion of Class A
Stock.
(e) Includes 79,950 shares of Class B Stock which are held of record by
certain trusts established by M.G. Robertson for the benefit of his
children other than Tim Robertson. As trustee of these trusts, M.G.
Robertson has voting and investment power with respect to, and thus
beneficial ownership of, these shares.
(f) The numbers set forth in the table assumes the exercise of options
issued pursuant to the terms of the International Family Entertainment,
Inc. Stock Incentive Plan (the "Stock Plan") with respect to the
following numbers of shares of Class B Stock; for M.G.
Robertson-250,000 shares; Tim Robertson-250,000 shares; Louis A.
Isakoff-27,083 shares; Anthony D. Thomopoulos-195,312 shares; Richard
L. Sirvaitis-5,000 shares; K.J. "Gus" Lucas-30,000 shares; Stephen D.
Lentz-23,333 shares; and for all directors and executive officers as a
group-849,527 shares.
(g) Does not include shares of Common Stock owned by M.G. Robertson, as to
which Tim Robertson disclaims beneficial ownership.
(h) Includes 37,500 shares of Class A Stock which are held of record by a
trust established by Tim Robertson for the benefit of his children (the
"Robertson Family Trust"). As trustee of the Robertson Family Trust,
Tim Robertson has voting and investment power with respect to, and thus
beneficial ownership of, these shares.
(i) Includes 24,375 shares of Class B Stock which are held of record by the
minor children of Tim Robertson. Also includes 49,000 shares of Class B
Stock which are held of record by the Robertson Family Trust and 8,000
shares of Class B Stock which are held of record by a charitable
remainder trust established by Tim Robertson. As trustee of these
trusts, Tim Robertson has voting and investment power with respect to,
and thus beneficial ownership of, these shares. Also includes 7,980
shares of Class B Stock held in Tim Robertson's name in the Company's
401(k) plan.
(j) Amounts to less than 1%.
(k) The business address for Mr. Armstrong is 1625 Broadway, Suite 780,
Denver, Colorado 80202.
(l) The business address for Mr. Morse is 5335 S.W. Meadows Road, Suite
365, Lake Oswego, Oregon 97035.
(m) The business address for Mr. Wallace is 675 N. First Street, 10th
Floor, San Jose, California 95112.
(n) Includes shares of Class B Stock issued pursuant to and, in part,
subject to forfeiture under the terms of the Stock Plan.
(o) The business address for CBN is 700 CBN Center, Virginia Beach,
Virginia 23463. The business address for Regent is 1000 Regent
University Drive, Virginia Beach, Virginia 23463. Regent may be deemed
to be an affiliate of CBN.
(p) Does not include the 3,125,000 shares of Class A Stock held by the
Charitable Remainder Trust, in which CBN holds the remainder interest.
(q) Excludes 4,212,450 shares of Class B Stock held by Regent University,
over which CBN may be deemed to share dispositive power with Regent.
(r) CBN may be deemed to share dispositive power with Regent as to
4,212,450 of these shares.
(s) LIFE is a direct, wholly owned subsidiary of Liberty Media Corporation.
Liberty Media is a direct, wholly owned subsidiary of TCI. The business
address for LIFE and Liberty Media is 8101 East Prentice Avenue, Suite
500, Englewood, Colorado 80111. The business address for TCI is 5619
DTC Parkway, Englewood, Colorado 80111.
(t) Includes 7,088,732 shares of Class B Stock issuable upon conversion of
LIFE's 7,088,732 shares of Class C Stock, and 2,587,500 shares of Class
B Stock issuable upon conversion of 2,587,500 shares of Class C Stock,
which Class C Stock is issuable upon conversion of LIFE's $23 million
aggregate principal amount of Convertible Notes.
(u) The number of shares reported in this table is based upon information
included in Amendment No. 3 to the Schedule 13G, dated February 12,
1997 (as amended, the "Capital Group Amended Schedule 13G"), filed by
The Capital Group Companies, Inc. ("The Capital Group"). As of February
12, 1997, Capital Guardian Trust Company and Capital Research and
Management Company ("CRMC"), operating subsidiaries of The Capital
Group, exercised investment discretion with respect to 1,504,000 shares
and 3,331,250 shares, respectively, which shares were owned by various
institutional investors. CRMC is an investment advisor to SMALLCAP
World Fund, Inc. ("SMALLCAP"); accordingly, the shares with respect to
which CRMC exercises investment discretion include the 1,768,750 shares
reported in this table as being beneficially owned by SMALLCAP. The
business address for The Capital Group and its affiliates disclosed in
the Capital Group Amended Schedule 13G is 333 South Hope Street, Los
Angeles, California 90071.
(v) The number of shares reported in this table is based upon information
included in the Capital Group Amended Schedule 13G, to which SMALLCAP
is a party pursuant to a Joint Filing Agreement, dated as of February
12, 1997, among
51
<PAGE> 66
SMALLCAP, The Capital Group, and CRMC. CRMC is an investment advisor to
SMALLCAP; accordingly, the 1,768,750 shares reported in this table as
being beneficially owned by SMALLCAP are included in the number of
shares reported in this table as being beneficially owned by The
Capital Group. The business address for SMALLCAP disclosed in the
Capital Group Amended Schedule 13G is 333 South Hope Street, Los
Angeles, California 90071.
(w) The number of shares reported in this table is based upon information
included in Amendment No. 22 to the Schedule 13D, dated as of June 17,
1997 (as amended, the "Gabelli Amended Schedule 13D"), filed by Gabelli
Funds, Inc. ("GFI"), GAMCO Investors, Inc. ("GAMCO"), Gabelli
Associates Fund ("Associates Fund"), Gabelli Associates Limited
("Associates Ltd"), Gabelli & Company, Inc. ("GCo"), Gabelli & Company,
Inc. Profit Sharing Plan ("PSP"), Gabelli Multimedia Partners, L.P.
("Multimedia"), ALCE Partners, L.P. ("ALCE"), Gabelli International II
Limited ("GIL II"), Gabelli Performance Partnership L.P. ("GPP"),
Gabelli Foundation, Inc. ("Gabelli Foundation"), Gabelli International
Limited ("GIL"), Gabelli Securities, Inc. ("GS"), Gabelli Asset
Management Company International Advisory Services Ltd. ("Gabelli Asset
Management"), and Mario J. Gabelli (each, a "Reporting Person" and
collectively, the "Reporting Persons," all of which are party to a
Joint Filing Agreement dated as of January 22, 1993). The Gabelli
Amended Schedule 13D reports that the Reporting Persons beneficially
own the shares reported in this table as follows: GFI (as
agent)-2,187,025 shares; GAMCO (as agent)-5,776,003 shares; Associates
Fund-211,000 shares; Associates Ltd-30,000 shares; GCo-10,000 shares;
PSP-10,600 shares; Multimedia-1,300 shares; ALCE-23,300 shares; GIL
II-9,000 shares; GPP-143,000 shares; Gabelli Foundation-20,000 shares;
GIL-58,000 shares; GS-10,000 shares; Gabelli Asset Management (as
agent)-10,500 shares; Mario J. Gabelli-0 shares. Further, Mario J.
Gabelli is deemed to have beneficial ownership of the shares
beneficially owned by each Reporting Person and GFI is deemed to have
beneficial ownership of the shares reported by each Reporting Person
other than Mr. Gabelli. The Gabelli Amended Schedule 13D discloses that
each of the Reporting Persons has the sole power to vote or direct the
vote and the sole power to dispose or to direct the disposition of the
shares reported for it, either for its own benefit or for the benefit
of its investment clients or its partners, as the case may be, except
that GAMCO does not have the authority to vote 126,250 shares of the
shares it beneficially owns and the power of Mario J. Gabelli and GFI
is indirect with respect to the shares beneficially owned by other
Reporting Persons. The business address for GFI, GAMCO, GCo, GS,
Associates Fund and Mario J. Gabelli disclosed on the Gabelli Amended
Schedule 13D is One Corporate Center, Rye, New York 10580. The business
address for GPP disclosed on the Gabelli Amended Schedule 13D is 8
Sound Shore Drive, Greenwich, Connecticut 06830. The business address
for Associates Limited and GIL disclosed on the Gabelli Amended
Schedule 13D is c/o MeesPierson (Cayman) Limited, British American
Centre, Dr. Roy's Drive-Phase 3, George Town, Grand Cayman, British
West Indies. The business address for GIL II disclosed on the Gabelli
Amended Schedule 13D is c/o Coutts & Company (Cayman) Limited, West Bay
Road, Grand Cayman, British West Indies. The business address for
Gabelli Asset Management disclosed on the Gabelli Amended Schedule 13D
is c/o Appleby, Spurling & Kempe, Cedar House, 41 Cedar Avenue,
Hamilton, HM12, Bermuda. The business address for Gabelli Foundation
disclosed on the Gabelli Amended Schedule 13D is 165 West Liberty
Street, Reno, Nevada 89501.
52
<PAGE> 67
MARKET PRICE AND DIVIDENDS
Class B Stock is quoted and traded on the NYSE under the symbol "FAM."
The table below sets forth, for the quarters indicated, the high and low sale
prices of Class B Common Stock as reported by NYSE.
<TABLE>
<CAPTION>
Class B Stock
-------------
High Low
---- ---
<S> <C> <C>
Year ended December 31, 1994
First Quarter 17.750 13.125
Second Quarter 14.000 11.125
Third Quarter 13.375 10.875
Fourth Quarter 11.375 9.625
Year ended December 31, 1995
First Quarter 12.250 9.875
Second Quarter 13.750 11.625
Third Quarter 16.500 11.625
Fourth Quarter 15.750 13.000
Year ended December 31, 1996
First Quarter 16.875 11.750
Second Quarter 19.125 15.000
Third Quarter 18.750 15.125
Fourth Quarter 18.125 14.875
</TABLE>
On June 10, 1997, the last full trading day prior to the public announcement of
the Merger Agreement, the high and low sale prices reported for shares of Class
B Stock on the NYSE were $32.00 and $30.75, respectively, and the last reported
sale price was $30.875. On ___________, 1997, the high and low sales prices
reported for shares of Class B Stock on the NYSE were $___ and $___,
respectively, and the last reported sale price was $____. No cash dividends have
ever been paid on the Company's Common Stock.
53
<PAGE> 68
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Exchange Act and, in accordance therewith, files reports, proxy statements and
other information with the Commission. Such reports and other information may be
inspected and copied or obtained by mail upon payment of the Commission's
prescribed rates at the public reference facilities maintained by the Commission
at 450 Fifth Street, N.W. Room 1024, Washington, D.C. 20549 and at the following
regional offices of the Commission: New York Regional Office, 7 World Trade
Center, New York, New York 10048, and Chicago Regional Office, 500 West Madison
Avenue, 14th Floor, Chicago, Illinois 60661. Certain reports, proxy statements
and other information filed by the Company may also be obtained at the
Commission's World Wide Web site, located at http://www.sec.gov. The Company
also files reports and other information with the NYSE. Such reports and other
information may be inspected at the offices of the NYSE, 20 Broad Street, New
York, New York 10005.
This Information Statement includes information required to be
disclosed pursuant to Rule 14c-2 under the Exchange Act.
54
<PAGE> 69
INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Audited Financial Statements
Consolidated Financial Statements
Consolidated Balance Sheets..................................................... F-2
Consolidated Statements of Operations........................................... F-3
Consolidated Statements of Cash Flows........................................... F-4
Consolidated Statements of Stockholders' Equity................................. F-5
Notes to Consolidated Financial Statements...................................... F-6
Independent Auditors' Report.......................................................... F-25
Quarterly Financial Information....................................................... F-26
Selected Consolidated Financial Data.................................................. F-27
Management's Discussion and Analysis
General......................................................................... F-29
Results of Operations........................................................... F-29
Cable Networks Segment Information........................................ F-30
The Family Channel.................................................. F-30
FiT TV.............................................................. F-32
International Networks.............................................. F-34
Production & Distribution Segment Information............................. F-35
Live Entertainment Segment Information.................................... F-38
Other Income and Expense Information...................................... F-39
Use of Estimates.......................................................... F-40
Liquidity and Capital Resources................................................. F-40
Inflation....................................................................... F-41
Income Taxes.................................................................... F-41
Financial Statement Schedule
II--Valuation and Qualifying Accounts........................................... F-42
All other schedules are omitted because the required information is not
present, or is not present in amounts sufficient to require submission of the
schedules, or because the information required is included in the consolidated
financial statements and notes thereto.
Independent Auditors' Report on Financial Statement Schedule.......................... F-43
Unaudited Financial Statements
Consolidated Balance Sheets (Unaudited) - March 31, 1997 and December 31, 1996........ F-44
Consolidated Statements of Operations for the Three Months Ended March 31, 1997 and
1996 (Unaudited).................................................................... F-45
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1997 and
1996 (Unaudited).................................................................... F-46
Notes to Consolidated Financial Statements (Unaudited)................................ F-47
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Unaudited).............................................................. F-48
</TABLE>
F-1
<PAGE> 70
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................... $ 4,997,000 $ 32,865,000
Investment in marketable securities......................... 9,053,000 8,290,000
Accounts receivable, net of allowances of $4,662,000 and
$5,780,000................................................. 121,359,000 95,699,000
Film rights, current portion................................ 97,441,000 56,355,000
Prepaid expenses and other.................................. 4,401,000 11,511,000
------------ ------------
Total current assets.................................... 237,251,000 204,720,000
Property and equipment, net....................................... 62,877,000 73,028,000
Film rights....................................................... 144,680,000 105,094,000
Long-term accounts receivable, net of allowances of $126,000 and
$520,000........................................................ 17,530,000 24,754,000
Investment in equity securities -- related party.................. 35,458,000 --
Other investments, net of deferred gain of $2,616,000............. 14,889,000 16,575,000
Goodwill, net of accumulated amortization of $8,830,000 and
$6,552,000...................................................... 48,517,000 54,795,000
Deferred tax benefit.............................................. 1,076,000 --
Other assets...................................................... 6,405,000 2,461,000
------------ ------------
$568,683,000 $481,427,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable............................................ $ 12,874,000 $ 14,598,000
Accrued liabilities......................................... 11,756,000 13,121,000
Accrued participations and residuals........................ 15,613,000 11,615,000
Current portion of film rights payable...................... 44,050,000 38,161,000
Current maturities of debt.................................. 1,205,000 181,000
Income taxes payable........................................ 9,214,000 --
Current portion of deferred income taxes.................... 6,544,000 611,000
Deferred income............................................. 7,927,000 5,891,000
------------ ------------
Total current liabilities............................... 109,183,000 84,178,000
Film rights payable............................................... 50,643,000 32,714,000
Long-term debt.................................................... 171,251,000 153,752,000
Accrued interest -- related party................................. 273,000 327,000
Convertible Notes -- related party................................ 23,000,000 23,000,000
Other liabilities, including participations and residuals......... 11,079,000 10,347,000
Deferred income taxes............................................. -- 2,676,000
Commitments and contingencies (Note N)
Minority interests................................................ 2,062,000 3,130,000
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 33,039,831 shares issued and
outstanding................................................ 101,456,000 104,886,000
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......................... (562,000) (1,697,000)
Cumulative foreign currency translation adjustment.......... -- 665,000
Unrealized gain (loss) on marketable securities............. 351,000 (373,000)
Retained earnings........................................... 49,087,000 16,962,000
------------ ------------
Total stockholders' equity.............................. 201,192,000 171,303,000
------------ ------------
$568,683,000 $481,427,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-2
<PAGE> 71
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Operating revenues............................... $332,810,000 $294,858,000 $242,050,000
------------ ------------ ------------
Operating expenses
Production and programming................. 178,762,000 155,685,000 137,294,000
Selling and marketing...................... 64,544,000 61,122,000 49,819,000
New business development................... 2,317,000 9,908,000 4,991,000
General and administrative................. 28,745,000 27,088,000 21,967,000
Amortization of goodwill................... 2,278,000 2,657,000 2,532,000
------------ ------------ ------------
Total operating expenses............... 276,646,000 256,460,000 216,603,000
------------ ------------ ------------
Operating income....................... 56,164,000 38,398,000 25,447,000
------------ ------------ ------------
Other income (expense)
Investment income (loss)................... 2,843,000 1,883,000 (2,522,000)
Interest expense -- related parties........ (1,606,000) (2,134,000) (1,754,000)
Interest expense -- other.................. (10,945,000) (10,855,000) (9,280,000)
Minority interests in losses............... 2,359,000 4,916,000 5,277,000
Gain on disposition of assets -- related
party.................................... 13,685,000 -- --
Other income (expense), net (Note B)....... (5,640,000) 522,000 7,789,000
------------ ------------ ------------
Total other income (expense)........... 696,000 (5,668,000) (490,000)
------------ ------------ ------------
Income before income taxes............. 56,860,000 32,730,000 24,957,000
Provision for income taxes....................... (24,735,000) (14,066,000) (10,165,000)
------------ ------------ ------------
Net income............................. 32,125,000 18,664,000 14,792,000
Dividend requirement on Preferred Stock.......... -- -- (2,200,000)
Distribution -- exchange of Preferred Stock...... -- (12,163,000) --
------------ ------------ ------------
Net income available for Common
Stock................................ $ 32,125,000 $ 6,501,000 $ 12,592,000
============ ============ ============
Primary and fully diluted earnings per common
share.......................................... $ 0.69 $ 0.16 $ 0.30
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE> 72
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------------
1996 1995 1994
------------- ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income....................................... $ 32,125,000 $ 18,664,000 $ 14,792,000
------------- ------------- ------------
Adjustments to reconcile net income to net cash
provided by operating activities
Amortization of film rights................. 145,047,000 120,277,000 103,231,000
Depreciation and amortization of property
and equipment, goodwill, and other
assets................................... 11,270,000 10,840,000 9,611,000
Write-downs of marketable securities........ -- -- 3,706,000
Allowances against investments.............. 5,250,000 -- --
Share of losses of affiliates, net.......... 514,000 1,345,000 --
Minority interests in losses................ (2,359,000) (4,916,000) (5,277,000)
Gain on marketable securities............... (1,924,000) -- --
Gain on disposition of assets -- related
party.................................... (13,685,000) -- --
Compensation -- Stock Plan.................. 686,000 1,351,000 1,127,000
Deferred income tax expense................. 5,477,000 11,654,000 1,206,000
Changes in assets and liabilities, net of
effect of acquisitions and dispositions
Accounts receivable, net of
allowances.......................... (23,257,000) (29,048,000) 1,093,000
Marketable securities, prepaids, and
other............................... (14,264,000) (5,837,000) 9,020,000
Accounts payable and accrued
liabilities......................... 1,440,000 (1,304,000) (15,211,000)
Income taxes payable................... 8,702,000 (10,428,000) 6,202,000
Deferred income........................ 1,537,000 (6,278,000) 3,451,000
------------- ------------- ------------
Total adjustments........................... 124,434,000 87,656,000 118,159,000
------------- ------------- ------------
Net cash provided by operating activities..... 156,559,000 106,320,000 132,951,000
------------- ------------- ------------
Cash flows from investing activities
Acquisitions of original programming............. (133,527,000) (57,184,000) (82,806,000)
Acquisitions of original programming -- related
parties....................................... (2,197,000) (2,747,000) (457,000)
Cash paid for acquisition........................ -- (3,060,000) --
Other investments, including advances............ (21,506,000) (6,102,000) --
Repayment of advances............................ 17,494,000 -- --
Purchases of marketable securities............... -- (858,000) (12,217,000)
Sales of marketable securities................... 4,954,000 1,089,000 3,689,000
Additions to property and equipment.............. (9,775,000) (10,182,000) (9,443,000)
Proceeds from sales of property and equipment.... -- -- 2,504,000
------------- ------------- ------------
Net cash used in investing activities......... (144,557,000) (79,044,000) (98,730,000)
------------- ------------- ------------
Cash flows from financing activities
Payments on film rights.......................... (58,142,000) (46,167,000) (42,428,000)
Proceeds from debt issuances..................... 59,150,000 313,250,000 5,000,000
Principal payments on debt....................... (40,703,000) (285,417,000) (31,201,000)
Cash provided by minority partners............... 3,000,000 4,523,000 2,774,000
Payment of Preferred Stock dividends............. -- (1,109,000) (2,200,000)
Repurchases of Common Stock...................... (2,981,000) (4,357,000) (2,661,000)
Repurchases of Common Stock -- related parties... -- (13,819,000) --
------------- ------------- ------------
Net cash used in financing activities......... (39,676,000) (33,096,000) (70,716,000)
------------- ------------- ------------
Effect of foreign currency rate changes............ (194,000) (31,000) 1,094,000
------------- ------------- ------------
Decrease in cash and cash equivalents.............. (27,868,000) (5,851,000) (35,401,000)
Cash and cash equivalents at beginning of year..... 32,865,000 38,716,000 74,117,000
------------- ------------- ------------
Cash and cash equivalents at end of year........... $ 4,997,000 $ 32,865,000 $ 38,716,000
============= ============= ============
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 73
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
UNREALIZED
10% CUMULATIVE GAIN
CONVERTIBLE FOREIGN (LOSS)
CUMULATIVE CLASS A CLASS B CLASS C UNEARNED CURRENCY ON RETAINED
PREFERRED COMMON COMMON COMMON COMPENSATION TRANSLATION MARKETABLE EARNINGS
STOCK STOCK STOCK STOCK STOCK PLAN ADJUSTMENT SECURITIES (DEFICIT) TOTAL
------------ -------- ------------ ----------- ------------ ---------- ---------- ------------ ------------
<S> <C> <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) $153,217,000
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) -- -- -- 1,000
Forfeiture of
Class B
Common
Stock under
the Stock
Plan,
14,000
shares..... -- -- (148,000) -- 147,000 -- -- -- (1,000)
Compensation -- Stock
Plan....... -- -- -- -- 1,127,000 -- -- -- 1,127,000
Repurchase
and
retirement
of Class B
Common
Stock,
176,033
shares..... -- -- (2,661,000) -- -- -- -- -- (2,661,000)
Increase in
deferred
tax benefit
related to
initial
basis
differences
(Note K)... -- -- 6,000,000 -- -- -- -- -- 6,000,000
Foreign
currency
translation
adjustment... -- -- -- -- -- 989,000 -- -- 989,000
Unrealized
loss on
marketable
securities... -- -- -- -- -- -- (156,000) -- (156,000)
Net income... -- -- -- -- -- -- -- 14,792,000 14,792,000
Preferred
Stock
dividends
paid....... -- -- -- -- -- -- -- (2,200,000) (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) 171,108,000
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 -- -- -- 1,351,000
Repurchase
and
retirement
of Class B
Common
Stock,
1,357,456
shares..... -- -- (18,176,000) -- -- -- -- -- (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) (5,000)
Foreign
currency
translation
adjustments... -- -- -- -- -- (313,000) -- -- (313,000)
Unrealized
loss on
marketable
securities... -- -- -- -- -- -- (217,000) -- (217,000)
Net income... -- -- -- -- -- -- -- 18,664,000 18,664,000
Preferred
Stock
dividends
paid....... -- -- -- -- -- -- -- (1,109,000) (1,109,000)
------------ -------- ------------ ----------- ----------- --------- --------- ------------ ------------
BALANCES AT
DECEMBER
31, 1995... -- 143,000 104,886,000 50,717,000 (1,697,000) 665,000 (373,000) 16,962,000 171,303,000
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 -- -- -- -- -- 266,000
Compensation -- Stock
Plan....... -- -- -- -- 686,000 -- -- -- 686,000
Repurchase
and
retirement
of Class B
Common
Stock,
241,502
shares..... -- -- (3,247,000) -- -- -- -- -- (3,247,000)
Foreign
currency
translation
adjustment... -- -- -- -- -- (665,000) -- -- (665,000)
Unrealized
gain on
marketable
securities... -- -- -- -- -- -- 724,000 -- 724,000
Net income... -- -- -- -- -- -- -- 32,125,000 32,125,000
------------ -------- ------------ ----------- ----------- --------- --------- ------------ ------------
BALANCES AT
DECEMBER
31, 1996... $ -- $143,000 $101,456,000 $50,717,000 $ (562,000) $ -- $ 351,000 $ 49,087,000 $201,192,000
============ ======== ============ =========== =========== ========= ========= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 74
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, 1996, 1995, and 1994 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-6
<PAGE> 75
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.
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.
F-7
<PAGE> 76
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
For the years ended December 31, 1995 and 1994, 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 (40,754,635 and 41,820,072,
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.
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.
Reclassifications
Certain amounts have been reclassified for comparability with the 1996
financial statement presentation.
F-8
<PAGE> 77
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1995 and 1994 of certain
pre-acquisition contingencies recorded in the acquisition of TVS were included
in the determination of net income. Such effects, which amounted to $2,521,000
and $7,291,000, were included in the determination of other income and expense
in the 1995 and 1994 Consolidated Statements of Operations, respectively.
F-9
<PAGE> 78
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
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
Available-for-sale securities, at fair value................ $4,072,000 $6,271,000
Trading securities, at fair value........................... 4,981,000 2,019,000
---------- ----------
$9,053,000 $8,290,000
========== ==========
</TABLE>
Available-for-sale securities, consisting primarily of equity securities,
had an amortized cost of $3,477,000 and $6,904,000 at December 31, 1996 and
1995, respectively. 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). 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). For the years ended December 31, 1996 and 1995, proceeds
from the disposition of available-for-sale securities amounted to $4,954,000 and
$1,089,000, respectively, and gross realized gains and losses were $1,093,000
and $(22,000) in 1996, and $29,000 and $(119,000) in 1995.
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
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Land and buildings........................................ $14,156,000 $21,010,000
Satellite transponders.................................... 36,415,000 36,415,000
Broadcasting and production equipment..................... 12,248,000 16,857,000
Furniture and other equipment............................. 24,494,000 16,584,000
Leasehold and building improvements....................... 5,424,000 5,993,000
----------- -----------
92,737,000 96,859,000
Less accumulated depreciation and amortization............ 29,860,000 23,831,000
----------- -----------
$62,877,000 $73,028,000
=========== ===========
</TABLE>
F-10
<PAGE> 79
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
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
Revolving Credit Facility................................. $150,500,000 $133,000,000
Subsidiary Credit Agreement............................... 10,000,000 8,850,000
6% notes payable, subordinated............................ 6,720,000 6,720,000
Capital lease obligations................................. 5,236,000 5,363,000
------------ ------------
172,456,000 153,933,000
Less current maturities................................. 1,205,000 181,000
------------ ------------
$171,251,000 $153,752,000
============ ============
</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-11
<PAGE> 80
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 6% CAPITAL
YEARS ENDED CREDIT CREDIT NOTES LEASE
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), through the date of sale, amounted to
$1,419,000 for 1996. The minority partner's 39% share of the net loss of this
joint venture amounted to $4,954,000 and $5,107,000 for the years ended December
31, 1995 and 1994, respectively.
F-12
<PAGE> 81
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 Agreement on
earnings per common share was a reduction of $0.24 per common share for the year
ended December 31, 1995.
F-13
<PAGE> 82
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-14
<PAGE> 83
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- SUPPLEMENTAL CASH FLOW INFORMATION
Total interest costs paid during the years ended December 31, 1996, 1995,
and 1994 were $12,045,000, $12,087,000, and $9,172,000, respectively. Income
taxes paid during the years ended December 31, 1996, 1995, and 1994 amounted to
$10,018,000, $13,397,000, and $2,757,000, respectively.
Non-cash investing and financing activities included the acquisition of
film rights under license agreements which aggregated approximately $73,893,000,
$37,221,000, and $30,343,000 for the years ended December 31, 1996, 1995, and
1994, 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 $76,000 and $5,380,000 for the years ended December 31, 1996
and 1995, 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.
F-15
<PAGE> 84
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income before income taxes, as shown in the Consolidated Statements of
Operations, is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Domestic........................................ $63,882,000 $36,737,000 $20,120,000
Foreign......................................... (7,022,000) (4,007,000) 4,837,000
----------- ----------- -----------
$56,860,000 $32,730,000 $24,957,000
=========== =========== ===========
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Current
Federal....................................... $14,969,000 $ 2,775,000 $ 4,593,000
State......................................... 3,564,000 668,000 1,064,000
Foreign....................................... 926,000 (752,000) 3,302,000
----------- ----------- -----------
19,459,000 2,691,000 8,959,000
----------- ----------- -----------
Deferred
Federal....................................... 4,261,000 6,032,000 (410,000)
State......................................... 1,015,000 1,691,000 (70,000)
Foreign....................................... -- 3,652,000 1,686,000
----------- ----------- -----------
5,276,000 11,375,000 1,206,000
----------- ----------- -----------
$24,735,000 $14,066,000 $10,165,000
=========== =========== ===========
</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
---------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Computed expected income tax expense............ $19,901,000 $11,456,000 $ 8,735,000
State income taxes, net of Federal benefit...... 2,967,000 1,637,000 646,000
Effect of amortization of nondeductible
goodwill...................................... 588,000 744,000 677,000
Effect of liquidation of foreign subsidiary..... -- -- 800,000
Other, net...................................... 1,279,000 229,000 (693,000)
----------- ----------- -----------
$24,735,000 $14,066,000 $10,165,000
=========== =========== ===========
</TABLE>
F-16
<PAGE> 85
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
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
Deferred tax assets
Initial basis differences............................... $ 5,800,000 $ 9,821,000
Accrued liabilities, participations, and residuals...... 12,131,000 7,199,000
Film rights............................................. 13,434,000 18,372,000
Other................................................... 7,006,000 7,527,000
------------ ------------
Total gross deferred tax assets................. 38,371,000 42,919,000
Less valuation allowance................................ (9,408,000) (9,599,000)
------------ ------------
Net deferred tax assets......................... 28,963,000 33,320,000
------------ ------------
Deferred tax liabilities
Accounts receivable, principally due to differences in
revenue recognition.................................. (24,779,000) (27,735,000)
Property and equipment, principally due to differences
in depreciation and capitalized interest............. (7,991,000) (7,203,000)
Other................................................... (1,661,000) (1,669,000)
------------ ------------
Total deferred tax liabilities.................. (34,431,000) (36,607,000)
------------ ------------
Net deferred tax liability...................... $ (5,468,000) $ (3,287,000)
============ ============
</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 $125,000 and $343,000 in
1996 and 1995, respectively.
F-17
<PAGE> 86
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
---------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Operating revenues.............................. $23,176,000 $17,863,000 $15,662,000
=========== =========== ===========
Operating expenses.............................. $ 5,191,000 $ 8,028,000 $ 6,402,000
=========== =========== ===========
Accounts receivable............................. $12,114,000 $ 4,632,000 $ 3,798,000
=========== =========== ===========
Accounts payable................................ $ 1,195,000 $ 588,000 $ 855,000
=========== =========== ===========
</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 569,100 shares and 142,226
shares available for grant as of December 31, 1996 and 1995, 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, 1996,
1995, and 1994 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, 1996, 1995, and 1994 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.
F-18
<PAGE> 87
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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, 1996 and 1995 would
have been decreased as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Net income
As reported............................................. $32,125,000 $18,664,000
=========== ===========
Pro forma............................................... $30,486,000 $18,002,000
=========== ===========
Primary and fully diluted earnings per common share
As reported............................................. $ 0.69 $ 0.16
=========== ===========
Pro forma............................................... $ 0.66 $ 0.14
=========== ===========
</TABLE>
Pro forma net income reflects only options granted in 1996 and 1995.
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 1996 and 1995, respectively: risk-free interest
rates of 5.96% and 6.23%; expected lives of 4.6 years and 5.8 years; expected
volatility of 34.5% and 31.0%; and no dividends.
A summary of stock options to purchase Class B Common Stock, as of December
31, 1996, 1995, and 1994, and changes during the years then ended, is presented
below:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------- --------------------- -------------------
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...................... 2,106,250 $ 12.44 350,000 $ 14.30 166,250 $ 16.70
Granted..................... 298,000 $ 15.70 1,812,500 $ 12.14 183,750 $ 12.13
Exercised................... (19,333) $ 15.16 -- --
Forfeited................... (49,417) $ 15.50 (56,250) $ 14.30 --
------ ------ ------
Options at end of year...... 2,335,500 $ 12.81 2,106,250 $ 12.44 350,000 $ 14.30
====== ====== ======
Options exercisable at
year-end.................. 653,560 $ 12.61 114,250 $ 14.48 36,250 $ 16.70
====== ====== ======
Weighted-average estimated
fair value of options
granted during the year... $ 6.08 $ 5.11
====== ======
</TABLE>
F-19
<PAGE> 88
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-AVE. WEIGHTED-AVE. WEIGHTED-AVE.
RANGE OF REMAINING EXERCISE EXERCISE
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 $629,000, $486,000, and
$405,000 to the 401(k) Plan for the years ended December 31, 1996, 1995, and
1994, 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.
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.
F-20
<PAGE> 89
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $5,193,000, $8,942,000,
and $7,770,000 for the years ended December 31, 1996, 1995, and 1994,
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.
F-21
<PAGE> 90
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 L3,000,000
(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 L23,000,000 ($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-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.
F-22
<PAGE> 91
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Operating Revenues
Cable Networks..................................... $249,620,000 $213,775,000 $178,746,000
Production & Distribution.......................... 104,519,000 86,990,000 70,340,000
Live Entertainment................................. 7,751,000 10,481,000 8,951,000
Intersegment Eliminations.......................... (29,080,000) (16,388,000) (15,987,000)
------------ ------------ ------------
$332,810,000 $294,858,000 $242,050,000
============ ============ ============
Operating Income (Loss)
Cable Networks..................................... $ 77,635,000 $ 42,899,000 $ 31,482,000
Production & Distribution.......................... (19,029,000) 1,155,000 (1,066,000)
Live Entertainment................................. (2,782,000) (5,012,000) (1,880,000)
Intersegment Eliminations.......................... 340,000 (644,000) (3,089,000)
------------ ------------ ------------
$ 56,164,000 $ 38,398,000 $ 25,447,000
============ ============ ============
Total Assets
Cable Networks..................................... $338,188,000 $286,738,000 $276,875,000
Production & Distribution.......................... 211,402,000 171,892,000 174,078,000
Live Entertainment................................. 26,392,000 27,783,000 22,305,000
Intersegment Eliminations.......................... (7,299,000) (4,986,000) (4,986,000)
------------ ------------ ------------
$568,683,000 $481,427,000 $468,272,000
============ ============ ============
Depreciation and Amortization
Cable Networks..................................... $ 83,415,000 $ 79,313,000 $ 74,044,000
Production & Distribution.......................... 100,885,000 63,367,000 48,832,000
Live Entertainment................................. 1,488,000 1,772,000 1,035,000
Intersegment Eliminations.......................... (29,471,000) (13,335,000) (11,069,000)
------------ ------------ ------------
$156,317,000 $131,117,000 $112,842,000
============ ============ ============
Capital Expenditures
Cable Networks..................................... $ 7,622,000 $ 7,418,000 $ 7,049,000
Production & Distribution.......................... 1,808,000 2,037,000 1,962,000
Live Entertainment................................. 421,000 6,107,000 432,000
------------ ------------ ------------
$ 9,851,000 $ 15,562,000 $ 9,443,000
============ ============ ============
</TABLE>
F-23
<PAGE> 92
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
------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Operating Revenues
Domestic........................................... $327,415,000 $281,143,000 $229,848,000
International...................................... 6,070,000 16,285,000 13,771,000
Interarea Eliminations............................. (675,000) (2,570,000) (1,569,000)
------------ ------------ ------------
$332,810,000 $294,858,000 $242,050,000
============ ============ ============
Operating Income (Loss)
Domestic........................................... $ 65,047,000 $ 53,045,000 $ 39,982,000
International...................................... (9,042,000) (14,268,000) (14,495,000)
Interarea Eliminations............................. 159,000 (379,000) (40,000)
------------ ------------ ------------
$ 56,164,000 $ 38,398,000 $ 25,447,000
============ ============ ============
Total Assets
Domestic........................................... $532,305,000 $438,843,000 $419,051,000
International...................................... 36,378,000 43,735,000 49,547,000
Interarea Eliminations............................. -- (1,151,000) (326,000)
------------ ------------ ------------
$568,683,000 $481,427,000 $468,272,000
============ ============ ============
Depreciation and Amortization
Domestic........................................... $152,312,000 $126,452,000 $109,350,000
International...................................... 4,797,000 6,551,000 5,021,000
Interarea Eliminations............................. (792,000) (1,886,000) (1,529,000)
------------ ------------ ------------
$156,317,000 $131,117,000 $112,842,000
============ ============ ============
Capital Expenditures
Domestic........................................... $ 9,810,000 $ 14,890,000 $ 7,883,000
International...................................... 41,000 672,000 1,560,000
------------ ------------ ------------
$ 9,851,000 $ 15,562,000 $ 9,443,000
============ ============ ============
</TABLE>
Included in domestic operating revenues are export sales of $15,355,000,
$18,091,000, and $15,320,000 for the years ended December 31, 1996, 1995, and
1994, respectively.
F-24
<PAGE> 93
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, 1996 and 1995, 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,
1996 and 1995, 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-25
<PAGE> 94
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
<TABLE>
<CAPTION>
1996
--------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- --------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C> <C>
Operating revenues................................. $74,492 $75,473 $78,661 $104,184
======= ======= ======= ========
Operating income................................... $12,410 $15,758 $15,769 $ 12,227
======= ======= ======= ========
Net income......................................... $ 4,688 $14,475 $ 7,227 $ 5,735
======= ======= ======= ========
Primary and fully diluted earnings per common
share............................................ $ 0.10 $ 0.31 $ 0.15 $ 0.12
======= ======= ======= ========
Market prices of Class B Common Stock
High............................................. 16 7/8 19 1/8 18 3/4 18 1/8
Low.............................................. 11 3/4 15 15 1/8 14 7/8
</TABLE>
<TABLE>
<CAPTION>
1995
--------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- --------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C> <C>
Operating revenues................................. $62,474 $62,389 $77,962 $ 92,033
======= ======= ======= =======
Operating income................................... $ 7,626 $ 8,831 $11,777 $ 10,164
======= ======= ======= =======
Net income......................................... $ 3,114 $ 4,014 $ 6,230 $ 5,306
======= ======= ======= =======
Primary and fully diluted earnings (loss) per
common share..................................... $ 0.06 $ 0.09 $ 0.14 $ (0.13)
======= ======= ======= =======
Market prices of Class B Common Stock
High............................................. 12 1/4 13 3/4 16 1/2 15 3/4
Low.............................................. 9 7/8 11 5/8 11 5/8 13
</TABLE>
F-26
<PAGE> 95
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below as of December 31,
1996, 1995, 1994, 1993, and 1992, and for each of the years in the five-year
period ended December 31, 1996, are derived from the consolidated financial
statements of the Company, which financial statements have been audited by KPMG
Peat Marwick LLP, independent certified public accountants.
The consolidated financial statements of the Company as of December 31,
1996 and 1995, and for each of the years in the three-year period ended December
31, 1996, are included herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Operating revenues.......................... $332,810 $294,858 $242,050 $208,216 $133,301
-------- -------- -------- -------- --------
Operating expenses
Production and programming................ 178,762 155,685 137,294 112,269 57,393
Selling and marketing..................... 64,544 61,122 49,819 43,281 28,140
New business development.................. 2,317 9,908 4,991 7,868 2,258
General and administrative................ 28,745 27,088 21,967 14,615 6,838
Amortization of goodwill.................. 2,278 2,657 2,532 1,562 --
-------- -------- -------- -------- --------
Total operating expenses.......... 276,646 256,460 216,603 179,595 94,629
-------- -------- -------- -------- --------
Operating income.................. 56,164 38,398 25,447 28,621 38,672
Investment income (loss).................... 2,843 1,883 (2,522) 8,037 1,219
Interest expense............................ (12,551) (12,989) (11,034) (11,792) (10,315)
Minority interests in losses................ 2,359 4,916 5,277 3,475 --
Gain on disposition of assets............... 13,685 -- -- -- --
Other income (expense)...................... (5,640) 522 7,789 -- --
Provision for income taxes.................. (24,735) (14,066) (10,165) (11,048) (11,228)
-------- -------- -------- -------- --------
Income before extraordinary item.......... 32,125 18,664 14,792 17,293 18,348
Extraordinary item--
Loss on early extinguishment of debt...... -- -- -- (52,087) --
-------- -------- -------- -------- --------
Net income (loss)................. 32,125 18,664 14,792 (34,794) 18,348
Dividend requirement on Preferred Stock..... -- -- (2,200) (2,197) (2,203)
Distribution -- exchange of Preferred
Stock..................................... -- (12,163) -- -- --
-------- -------- -------- -------- --------
Net income (loss) available for
Common Stock.................... $ 32,125 $ 6,501 $ 12,592 $(36,991) $ 16,145
======== ======== ======== ======== ========
Primary earnings (loss) per common share
Income before extraordinary item.......... $ 0.69 $ 0.16 $ 0.30 $ 0.39 $ 0.56
Extraordinary item........................ -- -- -- (1.05) --
-------- -------- -------- -------- --------
$ 0.69 $ 0.16 $ 0.30 $ (0.66) $ 0.56
======== ======== ======== ======== ========
Fully diluted earnings (loss) per common
share
Income before extraordinary item.......... $ 0.69 $ 0.16 $ 0.30 $ 0.39 $ 0.55
Extraordinary item........................ -- -- -- (1.05) --
-------- -------- -------- -------- --------
$ 0.69 $ 0.16 $ 0.30 $ (0.66) $ 0.55
======== ======== ======== ======== ========
Average common and common equivalent shares
Primary................................... 48,022 40,755 41,820 49,168 39,587
======== ======== ======== ======== ========
Fully diluted............................. 48,022 40,755 41,820 49,168 43,712
======== ======== ======== ======== ========
(Continued on next page)
</TABLE>
F-27
<PAGE> 96
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
SELECTED CONSOLIDATED FINANCIAL DATA -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA
Operating income before depreciation and
amortization of property and equipment,
goodwill, and other assets................ $ 67,434 $ 49,238 $ 35,058 $ 35,855 $ 40,210
Capital expenditures........................ 9,851 15,562 9,443 11,012 26,493
BALANCE SHEET DATA (AT END OF YEAR)
Cash and cash equivalents................... $ 4,997 $ 32,865 $ 38,716 $ 74,117 $ 32,249
Total assets................................ 568,683 481,427 468,272 497,416 253,272
Long-term film rights payable............... 50,643 32,714 34,530 43,109 19,733
Long-term debt (excluding current
maturities)............................... 171,251 153,752 120,720 146,509 27,282
Convertible Notes........................... 23,000 23,000 23,000 23,000 123,000
Stockholders' equity........................ 201,192 171,303 171,108 153,217 41,674
</TABLE>
F-28
<PAGE> 97
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
As described in Note Q of Notes to Consolidated Financial Statements, the
Company operates in three business segments: Cable Networks, Production &
Distribution, and Live Entertainment.
In addition to historical information, this report contains forward-looking
statements which are subject to risks and uncertainties, including those that
are discussed throughout this report. Accordingly, the Company's actual results
of operations and prospects could differ materially from those anticipated in
the forward-looking statements contained in this report. Undue reliance should
not be placed on these forward-looking statements, which reflect management's
analysis only as of the date hereof.
RESULTS OF OPERATIONS
The following table sets forth operating revenues, operating income or
loss, and depreciation and amortization by business segment.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Operating Revenues
Cable Networks
The Family Channel.............................. $241,124,000 $198,448,000 $169,961,000
FiT TV.......................................... 4,283,000 3,300,000 1,247,000
International Networks.......................... 5,045,000 12,705,000 7,538,000
Intrasegment Eliminations....................... (832,000) (678,000) --
------------ ------------ ------------
249,620,000 213,775,000 178,746,000
Production & Distribution.......................... 104,519,000 86,990,000 70,340,000
Live Entertainment................................. 7,751,000 10,481,000 8,951,000
Intersegment Eliminations.......................... (29,080,000) (16,388,000) (15,987,000)
------------ ------------ ------------
$332,810,000 $294,858,000 $242,050,000
============ ============ ============
Operating Income (Loss)
Cable Networks
The Family Channel.............................. $ 92,141,000 $ 62,816,000 $ 49,927,000
FiT TV.......................................... (5,452,000) (5,790,000) (5,101,000)
International Networks.......................... (9,054,000) (14,127,000) (13,344,000)
------------ ------------ ------------
77,635,000 42,899,000 31,482,000
Production & Distribution.......................... (19,029,000) 1,155,000 (1,066,000)
Live Entertainment................................. (2,782,000) (5,012,000) (1,880,000)
Intersegment Eliminations.......................... 340,000 (644,000) (3,089,000)
------------ ------------ ------------
$ 56,164,000 $ 38,398,000 $ 25,447,000
============ ============ ============
Depreciation and Amortization
Cable Networks
The Family Channel.............................. $ 77,218,000 $ 71,201,000 $ 68,016,000
FiT TV.......................................... 1,509,000 1,373,000 1,059,000
International Networks.......................... 4,688,000 6,739,000 4,969,000
------------ ------------ ------------
83,415,000 79,313,000 74,044,000
Production & Distribution.......................... 100,885,000 63,367,000 48,832,000
Live Entertainment................................. 1,488,000 1,772,000 1,035,000
Intersegment Eliminations.......................... (29,471,000) (13,335,000) (11,069,000)
------------ ------------ ------------
$156,317,000 $131,117,000 $112,842,000
============ ============ ============
</TABLE>
F-29
<PAGE> 98
CABLE NETWORKS SEGMENT INFORMATION
THE FAMILY CHANNEL
The following table sets forth comparative information relating to the
operations of The Family Channel.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Operating revenues
Advertising revenue........................... $139,925,000 $115,417,000 $ 95,953,000
Subscriber fees............................... 100,613,000 82,261,000 71,007,000
Other revenue................................. 586,000 770,000 3,001,000
------------ ------------ ------------
Total revenues............................. 241,124,000 198,448,000 169,961,000
------------ ------------ ------------
Operating expenses*
Production and programming.................... 85,321,000 75,733,000 71,473,000
Selling and marketing......................... 48,991,000 43,287,000 33,408,000
New business development...................... -- 3,521,000 4,307,000
General and administrative.................... 14,671,000 13,091,000 10,846,000
------------ ------------ ------------
Total operating expenses................... 148,983,000 135,632,000 120,034,000
------------ ------------ ------------
Operating income........................... $ 92,141,000 $ 62,816,000 $ 49,927,000
============ ============ ============
</TABLE>
- ---------------
* Includes depreciation and amortization:
<TABLE>
<S> <C> <C> <C>
Amortization of film rights
License agreements......................... $ 36,400,000 $ 31,426,000 $ 26,457,000
Original programming....................... 33,586,000 33,538,000 35,643,000
----------- ----------- -----------
69,986,000 64,964,000 62,100,000
Depreciation and amortization of property and
equipment and other assets..................... 7,232,000 6,237,000 5,916,000
----------- ----------- -----------
$ 77,218,000 $ 71,201,000 $ 68,016,000
=========== =========== ===========
</TABLE>
Operating Revenues
Advertising revenue increased $24,508,000 (or 21.2%) in 1996 as compared to
1995. Advertising revenue increased $19,464,000 (or 20.3%) in 1995 as compared
to 1994. The increase in 1996 is attributable to increases in advertising rates,
households reached, and ratings in 1996 as compared to 1995. The increase in
1995 was due primarily to a relatively stronger advertising climate in 1995 than
in 1994 as well as improved ratings and, to a lesser extent, the continuing
growth in total subscribers. In addition, in 1994, advertising revenue was
negatively affected by the inclusion of a program block centered around
interactive game shows (the "Game Block") on The Family Channel. The interactive
elements of the Game Block resulted in $1,503,000 of revenue in 1994 (included
in other revenue) which was generated by charges for telephone calls from viewer
response to the interactive elements. The interactive elements of the Game Block
were discontinued at the beginning of 1995.
Subscriber fees increased $18,352,000 (or 22.3%) in 1996 over 1995.
Subscriber fees increased $11,254,000 (or 15.8%) in 1995 over 1994. 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 total subscribers. During
1996, the average number of U.S. households reached by The Family Channel
increased 6.0% to 65.7 million and, during 1995, increased 4.7% to 62.0 million
from 59.2 million during 1994. The average number of billed subscribers,
including subscribers to direct broadcast satellite and other alternative
delivery services, increased 5.6% to 62.4 million for 1996 and, for 1995,
increased 6.7% to 59.1 million from 55.4 million for 1994. 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.
F-30
<PAGE> 99
The Family Channel currently reaches approximately 70% 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. Further, the Company expects that direct broadcast satellite and
other alternative delivery services will continue to develop. These developments
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
$9,588,000 (or 12.7%) in 1996 as compared to 1995 and increased $4,260,000 (or
6.0%) for 1995 as compared to 1994. The increase in 1996 is primarily
attributable to an increase in the amortization of film rights. The increase for
1995 includes a $1,035,000 settlement of certain disputed sales and use tax
deficiencies assessed against the Company relating to costs associated with
certain productions of original programming. As a percentage of The Family
Channel's total revenues, production and programming expense amounted to 35.4%,
38.2%, and 42.1% for 1996, 1995, and 1994, respectively.
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 increased $5,704,000
(or 13.2%) in 1996 as compared to 1995. Selling and marketing expense increased
$9,879,000 (or 29.6%) for 1995 as compared to 1994. The increase in 1996 is
primarily attributable to increased advertising and personnel costs. The
increase in 1995 was substantially attributable to costs associated with a new
image campaign and increased personnel costs. As a percentage of The Family
Channel's total revenues, selling and marketing expense amounted to 20.3%,
21.8%, and 19.7% for 1996, 1995, and 1994, respectively.
New Business Development
New business development expense in 1995 and 1994 was due to costs
associated with the development of the Game Block, which has since been
discontinued. Expense for new business development decreased $786,000 (or 18.2%)
for 1995 as compared to 1994. This decrease was primarily attributable to
reduced expenses related to the Game Block. As a percentage of The Family
Channel's total revenues, new business development expense amounted to 1.8% and
2.5% for 1995 and 1994, respectively.
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 $1,580,000 (or 12.1%) in 1996 as
compared to 1995. General and administrative expense increased $2,245,000 (or
20.7%) for 1995 as compared to 1994. The increase in 1996 is primarily
attributable to increased personnel costs and depreciation expense. During 1995,
the Company experienced non-recurring expenses of approximately $541,000
associated with certain state and local tax assessments. The remainder of the
increase during 1995 is primarily attributable to the implementation of a
process reengineering program, increased professional and other fees, and
increased salaries and other benefits. As a percentage of The Family Channel's
total revenues, general and administrative expense amounted to 6.1%, 6.6%, and
6.4% for 1996, 1995, and 1994, respectively.
F-31
<PAGE> 100
Operating Income
Operating income increased $29,325,000 (or 46.7%) in 1996 as compared to
1995 and increased $12,889,000 (or 25.8%) for 1995 over 1994. As a percentage of
The Family Channel's total revenues, operating income amounted to 38.2%, 31.7%,
and 29.4% for 1996, 1995, and 1994, respectively.
Operating income before depreciation and amortization of property and
equipment and other assets increased $30,320,000 (or 43.9%) in 1996 as compared
to 1995 and increased $13,210,000 (or 23.7%) for 1995 over 1994. As a percentage
of The Family Channel's total revenues, operating income before depreciation and
amortization of property and equipment and other assets was 41.2%, 34.8%, and
32.9% for 1996, 1995, and 1994, respectively.
FIT TV
The following table sets forth comparative information relating to the
operations of FiT TV.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Operating revenues
Advertising revenue.............................. $ 2,574,000 $ 1,769,000 $ 1,018,000
Merchandise revenue.............................. 1,709,000 1,531,000 229,000
----------- ----------- -----------
Total revenues................................ 4,283,000 3,300,000 1,247,000
----------- ----------- -----------
Operating expenses*
Production and programming....................... 3,686,000 3,516,000 3,069,000
Selling and marketing............................ 3,859,000 3,682,000 1,784,000
New business development......................... 185,000 91,000 4,000
General and administrative....................... 2,005,000 1,801,000 1,491,000
----------- ----------- -----------
Total operating expenses...................... 9,735,000 9,090,000 6,348,000
----------- ----------- -----------
Operating loss................................ $(5,452,000) $(5,790,000) $(5,101,000)
=========== =========== ===========
</TABLE>
- ---------------
* Includes depreciation and amortization:
<TABLE>
<S> <C> <C> <C>
Amortization of film rights
License agreements............................ $ -- $ -- $ --
Original programming.......................... 1,476,000 1,361,000 1,057,000
--------- --------- ---------
1,476,000 1,361,000 1,057,000
Depreciation and amortization of property and
equipment and other assets...................... 33,000 12,000 2,000
--------- --------- ---------
$1,509,000 $1,373,000 $1,059,000
========= ========= =========
</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. As of December 31,
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 11.7
million households as compared to approximately 9.6 million households as of
December 31, 1995, and approximately 4.6 million households as of December 31,
1994. The operations of FiT TV have generated operating losses and could
continue to generate operating losses for a significant period of time. 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
subscriber levels can be maintained, or that the FiT TV cable network will ever
become profitable in the future.
F-32
<PAGE> 101
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. 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 $983,000 (or 29.8%) during 1996 as compared to
1995 and increased $2,053,000 (or 164.6%) for 1995 over 1994. These increases
are due to higher advertising rates, growth in total subscribers, and an
increase in merchandise sales.
Production and programming expense includes the amortization of film rights
and an intercompany charge for transponder usage (at the rate of $1,800,000 per
annum). Production and programming expense increased $170,000 (or 4.8%) during
1996 as compared to 1995 and increased $447,000 (or 14.6%) for 1995 over 1994.
Selling and marketing expense increased $177,000 (or 4.8%) during 1996 as
compared to 1995 and increased $1,898,000 (or 106.4%) in 1995 as compared to
1994. The increase in 1996 is primarily due to increased consulting fees. The
increase in 1995 was primarily due to expenses incurred to support the launch of
FiT TV on cable systems in addition to expenses incurred to change the name of
the network to FiT TV from Cable Health Club. 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 $204,000 (or 11.3%) during 1996 as compared to
1995 and increased $310,000 (or 20.8%) for 1995 over 1994. These increases are
primarily due to increases in personnel costs.
As described in Note G 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. Although the Company similarly has no
contractual obligation to make additional capital contributions, since the
formation of the FiT TV Partnership, the Company has made loans to the
partnership to fund its operations and currently intends to continue to fund
such operations in the future.
F-33
<PAGE> 102
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>
YEARS ENDED DECEMBER 31
-------------------------------------------
1996 1995 1994
----------- ------------ ------------
<S> <C> <C> <C>
Operating revenues............................. $ 5,045,000 $ 12,705,000 $ 7,538,000
----------- ------------ ------------
Operating expenses*
Production and programming................... 8,501,000 16,291,000 13,935,000
Selling and marketing........................ 1,842,000 5,875,000 3,767,000
New business development..................... 2,169,000 1,646,000 629,000
General and administrative................... 1,587,000 3,020,000 2,551,000
----------- ------------ ------------
Total operating expenses............. 14,099,000 26,832,000 20,882,000
----------- ------------ ------------
Operating loss....................... $(9,054,000) $(14,127,000) $(13,344,000)
=========== ============ ============
The Family Channel (UK)........................ $(2,871,000) $(10,836,000) $(12,715,000)
The Family Channel De Las Americas............. (4,014,000) (1,645,000) --
New business development....................... (2,169,000) (1,646,000) (629,000)
----------- ------------ ------------
Operating loss....................... $(9,054,000) $(14,127,000) $(13,344,000)
=========== ============ ============
</TABLE>
- ---------------
* Includes depreciation and amortization:
<TABLE>
<S> <C> <C> <C>
Amortization of film rights
License agreements........................ $4,416,000 $5,832,000 $4,049,000
Original programming...................... 244,000 830,000 846,000
--------- --------- ---------
4,660,000 6,662,000 4,895,000
Depreciation and amortization of property and
equipment and other assets.................... 28,000 77,000 74,000
--------- --------- ---------
$4,688,000 $6,739,000 $4,969,000
========= ========= =========
</TABLE>
As previously discussed in Note P 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 were discontinued in
November 1996. Certain assets of this network have been contributed to UFC, as
described in Note B of Notes to Consolidated Financial Statements.
Expenses for new business development include costs incurred in connection
with the Company's exploration of opportunities for international expansion. New
business development expenses increased $523,000 in 1996 as compared to 1995,
and increased $1,017,000 in 1995 as compared to 1994. These increases are
primarily attributable to increased personnel costs.
F-34
<PAGE> 103
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>
YEARS ENDED DECEMBER 31
------------------------------------------
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Operating revenues
MTM Operations................................ $102,958,000 $82,138,000 $65,117,000
UK Studio..................................... 1,561,000 4,852,000 5,223,000
------------ ----------- -----------
Total revenues........................ 104,519,000 86,990,000 70,340,000
------------ ----------- -----------
Operating expenses*
Production and programming.................... 105,863,000 70,227,000 55,175,000
Selling and marketing......................... 9,551,000 8,099,000 10,203,000
General and administrative.................... 6,454,000 5,649,000 4,094,000
Amortization of goodwill...................... 1,680,000 1,860,000 1,934,000
------------ ----------- -----------
Total operating expenses.............. 123,548,000 85,835,000 71,406,000
------------ ----------- -----------
Operating income (loss)............... $(19,029,000) $ 1,155,000 $(1,066,000)
============ =========== ===========
MTM Operations.................................. $(16,517,000) $ 1,772,000 $ (606,000)
Family Channel Pictures......................... (2,372,000) (30,000) --
UK Studio....................................... (140,000) (587,000) (460,000)
------------ ----------- -----------
Operating income (loss)............... $(19,029,000) $ 1,155,000 $(1,066,000)
============ =========== ===========
</TABLE>
- ---------------
* Includes depreciation and amortization:
<TABLE>
<S> <C> <C> <C>
Amortization of film rights
License agreements....................................... $ 19,821,000 $20,378,000 $ 5,687,000
Original programming..................................... 78,575,000 40,247,000 40,561,000
----------- ---------- ----------
98,396,000 60,625,000 46,248,000
----------- ---------- ----------
Depreciation and amortization of property and
equipment, goodwill, and other assets
MTM Operations........................................... 2,257,000 2,052,000 2,037,000
UK Studio................................................ 232,000 690,000 547,000
----------- ---------- ----------
2,489,000 2,742,000 2,584,000
----------- ---------- ----------
$100,885,000 $63,367,000 $48,832,000
=========== ========== ==========
</TABLE>
Operating revenue for MTM Operations increased $20,820,000 (or 25.3%) in
1996 as compared to 1995 and increased $17,021,000 (or 26.1%) in 1995 as
compared to 1994.
Operating revenues in 1996 were derived primarily from (i) license fees
from the broadcast networks for series such as The Pretender, Sparks, and Bailey
Kipper's POV, (ii) the domestic syndication of The Cape, America's Funniest Home
Videos, Dr. Quinn, Medicine Woman, and Rescue 911, (iii) the international
distribution of programs produced for the broadcast networks, The Family
Channel, and others, and (iv) sales of series and made-for-television movies to
The Family Channel and other cable networks, including Home & Family, Newhart,
Apollo 11, Night of the Twisters, Panic in the Skies, and various game shows.
Operating revenues in 1995 were derived primarily from (i) license fees
from the broadcast networks for the series Christy and the made-for-television
movie Face on the Milk Carton, (ii) the domestic syndication of America's
Funniest Home Videos and Rescue 911,(iii) the international distribution of
programs produced for the broadcast networks, The Family Channel, and others,
and (iv) sales of series and made-for-television movies to The Family Channel
and other cable networks, including St. Elsewhere, Hill Street Blues, and Stolen
Memories: Secrets from the Rose Garden.
F-35
<PAGE> 104
Operating revenues in 1994 were derived primarily from (i) license fees
from the broadcast networks for the series Christy and the made-for-television
movie Gift of Love, (ii) the domestic syndication of Rescue 911, (iii) the
international distribution of programs produced for the broadcast networks, The
Family Channel, and others, and (iv) sales of series and made-for-television
movies to The Family Channel and other cable networks, including Lou Grant,
Remington Steele, and Evening Shade.
With respect to programming sold on a cash basis, 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, period-to-period comparisons may not be
meaningful. While programs distributed internationally and programs delivered to
broadcast and cable networks are sold on a cash basis, programs distributed
through domestic syndication may be sold on a cash or barter basis, or both. 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. In 1994, Rescue 911
was sold on a cash basis as well as on a cash and barter basis.
Production and programming expense increased $35,636,000 (or 50.7%) in 1996
as compared to 1995 and increased $15,052,000 (or 27.3%) in 1995 as compared to
1994. These increases were primarily attributable to the amortization of film
rights of the programs discussed above.
Selling and marketing expense increased $1,452,000 (or 17.9%) in 1996 over
1995 and decreased $2,104,000 (or 20.6%) in 1995 as compared to 1994. The
increase in 1996 is primarily attributable to increased sales bonuses and
increased marketing costs related to domestic syndication. During 1994, a
licensee associated with one of MTM's productions failed to fully meet its
obligation to provide advertising to television stations airing that program. As
a result, in order to fulfill the obligation to the stations, MTM Operations
purchased advertising time on these stations at a cost of approximately
$1,600,000.
General and administrative expense increased $805,000 (or 14.3%) in 1996 as
compared to 1995 and increased $1,555,000 (or 38.0%) in 1995 as compared to
1994. These increases are due to expenses incurred by Family Channel Pictures
and increased personnel and related costs, as well as the creation in 1996 of
the music publishing and consumer products divisions.
In 1996, MTM began production of four original programming series for
license to the broadcast networks, syndication to domestic television stations,
and distribution in the international marketplace. In contrast, MTM had a
limited production slate in 1995. As a result of this increase in production,
MTM incurred substantially increased development and overhead costs in addition
to the direct costs of production. These costs represent a substantial
investment and have exceeded revenue in the first year of production.
Recoverability of this investment is dependent upon, among other factors,
receiving orders for additional episodes as well as the ratings success of the
programs.
The success of MTM's television programming business depends, in large
part, upon the exhibition of its television series over a sufficient number of
years to allow for further domestic exhibition opportunities. During the initial
years of a one-hour network television series, network and international license
fees normally approximate the production costs of the series and, accordingly,
MTM recognizes only minimal profit or loss during this period. With respect to
first-run domestic syndication programming and half-hour network programming,
the production costs can substantially exceed the combination of barter
advertising revenues or network license fees, as applicable, and international
license fees and, accordingly, MTM recognizes losses during this period.
However, if a sufficient number of episodes of a series are produced, MTM is
reasonably assured that international license fees will increase and that it
will also be able to further exploit the series domestically.
During 1996, The Cape experienced lower than expected ratings, and MTM
recognized losses from the episodes of The Cape delivered to the first-run
syndication market. Losses were also recognized in connection with the episodes
delivered of Sparks, the half-hour network situation comedy. In addition, MTM
incurred substantial development and overhead costs relating to its increased
production activity.
F-36
<PAGE> 105
Also, in 1996, revenue recognized from cash sales, relating to the domestic
syndication of America's Funniest Home Videos and the sale of Newhart, St.
Elsewhere, and Hill Street Blues from MTM's existing library, decreased
approximately $17,200,000 as compared to 1995.
As a result of these and other factors, MTM Operations generated an
operating loss of $16,517,000 in 1996. Based upon the expected delivery of
additional episodes of Sparks and The Cape as well as anticipated new programs,
the Company believes that MTM Operations will continue to generate significant
operating losses in 1997.
In 1995, the operating income of MTM Operations amounted to $1,772,000,
which more than offset the operating losses of $30,000 and $587,000 generated by
Family Channel Pictures and the UK Studio, respectively, and operating income
(loss) before depreciation and amortization of property and equipment, goodwill,
and other assets for MTM Operations, Family Channel Pictures, and the UK Studio
was $3,824,000, $(30,000), and $103,000, respectively, for a total of
$3,897,000. In 1994, MTM Operations and the UK Studio experienced operating
losses of $606,000 and $460,000, respectively, for a total operating loss of
$1,066,000, and operating income before depreciation and amortization of
property and equipment, goodwill, and other assets of $1,431,000 and $87,000,
respectively, for a total of $1,518,000.
Family Channel Pictures has co-produced a motion picture which has not 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 receipts, if any, as well as revenues generated from other sources,
including licensing to The Family Channel. Unless it secures an appropriate
joint venture partner, the Company does not intend to produce and release
additional theatrical motion pictures.
As previously discussed in Note P of Notes to Consolidated Financial
Statements, on April 22, 1996, the Company sold the UK Studio.
Future results of operations of the Company's Production & Distribution
business are primarily dependent upon the Company's ability to profitably
distribute programming (i) obtained in the acquisition of film libraries, (ii)
produced for licensing to the broadcast networks and others, (iii) produced for
The Family Channel, and (iv) acquired under license agreements or otherwise.
As discussed above, the success of MTM's television programming business
depends, in large part, upon the exhibition of its television series over a
sufficient number of years to allow for further domestic exhibition
opportunities. In addition, the production of these television series over a
number of years enhances MTM's existing library of television programming.
Although the Company believes that the rewards associated with producing popular
original programming are worth the associated risks, there can be no assurance
that MTM will be able to profitably produce and distribute its programming.
F-37
<PAGE> 106
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>
YEARS ENDED DECEMBER 31
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Operating revenues............................... $ 7,751,000 $10,481,000 $ 8,951,000
----------- ----------- -----------
Operating expenses*
Production and programming..................... 7,878,000 8,527,000 7,748,000
Selling and marketing.......................... 1,158,000 1,102,000 1,089,000
New business development....................... -- 4,143,000 --
General and administrative..................... 899,000 924,000 1,396,000
Amortization of goodwill....................... 598,000 797,000 598,000
----------- ----------- -----------
Total operating expenses............... 10,533,000 15,493,000 10,831,000
----------- ----------- -----------
Operating loss......................... $(2,782,000) $(5,012,000) $(1,880,000)
=========== =========== ===========
Calvin Gilmore Productions....................... $(2,782,000) $(2,626,000) $(1,880,000)
Ice Capades...................................... -- (2,386,000) --
----------- ----------- -----------
Operating loss......................... $(2,782,000) $(5,012,000) $(1,880,000)
=========== =========== ===========
</TABLE>
- ---------------
* Includes depreciation and amortization:
<TABLE>
<S> <C> <C> <C>
Depreciation and amortization of property and
equipment, goodwill, and other assets.......... $ 1,488,000 $ 1,772,000 $ 1,035,000
========== ========== ==========
</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. As described in Note B of Notes to Consolidated
Financial Statements, the Company sold its interest in the Ice Capades on
December 31, 1995.
In December 1993, the Company acquired a majority interest in Calvin
Gilmore Productions which, at the time, produced three musical variety shows in
Myrtle Beach, South Carolina. Two of these shows were discontinued during 1995
and the related theaters were subsequently leased to third parties. The
remaining show, The Carolina Opry, has generated operating income before
depreciation and amortization of property and equipment, goodwill, and other
assets.
In September, 1995, the Company opened a new musical venue, located in
Charleston, South Carolina. For the year ended December 31, 1996, the operating
loss of Calvin Gilmore Productions was primarily attributable to the operating
loss of the Charleston theater. As a start-up operation, this new venue could
continue to generate 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 increased
levels of attendance, (ii) raising ticket prices without adversely affecting
attendance, (iii) securing talent at a reasonable cost, and (iv) competition in
the Myrtle Beach and Charleston markets. There can be no assurance that the
Company's Live Entertainment business will become profitable in the future.
F-38
<PAGE> 107
OTHER INCOME AND EXPENSE INFORMATION
Investment income increased to $2,843,000 for 1996 from $1,883,000 for
1995, an increase of $960,000. Investment income increased to $1,883,000 for
1995 from an investment loss of $2,522,000 for 1994, an increase of $4,405,000.
The increase in 1996 is due primarily to an increase in net realized and
unrealized gains on marketable securities partially offset by a decrease in
interest earned on cash and cash equivalents. The investment loss for 1994
included a loss of $3,691,000 related to the Company's investment in a certain
media enterprise. This investment was classified as an available-for-sale
security. Accordingly, the Company recognized an impairment related to this
investment because its market value had declined and such decline had been
sustained for more than six months. The investment loss for 1994 also included
net trading losses amounting to $2,338,000 on transactions involving futures
contracts and other derivative securities.
Total interest expense decreased to $12,551,000 for 1996 from $12,989,000
for 1995, a decrease of $438,000 (or 3.4%). Total interest expense increased to
$12,989,000 for 1995 from $11,034,000 for 1994, an increase of $1,955,000 (or
17.7%). The increase in 1995 was attributable to increased borrowings and higher
interest rates in 1995 as compared to 1994.
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. 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 39% share
of the net loss of this joint venture amounted to $4,954,000 and $5,107,000 for
1995 and 1994, respectively.
As described in Note G 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 $938,000.
As previously discussed in Note P 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 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. The
determination of other income and expense includes such adjustments, including a
valuation allowance of $5,300,000 in 1996 relating to the Company's investment
in 7 1/2% convertible notes receivable from the entity that purchased the Ice
Capades from the Company, as described in Note B of Notes to Consolidated
Financial Statements, and a share of loss of $1,500,000 in 1995 relating to the
Company's investment in China Entertainment Television Broadcast Limited. The
determination of other income and expense also included income of $2,521,000 and
$7,291,000 in 1995 and 1994, respectively, resulting from the effects of the
final resolution of certain preacquisition contingencies recorded in the
acquisition of TVS, as described in Note B of Notes to Consolidated Financial
Statements.
F-39
<PAGE> 108
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 the 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.
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------
The Company has financed its growth primarily through internally generated
funds, borrowings, and the sale of shares of Class B Common Stock. In December
1993, the Company entered into the Revolving Credit Facility. In December 1995,
the Company refinanced the Revolving Credit Facility and increased the
commitment thereunder to $250,000,000 from $175,000,000. In January 1995, a
subsidiary of the Company entered into the $10,000,000 Subsidiary Credit
Agreement which has terms substantially the same as those of the Revolving
Credit Facility. The Revolving Credit Facility provides for semi-annual
reductions of one-tenth of the loan commitment, beginning in December 1997, with
a final expiration date in June 2002. 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.
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
$242,121,000 at December 31, 1996, as compared to $161,449,000 at December 31,
1995, an increase of $80,672,000. 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 broadcast networks
and international distribution, (iii) production of The Cape for domestic
syndication and international distribution, and (iv) programming produced for
The Family Channel.
During the year ended December 31, 1996, the Company spent $135,724,000 for
originally-produced programming and $58,142,000 for various rights to programs
produced by others. The Company expects that the total amount to be spent on
programming in 1997 will not be less than the total amount for 1996. 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's total debt (including current maturities), other than the
Convertible Notes, increased to $172,456,000 at December 31, 1996 from
$153,933,000 at December 31, 1995, an increase of $18,523,000. This increase in
borrowings is primarily attributable to the Company's increased production of
original programming.
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
of Notes to Consolidated Financial Statements. 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.
F-40
<PAGE> 109
As of December 31, 1996, the Company had cash and cash equivalents of
$4,997,000 and borrowings available from banks of $99,500,000. 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; however, the
Company may pursue additional capital-raising activities if it believes that
market conditions or acquisition opportunities warrant such activities.
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. 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.
INFLATION
- ---------
Management believes that the effect of inflation has not been material to
the Company. However, inflation in personnel, programming and certain other
costs could significantly affect the Company's future operations.
INCOME TAXES
- --------------
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 IRS. As discussed in Note K of Notes to Consolidated
Financial Statements, this acquisition gave rise to an 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 the Closing Agreement settling certain issues
relating to the Company's income tax return for 1990.
Pursuant to the Closing Agreement, all outstanding issues regarding the
method and amounts of amortization in respect of the assets acquired from CBN
have been resolved. 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.
F-41
<PAGE> 110
SCHEDULE II
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS -- DEDUCTIONS
BEGINNING CHARGED TO ----------------------- BALANCE AT
DESCRIPTION OF YEAR EXPENSE WRITE-OFFS OTHER(1) END OF YEAR
- ------------------------------------ ----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
receivable
For the year ended December 31,
1996......................... $ 6,300,000 $ 551,000 $ 908,000 $1,155,000 $ 4,788,000
=========== ======== ========== ========== ==========
For the year ended December 31,
1995......................... $ 9,400,000 $ 107,000 $3,207,000 $ -- $ 6,300,000
=========== ======== ========== ========== ==========
For the year ended December 31,
1994......................... $13,200,000 $ 9,000 $3,809,000 $ -- $ 9,400,000
=========== ======== ========== ========== ==========
</TABLE>
- ---------------
Note (1): Represents deductions resulting from dispositions.
F-42
<PAGE> 111
INDEPENDENT AUDITORS' REPORT
ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders
International Family Entertainment, Inc.:
Under date of March 17, 1997, we reported on the consolidated balance
sheets of International Family Entertainment, Inc. and subsidiaries (the
"Company") as of December 31, 1996 and 1995, 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, which are included
herein. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated financial
statement schedule shown in the accompanying index. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits.
In our opinion, the related financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Norfolk, Virginia
March 17, 1997
F-43
<PAGE> 112
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
------------ ------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................... $ 14,961,000 $ 4,997,000
Investment in marketable securities......................... 7,886,000 9,053,000
Accounts receivable, net of allowances of $4,689,000 and
$4,662,000................................................. 119,919,000 121,359,000
Film rights, current portion................................ 89,901,000 97,441,000
Prepaid expenses and other.................................. 11,005,000 7,005,000
------------ ------------
Total current assets.................................... 243,672,000 239,855,000
Property and equipment, net of accumulated depreciation and
amortization of $32,102,000 and $29,860,000..................... 62,044,000 62,877,000
Film rights....................................................... 135,554,000 144,680,000
Long-term accounts receivable, net of allowances of $144,000 and
$126,000........................................................ 16,959,000 17,530,000
Investment in equity securities -- related party.................. 35,458,000 35,458,000
Other investments, net of deferred gain of $2,616,000............. 16,846,000 14,889,000
Goodwill, net of accumulated amortization of $9,400,000 and
$8,830,000...................................................... 47,947,000 48,517,000
Deferred tax benefit.............................................. 1,076,000 1,076,000
Other assets...................................................... 4,257,000 3,801,000
------------ ------------
$563,813,000 $568,683,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable............................................ $ 10,895,000 $ 12,874,000
Accrued liabilities......................................... 13,955,000 11,756,000
Accrued participations and residuals........................ 14,707,000 15,613,000
Current portion of film rights payable...................... 48,684,000 44,050,000
Current maturities of debt.................................. 1,158,000 1,205,000
Income taxes payable........................................ 6,002,000 9,214,000
Current portion of deferred income taxes.................... 7,645,000 6,544,000
Deferred income............................................. 9,955,000 7,927,000
------------ ------------
Total current liabilities............................... 113,001,000 109,183,000
Film rights payable............................................... 37,040,000 50,643,000
Long-term debt.................................................... 172,745,000 171,251,000
Accrued interest -- related party................................. 259,000 273,000
Convertible Notes -- related party................................ 23,000,000 23,000,000
Other liabilities, including participations and residuals......... 10,534,000 11,079,000
Commitments and contingencies (Note E)
Minority interests................................................ 1,660,000 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, 32,782,120 and 32,786,538 shares issued and
outstanding................................................ 101,375,000 101,456,000
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......................... (439,000) (562,000)
Unrealized gain (loss) on marketable securities............. (47,000) 351,000
Retained earnings........................................... 53,825,000 49,087,000
------------ ------------
Total stockholders' equity.............................. 205,574,000 201,192,000
------------ ------------
$563,813,000 $568,683,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-44
<PAGE> 113
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Operating revenues................................................ $97,183,000 $74,492,000
----------- -----------
Operating expenses
Production and programming.................................. 55,820,000 37,664,000
Selling and marketing....................................... 17,926,000 15,733,000
New business development.................................... 594,000 488,000
General and administrative.................................. 7,946,000 7,588,000
Amortization of goodwill.................................... 570,000 609,000
----------- -----------
Total operating expenses................................ 82,856,000 62,082,000
----------- -----------
Operating income........................................ 14,327,000 12,410,000
----------- -----------
Other income (expense)
Investment income........................................... 105,000 891,000
Interest expense -- related parties......................... (328,000) (537,000)
Interest expense -- other................................... (2,866,000) (3,102,000)
Minority interests in losses................................ 402,000 1,028,000
Other expense, net.......................................... (3,218,000) (2,347,000)
----------- -----------
Total other (expense)................................... (5,905,000) (4,067,000)
----------- -----------
Income before income taxes.............................. 8,422,000 8,343,000
Provision for income taxes........................................ (3,684,000) (3,655,000)
----------- -----------
Net income.............................................. $ 4,738,000 $ 4,688,000
=========== ===========
Primary and fully diluted earnings per common share............... $ 0.10 $ 0.10
=========== ===========
Primary and fully diluted average common and common equivalent
shares.......................................................... 48,193,720 47,559,442
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-45
<PAGE> 114
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities
Net income.................................................... $ 4,738,000 $ 4,688,000
----------- -----------
Adjustments to reconcile net income to net cash provided by
operating activities
Amortization of film rights................................ 49,385,000 27,434,000
Depreciation and amortization of property and equipment,
goodwill, and other assets............................... 3,036,000 2,862,000
Allowances against investments............................. 2,800,000 1,000,000
Share of losses of affiliates, net......................... 418,000 333,000
Minority interests in losses............................... (402,000) (1,028,000)
Compensation -- Stock Plan................................. 116,000 209,000
Deferred income tax expense................................ 1,842,000 1,710,000
Changes in assets and liabilities.......................... (288,000) (2,931,000)
----------- -----------
Total adjustments........................................ 56,907,000 29,589,000
----------- -----------
Net cash provided by operating activities.................. 61,645,000 34,277,000
----------- -----------
Cash flows from investing activities
Acquisitions of original programming.......................... (32,234,000) (10,671,000)
Other investments, including advances......................... (5,180,000) (7,181,000)
Sales of marketable securities................................ 517,000 --
Additions to property and equipment........................... (1,869,000) (2,225,000)
----------- -----------
Net cash used in investing activities...................... (38,766,000) (20,077,000)
----------- -----------
Cash flows from financing activities
Payments on film rights....................................... (14,288,000) (16,422,000)
Proceeds from debt issuances.................................. 15,000,000 5,650,000
Principal payments on debt.................................... (13,553,000) (4,544,000)
Repurchases of Common Stock................................... (74,000) (2,627,000)
----------- -----------
Net cash used in financing activities...................... (12,915,000) (17,943,000)
----------- -----------
Effect of foreign currency rate changes......................... -- (47,000)
----------- -----------
Increase (decrease) in cash and cash equivalents................ 9,964,000 (3,790,000)
Cash and cash equivalents at beginning of period................ 4,997,000 32,865,000
----------- -----------
Cash and cash equivalents at end of period...................... $ 14,961,000 $ 29,075,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-46
<PAGE> 115
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(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, 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 included in the
Company's Annual Report on Form 10-K 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.
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 months ended March 31, 1997 and 1996, 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. The minority partner's share of the net loss resulting
from the operations of The Family Channel (UK) amounted to $1,026,000 for the
three months ended March 31, 1996. On April 22, 1996, the Company consummated
the sale of its 61% interest in The Family Channel (UK) to Flextech. As
consideration for this transaction, the Company received approximately
$4,600,000 in cash and 5,792,008 shares of Flextech's convertible redeemable
non-voting common stock. Subsequent to March 31, 1997, this common stock was
converted on a share-for-share basis into Flextech voting common stock which is
listed on the London Stock Exchange.
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
F-47
<PAGE> 116
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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., 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
$402,000 for the three month period ended March 31, 1997.
NOTE D -- SUPPLEMENTAL CASH FLOW INFORMATION
Total interest costs paid were $3,406,000 and $3,221,000 during the three
months ended March 31, 1997 and 1996, respectively. Income taxes paid during the
three months ended March 31, 1997 and 1996 were approximately $5,657,000 and
$1,001,000, respectively.
Non-cash investing and financing included the acquisition of film rights
under license agreements which aggregated approximately $5,026,000 and
$19,700,000 for the three months ended March 31, 1997 and 1996, respectively.
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 March 31, 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 March 31, 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
promotion and 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. Such valuation allowance, which amounted to $2,800,000 and $1,000,000 for
the three months ended March 31, 1997 and 1996, respectively, is reflected in
the determination of other income and expense in the accompanying Consolidated
Statements of Operations.
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.
The Company leases office facilities 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.
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
F-48
<PAGE> 117
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
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, 1996.
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
$225,455,000 at March 31, 1997, as compared to $242,121,000 at December 31,
1996.
During the year ended December 31, 1996, the Company spent $135,724,000 for
originally-produced programming and $58,142,000 for various rights to programs
produced by others. The Company expects that the total amount to be spent on
programming in 1997 will not be less than the total amount for 1996. 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.
Guarantees
The Company has guaranteed a $12,000,000 bank credit facility for a certain
promotion and marketing enterprise in which the Company holds convertible notes.
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.
Liquidity
The Company has financed its growth primarily through internally generated
funds, borrowings, and the sale of shares of Class B Common Stock. As of March
31, 1997, the Company had cash, cash equivalents, and marketable securities of
$22,847,000 and borrowings available from banks of $98,000,000. In addition, the
Company holds 5,792,008 shares of Flextech's voting common stock with a market
value of approximately $59,000,000 as of May 2, 1997.
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; however, the
Company may pursue additional capital-raising activities if it believes that
market conditions or acquisition opportunities warrant such activities.
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.
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.
F-49
<PAGE> 118
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
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 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, until 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, until the discontinuance of its operations on
November 8, 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-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.
F-50
<PAGE> 119
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
The following table sets forth operating revenues, operating income or
loss, and depreciation and amortization by business segment.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Operating Revenues
Cable Networks
The Family Channel............................................. $69,716,000 $57,164,000
FiT TV......................................................... 1,001,000 1,230,000
International Networks......................................... -- 3,764,000
Intrasegment Eliminations...................................... (194,000) (242,000)
----------- -----------
70,523,000 61,916,000
Production & Distribution......................................... 35,136,000 14,271,000
Live Entertainment................................................ 1,294,000 1,043,000
Intersegment Eliminations......................................... (9,770,000) (2,738,000)
----------- -----------
$97,183,000 $74,492,000
=========== ===========
Operating Income (Loss)
Cable Networks
The Family Channel............................................. $27,691,000 $21,989,000
FiT TV......................................................... (1,629,000) (1,255,000)
International Networks......................................... (465,000) (3,621,000)
----------- -----------
25,597,000 17,113,000
Production & Distribution......................................... (10,531,000) (3,580,000)
Live Entertainment................................................ (825,000) (1,531,000)
Intersegment Eliminations......................................... 86,000 408,000
----------- -----------
$14,327,000 $12,410,000
=========== ===========
Depreciation and Amortization
Cable Networks
The Family Channel............................................. $23,145,000 $18,823,000
FiT TV......................................................... 400,000 261,000
International Networks......................................... -- 2,421,000
----------- -----------
23,545,000 21,505,000
Production & Distribution......................................... 38,531,000 11,089,000
Live Entertainment................................................ 372,000 381,000
Intersegment Eliminations......................................... (10,027,000) (2,679,000)
----------- -----------
$52,421,000 $30,296,000
=========== ===========
</TABLE>
F-51
<PAGE> 120
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
CABLE NETWORKS SEGMENT INFORMATION
THE FAMILY CHANNEL
The following table contains comparative information relating to the
operations of The Family Channel.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Operating revenues
Advertising revenue.......................................... $40,314,000 $32,722,000
Subscriber fees.............................................. 27,914,000 24,296,000
Other revenue................................................ 1,488,000 146,000
----------- -----------
Total revenues............................................ 69,716,000 57,164,000
----------- -----------
Operating expenses*
Production and programming................................... 25,127,000 20,735,000
Selling and marketing........................................ 13,139,000 11,045,000
General and administrative................................... 3,759,000 3,395,000
----------- -----------
Total operating expenses.................................. 42,025,000 35,175,000
----------- -----------
Operating income.......................................... $27,691,000 $21,989,000
=========== ===========
</TABLE>
- ---------------
* Includes depreciation and amortization:
<TABLE>
<S> <C> <C>
Amortization of film rights
Original programming...................................... $ 12,469,000 $ 7,168,000
License agreements........................................ 8,650,000 9,943,000
----------- -----------
21,119,000 17,111,000
Depreciation and amortization of property and equipment and
other assets................................................... 2,026,000 1,712,000
----------- -----------
$ 23,145,000 $ 18,823,000
=========== ===========
</TABLE>
Operating Revenues
Advertising revenue increased $7,592,000 (or 23.2%) for the first quarter
of 1997 as compared to the first quarter of 1996. This increase in advertising
revenue is attributable to increased advertising rates, as well as the increase
in the average number of U.S. households reached described below.
Subscriber fees increased $3,618,000 (or 14.9%) for the first quarter of
1997 over the first quarter of 1996. During the first three months of 1997, the
average number of U.S. households reached by The Family Channel increased 6.2%
to 68.6 million from 64.6 million for the first three months of 1996. The number
of billed subscribers, including subscribers to direct broadcast satellite and
other alternative delivery services, increased 5.7% to 64.7 million for the
first three months of 1997 from 61.2 million for the first three months of 1996.
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.
The Family Channel currently reaches approximately 71% 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. Further, the Company expects that direct broadcast satellite and
other alternative delivery services will continue to develop. These developments
may afford the Company additional opportunities to increase the number of
subscribers to The Family Channel, and thus to 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
F-52
<PAGE> 121
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
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
$4,392,000 (or 21.2%) for the first quarter of 1997 as compared to the first
quarter of 1996. This increase is primarily attributable to an increase in the
amortization of film rights. As a percentage of The Family Channel's total
revenues, production and programming expense amounted to 36.0% for the three
month period ended March 31, 1997 as compared with 36.3% for the corresponding
period 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 increased $2,094,000
(or 19.0%) for the first quarter of 1997 as compared to the first quarter of
1996. This increase resulted from, among other things, increased expenditures
for consumer advertising. As a percentage of The Family Channel's total
revenues, selling and marketing expense amounted to 18.8% for the three month
period ended March 31, 1997 as compared with 19.3% for the corresponding period
of the prior year.
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 $364,000 (or 10.7%) for the first
quarter of 1997 as compared to the first quarter of 1996. As a percentage of The
Family Channel's total revenues, general and administrative expense amounted to
5.4% for the three month period ended March 31, 1997 as compared to 5.9% for the
corresponding period of the prior year.
Operating Income
Operating income increased $5,702,000 (or 25.9%) for the first quarter of
1997 as compared to the first quarter of 1996. As a percentage of The Family
Channel's total revenues, operating income was 39.7% for the three month period
ended March 31, 1997 as compared with 38.5% for the corresponding period of the
prior year.
Operating income before depreciation and amortization of property and
equipment and other assets increased $6,016,000 (or 25.4%) for the first quarter
of 1997 as compared to the first quarter of 1996. 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 month period ended
March 31, 1997 was 42.6% as compared to 41.5% for the corresponding period in
1996.
F-53
<PAGE> 122
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
FIT TV
The following table sets forth comparative information relating to the
operations of FiT TV.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Operating revenues
Advertising revenue.......................................... $ 736,000 $ 617,000
Merchandise revenue.......................................... 265,000 613,000
----------- -----------
Total revenues............................................ 1,001,000 1,230,000
----------- -----------
Operating expenses*
Production and programming................................... 937,000 809,000
Selling and marketing........................................ 972,000 1,088,000
New business development..................................... 138,000 68,000
General and administrative................................... 583,000 520,000
----------- -----------
Total operating expenses.................................. 2,630,000 2,485,000
----------- -----------
Operating loss............................................ $(1,629,000) $(1,255,000)
=========== ===========
</TABLE>
- ---------------
* Includes depreciation and amortization:
<TABLE>
<S> <C> <C>
Amortization of film rights
Original programming...................................... $389,000 $256,000
License agreements........................................ -- --
------- -------
389,000 256,000
Depreciation and amortization of property and equipment and
other assets................................................. 11,000 5,000
------- -------
$400,000 $261,000
======= =======
</TABLE>
F-54
<PAGE> 123
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
- ---------------
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. On April 30, 1996,
the Company, Liberty Media, and Reebok formed the FiT TV Partnership to own and
operate FiT TV cable network. FiT TV had previously been owned and operated by
CHTV. As of March 31, 1997, 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 12.0 million households as compared to approximately
10.9 million households as of March 31, 1996. However, carriage on a part-time
basis constituted a greater portion of the subscriber base as of March 31, 1997
as compared to March 31, 1996. In addition, FiT TV programming is currently
seen, on a part-time basis, on The Family Channel and was also seen, through
August 1996, on the Prime network.
The FiT TV cable network is not currently carried by any direct broadcast
satellite service, although the Company is negotiating for such carriage with
the three major providers of such service. There can be no assurance that these
negotiations will be successful.
Currently, FiT TV programming is delivered via C-band analog satellite
transmission, which enables the programming to be received by home television
receive-only dish owners without subscription. FiT TV intends to begin
delivering its programming via digital satellite transmission during 1997. In
such event, in order to continue to receive FiT TV programming, C-band home
television receive-only dish owners will be required to acquire digital decoding
equipment and subscribe to a package of programming services which includes FiT
TV. There can be no assurance that FiT TV will be bought in such a package of
services. As of March 31, 1997, these C-band home television dish owners
represent approximately one-third of FiT TV's subscriber base.
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. 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 FiT TV. Industry regulation may also have an impact on
such trends.
Merchandise revenue decreased $348,000 (or 56.8%) for the first quarter of
1997 as compared to the first quarter of 1996. This decrease is attributable to
a variety of factors, including a decrease in the number of popular fitness
products in the marketplace as well as a decrease in the number of full-time
subscribers and the discontinuance of FiT TV programming on the Prime network.
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 $128,000 (or 15.8%) for the
first quarter of 1997 as compared to the first quarter of 1996.
Expenses for new business development include costs incurred in connection
with the Company's exploration of opportunities for the international expansion
of FiT TV. New business development expense increased $70,000 for the first
quarter of 1997 as compared to the first quarter of 1996.
General and administrative expense includes, among other things,
intercompany charges for services and support provided to FiT TV. General and
administrative expense increased $63,000 (or 12.1%) for the first quarter of
1997 as compared to the first quarter of 1996.
F-55
<PAGE> 124
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
The operations of FiT TV have generated operating losses and could continue
to generate operating losses for a significant period of time. 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 subscriber
levels can be maintained, or that the FiT TV cable network will ever become
profitable in the future.
Reebok and Liberty Media have no further obligations to make capital
contributions to the FiT TV Partnership. Although the Company similarly has no
contractual obligations to make additional capital contributions, since the
formation of the FiT TV Partnership, the Company has made loans to the
partnership to fund its operations and currently intends to continue to fund
such operations in the future.
INTERNATIONAL NETWORKS
The following table sets forth comparative information relating to
international new business development costs as well as the operations of The
Family Channel (UK) and The Family Channel De Las Americas in 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31
------------------------
1997 1996
--------- -----------
<S> <C> <C>
Operating revenues............................................. $ -- $ 3,764,000
----------- ------------
Operating expenses*
Production and programming................................... -- 4,962,000
Selling and marketing........................................ -- 1,300,000
New business development..................................... 465,000 429,000
General and administrative................................... -- 694,000
----------- ------------
Total operating expenses............................. 465,000 7,385,000
----------- ------------
Operating loss....................................... $(465,000) $(3,621,000)
=========== ============
The Family Channel (UK)........................................ $ -- $(2,068,000)
The Family Channel De Las Americas............................. -- (1,124,000)
New business development....................................... (465,000) (429,000)
----------- ------------
Operating loss....................................... $(465,000) $(3,621,000)
=========== ============
</TABLE>
- ---------------
* Includes depreciation and amortization:
<TABLE>
<S> <C> <C>
Amortization of film rights
Original programming...................................... $ -- $ 97,000
License agreements........................................ -- 2,306,000
--------- ---------
-- 2,403,000
Depreciation and amortization of property and equipment and
other assets................................................... -- 18,000
--------- ---------
$ -- $2,421,000
========= =========
</TABLE>
As previously discussed, on April 22, 1996, the Company sold its 61%
interest in The Family Channel (UK). The operations of The Family Channel De Las
Americas were discontinued in November 1996.
Expenses for new business development include costs incurred in connection
with the Company's exploration of opportunities for international expansion. New
business development expenses increased $36,000 for the first quarter of 1997 as
compared to the first quarter of 1996.
F-56
<PAGE> 125
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
In November 1996, the Company and a third party formed United Family
Communications, LLC ("UFC") as described in Note E of Notes to Consolidated
Financial Statements. The Company made a cash contribution and 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. The Company's share of losses of this venture during the first quarter of
1997 was approximately $452,000, which amount is reflected in the determination
of other income and expense.
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 ENDED MARCH 31
---------------------------
1997 1996
------------ -----------
<S> <C> <C>
Operating revenues
MTM Operations............................................. $ 35,136,000 $13,048,000
UK Studio.................................................. -- 1,223,000
------------ -----------
Total revenues..................................... 35,136,000 14,271,000
------------ -----------
Operating expenses*
Production and programming................................. 38,767,000 13,241,000
Selling and marketing...................................... 3,822,000 2,255,000
General and administrative................................. 2,658,000 1,896,000
Amortization of goodwill................................... 420,000 459,000
------------ -----------
Total operating expenses........................... 45,667,000 17,851,000
------------ -----------
Operating loss..................................... $(10,531,000) $(3,580,000)
============ ===========
MTM Operations............................................... $ (9,822,000) $(3,396,000)
Family Channel Pictures...................................... (709,000) (137,000)
UK Studio.................................................... -- (47,000)
------------ -----------
Operating loss..................................... $(10,531,000) $(3,580,000)
============ ===========
</TABLE>
- ---------------
* Includes depreciation and amortization:
<TABLE>
<S> <C> <C>
Amortization of film rights
Original programming.................................................... $34,900,000 $3,241,000
License agreements...................................................... 3,004,000 7,102,000
----------
37,904,000 10,343,000
----------
Depreciation and amortization of property and
equipment, goodwill, and other assets
MTM Operations.......................................................... 627,000 571,000
UK Studio............................................................... -- 175,000
----------
627,000 746,000
----------
$38,531,000 $11,089,000
==========
</TABLE>
Operating revenue for MTM Operations increased $22,088,000 (or 169.3%) for
the first quarter of 1997 as compared to the first quarter of 1996.
Operating revenues for the first quarter of 1997 were derived primarily
from (i) license fees from the broadcast networks for series such as The
Pretender and Sparks, (ii) the domestic syndication of The Cape and Dr. Quinn,
Medicine Woman, (iii) the international distribution of programs produced for
the broadcast networks, The Family Channel, and others, and (iv) sales of series
and made-for-television movies to The
F-57
<PAGE> 126
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
Family Channel and other cable networks, including Home & Family, Ditchdigger's
Daughters, Dog's Best Friend, and various game shows.
Operating revenues for the first quarter of 1996 were derived primarily
from (i) the domestic syndication of America's Funniest Home Videos and Rescue
911, (ii) the international distribution of programs produced for The Family
Channel and others, and (iii) sales of made-for-television movies, such as Night
of the Twisters, to The Family Channel.
With respect to programming sold on a cash basis, 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, period-to-period comparisons may not be
meaningful. While programs distributed internationally and programs delivered to
broadcast and cable networks are sold on a cash basis, programs distributed
through domestic syndication may be sold on a cash or barter basis, or both. 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.
Production and programming expense increased $25,526,000 (or 192.8%) for
the first quarter of 1997 as compared to the corresponding period of the prior
year. This increase is primarily attributable to the amortization of film rights
of the programs discussed above.
Selling and marketing expense increased $1,567,000 (or 69.5%) for the first
quarter of 1997 as compared to the corresponding period of the prior year. This
increase is primarily attributable to certain severance arrangements arising in
the first quarter of 1997 in connection with a reduction in the domestic
syndication sales force.
General and administrative expense increased $762,000 (or 40.2%) for the
first quarter of 1997 as compared to the corresponding period of the prior year.
This increase is primarily due to increased personnel and related costs
(including certain severance costs) incurred by Family Channel Pictures.
In mid-1996, MTM began production of four original programming series for
license to the broadcast networks, syndication to domestic television stations,
and distribution in the international marketplace. As a result of this increase
in production, MTM incurred substantially increased development and overhead
costs in addition to the direct costs of production. These costs represent a
substantial investment and have exceeded revenue in the first year of
production. Recoverability of this investment is dependent upon, among other
factors, receiving orders for additional episodes as well as the ratings success
of the programs. The Company does not expect to receive orders for or to renew
at least two of the aforementioned four original programming series.
The success of MTM's television programming business depends, in large
part, upon the exhibition of its television series over a sufficient number of
years to allow for further domestic exhibition opportunities. During the initial
years of a one-hour network television series, network and international license
fees normally approximate the production costs of the series and, accordingly,
MTM recognizes only minimal profit or loss during this period. With respect to
first-run domestic syndication programming and half-hour network programming,
the production costs can substantially exceed the combination of barter
advertising revenues or network license fees, as applicable, and international
license fees and, accordingly, MTM recognizes losses during this period.
However, if a sufficient number of episodes of a series are produced, MTM is
reasonably assured that international license fees will increase and that it
will also be able to further exploit the series domestically.
During the fall of 1996, The Cape experienced lower than expected ratings,
and MTM recognized losses from the episodes of The Cape delivered to the
first-run syndication market. Losses were also recognized in connection with the
episodes delivered of Sparks, the half-hour network situation comedy. During the
first quarter of 1997, MTM delivered additional episodes of Sparks and The Cape
and, as a result, MTM continued
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INTERNATIONAL FAMILY ENTERTAINMENT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
to recognize losses in connection with these programs. In addition, MTM incurred
substantial development and overhead costs relating to its increased production
activity.
As a result of these and other factors, MTM Operations generated an
operating loss of $9,822,000 for the first quarter of 1997. However, significant
fluctuations in revenue and income may occur from period to period depending on
the availability dates of programs. 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. Based upon the delivery of four additional
episodes of Sparks and the final three episodes of The Cape in the second
quarter of 1997, as well as the anticipated delivery of additional episodes of
currently produced series and any new programs for the 1997-98 television
season, the Company believes that MTM Operations will continue to generate
significant operating losses in 1997.
Family Channel Pictures has co-produced a motion picture which has not 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 receipts, if any, as well as revenues generated from other sources,
including licensing to The Family Channel. Unless it secures an appropriate
joint venture partner, the Company does not intend to produce and release
additional theatrical motion pictures.
As previously discussed, on April 22, 1996, the Company sold the UK Studio.
Future results of operations of the Company's Production & Distribution
business are primarily dependent upon the Company's ability to profitably
distribute programming (i) obtained in the acquisition of film libraries, (ii)
produced for licensing to the broadcast networks and others, (iii) produced for
The Family Channel, and (iv) acquired under license agreements or otherwise.
As discussed above, the success of MTM's television programming business
depends, in large part, upon the exhibition of its television series over a
sufficient number of years to allow for further domestic exhibition
opportunities. In addition, the production of these television series over a
number of years enhances MTM's existing library of television programming.
Although the Company believes that the rewards associated with producing popular
original programming are worth the associated risks, there can be no assurance
that MTM will be able to profitably produce and distribute its programming.
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<PAGE> 128
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
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 ENDED MARCH
31
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Operating revenues............................................. $ 1,294,000 $ 1,043,000
----------- -----------
Operating expenses*
Production and programming................................... 1,577,000 1,862,000
Selling and marketing........................................ 214,000 243,000
General and administrative................................... 178,000 319,000
Amortization of goodwill..................................... 150,000 150,000
----------- -----------
Total operating expenses............................. 2,119,000 2,574,000
----------- -----------
Operating loss....................................... $ (825,000) $(1,531,000)
=========== ===========
</TABLE>
- ---------------
* Includes depreciation and amortization:
<TABLE>
<S> <C> <C>
Depreciation and amortization of property and equipment,
goodwill, and other assets.................................... $ 372,000 $ 381,000
=========== ===========
</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 and during holiday vacation periods, such as
Christmas.
Future results of operations of the Company's Live Entertainment business
are primarily dependent upon, among other factors, (i) achieving increased
levels of attendance, (ii) raising ticket prices without adversely affecting
attendance, (iii) securing talent at a reasonable cost, and (iv) competition in
the Myrtle Beach and Charleston markets. There can be no assurance that the
Company's Live Entertainment business will become profitable in the future.
OTHER INCOME AND EXPENSE INFORMATION
Investment income decreased $786,000 for the first quarter of 1997 as
compared to the first quarter of 1996. Investment income in the first quarter of
1996 included approximately $500,000 of realized and unrealized gains on trading
securities.
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. 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), amounted to
$1,026,000 for the first quarter of 1996.
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 amounted to $402,000 for the first quarter of 1997.
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. The
determination of other income and expense includes such adjustments, including a
valuation allowance of $2,800,000 and $1,000,000 for the first quarter of 1997
and 1996, respectively, relating to the Company's investment in convertible
notes receivable from the entity that purchased the Ice Capades from the
Company. Other
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<PAGE> 129
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
expense for the first quarter of 1996 also included an adjustment of $1,350,000
relating to the Company's investment in China Entertainment Television Broadcast
Limited (which was sold in November 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 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.
INFLATION
Management believes that the effect of inflation has not been material to
the Company. However, inflation in personnel, programming, and certain other
costs could significantly affect the Company's future operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share, which
revised the calculation of earnings per share for publicly held companies in
certain situations. SFAS No. 128 is effective for fiscal years ending after
December 15, 1997. In the opinion of management, SFAS No. 128 is not expected to
have a material impact on the Company's calculation of earnings per share.
F-61
<PAGE> 130
ANNEX I
-------
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated as of June 11,
1997, is by and among FOX KIDS WORLDWIDE, INC., a Delaware corporation ("FKWW"),
FOX KIDS MERGER CORPORATION, a Delaware corporation and wholly-owned subsidiary
of FKWW ("FKW Sub"), and INTERNATIONAL FAMILY ENTERTAINMENT, INC., a Delaware
corporation (the "Company").
RECITALS
WHEREAS, it is the intention of the parties that FKW Sub merge with and
into the Company, upon the terms and subject to the conditions set forth herein
(the "Merger"), with the Company surviving as a wholly owned subsidiary of FKWW;
WHEREAS,
(a) M.G. "Pat" Robertson, individually and as trustee of each of the
Robertson Charitable Remainder Unitrust, u/t/a dated January 22,
1990 (the "PR Charitable Trust"), the Gordon P. Robertson
Irrevocable Trust, u/t/a dated December 18, 1996, the Elizabeth F.
Robinson Irrevocable Trust, u/t/a dated December 18, 1996, and the
Ann R. Lablanc Irrevocable Trust, u/t/a dated December 18, 1996 (the
Gordon P. Robertson Irrevocable Trust, the Elizabeth F. Robinson
Irrevocable Trust and the Ann R. Lablanc Irrevocable Trust,
together, the "Irrevocable Trusts"), Lisa N. Robertson and Timothy
B. Robertson ("Tim Robertson") as joint tenants, and Tim Robertson,
individually, as trustee of each of the Timothy and Lisa Robertson
Children's Trust, u/t/a dated September 18, 1995 (the "TR Family
Trust") and the Timothy B. Robertson Charitable Trust, u/t/a dated
December 30, 1996 (the "TR Charitable Trust"), and as custodian to
and for each of Abigail H. Robertson, Laura N. Robertson, Elizabeth
C. Robertson, Willis H. Robertson and Caroline S. Robertson under
the Virginia Uniform Transfers to Minors Act (Pat Robertson, the PR
Charitable Trust, the Irrevocable Trusts, Lisa N. Robertson, Tim
Robertson, the TR Family Trust and the TR Charitable Trust being
sometimes collectively referred to herein as the "Robertson
Sellers"), have agreed to sell to FKWW, all of the outstanding
shares of Class A Common Stock, par value $0.01 per share, of the
Company (the "Class A Stock"), in the form of Class B Common Stock,
par value $0.01 per share, of the Company (the "Class B Stock")
issuable upon conversion thereof, and the shares of Class B Stock
owned by them or issuable to them upon exercise of outstanding stock
options, pursuant to that certain Stock Purchase Agreement, dated of
even date herewith, by and among
<PAGE> 131
FKWW, on the one hand, and each of the Robertson Sellers, on the
other hand (as amended from time to time in accordance with its
terms, the "Robertson Purchase Agreement");
(b) The Christian Broadcasting Network, Inc., a Virginia corporation
("CBN"), has agreed to sell to FKWW, all of the Class B Stock owned
by it, pursuant to the terms of that certain Stock Purchase
Agreement, dated of even date herewith, by and between FKWW and CBN
(as amended from time to time in accordance with its terms, the "CBN
Purchase Agreement");
(c) Regent University, a Virginia corporation ("Regent"), has agreed to
sell to FKWW all of the Class B Stock owned by it, pursuant to the
terms of that certain Stock Purchase Agreement, dated of even date
herewith, by and between FKWW and Regent (as amended from time to
time in accordance with its terms, the "Regent Purchase Agreement,"
and, collectively with the Robertson Purchase Agreement and the CBN
Purchase Agreement, the "Stock Purchase Agreements");
(d) Liberty IFE, Inc., a Colorado corporation ("LIFE"), has agreed to
contribute to FKWW all of the shares of Class C Common Stock, par
value $0.01 per share, of the Company (the "Class C Stock," and
together with the Class A Stock and the Class B Stock, the "Company
Stock"), and $23 million principal amount of 6% Convertible Secured
Notes due 2004 of the Company (the "Convertible Notes"), in exchange
for shares of Series A Preferred Stock, par value $0.01 per share,
of FKWW pursuant to that certain Contribution and Exchange
Agreement, dated of even date herewith, by and among LIFE, Liberty
Media Corporation, a Delaware corporation, and FKWW (as amended from
time to time in accordance with its terms, the "Contribution
Agreement," and together with the Stock Purchase Agreements, the
"Other Transaction Agreements"); and
WHEREAS, the respective Boards of Directors of FKWW, FKW Sub and the
Company have each unanimously approved the Merger, in accordance with the
General Corporation Law of the State of Delaware (the "DGCL"), and the Board of
Directors of the Company has recommended the Merger to the Company's
stockholders;
WHEREAS, this Agreement and the Merger shall be approved by the
stockholders of the Company for purposes of the DGCL at such time as the Company
is in receipt of written consents approving this Agreement and the Merger
executed by the holders of that number of shares of Class A Stock and Class B
Stock (voting as a single class) representing the right to cast a majority of
the votes entitled to be cast at a meeting to consider the Agreement and the
Merger;
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<PAGE> 132
WHEREAS, immediately following execution of this Agreement by the Company
and concurrently with the execution of this Agreement by FKWW and FKW Sub, the
Robertson Sellers, CBN and Regent (which holders hold of record a number of
shares of Class A Stock and Class B Stock representing a majority of the votes
entitled to be cast at a meeting to consider the Agreement and the Merger) are
delivering their written consent (the "Consent") approving this Agreement and
the Merger (a copy of which is being provided to FKWW and FKW Sub), which
consent constitutes the only action necessary by stockholders of the Company
required in order to authorize this Agreement and the Merger under the Company's
Amended and Restated Certificate of Incorporation and the DGCL; and
WHEREAS, The News Corporation Limited ("Guarantor") has guaranteed the
obligations of FKWW and FKW Sub under each of this Agreement and the Stock
Purchase Agreements by separate Guaranty Agreements (the Guaranty Agreement
delivered in connection with this Agreement, being referred to herein as the
"Guaranty") delivered to the Company, the Robertson Sellers, CBN and Regent.
NOW, THEREFORE, in consideration of the premises and the respective
representations, warranties and covenants herein contained, and for other good
and valuable consideration the receipt and adequacy of which is hereby
acknowledged, FKWW, FKW Sub and the Company hereby agree as set forth below. An
index of defined terms used throughout this Agreement appears at Section 9.16
hereof.
ARTICLE I
THE MERGER
1.1 The Merger. Upon the terms and subject to the conditions of this
Agreement, at the Effective Time (as defined in Section 1.3 hereof), in
accordance with this Agreement and the DGCL, FKW Sub shall be merged with and
into the Company, the separate existence of FKW Sub shall cease, and the Company
shall continue as the surviving corporation (the "Surviving Corporation"). The
Company and FKW Sub are sometimes referred to herein as the "Constituent
Corporations."
1.2 Effect of the Merger. The Merger shall have the effects set
forth in the DGCL. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time, all of the properties, rights, privileges,
powers and franchises of the Company and FKW Sub shall vest in the Surviving
Corporation, and all debts, liabilities and duties of the Company and FKW Sub
shall become the debts, liabilities and duties of the Surviving Corporation.
1.3 Consummation of the Merger. On the later of (i) two business
days after the satisfaction or waiver of the conditions set forth in Article VII
hereof or (ii) the 20th calendar day after the Information Statement is first
sent or given to the Company's stockholders, the parties hereto shall cause the
Merger to be consummated by filing with the Secretary of State of the State of
Delaware a certificate of merger in such form as required by, and executed in
accordance with, the relevant provisions of the DGCL and take all such further
actions as may be required by law to make the Merger effective (the "Merger
Filing"). The
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<PAGE> 133
Merger shall become effective at the time of day on the date that the
certificate of merger is filed with the Secretary of State of the State of
Delaware or such later time as may be mutually agreed to by the parties hereto
and specified in the Merger Filing (the "Effective Time").
1.4 Certificate of Incorporation and Bylaws. The Amended and
Restated Certificate of Incorporation of the Company in effect immediately prior
to the Effective Time shall be the Certificate of Incorporation of the Surviving
Corporation. The By-Laws of FKW Sub in effect immediately prior to the Effective
Time shall be the By-Laws of the Surviving Corporation.
1.5 Directors and Officers. The directors of the Company immediately
prior to the Effective Time shall be the initial directors of the Surviving
Corporation, and the officers of the Company immediately prior to the Effective
Time shall be the initial officers of the Surviving Corporation, in each case
until their successors are duly elected and qualified.
1.6 Conversion of Securities. At the Effective Time, by virtue of
the Merger and without any action on the part of FKW Sub, the Company, the
Surviving Corporation or the holder of any outstanding share of the Class A
Stock, Class B Stock or Class C Stock (each, a "Share" and collectively, the
"Shares"):
(a) Each Share which is issued and outstanding immediately
prior to the Effective Time (other than Shares held by FKWW, FKW Sub or the
Company or by any Subsidiary of FKWW, FKW Sub or the Company) shall be canceled
and extinguished and be converted into and become a right to receive (i) in the
case of all such Shares other than Dissenting Shares, a cash payment equal to
$35.00 per Share (subject to adjustment as provided for in Section 1.6(d)
below), without interest (the "Merger Consideration"), and (ii) in the case of
Dissenting Shares, the consideration set forth in Section 1.7 hereof;
(b) Each Share which is issued and outstanding immediately
prior to the Effective Time and held by FKWW, FKW Sub, or the Company or by any
Subsidiary of FKWW, FKW Sub, or the Company shall be canceled and extinguished
and no consideration shall be paid therefor;
(c) Each share of capital stock of FKW Sub, par value $0.001
per share, outstanding immediately prior to the Effective Time shall be
converted into and become one share of Class B Common Stock, par value $0.001
per share, of the Surviving Corporation; and
(d) The Merger Consideration shall be increased to an amount
which equals (if greater than the Merger Consideration provided for herein) the
per share amount actually paid, directly or indirectly, by FKWW or any of its
Affiliates, with respect to the purchase of, or agreement to purchase, Company
Stock, or securities convertible into Company Stock, which purchase is effected
or agreement is entered into after the date hereof and through the Effective
Time (x) from (i) any of the Robertson Sellers, (ii) LIFE, (iii) CBN, (iv)
Regent, (v) any holder or "group" (within the meaning of Rule 13d-5(b)(1) under
the Exchange Act) that owns, or has the right to dispose of, or to direct the
disposition of, 2-1/2% or more of any class
I-4
<PAGE> 134
of common stock of the Company, (vi) any of the Affiliates of the entities
referred to in clauses (i), (ii), (iii), (iv) or (v) above, or (y) in any
transaction, or series of related or unrelated transactions (excluding for
purposes of this clause (y), any transaction referred to in clauses (x)(i),
(ii), (iii), (iv) and (vi)), after the date hereof and through the Effective
Time, involving, in the aggregate, 5% or more of the outstanding shares of any
class of common stock of the Company. For these purposes, it is acknowledged and
agreed that (x) the $3.5 million to be paid to LIFE under the Contribution
Agreement with respect to forfeited interest income on the Convertible Notes,
and (y) amounts to be paid with respect to any "tax gross up" with respect to
the Exchange Rights under the Contribution Agreement, shall not constitute an
amount paid, directly or indirectly, with respect to the purchase of Company
Stock. Further, the Merger Consideration shall not be adjusted as a result of
the provisions of the preceding sentence with respect to any purchase effected
under any of the Contribution Agreement, the Robertson Purchase Agreement, CBN
Purchase Agreement or the Regent Purchase Agreement unless the applicable
agreement has been amended after the date hereof so as to increase the
consideration to be paid by FKWW or any of its Affiliates, directly or
indirectly, with respect to the Company Stock or securities convertible into
Company Stock. FKWW shall promptly provide notice to the Company of any
agreement or amendment to an existing agreement entered into by FKWW or any of
its Affiliates with a Robertson Seller, CBN or Regent, or any amendment to an
Other Transaction Agreement to which LIFE or any of its Affiliates is a party,
from and after the date hereof and through the Effective Time.
1.7 Dissenting Shares.
(a) Notwithstanding anything in this Agreement to the
contrary, Shares which are issued and outstanding immediately prior to the
Effective Time and which are held by stockholders who have not voted such Shares
in favor of the Merger or consented thereto in writing, who shall have delivered
a written demand for appraisal of such Shares in the manner provided in the DGCL
and who, as of the Effective Time, shall not have effectively withdrawn or lost
such right to appraisal ("Dissenting Shares") shall not be converted into or
represent a right to receive the Merger Consideration pursuant to Section 1.6
hereof, but the holders thereof shall be entitled only to such rights as are
granted by Section 262 of the DGCL. Each holder of Dissenting Shares who becomes
entitled to payment for such Shares pursuant to Section 262 of the DGCL shall
receive payment therefor from the Surviving Corporation in accordance with the
DGCL; provided, however, that (i) if any such holder of Dissenting Shares shall
have failed to establish his entitlement to appraisal rights as provided in
Section 262 of the DGCL, or (ii) if any such holder of Dissenting Shares shall
have effectively withdrawn his demand for appraisal of such Shares or lost his
right to appraisal and payment of his Shares under Section 262 of the DGCL, or
(iii) if neither any holder of Dissenting Shares nor the Surviving Corporation
shall have filed a petition demanding a determination of the value of all
Dissenting Shares within the time provided in Section 262 of the DGCL, such
holder or holders (as the case may be) shall forfeit the right to appraisal of
such Shares, and each such Share shall thereupon be deemed to have been
converted, as of the Effective Time, into and represent the right to receive
payment from the Surviving Corporation of the Merger Consideration, without
interest thereon, as provided in Section 1.6 hereof.
I-5
<PAGE> 135
(b) Prior to the Effective Time, the Company shall give FKW
Sub (i) prompt notice of any written demands for appraisal, withdrawals of
demands for appraisal and any petitions served pursuant to Section 262 of the
DGCL received by the Company, and (ii) the opportunity to direct all
negotiations and proceedings with respect to demands for appraisal under Section
262 of the DGCL. The Company shall not, except with the prior written consent of
FKW Sub, voluntarily make any payment with respect to any demands for appraisal
or offers to settle or settle any such demands.
1.8 Stock Options and Other Plans.
(a) Prior to the Effective Time, the Board of Directors of the
Company (or, if appropriate, any committee thereof) shall adopt appropriate
resolutions and use its reasonable good faith efforts to take all other actions
necessary to provide for the cancellation, effective at the Effective Time,
subject to the payment provided for in the next sentence being made, of all the
outstanding stock options, warrants or rights to purchase Shares heretofore
granted (collectively, the "Options") under any outstanding stock option plan or
pursuant to any outstanding warrant agreement or any other outstanding plan,
program or arrangement of the Company providing for the issuance or grant of any
other interest in respect of the capital stock of the Company or any Subsidiary
of the Company (collectively, the "Stock Plans") such that, immediately prior to
the Effective Time, (i) each Option, whether or not then vested or exercisable,
shall no longer be exercisable for the purchase of Shares, but shall entitle
each holder thereof, in cancellation and settlement therefor, to payments in
cash (subject to any applicable withholding taxes, the "Cash Payment"), at the
Effective Time, equal to the product of (x) the total number of Shares subject
to such Option, whether or not then vested or exercisable, and (y) the excess of
the Merger Consideration over the exercise price per Share subject to such
Option, each such Cash Payment to be paid to each holder of an outstanding
Option at the Effective Time; provided, however, that with respect to any Person
subject to Section 16 of the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder (the "Exchange Act"), any such amount shall
be paid, without interest, as soon as practicable after the first date payment
can be made without liability to such Person under Section 16(b) of the Exchange
Act, and (ii) each Share previously issued in the form of grants of restricted
stock or grants of contingent shares shall fully vest in accordance with their
respective terms. Any then outstanding stock appreciation rights or limited
stock appreciation rights shall be canceled immediately prior to the Effective
Time without any payment therefor. The Company will use its reasonable good
faith efforts to ensure that, at the Effective Time, neither the Company nor any
of its Subsidiaries is or will be bound by any Options or Stock Plans which
would entitle any Person to acquire or hold any capital stock of the Surviving
Corporation or any of its Subsidiaries or to receive any payment in respect
thereof other than as set forth in this Agreement or the MTM Stock Plan,
providing for the issuance to employees of MTM Entertainment, Inc., a Delaware
corporation ("MTM"), a wholly owned Subsidiary of the Company, of shares of
common stock of MTM, all as, and other than as, disclosed in the Company
Disclosure Letter, including using its reasonable good faith efforts to obtain
all necessary consents and releases to ensure that after the Effective Time, the
only rights of the holders of Options will be to receive the Cash Payment in
cancellation and settlement thereof. Notwithstanding any other provision of this
Section 1.8 to the contrary, the Cash Payment may be withheld with respect to
any Option until necessary consents and releases are obtained.
I-6
<PAGE> 136
(b) All provisions in any Stock Plan providing for the future
issuance or grant of any capital stock of the Company or any interest in respect
of any capital stock of the Company shall terminate or be amended as of the
Effective Time to provide no continuing rights to acquire or be issued or
granted any capital stock or any interest in any capital stock (including, but
not limited to Options) of the Company or the Surviving Corporation (other than
in respect of capital stock or interests in capital stock (including, but not
limited to, Options) granted prior to the Effective Time, which are governed by
the provisions of Section 1.8(a) above).
1.9 Exchange of Certificates.
(a) From and after the Effective Time, a bank or trust company
to be designated by FKW Sub and reasonably acceptable to the Company (the
"Exchange Agent") shall act as exchange agent in effecting the exchange of the
Merger Consideration for certificates representing Shares entitled to payment
pursuant to Section 1.6 (the "Certificates"). At or prior to the Effective Time,
FKW Sub shall deposit with the Exchange Agent the amount necessary to enable the
Exchange Agent to exchange the Merger Consideration for Certificates received by
the Exchange Agent.
(b) Promptly after the Effective Time, the Exchange Agent
shall mail to each record holder of Certificates a letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon proper delivery of the Certificates to the
Exchange Agent) and instructions for use in surrendering Certificates and
receiving the Merger Consideration therefor. Upon the surrender of each
Certificate, together with such letter of transmittal duly executed and
completed in accordance with the instructions thereto, the holder of such
Certificate shall be entitled to receive in exchange therefor an amount equal to
the Merger Consideration multiplied by the number of Shares represented by such
Certificate, and such Certificate shall be canceled. Until so surrendered and
exchanged, each such Certificate shall represent solely the right to receive an
amount equal to the Merger Consideration multiplied by the number of Shares
represented by such Certificate. No interest shall be paid or accrue on the
Merger Consideration payable upon the surrender of the Certificates. If any
Merger Consideration is to be paid to a Person other than the Person in whose
name the Certificate surrendered in exchange therefor is registered, such
Certificate shall be accompanied by all documents required to evidence and
effect such transfer, and it shall be a condition to such exchange that the
Person requesting such exchange shall pay to the Exchange Agent any transfer or
other taxes required by reason of the payment of such Merger Consideration to a
Person other than the registered holder of the Certificate surrendered, or such
Person shall establish to the satisfaction of the Exchange Agent that such tax
has been paid or is not applicable. Notwithstanding the foregoing, neither the
Exchange Agent nor any party hereto shall be liable to a holder of Shares for
any Merger Consideration delivered to a public official pursuant to applicable
abandoned property, escheat and similar laws.
(c) Promptly following the date which is 180 days after the
Effective Time, the Exchange Agent's duties shall terminate, and any funds
deposited with the Exchange Agent that remain unclaimed by holders of
Certificates shall be paid to the Surviving Corporation upon demand. Thereafter,
each holder of a Certificate may surrender such
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Certificate to the Surviving Corporation along with the applicable letter of
transmittal and (subject to applicable abandoned property, escheat and similar
laws) receive in exchange therefor an amount equal to the Merger Consideration
multiplied by the number of Shares represented by such Certificate, without any
interest thereon, but shall have no greater rights against the Surviving
Corporation than may be accorded to general creditors of the Surviving
Corporation.
(d) After the Effective Time, there shall be no transfers on
the stock transfer books of the Surviving Corporation of any Shares. If, after
the Effective Time, Certificates are presented to the Surviving Corporation or
the Exchange Agent, they shall be canceled and exchanged for the applicable
Merger Consideration, as provided in this Article I, subject to applicable law
in the case of Dissenting Shares.
1.10 Taking of Necessary Action: Further Action. If, at any time
after the Effective Time, any reasonable and lawful further action is necessary
or desirable to carry out the purposes of this Agreement and to vest the
Surviving Corporation with full right, title and possession to all assets,
property, rights, privileges, powers and franchises of either of the Constituent
Corporations, the officers and directors of such corporations are fully
authorized in the name of their corporation or otherwise to take, and shall
take, all such lawful and necessary action.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF FKWW
As an inducement to the Company to enter into this Agreement, FKWW
hereby makes the following representations and warranties:
2.1 Organization. Etc. of FKWW. FKWW is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has all requisite corporate power and authority to own and operate
its properties and assets and to carry on its business as now conducted. FKWW is
duly qualified and in good standing in each jurisdiction in which the property
owned, leased or operated by it or the nature of the businesses conducted by it
makes such qualification necessary and where the failure to be so qualified
would be reasonably expected to have a material adverse effect on the business,
results of operations or financial condition of FKWW and its Subsidiaries taken
as a whole. FKWW has obtained from appropriate governmental regulatory
authorities, domestic or foreign (each a "Governmental Entity") all approvals,
permits and licenses necessary for the conduct of its business and operations as
currently conducted, which approvals, permits and licenses are valid and in full
force and effect, except where the failure to have obtained such approvals,
permits or licenses or the failure of such approvals, permits or licenses to be
valid and in full force and effect would not be reasonably expected to have a
material adverse effect on the business, results of operations or financial
condition of FKWW and its Subsidiaries taken as a whole. Other than FKW Sub,
FKWW has no Subsidiaries. As used in this Agreement, "Subsidiary" of a specified
Person means (i) any corporation of which equity securities possessing a
majority of the ordinary voting power in electing the board of directors are, at
the time as of which such determination is being made, owned or controlled by
such specified Person either directly or indirectly or in
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combination with one or more Subsidiaries of such specified Person, or (ii) any
Person (other than a corporation) in which such specified Person either directly
or indirectly through or in combination with one or more Subsidiaries, at the
time as of which such determination is being made, (x) is a general partner, or
(y) owns or controls more than a 50% ownership interest and has the right to
elect a majority of the members of the governing authority of such specified
Person.
2.2 Organization. Etc. of the Guarantor. The Guarantor is a
corporation organized and existing under the laws of South Australia, Australia,
with adequate corporate power and authority to own its properties and carry on
its business as presently conducted. The Guarantor has the corporate power and
authority to enter into, execute and deliver the Guaranty and to guarantee the
obligations of FKWW hereunder pursuant to such Guaranty.
2.3 Authorization. This Agreement and the consummation of the
transactions contemplated hereby have been unanimously approved by the Board of
Directors of FKWW and have been duly authorized by all other necessary corporate
action on the part of FKWW. This Agreement has been duly executed and delivered
by a duly authorized officer of FKWW and (assuming the same to be valid and
binding obligations of the other parties hereto) constitutes the valid and
binding agreement of FKWW, enforceable against FKWW in accordance with its
terms, except as may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium and other similar laws of general application which
may affect the enforcement of creditors' rights generally and by general
equitable principles. FKWW has delivered to the Company true and correct copies
of resolutions adopted by the Board of Directors of FKWW approving this
Agreement.
2.4 Execution. Delivery and Performance by the Guarantor. The
execution, delivery and performance of the Guaranty and the consummation of the
transactions contemplated thereby have been duly authorized by the Board of
Directors of the Guarantor, and the Guarantor has taken all other actions
required by law and its organizational documents in order to consummate the
transactions contemplated by the Guaranty. The Guaranty constitutes the valid
and binding obligations of the Guarantor and is enforceable in accordance with
its terms, except as enforceability may be subject to or limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally.
2.5 No Consents. The execution and delivery of this Agreement by
FKWW or by the Guarantor of the Guaranty, do not, and the performance of FKWW's
obligations under this Agreement and the Guarantor of its obligations under the
Guaranty, and the consummation of the transactions contemplated hereby or
thereby by FKWW and the Guarantor, respectively, will not require any consent,
approval, authorization or permit of, or filing with or notification to any
Governmental Entity, except (i) for (A) applicable requirements of the Exchange
Act, the Securities Act of 1933, as amended and the rules and regulations
thereunder (the "Securities Act"), and state securities or "blue sky" laws or
state anti-takeover laws ("Blue Sky Laws"), (B) the pre-merger notification
requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended and the rules and regulations thereunder (the "HSR Act"), and (C) the
Merger Filing, and (ii) where the failure to obtain such consents, approvals,
authorizations or
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permits, or to make such filings or notifications, (x) would not, individually
or in the aggregate, reasonably be expected to prevent consummation of the
Merger, or otherwise prevent FKWW or the Guarantor from performing their
respective obligations under this Agreement or the Guaranty in any material
respect, and (y) would not, individually or in the aggregate, reasonably be
expected to have a material adverse effect on the business, results of
operations or financial condition of FKWW and its Subsidiaries taken as a whole.
2.6 Brokers and Finders. FKWW has not employed any investment
banker, broker, finder, consultant or intermediary in connection with the
transactions contemplated by this Agreement which would be entitled to any
investment banking, brokerage, finder's or similar fee or commission payable
after the date hereof in connection with this Agreement or the Merger.
2.7 Compliance with Other Instruments. Etc. As of the date hereof,
FKWW is not in violation of any term of (a) its charter, by-laws or other
organizational documents, (b) any material agreement or instrument including any
such related to Indebtedness, (c) any applicable law, ordinance, rule or
regulation of any Governmental Entity, or (d) any applicable order, judgement or
decree of any court, arbitrator or Governmental Entity, the consequences of
which violation, whether individually or in the aggregate, would be reasonably
expected to have a material adverse effect on (i) the business, results of
operations or financial condition of FKWW or (ii) the ability of FKWW to perform
its obligations under this Agreement. The execution, delivery and performance of
this Agreement by FKWW will not result in any violation of or conflict with,
constitute a default under, or require any consent under any term of the
charter, bylaws or other organizational document of FKWW or any such agreement,
instrument, law, ordinance, rule, regulation, order, judgement or decree or
result in the creation of (or impose any obligation on FKWW to create) any Lien
upon any of the properties or assets of FKWW pursuant to any such term, except
where such violation, conflict or default, or the failure to obtain such
consent, individually or in the aggregate, would not be reasonably expected to
have a material adverse effect on (i) the business, results of operations or
financial condition of FKWW and its Subsidiaries taken as a whole or (ii) the
ability of FKWW to perform its obligations under this Agreement. For purposes of
this Agreement, "Lien" means any mortgage, pledge, lien, security interest or
other encumbrance of any kind or nature.
2.8 Litigation. As of the date hereof, there are no actions, suits,
investigations or proceedings (adjudicatory or rulemaking) pending or, to the
knowledge of FKWW, threatened against FKWW or any of its respective properties
in any court or before any arbitrator of any kind or before or by any
Governmental Entity, except actions, suits, investigations or proceedings which,
in the aggregate, would not be reasonably expected to have a material adverse
effect on the ability of FKWW to perform its obligations under this Agreement.
2.9 Information True and Correct. None of the information supplied
or to be supplied by FKWW for inclusion in the Information Statement will, at
the date the definitive Information Statement is first sent or given to the
stockholders of the Company, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading. No representation is made by FKWW with respect to
any
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information supplied by the Company or any of its Affiliates for inclusion in
the Information Statement.
2.10 Transaction Agreements. This Agreement, the Other Transaction
Agreements and the other agreements listed in the recitals above, are the only
agreements existing as of the date hereof between FKWW, on the one hand, and the
respective counterparties to such agreements and any Affiliates of such parties,
on the other hand, with respect to the acquisition of Class A Stock, Class B
Stock, Class C Stock or Convertible Notes.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF FKW SUB
As an inducement to the Company to enter into this Agreement, FKW
Sub hereby makes the following representations and warranties:
3.1 Organization. Etc. FKW Sub is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has all requisite corporate power and authority to own and operate its
properties and assets and to carry on its business as now conducted. FKW Sub is
duly qualified and in good standing in each jurisdiction in which the property
owned, leased or operated by it or the nature of the businesses conducted by it
makes such qualification necessary and where the failure to be so qualified
would be reasonably expected to have a material adverse effect on the business,
results of operations or financial condition of FKW Sub and its Subsidiaries
taken as a whole. FKW Sub has obtained from the appropriate Government Entities
all approvals, permits and licenses necessary for the conduct of its business
and operations as currently conducted, which approvals, permits and licenses are
valid and in full force and effect, except where the failure to have obtained
such approvals, permits or licenses or the failure of such approvals, permits or
licenses to be valid and in full force and effect would not be reasonably
expected to have a material adverse effect on the business, results of
operations or financial condition of FKW Sub and its Subsidiaries taken as a
whole. At the date of this Agreement, FKW Sub has no Subsidiaries.
3.2 Authorization. This Agreement and the consummation of the
transactions contemplated hereby have been unanimously approved by the Board of
Directors of FKW Sub and have been duly authorized by all other necessary
corporate action on the part of FKW Sub. This Agreement has been duly executed
and delivered by a duly authorized officer of FKW Sub and (assuming the same to
be valid and binding obligations of the other parties hereto) constitutes the
valid and binding agreement of FKW Sub, enforceable against FKW Sub in
accordance with its terms, except as may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium and other similar laws of general
application which may affect the enforcement of creditors' rights generally and
by general equitable principles.
3.3 No Consents. The execution and delivery of this Agreement by FKW
Sub do not, and the performance of its obligations under this Agreement and the
consummation of the transactions contemplated hereby by FKW Sub will not,
require any consent, approval, authorization or permit of, or filing with or
notification to any Governmental Entity, except (i)
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for (A) applicable requirements of the Exchange Act, the Securities Act, and the
Blue Sky Laws, (B) the pre-merger notification requirements of the HSR Act, and
(C) the Merger Filing, and (ii) where the failure to obtain such consents,
approvals, authorizations or permits, or to make such filings or notifications,
(x) would not, individually or in the aggregate, be reasonably expected to
prevent consummation of the Merger, or otherwise prevent FKW Sub from performing
its obligations under this Agreement in any material respect, and (y) would not,
individually or in the aggregate, be reasonably expected to have a material
adverse effect on the business, results of operations or financial conditions of
FKWW and its Subsidiaries taken as a whole.
3.4 Brokers and Finders. FKW Sub has not employed any investment
banker, broker, finder, consultant or intermediary in connection with the
transactions contemplated by this Agreement which would be entitled to any
investment banking, brokerage, finder's or similar fee or commission payable
after the date hereof in connection with the Merger.
3.5 Compliance with Other Instruments, Etc. As of the date hereof,
FKW Sub is not in violation of any term of (a) its charter, by-laws or other
organizational documents, (b) any material agreement or instrument including any
such related to Indebtedness, (c) any applicable law, ordinance, rule or
regulation of any Governmental Entity, or (d) any applicable order,judgement or
decree of any court, arbitrator or Governmental Entity, the consequences of
which violation, whether individually or in the aggregate, would be reasonably
expected to have a material adverse effect on (i) the business, results of
operations or financial condition of FKWW and its Subsidiaries taken as whole,
or (ii) the ability of FKW Sub to perform its obligations under this Agreement.
The execution, delivery and performance of this Agreement by FKW Sub will not
result in any violation of or conflict with, constitute a default under, or
require any consent under any term of the charter, bylaws or other
organizational document of FKW Sub or any such agreement, instrument, law,
ordinance, rule, regulation, order, judgement or decree or result in the
creation of (or impose any obligation on FKW Sub to create) any Lien upon any of
the properties or assets of FKW Sub pursuant to any such term, except where such
violation, conflict or default, or the failure to obtain such consent,
individually or in the aggregate, would not be reasonably expected to have a
material adverse effect on (i) the business, results of operations or financial
condition of FKWW and its Subsidiaries taken as a whole, or (ii) the ability of
FKW Sub to perform its obligations under this Agreement.
3.6 Litigation. As of the date hereof, there are no actions, suits,
investigations or proceedings (adjudicatory or rulemaking) pending or, to the
knowledge of FKW Sub, threatened against FKW Sub or any of its respective
properties in any court or before any arbitrator of any kind or before or by any
Governmental Entity, except actions, suits, investigations or proceedings which,
in the aggregate, would not be reasonably expected to have a material adverse
effect on the ability of FKW Sub to perform its obligations under this
Agreement.
3.7 Information True and Correct. None of the information supplied
or to be supplied by FKW Sub for inclusion in the Information Statement will, at
the date the definitive Information Statement is first sent or given to the
stockholders of the Company, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein
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or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. No representation is
made by FKW Sub with respect to any information supplied by the Company or any
of its Affiliates for inclusion in the Information Statement.
3.8 Fraudulent Transfer Laws. Assuming the Company is not Insolvent
immediately prior to the Effective Time, and further assuming the
representations and warranties of the Company contained in this Agreement are
true and accurate in all material respects immediately prior to the Effective
Time, the Surviving Corporation will not be Insolvent immediately after the
Effective Time (taking into account changes in assets and liabilities of the
Surviving Corporation as a result of the Merger). For purposes hereof, an entity
will be deemed to be Insolvent if (i) such entity's financial condition is such
that either the sum of its debts is greater than the fair value of its assets or
the fair saleable value of its assets is less than the amount required to pay
its probable liability on existing debts as they mature, (ii) such entity has
unreasonably small capital with which to engage in its business or (iii) such
entity has incurred liabilities beyond its ability to pay as they become due.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
As an inducement to FKWW and FKW Sub to enter into this Agreement,
the Company hereby makes the following representations and warranties. Whether
or not specifically referred to therein, such representations and warranties
contain exceptions set forth in a written disclosure letter (the "Company
Disclosure Letter") delivered to FKWW and FKW Sub concurrently with the
execution hereof, which is numbered to correspond to the various sections of
this Agreement and which also sets forth certain other information called for by
this Agreement.
4.1 Organization. Etc., of the Company. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has all requisite corporate power and authority to own and
operate its properties and assets and to carry on its business as now conducted.
The Company is duly qualified and in good standing in each jurisdiction in which
the property owned, leased or operated by it or the nature of the businesses
conducted by it makes such qualification necessary and where the failure to be
so qualified would be reasonably expected to have a material adverse effect on
the business, results of operations or financial condition of the Company and
its Subsidiaries taken as a whole. As of the date hereof, the Company has
obtained from the appropriate Government Entities all approvals, permits and
licenses necessary for the conduct of its business and operations as currently
conducted, which approvals, permits and licenses are, as of the date hereof,
valid and in full force and effect, except where the failure to have obtained
such approvals, permits or licenses or the failure of such approvals, permits or
licenses to be valid and in full force and effect would not be reasonably
expected to have a material adverse effect on the business, results of
operations or financial condition of the Company and its Subsidiaries taken as a
whole.
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4.2 Operations of Subsidiaries. Each Subsidiary of the Company (a)
is a corporation or other legal entity duly organized, validly existing and (if
applicable) in good standing under the laws of the jurisdiction of its
organization and has the requisite corporate or other organizational power and
authority to own its properties and assets and conduct its business and
operations as currently conducted, except where the failure to be duly
organized, validly existing and in good standing would not be reasonably
expected to have a material adverse effect on the business, results of
operations or financial condition of the Company and its Subsidiaries taken as a
whole, (b) is duly qualified and in good standing in each jurisdiction in which
the property owned, leased or operated by it or the nature of the business
conducted by it makes such qualification necessary, except where the failure to
be so qualified or in good standing would not reasonably be expected to have a
material adverse effect on the business, results of operations or financial
condition of the Company and its Subsidiaries taken as a whole, and (c) has, as
of the date hereof, obtained from the appropriate Government Entities all
approvals, permits and licenses necessary for the conduct of its business and
operations, as currently conducted, which approvals, permits and licenses are,
as of the date hereof, valid and remain in full force and effect, except where
the failure to have obtained such approvals, permits and licenses or the failure
of such approvals, permits or licenses to be valid and in full force and effect
would not be reasonably expected to have a material adverse effect on the
business, results of operations or financial condition of the Company and its
Subsidiaries taken as a whole. The Company Disclosure Letter sets forth a true
and correct list of each Subsidiary of the Company as of the date hereof. All of
the outstanding capital stock of each such Subsidiary is owned entirely by the
Company or by a Subsidiary of the Company, as the case may be, as of the date
hereof, free and clear of all Liens and Restrictions, except for such
restrictions on transfer as are imposed by state and federal securities laws and
except for Liens and Restriction as will not reasonably be expected to have a
material adverse effect on the business, results of operations or financial
condition of the Company and its Subsidiaries taken as a whole. For purposes of
this Agreement, "Restriction," means, when used with respect to any specified
security, any shareholders or other trust agreement, option, warrant, escrow,
proxy, buy-sell agreement, power of attorney or other contract, agreement or
arrangement which (i) grants to any Person the right to purchase or otherwise
acquire, or obligates any Person to sell or otherwise dispose of, such specified
security or any interest therein, or (ii) restricts the transfer of, or the
exercise of any rights or the enjoyment of any benefits arising by reason of,
the ownership of such specified security. All such shares of capital stock have
been duly authorized and validly issued and are fully paid and nonassessable.
There are no agreements, understandings or undertakings governing the rights and
duties of the Company or any Subsidiary of the Company as a stockholder of any
Subsidiary (other than a Subsidiary wholly owned by the Company or by a direct
or indirect wholly owned Subsidiary of the Company) under which the Company or
any Subsidiary is or may become obligated, directly or indirectly, to acquire or
dispose of any equity interest in, make any capital contribution or extend
credit to, or act as guarantor, surety or indemnitor for any liability of any
Subsidiary (other than a Subsidiary wholly owned by the Company or by a direct
or indirect wholly owned Subsidiary of the Company). Other than Subsidiaries of
the Company, the Company has no interest in any corporation, joint venture,
limited liability company, limited liability partnership, or other business
enterprise of any nature, other than investments in marketable securities
acquired in the ordinary course of business.
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4.3 Authorization. This Agreement and the consummation of the
transactions contemplated hereby have been approved by the Board of Directors of
the Company and upon execution of the Consent, this Agreement and the Merger
shall have been duly authorized by all other necessary corporate action on the
part of the Company, including any required stockholder action. This Agreement,
upon execution and delivery thereof, will be duly executed and delivered by a
duly authorized officer of the Company and (assuming the same to be valid and
binding obligations of the other parties hereto) this Agreement constitutes the
valid and binding Agreement of the Company, enforceable against the Company in
accordance with its terms, except as may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium and other similar laws of general
application which may affect the enforcement of creditors' rights generally and
by general equitable principles. The Company has delivered to FKWW and FKW Sub
true and correct copies of resolutions adopted by the Board of Directors.
4.4 Fairness Opinion: Approval by Board of Directors. On or prior to
the date hereof, the Board of Directors of the Company (i) approved the terms of
this Agreement and the Merger, (ii) determined that the Merger is fair to and in
the best interests of the holders of the Shares (other than FKWW, FKW Sub, the
Company, and their respective Affiliates), and (iii) has recommended this
Agreement and the Merger to the Company's stockholders. The Board of Directors
of the Company has received an oral opinion, as of the date hereof, of (x) Bear,
Stearns & Co. Inc. to the effect that the consideration to be received by the
holders of the Shares (other than FKWW, FKW Sub, the Company, and their
respective Affiliates) pursuant to this Agreement is fair to such holders from a
financial point of view, and (y) Goldman Sachs & Co. to the effect that the
consideration to be received by the holders of the Shares (other than FKWW, FKW
Sub, the Company and their respective Affiliates) pursuant to this Agreement is
fair to such holders. At the date hereof, such opinions (which, when confirmed
in writing, will be provided to FKWW and FKW Sub) have not been withdrawn,
revoked or modified. It is agreed and understood that such opinions are for the
use of the Board of Directors of the Company in considering this Agreement and
the Merger and may not be relied upon by FKWW or FKW Sub. Based on such
opinions, and such other factors as it deemed relevant, the Board of Directors
of the Company has taken all of the actions set forth in clauses (i) and (ii)
above and has directed that this Agreement be submitted to the stockholders of
the Company for their approval.
4.5 Capital Stock.
(a) The authorized capital stock of the Company consists of
(i) 10,000,000 shares of Class A Stock, of which 5,000,000 shares are
outstanding as of the date hereof, (ii) 100,000,000 shares of Class B Stock, of
which 32,781,795 shares are outstanding as of the date hereof, (iii) 20,000,000
shares of Class C Stock, of which 7,088,732 shares are outstanding as of the
date hereof, and (iv) 400,000 shares of 10% Convertible Cumulative Preferred
Stock, par value $0.001 per share, of which none are issued and outstanding as
of the date hereof. All outstanding Shares are duly authorized, validly issued,
fully paid and nonassessable.
(b) As of the date hereof, there are (i) no options, warrants,
calls, subscriptions, convertible securities or other rights (including
preemptive rights), agreements,
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understandings, arrangements or commitments of any character obligating the
Company now or at any time in the future to issue or sell any of its capital
stock or other equity interests in the Company or any of its Subsidiaries, (ii)
there are no obligations, contingent or otherwise, of the Company or any of its
Subsidiaries, to repurchase, redeem or otherwise acquire any shares of capital
stock or other equity interests of the Company or any of its Subsidiaries, (iii)
there are no outstanding bonds, debentures, notes or other obligations of the
Company or any of its Subsidiaries, the holders of which have the right to vote
(or which are convertible into or exercisable for securities having the right to
vote) with the holders of the Class A Stock and the Class B Stock on any matter,
(iv) there are no obligations, contingent or otherwise, guaranteeing the value
of any of the Shares or the capital stock of any of its Subsidiaries either now
or at any time in the future, and (v) there are no voting trusts, proxies or
other agreements or understandings to which the Company is a party or is bound
with respect to the voting of any capital stock or other equity interests of the
Company or any of its Subsidiaries. None of the Shares or any other equity
interest of the Company or any other securities convertible into or exchangeable
for Shares or any other equity interests of the Company, or options to acquire
Shares or securities convertible into Shares or equity interests of the Company
are held by any of the Company's Subsidiaries.
4.6 Consents. The execution and delivery of this Agreement by the
Company do not, and the performance of its obligations under this Agreement and
the consummation of the Merger by the Company will not, require any consent,
approval, authorization or permit of, or filing with or notification to any
Governmental Entity, except (i) for (A) applicable requirements of the Exchange
Act, the Securities Act, and the Blue Sky Laws, (B) the pre-merger notification
requirements of the HSR Act, and (C) the Merger Filing, and (ii) where the
failure to obtain such consents, approvals, authorizations or permits, or to
make such filings or notifications, (x) would not, individually or in the
aggregate, be reasonably expected to prevent the consummation of the Merger, or
otherwise prevent the Company from performing its obligations under this
Agreement in any material respect, and (y) with respect to any such requirement
in effect on the date hereof, would not, individually or in the aggregate, be
reasonably expected to have a material adverse effect on the business, results
of operations or financial condition of the Company and its Subsidiaries taken
as a whole.
4.7 SEC Reports and Financial Statements. Since January 1, 1994 up
to and including the date hereof, the Company has filed with the SEC all forms,
reports, schedules, registration statements, proxy statements and other
documents (collectively, "Company SEC Reports") required to be filed by the
Company with the Securities and Exchange Commission (the "SEC") under the
Securities Act, Exchange Act, and the rules and regulations thereunder. As of
their respective dates, or in the case of registration statements, as of their
respective effective dates, all of the Company SEC Reports, including all
exhibits and schedules thereto and all documents incorporated by reference
therein, (i) complied as to form in all material respects with the applicable
requirements of the Securities Act and the Exchange Act applicable thereto, and
(ii) did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, except for such statements, if any, as have been modified or
superseded by subsequent filings prior to the date hereof. The consolidated
financial statements of the Company and its Subsidiaries included in such
reports
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complied as of the respective dates thereof as to form in all material respects
with applicable accounting requirements and with the published rules and
regulations of the SEC with respect thereto, were prepared in accordance with
United States generally accepted accounting principles ("GAAP") as in effect on
their respective dates applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes thereto or, in the case of the
unaudited interim financial statements, as permitted by Form 10-Q of the SEC)
and fairly presented (subject, in the case of the unaudited interim financial
statements, to normal, year-end audit adjustments) the consolidated financial
position of the Company and its Subsidiaries as at the dates thereof and the
consolidated results of their operations and cash flows for the periods then
ended. Since December 31, 1996, and up to and including the date hereof, neither
the Company nor any of its Subsidiaries has incurred any liabilities or
obligations (whether absolute, accrued, fixed, contingent, liquidated,
unliquidated or otherwise and whether due or to become due) of any nature, which
would be required by GAAP, as of the date hereof, to be set forth on a
consolidated balance sheet of the Company and its Subsidiaries or in the notes
thereto except liabilities, obligations or contingencies (a) which are
disclosed, reflected or reserved for on the unaudited balance sheets of the
Company and its Subsidiaries as of March 31, 1997 (including the notes thereto)
or in this Agreement or the Company Disclosure Letter or (b) which (i) were
incurred in the ordinary course of business after December 31, 1996, and
consistent with past practices, or (ii) are disclosed or reflected or reserved
for in the Company SEC Reports filed after December 31, 1996, or (iii) would not
reasonably be expected to, individually or in the aggregate, have a material
adverse effect on the business, results of operations or financial condition of
the Company and its Subsidiaries taken as a whole, or (c) which were incurred as
a result of actions taken or refrained from being taken (i) in furtherance of
the transactions contemplated by this Agreement, or (ii) at the request of FKWW
and FKW Sub. Since December 31, 1996, there has been no change in any of the
significant accounting (including tax accounting) policies, practices or
procedures of the Company or any of its Subsidiaries except as required by GAAP
or applicable law.
4.8 Absence of Certain Changes or Events. Since December 31, 1996
and up to and including the date hereof, except as disclosed in the Company
Disclosure Letter or the Company SEC Reports, (A) the Company has not declared
or paid any dividend or made any distribution on or with respect to its capital
stock; redeemed, purchased or otherwise acquired any of its capital stock;
granted any options, warrants or other rights to purchase shares of, or any
other securities which may be convertible into or exchangeable for, its capital
stock; or issued any shares of its capital stock; (B) there has been no increase
in the compensation or benefits (including but not limited to any bonus,
severance or option plan, program, arrangements or understanding) payable or to
become payable to any officer or director of the Company or any of the 25 most
highly compensated (based on cash compensation paid in or with respect to
services rendered in calendar 1996) employees of the Company and its
Subsidiaries (including officers and directors of the Company, as applicable)
(collectively, including officers and directors of the Company, Highly
Compensated Persons"), other than increases in the ordinary course of business
and consistent with past practice; (C) there has been no pledge, disposition,
encumbrance, hypothecation, sale or other transfer of any material portion of
the properties or assets of the Company and its Subsidiaries taken as a whole
(whether tangible or intangible), except in the ordinary course of business and
consistent with past practice; and (D) there has been no agreement binding upon
the Company or any of its Subsidiaries to do any of
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the foregoing. Since December 31, 1996 and up to and including the date of this
Agreement, other than as disclosed in the Company Disclosure Letter or the
Company SEC Reports or as contemplated by this Agreement, the Company and each
of its Subsidiaries have conducted their respective businesses in the ordinary
course and there has been no change in the condition (financial or otherwise),
business, properties, assets or liabilities of the Company and its Subsidiaries
taken as a whole, except such failures to so conduct their businesses and such
changes, which, when considered as a whole, have not had a material adverse
effect on the business, results of operations or financial condition of the
Company and its Subsidiaries taken as a whole.
4.9 Service Mark. The Company and its Subsidiaries own or have
adequate rights, including the underlying intellectual property rights, with
respect to the mark, "The Family Channel," in the United States.
4.10 DGCL Section 203. The Company is not subject to the provisions
of Section 203 of the DGCL.
4.11 Material Contracts and Commitments. None of M.G. "Pat"
Robertson, Timothy B. Robertson, Anthony D. Thomopoulos, Richard L. Sirvaitis,
K.J. "Gus" Lucas, Stephen D. Lentz, or Louis A. Isakoff (collectively, the
"Responsible Officers") has, as of the date hereof, Actual Knowledge that the
Company or any other party to any of the Company's contracts or agreements is in
breach of any of their respective obligations under such contracts or agreements
other than breaches which, individually or in the aggregate, would not
reasonably be expected to have a material adverse affect on the business,
results of operations or financial condition of the Company and its Subsidiaries
taken as a whole.
4.12 Agreements with Related Parties. Other than as set forth in the
Company SEC Reports or the Company Disclosure Letter, as of the date hereof,
none of Pat Robertson, Tim Robertson, the officers and directors of the Company,
LIFE, CBN, Regent or their respective Affiliates (except Affiliates controlled
by the Company) (collectively, "Related Parties") is a party to any agreement
with the Company or any of its Subsidiaries providing for the payment of an
amount or amounts in excess of $250,000 in the aggregate, or has any interest in
any property (real, personal or mixed, tangible or intangible) used in or
pertaining to the business of the Company or any of its Subsidiaries which is
material to the Company and its Subsidiaries taken as a whole, except this
Agreement (the "Related Party Agreements"). No Person shall be deemed to have
any agreement or interest referred to in this Section 4.12 solely because such
Person holds an equity interest in a Person (who is not an Affiliate of such
Person) which is party to such agreement or has such interest. None of the
Related Party Agreements, in the form previously delivered to FKWW, has been
modified or amended in any material respect through the date hereof except as
contemplated by this Agreement, the Stock Purchase Agreements or the
Contribution Agreement.
4.13 Affiliation Agreements. The Company Disclosure Letter includes
a true and complete list as of the date hereof of the contracts between the
Company and the top 25 cable carriers relating to carriage of The Family Channel
(determined by reference to subscriber count as of the most recent practicable
dates) (the "Affiliation Agreements"). At the date hereof,
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to the Actual Knowledge of the Responsible Officers, the Company has not
received any notice (written or oral) that any such cable carrier (a) has
canceled or terminated, or has a specific intention to cancel or terminate, any
Affiliation Agreement, which cancellations or terminations would involve, in the
aggregate, the loss of more than 1,000,000 subscribers, or (b) has a specific
intention to effect a planned reduction in the number of subscribers covered by
such Affiliation Agreement other than reductions which would not reasonably be
expected to have a material adverse effect on the business, results of
operations or financial condition of the Company and its Subsidiaries taken as a
whole.
4.14 Brokers and Finders. Except for the fees and expenses payable
to Goldman, Sachs & Co. and Bear, Stearns & Co. Inc., which fees shall be paid
by the Surviving Corporation, the Company has not employed any investment
banker, broker, finder, consultant or intermediary in connection with the
transactions contemplated by this Agreement which would be entitled to any
investment banking, brokerage, finder's or similar fee or commission payable
after the date hereof in connection with this Agreement or the Merger
contemplated hereby.
4.15 Information Statement. None of the information supplied or to
be supplied by the Company for inclusion in the definitive Information Statement
to be filed with the SEC relating to the Merger as required by the Exchange Act
(the "Information Statement"), will, at the date such Information Statement is
first sent or given to stockholders of the Company, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Information
Statement will, when first sent or given to stockholders of the Company, comply
as to form in all material respects with the requirements of the Exchange Act.
No representation is made by Company with respect to any information supplied by
FKWW or FKW Sub expressly for inclusion in the Information Statement.
ARTICLE V
CONDUCT OF BUSINESS
5.1 Conduct of Business of the Company. Prior to the earlier of the
Effective Time of the Merger or the termination of this Agreement pursuant to
its terms, unless FKWW and FKW Sub shall otherwise consent in writing or unless
otherwise set forth in the Company Disclosure Letter:
(i) except as otherwise contemplated by this Agreement, the
Company shall, and shall cause its Subsidiaries to, carry on their
respective businesses in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted;
(ii) except as required or permitted by this Agreement and
except as required by any existing agreement of the Company or any of its
Subsidiaries or in order to comply with the legal requirements of the
jurisdiction of incorporation of any Subsidiary, the Company shall not and
shall not propose to, nor shall it permit any of its Subsidiaries to or
propose to (A) sell or pledge or agree to sell or pledge any capital
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stock owned by it (or any of its Subsidiaries) in any of its Subsidiaries,
(B) amend its Certificate of Incorporation or By-Laws, (C) split, combine,
reclassify or amend the terms of its outstanding capital stock or issue or
authorize or propose the issuance of any other securities in respect of,
in lieu of, or in substitution for, shares of capital stock of the
Company, or declare, set aside or make any dividend or other distribution
payable in cash, stock or property, or (D) directly or indirectly redeem,
purchase or otherwise acquire or agree to redeem, purchase or otherwise
acquire any shares of the capital stock of the Company or any options or
rights to purchase any shares of capital stock except as required by this
Agreement;
(iii) except as required by any existing agreement of the
Company or any Subsidiary or in order to comply with the legal
requirements of the jurisdiction of incorporation of any Subsidiary, the
Company shall not, nor shall it permit any of its Subsidiaries to, except
as required by this Agreement, authorize, issue, deliver, pledge, encumber
or sell or agree to authorize, issue, deliver, pledge, encumber or sell
any additional shares of, or rights of any kind to acquire any shares of,
its capital stock of any class, or any option, rights or warrants to
acquire, or securities convertible into, shares of capital stock;
(iv) except as otherwise contemplated by this Agreement, the
Company shall not, and shall cause its Subsidiaries not to: (A) adopt any
material employee benefit plan or (B) amend any material employee benefit
plan in a manner that significantly increases the benefits thereunder or
(C) adopt, extend or amend any employment agreement (including any
severance agreement) for senior management employees of the Company or (D)
make any increase in the compensation of any Highly Compensated Person,
whether now or hereafter payable, other than in the ordinary course of
business consistent with past practice (except that no such increase shall
be effected pursuant to any option, stock purchase, or other plan,
arrangement, contract or commitment providing for the issuance of capital
stock of the Company or any option or other right to acquire capital stock
of the Company), or (E) hire any new employee of the Company or any
Subsidiary at a cash compensation (including salary and anticipated bonus)
in excess of $100,000 per annum other than any replacement for a departing
employee pursuant to substantially equivalent compensation arrangements,
which replacements shall be made, if at all, only after consulting with
FKWW;
(v) the Company shall not and shall cause its Subsidiaries to
not, take or agree to take any action with the intent and knowledge that
such action would cause a breach of any of the representations or
warranties of the Company contained in this Agreement in any material
respect or prevent the Company from performing or cause the Company not to
perform any of its covenants hereunder in any material respect;
(vi) the Company shall not submit any matters to the
stockholders of the Company for a vote prior to the Effective Date other
than the Merger;
(vii) the Company shall not, and shall cause its Subsidiaries
to not, sell, pledge, dispose of, encumber or hypothecate any material
portion of the assets of the
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Company and its Subsidiaries taken as a whole, except in the ordinary
course of business and consistent with past practice;
(viii) the Company shall not, and shall cause its Subsidiaries
to not, acquire (by merger, consolidation or acquisition of stock or
assets) any corporation, partnership or any other business organization or
division thereof, or any material interest therein other than marketable
securities purchased in the ordinary course of business consistent with
past practice;
(ix) the Company shall not, and shall cause its Subsidiaries
to not, incur any liability in respect of (i) borrowed money, (ii)
capitalized lease obligations, (iii) the deferred purchase price of
property or services (other than trade payables in the ordinary course of
business), (iv) reimbursement obligations in respect of letters of credit
and (v) guarantees of any of the foregoing incurred by any Person other
than the Company and its direct or indirect wholly owned Subsidiaries
(collectively, "Indebtedness") except (x) to the extent of such
liabilities as of the date hereof, including any replacements,
refinancings or renewals thereof on terms not materially more onerous to
the Company, or (y) under revolving credit facilities existing on the date
hereof or (z) other obligations which do not exceed $1 million
individually or in the aggregate;
(x) the Company shall not, and shall cause its Subsidiaries to
not, authorize any capital expenditures or the purchase of any fixed
assets other than (i) expenditures or purchases which are included in the
capital budget of the Company previously delivered by the Company to FKWW
and FKW Sub or, if not included in such capital budget, do not exceed $10
million individually or in the aggregate, or (ii) expenditures necessary
to continue to operate the technical facility of the Company following the
occurrence of any emergency in order to continue to telecast the Family
Channel (subject in the case of (ii) above, to the receipt of approval of
FKWW, which approval shall not be unreasonably withheld and shall be
deemed given, if not previously given or reasonably withheld, upon the
expiration of 24 hours following confirmed, actual delivery of notice,
however delivered, to any of Chase Carey, Jay Itzkowitz, Larry Jacobson,
Haim Saban, Margaret Loesch or Mel Woods, which notice identifies the
emergency, provides an estimate of the expenditures to be incurred and
expressly refers to the requirement that notice of approval or the
withholding of approval be delivered to the Company within 24 hours. The
provisions of Section 9.2 hereof expressly do not apply to this Section
5.1(x);
(xi) the Company shall not, and shall cause its Subsidiaries
to not, authorize any expenditure for television or motion picture
productions or programming other than expenditures or purchases which are
included in the programming budget of the Company previously delivered by
the Company to FKWW and FKW Sub or, if not included in such capital
budget, do not exceed $10 million individually or in the aggregate;
(xii) the Company shall not, and shall cause its Subsidiaries
to not, enter into any transaction or incur or make any payment to any
Related Party of the Company
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except for goods or services provided in the ordinary course of business
consistent with past practice and except for payments incurred or made or
other transactions effected pursuant to any agreements existing on the
date hereof;
(xiii) the Company shall not, and shall cause its Subsidiaries
to not, take any action to change any of the significant accounting
(including tax accounting) policies, practices or procedures of the
Company or any of its Subsidiaries other than as required in order to
comply with GAAP or applicable law;
(xiv) the Company shall not, and shall cause its Subsidiaries
to not, enter into any agreement with any Person other than FKWW or FKW
Sub granting such other Person the right to program any block of time on
The Family Channel other than arrangements which (i) terminate on or prior
to September 1, 1998, or (ii) which are terminable by the Company on not
more than 30 days notice without any payment with respect thereto other
than reimbursement of any advance payments;
(xv) the Company shall not, and shall cause its Subsidiaries
to not, to launch a new cable channel without first consulting with FKWW;
(xvi) the Company shall not and shall cause its Subsidiaries
to not, cancel, revoke or fail to renew any of the Affiliation Agreements
or take any action with the intent and knowledge that such action would
cause a material breach or violation of any Affiliation Agreement; and
(xvii) the Company shall not, and shall cause its Subsidiaries
to not enter into any contract, agreement, commitment or arrangement with
respect to any of the foregoing subsections.
5.2 Conduct of Business of FKW Sub. Prior to the earlier of the
Effective Time of the Merger or the termination of this Agreement pursuant to
its terms, FKW Sub shall not engage in any activities of any nature except as
provided in or contemplated by this Agreement.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 Preparation of Information Statement. The Company shall, as
promptly as practicable, prepare and file a preliminary Information Statement
with the SEC and shall use its reasonable good faith efforts to respond to any
comments of the SEC and to cause the Information Statement to be mailed to the
Company's stockholders at the earliest practicable time. Each of the parties
hereto shall supply such information reasonably requested by the Company (or in
the case of the Company, as is necessary) in its possession for inclusion in the
Information Statement. The Company will notify FKWW and FKW Sub promptly of the
receipt of any comments from the SEC or its staff and of any request by the SEC
or its staff for amendments or supplements to the Information Statement or for
additional information and will supply FKWW and FKW Sub with copies of all
correspondence between the Company or any
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'
of its representatives, on the one hand, and the SEC or its staff, on the other
hand, with respect to the Information Statement or the Merger.
6.2 Filings and Other Actions. As promptly as practicable after the
execution of this Agreement, but in any event within 5 business days, FKWW, FKW
Sub and the Company shall file notification reports under the HSR Act and shall
request early termination of the waiting period under the HSR Act and use their
reasonable good faith efforts to obtain clearance or authorization under the HSR
Act of the Merger and the other transactions contemplated by this Agreement at
the earliest practicable time.
6.3 Fees and Expenses. Except as set forth in Section 9.11, whether
or not the Merger is consummated, all costs and expenses incurred in connection
with this Agreement and the transactions contemplated hereby shall be paid by
the party incurring such expenses.
6.4 Further Assurances.
(a) Subject to the terms and conditions herein provided, each
of the parties hereto agrees to use all reasonable good faith efforts to take,
or cause to be taken, all actions and to do, or cause to be done, all things
necessary, proper or advisable to consummate and make effective as promptly as
practicable the transactions contemplated by this Agreement, and to cooperate
with each other in connection with the foregoing, including, but not limited to,
using reasonable good faith efforts (a) to obtain all necessary waivers,
consents and approvals from other parties to material loan agreements, leases
and other contracts; (b) to obtain all necessary consents, approvals and
authorizations as are required to be obtained under any federal, state or
foreign law or regulation; (c) to defend all lawsuits or other legal proceedings
challenging this Agreement or the transactions contemplated hereby; (d) to lift
or rescind any injunction or restraining order or other order adversely
affecting the ability of the parties to consummate the transactions contemplated
hereby; (e) to effect all necessary filings with respect to the transactions
contemplated hereby, including, but not limited to, filings under the HSR Act
and submissions of information requested by Government Entities; and (f) to
fulfill all conditions to this Agreement. Notwithstanding the foregoing, nothing
contained herein shall require any party to waive any of the conditions to the
Merger or other transactions contemplated by this Agreement.
(b) FKWW and FKW Sub hereby agree, while this Agreement is in
effect, and except as contemplated hereby, not to take any action with the
intention and knowledge that such action would make any of their representations
or warranties contained herein untrue or incorrect in any material respect or
have the effect of preventing or disabling them from performing their
obligations under this Agreement. FKWW and FKW Sub shall not enter into, permit
or give any consent to, any amendment, supplement or other modification of, or
give any consent or waiver or otherwise take any action (including agreeing to a
delayed closing date) under, any of the Other Transaction Agreements (or any of
the agreements related thereto) (collectively, a "Modification") which could
reasonably be expected to delay the Effective Time, and shall not in any event
waive, amend, modify or terminate the condition set forth in Section 8.6 of the
Contribution Agreement, or terminate any of the Other Transaction Agreements (or
any of the agreements related thereto), without the prior written consent of the
Company (subject
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to Section 6.8, if applicable). Notwithstanding the foregoing, FKWW and FKW Sub
may effect any Modification to the Other Transaction Agreements (or any of the
agreements related thereto) which they determine in good faith to be reasonably
necessary to effect the transactions contemplated thereby, provided they use
their reasonable good faith efforts to cause the closing thereunder to occur as
soon as practicable and provided further that such Modification will not delay
the Effective Time beyond November 30, 1997.
6.5 Notification of Certain Matters. The Company shall use
reasonable good faith efforts to promptly give written notice to FKWW and FKW
Sub, and FKWW and FKW Sub shall use reasonable good faith efforts to promptly
give written notice to the Company, upon becoming aware of the occurrence or, to
its knowledge, impending or threatened occurrence, of any event which would
cause or constitute a breach of any of its representations, warranties or
covenants contained or referenced in this Agreement and use its reasonable good
faith efforts to prevent or promptly remedy the same.
6.6 Access and Information. From the date hereof to the Effective
Time, the Company shall, and shall cause its Subsidiaries and its and their
respective officers, directors, employees and agents to, afford the officers,
employees and agents of FKWW and FKW Sub and their respective affiliates
reasonable access during normal business hours (or at such other times as FKWW
or FKW Sub and the Company may mutually agree) to its properties, books,
contracts, commitments and records and shall furnish FKWW and FKW Sub and their
respective affiliates all financial, operating and other data and information as
FKWW or FKW Sub or any of their respective affiliates, through their respective
officers, employees or agents, may reasonably request. All information disclosed
pursuant to this Section 6.6, shall be subject to those certain Confidentiality
Agreements entered into by and between FKWW and the Company as of May 2, 1996,
December 17, 1996, and December 31, 1996 (the "Confidentiality Agreements").
6.7 Acquisition Proposals. Prior to the Effective Time, the Company
agrees (a) that neither it nor any of its Subsidiaries shall authorize or permit
any of its officers, directors, employees, agents and representatives
(including, without limitation, any investment banker, attorney or accountant
retained by it or any of its Subsidiaries) to initiate, solicit or encourage,
directly or indirectly, any inquiries or the making or implementation of any
proposal or offer (including, without limitation, any proposal or offer to its
stockholders) with respect to a merger, acquisition, consolidation or similar
transaction involving, or any purchase of all or any significant portion of the
assets or any equity securities of, the Company or any of its Subsidiaries (any
such proposal or offer being hereinafter referred to as an "Acquisition
Proposal") or engage in any negotiations concerning, or provide any confidential
information or data to, or have any discussions with, any Person relating to an
Acquisition Proposal, or otherwise facilitate any effort or attempt to make or
implement an Acquisition Proposal; (b) that it will immediately cease and cause
to be terminated any existing activities, discussions or negotiations with any
parties conducted heretofore with respect to any of the foregoing and will take
the necessary steps to inform the individuals or entities referred to above of
the obligations undertaken in this Section 6.7; and (c) that it will notify FKWW
and FKW Sub immediately if any such inquiries or proposals are received by, any
such information is received from, or any such negotiations or discussions are
sought to be initiated or continued with, it; provided,
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however, that nothing contained in this Section 6.7 shall prohibit the Board of
Directors of the Company from (i) furnishing information to or entering into
discussions or negotiations with, any Person or entity that makes an unsolicited
bona fide proposal to acquire the Company pursuant to a merger, consolidation,
share exchange, purchase of a substantial portion of the assets, business
combination or other similar transaction, if, and only to the extent that (A)
the Board of Directors determines in good faith, based as to legal matters on
advice of outside legal counsel, that the failure to take such action would
involve a substantial risk of breach of fiduciary duty to the Company's
shareholders imposed by applicable law, (B) prior to furnishing such information
to, or entering into discussions or negotiations with, such Person or entity,
the Company provides notice to FKWW and FKW Sub to the effect that it is
furnishing information to, or entering into discussions or negotiations with,
such Person or entity, and (C) subject to any confidentiality agreement with
such Person or entity (which the Company executed after determining in good
faith, based as to legal matters on advice of outside counsel, that the failure
to take such action would involve a substantial risk of breach of the Board of
Directors' fiduciary duty to stockholders imposed by applicable law), the
Company keeps FKWW and FKW Sub informed of the status (not the terms) of any
such discussions or negotiations; and (ii) to the extent applicable, complying
with Rule 14d-9 and 14e-2 promulgated under the Exchange Act with regard to an
Acquisition Proposal. Nothing in this Section 6.7 shall (x) permit any party to
terminate this Agreement (except as specifically provided in Section 8.1
hereof), (y) permit any party to enter into any agreement with respect to an
Acquisition Proposal during the term of this Agreement (it being agreed that
during the term of this Agreement, no party shall enter into any agreement with
any Person that provides for, or in any way facilitates, an Acquisition Proposal
(other than a confidentiality agreement in customary form)), or (z) affect any
other obligation of any party under this Agreement.
6.8 Board of Directors. In the event FKWW and the other parties
thereto consummate the purchase of the Company Stock from the Robertson Sellers
pursuant to the Robertson Purchase Agreement prior to the Closing of the Merger,
FKWW shall, from and after such closing, be entitled to designate, at its
option, upon notice to the Company, up to that number of directors, rounded to
the nearest whole number, of the Company's Board of Directors, subject to
compliance with Section 14(f) of the Exchange Act, as will make the percentage
of the Company's directors designated by FKWW equal to the aggregate voting
power of the Shares of Company Stock held by FKWW or any of its Subsidiaries
(after giving effect to the conversion of the Class A Stock to Class B Stock and
the conversion of any Class C Stock and any Convertible Notes then held by FKWW
or its Subsidiaries into Class B Stock); provided, however, that the Company
shall not be obligated and need not appoint any designee or designees to the
Board of Directors of the Company who, in the Board's good faith judgment, are
not fit to be Directors of the Company; and provided, further, that in the event
that FKWW designees are elected to the Board of Directors of the Company, such
Board of Directors shall have, until the Effective Time, at least two directors
who are Class B Directors on the date of this Agreement (the "Continuing
Directors"), and provided, further that, in such event, if the number of
Continuing Directors shall be reduced below two for any reason whatsoever, the
remaining Continuing Directors shall be permitted to designate an individual to
fill such vacancy who would be an "independent director" under the rules of the
New York Stock Exchange (such designee to be deemed to be a Continuing Director
for purposes of this Agreement) or, if no Continuing Directors then remain, the
other directors shall designate two individuals to fill such
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vacancies who shall not be officers, directors, employees or Affiliates of FKWW
or any of its Affiliates and shall otherwise be "independent directors" under
the rules of the New York Stock Exchange (each designee to be deemed to be a
Continuing Director for purposes of this Agreement). To the fullest extent
permitted by applicable law, the Company shall take all actions requested by
FKWW which are reasonably necessary to effect the election of any such designee
or designees, including the inclusion in the Information Statement, or a
separate mailing, of the information required by Section 14(f) of the Exchange
Act and Rule 14f-1 promulgated thereunder, and the making of such mailing as
part of the Information Statement or otherwise, as requested by FKWW (provided
that FKWW shall have provided to the Company on a timely basis all information
required to be included with respect to FKWW designees). In connection with the
foregoing, the Company will promptly either increase the size of the Company's
Board of Directors and/or obtain the resignation of such number of its current
directors as is necessary to enable FKWW designees to be elected or appointed to
the Company's Board of Directors as provided above. Following the election or
appointment of FKWW's designees pursuant to this Section 6.8 and prior to the
Effective Time, any amendment, or waiver of any term or condition, of this
Agreement or the Amended and Restated Certificate of Incorporation or Restated
By-Laws of the Company, any termination of this Agreement by the Company, any
extension by the Company of the time for the performance of any of the
obligations or other acts of FKWW or FKW Sub or waiver or assertion of any of
the Company's rights hereunder, or any other consents or actions by the Board of
Directors with respect to this Agreement or the Guaranty, will require, and will
require only, the concurrence of a majority of the Continuing Directors, except
to the extent that applicable law requires that such action be acted upon by the
full Board of Directors, in which case such action will require the concurrence
of a majority of the Directors, which majority shall include each of the
Continuing Directors, and no other action by the Company shall be required for
purposes of this Agreement. After the date of this Agreement, until the earlier
of (i) the Effective Time, and (ii) the termination of this Agreement, FKWW will
not exercise any rights it may have as a stockholder of the Company to effect a
change in the composition of the Board of Directors of the Company, except as
provided for in this Section 6.8.
6.9 Indemnification and Insurance. FKWW shall cause all rights to
indemnification or exculpation now existing in favor of the past and present
directors or officers of the Company as provided in the Company's Amended and
Restated Certificate of Incorporation or Restated By-Laws with respect to claims
arising from service as officers or directors prior to the Effective Time to
survive the merger and continue in full force and effect for a period of not
less than six years from the Effective Time (or with respect to claims arising
from service as officers or directors prior to the Effective Time which have not
been resolved prior to such sixth anniversary, until the time such matters are
finally resolved). FKWW shall cause the Surviving Corporation to maintain in
effect for not less than six years from the Effective Time the current policies
of the directors' and officers' liability insurance maintained by the Company as
of the date hereof (provided that the Surviving Corporation may substitute
therefor policies of at least the same amount of coverage (covering known or
unknown claims as of the Effective Time) containing terms and conditions which
are not less advantageous), copies of which has been previously made available
to FKWW, with respect to matters occurring prior to the Effective Time, to the
extent available; provided, however, that the Surviving Corporation shall not be
required to maintain such insurance to the extent the annual premium
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therefor exceeds 200% of the annual premiums currently paid by the Company in
respect of the current policy or policies (the "Maximum Amount") but in such
case shall purchase as much comparable coverage as available for the Maximum
Amount.
6.10 Officer's Certificate. The Company, at the request of FKWW,
shall deliver a certificate to FKWW executed by an executive officer of the
Company in the form and with respect to the matters referred to in the attached
Exhibit A, dated as of the date of the closing of the purchase of the Control
Stock (as defined in the Robertson Purchase Agreement) by FKWW pursuant to terms
of the Robertson Purchase Agreement, or, alternatively, inform FKWW that it is
unable to give such certificate because of the inaccuracy of any of the matters
referred to therein.
ARTICLE VII
CONDITION
7.1 Conditions to Obligation of Each Party to Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment or waiver at or prior to the Effective Time of the following
conditions:
(a) no temporary or permanent order, injunction or decree
shall be entered or enforced by or before any court, arbitrator or Governmental
Entity that would prohibit the consummation of the Merger;
(b) there shall not have occurred and be continuing any
declaration of any banking moratorium or suspension of payments by banks in the
United States or any general limitation on the extension of credit by lending
institutions in the United States;
(c) all required waiting periods under the HSR Act applicable
to the transactions contemplated hereunder shall have expired or terminated;
(d) the Company shall have obtained all consents and approvals
of Governmental Entities which are legally required to be obtained by the
Company prior to consummation of the Merger, which if not obtained would have a
material adverse effect on the business, results of operations or financial
condition of the Company and its Subsidiaries taken as a whole; and
(e) there shall not have been any statute, rule, regulation or
order promulgated, enacted, issued or deemed applicable to the Merger by any
Governmental Entity or court of competent jurisdiction which would make the
consummation of the Merger illegal;
provided, however, that upon the closing of the purchase of the Control Stock
pursuant to the Robertson Purchase Agreement, the conditions in subparagraphs
(c) and (d) of this Section 7.1 above shall, to the extent then applicable, no
longer be applicable.
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7.2 Additional Conditions to the Company's Obligation to Effect the
Merger. The obligation of the Company to effect the Merger is also subject to
the satisfaction or waiver at or prior to the Effective Time of the following
conditions: (a) the representations and warranties of FKWW and FKW Sub contained
in this Agreement shall be true and correct in all material respects on and as
of the Effective Time as though made on and as of such time (except for those
made as of a specified date (including "as of the date hereof") which shall be
true and correct as of such date), and (b) FKWW and FKW Sub shall have performed
in all material respects their respective obligations hereunder required to be
performed on or before the Effective Time; provided, however, upon the closing
of the purchase of the Control Stock pursuant to the terms of the Robertson
Purchase Agreement, the conditions set forth in clause (a) of this Section 7.2
shall no longer be applicable.
7.3 Additional Conditions to FKW Sub's Obligation to Effect the
Merger. The obligation of FKW Sub to effect the Merger is also subject to the
satisfaction or waiver at or prior to the Effective Time of the following
conditions: (a) the representations and warranties of the Company contained in
this Agreement shall be true and correct in all material respects on and as of
the Effective Time as though made on and as of such time (except for those made
as of a specified date (including "as of the date hereof"), which shall be true
and correct as of such date), except (i) for changes in circumstances expressly
permitted or contemplated by this Agreement or (ii) where the failure would not
be reasonably expected to have a material adverse effect on the business,
results of operations or financial condition of the Company and its Subsidiaries
taken as a whole, the Company shall have performed in all material respects
its obligations hereunder required to be performed on or before the Effective
Time, and (c) except as set forth in the Company Disclosure Letter or as
expressly provided for herein, (x) immediately prior to the Effective Time, the
representation and warranty contained in Section 4.5 (a) hereof shall be true
and correct (other than such changes resulting from the exercise of Options or
the conversions of convertible securities which are outstanding as of the date
hereof and disclosed in the Company Disclosure Letter), and (y) immediately
following the Effective Time, other than as provided for in the Company
Disclosure Letter, neither the Company nor any of its Subsidiaries is or will be
bound by any options, warrants, rights or agreements which would entitle any
Person, other than FKWW or its Subsidiaries, to own any capital stock of the
Surviving Corporation or to receive any payment in respect thereof; provided,
however, upon the closing of the purchase of the Control Stock pursuant to the
provisions of the Robertson Purchase Agreement, the conditions set forth in
clauses (a) and (b) of this Section 7.3 shall no longer be applicable.
ARTICLE VIII
TERMINATION, AMENDMENT, WAIVER AND LIABILITY
8.1 Termination. This Agreement may be terminated at any time prior
to the Effective Time, whether prior to or after approval of the Merger by the
stockholders of the Company:
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(a) by mutual written consent of FKW Sub, FKWW and the
Company, or
(b) by FKW Sub or FKWW, if the Effective Time shall not have
occurred on or prior to November 30, 1997, due to a failure of any of the
conditions to the obligations of FKW Sub to effect the Merger, to the extent
then applicable, set forth in Sections 7.1 or 7.3, or
(c) by the Company, if the Effective Time shall not have
occurred on or prior to November 30, 1997, due to a failure of any of the
conditions to the obligations of the Company to effect the Merger, to the extent
then applicable, set forth in Sections 7.1 or 7.2, or
(d) by the Company, if after the date hereof and before the
Effective Time, the Guarantor attempts or purports to revoke or withdraw the
Guaranty or a court of competent jurisdiction finally determines that the
Guaranty is unenforceable or invalid;
provided that any action by the Company shall be subject to Section 6.8 if then
applicable; and provided, further, that the November 30, 1997 date shall be
extended for (i) any period that a party is subject to a non-final order,
injunction or decree prohibiting consummation of the Merger and (ii) the
continuation of any event set forth in Section 7.1(b).
8.2 Effect of Termination. In the event of the termination of this
Agreement as provided in Section 8.1, this Agreement shall forthwith become void
and there shall be no liability or obligation on the part of the Company or FKW
Sub or FKWW or any of their Affiliates except as Set forth in Sections 6.3 and
9.11 (with respect to fees and expenses) or Section 6.6 (with respect to
confidentiality). In the event of a termination of this Agreement as provided in
Section 8.1, the parties will not be excused for any liability owing the others
for a prior breach of this Agreement, subject to the provisions of Sections 8.5
and 9.3.
8.3 Amendment. This Agreement may not be amended except by action of
the Board of Directors of each of the parties hereto (and subject, in the case
of the Company, to Section 6.8), which Amendment is set forth in an instrument
in writing signed on behalf of each of the parties hereto. No amendment
following approval of the stockholders shall require the approval of the
stockholders unless specifically required by the DGCL.
8.4 Waiver. At any time prior to the Effective Time, whether before
or after the stockholder approval, any party hereto, by action taken by its
Board of Directors (and subject, in the case of the Company, to Section 6.8),
may (i) extend the time for the performance of any of the obligations or other
acts of any other party hereto or (ii) subject to the second sentence of Section
8.3, waive compliance with any of the agreements of any other party or with any
conditions to its own obligations. Any agreement on the part of a party hereto
to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party by a duly authorized
officer.
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8.5 Limitation on Liability. The liability of the Company for any
breach by the Company of this Agreement shall be limited to the actual damages
suffered by FKWW and FKW Sub under this Agreement and the Company shall not be
liable for any consequential or other damages of FKWW or FKW Sub, including any
damages arising in connection with any Other Transaction Agreement.
ARTICLE IX
GENERAL PROVISIONS
9.1 Publicity. The initial press release relating to this Agreement
shall be a joint press release in the form attached hereto as Exhibit B, and
FKWW and the Company shall, subject to their respective legal obligations of
public companies, use reasonable good faith efforts to agree upon the text of
any other press release before issuing any such press release or otherwise
making public statements with respect to the transactions contemplated hereby
and in making any filings with any federal or state governmental or regulatory
agency or with any national securities exchange with respect thereto.
9.2 Notices. All notices and other communications required or
permitted hereunder shall be in writing and shall be delivered personally,
mailed by certified or registered mail, return receipt requested and postage
prepaid, or transmitted by facsimile to the parties at the following addresses
or at such other addresses as shall be specified by the parties by like notice:
(a) If to FKWW or FKW Sub:
Fox Kids Worldwide, Inc. or
Fox Kids Merger Corporation
10960 Wilshire Boulevard
Los Angeles, California 90024
Attn: Mel Woods
Fax: 310-235-5552
with a copy to:
Fox, Inc.
10201 West Pico Boulevard
Los Angeles, California 90035
Attn: President
Fax: 310-369-1203
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<PAGE> 160
and a copy to:
The News Corporation Limited
c/o News America Publishing Incorporated
1211 Avenue of the Americas
New York, New York 10036
Attn: Arthur M. Siskind, Esq.
Fax: 212-768-2029
and a copy to:
Troop Meisinger Steuber & Pasich, LLP
10940 Wilshire Boulevard
Los Angeles, California 90024
Attn: C.N. Franklin Reddick, III, Esq.
Fax: 310-443-8512
and a copy to:
Squadron, Ellenoff, Plesent & Sheinfeld, LLP
551 Fifth Avenue
New York, New York 10176
Attn: Jeffrey W. Rubin, Esq.
Fax: 212-697-6686
(b) If to the Company:
International Family Entertainment, Inc.
2877 Guardian Lane
Virginia Beach, Virginia 23450
Attn: Tim Robertson
Fax: 757-459-6422
with a copy to:
International Family Entertainment, Inc.
2877 Guardian Lane
Virginia Beach, Virginia 23450
Attn: Louis A. Isakoff, Esq.
Fax: 757-459-6422
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<PAGE> 161
and a copy to:
Latham & Watkins
53rd at Third, Suite 1000
885 Third Avenue
New York, New York 10022-4802
Attn: Erica H. Steinberger, Esq.
Fax: 212-751-4864
and a copy to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019-6064
Attn: James M. Dubin, Esq.
Fax: 212-757-3990
and shall for all purposes of this Agreement be treated as being effective or
having been given when delivered if delivered personally, or, if sent by mail or
facsimile, upon receipt.
9.3 Representations and Warranties. The respective representations
and warranties of the Company, FKWW and FKW Sub contained herein shall expire
with, and be terminated and extinguished at the Effective Time. Neither the
Company, FKWW nor FKW Sub shall be under any monetary or other liability
whatsoever with respect to any breach of a representation or warranty contained
herein or in or with respect to any certificate or other document delivered
pursuant hereto, and the sole consequence of any such breach shall be limited to
the failure to satisfy a condition set forth in Section 7.2 or 7.3 hereof, as
applicable, and the termination right provided for in Section 8.1 hereof, in
each case to the extent applicable according to such Section's express terms.
9.4 Titles and Gender. The titles of the Sections and subsections of
this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement. Whenever used herein, the singular
member includes the plural, the plural includes the singular, and the use of
either gender shall include both genders.
9.5 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the respective successors and
assigns of the parties hereto; provided, however, that no party hereto shall
assign any of its rights, interests or obligations hereunder without the prior
written consent of the other parties.
9.6 Third Party Beneficiaries. Nothing in this Agreement, expressed
or implied, is intended to confer on any Person other than the parties hereto or
their respective successors and permitted assigns, and other than as expressly
provided for in Section 6.8 and 6.9 hereof, any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
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<PAGE> 162
9.7 Counterparts. This Agreement may be executed in counterparts,
each of which shall be an original, but all of which together shall constitute
one and the same agreement.
9.8 Severability. Should any Section or any part of a Section of
this Agreement be rendered void, invalid or unenforceable by any court of law
for any reason, such invalidity or unenforceability shall not void or render
invalid or unenforceable any other Section or part of a Section of this
Agreement.
9.9 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
BOTH AS TO VALIDITY AND PERFORMANCE AND ENFORCED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF DELAWARE, WITHOUT GIVING EFFECT TO THE CHOICE OF LAW PRINCIPLES
THEREOF.
9.10 No Adverse Construction. The rule that a contract is to be
construed against the party drafting the contract is hereby waived, and shall
have no applicability in construing this Agreement or any provisions hereof.
9.11 Costs and Attorneys' Fees. In the event that any action, suit,
or other proceeding is brought or instituted, to enforce or to seek damages for
breach of this Agreement, the prevailing party shall recover all of such party's
costs, and reasonable attorneys' fees incurred in each and every such action,
suit, or other proceeding, including any and all appeals or petitions therefrom.
9.12 Entire Agreement. This Agreement, the attached Exhibits and
Company Disclosure Letter, the Confidentiality Agreements and the Guaranty
contain the entire understanding of the parties and there are no further or
other agreements or understandings, written or oral, in effect between the
parties relating to the subject matter hereof unless expressly referred to
herein.
9.13 Jurisdiction: Consent to Service of Process: No Jury Trial. (a)
Except as provided in the next paragraph, the parties hereto agree that any
dispute between or among them arising out of, connected with, related to, or
incidental to the relationship established among them pursuant to this
Agreement, and whether arising in contract, tort, equity, or otherwise, may be
resolved by state or federal courts located in Delaware. Each of the parties
hereto waives in any such dispute any objection that it may have to such
Delaware courts considering the dispute including, without limitation, any
objection to the laying of venue or based on the ground of forum non conveniens.
(b) Each of the parties hereto agrees that the other parties
to this Agreement shall have the right, to the extent permitted by applicable
law, to proceed against it or its property in a court in any location reasonably
selected in good faith to enable such other parties to realize on such property,
or to enforce a judgment or other court order entered in favor of any such other
party. Each of the parties hereto waives any objection that it may have to the
location of the court in which any other party to this Agreement has commenced a
proceeding described in this paragraph including, without limitation, any
objection to the laying of venue or based on the ground of forum non conveniens.
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<PAGE> 163
(c) The parties hereto each waives any right to have a jury
participate in resolving any dispute whether sounding in contract, tort, or
otherwise arising out of, connected with, related to or incidental to the
relationship established between them pursuant to this Agreement. Instead, any
disputes resolved in court will be resolved in a bench trial without a jury.
(d) Each party hereto hereby irrevocably designates CT
Corporation System as its designee, appointee and agent to receive, for and on
behalf of it, service of process in such respective jurisdictions in any legal
action or proceeding with respect to this Agreement or any document related
thereto. It is understood that a copy of such process serviced on such agent
will be promptly forwarded by mail to it at its address set forth in Section 9.2
hereof, but the failure to receive such copy shall not affect in any way the
service of such process. Each of the parties hereto further irrevocably consents
to the service of process of any of the aforementioned courts in any such action
or proceeding by the mailing of copies thereof by registered or certified mail,
postage prepaid, to it at its said address, such service to become effective
upon confirmed delivery.
(e) Nothing herein shall affect the right of any party to this
Agreement to serve process in any other manner permitted by law or to commence
legal proceedings or otherwise proceed against any other party in any other
jurisdiction.
9.14 Affiliate: Control, Controlled By and Under Common Control
With: Person: Actual Knowledge. For purposes of this Agreement:
(a) "Affiliate" shall mean, when used with reference to a
specified Person, any Person that directly or indirectly through one or more
intermediaries controls or is controlled by, or is under common control with,
such specified Person and, in the case of individuals, a Person's spouse,
parents, children, siblings, mothers and fathers in law, sons and daughters in
law, and brothers and sisters in law. For purposes of this definition, control
(including controlled by and under common control with), as used with respect to
any Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities, by contract or otherwise.
For purposes of this Agreement, (i) neither the Company nor any of its
Subsidiaries shall be deemed to be an Affiliate of FKWW, FKW Sub or any of their
respective Affiliates, (ii) each of the holders of the Class A Stock, Liberty,
CBN, Regent and their respective Affiliates shall be deemed to be an Affiliate
of the Company, and (iii) the Guarantor, Fox, Inc. and Saban Entertainment,
Inc., and their respective Affiliates, shall each be deemed to be an Affiliate
of FKWW and FKW Sub.
(b) "Person" means any individual, corporation, general or
limited partnership, limited liability company, limited liability partnership,
trust, joint venture, association or unincorporated entity of any kind.
(c) "Actual Knowledge" of a specified Person means the actual
knowledge of such Person without independent investigation or inquiry.
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<PAGE> 164
9.15 Specific Performance. Each of the parties hereto recognizes and
acknowledges that a breach by it of any covenants or agreements contained in
this Agreement will cause the other parties to sustain damages for which they
would not have an adequate remedy at law for money damages, and therefore each
of the parties hereto agrees that in the event of any such breach the aggrieved
party or parties shall, without the posting of bond or other security, be
entitled to the remedy of specific performance of such covenants and agreements
and injunctive and other equitable relief, in addition to any other remedy to
which it or they may be entitled, at law or in equity.
9.16 Definitions. The following terms are defined on the page
numbers indicated below:
Definition Section
- ---------- -------
Acquisition Proposal ............................................. 6.7
Actual Knowledge ................................................. 9.14
Affiliate ........................................................ 9.14
Affiliation Agreements ........................................... 4.13
Agreement ........................................................ Preamble
Blue Sky Laws .................................................... 2.3
Cash Payment ..................................................... 1.8
CBN .............................................................. Recitals
CBN Purchase Agreement ........................................... Recitals
Certificates ..................................................... 1.9
Class A Stock .................................................... Recitals
Class B Stock .................................................... Recitals
Class C Stock .................................................... Recitals
Company .......................................................... Recitals
Company Disclosure Letter ........................................ Article IV
Company SEC Reports .............................................. 4.7
Company Stock .................................................... Recitals
Confidentiality Agreements ....................................... 6.6
Consent .......................................................... Recitals
Constituent Corporations ......................................... 1.1
Continuing Directors ............................................. 6.8
Contribution Agreement ........................................... Recitals
Convertible Notes ................................................ Recitals
DGCL ............................................................. Recitals
Dissenting Shares ................................................ 1.7
Effective Time ................................................... 1.3
Exchange Act ..................................................... 1.8
Exchange Agent ................................................... 1.9
FKW Sub .......................................................... Recitals
FKWW ............................................................. Recitals
GAAP ............................................................. 4.7
Governmental Entity .............................................. 2.1
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<PAGE> 165
Guarantor ......................................................... Recitals
Guaranty .......................................................... Recitals
Highly Compensated Persons ........................................ 4.8
HSR ACT ........................................................... 2.3
Information Statement ............................................. 4.15
Irrevocable Trusts ................................................ Recitals
Lien .............................................................. 2.5
LIFE .............................................................. Recitals
Maximum Amount .................................................... 6.9
Merger ............................................................ Recitals
Merger Consideration .............................................. 1.6
Merger Filing ..................................................... 1.3
Modification ...................................................... 6.4
MTM ............................................................... 1.8
Options ........................................................... 1.8
Other Transaction Agreements ...................................... Recitals
Person ............................................................ 9.14
PR Charitable Trust ............................................... Recitals
Regent ............................................................ Recitals
Regent Purchase Agreement ......................................... Recitals
Related Parties ................................................... 4.12
Related Party Agreements .......................................... 4.12
Responsible Officers .............................................. 4.11
Restriction ....................................................... 4.2
Robertson Purchase Agreement ...................................... Recitals
The Robertson Sellers ............................................. Recitals
SEC ............................................................... 4.7
Securities Act .................................................... 2.3
Share ............................................................. 1.6
Stock Plans ....................................................... 1.8
Stock Purchase Agreements ......................................... Recitals
Subsidiary ........................................................ 2.1
Surviving Corporation ............................................. 1.11
The Family Channel ................................................ 4.9
Tim Robertson ..................................................... Recitals
TR Charitable Trust ............................................... Recitals
TR Family Trust ................................................... Recitals
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]
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<PAGE> 166
IN WITNESS WHEREOF, FKWW, FKW Sub and the Company have caused this
Agreement to be executed as of the date first written above by their duly
authorized respective officers.
FOX KIDS WORLDWIDE, INC.
By /s/ Mel Woods
---------------------------------
Name: Mel Woods
Title: President
FOX KIDS MERGER CORPORATION
By /s/ Mel Woods
---------------------------------
Name: Mel Woods
Title: President
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
By: /s/ M. G. Robertson
---------------------------------
Name: M. G. Robertson
Title: Chairman of the Board
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<PAGE> 167
EXHIBITS
Exhibit A --- Officer's Certificates
Exhibit B --- Press Release
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<PAGE> 168
EXHIBIT A
CERTIFICATE
This Certificate is issued to Fox Kids Worldwide, Inc., a Delaware
corporation ("FKWW") pursuant to Section 6.10 of that certain Agreement and Plan
of Merger (the "Merger Agreement"), dated as of _______, 1997, by and among
FKWW, Fox Kids Merger Corporation, a Delaware corporation and a wholly owned
subsidiary of FKWW, and International Family Entertainment, a Delaware
corporation, (the "Company"). Capitalized terms, unless otherwise defined
herein, shall have the meanings ascribed to them in the Merger Agreement.
In connection therewith, the Company hereby certifies, to the Actual
Knowledge of the Responsible Officers, as of the date hereof:
1. No temporary or permanent order, injunction, or decree has been entered or
enforced by or before any court, arbitrator or Governmental Entity against the
Company that would prohibit the consummation of the Merger by the Company; and
2. The Company has obtained all consents and approvals of any Governmental
Entity which are legally required to be obtained by the Company prior to the
consummation of the Merger, and which if not obtained would have a material
adverse effect on the business, results of operations or financial condition of
the Company and its Subsidiaries taken as a whole.
This certificate is being delivered by the undersigned in his capacity as
an officer of the Company and the undersigned shall have no personal liability
with respect to the matters set forth above. This certificate is for
informational purposes only and the accuracy of the information included herein
is not, and shall not be deemed to be, a condition to the Merger. Sections 7.1,
7.2 and 7.3 of the Merger Agreement include a complete list of the conditions to
the Merger. Further, this Certificate shall not form the basis of any claim or
assertion of liability on the part of the Company or any other Person
irrespective of whether the Merger occurs.
IN WITNESS WHEREOF, the undersigned has executed this certificate and
caused it to be delivered this __________, day of __________, 1997.
International Family Entertainment, Inc.
By: ___________________________________________
Its: __________________________________________
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<PAGE> 169
Acknowledged and (as to
the penultimate paragraph) agreed,
Fox Kids Worldwide, Inc.
By: ______________________________________
Its: ______________________________________
Fox Kids Merger Corporation
By: ______________________________________
Its: ______________________________________
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<PAGE> 170
EXHIBIT B
[LOGO]
INTERNATIONAL FAMILY ENTERTAINMENT
FOR IMMEDIATE RELEASE
Contacts:
Fox Kids Worldwide, Inc.
Mel Woods, 310/235-5555
The News Corporation Limited
Press Inquiries: Jim Platt, 212/852-7083
Investors: Reed Nolte, 212/852-7092
International Family Entertainment, Inc.
Press Inquiries: Diane Linen Powell
757/459-6155
Investors: Dave Humphrey
757/459-6110
INTERNATIONAL FAMILY ENTERTAINMENT TO BE ACQUIRED
BY FOX KIDS WORLDWIDE IN CASH MERGER
VALUED AT APPROXIMATELY $1.9 BILLION
$35 PER SHARE TRANSACTION APPROVED BY IFE STOCKHOLDERS
HOLDING A MAJORITY OF THE VOTING POWER
Virginia Beach, VA and Los Angeles, CA (June 11,1997) -- International Family
Entertainment, Inc. ("IFE") (NYSE:FAM) and Fox Kids Worldwide, Inc. ("FKW")
today announced the execution of an Agreement and Plan of Merger in which a
subsidiary of FKW will merge with and into IFE, with IFE as the surviving
corporation, in a transaction valued at approximately $1.9 billion, including
outstanding debt. Holders of IFE Common Stock will receive $35 per share in
cash. IFE's Board of Directors has determined that the merger is fair to, and in
the best interests of, the Company and its stockholders. Stockholders holding a
majority of the outstanding voting power of IFE's Common Stock have executed
written consents approving the merger. Consummation of the merger is subject to
the satisfaction of certain conditions and, in any event, will not occur until
the expiration of 20 days from the date a definitive information statement is
sent to IFE's stockholders.
Pat Robertson, IFE's Chairman, Tim Robertson, IFE's President and Chief
Executive Officer, and trusts controlled by them have agreed to sell all shares
of IFE's Class A Common Stock (in the form of Class B Common Stock into which
such shares are convertible) and Class B Common Stock held by them, and each of
The Christian Broadcasting Network, Inc. and Regent University have agreed to
sell all their shares of Class B Common Stock, to FKW for $35 per share in cash,
pursuant to separate Stock Purchase Agreements, and each of such stockholders
has executed a consent approving the merger.
-MORE-
2877 Guardian Lane o P.O. Box 2050 o Virginia Beach, VA 23450-2050
(757) 459-6000 o FAX (757) 459-6425
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<PAGE> 171
FAM To Be Acquired By Fox Kids Worldwide
Page 2
June 11, 1997
Liberty IFE, Inc., a subsidiary of Liberty Media Corporation
(Nasdaq/NM:LBTYA), which holds non-voting Class C Common Stock of IFE and $23
million of 6% Convertible Secured Notes due 2004, convertible into Class C
Common Stock, has agreed to contribute its Class C Common Stock and Convertible
Notes to FKW, in a transaction intended to be a tax-free exchange, in exchange
for a new series of nonconvertible 8.5% preferred stock of FKW. The FKW
preferred stock will have a liquidation preference equivalent to $35 per Class C
share, plus an amount designed to compensate Liberty for foregoing interest on
the Convertible Notes and for certain tax consequences.
The merger and each of the stock purchase agreements and the Liberty IFE
contribution agreement are subject to the satisfaction of certain conditions,
including expiration or termination of all applicable waiting periods under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976. It is anticipated that the
transactions contemplated by the contribution agreement and the stock purchase
agreements will be consummated upon such termination or expiration and prior to
the merger. However, consummation of such transactions is not a condition to the
merger.
Fox Kids Worldwide is a fully integrated global children's television
entertainment company which develops, produces, broadcasts and distributes
quality animated and live-action children's television programming through its
operating entities Fox Children's Network ("FCN") and Saban Entertainment. FCN
is the top-rated children's (ages 2-11) oriented broadcast television network in
the United States, providing 19 hours per week and reaching 97% of U.S.
television households. The Fox Kids brand is expanding globally, with networks
in the United Kingdom, Australia and Latin America.
Pat Robertson, IFE's Chairman, said, "We are very enthusiastic about the
merger of IFE with Fox Kids Worldwide. This transaction soundly demonstrates the
stockholder value created by our efforts to provide exciting, meaningful
entertainment that can be enjoyed by the whole family. In addition, the
transaction clearly validates the multi-year strategy we have consistently
implemented. We expect to continue to benefit from The Family Channel's
established position as a destination channel in an increasingly crowded cable
environment and from its growing family entertainment franchise."
Rupert Murdoch, Chairman and Chief Executive of News Corporation,
commented, "We are delighted that Fox Kids Worldwide is acquiring The Family
Channel, one of the premiere brands in family entertainment. We expect the
future combination of high quality programming from the Fox Kids Network and The
Family Channel will create a new force in worldwide family entertainment."
-MORE-
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FAM To Be Acquired By Fox Kids Worldwide
Page 3
June 11,1997
Haim Saban, Chief Executive Officer of Fox Kids Worldwide, added, "The
Robertsons have built a tremendous business with IFE and we look forward to
working with them to strengthen and expand it. FKW and our partners at Fox and
News Corporation plan to bring our collective assets together to build IFE to
the next level - our franchises and libraries in kids, film and television at
Saban and Fox, together with the worldwide distribution system of News
Corporation. Our goal will be to make IFE into a world class, worldwide
entertainment channel."
It is anticipated that Pat Robertson will be Co-Chairman of IFE and Tim
Robertson will continue as President and Chief Executive Officer. Corporate
headquarters will remain in Virginia Beach, Virginia.
Bear, Stearns & Co, Inc. and Goldman, Sachs & Co. acted as advisors to IFE
on this transaction.
Fox Kids Worldwide, Inc. is owned equally by The News Corporation Limited
(NYSE:NWS) and Saban Entertainment. The News Corporation Limited is one of the
world's largest media companies with total assets as of March 31, 1997 of $30.9
billion and total annual revenues of $10 billion.
International Family Entertainment, Inc. owns and operates an array of
entertainment assets. IFE's cable television networks provide high-quality
entertainment and information programming that emphasizes traditional values and
can be enjoyed by the entire family. The Family Channel is one of the nation's
largest advertiser-supported basic cable television networks, currently reaching
over 69 million television households. FiT TV is the only 24-hour cable network
dedicated to health and fitness. MTM Entertainment, Inc. is engaged in the
development, production and distribution of television series and other programs
throughout the world.
-END-
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ANNEX II: SECTION 262 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
SECTION 262 OF THE
GENERAL CORPORATION LAW OF THE
STATE OF DELAWARE
262 APPRAISAL RIGHTS. -- (a) Any stockholder of a corporation of this
State who holds shares of stock on the date of the making of a demand pursuant
to subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to sec.228 of this title shall be entitled to an appraisal by the Court
of Chancery of the fair value of his shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec.251 (other than a merger effected pursuant to
subsection (g) of Section 251), 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this
section shall be available for the shares of any class or series of
stock, which stock, or depository receipts in respect thereof, at the
record date fixed to determine the stockholders entitled to receive
notice of and to vote at the meeting of stockholders to act upon the
agreement of merger or consolidation, were either (i) listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000
holders; and further provided that no appraisal rights shall be
available for any shares of stock of the constituent corporation
surviving a merger if the merger did not require for its approval the
vote of the holders of the surviving corporation as provided in
subsection (f) of sec.251 of this title.
(2) Notwithstanding paragraph (1) of this subsection,
appraisal rights under this section shall be available for the shares
of any class or series of stock of a constituent corporation if the
holders thereof are required by the terms of an agreement of merger or
consolidation pursuant to sec.sec.251, 252, 254, 257, 258, 263 and 264
of this title to accept for such stock anything except:
a. Shares of stock of the corporation surviving or
resulting from such merger or consolidation, or depository
receipts in respect thereof;
b. Shares of stock of any other corporation, or
depository receipts in respect thereof, which shares of stock
(or depository receipts in respect thereof) or depository
receipts at the effective date of the merger or consolidation
will be either listed on a
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national securities exchange or designated as a national
market system security on an interdealer quotation system by
the National Association of Securities Dealers, Inc. or held
of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs
a. and b. of this paragraph; or
d. Any combination of the shares of stock,
depository receipts and cash in lieu of fractional shares or
fractional depository receipts described in the foregoing
subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under sec.253 of this title is
not owned by the parent corporation immediately prior to the merger,
appraisal rights shall be available for the shares of the subsidiary
Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this section shall be available for the shares of
any class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal
rights are provided under this section is to be submitted for approval
at a meeting of stockholders, the corporation, not less than 20 days
prior to the meeting, shall notify each of its stockholders who was
such on the record date for such meeting with respect to shares for
which appraisal rights are available pursuant to subsections (b) or (c)
hereof that appraisal rights are available for any or all of the shares
of the constituent corporations, and shall include in such notice a
copy of this section. Each stockholder electing to demand the appraisal
of his shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal
of his shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares. A
proxy or vote against the merger or consolidation shall not constitute
such a demand. A stockholder electing to take such action must do so by
a separate written demand as herein provided. Within 10 days after the
effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that
the merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to
sec.228 or sec.253 of this title, each constituent corporation, either
before the effective date of the merger or consolidation or within ten
days thereafter, shall notify each of the holders of any class or
series of stock of such constituent corporation who are entitled to
appraisal rights of the approval of the merger or consolidation and
that appraisal rights are available for any or all shares of such class
or series of stock of such constituent corporation, and shall include
in such notice a copy of this section;
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<PAGE> 175
provided that, if the notice is given on or after the effective date of
the merger or consolidation, such notice shall be given by the
surviving or resulting corporation to all such holders of any class or
series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the
effective date of the merger or consolidation, shall, also notify such
stockholders of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within twenty days after
the date of mailing of such notice, demand in writing from the
surviving or resulting corporation the appraisal of such holder's
shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such holder's shares. If
such notice did not notify stockholders of the effective date of the
merger or consolidation, either (i) each such constituent corporation
shall send a second notice before the effective date of the merger or
consolidation notifying each of the holders of any class or series of
stock of such constituent corporation that are entitled to appraisal
rights of the effective date of the merger or consolidation or (ii) the
surviving or resulting corporation shall send such a second notice to
all such holders on or within 10 days after such effective date;
provided, however, that if such second notice is sent more than 20 days
following the sending of the first notice, such second notice need only
be sent to each stockholder who is entitled to appraisal rights and who
has demanded appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall
be not more than 10 days prior to the date the notice is given;
provided that, if the notice is given on or after the effective date of
the merger or consolidation, the record date shall be such effective
date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the
day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements
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as to the value of their shares have not been reached by the surviving or
resulting corporation. If the petition shall be filed by the surviving or
resulting corporation, the petition shall be accompanied by such a duly verified
list. The Register in Chancery, if so ordered by the Court, shall give notice of
the time and place fixed for the hearing of such petition by registered or
certified mail to the surviving or resulting corporation and to the stockholders
shown on the list at the addresses therein stated. Such notice shall also be
given by 1 or more publications at least 1 week before the day of the hearing,
in a newspaper of general circulation published in the City of Wilmington,
Delaware or such publication as the Court deems advisable. The forms of the
notices by mail and by publication shall be approved by the Court, and the costs
thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such
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<PAGE> 177
stock for any purpose or to receive payment of dividends or other distributions
on the stock (except dividends or other distributions payable to stockholders of
record at a date which is prior to the effective date of the merger or
consolidation); provided, however, that if no petition for an appraisal shall be
filed within the time provided in subsection (e) of this section, or if such
stockholder shall deliver to the surviving or resulting corporation a written
withdrawal of his demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding
in the Court of Chancery shall be dismissed as to any stockholder without the
approval of the Court, and such approval may be conditioned upon such terms as
the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation. (Last amended by Ch.
349, L. '96, eff. 7-1-96.)
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ANNEX III
---------
[GOLDMAN, SACHS LETTERHEAD] [GOLDMAN, SACHS LOGO]
PERSONAL AND CONFIDENTIAL
June 11, 1997
Board of Directors
International Family Entertainment, Inc.
2877 Guardian Lane
Virginia Beach, Virginia 23452
Gentlemen:
You have requested our opinion as to the fairness to the holders (other than
Buyer (as defined below) or any of its affiliates) of the outstanding shares of
Class A Common Stock, par value $0.01 per share (the "Class A Shares"), Class B
Common Stock, par value $0.01 per share (the "Class B Shares"), and Class C
Common Stock, par value $0.01 per share (the "Class C Shares" and together with
the Class A Shares and the Class B Shares, the "Shares"), of International
Family Entertainment, Inc. (the "Company") of the Merger Consideration (as
defined below) to be received by such holders in the Merger (as defined below)
pursuant to the Agreement and Plan of Merger dated as of June 11, 1997 among
Fox Kids Worldwide, Inc. ("Buyer"), Fox Kids Merger Corporation, a wholly-owned
subsidiary of Buyer ("Buyer Sub"), and the Company (the "Agreement").
Pursuant to the Agreement, Buyer Sub will be merged (the "Merger") with and
into the Company and each issued and outstanding Share that is not owned by
Buyer or the Company (other than Dissenting Shares (as defined in the
Agreement)) will be converted into and become a right to receive a cash payment
equal to $35, subject to adjustment as provided for in Section 1.6(d) of the
Agreement (the "Merger Consideration").
You have informed us that, pursuant to the Stock Purchase Agreements (as
defined in the Agreement) and the Contribution Agreement (as defined in the
Agreement), the parties to such agreements (such parties, excluding Buyer and
its affiliates, the "Major Stockholders") have each agreed to sell or
contribute to Buyer, as the case may be, the Shares owned by each of them (the
sale and contribution transactions referred to in this paragraph and any
related transactions being hereinafter collectively referred to as the "Major
Stockholder Transactions").
It is understood that we are not opining as to the fairness of the Major
Stockholder Transactions or the consideration to be paid to the Major
Stockholders thereunder. In addition, certain rights held by and obligations of
certain of the Major Stockholders may have had an impact on the sale process.
Our opinion is directed only to the fairness of the Merger Consideration to be
received by the holders of the Shares in the Merger pursuant to the Agreement
and our opinion does not address the relative merits of the Merger as compared
to any alternative business transactions that might be available to the
Company.
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International Family Entertainment, Inc.
June 11, 1997
Page Two
Goldman, Sachs & Co., as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. We are
familiar with the Company having acted as its financial advisor in connection
with the Agreement. We also have provided certain investment banking services
to the Company from time to time. We also have provided certain investment
banking services to affiliates of the Buyer from time to time, including acting
as underwriter in the offering of public securities issued by certain of
Buyer's affiliates, and may provide investment banking services to Buyer and
its affiliates in the future.
In connection with this opinion, we have reviewed, among other things, the
Agreement; the Stock Purchase Agreements; the Contribution Agreement; the
Amended and Restated Certificate of Incorporation of the Company; the Restated
By-laws of the Company; the Shareholders Agreement, dated as of September 1,
1995, among the Company and certain of the Major Stockholders; Annual Reports
to Stockholders and Annual Reports on Form 10-K of the Company for the five
years ended December 31, 1996; certain interim reports to stockholders and
Quarterly Reports on Form 10-Q; certain other communications from the Company
to its stockholders; and certain internal financial analyses and forecasts for
the Company prepared by its management. We also have held discussions with
members of the senior management of the Company regarding its past and current
business operations, financial condition and future prospects. In addition, we
have reviewed the reported price and trading activity for the Class B Shares,
compared certain financial and stock market information for the Company with
similar information for certain other companies the securities of which are
publicly traded, reviewed the financial terms of certain recent business
combinations in the cable programming industry specifically and performed such
other studies and analyses as we considered appropriate.
We have relied on the accuracy and completeness of all of the financial and
other information reviewed by us and have assumed such accuracy and
completeness for purposes of rendering this opinion. In addition, we have not
made an independent evaluation or appraisal of the assets and liabilities of
the Company or any of its subsidiaries and we have not been furnished with any
such evaluation or appraisal. Our advisory services and the opinion expressed
herein are provided for the information and assistance of the Board of
Directors of the Company in connection with its consideration of the
transaction contemplated by the Agreement and such opinion does not constitute
a recommendation as to how any holder of Shares should vote with respect to
such transaction.
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International Family Entertainment, Inc.
June 11, 1997
Page Three
Based upon and subject to the foregoing and based upon such other matters as we
consider relevant, it is our opinion that as of the date hereof the Merger
Consideration to be received by the holders (other than Buyer or any of its
affiliates) of Shares pursuant to the Agreement is fair to such holders.
Very truly yours,
/s/ Goldman, Sachs & Co.
- ---------------------------------
(GOLDMAN, SACHS & CO.)
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<PAGE> 181
ANNEX IV
--------
[BEAR STEARNS LOGO] [BEAR STEARNS LETTERHEAD]
June 11, 1997
Board of Directors
International Family Entertainment, Inc.
2877 Guardian Lane
Virginia Beach, VA 23452
Gentlemen:
We understand that Fox Kids Merger Corporation ("FKW Sub"), a wholly-owned
subsidiary of Fox Kids Worldwide, Inc. ("FKWW"), intends to merge with and into
International Family Entertainment, Inc. ("IFE" or the "Company"), with IFE
continuing as the surviving corporation (the "Merger"). In the Merger, each
issued and outstanding share of the Company's Class A Common Stock, par value
$.01 per share (the "Class A Stock"), Class B Common Stock, par value
$.01 per share (the "Class B Stock") and Class C Common Stock, par value
$.01 per share (the "Class C Stock" and, together with the Class A Stock and
the Class B Stock, the "Common Stock"), other than shares held by FKWW, FKW
Sub, the Company or any subsidiary of FKWW, FKW Sub or the Company or any
holder of shares of Common Stock who perfects appraisal rights under applicable
law, will be converted into the right to receive a cash payment equal to $35.00
per share (the "Merger Consideration"). You have provided us with the Agreement
and Plan of Merger among FKWW, FKW Sub and IFE in substantially final form (the
"Merger Agreement").
You have asked us to render our opinion as to whether the Merger Consideration
is fair, from a financial point of view, to the stockholders of IFE.
In the course of performing our reviews and analyses for rendering this
opinion, we have:
1. reviewed the Merger Agreement;
2. reviewed drafts of the Stock Purchase Agreements and Contribution and
Exchange Agreement among FKWW and certain stockholders of the Company
(the "Other Transaction Agreements") pursuant to which, among other
things, such stockholders have agreed to sell or contribute to FKWW
Class B Stock and securities convertible into Class B Stock
representing a majority of the outstanding voting securities of the
Company;
3. reviewed drafts of certain other agreements proposed to be executed
by the parties to the Merger Agreement, the Other Transaction
Agreements and their respective
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Board of Directors
International Family Entertainment, Inc.
June 11, 1997
Page 2
affiliates in connection with the transactions contemplated by
the Merger Agreement and the Other Transaction Agreements
(collectively, the "Ancillary Agreements");
4. reviewed the Company's Annual Report to Shareholders and Annual
Report on Form 10-K for the year ended December 31, 1996 and its
Quarterly Report on Form 10-Q for the period ended March 31,
1997;
5. reviewed certain operating and financial information, including
estimates and projections, provided to us by the senior
management of IFE, relating to IFE's business and prospects;
6. met with certain members of IFE's senior management to discuss
the Company's operations, historical financial statements and
future prospects;
7. reviewed the historical price, trading volume and valuation
parameters of the Common Stock;
8. reviewed publicly available financial data, stock market
performance data and valuation parameters of companies
which we deemed generally comparable to IFE;
9. reviewed the terms of recent mergers and acquisitions involving
companies which we deemed generally comparable to IFE; and
10. conducted such other studies, analyses, inquiries and
investigations as we deemed appropriate.
In the course of our review, we have relied upon and assumed, without
independent verification, the accuracy and completeness of the financial and
other information provided to us by IFE. With respect to IFE's projected
financial results, we have assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
senior management of IFE as to the expected future performance of IFE. We have
not assumed any responsibility for the independent verification of any such
information or of the projections provided to us and we have further relied
upon the assurances of the senior management of IFE that they are unaware of
any facts that would make the information or projections provided to us
incomplete or misleading. In arriving at our opinion, we have not performed or
obtained any independent appraisal of the assets or liabilities of IFE, nor
have we been furnished with such appraisals. This letter does not address IFE's
underlying business decision to pursue the Merger. Our opinion is necessarily
based on economic, market and other conditions, and the information made
available to us, as of the date hereof.
This opinion does not address the relative merits of the Merger and any other
proposals or offers discussed or considered by the Board of Directors and the
holders of Class A Stock as alternatives to the Merger or the decisions by the
Board of Directors and the holders of Class A Stock with respect to the Merger.
Further, this opinion does not address the fairness of the terms of the Other
Transaction Agreements and Ancillary Agreements to the stockholders of IFE or
the positive or negative impact of such agreements on the terms of the Merger.
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Board of Directors
International Family Entertainment, Inc.
June 11, 1997
Page 3
We have acted as a financial advisor to IFE in connection with the Merger and
will receive a fee for such services, payment of which is contingent upon the
consummation of the Merger.
It is understood that this letter is intended for the benefit and use of the
Board of Directors of IFE and does not constitute a recommendation to any
holder of shares of Common Stock. This letter is not to be used for any other
purpose, or reproduced, disseminated, quoted or referred to at any time, in
whole or in part, without our prior written consent; provided, however, that
this letter may be included in its entirety in any information statement to be
distributed to the holders of Common Stock in connection with the Merger.
Based on the foregoing, it is our opinion that the Merger Consideration is fair,
from a financial point of view, to the stockholders of IFE.
Very truly yours,
BEAR, STEARNS & CO. INC.
By: /s/ Alan Mnuchin
----------------------------
Senior Managing Director
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