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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:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14c-5(d)(2))
[X] 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
- --------------------------------------------------------------------------------
[X] 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
---------------------
AUGUST 12, 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"). The
total aggregate amount of consideration to be received by the Company's
stockholders in the Merger (including the holders of outstanding options) is
approximately $846.1 million. The total aggregate amount of consideration to be
received by the Company's stockholders in connection with the Merger, including
the consideration received by certain stockholders pursuant to purchase or
exchange agreements with FKWW, as described below and under "THE
MERGER -- Ancillary Agreements," and to be received by the Company's
stockholders in the Merger, is approximately $1.715 billion. 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 were 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 held 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 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 partial
compensation for certain tax consequences. The Stock Purchase Agreements and the
Contribution and Exchange Agreement were consummated on August 1, 1997, and FKWW
presently owns a majority of the Company's outstanding voting Common Stock,
assuming FKWW converts all Class C Stock and Convertible Notes to Class B Stock.
See "THE MERGER -- Ancillary Agreements."
Immediately following execution of the Merger Agreement, the Robertson
Sellers, CBN and Regent, which then held 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 EFFECTIVE DATE OF THE MERGER WILL BE ON
SEPTEMBER 2, 1997 UNLESS YOU ARE OTHERWISE NOTIFIED.
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 August 12, 1997.
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TABLE OF CONTENTS
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Summary.............................................................................. 1
General.............................................................................. 7
Required Vote; Written Consent in Lieu of Meeting.................................... 7
Procedure for Receipt of Merger Consideration........................................ 8
Appraisal Rights..................................................................... 8
The Merger........................................................................... 10
Background of the Merger........................................................... 10
Opinions of the Company's Financial Advisors....................................... 18
Interests of Certain Persons in the Merger......................................... 22
Purpose of the Merger.............................................................. 24
Certain Effects of the Merger...................................................... 24
Certain Federal Income Tax Consequences of the Merger.............................. 24
Accounting Treatment............................................................... 25
Regulatory Matters................................................................. 25
Ancillary Agreements............................................................... 25
The Merger Agreement................................................................. 27
Consideration to be Paid in the Merger............................................. 27
Treatment of Options............................................................... 27
Representations and Warranties..................................................... 28
Conduct of Business Pending the Merger............................................. 29
Other Agreements................................................................... 29
Board Representation............................................................... 30
Costs and Expenses................................................................. 30
Conditions to the Merger........................................................... 30
Termination........................................................................ 31
Amendment.......................................................................... 31
No Liability for Breaches of Representations and Warranties........................ 31
Delaware Law....................................................................... 31
Specific Performance............................................................... 31
Guaranty........................................................................... 31
Estimated Fees and Expenses; Sources of Funds........................................ 31
Certain Information Regarding the Company............................................ 32
Introduction....................................................................... 32
Business Segments.................................................................. 33
Production and Distribution........................................................ 36
Live Entertainment................................................................. 38
Other Opportunities................................................................ 38
Competition........................................................................ 38
Satellite Distribution............................................................. 39
Regulation and Legislation......................................................... 39
Patents, Trademarks & Licenses..................................................... 43
Employees.......................................................................... 43
Properties......................................................................... 44
Legal Proceedings.................................................................. 44
Information Concerning FKWW, FKW Sub and News Corp................................... 44
Selected Financial Data of News Corporation.......................................... 46
Selected Consolidated Historical Financial Data...................................... 47
Management's Discussion and Analysis of Financial Condition and Results of
Operations......................................................................... 48
Principal Stockholders and Stock Ownership of Management............................. 49
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Market Price and Dividends........................................................... 52
Available Information................................................................ 53
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>
ii
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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 taxfree exchange, LIFE, which held 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
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 partial compensation for
certain tax consequences. The Stock Purchase Agreements and the Contribution and
Exchange Agreement were consummated on August 1, 1997, and FKWW presently owns a
majority of the Company's outstanding voting Common Stock, assuming FKWW
converts all Class C Stock and Convertible Notes to Class B Stock. 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."
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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.
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 issued or issuable to
LIFE pursuant to the Contribution and Exchange Agreement.
See "INFORMATION CONCERNING FKWW, FKW SUB AND NEWS CORP." 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 then held 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
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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 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 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 "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.
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, and should, read the opinion in its entirety.
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."
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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").
As provided in the Merger Agreement, the Company has reached agreements
with the holders of all outstanding stock options providing that such options
will be cancelled at the Effective Time for an amount in cash equal to the
Merger Consideration, less the per share option exercise price. See "THE MERGER
AGREEMENT -- Treatment of 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. 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. The applicable waiting period
under the HSR Act expired at 11:59 p.m., New York City time, on July 19, 1997.
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
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not then designated by FKWW. See "THE MERGER AGREEMENT -- Termination,"
"-- Amendment" and "-- Board Representation."
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
Federal Income Tax Consequences of the Merger." 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, 1997 and 1996 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.
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QUARTER ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
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STATEMENT OF OPERATIONS DATA
Operating Revenues.............................. $ 97,183 $ 74,492 $332,810 $294,858 $242,050 $208,216 $133,301
-------- -------- -------- -------- -------- -------- --------
Operating Expenses
Production and programming.................... 55,820 37,664 178,762 155,685 137,294 112,269 57,393
Selling and marketing......................... 17,926 15,733 64,544 61,122 49,819 43,281 28,140
New business development...................... 594 488 2,317 9,908 4,991 7,868 2,258
General and administrative.................... 7,946 7,588 28,745 27,088 21,967 14,615 6,838
Amortization of goodwill...................... 570 609 2,278 2,657 2,532 1,562 0
-------- -------- -------- -------- -------- -------- --------
Total operating expenses................ 82,856 62,082 276,646 256,460 216,603 179,595 94,629
-------- -------- -------- -------- -------- -------- --------
Operating income........................ 14,327 12,410 56,164 38,398 25,447 28,621 38,672
Investment income (loss)........................ 105 891 2,843 1,883 (2,522) 8,037 1,219
Interest expense................................ (3,194) (3,639) (12,551) (12,989) (11,034) (11,792) (10,315)
Minority interests in losses.................... 402 1,028 2,359 4,916 5,277 3,475 0
Gain on disposition of assets................... 0 0 13,685 0 0 0 0
Other income (expense).......................... (3,218) (2,347) (5,640) 522 7,789 0 0
Provision for income taxes...................... (3,684) (3,655) (24,735) (14,066) (10,165) (11,048) (11,228)
-------- -------- -------- -------- -------- -------- --------
Income before extraordinary item............ 4,738 4,688 32,125 18,664 14,792 17,293 18,348
Extraordinary item
Loss on early extinguishment of debt........ 0 0 0 0 0 (52,087) 0
-------- -------- -------- -------- -------- -------- --------
Net income (loss)....................... 4,738 4,688 32,125 18,664 14,792 (34,794) 18,348
Dividend requirement on Preferred Stock......... 0 0 0 0 (2,200) (2,197) (2,203)
Distribution -- exchange of Preferred Stock..... 0 0 0 (12,163) 0 0 0
-------- -------- -------- -------- -------- -------- --------
Net income (loss) available for Common
Stock................................. $ 4,738 $ 4,688 $ 32,125 $ 6,501 $ 12,592 $(36,991) $ 16,145
======== ======== ======== ======== ======== ======== ========
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 $ 0.56
Extraordinary item............................ 0.00 0.00 0.00 0.00 0.00 (1.05) 0.00
-------- -------- -------- -------- -------- -------- --------
$ 0.10 $ 0.10 $ 0.69 $ 0.16 $ 0.30 $ (0.66) $ 0.56
======== ======== ======== ======== ======== ======== ========
Fully diluted earnings (loss) per common share
Income before extraordinary item.............. $ 0.10 $ 0.10 $ 0.69 $ 0.16 $ 0.30 $ 0.39 $ 0.55
Extraordinary item............................ 0.00 0.00 0.00 0.00 0.00 (1.05) 0.00
-------- -------- -------- -------- -------- -------- --------
$ 0.10 $ 0.10 $ 0.69 $ 0.16 $ 0.30 $ (0.66) $ 0.55
======== ======== ======== ======== ======== ======== ========
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 $ 40,210
Capital expenditures............................ 1,869 2,225 9,851 15,562 9,443 11,012 26,493
BALANCE SHEET DATA (AT END OF PERIOD)
Cash and cash equivalents....................... $ 14,961 $ 29,075 $ 4,997 $ 32,865 $ 38,716 $ 74,117 $ 32,249
Total assets.................................... 563,813 492,495 568,683 481,427 468,272 497,416 253,272
Long-term film rights payable................... 37,040 31,119 50,643 32,714 34,530 43,109 19,733
Long-term debt (excluding current maturities)... 172,745 154,854 171,251 153,752 120,720 146,509 27,282
Convertible Notes............................... 23,000 23,000 23,000 23,000 23,000 23,000 123,000
Stockholders' equity............................ 205,574 173,818 201,192 171,303 171,108 153,217 41,674
</TABLE>
6
<PAGE> 11
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) 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 held 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 partial compensation for
certain tax consequences. The Stock Purchase Agreements and the Contribution and
Exchange Agreement were consummated on August 1, 1997, and FKWW presently owns a
majority of the Company's outstanding voting Common Stock, assuming FKWW
converts all Class C Stock and Convertible Notes to Class B Stock. 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.
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 then held 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.
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<PAGE> 12
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 are entitled to appraisal rights under Section
262 of the DGCL ("Section 262") as to shares of Common Stock owned 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 FULL TEXT OF SECTION 262 OF THE DGCL, RELATING TO APPRAISAL RIGHTS, IS
ATTACHED HERETO AS 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
8
<PAGE> 13
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 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.
9
<PAGE> 14
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.
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
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 Channel" 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
10
<PAGE> 15
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
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 "-- 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.
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
11
<PAGE> 16
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 "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,
12
<PAGE> 17
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 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
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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 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,
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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 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
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<PAGE> 20
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 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. In particular, the Board noted the
trend toward vertical integration among content providers, packagers and
distributors in the Company's industry. It was expected that this trend
would place the Company at a competitive disadvantage if an affiliation
with a strong global partner could not be achieved, resulting in a
reduction in The Family Channel's viewership and an erosion in the value of
its programming assets due to the emergence of an increasingly competitive
multi-channel environment and the development of increased competition for
high-quality programming. The Board further noted that an affiliation with
FKWW and its affiliated companies would support the Company's strategic
objectives identified by management and the Board: to strengthen the
"Family Channel" brand identity, fortify the Company's programming
positions through new channels and production, enhance the Company's access
to content, globalize its existing products and expand its existing
channels of distribution.
(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
five-for-four 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);
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(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 $6.33 million to compensate LIFE for foregone
interest on the Convertible Notes and for partial compensation for 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 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 was 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
FKWW and potentially with other parties, the Board of Directors (with such Class
B Directors abstaining) voted additional
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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 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
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<PAGE> 23
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 and the above summary of such opinion. Stockholders are urged
to read the full opinion of Goldman Sachs in its entirety.
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.
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 Contribution and Exchange Agreement among
FKWW and certain stockholders of the Company (the "Other Transaction
Agreements") pursuant to which, among other things, such stockholders 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
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<PAGE> 24
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 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,
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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 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.
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(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 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 the fifth
year. His duties as a consultant will include (i) serving as Co-Chairman of the
Company, (ii) advising the Company on its
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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. Pursuant to
the Merger Agreement, the Company 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. Pursuant thereto, the Company
has entered into an agreement with each holder of outstanding options providing
for such cancellation. See "THE MERGER AGREEMENT -- Conditions to the Merger."
Pursuant to the Robertson Stock Purchase Agreement, M.G. Robertson and Tim
Robertson each exercised their respective options to purchase 625,000 shares of
Class B Stock and sold such shares to FKWW at the same per share price as, and
following the initial sale of Common Stock by, the Robertson Sellers on August
1, 1997. 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.
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.
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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 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.
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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 were conditioned upon the expiration or termination 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 could not be consummated until the
expiration of a 30-calendar day waiting period following such filings. Such
waiting period expired at 11:59 p.m., New York City time, on July 19, 1997.
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
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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 became effective upon the closing under the Contribution
and Exchange Agreement on August 1, 1997.
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 into the Merger Agreement and the CBN Stock
Purchase Agreement, the Company and CBN entered into Amendment No. 1 to Program
Time Agreement, to 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
became effective upon the closing under the CBN Stock Purchase Agreement on
August 1, 1997.
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, which terminated the Shareholder Agreement upon the closing under
the Contribution and Exchange Agreement on August 1, 1997.
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 was 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 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 agreed immediately to 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.
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. The purchase of Common Stock by FKWW pursuant to each
Stock Purchase Agreement (including the purchase of Class B Stock received by
M.G. Robertson and Tim Robertson upon exercise of their options as described
above) was consummated on August 1, 1997.
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
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stock of FKWW, in a transaction intended to constitute a tax free exchange. Such
FKWW preferred stock is exchangeable at the holder's option, upon the happening
of certain events, into shares of a new series of preferred stock of NPAL. Such
FKWW preferred stock has, and such series of NPAL 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. It was originally agreed by
the parties that each such series would 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 and was mandatorily redeemable on June 30, 2027 and 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. The terms of each such series was amended on August 1, 1997, as provided
in the Contribution and Exchange Agreement, in response to proposed changes in
applicable tax laws, to provide for cumulative dividends at a rate of 9% per
annum, increasing to 11.5% as noted, mandatory redemption on August 1, 2027,
redemption at the option of the issuer at any time after August 1, 2007, and
redemption at the option of the holder for the thirty-day period commencing on
August 20, 2017 and 2022. As provided in the Contribution and Exchange
Agreement, each such series, as revised, is intended to have a value equivalent
to the respective series as originally negotiated. 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 in exchange for the new series of FKWW
preferred stock was consummated on August 1, 1997.
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 stockholders are urged to read the Merger Agreement 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 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. Pursuant to
the Merger Agreement, the Company 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. Pursuant thereto, the Company
has entered into agreements with each holder of outstanding options providing
for such cancellation. Pursuant to the Robertson Stock Purchase Agreement, M.G.
Robertson and Tim Robertson each agreed to exercise their respective options to
purchase 625,000 shares of Class B
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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. Such
options were exercised and the shares of Class B Stock received upon such
exercise were sold to FKWW on August 1, 1997. 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
is no longer a condition to the Company's obligation to effect the Merger as a
result of FKWW's purchase of the Class A Stock from the Robertson Sellers
pursuant to the Robertson Stock Purchase Agreement on August 1, 1997.
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 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 is no longer a condition to the
Company's obligation to effect the Merger as a result of FKWW's purchase of the
Class A Stock from the Robertson Sellers pursuant to the Robertson Stock
Purchase Agreement on August 1, 1997.
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) is no longer a condition to FKW Sub's obligation to effect the
Merger as a result of FKWW's purchase of the Class A Stock from the Robertson
Sellers pursuant to the Robertson Stock Purchase Agreement on August 1, 1997.
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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 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 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 agreed to file notification
reports under the HSR Act and request early termination of the waiting period
under the HSR Act. Such notification reports were filed on June 19, 1997 and the
applicable waiting period expired at 11:59 p.m., New York City time, on July 19,
1997. 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
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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 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 (which periods
expired on July 19, 1997 at 11:59, New York City time), (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. PURSUANT
TO THE MERGER AGREEMENT, FOLLOWING FKWW'S PURCHASE OF SHARES OF CLASS A STOCK
PURSUANT TO THE ROBERTSON STOCK PURCHASE AGREEMENT ON AUGUST 1, 1997, THE
CONDITION SET FORTH IN CLAUSE (I) IS NO LONGER APPLICABLE.
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. PURSUANT TO THE MERGER AGREEMENT, FOLLOWING FKWW'S
PURCHASE OF SHARES OF CLASS A STOCK PURSUANT TO THE ROBERTSON STOCK PURCHASE
AGREEMENT ON AUGUST 1, 1997, THE CONDITIONS SET FORTH IN CLAUSES (I) AND (II)
ARE NO LONGER APPLICABLE.
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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 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, 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 $545.6 million paid for FKWW's purchase of Common Stock
pursuant to the Stock Purchase Agreements (of which $15 million was paid to the
Company, representing the exercise price of options held by M.G. and Tim
Robertson) but not any cash funds required for the purchase of shares of Class C
Stock in the Merger, since such Class C Stock was exchanged, on August 1, 1997,
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 $1.4 billion, will be contributed by FKWW to the Surviving
Corporation. FKWW has established, pursuant to a credit agreement dated as of
August 1, 1997, a $602 million seven-year Secured Reducing Revolving Credit
Facility (the "Tranche A Revolving Credit"), a $400 million seven-year Secured
Reducing Revolving Credit Facility (the "Tranche B Revolving Credit") and a $298
million 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 Citicorp USA, Inc. acting as the administrative agent for a
syndicate of financial institutions providing the facility. In addition, FKWW
will be loaned approximately $250 million to $350 million from Fox Broadcasting
or an affiliate thereof. These funds will come from the working capital of News
Corp. or an affiliate thereof.
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The obligations of FKWW under the Merger Agreement are guaranteed by News
Corp. 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. See "CERTAIN
INFORMATION REGARDING FKWW, FKW SUB AND NEWS CORP."
Each party shall pay its own expenses if the Merger is not consummated. See
"THE MERGER AGREEMENT -- 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, a producer of live musical
variety shows.
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
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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 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, which terminated
the Shareholder Agreement upon the closing under the Contribution and Exchange
Agreement on August 1, 1997. 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
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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.
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 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
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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 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.
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-- 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.
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.
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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, 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
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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.
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.
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.
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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 toward 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 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
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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.
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
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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 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
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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 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 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
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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 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.
43
<PAGE> 48
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.
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, FKW SUB AND NEWS CORP.
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,
44
<PAGE> 49
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.
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.
The obligations of FKWW under the Merger Agreement are guaranteed by 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. News Corp., a South Australia
corporation, is a diversified international communications company principally
engaged in the production and distribution of motion pictures and television
programming; television, satellite and cable broadcasting; the publication of
newspapers, magazines, books and promotional free-standing inserts; the
development of digital broadcasting, conditional access and subscription
management systems; and the provision of computer information services. During
its fiscal year ended June 30, 1996, approximately 69% of News Corp.'s total
revenues of A$13.1 billion was generated from operations in the United States,
18% from operations in the United Kingdom and 13% from operations in
Australasia. News Corp. is subject to the informational requirements of the
Exchange Act and, in accordance therewith, files reports and other information
with the Commission. Such reports and other information may be inspected and
copied or obtained by mail from the Commission and the NYSE as set forth with
respect to the Company under "AVAILABLE INFORMATION." News Corp.'s American
Depositary Shares are listed on the NYSE.
Summary financial information with respect to News Corp. for the fiscal
years ended June 30, 1994, 1995 and 1996 and the nine months ended March 31,
1997 is set forth on the following page. The selected financial data presented
below are set forth in Australian dollars (except as otherwise indicated), and
are derived from the Consolidated Financial Statements of News Corp. and its
subsidiaries. Certain reclassifications, however, have been made to financial
data for fiscal years prior to fiscal 1996 in order to conform with the fiscal
1996 presentation.
The consolidated financial statements of News Corp. and its subsidiaries
have been prepared in accordance with accounting principles generally accepted
in Australia ("A-GAAP"). A-GAAP differs significantly in certain respects from
accounting principles generally accepted in the United States ("US-GAAP"). A
discussion of these differences for each of the fiscal years 1994 through 1996
is contained in Note 18 to the Consolidated Financial Statements of News Corp.
and its subsidiaries set forth in News Corp's annual report on Form 20-F for the
fiscal year ended June 30, 1996 and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- US-GAAP Reconciliation" in such
annual report, available from the Commission or NYSE as set forth above. At June
30 1996, total stockholders equity of News Corp., in accordance with US-GAAP,
was approximately A$8.841 billion and net income for the fiscal year ended June
30, 1996 was approximately A$483.0 million.
45
<PAGE> 50
SELECTED FINANCIAL DATA OF NEWS CORP.
AMOUNTS IN MILLIONS (EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,(1) NINE MONTHS
---------------------------------- ENDED
1994 1995 1996 MARCH 31,
-------- -------- -------- 1997
-----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Amounts in Accordance with A-GAAP
Income statement data:
Revenues.................................. A$11,621 A$12,175 A$13,088 A$ 10,799
Depreciation and amortization............. 236 248 285 234
Operating income.......................... 1,597 1,660 1,593 1,388
Equity in net earnings of associated
companies.............................. 394 377 351 301
Interest expense, net..................... 667 595 605 468
Other income.............................. 40 21 23 12
Income before abnormal items.............. 1,212 1,342 1,263 1,107
Net income................................ 1,335 1,365 1,020 1,020
Income before abnormal items per
share(2)............................... 0.42 0.46 0.40 0.33
Net income per share(2)................... 0.47 0.46 0.32 0.30
Balance sheet data at period end:
Cash...................................... 433 1,212 2,298 3,252
Total assets.............................. 26,946 30,190 30,763 39,476
Total debt................................ 7,905 8,156 8,542 10,850
Total stockholders' equity................ 14,463 16,582 17,166 21,859
</TABLE>
- ---------------
(1) See Note 2 to the Consolidated Financial Statements of News Corp. for
information with respect to significant acquisitions and dispositions
occurring during fiscal 1994, 1995 and 1996. During the nine months ended
March 31, 1997, News Corp. acquired New World Communications Group for
approximately A$3.0 billion including the assumption of indebtedness.
(2) Per share data for the fiscal year ended 1994 has been adjusted to reflect
the November 21, 1994 issuance of one preferred limited voting ordinary
share for each two ordinary shares held by stockholders of News Corp.
The following table sets forth, for the periods indicated, the average,
high, low and period-end Noon Buying Rates in New York City for Australian
dollars as certified for customs purposes by the Federal Reserve Bank of New
York, expressed in $ per A$1.00.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, AVERAGE HIGH LOW PERIOD-END
- -------------------------- ------- ------ ------ ----------
<S> <C> <C> <C> <C>
1994 0.6920 0.7438 0.6450 0.7310
1995 0.7420 0.7778 0.7108 0.7108
1996 0.7591 0.8026 0.7100 0.7856
1997 0.7802 0.8137 0.7455 0.7455
</TABLE>
On March 31, 1997 and August 11, 1997, the Noon Buying Rates were $0.7820
and $0.7368 per A$1.00, respectively.
46
<PAGE> 51
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, 1997 and 1996 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>
<CAPTION>
QUARTER ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------------- --------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Operating Revenues.......................... $ 97,183 $ 74,492 $332,810 $294,858 $242,050 $208,216 $133,301
-------- -------- -------- -------- -------- -------- ------------
Operating Expenses
Production and programming................ 55,820 37,664 178,762 155,685 137,294 112,269 57,393
Selling and marketing..................... 17,926 15,733 64,544 61,122 49,819 43,281 28,140
New business development.................. 594 488 2,317 9,908 4,991 7,868 2,258
General and administrative................ 7,946 7,588 28,745 27,088 21,967 14,615 6,838
Amortization of goodwill.................. 570 609 2,278 2,657 2,532 1,562 0
-------- -------- -------- -------- -------- -------- ------------
Total operating expenses............ 82,856 62,082 276,646 256,460 216,603 179,595 94,629
-------- -------- -------- -------- -------- -------- ------------
Operating income.................... 14,327 12,410 56,164 38,398 25,447 28,621 38,672
Investment income (loss).................... 105 891 2,843 1,883 (2,522) 8,037 1,219
Interest expense............................ (3,194) (3,639) (12,551) (12,989) (11,034) (11,792) (10,315)
Minority interests in losses................ 402 1,028 2,359 4,916 5,277 3,475 0
Gain on disposition of assets............... 0 0 13,685 0 0 0 0
Other income (expense)...................... (3,218) (2,347) (5,640) 522 7,789 0 0
Provision for income taxes.................. (3,684) (3,655) (24,735) (14,066) (10,165) (11,048) (11,228)
-------- -------- -------- -------- -------- -------- ------------
Income before extraordinary item........ 4,738 4,688 32,125 18,664 14,792 17,293 18,348
Extraordinary item
Loss on early extinguishment of debt.... 0 0 0 0 0 (52,087) 0
-------- -------- -------- -------- -------- -------- ------------
Net income (loss)................... 4,738 4,688 32,125 18,664 14,792 (34,794) 18,348
Dividend requirement on Preferred Stock..... 0 0 0 0 (2,200) (2,197) (2,203)
Distribution -- exchange of Preferred
Stock..................................... 0 0 0 (12,163) 0 0 0
-------- -------- -------- -------- -------- -------- ------------
Net income (loss) available for
Common Stock...................... $ 4,738 $ 4,688 $ 32,125 $ 6,501 $ 12,592 $(36,991) $ 16,145
======== ======== ======== ======== ======== ======== ============
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 $ 0.56
Extraordinary item........................ 0.00 0.00 0.00 0.00 0.00 (1.05) 0.00
-------- -------- -------- -------- -------- -------- ------------
$ 0.10 $ 0.10 $ 0.69 $ 0.16 $ 0.30 $ (0.66) $ 0.56
======== ======== ======== ======== ======== ======== ============
Fully diluted earnings (loss) per common
share
Income before extraordinary item.......... $ 0.10 $ 0.10 $ 0.69 $ 0.16 $ 0.30 $ 0.39 $ 0.55
Extraordinary item........................ 0.00 0.00 0.00 0.00 0.00 (1.05) 0.00
-------- -------- -------- -------- -------- -------- ------------
$ 0.10 $ 0.10 $ 0.69 $ 0.16 $ 0.30 $ (0.66) $ 0.55
======== ======== ======== ======== ======== ======== ============
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 $ 40,210
Capital expenditures........................ 1,869 2,225 9,851 15,562 9,443 11,012 26,493
BALANCE SHEET DATA (AT END OF PERIOD)
Cash and cash equivalents................... $ 14,961 $ 29,075 $ 4,997 $ 32,865 $ 38,716 $ 74,117 $ 32,249
Total assets................................ 563,813 492,495 568,683 481,427 468,272 497,416 253,272
Long-term film rights payable............... 37,040 31,119 50,643 32,714 34,530 43,109 19,733
Long-term debt (excluding current
maturities)............................... 172,745 154,854 171,251 153,752 120,720 146,509 27,282
Convertible Notes........................... 23,000 23,000 23,000 23,000 23,000 23,000 123,000
Stockholders' equity........................ 205,574 173,818 201,192 171,303 171,108 153,217 41,674
</TABLE>
47
<PAGE> 52
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-28
through F-41 and F-50 through F-60, respectively, hereof.
48
<PAGE> 53
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 B Stock, as of August 1, 1997
and reflects the consummation of the Stock Purchase Agreements and the
Contribution and Exchange Agreement on August 1, 1997, as a result of which M.G.
Robertson, Tim Robertson, CBN, Regent and LIFE no longer beneficially own any
shares of voting Common Stock and the only voting Common Stock outstanding is
the Class B Stock. Except as otherwise indicated, shares issuable upon exercise
of options that are or will become exercisable within 60 days of August 1, 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>
NUMBER OF
SHARES OF
CLASS B % OF
BENEFICIAL OWNER STOCK OWNED CLASS
- ------------------------------------------------------------------ ----------- ------
<S> <C> <C>
M.G. "Pat" Robertson, individually and as trustee(a).............. -- --
Timothy B. Robertson, individually and as trustee(a).............. 8,467 (b) (c)
Louis A. Isakoff(a)............................................... 176,728 (d) (c)
William L. Armstrong(e)........................................... 1,250
Lowell W. Morse(f)................................................ -- --
Robert M. Wallace(g).............................................. -- --
Anthony D. Thomopoulos(a)......................................... 312,500 (d) (c)
Richard L. Sirvaitis(a)........................................... 80,625 (d)(h) (c)
K.J. "Gus" Lucas (a).............................................. 75,000 (d) (c)
Stephen D. Lentz (a).............................................. 105,276 (d) (c)
All directors and executive officers as a group (15 persons)...... 1,256,088 (d)(h) 3.14
FKWW(i)........................................................... 25,263,659 (i) 51.87
The Capital Group Companies, Inc.(j).............................. 4,835,250 (j) 12.39
SMALLCAP World Fund, Inc.(k)...................................... 1,768,750 (k) 4.53
Mario J. Gabelli and affiliated entities(l)....................... 9,248,078 (l) 23.69
</TABLE>
- ---------------
(a) The business address of these persons is c/o International Family
Entertainment, Inc., 2877 Guardian Lane, Virginia Beach, Virginia 23452.
(b) Shares of Class B Stock held on behalf of Timothy B. Robertson in the
Company's 401(k) plan.
(c) Amounts to less than 1%.
(d) 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 Louis A. Isakoff -- 112,500 shares; Anthony D.
Thomopoulos -- 312,500 shares; Richard L. Sirvaitis -- 50,000 shares; K.J.
"Gus" Lucas -- 75,000 shares; Stephen D. Lentz -- 105,000 shares; and for
all directors and executive officers as a group -- 1,027,750 shares.
(e) The business address for Mr. Armstrong is 1625 Broadway, Suite 780, Denver,
Colorado 80202.
(f) The business address for Mr. Morse is 5335 S.W. Meadows Road, Suite 365,
Lake Oswego, Oregon 97035.
(g) The business address for Mr. Wallace is 675 N. First Street, 10th Floor, San
Jose, California 95112.
49
<PAGE> 54
(h) Includes shares of Class B Stock issued pursuant to and, in part, subject to
forfeiture under the terms of the Stock Plan. Includes shares of Class B
Stock held on behalf of the Company's directors and executive officers in
the Company's 401(k) plan.
(i) Includes 7,088,732 shares of Class B Stock issuable upon conversion of
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 $23 million aggregate principal amount
of Convertible Notes.
(j) 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.
(k) 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 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.
(l) The number of shares reported in this table is based upon information
included in Amendment No. 24 to the Schedule 13D, dated as of July 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 principal) --
20,000 shares; GFI (as agent) -- 2,534,125 shares; GAMCO (as
principal) -- 50,000 shares; GAMCO (as agent) -- 6,002,253 shares;
Associates Fund -- 250,000 shares; Associates Ltd -- 36,000 shares;
GCo -- 20,000 shares; PSP -- 40,600 shares; Multimedia -- 1,300 shares;
ALCE -- 23,300 shares; GIL II -- 9,000 shares; GPP -- 143,000 shares;
Gabelli Foundation -- 30,000 shares; GIL -- 58,000 shares; GS -- 20,000
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 141,750 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
50
<PAGE> 55
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.
51
<PAGE> 56
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
Year ended December 31, 1997
First Quarter.................................................... 21.375 15.125
Second Quarter................................................... 34.625 19.250
Third Quarter.................................................... 34.813 34.375
(through August 10)
</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 August 11, 1997, the high and low
sales prices reported for shares of Class B Stock on the NYSE were $34.6875 and
$34.5625, respectively, and the last reported sale price was $34.5625. No cash
dividends have ever been paid on the Company's Common Stock.
52
<PAGE> 57
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.
53
<PAGE> 58
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-28
Results of Operations.............................................................. F-28
Cable Networks Segment Information.............................................. F-29
The Family Channel............................................................ F-29
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-38
Use of Estimates................................................................ F-39
Liquidity and Capital Resources.................................................... F-39
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-50
</TABLE>
F-1
<PAGE> 59
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> 60
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> 61
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> 62
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
10% CUMULATIVE
CONVERTIBLE FOREIGN
CUMULATIVE CLASS A CLASS B CLASS C UNEARNED CURRENCY
PREFERRED COMMON COMMON COMMON COMPENSATION TRANSLATION
STOCK STOCK STOCK STOCK STOCK PLAN ADJUSTMENT
------------ -------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1994.............. $ 21,670,000 $150,000 $146,198,000 $ -- $(1,701,000) $ (11,000)
Conversion of Class A Common Stock,
500,000 shares.......................... -- (17,000) 17,000 -- -- --
Issuance of Class B Common Stock under
the Stock Plan, 140,482 shares.......... -- -- 2,258,000 -- (2,257,000) --
Forfeiture of Class B Common Stock under
the Stock Plan, 14,000 shares........... -- -- (148,000) -- 147,000 --
Compensation -- Stock Plan............... -- -- -- -- 1,127,000 --
Repurchase and retirement of Class B
Common Stock, 176,033 shares............ -- -- (2,661,000) -- -- --
Increase in deferred tax benefit related
to initial basis differences (Note K)... -- -- 6,000,000 -- -- --
Foreign currency translation
adjustment.............................. -- -- -- -- -- 989,000
Unrealized loss on marketable
securities.............................. -- -- -- -- -- --
Net income............................... -- -- -- -- -- --
Preferred Stock dividends paid........... -- -- -- -- -- --
------------ -------- ------------ ----------- ----------- ---------
BALANCES AT DECEMBER 31, 1994............ 21,670,000 133,000 151,664,000 -- (2,684,000) 978,000
Exchange of Preferred Stock for Class B
Common Stock, 4,000,000 shares.......... (21,670,000) -- 21,670,000 -- -- --
Exchange of Class B Common Stock for
Class C Common Stock, 5,670,986 shares
(Note H)................................ -- -- (50,703,000) 50,703,000 -- --
Issuance of Class B Common Stock under
the Stock Plan, 37,637 shares........... -- -- 578,000 -- (578,000) --
Forfeiture of Class B Common Stock under
the Stock Plan, 15,280 shares........... -- -- (214,000) -- 214,000 --
Compensation -- Stock Plan............... -- -- -- -- 1,351,000 --
Repurchase and retirement of Class B
Common Stock, 1,357,456 shares.......... -- -- (18,176,000) -- -- --
Five-for-four stock split, including
$5,000 paid for fractional shares (Note
I)...................................... -- 10,000 67,000 14,000 -- --
Foreign currency translation
adjustments............................. -- -- -- -- -- (313,000)
Unrealized loss on marketable
securities.............................. -- -- -- -- -- --
Net income............................... -- -- -- -- -- --
Preferred Stock dividends paid........... -- -- -- -- -- --
------------ -------- ------------ ----------- ----------- ---------
BALANCES AT DECEMBER 31, 1995............ -- 143,000 104,886,000 50,717,000 (1,697,000) 665,000
Issuance of Class B Common Stock under
the Stock Plan, 812 shares.............. -- -- 11,000 -- (11,000) --
Forfeiture of Class B Common Stock under
the Stock Plan, 31,936 shares........... -- -- (460,000) -- 460,000 --
Exercise of options to purchase Class B
Common Stock under the Stock Plan,
19,333 shares........................... -- -- 266,000 -- -- --
Compensation -- Stock Plan............... -- -- -- -- 686,000 --
Repurchase and retirement of Class B
Common Stock, 241,502 shares............ -- -- (3,247,000) -- -- --
Foreign currency translation
adjustment.............................. -- -- -- -- -- (665,000)
Unrealized gain on marketable
securities.............................. -- -- -- -- -- --
Net income............................... -- -- -- -- -- --
------------ -------- ------------ ----------- ----------- ---------
BALANCES AT DECEMBER 31, 1996............ $ -- $143,000 $101,456,000 $50,717,000 $ (562,000) $ --
============ ======== ============ =========== =========== =========
<CAPTION>
UNREALIZED
GAIN
(LOSS) ON RETAINED
MARKETABLE EARNINGS
SECURITIES (DEFICIT) TOTAL
---------- ------------ ------------
<S> <C> <C> <C>
BALANCES AT JANUARY 1, 1994.............. $ -- $(13,089,000) $153,217,000
Conversion of Class A Common Stock,
500,000 shares.......................... -- -- --
Issuance of Class B Common Stock under
the Stock Plan, 140,482 shares.......... -- -- 1,000
Forfeiture of Class B Common Stock under
the Stock Plan, 14,000 shares........... -- -- (1,000)
Compensation -- Stock Plan............... -- -- 1,127,000
Repurchase and retirement of Class B
Common Stock, 176,033 shares............ -- -- (2,661,000)
Increase in deferred tax benefit related
to initial basis differences (Note K)... -- -- 6,000,000
Foreign currency translation
adjustment.............................. -- -- 989,000
Unrealized loss on marketable
securities.............................. (156,000) -- (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............ (156,000) (497,000) 171,108,000
Exchange of Preferred Stock for Class B
Common Stock, 4,000,000 shares.......... -- -- --
Exchange of Class B Common Stock for
Class C Common Stock, 5,670,986 shares
(Note H)................................ -- -- --
Issuance of Class B Common Stock under
the Stock Plan, 37,637 shares........... -- -- --
Forfeiture of Class B Common Stock under
the Stock Plan, 15,280 shares........... -- -- --
Compensation -- Stock Plan............... -- -- 1,351,000
Repurchase and retirement of Class B
Common Stock, 1,357,456 shares.......... -- -- (18,176,000)
Five-for-four stock split, including
$5,000 paid for fractional shares (Note
I)...................................... -- (96,000) (5,000)
Foreign currency translation
adjustments............................. -- -- (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............ (373,000) 16,962,000 171,303,000
Issuance of Class B Common Stock under
the Stock Plan, 812 shares.............. -- -- --
Forfeiture of Class B Common Stock under
the Stock Plan, 31,936 shares........... -- -- --
Exercise of options to purchase Class B
Common Stock under the Stock Plan,
19,333 shares........................... -- -- 266,000
Compensation -- Stock Plan............... -- -- 686,000
Repurchase and retirement of Class B
Common Stock, 241,502 shares............ -- -- (3,247,000)
Foreign currency translation
adjustment.............................. -- -- (665,000)
Unrealized gain on marketable
securities.............................. 724,000 -- 724,000
Net income............................... -- 32,125,000 32,125,000
--------- ------------ ------------
BALANCES AT DECEMBER 31, 1996............ $ 351,000 $ 49,087,000 $201,192,000
========= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 63
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> 64
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
F-7
<PAGE> 65
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
are recorded as deferred income. Costs of profit participations and residual
payments are accrued, based upon amounts expected to be payable, at the time
revenue is recognized.
Income Taxes
The Company utilizes the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to be applicable to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that includes the enactment
date.
Stock Options
Prior to January 1, 1996, the Company accounted for stock options in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25. Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 123, Accounting for Stock-Based Compensation, which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net income and pro forma earnings per share disclosures for employee
stock option grants made in 1995 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
Earnings Per Share
The Convertible Notes, as described in Note F, are considered to be common
stock equivalents and, accordingly, the computations of primary and fully
diluted earnings per share assume conversion of the Convertible Notes if the
effect of such conversion is dilutive. Stock options are also included in the
computations of primary and fully diluted earnings per share if their effect is
dilutive.
For the 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.
F-8
<PAGE> 66
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reclassifications
Certain amounts have been reclassified for comparability with the 1996
financial statement presentation.
NOTE B -- ACQUISITIONS AND OTHER INVESTMENTS
Body By Jake Enterprises
In July 1995, the Company acquired a 20% interest in Body By Jake
Enterprises, LLC ("BBJE"), a fitness licensing and television production
company, for $4,000,000 in cash.
China Entertainment Television Broadcast Limited
In June 1995, the Company acquired a 33 1/3% interest in an entity which
held convertible demand notes, which were convertible into an 80% equity
interest in China Entertainment Television Broadcast Limited. This entity
recorded a valuation allowance in 1995 of which the Company's share was
approximately $1,500,000, which is reflected in the determination of other
income and expense in the 1995 Consolidated Statement of Operations. In November
1996, these convertible demand notes were sold to a third party for
approximately 77.5% of their face value.
Ice Capades
In February 1995, the Company acquired the assets of the Ice Capades for
consideration, consisting principally of assumed liabilities, amounting to
approximately $10,200,000. The liabilities assumed in the transaction included
$6,728,000 of cash advances by IFE prior to closing.
On December 31, 1995, the Company sold its interest in the Ice Capades to a
certain sports marketing enterprise in exchange for 7 1/2% convertible notes,
due in 2005, in the principal amount of $10,200,000 and the assumption of cash
advances due to the Company amounting to $4,090,000 at December 31, 1995. These
notes will be convertible, beginning in 1998, at the option of the Company, into
a majority interest in the acquiring entity. Accordingly, the gain on this
transaction amounting to $2,616,000 was deferred. In addition, on this same
date, the Company and the acquiring entity entered into a revolving credit
agreement whereby the Company agreed to advance the acquiring entity up to
$12,000,000 (including the aforementioned $4,090,000 in cash advances). During
1996, this revolving credit agreement was replaced by a bank credit facility
which is guaranteed by IFE. In 1996, the Company recorded a valuation allowance
in connection with its investment in the aforementioned 7 1/2% convertible
notes. Such valuation allowance, which amounted to $5,300,000, is reflected in
the determination of other income and expense in the 1996 Consolidated Statement
of Operations.
TVS ENTERTAINMENT PLC
During 1993, the Company acquired all of the outstanding capital stock of
TVS ENTERTAINMENT PLC ("TVS"), which was the parent company of MTM at that time.
Upon consummation of the acquisition of TVS, several contingencies existed and
the amounts related thereto were included in the allocation of the purchase
price, based upon management estimates utilizing the best available information.
Such estimates are periodically reviewed by management and revised when
warranted. Generally, after the first twelve months following an acquisition,
changes in estimates are included in the determination of net income.
Accordingly, the effects of the final resolution in 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> 67
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.
F-10
<PAGE> 68
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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
F-11
<PAGE> 69
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 DECEMBER CREDIT CREDIT NOTES LEASE
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).
F-12
<PAGE> 70
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-13
<PAGE> 71
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-14
<PAGE> 72
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Shareholder Agreement
Pursuant to the amended shareholder agreement (the "Shareholder Agreement")
among the Company and certain of its principal stockholders, each of the parties
to the Shareholder Agreement will, in the event of any future offering of
capital stock by the Company, be entitled to purchase additional shares of such
capital stock in order to maintain its percentage ownership of each class of
capital stock. The Shareholder Agreement also provides that, under certain
circumstances, Liberty IFE has a right of first refusal with respect to certain
sales, conversions or transfers of Class A Common Stock.
NOTE J -- SUPPLEMENTAL CASH FLOW INFORMATION
Total interest costs paid during the years ended December 31, 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
F-15
<PAGE> 73
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
corresponding increase in stockholders' equity. The Company's reported earnings
were not affected by the Closing Agreement.
Income before income taxes, as shown in the Consolidated Statements of
Operations, is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------------
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> 74
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.
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.
F-17
<PAGE> 75
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-18
<PAGE> 76
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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>
F-19
<PAGE> 77
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-20
<PAGE> 78
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE O -- DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Investment in Equity Securities -- Related Party
As described in Note P, on April 22, 1996, the Company received 5,792,008
shares of Flextech's convertible redeemable non-voting common stock. This common
stock is convertible, under certain circumstances, into Flextech's voting common
stock which is listed on the London Stock Exchange. Based upon the market value
of the underlying voting common stock (and the applicable foreign currency
exchange rate), as of December 31, 1996, and after applying the same rate of
discount as was determined by an independent valuation when the shares were
received, the estimated fair value of the Company's investment in Flextech is
$53,750,000.
Film Rights Payable
The amount reflected as film rights payable at December 31, 1996 represents
future payments to be made under program contract agreements. The fair value of
film rights payable is the present value of these future payments. At December
31, 1996, the present value of these future payments is approximately
$85,000,000.
Revolving Credit Facility and Subsidiary Credit Agreement
The Company's borrowings under the Revolving Credit Facility and Subsidiary
Credit Agreement are at floating rates of interest. Since the cost of carrying
this indebtedness fluctuates with current market conditions, it is assumed that
the carrying values would approximate fair value.
Convertible Notes
The Company has $23,000,000 in principal amount of Convertible Notes
outstanding. These notes are convertible into 2,587,500 shares of non-voting
Class C Common Stock, which Class C Common Stock is convertible, at the option
of the holder, into Class B Common Stock, on a share-for-share basis, as
described in Note F. The Company estimates that the fair value of the
Convertible Notes approximates the trading value of the underlying shares.
Accordingly, based on the average closing price of the Class B Common Stock for
December 1996, the estimated fair value of the Convertible Notes is $39,783,000.
Limitations
Fair value estimates are made at a specific point in time based on relevant
market information and information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and 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 Pound Stering
3,000,000 (approximately $4,600,000) in cash and 5,792,008 shares of Flextech's
convertible redeemable non-voting common stock. This common stock is
convertible, under certain circumstances, into Flextech's voting common stock
which is listed on the London Stock Exchange. The market value of the
underlying voting common stock as of the date of the
F-21
<PAGE> 79
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
aforementioned agreements was $46,100,000. The shares were recorded, for
financial statement purposes, at approximately Pound Sterling 23,000,000
($35,458,000 based on the 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.
Within the Live Entertainment business segment, the Company produces live
musical variety shows and, in 1995, operated the Ice Capades, a touring ice
show.
F-22
<PAGE> 80
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 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> 81
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> 82
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.
/s/ KPMG Peat Marwick LLP
--------------------------
KPMG PEAT MARWICK LLP
Norfolk, Virginia
March 17, 1997
F-25
<PAGE> 83
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>
1996
-------------------------------------
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> 84
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
======== ======== ======== ======== ========
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-27
<PAGE> 85
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
============ ============ ============
</TABLE>
F-28
<PAGE> 86
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
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>
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
F-29
<PAGE> 87
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.
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.
F-30
<PAGE> 88
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.
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.
F-31
<PAGE> 89
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.
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
F-32
<PAGE> 90
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> 91
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> 92
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
F-35
<PAGE> 93
movies to The Family Channel and other cable networks, including St. Elsewhere,
Hill Street Blues, and Stolen Memories: Secrets from the Rose Garden.
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.
F-36
<PAGE> 94
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.
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> 95
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.
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
F-38
<PAGE> 96
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.
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
F-39
<PAGE> 97
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.
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.
F-40
<PAGE> 98
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> 99
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> 100
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.
/s/ KPMG Peat Marwick LLP
---------------------------
KPMG Peat Marwick LLP
Norfolk, Virginia
March 17, 1997
F-43
<PAGE> 101
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> 102
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> 103
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> 104
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.
F-47
<PAGE> 105
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1997
(UNAUDITED)
FiT TV
On April 30, 1996, the Company, an affiliate of Liberty Media Corporation
("Liberty Media"), and an affiliate of Reebok International Limited ("Reebok")
entered into a definitive partnership agreement forming a partnership (the "FiT
TV Partnership"), effective January 1, 1996, to own and operate the FiT TV cable
network. FiT TV had previously been owned and operated by Cable Health TV, Inc.
("CHTV"), a 90%-owned subsidiary of IFE. 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.
F-48
<PAGE> 106
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1997
(UNAUDITED)
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.
F-49
<PAGE> 107
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
In addition to historical information, this report contains forward-looking
statements which are subject to risks and uncertainties. Accordingly, the
Company's actual results could differ materially from those anticipated in these
forward-looking statements. Undue reliance should not be placed on these
forward-looking statements, which reflect management's analysis only as of the
date hereof.
The following discussion and analysis should be read in conjunction with
the Management's Discussion and Analysis included in the Company's Annual Report
on Form 10-K for the year ended December 31, 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
F-50
<PAGE> 108
investments and acquisitions from internally generated cash flow, additional
borrowings, or additional issuances of Class B Common Stock.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
General
The Company operates in three business segments: the operation of
advertiser-supported cable networks ("Cable Networks"), the production and
distribution of entertainment programming ("Production & Distribution"), and the
production of live 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.
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
=========== ===========
</TABLE>
F-51
<PAGE> 109
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
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>
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
F-52
<PAGE> 110
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 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> 111
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>
- ---------------
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,
F-54
<PAGE> 112
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.
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.
F-55
<PAGE> 113
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.
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.
F-56
<PAGE> 114
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 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.
F-57
<PAGE> 115
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 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
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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.
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
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<PAGE> 117
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 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.
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<PAGE> 118
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 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
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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;
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
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<PAGE> 120
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 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 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
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<PAGE> 121
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.
(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
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<PAGE> 122
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.
(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
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Certificates shall be paid to the Surviving Corporation upon demand. Thereafter,
each holder of a Certificate may surrender such 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 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
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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 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.
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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
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) 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
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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 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.
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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.
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
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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.
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, 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
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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 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
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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 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.
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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, 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 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,
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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 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,
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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 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 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
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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 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
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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, 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
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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 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 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
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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.
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) of shall be true and
correct (other than such changes resulting from the exercise
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<PAGE> 138
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:
(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.
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
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<PAGE> 139
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
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
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<PAGE> 140
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
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.
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<PAGE> 141
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.
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.
(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
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<PAGE> 142
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.
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:
<TABLE>
<CAPTION>
DEFINITION SECTION
- --------------------------------------------------------------------------------- -----------
<S> <C>
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
</TABLE>
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<TABLE>
<CAPTION>
DEFINITION SECTION
- --------------------------------------------------------------------------------- -----------
<S> <C>
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
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
</TABLE>
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<TABLE>
<CAPTION>
DEFINITION SECTION
- --------------------------------------------------------------------------------- -----------
<S> <C>
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
</TABLE>
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]
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<PAGE> 145
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> 146
EXHIBITS
<TABLE>
<S> <C> <C>
Exhibit A -- Officer's Certificates
Exhibit B -- Press Release
</TABLE>
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<PAGE> 147
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:
--------------------------------------
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> 148
EXHIBIT B
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.
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
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<PAGE> 149
FAM To Be Acquired By Fox Kids Worldwide
Page 2
June 11, 1997
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."
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.
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ANNEX II:
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 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.
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(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; 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
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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 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.
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(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 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
letterhead
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.
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.
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International Family Entertainment, Inc.
June 11, 1997
Page Two
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.
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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ANNEX IV
letterhead
245 PARK AVENUE
NEW YORK, NEW YORK 10167
(212) 272-2000
FAX: (212) 272-3092
ATLANTA - BOSTON
CHICAGO - DALLAS - LOS ANGELES
NEW YORK - SAN FRANCISCO
SAO PAULO - LONDON - PARIS - GENEVA
BEIJING - HONG KONG - SHANGHAI - TOKYO
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 affiliates in connection with the transactions
contemplated by the Merger Agreement and the Other Transaction Agreements
(collectively, the "Ancillary Agreements");
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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.
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.
/s/ Alan Mnuchin
-------------------------
Senior Managing Director
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