1
----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
/ X / Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 1996.
/ / Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from to
------- -------
COMMISSION FILE NO. 1-11121
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 54-1522360
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
2877 GUARDIAN LANE, VIRGINIA BEACH, VIRGINIA 23452
(Address of principal executive offices) (Zip Code)
(804) 459-6000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES / X / NO / /
As of May 1, 1996, there were outstanding 5,000,000 shares of the Registrant's
Class A Common Stock, par value $.01 per share, convertible (the "Class A
Common Stock"); 32,827,293 shares of the Registrant's Class B Common Stock, par
value $.01 per share (the "Class B Common Stock"); and 7,088,732 shares of the
Registrant's Class C Common Stock, par value $.01 per share, non-voting and
convertible (the "Class C Common Stock" and, together with the Class A Common
Stock and Class B Common Stock, the "Common Stock").
2
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
INDEX TO FORM 10-Q/A
For the quarterly period ended March 31, 1996
Page No.
--------
Part I - Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets -
March 31, 1996 and December 31, 1995 3
Consolidated Statements of Operations -
For the Three Months Ended March 31, 1996 and 1995 5
Consolidated Statements of Cash Flows -
For the Three Months Ended March 31, 1996 and 1995 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 21
Other items in Part II have been omitted because they are not applicable for
the quarterly period ended March 31, 1996.
2
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
Consolidated Balance Sheets
(Unaudited)
ASSETS
March 31 December 31
1996 1995
---- ----
Current assets
Cash and cash equivalents $29,075,000 $32,865,000
Investment in marketable securities 9,782,000 8,290,000
Accounts receivable, net 92,757,000 95,699,000
Film rights, current portion 58,145,000 56,355,000
Prepaid expenses and other 10,978,000 11,511,000
------------ ------------
Total current assets 200,737,000 204,720,000
Property and equipment, net 72,887,000 73,028,000
Film rights 111,588,000 105,094,000
Long-term accounts receivable, net 29,306,000 24,754,000
Other investments, net 21,420,000 16,575,000
Goodwill, net 54,186,000 54,795,000
Other assets 2,371,000 2,461,000
------------ ------------
$492,495,000 $481,427,000
============ ============
(continued)
See accompanying notes.
3
4
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
Consolidated Balance Sheets, continued
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31 December 31
1996 1995
---- ----
Current liabilities
Accounts payable $ 13,066,000 $ 14,598,000
Accrued liabilities 20,246,000 16,606,000
Accrued participations and residuals 9,931,000 11,615,000
Current portion of film rights payable 37,167,000 34,676,000
Current maturities of debt 185,000 181,000
Income taxes payable 617,000 --
Current portion of deferred income taxes 1,022,000 611,000
Deferred income 5,714,000 5,891,000
------------ ------------
Total current liabilities 87,948,000 84,178,000
Film rights payable 31,119,000 28,830,000
Long-term debt 154,854,000 153,752,000
Accrued interest - related party 314,000 327,000
Convertible Notes - related party 23,000,000 23,000,000
Deferred income taxes 4,357,000 2,676,000
Other liabilities, including participations and residuals 14,866,000 14,231,000
Minority interests 2,219,000 3,130,000
Commitments and contingencies (Note E)
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, 32,834,393 and
33,039,831 shares issued and outstanding 102,270,000 104,886,000
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 (1,499,000) (1,697,000)
Cumulative foreign currency translation adjustment 359,000 665,000
Unrealized gain (loss) on marketable securities 178,000 (373,000)
Retained earnings 21,650,000 16,962,000
------------ ------------
Total stockholders' equity 173,818,000 171,303,000
------------ ------------
$492,495,000 $481,427,000
============ ============
See accompanying notes.
4
5
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
Consolidated Statements of Operations
(Unaudited)
Three Months
Ended March 31
--------------
1996 1995
---- ----
Operating revenues $74,492,000 $62,474,000
----------- -----------
Operating expenses
Production and programming 37,664,000 33,144,000
Selling and marketing 15,733,000 14,233,000
New business development 488,000 935,000
General and administrative 7,588,000 5,921,000
Amortization of goodwill 609,000 615,000
----------- -----------
Total operating expenses 62,082,000 54,848,000
----------- -----------
Operating income 12,410,000 7,626,000
----------- -----------
Other income (expense)
Investment income 891,000 392,000
Interest expense - related parties (537,000) (494,000)
Interest expense - other (3,102,000) (2,686,000)
Minority interests in losses 1,028,000 973,000
Other expense, net (2,347,000) (495,000)
----------- -----------
Total other (expense) (4,067,000) (2,310,000)
----------- -----------
Income before income taxes 8,343,000 5,316,000
Provision for income taxes (3,655,000) (2,202,000)
----------- -----------
Net income 4,688,000 3,114,000
Dividend requirement on Preferred Stock -- (542,000)
----------- -----------
Net income available for Common Stock $ 4,688,000 $ 2,572,000
=========== ===========
Primary and fully diluted earnings per common share $0.10 $0.06
=========== ===========
Primary and fully diluted average common and
common equivalent shares 47,559,442 40,906,147
=========== ===========
See accompanying notes.
5
6
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Three Months
Ended March 31
--------------
1996 1995
---- ----
Cash flows from operating activities
Net income $ 4,688,000 $ 3,114,000
Adjustments to reconcile net income to
net cash provided by operating activities
Amortization of film rights 27,434,000 25,570,000
Depreciation and amortization of property and
equipment, goodwill, and other assets 2,862,000 2,436,000
Share of losses of affiliates, net 1,333,000 --
Minority interests in losses (1,028,000) (973,000)
Compensation - Stock Plan 209,000 342,000
Deferred income tax expense 1,710,000 768,000
Changes in assets and liabilities, net of effect
from an acquisition in 1995 (2,931,000) (10,941,000)
------------ ------------
Total adjustments 29,589,000 17,202,000
------------ ------------
Net cash provided by operating activities 34,277,000 20,316,000
------------ ------------
Cash flows from investing activities
Acquisitions of original programming (10,671,000) (9,109,000)
Cash paid for acquisition -- (3,050,000)
Other investments (7,181,000) --
Purchases of marketable securities -- (312,000)
Sales of marketable securities -- 358,000
Additions to property and equipment (2,225,000) (1,267,000)
------------ ------------
Net cash used in investing activities (20,077,000) (13,380,000)
------------ ------------
Cash flows from financing activities
Payments on film rights (16,422,000) (17,865,000)
Proceeds from debt issuances 5,650,000 23,500,000
Principal payments on debt (4,544,000) (5,400,000)
Cash provided by minority partner -- 1,004,000
Payment of Preferred Stock dividends -- (1,109,000)
Repurchases of Class B Common Stock (2,627,000) (14,235,000)
------------ ------------
Net cash used in financing activities (17,943,000) (14,105,000)
------------ ------------
Effect of foreign currency rate changes (47,000) 1,315,000
------------ ------------
Decrease in cash and cash equivalents (3,790,000) (5,854,000)
Cash and cash equivalents at beginning of period 32,865,000 38,716,000
------------ ------------
Cash and cash equivalents at end of period $ 29,075,000 $ 32,862,000
============ ============
See accompanying notes.
6
7
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
Notes to Consolidated Financial Statements
March 31, 1996
(Unaudited)
NOTE A - PRESENTATION OF INTERIM FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements of International
Family Entertainment, Inc., (together with its consolidated subsidiaries "IFE"
or the "Company"), have been prepared by the Company pursuant to the
instructions for Form 10-Q and, accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
where permitted by regulation. In management's opinion, the accompanying
unaudited consolidated financial statements reflect all adjustments, consisting
of normal recurring accruals, necessary for a fair presentation of the
consolidated results of operations for the interim periods presented. The
consolidated results of operations for such interim periods are not necessarily
indicative of the results that may be expected for future interim periods or
for the year ended December 31, 1996. These interim consolidated financial
statements and notes should be read in conjunction with the audited
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
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
were not included in the computations of primary and fully diluted earnings per
share because their effect would be anti-dilutive or immaterial (less than 3%
impact on earnings per share).
For the three months ended March 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 related tax effect, and
dividing the result by the average number of common and common equivalent
shares outstanding during such period.
For the three months ended March 31, 1995, primary and fully diluted earnings
per common share were computed by dividing Net income available for Common
Stock by the average number of common shares outstanding during such period.
NOTE C - CAPITAL STOCK
Preferred Stock
On December 15, 1995, the Company and the holder of the 10% Convertible
Cumulative Preferred Stock (the "Preferred Stock") entered into an exchange
agreement (the "Exchange Agreement") whereby the holder of the Preferred Stock
(which is also the holder of the Convertible Notes) agreed to (i) exchange its
holdings of all of the Preferred Stock for shares of Class B Common Stock, (ii)
exchange all of its holdings of Class B Common Stock, (including the shares of
Class B Common Stock received in exchange for the Preferred Stock), for an
equal number of shares of non-voting Class C Common Stock, (iii) amend the
terms of the Convertible Notes to provide, among other things, for conversion
of such notes into shares of non-voting Class C Common Stock in lieu of shares
of Class B Common Stock and for the elimination of provisions which required
the Company to issue Class C Common Stock in the event of the occurrence of
certain payment defaults, and (iv) amend the terms of certain other agreements,
including the shareholder agreement among the Company and certain of its
principal shareholders.
7
8
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
Notes to Consolidated Financial Statements, continued
NOTE C - CAPITAL STOCK, CONTINUED
Preferred Stock, continued
Prior to the consummation of the Exchange Agreement, 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.
Common Stock
On November 16, 1995, the Company's Board of Directors approved a five-for-four
stock split of the Common Stock which was effected in the form of a 25% stock
dividend and payable on January 5, 1996 to the shareholders of record at the
close of business on December 15, 1995. Accordingly, all share and per share
amounts presented have been restated to retroactively reflect the stock split.
NOTE D - SUPPLEMENTAL CASH FLOW INFORMATION
Total interest costs paid were $3,221,000 and $2,917,000 during the three
months ended March 31, 1996 and 1995, respectively. Income taxes paid during
the three months ended March 31, 1996 and 1995 were approximately $1,001,000
and $3,321,000, respectively. Non-cash financing included the acquisition of
film rights under license agreements which aggregated approximately $19,700,000
and $3,711,000 for the three months ended March 31, 1996 and 1995,
respectively. Non-cash financing also included approximately $7,150,000 of
liabilities assumed in an acquisition during the first quarter of 1995.
NOTE E - COMMITMENTS AND CONTINGENCIES
The Company has commitments under program contracts for film rights (including
contingent liabilities for future payments of participations and residuals)
related to the exhibition or distribution of programming which was not
available as of March 31, 1996. The unpaid balance under program contracts for
film rights (and the aggregate future estimated payments of accrued
participations and residuals) related to the exhibition or distribution of
programming that was available as of March 31, 1996 is reflected as a liability
in the accompanying consolidated financial statements.
The Company leases office facilities, a satellite transponder, and certain
other 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.
NOTE F - SUBSEQUENT EVENTS
The Family Channel (UK)
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 p.l.c. ("Flextech") pursuant to an agreement 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"). TCI International is majority owned by
Tele-Communications, Inc. ("TCI"). An affiliate of TCI is the holder of the
Convertible Notes and all of the Company's outstanding Class C Common Stock.
8
9
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
Notes to Consolidated Financial Statements, continued
NOTE F - SUBSEQUENT EVENTS, CONTINUED
The Family Channel (UK), continued
As consideration for this transaction, the Company received 3,000,000 pound
sterling (approximately $4,600,000) in cash and 5,792,008 shares of Flextech's
convertible, redeemable, non-voting common stock. This common stock is
convertible, under certain circumstances, beginning in June 1997 at the
Company's option, into Flextech's voting ordinary shares which are listed on
the London Stock Exchange. The underlying market value of the voting ordinary
shares as of the date of the agreement was $46,100,000. The shares will be
recorded, for financial statement purposes, at approximately 23,000,000 pound
sterling ($35,457,000 based on the exchange rate on the date of closing),
which amount 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, beginning in June 1997 (if the shares do not
first become convertible), to "put" its holdings of Flextech's non-voting stock
to TCI International. Upon exercise of the put, TCI International has the
option of redeeming the stock for cash at the then-market value of Flextech's
voting ordinary shares. If the shares are not redeemed for cash, the Company
has the option of either (i) converting 50% of the shares on a share-for-share
basis into Flextech's voting ordinary shares and 50% of the shares into common
stock of the same value of TCI International, or (ii) converting 100% of the
shares into common stock of the same value of TCI International.
The combined operating losses of The Family Channel (UK) and the television
production studio amounted to $2,115,000 and $2,272,000 for the three months
ended March 31, 1996 and 1995, respectively, and the minority partner's share
of net losses in The Family Channel (UK) amounted to $1,026,000 and $973,000
for the three months ended March 31, 1996 and 1995, respectively.
FiT TV
On April 30, 1996, the Company, an affiliate of Reebok International Limited
("Reebok"), and an affiliate of Liberty Media Corporation ("Liberty Media")
entered into a definitive partnership agreement (the "Partnership Agreement")
forming a partnership (the "Partnership") to own and operate FiT TV. 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. Reebok is a major advertiser on the FiT TV cable network.
In accordance with the terms of the Partnership Agreement, CHTV contributed all
of the assets and liabilities of FiT TV to the Partnership in exchange for an
80% partnership interest and functions as the 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 at the time of exercise.
9
10
PART I - FINANCIAL INFORMATION, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
MATERIAL CHANGES IN FINANCIAL CONDITION
Film Rights
The Company produces, acquires, and distributes a variety of programs,
including original series, specials, and made-for-television movies, as well as
syndicated programs originally broadcast by others, to be aired on the
Company's cable networks and/or to be licensed to others. During the year
ended December 31, 1995, the Company spent $59,931,000 for originally-produced
programming and $46,167,000 for various rights to programs produced by others.
The Company anticipates that the total amount spent on programming in 1996 will
not be less than the total amount for 1995.
Common Stock Repurchases
During the three months ended March 31, 1996, the Company repurchased 206,250
shares of Class B Common Stock for $2,627,000 (for an average price of $12.74
per share). These repurchases were funded from available cash and cash
equivalents. It is expected that any further repurchases of Class B Common
Stock will also be funded from available cash and cash equivalents or from bank
borrowings.
Liquidity
As of March 31, 1996, the Company had cash and cash equivalents of $29,075,000,
and borrowings available from banks of $117,000,000. The Company believes that
funds from operations, borrowings available from banks, and existing cash
balances and investments will provide adequate sources of short-term and
long-term liquidity for its current operations, including the operations of FiT
TV and the international networks, as well as its contractual payments for film
rights. However, the Company may pursue additional capital-raising activities
if it believes that market conditions or acquisition opportunities warrant such
activities.
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 cable programming 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 has co-produced a theatrical motion picture which is
expected to be released in 1996 by Family Channel Pictures, Inc., a subsidiary
of the Company, and is currently exploring the possibility of producing
additional theatrical motion pictures. The Company plans to produce and
release, in conjunction with a joint venture partner, one or two motion
pictures annually with an expected production budget ranging from $8,000,000 to
$16,000,000 for each picture. The Company cannot estimate with any degree of
certainty the amount of other 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 all such other investments and
acquisitions from internally generated cash flow, additional borrowings, and/or
additional issuances of Class B Common Stock.
10
11
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 television programming ("Production & Distribution"), and the
production of live musical variety shows ("Live Entertainment").
Within the Cable Networks business segment during the period ended March 31,
1996, the Company operated four advertiser-supported, satellite-delivered cable
television networks: The Family Channel, which provides family-oriented
entertainment and informational programming; FiT TV, which provides healthy
lifestyle and fitness programming; The Family Channel (UK), which provides
family- oriented entertainment to the United Kingdom; and The Family Channel De
Las Americas, launched on July 1, 1995, which provides Spanish-language
family-oriented and fitness programming to Mexico, Central America, and
portions of South America.
Within the Production & Distribution business segment, the Company produces and
distributes programming in the United States and throughout many other parts of
the world ("MTM Operations") and operated a television production studio in
Maidstone, England (the "UK Studio") during the period ended March 31, 1996.
11
12
MATERIAL CHANGES IN RESULTS OF OPERATIONS, CONTINUED
GENERAL, CONTINUED
The following table sets forth operating revenues, operating income or loss,
and depreciation and amortization by business segment.
Three Months
Ended March 31
--------------
1996 1995
---- ----
Operating Revenues
Cable Networks
The Family Channel $ 57,164,000 $ 45,224,000
FiT TV 1,230,000 741,000
International Networks 3,764,000 2,944,000
Intrasegment Eliminations (242,000) (100,000)
------------- -------------
61,916,000 48,809,000
------------- -------------
Production and Distribution
MTM Operations 13,053,000 12,676,000
UK Studio 1,223,000 1,340,000
Intrasegment Eliminations (5,000) --
------------- -------------
14,271,000 14,016,000
------------- -------------
Live Entertainment 1,043,000 1,107,000
Intersegment Eliminations (2,738,000) (1,458,000)
------------- -------------
$ 74,492,000 $ 62,474,000
============= =============
Operating Income (Loss)
Cable Networks
The Family Channel $ 21,989,000 $ 14,242,000
FiT TV (1,255,000) (966,000)
International Networks (3,621,000) (2,370,000)
Intrasegment Eliminations -- 1,000
------------- -------------
17,113,000 10,907,000
------------- -------------
Production and Distribution
MTM Operations (3,533,000) (2,179,000)
UK Studio (47,000) --
------------- -------------
(3,580,000) (2,179,000)
------------- -------------
Live Entertainment (1,531,000) (1,113,000)
Intersegment Eliminations 408,000 11,000
------------- -------------
$ 12,410,000 $ 7,626,000
============= =============
Depreciation and Amortization
Cable Networks
The Family Channel $ 18,823,000 $ 15,659,000
FiT TV 261,000 305,000
International Networks 2,421,000 1,432,000
Intrasegment Eliminations -- (101,000)
------------- -------------
21,505,000 17,295,000
------------- -------------
Production and Distribution
MTM Operations 10,914,000 11,165,000
UK Studio 175,000 166,000
------------- -------------
11,089,000 11,331,000
------------- -------------
Live Entertainment 381,000 270,000
Intersegment Eliminations (2,679,000) (890,000)
------------- -------------
$ 30,296,000 $ 28,006,000
============= =============
12
13
MATERIAL CHANGES IN RESULTS OF OPERATIONS, CONTINUED
THE FAMILY CHANNEL
The following table contains comparative information relating to the operations
of The Family Channel.
Three Months
Ended March 31
--------------
1996 1995
---- ----
Operating revenues
Advertising revenue $ 32,722,000 $ 25,434,000
Subscriber fees 24,296,000 19,705,000
Interactive and other revenue 146,000 85,000
------------- -------------
Total revenues 57,164,000 45,224,000
------------- -------------
Operating expenses*
Production and programming 20,735,000 16,535,000
Selling and marketing 11,045,000 10,333,000
New business development -- 708,000
General and administrative 3,395,000 3,406,000
------------- -------------
Total operating expenses 35,175,000 30,982,000
------------- -------------
Operating income $ 21,989,000 $ 14,242,000
============= =============
-----------------
*Includes depreciation and amortization:
Amortization of film rights
Original programming $ 7,168,000 $ 7,774,000
License agreements 9,943,000 6,404,000
------------- -------------
17,111,000 14,178,000
Depreciation and amortization
of property and equipment
and other assets 1,712,000 1,481,000
------------- -------------
$ 18,823,000 $ 15,659,000
============= =============
Operating Revenues
Advertising revenue increased $7,288,000 (or 28.7%) for the first quarter of
1996 as compared to the first quarter of 1995. This increase in advertising
revenue is attributable to increases in advertising rates, households reached,
and ratings in 1996 as compared to 1995.
Subscriber fees increased $4,591,000 (or 23.3%) for the first quarter of 1996
over the first quarter of 1995. This increase is 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 in the first
quarter of 1996) and rate increases in existing contracts, and to a lesser
extent to the continuing growth of total subscribers. During the first three
months of 1996, the average number of U.S. households reached by The Family
Channel increased 7.5% to 64.6 million from 60.1 million for the first three
months of 1995. The average number of billed subscribers, including home
television receive-only satellite dish subscribers, increased 7.6% to 62.4
million for the first three months of 1996 from 58.0 million for the first
three months of 1995. The difference between total households reached and
billed subscribers is attributable to cable service theft and sampling error
inherent in projecting estimates.
13
14
MATERIAL CHANGES IN RESULTS OF OPERATIONS, CONTINUED
THE FAMILY CHANNEL, CONTINUED
Operating Revenues, continued
Although The Family Channel currently reaches approximately 99% of all cable
households, such households represent only 67% of all television households in
the United States. The Company expects that cable television system
penetration will continue to grow as cable operators construct new systems and
extend existing cable television distribution facilities to new service areas,
as well as the continued development of direct broadcast satellite and other
alternative delivery services. These options may afford the Company additional
opportunities to increase carriage of The Family Channel on cable systems or
otherwise to increase the number of subscribers to The Family Channel, and thus
to have an impact on advertising and subscriber 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 costs incurred in connection with
acquisition of programming, production of original programming by the Company
for The Family Channel, the use of satellite transponders, and engineering and
technical support services. Production and programming expense increased
$4,200,000 (or 25.4%) for the first quarter of 1996 as compared to the first
quarter of 1995. The increase is primarily due to an increase in amortization
of programs acquired from others. As a percentage of The Family Channel's
total revenues, production and programming expense amounted to 36.3% for the
three month period ended March 31, 1996 as compared with 36.6% 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 $712,000
(or 6.9%) for the first quarter of 1996 as compared to the first quarter of
1995. As a percentage of The Family Channel's total revenues, selling and
marketing expense amounted to 19.3% for the three month period ended March 31,
1996 as compared with 22.8% for the corresponding period of the prior year.
New Business Development
Expense for new business development decreased $708,000 for the first quarter
of 1996 as compared to the first quarter of 1995. This decrease is due to the
discontinuance of the development of a program block centered around
interactive game shows on The Family Channel.
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 decreased $11,000 (or 0.3%) for the first
quarter of 1996 as compared to the first quarter of 1995.
14
15
MATERIAL CHANGES IN RESULTS OF OPERATIONS, CONTINUED
THE FAMILY CHANNEL, CONTINUED
Operating Income
Operating income increased $7,747,000 (or 54.4%) for the first quarter of 1996
as compared to the first quarter of 1995. As a percentage of The Family
Channel's total revenues, operating income was 38.5% for the three month period
ended March 31, 1996 as compared with 31.5% for the corresponding period of the
prior year.
Operating income before depreciation and amortization of property and equipment
and other assets increased $7,978,000 (or 50.7%) for the first quarter of 1996
as compared to the first quarter of 1995. As a percentage of The Family
Channel's total revenues, operating income before depreciation and amortization
of property and equipment and other assets for the three month period ended
March 31, 1996 was 41.5% as compared to 34.8% for the corresponding period in
1995.
FiT TV
The following table sets forth information relating to the operations of FiT
TV.
Three Months
Ended March 31
--------------
1996 1995
---- ----
Operating revenues
Advertising revenue $ 617,000 $ 239,000
Merchandise revenue 613,000 502,000
-------------- ------------
Total revenues 1,230,000 741,000
-------------- ------------
Operating expenses*
Production and programming 359,000 392,000
Selling and marketing 1,088,000 525,000
New business development 68,000 11,000
General and administrative 970,000 779,000
-------------- ------------
Total operating expenses 2,485,000 1,707,000
-------------- ------------
Operating loss $ (1,255,000) $ (966,000)
============== ============
-------------
*Includes depreciation and amortization:
Amortization of film rights
Original programming $ 256,000 $ 304,000
License agreements - -
-------------- ------------
256,000 304,000
-------------- ------------
Depreciation and amortization
of property and equipment
and other assets 5,000 1,000
-------------- ------------
$ 261,000 $ 305,000
============== ============
FiT TV was launched in October 1993. The operations of FiT TV have generated
operating losses and, as a start-up operation could generate operating losses
for a significant period of time. During 1995, there was a substantial
increase in the number of households able to receive FiT TV due to new
affiliation agreements. As of March 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 10.9 million households as
compared to approximately 8.4 million households as of March 31, 1995. The
Company intends to broaden the carriage of FiT TV through, among other things,
increased marketing and promotional activities. However, in light of the
number of new cable programming services and the existence of limited channel
capacity, there can be no assurance that these activities will be successful or
that FiT TV will become profitable.
15
16
MATERIAL CHANGES IN RESULTS OF OPERATIONS, CONTINUED
FiT TV, CONTINUED
The Company expects cable system penetration will continue to grow as cable
operators construct new systems, enhance existing systems to increase channel
capacity and extend existing cable television distribution facilities to new
service areas. Furthermore, certain technological advances that are
anticipated to expand the channel capacity of cable television systems
(including the development of digital compression technology and the deployment
of fiber optic cable) or to provide the potential for reaching new subscribers
(such as direct broadcast satellite and other alternative delivery services)
may afford the Company additional opportunities to increase carriage of FiT TV
on cable systems or otherwise to increase the number of subscribers to FiT TV
and thus have an impact on advertising and merchandise revenues. There can be
no assurance, however, that these technological advances will be effected or
that, if effected, they will have the anticipated beneficial impact on future
results of operations. In addition, certain of these trends also have the
potential to benefit competitors of the Company, and the recently enacted cable
television legislation may have an impact on such trends.
Selling and marketing expense increased $563,000 during the three month period
ending March 31, 1996 as compared to the corresponding period of the prior
year. This increase is due primarily 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 increased $191,000 (or 24.5%) during the
three month period ending March 31, 1996 as compared to the corresponding
period of the prior year. This increase is primarily due to an increase in
personnel costs in 1996.
On April 30, 1996, the Company, an affiliate of Reebok International Limited
("Reebok"), and an affiliate of Liberty Media Corporation ("Liberty Media")
entered into a definitive partnership agreement (the "Partnership Agreement")
forming a partnership (the "Partnership") to own and operate FiT TV. 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. Reebok is a major advertiser on the FiT TV cable network.
In accordance with the terms of the Partnership Agreement, CHTV contributed all
of the assets and liabilities of FiT TV to the Partnership in exchange for an
80% partnership interest and functions as the 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 Partnership.
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 at the time of exercise.
16
17
MATERIAL CHANGES IN RESULTS OF OPERATIONS, CONTINUED
INTERNATIONAL NETWORKS
The following table sets forth 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.
Three Months
Ended March 31
--------------
1996 1995
---- ----
Operating revenues
Advertising revenue $ 543,000 $ 522,000
Subscriber fees 3,141,000 2,382,000
Other revenue 80,000 40,000
------------- -------------
Total revenues 3,764,000 2,944,000
------------- -------------
Operating expenses*
Production and programming 4,962,000 3,691,000
Selling and marketing 1,300,000 964,000
New business development 429,000 98,000
General and administrative 694,000 561,000
------------- -------------
Total operating expenses 7,385,000 5,314,000
------------- -------------
Operating loss $ (3,621,000) $ (2,370,000)
============= =============
The Family Channel (UK) $ (2,068,000) $ (2,272,000)
The Family Channel De Las Americas (1,124,000) -
New business development (429,000) (98,000)
------------- -------------
Operating loss $ (3,621,000) $ (2,370,000)
============= =============
-----------------
*Includes depreciation and amortization:
Amortization of film rights
Original programming $ 97,000 $ 279,000
License agreements 2,306,000 1,133,000
------------- -------------
2,403,000 1,412,000
Depreciation and amortization
of property and equipment
and other assets 18,000 20,000
------------- -------------
$ 2,421,000 $ 1,432,000
============= =============
Note - The Company records a minority interest representing the minority
partner's 39% share of The Family Channel (UK) operations. See "Other
Income and Expense Information".
The Family Channel De Las Americas was launched July 1, 1995 and is an
advertiser-supported cable network that provides Spanish-language
family-oriented entertainment programming as well as fitness programming in
Mexico, Central America, and portions of South America to, at the current time,
a limited group of subscribers. As a start up operation, this network could
generate significant losses for an extended period of time, and there can be no
assurance that it will become profitable.
As previously discussed in Note F of Notes to Consolidated Financial
Statements, on April 22, 1996, the Company sold its 61% interest in The Family
Channel (UK).
17
18
MATERIAL CHANGES IN RESULTS OF OPERATIONS, CONTINUED
PRODUCTION & DISTRIBUTION SEGMENT INFORMATION
The following table sets forth information relating to the domestic and
international operations of the Company's Production & Distribution business
segment.
Three Months
Ended March 31
--------------
1996 1995
---- ----
Operating revenues
MTM Operations $13,053,000 $12,676,000
UK Studio 1,223,000 1,340,000
------------ ------------
Total revenues 14,276,000 14,016,000
------------ ------------
Operating expenses*
Production and programming 13,246,000 12,591,000
Selling and marketing 2,255,000 2,375,000
General and administrative 1,896,000 764,000
Amortization of goodwill 459,000 465,000
------------ ------------
Total operating expenses 17,856,000 16,195,000
------------ ------------
Operating loss $(3,580,000) $(2,179,000)
============ ============
MTM Operations $(3,533,000) $(2,179,000)
UK Studio (47,000) -
------------ ------------
Operating loss $(3,580,000) $(2,179,000)
============ ============
--------------
*Includes depreciation and amortization:
Amortization of film rights
Original programming $ 3,241,000 $ 9,252,000
License agreements 7,102,000 1,415,000
------------ ------------
10,343,000 10,667,000
------------ ------------
Depreciation and amortization
of property and equipment,
goodwill, and other assets
MTM Operations 571,000 498,000
UK Studio 175,000 166,000
------------ ------------
746,000 664,000
------------ ------------
$11,089,000 $11,331,000
============ ============
Operating revenue for MTM Operations increased $377,000 for the first quarter
of 1996 as compared to the corresponding period of the prior year. Operating
revenues were derived primarily from the syndication of America's Funniest Home
Videos in 1996 and from the production and licensing of Christy in 1995.
Revenue is recognized when programming becomes available for telecast by
others. As a result, 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.
Production and programming expense increased $655,000 for the first quarter of
1996 as compared to the corresponding period of the prior year. The increase
is primarily attributable to approximately $1,500,000 of development expenses
which were incurred in the first quarter of 1996, partially offset by a
decrease in the 1996 amortization of America's Funniest Home Videos as compared
to the 1995 amortization of Christy.
18
19
MATERIAL CHANGES IN RESULTS OF OPERATIONS, CONTINUED
PRODUCTION & DISTRIBUTION SEGMENT INFORMATION, CONTINUED
General and administrative expense increased $1,132,000 for the first quarter
of 1996 as compared to the corresponding period of the prior year. This
increase is due to increased personnel and occupancy costs, the creation of a
music publishing division, and the reserve of certain receivables in 1996.
Future results of operations of the Company's Production & Distribution
business are primarily dependent upon the Company's ability to distribute
programming (i) obtained in the acquisition of film libraries, (ii) produced
for licensing to the major broadcast networks and others, (iii) produced for
The Family Channel, and (iv) acquired under license agreements or otherwise.
As previously discussed in Note F of Notes to Consolidated Financial
Statements, on April 22, 1996, the Company sold the UK Studio.
LIVE ENTERTAINMENT SEGMENT INFORMATION
The following table sets forth information relating to the operations of the
Company's Live Entertainment business segment.
Three Months
Ended March 31
--------------
1996 1995
---- ----
Operating revenues $ 1,043,000 $ 1,107,000
------------ ------------
Operating expenses*
Production and programming 1,862,000 1,614,000
Selling and marketing 243,000 234,000
General and administrative 319,000 222,000
Amortization of goodwill 150,000 150,000
------------ ------------
Total operating expenses 2,574,000 2,220,000
------------ ------------
Operating loss $(1,531,000) $(1,113,000)
============ ============
-------------
*Includes depreciation and amortization:
Depreciation and amortization
of property and equipment,
goodwill and other assets $ 381,000 $ 270,000
============ ============
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.
19
20
MATERIAL CHANGES IN RESULTS OF OPERATIONS, CONTINUED
OTHER INCOME AND EXPENSE INFORMATION
Minority interest is primarily attributable to the minority partner's share of
the net loss resulting from the operations of The Family Channel (UK). The
minority partner's 39% share of the net loss of this joint venture amounted to
$1,026,000 for the first quarter of 1996 and $973,000 for the first quarter of
1995.
Other investments include investments in and advances to affiliates and others.
Management of the Company periodically reviews the recoverability of these
investments and adjusts their carrying value, as appropriate, based on the
operations of the entities and other factors. Other expense of $2,347,000 in
1996 is composed of such adjustments, including an adjustment of $1,350,000
relating to the Company's investment in China Entertainment Television
Broadcast Limited which, as a start-up operation, could generate significant
losses for an extended period of time.
20
21
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
None.
(b) Reports on Form 8-K (filed during the first quarter of 1996):
A Form 8-K which reported an event under Item 5 that occurred on
December 15, 1995 was filed in January 1996, and a Form 8-K which
reported an event under Item 5 that occurred on December 26, 1995
was filed in February 1996.
21
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated May 13, 1996
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
By: /s/ Larry W. Dantzler
----------------------------------------------
Larry W. Dantzler,
Senior Vice President
and Chief Financial Officer
22