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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED, EFFECTIVE OCTOBER 7,
1996).
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NO. 1-11121
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INTERNATIONAL FAMILY ENTERTAINMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 54-1522360
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2877 GUARDIAN LANE
VIRGINIA BEACH, VIRGINIA 23452
(Address of principal executive offices) (Zip Code)
(757) 459-6000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Class B Common Stock, $.01 par value per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 1, 1997: Class A Common Stock -- $0; Class B Common
Stock -- $448,237,406.
The number of shares outstanding of each of the Registrant's classes of
common stock as of March 1, 1997: Class A Common Stock, par value $.01 per
share -- 5,000,000 shares; Class B Common Stock, par value $.01 per share --
32,782,445 shares; non-voting Class C Common Stock, par value $.01 per
share -- 7,088,732 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement (the "1997 Proxy
Statement") to be used in connection with the 1997 Annual Meeting of
Stockholders are incorporated by reference in Part III of this Form 10-K.
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PART I
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.
ITEM 1. BUSINESS
INTRODUCTION
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. IFE also owns a majority interest
in FiT TV, an advertiser-supported health and fitness cable network which
operates principally in the United States, and Calvin Gilmore Productions, Inc.,
a producer of live musical variety shows.
The Family Channel was founded in 1977 as a division of The Christian
Broadcasting Network, Inc. ("CBN"). In 1989, the Company was formed by M.G.
"Pat" Robertson and Timothy B. 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 $250,000,000 in principal
amount of the Company's 6% Convertible Secured Notes due 2004 (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 Tele-Communications, Inc. ("TCI") invested
$45,000,000 in the Company by purchasing $22,000,000 of the Company's 10%
Convertible Cumulative Preferred Stock, par value $.001 per share (the
"Preferred Stock"), from the Company and by acquiring $23,000,000 in principal
amount of the Convertible Notes from CBN. TCI subsequently transferred its
investment in the Company to Liberty IFE, Inc., one of its affiliates and an
affiliate of Liberty Media Corporation. M.G. "Pat" Robertson subsequently
transferred all of his shares of the Company's Class A Common Stock, par value
$.01 per share (the "Class A Common Stock"), to a charitable remainder trust
established by him.
Prior to the Company's initial public offering (the "IPO") in April 1992,
CBN converted $127,000,000 in principal amount of the Convertible Notes into
14,287,500 shares of the Company's Class B Common Stock, par value $.01 per
share (the "Class B Common Stock"). In the IPO, the Company sold 4,166,666
shares of Class B Common Stock and CBN sold 8,333,334 shares. In June 1992, CBN
donated the remaining $100,000,000 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 $100,000,000 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 Common Stock.
The Redemption Agreement was consummated in December 1993.
In order to finance the Regent Repurchase, the Company entered into a
$150,000,000 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 $175,000,000. Initial borrowings
of
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$138,000,000 under the Revolving Credit Facility were used to finance the Regent
Repurchase and to refinance the Company's existing bank indebtedness. In
December 1995, the Company amended the Revolving Credit Facility to, among other
things, increase the commitment thereunder to $250,000,000; 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, Liberty IFE, which holds all of
the remaining $23,000,000 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
Amended and Restated Shareholder Agreement among the Company and certain of its
principal stockholders (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 December 1995, the Company and Liberty IFE entered into an exchange
agreement (the "Exchange Agreement") whereby Liberty IFE exchanged all of its
holdings of the Company's Preferred Stock for 5,000,000 shares of the Company's
Class B Common Stock and exchanged an additional 2,088,732 of Class B Common
Stock it then held, along with the aforementioned 5,000,000 shares, for
7,088,732 shares of the Company's non-voting Class C Common Stock, par value
$.01 per share (the "Class C Common Stock," and together with the Class A Common
Stock and Class B Common Stock, the "Common 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
Common Stock in lieu of Class B Common 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
Common Stock has ten votes per share and the Class B Common Stock has one vote
per share. The Class C Common Stock is non-voting. Each share of Class A Common
Stock and Class C Common Stock is convertible, at the option of the holder, into
one share of Class B Common Stock. The Company's 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 represents 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.
RECENT DEVELOPMENTS
On April 22, 1996, the Company consummated the sale of its television
production studio in Maidstone, England (the "UK Studio") and its 61% interest
in The Family Channel (UK) to Flextech plc, an English public limited company
and owner of the remaining 39% interest in The Family Channel (UK), pursuant to
agreements dated as of March 20, 1996. As consideration for this transaction,
the Company received L3,000,000 (approximately $4,600,000) in cash and 5,792,008
shares of Flextech's convertible redeemable non-voting common stock. This common
stock is convertible, under certain circumstances, into Flextech's voting common
stock which is listed on the London Stock Exchange. The market value of the
underlying voting common stock as of the date of the aforementioned agreements
was $46,100,000.
In connection with this transaction, the Company received the right,
beginning in June 1997, to "put" its holdings of Flextech's non-voting stock to
Flextech's majority owner, Tele-Communications International, Inc. ("TCI
International"), an affiliate of TCI. 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
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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. Recently, however, in connection with a proposed transaction
between Flextech and the British Broadcasting Corporation ("BBC"), Flextech has
offered to allow the Company to convert its holdings of Flextech non-voting
common stock into Flextech voting common stock prior to June 1997, and eliminate
the Company's right to "put" its Flextech holdings to TCI International,
provided the proposed transaction is approved by Flextech's shareholders. There
can be no assurance that the proposed transaction between Flextech and the BBC
will be approved.
On April 30, 1996, the Company; Liberty CHC, Inc., an affiliate of TCI and
Liberty Media; and Reebok CHC, Inc., an affiliate of Reebok International, Ltd.,
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.
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
managing partner. Reebok CHC contributed cash of $2,000,000 and other
consideration agreed upon by the parties in exchange for a 10% partnership
interest. Liberty CHC 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 CHC entered into an
agreement whereby Liberty CHC 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 upon 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.
On November 18, 1996, the Company and a third party formed United Family
Communications LLC ("UFC") to operate and distribute satellite-delivered
programming services in Mexico, Central America, and South America. The Company
has agreed to make an initial capital contribution of $5,200,000 and has
contributed certain assets of The Family Channel De Las Americas (subject to
UFC'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.
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"). Selected
financial information about the Company's industry segments is set forth in Note
Q to the consolidated financial statements incorporated by reference in Item 8
of this Form 10-K. In addition, Note Q to the consolidated financial statements
sets forth financial information about the Company's foreign and domestic
operations and export sales.
CABLE NETWORKS
The Company operates The Family Channel and FiT TV, and, through UFC, has
an interest in certain international networks that are planned to be launched in
1997.
THE FAMILY CHANNEL
The Family Channel is one of the largest cable television networks in the
United States, reaching approximately 70% of all television households in the
United States. Originally launched in 1977, The Family Channel was the first
satellite-delivered basic cable television network in the United States. TCI is
one of the
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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 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
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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. As previously discussed, on April 30, 1996, the
Company, Liberty CHC, and Reebok CHC formed the FiT TV Partnership to own and
operate the FiT TV cable network. See "-- Recent Developments."
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. As previously discussed, on April 22, 1996, the
Company consummated an agreement to sell its 61% interest in The Family Channel
(UK) to Flextech. See "-- Recent Developments."
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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. As previously discussed, 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. See "-- Recent Developments."
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.
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In first-run syndication, once-a-week hourly programming is licensed
domestically in exchange for advertising time (referred to as "barter"). When
programming is licensed on a barter basis, MTM receives a specified amount of
advertising time during the broadcast of the programming and subsequently sells
this advertising time for cash.
As compared to programming produced for the broadcast networks, MTM
exercises greater control over the creative and production decisions related to
its first-run syndicated programming. However, there is much greater financial
risk associated with such programming, as there is no third-party to share the
production costs. While the license fees paid by a broadcast network for
programming are fixed by contract, barter revenue derived from distribution of
first-run syndicated programming is not fixed in amount, but varies depending on
the ratings success of the programming. Even when a first-run syndicated program
is ultimately successful, during the initial years of the program its revenue is
often less than the costs of production.
PROGRAMMING FOR THE FAMILY CHANNEL. The Company utilizes MTM's production
expertise to produce programming for license to The Family Channel. During the
1996-97 season, MTM is producing Home & Family, a daily, two-hour talk show;
three original game show series; and several two-hour original movies.
DEVELOPMENT AND PRODUCTION RISKS. There are a number of factors outside
MTM's control which may affect the timely completion on a cost-effective basis
of the development, 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.
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In recent years, domestic basic cable networks have represented an
increasingly significant market for the MTM library, especially the "classic"
series such as The Mary Tyler Moore Show, The Bob Newhart Show, Lou Grant, and
Hill Street Blues. Cable exhibition has effectively developed as an alternative
market, although traditionally a less lucrative one than domestic syndication.
Each year, a greater number of relatively successful broadcast network series
are being licensed to cable networks in lieu of domestic syndication.
Additionally, in some instances, cable networks have purchased rights to
short-running television series which do not include sufficient episodes to
allow for traditional off-network syndication distribution. The majority of
MTM's film library is currently licensed to several major cable networks for
domestic exhibition over the next several years, pursuant to contracts providing
for cash payments to MTM.
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
IFE'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.
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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. Certain of these organizations are "vertically integrated" (i.e.,
producing, distributing, and exhibiting their own programming). Moreover, with
the repeal of certain governmental regulations which formerly prohibited the
broadcast networks from acquiring financial interests in, and syndication rights
to, television programming, this trend towards vertical integration, and,
accordingly, competition in the industry, is expected to increase. See
"Regulation and Legislation." Many of MTM's competitors are larger and have
financial and other resources substantially greater than those of the Company.
In addition to its originally produced programming, MTM faces increased
competition in the acquisition of distribution rights to programming produced by
others due to industry consolidation and the elimination of the financial
interest and syndication rules. See "Regulation and Legislation."
Licensing television programming to local broadcast stations and cable
networks has also become increasingly competitive as new programming continually
enters the market and certain of MTM's competitors attempt to develop their own
programming production capabilities and/or align themselves with the existing
broadcast networks. Additionally, certain movie studios have formed domestic
broadcast networks through affiliation with traditionally independent local
broadcast television stations. A reduction in the number of independent stations
could have a material adverse effect on MTM's ability to syndicate programming.
SATELLITE DISTRIBUTION
The Company transmits all programming for The Family Channel and FiT TV
from its facilities located in Virginia Beach, Virginia, by means of an earth
station transmitting antenna (an "uplink"). The uplink facility transmits The
Family Channel's and FiT TV's programming signal to a transponder on an orbiting
satellite, which in turn retransmits the signal to cable system operators, DBS
services, and other alternative delivery services. The Company transmits The
Family Channel's programming using two separate "feeds" (one for the Eastern,
Central and certain Mountain time zones and another for all other Mountain time
zones and the Pacific time zones), which are transmitted to two different
satellite transponders.
The Family Channel's east coast feed is on a transponder which the Company
exercised its option to purchase in November 1993. The Company purchased a
transponder on a separate satellite for The Family Channel's west coast feed.
The Company also purchased a transponder on a third satellite, which is
currently being used by FiT TV. All of the Company's owned transponders have
"protected" status. "Protected" status means that should the transponder fail,
service will be transferred, subject to availability, to a spare transponder
and, if one is not available, then to a transponder with "preemptible" status on
the same satellite or on another satellite owned by the same seller or lessor,
subject to certain limitations. "Preemptible" status means that the transponder
can be preempted in the event of a failure of a "protected" transponder.
At present, there are a limited number of domestic communications
satellites available for the transmission of cable television programming to
cable system operators. If satellite transmission is interrupted or terminated
due to the failure or unavailability of a transponder, the termination or
interruption could have a
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material adverse effect on the Company. The availability of transponders in the
future is dependent on a number of factors over which the Company has no
control. These factors include the future authorization of additional domestic
satellites, future competition among prospective users for available transponder
space, the uncertain status of the United States' space shuttle program
(including priority allocation of future shuttle cargo space to military rather
than commercial payloads), and the uncertain availability of satellites
launching through private entities in the United States and through private or
governmental entities in other countries.
REGULATION AND LEGISLATION
Certain aspects of the Company's operations are subject, directly or
indirectly, to federal, state, and local regulation. At the federal level, the
operations of cable television systems, satellite distribution systems, other
multichannel distribution systems, broadcast television program distribution
companies, and, in some respects, vertically integrated cable programmers are
subject to the Communications Act of 1934, as amended by the Cable
Communications Policy Act of 1984 (the "1984 Act") the Cable Television Consumer
Protection and Competition Act (the "1992 Act"), and the Telecommunications Act
of 1996 (the "1996 Act") and regulations promulgated thereunder by the Federal
Communications Commission (the "FCC"). Cable television systems are also subject
to regulation at the state and local level.
The following does not purport to be a summary of all present and proposed
federal, state, and local regulations and legislation relating to the cable
television industry and other industries involved in the video marketplace.
Other existing legislation and regulations, copyright licensing, and, in many
jurisdictions, state and local franchise requirements are currently the subject
of a variety of judicial proceedings, legislative hearings, and administrative
and legislative proposals which could change, in varying degrees, the manner in
which the cable television industry and other industries involved in the video
marketplace operate.
Federal Regulation and Legislation
THE 1996 ACT. The 1996 Act took effect in February 1996, altering the
network of federal, state, and local laws and regulations pertaining to
telecommunications providers and services. The following is a summary of certain
provisions of the 1996 Act that affect the cable television industry, and
particularly the cable and telecommunications services provided by the Company.
The FCC is in the process of promulgating rules interpreting and implementing
the provisions of the 1996 Act. At this time, it is impossible to state with
precision the full impact the 1996 Act will have on the Company.
The 1996 Act seeks to promote facilities-based competition between
telephone companies and cable operators. To this end, it eliminates the
cable-telco cross-ownership prohibition, which barred the common ownership of
telephone companies and cable systems serving overlapping areas. It also
preempts and prohibits state and local regulations that prevent cable operators
from providing telephone service, and it requires telephone companies to
interconnect with cable operators and other alternative providers of
telecommunications service. While telephone companies and cable operators are
now permitted to offer competing services, the 1996 Act generally prohibits
telephone companies from acquiring existing cable operators in their service
areas, and vice versa.
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
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enactment. Even in the interim, the 1996 Act liberalizes the 1992 Act's
definition of "effective competition" to expand the circumstances under which
rate regulation will cease immediately. The local franchising authorities
("LFAs") remain primarily responsible for regulating the basic tier of cable
service. Furthermore, the 1996 Act eliminates the power of an individual
subscriber to bring a rate complaint, leaving such authority only in the hands
of LFAs. Thus, beyond the basic tier of cable service, which continues to be
regulated by the LFAs, rate regulation of other cable services between now and
1999 will only be triggered by a rate complaint by an LFA, and only in an area
where no effective competition exists.
The 1996 Act addresses obscenity, indecency, and violence in connection
with telecommunications services in several respects, including the
establishment of a television rating code to be created by an FCC advisory
committee or, voluntarily, by the industry. In addition, the 1996 Act addresses
the need to create wider availability of access to telecommunications services
for persons with disabilities. Specifically, the FCC is directed to study and
promulgate rules on closed captioning services.
To the extent the 1996 Act fosters greater competition for the provision of
cable services to individual subscribers, the Company should generally be
impacted either neutrally or advantageously, as additional providers are
additional potential customers for the Company. To the extent, however, that
rate deregulation causes a material increase in cable rates, the individual
subscriber base could be decreased, and therefore the Company's subscriber
revenues could be adversely affected. Further, the Company may be called upon to
provide increased closed captioning to assist in complying with rules
promulgated under the 1996 Act and may be required to provide assistance or
information to determine appropriate ratings for its programming, which in turn
could increase the Company's operating expenses.
THE 1992 ACT. Rate Regulation. The 1992 Act subjected all cable
television operators not subject to "effective competition" to rate regulation.
Under the 1992 Act, effective competition was deemed to exist where (i) fewer
than 30% of households in the franchise area subscribe to a cable service, (ii)
at least 50% of the homes in the franchise area are passed by at least two
unaffiliated multichannel video programming distributors, where the penetration
of at least one distributor other than the largest is at least 15%, or (iii) a
multichannel video programming distributor operated by the LFA for that area
passes at least 50% of the households in the franchise area. The 1996 Act
expanded this definition by providing that effective competition would also be
deemed to exist where a local exchange carrier or its affiliate offers
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
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boxes and remote control devices) and installation services be unbundled from
the provision of cable service and based upon actual costs plus a reasonable
profit. LFAs and/or the FCC are empowered to order a reduction of existing rates
that exceed the maximum permitted level for cable services and associated
equipment.
Once a system's rates are initially set, the rules permit subsequent
increases that reflect inflation and increases in existing programming costs and
certain other costs. The rules thus permit cable operators that carried The
Family Channel or FiT TV when their rates were initially regulated to pass
through to subscribers any subsequent increases in licensing fees. Systems may
also increase rates when they add new channels to regulated tiers, but there is
a cap on such increases. Alternatively, systems may create "new product tiers"
consisting entirely of services not previously offered on regulated tiers, and
these new product tiers will generally not be subject to rate regulations.
Rate regulation under the 1992 Act resulted in a reduction of rates to some
subscribers in some markets. The deregulation under the 1996 Act may, however,
result in an immediate increase in rates in some markets. In response to the
1992 Act and the FCC's implementing regulations, many cable systems retiered
channels to create an attractively priced basic tier consisting exclusively of
broadcast and public, educational, and governmental access channels, while
offering satellite-delivered programming services such as The Family Channel or
FiT TV on a different service tier or on an a la carte basis. To the extent that
such retiering or repricing of the Company's networks induces customers to
discontinue their subscriptions, the Company's 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. Litigation challenging the
constitutionality of the must-carry provisions is presently pending before the
United States Supreme Court. A decision voiding the must-carry provisions could
free channel capacity on cable systems for the carriage of additional
programming services.
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
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Family Channel and FiT TV. Because of vertical ownership limits adopted by the
FCC, Liberty may determine to eliminate or reduce its ownership interest in the
Company, or TCI may determine to limit or terminate the carriage of The Family
Channel or FiT TV by its affiliates. 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. If cable systems affiliated with TCI cease to carry The Family
Channel, the Company could be materially and adversely affected. Although the
Company does not expect any immediate impact from these regulations, such
regulations may in the future have an effect on the carriage of The Family
Channel or FiT TV on cable systems affiliated with TCI as well as other cable
systems.
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 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, and even from city to city within the same state. 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.
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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.
ITEM 2. 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.
See Item 13 "Certain Relationships and Related Transactions" and the information
incorporated therein by reference.
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. See Item 13 "Certain Relationships
and Related Transactions" and the information incorporated by reference therein.
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ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company and their ages, as of March 1, 1997,
and positions with the Company, are set forth below.
NAME AGE POSITION
- ---------------------------- --- -----------------------------------------------------------
M.G. "Pat" Robertson........ 66 Chairman of the Board and Director
Timothy B. Robertson........ 42 President, Chief Executive Officer and Director
Larry W. Dantzler........... 41 Senior Vice President and Chief Financial Officer
David R. Humphrey........... 40 Senior Vice President -- Investor Relations and Strategic
Planning
Louis A. Isakoff............ 42 Senior Vice President, General Counsel, Secretary and
Director
K. John "Gus" Lucas......... 49 President -- Family Channel Programming
D. Paul Newton.............. 40 Senior Vice President -- International Business Development
Diane Linen Powell.......... 49 Senior Vice President -- Corporate Communications
B. Randall Seiler........... 43 Senior Vice President -- Engineering and Technical Services
Craig R. Sherwood........... 45 Senior Vice President and Managing Director -- Affiliate
Relations
Richard L. Sirvaitis........ 47 President -- IFE Advertising Sales
Anthony D. Thomopoulos...... 59 Chief Executive Officer of MTM
The executive officers of the Company are elected by the Company's Board of
Directors to serve until their successors are elected and qualified. The
following is a brief description of the background of each of the executive
officers of the Company for at least the past five years.
M.G. "PAT" ROBERTSON has served as Chairman of the Board and as a Director
of the Company since December 1989. He has served as Chairman of the Board of
CBN since January 1960, Chief Executive Officer and President of CBN from
January 1960 to January 1987, and from January 1990 to September 1993, and Chief
Executive Officer of CBN from September 1993 to the present. He is also Chairman
of United States Media Corporation, Chairman of Northstar Entertainment Group,
Inc., Chairman of Asia Pacific Media, Inc., Chairman of Porchlight
Entertainment, Inc., President of the American Center for Law and Justice,
President of Operation Blessing International Relief and Development
Corporation, President of African Development Company, Ltd., and Chancellor and
a member of the Board of Trustees of Regent University.
TIMOTHY B. ROBERTSON has been President and Chief Executive Officer and a
Director of the Company since December 1989. He is currently a board member of
the National Cable Television Association, the National Academy of Cable
Programming, the Cable Television Advertising Bureau, the Walter Kaitz
Foundation and Cable in the Classroom, and a member of the Board of Trustees of
Regent University. Mr. Robertson is Chairman of MTM.
LARRY W. DANTZLER has been Senior Vice President and Chief Financial
Officer of the Company since December 1992, and from January 1990 to such date,
served as Vice President and Chief Financial Officer of the Company.
DAVID R. HUMPHREY has been Senior Vice President -- Investor Relations and
Strategic Planning of the Company since December 1993, and from July 1992 to
such date, served as Vice President -- Financial Relations of the Company. From
January 1981 to June 1992, he was Director of Financial Reporting for TCI, and
from August 1989 to June 1992, also served as an Assistant Vice President of
TCI.
LOUIS A. ISAKOFF has been Senior Vice President, General Counsel and
Secretary of the Company since December 1992, and from January 1990 to such
date, served as Vice President, General Counsel and Secretary of the Company. He
has served as a Director of the Company since December 1989.
K. JOHN "GUS" LUCAS has been the Company's President -- Family Channel
Programming since October 1996, and from May 1995 to such date, served as Senior
Vice President -- Programming of the Company. From August 1986 to September
1993, he was Executive Vice President of Viacom Entertainment Group, and from
March 1987 to August 1993, served as Viacom's President of West Coast
Operations. Previously, he was Vice President and Assistant to the President,
ABC Entertainment.
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D. PAUL NEWTON has been Senior Vice President -- International Business
Development of the Company since April 1996. From August 1993 to April 1996, he
served as Managing Director of The Family Channel (UK). From August 1988 to
August 1993, he served as a Senior Manager with Price Waterhouse LLP.
DIANE LINEN POWELL has been Senior Vice President -- Corporate
Communications of the Company since October 1996, and from July 1994 to such
date, served as Vice President -- Public Relations of the Company. From 1988 to
1990, she served as Senior Vice President of Development of the Television
Bureau of Advertising. Prior to 1988, she spent ten years at NBC, serving as,
among other positions, Vice President of Affiliate Relations, and three years in
investment banking at Communications Equity Associates.
B. RANDALL SEILER has served as Senior Vice President -- Engineering and
Technical Services since September 1994, and from July 1991 to such date, served
as Vice President -- Engineering and Technical Services of the Company. From
March 1984 to July 1991, he was Director of Engineering for Pyramid Production
Group, a television production company.
CRAIG R. SHERWOOD has served as Senior Vice President and Managing
Director -- Affiliate Relations of the Company since December 1992, and from
January 1990 to such date, served as Vice President and Managing
Director -- Affiliate Relations of the Company.
RICHARD L. SIRVAITIS was named President -- IFE Advertising Sales in May
1995 and is responsible for all advertising sales-related activity for the
Company. From August 1994 to April 1995, Mr. Sirvaitis was Executive Vice
President -- News and was responsible for all domestic sales for CNN/Headline
News and the CNN Broadcast Networks. From 1990 to July 1994, he served as
Executive Vice President, Operating Officer of National Sales for the Turner
Entertainment Networks.
ANTHONY D. THOMOPOULOS was named Chief Executive Officer of MTM in March
1995 and is responsible for all domestic and international programming of the
Company. From late 1991 to March 1995, he was President of Amblin Television, a
division of Steven Spielberg's Amblin Entertainment. In 1989, Mr. Thomopoulos
formed Thomopoulos Productions, which produced both motion pictures and
television programs. Prior to 1989, he had served as, among other positions,
President of ABC Entertainment, President of ABC Broadcast Group, and Chairman
of United Artists Pictures.
Pat Robertson and Timothy B. Robertson are father and son. No other family
relationships exist between any other executive officers of the Company.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since the IPO, the Class B Common Stock has traded on the New York Stock
Exchange under the symbol "FAM". Quarterly price information (high and low sale
price) with respect to the Class B Common Stock is set forth under the caption
entitled "Quarterly Financial Information" on page F-26 hereof and such
information is incorporated herein by reference. There is no established public
trading market for the Class A Common Stock or the Class C Common Stock.
As of March 1, 1997, there were approximately 5,600 holders of the Class B
Common Stock, including 1,310 stockholders of record. As of the same date, there
were three holders of record of the Class A Common Stock and one holder of
record of the Class C Common Stock.
No cash dividends have been paid with respect to the Common Stock. The
Company currently intends to retain earnings to fund future growth and has no
current plans to pay any cash dividends on the Common Stock in the foreseeable
future, although the dividend policy is reviewed by the Company's Board of
Directors from time to time and could be changed. The declaration and payment of
future dividends on the Common Stock will be at the sole discretion of the
Company's Board of Directors and will depend upon the Company's profitability
and financial condition, capital requirements, statutory restrictions,
requirements of the Company's lenders, future prospects and other factors deemed
relevant by the Company's Board of Directors. If any dividends are paid to the
holders of Common Stock, the holders of Class A Common Stock, Class B Common
Stock and Class C Common Stock will share equally in the dividends on a
per-share basis.
The terms of the Company's agreements relating to indebtedness restrict the
Company's ability to pay dividends on the Common Stock under certain
circumstances. A description of these restrictions is included in Notes E and F
to the consolidated financial statements incorporated by reference in Item 8 of
this Form 10-K. Reference is also made to Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the information
incorporated by reference therein.
ITEM 6. SELECTED FINANCIAL DATA
A summary of selected consolidated financial data for the Company for the
five years ended December 31, 1996 is set forth under the caption entitled
"Selected Consolidated Financial Data" on pages F-27 and F-28 hereof and is
incorporated herein by reference.
ITEM 7. 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 is set forth under the caption
entitled "Management's Discussion and Analysis" on pages F-29 through F-41
hereof and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements and notes thereto for the Company,
together with the report of KPMG Peat Marwick LLP, are set forth on pages F-2
through F-25 hereof, and are incorporated herein by reference. Supplementary
quarterly financial information is set forth under the caption "Quarterly
Financial Information" on page F-26 hereof and is incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
II-1
20
PART III
The information required by Part III (Items 10, 11, 12 and 13) has been
incorporated herein by reference to the 1997 Proxy Statement as set forth below,
in accordance with General Instruction G(3) of Form 10-K.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to directors of the Company and compliance with
Section 16(a) of the Securities Exchange Act of 1934 is set forth in the
sections entitled "Election of Directors" and "Compliance with Section 16(a)
Beneficial Ownership Reporting Compliance" in the 1997 Proxy Statement and is
incorporated herein by reference. Pursuant to General Instruction G(3) of Form
10-K, certain information concerning the executive officers of the Company is
set forth under the caption entitled "Executive Officers of the Company" in an
unnumbered item following Item 4 in Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding compensation of officers and directors of the Company
is set forth in the section entitled "Executive Compensation" in the 1997 Proxy
Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding ownership of certain of the Company's securities is
set forth in the section entitled "Security Ownership of Certain Beneficial
Owners and Management" in the 1997 Proxy Statement and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions with
the Company is set forth in the section entitled "Certain Relationships and
Related Transactions" in the 1997 Proxy Statement and is incorporated herein by
reference.
III-1
21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
(1)-(2) Financial Statements and Schedules:
The list of financial statements and schedules set forth in the
accompanying Index to Financial Information is incorporated herein by
reference. Such financial statements and schedules are filed as part of
this Form 10-K.
(3) Exhibits:
The exhibits listed on the accompanying Exhibit Index are filed or
incorporated by reference as part of this Form 10-K and such Exhibit
Index is incorporated herein by reference.
(b) Reports on Form 8-K (filed during the fourth quarter of 1996):
None.
IV-1
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
INTERNATIONAL FAMILY
ENTERTAINMENT, INC.
(Registrant)
By: /s/ TIMOTHY B. ROBERTSON
------------------------------------
Timothy B. Robertson
President and Chief Executive
Officer
Dated: March 17, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------ ---------------
/s/ M.G. ROBERTSON Chairman of the Board and March 17, 1997
- --------------------------------------------- Director
M.G. Robertson
/s/ TIMOTHY B. ROBERTSON President, Chief Executive March 17, 1997
- --------------------------------------------- Officer and Director
Timothy B. Robertson (Principal Executive
Officer)
/s/ LOUIS A. ISAKOFF Senior Vice President, March 17, 1997
- --------------------------------------------- Secretary, General Counsel
Louis A. Isakoff and Director
/s/ LARRY W. DANTZLER Senior Vice President and March 17, 1997
- --------------------------------------------- Chief Financial Officer
Larry W. Dantzler (Principal Accounting
Officer)
/s/ LOWELL W. MORSE Director March 17, 1997
- ---------------------------------------------
Lowell W. Morse
IV-2
23
INDEX TO FINANCIAL INFORMATION
PAGE
-----
Consolidated Financial Statements
Consolidated Balance Sheets..................................................... F-2
Consolidated Statements of Operations........................................... F-3
Consolidated Statements of Cash Flows........................................... F-4
Consolidated Statements of Stockholders' Equity................................. F-5
Notes to Consolidated Financial Statements...................................... F-6
Independent Auditors' Report.......................................................... F-25
Quarterly Financial Information....................................................... F-26
Selected Consolidated Financial Data.................................................. F-27
Management's Discussion and Analysis
General......................................................................... F-29
Results of Operations........................................................... F-29
Cable Networks Segment Information........................................ F-30
The Family Channel.................................................. F-30
FiT TV.............................................................. F-32
International Networks.............................................. F-34
Production & Distribution Segment Information............................. F-35
Live Entertainment Segment Information.................................... F-38
Other Income and Expense Information...................................... F-39
Use of Estimates.......................................................... F-40
Liquidity and Capital Resources................................................. F-40
Inflation....................................................................... F-41
Income Taxes.................................................................... F-41
Financial Statement Schedule
II--Valuation and Qualifying Accounts........................................... F-42
All other schedules are omitted because the required information is not
present, or is not present in amounts sufficient to require submission of the
schedules, or because the information required is included in the consolidated
financial statements and notes thereto.
Independent Auditors' Report on Financial Statement Schedule.......................... F-43
F-1
24
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
---------------------------
1996 1995
------------ ------------
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
============ ============
See accompanying notes to consolidated financial statements
F-2
25
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31
----------------------------------------------
1996 1995 1994
------------ ------------ ------------
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
============ ============ ============
See accompanying notes to consolidated financial statements
F-3
26
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
--------------------------------------------
1996 1995 1994
------------- ------------- ------------
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
============= ============= ============
See accompanying notes to consolidated financial statements
F-4
27
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
UNREALIZED
10% CUMULATIVE GAIN
CONVERTIBLE FOREIGN (LOSS)
CUMULATIVE CLASS A CLASS B CLASS C UNEARNED CURRENCY ON RETAINED
PREFERRED COMMON COMMON COMMON COMPENSATION TRANSLATION MARKETABLE EARNINGS
STOCK STOCK STOCK STOCK STOCK PLAN ADJUSTMENT SECURITIES (DEFICIT) TOTAL
------------ -------- ------------ ----------- ------------ ---------- ---------- ------------ ------------
BALANCES AT
JANUARY 1,
1994....... $ 21,670,000 $150,000 $146,198,000 $ -- $(1,701,000) $ (11,000) $ -- $(13,089,000) $153,217,000
Conversion of
Class A
Common
Stock,
500,000
shares..... -- (17,000) 17,000 -- -- -- -- -- --
Issuance of
Class B
Common
Stock under
the Stock
Plan,
140,482
shares..... -- -- 2,258,000 -- (2,257,000) -- -- -- 1,000
Forfeiture of
Class B
Common
Stock under
the Stock
Plan,
14,000
shares..... -- -- (148,000) -- 147,000 -- -- -- (1,000)
Compensation -- Stock
Plan....... -- -- -- -- 1,127,000 -- -- -- 1,127,000
Repurchase
and
retirement
of Class B
Common
Stock,
176,033
shares..... -- -- (2,661,000) -- -- -- -- -- (2,661,000)
Increase in
deferred
tax benefit
related to
initial
basis
differences
(Note K)... -- -- 6,000,000 -- -- -- -- -- 6,000,000
Foreign
currency
translation
adjustment... -- -- -- -- -- 989,000 -- -- 989,000
Unrealized
loss on
marketable
securities... -- -- -- -- -- -- (156,000) -- (156,000)
Net income... -- -- -- -- -- -- -- 14,792,000 14,792,000
Preferred
Stock
dividends
paid....... -- -- -- -- -- -- -- (2,200,000) (2,200,000)
------------ -------- ------------ ----------- ----------- --------- --------- ------------ ------------
BALANCES AT
DECEMBER
31, 1994... 21,670,000 133,000 151,664,000 -- (2,684,000) 978,000 (156,000) (497,000) 171,108,000
Exchange of
Preferred
Stock for
Class B
Common
Stock,
4,000,000
shares..... (21,670,000) -- 21,670,000 -- -- -- -- -- --
Exchange of
Class B
Common
Stock for
Class C
Common
Stock,
5,670,986
shares
(Note H)... -- -- (50,703,000) 50,703,000 -- -- -- -- --
Issuance of
Class B
Common
Stock under
the Stock
Plan,
37,637
shares..... -- -- 578,000 -- (578,000) -- -- -- --
Forfeiture of
Class B
Common
Stock under
the Stock
Plan,
15,280
shares..... -- -- (214,000) -- 214,000 -- -- -- --
Compensation -- Stock
Plan....... -- -- -- -- 1,351,000 -- -- -- 1,351,000
Repurchase
and
retirement
of Class B
Common
Stock,
1,357,456
shares..... -- -- (18,176,000) -- -- -- -- -- (18,176,000)
Five-for-four
stock
split,
including
$5,000 paid
for
fractional
shares
(Note I)... -- 10,000 67,000 14,000 -- -- -- (96,000) (5,000)
Foreign
currency
translation
adjustments... -- -- -- -- -- (313,000) -- -- (313,000)
Unrealized
loss on
marketable
securities... -- -- -- -- -- -- (217,000) -- (217,000)
Net income... -- -- -- -- -- -- -- 18,664,000 18,664,000
Preferred
Stock
dividends
paid....... -- -- -- -- -- -- -- (1,109,000) (1,109,000)
------------ -------- ------------ ----------- ----------- --------- --------- ------------ ------------
BALANCES AT
DECEMBER
31, 1995... -- 143,000 104,886,000 50,717,000 (1,697,000) 665,000 (373,000) 16,962,000 171,303,000
Issuance of
Class B
Common
Stock under
the Stock
Plan, 812
shares..... -- -- 11,000 -- (11,000) -- -- -- --
Forfeiture of
Class B
Common
Stock under
the Stock
Plan,
31,936
shares..... -- -- (460,000) -- 460,000 -- -- -- --
Exercise of
options to
purchase
Class B
Common
Stock under
the Stock
Plan,
19,333
shares..... -- -- 266,000 -- -- -- -- -- 266,000
Compensation -- Stock
Plan....... -- -- -- -- 686,000 -- -- -- 686,000
Repurchase
and
retirement
of Class B
Common
Stock,
241,502
shares..... -- -- (3,247,000) -- -- -- -- -- (3,247,000)
Foreign
currency
translation
adjustment... -- -- -- -- -- (665,000) -- -- (665,000)
Unrealized
gain on
marketable
securities... -- -- -- -- -- -- 724,000 -- 724,000
Net income... -- -- -- -- -- -- -- 32,125,000 32,125,000
------------ -------- ------------ ----------- ----------- --------- --------- ------------ ------------
BALANCES AT
DECEMBER
31, 1996... $ -- $143,000 $101,456,000 $50,717,000 $ (562,000) $ -- $ 351,000 $ 49,087,000 $201,192,000
============ ======== ============ =========== =========== ========= ========= ============ ============
See accompanying notes to consolidated financial statements
F-5
28
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
29
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Film Rights
Film rights include exhibition and exploitation rights acquired under
license agreements for the Company's own use on its cable networks and for
relicensing to others. Also included in film rights are costs of programming,
including films-in-progress, produced for exhibition by the Company on its cable
networks or produced for others. These costs, including allocated overhead, are
capitalized as incurred. Rights acquired under license agreements, along with
the related obligations, are recorded at the face amount of the contract at the
time the programming is made available.
Film rights, other than films-in-progress (which are stated at cost), are
stated at the lower of cost, less related amortization, or net realizable value.
Exhibition rights are amortized on a straight-line basis over the estimated
number of airings. Production and exploitation costs related to programs
produced for others are amortized based on the percentage that current year
revenues bear to estimated future revenues on a program-by-program basis.
Estimates of future airings and revenues are periodically reviewed by management
and revised when warranted by changing conditions, such as changes in expected
usage of a program on the Company's cable networks or changes in the
distribution marketplace.
The current portion of film rights is based upon the estimated portion of
these assets which is expected to be amortized over the next year.
Other Investments
Other investments in which the Company's voting interest is less than 20%
are carried at cost.
Investments in affiliates in which the Company's voting interest is 20% to
50% are accounted for under the equity method. Under this method, the
investment, originally recorded at cost, is adjusted to recognize the Company's
share of the net earnings or losses of the affiliates as they occur. The excess
of the cost of the stock of those affiliates over the Company's share of net
assets at the acquisition date is amortized on a straight-line basis over the
expected period to be benefited, generally 25 years.
Goodwill
Goodwill, which represents the excess of purchase price over the fair value
of net assets acquired, is amortized on a straight-line basis over the expected
period to be benefited, generally 25 years. At each balance sheet date, the
Company evaluates the realizability of goodwill based upon expectations of
nondiscounted future operating cash flows for each subsidiary having a material
goodwill balance. The evaluation of goodwill will be impacted if estimated
future operating cash flows are not achieved. Based upon its most recent
analysis, the Company believes that no material impairment of goodwill existed
at December 31, 1996.
Foreign Currency Translation
All balance sheet accounts of foreign investments were translated at the
current exchange rate as of the end of the accounting period. The resulting
translation adjustment was recorded as a separate component of stockholders'
equity. Income statement items are translated at average currency exchange
rates.
Revenue Recognition
Advertising revenue is recognized in the period in which the advertising
commercials or programs are telecast. Subscriber fees are recognized in the
period during which the network services are provided to a cable system operator
or other distributor.
Production and distribution revenues are recognized in the period in which
programming becomes available for telecast by others. Long-term receivables
arising from distribution arrangements are recorded at their net present values
when revenue is recognized. Amounts received in advance of recognition of
revenue are recorded as deferred income. Costs of profit participations and
residual payments are accrued, based upon amounts expected to be payable, at the
time revenue is recognized.
F-7
30
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company utilizes the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to be applicable to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that includes the enactment
date.
Stock Options
Prior to January 1, 1996, the Company accounted for stock options in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25. Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 123, Accounting for Stock-Based Compensation, which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net income and pro forma earnings per share disclosures for employee
stock option grants made in 1995 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
Earnings Per Share
The Convertible Notes, as described in Note F, are considered to be common
stock equivalents and, accordingly, the computations of primary and fully
diluted earnings per share assume conversion of the Convertible Notes if the
effect of such conversion is dilutive. Stock options are also included in the
computations of primary and fully diluted earnings per share if their effect is
dilutive.
For the year ended December 31, 1996, primary and fully diluted earnings
per common share were computed by increasing net income available for Common
Stock by the interest on the Convertible Notes, net of the related tax effect,
and dividing the result by the average number of common shares (48,022,327)
outstanding during 1996.
For the years ended December 31, 1995 and 1994, primary and fully diluted
earnings per common share were computed by dividing net income available for
Common Stock by the average number of common shares (40,754,635 and 41,820,072,
respectively) outstanding during such years. In 1995, the impact of the Exchange
Agreement, as described in Note H, on earnings per common share was a reduction
of $0.24 per common share.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
Reclassifications
Certain amounts have been reclassified for comparability with the 1996
financial statement presentation.
F-8
31
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- ACQUISITIONS AND OTHER INVESTMENTS
Body By Jake Enterprises
In July 1995, the Company acquired a 20% interest in Body By Jake
Enterprises, LLC ("BBJE"), a fitness licensing and television production
company, for $4,000,000 in cash.
China Entertainment Television Broadcast Limited
In June 1995, the Company acquired a 33 1/3% interest in an entity which
held convertible demand notes, which were convertible into an 80% equity
interest in China Entertainment Television Broadcast Limited. This entity
recorded a valuation allowance in 1995 of which the Company's share was
approximately $1,500,000, which is reflected in the determination of other
income and expense in the 1995 Consolidated Statement of Operations. In November
1996, these convertible demand notes were sold to a third party for
approximately 77.5% of their face value.
Ice Capades
In February 1995, the Company acquired the assets of the Ice Capades for
consideration, consisting principally of assumed liabilities, amounting to
approximately $10,200,000. The liabilities assumed in the transaction included
$6,728,000 of cash advances by IFE prior to closing.
On December 31, 1995, the Company sold its interest in the Ice Capades to a
certain sports marketing enterprise in exchange for 7 1/2% convertible notes,
due in 2005, in the principal amount of $10,200,000 and the assumption of cash
advances due to the Company amounting to $4,090,000 at December 31, 1995. These
notes will be convertible, beginning in 1998, at the option of the Company, into
a majority interest in the acquiring entity. Accordingly, the gain on this
transaction amounting to $2,616,000 was deferred. In addition, on this same
date, the Company and the acquiring entity entered into a revolving credit
agreement whereby the Company agreed to advance the acquiring entity up to
$12,000,000 (including the aforementioned $4,090,000 in cash advances). During
1996, this revolving credit agreement was replaced by a bank credit facility
which is guaranteed by IFE. In 1996, the Company recorded a valuation allowance
in connection with its investment in the aforementioned 7 1/2% convertible
notes. Such valuation allowance, which amounted to $5,300,000, is reflected in
the determination of other income and expense in the 1996 Consolidated Statement
of Operations.
TVS ENTERTAINMENT PLC
During 1993, the Company acquired all of the outstanding capital stock of
TVS ENTERTAINMENT PLC ("TVS"), which was the parent company of MTM at that time.
Upon consummation of the acquisition of TVS, several contingencies existed and
the amounts related thereto were included in the allocation of the purchase
price, based upon management estimates utilizing the best available information.
Such estimates are periodically reviewed by management and revised when
warranted. Generally, after the first twelve months following an acquisition,
changes in estimates are included in the determination of net income.
Accordingly, the effects of the final resolution in 1995 and 1994 of certain
pre-acquisition contingencies recorded in the acquisition of TVS were included
in the determination of net income. Such effects, which amounted to $2,521,000
and $7,291,000, were included in the determination of other income and expense
in the 1995 and 1994 Consolidated Statements of Operations, respectively.
F-9
32
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:
DECEMBER 31
-------------------------
1996 1995
---------- ----------
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
========== ==========
Available-for-sale securities, consisting primarily of equity securities,
had an amortized cost of $3,477,000 and $6,904,000 at December 31, 1996 and
1995, respectively. As of December 31, 1996, the unrealized gain related to
securities classified as available-for-sale amounted to $595,000 ($351,000 after
related tax effect). As of December 31, 1995, the unrealized loss related to
securities classified as available-for-sale amounted to $633,000 ($373,000 after
related tax effect). For the years ended December 31, 1996 and 1995, proceeds
from the disposition of available-for-sale securities amounted to $4,954,000 and
$1,089,000, respectively, and gross realized gains and losses were $1,093,000
and $(22,000) in 1996, and $29,000 and $(119,000) in 1995.
As of December 31, 1996, the unrealized gain related to trading securities
(with a cost of $4,129,000) amounted to $852,000, which amount is included in
the determination of investment income. For the year ended December 31, 1996,
proceeds from the disposition of trading securities amounted to $952,000, and
gross realized gains and losses were $164,000 and $(49,000) in 1996.
The Company recognized a $3,691,000 loss in 1994 on the impairment of
certain equity securities classified as available-for-sale securities. This loss
for 1994 was accounted for as a realized loss in the determination of investment
income. Also included in the determination of investment income for 1994 were
realized losses aggregating $2,338,000 on transactions which involved futures
contracts or other derivative securities.
NOTE D -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31
---------------------------
1996 1995
----------- -----------
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
=========== ===========
F-10
33
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE E -- LONG-TERM DEBT
Long-term debt, other than the Convertible Notes described in Note F,
consists of the following:
DECEMBER 31
---------------------------
1996 1995
------------ ------------
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
============ ============
Revolving Credit Facility
The Company has a long-term bank credit facility (the "Revolving Credit
Facility") with a group of banks with a maximum loan commitment thereunder of
$250,000,000. The Revolving Credit Facility provides for semi-annual reductions
of one-tenth of the loan commitment, beginning in December 1997, with a final
expiration in June 2002. Interest on borrowings under the Revolving Credit
Facility is payable quarterly at the prime rate or, at the option of the
Company, at a Eurodollar-based interest rate (5 9/16% at December 31, 1996),
plus a margin of 7/8% to 1 3/8%, depending on the Company's overall leverage. In
addition, the Company pays a fee of 1/4% to 3/8% per annum, depending on
leverage, on the average unborrowed portion of the total amount available for
borrowings. The Revolving Credit Facility contains (i) a negative pledge of
substantially all of the Company's assets and (ii) various restrictive covenants
which, among other things, obligate the Company to maintain certain financial
ratios and limit the ability of the Company to incur additional indebtedness,
liens, and guarantees. Under the terms of the Revolving Credit Facility, the
aggregate amount of future dividends on, and future redemptions of, the
Company's common stock cannot exceed approximately $50,000,000 as of December
31, 1996.
Interest Rate Exchange Agreement
In August 1996, the Company entered into an interest rate exchange
agreement pursuant to which it will make payments based upon a fixed rate of
interest (5 7/8% per annum) on a notional amount of $25,000,000 and, in
exchange, receive payments based upon a variable rate of interest using a
Eurodollar-based interest rate determined on a quarterly basis. The initial term
of this agreement is two years, with an additional term of one year at the
option of the counterparty. Although the Company does not anticipate
nonperformance by the counterparty, the Company is exposed to credit losses for
the periodic settlement of amounts due under this interest rate exchange
agreement in the event of such party's nonperformance.
Subsidiary Credit Agreement
In January 1995, a subsidiary of the Company entered into a $10,000,000
credit agreement with a certain bank (the "Subsidiary Credit Agreement"). The
terms of the Subsidiary Credit Agreement are substantially the same as those of
the Revolving Credit Facility.
F-11
34
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future Minimum Payments
The December 31, 1996 balance of long-term debt, other than the Convertible
Notes, is payable as follows:
REVOLVING SUBSIDIARY 6% CAPITAL
YEARS ENDED CREDIT CREDIT NOTES LEASE
DECEMBER 31 FACILITY AGREEMENT PAYABLE OBLIGATIONS TOTAL
------------------------- ------------ ----------- ---------- ----------- ------------
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
============ =========== ========== =========== ============
NOTE F -- CONVERTIBLE NOTES
The Company's 6% Convertible Secured Notes due 2004 (the "Convertible
Notes") were issued to a related party. The Convertible Notes provide for a
security interest in the Company's rights in two satellite transponders, and
contain restrictive covenants which, among other things, require the Company to
maintain certain financial ratios and limit the ability of the Company to incur
additional indebtedness. In addition, no dividends may be declared or paid on
any shares of the Company's capital stock (other than dividends payable solely
in shares of the capital stock of the Company) at any time when payments of
principal, interest or other amounts are past due under the Convertible Notes or
while any event of default is continuing under the Convertible Notes or would
result from such dividend.
The $23,000,000 in principal amount of the Convertible Notes is payable in
five equal annual installments beginning December 31, 2000. The Convertible
Notes are subordinated to borrowings under the Revolving Credit Facility
described in Note E. Each $1,000 in principal amount of the Convertible Notes
may be converted into 112 1/2 shares of Class C Common Stock. Each share of
Class C Common Stock is convertible, at the option of the holder, into one share
of Class B Common Stock. Accordingly, the Company has reserved 2,587,500 shares
of Class C Common Stock for potential future conversion of the Convertible Notes
(and, in addition, 2,587,500 shares of Class B Common Stock for potential future
conversion of the resulting Class C Common Stock).
NOTE G -- MINORITY INTERESTS
The Family Channel (UK)
Prior to April 22, 1996, minority interests were primarily attributable to
a minority partner's 39% interest in The Family Channel (UK) which was operated
as a joint venture. IFE and Flextech plc, the holder of the minority 39%
interest, funded the operations of The Family Channel (UK) through capital
investments and loans. On April 22, 1996, the Company consummated the sale of
its 61% interest in The Family Channel (UK) to Flextech, as described in Note P.
The minority partner's 39% share of the net loss resulting from the
operations of The Family Channel (UK), through the date of sale, amounted to
$1,419,000 for 1996. The minority partner's 39% share of the net loss of this
joint venture amounted to $4,954,000 and $5,107,000 for the years ended December
31, 1995 and 1994, respectively.
F-12
35
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FiT TV
On April 30, 1996, the Company, an affiliate of Liberty Media Corporation
("Liberty Media"), and an affiliate of Reebok International Limited ("Reebok")
entered into a definitive partnership agreement (the "FiT TV Partnership
Agreement") forming a partnership (the "FiT TV Partnership"), effective January
1, 1996, to own and operate the FiT TV cable network. FiT TV had previously been
owned and operated by Cable Health TV, Inc. ("CHTV"), a 90%-owned subsidiary of
IFE. Another affiliate of Liberty Media is the holder of the Convertible Notes
and all of the Company's outstanding Class C Common Stock. Liberty Media is an
affiliate of Tele-Communications, Inc. ("TCI"), one of the largest cable
television system operators in the United States and, as such, a major provider
of carriage for FiT TV.
In accordance with the terms of the FiT TV Partnership Agreement, CHTV
contributed all of the assets and liabilities of FiT TV to the FiT TV
Partnership in exchange for an 80% partnership interest and functions as the FiT
TV Partnership's managing partner. Reebok contributed cash of $2,000,000 and
other consideration agreed upon by the parties in exchange for a 10% partnership
interest. Liberty Media contributed cash of $1,000,000 and other consideration
agreed upon by the parties in exchange for a 10% partnership interest.
In conjunction with this transaction, CHTV and Liberty Media entered into
an agreement whereby Liberty Media was granted a five-year option to purchase an
additional 10% partnership interest from CHTV. The exercise price for this
option varies (up to a maximum of $5,000,000) depending on the number of
domestic subscribers receiving FiT TV from delivery systems owned or managed by
Liberty Media or an affiliate of Liberty Media (including TCI) at the time of
exercise.
The minority partners' combined 20% share of the net loss resulting from
the operations of the FiT TV Partnership, since its formation on April 30, 1996,
is reflected in the 1996 Consolidated Statement of Operations. The minority
partners' combined 20% share of the net loss of FiT TV amounted to $938,000 for
the year ended December 31, 1996.
NOTE H -- EXCHANGE OF PREFERRED STOCK
On December 15, 1995, the Company and Liberty IFE, Inc., an affiliate of
Liberty Media, the then holder of the 10% Convertible Cumulative Preferred Stock
(the "Preferred Stock"), and holder of the Convertible Notes, entered into an
exchange agreement (the "Exchange Agreement") whereby Liberty IFE (i) exchanged
its holdings of all of the Preferred Stock for shares of Class B Common Stock,
(ii) exchanged all of its holdings of Class B Common Stock (including the shares
of Class B Common Stock received in exchange for the Preferred Stock) for an
equal number of shares of non-voting Class C Common Stock, (iii) amended the
terms of the Convertible Notes to provide, among other things, for conversion of
such notes into shares of non-voting Class C Common Stock in lieu of shares of
Class B Common Stock and for the elimination of provisions which required the
Company to issue Class C Common Stock in the event of the occurrence of certain
payment defaults, and (iv) amended the terms of certain other agreements,
including the shareholder agreement among the Company and certain of its
principal shareholders.
The Exchange Agreement had no impact on the determination of net income for
the year ended December 31, 1995. However, net income available for Common Stock
for the year ended December 31, 1995 has been reduced by a distribution of
$12,163,000 (or $0.30 per common share), which amount represents the excess of
(i) the fair value of the shares of Class B Common Stock which were transferred
in the transaction by the Company to the former holder of the Preferred Stock
over (ii) the fair value of the Class B Common Stock which was issuable pursuant
to the original conversion terms. The amount of this distribution approximates
the present value of the dividend payments for 1995 and future years that would
have been required on the Preferred Stock. Excluding the effect of the dividend
which would have been required for 1995, the impact of the Exchange Agreement on
earnings per common share was a reduction of $0.24 per common share for the year
ended December 31, 1995.
F-13
36
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I -- CAPITAL STOCK
Preferred Stock
Prior to the consummation of the Exchange Agreement described in Note H,
the Preferred Stock was entitled to a dividend at an annual rate of 10% of the
$22,000,000 original liquidation preference, payable semiannually in January and
July. The liquidation preference was increased by cumulative dividends, whether
or not they were declared. At December 31, 1994, undeclared dividends totaled
$1,109,000, which was the amount of the dividend declared and paid in January
1995.
Common Stock
The Company has two classes of voting common stock. The Class A Common
Stock has ten votes per share and the Class B Common Stock has one vote per
share. Each share of Class A Common Stock is convertible, at the option of the
holder, into one share of Class B Common Stock. Each share of Class C Common
Stock is non-voting and is convertible, at the option of the holder, into one
share of Class B Common Stock.
The Class A Common Stock and Class B Common Stock vote together as a single
class on all matters except that (i) so long as the outstanding Class A Common
Stock has more than 40% of the total outstanding voting power of all common
stock entitled to vote, the holders of Class A Common Stock, voting separately
as a class, are entitled to elect a majority of the Company's directors, with
the remainder of the directors being elected by the holders of the Class B
Common Stock, voting separately as a class, and (ii) the approval of a majority
of each of the Class A Common Stock and the Class B Common Stock is required for
certain extraordinary corporate actions.
Stock Split
On November 16, 1995, the Company's Board of Directors approved a
five-for-four stock split which was effected in the form of a 25% stock dividend
and payable on January 5, 1996 to the shareholders of record at the close of
business on December 15, 1995. In connection with the stock split, all classes
of common stock were credited and retained earnings was charged for the
aggregate par value of the shares that were issued. A total of 1,000,000 shares
of Class A Common Stock, 6,607,657 shares of Class B Common Stock, and 1,417,746
shares of Class C Common Stock were issued in connection with the stock split.
Shareholder Agreement
Pursuant to the amended shareholder agreement (the "Shareholder Agreement")
among the Company and certain of its principal stockholders, each of the parties
to the Shareholder Agreement will, in the event of any future offering of
capital stock by the Company, be entitled to purchase additional shares of such
capital stock in order to maintain its percentage ownership of each class of
capital stock. The Shareholder Agreement also provides that, under certain
circumstances, Liberty IFE has a right of first refusal with respect to certain
sales, conversions or transfers of Class A Common Stock.
F-14
37
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- SUPPLEMENTAL CASH FLOW INFORMATION
Total interest costs paid during the years ended December 31, 1996, 1995,
and 1994 were $12,045,000, $12,087,000, and $9,172,000, respectively. Income
taxes paid during the years ended December 31, 1996, 1995, and 1994 amounted to
$10,018,000, $13,397,000, and $2,757,000, respectively.
Non-cash investing and financing activities included the acquisition of
film rights under license agreements which aggregated approximately $73,893,000,
$37,221,000, and $30,343,000 for the years ended December 31, 1996, 1995, and
1994, respectively.
As described in Note P, on April 22, 1996, the Company consummated the sale
of its television production studio in Maidstone, England and its 61% interest
in The Family Channel (UK) to a related party. This sale was primarily a
non-cash transaction in which the Company received equity securities. Cash
received in the transaction amounting to approximately $4,600,000 was offset by
the cash balances of the businesses sold (which were transferred to the buyer)
and cash outlays for expenses of the sale.
Non-cash investing and financing activities for the year ended December 31,
1995 included approximately $7,140,000 of liabilities assumed in the acquisition
of the Ice Capades. Non-cash purchases of property and equipment under capital
leases amounted to $76,000 and $5,380,000 for the years ended December 31, 1996
and 1995, respectively. The exchange of Preferred Stock for Common Stock with a
related party during the year ended December 31, 1995 was a non-cash
transaction. Non-cash investing and financing activities also included the sale
of the Ice Capades in December 1995, in exchange for $10,200,000 in notes
receivable and other consideration, as described in Note B.
NOTE K -- INCOME TAXES
In January 1990, the Company acquired the assets of The Family Channel from
The Christian Broadcasting Network, Inc. ("CBN"). For income tax purposes, the
Company established the basis of the assets it acquired from CBN at the
respective fair market values of the assets as determined by the negotiated
sales price and an independent appraisal. IFE and CBN are considered to be
related parties for financial reporting purposes and, accordingly, the net
assets acquired were recorded at CBN's book value at the date of acquisition.
Therefore, the tax basis of the assets acquired exceeds the amount reflected in
the accompanying consolidated financial statements. This initial basis
difference reduces the amount of the Company's income subject to income taxes to
the extent that it is amortizable for income tax purposes.
The Company's income tax return for 1990, the year in which the Company
acquired the assets of The Family Channel from CBN, is currently under
examination by the Internal Revenue Service ("IRS"). As discussed in the
preceding paragraph, this acquisition gave rise to the initial difference
between the basis of the assets acquired from CBN for financial statement
purposes and the basis of those assets for tax purposes. In May 1994, the
Company and the IRS entered into a closing agreement (the "Closing Agreement")
settling all outstanding issues regarding the method and amounts of amortization
in respect of the assets acquired from CBN. These amounts had previously been
estimated by the Company. As a result of the Closing Agreement, the amount of
deferred tax benefit recorded by the Company was increased in 1994 by $6,000,000
with a corresponding increase in stockholders' equity. The Company's reported
earnings were not affected by the Closing Agreement.
F-15
38
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income before income taxes, as shown in the Consolidated Statements of
Operations, is summarized as follows:
YEARS ENDED DECEMBER 31
---------------------------------------
1996 1995 1994
----------- ----------- -----------
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
=========== =========== ===========
The provision for income taxes consists of the following:
YEARS ENDED DECEMBER 31
---------------------------------------
1996 1995 1994
----------- ----------- -----------
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
=========== =========== ===========
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:
YEARS ENDED DECEMBER 31
---------------------------------------
1996 1995 1994
----------- ----------- -----------
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
=========== =========== ===========
F-16
39
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:
DECEMBER 31
---------------------------
1996 1995
------------ ------------
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)
============ ============
Based on the Company's historical levels of income before income taxes and
its anticipated future levels of income before income taxes, management
considers it more likely than not that the Company will have sufficient taxable
income to realize the full amount of its net deferred tax assets at December 31,
1996, although realization is not assured.
NOTE L--RELATED PARTY TRANSACTIONS
The Chairman of the Company is also the Chairman of the Board of CBN.
During the year ended December 31, 1995, the Company repurchased shares of Class
B Common Stock in transactions with CBN and an affiliate of CBN for an aggregate
consideration of $13,819,000. Also, in December 1995, the Company and Liberty
IFE entered into an exchange agreement whereby Liberty IFE exchanged its
holdings of all of the Preferred Stock for shares of Common Stock, as described
in Note H.
The Company provides specified program time to CBN at charges equal to the
Company's cost, pursuant to an agreement which extends through 2004 and
automatically renews at CBN's option. Also, the Company leases certain office
space and other operational facilities from CBN and, from time to time, enters
into various other transactions with CBN and its subsidiaries.
The Company holds a 20% interest in BBJE. BBJE provides certain services,
including television production, for FiT TV and pays an annual dividend to the
Company. Cash dividends received from BBJE amounted to $125,000 and $343,000 in
1996 and 1995, respectively.
F-17
40
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company and TCI have entered into a cable affiliation agreement,
extending to 2006, with respect to The Family Channel. Under the terms of the
agreement, the Company has granted TCI and its affiliates the right to carry The
Family Channel on certain cable television systems in exchange for subscriber
fees. The Company has also entered into a long-term agreement granting TCI and
its affiliates the right to carry FiT TV.
The Company subleased a transponder for The Family Channel (UK), until its
disposition on April 22, 1996, from Flextech. On such date, the Company sold its
61% interest in The Family Channel (UK) to Flextech, as described in Note P.
Related party transactions and balances, not otherwise disclosed, are
summarized as follows:
YEARS ENDED DECEMBER 31
---------------------------------------
1996 1995 1994
----------- ----------- -----------
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
=========== =========== ===========
NOTE M--EMPLOYEE BENEFIT PLANS
Stock Plan
The Company has a stock incentive plan (the "Stock Plan") covering
6,200,000 shares of Class B Common Stock. There were 569,100 shares and 142,226
shares available for grant as of December 31, 1996 and 1995, respectively. Prior
to May 1996, awards could be made separately or in any combination of stock
options and restricted stock. Beginning May 1996, awards under the Stock Plan
may only be made in the form of stock options. The number of awards granted
under the Stock Plan to individual employees is determined by a committee of the
Company's Board of Directors.
Issuances and forfeitures of restricted stock under the Stock Plan are
reflected in the accompanying Consolidated Statements of Stockholders' Equity.
The shares of restricted stock issued during the years ended December 31, 1996,
1995, and 1994 were sold to the employees at the par value of $.01 per share.
The difference between the market value and the amount paid for restricted stock
is reflected as a reduction of stockholders' equity. This unearned compensation
is recognized as expense over a five-year vesting period. At December 31, 1996,
126,794 shares of restricted stock were subject to forfeiture under the Stock
Plan.
Stock options may be granted for the purchase of Class B Common Stock at a
price not less than fair market value on the date of grant. The 1994 option
awards were granted at an exercise price higher than the fair market value on
the date of grant. The options are generally exercisable after one or more years
and expire no later than 10 years from the date of grant.
The Company has elected to continue to use the intrinsic value-based method
to account for all of its employee stock-based compensation plans. Under APB
Opinion No. 25, Accounting for Stock Issued to Employees, the Company has
recorded no compensation costs related to its stock option plans for the years
ended December 31, 1996, 1995, and 1994 because the exercise price of each
option equals or exceeds the fair value of the underlying common stock as of the
grant date for each stock option.
F-18
41
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pursuant to SFAS No. 123, Accounting for Stock-Based Compensation, the
Company is required to disclose the pro forma effects on net income and earnings
per share data as if the Company had elected to use the fair value approach to
account for all its employee stock-based compensation plans. If compensation
cost for the Company's plans had been determined consistent with the fair value
approach set forth in SFAS No. 123, the Company's pro forma net income and pro
forma earnings per share for the years ended December 31, 1996 and 1995 would
have been decreased as follows:
YEARS ENDED DECEMBER 31
---------------------------
1996 1995
----------- -----------
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
=========== ===========
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:
1996 1995 1994
--------------------- --------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- ------- ---------
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
====== ======
F-19
42
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options to purchase
Class B Common Stock which are outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- -----------------------
WEIGHTED-AVE. WEIGHTED-AVE. WEIGHTED-AVE.
RANGE OF REMAINING EXERCISE EXERCISE
EXERCISE PRICES SHARES CONTRACTUAL LIFE PRICE SHARES PRICE
---------------------------- --------- ---------------- ------------- ------- -------------
$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
======== =======
Subsidiary Stock Option Plan
The Company has adopted a separate stock option plan for a certain
subsidiary. This stock option plan was created as a means of attracting and
retaining employees and to stimulate the personal and active interest of such
individuals in the Company's (and such subsidiary's) development and financial
success.
During 1995, this subsidiary granted an employee an option to purchase
shares of its common stock. The effect of this option has been included in the
calculation of pro forma net income and pro forma primary and fully diluted
earnings per common share.
401(k) Plan
The Company has a 401(k) retirement savings plan (the "401(k) Plan") which
covers the majority of its employees. Subject to certain limitations, employees
may contribute up to 15% of their compensation to the 401(k) Plan. The Company's
contribution to the 401(k) Plan is discretionary as determined annually by the
Company's Board of Directors. The Company contributed $629,000, $486,000, and
$405,000 to the 401(k) Plan for the years ended December 31, 1996, 1995, and
1994, respectively.
Employment Agreements
The Company has employment agreements with its Chairman, its President &
Chief Executive Officer, and most other members of its senior management.
NOTE N -- COMMITMENTS AND CONTINGENCIES
The unpaid balance under program contracts for film rights related to the
production, exhibition, or distribution of programming that was available as of
the end of the year is reflected as a liability in the 1996 Consolidated Balance
Sheet. The balance due as of December 31, 1996 is payable as follows:
$44,050,000 in 1997; $32,692,000 in 1998; $13,721,000 in 1999; $2,551,000 in
2000; $265,000 in 2001; and $1,414,000 thereafter.
The Company has commitments under various program contracts for film rights
related to the production, exhibition, or distribution of programming which was
not available as of December 31, 1996. The commitments under these program
contracts as well as commitments under program development agreements and
employment agreements totaled approximately $93,000,000 as of December 31, 1996.
Subsequent to December 31, 1996, the Company made additional commitments under
long-term program contracts, for the exhibition rights to certain television
series and movies, totaling approximately $75,000,000.
Aggregate future estimated payments of accrued participations and residuals
as of December 31, 1996 are as follows: $15,613,000 in 1997; $6,731,000 in 1998;
$1,704,000 in 1999; $499,000 in 2000; and $844,000 in 2001.
F-20
43
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company leases office facilities and certain other property and
equipment under noncancelable operating leases with future minimum lease
payments as follows: $3,275,000 in 1997; $2,917,000 in 1998; $2,825,000 in 1999;
$2,449,000 in 2000; $2,275,000 in 2001; and $22,765,000 thereafter. Total rent
expense under operating leases amounted to approximately $5,193,000, $8,942,000,
and $7,770,000 for the years ended December 31, 1996, 1995, and 1994,
respectively.
The Company has guaranteed a $12,000,000 bank credit facility for the
entity that purchased the Ice Capades from the Company, as described in Note B.
In addition, the Company has contingent liabilities related to legal proceedings
and other matters arising from the normal course of operations. Management does
not expect that amounts, if any, which may be required to satisfy such
contingencies will be material in relation to the accompanying consolidated
financial statements.
NOTE O -- DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Investment in Equity Securities -- Related Party
As described in Note P, on April 22, 1996, the Company received 5,792,008
shares of Flextech's convertible redeemable non-voting common stock. This common
stock is convertible, under certain circumstances, into Flextech's voting common
stock which is listed on the London Stock Exchange. Based upon the market value
of the underlying voting common stock (and the applicable foreign currency
exchange rate), as of December 31, 1996, and after applying the same rate of
discount as was determined by an independent valuation when the shares were
received, the estimated fair value of the Company's investment in Flextech is
$53,750,000.
Film Rights Payable
The amount reflected as film rights payable at December 31, 1996 represents
future payments to be made under program contract agreements. The fair value of
film rights payable is the present value of these future payments. At December
31, 1996, the present value of these future payments is approximately
$85,000,000.
Revolving Credit Facility and Subsidiary Credit Agreement
The Company's borrowings under the Revolving Credit Facility and Subsidiary
Credit Agreement are at floating rates of interest. Since the cost of carrying
this indebtedness fluctuates with current market conditions, it is assumed that
the carrying values would approximate fair value.
Convertible Notes
The Company has $23,000,000 in principal amount of Convertible Notes
outstanding. These notes are convertible into 2,587,500 shares of non-voting
Class C Common Stock, which Class C Common Stock is convertible, at the option
of the holder, into Class B Common Stock, on a share-for-share basis, as
described in Note F. The Company estimates that the fair value of the
Convertible Notes approximates the trading value of the underlying shares.
Accordingly, based on the average closing price of the Class B Common Stock for
December 1996, the estimated fair value of the Convertible Notes is $39,783,000.
F-21
44
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Limitations
Fair value estimates are made at a specific point in time based on relevant
market information and information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect these estimates.
NOTE P -- GAIN ON DISPOSITION OF ASSETS -- RELATED PARTY
On April 22, 1996, the Company consummated the sale of its television
production studio in Maidstone, England and its 61% interest in The Family
Channel (UK) to Flextech pursuant to agreements dated as of March 20, 1996.
Flextech previously owned a 39% interest in The Family Channel (UK). Flextech's
majority owner is Tele-Communications International, Inc. ("TCI International"),
a majority-owned subsidiary of TCI. Another affiliate of TCI is the holder of
the Convertible Notes and all of the Company's outstanding Class C Common Stock.
As consideration for this transaction, the Company received L3,000,000
(approximately $4,600,000) in cash and 5,792,008 shares of Flextech's
convertible redeemable non-voting common stock. This common stock is
convertible, under certain circumstances, into Flextech's voting common stock
which is listed on the London Stock Exchange. The market value of the underlying
voting common stock as of the date of the aforementioned agreements was
$46,100,000. The shares were recorded, for financial statement purposes, at
approximately L23,000,000 ($35,458,000 based on the applicable foreign currency
exchange rate on the date of closing), which reflects a discount determined by
an independent valuation to allow for the lack of marketability during the
required holding period.
The Company received the right to "put" its holdings of Flextech's
non-voting stock to TCI International, beginning in June 1997 (if the shares do
not first become convertible). Upon exercise of the put, TCI International has
the option of redeeming the stock for cash at the then-market value of
Flextech's voting common stock. If the shares are not redeemed for cash, the
Company has the option of either (i) converting 50% of the shares on a
share-for-share basis into Flextech's voting common stock and 50% of the shares
into common stock of the same value of TCI International, or (ii) converting
100% of the shares into common stock of the same value of TCI International.
NOTE Q -- INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in three business segments: the operation of
advertiser-supported cable networks ("Cable Networks"), the production and
distribution of entertainment programming ("Production & Distribution"), and the
production of live entertainment shows ("Live Entertainment").
Within the Cable Networks business segment, the Company operates The Family
Channel, an advertiser-supported cable television network that provides
family-oriented entertainment and informational programming in the United States
and FiT TV, an advertiser-supported health and fitness cable network which
operates principally in the United States. IFE also operated The Family Channel
(UK), an advertiser-supported network in the United Kingdom, through its
disposition on April 22, 1996, and The Family Channel De Las Americas, launched
on July 1, 1995, which provided Spanish-language, family-oriented entertainment
programming, as well as fitness programming, to Mexico, Central America, and
portions of South America, through the discontinuance of its operations in
November 1996.
Within the Production & Distribution business segment, the Company produces
and distributes television programming in the United States and throughout many
other parts of the world ("MTM Operations"), co-produced a motion picture
through Family Channel Pictures, and operated a television production studio in
Maidstone, England (the "UK Studio") until its disposition on April 22, 1996.
F-22
45
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Within the Live Entertainment business segment, the Company produces live
musical variety shows and, in 1995, operated the Ice Capades, a touring ice
show.
The following table sets forth comparative information regarding operating
revenues, operating income or loss, total assets, depreciation and amortization,
and capital expenditures by business segment.
YEARS ENDED DECEMBER 31
------------------------------------------
1996 1995 1994
------------ ------------ ------------
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
============ ============ ============
F-23
46
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.
YEARS ENDED DECEMBER 31
------------------------------------------
1996 1995 1994
------------ ------------ ------------
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
============ ============ ============
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
47
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
International Family Entertainment, Inc.:
We have audited the accompanying consolidated balance sheets of
International Family Entertainment, Inc. and subsidiaries (the "Company") as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, cash flows and stockholders' equity for each of the years in the
three-year period ended December 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
International Family Entertainment, Inc. and subsidiaries as of December 31,
1996 and 1995, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1996, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Norfolk, Virginia
March 17, 1997
F-25
48
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
1996
--------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- --------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE DATA)
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
1995
--------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- --------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE DATA)
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
F-26
49
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.
YEARS ENDED DECEMBER 31
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA
Operating revenues.......................... $332,810 $294,858 $242,050 $208,216 $133,301
-------- -------- -------- -------- --------
Operating expenses
Production and programming................ 178,762 155,685 137,294 112,269 57,393
Selling and marketing..................... 64,544 61,122 49,819 43,281 28,140
New business development.................. 2,317 9,908 4,991 7,868 2,258
General and administrative................ 28,745 27,088 21,967 14,615 6,838
Amortization of goodwill.................. 2,278 2,657 2,532 1,562 --
-------- -------- -------- -------- --------
Total operating expenses.......... 276,646 256,460 216,603 179,595 94,629
-------- -------- -------- -------- --------
Operating income.................. 56,164 38,398 25,447 28,621 38,672
Investment income (loss).................... 2,843 1,883 (2,522) 8,037 1,219
Interest expense............................ (12,551) (12,989) (11,034) (11,792) (10,315)
Minority interests in losses................ 2,359 4,916 5,277 3,475 --
Gain on disposition of assets............... 13,685 -- -- -- --
Other income (expense)...................... (5,640) 522 7,789 -- --
Provision for income taxes.................. (24,735) (14,066) (10,165) (11,048) (11,228)
-------- -------- -------- -------- --------
Income before extraordinary item.......... 32,125 18,664 14,792 17,293 18,348
Extraordinary item--
Loss on early extinguishment of debt...... -- -- -- (52,087) --
-------- -------- -------- -------- --------
Net income (loss)................. 32,125 18,664 14,792 (34,794) 18,348
Dividend requirement on Preferred Stock..... -- -- (2,200) (2,197) (2,203)
Distribution -- exchange of Preferred
Stock..................................... -- (12,163) -- -- --
-------- -------- -------- -------- --------
Net income (loss) available for
Common Stock.................... $ 32,125 $ 6,501 $ 12,592 $(36,991) $ 16,145
======== ======== ======== ======== ========
Primary earnings (loss) per common share
Income before extraordinary item.......... $ 0.69 $ 0.16 $ 0.30 $ 0.39 $ 0.56
Extraordinary item........................ -- -- -- (1.05) --
-------- -------- -------- -------- --------
$ 0.69 $ 0.16 $ 0.30 $ (0.66) $ 0.56
======== ======== ======== ======== ========
Fully diluted earnings (loss) per common
share
Income before extraordinary item.......... $ 0.69 $ 0.16 $ 0.30 $ 0.39 $ 0.55
Extraordinary item........................ -- -- -- (1.05) --
-------- -------- -------- -------- --------
$ 0.69 $ 0.16 $ 0.30 $ (0.66) $ 0.55
======== ======== ======== ======== ========
Average common and common equivalent shares
Primary................................... 48,022 40,755 41,820 49,168 39,587
======== ======== ======== ======== ========
Fully diluted............................. 48,022 40,755 41,820 49,168 43,712
======== ======== ======== ======== ========
(Continued on next page)
F-27
50
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
SELECTED CONSOLIDATED FINANCIAL DATA -- (CONTINUED)
YEARS ENDED DECEMBER 31
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
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
F-28
51
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.
YEARS ENDED DECEMBER 31
------------------------------------------
1996 1995 1994
------------ ------------ ------------
Operating Revenues
Cable Networks
The Family Channel.............................. $241,124,000 $198,448,000 $169,961,000
FiT TV.......................................... 4,283,000 3,300,000 1,247,000
International Networks.......................... 5,045,000 12,705,000 7,538,000
Intrasegment Eliminations....................... (832,000) (678,000) --
------------ ------------ ------------
249,620,000 213,775,000 178,746,000
Production & Distribution.......................... 104,519,000 86,990,000 70,340,000
Live Entertainment................................. 7,751,000 10,481,000 8,951,000
Intersegment Eliminations.......................... (29,080,000) (16,388,000) (15,987,000)
------------ ------------ ------------
$332,810,000 $294,858,000 $242,050,000
============ ============ ============
Operating Income (Loss)
Cable Networks
The Family Channel.............................. $ 92,141,000 $ 62,816,000 $ 49,927,000
FiT TV.......................................... (5,452,000) (5,790,000) (5,101,000)
International Networks.......................... (9,054,000) (14,127,000) (13,344,000)
------------ ------------ ------------
77,635,000 42,899,000 31,482,000
Production & Distribution.......................... (19,029,000) 1,155,000 (1,066,000)
Live Entertainment................................. (2,782,000) (5,012,000) (1,880,000)
Intersegment Eliminations.......................... 340,000 (644,000) (3,089,000)
------------ ------------ ------------
$ 56,164,000 $ 38,398,000 $ 25,447,000
============ ============ ============
Depreciation and Amortization
Cable Networks
The Family Channel.............................. $ 77,218,000 $ 71,201,000 $ 68,016,000
FiT TV.......................................... 1,509,000 1,373,000 1,059,000
International Networks.......................... 4,688,000 6,739,000 4,969,000
------------ ------------ ------------
83,415,000 79,313,000 74,044,000
Production & Distribution.......................... 100,885,000 63,367,000 48,832,000
Live Entertainment................................. 1,488,000 1,772,000 1,035,000
Intersegment Eliminations.......................... (29,471,000) (13,335,000) (11,069,000)
------------ ------------ ------------
$156,317,000 $131,117,000 $112,842,000
============ ============ ============
F-29
52
CABLE NETWORKS SEGMENT INFORMATION
THE FAMILY CHANNEL
The following table sets forth comparative information relating to the
operations of The Family Channel.
YEARS ENDED DECEMBER 31
------------------------------------------
1996 1995 1994
------------ ------------ ------------
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
============ ============ ============
- ---------------
* Includes depreciation and amortization:
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
=========== =========== ===========
Operating Revenues
Advertising revenue increased $24,508,000 (or 21.2%) in 1996 as compared to
1995. Advertising revenue increased $19,464,000 (or 20.3%) in 1995 as compared
to 1994. The increase in 1996 is attributable to increases in advertising rates,
households reached, and ratings in 1996 as compared to 1995. The increase in
1995 was due primarily to a relatively stronger advertising climate in 1995 than
in 1994 as well as improved ratings and, to a lesser extent, the continuing
growth in total subscribers. In addition, in 1994, advertising revenue was
negatively affected by the inclusion of a program block centered around
interactive game shows (the "Game Block") on The Family Channel. The interactive
elements of the Game Block resulted in $1,503,000 of revenue in 1994 (included
in other revenue) which was generated by charges for telephone calls from viewer
response to the interactive elements. The interactive elements of the Game Block
were discontinued at the beginning of 1995.
Subscriber fees increased $18,352,000 (or 22.3%) in 1996 over 1995.
Subscriber fees increased $11,254,000 (or 15.8%) in 1995 over 1994. These
increases are primarily due to subscriber fee rate increases resulting from
renewals of affiliation agreements (including the renewal of a long-term
contract with a major cable operator at the beginning of 1996), rate increases
in existing contracts, and the continuing growth of total subscribers. During
1996, the average number of U.S. households reached by The Family Channel
increased 6.0% to 65.7 million and, during 1995, increased 4.7% to 62.0 million
from 59.2 million during 1994. The average number of billed subscribers,
including subscribers to direct broadcast satellite and other alternative
delivery services, increased 5.6% to 62.4 million for 1996 and, for 1995,
increased 6.7% to 59.1 million from 55.4 million for 1994. The difference
between total households reached and billed subscribers is attributable to a
variety of factors, including cable service theft and sampling error inherent in
projecting estimates.
F-30
53
The Family Channel currently reaches approximately 70% of all television
households in the United States. The Company expects that cable television
system penetration will continue to grow as cable operators construct new
systems and extend existing cable television distribution facilities to new
service areas. Further, the Company expects that direct broadcast satellite and
other alternative delivery services will continue to develop. These developments
may afford the Company additional opportunities to increase carriage of The
Family Channel on cable systems or otherwise to increase the number of
subscribers to The Family Channel, and thus have an impact on advertising and
subscriber fee revenues. There can be no assurance, however, that these
technological advances will be effected or that, if effected, they will have the
anticipated beneficial impact on future results of operations. In addition,
certain of these trends also have the potential to benefit competitors of the
Company. Industry regulation may also have an impact on such trends.
Production and Programming Expense
Production and programming expense includes the amortization of film
rights, the use of satellite transponders, and costs associated with engineering
and technical support services. Production and programming expense increased
$9,588,000 (or 12.7%) in 1996 as compared to 1995 and increased $4,260,000 (or
6.0%) for 1995 as compared to 1994. The increase in 1996 is primarily
attributable to an increase in the amortization of film rights. The increase for
1995 includes a $1,035,000 settlement of certain disputed sales and use tax
deficiencies assessed against the Company relating to costs associated with
certain productions of original programming. As a percentage of The Family
Channel's total revenues, production and programming expense amounted to 35.4%,
38.2%, and 42.1% for 1996, 1995, and 1994, respectively.
Selling and Marketing Expense
Selling and marketing expense includes costs associated with the sale of
advertising time, the marketing of The Family Channel to cable operators, and
advertising and promotion. Selling and marketing expense increased $5,704,000
(or 13.2%) in 1996 as compared to 1995. Selling and marketing expense increased
$9,879,000 (or 29.6%) for 1995 as compared to 1994. The increase in 1996 is
primarily attributable to increased advertising and personnel costs. The
increase in 1995 was substantially attributable to costs associated with a new
image campaign and increased personnel costs. As a percentage of The Family
Channel's total revenues, selling and marketing expense amounted to 20.3%,
21.8%, and 19.7% for 1996, 1995, and 1994, respectively.
New Business Development
New business development expense in 1995 and 1994 was due to costs
associated with the development of the Game Block, which has since been
discontinued. Expense for new business development decreased $786,000 (or 18.2%)
for 1995 as compared to 1994. This decrease was primarily attributable to
reduced expenses related to the Game Block. As a percentage of The Family
Channel's total revenues, new business development expense amounted to 1.8% and
2.5% for 1995 and 1994, respectively.
General and Administrative Expense
General and administrative expense includes costs associated with the
corporate, legal, finance, information services, and human resources divisions.
General and administrative expense increased $1,580,000 (or 12.1%) in 1996 as
compared to 1995. General and administrative expense increased $2,245,000 (or
20.7%) for 1995 as compared to 1994. The increase in 1996 is primarily
attributable to increased personnel costs and depreciation expense. During 1995,
the Company experienced non-recurring expenses of approximately $541,000
associated with certain state and local tax assessments. The remainder of the
increase during 1995 is primarily attributable to the implementation of a
process reengineering program, increased professional and other fees, and
increased salaries and other benefits. As a percentage of The Family Channel's
total revenues, general and administrative expense amounted to 6.1%, 6.6%, and
6.4% for 1996, 1995, and 1994, respectively.
F-31
54
Operating Income
Operating income increased $29,325,000 (or 46.7%) in 1996 as compared to
1995 and increased $12,889,000 (or 25.8%) for 1995 over 1994. As a percentage of
The Family Channel's total revenues, operating income amounted to 38.2%, 31.7%,
and 29.4% for 1996, 1995, and 1994, respectively.
Operating income before depreciation and amortization of property and
equipment and other assets increased $30,320,000 (or 43.9%) in 1996 as compared
to 1995 and increased $13,210,000 (or 23.7%) for 1995 over 1994. As a percentage
of The Family Channel's total revenues, operating income before depreciation and
amortization of property and equipment and other assets was 41.2%, 34.8%, and
32.9% for 1996, 1995, and 1994, respectively.
FIT TV
The following table sets forth comparative information relating to the
operations of FiT TV.
YEARS ENDED DECEMBER 31
---------------------------------------
1996 1995 1994
----------- ----------- -----------
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)
=========== =========== ===========
- ---------------
* Includes depreciation and amortization:
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
========= ========= =========
- ---------------
Note -- Beginning April 30, 1996, the Company records a minority interest
representing the minority partners' combined 20% share of the net loss
of FiT TV. See "Other Income and Expense Information".
The FiT TV cable network was launched in October 1993. As of December 31,
1996, FiT TV was available, on a full-time or part-time basis, via local cable
systems and home television receive-only satellite dishes, to approximately 11.7
million households as compared to approximately 9.6 million households as of
December 31, 1995, and approximately 4.6 million households as of December 31,
1994. The operations of FiT TV have generated operating losses and could
continue to generate operating losses for a significant period of time. The
Company intends to broaden the carriage of FiT TV through, among other things,
increased marketing and promotional activities. However, in light of the number
of new cable programming services and the existence of limited channel capacity,
there can be no assurance that these activities will be successful, that
subscriber levels can be maintained, or that the FiT TV cable network will ever
become profitable in the future.
F-32
55
The Company expects cable system penetration will continue to grow as cable
operators construct new systems, enhance existing systems to increase channel
capacity and extend existing cable television distribution facilities to new
service areas. Furthermore, certain technological advances that are anticipated
to expand the channel capacity of cable television systems (including the
development of digital compression technology and the deployment of fiber optic
cable) or to provide the potential for reaching new subscribers (such as direct
broadcast satellite and other alternative delivery services) may afford the
Company additional opportunities to increase carriage of FiT TV on cable systems
or otherwise to increase the number of subscribers to FiT TV and thus have an
impact on advertising and merchandise revenues. There can be no assurance,
however, that these technological advances will be effected or that, if
effected, they will have the anticipated beneficial impact on future results of
operations. In addition, certain of these trends also have the potential to
benefit competitors of the Company. Industry regulation may also have an impact
on such trends.
Total revenues increased $983,000 (or 29.8%) during 1996 as compared to
1995 and increased $2,053,000 (or 164.6%) for 1995 over 1994. These increases
are due to higher advertising rates, growth in total subscribers, and an
increase in merchandise sales.
Production and programming expense includes the amortization of film rights
and an intercompany charge for transponder usage (at the rate of $1,800,000 per
annum). Production and programming expense increased $170,000 (or 4.8%) during
1996 as compared to 1995 and increased $447,000 (or 14.6%) for 1995 over 1994.
Selling and marketing expense increased $177,000 (or 4.8%) during 1996 as
compared to 1995 and increased $1,898,000 (or 106.4%) in 1995 as compared to
1994. The increase in 1996 is primarily due to increased consulting fees. The
increase in 1995 was primarily due to expenses incurred to support the launch of
FiT TV on cable systems in addition to expenses incurred to change the name of
the network to FiT TV from Cable Health Club. The Company expects to increase
its expenditures related to FiT TV's marketing and promotional activities.
General and administrative expense includes, among other things,
intercompany charges for services and support provided to FiT TV. General and
administrative expense increased $204,000 (or 11.3%) during 1996 as compared to
1995 and increased $310,000 (or 20.8%) for 1995 over 1994. These increases are
primarily due to increases in personnel costs.
As described in Note G of Notes to Consolidated Financial Statements, on
April 30, 1996, the Company, Liberty Media, and Reebok formed the FiT TV
Partnership to own and operate the FiT TV cable network. FiT TV had previously
been owned and operated by CHTV.
In accordance with the terms of the FiT TV Partnership Agreement, CHTV
contributed all of the assets and liabilities of the FiT TV cable network to the
FiT TV Partnership in exchange for an 80% partnership interest and functions as
the FiT TV Partnership's managing partner. Reebok contributed cash of $2,000,000
and other consideration agreed upon by the parties in exchange for a 10%
partnership interest. Liberty Media contributed cash of $1,000,000 and other
consideration agreed upon by the parties in exchange for a 10% partnership
interest. Reebok and Liberty Media have no further obligations to make capital
contributions to the FiT TV Partnership. Although the Company similarly has no
contractual obligation to make additional capital contributions, since the
formation of the FiT TV Partnership, the Company has made loans to the
partnership to fund its operations and currently intends to continue to fund
such operations in the future.
F-33
56
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.
YEARS ENDED DECEMBER 31
-------------------------------------------
1996 1995 1994
----------- ------------ ------------
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)
=========== ============ ============
- ---------------
* Includes depreciation and amortization:
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
========= ========= =========
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
57
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.
YEARS ENDED DECEMBER 31
------------------------------------------
1996 1995 1994
------------ ----------- -----------
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)
============ =========== ===========
- ---------------
* Includes depreciation and amortization:
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
=========== ========== ==========
Operating revenue for MTM Operations increased $20,820,000 (or 25.3%) in
1996 as compared to 1995 and increased $17,021,000 (or 26.1%) in 1995 as
compared to 1994.
Operating revenues in 1996 were derived primarily from (i) license fees
from the broadcast networks for series such as The Pretender, Sparks, and Bailey
Kipper's POV, (ii) the domestic syndication of The Cape, America's Funniest Home
Videos, Dr. Quinn, Medicine Woman, and Rescue 911, (iii) the international
distribution of programs produced for the broadcast networks, The Family
Channel, and others, and (iv) sales of series and made-for-television movies to
The Family Channel and other cable networks, including Home & Family, Newhart,
Apollo 11, Night of the Twisters, Panic in the Skies, and various game shows.
Operating revenues in 1995 were derived primarily from (i) license fees
from the broadcast networks for the series Christy and the made-for-television
movie Face on the Milk Carton, (ii) the domestic syndication of America's
Funniest Home Videos and Rescue 911,(iii) the international distribution of
programs produced for the broadcast networks, The Family Channel, and others,
and (iv) sales of series and made-for-television movies to The Family Channel
and other cable networks, including St. Elsewhere, Hill Street Blues, and Stolen
Memories: Secrets from the Rose Garden.
F-35
58
Operating revenues in 1994 were derived primarily from (i) license fees
from the broadcast networks for the series Christy and the made-for-television
movie Gift of Love, (ii) the domestic syndication of Rescue 911, (iii) the
international distribution of programs produced for the broadcast networks, The
Family Channel, and others, and (iv) sales of series and made-for-television
movies to The Family Channel and other cable networks, including Lou Grant,
Remington Steele, and Evening Shade.
With respect to programming sold on a cash basis, revenue is recognized
when such programming becomes available for telecast by others. With respect to
programs sold on a barter basis, revenue is recognized upon sales of the
advertising time within such programs as they air. As a result, significant
fluctuations in revenue and income may occur from period to period depending on
the availability dates of programs and whether such programs were sold on a cash
or barter basis. Accordingly, period-to-period comparisons may not be
meaningful. While programs distributed internationally and programs delivered to
broadcast and cable networks are sold on a cash basis, programs distributed
through domestic syndication may be sold on a cash or barter basis, or both. In
1996, The Cape was sold on a barter basis; Dr. Quinn, Medicine Woman and Rescue
911 were sold on a cash and barter basis; and America's Funniest Home Videos was
sold on a cash basis. In 1995, Rescue 911 was sold on a cash and barter basis
and America's Funniest Home Videos was sold on a cash basis. In 1994, Rescue 911
was sold on a cash basis as well as on a cash and barter basis.
Production and programming expense increased $35,636,000 (or 50.7%) in 1996
as compared to 1995 and increased $15,052,000 (or 27.3%) in 1995 as compared to
1994. These increases were primarily attributable to the amortization of film
rights of the programs discussed above.
Selling and marketing expense increased $1,452,000 (or 17.9%) in 1996 over
1995 and decreased $2,104,000 (or 20.6%) in 1995 as compared to 1994. The
increase in 1996 is primarily attributable to increased sales bonuses and
increased marketing costs related to domestic syndication. During 1994, a
licensee associated with one of MTM's productions failed to fully meet its
obligation to provide advertising to television stations airing that program. As
a result, in order to fulfill the obligation to the stations, MTM Operations
purchased advertising time on these stations at a cost of approximately
$1,600,000.
General and administrative expense increased $805,000 (or 14.3%) in 1996 as
compared to 1995 and increased $1,555,000 (or 38.0%) in 1995 as compared to
1994. These increases are due to expenses incurred by Family Channel Pictures
and increased personnel and related costs, as well as the creation in 1996 of
the music publishing and consumer products divisions.
In 1996, MTM began production of four original programming series for
license to the broadcast networks, syndication to domestic television stations,
and distribution in the international marketplace. In contrast, MTM had a
limited production slate in 1995. As a result of this increase in production,
MTM incurred substantially increased development and overhead costs in addition
to the direct costs of production. These costs represent a substantial
investment and have exceeded revenue in the first year of production.
Recoverability of this investment is dependent upon, among other factors,
receiving orders for additional episodes as well as the ratings success of the
programs.
The success of MTM's television programming business depends, in large
part, upon the exhibition of its television series over a sufficient number of
years to allow for further domestic exhibition opportunities. During the initial
years of a one-hour network television series, network and international license
fees normally approximate the production costs of the series and, accordingly,
MTM recognizes only minimal profit or loss during this period. With respect to
first-run domestic syndication programming and half-hour network programming,
the production costs can substantially exceed the combination of barter
advertising revenues or network license fees, as applicable, and international
license fees and, accordingly, MTM recognizes losses during this period.
However, if a sufficient number of episodes of a series are produced, MTM is
reasonably assured that international license fees will increase and that it
will also be able to further exploit the series domestically.
During 1996, The Cape experienced lower than expected ratings, and MTM
recognized losses from the episodes of The Cape delivered to the first-run
syndication market. Losses were also recognized in connection with the episodes
delivered of Sparks, the half-hour network situation comedy. In addition, MTM
incurred substantial development and overhead costs relating to its increased
production activity.
F-36
59
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
60
LIVE ENTERTAINMENT SEGMENT INFORMATION
The following table sets forth comparative information relating to the
operations of the Company's Live Entertainment business segment.
YEARS ENDED DECEMBER 31
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
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)
=========== =========== ===========
- ---------------
* Includes depreciation and amortization:
Depreciation and amortization of property and
equipment, goodwill, and other assets.......... $ 1,488,000 $ 1,772,000 $ 1,035,000
========== ========== ==========
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 months and during holiday vacation periods,
such as Christmas.
New business development in 1995 related to expenses associated with the
operation of the Ice Capades. As described in Note B of Notes to Consolidated
Financial Statements, the Company sold its interest in the Ice Capades on
December 31, 1995.
In December 1993, the Company acquired a majority interest in Calvin
Gilmore Productions which, at the time, produced three musical variety shows in
Myrtle Beach, South Carolina. Two of these shows were discontinued during 1995
and the related theaters were subsequently leased to third parties. The
remaining show, The Carolina Opry, has generated operating income before
depreciation and amortization of property and equipment, goodwill, and other
assets.
In September, 1995, the Company opened a new musical venue, located in
Charleston, South Carolina. For the year ended December 31, 1996, the operating
loss of Calvin Gilmore Productions was primarily attributable to the operating
loss of the Charleston theater. As a start-up operation, this new venue could
continue to generate losses for an extended period of time.
Future results of operations of the Company's Live Entertainment business
are primarily dependent upon, among other factors, (i) achieving increased
levels of attendance, (ii) raising ticket prices without adversely affecting
attendance, (iii) securing talent at a reasonable cost, and (iv) competition in
the Myrtle Beach and Charleston markets. There can be no assurance that the
Company's Live Entertainment business will become profitable in the future.
F-38
61
OTHER INCOME AND EXPENSE INFORMATION
Investment income increased to $2,843,000 for 1996 from $1,883,000 for
1995, an increase of $960,000. Investment income increased to $1,883,000 for
1995 from an investment loss of $2,522,000 for 1994, an increase of $4,405,000.
The increase in 1996 is due primarily to an increase in net realized and
unrealized gains on marketable securities partially offset by a decrease in
interest earned on cash and cash equivalents. The investment loss for 1994
included a loss of $3,691,000 related to the Company's investment in a certain
media enterprise. This investment was classified as an available-for-sale
security. Accordingly, the Company recognized an impairment related to this
investment because its market value had declined and such decline had been
sustained for more than six months. The investment loss for 1994 also included
net trading losses amounting to $2,338,000 on transactions involving futures
contracts and other derivative securities.
Total interest expense decreased to $12,551,000 for 1996 from $12,989,000
for 1995, a decrease of $438,000 (or 3.4%). Total interest expense increased to
$12,989,000 for 1995 from $11,034,000 for 1994, an increase of $1,955,000 (or
17.7%). The increase in 1995 was attributable to increased borrowings and higher
interest rates in 1995 as compared to 1994.
Prior to April 22, 1996, minority interests were primarily attributable to
a minority partner's 39% interest in The Family Channel (UK) which was operated
as a joint venture. On April 22, 1996, the Company consummated the sale of its
61% interest in The Family Channel (UK). The minority partner's 39% share of the
net loss resulting from the operations of The Family Channel (UK), through the
date of sale, amounted to $1,419,000 for 1996. The minority partner's 39% share
of the net loss of this joint venture amounted to $4,954,000 and $5,107,000 for
1995 and 1994, respectively.
As described in Note G of Notes to Consolidated Financial Statements, on
April 30, 1996, the Company, Liberty Media, and Reebok formed the FiT TV
Partnership to own and operate the FiT TV cable network. The minority partners'
combined 20% share of the net loss resulting from the operations of the FiT TV
Partnership, since its formation on April 30, 1996, amounted to $938,000.
As previously discussed in Note P of Notes to Consolidated Financial
Statements, on April 22, 1996, the Company consummated the sale of its
television production studio in Maidstone, England and its 61% interest in The
Family Channel (UK) to a related party. This sale resulted in a pre-tax gain on
disposition of assets amounting to $13,685,000 for 1996.
Other investments include investments in and advances to affiliates and
others. Management of the Company periodically reviews the recoverability of
these investments and records allowances against their carrying value, as
appropriate, based on the operations of the entities and other factors. The
determination of other income and expense includes such adjustments, including a
valuation allowance of $5,300,000 in 1996 relating to the Company's investment
in 7 1/2% convertible notes receivable from the entity that purchased the Ice
Capades from the Company, as described in Note B of Notes to Consolidated
Financial Statements, and a share of loss of $1,500,000 in 1995 relating to the
Company's investment in China Entertainment Television Broadcast Limited. The
determination of other income and expense also included income of $2,521,000 and
$7,291,000 in 1995 and 1994, respectively, resulting from the effects of the
final resolution of certain preacquisition contingencies recorded in the
acquisition of TVS, as described in Note B of Notes to Consolidated Financial
Statements.
F-39
62
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare the consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
Management periodically reviews and revises its estimates of future airings
and revenues for film rights, as necessary, which may result in revised
amortization rates for film rights and, when applicable, write-downs to net
realizable value. Net income in future periods is affected by the Company's
amortization of its film rights and may be significantly affected by the
periodic adjustments in such amortization.
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------
The Company has financed its growth primarily through internally generated
funds, borrowings, and the sale of shares of Class B Common Stock. In December
1993, the Company entered into the Revolving Credit Facility. In December 1995,
the Company refinanced the Revolving Credit Facility and increased the
commitment thereunder to $250,000,000 from $175,000,000. In January 1995, a
subsidiary of the Company entered into the $10,000,000 Subsidiary Credit
Agreement which has terms substantially the same as those of the Revolving
Credit Facility. The Revolving Credit Facility provides for semi-annual
reductions of one-tenth of the loan commitment, beginning in December 1997, with
a final expiration date in June 2002. The Revolving Credit Facility contains (i)
a negative pledge of substantially all of the Company's assets and (ii) various
restrictive covenants which, among other things, obligate the Company to
maintain certain financial ratios and limit the ability of the Company to incur
additional indebtedness, liens, and guarantees. Under the terms of the Revolving
Credit Facility, the aggregate amount of future dividends on, and future
redemptions of, the Company's common stock cannot exceed approximately
$50,000,000 as of December 31, 1996.
The Company produces, acquires, and distributes a variety of programs,
including original series, specials, and movies, as well as syndicated programs
originally broadcast by others, to be aired on the Company's cable networks or
to be licensed to others. Film rights (including the current portion) were
$242,121,000 at December 31, 1996, as compared to $161,449,000 at December 31,
1995, an increase of $80,672,000. This increase is primarily attributable to (i)
the acquisition of domestic distribution rights to Dr. Quinn, Medicine Woman,
(ii) production of programs, such as The Pretender, for the broadcast networks
and international distribution, (iii) production of The Cape for domestic
syndication and international distribution, and (iv) programming produced for
The Family Channel.
During the year ended December 31, 1996, the Company spent $135,724,000 for
originally-produced programming and $58,142,000 for various rights to programs
produced by others. The Company expects that the total amount to be spent on
programming in 1997 will not be less than the total amount for 1996. A
significant portion of the Company's film rights are currently acquired from
others and there can be no assurance that the Company will be able to acquire
such rights at a comparable cost in the future.
The Company's total debt (including current maturities), other than the
Convertible Notes, increased to $172,456,000 at December 31, 1996 from
$153,933,000 at December 31, 1995, an increase of $18,523,000. This increase in
borrowings is primarily attributable to the Company's increased production of
original programming.
The Company has guaranteed a $12,000,000 bank credit facility for the
entity that purchased the Ice Capades from the Company, as described in Note B
of Notes to Consolidated Financial Statements. If the Company becomes obligated
under this guarantee, it is expected that any such obligation will be funded
from available cash and cash equivalents or from bank borrowings.
F-40
63
As of December 31, 1996, the Company had cash and cash equivalents of
$4,997,000 and borrowings available from banks of $99,500,000. The Company
believes that funds from operations, borrowings available from banks, and
existing cash balances and investments will provide adequate sources of
short-term and long-term liquidity for its current operations; however, the
Company may pursue additional capital-raising activities if it believes that
market conditions or acquisition opportunities warrant such activities.
The Company has explored and continues to explore opportunities to develop
international versions of The Family Channel's or FiT TV's programming concepts
through the acquisition or development of cable networks and other distribution
outlets in foreign countries. The Company is also exploring the possibility of
launching additional domestic cable networks or pay-per-view services, and, from
time to time, considers the acquisition of other television programming
distribution and production companies, entertainment companies, and film
libraries. The Company cannot estimate with any degree of certainty the amount
of expenditures it may make in the future in connection with such investments
and acquisitions; although, if many of the Company's plans in this regard
materialize, such expenditures could be substantial. The Company anticipates
funding such investments and acquisitions from internally generated cash flow,
additional borrowings, or additional issuances of Class B Common Stock.
INFLATION
- ---------
Management believes that the effect of inflation has not been material to
the Company. However, inflation in personnel, programming and certain other
costs could significantly affect the Company's future operations.
INCOME TAXES
- --------------
The Company's income tax return for 1990, the year in which the Company
acquired the assets of The Family Channel from CBN, is currently under
examination by the IRS. As discussed in Note K of Notes to Consolidated
Financial Statements, this acquisition gave rise to an initial difference
between the basis of the assets acquired from CBN for financial statement
purposes and the basis of those assets for tax purposes. In May 1994, the
Company and the IRS entered into the Closing Agreement settling certain issues
relating to the Company's income tax return for 1990.
Pursuant to the Closing Agreement, all outstanding issues regarding the
method and amounts of amortization in respect of the assets acquired from CBN
have been resolved. These amounts had previously been estimated by the Company.
As a result of the Closing Agreement, the amount of deferred tax benefit
recorded by the Company was increased in 1994 by $6,000,000 with a corresponding
increase in stockholders' equity. The Company's reported earnings were not
affected by the Closing Agreement.
F-41
64
SCHEDULE II
INTERNATIONAL FAMILY ENTERTAINMENT, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
BALANCE AT ADDITIONS -- DEDUCTIONS
BEGINNING CHARGED TO ----------------------- BALANCE AT
DESCRIPTION OF YEAR EXPENSE WRITE-OFFS OTHER(1) END OF YEAR
- ------------------------------------ ----------- ----------- ---------- ---------- -----------
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
=========== ======== ========== ========== ==========
- ---------------
Note (1): Represents deductions resulting from dispositions.
F-42
65
INDEPENDENT AUDITORS' REPORT
ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders
International Family Entertainment, Inc.:
Under date of March 17, 1997, we reported on the consolidated balance
sheets of International Family Entertainment, Inc. and subsidiaries (the
"Company") as of December 31, 1996 and 1995, and the related consolidated
statements of operations, cash flows and stockholders' equity for each of the
years in the three-year period ended December 31, 1996, which are included
herein. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated financial
statement schedule shown in the accompanying index. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits.
In our opinion, the related financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Norfolk, Virginia
March 17, 1997
F-43
66
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
3(i) -- Amended and Restated Certificate of Incorporation of Registrant (filed as *
(Exhibit 3(i) to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1995).
3(ii) -- Restated By-laws of the Registrant (filed as Exhibit 3.2 to the *
Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1992).
4.1 -- Credit Agreement, originally dated as of December 27, 1993, Amended and *
Restated as of December 26, 1995, by and among the Registrant, the Lenders
(as defined therein), and the First National Bank of Boston as agent for
the Lenders (filed as Exhibit 4.1 to the Registrant's Current Report on
Form 8-K, dated December 26, 1995).
4.2 -- Amendment No. 1, dated December 29, 1995, to Credit Agreement, dated as of *
December 26, 1995, by and among the Registrant and the lender(s) listed on
the signature pages thereto (filed as Exhibit 4.2 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995).
4.3 -- Amendment No. 2, dated November 15, 1996, to Credit Agreement, dated as of ***
December 26, 1995, by and among the Registrant and the lender(s) listed on
the signature pages thereto.
10.1 -- Program Time Agreement, dated as of January 5, 1990, between The Christian **
Broadcasting Network, Inc. and the Registrant.
10.2 -- Employment Agreement, dated as of July 1, 1995, between the Registrant and *
M.G. Robertson (filed as Exhibit 10.22 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995).
10.3 -- Employment Agreement, dated as of August 7, 1995, between the Registrant *
and Timothy B. Robertson (filed as Exhibit 10.23 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995).
10.4 -- International Family Entertainment, Inc. Family Channel Affiliation **
Agreement, dated as of December 28, 1989, between Satellite Services, Inc.
and the Registrant.
10.5 -- Uplink Facilities Lease and Transponder Sublease, dated as of January 5, **
1990, between The Christian Broadcasting Network, Inc. and the Registrant.
10.6 -- International Family Entertainment, Inc. Stock Incentive Plan, as amended *
(filed as Appendix 2 to the Registrant's definitive Proxy Statement, dated
April 19, 1996).
10.7 -- Form of The International Family Entertainment, Inc. Senior Executive **
Stock Incentive Plan.
10.8 -- Form of International Family Entertainment, Inc. 401(k) Employee **
Retirement Savings Plan and amending and restating the International
Family Entertainment, Inc. 401(k) Employee Retirement Savings Plan adopted
on April 1, 1990, and the Trust Agreement between the Registrant and
Signet Trust Company, as trustee, effective as of January 1, 1992.
10.9 -- Exchange Agreement, dated as of December 1, 1995, by and between the *
Registrant, Liberty Programming Corporation and Liberty IFE, Inc., a
direct, wholly owned subsidiary of Liberty Media Corporation and an
affiliate of Tele-Communications, Inc. (filed as Exhibit 2 to the
Registrant's Current Report on Form 8-K, dated December 15, 1995).
i
67
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
10.10 -- Amended and Restated Convertible Note Agreement, dated as of September 1, *
1995, by and between the Registrant and Liberty IFE, Inc. (filed as
Exhibit 2(a) to the Registrant's Current Report on Form 8-K, dated
December 15, 1995).
10.11 -- Waiver of Preemptive Rights, dated December 1, 1995, by and between M.G. *
Robertson, Timothy B. Robertson, The Christian Broadcasting Network, Inc.
and The Robertson Charitable Remainder Unitrust (filed as Exhibit 2(b) to
the Registrant's Current Report on Form 8-K, dated December 15, 1995).
10.12 -- Amended and Restated Shareholder Agreement, dated as of September 1, 1995, *
by and between M.G. Robertson, Timothy B. Robertson, the Robertson
Charitable Remainder Unitrust, The Christian Broadcasting Network, Inc.,
Liberty IFE, Inc. and the Registrant (filed as Exhibit 2(c) to the
Registrant's Current Report on Form 8-K, dated December 15, 1995).
10.13 -- Amended and Restated Subordination Agreement and Consent, dated as of *
September 1, 1995, by and between the Registrant, each Holder of
Subordinated Indebtedness executing a counterpart of the agreement and The
First National Bank of Boston, as agent for the Lenders (filed as Exhibit
2(d) to the Registrant's Current Report on Form 8-K, dated December 15,
1995).
10.14 -- Employment Agreement, dated as of October 27, 1993, between the Registrant *
and John B. Damoose (filed as Exhibit 99.1 to the Registrant's Current
Report on Form 8-K, dated March 8, 1994).
10.15 -- Employment Agreement, dated as of December 22, 1993, between the *
Registrant and Larry W. Dantzler (filed as Exhibit 99.2 to the
Registrant's Current Report on Form 8-K, dated March 8, 1994).
10.16 -- Employment Agreement, dated as of December 22, 1993, between the *
Registrant and David R. Humphrey (filed as Exhibit 99.3 to the
Registrant's Current Report on Form 8-K, dated March 8, 1994).
10.17 -- Employment Agreement, dated as of December 22, 1993, between the *
Registrant and Louis A. Isakoff (filed as Exhibit 99.4 to the Registrant's
Current Report on Form 8-K, dated March 8, 1994).
10.18 -- Employment Agreement, dated as of December 22, 1993, between the *
Registrant and Stephen D. Lentz (filed as Exhibit 99.5 to the Registrant's
Current Report on Form 8-K, dated March 8, 1994).
10.19 -- Employment Agreement, dated as of December 22, 1993, between the *
Registrant and Craig R. Sherwood (filed as Exhibit 99.6 to the
Registrant's Current Report on Form 8-K, dated March 8, 1994).
10.20 -- Employment Agreement, dated as of April 7, 1995, between the Registrant *
and Richard Sirvaitis (filed as Exhibit 10 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 1995).
10.21 -- Employment Agreement, dated as of January 1, 1995, between the Registrant *
and B. Randall Seiler (filed as Exhibit 10.21 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995).
10.22 -- Employment Agreement, effective as of March 6, 1995, between the Company *
and Anthony D. Thomopoulos, executed May 15, 1996 (filed as Exhibit 10.1
to the Registrant's Report on Form 10-Q for the quarterly period ended
June 30, 1996).
ii
68
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
10.23 -- Employment Agreement, dated as of April 1, 1996, between the Registrant ***
and D. Paul Newton.
10.24 -- Employment Agreement, dated as of January 1, 1997, between the Registrant ***
and Diane Linen Powell.
10.25 -- Agreement between International Family Entertainment, Inc. and Flextech *
plc, dated as of March 20, 1996, for the sale and purchase of shares in
International Family Entertainment UK (filed as Exhibit 2.1 to the
Registrant's Current Report on Form 8-K, dated April 22, 1996).
10.26 -- Agreement between International Family Entertainment, Inc. and Flextech *
plc, dated as of March 20, 1996, for the sale and purchase of shares in
TVS Television Limited (filed as Exhibit 2.2 to the Registrant's Current
Report on Form 8-K, dated April 22, 1996).
10.27 -- Shareholders Agreement in relation to Flextech plc, dated as of March 20, *
1996, between International Family Entertainment, Inc. and
Tele-Communications International, Inc. (filed as Exhibit 2.3 to the
Registrant's Current Report on Form 8-K, dated April 22, 1996).
10.28 -- Letter Agreement, dated as of May 16, 1996, amending the International ****
Family Entertainment, Inc. Family Channel Affiliation Agreement, dated as
of December 28, 1989, between Satellite Services, Inc. and the Registrant.
10.29 -- Affiliation Agreement, dated as of May 16, 1996, between Satellite ****
Services, Inc. and Cable Health TV, Inc., d/b/a FiT TV.
11 -- Computations of Earnings per Common Share. ***
21 -- Subsidiaries of the Registrant. ***
23 -- Consent of Independent Auditors. ***
27 -- Financial Data Schedule (for SEC use only). ***
- ---------------
* Previously filed (as indicated parenthetically in description of exhibit),
and incorporated herein by reference.
** Previously filed with the Registrant's Registration Statement (No.
33-45967) on Form S-1 under the Securities Act of 1933, and incorporated
herein by reference.
*** Filed herewith.
**** Confidential treatment has been requested with respect to such exhibit
pursuant to Rule 24b-2 of the Securities Exchange Act of 1934 and, in
accordance therewith, such exhibit has been omitted and filed separately
with the Securities and Exchange Commission.
iii