Initial Public Offering (IPO): Registration Statement (General Form) — Form S-1
Filing Table of Contents
Document/Exhibit Description Pages Size
1: S-1 Fox Kids Worldwide, Inc. Form S-1 159 914K
2: EX-3.1 Certificate of Incorporation 2 16K
3: EX-3.2 Restated Certificate of Incorporation 13 68K
4: EX-3.3 Bylaws of Registrant 21 87K
5: EX-10.1 Strategic Stock Holders Agreement Dated 12/22/95 46 150K
14: EX-10.10 Shuki Levy Employment Agreement Dated 9/1/96 31 93K
15: EX-10.11 LLC Formation Agreement Dated 11/1/95 18 61K
16: EX-10.12 Operating Agreement for Fox Kids Dated 12/22/95 35 137K
17: EX-10.13 Amend No. 1 to Operating Agreement Dated 9/26/96 4 16K
18: EX-10.15 Asset Assignment Agreement Dated 12/22/95 42 140K
19: EX-10.16 Management Agreement Dated 12/22/95 10 29K
20: EX-10.17 Stock Ownership Agreement Dated 12/22/95 12 39K
21: EX-10.18 Amend No. 1 to Stock Ownership Agreement 9/26/96 6 18K
6: EX-10.2 Amend No. 1 to Stockholders Agreement 2/26/96 2 12K
22: EX-10.20 Form of Fox Broadcasting Station Affiliate Agrmnt 11 47K
7: EX-10.3 Amend No. 2 to Stockholders Agreement 9/26/96 12 37K
8: EX-10.4 Amendment No. 3 to Strategic Stockholders Agmt. 10 32K
9: EX-10.5 Form of Indemnification Agreement 10 46K
10: EX-10.6 1996 Stock Incentive Plan 37 122K
11: EX-10.7 Hiam Saban Employment Agreement Dated 12/22/95 9 37K
12: EX-10.8 Margaret Loesch Employment Agreement - 1/1/96 32 108K
13: EX-10.9 Mel Woods Employment Agreement Dated 6/1/94 25 82K
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 27, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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FOX KIDS WORLDWIDE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 7812 95-4596247
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
10960 WILSHIRE BOULEVARD
LOS ANGELES, CALIFORNIA 90024
(310) 235-5555
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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MEL WOODS, PRESIDENT, CHIEF OPERATING OFFICER AND CHIEF FINANCIAL OFFICER
FOX KIDS WORLDWIDE, INC.
10960 WILSHIRE BOULEVARD
LOS ANGELES, CALIFORNIA 90024
(310) 235-5100
(310) 235-5102 (FAX)
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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Copies to:
[Download Table]
RICHARD E. TROOP JONATHAN A. SCHAFFZIN
LINDA M. GIUNTA CAHILL GORDON & REINDEL
TROOP MEISINGER STEUBER & PASICH, LLP 80 PINE STREET
10940 WILSHIRE BOULEVARD NEW YORK, NEW YORK 10005
LOS ANGELES, CALIFORNIA 90024 (212) 701-3000
(310) 824-7000 (212) 269-5420 (FAX)
(310) 443-7599 (FAX)
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION
STATEMENT.
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If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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PROPOSED
MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
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Class A Common Stock, par value $0.001 per share............. $150,000,000 $51,724
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(1) Estimated solely for the purpose of calculating the registration fee,
pursuant to Rule 457(o) under the Securities Act of 1933.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus, one to be used
in connection with an underwritten offering in the United States and Canada
(the "U.S. Prospectus") and one to be used in connection with a concurrent
international offering outside the United States and Canada (the
"International Prospectus"). The two prospectuses relate to an initial public
offering of up to shares of Class A Common Stock, par value $0.001
per share, of Fox Kids Worldwide, Inc., including up to shares that
may be sold pursuant to the underwriters' over-allotment option, if exercised.
The complete U.S. Prospectus follows this explanatory note. After the U.S.
Prospectus are the following alternate pages for the International Prospectus:
a front cover page, the Underwriting section and a back cover page. All other
pages of the U.S. Prospectus are to be used for both the United States
offering and the international offering. Each alternate page for the
International Prospectus included herein is labeled "Alternate Page for
International Prospectus." Final forms for each Prospectus will be filed with
the Securities and Exchange Commission pursuant to Rule 424(b).
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED SEPTEMBER 27, 1996
PROSPECTUS
SHARES
FOX KIDS WORLDWIDE, INC.
[LOGO OF FOX KIDS] CLASS A COMMON STOCK
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Of the shares of Class A Common Stock, par value $0.001 per share (the
"Class A Common Stock"), of Fox Kids Worldwide, Inc. (the "Company") offered
hereby, shares are being offered initially in the United States and
Canada by the U.S. Underwriters (the "U.S. Offering") and shares are
being offered in a concurrent offering outside the United States and Canada by
the International Underwriters (the "International Offering," and together with
the U.S. Offering, the "Offerings"). The initial public offering price and the
underwriting discount per share will be identical for both Offerings. See
"Underwriting."
Immediately following the Offerings, the Company's outstanding common stock
will be comprised of Class A Common Stock and Class B Common Stock, par value
$0.001 per share (the "Class B Common Stock" and, together with the Class A
Common Stock, the "Common Stock"). The rights of holders of each class of
Common Stock are identical, except that each share of Class B Common Stock
entitles its holder to ten votes and each share of Class A Common Stock
entitles its holder to one vote. Immediately following the Offerings, the
holders of the Company's Class B Common Stock will have approximately %, in
aggregate, of the combined voting power with respect to all matters submitted
for the vote of all stockholders, except as required by law. Immediately
following the Offerings, 50% of the shares of Class B Common Stock will be
beneficially owned by Fox Broadcasting Company, an indirect wholly owned
subsidiary of The News Corporation Limited, and 50% of the shares of Class B
Common Stock will be beneficially owned by the former stockholders of Saban
Entertainment, Inc. See "Principal Stockholders" and "Description of
Securities."
All of the shares of Class A Common Stock offered hereby are being
offered by the Company. Prior to the Offerings, there has been no public market
for the Class A Common Stock. It is currently estimated that the initial public
offering price will be between $ and $ per share. See "Underwriting"
for a discussion of the factors to be considered in determining the initial
public offering price.
The Company intends to apply for listing of the Class A Common Stock on the
New York Stock Exchange.
SEE "RISK FACTORS" COMMENCING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CLASS A COMMON STOCK
OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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PROCEEDS TO THE
PRICE TO PUBLIC UNDERWRITING DISCOUNT(1) COMPANY(2)
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Per Share............................ $ $ $
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Total(3)............................. $ $ $
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(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses, estimated at $ , payable by the Company.
(3) The Company has granted the U.S. Underwriters and the International
Underwriters options, exercisable within 30 days after the date hereof, to
purchase up to an aggregate of shares and shares of Class A
Common Stock, respectively, at the initial price to public per share, less
the underwriting discount, solely to cover over-allotments, if any. If
such options are exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to the Company will be $ , $ and
$ , respectively. See "Underwriting."
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The Class A Common Stock is being offered by the several Underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the Underwriters and
certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of certificates for the shares of Class A Common Stock
will be made in New York, New York on or about , 1996.
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MERRILL LYNCH & CO.
ALLEN & COMPANY INCORPORATED
BEAR, STEARNS & CO. INC.
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The date of this Prospectus is , 1996.
[PICTURES TO COME]
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IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN
THE OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
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Mighty Morphin Power Rangers(R), Power Rangers(R), Saban(R) and Saban's VR
Troopers(R) are registered trademarks of Saban Entertainment, Inc. and Saban
International N.V. Big Bad Beetleborgs(TM), Eagle Riders(TM), Jim Knopf(TM),
Masked Rider(TM), Power Rangers ZEO(TM), Princess Sissi(TM), Saban Kids
Network(TM), Saban's Adventures of Oliver Twist(TM), Samurai Pizza Cats(TM),
The Why Why Family(TM), Walter Melon(TM) and Wunschpunsch(TM) are trademarks
of Saban Entertainment, Inc., and Saban International N.V. Eek! The Cat(R) is
a registered trademark of Fox Children's Network, Inc. Bobby's World(TM)and
The Tick(TM) are trademarks of Fox Children's Network, Inc. Space
Strikers(TM), Bureau of Alien Detectors (TM) and The Mouse and the Monster(TM)
are trademarks of UPN Kids, a joint venture in which Saban Entertainment, Inc.
and Saban International N.V. are partners.
2
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial data, including
the financial statements and notes thereto, included elsewhere in this
Prospectus. Fox Kids Worldwide, Inc. (the "Company") was incorporated in August
1996 in order to acquire (i) all of the outstanding capital stock of FCN
Holding, Inc. (together with its consolidated subsidiary corporations, "FCN
Holding"), which is currently an indirect subsidiary of Fox Broadcasting
Company ("Fox Broadcasting"), (ii) all of the outstanding capital stock of
Saban Entertainment, Inc. (together with its consolidated subsidiary
corporations, "Saban") and (iii) Fox Broadcasting's direct and indirect members
interests in Fox Kids Worldwide, L.L.C., a strategic alliance between Saban and
FCN Holding (the "LLC") in the "Reorganization" (see "The Reorganization").
Unless otherwise indicated, the term the "Company" refers collectively to the
Company, FCN Holding, Saban and the LLC, and their respective subsidiaries; and
the information in this Prospectus gives effect to the Reorganization, which
will be effected immediately prior to the closing of the Offerings. All
references in this Prospectus to ratings refer to ratings compiled and
published by Nielsen Media Research ("Nielsen"). Unless otherwise indicated,
the information in this Prospectus assumes no exercise of the Underwriters'
over-allotment options, and an assumed initial public offering price of
$ per share, the mid-point of the initial offering price range. See
"Underwriting."
THE COMPANY
The Company is a fully-integrated global children's television entertainment
company which develops, acquires, produces, broadcasts and distributes quality
animated and live-action children's television programming. The Company's
principal operations are conducted by (i) Fox Children's Network, Inc. ("FCN"),
which operates the Fox Kids Network--the top-rated children's (ages 2-11)
oriented broadcast television network in the United States and (ii) Saban,
whose library of more than 3,700 half-hours of children's programming is among
the largest in the world. The Company is the result of the joint venture
launched in 1995 by Fox Broadcasting and Saban to match the complementary
programming and broadcasting strengths of the Fox Kids Network and the
international reach of Fox Broadcasting's parent company, The News Corporation
Limited ("News Corp."), with the development, production, distribution and
merchandising strengths of Saban. This combination has created a company with
the ability to manage children's properties and brands from the initial
creative concept through production, broadcast and the merchandising of related
consumer products.
Children represent an important and growing segment of the global consumer
market. The steady rise in birth rates and an increase in children's purchasing
power has resulted in increased marketing expenditures on products targeted
toward children. In the United States alone, children influence spending
decisions on over $150 billion worth of products annually. In order to reach
this market, manufacturers and other companies targeting children devote
significant resources to advertising and in the 1995-1996 broadcast season, an
estimated $725 million was spent in the United States on advertising directed
at children. Spending by these advertisers is concentrated on television
commercials; and over 80% of children report learning about new products
through watching television. The growth in advertising expenditures aimed at
children has led to the increased demand for children's programming from a
growing group of basic cable and broadcast television services targeting
children, including the Fox Kids Network and the Company's Saban Kids Network.
While television programming targeted toward children in the United States has
developed significantly over the past several years, the Company believes that
the children's television entertainment market in most countries remains
relatively underserved.
The Company creates, produces and acquires quality animated and live-action
children's television programming with brand-name characters and elements which
are either widely known to children, such as the Mighty Morphin Power Rangers
(including the recently introduced Power Rangers Zeo, "Power Rangers"), The
Tick, X-Men and Bobby's World, or which are or have been developed or acquired
due to their likelihood of maturing into popular brands. The Company produced
13 series in the 1995-1996 broadcast season and is
3
currently producing 16 series for the 1996-1997 broadcast season, including
Power Rangers, which since shortly after its launch in 1993 has been the
highest rated children's television program in the United States, as well as in
most of the international markets in which it is broadcast.
The Company operates the Fox Kids Network, the leading U.S. children's
broadcast television network, and the Saban Kids Network, an ad hoc syndicated
distribution network. Collectively, these outlets will broadcast 26 1/2 hours
of children's programming per week during the 1996-1997 broadcast season, more
than double the number of hours broadcast by its nearest competitor, The Walt
Disney Company. The Fox Kids Network, launched in 1990, will broadcast 19 hours
of children's programming each week during the 1996-1997 broadcast season to
97% of U.S. television households, the broadest reach of any network targeting
children. The Fox Kids Network was formed by Fox Broadcasting and most of the
FOX Television Network member stations to provide children's programming
weekdays and Saturday mornings. The Fox Kids Network has been the number one
rated children's broadcaster for each of the past three seasons, and has had
the highest viewership among children in its time period during 15 consecutive
"sweeps" periods. According to Nielsen, 20 million children--approximately 52%
of all children in the United States--watch the Fox Kids Network at least once
each month. This network affords advertisers the opportunity to reach children
in a cost-effective manner, while ensuring consistent nationwide placement of
their advertisements by generally broadcasting its programming at the same
local time and on the same day ("day-and-date") in each market. The Fox Kids
Network's advertising customers include virtually every major advertiser to
children. The Company also distributes 7 1/2 hours of programming each week
through the Saban Kids Network which enables its programming on a weighted
average basis to reach over 86% of the television households in the United
States.
One of the essential attributes of quality children's programming is its
"portability." Children's programming produced for exhibition in a particular
country is considered "portable" because it generally can be modified at modest
cost and resold for exhibition in other countries through editing and dubbing
into other languages. The Company currently distributes its programming over
terrestrial broadcast services in most major television markets throughout the
world. To further capitalize on its broad library of children's programming and
its relationship with News Corp.--which has significant equity interests in
cable and satellite services in most major international markets--the Company
has recently agreed or agreed in principle to launch full time or partial day
"Fox Kids" branded direct-to-home ("DTH") satellite and cable channels in
various markets in Europe and Latin America. On October 19, 1996, the Company
launched a Fox Kids branded channel as part of BSkyB's Sky Multichannels
package, which through DTH and cable services is currently estimated to reach
over 5.5 million viewers in the United Kingdom and Republic of Ireland. Subject
to completion of negotiation of definitive agreements, additional international
channels are currently contemplated to be launched over the next two years on
DTH satellite and cable in Latin America and Asia. See "Business--Distribution:
Networks and Syndication--International Channels." In Australia, the Foxtel
cable service has been carrying a Fox Kids Network children's channel segment
since 1994 under a license recently assigned to the Company by Fox
Broadcasting.
Children's programming provides excellent opportunities for licensing and
merchandising, and the Company has been successful in licensing its properties
for use in toys and other children's products. The Company attempts to retain
worldwide rights to its brands, and licenses their use to manufacturers for
specific products in exchange for royalties, typically accompanied by cash
advances. The Company currently has toy licenses with Bandai, Mattel, Hasbro
and Toybiz, as well as licenses for other merchandise with over 500 licensees
worldwide. The Company also realizes revenues through the distribution of its
programs in the U.S. and international home video markets. Through an agreement
in principle with Twentieth Century Fox Home Entertainment, Inc. ("Fox Video"),
the Company is positioned to increase materially its presence in the children's
home video market.
The Company believes that as a result of its strengths in substantially all
facets of the children's television entertainment business, it is well
positioned to exploit a broad range of domestic and international children's
entertainment opportunities, including television, merchandising, licensing and
home video. The Company intends to expand its business in the United States by
capitalizing on the network strengths of the Fox Kids
4
Network and the production and distribution strengths of Saban. As DTH
satellite and cable services continue to expand and become more prevalent
worldwide, the Company plans to launch additional international children's
television channels under the "Fox Kids" name. As the Company continues to
expand the distribution outlets which the Company controls, the Company
believes that it will also be able further to develop new programs, grow its
library of children's programming, build on its popular and branded characters
and increase revenue from its licensing and merchandising activities.
The Company is a Delaware corporation. Its principal executive offices are
located at 10960 Wilshire Boulevard, Los Angeles, California 90024 and its
telephone number is (310) 235-5100.
THE OFFERINGS
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Class A Common Stock Offered:
U.S. Offering................................... shares(1)
International Offering.......................... shares(1)
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Total................................... shares
Common Stock to be outstanding after the Offerings:
Class A Common Stock............................ shares(2)
Class B Common Stock............................ shares
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Total................................... shares
Voting and Conversion Rights....................... The rights of the holders
of the Class A Common
Stock and Class B Common
Stock are identical,
except that each share of
Class B Common Stock
entitles the holder to ten
votes per share, while
each share of Class A
Common Stock entitles the
holder to one vote per
share. The Class A Common
Stock and the Class B
Common Stock vote as a
single class on all
matters, except as
otherwise required by law.
The Class B Common Stock
is convertible at any time
at the election of the
holder on a share-for-
share basis into Class A
Common Stock, and
automatically converts
into Class A Common Stock
under certain
circumstances. See
"Principal Stockholders"
and "Description of
Securities."
Use of Proceeds.................................... The aggregate net proceeds
from the Offerings are
estimated to be
approximately $ , all of
which will be used for
general corporate
purposes, including
working capital. See "Use
of Proceeds."
Proposed New York Stock Exchange Symbol............ The Company intends to
apply for listing of the
Class A Common Stock on
the New York Stock
Exchange.
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(1) Assumes no exercise of the over-allotment options granted by the Company to
the Underwriters.
(2) Does not include an aggregate of shares of the Class A
Common Stock currently issuable upon exercise of options granted to certain
members of management of the Company, nor an aggregate of approximately
shares of Class A Common Stock issuable upon the exercise of options,
exercisable at the initial offering price, which the Company intends to
grant to certain officers and employees under its stock incentive plan
prior to the completion of the Offerings. See "Management--Stock Options
and Stock Incentive Plan."
5
THE REORGANIZATION
The Company's principal current operations are conducted by (i) Saban, which
is one of the largest suppliers of broadcast children's television programming
in the world, and (ii) FCN, which operates the Fox Kids Network-- the top-rated
children's (ages 2-11) oriented broadcast television network in the United
States. FCN is an indirect wholly-owned subsidiary of FCN Holding, itself an
indirect subsidiary of Fox Broadcasting, and both companies are indirect
subsidiaries of News Corp. Effective June 1, 1995, FCN Holding and Saban agreed
to form the LLC, a strategic alliance limited liability company, and since
November 1, 1995, each of Saban and FCN have been operated by their respective
managements subject to the overall supervision of the Members Committee of the
LLC.
Fox Kids Worldwide, Inc. was incorporated in Delaware in August 1996 in
connection with the Offerings to act as a holding company of FCN Holding, Saban
and the LLC. It currently conducts no business or operations. Immediately prior
to the closing of the Offerings, (i) Fox Broadcasting Sub, Inc., a wholly-owned
indirect subsidiary of Fox Broadcasting ("Fox Broadcasting Sub"), will exchange
its capital stock in FCN Holding, which indirectly owns FCN, for
shares of the Class B Common Stock, (ii) the other stockholders of FCN Holding
will exchange their capital stock in FCN Holding for an aggregate of
shares of the Class A Common Stock, (iii) Haim Saban and the other stockholders
of Saban (together, the "Saban Stockholders") (none of whom are affiliated with
News Corp.) will exchange their capital stock in Saban for an aggregate of
shares of the Class B Common Stock and (iv) all outstanding
management options to purchase Saban capital stock will become options to
purchase an aggregate of shares of the Class A Common Stock. In
addition, Fox Broadcasting will exchange its preferred, non-voting interest in
the LLC for an aggregate of 1,000,000 shares of the Company's Series A
Redeemable Preferred Stock, $0.001 par value per share (the "Series A Preferred
Stock"), and will exchange a $50 million contingent note receivable from the
LLC for a new preferred, non-voting interest in the LLC, which will entitle the
holder thereof to a priority right to "distributable cash" (see note 2 to
"Capitalization") of the LLC, Saban and FCN Holding and their respective
subsidiaries. See "Principal Stockholders," "Management--Stock Options and
Stock Incentive Plan," "Certain Transactions," "Underwriting" and "Description
of Securities." As a result of these transactions, which are referred to in
this Prospectus as the "Reorganization," FCN Holding, FCN, Saban and the LLC
will become direct or indirect subsidiaries of the Company.
The charts on the following page illustrate a simplified ownership structure
of the parties to the Reorganization (i) immediately before the Reorganization,
and (ii) immediately after the Reorganization and the Offerings. Certain
intermediate subsidiary corporations have not been included in these charts.
6
BEFORE THE REORGANIZATION:
This flow chart sets forth the ownership structure of the Company before
the Reorganization. Fox Children's Network, Inc. is a subsidiary of FCN Holding
which is a subsidiary of Fox Broadcasting Sub, which is a subsidiary of Fox
Broadcasting, which is a subsidiary of News Corp. Fox Broadcasting owned a non-
voting preferred interest in the LLC and FCN Holding owned a 50% voting interest
in the LLC. The Saban stockholders own Saban and Saban has a 50% voting interest
in the LLC.
[CHART APPEARS HERE]
AFTER THE REORGANIZATION AND THE OFFERINGS:
This flow chart sets forth the ownership structure of the Company after the
Reorganization and the Offerings. FCN Holding, FCN, the LLC and Saban are now
subsidiaries of the Company. Fox Broadcasting Sub owns 50% of the Class B Common
Stock of the Company and the Former Saban Stockholders own the other 50% of the
Class B Common Stock. Fox Broadcasting owns all of the Series A Preferred Stock
and the Public and Other STockholders own all of the Class A Common Stock. Fox
Broadcasting owns a non-voting preferred interest in the LLC.
[CHART APPEARS HERE]
The consummation of the Reorganization is a condition to the Offerings.
Unless the context otherwise requires, for purposes of this Prospectus the
Reorganization is assumed to have been consummated, and all descriptions in
this Prospectus of the Company, its business, operations, capitalization and
ownership are presented as if the Reorganization had already occurred.
7
SUMMARY HISTORICAL AND PRO FORMA
FINANCIAL DATA
Fox Kids Worldwide, Inc. was incorporated in Delaware in August 1996 in order
to effect the Reorganization. Prior to the Reorganization, it will not engage
in any business activities. Immediately following the Offerings and the
Reorganization, its sole assets will consist of the net proceeds of the
Offerings and the capital stock of its direct subsidiaries. Since November 1,
1995 (the "Effective Date"), each of Saban and FCN have been operated by their
respective managements subject to the overall supervision of the Members
Committee of the LLC. In connection with the Offerings, the Reorganization will
be effected, pursuant to which Saban, FCN Holding and the LLC will become
wholly-owned subsidiaries of Fox Kids Worldwide, Inc. Solely for financial
statement presentation purposes, although the Company will not acquire any of
the shares of the capital stock of Saban until immediately prior to the closing
of the Offerings, and the Reorganization will not be effected until immediately
prior to the closing of the Offerings, the assets and liabilities of Saban, FCN
Holding and the LLC are being presented on a combined basis and recorded at
historical cost from and after the Effective Date.
The following tables set forth, for the periods and on the dates indicated,
summary historical and pro forma consolidated financial data derived from the
financial statements included elsewhere in the Prospectus. The unaudited pro
forma financial data for the Company gives effect to the Reorganization as
though it had occured on July 3, 1995 (with respect to the statements of
operations data) and on June 30, 1996 (with respect to the balance sheet data).
The information presented below should be read together with the historical
financial statements and pro forma financial information included elsewhere
herein. The pro forma information, as well as the Company financial information
subsequent to October 31, 1995, are not necessarily indicative of actual
results of operations and financial position that would have been achieved had
the transactions been consummated on that date, and are not necessarily
indicative of future results of operations or financial position.
STATEMENTS OF OPERATIONS DATA:
SABAN ENTERTAINMENT, INC.
[Enlarge/Download Table]
FIVE MONTHS
YEAR ENDED MAY 31, ENDED
------------------------------------- OCTOBER 31,
1992 1993 1994 1995 1995
-------- -------- -------- -------- -----------
(IN THOUSANDS)
Revenues(1)............. $47,907 $57,244 $ 84,372 $242,468 $105,130
Operating income........ 9,011 11,286 27,338 73,017 51,570
Interest expense........ 1,274 1,279 2,337 1,315 539
Net income.............. 7,201 8,407 16,800 44,675 36,742
FCN HOLDING, INC. AND THE COMPANY
FCN HOLDING || THE COMPANY
------------------------------------------------- || ------------------------------
|| EIGHT
YEAR ENDED FOUR MONTHS || MONTHS FROM PRO FORMA
------------------------------------- ENDED || NOVEMBER 1, FOR THE
JUNE 30, JUNE 27, JULY 3, JULY 2, OCTOBER 31, || 1995 TO JUNE 30, YEAR ENDED
1992 1993 1994 1995 1995 || 1996 JUNE 30, 1996
-------- -------- -------- -------- ----------- || ---------------- -------------
(IN THOUSANDS) ||
||
Net revenues(1)......... $35,027 $85,729 $130,600 $168,871 $46,286 || $191,621 $327,105
Operating income ||
(loss)(2) ............. 364 (567) 7,435 18,174 (174) || 60,759 117,105
Interest expense........ 2,708 2,017 2,218 1,630 145 || 885 1,566
Net income (loss)....... (2,344) (2,584) 5,217 16,544 (319) || 31,600 71,370
See Notes to Summary Historical and Pro Forma Financial Data
8
BALANCE SHEET DATA:
THE COMPANY
[Download Table]
AS OF JUNE 30, 1996
--------------------
AS
ACTUAL ADJUSTED(3)
-------- -----------
(IN THOUSANDS)
Cash and cash equivalents.............................. $ 16,044 $
Programming costs, less accumulated amortization....... 181,427
Total assets........................................... 336,270
Long-term obligations (including current maturities)... 101,487
Stockholders' equity(4)................................ 72,831
OTHER DATA:
SABAN ENTERTAINMENT, INC.
[Enlarge/Download Table]
FIVE MONTHS
ENDED
OCTOBER 31,
YEAR ENDED MAY 31, 1995
----------------------------------- -----------
1992 1993 1994 1995
-------- --------- ------- --------
(IN THOUSANDS)
EBITDA(5)............... $ 9,122 $11,423 $27,521 $73,360 $51,730
Capital expenditures.... 480 789 1,795 2,242 4,020
Amortization of
programming costs...... 27,088 32,367 40,292 84,109 32,651
Investment in
programming(6)......... 38,340 50,388 65,092 114,903 34,988
FCN HOLDING, INC. AND THE COMPANY
FCN HOLDING || THE COMPANY
----------------------------------------------- || -----------------------
|| EIGHT MONTHS
FOUR || FROM PRO FORMA
YEAR ENDED MONTHS || NOVEMBER 1, FOR THE
----------------------------------- ENDED || 1995 TO YEAR ENDED
JUNE 30, JUNE 27, JULY 3, JULY 2, OCTOBER 31, || JUNE 30, JUNE 30,
1992 1993 1994 1995 1995 || 1996 1996
-------- --------- ------- -------- ----------- || ------------ ----------
(IN THOUSANDS) ||
||
EBITDA(4)............... $ 377 $ (531) $ 7,443 $ 18,191 $ (161) || $ 61,269 $117,756
Capital expenditures.... 0 6 10 91 31 || 3,053 6,897
Amortization of ||
programming costs...... 23,918 63,179 94,160 98,309 26,937 || 84,490 143,767
Investment in ||
programming(6)......... 27,475 66,545 88,999 107,368 28,884 || 113,506 170,777
See Notes to Summary Historical and Pro Forma Financial Data
9
NOTES TO SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
(1) Includes revenues recognized by Saban from FCN and revenues recognized by
FCN from Saban, as set forth below:
[Download Table]
FIVE MONTHS FOUR MONTHS
FISCAL YEAR ENDED ENDED
------------------------------ OCTOBER 31, OCTOBER 31,
1992 1993 1994 1995 1995 1995
------- ------ ------- ------- ----------- -----------
(IN THOUSANDS)
Saban revenues from FCN. $ -- $2,535 $10,483 $16,228 $9,651 n/a
FCN revenues from Saban. -- -- 885 14,662 n/a $973
(2) Under agreements between FCN and Fox Broadcasting and certain of its
affiliated corporations (the "Fox Parties"), for periods prior to June 1,
1995, FCN accrued administrative fees, distribution fees and other payments
to the Fox Parties. Effective June 1, 1995, the Fox Parties assigned to the
Company its rights to these payments. Amounts expensed under these
agreements were $2.7 million, $13.5 million, $19.8 million, $26.9 million
and $9.1 million for the 1992, 1993, 1994 and 1995 fiscal years and for the
four months ended October 31, 1995.
(3) As adjusted to give effect to (i) the Offerings, (ii) the Reorganization
and (iii) the repayment by the LLC of $14.5 million of its $64.5 million
non-interest bearing indebtedness to Fox Broadcasting in September 1996,
and the receipt of $50 million of non-voting Class A Members Interests in
the LLC (see note 2 to "Capitalization") in exchange for the balance of
such indebtedness.
(4) Included in stockholders' equity are (i) Class A Preferred Member's
Interests in the LLC, which entitle the holder thereof (Fox Broadcasting)
to preferential distributions of "distributable cash" of $40 million at
June 30, 1996 ($50 million as adjusted) (see note 2 to Capitalization), and
(ii) Series A Preferred Stock of the Company with dividend and liquidation
preferences of $0 at June 30, 1996 ($50 million as adjusted).
(5) EBITDA represents income from operations before interest, taxes,
depreciation and amortization (excluding amortization of programming
costs), and (with respect to the Company) a $10 million non-cash charge
for investment advisory services rendered to FCN Holding in connection
with the formation of the LLC. EBITDA is presented because the Company
believes it is a standard financial statistic commonly reported and widely
used by analysts and other interested parties in the television industry.
The Company believes that EBITDA, while providing useful information,
should not be considered in isolation or as a substitute for net income or
loss, as an indicator of operating performance or as an alternative to
cash flow as a measure of liquidity. EBITDA also does not represent funds
available for dividends, reinvestment or other discretionary uses.
(6) Includes acquisitions of existing programming and programming libraries.
10
RISK FACTORS
Prospective investors should consider carefully the following factors, in
addition to the other information contained in this Prospectus, including the
financial statements and the notes thereto, in evaluating the Company and its
business before purchasing shares of Class A Common Stock offered hereby.
DEPENDENCE ON POWER RANGERS
Since its introduction in the United States in 1993, the Power Rangers
series has been materially important to the success and growth of the Company,
and accounted for a significant portion of the Company's pro forma
consolidated revenues and operating profits for the fiscal year ended June 30,
1996, as well as a substantial portion of the historical revenues and
operating profits of Saban and FCN. For the fiscal year ended June 30, 1996,
revenues derived from the Company's production, distribution and worldwide
exploitation of Power Rangers accounted for approximately 44% of the Company's
pro forma consolidated revenues. While ratings of the Power Rangers over the
past three years have declined, Power Rangers has in each of these years been
the most watched children's television program in United States. However,
children's preferences change frequently, and there can be no assurance that
television viewership of Power Rangers will be maintained or that related
revenues will not be affected adversely. In addition, the carriage of highly
rated programs such as Power Rangers tends to enhance the viewership, and
ratings, of other programs broadcast on the Fox Kids Network, and thus further
contributes to the network's ratings. Any material decline in the viewership
of Power Rangers could also lead to a decline in the ratings of other programs
broadcast on the Fox Kids Network. Therefore, material declines in the ratings
of Power Rangers could materially and adversely affect the Company's results
of operations and financial condition. See "--Dependence on Key Contracts,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations" and "Business--Programming."
POSSIBLE DECLINE IN POPULARITY OF OTHER CURRENT PROGRAMS AND UNCERTAINTY OF
ACCEPTANCE OF NEW PROGRAMS
The Company's revenues are derived from the creation, development,
production, acquisition, distribution, merchandising and other exploitation of
children's television properties. For the fiscal year ended June 30, 1996,
revenues from these sources represented approximately 94% of the Company's pro
forma consolidated revenues. The success of each series depends upon
unpredictable and volatile factors beyond the Company's control, such as
children's preferences, competing programming and the availability of other
entertainment activities for children. A shift in children's interests could
cause the Company's current television programming to decline in popularity,
which could materially and adversely affect the Company's results of
operations and financial condition. The Company also intends to continue to
produce or acquire new properties, the success of which depends entirely upon
market acceptance. There can be no assurance as to the continuing commercial
success of any of the Company's currently distributed properties, or that the
Company will be successful in generating sufficient demand and market
acceptance for its new properties. While the Company is committed to the
ongoing development and acquisition of children's television programming, the
inability of the Company to develop or acquire new programs that are capable
of achieving commercial success could materially and adversely affect the
Company's results of operations and financial condition. See "--Competition."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon the expertise and
services of certain key executives, including Haim Saban, the Company's
Chairman and Chief Executive Officer and the founder of Saban. The Company has
entered into an employment agreement with Mr. Saban and certain of its other
key executives. For a description of the terms of these agreements, see
"Management--Employment Agreements." The Company does not maintain "key
person" life insurance policies on any of its executives. The loss of the
services of Mr. Saban or any of the key personnel could have a material
adverse effect on the results of
11
operations and financial condition of the Company. For a discussion of
agreements to which Mr. Saban is a party relating to his shareholdings, see
"Management--Employment Agreements," "--Agreement Regarding Election of
Directors; Change in Control" and "Description of Securities--Registration
Rights."
POSSIBILITY OF NON-RENEWAL OF FOX KIDS NETWORK AFFILIATED STATIONS
The Company currently distributes network programming to the television
stations which carry the Fox Kids Network (the "Fox Kids Network Affiliates")
pursuant to affiliation agreements, which will expire over the next two to ten
years. Although the Company currently expects to continue to be able to renew
its affiliation agreements as they mature, no assurance can be given that
these renewals will be obtained, or that they will be obtained on a cost-
effective basis. Substantially all of the current Fox Kids Network Affiliates
are also affiliates ("member stations") of Fox Broadcasting (the "FOX
Television Network"), and it is anticipated that renewals of most of the Fox
Kids Network affiliation agreements will occur in conjunction with renewals of
FOX Television Network affiliate agreements. If a FOX Television Network
member station decides not to renew its status as such, it is less likely that
it would renew its Fox Kids Network affiliate agreement. See "Business--
Distribution: Networks and Syndication" and "Business--The Strategic Alliance
with Fox/News Corp."
LIMITED NUMBER OF TIME SLOTS FOR U.S. CHILDREN'S TELEVISION PROGRAMMING
In addition to providing programming for the Fox Kids Network, the Company
is engaged in the creation, development and production of children's
television programming intended for broadcast on other networks, and in
syndication, in both the U.S. and international markets. For the fiscal year
ended June 30, 1996, in the U.S. and international markets, respectively,
approximately 3% and 15% of the Company's pro forma consolidated revenues were
derived from these activities. With respect to this programming, the Company
competes for time slots with a variety of companies which produce animated or
live-action television programming targeted at children. The number of U.S.
outlets available to producers of children's programming has expanded in the
last decade due, in part, to the growth in the number of broadcast and cable
outlets. However, the number of time slots currently allocated to children's
television programming remains limited (a "slot" is typically a half hour
broadcast time period for a program that either airs five times per week--
Monday through Friday--or once per week, usually on the weekend). In addition
to the seven shows owned and produced by the Company for broadcast on the Fox
Kids Network, the Company has cleared nine series in the United States for the
1996-1997 broadcast season, which will air primarily on the Saban Kids Network
and on UPN. The success of the Company will continue to be materially
dependent upon its ability to continue to be successful in obtaining
commercially reasonable levels of clearance for its programming.
DEPENDENCE ON KEY CONTRACTS
The Company has toy license agreements with Bandai America Incorporated
("Bandai") pursuant to which the Company has granted to Bandai worldwide toy
manufacturing and distribution rights to three series, including Power
Rangers. For the fiscal year ended June 30, 1996, approximately 20% of the
Company's pro forma consolidated revenues were derived from its license
agreements with Bandai. Should the Company's agreements with Bandai terminate,
there can be no assurance that the Company would be able to enter into license
agreements with other toy manufacturers on terms comparable to the Bandai
agreements. See "Business--Merchandising and Licensing." In addition, three of
the Company's 16 series for the 1996-1997 broadcast season are based on
programs originally developed by Toei Company Ltd. ("Toei"), which is
currently Japan's largest film company. The Company has been granted rights in
perpetuity to each of these series, including Power Rangers. Toei is obligated
to provide the Company with an exclusive option to acquire additional
children's programming through at least 2004. While the Company believes that
its ability successfully to develop future programming is not materially
dependent on its relationship with Toei, the possibility nonetheless exists
that any change in the Company's relationship with Toei, or the failure of
Toei to perform its obligations under its agreements with the Company, could
have a material adverse effect on the results of operations and financial
condition of the Company. See "Business--Programming--Relationships with
Marvel and Toei."
12
OVERESTIMATION OF REVENUES OR UNDERESTIMATION OF COSTS
The Company follows Financial Accounting Standards Board Statement No. 53,
"Financial Reporting by Producers and Distributiors of Motion Picture Films,"
regarding revenue recognition and amortization of production costs, in which
the Company owns or controls all applicable rights. All costs incurred in
connection with an individual program or film, including acquisition,
development, production and allocable production overhead costs and interest,
are capitalized as television and film costs. These costs are stated at the
lower of unamortized cost or estimated net realizable value. Estimated total
production costs for an individual program or film are amortized in the
proportion that revenue realized relates to management's estimate of the total
revenues expected to be received from such program or film. For programs in
which the Company acquires only network broadcast rights, the Company
amortizes such program costs over the estimated number of broadcasts in
accordance with Financial Accounting Standards Board Statement No. 63,
"Financial Reporting by Broadcasters." If revenue or cost estimates change
with respect to a program or film, the Company may be required to write down
all or a portion of the unamortized costs for such program or film. No
assurance can be given that such write-downs, if they occur, will not have a
material adverse effect on the Company's results of operations or financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Use of Estimates."
SEASONALITY
All of the Company's television programming revenues are recognized either
when the program is available for broadcast or when advertising spots which
appear in the programs are broadcast. For this reason, significant
fluctuations in the Company's total revenues and net income can occur from
period to period depending upon availability dates of programs and advertising
revenues. In the United States, revenues from advertising targeted at children
are concentrated in the fourth calendar quarter of each year. In the
international television market, a significant portion of revenues are
recognized in connection with sales at international trade shows (principally
MIP in April and MIP-COM in October). As a result, the second and fourth
quarters of each calendar year have generally contributed a substantial
portion of the Company's total revenues. Due, in part, to these seasonality
factors, the results of any one quarter are not necessarily indicative of
results for future periods, and cash flows may not correlate with revenue
recognition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Revenue Recognition and Seasonality."
COMPETITION
The businesses in which the Company engages are highly competitive. Each of
the Company's primary business operations is subject to competition from
companies which, in some instances, have greater production, distribution and
capital resources than the Company.
The Company competes on the basis of relationships and pricing for access to
a limited supply of facilities and talented creative personnel to produce its
programs. The Company competes with major motion picture studios, such as
Warner Bros. Television Distribution, Inc. ("Warner Bros.") and The Walt
Disney Company, and animation production companies including Hanna-Barbera and
Film Roman for the services of writers, producers, animators, actors and other
creative personnel and specialized production facilities.
In the United States, the Company competes for time slots, ratings and
related advertising revenues. The Company currently competes, through its Fox
Kids Network, with the other broadcast television networks, public television
and cable television channels, such as Nickelodeon, USA cable network and The
Cartoon Network, for market acceptance of its programming and for viewership
ratings. In addition, The Walt Disney Company has recently announced plans to
launch an educational cable television channel for children. Over the past
five years, cable television has captured an increasing market share while
overall viewership of the networks, and broadcast television in general, has
declined. Further, the Company vies for the children's audience with
independent television stations, suppliers of cable television programs,
direct broadcast satellite and other DTH
13
systems, radio and other forms of media. Through the Saban Kids Network, the
Company also competes with other syndicators, including The Disney Afternoon,
on a market-by-market basis for time slots, coverage commitments, ratings and
advertising revenue. As a result of heightened competition for the children
ages 2-11 category, virtually every major broadcast network suffered a decline
in ratings for each of the last two television seasons, and there can be no
assurance that such trend will not continue. Internationally, the Company
contends with a large number of U.S.-based and international distributors of
children's programming, including The Walt Disney Company and Warner Bros.,
with whom it must also compete in the development or acquisition of
programming expected to appeal to international audiences. Such programming
often must comply with foreign broadcast rules and regulations which may
stipulate certain local content requirements. See "--Licensing and
Merchandising," "--Government Regulation," "Business--Competition" and
"Business--Distribution: Networks and Syndication."
LICENSING AND MERCHANDISING
For the fiscal year ended June 30, 1996, the Company derived approximately
35% of its pro forma consolidated revenues from the licensing of its program
characters and other readily identifiable programming elements to others for
the production and distribution of a variety of products ranging from toys to
apparel and to merchandisers that utilized these characters or elements for
promotional purposes in their businesses. The Company competes with hundreds
of owners of creative content who seek to license their characters and
properties to a limited number of manufacturers and distributors. Although the
Company currently has entered into merchandising agreements with over 500
different manufacturing and commercial organizations, including manufacturers
such as Bandai, Toybiz, Hasbro and Mattel, and although the Company's
characters have been, and continue to be used in marketing campaigns by
international franchises such as McDonald's and Taco Bell, the ability of the
Company to continue successfully to exploit the merchandising opportunities
afforded by its programs will continue to be dependent on the favorable
ratings of the programs and the ability of the Company's characters to
continue to provide attractive merchandising features to its customers. See
"Business--Merchandising and Licensing."
INTERNATIONAL SUBCONTRACTING OF ANIMATION
As with other producers of animated programming, the Company subcontracts
some of the less creative and more labor-intensive components of its animation
production process to studios located in countries with relatively low-cost
labor, primarily in the Far East. With an increasing number of animated
feature films and animated television programs being produced in recent years,
the demand for the services of overseas studios has increased substantially.
This increased demand may lead overseas studios to increase their fees, which
could result in increased animated programming production costs incurred by
the Company or the inability of the Company to contract with its preferred
overseas studios. No assurance can be given that future subcontracting
arrangements will be obtainable on terms which are as favorable to the Company
as its current arrangements.
INTERNATIONAL SALES
Approximately 31% of the Company's pro forma consolidated revenues for the
fiscal year ended June 30, 1996 was derived from international operations. As
part of its business strategy, the Company intends to expand its international
program production and distribution activities, as well as its worldwide
merchandising, licensing and ancillary activities, including the launch of
children's channels on DTH satellite and cable platforms throughout the world.
See "Business--Business Strategies." The Company is subject to the special
risks inherent in international business activities, including (i) general
economic, social and political conditions in each country, (ii) currency
fluctuations, (iii) double taxation, (iv) unexpected changes in applicable
regulatory requirements and (v) compliance with a variety of international
laws and regulations. The operations of the Company's international entities
are measured in part in local currencies. For reporting purposes, assets and
liabilities are translated into U.S. dollars using exchange rates in effect at
the end of each reporting period. Revenues and expenses are translated into
U.S. dollars at the average exchange rates prevailing during the period. As a
result, the Company can expect to record foreign exchange losses and gains in
the future. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Results of Operations--Overview."
14
RAPID EXPANSION AND INTEGRATION OF THE BUSINESS
During the past three years, the Company has experienced rapid and
substantial growth in revenues, and diversification of its businesses. Any
future growth may place a significant strain on management and on its
financial and information processing systems. In addition, the integration of
the operations and business of the Fox Kids Network and Saban will require the
dedication of substantial management resources and may result in increased
administrative expenses. The failure to maintain or upgrade these systems, to
recruit additional staff and key personnel or to respond effectively to
difficulties encountered during expansion could have a material adverse effect
on the Company's results of operations and financial condition.
GOVERNMENT REGULATION
The Company's broadcast of its programming must comply with the provisions
of the Children's Television Act of 1990 ("CTA") and the rules and policies of
the Federal Communications Commission ("FCC") pertaining to the production and
distribution of television programs directed to children, particularly with
respect to the amount and type of commercial matter broadcast during programs
directed at children. Failure to comply with the children's television
commercial limitations can result in the imposition of sanctions, including
substantial monetary fines, on a broadcast television station, which could
adversely impact the Company.
On August 8, 1996, the FCC amended its rules to establish a "processing
guideline" for broadcast television stations of at least three hours per week,
averaged over a six-month period, of "programming that furthers the
educational and informational needs of children 16 and under in any respect,
including the child's intellectual/cognitive or social/emotional needs." Core
Programming has been defined as educational and informational programming
that, among other things, (i) has serving the educational and informational
needs of children "as a significant purpose," (ii) has a specified educational
and informational objective and a specified target child audience, (iii) is
regularly scheduled, weekly programming, (iv) is at least 30 minutes in
length, and (v) airs between 7:00 a.m. and 10:00 p.m. Any station that
satisfies the processing guideline by broadcasting at least three weekly hours
of Core Programming will receive FCC staff-level approval of the portion of
its license renewal application pertaining to the CTA. Alternatively, a
station may qualify for staff-level approval even if it broadcasts "somewhat
less" than three hours per week of Core Programming by demonstrating that it
has aired a weekly package of different types of educational and informational
programming that is "at least equivalent" to three hours of Core Programming.
Non-core programming that can qualify under this alternative includes
specials, public service announcements, short-form programs and regularly
scheduled non-weekly programs, "with a significant purpose of educating and
informing children." Although the Company has cleared a series called The Why
Why Family in the U.S. syndication market for the Fall of 1996, which it
believes qualifies as Core Programming under the new rules, the adoption of
the new quantitative guideline could result in a material increase in the
amount of educational and informational children's programming broadcast; and
it is unclear what impact, if any, such a result would have on the Company's
business.
The United States Congress and the FCC also currently have under
consideration, and may in the future adopt, new laws, regulations and policies
regarding a wide variety of matters which could, directly or indirectly,
materially adversely affect the operations of the Company. The Company is
unable to predict the outcome of future federal legislation or the impact of
any such laws or regulations on its operations. See "Business--Government
Regulation."
The Company is also subject to local content and quota requirements in
international markets which, although a significant portion of the Company's
library meets such current requirements in Europe, effectively limits access
to particular markets.
CONTROL BY EXISTING STOCKHOLDERS
Upon completion of the Offerings, Haim Saban, the other Saban Stockholders
(each of which has granted to Haim Saban the irrevocable right to vote its
shares) and Fox Broadcasting (collectively, the "Class B
15
Stockholders") will beneficially own all of the outstanding shares of the
Class B Common Stock, representing approximately % ( % if the
Underwriters' over-allotment options are exercised in full) of the votes
eligible to be cast on all matters submitted to a vote of the Company's
stockholders, except as required by law. The voting of the shares of the Class
B Common Stock owned by the Class B Stockholders is subject to the discretion
of the Class B Stockholders, which may differ from the interests of the
Company. As a result, the Class B Stockholders will have voting control on all
stockholder actions, including the sale or merger of the Company or a sale of
substantially all of its assets. In addition, holders of shares of the Class A
Common Stock and Class B Common Stock do not have cumulative voting rights,
and the Class B Stockholders will be able to elect all of the Company's
directors. This would effectively prevent a third party from acquiring control
of the Company without the Class B Stockholders' approval and could adversely
affect the market price of the Class A Common Stock. Moreover, while the Class
B Stockholders' positions as principal stockholders may make an unsolicited
takeover relatively unlikely, the enhanced voting power of Class B Common
Stock will enable Class B Stockholders to retain control of the Company even
if their economic stake is reduced, thereby further diminishing the likelihood
of a takeover bid, a merger proposal, a tender offer or a proxy contest. The
Class B Stockholders may have interests with respect to their ownership of the
Company which diverge from those of the Company's public stockholders. There
can be no assurance that the Company will not be adversely impacted by the
control which the Class B Stockholders will have with respect to matters
affecting the Company. See "Summary--The Reorganization," "Principal
Stockholders," "Certain Transactions" and "Description of Securities."
POTENTIAL FOR DEADLOCKS
The holders of the Class B Common Stock have agreed, so long as neither Fox
Broadcasting nor the former Saban Stockholders as a group have disposed of
more than one third of their respective initial Class B Common Stock
beneficial holdings, to vote their shares together on all matters presented to
the stockholders, and if they cannot agree as to how to vote on a matter, to
abstain from voting with respect thereto. With respect to the election of
directors, they have agreed to vote their shares for three directors selected
by Mr. Saban, three directors selected by Fox Broadcasting, and two
independent directors generally selected by both. Because the charter
documents provide that no Board action may be taken without a vote of at least
three-quarters of the directors, the possibility exists that, as a result of
differences which may arise in the future between Fox Broadcasting and Mr.
Saban, the Company may experience difficulties in defining and meeting its
business objectives, or in effecting a transaction which would be in the best
interests of the Company, which could materially and adversely affect the
results of operations and financial condition of the Company. See "Principal
Stockholders" and "Description of Securities."
STRATEGIC RELATIONSHIPS WITH NEWS CORP. AND FOX
The Company has had, and continues to have, a close strategic relationship
with News Corp. and its affiliated entities, including Fox Broadcasting, and
believes that this relationship is materially important to its business and
business strategies. However, except as may be provided in the agreements
between them which are discussed elsewhere in this Prospectus, neither News
Corp. or its affiliated companies, nor the Company, are obligated to engage in
any business transactions or jointly participate in any opportunities with the
other, and the possibility exists that the current strategic relationships
between the parties could materially change in the future.
TRANSACTIONS WITH STOCKHOLDERS AND THEIR AFFILIATES
The Company has in the past entered into transactions and agreements, some
of which are ongoing, with Mr. Saban and with Fox Broadcasting and News Corp.
and their affiliated companies. In addition, the Company may in the future
enter into additional agreements and other transactions with certain of these
affiliates. Although the Company has adopted a policy that future transactions
between the Company and any of these affiliates or family members must be
approved by a majority of the Board of Directors of the Company, including a
majority of the disinterested members of the Board, there can be no assurance
that any such future transactions will prove to be favorable to the Company.
See "Certain Transactions."
16
BROAD DISCRETION AS TO USE OF PROCEEDS
The Company intends to use the net proceeds of the Offerings for general
corporate purposes, including working capital primarily to finance the
Company's development, acquisition and licensing of children's programming and
its expansion in international television markets. In addition, the Company
may use a portion of the net proceeds to acquire businesses, libraries, and
other assets believed by the Company to be complementary to the Company's
current businesses or which support the Company's strategic goals; although,
except as described in this Prospectus, the Company has no such commitments.
As a result, a significant portion of the net proceeds will be available for
projects that are not yet identified, and management will have broad
discretion with respect to the application of such proceeds. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offerings, there has been no public market for the Class A
Common Stock and there can be no assurance that an active public market for
the Class A Common Stock will develop after the Offerings. The initial public
offering price will be determined by negotiations between the Company and the
Underwriters based upon several factors, and there can be no assurance that
the market price of the Class A Common Stock after the Offerings will equal or
exceed the initial public offering price. The market price of the Company's
Class A Common Stock could be subject to wide fluctuations in response to
variations in operating results, announcements of developments by the Company
or its competitors, and other events or factors. In addition, the stock market
has from time to time experienced extreme price and volume fluctuations,
including those which have particularly affected the market price for
entertainment companies, and that may be unrelated to the operating
performance of these companies. These broad market fluctuations may adversely
affect the market price of the Class A Common Stock. See "Underwriting."
SUBSTANTIAL DILUTION
Assuming an initial offering price of $ per share, purchasers of the
Class A Common Stock in the Offerings will realize immediate and substantial
dilution in net tangible book value as of June 30, 1996 of $ per share.
See "Dilution."
POTENTIAL ANTI-TAKEOVER EFFECTS
As a result of the agreements and charter provisions discussed under
"Control by Existing Stockholders" above, it is highly unlikely that any
transaction involving a change of control of the Company, including
transactions in which stockholders might receive a substantial premium for
their shares over then current market prices, could be effected without the
consent of both Fox Broadcasting and Mr. Saban, either of whom might determine
that such a transaction was not in its or his best interests. In addition,
other provisions of the Certificate of Incorporation and Bylaws, as well as
provisions of the Delaware General Corporation Law (the "DGCL"), may have the
effect of delaying or preventing transactions involving a change of control of
the Company, including transactions in which stockholders might receive a
substantial premium for their shares over then current market prices, and may
limit the ability of stockholders to approve transactions that they deem to be
in their best interest. See "Description of Securities."
IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offerings, the Company will have outstanding
shares of Class A Common Stock ( shares if the Underwriters' over-
allotment options are exercised in full), of which all but shares are being
sold in the Offerings, and shares of Class B Common Stock. Any portion, or
all, of the shares of Class B Common Stock are convertible into shares of
Class A Common Stock on a share-for-share basis at any time at the option of
the holder. Immediately following the Offerings, all shares of Class B Common
Stock will be held by "affiliates" (as defined in the Securities Act) of the
Company and will be "restricted
17
securities" under the Securities Act. Under current rules of the Securities
and Exchange Commission, these shares cannot be sold other than pursuant to an
effective registration statement under the Securities Act or an applicable
exemption from the registration requirements of the Securities Act, including
Rule 144 thereunder. The Company intends to file a registration statement
under the Securities Act within 180 days following the completion of the
Offerings covering the shares of Class A Common Stock reserved for issuance
upon exercise of outstanding stock options, and additional options granted
pursuant to the Company's stock incentive plan. No prediction can be made as
to the effect, if any, that future sales of shares of Class A Common Stock or
the availability of these shares for future sale will have on the market price
of shares of Class A Common Stock prevailing from time to time. See "Shares
Eligible for Future Sale."
USE OF PROCEEDS
The net proceeds to the Company from the Offerings, at an assumed offering
price of $ per share and after deducting the underwriting discount and
expenses, are estimated to be approximately $ million ($ million if the
Underwriters' over-allotment options are exercised in full). The Company
intends to use the net proceeds for general corporate purposes, including
working capital, primarily to finance the Company's development, acquisition
and licensing of children's programming and its expansion in international
television markets. In addition, the Company may use a portion of the net
proceeds to acquire businesses, libraries and other assets believed by the
Company to be complementary to the Company's current businesses or which
support the Company's strategic goals; although the Company currently has no
such commitments. Although the Company on a regular basis has had, and intends
to continue to engage in, exploratory discussions and analyses concerning
acquisition opportunities which might be favorable to it, none of these
discussions has, to date, resulted in a probable acquisition opportunity.
Pending these uses, the net proceeds of the Offerings will be invested in
deposits with financial institutions, investment grade securities and short-
term, income-producing investments, including government obligations and other
money-market instruments. See "Risk Factors--Broad Discretion as to Use of
Proceeds."
DIVIDEND POLICY
The Company has no current intention of paying cash dividends on its Common
Stock. Any future determination to pay cash dividends will be made at the
discretion of the Board of Directors of the Company, and will be dependent
upon the Company's results of operations, financial condition and other
factors deemed relevant by the Board of Directors. The Certificate of
Incorporation of the Company provides that the Class A Common Stock and Class
B Common Stock participate on a share for share basis in all dividends paid to
holders of Common Stock (see "Description of Securities--Class A Common Stock
and Class B Common Stock"). The Company has outstanding 1,000,000 shares of
Series A Preferred Stock, all of which are owned by Fox Broadcasting. The
Series A Preferred Stock has a liquidation value of $50 per share less any
dividends declared and paid by the Company with respect thereto. The Company's
Certificate of Incorporation provides that, as long as any shares of Series A
Preferred Stock remain outstanding, the Company cannot pay, or set aside and
reserve for payment, any cash dividends on any series or class of equity
securities ranking junior to the Series A Preferred Stock. In addition, under
the terms of the Class A Members Interest of the LLC, Fox Broadcasting has a
priority right to receive the first $50 million of "distributable cash" (as
defined) of the LLC, Saban and FCN Holding and their respective subsidiaries.
The Series A Preferred Stock and the Class A Members Interest of the LLC may
each have the effect of precluding the payment of cash dividends for an
extensive period of time.
The current line of credit of Saban with its principal U.S. bank prohibits
the payment of dividends from that subsidiary to the Company for any purpose,
including the payment of dividends by the Company to its stockholders, without
prior bank approval. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." For a
description of distributions made prior to the Reorganization, see "Certain
Transactions."
18
DILUTION
The net tangible book value of the Company at June 30, 1996, was $
million or $ per share of Common Stock. Net tangible book value per
share of Common Stock is equal to the Company's total assets less its total
liabilities, less the $50 million liquidation preference of the Series A
Preferred Stock, divided by the total number of outstanding shares of Common
Stock. After giving effect to the sale of shares of the Class A
Common Stock in the Offerings at an assumed initial public offering price of
$ per share, and the receipt and application of the net proceeds
therefrom (after deducting the estimated underwriting discount and expenses),
the pro forma net tangible book value of the Company at June 30, 1996 would
have been approximately $ million or $ per share of Common
Stock. This represents an immediate increase in such net tangible book value
of $ per share to the existing stockholders and an immediate dilution
of $ per share to new stockholders purchasing shares in the
Offerings. If the initial public offering price is higher or lower, the
dilution to the new stockholders will increase or decrease accordingly. The
following table illustrates this per share dilution:
[Download Table]
Assumed initial public offering price per share(1).............. $
Net tangible book value per share of Common Stock
as of June 30, 1996.......................................... $
-----
Increase in net tangible book value per share of Common Stock
attributable to new stockholders.............................
-----
Pro Forma net tangible book value per share of Common Stock as
of June 30, 1996 after the Offerings..............................
-----
Dilution in net tangible book value per share of Common Stock
to new stockholders in the Offerings........................... $
=====
--------
(1) Before deduction of the underwriting discount and estimated expenses.
The calculations in the table set forth above assume no exercise of the
Underwriters' over-allotment options and do not reflect the shares
of Class A Common Stock reserved for issuance pursuant to outstanding options
or options to be granted in connection with the Offerings. See "Management--
Stock Options and Stock Incentive Plan."
The following table summarizes, as of June 30, 1996, the difference between
the number of shares acquired from the Company and the total consideration and
average price per share paid therefor by existing stockholders (assuming no
exercise of any outstanding options by the holders thereof) and by new
investors, assuming an initial public offering price of $ per share:
[Download Table]
SHARES TOTAL
PURCHASED(1) CONSIDERATION(2)
-------------- ------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- --------- -------- -------------
Existing Stockholders....... % $ % $
New Investors...............
------ --- --------- ------ ------
Total................... 100% $ 100% $
====== === ========= ====== ======
--------
(1) Does not include shares of Class A Common Stock issuable
upon exercise of outstanding management stock options,
of which will be exercisable immediately after the Offerings (which
options, if exercised in full, would generate aggregate proceeds to the
Company of $ ).
(2) Based upon the purchase price paid, including services rendered, by the
existing stockholders for the securities of the companies which are
parties to the Reorganization; does not reflect (i) distributions and
dividends to the existing stockholders; or (ii) the receipt by Fox
Broadcasting of Series A Preferred Stock, with a $50 million liquidation
value, or Class A Members Interest in the LLC, with a $50 million
preference value, in connection with the Reorganization. See "Summary--The
Reorganization" and "Certain Transactions."
19
CAPITALIZATION
The following table sets forth the combined capitalization of the Company
(i) at June 30, 1996 and (ii) as adjusted to give effect to the
Reorganization, to the repayment and exchange effected in September 1996 with
respect to $64.5 million in indebtedness due to Fox Broadcasting and to the
sale of shares of the Class A Common Stock offered hereby, at an assumed
offering price of $ per share.
[Download Table]
AT JUNE 30, 1996
------------------
AS
ACTUAL ADJUSTED
-------- --------
(IN THOUSANDS)
Cash and cash equivalents................................. $ 16,044 $
======== ======
Long-term debt (including current portion)(1)............. $101,487 $
Capitalized lease obligations............................. --
-------- ------
Total long-term obligations............................. 101,487
-------- ------
Stockholders' equity:
Class A Preferred Member's Interest in the LLC
($40,000,000 liquidation preference actual and
$50,000,000 liquidation preference as adjusted)(2)..... 40,000 50,000(3)
Series A Preferred Stock, $0.001 par value; 1,000,000
shares authorized; none outstanding; 1,000,000 shares
issued and outstanding as adjusted ($40,000,000
liquidation preference actual and $50,000,000
liquidation preference as adjusted).................... --
Preferred Stock, $0.001 par value; 15,000,000 shares
authorized; no shares issued or outstanding............ --
Class A Common Stock, $0.001 par value; shares
authorized; none outstanding; shares issued and
outstanding as adjusted(4)............................. --
Class B Common Stock, $0.001 par value;
shares authorized; none outstanding; shares
issued and outstanding as adjusted..................... --
Common stock, $.01 par value, 10,000 shares authorized,
800 shares issued and outstanding (Saban Entertainment,
Inc.).................................................. --
Common stock, no par value, 2,000 shares authorized,
2,000 shares issued and outstanding (FCN Holding, Inc.)
....................................................... 2
Contributed capital..................................... 49,245
Cumulative translation adjustment....................... (11)
Retained deficit........................................ (16,405)
-------- ------
Total stockholders' equity.............................. $ 72,831 $
-------- ------
Total capitalization.................................. $174,318 $
======== ======
-------
(1) Includes $64.5 million of non-interest bearing indebtedness to Fox
Broadcasting. Of this indebtedness, $14.5 million was repaid after June
30, 1996. The balance of this indebtedness will on the Reorganization be
exchanged for $50 million of Class A Members Interest in the LLC.
(2) This non-voting members interest is entitled to preferential distributions
out of "distributable cash" (as defined), if any, of the LLC (which
includes cash available for Saban and FCN Holding and their respective
subsidiaries). The $40 million of Class A Members Interest in the LLC, and
a $10 million contingent liability of the LLC outstanding at June 30,
1996, will on the Reorganization be exchanged for 1,000,000 shares of the
Series A Preferred Stock of the Company. See "Certain Transactions--
Formation of the LLC and the Reorganization."
(3) Terminates in the event that $50 million in distributions have been
received .
(4) Does not include an aggregate of shares of the Class A Common Stock
currently issuable upon exercise of options granted to certain members of
management of the Company, nor an aggregate of approximately shares of
Class A Common Stock issuable upon the exercise of options, exercisable at
the initial offering price, which the Company intends to grant to certain
officers and employees under its stock incentive plan prior to the closing
of the Offerings. See "Management--Stock Options and Stock Incentive
Plan."
20
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma consolidated balance sheet reflects the
Reorganization as if it had occurred as of June 30, 1996. The following pro
forma consolidated statement of operations reflects, on a consolidated basis,
the results of operations of the Company, FCN Holding, Saban and the LLC as if
the Reorganization had occurred as of July 3, 1995. The pro forma information
is based on the historical financial statements of the Company, FCN Holding,
Saban and the LLC giving effect to the Reorganization, the results of
operations on a consolidated basis and the assumptions and adjustments in the
accompanying notes to the pro forma financial statements.
Included in the pro forma consolidated statement of operations for the year
ended June 30, 1996 are the statement of operations of the Company for the
eight months ended June 30, 1996 and the statement of operations of FCN
Holding for the four months ended October 31, 1995.
The pro forma consolidated statements have been prepared by the Company's
management based upon the financial statements of the Company, FCN Holding,
Saban and the LLC included elsewhere herein. These pro forma consolidated
statements may not be indicative of the results that actually would have
occurred if the combination had been in effect on the dates indicated or which
may be obtained in the future. The pro forma consolidated financial statements
should be read in conjunction with the audited financial statements and notes
of the Company, FCN Holding and Saban contained elsewhere herein.
21
PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
JUNE 30, 1996
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
[Download Table]
PRO FORMA PRO FORMA
AS REPORTED ADJUSTMENTS CONSOLIDATED
----------- ----------- ------------
ASSETS:
Cash and cash equivalents............... $ 16,044 $ 16,044
Restricted cash......................... 8,000 8,000
Accounts receivable, net................ 56,225 56,225
Amounts receivable from related parties. 25,789 25,789
Programming costs, less accumulated
amortization........................... 181,427 181,427
Property and equipment, at cost, less
accumulated depreciation .............. 8,711 8,711
Deferred income taxes .................. 27,023 27,023
Other assets............................ 13,051 13,051
-------- --------
Total assets........................ $336,270 $336,270
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable........................ $ 8,192 $ 8,192
Accrued liabilities..................... 30,247 30,247
Deferred revenue........................ 67,882 67,882
Fox Kids Network affiliate
participations payable................. 13,738 13,738
Accrued programming expenditures........ 15,179 15,179
Accrued residuals and participations.... 22,040 22,040
Income taxes payable.................... 3,884 3,884
Deferred income taxes................... 790 790
Debt.................................... 19,916 19,916
Amounts payable to related parties...... 81,571 (60,000)(a) 21,571
-------- ------- --------
Total liabilities................... 263,439 (60,000) 203,439
Commitments and contingencies -- --
Stockholders' equity
Common stock, $.01 par value, 10,000
shares authorized, 800 shares issued
and outstanding (Saban).............. -- --
Common stock, no par value, 2,000
shares authorized, 2,000 shares
issued and outstanding (FCN Holding). 2 2
Class A Preferred Member's Interest in
the LLC ($40,000,000 liquidation
preference and $50,000,000
liquidation preference as adjusted).. 40,000 10,000(a) 50,000
Series A Preferred Stock, $0.001 par
value; 1,000,000 shares authorized;
none outstanding; 1,000,000 shares
issued and outstanding as adjusted
($50,000,000 liquidation preference
as adjusted)......................... -- 50,000(a) 50,000
Preferred Stock, $0.001 par value;
15,000,000 shares authorized; no
shares issued or outstanding......... -- --
Class A Common Stock, $0.001 par
value; shares authorized; none
outstanding; shares issued and
outstanding as adjusted.............. -- --
Class B Common Stock, $0.001 par
value; shares authorized;
none outstanding; shares issued
and outstanding as adjusted.......... -- --
Contributed capital................... 49,245 49,245
Cumulative translation adjustment..... (11) (11)
Retained deficit...................... (16,405) (16,405)
-------- ------- --------
Total stockholders' equity.............. 72,831 60,000 132,831
-------- ------- --------
Total liabilities and stockholders'
equity................................. $336,270 $336,270
======== ======= ========
See notes to pro forma consolidated financial statements.
22
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
TWELVE MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS)
[Enlarge/Download Table]
AS REPORTED PRO FORMA ADJUSTMENTS
----------------------------------- ----------------------------
FCN HOLDING, SABAN
FCN HOLDING AND THE LLC SABAN OTHER
---------------- ------------------ ------------------- --------
PERIOD FROM
JULY 3, 1995 EIGHT MONTHS FOUR MONTHS
TO ENDED ENDED PRO FORMA
OCTOBER 31, 1995 JUNE 30, 1996 OCTOBER 31, 1995(B) CONSOLIDATED(C)
---------------- ------------------ ------------------- -------- ---------------
Net revenues............ $46,286 $191,621 $99,538 $(10,340)(c) $327,105
Costs and expenses:
Amortization of
programming costs,
residuals and
participations........ 29,698 98,937 39,177 (8,101)(c) 159,711
Fees and costs to a
related party......... 7,313 -- -- (7,313)(c) --
Selling, general and
administrative........ 2,566 23,072 10,397 700 (c) 36,735
Fox Kids Network
affiliate
participations........ 6,883 8,853 -- (2,182)(c) 13,554
------- -------- ------- -------- --------
Operating (loss) income
....................... (174) 60,759 49,964 6,556 (c) 117,105
Investment advisory fee. -- 10,000 -- -- 10,000
Interest expense........ 145 885 536 -- 1,566
------- -------- ------- -------- --------
(Loss) income before
provision for income
taxes.................. (319) 49,874 49,428 6,556 105,539
Provision for income
taxes.................. -- 18,274 13,840 2,055 (c) 34,169
------- -------- ------- -------- --------
Net (loss) income ...... $ (319) $ 31,600 $35,588 $ 4,501 $ 71,370
======= ======== ======= ======== ========
See notes to pro forma consolidated financial statements.
23
NOTES TO PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1996
(IN THOUSANDS)
(a) In connection with the formation of the LLC, the Company agreed to pay
to Fox Broadcasting a fee of $10 million for providing all uplink, transponder
and other facilities necessary to deliver via satellite Fox Kids Network
programming for broadcast to the Fox Kids Network Affiliates, and certain
other services. Such amount is included in other assets, net of accumulated
amortization, and amounts payable to related parties in the "As Reported"
column. In September 1996, the LLC paid this $10 million to Fox Broadcasting.
Immediately upon receipt of this $10 million payment, Fox Broadcasting made a
contribution to the LLC of $10 million in exchange for additional Class A
Member's Interest. In connection with the Reorganization, the $10 million of
additional Class A Member's Interest will be exchanged for $10 million of
Series A Preferred Stock in the Company.
In connection with the Reorganization the existing Class A Preferred
Member's Interest in the LLC will be exchanged for Series A Preferred Stock in
the Company.
Fox Broadcasting made a $64.5 million interest free loan to the LLC, of
which $14.5 million of the loan was repaid in September 1996. The $50 million
remainder of this loan is to be paid out of Distributable Cash of the LLC
before any distributions are made on the Class A and Class B Members
Interests. In connection with the Reorganization, immediately prior to the
closing of the Offerings, Fox Broadcasting will exchange this loan for new
Class A Members Interests in the LLC, which will grant Fox Broadcasting a
priority right to receive distributions of Distributable Cash and other
distributions from the LLC until it has received aggregate distributions of
$50 million, whereupon this interest will terminate and expire. "Distributable
Cash" means the amount of cash available for distribution by the LLC
(including cash available from Saban and FCN Holding), taking into account all
cash, debts, liabilities and obligations of the LLC then due and after setting
aside reserves to provide for the LLC's capital expenditures, debt service,
working capital and expansion plans.
(b) Represents results of operations of Saban for the four months ended
October 31, 1995
(c) A summary of adjustments to combine Saban, FCN Holding and the LLC for
the four months ended October 31, 1995:
[Download Table]
Elimination of revenues between FCN and Saban................... $(10,340)
Reduction of amortization of programming costs resulting from
the elimination of revenues and costs between FCN and Saban.. 8,101
Amortization of Services Fee to Fox Broadcasting................ (700)
Elimination of fees and costs to related party(1)............... 7,313
Elimination of Fox Kids Network affiliate participations related
to Fox O&O's................................................. 2,182
Increase in provision for income taxes resulting from pro forma
adjustments.................................................. (2,055)
--------
$ 4,501
========
--------
(1) On December 22, 1995, in connection with the formation of the LLC,
distribution fees from the Fox Parties were assigned to the LLC by the Fox
Parties. The incremental costs to the Fox Parties for providing these
distribution services to the Company are not material. In future periods
these distribution services will be provided by the Company. The
incremental costs to the Company in connection with these distribution
services for such additional programs are not material.
24
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The selected financial data of Saban set forth below as of May 31, 1994 and
1995 and as of October 31, 1995 and for each of the two years in the period
ended May 31, 1995 and for the five months ended October 31, 1995 are derived
from Saban's consolidated financial statements audited by Ernst & Young LLP,
independent auditors, included elsewhere in this Prospectus. The selected
financial data of Saban presented below as of May 31, 1992 and 1993 and for
the two years ended May 31, 1993 are derived from Saban's consolidated
financial statements audited by Ernst & Young LLP, independent auditors.
The selected financial data of FCN Holding set forth below as of July 3,
1994, July 2, 1995 and as of October 31, 1995 and for each of the annual
fiscal periods in the two years ended July 2, 1995 and for the four months
ended October 31, 1995 are derived from FCN Holding's consolidated financial
statements audited by Ernst & Young LLP, independent auditors, included
elsewhere in this Prospectus.
The selected financial data of FCN Holding at June 30, 1992 and June 27,
1993 and for each of the annual fiscal periods in the two years ended June 27,
1993 are derived from FCN Holding's unaudited consolidated financial
statements. The unaudited consolidated financial statements from which such
selected financial data are derived include all adjustments, consisting of
only normal recurring accruals, which management considers necessary for a
fair presentation.
The selected financial data of the Company set forth below as of June 30,
1996 and for the eight months ended June 30, 1996 are derived from the
Company's combined financial statements audited by Ernst & Young LLP,
independent auditors, included elsewhere in this Prospectus.
The selected financial data presented below and under "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
should be read in conjunction with the consolidated and combined financial
statements, including the notes thereto, appearing elsewhere in this
Prospectus.
SABAN ENTERTAINMENT, INC.
[Download Table]
FIVE MONTHS
YEAR ENDED MAY 31, ENDED
-------------------------------- OCTOBER 31,
1992 1993 1994 1995 1995
------- ------- ------- -------- -----------
(IN THOUSANDS)
STATEMENT OF OPERATIONS
DATA:
Revenues(1)............. $47,907 $57,244 $84,372 $242,468 $105,130
Costs and expenses:
Amortization of
programming costs,
residuals and
participations........ 33,043 39,703 48,101 117,557 42,022
Selling, general and
administrative
expenses.............. 5,853 6,255 8,933 51,894 11,538
------- ------- ------- -------- --------
Operating income........ 9,011 11,286 27,338 73,017 51,570
Interest expense........ 1,274 1,279 2,337 1,315 539
------- ------- ------- -------- --------
Income before income tax
expense................ 7,737 10,007 25,001 71,702 51,031
Income tax expense...... 536 1,600 8,201 27,027 14,289
------- ------- ------- -------- --------
Net income.............. $ 7,201 $ 8,407 $16,800 $ 44,675 $ 36,742
======= ======= ======= ======== ========
AS OF MAY 31, AS OF
-------------------------------- OCTOBER 31,
1992 1993 1994 1995 1995
------- ------- ------- -------- -----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 990 $ 1,554 $ 3,849 $ 14,584 $ 16,207
Programming costs, less
accumulated
amortization........... 42,258 60,279 85,079 115,873 118,210
Total assets............ 69,043 94,916 136,967 218,197 207,479
Long-term obligations
(including current
maturities)............ 25,330 28,933 34,023 5,623 5,605
Stockholders' equity.... 28,241 36,648 53,253 58,122 94,971
25
FCN HOLDING, INC. AND THE COMPANY
[Enlarge/Download Table]
FCN HOLDING || THE COMPANY
--------------------------------------------------- || --------------------
YEAR ENDED ||
-------------------------------------- ||
|| EIGHT PRO
FOUR MONTHS || MONTHS FORMA YEAR
ENDED || ENDED ENDED
JUNE 30, JUNE 27, JULY 3, JULY 2, OCTOBER 31, || JUNE 30, JUNE 30,
1992 1993 1994 1995 1995 || 1996 1996
-------- -------- -------- -------- ----------- || -------- -----------
STATEMENT OF OPERATIONS ||
DATA: (IN THOUSANDS) ||
||
Net revenues(1)......... $ 35,027 $ 85,729 $130,600 $168,871 $46,286 || $191,621 $327,105
Costs and expenses: ||
Amortization of ||
programming costs, ||
residuals and ||
participations........ 26,954 67,804 98,725 109,259 29,698 || 98,937 159,711
Fees and costs to a ||
related party......... 4,434 14,682 20,861 24,713 7,313 || --
Selling, general and ||
administrative ||
expenses.............. 3,275 3,810 3,579 5,202 2,566 || 23,072 36,735
Fox Kids Network ||
affiliate ||
participation......... -- -- -- 11,523 6,883 || 8,853 13,554
-------- -------- -------- -------- ------- || -------- --------
Operating income ||
(loss)(2).............. 364 (567) 7,435 18,174 (174) || 60,759 117,105
Investment advisory fee. -- -- -- -- -- || 10,000 10,000
Interest expense........ 2,708 2,017 2,218 1,630 145 || 885 1,566
-------- -------- -------- -------- ------- || -------- --------
Income (loss) before ||
income tax expense..... (2,344) (2,584) 5,217 16,544 (319) || 49,874 105,539
Income tax expense...... -- -- -- -- -- || 18,274 34,169
-------- -------- -------- -------- ------- || -------- --------
Net income (loss)....... $ (2,344) $ (2,584) $ 5,217 $ 16,544 $ (319) || $ 31,600 $ 71,370
======== ======== ======== ======== ======= || ======== ========
AS OF || AS OF JUNE 30, 1996
--------------------------------------------------- || --------------------
JUNE 30, JUNE 27, JULY 3, JULY 2, OCTOBER 31, || AS
1992 1993 1994 1995 1995 || ACTUAL ADJUSTED(3)
-------- -------- -------- -------- ----------- || -------- -----------
BALANCE SHEET DATA: (IN THOUSANDS) ||
||
Cash and cash ||
equivalents............ $ 82 $ 304 $ 268 $ -- $ 317 || $ 16,044 $
Programming costs, less ||
accumulated ||
amortization........... 18,879 22,245 17,084 26,143 28,090 || 181,427
Total assets............ 27,321 39,476 35,950 49,816 52,792 || 336,270
Long-term obligations ||
(including current ||
maturities)............ 43,813 41,416 27,163 10,686 8,727 || 101,487
Stockholders' equity ||
(deficit).............. (22,991) (25,575) (20,356) (3,811) (4,130) || 72,831
--------
(1) Includes revenues recognized by Saban from FCN and by FCN from Saban as
set forth below:
[Download Table]
FIVE MONTHS FOUR MONTHS
FISCAL YEAR ENDED ENDED
----------------------------- OCTOBER 31, OCTOBER 31,
1992 1993 1994 1995 1995 1995
------ ------ ------- ------- ----------- -----------
(IN THOUSANDS)
Saban revenues from FCN. $ -- $2,535 $10,483 $16,228 $9,651 n/a
FCN revenues from Saban. -- -- 885 14,662 n/a $973
(2) Under agreements between FCN and Fox Broadcasting, for periods prior to
June 1, 1995, FCN paid administrative and other fees to Fox Broadcasting.
Effective June 1, 1995, Fox Broadcasting assigned to the Company its
rights to these payments. Amounts expensed under these agreements were
$2.7 million, $13.5 million, $19.8 million, $26.9 million and $9.1
million, for the years ended June 30, 1992, 1993, 1994 and 1995 and the
four months ended October 31, 1995.
(3) As adjusted to give effect to (i) the Offerings, (ii) the Reorganization
and (iii) the repayment by the LLC of $14.5 million of its $64.5 million
non-interest bearing indebtedness to Fox Broadcasting in September 1996,
and the receipt of $50 million of non-voting Class A Members Interests in
the LLC (see note 2 to "Capitalization") in exchange for the balance of
such indebtedness.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's current principal operations are conducted by FCN, Saban and
the LLC. FCN commenced operations with the launch, in September 1990, of the
Fox Kids Network, which is currently the top-rated children's oriented
broadcast television network in the United States. Saban, which commenced
business in the mid-1980's, is currently one of the largest suppliers of
children's television programming in the world. The LLC was formed by FCN
Holding (a parent of FCN) and Saban pursuant to agreements executed on
November 1, 1995, as a strategic alliance between Saban and FCN. Under the
terms of the agreements relating to the strategic alliance, since November 1,
1995 each of Saban and FCN have been operated by their respective managements
subject to the overall supervision by the Members Committee of the LLC.
The Company was incorporated in August 1996 in connection with the Offerings
to act as a holding company of FCN Holding, Saban and the LLC, and their
respective subsidiaries. The Company currently conducts no business or
operations. The Reorganization will be effected pursuant to an agreement among
the stockholders of FCN Holding and Saban, which was entered into in
connection with the formation of the LLC, and which, among other things,
specified the manner in which the companies should be combined at the time of
any public offering of the combined companies. After consummation of the
Offerings and the closing of the Reorganization, the Company's sole assets
will consist of the net proceeds of the Offerings and the capital stock of
Saban and FCN Holding.
Solely for financial statement presentation purposes, although the Company
will not acquire any of the shares of the capital stock of Saban until
immediately prior to the closing of the Offerings, and although the
Reorganization will not be effected until immediately prior to the closing of
the Offerings, as the result of the foregoing, the assets and liabilities of
Saban, FCN Holding and the LLC are being presented on a combined basis and
recorded at historical cost from and after the Effective Date.
Included in this Prospectus are (i) pro forma consolidated financial
statements of the Company for the year ended June 30, 1996, which on a
hypothetical basis reflect the accounts of the Company, FCN Holding, Saban and
the LLC as if the Reorganization had occurred as of July 3, 1995, (ii) the
consolidated financial statements of Saban covering the two year period ended
May 31, 1995 and the five month period ended October 31, 1995 (the close of
business prior to the Effective Date), (iii) the consolidated financial
statements of FCN Holding covering the two year period ended July 2, 1995, and
the four month period ended October 31, 1995, and (iv) the combined financial
statements of the Company (FCN Holding, Saban and the LLC) for the eight month
period commencing on the Effective Date and ending June 30, 1996.
The following discussion provides information and analysis with respect to
results of operations reflected in the financial statements included in this
Prospectus, as well as the liquidity and capital resources of the Company.
This discussion should be read in conjunction with the historical and pro
forma financial statements and related notes, "Selected Historical and Pro
Forma Consolidated Financial Data" and "The Reorganization" included elsewhere
in this Prospectus.
Use of Estimates
As is industry practice, management has made a number of estimates and
assumptions relating to the amortization of programming costs and the
reporting of assets and liabilities in the preparation of the financial
statements discussed herein. Actual results could differ materially from these
estimates. Management periodically reviews and revises its estimates of future
airings and revenues for program and film rights, as necessary, which may
result in revised amortization of its program and film rights and may be
significantly affected by the periodic adjustments in such amortization.
Revenue Recognition and Seasonality
Children's television programming revenues have historically represented a
significant portion of the Company's total revenues, and, for the fiscal year
ended June 30, 1996, accounted for approximately 55% of the Company's pro
forma consolidated revenues (see "Results of Operations"). Revenues from
television
27
programming lease agreements are recognized when the lease period begins,
collectibility is reasonably assured and the product is available pursuant to
the terms of the lease agreement. Advertising revenue is recognized as earned
in the period in which the advertising commercials are broadcast. For this
reason, significant fluctuations in the Company's revenues, and net income,
can occur from period to period depending upon the availability dates of
programs and advertising revenues. In the United States, revenues from
advertising targeted at children are concentrated in the fourth calendar
quarter, and in the international markets, a significant portion of revenues
are recognized in April and October. While 31% of the Company's pro forma
consolidated revenues for the fiscal year ended June 30, 1996 ("Fiscal 1996")
were recognized in the first fiscal quarter, in part as the result of
significant revenues from merchandising realized by the Company in that
quarter, the Company expects that its second and fourth fiscal quarters will
generally contribute a disproportionate share of total revenues for any fiscal
year. During the fiscal year ended June 30, 1996, 31% and 26%, respectively,
of the Company's pro forma consolidated television programming revenues were
recognized in the second fiscal quarter and fourth fiscal quarter of that
year. See "Risk Factors--Seasonality."
RESULTS OF OPERATIONS
Overview
The Company's revenues have historically been generated from (i) the
operations of FCN's Fox Kids Network, (ii) Saban's U.S. and international
distribution of children's television programming, (iii) the merchandising and
licensing of its characters and properties, (iv) home video and other
ancillary exploitation of its children's-oriented properties and (v) telefilms
and other non-children related activities.
The following tables set forth, for the periods indicated, certain data with
respect to revenues, and costs and expenses as a percentage of total revenues:
REVENUE SUMMARY
[Enlarge/Download Table]
SABAN ENTERTAINMENT, INC. FCN HOLDING, INC. || THE COMPANY
------------------------------------ -------------------------------------- || -----------------
|| PRO
|| EIGHT FORMA
YEAR ENDED MAY 31, FIVE MONTHS YEAR ENDED FOUR MONTHS || MONTHS YEAR
------------------------ ENDED -------------------------- ENDED || ENDED ENDED
OCTOBER 31, JUNE 27, JULY 3, JULY 2, OCTOBER 31, || JUNE 30, JUNE 30,
1993 1994 1995 1995 1993 1994 1995 1995 || 1996 1996
------- ------- -------- ----------- -------- -------- -------- ----------- || -------- --------
(IN THOUSANDS) ||
||
Revenues: ||
Children's programming: ||
U.S. television ||
distribution(1)...... $ 8,837 $11,995 $ 31,529 $ 14,823 $80,008 $124,666 $148,725 $42,845 || $ 85,883 $132,810
Foreign television ||
distribution(2)...... 27,060 16,367 29,944 19,931 -- -- -- || 29,389 47,480
Merchandising and ||
licensing, home video ||
and other ancillary ||
revenues............. 4,037 32,274 164,273 65,772 5,721 5,934 20,146 3,441 || 60,541 127,631
------- ------- -------- -------- ------- -------- -------- ------- || -------- --------
Total................. 39,934 60,636 225,746 100,526 85,729 130,600 168,871 46,286 || 175,813 307,921
------- ------- -------- -------- ------- -------- -------- ------- || -------- --------
Telefilms: ||
U.S. distribution..... 8,156 13,954 1,196 26 -- -- -- -- || 4,474 4,500
Foreign distribution.. 9,154 9,782 15,526 4,578 -- -- -- -- || 11,334 14,684
------- ------- -------- -------- ------- -------- -------- ------- || -------- --------
Total................. 17,310 23,736 16,722 4,604 -- -- -- -- || 15,808 19,184
------- ------- -------- -------- ------- -------- -------- ------- || -------- --------
Total revenues........ $57,244 $84,372 $242,468 $105,130 $85,729 $130,600 $168,871 $46,286 || $191,621 $327,105
======= ======= ======== ======== ======= ======== ======== ======= || ======== ========
Power Rangers-related ||
revenues as a ||
percentage of total ||
revenues............. 8% 55% 72% 66% -- 15% 33% 23% || 38% 44%
--------
(1) Television distribution in the United States consists principally of
advertising sales generated by FCN and barter advertising sales in
syndication generated by Saban.
(2) Foreign television distribution consists principally of cash transactions
with foreign broadcasters.
28
COSTS AND EXPENSES AS A PERCENTAGE OF TOTAL REVENUES
[Enlarge/Download Table]
SABAN ENTERTAINMENT, INC. FCN HOLDING, INC. || THE COMPANY
----------------------------- ------------------------------------- || -----------------
|| PRO
YEAR ENDED || EIGHT FORMA
MAY 31, FIVE MONTHS YEAR ENDED FOUR MONTHS || MONTHS YEAR
---------------- ENDED ------------------------- ENDED || ENDED ENDED
OCTOBER 31, JUNE 27, JULY 3, JULY 2, OCTOBER 31, || JUNE 30, JUNE 30,
1993 1994 1995 1995 1993 1994 1995 1995 || 1996 1996
---- ---- ---- ----------- -------- ------- ------- ----------- || -------- --------
||
Costs and expenses: ||
Amortization of films ||
and television costs, ||
residuals and ||
participations........ 69.4% 57.0% 48.5% 40.0% 79.1 % 75.6% 64.7% 64.2 % || 51.6% 48.8%
Affiliate ||
participations........ 6.8 14.9 || 4.6 4.1
Fees and costs to a ||
related party......... 17.1 16.0 14.6 15.8 || 0.0 0.0
Selling, general and ||
administrative ||
expenses.............. 10.9 10.6 21.4 11.0 4.4 2.7 3.1 5.5 || 12.0 11.2
---- ---- ---- ---- ----- ---- ---- ----- || ---- ----
Total costs and ||
expenses............ 80.3% 67.6% 69.9% 50.9% 100.6 % 94.3% 89.2% 100.4 % || 68.2% 64.1%
Operating income (loss). 19.7% 32.4% 30.1% 49.1% (0.6)% 5.7% 10.8% (0.4)% || 31.8% 35.9%
Comparability
Even though, for accounting purposes, FCN Holding is deemed the "surviving
company" in the Reorganization, the operating results of the Company for the
eight month period ended June 30, 1996 are not comparable to the financial
statements of FCN Holding for periods prior to the Effective Date. Subsequent
to the Effective Date, the operations of the Company for the first time
included both FCN Holding and Saban, and thus the combined profit for that
period can be attributable to the results of both operations.
In addition, since 1993, Saban has licensed to FCN the Power Rangers, as
well as other series, for broadcast on the Fox Kids Network, and the parties
have entered into other arm's-length transactions concerning licensing,
merchandising and promotional activities. The following table sets forth
revenues recognized by Saban from FCN, and revenues recognized by FCN from
Saban, in each period preceding the Effective Date:
[Download Table]
FIVE MONTHS FOUR MONTHS
FISCAL YEAR ENDED ENDED
---------------------- OCTOBER 31, OCTOBER 31,
1993 1994 1995 1995 1995
------ ------- ------- ----------- -----------
(IN THOUSANDS)
Saban revenues from FCN.......... $2,535 $10,483 $16,228 $9,651 n/a
FCN revenues from Saban.......... -- 885 14,662 n/a $973
Commencing on the Effective Date, all revenues between FCN and Saban have
been eliminated in the combined financial statements.
In addition, in connection with the formation of the LLC, Fox Broadcasting
and certain of its affiliate companies agreed, among other things, to assign
to the LLC, effective June 1, 1995, substantially all of their contracts with
FCN, and all revenues received or receivable from FCN (which had previously
been reflected as "fees and costs to related party" in FCN Holding's
statements of operations) thereafter.
Importance of the Power Rangers and Increased International Focus
Since its introduction in 1993, the Power Rangers series has been materially
important to the success and growth of the Company, and has accounted for a
significant portion of the Company's children's programming
29
revenues, foreign distribution revenues and merchandising and licensing
revenues. While ratings for the Power Rangers have somewhat declined, Power
Rangers remains the most watched children's program in the United States, as
well as in most of the international markets in which it is broadcast. Some
continued decline in Power Rangers related revenues may be expected. Material
declines in the viewership of the Power Rangers could materially and adversely
affect the Company's results of operations and financial condition. See "Risk
Factors--Dependence on Power Rangers."
In recent years, revenues derived from international operations have become
increasingly significant to Saban (representing 31% of the Company's pro forma
consolidated revenues for the fiscal year ended June 30, 1996). As part of its
business strategy, the Company intends to expand its international program
production and distribution activities. See "Business--Business Strategies"
and "--Distribution: Networks and Syndication--International Channels." It may
be expected that certain of these activities, such as the rollout of new
international channels, will require material marketing and other expenses in
advance of the receipt of related revenues, thereby adversely affecting the
Company's results of operations as these activities are expanded and the
international markets are developed.
Minimum guarantees to Fox Kids Network Affiliates
The Fox Kids Network Affiliates are entitled to receive participations in
"net profits" (as defined) of FCN; and through June 30, 1996, an aggregate of
$31.4 million in participations had been accrued to Fox Kids Network
Affiliates, of which $15 million has been paid through June 30, 1996. In
connection with the formation of the LLC, certain of the Fox O&O's have waived
their rights in favor of the Company to their share of Fox Kids Network net
profits participations (see "Business--Distribution: Network and Syndication--
Fox Kids Network").
In connection with the Reorganization, the Company has offered Fox Kids
Network Affiliates that, should the Company launch a block of children's
programming on a U.S. cable channel, the Company would share with the Fox Kids
Network Affiliates 50% of the "net profits" (adjusted to deduct all costs
related to the cable channel and a 15% administrative fee) realized by the
Company from such block of programming. In addition, the Company has offered
to guarantee that profit participations to Fox Kids Network Affiliates,
including the Fox O&O's (Fox O&O's have been entitled to approximately 31% of
distributions to date) from both the cable operations and from FCN will
aggregate at least $75 million over the five year period commencing January 1,
1997; to the extent that net profits distributed in any year are less than $15
million, subject to certain recoupment rights, the Company would advance the
shortfall (see "Business--Distribution: Networks and Syndication--Fox Kids
Network"). The Fox Kids Network Affiliates are currently considering this
offer. To the extent that this offer is accepted, amounts paid to non-Fox O&O
Kids Network Affiliates in excess of their participations in net profits will,
for accounting purposes, be treated as expenses. To the extent that net income
of FCN and such cable operations is significantly below the $15 million
amount, net income of the Company would be adversely affected.
PRO FORMA FISCAL YEAR ENDED JUNE 30, 1996
In the discussion and analysis which follows, the results of operations for
the period from July 3, 1995 to June 30, 1996 are combined for certain items
of revenue and expense for the purpose of presenting the pro forma results of
operations of the Company for the fiscal year ended June 30, 1996 ("Fiscal
1996") as if the Effective Date had been July 3, 1995 and the operations of
the Company had been combined since that date. Pro forma information for the
fiscal year ended July 2, 1995 ("Fiscal 1995") has been prepared on a similar
basis. These pro forma statements may not be indicative of the results that
actually would have occurred if the combination had been in effect on the
dates indicated or which may be obtained in the future. The pro forma
financial statements should be read in conjunction with the audited financial
statements and notes of the Company, FCN Holding and Saban contained elsewhere
herein.
The Company's pro forma consolidated revenues for Fiscal 1996 were $327.1
million, a 14% decline from the pro forma consolidated revenues of $380.4
million for the period from July 4, 1994 to July 2, 1995. On a pro forma
basis, U.S. broadcasting revenues from the Fox Kids Network decreased by $16
million, or
30
approximately 11%, from Fiscal 1995 to Fiscal 1996, primarily as the result of
the decline in ratings as compared to the prior year, offset, in part, by a 5%
increase in such revenues as a result of increases in rates (cost per thousand
viewers ("CPMs")) charged to advertisers. Management believes that the decline
in ratings of the Fox Kids Network (which during both periods remained the
number one rated U.S. children's network) was attributable to increased
competition from other children's services and an expected normal decline in
the ratings of Power Rangers from its previous extraordinary levels. Early
ratings results from the 1996-1997 broadcast season, which commenced in
September 1996, indicate a modest increase in Fox Kids Network ratings from
the comparable period of the prior year. However, children's preferences
change, and no assurance can be given that the Company will be able to sustain
this ratings improvement. See "Risk Factors--Possible Decline in Popularity of
Other Current Programs and Uncertainty of Acceptance of New Programs."
Merchandising, licensing and promotion royalties for Fiscal 1996 represented
approximately 35% of total pro forma consolidated revenues for the period.
Approximately 94% of these revenues were generated from the exploitation of
Power Rangers. Total merchandising, licensing and promotion pro forma
consolidated revenues related to Power Rangers in Fiscal 1996 were comparable
to those generated in the prior year. Royalties from home video distribution
during Fiscal 1996 decreased by approximately $24.2 million from the prior
year.
The balance of pro forma combined revenues for Fiscal 1996 was generated
principally from the foreign television distribution of children's programming
and telefilms. Revenues from foreign distribution of children's programming
increased by approximately $18.0 million, or 60%, from Fiscal 1995 to Fiscal
1996. Approximately 50% of this increase was attributable to the distribution
of the European co-production Iznogoud, with the balance attributable to an
increase in library sales. Revenues generated from the foreign distribution of
telefilms (see "Business--Home Video and Telefilms") for Fiscal 1996 were
comparable to the corresponding period of the prior year.
The Company and its predecessors have realized a significant reduction over
the past four years in amortization of programming costs, residuals and
participations ("Cost of Sales") as a percentage of total revenues. This
decrease in Cost of Sales as a percentage of total revenues is primarily
attributable to two factors--FCN's reduced dependence on programming supplied
by Warner Bros., and the significant increase in revenues from the Power
Rangers.
Historically, a significant portion of Fox Kids Network programming was
licensed from Warner Bros. under programming agreements which generally
required FCN to pay Warner Bros. 100% of broadcast revenues net, of
commissions, after payment of a 15% administration fee to Fox Broadcasting,
earned from Warner Bros.-supplied programming. The following table sets forth
the average number of Warner Bros. supplied programming hours broadcast or
scheduled to be broadcast by FCN each week during the periods indicated:
[Download Table]
AVERAGE FCN AVERAGE WARNER BROS.
HOURS BROADCAST HOURS BROADCAST ON
PER WEEK FCN PER WEEK
--------------- --------------------
Fiscal 1993.......................... 19 13 1/2
Fiscal 1994.......................... 19 11
Fiscal 1995.......................... 19 8 1/2
Fiscal 1996.......................... 19 5
Fiscal 1997.......................... 19 2 1/2
All broadcast commitments to Warner Bros. expire at the end of the current
(1996-1997) broadcast season.
The second factor contributing to the decrease over the past four years in
Cost of Sales as a percentage of total revenues is the significant increase in
Power Rangers-related revenues as a percentage of total revenues. The success
of Power Rangers has resulted in higher than normal profit margins, leading to
an overall decrease in Cost of Sales as a percentage of total revenues.
31
Affiliate participations as a percentage of pro forma consolidated total
revenues in Fiscal 1996 were approximately 4%, a significant reduction from
prior periods. This reduction is attributable primarily to the agreement of
the Fox Parties, effective June 1, 1995, to cause certain of the Fox O&O's to
waive the right to their share of Fox Kids Network affiliate participations
(see "Business--Distribution: Network and Syndication--Fox Kids Network").
Because of the determination of the Company to offer to guarantee minimum net
profit participation payments to Fox Kids Network Affiliates, the possibility
exists that this percentage relationship could increase in future periods. See
"--Minimum guarantees to Fox Kids Network Affiliates".
"Fees and costs to a related party" consists of administrative and other
fees charged by Fox Broadcasting to FCN. As described above, effective June 1,
1995, Fox Broadcasting and certain of its affiliates assigned to the LLC all
revenues received or receivable from FCN which had previously been reflected
in this item. As a result, no fees and costs to a related party are included
in the pro forma consolidated costs and expenses of the Company for Fiscal
1996.
Selling, general and administrative expenses, which were 11.2% of pro forma
consolidated total revenues for Fiscal 1996, include the combined overhead,
net of capitalized amounts, for FCN, Saban and the LLC during Fiscal 1996. In
Fiscal 1996, the Company recognized a non-cash $3.8 million charge as a result
of vesting under stock options granted by Saban to certain of its executive
officers; following the offerings, no similar charges are expected to be
required with respect to these options (see "Saban Entertainment, Inc.--Year
Ended May 31, 1995 ("Saban Fiscal 1995") compared with the year ended May 31,
1994 ("Saban Fiscal 1994")"). The Fiscal 1996 results also include a one-time
$10.0 million charge for investment advisory services to FCN Holding rendered
in connection with the formation of the LLC. Excluding the effect of charges
with respect to the options, and the one-time charge for investment advisory
services, selling, general and administrative expenses would have represented
approximately 7% of pro forma consolidated total revenues for fiscal 1996.
Selling, general and administrative expenses during Saban Fiscal 1995
included a charge of $18.1 million for bonus compensation paid to Haim Saban.
As discussed further below, no bonuses are payable to Mr. Saban for periods
subsequent to Fiscal 1995.
Primarily as a result of the factors discussed above, pro forma consolidated
net income increased by 5% from $68.2 million in Fiscal 1995 to $71.4 million
in Fiscal 1996.
SABAN ENTERTAINMENT, INC.
Five months ended October 31, 1995
Revenues for the five months ended October 31, 1995 totaled $105.1 million,
of which approximately 66% represented revenues attributable to Power Rangers,
as compared to 72% of Saban total revenues for the fiscal year ended May 31,
1995 ("Saban Fiscal 1995"). VR Troopers, Masked Rider and the European co-
production Iznogoud each contributed approximately 6% of revenues for the five
month period, and X-Men contributed just over 3%.
Cost of Sales for the five months ended October 31, 1995 was $42.0 million,
or 40% of total revenues for the period. Cost of Sales for Saban Fiscal 1995,
as a percentage of total revenues, was 48%. This improvement in Cost of Sales
as a percentage of revenues is attributable to an improvement in the gross
profit margin on Power Rangers. Gross profit from Power Rangers in Saban
Fiscal 1995 had been negatively impacted by costs of litigation which was
resolved during Saban Fiscal 1995.
Selling, general and administrative expenses for the five months ended
October 31, 1995 were $11.5 million, or approximately 11% of revenues for the
period. Selling, general and administrative expenses for Saban Fiscal 1995
were approximately 21% of revenues. This improvement in selling, general and
administrative expenses as a percentage of revenues is attributable to the
elimination of the contractual bonus payable to Haim Saban, and to a
significant reduction in non-cash charges related to stock options, both of
which are discussed further below. Excluding the effect of these items,
selling, general and administrative expenses would have been approximately 9%
of revenues for Saban Fiscal 1995.
32
Saban's effective tax rate for the five months ended October 31, 1995 was
28%. The effective tax rate for Saban Fiscal 1995 was 38%. This change is
attributable to an increase in foreign source revenues as a percentage of
total revenues.
Year ended May 31, 1995 ("Saban Fiscal 1995") compared with the year ended
May 31, 1994 ("Saban Fiscal 1994")
Revenues for Saban Fiscal 1995 increased 187% to $242.5 million from $84.4
million for the prior fiscal year. This increase is primarily attributable to
the success of Power Rangers, in particular, significant increases (626%) in
toy, merchandising and licensing royalties and, to a lesser extent, increases
in broadcast related revenues, home video royalties and ancillary revenues.
During Saban Fiscal 1995, toy, merchandising and licensing royalties increased
to $115.1 million from $13.4 million for the prior fiscal year, accounting for
64% of the increase in total revenues for the year. Home video royalties
generated by Power Rangers in Saban Fiscal 1995 increased by $9.9 million,
broadcast related revenues increased by $8.2 million, and ancillary revenues
from the Power Rangers live stage tour (all of the revenues of which were
realized in 1995), and the Power Rangers fan club, contributed another $13.0
million and $3.1 million, respectively, to the increase in revenues for the
year. The series VR Troopers and Sweet Valley High, which began broadcast in
the Fall of 1994, contributed another $22.7 million and $5.1 million,
respectively, of revenues for Saban Fiscal 1995.
Cost of Sales for Saban Fiscal 1995 decreased as a percentage of total
revenues from 57% in Saban Fiscal 1994 to 48% in Saban Fiscal 1995. In
dollars, Cost of Sales in Saban Fiscal 1995 increased 144% to $117.6 million
from $48.1 million for the prior year. Approximately 65% of this increase is
attributable to increases in the amortization of production costs and accrual
of profit participations in connection with the significant increase in
revenues from the Power Rangers, described above. To a lesser extent, Cost of
Sales increased as a result of amortization of production costs related to the
series VR Troopers and Sweet Valley High.
Selling, general and administrative expenses for Saban Fiscal 1995 increased
483% to $51.9 million from $8.9 million for the prior year. This increase is
primarily attributable to $18.1 million in bonus compensation paid Haim Saban
pursuant to his previous employment agreement, and the recognition of a non-
cash $11 million charge related to stock options granted by Saban to certain
of its executive officers. On December 22, 1995, Mr. Saban entered into a new
employment agreement with the LLC pursuant to which his compensation has been
fixed, commencing July 1, 1995, at $1 million per year. The charge with
respect to options was required because of a provision in the option
agreements which obligates Saban, so long as it remains private, to repurchase
the option shares, and vested options, at fair market value upon termination
of the optionee's employment. Following the Offerings, no similar charges are
expected to be required with respect to these options.
The balance of the increase in selling, general and administrative expenses
for Saban Fiscal 1995 as compared to Saban Fiscal 1994 can be attributed to
increased legal and personnel costs associated with the growth of Saban.
Excluding the effect of Mr. Saban's bonus, and charges with respect to the
options, selling, general and administrative expenses would have decreased as
a percentage of total revenues from 11% in Saban Fiscal 1994 to 9% in Saban
Fiscal 1995.
Saban's effective tax rate for Saban Fiscal 1995 increased to 38% from 33%
for the prior fiscal year. This increase in the effective tax rate resulted
from an increase in income generated in the United States as a percentage of
total revenues. As noted in the notes to Saban's consolidated financial
statements, earnings from Saban's foreign subsidiaries are considered to be
indefinitely reinvested. Accordingly, no provision for U.S. Federal or state
income taxes has been recorded in connection with foreign earnings. To the
extent that Saban's international operations continue to expand, it can be
expected that the effective tax rate would decline.
Year ended May 31, 1994 ("Saban Fiscal 1994") compared with the year ended
May 31, 1993 ("Saban Fiscal 1993")
Revenues for Saban Fiscal 1994 increased 48% to $84.4 million from $57.2
million for Saban Fiscal 1993. Of this increase, $41.7 million of this
increase is attributable to the initial release in August 1993 of Power
33
Rangers, and $8 million is attributable to an increase in revenues from
telefilms, offset by a reduction in sales of library programming. During Saban
Fiscal 1994, Saban realized significant increases in revenues generated by
Power Rangers from worldwide home video sales, worldwide licensing and
merchandising royalties and broadcast fees for Germany.
Cost of Sales for Saban Fiscal 1994 decreased as a percentage of total
revenues from 69% in Saban Fiscal 1994 to 57% in Saban Fiscal 1993, but
increased in dollars by 21%, to $48.1 million from $39.7 million for the prior
fiscal year. Amortization of film costs and the accrual of profit
participations related to Power Rangers increased $11.7 million in Saban
Fiscal 1994 and amortization on telefilms increased by $6.1 million as a
result of the increase in related revenues. The reduction in library revenues
resulted in a decrease in amortization related thereto.
Selling, general and administrative expenses for Saban Fiscal 1994 increased
41% to $8.9 million from $6.3 million for the prior fiscal year, but as a
percentage of total revenues remained relatively constant. This increase is
the result primarily of increased personnel costs associated with Saban's
revenue growth.
Saban's effective tax rate for Saban Fiscal 1994 increased to 33% from 16%
for the prior fiscal year. This increase is primarily related to an increase
in U.S. revenues resulting from the release of Power Rangers in September
1993.
FCN HOLDING, INC.
Four months ended October 31, 1995
Revenues for the four months ended October 31, 1995 were $46.3 million and
Cost of Sales as a percentage of revenues was 64%. Cost of Sales as a
percentage of revenues for the four month period is comparable to Cost of
Sales as a percentage of revenues for Fiscal 1995. The administrative fee
payable to Fox Broadcasting is based upon a percentage of net advertising
revenues, and thus varied in direct proportion to revenues.
Selling, general and administrative expenses for the four month period
increased from the prior year, both on a pro rata basis and as a percentage of
revenues. This increase in selling, general and administrative expenses is
attributable primarily to increased promotion costs of FCN.
Fiscal 1995 compared with Fiscal 1994
Revenues for Fiscal 1995 increased 29% to $168.9 million from $130.6 million
for Fiscal 1994. This increase of $38.3 million is attributable to an increase
in net revenues from advertising sales of $24.0 million, with the balance
related to an increase in ancillary revenues. This increase in revenue was
primarily a result of the success of Power Rangers, and to a lesser extent, to
the strength of the advertising market.
Cost of Sales as a percentage of revenues was 65% for Fiscal 1995 as
compared to 76% for Fiscal 1994. Cost of Sales for Fiscal 1995 increased 11%
to $109.3 million from $98.7 million for Fiscal 1994. While the overall
increase in Cost of Sales for Fiscal 1995 is attributable to the 29% increase
in revenues described above, the improvement in gross margin is attributable
principally to the increase in revenues related to Power Rangers, which
generated significantly higher gross margins than other FCN programming, as
well as to a reduction in the number of Warner Bros. supplied programming
hours.
The administrative and other fees payable to Fox Broadcasting for Fiscal
1995 increased 20% to $21.5 million from $17.9 million for Fiscal 1994. The
administrative fee is based, in part, upon net advertising revenues and the
increase for the year is directly attributable to the increase in net
advertising revenues for the year.
The Fox Kids Network affiliation agreements provide that FCN is to pay to
each of the Fox Kids Network affiliates (including Fox O&O's) participation
based upon the cumulative "net profits" (as defined) of FCN. Fiscal 1995 was
the first year in which FCN reached a level of defined net profits on a
cumulative basis. Therefore, Fiscal 1994 did not reflect a charge for
affiliate participations.
34
Since the net profits of FCN are distributed to the affiliates, no taxes
have been provided on the income of FCN.
THE COMPANY
Eight Months ended June 30, 1996
The discussion and analysis for the eight months ended June 30, 1996 which
follows should be read in conjunction with the above discussion and analysis
for the pro forma consolidated results of operations for the fiscal year ended
June 30, 1996.
The following table compares the Company's revenues, by category, for the
eight months ended June 30, 1996 to the pro forma consolidated revenues for
the year ended June 30, 1996:
REVENUE SUMMARY
[Download Table]
EIGHT MONTHS ENDED PRO FORMA YEAR ENDED
JUNE 30, 1996 JUNE 30, 1996
----------------------- -----------------------
DOLLARS DOLLARS
IN PERCENTAGE OF IN PERCENTAGE OF
THOUSANDS TOTAL THOUSANDS TOTAL
--------- ------------- --------- -------------
Revenues:
Children's programming:
U.S. television distribu-
tion(1)................... $ 85,883 45% $132,810 40%
Foreign television distri-
bution(2)................. 29,389 15 47,480 15
Merchandising and licens-
ing, home video and other
ancillary revenues........ 60,541 32 127,631 39
-------- --- -------- ---
Total.................... 175,813 92 307,921 94
Telefilms:
U.S. distribution............ 4,474 2 4,500 1
Foreign distribution......... 11,334 6 14,684 5
-------- --- -------- ---
Total.................... 15,808 8 19,184 6
-------- --- -------- ---
Total revenues................. $191,621 100% $327,105 100%
======== === ======== ===
Revenues from the U.S. television distribution of children's programming
during the eight months ended June 30, 1996 represented 45% of total revenues
during the eight month period, as compared to 40% of pro forma consolidated
revenues for the year ended June 30, 1996. For the eight month period ended
June 30, 1996, revenues from merchandising and licensing, home video and other
ancillary revenues represented 32% of total consolidated revenues, as compared
to 39% of pro forma consolidated revenues for the year ended June 30, 1996.
These changes in relative contribution to total revenues during the periods
are directly attributable to the inclusion in the pro forma consolidated
revenues of the results of operations of Saban for the four months ended
October 31, 1995. During the four months ended October 31, 1995, U.S.
television revenues for Saban represented 14% of its revenues for the period
and merchandising and licensing, home video and other ancillary revenues
represented 63% of its revenues for the period.
Cost of Sales and affiliate participations as a percentage of revenues for
the eight months ended June 30, 1996 were comparable to the pro forma
consolidated results for the year ended June 30, 1996.
Selling, general and administrative expenses were approximately 12% of
revenues for the eight months ended June 30, 1996. Included in selling,
general and administrative expenses for the eight month period was a $10
million charge for investment advisory services rendered to FCN Holding in
connection with the formation of the LLC. Without this charge, selling,
general and administrative expenses as a percentage of revenues would have
been approximately 7%.
35
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise primarily from (i) its working
capital needs, principally costs related to the development, production and
acquisition of children's programming, accounts receivable and other related
operating costs, and (ii) the international expansion of its operations (see
"Business--Business Strategies"). During the fiscal year ended June 30, 1996,
the Company also expended significant funds in connection with the
transactions relating to the formation of the LLC and the Reorganization. The
Company on a regular basis has had, and intends to continue to engage in,
exploratory discussions concerning programming and other acquisition
opportunities, and any such acquisition could result in additional
requirements for liquidity.
The discussion of comments of cash flows of Saban and FCN Holding for the
five and four months periods ended October 31, 1995, as applicable, includes
items of cash flow between these two companies (which are eliminated in the
combined cash flows for the eight month period ended June 30, 1996).
Management does not consider the existence of such intercompany items to be
material to an understanding of cash flows for Fiscal 1996. See "--Result of
Operations--Overview."
Net cash provided by (used in) operating activities (i) of the Company
during the eight month period ended June 30, 1996, (ii) of Saban during the
five month period ended October 31, 1995 and (iii) of FCN Holding during the
four month period ended October 31, 1995 were $12.9 million, $5.6 million and
$2.3 million, respectively. During this period, the Company distributed an
aggregate of $10.3 million to non-Fox O&O Affiliates. See "--Results of
Operations--Overview--Minimum guarantees to Fox Kids Network Affiliates."
Net cash provided by (used in) investing activities (i) of the Company
during the eight month period ended June 30, 1996, (ii) of Saban during the
five month period ended October 31, 1995 and (iii) of FCN Holding during the
four month period ended October 31, 1995, were $7.4 million, ($4.0 million)
and ($.03 million), respectively. The Company's net cash flow from investing
activities included $5.8 million (net of cash received) incurred in connection
with the purchase of U.S. and international programming and libraries, and
$16.2 million, representing Saban's cash balances at November 1, 1995. The net
cash flows used in investing activities of Saban and FCN Holdings related to
the purchase of property and equipment during the period.
Net cash provided by (used in) financing activities (i) of the Company
during the eight month period ended June 30, 1996 and (ii) of FCN Holding
during the four month period ended October 31, 1995, were ($4.5 million) and
($2.0 million), respectively. Net cash flows from financing activities of
Saban during the five month period ended October 31, 1995 were not
significant. The principal financing activities of the Company related to
agreements entered into in connection with the formation of the LLC, pursuant
to which Fox Broadcasting loaned the LLC $64.5 million, and the LLC paid the
stockholders of Saban an aggregate of $80.1 million in connection with rights
acquired under the Stock Ownership Agreement. See "Certain Transactions--
Formation of LLC and the Reorganization."
The Company's total unrestricted cash balances at June 30, 1996 were $16.0
million. Saban and its Saban International N.V. subsidiary have credit
facilities, currently aggregating $50 million, with a syndicate of banks.
Borrowings under these facilities are based upon the value of collateral
available to the banks. The credit facilities restrict payment of dividends,
and contain certain restrictive covenants regarding, among other things, the
maintenance of certain financial ratios and restrictions on the distribution
of assets. At June 30, 1996, no amounts have been borrowed under these credit
facilities. See Note 5 of Notes to the Company's combined financial
statements. Following the Offerings, the Company intends to seek expansion of
these credit facilities. However, no assurance can be given that the Company
will be successful in its efforts to expand these facilities.
The Company recently launched a DTH satellite and cable television
children's service in the United Kingdom and Republic of Ireland, and plans to
launch additional international channels over the next two years (see
"Business -- Distribution: Networks and Syndication -- International
Channels"). The Company has also explored and continues to explore
opportunities to develop a U.S. cable network. The Company also, from time to
time, considers the acquisition of other children's-oriented television
programming distribution and production
36
companies, entertainment companies and libraries. The Company plans to produce
and release from 15 to 20 telefilms annually with an expected production
budget ranging from $500,000 to $1 million for each picture, and the Company
also plans to produce or co-produce a limited number of limited theatrical
release or direct-to-video children's films with expected production budgets
ranging from $3.0 million to $6.0 million for each film. The Company cannot
estimate with any degree of certainty the amount of other expenditures it may
make in the future in connection with such investments and acquisitions,
although if many of the Company's plans in this regard materialize, such
expenditures could be substantial. The Company anticipates funding all such
other investments and acquisitions from proceeds of the Offerings, internally
generated cash flow, additional borrowings, or additional issuances of its
Class A Common Stock.
The Company believes that the net proceeds of the Offerings, together with
cash flow from operations and borrowings under the Company's current borrowing
facilities, should be sufficient to fund its operations for the foreseeable
future.
37
BUSINESS
The Company is a fully-integrated global children's television entertainment
company which develops, acquires, produces, broadcasts and distributes quality
animated and live-action children's television programming. The Company's
current operations are conducted by (i) FCN, which operates the Fox Kids
Network--the top-rated children's (ages 2-11) oriented broadcast television
network in the United States and (ii) Saban, whose library of more than 3,700
half-hours of children's programming is among the largest in the world. The
Company is the result of the joint venture launched in 1995 by Fox
Broadcasting and Saban to match the complementary programming and broadcasting
strengths of the Fox Kids Network and the international reach of Fox
Broadcasting's parent company, News Corp., with the development, production,
distribution and merchandising strengths of Saban. This combination has
created a company with the ability to manage children's properties and brands
from the initial creative concept through production, broadcast and the
merchandising of related consumer products.
Children represent an important and growing segment of the global consumer
market. The steady rise in birth rates and an increase in children's
purchasing power has resulted in increased marketing expenditures on products
targeted toward children. In the United States alone, children influence
spending decisions on over $150 billion worth of products annually. In order
to reach this market, manufacturers and other companies targeting children
devote significant resources to advertising and in the 1995-96 broadcast
season, an estimated $725 million was spent in the United States on
advertising directed at children. Spending by these advertisers is
concentrated on television commercials; and over 80% of children report
learning about new products through watching television. The growth in
advertising expenditures aimed at children has led to the increased demand for
children's programming from a growing group of basic cable and broadcast
television services targeting children, including the Fox Kids Network and the
Company's Saban Kids Network. While television programming targeted toward
children in the United States has developed significantly over the past
several years, the Company believes that the children's television
entertainment market in most countries remains relatively underserved.
The Company creates, produces and acquires quality animated and live-action
children's television programming with brand-name characters and elements
which are either widely known to children, such as Power Rangers, The Tick, X-
Men and Bobby's World, or which are or have been developed or acquired due to
their likelihood of maturing into popular brands. The Company produced 13
series in the 1995-1996 broadcast season and is currently producing 16 series
for the 1996-1997 broadcast season, including Power Rangers, which since
shortly after its launch in 1993 has been the highest rated children's
television program in the United States, as well as in most of the
international markets in which it is broadcast.
The Company operates the Fox Kids Network, the leading U.S. children's
broadcast television network, and the Saban Kids Network, an ad hoc syndicated
distribution network. Collectively, these outlets will broadcast 26 1/2 hours
of children's programming per week during the 1996-1997 broadcast season, more
than double the number of hours broadcast by its nearest competitor, The Walt
Disney Company. The Fox Kids Network, launched in 1990, will broadcast 19
hours of children's programming each week during the 1996-1997 broadcast
season to 97% of U.S. television households, the broadest reach of any network
targeting children. The Fox Kids Network was formed by Fox Broadcasting and
most of the FOX Television Network member stations to provide children's
programming weekday mornings and afternoons, and Saturday mornings. The Fox
Kids Network has been the number one rated children's broadcaster for each of
the past three seasons, and has had the highest viewership among children in
its time period during 15 consecutive "sweeps" periods. According to Nielsen,
20 million children--approximately 52% of all children in the United States--
watch the Fox Kids Network at least once each month. This network affords
advertisers the opportunity to reach children in a cost-effective manner,
while ensuring a consistent "day-and-date" placement of their advertisements
in each television market. The Fox Kids Network's advertising customers
include virtually every major advertiser to children. The Company also
distributes 7 1/2 hours of programming each week through the Saban Kids
Network which enables its programming on a weighted average basis to reach
over 86% of the television households in the United States.
38
One of the essential attributes of quality children's programming is its
"portability." Children's programming produced for exhibition in a particular
country is considered "portable" because it can generally be modified at
modest cost and resold for exhibition in other countries through editing and
dubbing into other languages. The Company currently distributes its
programming over terrestrial broadcast services in most major television
markets throughout the world. To further capitalize on its broad library of
children's programming and its current relationship with News Corp.--which has
significant equity interests in cable and satellite services in most
international markets--the Company has recently agreed or agreed in principle
to launch full time or partial day "Fox Kids" branded DTH satellite and cable
channels in various markets in Europe and Latin America. On October 19, 1996,
the Company launched a Fox Kids branded channel as part of BSkyB's Sky
Multichannels package, which through DTH and cable services, is currently
estimated to reach over 5.5 million viewers in the United Kingdom and Republic
of Ireland. Subject to completion of negotiation of definitive agreements,
additional international channels are currently contemplated to be launched
over the next two years on DTH and cable in Latin America and Asia. See "--
Distribution: Networks and Syndication--International Channels." In Australia,
the Foxtel cable service has been carrying a Fox Kids Network children's
channel segment since 1994 under a license recently assigned to the Company by
Fox Broadcasting.
Children's programming provides excellent opportunities for licensing and
merchandising, and the Company has been successful in licensing its properties
for use in toys and other children's products. The Company attempts to retain
worldwide rights to its brands, and licenses their use to manufacturers for
specific products in exchange for royalties, typically accompanied by cash
advances. The Company currently has toy licenses with Bandai, Mattel, Hasbro
and Toybiz, as well as licenses for other merchandise with over 500 licensees
worldwide. The Company also realizes revenues through the distribution of its
programs in the U.S. and international home video markets. Through an
agreement in principle entered into with Fox Video, the Company is positioned
to increase materially its presence in the children's home video market.
The Company believes that as a result of its strengths in substantially all
facets of the children's television entertainment business, it is well
positioned to exploit a broad range of domestic and international children's
entertainment opportunities, including television, merchandising, licensing
and home video. The Company intends to expand its business in the United
States by capitalizing on the network strengths of the Fox Kids Network and
the production and distribution strengths of Saban. As satellite and cable
services continue to expand and become more prevalent worldwide, the Company
plans to launch additional international children's television channels under
the "Fox Kids" name. As the Company continues to expand the distribution
outlets which the Company controls, the Company believes that it will also be
able further to develop new programs, grow its library of children's
programming, build on its popular and branded characters and increase revenue
from its licensing and merchandising activities.
INDUSTRY OVERVIEW
Children's Television
The U.S. television market is served principally by network-affiliated
stations, independent stations and cable or satellite television operators.
Historically, four major broadcast networks--ABC, CBS, FOX and NBC--
collectively have been watched by the vast majority of the television viewing
audience. In recent years UPN and WB have been launched as new national
broadcast television networks. Additional television entertainment options,
including cable channels and DTH satellite services, have also been launched
in recent years.
The networks and cable channels have increased the amount of children's
television programming broadcast in recent years. Because network affiliates
generally broadcast network programming nationwide, generally at the same
local time and on the same day, the formation of a children's network, such as
the Fox Kids Network, has allowed advertisers to efficiently plan and execute
their national advertising campaigns. As other networks recognized the value
of providing programming for this audience, the number of services offering
children's programming blocks has expanded. Weekend morning children's
programming now airs on Fox Kids Network, ABC, CBS, UPN Kids and Kids WB. In
addition, Fox Kids Network and Kids WB broadcast animated and live-action
programming for children Monday through Friday mornings and afternoons. For
the 1996-97 broadcast
39
season, children's animated and live-action programming will occupy
approximately 40 hours of air time per week on the U.S. broadcast television
networks. UPN and the USA cable network, as well as many first-run
syndicators, provide children's programming blocks on Sunday mornings. Cable
channels which broadcast advertiser-supported children's programs include The
Cartoon Network, Nickelodeon, USA cable network and The Family Channel.
In the United States, an estimated $725 million was spent in the 1995-1996
broadcast season by advertisers on children, and expenditures have grown at an
average annual rate of 13% since 1990. For the period from September 1995
through May 1996, national advertiser expenditures on television commercials
targeting children, including major toy companies such as Mattel and Hasbro,
other children's consumer product companies such as Kellogg's and Quaker Oats,
and major fast food chains such as McDonald's, Burger King and Taco Bell were
over $230 million in the aggregate.
The growth in the number of international television outlets has created
additional global demand for children's programming. The privatization of the
international television industry has encouraged a ratings/revenue-oriented
focus among international broadcasters, increasing the demand for high-quality
television entertainment. Children's programs produced in the United States
have enjoyed wide acceptance internationally. In addition, the number of cable
and satellite programming services addressing the international community has
grown significantly in recent years. These added programming services have
created an opportunity for distributors, including the Company, to license
simultaneously both traditional broadcast and DTH satellite programing rights
within the same territory. International television, cable, DTH satellite and
home video sales of a children's program produced in the United States can
account for more than half of the revenue for a given program.
Suppliers and Distributors
Suppliers of television programming include the production divisions and
affiliated companies of the major motion picture studios, independent
production companies, syndicators, broadcast television networks, station
owners and advertising agencies. These suppliers sell programming to broadcast
networks or television stations for a fixed cash fee per episode, by barter,
or by a combination of cash and barter. Virtually all children's programming
sold though syndication is sold by barter, where a syndicator obtains
commitments from television stations to broadcast a program at a certain time,
retains a portion of the advertising time in the program in lieu of receiving
cash licensing fees and sells the retained advertising time for its own
account to national advertisers.
Broadcasters of children's television programming in the United States
consist primarily of networks (both over the air broadcast television networks
and basic cable networks) and independent television stations. Distributors of
children's programming generally sell television series to networks on a cash
basis and sell to independent television stations on a barter basis. Networks
typically pay a distributor a fixed cash license fee which entitles the
network to a number of runs of a series over a defined period of time.
Networks are generally entitled to retain 100% of the advertising revenues
generated by the broadcast of a series and sell advertising spots to national
advertisers on the basis of guaranteed ratings.
Independent television stations, which obtain series programming through
barter transactions, agree to provide a distributor with a certain number of
advertising spots during each broadcast of the series on the station in
exchange for the local broadcast rights. The advertising spots retained by the
independent station are sold by the station on a local basis. The advertising
spots retained by the distributor are sold to national advertisers on the
basis of guaranteed ratings. Nielsen periodically publishes data on the
percentage of viewers actually watching each program. If the actual viewership
falls below the guaranteed rating, the distributor or network, as the case may
be, generally provides the advertiser with "make-goods"--additional airings of
the advertiser's commercial in order to achieve the promised audience level--
or in some cases, cash refunds. When selling national advertising time, the
network or distributor typically holds back a certain number of advertising
spots to be used as future "make-goods." Since stations do not receive any
compensation for delivering ratings in excess
40
of the guarantee, and "make-goods" lower the inventory of available commercial
time which can be sold on an up-front basis, accurately predicting a series'
rating is important to maximizing advertising revenues.
Licensing and Merchandising
In addition to utilizing television to advertise products to children,
children's programming itself provides broad licensing and merchandising
opportunities. Characters developed in a popular series, and often the series
themselves, achieve a high level of recognition and popularity among children,
making them valuable assets for the licensing and merchandising market, where
they can provide attractive "branding" opportunities. The children's market is
one of the fastest growing segments in licensed merchandising sales, with over
70% of the $6 billion spent in the United States on entertainment and
character-related properties in 1995 relating to children-oriented products.
Among the most popular licensed items are toys, t-shirts, food,
dinnerware/lunch boxes, watches and soft vinyl goods such as boots, backpacks
and raincoats. There are currently over 38 million children in the United
States between the ages of 2-11, with approximately 4.5 million children
entering the marketplace annually, and the average annual amount spent on toy
purchases for a child up to ten years of age is estimated at between $240 and
$300.
BUSINESS STRATEGIES
The Company intends to continue to increase its presence in the children's
television entertainment business, with the goal of becoming the leading
worldwide producer, broadcaster and distributor of children's television
programming. The principal elements of the Company's strategies for achieving
this objective include the following:
Develop Strong Branded Characters and Properties. Strong characters and
names not only dramatically improve the ratings, longevity and worldwide
distribution potential of programming, but also develop household name
"franchise values," which are leveragable into merchandising, movies and
spin-off and sequel shows. The Company intends to continue to create and
develop new entertainment properties with potential franchise value and to
further build on its existing and widely recognized institutional and
programming brands. Some of the Company's programming, such as the Power
Rangers, have already achieved franchise status, and their high consumer
awareness should provide opportunities to generate revenues from multiple
sources on a long-term basis (the Company expects to continue periodically
to freshen these series with new characters and other creative elements).
In addition, the Company's agreement with Marvel Entertainment Group
("Marvel") should provide access to many well-known comic book characters
(see "--Programming--Relationships with Marvel and Toei"). On an
institutional basis, the Fox Kids Network is a known leader in the United
States, and the Fox Kids and Saban names are recognized by broadcasters
internationally for popular and high quality programming. The Company
intends to use its Fox Kids brand for all of its international channels.
Maximize Revenue from Licensing and Merchandising. The Company intends to
capitalize on the popularity and recognition of its properties in all media
and markets, including toys, merchandising, home video and consumer
products. The Company plans to leverage the expertise it has developed
through its merchandising campaigns for Power Rangers, which have generated
retail sales in excess of $2.0 billion since 1993, and the relationships it
has built with major retailers, toy companies and more than 500 licensees
worldwide, to exploit the merchandising and other ancillary revenue
potential of its properties. Revenues from the licensing and merchandising
of the Company's branded characters and properties have contributed
materially to the Company's operating results, and represented
approximately 35% of the Company's pro forma consolidated revenues for the
fiscal year ended June 30, 1996.
Strengthen U.S. Broadcasting and Distribution Operations. The Company
strives to maintain and improve the ratings, reach and penetration of its
U.S. broadcasting and distribution operations. The Fox Kids Network is the
top-rated children's oriented broadcast television network in the United
States, currently reaching 97% of the television households in the United
States. The Saban Kids Network, an ad hoc syndicated network of independent
stations, currently broadcasts 7 1/2 hours of children's programming each
41
week, with market reach, on a weighted average basis, to over 86% of U.S.
television households. The Company plans to seek to further improve its
ratings for both of its U.S. services, and to expand the reach of its Saban
Kids Network, by continuing to develop, acquire or license quality
programming which is attractive to children. The Company, which has created
such "hit" programs as the Power Rangers and Bobby's World, currently owns
most of the underlying rights to 15 of the 21 programs broadcast on its
networks, and will strive to increase the number of its owned programs
broadcast. This integration of ownership and distribution has the potential
to enhance the profitability of both the Fox Kids Network and the Company's
programming. In addition, its competitive position and reputation have
improved the Company's ability to attract quality sources for its
programming, such as those series opportunities available to the Company
under its recent agreement in principle with Marvel. See "--Programming--
Relationships with Marvel and Toei."
Broaden International Television Channels. The Company believes that
significant expansion opportunities exist in the international television
markets, where the Company believes that children's programming has been
relatively underserved. With its library of over 3,700 half-hour episodes
of children's programming, a significant portion of which meet the "local
content" requirement of various European countries, the Company intends to
focus significant resources on the expansion of its international
operations. The Company has an important strategic advantage because of its
current relationship with News Corp., and News Corp.'s interests in
international television distribution platforms have been helpful in
securing carriage agreements on those platforms. The Company intends to
expand globally the Fox Kids Network by launching "Fox Kids" branded cable
and DTH satellite channels targeting children in all major territories, and
the Company has recently entered into agreements or agreements in principle
to launch channels in the United Kingdom and Republic of Ireland and Latin
America, and is currently in active negotiations to launch several channels
in Europe and Asia. See "--Distribution: Networks and Syndication--
International Channels."
Expand Breadth and Depth of Programming Library. As services targeting
children expand worldwide, competition for access to attractive children's
programming has intensified. By owning a large, diversified library of
easily portable children's television programming, the Company has been
able to provide a consistent supply of programming for its own U.S. and
international broadcast and distribution operations without reliance on
third party suppliers, and believes that it is important to continue to
expand this library. The Company intends to continue to build its library
through internal creation, development and production, by pursuing co-
production arrangements with international partners and by acquiring
properties and libraries from third parties. In the twelve month periods
ended June 30, 1994, 1995 and 1996, the Company added 165, 343 and 1,595
half-hour episodes, respectively, to its library, which as of June 30,
1996, included 3,721 half-hour episodes of children's programming.
By managing every stage of the children's television business, from the
creation and production of programming to the worldwide licensing and
merchandising of properties, the Company believes it will be able to
coordinate all forms of exploitation in tandem with the timing of television
broadcasts on a worldwide basis with the goal of maximizing market reach and
revenues.
PROGRAMMING
The Company creates, produces and acquires quality animated and live-action
children's television programming. The Company believes that its library of
more than 3,700 half-hours of children's television programming is one of the
largest children's libraries in the world. The principal programming objective
of the Company is to develop or acquire on a cost-effective basis appealing
characters and concepts that can be commercially exploited throughout the
world through television exhibition, home video sales, licensing and
merchandising.
One of the essential attributes of quality children's programming is its
"portability." Children's programming produced for exhibition in a particular
country is "portable" because it can generally be modified
42
at a modest cost and resold for exhibition in other countries through editing
and dubbing into other languages. The Power Rangers live-action series is an
example of this portability. Since its launch on the Fox Kids Network in
August 1993, Power Rangers has been the number one rated children's television
program in the United States. In 1992, the Company acquired rights from Toei,
a leading Japanese film company, to adapt, as the Power Rangers, a Japanese
program for sale and distribution throughout the world (other than certain
parts of Asia). The genre of programming which includes Power Rangers has been
continuously exhibited in Japan for over 25 years. By adapting the series for
the U.S. television market and acquiring broad U.S. and international rights
to license and otherwise exploit the series, the Company has developed a long-
running popular television series with extensive brand appeal. For the year
ended June 30, 1996, Power Rangers-related revenues (including broadcasting,
licensing and other merchandising revenues) accounted for approximately $142.7
million, or 44% of the Company's pro forma consolidated revenues. From time to
time, the Company refreshes the Power Rangers characters by changing their
costumes and ethnicity and last year introduced a sequel, Power Rangers Zeo.
Power Rangers is currently being broadcast in approximately 40 countries,
including Germany, the United Kingdom, France, Latin America and Australia.
Programming Library
As of June 30, 1996, the Company's library of children's programming was
comprised of 3,721 half-hour episodes. The two principal sources of the
Company's programming library are (i) television series that have been
originally produced by the Company for broadcast in the United States and
internationally (approximately 1,160 half-hours) and (ii) programming produced
by others for which the Company has acquired various distribution rights
(approximately 2,561 half-hours), of which approximately 40% have been
"freshened" with new scripts, voices and music prior to distribution. Of the
Company's library, 1,262 half-hours are original co-produced programming that
meet applicable European content requirements and are intended for initial
broadcast in Europe.
Approximately 86% of the library is animated programming, and the balance is
live-action. The Company believes that its distribution rights are broad
enough as to territory to permit it to meet broadcasters' requirements in
markets throughout the world. Of the episodes in the Company's library,
approximately 87% are parts of series consisting of 26 or more episodes,
facilitating their distribution as complete series in the United States and
international markets. The Company's international programming includes
worldwide distribution rights to a 445 half-hour episode library of family-
oriented programming acquired in the April 1996 acquisition of Paris-based
Creativite & Developpement ("C&D"), a leading European producer of family
entertainment, and a 706 half-hour episode library of animated children's
programming acquired in the April 1996 acquisition of Vesical Limited, a
library of international rights to programming originally produced by DIC. The
Vesical library includes non-U.S. rights to classic series such as Inspector
Gadget, Heathcliff and Dennis the Menace.
The following table sets forth, as of June 30, 1996, the growth in the size
of the Company's library. Approximately 31% of the library is relatively new,
having been produced since 1995. Approximately 472 additional half-hour
episodes were in production as of June 30, 1996 for release in 1997.
[Download Table]
TOTAL NUMBER OF EPISODES
----------------------------------------------------------------
YEAR ENDED EXISTING AT END OF
JUNE 30, PRODUCED ACQUIRED FISCAL YEAR
---------- -------- -------- ------------------
1990 80 172 945
1991 169 127 1,241
1992 29 140 1,410
1993 117 91 1,618
1994 152 13 1,783
1995 267 76 2,126
1996 284 1,311 3,721
43
Creation and Development of Programming
The Company has and will continue to pursue ideas and properties for
original production from a number of sources. For example, the Company may
acquire production, distribution and possibly other rights to an existing
property (such as Marvel's X-Men or Francine Pascal's Sweet Valley High) or
series (such as Power Rangers or Heathcliff), develop internally a new
property based on an existing public domain property (such as Adventures of
Oliver Twist) or create or acquire an entirely new idea or character (such as
Eek! Stravaganza). The Company considers itself the producer of all series
which it has financed or co-financed, and in which it owns substantial
distribution rights. The Company has teams of employees in the United States
and France involved in programming development and currently has over 35
projects in various stages of active development. In general, production does
not commence without significant commitments for broadcasting by networks or
independent television stations. Typically, the Company has seven months to
one year to produce and deliver anywhere from 13 half-hour episodes (the
typical number of episodes ordered for a weekly series) to 65 half-hour
episodes (the typical maximum number of episodes ordered for a weekday
series). The Company attempts to produce programming in a cost-effective
manner while maintaining control over critical parts of the production process
to ensure continued high quality. For example, with respect to programming in
which the Company has assumed responsibility for physical production,
freelance script writers are utilized but supervised by a Company production
executive and certain labor-intensive animation work may be subcontracted to
countries with relatively low-cost labor, while the Company handles or
directly supervises both initial creative development and all post-production
work.
Pursuant to a letter agreement between them, Saban and UPN have each agreed,
subject to any third party contractual restrictions and other conditions, to
provide a Saban-UPN joint venture with a "first look" at any children's
properties for which it owns or controls U.S. network television distribution
rights, and, under certain circumstances, to co-finance the production of
children's programming for first run on UPN. The current Bureau of Alien
Detectors and The Mouse and the Monster series are being co-produced by this
venture. As a result of certain disagreements among the parties, the parties
are currently negotiating a termination of the letter agreement.
The Company also produces most of the on-air promotions, sales films and
public service announcements for its Fox Kids Network. The Company has
received numerous national awards of recognition for its Fox Kids Network
public service campaigns, including the George Foster Peabody Award, the
International Monitor Award, the Parent's Choice Award and the National
Education Association Award for the Advancement of Learning through
Broadcasting.
44
The following is a list of the programs currently being broadcast in the
United States for the 1996-1997 broadcast season for which the Company owns or
controls most of the underlying property and distribution rights.
[Enlarge/Download Table]
EPISODES
IN PRODUCTION YEARS
FOR 1996-97 PROGRAM ON
SERIES SEASON SCHEDULE AIR PROGRAM DESCRIPTION
------ ------------- ------------- -------- ------------------------
Fox Kids Network:
Big Bad Beetleborgs+ 53 Weekday premiere Three kids become comic
book superheroes in
this comedy-adventure
series.
Bobby's World* 3 Weekday 7 Combines point of view
of a 4-year old with
spirit of Howie Mandel.
Eek! Stravaganza* 9 Weekday 5 The offbeat adventures
of everyone's favorite
feline and his zany
friends.
Power Rangers Zeo+ 40 Weekday 4 The next generation of
the Power Rangers saga.
Life With Louie* 13 Saturday A.M. 2 Comedian Louie
Anderson's childhood
ups 'n downs of dodging
bullies, eating pies
and going on family
vacations.
The Tick* 10 Saturday A.M. 3 A garden variety giant
blue 400-pound crime
fighter.
X-Men* 14 Saturday A.M. 5 Marvel comic book heroes
still going strong
after 30 years.
Saban Kids Network:
Masked Rider+ 13 Weekday 2 Alien superhero protects
the earth while leading
a normal life.
Samurai Pizza Cats* 40 Weekday premiere Futuristic feline
superheroes save the
world.
Adventures of Oliver Twist* 13 Weekend A.M. premiere Inspired by Charles
Dickens' timeless
classic.
Eagle Riders* 13 Weekend A.M. premiere Secret agents who glide
like birds in a battle
against VORAK.
Sweet Valley High+ 22 Saturday 3 Twins living the
California dream.
The Why Why Family* 13 Weekend A.M. premiere Animated "edutainment"
series.
UPN:
Bureau of Alien Detectors 13 Sunday A.M. premiere Idealistic individuals
(B.A.D.)*(1) defend humanity.
The Mouse and the Monster*(1) 13 Sunday A.M. premiere An 8-foot, one-eyed blue
monster, Mo and his
buddy, Chesbro the
mouse.
--------
+ Live-Action
* Animation
(1) Financed by a joint venture between Saban and UPN; the Company controls
worldwide merchandising and all international sales with respect to this
series.
45
Production Facilities
The Company handles or directly supervises most aspects of the creative
development of a property from initial concept through the post-production of
a series, from the development of a story and writing of scripts to the
production of voices, music and special effects. Of the 15 series listed in
the foregoing table, 13 are being internally produced by the Company. The
Company films all of its live-action series at its production facilities in
Valencia, California. The Company also maintains a state of the art post-
production facility in Los Angeles, California. The Company records all of the
music for its programming and edits and adds audio and sound effects to its
programming.
The Company has a full-service animation studio in Paris which develops
programming containing content that meets the local content requirements of
various European countries for local broadcast television. The Paris studio
has produced almost 200 half-hours of programming since its inception in 1990
and has an additional 78 half-hours in development for the Fall 1996
television season. In general, the Company enters into strategic co-production
alliances to develop its French and European content programming. Many of the
projects developed by the Paris studio are based upon existing, popular
European characters, such as Iznogoud, which was based upon the popular comic
books of Rene Goscinny, creator of Asterix (which have sold 350 million copies
in Europe). Among the Company's European co-production partners are Canal
Plus, France 2, M6 and Television Francaise 1 ("TF1") in France, Radio
Television Luxembourg 4 ("RTLF4") in Holland, Compagnie Luxembourgois de
Telediffusion ("CLT") in Luxemburg, British Broadcasting Company ("BBC") in
the United Kingdom, Television Suisse Romande ("TSR") in Switzerland, Radio-
Television Belge de la Communaute ("RTFB") in Belgium, Radiotelevisione
Italiana ("RAI") in Italy, Tele 5 in Spain and Arbeitsgemeinschaft der
Oeffentlichen Rechtlichen Rundfunkanstalten Deutschlands ("ARD") in Germany.
Relationships with Marvel and Toei
The two most significant third party sources for characters on which the
Company bases original programming have been, and are currently expected to
continue to be, Marvel and Toei.
In June 1996, the Company and Marvel reached an understanding on the
principal terms of an agreement granting to the Company the exclusive right to
produce and distribute animated series, subject to other preexisting
agreements, based on characters from Marvel's library of approximately 3,500
comic book characters, including Silver Surfer, Captain America and Daredevil.
Marvel has agreed, subject to the negotiation and execution of definitive
documents, to contribute a portion of the Company's production costs while the
Company will bear all development and distribution costs. The parties are in
the final stages of negotiations with respect to the definitive agreement, and
the Company expects this agreement to be executed in the near future. The
remainder of this paragraph assumes that the agreement is executed in its
current form; no assurance can be given that the final agreement will not vary
materially from the discussion which follows, or that any agreement will be
executed. Pursuant to the agreement, the Company will commit to produce a
minimum of 52 episodes of at least four new series over the next seven years.
The Company will have worldwide television and home video distribution rights
to all series produced for a period of 21 years. The term of the agreement may
be extended for an additional three year period if during the first two years,
the Company orders a minimum of 104 episodes and such programming is comprised
of a minimum of 8 separate series, with each series based on a different
Marvel character. While Marvel has retained all merchandising and other
ancillary rights to its characters, the Company will receive a portion of
worldwide merchandising revenues received by Marvel from characters or series
broadcast on the Company's Fox Kids Network. The Company and Marvel will share
U.S. syndication revenues. To date, the Company plans to develop, produce and
distribute either a Silver Surfer or Captain America series for inclusion in
the 1997-1998 Fox Kids Network schedule.
Although the Company's relationship with Toei dates from the 1980's, it was
through an August 1992 distribution agreement that the Company acquired the
right to adapt elements of Toei's live-action programming into new series. The
first adaptation resulted in Mighty Morphin Power Rangers. The distribution
agreement granted the Company the exclusive right to acquire additional Toei
live-action programming through March
46
1995, subject to extension by one year for each new series so acquired. To
date, the Company has exercised this option nine times, thus extending its
exclusive right to acquire additional series through March 2004. The
additional series acquired by the Company have been used as the basis for
additional Power Rangers episodes, VR Troopers, Masked Rider and Big Bad
Beetleborgs. The distribution agreement grants the Company the right in
perpetuity to distribute, adapt and exploit all elements and characters of
these series in all non-Asian markets through all media outlets including
television, video, music, soundtracks, theatrical use and literary publishing
and all other ancillary rights. In general, the Company pays Toei a fee per
episode for all rights to exploit the applicable property throughout the world
(other than certain parts of Asia) in all media and pays Toei a royalty based
on merchandising royalties and/or certain distribution revenues.
DISTRIBUTION: NETWORKS AND SYNDICATION
The Company distributes its own programming, as well as the programming of
others, throughout the United States and in major markets throughout the
world. The Company is uniquely positioned as a distributor as a result of its
strategic relationship with Fox Broadcasting and News Corp. and by reason of
its large programming library. See "Risk Factors--Strategic Relationships with
News Corp. and Fox," "--The Strategic Alliance with Fox/News Corp." and "--
Programming."
In the United States, the Company operates the Fox Kids Network, the number
one rated children's television broadcaster in its time slots for the last
three seasons. Through the FOX Television Network, the Fox Kids Network
reaches approximately 97% of U.S. television households. According to Nielsen,
20 million children--approximately 52% of all children in the United States--
watch the Fox Kids Network at least once each month. In the 1996-97 broadcast
season, the Fox Kids Network will broadcast 19 televised hours of children's
programming each week, of which approximately 12 hours will represent the
Company's own programming. The Company has recently agreed or agreed in
principle, to launch full time or partial day "Fox Kids" branded DTH satellite
and cable channels in various markets in Europe and Latin America. On October
19, 1996, the Company launched a Fox Kids branded channel, as part of BSkyB's
Sky Multichannels package, which through DTH and cable services is expected to
reach more than 5.5 million viewers in the United Kingdom and Republic of
Ireland. Subject to completion of negotiation of definitive agreements,
additional international channels are currently contemplated to be launched
over the next two years on DTH and cable in Latin America and Asia. In
Australia, the Foxtel cable service has been carrying a Fox Kids Network
children's channel segment since 1994 under a license recently assigned to the
Company by Fox Broadcasting.
In the United States the Company also distributes programming through
syndication to independent television stations. One of the Company's current
distribution strategies in the United States is to package some of its
original and library programming under the Saban Kids Network name. In the
1996-97 broadcast season, the Company will distribute under the Saban Kids
Network name a block of 7 1/2 hours of programming each week which, on a
weighted average basis, reaches over 86% of the television households in the
United States. See "--Syndication."
Fox Kids Network
The Fox Kids Network, launched in September 1990, is the result of an
arrangement between Fox Broadcasting and participating FOX Television Network
member stations which formed a broadcast television network focused on
children (ages 2-11). This Network was the first television network to
broadcast children's programs during the week (Monday through Friday) as well
as on Saturday. The guiding philosophy of the Fox Kids Network is to provide a
diverse slate of quality entertainment targeted toward children. Of its 19
hours of children's programming per week, the Fox Kids Network generally
broadcasts four hours on Saturday mornings, one hour each weekday morning and
two hours each weekday afternoon. At least three hours of programming each
week are dedicated to educational programming for children. See "--Government
Regulation."
Now in its sixth broadcast season, the Fox Kids Network currently is carried
by 172 affiliated stations (the "FOX Kids Network Affiliates"), including ten
of Fox Television Station, Inc.'s ("FOX Television") 12
47
currently owned and operated stations ("Fox O&O's") and (representing over 91%
of the FOX Television Network member stations). The Fox Kids Network
Affiliates currently reach approximately 97% of all U.S. television
households. According to Nielsen, 20 million children--approximately 52% of
all children in the United States--watch the Fox Kids Network at least once
each month. The Fox Kids Network produces and acquires programs, markets and
promotes those programs, makes its schedule available to its Fox Kids Network
Affiliates and sells network advertising.
Under an Administration Agreement between Fox Broadcasting and FCN, Fox
Broadcasting agreed to perform certain of FCN's activities, including network
national advertising sales and the administration thereof, commercial
trafficking and broadcast operations (including the delivery of programming to
the Fox Kids Network Affiliates) and overhead charges related to Fox
Broadcasting's in-house administrative support in the areas of research,
promotion, business affairs, legal affairs and accounting. In exchange for
these services, FCN agreed to pay Fox Broadcasting an administrative fee,
which is currently equal to 15% of the net advertising revenues derived from
Fox Kids Network national commercials and other advertising. Effective June 1,
1995, Fox Broadcasting assigned all of its rights under this agreement to the
Company, including the rights to such fees, and agreed to continue to provide
the Company for a one-time fee (which has been paid) all uplink, transponder
and other facilities necessary to deliver via satellite Fox Kids Network
programming for broadcast to the Fox Kids Network Affiliates, as well as
certain other services. See "Certain Transactions--Formation of the LLC and
the Reorganization."
The extensive reach of the Fox Kids Network affords Fox Kids Network
advertisers substantial day-and-date capacity to conduct nationwide
advertising campaigns. The Company believes that day-and-date capacity,
coupled with programming which has won 15 consecutive sweeps victories, has
resulted in the Fox Kids Network achieving the highest advertising rate
structure among all of the competitors for its target audience of children
(ages 2-11).
Advertising. Substantially all of the revenues of the Fox Kids Network are
derived from national network advertising and the merchandising of its
characters and related series elements. Of the top 20 advertisers targeting
children who advertised on FOX, ABC, NBC, Nickelodeon and The Cartoon Network,
the Company believes that over $110 million, or over 45% of their total U. S.
children's television advertising budgets for the 1995-1996 broadcast season,
were spent on national advertising on the Fox Kids Network. The following
advertisers are representative of those who have historically advertised on
the Fox Kids Network on a regular basis:
[Download Table]
FAST FOOD CEREAL
FRANCHISES MANUFACTURERS TOY COMPANIES
---------- ------------- -------------
Burger King
Corp. Kellogg Co. Hasbro Inc. Nintendo Co.
McDonald's Corp. Quaker Oats Company Lego Systems Inc. Toybiz Inc.
Taco Bell Corp. Post Cereals Lewis Galoob Toys Inc. Tyco Toys Inc.
Wendy's Interna- Mattel Inc.
tional, Inc.
[Download Table]
FOOD AND BEVERAGE
COMPANIES ENTERTAINMENT COMPANIES CANDY COMPANIES
----------------- ----------------------- ---------------
Campbell Soup Co. Fox Hershey Foods Corp.
Coca Cola Co. Time Warner Inc. Mars Inc.
Kraft The Walt Disney Company Nestle SA
Nabisco William Wrigley Jr. Co.
Oscar Mayer
Pepsi-Cola Inc.
48
Ratings and Programming. The following table sets forth, for each of the
broadcast seasons indicated, the average number of weekly hours of children's
programming which appeared on the Fox Kids Network, the number of FOX
Television Network member stations carrying the Fox Kids Network, and
clearance information.
[Enlarge/Download Table]
BROADCAST SEASON
---------------------------------------------------------------------
1990-1991 1991-1992 1992-1993 1993-1994 1994-1995 1995-1996 1996-1997
--------- --------- --------- --------- --------- --------- ---------
Average Number of Weekly
Hours Broadcast........ 5.5 10.5 19 19 19 19 19
Fox Kids Network
Affiliates:
Independent Fox
television member
stations(1).......... 133 143 150 152 145 130 142
Fox O&O's............. 7 7 7 8 8 12 12
Non-Fox member
stations(2).......... -- -- -- -- 8 19 18
--- ---- --- --- --- --- ---
Total............... 140 150 157 160 161 161 172
% of Coverage of U.S.
Television Households.. 91% 92% 94% 95% 95% 97% 97%
--------
(1)Stations which carry both FOX prime-time and Fox Kids Network.
(2)Stations which carry only Fox Kids Network.
The following table sets forth, for each of the broadcast seasons indicated,
ratings and share information relating to the Fox Kids Network, Monday through
Saturday, and as compared to ABC, CBS, NBC and Kids WB for Saturday mornings,
as well as Fox Kids Network's Saturday morning rank. In the television
industry, for the 1996-1997 broadcast season each kids 2-11 rating point
represents an estimated 388,900 children, or 1% of the total number of
children (ages 2-11) in the United States, and references to one share point
are to 1% of these children who are watching television during the time slot
involved. In the past two seasons, the Fox Kids Network has experienced some
erosion in its ratings due to the increasing competition from cable television
and other forms of entertainment targeted at children. Despite the decline in
ratings, the Fox Kids Network garnered a 20 share for the 1995-96 season--more
than one in five children watching television at the time Fox Kids Network was
broadcasting was watching the Fox Kids Network.
[Enlarge/Download Table]
BROADCAST SEASON
------------------------------------------------------------------------
1990-1991 1991-1992 1992-1993 1993-1994 1994-1995 1995-1996 1996-1997(3)
--------- --------- --------- --------- --------- --------- ------------
Kids 2-11 Rating/
Share(1):
Fox Kids (M-Sat.)...... 3.4/15 3.5/20 4.3/24 5.7/30 5.1/30 3.3/20 3.5/21
Fox Kids (M-F Only).... 4.7/25 4.0/24 4.6/27 5.4/33 4.9/31 3.0/21 2.6/19
Fox Kids (Sat. Only)... 3.2/15 3.7/16 5.2/21 6.6/27 5.7/25 4.4/20 5.1/22
ABC (Sat. A.M.)........ 5.9/23 5.0/21 4.6/19 4.1/17 3.5/15 2.5/12 2.9/13
CBS (Sat. A.M.)........ 6.6/26 5.5/22 4.7/19 3.9/16 3.0/13 2.3/10 1.5/7
NBC (Sat. A.M.) (2).... 4.2/16 3.6/14 2.6/10 1.2/5 1.5/6 1.4/6 1.3/6
Kids WB (Sat. A.M.).... n/a n/a n/a n/a n/a 1.9/9 1.7/8
Fox Kids Saturday A.M.
Rank................... #4 #3 #3 #1 #1 #1 #1
--------
(1) Ratings are for children, ages 2-11, in the Monday-Saturday television
schedule. Fox Kids Network remains the leader in children's broadcasting.
(2)NBC has changed the focus of its programming for Saturday morning from
children to teens.
(3)Represents the period from September 7, 1996 through September 14, 1996.
49
The current Fox Kids Network schedule for the 1996-1997 broadcast season is
set forth below. The Company believes that the programming designated below as
"educational" complies with the FCC's requirement that broadcast television
stations show at least three hours of "educational" programming per week.
SATURDAY MORNING PROGRAMMING
[Enlarge/Download Table]
TIME PERIOD YEARS ON
(EST) PROGRAM PRODUCER AIR PROGRAM DESCRIPTION
----------- ------------------- ------------------- -------- ------------------------
8:00-8:30 AM C Bear & Jamal Film Roman premiere Life of Jamal Wingo, a
(educational) 10-year old African-
American boy, whose
thrift-store teddy bear
comes to life.
8:30-9:00 AM Big Bad Beetleborgs The Company premiere Three kids become comic
book superheroes in
this comedy-adventure
series.
9:00-9:30 AM Casper Universal Family 1 The friendly ghost.
Entertainment
9:30-10:00 AM Spider-Man Marvel Films 3 Based on the most
Animation popular Marvel comic
book hero in history.
10:00-10:30 AM Goosebumps Scholastic/Protocol 2 Based on the best-
selling suspense novels
by R.L. Stine.
10:30-11:00 AM Life With Louie The Company 2 Comedian Louie
Anderson's childhood
ups 'n downs of dodging
bullies, eating pies
and going on family
vacations.
11:00-11:30 AM X-Men The Company 5 Marvel comic book heroes
still going strong
after 30 years.
11:30 AM- The Tick The Company 3 A garden variety, giant
12 NOON blue 400-pound crime
fighter.
WEEKDAY PROGRAMMING
TIME PERIOD YEARS ON
(EST) PROGRAM PRODUCER AIR PROGRAM DESCRIPTION
----------- ------------------- ------------------- -------- ------------------------
7:30-8:00 AM Bobby's World The Company 7 Combines point-of-view
of a 4-year old with
the spirit of comedian
Howie Mandel.
8:00-8:30 AM Where On Earth DIC 4 Master thief Carmen
Is Carmen Sandiego? Sandiego is tracked
(educational) down by teen super
sleuths while teaching
viewers geography, art
and history.
3:00-3:30 PM Eek! Stravaganza The Company 5 The offbeat adventures
of everyone's favorite
feline and his zany friends.
3:30-4:00 PM The Adventures of Warner 3 The Dynamic Duo use
Batman & Robin their powers to protect
the citizens of Gotham
City.
4:00-4:30 PM Big Bad Beetleborgs The Company premiere Three kids become comic
book superheroes in
this comedy-adventure
series.
4:30-5:00 PM Power Rangers ZEO The Company 4 The next generation of
the Power Rangers saga.
50
Fox Kids Affiliation Agreements. Currently, more than 91% of the FOX
Television Network member stations, including ten of the 12 Fox O&O's, carry
the Fox Kids Network pursuant to their affiliation agreements with Fox
Broadcasting. These affiliation agreements expire over the next two to ten
years and there can be no assurance that they will be renewed. See "Risk
Factors--Possibility of Non-Renewal of Fox Kids Network Affiliated Stations."
The Fox Kids Network affiliation agreements provide that FCN is to pay to
each of the Fox Kids Network Affiliates (including the Fox O&O's)
participations based upon the "net profits" (as defined) of FCN, with the
participations allocated among the Fox Kids Network Affiliates based upon each
affiliate's percentage of audience delivery as compared to the other Fox Kids
Network Affiliates. "Net profits" is defined on a cumulative basis to include
amounts actually received by FCN from the exhibition, distribution and other
exploitation of Fox Kids programs and the merchandising and other rights
relating thereto, less administrative fees, production/license fees,
distribution and merchandising fees (including those payable to the Company),
overhead and other expenses and reserves. Certain of the Fox O&O's have waived
in favor of the Company their rights to receive these participations, and the
amounts of their participations are retained by the Company, representing
through June 30, 1996 $4.7 million, or approximately 31% of the total amounts
paid to all Fox Kids Network Affiliates.
The non-Fox O&O Fox Kids Network Affiliates have appointed a board of their
members (the "Affiliate Board") for the purpose of representing all of the
non-Fox O&O Affiliates in dealings with FCN. On behalf of the Company, Fox
Broadcasting from time to time meets with the Affiliate Board to review the
operations and operating policies of FCN and the Fox Kids Network.
In connection with the announcement of the Reorganization to the Fox Kids
Network Affiliates, the Company has offered to the Fox Kids Network Affiliates
that, should the Company launch a block of children's programming on a U.S.
cable channel, the Company would share with the Fox Kids Network Affiliates
50% of the "net profits" (adjusted to deduct all costs related to the cable
channel and a 15% administrative fee) realized by the Company from such block
of programming. In addition, the Company has offered to guarantee that, for
the five-year period commencing January 1, 1997, profits (including net
profits from both cable operations and from FCN) distributed to the Fox Kids
Network Affiliates as a group (including certain of the Fox O&O's, who have,
however, waived their rights to receive their share of these participations in
favor of the Company) will aggregate at least $75 million. To the extent that
net profits distributed in any year during the guarantee period are less than
$15 million, the Company would advance the shortfall. To the extent that net
profits distributable in any year during the guarantee period exceed $15
million, the Company would be entitled to credit the excess against advances
previously paid or thereafter due. The Fox Kids Network Affiliates are
currently considering this offer.
On July 17, 1996, News Corp. agreed, subject to customary closing
conditions, to acquire New World Communications Group Incorporated ("New
World"), which owns 11 television stations (one of which, an NBC affiliate is
scheduled to be sold). Although none of the New World stations had carried the
Fox Kids Network, one of these stations has agreed, commencing September 14,
1996, to provide clearance of the Fox Kids Network's Monday through Saturday
line-up in addition to FOX prime-time, news and sports coverage. All of the
New World stations are located in markets currently served by existing Fox
Kids Network Affiliates.
Promotions. The Company also promotes the Fox Kids Network with innovative
contests, promotions and other programs targeting children, including the
following:
Contests. The Company regularly sponsors contests, such as Fox Kids
McWorld Home Arcade, in which over 650,000 entries were received from
children, and the winner received four full-sized arcade games. Contests
have been effective ways to promote the Company's television programs
because they appeal to children and at the same time provide valuable
information about the Company's programming.
Fox Kids Club. Fox Kids Club is a club linking the Fox Kids Network with
over 5.3 million of its viewers. The Company publishes a monthly full-color
magazine called Totally Kids, which includes games,
51
articles and celebrity interviews, that is mailed to each club member's
household. In addition, the Company sells advertising in the magazine and
allocates space to each of its local affiliates so that the magazine is
tailored to the broadcast schedule of each local market.
Fox Kids Countdown. Fox Kids Countdown is a nationally syndicated weekly
radio program for children which is currently broadcast by 183 radio
stations. The Company produces a two hour top contemporary hits countdown
show, including guest hosts from the Company's shows, and national
sponsorships from such companies as McDonald's, Marvel and Bandai. Fox Kids
Countdown provides an attractive way to reach current and potential
viewers, and to extend the Company's brands though the exploitation of
additional media outlets.
Fox Kids Website. Fox Kids Network launched its Fox Kids Cyberstation
(www.foxkids.com) site on the World Wide Web on July 1, 1996. This website
includes excerpts from Totally Kids magazine, inside scoops on the
Company's programming, contests and coloring books featuring, for example,
The Tick, Goosebumps and Eek! Stravaganza. The Website also offers children
the opportunity to join the Fox Kids Club.
Syndication
Saban Kids Network. The Company syndicates programming, currently under the
Saban Kids Network name, to television stations with market reach on a
weighted average basis of over 86% of television households in the United
States. For the 1996-1997 broadcast season, two Monday through Friday half-
hour television shows and five weekly half-hour series are being broadcast.
The Company intends to attempt to increase its share of broadcasting hours in
existing markets by continuing to provide broadcasters with attractive
syndicated programming and by using its available resources, including its
extensive library, to offer additional programming to existing and potential
program distributors. Distribution through the Saban Kids Network affords the
Company the opportunity to generate additional revenues at modest additional
cost by exploiting its existing library and broadcasting lower cost acquired
programming. Beginning in the 1996-1997 broadcast season, Fox Broadcasting's
advertising sales staff has assumed responsibility for sales of advertisements
for the Saban Kids Network; one apparent result of this arrangement has been a
14% increase in average advertising rates for Saban Kids Network's
programming. The following table sets forth, for each of the seasons
indicated, the average number of weekly hours of children's syndicated
programming distributed by Saban, as well as ratings and clearance
information. The Company began using the name "Saban Kids Network" in the
1996-1997 broadcast season.
[Download Table]
BROADCAST SEASON
-----------------------------
1994-1995 1995-1996 1996-1997
--------- --------- ---------
Average Number of Weekly Hours................... 4.0 4.5 7.5
Average Ratings (children 2-11).................. 1.9 1.1 n/a
Average Percent of Coverage of U.S. Television
Households...................................... 79% 75% 86%
International Channels
The Company believes that it is positioned strategically to take advantage
of growth in international DTH satellite and cable television services and the
resulting increase in demand for television programming, including through its
current relationship with News Corp. In addition to its recent launch of Fox
Kids branded DTH satellite and cable channels in the United Kingdom and
Republic of Ireland, the Company is in active discussions and negotiations to
launch additional Fox Kids branded channels on other distribution platforms
throughout the world. Except with respect to British Sky Broadcasting Group
plc ("BSkyB") and certain Latin American cable operators, the Company has not
yet reached agreement as to the terms of carriage, and no assurance can be
given that the parties will be able to reach such agreement, or that any such
agreement will be on terms favorable to the Company.
52
United Kingdom and Republic of Ireland. On October 19, 1996, pursuant to an
agreement with BSkyB, the Company launched a Fox Kids channel as part of
BSkyB's Sky Multichannels package, a service which, through DTH and cable, is
currently estimated to reach over 5.5 million viewers in the United Kingdom
and Republic of Ireland. News Corp. holds a 40% interest in BSkyB, a public
company, which operates the leading pay television broadcasting service in the
United Kingdom and the Republic of Ireland. The Fox Kids channel is carried
from 6 a.m. to 7 p.m. each day. The term of the agreement is eight years. The
Fox Kids Channel is part of the Sky Multichannels DTH package, sharing a
transponder with Sky2 which occupies the balance of the schedule each day. As
part of its agreement with BSkyB, the Company has acquired, for approximately
$3.7 million, all of BSkyB's United Kingdom license rights to approximately
1,400 half-hours of children's programming which had been acquired for
broadcast by BSkyB prior to launch of this channel. BSkyB also carries
Nickelodeon, a 24-hour service targeting children. In September 1996, media
reports in the United Kingdom disclosed that Viacom, which owns Nickelodeon,
had expressed concerns about the carriage of the Fox Kids Network on BSkyB,
and was considering filing an action for injunctive relief to prevent launch
of the Company's channel on BSkyB. To the knowledge of the Company, at the
date of this Prospectus, no such action had been filed. The Company is unable
at this time to assess the merits of Viacom's reported position. Should such
an action be filed, and should Viacom prevail, the Company's ability to launch
a United Kingdom-targeted children's service could be materially and adversely
affected.
Latin America. Since 1994, Canal FOX, a general entertainment channel
servicing 19 countries in Latin America (and reaching, in June 1996,
approximately 5.9 million households), has carried a Fox Kids-branded
children's programming block under a license agreement between FCN and Canal
FOX, which expired in September 1996. Revenues to the Company under this
license have not been material. It is anticipated that the Fox Kids-branded
channel will be carried over the pan-regional channels described below,
commencing November 1, 1996.
The Company plans to launch its own 24 hour Fox Kids-branded pan-regional
Latin America DTH satellite and cable channels, which will simultaneously
broadcast programming in Spanish, Portuguese and English, and is currently in
active negotiations with a number of DTH satellite and cable operators for
carriage of this service. The following paragraphs describe the current status
of these operations.
On November 1, 1996, the Company is scheduled to launch the Fox Kids channel
in Brazil over NetSat Serbicos Ltda. ("NetSat"). NetSat is a DTH satellite
platform which currently reaches over 100,000 Brazilian households, and is 36%
owned indirectly by News Corp. The Company is also currently negotiating
carriage of this channel on various Brazilian cable systems.
The Company expects shortly to reach agreement to launch the Fox Kids
channel over various cable services in the balance of South America,
commencing November 1, 1996. Subject to the negotiation and execution of
agreements, the Company intends to expand the channel to Mexico (DTH satellite
and cable) and Central America in December 1996. The Company is also in
preliminary discussions for the launch of the Fox Kids channel on DTH
satellite and cable platforms covering the balance of South America during the
first half of 1997.
The launch of each of these services is dependent on the conclusion of
negotiations concerning the terms of carriage. No assurance can be given that
agreement will be reached in time to meet the Company's launch schedule, or
that any or all of these channels will be launched.
Australia. Foxtel, an Australian-based cable service, has carried a Fox Kids
Network children's channel segment since 1994 under a license agreement
between Foxtel and an affiliate of Fox Broadcasting. This license was recently
assigned to the Company. Revenues to the Company under this license are not
material. Foxtel is a 50/50 partnership between News Corp. and the Australian
telephone company, Telstra.
53
Asia, India and the Pacific Rim. STAR TV is a 100% owned subsidiary of News
Corp., and is currently the Asia Pacific region's largest DTH satellite
television broadcaster (News Corp. has entered into a binding agreement to
sell 7.5% of its interest in STAR TV to a third party). STAR TV broadcasts
television and radio programming over an area covering all of China and India,
as well as approximately 50 other countries. The Company has recently entered
into exploratory negotiations with STAR TV for carriage of Fox Kids branded
services over various STAR TV platforms.
Germany. The Company has commenced discussions with DF1, a DTH satellite
joint venture between BSkyB and Germany's Kirsh Group, for the carriage of a
Fox Kids channel targeting German speaking Europe.
International Distribution
The Company also distributes its programming to others on a worldwide basis.
The Company believes that by owning and controlling the international
distribution rights to its programming, it not only can generate significant
revenue from the sales of its programming, but can also establish an
international presence for the Company and its properties which should support
its international licensing and merchandising efforts. The Company is
currently party to distribution arrangements with international television
broadcasters and distributors to exhibit and distribute the Company's
programming to over 375 terrestrial, cable and satellite distribution
platforms in approximately 100 countries. The Company has also used its
international presence to expand its operations in emerging television
markets.
In January 1996, the Company entered into a distribution agreement with ARD,
the largest broadcaster in Germany, pursuant to which the Company agreed to
grant to ARD rights to at least 24 two-hour movies for television
("telefilms"), six co-produced animated children's program series (consisting
of Jim Knopf, Wunschpunsch, Walter Melon, The Why Why Family, Princess Sissi
and The Adventures of Oliver Twist), plus any coproduced series based on
German author Michel Ende's stories for which the Company controls the rights,
and 390 half-hour episodes of other children's animated programs. The
territory is limited to German-speaking Europe. ARD's rights include the right
to transmit (with unlimited runs), broadcast, exhibit, dub and sublease within
its territory each telefilm and series, and to receive a profit participation,
as defined in the agreement, in net revenues, from the distribution of certain
properties covered by the agreement. The terms are ten years for the
telefilms, thirteen years for the six co-produced series and seven years for
the other half hour episodes.
MERCHANDISING AND LICENSING
The Company capitalizes on its popular characters and properties by entering
into licensing agreements with manufacturers and retailers of children's
products. By controlling licensing and merchandising rights, the Company earns
revenue from the sale of products while limiting the costs and risks
associated with manufacturing, distributing and marketing merchandise. The
revenue derived from licensing and merchandising depends not only on the
success, recognition and appeal of a character, but also on the quality and
extent of the marketing efforts of the Company and its licensees. Sales of
licensed products also help the Company's shows by promoting the Company's
characters.
The Company has entered into toy license agreements with a number of toy
manufacturers pursuant to which the toy companies are given the exclusive
right to create, manufacture and develop toys representing characters from the
Company's series. For example, the Company has toy licenses with Bandai
covering Power Rangers, Masked Rider and Big Bad Beetleborgs, with Hasbro
covering VR Troopers, with Mattel covering Bureau of Alien Detectors and with
Toybiz covering Space Strikers. These licenses generally grant the exclusive
right to manufacture and sell toys based upon the characters and other
creative elements in the licensed series. Pursuant to these agreements, the
Company generally receives an up-front advance that is non-refundable but
credited against royalties, generally based on a percentage of net sales of
the licensed product. The Company also retains approval rights regarding
advertising, packaging and the quality of its licensed product, as well as
54
continued ownership of the copyright and trademark. For the year ended June
30, 1996, the Company's licensing and merchandising activities represented
approximately 35% of the Company's pro forma consolidated revenues.
The Company has licensing arrangements in place with over 500 different
licensees for consumer products targeting children, such as apparel, school
supplies, watches and dinnerware/lunch boxes. Merchandise based on the
Company's characters and properties is sold in approximately 60 countries
throughout the world.
The following table sets forth examples of the licensee and products for
some of the more than 60 licensees of the Power Rangers series.
[Download Table]
LICENSEE PRODUCTS INCLUDING
-------- ------------------
Aladdin Properties Plastic lunch kits
Bandai Toys including action figures and video games
Best Personalized Books Childrens' books
Butterick Company Halloween costumes and sweatshirts
Colgate-Palmolive Company Colgate Plus toothbrush
Ero Marketing Backpacks and other soft vinyl goods
Fruit of the Loom, Inc. Girl's and boy's underwear
Good Humor-Breyers Ice Cream Frozen novelties
Hasbro Games and puzzles
High Point Knitting Belts, hats and other apparel
Milton Appel Co., Inc. Childrens' optical frames
R. F. Frookies Cookies and candy
Springs Industries Sheets and other bedding products
Toybiz Fitness sets and remote control vehicles
Tyco Industries Individual films and film viewers
Zebco Corporation Fishing rods & reels and fishing tackle
HOME VIDEO AND TELEFILMS
Home Video. The Company produces direct-to-video feature films, in addition
to granting home video distribution rights to manufacture and distribute video
cassettes based upon its television programming. For example, the Company has
acquired the rights to produce films based upon the characters "Casper" and
"Richie Rich." The Company has also acquired the rights to produce new live-
action television specials and series programs based upon the "The Addams
Family" characters. The Company also receives royalties from the sale of home
video cassettes of its television programming.
Telefilms. The Company, through its Libra Pictures division, acquires
international distribution rights to telefilms--ranging from 12 to 15 motion
pictures per year over the past three years. While the Company occasionally
acquires U.S. rights to these films, the primary objective of acquiring
telefilms is to complement the Company's international sales activities. These
films are typically targeted at prime time audiences and consist of dramas,
thrillers and action/adventure features. The films typically have a budget of
less than $2.0 million, but include one or more "name" actors to enhance the
film's commercial appeal. The Company distributes these features
internationally to television broadcasters and home video distributors and
generally seeks to limit its cost for such international distribution rights
to less than $800,000 per film.
THE STRATEGIC ALLIANCE WITH FOX/NEWS CORP.
News Corp., along with its subsidiaries, including Fox Broadcasting, is a
diversified international communications company principally engaged in the
production and distribution of motion pictures and television programming;
television broadcasting; the publication of newspapers, magazines, books and
free standing inserts; computer information services; and digital broadcasting
systems. As of September 1, 1996, the FOX Television Network had 165 prime
time primary television station affiliates and seven prime time secondary
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television station affiliates across the United States, including 12 Fox
O&O's, reaching over 96% of U.S. television households. Each television
station affiliate is a party to an affiliation agreement with Fox
Broadcasting, which governs the terms of the relationship between them.
The Fox Kids Network is distributed to its Fox Kids Network Affiliates over
the same broadcast facilities as the FOX Television Network. In December 1995,
Fox Broadcasting and certain of its affiliated companies (the "Fox Parties")
entered into a long-term strategic alliance with the Company for the mutual
support of the Fox Parties and the Company in the children's entertainment
business. See "Certain Transactions."
Set forth below is a summary of certain of the material portions of the
relevant strategic alliance provisions contained in the Asset Assignment
Agreement (the "Asset Assignment Agreement"), pursuant to which the Fox
Parties assigned, effective as of June 1, 1995, certain assets and interests
to the Company. See "Certain Transactions." This summary is qualified by
reference to the full Asset Assignment Agreement, which is filed as an exhibit
to the Registration Statement of which this Prospectus is a part.
License of "Fox" Name. The Fox Parties granted to the Company, on the
terms set forth in the Asset Assignment Agreement, the perpetual worldwide
exclusive right to use the name "Fox" in conjunction with the words "Kids,"
"Kid" or "Children," and agreed not to use or license the name "Fox" to
others for similar purposes.
New Services and other Noncompetition Provisions. The Fox Parties agreed
not to operate in the United States any broadcast, cable or non-standard
programming service targeted at children, ages 2-11 (a "kids' service")
other than Fox Kids Network. If the Fox Parties at any time determine to
acquire a new kids' service anywhere else in the world, which kids' service
would bear the "Fox" name, they are required to provide the Company,
pursuant to the terms of the agreement, with a right of first refusal to
acquire and own that new kids' service. Moreover, should the Fox Parties or
any of their affiliates at any time acquire a television, cable or
satellite network or any other business which includes a kids' programming
service, the Fox Parties will be required to offer the Company, pursuant to
the terms of the Asset Assignment Agreement, the right to acquire and own
that kids' service.
First Right to Fox Parties Originated Programming. The Fox Parties have
agreed to provide the Company with the first right to acquire first run
exhibition rights to any new programming suitable for a kids' service
("kids' programming") prior to its sale or license to any third party;
however, the Fox Parties may freely license kids' programming to any broad
based entertainment network (which is not a kids' service) for prime time
or late night broadcast and programming derived from properties (such as
The Simpsons) not originally launched on the Fox Kids Network.
The Company is working with News Corp. to capitalize on the international
demand for quality children's programming. In addition to its current channel
in the United Kingdom, the Company plans to launch additional new children's
television channels, generally using the name "Fox Kids," on television
distribution platforms in certain of the territories in which News Corp. has
an interest in such platforms. See "--Distribution: Networks and Syndication--
International Channels."
Other Fox Services. The Company has historically maintained a close working
relationship with the Fox Parties, pursuant to which the Company and its
operating subsidiaries have been granted access to the Fox Parties' motion
picture studio and other ancillary facilities, as well as their distribution
and administrative services (see "Certain Transactions"), and, although the
Fox Parties are not generally obligated to provide these or similar services
in the future, the Company intends to seek access to these services where the
Company believes that they may be beneficial to the Company.
For example, although the Company has no current plans generally to enter
the theatrical feature film business, in 1995 the Company's Mighty Morphin
Power Rangers motion picture, which had U.S. box office receipts in excess of
$38 million, was financed, produced and distributed worldwide by Twentieth
Century Fox.
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The Company is currently producing a lower budget sequel to the initial Power
Rangers movie which is expected to be released in the Spring of 1997. The
sequel will be produced and financed by the Company and will be distributed
worldwide by Twentieth Century Fox. Twentieth Century Fox will be responsible
for all print and advertising costs and will retain a distribution fee after
recouping its print, advertising and other distribution costs; all other net
receipts after fees and costs will be remitted to the Company. While the
Company has no definitive plans to produce future feature films for theatrical
release, the Company may determine that it is appropriate to produce a motion
picture based on one of its programs. The Company is required to afford
Twentieth Century Fox the first right of negotiation with respect to the
distribution of any of these films. The Company also is planning to produce
within the next 18 months three direct to video films, including sequels to
Casper, Richie Rich and The Addams Family. See "--Home Video and Telefilms."
It is anticipated that all of these films will be co-produced with Twentieth
Century Fox and distributed in the home video markets by Fox Video, with the
exception of Richie Rich, which will be distributed in the home video markets
by Warner Bros.
COMPETITION
The businesses in which the Company engages are highly competitive. Each of
the Company's primary market business operations is subject to competition
from companies which, in some instances, have greater production, distribution
and capital resources than those of the Company.
Production. The Company competes on the basis of relationships and pricing
for access to a limited supply of facilities and talented creative personnel
to produce its programs. The Company competes with major motion pictures
studios, such as Warner Bros. and The Walt Disney Company, and animation
production companies including Hanna-Barbera and Film Roman, for the services
of writers, producers, animators, actors and other creative personnel and
specialized production facilities.
Distribution. In the United States, the Company competes for time slots,
ratings and related advertising revenues. The Company currently competes,
through Fox Kids Network, with the other broadcast television networks, public
television and cable television channels, such as Nickelodeon, USA cable
network and The Cartoon Network for market acceptance of its programming and
for viewership ratings. The Walt Disney Company has recently announced its
plans to launch a 24-hour cable television children's channel. Further, the
Company vies for the children's audience with independent television stations,
suppliers of cable television programs, direct broadcast satellite and other
DTH satellite systems, radio and other forms of media. Through the Saban Kids
Network, the Company also competes with other syndicators, including The
Disney Afternoon, on a market-by-market basis for time slots, coverage
commitments, ratings and advertising revenue. Internationally, the Company
contends with a large number of U.S.-based and international distributors of
children's programming, including The Walt Disney Company and Warner Bros.,
with whom it must compete in the development or acquisition of programming
expected to appeal to international audiences. Such programming often must
comply with foreign broadcast rules and regulations which may stipulate
certain minimum local content requirements.
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The following chart reflects, for the Fox Kids Network and its primary
competitors, the percentage of coverage of U.S. television households for the
1995-1996 broadcast season to date through July 1996.
[Bar graph depicting the percentage of coverage of U.S. television households
for the 1995-1996 broadcast season through July 1996. The "y" axis reflects
values from 0% to 100%. The "x" axis compares Fox Kids Network coverage (97%) to
each of ABC (91%), CBS (91%), The Disney Afternoon (88%), Kids WB (83%),
Nickelodeon (69%) and The Cartoon Network (28%)]
Source: Nielsen Media Research.
Merchandising. The Company also competes with hundreds of owners of creative
content who seek to license their characters and properties to a limited
number of manufacturers and distributors. Although the Company currently has
entered into merchandising agreements with over 500 different manufacturing
and commercial organizations, including manufacturers such as Bandai, Toybiz,
Hasbro and Mattel, and although the Company's characters have been used in
marketing campaigns by retail chains such as McDonald's and Burger King, the
ability of the Company to continue successfully to exploit the merchandising
opportunities afforded by its programs will continue to be dependent on the
favorable ratings of its programs and the ability of the Company's characters
to continue to provide attractive merchandising features to its customers.
GOVERNMENT REGULATION
The Company's programming must comply with the provisions of the CTA and the
rules and policies of the FCC pertaining to the production and distribution of
television programs directed to children. With respect to programs originally
produced and broadcast primarily for children ages 12 and under, the CTA and
FCC rules, among other things, (i) limit the number of minutes of commercial
matter per hour, (ii) generally require that program material be clearly
separated from commercial matter, (iii) prohibit the broadcast within a
program of commercials for products associated with that program, and (iv)
prohibit program personalities, whether live or animated, from delivering
commercials during, or in close proximity to, programs in which the
personalities appear or with which they are associated. Failure to comply with
the children's television commercial limitations can result in the imposition
of sanctions, including substantial monetary fines, on a broadcast television
station.
On August 8, 1996, the FCC amended its rules to establish a "processing
guideline" for broadcast television stations of at least three hours per week,
averaged over a six-month period, of "programming that furthers the
educational and informational needs of children 16 and under in any respect,
including the child's intellectual/cognitive or social/emotional needs." Core
Programming has been defined as educational and informational programming
that, among other things, (i) has served the educational and informational
needs of children "as a significant purpose," (ii) has a specified educational
and informational objective and a specified target child audience, (iii) is
regularly scheduled, weekly programming, (iv) is at least 30 minutes in
length, and
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(v) airs between 7:00 a.m. and 10:00 p.m. Any station that satisfies the
processing guideline by broadcasting at least three weekly hours of Core
Programming will receive FCC staff-level approval of the portion of its
license renewal application pertaining to the CTA. Alternatively, a station
may qualify for staff-level approval even if it broadcasts "somewhat less"
than three hours per week of Core Programming by demonstrating that it has
aired a weekly package of different types of educational and informational
programming that is "at least equivalent" to three hours of Core Programming.
Non-core programming that can qualify under this alternative includes
specials, public service announcements, short-form programs and regularly
scheduled non-weekly programs, "with a significant purpose of educating and
informing children."
A licensee that does not meet the processing guideline under either of these
alternatives will be referred by the FCC's staff to the Commissioners of the
FCC, who will evaluate the licensee's compliance with the CTA on the basis of
both its programming and its other efforts related to children's educational
and informational programming, e.g., its sponsorship of Core Programming on
other stations in the market, or nonbroadcast activities "which enhance the
value" of such programming. A television station ultimately found not to have
complied with the CTA could face sanctions including monetary fines and the
possible non-renewal of its broadcast license. The Company believes that its
current program offering on the Fox Kids Network exceeds the processing
guidelines. In addition, the Company has cleared a series called The Why Why
Family in the U.S. syndication market for the Fall of 1996, which it believes
qualifies as Core Programming under the new rules. Nonetheless the adoption of
the new quantitative guideline could result in a material increase in the
amount of educational and informational children's programming broadcast; and
it is unclear what impact, if any, such a result would have on the Company's
business.
Pursuant to the 1992 Cable Act, the FCC substantially reregulated the cable
television industry in various areas, including rate regulation, competitive
access to programming, "must-carry" and retransmission consent for broadcast
stations, and customer service regulations. These rules, among other things,
restrict the extent to which a cable system may profit from (or recover the
costs associated with) adding new program channels, impose certain carriage
requirements with respect to television broadcast stations, limit exclusivity
provisions in programming contracts, and require prior notice for channel
additions, deletions and changes.
Cable operators and satellite cable or satellite broadcast programmers in
which cable operators have attributable interests are prohibited from using
unfair methods of competition or unfair acts or deceptive acts or practices,
the purpose or effect of which is to hinder significantly or prevent any
multichannel video programming distributor from providing satellite cable or
satellite broadcast programming to customers. A cable operator with an
attributable interest (defined as five percent equity or five percent voting
control) in a satellite cable or satellite broadcast programmer must not
improperly influence the programmer's decision to sell programming to an
unaffiliated multichannel video programming distributor (or the terms and
conditions of such a sale). Similarly, a satellite cable programmer in which a
cable operator has an attributable interest may not discriminate among
competing cable systems or other multichannel video programming distributors
in the prices, terms and conditions of sale or delivery of programming. Such
programmers may offer discounts, however, based on actual cost savings.
Exclusive contracts between affiliated cable operators and programmers are
prohibited for areas not served by the cable operator as of October 1992. In
areas served by the affiliated cable operator, exclusive contracts are
prohibited unless the FCC makes a prior determination that such a contract
would serve the public interest. Multichannel video programming distributors
are generally prohibited from restraining the ability of unaffiliated
programmers to compete fairly by discriminating in the selection, terms or
conditions of carriage of programming services based on affiliation.
It is not possible to predict at this time the impact, if any, that these
rules may have on the Company's plans to distribute programming through cable
and DTH satellite systems, some of which could be deemed to be affiliated with
the Company.
The United States Congress and the FCC also currently have under
consideration, and may in the future adopt, new laws, regulations and policies
regarding a wide variety of matters which could, directly or indirectly,
59
materially adversely affect the operations of the Company. The Company is
unable to predict the outcome of future federal legislation or the impact of
any such laws or regulations on its operations.
The Company is also subject to local content and quota requirements in
international markets which, although a significant portion of the Company's
library meets current European and French requirements, effectively limits
access to particular markets.
FACILITIES
The Company currently leases a total of 111,225 square feet of office and
production space in its headquarters building in Los Angeles, California under
a lease expiring in April 2006, subject to two separate five-year extension
options. The Company's Fox Kids Network also leases 18,568 square feet of
office and production space in a separate facility in Los Angeles on a month-
to-month arrangement with FOX Television. See "Certain Transactions." The
Company also leases a multi-purpose production facility in Valencia,
California under a lease expiring in January 1997, subject to two separate
one-year extension options. The Company's Paris animation studio currently
leases 1,379 square meters of office and production space under a lease
expiring February 28, 2005, but the lease may be canceled by the Company with
six months notice on February 28, 1999 or February 28, 2002. The Company also
leases office facilities in other locations throughout the world, none of
which are considered material. The Company believes that its current office
and production space, together with space readily available without material
cost in the markets in which it operates, are adequate to meet its needs for
the foreseeable future.
EMPLOYEES
As of September 1, 1996, the Company had 366 full-time employees in the
United States and 38 full-time employees outside the United States. The
Company also regularly engages freelance creative staff and other independent
contractors on a project-by-project basis. The Company believes its relations
with its employees are good.
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INTELLECTUAL PROPERTY
The Company generally holds copyrights to its owned programming in its
library. Additionally, the Company holds registered trademarks on the various
characters and series contained in its owned programming. The Company also
holds significant rights as licensee of other productions, programming,
characters and series, most of which are subject to copyrights and trademarks
owned by the respective licensors of such properties. The following table
lists the Company's network and syndication programming for the 1996-1997
broadcast season, the nature of the ownership of the copyrights and trademarks
associated with such programming and certain restrictions applicable to such
licensed copyrights and trademarks.
[Enlarge/Download Table]
INTELLECTUAL PROPERTY DISTRIBUTION RIGHTS
--------------------- ------------------------------------------------------------------
HOME NON-
COPYRIGHTS TRADEMARKS TERRITORY TELEVISION VIDEO THEATRICAL THEATRICAL MERCHANDISING
---------- ---------- ------------- ---------- ----- ---------- ---------- -------------
Adventures of Oliver . . Worldwide . . . . .
Twist
Big Bad Beetleborgs . . Worldwide . . . . .
(except Asia)
Bobby's World . . Worldwide . . . . .
Bureau of Alien .(1) .(1) International . . . . .
Detectors (B.A.D.) (worldwide)
Dragonball Z V(2) V(2) United States . . V V V
Eagle Riders V(3) . Worldwide . . . . .
(except Asia)
Eek! Stravaganza . . Worldwide . . . . .
Life With Louie . . Worldwide . . . . .
Masked Rider . . Worldwide . . . . .
The Mouse and the .(1) .(1) International . . . . .
Monster (worldwide)
Power Rangers Zeo . . Worldwide . . . . .
(except Asia)
Samurai Pizza Cats V(4) . Worldwide . . . . .
(except Asia)
Sweet Valley High . V Worldwide . . . . .
(except
publishing)
The Tick . . Worldwide . . . . .
The Why Why Family . . Worldwide . . . . .
X-Men V(5) V(5) Worldwide . . V V V
--------
("." Company owns the intellectual property rights or programming distribution
rights; "V" Company does not own the intellectual property rights or
programming distribution rights)
(1) Copyrights and trademarks are owned jointly with UPN.
(2) FUNimation and Toei Animation own copyrights and trademarks. The Company
has exclusive U.S. distribution rights on a year-to-year basis through
2001.
(3) Tatsunoko and Intervision own copyrights. The Company has exclusive
distribution rights through 2004, with a right to extend for 15 years.
(4) Tatsunoko owns copyrights. The Company has distribution rights through
2000, with a right to extend for 10 years.
(5) Marvel owns copyrights and trademarks. The Company has exclusive
distribution rights for 15 years.
The Company considers its owned and licensed copyrights and trademarks to be
of significant value and importance to the Company's business. Accordingly,
the Company's policy is to vigorously enforce copyrights and trademarks with
respect to owned and licensed programming against unlawful infringement by
third parties.
LEGAL PROCEEDINGS
The Company is engaged in litigation in the ordinary course of its business,
none of which the Company believes is material.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company, and their ages at June
30, 1996, are as follows:
[Download Table]
NAME AGE POSITION
---- --- --------
Haim Saban 51 Chairman of the Board and Chief Executive Officer of the
Company; Chairman and Chief Executive Officer of Saban
Margaret Loesch 50 President and Director of the Company; Chairman and
Chief Executive Officer of Fox Kids Networks Worldwide
Mel Woods 44 President, Chief Operating Officer, Chief Financial
Officer and Director of the Company; President and
Chief Operating Officer of Saban
Shuki Levy 50 Executive Vice President and Director of the Company
William Josey 49 Senior Vice President, Business Affairs and General
Counsel--Saban
Mark Ittner 44 Senior Vice President of Finance--Saban
K. Rupert Murdoch 65 Director
Chase Carey 42 Director
The Company intends to appoint two independent directors to its Board of
Directors within 90 days of the date of this Prospectus, and expects that each
of such directors will be appointed as members of the audit and compensation
committees of the Board of Directors.
HAIM SABAN, the founder of Saban, has served as its Chairman and Chief
Executive Officer since the establishment of the company in 1983. Mr. Saban is
a creator and executive producer of the Company's live-action series, Power
Rangers. Mr. Saban has also served as a Senior Executive Officer of the LLC
since June 1995.
MARGARET LOESCH has served as President of Fox Kids Networks Worldwide since
January 1996. Ms. Loesch has been President of Fox Kids Network since its
inception in March 1990. From 1984 to 1990, Ms. Loesch was President and Chief
Executive Officer of Marvel Productions Ltd., where she supervised the
development of numerous series, including Jim Henson's Muppet Babies, Dungeons
and Dragons and Jim Henson's Fraggle Rock. Before joining Marvel, Ms. Loesch
was Executive Vice President of Programming for Hanna-Barbera Productions,
which she joined in 1979 as Vice President of Children's Programming. Ms.
Loesch is an active member of the Academy of Television Arts and Sciences,
where she served three terms as an Academy Governor for children's
programming. She currently serves as Vice President of the Academy of
Television Arts and Sciences Foundation. Ms. Loesch is the recipient of four
Emmy Awards.
MEL WOODS has served as the President and Chief Operating Officer of Saban
since 1991. Mr. Woods has also been a director of Saban since 1991. From 1987
to 1991, Mr. Woods served as Senior Vice President and Chief Financial Officer
of DIC Enterprises, an animation production company. Prior to joining DIC, Mr.
Woods was Senior Vice President, Chief Financial Officer and Treasurer of
Orion Pictures Corp. and served as a member of its board of directors.
SHUKI LEVY has served as an independent contractor performing production
related assignments for Saban since 1983. Mr. Levy became the Executive Vice
President of the Company in 1996, responsible for productions. Mr. Levy is
executive producer of the Company's live-action series, Power Rangers, and
also serves as executive producer for Big Bad Beetleborgs and Masked Rider.
Mr. Levy is also a singer, having sold more than 14 million records worldwide,
a composer of theme music for television movies, series and feature films, a
screenwriter and a feature film director.
62
WILLIAM JOSEY has served as Senior Vice President of Business Affairs and
General Counsel since joining Saban in 1991. Prior to joining Saban, Mr. Josey
served as Senior Vice President of MGM/UA Telecommunications, supervising
business and legal matters. During the past 20 years, Mr. Josey has also held
a number of executive positions, including Vice President of Business and
Legal Affairs for The Disney Channel; Vice President of Business Affairs for
Lorimar Television; Vice President of Business Affairs for Polygram
Television; Director of Business Affairs for Columbia Pictures Television; and
Director of Contracts for ABC Television Network. Mr. Josey received his Juris
Doctor from the University of Houston in 1973.
MARK ITTNER has served as Senior Vice President of Finance of Saban since
joining the company in 1993. From 1990 to 1993, Mr. Ittner served as Vice
President and Controller of Imagine Films, a motion picture and television
production company. Prior to joining Imagine Films, Mr. Ittner was the acting
Co-Chief Financial Officer of Weintraub Entertainment Group, after joining
Weintraub as a Vice President and Controller in January 1988. From 1979 to
1984, Mr. Ittner was first Assistant Controller and then in 1984, Vice
President and Controller, of Hanna-Barbera Productions, Inc., and its parent
company, The Taft Entertainment Company. Mr. Ittner is a Certified Public
Accountant and is a member of the California Society of Certified Public
Accountants and the American Institute of Certified Public Accountants.
K. RUPERT MURDOCH has served as Executive Director of News Corp. since 1959
and remains its Chairman, Managing Director and Chief Executive. He also has
served as Director of News Limited, News Corp.'s principal subsidiary in
Australia, since 1953. He has been Director of News International plc, News
Corp.'s principal subsidiary in the United Kingdom, since 1969 and Managing
Director from December 1986 to January 1990. He has served as Chairman, Chief
Executive Officer and a director of News America Holdings Incorporated
("NAHI"), News Corp.'s principal subsidiary in the United States, since 1973.
He became President of NAHI in October 1985. He has served as Chairman and a
Director of STAR TV since July 1993. He also has been a Member of the Board of
Directors of BSkyB since November 1990.
CHASE CAREY has served as Chairman and Chief Executive Officer of Fox
Television since July 1994. Mr. Carey is responsible for all divisions of Fox
Television including Fox Broadcasting, Fox Television, Twentieth Television's
domestic syndication unit and Fox's cable interests. Mr. Carey joined Fox Inc.
in 1988 as Executive Vice President, served as Chief Financial Officer, and
assumed the title of Chief Operating Officer in February 1992. Prior to
joining Fox, Mr. Carey worked at Columbia Pictures in several executive
positions, including President of Pay/Cable and Home Entertainment and
Executive Vice President of Columbia Pictures International. Mr. Carey is a
member of the board of directors of Gateway 2000 and Colgate University.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors will establish an Audit Committee and a Compensation
Committee following the Offerings. The Audit Committee, which will consist of
the two independent directors of the Company and will, among other things,
make recommendations to the Board of Directors regarding the independent
auditors to be nominated for ratification by the stockholders, review the
independence of those auditors, approve the scope of the annual activities of
the independent auditors and review audit results. The Compensation Committee,
which will consist of the two independent directors of the Company, will
recommend to the Board compensation plans and arrangements with respect to the
Company's executive officers and key personnel.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to consummation of the Offerings, there was no Compensation Committee
of the Board of Directors. During the fiscal year ended June 30, 1996,
executive compensation decisions were made at Saban by the management of Saban
and at FCN by the management of Fox Broadcasting.
63
TERMS OF OFFICE
Each director is elected to hold office until the next annual meeting of
stockholders and until his or her respective successor is elected and
qualified. Officers serve at the discretion of the Board of Directors, except
that Haim Saban may not be removed or replaced until such time as he and the
other stockholders whose shares he controls collectively transfer to
unaffiliated parties more than one-third of their beneficial Class B Common
Stock holdings.
AGREEMENT REGARDING ELECTION OF DIRECTORS; CHANGE IN CONTROL
Under the terms of an agreement between them, Fox Broadcasting and Mr. Saban
have agreed to vote all of the shares of Class B Common Stock beneficially
owned by each of them to the election of three directors designated by Fox
Broadcasting, three directors designated by Mr. Saban, and two independent
directors generally acceptable to each of them. If they are unable to mutually
agree as to the independent directors, Fox Broadcasting has the right to
nominate one independent director and Mr. Saban has the right to nominate the
other, and each will vote for both. Fox Broadcasting has agreed with Ms.
Loesch that she will, during the term of her employment with the Company, be
one of Fox's designees to the Board of Directors. Fox Broadcasting's other
designees are currently Messrs. Murdoch and Carey. Messrs. Saban, Woods and
Levy are the designees of Mr. Saban. See "Principal Stockholders."
Under agreements between Mr. Saban, the other Saban Stockholders and Fox
Broadcasting, Fox Broadcasting has the right and option, commencing in
December 2002 or earlier in certain circumstances, to acquire all of the
shares of Class B Common Stock of the Company then held by Mr. Saban and the
other Saban Stockholders and Mr. Saban has the right and option, commencing in
December 2000, or earlier in the event of a change in control of Fox
Broadcasting or certain limited circumstances, to cause Fox Broadcasting to
purchase all of these shares. These agreements do not restrict Mr. Saban's
ability publicly to dispose of his shares.
EXECUTIVE COMPENSATION
The following table sets forth the aggregate cash and non-cash compensation
paid or accrued by the Company to the Chief Executive Officer and the other
four most highly compensated executive officers ("Named Executive Officers")
compensated in excess of $100,000 for the fiscal year ended June 30, 1996:
SUMMARY COMPENSATION TABLE
[Download Table]
ANNUAL COMPENSATION
---------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS
--------------------------- ---- ---------- --------
Haim Saban......................................... 1996 $1,000,000 $ --
Chairman and Chief Executive Officer
Margaret Loesch.................................... 1996 500,000 250,000
President
Mel Woods.......................................... 1996 428,000 624,000
President, Chief Operating Officer and
Chief Financial Officer
Shuki Levy(1)...................................... 1996 500,000(1) --
Executive Vice President
William Josey...................................... 1996 238,700 15,000
Senior Vice-President, Business Affairs and
General Counsel--Saban
--------
(1) Includes amounts paid to Mr. Levy as a consultant during the fiscal year
ended June 30, 1996. The Company intends to pay Mr. Levy a bonus of
$700,000 for services rendered.
See "Certain Transactions--Transactions between Haim Saban, other executive
officers and Saban" for information with respect to certain loans,
forgivenesses of loans and other transactions for the benefit of certain of
the Named Executive Officers.
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EMPLOYMENT AGREEMENTS
Haim Saban
Effective December 22, 1995, Haim Saban entered into an employment agreement
with the Company which extends through June 20, 2002. Pursuant to the terms of
the employment agreement, Mr. Saban is to be paid an annual salary of
$1.0 million. Mr. Saban may not be removed or replaced with or without cause
until he and the other stockholders whose shares he controls collectively
transfer more than one-third of the number of shares of Class B Common Stock
they beneficially own at the time of the Offerings. If Mr. Saban is terminated
following such an event, he will be entitled to receive an amount equal to his
annual base salary from the date of his termination through June 30, 2002.
Other Executives
The Company has entered into employment agreements with each of the
following executives on substantially the same terms and conditions. Pursuant
to the terms of each employment agreement, the Company may terminate the
executive's employment at any time with or without cause and the executive may
terminate his or her employment upon the Company's material breach of the
employment agreement. If the executive is terminated by the Company with
cause, he or she will be entitled to receive (i) annual base salary for the
period in which the date of termination falls, pro-rated to the date of such
termination and (ii) vested rights with respect to certain stock options
granted in connection with the employment agreement. Should the executive
terminate his or her employment or should his or her employment be terminated
by the Company without cause, the executive will be entitled to receive (i)
his or her annual base salary for the period in which the date of termination
falls, pro-rated to the date of such termination, (ii) severance pay for the
balance of the term of the employment agreement, subject to offset against the
executive's future earnings, (iii) bonus compensation for the period in which
the date of termination falls, pro-rated to the date of such termination and
(iv) vested rights with respect to certain stock options granted in connection
with the employment agreement.
Margaret Loesch. Effective January 1, 1996, Margaret Loesch entered into a
five-year employment agreement with the Company. Pursuant to the terms of the
employment agreement, Ms. Loesch is to be paid an annual base salary of
$550,000 for 1996, increasing by $25,000 each year thereafter, and an annual
contingent bonus of between $300,000 and $575,000 for 1996, with the maximum
bonus increasing $25,000 each year thereafter. Concurrent with the execution
of the employment agreement, the Company and Ms. Loesch entered into a five-
year, non-exclusive consulting agreement pursuant to which, among other
things, the Company agreed that if the employment agreement is not extended
beyond its five-year term, the Company would, on the terms set forth therein,
be obligated to pay Ms. Loesch over a five-year period an annual consulting
fee at a rate not exceeding $250,000 per year. In connection with the
execution of Ms. Loesch's employment agreement, Fox Broadcasting agreed to
nominate Ms. Loesch (for the term of her employment) as one of the Fox
appointees to the Board of Directors of the Company. In addition, Fox
Broadcasting agreed with Ms. Loesch that all stock options granted by New
Corp. to Ms. Loesch through December 31, 1995 would remain outstanding and
continue to vest as if Ms. Loesch were still employed by Fox, Inc. or a Fox,
Inc. subsidiary.
Mel Woods. Effective June 1, 1994, Mr. Woods entered into a five-year
employment agreement with the Company. Pursuant to the terms of the employment
agreement, Mr. Woods is to be paid an annual base salary of $450,000, $475,000
and $500,000 for each of the remaining 1996-97, 1997-98 and 1998-99 periods,
respectively, and an annual contingent bonus which is limited to $650,000,
$675,000 and $700,000 for each of the 1996-97, 1997-98 and 1998-99 periods,
respectively.
Shuki Levy. Effective June 1, 1996, Mr. Levy entered into an employment
agreement with the Company. The term of the employment agreement extends
through May 31, 1999. Pursuant to the terms of the employment agreement, Mr.
Levy is to be paid an annual base salary of $500,000 for 1996-97, 1997-98 and
1998-99, respectively, and is eligible to receive additional benefits.
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STOCK OPTIONS AND STOCK INCENTIVE PLAN
The following table sets forth information for the Named Executive Officers
with respect to grants of options to purchase Class A Common Stock of the
Company made during the fiscal year ended June 30, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
[Enlarge/Download Table]
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION FOR
INDIVIDUAL GRANTS 10-YEAR OPTION TERM
--------------------------------------------------- ------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO PER SHARE
OPTIONS EMPLOYEES EXERCISE EXPIRATION
NAME GRANTED(1) IN FISCAL YEAR PRICE DATE 0% 5% 10%
---- ---------- -------------- --------- --------------- --------- --------- ----------
Margaret Loesch......... 100% January 1, 2006
--------
(1) This option vested with respect to one-fifth of the shares on January 1,
1996. The balance of the option will vest in 20% increments on each
December 31 thereafter. The option will terminate on January 1, 2006,
unless terminated earlier as provided in the stock option agreement.
The following table summarizes information with respect to the number of
shares of Class A Common Stock underlying stock options held by each of the
Named Executive Officers at June 30, 1996, and the value of unexercised
options, assuming a value of $ per share, which is the assumed
initial public offering price per share of Class A Common Stock in the
Offerings.
AGGREGATED FISCAL YEAR-END OPTION VALUES
[Enlarge/Download Table]
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR-END OPTIONS AT FISCAL YEAR-END
---------------------------------------------- ------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------------- ---------------------- ---------------- -----------------
Margaret Loesch......... $ $
Mel Woods...............
Shuki Levy..............
Each of these options has a term of 10 years from the date of its grant
(June 1, 2004 in the case of Messrs. Woods and Levy, and January 1, 2006 in
the case of Ms. Loesch), unless terminated earlier as provided in the
agreement granting the option.
Stock Incentive Plan
In September 1996, the Board of Directors and stockholders of the Company
approved the Company's 1996 Stock Incentive Plan (the "1996 Plan"). The 1996
Plan was adopted in order to enable the Company and its subsidiaries to
attract, retain and motivate selected eligible directors, officers, employees
and consultants of the Company by providing for or increasing the proprietary
interests of those persons in the Company, and by associating their interests
in the Company with those of the Company's stockholders.
Any person who is a director, officer, employee or consultant of the
Company, or any of its current or future subsidiaries, shall be eligible to be
considered for the grant of Awards under the Plan. The Plan shall be
administered by a committee of the Board of Directors of the Company (the
"Committee"). Pursuant to the 1996 Plan, the Committee may grant, without
limitation, any of the following awards: shares of Class A Common Stock or any
option, warrant, convertible security, stock appreciation right or similar
right with an exercise or conversion privilege at a price related to an equity
security, or similar securities with a value derived from the value of an
equity security (an "Award"). Awards are not restricted to any specified form
or structure and may include, but need not be limited to, sales, bonuses and
other transfers of stock, restricted stock, stock options, reload stock
options, stock purchase warrants, other rights to acquire stock or securities
convertible into or redeemable for stock, stock appreciation rights, phantom
stock, dividend equivalents, performance units or
66
performance shares, and an Award may consist of one such security or benefit,
or two or more of them in tandem or in the alternative. The Committee, in its
sole discretion, determines all of the terms and conditions of each Award
granted under the 1996 Plan.
An aggregate of shares of Class A Common Stock have been
reserved for issuance in connection with the Awards made under the 1996 Plan.
The 1996 Plan is effective for a period of ten years, through 2006.
The Committee may amend or terminate the 1996 Plan at any time and in any
manner but no such amendment or termination may terminate or modify any Award
previously granted under the 1996 Plan without the consent of the recipient of
the Award. The Company has granted to independent directors and certain
members of management options to purchase an aggregate of shares of the
Class A Common Stock. In addition, the Company intends to grant prior to the
closing of the Offerings to certain officers and employees under its stock
incentive plan options to purchase shares of Class A Common Stock,
exercisable at the initial offering price.
67
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of September 15, 1996
(after giving effect to the Reorganization) with respect to the shares of
Class A Common Stock and Class B Common Stock beneficially owned by (i) each
director of the Company; (ii) each person known to the Company to be the
beneficial owner of more than 5% of either class of Common Stock; (iii) each
Named Executive Officer; and (iv) all directors and executive officers of the
Company as a group. Except as may be indicated in the footnotes to the table,
each of such persons has the sole voting and investment power with respect to
the shares owned, subject to applicable community property laws. The address
of each person listed is in care of the Company, 10960 Wilshire Boulevard, Los
Angeles, California 90024.
[Enlarge/Download Table]
CLASS B
CLASS A COMMON STOCK (1) COMMON STOCK (1)
--------------------------- ------------------
PERCENT OF CLASS AGGREGATE VOTING
OWNED POWER
------------------- -------------------
NUMBER PRIOR TO AFTER NUMBER PERCENT PRIOR TO AFTER
OF THE THE OF OF CLASS THE THE
SHARES OFFERINGS OFFERINGS SHARES OWNED OFFERINGS OFFERINGS
------- --------- --------- --------- -------- --------- ---------
Haim Saban(2)(3)........ 100.0% 100.0% 100.0%
Silverlight Enterprises,
L.P.(2)(3)............. 17.4 17.4 17.4
Fox Broadcasting(3)..... 100.0 100.0 100.0
Margaret Loesch.........
Mel Woods...............
Shuki Levy..............
Rupert Murdoch.......... 100.0 100.0 100.0
Chase Carey............. 100.0 100.0 100.0
All of the Company's
executive officers and
directors as a group
(eight persons)........ 100.0 100.0 100.0
--------
* Less than one percent
(1) Under Rule 13d-3 of the Securities Exchange Act, certain shares may be
deemed to be beneficially owned by more than one person (if, for example,
persons share the power to vote or the power to dispose of the shares). In
addition, shares are deemed to be beneficially owned by a person if the
person has the right to acquire the shares (for example, upon exercise of
an option) within 60 days of the date as of which the information is
provided. In computing the percentage ownership of any person, the amount
of shares outstanding is deemed to include the amount of shares
beneficially owned by that person (and only that person) by reason of
these acquisition rights. As a result, the percentage of outstanding
shares of any person as shown in this table does not necessarily reflect
the person's actual ownership or voting power with respect to the number
of shares of Common Stock actually outstanding at September 15, 1996.
(2) Pursuant to Rule 13d-3 under the Securities Exchange Act, Haim Saban may
be deemed to beneficially own all shares of Class B Common Stock held by
the Company as the result of an agreement between them, pursuant to which
Mr. Saban has the right to direct the voting of these shares with respect
to all matters submitted to a vote of the stockholders, including the
election of directors of the Company.
(3) Pursuant to Rule 13d-3 under the Securities Exchange Act, Haim Saban and
Fox Broadcasting may be deemed to beneficially own all shares of Class B
Common Stock held by each of them, and by the other stockholders
identified in the following table, as the result of an agreement pursuant
to which Mr. Saban and Fox Broadcasting have the right to direct the
voting of such shares with respect to all matters submitted to a vote of
the stockholders, including the election of directors of the Company. With
regard to the election of directors, Fox Broadcasting has agreed to vote
in favor of three nominees designated by Haim Saban and Haim Saban has
agreed to vote in favor of three nominees designated by Fox Broadcasting.
Fox Broadcasting and Haim Saban will mutually agree on the two independent
directors. If they are unable to
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mutually agree, Fox Broadcasting will nominate one independent director and
Haim Saban will nominate the other and they will each vote for both
nominees. If either Haim Saban or Fox Broadcasting transfers more than one-
third of their initial holdings of Class B Common Stock, then, at the
option of the other, the voting agreement will terminate. As part of the
voting agreement, both Mr. Saban and Fox Broadcasting have agreed to a
standstill whereby neither of them will, without the consent of the other,
among other things, (i) purchase, acquire, offer or agree to purchase or
acquire any shares of capital stock or other voting securities of the
Company; (ii) solicit stockholders for the approval of stockholder
proposals; or (iii) otherwise act, alone or in concert with others, to
assert or encourage any other person or entity in seeking to control the
management, board of directors or policies of the Company or to propose or
effect a business combination, restructuring, recapitalization,
liquidation, dissolution or similar transaction. See "Management--Agreement
Regarding Election of Directors; Change in Control."
Under agreements between Mr. Saban, the other Saban Stockholders and Fox
Broadcasting, Fox Broadcasting has the right and option, commencing in
December 2002 or earlier in certain circumstances, to acquire all of the
shares of Class B Common Stock of the Company held by Mr. Saban and the
other Saban Stockholders and Mr. Saban has the right and option, commencing
in December 2000, or earlier in the event of a change in control of Fox
Broadcasting or certain limited circumstances, to cause Fox Broadcasting to
purchase all of such shares.
As of September 15, 1996, the number of shares of Common Stock beneficially
owned by Mr. Saban, the entities which he controls, and Fox Broadcasting
over which each member thereof had sole investment power was as follows:
[Download Table]
PRIOR TO THE AFTER
OFFERINGS THE OFFERINGS
-------------------- -------------
NUMBER
OF AGGREGATE AGGREGATE
SHARES VOTING POWER VOTING POWER
------- ------------ -------------
Haim Saban............................... 49.9%
Quartz Enterprises, L.P.................. 4.8
Merlot Investments, a California general
partnership............................. 4.0
Silverlight Enterprises, L.P............. 17.4
Celia Enterprises, L.P................... 0.1
Fox Broadcasting......................... 49.9
(4) Because of their positions with the Company, each of Messrs. Murdoch and
Carey may be deemed to beneficially own all of the shares of Common Stock
owned or controlled by Fox Broadcasting. Each of Messrs. Murdoch and Carey
disclaims any pecuniary interest in such securities.
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CERTAIN TRANSACTIONS
The following discussion is qualified by reference to the full agreements,
each of which is filed as an exhibit to the Registration Statement of which
this Prospectus is a part.
FORMATION OF THE LLC AND THE REORGANIZATION
In connection with the formation of the LLC, Haim Saban, Saban and the Fox
Parties entered into a series of agreements. As a result of the
Reorganization, the LLC will become a subsidiary of the Company and the
Company will be entitled to the benefits of and subject to these agreements.
On November 1, 1995, Saban, FCN Holding and Fox Broadcasting entered into a
LLC Formation Agreement pursuant to which the parties agreed to cause the
formation of the LLC. Pursuant thereto, Fox Broadcasting agreed to enter into
an Asset Assignment Agreement (described below) with the LLC, and deliver
certain cash, documents and other assets, summarized below, at the closing of
the formation of the LLC. In addition, FCN Holding and Saban each paid and
contributed $100,000 to the LLC. In consideration for Fox Broadcasting's
contribution, Fox Broadcasting received a non-voting Class A Members Interest
in the LLC; and in consideration for the contributions from Saban and FCN
Holding, each received a Class B Members Interest in the LLC. See "Summary--
The Reorganization."
As a Class A Member of the LLC, Fox Broadcasting was granted a priority
right to receive distributions of Distributable Cash (defined below) and other
distributions until it has received aggregate distributions in an amount equal
to $40 million. As described below, in September 1996, Fox Broadcasting
purchased, for $10 million cash, an additional $10 million of Class A Members
Interest. Pursuant to the terms of the Reorganization, immediately prior to
the closing of the Offerings, Fox Broadcasting will exchange all of its Class
A Members Interest for shares of the Company's Series A Preferred Stock.
See "Summary--The Reorganization." This Series A Preferred Stock terminates
once an aggregate of $50 million in dividend and redemption amounts are paid
to Fox Broadcasting. See "Description of Securities--Series A Preferred
Stock." As a Class B Member of the LLC, each of Saban and FCN Holding also
obtained the right to receive distributions of Distributable Cash, and other
distributions, generally junior in right to the distributions of Fox
Broadcasting.
Fox Broadcasting also made a $64.5 million interest free loan to the LLC, of
which $14.5 million was repaid in September 1996. The $50 million remainder of
this loan was to be paid from time to time out of Distributable Cash of the
LLC before any distributions are made on the Class A and Class B Members
Interest. In connection with the Reorganization, immediately prior to the
closing of the Offerings, Fox Broadcasting will exchange this loan for a new
Class A Members Interest in the LLC, which will grant Fox Broadcasting a
priority right to receive distributions of Distributable Cash and other
distributions from the LLC until it has received aggregate distributions of
$50 million, whereupon it will terminate and expire. Distributable Cash
generally means the amount of cash available for distribution by the LLC
(including cash available from Saban and FCN Holding and their respective
subsidiaries), taking into account all cash, debts, liabilities and
obligations of the LLC then due and after setting aside reserves to provide
for the LLC's capital expenditures, debt service, working capital and
expansion plans.
Pursuant to the Asset Assignment Agreement (which survives the
Reorganization), the Fox Parties agreed to provide the LLC certain business
opportunities (see "Business--The Strategic Alliance with Fox/News Corp."),
and the parties further agreed to the following:
Programming. The LLC agreed to make programming available at market rates
to any program services which were offered to and rejected by the LLC and
thereafter operated by the Fox Parties or their affiliates.
Distribution Services. The Fox Parties and their affiliates were granted
a right of first negotiation and first refusal, with certain exceptions, to
provide any of the distribution services which the Fox Parties typically
provide and which the LLC decides to obtain from a third party. If the Fox
Parties or their affiliates
70
do not accept the offer, the LLC may obtain the services from a third
party. In the event of any material change in terms, the LLC must reoffer
the opportunity to the Fox Parties.
Other Agreements. The Fox Parties also assigned to the LLC most of their
other agreements with FCN, including agreements which had granted the Fox
Parties the right, for a fee, to provide programming, distribution and
merchandising services for FCN (discussed below). The Fox Parties also
assigned to the LLC all of their rights in an Administration Agreement
(discussed below) between Fox Broadcasting and FCN pursuant to which Fox
Broadcasting agreed to provide for a fee certain administrative services to
FCN, including network national advertising sales, commercial trafficking
and broadcast operations and certain in-house administrative support in the
areas of research, promotions, business affairs, legal affairs and
accounting. See "Business--Distribution: Networks and Syndication--Fox Kids
Network."
In addition to assigning to the LLC the agreements referred to above, the
Fox Parties agreed to pay to the LLC (i) an amount equal to the aggregate of
the distribution fees and commissions received by or credited to the Fox
Parties in connection with the merchandising and distribution agreements
described under "Other Strategic Relationships", (ii) certain "net" revenues
with respect to the existing series properties, and (iii) fees and commissions
under the Administration Agreement, in each case for the period from June 1,
1995 through December 22, 1995 (collectively, the "Catch-Up Payments"). All of
the payments were due on or before July 15, 1996, with interest on the amount
in excess of $14.5 million at a rate of 7% per annum. In September 1996, the
Fox Parties paid $25.4 million to the LLC pursuant to these provisions.
Fox Broadcasting also agreed to contribute to the LLC an amount equal to the
difference, if any, between $35,755,000 and the amount of actual cash payments
made to the LLC pursuant to the Asset Assignment Agreement plus certain
dividends paid to a subsidiary of FCN Holding pursuant to the terms of the LLC
Operating Agreement. In September 1996, Fox Broadcasting paid $10.4 million to
the LLC pursuant to these provisions.
As part of the closing of the formation of the LLC, Saban, the Saban
Stockholders, Fox Broadcasting, FCN Holding and one of its subsidiaries
entered into a Strategic Stockholders Agreement which provided, among other
things, for restrictions on transfer of the stock held by the parties, certain
voting rights between them, as well as the terms of the Reorganization, should
either party subsequently determine to effect an initial public offering of a
successor entity, such as the Offerings.
The parties to the Strategic Stockholders Agreement also agreed to provide
Haim Saban and the Saban Stockholders and Fox Broadcasting certain
registration rights. See "Description of Securities--Registration Rights."
In connection with the Reorganization, in September 1996, the LLC paid to
Fox Broadcasting $10 million, representing the unpaid balance of a fee for
providing all uplink, transponder and other facilities necessary to deliver
via satellite Fox Kids Network programming for broadcast to the Fox Kids
Network Affiliates, and certain other services. Immediately upon receipt of
this $10 million payment, Fox Broadcasting made a contribution to the LLC of
$10 million in exchange for the additional Class A Members Interest described
above.
Pursuant to a Stock Ownership Agreement dated December 22, 1995, the LLC was
granted an option to purchase, upon the occurrence of certain events, all of
the Saban common stock (or the stock of a successor entity, including the
Company) held by the Saban Stockholders, and any of their transferees. The
option is triggered upon the occurrence of the following events and may be
exercised as follows: (i) for a period of one year following the death of Haim
Saban, if he dies prior to December 22, 2012; (ii) upon delivery of written
notice by Fox Broadcasting at any time on or after December 22, 2002 or before
December 22, 2012; or (iii) upon receipt by Fox Broadcasting of written notice
(which generally cannot be delivered prior to December 22, 2001) from Haim
Saban of his desire to cause Fox Broadcasting to purchase all of the shares of
Class B Common Stock held by the Saban Stockholders. The LLC paid to the Saban
Stockholders an aggregate
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of $80.1 million for the grant of the option. The purchase price formula under
the option is based on the fair market value of the Company. As part of the
Reorganization, in September 1996 the LLC distributed the Stock Ownership
Agreement to FCN Holding, which immediately distributed that agreement to Fox
Broadcasting Sub.
CERTAIN TRANSACTIONS BETWEEN THE COMPANY AND THE FOX PARTIES
In May 1996, Saban entered into an agreement in principle with Fox Video
(the "Fox Agreement") for the production and distribution of a live-action
feature film for the home video market based upon the animated character of
Casper (the "Film") to be delivered to Fox Video no later than June 30, 1997.
See "Business--Home Video and Telefilms." The distribution term runs for seven
years from the earlier of the initial release date or December 31, 1997.
Pursuant to the Fox Agreement, Saban will develop, produce and deliver the
Film to Fox Video. Saban has the right and obligation to market, distribute
(at no charge) and exploit the Film in all forms of television, non-theatrical
and airline markets. Fox Video has the right and obligation to market,
manufacture, package, distribute (at no charge) and exploit the Film in home
video formats, and will release the Film in the United States and major
international territories. Saban and Fox Video each will contribute one-half
of the production costs of the Film subject to the rights of both parties to
recoup certain of these costs. Saban and Fox Video will share the television
net income 55% and 45%, respectively, and the home video net income 45% and
55%, respectively subject to the participation rights of the Harvey
Entertainment Company which holds the copyright to Casper.
Fox Video and Saban are currently negotiating a Home Video Rights
Acquisition Agreement pursuant to which, under the proposed terms of the
agreement, Saban will grant to Fox Video the right to distribute English and
Spanish language versions throughout the United States and Canada of certain
of its programs, including Sweet Valley High, all television programs produced
for children and owned or controlled by Saban or FCN, all television programs
produced or to be produced pursuant to the Marvel Agreement and all television
programs which are owned or controlled first by Marvel and subsequently by
Saban, the LLC or the Company. The execution of this agreement is subject to
the earlier termination of an agreement (the "Warner Agreement") dated as of
March 1, 1994 between Saban and Warner Home Video. The beginning of the term
of this agreement varies by type of program, but the term ends as to all
programs between seven and nine years from the date of termination of the
Warner Agreement. Saban is required to make available for release by Fox Video
at least six programs each year, at least two of which will not have been
previously released for home video distribution in any of the territories
covered by the agreement. In consideration of the grant of the distribution
rights, Fox Video has agreed to pay Saban 50% of gross receipts, after
deduction of certain expenses.
The Company has also entered into, and is currently in negotiations with
respect to, a number of agreements with affiliates of News Corp. to launch new
international children's channels. See "Business--Distribution: Networks and
Syndication--International Channels."
Saban and Fox Broadcasting are parties to a Barter Syndication Agreement
dated as of January 5, 1996, pursuant to which Saban engaged Fox Broadcasting
to provide barter advertising sales for the 1996-1997 broadcast season for the
Saban Kids Network. Fox Broadcasting's services will include advertising
sales, sales administration, account maintenance, ratings processing, credit
and collection, sales data entry and reporting and commercials broadcast
standards and practices. In consideration for the services rendered by Fox
Broadcasting to Saban, Saban has agreed to pay Fox Broadcasting a barter
advertising sales fee of $800,000.
FCN and Twentieth Century Fox Licensing and Merchandising, a unit of Fox
Inc. ("Twentieth Fox Licensing") are parties to a Merchandising Rights
Acquisition Agreement dated as of July 1, 1990, pursuant to which FCN licenses
to Twentieth Fox Licensing the right to acquire and exercise throughout the
world literary publishing rights and merchandising rights with respect to each
program currently existing or produced by or on behalf of FCN for initial
exhibition in the United States, including, for example, Bobby's World. The
term of the agreement extends in perpetuity, unless FCN sets forth limitations
with respect to the term of a particular program. In consideration for the
rights granted, Twentieth Fox Licensing agreed to pay to FCN an amount equal
to 100% of "Net Profits," which equaled gross receipts less distribution fees
and expenses. For the fiscal years
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ended June 30, 1994 and 1995, Twentieth Fox Licensing retained approximately
$218,000 and $567,000 as distribution fees under this agreement. On December
22, 1995, in connection with the formation of the LLC, this agreement, and all
amounts retained as distribution fees by Twentieth Fox Licensing from June 1,
1995, were assigned to the LLC by the Fox Parties.
FCN and Twentieth Century Fox are parties to a Distribution Rights
Acquisition Agreement dated as of September 1, 1990, pursuant to which FCN
licensed to Twentieth Century Fox certain worldwide distribution rights with
respect to programming provided by FCN to its affiliated television stations.
The term of the agreement extends in perpetuity, unless FCN sets forth
limitations regarding a particular program's duration. In consideration for
the rights granted, Twentieth Century Fox agreed to pay to FCN 100% of Net
Profits, which equaled gross receipts less distribution fees and expenses. For
the fiscal years ended June 30, 1994 and 1995, Twentieth Century Fox retained
approximately $1.2 million in each year as distribution fees under this
agreement. On December 22,1995, in connection with the formation of the LLC,
this agreement, and all rights of Twentieth Century Fox commencing June 1,
1995, were assigned to the LLC by the Fox Parties.
FCN and Fox Broadcasting are parties to an Administration Agreement dated as
of February 7, 1990, pursuant to which Fox Broadcasting agreed to provide the
following services to FCN: network national advertising sales and the
administration thereof, commercial trafficking and broadcast operations
(including program delivery to Fox Kids Network Affiliates) and overhead
charges related to Fox Broadcasting in-house administrative support in the
areas of research, promotion, business affairs, legal affairs and accounting.
FCN agreed to pay to Fox Broadcasting a fee equal to 15% of 100% of the net
advertising revenue (gross advertising revenue less advertising agency
commissions) derived with respect to national commercials, commercial material
or other advertising matter included or used in connection with any of the
programs exhibited on the Fox Kids Network. For the fiscal years ended June
30, 1994 and 1995, FCN paid to Fox Broadcasting approximately $16.2 million
and $21.3 million in fees pursuant to this agreement. On December 22, 1995, in
connection with the terms of LLC, this agreement, and all rights of Fox
Broadcasting to receive management fees on or subsequent to June 1, 1995, were
assigned to the LLC by the Fox Parties.
Saban is currently negotiating with Fox Family Films, Inc. ("Distributor")
for the distribution of Mighty Morphin Power Rangers II, a "PG-rated" sequel
to the original motion picture (the "Sequel"). Under the proposed terms of the
agreement, Saban will produce and deliver the Sequel to Distributor for
worldwide distribution and grant to Distributor all rights necessary to
advertise, promote, publicize and distribute the Sequel. Saban will hold the
copyright to the Sequel as well as certain rights including, without
limitation, merchandising, television, stage and animated-theatrical rights.
Commercial tie-in rights will be mutually controlled by Saban and Distributor.
Saban will receive 100% of gross receipts after certain distribution fees and
expenses are deducted, based upon a formula set forth in the agreement.
Saban is party to six program exhibition agreements for the 1996-1997
broadcast season with FOX Television and one with FoxNet, both subsidiaries of
Fox Broadcasting, pursuant to which Saban licenses certain of Fox Television's
owned and operated stations and the FoxNet cable television service the right
to broadcast certain series which are part of the Saban Kids Network. All
series are licensed on a barter basis, as described in "Distribution: Networks
and Syndication--Syndication."
TRANSACTIONS BETWEEN HAIM SABAN, OTHER EXECUTIVE OFFICERS AND SABAN
From time to time, Saban has loaned and advanced funds to Haim Saban, the
Company's Chairman and Chief Executive Officer. For the past three fiscal
years, the highest aggregate amounts outstanding from Mr. Saban to Saban were
approximately $922,000 for the fiscal year ended June 30, 1994, and
$2.7 million for each of the fiscal years ended June 30, 1995 and June 30,
1996. In connection with the formation of the LLC, on December 22, 1995, Saban
forgave in full all amounts then owing from Haim Saban, aggregating
$2,649,000. All of these loans accrued interest at the rate of one percent
over City National Bank's prime rate.
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During the same period Haim Saban loaned and advanced funds to Saban to
cover working capital needs of Saban. The highest aggregate amounts
outstanding from Saban to Mr. Saban were approximately $13.3 million for the
fiscal year ended June 30, 1994 and $9.0 million for the fiscal year ended
June 30, 1995. The balance of these loans was repaid in full in October 1994.
All of the loans owing to Mr. Saban accrued interest at the rate of one
percent over City National Bank's prime rate.
From time to time, Saban has loaned and advanced funds to Shuki Levy, the
Company's Executive Vice President. For the past three fiscal years, the
highest aggregate amounts outstanding from Mr. Levy to Saban were $980,000 for
the fiscal year ended June 30, 1994, $1.0 million for the fiscal year ended
June 30, 1995 and $1.2 million for the fiscal year ended June 30, 1996. As of
September 1, 1996, the total amount outstanding, including accrued and unpaid
interest, was $1.2 million. All of the amounts outstanding under these loans
accrued interest at rates ranging from 5% to 6.5% per annum.
Saban currently leases and distributes certain of its properties (e.g.,
motion pictures, television programs, merchandising and licensing rights) in
Israel through Duveen Trading Ltd., a corporation wholly-owned by Haim Saban's
brother. The term of the agreement extends through December 31, 1997, subject
to extension by Saban for an additional three years. Duveen Trading Ltd. is
not obligated to make any payments to Saban under this agreement.
In connection with Mr. Saban's employment agreement, the LLC agreed to
reimburse Mr. Saban for all out-of-pocket costs and expenses for domestic and
international travel, including private air charter which may include aircraft
owned by Mr. Saban. Saban has entered into a contract with the agency which
leases Mr. Saban's airplane to charter from that agency Mr. Saban's or another
similar airplane for a minimum of fifty charter hours during a twelve-month
period. From March 1996 through June 30, 1996, Saban has paid approximately
$370,000 for such services.
In September 1994, Saban entered into a music services agreement (the "Music
Agreement") with Haim Saban, which agreement was amended in June 1995 and
assigned to a corporation wholly-owned by Mr. Saban in January 1996. The Music
Agreement remains in effect until August 31, 2001. Under the terms of the
Music Agreement, all original theme music, underscores, cues and songs for use
in all programming produced by Saban will be supplied to Saban through Mr.
Saban. Saban is entitled to license third party musical compositions for use
in its programming so long as such compositions are not used as opening or
closing themes nor constitute more than 15% of the total musical content of
any program or episode, without Haim Saban's prior written consent. Saban has
the royalty-free right to use the compositions in articles of merchandise such
as home video units, video games and interactive toys. Saban has been granted
the non-exclusive, worldwide, perpetual license to (i) synchronize and perform
compositions in theatrical motion pictures and (ii) synchronize compositions
in all other forms of programming. Saban creates and owns all right, title and
interest in master recordings of compositions for use in Saban's programming,
and Saban owns the proceeds derived from all forms of exploitation thereof. In
consideration for the provision of the compositions to Saban, Mr. Saban is
entitled to receive all publishing income, directly or through Saban, in
connection with the exploitation of such compositions. Saban is entitled to
reimbursement from Mr. Saban of certain costs associated with the creation of
the compositions. To date, Saban has made no payments of publishing income to
Mr. Saban and Mr. Saban has made no payments for reimbursement of costs to
Saban. For the fiscal year ended June 30, 1996 approximately $262,000 was owed
to Mr. Saban under this agreement.
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DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of shares of
Class A Common Stock, shares of Class B Common Stock, 15,000,000
shares of Preferred Stock, and 1,000,000 shares of Series A Preferred Stock.
As of the Closing Date, including the shares being offered hereunder,
shares of Class A Common Stock, shares of Class B Common
Stock and 1,000,000 shares of Series A Preferred Stock will be issued and
outstanding and no shares of Preferred Stock will be issued or outstanding.
The following descriptions of the securities of the Company and certain
provisions of the Company's Certificate of Incorporation and Bylaws are
summaries, do not purport to be complete and are subject to the detailed
provisions of, and are qualified in their entirety by reference to, the
Certificate of Incorporation and Bylaws of the Company.
CLASS A COMMON STOCK AND CLASS B COMMON STOCK
The Certificate of Incorporation provides for two classes of common stock,
Class A Common Stock and Class B Common Stock, the two classes of which are
substantially identical, except for disparity in voting power.
Voting. Each share of Class B Common Stock entitles the holder of record to
ten votes and each share of Class A Common Stock entitles the holder to one
vote at each annual or special meeting of stockholders, in the case of any
written consent of stockholders, and for all other purposes. The holders of
Class A Common Stock and Class B Common Stock will vote as a single class on
all matters submitted to a vote of the stockholders, except as otherwise
provided by law. Neither the holders of Class A Common Stock nor the holders
of Class B Common Stock have cumulative voting rights. The Company may, as a
condition to counting the votes cast by any holder of Class B Common Stock at
any annual or special meeting of stockholders, in the case of any written
consent of stockholders, or for any other purpose, require the furnishing of
such affidavits or other proof as it may reasonably request to establish that
the Class B Common Stock held by such holder has not, by virtue of the
provisions of the Certificate of Incorporation, been converted into Class A
Common Stock.
Conversion Rights. Each share of Class B Common Stock is convertible at the
holder's option at all times, without cost to the stockholder, into one share
of Class A Common Stock. In addition, Class B Common Stock is subject to
automatic conversion in the event of a transfer in violation of the transfer
restrictions described below.
Dividends and Other Distributions. The holders of Class A Common Stock and
Class B Common Stock will be entitled to receive dividends and other
distributions as may be declared thereon by the board of directors of the
Company out of assets or funds of the Company legally available therefor,
subject to the rights of the holders of the Series A Preferred Stock or any
other series of Preferred Stock and any other provision of the Certificate of
Incorporation. The Certificate of Incorporation provides that if at any time a
dividend or other distribution in cash or other property is paid on Class A
Common Stock or Class B Common Stock, a like dividend or other distribution in
cash or other property will also be paid on Class B Common Stock or Class A
Common Stock, as the case may be, in an equal amount per share. In this
connection, the Certificate of Incorporation specifically provides that if
shares of Class B Common Stock are paid on Class B Common Stock and shares of
Class A Common Stock are paid on Class A Common Stock, in an equal amount per
share of Class B Common Stock and Class A Common Stock, such payment will be
deemed to be a like dividend or other distribution. In the case of any split,
subdivision, combination or reclassification of Class B Common Stock or Class
A Common Stock, the shares of Class A Common Stock or Class B Common Stock, as
the case may be, will also be split, subdivided, combined or reclassified so
that the number of shares of Class B Common Stock and Class A Common Stock
outstanding immediately following such split, subdivision, combination or
reclassification will bear the same relationship to each other as that which
existed immediately prior thereto.
Distributions Upon Liquidation. In the event of any liquidation, dissolution
or winding up of the Company, the holders of Class B Common Stock and the
holders of Class A Common Stock will be entitled to receive the
75
assets and funds of the Company available for distribution after payments to
creditors and to the holders of the Series A Preferred Stock or any Preferred
Stock of the Company that may at the time be outstanding, in proportion to the
number of shares held by them, respectively, without regard to class.
Transferability of Shares. The shares of Class A Common Stock offered hereby
are freely transferable, subject to certain restrictions on resale imposed on
affiliates of the Company. Class B Common Stock is not transferable by a
stockholder except to the following transferees (each a "Permitted
Transferee"): (i) to any other Class B Stockholder, any of Haim Saban's family
members, any trust established solely for the benefit of one or more of Haim
Saban's family members or any legal entity in which Haim Saban or such persons
are the sole beneficial owners; (ii) to a direct or indirect wholly-owned
subsidiary of such Class B Stockholder (or with respect to a Class B
Stockholder which is a natural person, a corporation or other person wholly-
owned by the Class B Stockholder); or (iii) to a Fox Inc. Subsidiary. A "Fox
Inc. Subsidiary" is Twentieth Holdings Corp. and any corporation or other
person in which Fox Inc., or Twentieth Holdings Corp. is the sole beneficial
owner (either directly or indirectly though one or more wholly-owned
subsidiaries) of all the outstanding voting securities of that corporation or
other person. Any purported transfer of Class B Common Stock other than to a
Permitted Transferee shall be null and void and of no effect and the purported
transfer by a holder of Class B Common Stock, other than to a Permitted
Transferee, will result in the immediate and automatic conversion of such
holder's shares of Class B Common Stock into shares of Class A Common Stock.
Reorganization. In the event of any corporate merger, consolidation,
purchase or acquisition of property or stock, or other reorganization in which
any consideration is to be received by the holders of Class B Common Stock or
the holders of Class A Common Stock, the holders of Class B Common Stock and
the holders of Class A Common Stock will receive the same consideration on a
per share basis; except that, if such consideration shall consist in any part
of voting securities) (or of options or warrants to purchase voting
securities, or of securities convertible into or exchangeable for voting
securities), the holders of Class B Common Stock may receive, on a per share
basis, voting securities with ten times the number of votes per share as those
voting securities to be received by the holders of Class A Common Stock (or
options or warrants to purchase, or securities convertible into or
exchangeable for, voting securities with ten times the number of votes per
share as those voting securities issuable upon the exercise of the options or
warrants, or into which the convertible or exchangeable securities may be
converted or exchanged, received by the holders of Class A Common Stock).
Except as expressly set forth in the Certificate of Incorporation, the
rights of the holders of Class B Common Stock and the rights of the holders of
Class A Common Stock are in all respects identical.
SERIES A PREFERRED STOCK
The holders of Series A Preferred Stock have no preemptive rights and are
not subject to future assessments by the Company. All outstanding shares of
Series A Preferred Stock are fully paid and nonassessable. The Series A
Preferred Stock has aggregate dividend and/or redemption obligations of $50
million. Once an aggregate of $50 million has been paid, the Series A
Preferred Stock will cease to be outstanding. The Series A Preferred Stock,
with respect to dividend rights and rights on liquidation, winding up and
dissolution, ranks senior to the Preferred Stock and to the Common Stock. The
holders of the shares of Series A Preferred Stock are entitled to receive,
when, as and if declared by the Board of Directors, out of funds legally
available therefor, cash dividends in an amount equal to the Distributable
Cash of the Company. No more than $49 in dividends may be paid with respect to
any share of Series A Preferred Stock. "Distributable Cash" means, at the time
a determination of Distributable Cash is made, the net cash provided by
operating activities of the Company (on a consolidated basis) from the date of
issuance of the Series A Preferred Stock through the end of the last fiscal
quarter ending not less than 90 days prior to the time of determination, less
the sum of (i) all restricted cash, (ii) all Reserves, and (iii) all amounts
previously paid as dividends on the Series A Preferred Stock. "Reserves" are
those amounts determined from time to time by the Board of Directors as
necessary to provide, over such period as the Board of Directors considers
appropriate, for current and planned capital expenditures, debt service,
working capital requirements and expansion plans; and if the Board of
Directors is unable to reach agreement thereon, the
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Reserves shall be maintained at a level equal to the sum of (i) $30 million,
plus (ii) the net proceeds realized by the Company from the Offerings. The
Company will have the right from time to time to redeem the Series A Preferred
Stock, in whole or in part, with the consent of the holders of the Series A
Preferred Stock, at a redemption price equal to the then-current liquidation
value of the Series A Preferred Stock. If the liquidation value of the Series
A Preferred Stock is $1.00 per share, the Company will have the right and
power at any time thereafter to redeem all, and not less than all, of the
Series A Preferred Stock at a redemption price of $1.00 per share. The holders
of Series A Preferred Stock will have no voting rights with respect to
corporate matters except as provided by law.
PREFERRED STOCK
The Certificate of Incorporation provides that shares of Preferred Stock may
be issued from time to time in one or more series. The Board of Directors is
authorized to fix the voting rights, if any, designations, powers, preferences
and the relative participation, optional or other rights, if any, and the
qualifications, limitations or restrictions thereof, of any unissued series of
Preferred Stock, to fix the number of shares constituting such series, and to
increase or decrease the number of shares of any such series (but not below
the number of shares of such series then outstanding). Accordingly, the Board
of Directors is empowered, without stockholder approval, to issue Preferred
Stock with dividend, liquidation, conversion, voting or other rights which
could adversely affect the voting power or other rights of the holders of the
Company's Class B Common Stock and Class A Common Stock. In the event of
issuance, these shares of Preferred Stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing an
acquisition or a change in control of the Company. The Company currently does
not intend to issue any of the authorized but unissued shares of its Preferred
Stock.
REGISTRATION RIGHTS
Following the closing of the Offerings, Haim Saban and the other former
Saban Stockholders and Fox Broadcasting Sub (the "Holders") who hold all of
the shares of the Class B Common Stock in the aggregate (the "Registrable
Securities") will be entitled to certain rights with respect to the
registration of such shares under the Securities Act. Pursuant to the terms of
the Company's Certificate of Incorporation, upon transfer, the Registrable
Securities become Class A Common Stock. The rights are provided under the
terms of an agreement among the Holders, Saban and FCN Holding. Subject to
certain limitations in the agreement, the Holders of at least 10% of the
Registrable Securities may require the registration of at least the lesser of
50% of the Registrable Securities then outstanding or a number of shares
expected to have an aggregate offering price of $15 million at any time after
six months from the effective date of the Offerings. If the Company receives a
request to register any of the Common Stock for the account of the Holders, or
the Company registers Common Stock for its own account, the Company must offer
to other Holders of Registrable Securities and all others who have a
contractual right, the opportunity to include their shares in the
registration. The Holders may require no more than two long-form registration
statements in any year and no more than three registration statements on Form
S-3 for which the Company will pay all registration expenses. The Company is
not required to pay for a long-form registration statement unless the
Registrable Securities will be disposed of in a firm commitment underwritten
offering. A Holder's right to include shares in an underwritten registration
is subject to the ability of the underwriters to limit the number of shares
included in the offering. The Company is not required to prepare and file a
registration statement which would become effective within 270 days following
the effective date of a registration statement filed by the Company.
DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Certain provisions of the DGCL and of the Certificate of Incorporation and
Bylaws, summarized in the following paragraphs, may be considered to have an
anti-takeover effect and may delay, deter or prevent a tender offer, proxy
contest or other takeover attempt that a stockholder might consider to be in
such stockholder's best interest, including such an attempt as might result in
payment of a premium over the market price for shares held by stockholders.
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Delaware Anti-Takeover Law. Section 203 ("Section 203") of the DGCL
provides, in general, that a stockholder acquiring more than 15% of the
outstanding voting stock of a corporation subject to the statute (an
"Interested Stockholder") but less than 85% of such stock may not engage in
certain "Business Combinations" with the corporation for a period of three
years subsequent to the date on which the stockholder became an Interested
Stockholder unless (i) prior to such date the corporation's board of directors
approved either the Business Combination or the transaction in which the
stockholder became an Interested Stockholder or (ii) the Business Combination
is approved by the corporation's board of directors and authorized by a vote
of at least 66 2/3% of the outstanding voting stock of the corporation not
owned by the Interested Stockholder.
The Restated Certificate of Incorporation of the Company, which will be
filed immediately prior to the closing of the Reorganization, will exclude the
Company from the restrictions imposed by Section 203.
Special Meetings of Stockholders. The Bylaws provide that special meetings
of stockholders may be called only by the Chairman of the Board of Directors,
Chief Executive Officer or by order of the Board of Directors.
Removal of Directors and Related Matters. Any director may be removed with
or without cause only by the vote of at least 75% of the shares entitled to
vote for the election of directors. The Certificate of Incorporation and
Bylaws require the affirmative vote of holders of at least 66 2/3% of the
combined voting power of the then outstanding shares of stock of all classes
entitled to vote generally in the election of Directors cast at a meeting of
the stockholders, as well as more than 66 2/3% of the then-outstanding Class B
Common Stock, called for the purpose to amend or repeal these Certificate of
Incorporation provisions.
Voting by Directors. All actions of the Board of Directors (including, but
not limited to, interested party transactions, financing transactions, mergers
and acquisitions, changes in executive officers, director nominations and
committee appointments) will require the vote of at least 75% of the then duly
elected and acting members of the Board of Directors. Interested directors
will be counted and may cast votes. In addition, the Bylaws provide that any
committee of the Board of Directors, other than the audit and compensation
committees, shall have four members and that decisions of the committee shall
be made by at least three of the four members.
Director Liability and Indemnification. The Certificate of Incorporation and
the Bylaws, taken together, provide that the Company shall, to the fullest
extent permitted by the DGCL as then in effect, indemnify any person who was
or is involved in any manner or was or is threatened to be made so involved in
any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative, or investigative, by reason of the fact that
he is or was a director, officer, employee or agent of the Company or is or
was serving at the request of the Company as director, officer, employee or
agent of another corporation or other enterprise against all expenses,
judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such proceeding. The Certificate of
Incorporation provides that no director of the Company will be personally
liable to the Company or to its stockholders for monetary damages for breach
of fiduciary duty as a director. This right to indemnification includes the
right to receive payment of any expenses incurred by the person being
indemnified in connection with such proceeding in advance of the final
disposition of the proceeding consistent with applicable law as then in
effect. All rights to indemnification conferred in the Certificate of
Incorporation shall be contract rights. The right of indemnification,
including the right to receive payment in advance of expenses, conferred by
the Certificate of Incorporation and Bylaws are not exclusive of any other
rights to which any person seeking indemnification may otherwise be entitled.
The Certificate of Incorporation requires the affirmative vote of holders of
at least % of the combined voting power of the then outstanding shares of
stock of all classes entitled to vote generally in the election of Directors
to amend or repeal the Certificate of Incorporation indemnification
provisions.
TRANSFER AGENT
The registrar and transfer agent for the Class A Common Stock is
.
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SHARES ELIGIBLE FOR FUTURE SALE
The shares of Class A Common Stock sold by the Company in the Offerings will
be freely tradable without restriction or further registration under the
Securities Act., except for shares held by "affiliates" of the Company (as
that term is defined in Rule 144 under the Securities Act). Upon completion of
the Offerings, the Company will have shares of Class A Common Stock
outstanding ( shares if the Underwriters' over-allotment options are
exercised in full) and shares of Class B Common Stock outstanding. Each
share of Class B Common Stock is convertible into a share of Class A Common
Stock at any time at the option of the holder. Any shares held by affiliates
of the Company may be sold only if they are registered under the Securities
Act or are sold pursuant to an applicable exemption from the registration
requirements of the Securities Act, including Rule 144 thereunder. Immediately
following the Offerings, the shares of Class B Common Stock will be held by
affiliates and will be "restricted securities" under the Securities Act. Such
shares cannot be sold other than pursuant to an effective registration
statement under the Securities Act or an applicable exemption from the
registration requirements of the Securities Act, including Rule 144
thereunder. All current holders of Class A Common Stock and Class B Common
Stock (representing % of the outstanding Class A Common Stock and % of the
Class B Common Stock) and all directors and executive officers of the Company
have agreed with the Underwriters not to offer, sell, contract to sell, grant
any option to purchase or otherwise dispose of any of their shares or any
securities convertible into or exchangeable for their shares or in any other
manner transfer all or a portion of the economic consequences associated with
ownership of their shares for a period of 180 days after the date of this
Prospectus without the prior written consent of Merrill Lynch, Pierce, Fenner
& Smith Incorporated acting on behalf of the Underwriters.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated) who has beneficially owned shares for at least
two years is entitled to sell, within any three-month period, a number of
shares which does not exceed the greater of 1% of the then-outstanding shares
of the Company's Common Stock (approximately shares immediately
after the Offerings) or the average weekly trading volume of the Company's
Common Stock in the over-the-counter market or on a recognized exchange during
the four calendar weeks preceding the date on which notice of the sale is
filed with the Commission. Sales under Rule 144 may also be subject to certain
manner of sale provisions, notice requirements and the availability of current
public information about the Company. Any person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the three months preceding a sale, and who has beneficially owned
shares within the definition of "restricted securities" under Rule 144 for at
least three years, is entitled to sell such shares under Rule 144(k) without
regard to the volume limitation, manner of sale provisions, public information
requirements or notice requirements. To the extent shares were acquired from
an affiliate of the Company, such stockholder's holding period for the purpose
of effecting a sale under Rule 144 commences on the date of transfer from the
affiliate. The Commission has recently proposed to amend Rule 144 to shorten
each of the two-year and three-year holding periods by one year.
The Company is authorized to issue up to shares of Class A
Common Stock under its Stock Incentive Plan, of which are subject to
options which have been granted as of the date of this Prospectus (see
"Management--Stock Options and Stock Incentive Plan"). The Company intends to
file a registration statement under the Securities Act within 180 days
following the completion of the Offerings covering these shares of Class A
Common Stock. Accordingly, shares registered under such registration statement
will, subject to Rule 144 volume limitations applicable to affiliates, be
available for sale in the open market, subject to vesting restrictions and the
lock-up arrangements described above.
79
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States Federal tax
consequences of the ownership and disposition of Class A Common Stock by a
holder that, for United States Federal income tax purposes, is not a "United
States person" (a "Non-United States Holder"). For purposes of this
discussion, a "United States person" means a citizen or resident of the United
States; a corporation or partnership created or organized in the United States
or under the laws of the United States or of any political subdivision
thereof; or an estate or trust the income of which is includible in gross
income for United States Federal income tax purposes regardless of its source.
Resident alien individuals will be subject to United States Federal income tax
with respect to the Class A Common Stock as if they were United States
citizens.
This discussion does not consider any specific facts or circumstances that
may apply to a particular Non-United States Holder. Prospective investors are
urged to consult their tax advisors regarding the United States Federal tax
consequences of owning and disposing of Class A Common Stock (including such
investor's status as a United States person or Non-United States Holder), as
well as any tax consequences that may arise under the laws of any state,
municipality or other taxing jurisdiction.
Proposed United States Treasury Regulations were issued on April 15, 1996
(the "Proposed Regulations") which, if adopted, would affect the U.S. taxation
of dividends paid to a Non-United States Holder on Class A Common Stock. The
Proposed Regulations are generally proposed to be effective with respect to
dividends paid and other payments made after December 31, 1997, subject to
certain transition rules. The discussion below is not intended to be a
complete discussion of the provisions of the Proposed Regulations, and
prospective investors are urged to consult their tax advisors with respect to
the effect the Proposed Regulations would have if adopted.
DIVIDENDS
Dividends paid to a Non-United States Holder generally will be subject to
withholding of United States Federal income tax at the rate of 30% unless the
dividend is effectively connected with the conduct of a trade or business
within the United States by the Non-United States Holder, in which case the
dividend will be subject to the United States Federal income tax on net income
that applies to United States persons (and, with respect to corporate holders
and under certain circumstances, the branch profits tax). Non-United States
Holders should consult any applicable income tax treaties which may provide
for reduced withholding or other rules different from those described above. A
Non-United States Holder may be required to satisfy certain certification
requirements in order to claim treaty benefits or to otherwise claim a
reduction of or exemption from withholding under the foregoing rules.
Under the Proposed Regulations, to obtain a reduced rate of withholding
under a treaty, a Non-United States Holder would generally be required to
provide an Internal Revenue Service Form W-8 certifying such Non-United States
Holder's entitlement to benefits under a treaty together with, in certain
circumstances, additional information. The Proposed Regulations also would
provide special rules to determine whether, for purposes of determining the
applicability of a tax treaty and for purposes of the 30% withholding tax
described above, dividends paid to a Non-United States Holder that is an
entity should be treated as paid to the entity or to those holding an interest
in that entity.
GAIN ON DISPOSITION
Subject to special rules applicable to individuals as described in the next
paragraph, a Non-United States Holder will not generally be subject to United
States Federal income tax on gain recognized on a sale or other disposition of
Class A Common Stock unless (i) the gain is effectively connected with the
conduct of a trade or business within the United States by the Non-United
States Holder (or by a partnership, trust or estate in which the Non-United
States Holder is a partner or beneficiary) or (ii) the Company is or becomes a
"United States real property holding corporation" for United States Federal
income tax purposes (a "USRPHC") and certain
80
other requirements are met. The Company believes that it has not been, and is
not currently, a USRPHC. It is possible, however, that the Company may become
a USRPHC in the future. If the Company were to become a USRPHC at any time
within the shorter of (a) the five year period preceding a sale of Class A
Common Stock by a Non-United States Holder or (b) such Non-United States
Holder's holding period for such stock (the "Testing Period"), then gain
realized on a disposition of Class A Common Stock by a Non-United States
Holder that owns, actually or constructively, more than 5% of the Class A
Common Stock at any time during the Testing Period generally will be treated
as effectively connected with the conduct of a trade or business within the
United States by such Non-United States Holder. Gain that is effectively
connected with the conduct of a trade or business within the United States by
the Non-United States Holder will be subject to the United States Federal
income tax on net income that applies to United States persons (and, with
respect to corporate holders and under certain circumstances, the branch
profits tax) and may be subject to withholding. Non-United States Holders
should consult applicable income tax treaties, which may provide for different
rules.
In addition to being subject to the rules described above, an individual
Non-United States Holder who holds Class A Common Stock as a capital asset
will generally be subject to tax at a 30% rate on any gain recognized on the
disposition of such stock if such individual is present in the United States
for 183 days or more in the taxable year of disposition. Individual Non-United
States Holders may also be subject to tax pursuant to provisions of United
States Federal income tax law applicable to certain United States expatriates.
FEDERAL ESTATE TAXES
Class A Common Stock owned or treated as owned by an individual who is not a
citizen or resident (as specially defined for United States Federal estate tax
purposes) of the United States at the date of death will be included in such
individual's estate for United States Federal estate tax purposes, unless an
applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the Internal Revenue Service (the
"Service") and to each Non-United States Holder the amount of dividends paid
to, and the tax withheld with respect to, such holder, regardless of whether
tax was actually withheld. That information may also be made available to the
tax authorities of the country in which the Non-United States Holder resides.
United States Federal backup withholding (which generally is withholding
imposed at the rate of 31% on certain payments to persons not otherwise exempt
who fail to furnish certain information) will not generally apply to dividends
paid to a Non-United States Holder that are subject to withholding at the 30%
rate (or would be so subject but for a reduced rate under an applicable
treaty). In addition, the payor of dividends currently may rely on the payee's
foreign address in determining that the payee is exempt from backup
withholding, unless the payor has knowledge that the payee is a United States
person.
Those backup withholding and information reporting requirements also apply
to the gross proceeds paid to a Non-United States Holder upon the disposition
of Class A Common Stock by or through a United States office of a United
States or foreign broker, unless the holder certifies to the broker under
penalties of perjury as to its name, address and status as a Non-United States
Holder or the holder otherwise establishes an exemption. Information reporting
requirements (but not backup withholding) will apply to a payment of the
proceeds of a disposition of Class A Common Stock by or through a foreign
office of (i) a United States broker, (ii) a foreign broker 50% or more of
whose gross income for certain periods is effectively connected with the
conduct of a trade or business in the United States or (iii) a foreign broker
that is a "controlled foreign corporation" for United States Federal income
tax purposes, unless the broker has documentary evidence in its records that
the holder is a Non-United States Holder and certain other conditions are met,
or the holder otherwise establishes an exemption. Neither backup withholding
nor information reporting generally will apply to a payment of the proceeds of
a disposition of Class A Common Stock by or through a foreign office of a
foreign broker not subject to the preceding sentence.
81
The Proposed Regulations would, if adopted, alter the foregoing rules in
certain respects. Among other things, the Proposed Regulations would provide
certain presumptions under which a Non-United States Holder would be subject
to backup withholding and information reporting unless the Company receives
certification from the holder of non-United States status.
Any amounts withheld under the backup withholding rules will be refunded or
credited against the Non-United States Holder's United States Federal income
tax liability, provided that required information is furnished to the Service.
82
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"U.S. Purchase Agreement"), the Company has agreed to sell to each of the
underwriters named below (the "U.S. Underwriters"), and each of the U.S.
Underwriters, for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"), Allen & Company Incorporated and Bear, Stearns & Co. Inc.
are acting as representatives (the "U.S. Representatives"), severally has
agreed to purchase, the aggregate number of shares of Class A Common Stock set
forth opposite its name below.
[Download Table]
NUMBER
OF
U.S. UNDERWRITERS SHARES
----------------- --------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................................
Allen & Company Incorporated.....................................
Bear, Stearns & Co. Inc..........................................
--------
Total..........................................................
========
The Company has also entered into a purchase agreement (the "International
Purchase Agreement" and, together with the U.S. Purchase Agreement, the
"Purchase Agreements") with Merrill Lynch International, Allen & Company
Incorporated and Bear, Stearns International Limited, acting as
representatives (the "International Representatives" and, together with the
U.S. Representatives, the "Representatives"), and certain other underwriters
outside the United States and Canada (collectively, the "International
Underwriters" and, together with the U.S. Underwriters, the "Underwriters").
Subject to the terms and conditions set forth in the International Purchase
Agreement, the Company has agreed to sell to the International Underwriters,
and the International Underwriters severally have agreed to purchase, an
aggregate of shares of Class A Common Stock.
In each Purchase Agreement, the Underwriters named therein have agreed,
subject to the terms and conditions set forth in such Purchase Agreement, to
purchase all of the shares of Class A Common Stock being sold pursuant to such
Purchase Agreement if any of the shares of Class A Common Stock being sold
pursuant to such Purchase Agreement are purchased. Under certain
circumstances, under the Purchase Agreements, the commitments of non-
defaulting Underwriters may be increased. Each Purchase Agreement provides
that the Company is not obligated to sell, and the Underwriters named therein
are not obligated to purchase, the shares of Class A Common Stock under the
terms of the Purchase Agreement unless all of the shares of Class A Common
Stock to be sold pursuant to the Purchase Agreements are contemporaneously
sold.
The U.S. Representatives have advised the Company that the U.S. Underwriters
propose to offer the shares of Class A Common Stock offered hereby to the
public initially at the public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share of Class A Common Stock, and that the U.S.
Underwriters may allow, and such dealers may reallow, a discount not in excess
of $ per share of Class A Common Stock on sales to certain other dealers.
After the Offerings, the public offering price, concession and discount may be
changed.
The public offering price per share of Class A Common Stock and the
underwriting discount per share of Class A Common Stock are identical for both
Offerings.
The Company has granted to the U.S. Underwriters and the International
Underwriters options to purchase up to an aggregate of shares and shares
of Class A Common Stock, respectively, at the initial public offering price,
less the underwriting discount. Such options, which will expire 30 days after
the date of this Prospectus, may be exercised solely to cover over-allotments.
The Company has been informed that the Underwriters have entered into an
agreement (the "Intersyndicate Agreement") providing for the coordination of
their activities. Pursuant to the Intersyndicate Agreement, the
83
U.S. Underwriters and the International Underwriters are permitted to sell
shares of Class A Common Stock to each other. The Company has been informed
that, under the terms of the Intersyndicate Agreement, the U.S. Underwriters
and any dealer to whom they sell shares of Class A Common Stock will not offer
to sell or resell shares of Class A Common Stock to persons who are non-U.S.
or non-Canadian persons or to persons they believe intend to resell to persons
who are non-U.S. or non-Canadian persons, and the International Underwriters
and any bank, broker or dealer to whom they sell shares of Class A Common
Stock will not offer to resell shares of Class A Common Stock to U.S. persons
or to Canadian persons or to persons they believe intend to resell to U.S.
persons or to Canadian persons, except in the case of transactions pursuant to
the Intersyndicate Agreement which, among other things, permits the
Underwriters to purchase from each other and to offer to resell such number of
shares of Class A Common Stock as the selling Underwriter or Underwriters and
the purchasing Underwriter or Underwriters may agree.
The Company, Fox Broadcasting, Haim Saban and certain officers and directors
of the Company have each agreed not to sell or grant any option for the sale
of, or otherwise dispose of, any Common Stock, or any securities convertible
into or exchangeable or exercisable for shares of Common Stock, other than the
shares of Common Stock that may be offered by the Company in the Offerings and
not to file or request to be filed, as the case may be, any registration
statement with respect to Common Stock for a period of 180 days after the date
of this Prospectus without the prior written consent of Merrill Lynch.
The U.S. Underwriters and the International Underwriters have informed the
Company that they do not intend to sell shares of Class A Common Stock offered
hereby to any accounts over which they exercise discretionary authority.
Prior to the Offerings, there has been no public market for the Class A
Common Stock of the Company. The initial public offering price for the Class A
Common Stock has been determined by negotiation between the Company and the
U.S. Representatives and International Representatives. Among the factors that
were considered in determining the initial public offering price were the
Company's results of operations, the Company's current financial condition,
its future prospects, the experience of its management, the economics of the
industry in general, the general condition of the equity securities market,
the demand for similar securities of companies considered comparable to the
Company and other relevant factors.
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments the Underwriters may be required to make in respect thereof.
Certain of the Underwriters or their affiliates have provided from time to
time, and may provide in the future, commercial and investment banking
services to News Corp. and its affiliates, for which such Underwriters or
their affiliates have received or will receive fees and commissions.
Allen & Company Incorporated ("Allen") has, over the years, rendered
investment banking and financial advisory services to News Corp. and various
of its subsidiaries, as well as to Saban, in connection with a number of
matters. Stanley S. Shuman, a Managing Director and Executive Vice President
of Allen, has been a non-Executive Director of News Corp. since 1982. Allen
acquired 16 16/99 shares of common stock of FCN Holding in lieu of a cash fee
earned in December 1995 for certain financial advisory and other investment
banking services rendered to FCN Holding in connection with the negotiation,
structuring, formation and capitalization of the LLC. These shares will be
exchanged in the Reorganization for shares of Class A Common Stock of
the Company. As a result, after the Reorganization and before the Offerings,
Allen will own an aggregate of shares of Class A Common Stock of the
Company.
84
LEGAL MATTERS
Counsel for the Company, Troop Meisinger Steuber & Pasich, LLP, Los Angeles,
California, has rendered an opinion to the effect that the Class A Common
Stock offered by the Company upon sale will be duly and validly issued, fully
paid and nonassessable. Certain legal matters will be passed upon for the
Underwriters by Cahill Gordon & Reindel (a partnership including a
professional corporation), New York, New York.
EXPERTS
The consolidated financial statements of Saban Entertainment, Inc. at May
31, 1994 and 1995 and at October 31, 1995, and for each of the three years in
the period ended May 31, 1995 and the five month period ended October 31,
1995, appearing in this Prospectus and Registration Statement, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
The consolidated financial statements of FCN Holding, Inc. at July 3, 1994,
July 2, 1995 and October 29, 1995, and for each of the two years in the period
ended July 2, 1995 and for the four months ended October 29, 1995 and the
Balance Sheet of Fox Kids Worldwide, Inc. at September 27, 1996, appearing in
this Prospectus and Registration Statement, have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The combined financial statements of FCN Holding, Inc., Saban Entertainment,
Inc. and Fox Kids Worldwide, L.L.C. (from and after the date of the
Reorganization, Fox Kids Worldwide, Inc.) at June 30, 1996 and for the eight
months ended June 30, 1996, appearing in this Prospectus and Registration
Statement, have been audited by Ernst & Young LLP, independent auditors, as
set forth in their report thereon appearing elsewhere herein, and are included
in reliance upon such report given upon the authority of such firm as experts
in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement under the Securities Act with respect to the shares of
Class A Common Stock offered hereby. This Prospectus does not contain all of
the information set forth in the Registration Statement and the exhibits
thereto, certain portions of which have been omitted pursuant to the rules and
regulations of the Commission. Statements contained in this Prospectus as to
the contents of any contract or any other document referred to are not
necessarily complete, and with respect to any contract or other document filed
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description of the matter involved, and each such
statement is qualified in its entirety by such reference. For further
information with respect to the Company and the shares offered hereby,
reference is hereby made to the Registration Statement and exhibits thereto. A
copy of the Registration Statement, including the exhibits thereto, may be
inspected without charge at the Commission's principal office in Washington,
D.C., and copies of all or any part thereof may be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, upon payment of certain prescribed rates.
Upon consummation of the Offerings, the Company will become subject to the
information and reporting requirements of the Securities Exchange Act and, in
accordance therewith, will file reports and other information with the
Commission in accordance with its rules. Such reports and other information
concerning the Company may be inspected and copied at the address set forth
above and the Commission's Regional Offices in New York (Suite 1300, Seven
World Trade Center, New York, New York 10048) and Chicago (Citicorp Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661).
Application has been made to list the Class A
85
Common Stock on the New York Stock Exchange. If approved for listing, any such
material will also be available for inspection at the offices of the New York
Stock Exchange, 20 Broad Street, New York, New York 10005.
The Company intends to furnish holders of Class A Common Stock annual
reports containing audited consolidated financial statements and quarterly
reports containing unaudited financial information. Such audited financial
statements and unaudited quarterly financial information will be prepared in
accordance with generally accepted accounting principles in the United States.
86
INDEX TO FINANCIAL STATEMENTS
[Download Table]
PAGE
----
FCN HOLDING, INC., SABAN ENTERTAINMENT, INC. AND FOX KIDS WORLDWIDE,
L.L.C. (FROM AND AFTER THE DATE OF THE REORGANIZATION (NOTE 1), FOX KIDS
WORLDWIDE, INC.)
Report of Independent Auditors......................................... F-2
Combined Balance Sheet as of June 30, 1996............................. F-3
Combined Statement of Operations for the eight months ended June 30,
1996.................................................................. F-4
Combined Statement of Stockholders' Equity for the eight months ended
June 30, 1996......................................................... F-5
Combined Statement of Cash Flows for the eight months ended June 30,
1996.................................................................. F-6
Notes to Combined Financial Statements................................. F-7
FCN HOLDING, INC.
Report of Independent Auditors.......................................... F-21
Consolidated Balance Sheets as of July 3, 1994, July 2, 1995 and October
31, 1995............................................................... F-22
Consolidated Statements of Operations for the periods ended July 3,
1994, July 2, 1995 and October 31, 1995................................ F-23
Consolidated Statements of Stockholder's Equity for the periods ended
July 3, 1994, July 2, 1995 and October 31, 1995........................ F-24
Consolidated Statements of Cash Flows for the period ended July 3, 1994,
July 2, 1995 and October 31, 1995...................................... F-25
Notes to Consolidated Financial Statements.............................. F-26
SABAN ENTERTAINMENT, INC.
Report of Independent Auditors.......................................... F-31
Consolidated Balance Sheets as of May 31, 1994 and 1995 and October 31,
1995................................................................... F-32
Consolidated Statements of Operations for the years ended May 31, 1994
and 1995 and for the five months ended October 31, 1995................ F-33
Consolidated Statements of Stockholders' Equity for the years ended May
31, 1994 and 1995 and for the five months ended October 31, 1995....... F-34
Consolidated Statements of Cash Flows for the years ended May 31, 1994
and 1995 and for the five months ended October 31, 1995................ F-35
Notes to Consolidated Financial Statements.............................. F-36
FOX KIDS WORLDWIDE, INC.
Report of Independent Auditors.......................................... F-47
Balance Sheet as of September 27, 1996.................................. F-48
Notes to Financial Statements........................................... F-49
F-1
REPORT OF INDEPENDENT AUDITORS
Boards of Directors and Members Committee
FCN Holding, Inc., Saban Entertainment, Inc. and Fox Kids Worldwide, L.L.C.
We have audited the accompanying combined balance sheet of FCN Holding,
Inc., Saban Entertainment, Inc. and Fox Kids Worldwide, L.L.C. (from and after
the date of the Reorganization (Note 1), Fox Kids Worldwide, Inc.) as of June
30, 1996 and the related combined statements of operations, stockholders'
equity, and cash flows for the eight months ended June 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of FCN
Holding, Inc., Saban Entertainment, Inc. and Fox Kids Worldwide, L.L.C. (from
and after the date of the Reorganization (Note 1), Fox Kids Worldwide, Inc.)
and the combined results of their operations and their cash flows for the
eight months ended June 30, 1996, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Los Angeles, California
September 27, 1996
F-2
FCN HOLDING, INC., SABAN ENTERTAINMENT, INC.
AND FOX KIDS WORLDWIDE, L.L.C.
(FROM AND AFTER THE DATE OF THE REORGANIZATION (NOTE 1), FOX KIDS WORLDWIDE,
INC.)
COMBINED BALANCE SHEET
JUNE 30, 1996
[Download Table]
ASSETS
Cash and cash equivalents........................................ $ 16,044,000
Restricted cash.................................................. 8,000,000
Accounts receivable, net of allowance for doubtful accounts of
$1,690,000 and including $3,119,000 from related parties........ 56,225,000
Amounts receivable from related parties.......................... 25,789,000
Programming costs, less accumulated amortization................. 181,427,000
Property and equipment, at cost, less accumulated depreciation... 8,711,000
Deferred income taxes............................................ 27,023,000
Other assets..................................................... 13,051,000
------------
Total assets..................................................... $336,270,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable................................................. $ 8,192,000
Accrued liabilities.............................................. 30,247,000
Deferred revenue................................................. 67,882,000
Fox Kids Network affiliate participation payable................. 13,738,000
Accrued programming expenditures................................. 15,179,000
Accrued residuals and participations............................. 22,040,000
Income taxes payable............................................. 3,884,000
Deferred income taxes............................................ 790,000
Debt............................................................. 19,916,000
Amounts payable to related parties............................... 81,571,000
------------
Total liabilities................................................ $263,439,000
Commitments and contingencies.................................... --
Stockholders' equity
Preferred class A members interest............................. 40,000,000
Common stock, $.01 par value, 10,000 shares authorized, 800
shares issued and outstanding (Saban Entertainment, Inc.)..... --
Common stock, no par value, 2,000 shares authorized, 2,000
shares issued and outstanding (FCN Holding, Inc.) ............ 2,000
Contributed capital............................................ 49,245,000
Cumulative translation adjustment.............................. (11,000)
Retained deficit............................................... (16,405,000)
------------
Total stockholders' equity....................................... 72,831,000
------------
Total liabilities and stockholders' equity....................... $336,270,000
============
See accompanying notes.
F-3
FCN HOLDING, INC., SABAN ENTERTAINMENT, INC.
AND FOX KIDS WORLDWIDE, L.L.C.
(FROM AND AFTER THE DATE OF THE REORGANIZATION (NOTE 1), FOX KIDS WORLDWIDE,
INC.)
COMBINED STATEMENT OF OPERATIONS
EIGHT MONTHS ENDED JUNE 30, 1996
[Download Table]
Net revenues (including $5,498,000 from related parties)........... $191,621,000
Costs and expenses:
Amortization of programming costs, residuals and participations.. 98,937,000
Selling, general and administrative (including $1,114,000 to a
related party).................................................. 23,072,000
Fox Kids Network affiliate participations........................ 8,853,000
------------
Operating income................................................... 60,759,000
Investment advisory fee............................................ 10,000,000
Interest expense (including $170,000 to a related party)........... 885,000
------------
Income before provision for income taxes........................... 49,874,000
Provision for income taxes......................................... 18,274,000
------------
Net income......................................................... $ 31,600,000
============
Net income attributable to common stock............................ $
============
Net income per common share........................................ $
============
Weighted average shares outstanding................................
============
See accompanying notes.
F-4
FCN HOLDING, INC., SABAN ENTERTAINMENT, INC.
AND FOX KIDS WORLDWIDE, L.L.C.
(FROM AND AFTER THE DATE OF THE REORGANIZATION (NOTE 1), FOX KIDS WORLDWIDE,
INC.)
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
JUNE 30, 1996
[Enlarge/Download Table]
PREFERRED CLASS A
MEMBERS INTEREST COMMON STOCK CUMULATIVE
------------------ ------------- CONTRIBUTED TRANSLATION RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT TOTAL
------ ----------- ------ ------ ----------- ----------- ------------ ------------
Balance at November 1,
1995 .................. -- $ -- 2,000 $2,000 $ -- $ -- $ (4,132,000) $ (4,130,000)
Transactions at November
1, 1995:
Capital contributions.. -- -- -- -- 29,344,000 -- -- 29,344,000
Forgiveness of debt.... -- -- -- -- 5,124,000 -- -- 5,124,000
Distribution........... -- -- -- -- -- -- (2,700,000) (2,700,000)
Saban Entertainment,
Inc................... -- -- 800 -- 11,751,000 46,000 83,174,000 94,971,000
Elimination of certain
amounts between FCN
Holding, Inc. and
Saban Entertainment,
Inc. ................. -- -- -- -- -- -- (4,247,000) (4,247,000)
Payment to a related
party for a stock
purchase option........ -- -- -- -- -- -- (80,100,000) (80,100,000)
Related party tax
obligation............. -- -- -- -- 3,026,000 -- -- 3,026,000
Exchange loss on
translation of foreign
subsidiaries' financial
statements............. -- -- -- -- -- (57,000) -- (57,000)
Net income.............. -- -- -- -- -- -- 31,600,000 31,600,000
Amount attributable to
Series A Preferred
Stock.................. -- 40,000,000 -- -- -- -- (40,000,000) --
--- ----------- ----- ------ ----------- -------- ------------ ------------
Balance at June 30,
1996................... -- $40,000,000 2,800 $2,000 $49,245,000 $(11,000) $(16,405,000) $ 72,831,000
=== =========== ===== ====== =========== ======== ============ ============
See accompanying notes.
F-5
FCN HOLDING, INC., SABAN ENTERTAINMENT, INC.
AND FOX KIDS WORLDWIDE, L.L.C.
(FROM AND AFTER THE DATE OF THE REORGANIZATION (NOTE 1), FOX KIDS WORLDWIDE,
INC.)
COMBINED STATEMENT OF CASH FLOWS
EIGHT MONTHS ENDED JUNE 30, 1996
[Download Table]
OPERATING ACTIVITIES
Net income..................................................... $ 31,600,000
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Amortization of programming costs............................ 84,490,000
Depreciation................................................. 1,585,000
Cumulative translation adjustment............................ (57,000)
Investment advisory fee...................................... 10,000,000
Changes in operating assets and liabilities:
Restricted cash............................................ (3,000,000)
Accounts receivable........................................ 11,896,000
Amounts receivable from related parties.................... (8,672,000)
Additions to programming costs............................. (113,506,000)
Other assets............................................... 2,194,000
Accounts payable........................................... (8,009,000)
Accrued liabilities........................................ 224,000
Accrued residuals and participations....................... 5,771,000
Administration fee payable to a related party.............. (6,173,000)
Income taxes payable and deferred income taxes............. (9,583,000)
Deferred revenue........................................... 23,437,000
Fox Kids Network affiliate participation payable........... (4,667,000)
Accrued programming expenditures........................... (4,637,000)
-------------
Net cash provided by operating activities...................... 12,893,000
INVESTING ACTIVITIES
Purchase of property and equipment............................. (3,053,000)
Acquisition of programming rights.............................. (7,200,000)
Acquisition of Creativite & Developpement SA................... (1,722,000)
Cash acquired in acquisition of Creativite & Developpement SA.. 3,151,000
Cash acquired in deemed acquisition of Saban Entertainment,
Inc........................................................... 16,207,000
-------------
Net cash provided by investing activities...................... 7,383,000
FINANCING ACTIVITIES
Proceeds from bank borrowings.................................. 15,880,000
Payments on bank borrowings.................................... (11,606,000)
Payment to a related party for a stock purchase option......... (80,100,000)
Proceeds from related parties.................................. 207,400,000
Payments to related parties.................................... (139,433,000)
Capital contributions from related parties..................... 3,310,000
-------------
Net cash used in financing activities.......................... (4,549,000)
-------------
Increase in cash and cash equivalents.......................... 15,727,000
Cash and cash equivalents at beginning of period............... 317,000
-------------
Cash and cash equivalents at end of period..................... $ 16,044,000
=============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amounts capitalized)........................ $ 414,000
=============
Income taxes................................................. $ 27,796,000
=============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
Amounts payable to a related party of $5,124,000 were forgiven
and recorded as contributed capital.
The Company accrued $10,000,000 in other assets and amounts
payable to related parties in connection with the formation of
the LLC.
A receivable from a related party of $2,700,000 was forgiven
and charged to retained earnings.
The Company recorded $3,026,000 arising under a tax sharing
obligation which was deemed to be contributed to capital by
the related party.
See accompanying notes.
F-6
FCN HOLDING, INC., SABAN ENTERTAINMENT, INC.
AND FOX KIDS WORLDWIDE, L.L.C.
(FROM AND AFTER THE DATE OF THE REORGANIZATION (NOTE 1), FOX KIDS WORLDWIDE,
INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
JUNE 30, 1996
1. BASIS OF FINANCIAL STATEMENT PRESENTATION, ORGANIZATION AND RELATED PARTY
TRANSACTIONS
On November 1, 1995 (the "Effective Date") FCN Holding, Inc. ("FCN Holding")
and Saban Entertainment, Inc. ("Saban") formed Fox Kids Worldwide, L.L.C. (the
"LLC"), a limited liability company, for the purpose of jointly expanding the
worldwide childrens' businesses of FCN Holding and Saban. Since the Effective
Date, FCN Holding and Saban have been operated by their respective managements
subject to the overall supervision of the Members Committee of the LLC. In
connection with the initial public offerings referred to below (the
"Offerings"), a reorganization (the "Reorganization") will be effected
pursuant to which Saban, FCN Holding and the LLC will become wholly-owned
subsidiaries of Fox Kids Worldwide, Inc. ("Fox Kids Worldwide" or the
"Company"). Solely for financial statement presentation purposes, although the
Company will not acquire any of the shares of the capital stock of Saban until
immediately prior to the closing of the Offerings, and although the
Reorganization will not be effected until immediately prior to the closing of
the Offerings, as the result of the foregoing, the assets and liabilities of
Saban, FCN Holding and the LLC are being recorded at historical cost from and
after the Effective Date. The combined historical financial statements of the
Company (as the deemed successor to Saban, FCN Holding and the LLC) included
herein represent the historical financial statements of FCN Holding (after
giving effect to such combination as of the Effective Date).
The combined financial statements of the Company includes the balance sheets
of FCN Holding, Saban and the LLC at June 30, 1996 together with the combined
results of operations of FCN Holding, Saban and the LLC since November 1,
1995. The operations of certain foreign subsidiaries of Saban have been
combined at May 31, 1996 and include operations for the eight month period
ended May 31, 1996. Unaudited pro forma consolidated statements of operations
for the period from July 4, 1994 to July 2, 1995 and from July 3, 1995 to June
30, 1996, which would consolidate the results of operations of FCN Holding,
Saban and the LLC from the beginning of the respective periods are presented
below.
[Download Table]
PERIOD FROM PERIOD FROM
JULY 4, 1994 JULY 3, 1995
TO TO
JULY 2, 1995 JUNE 30, 1996
------------ -------------
Pro-forma revenues.............................. $380,449,000 $327,105,000
Pro-forma net income............................ $ 68,170,000 $ 71,370,000
============ ============
The Company is a fully-integrated global children's television entertainment
company which develops, acquires, produces, broadcasts and distributes quality
animated and live-action children's television programming. The Company's
principal operations are conducted by (i) Fox Children's Network, Inc.
("FCN"), which operates the Fox Kids Network--the top rated children's (ages
2-11) oriented broadcast television network in the United States ("Fox Kids
Network") and (ii) Saban, whose library of more than 3,700 half-hours of
children's programming is among the largest in the world. The Company is the
result of the joint venture (the LLC) formed in 1995 by Fox Broadcasting
Company ("Fox Broadcasting") and Saban. All significant intercompany
transactions and accounts have been eliminated.
THE REORGANIZATION
Fox Kids Worldwide was incorporated in Delaware in August 1996 and currently
conducts no business or operations. Immediately prior to the closing of the
Offerings, (i) Fox Broadcasting Sub, Inc.; a wholly-owned subsidiary of Fox
Broadcasting ("Fox Broadcasting Sub"), will exchange its capital stock in FCN
Holding, which indirectly owns FCN, for 50% of the number of shares of the Fox
Kids Worldwide's class B common
F-7
FCN HOLDING, INC., SABAN ENTERTAINMENT, INC.
AND FOX KIDS WORLDWIDE, L.L.C.
(FROM AND AFTER THE DATE OF THE REORGANIZATION (NOTE 1), FOX KIDS WORLDWIDE,
INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
stock, par value $0.001 per share ("Class B Common Stock"), which will be
outstanding immediately after the Reorganization and prior to the closing of
the Offerings (the "Reorganization Closing"), (ii) the other stockholders of
FCN Holding will exchange their capital stock in FCN Holding for an aggregate
of one percent of the aggregate number of shares of Class A Common Stock and
Class B Common Stock (the "Common Stock") which will be outstanding
immediately after the Reorganization Closing, (iii) the Chairman and Chief
Executive Officer of Saban ("Haim Saban") and the other stockholders of Saban
will exchange their capital stock in Saban for an aggregate of 50% of the
number of shares of Class B Common Stock which will be outstanding immediately
after the Reorganization Closing and (iv) all outstanding management options
to purchase Saban capital stock will become options to purchase an aggregate
of approximately four percent of the aggregate number of shares of Common
Stock which will be outstanding immediately after the Reorganization Closing.
In addition, Fox Broadcasting will exchange its preferred, non-voting interest
in the LLC for an aggregate of 1,000,000 shares of Fox Kids Worldwide's series
A redeemable preferred stock, $0.001 par value per share (the "Series A
Preferred Stock") and will exchange a $50 million contingent note receivable
from the LLC for a new preferred, non-voting interest in the LLC. As a result
of these transaction, FCN Holding, FCN, Saban and the LLC will become direct
or indirect subsidiaries of Fox Kids Worldwide, Inc.
RELATED PARTY TRANSACTIONS IN CONNECTION WITH THE FORMATION OF THE LLC AND THE
SUBSEQUENT REORGANIZATION
As described more fully below, in connection with the formation of the LLC
and the subsequent Reorganization, various corporate affiliates of Fox
Broadcasting transferred certain distribution rights and other contractual
rights to the LLC, made a cash loan to the LLC and committed to provide
certain administrative services to FCN Holding on an on-going basis. In
consideration, Fox Broadcasting is entitled to receive payment of its loan and
certain other cash distributions in priority to the common stockholders of the
Company.
FCN and Twentieth Century Fox Licensing and Merchandising, a unit of Fox,
Inc. ("Twentieth Fox Licensing") had previously entered into a Merchandising
Rights Acquisition Agreement, dated as of July 1, 1990, pursuant to which FCN
licensed to Twentieth Fox Licensing the worldwide merchandising rights to
properties owned or controlled by FCN. The term of the agreement extends in
perpetuity. In consideration for the rights granted, Twentieth Fox Licensing
agreed to pay FCN an amount equal to 100% of net profits from exploitation of
such merchandising rights, which equaled gross receipts less distribution fees
and expenses. On December 22, 1995, in connection with the formation of the
LLC, this agreement, and all amounts retained as distribution fees by
Twentieth Fox Licensing from June 1, 1995 through that date, were assigned to
the LLC by Fox Broadcasting and certain of its affiliates ("Fox Parties").
FCN and Twentieth Century Fox Film Corporation ("Twentieth Century Fox") are
parties to a Distribution Rights Acquisition Agreement, dated as of September
1, 1990, pursuant to which FCN licensed to Twentieth Century Fox certain
worldwide distribution rights with respect to programming owned or controlled
by FCN. The term of this agreement extends in perpetuity. In consideration for
the rights granted, Twentieth Century Fox agreed to pay FCN 100% of net
profits, which equals gross receipts less distribution fees and expenses. On
December 22, 1995, in connection with the formation of the LLC, this
agreement, and all rights retained by Twentieth Century Fox commencing June 1,
1995, were assigned to the LLC by the Fox Parties.
FCN and Fox Broadcasting are parties to an Administration Agreement, dated
as of February 7, 1990, pursuant to which Fox Broadcasting agreed to provide
the following services to FCN: network national advertising sales and the
administration thereof, commercial trafficking and broadcast operations
(including
F-8
FCN HOLDING, INC., SABAN ENTERTAINMENT, INC.
AND FOX KIDS WORLDWIDE, L.L.C.
(FROM AND AFTER THE DATE OF THE REORGANIZATION (NOTE 1), FOX KIDS WORLDWIDE,
INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
all uplink, transponder and other facilities necessary to deliver via
satellite Fox Kids Network programming for broadcast to the Fox Kids Network
Affiliates (defined below)) and overhead charges related to Fox Broadcasting's
in-house administrative support in the areas of research, promotion, business
affairs, legal affairs and accounting. FCN agreed to pay to Fox Broadcasting a
fee equal to 15% of 100% of the net advertising revenue (gross advertising
revenue less advertising agency commissions) derived with respect to national
commercials, commercial material or other advertising matter included or used
in connection with any of the programs exhibit on the Fox Kids Network. On
December 22, 1995, in connection with the terms of the LLC, this agreement,
and all rights of Fox Broadcasting to receive management fees on or subsequent
to June 1, 1995, were assigned to the LLC by the Fox Parties. Consequently,
the Company agreed to pay to Fox Broadcasting a fee of $10 million for
providing these services and such amount is included in other assets and
amounts payable to related parties at June 30, 1996. In September 1996, the
Company paid this fee and, immediately upon receipt of this $10 million
payment, Fox Broadcasting made a contribution to the LLC of $10 million in
exchange for additional Class A Members Interest, described above. Fox
Broadcasting continues to be obligated to provide the services described above
and estimates the incremental costs for providing these services to the
Company to be $2,200,000 per annum. Accordingly, the Company is amortizing the
$10 million fee over approximately five years, representing the period over
which the value of the services is estimated to be incurred, and has recorded
amortization of $1,467,000 for the eight months ended June 30, 1996. Fox
Broadcasting believes that these estimates were made on a reasonable basis.
However, these estimates may not necessarily be indicative of the level of
expenses that might have been incurred had the Company operated on a stand-
alone basis. Fox Broadcasting has not made a study or any attempt to obtain
quotes from third parties to determine what the costs of obtaining such
services from third parties would have been.
Pursuant to terms of the affiliation agreements ("Agreements") among the
Company, Fox Broadcasting and substantially all of its affiliated television
stations ("Fox Kids Network Affiliates"), the Fox Kids Network Affiliates,
including owned operated television stations of certain affiliates of Fox
Broadcasting ("Fox O&O's") are entitled to compensation which is equal to 100%
of FCN's programming Net Profits (as defined below). Amounts payable under
these compensation arrangements are due quarterly in amounts derived pursuant
to the provisions in the Agreements. "Net Profits" is defined on a cumulative
basis to include amounts actually received by FCN from the exhibition,
distribution and other exploitation of the Company's programs and the
merchandising and other rights relating thereto, less administrative fees,
production/license fees, distribution and merchandising fees (including those
payable to the Company), overhead and other expenses and reserves. Certain of
the Fox O&O's have waived in favor of the Company their rights to receive
these participations.
In addition to assigning to the LLC the agreements and Net Profit
participations referred to above, Fox Broadcasting agreed that the net cash
flow to the LLC from such agreements and participations for the twelve months
ended June 30, 1996 would be a minimum of $35,755,000. For the eight months
ended June 30, 1996, the Company recorded $16,611,000 as a decrease in
expenses. The remaining balance of $19,144,000 was recorded as a capital
contribution. Subsequent to June 30, 1996, the outstanding balance was paid.
In connection with the formation of the LLC, Fox Broadcasting made a $64.5
million interest free loan to the LLC, of which $14.5 million of the loan was
repaid in September 1996. The $50 million balance of this loan must be paid
out of Distributable Cash of the LLC before any distributions are made on the
Class A and Class B Members Interests. In connection with the Reorganization,
concurrent with the closing of the Offerings, Fox Broadcasting will exchange
this loan for new Class A Members Interests in the LLC, which will grant Fox
Broadcasting a priority right to receive distributions of Distributable Cash
(as defined below) and other
F-9
FCN HOLDING, INC., SABAN ENTERTAINMENT, INC.
AND FOX KIDS WORLDWIDE, L.L.C.
(FROM AND AFTER THE DATE OF THE REORGANIZATION (NOTE 1), FOX KIDS WORLDWIDE,
INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
distributions from the LLC until it has received aggregate distributions of
$50 million, whereupon it will terminate and expire. Distributable Cash means
the amount of cash available for distribution by the LLC (including cash
available from Saban and FCN Holding), taking into account all cash, debts,
liabilities and obligations of the LLC then due and after setting aside
reserves to provide for the LLC's capital expenditures, debt service, working
capital and expansion plans ("Distributable Cash").
In addition to the priority distributions described in the paragraph above,
in connection with the formation of the LLC, Fox Broadcasting was also granted
a priority right to receive distributions of Distributable Cash and other
distributions until it receives aggregate distributions in an amount equal to
$40 million. As described below, in September 1996, Fox Broadcasting
purchased, for $10 million cash, an additional $10 million of Class A Members
Interest. Pursuant to the terms of the Reorganization and concurrent with the
closing of the Offerings, Fox Broadcasting will exchange this Class A Members
Interest for 1,000,000 shares of the Company's Series A Preferred Stock. This
Series A Preferred Stock terminates once an aggregate of $50 million in
dividends and redemption amounts are paid to Fox Broadcasting. The difference
between the carrying value of the Series A Preferred Stock and the liquidation
value has been accreted and charged against retained earnings.
Pursuant to an agreement, dated December 22, 1995, between the LLC and the
stockholders of Saban, the LLC was granted an option to purchase, upon the
occurrence of certain events, all of the Saban common stock (or the stock of a
successor entity, including the Company) held by the stockholders of Saban,
and any of their transferees ("Stock Ownership Agreement"). The option is
triggered upon the occurrence of the following events and may be exercised as
follows: (i) for a period of one year following the death of Haim Saban, if he
dies prior to December 22, 2012; (ii) upon delivery of written notice by Fox
Broadcasting at any time on or after December 22, 2002 or before December 22,
2012; or (iii) upon receipt by Fox Broadcasting of written notice (which
generally cannot be delivered prior to December 22, 2001) from Haim Saban of
his desire to cause Fox Broadcasting to purchase all of the shares of Class B
Common Stock held by the stockholders of Saban. The LLC paid to the
stockholders of Saban an aggregate of $80.1 million for payment under the
Stock Ownership Agreement. The purchase price formula under the option is
based on the fair market value of the Company. As part of the Reorganization,
the LLC distributed the Stock Ownership Agreement to Fox Broadcasting Sub.
OTHER RELATED PARTY TRANSACTIONS
Receivables from related parties include advances of $1,329,000 to certain
non-stockholder officers and directors of the Company.
Saban and Fox Broadcasting are parties to a barter syndication agreement,
dated as of January 5, 1996, pursuant to which Saban engaged Fox Broadcasting
to provide barter advertising sales for the 1996-1997 broadcast season for the
Saban Kids Network, an ad hoc syndicated distribution network.
Related companies of Fox Broadcasting have funded the operations of FCN
Holding from its inception through loans to the Company. All amounts derived
by the operations of FCN Holding are used to reduce such outstanding
borrowings. Amounts outstanding bear interest at the prime rate (8.25% at June
30, 1996). Amounts due to the related companies of Fox Broadcasting in
connection therewith, including interest, totalled $7,071,000 at June 30,
1996.
F-10
FCN HOLDING, INC., SABAN ENTERTAINMENT, INC.
AND FOX KIDS WORLDWIDE, L.L.C.
(FROM AND AFTER THE DATE OF THE REORGANIZATION (NOTE 1), FOX KIDS WORLDWIDE,
INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The Company has also entered into a number of binding agreements with
affiliated companies of The News Corporation Limited, the parent company of
Fox Broadcasting, to launch new international children's channels.
From time to time, Saban has loaned and advanced funds to Haim Saban. In
connection with the formation of the LLC and as inducement to Haim Saban to
enter into certain documentation in connection with the formation of the LLC,
on December 22, 1995, Saban forgave in full the loan plus accrued interest
owing from Haim Saban in the amount of approximately $2,700,000. This amount
was treated as a distribution and charged to retained earnings in the eight
months ended June 30, 1996. In connection with Haim Saban's employment
agreement, dated December 22, 1995, with the LLC, the LLC agreed to reimburse
Haim Saban for all out-of-pocket costs and expenses for domestic and
international travel, including private air charter which may include aircraft
owned directly or indirectly by Haim Saban. For the eight months ended June
30, 1996, Saban has paid approximately $370,000 for such services.
Saban currently leases and distributes its entertainment properties (e.g.,
motion pictures, television programs, merchandising and licensing rights) in
Israel through Duveen Trading Ltd. ("Distributor"), a corporation owned wholly
by Haim Saban's brother. The term of the agreement extends through
December 31, 1997, subject to extension by Saban for an additional three
years. Duveen Trading Ltd. is not obligated to make any payments to Saban
under this agreement.
In September 1994, Saban entered into a music services agreement (the "Music
Agreement") with Haim Saban. The Music Agreement remains in effect until
August 31, 2001. Under the terms of the Music Agreement, all original theme
music, underscore, cues and songs for use in all programming produced by Saban
will be supplied through Haim Saban. Saban has been granted the non-exclusive,
worldwide, perpetual license to (i) synchronize and perform compositions in
theatrical motion pictures and (ii) synchronize composition in all other forms
of programming and has the royalty-free right to use the compositions in
articles of merchandise such as home video units, video games and interactive
toys. All music publishing income earned in connection with such musical
compositions is retained by Haim Saban. The Company has accrued $262,000 for
payment to Haim Saban pursuant to the terms of the Music Agreement.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR-END
The Company's fiscal year ends on the Sunday closest to June 30.
REVENUE RECOGNITION
Advertising revenue is recognized as earned in the period in which the
advertising commercials are telecast and are net of agency commission fees of
$20,817,000. Revenues from television, music and merchandising lease
agreements, which provide for the receipt by the Company of nonrefundable
guaranteed amounts, are recognized when the lease period begins,
collectibility is reasonably assured and the product is available pursuant to
the terms of the lease agreement. Amounts in excess of minimum guarantees
under these lease agreements are recognized when earned. Amounts received in
advance of recognition of revenue are recorded as deferred revenue. FCN
Holding generally provides advertisers with guaranteed ratings in connection
with its domestic network broadcasts. Revenue is recorded net of estimated
shortfalls, which are settled either by additional advertising time ("make
goods") or cash refunds to the advertiser. FCN Holding accounts for the full
amount of the estimated shortfall.
F-11
FCN HOLDING, INC., SABAN ENTERTAINMENT, INC.
AND FOX KIDS WORLDWIDE, L.L.C.
(FROM AND AFTER THE DATE OF THE REORGANIZATION (NOTE 1), FOX KIDS WORLDWIDE,
INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
PROGRAMMING COSTS
Programming costs, consisting of direct production costs, acquisition of
story rights, costs to acquire distribution rights, allocable production
overhead, interest and exploitation costs (which benefit future periods) are
capitalized as incurred. The individual film forecast method is used to
amortize programming costs in which the Company owns or controls distribution
rights. Costs accumulated in the production of a program are amortized in the
proportion that gross revenues realized bear to management's estimate of the
total gross revenues expected to be received. Estimated liabilities for
residuals and participations are accrued and expensed in the same manner as
programming cost inventories are amortized.
For programs in which the Company acquires only network broadcast rights,
the Company amortizes such program costs over the estimated number of
telecasts. The Company evaluates its programming rights for possible changes
in the estimated number of telecasts or the possibility of impairment.
Revenue estimates on a program-by-program basis are reviewed periodically by
management and are revised, if warranted, based upon management's appraisal of
current market conditions. Based on this review, if estimated future gross
revenues from a program are not sufficient to recover the unamortized costs,
the unamortized programming cost will be written down to net realizable value.
CONCENTRATION OF CREDIT RISKS
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of temporary cash investments and trade
receivables. The Company places its temporary cash investments with high
credit quality financial institutions or in a mutual fund which invests in
government securities and therefore are subject to reduced risk. The Company
has not incurred any losses relating to these investments.
The Company leases its product to distributors and broadcasters throughout
the world. The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral. Generally,
payment is received in full or in part prior to the Company's release of
product to such distributors and broadcasters. At June 30, 1996, substantially
all of the Company's trade receivables were from customers in the
entertainment or broadcast industries or from advertising agencies.
Receivables generally are due within 30 days. Credit losses relating to
customers in the entertainment and broadcast industries or advertising
agencies consistently have been within management's expectations.
CASH AND CASH EQUIVALENTS
For the purposes of balance sheet classification and the statement of cash
flows, the Company considers all highly liquid investments that are both
readily convertible into cash with original maturities when purchased of three
months or less to be cash equivalents.
RESTRICTED CASH
Restricted cash represents amounts held by financial institutions as
collateral on outstanding debt.
FINANCIAL INSTRUMENTS
Financial instruments are carried at historical cost which approximates fair
value.
F-12
FCN HOLDING, INC., SABAN ENTERTAINMENT, INC.
AND FOX KIDS WORLDWIDE, L.L.C.
(FROM AND AFTER THE DATE OF THE REORGANIZATION (NOTE 1), FOX KIDS WORLDWIDE,
INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost and depreciation is computed
using the straight-line method over their estimated useful lives of three to
five years. Leasehold improvements are amortized over the lesser of the term
of the lease or the estimated useful lives of the improvement using the
straight-line method.
FOREIGN CURRENCY TRANSLATION AND CUMULATIVE ADJUSTMENT
Saban International N.V. ("SINV"), after the Effective Date deemed to be a
wholly-owned subsidiary of the Company, uses the U.S. dollar as the functional
currency. Saban International Paris S.A.R.L. ("SIP"), Saban Entertainment
Germany GmbH and Saban Merchandising and Licensing GmbH and Saban
Entertainment (UK) Limited, all foreign subsidiaries of the Company, use local
currency as the functional currency. Assets and liabilities are translated
into U.S. dollars at current exchange rates. Revenue and expenses have been
translated into U.S. dollars based generally on the average rates prevailing
during the period.
Gains and losses arising from foreign currency transactions are included in
determining net income for the period. The aggregate transaction gains for the
eight months ended June 30, 1996 were $132,000.
The cumulative translation adjustment in stockholders' equity at June 30,
1996 represents the Company's net unrealized exchange losses on the
translation of foreign subsidiaries' financial statements.
INCOME TAXES
The Company provides for income taxes based on the liability method under
Statement of Financial Accounting Standards No. 109. Under this method,
deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes including amortization of programming costs. Actual results
could differ from those estimates. Management periodically reviews and revises
its estimates of future airings and revenues for program costs, as necessary,
which may result in revised amortization of its program costs and may be
significantly affected by the periodic adjustments in such amortization.
STOCK-BASED COMPENSATION
The Company accounts for its stock compensation arrangements under the
provisions of Accounting Principles Board No. 25, "Accounting for Stock Issued
to Employees" and intends to continue to do so.
NET INCOME PER COMMON SHARE
The per share data is based on the weighted average number of common and
common equivalent shares outstanding during the period and are calculated in
accordance with a Staff Accounting Bulletin of the Securities and Exchange
Commission whereby common and common share equivalents issued within a 12-
month period prior to an initial public offering are treated as outstanding
for all periods presented if the issue price was less than the proposed
initial public offering price. In addition, shares issuable upon the exercise
of options within the 12-month period are considered to have been outstanding
since inception of the Company.
F-13
FCN HOLDING, INC., SABAN ENTERTAINMENT, INC.
AND FOX KIDS WORLDWIDE, L.L.C.
(FROM AND AFTER THE DATE OF THE REORGANIZATION (NOTE 1), FOX KIDS WORLDWIDE,
INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
For the eight months ended June 30, 1996, the per share amount gives effect
to the accretion of the preferred class A members interest up to its
liquidation value of $40,000,000.
3. PROGRAMMING COSTS
Programming costs, net of accumulated amortization, is comprised of the
following:
[Download Table]
NET
ACCUMULATED PROGRAMMING
COST AMORTIZATION COSTS
------------ ------------ ------------
Children's programming, broadcast.... $303,161,000 $285,615,000 $ 17,546,000
Children's programming, other........ 434,773,000 344,638,000 90,135,000
Movies and mini-series............... 121,642,000 88,642,000 33,000,000
Projects in production............... 38,999,000 -- 38,999,000
Development.......................... 1,747,000 -- 1,747,000
------------ ------------ ------------
$900,322,000 $718,895,000 $181,427,000
============ ============ ============
Based on the Company's estimate of future revenues, approximately 76% of
unamortized released programming costs at June 30, 1996 will be amortized
during the three years ending June 30, 1999.
4. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
[Download Table]
Studio equipment................................................ $ 8,338,000
Office furniture and fixtures................................... 3,257,000
Leasehold improvements.......................................... 2,455,000
Other........................................................... 64,000
-----------
14,114,000
Less accumulated depreciation................................... 5,403,000
-----------
$ 8,711,000
===========
5. DEBT
Debt is comprised of the following:
[Download Table]
DeNationale Investeringsbank N.V.; secured line of credit due
April 18, 1999; interest at three month LIBOR (5.58% at June
30, 1996) plus 0.4% paid quarterly; maximum borrowings of
$8,000,000.................................................... $ 6,862,000
Secured lines of credit with varying due dates between December
31, 1997 and April 13, 1998; maximum borrowing availability
varying between FF 3,500,000 ($674,000 at June 30, 1996) and
FF 16,462,000 ($3,170,000 at June 30, 1996); varying interest
rates (between 4.79% and 8.75% at June 30, 1996) paid
quarterly..................................................... 3,554,000
Secured promissory notes with varying due dates between April
16, 1997 and August 5, 1999; original principal amounts paid
quarterly or at maturity; notes are non-interest bearing...... 6,484,000
Norwest Equipment Finance, Inc.; secured promissory note due
February 9, 2000 and principal paid annually; original
principal of $3,912,000; interest at 7.5% per annum and paid
annually...................................................... 3,016,000
-----------
$19,916,000
===========
F-14
FCN HOLDING, INC., SABAN ENTERTAINMENT, INC.
AND FOX KIDS WORLDWIDE, L.L.C.
(FROM AND AFTER THE DATE OF THE REORGANIZATION (NOTE 1), FOX KIDS WORLDWIDE,
INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Payments of principal on promissory notes in future periods are as follows:
[Download Table]
YEAR ENDING JUNE 30
-------------------
1997............................................................ $6,895,000
1998............................................................ 947,000
1999............................................................ 879,000
2000............................................................ 779,000
----------
$9,500,000
==========
In July 1995, Saban and SINV separately entered into credit agreements with
Imperial Bank ("Imperial"), as agent, and a group of lenders for secured
revolving credit facilities ("Credit Facilities") aggregating $50 million
maturing on July 31, 1998. Interest on the borrowings is at either the prime
rate (8.25% at June 30, 1996) plus .5% or .25% depending on Saban's and SINV's
tangible net worth or three month or six month LIBOR (5.58% and 5.81%,
respectively, at June 30, 1996) plus 2.25% or 2% depending on Saban's and
SINV's tangible net worth. Interest is payable at the end of the interest
period which is either one, three or six months. Saban and SINV are required
to pay a quarterly commitment fee of .25% per annum of the average daily
unused portion of the commitment. Saban and SINV also paid a loan fee
amounting to .75% of the commitment. The combined amount available for
borrowing under the Credit Facilities at any time is limited in accordance
with a formula based upon the value of collateral in Saban's and SINV's
borrowing bases. The borrowing bases include on and off balance sheet
receivables and amounts attributable to the value of Saban's and SINV's film
library. Saban's credit facility is secured by substantially all of the assets
of Saban and its subsidiaries (excluding SINV and other foreign subsidiaries
of Saban) and SINV's credit facility is secured by substantially all of the
assets of Saban and its subsidiaries. The Credit Facilities restrict the
payment of dividends.
The Credit Facilities contain restrictive covenants regarding, among other
things, additional indebtedness, payments and advances for product, the
maintenance of certain financial ratios and restrictions on the disposition of
assets. At June 30, 1996 the Company and SINV were in compliance or had
obtained waivers for these covenants. At June 30, 1996 no amounts were
outstanding under these Credit Facilities.
6. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets are as follows:
[Download Table]
Deferred tax liabilities:
Accounts receivable...................................... $ 581,000
State taxes.............................................. 209,000
------------
Total deferred tax liabilities............................. $ 790,000
Deferred tax assets:
Deferred revenue......................................... $ 18,813,000
Book over tax amortization............................... 665,000
Accrued expenses and reserves............................ 6,095,000
Other.................................................... 1,450,000
------------
Total deferred tax assets.................................. 27,023,000
Valuation allowance for deferred tax assets................ --
------------
Net deferred tax assets.................................... 27,023,000
------------
Net deferred tax assets.................................... $(26,233,000)
============
F-15
FCN HOLDING, INC., SABAN ENTERTAINMENT, INC.
AND FOX KIDS WORLDWIDE, L.L.C.
(FROM AND AFTER THE DATE OF THE REORGANIZATION (NOTE 1), FOX KIDS WORLDWIDE,
INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
For financial reporting purposes, income before income taxes includes the
following components:
[Download Table]
Pretax income:
United States............................................... $33,149,000
Foreign..................................................... 16,725,000
-----------
$49,874,000
===========
Significant components of the provision for income taxes are as follows:
Current:
Federal..................................................... $14,316,000
State....................................................... 3,964,000
Foreign..................................................... 586,000
-----------
$18,866,000
-----------
Deferred:
Federal..................................................... $ (431,000)
State....................................................... (161,000)
Foreign..................................................... 0
-----------
$ (592,000)
-----------
Total......................................................... $18,274,000
===========
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is:
Tax at U.S. statutory rates................................. 35 %
State taxes, net of federal benefit......................... 5
Foreign subsidiary's income not subject to state or federal
tax........................................................ (13)
Foreign taxes............................................... 1
Other....................................................... 1
Non-deductible investment advisory fees..................... 8
-----------
37 %
===========
A liability attributable to the tax provision of FCN Holding was deemed to
be contributed to capital by a related party.
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $78,000,000 at June 30, 1996. Those earnings are considered to
be indefinitely reinvested and, accordingly, no provision for U.S. federal and
state income taxes has been provided thereon. Upon distribution of those
earnings in the form of dividends or otherwise, the Company would be subject
to both U.S. income taxes (subject to an adjustment for foreign tax credits)
and withholding taxes payable to the various foreign countries. Determination
of the amount of unrecognized deferred U.S. income tax liability is not
practicable because of the complexities associated with its hypothetical
calculation; however, unrecognized foreign tax credit carryforwards would be
available to reduce some portion of the U.S. liability.
F-16
FCN HOLDING, INC., SABAN ENTERTAINMENT, INC.
AND FOX KIDS WORLDWIDE, L.L.C.
(FROM AND AFTER THE DATE OF THE REORGANIZATION (NOTE 1), FOX KIDS WORLDWIDE,
INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
The Company leased office space in Burbank, California, under a ten year
lease which was terminated in December 1995, and a lease termination fee of
$305,000 was paid. The Company also leases office space in New York City under
a three year lease which is cancelable after the end of each year by payment
of a termination fee. In addition, the Company leases office space in Paris,
France, Cologne, Germany and London, England under nine year, five year and
three year operating leases, respectively. One of the Paris, France leases
provides for early termination on January 15, 1997 and the other on February
28, 1999 and February 28, 2002, both upon six months advance written notice.
The London, England lease provides for early termination upon six months
advance written notice.
In July 1995, the Company entered into a 10 year lease commencing on April
1, 1996 for office space in Los Angeles, California. The lease provides for
early termination at the end of the sixth and eighth years upon payment of a
termination fee. The lease calls for monthly payments plus maintenance and
property tax payments. The Company also has two leases for production
facilities, one is a short-term lease in Los Angeles, California expiring
March 1997, and the other is a two-year lease in Valencia, California expiring
in January 1997 and subject to two one-year extensions.
Noncancelable future minimum payments for the remainder of the initial,
noncancelable lease periods are as follows:
[Download Table]
YEAR ENDING JUNE 30
-------------------
1997.............................................................. $ 4,095,000
1998.............................................................. 1,961,000
1999.............................................................. 2,208,000
2000.............................................................. 3,157,000
2001.............................................................. 3,307,000
Thereafter........................................................ 17,850,000
-----------
$32,578,000
===========
Rent expense for the eight months ended June 30, 1996, net of amounts
capitalized, was approximately $1,006,000.
The Fox Kids Network occupies approximately 18,568 square feet of space in a
facility subleased from FOX Television Stations, Inc. ("FOX Television"). FOX
Television leases the space from Metromedia Inc. The Fox Kids Network
currently pays to FOX Television an annual rate of $24.17 per square foot for
use of this space. There is no written agreement evidencing any obligation
between the Fox Kids Network and FOX Television.
The Company is involved in various lawsuits, both as a plaintiff and
defendant, in the ordinary course of its business. Based on an evaluation
which included consultation with counsel concerning legal and factual issues
involved, management is of the opinion that the foregoing claims and lawsuits
will not have a material adverse effect on the Company's consolidated
financial position.
The Company has entered into employment agreements with certain key members
of management. Such agreements are for terms ranging from one to six and one-
half years and generally include bonus provisions. Additionally, one key
member of management has entered into a five-year, non-exclusive consulting
agreement pursuant to which, among other things, the Company agreed that if
the employment agreement is not extended
F-17
FCN HOLDING, INC., SABAN ENTERTAINMENT, INC.
AND FOX KIDS WORLDWIDE, L.L.C.
(FROM AND AFTER THE DATE OF THE REORGANIZATION (NOTE 1), FOX KIDS WORLDWIDE,
INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
beyond the current five-year term, the Company would, on the terms set forth
therein, be obligated to pay this individual over a five-year period an annual
consulting fee at a rate not exceeding $250,000 per year. Future minimum
payments under these agreements approximate $24,543,000 of which $10,400,000
is due in 1997, $5,433,000 is due in 1998, $3,470,000 is due in 1999,
$1,639,000 is due in 2000 and $1,454,000 is due in 2001.
Effective June 1994, Saban issued to two employees and a consultant options
to purchase an aggregate of 48.981 shares of common stock, 19.592 of which
were exercisable at June 30, 1996. These options vest ratably over five years
and are exercisable at $122,496 per share, which approximates the fair market
value at the time of grant. Effective January 1996, Saban issued to one key
employee options to purchase 16.327 shares of common stock, 3.265 of which
were exercisable at June 30, 1996. These options vest ratably over five years
and are exercisable at $612,500 per share, which approximates the fair market
value at the time of grant. No options have been exercised at June 30, 1996.
With respect to termination for any reason, so long as the Company is not
public, the Company will purchase from the employee and the employee will sell
to the Company any and all option shares owned by the employee and the option
granted to the employee for an amount equal to the fair market value of the
option shares owned by the employee plus the fair market value of the option
shares with respect to which the employee's option has vested but not
exercised less the exercise price. Included in selling, general and
administrative expenses for the eight months ended June 30, 1996 is $3,800,000
and in accrued liabilities at June 30, 1996 is $17,200,000 related to
compensation recorded in connection with these options.
In connection with the Reorganization as described in Note 1, all options
will become options to purchase shares of the Class A Common Stock and will
have a term of 10 years from the date of grant, unless terminated earlier as
provided in the agreement granting the options.
As of June 30, 1996 65.308 shares of Saban common stock are reserved for
future issuance related to options.
Future estimated program commitments are approximately $37,173,000.
Effective April 3, 1996, FCN Holding has agreed to issue to an investment
banker 16.16 shares of common stock of FCN Holding as compensation for certain
financial advisory and other investment banking services rendered in
connection with the negotiation, structuring, formation and capitalization of
the LLC. In connection therewith, $10,000,000 is included in the combined
statement of operations for the eight months ended June 30, 1996. FCN Holding
has reserved 16.16 shares for future issuances.
8. PROFIT SHARING PLAN
Saban has a qualified tax deferred profit sharing plan (the "Plan") for all
of its eligible employees. Under the Plan, employees become eligible on the
first January 1 following such employees' completion of six months of service
with Saban. Each participant is permitted to make voluntary contributions, not
to exceed 15% of his or her respective compensation and the applicable
statutory limitation, which are immediately 100% vested. Saban, at the
discretion of the Board of Directors, may make matching contributions to the
Plan. Related expense for the eight months ended June 30, 1996, was
approximately $43,000.
9. ACQUISITIONS
On April 16, 1996, the Company acquired the stock of Creativite &
Developpement SA ("C&D"), a leading Paris-based producer of family
entertainment for $2,869,000, $1,721,000 payable upon closing (April 16,
F-18
FCN HOLDING, INC., SABAN ENTERTAINMENT, INC.
AND FOX KIDS WORLDWIDE, L.L.C.
(FROM AND AFTER THE DATE OF THE REORGANIZATION (NOTE 1), FOX KIDS WORLDWIDE,
INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
1996) and $1,148,000 payable on April 16, 1997 and is secured by a letter of
credit. The Company has accounted for the acquisition as a purchase. No
goodwill was recorded as the entire purchase price was allocated to the
respective assets and liabilities. The acquisition included the international
distribution rights to over 400 half-hour episodes of children's programming.
As a result, the balance sheet of C&D at May 31, 1996, together with the
results of operations of C&D since the purchase date of April 16, 1996 have
been consolidated with the Company's results of operations for the year ended
June 30, 1996. Unaudited pro forma combined statements of operations for the
years ended June 30, 1996 and July 2, 1995, which would combine the results of
operations of the Company and C&D are not presented herein as such information
is not material to the combined results of operations.
In December 1995, the Company purchased from Vesical Limited ("Vesical") its
interest and rights to certain television programming and related account
receivable balances for $12,000,000, $7,200,000 payable upon closing (April
18, 1996) and $4,800,000 payable on April 18, 1997 and secured by a letter of
credit. The Company allocated the purchase price between the account
receivable balances and the television programming rights based upon the
respective assets fair market values using a discounted cash flow analysis.
10. SIGNIFICANT CUSTOMERS AND PROPERTIES AND GEOGRAPHICAL INFORMATION
The Company operates in one business segment which is the acquisition,
production and worldwide broadcast, distribution and leasing of entertainment
properties. For the eight months ended June 30, 1996, the Company earned
revenues from one significant customer of approximately $32,148,000 (17%). The
Company earned revenues of $72,668,000 (38%) from one significant property
(Power Rangers).
F-19
FCN HOLDING, INC., SABAN ENTERTAINMENT, INC.
AND FOX KIDS WORLDWIDE, L.L.C.
(FROM AND AFTER THE DATE OF THE REORGANIZATION (NOTE 1), FOX KIDS WORLDWIDE,
INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Geographic information concerning the Company's operations is as follows:
[Download Table]
Revenues:
Domestic..................................................... $129,645,000
International, principally Europe(/2/)....................... 61,976,000
------------
Total.......................................................... 191,621,000
Operating profit(/1/)
Domestic..................................................... 67,970,000
International, principally Europe(/2/) 24,714,000
------------
Total.......................................................... 92,684,000
Selling, general and administrative expenses................... 23,072,000
Fox Kids Network affiliate participations...................... 8,853,000
Investment advisory fee........................................ 10,000,000
Interest expense............................................... 885,000
------------
Income before provision for income taxes....................... $ 49,874,000
============
Identifiable assets:
Domestic..................................................... $197,315,000
International, principally Europe(/2/)....................... 138,955,000
------------
Total.......................................................... $336,270,000
============
--------
(1) For purposes of this presentation, operating profit is total revenues less
amortization of programming costs residuals and profit participations.
(2) International amounts relate principally to Western Europe in connection
with the Company's subsidiary, SINV, a Netherlands Antilles company with
offices in Switzerland.
11. SUBSEQUENT EVENT
In connection with the Reorganization, on September 25, 1996 the Company's
Board of Directors authorized management of the Company to file a Registration
Statement with the Securities and Exchange Commission to sell shares of its
common stock.
F-20
REPORT OF INDEPENDENT AUDITORS
Board of Directors
FCN Holding, Inc.
We have audited the accompanying consolidated balance sheets of FCN Holding,
Inc., as of July 3, 1994, July 2, 1995 and October 31, 1995, and the related
consolidated statements of operations, stockholder's equity, and cash flows
for the period from June 28, 1993 to July 3, 1994, the period from July 4,
1994 to July 2, 1995 and the period from July 3, 1995 to October 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these 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 consolidated financial position
of FCN Holding, Inc. and the results of its operations and its cash flows for
the period from June 28, 1993 to July 3, 1994, the period from July 4, 1994 to
July 2, 1995 and the period from July 3, 1995 to October 31, 1995, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Los Angeles, California
September 27, 1996
F-21
FCN HOLDING, INC.
CONSOLIDATED BALANCE SHEETS
[Download Table]
JULY 3, JULY 2, OCTOBER 31,
1994 1995 1995
----------- ----------- -----------
ASSETS
Cash and cash equivalents............... $ 268,000 $ -- $ 317,000
Accounts receivable, including
$3,717,000 (1994), $2,265,000 (July 2,
1995) and $2,341,000 (October 31, 1995)
from related parties................... 18,491,000 23,539,000 23,175,000
Programming costs, less accumulated
amortization........................... 17,084,000 26,143,000 28,090,000
Property and equipment, at cost, less
accumulated depreciation .............. 10,000 85,000 103,000
Other assets............................ 97,000 49,000 1,107,000
----------- ----------- -----------
Total assets............................ $35,950,000 $49,816,000 $52,792,000
=========== =========== ===========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Accounts payable........................ $ 2,367,000 $ 1,991,000 1,718,000
Accrued liabilities..................... 1,095,000 876,000 1,291,000
Deferred revenue........................ -- 1,763,000 791,000
Fox Kids Network affiliate participation
payable................................ -- 11,523,000 18,406,000
Accrued programming expenditures........ 21,052,000 21,960,000 19,816,000
Administrative fee payable to a related
party.................................. 4,629,000 4,828,000 6,173,000
Amounts payable to related parties...... 27,163,000 10,686,000 8,727,000
----------- ----------- -----------
Total liabilities....................... 56,306,000 53,627,000 56,922,000
Commitments and contingencies -- -- --
Stockholder's deficit:
Common stock, no par value, 2,000
authorized, issued and outstanding
1,000 shares (1994) and 2,000 shares
(1995) .............................. 1,000 2,000 2,000
Retained deficit...................... (20,357,000) (3,813,000) (4,132,000)
----------- ----------- -----------
Total stockholder's deficit............. (20,356,000) (3,811,000) (4,130,000)
----------- ----------- -----------
Total liabilities and stockholder's
deficit................................ $35,950,000 $49,816,000 $52,792,000
=========== =========== ===========
See accompanying notes.
F-22
FCN HOLDING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
[Download Table]
PERIOD FROM PERIOD FROM PERIOD FROM
JUNE 28, 1993 JULY 4, 1994 JULY 3, 1995
TO TO TO
JULY 3, 1994 JULY 2, 1995 OCTOBER 31, 1995
------------- ------------ ----------------
Net revenues (including $8,778,000
(1994), $8,443,000 (July 2, 1995)
and $2,822,000 (October 31, 1995)
from related parties)............. $130,600,000 $168,871,000 $46,286,000
Costs and expenses:
Amortization of programming
costs, residuals and
participations ................. 98,725,000 109,259,000 29,698,000
Ancillary market distribution
costs to a related party ....... 2,922,000 3,255,000 1,140,000
Administrative fee to a related
party........................... 17,939,000 21,458,000 6,173,000
Selling, general and
administrative (including
$1,118,000 (1994), $1,075,000
(July 2, 1995) and $448,000
(October 31, 1995) to related
parties)........................ 3,579,000 5,202,000 2,566,000
Fox Kids Network affiliate
participations.................. -- 11,523,000 6,883,000
------------ ------------ -----------
Operating income (loss)............ 7,435,000 18,174,000 (174,000)
------------ ------------ -----------
Interest expense to a related
party............................. 2,218,000 1,630,000 145,000
------------ ------------ -----------
Income (loss) before provision for
income taxes...................... 5,217,000 16,544,000 (319,000)
Provision for income taxes......... -- -- --
------------ ------------ -----------
Net income (loss).................. $ 5,217,000 $ 16,544,000 $ (319,000)
============ ============ ===========
Net income per common share........ $ $ $
============ ============ ===========
Weighted average shares
outstanding.......................
============ ============ ===========
See accompanying notes.
F-23
FCN HOLDING, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
[Download Table]
COMMON STOCK
------------- RETAINED
SHARES AMOUNT DEFICIT TOTAL
------ ------ ------------ ------------
Balance at June 27, 1993............. 1,000 $1,000 $(25,574,000) $(25,573,000)
Net income......................... -- -- 5,217,000 5,217,000
----- ------ ------------ ------------
Balance at July 3, 1994.............. 1,000 1,000 (20,357,000) (20,356,000)
Net income......................... -- -- 16,544,000 16,544,000
Issuance of stock.................. 1,000 1,000 -- 1,000
----- ------ ------------ ------------
Balance at July 2, 1995.............. 2,000 2,000 (3,813,000) (3,811,000)
Net loss........................... -- -- (319,000) (319,000)
----- ------ ------------ ------------
Balance at October 31, 1995.......... 2,000 $2,000 $ (4,132,000) $ (4,130,000)
===== ====== ============ ============
See accompanying notes.
F-24
FCN HOLDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Download Table]
PERIOD FROM PERIOD FROM PERIOD FROM
JUNE 28, 1993 JULY 4, 1994 JULY 3, 1995
TO TO TO
JUNE 3, 1994 JULY 2, 1995 OCTOBER 31, 1995
------------- ------------- ----------------
OPERATING ACTIVITIES
Net income (loss).............. $ 5,217,000 $ 16,544,000 $ (319,000)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Amortization of programming
costs....................... 94,160,000 98,309,000 26,937,000
Depreciation................. 8,000 17,000 13,000
Provision for doubtful
accounts.................... -- 480,000 --
Changes in operating assets
and liabilities:
Accounts receivable........ (1,611,000) (5,528,000) 364,000
Additions to programming
costs .................... (88,999,000) (107,368,000) (28,884,000)
Other assets............... (56,000) 48,000 (1,058,000)
Accounts payable........... 1,949,000 (376,000) (273,000)
Accrued liabilities........ 106,000 (219,000) 415,000
Administration fee payable
to a related party........ 1,753,000 199,000 1,345,000
Deferred revenue........... -- 1,763,000 (972,000)
Fox Kids Network affiliate
participation payable..... -- 11,523,000 6,883,000
Accrued programming
expenditures.............. 1,700,000 908,000 (2,144,000)
------------- ------------- ------------
Net cash provided by operating
activities.................... 14,227,000 16,300,000 2,307,000
INVESTING ACTIVITIES
Purchase of property and
equipment..................... (10,000) (91,000) (31,000)
------------- ------------- ------------
Net cash used in investing
activities.................... (10,000) (91,000) (31,000)
FINANCING ACTIVITIES
Proceeds from related parties.. 127,113,000 180,765,000 68,308,000
Payments to related parties.... (141,366,000) (197,242,000) (70,267,000)
------------- ------------- ------------
Net cash used in financing
activities.................... (14,253,000) (16,477,000) (1,959,000)
------------- ------------- ------------
(Decrease) increase in cash and
cash equivalents.............. (36,000) (268,000) 317,000
Cash and cash equivalents at
beginning of period........... 304,000 268,000 --
------------- ------------- ------------
Cash and cash equivalents at
end of period................. $ 268,000 $ -- $ 317,000
============= ============= ============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid during the period
for:
Interest..................... $ 2,172,000 $ 2,053,000 $ 201,000
============= ============= ============
Income taxes................. $ -- $ -- $ --
============= ============= ============
See accompanying notes.
F-25
FCN HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1995
1. BASIS OF FINANCIAL STATEMENT PRESENTATION AND ORGANIZATION
The accompanying consolidated financial statements include the accounts of
FCN Holding, Inc. and its wholly-owned subsidiaries, Fox Kids Club, Fox Kids
Countdown and Fox Storymakers (collectively "FCN Holding"). All significant
intercompany transactions and accounts have been eliminated.
FCN Holding is an indirect subsidiary of Fox Broadcasting Company ("Fox
Broadcasting"), itself an indirect subsidiary of The News Corporation Limited.
FCN Holding's largest operating entity is an indirect wholly-owned subsidiary,
Fox Children's Network, Inc. ("FCN"), which began primary operations on
September 8, 1990. FCN Holding produces and licenses children's animated and
live-action television shows with initial exploitation on the Fox Broadcasting
television network followed by distribution in ancillary markets when such
rights exist.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR-END
FCN Holding's fiscal year ends on the Sunday closest to June 30.
REVENUE RECOGNITION
Advertising revenue is recognized as earned in the period in which the
advertising commercials are telecast and are net of agency commission fees of
$21,343,000, $25,490,000 and $7,328,000 for the periods ended July 3, 1994,
July 2, 1995 and October 31, 1995, respectively. Revenues from foreign and
merchandising license agreements, which provide for the receipt by FCN Holding
of nonrefundable guaranteed amounts, are recognized when the license period
begins and the product is available pursuant to the terms of the license
agreement. Amounts in excess of minimum guarantees under these license
agreements are recognized when earned. Amounts received in advance of
recognition of revenue are recorded as deferred revenue. FCN Holding generally
provides advertisers with guaranteed ratings in connection with its domestic
network broadcasts. Revenue is recorded net of estimated shortfalls, which are
settled either by additional advertising time ("make goods") or cash refunds
to the advertiser. FCN Holding accounts for the full amount of the estimated
shortfall.
PROGRAMMING COSTS
Program licenses and rights include exhibition and exploitation rights
acquired under license agreements and costs of developing and producing
original programming for use by FCN Holding on its network. The individual
film forecast method is used to amortize programming costs in which FCN
Holding owns or controls distribution rights. Costs accumulated in the
production of a program are amortized in the proportion that gross revenues
realized bear to management's estimate of the total gross revenues expected to
be received. Estimated liabilities for residuals and participations are
accrued and expensed in the same manner as programming cost inventories are
amortized.
For programs in which the Company acquires only broadcast network rights,
the Company amortizes such program costs over the estimated number of
telecasts. The Company evaluates its programming rights for possible changes
in the estimated number of telecasts or the possibility of impairment.
Revenue estimates on a program-by-program basis are reviewed periodically by
management and are revised, if warranted, based upon management's appraisal of
current market conditions, such as changes in the
F-26
FCN HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
distribution marketplace or changes in expected usage of a program on the
network. Based on this review, if estimated future gross revenues from a
program are not sufficient to recover the unamortized costs, the unamortized
programming cost will be written down to net realizable value.
CONCENTRATION OF CREDIT RISKS
Financial instruments which potentially subject FCN Holding to concentration
of credit risk consist principally of temporary cash investments and trade
receivables. FCN Holding places its temporary cash investments with high
credit quality financial institutions and therefore is subject to reduced
risk. FCN Holding has not incurred any losses relating to these investments.
At October 31, 1995, substantially all of FCN Holding's trade receivables
were from advertising agencies. FCN Holding performs periodic credit
evaluations of its customers' financial condition and generally does not
require collateral. Receivables generally are due within 30 days. Credit
losses relating to advertising agencies consistently have been within
management's expectations.
CASH AND CASH EQUIVALENTS
For the purposes of balance sheet classification and the statement of cash
flows, FCN Holding considers all highly liquid investments that are both
readily convertible into cash with original maturities when purchased of three
months or less to be cash equivalents.
FINANCIAL INSTRUMENTS
Financial instruments are carried at historical cost which approximates fair
value.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost and depreciation is computed
using the straight-line method over their estimated useful lives of three to
five years. Leasehold improvements are amortized over the lesser of the term
of the lease or the estimated useful lives of the improvements using the
straight-line method.
INCOME TAXES
FCN Holding provides for income taxes based on the liability method under
Statement of Financial Accounting Standards No. 109. Under this method,
deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes including amortization of programming costs. Actual results
could differ from those estimates. Management periodically reviews and revises
its estimates of future airings and revenues for program costs, as necessary,
which may result in revised amortization of its program costs and may be
significantly affected by the periodic adjustments in such amortization.
NET INCOME PER COMMON SHARE
The per share data is based on the weighted average number of common and
common equivalent shares outstanding during the period.
F-27
FCN HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. PROGRAMMING COSTS
Programming costs, net of accumulated amortization, are comprised of the
following:
[Download Table]
JULY 3, JULY 2, OCTOBER 31,
1994 1995 1995
------------ ------------ ------------
Programming costs, broadcast....... $159,565,000 $244,599,000 $261,078,000
Programming costs, produced........ 64,654,000 89,493,000 99,730,000
Programming costs in development
and production.................... 3,803,000 1,298,000 3,466,000
------------ ------------ ------------
228,022,000 335,390,000 364,274,000
------------ ------------ ------------
Accumulated amortization........... 210,938,000 309,247,000 336,184,000
------------ ------------ ------------
$ 17,084,000 $ 26,143,000 $ 28,090,000
============ ============ ============
Based on FCN Holding's estimate of future revenues, substantially all of the
unamortized released programming costs at October 31, 1995 will be amortized
during the three year period ending October 31, 1998.
4. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
[Download Table]
JULY 3, JULY 2, OCTOBER 31,
1994 1995 1995
------- ------- -----------
Computer equipment............................. $43,000 $93,000 $100,000
Office furniture and fixtures.................. 4,000 4,000 28,000
Machinery and equipment........................ 31,000 41,000 41,000
Leasehold improvements......................... -- 32,000 32,000
------- ------- --------
78,000 170,000 201,000
Less accumulated depreciation.................. 68,000 85,000 98,000
------- ------- --------
$10,000 $85,000 $103,000
======= ======= ========
5. RELATED PARTY TRANSACTIONS
FCN and Twentieth Century Fox Licensing and Merchandising, a unit of Fox,
Inc. ("Twentieth Fox Licensing") are parties to a Merchandising Rights
Acquisition Agreement, dated as of July 1, 1990, pursuant to which FCN
licenses to Twentieth Fox Licensing the worldwide merchandising and licensing
rights, in perpetuity, to programming owned or controlled by FCN. In
consideration for the rights granted, Twentieth Fox Licensing agreed to pay to
FCN an amount equal to 100% of net profits, which equaled gross receipts less
distribution fees and expenses.
FCN and Twentieth Century Fox Film Corporation ("Twentieth Century Fox") are
parties to a Distribution Rights Acquisition Agreement, dated as of September
1, 1990, pursuant to which FCN licensed to Twentieth Century Fox the worldwide
distribution rights, in perpetuity, with respect to programming owned or
controlled by FCN. In consideration for the rights granted, Twentieth Century
Fox agreed to pay to FCN 100% of net profits as defined in the agreement.
FCN and Fox Broadcasting are parties to an Administration Agreement, dated
as of February 7, 1990, pursuant to which Fox Broadcasting agreed to provide
the following services to FCN: network national advertising sales and the
administration thereof, commercial trafficking and broadcast operations
(including program delivery to Fox Kids Network Affiliates (see Note 8--"Fox
Kids Network Affiliate Participation
F-28
FCN HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Payable")) and overhead charges related to Fox Broadcasting in-house
administrative support in the areas of research, promotion, business affairs,
legal affairs and accounting. FCN agreed to pay to Fox Broadcasting a fee
equal to 15% of 100% of the net advertising revenue (gross advertising revenue
less advertising agency commissions) derived with respect to national
commercials, commercial material or other advertising matter included or used
in connection with any of the programs exhibited on the Fox Kids Network.
FCN Holding leases office space on a month to month basis from a company
related to Fox Broadcasting. Rent expense to this related party was $199,000,
$231,000 and $88,000 for the periods ended July 3, 1994, July 2, 1995 and
October 31, 1995.
Related companies of Fox Broadcasting have funded the operation of FCN
Holding from its inception through loans to FCN Holding. All amounts derived
by the operations of FCN Holding are used to reduce such outstanding
borrowings. Amounts outstanding bear interest at the prime rate (8.75% at
October 31, 1995). Amounts due to the related companies of Fox Broadcasting
including interest totalled $27,163,000, $10,686,000 and $8,727,000 at July 3,
1994, July 2, 1995 and October 31, 1995, respectively.
6. INCOME TAXES
FCN Holding, together with other related companies of Fox Broadcasting,
files consolidated federal and state income tax returns. No deferred tax
assets or liabilities arising from FCN Holding's activities have been
allocated.
FCN Holding did not incur any current or deferred tax expense due to the
utilization of prior year net operating loss carryforwards.
The actual tax expense differs from the "expected" federal tax rate of 35%
as follows:
[Download Table]
PERIOD FROM PERIOD FROM PERIOD FROM
JUNE 28, 1993 JULY 4, 1994 JULY 3, 1995
TO TO TO
JULY 3, 1994 JULY 2, 1995 OCTOBER 31, 1995
------------- ------------ ----------------
Computed "expected" tax expense. 35 % 35 % --%
Impact of utilized net operating
loss carryforward.............. (35)% (35)% --%
--- --- ---
-- -- --
=== === ===
7. COMMITMENTS AND CONTINGENCIES
Future estimated program commitments are approximately $58,648,000.
FCN Holding is involved in certain legal proceedings arising from the normal
course of operations. Management believes that the ultimate resolution of
these matters will not have a material effect on its financial position or
results of operations.
FCN Holding has entered into employment agreements with several key
employees extending through fiscal year 1999 requiring future payments of
$1,135,000 in the one year period ended October 31, 1996, $788,000 in the one
year period ended October 31, 1997 and $257,000 in the one year period ended
October 31, 1998.
F-29
FCN HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. FOX KIDS NETWORK AFFILIATE PARTICIPATION PAYABLE
Pursuant to the terms of the affiliation agreements ("Agreement") among Fox
Broadcasting and substantially all of its affiliated television stations ("Fox
Kids Network Affiliates"), the Fox Kids Network Affiliates in total are
entitled to compensation which is equal to 100% of FCN's programming Net
Profits (as defined below). Amounts payable under these compensation
arrangements are due quarterly in amounts derived pursuant to the provisions
in the Agreement. Net profits are defined on a cumulative basis to include
amounts actually received by FCN from the exhibition, distribution and other
exploitation of FCN Holding's programs and the merchandising and other rights
relating thereto, less amounts paid for administrative fees,
production/license fees, distribution and merchandising fees (including those
payable to FCN Holding), overhead and other expenses and reserves.
9. MAJOR CUSTOMERS AND PROPERTIES
For the year ended July 3, 1994, FCN Holding earned net revenues from two
significant customers of approximately $25,126,000 (20%). For the period ended
July 2, 1995, FCN Holding earned net revenues from two significant customers
of approximately $32,723,000 (20%). For the period ended October 31, 1995, FCN
Holding earned net revenues from three significant customers of approximately
$15,957,000 (34%). For the periods ended July 3, 1994, July 2, 1995 and
October 31, 1995, FCN Holding earned net revenues from one significant
property (Power Rangers) of $19,240,000 (15%), $55,805,000 (33%) and
$10,847,000 (23%), respectively.
10. SUBSEQUENT EVENT
On November 1, 1995 (the "Effective Date") FCN Holding and Saban
Entertainment, Inc. ("Saban") formed Fox Kids Worldwide, L.L.C. (the "LLC"), a
limited liability company, for the purpose of jointly expanding the worldwide
childrens' businesses of FCN Holding and Saban. Since the Effective Date, FCN
Holding and Saban have been operated by their respective managements subject
to the overall supervision of the members committee of the LLC.
THE REORGANIZATION
Fox Kids Worldwide, Inc. was incorporated in Delaware in August 1996 and
currently conducts no business or operations. Immediately prior to the closing
of proposed initial public offerings ("Offerings"), (i) Fox Broadcasting Sub,
Inc.; a wholly-owned subsidiary of Fox Broadcasting ("Fox Broadcasting Sub"),
will exchange its capital stock in FCN Holding, which indirectly owns FCN, for
50% of the number of shares of the Fox Kids Worldwide, Inc.'s class B common
stock, par value $0.001 per share ("Class B Common Stock"), which will be
outstanding immediately after the Reorganization and prior to the closing of
the Offerings (the "Reorganization Closing"), (ii) the other stockholders of
FCN Holding will exchange their capital stock in FCN Holding for an aggregate
of one percent of the aggregate number of shares of Fox Kids Worldwide, Inc.'s
class A common stock, par value $0.001 per share ("Class A Common Stock") and
Class B Common Stock (Class A Common Stock and Class B Common Stock are
collectively the "Common Stocks") which will be outstanding immediately after
the Reorganization Closing, (iii) the Chairman and Chief Executive Officer of
Saban ("Haim Saban") and the other stockholders of Saban will exchange their
capital stock in Saban for an aggregate of 50% of the number of shares of
Class B Common Stock which will be outstanding immediately after the
Reorganization Closing and (iv) all outstanding management options to purchase
Saban capital stock will become options to purchase an aggregate of
approximately four percent of the aggregate number of shares of Common Stock
which will be outstanding immediately after the Reorganization Closing. In
addition, Fox Broadcasting will exchange its preferred, non-voting interest in
the LLC for an aggregate of 1,000,000 shares of Fox Kids Worldwide, Inc.'s
series A redeemable preferred stock, $0.001 par value per share (the "Series A
Preferred Stock") and will exchange a $50 million contingent note receivable
from the LLC for a new preferred, non-voting interest in the LLC. As a result
of these transactions, FCN Holding, FCN, Saban and the LLC will become direct
or indirect subsidiaries of Fox Kids Worldwide, Inc.
F-30
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Saban Entertainment, Inc.
We have audited the accompanying consolidated balance sheets of Saban
Entertainment, Inc. as of May 31, 1994 and 1995 and as of October 31, 1995,
and the related consolidated statements of operations, stockholders' equity,
and cash flows for the years ended May 31, 1994 and 1995 and for the five
months ended October 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these 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 consolidated financial position
of Saban Entertainment, Inc. at May 31, 1994 and 1995, and at October 31, 1995
and the results of its operations and its cash flows for the years ended May
31, 1994 and 1995 and for the five months ended October 31, 1995, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Los Angeles, California
September 27, 1996
F-31
SABAN ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
[Download Table]
MAY 31
-------------------------- OCTOBER 31
1994 1995 1995
------------ ------------ ------------
ASSETS
Cash and cash equivalents............. $ 3,849,000 $ 14,584,000 $ 16,207,000
Restricted cash....................... 299,000 5,000,000 5,000,000
Accounts receivable, net of allowance
for doubtful accounts of $385,000 at
May 31, 1994, $1,385,000 at May 31,
1995 and $1,385,000 at October 31,
1995 38,238,000 37,338,000 30,157,000
Amounts receivable from related par-
ties................................. 1,147,000 3,796,000 3,832,000
Programming costs, less accumulated
amortization......................... 85,079,000 115,873,000 118,210,000
Property and equipment, at cost, less
accumulated depreciation ............ 2,684,000 3,630,000 7,079,000
Deferred income taxes................. 4,920,000 35,473,000 26,186,000
Other assets.......................... 751,000 2,503,000 808,000
------------ ------------ ------------
Total assets.......................... $136,967,000 $218,197,000 $207,479,000
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable...................... $ 4,208,000 $ 6,818,000 $ 8,817,000
Accrued liabilities................... 3,479,000 29,606,000 23,411,000
Deferred revenue...................... 14,764,000 62,755,000 48,155,000
Accrued residuals and participations.. 12,335,000 9,672,000 10,074,000
Income taxes payable.................. 5,723,000 36,378,000 15,680,000
Deferred income taxes................. 9,182,000 9,233,000 766,000
Debt.................................. 19,891,000 5,623,000 5,605,000
Amounts payable to related parties.... 14,132,000 -- --
------------ ------------ ------------
83,714,000 160,085,000 112,508,000
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 10,000
shares authorized, 1,067 shares
issued and outstanding at May 31,
1994 and 800 shares issued and
outstanding at May 31, 1995 and
October 31, 1995 .................. -- -- --
Contributed capital................. 11,751,000 11,751,000 11,751,000
Cumulative translation adjustment... (255,000) (71,000) 46,000
Retained earnings................... 41,757,000 46,432,000 83,174,000
------------ ------------ ------------
Total stockholders' equity............ 53,253,000 58,112,000 94,971,000
------------ ------------ ------------
Total liabilities and stockholders'
equity............................... $136,967,000 $218,197,000 $207,479,000
============ ============ ============
See accompanying notes.
F-32
SABAN ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
[Download Table]
FIVE MONTHS
YEAR ENDED MAY 31 ENDED
------------------------ OCTOBER 31
1994 1995 1995
----------- ------------ ------------
Revenues................................. $84,372,000 $242,468,000 $105,130,000
Costs and expenses:
Amortization of programming costs,
residuals and participations.......... 48,101,000 117,557,000 42,022,000
Selling, general and administrative.... 8,933,000 51,894,000 11,538,000
----------- ------------ ------------
Operating income......................... 27,338,000 73,017,000 51,570,000
----------- ------------ ------------
Interest expense......................... 2,337,000 1,315,000 539,000
----------- ------------ ------------
Income before provision for income taxes. 25,001,000 71,702,000 51,031,000
Provision for income taxes............... 8,201,000 27,027,000 14,289,000
----------- ------------ ------------
Net income............................... $16,800,000 $ 44,675,000 $ 36,742,000
=========== ============ ============
Net income per common share.............. $ $ $
=========== ============ ============
Weighted average shares outstanding......
=========== ============ ============
See accompanying notes.
F-33
SABAN ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
[Enlarge/Download Table]
COMMON STOCK CUMULATIVE
-------------- CONTRIBUTED TRANSLATION RETAINED
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS TOTAL
------ ------ ----------- ----------- ------------ -----------
Balance at May 31, 1993....... 1,067 $-- $11,751,000 $ (60,000) $ 24,957,000 $36,648,000
Exchange loss on translation
of foreign subsidiaries'
financial statements....... -- -- -- (255,000) -- (255,000)
Realized translation loss on
sale of equity investment
in unconsolidated
affiliated company......... -- -- -- 60,000 -- 60,000
Net income.................. -- -- -- -- 16,800,000 16,800,000
----- ---- ----------- --------- ------------ -----------
Balance at May 31, 1994....... 1,067 -- 11,751,000 (255,000) 41,757,000 53,253,000
Exchange gain on translation
of foreign subsidiaries'
financial statements....... -- -- -- 184,000 -- 184,000
Purchase of minority
stockholder shares......... (267) -- -- -- (40,000,000) (40,000,000)
Net income.................. -- -- -- -- 44,675,000 44,675,000
----- ---- ----------- --------- ------------ -----------
Balance at May 31, 1995....... 800 -- 11,751,000 (71,000) 46,432,000 58,112,000
Exchange gain on translation
of foreign subsidiaries'
financial statements....... -- -- -- 117,000 -- 117,000
Net income.................. -- -- -- -- 36,742,000 36,742,000
----- ---- ----------- --------- ------------ -----------
Balance at October 31, 1995... 800 $-- $11,751,000 $ 46,000 $ 83,174,000 $94,971,000
===== ==== =========== ========= ============ ===========
See accompanying notes.
F-34
SABAN ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
OPERATING ACTIVITIES
[Download Table]
FIVE MONTHS
YEAR ENDED MAY 31 ENDED
--------------------------- OCTOBER 31
1994 1995 1995
------------ ------------- ------------
Net income......................... $ 16,800,000 $ 44,675,000 $ 36,742,000
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities:
Amortization of programming
costs........................... 40,292,000 84,109,000 32,651,000
Depreciation..................... 827,000 1,296,000 571,000
Cumulative translation adjust-
ment............................ (195,000) 184,000 117,000
Provision for doubtful accounts.. -- 1,000,000
Changes in operating assets and
liabilities:
Restricted cash................ 51,000 (4,701,000) --
Accounts receivable............ (8,733,000) (100,000) 7,181,000
Amounts receivable from related
parties....................... (811,000) (2,649,000) (36,000)
Additions to programming costs. (65,092,000) (114,903,000) (34,988,000)
Other assets................... 425,000 (1,752,000) 1,695,000
Accounts payable............... 2,173,000 2,610,000 1,999,000
Accrued liabilities............ (4,373,000) 26,127,000 (6,195,000)
Accrued residuals and partici-
pations....................... 2,740,000 (2,663,000) 402,000
Accrued interest to related
parties....................... (488,000) (2,359,000) --
Income taxes payable and de-
ferred income taxes........... 7,524,000 153,000 (19,878,000)
Deferred revenue............... 7,372,000 47,991,000 (14,600,000)
------------ ------------- ------------
Net cash (used in) provided by op-
erating activities................ (1,488,000) 79,018,000 5,661,000
INVESTING ACTIVITIES
Purchase of property and equipment. (1,795,000) (2,242,000) (4,020,000)
------------ ------------- ------------
Net cash used in investing activi-
ties.............................. (1,795,000) (2,242,000) (4,020,000)
FINANCING ACTIVITIES
Proceeds from bank borrowings...... 41,891,000 7,395,000 11,000,000
Payments on bank borrowings........ (35,282,000) (21,663,000) (11,018,000)
Proceeds from related parties...... 700,000 1,000,000 --
Payments to related parties........ (1,731,000) (12,773,000) --
Purchase of minority stockholder
shares............................ -- (40,000,000) --
------------ ------------- ------------
Net cash provided by (used in) fi-
nancing activities................ 5,578,000 (66,041,000) (18,000)
------------ ------------- ------------
Increase in cash and cash equiva-
lents............................. 2,295,000 10,735,000 1,623,000
Cash and cash equivalents at begin-
ning of year...................... 1,554,000 3,849,000 14,584,000
------------ ------------- ------------
Cash and cash equivalents at end of
year.............................. $ 3,849,000 $ 14,584,000 $ 16,207,000
============ ============= ============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid during the year for:
Interest (net of amounts capital-
ized)........................... $ 2,377,000 $ 3,280,000 $ 347,000
============ ============= ============
Income taxes..................... $ 486,000 $ 26,884,000 $ 34,156,000
============ ============= ============
See accompanying notes.
F-35
SABAN ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1995
1. BASIS OF FINANCIAL STATEMENTS PRESENTATION AND ORGANIZATION
Saban Entertainment, Inc. and its subsidiaries (collectively "Saban"), is a
broad-based entertainment company specializing in the creation, production,
acquisition, distribution, merchandising and licensing of animated and live-
action children's programming in the worldwide entertainment marketplace.
Saban is one of the largest independent suppliers of children's programming
in the world and its library of children's television programming is one of
the largest children's libraries in the world. Saban provides programming in
all dayparts for network, first-run syndication and cable television for both
domestic and international television. In the United States, Saban syndicates
its programming under the Saban Kids Network name.
In addition, Saban is involved in the creation and production of music and
the acquisition of international distribution rights to telefilms and mini
series. Saban's operations are conducted through offices in the United States,
France, Switzerland, Germany, Italy and the United Kingdom.
The accompanying consolidated financial statements include the accounts of
Saban Entertainment, Inc. and subsidiaries. All significant intercompany
transactions and accounts have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenues from television, music and merchandising lease agreements, which
provide for the receipt by the Company of nonrefundable guaranteed amounts,
are recognized when the lease period begins, collectibility is reasonably
assured and the product is available pursuant to the terms of the lease
agreement. Amounts in excess of minimum guarantees under these lease
agreements are recognized when earned. Amounts received in advance of
recognition of revenue are recorded as deferred revenue.
PROGRAMMING COSTS
Programming costs, consisting of direct production costs, acquisition of
story rights, costs to acquire distribution rights, allocable production
overhead, interest and exploitation costs (which benefit future periods) are
capitalized as incurred. The individual film forecast method is used to
amortize programming costs in which Saban owns or controls distribution
rights. Costs accumulated in the production of a program are amortized in the
proportion that gross revenues realized bear to management's estimate of the
total gross revenues expected to be received. Estimated liabilities for
residuals and participations are accrued and expensed in the same manner as
programming cost inventories are amortized.
Revenue estimates on a program-by-program basis are reviewed periodically by
management and are revised, if warranted, based upon management's appraisal of
current market conditions. Based on this review, if estimated future gross
revenues from a program are not sufficient to recover the unamortized costs,
the unamortized programming cost will be written down to net realizable value.
CONCENTRATION OF CREDIT RISKS
Financial instruments which potentially subject Saban to concentration of
credit risk consist principally of temporary cash investments and trade
receivables. Saban places its temporary cash investments principally in a
mutual fund which invests in government securities and therefore are subject
to reduced risk. Saban has not incurred any losses relating to these
investments.
F-36
SABAN ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Saban leases its product to distributors and broadcasters throughout the
world. Saban performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Generally, payment is
received in full or in part prior to Saban's release of product to such
distributors and broadcasters. At October 31, 1995, substantially all of
Saban's trade receivables were from customers in the entertainment or
broadcast industries. Receivables generally are due within 30 days. Credit
losses relating to customers in the entertainment and broadcast industries
consistently have been within management's expectations.
CASH AND CASH EQUIVALENTS
For the purposes of balance sheet classification and the statement of cash
flows, Saban considers all highly liquid investments that are both readily
convertible into cash with original maturities when purchased of three months
or less to be cash equivalents.
RESTRICTED CASH
Restricted cash represents amounts held by financial institutions as
collateral on outstanding debt.
FINANCIAL INSTRUMENTS
Financial instruments are carried at historical cost which approximates fair
value.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost and depreciation is computed
using the straight-line method over their estimated useful lives of five
years. Leasehold improvements are amortized over the lesser of the term of the
lease or the estimated useful lives of the improvement using the straight-line
method.
FOREIGN CURRENCY TRANSLATION AND CUMULATIVE ADJUSTMENT
Saban International N.V. ("SINV"), a wholly-owned subsidiary of Saban uses
the U.S. dollar as the functional currency. Saban International Paris S.A.R.L.
("SIP"), Saban Entertainment Germany GmbH and Saban Merchandising and
Licensing GmbH and Saban Entertainment (UK) Limited, all foreign subsidiaries
of Saban, use local currency as the functional currency. Assets and
liabilities are translated into U.S. dollars at current exchange rates.
Revenue and expenses have been translated into U.S. dollars based generally on
the average rates prevailing during the period.
Gains and losses arising from foreign currency transactions are included in
determining net income for the period. The aggregate transaction (losses)
gains for the years ended May 31, 1994 and 1995, and for the five months ended
October 31, 1995 were $(523,000), $577,000 and $135,000, respectively.
The cumulative translation adjustment in stockholders' equity at May 31,
1993, 1994 and 1995, and at October 31, 1995, represents Saban's net
unrealized exchange (losses) gains on the translation of foreign subsidiaries'
financial statements.
INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("FAS") No. 109, "Accounting for Income
Taxes." Saban adopted the provisions of the new standard in its financial
statements for the year ended May 31, 1994. As permitted by the FAS, prior
year financial statements have not been restated to reflect the change in
accounting method. The cumulative effect as of June 1, 1993, of adopting FAS
109 was not material to Saban's financial statements.
Under FAS 109, the liability method is used in accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. Prior to the adoption
of FAS 109, income tax expense was determined using the deferred
F-37
SABAN ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
method. Deferred tax expense was based on items of income and expense that
were reported in different years in the financial statements and the tax
returns and were measured at the tax rate in effect in the year the difference
originated.
STOCK-BASED COMPENSATION
Saban accounts for its stock compensation arrangements under the provisions
of Accounting Principles Board No. 25, "Accounting for Stock Issued to
Employees" and intends to continue to do so.
NET INCOME PER COMMON SHARE
The per share data is based on the weighted average number of common and
common equivalent shares outstanding during the period and are calculated in
accordance with a Staff Accounting Bulletin of the Securities and Exchange
Commission whereby common and common share equivalents issued within a 12-
month period prior to an initial public offering are treated as outstanding
for all periods presented if the issue price was less than the proposed
initial public offering price. In addition, shares issuable upon the exercise
of options within the 12-month period are considered to have been outstanding
since inception of the Company.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes including amortization of programming costs. Actual results
could differ from those estimates. Management periodically reviews and revises
its estimates of future airings and revenues for program costs, as necessary,
which may result in revised amortization of its program costs and may be
significantly affected by the periodic adjustments in such amortization.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1994 financial statements to
conform to the current period presentation.
3. PROGRAMMING COSTS
Programming costs, net of accumulated amortization, is comprised of the
following:
[Enlarge/Download Table]
MAY 31, 1994 MAY 31, 1995
----------------------------------------- -----------------------------------------
ACCUMULATED NET PROGRAMMING ACCUMULATED NET PROGRAMMING
COST AMORTIZATION COSTS COST AMORTIZATION COSTS
------------ ------------ --------------- ------------ ------------ ---------------
Children's programming.. $113,730,000 $ 76,502,000 $37,228,000 $203,765,000 $147,813,000 $ 55,952,000
Movies and mini-series.. 85,049,000 63,413,000 21,636,000 101,656,000 76,211,000 25,445,000
Projects in production.. 25,471,000 -- 25,471,000 33,008,000 -- 33,008,000
Development............. 744,000 -- 744,000 1,468,000 -- 1,468,000
------------ ------------ ----------- ------------ ------------ ------------
$224,994,000 $139,915,000 $85,079,000 $339,897,000 $224,024,000 $115,873,000
============ ============ =========== ============ ============ ============
[Download Table]
OCTOBER 31, 1995
-----------------------------------------
ACCUMULATED NET PROGRAMMING
COST AMORTIZATION COSTS
------------ ------------ ---------------
Children's programming................ $237,286,000 $177,232,000 $ 60,054,000
Movies and mini-series................ 112,554,000 79,443,000 33,111,000
Projects in production................ 24,177,000 -- 24,177,000
Development........................... 868,000 -- 868,000
------------ ------------ ------------
$374,885,000 $256,675,000 $118,210,000
============ ============ ============
F-38
SABAN ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Based on Saban's estimate of future revenues, approximately 70% of
unamortized released programming costs at October 31, 1995 will be amortized
during the three years ending October 31, 1998. Interest in the amount of
$757,000, $304,000 and $32,000 was capitalized to programming costs during the
years ended May 31, 1994 and 1995 and for the five months ended October 31,
1995, respectively.
4. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
[Download Table]
MAY 31
--------------------- OCTOBER 31
1994 1995 1995
---------- ---------- -----------
Studio equipment ............................ $3,384,000 $5,280,000 $ 5,832,000
Office furniture and fixtures................ 764,000 907,000 1,505,000
Leasehold improvements....................... 924,000 1,095,000 3,965,000
Other........................................ 67,000 64,000 64,000
---------- ---------- -----------
5,139,000 7,346,000 11,366,000
Less accumulated depreciation................ 2,455,000 3,716,000 4,287,000
---------- ---------- -----------
$2,684,000 $3,630,000 $ 7,079,000
========== ========== ===========
5. DEBT
Debt is comprised of the following:
[Download Table]
MAY 31
---------------------- OCTOBER 31
1994 1995 1995
----------- ---------- ----------
Imperial Bank; secured revolving line of
credit; interest at prime rate (8.75% at
October 31, 1995) plus .5% due monthly;
maximum borrowings of $25,000,000
(terminated on December 4, 1995).......... $19,372,000 $ -- $ --
DeNationale Investeringsbank N.V.; secured
line of credit due
July 31, 1997; interest at three month or
six month LIBOR (5.94% and 5.88%,
respectively, at October 31, 1995) plus
0.4% paid quarterly; maximum borrowings of
$5,000,000................................ -- 5,000,000 5,000,000
Coficine; secured revolving credit facility
due March 28, 1996; interest at the bank's
basis rate (8.1% at October 31, 1995) plus
1% paid quarterly; maximum borrowings of
FF 7,200,000.............................. 519,000 623,000 605,000
----------- ---------- ----------
$19,891,000 $5,623,000 $5,605,000
=========== ========== ==========
In July 1995, Saban and SINV separately entered into credit agreements with
Imperial Bank ("Imperial"), as agent, and a group of lenders for secured
revolving credit facilities ("Credit Facilities") aggregating $50 million
maturing on July 31, 1998. Interest on the borrowings is at either the prime
rate (8.75% at October 31, 1995) plus .5% or .25% depending on Saban's and
SINV's tangible net worth or at three month or six month LIBOR (5.94% and
5.88%, respectively, at October 31, 1995) plus 2.25% or 2% depending on
Saban's and SINV's tangible net worth. Interest is payable at the end of the
interest period which is either one, three or six months. Saban and SINV are
required to pay a quarterly commitment fee of .25% per annum of the average
daily unused portion of the commitment. Saban and SINV also paid a loan fee
amounting to .75% of the commitment. The combined amount available for
borrowing under the Credit Facilities at any time is limited in accordance
with a formula based upon the value of collateral in Saban's and SINV's
borrowing bases. The borrowing bases include on and off balance sheet
receivables and amounts attributable to the value of Saban's
F-39
SABAN ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and SINV's film library. Saban's credit facility is secured by substantially
all of the assets of Saban and its subsidiaries (excluding SINV and other
foreign subsidiaries of Saban) and SINV's credit facility is secured by
substantially all of the assets of Saban and its subsidiaries. The Credit
Facilities restrict the payment of dividends. The Credit Facilities contain
restrictive covenants regarding, among other things, additional indebtedness,
payments and advances for product, the maintenance of certain financial ratios
and restrictions on the disposition of assets. At October 31, 1995 Saban and
SINV were in compliance or had obtained waivers for those covenants. At
October 31, 1995 no amounts have been borrowed under the Credit Facilities.
In June 1993, SINV entered into a credit agreement with Imperial as agent
and DeNationale Investeringsbank N.V. (the "Bank Facility"). An additional
bank, Banque Nationale de Paris was added to the Bank Facility in March 1994.
SINV paid a quarterly commitment fee of .5% per annum of the average daily
unused portion of the commitment. Substantially all of SINV's cash collections
were paid into accounts controlled by Imperial and applied to repayment of
borrowings under the Bank Facility. The restricted cash balance of $299,000 at
May 31, 1994, represented cash held by Imperial and not yet transferred to
Saban. The amount that SINV borrowed was based upon the value of collateral in
the borrowing base which consists principally of accounts receivable. All
borrowings were collateralized by substantially all of the assets of Saban.
Further, Saban agreed to maintain, on a quarterly average basis, $1,000,000 in
compensating balances at Imperial. The Bank Facility contained restrictive
covenants regarding, among other things, additional indebtedness, payments and
advances for product, the maintenance of certain financial ratios and
restrictions on the disposition of assets. On December 4, 1995, the Bank
Facility was replaced by the Credit Facilities and any outstanding obligation
plus interest was paid.
SIP has a revolving credit facility with Coficine bank which provides for
borrowings against project receivables up to a maximum of FF 7,200,000
($1,475,000 at October 31, 1995). In March 1996 the outstanding obligation
plus interest was paid in full.
In September 1994, SIP entered into a credit agreement with DeNationale
Investeringsbank N.V. ("NIB"). The facility provides for maximum borrowings of
$5,000,000. The facility is secured by a $5,000,000 deposit at NIB pledged by
SINV. Such $5,000,000 deposit is included in restricted cash at October 31,
1995 and at May 31, 1995. In April 1996 the outstanding obligation plus
interest was paid in full and SIP and NIB entered into a new agreement for a
facility with similar terms, providing maximum borrowings of $8,000,000. The
new facility is secured by an $8,000,000 deposit at NIB pledged by SINV.
6. RELATED PARTY TRANSACTIONS
In March 1995, Saban purchased all of the outstanding shares of Saban held
by a former minority stockholder.
Receivables from stockholders and related parties consist of the following:
[Download Table]
MAY 31
--------------------- OCTOBER 31
1994 1995 1995
---------- ---------- ----------
Advances due from the Chairman and Chief
Executive Officer of Saban ("Haim Saban"), or
entities controlled by Haim Saban, interest
at prime rate (8.75% at October 31, 1995)
plus 1% and due on demand.................... $ -- $2,649,000 $2,610,000
Advances to certain non-stockholder officers
and directors of Saban ($885,000 at 5% and
$337,000 noninterest bearing with varying due
dates)....................................... 1,147,000 1,147,000 1,222,000
---------- ---------- ----------
$1,147,000 $3,796,000 $3,832,000
========== ========== ==========
F-40
SABAN ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Notes and accrued interest payable to stockholders is comprised of the
following:
[Download Table]
MAY 31
---------------- OCTOBER 31
1994 1995 1995
----------- ---- ----------
Notes and advances payable to Haim Saban or enti-
ties controlled by Haim Saban, interest at prime
rate (8.75% at October 31, 1995) plus 1%. Paid in
full October 1994................................. $10,773,000 $-- $--
Note payable to Visionlights, S.A., a controlled
subsidiary of a former minority stockholder,
interest at prime rate (8.75% at October 31, 1995)
plus 1%. Paid in full November 1994............... 1,000,000 -- --
Accrued interest to stockholders................... 2,359,000 --
----------- ---- ----
$14,132,000 $-- $--
=========== ==== ====
During the year ended May 31, 1994, Saban paid approximately $880,000 to a
former outside director of Saban for selling, writing and production services
rendered in connection with various entertainment properties produced by
Saban.
An outside director of Saban acts as a legal consultant to Saban. Fees paid
to this director were approximately $315,000, $153,000 and $62,000 for the
years ended May 31, 1994 and 1995 and for the five months ended October 31,
1995, respectively.
In September 1994, Saban entered into a music services agreement (the "Music
Agreement") with Haim Saban. The Music Agreement remains in effect until
August 31, 2001. Under the terms of the Music Agreement, all original theme
music, underscore, cues and songs for use in all programming produced by Saban
will be supplied through Haim Saban. Saban has been granted the non-exclusive,
worldwide, perpetual license to (i) synchronize and perform compositions in
theatrical motion pictures and (ii) synchronize composition in all other forms
of programming and has the royalty-free right to use the compositions in
articles of merchandise such as home video units, video games and interactive
toys. All music publishing income earned in connection with such musical
compositions is retained by Haim Saban. As of October 31, 1995, no amounts
were owed to Haim Saban pursuant to the terms of the Music Agreement.
Saban currently licenses and distributes its entertainment properties (e.g.,
motion pictures, television programs, merchandising and licensing rights) in
Israel through Duveen Trading Ltd. ("Distributor"), a corporation owned wholly
by Haim Saban's brother. The term of the agreement extends through
December 31, 1997, subject to extension by Saban for an additional three
years. Duveen Trading Ltd. is not obligated to make any payments to Saban
under this agreement.
7. COMMITMENTS AND CONTINGENCIES
Saban leased office space in Burbank, California, under a ten year lease
which was terminated in December 1995, and a lease termination fee of $305,000
was paid. Saban also leases office space in New York City under a three year
lease which is cancelable after the end of each year by payment of a
termination fee. In addition, Saban leases office space in Paris, France,
Cologne, Germany and London, England under nine year, five year and three year
operating leases, respectively. The Paris, France lease provides for
termination on February 28, 1999 and February 28, 2002, both upon six months
advance written notice. The London, England lease provides for early
termination upon six months advance written notice.
In July 1995, Saban entered into a 10 year lease which commenced on April 1,
1996 for office space in Los Angeles, California. The lease contains two
separate five-year extension options and provides for early termination at the
end of the sixth and eighth years upon payment of a termination fee. The lease
calls for
F-41
SABAN ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
monthly payments plus maintenance and property tax payments. Saban also has
two leases for production facilities, one is a short-term lease in Los
Angeles, California originally expiring in November 1995 and subsequently
extended to March 1997, and the other is a two year lease in Valencia,
California expiring in January 1997 and subject to two separate one-year
extension options.
Noncancelable future minimum payments for the remainder of the initial,
noncancelable lease periods are as follows:
[Download Table]
TWELVE MONTHS ENDED OCTOBER 31
------------------------------
1996............................................................ $ 2,449,000
1997............................................................ 2,921,000
1998............................................................ 1,838,000
1999............................................................ 2,589,000
2000............................................................ 3,157,000
Thereafter...................................................... 20,105,000
-----------
$33,059,000
===========
Rent expense for the years ended May 31, 1994 and 1995 and for the five
months ended October 31, 1995, net of amounts capitalized, was approximately
$275,000, $797,000 and $365,000, respectively.
Saban is involved in various lawsuits, both as a plaintiff and defendant, in
the ordinary course of its business. Based on an evaluation which included
consultation with counsel concerning legal and factual issues involved,
management is of the opinion that the foregoing claims and lawsuits will not
have a material adverse effect on Saban's consolidated financial position.
Saban has entered into employment agreements with certain key members of
management including Haim Saban. Such agreements are for terms ranging from
one to seven years and generally include bonus provisions. Future minimum
payments under these agreements approximate $20,939,000 of which $5,184,000 is
due for the twelve months ended October 31, 1996, $5,104,000 is due in the
twelve months ended October 31, 1997, $4,434,000 is due in the twelve months
ended October 31, 1998 and $6,216,000 is due thereafter.
Effective June 1994, Saban issued to two employees and a consultant options
to purchase an aggregate of 48.981 shares of common stock, 9.796 of which were
exercisable at October 31, 1995. These options vest ratably over five years
and are exercisable at $122,496 per share, which approximates the fair market
value at the time of grant. No options have been exercised at October 31,
1995. With respect to termination for any reason, so long as the Company is
not public, the Company will purchase from the employee and the employee will
sell to the Company any and all option shares owned by the employee and the
option granted to the employee for an amount equal to the fair market value of
the option shares owned by the employee plus the fair market value of the
option shares with respect to which the employee's option has vested but not
exercised less the exercise price. Included in selling, general and
administrative expenses is $11,000,000 and $2,400,000 for the year ended May
31, 1995 and the five months ended October 31, 1995, respectively, and in
accrued liabilities is $11,000,000 and $13,400,000 at May 31, 1995 and October
31, 1995, respectively, related to compensation recorded in connection with
these options.
As of October 31, 1995, 48.981 shares of common stock are reserved for
future issuance related to options.
F-42
SABAN ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. PROFIT SHARING PLAN
Saban has a qualified tax deferred profit sharing plan (the "Plan") for all
of its eligible employees. Under the Plan, employees become eligible on the
first January 1 following such employees' completion of six months of service
with Saban. Each participant is permitted to make voluntary contributions, not
to exceed 15% of his or her respective compensation and the applicable
statutory limitation, which are immediately 100% vested. Saban, at the
discretion of the Board of Directors, may make matching contributions to the
Plan. Related expense for the years ended May 31, 1994 and 1995, and for the
five months ended October 31, 1995 was approximately $45,000, $40,000 and
$10,000, respectively.
9. INCOME TAXES
Effective June 1, 1993, Saban changed its method of accounting for income
taxes from the deferred method to the liability method required by FAS 109,
"Accounting for Income Taxes" (see Note 2 "Income Taxes"). As permitted under
the new rules, prior years' financial statements have not been restated.
The cumulative effect of adopting FAS 109 as of June 1, 1993, was not
material to Saban's financial statements.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of Saban's deferred tax liabilities and assets are as follows:
[Download Table]
MAY 31
------------------------ OCTOBER 31
1994 1995 1995
----------- ------------ ------------
Deferred tax liabilities:
Accounts receivable.................... $ 7,068,000 $ 3,181,000 $ 563,000
Tax over book amortization............. 2,114,000 6,052,000 --
State taxes............................ -- -- 203,000
----------- ------------ ------------
Total deferred tax liabilities......... $ 9,182,000 $ 9,233,000 $ 766,000
Deferred tax assets:
State taxes............................ $ 101,000 $ 1,511,000 $ --
Deferred revenue....................... 3,582,000 20,268,000 18,244,000
Accrued expenses and reserves.......... 939,000 12,015,000 4,590,000
Tax over book amortization............. -- -- 2,299,000
Other.................................. 298,000 1,679,000 1,053,000
----------- ------------ ------------
Total deferred tax assets.............. 4,920,000 35,473,000 26,186,000
Valuation allowance for deferred tax
assets................................ -- -- --
----------- ------------ ------------
Net deferred tax assets................ 4,920,000 35,473,000 26,186,000
----------- ------------ ------------
Net deferred tax liabilities (assets).. $ 4,262,000 $(26,240,000) $(25,420,000)
=========== ============ ============
For financial reporting purposes, income before income taxes includes the
following components:
[Download Table]
FIVE MONTHS
YEAR ENDED MAY 31 ENDED
------------------------ OCTOBER 31
1994 1995 1995
----------- ------------ ------------
Pretax income:
United States........................ $19,846,000 $ 56,193,000 $ 33,872,000
Foreign.............................. 5,155,000 15,509,000 17,159,000
----------- ------------ ------------
$25,001,000 $ 71,702,000 $ 51,031,000
=========== ============ ============
F-43
SABAN ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Significant components of the provision for income taxes are as follows:
[Download Table]
YEAR ENDED MAY 31 FIVE MONTHS ENDED
----------------------- OCTOBER 31
1994 1995 1995
---------- ------------ -----------------
Current:
Federal............................ $4,421,000 $ 47,213,000 $11,514,000
State.............................. 751,000 8,777,000 2,802,000
Foreign............................ 180,000 1,539,000 489,000
---------- ------------ -----------
5,352,000 57,529,000 14,805,000
Deferred:
Federal............................ $2,344,000 $(25,776,000) $ (301,000)
State.............................. 392,000 (4,726,000) (215,000)
Foreign............................ 113,000 -- --
---------- ------------ -----------
2,849,000 (30,502,000) (516,000)
---------- ------------ -----------
$8,201,000 $ 27,027,000 $14,289,000
========== ============ ===========
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is:
[Download Table]
YEAR
ENDED MAY
31 FIVE MONTHS ENDED
---------- OCTOBER 31
1994 1995 1995
---- ---- -----------------
Tax at U.S. statutory rates........................ 35% 35% 35%
State taxes, net of federal benefit................ -- 6 5
Foreign subsidiary's income not subject to state or
federal tax....................................... (7) (7) (13)
Foreign taxes...................................... 1 2 1
Other.............................................. 4 2 0
--- --- ---
33% 38% 28%
=== === ===
Undistributed earnings of Saban's foreign subsidiaries amounted to
approximately $61,000,000 at October 31, 1995. Those earnings are considered
to be indefinitely reinvested and, accordingly, no provision for U.S. federal
and state income taxes has been provided thereon. Upon distribution of those
earnings in the form of dividends or otherwise, Saban would be subject to both
U.S. income taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to the various foreign countries. Determination of
the amount of unrecognized deferred U.S. income tax liability is not
practicable because of the complexities associated with its hypothetical
calculation; however, unrecognized foreign tax credit carryforwards would be
available to reduce some portion of the U.S. liability.
During the year ended May 31, 1994, the Internal Revenue Service completed
an examination of the Saban's May 31, 1990 tax returns and concluded that no
changes were necessary to the income tax reported by the Company.
10. SIGNIFICANT CUSTOMERS AND PROPERTIES AND GEOGRAPHICAL INFORMATION
Saban operates in one business segment which is the acquisition, production
and worldwide distribution and leasing of entertainment properties. Saban did
not have any significant customers for the years ended May 31, 1994 and 1995.
For the five months ended October 31, 1995, Saban earned revenues from one
significant
F-44
SABAN ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
customer of approximately $33,332,000 (32%). For the year ended May 31, 1995,
Saban earned revenues from one significant customer of $26,308,000 (11%). For
the year ended May 31, 1994, Saban earned revenues from one significant
customer of $10,483,000 (12%). For the years ended May 31, 1994 and 1995, and
for the five months ended October 31, 1995, Saban earned revenues from one
significant property (Power Rangers) of $46,444,000 (55%), $174,389,000 (72%)
and $68,975,000 (66%), respectively.
Geographic information concerning Saban's operations is as follows:
[Download Table]
FIVE MONTHS
YEAR ENDED MAY 31 ENDED
------------------------- OCTOBER 31
1994 1995 1995
------------ ------------ ------------
Revenues:
Domestic.............................. $ 56,455,000 $172,239,000 $ 61,671,000
International, principally Eu-
rope(/2/)............................ 27,917,000 70,229,000 43,459,000
------------ ------------ ------------
Total................................... 84,372,000 242,468,000 105,130,000
Operating profit:(/1/)
Domestic.............................. 24,366,000 97,433,000 42,128,000
International, principally Eu-
rope(/2/)............................ 11,905,000 27,478,000 20,980,000
------------ ------------ ------------
Total................................... 36,271,000 124,911,000 63,108,000
Selling, general and administrative ex-
penses................................. 8,933,000 51,894,000 11,538,000
Interest expense........................ 2,337,000 1,315,000 539,000
------------ ------------ ------------
Income before provision for income tax-
es..................................... $ 25,001,000 $ 71,702,000 $ 51,031,000
============ ============ ============
Identifiable assets:
Domestic.............................. $ 47,089,000 $ 89,772,000 $ 82,145,000
International, principally Eu-
rope(/2/)............................ 89,878,000 128,425,000 125,334,000
------------ ------------ ------------
Total................................... $136,967,000 $218,197,000 $207,479,000
============ ============ ============
--------
(1) For purposes of this presentation, operating profit is total revenues less
amortization of programming costs, residuals and profit participations.
(2) International amounts relate principally to Western Europe in connection
with the Company's subsidiary, SINV, a Netherlands Antilles company with
offices in Switzerland.
11. SUBSEQUENT EVENTS
On April 16, 1996, Saban acquired the stock of Creativite & Developpement SA
("C&D"), a leading Paris-based producer of family entertainment for
$2,869,000, payable $1,721,000 upon closing (April 16, 1996) and $1,148,000
payable on April 16, 1997 and is secured by a letter of credit. Saban
accounted for the acquisition as a purchase. No goodwill was recorded as the
purchase price was allocated to the respective assets and liabilities. The
acquisition included the international distribution rights to over 400 half-
hour episodes of children's programming.
In December 1995, Saban purchased from Vesical Limited ("Vesical") its
interest and rights to certain television programming and certain account
receivable balances for $12,000,000, payable $7,200,000 upon closing (April
18, 1996) and $4,800,000 payable on April 18, 1997 and is secured by a letter
of credit. Saban allocated the purchase price between the account receivable
balances and the television programming rights based upon the respective
assets fair market values using a discounted cash flow analysis.
F-45
SABAN ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Effective June 1, 1995, FCN Holding, Inc. ("FCN Holding") and Saban formed a
strategic alliance limited liability company ("LLC"), and since November 1,
1995, Saban and FCN Holding have been operating under the management of the
LLC.
THE REORGANIZATION
Fox Kids Worldwide, Inc. was incorporated in Delaware in August 1996 and
currently conducts no business or operations. Immediately prior to the closing
of proposed initial public offerings ("Offerings"), (i) Fox Broadcasting Sub,
Inc.; a wholly-owned subsidiary of Fox Broadcasting ("Fox Broadcasting Sub"),
will exchange its capital stock in FCN Holding, which indirectly owns FCN, for
50% of the number of shares of the Fox Kids Worldwide, Inc.'s class B common
stock, par value $0.001 per share ("Class B Common Stock"), which will be
outstanding immediately after the Reorganization and prior to the closing of
the Offerings (the "Reorganization Closing"), (ii) the other stockholders of
FCN Holding will exchange their capital stock in FCN Holding for an aggregate
of one percent of the aggregate number of shares of Fox Kids Worldwide, Inc.'s
class A common stock, par value $0.001 per share ("Class A Common Stock") and
Class B Common Stock (Class A Common Stock and Class B Common Stock are
collectively the "Common Stock") which will be outstanding immediately after
the Reorganization Closing, (iii) the Chairman and Chief Executive Officer of
Saban ("Haim Saban") and the other stockholders of Saban will exchange their
capital stock in Saban for an aggregate of 50% of the number of shares of
Class B Common Stock which will be outstanding immediately after the
Reorganization Closing and (iv) all outstanding management options to purchase
Saban capital stock will become options to purchase an aggregate of
approximately four percent of the aggregate number of shares of Common Stock
which will be outstanding immediately after the Reorganization Closing. In
addition, Fox Broadcasting will exchange its preferred, non-voting interest in
the LLC for an aggregate of 1,000,000 shares of Fox Kids Worldwide, Inc.'s
series A redeemable preferred stock, $0.001 par value per share (the "Series A
Preferred Stock") and will exchange a $50 million contingent note receivable
from the LLC for a new preferred, non-voting interest in the LLC. As a result
of these transaction, FCN Holding, FCN, Saban and the LLC will become direct
or indirect subsidiaries of Fox Kids Worldwide, Inc.
OTHER RELATED PARTY TRANSACTIONS
From time to time, Saban has loaned and advanced funds to Haim Saban. In
connection with the formation of the LLC and as inducement to Haim Saban to
enter into certain documentation in connection with the formation of the LLC,
on December 22, 1995, Saban forgave in full the loan plus accrued interest
owing from Haim Saban in the amount of approximately $2,700,000. In connection
with Haim Saban's employment agreement, dated December 22, 1995, with the LLC
, the LLC agreed to reimburse Haim Saban for all out-of-pocket costs and
expenses for domestic and international travel, including private air charter
which may include aircraft owned directly or indirectly by Haim Saban.
F-46
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Fox Kids Worldwide, Inc. (a Delaware corporation)
We have audited the accompanying balance sheet of Fox Kids Worldwide, Inc.
(a Delaware corporation) as of September 27, 1996. This financial statement is
the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit 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 statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the financial position of Fox Kids Worldwide, Inc.
(a Delaware corporation) as of September 27, 1996, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Los Angeles, California
September 27, 1996
F-47
FOX KIDS WORLDWIDE, INC.
(A DELAWARE CORPORATION)
BALANCE SHEET
SEPTEMBER 27, 1996
[Download Table]
STOCKHOLDERS' EQUITY
Common Stock, $0.001 par value: 1,000 shares authorized; none issued... $ --
Additional paid-in capital............................................. 300
Receivable from FCN Holding, Inc....................................... (300)
-----
$ --
=====
See notes to balance sheet.
F-48
FOX KIDS WORLDWIDE INC.
(A DELAWARE CORPORATION)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 27, 1996
1. DESCRIPTION OF BUSINESS
Fox Kids Worldwide, Inc. (the "Company") was incorporated in Delaware in
August 1996 in connection with proposed initial public offerings ("Offerings")
of certain shares of class A common stock, par value $0.001 per share ("Class
A Common Stock") of the Company and to hold the shares and interests of FCN
Holding, Inc. ("FCN Holding"), Saban Entertainment, Inc. and its subsidiaries
("Saban") and a strategic alliance limited liability company ("LLC") formed
between Fox Broadcasting Company ("Fox Broadcasting"), FCN Holding and Saban.
The Company currently conducts no business or operations. Immediately prior to
the closing of the Offerings, (i) Fox Broadcasting Sub, Inc., a wholly-owned
subsidiary of Fox Broadcasting, will exchange its capital stock in FCN
Holding, which indirectly owns Fox Children's Network, Inc. ("FCN"), for 50%
of the number of shares of the class B common stock, par value $0.001 per
share ("Class B Common Stock"), which will be outstanding immediately after
the Reorganization and prior to the closing of the Offerings (the
"Reorganization Closing"), (ii) the other stockholders of FCN Holding will
exchange their capital stock in FCN Holding for an aggregate of one percent of
the aggregate number of shares of Class A Common Stock and Class B Common
Stock (the "Common Stock") which will be outstanding immediately after the
Reorganization Closing, (iii) Haim Saban, the Chief Executive Officer and
Chairman of Saban ("Haim Saban"), and the other stockholders of Saban will
exchange their capital stock in Saban for an aggregate of 50% of the number of
shares of the Class B Common Stock which will be outstanding immediately after
the Reorganization Closing and (iv) all outstanding management options to
purchase Saban capital stock will become options to purchase an aggregate of
approximately four percent of the aggregate number of shares of Common Stock
which will be outstanding immediately after the Reorganization Closing. In
addition, Fox Broadcasting will exchange its preferred, non-voting interest in
the LLC for an aggregate of 1,000,000 shares of the Company's series A
redeemable preferred stock, $0.001 par value per share (the "Series A
Preferred Stock") and will exchange a $50 million contingent note receivable
from the LLC for a new preferred, non-voting interest in the LLC. As a result
of these transactions, FCN Holding, FCN, Saban and the LLC will become direct
or indirect subsidiaries of the Company.
DESCRIPTION OF SECURITIES
Simultaneously with the Reorganization, the capital stock of the Company
will be changed as follows:
The authorized capital stock of the Company consists of shares of
Class A Common Stock, shares of Class B Common Stock, 15,000,000 shares
of preferred stock ("Preferred Stock"), and 1,000,000 shares of Series A
Preferred Stock. As of the Closing Date, including the shares being offered
hereunder, shares of Class A Common Stock, shares of Class B
Common Stock and 1,000,000 shares of Series A Preferred Stock will be issued
and outstanding and no shares of Preferred Stock will be issued or
outstanding.
CLASS A COMMON STOCK AND CLASS B COMMON STOCK
The Certificate of Incorporation provides for two classes of common stock,
Class A Common Stock and Class B Common Stock, the two classes of which are
substantially identical, except for disparity in voting power.
Voting. Each share of Class B Common Stock entitles the holder of record to
ten votes and each share of Class A Common Stock entitles the holder to one
vote at each annual or special meeting of stockholders, in the case of any
written consent of stockholders, and for all other purposes. The holders of
Class A Common Stock and Class B Common Stock will vote as a single class on
all matters submitted to a vote of the stockholders, except as otherwise
provided by law. Neither the holders of Class A Common Stock nor the holders
of Class B
F-49
FOX KIDS WORLDWIDE INC.
(A DELAWARE CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Common Stock have cumulative voting rights. The Company may, as a condition to
counting the votes cast by any holder of Class B Common Stock at any annual or
special meeting of stockholders, in the case of any written consent of
stockholders, or for any other purpose, require the furnishing of such
affidavits or other proof as it may reasonably request to establish that the
Class B Common Stock held by such holder has not, by virtue of the provisions
of the Certificate of Incorporation, been converted into Class A Common Stock.
Conversion Rights. Each share of Class B Common Stock is convertible at the
holder's option at all times, without cost to the stockholder, into one share
of Class A Common Stock. In addition, Class B Common Stock is subject to
automatic conversion in the event of a transfer in violation of the transfer
restrictions described below.
Dividends and Other Distributions. The holders of Class A Common Stock and
Class B Common Stock will be entitled to receive dividends and other
distributions as may be declared thereon by the board of directors of the
Company out of assets or funds of the Company legally available therefor,
subject to the rights of the holders of the Series A Preferred Stock or any
other series of Preferred Stock and any other provision of the Certificate of
Incorporation. The Certificate of Incorporation provides that if at any time a
dividend or other distribution in cash or other property is paid on Class A
Common Stock or Class B Common Stock, a like dividend or other distribution in
cash or other property will also be paid on Class B Common Stock or Class A
Common Stock, as the case may be, in an equal amount per share. In this
connection, the Certificate of Incorporation specifically provides that if
shares of Class B Common Stock are paid on Class B Common Stock and shares of
Class A Common Stock are paid on Class A Common Stock, in an equal amount per
share of Class B Common Stock and Class A Common Stock, such payment will be
deemed to be a like dividend or other distribution. In the case of any split,
subdivision, combination or reclassification of Class B Common Stock or Class
A Common Stock, the shares of Class A Common Stock or Class B Common Stock, as
the case may be, will also be split, subdivided, combined or reclassified so
that the number of shares of Class B Common Stock and Class A Common Stock
outstanding immediately following such split, subdivision, combination or
reclassification will bear the same relationship to each other as that which
existed immediately prior thereto.
Distributions Upon Liquidation. In the event of any liquidation, dissolution
or winding up of the Company, the holders of Class B Common Stock and the
holders of Class A Common Stock will be entitled to receive the assets and
funds of the Company available for distribution after payments to creditors
and to the holders of the Series A Preferred Stock or any Preferred Stock of
the Company that may at the time be outstanding, in proportion to the number
of shares held by them, respectively, without regard to class.
Transferability of Shares. The shares of Class A Common Stock offered hereby
are freely transferable, subject to certain restrictions on resale imposed on
affiliates of the Company. Class B Common Stock is not transferable by a
stockholder except to the following transferees (each a "Permitted
Transferee"): (i) to any other Class B Stockholder, any of Haim Saban's family
members, any trust established solely for the benefit of one or more of Haim
Saban's family members or any legal entity in which Haim Saban or such persons
are the sole beneficial owners; (ii) to a direct or indirect wholly-owned
subsidiary of such Class B Stockholder (or with respect to a Class B
Stockholder which is a natural person, a corporation or other person wholly-
owned by the Class B Stockholder); or (iii) to a Fox Subsidiary. A "Fox Inc.
Subsidiary" is Twentieth Holdings Corp. and any corporation or other person in
which Fox Inc., or Twentieth Holdings Corp. is the sole beneficial owner
(either directly or indirectly through one or more wholly-owned subsidiaries)
of all the outstanding voting securities of that corporation or other person.
Any purported transfer of Class B Common Stock other than to a Permitted
Transferee shall be null and void and of no effect and the purported transfer
by a holder of Class B Common Stock, other than to a Permitted Transferee,
will result in the immediate and automatic conversion of such holder's shares
of Class B Common Stock into shares of Class A Common Stock.
F-50
FOX KIDS WORLDWIDE INC.
(A DELAWARE CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Reorganization. In the event of any corporate merger, consolidation,
purchase or acquisition of property or stock, or other reorganization in which
any consideration is to be received by the holders of Class B Common Stock or
the holders of Class A Common Stock, the holders of Class B Common Stock and
the holders of Class A Common Stock will receive the same consideration on a
per share basis; except that, if such consideration shall consist in any part
of voting securities) (or of options or warrants to purchase voting
securities, or of securities convertible into or exchangeable for voting
securities), the holders of Class B Common Stock may receive, on a per share
basis, voting securities with ten times the number of votes per share as those
voting securities to be received by the holders of Class A Common Stock (or
options or warrants to purchase, or securities convertible into or
exchangeable for, voting securities with ten times the number of votes per
share as those voting securities issuable upon the exercise of the options or
warrants, or into which the convertible or exchangeable securities may be
converted or exchange, received by the holders of Class A Common Stock).
Except as expressly set forth in the Certificate of Incorporation, the
rights of the holders of Class B Common Stock and the rights of the holders of
Class A Common Stock are in all respects identical.
SERIES A PREFERRED STOCK
The holders of Series A Preferred Stock have no preemptive rights and are
not subject to future assessments by the Company. All outstanding shares of
Series A Preferred Stock are fully paid and nonassessable. The Series A
Preferred Stock has aggregate dividend and/or redemption obligations of $50
million. Once an aggregate of $50 million has been paid, the Series A
Preferred Stock will cease to be outstanding. The Series A Preferred Stock,
with respect to dividend rights and rights on liquidation, winding up and
dissolution, ranks senior to the Preferred Stock and to the Common Stock. The
holders of the shares of Series A Preferred Stock are entitled to receive,
when, as and if declared by the board of directors, out of funds legally
available therefor, cash dividends in an amount equal to the Distributable
Cash of the Company. No more than $49 in dividends may be paid with respect to
any share of Series A Preferred Stock. "Distributable Cash" means, at the time
a determination of Distributable Cash is made, the net cash provided by
operating activities of the Company (on a consolidated basis) from the date of
issuance of the Series A Preferred Stock through the end of the last fiscal
quarter ending not less than 90 days prior to the time of determination, less
the sum of (i) all restricted cash, (ii) all Reserves, and (iii) all amounts
previously paid as dividends on the Series A Preferred Stock. "Reserves" are
those amounts determined from time to time by the board of directors as
necessary to provide, over such period as the board of directors considers
appropriate, for current and planned capital expenditures, debt service,
working capital requirements and expansion plans; and if the board of
directors is unable to reach agreement thereon, the Reserves shall be
maintained at a level equal to the sum of (i) $30 million, plus (ii) the net
proceeds realized by the Company from the Offerings. The Company shall have
the right from time to time to redeem the Series A Preferred Stock, in whole
or in part, with the consent of the holders of the Series A Preferred Stock,
at a redemption price equal to the then-current liquidation value of the
Series A Preferred Stock. If the liquidation value of the Series A Preferred
Stock is $1.00 per share, the Company shall have the right and power at any
time thereafter to redeem all, and not less than all, of the Series A
Preferred Stock at a redemption price of $1.00 per share. The holders of
Series A Preferred Stock shall have no voting rights with respect to corporate
matters except as provided by law.
PREFERRED STOCK
The Certificate of Incorporation provides that shares of Preferred Stock may
be issued from time to time in one or more series. The board of directors is
authorized to fix the voting rights, if any, designations, powers, preferences
and the relative participation, optional or other rights, if any, and the
qualifications, limitations or restrictions thereof, of any unissued series of
Preferred Stock, to fix the number of shares constituting such series, and to
increase or decrease the number of shares of any such series (but not below
the number of shares of such
F-51
FOX KIDS WORLDWIDE INC.
(A DELAWARE CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
series then outstanding). Accordingly, the Board of Directors is empowered,
without stockholder approval, to issue Preferred Stock with dividend,
liquidation, conversion, voting or other rights which could adversely affect
the voting power or other rights of the holders of the Company's Class B
Common Stock and Class A Common Stock. In the event of issuance, these shares
of Preferred Stock could be utilized, under certain circumstances, as a method
of discouraging, delaying or preventing an acquisition or a change in control
of the Company. The Company currently does not intend to issue any of the
authorized but unissued shares of its Preferred Stock.
STOCK OPTIONS AND STOCK INCENTIVE PLAN
In 1996, the Board of Directors and stockholders of the Company
approved the Company's 1996 Stock Incentive Plan (the "1996 Plan"). The 1996
Plan was adopted in order to enable the Company and its subsidiaries to
attract, retain and motivate selected eligible directors, officers, employees
and consultants of the Company by providing for or increasing the proprietary
interests of those persons in the Company, and by associating their interests
in the Company with those of the Company's stockholders.
Any person who is a director, officer, employee or consultant of the
Company, or any of its current or future subsidiaries, shall be eligible to be
considered for the grant of Awards under the Plan. The Plan shall be
administered by a committee of the Board of Directors of the Company (the
"Committee"). Pursuant to the 1996 Plan, the Committee may grant, without
limitation, any of the following awards: shares of Class A Common Stock or any
option, warrant, convertible security, stock appreciation right or similar
right with an exercise or conversion privilege at a price related to an equity
security, or similar securities with a value derived from the value of an
equity security (an "Award"). Awards are not restricted to any specified form
or structure and may include, but need not be limited to, sales, bonuses and
other transfers of stock, restricted stock, stock options, reload stock
options, stock purchase warrants, other rights to acquire stock or securities
convertible into or redeemable for stock, stock appreciation rights, phantom
stock, dividend equivalents, performance units or performance shares, and an
Award may consist of one such security or benefit, or two or more of them in
tandem or in the alternative. The Committee, in its sole discretion,
determines all of the terms and conditions of each Award granted under the
1996 Plan.
An aggregate of shares of Class A Common Stock have been reserved for
issuance in connection with the Awards made under the 1996 Plan. The 1996 Plan
is effective for a period of ten years, through 2006. The Committee may
amend or terminate the 1996 Plan at any time and in any manner but no such
amendment or termination may terminate or modify any Award previously granted
under the 1996 Plan without the consent of the recipient of the Award. The
Company has granted to independent directors and certain members of management
options to purchase an aggregate of shares of the Class A Common Stock.
In addition, the Company intends to grant prior to the closing of the
Offerings to certain officers and employees under its stock incentive plan
options to purchase shares of Class A Common Stock, exercisable at the
initial offering price.
F-52
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHO-
RIZED BY THE COMPANY OR ANY UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
---------------
TABLE OF CONTENTS
[Download Table]
PAGE
----
Prospectus Summary........................................................ 3
Risk Factors ............................................................. 11
Use of Proceeds........................................................... 18
Dividend Policy........................................................... 18
Dilution ................................................................. 19
Capitalization............................................................ 20
Unaudited Pro Forma Financial Information................................. 21
Selected Historical and Pro Forma Financial Data.......................... 25
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 27
Business.................................................................. 38
Management................................................................ 62
Principal Stockholders.................................................... 68
Certain Transactions...................................................... 70
Description of Securities................................................. 75
Shares Eligible for Future Sale........................................... 79
Certain United States Federal Tax Consequences to Non-United States
Holders.................................................................. 80
Underwriting.............................................................. 83
Legal Matters............................................................. 85
Experts................................................................... 85
Available information..................................................... 85
Index to Financial Statements............................................. F-1
---------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
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SHARES
[LOGO OF FOX KIDS]
FOX KIDS
WORLDWIDE, INC.
CLASS A COMMON STOCK
---------------
PROSPECTUS
---------------
MERRILL LYNCH & CO.
ALLEN & COMPANY
INCORPORATED
BEAR, STEARNS & CO. INC.
, 1996
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED SEPTEMBER 27, 1996
PROSPECTUS
SHARES
FOX KIDS WORLDWIDE, INC.
[LOGO OF FOX KIDS] CLASS A COMMON STOCK
-----------
Of the shares of Class A Common Stock, par value $0.001 per share (the
"Class A Common Stock"), of Fox Kids Worldwide, Inc. (the "Company") offered
hereby, shares are being offered initially in the United States and
Canada by the U.S. Underwriters (the "U.S. Offering") and shares are
being offered in a concurrent offering outside the United States and Canada by
the International Underwriters (the "International Offering," and together with
the U.S. Offering, the "Offerings"). The initial public offering price and the
underwriting discount per share will be identical for both Offerings. See
"Underwriting."
Immediately following the Offerings, the Company's outstanding common stock
will be comprised of Class A Common Stock and Class B Common Stock, par value
$0.001 per share (the "Class B Common Stock" and, together with the Class A
Common Stock, the "Common Stock"). The rights of holders of each class of
Common Stock are identical, except that each share of Class B Common Stock
entitles its holder to ten votes and each share of Class A Common Stock
entitles its holder to one vote. Immediately following the Offerings, the
holders of the Company's Class B Common Stock will have approximately %, in
aggregate, of the combined voting power with respect to all matters submitted
for the vote of all stockholders, except as required by law. Immediately
following the Offerings, 50% of the shares of Class B Common Stock will be
beneficially owned by Fox Broadcasting Company, an indirect wholly owned
subsidiary of The News Corporation Limited and 50% of the shares of Class B
Common Stock will be beneficially owned by the former stockholders of Saban
Entertainment, Inc. See "Principal Stockholders" and "Description of
Securities."
All of the shares of Class A Common Stock offered hereby are being
offered by the Company. Prior to the Offerings, there has been no public market
for the Class A Common Stock. It is currently estimated that the initial public
offering price will be between $ and $ per share. See "Underwriting"
for a discussion of the factors to be considered in determining the initial
public offering price.
The Company intends to apply for listing of the Class A Common Stock on the
New York Stock Exchange.
SEE "RISK FACTORS" COMMENCING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CLASS A COMMON STOCK
OFFERED HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
[Enlarge/Download Table]
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PROCEEDS TO THE
PRICE TO PUBLIC UNDERWRITING DISCOUNT(1) COMPANY(2)
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Per Share............................ $ $ $
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Total(3)............................. $ $ $
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(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses, estimated at $ , payable by the Company.
(3) The Company has granted the U.S. Underwriters and the International
Underwriters options, exercisable within 30 days after the date hereof, to
purchase up to an aggregate of and shares of Class A Common
Stock, respectively, at the initial price to public per share, less the
underwriting discount, solely to cover over-allotments, if any. If such
options are exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to the Company will be $ , $ and $ ,
respectively. See "Underwriting."
-----------
The Class A Common Stock is being offered by the several Underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the Underwriters and
certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of certificates for the shares of Class A Common Stock
will be made in New York, New York on or about , 1996.
-----------
MERRILL LYNCH INTERNATIONAL
ALLEN & COMPANY INCORPORATED
BEAR, STEARNS INTERNATIONAL LIMITED
-----------
The date of this Prospectus is , 1996.
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
UNDERWRITING
Subject to the terms and conditions set forth in the international purchase
agreement (the "International Purchase Agreement"), the Company and the
Selling Stockholders have agreed to sell to each of the underwriters named
below (the "International Underwriters"), and each of the International
Underwriters, for whom Merrill Lynch International, Allen & Company
Incorporated and Bear, Stearns International Limited are acting as
representatives (the "International Representatives"), severally has agreed to
purchase the aggregate number of shares of Class A Common Stock set forth
opposite its name below.
[Download Table]
NUMBER OF
INTERNATIONAL UNDERWRITERS SHARES
-------------------------- ---------
Merrill Lynch International.........................................
Allen & Company Incorporated........................................
Bear, Stearns International Limited.................................
-------
Total...........................................................
=======
The Company has also entered into the U.S. purchase agreement (the "U.S.
Purchase Agreement" and, together with the International Purchase Agreement,
the "Purchase Agreements") with Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"), Allen & Company Incorporated and Bear, Stearns
& Co. Inc., acting as representatives (the "U.S. Representatives" and,
together with the International Representatives, the "Representatives"), and
certain other underwriters in the United States and Canada (collectively, the
"U.S. Underwriters" and, together with the International Underwriters, the
"Underwriters"). Subject to the terms and conditions set forth in the U.S.
Purchase Agreement, the Company has agreed to sell to the U.S. Underwriters,
and the U.S. Underwriters severally have agreed to purchase, an aggregate of
shares of Class A Common Stock.
In each Purchase Agreement, the Underwriters named therein have agreed,
subject to the terms and conditions set forth in such Purchase Agreement, to
purchase all of the shares of Class A Common Stock being sold pursuant to such
Purchase Agreement if any of the shares of Class A Common Stock being sold
pursuant to such Purchase Agreement are purchased. Under certain
circumstances, under the Purchase Agreements, the commitments of non-
defaulting Underwriters may be increased. Each Purchase Agreement provides
that the Company is not obligated to sell, and the Underwriters named therein
are not obligated to purchase, the shares of Class A Common Stock under the
terms of the Purchase Agreement unless all of the shares of Class A Common
Stock to be sold pursuant to the Purchase Agreements are contemporaneously
sold.
The International Representatives have advised the Company that the
International Underwriters propose to offer the shares of Class A Common Stock
offered hereby to the public initially at the public offering price set forth
on the cover page of this Prospectus and to certain dealers at such price less
a concession not in excess of $ per share of Class A Common Stock, and that
the International Underwriters may allow, and such dealers may reallow, a
discount not in excess of $ per share of Class A Common Stock on sales to
certain other dealers. After the Offerings, the public offering price,
concession and discount may be changed.
The public offering price per share of Class A Common Stock and the
underwriting discount per share of Class A Common Stock are identical for both
Offerings.
The Company has granted to the International Underwriters and the U.S.
Underwriters options to purchase up to an aggregate of shares and
shares of Class A Common Stock at the initial public offering price,
less the underwriting discount. Such options, which will expire 30 days after
the date of this Prospectus, may be exercised solely to cover over-allotments.
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
The Company has been informed that the Underwriters have entered into an
agreement (the "Intersyndicate Agreement") providing for the coordination of
their activities. Pursuant to the Intersyndicate Agreement, the International
Underwriters and the U.S. Underwriters are permitted to sell shares of Class A
Common Stock to each other. The Company has been informed that, under the
terms of the Intersyndicate Agreement, the International Underwriters and any
dealer to whom they sell shares of Class A Common Stock will not offer to sell
or resell shares of Class A Common Stock to persons who are U.S. or Canadian
persons or to persons they believe intend to resell to persons who are U.S. or
Canadian persons, and the U.S. Underwriters and any bank, broker or dealer to
whom they sell shares of Class A Common Stock will not offer to resell shares
of Class A Common Stock to non-U.S. persons or to non-Canadian persons or to
persons they believe intend to resell to non-U.S. persons or to non-Canadian
persons, except in the case of transactions pursuant to the Intersyndicate
Agreement which, among other things, permits the Underwriters to purchase from
each other and to offer to resell such number of shares of Class A Common
Stock as the selling Underwriter or Underwriters and the purchasing
Underwriter or Underwriters may agree.
The Company, Fox Broadcasting, Haim Saban and certain officers and directors
of the Company have each agreed not to sell or grant any option for the sale
of, or otherwise dispose of, any Common Stock, or any securities convertible
into or exchangeable or exercisable for shares of Common Stock, other than the
shares of Common Stock that may be offered by the Company in the Offerings and
not to file or request to be filed, as the case may be, any registration
statement with respect to Common Stock for a period of 180 days after the date
of this Prospectus without the prior written consent of Merrill Lynch.
Each International Underwriter has agreed that (i) it has not offered or
sold and it will not offer or sell, directly or indirectly, any shares of
Common Stock offered hereby in the United Kingdom by means of any document,
except in circumstances which do not constitute an offer to the public within
the meaning of the Companies Act 1985, (ii) it has complied and will comply
with all applicable provisions of the Financial Services Act 1986 with respect
to anything done by it in relation to the Common Stock in, from or otherwise
involving the United Kingdom, and (iii) it has only issued or passed on and
will only issue or pass on to any person in the United Kingdom any document
received by it in connection with the issuance of Common Stock if that person
is of a kind described in Article 9(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1988 or is a person to whom the
document may otherwise lawfully be issued or passed on.
No action has been or will be taken in any jurisdiction (except in the
United States) that would permit a public offering of the shares of Common
Stock, or the possession, circulation or distribution of this Prospectus or
any other material relating to the Company or shares of Common Stock, in any
jurisdiction where action for that purpose is required. Accordingly, the
shares of Common Stock may not be offered or sold, directly or indirectly, and
neither this prospectus nor any other offering material or advertisements in
connection with the shares of the Common Stock may be distributed or
published, in or from any country or jurisdiction except in compliance with
any applicable rules and regulations of such country or jurisdiction.
Purchasers of the shares of Common Stock offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase, in addition to the offering price set forth on the
cover page hereof.
The International Underwriters and the U.S. Underwriters have informed the
Company that they do not intend to sell shares of Class A Common Stock offered
hereby to any accounts over which they exercise discretionary authority.
Prior to the Offerings, there has been no public market for the Class A
Common Stock of the Company. The initial public offering price for the Class A
Common Stock has been determined by negotiation between the Company and the
U.S. Representatives and International Representatives. Among the factors that
were considered in determining the initial public offering price were the
Company's results of operations, the
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
Company's current financial condition, its future prospects, the experience of
its management, the economics of the industry in general, the general
condition of the equity securities market, the demand for similar securities
of companies considered comparable to the Company and other relevant factors.
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments the Underwriters may be required to make in respect thereof.
Certain of the Underwriters or their affiliates have provided from time to
time, and may provide in the future, commercial and investment banking
services to News Corp. and its affiliates, for which such Underwriters or
their affiliates have received or will receive fees and commissions.
Allen & Company Incorporated ("Allen") has, over the years, rendered
investment banking and financial advisory services to News Corp. and various
of its subsidiaries, as well as Saban, in connection with a number of matters.
Stanley S. Shuman, a Managing Director and Executive Vice President of Allen,
has been a non-Executive Director of News Corp. since 1982. Allen acquired 16
16/99 shares of Common Stock of FCN Holding in lieu of a cash fee earned in
December 1995 for certain financial advisory and other investment banking
services rendered to FCN Holding in connection with the negotiation,
structuring, formation and capitalization of the LLC. These shares will be
exchanged in the Reorganization for shares of Class A Common Stock of
the Company. As a result, after the Reorganization and before the Offerings,
Allen will own an aggregate of shares of Class A Common Stock of the
Company.
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CON-
NECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHO-
RIZED BY THE COMPANY OR ANY UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
THERE ARE RESTRICTIONS ON THE OFFER AND SALE OF THE CLASS A COMMON STOCK OF-
FERED HEREBY IN THE UNITED KINGDOM. ALL APPLICABLE PROVISIONS OF THE FINANCIAL
SERVICES ACT 1986 AND THE COMPANIES ACT 1985 WITH RESPECT TO ANYTHING DONE BY
ANY PERSONS IN RELATION TO THE CLASS A COMMON STOCK IN, FROM OR OTHERWISE IN-
VOLVING THE UNITED KINGDOM MUST BE COMPLIED WITH. SEE "UNDERWRITING."
IN THIS PROSPECTUS, REFERENCE TO "DOLLARS" AND "$" ARE TO UNITED STATES DOL-
LARS UNLESS STATED OTHERWISE.
---------------
TABLE OF CONTENTS
[Download Table]
PAGE
----
Prospectus Summary........................................................ 3
Risk Factors ............................................................. 11
Use of Proceeds........................................................... 18
Dividend Policy........................................................... 18
Dilution ................................................................. 19
Capitalization............................................................ 20
Unaudited Pro Forma Financial Information................................. 21
Selected Historical and Pro Forma Financial Data.......................... 25
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 27
Business.................................................................. 38
Management................................................................ 62
Principal Stockholders.................................................... 68
Certain Transactions...................................................... 70
Description of Securities................................................. 75
Shares Eligible for Future Sale........................................... 79
Certain United States Federal Tax Consequences to Non-United States
Holders.................................................................. 80
Underwriting.............................................................. 83
Legal Matters............................................................. 85
Experts................................................................... 85
Available Information..................................................... 85
Index to Financial Statements............................................. F-1
---------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SHARES
[LOGO OF FOX KIDS]
FOX KIDS
WORLDWIDE, INC.
CLASS A COMMON STOCK
---------------
PROSPECTUS
---------------
MERRILL LYNCH INTERNATIONAL
ALLEN & COMPANY
INCORPORATED
BEAR, STEARNS INTERNATIONAL LIMITED
, 1996
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table itemizes the expenses incurred by the Registrant in
connection with the issuance and distribution of the Class A Common Stock
being registered, other than underwriting discounts. All the amounts shown are
estimates except the Securities and Exchange Commission registration fee, the
NASD filing fee and the New York Stock Exchange filing fee.
[Download Table]
Registration fee--Securities and Exchange Commission............. $51,724
NASD filing fee.................................................. 15,500
New York Stock Exchange filing fee...............................
Accounting fees and expenses.....................................
Legal fees and expenses (other than blue sky)....................
Printing; stock certificates.....................................
Transfer agent and registrar fees................................
Miscellaneous....................................................
-------
Total.......................................................... $
=======
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The U.S. Purchase Agreement and International Purchase Agreement (Exhibits
1.1 and 1.2 hereto) provide for indemnification by the Underwriters of the
Company and its officers and directors, and by the Company of the
Underwriters, for certain liabilities arising under the Securities Act or
otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
(a) Since June 1, 1994, the Registrant and its predecessors have issued and
sold the following unregistered securities:
(1) On June 1, 1994, Saban granted to each of Mel Woods, Shuki Levy and
Stan Golden an option to purchase 16.327 shares of Saban common stock at a
purchase price of $122,496.48 per share. On January 1, 1996, Saban granted
to Margaret Loesch an option to purchase 16.327 shares of Saban common
stock at a purchase price of $612,500 per share.
(2) On September 26, 1996, FCN Holding issued and sold to Allen and
Company Incorporated ("Allen") and its affiliates including Stanley Shuman
("Shuman"), an employee of Allen, effective as of April 3, 1996, 16 16/99
shares of the common stock of FCN Holding valued at $10 million, in
consideration for financial advisory services and other investment banking
services rendered by Allen and Shuman to FCN Holding in connection with the
formation of the LLC.
(3) Immediately prior to the closing of the Offerings, (i) Fox
Broadcasting Sub, a wholly-owned subsidiary of Fox Broadcasting, will
exchange its capital stock in FCN Holding, which indirectly owns FCN, for
shares of the Class B Common Stock, (ii) the other stockholders of
FCN Holding will exchange their capital stock in FCN Holding for an
aggregate of shares of the Class A Common Stock, (iii) Haim Saban and
the other stockholders of Saban (none of whom are affiliated with News
Corp.) will exchange their capital stock in Saban for an aggregate of
shares of the Class B Common Stock and (iv) all outstanding management
options to purchase Saban common stock, as outstanding management options
to purchase Saban common stock, as more particularly described in Item
15(a) (1) above, will become options to purchase an aggregate of
shares of the Class A Common Stock. In addition, Fox Broadcasting will
exchange its preferred, non-voting interest in the LLC for an aggregate of
1,000,000 shares of the Company's Series A Redeemable Preferred Stock,
$0.001 par value per share. As a result of these transactions, FCN Holding,
FCN, Saban and the LLC will become direct or indirect wholly-owned
subsidiaries of the Company.
II-1
(b) There were no underwritten offerings employed or commissions paid to any
person in connection with any of the transactions set forth in Item 15(a).
The issuances of the securities set forth in Item 15(a) were deemed to be
exempt from registration under the Securities Act of 1933, as amended (the
"Act") in reliance on Section 4(2) of such Act as transactions by an issuer
not involving any public offering. The recipients of securities in each such
transaction represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the securities
issued in such transactions. All recipients of these securities had adequate
access, through their relationships with the Registrant and its subsidiaries,
to information about the Registrant and each affiliated issuer of securities
involved in the transactions.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
[Download Table]
EXHIBIT NO. DESCRIPTION
----------- -----------
1.1 Form of U.S. Purchase Agreement.*
1.2 Form of International Purchase Agreement.*
2.1 Share Transfer Agreement dated as of April 15, 1996 by and
among Saban International Paris, as Purchaser and certain
parties as Sellers relating to Creativite & Developpement.(1)+
2.2 Agreement for the Purchase of Film Assets dated as of December
31, 1995 by and between Vesical Limited and Saban
International N.V.(1)+
3.1 Certificate of Incorporation of the Registrant.
3.2 Restated Certificate of Incorporation (to be filed with the
Delaware Secretary of State prior to effectiveness of this
Registration Statement).
3.3 Bylaws of the Registrant.
4.1 Specimen certificate evidencing Class A Common Stock of the
Registrant.*
5.1 Opinion of Troop Meisinger Steuber & Pasich, LLP.*
10.1 Strategic Stockholders Agreement dated as of December 22, 1995,
by and among Saban Entertainment, Inc., Haim Saban, certain
entities listed on Schedule A thereto, Fox Broadcasting
Company, FCN Holding, Inc. and FCNH Sub, Inc.+
10.2 Amendment No. 1 to Strategic Stockholders Agreement dated as of
February 26, 1996.
10.3 Amendment No. 2 to Strategic Stockholders Agreement dated as of
September 26, 1996.+
10.4 Amendment No. 3 to Strategic Stockholders Agreement dated as of
September 26, 1996 (to be executed prior to closing).
10.5 Form of Indemnification Agreement and Schedule of Indemnified
Parties.
10.6 1996 Stock Incentive Plan.
10.7 Employment Agreement effective December 22, 1995, between Fox
Kids Worldwide, L.L.C. and Haim Saban.
10.8 Employment Agreement effective January 1, 1996, between Fox
Kids Worldwide, L.L.C. and Margaret Loesch; Stock Option
Agreement effective January 1, 1996, between Saban
Entertainment, Inc. and Margaret Loesch, as amended by
Amendment No. 1.
10.9 Employment Agreement effective June 1, 1994, between Saban
Entertainment, Inc. and Mel Woods, as amended by Amendment
No. 1 to Employment Agreement.
10.10 Employment Agreement effective June 1, 1996, between Saban
Entertainment, Inc. and Shuki Levy; Stock Option Agreement
effective June 1, 1994 between Saban Entertainment, Inc. and
Shuki Levy, as amended by Amendment No. 1.
II-2
[Download Table]
EXHIBIT NO. DESCRIPTION
----------- -----------
10.11 LLC Formation Agreement dated as of November 1, 1995, between
Saban Entertainment, Inc., FCN Holding, Inc. and Fox
Broadcasting Company.
10.12 Operating Agreement for Fox Kids Worldwide, L.L.C. dated as of
December 22, 1995 by and among Saban Entertainment, Inc., FCN
Holding, Inc. and Fox Broadcasting Company.+
10.13 Amendment No. 1 to Operating Agreement dated as of September
26, 1996.
10.14 Amendment No. 2 to Operating Agreement dated as of , 1996.*
10.15 Asset Assignment Agreement dated as of December 22, 1995 by and
between Fox Kids Worldwide, L.L.C., on the one hand, and Fox,
Inc., Fox Broadcasting Company, Twentieth Century Fox Film
Corporation, Fox Television Stations, Inc., and FCN Holding,
Inc.+
10.16 Management Agreement dated as of December 22, 1995, by and
among Fox Kids Worldwide, L.L.C., Saban Entertainment, Inc.
and FCN Holding Sub, Inc.
10.17 Stock Ownership Agreement dated as of December 22, 1995 by and
among Haim Saban, certain entities listed on Schedule 1.1(a)
thereto and Fox Kids Worldwide, L.L.C.+
10.18 Amendment No. 1 to Stock Ownership Agreement dated as of
September 26, 1996.+
10.19 Home Video Rights Acquisition Agreement (Casper) dated as of
May 24, 1996, by and among Twentieth Century Fox Home
Entertainment Inc. on the one hand and Saban Entertainment,
Inc. and Saban International N.V. on the other hand.*
10.20 Form of Fox Broadcasting Company Station Affiliate Agreement.
10.21 Merchandising Rights Acquisition Agreement dated as of July 1,
1990 between Twentieth Century Fox Licensing and Merchandising
and Fox Children's Network, Inc.+
10.22 Indemnification Agreement dated as of December 22, 1995 between
Fox Broadcasting Company and Fox Children's Network, Inc.
10.23 Distribution Rights Acquisition Agreement dated of September 1,
1990 between Twentieth Century Fox Film Corporation and Fox
Children's Network, Inc.+
10.24 Administration Agreement dated as of February 7, 1990 between
Fox Broadcasting Company and Fox Children's Network, Inc.
10.25 Registration Agreement dated as of December 22, 1995 between
Haim Saban and Saban Entertainment, Inc. and certain entities
listed on Schedule A thereto.
10.26 Amendment No. 1 to Registration Agreement dated as of April 3,
1996.
10.27 Assumption Agreement dated as of , 1996.*
10.28 Guarantee dated as of December 22, 1995 by The News Corporation
Limited.
10.29 Senior Note in the amount of $64,500,000 dated as of December
22, 1995 between Fox Kids Worldwide, L.L.C. as Payor and Fox
Broadcasting Company as Payee.
10.30 Credit Agreement among Saban Entertainment, Inc., as borrower,
the lenders named therein and Imperial Bank, as agent for the
lenders, dated July 31, 1995.
10.31 Credit Agreement among Saban International N.V., as borrower,
the lenders named therein and Imperial Bank, as agent for the
lenders, dated July 31, 1995.
10.32 Heads of Agreement for Broadcasting Services for The Fox Kids
Network between Fox Kids (UK) and British Sky Broadcasting
Limited.*
10.33 Home Video Rights Acquisition Agreement among Saban
Entertainment, Inc., Saban International N.V. and Twentieth
Century Fox Home Entertainment, Inc.*
10.34 Agreement dated as of June 24, 1996 between Fox Kids Worldwide,
L.L.C. and Saban International N.V., on the one hand, and
Marvel Characters Group, Inc., on the other hand.*
II-3
[Download Table]
EXHIBIT NO. DESCRIPTION
----------- -----------
10.35 Distribution Agreement dated as of August 21, 1992, as amended,
between Saban International N.V. and Saban International
Services, Inc. on the one hand and Toei Company Ltd.+
10.36 Memorandum of Agreement dated as of January 19, 1996 between
Saban Merchandising, Inc. and Ventura Film Distributors, B.V.
on the one hand and Bandai America Incorporated, on the other
hand.+
10.37 Term Sheet--Mighty Morphin Power Rangers II between Fox Family
Films, Inc. and Saban International N.V.*
10.38 10960 Wilshire Boulevard Office Lease dated as of July 17, 1995
between 10960 Property Corporation and Saban Entertainment,
Inc.
10.39 Production Facility Agreement dated as of January 5, 1994
between Magic Movie Studios of Valencia, Ltd. and Saban
Entertainment, Inc.
10.40 Letter Agreement dated as of January 1, 1995 between Saban
International, N.V. and Duveen Trading Ltd.*
10.41 Barter Syndication Agreement dated as of January 5, 1996
between Saban Entertainment, Inc. and Fox Broadcasting Company
(to be executed prior to closing).
10.42 Letter Agreement dated as of September 26, 1996, but effective
as of April 3, 1996 by and among Stanley S. Shuman, FCN
Holding, Inc., and Allen & Company Incorporated, as amended by
that certain Side Letter Agreement dated as of September 26,
1996, but effective as of April 3, 1996.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Troop Meisinger Steuber & Pasich, LLP (included in
its opinion filed as Exhibit 5.1 hereto) (to include (S) 462
consent).
23.2 Consent of Ernst & Young LLP.
24.1 Power of Attorney (included in page II-6).
27.1 Financial Data Schedule.
--------
*To be supplied by amendment.
+ Portions of exhibits deleted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidentiality.
(1) Upon request, the Registrant will furnish supplementally to the Securities
and Exchange Commission a copy of omitted schedule.
(b) Financial Statement Schedules.
FCN Holding, Inc., Saban Entertainment, Inc., and Fox Kids Worldwide,
L.L.C. (from and after the date of the Reorganization, Fox Kids Worldwide,
Inc.)
Schedule II--Valuation and Qualifying Accounts
FLN Holding, Inc.
Schedule II--Valuation and Qualifying Accounts
Saban Entertainment, Inc.
Schedule II--Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulations of the Commission are either not required under the related
instructions or are inapplicable, and therefore have been omitted.
II-4
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer of controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by a controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(b) The undersigned registrant hereby undertakes that:
(1) For the purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
II-5
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF LOS
ANGELES, STATE OF CALIFORNIA, ON SEPTEMBER 26, 1996.
FOX KIDS WORLDWIDE, INC.
By /s/ Haim Saban
-------------------------------------
Haim Saban
Chief Executive Officer
EACH PERSON WHOSE SIGNATURE APPEARS BELOW CONSTITUTES AND APPOINTS HAIM
SABAN AND MEL WOODS AND EACH OF THEM, AS HIS TRUE AND LAWFUL ATTORNEYS-IN-FACT
AND AGENTS WITH FULL POWER OF SUBSTITUTION AND RESUBSTITUTION, FOR HIM AND IN
HIS NAME, PLACE AND STEAD, IN ANY AND ALL CAPACITIES, TO SIGN ANY OR ALL
AMENDMENTS (INCLUDING POST EFFECTIVE AMENDMENTS) TO THIS REGISTRATION
STATEMENT AND A NEW REGISTRATION STATEMENT FILED PURSUANT TO RULE 462(B) OF
THE SECURITIES ACT OF 1933 AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO,
AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE
COMMISSION, GRANTING UNTO SAID ATTORNEY-IN-FACT AND AGENTS, AND EACH OF THEM,
FULL POWER AND AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND THING
REQUISITE AND NECESSARY TO BE DONE IN AND ABOUT THE FOREGOING, AS FULLY TO ALL
INTENTS AND PURPOSES AS HE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND
CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS, OR EITHER OF THEM, OR
THEIR SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
[Enlarge/Download Table]
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Haim Saban Chairman and Chief Executive September 26, 1996
____________________________________ Officer
Haim Saban
/s/ Margaret Loesch President, Director September 26, 1996
____________________________________
Margaret Loesch
/s/ Mel Woods President, Chief Financial September 26, 1996
__________________________________ Officer, Chief Operating
Mel Woods Officer, Director
/s/ Mark Ittner Principal Accounting Officer September 26, 1996
____________________________________
Mark Ittner
II-6
[Download Table]
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Shuki Levy Director September 26, 1996
____________________________________
Shuki Levy
/s/ Rupert Murdoch Director September 26, 1996
____________________________________
Rupert Murdoch
/s/ Chase Carey Director September 26, 1996
____________________________________
Chase Carey
II-7
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
[Download Table]
ADDITIONS
------------------
BALANCE CHARGED
AT TO COSTS CHARGED BALANCE
BEGINNING AND TO OTHER AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- --------- -------- -------- ---------- ---------
SABAN ENTERTAINMENT, INC.
FY ended May 1994
Allowance for doubtful
accounts.................. 385,000 0 0 0 385,000
FY ended May 1995
Allowance for doubtful
accounts.................. 385,000 1,000,000 0 0 1,385,000
Five months ended October
1995
Allowance for doubtful
accounts.................. 1,385,000 0 0 0 1,385,000
S-1
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
[Download Table]
ADDITIONS
-------------------
BALANCE AT CHARGED TO CHARGED BALANCE AT
BEGINNING COSTS AND TO OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ---------- ---------- -------- ---------- ----------
FCN HOLDINGS, INC.
FY ended July 3, 1994
Allowance for doubtful
accounts............... 0 0 0 0 0
FY ended July 2, 1995
Allowance for doubtful
accounts............... 0 480,000 0 0 480,000
Four months ended October
29, 1995
Allowance for doubtful
accounts............... 480,000 0 0 0 480,000
S-2
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
[Download Table]
ADDITIONS
BALANCE -------------------
AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- --------- ---------- -------- ---------- ---------
FCN HOLDING, INC., SABAN
ENTERTAINMENT, INC. AND
FOX KIDS WORLDWIDE, L.L.C.
(FROM AND AFTER THE DATE
OF THE REORGANIZATION, FOX
KIDS WORLDWIDE, INC.)
Eight months ended June 30,
1996
Allowance for doubtful
accounts................ 1,865,000 0 0 (175,000) 1,690,000
S-3
EXHIBIT INDEX
[Download Table]
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ------------
1.1 Form of U.S. Purchase Agreement.*
1.2 Form of International Purchase Agreement.*
2.1 Share Transfer Agreement dated as of April 15, 1996
by and among Saban International Paris, as
Purchaser and certain parties as Sellers relating
to Creativite & Developpement.(1)+
2.2 Agreement for the Purchase of Film Assets dated as
of December 31, 1995 by and between Vesical
Limited and Saban International N.V.(1)+
3.1 Certificate of Incorporation of the Registrant.
3.2 Restated Certificate of Incorporation (to be filed
with the Delaware Secretary of State prior to
effectiveness of this Registration Statement).
3.3 Bylaws of the Registrant.
4.1 Specimen certificate evidencing Class A Common
Stock of the Registrant.*
5.1 Opinion of Troop Meisinger Steuber & Pasich, LLP.*
10.1 Strategic Stockholders Agreement dated as of
December 22, 1995, by and among Saban
Entertainment, Inc., Haim Saban, certain entities
listed on Schedule A thereto, Fox Broadcasting
Company, FCN Holding, Inc. and FCNH Sub, Inc.+
10.2 Amendment No. 1 to Strategic Stockholders Agreement
dated as of February 26, 1996.
10.3 Amendment No. 2 to Strategic Stockholders Agreement
dated as of September 26, 1996.+
10.4 Amendment No. 3 to Strategic Stockholders Agreement
dated as of September 26, 1996 (to be executed
prior to closing).
10.5 Form of Indemnification Agreement and Schedule of
Indemnified Parties.
10.6 1996 Stock Incentive Plan.
10.7 Employment Agreement effective December 22, 1995,
between Fox Kids Worldwide, L.L.C. and Haim Saban.
10.8 Employment Agreement effective January 1, 1996,
between Fox Kids Worldwide, L.L.C. and Margaret
Loesch; Stock Option Agreement effective
January 1, 1996, between Saban Entertainment, Inc.
and Margaret Loesch, as amended by Amendment
No. 1.
10.9 Employment Agreement effective June 1, 1994,
between Saban Entertainment, Inc. and Mel Woods,
as amended by Amendment No. 1 to Employment
Agreement.
10.10 Employment Agreement effective June 1, 1996,
between Saban Entertainment, Inc. and Shuki Levy;
Stock Option Agreement effective June 1, 1994
between Saban Entertainment, Inc. and Shuki Levy,
as amended by Amendment No. 1.
10.11 LLC Formation Agreement dated as of November 1,
1995, between Saban Entertainment, Inc., FCN
Holding, Inc. and Fox Broadcasting Company.
10.12 Operating Agreement for Fox Kids Worldwide, L.L.C.
dated as of December 22, 1995 by and among Saban
Entertainment, Inc., FCN Holding, Inc. and Fox
Broadcasting Company.+
10.13 Amendment No. 1 to Operating Agreement dated as of
September 26, 1996.
10.14 Amendment No. 2 to Operating Agreement dated as of
, 1996.*
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10.15 Asset Assignment Agreement dated as of December 22,
1995 by and between Fox Kids Worldwide, L.L.C., on
the one hand, and Fox, Inc., Fox Broadcasting
Company, Twentieth Century Fox Film Corporation,
Fox Television Stations, Inc., and FCN Holding,
Inc.+
10.16 Management Agreement dated as of December 22, 1995,
by and among Fox Kids Worldwide, L.L.C., Saban
Entertainment, Inc. and FCN Holding Sub, Inc.
10.17 Stock Ownership Agreement dated as of December 22,
1995 by and among Haim Saban, certain entities
listed on Schedule 1.1(a) thereto and Fox Kids
Worldwide, L.L.C.+
10.18 Amendment No. 1 to Stock Ownership Agreement dated
as of September 26, 1996.+
10.19 Home Video Rights Acquisition Agreement (Casper)
dated as of May 24, 1996, by and among Twentieth
Century Fox Home Entertainment Inc. on the one
hand and Saban Entertainment, Inc. and Saban
International N.V. on the other hand.*
10.20 Form of Fox Broadcasting Company Station Affiliate
Agreement.
10.21 Merchandising Rights Acquisition Agreement dated as
of July 1, 1990 between Twentieth Century Fox
Licensing and Merchandising and Fox Children's
Network, Inc.+
10.22 Indemnification Agreement dated as of December 22,
1995 between Fox Broadcasting Company and Fox
Children's Network, Inc.
10.23 Distribution Rights Acquisition Agreement dated of
September 1, 1990 between Twentieth Century Fox
Film Corporation and Fox Children's Network, Inc.+
10.24 Administration Agreement dated as of February 7,
1990 between Fox Broadcasting Company and Fox
Children's Network, Inc.
10.25 Registration Agreement dated as of December 22,
1995 between Haim Saban and Saban Entertainment,
Inc. and certain entities listed on Schedule A
thereto.
10.26 Amendment No. 1 to Registration Agreement dated as
of April 3, 1996.
10.27 Assumption Agreement dated as of , 1996.*
10.28 Guarantee dated as of December 22, 1995 by The News
Corporation Limited.
10.29 Senior Note in the amount of $64,500,000 dated as
of December 22, 1995 between Fox Kids Worldwide,
L.L.C. as Payor and Fox Broadcasting Company as
Payee.
10.30 Credit Agreement among Saban Entertainment, Inc.,
as borrower, the lenders named therein and
Imperial Bank, as agent for the lenders, dated
July 31, 1995.
10.31 Credit Agreement among Saban International N.V., as
borrower, the lenders named therein and Imperial
Bank, as agent for the lenders, dated July 31,
1995.
10.32 Heads of Agreement for Broadcasting Services for
The Fox Kids Network between Fox Kids (UK) and
British Sky Broadcasting Limited.*
10.33 Home Video Rights Acquisition Agreement among Saban
Entertainment, Inc., Saban International N.V. and
Twentieth Century Fox Home Entertainment, Inc.*
10.34 Agreement dated as of June 24, 1996 between Fox
Kids Worldwide, L.L.C. and Saban International
N.V., on the one hand, and Marvel Characters
Group, Inc., on the other hand.*
10.35 Distribution Agreement dated as of August 21, 1992,
as amended, between Saban International N.V. and
Saban International Services, Inc. on the one hand
and Toei Company Ltd.+
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10.36 Memorandum of Agreement dated as of January 19,
1996 between Saban Merchandising, Inc. and Ventura
Film Distributors, B.V. on the one hand and Bandai
America Incorporated, on the other hand.+
10.37 Term Sheet--Mighty Morphin Power Rangers II between
Fox Family Films, Inc. and Saban International
N.V.*
10.38 10960 Wilshire Boulevard Office Lease dated as of
July 17, 1995 between 10960 Property Corporation
and Saban Entertainment, Inc.
10.39 Production Facility Agreement dated as of January
5, 1994 between Magic Movie Studios of Valencia,
Ltd. and Saban Entertainment, Inc.
10.40 Letter Agreement dated as of January 1, 1995
between Saban International, N.V. and Duveen
Trading Ltd.*
10.41 Barter Syndication Agreement dated as of January 5,
1996 between Saban Entertainment, Inc. and Fox
Broadcasting Company (to be executed prior to
closing).
10.42 Letter Agreement dated as of September 26, 1996,
but effective as of April 3, 1996 by and among
Stanley S. Shuman, FCN Holding, Inc., and Allen &
Company Incorporated, as amended by that certain
Side Letter Agreement dated as of September 26,
1996, but effective as of April 3, 1996.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Troop Meisinger Steuber & Pasich, LLP
(included in its opinion filed as Exhibit 5.1
hereto) (to include (S) 462 consent).
23.2 Consent of Ernst & Young LLP.
24.1 Power of Attorney (included in page II-6).
27.1 Financial Data Schedule.
--------
* To be supplied by amendment.
+ Portions of exhibits deleted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidentiality.
(1) Upon request, the Registrant will furnish supplementally to the Securities
and Exchange Commission a copy of any omitted schedule. Registrant has
requested confidentiality of entire exhibit. Accordingly, none of these
exhibits have been filed.
Dates Referenced Herein and Documents Incorporated by Reference
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