<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO_______________
COMMISSION FILE NUMBER: 1-6739
SPELLING ENTERTAINMENT GROUP INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 59-0862100
-------- ------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5700 WILSHIRE BOULEVARD
LOS ANGELES, CALIFORNIA 90036
----------------------- ---------
(Address of principal executive offices) (Zip Code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (213) 965-5700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ______.
On November 10, 1995, the registrant had outstanding 88,748,273 shares
of Common Stock, $.001 par value.
<PAGE> 2
SPELLING ENTERTAINMENT GROUP INC.
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S> <C>
ITEM 1. FINANCIAL STATEMENTS PAGE
----
Unaudited Condensed Consolidated Balance Sheets -
September 30, 1995 and December 31, 1994 3
Unaudited Condensed Consolidated Statements of
Operations - Three Months and Nine Months Ended
September 30, 1995 and 1994 4
Unaudited Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1995 and 1994 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
</TABLE>
2
<PAGE> 3
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------ ------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 13,793 $ 22,400
Accounts receivable, net 194,110 242,127
Entertainment product, net 360,070 325,643
Property, plant and equipment, net 23,598 16,161
Other assets 23,304 19,678
Intangible assets, net 390,099 400,751
---------- ----------
$1,004,974 $1,026,760
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable, accrued expenses and other liabilities $ 44,757 $ 101,484
Accrued participation expense 95,763 83,493
Deferred revenue 17,160 11,275
Bank and other debt 264,429 248,853
Income and other taxes 26,960 24,355
Net liabilities related to discontinued operations 18,645 27,061
---------- ----------
Total Liabilities 467,714 496,521
---------- ----------
Minority interest 611 1,792
Commitments and contingent liabilities
Shareholders' Equity:
Preferred stock, $.001 and $.10 par value,
respectively; authorized 20,000,000 shares;
none outstanding - -
Common stock, $.001 and $.10 par value,
respectively; authorized 300,000,000 shares;
issued and outstanding 88,641,426 and
87,983,329 shares, respectively 89 8,798
Capital in excess of par value 559,362 546,843
Accumulated deficit (21,246) (27,287)
Cumulative translation adjustment (1,556) 93
---------- ----------
Total Shareholders' Equity 536,649 528,447
---------- ----------
$1,004,974 $1,026,760
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ----------------------
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $132,573 $136,744 $453,053 $301,389
Costs and expenses:
Entertainment product costs 104,690 116,640 355,547 233,817
Selling, general and administrative 25,930 18,175 73,841 36,791
-------- -------- -------- --------
Operating income 1,953 1,929 23,665 30,781
Interest income 1,149 980 2,731 2,314
Interest expense (3,330) (2,575) (12,176) (5,476)
Other income (expense), net (81) 56 33 66
-------- ------- -------- --------
Income (loss) before income taxes and
minority interest (309) 390 14,253 27,685
Benefit (provision) for income taxes 378 (650) (6,670) (12,384)
-------- ------- -------- --------
Income (loss) before minority interest 69 (260) 7,583 15,301
Minority interest in (income) loss 544 (271) 1,181 (271)
-------- ------- -------- --------
Net income (loss) $613 ($531) $8,764 $15,030
======== ======== ======== ========
Average number of common and
common equivalent shares:
Primary 90,546 80,283 89,948 71,751
======== ======== ======== ========
Fully-diluted 91,059 80,283 90,734 72,287
======== ======== ======== ========
Primary and fully-diluted net
income (loss) per common and
common equivalent share $0.01 $(0.01) $0.10 $0.21
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------
1995 1994
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $8,764 $15,030
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation and amortization 12,373 5,003
Amortization of entertainment product costs 305,723 185,442
Additions to entertainment product costs (335,945) (226,058)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 30,489 (46,183)
Increase (decrease) in accounts payable,
accrued expenses, other liabilities and income taxes (51,488) 21,549
Increase (decrease) in accrued participation expenses 28,506 (8,381)
Increase in deferred revenue 5,885 21,717
(Increase) decrease in prepaid and other assets (8,413) 1,062
Other, net (2,942) (7,184)
-------- --------
(7,048) (38,003)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (11,979) (2,017)
Changes in net liabilities related to
discontinued operations (8,416) (4,739)
Purchase of Republic,
net of cash acquired - (101,214)
Cash acquired in acquisition of Virgin - 2,197
-------- ---------
(20,395) (105,773)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facilities 50,449 255,665
Repayments of credit facilities (34,873) (112,566)
Cash dividends paid on Common Stock - (4,334)
Issuances of Common Stock 3,260 5,296
-------- --------
18,836 144,061
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (8,607) 285
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 22,400 12,682
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $13,793 $12,967
======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
1. INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements of
Spelling Entertainment Group Inc. and subsidiaries (the "Company") have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. The Company believes that the disclosures contained herein are
adequate to make the information presented not misleading; however, these
unaudited condensed consolidated financial statements should be read in
conjunction with the more detailed financial statements and notes thereto
included in the Company's most recent Annual Report on Form 10-K.
The financial statements reflect, in the opinion of management, all normal
recurring adjustments necessary to present fairly the Company's financial
position and results of operations. In order to maintain consistency and
comparability between periods presented, certain amounts have been reclassified
from the previously reported financial statements in order to conform with the
financial statement presentation in the current period.
Blockbuster Entertainment Corporation ("BEC") owned 67,673,702 shares of the
Company's outstanding common stock ("Common Stock") at September 29, 1994.
Effective as of that date, BEC merged with and into Viacom Inc. ("Viacom"),
with Viacom being the surviving corporation. As a result of the merger, Viacom
currently owns approximately 76% of the Company's Common Stock.
The first quarter of 1995 reflected $5,026,000 of operating income that resulted
from the Company conforming its accounting policies with respect to Statement
of Financial Accounting Standards ("SFAS") No. 53 to those of Viacom. In
addition, such operating income included a net adjustment of approximately
$5,500,000 attributable to prior years.
Effective May 26, 1995, the Company changed its place of incorporation from
Florida to Delaware by merging into a newly-formed Delaware corporation. As a
result of the Company's reincorporation, each share of the Company's common
stock then issued was converted into and exchanged for one share of common
stock, par value $.001 per share, of the Delaware corporation. There was no
change in the business, properties or management of the Florida corporation
as a result of this reincorporation.
On August 10, 1995, Viacom announced its intent to sell the Company, and that
it has retained an investment banking firm to identify qualified purchasers and
to assist in the evaluation of proposals. Viacom also announced its intention
to acquire the Company's interest in Virgin Interactive Entertainment Limited
("VIEL", together with its subsidiaries, "VIE"). An independent committee of
the Company's board of directors has been formed to negotiate the terms of any
proposed VIE transaction.
6
<PAGE> 7
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
2. MERGER AND ACQUISITION
On April 26, 1994, the Company acquired all of the outstanding shares of
Republic Entertainment Inc. (formerly Republic Pictures Corporation)
("Republic") through a cash merger (the "Merger").
On July 30, 1994, the Company acquired from BEC (the "Acquisition") 8,686,984
ordinary shares (the "Ordinary Shares") of VIEL and an option to acquire
550,000 Ordinary Shares of VIEL (collectively, the "VIE Interests") in exchange
for 22,015,062 shares of the Company's Common Stock. BEC had acquired a
majority of the VIE Interests from third parties on July 29, 1994. As a result
of the Acquisition, the Company acquired approximately 90% of VIEL's Ordinary
Shares.
In connection with the Acquisition, the Company also entered into put- and
call-option agreements with respect to the Ordinary Shares of VIEL not
owned by the Company. Under these agreements, the Company may acquire, or be
required by Blockbuster Entertainment Group, a division of Viacom ("BEG"), to
purchase, these shares from BEG at an agreed-upon price. At the option of the
Company, such purchase price may be paid in cash or shares of the Company's
Common Stock. On June 8, 1995, BEG acquired the remaining Ordinary Shares of
VIEL not owned by the Company for approximately $22,973,000 plus other costs
associated with the transaction. BEG and the Company have executed amendments
to extend the put- and call-option agreements, which originally had a term of
30 days from June 8, 1995, through March 5, 1996. See Note 1 regarding the
potential sale of VIE.
The Company has accounted for the Merger and the Acquisition under the purchase
method of accounting. The results of operations of Republic and VIE are
included in the Company's results of operations subsequent to acquisition. The
assets and liabilities of Republic and VIE are included in the accompanying
condensed consolidated balance sheets as of September 30, 1995 and December 31,
1994, at fair value, with the differences between purchase price and such fair
values being included in intangible assets. The excess of the purchase price
over net assets and liabilities acquired is being amortized on a straight-line
basis over forty years.
7
<PAGE> 8
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
3. ENTERTAINMENT PRODUCT, NET
Entertainment product, net, includes production or acquisition costs (including
advance payments to producers), capitalized overhead and interest, home video
and interactive manufacturing costs, and prints, advertising and other related
distribution costs expected to benefit future periods. These costs are
amortized, and third-party participations and residuals are accrued, on an
individual product basis in the ratio that current year gross revenue bears to
estimated future gross revenue.
Entertainment product, net, is stated at the lower of cost less amortization or
estimated net realizable value, generally on an individual product basis.
Estimates of total gross revenue, costs and participations are reviewed
quarterly and revised as necessary. When estimates of total revenue and costs
indicate that an individual product will realize an ultimate loss, additional
amortization is provided to fully recognize such loss in that period.
Entertainment product, net, is comprised of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- ------------
<S> <C> <C>
Entertainment product:
Released $191,750 $162,147
In process and other 40,577 53,615
Entertainment product rights 127,743 109,881
-------- --------
$360,070 $325,643
======== ========
</TABLE>
8
<PAGE> 9
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
Entertainment product rights include advances to producers and acquisition
costs for distribution or other rights to entertainment product not produced by
the Company.
4. DEBT
Debt consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- ------------
<S> <C> <C>
Viacom Facility, average interest at
6.87% at September 30, 1995 $190,000 $181,805
Credit Agreement, average interest at
6.87% at September 30, 1995 72,845 54,313
UK Facility, interest at 7.13%
at September 30, 1995 1,584 8,943
Other credit facilities - 3,792
-------- --------
$264,429 $248,853
======== ========
</TABLE>
In January 1994, the Company entered into a three-year credit agreement with
BEC. As a result of the merger of BEC with and into Viacom, Viacom succeeded
to BEC's position under the credit agreement (the "Viacom Facility"). This
agreement was amended and restated in January 1995 to reflect certain
amendments to the facility which were effective as of December 7, 1994,
including a $25,000,000 increase in the amount available under the facility.
In October 1995, Viacom agreed to provide a further $40,000,000 increase in the
amount available under the Viacom Facility and it is anticipated that an
amendment reflecting such increase will be executed. The Viacom Facility,
after giving effect to the proposed increase, will provide for (i) a term loan
of $100,000,000 and (ii) a revolving credit facility of $140,000,000 to fund
the Company's working capital and other requirements. All outstanding
borrowings mature on March 31, 1997. Under the Viacom Facility, the Company
pays an annual fee (currently 0.3125%) based on the unused portion of the
facility, as well as certain facility and administration fees, all based on
the similar fees payable by Viacom under its separate credit facilities.
Interest on all outstanding borrowings is payable, at the Company's option,
at LIBOR plus a spread (currently 1.0%) or at prime rate; both rates are
determined by reference to the corresponding rates payable by Viacom under
its separate credit facilities.
Borrowings under the Viacom Facility are secured by all of the assets of the
Company and its domestic subsidiaries and the entire amount outstanding under
the Viacom Facility may be accelerated if Viacom's borrowings under its
separate credit facilities were to be accelerated. Borrowings under the Viacom
Facility will be accelerated in the event of a "change in control," as defined
in the Viacom Facility, of the Company. (See Note 1.)
9
<PAGE> 10
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
On December 23, 1993, a wholly-owned subsidiary of VIEL established a
multi-currency credit agreement with a bank in the U.S. (the "Credit
Agreement"). The Credit Agreement initially provided for maximum borrowings of
$15,000,000, subject to a borrowing base test. Following the Acquisition, the
amount of borrowings allowable under the Credit Agreement was increased to
$75,000,000, and the borrowing base test and other ratio tests were eliminated,
based on the guarantee of all borrowings under the Credit Agreement by BEC (now
Viacom). The bank has agreed to increase the amount of the facility to
$100,000,000 and to extend the term to March 31, 1997. Interest is payable
monthly at the bank's reference rate or, at the Company's option, certain
alternative rates. Additionally, the Company must pay a commitment fee
of 0.125% on the unused portion of the available credit.
On September 8, 1993, another wholly-owned subsidiary of VIEL established a
5,000,000 pounds sterling credit facility (the "UK Facility") with a bank in
the United Kingdom. On April 12, 1994, the UK Facility was increased to
10,000,000 pounds sterling, based in part on the personal guarantee of two of
the directors of the subsidiary. Following the Acquisition, the Company
guaranteed the UK Facility and the guarantees of the two directors were
terminated. Advances under the credit facility bear interest at the bank's
prime rate plus 1.5% and are due on demand. The UK Facility matures on April
30, 2005.
During the first quarter of 1995, the Company's other credit facilities were
substantially paid off and terminated.
5. SHAREHOLDERS' EQUITY
The following is a summary of the changes in the components of shareholders'
equity:
<TABLE>
<CAPTION>
Capital In Cumulative
Common Excess of Accumulated Translation
Stock Par Value Deficit Adjustment Total
------ --------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1994 $8,798 $546,843 $(27,287) $93 $528,447
Sales of common stock 35 3,775 - - 3,810
Change in par value as a
result of reincorporation (8,744) 8,744 - - -
Unrealized holding loss, net - - (2,723) - (2,723)
Net income for the period - - 8,764 - 8,764
Cumulative translation adjustment - - - (1,649) (1,649)
------ -------- -------- ------- --------
Balance at September 30, 1995 $ 89 $559,362 $(21,246) $(1,556) $536,649
====== ======== ======== ======= ========
</TABLE>
10
<PAGE> 11
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
Effective January 1, 1994, the Company adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." This statement requires the
Company to adjust the carrying value of common stock investments, which are
classified as "available for sale" under the applicable provisions of SFAS No.
115, to fair market value with a corresponding adjustment to shareholders'
equity. The adjustment recorded in the nine months ended September 30, 1995
was a decrease of $2,723,000, net of tax. The carrying value of these
investments is included in other assets.
Effective May 26, 1995, each share of the Company's common stock then issued was
converted into and exchanged for one share of common stock, par value $.001 per
share, as a result of the Company's reincorporation in Delaware. (See Note 1.)
6. INCOME TAXES
Income taxes have been provided in each period based on the Company's
anticipated annual effective income tax rate.
7. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Net income per common and common equivalent share amounts are based on the
weighted average number of common shares outstanding during the respective
periods.
8. LEGAL MATTERS
The Company is involved in certain legal proceedings which arise in the
ordinary course of conducting its business operations. The Company believes
such legal proceedings should not have a material adverse effect on the
Company's consolidated results of operations or financial condition.
The Company also is subject to pending and contingent claims relating to the
Company's discontinued operations, including certain claims involving
environmental matters. Some of the parties involved in such actions seek
significant damages. While the outcome of these claims cannot be predicted
with certainty, the Company believes based upon (i) its knowledge of the facts
and circumstances and applicable law; (ii) allowances for estimated losses on
disposal of the discontinued operations, and (iii) an indemnity agreement,
that the ultimate resolution of such suits and claims will not have a material
adverse effect on the Company's consolidated results of operations or financial
condition.
9. RELATED PARTY TRANSACTIONS
See Note 4 regarding the Company's credit facility with Viacom and Viacom's
guarantee of the Company's credit agreement with a bank. The Company paid
interest and fees to Viacom of $9,706,000 and to BEC of $5,066,000 during
the nine months ended September 30, 1995 and 1994, respectively, in connection
with this facility.
11
<PAGE> 12
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
During the nine months ended September 30, 1995 and 1994, the Company recorded
revenue, net of returns, of approximately $3,793,000 and $2,101,000,
respectively, from the sale of home videocassettes and interactive
entertainment product to BEG.
At September 30, 1995, the Company had a net receivable due from BEG of
approximately $1,609,000 resulting from these sales and associated returns.
Viacom (BEC) provided the Company with management services for which the
Company was charged $450,000 by Viacom and $375,000 by BEC for the nine months
ended September 30, 1995 and 1994, respectively. As of September 30, 1995,
the Company had a net payable to Viacom of approximately $456,000 with respect
to these and other expenses.
Prior and subsequent to the merger of BEC into Viacom, the Company licensed
certain entertainment product to Showtime Networks, Inc. ("Showtime"), a
subsidiary of Viacom, and certain television stations owned by Viacom. Revenue
from sales to Showtime were not material for the nine months ended September
30, 1995. Sales to the television stations consist of both cash and barter
contracts. Revenue from cash contracts was $710,000 for the nine months ended
September 30, 1995 and the Company has a receivable due from Viacom of
$2,781,000 as of September 30, 1995. The Company realized $437,000 in revenue
from third-party advertisers with respect to the sale of advertising time
received under the barter contracts.
Additionally, prior and subsequent to the merger of BEC into Viacom, the
Company licensed certain entertainment product to USA Network and Sci-Fi
Channel in which Viacom has equity interests. Revenue from such sales were
$3,589,000 for the nine months ended September 30, 1995, and the Company has
receivables at September 30, 1995 due from USA Network and Sci-Fi Channel of
$4,725,000 associated with such sales.
Republic has entered into agreements with, and in certain cases has advanced
funds to, BEG, Showtime and Viacom to distribute certain of their productions in
the home video market.
The Company has entered into agreements with Paramount Pictures Corporation
("Paramount") with respect to the domestic distribution of two of the
Company's upcoming feature film releases, "Night Falls on Manhattan" and
"Thinner," in the theatrical, non-theatrical and pay television markets.
In the ordinary course of business, the Company has and expects to continue to
do business with Viacom and its affiliates, including BEG, Showtime, Nickelodeon
and Paramount.
12
<PAGE> 13
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(000's omitted in all tables)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
unaudited condensed consolidated financial statements and the related notes
thereto. References to Notes relate to the notes to such statements.
RESULTS OF OPERATIONS
The results of operations for any period are significantly affected by the
quantity and performance of the Company's entertainment product which is
licensed or sold to, and available for exploitation by, licensees or customers
in various media and territories. Consequently, results of operations may vary
significantly between periods, and the results of operations in any one period
may not be indicative of results of operations in future periods.
REVENUE
The following table sets forth the components of revenue from the Company's
major media and markets for the three month and nine month periods ended
September 30:
<TABLE>
<Ca
ption>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1995* 1994 1995* 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Television distribution $64,344 $70,410 $269,257 $202,052
Worldwide interactive entertainment 40,201 33,818 108,459 33,818
Worldwide home video 21,073 19,149 54,078 39,015
International film distribution 2,629 6,114 8,296 10,310
Worldwide licensing and merchandising 3,360 4,330 10,666 13,352
Other 966 2,923 2,297 2,842
-------- -------- -------- --------
$132,573 $136,744 $453,053 $301,389
======== ======== ======== ========
</TABLE>
*Includes operations of VIE, which was acquired in the third quarter of
1994, for the full three and nine month periods in 1995. Includes operations of
Republic, which was acquired in the second quarter of 1994, for the full nine
month period in 1995.
13
<PAGE> 14
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(000's omitted in all tables)
(Continued)
Television distribution revenue from television programming is derived from
U.S. network licenses, first-run syndication sales and other domestic and
international television licensing agreements. During the initial years of a
one-hour network television series, network and international license fees
normally approximate the production costs of the series, and accordingly the
Company recognizes only minimal profit or loss during this period. With
respect to half-hour network television programming and first-run syndication
television programming, the production costs can significantly exceed the
combination of the network or other domestic revenue and international license
fees. However, if a sufficient number of episodes of a series are produced,
the Company is reasonably assured that it will also be able to sell the series
in the domestic off-network market, and the Company would then expect to be
able to reduce its loss or realize a profit with respect to the series.
Revenue from television distribution decreased $6,066,000 during the three
months and increased $67,205,000 during the nine months ended September 30,
1995, respectively, compared to the similar periods in 1994. The decrease in
the three month period is attributable to fewer hours of programming delivered
to the networks, partially offset by higher per episode network license fees.
The increase in the nine month period arose primarily from (i) higher per
episode network license fees; (ii) the delivery of five television pilots to
the networks in the second quarter of 1995; (iii) the distribution of
programming in the first-run syndication market; (iv) higher revenue from the
exploitation of the Company's library, including revenue recognized in the
first quarter of 1995 attributable to prior periods; and (v) the effect
recorded in the first quarter of 1995 of conforming the Company's accounting
policies to those of Viacom (see Note 1).
Revenue from interactive entertainment product increased $6,383,000 during the
three months ended September 30, 1995 compared to the corresponding period in
1994, primarily as a result of the fact that the 1995 period included three
months of operations of VIE, as compared to only two months in the 1994 period.
Revenue in the third quarter of 1995 was adversely affected by delays in the
release for certain of VIE's titles, as well as fewer than anticipated
shipments to retailers reflecting the continuing reluctance by consumers to
purchase interactive software product until the new generation hardware
platforms are better established. A significant portion of the interactive
entertainment product revenue is denominated in foreign currencies and as
such is subject to exchange fluctuations.
Home video revenue increased $1,924,000 and $15,063,000 for the three and nine
month periods ended September 30, 1995, respectively, from the comparable
periods in 1994. The increase for the nine month period is primarily a result
of the acquisition of the operations of Republic in the second quarter of 1994.
International film distribution revenue decreased $3,485,000 and $2,014,000
for the three and nine months ended September 30, 1995, respectively, from the
comparable periods in 1994. This decrease was primarily due to the 1994
release of the film package entitled "Young & Reckless," which accounted for
almost all of the film distribution revenue in the 1994 periods, while the
Company did not have similar packages in distribution in the 1995 periods.
This decrease was partially offset by the release of "The Usual Suspects" in
the third quarter of 1995.
14
<PAGE> 15
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(000's omitted in all tables)
(Continued)
Licensing and merchandising revenue decreased $970,000 and $2,686,000 for the
three months and nine months ended September 30, 1995, respectively, from the
comparable periods in 1994. The decrease was primarily due to the decline in
licensing revenue related to "Beverly Hills, 90210."
ENTERTAINMENT PRODUCT COSTS
Entertainment product costs consist primarily of the amortization of
capitalized product costs and the accrual of third-party participations and
residuals. The decrease in such costs of $11,950,000 during the three months
ended September 30, 1995, compared to the same period in 1994, is due to
approximately $11,000,000 of additional amortization provided in 1994 with
respect to losses expected to be incurred on certain television programming,
primarily first-run syndication programming. Such additional amortization in
the 1995 period was not material. The increase in such costs of $121,730,000
during the nine months ended September 30, 1995, compared to the corresponding
period in 1994, resulted primarily from the increase in revenue described
above.
Additionally, the percentage relationship between such costs and the related
revenue remained stable at 78% in the nine month periods ended September 30,
1995 and 1994. This percentage relationship is a function of (i) the mix of
entertainment product generating revenue in each period and (ii) changes in the
projected profitability of individual entertainment product based on the
Company's estimates of such product's ultimate revenue and costs.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased $7,755,000 and
$37,050,000 during the three months and nine months ended September 30, 1995,
respectively, compared to the same periods of 1994, primarily due to the
selling, general and administrative costs related to the operations of VIE and
Republic, including the amortization of intangible assets. In addition, there
were increased administrative costs commensurate with the Company's growth.
INTEREST EXPENSE
Interest expense increased $755,000 and $6,700,000 during the three months and
nine months ended September 30, 1995, respectively, in comparison to the prior
year periods, as a result of higher total indebtedness, including that related
to the Merger and the operations of VIE. The Company's interest expense is
dependent upon the interest rates on its outstanding obligations, which are
largely tied to the interest rates under Viacom's separate credit facilities,
and the Company could experience fluctuations in interest expense resulting
solely from increases or decreases in such interest rates.
15
<PAGE> 16
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(000's omitted in all tables)
(Continued)
PROVISION FOR INCOME TAXES
The Company computes its interim provision for income taxes based upon an
estimated annual effective tax rate computed in accordance with SFAS No. 109.
The Company's provision for income taxes for the nine months ended September
30, 1995, decreased $5,714,000 as compared to the corresponding period of
1994, largely as a result of the decrease in income for the period partially
offset by an increase in the effective tax rate. The effective tax rate for
the nine months ended September 30, 1995, increased as compared to the
corresponding period for 1994 as a result of changes in the relationship
between revenue and expenses composing income before income taxes and minority
interest, which was largely offset by the effect of the favorable resolution of
certain tax controversies during the third quarter. The benefit for the three
months ended September 30, 1995 is primarily due to the reduction in the
effective tax rate for the nine month period, as compared to the effective tax
rate applied to the preceding six month period as a result of the resolution of
certain tax controversies.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations require the production of entertainment product and
the acquisition of distribution or other rights to entertainment product
produced by third parties. The Company's expenditures in this regard totaled
$335,945,000 and $226,058,000 in the nine months ended September 30, 1995 and
1994, respectively. The cost of producing network television programming is
largely funded through the receipt of the related network license fees. The
deficit financing of its network programming and the cost of other production
and acquisition activities is funded through the Company's operating cash flow
and borrowings under its credit arrangements.
The Company's principal credit agreement is with Viacom. (See Note 4.) In
October 1995, Viacom agreed to provide a further $40,000,000 increase in the
amount available under the Viacom Facility and it is anticipated that an
amendment reflecting such increase will be executed. The Viacom Facility,
after giving effect to the proposed increase, will provide for a three-year
term loan facility of $100,000,000, which funded the Company's acquisition of
Republic, and a revolving credit facility of $140,000,000 to fund the
Company's working capital and other requirements.
A wholly-owned subsidiary of VIEL has a multi-currency credit agreement with
a bank in the U.S. The bank has agreed to increase the amount of the facility
to $100,000,000 and to extend the term to March 31, 1997. Viacom has
guaranteed all of the borrowings under the Credit Agreement. (See Note 4.)
Another wholly-owned subsidiary of VIEL has a 10,000,000 pounds sterling credit
facility with a bank in the United Kingdom, which the Company has guaranteed.
The UK Facility has been extended until April 2005. (See Note 4.)
As a result of the merger of BEC into Viacom in September 1994, Viacom
currently owns approximately 76% of the Company's Common Stock. Pursuant to
the separate credit facilities under which Viacom is a borrower, certain
subsidiaries of Viacom, including the Company, are restricted from incurring
16
<PAGE> 17
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(000's omitted in all tables)
(Continued)
indebtedness (other than indebtedness owing to Viacom) without the prior
consent of Viacom's lenders. Such consent has been given with respect to the
Credit Agreement and the UK Facility.
On August 10, 1995, Viacom announced its intent to sell the Company, and that
it has retained an investment banking firm to identify qualified purchasers and
to assist in the evaluation of proposals. Viacom also announced its intention
to acquire the Company's interest in VIE. An independent committee of the
Company's board of directors has been formed to negotiate the terms of any
proposed VIE transaction. The following table summarizes the revenue and
earnings (loss) before interest, taxes, depreciation and amortization
("EBITDA") from the operations of VIE:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1995 1994 1995 1994
------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $40,201 $ 33,818 $108,459 $ 33,818
EBITDA (10,158) 3,782 (16,476) 3,782
</TABLE>
The Company believes that its financial condition remains strong and that it
has the financial resources necessary to meet its anticipated capital
requirements. The Company has sufficient resources available from the cash
provided by operating activities and that available under its credit facilities
to meet its ongoing plans for the production, acquisition and distribution of
entertainment product and to take advantage of internal and external
development and growth opportunities. A change in control of the Company,
which would result from a sale of the Company (see Note 1), constitutes an
event of default under the Viacom Facility and would accelerate any outstanding
borrowings under the Viacom Facility. The Company expects the resolution of
these matters would be negotiated in connection with any proposed sale of the
Company.
UNCERTAINTIES
The Company is subject to pending and contingent claims relating to the
Company's discontinued operations, including certain claims involving
environmental matters. Some of the parties involved in such actions seek
significant damages. While the outcome of these claims cannot be predicted
with certainty, the Company believes based upon (i) its knowledge of the facts
and circumstances and applicable law; (ii) allowances for estimated losses on
disposal of the discontinued operations, and (iii) an indemnity agreement, that
the ultimate resolution of such claims will not have a material adverse effect
on the Company's consolidated results of operations or financial condition.
17
<PAGE> 18
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
PART II.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10(i) Amendment No. 1 to Exchange Agreement, dated as of July 8, 1995 by
and among the Registrant, Blockbuster Entertainment Group on behalf of
Viacom Inc. and Blockbuster Interactive Entertainment, Inc.
10(ii) Amendment No. 2 to Exchange Agreement, dated as of November 7, 1995,
by and among the Registrant, Blockbuster Entertainment Group on behalf
of Viacom Inc. and Blockbuster Interactive Entertainment, Inc.
11 Computation of net income per common and common equivalent share.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
None
18
<PAGE> 19
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPELLING ENTERTAINMENT GROUP INC.
November 13, 1995 By: /s/ Thomas P. Carson
---------------------------------
Thomas P. Carson
Executive Vice President-
Office of the President,
Chief Financial
Officer and Treasurer
(Principal Financial Officer)
By: /s/ Kathleen Coughlan
---------------------------------
Kathleen Coughlan
Senior Vice President and
Corporate Controller
(Principal Accounting Officer)
19
<PAGE> 1
Exhibit 10(i)
AMENDMENT NO. 1 TO EXCHANGE AGREEMENT
AMENDMENT, dated as of July 8, 1995, by and among Spelling
Entertainment Group Inc., a Delaware corporation and successor-in-interest to
Spelling Entertainment Group Inc., a Florida corporation (the "Company"),
Blockbuster Entertainment Group on behalf of Viacom Inc., as
successor-in-interest to Blockbuster Entertainment Corporation, a Delaware
corporation ("BEG") and Blockbuster Interactive Entertainment, Inc., a Delaware
corporation ("BIE"), to that certain Exchange Agreement entered into by and
among the Company, BEG and BIE as of June 30, 1994 (the "Agreement").
WHEREAS, the Company, BEG and BIE have agreed to amend certain
provisions of the Agreement pertaining to BEG's Put Right and the Company's
Call Right;
NOW THEREFORE, in consideration of the premises and pursuant to Section
12.3 of the Agreement, the Company, BEG and BIE hereby agree as follows:
1. Section 10.5(c) of the Agreement is hereby amended to read in its
entirety as follows:
(c) The options provided for in this Section 10.5 are
collectively referred to herein as the "Put Right." The Put Right may
be exercised by BEG at any time within the 120 day period commencing
on July 8, 1995 and concluding on November 6, 1995.
2. Section 10.6(b) of the Agreement is hereby amended to read in its
entirety as follows:
(b) The options provided for in this Section 10.6 are referred
to herein as the "Call Right." The Call Right may be exercised by the
Company at any time within the 120 day period commencing on July 8,
1995 and concluding on November 6, 1995.
3. This Amendment shall be deemed effective as of July 8, 1995.
4. Except as expressly provided in this Amendment, the Agreement shall
not be deemed amended, modified or altered in any manner whatsoever.
5. Capitalized terms not otherwise defined herein shall have the
meaning given to them in the Agreement.
<PAGE> 2
IN WITNESS WHEREOF, the undersigned have caused this Amendment No. 1 to
Exchange Agreement to be duly executed on this 16th day of August, 1995.
SPELLING ENTERTAINMENT GROUP INC.
a Delaware corporation
By: /s/ Peter Bachmann
---------------------------------
Title: EVP
------------------------------
BLOCKBUSTER INTERACTIVE ENTERTAINMENT, INC.
By: /s/ Thomas W. Hawkins
---------------------------------
Title: Sr. VP
------------------------------
BLOCKBUSTER ENTERTAINMENT GROUP,
on behalf of Viacom Inc.
By: /s/ Thomas W. Hawkins
---------------------------------
Title: Ex. VP
------------------------------
2
<PAGE> 1
EXHIBIT 10(ii)
AMENDMENT NO. 2 TO EXCHANGE AGREEMENT
AMENDMENT, dated as of November 7, 1995, by and among Spelling
Entertainment Group Inc., a Delaware corporation and successor-in-interest to
Spelling Entertainment Group Inc., a Florida corporation (the "Company"),
Blockbuster Entertainment Group on behalf of Viacom Inc., as
successor-in-interest to Blockbuster Entertainment Corporation, a Delaware
corporation ("BEG") and Blockbuster Interactive Entertainment, Inc., a Delaware
corporation ("BIE"), to that certain Exchange Agreement entered into by and
among the Company, BEG and BIE as of June 30, 1994, and Amendment No. 1 to
Exchange Agreement, dated as of July 8, 1995 (the "Agreement").
WHEREAS, the Company, BEG and BIE have agreed to amend certain
provisions of the Agreement pertaining to BEG's Put Right and the Company's
Call Right;
NOW, THEREFORE, in consideration of the premises and pursuant to
Section 12.3 of the Agreement, the Company, BEG and BIE hereby agree as
follows:
1. Section 10.5(c) of the Agreement is hereby amended to
read in its entirety as follows:
(c) The options provided for in this Section 10.5 are
collectively referred to herein as the "Put Right." The Put
Right may be exercised by BEG at any time within the 120 day
period commencing on November 7, 1995 and concluding on
March 5, 1996.
2. Section 10.6(b) of the Agreement is hereby amended to read
in its entirety as follows:
(b) The options provided for in this Section 10.6 are
referred to herein as the "Call Right." The Call Right may be
exercised by the Company at any time within the 120 day period
commencing on November 7, 1995 and concluding on March 5, 1996.
3. This Amendment shall be deemed effective as of November 7,
1995.
4. Except as expressly provided in this Amendment, the
Agreement shall not be deemed amended, modified or altered in any
manner whatsoever.
5. Capitalized terms not otherwise defined herein shall have
the meaning given to them in the Agreement.
<PAGE> 2
IN WITNESS WHEREOF, the undersigned have caused this Amendment No. 2
to Exchange Agreement to be duly executed on this 7th day of November, 1995.
SPELLING ENTERTAINMENT GROUP INC.
By: /s/ Thomas P. Carson
---------------------------------------
Title: Executive Vice President
---------------------------------------
BLOCKBUSTER INTERACTIVE
ENTERTAINMENT, INC.
By: /s/ Thomas W. Hawkins
---------------------------------------
Title: Sr. Vice President
---------------------------------------
BLOCKBUSTER ENTERTAINMENT GROUP,
on behalf of Viacom Inc.
By: /s/ Thomas W. Hawkins
---------------------------------------
Title: Ex. Vice President
---------------------------------------
<PAGE> 1
EXHIBIT 11
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF NET INCOME (LOSS) PER COMMON
AND COMMON EQUIVALENT SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1995 1994 1995 1994
------- ------- -------- -------
<S> <C> <C>
Net income (loss): $ 613 ($531) $ 8,764 $15,030
======= ======= ======= =======
Shares:
Basic shares - weighted average of
common shares outstanding 88,454 80,283 88,302 69,893
Additional shares assuming
conversion of stock options and warrants 2,092 - 1,646 1,858
------- ------- ------- -------
Primary shares 90,546 80,283 89,948 71,751
Additional shares, when dilutive, assuming
full dilution of stock options and warrants 513 - 786 536
------- ------- ------- -------
Fully-diluted shares 91,059 80,283 90,734 72,287
======= ======= ======= =======
Primary and fully-diluted net income (loss)
per common and common equivalent share $0.01 ($0.01) $0.10 $0.21
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's unaudited condensed consolidated balance sheet as of September 30,
1995 and the unaudited condensed statement of operations for the nine months
then ended and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 13,793
<SECURITIES> 0
<RECEIVABLES> 217,323
<ALLOWANCES> (23,213)
<INVENTORY> 360,070
<CURRENT-ASSETS> 451,139
<PP&E> 37,159
<DEPRECIATION> (13,561)
<TOTAL-ASSETS> 1,004,974
<CURRENT-LIABILITIES> 228,177
<BONDS> 0
<COMMON> 89
0
0
<OTHER-SE> 536,560
<TOTAL-LIABILITY-AND-EQUITY> 1,004,974
<SALES> 453,053
<TOTAL-REVENUES> 453,053
<CGS> 355,547
<TOTAL-COSTS> 355,547
<OTHER-EXPENSES> 73,841
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 12,176
<INCOME-PRETAX> 14,253
<INCOME-TAX> 6,670
<INCOME-CONTINUING> 7,583
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,764
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
<FN>
<F1>Amounts are not presented as permitted under Rule 10-01(a) of Article 10 of
Regulation S-X.
</FN>
</TABLE>
