<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 1 to
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996 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)
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)
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 8, 1996, the registrant had outstanding 90,499,293 shares of
Common Stock, $.001 par value.
<PAGE> 2
SPELLING ENTERTAINMENT GROUP INC.
PART I. FINANCIAL INFORMATION
PAGE
ITEM 1. FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 3
Unaudited Condensed Consolidated Statements of
Operations - Three Months and Nine Months Ended
September 30, 1996 and 1995 4
Unaudited Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1996 and 1995 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
As more fully described in Note 1 to the Unaudited
Condensed Consolidated Financial Statements, 1996
financial information has been restated to reflect
the change in accounting principles from Statement
of Financial Accounting Standards ("SFAS") No. 53
to SFAS No. 86 with respect to capitalized software
development costs.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 14
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
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,
1996* 1995
------------- ------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 26,676 $ 20,678
Accounts receivable, net 229,849 236,812
Entertainment product, net 385,424 365,243
Software development costs, net 87,551 63,597
Property and equipment, net 29,846 25,757
Other assets 27,874 20,102
Intangible assets, net 379,671 387,481
---------- ----------
Total Assets $1,166,891 $1,119,670
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable, accrued expenses and other liabilities $ 75,006 $ 87,500
Accrued participation expense 100,719 111,818
Deferred revenue 17,118 19,362
Debt payable to Viacom 305,000 210,000
Bank debt 112,103 95,676
Income and other taxes 5,016 21,040
Net liabilities related to discontinued operations 14,955 15,754
---------- ----------
Total Liabilities 629,917 561,150
---------- ----------
Commitments and contingent liabilities
Shareholders' Equity:
Preferred stock, $.10 par value; authorized
20,000,000 shares; none outstanding - -
Common stock, $.001 par value; authorized
300,000,000 shares; issued and outstanding
90,479,293 and 89,683,378 shares, respectively 90 90
Capital in excess of par value 577,463 571,244
Accumulated deficit (39,931) (11,914)
Cumulative translation adjustment (648) (900)
---------- ----------
Total Shareholders' Equity 536,974 558,520
---------- ----------
Total Liabilities and Shareholders' Equity $1,166,891 $1,119,670
========== ==========
</TABLE>
* Certain amounts have been restated as described in Note 1 - "Interim
Financial Statements and Restated Financial Information."
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,
---------------------- ------------------------
1996* 1995 1996* 1995
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenue $166,466 $132,573 $460,890 $453,053
Costs and expenses:
Product costs 142,468 104,690 407,389 355,547
Selling, general and administrative 30,847 25,930 89,762 73,841
-------- -------- -------- --------
Operating income (loss) (6,849) 1,953 (36,261) 23,665
Interest income 451 1,149 1,470 2,731
Interest expense, net (5,261) (3,330) (13,219) (12,176)
Other income (expense), net 33 (81) (310) 33
-------- -------- -------- --------
Income (loss) before income taxes and
minority interest (11,626) (309) (48,230) 14,253
Provision (benefit) for income taxes (7,065) (378) (17,618) 6,670
-------- -------- -------- --------
Income (loss) before minority interest (4,561) 69 (30,702) 7,583
Minority interest - 544 409 1,181
-------- -------- -------- --------
Net income (loss) $ (4,561) $ 613 $(30,293) $ 8,764
======== ======== ======== ========
Average number of common and
common equivalent shares 90,422 88,454 90,311 88,302
======== ======== ======== ========
Net income (loss) per common and
common equivalent share $ (0.05) $ 0.01 $ (0.34) $ 0.10
======== ======== ======== ========
</TABLE>
* Certain amounts have been restated as described in Note 1 -- "Interim
Financial Statements and Restated Financial Information."
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,
--------------------------
1996* 1995
--------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ (30,293) $ 8,764
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation and amortization 14,218 12,373
Amortization of product and development costs 322,695 258,975
Additions to product and development costs (372,864) (289,089)
Changes in operating assets and liabilities:
Decrease in accounts receivable 6,185 30,489
Decrease in accounts payable, accrued expenses,
other liabilities and income taxes (26,355) (51,488)
Increase (decrease) in accrued participation expenses (8,853) 28,506
Increase (decrease) in deferred revenue (2,810) 5,885
Increase in prepaid and other assets (3,195) (8,413)
Other, net 2,089 (3,050)
--------- ---------
(99,183) (7,048)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (9,942) (11,979)
Changes in net liabilities related to
discontinued operations (793) (8,416)
--------- ---------
(10,735) (20,395)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facilities 111,427 50,449
Repayments of credit facilities - (34,873)
Proceeds from exercise of stock options and warrants 4,489 3,260
--------- ---------
115,916 18,836
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,998 (8,607)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 20,678 22,400
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 26,676 $ 13,793
========= =========
</TABLE>
* Certain amounts have been restated as described in Note 1 -- "Interim
Financial Statements and Restated Financial Information."
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 AND RESTATED FINANCIAL INFORMATION
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 ("SEC"). 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 Annual Report on Form 10-K for the year
ended December 31, 1995.
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.
Viacom Inc. ("Viacom") currently owns approximately 75% of the Company's Common
Stock.
On July 30, 1994, the Company acquired approximately 91% of the ordinary shares
("Ordinary Shares") of Virgin Interactive Entertainment Limited ("VIEL") and
also entered into put- and call-option agreements with respect to the Ordinary
Shares of VIEL not owned by the Company and currently owned by Viacom. These
agreements, as amended, were scheduled to expire on November 5, 1996. Prior to
their expiration, the Company and Viacom executed an extension of these
agreements, which extension is effective as of November 6, 1996 and will expire
on January 31, 1997.
The first quarter of 1995 reflects $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 includes a net adjustment of approximately
$5,500,000 attributable to prior years.
RESTATED FINANCIAL INFORMATION. Prior to May 1996, the Company accounted for
all of its entertainment product, including the software development costs of
VIEL, which develops, produces and distributes interactive games, under the
requirements of SFAS No. 53, "Financial Reporting by Producers and Distributors
of Motion Picture Films," capitalizing all direct development and production
costs, as well as capitalized overhead and interest. In May 1996, the SEC staff
publicly announced that it had become aware of "diversity in the application of
generally accepted accounting principles to exploitation, film, and other
software development costs" associated with entertainment and educational
software products. The SEC staff stated its position that companies developing
computer software, without regard to the nature of the business enterprise, are
required to capitalize development costs at that point in time when
technological feasibility is achieved, in accordance with the standards of SFAS
No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed." The Financial Accounting Standards Board Emerging Issues
Task Force ("EITF"), which had been considering this issue, cited the SEC
staff's position in its decision to discontinue its efforts to reach a consensus
on the matter in Issue No. 96-6," Accounting for the Film and Software Costs
Associated with Developing Entertainment and Educational Software Products." In
view of the foregoing events, the Company has applied the guidance of SFAS No.
86 with respect to the
6
<PAGE> 7
capitalization of software development costs and has recorded a cumulative
pretax adjustment of approximately $7,500,000 in the second quarter of 1996 to
reflect this change. The amounts included for prior periods are not material to
the respective periods. The pretax adjustment recorded in the quarter ended
September 30, 1996 was approximately $600,000. (See Note 3.)
Additionally, the Company has recorded pretax adjustments of approximately
$1,500,000 and $250,000 in the second and third quarters of 1996, respectively,
to accrue long-term incentive compensation expense with respect to employment
contracts which were executed in 1996.
The impact of these adjustments on the Company's previously reported financial
results is summarized below (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1996 September 30, 1996
------------------ ------------------
As Reported As Restated As Reported As Restated
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $166,466 $166,466 $460,890 $460,890
Product costs 141,880 142,468 399,332 407,389
Selling, general and
administrative 30,597 30,847 88,012 89,762
-------- -------- -------- --------
Operating loss $ (6,011) $ (6,849) $(26,454) $(36,261)
Net loss $ (2,005) $ (4,561) $(24,289) $(30,293)
======== ======== ======== ========
Loss per share $(0.02) $(0.05) $(0.27) $(0.34)
======== ======== ======== ========
Accumulated deficit at end
of period $ 33,927 $39,931 $ 33,927 $ 39,931
======== ======== ======== ========
</TABLE>
7
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SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
2. ENTERTAINMENT PRODUCT, NET
Entertainment product, net, includes production or acquisition costs (including
advance payments to producers), capitalized overhead and interest, home video
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. Domestic syndication and basic cable revenue estimates are not
included in estimated future gross revenue of television programming until such
sales are probable.
Entertainment product, net, is stated at the lower of cost less amortization or
estimated net realizable value. 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,
1996 1995
------------ ------------
<S> <C> <C>
Entertainment product:
Theatrical
Released $105,714 $106,530
Completed, not released 2,402 -
In process and other 88,240 66,573
-------- --------
196,356 173,103
Television
Released 183,603 158,814
Completed, not released 110 -
In process and other 5,355 33,326
-------- --------
189,068 192,140
$385,424 $365,243
======== ========
</TABLE>
8
<PAGE> 9
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
3. SOFTWARE DEVELOPMENT COSTS, NET
In May 1996, the EITF published Issue No. 96-6, citing the SEC staff's position
which requires the Company to apply the principles of SFAS No. 86 with respect
to capitalization of software development costs. This resulted in a cumulative
pretax adjustment of approximately $7,500,000 and a pretax adjustment of
approximately $600,000 recorded in the second and third quarters, respectively,
as restated. The amounts included for prior periods are not material to the
respective periods. (See Note 1.)
Pursuant to SFAS No. 86, the Company capitalizes certain software development
and production costs once technological feasibility has been achieved.
Capitalized software development and production costs are reported at the lower
of cost less amortization or estimated net realizable value. Software
development costs incurred prior to achieving technological feasibility are
charged to expense as incurred. Amortization of capitalized software development
costs and development costs expensed prior to achieving technological
feasibility are included in product costs in the accompanying statements of
operations.
4. DEBT
Debt consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Viacom Credit Agreement, average
interest at 6.7% at September 30, 1996 $305,000 $ -
Viacom Facility, average interest at
6.9% at December 31, 1995 - 210,000
Credit Agreement, average interest at
6.1% at September 30, 1996 97,510 95,646
UK Facility, interest at 7.1%
at September 30, 1996 14,593 30
-------- --------
$417,103 $305,676
======== ========
</TABLE>
In January 1994, the Company entered into a three-year credit agreement with a
predecessor of Viacom (the "Viacom Facility"). This agreement was amended and
restated in January 1995 and again in November 1995 to provide, among other
matters, increases in the amount available under the facility. The Viacom
Facility, as amended, provided for (i) a term loan of $100,000,000 which funded
the Company's merger with Republic Entertainment, Inc. ("Republic") in April
1994 and (ii) a revolving credit facility of $140,000,000 to fund the Company's
working capital and other requirements. All outstanding borrowings under the
Viacom Facility were due to mature on March 31, 1997. On September 30, 1996,
the Company and Viacom executed a credit agreement (the "Viacom Credit
Agreement"), which replaced the Viacom Facility. The Viacom Credit Agreement
9
<PAGE> 10
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
provides for (i) a term loan of $200,000,000 and (ii) a revolving credit
facility of $155,000,000 to fund the Company's working capital and other
requirements. All outstanding borrowings under the Viacom Credit Agreement
mature on December 31, 1998.
Under the Viacom Credit Agreement, the Company pays an annual fee (currently
0.375%) based on the unused portion of the facility, as well as certain facility
and administration fees. Effective October 1, 1996, interest on all outstanding
borrowings is payable, at the Company's option, at LIBOR plus a spread - based
on the Company's leverage ratio, as defined - (currently 2.5%) or at Citibank
N.A.'s base rate. Additional terms of the Viacom Credit Agreement require,
among other items, a minimum amount, as defined, of net worth. Borrowings under
the Viacom Credit Agreement are secured by all of the assets of the Company and
its domestic subsidiaries and the entire amount outstanding under the Viacom
Credit Agreement may be accelerated if Viacom's borrowings under its separate
credit facilities were to be accelerated.
A wholly owned subsidiary of VIEL has a multi-currency credit agreement with a
bank in the United States (the "Credit Agreement") which is guaranteed by
Viacom. During 1995, the borrowings allowable under the Credit Agreement were
increased to $100,000,000 and the term was extended to March 31, 1997. The
Company anticipates that such Credit Agreement will be extended to March 31,
1998; however, in the event that the Company cannot extend or refinance the
Credit Agreement, the Viacom Credit Agreement provides for an additional term
loan of up to $100,000,000. 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. As of September 30, 1996, the Company had approximately
$141,000 in letters of credit outstanding under the Credit Agreement to
guarantee its interactive game purchases.
Another wholly owned subsidiary of VIEL has a 10,000,000 pounds sterling credit
facility (the "UK Facility") with a bank in the United Kingdom which is
guaranteed by the Company. Advances under the UK Facility bear interest at the
bank's prime rate plus 1.0%. The UK Facility matures on November 30, 1996. The
Company is currently negotiating with the bank regarding a new credit facility
to replace the UK Facility. As of September 30, 1996, the Company had
approximately $314,000 in letters of credit outstanding under the UK Facility to
guarantee its interactive game purchases. The Company also provides a rent
guarantee for this subsidiary which expires in 2005.
Pursuant to the separate credit facilities under which Viacom is a borrower,
certain subsidiaries of Viacom, including the Company, are restricted from
incurring 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. At September 30, 1996, the carrying
value of all of the Company's debt approximated fair value.
10
<PAGE> 11
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
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, 1995 $90 $571,244 $ (11,914) $(900) $558,520
Exercise of options and warrants - 4,489 - - 4,489
Income tax benefit related to stock
options - 1,730 - - 1,730
Unrealized holding gain, net - - 2,276 - 2,276
Net loss for the period - - (30,293) - (30,293)
Cumulative translation adjustment - - - 252 252
--- -------- --------- ----- --------
Balance at September 30, 1996 $90 $577,463 $($39,931) $(648) $536,974
=== ======== ========= ===== ========
</TABLE>
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 (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Net income (loss) per common and common equivalent share amounts are based on
the weighted average number of common shares outstanding during the respective
periods. Primary and fully diluted net income (loss) per common and common
equivalent share are not presented as they result in a dilution of less than 3%
from basic net income (loss) per common and common equivalent share or are
anti-dilutive.
11
<PAGE> 12
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
8. LEGAL MATTERS
The Company is involved in certain legal proceedings which arise in the
ordinary course of conducting its entertainment 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, based upon (i) its knowledge of the facts and circumstances and its
understanding of the applicable law; (ii) allowances for estimated losses on
disposal of the discontinued operations, and (iii) an indemnity agreement, the
Company believes that the ultimate resolution of such suits and claims should
not have a material adverse effect on the Company's consolidated results of
operations or financial condition.
9. RELATED PARTY TRANSACTIONS
The Company was charged interest and fees by Viacom of $13,298,000 and
$9,706,000 during the nine months ended September 30, 1996 and 1995,
respectively, in connection with the Viacom Facility. Included in accounts
payable, accrued expenses and other liabilities is accrued interest payable to
Viacom of $1,765,000 and $813,000 as of September 30, 1996 and December 31,
1995, respectively. See Note 4 regarding the Viacom Facility, the Viacom
Credit Agreement and the Credit Agreement.
Viacom provided the Company with management services for which the Company was
charged $150,000 and $450,000 for the nine month periods ended September 30,
1996 and 1995, respectively, for the services of an executive. Upon the
resignation of such executive in the first quarter of 1996, the charge was
terminated. As of September 30, 1996, the Company had a net payable to Viacom
of approximately $1,571,000 with respect to these and other expenses.
During the nine months ended September 30, 1996 and 1995, the Company sold home
video and interactive product to several operating subsidiaries of
Viacom International Inc., a subsidiary of Viacom. Additionally, the Company
licensed certain entertainment product to (i) Showtime Networks Inc.
("Showtime"), a subsidiary of Viacom; (ii) MTV Networks, a division of a
subsidiary of Viacom; (iii) certain television stations owned by Viacom; and
(iv) USA Network and Sci-Fi Channel in which Viacom has equity interests. For
the nine months ended September 30, 1996 and 1995, these transactions were not
material.
Republic has entered into agreements with, and in certain cases has advanced
funds to Viacom and its Showtime unit to distribute certain of their products
in the home video market.
12
<PAGE> 13
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
VIEL has entered into an agreement with Viacom New Media ("VNM"), a subsidiary
of Viacom, to distribute certain of their product in the interactive market.
Additionally, VIEL has entered into an agreement to provide management services
to VNM commencing September 18, 1996. VIEL has also entered into agreements
with North Star Studios Inc., Revolution Software Limited, Xatrix Entertainment,
Inc. and Black Ops Entertainment Inc., software developers in which the Company
has equity interests. In certain instances, VIEL has advanced funds to these
entities for product development.
The Company has entered into agreements with Paramount Pictures Corporation, a
Viacom subsidiary, with respect to the distribution of two of the Company's
feature film releases, "Stephen King's Thinner" and the upcoming "Night
Falls on Manhattan," in the domestic theatrical, non-theatrical and pay
television markets.
In the ordinary course of business, the Company has done and expects to continue
to do business with Viacom and its affiliates.
13
<PAGE> 14
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
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 refer to the notes to such statements.
As more fully described in Note 1 to the Unaudited Condensed Consolidated
Financial Statements, 1996 financial information has been restated to reflect
the change in accounting principles from Statement of Accounting Standards
("SFAS") No. 53 to SFAS No. 86 with respect to capitalized software development
costs.
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 exhibition 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.
The success of the Company's television programming business depends, in large
part, upon the successful network exhibition of its television series over a
sufficient number of years to allow for off-network exhibition opportunities.
During the initial years of one-hour network television programming, 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 and/or
distribution 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 licensed to a network or
distributed in first-run syndication, the Company would then expect to be able
to reduce its loss or realize a profit with respect to the series.
The Company's business in general is affected by the public's acceptance of its
product, which is unpredictable and subject to change, and by conditions within
the entertainment industry, including, but not limited to, the quality and
availability of creative talent and the negotiation and renewal of union
contracts relating to writers, directors, actors, musicians and studio
technicians and craftsmen, as well as any changes in the law and governmental
regulation. In 1993, a Federal district court vacated certain provisions of a
consent decree which prohibited television networks from acquiring financial
interests and syndication rights in television programming produced by program
suppliers such as the Company. The Telecommunications Act of 1996 eliminates
the restrictions on the number of television stations that one entity may own
and increases the national audience reach limitation by one entity from 25% to
35%. Accordingly, the networks will be able to own the programming which they
broadcast, and increasingly become competitors of the Company in the production
and distribution of programming.
14
<PAGE> 15
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
REVENUE
The following table sets forth the components of revenue from the Company's
major media and markets for the three months and nine months ended September 30
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -------------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Worldwide television distribution $ 92,375 $ 65,596 $277,490 $271,716
Worldwide interactive 54,874 40,201 121,282 108,459
Worldwide home video 14,017 21,421 40,897 54,387
International film distribution 860 1,029 7,835 5,528
Worldwide licensing and merchandising 3,200 3,360 9,889 10,666
Other 1,140 966 3,497 2,297
-------- -------- -------- --------
$166,466 $132,573 $460,890 $453,053
======== ======== ======== ========
</TABLE>
Worldwide television revenue increased $26,779,000 and $5,774,000, or 41% and
2%, in the three months and nine months ended September 30, 1996, respectively,
from the comparable periods in 1995 primarily due to (i) an increase in the
number of hours of network programming delivered in both periods in 1996; (ii)
higher per episode network license fees for "Beverly Hills, 90210" and "Melrose
Place," and (iii) the recognition of domestic off-network revenue for "Melrose
Place" which became available in the third quarter of 1996. These increases
were partially offset by (i) the one time effect recorded in the first quarter
of 1995 of conforming the Company's accounting policies to those of Viacom; (ii)
the one time effect recorded in the first quarter of 1995 for a significant
contract extension; and (iii) less programming distributed in first-run
syndication.
Worldwide interactive revenue increased $14,673,000 and $12,823,000, or 37% and
12%, for the three month and nine month periods ended September 30, 1996,
respectively, from the comparable periods in 1995. The increase is due
primarily to a greater volume of new product releases, including "Resident
Evil," in the three months ended September 30, 1996. However, anticipated growth
in revenue in 1996 was not achieved due to delays in the release of a number of
VIEL's titles, as well as fewer than anticipated shipments to retailers
reflecting in part the continuing reluctance by consumers to purchase
interactive software product until the new generation hardware platforms achieve
a higher installed base. It is expected that revenue will continue to be
adversely impacted in the near term. The Company continues to actively work
with hardware manufacturers to develop and adapt its titles to different
platforms as they become commercially viable.
15
<PAGE> 16
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Worldwide home video revenue decreased $7,404,000, or 35%, and $13,490,000, or
25%, in the three months and nine months ended September 30, 1996, respectively,
from the comparable periods in 1995. The home video market is currently very
competitive due to recently released theatrical product, leaving less shelf
space available for the Company's made-for-video product. It is expected that
this trend will continue in the near term.
International film distribution revenue decreased $169,000, or 16%, for the
three month period ended September 30, 1996 from the same period in 1995.
International film distribution revenue increased $2,307,000, or 42%, for the
nine month period ended September 30, 1996 from the comparable period in 1995.
The increase is due primarily to the release of "Unforgettable" and "Moll
Flanders" in 1996. The only release of similar significance in 1995 was "Usual
Suspects."
Licensing and merchandising revenue decreased $160,000 and $777,000, or 5% and
7%, for the three and nine month periods ended September 30, 1996,
respectively, from the comparable periods in 1995. The decrease is
attributable to the decline in licensing programs for "Beverly Hills, 90210"
and "Melrose Place."
Certain of the operations of the Company generate significant revenue
denominated in foreign currencies, and, as a result, fluctuations in foreign
currency exchange rates may affect operating results. In particular, the
Company generates revenue denominated in pounds sterling, French francs,
Deutsche marks, Canadian dollars, Mexican pesos and Japanese yen, among others.
These currency exposures are partially offset by the fact that certain of the
Company's manufacturing costs and overhead are denominated in the same
currencies, and certain of the Company's bank debt is denominated in foreign
currencies.
PRODUCT COSTS
Product costs consist primarily of the amortization of capitalized production,
distribution and development costs and the accrual of third-party
participations and residuals. Such costs increased $37,778,000 and $51,842,000,
or 36% and 15%, for the three month and nine month periods ended September 30,
1996, respectively, as compared to the same periods in 1995. The increase is
due to the increase in revenue described above and the increase in the
percentage relationship between such costs and the related revenue to 88% in
1996 from 78% in 1995. 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. Additionally,
in May 1996, the EITF published Issue No. 96-6 requiring the Company to apply
the principles of SFAS No. 86 with respect to capitalization of software
development costs. This resulted in a cumulative pretax adjustment of
approximately $7,500,000 and a pretax adjustment of approximately $600,000
recorded in the second and third quarters, respectively, as restated. The
amounts included for prior periods are not material to the respective periods.
(See Note 1.)
16
<PAGE> 17
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Company recorded write-downs to net realizable value with respect to its
capitalized product and development costs of $10,499,000 and $41,755,000 in the
three month and nine month periods ended September 30, 1996, respectively,
compared to $2,433,000 and $24,748,000 in the corresponding periods in 1995.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased $4,917,000 and
$15,921,000, or 19% and 22%, during the three months and nine months ended
September 30, 1996, respectively, from the comparable 1995 periods. The
increase is primarily due to the growth in the Company's distribution
infrastructure. Additionally, the Company has recorded pretax adjustments of
approximately $1,500,000 and $250,000 in the second and third quarters of 1996,
respectively, to accrue compensation expense with respect to certain employment
contracts which were executed in the second quarter of 1996.
INTEREST EXPENSE, NET
Interest expense, net, increased $1,931,000 and $1,043,000, or 58% and 9%, for
the three months and nine months ended September 30, 1996, respectively, from
the comparable periods in 1995 due to higher average indebtedness in the 1996
period, offset by (i) a decrease in the average interest rate from 1995 to 1996
and (ii) an increase in interest capitalized in 1996 due to longer production
cycles associated with both the Company's increased theatrical production
activities and the increased programming complexity required by the growing
consumer sophistication in the market for interactive product.
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, 1996, decreased $24,288,000, to a net benefit of $17,618,000 in the current
period, as compared to a provision of $6,670,000 for the corresponding period
in 1995, largely as a result of the loss for the period partially offset by a
change in the effective tax rate. The change in the effective tax rate for the
nine months ended September 30, 1996, as compared to the corresponding period
of 1995, is largely a result of changes in the relationships between revenue
and expenses comprising income before income taxes and minority interest.
Additionally, the change in the effective tax rate for the nine months ended
September 30, 1996, as compared to the effective rate for the six months ended
June 30, 1996, is a result of changes in expected operating results for the
year.
17
<PAGE> 18
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
MINORITY INTEREST
Minority interest in the losses incurred by VIEL was $409,000 and $1,181,000 for
the nine months ended September 30, 1996 and 1995, respectively. The Company
has put- and call-option agreements with Blockbuster on behalf of Viacom with
respect to the remaining minority interest in VIEL. These agreements, as
amended, were scheduled to expire on November 5, 1996. Prior to their
expiration, the Company and Viacom executed an extension of these agreements,
which extension is effective as of November 6, 1996 and will expire on January
31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations require significant capital resources for 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 $372,864,000 and $289,089,000 in the nine
months ended September 30, 1996 and 1995, respectively. Additionally, such
expenditures by the Company are expected to remain consistent with current
expenditures in conjunction with its projected production levels.
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. Borrowings, net of
repayments, under the Company's credit arrangements increased from $15,576,000
to $111,427,000 in the nine month periods ended September 30, 1995 and 1996,
respectively, largely as a result of the increased expenditures for the
production and acquisition of entertainment product and distribution rights.
The Company's principal credit agreement is with Viacom. (See Note 4.) The
Viacom Credit Agreement provides for a term loan facility of $200,000,000 and a
revolving credit facility of $155,000,000 to fund the Company's working capital
and other requirements.
A wholly owned subsidiary of VIEL has a multi-currency credit agreement for
$100,000,000 with a bank in the United States. As of September 30, 1996, the
Company had approximately $141,000 in letters of credit outstanding under the
Credit Agreement to guarantee its interactive game purchases. Viacom has
guaranteed all of the borrowings under the Credit Agreement, which are due March
31, 1997. (See Note 4.)
18
<PAGE> 19
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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. As
of September 30, 1996, the Company had approximately $314,000 in letters of
credit outstanding under the UK Facility to guarantee its interactive game
purchases. The UK Facility matured on November 30, 1996. The Company is
currently negotiating with the bank regarding a new facility to replace the UK
Facility. The Company also provides a rent guarantee for this subsidiary which
expires in 2005. (See Note 4.)
Pursuant to the separate credit facilities under which Viacom is a borrower,
certain subsidiaries of Viacom, including the Company, are restricted from
incurring 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.
The Company is in the process of determining its capital requirements and
expects to fund such requirements with internally generated funds and from
various external sources, which may include the Company's existing credit
agreements and amendments thereto, and additional financings, including
co-financing arrangements.
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, based upon (i) its knowledge of the facts and circumstances and
its understanding of the applicable law; (ii) allowances for estimated losses
on disposal of the discontinued operations; and (iii) an indemnity agreement,
the Company believes that the ultimate resolution of such claims should not have
a material adverse effect on the Company's consolidated results of operations
or financial condition. (See Note 8.)
19
<PAGE> 20
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
PART II.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Credit Agreement dated as of September 30, 1996, by and among
the Registrant, certain subsidiaries of the Registrant and
Viacom Inc.
10.2 Pledge and Security Agreement dated as of September 30, 1996,
by and among the Registrant, certain subsidiaries of the
Registrant and Viacom Inc.
10.3 Copyright Mortgage and Assignment; Power of Attorney dated
as of September 30, 1996, by the Registrant and certain
subsidiaries of the Registrant in favor of Viacom Inc.
10.4 Guaranty dated as of September 30, 1996, by the Registrant and
certain subsidiaries of the Registrant in favor of Viacom Inc.
10.5 Amendment No. 5 to Exchange Agreement dated as of
November 5, 1996, by and among a subsidiary of the
Registrant, Blockbuster Entertainment Group on behalf of
Viacom Inc. and SEGI Holding Co. (successor-in-interest to
Blockbuster Interactive Entertainment, Inc.)
11 Computation of Net Income (Loss) Per Common and Common
Equivalent Share.*
27 Financial Data Schedule.*
* Amended exhibits attached hereto.
(b) Reports on Form 8-K:
None.
20
<PAGE> 21
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPELLING ENTERTAINMENT GROUP INC.
May 13, 1997 By: /s/ Peter H. Bachmann
--------------------------------
Peter H. Bachmann
Executive Vice President, Office
of the President
(Principal Executive Officer)
By: /s/ William P. Clark
--------------------------------
William P. Clark
Senior Vice President, Chief
Financial Officer and Treasurer
(Principal Financial Officer)
21
<PAGE> 1
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,
-------------------- ---------------------
1996 1995 1996 1995
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net income (loss) $(4,561) $ 613 $(30,293) $ 8,764
======= ======= ======== =======
Shares:
Basic shares - weighted average of
common shares outstanding 90,422 88,454 90,311 88,302
Additional shares, when dilutive, assuming
conversion of stock options and warrants - 2,092 - 1,646
------- ------- -------- -------
Primary Shares 90,422 90,546 90,311 89,948
Additional shares, when dilutive, assuming
full dilution of stock options and warrants - 513 - 786
------- ------- -------- -------
Fully diluted shares 90,422 91,059 90,311 90,734
======= ======= ======== =======
Primary and fully diluted net income (loss)
per common and common equivalent share $ (0.05) $ 0.01 $( $0.34) $ 0.10
======= ======= ======== =======
</TABLE>
Note 1: This calculation is submitted in accordance with the Securities
Exchange Act of 1934 although not required by footnote 2 to paragraph
14 of APB Opinion No. 15 because the calculation of primary and
fully diluted net income (loss) per common and common equivalent share
results in a dilution of less than 3% or is anti-dilutive.
<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,
1996 AND THE UNAUDITED CONDENSED CONSOLIDATED 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> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 26,676
<SECURITIES> 0
<RECEIVABLES> 256,411
<ALLOWANCES> (26,562)
<INVENTORY> 472,975
<CURRENT-ASSETS> 508,988
<PP&E> 49,195
<DEPRECIATION> (19,349)
<TOTAL-ASSETS> 1,166,891
<CURRENT-LIABILITIES> 288,953
<BONDS> 0
0
0
<COMMON> 90
<OTHER-SE> 536,884
<TOTAL-LIABILITY-AND-EQUITY> 1,166,891
<SALES> 460,890
<TOTAL-REVENUES> 460,890
<CGS> 407,389
<TOTAL-COSTS> 407,389
<OTHER-EXPENSES> 89,762
<LOSS-PROVISION> 23,734
<INTEREST-EXPENSE> 13,219
<INCOME-PRETAX> (48,320)
<INCOME-TAX> (17,618)
<INCOME-CONTINUING> (30,702)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (30,293)
<EPS-PRIMARY> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
