<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 JUNE 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 August 9, 1996, the registrant had outstanding 90,414,185 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 -
June 30, 1996 and December 31, 1995 3
Unaudited Condensed Consolidated Statements of
Operations - Three Months and Six Months Ended
June 30, 1996 and 1995 4
Unaudited Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 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>
June 30, December 31,
1996* 1995
----------- -------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 6,952 $ 20,678
Accounts receivable, net 203,228 236,812
Entertainment product, net 375,522 365,243
Software development costs, net 75,265 63,597
Property and equipment, net 28,768 25,757
Other assets 28,702 20,102
Intangible assets, net 382,282 387,481
----------- -----------
Total Assets $ 1,100,719 $ 1,119,670
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable, accrued expenses and other liabilities $ 54,033 $ 87,500
Accrued participation expense 100,682 111,818
Deferred revenue 8,757 19,362
Bank and other debt 368,701 305,676
Income and other taxes 13,498 21,040
Net liabilities related to discontinued operations 13,626 15,754
----------- -----------
Total Liabilities 559,297 561,150
----------- -----------
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
90,414,185 and 89,683,378 shares, respectively 90 90
Capital in excess of par value 577,225 571,244
Accumulated deficit (34,856) (11,914)
Cumulative translation adjustment (1,037) (900)
----------- -----------
Total Shareholders' Equity 541,422 558,520
----------- -----------
Total Liabilities and Shareholders' Equity $ 1,100,719 $ 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 Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
1996* 1995 1996* 1995
---------- --------- --------- --------
<S> <C> <C> <C> <C>
Revenue $ 129,506 $ 135,332 $ 294,424 $ 320,480
Costs and expenses:
Product costs 121,656 106,115 264,921 250,857
Selling, general and administrative 29,690 24,544 58,915 47,911
--------- --------- --------- ---------
Operating income (loss) (21,840) 4,673 (29,412) 21,712
Interest income 490 525 1,019 1,582
Interest expense (4,350) (4,147) (7,958) (8,846)
Other income (expense), net (260) 61 (343) 114
--------- --------- --------- ---------
Income (loss) before income taxes and
minority interest (25,960) 1,112 (36,694) 14,562
Provision (benefit) for income taxes (4,096) 842 (10,053) 7,048
--------- --------- --------- ---------
Income (loss) before minority interest (21,864) 270 (26,141) 7,514
Minority interest 122 (610) (409) (637)
--------- --------- --------- ---------
Net income (loss) $ (21,986) $ 880 $ (25,732) $ 8,151
========= ========= ========= =========
Average number of common and
common equivalent shares 90,409 88,327 90,255 88,254
========= ========= ========= =========
Net income (loss) per common and
common equivalent share $ (0.24) $ 0.01 $ (0.29) $ 0.09
========= ========= ========= =========
</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>
Six Months Ended
June 30,
-----------------------------
1996* 1995
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ (25,732) $ 8,151
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation and amortization 8,101 7,859
Amortization of product and development costs 204,483 210,076
Additions to product and development costs (235,102) (204,208)
Changes in operating assets and liabilities:
Decrease in accounts receivable 32,806 45,047
Decrease in accounts payable, accrued expenses,
other liabilities and income taxes (39,132) (44,850)
Increase (decrease) in accrued participation expenses (3,763) 7,807
Decrease in deferred revenue (11,171) (9,768)
Other, net (3,620) (9,425)
--------- ---------
(73,130) 10,689
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (5,911) (8,650)
Changes in net liabilities related to
discontinued operations (2,122) (4,948)
--------- ---------
(8,033) (13,598)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facilities 63,025 18,000
Repayments of credit facilities -- (24,859)
Proceeds from exercise of stock options and warrants 4,412 1,865
--------- ---------
67,437 (4,994)
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (13,726) (7,903)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 20,678 22,400
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,952 $ 14,497
========= =========
</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 May 21, 1996, Viacom announced that it has decided not to continue to
pursue the sale of its interest in the Company.
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
Virgin Interactive Entertainment Limited (" 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 capitalization of
software development costs and has recorded a cumulative pretax adjustment of
approximately $7,500,000 in the current quarter to reflect this change. The
amounts included for prior periods are not material to the respective periods.
(See Note 3.)
6
<PAGE> 7
Additionally, the Company has recorded a pretax adjustment of approximately
$1,500,000 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 Six Months Ended
June 30, 1996 June 30, 1996
------------------------- -------------------------
As Reported As Restated As Reported As Restated
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $129,506 $129,506 $294,424 $294,424
Product costs 114,187 121,656 257,452 264,921
Selling, general and
administrative 28,190 29,690 57,415 58,915
-------- -------- -------- --------
Operating loss $(12,871) $(21,840) $(20,443) $(29,412)
Net loss $(18,538) $(21,986) $(22,284) $(25,732)
======== ======== ======== ========
Loss per share $(0.21) $(0.24) $(0.25) $(0.29)
======== ======== ======== ========
Accumulated deficit at
end of period $ 31,408 $ 34,856 $ 31,408 $ 34,856
======== ======== ======== ========
</TABLE>
7
<PAGE> 8
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>
June 30, December 31,
1996 1995
--------- ------------
<S> <C> <C>
Entertainment product:
Theatrical
Released $115,786 $ 106,530
Completed, not released 6,002 --
In process and other 77,270 66,573
-------- ------------
199,058 173,103
Television
Released 163,654 158,814
Completed, not released 5,142 --
In process and other 7,668 33,326
-------- ------------
176,464 192,140
$375,522 $ 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 recorded in the current period as
restated. The amounts included for prior periods are not material in 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>
June 30, December 31,
1996 1995
-------- -----------
<S> <C> <C>
Viacom Facility, average interest at
6.5% at June 30, 1996 $240,000 $210,000
Viacom Promissory Note, average
interest at 6.5% at June 30, 1996 25,000 --
Credit Agreement, average interest at
6.4% at June 30, 1996 95,732 95,646
UK Facility, interest at 7.1%
at June 30, 1996 7,969 30
-------- --------
$368,701 $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, provides 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 mature on
9
<PAGE> 10
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
March 31, 1997. Viacom has agreed to provide a further increase of up to
$95,000,000 in the amount available under the Viacom Facility and to extend the
maturity date of the Viacom Facility to June 30, 1998, and it is anticipated
that an amendment reflecting such changes will be executed. Pursuant to this
agreement, the Company executed a $25,000,000 promissory note to Viacom in
April 1996 and a $40,000,000 promissory note in August 1996.
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. In connection with the proposed amendment to the Viacom Facility
described above, it is expected that certain of these rates may be increased
while certain of these fees may be decreased.
A wholly owned subsidiary of VIEL has a multi-currency credit agreement with a
bank in the U.S. (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. 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 June 30, 1996, the Company
had approximately $107,000 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 August 31, 1996. The
Company is currently negotiating with the bank regarding a new credit facility
to replace the UK Facility. As of June 30, 1996, the Company had approximately
$710,000 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 June 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 -- 4,412 -- -- 4,412
Income tax benefit related to stock
options -- 1,569 -- -- 1,569
Unrealized holding gain, net -- -- 2,790 -- 2,790
Net loss for the period -- -- (25,732) -- (25,732)
Cumulative translation adjustment -- -- -- (137) (137)
--------- --------- --------- --------- ---------
Balance at June 30, 1996 $ 90 $ 577,225 $ (34,856) $ (1,037) $ 541,422
========= ========= ========= ========= =========
</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 will not
have a material adverse effect on the Company's consolidated results of
operations or financial condition.
A subsidiary of the Company has pursued a cost recovery action against two
former owners of a petroleum storage terminal property in Tiverton, Rhode
Island, seeking contribution to the cost of an environmental cleanup being
performed by the subsidiary. In June 1996, one of the former owners agreed to a
settlement pursuant to which it will pay $2,500,000 to the subsidiary.
9. RELATED PARTY TRANSACTIONS
The Company was charged interest and fees by Viacom of $8,267,000 and
$6,757,000 during the six months ended June 30, 1996 and 1995, respectively, in
connection with the Viacom Facility. See Note 4 regarding the Viacom Facility
and the Credit Agreement.
Viacom provided the Company with management services for which the Company was
charged $150,000 and $300,000 for the six month periods ended June 30, 1996 and
1995, respectively. As of June 30, 1996, the Company had a net payable to Viacom
of approximately $1,508,000 with respect to these and other expenses.
During the six months ended June 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 six months ended
June 30, 1996 and 1995, these transactions are not material.
12
<PAGE> 13
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
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.
VIEL has entered into an agreement with Viacom New Media, a subsidiary of
Viacom, to distribute certain of their product in the interactive market.
The Company has entered into agreements with Paramount Pictures Corporation, a
Viacom subsidiary, with respect to the distribution of two of the Company's
upcoming feature film releases, "Night Falls on Manhattan" and "Stephen King's
Thinner," in the domestic 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.
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 six months ended June 30 (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Worldwide television distribution $ 78,840 $ 80,904 $185,115 $206,120
Worldwide interactive 30,288 31,994 66,407 68,258
Worldwide home video 12,855 14,115 26,880 32,966
International film distribution 2,701 2,986 6,975 4,499
Worldwide licensing and merchandising 3,151 4,125 6,689 7,306
Other 1,671 1,208 2,358 1,331
-------- -------- -------- --------
$129,506 $135,332 $294,424 $320,480
======== ======== ======== ========
</TABLE>
Worldwide television revenue decreased $2,064,000 and $21,005,000, or 3% and
10%, in the three months and six months ended June 30, 1996, respectively, from
the comparable periods in 1995 primarily due to (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 in the first quarter of 1995 for a
significant contract extension; and (iii) less programming distributed in
first-run syndication. These decreases were partially offset by (i) an increase
in the number of hours of network programming delivered in both periods in 1996
and (ii) higher per episode network license fees for "Beverly Hills, 90210" and
"Melrose Place."
Worldwide interactive revenue decreased $1,706,000 and $1,851,000, or 5% and 3%,
for the three month and six month periods ended June 30, 1996, respectively,
from the comparable periods in 1995. 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.
Worldwide home video revenue decreased $1,260,000, or 9%, and $6,086,000, or
18%, in the three months and six months ended June 30, 1996, respectively, from
the comparable periods in 1995. The Company marketed a highly successful
sell-through promotion in the six-month 1995 period with no comparable release
in the six-month 1996 period. Additionally, 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.
15
<PAGE> 16
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
International film distribution revenue decreased $285,000, or 10%, for the
three month period ended June 30, 1996 from the same period in 1995.
International film distribution revenue increased $2,476,000, or 55%, for the
six month period ended June 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 $974,000 and $617,000, or 24% and
8%, for the three and six month periods ended June 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 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 and the accrual of third-party participations and
residuals. Despite lower revenue, such costs increased $15,541,000 and
$14,064,000, or 15% and 6%, for the three month and six month periods ended June
30, 1996, respectively, as compared to the same periods in 1995, so that the
percentage relationship between such costs and the related revenue increased to
90% 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 recorded in the current period 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 $14,271,000 and $31,256,000 in the
three month and six month periods ended June 30, 1996, respectively, compared to
$9,339,000 and $22,315,000 in the corresponding periods in 1995.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased $5,146,000 and
$11,004,000, or 21% and 23%, during the three months and six months ended June
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 recorded a pretax adjustment of approximately
$1,500,000 in the quarter ended June 30, 1996 with respect to certain
employment contracts. (See Note 1.)
INTEREST EXPENSE, NET
Interest expense, net, increased $203,000, or 5%, for the three months ended
June 30, 1996 from the comparable period 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. In the six months ended June 30, 1996, the effect on
interest expense of higher average borrowings was more than offset by the
decrease in average interest rates and greater interest capitalization and
resulted in a net decrease of $888,000, or 10%, from the similar period in 1995.
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 six months ended June 30, 1996,
decreased $17,601,000, to a net benefit of $10,553,000 in the current period, as
compared to a provision of $7,048,000 for the corresponding period in 1995,
largely as a result of the decrease in income for the period partially offset by
a reduction in the effective tax rate. The effective tax rate for the six months
ended June 30, 1996, decreased as compared to the corresponding period of 1995,
largely as a result of changes in the relationships between revenue and expenses
comprising income before income taxes and minority interest, the effect of which
was amplified by the decrease in income.
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 were $409,000 and $637,000 for
the six months ended June 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.
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 $235,102,000 and $204,208,000 in the six
months ended June 30, 1996 and 1995, respectively. Additionally, such
expenditures by the Company are expected to increase in conjunction with its
increase in 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.
The Company's principal credit agreement is with Viacom. (See Note 4.) The
Viacom Facility provides 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. Viacom has agreed to provide a further increase of up to
$95,000,000 in the amount available under the Viacom Facility and it is
anticipated that an amendment reflecting such increase will be executed.
Pursuant to this agreement, the Company executed a $25,000,000 promissory note
to Viacom in April 1996 and a $40,000,000 promissory note in August 1996.
A wholly owned subsidiary of VIEL has a multi-currency credit agreement for
$100,000,000 with a bank in the U.S. As of June 30, 1996, the Company had
approximately $107,000 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.)
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 June 30, 1996, the Company had approximately $710,000 in letters of
credit outstanding under the UK Facility to guarantee its interactive
game purchases. The UK Facility matures on August 31, 1996. The Company is
currently negotiating with the bank regarding a new credit facility to replace
the UK Facility. The Company also provides a rent guarantee for this subsidiary
which expires in 2005. (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)
Viacom owns approximately 75% 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
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 May 21, 1996, Viacom announced that it has
decided not to continue to pursue the sale of its 75% interest in the Company.
The Company believes 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 foreseen internal
and external development and growth opportunities.
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 will 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 Demand Promissory Note dated as of August 1, 1996, between the
Registrant and Viacom 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:
(1) Form 8-K dated May 21, 1996 regarding Viacom Inc.'s announcement
that it decided not to continue to pursue the proposed sale of its
75% interest in the Company.
20
<PAGE> 21
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.
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 Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
1996 1995 1996 1995
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Net income (loss) $(21,986) $ 880 $(25,732) $ 8,151
======== ======== ======== ========
Shares:
Basic shares - weighted average of
common shares outstanding 90,409 88,327 90,255 88,254
Additional shares, when dilutive, assuming
conversion of stock options and warrants -- 1,687 -- 1,558
-------- -------- -------- --------
Primary shares 90,409 90,014 90,255 89,812
Additional shares, when dilutive, assuming
full dilution of stock options and warrants -- -- -- --
-------- -------- -------- --------
Fully diluted shares 90,409 90,014 90,255 89,812
======== ======== ======== ========
Primary and fully diluted net income (loss)
per common and common equivalent share $ (0.24) $ 0.01 $ (0.29) $ 0.09
======== ======== ======== ========
</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 JUNE 30, 1996 AND
THE UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS
THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 6,952
<SECURITIES> 0
<RECEIVABLES> 233,070
<ALLOWANCES> (29,842)
<INVENTORY> 450,787
<CURRENT-ASSETS> 423,386
<PP&E> 46,327
<DEPRECIATION> (17,559)
<TOTAL-ASSETS> 1,100,719
<CURRENT-LIABILITIES> 257,564
<BONDS> 0
0
0
<COMMON> 90
<OTHER-SE> 541,332
<TOTAL-LIABILITY-AND-EQUITY> 1,100,719
<SALES> 294,424
<TOTAL-REVENUES> 294,424
<CGS> 264,921
<TOTAL-COSTS> 264,921
<OTHER-EXPENSES> 58,915
<LOSS-PROVISION> 17,870
<INTEREST-EXPENSE> 7,958
<INCOME-PRETAX> (36,694)
<INCOME-TAX> (10,553)
<INCOME-CONTINUING> (26,141)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,732)
<EPS-PRIMARY> (0.29)
<EPS-DILUTED> (0.29)
</TABLE>
