<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997 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 of 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 May 12, 1997, the registrant had outstanding 90,730,254 shares
of Common Stock, $.001 par value.
<PAGE> 2
SPELLING ENTERTAINMENT GROUP INC.
PART 1. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets -
March 31, 1997 and December 31, 1996 (Unaudited) 3
Condensed Consolidated Statements of
Operations - Three Months Ended
March 31, 1997 and 1996 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1997 and 1996 (Unaudited) 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
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 21
</TABLE>
2
<PAGE> 3
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ---------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,441 $ 3,325
Accounts receivable, net 121,676 104,645
Entertainment product, net 230,993 233,002
Other current assets 4,144 4,204
--------- ---------
Total current assets 358,254 345,176
Accounts receivable, net 108,728 91,880
Entertainment product, net 175,005 182,786
Property and equipment, net 13,151 13,389
Net assets of VIE -- 14,289
Intangible assets, net 191,435 192,806
Other noncurrent assets 20 20
--------- ---------
Total assets $ 846,593 $ 840,346
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable, accrued expenses and other liabilities $ 29,408 $ 36,103
Accrued participation expense 67,555 54,534
Deferred revenue 20,483 21,388
Income and other taxes 1,100 791
--------- ---------
Total current liabilities 118,546 112,816
Accrued participation expense 43,115 45,797
Long-term debt payable to Viacom 314,000 315,000
Deferred income and other taxes 40,026 36,156
Net liabilities related to discontinued operations of VIE 2,346 --
Net liabilities related to discontinued operations of Charter 12,404 10,834
--------- ---------
530,437 520,603
--------- ---------
Commitments and contingent liabilities
SHAREHOLDERS' EQUITY
Preferred Stock -- --
Common Stock, $.001 par value,
- 300,000,000 shares authorized
- 90,730,254 and 90,625,321 shares issued and outstanding 91 91
Capital in excess of par value 576,795 576,260
Accumulated deficit (259,518) (258,671)
Cumulative translation adjustment (1,212) 2,063
--------- ---------
Total shareholders' equity 316,156 319,743
--------- ---------
Total liabilities and shareholders' equity $ 846,593 $ 840,346
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
--------- ---------
<S> <C> <C>
Revenue $ 166,503 $ 128,779
Costs and expenses:
Entertainment product costs 141,152 111,854
Selling, general and administrative 14,987 15,503
--------- ---------
Operating income 10,364 1,422
Interest income 240 399
Interest expense, net (4,889) (2,533)
Other, net (1) (3)
--------- ---------
Income (loss) from continuing operations
before income taxes 5,714 (715)
Provision (benefit) for income taxes 4,986 (357)
--------- ---------
Income (loss) from continuing operations 728 (358)
Loss from discontinued operations of VIE, net - (3,388)
--------- ---------
Net income (loss) $ 728 $ (3,746)
========= =========
Average number of common and common equivalent shares 90,720 90,101
========= =========
Income (loss) per common and common equivalent share:
Continuing operations $ 0.01 $ -
Discontinued operations - (0.04)
--------- ---------
Net income (loss) per common and common equivalent share $ 0.01 $ (0.04)
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 728 $ (3,746)
Adjustments to reconcile net income (loss) to cash flows
from continuing operations:
Net loss from discontinued operations -- 3,388
Depreciation and amortization 2,178 2,048
Amortization of entertainment product costs 118,982 93,408
Additions to entertainment product costs (108,292) (99,616)
Increase in accounts receivable (34,777) (14,058)
Increase (decrease) in accounts payable, accrued expense,
other liabilities and income taxes (2,069) 742
Increase in accrued
participation expense 10,338 11,183
Decrease in deferred revenue (906) (6,490)
Other, net (727) (1,847)
--------- ---------
Net cash used by continuing operations (14,545) (14,988)
Net cash provided (used) by discontinued operations 11,360 (11,053)
--------- ---------
(3,185) (26,041)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (597) (1,393)
Repayments by (advances to) discontinued operations of VIE 12,684 (5,429)
Changes in net liabilities related to
discontinued operations of Charter 1,570 (1,203)
--------- ---------
Net cash provided (used) by continuing operations 13,657 (8,025)
Net cash used by discontinued operations (1,068) (1,543)
--------- ---------
12,589 (9,568)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facilities 23,000 22,000
Repayments of credit facilities (24,000) --
Issuances of Common Stock 4 777
--------- ---------
Net cash provided (used) by continuing operations (996) 22,777
Net cash provided (used) by discontinued operations (19,009) 9,987
--------- ---------
(20,005) 32,764
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (10,601) (2,845)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 16,175 20,678
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,574 $ 17,833
========= =========
CASH AND CASH EQUIVALENTS AT END OF PERIOD:
Continuing operations $ 1,441 $ 6,408
Discontinued operations 4,133 11,425
--------- ---------
$ 5,574 $ 17,833
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
1. INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements of
Spelling Entertainment Group Inc. and subsidiaries (the "Company") have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. The Company believes that the disclosures contained herein are
adequate to make the information presented not misleading; however, these
unaudited condensed consolidated financial statements should be read in
conjunction with the more detailed financial statements and notes thereto
included in the Company's most recent Annual Report on Form 10-K.
The financial statements reflect, in the opinion of management, all normal
recurring adjustments necessary to present fairly the Company's financial
position and results of operations. In order to maintain consistency and
comparability between periods presented, certain amounts have been reclassified
from the previously reported financial statements in order to conform with the
financial statement presentation in the current period. The Condensed
Consolidated Statements of Operations and of Cash Flows for the first quarter
of 1996 have been restated to conform with the current year discontinued
operations presentation.
Viacom Inc. ("Viacom") currently owns approximately 75% of the Company's Common
Stock. See Note 10 regarding Viacom's intention to acquire additional shares of
the Company's outstanding 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. Viacom
and the Company have executed amendments to extend the put-and call-option
agreements, which were originally scheduled to expire in July 1995, through
August 1, 1997. (See Note 9 regarding the planned disposition of VIEL (together
with its subsidiaries, "VIE")).
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, generally 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.
6
<PAGE> 7
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
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>
March 31, December 31,
1997 1996
-------- ------------
<S> <C> <C>
Entertainment product:
Theatrical
Released $156,783 $137,266
Completed, not released 35,732 4,833
In process and other 22,244 73,745
-------- --------
214,759 215,844
Television
Released 159,937 184,954
In process and other 31,302 14,990
-------- --------
191,239 199,944
$405,998 $415,788
======== ========
</TABLE>
3. DEBT
In January 1994, the Company entered into a three-year credit agreement (the
"Viacom Facility") with a predecessor of Viacom. This agreement was amended and
restated in January 1995 and again in November 1995, to provide, among other
things, increases in the amount available under such 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 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.
7
<PAGE> 8
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
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 as of 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. The average interest rate at March 31, 1997, on
borrowings under the Viacom Credit Agreement was 7.9%. Additional terms of the
Viacom Credit Agreement require, among other things, 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.
At March 31, 1997, the carrying value of all of the Company's debt approximated
fair value.
See Note 9 regarding debt related to discontinued operations.
8
<PAGE> 9
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
4. 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, 1996 $ 91 $ 576,260 $(258,671) $ 2,063 $ 319,743
Exercise of options and warrants -- 535 -- -- 535
Unrealized holding loss, net -- -- (1,575) -- (1,575)
Net income for the period -- -- 728 -- 728
Cumulative translation adjustment -- -- -- (3,275) (3,275)
--------- --------- --------- --------- ---------
Balance at March 31, 1997 $ 91 $ 576,795 $(259,518) $ (1,212) $ 316,156
========= ========= ========= ========= =========
</TABLE>
5. INCOME TAXES
Income taxes have been provided in each period based on the Company's
anticipated annual effective income tax rate.
6. 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 and common equivalent 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.
During February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which
is effective for financial statements for both interim and annual periods ending
after December 15, 1997. The Company does not expect this statement to have a
material impact on its net income (loss) per share.
9
<PAGE> 10
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
7. LEGAL MATTERS
The Company is involved in certain legal proceedings which arise in the normal
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.
8. RELATED PARTY TRANSACTIONS
The Company was charged interest and fees by Viacom of $6,522,000 and $3,830,000
during the three months ended March 31, 1997 and 1996, respectively, in
connection with the Viacom Credit Agreement and the Viacom Facility. Included in
accounts payable, accrued expenses and other liabilities is accrued interest
payable to Viacom of $1,112,000 and $1,226,000 as of March 31, 1997 and December
31, 1996, respectively. See Note 3 regarding the Company's credit facilities
with Viacom and Note 9 regarding Viacom's guarantee of the Company's credit
agreements with banks.
Viacom provided the Company with management services for which the Company was
charged $150,000 for the three month period ended March 31, 1996 for the
services of an executive. No further charges were incurred after the resignation
of such executive in the first quarter of 1996. As of March 31, 1997, the
Company had a net payable to Viacom of approximately $2,321,000 with respect to
these and other expenses.
During the three months ended March 31, 1997 and 1996, the Company sold home
video 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)
certain television stations owned by Viacom; and (iii) USA Network, Sci-Fi
Channel and United Paramount Network in which Viacom has equity interests. For
the three months ended March 31, 1997 and 1996, these transactions were not
material.
Republic has entered into agreements with, and in certain cases has advanced
funds to Viacom, a partnership in which a subsidiary of Viacom is the managing
partner and Showtime to distribute certain of their productions in the
home video market.
10
<PAGE> 11
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
The Company has entered into agreements with Paramount Pictures Corporation
("Paramount"), a Viacom subsidiary, with respect to the distribution of two of
the Company's feature film releases, "Night Falls on Manhattan" and "Stephen
King's Thinner," in the domestic theatrical, non-theatrical and pay television
markets. Additionally, the Company has partnered with Paramount in the
production or funding of two additional feature films, "In & Out" and
"Breakdown," in which the Company owns the international distribution rights.
In the ordinary course of business, the Company has and expects to continue to
do business with Viacom and its affiliates.
9. DISCONTINUED OPERATIONS
On February 20, 1997, the Company announced its intention to dispose of its
interactive game business, VIE, through a public offering expected to be
completed by December 31, 1997 and has, accordingly, reflected the operations of
VIE as discontinued.
VIE's net assets (liabilities) as of March 31, 1997 and December 31, 1996, and
results of operations for the three month period ended March 31, 1996, are as
follows (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---------- ------------
<S> <C> <C>
Current assets $ 92,946 $ 152,724
Current liabilities (170,426) (116,400)
--------- ---------
Net current assets (liabilities) (77,480) 36,324
--------- ---------
Property and equipment, net 16,395 16,793
Intangibles, net 103,670 107,657
Other non-current assets 8,611 21,257
Non-current liabilities (53,542) (167,742)
--------- ---------
Net non-current assets (liabilities) 75,134 (22,035)
========= =========
Net assets (liabilities) $ (2,346) $ 14,289
========= =========
</TABLE>
11
<PAGE> 12
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
1996
----------
<S> <C>
Revenue $ 36,139
Costs and expenses 46,159
--------
Loss before provision for income taxes (10,020)
Benefit for income taxes (6,101)
--------
Net loss before minority interest (3,919)
Minority interest in loss of discontinued operations (531)
--------
Net loss from discontinued operations $ (3,388)
========
</TABLE>
During the year ended December 31, 1996, the Company provided for an estimated
loss on disposal of VIE of approximately $139,501,000, which included a
provision for future operating losses of approximately $56,000,000. For the
three months ended March 31, 1997, revenue and the net operating loss of VIE
were $46,393,000 and $15,199,000, respectively, and the net operating loss was
provided for in the estimated loss on disposal as of December 31, 1996.
In May 1996, the SEC staff announced its position that companies developing
computer software are required to capitalize development costs in accordance
with the standards of SFAS No. 86, "Accounting for the Costs of Computer
Software to Be Sold, Leased or Otherwise Marketed." Accordingly, the Company has
applied the principles of SFAS No. 86 with respect to the 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 of 1996, respectively, as restated.
The amounts included for prior periods were not material to the respective
periods.
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.
12
<PAGE> 13
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
On December 23, 1993, a wholly owned subsidiary of VIE established a
multi-currency credit agreement (the "Credit Agreement") with a bank in the U.S.
The Credit Agreement initially provided for maximum borrowings of
$15,000,000, subject to a borrowing base test. Following the acquisition of VIE,
the amount of borrowings allowable under the Credit Agreement was increased to
$75,000,000 and the borrowing base test and other ratio tests were eliminated,
based on the guarantee of all borrowings under the Credit Agreement by Viacom.
During 1995, the borrowings allowable under the Credit Agreement were increased
to $100,000,000. During 1996, the term was extended to March 31, 1998. 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. Borrowings under the
Credit Agreement as of March 31, 1997 and December 31, 1996 were $93,347,000 and
$98,010,000, respectively. As of March 31, 1997, the Company had approximately
$466,000 in letters of credit outstanding under the Credit Agreement to
guarantee its interactive game purchases.
On September 8, 1993, another wholly owned subsidiary of VIE established a
5,000,000 pounds sterling credit facility (the "UK Facility") with a bank in the
United Kingdom. On April 12, 1994, the UK Facility was increased to 10,000,000
pounds sterling, based in part on the personal guarantee of two of the directors
of the subsidiary. Following the acquisition of VIE, the Company guaranteed the
UK Facility and the guarantees of the two directors were terminated. Advances
under the UK Facility bear interest at the bank's prime rate plus 1.0%.
Effective as of April 3, 1997, the UK Facility was renegotiated on terms more
favorable to the subsidiary. The renegotiated UK Facility, which is an annual
facility, will expire on December 31, 1997 and is guaranteed by Viacom and the
Company. Advances under the renegotiated UK Facility will bear interest at the
bank's prime rate plus 1% or alternatively at selected Eurocurrency rates.
Borrowings under the UK Facility as of March 31, 1997 and December 31, 1996 were
$1,708,000 and $3,898,000, respectively. As of March 31, 1997, the Company had
approximately $269,000 in letters of credit outstanding under the UK Facility to
guarantee its interactive game purchases. The Company and Viacom also provide
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.
10. SUBSEQUENT EVENTS
On April 18, 1997, Viacom announced its intention to acquire additional shares
of the Company's outstanding common stock and increase its ownership to
approximately 80%. Viacom indicated that the purchase of additional shares is
intended to permit it to consolidate the Company's results for tax purposes and
it has no plans to increase its ownership beyond approximately 80%.
13
<PAGE> 14
SPELLING ENTERTAINMENT GROUP INC.
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.
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 television series, network and
international license fees normally approximate the production costs of the
series, and accordingly the Company recognizes only minimal profit or loss
during this period. With respect to half-hour network programming and first-run
syndication television programming, the production costs can substantially
exceed the combination of the network or other domestic revenue and
international license fees, and the Company recognizes losses during this
period. However, if a sufficient number of episodes of a series are produced,
the Company is reasonably assured that it will also be able to sell the series
in the domestic off-network market, and the Company would then expect to be able
to reduce its loss or realize a profit with respect to the series.
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. On September 6, 1995, the Federal Communications Commission released
an order repealing its rules 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.
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 ended March 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Television $139,866 $106,275
Home video 18,124 14,025
Film distribution 4,297 4,274
Licensing and merchandising 3,426 3,538
Other 790 667
-------- --------
$166,503 $128,779
======== ========
</TABLE>
Television revenue increased $33,591,000 (32%) in the first quarter of 1997 from
the comparable period in 1996. The increase in the 1997 period arose primarily
from (i) higher per episode network license fees for the Company's continuing
series; (ii) increased hours of programming delivered to the networks, including
the new daytime serial "Sunset Beach"; and (iii) higher revenue from
exploitation of the Company's library.
Home video revenue increased $4,099,000 (29%) in the first quarter of 1997 from
the same period in 1996, due primarily to the successful release of "Bound," one
of the Company's feature films released theatrically in October 1996. The home
video market continues to be very competitive due to home video retailers
purchasing greater volumes of theatrical releases from the major studios and
lower volumes of made-for-video product, such as the Company's. It is expected
that this trend will continue in the near term. The Company plans to reduce its
acquisition of made-for-video titles to focus on the release of its theatrical
titles. Another of the Company's feature films, "Stephen King's Thinner" which
was released theatrically in 1996, is scheduled for release in the home video
market in the second quarter of 1997.
Film distribution revenue remained stable in the quarter ended March 31, 1997
compared to the same period in 1996. The Company released "Roseanna's Grave"
internationally and "Night Falls on Manhattan" in select territories
internationally in the first quarter of 1997. Releases of similar significance
in 1996 were "Unforgettable" and "Normal Life."
Licensing and merchandising revenue decreased $112,000 (3%) in the first quarter
of 1997 from the same period in 1996, due primarily to a continuing decline in
the licensing revenue for "Beverly Hills, 90210" and "Melrose Place," partially
offset by increased revenue from third-party clients.
Other revenue increased $123,000 (18%) in the three months ended March 31, 1997
from 1996 due primarily to an overall increase in the volume of product owned
and distributed by the Company.
15
<PAGE> 16
SPELLING ENTERTAINMENT GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Certain of the Company's operations generate 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 French francs, Canadian dollars and Mexican pesos, among others.
ENTERTAINMENT PRODUCT COSTS
Entertainment product costs consist primarily of amortization of capitalized
product costs and the accrual of third-party participations and residuals. Such
costs increased $29,298,000 (26%) in the quarter ended March 31, 1997 from the
comparable prior-year period. The increase resulted primarily from the increases
in revenue described above. Additionally, the percentage relationship between
such costs and the related revenue was 85% and 87% in the 1997 and 1996 periods,
respectively. This percentage relationship is a function of (i) the mix of
entertainment product generating the 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. The Company
recorded write-downs to net realizable value with respect to its entertainment
product of $10,918,000 and $13,882,000 in the quarters ended March 31, 1997 and
1996, respectively. The decrease in write-downs in the 1997 period was primarily
attributable to (i) fewer first-run syndication programs produced; (ii) a
decrease in the write-downs associated with the Company's made-for-video
releases; and (iii) lower net realizable value adjustments resulting from
changes in profitability estimates. These decreases were partially offset by a
write-down associated with the initial release of one of the Company's feature
films during the period.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative costs remained relatively consistent in 1997
with the comparable prior-year period. Increases in such costs in the quarter
ended March 31, 1997 from the comparable prior-year period were offset by
corresponding increases in overhead capitalized to the Company's television
programming productions.
INTEREST EXPENSE
Interest expense, net of amounts capitalized, increased $2,356,000 (93%) in 1997
due to (i) higher average indebtedness outstanding under the Company's credit
arrangements; (ii) an increase in the weighted average interest rate; and (iii)
a decrease in capitalized interest associated with the Company's theatrical
production activities.
16
<PAGE> 17
SPELLING ENTERTAINMENT GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
PROVISION FOR INCOME TAXES
During 1997, the Company's provision for income taxes increased $5,343,000, to a
provision of $4,986,000 in 1997 as compared to a benefit of $357,000 in 1996,
largely as a result of the increase in income from continuing operations for the
year and a change in the effective tax rate. The effective tax rate increased to
87% in 1997 from 50% in 1996, largely as a result of changes in the
relationships between revenue and expenses comprising income from continuing
operations before income taxes.
DISCONTINUED OPERATIONS
On February 20, 1997, the Company announced its intention to dispose of its
interactive game business, VIE, through a public offering expected to be
completed by December 31, 1997, and accordingly, VIE is presented as a
discontinued operation in the accompanying financial statements. See "Financial
Condition -- Discontinued Operations" below.
FINANCIAL CONDITION
Continuing Operations. The Company's continuing 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 $108,292,000
and $99,616,000 in the three months ended March 31, 1997 and 1996, respectively.
Additionally, future expenditures by the Company are expected to remain
consistent with 1996 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. The Company's principal
credit agreement is with Viacom (the "Viacom Credit Agreement"). 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. (See Note 3.)
17
<PAGE> 18
SPELLING ENTERTAINMENT GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
In order to meet the anticipated capital requirements to fund its production and
acquisition activities, the Company is currently exploring a number of
additional sources of external financing. The Company has engaged an investment
bank to act as its advisor with respect to a proposed program which would fund
the production of certain motion pictures on a limited recourse basis. No
assurance can be given that the program will be successfully implemented or that
the Company will obtain funding for film production through the contemplated
program. Except as set forth above, the Company has no other external sources of
financing.
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. See Note 3 regarding certain
acceleration provisions of the Viacom Facility.
Discontinued Operations. A wholly owned subsidiary of VIEL has a revolving
multi-currency credit agreement (the "Credit Agreement") for $100,000,000 with a
bank in the U.S.. As of March 31, 1997, the Company had approximately $466,000
in letters of credit outstanding under the Credit Agreement to guarantee its
interactive game purchases. (See Note 9.) Viacom has guaranteed all of the
borrowings under the Credit Agreement, which are due March 31, 1998.
Another wholly owned subsidiary of VIEL has a credit facility (the "UK
Facility") with a bank in the United Kingdom in the net amount of 10,000,000
pounds sterling, which the Company and Viacom have guaranteed. The UK Facility
expires on December 31, 1997. As of March 31, 1997, the Company had
approximately $269,000 in letters of credit outstanding under the UK Facility to
guarantee its interactive game purchases. (See Note 9.)
On February 20, 1997, the Company announced its intention to dispose of its
interactive game business, VIE, through a public offering expected to be
completed by December 31, 1997 and has, accordingly, reflected the operations of
VIE as discontinued.
18
<PAGE> 19
SPELLING ENTERTAINMENT GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
VIE's net assets (liabilities) as of March 31, 1997 and December 31, 1996, and
results of operations for the three month period ended March 31, 1996, are as
follows (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
<S> <C> <C>
Current assets $ 92,946 $ 152,724
Current liabilities (170,426) (116,400)
--------- ---------
Net current assets (liabilities) (77,480) 36,324
--------- ---------
Property and equipment, net 16,395 16,793
Intangibles, net 103,670 107,657
Other non-current assets 8,611 21,257
Non-current liabilities (53,542) (167,742)
--------- ---------
Net non-current assets (liabilities) 75,134 (22,035)
--------- ---------
Net assets (liabilities) $ (2,346) $ 14,289
========= =========
</TABLE>
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
1996
------------
<S> <C>
Revenue $ 36,139
Costs and expenses 46,159
--------
Loss before provision for income taxes (10,020)
Benefit for income taxes (6,101)
--------
Net loss before minority interest (3,919)
Minority interest in loss of discontinued
operations (531)
--------
Net loss from discontinued operations $ (3,388)
========
</TABLE>
During the year ended December 31, 1996, the Company provided for an estimated
loss on disposal of VIE of approximately $139,501,000, which included a
provision for future operating losses of approximately $56,000,000. For the
three months ended March 31, 1997, revenue and the net operating loss of VIE
were $46,393,000 and $15,199,000, respectively, and the net operating loss was
provided for in the estimated loss on disposal as of December 31, 1996.
19
<PAGE> 20
SPELLING ENTERTAINMENT GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
In May 1996, the SEC staff announced its position that companies developing
computer software are required to capitalize development costs in accordance
with the standards of SFAS No. 86, "Accounting for the Costs of Computer
Software to Be Sold, Leased or Otherwise Marketed." Accordingly, the Company has
applied the principles of SFAS No. 86 with respect to the 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 of 1996, respectively, as restated.
The amounts included for prior periods were not material to the respective
periods.
Other Financing Items. Viacom owns approximately 75% of the Company's Common
Stock. Pursuant to the separate credit facilities under which Viacom is
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.
UNCERTAINTIES
The Company is involved in certain legal proceedings which arise in the normal
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 claims will not have a
material adverse effect on the Company's consolidated results of operations or
financial condition.
20
<PAGE> 21
SPELLING ENTERTAINMENT GROUP INC.
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amendment No. 7 to Exchange Agreement dated as of May 3, 1997,
by and among a subsidiary of the Registrant, Blockbuster
Entertainment Group on behalf of Viacom International 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.
(b) Reports on Form 8-K:
None
21
<PAGE> 22
SPELLING ENTERTAINMENT GROUP INC.
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 14, 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)
22
<PAGE> 1
EXHIBIT 10.1
AMENDMENT NO. 7 TO EXCHANGE AGREEMENT
AMENDMENT, dated as of May 3, 1997, by and among VIE Holding
Company (the "Company"), a Delaware corporation (successor-in-interest to
Spelling Entertainment Group Inc. ("SEGI")), Blockbuster Entertainment Group
("BEG") a division of Viacom International Inc., a Delaware corporation
(successor-in-interest to Blockbuster Entertainment Corporation), and SEGI
Holding Co. ("SEGI Holding"), a Delaware corporation (successor-in-interest to
Blockbuster Interactive Entertainment, Inc.), to that certain Exchange
Agreement by and among the Company, BEG and SEGI Holding dated as of June 30,
1994, amended as of July 8, 1995, November 7, 1995, February 22, 1996, May 6,
1996, November 5, 1996 and February 1, 1997 and assigned by SEGI to the Company
as of December 8, 1995 (as so amended and assigned, the "Agreement").
WHEREAS, the Company, BEG and SEGI Holding have agreed to amend certain
provisions of the Agreement pertaining to BEG's Put Right and the Company's
Call Right;
NOW, THEREFORE, in consideration of the premises and pursuant to
Section 12.3 of the Agreement, the Company, BEG and SEGI Holding hereby agree
as follows:
1. Section 10.5(c) of the Agreement is hereby amended to
read in its entirety as follows:
(c) The options provided for in this Section 10.5
are collectively referred to herein as the "Put Right." The Put
Right may be exercised by BEG at any time within the 90 day
period commencing on May 3, 1997 and concluding on August 1,
1997.
2. Section 10.6(b) of the Agreement is hereby amended to
read in its entirety as follows:
(b) The options provided for in this Section 10.6
are referred to herein as the "Call Right." The Call Right may
be exercised by the Company at any time within the 90 day period
commencing on May 3, 1997 and concluding on August 1, 1997.
3. This Amendment shall be deemed effective as of May 3,
1997.
4. Except as expressly provided in this Amendment, the
Agreement shall not be deemed amended, modified or altered in any manner
whatsoever.
5. Capitalized terms not otherwise defined herein shall
have the meaning given to them in the Agreement.
<PAGE> 2
6. This Amendment may be executed in one or more
counterparts and by the different parties hereto in separate
counterparts, each of which when executed shall be deemed to me an
original but all of which taken together shall constitute one and the
same agreement.
IN WITNESS WHEREOF, the undersigned have caused this Amendment No. 7 to
Exchange Agreement to be duly executed on this 3rd day of May, 1997.
BLOCKBUSTER ENTERTAINMENT GROUP,
a division of Viacom International Inc.
By: /s/ MICHAEL D. FRICKLAS
------------------------------
Name: Michael D. Fricklas
----------------------------
Title: Senior Vice President
----------------------------
SEGI HOLDING CO.
By: /s/ MICHAEL D. FRICKLAS
------------------------------
Name: Michael D. Fricklas
----------------------------
Title: Senior Vice President
----------------------------
VIE HOLDING COMPANY
By: /s/ PETER H. BACHMANN
------------------------------
Name: Peter H. Bachmann
----------------------------
Title: President
----------------------------
2
<PAGE> 1
SPELLING ENTERTAINMENT GROUP INC.
EXHIBIT 11 - COMPUTATION OF NET INCOME (LOSS) PER COMMON
AND COMMON EQUIVALENT SHARE
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1997 1996
-------- --------
<S> <C> <C>
Net income (loss):
Continuing operations $ 728 $ (358)
Discontinued operations -- (3,388)
-------- --------
Net income (loss) $ 728 $ (3,746)
======== ========
Shares:
Basic shares - weighted average of common shares
outstanding 90,720 90,101
Additional shares assuming conversion of stock
options and warrants 35 1,684
-------- --------
Primary shares 90,755 91,785
Additional shares, when dilutive, assuming full
dilution of stock options and warrants -- --
-------- --------
Fully diluted shares 90,755 91,785
======== ========
Basic, primary and fully diluted net income (loss)
per common and common equivalent share:
Continuing operations $ 0.01 $ --
Discontinued operations -- (0.04)
-------- --------
Net income (loss) per common
and common equivalent share $ 0.01 $ (0.04)
======== ========
</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 MARCH 31, 1997
AND THE UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE
THREE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,441
<SECURITIES> 0
<RECEIVABLES> 142,361
<ALLOWANCES> 20,685
<INVENTORY> 230,993
<CURRENT-ASSETS> 358,254
<PP&E> 25,166
<DEPRECIATION> 12,015
<TOTAL-ASSETS> 846,593
<CURRENT-LIABILITIES> 118,546
<BONDS> 0
0
0
<COMMON> 91
<OTHER-SE> 316,065
<TOTAL-LIABILITY-AND-EQUITY> 846,593
<SALES> 166,503
<TOTAL-REVENUES> 166,503
<CGS> 141,152
<TOTAL-COSTS> 141,152
<OTHER-EXPENSES> 14,987
<LOSS-PROVISION> 2,778
<INTEREST-EXPENSE> 4,889
<INCOME-PRETAX> 5,714
<INCOME-TAX> 4,986
<INCOME-CONTINUING> 728
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 728
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
