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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): July 30, 1994
SPELLING ENTERTAINMENT GROUP INC.
(Exact name of registrant as specified in its charter)
FLORIDA
(State or other jurisdiction of incorporation)
1-6739 58-0862100
(Commission File Number) (IRS Employer Identification No.)
5700 WILSHIRE BOULEVARD, LOS ANGELES, CALIFORNIA 90036
(Address of principal executive offices) (Zip Code)
(213) 965-5700
(Registrant's telephone number, including area code)
N.A.
(Former name or former address, if changed since last report)
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Businesses Acquired:
VIRGIN INTERACTIVE ENTERTAINMENT PLC PAGE
----
Independent Auditors' Report 3
Consolidated Balance Sheets as of July 31, 1992 and 1993 4
Consolidated Statements of Operations for each of the three
years ended July 31, 1993 5
Consolidated Statements of Shareholders' Deficiency for each of
the three years ended July 31, 1993 6
Consolidated Statements of Cash Flows for each of the three
years ended July 31, 1993 7
Notes to Consolidated Financial Statements 8
Condensed Consolidated Balance Sheet as of April 30, 1994 (Unaudited) 26
Condensed Consolidated Statements of Operations for the nine
months ended April 30, 1993 and 1994 (Unaudited) 27
Condensed Consolidated Statements of Cash Flows for the
nine months ended April 30, 1993 and 1994 (Unaudited) 28
Notes to Condensed Consolidated Financial Statements (Unaudited) 29
(b) Pro Forma Financial Information:
SPELLING ENTERTAINMENT GROUP INC.
Unaudited Pro Forma Condensed Combined Financial Information 30
Unaudited Pro Forma Condensed Combined Balance Sheet
as of June 30,1994 31
Unaudited Pro Forma Condensed Combined Statement of Operations
for the year ended December 31, 1993 32
Unaudited Pro Forma Condensed Combined Statement of Operations
for the six months ended June 30, 1994. 33
Notes to Unaudited Pro Forma Condensed Combined
Financial Information 34
(c) Exhibits:
The Exhibits to this Report are listed in the Exhibit Index. 39
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INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Virgin Interactive Entertainment plc:
We have audited the accompanying consolidated balance sheets of Virgin
Interactive Entertainment plc and subsidiaries as of July 31, 1992 and 1993,
and the related consolidated statements of operations, shareholders'
deficiency, and cash flows for each of the years in the three-year period ended
July 31, 1993. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Virgin
Interactive Entertainment plc and subsidiaries as of July 31, 1992 and 1993,
and the results of their operations and their cash flows for each of the years
in the three-year period ended July 31, 1993, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Orange County, California
September 10, 1993, except
as to note 1, which is as of
January 14, 1994
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VIRGIN INTERACTIVE ENTERTAINMENT plc
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
July 31,
--------------------
1992 1993
------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 1,810 $ 1,632
Receivables, net 25,125 21,269
Inventories 1,560 1,673
Entertainment product costs, net 4,755 6,460
Deferred income taxes -- 675
Prepaid expenses and other current assets 1,514 3,144
------- --------
Total current assets 34,764 34,853
Property and equipment, net 1,356 2,227
Intangible assets, net 992 791
Due from affiliate -- 568
Other noncurrent assets 462 257
------- --------
$37,574 $ 38,696
======= ========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Notes payable $ 807 $ 477
Accounts payable 17,440 8,294
Accrued expenses 3,798 3,546
Income taxes payable 74 3,006
Deferred income taxes 205 --
Other current liabilities 466 586
------- --------
Total current liabilities 22,790 15,909
Due to Virgin Communications Limited 21,554 26,238
Accrued compensation 794 --
------- --------
Total liabilities 45,138 42,147
------- --------
Commitments and contingencies
Shareholders' deficiency:
Ordinary shares, pound sterling 0.008 par value;
40,000,000 shares authorized; 250 shares issued and
outstanding at July 31, 1992 and 1993 1 1
Additional paid-in capital -- 7,277
Cumulative translation adjustment (1,130) (266)
Accumulated deficit (6,435) (10,463)
------- --------
Total shareholders' deficiency (7,564) (3,451)
------- --------
$37,574 $ 38,696
======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
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VIRGIN INTERACTIVE ENTERTAINMENT plc
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
Year ended July 31,
-------------------------------
1991 1992 1993
------- ------- -------
Revenue:
Net sales $24,353 $48,928 $96,090
Royalties 696 1,358 2,997
------- ------- -------
Total revenue 25,049 50,286 99,087
Cost of sales 16,690 34,615 68,983
------- ------- -------
Gross profit 8,359 15,671 30,104
Operating expenses:
Entertainment product costs 2,016 4,965 8,984
Sales and marketing 5,043 6,764 11,320
General and administrative 3,010 2,331 3,600
Related party management fees 178 246 278
Compensation expense -- 794 6,390
------- ------- -------
Operating income (loss) (1,888) 571 (468)
Interest expense 1,231 2,010 1,991
Foreign exchange gain -- -- (498)
Other income (13) (101) (229)
------- ------- -------
Loss before income taxes (3,106) (1,338) (1,732)
Provision (benefit) for income taxes (609) 197 2,296
------- ------- -------
Net loss $(2,497) $(1,535) $(4,028)
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
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VIRGIN INTERACTIVE ENTERTAINMENT plc
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIENCY
(In thousands, except share data)
Ordinary Shares Additional Cumulative Total
--------------- Paid-In Translation Accumulated Shareholders'
Number Amount Capital Adjustment Deficit Deficiency
------ ------ ---------- ---------- ----------- -------------
Balance at July 31, 1990 250 $1 $ -- $ 71 $ (2,403) $(2,331)
Translation adjustment -- -- -- 69 -- 69
Net loss -- -- -- -- (2,497) (2,497)
--- -- ------ -------- -------- -------
Balance at July 31, 1991 250 1 -- 140 (4,900) (4,759)
Translation adjustment -- -- -- (1,270) -- (1,270)
Net loss -- -- -- -- (1,535) (1,535)
--- -- ------ -------- -------- -------
Balance at July 31, 1992 250 1 -- (1,130) (6,435) (7,564)
Issuance of ordinary shares to
Virgin Communications
Limited by VIE Holdings -- -- 93 -- -- 93
Compensatory share options -- -- 7,184 -- -- 7,184
Translation adjustment -- -- -- 864 -- 864
Net loss -- -- -- -- (4,028) (4,028)
--- -- ------ -------- -------- -------
Balance at July 31, 1993 250 $1 $7,277 $ (266) $(10,463) $(3,451)
=== == ====== ======== ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
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VIRGIN INTERACTIVE ENTERTAINMENT plc
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended July 31,
--------------------------------
1991 1992 1993
------- -------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,497) $ (1,535) $(4,028)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 159 327 830
Compensatory share options -- -- 7,184
Gain on foreign exchange transactions -- -- (498)
Provision for doubtful accounts and sales returns and
allowances 3,923 2,827 6,882
Changes in asset and liability accounts:
Increase in receivables (5,619) (24,176) (7,307)
(Increase) decrease in inventories 399 (2,146) (113)
Increase in entertainment product costs (851) (639) (1,705)
(Increase) decrease in deferred income taxes 327 560 (880)
(Increase) decrease in prepaid expenses and other
current assets 248 (307) (1,630)
(Increase) decrease in other noncurrent assets 222 (205) 205
Increase (decrease) in accounts payable 16 16,543 (9,146)
Increase (decrease) in accrued expenses (18) 2,050 (252)
Increase (decrease) in income taxes payable (270) (282) 2,932
Increase in other current liabilities 60 202 120
Increase (decrease) in accrued compensation -- 794 (794)
------- -------- -------
Net cash used in operating activities (3,901) (5,987) (8,200)
------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (272) (948) (1,580)
Acquisition of subsidiary -- (516) --
------- -------- -------
Net cash used in investing activities (272) (1,464) (1,580)
------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in due from affiliate -- -- (568)
Repayment of notes payable -- -- (807)
Borrowings under notes payable -- -- 477
Increase in due to Virgin Communications Limited 4,116 10,168 4,684
Sale of ordinary shares -- -- 93
------- -------- -------
Net cash provided by financing activities 4,116 10,168 3,879
Effect of exchange rate changes on cash and cash equivalents 70 (1,327) 5,723
------- -------- -------
Net increase (decrease) in cash and cash equivalents 13 1,390 (178)
Cash and cash equivalents at beginning of year 407 420 1,810
------- -------- -------
Cash and cash equivalents at end of year $ 420 $ 1,810 $ 1,632
======= ======== =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ -- $ 1,011 $ 1,226
Income taxes $ 26 $ -- $ 241
The accompanying notes are an integral part of these consolidated financial
statements.
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VIRGIN INTERACTIVE ENTERTAINMENT plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Virgin Interactive Entertainment plc (the "Company") was formed on November 25,
1993 as part of a plan to reorganize the ownership (the "Reorganization") of
Virgin Interactive Entertainment (Holdings) Limited ("VIE Holdings"). The
Company is a holding company and had no substantial business operations prior
to January 5, 1994. On December 21, 1993, the ordinary shares of VIE Holdings
owned by Virgin Communications Limited ("VCL") were transferred to another
company ("Newco") owned by certain of VCL's ultimate shareholders ("VCL's
Shareholders"). On January 5, 1994, pursuant to an agreement among the
Company, VCL's Shareholders and Newco, Newco was liquidated and the Company
acquired the ordinary shares of VIE Holdings in exchange for the issuance of
7,850,535 of the Company's ordinary shares to VCL's Shareholders. Also on
January 5, 1994, the Company acquired the remaining 1,518,282 ordinary shares
of VIE Holdings from Hasbro, Inc. ("Hasbro") in exchange for a like number of
the Company's shares. On January 14, 1994, the Company changed its name to
Virgin Interactive Entertainment plc and reregistered as a public limited
company in the United Kingdom. As a result of the Reorganization, VIE Holdings
became a wholly owned subsidiary of the Company. As a further result of the
Reorganization, the Company may be subject to significant tax liabilities under
U.K. tax laws (see note 15).
On July 28, 1993, VIE Holdings acquired all of the outstanding ordinary shares
of Virgin Interactive Entertainment (Europe) Limited ("VIEL," formerly Virgin
Games Limited) from VCL. VIE Holdings is a holding company and had no
substantial business operations prior to the acquisition.
The acquisitions have been accounted for in a manner similar to the
pooling-of-interests method due to VCL's Shareholders' control over the
Company, VCL, VIE Holdings and VIEL. Accordingly, all consolidated financial
data include the results of VIE Holdings, VIEL and their subsidiaries.
2. DESCRIPTION OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The Company and its wholly owned subsidiaries are in the business of
developing, publishing, marketing and distributing interactive entertainment
product for use on many consumer hardware systems. The Company creates
innovative product using multimedia technologies such as high resolution
graphics and animation, digitized video, sound and music. The Company sells
its product to retailers, distributors and mass merchandisers in North America
and services other markets through its subsidiaries in the United Kingdom,
France, Germany and Japan.
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VIRGIN INTERACTIVE ENTERTAINMENT plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Principles of Consolidation
These consolidated financial statements include the accounts of Virgin
Interactive Entertainment plc and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Foreign Currency Translation
The Company uses the local currency as the functional currency of its operating
subsidiaries. Accordingly, all assets and liabilities outside the United
States are translated into U.S. dollars at the rate of exchange in effect at
the balance sheet date. Income and expense items are translated at the
weighted average exchange rate prevailing during the period. The effects of
foreign currency translation adjustments for these entities are deferred and
included as a component of shareholders' deficiency.
The Company and VIE Holdings use the U.S. dollar as their functional currency.
Accordingly, monetary assets and liabilities are translated at the rate of
exchange in effect at the balance sheet date and nonmonetary assets and
liabilities at historical rates. Income and expense items are translated at
the weighted average exchange rate prevailing during the period, except that
expenses related to nonmonetary assets and liabilities are translated at
historical rates. The effects of foreign currency translation adjustments for
these entities are included in the results of operations.
Revenue Recognition
Sales of the Company's entertainment product are recorded when the product is
shipped or delivered to the customer in accordance with applicable sales terms.
A reserve for estimated price concessions, warranty costs and sales returns and
allowances is provided at the time revenue is recognized. Royalty income is
recognized on sublicense agreements through the sale of product either on a
per-unit basis or a percentage of sales, as defined in the individual contracts.
Cash Equivalents
Cash equivalents represent highly liquid investments which are readily
convertible into known amounts of cash and have original maturities of three
months or less.
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VIRGIN INTERACTIVE ENTERTAINMENT plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Inventories
Inventories are valued at the lower of cost or market. Cost is determined
using the first-in, first-out ("FIFO") method.
Property and Equipment
Property and equipment are stated at historical cost and depreciated using the
straight-line method over the estimated useful lives of the assets ranging from
three to five years. Leasehold improvements are amortized using the
straight-line method over the lesser of the lease terms or estimated useful
lives of the related assets.
Entertainment Product Costs
Entertainment product costs are stated at the lower of cost or net realizable
value, and consist principally of advanced royalties and development fees,
which represent prepayments to outside developers and licensors of intellectual
properties under licensing agreements. Such costs are amortized to cost of
sales on a per-unit basis in accordance with the individual agreements as the
related product is sold, or on a straight-line basis over the estimated product
life, whichever is greater. Amortization expense totaled $1,094,000,
$2,344,000 and $3,311,000 for the years ended July 31, 1991, 1992 and 1993,
respectively.
Entertainment product costs also include certain product development costs.
These costs are then amortized on a straight-line basis over the estimated
product life, or the ratio of current revenue to total projected product
revenue, whichever is greater. In the accompanying consolidated financial
statements, no internal product development costs have been capitalized because
the effect of such capitalization for all periods presented is immaterial.
Intangible Assets
Intangible assets, net of accumulated amortization of $17,000 and $218,000 at
July 31, 1992 and 1993, respectively, include software tool rights and
noncompetition agreements. The intangible assets are amortized using the
straight-line method over the lesser of their estimated useful lives or the
agreement terms, not to exceed five years. Amortization expense totaled
$17,000 and $201,000 for the years ended July 31, 1992 and 1993, respectively.
Prepaid Advertising
The Company has entered into barter transactions with an international trading
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VIRGIN INTERACTIVE ENTERTAINMENT plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
company, whereby inventories were exchanged for media advertising. The prepaid
advertising has been recorded at the fair value of the inventories at the
transaction dates. As of July 31, 1992 and 1993, $432,000 and $110,000,
respectively, of prepaid advertising was not expected to be utilized within one
year and, accordingly, has been included in other noncurrent assets in the
accompanying consolidated balance sheets.
Income Taxes
The Company recognizes incomes taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under
the asset and liability method of SFAS 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
Prior to the Reorganization, the Company was part of the consolidated U.K. tax
group of VCL. The Company's income taxes for such periods were determined on a
separate return basis. Additionally, the Company's subsidiaries filed
separately in various other jurisdictions.
Share Split
On November 29, 1993, the Company declared a 125-for-1 split of the
Company's ordinary shares and reduced par value from pound sterling 1 to
pound sterling 0.008. All references to the number of shares and per share
information have been adjusted to reflect the share split.
Loss Per Share
Loss per share information is not presented for these periods as the
Company was not publicly traded.
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VIRGIN INTERACTIVE ENTERTAINMENT plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. RECEIVABLES
Receivables, net, consist of the following (in thousands):
July 31,
-------------------------
1992 1993
------- -------
Trade accounts receivable $26,043 $23,944
Royalties receivable 398 257
Employee receivables 160 172
Other receivables 216 732
------- -------
26,817 25,105
Less allowance for doubtful
accounts and sales returns
and allowances 1,692 3,836
------- -------
$25,125 $21,269
======= =======
Significant Concentrations of Credit Risk
At July 31, 1992, receivables from an international distributor totaled
$17,176,000. The Company had no other receivables in excess of 10% of total
receivables at July 31, 1992 and 1993.
4. INVENTORIES
Inventories, net, consist of the following (in thousands):
July 31,
------------------------
1992 1993
------ ------
Raw materials $ 348 $ 466
Finished goods 1,212 1,207
------ ------
$1,560 $1,673
====== ======
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VIRGIN INTERACTIVE ENTERTAINMENT plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following (in
thousands):
July 31,
------------------------
1992 1993
------ ------
Prepaid advertising $ 857 $1,859
Pledged certificates of deposits 147 --
Other prepaid expenses 510 1,285
------ ------
$1,514 $3,144
====== ======
Pledged certificates of deposit represent collateral for letters of credit for
the purchase of inventories.
6. PROPERTY AND EQUIPMENT
Property and equipment, net, consist of the following (in thousands):
July 31,
------------------------
1992 1993
------ ------
Computers and equipment $1,689 $2,903
Furniture and fixtures 152 374
Leasehold improvements 150 195
Automobiles 65 19
------ ------
2,056 3,491
Less accumulated
depreciation and amortization 700 1,264
------ ------
$1,356 $2,227
====== ======
7. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
July 31,
------------------------
1992 1993
------ ------
Royalites $1,599 $2,155
Other 2,199 1,391
------ ------
$3,798 $3,546
====== ======
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VIRGIN INTERACTIVE ENTERTAINMENT plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
8. NOTES PAYABLE
Notes payable at July 31, 1992 consisted of $807,000 principal amount of notes
payable incurred in connection with the acquisition of Sperry Castle
Associates, Inc. (see note 13). The notes bore interest at the prime rate and
were paid in full in two installments in September and December 1992.
Notes payable at July 31, 1993 consisted of $477,000 principal amount of
discounted notes receivable with a foreign bank. The notes bore interest at
approximately 4.75% and were repaid in full prior to April 30, 1994
(unaudited).
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VIRGIN INTERACTIVE ENTERTAINMENT plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9. COMMITMENTS AND CONTINGENCIES
The Company has entered into various operating leases principally for office
space and equipment which expire at various dates through 1999. Future minimum
lease payments under all noncancelable operating leases with initial or
remaining terms of one year or more as of July 31, 1993 are as follows (in
thousands):
Year ending July 31:
1994 $ 829
1995 827
1996 666
1997 482
1998 455
Thereafter 57
------
$3,316
======
Rental expense approximated $186,000, $310,000, and $551,000 for the years
ended July 31, 1991, 1992 and 1993, respectively.
The Company is involved as both plaintiff and defendant in various claims and
legal actions arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
10. RELATED PARTY TRANSACTIONS
The Company has an arrangement with VCL, under which VCL provides funding in
sterling at 1.5% over Lloyds' base rate, in U.S. dollars at 10% (9% after July
31, 1993), and in Japanese Yen and French Francs at 1.5% over appropriate
market base rates as advised by VCL. The loans are repayable on demand. VCL
has agreed that it will not demand repayment of the amounts due so
long as such funds are necessary for the Company to meet its operating
requirements through August 1, 1994 and, accordingly, such amounts totaling
$21,554,000, and $26,238,000 at July 31, 1992 and 1993, respectively, have been
classified as long-term obligations in the accompanying consolidated balance
sheets. Interest is calculated on a monthly basis and payable quarterly in
arrears. Interest expense on the VCL loans totaled $1,231,000, $2,010,000, and
$1,926,000 for the years ended July 31, 1991, 1992 and 1993, respectively.
VCL has provided services to the Company such as treasury, foreign exchange,
tax advisory, legal, strategic planning, and the services of certain
executives. Effective August 1, 1993,
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VIRGIN INTERACTIVE ENTERTAINMENT plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
VCL and the Company entered into a new agreement, whereby VCL will
provide to the Company from time to time upon its request certain
administrative services, such as tax, insurance, payroll, company secretarial
services, public relations and other administrative services for an annual fee
of pound sterling 75,000 subject to adjustment each year based on the English
retail consumer price index. The fee is due and payable monthly in arrears.
VCL may terminate the agreement after a specified notice period upon a payment
default or other breach by the Company. The agreement terminates on August 1,
1998. Pursuant to an agreement effective August 1, 1993, VCL has also agreed
to provide Robert H.F. Devereux's services as Chairman of the Board, President
and Chief Executive Officer to the Company until August 1, 1997. The agreement
requires Mr. Devereux to devote at least a majority of his time and attention
to the affairs of the Company for an annual fee of pound sterling 225,000,
payable monthly in arrears, subject to an adjustment each year based on the
English retail consumer price index. The agreement provides that Mr. Devereux
will not, during the term of the agreement, be involved in any business which
competes with the Company's business of publishing interactive entertainment
game products. Management fees were $178,000, $246,000, and $278,000 for the
years ended July 31, 1991, 1992 and 1993, respectively. Management believes
that management fees paid to VCL approximates the cost of securing such
services from unaffiliated parties. See note 15 regarding changes to these
agreements with VCL.
On July 30, 1993, VCL purchased 7,838,285 ordinary shares from VIE Holdings for
$93,000.
The Company financed its operations in fiscal 1993 primarily through
periodic borrowings from and letters of credit issued by VCL. In return for
this extension of credit, the Company was a guarantor under VCL's credit
agreements with maximum borrowings of $8,000,000, pound sterling 5,000,000 and
pound sterling 2,500,000 with three banks, respectively (the "Credit
Agreements"). The provisions of the Company's guarantees prohibited the
Company from granting any liens or encumbrances on its assets to any other
party. In December 1993, the Company was released from the guarantees. The
Company was contingently liable for letters of credit in the amount of
approximately $2,302,000 at July 31, 1993 posted by VCL on behalf
of the Company under the Credit Agreements contingent upon the shipment of
cartridge inventory to the Company's principal U.S. subsidiary.
In July 1993, the Company entered into an agreement with VCL and a subsidiary
of VCL ("Mark 2211 Limited") pursuant to which certain of the Company's assets
and liabilities were transferred to Mark 2211 Limited for approximately
$661,000, which represented the net book value of the assets transferred, plus
reimbursement for certain costs paid by the Company on behalf of Mark 2211
Limited related to the assets transferred. At July 31, 1993, approximately
$568,000 was due from Mark 2211 Limited which is included in due
from affiliate in the accompanying consolidated balance sheets. VCL has
guaranteed Mark 2211 Limited's obligations under the agreement. In addition,
the Company transferred its interest in certain wholly owned subsidiaries
unrelated to the Company's business in July 1993 for approximately $4,000.
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VIRGIN INTERACTIVE ENTERTAINMENT plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company subleased certain of its London offices from an affiliate of VCL.
Rent expense under the sublease totaled $59,000, $32,000, and $124,000 for the
years ended July 31, 1991, 1992 and 1993, respectively. Effective November 1,
1993, the leases were assigned to the Company.
"Virgin" is a trademark of Virgin Enterprises Limited ("VEL"), an affiliate of
VCL. VEL has granted the Company a worldwide license to use the "Virgin"
trademark and logo (the "Marks"), exclusively with interactive entertainment
game product and nonexclusively with other interactive entertainment product.
Commencing August 1, 1994, the company is required to pay royalties each fiscal
year in the amount of $100,000 plus an amount equal to 1/4% of revenue between
$100 million and $200 million in respect of products and services utilizing the
Marks, plus 1/2% of all such revenue in excess of $200 million. The license
expires in 2092, subject to the Company's compliance with certain quality
requirements in respect to products and services in connection with which the
Marks are used. See note 15 regarding the amendment of this license.
On September 3, 1993, Hasbro purchased 1,518,282 ordinary shares from VIE
Holdings for approximately $24,596,000 (unaudited). On January 5, 1994, in
connection with the Reorganization, Hasbro exchanged its VIE Holdings Shares
for a like number of ordinary shares of the Company. The Company received
royalty payments from Hasbro of approximately $605,000 and $220,000 for the
years ended July 31, 1992 and 1993, respectively. In addition, the Company
made royalty payments to Hasbro of approximately $509,000, $441,000 and
$567,000, respectively, for the years ended July 31, 1991, 1992 and 1993,
respectively.
11. INCOME TAXES
The components of income (loss) before income taxes are as follows (in
thousands):
Year ended July 31,
------------------------------------------
1991 1992 1993
------- ------- -------
U.S. $ (540) $ (927) $(3,444)
Foreign (2,566) (411) 1,712
------- ------- -------
$(3,106) $(1,338) $(1,732)
======= ======= =======
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VIRGIN INTERACTIVE ENTERTAINMENT plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The provision (benefit) for income taxes is comprised of the following (in
thousands):
Year ended July 31,
-----------------------------------------
1991 1992 1993
----- ----- ------
Current:
U.S. Federal $(412) $(405) $1,241
State 2 5 224
Foreign (499) -- 1,757
----- ----- ------
(909) (400) 3,222
----- ----- ------
Deferred:
U.S. Federal 639 461 (647)
State (7) 81 (36)
Foreign (332) 55 (243)
----- ----- ------
300 597 (926)
----- ----- ------
$(609) $ 197 $2,296
===== ===== ======
18
19
VIRGIN INTERACTIVE ENTERTAINMENT plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities are as follows (in thousands):
July 31,
----------------------
1992 1993
------- -------
Deferred tax assets:
Accounts receivable, principally
due to allowance for doubtful
accounts and sales returns and
allowances $ 144 $ 66
Inventories, principally due to
additional costs inventoried for
tax purposes 217 553
Accrued expenses, principally due
to interest expense and entertainment
product costs not currently
deductible for tax purposes 247 1,208
Accrued compensation expense,
principally due to amounts
being deductible for tax purposes as paid 185 1,322
Net operating loss carryforwards expiring
through 2008 935 992
Other 57 109
------- -------
Total gross deferred tax assets 1,785 4,250
Less valuation allowance (989) (2,723)
------- -------
796 1,527
------- -------
Deferred tax liabilities:
Entertainment product costs which were
expensed as incurred for tax purposes (718) (753)
Other (283) (99)
------- -------
(1,001) (852)
------- -------
Net deferred tax assets (liabilities) $ (205) $ 675
======= =======
The net change in the valuation allowance was $402,000, $340,000 and
$1,734,000 for the years ended July 31, 1991, 1992 and 1993, respectively.
19
20
VIRGIN INTERACTIVE ENTERTAINMENT plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The provision (benefit) for income taxes, computed by applying the U.S.
statutory rate to consolidated loss before income taxes, is reconciled to the
actual provision (benefit) as follows:
Year ended July 31,
---------------------------------
1991 1992 1993
------- ------- -------
Statutory tax rate (34.0)% (34.0)% (34.0)%
Change in valuation allowance
for deferred tax assets 12.9 % 25.3 % 100.0 %
Nondeductible foreign
royalty payments 0.3 % 10.7 % --
Nondeductible foreign
compensation expense -- 6.1 % 49.0 %
State income taxes (0.2)% 6.5 % 7.2 %
Other, net 1.4 % 0.1 % 10.4 %
----- ----- -----
(19.6)% 14.7 % 132.6 %
===== ===== =====
During fiscal 1991, the Internal Revenue Service ("IRS") began an examination
of the U.S. subsidiary's income tax returns for prior years. Management
believes that any liability which may arise from the IRS examination will not
have a material adverse effect on the Company's financial position or results
of operations.
12. EMPLOYEE BENEFITS AND EMPLOYMENT AGREEMENTS
In August 1992, the Company established a defined contribution plan covering
all eligible U.S. employees who have completed one year of service. The U.S.
plan is intended to qualify under Section 401(k) of the Internal Revenue Code.
Pension expense for U.S. employees covered under this plan totaled $50,000 for
the year ended July 31, 1993.
The Company also participates in a defined contribution plan maintained by VCL
covering all eligible U.K. employees who have completed one year of service.
Company contributions under this plan totaled $8,000, $9,000, and $26,000 for
the years ended July 31, 1991, 1992 and 1993, respectively.
The Company entered into separate employment agreements with two of its
executive vice presidents (the "Executives") which included requirements that
the Company pay the Executives in cash an aggregate of 7% of the increase in
the market value of the Company (as
20
21
VIRGIN INTERACTIVE ENTERTAINMENT plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
defined) at the end of the terms of the agreements which were to expire in July
1995 and July 1996, respectively. The Company recognized compensation expense
under the agreements of $794,000 and $3,845,000, for the years ended July 31,
1992 and 1993, respectively. Included in accrued compensation in the
accompanying consolidated balance sheet at July 31, 1992 is $794,000 to record
the Company's obligations under the employment agreements. The employment
agreements were terminated on July 31, 1993.
On July 31, 1993, the Company granted fully-vested share options to the
Executives. The President of VIE-U.S. received options to purchase 322,635
ordinary shares at an exercise price of $2.53 per share and the Managing
Director of European Operations received options to purchase 172,072 ordinary
shares at an exercise price of $0.29 per share. Accordingly, $2,545,000 in
additional compensation expense was recognized during the year ended July 31,
1993 to fully record the compensation expense related to the fully-vested
options. The cumulative compensation cost related to the employment agreements
and fully-vested options of $7,184,000 was recorded as additional paid-in
capital during the year ended July 31, 1993. In addition, the Executives were
granted fair market value options to purchase an aggregate of 258,108 ordinary
shares at an exercise price of $16.27 per share, vesting July 31, 1997, in
connection with the execution of new employment agreements.
On January 5, 1994, in connection with the Reorganization (see note 1), the
Executives entered into agreements with the Company to immediately exchange any
ordinary shares of VIE Holdings purchased upon exercise of their options for an
equal number of ordinary shares of the Company. Also on January 5, 1994, the
Executives exercised options to purchase 70,000 ordinary shares (unaudited).
In accordance with the options agreements, the Company elected to pay the
Executives the cash equivalent value of the options of approximately $1,011,000
(unaudited) based on an estimated fair market value of $16.20 (unaudited) per
share in lieu of issuing shares to the Executives.
In connection with the acquisition of Sperry Castle Associates, Inc. ("SCA")
(see note 13) by Westwood Studios Inc. ("Westwood Studios"), an indirect
wholly owned subsidiary of the Company, Westwood Studios entered into certain
employment agreements with its principals. The employment agreements provided
for payment of signing bonuses aggregating $250,000 on June 15, 1992, which
amount was expensed when paid and is included in general and administrative
expense in the accompanying July 31, 1992 consolidated statement of operations.
Under the employment agreements, as amended, each of Mr. Sperry and Mr. Castle
is entitled to receive, in addition to his salary, incentive compensation in an
amount equal to five percent of Westwood Studios' annual profit, as defined in
the agreements, for fiscal 1994, 1995 and 1996, with a minimum total incentive
compensation of $900,000, to be paid in installments at the end of each of the
three fiscal years. In the event of Mr. Sperry's or Mr. Castle's termination
of employment due to Westwood Studios' breach of such employee's
21
22
VIRGIN INTERACTIVE ENTERTAINMENT plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
employment agreement, the terminated employee will receive as severance an
amount equal to the difference between the incentive compensation he has
received to the date of termination and $900,000. In addition, the Company has
guaranteed each of Mr. Sperry and Mr. Castle $221,000 for the development of
the Lion King product on certain platforms. Westwood Studios has also agreed
to assign and convey all of its proprietary rights existing at the time of the
June 1992 acquisition to Mr. Sperry and Mr. Castle for $1 upon the occurrence
of the following events: (i) the liquidation, bankruptcy or winding up of
Westwood Studios or its immediate parent corporation, except for a voluntary
reorganization of Westwood Studios, its immediate parent corporation, or their
respective affiliates and parent corporations or (ii) the termination of both
Mr. Sperry's and Mr. Castle's employment without cause. The above obligation
of Westwood Studios to assign to Mr. Castle and Mr. Sperry the aforementioned
proprietary rights expires upon the earlier of Mr. Sperry and Mr. Castle each
receiving $1.3 million in incentive compensation or June 1996. In addition,
the employment agreements require additional incentive compensation based on
the performance of SCA during the term of the employment agreements, which
expire in June 1996. No incentive compensation has been earned under the
provisions of the employment agreements.
13. ACQUISITION
On June 15, 1992, the Company acquired substantially all of the
operating assets and assumed certain liabilities of SCA for $1,323,000,
including acquisition costs of $66,000. The acquisition has been accounted for
under the purchase method of accounting and, accordingly, the results of
operations of the acquired business have been included in the results of
operations since the acquisition date. The estimated fair market value of the
net assets acquired, which consisted primarily of property and equipment,
software tool rights and noncompetition agreements, exceeded the acquisition
cost by $34,000, which amount was applied proportionately to reduce the
carrying amount of the noncurrent assets acquired.
The effect of the acquisition is considered immaterial to the consolidated
financial position and results of operations of the Company and, therefore, pro
forma financial information has not been presented.
14. GEOGRAPHIC AREA INFORMATION
The Company operates in one industry segment: the development, publishing,
marketing and distribution of entertainment product. Information with respect
to the Company's operations by significant geographic area is set forth below.
"Other foreign" includes operations in France, Germany and Japan.
22
23
VIRGIN INTERACTIVE ENTERTAINMENT plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Year ended July 31,
---------------------------------------
1991 1992 1993
------- ------- -------
(in thousands)
Revenue from unaffiliated
customers:
United States $17,118 $26,043 $43,896
United Kingdom 7,931 24,243 50,332
Other foreign -- -- 4,859
------- ------- -------
$25,049 $50,286 $99,087
======= ======= =======
Operating income (loss):
United States $ (553) $(1,028) $(2,480)
United Kingdom (1,335) 1,599 1,419
Other foreign -- -- 593
------- ------- -------
$(1,888) $ 571 $ (468)
======= ======= =======
July 31,
------------------------
1992 1993
------- -------
(in thousands)
Identifiable assets:
United States $14,253 $23,315
United Kingdom 23,321 12,295
Other foreign -- 3,086
------- -------
$37,574 $38,696
======= =======
The Company's total revenue included $16,270,000 (32%) and $42,964,000 (43%)
for the years ended July 31, 1992 and 1993, respectively, from a single
customer. No other single customer accounted for more than 10% of total
revenue during the years ended July 31, 1991, 1992 and 1993.
23
24
VIRGIN INTERACTIVE ENTERTAINMENT plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15. SUBSEQUENT EVENTS (UNAUDITED)
On September 8, 1993, the Company established a pound sterling
5,000,000 credit facility with a bank. Advances under the credit facility
bear interest at the bank's prime rate plus 1% and are due on demand.
On November 29, 1993, the Company increased the number of authorized ordinary
shares to 40,000,000.
On December 23, 1993, Virgin Interactive Entertainment, Inc. ("VIE-US"), an
indirect wholly owned subsidiary of the Company, entered into a multi-currency
credit agreement with a bank (the "Credit Agreement"). The Credit Agreement
provides for maximum borrowings of $15,000,000, subject to a borrowing base of
70% of eligible accounts receivable of VIE-US. Interest on outstanding
borrowings is payable monthly at the bank's reference rate or, at the Company's
option, certain alternative rates. All outstanding borrowings under the Credit
Agreements are due June 30, 1995. The Credit Agreement requires the Company to
pay a commitment fee of 1/8% on the unused portion of the available credit.
The Credit Agreement is secured by substantially all VIE-US assets and is
guaranteed by the Company. In addition, the Credit Agreement contains
restrictions which, among other things, require maintenance of certain
financial ratios and restrict encumbrance of assets and creation of
indebtedness.
On January 5, 1994, the Company adopted the Virgin Interactive Entertainment
Share Option Plan (the "Plan"). Options to acquire ordinary shares may be
issued under the Plan for a period of 10 years following its adoption. The
maximum number of ordinary shares which may be issued by the Company pursuant
to options granted under the Plan may not exceed, at any time during the
10-year term of the Plan, such number as represents 15% of the total number of
ordinary shares of the Company then issued and outstanding. Employees and
directors of, and persons providing services to, the Company or any of its
subsidiaries will be eligible to receive options under the Plan. The Plan is
administered by the Board of Directors of the Company which has sole discretion
and authority, consistent with the provisions of the Plan, to determine which
eligible participants will receive options, when options will be granted, the
terms and conditions of options granted and the number of ordinary shares which
will be subject to options granted under the Plan. Options granted under the
Plan shall have such exercise price as determined by the Board of Directors.
On January 10, 1994, the Company granted options to purchase 963,415 ordinary
shares at exercise prices ranging from $14.00 to $18.00 per share and 1,250
ordinary shares at an exercise price of par value under the Plan.
In connection with the Reorganization (see note 1), the Company may be subject
to significant tax liabilities under U.K. tax laws. Pursuant to the
Reorganization, VIE Holdings was transferred from a company that was part of
the VCL group of companies (the "Transferor") and became a wholly owned
subsidiary of the Company. This transfer was considered to qualify as a
tax-free "Scheme of Reconstruction" under U.K. tax law. In this regard, a
clearance was sought and obtained in advance from the U.K. Inland Revenue that
the transfer of VIE Holdings out of the VCL group would satisfy certain
conditions required for it to be tax-free. The Company believes, based in part
on the opinion of tax counsel, that the practical likelihood of the Inland
Revenue successfully challenging the tax-free status of this transfer is very
low. The tax-free status may be denied if the transactions undertaken do not
technically constitute a Scheme of Reconstruction or if the disclosures made in
the clearance applications were incomplete or misleading. If the tax-free
status were denied, a corporation tax liability of up to approximately
$44 million could be assessed. The Transferor would be primarily
liable for this tax and it in turn is effectively indemnified by VCL's
Shareholders. In the event the Transferor or VCL's Shareholders were unable or
fail to pay the tax, VCL would be liable. In this case, the Inland Revenue
would have a direct remedy against the Company for such tax only if the
clearance applications were incomplete or misleading (which management believes
is not the case) and any indirect remedy against the Company would be remote.
Accordingly, management believes that the possibility of this tax liability
arising is unlikely, and that, even if such tax is assessed, the likelihood of
the Company incurring any liability in respect of such tax is remote.
A further effect of the Reorganization is that the Company is no longer a part
of the VCL tax group. As a result, the Company will now be subject to a
corporation tax liability relating to the June 1991 transfer of its U.S. and
U.K. operations within the VCL group companies. The tax liability will amount
to 33% of the difference between the market value and tax basis in June 1991 of
the chargeable assets transferred. Management of the Company believes that the
tax liability will not be material. The market value, however, must be agreed
to by the U.K. Inland Revenue or ultimately determined by judicial authorities.
VCL has reached an agreement in principle that it will indemnify the Company
for any tax liability with respect to this transaction. There can be no
assurance that the value ultimately determined will not result in a material
tax liability or that VCL will have the resources to satisfy any liability
under its indemnity.
On January 11, 1994, Blockbuster Entertainment Corporation ("Blockbuster")
purchased a total of 1,864,444 ordinary shares of the Company from VCL's
Shareholders. In addition, Blockbuster received various other options to
purchase, under certain circumstances, additional ordinary shares from VCL's
Shareholders sufficient to increase its ownership of the Company to 50.1%. The
Company had revenue from sales to Blockbuster of approximately $2,212,000 for
the year ended July 31, 1993.
On July 29, 1994, the Company amended its agreement covering the Marks. Under
the amended agreement, the Company obtained the right to use the Marks through
July 29, 1999 in exchange for a payment of $2,046,000. The amended agreement is
renewable for an additional 5-year term on the original royalty schedule. Also
on July 29, 1994, the Company terminated its administrative services agreement
with VCL and amended its agreement with VCL for the services of Robert H.F.
Devereux to reduce the term to one year and the annual fee to pound sterling
100,000.
On July 30, 1994, Spelling Entertainment Group Inc. ("Spelling"), and
Blockbuster Interactive Entertainment, Inc. ("BIEI"), a wholly-owned subsidiary
of Blockbuster, entered into an Exchange Agreement (the "Exchange Agreement")
and consummated the transactions contemplated thereby (the "Exchange").
Pursuant to the Exchange Agreement, BIEI delivered to Spelling 8,686,984
ordinary shares, par value pound sterling 0.008 per share ("Ordinary Shares"),
of the Company and an option to acquire 550,000 Ordinary Shares (collectively,
the "VIE Interests") in
24
25
VIRGIN INTERACTIVE ENTERTAINMENT plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
exchange for 22,015,062 shares of common stock, par value $.10 per share, of
Spelling (the "Spelling Common Stock"). The number of shares of Spelling
Common Stock delivered to BIEI pursuant to the Exchange Agreement was
determined by dividing (i) $197,034,805, which represents the aggregate cost of
the VIE Interests to BIEI and its affiliates (including the fees and expenses
incurred by BIEI and its affiliates in connection with their acquisition of the
VIE Interests), by (ii) $8.95, which is the average of the closing sales price
per share of Spelling Common Stock as reported on the New York Stock Exchange
Composite Tape as published in the Wall Street Journal (Southeast Edition), for
the five trading days ended June 27, 1994, which is the date prior to the date
on which Blockbuster and Spelling entered an agreement in principle relating
to the transactions described herein.
25
26
VIRGIN INTERACTIVE ENTERTAINMENT plc
CONDENSED CONSOLIDATED BALANCE SHEET
April 30, 1994
(In thousands, except share data)
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,400
Receivables, net 17,478
Inventories 6,456
Entertainment product costs, net 10,112
Deferred income taxes 1,940
Prepaid expenses and other current assets 4,479
-------
Total current assets 42,865
Property and equipment, net 4,519
Intangible assets, net 686
Other noncurrent assets 95
-------
$48,165
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 6,826
Due to Virgin Communications Limited 2,242
Accounts payable 9,585
Accrued expenses 6,226
Income taxes payable 4,026
Deferred income taxes 154
Other liabilities 750
-------
Total liabilities 29,809
-------
Shareholders' equity:
Ordinary shares, pound sterling 0.008 par value; 40,000,000
shares authorized; 9,369,067 shares issued and outstanding 112
Additional paid-in capital 28,645
Cumulative translation adjustment (185)
Accumulated deficit (10,216)
-------
Total shareholders' equity 18,356
-------
$48,165
=======
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
26
27
VIRGIN INTERACTIVE ENTERTAINMENT plc
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
Nine months ended April 30,
---------------------------
1993 1994
------- -------
Revenue:
Net sales $62,188 $78,117
Royalties 2,157 9,282
------- -------
Total revenue 64,345 87,399
Cost of sales 45,506 53,707
------- -------
Gross profit 18,839 33,692
Operating expenses:
Entertainment product costs 6,253 10,956
Selling, general and administrative 10,313 20,231
Related party management fees 197 348
Compensation expense 2,751 --
------- -------
Operating income (loss) (675) 2,157
Interest expense 1,427 331
Foreign exchange (gain) loss 10 (63)
Write-off of offering costs -- 1,855
Other income (233) (352)
------- -------
Income (loss) before income taxes (1,879) 386
Provision for income taxes 2,491 139
------- -------
Net income (loss) $(4,370) $ 247
======= =======
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
27
28
VIRGIN INTERACTIVE ENTERTAINMENT plc
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine months ended April 30,
---------------------------
1993 1994
------- -------
Cash flows from operating activities $(4,314) $ 61
------- -------
Cash flows from investing activities:
Capital expenditures (962) (3,148)
Investment in equity investee -- (95)
Increase in intangible assets (3) (55)
------- -------
Net cash used in investing activities (965) (3,298)
------- -------
Cash flows from financing activities:
Repayment of notes payable (807) --
Borrowings under notes payable -- 5,825
Increase (decrease) in due to affiliate 5,112 (23,428)
Sale of ordinary shares -- 22,490
Cash paid in lieu of issuing ordinary shares on exercises of
share options -- (1,011)
------- -------
Net cash provided by financing activities 4,305 3,876
------- -------
Effect of exchange rate changes on cash and cash equivalents 863 129
------- -------
Net increase (decrease) in cash and cash equivalents (111) 768
Cash and cash equivalents at beginning of period 1,810 1,632
------- -------
Cash and cash equivalents at end of period $ 1,699 $ 2,400
======= =======
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
28
29
VIRGIN INTERACTIVE ENTERTAINMENT plc
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended April 30, 1993 and 1994
(Unaudited)
1. INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements of
Virgin Interactive Entertainment plc and subsidiaries (the "Company") have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission and, in the opinion of management, reflect all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly
the Company's financial position as of April 30, 1994 and the results of
operations and cash flows for the nine months ended April 30, 1993 and 1994.
Income (loss) per share information is not presented for these periods as the
Company was not publicly traded.
2. ACQUISITION OF THE COMPANY
On January 11, 1994, Blockbuster Entertainment Corporation ("Blockbuster")
acquired 1,864,444 ordinary shares of the Company from certain of its
shareholders for approximately $30.2 million. In March 1994, Blockbuster
expressed its interest in acquiring a controlling interest in the Company.
See note 5 for the Acquisition of the Company by Blockbuster and Spelling
Entertainment Group Inc. ("Spelling").
3. INVENTORIES
Inventories, net, at April 30, 1994 consist of the following (in thousands):
Raw materials $1,647
Finished goods 4,809
------
$6,456
======
4. INCOME TAXES
Income taxes have been provided in each period based on the Company's
anticipated annual effective income tax rate.
5. SUBSEQUENT EVENTS
On July 29, 1994, Blockbuster, in a series of related transactions, acquired
an additional 6,822,540 ordinary shares of the Company from certain of its
shareholders, bringing Blockbuster's ownership of the Company to
approximately 90%.
On July 30, 1994, Spelling and Blockbuster Interactive Entertainment, Inc.
("BIEI"), a wholly-owned subsidiary of Blockbuster, entered into an Exchange
Agreement (the "Exchange Agreement") and consummated the transactions
contemplated thereby (the "Exchange"). Pursuant to the Exchange Agreement,
BIEI delivered to Spelling 8,686,984 ordinary shares, par value pound sterling
0.008 per share ("Ordinary Shares"), of the Company and an option to acquire
550,000 Ordinary Shares (collectively, the "VIE Interests") in exchange for
22,015,062 shares of common stock, par value $.10 per share, of Spelling (the
"Spelling Common Stock"). The number of shares of Spelling Common Stock
delivered to BIEI pursuant to the Exchange Agreement was determined by
dividing (i) $197,034,805, which represents the aggregate cost of the VIE
Interests to BIEI and its affiliates (including the fees and expenses incurred
by BIEI and its affiliates in connection with their acquisition of the VIE
Interests), by (ii) $8.95, which is the average of the closing sales price
per share of Spelling Common Stock as reported on the New York Stock Exchange
Composite Tape as published in the Wall Street Journal (Southeast Edition),
for the five trading days ended June 27, 1994, which is the date prior to the
date on which Blockbuster and Spelling entered an agreement in principle
relating to the transactions described herein.
As a result of the above transactions with Blockbuster and Spelling, the Company
canceled its planned initial public offering and wrote off related offering
costs of $1,855,000 during the nine months ended April 30, 1994.
29
30
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION
The following Unaudited Pro Forma Condensed Combined Balance Sheet and
Statements of Operations have been prepared on the basis of and utilizing the
historical and pro forma financial information described in the accompanying
Notes to Unaudited Pro Forma Condensed Combined Financial Information
("Notes"). This information should be read in conjunction with the historical
financial statements of Spelling Entertainment Group Inc. ("Spelling"),
Republic Pictures Corporation ("Republic") and Virgin Interactive Entertainment
plc ("VIE") and related notes thereto.
The accompanying pro forma financial information with respect to Republic and
VIE is preliminary in nature, because Spelling does not yet have final
information as to the fair market value of the individual assets and
liabilities of Republic and VIE or the effect of the consolidation of the
operations of Spelling, Republic and VIE. The actual adjustments to the
accounts of Republic and VIE will be made on the basis of Spelling's appraisals
and internal valuations as of the consummation of the acquisition of Republic
and VIE, and, therefore, the pro forma information does not give effect to all
adjustments which may ultimately be required to reflect the fair value of the
assets acquired, liabilities assumed or the effect of the consolidation of
operations.
The Unaudited Pro Forma Condensed Combined Balance Sheet assumes that Spelling
acquired VIE (the "Acquisition") on June 30, 1994 and adjusted its historical
balance sheet as of that date to reflect the pro forma effects of the
Acquisition under the purchase method of accounting and the issuance of
22,015,062 shares of Common Stock. The Unaudited Pro Forma Condensed
Combined Statements of Operations for the year ended December 31, 1993 and
the six months ended June 30, 1994 assume that Spelling acquired Republic
(the "Merger") and VIE as of the beginning of each period and adjusted its
historical statement of operations to reflect the operations of Republic
and VIE under the purchase method of accounting, and the effects of the
issuance of Spelling's Common Stock in connection with both the Acquisition
and the Merger.
This pro forma financial information is not intended to reflect the results of
operations or the financial position which would have actually resulted had the
Merger and the Acquisition been effective on the dates indicated. Moreover,
this pro forma information is not intended to be indicative of the results of
operations or the financial position which may be obtained in the future.
30
31
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
June 30, 1994
(In thousands)
SPELLING VIE PRO FORMA PRO FORMA
At June 30, 1994 At April 30, 1994 ADJUSTMENTS COMBINED
---------------- ----------------- ----------- ---------
ASSETS:
Cash and cash equivalents $ 10,546 $ 2,400 $ -- $ 12,946
Accounts receivable, net 124,904 17,478 -- 142,382
Entertainment product costs, net 271,302 16,568 -- (4a) 287,870
Intangible assets, net 192,548 686 191,151 (4b) 384,385
Other assets 26,423 11,033 -- 37,456
-------- ------- -------- --------
$625,723 $48,165 $191,151 $865,039
======== ======= ======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Accounts payable, accrued expenses
and other liabilities $ 26,890 $18,803 $ 3,046 (4c) $ 48,739
Accrued participation expense 72,294 -- -- 72,294
Deferred revenue 10,193 -- -- 10,193
Bank and other debt 150,000 6,826 156,826
Income taxes 21,549 4,180 -- 25,729
Minority interest -- -- 1,788 (4d) 1,788
Net liabilities related to
discontinued operations 31,450 -- -- 31,450
-------- ------- -------- --------
Total Liabilities 312,376 29,809 4,834 347,019
-------- ------- -------- --------
Commitments and contingent
liabilities
Shareholders' Equity:
Common Stock 6,496 112 (112)(4e) 8,698
2,202 (4f)
Capital in excess of par value 338,731 28,645 (28,645)(4e) 541,202
202,471 (4f)
Accumulated earnings (deficit) (31,880) (10,401) 10,401 (4e) (31,880)
-------- ------- -------- --------
Total Shareholders' Equity 313,347 18,356 186,317 518,020
-------- ------- -------- --------
$625,723 $48,165 $191,151 $865,039
======== ======= ======== ========
The accompanying notes are an integral part of this statement.
31
32
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
(In thousands, except per share data)
SPELLING REPUBLIC VIE
12 Months Ended 12 Months Ended 12 Months Ended PRO FORMA PRO FORMA
December 31, 1993 December 31, 1993 October 31, 1993 ADJUSTMENTS COMBINED
------------------ ------------------ ---------------- ----------- ---------
Continuing Operations:
Revenue $274,899 $88,862 $108,593 $ -- $472,354
Costs and Expenses:
Products costs 201,449 79,868 72,118 -- (5a) 354,132
697 (5d)
Selling, general and
administrative 33,723 4,026 34,083 6,337 (5a) 65,108
-- (5b)
(500)(5c)
(6,775)(5d)
(5,786)(5e)
-------- -------- -------- -------- --------
Operating Income 39,727 4,968 2,392 6,027 53,114
Interest income
(expense), net (3,064) (984) (1,782) (6,625)(5f) (5,267)
7,188 (5g)
Miscellaneous, net 52 -- 688 -- 740
-------- -------- -------- -------- --------
Income from
continuing
operations before
income taxes 36,715 3,984 1,298 6,590 48,587
Provision for income
taxes (13,056) (1,628) (1,494) (8,007)(5h) (24,185)
-------- -------- -------- -------- --------
Net income (loss)
from continuing
operations before
minority interest 23,659 2,356 (196) (1,417) 24,402
Minority interest -- -- -- 708 (5i) 708
-------- -------- -------- -------- --------
Net income (loss)
from continuing
operations 23,659 2,356 (196) (2,125) 23,694
Preferred dividend 724 -- -- (724)(5g) --
-------- -------- -------- -------- --------
Net income (loss)
applicable to
Common Stock $ 22,935 $ 2,356 $ (196) $ (1,401) $ 23,694
======== ======== ======== ======== ========
Average number of
Common Shares 54,253 32,111 (5j) 86,364
======== ======== ========
Net income per Common
Share from continuing
operations $0.42 $0.27
======== ========
The accompanying notes are an integral part of this statement.
32
33
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1994
(In thousands, except per share data)
SPELLING REPUBLIC VIE
6 Months Ended 4 Months Ended 6 Months Ended PRO FORMA PRO FORMA
June 30, 1994 April 26, 1994 April 30, 1994 ADJUSTMENTS COMBINED
-------------- --------------- --------------- ----------- ---------
Continuing Operations:
Revenue $164,645 $19,048 $65,408 $ -- $249,101
Costs and Expenses:
Products costs 117,177 14,286 42,222 -- (5a) 176,736
3,051 (5d)
Selling, general and 18,616 5,239 23,093 3,168 (5a) 46,130
administrative -- (5b)
(3,986)(5d)
-------- ------- ------- ------- --------
Operating Income 28,852 (477) 93 (2,233) 26,235
Interest income (expense), net (1,557) (261) 277 (2,208)(5f) (3,749)
Miscellaneous, net -- -- (1,855) 1,855 (5c) --
-------- ------- ------- ------- --------
Income (loss) from continuing
operations before income taxes 27,295 (738) (1,485) (2,586) 22,486
(Provision) benefit for income
taxes (11,734) 317 595 (752)(5h) (11,574)
-------- ------- ------- ------- --------
Net income (loss) before
minority interest 15,561 (421) (890) (3,338) 10,912
Minority interest -- -- -- 61 (5i) 61
-------- ------- ------- ------- --------
Net income (loss) applicable
to Common Stock $ 15,561 $ (421) $ (890) $ (3,399) $ 10,851
======== ======= ======= ======= ========
Average number of Common Shares 64,698 22,015 (5j) 86,713
======== ======= ========
Net income per Common Share
from continuing operations $0.24 $0.13
======== ========
The accompanying notes are an integral part of this statement.
33
34
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION
(UNAUDITED)
NOTE 1 -- THE ACQUISITION AND THE MERGER
On July 30, 1994, Spelling, Blockbuster Entertainment Corporation
("Blockbuster") and Blockbuster Interactive Entertainment, Inc. ("BIEI"), a
wholly-owned subsidiary of Blockbuster, entered into an Exchange Agreement (the
"Exchange Agreement") and consummated the transactions contemplated thereby
(the "Acquisition"). Pursuant to the Exchange Agreement, BIEI delivered to
Spelling 8,686,984 ordinary shares, par value pound sterling 0.008 per share
("Ordinary Shares"), of VIE and an option to acquire 550,000 Ordinary Shares
of VIE (collectively, the "VIE Interests") in exchange for 22,015,062 shares
of common stock, par value $.10 per share, of Spelling (the "Common Stock").
As a result of the Acquisition, Spelling acquired approximately 90% of the
outstanding shares of VIE.
The total purchase price for the VIE Interests is summarized as follows (in
thousands):
Common Stock issued (22,015,062 shares) $197,035
Inherent value of stock options 7,638
Other costs (estimated) 1,000
--------
Total consideration $205,673
========
On April 26, 1994, DE Acquisition Corporation, a Delaware corporation and
wholly-owned subsidiary of Spelling, merged (the "Merger") with and into
Republic. As a result of the Merger, Republic became a wholly-owned subsidiary
of Spelling, and each share of the common stock of Republic ("Republic Common
Stock") outstanding immediately prior to the effective time of the Merger (the
"Effective Time") was converted into the right to receive $13.00, without
interest.
In connection with the Merger, Spelling in October 1993 issued 13,362,215
shares of its Common Stock to Blockbuster in exchange for 3,652,542 shares of
Blockbuster's common stock (the "Blockbuster Shares"). The Blockbuster Shares
were subsequently resold, with Spelling realizing approximately $100,445,000 in
proceeds. Spelling used these proceeds to prepay or redeem (i) all of the
outstanding principal amount of its 10% Senior Subordinated Notes and 12%
Subordinated Debentures, (ii) approximately $39,500,000 of bank debt and (iii)
all of Spelling's outstanding preferred stock. As a result, Spelling borrowed
the cash consideration necessary to fund the Merger under its credit agreement,
dated January 31, 1994, by and between Spelling and Blockbuster.
34
35
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION (CONTINUED)
(UNAUDITED)
NOTE 2 -- BASIS OF PRESENTATION
The unaudited pro forma condensed combined financial information is based on
historical financial statements of Spelling, Republic and VIE, adjusted in the
case of Republic and VIE to reflect the purchase method of accounting.
The historical financial statements of VIE are consolidated with Spelling's
financial statements on a sixty day lag. VIE will conform its financial
statement periods after the Acquisition to conform to Spelling's financial
statement periods.
NOTE 3 -- ALLOCATIONS OF PURCHASE PRICE FOR VIE AND REPUBLIC
The aggregate purchase price paid for the shares of VIE by Spelling exceeded
the historical book value of the identifiable net assets of VIE by
$189,105,000. Spelling is currently evaluating the assets and liabilities of
VIE and Republic and accordingly this excess is reflected as cost in
excess of fair value of net assets acquired.
NOTE 4 -- ADJUSTMENTS TO HISTORICAL BALANCE SHEET
Preliminary adjustments to the Unaudited Pro Forma Condensed Combined Balance
Sheet are as follows (in thousands):
(a) The fair values of VIE's interactive entertainment product are
currently being evaluated.
(b) To record excess of purchase price over the fair value of net
assets acquired.
(c) To accrue costs related to the Acquisition.
(d) To record the minority interests of VIE.
(e) To eliminate VIE's historical equity accounts.
(f) To record the issuance of 22,015,062 shares of Spelling's
Common Stock and the conversion of the stock options of VIE
into options to acquire shares of Spelling's Common Stock.
35
36
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION (CONTINUED)
(UNAUDITED)
NOTE 5 - ADJUSTMENTS TO HISTORICAL STATEMENTS OF OPERATIONS
Preliminary adjustments to the Unaudited Pro Forma Condensed Combined
Statements of Operations are as follows:
(a) Because the fair values of the assets of Republic and VIE are
currently being evaluated, the amortization effect has not been
estimated for such assets. Amortization of the excess of cost
over fair value of net assets acquired has been computed using
an estimated life of forty years.
(b) Spelling is currently evaluating the potential opportunities
for reducing costs which may result from the consolidation of
the operations of Spelling, Republic and VIE.
(c) To eliminate merger costs and offering costs previously
expensed.
(d) To conform the methods of accounting of Republic and VIE for
entertainment product to those of Spelling.
(e) To eliminate compensation expense related to employment
agreements and fully vested share options issued to certain
executive officers of VIE. The employment agreements were
terminated on July 31, 1993. See Note 12 of Notes to
Consolidated Financial Statements of VIE.
(f) To reflect interest costs related to the debt financing under
the Blockbuster credit facility.
(g) To reflect the reduction in interest costs and dividends
resulting from the redemption and repayment of bank and other
debt and Preferred Stock as of January 1, 1993 with the
proceeds from the issuance of Common Stock, such reductions
being limited to the extent of actual interest expense and
dividends paid for the year ended December 31, 1993.
(h) An adjusted tax provision has been computed to arrive at an
estimated marginal tax rate of 50% and 52% for the twelve
months ended December 31, 1993 and the six months ended
June 30, 1994, respectively, on pro forma combined income.
(i) To record the minority interest in the earnings of VIE.
36
37
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION (CONTINUED)
(UNAUDITED)
(j) To reflect the effect of the issuance of an additional
35,377,277 shares of Common Stock as of January 1, 1993 and an
additional 22,015,062 shares of Common Stock on January 1,
1994.
NOTE 6 -- EXTRAORDINARY ITEMS AND DISCONTINUED OPERATIONS
The unaudited Pro Forma Condensed Combined Statements of Operations do not
reflect the extraordinary items or discontinued operations reflected in the
historical financial statements of Spelling.
NOTE 7 -- NET INCOME PER COMMON SHARE
Net income per common share amounts are based on the pro forma weighted average
number of common shares outstanding during the year ended December 31, 1993 and
the six months ended June 30, 1994. Pro forma primary and fully-diluted net
income per common share are not presented as they result in a dilution of less
than 3% from basic net income per common share.
37
38
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused the report to be signed on its behalf by the
undersigned hereunto duly authorized.
SPELLING ENTERTAINMENT GROUP INC.
Date: October 12, 1994 By: /s/ Thomas P. Carson
------------------------
Thomas P. Carson
Executive Vice President,
Chief Financial Officer
and Treasurer
38
39
SPELLING ENTERTAINMENT GROUP INC.
EXHIBIT INDEX
Number and
Description of Exhibit
- - ----------------------
1. None
2. Exchange Agreement, dated July 30, 1994, by and among Spelling
Entertainment Group Inc., Blockbuster Entertainment Corporation and
Blockbuster Interactive Entertainment, Inc. (incorporated by reference
to Exhibit 2 to the Registrant's Current Report on Form 8-K dated
July 30, 1994.)
4. None
16. None
17. None
20. None
23. Consent of KPMG Peat Marwick LLP
24. None
27. Financial Data Schedule
99. Press Release, dated August 1, 1994 (incorporated by reference to
Exhibit 2 to the Registrant's Current Report on Form 8-K dated
July 30, 1994.)
39