1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1994 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)
FLORIDA 59-0862100
------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5700 WILSHIRE BOULEVARD
LOS ANGELES, CALIFORNIA 90036
------------------------------- -------------
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (213) 965-5700
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
------ ------
On November 9, 1994, the registrant had outstanding 87,876,714 shares of
Common Stock, $.10 par value.
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SPELLING ENTERTAINMENT GROUP INC.
PART I. FINANCIAL INFORMATION
PAGE
----
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets -
September 30, 1994 (Unaudited) and December 31, 1993 3
Condensed Consolidated Statements of
Operations - Three Months and Nine Months Ended
September 30, 1994 and 1993 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1994 and 1993 (Unaudited) 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
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SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, December 31,
1994 1993
------------- ------------
ASSETS: (Unaudited)
Cash and cash equivalents $ 12,967 $ 12,682
Accounts receivable, net 175,223 93,242
Entertainment product costs, net 339,503 204,232
Intangible assets 380,101 154,983
Other assets 41,823 9,332
-------- --------
$949,617 $474,471
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable and accrued expenses $ 62,812 $ 13,275
Accrued participation expense 63,914 57,547
Advance license fees and deferred revenue 36,689 14,425
Debt 209,464 49,580
Income taxes 27,328 8,121
Net liabilities from discontinued operations 28,931 33,669
-------- --------
Total Liabilities 429,138 176,617
-------- --------
Minority interest 1,366 --
Commitments and contingent liabilities
Shareholders' Equity:
Preferred Stock, $.10 par value; authorized
20,000,000 shares; none outstanding -- --
Common stock, $.10 par value; authorized
300,000,000 shares; issued and outstanding
87,453,707 and 64,504,838 shares, respectively 8,745 6,450
Capital in excess of par value 543,828 342,824
Accumulated deficit (33,673) (51,420)
Cumulative translation adjustment 213 --
-------- --------
Total Shareholders' Equity 519,113 297,854
-------- --------
$949,617 $474,471
======== ========
The accompanying notes are an integral part of these statements.
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SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
1994 1993 1994 1993
-------- ------- -------- --------
Revenue $136,744 $55,082 $301,389 $177,178
Costs and expenses:
Entertainment product costs 116,640 39,276 233,817 127,902
Selling, general and administrative 18,175 8,624 36,791 27,065
-------- ------- -------- --------
Operating income 1,929 7,182 30,781 22,211
Interest income 507 912 1,841 4,929
Interest expense (2,102) (2,305) (5,003) (7,137)
Other income (expense), net 56 19 66 (1,252)
-------- ------- -------- --------
Income from continuing operations
before income taxes 390 5,808 27,685 18,751
Benefit (provision) for income taxes (650) 1,674 (12,384) (4,251)
-------- ------- -------- --------
Income (loss) from continuing operations before
minority interest (260) 7,482 15,301 14,500
Minority interest (271) -- (271) --
-------- ------- -------- --------
Income (loss) from continuing operations (531) 7,482 15,030 14,500
Loss from discontinued operations, net -- -- -- (3,710)
-------- ------- -------- --------
Net income (loss) (531) 7,482 15,030 10,790
Less preferred dividends -- 202 -- 607
-------- ------- -------- --------
Net income (loss) applicable to
common shares $ (531) $ 7,280 $ 15,030 $ 10,183
======== ======= ======== ========
Average number of common shares - primary 80,283 51,489 71,751 51,157
======== ======= ======== ========
Average number of common shares - fully-diluted 80,283 51,871 72,287 51,835
======== ======= ======== ========
Primary and fully-diluted income (loss) per common and
common equivalent share:
Continuing operations $ (0.01) $ 0.14 $ 0.21 $ 0.27
Discontinued operations -- -- -- (0.07)
-------- ------- -------- --------
Net income (loss) $ (0.01) $ 0.14 $ 0.21 $ 0.20
======== ======= ======== ========
The accompanying notes are an integral part of these statements.
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SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
-----------------------
1994 1993
--------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,030 $ 10,790
Adjustments to reconcile net income to cash flows
from operating activities:
Amortization of entertainment product costs 185,442 83,751
Depreciation and amortization 5,003 3,841
Additions to entertainment product costs (226,058) (114,994)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (46,183) 4,381
Increase (decrease) in accounts payable
and accrued expenses 13,431 (1,398)
Decrease in accrued participation expense (8,381) (36,105)
Increase in advance license fees and deferred revenue 21,717 12,689
Increase in current and deferred income taxes 10,043 5,515
Other, net (8,047) (4,755)
--------- ---------
(38,003) (36,285)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (2,017) (578)
Changes in net liabilities related to
discontinued operations (4,739) 1,334
Payment for purchase of Republic Pictures Corporation,
net of cash acquired (101,214) --
Cash acquired in acquisition of Virgin Interactive Entertainment plc 2,197 --
--------- ---------
(105,773) 756
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from Blockbuster Entertainment Corporation 195,000 --
Proceeds from borrowings 60,665 35,000
Repayments of borrowings (112,566) (13,500)
Cash dividends paid (4,334) (3,659)
Proceeds from the issuance of common stock 5,296 1,357
--------- ---------
144,061 19,198
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 285 (16,331)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,682 36,117
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,967 $ 19,786
========= =========
The accompanying notes are an integral part of these statements.
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SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables except per share data)
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 to shareholders.
The financial statements reflect, in the opinion of management, all normal
recurring adjustments necessary to present fairly the Company's financial
position and results of operations. In order to maintain consistency and
comparability between periods presented, certain amounts have been reclassified
from the previously reported financial statements in order to conform with the
financial statement presentation in the current period.
Blockbuster Entertainment Corporation ("BEC") indirectly owned approximately
78% of the Company's outstanding common stock ("Common Stock") at September 29,
1994 (see Note 2 regarding the issuance of Common Stock in connection with the
acquisition of Virgin Interactive Entertainment plc ("VIE")). Effective as of
that date, BEC merged with and into Viacom Inc. ("Viacom"), with Viacom being
the surviving corporation. Upon the closing of the merger, which was approved
by the shareholders of Viacom and BEC, Viacom indirectly owned approximately
78% of the Company's Common Stock.
2. MERGER AND ACQUISITION
On April 26, 1994, DE Acquisition Corporation, a wholly-owned subsidiary of the
Company, merged (the "Merger") with and into Republic Pictures Corporation
("Republic"). As a result of the Merger, Republic became a wholly-owned
subsidiary of the Company, and each share of the common stock of Republic (the
"Republic Common Stock") outstanding immediately prior to the Merger was
converted into the right to receive $13.00 in cash, without interest.
Immediately prior to the Merger, BEC indirectly owned 2,550,000 shares of
Republic Common Stock and warrants to purchase 810,000 additional shares of
Republic Common Stock at an exercise price of $11.50 per share. In accordance
with the terms of the Merger, the Company purchased the 2,550,000 shares of
Republic Common Stock from BEC for $33,150,000 and the warrants owned by BEC
were converted into warrants to purchase
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SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables except per share data)
(Continued)
1,337,148 shares of the Company's Common Stock at an exercise price of $6.97
per share.
On July 30, 1994, the Company, BEC and Blockbuster Interactive
Entertainment, Inc. ("BIEI"), a wholly-owned subsidiary of BEC, entered into an
exchange agreement (the "Exchange Agreement") and consummated the transactions
contemplated thereby (the "Acquisition"). Pursuant to the Exchange Agreement,
BIEI delivered to the Company 8,686,984 ordinary shares (the "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 the Company's Common
Stock. BIEI had acquired a majority of the VIE Interests from third parties on
July 29, 1994. As a result of the Acquisition, the Company acquired
approximately 90% of VIE's Ordinary Shares.
The Company has generally accounted for the Merger and the Acquisition under
the purchase method of accounting. However, with respect to the Merger, the
Company has recorded an adjustment of $6,670,000 to shareholders' equity
(see Note 5) to reflect the excess of the cash consideration paid for BEC's
ownership interest in Republic Common Stock over BEC's carrying value for
such interest. Further, because BEC controlled both the Company and VIE at
the time of the Acquisition, the Company's purchase price for the VIE
Interests has been determined by reference to the purchase price paid by
BIEI for the VIE Interests.
The assets and liabilities of Republic and VIE are included in the accompanying
unaudited condensed consolidated balance sheet as of September 30, 1994
primarily at predecessor historical cost, with the preliminary differences
between purchase price and predecessor cost being included in intangible
assets. The Company is in the process of evaluating the assets and liabilities
of Republic and VIE, and when such valuations and purchase price allocations
have been completed, the acquired assets and liabilities will be stated at fair
value. The excess of the purchase price over net assets and liabilities
acquired is being amortized on a straight-line basis over forty years.
The results of operations of Republic since April 26, 1994, and the results of
operations of VIE since July 30, 1994, are included in the accompanying
unaudited condensed consolidated statements of operations. The following table
presents the pro forma results of operations assuming that the Merger and the
Acquisition had both occurred on January 1, 1993. This pro forma information
does not purport to be indicative of the results that actually would have been
obtained had the Merger and the Acquisition occurred at such date, or to be a
projection of future results.
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SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables except per share data)
(Continued)
Nine Months Ended
September 30,
------------------------
1994 1993
-------- --------
Revenue $374,849 $325,268
Net income from continuing operations 6,638 17,395
Net income per share from continuing
operations-basic 0.08 0.20
3. ENTERTAINMENT PRODUCT COSTS
Entertainment product costs include production or acquisition costs (including
advance payments to producers), capitalized overhead and interest, prints and
advertising expected to benefit future periods. These costs are amortized, and
third party participations and residuals are accrued, on an individual product
basis in the ratio that current year gross revenue bears to estimated future
gross revenue.
Entertainment product costs are stated at the lower of cost less amortization
or estimated net realizable value on an individual product basis. Estimates of
total gross revenue, costs and participations are reviewed quarterly and
revised as necessary. When estimates of total revenue and costs indicate that
there will be an ultimate loss with respect to a specific product, additional
amortization is provided to fully recognize such loss in that period.
Entertainment product costs consisted of the following:
September 30, December 31,
1994 1993
------------- ------------
Entertainment product costs:
Released $102,959 $ 92,533
In process and other 55,424 22,009
Entertainment product rights 181,120 89,690
--------- --------
$339,503 $204,232
======== ========
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SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables except per share data)
(Continued)
4. DEBT
Debt consisted of the following:
September 30, December 31,
1994 1993
------------- ------------
Revolving credit facility, interest at
5.88% at September 30, 1994 $ 68,500 $ --
Multi-currency credit facility, average
interest at 5.73% at September 30, 1994 40,964 --
Term loan, interest at 6.625%
at September 30, 1994 100,000 --
Bank term loans, interest at
5.62% at December 31, 1993 -- 49,580
-------- -------
$209,464 $49,580
======== =======
In January 1994, the Company entered into a three-year credit agreement with
BEC (the "BEC Facility"). The BEC Facility provides for (i) a three-year term
loan facility of $100,000,000 to fund the Company's merger with Republic
(see Note 2) and (ii) a revolving credit facility of $75,000,000 due June 1997
to fund the Company's working capital and other requirements. Under the BEC
Facility, the Company pays an annual fee of 0.175% of the unused portion of the
revolving credit facility and certain facility and administration fees;
interest on the revolving facility is payable at LIBOR plus 1.0%.
Borrowings under the BEC Facility are secured by all of the assets of the
Company. Further, the Company guaranteed the obligations of BEC under BEC's
credit facility to the extent of the Company's borrowings from BEC under the
BEC Facility. The fees and interest rate applicable to the revolving credit
portion of the BEC Facility are subject to renegotiation upon the termination,
repayment or restructuring of BEC's facility, and the entire amount outstanding
under the BEC Facility may be accelerated if BEC's facility were accelerated by
its lenders.
As a result of the merger of BEC with and into Viacom, Viacom succeeded to
BEC's position under the BEC Facility. Additionally, in connection with the
BEC/Viacom merger, BEC's credit facilities were repaid and terminated, thereby
also terminating the Company's guarantee of such facilities. The Company has
been advised that Viacom's overall financing costs under its newly restructured
credit facilities are higher than those under BEC's prior credit facilities.
The Company has entered into discussions with Viacom regarding the fees and
interest rate payable by the Company under the revolving credit portion of the
BEC Facility, as well as a possible increase in the amount of the revolving
credit facility in order to replace certain VIE credit facilities (see below).
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SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables except per share data)
(Continued)
On September 8, 1993, a wholly-owned subsidiary of VIE ("VIE-UK") 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 VIE-UK. Following the Acquisition (see Note 2), the Company
guaranteed the UK Facility and the guarantees of the two directors were
terminated. Advances under the credit facility bear interest at the bank's
prime rate plus 1% and are due on demand.
On December 23, 1993, a wholly-owned subsidiary of VIE ("VIE-U.S.") established
a multi-currency credit agreement with a bank in the U.S. (the "Credit
Agreement"). The Credit Agreement initially provided for maximum borrowings of
$15,000,000, subject to a borrowing base test. Following the Acquisition, the
amount of borrowings allowable under the Credit Agreement was increased to
$75,000,000, and the borrowing base test and other ratio tests were eliminated,
based on the guarantee of all borrowings under the Credit Agreement by BEC (now
Viacom). All outstanding borrowings under the Credit Agreement are due
December 31, 1994. 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. The Credit Agreement is secured by substantially all of the
assets of VIE-U.S.
As of September 30, 1994, the Company had $39,265,000 in letters of credit
outstanding under the UK Facility and the Credit Agreement to guarantee its
purchases of interactive entertainment product.
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SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables except per share data)
(Continued)
5. SHAREHOLDERS' EQUITY
The following is a summary of the changes in the components of shareholders'
equity:
Capital in Cumulative
Common Excess of Accumulated Translation
Stock Par Value Deficit Adjusment Total
------ ---------- ----------- ----------- ---------
Balance at
December 31, 1993 $6,450 $342,824 $(51,420) $-- $297,854
Sales of common stock 94 5,353 -- -- 5,447
Acquisition of Republic -- (6,670) -- -- (6,670)
Acquisition of VIE 2,201 202,321 -- -- 204,522
Unrealized holding gain, net -- -- 7,051 -- 7,051
Cash dividends -- -- (4,334) -- (4,334)
Net income for the period -- -- 15,030 -- 15,030
Cumulative translation adjustment -- -- -- 213 213
------ -------- -------- ---- --------
Balance at September 30, 1994 $8,745 $543,828 $(33,673) $213 $519,113
====== ======== ======== ==== ========
At the Company's Annual Meeting of Stockholders on May 17, 1994, the
Stockholders approved an increase in the number of authorized shares of the
Company's Common Stock from 200,000,000 to 300,000,000.
Cash dividends of two cents and six cents per common share were declared and
paid during the three months and nine months ended September 30, 1994,
respectively. On November 11, 1994, the Company's board of directors voted to
discontinue the quarterly dividend.
The Company recorded an adjustment of $6,670,000 to capital in excess of par
value during the nine months ended September 30, 1994 to reflect the excess of
the cash consideration paid for BEC's ownership interest in Republic (see Note
2) over BEC's carrying value for such interest.
See Note 2 regarding the issuance of 22,015,062 shares of the Company's Common
Stock in connection with the Acquisition.
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SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables except per share data)
(Continued)
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." This statement requires the Company to adjust the
carrying value of a common stock investment, which is classified as "available
for sale" under the applicable provisions of SFAS No. 115, to fair market value
with a corresponding adjustment (net of tax) of $7,051,000 to Shareholder's
Equity. Such investment is included in other assets.
6. INCOME TAXES
The Company adopted SFAS 109 effective January 1993. In the first quarter of
1993, the Company recorded deferred tax assets and liabilities with respect to
(i) tax attribute carryforwards and (ii) differences in financial and tax
reporting for the Company's assets and liabilities. Prior management of the
Company also recorded a valuation reserve with respect to the deferred tax
assets arising from certain of its carryforwards based on its assessment (under
the criteria of SFAS 109) of the realizability of such assets in future
periods.
In the third quarter of 1993, management of the Company reassessed (under the
criteria of SFAS 109) the realizability of the tax attribute carryforwards in
light of factors arising from, or related to, the acquisition of a majority of
the Company's Common Stock by BEC. Based on this reassessment, the Company
reduced the valuation reserve by approximately $4,200,000, and reflected a
corresponding benefit in its income tax provision for the third quarter of
1993. Giving effect to this adjustment, the Company recorded a net tax benefit
of $1,674,000 in the third quarter. The remaining estimated annual effective
income tax rate in 1993 primarily represents a provision for foreign income
taxes.
There has been no similar adjustment to the valuation reserve during 1994. The
Company has provided for income taxes based on its estimated annual effective
income tax rate. Such annual rate has been adjusted to reflect the operations
of Republic and VIE.
7. NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common and common equivalent share amounts are based on
the weighted average number of common shares outstanding plus (when dilutive)
the effect of stock options and warrants during the respective periods. The
number of shares of Common Stock outstanding during the third quarter of 1994
were substantially higher than in the third quarter of 1993 due to the issuance
of shares in connection with the Merger and the Acquisition.
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SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables except per share data)
(Continued)
8. DISCONTINUED OPERATIONS
In March 1993, the Company made a one-time payment of $5,000,000 for
insurance-type excess loss protection to cover certain costs the Company may
have to pay in resolving environmental and bankruptcy related claims over a
twelve year period. The indemnity covers up to $35,000,000 of such liabilities
in excess of a threshold of $25,000,000, subject to certain adjustments. The
payment was expensed as part of the loss from discontinued operations in 1993,
net of the income tax benefit expected to be realized from the loss.
9. LEGAL MATTERS
Substantially all litigation and claims against the Company as of the dates of
its bankruptcy filings, other than disputed claims which remain pending, were
settled and discharged under settlement agreements or plans of reorganization
confirmed by the Bankruptcy Court. The Company continues to be involved in a
number of legal actions including threatened claims and pending litigation from
matters such as contract disputes, environmental clean-up assessments and
damages from alleged dioxin contamination. Some of the parties involved in
such actions seek significant amounts of damages. While the results of such
actions cannot be predicted with certainty, based upon its knowledge of the
facts and circumstances and applicable laws, as well as the insurance-type
arrangement described in Note 8, the Company believes that the ultimate
resolution of all disputed claims, pending litigation and threatened claims
will not have a material adverse effect on its financial condition and results
of operations.
On July 8, 1994, the U.S. District Court denied the Company's motion for
reconsideration of its earlier summary judgement in respect of insurance
coverage for dioxin claims. The Company has filed an appeal.
On September 13, 1993, five class action lawsuits were filed in the Delaware
Chancery Court against the Company, Republic, BEC and the members of the Board
of Directors of Republic. These actions were later consolidated into "In Re
Republic Pictures Corp. et al," C.A. No. 13122 (the "Action"). The Action
named as defendants the Company, Republic, BEC and the
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SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables except per share data)
(Continued)
members of the Board of Directors of Republic. The plaintiffs in the Action
challenged the merger between Republic and the Company and sought certification
as a class action on behalf of all common stockholders of Republic (other than
defendants and their affiliates) and further sought to recover damages.
Pursuant to a Stipulation and Agreement of Compromise, Settlement and Release
dated July 12, 1994 among the parties, on October 5, 1994 the Court entered an
Order and Final Judgement that, among other things, certified the action as a
class action on behalf of all persons who were shareholders of record or
beneficial owners of shares of Republic during September 13, 1993 through
April 27, 1994 (other than defendants and their affiliates), and their
successors in interest or transferees, and dismissed the action with prejudice.
10. RELATED PARTY TRANSACTIONS
See Note 4 regarding the Company's credit facility with Viacom. The Company
paid interest and fees to BEC of $2,511,000 and $4,501,000 during the three
months and nine months ended September 30, 1994, respectively, in connection
with this facility.
As of September 30, 1994, the Company had a net payable to BEC of $280,000 for
various services such as accounting, legal and tax services. Such amount also
includes amounts charged by BEC for management services provided to the Company
by BEC employees. In addition, the Company recorded sales of $1,535,000 to BEC
for related video and interactive entertainment product for the three months
ended September 30, 1994. At such date the Company had a net payable of
$1,000,000 relating primarily to returns of video product from BEC.
See Notes 2 and 5 regarding the acquisition by the Company of the Republic
Common Stock held by BEC and the conversion of the Republic warrants held by
BEC into warrants to acquire shares of the Company's Common Stock.
See Notes 2 and 5 regarding the acquisition of approximately 90 percent
ownership of VIE from BIEI, in exchange for 22,015,062 shares of the Company's
Common Stock.
A director of the Company previously held $18,287,500 of the Company's 10%
Senior Subordinated Notes ("10% Notes"). The Company paid interest of $914,375
on its 10% Notes during the nine months ended September 30, 1993. The Company
repurchased its 10% Notes in the fourth quarter of 1993.
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SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
unaudited condensed consolidated financial statements and the related notes
thereto. References to Notes refer to the notes to such statements.
RESULTS OF CONTINUING 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 to, and available for exhibition by, licensees 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.
As a result of the acquisitions of Republic and VIE, the Company anticipates a
significant increase in revenue, particularly from the home video and
interactive entertainment markets.
REVENUE
The following table sets forth the components of revenue from the Company's
major markets (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ---------------------
1994 1993 1994 1993
-------- ------- -------- -------
Network $20,832 $ 9,347 $ 75,501 $ 45,914
Home video 22,095 1,623 41,961 8,164
International film distribution 6,243 1,516 10,458 8,953
Licensing and merchandising 4,308 4,703 13,405 10,919
Interactive entertainment 33,818 -- 33,818 --
Other distribution 49,448 37,893 126,246 103,228
-------- ------- -------- --------
$136,744 $55,082 $301,389 $177,178
======== ======= ======== ========
Television programming revenue is derived from network license fees,
first-run syndication sales and license fees arising from domestic and
international television licensing agreements. During the initial years of a
dramatic 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. During the initial
years of a comedy television series, such license fees normally are less than
the production costs, and the Company recognizes this difference as a loss on a
current basis. Once a sufficient number of episodes of a series have been
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 realize a profit with respect to the series.
15
16
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Television programming network revenue increased $11,485,000 and $29,587,000
for the three and nine month periods ended September 30, 1994, respectively,
from the comparable periods in 1993. A significant portion of the increase
resulted from the licensing of four new series, "Burke's Law," "Winnetka Road,"
"Models, Inc." and "Madman of the People."
Home video revenue increased $20,472,000 and $33,797,000 for the three
and nine month periods ended September 30, 1994, respectively, from the
comparable periods in 1993, primarily as a result of the merger of the
operations of Republic. International film distribution revenue increased in
the 1994 periods due to an increase in the number of films in active
distribution. Other distribution revenue increased $11,555,000 and
$23,018,000 in the 1994 periods, respectively, primarily as a result of
increases in (i) international cable revenue with respect to the Company's
library and (ii) worldwide television revenue from exploitation of the
Republic library. Revenue from interactive entertainment product resulted from
the acquisition of VIE during the third quarter of 1994. A significant portion
of the interactive entertainment product revenue is denominated in foreign
currencies and as such is subject to exchange fluctuations. The Company
from time to time hedges its position in such foreign currencies.
ENTERTAINMENT PRODUCT COSTS
Entertainment product costs consist primarily of the amortization of
capitalized product costs and third party participations. The increases in
such costs of $77,364,000 and $105,915,000 during the three and nine month
periods ended September 30, 1994, respectively, as compared to the same periods
in 1993, resulted primarily from the increases in revenue described above.
However, during the three months ended September 30, 1994, the Company also
provided approximately $11,000,000 in additional amortization with respect to
losses expected to be incurred on certain of its television programming,
primarily first-run syndication. In the prior year period, there was a minor
provision.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased $9,551,000 and
$9,726,000 during the three and nine month periods ended September 30, 1994,
compared to the same periods of 1993. The principal reason for these increases
was the addition of the operations of Republic and VIE.
INTEREST EXPENSE
Interest expense decreased $2,134,000 during the nine month period ended
September 30, 1994 in comparison to the prior year period, as a result of lower
total indebtedness prior to the merger with Republic and lower average
effective interest rates. In April 1994, the Company
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17
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
borrowed $100,000,000 in connection with the merger with Republic.
Consequently, the Company expects to have higher levels of total indebtedness
resulting in higher interest expense during the remainder of 1994 and later
years.
PROVISION FOR INCOME TAXES
Effective January 1993 the Company adopted SFAS 109, which changed its method
of accounting for income taxes. The effect of this adoption did not have a
material effect on the accompanying unaudited condensed consolidated financial
statements. The increases in the provision for income taxes for the three and
nine month periods ended September 30, 1994, respectively, in comparison to the
comparable periods in 1993, resulted primarily from the increase in income from
continuing operations, increase in certain non-deductible expenses, and the
adjustment for the realization of certain tax attributes recognized in the
third quarter of 1993. The effective rates of income tax expense for the
periods presented are based upon the Company's anticipated annual effective
income tax rate.
LIQUIDITY AND CAPITAL RESOURCES
A substantial portion of the production costs of the Company's network
television programming is financed through network license fees received during
production. The Company generally expects to recover any excess of its
production costs over the related network license fees from initial
international licensing revenue, with additional domestic and international
revenue to be expected in later years. On the other hand, the Company must
finance the entire production costs of its first-run syndication programming
until it realizes domestic barter revenue and international licensing fees.
Obtaining the rights to distribute third party entertainment product often
requires the Company to make advance payments to third parties as a guarantee
of the net receipts to be earned by the third parties from such distribution.
The Company enters into license agreements during or shortly after the
production period for a specific product and thus expects to recoup its entire
investment within a reasonably short period of time. To the extent that
capital resources are required to cover working capital deficits arising from
internally produced television programming or advances for acquired product,
the Company has historically financed its requirements through operating cash
flow and borrowings under its credit facilities.
On October 5, 1993, the Company sold 13,362,215 shares of Common Stock to BEC
in exchange for 3,652,542 shares of BEC common stock. This sale was
negotiated in
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18
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
connection with the Company's merger with Republic. The BEC shares were
subsequently resold, with the Company realizing approximately $100,445,000 in
cash. During 1993, the Company used such funds to redeem its 12% Subordinated
Debentures and Preferred Stock, as well as to pay down a substantial portion of
its bank debt and prepay its 10% Notes.
The Company has credit facilities with BEC (now Viacom) and several banks. The
Company used the BEC Facility to fund its merger with Republic, and uses
all three facilities to fund its ongoing operational requirements.
Additionally, as of September 30, 1994, the Company had outstanding $39,265,000
in letters of credit guaranteeing certain of its purchases of interactive
entertainment product.
The Company is currently evaluating its overall capital requirements, including
those resulting from its recent acquisitions of the operations of Republic and
VIE, and has entered into discussions with Viacom regarding a possible increase
in the BEC Facility in order to restructure or eliminate its other credit
facilities. Further, the Company has been exploring, and believes it can
obtain, credit arrangements with third parties under terms and conditions not
materially different from the BEC Facility. Under either alternative, the
Company believes that its capital resources available from operations and its
credit facilities will be sufficient to fund its ongoing operations and capital
requirements.
On July 30, 1994, the Company issued 22,015,062 shares of Common Stock to BIEI
in exchange for approximately 90% of the common stock of VIE.
DISCONTINUED OPERATIONS
The Company previously sold its oil operations; accordingly, such operations
are reported as discontinued in the accompanying financial statements.
During the three months ended March 31, 1993, the Company made a one-time
payment of $5,000,000 for insurance-type excess loss protection to cover
certain costs the Company may have to pay in resolving environmental and
bankruptcy related claims over a twelve year period. Discontinued operations
in 1993 also included approximately $500,000 of legal and administrative costs
attributable to the Company's former oil operations. See Notes 8 and 9 for a
further discussion of outstanding liabilities and reserves related to former
operations.
18
19
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
UNCERTAINTIES
The Company continues to be involved in a number of legal actions including
threatened claims and pending litigation from matters such as contract
disputes, environmental clean-up assessments and damages from alleged dioxin
contamination. Some of the parties involved in such actions seek significant
amounts of damages. While the results of such actions cannot be predicted with
certainty, based upon its knowledge of the facts and circumstances and
applicable laws, as well as the insurance-type arrangement, management believes
that the ultimate resolution of all disputed claims, pending litigation and
threatened claims will not have a material adverse effect on the Company's
financial condition or results of operations.
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20
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
PART II.
ITEM 1. LEGAL PROCEEDINGS
See Note 9 for information concerning an environmental claim relating to the
Company's discontinued operations and shareholder litigation relating to the
Company's merger with Republic.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
11 Computation of net income (loss) per common share.
27 Financial Data Schedule
(b) Reports on Form 8-K:
(1) Form 8-K dated July 30, 1994 (as amended by Form 8-K/A
dated July 30, 1994 and filed with the Commission on
October 13, 1994) regarding consummation of
exchange transaction with Blockbuster Entertainment
Corporation in which shares of the Company's common stock
were exchanged for ordinary shares of Virgin Interactive
Entertainment plc.
(2) Form 8-K dated August 23, 1994 regarding proposed merger
of Blockbuster Entertainment Corporation with Viacom Inc.
(3) Form 8-K dated September 29, 1994 regarding change in
control of the Company resulting from consummation of
merger of Blockbuster Entertainment Corporation with
Viacom Inc.
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21
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPELLING ENTERTAINMENT GROUP INC.
November 14, 1994 By:
-----------------------------------------------
Thomas P. Carson
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
By:
-----------------------------------------------
Kathleen Coughlan
Senior Vice President and Corporate Controller
(Principal Accounting Officer)
21