1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1995 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 May 10, 1995, the registrant had outstanding 88,327,011 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 -
March 31, 1995 and December 31, 1994 (Unaudited) 3
Condensed Consolidated Statements of
Operations - Three Months Ended
March 31, 1995 and 1994 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1995 and 1994 (Unaudited) 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
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SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)
March 31, December 31,
1995 1994
-------- ----------
ASSETS:
Cash and cash equivalents $ 21,450 $ 22,400
Accounts receivable, net 204,888 242,127
Entertainment product, net 321,825 325,643
Property, plant and equipment, net 19,207 16,161
Other assets 25,135 19,678
Intangible assets 398,137 400,751
-------- ----------
$990,642 $1,026,760
======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable, accrued expenses and other liabilities $ 69,478 $ 101,484
Accrued participation expense 81,404 83,493
Deferred revenue 6,405 11,275
Bank and other debt 239,482 248,853
Income and other taxes 30,006 24,355
Net liabilities related to discontinued operations 25,102 27,061
-------- ----------
Total Liabilities 451,877 496,521
-------- ----------
Minority interest 1,765 1,792
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
88,295,986 and 87,983,329 shares, respectively 8,830 8,798
Capital in excess of par value 548,299 546,843
Accumulated deficit (20,677) (27,287)
Cumulative translation adjustment 548 93
-------- ----------
Total Shareholders' Equity 537,000 528,447
-------- ----------
$990,642 $1,026,760
======== ==========
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
March 31,
-----------------------
1995 1994
--------- --------
Revenue $ 185,148 $ 80,413
Costs and expenses:
Entertainment product costs 144,742 59,531
Selling, general and administrative 23,367 8,731
--------- --------
Operating income 17,039 12,151
Interest income 1,057 524
Interest expense (4,699) (656)
Other income, net 53 --
--------- --------
Income from continuing operations
before income taxes and minority interest 13,450 12,019
Provision for income taxes (6,206) (5,165)
--------- --------
Income from continuing operations before minority interest 7,244 6,854
Minority interest 27 --
--------- --------
Net income $ 7,271 $ 6,854
========= ========
Average number of common and common equivalent shares 88,125 64,579
========= ========
Net income per common and common equivalent share $ 0.08 $ 0.11
========= ========
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)
Three Months Ended
March 31,
-------------------
1995 1994
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,271 $ 6,854
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation and amortization 3,788 1,289
Amortization of entertainment product costs 132,332 39,875
Additions to entertainment product costs (128,514) (35,271)
Changes in operating assets and liabilities:
Decrease in accounts receivable 37,239 11,187
Increase (decrease) in accounts payable
accrued expenses, other liabilities and income taxes (25,894) 4,785
Decrease in accrued participation expense (2,089) (3,330)
Decrease in deferred revenue (4,870) (7,629)
Other, net (6,261) 1,220
--------- --------
13,002 18,980
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (4,110) (189)
Changes in net liabilities related to
discontinued operations (1,959) (1,771)
--------- --------
(6,069) (1,960)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facilities 19,598 50,000
Repayments of credit facilities (28,969) (59,580)
Cash dividends paid on Common Stock -- (1,291)
Issuances of Common Stock 1,488 865
--------- --------
(7,883) (10,006)
--------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (950) 7,014
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 22,400 12,682
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 21,450 $ 19,696
========= ========
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 on Form 10-K.
The financial statements reflect, in the opinion of management, all normal
recurring adjustments necessary to present fairly the Company's financial
position and results of operations. In order to maintain consistency and
comparability between periods presented, certain amounts have been reclassified
from the previously reported financial statements in order to conform with the
financial statement presentation in the current period.
Blockbuster Entertainment Corporation ("BEC") owned 67,673,702 shares 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 Limited ("VIEL," together with
its subsidiaries, "VIE")). Effective as of that date, BEC merged with and into
Viacom Inc. ("Viacom"), with Viacom being the surviving corporation. As a
result of the merger, Viacom currently owns approximately 77% of the Company's
Common Stock.
The first quarter of 1995 reflects $5,026,000 of operating income that resulted
from the Company conforming its accounting policies, with respect to Statement
of Financial Accounting Standards ("SFAS") No. 53, to those of Viacom. In
addition, such operating income includes a net adjustment of approximately
$5,500,000 attributable to prior years. Also, in the first quarter of 1995,
the Company recognized write-downs to net realizable value of approximately
$9,077,000 with respect to certain of the Company's entertainment product.
2. MERGER AND ACQUISITION
On April 26, 1994, the Company, acquired all of the outstanding shares of
Republic Entertainment Inc. (formerly Republic Pictures Corporation)
("Republic"), through a cash merger (the "Merger").
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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 July 30, 1994, the Company acquired from BEC (the "Acquisition") 8,686,984
ordinary shares (the "Ordinary Shares") of VIEL and an option to acquire 550,000
Ordinary Shares of VIEL (collectively, the "VIE Interests") in exchange for
22,015,062 shares of the Company's Common Stock. BEC 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 VIEL's Ordinary Shares.
In connection with the Acquisition, the Company also entered into put- and
call-option agreements with BEC (now Viacom) with respect to the Ordinary Shares
of VIEL not owned by the Company. Under these agreements, at certain dates over
the next three years the Company may acquire, or be required by Viacom to
purchase, these shares from Viacom at an agreed-upon price. At the option of
the Company, such purchase price may be paid in cash or shares of the
Company's Common Stock. (See Note 10.)
The Company has accounted for the Merger and the Acquisition under the purchase
method of accounting. The results of operations of Republic and VIEL are
included in the Company's results of operations subsequent to acquisition. The
assets and liabilities of Republic and VIEL are included in the accompanying
condensed consolidated balance sheets as of March 31, 1995 and December 31,
1994, at estimated fair value, with the preliminary differences between purchase
price and such fair values being included in intangible assets. The Company has
completed a preliminary evaluation of the assets and liabilities of Republic and
VIEL. The excess of the purchase price over net assets and liabilities acquired
is being amortized on a straight-line basis over forty years.
3. ENTERTAINMENT PRODUCT, NET
Entertainment product, net includes production or acquisition costs (including
advance payments to producers), capitalized overhead and interest, home video
and interactive manufacturing costs, and prints, advertising and other related
distribution costs expected to benefit future periods. These costs are
amortized, and third-party participations and residuals are accrued, on an
individual product basis in the ratio that current year gross revenue bears to
estimated future gross revenue.
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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)
Entertainment product, net is stated at the lower of cost less amortization or
estimated net realizable value, generally on an individual film 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 an individual product will realize an ultimate loss, additional
amortization is provided to fully recognize such loss in that period.
Entertainment product, net is comprised of the following:
March 31, December 31,
1995 1994
--------- ------------
Entertainment product:
Released $185,822 $ 162,147
In process and other 38,749 53,615
Entertainment product rights 97,254 109,881
-------- ---------
$321,825 $ 325,643
======== =========
Entertainment product rights include advances to producers and acquisition
costs for distribution or other rights to entertainment product not produced by
the Company.
4. DEBT
Debt consisted of the following:
March 31, December 31,
1995 1994
--------- ------------
Viacom Facility, average interest at
7.38% at March 31, 1995 $170,000 $181,805
Credit Agreement, average interest at
7.12% at March 31, 1995 69,274 54,313
UK Facility, interest at 7.75%
at March 31, 1995 147 8,943
Other credit facilities 61 3,792
-------- --------
$239,482 $248,853
======== ========
In January 1994, the Company entered into a three-year credit agreement with
BEC. As a result of the merger of BEC with and into Viacom, Viacom succeeded
to BEC's position under the credit agreement (the "Viacom Facility"). This
agreement was amended and restated in
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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)
January 1995 to reflect certain amendments to the facility which were effective
as of December 7, 1994, including a $25,000,000 increase in the amount
available under the facility. The Viacom Facility, as amended, provides for
(i) a term loan of $100,000,000 and (ii) a revolving credit facility of
$100,000,000 to fund the Company's working capital and other requirements. All
outstanding borrowings mature on March 31, 1997. Under the Viacom Facility,
the Company pays an annual fee (currently 0.375%) based on the unused portion
of the facility, as well as certain facility and administration fees, all based
on the similar fees payable by Viacom under its separate credit facilities.
Interest on all outstanding borrowings is payable, at the Company's option, at
LIBOR plus a spread (currently 1.25%) or at prime rate; both rates are
determined by reference to the corresponding rates payable by Viacom under its
separate credit facilities.
Borrowings under the Viacom Facility are secured by all of the assets of the
Company and its domestic subsidiaries and the entire amount outstanding under
the Viacom Facility may be accelerated if Viacom's borrowings under its
separate credit facilities were to be accelerated.
On December 23, 1993, a wholly-owned subsidiary of VIEL 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 August
31, 1995. Interest is payable monthly at the bank's reference rate or, at the
Company's option, certain alternative rates. Additionally, the Company must
pay a commitment fee of 0.125% on the unused portion of the available credit.
As of March 31, 1995, the Company had approximately $2,915,000 in letters of
credit outstanding under the Credit Agreement to guarantee its purchases of
interactive entertainment product.
On September 8, 1993, another wholly-owned subsidiary of VIEL established a
5,000,000 pounds sterling credit facility (the "UK Facility") with a bank in
the United Kingdom. On April 12, 1994, the UK Facility was increased to
10,000,000 pounds sterling, based in part on the personal guarantee of two of
the directors of the subsidiary. Following the Acquisition, the Company
guaranteed the UK Facility and the guarantees of the two directors were
terminated. (See Note 2.) Advances under the credit facility bear interest at
the bank's prime rate plus 1.5% and are due on demand. The UK Facility matures
on April 30, 2005.
During the first quarter of 1995, the Company's other credit facilities were
paid off and terminated.
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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)
Pursuant to the separate credit facilities under which Viacom is a borrower,
certain subsidiaries of Viacom, including the Company, are restricted from
incurring indebtedness (other than indebtedness owing to Viacom) without the
prior consent of Viacom's lenders. Such consent has been given with respect to
the Credit Agreement and the UK Facility.
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 Adjustment Total
------- --------- ------- ----------- -----
Balance at
December 31, 1994 $8,798 $ 546,843 $(27,287) $ 93 $ 528,447
Sales of common stock 32 1,456 -- -- 1,488
Unrealized holding gain, net -- -- (661) -- (661)
Net income for the period -- -- 7,271 -- 7,271
Cumulative translation adjustment -- -- -- 455 455
------ --------- -------- ---- ---------
Balance at March 31, 1995 $8,830 $ 548,299 $(20,677) $548 $ 537,000
====== ========= ======== ==== =========
Effective January 1, 1994, the Company adopted 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 to Shareholders'
Equity. The adjustment recorded in the first quarter of 1995 was a decrease of
$661,000, net of tax. The carrying value of this investment is included in
other assets.
6. INCOME TAXES
Income taxes have been provided in each period based on the Company's
anticipated annual effective income tax rate.
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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)
7. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Net income per common and common equivalent share amounts are based on the
weighted average number of common shares outstanding during the respective
periods. Primary and fully-diluted net income per common and common equivalent
share are not presented as they result in a dilution of less than 3% from basic
net income per common and common equivalent share.
8. LEGAL MATTERS
The Company is involved in certain legal proceedings which arise in the
ordinary course of conducting its entertainment business operations. The
Company believes such legal proceedings should not have a material adverse
effect on the Company's consolidated results of operations or financial
condition.
The Company also is subject to pending and contingent claims relating to the
Company's discontinued operations, including certain claims involving
environmental matters. Some of the parties involved in such actions seek
significant damages. While the outcome of these claims cannot be predicted with
certainty, the Company believes based upon (i) its knowledge of the facts and
circumstances and applicable law; (ii) allowances for estimated losses on
disposal of the discontinued operations, and (iii) an indemnity agreement, that
the ultimate resolution of such claims will not have a material adverse effect
on the Company's consolidated results of operations or financial condition.
9. RELATED PARTY TRANSACTIONS
See Note 4 regarding the Company's credit facility with Viacom and Viacom's
guarantee of the Company's credit agreement with a bank. The Company paid
interest and fees to Viacom of $2,901,000 and to BEC of $322,000 during the
three months ended March 31, 1995 and 1994, respectively, in connection with
this facility.
During the three months ended March 31, 1995 and 1994, the Company recorded
revenue, net of returns, of approximately $1,215,000 and $53,000, respectively,
from the sale of home videocassettes and interactive entertainment product to
BEC (subsequent to September
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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)
29, 1994, Blockbuster Entertainment Group, a division of Viacom "BEG"). At
March 31, 1995, the Company had a net receivable due from BEG of approximately
$122,000 resulting from these sales and associated returns.
Viacom (BEC) provided the Company with management services for which the
Company was charged $150,000 by Viacom and $125,000 by BEC for the three months
ended March 31, 1995 and 1994, respectively. As of March 31, 1995 the Company
had a net payable to Viacom of approximately $401,000 with respect to such
expenses.
Prior and subsequent to the merger of BEC into Viacom, the Company licensed
certain entertainment product to Showtime Networks Inc. ("Showtime"), a
subsidiary of Viacom, and certain television stations owned by Viacom. Revenue
from sales to Showtime were not material for the three months ended March 31,
1995. Sales to the television stations consist of both cash and barter
contracts. Revenue from cash contracts was $710,000 for the three months ended
March 31, 1995 and the Company has a receivable due from Viacom of $2,332,000
as of March 31, 1995. The Company realized $276,000 in revenue from
third-party advertisers with respect to the sale of advertising time received
under the barter contracts.
Additionally, prior and subsequent to the merger of BEC into Viacom, the
Company licensed certain entertainment product to USA Network and Sci-Fi
Channel in which Viacom has equity interests. Revenue from such sales were
$2,659,000 for the three months ended March 31, 1995, and the Company has
receivables at March 31, 1995 due from USA Network and Sci-Fi Channel of
$6,066,000 associated with such sales.
In the ordinary course of business, the Company has and expects to continue to
do business with Viacom and it affiliates, including BEG, Showtime and
Paramount Pictures Corporation.
10. SUBSEQUENT EVENTS
On April 21, 1995, BEG entered into an agreement to acquire the remaining
Ordinary Shares of VIEL not owned by the Company for approximately $22,973,000
plus other costs associated with the transaction. These shares are subject to
put- and call-option agreements between the Company and BEG. (See Note 2.)
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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 or sold to, and available for exhibition by, licensees or customers in
various media and territories. Consequently, results of operations may vary
significantly between periods, and the results of operations in any one period
may not be indicative of results of operations in future periods.
REVENUE
The following table sets forth the components of revenue from the Company's
major media and markets for the three months ended March 31 (in thousands):
1995* 1994
-------- ---------
U.S. Networks $ 33,236 $ 34,594
Other domestic television distribution 42,309 9,948
International television distribution 49,036 23,087
Worldwide interactive entertainment 36,264 --
Worldwide home video 18,990 4,019
International film distribution 2,009 2,104
Worldwide licensing and merchandising 3,181 4,964
Other 123 1,697
-------- --------
$185,148 $ 80,413
======== ========
* Includes operations of Republic and VIE, which were acquired after March 31,
1994.
Television programming revenue is derived from network license fees, first-
run syndication sales and fees arising from domestic and international
television licensing agreements. During the initial years of a one-hour
network television series, network and international license fees normally
approximate the production costs of the series, and accordingly the Company
recognizes only minimal profit or loss during this period. With respect to
half-hour network television programming and first-run syndication television
programming, the production costs can significantly exceed the combination of
the network or other domestic revenue and international license fees. However,
if a sufficient number of episodes of a series are produced, the Company is
reasonably assured that it will also be able to sell the series in the
domestic off-network market, and the Company would then expect to be able to
reduce its loss or realize a profit with respect to the series.
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SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Network revenue decreased $1,358,000 for the three months ended March 31, 1995.
The Company delivered fewer hours of programming in the three months ended
March 31, 1995, than in the comparable period in 1994, which was partially
offset by an increase in network license fees in the first quarter of 1995 for
"Beverly Hills, 90210" and "Melrose Place."
Other domestic television distribution revenue increased $32,361,000 for the
three months ended March 31, 1995 from the comparable period in 1994. The
increase was primarily attributable to (i) the distribution of "Beverly Hills,
90210" in domestic syndication; (ii) the distribution of three one-hour dramas,
"Robin's Hoods," "University Hospital," and "Heaven Help Us," in first-run
syndication; (iii) exploitation of the Company's library, including that
attributable to prior periods; and (iv) conforming the Company's accounting
policies to those of Viacom. (See Note 1.)
International television distribution revenue increased $25,949,000 for the
three months ended March 31, 1995 from the comparable period in 1994. The
increase was primarily attributable to (i) the increase in network and
first-run syndication programming available for international distribution; and
(ii) conforming the Company's accounting policies to those of Viacom. (See
Note 1.)
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.
Home video revenue increased $14,971,000 for the three month period ended March
31, 1995, from the comparable period in 1994, primarily as a result of the
acquisition of the operations of Republic.
Licensing and merchandising revenue decreased $1,783,000 for the three months
ended March 31, 1995 from the comparable period in 1994. The decrease was
primarily due to the decline in licensing revenue related to "Beverly Hills,
90210."
ENTERTAINMENT PRODUCT COSTS
Entertainment product costs consist primarily of the amortization of
capitalized product costs and the accrual of third-party participations and
residuals. The increases in such costs of $85,211,000 during the three months
ended March 31, 1995, as compared to the same period in 1994, resulted
primarily from the increases in revenue described above.
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SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Additionally, the percentage relationship between such costs and the related
revenue increased to 78% in the first quarter of 1995 as compared to 74% in the
first quarter of 1994. This percentage relationship is a function of (i) the
mix of entertainment product generating revenue in each period and (ii) changes
in the projected profitability of individual entertainment product based on the
Company's estimates of such product's ultimate revenue and costs. The Company
recorded write-downs to net realizable value with respect to its entertainment
product of $9,077,000 and $2,021,000 for the three months ended March 31, 1995
and 1994, respectively. The increase was primarily attributable to the
Company's increased activities in first-run syndication programming.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased $14,636,000 during the
three months ended March 31, 1995, compared to the same period of 1994,
primarily due to the selling, general and administrative costs related to the
operations of VIE and Republic, including the amortization of intangible
assets. In addition, there were increased administrative costs commensurate
with the Company's growth.
INTEREST EXPENSE
Interest expense increased $4,043,000 during the three months ended March 31,
1995 in comparison to the prior year period, as a result of higher total
indebtedness, including that related to the Republic merger. (See Note 4.)
The Company's interest expense is dependent upon the interest rates on its
outstanding obligations, which are largely tied to the interest rates under
Viacom's separate credit facilities, and the Company could experience
fluctuations in interest expense resulting solely from increases or decreases
in such interest rates.
PROVISION FOR INCOME TAXES
The Company computes its interim provision for income taxes based upon an
estimated annual effective tax rate computed in accordance with SFAS No. 109.
The Company's provision for income taxes for the three months ended March 31,
1995, increased $1,041,000, as compared to the first quarter of 1994, largely
as a result of the increase in income for the period and the increase in the
effective tax rate. The effective tax rate, while greater than the rate for
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SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
the same quarter last year, is consistent with the annual effective tax rate
for 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations require the production of entertainment product and the
acquisition of distribution or other rights to entertainment product produced by
third parties. The Company's expenditures in this regard totaled $128,514,000
and $35,271,000 in the three months ended March 31, 1995 and 1994, respectively.
The cost of producing network television programming is largely funded through
the receipt of the related network license fees. The deficit financing of its
network programming and the cost of other production and acquisition activities
is funded through the Company's operating cash flow and borrowings under its
credit arrangements.
The Company's principal credit agreement is with Viacom. (See Note 4.) The
Viacom Facility provides for a three-year term loan facility of $100,000,000,
which funded the Company's acquisition of Republic, and a revolving credit
facility of $100,000,000 (increased in December 1994 from $75,000,000) to fund
the Company's working capital and other requirements.
A wholly-owned subsidiary of VIEL has a multi-currency credit agreement for
$75,000,000 with a bank in the U.S. As of March 31, 1995, the Company had
$2,915,000 in letters of credit outstanding under the Credit Agreement to
guarantee its purchases of interactive entertainment product. (See Note 4.)
Viacom has guaranteed all of the borrowings under the Credit Agreement, which
are due August 31, 1995. The Company has entered into negotiations with the
bank to extend the term of the loan for at least twelve months. The Company
believes that it will be able to obtain this extension, or, alternatively,
obtain similar financing from Viacom.
Another wholly-owned subsidiary of VIEL has a 10,000,000 pounds sterling credit
facility with a bank in the United Kingdom, which the Company has guaranteed.
The UK Facility has been extended until April 2005. (See Note 4.)
As a result of the merger of BEC into Viacom in September 1994, Viacom
currently owns approximately 77% of the Company's Common Stock. Pursuant to
the separate credit facilities under which Viacom is a borrower, certain
subsidiaries of Viacom, including the Company, are restricted from incurring
indebtedness (other than indebtedness owing to Viacom) without the prior
consent of Viacom's lenders. Such consent has been given with respect to the
Credit Agreement and the UK Facility.
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SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Company believes that its financial condition remains strong and that it
has the financial resources necessary to meet its anticipated capital
requirements. The Company has sufficient resources available from the cash
provided by operating activities and that available under its credit facility
to meet its ongoing plans for the production, acquisition and distribution of
entertainment product and to take advantage of internal and external
development and growth opportunities.
UNCERTAINTIES
The Company is subject to pending and contingent claims relating to the
Company's discontinued operations, including certain claims involving
environmental matters. Some of the parties involved in such actions seek
significant damages. While the outcome of these claims cannot be predicted with
certainty, the Company believes based upon (i) its knowledge of the facts and
circumstances and applicable law; (ii) allowances for estimated losses on
disposal of the discontinued operations, and (iii) an indemnity agreement, that
the ultimate resolution of such claims will not have a material adverse effect
on the Company's consolidated results of operations or financial condition.
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SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
PART II.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.18 Employment Agreement, dated as of January 10, 1994, between
Registrant and Kathleen Coughlan, and Amendment to Employment
Agreement, dated as of September 1, 1994.
11 Computation of net income per common and common equivalent share.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
None
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SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPELLING ENTERTAINMENT GROUP INC.
May 12, 1995 By: /s/ Thomas P. Carson
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Thomas P. Carson
Executive Vice President, Chief Financial
Officer and Treasurer
(Principal Financial Officer)
By: /s/ Kathleen Coughlan
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Kathleen Coughlan
Senior Vice President and Corporate Controller
(Principal Accounting Officer)
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