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, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO _______________
COMMISSION FILE NUMBER: 1-6739
SPELLING ENTERTAINMENT GROUP INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 59-0862100
- ------------------------------- --------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5700 WILSHIRE BOULEVARD
LOS ANGELES, CALIFORNIA 90036
- ---------------------------------------- --------------------
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (323) 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 11, 1998, the registrant had outstanding 92,954,681 shares of
Common Stock, $.001 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, 1998 and December 31, 1997 (Unaudited) 3
Condensed Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 1998 and 1997 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997 (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 6. EXHIBITS AND REPORTS ON FORM 8-K 24
2
3
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
September 30, December 31,
1998 1997
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,642 $ 860
Accounts receivable, net 98,632 104,150
Entertainment product, net 244,319 246,955
Other current assets 35,786 4,372
--------- ---------
TOTAL CURRENT ASSETS 386,379 356,337
Accounts receivable, net 84,005 90,593
Entertainment product, net 144,462 127,901
Property and equipment, net 10,572 11,409
Intangible assets, net 183,206 187,320
Other noncurrent assets 20 20
--------- ---------
$ 808,644 $ 773,580
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, accrued expenses and other liabilities $ 45,502 $ 34,691
Accrued participation expense 66,662 59,490
Deferred revenue 29,503 15,430
Income and other taxes 3,738 4,103
--------- ---------
TOTAL CURRENT LIABILITIES 145,405 113,714
Accrued participation expense 46,363 48,159
Long-term debt payable to Viacom 245,000 289,000
Deferred income and other taxes 47,461 25,245
Net liabilities related to discontinued operations of VIE 55,567 21,909
Net liabilities related to discontinued operations of Charter 1,263 4,535
--------- ---------
541,059 502,562
--------- ---------
Commitments and contingent liabilities
SHAREHOLDERS' EQUITY
Common Stock, $.001 par value,
- 300,000,000 shares authorized
- 92,538,484 and 90,987,329 shares issued and outstanding 93 91
Capital in excess of par value 589,609 578,704
Accumulated deficit (341,149) (313,355)
Accumulated other comprehensive income 19,032 5,578
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 267,585 271,018
--------- ---------
$ 808,644 $ 773,580
========= =========
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,
----------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Revenue $ 157,065 $ 108,480 $ 433,275 $ 423,408
Gain on Sale of TeleUNO -- -- 7,030 --
Costs and expenses:
Entertainment product costs 114,747 102,331 339,918 382,050
Selling, general and administrative 14,114 14,238 40,347 43,920
Provision for closure of film and
video divisions 3,995 -- 23,995 --
--------- --------- --------- ---------
Operating income (loss) 24,209 (8,089) 36,045 (2,562)
Interest income 490 229 1,381 748
Interest expense, net (4,989) (5,660) (15,595) (15,207)
Other, net (33) (745) (90) 4,921
--------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes 19,677 (14,265) 21,741 (12,100)
Provision for income taxes 24,136 3,822 24,535 2,222
--------- --------- --------- ---------
Loss from continuing operations (4,459) (18,087) (2,794) (14,322)
Loss from discontinued operations of VIE, net 25,000 -- 25,000 --
--------- --------- --------- ---------
Net loss $ (29,459) $ (18,087) $ (27,794) $ (14,322)
========= ========= ========= =========
Weighted average number of common shares:
Basic 92,514 90,746 92,223 90,730
Diluted 92,514 90,746 92,223 90,730
Basic loss per common share:
Continuing operations $ (0.05) $ (0.20) $ (0.03) $ (0.16)
Discontinued operations (0.27) -- (0.27) --
--------- --------- --------- ---------
Basic loss per common share $ (0.32) $ (0.20) $ (0.30) $ (0.16)
========= ========= ========= =========
Diluted loss per common share:
Continuing operations $ (0.05) $ (0.20) $ (0.03) $ (0.16)
Discontinued operations (0.27) -- (0.27) --
--------- --------- --------- ---------
Diluted loss per common share $ (0.32) $ (0.20) $ (0.30) $ (0.16)
========= ========= ========= =========
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,
--------------------------
1998 1997
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (27,794) $ (14,322)
Adjustments to reconcile net loss to cash flows
from continuing operations:
Net loss from discontinued operations 25,000 --
Depreciation and amortization 7,108 6,827
Provision for closure of film and video divisions 23,995 --
Amortization of entertainment product costs 273,698 317,984
Additions to entertainment product costs (309,768) (292,207)
Gain from marketable securities -- (5,648)
Decrease in accounts receivable 12,333 6,962
Increase (decrease) in accounts payable, accrued expense,
other liabilities and income taxes 22,136 (12,454)
Increase in accrued participation expense 12,512 17,290
Increase in deferred revenue 14,073 1,235
Other, net 432 (1,993)
--------- ---------
Net cash provided by continuing operations 53,725 23,674
Net cash provided (used) by discontinued operations (41,608) (8,470)
--------- ---------
12,117 15,204
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (2,213) (1,471)
Repayments by (funding of) discontinued operations of VIE (8,120) 2,471
Changes in net liabilities related to
discontinued operations of Charter (3,272) 73
--------- ---------
Net cash provided (used) by continuing operations (13,605) 1,073
Net cash provided (used) by discontinued operations 122,500 (2,027)
--------- ---------
108,895 (954)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facilities 97,000 45,000
Repayments of credit facilities (141,000) (72,000)
Issuances of Common Stock 10,662 190
--------- ---------
Net cash used by continuing operations (33,338) (26,810)
Net cash provided (used) by discontinued operations (87,712) 4,023
--------- ---------
(121,050) (22,787)
--------- ---------
Net decrease in cash and cash equivalents (38) (8,537)
Cash and cash equivalents at beginning of period 10,113 16,175
--------- ---------
Cash and cash equivalents at end of period $ 10,075 $ 7,638
========= =========
Cash and cash equivalents at end of period:
Continuing operations $ 7,642 $ 1,262
Discontinued operations 2,433 6,376
--------- ---------
$ 10,075 $ 7,638
========= =========
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)
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 ("SEC"). The Company believes that the disclosures contained herein
are adequate to make the information presented not misleading; however, these
unaudited condensed consolidated financial statements should be read in
conjunction with the more detailed financial statements and notes thereto
included in the Company's most recent Annual Report on Form 10-K.
The financial statements reflect, in the opinion of management, all normal
recurring adjustments necessary to present fairly the Company's financial
position and results of operations. In order to maintain consistency and
comparability between periods presented, certain amounts have been reclassified
from the previously reported financial statements in order to conform with the
financial statement presentation in the current period.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Viacom Inc. ("Viacom") currently owns approximately 80% of the Company's common
stock ("Common Stock"). (See Note 5 regarding the Company's agreement with
Viacom regarding tax reporting and administrative matters.)
On July 30, 1994, the Company acquired approximately 91% of the ordinary shares
("Ordinary Shares") of Virgin Interactive Entertainment Limited ("VIEL") and
also entered into put- and call-option agreements with respect to the Ordinary
Shares of VIEL not owned by the Company and currently owned by Viacom. Viacom
and the Company have executed amendments to extend the put- and call-option
agreements, which were originally scheduled to expire in July 1995, through
December 31, 1998. Effective as of November 9, 1998, the put- and call-option
agreements were terminated by mutual agreement. On February 20, 1997, the
Company announced its intention to dispose of its interactive game business,
VIEL (together with its subsidiaries, "VIE"). The Company has disposed of
substantially all of its investments in VIE and expects to shutdown the
remaining VIE operations in 1999. (See Notes 9 and 10 regarding the planned
disposition of the remaining operations of VIE).
In February 1998, the Company announced its intention to exit the feature film
business and close Spelling Films Inc. ("Spelling Films"). The Company recorded
a charge of $20,000,000, including the write-down to estimated net realizable
value of capitalized development projects which will be sold or abandoned,
reserves for commitments to various talent, as well as severance costs related
to Spelling Films' employees. As of September 30, 1998, the remaining accrual
balance for this provision of
6
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SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
$2,988,000 is included in accounts payable, accrued expenses and other
liabilities in the accompanying balance sheet.
In April 1998, the Company sold TeleUNO, its Latin American entertainment
channel. The Company recognized a gain of $7,030,000 from this transaction in
the second quarter, which is reflected in the accompanying financial statements.
In September 1998, the Company entered into a seven-year licensing agreement
with a third party covering the domestic and Canadian home video and digital
video disc ("DVD") distribution rights to approximately 3,000 titles in the
Company's library. In connection with this transaction, the Company recorded a
charge of $3,995,000, including severance costs related to employees of Republic
Entertainment Inc. ("Republic"), the reduction of carrying values of physical
inventory sold to the third party and the write-down to estimated net realizable
value of certain titles. As of September 30, 1998, the remaining accrual balance
of this reserve was $2,863,000 and is included in accounts payable, accrued
expenses and other liabilities in the accompanying balance sheet.
2. ENTERTAINMENT PRODUCT, NET
Entertainment product, net, includes development, production or acquisition
costs (including advance payments to producers), capitalized overhead and
interest, home video manufacturing costs, and prints, advertising and other
related distribution costs expected to benefit future periods. These costs are
amortized, and third-party participations and residuals are accrued, generally
on an individual product basis in the ratio that current year gross revenue
bears to estimated future gross revenue.
Domestic syndication and basic cable revenue estimates are not included in
estimated future gross revenue of television programming until such sales are
probable. Entertainment product, net, is stated at the lower of cost less
amortization or estimated net realizable value. Estimates of total gross
revenue, costs and participations are reviewed quarterly and revised as
necessary. When estimates of total revenue and costs indicate that an individual
existing product will realize an ultimate loss, additional amortization is
provided to fully recognize such loss in that period or, for new television
product, as the episodes are delivered.
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SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
Entertainment product, net, is comprised of the following:
September 30, December 31,
1998 1997
------------- ------------
Entertainment product:
Theatrical
Released $ 126,329 $ 147,301
In process and other 2,769 12,607
--------- ---------
129,098 159,908
--------- ---------
Television
Released 225,460 189,624
In process and other 34,223 25,324
--------- ---------
259,683 214,948
--------- ---------
Total 388,781 374,856
Less: non-current portion (144,462) (127,901)
--------- ---------
Current portion $ 244,319 $ 246,955
========= =========
3. DEBT
On September 30, 1996, the Company and Viacom executed a credit agreement (the
"Viacom Credit Agreement") which replaced its previous credit agreement with
Viacom. The Viacom Credit Agreement provides for (i) a term loan of $200,000,000
and (ii) a revolving credit facility of $155,000,000 to fund the Company's
working capital and other requirements. All outstanding borrowings under the
Viacom Credit Agreement mature on December 31, 1999.
Under the Viacom Credit Agreement, the Company pays an annual fee (currently
0.375%) based on the unused portion of the facility, as well as certain facility
and administration fees. Effective as of October 1, 1996, interest on all
outstanding borrowings is payable, at the Company's option, at LIBOR plus a
spread based on the Company's leverage ratio, as defined (2.5% during this
reporting period), or at Citibank N.A.'s base rate. The average interest rate at
September 30, 1998 and December 31, 1997, on borrowings under the Viacom Credit
Agreement, was 8.1% and 8.5%, respectively. Additional terms of the Viacom
Credit Agreement require, among other items, a minimum amount of net worth, as
defined. Borrowings under the Viacom Credit Agreement are secured by all of the
assets of the Company and its domestic subsidiaries, and the entire amount
outstanding under the Viacom Credit Agreement may be accelerated if Viacom's
borrowings under its separate credit facilities were to be accelerated. At
September 30, 1998, the carrying value of all of the Company's debt approximated
fair value.
See Notes 9 and 10 regarding debt related to discontinued operations.
8
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SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
4. SHAREHOLDERS' EQUITY
The following is a summary of the changes in the components of shareholders'
equity:
Accumulated
Capital In Other
Common Excess of Accumulated Comprehensive
Stock Par Value Deficit Income Total
--------- ----------- ----------- --------------- ---------
Balance at December 31, 1997 $ 91 $ 578,704 $(313,355) $ 5,578 $ 271,018
Exercise of options and warrants 2 10,779 -- -- 10,781
Income tax benefit related
to stock options -- 126 -- -- 126
Net loss for the period -- -- (27,794) -- (27,794)
Unrealized holding gain, net -- -- -- 14,981 14,981
Cumulative translation adjustment -- -- -- (1,527) (1,527)
--------- --------- --------- --------- ---------
Balance at September 30, 1998 $ 93 $ 589,609 $(341,149) $ 19,032 $ 267,585
========= ========= ========= ========= =========
In February 1998, Viacom exercised warrants it received in connection with its
1994 acquisition of Blockbuster Entertainment Company to acquire 1,337,148
shares of Common Stock for a total exercise price of approximately $9,316,000.
The net liabilities relating to discontinued operations of VIE include a common
stock investment which had a carrying value (fair value) of $16,611,000 at
December 31, 1997. On May 29, 1998, the Company acquired this investment from
VIE. At September 30, 1998 this investment is included in other current assets
of the Company at its carrying value (fair value) of $31,603,000, and the
unrealized gain associated with the investment is included in accumulated other
comprehensive income above. The Company has accounted for this common stock
investment as an "available for sale" security under the applicable provisions
of Statement of Financial Accounting Standards ("SFAS") No. 115, adjusting the
carrying value to fair market value, with a corresponding adjustment, net of
tax, to shareholders' equity. Subsequent to September 30, 1998, the Company,
along with Viacom, began liquidating this common stock investment.
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," effective
January 1, 1998. Total comprehensive income (loss) for the three- and nine-month
periods ended September 30, 1998 was ($23,927,000) and ($14,340,000),
respectively. For the three- and nine-month periods ended September 30, 1997,
total comprehensive income (loss) was ($15,840,000) and ($16,717,000),
respectively. Total comprehensive income (loss) is comprised of net income and
other comprehensive income items, including foreign currency translation
adjustments and unrealized holding gains on securities.
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SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
5. INCOME TAXES
Income taxes have been provided in each period based on the Company's expected
effective income tax rate.
Viacom has acquired approximately 80% of the outstanding shares of the Company
and, therefore, the Company is required to be included in the consolidated
federal income tax return of Viacom. The Company and Viacom are party to an
agreement that provides for the administration of federal, state and foreign tax
matters (the "Tax Agreement"). Under the Tax Agreement, the Company will remain
in the same tax position as it would have if it were continuing to file its tax
returns separate and apart from Viacom. As a result, the Company does not
anticipate any material impact to its consolidated financial condition or
results of operations.
6. NET LOSS PER COMMON SHARE
Basic loss per common share amounts are based on the weighted average number
of common shares outstanding during the respective periods. Diluted loss per
common share amounts are based on the weighted average common shares outstanding
during the period and shares assumed issued upon conversion of stock options and
warrants when the effect of such conversions would have been dilutive to income
from continuing operations.
Prior period amounts have been restated to conform to SFAS No. 128. The table
below presents a reconciliation of weighted average shares used in the
calculation of basic and diluted loss per common share:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1998 1997 1998 1997
------ ------ ------ ------
Basic shares - weighted average
of common shares outstanding 92,514 90,746 92,223 90,730
Additional shares assuming conversions
of stock options and warrants -- -- -- --
------ ------ ------ ------
Diluted shares 92,514 90,746 92,223 90,730
====== ====== ====== ======
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SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
7. LEGAL MATTERS
The Company is subject to various lawsuits, claims and other legal matters in
the course of conducting its entertainment business operations. The Company
believes such lawsuits, claims and other legal matters should not have a
material adverse effect on the Company's consolidated results of operations or
financial condition.
The Company also is involved in a number of legal actions including threatened
claims, pending lawsuits and contract disputes in connection with certain
bankruptcy and environmental matters relating to the discontinued operations of
The Charter Company and its subsidiaries ("Charter"), as well as other matters.
Some of the parties involved in such actions seek significant damages. While the
outcome of these suits and claims cannot be predicted with certainty, based upon
(i) its current knowledge of the facts and circumstances and its understanding
of the applicable law; (ii) allowances for estimated losses on disposal of the
discontinued operations; and (iii) an indemnity agreement, the Company believes
that the ultimate resolution of such suits and claims will not have a material
adverse effect on the Company's consolidated results of operations or financial
condition.
Environmental cleanup activity at the former petroleum terminal in Tiverton,
Rhode Island was substantially completed in September 1998, although final site
grading and negotiation of final administrative approvals will continue into
1999.
8. RELATED PARTY TRANSACTIONS
The Company was charged interest and fees by Viacom of $16,505,000 and
$19,375,000 during the nine months ended September 30, 1998 and 1997,
respectively, in connection with the Viacom Credit Agreement. Included in
accounts payable, accrued expenses and other liabilities is accrued interest
payable to Viacom of $521,000 and $568,000 as of September 30, 1998 and December
31, 1997, respectively. (See Note 3 regarding the Company's credit facilities
with Viacom and Note 9 regarding Viacom's guarantees of the Company's credit
agreements with banks.)
The Company participates in the Viacom insurance programs with respect to
general business and workers' compensation coverage. Effective January 1, 1998,
the Company also began participating in certain Viacom health and welfare
benefit plans for its employees. As of September 30, 1998, the Company had a net
payable to Viacom of approximately $2,957,000 with respect to these and other
expenses.
During the nine months ended September 30, 1998 and 1997, the Company sold home
video product to several operating subsidiaries of Viacom International Inc., a
subsidiary of Viacom. Additionally, the Company licensed certain entertainment
product to the following parties in which Viacom has or had an ownership
interest (i) Showtime Networks Inc. ("Showtime"), a subsidiary of Viacom; (ii)
MTV Networks, a division of a subsidiary of Viacom; (iii) certain television
stations owned by
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SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
Viacom; (iv) USA Network and Sci-Fi Channel, in which Viacom had equity
interests until October 1997; and (v) United Paramount Network, Nickelodeon U.K.
and Comedy Central, in which Viacom has equity interests. For the nine months
ended September 30, 1998 and 1997, these transactions are not material.
Republic has entered into agreements with, and in certain cases has advanced
funds to Viacom, a partnership in which a subsidiary of Viacom is the managing
partner and Showtime to distribute certain of their productions in the home
video market.
The Company is party to agreements with Paramount Pictures Corporation
("Paramount"), a Viacom subsidiary, with respect to the distribution of two of
the Company's feature film releases, "Night Falls on Manhattan" and "Stephen
King's Thinner," in the domestic theatrical, non-theatrical and pay television
markets. Additionally, the Company is party to agreements with Paramount for the
production and funding of two additional feature films, "In & Out" and
"Breakdown," to which the Company owns the international distribution rights. In
August 1997, Republic entered into an agreement with Paramount and licensed its
domestic home video rights to ten rental titles, including "Night Falls on
Manhattan."
The Company has entered into an agreement with Comedy Partners, in which Viacom
has an equity interest, to perform certain licensing and merchandising
activities on its behalf in exchange for a fee.
In November 1997, the Company entered into an agreement with Famous Music
Corporation and Ensign Music Corporation, subsidiaries of Paramount, with
respect to administration of the Company's music rights.
In the ordinary course of business, the Company expects to continue to do
business with Viacom and its affiliates.
9. DISCONTINUED OPERATIONS
On February 20, 1997, the Company announced its intention to dispose of its
interactive game business, VIE. The Company has disposed of substantially all of
its investment in VIE and expects to shutdown the remaining VIE operations in
1999. Accordingly, the operations of VIE are reflected as discontinued.
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SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
During the year ended December 31, 1996, the Company provided for an estimated
loss on disposal of VIE of approximately $139,501,000, which included a
provision for future operating losses of approximately $56,000,000, net of
income taxes. In the fourth quarter of 1997, the Company recorded an additional
provision of $40,000,000, net of income taxes, for future operating losses and
cash funding requirements projected for the remaining holding period through
completion of the disposition. On September 4, 1998, the Company completed the
sale of the stock of Westwood Studios, Inc., a subsidiary of VIE, and certain
development assets of VIE for $122,500,000 in cash. The proceeds of this
transaction were used to pay down bank debt and other costs associated with the
transaction. In addition, in the third quarter of 1998, the Company recorded an
additional provision of $25,000,000, net of income taxes, to provide for the
costs of shutdown, net of the proceeds from the sale of VIE's remaining
operations and assets. (See Note 10 regarding the disposition of VIE's
international operations subsequent to the reporting period.)
For the nine months ended September 30, 1998 and 1997, revenue of VIE was
$94,043,000 and $128,378,000, respectively. The net operating losses of VIE were
$44,924,000 and $49,483,000, respectively, for the same periods. The net
operating losses were provided for in the estimated loss on disposal as of
December 31, 1997 and 1996 discussed above.
VIE's net liabilities as of September 30, 1998 and December 31, 1997, are as
follows:
September 30, December 31,
1998 1997
------------- ------------
Current assets $ 15,165 $ 115,043
Current liabilities (44,571) (194,505)
--------- ---------
Net current liabilities (29,406) (79,462)
--------- ---------
Property and equipment, net 5,870 14,081
Intangibles, net -- 91,707
Other non-current assets 376 5,066
Non-current liabilities (32,407) (53,301)
--------- ---------
Net non-current (liabilities)
assets (26,161) 57,553
--------- ---------
Net liabilities $ (55,567) $ (21,909)
========= =========
On December 23, 1993, a wholly owned subsidiary of VIE established a
multi-currency credit agreement (the "Credit Agreement") with a bank in the U.S.
The Credit Agreement initially provided for maximum borrowings of $15,000,000,
subject to a borrowing base test. Following the Company's acquisition of VIE,
the amount of borrowings allowable under the Credit Agreement was
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SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
increased to $75,000,000 and the borrowing base test and other ratio tests were
eliminated, based on the guarantee of all borrowings under the Credit Agreement
by Viacom. During 1995, the borrowings allowable under the Credit Agreement were
increased to $100,000,000. In February 1998, the term was extended to September
30, 1998. On September 8, 1998, total borrowings under the Credit Agreement in
the amount of $97,000,000 were repaid and the Credit Agreement was terminated.
Borrowings under the Credit Agreement as of December 31, 1997 were $97,472,000.
As of December 31, 1997, the Company had no letters of credit outstanding under
the Credit Agreement.
On September 8, 1993, another wholly owned subsidiary of VIE established a
5,000,000 pounds sterling credit facility (the "UK Facility") with a bank in the
United Kingdom. On April 12, 1994, the UK Facility was increased to 10,000,000
pounds sterling. Advances under the UK Facility bore interest at the bank's
prime rate plus 1.0%. Effective as of April 3, 1997, the UK Facility was
renegotiated on terms more favorable to the subsidiary. The renegotiated UK
Facility was extended to December 31, 1998 and is guaranteed by Viacom and the
Company. Advances under the renegotiated UK Facility bore interest at the bank's
prime rate plus 1.0% or alternatively at selected Eurocurrency rates. Borrowings
under the UK Facility as of September 30, 1998 and December 31, 1997 were
$12,609,000 and $11,090,000, respectively. As of September 30, 1998, the Company
had no letters of credit outstanding under the UK facility. As of December 31,
1997, the Company had approximately $938,000 in letters of credit outstanding
under the UK Facility to guarantee its interactive game purchases. On November
10, 1998, total borrowings under the UK Facility were repaid and the UK Facility
was terminated. (See Note 10.)
The Company and Viacom also provide a rent guarantee, which expires in 2005, for
this subsidiary. 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 consents were obtained with
respect to the Credit Agreement and the UK Facility.
10. SUBSEQUENT EVENT
Effective as of November 9, 1998, the Company and Viacom agreed to terminate the
put- and call-option agreements with respect to the ordinary shares of VIEL.
(See Note 1.)
On November 10, 1998, the Company completed the sale of all non-U.S. operations
of VIE, effectively completing the disposal of its interactive game business.
The additional loss provision of $25,000,000 recorded in the third quarter of
1998 contemplated this sale of the non-U.S. operations of VIE. (See Note 9.)
14
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SPELLING ENTERTAINMENT GROUP INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
unaudited condensed consolidated financial statements and the related notes
thereto. References to Notes refer to the notes to such statements.
RESULTS OF OPERATIONS
The results of operations for any period are significantly affected by the
quantity and performance of the Company's existing entertainment product, which
is licensed to, and available for exhibition by, licensees or customers in
various media and territories, and the volume, performance and production costs
associated with the Company's new television product. 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. Due to the aforementioned factors and those discussed below, the
Company's net income is generally negatively impacted in the fourth quarter of
each year.
The success of the Company's television programming business depends, in part,
upon the successful network exhibition of its television series over a
sufficient number of years to allow for off-network exhibition opportunities.
During the initial years of a one-hour television series, network and
international license fees offset most of the production costs of the series,
and accordingly the Company normally recognizes losses or deficits during this
period. With respect to half-hour network programming, the production costs can
substantially exceed the combination of the network and international license
fees during the initial years and the Company normally recognizes larger losses
during this period. However, if a sufficient number of episodes of a one-hour or
half-hour 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 recoup its deficits and realize a profit
with respect to these series.
First-run syndicated television series, which are licensed on a cash basis,
barter basis or a combination of the two, typically do not generate sufficient
revenue to cover the production and promotion costs of the programs during their
initial years and such losses are borne exclusively by the Company. However,
with high ratings, the revenue that may be realized by the Company through its
cash license fees and barter arrangements can be significant.
The Company's business in general is affected by the public's acceptance of its
product, which is unpredictable, and by conditions within the entertainment
industry, including, but not limited to, the quality and availability of
creative talent and the negotiation and renewal of union contracts relating to
writers, directors, actors, musicians and studio technicians and craftsmen as
well as changes in the law and governmental regulations. On September 6, 1995,
the Federal Communications Commission released an order repealing its rules
which prohibited television networks from acquiring financial interests and
syndication rights in television programming produced by program suppliers such
as the Company. Accordingly, the networks are able to own the programming which
they broadcast and have increasingly become competitors of the Company in the
production and distribution of programming. The Telecommunications Act of 1996
eliminates the restrictions on the number of television stations that one entity
may own and increases the national audience reach
15
16
SPELLING ENTERTAINMENT GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
limitation by one entity from 25% to 35%, which serves to further increase the
broadcast networks' and major studios' ability to secure distribution for their
own product.
REVENUE
The following table sets forth the components of the Company's revenue for the
three and nine months ended September 30 (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1997 1998 1997
-------- -------- -------- --------
Television $117,963 $ 93,530 $351,036 $338,449
Home video 30,519 8,341 43,577 50,985
Film distribution 1,843 2,434 12,452 20,828
Licensing and merchandising 5,789 3,121 13,616 9,729
Other 951 1,054 12,594 3,417
-------- -------- -------- --------
$157,065 $108,480 $433,275 $423,408
======== ======== ======== ========
Television revenue increased $24,433,000 (26%) and $12,587,000 (4%) in the
three- and nine-month periods ended September 30, 1998, respectively, from the
comparable periods in 1997. The increase in the 1998 periods arose primarily
from higher revenue from exploitation of the Company's library.
Home video revenue increased $22,178,000 (266%) and decreased $7,408,000 (15%)
in the three- and nine-month periods ended September 30, 1998, respectively,
from the same periods in 1997. The increase in the three-month period is due
primarily to the recognition of revenue relating to the licensing of the
Company's domestic and Canadian home video and DVD distribution rights to a
third party in September 1998. The decrease in the nine-month period is due
primarily to a decline in the number of initial releases during the period,
specifically in connection with the Company's exit in 1997 from the business of
distributing video titles in the domestic rental market, offset by the revenue
from the licensing agreement recognized in September 1998.
Film distribution revenue decreased $591,000 (24%) and $8,376,000 (40%) in the
three- and nine-month periods ended September 30, 1998, respectively, compared
to the same periods in 1997. The decrease in the 1998 periods is due primarily
to the Company's exit from the feature film business announced in February 1998
and the resulting cessation of production, acquisition and distribution of new
feature films. Film distribution revenue is expected to continue to decrease in
the future as a result of the Company's exit from the feature film business.
16
17
SPELLING ENTERTAINMENT GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Licensing and merchandising revenue increased $2,668,000 (85%) and $3,887,000
(40%) in the three- and nine-month periods ended September 30, 1998,
respectively, compared to the same periods in 1997. The increase is due
primarily to increased revenues from third-party clients, particularly relating
to merchandising and licensing agreements with Comedy Partners for the show
"South Park." (See Note 8.)
Other revenue decreased $103,000 (10%) and increased $9,177,000 (269%) in the
three months and nine months ended September 30, 1998, respectively, compared to
the same periods in 1997. The increase in the nine-month period is due primarily
to the recognition of a new agreement with Famous Music Corporation and Ensign
Music Corporation for the administration of the Company's music rights and the
associated non-refundable advances received pursuant to the terms of the
agreement.
Certain operations of the Company generate revenue denominated in foreign
currencies, and as a result, fluctuations in foreign currency exchange rates may
affect operating results. In particular, the Company generates revenue
denominated in French francs and Canadian dollars, among others. The Company has
no material transactions denominated in Asian currencies.
GAIN ON SALE OF TELEUNO
In April 1998, the Company sold TeleUNO, its Latin American entertainment
channel. The Company recognized a gain of $7,030,000 in the quarter ended June
30, 1998 relating to the sale.
ENTERTAINMENT PRODUCT COSTS
Entertainment product costs consist primarily of the amortization of capitalized
product costs, including deficits recognized on new programming, and the accrual
of third-party participations and residuals. Such costs increased $12,416,000
(12%) and decreased $42,132,000 (11%) in the three- and nine-month periods ended
September 30, 1998, respectively, from the comparable prior-year periods. The
increase in the three-month period resulted primarily from the increase in
television and home video revenue described above. The decrease in the
nine-month period resulted primarily from the Company's exit from the theatrical
feature film business. In addition, the percentage relationship between such
costs and the related revenue decreased to 78% from 90% for the nine months
ended September 30, 1998 and 1997, respectively. This percentage relationship is
a function of (i) the mix of entertainment product generating the revenue in
each period and (ii) changes in the projected profitability of individual
entertainment product based on the Company's estimates of such product's
ultimate revenue and costs.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative costs decreased $124,000 (1%) and $3,573,000
(8%) in the quarter and nine-month period ended September 30, 1998,
respectively, from the comparable prior-year periods. The decrease results
primarily from the Company's August 1997 exit from the
17
18
SPELLING ENTERTAINMENT GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
business of distributing video titles in the domestic rental market and the
Company's February 1998 exit from the theatrical film business.
PROVISION FOR CLOSURE OF FILM AND VIDEO DIVISIONS
A charge of $20,000,000, of which approximately $14,400,000 was non-cash, was
recorded in the quarter ended March 31, 1998 related to the Company's decision
to exit the theatrical feature film business and close Spelling Films. This
charge includes the write-down to estimated net realizable value of capitalized
development projects which will be sold or abandoned, reserves for commitments
to various talent, as well as severance costs related to Spelling Films'
employees. As of September 30, 1998, the remaining accrual balance for this
provision of $2,988,000 is included in accounts payable, accrued expenses and
other liabilities in the balance sheet. (See Note 1.)
In September 1998, the Company entered into a seven-year licensing agreement
with a third party covering the domestic and Canadian home video and DVD
distribution rights to approximately 3,000 titles in the Company's library. The
Company retained all other rights with the respect to the library. In
conjunction with the licensing of these home video rights, in the quarter ended
September 30, 1998, the Company recorded a charge to exit the domestic home
video distribution business of $3,995,000, of which approximately $2,295,000 was
non-cash. The charge included severance costs related to Republic employees, the
reduction of carrying values of physical inventory sold to the third party and
the write-down to estimated net realizable value of certain titles. As of
September 30, 1998, the remaining accrual balance of this reserve was $2,863,000
and is included in accounts payable, accrued expenses and other liabilities in
the accompanying balance sheet. (See Note 1.)
INTEREST EXPENSE
Interest expense, net of amounts capitalized, decreased $671,000 (12%) and
increased $388,000 (3%) in the three-month and nine-month periods ended
September 30, 1998, respectively. The decrease in the three-month period is due
primarily to lower average indebtedness under the Company's credit arrangements.
The increase in the nine-month period is due primarily to a decrease in
capitalized interest associated with the Company's theatrical production
activities, partially offset by lower average indebtedness outstanding under the
Company's credit arrangements.
18
19
SPELLING ENTERTAINMENT GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
PROVISION FOR INCOME TAXES
During the nine months ended September 30, 1998, the Company's provision for
income taxes increased $22,313,000 to a provision of $24,535,000 in 1998 as
compared to a provision of $2,222,000 in 1997, largely as a result of an
increase in the effective tax rate. The effective tax rate increased to 113% in
1998 from (18%) in 1997, primarily as a result of changes in the relationships
between revenue and expenses comprising income from continuing operations before
income taxes and is in accordance with management's estimation of the
relationships and results for the entire year.
The effective rate of 113% for the nine months ended September 30, 1998
increased from 19% for the six months ended June 30, 1998 due to changes in
management's estimates of the results of operations for the entire year. These
changes in estimates were driven by higher than anticipated profitability in the
quarter ended September 30, 1998.
The provision for income taxes primarily relates to the use of tax losses and
other attributes of the Company and is primarily non-cash in nature.
Viacom owns approximately 80% of the outstanding shares of the Company and,
therefore, the Company is required to be included in the consolidated federal
income tax return of Viacom. The Company and Viacom are party to an agreement
that provides for the administration of federal, state and foreign tax matters
(the "Tax Agreement"). Under the Tax Agreement, the Company will remain in the
same tax position as it would have if it were continuing to file its tax returns
separate and apart from Viacom. As a result, the Company does not anticipate any
material impact to its consolidated financial condition or results of
operations.
DISCONTINUED OPERATIONS
On February 20, 1997, the Company announced its intention to dispose of its
interactive game business, VIE. The Company has disposed of substantially all of
its investment in VIE and expects to shutdown the remaining VIE operations by
the end of 1998. Accordingly, VIE is presented as a discontinued operation in
the accompanying financial statements. See "Financial Condition - Discontinued
Operations" below.
FINANCIAL CONDITION
CONTINUING OPERATIONS. The Company's continuing operations require significant
capital resources for the production of entertainment product and the
acquisition of distribution or other rights to entertainment product produced by
third parties. The Company's expenditures in this regard totaled $309,768,000
and $292,207,000 in the nine months ended September 30, 1998 and 1997,
respectively.
Additionally, future expenditures by the Company are expected to increase from
1997 levels in connection with its projected increased production levels. The
cost of producing television programming is borne by the Company to the extent
costs are not recouped through network license fees and cash license fees on
syndicated product.
19
20
SPELLING ENTERTAINMENT GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The deficit financing of its network programming and the cost of other
production and acquisition activities has historically been funded through the
Company's operating cash flow and borrowings under its credit arrangements. The
Company's principal credit agreement is with Viacom. The Viacom Credit Agreement
provides for a term loan facility of $200,000,000 and a revolving credit
facility of $155,000,000 to fund the Company's working capital and other
requirements. At September 30, 1998, $110,000,000 was available under these
facilities to fund the Company's operations and investments. (See Note 3.)
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 expects to have sufficient resources available from the cash
provided by operating activities and funds available under its credit facilities
and other financing sources to meet its ongoing plans for the production,
acquisition and distribution of entertainment product. (See Note 3
regarding certain acceleration provisions of the Viacom Facility.)
Net cash flow from operating activities of the Company's continuing operations
increased to $53,725,000 for the nine months ended September 30, 1998 from
$23,674,000 for the comparable prior-year period due primarily to the timing of
payment of accrued operating expenses. Net cash flow from investing activities
of the Company's continuing operations decreased to a deficit of $13,605,000
from a net inflow of $1,073,000 for the nine months ended September 30, 1998 and
1997, respectively.
Financing activities principally reflect borrowings and repayments under the
Viacom Credit Agreement in both periods and the exercise of warrants by Viacom
in the first quarter of 1998. (See Note 4.)
DISCONTINUED OPERATIONS. During the year ended December 31, 1996, the Company
provided for an estimated loss on disposal of VIE of approximately $139,501,000,
which included a provision for future operating losses of approximately
$56,000,000. In the fourth quarter of 1997, the Company recorded an additional
provision of $40,000,000, net of income taxes, for future operating losses and
cash funding requirements projected for the remaining holding period through
completion of the disposition. On September 4, 1998, the Company completed the
sale of the stock of Westwood Studios, Inc., a subsidiary of VIE, and certain
development assets of VIE for $122,500,000 in cash. The proceeds of this
transaction were used to pay down bank debt and other costs associated with the
transaction. On November 10, 1998, the Company completed the sale of all
non-U.S. operations of VIE, effectively completing the disposal of its
interactive game business. In addition, in the third quarter of 1998, the
Company recorded an additional provision of $25,000,000, net of income taxes, to
provide for the costs of shutdown, net of the proceeds from the sale of VIE's
remaining operations and assets.
For the nine months ended September 30, 1998 and 1997, revenue of VIE was
$94,043,000 and $128,378,000, respectively. The net operating losses of VIE were
$44,924,000 and $49,483,000, respectively, for the same periods. The net
operating losses for these periods were provided for in the estimated loss on
disposal as of September 30, 1998 and December 31, 1997 discussed above.
VIE's net liabilities as of September 30, 1998 and December 31, 1997, are as
follows (in thousands):
September 30, December 31,
1998 1997
------------- ------------
Current assets $ 15,165 $ 115,043
Current liabilities (44,571) (194,505)
--------- ---------
Net current liabilities (29,406) (79,462)
--------- ---------
Property and equipment, net 5,870 14,081
Intangibles, net -- 91,707
Other non-current assets 376 5,066
Non-current liabilities (32,407) (53,301)
--------- ---------
Net non-current (liabilities) assets (26,161) 57,553
--------- ---------
Net liabilities $ (55,567) $ (21,909)
========= =========
20
21
SPELLING ENTERTAINMENT GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
A wholly owned subsidiary of VIEL had a revolving multi-currency credit
agreement for $100,000,000 with a bank in the U.S. On September 8, 1998, total
borrowings under the Credit Agreement in the amount of $97,000,000 were repaid
and the Credit Agreement was terminated. Borrowings under the Credit Agreement
as of December 31, 1997 were $97,472,000. As of December 31, 1997, the Company
had no letters of credit outstanding under the Credit Agreement. (See Note 9.)
Another wholly owned subsidiary of VIEL has a credit facility with a bank in the
United Kingdom in the net amount of 10,000,000 pounds sterling, which the
Company and Viacom have guaranteed. The UK Facility expires on December 31,
1998. Borrowings under the UK Facility as of September 30, 1998 and December 31,
1997 were $12,609,000 and $11,090,000, respectively. As of September 30, 1998,
the Company had no letters of credit outstanding under the UK Facility. As of
December 31, 1997, the Company had approximately $938,000 in letters of credit
outstanding under the UK Facility to guarantee its interactive game purchases.
On November 10, 1998, total borrowings under the UK Facility were repaid and the
UK Facility was terminated. (See Notes 9 and 10.)
21
22
SPELLING ENTERTAINMENT GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
OTHER FINANCING ITEMS. Viacom owns approximately 80% 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 consents were obtained with respect
to the Credit Agreement and the UK Facility.
YEAR 2000
OVERVIEW. The widespread use of computer programs that rely on two-digit dates
to perform computations and decision-making functions may cause computer systems
to malfunction prior to or in the year 2000 and lead to significant business
delays and disruptions in the U.S. and internationally. The Company has a year
2000 ("Y2K") program to identify and mitigate these risks. External consulting
firms and contractors have been engaged by the Company to assist with Y2K
remediation. It is presently anticipated that the Company will complete its
Y2K projects by mid-1999 in all material respects.
The Company has adopted a five-phase program consisting of inventory,
assessment, remediation, testing and contingency planning. Costs of the
Company's Y2K program are not expected to have a material effect on the results
of operations, financial position or liquidity.
STATE OF READINESS AND CONTINGENCY PLANS. The Company commenced its Y2K
readiness efforts in 1998. The Company has substantially completed the inventory
and assessment phases. Remediation and testing is scheduled for completion by
mid-1999. The Company is also preparing contingency plans based on an analysis
of system risks, including potential failure dates and expected remediation
dates. The Company will continually review its progress against its Y2K program
plans and make a conclusion, if necessary, on the appropriate and feasible
contingency plans to reduce its exposure to Y2K-related issues by late spring
1999. The Company has received information regarding Y2K compliance from its
principal business partners and third party providers and is engaging in a more
detailed review of their compliance. The Company expects to complete such review
by late spring 1999. To date, no principal business partners or third party
providers have informed the Company that a material Y2K issue exists which will
have a material effect on the Company.
RISKS. The Company's goal is to achieve timely and substantial Y2K compliance,
with remediation work assigned a priority based upon how critical each system is
to the Company. Due to the general uncertainty inherent in the Y2K problem
resulting in part from the uncertainty of compliance by the Company's business
partners and third party providers, the Company is unable to determine at this
time what the consequences of Y2K may be. The Company will continue to devote
the necessary resources to complete its Y2K program and contingency plans and
believes that the completion of its Y2K program and contingency plans should
significantly mitigate operational and financial risks.
22
23
SPELLING ENTERTAINMENT GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
UNCERTAINTIES
The Company is subject to various lawsuits, claims and other legal matters in
the course of conducting its entertainment business operations. The Company
believes such lawsuits, claims and other legal matters should not have a
material adverse effect on the Company's consolidated results of operations or
financial condition.
The Company also is involved in a number of legal actions including threatened
claims, pending lawsuits and contract disputes in connection with certain
bankruptcy and environmental matters relating to the Company's discontinued
operations of Charter, as well as other matters. Some of the parties involved in
such actions seek significant damages. While the outcome of these suits and
claims cannot be predicted with certainty, based upon (i) its current knowledge
of the facts and circumstances and its understanding of the applicable law; (ii)
allowances for estimated losses on disposal of the discontinued operations; and
(iii) an indemnity agreement, the Company believes that the ultimate resolution
of such claims will not have a material adverse effect on the Company's
consolidated results of operations or financial condition.
Environmental cleanup activity at the former petroleum terminal in Tiverton,
Rhode Island was substantially completed in September 1998, although final site
grading and negotiation of final administrative approvals will continue into
1999.
23
24
SPELLING ENTERTAINMENT GROUP INC.
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Employment Agreement dated as of July 20, 1998 between
Registrant and Ross G. Landsbaum.
11 Computation of net loss per common share.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
None
24
25
SPELLING ENTERTAINMENT GROUP INC.
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPELLING ENTERTAINMENT GROUP INC.
November 16, 1998 By: /s/ Peter H. Bachmann
-----------------------------------------------
Peter H. Bachmann
President
(Principal Executive Officer)
By: /s/ Ross G. Landsbaum
-----------------------------------------------
Ross G. Landsbaum
Senior Vice President - Chief Financial Officer
(Principal Financial Officer)
25