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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED DECEMBER 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)
DELAWARE 59-0862100
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
5700 WILSHIRE BOULEVARD
LOS ANGELES, CALIFORNIA 90036
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (213) 965-5700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
COMMON STOCK, $.001 PAR VALUE NEW YORK AND PACIFIC STOCK EXCHANGES
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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 .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. [ ]
On March 22, 1996, the registrant had 90,300,904 outstanding shares of
Common Stock, $.001 par value, and at such date, the aggregate market value
of the shares of Common Stock held by non-affiliates of the registrant
was approximately $229,100,000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Portions of Registrant's Proxy Statement relating to the 1996
Annual Meeting of Shareholders on May 14, 1996.
Part IV - Portions of previously filed reports and registration statements.
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SPELLING ENTERTAINMENT GROUP INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
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PART I
<S> <C>
Item 1. Business 3
Item 2. Properties 12
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 14
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 48
PART III
Item 10. Directors and Executive Officers of the Registrant 49
Item 11. Executive Compensation 49
Item 12. Security Ownership of Certain Beneficial Owners
and Management 49
Item 13. Certain Relationships and Related Transactions 49
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 50
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ITEM 1. BUSINESS
INTRODUCTION
Spelling Entertainment Group Inc. (the "Company") is a fully-integrated producer
and distributor of television series, mini-series, movies-for-television,
interactive video games and feature films (collectively referred to hereinafter
as "entertainment product"). The Company has an extensive library of
entertainment product, which it distributes worldwide. The Company also licenses
and otherwise exploits ancillary rights in this product, such as music and
merchandising rights. Unless the context indicates otherwise, "Spelling" or the
"Company" refers to Spelling Entertainment Group Inc. and its subsidiaries.
The Company (formerly The Charter Company) was originally incorporated in
Florida in 1959. The Company was formerly engaged in petroleum marketing
operations, but substantially all of its remaining operations in this area were
sold in 1992. (See Note 10 to the Company's Consolidated Financial Statements;
references to Notes hereinafter are to the notes to such financial statements.)
It began production and distribution of entertainment product when it acquired
82% of Spelling Entertainment Inc. ("SEI") in May 1991. It acquired the
remaining shares of SEI in July 1992. The Company acquired all of the stock of
Republic Entertainment Inc. (formerly Republic Pictures Corporation, with its
subsidiaries, hereinafter "Republic") on April 26, 1994 and approximately 91% of
the ordinary shares of Virgin Interactive Entertainment Limited ("VIEL") on July
30, 1994. (See Note 2.) Currently, the Company operates in a single industry
segment, the entertainment industry. (See Note 12.)
The Company's production operations are conducted by Torand Productions Inc. and
its subsidiaries, including Spelling Television Inc. ("Spelling Television");
Big Ticket Television Inc. and its subsidiaries ("Big Ticket Television");
Spelling Films Inc. and its subsidiaries ("Spelling Films"); and VIEL and its
subsidiaries (collectively, "VIE"). Distribution operations are conducted by
Spelling Films; Republic; Worldvision Enterprises, Inc. and its subsidiaries
("Worldvision"); and VIE. The Company's licensing and merchandising operations
are conducted by Hamilton Projects, Inc. ("Hamilton Projects").
Approximately 48% of the Company's Common Stock was owned by American Financial
Corporation and its subsidiaries ("AFC") until March 31, 1993, when AFC sold the
Common Stock it owned to Blockbuster Entertainment Corporation ("BEC"). BEC
acquired additional Common Stock during 1993 and 1994, both from third parties
and from the Company. (See Note 6.) Effective as of September 29, 1994, BEC
merged with and into Viacom Inc. ("Viacom"), with Viacom being the surviving
corporation. As a result of the merger, Viacom currently owns approximately 75%
of the Company's Common Stock.
Viacom is exploring the sale of the Company. Viacom also has indicated its
intention to acquire the Company's interest in VIE in connection with such
sale. An independent committee of the Company's board of directors has been
formed to negotiate the terms of any proposed VIE transaction.
The Company has its principal executive offices at 5700 Wilshire Boulevard, Los
Angeles, California 90036, telephone (213) 965-5700. Effective May 26, 1995, the
Company changed its state of incorporation to Delaware.
DEVELOPMENT AND PRODUCTION
NETWORK PROGRAMMING
The Company develops and produces network programming through Spelling
Television and Big Ticket Television. Scripts for potential television
programming are usually developed by the Company in conjunction with one of the
U.S. television networks. If the network accepts the script, it will typically
order production of a pilot, for which it will pay the Company a negotiated
fixed license fee. If the network decides to order episodes of the series, the
license agreement generally provides for a minimum number of episodes to be
delivered, with the
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network having certain rights to order additional episodes. The license
agreement normally grants the network the right to exhibit the episodes a
limited number of times in the United States during the license period. All
other ownership and distribution rights are retained by the Company, subject to
certain network-related holdbacks.
Network license fees are normally less than the Company's costs of producing the
related programming, resulting in a deficit for the Company. In recent years,
the size of the series deficits incurred by the Company has generally increased
as escalations in license fees have failed to keep pace with escalations in
production costs. However, in the case of its drama series, the Company has
generally been successful in obtaining sufficient revenue from Worldvision's
international sales efforts to substantially offset such production deficits.
See "Distribution."
Aaron Spelling, Chairman and Chief Executive Officer of Spelling Television, has
a history of successful network television production, including more than 3,000
hours of television series, movies-for-television, mini-series and pilots, as
well as feature films. In association with a variety of partnerships, Aaron
Spelling has consistently been one of the industry's most creative and prolific
producers of network television programming, producing such successful series as
"Beverly Hills, 90210," "Melrose Place," "The Love Boat," "Dynasty," "Hotel,"
"Vegas" and "Matt Houston." He has also produced "Fantasy Island," "Charlie's
Angels," "Starsky and Hutch," "Family" and "Hart to Hart," all series in which
the Company has no financial interest. Mr. Spelling's employment agreement
with Spelling Television expires in April 1996. The Company has entered into
preliminary discussions concerning the extension of Mr. Spelling's employment
agreement.
Spelling Television is currently producing five one-hour drama television
series. "Beverly Hills, 90210," which is currently in its sixth season, has been
ordered by Fox Broadcasting Company ("FBC") for an additional season. "Melrose
Place" is now in its fourth season, and has also been ordered by FBC for an
additional season. Spelling Television is also producing twelve episodes of
"Savannah," which is airing on The WB Television Network ("WB"); and has
received an order from WB for 13 more episodes; seven episodes of "Kindred: The
Embraced," which is airing on FBC; and a two-hour movie and six episodes of
"Malibu Shores," which will air on NBC. It also has a number of movies for
television in development or production, including a four-hour mini-series,
"A Season In Purgatory," and a two-hour movie, "After Jimmy," for CBS.
Big Ticket Television was established in November 1994 primarily to develop and
produce half-hour comedy television series for the U.S. television networks, but
also to develop and produce programming for cable and first-run syndication
television (see below). Big Ticket Television has had projects in development at
the four networks (ABC, NBC, CBS and FBC) as well as the recently launched
United Paramount Network ("UPN") and WB. Big Ticket Television is currently
producing 15 episodes of a half-hour situation comedy, "Moesha", which is airing
on UPN, and has received an additional order of 22 episodes for the 1996-97
season.
The Company had revenue from FBC in 1995, 1994 and 1993 representing 15%, 15%
and 22% of revenue, respectively.
FIRST-RUN SYNDICATED PROGRAMMING
First-run syndicated television series are produced and sold directly to
television stations in the United States without any prior network broadcast.
These programs are licensed to individual or groups of television stations, on a
market by market basis, in contrast to network distribution, which provides
centralized access to a national audience.
In first-run syndication, programming is licensed domestically in exchange for
cash payments, advertising time ("barter") or a combination of both.
Internationally, Worldvision distributes this programming for cash license fees.
In cash licensing, a broadcaster normally agrees to pay a fixed license fee in
one or more installments in exchange for the right to broadcast the programming
a specified number of times over the license term. When programming is licensed
on a barter basis, the producer receives a specified amount of advertising time
during the broadcast, and the producer subsequently sells this advertising time
for cash. Worldvision carries out this function on behalf of the Company through
an internal advertising sales organization.
As compared to programming produced for the network, the Company exercises
greater control over creative and production decisions related to its first-run
syndicated programming. However, there is much greater financial risk
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associated with such programming, as there is no third-party network to share
the production costs. While the license fees paid by a network for television
programming are fixed by contract, barter revenue derived from distribution of
first-run syndicated programming is not fixed in amount, but varies depending on
the ratings success of the programming. Such ratings may vary significantly
between different genres of programming, as well as between individual programs
within each genre. Even when a first-run syndicated program is ultimately
successful, during the initial years of the program its revenue is often less
than the Company's costs of producing the program. However, if a program has
strong ratings, the advertising revenue which may be realized by the Company
through its barter arrangements could be substantial.
In 1994 and 1995, Worldvision distributed in first-run barter syndication three
one-hour drama series, "Heaven Help Us," "Robin's Hoods" and "University
Hospital," which were produced by Spelling Television. Big Ticket Television is
producing twenty-six episodes of an original nighttime comedy entitled "Night
Stand with Dick Dietrick," distributed in first-run syndication by Worldvision,
beginning in September 1995. Worldvision also is distributing "Jim J. & Ann," a
one-hour talk show.
INTERACTIVE ENTERTAINMENT
The interactive entertainment market in which the Company competes consists
primarily of video games for use on Nintendo, Sega, Sony and other home
entertainment systems, and for use on multimedia personal computers. There is an
ongoing evolution in hardware platforms. During 1995, new 32-bit console systems
were introduced by Sega and Sony, and Nintendo is expected to introduce a 64-bit
system during 1996. Other hardware manufacturers (e.g., 3DO, Apple, Atari,
etc.) seek to compete with them. In recent years an increasing number of games
have been developed for use on systems equipped with CD-ROM drives, instead of
systems using cartridges and floppy disks. As compared to games developed for
cartridge platforms, games developed for CD-based platforms require a
significantly longer development period, and accordingly the Company's
development costs for each game are proportionately higher. However, the cost of
manufacturing the individual games for CD-based platforms is significantly lower
than the cost of manufacturing game cartridges, thereby often offsetting the
additional development costs. VIE's strategy is to develop content that is
generally platform-independent and adapt these titles to different commercially
successful platforms in order to minimize its reliance on the success of any one
hardware system. This strategy reduces the risk associated with specific
platform failure or obsolescence.
The Company believes that VIE's entertainment product must become increasingly
sophisticated and challenging in order to remain competitive in meeting consumer
expectations. In order to meet these expectations, VIE has been expanding its
internal resources to develop and produce titles over a wide range of genres
including action, strategy, sports simulation, role-playing and licensed
character-based games. VIE's internal development gives it the control to enable
it to improve its design capabilities, better manage the development process and
create and enhance unique tools and techniques relating to key and emerging
technologies. While VIE will occasionally distribute edutainment or infotainment
product created by third parties, it does not develop or produce these types of
products.
In addition to its internal product development, VIE continues to obtain a
considerable portion of its entertainment product from third-party software
developers. Development agreements are established for each project, either on a
work-for-hire basis, whereby flat fees are paid to the developer, or under a
royalty arrangement, whereby advances are paid to the developer against
royalties to be earned from the exploitation of the related product. In certain
instances, VIE has taken minority interests in third-party developers in order
to secure access to their product.
VIE also seeks, on a selective basis, to obtain licenses for properties which
enjoy a high degree of consumer awareness, in order to incorporate these
licensed characters, trademarks, themes and/or personalities into its products
to capitalize on their name recognition. Some of VIE's designs and products have
been inspired by well-
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known animated and feature films, famous sports personalities, prominent
corporate logos and popular board games.
During 1995, VIE released, among other titles, "The 11th Hour: The Sequel to 7th
Guest," "Command & Conquer," "Daedelus Encounter," "Agile Warrior" and
"Monopoly."
FEATURE FILMS
In 1990, the Company began the acquisition and distribution of theatrical
feature films through the formation of Spelling Films. Spelling Films typically
acquires all international distribution rights to such films by paying a
guaranteed advance to the producer against the producer's share of distribution
receipts. Such advances are normally payable upon the producer's delivery of the
completed film. Spelling Films then presells distribution rights, generally on
an all-rights, territory-by-territory basis. Under this approach, Spelling Films
generally covers all or a substantial portion of its acquisition cost, reducing
its risk and capital requirements, but also limiting its upside profit
potential.
Since its inception, Spelling Films has acquired international distribution
rights to "The Player," "Short Cuts" and "Shadowlands." Recent films include
"The Usual Suspects," which received two Oscar awards and was released
domestically by Gramercy Pictures in August 1995; and "Moll Flanders," starring
Robin Wright and Morgan Freeman, and "Unforgettable," starring Ray Liotta and
Linda Fiorentino, both of which are being distributed domestically by
Metro-Goldwyn-Mayer Pictures, Inc.
Within the last eighteen months, Spelling Films has expanded its focus and
presence in the feature film area by developing and producing, on a
fully-financed basis, moderately budgeted theatrical feature films for which it
will retain all distribution rights on a worldwide basis. Spelling Films
typically enters into agreements with domestic film companies to handle domestic
theatrical distribution, but distributes the films in all other markets and
media through the Company's own distribution operations. Spelling Films
currently has two fully-financed feature films in postproduction, "Stephen
King's Thinner," starring Robert John Burke and Joe Mantegna, and "Night Falls
on Manhattan," starring Andy Garcia, Lena Olin and Richard Dreyfuss. Both of
these films are scheduled for domestic theatrical release in 1996.
Republic acquires varying distribution rights to feature films primarily for
initial release in the domestic home video marketplace, typically by paying a
guaranteed advance. Republic released approximately 36 films in 1995 and expects
to release approximately 40 in 1996. Most of the films have production budgets
in the $2-3 million range, and Republic's acquisition costs for such films are a
percentage of such budgets, based on a variety of factors.
DEVELOPMENT AND PRODUCTION RISKS
As discussed above, the Company has various development and production
operations encompassing television programming, feature films and interactive
entertainment product. There are a number of factors outside the control of the
Company which may affect the timely completion of the development, production
and/or release of the Company's entertainment product, including availability of
talent and other resources integral to these processes. The Company attempts
to minimize such risks to the greatest extent possible through the active
management of the development and production process. See "Competition" and
"Technology" below.
DISTRIBUTION
In addition to its production activities, the Company is actively engaged in the
worldwide distribution of entertainment product, either directly or through
subdistributors. Historically, the Company's distribution activities have
focused on the distribution of its network television programming. However, with
the formation of Spelling
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Films and the acquisition of Republic and VIE, the Company's distribution
activities have been extended to include both feature films and interactive
entertainment product. As a result of these activities, as of December 31, 1995,
the Company had contractual agreements with licensees covering entertainment
product which provide for approximately $133,549,000 in future revenue,
approximately 43% of which is expected to be recognized after 1996. As of
December 31, 1994, the Company had contractual agreements which provided for
approximately $178,199,000 in future revenue.
THEATRICAL DISTRIBUTION
Spelling Films generally sells or licenses the international theatrical, home
video and/or television rights to its films to various subdistributors in each
territory in exchange for a guaranteed advance plus, in most cases, a share of
future profits. For certain films, Spelling Films may elect to presell some
territories but enter into distribution arrangements in other territories. In
the latter cases, Spelling Films receives no advance; however, the
subdistributor retains a lower distribution fee and Spelling Films receives the
balance of any revenue generated. In certain cases where Spelling Films is able
to retain the home video and television rights, Republic and Worldvision
distribute such rights for Spelling Films.
To the extent that Spelling Films and/or Republic desire to exploit feature
films in the United States and Canadian theatrical markets, they will engage a
third party to handle such distribution. With respect to two of its films,
Spelling Films has engaged Paramount Pictures Corporation to handle domestic
theatrical distribution.
HOME VIDEO DISTRIBUTION
Republic has been engaged in the production and distribution of entertainment
product for over sixty years. Its library includes more than 1,400 films and
over 1,000 hours of off-network television programming, as well as certain
distribution rights to over 2,000 hours of pre-1974 NBC television series and
specials (the "Republic Library"). Republic currently handles the marketing and
sale, either directly or through licensees, of all the Company's entertainment
product in the worldwide home video market.
Domestically, videocassettes are sold by Republic through its own sales force to
independent wholesalers for resale to retail outlets, or in some instances,
directly to retailers. Internationally, the Company licenses third parties to
distribute its product in the home video market, generally in exchange for a
minimum guarantee against a royalty. The Republic Library has previously been
licensed in most territories outside of North America, and little additional
revenue is anticipated in the near term from such territories.
TELEVISION DISTRIBUTION
Worldvision has been engaged in the distribution of entertainment product in the
worldwide television market for over thirty-five years, originally serving as
the distribution arm of the ABC network. Today, Worldvision is a leading
worldwide distributor with rights to more than 8,000 hours of television
programming available for domestic television distribution and more than 18,000
hours of television programming for international television distribution,
including both the original ABC library and the original NBC library recently
acquired through Republic. Worldvision currently distributes such programming in
110 countries through offices or representatives in London, Paris, Rome,
Toronto, Sydney, Tokyo and Rio de Janeiro.
Demand for American-made entertainment product in international markets has
increased in recent years due to the increase in the number of international
television stations, cable systems and satellite delivery systems in those
markets and, in some territories, the privatization of the local television
industry. The Company typically begins to earn international television revenue
from its television programming during the same season such programming is
originally broadcast on domestic television, or soon thereafter. Substantially
all of the Company's television programming has been or is presently being
distributed by Worldvision in international television markets. The
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Republic Library has previously been licensed for various terms in many
territories around the world and will not all be available for the Company's
exploitation in the near term.
In March 1993, Spelling Satellite Networks ("SSN") launched its first cable
channel, TeleUNO, which currently reaches more than four million homes in Latin
America, including Mexico, Argentina and Brazil. TeleUNO generates both
subscription fees and advertising revenue. SSN is also currently exploring the
possibility of launching additional channels in partnership with programmers or
others in other markets around the world, including direct to home satellite
transmission.
Television revenue from the distribution of feature films is generally delayed
until after the films have been exploited in the theatrical and home video
markets in each territory.
The profitability of the Company's television programming continues to depend
substantially on the consumer's acceptance of the programming in the domestic
marketplace after initial network exhibition or first-run syndication. However,
in recent years the revenue obtainable from this secondary market has declined,
and is expected to continue to decline, due in part to the increase in original
programming available to independent stations from the emergence of UPN and WB,
and the increased production of programming produced specifically for first-run
syndication.
Expected revenue per episode in this market normally increases for longer
running series. In the Company's experience, at least four broadcast seasons of
a series are generally required to successfully market repeat showings of a
series in the domestic syndication market. For example, Worldvision is currently
distributing "Beverly Hills, 90210" in the domestic syndication market. Episodes
from a series normally become available for secondary syndication distribution
four or five years after the series' initial telecast.
Domestic basic cable television potentially represents an increasingly
significant market for the Company's product. The series "Melrose Place,"
"Models, Inc.," "Hotel," "Vegas" and "Dynasty" among others, have been licensed
to cable television. Cable exhibition has effectively developed as an
alternative market, albeit traditionally a less lucrative one than domestic
syndication. Each year a greater number of relatively successful network
television series are being licensed to basic cable in lieu of domestic
syndication. Additionally, cable exhibitors in some instances have purchased
rights to short-running television series which do not include sufficient
episodes to allow for traditional off-network syndication distribution.
Cable television operations outside the U.S., while still in development in many
countries, have also been growing rapidly.
See "Governmental Regulation" for restrictions placed on exhibition of the
Company's entertainment product in certain markets.
INTERACTIVE ENTERTAINMENT
VIE sells its entertainment product in North America using its in-house sales
organization. This approach has reduced its costs, strengthened its distribution
capabilities and has helped to attract third-party developers and publishers to
VIE. VIE's primary retail accounts include toy stores, general or mass
merchandise retailers, electronics appliance stores, computer software and
specialty stores, warehouse clubs, office supply warehouses and video rental
stores.
VIE markets and/or sells its product internationally through its offices in the
U.K., France, Germany, Spain, Singapore and Japan to various local distributors
and retailers. VIE has appointed national or territorial distributors to serve
customers in other international markets. These operations normally generate
revenue denominated in foreign currencies and, accordingly, the Company may
experience gains and losses resulting from foreign currency exchange rate
fluctuations.
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LICENSING AND MERCHANDISING
Hamilton Projects is a full service consumer product and promotional licensing
agency, providing its clients with strategic planning, concept development and
product marketing program management. Hamilton Projects typically earns its fees
through a commission based upon the royalties earned by its clients from the
sale of licensed consumer products, promotions and books based upon the
copyrights, trademarks and trade names of the companies it represents. In
addition to managing the consumer product merchandising programs for "Beverly
Hills, 90210" and "Melrose Place," Hamilton Projects also represents several
third parties, such as Jeep(R), Dr. Scholl's(R) and the United States Postal
Service. Through the efforts of Hamilton Projects the Company has taken
advantage of various consumer product and promotional opportunities such as a
dedicated show on the Q2 channel of QVC and phone cards to market "Melrose
Place" merchandise, the operation of World Wide Web sites on the Internet, the
introduction of the Melrose Place Fragrance, as well as the traditional
merchandising of clothing, posters, calendars and books.
COMPETITION
The entertainment industry is highly competitive with many companies competing
for available literary properties, creative personnel, talent, production
personnel, distribution channels and financing which are essential to acquire,
develop, produce and distribute entertainment product. The Company's competitors
include major motion picture and television companies as well as a broad range
of independent production and distribution companies. Certain of the Company's
competitors have greater financial resources than those of the Company.
Moreover, the repeal of certain governmental regulations permits the television
networks to acquire financial interests in, and syndication rights to,
television programs, which intensifies competition in the television industry.
See "Governmental Regulation."
Despite the fact that the Company may receive an order from the networks for the
production of a pilot, series, movie or mini-series, the networks are under no
obligation to actually broadcast the Company's product. The Company's successful
off-network domestic sale of a network series generally depends upon the ratings
achieved through network exhibition of such a series over a number of years. In
turn, the Company's overall success in achieving multiple years of network
exhibition of a series is dependent upon unpredictable factors such as the
viewing public's acceptance as reflected in the ratings and critical reviews.
In addition to its internally produced product, the Company must continue to
acquire distribution rights to entertainment product produced by third parties
to maintain its competitive position. In order to acquire rights to distribute
new third-party product, the Company may be required to increase its guaranteed
advance payments to producers and/or reduce the distribution fees it charges.
Licensing television programming to broadcasters and cable networks has also
become increasingly competitive as new programming continually enters the market
and certain of the Company's competitors attempt to develop their own
programming services and/or align themselves with the existing networks.
Likewise, Spelling Films is competing with numerous well-financed, established
companies engaged in feature film production and distribution. The Company has
had a short operating history in this area and does not possess the theatrical
distribution capabilities or track record of some of its competitors.
The Company's ability to compete in certain countries is affected by local
restrictions and quotas. Governments of certain countries require that a minimum
percentage of locally produced programming be broadcast.
In addition to the competitive facts applicable to all areas of the
entertainment industry, the market for interactive entertainment is also
characterized by the frequent introduction of new, ever-evolving hardware
systems. Among VIE's competitors are companies which manufacture and sell
such hardware systems in addition to publishing and distributing interactive
entertainment software product.
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TRADEMARKS, SERVICE MARKS AND COPYRIGHTS
The Company or its subsidiaries own various United States trademarks and service
marks, including SPELLING(R), BEVERLY HILLS, 90210(R), MELROSE PLACE(R), COMMAND
AND CONQUER(R), REPUBLIC(R), SPELLING FILMS(TM) and BIG TICKET TELEVISION(R),
and has applied for registration for numerous other marks relating to
its entertainment products in the United States and foreign countries.
The Company uses the VIRGIN name and trademark under a license which expires
in 2004. The Company or its subsidiaries own various foreign trademark and
service mark registrations and have pursued licensing and/or merchandising
opportunities related to the use of these marks. The Company registers and
endeavors to take the necessary actions to protect the marks created and
acquired in its businesses. See "Distribution - Licensing and Merchandising."
The Company regularly obtains copyright protection for each episode of its
television programs, for its feature films and for other entertainment product.
Certain of the Company's copyrights, trademarks and service marks may be
considered material to the Company's business.
TECHNOLOGY
The Company is dependent on various forms of technology for the production and
distribution of its entertainment product. As a result, the Company is subject
to business risks as a result of changing technologies in the media,
communications and computer industries. Changes in the hardware platforms, new
digital disk systems, direct to home satellite systems and other new delivery
systems also provide new opportunities and markets for the Company. The Company
endeavors to minimize the risk of technological change to or obsolescence of a
particular hardware platform or media and take advantage of new markets created
by changing technologies. Additionally, the risk of illegal manufacture and
distribution ("piracy") of the Company's entertainment product may increase with
the advancement and proliferation of various technologies. It is difficult for
the Company to determine the impact of such piracy and there can be no assurance
that such activities will not have a material impact on the Company.
GOVERNMENT REGULATION
The production and distribution of television programming by independent
producers is not directly regulated by the federal or state governments, but the
marketplace for television programming is substantially affected by regulations
of the Federal Communications Commission ("FCC") applicable to television
stations, television networks and cable television systems. The FCC's syndicated
program exclusivity rules affect the sale of programming to commercial
television stations, regional superstations and cable networks. Pursuant to
these rules, commercial television stations can bargain for the right to
exclusive showing of programming generally within a 35-mile radius and
separately to require cable television systems with 1,000 or more subscribers to
black out showings of the same programming on certain television stations they
carry in order to preserve contracted exclusivity. The FCC also allows regional
superstations (such as WTBS in Atlanta and WGN in Chicago) and group owners to
purchase rights to programming on a nationwide basis.
The Cable Television Consumer Protection and Competition Act of 1992 ("Cable
Act") prohibits certain unfair or discriminatory practices in the distribution
of the signal from satellite superstations or in the sale of satellite cable
programming by entities affiliated with cable operators. The Telecommunications
Act of 1996 ("1996 Act") extends these rules to entities affiliated with common
carriers. The Cable Act also strictly limits entities affiliated with cable
operators in offering exclusive contracts for satellite cable programming or
superstations. Furthermore, the Cable Act prohibits certain coercive and
discriminatory acts by cable operators and satellite program vendors against
multichannel video program distributors. In addition, the Cable Act provides all
commercial television stations with the right to bargain for and withhold
consent to the local retransmission of their signals by cable television
systems, and certain local stations have the option to demand carriage on cable
systems. These provisions are subject to interpretation by the FCC. Moreover,
judicial appeals relating to various aspects of these rules are pending.
Accordingly, the Company cannot predict the specific impact of the Cable Act on
its business.
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<PAGE> 11
The 1996 Act eliminates the numerical restrictions on the number of television
stations that one entity may own and increases the national audience reach
limitation by one entity from 25% to 35%. In addition, the FCC is directed to
revise its dual network rule which prohibits a TV station from affiliating with
an entity maintaining two or more networks of television broadcast stations. The
FCC must now permit such affiliations unless certain limited circumstances
pertain. The FCC must also amend its rules to permit common ownership or control
of a broadcast network and cable systems. These changes in the FCC's ownership
rules could have an adverse effect on the Company in that the number of
potential customers for its programming may be reduced.
In 1989, the twelve-member European Community ("EC") adopted a directive that
its member states ensure that more than 50% of the programming shown on their
television stations be European-produced "where practicable." These guidelines
could restrict the amount of American television programming and feature films
that are shown on European television. In the recently concluded General
Agreement on Trade & Tariffs, the EC refused to make any commitment to modify
these guidelines or to refrain from adopting additional barriers. Because of
significant questions regarding the interpretation and enforcement as well
as the possible future modification of the current guidelines, the Company
cannot predict what effect they may have on its business. In addition,
certain European countries have adopted individual national restrictions on
broadcasting of programming based on origin. Other countries in which the
Company distributes its programming may adopt similar restrictions, which may
have an adverse effect on its ability to distribute its programs or create
stronger incentives for the Company to establish ventures with international
firms.
The effect of the foregoing regulations on the Company's operations cannot be
accurately assessed at this time.
On September 6, 1995, the FCC released an order repealing its rules governing
financial interests in and syndication of programming by the broadcast
television networks (the "Fin Syn Rules"). The earlier decision of the FCC to
permit the expiration of the Fin Syn Rules was recently upheld by the United
States Court of Appeals for the Seventh Circuit.
In 1993, a Federal district court vacated certain provisions of consent decrees
which prohibited television networks from acquiring financial interests and
syndication rights in television programming produced by non-network suppliers
such as the Company. The repeal of the Fin Syn Rules and the court's action
could have a material adverse effect on the operations of the Company.
EMPLOYEES
At December 31, 1995, the Company had approximately 900 employees. In addition,
the Company employs a large number of individuals for particular television and
feature film productions. As a result, the total number of employees can vary
substantially during the course of a year depending upon the number and
scheduling of its productions.
Certain of the Company's subsidiaries are signatories to collective bargaining
agreements relating to the engagement of various individuals in the many
different job classifications required to produce entertainment product. These
agreements set forth wage scales and fringe benefits which are generally
applicable to the production of television programming and feature films. In the
United States, the agreements are industrywide, whereas in Canada they are
negotiated on a company by company basis. These employees include writers,
directors, actors, musicians and studio technicians and craftsmen. The following
table sets forth the union contracts to which certain of the Company's
subsidiaries are parties, and the relevant expiration dates:
11
<PAGE> 12
<TABLE>
<CAPTION>
CONTRACT
UNION EXPIRATION DATE
----- ---------------
<S> <C>
International Alliance of Theatrical
and Stage Employees (IATSE) (United States)........................ July 31, 1996
IATSE Local 891 (Canada)............................................. May 31, 1996 (b)
Writers Guild of America............................................. March 1, 1998
Screen Actors Guild.................................................. June 30, 1998
American Federation of Musicians..................................... February 15, 1996
Directors Guild of America........................................... June 30, 1996
Directors Guild of America Freelance Live and Tape
Television Agreement.............................................. June 30, 1996
IATSE Videotape Agreement ........................................... September 30, 1996 (a)
American Federation of Television and Radio Artists.................. November 15, 1997
Teamsters Local Union No. 155........................................ May 31, 1997 (b)
</TABLE>
(a) Cancelable by one year's notice.
(b) Canadian guilds.
Although the Company considers its guilds and union relationships to be
satisfactory at present, the renewal of union contracts does not depend on its
activities or decisions alone and is largely out of the Company's control. If
the relevant union and the motion picture and television industry were unable to
come to a new agreement prior to these expiration dates, any resulting work
stoppage could adversely affect the Company's production activities.
DISCONTINUED OPERATIONS
The Company, formerly known as The Charter Company, was historically engaged in
petroleum marketing operations, all of which have been sold or discontinued.
Additional information relating to discontinued operations, including
information regarding environmental contingencies, is provided in the
accompanying financial statements. (See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Discontinued
Operations" and Note 10.)
ITEM 2. PROPERTIES
The Company leases office space of approximately 183,000 square feet in
Southern California, 37,000 square feet in Las Vegas, 27,000 square feet
in London and 54,000 square feet in New York City. In addition, the Company
leases offices in other cities in the United States and in various other
countries throughout the world in connection with its international
distribution activities. The Company also rents facilities on a short-term
basis for the production of its entertainment product, including a facility
in Vancouver, British Columbia. Management believes comparable space is
readily available should any lease expire without the prospect of renewal.
The Company also owns a 43,000 square foot building in Los Angeles, formerly
occupied by Republic, which is now housed at the Company's corporate offices.
The Company intends to sell the building in the near future.
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<PAGE> 13
ITEM 3. LEGAL PROCEEDINGS
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 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, as well as other matters. While the outcome of these suits and
claims cannot be predicted with certainty, the Company believes based upon its
current knowledge of the facts and circumstances and its understanding of the
applicable law that the ultimate resolution of such suits and claims will not
have a material adverse effect on the Company's results of operations or
financial condition. This belief is also based upon the allowances which have
been established in connection with these matters and the Company's coverage
under an insurance-type indemnity agreement which covers up to $35 million of
certain such liabilities in excess of a threshold amount of $25 million, subject
to certain adjustments. Substantial portions of such allowances and indemnity
are intended to cover environmental costs associated with the Company's former
petroleum operations. Although there are significant uncertainties inherent in
estimating environmental liabilities, based upon the Company's experience it is
considered unlikely that the amount of possible environmental liabilities and
Chapter 11 disputed claims would exceed the amount of the allowances by more
than $50 million, a substantial portion of which would be covered by the
indemnity discussed above. (See Note 10.)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders.
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<PAGE> 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the New York and Pacific Stock Exchanges
under the symbol SP. The table below sets forth the low and high sales prices
for the Common Stock as reported on the Composite Tape.
<TABLE>
<CAPTION>
1995 1994
----------------------- ------------------------
QUARTER LOW HIGH LOW HIGH
------- --- ---- --- ----
<S> <C> <C> <C> <C>
First $ 9 1/2 $11 7/8 $ 9 1/4 $12 1/8
Second 9 5/8 11 1/4 8 1/2 10 7/8
Third 9 1/4 13 7/8 8 1/2 12 1/8
Fourth 12 1/4 14 10 3/4 12 1/4
</TABLE>
The number of holders of record of the Company's Common Stock as of March 22,
1996, was approximately 9,900. Dividend payments were discontinued by the
Board of Directors as of the fourth quarter of 1994.
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<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain data for the years ended December 31 (in
thousands, except per share data):
<TABLE>
<CAPTION>
1995 1994 (c) 1993 1992 (a) 1991
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenue from continuing
operations $ 664,387 $ 599,839 $ 274,899 $ 257,546 $ 122,748
========== ========== ========== ========== ==========
Operating income $ 42,535 $ 50,743 $ 39,727 $ 25,315 $ 8,833
========== ========== ========== ========== ==========
Net income (loss) from:
Continuing operations $ 16,521 $ 24,108 $ 23,659 $ 7,917 $ 636
Discontinued operations -- -- (3,971) (2,043) 7,369
Extraordinary items -- -- (2,022) 3,948 4,959
---------- ---------- ---------- ---------- ----------
Net income $ 16,521 $ 24,108 $ 17,666 $ 9,822 $ 12,964
========== ========== ========== ========== ==========
Net income (loss) per common
and common equivalent share
from:
Continuing operations (b) $ 0.19 $ 0.32 $ 0.42 $ 0.15 $ --
Discontinued operations -- -- (0.07) (0.04) 0.16
Extraordinary items -- -- (0.04) 0.08 0.11
---------- ---------- ---------- ---------- ----------
Net income $ 0.19 $ 0.32 $ 0.31 $ 0.19 $ 0.27
========== ========== ========== ========== ==========
Balance Sheet Data:
Total assets $1,119,670 $1,026,760 $ 474,471 $ 451,661 $ 389,904
Long-term debt 305,676 248,853 49,580 109,915 77,143
Shareholders' equity 558,520 528,447 297,854 197,560 150,683
Cash dividends per
common share -- 0.06 0.08 0.08 0.05
</TABLE>
(a) Due to the acquisition of SEI in the second quarter of 1991, amounts are
not comparable to the prior year.
(b) Per share amounts for 1991 and 1992 are calculated after preferred
dividends of $810,000 and in 1993 after preferred dividends of $724,000.
(c) The Company acquired Republic on April 26, 1994 and VIE on July 30, 1994,
and, accordingly, amounts are not comparable to 1995 or to prior years.
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<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements of the Company and the related notes.
BUSINESS COMBINATIONS AND ACQUISITIONS
The Company makes its decisions to acquire or invest in businesses based on
financial and strategic considerations. The Company may from time to time invest
in or acquire businesses or assets in addition to those described below.
In May 1991, the Company acquired ownership of approximately 82% of the common
stock of SEI and acquired the remainder in July 1992. This acquisition was
accounted for using the purchase method of accounting and, accordingly, the
operations of SEI have been included in the Company's financial statements from
the original date of acquisition.
In April 1994, the Company and Republic consummated a merger (the "Merger") in
which the Company acquired all of the outstanding shares of common stock of
Republic for $13 per share in cash, including the approximate 35% interest in
Republic held by BEC. The total consideration was approximately $101,000,000,
which was funded through borrowings under the Company's credit arrangements with
BEC. (See Notes 2 and 4 and "Financial Condition" below.)
On July 30, 1994, the Company and BEC entered into an exchange agreement (the
"Exchange Agreement") and consummated the transactions contemplated thereby (the
"Acquisition"). Pursuant to the Exchange Agreement, BEC delivered to the Company
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 91% of VIEL's Ordinary
Shares.
In connection with the Acquisition, the Company also entered into put-and
call-option agreements with respect to the Ordinary Shares of VIEL not owned by
the Company. Under these agreements, the Company may acquire, or be required by
Blockbuster Entertainment Group, a division of Viacom ("BEG"), to purchase,
these shares from BEG 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.
On June 8, 1995, BEG acquired the remaining Ordinary Shares of VIEL not owned by
the Company for approximately $22,973,000 plus other costs associated with the
transaction. BEG and the Company have executed amendments to extend the put-and
call-option agreements, which originally expired in July 1995, through May 5,
1996. (See "Financial Condition" below and Note 1 regarding the potential
sale of VIE to Viacom.)
RESULTS OF CONTINUING OPERATIONS
Results of operations for the years ended December 31, 1995, 1994 and 1993 are
not comparable due to the business combinations and acquisitions above.
Additionally, the results of operations for any period are significantly
affected by the quantity and performance of the Company's entertainment product
which is licensed or sold to, and available for exhibition by, licensees or
customers in various media and territories. Consequently, results of operations
may vary significantly between periods, and the results of operations in any one
period may not be indicative of results of operations in future periods.
The success of the Company's television programming business depends, in large
part, upon the successful network exhibition of its television series over a
sufficient number of years to allow for off-network exhibition opportunities.
During the initial years of a one-hour television series, network and
international license fees normally approximate the production costs of the
series, and accordingly the Company recognizes only minimal profit or loss
during this period. With respect to half-hour network programming, the
production costs can substantially exceed the combination of the network and
international license fees, and the Company recognizes
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<PAGE> 17
losses during this period. However, if a sufficient number of episodes of a
series are produced, the Company is reasonably assured that it will also be able
to sell the series in the domestic off-network market, and the Company would
then expect to be able to realize a substantial profit with respect to the
series.
The Company's business in general is affected by the public's acceptance of its
product, which is unpredictable and subject to change, and by conditions within
the entertainment industry, including, but not limited to, the quality and
availability of creative talent and the negotiation and renewal of union
contracts relating to writers, directors, actors, musicians and studio
technicians and craftsmen as well as any changes in the law and governmental
regulation. In 1993, a Federal district court vacated certain provisions of a
consent decree which prohibited television networks from acquiring financial
interests and syndication rights in television programming produced by program
suppliers such as the Company. The Telecommunications Act of 1996 eliminates the
restrictions on the number of television stations that one entity may own and
increases the national audience reach limitation by one entity from 25% - 35%.
Accordingly, the networks will be able to own the programming which they
broadcast, and increasingly become competitors of the Company in the production
and distribution of programming.
The following paragraphs discuss significant items in the Consolidated
Statements of Operations for the three years ended December 31, 1995.
REVENUE
The following table sets forth the major components of the Company's revenue for
the three years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1995 1994* 1993
-------- -------- --------
<S> <C> <C> <C>
Worldwide television $349,671 $327,164 $208,062
Worldwide interactive entertainment 212,237 183,394 --
Worldwide home video 72,211 57,353 31,150
International film distribution 11,371 11,593 15,955
Worldwide licensing and merchandising 15,758 18,074 16,956
Other 3,139 2,261 2,776
-------- -------- --------
$664,387 $599,839 $274,899
======== ======== ========
</TABLE>
* Includes eight months of operations of Republic and five months of operations
of VIE.
Worldwide television revenue increased $22,507,000 (7%) and $119,102,000 (57%)
in 1995 and 1994, respectively. The increase in 1995 arose primarily from (i)
higher per episode network license fees; (ii) the continued distribution of
programming in the first-run syndication market; (iii) higher revenue from the
exploitation of the Company's library; and (iv) the effect recorded in the first
quarter of 1995 of conforming the Company's accounting policies to those of
Viacom (see Note 1); however, these increases were offset by the effect of fewer
hours of programming being delivered to the networks. The increase in 1994 was
primarily due to (i) substantially more hours of programming being delivered
to the networks; (ii) the release of "Beverly Hills, 90210" in domestic
syndication; (iii) the increase in programming available for distribution,
including the Republic Library; and (iv) the distribution of two one-hour
dramas in first-run syndication.
Worldwide interactive entertainment revenue increased $28,843,000, or 16%, in
1995 from 1994 primarily as a result of having twelve months of operations of
VIE (acquired July 30, 1994) included in the 1995 results as compared to only
five months of operations in 1994. Revenue in the last six months of 1995 was
adversely affected by delays in the release of a significant number of VIE's
titles from 1995 to 1996, as well as fewer than anticipated shipments to
retailers reflecting in part the continuing reluctance by consumers to
purchase interactive software product until the new generation hardware
platforms achieve a higher installed base. The Company continues to
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<PAGE> 18
actively work with hardware manufacturers to develop and adapt its titles to
different platforms as they become commercially viable.
In general, VIE's revenue is highest in the fourth quarter of each year. VIE
released "The Lion King" interactive game, VIE's highest grossing title ever, on
various cartridge formats in October 1994. This game contributed a very
significant portion of the worldwide interactive entertainment revenue realized
by the Company during 1994 while there was no release of similar significance in
1995. (See "Financial Condition" below and Note 1 regarding the potential sale
of VIE to Viacom.)
Home video revenue increased $14,858,000, or 26%, in 1995 as compared to 1994
and $26,203,000, or 84%, in 1994 as compared to 1993. The increase in 1995 is
primarily a result of having twelve months of operations of Republic (acquired
April 26, 1994, with significant home video distribution operations) being
included in the 1995 results as compared to only eight months of operations in
1994. The increase in 1994 was also primarily the result of the acquisition of
Republic's home video operation in that year. In addition, the Company released
"James A. Michener's TEXAS" and "The Stand" in the domestic home video
marketplace in 1994.
International film distribution revenue remained relatively stable in 1995 as
compared to 1994 and decreased $4,362,000, or 27%, in 1994 as compared to 1993.
During 1995 the Company released the successful film "The Usual Suspects."
During 1994 the Company released a group of ten films with the overall title of
"The Young and The Reckless;" such films individually generated relatively
modest levels of revenue. During 1993, the Company released two feature films,
"Short Cuts" and "Shadowlands."
Licensing and merchandising revenue decreased $2,316,000, or 13%, in 1995 as
compared to 1994 and increased $1,118,000, or 7%, in 1994 as compared to 1993.
The decrease in 1995 was primarily due to the continued decline in licensing
revenue related to "Beverly Hills, 90210." The increase from 1993 to 1994 was
primarily due to revenue related to third-party product, which more than offset
a decline in licensing revenue from "Beverly Hills, 90210."
Certain of the operations of the Company generate significant 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 pounds sterling, French francs, deutsche marks,
Canadian dollars, Mexican pesos and Japanese yen, among others. These currency
exposures are partially offset by the fact that certain of the Company's
manufacturing costs and overhead are also denominated in the same currencies,
and certain of the Company's bank debt is denominated in foreign currencies.
ENTERTAINMENT PRODUCT COSTS
Entertainment product costs consist primarily of the amortization of capitalized
product costs and the accrual of third-party participations and residuals. (See
Note 1.) Such costs increased $36,023,000 and $282,078,000 in 1995 and 1994,
respectively, from the comparable prior year periods. The increases primarily
resulted from the increases in revenue discussed above, including the increase
in worldwide interactive entertainment revenue as a result of the acquisition of
VIE. Additionally, the percentage relationship between such costs and the
related revenue was 78%, 81% and 73% in 1995, 1994 and 1993, respectively. 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
$24,876,000, $25,687,000 and $6,177,000 in 1995, 1994 and 1993, respectively.
The write-downs in 1995 were primarily attributable to the Company's
continued activities in first-run syndication, delivery by the Company of
five television series pilots, which traditionally cost more than the related
network license fees, and losses related to interactive titles. The increase
in 1994 was primarily attributable to the Company's increased activities in
first-run syndication and half-hour comedy programming.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative costs in 1995 increased $36,733,000, or 56%,
as compared to 1994 and in 1994 increased $31,846,000, or 94%, as compared to
1993. The increase in 1995 and 1994 resulted primarily from the
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<PAGE> 19
selling, general and administrative costs related to the operations of VIE and
Republic, including the amortization of intangible assets, for the full twelve
month period in 1995 and since their respective acquisition dates in 1994. In
addition, there were increased administrative costs commensurate with the
Company's growth in both years.
INTEREST INCOME
Interest income remained relatively stable in 1995 as compared to 1994 and
decreased $2,559,000, or 53%, in 1994 as compared to 1993. The decrease in 1994
resulted from (i) lower interest rates on certain international cash balances
and (ii) lower discount amortization on certain acquired receivables, as a
result of a portion of these receivables being collected in 1994.
INTEREST EXPENSE
Interest expense increased $7,623,000, or 89%, and $665,000, or 8%, in 1995 and
1994, respectively. The increase in both years was attributable to higher
average borrowings which was partially offset by lower average interest rates.
(See Note 4 and "Financial Condition" below.) 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 significant increases or decreases resulting
solely from increases or decreases in such interest rates.
MINORITY INTEREST
The Company had minority interest (income) expense of $(1,382,000) and $680,000
in 1995 and 1994, respectively, relating to the operations of VIE, as it
owns approximately 91% of VIE. The Company has put- and call-option agreements
with BEG with respect to the remaining minority interest in VIE. (See Note 2.)
PROVISION FOR INCOME TAXES
During 1995, the Company's provision for income taxes decreased $5,924,000, or
30%, compared to the provision in 1994 due primarily to the decrease in income
from continuing operations before income taxes and minority interest, partially
offset by an increase in the effective tax rate. The effective tax rate
increased to 48% in 1995 from 44% in 1994, largely as a result of the changes in
the relationship between revenue and expenses composing income from continuing
operations, partially offset by the effect of the reversal of reserves as a
result of the favorable settlement of certain tax controversies.
During 1994, the Company's provision for income taxes increased $6,639,000, or
51%, as compared to 1993. The effective tax rate increased to 44% in 1994 from
36% in 1993 primarily as a result of the effect of a non-recurring favorable
adjustment to a valuation allowance in 1993 (see below). The provision increased
in 1994 largely as a result of the increase in income from continuing operations
and the increase in the effective tax rate. (See Note 9.)
DISCONTINUED OPERATIONS
The Company, formerly known as The Charter Company, was engaged in petroleum
marketing operations, and in 1992 sold substantially all of the remaining such
operations without material gain or loss. The Company continues to sell the few
remaining assets of the discontinued operations whenever possible and to resolve
remaining claims and liabilities. (See Note 10.)
The financial position of the discontinued operations is presented in the
balance sheets under the caption "Net liabilities related to discontinued
operations." Included in such amounts are certain allowances for estimated
expenses related to environmental matters and disputed claims relating to the
reorganization in 1986 under Chapter
19
<PAGE> 20
11 of the Bankruptcy Code. These allowances totaled approximately $12,194,000
and $20,368,000 at December 31, 1995 and 1994, respectively. (See Note 10.)
The Company is involved in a number of legal actions including threatened
claims, pending lawsuits and contract disputes, environmental clean-up
assessments, damages from alleged dioxin contamination and other matters. Some
of the parties involved in such actions seek damages in very large amounts.
While the outcome of these suits and claims cannot be predicted with certainty,
the Company believes based upon its current knowledge of the facts and
circumstances and its understanding of the applicable law that the ultimate
resolution of such suits and claims will not have a material adverse effect on
the Company's results of operations or financial condition. This belief is also
based upon the allowances described above and the Company's coverage under an
insurance-type indemnity agreement which covers up to $35 million of certain
such liabilities in excess of a threshold amount of $25 million, subject to
certain adjustments. Substantial portions of such allowances and indemnity are
intended to cover environmental costs associated with the Company's former
petroleum operations. Although there are significant uncertainties inherent in
estimating environmental liabilities, based upon the Company's experience it is
considered unlikely that the amount of possible environmental liabilities and
Chapter 11 disputed claims would exceed the amount of the allowances by more
than $50 million, a substantial portion of which would be covered by the
indemnity discussed above. (See Note 10.)
In 1993, the Company had a net loss from discontinued operations of $3,971,000
after an income tax benefit of $2,529,000. This loss resulted primarily from the
premium paid for the insurance-type indemnity described above.
EXTRAORDINARY ITEM
In connection with the early extinguishment of certain indebtedness in 1993, the
Company recorded an extraordinary loss of $2,022,000 (net of a tax benefit of
$1,287,000) from the write-off of remaining unamortized discount and debt
issuance costs.
FINANCIAL CONDITION
The Company's operations require the production of entertainment product and the
acquisition of distribution rights to entertainment product produced by third
parties. The Company's expenditures in this regard totaled $436,373,000 and
$444,475,000 in 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.
In connection with the Merger, the Company in October 1993 issued 13,362,215
shares of the Company's Common Stock to BEC in exchange for 3,652,542 shares of
BEC common stock. The BEC shares were subsequently resold, with the Company
realizing approximately $100,445,000 in proceeds. The Company subsequently used
the proceeds to redeem, pay or prepay all its subordinated debt and a
substantial portion of its bank debt. (See Notes 2, 4 and 6.) The Company
borrowed the funds required to complete the Merger in the second quarter of
1994.
The Company's principal credit agreement is with Viacom (the "Viacom Facility").
(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 $140,000,000 (increased in November 1995 from
$100,000,000) to fund the Company's working capital and other requirements.
Viacom has agreed to provide a further increase of up to $115,000,000 in the
amount available under the Viacom Facility and it is anticipated that an
amendment reflecting such increase will be executed.
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<PAGE> 21
A wholly-owned subsidiary of VIEL has a multi-currency credit agreement for
$100,000,000 with a bank in the U.S. (the "Credit Agreement"). As of December
31, 1994, the Company had $5,816,000 in letters of credit outstanding under the
Credit Agreement to guarantee its purchases of entertainment product. There were
no letters of credit outstanding under the Credit Agreement at December 31,
1995. Viacom has guaranteed all of the borrowings under the Credit Agreement,
which are due March 31, 1997. (See Note 4.)
Another wholly-owned subsidiary of VIEL has a 10,000,000 pounds sterling credit
facility (the "UK Facility") with a bank in the United Kingdom, which the
Company has guaranteed. The UK Facility matures in 2005. (See Note 4.) As of
December 31, 1995, the Company had approximately $2,200,000 in letters of credit
outstanding under the UK Facility to guarantee its purchases of entertainment
product. Letters of credit outstanding under this facility at December 31, 1994
were not material.
As a result of the merger of BEC into Viacom in September 1994, Viacom currently
owns approximately 75% 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.
Viacom is exploring the sale of the Company. Viacom also has indicated its
intent to acquire the Company's interest in VIE in connection with such sale.
An independent committee of the Company's board of directors has been formed
to negotiate the terms of any proposed VIE transaction. The following table
summarizes the revenue and earnings (loss) before interest, taxes,
depreciation and amortization ("EBITDA") from the operations of VIE:
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------
1995 1994 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE $103,778 $149,576 $212,237 $183,394
EBITDA 2,096 9,766 (14,380) 13,548
</TABLE>
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 that available under its credit facility,
including the anticipated amendment to the Viacom Facility, to meet its ongoing
plans for the production and acquisition of entertainment product and to take
advantage of internal and external development and growth opportunities. A
change in control of the Company, which would result from a sale of the Company
(see Note 1), constitutes an event of default under the Viacom Facility and
would accelerate any outstanding borrowings under the Viacom Facility. The
Company expects the resolution of these matters would be negotiated in
connection with any proposed sale of the Company.
RECENTLY ISSUED ACCOUNTING STANDARDS
In 1995, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and SFAS No.
123, "Accounting for Stock-Based Compensation," both effective for fiscal years
beginning after December 15, 1995. Management does not anticipate either
statement will have a material effect on the Company's results of operations or
financial condition. (See Notes 1 and 6.)
In 1994, the American Institute of Certified Public Accountants issued Statement
of Position ("SOP") 94-6, "Disclosure of Certain Significant Risks and
Uncertainties," effective for fiscal years ending after December 15, 1995. The
Company adopted SOP 94-6 in the accompanying financial statements. (See Note 1.)
Effective January 1994, the Company became subject to SFAS No. 112, "Employers'
Accounting for Postemployment Benefits," and SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." SFAS No. 112 did not have an
effect on the Company's results of operations or financial condition
21
<PAGE> 22
because the Company does not provide such benefits. However, the adoption of
SFAS No. 115 required the Company to adjust the carrying value of a common stock
investment to fair market value with a corresponding adjustment, net of tax, to
its Shareholders' Equity. (See Notes 1 and 6.)
22
<PAGE> 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants:
Years Ended December 31, 1995 and 1994 24
Report of Independent Public Accountants:
Year Ended December 31, 1993 25
Consolidated Balance Sheets:
December 31, 1995 and 1994 26
Consolidated Statements of Operations:
Years ended December 31, 1995, 1994 and 1993 27
Consolidated Statements of Changes in Shareholders' Equity:
Years ended December 31, 1995, 1994 and 1993 28
Consolidated Statements of Cash Flows:
Years ended December 31, 1995, 1994 and 1993 29
Notes to Consolidated Financial Statements 30
"Selected Quarterly Financial Data" has been included
in Note 13 to the Consolidated Financial Statements
</TABLE>
23
<PAGE> 24
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
OF SPELLING ENTERTAINMENT GROUP INC.
We have audited the accompanying consolidated balance sheets of Spelling
Entertainment Group Inc. (a Delaware Corporation) and subsidiaries as of
December 31, 1995 and 1994, and the related consolidated statements of
operations, of shareholders' equity and of cash flows for the years then ended.
These financial statements and the financial statement schedule for the years
ended December 31, 1995 and 1994 listed in the index at Item 14 (a) are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and the financial statement schedule based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements audited by us present
fairly, in all material respects, the financial position of Spelling
Entertainment Group Inc. and subsidiaries as of December 31, 1995 and 1994, and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
Our audits also included an audit of the financial statement schedule listed in
item 14(a) of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
PRICE WATERHOUSE LLP
Los Angeles, California
February 6, 1996
24
<PAGE> 25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO SPELLING ENTERTAINMENT GROUP INC.
We have audited the accompanying consolidated balance sheet of Spelling
Entertainment Group Inc. (a Delaware Corporation) and subsidiaries as of
December 31, 1993 (not presented herein), and the related consolidated
statements of operations, shareholders' equity, and cash flows for the year then
ended. These financial statements and the schedule for the year ended December
31, 1993 listed in the index at Item 14 (a) are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and the schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Spelling Entertainment Group
Inc. and subsidiaries as of December 31, 1993, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule for the year ended December 31, 1993
listed in the index at Item 14 (a) is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Los Angeles, California
February 1, 1994
25
<PAGE> 26
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31,
--------------------------
1995 1994
----------- -----------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 20,678 $ 22,400
Accounts receivable, net 236,812 242,127
Entertainment product, net 428,840 325,643
Property and equipment, net 25,757 16,161
Other assets 20,102 19,678
Intangible assets, net 387,481 400,751
----------- -----------
$ 1,119,670 $ 1,026,760
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable, accrued expenses and other liabilities $ 87,090 $ 101,484
Accrued participation expense 111,818 83,493
Deferred revenue 19,362 11,275
Bank and other debt 305,676 248,853
Income and other taxes 21,040 24,355
Net liabilities related to discontinued operations 15,754 27,061
----------- -----------
TOTAL LIABILITIES 560,740 496,521
----------- -----------
Minority Interest 410 1,792
Commitments and contingent liabilities
SHAREHOLDERS' EQUITY:
Preferred Stock -- --
Common Stock, $.001 and $0.10 par value, respectively,
- 300,000,000 shares authorized
- 89,683,378 and 87,983,329 shares issued and outstanding 90 8,798
Capital in excess of par value 571,244 546,843
Accumulated deficit (11,914) (27,287)
Cumulative translation adjustment (900) 93
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 558,520 528,447
----------- -----------
$ 1,119,670 $ 1,026,760
=========== ===========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
26
<PAGE> 27
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Revenue $ 664,387 $ 599,839 $ 274,899
Costs and Expenses:
Entertainment product costs 519,550 483,527 201,449
Selling, general and administrative 102,302 65,569 33,723
--------- --------- ---------
621,852 549,096 235,172
--------- --------- ---------
Operating Income 42,535 50,743 39,727
Interest income 2,444 2,249 4,808
Interest expense (16,160) (8,537) (7,872)
Other, net 91 28 52
--------- --------- ---------
Income from continuing operations
before income taxes and minority interest 28,910 44,483 36,715
Provision for income taxes (13,771) (19,695) (13,056)
--------- --------- ---------
Income from continuing operations before
minority interest 15,139 24,788 23,659
Minority interest 1,382 (680) --
--------- --------- ---------
Income from continuing operations 16,521 24,108 23,659
Loss from discontinued operations, net -- -- (3,971)
--------- --------- ---------
Income before extraordinary item 16,521 24,108 19,688
Extraordinary item, net -- -- (2,022)
--------- --------- ---------
Net Income 16,521 24,108 17,666
Preferred dividends -- -- (724)
--------- --------- ---------
Net income applicable to common stock $ 16,521 $ 24,108 $ 16,942
========= ========= =========
Average number of common and common equivalent shares 88,458 74,377 54,253
========= ========= =========
Income (loss) per common
and common equivalent share:
Continuing operations $ 0.19 $ 0.32 $ 0.42
Discontinued operations -- -- (0.07)
Extraordinary item -- -- (0.04)
--------- --------- ---------
Net income per common and common equivalent share $ 0.19 $ 0.32 $ 0.31
========= ========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
27
<PAGE> 28
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
Common Stock Capital In Cumulative Total
----------------------- Excess of Accumulated Translation Shareholders'
Number Par Value Par Value Deficit Adjustment Equity
---------- -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1992 50,841,392 $ 5,084 $ 242,279 $ (58,803) $ -- $ 197,560 (a)
Preferred stock redemption -- -- -- -- -- (9,000)(a)
Exercise of options 301,231 30 1,436 -- -- 1,466
Issuance of stock 13,362,215 1,336 99,109 -- -- 100,445
Pension liability adjustment, net -- -- -- (5,217) -- (5,217)
Cash dividends paid or accrued:
Preferred Stock -- -- -- (724) -- (724)
Common Stock -- -- -- (4,342) -- (4,342)
Net income -- -- -- 17,666 -- 17,666
---------- -------- ---------- ---------- ---------- ----------
Balance December 31, 1993 64,504,838 6,450 342,824 (51,420) -- 297,854
Exercise of options 1,463,429 147 8,218 -- -- 8,365
Pension liability adjustment, net -- -- -- 380 -- 380
Cash dividends paid or accrued:
Common Stock -- -- -- (4,334) -- (4,334)
Merger with Republic -- -- (6,670) -- -- (6,670)
Acquisition of VIE 22,015,062 2,201 202,471 -- -- 204,672
Unrealized holding gain, net -- -- -- 3,979 -- 3,979
Cumulative translation adjustment -- -- -- -- 93 93
Net income -- -- -- 24,108 -- 24,108
---------- -------- ---------- ---------- ---------- ----------
Balance December 31, 1994 87,983,329 8,798 546,843 (27,287) 93 528,447
Exercise of options
and warrants 1,700,049 36 11,339 -- -- 11,375
Pension liability adjustment, net -- -- -- 829 -- 829
Income tax benefit related to
stock options -- -- 4,318 -- -- 4,318
Change in par value as a
result of reincorporation -- (8,744) 8,744 -- -- --
Unrealized holding loss, net -- -- -- (1,977) -- (1,977)
Cumulative translation adjustment -- -- -- -- (993) (993)
Net income -- -- -- 16,521 -- 16,521
---------- -------- ---------- ---------- ---------- ----------
Balance December 31, 1995 89,683,378 $ 90 $ 571,244 $ (11,914) $ (900) $ 558,520
========== ======== ========== ========== ========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
(a) Includes 9,000 shares of preferred stock at $9,000,000 which were redeemed
in 1993.
28
<PAGE> 29
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 16,521 $ 24,108 $ 17,666
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation and amortization 16,103 10,125 4,855
Amortization of entertainment product costs 345,947 397,320 177,748
Additions to entertainment product costs (436,373) (444,475) (215,017)
Loss on extinguishment of debt -- -- 3,309
(Increase) decrease in accounts receivable 5,652 (110,902) (11,257)
Increase (decrease) in accounts payable,
accrued expenses, other liabilities and income taxes (12,321) 58,011 3,898
Increase (decrease) in accrued
participation expense 17,550 6,025 (34,015)
Increase (decrease) in deferred revenue 8,090 (3,697) 3,147
Other, net (5,429) (4,622) 917
--------- --------- ---------
(44,260) (68,107) (48,749)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Merger with Republic, net of cash acquired -- (102,299) --
Cash acquired in acquisition of VIE -- 2,197 --
Sale of discontinued operations properties -- 2,703 --
Purchases of property and equipment (15,699) (6,705) (966)
Changes in net liabilities related to
discontinued operations (9,961) (8,696) 1,653
--------- --------- ---------
(25,660) (112,800) 687
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under the credit facilities 96,696 275,003 43,000
Repayments of credit facilities (39,873) (88,409) (106,218)
Cash dividends paid on Common and Preferred Stock -- (4,334) (5,066)
Issuances of Common Stock 11,375 8,365 101,911
Redemption of Preferred Stock -- -- (9,000)
--------- --------- ---------
68,198 190,625 24,627
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,722) 9,718 (23,435)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 22,400 12,682 36,117
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 20,678 $ 22,400 $ 12,682
========= ========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
29
<PAGE> 30
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements present the
consolidated financial position and results of operations of Spelling
Entertainment Group Inc. and subsidiaries (the "Company" or "Spelling"). All
material intercompany accounts and transactions have been eliminated. Certain
reclassifications have been made to prior periods to conform to the current
year's presentation.
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 and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could subsequently differ from those estimates.
Assets and liabilities of international operations are translated at year end
rates of exchange while results of operations are translated at average rates of
exchange in effect for the applicable period. Translation gains or losses are
shown as a separate component of Shareholders' Equity.
See Note 2 regarding the acquisition of Republic Entertainment Inc. (formerly
Republic Pictures Corporation, together with its subsidiaries, "Republic") and
Virgin Interactive Entertainment Limited ("VIEL," together with its
subsidiaries, "VIE").
Until March 31, 1993, American Financial Corporation and subsidiaries ("AFC")
owned 24,594,215 shares (48%) of the Company's common stock, $.10 par value
("Common Stock"), and 9,000 shares (100%) of the Company's preferred stock, $.10
par value ("Preferred Stock"); at that date, AFC sold the shares of Common Stock
to Blockbuster Entertainment Corporation ("BEC"). Subsequently, BEC increased
its ownership to 67,673,702 shares of the Company's Common Stock. (See Note 6.)
On September 29, 1994, BEC merged with and into Viacom Inc. ("Viacom"), with
Viacom being the surviving corporation. As a result of the merger, Viacom
currently owns approximately 75% of the Company's Common Stock.
Effective May 26, 1995, the Company changed its place of incorporation from
Florida to Delaware by merging into a newly-formed Delaware corporation. As a
result of the Company's reincorporation, each share of the Company's common
stock then issued was converted into and exchanged for one share of common
stock, par value $.001 per share, of the Delaware corporation. There was no
change in the business, properties or management of the Company as a
result of this reincorporation.
Viacom is exploring the sale of the Company. Viacom also has indicated its
intention to acquire the Company's interest in VIE in connection with such
sale. An independent committee of the Company's board of directors has been
formed to negotiate the terms of any proposed VIE transaction.
CASH AND CASH EQUIVALENTS. Cash equivalents consist of interest-bearing
securities with original maturities of less than ninety days.
ACCOUNTS RECEIVABLE, NET. Accounts receivable are net of allowances for doubtful
accounts and returns of $30,357,000 and $35,218,000 at December 31, 1995 and
1994, respectively.
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, 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.
30
<PAGE> 31
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Entertainment product, net, is stated at the lower of cost less amortization or
estimated net realizable value. Estimates of total gross revenue, costs and
participations are reviewed quarterly and revised as necessary. When estimates
of total revenue and costs indicate that an individual product will realize an
ultimate loss, additional amortization is provided to fully recognize such loss
in that period.
PROPERTY AND EQUIPMENT, NET. The carrying values of property and equipment are
based on cost, and provision for depreciation is made principally on the
straight-line method over estimated useful lives, ranging from 5 to 10 years.
Property and equipment are net of accumulated depreciation of $15,137,000 and
$10,160,000 at December 31, 1995 and 1994, respectively.
OTHER ASSETS. Included in other assets is a common stock investment at a
carrying value (at fair value) of $5,480,000 and $8,712,000 at December 31, 1995
and 1994, respectively. (Viacom owns a significant number of shares in the same
company, accounted for under the equity method.) The Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," which became effective in 1994. This statement requires the
Company to adjust the carrying value of this asset, which is classified as
"available for sale" under the applicable provisions of SFAS No. 115, to fair
market value based on its over-the-counter market price, with a corresponding
adjustment, net of tax, to Shareholders' Equity. It is not clear that the
Company could realize such a value if the investment were to be sold
due to the low trading volume of such shares relative to the number of shares
owned by the Company.
INTANGIBLE ASSETS, NET. Intangible assets represent the acquisition costs of
Spelling Entertainment Inc., Republic and VIE in excess of the value of their
identified net assets. (See Note 2.) These costs are being amortized on a
straight-line basis over 40 years. Amortization expense relating to such
intangible assets was $10,352,000, $7,144,000 and $3,825,000 for the three years
ended December 31, 1995, respectively. Intangible assets are net of accumulated
amortization of $28,023,000 and $17,671,000 at December 31, 1995 and 1994,
respectively. It is the Company's policy to evaluate the carrying value of such
costs on a regular basis, and to recognize impairment if it becomes probable
that such costs would not be recoverable. In March 1995, the FASB issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," which the Company will be required to adopt in 1996.
SFAS No. 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those assets to
be held and used and for long-lived assets and certain identifiable intangibles
to be disposed of. The Company does not anticipate the adoption of this
statement will have a material effect on the Company's results of operations or
financial condition.
DEFERRED REVENUE. A substantial portion of the network license fees related to
television programming are received prior to the time the programming is
completed or delivered to the network. Such fees, and other monies received
prior to the time that the related entertainment product is available to the
licensee, are recorded on the balance sheet as deferred revenue. Such amounts
are normally repayable by the Company only if it fails to deliver the related
product to the licensee.
REVENUE RECOGNITION. Revenue from licensing agreements covering entertainment
product owned by the Company is recognized when the entertainment product is
available to the licensee for telecast, exhibition or distribution, and other
conditions of the licensing agreements have been met. Long-term
noninterest-bearing receivables arising from such agreements are discounted to
present value. Prior to 1995, revenue from television distribution of
entertainment product not owned by the Company was recognized as billed. In the
first quarter of 1995, the Company conformed its accounting policies, with
respect to SFAS No. 53, to those of Viacom.
Revenue from direct distribution of home video and interactive entertainment
product is recognized, net of an allowance for estimated returns and discounts,
together with related costs, in the period in which the product is shipped to
the Company's customers.
31
<PAGE> 32
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
ACCOUNTING FOR ENVIRONMENTAL MATTERS. The allowances for estimated expenses and
disputed claims reported in Note 10 include accruals for environmental
liabilities, including anticipated remediation costs of properties held for
sale. Such accruals are determined independently of the estimated net realizable
value of any related asset, and are recorded without discount or offset for
either (i) time value of money prior to the anticipated date of payment, or (ii)
expected recoveries from insurance or contribution claims against unaffiliated
entities. The allowances are reviewed quarterly and revised as necessary.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE. Net income per common and
common equivalent share amounts are based on the weighted average common and
common equivalent shares outstanding during the respective period. 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.
2. BUSINESS COMBINATIONS AND ACQUISITIONS
On April 26, 1994, DE Acquisition Corporation, a wholly-owned subsidiary of the
Company, merged with and into Republic (the "Merger"). As a result of the
Merger, Republic became a wholly-owned subsidiary of the Company, and each share
of the common stock of Republic (the "Republic Common Stock") outstanding
immediately prior to the Merger was converted into the right to receive $13.00
in cash, without interest.
Immediately prior to the Merger, BEC owned 2,550,000 shares of Republic Common
Stock and warrants to purchase 810,000 additional shares of Republic Common
Stock at an exercise price of $11.50 per share. In accordance with the terms of
the Merger, the Company purchased the 2,550,000 shares of Republic Common Stock
from BEC for $33,150,000, and the warrants owned by BEC were converted into
warrants to purchase 1,337,148 shares of the Company's Common Stock at an
exercise price of $6.97 per share. Certain other parties held warrants to
purchase 500,000 shares of Republic Common Stock at an exercise price of $12.50
per share. In accordance with the terms of the Merger, these warrants were
converted into warrants to purchase 825,400 shares of the Company's Common Stock
at an exercise price of $7.57 per share, of which 725,400 were exercised in
December 1995. (See Note 6.)
On July 30, 1994, the Company and BEC entered into an exchange agreement (the
"Exchange Agreement") and consummated the transactions contemplated thereby (the
"Acquisition"). Pursuant to the Exchange Agreement, BEC delivered to the Company
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 91% of VIEL's Ordinary
Shares. (See Note 6.)
In connection with the Acquisition, the Company also entered into put- and
call-option agreements with respect to the Ordinary Shares of VIEL not owned by
the Company. Under these agreements, the Company may acquire, or be required by
Blockbuster Entertainment Group, a division of Viacom ("BEG"), to purchase,
these shares from BEG 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.
On June 8, 1995, BEG acquired the remaining Ordinary Shares of VIEL not owned by
the Company for approximately $22,973,000 plus other costs associated with the
transaction. BEG and the Company have executed amendments to extend the put-
and call-option agreements, which originally expired in July 1995, through
May 5, 1996. See Note 1 regarding the potential sale of VIE to Viacom.
32
<PAGE> 33
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company has accounted for the Merger and the Acquisition under the purchase
method of accounting. However, with respect to the Merger, the Company has
recorded an adjustment of $6,670,000 to Shareholders' Equity to reflect the
excess of the cash consideration paid for BEC's ownership interest in Republic
Common Stock (see above) over BEC's carrying value for such interest. (See Note
6.) Further, because BEC controlled both the Company and VIE at the time of
the Acquisition, the Company's purchase price for the VIE Interests has been
determined by reference to the purchase price paid by BEC for the VIE Interests.
The assets and liabilities of Republic and VIE are included in the accompanying
consolidated balance sheets as of December 31, 1995 and 1994 at fair value, with
the differences between the total purchase price and such fair values being
included in intangible assets. The excess of the purchase price over net assets
and liabilities acquired is being amortized on a straight-line basis over forty
years.
The results of operations of Republic since April 26, 1994, and the results of
operations of VIE since July 30, 1994, are included in the accompanying
consolidated statements of operations. The following table presents the
unaudited pro forma results of operations assuming that the Merger and the
Acquisition had both occurred on January 1, 1993 (in thousands, except per share
amounts).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1993
-------- --------
<S> <C> <C>
Revenue $657,200 $472,400
Income from continuing operations 17,300 34,300
Income per share from continuing operations 0.22 0.39
</TABLE>
The pro forma results set forth in the preceding tables are not necessarily
indicative of the results that would have been realized had these transactions
actually taken place on the applicable dates or of the results which may occur
in the future.
3. ENTERTAINMENT PRODUCT, NET
Entertainment product, net, is comprised of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Entertainment product:
Released $172,051 $162,147
In process and other 127,887 53,615
Entertainment product rights 128,902 109,881
-------- --------
$428,840 $325,643
======== ========
</TABLE>
Entertainment product rights include advances to producers for distribution
rights and other entertainment product not produced by the Company.
Based on the Company's estimates of future gross revenue as of December 31,
1995, approximately 70% of unamortized released entertainment product and
entertainment product rights will be amortized during the three years ending
December 31, 1998.
33
<PAGE> 34
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. DEBT
Debt consisted of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Viacom Facility, average interest
at 6.9% at December 31, 1995 $210,000 $181,805
Credit Agreement, average interest
at 6.7% at December 31, 1995 95,646 54,313
UK Facility, interest
at 8.0% at December 31, 1995 30 8,943
Other credit facilities - 3,792
-------- --------
$305,676 $248,853
======== ========
</TABLE>
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 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. In November
1995, the agreement was again amended to provide a further $40,000,000 increase
in the amount available under the Viacom Facility. The Viacom Facility, as
amended, provides for (i) a term loan of $100,000,000 which funded the Company's
merger with Republic (see Note 2) and (ii) a revolving credit facility of
$140,000,000 to fund the Company's working capital and other requirements. All
outstanding borrowings mature on March 31, 1997. Viacom has agreed to provide a
further increase of up to $115,000,000 in the amount available under the Viacom
Facility and it is anticipated that an amendment reflecting such increase will
be executed.
Under the Viacom Facility, the Company pays an annual fee (currently 0.3125%)
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 1.0%) or at prime
rate; both rates are principally 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. Borrowings under the Viacom Facility will be
accelerated in the event of a "change in control," as defined in the Viacom
Facility, of the Company. (See Note 1.)
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). During 1995, the borrowings allowable under the Credit Agreement were
increased to $100,000,000 and the term was extended to March 31, 1997. 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 December 31,
1994, the Company had approximately $5,816,000 in letters of credit outstanding
under the Credit Agreement to guarantee its purchases of interactive
entertainment product. There were no letters of credit outstanding under the
Credit Agreement at December 31, 1995.
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.
34
<PAGE> 35
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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%. The UK
Facility matures on April 30, 2005. As of December 31, 1995, the Company had
approximately $2,200,000 in letters of credit outstanding under the UK Facility
to guarantee its purchases of entertainment product. Letters of credit
outstanding under this facility at December 31, 1994 were not material.
As of December 31, 1994, the Company had several other credit facilities, all of
which were paid off and terminated during the first quarter of 1995. As of
December 31, 1993, the Company had a credit facility with a group of banks. This
facility was terminated in January 1994 when the Company entered into the Viacom
Facility. In 1993, the Company redeemed, paid or prepaid all of its subordinated
debt and a substantial portion of its bank debt. (See Note 5.)
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.
The Company made cash interest payments of $13,514,000 in 1995, $8,436,000 in
1994 and $7,800,000 in 1993.
At December 31, 1995, the carrying value of all of the Company's debt
approximated fair value.
5. EXTRAORDINARY ITEM
For the year ended December 31, 1993, the Company recorded an extraordinary loss
of $2,022,000, net of a benefit for income taxes of $1,287,000, as a result of
the write-off of unamortized discount and debt issuance costs relating to the
early extinguishment of certain indebtedness. (See Note 4.)
6. SHAREHOLDERS' EQUITY
PREFERRED STOCK. At December 31, 1995 and 1994, there were 20,000,000 shares of
Preferred Stock authorized but none outstanding. In November 1993, the Company
redeemed all 9,000 shares then outstanding of the Series A Preferred Stock,
with a dividend yield of 9% and a liquidation value of $1,000 per share.
COMMON STOCK. Effective May 26, 1995, in connection with the reincorporation of
the Company in Delaware, the par value of its Common Stock was reduced from
$0.10 per share to $0.001 per share. The Company recorded an adjustment of
$8,744,000 to Common Stock in order to reflect this reduction, with a
corresponding increase to Capital in Excess of Par Value. (See Note 1.)
The Company declared and paid cash dividends on its Common Stock of $.06 and
$.08 for the years ended December 31, 1994 and 1993, respectively. Dividends
were discontinued by the Board of Directors as of the fourth quarter of 1994.
At the Company's Annual Meeting of Shareholders on May 18, 1994, the
shareholders approved an increase in the number of authorized shares of the
Company's Common Stock from 200,000,000 to 300,000,000.
See Note 2 regarding the existence of certain warrants to purchase 1,437,148
shares of Common Stock.
35
<PAGE> 36
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SALE OF COMMON STOCK. In October 1993, in connection with the negotiation of the
Merger (see Note 2.), the Company sold 13,362,215 shares of its Common Stock to
BEC in exchange for 3,652,542 shares of BEC's common stock. The BEC shares were
subsequently sold, with the Company realizing approximately $100,445,000 in cash
proceeds.
ISSUANCE OF COMMON STOCK. See Note 2 regarding the issuance of 22,015,062 shares
of the Company's Common Stock in connection with the acquisition of VIE.
CAPITAL IN EXCESS OF PAR VALUE. See Note 2 regarding adjustments to the
accumulated deficit related to the acquisition of Republic Common Stock from
BEC. An adjustment of $4,318,000 has been recorded to Capital in Excess of Par
Value to reflect the tax benefit obtained by the Company with respect to
nonqualified stock options exercised by its employees. (See Note 10.)
ACCUMULATED DEFICIT. See Note 10 regarding adjustments to the accumulated
deficit related to the Company's pension plan and Note 1 regarding adjustments
related to a common stock investment.
STOCK OPTIONS. The Company has stock option plans under which both incentive
and nonqualified stock options may be granted to certain key employees and
directors to purchase up to approximately five million shares of Common Stock.
Options may be granted at a price not less than the fair value of the underlying
Common Stock on the date of grant, in the case of incentive stock options, or
50% thereof, in the case of nonqualified options. Each option may be granted
subject to various terms and conditions established on the date of grant,
including exercise and expiration dates; provided, however, that all options
will expire no later than ten years from their date of grant. The options
typically become exercisable at the rate of 20% or 25% annually, beginning one
year after the date of grant. Stock option data follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------------------------- ---------------------------- ------------------------------
Option Prices Option Prices Option Prices
Shares Per Share Shares Per Share Shares Per Share
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 5,648,669 $0.12 - $19.28 3,749,262 $ 3.38 - $19.28 1,130,481 $ 3.00 - $19.28
Granted 1,675,000 $9.13 - $11.88 3,384,181 $ 0.12 - $10.38 3,141,480 $ 6.00 - $ 7.34
Exercised (974,649) $0.12 - $ 9.99 (1,463,429) $ 3.38 - $ 9.99 (301,231) $ 3.00 - $ 9.88
Terminated (589,802) $4.50 - $10.75 (21,345) $ 5.93 - $ 6.74 (221,468) $ 3.38 - $ 8.38
--------- ---------- ---------
Outstanding at December 31 5,759,218 $0.12 - $19.28 5,648,669 $ 0.12 - $19.28 3,749,262 $ 3.38 - $19.28
========= ========== =========
Exercisable at December 31 2,694,082 $0.12 - $19.28 1,069,847 $ 3.38 - $19.28 785,780 $ 3.38 - $19.28
========= ========== =========
Available for grant at
December 31 3,158,343 4,380,542 579,207
========= ========== =========
</TABLE>
In connection with the Merger and the Acquisition, the Company converted
outstanding options under the respective stock option plans of Republic and VIE
to options to purchase the Company's Common Stock, which are included in options
granted in the 1994 table above.
Options to acquire shares of Republic common stock outstanding under the
Republic stock options plan(s) were converted into the right to receive, upon
payment of the exercise price as adjusted, 1.6508 shares of the Company's Common
Stock for each share of Republic common stock into which such option was
exercisable. The exercise price of Republic options was adjusted by multiplying
such exercise price by .6058.
36
<PAGE> 37
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Options to acquire ordinary shares of VIE were converted into the right to
receive, upon payment of the adjusted exercise price, shares of the Company's
Common Stock. A conversion ratio of 2.4022 was determined based on the
relative fair values of the ordinary shares to the shares of the Company's
Common Stock at that time. The exercise price of VIE options was adjusted by
dividing by the conversion ratio.
The times at which the previously outstanding Republic and VIE options may be
exercised remains unchanged. No additional options may be granted pursuant to
the pre-existing Republic and VIE plans, and the issuance of options to acquire
the Company's Common Stock to Republic and VIE plan participants did not reduce
the amounts available under the Company's current plans.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which establishes a fair value based method of accounting for
compensation cost related to stock option plans and other forms of stock-based
compensation plans as an alternative to the intrinsic value based method of
accounting defined under Accounting Principles Board Opinion No. 25. Companies
that do not elect the new method of accounting for 1996 will be required to
provide proforma disclosures as if the fair value based method had been applied
for the current period and prior comparable period. The Company intends to adopt
SFAS No. 123 by providing the pro forma disclosures.
7. BENEFIT PLANS
Effective January 1, 1993, the Company adopted a 401(k) Contribution Plan (the
"Plan"). Expenses under the various employee retirement plans were $1,494,000,
$1,564,000 and $915,000 for the three years ended December 31, 1995, 1994 and
1993, respectively. The Company's matching contribution to the Plan and its
discretionary profit-sharing contributions to the Plan are made in cash and are
restricted to investment in the Company's Common Stock, which is purchased by
the Plan's trustee in the open market.
A significant number of the Company's production employees are covered by union
sponsored, collectively bargained, multi-employer pension plans. The Company
contributed approximately $9,044,000, $8,771,000 and $4,259,000 to such plans
for the three years ended December 31, 1995, 1994 and 1993, respectively.
The FASB has issued SFAS No. 112 "Employers' Accounting for Postemployment
Benefits" (effective in 1994). The Company does not provide any postemployment
benefits.
8. 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 was charged
interest and fees by Viacom of $13,558,000 and $3,016,000
37
<PAGE> 38
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
for the years ended December 31, 1995 and 1994, respectively. The Company was
charged interest and fees by BEC of $4,787,000 for the year ended December 31,
1994.
See Note 6 regarding the Company's sale and issuance of Common Stock to BEC in
1994 and 1993, respectively.
From their issuance in May 1991 until their repayment in October 1993, a
director of the Company held $18,287,500 principal amount of the Company's 10%
Senior Subordinated Notes. The Company paid $1,791,000 in interest on these
obligations during 1993.
During 1993, the Company paid AFC a premium of $5,000,000 for an insurance-type
indemnity against up to $35,000,000 of certain costs it may have to pay in
excess of $25,000,000, subject to certain adjustments, in resolving
environmental and bankruptcy related claims through March 31, 2005. (See Note
10.)
AFC provided the Company with management services during early 1993 for which
the Company was charged $1,283,000. BEC, and subsequently BEG, provided similar
services to the Company in 1993, 1994 and 1995, for which the Company was
charged $380,000, $500,000 and $600,000, respectively. As of December 31, 1995
the Company had a net payable to Viacom of $1,264,000 with respect to these and
other expenses.
During 1995, 1994 and 1993, the Company sold home video and interactive
entertainment product to BEG. Additionally, prior and subsequent to the merger
of BEC into Viacom, the Company licensed certain entertainment product to (i)
Showtime Networks Inc., a subsidiary of Viacom, (ii) certain television stations
owned by Viacom, and (iii) USA Network and Sci-Fi Channel in which Viacom has
equity interests. For the three years ended December 31, 1995, these
transactions are not material.
Republic has entered into agreements with, and in certain cases has advanced
funds to, BEG, Showtime and Viacom to distribute certain of their productions in
the home video market.
The Company has entered into agreements with Paramount Pictures Corporation
("Paramount") with respect to the domestic distribution of two of the Company's
upcoming feature film releases, "Night Falls on Manhattan" and "Stephen King's
Thinner," in the theatrical, non-theatrical and pay television markets.
In the ordinary course of business, the Company has and expects to continue to
do business with Viacom and its affiliates, including BEG, Showtime, Nickelodeon
and Paramount.
9. INCOME TAXES
The provision for income taxes for continuing operations, discontinued
operations and extraordinary item for each of the three years ended December 31
include (in thousands):
38
<PAGE> 39
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Continuing operations:
Federal $12,032 $11,305 $ 5,643
Foreign 3,002 6,494 5,023
State and local (1,263) 1,896 2,390
------- ------- -------
13,771 19,695 13,056
------- ------- -------
Discontinued operations:
Federal -- -- (2,139)
State and local -- -- (390)
------- ------- -------
-- -- (2,529)
------- ------- -------
Extraordinary item:
Federal -- -- (1,088)
State and local -- -- (199)
------- ------- -------
-- -- (1,287)
------- ------- -------
Total $13,771 $19,695 $ 9,240
======= ======= =======
</TABLE>
In 1995, an income tax benefit attributable to employee stock option
transactions was allocated to shareholders' equity. (See Note 6.)
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for
Income Taxes" ("SFAS 109"). SFAS 109 requires an asset and liability approach in
accounting for income taxes. Under this method, deferred income taxes are
recognized, at enacted rates, to reflect the future effects of tax loss and
credit ("tax attribute") carryforwards and temporary differences arising between
the tax bases of assets and liabilities and their financial reporting amounts at
each year-end. Deferred tax assets and liabilities are adjusted for tax rate
changes when they occur. This statement also eliminated the concept of
recognizing the benefits of subsequent period utilization of tax attribute
carryforwards as extraordinary items, by requiring the immediate recognition of
attributes in the year incurred, subject to realization. The cumulative effect
of adopting SFAS 109 was not material.
The temporary differences and tax attribute carryforwards which gave rise to
deferred tax assets and liabilities at December 31, 1995 and 1994 were as
follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Deferred Tax Assets:
Discontinued operations allowances $ 6,461 $ 9,286
Accounts receivable 6,409 2,816
Tax attribute carryforwards 35,185 37,281
Pension liability adjustment 2,231 3,027
Other, net 6,673 --
-------- --------
56,959 52,410
Valuation allowance (29,144) (27,219)
-------- --------
$ 27,815 $ 25,191
======== ========
Deferred Tax Liabilities:
Entertainment product, net $ 20,746 $ 23,112
Revenue recognition 18,753 8,880
Unrealized holding gain 1,397 2,770
Other, net 4,069 5,223
-------- --------
$ 44,965 $ 39,985
======== ========
</TABLE>
39
<PAGE> 40
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
In connection with adopting SFAS 109, the Company established a valuation
allowance against certain of its tax attribute carryforwards. During 1993, the
Company reassessed (under the criteria of SFAS 109) the realizability of the tax
attribute carryforwards in light of factors arising from, or related to, the
acquisition of a majority of the Company's Common Stock by BEC. Based on this
reassessment, the Company reduced the valuation allowance by approximately
$4,200,000 and reflected a corresponding benefit in its provision for income
taxes for the third quarter of 1993.
The increase in the valuation allowance in 1994 was caused by the acquisition of
VIE, which had previously recorded an allowance in the amount of $2,153,000,
which the Company has determined is reasonable.
The further increase in the valuation allowance during 1995 was due to the
Company's determination that certain additional tax attribute carryforwards
recorded in 1995 are not realizable under a more likely than not standard,
partially offset by a reduction in the valuation allowance attributable to the
expiration of certain foreign tax credit carryforwards during the year.
The components of income from continuing operations before the provision for
income taxes in 1995, 1994 and 1993 were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Domestic $19,094 $27,503 $21,300
Foreign 9,816 16,980 15,415
------- ------- -------
$28,910 $44,483 $36,715
======= ======= =======
</TABLE>
The primary reasons for the effective tax rates on the income from continuing
operations differing from the statutory federal tax rates for each of the three
years ended December 31 are summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Federal tax rate 35% 35% 35%
Amortization of intangible assets 13 6 4
Adjustment of valuation allowance and
other reserves (6) -- (11)
State and local taxes, net of available
federal income tax benefits 5 4 4
Foreign taxes, net of available
federal income tax benefit -- -- 5
Foreign sales corporation benefit -- -- (2)
Other 1 (1) 1
--- --- ---
48% 44% 36%
=== === ===
</TABLE>
As of December 31, 1995, the Company had available net operating loss
carryforwards of approximately $63,712,000, capital loss carryforwards of
$4,829,000, foreign tax credit carryforwards of $5,217,000, investment tax
credit carryforwards of $4,677,000 and AMT credit carryforwards of $3,963,000.
The use of these attributes, which except for the AMT credit will expire in 1996
through 2007, is subject to certain limitations as a result of BEC's acquisition
of a majority interest in the Company during 1993.
40
<PAGE> 41
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Total cash income tax payments were $11,798,000, $7,661,000 and $6,300,000,
respectively for 1995, 1994 and 1993. In addition, the Company received
$1,116,000 and $8,950,000 of income tax refunds during 1995 and 1994,
respectively, the receipt of which had previously been accrued. However, the
Company did recognize benefits of $1,740,000 and $547,000 during 1995 and 1994,
respectively, as a result of the favorable resolution of certain tax
controversies. Additionally, the Company is subject to audit by taxing
authorities for varying periods in various tax jurisdictions. Management
believes that any required adjustments to the Company's tax liabilities
resulting from such audits will not have a material adverse impact on its
financial position or results of operations.
10. DISCONTINUED OPERATIONS
All of the Company's former industry segments are reported as discontinued. For
the year ended December 31, 1993, the Company reported a net loss from
discontinued operations of $3,971,000, net of an income tax benefit of
$2,529,000, primarily as a result of a one-time payment for an insurance-type
indemnity agreement (see discussion below). This resulted in a net loss from
discontinued operations of $0.07 per common and common equivalent share.
Net assets (liabilities) of discontinued operations which are held for
disposition consisted of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Receivables, net $ 608 $ 608
Property, plant and equipment, net 3,161 3,161
Accounts payable and other (1,719) (1,749)
Pension liability (5,610) (8,713)
Allowances for estimated expenses
and disputed claims (12,194) (20,368)
-------- --------
$(15,754) $(27,061)
======== ========
</TABLE>
CONTINGENCIES. Contingent liabilities relating to discontinued operations
include contract disputes, remaining disputed claims under the joint plan of
reorganization of the Company and certain of its subsidiaries (the "Joint
Plan"), environmental clean-up assessments, damages from alleged dioxin
contamination and others. Some of the parties seek damages from the Company in
very large amounts, however, as discussed below, management does not believe the
ultimate resolution of these matters should have a material adverse effect on
its financial condition and its results of operations.
(A) The Company and its insurers paid approximately $15.5 million and $33
million, respectively, over a ten year period to resolve government and private
party actions arising from the alleged improper disposal by a subsidiary in 1971
of waste material, which later was determined to contain dioxin, at a number of
sites in Missouri. The Company has written off its investment in the subsidiary.
The Company filed an action against its insurers to secure coverage for the
dioxin claims. In 1995 there was a final determination of that action, holding
that the insurers had no further coverage obligation. The only remaining claim
against the Company is by a codefendant, which also has spent substantial
amounts in respect of the dioxin claims and which filed a $200,000 proof of
claim in the Company's Chapter 11 proceedings in 1986. The Company believes it
has defenses to such claim, and that future claims are unlikely.
41
<PAGE> 42
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(B) The Company has had contact with various governmental agencies regarding
possible contamination of soil and groundwater at six properties that are or
have been owned or leased by the Company's subsidiaries. Private actions also
have been brought or threatened with respect to such possible contamination at
an additional two locations. Notification of possible responsibility has also
been received regarding nine other sites where waste materials allegedly were
delivered. The Company may be assessed for cleanup costs or damages under
relevant environmental laws, and future claims could be asserted with respect to
other properties. The Company's liability insurers have been placed on notice of
many of these claims and have taken the position that there is no coverage under
their policies. While the Company does not agree that coverage is not available
under its past policies, there is no assurance that pending or future claims
will be covered by such insurance. Although comprehensive evaluations of
liability and of the extent of contamination have not been performed in all
cases, the following claims are believed by the Company at this time to be
potentially the most significant.
A subsidiary is engaged in the cleanup of a petroleum terminal property owned by
the subsidiary in Tiverton, Rhode Island. The remaining cost could be in the
range of $6.5 million, which is fully provided for in the allowances for
estimated expenses for environmental matters. The subsidiary has filed a cost
recovery action against two former owners of the terminal, and is continuing to
investigate whether its insurers may be liable for a portion of the cost. A
third former owner has resolved its potential liability at the site by agreeing
to pay the Company $800,000.
In 1990, a subsidiary declined to join a settlement agreement among the United
States, a state government and 15 companies regarding the Sullivan's Ledge
superfund site in New Bedford, Massachusetts, based upon certain legal defenses
and the belief that any liability the subsidiary may have should be less than a
pro rata allocation among the settling parties. Under such agreement, the
subsidiary would have been obligated to pay between $2 million and $3 million in
cleanup costs. The subsidiary subsequently settled its liability to the United
States separately for $215,000, but is appealing the requisite court approval
thereof because the court did not determine whether such separate settlement
provides a defense to a private cost recovery action filed by the 15 parties to
the original agreement who are performing the cleanup.
A subsidiary has been informed that it is one of thirteen identified potentially
responsible parties at the Sikes superfund site in Crosby, Texas, and that a
cleanup plan estimated to cost approximately $89 million has been selected and
is being implemented by the EPA. Although joint and several liability is
possible with respect to such sites, and there is little relevant information
presently available, management believes that there are meritorious defenses
against any material liability.
While the results of such actions cannot be predicted with certainty, based upon
its current knowledge of the facts and circumstances and its understanding of
the applicable laws, the Company believes the ultimate resolution of these
matters should not have a material adverse effect on its financial condition and
its results of operations. This belief is also based upon (i) allowances that
have been established for estimated expenses related to environmental matters
and remaining Chapter 11 disputed claims (see table above), and (ii) an
insurance-type indemnity agreement with AFC. Although there are significant
uncertainties inherent in estimating environmental-related liabilities, based
upon the Company's experience it is considered unlikely that the amount of
possible environmental liabilities and Joint Plan disputed claims would exceed
the amount of the allowances by more than $50 million, a substantial portion of
which would be covered by the AFC indemnity.
The AFC indemnity, which was agreed to in exchange for a one-time payment of $5
million expensed by the Company as part of discontinued operations in the first
quarter of 1993, provides for the reimbursement to the Company of liabilities it
may have to pay in resolving environmental and bankruptcy related claims through
March 31,
42
<PAGE> 43
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
2005. The indemnity covers up to $35 million of such liabilities in excess of a
threshold amount of $25 million, subject to certain adjustments.
PENSION PLAN. The Company has a noncontributory, defined benefit pension plan
which covers employees of the discontinued operations, a significant number of
which have vested benefits. Contributions are made on an actuarial basis in
amounts primarily based on employees' years of service and average salary when
employed.
In 1993, the Company recorded an additional minimum pension liability of
$5,217,000 (net of a tax benefit of $3,321,000), with an offsetting charge to
Shareholders' Equity, to reflect the adjustment to pension liability resulting
from the reduction in the discount rate from 8.5% in 1992 to 7% in 1993. An
increase in the discount rate to 8.25% resulted in an adjustment to reduce the
additional minimum liability and related tax benefit with an offsetting credit
to Shareholders' Equity of $380,000 in 1994. The additional minimum pension
liability was further reduced in 1995 by $829,000 (net of a tax benefit
adjustment of $519,000) with an offsetting credit to Shareholders' Equity.
The following table sets forth the plan's funded status and amounts recognized
as of December 31 (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Total projected benefit obligation $(48,477) $(44,313)
Market value of assets 41,890 35,600
-------- --------
Funded status (6,587) (8,713)
Transition asset (2,369) (2,764)
Unrecognized loss 9,920 10,680
Unrecognized prior service cost 1 7
Additional minimum liability (6,575) (7,923)
-------- --------
Accrued pension cost $ (5,610) $ (8,713)
======== ========
</TABLE>
During 1994, the Company transferred all obligations and assets relating to
annuities guaranteed by insurance to a third party. Such obligations or assets
are therefore not reflected in the plan balances on December 31, 1994.
Net pension costs for the years ended December 31, which were charged against
net liabilities related to discontinued operations in the balance sheet, are as
follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Service Cost $ -- $ -- $ 43
Interest Cost 3,357 3,750 3,789
Expected return on assets (7,862) (3,547) (3,990)
Net amortization and deferrals 4,911 (105) 391
------- ------- -------
Pension expense $ 406 $ 98 $ 233
======= ======= =======
</TABLE>
The weighted-average discount rates used in determining the actuarial present
value of the projected benefit obligation were 7%, 8.25% and 7% for the years
ended December 31, 1995, 1994 and 1993, respectively. The expected long-term
rates of return on assets were 8%, 8% and 9%, respectively. The plan assets are
invested
43
<PAGE> 44
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
primarily in fixed income securities. Included in the plan assets at
December 31, 1993, was $5.5 million principal amount of AFC 12.25% debentures
due 2003. This asset was sold in 1994.
11. COMMITMENTS AND CONTINGENCIES
The Company continues to be involved in a number of legal and other actions
including threatened claims and pending litigation. While the results of such
actions cannot be predicted with certainty, based upon its current knowledge of
the facts and circumstances and its understanding of the applicable laws, the
Company believes that the ultimate resolution of all disputed claims, pending
litigation and threatened claims will not have a material adverse effect on its
financial condition or its results of operations. See Note 10 for contingencies
relating to discontinued operations.
As of December 31, 1995, the Company had operating leases for offices and
equipment. The rental expense, net of amounts capitalized, for the three years
ended December 31, 1995 was $7.1 million, $4.2 million and $3.3 million,
respectively. The future minimum annual rental commitments under non-cancelable
operating leases, excluding renewal options, for the subsequent five years and
thereafter for continuing operations are as follow (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1996 $10,727
1997 8,530
1998 6,967
1999 5,644
2000 4,595
Thereafter 32,161
-------
Total $68,624
=======
</TABLE>
12. INDUSTRY SEGMENTS
The Company's continuing business activities consist of one industry segment,
the entertainment industry. The Company had revenue from one customer in 1995,
1994 and 1993 representing 15%, 15%, and 22% of revenue, respectively. The
Company does not believe it has any significant concentration of credit risk
with respect to its operations.
44
<PAGE> 45
Revenue, operating profit and identifiable assets of the Company's international
operations were not material related to consolidated amounts as of and for the
year ended December 31, 1993. Due to the acquisition of VIE in 1994,
international operations, primarily in Europe, have increased in significance
related to the consolidated operations of the Company. Information with respect
to the revenue, operating profit and identifiable assets by geographic area, as
of and for the years ended December 31 follows (in thousands):
<TABLE>
<CAPTION>
United States Europe All Other Total
------------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
1995
REVENUE $530,706 $124,482 $ 9,199 $ 664,387
Operating income (loss) 56,018 (13,392) ( 91) 42,535
Identifiable assets 924,010 183,014 12,646 1,119,670
1994
REVENUE $499,115 $ 94,735 $ 5,989 $ 599,839
Operating income 43,949 6,608 186 50,743
Identifiable assets 824,698 188,438 13,624 1,026,760
</TABLE>
Export sales for the years ended December 31, 1995, 1994 and 1993 totaled
approximately $167,830,000, $120,903,000 and $97,813,000, respectively. Export
sales to Europe for the years ended December 31, 1995, 1994 and 1993 were
$86,462,000, $67,952,000 and $47,579,000, respectively.
45
<PAGE> 46
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents quarterly results of operations for the years ended
December 31, 1995 and 1994 (in thousands, except per share data).
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
1995 QUARTER QUARTER QUARTER QUARTER
- ---- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $185,148 $135,332 $132,573 $211,334
Income from continuing
operations, net $ 7,271 $ 880 $ 613 $ 7,757
Net income $ 7,271 $ 880 $ 613 $ 7,757
Net income per common
and common equivalent share $ 0.08 $ 0.01 $ 0.01 $ 0.09
</TABLE>
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
1994 QUARTER QUARTER QUARTER QUARTER
- ---- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $80,413 $84,232 $136,744 $298,450
Income (loss) from continuing
operations, net $ 6,854 $ 8,707 $ (531) $ 9,078
Net income (loss) $ 6,854 $ 8,707 $ (531) $ 9,078
Net income (loss) per common
and common equivalent share $ 0.11 $ 0.13 $ (0.01) $ 0.10
</TABLE>
46
<PAGE> 47
SPELLING ENTERTAINMENT GROUP INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995
- -------------------------------------------------------------------------------------------------------------------------
Other
Balance Additions Deductions adjustments Balance at
at beginning charged from during end of
DESCRIPTION of period to income reserves period period
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Deducted from accounts receivable
for doubtful accounts and returns $35,218 $38,131 $(43,750) $ 758 $30,357
Estimated expenses and
disputed claims $20,368 $ -- $ (8,174) $ -- $12,194
1994
- --------------------------------------------------------------------------------------------------------------------------
Deducted from accounts receivable
for doubtful accounts and returns $ 4,983 $19,210 $ (5,888) $16,913 (a) $35,218
Estimated expenses and
disputed claims $29,621 $ -- $ (9,253) $ -- $20,368
1993
- --------------------------------------------------------------------------------------------------------------------------
Deducted from accounts receivable
for doubtful accounts $ 4,661 $ 1,008 $ (686) $ -- $ 4,983
Estimated expenses and
disputed claims $15,058 $ 1,040 $ (2,050) $15,573 (b) $29,621
</TABLE>
(a) Existing allowances at the dates of acquisition of Republic and VIE.
(b) During 1993, all allowances for disputed claims and other items were
reclassed into estimated expenses and disputed claims.
47
<PAGE> 48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
48
<PAGE> 49
PART III
The information required by the following items will be included in the
Company's definitive Proxy Statement, which will be filed with the Securities
and Exchange Commission in connection with the 1996 Annual Meeting of
Shareholders, and is incorporated herein by reference:
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
49
<PAGE> 50
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Documents filed as part of this Report:
1. Financial Statements are included in Part II, Item 8.
2. Financial Statement Schedules:
A. Selected Quarterly Financial Data is included in Note 13 to the
Company's Consolidated Financial Statements
B. Schedules filed herewith for 1995, 1994 and 1993:
PAGE
I - Condensed Financial Information of Registrant
This schedule has been omitted since the debt
which restricted net assets was repaid. (See Note
4.) The current debt agreement does not contain
any restrictions in this regard; accordingly, the
schedule is no longer relevant.
II - Valuation and Qualifying Accounts 47
All other schedules for which provisions are made
in the applicable regulation of the Securities and
Exchange Commission have been omitted as they are
not applicable, not required, or the information
required thereby is set forth in the Consolidated
Financial Statements or the notes thereto.
3. Exhibits 53
(b) Reports on Form 8-K:
None
50
<PAGE> 51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C>
SPELLING ENTERTAINMENT GROUP INC.
Date: March 29, 1996 By: /s/ Peter H. Bachmann
---------------------------------
Peter H. Bachmann
Executive Vice President-
Office of the President
(Principal Executive Officer)
Date: March 29, 1996 By: /s/ Thomas P. Carson
---------------------------------
Thomas P. Carson
Executive Vice President-
Office of the President
(Principal Executive Officer)
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C>
Date: March 29, 1996 By: /s/ Sumner M. Redstone
---------------------------------
Sumner M. Redstone
Chairman of the Board
Date: March 29, 1996 By: /s/ Aaron Spelling
---------------------------------
Aaron Spelling
Vice Chairman of the Board
Date: March 29, 1996 By: /s/ Thomas P. Carson
---------------------------------
Thomas P. Carson
Executive Vice President-
Office of the President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date: March 29, 1996 By: /s/ Kathleen Coughlan
---------------------------------
Kathleen Coughlan
Senior Vice President and
Corporate Controller
(Principal Accounting Officer)
</TABLE>
51
<PAGE> 52
<TABLE>
<S> <C>
Date: March 29, 1996 By: /s/ Philippe P. Dauman
-------------------------------
Philippe P. Dauman
Director
Date: March 29, 1996 By: /s/ J. Brian McGrath
-------------------------------
J. Brian McGrath
Director
Date: March 29, 1996 By: /s/ John L. Muething
-------------------------------
John L. Muething
Director
</TABLE>
52
<PAGE> 53
SPELLING ENTERTAINMENT GROUP INC.
INDEX TO EXHIBITS
NUMBER EXHIBIT DESCRIPTION
- ------ -------------------
2.1 Certificate of Merger merging Spelling Entertainment
Group Inc. with and into Spelling Merger Corporation.
3.1 Certificate of Incorporation of Spelling Merger
Corporation (incorporated by reference to Spelling
Entertainment Group Inc.'s Notice of Annual Meeting and
Proxy Statement dated April 14, 1995).
3.2 ByLaws of Spelling Merger Corporation (incorporated by
reference to Spelling Entertainment Group Inc.'s Notice
of Annual Meeting and Proxy Statement dated April 14,
1995).
10.1 Amended and Restated Credit Agreement dated as of January
31, 1995, by and among the Registrant, certain
subsidiaries of the Registrant and Viacom Inc.
(incorporated by reference to Exhibit 4.1 to Registrant's
Form 10-K for fiscal year ended December 31, 1994).
10.2 Amended and Restated Pledge and Security Agreement dated
as of January 31, 1995, by and among the Registrant,
certain subsidiaries of the Registrant and Viacom Inc.
(incorporated by reference to Exhibit 4.2 to Registrant's
Form 10-K for fiscal year ended December 31, 1994).
10.3 Amended and Restated Copyright Mortgage and Assignment;
Power of Attorney dated as of January 31, 1995, by the
Registrant and certain subsidiaries of the Registrant in
favor of Viacom Inc. (incorporated by reference to Exhibit
4.3 to Registrant's Form 10-K for fiscal year ended
December 31, 1994).
10.4 Amendment 1 to Amended and Restated Credit Agreement
dated as of November 28, 1995, by and among the
Registrant, certain subsidiaries of the Registrant
and Viacom Inc.
10.5 Second Amended and Restated Credit Agreement dated as of
December 1, 1994 between Virgin Interactive Entertainment,
Inc. and Bank of America National Trust and Savings
Association (incorporated by reference to Exhibit 10(i)
to Registrant's Form 10-Q for quarterly period ended June
30, 1995).
10.6 First Amendment to Second Amended and Restated Credit
Agreement dated March 31, 1995, between Virgin Interactive
Entertainment, Inc. and Bank of America National Trust and
Savings Association (incorporated by reference to Exhibit
10(ii) to Registrant's Form 10-Q for quarterly period
ended June 30, 1995).
10.7 Second Amendment to Second Amended and Restated Credit
Agreement dated June 1, 1995, between Virgin Interactive
Entertainment, Inc. and Bank of America National Trust and
Savings Association (incorporated by reference to Exhibit
10(iii) to Registrant's Form 10-Q for quarterly period
ended June 30, 1995).
53
<PAGE> 54
SPELLING ENTERTAINMENT GROUP INC.
INDEX TO EXHIBITS
NUMBER EXHIBIT DESCRIPTION
- ------ -------------------
10.8 Third Amendment to Second Amended and Restated
Credit Agreement dated as of December 20, 1995,
between Virgin Interactive Entertainment, Inc. and
Bank of America National Trust and Savings Association.
10.9 Amended and Restated Agreement and Plan of Merger dated
May 22, 1992, by and among the Registrant, SEI Acquisition
Corp. and Spelling Entertainment Inc.(incorporated by
reference to Spelling Entertainment Inc.'s Notice of
Annual Meeting and Proxy Statement dated June 24, 1992).
10.10 Stock Purchase Agreement dated as of March 7, 1993, among
Blockbuster Entertainment Corporation, BPH Subsidiary,
Inc., American Financial Corporation and certain
subsidiaries of American Financial Corporation (includes
insurance-type indemnity reference in Note 10 to the
Registrant's consolidated financial statements)
(incorporated by reference to Exhibit 28.1 to Blockbuster
Entertainment Corporation's Current Report on Form 8-K
dated March 7, 1993).
10.11 Agreement and Plan of Merger dated December 8, 1993, by
and among the Registrant, DE Acquisition Corporation and
Republic Pictures Corporation (incorporated by reference
to Exhibit 99.1 to the Registrant's Current Report on Form
8-K dated December 8, 1993).
10.12 Exchange Agreement dated July 30, 1994, by and among
Spelling Entertainment Group Inc., Blockbuster
Entertainment Corporation and Blockbuster Interactive
Entertainment, Inc. (incorporated by reference to Exhibit
2 to Registrant's Form 8-K dated July 30, 1994).
10.13 Amendment No. 1 to Exchange Agreement dated as of July 8,
1995 by and among the Registrant, Blockbuster
Entertainment Group on behalf of Viacom Inc. and
Blockbuster Interactive Entertainment, Inc. (incorporated
by reference to Exhibit 10 (i) to Registrant's Form 10-Q
for the quarterly period ended September 30, 1995).
10.14 Amendment No. 2 to Exchange Agreement dated as of
November 7, 1995, by and among the Registrant, Blockbuster
Entertainment Group on behalf of Viacom Inc. and
Blockbuster Interactive Entertainment, Inc. (incorporated
by reference to Exhibit 10 (ii) to Registrant's Form 10-Q
for the quarterly period ended September 30, 1995).
10.15 Amendment No. 3 to Exchange Agreement dated as of
February 22, 1996, by and among the Registrant,
Blockbuster Entertainment Group on behalf of Viacom Inc.
and Blockbuster Interactive Entertainment, Inc.
10.16 Registrant's Stock Option Plan and Amendment Nos. One
through Five thereto (incorporated by reference to Exhibit
4.03 to the Registrant's Registration Statement No.
33-61914 on Form S-8).
54
<PAGE> 55
SPELLING ENTERTAINMENT GROUP INC.
INDEX TO EXHIBITS
NUMBER EXHIBIT DESCRIPTION
- ------ -------------------
10.17 Registrant's 1994 Stock Option Plan (incorporated by
reference to Annex A to Registrant's Notice of Annual
Meeting and Proxy Statement dated April 27, 1994).
10.18 Employment Agreement, dated March 1, 1989, by and between
Spelling Entertainment Inc. and Aaron Spelling
(incorporated by reference to Exhibit 10.50 to Spelling
Entertainment Inc.'s Registration Statement No. 33-26497
on Form S-4).
10.19 Amendment to Employment Agreement, dated November 7, 1991,
by and among Spelling Entertainment Inc., Aaron Spelling
Productions, Inc. and Aaron Spelling (incorporated by
reference to Exhibit 10.7 to Registrant's Form 10-K for
fiscal year ended December 31, 1993).
10.20 Amendment No. 2 to Employment Agreement, dated May 6,
1993, by and among Spelling Entertainment Inc., Aaron
Spelling Productions, Inc. and Aaron Spelling
(incorporated by reference to Exhibit 10.8 to Registrant's
Form 10-K for fiscal year ended December 31, 1993).
10.21 Employment Agreement dated as of September 26, 1994,
between Registrant and Peter Bachmann (incorporated by
reference to Exhibit 10.15 to Registrant's Form 10-K for
fiscal year ended December 31, 1994).
10.22 Employment Agreement dated as of September 1, 1994,
between Registrant and Tom Carson (incorporated by
reference to Exhibit 10.16 to Registrant's Form 10-K for
fiscal year ended December 31, 1994).
10.23 Employment Agreement dated as of January 10, 1994,
between Registrant and Kathleen Coughlan and Amendment to
Employment Agreement, dated as of September 1, 1994
(incorporated by reference to Exhibit 10.18 to
Registrant's Form 10-Q for the quarterly period ended
March 31, 1995).
10.24 Amendment No. 2 to Employment Agreement, dated as of
February 8, 1996, between Registrant and Kathleen
Coughlan.
10.25 Employment Agreement dated as of January 1, 1995, between
Registrant and Sally Suchil.
11 Computation of net income per common and common equivalent
share.
21 Subsidiaries of the Registrant.
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
55
<PAGE> 1
EXHIBIT 2.1
CERTIFICATE OF MERGER
MERGING
SPELLING ENTERTAINMENT GROUP INC.
WITH AND INTO
SPELLING MERGER CORPORATION
Pursuant to Section 252 of the
Delaware General Corporation Law
The undersigned, being the Executive Vice President of Spelling Merger
Corporation, a corporation organized and existing under and by virtue of the
General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY AS
FOLLOWS:
FIRST: That the name of and the state of incorporation of each of the
constituent corporations in the merger is as follows:
Name State of Incorporation
---- ----------------------
Spelling Entertainment Group Inc. ...................Florida
Spelling Merger Corporation .........................Delaware
SECOND: That an Agreement and Plan of Merger dated as of April 12, 1995
("Merger Agreement"), between Spelling Entertainment Group Inc. and Spelling
Merger Corporation has been approved, adopted, certified, executed and
acknowledged by each of the constituent corporations in accordance with Section
252 of the General Corporation Law of the State of Delaware.
THIRD: That the name of the surviving corporation is Spelling Merger
Corporation, changing its name to Spelling Entertainment Group Inc. ("Surviving
Corporation").
FOURTH: That the certificate of incorporation of Spelling Merger
Corporation will be the certificate of incorporation of the Surviving
Corporation, except that ARTICLE FIRST of the Certificate of Incorporation
shall be amended to read in its entirety as follows:
"ARTICLE FIRST: That name of this corporation is Spelling Entertainment
Group Inc. (hereinafter referred to as the "Corporation)."
FIFTH: That an executed copy of the Merger Agreement is on file at the
principal place of business of the Surviving Corporation at the following
address:
5700 Wilshire Boulevard
Los Angeles, CA 90036
SIXTH: That a copy of the Merger Agreement will be furnished by the
Surviving Corporation, on request, and without cost, to any stockholder of any
constituent corporation.
<PAGE> 2
SEVENTH: That the authorized shares of capital stock of Spelling
Entertainment Group Inc. consist of 300 million shares of Common Stock, par
value $.10 per share, and 20 million shares of Preferred Stock, par value $.10
per share.
IN WITNESS THEREOF, Spelling Merger Corporation has caused this
Certificate of Merger to be signed by Peter H. Bachmann, its Executive Vice
President, and attested by Sally Suchil, its Secretary, this 25th day of May,
1995.
SPELLING MERGER CORPORATION
By: /s/ Peter H. Bachmann
-------------------------
Peter H. Bachmann
Title: Executive Vice President
ATTEST:
/s/ Sally Suchil
- -----------------------------
Sally Suchil
Secretary
<PAGE> 1
Exhibit 10.4
Amendment 1
This Amendment ("Amendment"), dated as of November 28, 1995, shall be:
AMENDMENT NO. 1 to the AMENDED AND RESTATED CREDIT AGREEMENT, dated as of
January 31, 1995 (the "Credit Agreement"), among SPELLING ENTERTAINMENT GROUP
INC. a Delaware corporation, AND ITS SUBSIDIARIES, as Borrowers, and VIACOM
INC., a Delaware corporation, as Lender.
WITNESSETH;
WHEREAS, the parties who have heretofore entered into the Credit Agreement
now desire to amend such agreement to increase the amount of revolving credit
available thereunder.
NOW THEREFORE, the parties hereto agree as follows:
SECTION 1. Amendment.
(a) The definition of Stated Amount of Revolving Credit in Section 1.52 of
the Credit Agreement is hereby amended by deleting it in its entirety and
replacing it with the following:
"1.52 "Stated Amount of Revolving Credit" means, at any date, the lesser
of (a) One Hundred Forty Million Dollars ($140,000,000) or (b) such lesser
amount (in an integral multiple of $1,000,000) specified by irrevocable written
notice from the Borrowers to the Lender permanently reducing the Stated Amount
of Revolving Credit."
(b) Concurrent with the execution of this Amendment, Borrowers shall
deliver to Lender an amended Revolving Note in the form attached hereto, which
Revolving Note shall replace the Revolving Note dated as of January 31, 1995
previously delivered by the Borrowers.
(c) The first sentence of Section 3.2.2 Facility Fee is hereby amended by
deleting it in its entirety and replacing it with the following:
"Borrowers (jointly and severally) agree to pay to Lender, payable
annually on January 31 of each year, a facility fee equal to Four Hundred
Eighty Thousand Dollars ($480,000) per annum (i.e., .20% of $240,000,000)."
SECTION 2. Effectiveness.
This Amendment, when executed by the Borrowers and the Lender, will be
effective as of the date first above written.
<PAGE> 2
SECTION 3. Representations and Warranties. Each Borrower and Guarantor
hereby represents and warrants that as of the date hereof, both before and
after giving effect to this Amendment, no Default or Event of Default shall
exist or be continuing under the Credit Agreement.
SECTION 4. Miscellaneous.
(a) Capitalized terms used herein and not otherwise defined herein shall
have the meanings ascribed to them in the Credit Agreement.
(b) Except as amended hereby, all of the terms of the Credit Agreement
shall remain and continue in full force and effect and are hereby confirmed in
all respects.
(c) This Amendment may be signed in any number of counterparts, each of
which shall be an original, with the same effect as if the signatures thereto
were upon the same instrument. Delivery of an executed counterpart of a
signature page of this Amendment by telecopier shall be effective as delivery
of a manually executed counterpart of this Amendment.
(d) This Amendment and the rights and obligations of the parties hereto
shall be governed by, and construed in accordance with the laws of the State of
New York with respect to contracts entered into and performed wholly within
such state.
SECTION 5. Guarantor Confirmation.
By signing below, each of the Guarantors hereby agrees to the terms of the
foregoing Amendment and confirms that the Guarantee remains in full force and
effect.
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first above written.
BORROWERS AND GUARANTORS
------------------------
SPELLING ENTERTAINMENT GROUP INC.
SPELLING ENTERTAINMENT INC.
AARON SPELLING PRODUCTIONS, INC.
LAUREL ENTERTAINMENT, INC.
SPELLING FILMS INTERNATIONAL INC.
SPELLING TELEVISION INC.
TORAND PRODUCTIONS INC.
WORLDVISION ENTERPRISES, INC.
HAMILTON PROJECTS, INC.
REPUBLIC ENTERTAINMENT INC.
REPUBLIC DISTRIBUTION CORPORATION
REPUBLIC PICTURES TELEVISION
By: REPUBLIC ENTERTAINMENT INC.
ITS: GENERAL PARTNER
VIRGIN INTERACTIVE ENTERTAINMENT, INC.
By: /s/ Thomas P. Carson
As an authorized officer of each of the foregoing
LENDER
VIACOM INC.
By: /s/ Vaughn A. Clarke
Senior Vice President, Treasurer
<PAGE> 4
REVOLVING NOTE
$140,000,000 as of November 28, 1995
FOR VALUE RECEIVED, each of the undersigned, Spelling Entertainment Group
Inc., a Delaware corporation (the "Company"), and certain of its subsidiaries
listed on the signature page hereof (together with the Company, the
"Borrowers"), jointly and severally, hereby promises to pay Viacom Inc. (the
"Lender") or order, on the Final Loan Maturity Date (as defined in the Amended
and Restated Credit Agreement referred to below), the aggregate unpaid
principal amount of the loans made by the Lender to the Borrowers pursuant to
the Amended and Restated Credit Agreement. The Borrowers jointly and severally
promise to pay daily interest, computed as provided in such Amended and
Restated Credit Agreement, on the aggregate principal amount of such loans from
time to time unpaid at the per annum rate applicable to such unpaid principal
amount as provided in such Amended and Restated Credit Agreement and to pay
interest on overdue principal and, to the extent not prohibited by applicable
law, on overdue installments of interest and fees at the rate specified in such
Amended and Restated Credit Agreement, all such interest being payable at the
times specified in such Amended and Restated Credit Agreement, except that all
accrued interest shall be paid at the stated or accelerated maturity hereof or
upon the prepayment in full hereof.
Payments hereunder shall be made to Lender at such account of Lender as is
specified by Lender in writing from time to time.
This Revolving Note evidences borrowings under, and is entitled to the
benefits and security of, and is subject to the provisions of, the Amended and
Restated Credit Agreement dated as of January 31 1995, as from time to time in
effect (the "Amended and Restated Credit Agreement"), among the Borrowers and
Lender and the Security Documents (as defined in the Amended and Restated
Credit Agreement). The principal of this Revolving Note is prepayable in the
amounts and under the circumstances set forth in the Amended and Restated
Credit Agreement, and may be prepaid in whole or from time to time in part, all
as set forth in the Amended and Restated Credit Agreement. Terms defined in the
Amended and Restated Credit Agreement and not otherwise defined herein are used
herein with the meanings so defined.
In case an Event of Default shall occur and be continuing, the entire
principal of this Revolving Note may become or be declared due and payable in
the manner and with the effect Provided in the Amended and Restated Credit
Agreement.
THIS REVOLVING NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS (OTHER THAN THE CONFLICT OF LAWS RULES) OF THE STATE OF NEW YORK.
The parties hereto, including the Borrowers and all guarantors and
endorsers, hereby waive presentment, demand, notice, protest and all other
demands and notices in connection with
<PAGE> 5
the delivery, acceptance, performance and enforcement of this Revolving Note,
except as specifically otherwise provided in the Amended and Restated Credit
Agreement, and assent to extensions of time of payment, or forbearance or other
indulgence without notice.
BORROWERS
---------
SPELLING ENTERTAINMENT GROUP INC.
SPELLING ENTERTAINMENT INC.
AARON SPELLING PRODUCTIONS, INC.
LAUREL ENTERTAINMENT, INC.
SPELLING FILMS INTERNATIONAL INC.
SPELLING TELEVISION INC.
TORAND PRODUCTIONS INC.
WORLDVISION ENTERPRISES, INC.
HAMILTON PROJECTS, INC.
REPUBLIC ENTERTAINMENT INC.
REPUBLIC DISTRIBUTION CORPORATION
REPUBLIC PICTURES TELEVISION
BY: REPUBLIC ENTERTAINMENT INC.
ITS: GENERAL PARTNER
VIRGIN INTERACTIVE ENTERTAINMENT, INC.
By: /s/ Thomas P. Carson
As an authorized officer of each of the foregoing
5700 Wilshire Boulevard
Los Angeles, California 90036
<PAGE> 1
Exhibit 10.8
THIRD AMENDMENT TO
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
This Amendment, dated as of December 20, 1995, (this "Amendment") is
entered into by and between VIRGIN INTERACTIVE ENTERTAINMENT, INC., a Delaware
corporation (the "Company") and BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION (the "Bank").
RECITALS
The Company and the Bank are parties to a Second Amended and Restated
Credit Agreement dated as of December 1, 1994, as amended (the "Credit
Agreement"), to which the Bank extended a revolving and letter of credit
facility. Capitalized terms used and not otherwise defined or amended in this
Amendment shall have the meanings respectively assigned to them in the Credit
Agreement.
The Company has requested that the Bank extend the maturity date and
increase the amount of the facility. The Company has requested that the Bank
enter into this Amendment in order to approve and reflect the foregoing, and
the Bank has agreed to do so, all upon the terms and provisions and subject to
the conditions hereinafter set forth.
AGREEMENT
In consideration of the foregoing and the mutual covenants and agreement
hereinafter set forth, the parties hereto mutually agree as follows:
A. AMENDMENTS
Amendment of Section 1.01
1. Section 1.01 of the Credit Agreement is hereby amended by deleting
"December 31, 1995" in the definition of "Availability Period" and substituting
"December 31, 1996" therefor.
2. Section 1.01 of the Credit Agreement is hereby further amended by
deleting "March 31, 1996" in the definitions of "CD Rate Interest Period,
"Offshore Rate Interest Period" and "Revolving Maturity Date" and substituting
"March 31, 1997" therefor.
3. Section 1.01 of the Credit Agreement is hereby further amended by
deleting "March 31, 1996" in the definition of "Revolving Maturity Date" and
substituting "March 31, 1997" therefor.
<PAGE> 2
Amendment of Section 2.01(c)
1. Section 2.01(c) of the Credit Agreement is amended by deleting
"$75,000,000" and substituting "$100,000,000" therefor.
B. REPRESENTATIONS AND WARRANTIES
The Company hereby represents and warrants to the Bank that:
1. No Event of Default specified in the Credit Agreement and no event
which with notice or lapse of time or both would become such an Event of
Default has occurred and is continuing;
2. The representations and warranties of the Company pursuant to the
Credit Agreement are true on and as of the date hereof as if made on and as of
said date;
3. The making and performance by the Company of this Amendment have been
duly authorized by all corporate action; and
4. No consent, approval, authorization, permit or license from any federal
or state regulatory authority is required in connection with the making or
performance of the Credit Agreement as amended hereby.
C. CONDITIONS PRECEDENT
This Amendment will become effective as of the date hereof provided that
the Bank shall have received counterparts of this Amendment executed by the
Borrower and consented to by the Guarantor.
D. MISCELLANEOUS
1. This Amendment may be signed in any number of counterparts, each of
which shall be an original, with same effect as if the signatures thereto and
hereto were upon the same instrument.
2. Except as herein specifically amended, all terms, covenants and
provisions of the Credit Agreement shall remain in full force and effect and
shall be performed by the parties hereto according to its terms and provisions
and all references therein or in the Exhibits shall henceforth refer to the
Credit Agreement as amended by this Amendment.
3. This Amendment shall be governed by and construed in accordance with
the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment as of the date first written.
<PAGE> 3
VIRGIN INTERACTIVE ENTERTAINMENT,
INC.
By: /s/ Thomas P. Carson
Title: Executive Vice President
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By: /s/ Bruce Thomas
Title: Vice President
<PAGE> 4
CONSENT OF GUARANTOR
The undersigned, as guarantor under that certain Viacom Guarantee dated as
of September 28, 1994 made by the undersigned in favor of Bank of America
National Trust and Savings Association (the "Guarantee"), hereby consent to the
Third Amendment to Second Amended and Restated Credit Agreement dated as of
December 1, 1994, as amended, between Virgin Interactive Entertainment, Inc.
and Bank of America National Trust and Savings Association, and confirms that
the guarantee remains in full force and effect after giving effect thereto.
VIACOM, INC.
By: /s/ William C. Bradley
Title: VP Assistant Treasurer
<PAGE> 1
Exhibit 10.15
AMENDMENT NO. 3 TO EXCHANGE AGREEMENT
AMENDMENT, dated as of February 22, 1996, by and among Spelling
Entertainment Group Inc., a Delaware corporation and successor-in-interest to
Spelling Entertainment Group Inc., a Florida corporation (the "Company"),
Blockbuster Entertainment Group on behalf of Viacom Inc., as
successor-in-interest to Blockbuster Entertainment Corporation, a Delaware
corporation ("BEG") and Blockbuster Interactive Entertainment, Inc., a Delaware
corporation ("BIE"), to that certain Exchange Agreement entered into by and
among the Company, BEG and BIE as of June 30, 1994, and Amendment No. 1 to
Exchange Agreement, dated as of July 8, 1995 and Amendment No. 2 to Exchange
Agreement, dated as of November 7, 1995 (the "Agreement").
WHEREAS, the Company, BEG and BIE have agreed to amend certain provisions
of the Agreement pertaining to BEG's Put Right and the Company's Call Right;
NOW, THEREFORE, in consideration of the premises and pursuant to Section
12.3 of the Agreement, the Company, BEG and BIE hereby agree as follows:
1. Section 10.5(c) of the Agreement is hereby amended to read
in its entirety as follows:
(c) The options provided for in this Section 10.5
are collectively referred to herein as the "Put
Right." The Put Right may be exercised by BEG at any
time within the 60 day period commencing on March 6,
1996 and concluding on May 5, 1996.
2. Section 10.6(b) of the Agreement is hereby amended to read
in its entirety as follows:
(b) The options provided for in this Section 10.6
are referred to herein as the "Call Right." The Call
Right may be exercised by the Company at any time
within the 60 day period commencing on March 6, 1996
and concluding on May 5, 1996.
3. This Amendment shall be deemed effective as of March 6,
1996.
4. Except as expressly provided in this Amendment, the
Agreement shall not be deemed amended, modified or altered in any
manner whatsoever.
5. Capitalized terms not otherwise defined herein shall have
the meaning given to them in the Agreement.
<PAGE> 2
IN WITNESS WHEREOF, the undersigned have caused this Amendment No. 3 to
Exchange Agreement to be duly executed on this 26th day of February, 1996.
SPELLING ENTERTAINMENT GROUP INC.
By: /s/ Thomas P. Carson
Title: Executive Vice President
BLOCKBUSTER INTERACTIVE
ENTERTAINMENT, INC.
By: /s/ Thomas W. Hawkins
Title: Senior Vice President
BLOCKBUSTER ENTERTAINMENT GROUP,
on behalf of Viacom Inc.
By: /s/ Thomas W. Hawkins
Title: Executive Vice President
<PAGE> 1
Exhibit 10.24
AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement (the "Amendment"), is made and
entered into as of February 8, 1996, by and between Spelling Entertainment
Group Inc., a Delaware corporation ("Employer"), and Kathleen Coughlan
("Employee") with reference to the following facts and circumstances:
WHEREAS, the parties hereto previously entered into that certain
Employment Agreement, dated as of January 10, 1994 (the "Employment
Agreement");
WHEREAS, the parties amended the Employment Agreement as of September 1,
1994;
AND WHEREAS, the parties now desire to further amend the Employment
Agreement in certain respects, as set forth more fully hereinbelow;
NOW THEREFORE, Employer and Employee mutually agree to further amend the
Employment Agreement as follows:
1. Employment Term. The term of the Employment Agreement shall be
extended for a one (1) year period commencing on January 10, 1997 and
terminating on January 9, 1998 ("Extended Term").
2. Base Salary. Employer shall pay Employee a Base Salary of Two Hundred
Twenty-Five Thousand Dollars ($225,000) on an annualized basis commencing
January 10, 1996. Employee's salary is subject to review on or about January
10, 1997 and possible adjustment during the Extended Term. Although Employee
acknowledges that Employer's agreement to so review Employee's salary does not
obligate Employer to increase Employee's salary, Employee's salary shall not be
decreased below Two Hundred Twenty-Five Thousand Dollars ($225,000) per annum.
3. Continuing Effect. Except as amended by this Amendment, the
Employment Agreement shall not be amended in any respect whatsoever and shall
continue in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the date first above written.
SPELLING ENTERTAINMENT GROUP INC.
By: /s/ Thomas P. Carson /s/ Kathleen Coughlan
KATHLEEN COUGHLAN
Its: Executive Vice President
c:\amenKC
<PAGE> 1
Exhibit 10.25
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made and entered into as of the
1st day of January, 1995 (the "Commencement Date"), by and between SPELLING
ENTERTAINMENT GROUP INC., a Delaware corporation ("Employer"), and SALLY SUCHIL
("Employee"). The parties agree to the following:
1. Duties
Employer engages Employee to serve in the capacity of Senior Vice
President, General Counsel and Secretary, reporting to Peter H. Bachmann,
Executive Vice President - Office of the President of Employer, or such other
persons as Employer may later designate. During the term of this Agreement,
Employee shall perform the duties and responsibilities as shall from time to
time, be reasonably delegated or assigned to Employee by Employer, so long as
such duties and responsibilities are commensurate with those performed by a
Senior Vice President, General Counsel and Secretary. Employee shall be based
in the metropolitan Los Angeles area.
2. Employment Term
2.1 Employment of Employee. Subject to the termination provisions of this
Agreement, Employer hereby employs Employee under the terms and conditions set
forth in this Agreement for a period of three (3) years, commencing on the
Commencement Date and terminating on December 31, 1997 (the "Employment Term").
2.2 Employment Relationship. Employee and Employer acknowledge and agree
that neither has any obligation or duty to renew, extend or negotiate for the
renewal or extension of the employment relationship beyond the Employment Term.
However, Employer shall notify Employee in writing before October 1, 1997 as to
whether Employer intends to extend or renew the Agreement. Should the
employment relationship continue after the Employment Term without a new
employment contract, the employment during such period shall be at will, so
that either Employer or Employee may terminate the employment at any time.
3. Compensation
3.1 Base Salary. As compensation for the performance of Employee's
obligations hereunder, Employer shall pay Employee a base salary ("Base
Salary") during the Employment Term as follows:
$200,000 on an annualized basis during the first year of the Employment
Term.
$250,000 on an annualized basis during the second year of the Employment
Term.
$250,000 on an annualized basis during the third year of the Employment
Term.
<PAGE> 2
All compensation under this section shall be payable in accordance with
Employer's normal practices.
3.2 Bonus Compensation. Employee shall be eligible, at Employer's sole
discretion, to receive bonus compensation. The amount of such bonus
compensation, if any, shall be determined in accordance with the policies used
in determining the bonus compensation of executives of similar stature.
4. Benefits
4.1 Expenses. Employer agrees to pay or reimburse Employee for reasonable
and necessary business expenses in accordance with Employer's general policies
for executives of similar stature.
4.2 Medical, Insurance and Other Benefits. During the Employment Term,
Employee shall be entitled to participate in all benefit plans available to
other executives of Employer of similar stature, including, without limitation,
any stock option plan (together with applicable option, vesting, exercise and
termination provisions), or group medical, dental or disability benefits, as
such plans or benefits may be established or modified from time to time in
Employer's sole discretion.
4.3 Stock Options. Employee shall be granted 40,000 options to purchase
common stock of Employer, at a purchase price equal to the closing price on
January 3, 1995, in accordance with the terms of Employer's Stock Option Plan.
These options shall vest in four (4) equal annual installments. Vesting of
stock options shall continue during the Employment Term if Employee's
employment is terminated without cause. Otherwise, vesting shall cease upon
termination of Employee's employment, and Employee's right to exercise such
stock options (to the extent she was entitled to do so at the date of
termination) shall cease after termination of Employee's employment for any
other reason. Employee acknowledges and agrees that the vesting periods
referred to herein do not expressly or impliedly constitute a promise or
representation concerning an extension or continuation of the employment
relationship beyond the Employment Term.
4.4 Vacation. During the Employment Term, Employee shall be entitled to
four (4) weeks vacation per year, in accordance with the policies established
from time to time by Employer.
4.5 Pension. Employee shall be eligible to participate in Employer's
401(k) plan, and any other pension plan Employer may adopt, offered to its
employees, on the same terms and conditions applicable to all employees of
similar stature under the plan.
4.5 Car Allowance. During the Employment Term, Employee shall receive a
car allowance in the amount of $600 per month.
<PAGE> 3
5. Termination For "Cause"
Employer may terminate Employee's employment for "cause" as defined in
this Section if Employee fails to cure such "cause" within ten (10) business
days following receipt of written notice describing the breach to Employee by
Employer, provided however, that there shall be no cure period with respect to
any matter incapable of being cured. As used herein, the term "cause" shall
mean any one or combination of the following:
(i) Employee's conviction of any felony (whether or not
involving Employer) which is punishable by imprisonment of one
year or more (excluding any conviction related to the operation of
a motor vehicle).
(ii) Any material act or omission by Employee involving
material malfeasance or negligence, or constituting a material
breach of this Agreement.
(iii) Employee's material omission or act constituting
material fraud, dishonesty or misrepresentation, whether prior or
subsequent to the date hereof, including, without limitation, any
material fraud, dishonesty or misrepresentation relating to
Employee's hiring by Employer .
(iv) Employee's failure, inability (which does not qualify as
a disability under federal or state law), or refusal to perform
Employee's material duties on an exclusive and full-time basis.
(v) Employee's material violation of any material rule or
regulation of Employer applicable to other employees of similar
stature.
6. Mitigation
If Employee's employment is terminated by Employer without cause, as
"cause" is defined in Section 5 hereof, Employer shall, except as otherwise
provided below, pay to Employee the compensation described in Section 3.1 for
the balance of the Employment Term. However, Employee shall have the obligation
to use good faith and best efforts to seek comparable employment. Employer
shall be entitled to reduce the amount of any compensation and applicable
benefits payable to Employee under this Agreement by the amount of salary,
bonus and/or benefits or other similar employment-related compensation of any
kind earned by Employee from any third party and/or any such amounts,
compensation or benefits earned through self employment from the date of
termination through the end of the Employment Term.
7. Confidentiality
7.1 Non-Disclosure of Company Information. During the term of Employee's
employment and thereafter, Employee shall keep in confidence and shall not use
for Employee or others, or divulge to others (except in the ordinary course of
business), any information pertaining to the business of Employer or its
affiliates including, without limitation, secret or confidential information,
knowledge, data or plans of Employer or its affiliates, including, without
limitation, matters of a business nature such as information about costs and
profits, projections, personnel information, records, customer lists, contact
persons, customer data, software, sales data, or matters of a creative nature,
including without limitation, matters regarding ideas of a literary or
<PAGE> 4
dramatic nature, or regarding any form of motion pictures or television product
("Company Information"), unless such information is compelled by governmental,
judicial or administrative subpoena or other legal process. Company
Information shall be considered and kept as the private, proprietary and
confidential information of Employer and may not be divulged without the
express written authorization of Employer.
7.2 Return of Records. All records, files, lists, drawings, documents,
models, equipment, software or intellectual property relating to Employer's
business shall be returned to Employer upon the termination of Employee's
employment (except for Employee's rolodex and other items of a personal
nature).
7.3 Irreparable Harm. Employee acknowledges and agrees that any material
breach of this provision could cause irreparable harm to Employer, and would
entitle Employer to seek to enjoin unauthorized disclosure of Company
Information.
8. Conflict of Interest
8.1 Restriction on Use of Title. Employee shall not use, or allow the use
of, Employee's title or the fact of Employee's employment or affiliation with
Employer or any of its affiliates in connection with any activities or
endeavors which are not directly related to the performance of Employee's
duties under this Agreement without the prior written approval of Employer.
However, Employee may use her title in connection with her activities related
to non-profit, professional, bar association, community, charitable, civic,
educational and social boards, committees, commissions and foundations.
8.2 Investment Limitation. Employee shall not become financially
interested in, or associated with, directly or indirectly, any third party in
connection with the production, distribution or exhibition of motion pictures,
television programs, sound recordings, theatrical plays, any visual and/or
audio recordings of any kind, or any other entertainment related business or
activity without the prior written approval of Employer; provided, however,
that this provision shall not prevent Employee from (i) holding a passive or
beneficial interest in any third party which is not a competitor of Employer or
any of its affiliates or (ii) holding a passive or beneficial interest not
exceeding one percent (1%) of the outstanding stock of any publicly traded
corporation whether or not such publicly traded corporation competes with
Employer or any of its affiliates.
9. No Solicitation of Employees
Employee shall not during the term of this Agreement, or for a period of
one year thereafter, induce or attempt to induce any employees or
representatives of Employer (or those of any of its affiliates) to stop working
for or representing Employer or any of its affiliates in order to work for or
represent any of Employer's competitors. However, this Section shall not apply
to Employee's personal assistant or secretary. The provisions of this Section
shall survive the expiration, termination or rescission of this Agreement.
<PAGE> 5
10. Ownership of Intellectual Property
10.1 Agreement to Transfer Intellectual Property. Employer shall own, and
Employee hereby transfers and assigns to it, all rights, of every kind and
character throughout the world, in perpetuity, in and to any material or ideas
and all results and proceeds of Employee's services hereunder, or conceived of
or produced during the term of Employee's employment, whether the same consists
of literary, dramatic, musical, motion picture, mechanical, or any other form
of works, themes, ideas, inventions, creations, products or compositions.
10.2 Execution of Assignment Documents. Employee agrees to execute and
deliver to Employer such assignments, certificates of authorship, or other
instruments in accordance with standard industry practice as Employer may
require from time to time to evidence ownership of the results and proceeds of
Employee's services. Employee's agreement to assign to Employer any of
Employee's rights as set forth in this Section does not apply to any invention
which qualifies fully as Employee's invention under the provisions of Section
2870 of the California Labor Code, where no equipment, supplies, facility, or
trade secret information of Employer was used and which was developed entirely
upon Employee's own time, and which (i) does not relate to the business of
Employer or to its actual or demonstrably anticipated research or development,
or (ii) which does not result from any work performed by Employee for Employer.
10.3 Status of Ownership of Copyrights. Employee represents and warrants
that except as previously disclosed to Employer in writing, Employee neither
owns nor controls any copyrights, literary rights, contract rights, or other
rights in any literary, dramatic work, musical work or any concept or idea
which could be the basis for a television program, feature film, video or other
motion picture or copyrightable product.
11. Exclusive Services
Employee agrees not to perform services of any kind or nature which would
materially interfere with the performance of Employee's services hereunder for
any third party or render services for Employee's own account which would
materially interfere with the performance of Employee's services hereunder.
However, Employee may serve on non-profit, professional, bar association,
community, charitable, civic, educational and social boards, committees,
commissions and foundations.
12. Unique Personal Services
Employee agrees and acknowledges that Employee's personal services are of
a special, unique, unusual, extraordinary, and intellectual character giving
them a peculiar value, the loss of which Employer cannot be reasonably
compensated for in damages in an action at law. Therefore, in the event of the
breach by Employee of this Agreement, Employer shall, notwithstanding the
provisions of Section 21 below, be entitled to make application to a court of
competent jurisdiction for equitable relief by way of injunction or otherwise.
This provision shall not be construed as a waiver of any of the rights which
Employer may have for damages under this Agreement or otherwise, and all of
Employer's rights and remedies shall be unrestricted.
<PAGE> 6
13. Acknowledgement of Section 508
Employee acknowledges that Employee is familiar with the requirements of
Section 508 of the Federal Communications Act (regarding the acceptance or
payment of money or other consideration for the inclusion of program matter),
is aware that the violation of Section 508 constitutes a criminal offense, has
not violated and will not violate any of the provisions of Section 508, and has
not and will not do any act which would require disclosure pursuant to Section
508.
14. Disability
If Employee becomes "Materially Disabled" (as defined in this Section)
during the Employment Term, Employer may, at its election, terminate this
Agreement, except that Employee's obligations under Sections 6, 7, 9 and 10 of
this Agreement shall survive any such termination. "Materially Disabled" shall
mean any instance where Employee becomes unable, as a result of a serious
health condition (other than a pregnancy-related disability), to render full
services as contemplated by this Agreement for any period totalling more than
sixteen (16) weeks in the aggregate during any twelve (12) month period.
15. Death
In the event of Employee's death, this Agreement shall terminate, and
Employer shall thereupon be released and discharged from all further
obligations under this Agreement, except for any vested benefits and earned and
unpaid Base Salary.
16. Complete Agreement
16.1 No Other Agreements. This Agreement is the product of negotiation
between the parties hereto and supersedes all prior agreements, if any, between
Employer and Employee, and constitutes the entire agreement between the
parties.
16.2 Modification or Amendment. No amendment or modification of this
Agreement shall be valid or binding unless it is in writing and duly executed
by Employer.
16.3 No Third Party Representations. Employee acknowledges that no person
has made any representation or promise on behalf of Employer not set forth
herein and this Agreement has not been executed in reliance upon any such
representation or promise.
<PAGE> 7
17. Severable Agreement
If any provision of this Agreement is declared invalid, illegal, or
incapable of being enforced, all of the remaining provisions of this Agreement
shall nevertheless continue in full force and effect.
18. Notices
Any notice required or desired to be given to Employer or to Employee
shall be given in writing, and shall be addressed:
To Employer:
Spelling Entertainment Group Inc.
5700 Wilshire Boulevard
Los Angeles, California 90036
Attention: Peter H. Bachmann
Executive Vice President - Office of the President
To Employee:
Sally Suchil
............................
............................
Notices given under this Section shall be given by hand delivery, telecopy,
registered mail or overnight courier.
19. Assignment
Employer shall have the right to assign this Agreement to any subsidiary
or affiliate or successor of Employer.
20. Employer's Affiliated Corporations
20.1 Employee acknowledges and agrees that all of Employee's covenants and
obligations to Employer, as well as the rights of Employer hereunder, shall run
in favor of and shall be enforceable by the parent, subsidiary and affiliated
companies of Employer.
20.2 Employee acknowledges that notwithstanding references in this
Agreement to any parent, subsidiary and affiliated companies of Employer, this
Agreement is between Employee and Employer and there are no other parties to
this Agreement. Employee shall have no right to enforce this Agreement against
any other parent, subsidiary and affiliated companies of Employer unless this
Agreement is assigned to any such entity in accordance with the provisions of
paragraph 19 hereof.
<PAGE> 8
21. Alternative Dispute Resolution
21.1 Binding Arbitration. Except for Employer's right to seek equitable
relief in accordance with the provisions of Sections 7, 9, and 12 of this
Agreement, the parties agree that all disputes, claims and other matters in
controversy arising out of or relating to this Agreement, or the performance or
breach thereof, shall be submitted to binding arbitration in accordance with
the provisions and procedures of this Section.
21.2 Arbitrator/Place of Arbitration. The arbitration provided for in this
paragraph shall take place in Los Angeles County, California, in accordance with
the provisions of Title 9, Sections 1280 et seq of the California Code of Civil
Procedure ("CCP"), except as provided to the contrary hereunder. The arbitration
shall be held before and decided by a single neutral arbitrator. The single
neutral arbitrator shall be selected from a list of retired judges of the
Superior Court of the State of California for the County of Los Angeles by a
process mutually agreed upon by the parties. If no agreement can be reached as
to the process for selecting the arbitrator or if the agreed method fails, the
arbitrator shall be appointed in accordance with the provisions of CCP Section
1281.6.
21.3 Arbitration Procedures
(a) Time and Place for Hearing. The parties shall mutually agree
upon the date and location of the arbitration, subject to the
availability of the arbitrator. If no agreement can be reached as to the
date and location of the arbitration, the arbitrator shall appoint a time
and place in accordance with the provisions of CCP Section 1282.2(a)(1),
except that the arbitrator shall give not less than 30 days notice of the
hearing unless the parties mutually agree to shorten time for notice.
(b) Discovery. The parties shall be entitled to undertake discovery
in the arbitration in accordance with the provisions of subsections (a)
through (d) of CCP Section 1283.05. In conjunction with these procedures,
the parties shall be entitled to request and obtain production of
documents in discovery in the arbitration in accordance with the same
rights, remedies and procedures, and shall be subject to all of the same
duties, liabilities and obligations as if the subject matter of the
arbitration were pending in a civil action before a Superior Court of the
State of California. The parties hereby agree that any discovery taken
hereunder shall be permitted without first securing leave of the
arbitrator and shall be kept to a reasonable minimum.
(c) Award Final. The decision of the arbitrator may be confirmed
pursuant to the provisions of CCP Section 1285, and shall not be
appealable for any reason, it being understood that a petition to vacate
an award for any of the reasons set forth in CCP Section 1286.2 shall not
be permitted.
<PAGE> 9
22. Counterparts
This Agreement may be executed in counterparts, each of which, when so
executed, shall be deemed an original, but all of which together shall
constitute one and the same instrument.
23. Governing Law
This Agreement shall be deemed made in the State of California, County of
Los Angeles, and shall be governed by the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
SPELLING ENTERTAINMENT GROUP INC.
(EMPLOYER)
By: /s/ Peter Bachmann
Its: Executive Vice President
/s/ Sally Suchil
SALLY SUCHIL
(EMPLOYEE)
<PAGE> 1
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
NET INCOME:
Income from continuing operations $ 16,521 $ 24,108 $ 23,659
Dividends on preferred stock -- -- 724
-------- -------- --------
Income from continuing operations
applicable to common stock 16,521 24,108 22,935
Loss from discontinued operations -- -- (3,971)
Extraordinary item -- -- (2,022)
-------- -------- --------
Net income applicable to common stock $ 16,521 $ 24,108 $ 16,942
======== ======== ========
Shares:
Basic shares - weighted average of common
shares outstanding 88,458 74,377 54,253
Additional shares assuming conversion
of stock options and warrants 1,726 1,354 427
-------- -------- --------
Primary shares 90,184 75,731 54,680
Additional shares assuming full dilution of
stock options and warrants 394 131 524
-------- -------- --------
Fully-diluted shares 90,578 75,862 55,204
======== ======== ========
Basic, primary, and fully-diluted net
income (loss) per common and common equivalent share:
Continuing operations $ 0.19 $ 0.32 $ 0.42
Discontinued operations -- -- (0.07)
Extraordinary item -- -- (0.04)
-------- -------- --------
Net income per common and common equivalent share $ 0.19 $ 0.32 $ 0.31
======== ======== ========
</TABLE>
<PAGE> 1
SPELLING ENTERTAINMENT GROUP INC.
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
The following is a list of the Company's significant subsidiaries at December
31, 1995. At that date, all corporations were 100% - owned subsidiaries, except
as noted.
STATE OF
NAME OF COMPANY INCORPORATION
- --------------- -------------
Republic Entertainment Inc. Delaware
Spelling Entertainment Inc. Delaware
Aaron Spelling Productions, Inc. California
Spelling Films Inc. Delaware
Torand Productions Inc. Delaware
Spelling Television Inc. Delaware
Worldvision Enterprises, Inc. New York
VIE Holding Company Delaware
Virgin Interactive Entertainment Limited* United Kingdom
Virgin Interactive Entertainment (Holdings) Ltd. United Kingdom
Virgin Interactive Entertainment (Investments) Ltd. United Kingdom
Virgin Interactive Entertainment, Inc. Delaware
Virgin Interactive Entertainment (Europe) Limited United Kingdom
The names of certain subsidiaries are omitted, as such subsidiaries in the
aggregate would not constitute a significant subsidiary.
* Approximately 90.6% of the Ordinary Shares are owned by the Company.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-24650, No. 33-61914, No. 33-53291, No. 33-53951,
No. 33-55305 and No. 33-55991) and on Form S-3 (No. 33-53575 and No. 33-64559)
of Spelling Entertainment Group Inc. of our report dated February 6, 1996
appearing on page 24 of this Form 10-K.
PRICE WATERHOUSE LLP
Los Angeles, California
March 29, 1996
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report (dated February 1, 1994) included in this Form 10-K, into the Company's
previously filed Registration Statements on Forms S-8 (Registration No.
33-24650, No. 33-61914, No. 33-53291, No. 33-53951, No. 33-55305 and No.
33-55991) and on Form S-3 (Registration No. 33-53575 and No. 33-64559).
ARTHUR ANDERSEN LLP
Los Angeles, California
March 29, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1995 AND THE
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR THEN ENDED AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 20,678
<SECURITIES> 0
<RECEIVABLES> 267,169
<ALLOWANCES> (30,357)
<INVENTORY> 428,840
<CURRENT-ASSETS> 509,530
<PP&E> 40,894
<DEPRECIATION> (15,138)
<TOTAL-ASSETS> 1,119,670
<CURRENT-LIABILITIES> 186,782
<BONDS> 0
0
0
<COMMON> 90
<OTHER-SE> 558,430
<TOTAL-LIABILITY-AND-EQUITY> 1,119,670
<SALES> 664,387
<TOTAL-REVENUES> 664,387
<CGS> 519,550
<TOTAL-COSTS> 519,550
<OTHER-EXPENSES> 102,302
<LOSS-PROVISION> 38,131
<INTEREST-EXPENSE> 16,160
<INCOME-PRETAX> 28,910
<INCOME-TAX> 13,771
<INCOME-CONTINUING> 16,521
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,521
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.19
</TABLE>
