<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
------------ --------------
COMMISSION FILE NUMBER: 1-6739
SPELLING ENTERTAINMENT GROUP INC.
(Exact name of registrant as specified in its charter)
DELAWARE 59-0862100
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5700 WILSHIRE BOULEVARD
LOS ANGELES, CALIFORNIA 90036
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (213) 965-5700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
---- ----
On May 10, 1996, the registrant had outstanding 90,406,464 shares of Common
Stock, $.001 par value.
<PAGE> 2
SPELLING ENTERTAINMENT GROUP INC.
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets -
March 31, 1996 and December 31, 1995 (Unaudited) 3
Condensed Consolidated Statements of
Operations - Three Months Ended
March 31, 1996 and 1995 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1996 and 1995 (Unaudited) 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
</TABLE>
2
<PAGE> 3
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
----------- -----------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 17,833 $ 20,678
Accounts receivable, net 215,815 236,812
Entertainment product, net 442,951 428,840
Property and equipment, net 26,830 25,757
Other assets 25,813 20,102
Intangible assets, net 384,886 387,481
----------- -----------
Total Assets $ 1,114,128 $ 1,119,670
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable, accrued expenses and other liabilities $ 59,269 $ 87,500
Accrued participation expense 118,985 111,818
Deferred revenue 13,885 19,362
Bank and other debt 329,449 305,676
Income and other taxes 17,889 21,040
Net liabilities related to discontinued operations 14,545 15,754
----------- -----------
Total Liabilities 554,022 561,150
----------- -----------
Commitments and contingent liabilities
Shareholders' Equity:
Preferred stock, $.10 par value; authorized
20,000,000 shares; none outstanding
Common stock, $.001 par value; authorized
300,000,000 shares; issued and outstanding
90,300,904 and 89,683,378 shares, respectively 90 90
Capital in excess of par value 576,368 571,244
Accumulated deficit (15,043) (11,914)
Cumulative translation adjustment (1,309) (900)
----------- -----------
Total Shareholders' Equity 560,106 558,520
----------- -----------
Total Liabilities and Shareholders' Equity $ 1,114,128 $ 1,119,670
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1996 1995
--------- ---------
<S> <C> <C>
Revenue $ 164,918 $ 185,148
Costs and expenses:
Entertainment product costs 143,265 144,742
Selling, general and administrative 29,225 23,367
--------- ---------
Operating income (loss) (7,572) 17,039
Interest expense, net (3,608) (4,699)
Interest income 529 1,057
Other income (expense), net (83) 53
--------- ---------
Income (loss) before income taxes and
minority interest (10,734) 13,450
(Provision) benefit for income taxes 6,458 (6,206)
--------- ---------
Income (loss) before minority interest (4,276) 7,244
Minority interest 531 27
--------- ---------
Net income (loss) $ (3,745) $ 7,271
========= =========
Average number of common and common equivalent shares 90,101 88,125
========= =========
Net income (loss) per common and common equivalent share $ (0.04) $ 0.08
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1996 1995
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (3,745) $ 7,271
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation and amortization 4,483 3,788
Amortization of entertainment product costs 104,706 115,398
Additions to entertainment product costs (120,445) (111,580)
Changes in operating assets and liabilities:
Decrease in accounts receivable 20,219 37,239
Decrease in accounts payable,
accrued expenses, other liabilities and income taxes (27,869) (25,894)
Increase (decrease) in accrued participation expenses 7,226 (2,089)
Decrease in deferred revenue (6,043) (4,870)
Other, net (4,573) (6,261)
--------- ---------
(26,041) 13,002
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (2,936) (4,110)
Changes in net liabilities related to
discontinued operations (1,203) (1,959)
--------- ---------
(4,139) (6,069)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facilities 26,362 19,598
Repayments of credit facilities (2,589) (28,969)
Proceeds from exercise of stock options
and warrants 3,562 1,488
--------- ---------
27,335 (7,883)
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (2,845) (950)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 20,678 22,400
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,833 $ 21,450
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
1. INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements of
Spelling Entertainment Group Inc. and subsidiaries (the "Company") have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. The Company believes that the disclosures contained herein are
adequate to make the information presented not misleading; however, these
unaudited condensed consolidated financial statements should be read in
conjunction with the more detailed financial statements and notes thereto
included in the Company's most recent Annual Report on Form 10-K.
The financial statements reflect, in the opinion of management, all normal
recurring adjustments necessary to present fairly the Company's financial
position and results of operations. In order to maintain consistency and
comparability between periods presented, certain amounts have been reclassified
from the previously reported financial statements in order to conform with the
financial statement presentation in the current period.
Viacom Inc. ("Viacom") currently owns approximately 75% of the Company's Common
Stock. Viacom is exploring the sale of the Company and the purchase of the
Company's interest in Virgin Interactive Entertainment Limited ("VIEL"). The
Company has formed an independent committee of its board of directors to
negotiate the terms of any proposed VIEL transaction.
On July 30, 1994, the Company acquired approximately 91% of the ordinary shares
("Ordinary Shares") of VIEL and 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 Viacom to
purchase, these shares from Viacom at Viacom's cost. 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, Viacom acquired the remaining Ordinary Shares of
VIEL not owned by the Company for approximately $22,973,000 plus other costs
associated with the transaction. Viacom and the Company have executed
amendments to extend the put-and call-option agreements, which originally
expired in July 1995, through November 5, 1996. (See Note 9.)
The first quarter of 1995 reflects $5,026,000 of operating income that resulted
from the Company conforming its accounting policies with respect to Statement of
Financial Accounting Standards ("SFAS") No. 53 to those of Viacom. In addition,
such operating income includes a net adjustment of approximately $5,500,000
attributable to prior years.
6
<PAGE> 7
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
2. 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.
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.
Entertainment product, net, is comprised of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
-------------- -----------------
<S> <C> <C>
Entertainment product:
Released $196,696 $172,051
In process and other 111,704 127,887
Entertainment product rights 134,551 128,902
-------- --------
$442,951 $428,840
======== ========
</TABLE>
Entertainment product rights include advances to producers and acquisition costs
for distribution or other rights to entertainment product not produced by the
Company.
3. DEBT
Debt consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
-------- --------
<S> <C> <C>
Viacom Facility, average interest at 6.4%
at March 31, 1996 $232,000 $210,000
Credit Agreement, average interest at 6.4%
at March 31, 1996 97,449 95,646
UK Facility, interest at 7.1% at March 31, 1996 -- 30
-------- --------
$329,449 $305,676
======== ========
</TABLE>
7
<PAGE> 8
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
In January 1994, the Company entered into a three-year credit agreement with a
predecessor of Viacom (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
Entertainment Inc. ("Republic") in April 1994 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. (See Note 9.)
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 determined by reference to the corresponding rates payable
by Viacom under its separate credit facilities, which rates the Company believes
to be more favorable than those the Company could obtain separately. 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 of
VIEL, 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 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
March 31, 1996, the Company had approximately $585,000 in letters of credit
outstanding under the Credit Agreement to guarantee its purchases of interactive
entertainment product.
8
<PAGE> 9
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
On September 8, 1993, another wholly-owned subsidiary of VIEL established a
5,000,000 pounds sterling credit facility (the "UK Facility") with a bank in the
United Kingdom. On April 12, 1994, the UK Facility was increased to 10,000,000
pounds sterling, based in part on the personal guarantee of two of the directors
of the subsidiary. Following the acquisition of VIEL, the Company guaranteed the
UK Facility and the guarantees of the two directors were terminated. Advances
under the UK Facility bear interest at the bank's prime rate plus 1.5%. The UK
Facility matures on April 30, 2005. As of March 31, 1996, there were no letters
of credit outstanding under the UK Facility.
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. At March 31, 1996, the carrying value
of all of the Company's debt approximated fair value.
4. SHAREHOLDERS' EQUITY
The following is a summary of the changes in the components of shareholders'
equity:
<TABLE>
<CAPTION>
Capital In Cumulative
Common Excess of Accumulated Translation
Stock Par Value Deficit Adjustment Total
---------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 90 $571,244 $ (11,914) $ (900) $558,520
Exercise of options and warrants - 3,562 - - 3,562
Income tax benefit related
to stock options - 1,562 - - 1,562
Unrealized holding gain, net - - 616 - 616
Net loss for the period - - (3,745) - (3,745)
Cumulative translation adjustment - - - (409) (409)
---------- -------- --------- ---------- ---------
Balance at March 31, 1996 $ 90 $576,368 $ (15,043) $ (1,309) $560,106
========== ======== ========= ========== ========
</TABLE>
9
<PAGE> 10
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
5. INCOME TAXES
Income taxes have been provided in each period based on the Company's
anticipated annual effective income tax rate.
6. NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Net income (loss) per common and common equivalent share amounts are based on
the weighted average number of common shares outstanding during the respective
periods. Primary and fully-diluted net income (loss) per common and common
equivalent share are not presented as they result in a dilution of less than 3%
from basic net income (loss) per common and common equivalent share.
7. LEGAL MATTERS
The Company is involved in certain legal proceedings which arise in the ordinary
course of conducting its entertainment business operations. The Company believes
such legal proceedings should not have a material adverse effect on the
Company's consolidated results of operations or financial condition.
The Company also is subject to pending and contingent claims relating to the
Company's discontinued operations, including certain claims involving
environmental matters. Some of the parties involved in such actions seek
significant damages. While the outcome of these claims cannot be predicted with
certainty, based upon (i) its knowledge of the facts and circumstances and its
understanding of the applicable law; (ii) allowances for estimated losses on
disposal of the discontinued operations, and (iii) an indemnity agreement, the
Company believes that the ultimate resolution of such suits and claims will not
have a material adverse effect on the Company's consolidated results of
operations or financial condition. See Note 9 regarding certain ligitation with
respect to the Company's discontinued operations.
8. RELATED PARTY TRANSACTIONS
The Company was charged interest and fees by Viacom of $3,830,000 and $3,397,000
during the three months ended March 31, 1996 and 1995, respectively, in
connection with the Viacom Facility. See Note 3 regarding the Company's credit
facility with Viacom and Viacom's guarantee of the Company's credit agreement
with a bank.
Viacom provided the Company with management services for which the Company was
charged $150,000 for each of the three month periods ended March 31, 1996 and
1995. As of March 31, 1996, the Company had a net payable to Viacom of
approximately $1,462,000 with respect to these and other expenses.
10
<PAGE> 11
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
During the three months ended March 31, 1996 and 1995, the Company sold home
video and interactive entertainment product to Blockbuster Entertainment Group,
a division of Viacom ("Blockbuster"). Additionally, the Company licensed certain
entertainment product to (i) Showtime Networks Inc., a subsidiary of Viacom
("Showtime"), (ii) certain television stations owned by Viacom, and (iii) USA
Network and Sci-Fi Channel in which Viacom has equity interests. For the three
months ended March 31, 1996 and 1995, these transactions are not material.
Republic has entered into agreements with, and in certain cases has advanced
funds to, Viacom and its Blockbuster and Showtime units to distribute certain
of their products in the home video market.
The Company has entered into agreements with Paramount Pictures Corporation, a
Viacom subsidiary, with respect to the distribution of two of the Company's
upcoming feature film releases, "Night Falls on Manhattan" and "Stephen King's
Thinner," in the domestic 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.
9. SUBSEQUENT EVENTS
In April 1996, the Company executed a $25,000,000 promissory note to Viacom
pursuant to Viacom's agreement to provide a further increase of up to
$115,000,000 in the amount available under the Viacom Facility. (See Note 3.)
The terms of this note are consistent with the terms of the Viacom Facility.
In May 1996, the court of appeals affirmed a lower court decision concerning
the alleged liability of a Company subsidiary at the Sullivan's Ledge superfund
site in New Bedford, Massachusetts. The lower court had declined to rule that
the subsidiary's settlement of claims by the United States provided a defense
to a private cost recovery action filed by a group of companies that are
performing a clean up at the site. The Company will continue to oppose the
group's claims on the basis of other defenses.
In May 1996, the Company and Viacom executed an amendment to extend the put-
and call-option agreements, with respect to the Ordinary Shares of VIEL not
owned by the Company, through November 5, 1996. (See Note 1.)
11
<PAGE> 12
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
unaudited condensed consolidated financial statements and the related notes
thereto. References to Notes refer to the notes to such statements.
RESULTS OF CONTINUING OPERATIONS
The results of operations for any period are significantly affected by the
quantity and performance of the Company's entertainment product which is
licensed 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 one-hour network television programming, network and
international license fees normally approximate the production costs of the
series, and accordingly the Company recognizes only minimal profit or loss
during this period. With respect to half-hour network television programming and
first-run syndication television programming, the production costs can
significantly exceed the combination of the network or other domestic revenue
and international license fees. However, if a sufficient number of episodes of a
series are produced, the Company is reasonably assured that it will also be able
to sell the series in the domestic off-network market, and the Company would
then expect to be able to reduce its loss or realize a profit with respect to
the series.
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.
12
<PAGE> 13
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
REVENUE
The following table sets forth the components of revenue from the Company's
major media and markets for the three months ended March 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Worldwide television distribution $106,275 $124,581
Worldwide interactive entertainment 36,119 36,264
Worldwide home video 14,025 18,990
International film distribution 4,274 2,009
Worldwide licensing and merchandising 3,538 3,181
Other 687 123
-------- --------
$164,918 $185,148
======== ========
</TABLE>
Worldwide television revenue decreased $18,306,000, or 15%, in 1996 primarily
due to (i) the one time effect recorded in the first quarter of 1995 of
conforming the Company's accounting policies to those of Viacom; (ii) the one
time effect in the first quarter of 1995 for a significant contract extension
and (iii) less programming distributed in first-run syndication. These decreases
were partially offset by (i) an increase in the number of hours of network
programming delivered in the first quarter of 1996 and (ii) higher per episode
network license fees.
Worldwide interactive entertainment revenue remained relatively stable in 1996
compared to the similar 1995 period. Anticipated growth in revenue in the first
quarter of 1996 was not achieved due to delays in the release of a number of
VIEL's titles, 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. It is expected that revenue will continue to be
adversely impacted in the near term. The Company continues to actively work with
hardware manufacturers to develop and adapt its titles to different platforms as
they become commercially viable.
Worldwide home video revenue decreased $4,965,000, or 26%, in 1996 from the
comparable period in 1995. The Company marketed a highly successful sell-through
promotion in the 1995 period with no comparable release in the 1996 period.
Additionally, the home video market is currently very competitive due to
recently released theatrical product, leaving less shelf space available for the
Company's made-for-video product. It is expected that this trend will continue
in the near term.
International film distribution revenue increased $2,265,000, or 113%, in 1996
compared to 1995. The increase is due primarily to the release of
"Unforgettable" in 1996, while there was no release with similar success in the
1995 period.
Licensing and merchandising revenue remained relatively stable in 1996 compared
to 1995.
13
<PAGE> 14
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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 offset by the fact that certain of the Company's manufacturing
costs and overhead are 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.
Despite lower revenue, such costs remained relatively stable in the 1996 period
compared to the 1995 period, so that the percentage relationship between such
costs and the related revenue increased to 87% in 1996 from 78% in 1995. 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
$11,447,000 in 1996 compared to $9,077,000 in the corresponding period in 1995.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative costs in 1996 increased $5,858,000, or 25%,
from the comparable 1995 period. The increase is commensurate with the Company's
growth between periods.
INTEREST EXPENSE
Interest expense decreased $1,091,000, or 23%, from the comparable period in
1995 due to (i) a decrease in the average interest rate from 1995 to 1996 and
(ii) an increase in interest capitalized in 1996 due to longer production cycles
associated with both the Company's increased theatrical production activities
and the increased programming complexity required by the growing consumer
sophistication in the market for interactive product. This decrease was
partially offset by higher average borrowings in 1996.
PROVISION FOR INCOME TAXES
The Company computes its interim provision for income taxes based upon an
estimated annual effective tax rate computed in accordance with Statement of
Financial Accounting Standards No. 109. The Company's provision for income taxes
decreased $12,664,000 in the first quarter of 1996 compared to the corresponding
period in 1995, largely as a result of the decrease in income for the period
partially
14
<PAGE> 15
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
offset by an increase in the effective tax rate. The effective tax rate for the
three months ended March 31, 1996 increased as compared to the corresponding
period in 1995 as a result of changes in the relationship between revenue and
expenses comprising income before income taxes and minority interest.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations require the production of entertainment product and the
acquisition of distribution or other rights to entertainment product produced by
third parties. The Company's expenditures in this regard totaled $120,445,000
and $111,580,000 in the three months ended March 31, 1996 and 1995,
respectively. Additionally, such expenditures by the Company are expected to
increase in conjunction with its expected increase in production levels. The
cost of producing network television programming is largely funded through the
receipt of the related network license fees. The deficit financing of its
network programming and the cost of other production and acquisition activities
is funded through the Company's operating cash flow and borrowings under its
credit arrangements.
The Company's principal credit agreement is with Viacom. (See Note 3.) 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. Pursuant to this agreement, the Company has
executed a $25,000,000 promissory note to Viacom in April, 1996. (See Note 9.)
A wholly-owned subsidiary of VIEL has a multi-currency credit agreement for
$100,000,000 with a bank in the U.S. As of March 31, 1996, the Company had
approximately $585,000 in letters of credit outstanding under the Credit
Agreement to guarantee its purchases of interactive entertainment product. (See
Note 3.) Viacom has guaranteed all of the borrowings under the Credit Agreement,
which are due March 31, 1997.
Another wholly-owned subsidiary of VIEL has a 10,000,000 pounds sterling credit
facility with a bank in the United Kingdom, which the Company has guaranteed.
The UK Facility has been extended until April 2005. (See Note 3.)
Viacom 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 and
the purchase of the Company's interest in VIEL. The Company has formed an
independent committee of its board of directors to negotiate the terms of any
proposed VIEL transaction. VIEL generated revenue of $36,139,000 and $36,264,000
for the three months ended March 31, 1996 and 1995, respectively, and losses
before interest, taxes, depreciation and amortization of $6,559,000 and
$3,908,000, respectively.
15
<PAGE> 16
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Company believes that it has the financial resources necessary to meet its
anticipated capital requirements. The Company has sufficient resources available
from the cash provided by operating activities and that available under its
credit facilities to meet its ongoing plans for the production, acquisition and
distribution of entertainment product and to take advantage of foreseen
internal and external development and growth opportunities. See Notes 1 and 3
regarding certain acceleration provisions of the Viacom Facility.
UNCERTAINTIES
The Company is subject to pending and contingent claims relating to the
Company's discontinued operations, including certain claims involving
environmental matters. Some of the parties involved in such actions seek
significant damages. While the outcome of these claims cannot be predicted with
certainty, based upon (i) its knowledge of the facts and circumstances and its
understanding of the applicable law; (ii) allowances for estimated losses on
disposal of the discontinued operations, and (iii) an indemnity agreement, the
Company believes that the ultimate resolution of such claims will not have a
material adverse effect on the Company's consolidated results of operations or
financial condition. (See Notes 7 and 9.)
16
<PAGE> 17
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
PART II.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Demand Promissory Note dated as of April 15, 1996, between the Registrant
and Viacom Inc.
10.2 Amendment No. 4 to Exchange Agreement dated as of May 6, 1996, by and
among the Registrant, Blockbuster Entertainment Group on behalf of
Viacom, Inc. and SEGI Holding Co.
10.3 Employment Agreement dated as of May 1, 1996, by and between the
Registrant and Aaron Spelling.
11 Computation of net income (loss)
per common and common equivalent share.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
None
17
<PAGE> 18
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPELLING ENTERTAINMENT GROUP INC.
May 14, 1996 By: /s/ Thomas P. Carson
-------------------------
Thomas P. Carson
Executive Vice President, Office of the President
Chief Financial Officer and Treasurer
(Principal Financial Officer)
By: /s/ Kathleen Coughlan
-------------------------
Kathleen Coughlan
Senior Vice President and Corporate Controller
(Principal Accounting Officer)
18
<PAGE> 19
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF NET INCOME (LOSS) PER COMMON
AND COMMON EQUIVALENT SHARE
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1996 1995
-------- -------
<S> <C> <C>
Net income (loss) $ (3,745) $ 7,271
======== =======
Shares:
Basic shares - weighted average of
common shares outstanding 90,101 88,125
Additional shares assuming
conversion of stock options and warrants 1,684 1,633
-------- -------
Primary shares 91,785 89,758
Additional shares, when dilutive, assuming
full dilution of stock options and warrants -- 28
-------- -------
Fully-diluted shares 91,785 89,786
======== =======
Basic, primary and fully-diluted net income (loss)
per common and common equivalent share $ (0.04) $ 0.08
======== =======
</TABLE>
Note 1: This calculation is submitted in accordance with the Securities
Exchange Act of 1934 although not required by footnote 2 to paragraph
14 of APB Opinion No. 15 because the calculation of primary and
fully-diluted net income (loss) per common and common equivalent share
results in a dilution of less than 3%.
19
<PAGE> 1
EXHIBIT 10.1
DEMAND PROMISSORY NOTE
$25,000,000.00 as of April 15, 1996
FOR VALUE RECEIVED, Spelling Entertainment Group Inc., a Delaware
corporation (the "Borrower"), hereby promises to pay Viacom Inc. (the "Lender"),
on demand, the lesser of (i) the principal sum of Twenty-Five Million and 00/100
Dollars ($25,000,000.00) or (ii) the aggregate principal amount of all advances
made by the Lender to the Borrower pursuant to this Demand Promissory Note, duly
endorsed and set forth on the attached sheet, plus accrued interest thereon.
Interest will accrue daily and will be computed in a manner consistent with the
provisions of the Amended and Restated Credit Agreement (the "Credit Agreement")
dated as of January 31, 1995 among the Borrower and Lender, as amended, on the
aggregate principal amount of such advances at the per annum rate equal to the
then applicable one month Eurodollar Rate plus 1.00%, as defined in the Credit
Agreement. The Borrower also agrees to pay interest on overdue principal and,
to the extent not prohibited by applicable law, on overdue installments of
interest at the rate and manner specified in the Credit Agreement.
Payments hereunder shall be made to Lender at such account of Lender as
is specified by Lender in writing from time to time.
THIS DEMAND PROMISSORY 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 BORROWER WAIVES THE RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING
OR COUNTERCLAIM INSTITUTED WITH RESPECT TO THIS DEMAND PROMISSORY NOTE.
The Borrower hereby waives presentment, demand, notice, protest and all
other demands and notices in connection with the delivery, acceptance,
performance and enforcement of this Demand Promissory Note.
BORROWER
SPELLING ENTERTAINMENT GROUP INC.
By: /s/ THOMAS P. CARSON
------------------------------
Name: Thomas P. Carson
Title: Executive Vice President
As an authorized officer of
the foregoing corporation
<PAGE> 2
Advances and Aggregate Outstandings of Principal
Demand Promissory Note - Spelling
<TABLE>
<CAPTION>
Aggregate
Date of Amount of Principal
Advance Advance Rate Amount
- ------- --------- ---- ---------
<S> <C> <C> <C>
</TABLE>
<PAGE> 1
Exhibit 10.2
AMENDMENT NO. 4 TO EXCHANGE AGREEMENT
AMENDMENT, dated as of May 6, 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 SEGI
Holding Co. (formerly known as Blockbuster Interactive Entertainment, Inc.), a
Delaware corporation ("SHC"), to that certain Exchange Agreement entered into by
and among the Company, BEG and SHC as of June 30, 1994, and Amendment No. 1 to
Exchange Agreement, dated as of July 8, 1995, Amendment No. 2 to Exchange
Agreement, dated as of November 7, 1995 and Amendment No. 3 to Exchange
Agreement, dated as of February 22, 1996 (the "Agreement").
WHEREAS, the Company, BEG and SHC 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 SHC 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 six month period
commencing on May 6, 1996 and concluding on November 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 six month period
commencing on May 6, 1996 and concluding on November 5, 1996.
3. This Amendment shall be deemed effective as of May 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. 4 to
Exchange Agreement to be duly executed on this __ day of May, 1996.
SPELLING ENTERTAINMENT GROUP INC.
By: /s/ Thomas P. Carson
--------------------------------------
Title: Executive Vice President
-----------------------------------
SEGI HOLDING CO.
By: /s/ Michael D. Fricklas
--------------------------------------
Title: Senior Vice President
-----------------------------------
BLOCKBUSTER ENTERTAINMENT GROUP,
on behalf of Viacom Inc.
By: /s/ Michael D. Fricklas
--------------------------------------
Title: Senior Vice President
-----------------------------------
2
<PAGE> 1
Exhibit 10.3
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into as of this
1st day of May, 1996, (the "Commencement Date") by and between SPELLING
ENTERTAINMENT GROUP INC., a Delaware corporation (the "Company"), and AARON
SPELLING (the "Executive"). The parties agree to the following:
1. Term of Employment. Subject to the termination provisions of this
Agreement, Company hereby employs Executive under the terms and conditions set
forth in this Agreement commencing on the Commencement Date and terminating on
April 30, 1998 (the "Employment Term") with a mutual option by Company and
Executive to renew for a third year commencing on May 1, 1998 and terminating on
April 30, 1999 (the "Option Term"). The mutual option is exercisable only with
approval of both Company and Executive. The Employment Term and Option Term (if
any) are hereinafter referred to collectively as the "Term."
2. Duties and Responsibilities.
2.1 Officer and Director. During the Term, the Executive shall
serve as Vice Chairman of the Board of the Company and as Chairman of the Board
and Chief Executive Officer of Spelling Television Inc. ("STI") and shall serve
in his discretion as Chairman of the Board and Chief Executive Officer of any of
the other subsidiaries of the Company which engage in substantial television
production, whether currently existing or hereafter formed or acquired
(collectively referred to herein as the "Production Subsidiaries"), and shall
serve as a member of the Board of Directors of the Company. Notwithstanding the
foregoing, the term "Production Subsidiaries" shall not include Worldvision
Enterprises, Inc. and its subsidiaries. The Company shall use its best efforts
to cause the Executive to be a member of the Board of Directors of the Company
throughout the Term and shall include him in the management slate for election
as a director of the Company at every stockholders' meeting at which his term as
a director would otherwise expire. During the Term, STI and the Production
Subsidiaries designated by Executive shall employ or engage no one other than
the Executive with the Executive's title or function under this Agreement
without the Executive's prior written approval. During the Term, all officers
and employees (who shall include all persons traditionally employed by such
entities prior to the date hereof and the persons performing all of the
principal functions of a stand-alone production company, including but not
limited to development, production (including wardrobe, transportation, etc.),
merchandising, business affairs, legal affairs and the like) of STI and the
designated Production Subsidiaries shall report to the Executive (directly or
through such channels as the Executive shall designate in consultation with
Sumner Redstone and the appropriate board of directors) and not to any other
individual or entity. During the Term, the Company agrees it will not, without
the prior written consent of the Executive, cease to have the production of
television programming as one of its principal lines of business.
2.2 Executive Producer or Producer. In addition, the Executive
shall be entitled to serve as executive producer on all television programs, and
as executive producer or producer (as the Executive may elect) on all theatrical
films, produced by the Company or the Production Subsidiaries (whether produced
alone or in conjunction with others) (the "Product")
<PAGE> 2
and (b) to approve for production, to approve the general budget ranges for, and
to decide which entity among the Company and its majority-owned or controlled
subsidiaries will be primarily responsible for the production of, all
substantial television or theatrical film projects produced by the Company or
any Production Subsidiary.
2.3 Extent of Services. The Executive shall devote substantially
all of his business time, ability and energy to the performance of his duties
hereunder. The Executive shall not be required to accept without his approval
any duties with the Company inconsistent with his positions hereunder. No action
will be taken by the Company which, in form or substance, shall detract from the
authority, jurisdiction or responsibility of the Executive or render it
difficult or impossible for the Executive to carry on his duties, except that
nothing in this sentence shall negate or otherwise diminish the authority of the
Board of Directors of the Company to authorize or withhold corporate action with
respect to matters which, under Delaware law, the Company's Certificate of
Incorporation or the Bylaws, are within the exclusive province of the Board of
Directors. The Executive shall not be required to perform any duties under this
Agreement in a location other than in Los Angeles, nor shall he be required to
travel outside the Los Angeles area in the performance of his duties hereunder.
3. Compensation.
3.1 Base Salary. As compensation for the performance by the
Executive of his obligations hereunder, the Company shall pay the Executive a
base salary ("Base Salary") as follows:
(a) One Million Four Hundred Thousand Dollars ($1,400,000)
during the first year of the Employment Term.
(b) One Million Five Hundred Fifty Thousand Dollars
($1,550,000) during the second year of the Employment
Term.
(c) One Million Seven Hundred Thousand Dollars ($1,700,000)
during the Option Term (if any).
(d) All compensation under this section shall be payable in
accordance with Company's normal practices.
3.2 Executive Producer Fees and Other Compensation for Televison
Programming. Executive shall be entitled to receive executive producer fees and
other compensation for television programming as follows:
(a) Beverly Hills, 90210: $50,000 for each episode produced
during the seventh year of production (1996-97
television season) and $55,000 for each episode produced
during the eighth year of production (1997-98 television
season)
2
<PAGE> 3
(b) Melrose Place: $45,000 for each episode produced during
the fifth year of production (1996-97 television season)
and $50,000 for each episode produced during the sixth
year of production (1997-98 television season).
(c) Savannah: $35,000 for each episode produced during the
second year of production (1996-97 television season).
Executive's producer fee shall be increased by $7,500
per episode for each subsequent year "Savannah" is in
production.
(d) New Series: Except as provided for in Section 3.2(a),
3.2(b) and 3.2(c), the Executive shall be entitled to
receive an executive producer fee of $35,000 per episode
produced for any new television program series ("New
Series") during the first year of any New Series.
Executive's producer fee shall be increased by $7,500
per episode for each subsequent year the New Series is
in production.
(e) Mini-Series and Movies-of-the-Week ("MOW"): $50,000 for
each hour of any television mini-series or MOW produced.
(f) NBC Soap Opera: $12,500 for each week of episodes
produced during the first year of production (1996-1997
television season). Executive Producer Fees shall be
increased by an amount to be determined in accordance
with discussions with Executive for each week for each
subsequent year of production.
(g) Series Sales Bonus: Commencing in the seventh year of
production of "Beverly Hills, 90210" (1996-97 television
season) and the fifth year of production of "Melrose
Place" (1996-97 television season), the Company shall
pay Executive an annual sales bonus of $250,000 for each
series and for every year after the 1996-97 television
season each series is in production.
Commencing in the first year of production of the NBC
Soap Opera, the Company shall pay Executive an annual
sales bonus of an amount to be determined in accordance
with discussions with Executive for each year the NBC
Soap Opera is in production.
(h) Other Programming: Executive Producer Fees and other
compensation for additional programming not specifically
provided for in paragraphs 3.2(a)-(g) above shall be
negotiated in good faith and be commensurate with
industry standards for producers of Executive's stature.
3
<PAGE> 4
3.2.1 Executive shall also be entitled to receive certain
executive producer fees and certain participations and deferments as agreed to
by Executive and the Company with respect to theatrical films produced by the
Company during the Term, including but not limited to, "No Ordinary Joe," "Mod
Squad" and "Love Boat."
3.3 Incentive Compensation. In addition to his Base Salary and
Executive Producer Fees, the Executive shall also be entitled to participate on
a basis consistent with his position and the Company's past practice in all
bonus and profit sharing plans of the Company in effect from time to time which
are applicable to executives of the Company.
3.4 Expenses. Except to the extent that persons directly employed
by Executive perform business functions for Executive, during the Term, the
Company shall pay or reimburse the Executive promptly for all reasonable
business expenses incurred by the Executive in the performance of his duties
hereunder.
3.5 Benefits. The Executive shall be entitled to participate in
any group life, health, accident, disability or other insurance programs, 401(k)
programs, and any other fringe benefits in effect from time to time which are
applicable to executives of the Company.
3.6 Stock Options. Executive shall be granted 75,000 stock
options to purchase common stock of the Company at a purchase price equal to the
closing price on April 3, 1996, in accordance with the terms of the Company's
Stock Option Plan. However, except as provided below, if the Company enters into
a "going private" transaction or if there is a Change in Control as defined in
Section 4.2.1 during the Term, such options remaining, to the extent not already
vested or exercised, shall immediately become exercisable upon consummation of
such "going private" transaction or Change in Control. Vesting of stock options
shall continue during the Term if Executive's employment is terminated without
cause. Otherwise, vesting of stock options shall cease upon termination of
Executive's employment, and Executive's right to exercise stock options shall
cease after termination of Executive's employment in accordance with the terms
of the Company's Stock Option Plan.
3.7 Vacations. Subject to the requirements of the Executive's
office, the Executive shall be entitled to take vacations aggregating six (6)
weeks in length during each year of the Term.
3.8 Car Alllowance. During the Employment Term, Executive shall
receive a car allowance in the amount of $1,200 per month.
4. Termination.
4
<PAGE> 5
4.1 Termination by Employer.
4.1.1 Grounds. The Company shall have the right, at its
election by giving written notice to the Executive, to terminate the Executive's
employment under this Agreement during the Term for any of the following
reasons:
4.1.1.1 The Executive's (i) death, or (ii) disability
(by reason of accident, illness, mental or physical cause) which in fact
incapacitates the Executive from performing substantially the services
contemplated herein for a period of four (4) consecutive months, or (iii)
disability, the nature of which is that the Executive will be incapacitated from
performing such services for a period of four (4) consecutive months;
4.1.1.2 The Executive's willful and material failure
or refusal to perform the Executive's services as provided herein or the failure
by the Executive to cure or cease any other material breach of this Agreement by
the Executive within thirty (30) days after receiving a notice from the Company
reasonably specifying the nature of that breach;
4.1.1.3 The Executive's willful misappropriation of
any funds or property of the Company;
4.1.1.4 Conviction of the Executive of a felony; or
4.1.1.5 Any justifiable legal cause as determined by
appropriate arbitration.
4.1.2 Payment Upon Termination by the Company. In the event
of the Executive's termination pursuant to Section 4.1.1 above, the Company
shall be obligated to pay (i) any Base Salary due and owing to the Executive for
the period through the effective date of such termination, (ii) any Executive
Producer Fees due through the effective date of such termination, (iii) benefits
vested under any applicable pension or other employee benefit plans, and (iv)
all vested, accrued and unused vacation time existing as of the effective date
of such termination as reflected in the Company's personnel records. Payment for
such vacation time shall be at a rate equal to the Executive's Base Salary.
Executive shall also be entitled by exercise any outstanding vested and
unexercised stock options in accordance with the terms of the Company's Stock
Option Plan.
4.2 Termination by Executive.
4.2.1 Grounds. The Executive shall have the right to
terminate his employment under this Agreement effective upon seven (7) days
written notice if, at any time during the Term, the Company shall be in material
breach of its material obligations under this Agreement (including, but not
limited to, the Executive not being elected or retained or otherwise not
actually having the authority contemplated in this Agreement as the Vice
Chairman of the Board of Directors of the Company and as the Chairman of the
Board and Chief Executive
5
<PAGE> 6
Officer of STI or the designated Production Subsidiaries or being obligated to
report to any person other than Sumner M. Redstone) or there occurs a "Change in
Control." For purposes of this Agreement, the term "Change in Control" means:
(a) the control by any person or "group," within the meaning of Section 13(d) or
14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), of beneficial ownership (within the meaning of the Rule 13d-3 promulgated
under the Exchange Act), directly or indirectly, of voting securities of the
Company representing 50% or more of the combined voting power of the Company's
then outstanding voting securitites entitled to vote generally in the election
of directors; provided, however, that this clause shall not apply to any shares
held by Viacom Inc. or its affiliates; or (b) such time as a majority of the
Board of Directors of the Company (the "Board") shall be comprised of persons
who were not elected to such offices as part of the "Company nominated slate" of
directors (i.e. the slate of nominees proposed by the Board in office
immediately prior to the election; provided, however, that this clause shall not
apply in the event one or more directors voluntarily resigns from the Board and
such resignation or resignations would otherwise come within the provisions of
this Section 4.2.1(b).
4.2.2 Consequences of Termination by Executive. In the
event of termination by the Executive pursuant to Section 4.2.1 above:
4.2.2.1 The Executive shall have no further
obligations or liabilities to the Company whatsoever except for his obligations
under Section 6.2 and, if applicable, Section 4.2.5;
4.2.2.2 Except where the termination by Executive is
premised solely on a Change in Control, the Company shall pay the Executive
within thirty (30) days of the date of such termination, a cash payment equal to
the present value (based on an annual discount rate equal to the "applicable
Federal rate" within the meaning of Section 1274(d) of the Internal Revenue Code
of 1986, as amended (the "Code"), in effect at the time of such termination) of
(i) the Executive's Base Salary hereunder for the remainder of the Term which
would have been payable had such termination not occurred, plus (ii) at the
Executive's election, the amount of Executive Producer Fees which would have
been payable to the Executive had the aggregate Executive Producer Fees paid to
the Executive by the Company and the Production Subsidiaries in the last full
fiscal year prior to the effective date of such termination been paid each year
(or portion thereof) for the remainder of the Term had such termination not
occurred. In the event the Executive does not elect to have his Executive
Producer Fees accelerated under clause (ii), the Company and the Production
Subsidiaries, as applicable, shall continue to pay the Executive the Executive
Producer Fees which would have been payable during the remaining Term had such
termination not occurred, assuming that the Executive were to provide services
on all projects on which he would have been eligible.
4.2.2.3 Any termination pursuant to Section 4.2 shall
not affect any vested rights which the Executive may have had at the effective
date of such termination pursuant to any insurance or other death benefit plans
or arrangements of the Company or any Production Subsidiary or under any bonus,
management incentive or other plan of the Company
6
<PAGE> 7
or any Production Subsidiary maintained for its executives, all of which rights
shall remain in full force and effect.
4.2.3 Mitigation. In the event of a breach of this
Agreement by the Company, the Executive shall not be required to mitigate his
damages hereunder.
4.2.4 Certain Additional Payments by the Company. Anything
in this Agreement to the contrary notwithstanding, in the event it shall be
determined that any payment or distribution by the Company or any Production
Subsidiary to or for the benefit of the Executive, whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise (a "Payment"), would be subject to the excise tax imposed by Section
4999 of the Code or any interest or penalties with respect to such excise tax
(such excise tax, together with any such interest and penalties, are hereinafter
collectively referred to as the "Excise Tax"), then the Executive shall be
entitled to receive an additional payment (a "Gross-Up Payment") in an amount
such that after payment by the Executive of all taxes (including any interest or
penalties imposed with respect to such taxes), including any Excise Tax, imposed
upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up
Payment equal to the Excise Tax imposed upon the Payments.
4.2.5 Services Following Term. In the event this Agreement
is terminated for any reason, Executive will continue to provide executive
producer services on "Beverly Hills, 90210" and "Melrose Place" and the Company
will continue to engage Executive to provide such services and pay him the
Executive Producer Fees as specified in Section 3.2.
5. Services After the Term. At any time following the Term, the
Executive shall be entitled to serve and receive appropriate fees as executive
producer on any Production Subsidiary product which is a television program if a
script has been submitted to a network prior to the end of the Term for either
(i) that program or (ii) if the program is part of a series (including a
spin-off of or a sequel to a series), for the pilot or original episode of the
original series.
6. Covenants.
6.1 Solicitation. The Executive will not, directly or indirectly,
(a) (i) during the Term solicit, entice, persuade or induce (collectively,
"Solicit") any employee of the Company or any Production Subsidiary or any
performing artist or other person then under contract with or rendering services
to or making theatrical films, television programs or phonograph or other
recordings for the Company or any Production Subsidiary, to terminate his or her
employment by, or contractual relationship with, the Company or any Production
Subsidiary or to refrain from extending or renewing the same (upon the same or
new terms) or to refrain from rendering services to or making theatrical films,
television programs or phonograph or other recordings for Company or any
Production Subsidiary or (ii) during the actual Term Solicit any such person to
become employed by or to enter into contractual relations with or to make
theatrical films, television programs or phonograph or other recordings for
persons or entities other than Company or any Production Subsidiary: (b)
approach any such employee, performing artist, director, producer or other
person or entity for any of the foregoing purposes
7
<PAGE> 8
during the applicable period; or (c) authorize or knowingly approve or assist in
the taking of any such actions by any other person or entity during the
applicable period.
6.2 Confidentiality. During the term of his employment and
thereafter, the Executive shall keep in confidence and shall not use for his
benefit or that of others, or divulge to others except as is appropriate in the
course of his duties hereunder, any secret or confidential information,
knowledge, data or plans of the Company or any Production Subsidiary gained in
his capacity as an employee, officer or director of the Company or any
Production Subsidiary, unless authorized by the Company. The preceding sentence
shall not apply to any such information, knowledge, data or plan which (a) is
now or becomes generally available to the public other than as a result of a
breach of this Section 6.2, (b) was in the Executive's possession on a
non-confidential basis prior to its being obtained by the Executive in his
capacity as an employee, officer or director of the Company or any Production
Subsidiary, or (c) is now or becomes available to the Executive on a
non-confidential basis from a source other than the Company or any Production
Subsidiary provided the Executive does not know (or have reason to know) of any
breach by such source of any confidentiality obligations it may have with
respect thereto. All records, files, drawings, documents, models, equipment, and
the like relating to the Company's or such Production Subsidiary's business,
which the Executive shall prepare, or use, or come into contact with shall be
returned to the Company or any such Production Subsidiary immediately upon the
termination of the Executive's employment hereunder.
6.3 Exclusive Employment. During the Term, the Executive shall
not, without the consent of the Company:
6.3.1 Perform services for any business other than the
Company or the Production Subsidiaries without the prior written consent of the
Company;
6.3.2 Engage in any activity which would materially
interfere with the performance of his services hereunder; or
6.3.3 Become financially interested in or associated with,
directly or indirectly, any person or entity other than the Company, STI and the
Production Subsidiaries in connection with the production, distribution or
exhibition of motion pictures, television programs and visual recordings of any
kind, and/or in the broadcasting business; provided, however, that
notwithstanding the foregoing, the Executive may (a) serve as a manager,
officer, director, employee or consultant to any general or limited partnership,
joint venture, corporation or other entity which is not a competitor of the
Company, STI or the Production Subsidiaries in any of their major lines of
business (a "non-competing entity") or (b) hold a legal or beneficial interest
in any noncompeting entity, provided, however, that Executive's legal or
beneficial interest in any entity which competes with the Company, STI or the
Production Subsidiaries in any of their major lines of business shall not exceed
five percent (5%) of the equity of such entity. The prohibitions of this 6.3.3
shall not apply to the Executive's ownership of presently owned programming
already produced.
8
<PAGE> 9
7. Ownership of Proceeds of Employment. The Executive acknowledges that
the relationship between the parties hereto is exclusively that of employer and
employee, and that the Company's obligations to the Executive are exclusively
contractual in nature. The Company shall be the sole owner of all the fruits and
proceeds of the Executive's services hereunder including, but not limited to,
all ideas, concepts, formats, suggestions, developments, arrangements, designs,
packages, programs, promotions and other intellectual properties which the
Executive may create concerning the business of the Company and during the Term,
free and clear of any claims by the Executive (or anyone claiming under him) of
any kind or character whatsoever (other than the Executive's right to
compensation hereunder). The Executive shall, at the request of the Company,
execute such assignments, certificates or other instruments as the Company may
from time to time deem necessary or desirable to evidence, establish, maintain,
perfect, protect, enforce or defend its right, or title and interest in or to
any such properties.
8. Arbitration as the Exclusive Remedy. Any controversy or claim
arising out of or relating to this Employment Agreement including, but
not-limited to, any claim relating to its validity, interpretation,
enforceability or breach, and/or any other claim or controversy arising out of
the employment relationship or the commencement or termination of that
relationship, including, but not limited to, claims for breach of covenant,
breach of an implied covenant or intentional infliction of emotional distress,
which are not settled by agreement between the parties, shall be settled by
arbitration in Los Angeles, California before a board of three arbitrators, one
to be selected by the Company, one by the Executive and the other by the two
persons so selected, all in accordance with the labor arbitration rules of the
American Arbitration Association then in effect. In the event that the
arbitrator selected by the Company and the arbitrator selected by the Executive
are unable to agree upon a third arbitrator, then the third arbitrator shall be
selected from the list provided by the American Arbitration Association, such
list to contain an odd number of names of potential arbitrators, with the
parties' striking names in order and the party striking first to be determined
by the flip of a coin. In consideration of each party's agreement to submit to
arbitration all disputes with regard to this Agreement and/or with regard to any
alleged contract or tort or other claim arising out of the employment
relationship or the commencement or termination of that employment relationship,
and in consideration of the anticipated expedition and the minimizing of expense
of this arbitration remedy, each agrees that the arbitration provisions of this
Agreement shall provide it with its exclusive remedy and each party expressly
waives any right it might have to seek redress in any other forum except as
provided herein. The parties further agree that the arbitrators acting hereunder
shall be empowered to assess any remedy including, but not limited to,
injunctive orders (including temporary, preliminary and permanent relief) when
appropriate. It is specifically contemplated and agreed by the parties hereto
that discovery may be conducted by any party pursuant to the provisions of
Section 1283.05 of the California Code of Civil Procedure which are hereby
incorporated into, and made a part of, and made applicable to this Agreement,
and the arbitrators shall have the full power of a Court of the State of
California to issue and enforce subpoenas. The expenses of the neutral
arbitrator and of a transcript during any arbitration proceeding shall be
divided equally between the Company and the Executive .
9
<PAGE> 10
Any decision and award or order of the majority of the arbitrators
shall be binding upon the parties hereto and judgment thereon may be entered in
the Superior Court of the State of California or any other court having
jurisdiction.
9. Miscellaneous.
9.1 Notice. Notices authorized or required to be sent pursuant
to this Agreement shall be in writing and shall be considered given when mailed,
by certified or registered mail, return receipt requested, to the parties at the
following addresses:
If to the Executive, to him at:
Aaron Spelling
------------------
------------------
If to the Company at:
Spelling Entertainment Group Inc.
5700 Wilshire Boulevard
Los Angeles, California 90036
Attention: General Counsel
Copies of all notices should be sent to:
Irell & Manella
1800 Avenue of the Stars, Suite 900
Los Angeles, California 90067
Attention: Arthur Manella, Esq.
9.2 Payment of Taxes. Except as provided in Section 4.6 above, to
the extent that any taxes become payable by the Executive by virtue of any
payments made or benefits conferred by the Company, the Company shall not be
liable to pay or obligated to reimburse the Executive for any such taxes or to
make any adjustment under this Agreement.
9.3 Right of Offset. Any amounts payable by the Executive to the
Company may be used by the Company, at its sole option, as an offset against any
of the Company's payment obligations under this Agreement.
9.4 Use of Executive's Name. Except with respect to (i) the use
of the name "Spelling Entertainment Group Inc." and "Spelling Entertainment
Inc." as the corporate names of the Company and their wholly-owned subsidiaries,
and (ii) uses required by law, the Company and the Production Subsidiaries shall
not have the right to use, without the Executive's written consent, all or any
portion of the Executive's name, biography and likeness in connection with its
business, including in advertising its television programs and theatrical films.
Without the
10
<PAGE> 11
Executive's further written consent, the Company may not grant to others any
such right which it obtains from the Executive. Upon request of the Executive
after the Term, the Company and the Production Subsidiaries will discontinue use
of the Executive's name, biography and likeness other than in connection with
Product produced prior to the end of the Term, including any reference to "Aaron
Spelling" or "Spelling" in any production credit, and the Production
Subsidiaries (including Aaron Spelling Productions, Inc.) will as early as
practicable, amend their respective corporate charters to change their
respective corporate names so as to no longer use all or any portion of the
Executive's name, although the Company may use "Spelling Entertainment Group
Inc." and "Spelling Entertainment Inc." as its corporate name but not as a
production credit on programming, although the mere identification of a
production company as a Spelling Entertainment subsidiary shall not be a
"production credit."
9.5 Life Insurance. The Company shall have the right to take out
life insurance or other insurance on the life of the Executive at its sole cost
and expense and for its sole benefit, and the Executive acknowledges that he
shall have no right in or to such insurance or the proceeds thereof. The
Executive agrees to cooperate with the Company in obtaining such insurance and
to submit, at his reasonable convenience, to the usual medical and other
examinations required in connection therewith.
9.6 Construction and Assignment. This Agreement and the
performance hereof shall be governed, interpreted, construed and regulated by
the laws of the State of California without giving effect to the conflicts of
law provisions thereof. This Agreement shall not be assignable by the Executive.
The terms and conditions of this Agreement shall inure to the benefit of and be
binding upon any successor to the business of the Company.
9.7 Waivers.
9.7.1 General. The waiver by either party of a breach of
any provision of this Agreement shall not operate or be construed as a waiver of
any subsequent breach of this Agreement.
9.7.2 Credits. In the event Executive waives his right to
receive credit for any television program or theatrical film made by the Company
or the Production Subsidiaries including, without limitation, Executive's right
to receive credit as executive producer thereof, such waiver shall in no way
perjudice Executive's other rights under this Agreement.
9.8 Severability. If any term, covenant, condition or provision
of this Agreement, or the application thereof to any person or circumstance,
shall at any time or to any extent be invalid or unenforceable, the remainder of
this Agreement, or the application of such term or provision to persons or
circumstances other than those as to which it is held invalid or unenforceable
shall not be affected thereby and each term, covenant, condition and provision
of this Agreement shall be valid and enforced to the fullest extent permitted by
law.
11
<PAGE> 12
9.9 Entire Agreement. This Agreement constitutes the entire
agreement and understanding of the parties with respect to the transactions
contemplated herein, and supersedes all prior agreements, arrangements and
understandings related to the subject matter thereof. No representation,
promise, inducement or statement of intention has been made by any of the
parties not embodied in this Agreement or in the documents referred to herein,
and no party shall be bound by or liable for any alleged representation,
promise, inducement or statements of intention not set forth or referred to
herein.
9.10 Attorneys' Fees. In the event of any suit, arbitration or
other proceeding between the parties hereto with respect to any of the
transactions contemplated hereby or the subject matter hereof, the prevailing
party shall, in addition to such other relief as the court or arbitrator(s) may
award, be entitled to recover reasonable attorneys' fees and expenses, all as
actually incurred.
9.11 Headings. The headings of the sections and paragraphs of this
Agreement are inserted for convenience only and shall not be deemed to
constitute a part of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this agreement as
of the day and year first above written.
SPELLING ENTERTAINMENT GROUP INC.
(COMPANY)
By: /s/ Sumner Redstone
--------------------------------
Its: Chairman
-------------------------------
AARON SPELLING
(EXECUTIVE)
By: /s/ Aaron Spelling
--------------------------------
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's unaudited condensed consolidated balance sheet as of March 31, 1996
and the unaudited condensed statement of operations for the three months then
ended and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 17,833
<SECURITIES> 0
<RECEIVABLES> 249,952
<ALLOWANCES> (34,137)
<INVENTORY> 442,951
<CURRENT-ASSETS> 450,439
<PP&E> 43,352
<DEPRECIATION> (16,522)
<TOTAL-ASSETS> 1,114,128
<CURRENT-LIABILITIES> 538,199
<BONDS> 0
0
0
<COMMON> 90
<OTHER-SE> 560,016
<TOTAL-LIABILITY-AND-EQUITY> 1,114,128
<SALES> 164,918
<TOTAL-REVENUES> 164,918
<CGS> 143,265
<TOTAL-COSTS> 143,265
<OTHER-EXPENSES> 29,225
<LOSS-PROVISION> 9,287
<INTEREST-EXPENSE> 3,608
<INCOME-PRETAX> (10,734)
<INCOME-TAX> 6,458
<INCOME-CONTINUING> (4,276)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,745)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
