<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 SEPTEMBER 30, 1997 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 November 10, 1997, the registrant had outstanding 90,875,144 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 -
September 30, 1997 and December 31, 1996 (Unaudited) 3
Condensed Consolidated Statements of
Operations - Three Months and Nine Months Ended
September 30, 1997 and 1996 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1997 and 1996 (Unaudited) 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 15
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 23
</TABLE>
2
<PAGE> 3
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,262 $ 3,325
Accounts receivable, net 96,667 104,645
Entertainment product, net 262,224 233,002
Other current assets 4,078 4,204
--------- ---------
Total current assets 364,231 345,176
Accounts receivable, net 91,996 91,880
Entertainment product, net 130,924 182,786
Property and equipment, net 12,094 13,389
Net assets of VIE 15,223 14,289
Intangible assets, net 188,692 192,806
Other noncurrent assets 20 20
--------- ---------
Total assets $ 803,180 $ 840,346
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable, accrued expenses and other liabilities $ 25,687 $ 36,103
Accrued participation expense 71,864 54,534
Deferred revenue 22,624 21,388
Income and other taxes 3,138 791
--------- ---------
Total current liabilities 123,313 112,816
Accrued participation expense 47,994 45,797
Long-term debt payable to Viacom 288,000 315,000
Deferred income and other taxes 29,130 36,156
Net liabilities related to discontinued operations of Charter 10,907 10,834
--------- ---------
499,344 520,603
--------- ---------
Commitments and contingent liabilities
SHAREHOLDERS' EQUITY
Preferred stock -- --
Common stock, $.001 par value,
- 300,000,000 shares authorized
- 90,770,161 and 90,625,321 shares issued and outstanding 91 91
Capital in excess of par value 577,070 576,260
Accumulated deficit (273,730) (258,671)
Cumulative translation adjustment 405 2,063
--------- ---------
Total shareholders' equity 303,836 319,743
--------- ---------
Total liabilities and shareholders' equity $ 803,180 $ 840,346
========= =========
</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 Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue $ 108,480 $ 111,581 $ 423,408 $ 339,566
Costs and expenses:
Entertainment product costs 102,331 97,610 382,050 295,118
Selling, general and administrative 14,238 15,999 43,920 44,980
--------- --------- --------- ---------
Operating loss (8,089) (2,028) (2,562) (532)
Interest income 229 403 748 1,154
Interest expense, net (5,660) (3,470) (15,207) (9,137)
Other income (expense), net (745) 31 4,921 28
--------- --------- --------- ---------
Loss from continuing operations
before income taxes (14,265) (5,064) (12,100) (8,487)
Provision (benefit) for income taxes 3,822 (4,334) 2,222 (5,648)
--------- --------- --------- ---------
Loss from continuing operations (18,087) (730) (14,322) (2,839)
Loss from discontinued operations of VIE, net -- (3,831) -- (27,454)
--------- --------- --------- ---------
Net loss $ (18,087) $ (4,561) $ (14,322) $ (30,293)
========= ========= ========= =========
Average number of common and common
equivalent shares 90,746 90,422 90,730 90,311
========= ========= ========= =========
Loss per common and common equivalent share:
Continuing operations $ (0.20) $ (0.01) $ (0.16) $ (0.03)
Discontinued operations -- (0.04) -- (0.31)
--------- --------- --------- ---------
Net loss per common and common
equivalent share $ (0.20) $ (0.05) $ (0.16) $ (0.34)
========= ========= ========= =========
</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>
Nine Months Ended September 30,
-------------------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (14,322) $ (30,293)
Adjustments to reconcile net loss to cash flows
from continuing operations:
Net loss from discontinued operations -- 27,454
Depreciation and amortization 6,827 6,358
Amortization of entertainment product costs 317,984 267,777
Additions to entertainment product costs (292,207) (291,839)
Gain from marketable securities (5,648) --
(Increase) decrease in accounts receivable 6,962 (18,589)
Decrease in accounts payable, accrued expenses,
other liabilities and income taxes (12,454) (12,036)
Increase (decrease) in accrued participation expense 17,290 (3,738)
Increase (decrease) in deferred revenue 1,235 (2,725)
Other, net (1,993) (883)
--------- ---------
Net cash provided (used) by continuing operations 23,674 (58,514)
Net cash used by discontinued operations (8,470) (40,668)
--------- ---------
15,204 (99,182)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (1,471) (4,305)
Repayments by (advances to) discontinued operations of VIE 2,471 (22,335)
Changes in net liabilities related to
discontinued operations of Charter 73 (793)
--------- ---------
Net cash provided (used) by continuing operations 1,073 (27,433)
Net cash used by discontinued operations (2,027) (5,637)
--------- ---------
(954) (33,070)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facilities 45,000 95,000
Repayments of credit facilities (72,000) --
Issuances of common stock 190 1,575
--------- ---------
Net cash provided (used) by continuing operations (26,810) 96,575
Net cash provided by discontinued operations 4,023 41,675
--------- ---------
(22,787) 138,250
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (8,537) 5,998
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 16,175 20,678
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,638 $ 26,676
========= =========
CASH AND CASH EQUIVALENTS AT END OF PERIOD:
Continuing operations $ 1,262 $ 17,273
Discontinued operations 6,376 9,403
--------- ---------
$ 7,638 $ 26,676
========= =========
</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 ("SEC"). The Company believes that the disclosures contained herein
are adequate to make the information presented not misleading; however, these
unaudited condensed consolidated financial statements should be read in
conjunction with the more detailed financial statements and notes thereto
included in the Company's most recent Annual Report on Form 10-K.
The financial statements reflect, in the opinion of management, all normal
recurring adjustments necessary to present fairly the Company's financial
position and results of operations. In order to maintain consistency and
comparability between periods presented, certain amounts have been reclassified
from the previously reported financial statements in order to conform with the
financial statement presentation in the current period. The Condensed
Consolidated Statements of Operations and of Cash Flows for the third quarter
and the nine-month period ended September 30, 1996 have been restated to conform
with the current year discontinued operations presentation.
Viacom Inc. ("Viacom") currently owns approximately 80% of the Company's common
stock. On April 18, 1997, Viacom announced its intention to acquire additional
shares of the Company's outstanding common stock and increase Viacom's ownership
to approximately 80%. During the period through November 11, 1997, Viacom
acquired additional shares of the Company's outstanding common stock sufficient
to meet this objective. The purchase of such additional shares permits Viacom to
consolidate the Company's results for tax purposes. Viacom has no plans to
increase its ownership beyond approximately 80%. (See Note 5 regarding the
Company's agreement with Viacom regarding tax reporting and administrative
matters).
On July 30, 1994, the Company acquired approximately 91% of the ordinary shares
("Ordinary Shares") of Virgin Interactive Entertainment Limited ("VIEL") and
also entered into put- and call-option agreements with respect to the Ordinary
Shares of VIEL not owned by the Company and currently owned by Viacom. Viacom
and the Company have executed amendments to extend the put- and call-option
agreements, which were originally scheduled to expire in July 1995, through
December 31, 1997. (See Note 9 regarding the planned disposition of VIEL
(together with its subsidiaries, "VIE")).
2. ENTERTAINMENT PRODUCT, NET
Entertainment product, net, includes production or acquisition costs (including
advance payments to producers), capitalized overhead and interest, home video
manufacturing costs, and prints, advertising and other related distribution
costs expected to benefit future periods. These costs are amortized, and
third-party participations and residuals are accrued, generally on an individual
product basis in the ratio that current-year gross revenue bears to estimated
future gross revenue. Domestic syndication and basic cable revenue estimates are
not included in estimated future gross revenue of television programming until
such sales are probable.
6
<PAGE> 7
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(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.
Entertainment product, net, is comprised of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------- --------
<S> <C> <C>
Entertainment product:
Theatrical
Released $161,728 $137,266
Completed, not released 14,371 4,833
In process and other 12,254 73,745
-------- --------
188,353 215,844
Television
Released 169,824 184,954
Completed, not released 916 --
In process and other 34,055 14,990
-------- --------
204,795 199,944
$393,148 $415,788
======== ========
</TABLE>
3. DEBT
In January 1994, the Company entered into a three-year credit agreement (the
"Viacom Facility") with a predecessor-in-interest to Viacom. This agreement was
amended and restated in January 1995 and again in November 1995, to provide,
among other things, increases in the amount available under such facility. The
Viacom Facility, as amended, provided 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
under the Viacom Facility were due to mature on March 31, 1997.
On September 30, 1996, the Company and Viacom executed a credit agreement (the
"Viacom Credit Agreement") which replaced the Viacom Facility. The Viacom Credit
Agreement provides for (i) a term loan of $200,000,000 and (ii) a revolving
credit facility of $155,000,000 to fund the Company's working capital and other
requirements. All outstanding borrowings under the Viacom Credit Agreement
mature on December 31, 1998.
7
<PAGE> 8
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
Under the Viacom Credit Agreement, the Company pays an annual fee (currently
0.375%) based on the unused portion of the facility, as well as certain facility
and administration fees. Effective as of October 1, 1996, interest on all
outstanding borrowings is payable, at the Company's option, at LIBOR plus a
spread based on the Company's leverage ratio, as defined (currently 2.5%) or at
Citibank N.A.'s base rate. The average interest rate at September 30, 1997, on
borrowings under the Viacom Credit Agreement, was 8.2%. Additional terms of the
Viacom Credit Agreement require, among other things, a minimum amount, as
defined, of net worth. Borrowings under the Viacom Credit Agreement are secured
by all of the assets of the Company and its domestic subsidiaries and the entire
amount outstanding under the Viacom Credit Agreement may be accelerated if
Viacom's borrowings under its separate credit facilities were to be accelerated.
At September 30, 1997, the carrying value of all of the Company's debt
approximated fair value.
See Note 9 regarding debt related to discontinued operations.
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, 1996 $91 $576,260 $(258,671) $ 2,063 $ 319,743
Exercise of options and warrants -- 796 -- -- 796
Income tax benefit related to stock options -- 14 -- -- 14
Realized gain included in net income -- -- (3,484) -- (3,484)
Unrealized holding gain, net -- -- 2,747 -- 2,747
Net loss for the period -- -- (14,322) -- (14,322)
Cumulative translation adjustment -- -- -- (1,658) (1,658)
--- -------- --------- ------- ---------
Balance at September 30, 1997 $91 $577,070 $(273,730) $ 405 $ 303,836
=== ======== ========= ======= =========
</TABLE>
8
<PAGE> 9
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
In May 1997, the Company realized a non-cash gain with respect to a common stock
investment upon the merger of the investee with an unrelated acquiring company.
The Company received common shares of the acquiring company in exchange for the
common shares of the investee, and recorded the fair market value of the shares
received as the cost basis for such shares.
The Company has accounted for both common stock investments (prior and
subsequent to the merger) as "available for sale" securities under the
applicable provisions of Statement of Financial Accounting Standards ("SFAS")
No. 115, adjusting the carrying value to fair market value, with a corresponding
adjustment, net of tax, to shareholders' equity.
5. INCOME TAXES
Income taxes have been provided in each period based on the Company's
anticipated annual effective income tax rate.
The Directors of the Company have approved an agreement between the Company and
Viacom that provides for the administration of federal, state and foreign tax
matters (the "Tax Agreement"). Under the Tax Agreement, the Company will
remain in the same tax position as it would have if it were continuing to file
its tax returns separate and apart from Viacom.
As previously announced, Viacom intended to acquire additional common shares of
the Company necessary to achieve consolidation for federal income tax purposes.
Viacom has acquired shares in excess of 80% of the outstanding shares of the
Company and, therefore, the Company is required to be included in the
consolidated federal income tax return of Viacom. Given the Tax Agreement
discussed above, the Company does not anticipate any material impact to its
financial condition or results of operations.
9
<PAGE> 10
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
6. NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE
Net loss per common and common equivalent share amounts are based on the
weighted average number of common and common equivalent shares outstanding
during the respective periods. Primary and fully diluted net loss per common and
common equivalent share are not presented as they result in a dilution of less
than 3% from basic net loss per common and common equivalent share or are
anti-dilutive. During February 1997, the Financial Accounting Standards Board
issued SFAS No. 128, "Earnings Per Share," which is effective for financial
statements for both interim and annual periods ending after December 15, 1997.
The Company does not expect this statement to have a material impact on its net
income (loss) per share.
7. LEGAL MATTERS
The Company is involved in certain legal proceedings which arise in the normal
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.
Ten parties unaffiliated with the Company (the "Group") entered into agreements
with the United States in 1996 tolling the statute of limitations with respect
to potential reimbursement claims by the Government in connection with its clean
up of the Sikes Superfund Site in Crosby, Texas, at an alleged cost exceeding
$140,000,000. The United States and the Group presently are conducting
depositions of individuals with alleged knowledge of disposals at Sikes as part
of a mediation process seeking to resolve the Government's claims. Although the
EPA previously had advised a subsidiary of the Company, Charter International
Oil Company ("CIOC"), that it was a potentially responsible party based upon
information from certain of these individuals, any action by the Government
against CIOC appears now to be precluded by the statute of limitations. The
Group, which could bring contribution claims against CIOC for its equitable
share of any judgment or settlement amounts they may pay to the United States,
has invited voluntary participation by CIOC and 34 other similarly situated
parties in the mediation and that request is currently under advisement.
CIOC believes that it has meritorious defenses to any such contribution claims,
including those based upon its Chapter 11 proceedings.
While the outcome of claims relating to the Company's discontinued operations
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.
10
<PAGE> 11
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
8. RELATED PARTY TRANSACTIONS
The Company was charged interest and fees by Viacom of $19,375,000 and
$13,298,000 during the nine months ended September 30, 1997 and 1996,
respectively, in connection with the Viacom Credit Agreement and the Viacom
Facility. Included in accounts payable, accrued expenses and other liabilities
is accrued interest payable to Viacom of $644,000 and $1,226,000 as of September
30, 1997 and December 31, 1996, respectively. See Note 3 regarding the Company's
credit facilities with Viacom and Note 9 regarding Viacom's guarantee of the
Company's credit agreements with banks.
Viacom provided the Company with management services for which the Company was
charged $150,000 for the three-month period ended March 31, 1996 for the
services of an executive. No further charges were incurred after the resignation
of such executive in the first quarter of 1996. As of September 30, 1997, the
Company had a net payable to Viacom of approximately $851,000 with respect to
these and other expenses.
During the nine months ended September 30, 1997 and 1996, the Company sold home
video product to several operating subsidiaries of Viacom International Inc., a
subsidiary of Viacom. Additionally, the Company licensed certain entertainment
product to the following parties in which Viacom has or had an ownership
interest (i) Showtime Networks Inc. ("Showtime"), a subsidiary of Viacom; (ii)
certain television stations owned by Viacom; (iii) USA Network and Sci-Fi
Channel, in which Viacom had equity interests until October 1997; and (iv)
United Paramount Network, in which Viacom has an equity interest. For the nine
months ended September 30, 1997 and 1996, these transactions were not material.
Republic has entered into agreements with, and in certain cases has advanced
funds to Viacom, a partnership in which a subsidiary of Viacom is the managing
partner and Showtime to distribute certain of their productions in the home
video market.
The Company has entered into agreements with Paramount Pictures Corporation
("Paramount"), a Viacom subsidiary, with respect to the distribution of two of
the Company's feature film releases, "Night Falls on Manhattan" and "Stephen
King's Thinner," in the domestic theatrical, non-theatrical and pay television
markets. Additionally, the Company has partnered with Paramount in the
production or funding of two additional feature films, "In & Out" and
"Breakdown," to which the Company owns the international distribution rights. In
August 1997, Republic entered into an agreement and licensed its rights to
distribute seven 1997 rental titles, including "Night Falls on Manhattan," in
the domestic home video market to Paramount.
In the ordinary course of business, the Company has and expects to continue to
do business with Viacom and its affiliates.
11
<PAGE> 12
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
9. DISCONTINUED OPERATIONS
On February 20, 1997, the Company announced its intention to dispose of its
interactive game business, VIE, and has, accordingly, reflected the operations
of VIE as discontinued.
VIE's net assets as of September 30, 1997 and December 31, 1996, and results of
operations for the three- and nine-month periods ended September 30, 1996, are
as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
--------- ---------
<S> <C> <C>
Current assets $ 67,939 $ 152,724
Current liabilities (173,783) (116,400)
--------- ---------
Net current assets (liabilities) (105,844) 36,324
--------- ---------
Property and equipment, net 15,760 16,793
Intangibles, net 96,481 107,657
Other non-current assets 30,783 21,257
Non-current liabilities (21,957) (167,742)
--------- ---------
Net non-current assets (liabilities) 121,067 (22,035)
--------- ---------
Net assets $ 15,223 $ 14,289
========= =========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1996 September 30, 1996
------------------ ------------------
<S> <C> <C>
Revenue $ 54,885 $ 121,324
Costs and expenses 61,447 161,158
--------- ---------
Loss before provision for income taxes (6,562) (39,834)
Benefit for income taxes (2,731) (11,971)
--------- ---------
Net loss before minority interest (3,831) (27,863)
Minority interest -- (409)
--------- ---------
Net loss from discontinued operations $ (3,831) $ (27,454)
========= =========
</TABLE>
12
<PAGE> 13
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(000's omitted in all tables)
(Continued)
During the year ended December 31, 1996, the Company provided for an estimated
loss on disposal of VIE of approximately $139,501,000, which included a
provision for future operating losses of approximately $56,000,000. For the nine
months ended September 30, 1997, revenue and the net operating loss of VIE were
$128,378,000 and $49,483,000, respectively, and the net operating loss was
provided for in the estimated loss on disposal as of December 31, 1996.
In May 1996, the SEC staff announced its position that companies developing
computer software are required to capitalize development costs in accordance
with the standards of SFAS No. 86, "Accounting for the Costs of Computer
Software to Be Sold, Leased or Otherwise Marketed." Accordingly, the Company has
applied the principles of SFAS No. 86 with respect to the capitalization of
software development costs. This resulted in a cumulative pretax adjustment of
approximately $7,500,000 and a pretax adjustment of approximately $600,000
recorded in the second and third quarters of 1996, respectively, as restated.
The amounts included for prior periods were not material to the respective
periods.
Pursuant to SFAS No. 86, the Company capitalizes certain software development
and production costs once technological feasibility has been achieved.
Capitalized software development and production costs are reported at the lower
of cost less amortization or estimated net realizable value. Software
development costs incurred prior to achieving technological feasibility are
charged to expense as incurred. Amortization of capitalized software development
costs and development costs expensed prior to achieving technological
feasibility are included in product costs.
On December 23, 1993, a wholly owned subsidiary of VIE established a
multi-currency credit agreement (the "Credit Agreement") with a bank in the U.S.
The Credit Agreement initially provided for maximum borrowings of $15,000,000,
subject to a borrowing base test. Following the acquisition of VIE, 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. During 1996, the term was extended to March 31, 1998. 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. Borrowings under the
Credit Agreement as of September 30, 1997 and December 31, 1996 were $95,615,000
and $98,010,000, respectively. As of September 30, 1997, the Company had no
letters of credit outstanding under the Credit Agreement to guarantee its
interactive game purchases.
13
<PAGE> 14
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 VIE established a
5,000,000 pounds sterling credit facility (the "UK Facility") with a bank in the
United Kingdom. On April 12, 1994, the UK Facility was increased to 10,000,000
pounds sterling, based in part on the personal guarantee of two of the directors
of the subsidiary. Following the acquisition of VIE, 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 1.0%.
Effective as of April 3, 1997, the UK Facility was renegotiated on terms more
favorable to the subsidiary. The renegotiated UK Facility, which is an annual
facility, will expire on December 31, 1997 and is guaranteed by Viacom and the
Company. Advances under the renegotiated UK Facility will bear interest at the
bank's prime rate plus 1.0% or alternatively at selected Eurocurrency rates.
Borrowings under the UK Facility as of September 30, 1997 and December 31, 1996
were $12,168,000 and $3,898,000, respectively. As of September 30, 1997, the
Company had approximately $1,924,000 in letters of credit outstanding under the
UK Facility to guarantee its interactive game purchases. The Company and Viacom
also provide a rent guarantee, which expires in 2005, for this subsidiary.
Pursuant to the separate credit facilities under which Viacom is a borrower,
certain subsidiaries of Viacom, including the Company, are restricted from
incurring indebtedness (other than indebtedness owing to Viacom) without the
prior consent of Viacom's lenders. Such consent has been given with respect to
the Credit Agreement and the UK Facility.
14
<PAGE> 15
SPELLING ENTERTAINMENT GROUP INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
unaudited condensed consolidated financial statements and the related notes
thereto. References to Notes refer to the notes to such statements.
RESULTS OF OPERATIONS
The results of operations for any period are significantly affected by the
quantity and performance of the Company's 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 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 and first-run
syndication television programming, the production costs can substantially
exceed the combination of the network or other domestic revenue and
international license fees, and the Company recognizes 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 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, competition, 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. On September 6, 1995, the Federal Communications Commission released
an order repealing its rules which prohibited television networks from acquiring
financial interests and syndication rights in television programming produced by
program suppliers such as the Company. 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% to 35%. Accordingly, the networks will be able to own the programming which
they broadcast and increase their national audience reach, thereby becoming
greater competitors of the Company in the production and distribution of
programming.
15
<PAGE> 16
SPELLING ENTERTAINMENT GROUP INC.
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 and nine months ended September 30 (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Television $ 93,530 $ 92,375 $338,449 $277,490
Home video 8,341 14,017 50,985 40,897
Film distribution 2,434 860 20,828 7,835
Licensing and merchandising 3,121 3,200 9,729 9,889
Other 1,054 1,129 3,417 3,455
-------- -------- -------- --------
$108,480 $111,581 $423,408 $339,566
======== ======== ======== ========
</TABLE>
Television revenue increased $1,155,000 (1%) and $60,959,000 (22%) in the three-
and nine-month periods ended September 30, 1997, respectively, from the
comparable periods in 1996. The increase in the 1997 periods arose primarily
from (i) higher per episode network license fees for the Company's continuing
series; (ii) increased hours of programming delivered to the networks, including
the new daytime serial "Sunset Beach"; and (iii) higher revenue from
exploitation of the Company's library.
Home video revenue decreased $5,676,000 (40%) and increased $10,088,000 (25%) in
the three- and nine-month periods ended September 30, 1997, respectively, from
the same periods in 1996. The decrease in the three-month period is due
primarily to a decline in the number and performance of initial releases during
the period. The increase in the nine-month period is due primarily to the
release of "Bound" in the first quarter of 1997 and "Stephen King's Thinner" in
the second quarter of 1997. The home video market continues to be very
competitive due to home video retailers purchasing greater volumes of theatrical
releases from the major studios and lower volumes of made-for-video product,
such as the Company's. It is expected that this trend will continue in the near
term. As a result, in the third quarter of 1997, the Company determined that it
was appropriate to exit the business of distributing video titles in the
domestic rental market. The Company has ceased to acquire made-for-video titles
other than those for which it had previously made contractual commitments.
Further, in August of 1997, it licensed its made-for-video titles scheduled for
initial release during the remainder of 1997, as well as "Night Falls on
Manhattan," and eliminated the sales infrastructure and other support functions
specifically established for this market.
16
<PAGE> 17
SPELLING ENTERTAINMENT GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Film distribution revenue increased $1,574,000 (183%) and $12,993,000 (166%) in
the three- and nine-month periods ended September 30, 1997, respectively,
compared to the same periods in 1996. The domestic rights to "House of Yes,"
which were sold to a third party, were made available in the third quarter of
1997. In the second quarter of 1997, the Company released "Night Falls on
Manhattan" in the domestic theatrical market and expanded its release
internationally. "Breakdown" was also released in limited markets
internationally in the second quarter of 1997. Releases of similar significance
in the 1996 periods were "Moll Flanders" and "Unforgettable."
Licensing and merchandising revenue remained consistent in the three- and
nine-month periods ended September 30, 1997 compared to the same periods in
1996. The decline in the licensing revenue for "Beverly Hills, 90210" and
"Melrose Place," was offset by an overall increase in revenue from third-party
clients.
Certain of the Company's operations generate revenue denominated in foreign
currencies, and as a result, fluctuations in foreign currency exchange rates may
affect operating results. In particular, the Company generates revenue
denominated in French francs, Canadian dollars and Mexican pesos, among others.
ENTERTAINMENT PRODUCT COSTS
Entertainment product costs consist primarily of amortization of capitalized
product costs and the accrual of third-party participations and residuals. Such
costs increased $4,721,000 (5%) and $86,932,000 (29%) in the quarter and
nine-month period ended September 30, 1997, respectively, from the comparable
prior-year periods. The increase resulted primarily from the increases in
revenue described above. Additionally, the percentage relationship between such
costs and the related revenue was 90% and 87% for the nine months ended
September 30, 1997 and 1996, respectively. This percentage relationship is a
function of (i) the mix of entertainment product generating the revenue in each
period and (ii) changes in the projected profitability of individual
entertainment product based on the Company's estimates of such product's
ultimate revenue and costs. The Company recorded write-downs to net realizable
value with respect to its entertainment product of $12,124,000 and $8,993,000 in
the quarters ended September 30, 1997 and 1996, respectively, and $36,684,000
and $30,763,000 in the nine-month periods ended September 30, 1997 and 1996,
respectively. The increase in write-downs in the 1997 periods was primarily
attributable to the domestic theatrical performance of feature films released
during the periods, and the related revisions to profitability estimates
resulting in net realizable value adjustments.
17
<PAGE> 18
SPELLING ENTERTAINMENT GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative costs decreased $1,761,000 (11%) and
$1,060,000 (2%) in the quarter and nine months ended September 30, 1997,
respectively, from the comparable prior-year periods. The decreases result
primarily from the impact of executive severance expense in the third quarter of
1996 with no similar expense in the current year period, and the impact of the
Company's ongoing cost savings initiatives.
INTEREST EXPENSE
Interest expense, net of amounts capitalized, increased $2,190,000 (63%) and
$6,070,000 (66%) in the three- and nine-month periods ended September 30, 1997,
due to (i) higher average indebtedness outstanding under the Company's credit
arrangements; (ii) an increase in the weighted average interest rate; and (iii)
a decrease in capitalized interest associated with the Company's theatrical
production activities.
OTHER INCOME (EXPENSE), NET
Other income (expense), net, increased in the nine months ended September 30,
1997 from the same period in 1996 due primarily to the realization in the second
quarter of 1997 of a non-cash gain related to an investment in a marketable
equity security. Such gain had previously been recorded as an unrealized
adjustment to shareholders' equity pursuant to the requirements of SFAS No. 115.
(See Note 4.) This gain was partially offset by certain costs associated with
the Company's exploration of various financing alternatives.
PROVISION FOR INCOME TAXES
During the nine months ended September 30, 1997, the Company's provision for
income taxes increased $7,870,000 to a provision of $2,222,000 in 1997 as
compared to a benefit of $5,648,000 in 1996, largely as a result of adjustments
to tax attributes and valuation allowances offset by a decrease in the effective
tax rate. There was a net reduction in valuation allowances and tax attributes
of approximately $5,661,000 recognized in the nine months ended September 30,
1997, as compared to no adjustment for the similar period in 1996. Further, for
the same period, the effective tax rate decreased to (65%) in 1997 from 67% in
1996, largely as a result of the expected changes in the relationships between
revenue and expenses comprising income from continuing operations before income
taxes.
18
<PAGE> 19
SPELLING ENTERTAINMENT GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The tax provision of $3,822,000 for the three months ended September 30, 1997,
reflects the change in the effective tax rate between the second and third
quarters of 1997. The effective tax rate decreased from 188% for the six months
ended June 30, 1997, to (65%) for the nine months ended September 30, 1997,
principally as a result of the expected changes in the relationships between
revenue and expenses comprising income from continuing operations before income
taxes. Additionally, the increase in the effective tax rate from 38% for the six
months ended June 30, 1996, to 67% for the nine months ended September 30, 1996,
was a result of changes in expected operating results for the year.
The Directors of the Company have approved an agreement between the Company and
Viacom that provides for the administration of federal, state and foreign tax
matters (the "Tax Agreement"). Under the Tax Agreement, the Company will
remain in the same tax position as it would have if it were continuing to file
its tax returns separate and apart from Viacom.
As previously announced, Viacom intended to acquire additional common shares of
the Company necessary to achieve consolidation for federal income tax purposes.
Viacom has acquired shares in excess of 80% of the outstanding shares of the
Company and, therefore, the Company is required to be included in the
consolidated federal income tax return of Viacom. Given the Tax Agreement
discussed above, the Company does not anticipate any material impact to its
financial condition or results of operations.
DISCONTINUED OPERATIONS
On February 20, 1997, the Company announced its intention to dispose of its
interactive game business, VIE, and accordingly, VIE is presented as a
discontinued operation in the accompanying financial statements. See "Financial
Condition - Discontinued Operations" below.
FINANCIAL CONDITION
CONTINUING OPERATIONS. The Company's continuing operations require significant
capital resources for the production of entertainment product and the
acquisition of distribution or other rights to entertainment product produced by
third parties. The Company's expenditures in this regard totaled $292,207,000
and $291,839,000 in the nine months ended September 30, 1997 and 1996,
respectively.
Additionally, future expenditures by the Company are expected to increase from
1997 and 1996 expenditures in conjunction with its projected 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. The Viacom Credit Agreement provides for a term
loan facility of $200,000,000 and a revolving credit facility of $155,000,000 to
fund the Company's working capital and other requirements. (See Note 3.)
19
<PAGE> 20
SPELLING ENTERTAINMENT GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Company continues to explore opportunities for additional sources of
financing. No assurance can be given that the Company will obtain such
additional external financing.
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 available under its credit
facilities to meet its ongoing plans for the production, acquisition and
distribution of entertainment product and to take advantage of internal and
external development and growth opportunities. See Note 3 regarding certain
acceleration provisions of the Viacom Facility.
Net cash flow from operating activities of the Company's continuing operations
increased to $23,674,000 for the nine months ended September 30, 1997 from
negative $58,514,000 for the comparable prior-year period due primarily to
increased revenue and collections during the period. Net cash flow from
investing activities of the Company's continuing operations increased to
$1,073,000 from negative $27,433,000 for the nine months ended September 30,
1997 and 1996, respectively. In the 1996 period the Company advanced
$22,335,000 to VIE. Financing activities principally reflect borrowings and
repayments under the Viacom Credit Agreement in both periods.
DISCONTINUED OPERATIONS. A wholly owned subsidiary of VIEL has a revolving
multi-currency credit agreement for $100,000,000 with a bank in the U.S.
Borrowings under the Credit Agreement as of September 30, 1997 and December 31,
1996 were $95,615,000 and $98,010,000, respectively. As of September 30, 1997,
the Company had no letters of credit outstanding under the Credit Agreement to
guarantee its interactive game purchases. (See Note 9.) Viacom has guaranteed
all of the borrowings under the Credit Agreement, which are due March 31, 1998.
Another wholly owned subsidiary of VIEL has a credit facility with a bank in the
United Kingdom in the net amount of 10,000,000 pounds sterling, which the
Company and Viacom have guaranteed. The UK Facility expires on December 31,
1997. Borrowings under the UK Facility as of September 30, 1997 and December 31,
1996 were $12,168,000 and $3,898,000, respectively. As of September 30, 1997,
the Company had approximately $1,924,000 in letters of credit outstanding under
the UK Facility to guarantee its interactive game purchases. (See Note 9.)
20
<PAGE> 21
SPELLING ENTERTAINMENT GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
VIE's net assets as of September 30, 1997 and December 31, 1996, and results of
operations for the three- and nine-month periods ended September 30, 1996, are
as follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
--------- ---------
<S> <C> <C>
Current assets $ 67,939 $ 152,724
Current liabilities (173,783) (116,400)
--------- ---------
Net current assets (liabilities) (105,844) 36,324
--------- ---------
Property and equipment, net 15,760 16,793
Intangibles, net 96,481 107,657
Other non-current assets 30,783 21,257
Non-current liabilities (21,957) (167,742)
--------- ---------
Net non-current assets (liabilities) 121,067 (22,035)
--------- ---------
Net assets $ 15,223 $ 14,289
========= =========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1996 September 30, 1996
------------------ ------------------
<S> <C> <C>
Revenue $ 54,885 $ 121,324
Costs and expenses 61,447 161,158
-------- ---------
Loss before provision for income taxes (6,562) (39,834)
Benefit for income taxes (2,731) (11,971)
-------- ---------
Net loss before minority interest (3,831) (27,863)
Minority interest -- (409)
-------- ---------
Net loss from discontinued operations $ (3,831) $ (27,454)
======== =========
</TABLE>
During the year ended December 31, 1996, the Company provided for an estimated
loss on disposal of VIE of approximately $139,501,000, which included a
provision for future operating losses of approximately $56,000,000. For the nine
months ended September 30, 1997, revenue and the net operating loss of VIE were
$128,378,000 and $49,483,000, respectively, and the net operating loss was
provided for in the estimated loss on disposal as of December 31, 1996.
21
<PAGE> 22
SPELLING ENTERTAINMENT GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
In May 1996, the SEC staff announced its position that companies developing
computer software are required to capitalize development costs in accordance
with the standards of SFAS No. 86, "Accounting for the Costs of Computer
Software to Be Sold, Leased or Otherwise Marketed." Accordingly, the Company has
applied the principles of SFAS No. 86 with respect to the capitalization of
software development costs. This resulted in a cumulative pretax adjustment of
approximately $7,500,000 and a pretax adjustment of approximately $600,000
recorded in the second and third quarters of 1996, respectively, as restated.
The amounts included for prior periods were not material to the respective
periods.
OTHER FINANCING ITEMS. Viacom owns approximately 80% of the Company's common
stock. Pursuant to the separate credit facilities under which Viacom is
borrower, certain subsidiaries of Viacom, including the Company, are restricted
from incurring indebtedness (other than indebtedness owing to Viacom or related
to certain production activities) without the prior consent of Viacom's lenders.
Such consent has been given with respect to the Credit Agreement and the UK
Facility.
UNCERTAINTIES
The Company is involved in certain legal proceedings which arise in the normal
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.
Ten parties unaffiliated with the Company (the "Group") entered into agreements
with the United States in 1996 tolling the statute of limitations with respect
to potential reimbursement claims by the Government in connection with its clean
up of the Sikes Superfund Site in Crosby, Texas, at an alleged cost exceeding
$140,000,000. The United States and the Group presently are conducting
depositions of individuals with alleged knowledge of disposals at Sikes as part
of a mediation process seeking to resolve the Government's claims. Although the
EPA previously had advised a subsidiary of the Company, Charter International
Oil Company ("CIOC"), that it was a potentially responsible party based upon
information from certain of these individuals, any action by the Government
against CIOC appears now to be precluded by the statute of limitations. The
Group, which could bring contribution claims against CIOC for its equitable
share of any judgment or settlement amounts they may pay to the United States,
has invited voluntary participation by CIOC and 34 other similarly situated
parties in the mediation and that request is currently under advisement.
CIOC believes that it has meritorious defenses to any such contribution claims,
including those based upon its Chapter 11 proceedings.
While the outcome of claims relating to the Company's discontinued operations
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.
22
<PAGE> 23
SPELLING ENTERTAINMENT GROUP INC.
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Employment Agreement dated as of January 1, 1997, between Registrant and
Peter Bachmann.
11 Computation of net loss per common and common equivalent share.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
None
23
<PAGE> 24
SPELLING ENTERTAINMENT GROUP INC.
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPELLING ENTERTAINMENT GROUP INC.
November 13, 1997 By: /s/ Peter H. Bachmann
----------------------------------
Peter H. Bachmann
President
(Principal Executive Officer)
By: /s/ James Miller
---------------------------------
James Miller
Vice President, Corporate Controller
(Principal Financial Officer)
24
<PAGE> 1
EXHIBIT 10.1
As of January 1, 1997
Peter Bachmann
5139 Bellaire Avenue
North Hollywood, CA 91607
Dear Mr. Bachmann:
Spelling Entertainment Group, Inc. ("Spelling"), having an address at
5700 Wilshire Boulevard, Los Angeles, California 90036, agrees to employ you and
you agree to accept such employment upon the following terms and conditions:
1. Term. The term of your employment hereunder shall commence on January
1, 1997 and, unless terminated by Spelling or you pursuant to paragraph 8
hereof, shall continue through and until January 1, 2000. The period from
January 1, 1997 through January 1, 2000 shall hereinafter be referred to as the
"Employment Term" notwithstanding any earlier termination pursuant to paragraph
8.
2. Duties. During the Employment Term, you agree to devote substantially
all of your business time, attention and energies to the business of Spelling.
You will be President of Spelling and you agree to perform such duties, and such
other duties reasonable and consistent with such office as may be assigned to
you from time to time by the Board of Directors of Spelling (the "Board"). Your
principal place of business shall be at Spelling's headquarters in the
metropolitan Los Angles area.
3. Compensation.
(a) Salary: For all the services rendered by you in any capacity
hereunder, Spelling agrees to pay you the sum of Six Hundred Seventy-Five
Thousand Dollars ($675,000) per annum ("Salary"), payable in accordance with
Spelling's then effective payroll practices. Your Salary will be increased on
January 1, 1998 to Seven Hundred Twenty-Five Thousand Dollars ($725,000) per
annum and on January 1, 1999 to Seven Hundred Ninety-Five Thousand Hundred
Dollars ($795,000) per annum.
<PAGE> 2
Peter Bachmann
As of January 1, 1997
Page 2
(b) Bonus Compensation: In addition to your Salary, you shall be
entitled to receive bonus compensation ("Bonus") for each of the calendar years
during the Employment Term, determined and payable as follows:
(i) Your Bonus for each of the calendar years during
the Employment Term will be based upon a
measurement of performance against established
objectives in accordance with the Spelling
Short-Term Incentive Plan, as the same may be
amended from time to time.
(ii) The target for your Bonus ("Target Bonus") for each
of the calendar years during the Employment Term
shall be 50% of your then current Salary.
(iii) Your Bonus for any calendar year shall be payable
by February 28 of the following calendar year.
(c) Long-Term Incentive Compensation.
(i) In addition to your Salary and Bonus, you shall
receive an annual grant (the "Annual Grant") under
Spelling's 1994 Stock Option Plan or any successor
plans for each of the calendar years during the
Employment Term of stock options to purchase no
less than 125,000 shares of Spelling's Common
Stock; provided, that the amount of the Annual
Grant shall be adjusted in the event of a stock
split or stock dividend. Each Annual Grant shall be
made as of the date as of which the Board or any
Committee thereof shall award the major stock
option grant to Spelling's senior executives for
such calendar year.
(ii) If a "Triggering Event" (as defined in clause (iii)
below) occurs during the Employment Term, the
vesting of all stock options granted to you whether
under Spelling's 1987 Stock Option Plan, Spelling's
1994 Stock Option Plan or any successor Spelling
plans or otherwise (collectively, the "Spelling
Stock Option Plans") that are not exercisable as of
the date of Triggering Event will be accelerated
and such
<PAGE> 3
Peter Bachmann
As of January 1, 1997
Page 3
stock options will become fully exercisable and
vested as of the date of the Triggering Event
specified in clause (iii)(x) and (y) below and as
of the day immediately preceding the Triggering
Event specified in clause (iii)(z) below.
(iii) A "Triggering Event" means the happening of any of
the following:
(x) When any person or group other than Viacom
Inc. or any affiliate of Viacom Inc. or any
successor of Viacom Inc. or such affiliate
becomes the beneficial owner of securities of
Spelling representing 50% or more of the
combined voting power of Spelling's then
outstanding securities;
(y) The liquidation of Spelling or the sale or
other disposition of all or substantially all
of the assets of Spelling; or
(z) Spelling goes private in a transaction subject
to Rule 13e-3 under the Securities Exchange
Act of 1934 (the "Exchange Act").
For purposes of this clause (iii), "affiliate"
shall have the meaning provided in Rule 144
under the Securities Act of 1933; "beneficial
owner" shall have the meaning provided in Rule
13d-3 under the Exchange Act; "group" shall
have the meaning provided in Section 13(d) of
the Exchange Act; and "person" shall have the
meaning provided in Section 3(a)(9) of the
Exchange Act and used in Sections 13(d) and
14(d) thereof.
(iv) In the event that Spelling or Viacom Inc.
establishes for its executives a non-stock based
long-term incentive compensation plan, you will be
eligible to participate in such plan on the same
basis as other senior executives which may entail
adjusting your participation in the Spelling Stock
Option Plans as set forth in clause (i) above.
<PAGE> 4
Peter Bachmann
As of January 1, 1997
Page 4
4. Benefits. You shall be entitled to participate in such medical,
dental and life insurance, 401(k), pension and other plans as Spelling from time
to time may have or establish and in which you would be entitled to participate
pursuant to the terms thereof. The foregoing, however, shall not be construed to
require Spelling to establish any such plans or to prevent the modification or
termination of such plans once established, and no such action or failure
thereof shall affect this Agreement. It is further understood and agreed that
all benefits you may be entitled to as an employee of Spelling shall be based
upon your Salary, as set forth in paragraph 3(a) hereof, and not upon any bonus
compensation due, payable or paid to you hereunder, except where the benefit
plan expressly provides otherwise. You shall be entitled to four (4) weeks of
vacation.
5. Business Expenses; Indemnification.
(a) Business Expenses. During the Employment Term, you shall be
reimbursed for such reasonable travel and other expenses incurred in the
performance of your duties hereunder as are customarily reimbursed to senior
executives of Spelling. You shall be entitled to a car allowance in the amount
of One Thousand Dollars ($1,000) per month.
(b) Indemnification. Spelling shall indemnify, defend and hold
you harmless for any claims, losses or damages (including reasonable attorney's
fees) resulting from your carrying out the duties provided herein, except that
Spelling shall not be required to indemnify, defend, or hold you harmless for
claims, losses and damages resulting from your gross negligence or malfeasance.
6. Exclusive Employment, Confidential Information, Etc.
(a) Non-Competition. You agree that your employment hereunder is
on an exclusive basis, and that during the period ending on the last day of the
Employment Term or, if earlier, the date of the termination of your employment
pursuant to paragraph 8(b) or 8(c) hereof or eighteen (18) months after the
termination of your employment pursuant to paragraph 8(a) hereof (the
"Non-Compete Period"), you will not engage in any other business activity which
is in conflict with your duties and obligations hereunder. You agree that,
during the Non-Compete Period, you shall not directly or indirectly engage in or
participate as an officer, employee, director, agent
<PAGE> 5
Peter Bachmann
As of January 1, 1997
Page 5
of or consultant for any business directly competitive with that of Spelling,
nor shall you make any investments in any company or business competing with
Spelling; provided, however, that nothing herein shall prevent you from
investing as less than a one (1%) percent shareholder in the securities of any
company listed on a national securities exchange or quoted on an automated
quotation system.
(b) Confidential Information. You agree that you shall not,
during the Employment Term or at any time thereafter, use for your own purposes,
or disclose to or for the benefit of any third party, any trade secret or other
confidential information of Spelling or Viacom Inc. ("Viacom") (except as may be
required by law or in the performance of your duties hereunder consistent with
Spelling's policies) and that you will comply with any confidentiality
obligations of Spelling or, to the extent known to you, Viacom to a third party,
whether under agreement or otherwise. Notwithstanding the foregoing,
confidential information shall be deemed not to include information which (i) is
or becomes generally available to the public other than as a result of a
disclosure by you or any other person who directly or indirectly receives such
information from you or at your direction or (ii) is or becomes available to you
on a non-confidential basis from a source which is entitled to disclose it to
you.
(c) No Employee Solicitation. You agree that, during the
Employment Term and for one (1) year thereafter, you shall not, directly or
indirectly, engage, employ, or solicit the employment of any person who is then
or has been within six (6) months prior thereto, an employee of Spelling, Viacom
or any of Viacom's affiliates.
(d) Spelling Ownership. The results and proceeds of your services
hereunder, including, without limitation, any works of authorship resulting from
your services during your employment with Spelling, Viacom and/or any of
Viacom's affiliates and any works in progress, shall be works-made-for-hire and
Spelling shall be deemed the sole owner throughout the universe of any and all
rights of whatsoever nature therein, whether or not such rights are now or
hereafter known, existing, contemplated, recognized or developed, with the right
to use the same in perpetuity in any manner Spelling determines in its sole
discretion without any further payment to you whatsoever. If, for any reason,
any of such results and proceeds shall not legally be a work-for-hire and/or
there are any rights which do not accrue to Spelling under the preceding
sentence, then you hereby irrevocably assign and agree to assign any and all of
your right, title and interest thereto, including, without limitation, any and
all copyrights, patents, trade secrets, trademarks and/or other rights of
whatsoever nature therein, whether or not such rights are now or hereafter
known, existing, contemplated, recognized or developed to Spelling, and Spelling
shall have the right to use the same
<PAGE> 6
Peter Bachmann
As of January 1, 1997
Page 6
in perpetuity throughout the universe in any manner Spelling determines without
any further payment to you whatsoever. You shall, from time to time, as may be
requested by Spelling, at Spelling's sole cost and expense, do any and all
reasonable things which Spelling may deem useful or desirable to establish or
document Spelling's exclusive ownership of any and all rights in any such
results and proceeds, including, without limitation, the execution of
appropriate copyright and/or patent applications or assignments. To the extent
you have any rights in the results and proceeds of your services that cannot be
assigned in the manner described above, you unconditionally and irrevocably
waive the enforcement of such rights. This paragraph 6(d) is subject to, and
shall not be deemed to limit, restrict, or constitute any waiver by Spelling of
any rights of ownership to which Spelling may be entitled by operation of law by
virtue of Spelling being your employer.
(e) Litigation. You agree that, during the Employment Term, for
one (1) year thereafter and, if longer, during the pendency of any litigation or
other proceeding, (i) you shall not communicate with anyone (other than your own
attorneys and tax advisors and, except to the extent necessary in the
performance of your duties hereunder) with respect to the facts or subject
matter of any pending or potential litigation, or regulatory or administrative
proceeding involving Spelling, Viacom or any of Viacom's affiliates, other than
any litigation or other proceeding in which you are a party-in-opposition,
without giving prior notice to Spelling or Spelling's counsel, and (ii) in the
event that any other party attempts to obtain information or documents from you
with respect to matters possibly related to such litigation or other proceeding,
you shall promptly so notify Spelling's counsel.
(f) No Right to Write Books, Articles, Etc. During the Employment
Term, except as authorized by Spelling or Viacom, you shall not prepare or
assist any person or entity in the preparation of any books, articles,
television or motion picture productions or other creations concerning Spelling,
Viacom or any of Viacom's affiliates or any of their officers, directors,
agents, employees, suppliers or customers.
(g) Return of Property. All documents, data, recordings, or other
property, whether tangible or intangible, including all information stored in
electronic form, obtained or prepared by or for you and utilized by you in the
course of your employment with Spelling shall remain the exclusive property of
Spelling. In the event of the termination of your employment for any reason,
Spelling reserves the right, to the extent permitted by law and in addition to
any other remedy Spelling may have, to deduct from any monies otherwise payable
to you the following: (i) the full amount of any specifically determined debt
you owe to Spelling, Viacom or any of Viacom's
<PAGE> 7
Peter Bachmann
As of January 1, 1997
Page 7
affiliates at the time of or subsequent to the termination of your employment
with Spelling, and (ii) the value of the Spelling property which you retain in
your possession after the termination of your employment with Spelling. In the
event that the law of any state or other jurisdiction requires the consent of an
employee for such deductions, this Agreement shall serve as such consent.
(h) Non-Disparagement. You agree that you shall not, during the
Employment Term and for one (1) year thereafter, in any communications with any
customer or client of Spelling, Viacom or any of Viacom's affiliates, criticize,
ridicule or make any statement which disparages or is derogatory of Spelling,
Viacom or any of Viacom's affiliates or any of their officers, directors, agents
or employees.
(i) Injunctive Relief. Spelling has entered into this Agreement
in order to obtain the benefit of your unique skills, talent, and experience.
You acknowledge and agree that any violation of paragraphs 6(a) through (h)
hereof will result in irreparable damage to Spelling and/or Viacom, and,
accordingly, Spelling and/or Viacom may obtain injunctive and other equitable
relief for any breach or threatened breach of such paragraphs, in addition to
any other remedies available to Spelling and/or Viacom.
(j) Survival; Modification of Terms. Your obligations under
paragraphs 6(a) through (i) hereof shall remain in full force and effect for the
entire period provided therein notwithstanding the termination of the Employment
Term pursuant to paragraph 8 hereof or otherwise; provided, however, that your
obligations under paragraph 6(a) hereof shall cease in the event that your
employment terminates pursuant to paragraph 8(b) or 8(c) hereof. You and
Spelling agree that the restrictions and remedies contained in paragraphs 6(a)
through (i) hereof are reasonable and that it is your intention and the
intention of Spelling that such restrictions and remedies shall be enforceable
to the fullest extent permissible by law. If it shall be found by a court of
competent jurisdiction that any such restriction or remedy is unenforceable but
would be enforceable if some part thereof were deleted or the period or area of
application reduced, then such restriction or remedy shall apply with such
modification as shall be necessary to make it enforceable.
7. Incapacity. In the event you become totally medically disabled and
cannot substantially perform your duties at any time during the Employment Term,
the Board, at any time after such disability has continued for 30 consecutive
days, may determine that Spelling requires such duties and responsibilities be
performed by another executive. In the event you become disabled, you will first
receive benefits under
<PAGE> 8
Peter Bachmann
As of January 1, 1997
Page 8
Spelling's short-term disability program for the first 26 weeks of consecutive
absence. Thereafter, you will be eligible to receive benefits under the Spelling
Long-Term Disability ("LTD") program in accordance with its terms. Upon receipt
of benefits under the LTD program, you will also be entitled to receive a
pro-rated Target Bonus for the calendar year in which such benefits commence.
8. Termination.
(a) Termination for Cause. Spelling may, at its option, terminate
this Agreement forthwith for "cause", and Spelling shall thereafter have no
further obligations under this Agreement, including, without limitation, any
obligation to pay Salary or Bonus or to provide benefits under this Agreement.
For purposes of this Agreement, termination of this Agreement for "cause" shall
mean termination for embezzlement, fraud or other conduct which would constitute
a felony, conviction of a felony, or willful unauthorized disclosure of
confidential information, or if you at any time materially breach this Agreement
(including, without limitation, your failure, neglect of or refusal to
substantially perform your obligations hereunder as set forth in paragraphs 2
and 11 hereof), except in the event of your disability as set forth in paragraph
7. Anything herein to the contrary notwithstanding, Spelling will give you
written notice prior to terminating this Agreement for your material breach
setting forth the exact nature of any alleged breach and the conduct required to
cure such breach. You shall have ten (10) business days from the giving of such
notice within which to begin to cure.
(b) Good Reason Termination. You may terminate your employment
hereunder for "Good Reason" at any time during the Employment Term by written
notice to Spelling not more than thirty (30) days after you learn or reasonably
should have learned of the occurrence of the event constituting "Good Reason".
Such notice shall state an effective date no later than ten (10) business days
after the date it is given. Good Reason shall mean, without your prior written
consent, other than in connection with the termination of your employment for
"cause" (as defined above) or in connection with your permanent disability, the
assignment to you by Spelling of duties substantially inconsistent with your
positions, duties, responsibilities, titles or offices hereunder, the withdrawal
of a material part of your responsibilities as set forth in paragraph 2, the
material breach by Spelling of its material obligations hereunder, a reduction
in your Salary or a reduction in benefits (other than in connection with a
reduction in benefits applicable to all executives of a comparable level) or
your relocation to offices more than 75 miles from your present location.
<PAGE> 9
Peter Bachmann
As of January 1, 1997
Page 9
(c) Termination Without Cause. Spelling may terminate your
employment hereunder without "cause" (as defined above) at any time during the
Employment Term by written notice to you.
(d) Termination Payments, Etc. In the event that your employment
terminates pursuant to paragraph 8(b) or 8(c) hereof, you shall be entitled to
receive, subject to applicable withholding taxes:
(i) your Salary as provided in paragraph 3(a) until the
end of the Employment Term, payable in accordance
with Spelling's then effective payroll practices;
(ii) bonus compensation for each calendar year during
the Employment Term equal to the Target Bonus, as
set forth in paragraph 3(b);
(iii) your car allowance as provided in paragraph 5 until
the end of the Employment Term, payable in
accordance with Spelling's then effective payroll
practices;
(iv) medical and dental insurance coverage under COBRA
until the end of the Employment Term or, if
earlier, the date on which you become eligible for
medical and dental coverage from a third party
employer; during this period, Spelling will pay an
amount equal to the applicable COBRA premiums (or
such other amounts as may be required by applicable
law) (which amount will be included in your income
for tax purposes to the extent required by
applicable law); at the end of such period, you may
elect to continue your medical and dental insurance
coverage at your own expense for the balance, if
any, of the period required by law;
(v) life insurance coverage until the end of the
Employment Term (the amount of Salary covered by
such insurance to be reduced by the amount of any
salary payable to you by a third party); and
<PAGE> 10
Peter Bachmann
As of January 1, 1997
Page 10
(vi) stock options granted to you under any of
Spelling's Stock Option Plans which are exercisable
on or prior to the date of the termination of your
employment under paragraph 8(b) or 8(c) or that
would have vested and become exercisable on or
before the last day of the Employment Term will be
exercisable until six (6) months after the date of
such termination or, if earlier, the expiration
date of the stock options;
provided, however, you shall be required to mitigate the amount of any payment
provided for in (i), (ii) and (iii) of this paragraph 8(d) by seeking other
comparable employment or otherwise (to the extent required by law), and the
amount of any such payment provided for in (i), (ii) and (iii) shall be reduced
by any compensation earned by you from a third person except that mitigation
shall not be required, and no reduction for any other compensation shall be
made, for eighteen (18) months after the termination of your employment or for
the period commencing with the termination of your employment and ending on the
last day of the Employment Term, whichever is shorter. The payments provided for
in (i) above are in lieu of any severance or income continuation or protection
under any Spelling plan that may now or hereafter exist. The payments and
benefits to be provided pursuant to this paragraph 8(d) shall constitute
liquidated damages, and shall be deemed to satisfy and be in full and final
settlement of all obligations of Spelling to you under this Agreement.
(e) Termination of Benefits. Notwithstanding anything in this
Agreement to the contrary (except as otherwise provided in paragraph 8(d) with
respect to medical, dental and life insurance), coverage under all Spelling
benefit plans and programs (including, without limitation, vacation, 401(k) and
pension plans, LTD and car insurance) will terminate upon the termination of
your employment except to the extent otherwise expressly provided in such plans
or programs.
(f) Non-Renewal Notice, Etc. Spelling shall notify you in writing
in the event that Spelling elects not to extend or renew this Agreement. If
Spelling gives you such notice less than twelve (12) months before the end of
the Employment Term, or your employment terminates pursuant to paragraph 8(b) or
8(c) hereof during the final twelve (12) months of the Employment Term, you
shall be entitled to receive Salary as provided in paragraph 3(a), payable in
accordance with Spelling's then effective payroll practices, subject to
applicable withholding requirements, for the period commencing after the end of
the Employment Term which, when added to the portion of the Employment Term, if
any, remaining when the notice is given or the termination occurs,
<PAGE> 11
Peter Bachmann
As of January 1, 1997
Page 11
equals twelve (12) months; provided, however, you shall be required to mitigate
the amount of any payment pursuant to this paragraph 8(f) by seeking other
comparable employment or otherwise (to the extent required by law), and the
amount of any such payment shall be reduced by any compensation earned by you
from a third person except that mitigation shall not be required, and no
reduction for any other compensation shall be made, for six (6) months after the
expiration of the Employment Term. The payments provided for in this paragraph
8(f) are in lieu of any severance or income continuation or protection under any
Spelling plan that may now or hereafter exist.
9. Death. If you die prior to the end of the Employment Term, your
beneficiary or estate shall be entitled to receive your Salary up to the date on
which the death occurs and pro-rated Target Bonus and to exercise all Spelling
stock options consistent with the terms and conditions of the Spelling Stock
Option Plans.
10. Section 317 and 507 of the Federal Communications Act. You represent
that you have not accepted or given nor will you accept or give, directly or
indirectly, any money, services or other valuable consideration from or to
anyone other than Spelling for the inclusion of any matter as part of any film,
television program or other production produced, distributed and/or developed by
Spelling, Viacom and/or Viacom's affiliates.
11. Equal Opportunity Employer. You acknowledge that Spelling is an
equal opportunity employer. You agree that you will comply with Spelling
policies regarding employment practices and with applicable federal, state and
local laws prohibiting discrimination on the basis of race, color, creed,
national origin, age, sex or disability.
12. Notices. All notices required to be given hereunder shall be given
in writing, by personal delivery or by mail at the respective addresses of the
parties hereto set forth above, or at such other address as may be designated in
writing by either party, in the case of Spelling, to the attention of the
General Counsel of Spelling and, in your case, with a copy to the attention of
Ronald S. Barak, Esq., Manatt, Phelps & Phillips, 11355 West Olympic Boulevard,
Los Angeles, California 90064. Any notice given by mail shall be deemed to have
been given three days following such mailing.
13. Assignment. This is an Agreement for the performance of personal
services by you and may not be assigned by you or Spelling, except that Spelling
may assign this Agreement to Viacom or any affiliate of Viacom or any successor
in interest
<PAGE> 12
Peter Bachmann
As of January 1, 1997
Page 12
to Spelling, Viacom or any affiliate of Viacom. Notwithstanding the foregoing,
no such assignment shall affect the duties and responsibilities provided for you
herein.
14. California Law. This Agreement and all matters or issues collateral
thereto shall be governed by the laws of the State of California applicable to
contracts entered into and performed entirely therein.
15. No Implied Contract. Nothing contained in this Agreement shall be
construed to impose any obligation on Spelling to renew this Agreement or any
portion thereof. The parties intend to be bound only upon execution of a written
agreement and no negotiation, exchange of draft or partial performance shall be
deemed to imply an agreement. Neither the continuation of employment nor any
other conduct shall be deemed to imply a continuing agreement upon the
expiration of this Agreement.
16. Entire Understanding. This Agreement contains the entire
understanding of the parties hereto relating to the subject matter herein
contained, and can be changed only by a writing signed by both parties hereto.
17. Void Provisions. If any provision of this Agreement, as applied to
either party or to any circumstances, shall be adjudged by a court to be void or
unenforceable, the same shall be deemed stricken from this Agreement and shall
in no way affect any other provision of this Agreement or the validity or
enforceability of this Agreement.
<PAGE> 13
Peter Bachmann
As of January 1, 1997
Page 13
18. Supersedes Previous Agreement. Except to the extent of any accrued
but unpaid obligations under any prior agreement, this Agreement supersedes and
cancels all prior agreements relating to your employment by Spelling.
If the foregoing correctly sets forth our understanding, please sign one
copy of this letter and return it to the undersigned, whereupon this letter
shall constitute a binding agreement between us.
Very truly yours,
SPELLING ENTERTAINMENT GROUP INC.
By: /s/ PHILIPPE P. DAUMAN
------------------------------
Name: Philippe P. Dauman
Title: Director
ACCEPTED AND AGREED:
/s/ PETER BACHMANN
- -----------------------------
Peter Bachmann
<PAGE> 1
EXHIBIT 11
SPELLING ENTERTAINMENT GROUP INC.
EXHIBIT 11 - COMPUTATION OF NET LOSS PER COMMON
AND COMMON EQUIVALENT SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss:
Continuing operations $(18,087) $ (730) $(14,322) $ (2,839)
Discontinued operations -- (3,831) -- (27,454)
-------- -------- -------- --------
Net loss $(18,087) $ (4,561) $(14,322) $(30,293)
======== ======== ======== ========
Shares:
Basic shares - weighted average of common shares
outstanding 90,746 90,422 90,730 90,311
Additional shares assuming conversion of stock
options and warrants -- -- -- --
-------- -------- -------- --------
Primary shares 90,746 90,422 90,730 90,311
Additional shares, when dilutive, assuming full
dilution of stock options and warrants -- -- -- --
-------- -------- -------- --------
Fully diluted shares 90,746 90,422 90,730 90,311
======== ======== ======== ========
Basic, primary and fully diluted net
loss per common and
common equivalent share:
Continuing operations $ (0.20) $ (0.01) $ (0.16) $ (0.03)
Discontinued operations -- (0.04) -- (0.31)
-------- -------- -------- --------
Net loss
per common and common equivalent share $ (0.20) $ (0.05) $ (0.16) $ (0.34)
======== ======== ======== ========
</TABLE>
Note 1: This calculation is submitted in accordance with the Securities
Exchange Act of 1934 although not required by paragraph 30 of APB
Opinion No. 15 because the calculation of primary and fully diluted
net loss per common and common equivalent share would be
anti-dilutive for all periods presented.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30,
1997 AND THE UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE
NINE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,262
<SECURITIES> 0
<RECEIVABLES> 114,611
<ALLOWANCES> 17,944
<INVENTORY> 262,224
<CURRENT-ASSETS> 364,231
<PP&E> 26,009
<DEPRECIATION> 13,915
<TOTAL-ASSETS> 803,180
<CURRENT-LIABILITIES> 123,313
<BONDS> 0
0
0
<COMMON> 91
<OTHER-SE> 303,745
<TOTAL-LIABILITY-AND-EQUITY> 803,180
<SALES> 423,408
<TOTAL-REVENUES> 423,408
<CGS> 382,050
<TOTAL-COSTS> 382,050
<OTHER-EXPENSES> 43,920
<LOSS-PROVISION> 6,273
<INTEREST-EXPENSE> 15,207
<INCOME-PRETAX> (12,100)
<INCOME-TAX> 2,222
<INCOME-CONTINUING> (14,322)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,322)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
