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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
Exchange Act of 1934
FOR FISCAL YEAR ENDED DECEMBER 31, 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
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5700 Wilshire Boulevard
Los Angeles, California 90036
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(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (213) 965-5700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $.001 Par Value New York and Pacific Exchanges
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--------- -----.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K.
On March 26, 1998, the registrant had 92,394,374 outstanding shares of Common
Stock, $.001 par value, and at such date, the aggregate market value of the
shares of Common Stock held by non-affiliates of the registrant was
approximately $159,771,000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Portions of Registrant's Proxy Statement relating to the 1998
Annual Meeting of Shareholders on May 21, 1998.
Part IV - Portions of previously filed reports and registration statements.
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SPELLING ENTERTAINMENT GROUP INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
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PAGE
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PART I
<S> <C> <C>
Item 1. Business 3
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 49
PART III
Item 10. Directors and Executive Officers of the Registrant 50
Item 11. Executive Compensation 50
Item 12. Security Ownership of Certain Beneficial Owners
and Management 50
Item 13. Certain Relationships and Related Transactions 50
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 51
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ITEM 1. BUSINESS
INTRODUCTION
Spelling Entertainment Group Inc. (the "Company") is a producer and distributor
of television series, mini-series and movies-for-television (collectively
referred to hereinafter as "television product") and interactive games. The
Company has an extensive library of television product and feature-length films,
which it distributes worldwide. The Company also licenses and otherwise exploits
ancillary rights of this product, such as music and merchandising rights. Unless
the context indicates otherwise, "Spelling" or the "Company" refers to Spelling
Entertainment Group Inc. and its subsidiaries.
The Company (formerly The Charter Company) was originally incorporated in
Florida in 1959. The Company was formerly engaged in petroleum operations, but
substantially all of its remaining operations in this area were sold in 1992.
(See Note 9 to the Company's Consolidated Financial Statements; references to
Notes hereinafter are to the notes to such financial statements.) The Company
began production and distribution of entertainment product when it acquired 82%
of Spelling Entertainment Inc. ("SEI") in May 1991. It acquired the remaining
shares of SEI in July 1992. The Company acquired all of the stock of Republic
Entertainment Inc. (formerly Republic Pictures Corporation, with its
subsidiaries, hereinafter "Republic") on April 26, 1994 and approximately 91% of
the Ordinary Shares of Virgin Interactive Entertainment Limited, ("VIEL") on
July 30, 1994.
The Company's television production operations are conducted by subsidiaries of
the Company, including Spelling Television Inc. ("Spelling Television"), and Big
Ticket Television Inc. and its subsidiaries ("Big Ticket Television"). The
Company is engaged in the worldwide distribution of television product and
feature-length films through Worldvision Enterprises, Inc. and its subsidiaries
("Worldvision"). The Company's licensing and merchandising operations are
conducted by Hamilton Projects, Inc. ("Hamilton Projects"). Republic conducts
home video distribution for the Company's product into the sell-through video
market. In August 1997, the Company ceased the distribution of home video
rental titles and licensed its remaining 1997 titles to Paramount Home Video.
VIEL produces and distributes interactive games. On February 20, 1997, the
Company announced its intention to dispose of VIEL (together with its
subsidiaries, "VIE"). Accordingly, VIE is presented as a discontinued operation
in the accompanying financial statements. Feature film production, acquisition
and distribution is conducted by Spelling Films Inc. and its subsidiaries
("Spelling Films"). On February 19, 1998, the Company announced its decision to
exit the feature film business and close Spelling Films.
Approximately 48% of the Company's Common Stock was owned by American Financial
Corporation and its subsidiaries ("AFC") until March 31, 1993, when AFC sold the
Common Stock it owned to Blockbuster Entertainment Corporation ("BEC"). BEC
acquired additional Common Stock during 1993 and 1994, both from third parties
and from the Company. Effective as of September 29, 1994, BEC merged with and
into Viacom Inc. ("Viacom"), with Viacom being the surviving corporation. As a
result of the merger, and the subsequent acquisition of the Company's shares and
the exercise of certain warrants, Viacom currently owns approximately 80% of the
Company's Common Stock.
In the ordinary course of business, the Company has and expects to continue to
do business with Viacom and its affiliates, including Blockbuster, Showtime,
Nickelodeon and Paramount. In each case the transaction is negotiated on an
arms-length basis and the Company believes that the transaction is at least
equal to the value that the Company could obtain from an outside third party.
Effective May 26, 1995, the Company changed its state of incorporation to
Delaware.
The Company has its principal executive offices at 5700 Wilshire Boulevard, Los
Angeles, California 90036, telephone (213) 965-5700.
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PROGRAMMING - DEVELOPMENT AND PRODUCTION
NETWORK PROGRAMMING
The Company develops and produces programming for the U.S. television networks
through Spelling Television and Big Ticket Television. Scripts for potential
television programming are usually developed by the Company in conjunction with
one of the broadcast networks. If the network orders the script to production,
it will typically order a pilot episode or presentation, for which it will pay
the Company a fixed license fee pursuant to a negotiated license agreement. If
the network exercises its option to order episodes of the series, the license
agreements provide for a minimum number of episodes to be delivered, with the
network having certain rights to order additional episodes. All other ownership
and distribution rights are generally retained by the Company, subject to
certain network-related holdbacks. Alternatively, certain network agreements
provide that the network has a financial or ownership interest, and sometimes,
distribution rights, in the program, or the network has a interest in the
profits from exploitation of the program. These agreements grant the network the
right to exhibit the episodes a limited number of times in the United States
during the license period.
The license fees paid by the networks are typically less than the Company's
costs of producing the related programming, resulting in a deficit for the
Company. In recent years, the size of the series deficits incurred by the
Company has generally increased as escalations in license fees have failed to
keep pace with escalations in production costs. However, in the case of its one
hour drama series, the Company has generally been successful in obtaining
sufficient revenue from its international sales to offset a significant portion
of its production deficits. See "Business-Distribution."
Aaron Spelling, Chairman and Chief Executive Officer of Spelling Television and
Vice Chairman of the Company, has a history of successful network television
production, including more than 3,800 hours of television series, movies-for-
television and mini-series, as well as feature films. In association with a
variety of partnerships, Mr. Spelling has consistently been one of the
industry's most creative and prolific producers of network television
programming, producing such successful series as "Beverly Hills, 90210,"
"Melrose Place," "The Love Boat," "Dynasty," "Hotel," "Vegas" and "Matt
Houston." He has also produced "Fantasy Island," "Charlie's Angels," "Starsky
and Hutch," "Family" and "Hart to Hart."
Spelling Television is currently producing four one-hour drama television series
and a one-hour daytime serial. "Beverly Hills, 90210," which is currently in its
eighth season, has been ordered by Fox Broadcasting Company ("FBC") for a ninth
season. "Melrose Place" is now in its sixth season, and also has been ordered by
FBC for an additional season. "7th Heaven," which is airing in its second season
on The WB Television Network ("WB"), has been ordered by WB for a third season.
Spelling Television is also currently producing six episodes of the "Love Boat:
The Next Wave," for UPN which is scheduled to debut in April 1998. The daytime
serial "Sunset Beach," which debuted in January 1997 on NBC, is currently in its
second year.
Spelling Television has a number of movies-for-television and pilots for series
in development and has received six pilot orders for the 1998/1999 television
season from CBS, NBC, WB and Lifetime. These pilots represent a variety of
action, adventure and drama series. There is no assurance that any of these
pilots will be ordered to series by the networks.
Big Ticket Television was established in November 1994 to develop and produce
half-hour situation comedy series for the U.S. television networks, and
programming for first-run syndication. Big Ticket Television is currently
producing a half-hour situation comedy, "Moesha," which is airing on UPN, and
which has been ordered by the network for a fourth season. Big Ticket Television
has received three pilot orders for half-hour situation comedies for the
1998/1999 television season from ABC, NBC and CBS. There is no assurance that
any of these pilots will be ordered to series by the networks.
The Company had revenue from FBC in 1997, 1996 and 1995 representing 21%, 20%
and 22% of total revenue, respectively.
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FIRST-RUN SYNDICATED PROGRAMMING
First-run syndicated television series are produced and sold directly to
television stations or groups of stations in the United States without any prior
network broadcast. These programs are licensed and exhibited on a market-by-
market basis, in contrast to network distribution where the programs are
telecast simultaneously, which provides more concentrated and direct access to a
national audience.
In first-run syndication, programming is licensed domestically by Worldvision in
exchange for cash payments, advertising time ("barter") or a combination of
both. Internationally, Worldvision distributes this programming primarily for
cash license fees. When programs are licensed on a cash basis, a broadcaster
agrees to pay a license fee in one or more installments in exchange for the
right to broadcast the programming a specified number of times over an agreed
license term. When programming is licensed on a barter basis, the Company
reserves a specified amount of advertising time during the broadcast, which it
sells for cash to national advertisers. Through its advertising sales staff,
Worldvision carries out this function on behalf of the Company.
As compared to programming produced for the networks, the Company exercises
greater control over creative and production decisions related to its first-run
syndicated programming. However, there may be greater financial risk associated
with such programming as there is no third-party network to share the production
and promotion costs. While the license fees paid by a network for television
programming are fixed by contract, barter revenue derived from the broadcasting
of first-run syndicated programming is not fixed in amount, but varies depending
on the ratings success of the programming. Such ratings may vary significantly
between different types of programming, as well as between individual programs.
Even when a first-run syndicated program is ultimately successful, its revenue
is often less than the Company's costs of producing, promoting and distributing
the program during its initial years. However, if a program has strong ratings,
the advertising revenue and cash license fees which may be realized by the
Company can be substantial.
In 1996 and 1997, Worldvision distributed in first-run syndication three half-
hour series: "Judge Judy," "America's Dumbest Criminals," and "Night Stand with
Dick Dietrick." "Judge Judy" and "Night Stand with Dick Dietrich" are produced
by Big Ticket Television. "Night Stand with Dick Dietrich" also aired on E!
Entertainment, a basic cable channel, under a cash license fee arrangement.
"Judge Judy" and "America's Dumbest Criminals" are presently in their second
seasons, "Judge Judy" is being sold on a cash and barter basis and "America's
Dumbest Criminals" on a barter basis. In 1997, Worldvision financed and
distributed the first season of the game show "Pictionary" on a cash and barter
basis. Additionally, Worldvision is preparing to launch a new half-hour first-
run syndication program for the 1998/1999 season entitled "Judge Joe Brown," to
be produced by Big Ticket Television and, if successfully launched, will be
distributed on a cash and barter basis.
FEATURE FILMS
In 1990, the Company began acquiring and distributing theatrical feature films
in international markets through Spelling Films, and subsequently increased
these activities to include the development and production of films. Most
recently Spelling Films typically acquired all international distribution rights
(i.e. theatrical, television and home video) to such films by paying a
guaranteed advance to the producer and then licensed these distribution rights,
generally on an all-rights, territory-by-territory basis to local distributors
in the foreign territories. Under this approach, Spelling Films generally
covered all or a substantial portion of its acquisition cost, reduced its risk
and capital requirements, but also limited its profit potential.
In 1997, Spelling Films' releases included "Breakdown," starring Kurt Russell,
J.T. Walsh and Kathleen Quinlan, and "In & Out," starring Kevin Kline, Joan
Cusack, Bob Newhart and Tom Selleck, both of which were distributed domestically
by Paramount Pictures ("Paramount"). In addition, during 1997 Spelling Films
engaged Paramount to distribute "In & Out" and "Breakdown" in certain foreign
territories. Other 1997 films included "For Roseanna" (aka "Roseanna'a Grave"),
starring Jean Reno, Mercedes Ruehl and Polly Walker, distributed domestically by
Fine Line Features and "The House of Yes," starring Parker Posey, Josh Hamilton,
Tori Spelling, Freddie Prinze, Jr. and Genevieve Bujold, which was distributed
domestically by Miramax Film Corp. In 1996, Spelling Films fully financed and
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produced "Night Falls on Manhattan" starring Andy Garcia, Lena Olin and Richard
Dreyfuss. Spelling Films entered into an agreement with Paramount to handle
domestic theatrical and pay television distribution for "Night Falls on
Manhattan," but sold and distributed the film in all other markets and media
through the Company's own sales and distribution operations during 1997.
In February 1998, the Company announced plans to close its Spelling Films unit
to capitalize on the greater growth potential of its successful television
production and distribution operations. Spelling Films will be closed in a
manner to preserve the assets and insure that current projects, including films
already in distribution, are appropriately serviced and exploited.
DEVELOPMENT AND PRODUCTION RISKS
There are a number of factors beyond the Company's control which may affect the
timely completion of the development and production of the Company's
entertainment product, including availability of talent and other resources
integral to these processes as well as the status of various collective
bargaining agreements. The Company attempts to minimize such risks to the
greatest extent possible through the active management of the development and
production process. See "Competition," "Technology" and "Employees."
DISTRIBUTION
In addition to its production activities, the Company is actively engaged in the
worldwide distribution of television product and feature length films, either
directly or through subdistributors. As a result of these activities, as of
December 31, 1997, the Company had contractual agreements with licensees which
provide for approximately $121,266,000 in future revenue, approximately 53% of
which is expected to be recognized after 1998. As of December 31, 1996, the
Company had contractual agreements which provided for approximately $173,773,000
in future revenue.
TELEVISION DISTRIBUTION
Worldvision has been engaged in the distribution of entertainment product in the
worldwide television market for more than 35 years, originally serving as the
distribution arm of the ABC Network. Today, Worldvision is a leading
distributor and as of December 31, 1997 held rights to more than 8,000 hours of
programming available for domestic television distribution and more than 18,000
hours of programming for international television distribution, including the
Company's television product, most of the original ABC library, as well as the
original NBC library which was acquired through Republic. Worldvision also
distributes the available television rights to the Spelling Films and Republic
libraries, as well as certain television rights to the Carolco library.
Worldvision currently distributes such programming in the United States through
offices located in Atlanta, Los Angeles and Chicago and in approximately 110
countries through offices or representatives located in London, Paris, Toronto,
Sydney, Tokyo and Rio de Janeiro.
Demand for American-made entertainment product in international markets has
increased in recent years due to the increase in the number of international
television stations, cable systems and satellite delivery systems in those
markets and, in some territories, the privatization of the local television
industry. The Company typically begins to earn international television revenue
from its television programming during the same season such programming is
originally broadcast in the United States. Substantially all of the Company's
television programming has been or is presently being distributed by Worldvision
in international television markets. At the time of the Company's acquisition,
the Republic library had previously been licensed for various terms in many
territories around the world and will not be fully available for the Company's
exploitation in the near term.
In December 1996, the Company and the KirchGroup entered into a television
licensing agreement whereby the KirchGroup has licensed Spelling's existing
library through 2010 for free and pay television, pay per view and near video on
demand principally for the German-language territories of Europe.
Additionally, for the period 1996-
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2000, the KirchGroup licensed certain rights to newly produced television mini-
series, movies series and certain theatrical feature films in the German-
language territories and made-for-television movies for continental Europe. The
Company has the option to extend that agreement for an additional five years.
In March 1993, Spelling Satellite Networks ("SSN") launched its basic
cable/satellite delivered channel, TeleUNO, which currently reaches more than
6.6 million subscribers in Latin America including Mexico, Argentina and Brazil.
TeleUNO generates both subscription fees and advertising revenue.
The profitability of the Company's network television programming continues to
depend substantially on the consumer's acceptance of the programming in the
domestic syndication market after initial network exhibition. Expected revenue
per episode in this market is normally greater for more popular shows and longer
running series. At least four broadcast seasons of a series are typically
required to successfully license repeat showings of a series in the domestic
syndication market. Worldvision is currently distributing "Beverly Hills,
90210" in the domestic syndication market and has entered into off-network
domestic syndication agreements for both "Moesha" and "7th Heaven." Episodes
from a network series typically become available for off-network syndication or
basic cable exploitation four to six years after the series' initial network
telecast.
Domestic basic cable television potentially represents an increasingly
significant market for the Company's product to offset the potential decrease in
syndication opportunities as a result of the increase in original television
production due to the emergence of the UPN and WB and stations affiliated with
them and airing programming provided by these new networks in lieu of reruns.
The series "Melrose Place," "Models, Inc.," "Hotel," "Vegas" and "Dynasty,"
among others, have been licensed to cable television. Cable exhibition has
effectively developed as an alternative market, albeit traditionally a less
lucrative one, than domestic syndication. However, each year a greater number
of successful network television series are being licensed to basic cable in
lieu of domestic broadcast syndication and certain high-profile and successful
programming is able to generate off-network license fees comparable to, and in
some cases, greater than, the fees available in domestic syndication.
Additionally, cable exhibitors in some instances have purchased rights to short-
running television series which do not include sufficient episodes to allow for
traditional off-network syndication. In addition, cable television has been
licensing increasing amounts of library programs in windows following off-
network syndication.
While still in development in many countries, cable television opportunities
outside the U.S. have also been growing rapidly.
See "Government Regulation" for restrictions placed on exhibition of the
Company's entertainment product in certain markets.
LICENSING AND MERCHANDISING
Hamilton Projects is a full-service consumer product and promotional licensing
agency, providing its clients with strategic planning, concept development and
product marketing program management. Hamilton Projects typically earns its
fees through a commission based upon the royalties earned by its clients from
the sale of licensed consumer products, promotions and books based upon the
copyrights, trademarks and trade names of the companies it represents. In
addition to managing the consumer product merchandising programs for "Beverly
Hills, 90210(R)" and "Melrose Place(R)," Hamilton Projects also represents
several third parties, such as Jeep(R), Dr. Scholl's,(R) Comedy Central's South
Park(TM) and the United States Postal Service(R). Through the efforts of
Hamilton Projects, the Company has taken advantage of various consumer product
and promotional opportunities such as a dedicated show on the Q2 channel of QVC
and phone cards to market "Melrose Place" merchandise; the operation of World
Wide Web sites on the Internet; the introduction of the Melrose Place Fragrance;
as well as the traditional merchandising of clothing, posters, calendars and
books.
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HOME VIDEO DISTRIBUTION
Domestically, videocassettes are sold by Republic through its own sales force to
independent wholesalers for resale to retail outlets, or in some instances,
directly to retailers for the sell-through market. Internationally, the Company
licenses third parties to distribute its product in the home video market,
generally in exchange for a minimum guarantee against future royalties. The
Republic library has previously been licensed in most territories outside of
North America, and little additional revenue is anticipated in the near term
from such territories.
As a result of the decrease in the market for made-for-video product, and the
expectation that this trend would continue, the Company has ceased to acquire
made-for-video titles and in 1997 distributed only those titles for which it had
prior contractual commitments. In August 1997, the Company ceased the wholesale
distribution of home video rental titles, licensing its remaining seven 1997
titles, including "Night Falls on Manhattan," to Paramount Home Video. The
Company is continuing to exploit the Republic library in the sell-through video
marketplace.
THEATRICAL FILM DISTRIBUTION
Spelling Films generally licensed the international theatrical, home video
and/or television rights to its films to various subdistributors in each
territory in exchange for a guaranteed advance plus, in most cases, a share of
profits after the subdistributor takes a distribution fee and recoups its costs.
For certain films, Spelling Films elected to presell most territories and
entered into distribution arrangements in a few, select territories. In the
case of its distribution arrangements, Spelling Films received no advance,
however, the subdistributor retained a lower distribution fee and Spelling Films
received the balance of any revenue generated. In certain cases where Spelling
Films retained the domestic home video and worldwide television rights, Republic
and Worldvision distributed such films for Spelling Films in those media and
territories. The Company will continue to exploit the distribution rights from
the Spelling Films library in television, home video and other media.
To the extent that Spelling Films and/or Republic desired to exploit feature
films in the United States and Canadian theatrical markets, they engaged a third
party to handle such distribution. See "Business - Feature Films."
TRADEMARKS, SERVICE MARKS AND COPYRIGHTS
The Company or its subsidiaries own various United States trademarks and service
marks, including SPELLING ENTERTAINMENT(R), SPELLING TELEVISION(R), BEVERLY
HILLS, 90210(R), MELROSE PLACE(R), COMMAND AND CONQUER(R), REPUBLIC
ENTERTAINMENT(R), WESTWOOD STUDIOS(TM), WORLDVISION ENTERPRISES(R), BIG TICKET
TELEVISION(R), and 7TH HEAVEN(TM), and has applied for registration for
numerous other marks relating to its entertainment product in the United States
and foreign countries. The Company uses the VIRGIN name and trademark under a
license which expires in July 1999, with the Company having an option to extend
the license an additional five years to July 2004. The Company or its
subsidiaries own various foreign trademark and service mark registrations and
have pursued licensing and/or merchandising opportunities related to the use of
certain of these marks. The Company registers and endeavors to take the
necessary actions to protect the marks created and acquired in its businesses.
See "Distribution - Licensing and Merchandising."
The Company regularly obtains copyright protection for each episode of its
television programs, for its feature films and for other entertainment product.
Certain of the Company's copyrights, trademarks and service marks may be
considered material to the Company's business.
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DISCONTINUED OPERATIONS
On February 20, 1997, the Company announced its intention to dispose of VIE, its
interactive game subsidiary, and is continuing to pursue its plan to dispose of
VIE. Accordingly, VIE is presented as a discontinued operation in the
accompanying financial statements.
VIE is a developer, publisher and distributor of interactive games throughout
the world. VIE develops its products for use on both multimedia personal
computers and dedicated gaming consoles. VIE generates its revenues through the
sale, distribution and licensing of products that it has developed internally,
through collaboration with external developers, or through other co-publishing,
licensing or distribution relationships with third parties. During 1997, VIE
released, among other titles, "Command & Conquer: Red Alert," "Blade Runner,"
"Golden Nugget," "Resident Evil" and "Hercules."
Prior to 1992, the Company, formerly known as The Charter Company, was engaged
in petroleum operations, all of which have been sold or discontinued.
Additional information relating to discontinued operations, including
information regarding environmental contingencies, is provided in the
accompanying financial statements. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Discontinued
Operations" and Notes 1, 2 and 9.
COMPETITION
The entertainment industry is highly competitive with many companies competing
for available literary properties, creative personnel, talent, production
personnel, distribution channels and financing which are essential to acquire,
develop, produce and distribute entertainment product. The Company's
competitors include major motion picture and television companies, the networks
and station groups, as well as independent production and distribution
companies. Certain of the Company's competitors have greater financial
resources than those of the Company.
Despite the fact that the Company may receive an order from the networks for the
production of a pilot, series, movie or mini-series, the networks are under no
obligation to actually broadcast the Company's product. The Company's
successful off-network domestic sale of a network series generally depends upon
the ratings achieved through network exhibition of such a series over a number
of years. In turn, the Company's overall success in achieving multiple years of
network exhibition of a series is dependent upon unpredictable factors such as
the viewing public's acceptance as reflected by its ratings. Similarly, the
overall success of the Company's first-run syndicated programming is dependent
upon its ability to attain sufficient ratings to support the continuing renewal
of the program.
In addition to its internally produced product, the Company continues to acquire
distribution rights to entertainment product produced by third parties. In
order to acquire rights to distribute new third-party product, the Company
competes with third parties on terms, including the size of any guaranteed
advance payments and distribution fees it charges.
Licensing television programming to broadcast networks and cable networks has
also become increasingly competitive as broadcast networks are now permitted to
have a financial interest in and/or own syndication rights to programs they
broadcast. The broadcast networks now air a significant amount of programming
which they have said interest and rights in. In addition, certain of the
Company's competitors attempt to develop their own programming services which
reduces the time available for syndicated programming.
The Company's ability to compete in certain countries is affected by an increase
in investment in local production by local and U.S. media companies as well as
local restrictions and quotas. Governments of certain countries require that a
minimum percentage of locally produced programming be broadcast. See
"Government Regulation."
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TECHNOLOGY
The Company is subject to business risks as a result of changing technologies in
the media, communications and computer industries. Changes in hardware
platforms, new digital disk systems, direct-to-home satellite systems and other
new delivery systems also provide new opportunities and markets for the Company.
The Company endeavors to minimize the risk of technological change to or
obsolescence of a particular hardware platform or media and take advantage of
new markets created by changing technologies. Additionally, the risk of illegal
manufacture and distribution of the Company's entertainment product may increase
with the advancement and proliferation of various technologies. It is difficult
for the Company to determine the impact of such piracy.
GOVERNMENT REGULATION
The production and distribution of television programming by independent
producers is not directly regulated by the federal or state governments, but the
marketplace for television programming in the U.S. is substantially affected by
regulations of the Federal Communications Commission ("FCC") applicable to
television stations, television networks and cable television systems. With
respect to the ownership of programming by broadcast television networks, the
FCC in September 1995 repealed its rules prohibiting such networks from
acquiring financial interest and syndication rights in television programming
produced by program suppliers such as the Company. Accordingly, the networks
are able to own the programming which they broadcast, and increasingly become
competitors of the Company in the production and distribution of programming.
As to ownership of broadcast television stations on a national basis, in
February 1996 Congress enacted the Telecommunications Act of 1996 (the "1996
Act"), which, among other things, eliminated the 12-station cap on nationwide
ownership of television stations and increased from 25% to 35% the nationwide
audience reach of commonly owned television stations. This provision of the
1996 Act served to further increase the broadcast networks' and major studios'
ability to secure distribution for their own programming product. On a local
basis, various FCC rules and policies limit the ownership of broadcast
television stations. As directed by the 1996 Act, the FCC recently initiated a
biennial review of national and local ownership rules. Changes in these rules
could augment the market power of television group owners and could have an
impact on the market for the Company's syndicated television product.
In 1989, the 12-member European Community ("EC") adopted a directive that its
member states ensure that more than 50% of the programming shown on their
television stations be European-produced "where practicable and by appropriate
means to be achieved progressively on the basis of suitable criteria." These
guidelines could restrict the amount of American television programming and
feature films that are shown on European television. In the recently concluded
General Agreement on Trade & Tariffs, the EC refused to make any commitment to
modify these guidelines or to refrain from adopting additional barriers.
Because of significant questions regarding the interpretation and enforcement as
well as the possible future modification of the current guidelines, the Company
cannot predict what effect they may have on its business. In its review of the
1989 directive, the EC agreed to continue with the 1989 wording which will not
tighten the quotas or reduce the flexibility with regard to the quotas. In
addition, many European countries have adopted individual national restrictions
on broadcasting of programming based on origin. Other countries in which the
Company distributes its programming may adopt similar restrictions, which may
have an adverse effect on its ability to distribute its programs or create
stronger incentives for the Company to establish ventures with international
firms. Further, foreign countries have regulations that impact or regulate the
Company's customers.
10
<PAGE>
Congress is presently considering a revision to the compulsory copyright license
schemes applicable to direct-to-home satellite video programming ("DTH")
distributors. In August 1997, a copyright arbitration royalty panel ruled that
the DTH rates for retransmission of distant broadcast signals should be
increased. This decision was updated by the Librarian of Congress who set the
effective date for the rate increase as of January 1, 1998. However, the new
rate is now being challenged in federal district court and legislation has been
introduced in Congress which reinstates the old rates. The final rate to be
paid by the satellite distributors could affect the revenues which the Company
derives from the compulsory license royalty fee pool.
The effect of the foregoing regulations on the Company's operations cannot be
accurately assessed at this time.
EMPLOYEES
At December 31, 1997, the Company had approximately 900 employees, of which 475
are employed by VIE. In addition, the Company employs a large number of
individuals for particular television and feature film productions. As a
result, the total number of employees can vary substantially during the course
of a year depending upon the number and scheduling of its productions.
Certain of the Company's subsidiaries are signatories to collective bargaining
agreements relating to the engagement of various individuals in the many
different job classifications required to produce entertainment product. These
agreements set forth wage scales and fringe benefits which are generally
applicable to the production of television programming and feature films.
Typically in the United States, such agreements are industry-wide. These
employees include writers, directors, actors, musicians and studio technicians
and craftsmen.
The following table sets forth the collective bargaining agreements to which
certain of the Company's subsidiaries are parties, and the relevant expiration
dates:
<TABLE>
<CAPTION>
CONTRACT
UNION EXPIRATION DATE
----- ---------------
<S> <C>
Writers Guild of America..................................May 1, 1998
Screen Actors Guild.......................................June 30, 1998
American Federation of Television and Radio Artists.......November 15, 1998
American Federation of Musicians (TV Film)................February 15, 1999
American Federation of Musicians (TV Tape)................May 31, 1999
Directors Guild of America................................June 30, 1999
Directors Guild of America Freelance Live and Tape
Television Agreement.....................................June 30, 1999
International Alliance of Theatrical
and Stage Employees (IATSE) (United States)..............July 31, 2000
IATSE Videotape Agreement.................................July 31, 2000
</TABLE>
Although the Company considers its guilds and union relationships to be
satisfactory at present, the renewal of union contracts does not depend on its
activities or decisions alone and is largely beyond the Company's control.
Spelling Television and Big Ticket Television are members of the Alliance of
Motion Picture and Television Producers ("AMPTP"). The AMPTP is currently
negotiating with the Screen Actors Guild ("SAG") and the Writers Guild of
America ("WGA") for new collective bargaining agreements. If new agreements are
not reached by the expiration of the current SAG and WGA agreements, or if any
other material collective bargaining agreement is not concluded on a timely
basis, there could be a resulting work stoppage which could have an adverse
impact on the Company's production activities. In addition, agreements
concluded with various guilds may contain terms which may have an adverse impact
on the Company.
11
<PAGE>
ITEM 2. PROPERTIES
The Company leases office space of approximately 157,000 square feet in Southern
California and 54,000 square feet in New York City for its continuing
operations. In addition, the Company leases offices in other cities in the
United States and in various other countries throughout the world in connection
with its international distribution activities. The Company also rents
facilities on a short-term basis for the production of its entertainment
product. Management believes comparable space is readily available should any
lease expire without the prospect of renewal.
VIE leases office space of approximately 64,000 square feet in Southern
California, 37,000 square feet in Las Vegas and 24,000 square feet in London.
In addition, VIE leases offices in other cities in the United States and in
various other countries throughout the world in connection with its distribution
activities. Management believes comparable space is readily available should
any lease expire without the prospect of renewal. The Company has guaranteed
VIE's lease obligations with respect to the Las Vegas and London facilities.
(See Note 10.)
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various lawsuits, claims and other legal matters in
the course of conducting its entertainment business operations. The Company
believes such lawsuits, claims and other legal matters should not have a
material adverse effect on the Company's consolidated results of operations or
financial condition.
The Company is involved in a number of legal actions including threatened
claims, pending lawsuits and contract disputes in connection with certain
bankruptcy and environmental matters relating to the Company's discontinued
operations, as well as other matters. While the outcome of these suits and
claims cannot be predicted with certainty, the Company believes, based upon its
current knowledge of the facts and circumstances and its understanding of the
applicable law, that the ultimate resolution of such suits and claims will not
have a material adverse effect on the Company's results of operations or
financial condition. This belief is also based upon the reserves which have
been established in connection with these matters and the Company's coverage
under an insurance-type indemnity agreement which covers up to $35,000,000 of
certain such liabilities in excess of a threshold amount of $25,000,000, subject
to certain adjustments. Substantial portions of such reserves and indemnity are
intended to cover environmental costs associated with the Company's former
petroleum operations. Although there are significant uncertainties inherent in
estimating environmental liabilities, based upon the Company's experience it is
considered unlikely that the amount of possible environmental liabilities and
Chapter 11 disputed claims would exceed the amount of the reserves by more than
$50,000,000, a substantial portion of which would be covered by the indemnity
discussed above. (For a more complete description of such legal matters, see
the discussion under "Contingencies" in Note 9.)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the New York Stock and Pacific Exchanges
under the symbol SP. The table below sets forth the low and high sales prices
for the Common Stock as reported on the Composite Tape.
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
Quarter Low High Low High
------- --- ---- --- ----
<S> <C> <C> <C> <C>
First $5 1/2 $8 3/8 $9 1/4 $13 3/8
Second 5 1/4 7 1/8 6 7/8 10 1/8
Third 6 3/8 9 3/16 6 1/2 8 1/8
Fourth 6 5/8 9 1/8 6 7/8 9 5/8
</TABLE>
The number of holders of record of the Company's Common Stock as of March 26,
1998, was approximately 8,900. The Company does not currently pay dividends.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain data for the years ended December 31 (in
thousands, except per share data). Refer to "Item 7 - Management's Discussion
and Analysis of Financial Condition and Results of Operations - Discontinued
Operations" and Notes 1, 2 and 9 for discussion of discontinued operations.
<TABLE>
<CAPTION>
1997 1996 1995 1994(a) 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
- - ----------------------
Revenue from continuing
operations $ 564,239 $ 497,601 $ 452,150 $ 416,445 $ 274,899
Operating income $ 1,056 $ 23,790 $ 66,252 $ 40,394 $ 39,727
Net income (loss) from
continuing operations $ (12,322) $ 4,075 $ 34,131 $ 19,430 $ 23,659
Net income (loss) per common
share from continuing
operations (b):
Basic $ (0.14) $ 0.04 $ 0.39 $ 0.26 $ 0.42
Diluted $ (0.14) $ 0.04 $ 0.38 $ 0.26 $ 0.42
Balance Sheet Data:
- - -------------------
Total assets $ 773,580 $ 840,346 $ 956,836 $ 871,245 $ 474,471
Long-term debt $ 289,000 $ 315,000 $ 210,000 $ 181,805 $ 49,580
Shareholder's equity $ 271,018 $ 319,743 $ 558,520 $ 528,447 $ 297,854
Cash dividends per
common share $ - $ - $ - $ 0.06 $ 0.08
(a) The Company acquired Republic on April 26, 1994 and, accordingly, amounts are not comparable to 1995 or 1993.
(b) Per share amounts for 1993 are calculated after preferred dividends of $724,000.
</TABLE>
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements of the Company and the related notes.
BUSINESS COMBINATIONS, ACQUISITIONS AND DISPOSITIONS
The Company has acquired, invested in or divested of businesses based on
financial and strategic considerations. The Company may from time to time
invest in, acquire or divest of businesses or assets in addition to those
described below.
On July 30, 1994, the Company and BEC entered into an exchange agreement (the
"Exchange Agreement") and consummated the transactions contemplated thereby (the
"Acquisition"). Pursuant to the Exchange Agreement, BEC delivered to the
Company 8,686,984 ordinary shares (the "Ordinary Shares") of VIEL and an option
to acquire 550,000 Ordinary Shares of VIEL (collectively, the "VIE Interests")
in exchange for 22,015,062 shares of the Company's Common Stock. BEC had
acquired a majority of the VIE Interests from third parties on July 29, 1994.
As a result of the Acquisition, the Company acquired approximately 91% of VIEL's
Ordinary Shares.
In connection with the Acquisition, the Company also entered into put- and call-
option agreements with respect to the Ordinary Shares of VIEL not owned by the
Company. Under these agreements, the Company may acquire, or be required by
Blockbuster Entertainment Group ("BEG"), a division of Viacom, to purchase
these shares from BEG at an agreed-upon price. At the option of the Company,
such purchase price may be paid in cash or shares of the Company's Common Stock.
On June 8, 1995, BEG acquired the remaining Ordinary Shares of VIEL not owned by
the Company for approximately $22,973,000 plus other costs associated with the
transaction. BEG and the Company have executed amendments to extend the put-
and call-option agreements, which were originally scheduled to expire in July
1995, through June 30, 1998.
The Company is strengthening its core television business in an effort to
improve its performance in an increasingly competitive environment. This has
included a significant increase in the production of new television series and
first-run syndication programming, as well as expanded efforts to exploit the
Company's entertainment product on an international basis. As part of its focus
on its core business, the Company announced its intention to dispose of its
interactive game business, VIE. As a result of this decision, VIE is being
treated as a discontinued operation in the accompanying financial statements.
See "Results of Operations - Discontinued Operations" and "Financial Condition"
below and Notes 1, 2 and 9 regarding the planned disposition of VIE.
Additionally, in February 1998 the Company announced its intention to exit the
theatrical feature film business and close Spelling Films. (See Note 13.)
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 part,
upon the successful network exhibition of its television series over a
sufficient number of years to allow for off-network exhibition opportunities.
During the initial years of a one-hour television series, network and
international license fees
15
<PAGE>
substantially offset the production costs of the series, and accordingly the
Company normally recognizes a nominal loss during this period. With respect to
half-hour network programming, the production costs can substantially exceed the
combination of the network and international license fees during the initial
years and the Company normally recognizes larger losses during this period.
However, if a sufficient number of episodes of a one-hour or half-hour series
are produced, the Company is reasonably assured that it will also be able to
sell the series in the domestic off-network market, and the Company would then
expect to be able to recoup its deficits and realize a profit with respect to
these series.
First-run syndicated television series, which are sold on a cash basis, barter
basis or a combination of both, typically do not generate sufficient revenue to
cover the production and promotion costs of the programs during their initial
years and such financial risk is borne exclusively by the Company. However,
with strong ratings, the revenue which may be realized by the Company through
its cash license fees and barter arrangements can be significant.
The Company's business in general is affected by the public's acceptance of its
product, which is unpredictable and 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
regulations. On September 6, 1995, the FCC released an order repealing its
rules which prohibited television networks from acquiring financial interests
and syndication rights in television programming produced by program suppliers
such as the Company. Accordingly, the networks are able to own the programming
which they broadcast, and increasingly become competitors of the Company in the
production and distribution of programming. The Telecommunications Act of 1996
eliminates the restrictions on the number of television stations that one entity
may own and increases the national audience reach limitation by one entity from
25% to 35%, which serves to further increase the broadcast networks' and major
studios' ability to secure distribution for their own product.
The following paragraphs discuss significant items in the Consolidated
Statements of Operations for the three years ended December 31, 1997.
REVENUE
The following table sets forth the components of the Company's revenue for the
three years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------------- -------------- ---------------
<S> <C> <C> <C>
Television $ 446,572 $ 402,600 $ 352,477
Home video 68,377 57,282 74,873
Film distribution 28,666 17,418 5,903
Licensing and merchandising 15,643 15,076 15,758
Other 4,981 5,225 3,139
--------------- -------------- ---------------
$ 564,239 $ 497,601 $ 452,150
=============== ============== ===============
</TABLE>
Television revenue increased $43,972,000 (11%) and $50,123,000 (14%) in 1997 and
1996, respectively. The increase in 1997 arose primarily from (i) higher per
episode network license fees; (ii) increased hours of programming delivered to
the networks, including the new daytime serial "Sunset Beach"; and (iii)
increased first-run syndication revenue. These increases were offset by reduced
revenue from exploitation of the Company's library.
16
<PAGE>
The increase in 1996 was attributable to (i) higher per episode network license
fees; (ii) increased hours of programming delivered to the networks; and (iii)
higher revenue from the exploitation of the Company's library. These increases
were offset by reduced first-run syndication revenue and the one-time effect
recorded in the first quarter of 1995 of conforming the Company's accounting
policies to those of Viacom. (See Note 1.)
Home video revenue increased $11,095,000 (19%) in 1997 from 1996. The increase
is due primarily to the release of "Bound" in the first quarter, "Stephen King's
Thinner" in the second quarter and "Night Falls on Manhattan" in the fourth
quarter of 1997, all of which were feature films released theatrically by
Spelling Films. Home video revenue decreased $17,591,000 (23%) in 1996 from
1995. This decrease is attributable 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, at least 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 serving this market.
Film distribution revenue increased $11,248,000 (65%) and $11,515,000 (195%) in
1997 and 1996, respectively. The increase in 1997 as compared to 1996 is due
primarily to the domestic availability of "House of Yes," the domestic release
of "Night Falls on Manhattan" and the international releases of "Breakdown" and
"In & Out." The increase in 1996 as compared to 1995 is due primarily to the
Company's domestic theatrical releases of "Bound" and "Stephen King's Thinner"
in the fourth quarter of 1996. Film distribution revenue is expected to
decrease in the future as a result of the Company's decision to exit the feature
film business in February 1998, and thus cease the production, acquisition and
distribution of new feature films. (See Note 13.)
Licensing and merchandising revenue increased $567,000 (4%) in 1997 from 1996
and decreased $682,000 (4%) in 1996 from 1995. In 1997, the decline in the
licensing revenue for "Beverly Hills, 90210" and "Melrose Place" was more than
offset by an overall increase in revenue from third-party clients. In 1996, the
revenue from third-party clients did not offset the decline in revenue for
"Beverly Hills, 90210" and "Melrose Place."
Other revenue decreased $244,000 (5%) in 1997 from 1996 and increased $2,086,000
(66%) in 1996 from 1995. The decrease in 1997 is primarily attributable to
reduced stage rental revenue due to the closing of these operations in Canada.
The increase in 1996 resulted from increases in music royalties and an overall
increase in the volume of product owned and distributed by the Company.
Certain operations of the Company generate revenue denominated in foreign
currencies and, as a result, fluctuations in foreign currency exchange rates may
affect operating results. In particular, the Company generates revenue
denominated in French francs, Canadian dollars and Mexican pesos, among others.
ENTERTAINMENT PRODUCT COSTS
Entertainment product costs consist primarily of the amortization of capitalized
product costs and the accrual of third-party participations and residuals. (See
Note 1.) Such costs increased $90,681,000 (22%) and $79,756,000 (24%) in 1997
and 1996, respectively, from the prior years. The increases primarily resulted
from the increases in revenue discussed above. Additionally, the percentage
relationship between such costs and the related revenue was 89%, 83% and 74%
in 1997, 1996 and 1995, respectively. This percentage relationship is a
function of (i) the mix of entertainment product generating revenue in each
period and (ii) changes in the projected profitability of individual
entertainment product based on the Company's estimates of such product's
ultimate revenue and costs. The Company recorded write-downs to net realizable
value with respect to its entertainment product of $44,536,000, $43,967,000 and
$22,761,000 in 1997, 1996 and 1995, respectively. Included were write-downs to
net realizable value of $20,680,000, $14,636,000 and $789,000 in 1997, 1996 and
1995, respectively, related to theatrical and made-for-video feature films. The
write-downs in 1997 were primarily attributable to deficits associated with new
television series and first-run syndication programming produced or acquired,
the initial release of a feature film and the decline in the market for made-
for-video product.
17
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative costs decreased $1,309,000 (2%) in 1997 from
1996 and increased $8,157,000 (16%) in 1996 from 1995. The decrease in 1997
results from the impact of executive severance expense in 1996 with no similar
expense in the current year and the impact of the Company's ongoing cost savings
initiatives. The increase in 1996 is due primarily to the growth in the
Company's sales and distribution activities.
INTEREST EXPENSE, NET
Interest expense, net of amounts capitalized, increased $6,497,000 (45%) and
$2,548,000 (21%) in 1997 and 1996, respectively. The increase in 1997 was due
to higher average indebtedness as well as an increase in the average interest
rate. In 1996, the increase was due to higher average indebtedness partially
offset by an increase in interest capitalized due to longer production cycles
associated with the Company's increased theatrical production activities and by
a decrease in the average interest rate. (See Note 4 and "Financial Condition"
below.) The Company's interest expense is dependent upon the interest rates on
its outstanding obligations and the Company could experience significant
increases or decreases in interest expense resulting solely from increases or
decreases in such interest rates.
PROVISION FOR INCOME TAXES
During 1997, the Company's provision for income taxes decreased $8,234,000, to a
benefit of $981,000 in 1997 as compared to a provision of $7,253,000 in 1996,
largely as a result of the decrease in income from continuing operations for the
year and adjustments to tax attributes and valuation allowances offset by a
decrease in the effective tax rate. The effective tax rate decreased to 7% in
1997 from 64% in 1996, largely as a result of changes in the relationships
between revenue and expenses comprising income from continuing operations before
income taxes and adjustments to tax attributes.
During 1996, the Company's provision for income taxes decreased $15,331,000, to
a provision of $7,253,000 in 1996 as compared to a provision of $22,584,000 in
1995, largely as a result of the decrease in income from continuing operations
before income taxes, partially offset by a change in the effective tax rate.
The effective tax rate increased to 64% in 1996 from 40% in 1995, largely as a
result of the changes in the relationships between revenue and expenses
comprising income from continuing operations.
Viacom has acquired approximately 80% of the outstanding shares of the Company
and, therefore, the Company is required to be included in the consolidated
federal income tax return of Viacom. The Directors of the Company 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; and,
as a result, the Company does not anticipate any material impact to its
financial condition or results of operations.
DISCONTINUED OPERATIONS
INTERACTIVE GAME BUSINESS. On February 20, 1997, the Company announced its
intention to dispose of its interactive game business, VIE, and expects to
complete a transaction in 1998. Accordingly, VIE is presented as a discontinued
operation in the accompanying financial statements.
The financial position of the discontinued operations of VIE is presented in the
balance sheets under the captions "Net liabilities related to discontinued
operations of VIE" and "Net assets of VIE" as of December 31, 1997 and 1996,
respectively. During 1997, the Company recorded a provision of $40,000,000, net
of income taxes, for future operating losses and cash funding requirements
projected for the remaining holding period through completion of the
disposition, resulting in net liabilities at VIE. During 1996, the net assets of
VIE decreased by approximately $194,000,000 as
18
<PAGE>
a result of operating losses, the recording of an impairment loss with respect
to the carrying value of goodwill and accounting adjustments recorded in
connection with the Company's decision to dispose of VIE. (See "Financial
Condition" below and Notes 1, 2 and 9 regarding the planned disposition of VIE.)
PETROLEUM BUSINESS. The Company, formerly known as The Charter Company
("Charter"), was engaged in petroleum operations, and in 1992 sold substantially
all of the remaining such operations without material gain or loss. The Company
continues to sell the few remaining assets of the discontinued operations
whenever possible and to resolve remaining claims and liabilities. (See Note
9.)
The financial position of the discontinued operations of Charter is presented in
the balance sheets under the caption "Net liabilities related to discontinued
operations of Charter." Included in such amounts are certain allowances for
estimated expenses related to environmental matters and disputed claims relating
to the reorganization in 1986 under Chapter 11 of the Bankruptcy Code. These
allowances totaled approximately $9,331,000 and $10,986,000 at December 31, 1997
and 1996, respectively. (See Note 9.)
The Company is involved in a number of legal actions including threatened
claims, pending lawsuits and contract disputes, environmental cleanup
assessments or damages and other matters. Some of the parties involved in such
actions seek damages in very large amounts. While the outcome of these suits
and claims cannot be predicted with certainty, the Company believes, based upon
its current knowledge of the facts and circumstances and its understanding of
the applicable law, that the ultimate resolution of such suits and claims will
not have a material adverse effect on the Company's results of operations or
financial condition. This belief is also based upon the allowances described
above and the Company's coverage under an insurance-type indemnity agreement
which covers up to $35,000,000 of certain such liabilities in excess of a
threshold amount of $25,000,000, subject to certain adjustments. Substantial
portions of such allowances and indemnity are intended to cover environmental
costs associated with the Company's former petroleum operations. Although there
are significant uncertainties inherent in estimating environmental liabilities,
based upon the Company's experience it is considered unlikely that the amount of
possible environmental liabilities and Chapter 11 disputed claims would exceed
the amount of the allowances by more than $50,000,000, a substantial portion of
which would be covered by the indemnity discussed above. (See Note 9.)
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 $385,020,000
and $416,841,000 in 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 has historically been funded through the
Company's operating cash flow and borrowings under its credit arrangements. The
Company's principal credit agreement is with Viacom (the "Viacom Credit
Agreement"). (See Note 4.) 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. The Company's net
borrowings under its credit facilities decreased $26,000,000 in 1997, primarily
due to decreased production and acquisition activities, as well as reduced
funding required for the operations of VIE.
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 its financial condition remains strong and that it has
the financial resources necessary to meet its anticipated capital requirements.
The Company expects to have sufficient resources available from the cash
provided by operating activities and that available under its credit facility
and other financing sources to meet
19
<PAGE>
its ongoing plans for the production and acquisition of entertainment product
and to take advantage of internal and external development and growth
opportunities.
DISCONTINUED OPERATIONS. A wholly owned subsidiary of VIE has a revolving
multi-currency credit agreement for $100,000,000 with a bank in the U.S. (the
"Credit Agreement"). As of December 31, 1997, this subsidiary had no letters
of credit outstanding under the Credit Agreement. As of December 31, 1996,
this subsidiary had $269,000 in letters of credit outstanding under the Credit
Agreement to guarantee its interactive game purchases. Viacom has guaranteed all
of the borrowings under the Credit Agreement, which expires on September 30,
1998. (See Note 9.)
Another wholly owned subsidiary of VIE has a credit facility with a bank in the
United Kingdom ("the UK Facility") in the net amount of 10,000,000 pounds
sterling, which the Company and Viacom have guaranteed. This facility expires
on June 30, 1998. (See Note 9.) As of December 31, 1997 and 1996, this
subsidiary had approximately $938,000 and $461,000, respectively, in letters of
credit outstanding under the UK Facility to guarantee its interactive game
purchases. The Company and Viacom also provide a rent guarantee for this
subsidiary which expires in 2005.
Viacom currently owns approximately 80% of the Company's Common Stock. Pursuant
to the separate credit facilities under which Viacom is a borrower, certain
subsidiaries of Viacom, including the Company, are restricted from incurring
indebtedness (other than indebtedness owing to Viacom) without the prior consent
of Viacom's lenders. Such consent has been given with respect to the Credit
Agreement and the UK Facility.
RECENTLY ISSUED ACCOUNTING STANDARDS
In 1995, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and SFAS No.
123, "Accounting for Stock-Based Compensation," both effective for fiscal years
beginning after December 15, 1995. Both statements have been adopted in the
accompanying financial statements or notes thereto. (See Notes 1 and 5.)
In 1994, the American Institute of Certified Public Accountants issued Statement
of Position ("SOP") 94-6, "Disclosure of Certain Significant Risks and
Uncertainties," effective for fiscal years ending after December 15, 1995. The
Company adopted SOP 94-6 in the accompanying financial statements. (See Note 1.)
In May 1996, the Emerging Issues Task Force published Issue No. 96-6,
"Accounting for the Film and Software Costs Associated with Developing
Entertainment and Educational Software Products," which determined that
companies developing computer software are required to follow SFAS No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed." The Company had previously accounted for its software development
costs with respect to interactive games under the requirements of SFAS No. 53,
"Financial Reporting by Producers and Distributors of Motion Picture Films."
The Company recorded a cumulative pretax adjustment of approximately $7,500,000
resulting from the change to SFAS No. 86 in the second quarter of 1996 and
restated its second and third quarter 1996 results in filings on Form 10-QA to
reflect the cumulative and period adjustments. (See Notes 1 and 9.)
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share," which is
effective for interim and annual financial statements for periods ending after
December 15, 1997. The Company adopted SFAS No. 128 in the accompanying
financial statements. (See Note 1.)
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
effective for fiscal years beginning after December 15, 1997. The new rules
establish standards for the reporting of comprehensive income and its components
in financial statements. Comprehensive income consists of net income and other
gains and losses affecting shareholders' equity that, under generally accepted
accounting principles, are excluded from net income, such as unrealized gains
and losses on marketable equity securities and foreign currency translation
gains
20
<PAGE>
and losses. The Company will adopt SFAS No. 130 in 1998 and does not expect that
the adoption will have a material effect on its financial condition or results
of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," effective for fiscal years beginning after
December 15, 1997. The new rules establish revised standards for public
companies relating to the reporting of financial and descriptive information
about their operating segments in financial statements. The Company will
adopt SFAS No. 131 in 1998 and does not expect that the adoption will have a
material effect on its financial condition or results of operations.
OTHER MATTERS
The widespread use of computer programs that rely on two-digit dates to perform
computations and decision-making functions may cause computer systems to
malfunction in or prior to the year 2000 and lead to significant business delays
and disruptions in the U.S. and internationally. The Company has developed a
plan to minimize the impact of this "year 2000 problem" and periodically reports
on the status of its efforts to the Company's corporate officers. Pursuant to
such plan, the Company is engaged in the process of identifying programs used
by its computer systems that may malfunction as a result of the use of such two-
digit dates, and has initiated plans to rectify any problems, including
upgrading existing software packages, implementing new year 2000 compliant
systems or repairing existing software. The Company has also begun
communications with its significant suppliers to determine the extent to which
the Company's operations are vulnerable to those third parties' failure to solve
their own year 2000 issues. Management believes that the costs of resolving
potential year 2000 issues will not be material and that the necessary revisions
or replacements of material computer systems will be accomplished in a timely
fashion.
21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants 23
Consolidated Balance Sheets:
December 31, 1997 and 1996 24
Consolidated Statements of Operations:
Years ended December 31, 1997, 1996 and 1995 25
Consolidated Statements of Changes in Shareholders' Equity:
Years ended December 31, 1997, 1996 and 1995 26
Consolidated Statements of Cash Flows:
Years ended December 31, 1997, 1996 and 1995 27
Notes to Consolidated Financial Statements 28
</TABLE>
"Selected Quarterly Financial Data" has been included
in Note 12 to the Consolidated Financial Statements
22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Spelling Entertainment Group Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a) 1. and 2. on page 51 present fairly, in all
material respects, the financial position of Spelling Entertainment Group
Inc. and its subsidiaries at December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion
expressed above.
PRICE WATERHOUSE LLP
Los Angeles, California
March 27, 1998
23
<PAGE>
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31,
-------------- --------------
1997 1996
-------------- --------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 860 $ 3,325
Accounts receivable, net 104,150 104,645
Entertainment product, net 246,955 233,002
Other current assets 4,372 4,204
-------------- --------------
Total current assets 356,337 345,176
Accounts receivable, net 90,593 91,880
Entertainment product, net 127,901 182,786
Property and equipment, net 11,409 13,389
Net assets of VIE - 14,289
Intangible assets, net 187,320 192,806
Other noncurrent assets 20 20
-------------- --------------
$ 773,580 $ 840,346
============== ==============
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable, accrued expenses and other liabilities $ 34,691 $ 36,103
Accrued participation expense 59,490 54,534
Deferred revenue 15,430 21,388
Income and other taxes 4,103 791
-------------- --------------
Total current liabilities 113,714 112,816
Accrued participation expense 48,159 45,797
Long-term debt payable to Viacom 289,000 315,000
Deferred income and other taxes 25,245 36,156
Net liabilities related to discontinued operations of VIE 21,909 -
Net liabilities related to discontinued operations
of Charter 4,535 10,834
-------------- --------------
502,562 520,603
-------------- --------------
Commitments and contingent liabilities
Shareholders' Equity
Preferred Stock - -
Common Stock, $.001 par value,
- 300,000,000 shares authorized
- 90,987,329 and 90,625,321 shares issued and outstanding 91 91
Capital in excess of par value 578,704 576,260
Accumulated deficit (313,355) (261,033)
Other equity adjustments 5,578 4,425
-------------- --------------
Total shareholders' equity 271,018 319,743
-------------- --------------
$ 773,580 $ 840,346
============== ==============
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
24
<PAGE>
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year ended December 31,
-------------- ---------------- --------------
1997 1996 1995
-------------- ---------------- --------------
<S> <C> <C> <C>
Revenue $ 564,239 $ 497,601 $ 452,150
Costs and expenses:
Entertainment product costs 504,526 413,845 334,089
Selling, general and administrative 58,657 59,966 51,809
-------------- ---------------- --------------
563,183 473,811 385,898
-------------- ---------------- --------------
Operating income 1,056 23,790 66,252
Interest income 1,976 1,585 2,279
Interest expense, net (20,928) (14,431) (11,883)
Other, net 4,593 384 67
-------------- ---------------- --------------
Income (loss) from continuing operations
before income taxes (13,303) 11,328 56,715
Benefit (provision) for income taxes 981 (7,253) (22,584)
-------------- ---------------- --------------
Income (loss) from continuing operations (12,322) 4,075 34,131
Loss from discontinued operations of VIE, net - (103,820) (17,610)
Estimated loss on disposal of VIE, net (40,000) (151,380) -
-------------- ---------------- --------------
Net income (loss) $ (52,322) $ (251,125) $ 16,521
============== ================ ==============
Weighted average number of common shares:
Basic 90,777 90,369 88,458
Diluted 90,777 91,298 90,184
Basic income (loss) per common share:
Continuing operations $ (0.14) $ 0.04 $ 0.39
Discontinued operations (0.44) (2.82) (0.20)
-------------- ---------------- --------------
Basic income (loss) per common share $ (0.58) $ (2.78) $ 0.19
============== ================ ==============
Diluted income (loss) per common share:
Continuing operations $ (0.14) $ 0.04 $ 0.38
Discontinued operations (0.44) (2.79) (0.20)
-------------- ---------------- --------------
Diluted income (loss) per common share $ (0.58) $ (2.75) $ 0.18
============== ================ ==============
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
25
<PAGE>
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In Thousands, Except Number of Shares)
<TABLE>
<CAPTION>
Common Stock Capital In Other Total
----------------------------------- Excess of Accumulated Equity Shareholders'
Number Par Value Par Value Deficit Adjustments Equity
----------------- ------------ ------------- ---------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1994 87,983,329 $ 8,798 $ 546,843 $ (26,429) $ (765) $ 528,447
Exercise of options
and warrants 1,700,049 36 11,339 - - 11,375
Pension liability adjustment, net - - - - 829 829
Income tax benefit related to
stock options - - 4,318 - - 4,318
Change in par value as a
result of reincorporation - (8,744) 8,744 - - -
Unrealized holding loss, net - - - - (1,977) (1,977)
Cumulative translation adjustment - - - - (993) (993)
Net income - - - 16,521 - 16,521
----------------- ----------- -------------- ---------------- ------------ -------------
Balance December 31, 1995 89,683,378 90 571,244 (9,908) (2,906) 558,520
Exercise of options
and warrants 941,943 1 4,878 - - 4,879
Pension liability adjustment,
net - - - - 1,453 1,453
Income tax benefit related
to stock options - - 138 - - 138
Unrealized holding gain, net - - - - 2,915 2,915
Cumulative translation adjustment - - - - 2,963 2,963
Net loss - - - (251,125) - (251,125)
----------------- ----------- --------------- ---------------- ------------ -------------
Balance December 31, 1996 90,625,321 91 576,260 (261,033) 4,425 319,743
Exercise of options
and warrants 362,008 - 2,274 - - 2,274
Pension liability adjustment,
net - - - - 2,555 2,555
Income tax benefit related
to stock options - - 170 - - 170
Realized gain included
in net loss - - - - (3,484) (3,484)
Unrealized holding gain, net - - - - 4,124 4,124
Cumulative translation adjustment - - - - (2,042) (2,042)
Net loss - - - (52,322) - (52,322)
----------------- ----------- --------------- ---------------- ------------ --------------
Balance December 31, 1997 90,987,329 $ 91 $ 578,704 $ (313,355) $ 5,578 $ 271,018
================= =========== =============== ================ ============ ==============
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
26
<PAGE>
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------- ---------------- --------------
1997 1996 1995
-------------- ---------------- --------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ (52,322) $(251,125) $ 16,521
Adjustments to reconcile net income (loss) to cash flows
from continuing operations:
Net loss from discontinued operations 40,000 255,200 17,610
Depreciation and amortization 9,151 8,596 7,739
Amortization of entertainment product costs 428,381 362,255 251,854
Additions to entertainment product costs (385,020) (416,841) (327,936)
Gain from marketable securities (5,648) - -
(Increase) decrease in accounts receivable 1,700 (42,829) (19,842)
Increase (decrease) in accounts payable, accrued expenses,
other liabilities and income taxes (11,503) 12,919 9,928
Increase in accrued participation expense 10,490 9,708 13,521
Increase (decrease) in deferred revenue (5,959) 2,042 8,090
Other, net (2,487) 1,393 (982)
-------------- ---------------- --------------
Net cash provided (used) by continuing operations 26,783 (58,682) (23,497)
Net cash used by discontinued operations (9,698) (47,726) (20,763)
-------------- ---------------- --------------
17,085 (106,408) (44,260)
-------------- ---------------- --------------
Cash Flows From Investing Activities:
Purchases of property and equipment, net (1,766) (3,902) (5,955)
Funding of discontinued operations of VIE (960) (44,773) (2,591)
Changes in net liabilities related to
discontinued operations of Charter (2,086) (2,552) (9,961)
-------------- ---------------- --------------
Net cash used by continuing operations (4,812) (51,227) (18,507)
Net cash used by discontinued operations (2,114) (7,752) (9,744)
-------------- ---------------- --------------
(6,926) (58,979) (28,251)
-------------- ---------------- --------------
Cash Flows From Financing Activities:
Borrowings under credit facilities 54,000 120,000 68,000
Repayments of credit facilities (80,000) (15,000) (39,873)
Issuances of Common Stock 1,564 1,590 7,841
-------------- ---------------- --------------
Net cash provided (used) by continuing operations (24,436) 106,590 35,968
Net cash provided by discontinued operations 8,215 54,294 34,821
-------------- ---------------- --------------
(16,221) 160,884 70,789
-------------- ---------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (6,062) (4,503) (1,722)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 16,175 20,678 22,400
-------------- ---------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 10,113 $ 16,175 $ 20,678
============== ================ ==============
CASH AND CASH EQUIVALENTS AT END OF YEAR:
Continuing operations $ 860 $ 3,325 $ 6,644
Discontinued operations 9,253 12,850 14,034
-------------- ---------------- --------------
$ 10,113 $ 16,175 $ 20,678
============== ================ ==============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
27
<PAGE>
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS. Spelling Entertainment Group Inc. (the "Company")
is a producer and distributor of television series, mini-series, movies-for-
television and feature films (collectively referred to hereinafter as
"entertainment product") and interactive games. The Company has an extensive
library of entertainment product, which it distributes worldwide. The Company
also licenses and otherwise exploits ancillary rights of this product, such as
music and merchandising rights. Unless the context indicates otherwise,
"Spelling" or the "Company" refers to Spelling Entertainment Group Inc. and its
subsidiaries.
BASIS OF PRESENTATION. The consolidated financial statements present the
consolidated financial position and results of operations of Spelling. All
material intercompany accounts and transactions have been eliminated. Certain
reclassifications have been made to prior periods to conform to the current
year's presentation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could subsequently differ from those estimates.
Assets and liabilities of international operations are translated at year-end
rates of exchange while results of operations are translated at average rates of
exchange in effect for the applicable period. Translation gains or losses are
included in other equity adjustments as a separate component of shareholders'
equity. (See Note 5.)
Viacom Inc. ("Viacom") currently owns approximately 80% of the Company's common
stock ("Common Stock").
Effective May 26, 1995, the Company changed its place of incorporation from
Florida to Delaware by merging into a newly formed Delaware corporation. As a
result of the Company's reincorporation, each share of the Company's Common
Stock then issued was converted into and exchanged for one share of Common
Stock, par value $.001 per share, of the Delaware corporation. There was no
change in the business, properties or management of the Company as a result of
this reincorporation. (See Note 5.)
See Note 9 regarding the planned disposition of Virgin Interactive Entertainment
Limited ("VIEL," together with its subsidiaries, "VIE").
See Note 13 regarding the Company's decision in February 1998 to restructure
Spelling Films Inc. ("Spelling Films").
CASH AND CASH EQUIVALENTS. Cash equivalents consist of interest-bearing
securities with original maturities of less than 90 days.
ACCOUNTS RECEIVABLE, NET. Accounts receivable are net of allowances for
doubtful accounts and returns of $20,697,000 and $18,935,000 at December 31,
1997 and 1996, respectively.
ENTERTAINMENT PRODUCT, NET. Entertainment product, net, includes development,
production or acquisition costs (including advance payments to producers),
capitalized overhead and interest, home video manufacturing costs, and prints,
advertising and other related distribution costs expected to benefit future
periods. These costs are amortized, and third-party participations and residuals
are accrued, generally on an individual product basis in the ratio that current
year gross revenue bears to estimated future gross revenue. Domestic syndication
and basic cable revenue estimates are not included in estimated future gross
revenue of television programming until such sales are probable.
28
<PAGE>
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Entertainment product, net, is stated at the lower of cost less amortization or
estimated net realizable value. Estimates of total gross revenue, costs and
participations are reviewed quarterly and revised as necessary. When estimates
of total revenue and costs indicate that an individual product will realize an
ultimate loss, additional amortization is provided to fully recognize such loss
in that period.
COMPUTER SOFTWARE DEVELOPMENT COSTS. Prior to May 1996, the Company accounted
for all of its entertainment product, including the software development costs
of VIE, which develops, produces and distributes interactive games, under the
requirements of Statement of Financial Accounting Standards ("SFAS") No. 53,
"Financial Reporting by Producers and Distributors of Motion Picture Films,"
capitalizing all direct development and production costs, as well as capitalized
overhead and interest. In May 1996, the Emerging Issues Task Force ("EITF")
published Issue No. 96-6, "Accounting for the Film and Software Costs Associated
with Developing Entertainment and Educational Software Products." The SEC
Observer attending the EITF meeting made the determination that companies
developing computer software, without regard to the nature of the business
enterprise, are required to follow the guidance of SFAS No. 86, "Accounting for
the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed," and
capitalize development costs at that point in time when technological
feasibility is achieved. Therefore, the Company has applied the guidance of
SFAS No. 86 with respect to capitalization of software development costs and has
recorded a cumulative pretax adjustment of approximately $7,500,000 in the
second quarter of 1996 to reflect this change. The Company restated its second
and third quarter 1996 results in filings on Form 10-QA to reflect the
cumulative and period adjustments. The amounts included for prior years are not
material to the respective periods. (See Note 9.)
PROPERTY AND EQUIPMENT, NET. The carrying values of property and equipment are
based on cost, and provision for depreciation is made principally on the
straight-line method over estimated useful lives, ranging from 3 to 10 years.
Property and equipment are net of accumulated depreciation of $14,882,000 and
$11,179,000 at December 31, 1997 and 1996, respectively.
INTANGIBLE ASSETS, NET. Intangible assets represent the acquisition costs of
Spelling Entertainment Inc. and Republic Entertainment Inc. ("Republic") in
excess of the value of their identified net assets. These costs are being
amortized on a straight-line basis over 40 years. Amortization expense relating
to such intangible assets was $5,486,000, $5,486,000 and $5,413,000 for the
three years ended December 31, 1997, respectively. Intangible assets are net of
accumulated amortization of $32,015,000 and $26,529,000 at December 31, 1997 and
1996, respectively. It is the Company's policy to evaluate the carrying value
of such costs on a regular basis, and to recognize impairment if it becomes
probable that such costs would not be recoverable. In conjunction with its
decision to divest of its interactive game business, VIE, the Company recorded
an impairment loss of approximately $74,000,000 with respect to the carrying
value of goodwill associated with that business in the fourth quarter of 1996.
Additionally, the Company revised its estimate of the remaining useful life
associated with VIE goodwill to seven years and recorded an adjustment to
goodwill amortization of approximately $3,000,000 in the fourth quarter of 1996.
(See Note 9.)
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets to be held
and used and for long-lived assets and certain identifiable intangibles to be
disposed of. The Company adopted this statement in 1996.
29
<PAGE>
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES. Included in the
caption "Accounts payable, accrued expenses and other liabilities" at December
31, 1997 and 1996 are accounts payable of $10,446,000 and $5,645,000; accrued
compensation of $10,755,000 and $8,749,000; accrued liabilities for untendered
Republic stock of $288,000 and $6,732,000; interest and other payables to Viacom
of $1,391,000 and $3,323,000 (see Note 7); and other current liabilities of
$10,763,000 and $3,774,000, respectively. Additionally, accrued distribution
costs of $1,048,000 and $7,880,000 related to domestic theatrical distribution
are included at December 31, 1997 and 1996, respectively.
DEFERRED REVENUE. A substantial portion of the network license fees related to
television programming are received prior to the time the programming is
completed or delivered to the network. Such fees, and other monies received
prior to the time that the related entertainment product is available to the
licensee, are recorded on the balance sheet as deferred revenue. Such amounts
are normally repayable by the Company only if it fails to deliver the related
product to the licensee.
REVENUE RECOGNITION. Revenue from licensing agreements covering entertainment
product owned or distributed by the Company is recognized when the entertainment
product is available to the licensee for telecast, exhibition or distribution,
and other conditions of the licensing agreements have been met. Long-term
noninterest-bearing receivables arising from such agreements are discounted to
present value. Prior to 1995, revenue from television distribution of
entertainment product not owned by the Company was recognized as billed. In the
first quarter of 1995, the Company conformed its accounting policies, with
respect to SFAS No. 53, to those of Viacom.
Revenue from direct distribution of home video product is recognized, net of an
allowance for estimated returns and discounts, together with related costs, in
the period in which the product is shipped to the Company's customers.
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. Included in
Net Liabilities Related to Discontinued Operations of VIE at December 31, 1997
and in Net Assets of VIE as of December 31, 1996 are common stock investments at
a carrying value (fair value) of $16,611,000 and $10,539,000, respectively.
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 SFAS No. 115, adjusting the carrying value to fair
market value, with a corresponding adjustment, net of tax, to shareholders'
equity. (See Note 5.)
ACCOUNTING FOR ENVIRONMENTAL MATTERS. The allowances for estimated expenses and
disputed claims reported in Note 9 include accruals for environmental
liabilities, including anticipated remediation costs of properties held for
sale. Such accruals are determined independently of the estimated net
realizable value of any related asset, and are recorded without discount or
offset for either (i) time value of money prior to the anticipated date of
payment, or (ii) expected recoveries from insurance or contribution claims
against unaffiliated entities. The allowances are reviewed quarterly and
revised as necessary.
30
<PAGE>
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NET INCOME (LOSS) PER COMMON SHARE. In February 1997, the FASB issued SFAS No.
128, "Earnings per Share," which is effective for interim and annual financial
statements for periods ending after December 15, 1997. The Company adopted SFAS
No. 128 in the accompanying financial statements. SFAS No. 128 replaces the
presentation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Basic income (loss) per common share amounts are
based on the weighted average common shares outstanding during the respective
period. Diluted income (loss) per common share amounts are based on the weighted
average common shares outstanding during the period and shares assumed issued
upon conversion of stock options and warrants only in periods when the effect of
such conversions would have been dilutive to income (loss) from continuing
operations. There is no assumed conversion of stock options and warrants for
the year ended December 31, 1997 as the effect would be anti-dilutive.
Prior period amounts have been restated to conform to SFAS No. 128. The table
below presents a reconciliation of weighted average shares used in the
calculation of basic and diluted income (loss) per share:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Basic shares - weighted average of common
shares outstanding 90,777 90,369 88,458
Additional shares assuming conversion
of stock options and warrants - 929 1,726
------------- ------------- -------------
Diluted shares 90,777 91,298 90,184
============= ============= =============
</TABLE>
STATEMENTS OF CASH FLOWS. Included in net cash provided by discontinued
operations from financing activities are fundings by the Company of $960,000,
$44,773,000 and $2,591,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
2. BUSINESS COMBINATIONS, ACQUISITIONS AND DISPOSITIONS
In connection with the acquisition of VIEL, the Company entered into put- and
call-option agreements with respect to the ordinary shares ("Ordinary Shares")
of VIEL not owned by the Company and currently owned by Viacom. Under these
agreements, the Company may acquire, or be required to purchase these shares at
an agreed-upon price. At the option of the Company, such purchase price may be
paid in cash or shares of the Company's Common Stock. On June 8, 1995, 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 were originally scheduled to expire in July 1995,
through June 30, 1998. See Note 9 regarding the planned disposition of VIE.
31
<PAGE>
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. ENTERTAINMENT PRODUCT, NET
Entertainment product, net, is comprised of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Entertainment product:
Theatrical
Released $ 147,301 $ 137,266
Completed, not released - 4,833
In process and other 12,607 73,745
-------------- --------------
159,908 215,844
-------------- --------------
Television
Released 189,624 184,954
In process and other 25,324 14,990
-------------- --------------
214,948 199,944
-------------- --------------
Total 374,856 415,788
Less: non-current portion (127,901) (182,786)
-------------- --------------
Current portion $ 246,955 $ 233,002
============== ==============
</TABLE>
Included in entertainment product, net, are entertainment product rights
representing primarily advances to producers for distribution rights and other
entertainment product not produced by the Company.
Based on the Company's estimates of future gross revenue as of December 31,
1997, approximately 63% of unamortized released entertainment product will be
amortized during the three years ending December 31, 2000.
4. DEBT
In January 1994, the Company entered into a three-year credit agreement with
Blockbuster Entertainment Corporation ("BEC"). As a result of the merger of BEC
with and into Viacom, Viacom succeeded to BEC's position under the credit
agreement (the "Viacom Facility"). This agreement was amended and restated in
January 1995 and again in November 1995, to provide, among other matters,
increases in the amount available under the facility. The Viacom Facility, as
amended, provided for (i) a term loan of $100,000,000 which funded the Company's
merger with Republic 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 were due to mature on December 31, 1998. In March 1998, the Company
and Viacom executed an amendment, effective December 31, 1997, to extend the
maturity date to December 31, 1999. (See Note 13.)
32
<PAGE>
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 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 December 31, 1997 and 1996, on
borrowings under the Viacom Credit Agreement was 8.5% and 8.1%, respectively.
Additional terms of the Viacom Credit Agreement require, among other items, a
minimum amount, as defined, of net worth. The minimum net worth covenant has
been amended as of December 31, 1996. 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.
The Company made cash interest payments of $25,942,000 in 1997, $19,418,000 in
1996, and $13,514,000 in 1995.
At December 31, 1997, the carrying value of all of the Company's debt
approximated fair value.
See Note 9 regarding debt related to discontinued operations.
5. SHAREHOLDERS' EQUITY
PREFERRED STOCK. At December 31, 1997 and 1996, there were 20,000,000 shares of
Preferred Stock authorized but none outstanding.
COMMON STOCK. Effective May 26, 1995, in connection with the reincorporation of
the Company in Delaware, the par value of its Common Stock was reduced from
$0.10 per share to $0.001 per share. The Company recorded an adjustment of
$8,744,000 to Common Stock in order to reflect this reduction, with a
corresponding increase to Capital in Excess of Par Value. (See Note 1.)
ISSUANCE OF COMMON STOCK. As a result of Viacom's merger with BEC, Viacom
acquired certain warrants to purchase 1,337,148 shares of Common Stock. These
warrants were exercised in February 1998 for a total exercise price of
approximately $9,316,000. (See Note 13.)
CAPITAL IN EXCESS OF PAR VALUE. An adjustment of $170,000, $138,000 and
$4,318,000 has been recorded to Capital in Excess of Par Value in 1997, 1996 and
1995, respectively, to reflect the tax benefit obtained by the Company with
respect to stock options exercised by its employees. (See Note 8.)
OTHER EQUITY ADJUSTMENTS. Other equity adjustments include (i) additional
minimum pension liability, net of income taxes, of $2,555,000 at December 31,
1996; (ii) unrealized holding gains, net of income taxes, of $5,557,000 and
$4,917,000 at December 31, 1997 and 1996, respectively; and (iii) cumulative
translation adjustments of $21,000 and $2,063,000 at December 31, 1997 and 1996,
respectively. The additional minimum pension liability was no longer required
at December 31, 1997. (See Notes 1 and 9.)
33
<PAGE>
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
STOCK OPTIONS. The Company currently has stock option plans under which both
incentive and nonqualified stock options have been granted to certain key
employees, consultants and directors. Options have generally been granted with
an exercise price equal to the fair market value of the underlying Common Stock
on the date of grant, although nonqualified options may be granted with an
exercise price not less than 50% of such fair market value. Each option is
granted subject to various terms and conditions established on the date of
grant, including vesting periods and expiration dates. The options typically
become exercisable at the rate of 20% or 25% annually, beginning one year after
the date of grant. Options must expire no later than 10 years from their date of
grant. Stock option data follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------- ------------------------------- -------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------- ---------- --------------- ---------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 7,978,318 $7.80 5,759,218 $7.72 7,123,669 $ 7.23
Granted 1,171,000 $6.90 3,750,010 (a) $7.13 200,000 $10.31
Exercised (362,008) $6.29 (841,943) $4.91 (974,649) $ 6.04
Terminated (588,519) $8.90 (688,967) $7.02 (589,802) $ 6.84
--------------- --------------- ---------------
Outstanding at December 31 8,198,791 7,978,318 5,759,218
============== =============== ===============
Exercisable at December 31 3,813,349 $7.85 3,079,436 $7.70 2,694,082 $ 6.61
============== =============== ===============
Available for grant at
December 31 3,030,838 5,094,251 (a) (b) 3,158,343
============== =============== ===============
</TABLE>
(a) Includes 1,622,500 shares granted and 5,000,000 shares available for grant,
which were pending shareholder approval of an increase to the number of
shares available for grant under the plans and were subsequently approved
at the Annual Meeting of Shareholders on May 21, 1997.
(b) Includes 1,360,866 shares available for grant under a plan which expired
on April 13, 1997.
The following table summarizes information concerning currently outstanding and
exercisable stock options at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------- -------------------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Number Contractual Life Average Number Average
Exercise Prices of Shares in Years Exercise Price of Shares Exercise Price
- - ------------------- ---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 3.38 - $ 5.83 217,648 1.33 $ 5.22 217,648 $ 5.22
$ 6.00 - $ 7.49 5,987,245 7.45 6.87 2,158,844 6.46
$ 7.62 - $ 9.88 532,773 6.74 9.02 369,732 9.14
$ 10.00 - $ 12.00 1,461,125 6.69 10.77 1,067,125 10.77
---------------- ---------------- ---------------- ---------------- ----------------
$ 3.38 - $ 12.00 8,198,791 7.11 $ 7.66 3,813,349 $ 7.85
================ ================ ================ ================ ================
</TABLE>
34
<PAGE>
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Options related to employees of VIE and included in the tables above are 875,010
and 50,000 shares granted for the years ended December 31, 1996 and 1995,
respectively. Also included are 133,582, 775,220 and 643,003 shares exercised,
and 184,269, 149,921 and 140,189 shares terminated for the years ended December
31, 1997, 1996 and 1995, respectively. No options were granted to employees of
VIE for the year ended December 31, 1997.
The Company has adopted SFAS No. 123, "Accounting for Stock-Based Compensation,"
which establishes a fair value based method of accounting for compensation cost
related to stock option plans and other forms of stock-based compensation plans,
by providing the pro forma disclosures as if the fair value based method had
been applied for the current period and prior comparable periods. In accordance
with SFAS No. 123, the Company applies the intrinsic value based method of
accounting defined under Accounting Principles Board Opinion No. 25 and
accordingly, does not recognize compensation expense for its plans.
Had compensation expense for the plans been determined based upon the fair value
at the grant date for awards consistent with the provisions of SFAS No. 123, the
Company's pretax income would decrease by $3,389,000 ($2,084,000 after tax or
$0.02 per share), $2,007,000 ($1,240,000 after tax or $0.01 per share) and
$238,000 ($146,000 after tax) in 1997, 1996 and 1995, respectively. The 1995
earnings per share effect was not material. These pro forma amounts may not be
representative of future disclosures since the estimated fair value of stock
options is amortized to expense over the vesting period, and additional options
may be granted in future years.
The weighted average fair value of each option as of the grant date was $2.65,
$2.66 and $3.89 for 1997, 1996 and 1995, respectively. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option-
pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Expected dividend yield (a) - - -
Expected stock price volatility 30.91% 28.45% 29.91%
Risk-free interest rate 5.75% 6.60% 6.88%
Expected life of options (years) 5.2 4.8 4.8
</TABLE>
(a) During 1997, 1996 and 1995, the Company has not declared any cash
dividends on its Common Stock.
6. BENEFIT PLANS
The Company maintains a 401(k) Contribution Plan (the "Plan") for the benefit of
all U.S. non-union employees meeting certain eligibility requirements. Expenses
under the various employee retirement plans were $1,306,000, $1,951,000 and
$1,494,000 for the three years ended December 31, 1997, 1996 and 1995,
respectively. The Company's matching contribution to the Plan and its
discretionary profit-sharing contributions to the Plan are made in cash and are
restricted to investment in the Company's Common Stock, which is purchased by
the Plan's trustee in the open market.
A significant number of the Company's production employees are covered by union
sponsored, collectively bargained, multi-employer pension plans. The Company
contributed approximately $11,512,000, $9,229,000 and $9,044,000 to such plans
for the three years ended December 31, 1997, 1996 and 1995, respectively.
The Company does not provide any postemployment benefits.
35
<PAGE>
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. RELATED PARTY TRANSACTIONS
See Notes 4 and 9 regarding the Company's credit facility with Viacom and
Viacom's guarantees of the Company's credit agreements with banks. The Company
was charged interest and fees by Viacom of $25,633,000, $19,808,000 and
$13,558,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Included in accounts payable, accrued expenses and other liabilities is accrued
interest payable to Viacom of $568,000 and $1,226,000 as of December 31, 1997
and 1996, respectively. VIE was allocated interest charges of $2,676,000,
$1,633,000 and $265,000 in 1997, 1996 and 1995, respectively, related to its pro
rata share of borrowings under the Viacom Credit Agreement and the Viacom Credit
Facility. (See Note 9.)
Viacom provided the Company with management services in 1996 and 1995, for which
the Company was charged $150,000 and $600,000, respectively, 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 December 31, 1997 and 1996, the
Company had a net payable to Viacom of $823,000 and $2,097,000, respectively,
with respect to these and other expenses.
During 1997, 1996 and 1995, the Company sold home video product to several
operating subsidiaries of Viacom International Inc., a subsidiary of Viacom.
Additionally, the Company licensed certain entertainment product to the
following parties in which Viacom has or had an ownership interest (i) Showtime
Networks Inc. ("Showtime"), a subsidiary of Viacom; (ii) MTV Networks, a
division of a subsidiary of Viacom; (iii) certain television stations owned by
Viacom; (iv) USA Network and Sci-Fi Channel in which Viacom had equity interests
until October 1997; and (v) United Paramount Network, Nickelodeon U.K. and
Comedy Central, in which Viacom has equity interests. For the three years ended
December 31, 1997, these transactions are not material.
Republic has entered into agreements with, and in certain cases has advanced
funds to Viacom, a partnership in which a subsidiary of Viacom is the managing
partner and Showtime to distribute certain of their productions in the home
video market.
The Company has entered into agreements with Paramount Pictures Corporation
("Paramount") with respect to the domestic distribution of two of the Company's
feature film releases, "Night Falls on Manhattan" and "Stephen King's Thinner,"
in the 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 with Paramount and licensed its domestic home video rights to seven
1997 rental titles, including "Night Falls on Manhattan."
The Company has entered into an agreement with Comedy Partners, in which Viacom
has an equity interest, to perform certain licensing and merchandising
activities on their behalf in exchange for a fee.
In November 1997, the Company entered into an agreement with Famous Music
Corporation and Ensign Music Corporation, subsidiaries of Paramount, with
respect to administration of the Company's music rights.
The Company engaged Showtime to explore business development opportunities for
the Company's various cable/programming channels, through December 31, 1997, at
which time the Company terminated this arrangement.
The Company participates in the Viacom insurance programs with respect to
general business and workers' compensation coverage.
In the ordinary course of business, the Company has and expects to continue to
do business with Viacom and its affiliates.
36
<PAGE>
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. INCOME TAXES
The provision (benefit) for income taxes for continuing operations and
discontinued operations for each of the three years ended December 31 include
(in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Continuing operations
Current tax expense
Federal $ 141 $ - $ 776
Foreign 8,818 5,047 4,847
State and local 516 80 1,473
------------ ------------ ------------
Total current 9,475 5,127 7,096
------------ ------------ ------------
Deferred tax expense
Federal 3,168 1,099 17,191
Foreign - 234 235
State and local (117) 793 (1,938)
------------ ------------ ------------
Total deferred 3,051 2,126 15,488
------------ ------------ ------------
Change in the beginning-of-the year
valuation allowance (13,507) - -
------------ ------------ ------------
Total provision (benefit) for continuing operations $ (981) $ 7,253 $22,584
============ ============ ===========
Discontinued operations:
Federal $ - $ 7,863 $(5,935)
Foreign 1,106 3,678 (2,080)
State and local - 338 (798)
------------ ------------ ------------
Total provision for discontinued operations $ 1,106 $11,879 $(8,813)
=========== =========== ===========
</TABLE>
For the three years ended December 31, 1997, an income tax benefit attributable
to the exercise of stock options by the Company's employees was recorded in
shareholders' equity. (See Note 5.)
37
<PAGE>
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The temporary differences and tax attribute carryforwards which gave rise to
deferred tax assets and liabilities at December 31, 1997 and 1996 were as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Deferred Tax Assets:
Tax attribute carryforwards $ 37,159 $ 58,944
Other, net 2,658 4,480
Pension liability adjustment - 976
Discontinued operations allowances - Charter 3,344 4,884
Loss on disposal of VIE 105,863 105,863
-------------- --------------
149,024 175,147
Valuation allowance (115,558) (131,658)
-------------- --------------
$ 33,466 $ 43,489
============== ==============
Deferred Tax Liabilities:
Entertainment product, net $ 16,095 $ 38,781
Revenue recognition 27,368 25,053
Other, net 5,056 4,440
-------------- --------------
$ 48,519 $ 68,274
============== ==============
</TABLE>
The decrease in the valuation allowance during 1997 is due to the Company's
determination that certain tax benefits are currently realizable under a more
likely than not standard, as well as a reduction of previously recorded
valuation allowances attributable to the expiration of certain limited
investment tax credit carryforwards. This is partially offset by an increase in
the valuation allowance for other tax benefits that are not currently realizable
under a more likely than not standard.
38
<PAGE>
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The components of income (loss) from continuing operations before the provision
for income taxes in 1997, 1996 and 1995 were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Domestic $(17,190) $(8,540) $31,699
Foreign 3,887 19,868 25,016
-------- ------- -------
$(13,303) $11,328 $56,715
======== ======= =======
</TABLE>
The primary reasons for the effective tax rates on the income (loss) from
continuing operations differing from the statutory federal tax rates for each of
the three years ended December 31 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Federal tax rate 35% 35% 35%
Amortization of intangible assets (15) 17 3
Adjustment of valuation allowance and
other reserves 43 (3) (3)
State and local taxes, net of available
federal income tax benefits (3) 8 4
Foreign taxes, net of available federal
income tax benefits (44) - -
Other non-deductible expenses (9) 7 1
-------- -------- --------
7% 64% 40%
======== ======== ========
</TABLE>
As of December 31, 1997, the Company has available net operating loss
carryforwards of approximately $58,277,000, foreign tax credit carryforwards of
$10,675,000, investment tax credit carryforwards of $2,795,000 and AMT credit
carryforwards of $3,243,000. The use of these attributes, which except for the
AMT credit will expire in 1998 through 2009, is subject to certain limitations
as a result of BEC's acquisition of a majority interest in the Company during
1993.
Total cash income tax payments were $6,534,000, $5,349,000 and $11,798,000 for
1997, 1996 and 1995, respectively. In addition, the Company received $724,000,
$1,431,000 and $1,116,000 of income tax refunds during 1997, 1996 and 1995,
respectively, the receipt of which had previously been accrued. However, the
Company did recognize benefits of $5,661,000, $300,000 and $1,740,000 during
1997, 1996 and 1995, respectively, as a result of the favorable resolution of
certain tax controversies and other issues. Additionally, the Company is
subject to audit by taxing authorities for varying periods in various tax
jurisdictions. Management believes that any required adjustments to the
Company's tax liabilities resulting from such audits will not have a material
adverse impact on its financial condition or results of operations.
Viacom has acquired approximately 80% of the outstanding shares of the Company
and, therefore, the Company is required to be included in the consolidated
federal income tax return of Viacom. The Directors of the Company 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; and,
as a result, the Company does not anticipate any material impact to its
financial condition or results of operations.
39
<PAGE>
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
9. DISCONTINUED OPERATIONS
INTERACTIVE BUSINESS
On February 20, 1997, the Company announced its intention to dispose of its
interactive game business, VIE, and expects to complete a transaction in 1998.
Accordingly, the operations of VIE are reflected as discontinued.
VIE's net assets (liabilities) as of December 31, 1997 and 1996, and results of
operations for the three years then ended are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
December 31,
1997 1996
-------------- ----------------
Current assets $ 115,043 $ 152,724
Current liabilities (194,505) (116,400)
-------------- ----------------
Net current assets (liabilities) (79,462) 36,324
-------------- ----------------
Property and equipment, net 14,081 16,793
Intangibles, net 91,707 107,657
Other non-current assets 5,066 21,257
Non-current liabilities (53,301) (167,742)
-------------- ----------------
Net non-current assets (liabilities) 57,553 (22,035)
-------------- ----------------
Net assets (liabilities) $ (21,909) $ 14,289
============== ================
Year Ended December 31,
1997 1996 1995
-------------- ---------------- --------------
Revenue $243,265 $ 254,046 $212,237
Loss before provision for income taxes $(38,894) $(243,730) $(27,805)
Net loss from discontinued operations $(40,000) $(255,200) $(17,610)
</TABLE>
40
<PAGE>
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 year
ended December 31, 1997, the net operating loss of VIE (before the additional
provision discussed below) was $55,808,000 and was provided for in the
estimated loss on disposal as of December 31, 1996. In the fourth quarter of
1997, the Company recorded an additional provision of $40,000,000, net of income
taxes, for future operating losses and cash funding requirements projected for
the remaining holding period through completion of the disposition.
Included in costs and expenses in the 1996 results of operations is a cumulative
pretax adjustment of approximately $7,500,000 related to the change in
accounting principles from SFAS No. 53 to SFAS No. 86 with respect to accounting
for software development costs, as required by EITF 96-6. Also, included in the
estimated loss on disposal in the 1996 results of operations is an adjustment to
record an impairment to the goodwill carrying value associated with VIE of
approximately $74,000,000 and a provision for future operating losses of
approximately $56,000,000. (See Note 1.) The income tax provision in the 1997
and 1996 results of operations is due to the Company's determination that the
tax benefit arising from the estimated loss on disposal, as well as from VIE's
past losses, is not currently realizable under a more likely than not standard.
On December 23, 1993, a wholly owned subsidiary of VIE 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 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 BEC (now Viacom).
During 1995, the borrowings allowable under the Credit Agreement were increased
to $100,000,000. In February 1998, the term was extended to September 30, 1998.
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 .0125% on the unused portion of the available credit.
Borrowings under the Credit Agreement as of December 31, 1997 and 1996 were
$97,472,000 and $98,010,000, respectively. As of December 31, 1997, the Company
had no letters of credit outstanding under the Credit Agreement. As of December
31, 1996, the Company had approximately $269,000 in letters of credit
outstanding under the Credit Agreement to guarantee its interactive game
purchases.
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 credit 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, will expire on June
30, 1998 and is guaranteed by Viacom and the Company. Advances under the
renegotiated UK Facility bear interest at the bank's prime rate plus 1.0% or
alternatively at selected Eurocurrency rates. Borrowings under the UK Facility
as of December 31, 1997 and 1996 were $11,090,000 and $3,898,000, respectively.
As of December 31, 1997 and 1996, the Company had approximately $938,000 and
$461,000, respectively, in letters of credit outstanding under the UK Facility
to guarantee its interactive game purchases. The Company and Viacom provide a
rent guarantee for this subsidiary which expires in 2005.
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.
VIE made cash interest payments of $7,119,000, $7,484,000 and $8,779,000 in
1997, 1996 and 1995, respectively, with respect to the credit arrangements
discussed above.
41
<PAGE>
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Petroleum Business
Net assets (liabilities) of discontinued petroleum operations which are held for
disposition consisted of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------------- --------------
<S> <C> <C>
Receivables, net $ 574 $ 574
Property and equipment, net 3,186 3,186
Pension asset (liability) 2,691 (1,902)
Accounts payable and other (1,655) (1,706)
Allowances for estimated expenses
and disputed claims (9,331) (10,986)
------------- --------------
$(4,535) $(10,834)
============= ==============
</TABLE>
CONTINGENCIES. Contingent liabilities relating to discontinued operations
include matters such as contract disputes, remaining disputed claims under the
joint plan of reorganization of the Company and certain of its subsidiaries (the
"Joint Plan") and environmental cleanup assessments or damages. Some of the
parties seek damages from the Company in very large amounts, however, as
discussed below, management does not believe the ultimate resolution of these
matters should have a material adverse effect on its financial condition and its
results of operations.
(A) The Company and its insurers paid approximately $15,500,000 and
$33,000,000, respectively, over a 10 year period to resolve government and
private party actions arising from the alleged improper disposal by a subsidiary
in 1971 of waste material, which later was determined to contain dioxin, at a
number of sites in Missouri. The Company has written off its investment in the
subsidiary. The Company filed an action against its insurers to secure coverage
for the dioxin claims. In 1995 there was a final determination of that action,
holding that the insurers had no further coverage obligation. The only
remaining claim against the Company is by a codefendant (Syntex Agribusiness
Inc.), which also has spent substantial amounts in respect of the dioxin claims
and in 1986 filed a $200,000 proof of claim in the Company's Chapter 11
proceedings (In re The Charter Company, et. al., debtors, filed April 20, 1984
in the U.S. Bankruptcy Court for the Middle District of Florida, Jacksonville
Division). The Company believes it has defenses to such claim, and that future
claims are unlikely.
(B) The Company has had contact with various governmental agencies regarding
possible contamination of soil and groundwater at six properties that are or
have been owned or leased by the Company's subsidiaries. A private action also
has been brought with respect to such possible contamination at an additional
location. Notification of possible cleanup or damages responsibility has also
been received regarding seven other sites where waste materials allegedly were
delivered. The Company may be assessed for cleanup costs or damages under
relevant environmental laws, and future claims could be asserted with respect to
other properties. The Company's liability insurers have been placed on notice
of many of these claims and have taken the position that there is no coverage
under their policies. While the Company does not agree that coverage is not
available under its past policies, there is no assurance that pending or future
claims will be covered by such insurance. Although comprehensive evaluations of
liability and of the extent of contamination have not been performed in all
cases, the following are updates of previous disclosures or represent claims
believed by the Company at this time to be potentially the most significant.
42
<PAGE>
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
A subsidiary is engaged in the cleanup of a petroleum terminal property owned by
the subsidiary in Tiverton, Rhode Island. The remaining cost could be
approximately $2,500,000, which is fully provided for in the allowances for
estimated expenses and disputed claims. The subsidiary has received
contributions to the cleanup cost from three former owners, and is continuing
to investigate whether other parties or its insurers also may be liable for a
portion of the cost.
Ten parties unaffiliated with the Company, plus certain affiliates of those
parties, (together, the "Group") entered into agreements in 1996 with the United
States tolling the statute of limitations with respect to potential
reimbursement claims by the government in connection with its cleanup of the
Sikes Superfund Site in Crosby, Texas, at an alleged cost exceeding
$140,000,000. An effort to mediate such claims has failed, and the United
States and the State of Texas have filed a cost recovery lawsuit against the
Group. Although the EPA previously had advised a subsidiary of the Company,
Charter International Oil Company ("CIOC"), that it was a potentially
responsible party, any action by the government against CIOC appears now to be
precluded by the statute of limitations. The Group is filing third-party claims
in such lawsuit, seeking contribution from other parties they believe should be
responsible for an equitable share of any judgment or settlement amounts the
Group ultimately may pay. To the best of the Company's knowledge, the Group
presently does not intend to file such a claim against CIOC because of its
defenses, including those relating to CIOC's Chapter 11 proceedings.
While the results of such actions cannot be predicted with certainty, based upon
its current knowledge of the facts and circumstances and its understanding of
the applicable laws, the Company believes the ultimate resolution of these
matters should not have a material adverse effect on its financial condition and
its results of operations. This belief is also based upon (i) allowances that
have been established for estimated expenses related to environmental matters
and remaining Chapter 11 disputed claims (see table above), and (ii) an
insurance-type indemnity agreement with American Financial Corporation ("AFC").
Although there are significant uncertainties inherent in estimating
environmental-related liabilities, based upon the Company's experience it is
considered unlikely that the amount of possible environmental liabilities and
Joint Plan disputed claims would exceed the amount of the allowances by more
than $50,000,000, a substantial portion of which would be covered by the AFC
indemnity.
The AFC indemnity, which was agreed to in exchange for a one-time payment of
$5,000,000 expensed by the Company as part of discontinued operations in the
first quarter of 1993, provides for the reimbursement to the Company of
liabilities it may have to pay in resolving environmental and bankruptcy related
claims through March 31, 2005. The indemnity covers up to $35,000,000 of such
liabilities in excess of a threshold amount of $25,000,000, subject to certain
adjustments.
PENSION PLAN. The Company has a noncontributory, defined benefit pension plan
which covers employees of the discontinued petroleum operations, a significant
number of which have vested benefits. Contributions are made on an actuarial
basis in amounts primarily based on employees' years of service and average
salary when employed.
43
<PAGE>
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The additional minimum pension liability was reduced by $829,000 (net of a tax
benefit adjustment of $519,000) in 1995, by $1,453,000 (net of a tax benefit
adjustment of $909,000) in 1996 and by $2,555,000 (net of a tax benefit
adjustment of $1,658,000) in 1997 with corresponding credits to shareholders'
equity. (See Note 5.)
The following table sets forth the plan's funded status and amounts recognized
as of December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Total projected benefit obligation $(46,749) $(47,142)
Market value of assets 49,661 44,838
-------------- --------------
Funded status 2,912 (2,304)
Transition asset (1,580) (1,974)
Unrecognized loss 1,334 6,187
Additional minimum liability - (4,213)
-------------- --------------
Prepaid (accrued) pension cost $ 2,666 $ (2,304)
============== ==============
</TABLE>
Net pension costs for the years ended December 31, which were charged against
net liabilities related to discontinued operations of Charter in the balance
sheet, are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Interest Cost $ 3,215 $ 3,273 $ 3,357
Expected return on assets (8,316) (5,857) (7,862)
Net amortization and deferrals 4,492 2,432 4,911
------------ ------------ ------------
Pension expense $ (609) $ (152) $ 406
============ ============ ============
</TABLE>
The weighted-average discount rates used in determining the actuarial present
value of the projected benefit obligation were 7%, 7.25% and 7% for the years
ended December 31, 1997, 1996 and 1995, respectively. The expected long-term
rate of return on assets was 8% for each of the years ended December 31, 1997,
1996 and 1995. The plan assets are invested primarily in fixed income
securities.
10. COMMITMENTS AND CONTINGENCIES
The Company continues to be involved in a number of legal and other actions
including threatened claims and pending litigation. While the results of such
actions cannot be predicted with certainty, based upon its current knowledge of
the facts and circumstances and its understanding of the applicable laws, the
Company believes that the ultimate resolution of all disputed claims, pending
litigation and threatened claims will not have a material adverse effect on its
financial condition or its results of operations. See Note 9 for contingencies
relating to discontinued operations.
44
<PAGE>
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
As of December 31, 1997, the Company had operating leases for offices and
equipment. The rental expense for continuing operations, net of amounts
capitalized, for the three years ended December 31, 1997 was $ 5,962,000,
$5,527,000 and $4,645,000, respectively. The future minimum annual rental
commitments under non-cancelable operating leases, excluding renewal options,
for the subsequent five years and thereafter for continuing operations are as
follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1998 $ 9,102
1999 7,465
2000 4,356
2001 1,687
2002 1,665
Thereafter 9,040
------------
Total $33,315
============
</TABLE>
The Company has guaranteed VIE leases for office space in Las Vegas, Nevada and
London, England. The future minimum annual rental commitments, excluding
renewal options, for the subsequent five years and thereafter for these leases
are $1,432,000 for 1998, $989,000 for 1999, $989,000 for 2000, $989,000 for
2001, $989,000 for 2002 and $17,311,000 thereafter.
11. INDUSTRY SEGMENT INFORMATION
The Company's continuing business activities consist of one industry segment,
the entertainment industry. The Company had revenue from one customer in 1997,
1996 and 1995 representing 21%, 20% and 22% of revenue, respectively. The
Company does not believe it has any significant concentration of credit risk
with respect to its operations.
Revenue, operating profit and identifiable assets of the Company's continuing
international operations were not material related to consolidated amounts as of
and for the years ended December 31, 1997 and 1996.
Export sales for the years ended December 31, 1997, 1996 and 1995 totaled
approximately $223,574,000, $182,991,000 and $167,830,000, respectively. Export
sales to Europe for the years ended December 31, 1997, 1996 and 1995 were
$144,915,000, $120,925,000 and $86,462,000, respectively.
12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents quarterly results of operations for the years ended
December 31, 1997 and 1996 (in thousands, except per share data). The net loss
and net loss per common share amounts for the second, third and fourth quarters
of 1996 were previously filed or otherwise reported as $18,538,000, $2,005,000,
$226,836,000 and $0.21, $0.02, $2.50, respectively. The Company restated 1996
second and third
45
<PAGE>
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
quarter results in filings on Form 10-QA to reflect these changes. (See
Computer Software Development Costs in Note 1.)
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
------------------- ------------------- ------------------- ---------------
<S> <C> <C> <C> <C>
Revenue $166,503 $148,425 $108,480 $ 140,831
Income (loss) from continuing
operations, net 728 3,037 (18,087) 2,000
Discontinued operations, net - - - (40,000)
------------------- ------------------- ------------------- ---------------
Net income (loss) $ 728 $ 3,037 $(18,087) $ (38,000)
================== ================== ================== ==============
Basic income (loss) per common share:
Continuing operations $ 0.01 $ 0.03 $ (0.20) $ 0.02
Discontinued operations - - - (0.44)
------------------- ------------------- ------------------- ---------------
Basic income (loss) per common share $ 0.01 $ 0.03 $ (0.20) $ (0.42)
=================== =================== =================== ===============
Diluted income (loss) per common share:
Continuing operations $ 0.01 $ 0.03 $ (0.20) $ 0.02
Discontinued operations - - - (0.44)
------------------- ------------------- ------------------- ---------------
Diluted income (loss) per common share $ 0.01 $ 0.03 $ (0.20) $ (0.42)
=================== =================== =================== ===============
1996
-------------------------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
------------------- ------------------- ------------------- ---------------
Revenue $128,779 $ 99,206 $111,581 $ 158,035
Income (loss) from continuing
operations, net (358) (1,751) (730) 6,914
Discontinued operations, net (3,388) (20,235) (3,831) (227,746)
------------------- ------------------- ------------------- ---------------
Net loss $ (3,746) $(21,986) $ (4,561) $(220,832)
=================== =================== =================== ===============
Basic income (loss) per common share:
Continuing operations $ - $ (0.02) $ (0.01) $ 0.08
Discontinued operations (0.04) (0.22) (0.04) (2.52)
------------------- ------------------- ------------------- ---------------
Basic loss per common share (0.04) (0.24) (0.05) $ (2.44)
=================== =================== =================== ===============
Diluted income (loss) per common share:
Continuing operations $ - $ (0.02) $ (0.01) $ 0.08
Discontinued operations (0.04) (0.22) (0.04) (2.51)
------------------- ------------------- ------------------- ---------------
Diluted loss per common share $ (0.04) $ (0.24) $ (0.05) $ (2.43)
=================== =================== =================== ===============
</TABLE>
46
<PAGE>
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
13. SUBSEQUENT EVENTS
In February 1998, the Company announced its intention to exit the feature film
business and close Spelling Films. The Company expects to record a charge of
approximately $20,000,000 associated with such closing in the first quarter of
1998.
Also in February 1998, Viacom exercised warrants to acquire 1,337,148 shares of
Common Stock for a total exercise price of approximately $9,316,000.
In March 1998, the Company and Viacom executed an amendment to the Viacom Credit
Agreement, effective as of December 31, 1997, which extended the maturity date
to December 31, 1999. No other terms or conditions of the Viacom Credit
Agreement were amended.
47
<PAGE>
SPELLING ENTERTAINMENT GROUP INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997
- - ------------------------------------------------------------------------------------------------------------------------------------
Other
Balance Additions Deductions adjustments Balance at
at beginning charged from during end of
Description of year to income reserves year year
- - ------------------------------------ ------------- ------------- --------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Deducted from accounts receivable
for doubtful accounts and returns $ 18,935 $ 9,568 $ (8,690) $ 884 $ 20,697
Estimated expenses and
disputed claims $ 10,986 $ - $ (1,655) $ - $ 9,331
1996
- - ------------------------------------------------------------------------------------------------------------------------------------
Deducted from accounts receivable
for doubtful accounts and returns $ 26,070 $ 4,331 $ (11,448) $ (18) $ 18,935
Estimated expenses and
disputed claims $ 12,194 $ - $ (1,208) $ - $ 10,986
1995
- - ------------------------------------------------------------------------------------------------------------------------------------
Deducted from accounts receivable
for doubtful accounts and returns $ 26,946 $ 13,238 $ (12,949) $ (1,165) $ 26,070
Estimated expenses and
disputed claims $ 20,368 $ - $ (8,174) $ - $ 12,194
</TABLE>
48
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
49
<PAGE>
PART III
The information required by the following items will be included in the
Company's definitive Proxy Statement, which will be filed with the Securities
and Exchange Commission in connection with the 1998 Annual Meeting of
Shareholders, and is incorporated herein by reference:
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
50
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Documents filed as part of this Report:
1. Financial Statements are included in Part II, Item 8.
2. Financial Statement Schedules:
A. Selected Quarterly Financial Data is included in Note 12 to the
Company's Consolidated Financial Statements
B. Schedules filed herewith for 1997, 1996 and 1995:
PAGE
II - Valuation and Qualifying Accounts 48
All other schedules for which provisions are made
in the applicable regulation of the Securities and
Exchange Commission have been omitted as they are not
applicable, not required, or the information required
thereby is set forth in the Consolidated Financial
Statements or the notes thereto.
3. Exhibits 53
(b) Reports on Form 8-K:
None.
51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SPELLING ENTERTAINMENT GROUP INC.
Date: March 31, 1998 By: /s/ Peter H. Bachmann
------------------------------
Peter H. Bachmann
President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: March 31, 1998 By: /s/ Sumner M. Redstone
--------------------------------------
Sumner M. Redstone
Chairman of the Board
Date: March 31, 1998 By: /s/ Aaron Spelling
--------------------------------------
Aaron Spelling
Vice Chairman of the Board
Date: March 31, 1998 By: /s/ Ross G. Landsbaum
--------------------------------------
Ross G. Landsbaum
Vice President - Finance and Business
Development and Treasurer
(Principal Financial Officer)
Date: March 31, 1998 By: /s/ James Miller
--------------------------------------
James Miller
Vice President and Controller
(Principal Accounting Officer)
Date: March 31, 1998 By: /s/ Philippe P. Dauman
--------------------------------------
Philippe P. Dauman
Director
Date: March 31, 1998 By: /s/ Thomas E. Dooley
--------------------------------------
Thomas E. Dooley
Director
Date: March 31, 1998 By: /s/ William M. Haber
--------------------------------------
William M. Haber
Director
Date: March 31, 1998 By: /s/ John L. Muething
--------------------------------------
John L. Muething
Director
52
<PAGE>
SPELLING ENTERTAINMENT GROUP INC.
INDEX TO EXHIBITS
NUMBER EXHIBIT DESCRIPTION
- - ------ -------------------
2.1 Certificate of Merger merging Spelling Entertainment Group Inc. with
and into Spelling Merger Corporation (incorporated by reference to
Exhibit 2.1 to Registrant's Form 10-K for fiscal year ended December
31, 1995).
3.1 Certificate of Incorporation of Spelling Merger Corporation
(incorporated by reference to Spelling Entertainment Group Inc.'s
Notice of Annual Meeting and Proxy Statement dated April 14, 1995).
3.2 ByLaws of Spelling Merger Corporation (incorporated by reference to
Spelling Entertainment Group Inc.'s Notice of Annual Meeting and Proxy
Statement dated April 14, 1995).
10.1 Credit Agreement dated as of September 30, 1996, by and among the
Registrant, certain subsidiaries of the Registrant and Viacom Inc.
(incorporated by reference to Exhibit 10.1 to Registrant's Form 10-Q
for quarterly period ended September 30, 1996).
10.2 Pledge and Security Agreement dated as of September 30, 1996, by and
among the Registrant, certain subsidiaries of the Registrant and Viacom
Inc. (incorporated by reference to Exhibit 10.2 to Registrant's Form
10-Q for quarterly period ended September 30, 1996).
10.3 Copyright Mortgage and Assignment; Power of Attorney dated as of
September 30, 1996, by the Registrant and certain subsidiaries of the
Registrant in favor of Viacom Inc. (incorporated by reference to
Exhibit 10.3 to Registrant's Form 10-Q for quarterly period ended
September 30, 1996).
10.4 Guaranty dated as of September 30, 1996, by the Registrant and certain
subsidiaries of the Registrant in favor of Viacom Inc. (incorporated by
reference to Exhibit 10.4 to Registrant's Form 10-Q for quarterly
period ended September 30, 1996).
10.5 Amendment No. 1 to the Credit Agreement dated as of December 31, 1996,
by and among the Registrant, certain subsidiaries of the Registrant and
Viacom Inc. (incorporated by reference to Exhibit 10.5 to Registrant's
Form 10-K for fiscal year ended December 31, 1996).
10.6 Amendment No. 2 to the Credit Agreement dated as of December 31, 1997
by and among the Registrant, certain subsidiaries of the Registrant and
Viacom Inc.
10.7 Second Amended and Restated Credit Agreement dated as of December 1,
1994 between Virgin Interactive Entertainment, Inc. and Bank of America
National Trust and Savings Association (incorporated reference to
Exhibit 10 (i) to Registrant's Form 10-Q for quarterly period ended
June 30, 1995).
10.8 First Amendment to Second Amended and Restated Credit Agreement dated
March 31, 1995, between Virgin Interactive Entertainment, Inc. and Bank
of America National Trust and Savings Association (incorporated by
reference to Exhibit 10 (ii) to Registrant's Form 10-Q for quarterly
period ended June 30, 1995).
53
<PAGE>
SPELLING ENTERTAINMENT GROUP INC.
INDEX TO EXHIBITS
NUMBER EXHIBIT DESCRIPTION
- - ------ -------------------
10.9 Second Amendment to Second Amended and Restated Credit Agreement dated
June 1, 1995, between Virgin Interactive Entertainment, Inc. and Bank
of America National Trust and Savings Association (incorporated by
reference to Exhibit 10 (iii) to Registrant's Form 10-Q for quarterly
period ended June 30, 1995).
10.10 Third Amendment to Second Amended and Restated Credit Agreement dated
as of December 20, 1995, between Virgin Interactive Entertainment, Inc.
and Bank of America National Trust and Savings Association
(incorporated by reference to Exhibit 10.8 to Registrant's Form 10-K
for fiscal year ended December 31, 1995).
10.11 Fourth Amendment to Second Amended and Restated Credit Agreement dated
as of December 31, 1996, between Virgin Interactive Entertainment, Inc.
and Bank of America National Trust and Savings Association
(incorporated by reference to Exhibit 10.10 to Registrant's Form 10-K
for fiscal year ended December 31, 1996).
10.12 Fifth Amendment to Second Amended and Restated Credit Agreement dated
as of February 24, 1998, between Virgin Interactive Entertainment, Inc.
and Bank of America National Trust and Savings Association.
10.13 Amended and Restated Agreement and Plan of Merger dated May 22, 1992,
by and among the Registrant, SEI Acquisition Corp. and Spelling
Entertainment Inc. (incorporated by reference to Spelling Entertainment
Inc.'s Notice of Annual Meeting and Proxy Statement dated June 24,
1992).
10.14 Stock Purchase Agreement dated as of March 7, 1993, among Blockbuster
Entertainment Corporation, BPH Subsidiary Inc., American Financial
Corporation and certain subsidiaries of American Financial Corporation
(includes insurance-type indemnity reference in Note 9 to the
Registrant's consolidated financial statement)(incorporated by
reference to Exhibit 28.1 to Blockbuster Entertainment Corporation's
Current Report on Form 8-K dated March 7, 1993).
10.15 Agreement and Plan of Merger dated December 8, 1993, by and among the
Registrant, DE Acquisition Corporation and Republic Pictures
Corporation (incorporated by reference to Exhibit 99.1 to the
Registrant's Current Report on Form 8-K dated December 8, 1993).
10.16 Exchange Agreement dated July 30, 1994, by and among Spelling
Entertainment Group Inc., Blockbuster Entertainment Corporation and
Blockbuster Interactive Entertainment, Inc. (incorporated by reference
to Exhibit 2 to Registrant's Form 8-K dated July 30, 1994).
10.17 Amendment No. 1 to Exchange Agreement dated as of July 8, 1995, by and
among the Registrant, Blockbuster Entertainment Group on behalf of
Viacom Inc. and Blockbuster Interactive Entertainment, Inc.
(incorporated by reference to Exhibit 10 (i) to Registrant's Form 10-Q
for the quarterly period ended September 30, 1995).
10.18 Amendment No. 2 to Exchange Agreement dated as of November 7, 1995, by
and among the Registrant, Blockbuster Entertainment Group on behalf of
Viacom Inc. and Blockbuster Interactive Entertainment, Inc.
(incorporated by reference to Exhibit 10 (ii) to Registrant's Form 10-Q
for the quarterly period ended September 30, 1995).
54
<PAGE>
SPELLING ENTERTAINMENT GROUP INC.
INDEX TO EXHIBITS
NUMBER EXHIBIT DESCRIPTION
- - ------ -------------------
10.19 Amendment No. 3 to Exchange Agreement dated as of February 22, 1996, by
and among the Registrant, Blockbuster Entertainment Group on behalf of
Viacom Inc. and Blockbuster Interactive Entertainment, Inc.
(incorporated by reference to Exhibit 10.15 to Registrant's Form 10-K
for fiscal year ended December 31, 1995).
10.20 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. (incorporated by reference to Exhibit
10.2 to Registrant's Form 10-Q for quarterly period ended March 31,
1996).
10.21 Amendment No. 5 to Exchange Agreement dated as of November 5, 1996, by
and among a subsidiary of the Registrant, Blockbuster Entertainment
Group on behalf of Viacom Inc. and SEGI Holding Co. (successor-in-
interest to Blockbuster Interactive Entertainment, Inc.) (incorporated
by reference to Exhibit 10.5 to Registrant's Form 10-Q for quarterly
period ended September 30, 1996).
10.22 Amendment No. 6 to Exchange Agreement dated as of February 1, 1997, by
and among a subsidiary of the Registrant, Blockbuster Entertainment
Group on behalf of Viacom Inc. and SEGI Holding Co. (successor-in-
interest to Blockbuster Interactive Entertainment, Inc.) (incorporated
by reference to Exhibit 10.20 to Registrant's Form 10-K for fiscal year
ended December 31, 1996).
10.23 Amendment No. 7 to Exchange Agreement dated as of May 3, 1997, by and
among a subsidiary of the Registrant, Blockbuster Entertainment Group
on behalf of Viacom International Inc. and SEGI Holding Co. (successor-
in-interest to Blockbuster Interactive Entertainment, Inc.)
(incorporated by reference to Exhibit 10.1 to Registrant's Form 10-Q
for quarterly period ended March 31, 1997).
10.24 Amendment No. 8 to Exchange Agreement dated as of August 2, 1997, by
and among the Registrant, Blockbuster Entertainment Group on behalf of
Viacom International Inc. and SEGI Holding Co. (successor-in-interest
to Blockbuster Interactive Entertainment, Inc.) (incorporated by
reference to Exhibit 10.1 to Registrant's Form 10-Q for quarterly
period ended June 30, 1997).
10.25 Amendment No. 9 to Exchange Agreement dated as of January 1, 1998, by
and among the Registrant, Viacom International Inc. and SEGI Holding
Co. (successor-in-interest to Blockbuster Interactive Entertainment,
Inc.).
10.26 Tax Agreement dated November 12, 1997, by and among the Registrant
and Viacom Inc.
10.27 Registrant's Stock Option Plan and Amendment Nos. One through Five
thereto (incorporated by reference to Exhibit 4.03 to the Registrant's
Registration Statement No. 33-61914 on Form S-8).
10.28 Registrant's 1987 Stock Option Plan, as amended and restated
(incorporated by reference to Exhibit 99.1 to the Registrant's Post-
Effective Amendment No. 1 to the Registration Statement No. 33-61914 on
Form S-8 dated February 26, 1998).
55
<PAGE>
SPELLING ENTERTAINMENT GROUP INC.
INDEX TO EXHIBITS
NUMBER EXHIBIT DESCRIPTION
- - ------ -------------------
10.29 Registrant's 1994 Stock Option Plan (incorporated by reference to
Annex A to Registrant's Notice of Annual Meeting and Proxy Statement
dated April 27, 1994).
10.30 Registrant's 1994 Stock Option Plan, as amended and restated
(incorporated by reference to Exhibit 99.1 to the Registrant's Post-
Effective Amendment No. 1 to the Registration Statement No. 33-53951 on
Form S-8 dated February 26, 1998).
10.31 Amended and Restated Employment Agreement dated March 1, 1998,
between Registrant and Aaron Spelling.
10.32 Employment Agreement dated as of January 1, 1997, between Registrant
and Peter Bachmann (incorporated by reference to Exhibit 10.1 to
Registrant's Form 10-Q for quarterly period ended September 30, 1997).
10.33 Employment Agreement dated as of January 1, 1995, between Registrant
and Sally Suchil (incorporated by reference to Exhibit 10.25 to
Registrant's Form 10-K for fiscal year ended December 31, 1995).
10.34 Amendment to Employment Agreement dated as of December 12, 1997,
between Registrant and Sally Suchil.
10.35 Employment Agreement dated as of January 6, 1997, between Registrant
and James Miller (incorporated by reference to Exhibit 10.27 to
Registrant's Form 10-K for fiscal year ended December 31, 1996).
10.36 Employment Agreement dated as of July 5, 1994, Amendment to
Employment Agreement dated as of July 5, 1995, Amendment No. 2 to
Employment Agreement dated as of February 4, 1997, and Amendment No. 3
to Employment Agreement dated as of December 18, 1997, between
Registrant and Ross G. Landsbaum.
11 Computation of net income (loss) per common share.
21 Subsidiaries of the Registrant.
23.1 Consent of Price Waterhouse LLP.
27.1 Financial Data Schedule.
27.2 Financial Data Schedule.
27.3 Financial Data Schedule.
27.4 Financial Data Schedule.
27.5 Financial Data Schedule.
27.6 Financial Data Schedule.
27.7 Financial Data Schedule.
27.8 Financial Data Schedule.
27.9 Financial Data Schedule.
56
<PAGE>
EXHIBIT 10.6
AMENDMENT NO. 2
AMENDMENT NO. 2, dated as of December 31, 1997 ("Amendment No. 2"), to the
CREDIT AGREEMENT, dated as of September 30, 1996 (the "Credit Agreement"), among
Spelling Entertainment Group Inc. and its Subsidiaries listed therein, as
Borrowers and VIACOM INC., as Lender.
W I T N E S S E T H:
-------------------
WHEREAS, the Borrowers have requested an amendment be made to a certain
provision of the Credit Agreement;
WHEREAS, the parties who have heretofore entered into the Credit Agreement
now desire to amend such provision of such agreement.
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Amendment. Article I of the Credit Agreement is hereby amended
---------
by deleting the date "December 31, 1998" in the definition of "Final Loan
Maturity Date" and substituting the date "December 31, 1999" therefor.
SECTION 2. Effectiveness. This Amendment No. 2 will be effective as of
-------------
December 31, 1997 upon the execution thereof by the Lender and each of the
Borrowers.
SECTION 3. Representations and Warranties. Each Borrower hereby
------------------------------
represents and warrants that as of the date hereof after giving effect to this
Amendment No. 2, no Default or Event of Default shall exist or be continuing
under the Credit Agreement.
SECTION 4. Miscellaneous. (a) Capitalized terms used herein and not
-------------
otherwise defined herein shall have the meanings ascribed to them in the Credit
Agreement.
(b) Except as amended hereby, all of the terms of the Credit Agreement
shall remain and continue in full force and effect and are hereby confirmed in
all respects.
(c) This Amendment No. 2 may be signed in any number of counterparts, each
of which shall be an original, with the same effect as if the signatures thereto
were upon the same instrument.
(d) THIS AMENDMENT NO. 2 AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HERETO SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF NEW YORK.
<PAGE>
SECTION 5. Guarantor Confirmation. By signing below, the Guarantors
----------------------
hereby agree to the terms of the foregoing Amendment No. 2 and confirm that the
Guaranty remains in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first above written.
BORROWERS AND GUARANTORS
------------------------
SPELLING ENTERTAINMENT GROUP INC.
SPELLING ENTERTAINMENT INC.
AARON SPELLING PRODUCTIONS, INC.
LAUREL ENTERTAINMENT, INC.
SPELLING FILMS INC.
SPELLING TELEVISION INC.
TORAND PRODUCTIONS INC.
WORLDVISION ENTERPRISES INC.
HAMILTON PROJECTS, INC.
WILSHIRE ENTERTAINMENT INC.
SPELLING SATELLITE NETWORKS, INC.
BIG TICKET TELEVISION INC.
REPUBLIC ENTERTAINMENT INC.
REPUBLIC DISTRIBUTION CORPORATION
VIRGIN INTERACTIVE ENTERTAINMENT, INC.
VIE HOLDING COMPANY
WESTWOOD STUDIOS INC.
By: /s/ Ross G. Landsbaum
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ROSS G. LANDSBAUM
As an authorized officer of each of the
foregoing corporations
Address: 5700 Wilshire Boulevard
Los Angeles, California 90036
LENDER
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VIACOM INC.
By: /s/ George S. Smith, Jr.
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GEORGE S. SMITH, JR.
Title: Senior Vice President,
Chief Financial Officer
Address: 1515 Broadway
New York, New York 10036
<PAGE>
EXHIBIT 10.12
FIFTH AMENDMENT TO
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
This Amendment, dated as of February 24, 1998 (this "Amendment") is entered
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into by and between VIRGIN INTERACTIVE ENTERTAINMENT, INC., a Delaware
corporation (the "Company") and BANK OF AMERICA NATIONAL TRUST AND SAVINGS
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ASSOCIATION (the "Bank").
RECITALS
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The Company and the Bank are parties to a Second Amended and Restated
Credit Agreement dated as of December 1, 1994, as amended (the "Credit
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Agreement"), to which the Bank extended a revolving and letter of credit
- - ---------
facility. Capitalized terms used and not otherwise defined or amended in this
Amendment shall have the meanings respectively assigned to them in the Credit
Agreement.
The Company has requested that the Bank extend the maturity date of the
facility. The Company has requested that the Bank enter into this Amendment in
order to approve and reflect the foregoing, and the Bank has agreed to do so,
all upon the terms and provisions and subject to the conditions hereinafter set
forth.
AGREEMENT
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In consideration of the foregoing and the mutual covenants and agreement
hereinafter set forth, the parties hereto mutually agrees as follows:
A. AMENDMENTS
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Amendment of Section 1.01
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1. Section 1.01 is hereby amended by deleting the date "December 31,
1997" in the definition of "Availability Period" and substituting the date
"September 30, 1998" therefor.
2. Section 1.01 is hereby further amended by deleting the date "March 31,
1998" in the definitions of "CD Rate Interest Period" "Offshore Rate Interest
Period" and "Revolving Maturity Date" and substituting the date "September 30,
1998" therefor.
3. Section 1.01 of the Credit Agreement is hereby further amended by
deleting "March 31, 1998" in the definition of "Revolving Maturity Date" and
substituting "September 30, 1998" therefor.
B. REPRESENTATIONS AND WARRANTIES
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The Company hereby represents and warrants to the Bank that:
1. No Event of Default specified in the Credit Agreement and no event
which with notice or lapse of time or both would become such an Event of Default
has occurred and is continuing;
2. The representations and warranties of the Company pursuant to the
Credit Agreement are true on and as of the date hereof as if made on and as of
said date;
<PAGE>
3. The making and performance by the Company of this Amendment have been
duly authorized by all corporate action; and
4. No consent, approval, authorization, permit or license from any
federal or state regulatory authority is required in connection with the making
or performance of the Credit Agreement as amended hereby.
C. CONDITIONS PRECEDENT
--------------------
This Amendment will become effective as of the date hereof, provided that
the Bank shall have received counterparts of this Amendment executed by the
Borrower and consented to by the Guarantor.
D. MISCELLANEOUS
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1. This Amendment may be signed in any number of counterparts, each of
which shall be an original, with same effect as if the signatures thereto and
hereto were upon the same instrument.
2. Except as herein specifically amended, all terms, covenants and
provisions of the Credit Agreement shall remain in full force and effect and
shall be performed by the parties hereto according to its terms and provisions
and all references therein or in the Exhibits shall henceforth refer to the
Credit Agreement as amended by this Amendment.
3. This Amendment shall be governed by and construed in accordance with
the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment as of the date first written.
VIRGIN INTERACTIVE ENTERTAINMENT, INC.
By: /s/ Ross G. Landsbaum
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Title: Vice President, Finance and Business
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Development & Treasurer
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BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By: /s/ Carl F. Salas
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Title: Vice President
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<PAGE>
EXHIBIT 10.25
AMENDMENT NO. 9 TO EXCHANGE AGREEMENT
AMENDMENT, dated as of January 1, 1998, by and among Spelling Entertainment
Group Inc. (the "Company"), a Delaware corporation (successor-in-interest to VIE
Holding Company), Viacom International Inc. ("Viacom"), a Delaware corporation
(successor-in-interest to Blockbuster Entertainment Corporation), and SEGI
Holding Co. ("SEGI Holding"), a Delaware corporation (successor-in-interest to
Blockbuster Interactive Entertainment, Inc.), to that certain Exchange Agreement
by and among the Company, Viacom and SEGI Holding dated as of June 30, 1994,
amended as of July 8, 1995, November 7, 1995, February 22, 1996, May 6, 1996,
November 5, 1996, February 1, 1997, May 3, 1997 and August 2, 1997, and assigned
by the Company to VIE Holding Company as of December 8, 1995 and reassigned by
VIE Holding Company to the Company as of May 5, 1997 (as so amended and
assigned, the "Agreement").
WHEREAS, the Company, Viacom and SEGI Holding have agreed to amend certain
provisions of the Agreement pertaining to Viacom'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, Viacom and SEGI Holding 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 Viacom at any time within the 180 day period
commencing on January 1, 1998 and concluding on June 30, 1998.
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 180 day period commencing on January 1,
1998 and concluding on June 30, 1998.
3. This Amendment shall be deemed effective as of January 1, 1998.
4. Except as expressly provided in this Amendment, the Agreement
shall not be deemed amended, modified or altered in any manner whatsoever.
<PAGE>
5. Capitalized terms not otherwise defined herein shall have the
meaning given to them in the Agreement.
6. This Amendment may be executed in one or more counterparts and by
the different parties hereto in separate counterparts, each of which when
executed shall be deemed to be an original but all of which taken together
shall constitute one and the same agreement.
IN WITNESS WHEREOF, the undersigned have caused this Amendment No. 9 to
Exchange Agreement to be duly executed on this 12th day of January 1998.
SPELLING ENTERTAINMENT GROUP INC.
By: /s/ Sally Suchil
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Name: Sally Suchil
--------------------------------
Title: Senior Vice President
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VIACOM INTERNATIONAL INC.
By: /s/ Michael D. Fricklas
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Name: Michael D. Fricklas
--------------------------------
Title: Senior Vice President
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SEGI HOLDING CO.
By: /s/ Michael D. Fricklas
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Name: Michael D. Fricklas
--------------------------------
Title: Senior Vice President
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2
<PAGE>
EXHIBIT 10.26
TAX AGREEMENT
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THIS AGREEMENT, dated as of November 12, 1997, is entered into between
Viacom Inc., a Delaware corporation ("Viacom"), and Spelling Entertainment
Group Inc., a Delaware corporation ("SEGI").
R E C I T A L S
- - - - - - - -
A. SEGI is the common parent corporation of an affiliated group of
corporations within the meaning of Section 1504 of the Internal Revenue
Code of 1986, as amended (the "Code"), which, together with any other
corporations which may become members of such affiliated group, is referred
to as the "SEGI Consolidated Group".
B. Viacom is the common parent corporation of an affiliated group of
corporations which, together with any other corporations which may become
members of such affiliated group, but excluding members of the SEGI
Consolidated Group, is referred to as the "Viacom Consolidated Group".
C. On November 11, 1997, SEGI Holding Inc., an indirect wholly-owned
subsidiary of Viacom, acquired stock of SEGI and thereby increased its
equity interest in SEGI to amount which met the requirements of Section
1504(a)(2) of the Code; consequently, as of the date hereof the Viacom
Consolidated Group and the SEGI Consolidated Group comprise a single
affiliated group (the "Combined Consolidated Group") with Viacom as the
common parent corporation.
D. Viacom and SEGI desire to set forth in this Agreement certain
matters relating to the inclusion of the SEGI Consolidated Group in the
Combined
<PAGE>
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Consolidated Group, including the allocation of tax liabilities for years
in which the SEGI Consolidated Group is so included and certain other
matters relating to taxes.
The parties agree as follows:
1. Filing of Consolidated Returns and Payment of Consolidated Tax
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Liability. For all taxable years in which Viacom files consolidated
---------
federal income tax returns and is entitled to include the SEGI Consolidated
Group in such returns under Sections 1501-1504, or successor provisions, of
the Code, Viacom shall include the SEGI Consolidated Group in the
consolidated federal income tax returns it files as the common parent
corporation of the Combined Consolidated Group. Viacom, SEGI, and the
other members of the Combined Consolidated Group shall file any and all
consents, elections or other documents and take any other actions necessary
or appropriate to effect the filing of such federal income tax returns.
For all taxable years in which the SEGI Consolidated Group is included in
the Combined Consolidated Group, Viacom shall pay the entire federal income
tax liability of the Combined Consolidated Group and shall indemnify and
hold harmless SEGI against any such liability; provided, however, that SEGI
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shall make payments to Viacom or receive payments from Viacom as provided
in this Agreement in settlement of the SEGI Consolidated Group's share of
the entire federal income tax liability of the Combined Consolidated Group.
2. Pro Forma SEGI Return.
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For each taxable year of the SEGI Consolidated Group (which term shall
throughout this Agreement include any short taxable year) for which Viacom
files a consolidated federal income tax return that includes the SEGI
Consolidated Group (a
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"Combined Consolidated Return"), Viacom shall prepare a pro forma
consolidated federal income tax return for the common parent corporation of
the SEGI Consolidated Group (a "Pro Forma SEGI Return"). Except as
otherwise provided herein, the Pro Forma SEGI Return for each taxable year
shall be prepared as if SEGI filed a consolidated return on behalf of the
SEGI Consolidated Group for such taxable year and all prior taxable years.
The Pro Forma SEGI Return shall reflect any carryovers of net operating
losses, net capital losses, excess tax credits, or other tax attributes
from actual returns of the SEGI Consolidated Group for years prior to the
SEGI Consolidated Group's inclusion in the Combined Consolidated Group
("Pre-Consolidation Years") and prior years' Pro Forma SEGI Returns which
could have been utilized by the SEGI Consolidated Group if the SEGI
Consolidated Group had never been included in the Combined Consolidated
Group and all Pro Forma SEGI Returns (as defined above) had been actual
returns, but otherwise shall not reflect carryover of any attributes from
the Combined Consolidated Return. The Pro Forma SEGI Return shall be
prepared in a manner that reflects all elections, positions, and methods
used in the Combined Consolidated Return that must be applied on a
consolidated basis and otherwise shall be prepared in a manner consistent
with the Combined Consolidated Return; provided, however that SEGI may
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deduct rather than credit foreign taxes on the Pro Forma SEGI Return to the
extent that such foreign taxes can be utilized as credits on a current
basis on the Combined Consolidated Return. The provisions of the Code that
require consolidated computations, such as Sections 861, 1201-1212, and
1231, shall be applied separately to the SEGI Consolidated Group. Section
1.1502-13 of the Income Tax Regulations shall be
<PAGE>
-4
applied as if the SEGI Consolidated Group and the Viacom Consolidated Group
were separate affiliated groups, except that the Pro Forma SEGI Return
shall include any gains or losses recognized by the SEGI Consolidated Group
on transactions within the SEGI Consolidated Group which must be taken into
account pursuant to Section 1.1502-13 of the Income Tax Regulations and
reflected on the Combined Consolidated Return if the SEGI Consolidated
Group ceases to be included in the Combined Consolidated Group. For
purposes of this Agreement, all determinations made as if the SEGI
Consolidated Group had never been included in the Combined Consolidated
Group and as if all Pro Forma SEGI Returns were actual returns shall
reflect any actual short taxable years resulting from the SEGI Consolidated
Group joining or leaving the Combined Consolidated Group.
3. Pro Forma SEGI Return Payments.
------------------------------
For each taxable year for which a Combined Consolidated Return is
filed, SEGI shall make periodic payments to Viacom in such amounts as
determined by Viacom based upon the estimated tax payments that would be
due from the SEGI Consolidated Group if it were not included in the
Combined Consolidated Group no later than the dates on which payments of
estimated tax would be due from the SEGI Consolidated Group if it were not
included in the Combined Consolidated Group. The balance of the tax due for
a taxable year shall be paid to Viacom no later than March 15 of the
following year. SEGI shall pay to Viacom no later than the date on which a
Combined Consolidated Return for any taxable year is filed an amount equal
to the sum of (i) the federal income tax liability shown on the
corresponding Pro Forma SEGI Return prepared for the taxable year and (ii)
the additions to tax, if any,
<PAGE>
-5
under Section 6655 of the Code that would have been imposed on SEGI
(treating the amount due to Viacom under (i) above as its federal income
tax liability and treating any periodic payments to Viacom pursuant to the
first sentence of this Section 3 as estimated payments under Section 6655
of the Code) and which result from the inaccuracy of any information
provided by SEGI to Viacom pursuant to Section 5 hereof or from the failure
of SEGI to provide any requested information, reduced by (iii) the sum of
the amount of the periodic payments and the payment made on March 15, plus
(iv) any interest and additions to tax (other than under Section 6655 of
the Code) that would be due under the Code if the payments described above
were actual payments of tax. If SEGI's total periodic payments to Viacom
for any taxable year exceed the amount of its liability under the preceding
sentence, Viacom shall refund such excess to SEGI within 30 days after
filing the Combined Consolidated Return. For purposes of this Agreement,
the term "federal income tax liability" means the tax imposed by Sections
11, 55 and 59A of the Code, or any successor provisions to such Sections.
For purposes of this section 3, Viacom shall notify SEGI concerning the
amount due from SEGI to Viacom no later than 5 business days prior to the
date such payments are due and such payments shall not be considered due
until the later of the due date described above or the fifth day from the
notice from Viacom.
4. Carrybacks.
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If a Pro Forma SEGI Return reflects a net operating loss, net capital
loss, excess tax credits or other tax attributes ("Pro Forma SEGI
Attributes") or if the Combined Consolidated Group has any such attributes
that are attributable to the SEGI Consolidated Group ("Actual SEGI
Attributes"), then, within 30 days after the
<PAGE>
-6
due date for the Combined Consolidated Return (taking into account any
extensions thereof), Viacom shall pay to SEGI the excess, if any, of (i)
the sum of (A) the refund which the SEGI Consolidated Group would have
received as a result of the carryback of such Pro Forma SEGI Attributes to
Pro Forma SEGI Returns for any taxable year or years in which the SEGI
Consolidated Group is included in the Combined Consolidated Group and (B)
any refund that would have been received as a result of a carryback of Pro
Forma SEGI Attributes to any Pre-Consolidation Year (determined as if the
SEGI Consolidated Group had never been included in the Combined
Consolidated Group and Pro Forma SEGI Returns had been actual returns) over
(ii) the amount of any refund actually received (and paid by Viacom to SEGI
if such refund is received by Viacom) as a result of a carryback of any
Actual SEGI Attributes to a Pre-Consolidation Year, or SEGI shall pay to
Viacom the excess, if any, of the amount described in clause (ii) over the
amount described in clause (i). All calculations of actual and deemed
refunds pursuant to this Section 4 shall include interest computed as if
SEGI had filed a claim for refund or an application for a tentative
carryback adjustment pursuant to Section 6411(a) of the Code on the date on
which the Combined Consolidated Return is filed.
5. Preparation of Tax Package and Other Financial Reporting
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Information.
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SEGI shall provide to Viacom in a format determined by Viacom all
information necessary to prepare the Combined Consolidated Return and the
Pro Forma SEGI Return (the "Viacom Tax Package") as are communicated to
SEGI by Viacom. The Viacom Tax Package shall be provided to Viacom on a
timely basis
<PAGE>
-7
consistent with current practices of the Viacom Consolidated Group. SEGI
shall also provide to Viacom current federal taxable income, current and
deferred tax liabilities, tax reserve items, and any additional current or
prior information required by Viacom on a timely basis consistent with
current practices of the Viacom Consolidated Group as are communicated to
SEGI by Viacom.
6. Returns, Audits, Refunds, Amended Returns, Litigation, and
----------------------------------------------------------
Adjustments.
-----------
(a) Returns. Viacom shall have exclusive and sole responsibility for
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the preparation and filing of the Combined Consolidated Returns and any
other returns, amended returns and other documents or statements required
to be filed with the Internal Revenue Service in connection with the
determination of the federal income tax liability of the Combined
Consolidated Group.
(b) Audits; Refund Claims. Viacom will have exclusive and sole
---------------------
responsibility and control with respect to the conduct of Internal Revenue
Service examinations of the returns filed by the Combined Consolidated
Group and any refund claims with respect thereto. SEGI shall cooperate
with Viacom during the course of any such proceeding. Viacom shall give
SEGI notice of and consult with SEGI with respect to any issues relating to
items of income, deduction, gain, loss or credit of members of the SEGI
Consolidated Group ("SEGI Consolidated Return Items").
(c) Litigation. If the federal income tax liability of the Combined
----------
Consolidated Group becomes the subject of litigation in any court, the
conduct of the litigation shall be controlled exclusively by Viacom. SEGI
shall cooperate with
<PAGE>
-8
Viacom during the course of litigation, and Viacom shall consult with SEGI
regarding any issues relating to SEGI Consolidated Return Items.
(d) Expenses. SEGI shall reimburse Viacom for all reasonable out-of-
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pocket expenses (including, without limitation, legal, consulting, and
accounting fees) incurred by Viacom in the course of proceedings described
in paragraphs (b) and (c) of this Section to the extent such expenses are
reasonably attributable to SEGI Consolidated Return Items.
(e) Recalculation of Payments to Reflect Adjustments. To the extent
------------------------------------------------
that any audit, litigation or claim for refund with respect to a Combined
Consolidated Return results in an additional payment of tax (including a
payment of tax made preliminary to commencing a refund claim or litigation)
or a refund of tax (any such additional payment or refund, an "Adjustment")
relating to the treatment of a SEGI Consolidated Return Item, a
corresponding adjustment shall be made to the corresponding Pro Forma SEGI
Return.
All calculations of payments made pursuant to Sections 3 and 4 of this
Agreement shall be recomputed to reflect the effect of any Adjustments on
the relevant Pro Forma SEGI Return. Within 5 days after any such
Adjustment of an Pro Forma SEGI Return, SEGI or Viacom, as appropriate,
shall make additional payments or refund payments to the other party
reflecting such Adjustment, plus interest pursuant to Section 7 of this
Agreement calculated as if payments by and to SEGI pursuant to Sections 3
and 4 of this Agreement and this Section 5 were payments and refunds of
federal income taxes. SEGI shall further pay to Viacom the amount of any
penalties or additions to tax incurred by the Combined Consolidated
<PAGE>
-9
Group as a result of an adjustment to any SEGI Consolidated Return Item.
7. Interest.
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Interest required to be paid by or to SEGI pursuant to this Agreement
shall, unless otherwise specified, be computed at the rate and in the
manner provided in the Code for interest or underpayments and overpayments,
respectively, of federal income tax for the relevant period. Any payments
required pursuant to this Agreement which are not made within the time
period specified in this Agreement shall bear interest at the rate provided
in the Credit Agreement between Viacom and SEGI dated as of September 30,
1996, as amended from time to time.
8. Foreign, State and Local Income Taxes and other Taxes .
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Viacom shall have the responsibility for filing, or causing to be
filed, all foreign, state or local income tax returns for the Combined
Consolidated Group and for all the members thereof. In the case of foreign,
state or local taxes based on or measured by the net income of the Combined
Consolidated Group, or any combination of members thereof (other than
solely with respect to members who are members of the Viacom Consolidated
Group or the SEGI Consolidated Group) on a combined, consolidated or
unitary basis, the provisions of Sections 1 through 7 of this Agreement
with respect to sharing of federal income tax liability shall apply with
equal force to such foreign, state or local tax whether or not the SEGI
Consolidated Group is included in the Combined Consolidated Group for
federal income tax purposes; provided, however, that interest pursuant to
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Section 7 of this Agreement shall be computed at the rate and in the manner
provided under such foreign, state or local law for interest on
underpayments and overpayments of such tax for the relevant
<PAGE>
-10
period and references to provisions of the Code shall be deemed to be
references to analogous provisions of state, local, and foreign law. Viacom
shall have the sole and exclusive responsibility for determining if a
combined, consolidated or unitary tax return should be filed for any
foreign, state or local tax purpose. SEGI shall provide to Viacom separate
legal entity reporting information with respect to any member of the SEGI
Consolidated Group as required by Viacom and communicated to SEGI. SEGI
shall reimburse Viacom for any tax liability due as a result of any member
of the SEGI Consolidated Group which files a separate foreign, state or
local tax return under terms consistent with Section 3 of this Agreement
and for expenses (including, without limitation, legal consulting and
accounting fees incurred by Viacom) with respect to any separate legal
entity filing. Viacom shall have exclusive and sole responsibility and
control of all foreign, state or local income tax audits and litigation
with respect to any member of the SEGI Consolidated Group. Viacom will
provide notice of and consult with SEGI with respect to any issue relating
to such audits and litigation and SEGI will provide to Viacom any
information necessary to conduct such audits and litigation. SEGI shall be
responsible for filing tax returns relating to payroll, sales and use,
property, withholding and similar taxes.
9. Confidentiality.
---------------
Each of Viacom and SEGI agrees that any information furnished pursuant
to this Agreement is confidential and, except as, and to the extent,
required during the
<PAGE>
-11
course of an audit or litigation or other administrative or legal
proceeding, shall not be disclosed to other persons.
10. Successors and Access to Information.
------------------------------------
This Agreement shall be binding upon and inure to the benefit of any
successor to any of the parties, by merger, acquisition of assets or
otherwise, to the same extent as if the successor had been an original
party to this Agreement. If for any taxable year the SEGI Consolidated
Group is no longer included in the Combined Consolidated Group, Viacom and
SEGI agree to provide to the other party tax information reasonably
required to complete tax returns for taxable periods beginning after the
SEGI Consolidated Group is no longer included in a Combined Consolidated
Return, and each of Viacom and SEGI will cooperate with respect to any
audits relating to a Combined Consolidated Return.
11. Governing Law.
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This Agreement shall be governed by and construed in accordance with
the laws of New York excluding (to the greatest extent permissible by law)
any rule of law that would cause the application of the laws of any
jurisdiction other than the State of New York.
12. Headings.
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The headings in this Agreement are for convenience only and shall not
be deemed for any purpose to constitute a part or to affect the
interpretation of this
<PAGE>
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Agreement.
13. Counterparts.
------------
This Agreement may be executed simultaneously in two or more
counterparts, each of which will be deemed an original, and it shall not be
necessary in making proof of this Agreement to produce or account for more
than one counterpart.
14. Severability.
------------
If any provision of this Agreement is held to be unenforceable for any
reason, it shall be adjusted rather than voided, if possible, in order to
achieve the intent of the parties to the maximum extent practicable. In
any event, all other provisions of this Agreement shall be deemed valid,
binding, and enforceable to their full extent.
15. Termination.
-----------
Unless otherwise agreed by the parties, this Agreement shall remain in
force and be binding so long as the period of assessments under the Code
remains unexpired for any taxable year during which the SEGI Consolidated
Group is included in a Combined Consolidated Return; provided, however,
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that, except as expressly provided in Section 4 with respect to Pre-
Consolidation Years, neither Viacom nor SEGI shall have any liability to
the other party with respect to tax liabilities for taxable years in which
the SEGI Consolidated Group is not included in
<PAGE>
-13
the Combined Consolidated Returns.
16. Successor Provisions
--------------------
Any reference herein to any provisions of the Code or Treasury
Regulations shall be deemed to include any amendments or successor
provisions thereto as appropriate.
IN WITNESS WHEREOF, each of the parties of this Agreement has caused
this Agreement to be executed by its duly authorized officer on this date
of November 12, 1997.
Viacom Inc.
By: /s/ John V. Berna
-----------------
Name: John V. Berna
Title: Vice President, Taxes
Spelling Entertainment Group Inc.
By: /s/ Ross G. Landsbaum
---------------------
Name: Ross G. Landsbaum
Title: Vice President, Finance &
Business Development &
Treasurer
<PAGE>
EXHIBIT 10.31
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This Amended and Restated Employment Agreement (the "Agreement") is entered
into effective as of March 1, 1998, (the "Commencement Date") by and between
Spelling Entertainment Group Inc., a Delaware corporation (the "Company"), and
Aaron Spelling (the "Executive"), and amends and restates in its entirety that
certain Employment Agreement dated May 1, 1996, as amended by that certain
Amendment No. 1 to Employment Agreement dated July 28, 1997 both between
Executive and Company. 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, 2000 (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
<PAGE>
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") 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
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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.
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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:
3.1.1. From the Commencement Date to April 30, 1998, the amount
of One Hundred Twenty Nine Thousand One Hundred Sixty Seven Dollars ($129,167)
per month.
3.1.2. From May 1, 1998 to April 30, 1999, the amount of One
Million Seven Hundred Thousand Dollars ($1,700,000).
3.1.3. From May 1, 1999 to April 30, 2000, the amount of One
Million Eight Hundred Fifty Thousand Dollars ($1,850,000).
3.1.4. All compensation under this section shall be payable in
accordance with Company's normal practices.
3.2. Executive Producer Fees and Other Compensation for Television
-------------------------------------------------------------
Programming. Executive shall be entitled to receive executive producer fees and
- - -----------
other compensation ("Executive Producer Fees") for television programming as
follows:
(a) Beverly Hills, 90210: $55,000 for each episode produced
--------------------
during the eighth year of production (1997-98 television
season), $62,500 for each episode produced during the ninth
year of production (1998-99 television season) and $70,000
for each episode produced during the tenth year of production
(1999-2000 television season).
(b) Melrose Place: $50,000 for each episode produced during the
-------------
sixth year of production (1997-98 television season), $57,500
for each episode produced during the seventh year of
production (1998-99 television season) and $65,000 for each
episode produced during the eighth year of production (1999-
2000 television season).
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(c) 7th Heaven: $42,500 for each episode produced during the
----------
second year of production (1997-98 television season),
$52,500 for each episode produced during the third year of
production (1998-99 television season) and $62,500 for each
episode produced during the fourth year of production (1999-
2000 television season).
(d) Sunset Beach: $12,500 for each week of five (5) episodes
------------
produced during the first year of production (1997 television
season), $15,000 for each week of five (5) episodes produced
during the second year of production (1998 television
season), $17,500 for each week of five (5) episodes produced
during the third year of production (1999 television season),
in each case prorated for any partial week period.
(e) Love Boat: $35,000 for each episode produced during the
---------
first year of production (1998-99 television season) and
$42,500 for each episode produced during the second year of
production (1999-2000 television season).
(f) New Series: Except as provided for in Sections 3.2(a),
----------
3.2(b), 3.2(c), 3.2(d) and 3.2(e), 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
Executive Producer Fee shall be increased by $7,500 per
episode for each subsequent year the New Series is in
production.
(g) Mini-Series and Movies-of-the-Week ("MOW"): $60,000 for each
------------------------------------------
hour of any television mini-series produced and $50,000 for
each hour of any MOW produced.
(h) Series Sales Bonus: Commencing in the seventh year of
------------------
production of "Beverly Hills, 90210"
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(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 "Sunset Beach"
(1997 television season), the Company shall pay Executive an
annual sales bonus of $125,000 for each year the series is in
production.
Commencing in the third year of production of "7th Heaven"
(1998-99 television season), the Company shall pay Executive
an annual sales bonus of $150,000 for the 1998-99 television
season and each subsequent year the series is in production.
Commencing in the third year of production of any New
Series, including "Love Boat", the Company shall pay
Executive an annual sales bonus of $125,000 for each New
Series. For each production year after the third production
year of such New Series, the annual sales bonus shall
increase by $25,000.
(i) Other Programming: Executive Producer Fees and other
-----------------
compensation for additional programming not specifically
provided for in Sections 3.2(a)-(g) above shall be negotiated
in good faith and be commensurate with industry standards for
producers of Executive's stature.
(j) If E. Duke Vincent retires from employment with Company,
Spelling Television Inc. or any of their respective
subsidiaries, and no longer receives episodic fees, the
Executive Producer Fees payable to Executive pursuant to this
Section 3.2 after E. Duke Vincent's
5
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retirement shall be increased by forty percent (40%).
3.3. Theatrical Film Compensation. During the Term, Executive shall
----------------------------
also be entitled to receive executive producer fees, participations, deferments
and other compensation, exclusive of reimbursement of Company's actual direct
out-of-pocket costs ("Theatrical Film Compensation") as agreed to by Executive,
the Company and the producer/studio of the following theatrical films which had
been in development with the Company, "No Ordinary Joe," "Mod Squad" and "Love
Boat" ("Theatrical Films"). At Executive's request, Company shall enter into
loan-out agreements lending Executive's executive producing services to such
producers/studios and shall pay Executive (i) one hundred percent (100%) of all
Theatrical Film Compensation from "Mod Squad", and (ii) fifty percent (50%) of
all Theatrical Film Compensation received by Company from any other Theatrical
Film. None of Executive's work on the theatrical films shall interfere with his
duties and responsibilities as set forth in Paragraph 2.
3.4. Year End Bonus. For the term year of May 1, 1998 to April 30,
--------------
1999, and on or before February 29, 1999, Company shall pay Executive a year-end
bonus of One Hundred Seventy Five Thousand dollars ($175,000) and for the term
year of May 1, 1999 to April 30, 2000, and on or before February 28, 2000,
Company shall pay Executive a year-end bonus of Two Hundred Thousand dollars
($200,000). The bonus payments set forth in this Section 3.4 shall be payable
in accordance with Employer's normal practices.
3.5. Incentive Compensation. In addition to his Base Salary,
----------------------
Executive Producer Fees, Theatrical Film Compensation and Year-End Bonus, 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. Executive's participation in the Company's Short Term Incentive
Plan is as set forth in Section 3.4.
3.6. 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.
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3.7. 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.
3.8. 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 December 22, 1997, 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, any options held by Executive then 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 in accordance with the
terms of the Company's Stock Option Plan, 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.
3.9. 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.
3.10. Car Allowance. During the Employment Term, Executive shall
-------------
receive a car allowance in the amount of $1,200 per month.
4. Termination.
-----------
4.1. Termination by Company.
----------------------
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:
7
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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 Executive (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 and other compensation, payable pursuant to Section 3.2
due through the effective date of such termination, (iii) any Theatrical Film
Compensation payable pursuant to Section 3.3 due through the last day Executive
rendered services on such Theatrical Film, and thereafter any participation and
deferments already earned as of the last day of Executive's services on such
Theatrical Film, (iv) a pro rata portion of the year end bonus set forth in
Section 3.4 prorated on the basis of a 365 day year for that period from the
start of the term year through the effective date of such termination, (v)
benefits vested under any applicable pension or other employee benefit plans,
and (vi) 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
8
<PAGE>
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
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 securities 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:
9
<PAGE>
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", based on the remaining length of the Term, 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 and other compensation which would have been payable to
the Executive pursuant to Section 3.2 and Theatrical Film Compensation which
would have been payable pursuant to Section 3.3 had the aggregate Executive
Producer Fees and other compensation and Theatrical Film Compensation 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, plus (iii) the amount of the year end bonuses for the remainder of the
Term payable pursuant to Section 3.4. In the event the Executive does not elect
to have some or all of his Executive Producer Fees and other compensation or
Theatrical Film Compensation accelerated under clause (ii), the Company and the
Production Subsidiaries, as applicable, shall continue to pay the Executive the
Executive Producer Fees and other compensation and Theatrical Film Compensation
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. If termination by Executive is premised
solely on a Change in Control, then Company shall pay Executive only the amount
specified in clause (ii) or the penultimate sentence of this Section 4.2.2.2, as
applicable, at Executive's election.
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
10
<PAGE>
Company or any Production Subsidiary or under any bonus, management incentive or
other plan of the Company 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, and there shall be no reduction in payments due hereunder if
Executive secures other employment.
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, may at his election, continue to provide
executive producer services on "Beverly Hills, 90210," "Melrose Place," "7th
Heaven", "Love Boat" and "Sunset Beach," or any other Product or Theatrical Film
for which Executive was rendering executive producer services at the time this
Agreement is terminated, and for any such series, Product or Theatrical Film for
which Executive so elects, the Company will continue to engage Executive to
provide such services and pay him the Executive Producer Fees and other
compensation as specified in Section 3.2 and the Theatrical Film Compensation as
specified in Section 3.3.
5. Services After the Term. At any time following the Term, the
-----------------------
Executive shall be entitled to serve and receive appropriate
11
<PAGE>
fees pursuant to Sections 3.2(f) and (g) 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 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 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
12
<PAGE>
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 Except as provided in Section 3.3, 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 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.
13
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7. Ownership of Proceeds of Employment. The Executive acknowledge's 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 results
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 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
14
<PAGE>
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.
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
594 South Mapleton Drive
Los Angeles, California 90024
If to the Company at:
Spelling Entertainment Group Inc.
5700 Wilshire Boulevard
15
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Los Angeles, California 90036
Attention: General Counsel
Copies of all notices should be sent to:
Greenberg Glusker Fields
Claman & Machtinger LLP
1900 Avenue of the Stars, Suite 2100
Los Angeles, California 90067
Attention: Robert S. Chapman, 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 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,
16
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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
prejudice 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
17
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and provision of this Agreement shall be valid and enforced to the fullest
extent permitted by law.
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)
/s/ Aaron Spelling
----------------------------------
18
<PAGE>
EXHIBIT 10.34
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement (the "Amendment"), is made and
entered into as of December 12, 1997, by and between SPELLING ENTERTAINMENT
GROUP INC. ("Employer") and SALLY SUCHIL ("Employee") with reference to the
following facts and circumstances:
WHEREAS, the parties hereto previously entered into that certain employment
agreement, dated as of January 1, 1995 (the "Employment Agreement");
WHEREAS, the Employment Agreement terminates on December 31, 1997;
NOW, THEREFORE, Employer and Employee mutually agree to amend the
Employment Agreement as follows:
1. The term of the Employment Agreement shall be extended from January 1,
1998 to January 4, 2000 (the "Extended Term").
2. From January 1, 1998 to December 31, 1998, Employer shall pay Employee a
base salary of Three Hundred Five Thousand Dollars ($305,000), and from
January 1, 1999 to January 4, 2000, Employer shall pay Employee a base
salary of Three Hundred Twenty Five Thousand Dollars ($325,000), payable
on an annualized basis in accordance with Employer's normal practices.
3. During the Extended Term, Employee shall be paid a monthly car allowance
in the amount of Seven Hundred Fifty Dollars ($750).
4. During the Extended Term, the target for Employee's bonus compensation
shall be 30% of Employee's annual Base Salary.
5. During the Extended Term, Employee's title shall be Senior Vice
President - General Counsel, Secretary and Administration.
6. Except as amended by this Amendment, the Employment Agreement shall not
be amended in any respect whatsoever and shall continue in full force
and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the date first above written.
SPELLING ENTERTAINMENT GROUP INC. SALLY SUCHIL
By: /s/ Peter H. Bachmann /s/ Sally Suchil
------------------------ ----------------------
Its: President
-----------------------
1
<PAGE>
EXHIBIT 10.36
AGREEMENT
THIS AGREEMENT ("Agreement") is made and entered into as of July 5, 1994
(the "Commencement Date"), by and between SPELLING ENTERTAINMENT GROUP INC.
("SEGI"), a Florida Corporation ("Employer") and ROSS G. LANDSBAUM ("Employee").
The parties agree to the following:
1. DUTIES: Employer engages Employee to serve in the capacity of Vice
------
President, Taxes and Finance, reporting to the Chief Financial Officer ("CFO")
of Employer, or such other person as may later be designated by the CFO or Chief
Executive Officer ("CEO") of Employer. During the term of this Agreement,
Employer shall determine within its sole and absolute discretion the scope of
duties and responsibilities of Employee, so long as such duties and
responsibilities are consistent with those exercised by a Vice-President, Taxes
and Finance. In addition, Employer will determine within its sole and absolute
discretion the particular additional office or offices, if any, to be held by
Employee with Employer or its affiliates or subsidiaries. Employee shall furnish
such other services to Employer as may be requested by Employer in its sole and
absolute discretion. Employee shall furnish his services to Employer on an
absolutely exclusive basis. Employee shall not perform any services of any kind
or nature which could interfere with the performance of his services hereunder
for any individual, partnership, corporation or other entity, or engage in any
self employment, and shall not engage in any activity whatsoever which would
interfere with the performance of his services hereunder. Employee shall not
use, or allow the use of, his title or offices with Employer or the fact of his
employment or affiliation with Employer or any of its affiliated entities in
connection with any activities or endeavors which are not specifically and
directly related to the performance of his duties under this Agreement without
the specific and express written authorization of the CFO of Employer, or his or
his express designee. Furthermore, Employee shall not become financially
interested in or associated with, directly or indirectly, any other individual,
partnership, corporation or other entity in connection with the production,
distribution or exhibition of motion pictures, television programs, sound
recordings, theatrical plays, any visual and or audio recordings of any kind, in
the broadcasting and/or music publishing businesses, or any other entertainment
related business or activity; provided, however, that the foregoing shall not
prevent Employee from (i) holding a passive legal or beneficial interest in any
partnership, corporation or other entity which is not a competitor of Employer
(or any subsidiary of Employer) in any of the Employer's (or any of its
subsidiaries) lines of business or (ii) from holding a legal or beneficial
interest not exceeding one percent (1%) of the outstanding stock of any publicly
traded corporation whether or not such publicly traded corporation competes with
Employer (or any of its subsidiaries) in any of Employer's (or any of its
subsidiaries') lines of business.
2. TERM OF EMPLOYMENT: Subject to prior termination as hereinafter
------------------
provided, Employer hereby employs Employee and Employee hereby accepts
employment with Employer, under the terms and conditions set forth in this
Agreement commencing on the Commencement Date and terminating on June 30, 1997
(the "Employment Term"). Both Employee and Employer acknowledge and agree that
neither has any obligation or duty to renew, extend or negotiate for the renewal
or extension of the employment relationship beyond the Employment Term. Should
the
<PAGE>
employment relationship continue after the Employment Term without the agreement
to and execution of a complete and integrated written employment contract, the
employment during such period shall be completely at will, so that either
Employer or Employee may terminate the employment at any time, without notice,
for any reason or no reason, and no reason need be given.
3. COMPENSATION:
3.1 Base Salary: As compensation for the performance by
-----------
Employee of all his obligations hereunder, Employer shall pay Employee a base
salary ("Base Salary") as follows: Employee's Base Salary during the first year
of the Employment Term shall be $130,000. Employee's Base Salary is subject to
review and possible adjustment after each year of employment hereunder. Although
Employee acknowledges and agrees that Employer's agreement to so review his Base
Salary after each year of employment hereunder does not obligate Employer to
increase his Base Salary, Employee's base salary shall not be decreased below
$130,000 per annum. All compensation under this section shall be payable in
accordance with Employer's normal practices. No additional compensation shall be
payable to Employee by reason of any hours worked on Saturdays, Sundays,
holidays or otherwise.
3.2 Bonus Compensation: Employee may also be eligible to
------------------
receive discretionary bonus compensation. The amount of such discretionary bonus
compensation, if any, however, shall be determined on an individual basis by the
Employer in its sole and absolute discretion using the same criteria, if any, as
are used in connection with the discretionary bonus compensation decisions made
with respect to executives of similar stature as that of Employee.
4. BENEFITS:
--------
4.1 Expenses: Employer agrees to repay or reimburse Employee for
--------
ordinary and necessary business expenses compatible with Employer's general
policies for executives of similar stature, upon the presentation of itemized
statements of such business expenses on the form generally used by executives of
Employer within forty-five (45) days of the occurrence of such expense. Employee
shall obtain permission of the CFO of Employer, or such other person as may be
designated by Employer, before incurring any business expenses out of the
ordinary course.
4.2 Medical, Insurance and Other Benefits: During the
-------------------------------------
Employment Term, Employee shall be entitled to participate in all benefit plans
available to other SEGI executives of similar stature, including without
limitation, group medical, dental or disability benefits, as such plans or
benefits may be established or modified from time to time in Employer's sole and
absolute discretion.
4.3 Stock Options: Employee shall be granted 25,000 stock
-------------
options to purchase common stock of Spelling Entertainment Group Inc. ("SEGI"),
at a purchase price equal to the closing price on July 5, 1994, pursuant to the
terms of the SEGI Stock Participation Plan. Said options shall vest in four (4)
equal annual installments commencing July 4, 1995. Vesting of stock options
shall continue during the Employment Term if Employee's employment is terminated
without cause, as defined in Paragraphs 5 and 6, below. Otherwise, vesting shall
cease upon
<PAGE>
termination of Employee's employment, and Employee's right to exercise stock
options shall cease after termination of Employee's employment for any reason in
accordance with the terms of the SEGI Stock Participation Plan. Employee
acknowledges and agrees that the vesting periods referred to herein do not
expressly or impliedly constitute a promise or representation concerning an
extension or continuation of the employment relationship beyond the Employment
Term.
4.4 Vacation: During the Employment Term, Employee shall be
--------
entitled to four (4) weeks vacation per year without reduction in Employee's
Base Salary, in accordance with the policies established from time to time by
Employer.
4.5 Pension: Employee shall be eligible to participate in
-------
Employer's 401(k) plan offered to its employees, on the same terms and
conditions applicable to all employees of similar stature under the plan.
4.6 Benefits: All the benefits described in this Section
--------
shall cease immediately upon the termination of Employee's employment with
Employer for any reason, subject to Employee's rights under COBRA and ERISA.
5. TERMINATION BY EMPLOYER FOR CAUSE: Notwithstanding anything to the
---------------------------------
contrary in this Agreement, if at any time Employer, through its CFO or the
express designee(s) of the CEO of SEGI, has a reasonable basis to believe that
Employee has committed any act or omission that constitutes "cause" as defined
below, Employee shall be in breach of this Agreement, and Employer shall have
the right to terminate Employee's employment immediately and retain any rights
in equity or law including rights of offset against Employee for such breach,
and Employee's compensation and benefits shall cease immediately, subject only
to such rights as Employee may have under COBRA or ERISA. As used herein, the
term "cause" shall mean:
(i) Employee's conviction of any crime (whether or not
involving Employer) which constitutes a crime of moral turpitude or is
punishable by imprisonment of one year or more;
(ii) Any act or omission by Employee involving malfeasance
or negligence, or constituting a material breach of this Agreement;
(iii) Employee's omission or act constituting fraud,
dishonesty or misrepresentation, whether prior or subsequent to the date
hereof, including, without limitation any fraud, dishonesty or
misrepresentation relating to Employee's hiring by Employer;
(iv) Employee's failure, inability (which does qualify as a
disability under federal or state law), or refusal to perform Employee's
duties on an exclusive and full-time basis;
(v) Employee's violation of any rule or regulation of
Employer applicable to other employees of similar stature;
<PAGE>
(vi) Any other act, omission, fact or event which could
constitute cause under federal or state law.
Employee acknowledges and agrees that he is a fiduciary of Employer and, as
such, has affirmative and active duties of loyalty, confidence, trust and
cooperation with Employer. In connection with such duties, Employee acknowledges
and agrees that he will be required to provide to Employer any and all written
or oral information deemed relevant by Employer in connection with its review
and determination of cause. Employee acknowledges and agrees that such duties
survive the termination of his employment and that his failure to so cooperate
with Employer's review and determination of cause shall itself constitute cause
justifying the termination of employment.
6. MITIGATION: If Employee's employment is terminated by Employer
----------
without cause as defined above, Employee shall have an active and affirmative
duty to use continuous good faith and best efforts to seek alternative
employment and to report to Employer on a monthly basis concerning such efforts.
Employer shall be entitled to reduce the amount of any compensation and
applicable benefits payable to Employee under this Agreement by the amount of
salary, bonus and/or benefits or other compensation of any kind earned or
received by Employee from any third party and/or any such amounts, compensation
or benefits earned through self employment from the date of termination through
the end of the Employment Term. Employee acknowledges and agrees that any
failure by Employee to use such efforts to mitigate shall constitute a material
breach of this Agreement and shall constitute a ground excusing further
performance by Employer under this Agreement.
7. CONFIDENTIALITY: During the term of Employee's employment and
---------------
thereafter, Employee shall keep in absolute confidence and shall not use for
Employee or others, or divulge to others, any information pertaining to
Employer's business, including without limitation, secret or confidential
information, knowledge, data or plans of Employer, including without limitation,
matters of a business nature such as information about costs and profits,
projections, personnel information, records, customer lists, contact persons,
customer data, software, and sales data, or matters of a creative nature,
including without limitation, matters regarding or including ideas of a literary
or dramatic nature, or regarding any form of motion pictures ("Company
Information"). Company Information shall be considered and kept as the private
and privileged information of Employer and may not be divulged without the
express written authorization of the President of Employer or his or her express
designee. Any records, files, lists, drawings, documents, models, equipment,
software or the like relating to Employer's business which Employee shall
prepare or use, or come into contact with or any other Company Information shall
not be removed from Employer's premises without Employer's express and specific
written consent, except as specifically required to perform Employee's duties
under this Agreement in the course and scope of Employee's employment during the
term of Employee's employment, and shall be returned to Employer (including all
copies or other recordation) immediately upon the termination of Employee's
employment hereunder. If Employee breaches any of the covenants in this Section,
then Employer shall have the right to enforce any legal or equitable remedy
(including, without limitation, preliminary and permanent injunctive relief and
accounting for all profits and benefits) that may be available and Employee
agrees that Employee's duties of confidentiality with respect to Company
Information shall survive the termination of his employment with Employer.
Employee
<PAGE>
acknowledges and agrees that any breach of such covenants could cause
irreparable harm to Employer and, as such, entitle Employer to an injunction to
enjoin unauthorized disclosure of Company Information.
8. DISABILITY: At any time that Employee is Materially Disabled (as
----------
hereinafter defined) during the Employment Term, Employer may at its election
terminate this Agreement and both Employee and Employer shall thereupon be
released and discharged of and from all further obligations when this Agreement
hereunder except for obligations under Sections 5, 7 and 10 and 11 hereof, or as
required by COBRA or ERISA. "Materially Disabled" shall mean any instance where
Employee is not able as a result of a serious health condition to render full
services as contemplated hereby for any period totalling more than twelve (12)
weeks in the aggregate during any twelve (12) month period. Employee
acknowledges the critical nature of his position and the functions he exercises
with Employer and that agrees his continued employment after he is materially
disabled would constitute an undue hardship to Employer for which no further
reasonable accommodation would be possible. Employee acknowledges and agrees
that Employer will be entitled access to any medical information and to
communicate with any of his medical practioners for the purpose of independently
reviewing and assessing any claimed disability. Employee further acknowledges
and agrees that Employee may be required to submit to duly licensed medical
practioners selected by Employer for the purpose of Employer's independent
review of any claimed disability.
9. DEATH: In the event of Employee's death, at any time during the term
-----
hereof, this Agreement shall terminate, and both Employee and Employer shall
thereupon be released and discharged from all further obligations hereunder
except for any vested benefits and earned and unpaid earned Base Salary for time
worked.
10. SOLICITATION: Upon the termination of the employment relationship
------------
between Employer and Employee, and for a period of one (1) year thereafter,
Employee agrees not to induce or attempt to induce any employees of Employer to
seek or to accept employment with any entity or individual other than Employer.
11. OWNERSHIP OF IDEAS: Employer shall own, and Employee hereby transfers
------------------
and assigns to it, all rights, of every kind and character throughout the world,
in perpetuity, in and to any material and/or ideas and all results and proceeds
of Employer's and Employee's services hereunder, or conceived of or produced
during the term of Employee's Employment by either of them, whether the same
consists of literary, dramatic, musical, motion picture, mechanical, or any
other form of works, themes, ideas, inventions, creations, products or
compositions. Employee agrees to execute and deliver to Employer such
assignments, certificates of authorship, or other instruments in accordance with
standard industry practice as Employer may require from time to time to evidence
ownership of the results and proceeds of Employer's and Employee's services.
Employee's agreement to assign to Employer any of his rights as set forth in
this Section 11 does not apply to any invention which qualifies fully under as
his invention under the provisions of Section 2870 of the California Labor Code,
where no equipment, supplies, facility, or trade secret information of Employer
was used and which was developed entirely upon Employee's own time, and which
(i) does not relate to the business of Employer or to its actual or demonstrably
anticipated research or development, or
<PAGE>
(ii) which does not result from any work performed by Employee for Employer.
Employee represents and warrants that except as previously disclosed to Employer
in writing, Employee neither owns nor controls any copyright rights, literary
rights, contract rights, or other rights in any literary, dramatic work, musical
work or any concept or idea which could be the basis for a television program,
feature film, video or other motion picture or copyrightable product.
12. REPRESENTATIONS AND WARRANTIES: Employee represents and warrants that
------------------------------
Employee has all right, power, authority, and capacity, and is free, to enter
into this Agreement; and that by doing so Employee will not violate or interfere
with the rights of any other person or entity; and that Employee is not subject
to any contract, understanding, or obligation which will or might prevent,
interfere with, or impair the performance of this Agreement by Employee.
Employee will indemnify, defend and hold Employer harmless with respect to any
losses, liabilities, demands, claims, fees, expenses, damages, and costs
(including attorneys' fees and court costs) resulting from or arising out of any
breach or alleged breach of any representation, warranty or covenant of Employee
contained herein. Employer and Employee are familiar with the requirements of
Section 507 (regarding the acceptance or payment of money or other consideration
for the inclusion of program matter) of the Federal Communications Act, are
aware that the violation of Section 507 constitutes a criminal offense, have not
violated and will not violate any of the provisions of said Section 507, and
have not and will not do any act which would require disclosure pursuant to said
Section 507. Employer shall indemnify, defend and hold harmless Employee for any
claims, losses or damages (including reasonable attorneys fees) arising out of
the carrying out of Employee's duties under this Agreement, except for claims,
losses and damages arising out of the gross negligence or malfeasance of
Employee.
13. SERVICES UNIQUE: It is mutually understood and agreed that Employee's
---------------
services and covenants, being personal to Employee are special, unique, unusual,
extraordinary, and of an intellectual character giving them a peculiar value,
for the loss of which Employer cannot be reasonably compensated in damages in an
action at law, and therefore in the event of any breach by Employee of this
Agreement, Employer shall be entitled to make application to a court of
competent jurisdiction for equitable relief by way of injunction or otherwise.
This provision shall not, however, be construed as a waiver of any of the rights
which Employer may have for damages under this Agreement or otherwise, and all
of Employer's rights and remedies shall be unrestricted.
14. COMPLETE AGREEMENT; MODIFICATION: This Agreement is the product of
--------------------------------
negotiation between the parties hereto and supersedes all prior agreements, if
any, between Employer and Employee and constitutes the entire agreement between
Employer and Employee. No modification of this Agreement, or other agreement,
condition or stipulation shall be valid or binding unless the same be in writing
and duly executed by Employer, through the CFO of Employer or his or his express
designee, and Employee. No person has any authority to make any representation
or promise on behalf of the parties not set forth herein and this Agreement has
not been executed in reliance upon any representation or promise except as
contained herein. No waiver by any party to this Agreement shall be deemed to be
a waiver of any proceeding or succeeding breach and the fact that an objection
is waived for a period of time or in one instance shall not be considered a
continuing waiver.
<PAGE>
15. SEVERABILITY: If any provision of this Agreement is declared invalid,
------------
illegal, or incapable of being enforced by any court of competent jurisdiction,
all the remaining provisions of this Agreement shall nevertheless continue in
full force and effect and no provision shall be deemed dependent upon any other
provision unless so expressed herein.
16. NOTICES: Any notice required or desired to be given to Employer or
-------
to Employee shall be given in writing, and shall be addressed (i) to Employer at
its principal place of business, and (ii) to Employee at his most recent home
address in the records of Employer, or to such other address sufficiently given
by actual delivery thereof to Employer or Employee, as the case may be.
All notices shall be given by hand delivery, telegraph, telecopy,
registered mail or overnight courier (postage prepaid, return receipt requested)
addressed to the other party as aforesaid, and the date of delivery, mailing,
telecopying, or telegraphing shall be the date of the giving of such notice.
17. ASSIGNMENT: This Agreement shall not be assignable by Employee.
----------
Notwithstanding the foregoing, Employer shall be free to assign this Agreement
to any subsidiary or affiliate or successor of Employer or, if Employer is
reorganized, any successor's corporation. Change of control of Employer shall
not be deemed to be an assignment for purposes of this provision.
18. PAYMENT OF TAXES: To the extent that any taxes become payable by
----------------
Employee by virtue of any payments made or benefits conferred by Employer,
Employer shall not be liable to pay or obligated to reimburse Employee for any
such taxes or to make any adjustment under this Agreement. Any payments
hereunder to Employee, including but not limited to the Base Salary, shall be
made net of any required withholding and other appropriate payroll deductions.
19. COOPERATION AFTER TERMINATION: Upon termination of employment and for
-----------------------------
a period of one year thereafter, Employee shall materially and fully cooperate
with Employer in all matters relating to the course and scope of his employment,
including without limitation, the winding up of his pending work with Employer
and the orderly transfer of such work to other employees of Employer as may be
designated by Employer. Following one year after termination of employment,
Employee shall be required to so cooperate only on a reasonable basis that does
not materially interfere with Employee's other activities.
20. OBLIGATION TO PARENTS, SUBSIDIARIES AND AFFILIATES OF EMPLOYER:
--------------------------------------------------------------
Employee acknowledges and agrees that all of Employee's covenants and
obligations to Employer, as well as all rights of Employer hereunder, shall run
in favor of and shall be enforceable by any and all parents, subsidiaries or
affiliates of Employer, and Employee acknowledges and agrees that wherein
Employee has an obligation or covenant running in favor of Employer, or Employer
has a right hereunder, the term "Employer" shall include all parents,
subsidiaries or affiliates of Employer.
<PAGE>
21. SECTION HEADINGS: Section and other headings contained in
----------------
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation 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.
(Employer)
By: /s/ Thomas P. Carson
--------------------------------
Its: Executive Vice President
--------------------------------
/s/ Ross G. Landsbaum
--------------------------------
ROSS G. LANDSBAUM
(Employee)
<PAGE>
As of July 5, 1995
Mr. Ross Landsbaum
Spelling Entertainment Group, Inc.
5700 Wilshire Boulevard
Los Angeles, California 90036
Dear Mr. Landsbaum:
Kindly refer to the Employment Agreement dated July 5, l 994 between you
("Employee") and Spelling Entertainment Group Inc. ("Employer").
Employee and Employer hereby mutually agree to amend the Employment Agreement as
follows:
1. Employer shall pay Employee a base salary of One Hundred Forty Thousand
Dollars ($140,000) commencing July 5, 1995.
2. Employee shall receive a car allowance in the amount of $350 per month
commencing July 5, 1995.
3. Except as herein specifically provided, the Employment Agreement shall
not be amended in any respect whatsoever and shall continue in full
force and effect.
If the foregoing is in accordance with your understanding and agreement, please
so indicate by signing below.
Very truly yours,
SPELLING ENTERTAINMENT GROUP INC.
By: /s/ Peter Bachmann
---------------------
Its: Executive Vice President
------------------------------
AGREED:
/s/ Ross G. Landsbaum
- - ------------------------
ROSS LANDSBAUM
<PAGE>
AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement (the "Amendment"), is made and
entered into as of February 4, 1997, by and between ROSS LANDSBAUM ("Employee")
and SPELLING ENTERTAINMENT GROUP INC. ("Employer") with reference to the
following facts and circumstances:
WHEREAS, the parties hereto previously entered into that certain employment
agreement, dated as of July 5, 1994 (the "Employment Agreement");
WHEREAS, the parties amended the Employment Agreement as of July 5, 1995
("Amendment No. 1");
WHEREAS, effective as of July 1, 1996, Employer agreed to pay Employee a
base salary of One Hundred Fifty Thousand Dollars ($150,000);
AND WHEREAS, the parties now desire to further amend the Employment
Agreement in certain respects, as set forth more fully hereinbelow;
NOW, THEREFORE, Employer and Employee mutually agree to further amend the
Employment Agreement ("Amendment No. 2") as follows:
1. The term of the Amended Employment Agreement shall be extended from
July 1, 1997 to June 30, 1998 (the "Extended Term").
2. During the Extended Term, Employer shall pay Employee a base salary
of One Hundred Sixty Thousand Dollars ($ 160,000), payable on an
annualized basis in accordance with Employer's normal practices.
3. Employee's title shall be Vice President - Finance and Tax.
4. In consideration for agreeing to the Extended Term, subject to the
approval by Employer's Board of Directors, and approval by the
shareholders of Employer at its 1997 Annual Meeting of Shareholders,
Employee shall be granted 15,000 stock options to purchase common
stock of Employer, at a purchase price equal to the closing price on
February 4, 1997, in accordance with the terms of Employer's Stock
Option Plan. Said options shall vest over a four year period
commencing on July 1, 1997.
5. Except as amended by Amendment Nos. 1 and 2, the Employment Agreement
shall not be amended in any respect whatsoever and shall continue in
full force and effect.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 2 to
be executed as of the date first above written.
SPELLING ENTERTAINMENT GROUP INC. ROSS LANDSBAUM
By: /s/ Peter Bachmann /s/ Ross G. Landsbaum
------------------- ----------------------
Its: /s/ Executive Vice President
-----------------------------
<PAGE>
AMENDMENT NO. 3 TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement (the "Amendment"), is made and
entered into as of December 18, 1997 by and between SPELLING ENTERTAINMENT GROUP
INC. ("Employer") and ROSS LANDSBAUM ("Employee") with reference to the
following facts and circumstances:
WHEREAS, the parties hereto previously entered into that certain employment
agreement, dated as of July 5, 1994 (the "Employment Agreement");
WHEREAS, the parties amended the Employment Agreement as of July 5, 1995
("Amendment No. 1");
WHEREAS, the parties further amended the Employment Agreement as of
February 4, 1997 ("Amendment No. 2");
AND WHEREAS, the parties now desire to further amend the Employment
Agreement in certain respects, as set forth more fully hereinbelow;
NOW, THEREFORE, Employer and Employee mutually agree to further amend the
Employment Agreement as follows:
1. The term of the Employment Agreement shall be extended from June 30,
1998 to August 3, 1999.
2. From August 4, 1997 to August 3, 1998, Employer shall pay Employee a
Base Salary of One Hundred Ninety Thousand Dollars ($190,000), and
from August 4, 1998 to August 3, 1999, Employer shall pay Employee a
Base Salary of Two Hundred Ten Thousand Dollars ($210,000), payable
on an annualized basis in accordance with Employer's normal
practices.
3. From August 4, 1997 to August 3, 1999 ("Amendment No. 3 Term"),
Employee shall be paid a monthly car allowance in the amount of Six
Hundred Dollars ($600).
4. During the Amendment No. 3 Term, Employee shall be eligible, at
Employer's sole discretion, to receive bonus compensation. The target
for Employee's bonus compensation shall be 30% of Employee's annual
Base Salary. The actual amount of such bonus compensation, if any,
shall be determined in accordance with the policies used in
determining the bonus compensation of employees of similar stature.
<PAGE>
5. During the Amendment No. 3 Term, Employee's title shall be Vice
President - Finance and Business Development and Treasurer.
Employee's duties shall be those which are commensurate with his
title.
6. Employer shall provide Employee with ninety (90) days notice as to
whether Employer intends to extend or renew the Employment Agreement.
7. Except as amended by Amendment Nos. 1, 2 and this Amendment herein,
the Employment Agreement shall not be amended in any respect
whatsoever and shall continue in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the date first above written.
SPELLING ENTERTAINMENT GROUP INC. ROSS LANDSBAUM
By: /s/ Peter H. Bachmann /s/ Ross Landsbaum
---------------------- -------------------
Its: President
----------------------
<PAGE>
SPELLING ENTERTAINMENT GROUP INC.
EXHIBIT 11
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Year ended December 31,
--------------- ---------------- ------------
1997 1996 1995
--------------- ---------------- ------------
<S> <C> <C> <C>
Net Income (Loss):
Income (loss) from continuing operations
applicable to common stock $ (12,322) $ 4,075 $ 34,131
Loss from discontinued operations (40,000) (255,200) (17,610)
--------------- ---------------- ------------
Net income (loss) applicable to common stock $ (52,322) $ (251,125) $ 16,521
=============== ================ ============
Shares:
Basic shares - weighted average of common
shares outstanding 90,777 90,369 88,458
Additional shares assuming conversion
of stock options and warrants - 929 1,726
--------------- ---------------- ------------
Diluted shares 90,777 91,298 90,184
=============== ================ ============
Basic income (loss) per common share:
Continuing operations $ (0.14) $ 0.04 $ 0.39
Discontinued operations (0.44) (2.82) (0.20)
--------------- ---------------- ------------
Basic income (loss) per common share $ (0.58) $ (2.78) $ 0.19
=============== ================ ============
Diluted income (loss) per common share:
Continuing operations $ (0.14) $ 0.04 $ 0.38
Discontinued operations (0.44) (2.79) (0.20)
--------------- ---------------- ------------
Diluted income (loss) per common share $ (0.58) $ (2.75) $ 0.18
============== =============== ===========
</TABLE>
<PAGE>
SPELLING ENTERTAINMENT GROUP INC.
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
The following is a list of the Company's significant subsidiaries at December
31, 1997. At that date, all corporations were 100% - owned, except as noted.
<TABLE>
<CAPTION>
STATE OF
NAME OF COMPANY INCORPORATION
- - --------------- -------------
<S> <C>
Aaron Spelling Productions, Inc. California
Hamilton Projects, Inc. New York
Big Ticket Television Inc. Delaware
Republic Entertainment Inc. Delaware
Spelling Entertainment Inc. Delaware
Spelling Films Inc. Delaware
Torand Productions Inc. Delaware
Spelling Television Inc. Delaware
Worldvision Enterprises, Inc. New York
Virgin Interactive Entertainment Limited* United Kingdom
Virgin Interactive Entertainment (Holdings) Ltd. United Kingdom
Virgin Interactive Entertainment (Investments) Ltd. United Kingdom
Virgin Interactive Entertainment, Inc. Delaware
Virgin Interactive Entertainment (Europe) Limited United Kingdom
Westwood Studios, Inc. Nevada
</TABLE>
The names of certain subsidiaries are omitted, as such subsidiaries in the
aggregate would not constitute a significant subsidiary.
* Approximately 91% of the Ordinary Shares are owned by the Company.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-24650, No. 33-61914, No. 33-53291, No. 33-53951,
No. 33-55305 and No. 33-55991) and on Form S-3 (No. 33-53575 and No. 33-64559)
of Spelling Entertainment Group Inc. of our report dated March 27, 1998
appearing on page 23 of this Form 10-K.
PRICE WATERHOUSE LLP
Los Angeles, California
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 AND THE
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR THEN ENDED AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 860
<SECURITIES> 0
<RECEIVABLES> 124,847
<ALLOWANCES> 20,697
<INVENTORY> 246,955
<CURRENT-ASSETS> 356,337
<PP&E> 26,291
<DEPRECIATION> 14,882
<TOTAL-ASSETS> 773,580
<CURRENT-LIABILITIES> 113,714
<BONDS> 0
0
0
<COMMON> 91
<OTHER-SE> 270,927
<TOTAL-LIABILITY-AND-EQUITY> 773,580
<SALES> 564,239
<TOTAL-REVENUES> 564,239
<CGS> 504,526
<TOTAL-COSTS> 504,526
<OTHER-EXPENSES> 58,657
<LOSS-PROVISION> 9,568
<INTEREST-EXPENSE> 20,928
<INCOME-PRETAX> (13,303)
<INCOME-TAX> (981)
<INCOME-CONTINUING> (12,322)
<DISCONTINUED> (40,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (52,322)
<EPS-PRIMARY> (0.58)
<EPS-DILUTED> (0.58)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30,
1996 AND THE UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE
NINE MONTHS THEN ENDED, AS RESTATED FOR DISCONTINUED OPERATIONS AND EARNINGS PER
SHARE PRESENTED IN ACCORDANCE WITH SFAS NO.128.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996<F1>
<CASH> 17,273
<SECURITIES> 0
<RECEIVABLES> 171,989
<ALLOWANCES> 18,498
<INVENTORY> 221,093
<CURRENT-ASSETS> 407,025
<PP&E> 24,971
<DEPRECIATION> 10,336
<TOTAL-ASSETS> 1,004,095
<CURRENT-LIABILITIES> 96,501
<BONDS> 0
0
0
<COMMON> 90
<OTHER-SE> 536,884
<TOTAL-LIABILITY-AND-EQUITY> 1,004,095
<SALES> 339,566
<TOTAL-REVENUES> 339,566
<CGS> 295,118
<TOTAL-COSTS> 295,118
<OTHER-EXPENSES> 44,980
<LOSS-PROVISION> 2,697
<INTEREST-EXPENSE> 9,137
<INCOME-PRETAX> (8,487)
<INCOME-TAX> (5,648)
<INCOME-CONTINUING> (2,839)
<DISCONTINUED> (27,454)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (30,293)
<EPS-PRIMARY> (0.34)
<EPS-DILUTED> (0.33)
<FN>
<F1>RESTATEMENT REFLECTED HEREIN IS THE RESULT OF RESTATEMENTS AND
RECLASSIFICATIONS TO PRIOR PERIODS' FINANCIAL STATEMENTS TO CONFORM TO THE
CURRENT PERIOD PRESENTATION.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1996 AND
THE UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS
THEN ENDED, AS RESTATED FOR DISCONTINUED OPERATIONS AND EARNINGS PER SHARE
PRESENTED IN ACCORDANCE WITH SFAS NO. 128.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996<F1>
<CASH> 5,935
<SECURITIES> 0
<RECEIVABLES> 153,135
<ALLOWANCES> 19,274
<INVENTORY> 179,404
<CURRENT-ASSETS> 335,429
<PP&E> 24,115
<DEPRECIATION> 9,525
<TOTAL-ASSETS> 962,541
<CURRENT-LIABILITIES> 79,900
<BONDS> 0
0
0
<COMMON> 90
<OTHER-SE> 541,332
<TOTAL-LIABILITY-AND-EQUITY> 962,541
<SALES> 227,985
<TOTAL-REVENUES> 227,985
<CGS> 197,508
<TOTAL-COSTS> 197,508
<OTHER-EXPENSES> 28,981
<LOSS-PROVISION> 1,116
<INTEREST-EXPENSE> 5,667
<INCOME-PRETAX> (3,423)
<INCOME-TAX> (1,314)
<INCOME-CONTINUING> (2,109)
<DISCONTINUED> (23,623)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,732)
<EPS-PRIMARY> (0.29)
<EPS-DILUTED> (0.28)
<FN>
<F1>RESTATEMENT REFLECTED HEREIN IS THE RESULT OF RESTATEMENTS AND
RECLASSIFICATIONS TO PRIOR PERIODS' FINANCIAL STATEMENTS TO CONFORM TO THE
CURRENT PERIOD PRESENTATION.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<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 CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE
MONTHS THEN ENDED, AS RESTATED FOR DISCONTINUED OPERATIONS AND EARNINGS PER
SHARE PRESENTED IN ACCORDANCE WITH SFAS NO. 128.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996<F1>
<CASH> 6,408
<SECURITIES> 0
<RECEIVABLES> 169,196
<ALLOWANCES> 22,263
<INVENTORY> 189,245
<CURRENT-ASSETS> 355,368
<PP&E> 22,059
<DEPRECIATION> 8,769
<TOTAL-ASSETS> 970,940
<CURRENT-LIABILITIES> 106,509
<BONDS> 0
0
0
<COMMON> 90
<OTHER-SE> 559,931
<TOTAL-LIABILITY-AND-EQUITY> 970,940
<SALES> 128,779
<TOTAL-REVENUES> 128,779
<CGS> 111,854
<TOTAL-COSTS> 111,854
<OTHER-EXPENSES> 15,503
<LOSS-PROVISION> 947
<INTEREST-EXPENSE> 2,533
<INCOME-PRETAX> (715)
<INCOME-TAX> (357)
<INCOME-CONTINUING> (358)
<DISCONTINUED> (3,388)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,746)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
<FN>
<F1>RESTATEMENT REFLECTED HEREIN IS THE RESULT OF RESTATEMENTS AND
RECLASSIFICATIONS TO PRIOR PERIODS' FINANCIAL STATEMENTS TO CONFORM TO THE
CURRENT PERIOD PRESENTATION.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1995 AND THE
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR THEN ENDED, AS RESTATED FOR
DISCONTINUED OPERATIONS AND EARNINGS PER SHARE PRESENTED IN ACCORDANCE WITH
SFAS NO. 128.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995<F1>
<CASH> 6,644
<SECURITIES> 0
<RECEIVABLES> 154,790
<ALLOWANCES> 26,070
<INVENTORY> 241,934
<CURRENT-ASSETS> 387,257
<PP&E> 21,144
<DEPRECIATION> 8,570
<TOTAL-ASSETS> 956,836
<CURRENT-LIABILITIES> 98,177
<BONDS> 0
0
0
<COMMON> 90
<OTHER-SE> 558,430
<TOTAL-LIABILITY-AND-EQUITY> 956,836
<SALES> 452,150
<TOTAL-REVENUES> 452,150
<CGS> 334,089
<TOTAL-COSTS> 334,089
<OTHER-EXPENSES> 51,089
<LOSS-PROVISION> 13,238
<INTEREST-EXPENSE> 11,883
<INCOME-PRETAX> 56,715
<INCOME-TAX> 22,584
<INCOME-CONTINUING> 34,131
<DISCONTINUED> (17,610)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,521
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.18
<FN>
<F1>RESTATEMENT REFLECTED HEREIN IS THE RESULT OF RESTATEMENTS AND
RECLASSIFICATIONS TO PRIOR PERIODS' FINANCIAL STATEMENTS TO CONFORM TO THE
CURRENT PERIOD PRESENTATION.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30,
1995 AND THE UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE
NINE MONTHS THEN ENDED, AS RESTATED FOR DISCONTINUED OPERATIONS AND EARNINGS PER
SHARE PRESENTED IN ACCORDANCE WITH SFAS NO. 128.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995<F1>
<CASH> 8,894
<SECURITIES> 0
<RECEIVABLES> 153,309
<ALLOWANCES> 17,496
<INVENTORY> 197,702
<CURRENT-ASSETS> 346,945
<PP&E> 19,422
<DEPRECIATION> 8,136
<TOTAL-ASSETS> 903,161
<CURRENT-LIABILITIES> 116,441
<BONDS> 0
0
0
<COMMON> 89
<OTHER-SE> 536,560
<TOTAL-LIABILITY-AND-EQUITY> 903,161
<SALES> 344,594
<TOTAL-REVENUES> 344,594
<CGS> 257,362
<TOTAL-COSTS> 257,362
<OTHER-EXPENSES> 40,682
<LOSS-PROVISION> 0<F2>
<INTEREST-EXPENSE> 9,456
<INCOME-PRETAX> 38,995
<INCOME-TAX> 15,543
<INCOME-CONTINUING> 23,452
<DISCONTINUED> (14,688)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,764
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
<FN>
<F1>RESTATEMENT REFLECTED HEREIN IS THE RESULT OF RESTATEMENTS AND
RECLASSIFICATIONS TO PRIOR PERIODS' FINANCIAL STATEMENTS TO CONFORM TO THE
CURRENT PERIOD PRESENTATION.
<F2>AMOUNTS ARE NOT PRESENTED AS PERMITTED UNDER RULE 10-01(a) OF ARTICLE 10 OF
REGULATION S-X.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1995 AND
THE UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS
THEN ENDED, AS RESTATED FOR DISCONTINUED OPERATIONS AND EARNINGS PER SHARE
PRESENTED IN ACCORDANCE WITH SFAS NO. 128.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995<F1>
<CASH> 8,132
<SECURITIES> 0
<RECEIVABLES> 158,970
<ALLOWANCES> 18,240
<INVENTORY> 164,561
<CURRENT-ASSETS> 317,773
<PP&E> 18,967
<DEPRECIATION> 7,976
<TOTAL-ASSETS> 867,880
<CURRENT-LIABILITIES> 95,118
<BONDS> 0
0
0
<COMMON> 8,835
<OTHER-SE> 527,058
<TOTAL-LIABILITY-AND-EQUITY> 867,880
<SALES> 252,222
<TOTAL-REVENUES> 252,222
<CGS> 193,869
<TOTAL-COSTS> 193,869
<OTHER-EXPENSES> 26,358
<LOSS-PROVISION> 0<F2>
<INTEREST-EXPENSE> 6,872
<INCOME-PRETAX> 26,472
<INCOME-TAX> 11,675
<INCOME-CONTINUING> 14,797
<DISCONTINUED> (6,646)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,151
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
<FN>
<F1>RESTATEMENT REFLECTED HEREIN IS THE RESULT OF RESTATEMENTS AND
RECLASSIFICATIONS TO PRIOR PERIODS' FINANCIAL STATEMENTS TO CONFORM TO THE
CURRENT PERIOD PRESENTATION.
<F2>AMOUNTS ARE NOT PRESENTED AS PERMITTED UNDER RULE 10-01(a) OF ARTICLE 10 OF
REGULATION S-X.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1995
AND THE UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE
MONTHS THEN ENDED, AS RESTATED FOR DISCONTINUED OPERATIONS AND EARNINGS PER
SHARE PRESENTED IN ACCORDANCE WITH SFAS NO. 128.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995<F1>
<CASH> 4,932
<SECURITIES> 0
<RECEIVABLES> 157,162
<ALLOWANCES> 16,713
<INVENTORY> 170,888
<CURRENT-ASSETS> 319,723
<PP&E> 17,304
<DEPRECIATION> 7,328
<TOTAL-ASSETS> 873,168
<CURRENT-LIABILITIES> 96,461
<BONDS> 0
0
0
<COMMON> 8,830
<OTHER-SE> 528,170
<TOTAL-LIABILITY-AND-EQUITY> 873,168
<SALES> 148,884
<TOTAL-REVENUES> 148,884
<CGS> 114,223
<TOTAL-COSTS> 114,223
<OTHER-EXPENSES> 13,714
<LOSS-PROVISION> 0<F2>
<INTEREST-EXPENSE> 3,505
<INCOME-PRETAX> 18,318
<INCOME-TAX> 8,082
<INCOME-CONTINUING> 10,236
<DISCONTINUED> (2,965)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,271
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
<FN>
<F1>RESTATEMENT REFLECTED HEREIN IS THE RESULT OF RESTATEMENTS AND
RECLASSIFICATIONS TO PRIOR PERIODS' FINANCIAL STATEMENTS TO CONFORM TO THE
CURRENT PERIOD PRESENTATION.
<F2>AMOUNTS ARE NOT PRESENTED AS PERMITTED UNDER RULE 10-01(a) OF ARTICLE 10 OF
REGULATION S-X.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1994 AND THE
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR THEN ENDED, AS RESTATED FOR
DISCONTINUED OPERATIONS AND EARNINGS PER SHARE PRESENTED IN ACCORDANCE WITH SFAS
NO. 128.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994<F1>
<CASH> 12,680
<SECURITIES> 0
<RECEIVABLES> 136,059
<ALLOWANCES> 26,946
<INVENTORY> 182,373
<CURRENT-ASSETS> 315,592
<PP&E> 15,844
<DEPRECIATION> 6,752
<TOTAL-ASSETS> 871,245
<CURRENT-LIABILITIES> 83,212
<BONDS> 0
0
0
<COMMON> 8,798
<OTHER-SE> 519,649
<TOTAL-LIABILITY-AND-EQUITY> 871,245
<SALES> 416,445
<TOTAL-REVENUES> 416,445
<CGS> 331,652
<TOTAL-COSTS> 331,652
<OTHER-EXPENSES> 44,399
<LOSS-PROVISION> 4,514
<INTEREST-EXPENSE> 8,106
<INCOME-PRETAX> 34,846
<INCOME-TAX> 15,416
<INCOME-CONTINUING> 19,430
<DISCONTINUED> 4,678
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,108
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.32
<FN>
<F1>RESTATEMENT REFLECTED HEREIN IS THE RESULT OF RESTATEMENTS AND
RECLASSIFICATIONS TO PRIOR PERIODS' FINANCIAL STATEMENTS TO CONFORM TO THE
CURRENT PERIOD PRESENTATION.
</FN>
</TABLE>
