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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, 1996 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________________ TO _____________________
COMMISSION FILE NUMBER: 1-6739
SPELLING ENTERTAINMENT GROUP INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 59-0862100
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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 STOCK EXCHANGES
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [ ]
On March 26, 1997, the registrant had 90,735,197 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 $141,252,000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Portions of Registrant's Proxy Statement relating to the 1997
Annual Meeting of Shareholders on May 21, 1997.
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
PAGE
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PART I
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 23
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 51
PART III
Item 10. Directors and Executive Officers of the Registrant 52
Item 11. Executive Compensation 52
Item 12. Security Ownership of Certain Beneficial Owners
and Management 52
Item 13. Certain Relationships and Related Transactions 52
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 53
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ITEM 1. BUSINESS
INTRODUCTION
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.
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.) It began
production and distribution of entertainment product when it acquired 82% of
Spelling Entertainment Inc. ("SEI") in May 1991. It acquired the remaining
shares of SEI in July 1992. The Company acquired all of the stock of Republic
Entertainment Inc. (formerly Republic Pictures Corporation, with its
subsidiaries, hereinafter "Republic") on April 26, 1994 and approximately 91% of
the ordinary shares of Virgin Interactive Entertainment Limited ("VIEL") on July
30, 1994. (See Note 2.) See Note 11 for discussion of industry segment
information.
The Company's production operations are conducted by Spelling Daytime Television
Inc. and Torand Productions Inc. and its subsidiaries, including Spelling
Television Inc. (collectively, "Spelling Television"); Big Ticket Television
Inc. and its subsidiaries ("Big Ticket Television"); Spelling Films Inc. and its
subsidiaries ("Spelling Films"); and VIEL and its subsidiaries ("VIE").
Distribution operations are conducted by Spelling Films; Republic; Worldvision
Enterprises, Inc. and its subsidiaries ("Worldvision"); and VIE. The Company's
licensing and merchandising operations are conducted by Hamilton Projects, Inc.
("Hamilton Projects").
Approximately 48% of the Company's Common Stock was owned by American Financial
Corporation and its subsidiaries ("AFC") until March 31, 1993, when AFC sold the
Common Stock it owned to Blockbuster Entertainment Corporation ("BEC"). BEC
acquired additional Common Stock during 1993 and 1994, both from third parties
and from the Company. (See Note 5.) Effective as of September 29, 1994, BEC
merged with and into Viacom Inc. ("Viacom"), with Viacom being the surviving
corporation. As a result of the merger, Viacom currently owns approximately 75%
of the Company's Common Stock.
Effective May 26, 1995, the Company changed its state of incorporation to
Delaware.
On February 20, 1997, the Company announced its intention to dispose of VIE
through a public offering. Accordingly, VIE is presented as a discontinued
operation in the accompanying financial statements. (See Notes 1, 2 and 9.)
The Company has its principal executive offices at 5700 Wilshire
Boulevard, Los Angeles, California 90036, telephone (213) 965-5700.
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 networks. If the network accepts the script for production, it will
typically order a pilot episode or presentation, for which it will pay the
Company a negotiated fixed license fee pursuant to a license agreement. If the
network decides to order episodes of the series, the license agreement
generally provides for a minimum number of episodes to be delivered, with the
network having certain rights to order additional episodes. The license
agreement normally grants the network the right to exhibit the episodes a
limited number of times in
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the United States during the license period. All other ownership and
distribution rights are generally retained by the Company, subject to certain
network-related holdbacks.
The license fees paid by the networks are less than the Company's costs of
producing the related programming, resulting in a deficit for the Company. In
recent years, the size of the series deficits incurred by the Company has
generally increased as escalations in license fees have failed to keep pace
with escalations in production costs. However, in the case of its drama
series, the Company has generally been successful in obtaining sufficient
revenue from its international sales to substantially offset such production
deficits. See "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 3,000 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," all series in which the Company has no
financial interest.
Spelling Television is currently producing six one-hour drama television series;
"Beverly Hills, 90210," which is currently in its seventh season, has been
ordered by Fox Broadcasting Company ("FBC") for an eighth season; "Melrose
Place" is now in its fifth season, and has also been ordered by FBC for an
additional season; "Savannah," which is in its second season and is airing on
The WB Television Network ("WB"); "Seventh Heaven," which is airing on WB; and
"Pacific Palisades," which will begin airing on FBC in April 1997. Additionally,
NBC ordered 52 weeks of a new daytime soap opera, "Sunset Beach," which began
airing in January 1997. Spelling Television also has a number of
movies-for-television and pilots for series in development.
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 cable and first-run syndication (see below). Big Ticket
Television has had projects in development at four networks (ABC, NBC, CBS and
FBC) as well as the recently launched United Paramount Network ("UPN") and WB.
Big Ticket Television is currently producing a half-hour situation comedy,
"Moesha," which is airing on UPN.
The Company had revenue from FBC in 1996, 1995 and 1994 representing 20%, 22%
and 21% of total revenue, respectively.
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 on a market-by-market
basis, in contrast to network distribution, which provides centralized access
to a national audience.
In first-run syndication, programming is licensed domestically by Worldvision in
exchange for cash payments, advertising time ("barter") or a combination of
both. Internationally, Worldvision distributes this programming 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 the license term. When
programming is licensed on a barter basis, the Company receives 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 is generally 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
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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 and promoting the program
during its initial years. However, if a program has strong ratings, the
advertising revenue which may be realized by the Company through its barter
arrangements can be substantial.
In 1994 and 1995, Worldvision distributed in first-run barter syndication three
one-hour drama series, "Heaven Help Us," "Robin's Hoods" and "University
Hospital," which were produced by Spelling Television. Big Ticket Television
is producing an original nighttime comedy entitled "Night Stand with Dick
Dietrick" and a courtroom program entitled "Judge Judy," both distributed in
first-run syndication on a barter basis by Worldvision. "Night Stand with Dick
Dietrick" also airs on E! Entertainment, a basic cable channel, under a cash
license fee arrangement.
FEATURE FILMS
In 1990, the Company began acquiring and distributing theatrical feature films
through Spelling Films. Spelling Films typically acquires all international
distribution rights to such films by paying a guaranteed advance to the
producer against the producer's share of distribution receipts. Such advances
are normally payable upon the producer's delivery of the completed film.
Spelling Films then presells distribution rights, generally on an all-rights,
territory-by-territory basis. Under this approach, Spelling Films generally
covers all or a substantial portion of its acquisition cost, reduces its risk
and capital requirements, but also limits its profit potential.
Since its inception, Spelling Films has acquired international distribution
rights to "The Player," "Short Cuts," "Shadowlands" and "The Usual Suspects,"
which received two Oscar awards. Recent films include "Moll Flanders," starring
Robin Wright and Morgan Freeman, and "Unforgettable," starring Ray Liotta and
Linda Fiorentino, both of which are being distributed domestically by
Metro-Goldwyn-Mayer Pictures Inc. Scheduled 1997 releases include "Breakdown,"
starring Kurt Russell, J.T. Walsh and Kathleen Quinlan, and "In and Out,"
starring Kevin Kline, Joan Cusack, Matt Dillon, Debbie Reynolds, Wilford
Brimley, Bob Newhart and Tom Selleck, both of which are being distributed
domestically by Paramount Pictures Corporation ("Paramount"); "Roseanna's
Grave," starring Jean Reno, Mercedes Ruehl and Polly Walker, which will be
distributed domestically by New Line Cinema Corporation; and "House of Yes,"
starring Parker Posey, Josh Hamilton, Tori Spelling, Freddie Prinze, Jr. and
Genevieve Bujold, which will be distributed domestically by Miramax Film Corp.
Spelling Films fully financed "Stephen King's Thinner" and "Night Falls on
Manhattan," for which it retained all distribution rights on a worldwide basis.
Spelling Films entered into agreements with Paramount to handle domestic
theatrical and pay television distribution, but will sell and distribute the
films in all other markets and media through the Company's own sales and
distribution operations. "Stephen King's Thinner," starring Robert John Burke
and Joe Mantegna, has to date garnered approximately $15,300,000 at the domestic
theatrical box office. "Night Falls on Manhattan," starring Andy Garcia, Lena
Olin and Richard Dreyfuss, is scheduled for domestic theatrical release in the
second quarter of 1997. The Company also has acquired worldwide rights,
excluding Scandinavia, to a Norwegian film, tentatively titled "Chasing the
Kidney Stone."
Republic acquires certain distribution rights to lower-budgeted feature films
primarily for initial release into the domestic home video marketplace,
typically by paying a guaranteed advance. Republic released approximately 26
such films in 1996 and expects to release approximately 16 in 1997. Most of the
films have production budgets of $2,000,000 to $3,000,000, and Republic's
acquisition costs for such films are a varying percentage of such budgets, based
on a variety of factors.
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DEVELOPMENT AND PRODUCTION RISKS
There are a number of factors beyond the Company's control which may affect the
timely completion of the development, production and/or release of the Company's
entertainment product, including availability of talent and other resources
integral to these processes. The Company attempts to minimize such risks to the
greatest extent possible through the active management of the development and
production process. See "Competition" and "Technology" below.
DISTRIBUTION
In addition to its production activities, the Company is actively engaged in the
worldwide distribution of entertainment product, either directly or through
subdistributors. Historically, the Company's distribution activities have
focused on the distribution of its network television programming and
programming from its vast library. With the formation of Spelling Films and the
acquisition of Republic, the Company's distribution activities have been
expanded to include more feature films. As a result of these activities, at
December 31, 1996, the Company had contractual agreements with licensees
covering entertainment product which provide for approximately $173,773,000 in
future revenue, approximately 32% of which is expected to be recognized after
1997. As of December 31, 1995, the Company had contractual agreements which
provided for approximately $133,549,000 in future revenue.
THEATRICAL DISTRIBUTION
Spelling Films generally sells or licenses the international theatrical, home
video and/or television rights to its films to various subdistributors in each
territory in exchange for a guaranteed advance plus, in most cases, a share of
future profits. For certain films, Spelling Films may elect to presell some
territories but enter into distribution arrangements in other territories. In
these cases, Spelling Films receives no advance; however, the subdistributor
retains a lower distribution fee and Spelling Films receives the balance of any
revenue generated. In certain cases where Spelling Films is able to retain the
domestic home video and worldwide television rights, Republic and Worldvision,
respectively, distribute such rights for Spelling Films.
To the extent that Spelling Films and/or Republic desire to exploit feature
films in the United States and Canadian theatrical markets, they will engage a
third party on a fee basis to handle such distribution. With respect to
"Stephen King's Thinner" and "Night Falls on Manhattan," Spelling Films has
engaged Paramount to handle domestic theatrical distribution.
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. 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.
TELEVISION DISTRIBUTION
Worldvision has been engaged in the distribution of entertainment product in the
worldwide television market for over thirty-five years, originally serving as
the distribution arm of the ABC Network. Today, Worldvision is a leading
worldwide distributor with rights to more than 8,000 hours of programming
available for domestic television distribution and more than 18,000 hours of
programming for international television distribution, including the original
ABC library, as well as the original NBC library acquired through Republic.
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Worldvision currently distributes such programming in 110 countries through
offices or representatives in London, Paris, Rome, Toronto, Sydney, Tokyo and
Rio de Janeiro.
Demand for American-made entertainment product in international markets has
increased in recent years due to the increase in the number of international
television stations, cable systems and satellite delivery systems in those
markets and, in some territories, the privatization of the local television
industry. The Company typically begins to earn international television revenue
from its television programming during the same season such programming is
originally broadcast in the United States, or soon thereafter. Substantially all
of the Company's television programming has been or is presently being
distributed by Worldvision in international television markets. The Republic
library has 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, the German media group,
entered into a broad-based television licensing agreement. Under the agreement,
the KirchGroup has licensed Spelling's existing library through 2010 for free
and pay television, pay per view and near video on demand for the
German-language territory. KirchGroup also agreed to license over a five-year
term, renewable by the Company for an additional five years, certain rights to
television mini-series and series and certain theatrical feature films in the
German-language territory and made-for-television movies for continental Europe.
In March 1993, Spelling Satellite Networks ("SSN") launched its basic
cable/satellite delivered channel, TeleUNO, which currently reaches more than
five million subscribers in Spain and Latin America, including Mexico, Argentina
and Brazil. TeleUNO generates both subscription fees and advertising revenue.
SSN has explored the possibility of launching additional services, including
direct-to-home satellite transmission, in partnership with programmers or others
in additional markets around the world.
Television revenue from the distribution of feature films is generally realized
after the films have been exploited in the theatrical and home video markets in
each territory.
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. However, in
recent years the revenue obtainable from this secondary market has declined for
all but the most successful network programs, and is expected to continue to
decline, due in part to the increase in original programming available to
independent stations from the emergence of UPN and WB, and the increased
production of programming produced specifically for first-run syndication.
Expected revenue per episode in this market normally increases for longer
running series. At least four broadcast seasons of a series are typically
required to successfully market repeat showings of a series in the domestic
syndication market. For example, Worldvision is currently distributing "Beverly
Hills, 90210" in the domestic syndication market. Episodes from a series
normally become available for secondary syndication distribution four or five
years after the series' initial telecast.
Domestic basic cable television potentially represents an increasingly
significant market for the Company's product to offset the decrease in
syndication opportunities. The series "Melrose Place," "Models, Inc.," "Hotel,"
"Vegas" and "Dynasty," among others, have been licensed to cable television.
Cable exhibition has effectively developed as an alternative market, albeit
traditionally a less lucrative one, than domestic syndication. Each year a
greater number of relatively successful network television series are being
licensed to basic cable in lieu of domestic syndication. Additionally, cable
exhibitors in some instances have purchased rights to short-running television
series which do not include sufficient episodes to allow for traditional
off-network syndication.
While still in development in many countries, cable television opportunities
outside the U.S. have also been growing rapidly.
See "Governmental Regulation" for restrictions placed on exhibition of the
Company's entertainment product in certain markets.
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LICENSING AND MERCHANDISING
Hamilton Projects is a full-service consumer product and promotional licensing
agency, providing its clients with strategic planning, concept development and
product marketing program management. Hamilton Projects typically earns its
fees through a commission based upon the royalties earned by its clients from
the sale of licensed consumer products, promotions and books based upon the
copyrights, trademarks and trade names of the companies it represents. In
addition to managing the consumer product merchandising programs for "Beverly
Hills, 90210" and "Melrose Place," Hamilton Projects also represents several
third parties, such as Jeep(R), Dr. Scholl's(R) and the United States Postal
Service. Through the efforts of Hamilton Projects, the Company has taken
advantage of various consumer product and promotional opportunities such as a
dedicated show on the Q2 channel of QVC and phone cards to market "Melrose
Place" merchandise; the operation of World Wide Web sites on the Internet; the
introduction of the Melrose Place Fragrance; as well as the traditional
merchandising of clothing, posters, calendars and books.
COMPETITION
The entertainment industry is highly competitive with many companies competing
for available literary properties, creative personnel, talent, production
personnel, distribution channels and financing which are essential to acquire,
develop, produce and distribute entertainment product. The Company's
competitors include major motion picture and television companies as well as a
broad range of independent production and distribution companies. Certain of
the Company's competitors have greater financial resources than those of the
Company. Moreover, the repeal of certain governmental regulations permits the
U.S. television networks to acquire a financial interest in, and syndication
rights to, television programs which intensifies competition in the television
industry. See "Governmental Regulation."
Despite the fact that the Company may receive an order from the networks for the
production of a pilot, series, movie or mini-series, the networks are under no
obligation to actually broadcast the Company's product. The Company's
successful off-network domestic sale of a network series generally depends upon
the ratings achieved through network exhibition of such a series over a number
of years. In turn, the Company's overall success in achieving multiple years of
network exhibition of a series is dependent upon unpredictable factors such as
the viewing public's acceptance as reflected by its ratings.
In addition to its internally produced product, the Company must continue to
acquire distribution rights to entertainment product produced by third parties.
In order to acquire rights to distribute new third-party product, the Company
may be required to increase its guaranteed advance payments to producers and/or
reduce the distribution fees it charges to maintain its competitive position.
Licensing television programming to broadcasters and cable networks has also
become increasingly competitive as new programming continually enters the market
and certain of the Company's competitors attempt to develop their own
programming services and/or align themselves with the existing U.S. networks.
Spelling Films competes with numerous well-financed, established companies
engaged in feature film production and distribution. The Company has had a
short operating history in this area and does not possess the theatrical
distribution capabilities or track record of some of its competitors.
The Company's ability to compete in certain countries is affected by local
restrictions and quotas. Governments of certain countries require that a
minimum percentage of locally produced programming be broadcast. See
"Government Regulation" below.
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TRADEMARKS, SERVICE MARKS AND COPYRIGHTS
The Company or its subsidiaries own various United States trademarks and service
marks, including SPELLING(R), BEVERLY HILLS, 90210(R), MELROSE PLACE(R), COMMAND
AND CONQUER(R), REPUBLIC(R), SPELLING FILMS(TM), WESTWOOD STUDIOS(TM),
WORLDVISION(R) and BIG TICKET TELEVISION(R), 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
these marks. The Company registers and endeavors to take the necessary actions
to protect the marks created and acquired in its businesses. See "Distribution -
Licensing and Merchandising."
The Company regularly obtains copyright protection for each episode of its
television programs, for its feature films and for other entertainment product.
Certain of the Company's copyrights, trademarks and service marks may be
considered material to the Company's business.
TECHNOLOGY
The Company is dependent on various forms of technology for the production and
distribution of its entertainment product. As a result, the Company is subject
to business risks as a result of changing technologies in the media,
communications and computer industries. Changes in the hardware platforms, new
digital disk systems, direct-to-home satellite systems and other new delivery
systems also provide new opportunities and markets for the Company. The
Company endeavors to minimize the risk of technological change to or
obsolescence of a particular hardware platform or media and take advantage of
new markets created by changing technologies. Additionally, the risk of
illegal manufacture and distribution ("piracy") of the Company's entertainment
product may increase with the advancement and proliferation of various
technologies. It is difficult for the Company to determine the impact of such
piracy and there can be no assurance that such activities will not have a
material impact on the Company.
GOVERNMENT REGULATION
The production and distribution of television programming by independent
producers is not directly regulated by the federal or state governments, but the
marketplace for television programming is substantially affected by regulations
of the Federal Communications Commission ("FCC") applicable to television
stations, television networks and cable television systems. The FCC's
syndicated program exclusivity rules affect the sale of programming to
commercial television stations, regional superstations and cable networks.
Pursuant to these rules, commercial television stations can bargain for the
exclusive right to broadcast programming, generally within a 35-mile radius, and
separately to require cable television systems with 1,000 or more subscribers to
black out showings of the same programming on certain television stations they
carry in order to preserve contracted exclusivity. The FCC also allows regional
superstations (such as WTBS in Atlanta and WGN in Chicago) and cable group
owners to purchase rights to programming and broadcast on a nationwide basis.
The Cable Television Consumer Protection and Competition Act of 1992 ("Cable
Act") prohibits certain unfair or discriminatory practices in the distribution
of the signal from satellite superstations or in the sale of satellite cable
programming by entities affiliated with cable operators. The Telecommunications
Act of 1996 ("1996 Act") extends these rules to entities affiliated with common
carriers. The Cable Act also strictly limits entities affiliated with cable
operators in offering exclusive contracts for satellite cable programming or
superstations. Furthermore, the Cable Act prohibits certain coercive and
discriminatory acts by cable operators and satellite program vendors against
multichannel video program distributors. In addition, the Cable Act provides
all commercial television stations with the right to bargain for and withhold
consent to the local retransmission of their signals by cable television
systems, and certain local stations have the option to demand carriage on cable
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systems. These provisions are subject to interpretation by the FCC. Moreover,
judicial appeals relating to various aspects of these rules are pending.
Accordingly, the Company cannot predict the specific impact of the Cable Act on
its business. The 1996 Act eliminates the numerical restrictions on the number
of television stations that one entity may own and increases the national
audience reach limitation by one entity from 25% to 35%. In addition, the FCC
is directed to revise its dual network rule which prohibits a TV station from
affiliating with an entity maintaining two or more networks of television
broadcast stations. The FCC must now permit such affiliations unless certain
limited circumstances pertain. The FCC must also amend its rules to permit
common ownership or control of a broadcast network and cable systems and it must
determine whether its rule prohibiting common ownership of co-located cable
systems and television broadcast stations should be retained. These changes in
the FCC's ownership rules could have an adverse effect on the Company in that
the number of potential customers for its programming may be reduced. In 1989,
the 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." 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. At this time, the EC has
decided not to 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.
The effect of the foregoing regulations on the Company's operations cannot be
accurately assessed at this time.
On September 6, 1995, the FCC released an order repealing its rules governing
financial interests in and syndication of programming by the broadcast
television networks (the "Fin Syn Rules"). The earlier decision of the FCC to
permit the expiration of the Fin Syn Rules was recently upheld by the United
States Court of Appeals for the Seventh Circuit. The repeal of the Fin Syn
Rules could have a material adverse effect on the Company.
EMPLOYEES
At December 31, 1996, the Company had approximately 1,100 employees. In
addition, the Company employs a large number of individuals for particular
television and feature film productions. As a result, the total number of
employees can vary substantially during the course of a year depending upon the
number and scheduling of its productions.
Certain of the Company's subsidiaries are signatories to collective bargaining
agreements relating to the engagement of various individuals in the many
different job classifications required to produce entertainment product. These
agreements set forth wage scales and fringe benefits which are generally
applicable to the production of television programming and feature films. In
the United States, the agreements are industry-wide, whereas in Canada they are
negotiated on a company-by-company basis. These employees include writers,
directors, actors, musicians and studio technicians and craftsmen.
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The following table sets forth the union contracts to which certain of the
Company's subsidiaries are parties, and the relevant expiration dates:
CONTRACT
UNION EXPIRATION DATE
----- ---------------
International Alliance of Theatrical
and Stage Employees (IATSE) (United States) . . . . . . . . . . . . . . . . . . . July 31, 2000
Writers Guild of America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 1, 1998
Screen Actors Guild . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . June 30, 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
IATSE Videotape Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . July 31, 2000
American Federation of Television and Radio Artists . . . . . . . . . . . . . . . November 15, 1997
Teamsters Local Union No. 155 . . . . . . . . . . . . . . . . . . . . . . . . . . May 31, 1997 (a)
(a) Canadian guild.
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. If
the relevant union and the motion picture and television industry were unable
to come to a new agreement prior to these expiration dates, any resulting work
stoppage could adversely affect the Company's production activities.
DISCONTINUED OPERATIONS
On February 20, 1997, the Company announced its intention to dispose of VIE, its
interactive game subsidiary, through a public offering expected to be completed
by December 1997. Accordingly, VIE is presented as a discontinued operation in
the accompanying financial statements.
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.
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ITEM 2. PROPERTIES
The Company leases office space of approximately 166,000 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 59,000 square feet in Southern
California, 37,000 square feet in Las Vegas and 22,000 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.
In November 1996, the Company sold a 43,000 square foot building in Los
Angeles, formerly occupied by Republic, which is now located at the Company's
corporate offices.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various lawsuits, claims and other legal matters in
the course of conducting its entertainment business operations. The Company
believes such lawsuits, claims and other legal matters should not have a
material adverse effect on the Company's consolidated results of operations or
financial condition.
The Company is involved in a number of legal actions including threatened
claims, pending lawsuits and contract disputes in connection with certain
bankruptcy and environmental matters relating to the Company's discontinued
operations, as well as other matters. While the outcome of these suits and
claims cannot be predicted with certainty, the Company believes, based upon its
current knowledge of the facts and circumstances and its understanding of the
applicable law, that the ultimate resolution of such suits and claims will not
have a material adverse effect on the Company's results of operations or
financial condition. This belief is also based upon the allowances which have
been established in connection with these matters and the Company's coverage
under an insurance-type indemnity agreement which covers up to $35,000,000 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. (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.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS
The Company's Common Stock is traded on the New York and Pacific Exchange
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.
1996 1995
------------------- -------------------
QUARTER LOW HIGH LOW HIGH
------- --- ---- --- ----
First $ 9 1/4 $ 13 3/8 $ 9 1/2 $ 11 7/8
Second 6 7/8 10 1/8 9 5/8 11 1/4
Third 6 1/2 8 1/8 9 1/4 13 7/8
Fourth 6 7/8 9 5/8 12 1/4 14
The number of holders of record of the Company's Common Stock as of March 26,
1997, was approximately 9,400. Dividend payments were discontinued by the Board
of Directors as of the fourth quarter of 1994 and the Board of Directors does
not have any current plans to resume payment of dividends.
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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.
1996 1995 1994(a) 1993 1992
-------- -------- -------- -------- --------
Income Statement Data:
Revenue from continuing
operations $497,601 $452,150 $416,445 $274,899 $257,546
Operating income $23,790 $66,252 $40,394 $39,727 $8,833
Net income from
continuing operations $4,075 $34,131 $19,430 $23,659 $7,917
Net income per common
and common equivalent share
from continuing operations (b) $0.04 $0.39 $0.26 $0.42 $0.15
Balance Sheet Data:
Total assets $840,346 $956,836 $871,245 $474,471 $451,661
Long-term debt 315,000 210,000 181,805 49,580 109,915
Shareholder's equity 319,743 558,520 528,447 297,854 197,560
Cash dividends per
common share - - 0.06 0.08 0.08
(a) The Company acquired Republic on April 26, 1994 and, accordingly, amounts
are not comparable to 1995 or to prior years.
(b) Per share amounts for 1993 and 1992 are calculated after preferred
dividends of $724,000 and $810,000, respectively.
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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.
In April 1994, the Company and Republic consummated a merger (the "Merger") in
which the Company acquired all of the outstanding shares of common stock of
Republic for $13 per share in cash, including the approximate 35% interest in
Republic held by BEC. The total consideration was approximately $101,000,000,
which was funded through borrowings under the Company's credit arrangements
with BEC. (See Notes 2 and 4 and "Financial Condition" below.)
On July 30, 1994, the Company and BEC entered into an exchange agreement (the
"Exchange Agreement") and consummated the transactions contemplated thereby
(the "Acquisition"). Pursuant to the Exchange Agreement, BEC delivered to the
Company 8,686,984 ordinary shares (the "Ordinary Shares") of VIEL and an option
to acquire 550,000 Ordinary Shares of VIEL (collectively, the "VIE Interests")
in exchange for 22,015,062 shares of the Company's Common Stock. BEC had
acquired a majority of the VIE Interests from third parties on July 29, 1994.
As a result of the Acquisition, the Company acquired approximately 91% of
VIEL's Ordinary Shares.
In connection with the Acquisition, the Company also entered into put- and
call-option agreements with respect to the Ordinary Shares of VIEL not owned by
the Company. Under these agreements, the Company may acquire, or be required by
Blockbuster Entertainment Group ("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 May 2, 1997.
The Company is strengthening its core television and feature film businesses in
an effort to improve their performance in an increasingly competitive
environment. This has included a significant increase in the production of new
television series, first-run syndication programming and feature films, as well
as expanded efforts to exploit the Company's entertainment product on an
international basis. As part of its focus on these core businesses, the Company
recently announced its intention to dispose of its interactive game business
through a public offering of VIE which is currently expected to be completed by
December 1997. As a result of this decision, VIE is being treated as a
discontinued operation. See "Results of Operations - Discontinued Operations"
and "Financial Condition" below and Notes 1, 2 and 9 regarding the planned
disposition of VIE.
RESULTS OF OPERATIONS
Results of operations for the years ended December 31, 1996, 1995 and 1994 are
not comparable due to the business combinations, acquisitions and dispositions
described above.
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Additionally, the results of operations for any period are significantly
affected by the quantity and performance of the Company's entertainment product
which is licensed or sold to, and available for exhibition by, licensees or
customers in various media and territories. Consequently, results of operations
may vary significantly between periods, and the results of operations in any one
period may not be indicative of results of operations in future periods.
The success of the Company's television programming business depends, in large
part, upon the successful network exhibition of its television series over a
sufficient number of years to allow for off-network exhibition opportunities.
During the initial years of a one-hour television series, network and
international license fees normally approximate the production costs of the
series, and accordingly the Company recognizes only minimal profit or loss
during this period. With respect to half-hour network programming, the
production costs can substantially exceed the combination of the network and
international license fees, and the Company recognizes losses during this
period. However, if a sufficient number of episodes of a series are produced,
the Company is reasonably assured that it will also be able to sell the series
in the domestic off-network market, and the Company would then expect to be able
to realize a profit with respect to the series.
The Company's business in general is affected by the public's acceptance of its
product, which is unpredictable and subject to change, and by conditions within
the entertainment industry, including, but not limited to, the quality and
availability of creative talent and the negotiation and renewal of union
contracts relating to writers, directors, actors, musicians and studio
technicians and craftsmen as well as any changes in the law and governmental
regulation. 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. The Telecommunications Act of 1996 eliminates the restrictions
on the number of television stations that one entity may own and increases the
national audience reach limitation by one entity from 25% to 35%. Accordingly,
the networks will be able to own the programming which they broadcast, and
increasingly become competitors of the Company in the production and
distribution of programming.
The following paragraphs discuss significant items in the Consolidated
Statements of Operations for the three years ended December 31, 1996.
REVENUE
The following table sets forth the components of revenue from the Company's
major media and markets for the three years ended December 31 (in thousands):
1996 1995 1994*
-------- -------- --------
Television $402,600 $352,477 $328,014
Home video 57,282 74,873 66,909
Film distribution 17,418 5,903 1,187
Licensing and merchandising 15,076 15,758 18,074
Other 5,225 3,139 2,261
-------- -------- --------
$497,601 $452,150 $416,445
======== ======== ========
* Includes eight months of operations of Republic.
Television revenue increased $50,123,000 (14%) and $24,463,000 (7%) in 1996 and
1995, respectively. The increase in 1996 arose primarily from (i) higher per
episode network license fees; (ii) increased hours of programming delivered to
the networks; and (iii) higher revenue from exploitation of the Company's
library. These increases were offset by reduced first-run syndication revenue
and the one-time effect in the first quarter of 1995 of conforming the Company's
accounting policies to those of Viacom. (See Note 1.) The increase in 1995 was
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17
attributable to (i) higher per episode network license fees; (ii) the continued
distribution of programming in the first-run syndication market; (iii) higher
revenue from the exploitation of the Company's library; and (iv) the one-time
effect recorded in the first quarter of 1995 of conforming the Company's
accounting policies to those of Viacom discussed above, offset by fewer hours of
programming delivered to the networks.
Home video revenue decreased $17,591,000 (23%) in 1996 from 1995. This decrease
is attributable to home video retailers purchasing greater volumes of the major
studios' theatrical releases and lower volumes of made-for-video product like
the Company's. It is expected that this trend will continue, at least in the
near term. The Company plans to reduce its acquisition of made-for-video titles
to focus on the distribution of its library product in the sell-through
marketplace and the release of its theatrical titles. Two of the Company's 1996
theatrical feature films are scheduled for release in the home video market in
1997. Home video revenue increased $7,964,000 (12%) in 1995 as compared to
1994, primarily as a result of having 12 months of operations of Republic
(acquired April 26, 1994) included in the 1995 results as compared to only eight
months of operations in 1994. This increase was partially offset by the
significant international home video release of a 10- film package in 1994,
"Young and Reckless," with no release(s) of similar significance in 1995.
Film distribution revenue increased $11,515,000 (195%) and $4,716,000 (397%) in
1996 and 1995, respectively. 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. The increase in 1995 as compared to
1994 is due primarily to the international release of "The Usual Suspects" in
1995 with no release of similar significance in 1994.
Licensing and merchandising revenue decreased $682,000 (4%) and $2,316,000
(13%) in 1996 and 1995, respectively, due primarily to a continuing decline in
the licensing revenue for "Beverly Hills, 90210" and "Melrose Place."
Other revenue increased $2,086,000 (66%) in 1996 from 1995 and $878,000 (39%) in
1995 from 1994 primarily due to 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 $79,756,000 (24%) and $2,437,000 (1%) in 1996 and
1995, 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 83%, 74% and 80% in
1996, 1995 and 1994, 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 $43,967,000, $22,761,000 and $23,504,000 in 1996, 1995
and 1994, respectively. The write-downs in 1996 were primarily attributable to
deficits associated with new television series and first-run syndication
programming produced, the initial release of two feature films and the decline
in the market for made-for-video product.
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SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative costs increased $8,157,000 (16%) and
$7,410,000 (17%) in 1996 and 1995, respectively. The increase in 1996 is due
primarily to the growth in the Company's distribution infrastructure. The
increase in 1995 resulted primarily from the selling, general and administrative
costs related to the operations of Republic, including the amortization of
intangible assets, for the full 12-month period in 1995.
INTEREST EXPENSE, NET
Interest expense, net of amounts capitalized, increased $2,548,000 (21%) and
$3,777,000 (47%) in 1996 and 1995, respectively. The increases were due to
higher average indebtedness in both years. In 1996, this increase was partially
offset by an increase in interest capitalized due to longer production cycles
associated with the Company's increased theatrical production activities. In
1996 and 1995, these increases were also partially offset 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 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
for the year 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 changes
in the relationships between revenue and expenses comprising income from
continuing operations before income taxes.
During 1995, the Company's provision for income taxes increased $7,168,000
compared to the provision in 1994 due to the increase in income from continuing
operations before income taxes, partially offset by a decrease in the
effective tax rate. The effective tax rate decreased to 40% in 1995 from 44%
in 1994, largely as a result of the changes in the relationship between revenue
and expenses comprising income from continuing operations, partially offset by
the effect of a reversal of reserves as a result of the favorable settlement of
certain tax controversies.
DISCONTINUED OPERATIONS
INTERACTIVE GAME BUSINESS. On February 20, 1997, the Company announced its
intention to dispose of its interactive game business, VIE, through a public
offering expected to be completed by December 1997 and, accordingly, VIE is
presented as a discontinued operation in the accompanying financial statements.
Interactive revenue increased $41,809,000 (20%) and $28,843,000 (16%) in 1996
and 1995, respectively. The increase in 1996 from 1995 is attributable to a
greater volume of new product releases in the third and fourth quarters,
including the successful "Command and Conquer: Red Alert," as well as the
continued growth of the Company's distribution of third-party product in Europe.
The increase in 1995 from 1994 is primarily as a result of having 12 months of
operations of VIE and its subsidiaries (acquired July 30, 1994) included in the
1995 results as compared to only five months of operations in 1994. Anticipated
growth in revenue in 1996 and 1995 was not achieved due to delays in the release
of a number of VIE's titles, as well as fewer than anticipated shipments to
retailers, reflecting in part the continuing reluctance by consumers to purchase
interactive software product until the new generation of hardware platforms
achieve a higher installed base. It is expected that revenue will continue to be
adversely impacted by these conditions in the near term. The Company continues
to actively work with hardware manufacturers to develop and adapt its titles to
different platforms as they become commercially viable.
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19
In general, VIE's revenue is highest in the fourth quarter of each year as it
coincides with the holiday buying season. VIE released "The Lion King"
interactive game, VIE's highest grossing title ever, on various cartridge
formats in October 1994 and released "Command and Conquer: Red Alert," VIE's
highest grossing PC CD-ROM title ever, in November 1996. These games contributed
very significant portions of the worldwide interactive revenue realized by the
Company during 1994 and 1996 while there was no release of similar significance
in 1995.
Cost of sales for the interactive game business increased $84,813,000 (46%) and
$33,586,000 (22%) in 1996 and 1995, respectively. The increase in 1996 is
primarily due to (i) the increase in revenue for the same period; (ii) the
write-off of certain projects as they were determined to no longer be
commercially viable and (iii) the write-down of certain projects to net
realizable value. Additionally, prior to May 1996, the Company accounted for all
of its entertainment product, including the software development costs of VIE
under the requirements of 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
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 is also restating 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. The increase in 1995 is substantially due to
the increase in revenue for the same period and the write-off of certain
projects as they were determined to no longer be commercially viable.
Selling, general and administrative costs for the interactive game business
increased $23,594,000 (47%) and $29,323,000 (139%) in 1996 and 1995,
respectively. The increase in 1996 is due primarily to the growth of the
interactive distribution infrastructure and increase in the number of titles to
be released. The increase in 1995 from 1994 is primarily as a result of having
12 months of operations in the 1995 results as compared to only five months of
operations in 1994.
Interest expense, net of amounts capitalized, increased $6,092,000 and
$3,848,000 in 1996 and 1995, respectively. The increase in 1996 is primarily
due to higher average borrowings coupled with an increase in the allocation of
interest expense related to VIE's pro rata share of the Company's borrowings
under its credit agreement with Viacom. The increase in 1995 and 1994 is
primarily as a result of having 12 months of operations in the 1995 results
as compared to only five months of operations in 1994.
The provision for income taxes increased $20,692,000 to a provision of
$11,879,000 in 1996 as compared to a benefit of $8,813,000 in 1995, principally
as a result of the Company's determination that the tax benefit from VIE's
current and past losses is not currently realizable under a more likely than
not standard. The provision decreased $13,092,000 in 1995 from a provision of
$4,279,000 in 1994, largely as a result of the respective decrease in pretax
income.
Minority interest in the (income)/loss of VIE was $409,000, $1,382,000 and
($680,000) in 1996, 1995 and 1994, respectively. The Company has put- and
call-option agreements with Blockbuster on behalf of Viacom with respect to
the remaining minority interest in VIE. These agreements, as amended, will
expire on May 2, 1997.
The financial position of the discontinued operations of VIE is presented in the
balance sheets under the caption "Net assets of VIE." During 1996, the net
assets of VIE decreased by approximately $194,000,000 as 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 through a public offering expected to be completed by
December 1997. (See "Financial Condition" below and Notes 1, 2 and 9 regarding
the planned disposition of VIE.)
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20
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 $10,986,000 and $12,194,000 at December 31,
1996 and 1995, respectively. (See Note 9.)
The Company is involved in a number of legal actions including threatened
claims, pending lawsuits and contract disputes, environmental clean-up
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 $416,841,000
and $327,936,000 in 1996 and 1995, respectively. Additionally, future
expenditures by the Company are expected to remain consistent with 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 increased $105,000,000 in 1996, primarily
to fund its production and acquisition activities, as well as the operations of
VIE.
In order to meet the anticipated capital requirements to fund increased
production and acquisition activities, the Company is currently exploring a
number of additional sources of external financing. The Company has engaged an
investment bank to act as its advisor with respect to a proposed program which
would fund production of certain motion pictures on a limited recourse basis. No
assurance can be given that the program will be successfully implemented or that
the Company will obtain funding for film production through the contemplated
program. Except as set forth above, the Company has no other external sources
of financing.
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In connection with the Merger in October 1993, the Company issued 13,362,215
shares of the Company's Common Stock to BEC in exchange for 3,652,542 shares of
BEC common stock. The BEC shares were subsequently resold, with the Company
realizing approximately $100,445,000 in proceeds. The Company subsequently
used the proceeds to redeem, pay or prepay all its subordinated debt and a
substantial portion of its bank debt. (See Notes 2, 4 and 5.) The Company
borrowed the funds required to complete the Merger in the second quarter of
1994.
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 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, 1996, this subsidiary had $269,000 in
letters of credit outstanding under the Credit Agreement to guarantee its
interactive game purchases. There were no letters of credit outstanding under
the Credit Agreement at December 31, 1995. Viacom has guaranteed all of the
borrowings under the Credit Agreement, which expires on March 31, 1998. (See
Note 9.)
Another wholly owned subsidiary of VIE has a credit facility in the net amount
of 10,000,000 pounds sterling with a bank in the United Kingdom (the "UK
Facility"), which the Company has guaranteed. This facility, which expires on
April 30, 1997, has been renegotiated on terms more favorable to the subsidiary.
The renegotiated UK Facility, which will be an annual facility, will expire on
December 31, 1997 and will be guaranteed by Viacom and the Company. (See Note
9.) As of December 31, 1996 and 1995, this subsidiary had approximately
$461,000 and $2,200,000, respectively, in letters of credit outstanding under
the UK Facility to guarantee its interactive game purchases. The Company also
provides a rent guarantee for this subsidiary which expires in 2005. This
guarantee will be complemented with a Viacom guarantee when the renegotiated UK
Facility is in place.
As a result of the merger of BEC into Viacom in September 1994, Viacom
currently owns approximately 75% of the Company's Common Stock. Pursuant to
the separate credit facilities under which Viacom is a borrower, certain
subsidiaries of Viacom, including the Company, are restricted from incurring
indebtedness (other than indebtedness owing to Viacom) without the prior
consent of Viacom's lenders. Such consent has been given with respect to the
Credit Agreement and the UK Facility.
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.)
Effective January 1994, the Company became subject to SFAS No. 112, "Employers'
Accounting for Postemployment Benefits," and SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." SFAS No. 112 did not have
an effect on the Company's results of operations or financial condition because
the Company does not provide such benefits. However, the adoption of SFAS No.
115 required the Company to adjust the carrying value of a common stock
investment to fair market value with a corresponding adjustment, net of tax, to
its Shareholders' Equity. (See Notes 1, 5 and 9.)
21
22
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 is
restating 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
will be effective for interim and annual financial statements for periods
ending after December 15, 1997. Earlier application is not permitted. The
Company will adopt SFAS No. 128 for fiscal year ending December 31, 1997 and
does not expect this statement to have a material effect on its earnings per
share. (See Note 1.)
22
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
PAGE
----
Report of Independent Accountants 24
Consolidated Balance Sheets:
December 31, 1996 and 1995 25
Consolidated Statements of Operations:
Years ended December 31, 1996, 1995 and 1994 26
Consolidated Statements of Changes in Shareholders' Equity:
Years ended December 31, 1996, 1995 and 1994 27
Consolidated Statements of Cash Flows:
Years ended December 31, 1996, 1995 and 1994 28
Notes to Consolidated Financial Statements 29
"Selected Quarterly Financial Data" has been included
in Note 12 to the Consolidated Financial Statements
23
24
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 53 present fairly, in all
material respects, the financial position of Spelling Entertainment Group Inc.
and its subsidiaries at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, 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 21, 1997
24
25
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
December 31,
----------------------
1996 1995
------- -------
ASSETS
Current Assets:
Cash and cash equivalents $3,325 $6,644
Accounts receivable, net 104,645 128,720
Entertainment product, net 233,002 241,934
Other current assets 4,204 9,959
-------- --------
Total current assets 345,176 387,257
Accounts receivable, net 91,880 25,727
Entertainment product, net 182,786 123,309
Property and equipment, net 13,389 12,574
Net assets of VIE 14,289 209,021
Intangible assets, net 192,806 198,291
Other noncurrent assets 20 657
-------- --------
$840,346 $956,836
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable, accrued expenses and other liabilities $36,103 $28,260
Accrued participation expense 54,534 49,160
Deferred revenue 21,388 19,362
Income and other taxes 791 1,395
-------- --------
Total current liabilities 112,816 98,177
Accrued participation expense 45,797 43,866
Long-term debt payable to Viacom 315,000 210,000
Deferred income and other taxes 36,156 30,519
Net liabilities related to discontinued operations
of Charter 10,834 15,754
-------- --------
520,603 398,316
-------- --------
Commitments and contingent liabilities
SHAREHOLDERS' EQUITY
Preferred Stock - -
Common Stock, $.001 par value,
- 300,000,000 shares authorized
- 90,625,321 and 89,683,378 shares issued and
outstanding 91 90
Capital in excess of par value 576,260 571,244
Accumulated deficit (258,671) (11,914)
Cumulative translation adjustment 2,063 (900)
-------- --------
Total shareholders' equity 319,743 558,520
-------- --------
$840,346 $956,836
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
25
26
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year ended December 31,
----------------------------------------
1996 1995 1994
-------- -------- --------
Revenue $497,601 $452,150 $416,445
Costs and expenses:
Entertainment product costs 413,845 334,089 331,652
Selling, general and administrative 59,966 51,809 44,399
--------- -------- --------
473,811 385,898 376,051
--------- -------- --------
Operating income 23,790 66,252 40,394
Interest income 1,585 2,279 2,488
Interest expense, net (14,431) (11,883) (8,106)
Other, net 384 67 70
--------- -------- --------
Income from continuing operations
before income taxes 11,328 56,715 34,846
Provision for income taxes (7,253) (22,584) (15,416)
--------- -------- --------
Income from continuing operations 4,075 34,131 19,430
Income (loss) from discontinued operations of VIE, net (103,820) (17,610) 4,678
Estimated loss on disposal of VIE, net (151,380) - -
--------- -------- --------
Net income (loss) ($251,125) $16,521 $24,108
========= ======== ========
Average number of common and common equivalent shares 90,369 88,458 74,377
========= ======== ========
Income (loss) per common
and common equivalent share:
Continuing operations $0.04 $0.39 $0.26
Discontinued operations (2.82) (0.20) 0.06
--------- -------- --------
Net income (loss) per common and common equivalent share ($2.78) $0.19 $0.32
========= ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
26
27
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
Common Stock Capital In Cumulative Total
---------------------- Excess of Accumulated Translation Shareholders'
Number Par Value Par Value Deficit Adjustment Equity
---------- --------- ---------- ----------- ----------- -------------
Balance December 31, 1993 64,504,838 $ 6,450 $342,824 ($51,420) $ - $297,854
Exercise of options 1,463,429 147 8,218 - - 8,365
Pension liability adjustment, net - - - 380 - 380
Cash dividends paid or accrued:
Common Stock - - - (4,334) - (4,334)
Merger with Republic - - (6,670) - - (6,670)
Acquisition of VIE 22,015,062 2,201 202,471 - - 204,672
Unrealized holding gain, net - - - 3,979 - 3,979
Cumulative translation adjustment - - - - 93 93
Net income - - - 24,108 - 24,108
---------- ------- -------- ------- ------ --------
Balance December 31, 1994 87,983,329 8,798 546,843 (27,287) 93 528,447
Exercise of options
and warrants 1,700,049 36 11,339 - - 11,375
Pension liability adjustment, net - - - 829 - 829
Income tax benefit related to
stock options - - 4,318 - - 4,318
Change in par value as a
result of reincorporation - (8,744) 8,744 - - -
Unrealized holding loss, net - - - (1,977) - (1,977)
Cumulative translation adjustment - - - - (993) (993)
Net income - - - 16,521 - 16,521
---------- ------- -------- ------- ------ --------
Balance December 31, 1995 89,683,378 90 571,244 (11,914) (900) 558,520
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)
---------- ------- -------- --------- ------ --------
90,625,321 $ 91 $576,260 ($258,671) $2,063 $319,743
========== ======= ======== ========= ====== ========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
27
28
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended December 31,
---------------------------------------
1996 1995 1994
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(251,125) $ 16,521 $ 24,108
Adjustments to reconcile net income (loss)
to cash flows from continuing operations:
Net (income) loss from discontinued operations 255,200 17,610 (4,678)
Depreciation and amortization 8,596 7,739 6,926
Amortization of entertainment product costs 362,255 251,854 282,006
Additions to entertainment product costs (416,841) (327,936) (307,824)
Increase in accounts receivable (42,829) (19,842) (14,658)
Increase in accounts payable, accrued expense,
other liabilities and income taxes 12,919 9,928 7,842
Increase (decrease) in accrued
participation expense 9,708 13,521 (8,738)
Increase (decrease) in deferred revenue 2,042 8,090 (3,697)
Other, net 1,393 (982) (3,535)
--------- --------- ---------
Net cash used by continuing operations (58,682) (23,497) (22,248)
Net cash used by discontinued operations (47,726) (20,763) (45,859)
--------- --------- ---------
(106,408) (44,260) (68,107)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Merger with Republic, net of cash acquired - - (102,299)
Cash acquired in acquisition of VIE - - 2,197
Sale of discontinued operations properties of Chapter - - 2,703
Purchases of property and equipment, net (3,902) (5,955) (3,939)
Funding of discontinued operations of VIE (44,773) (2,591) (297)
Changes in net liabilities related to
discontinued operations of Charter (2,552) (9,961) (8,696)
--------- --------- ---------
Net cash used by continuing operations (51,227) (18,507) (110,331)
Net cash used by discontinued operations (7,752) (9,744) (2,766)
--------- --------- ---------
(58,979) (28,251) (113,097)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facilities 120,000 68,000 208,305
Repayments of credit facilities (15,000) (39,873) (76,101)
Cash dividends paid on Common and Preferred Stock - - (4,334)
Issuances of Common Stock 1,590 7,841 6,904
--------- --------- ---------
Net cash provided by continuing operations 106,590 35,968 134,774
Net cash provided by discontinued operations 54,294 34,821 56,148
--------- --------- ---------
160,884 70,789 190,922
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,503) (1,722) 9,718
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 20,678 22,400 12,682
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 16,175 $ 20,678 $ 22,400
========= ========= =========
CASH AND CASH EQUIVALENTS AT END OF YEAR:
Continuing operations $ 3,325 $ 6,644 $ 12,680
Discontinued operations 12,850 14,034 9,720
--------- --------- ---------
$ 16,175 $ 20,678 $ 22,400
========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
28
29
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 shown as a separate component of Shareholders' Equity.
See Note 2 regarding the acquisition of Republic Entertainment Inc. (formerly
Republic Pictures Corporation, together with its subsidiaries, "Republic").
See Notes 2 and 9 regarding the acquisition and planned disposition of Virgin
Interactive Entertainment Limited ("VIEL," together with its subsidiaries,
"VIE").
Blockbuster Entertainment Corporation ("BEC") owned 67,673,702 shares of the
Company's Common Stock until September 29, 1994, when BEC merged with and into
Viacom Inc. ("Viacom"), with Viacom being the surviving corporation. As a
result of the merger, Viacom currently owns approximately 75% of the Company's
Common Stock.
Effective May 26, 1995, the Company changed its place of incorporation from
Florida to Delaware by merging into a newly formed Delaware corporation. As a
result of the Company's reincorporation, each share of the Company's common
stock then issued was converted into and exchanged for one share of common
stock, par value $.001 per share, of the Delaware corporation. There was no
change in the business, properties or management of the Company as a result of
this reincorporation.
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 $18,935,000 and $26,070,000 at December 31,
1996 and 1995, respectively.
ENTERTAINMENT PRODUCT, NET. Entertainment product, net, includes production or
acquisition costs (including advance payments to producers), capitalized
overhead and interest, home video manufacturing costs, and prints, advertising
and other related distribution costs expected to benefit future periods. These
costs are amortized, and third-party participations and residuals are accrued,
generally on an individual product basis in the ratio that current year gross
revenue bears to estimated future gross revenue. Domestic syndication and
basic cable revenue estimates are not included in estimated future gross
revenue of television programming until such sales are probable.
29
30
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 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 is
also restating 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 5 to 10 years.
Property and equipment are net of accumulated depreciation of $11,179,000 and
$8,570,000 at December 31, 1996 and 1995, respectively.
OTHER CURRENT ASSETS. Included in other current assets is a common stock
investment at a carrying value (at fair value) of $5,480,000 at December 31,
1995. As of December 31, 1996, the same common stock investment is included in
the net assets of discontinued operations at a carrying value (fair value) of
$10,539,000. (See Note 9.) (Viacom owns a significant number of shares in the
same company.) The Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," which became effective in
1994. This statement requires the Company to adjust the carrying value of this
asset, which is classified as "available for sale" under the applicable
provisions of SFAS No. 115, to fair market value based on its over-the-counter
market price, with a corresponding adjustment, net of tax, to Shareholders'
Equity. It is not clear that the Company could realize such a value if the
investment were to be sold due to the low trading volume of such shares relative
to the number of shares owned by the Company.
INTANGIBLE ASSETS, NET. Intangible assets represent the acquisition costs of
Spelling Entertainment Inc. and Republic in excess of the value of their
identified net assets. (See Note 2.) These costs are being amortized on a
straight-line basis over 40 years. Amortization expense relating to such
intangible assets was $5,486,000, $5,413,000, and $5,119,000 for the three years
ended December 31, 1996, respectively. Intangible assets are net of accumulated
amortization of $26,529,000 and $21,043,000 at December 31, 1996 and 1995,
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 has recorded an
impairment loss of approximately $74,00,000 with respect to the carrying value
of goodwill associated with that business in the fourth quarter of 1996.
Additionally, the Company has 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.)
30
31
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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.
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES. Included in the
caption "Accounts payable, accrued expenses and other liabilities" at December
31, 1996 and 1995 are accounts payable of $5,645,000 and $1,009,000; accrued
compensation of $8,749,000 and $10,041,000; accrued liabilities for untendered
Republic stock of $6,732,000 and $6,750,000; interest and other payables to
Viacom of $3,323,000 and $2,077,000 (see Note 7); and other current liabilities
of $3,774,000 and $8,383,000, respectively. Additionally, accrued distribution
costs of $7,880,000 related to domestic theatrical distribution are included at
December 31, 1996, with no comparable accrual at December 31, 1995.
DEFERRED REVENUE. A substantial portion of the network license fees related to
television programming are received prior to the time the programming is
completed or delivered to the network. Such fees, and other monies received
prior to the time that the related entertainment product is available to the
licensee, are recorded on the balance sheet as deferred revenue. Such amounts
are normally repayable by the Company only if it fails to deliver the related
product to the licensee.
REVENUE RECOGNITION. Revenue from licensing agreements covering entertainment
product owned by the Company is recognized when the entertainment product is
available to the licensee for telecast, exhibition or distribution, and other
conditions of the licensing agreements have been met. Long-term
noninterest-bearing receivables arising from such agreements are discounted to
present value. Prior to 1995, revenue from television distribution of
entertainment product not owned by the Company was recognized as billed. In
the first quarter of 1995, the Company conformed its accounting policies, with
respect to SFAS No. 53, to those of Viacom.
Revenue from direct distribution of home video 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 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.
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE. Net income (loss)
per common and common equivalent share amounts are based on the weighted
average common and common equivalent shares outstanding during the respective
period. Primary and fully-diluted net income (loss) per common and common
equivalent share are not presented as they result in a dilution of less than 3%
from basic net income (loss) per common and common equivalent share or are
anti-dilutive.
31
32
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share," which
will be effective for interim and annual financial statements for periods
ending after December 15, 1997. Earlier application is not permitted. The
Company will adopt SFAS No. 128 for fiscal year ending December 31, 1997 and
does not expect this statement to have a material effect on its earnings per
share.
2. BUSINESS COMBINATIONS, ACQUISITIONS AND DISPOSITIONS
On April 26, 1994, DE Acquisition Corporation, a wholly owned subsidiary of the
Company, merged with and into Republic (the "Merger"). As a result of the
Merger, Republic became a wholly owned subsidiary of the Company, and each
share of the common stock of Republic (the "Republic Common Stock") outstanding
immediately prior to the Merger was converted into the right to receive $13.00
in cash, without interest.
Immediately prior to the Merger, BEC owned 2,550,000 shares of Republic Common
Stock and warrants to purchase 810,000 additional shares of Republic Common
Stock at an exercise price of $11.50 per share. In accordance with the terms
of the Merger, the Company purchased the 2,550,000 shares of Republic Common
Stock from BEC for $33,150,000, and the warrants owned by BEC were converted
into warrants to purchase 1,337,148 shares of the Company's Common Stock at an
exercise price of $6.97 per share. Certain other parties held warrants to
purchase 500,000 shares of Republic Common Stock at an exercise price of $12.50
per share. In accordance with the terms of the Merger, these warrants were
converted into warrants to purchase 825,400 shares of the Company's Common
Stock at an exercise price of $7.57 per share, all of which were exercised in
December 1995 and April 1996. (See Note 5.)
On July 30, 1994, the Company and BEC entered into an exchange agreement (the
"Exchange Agreement") and consummated the transactions contemplated thereby
(the "Acquisition"). Pursuant to the Exchange Agreement, BEC delivered to the
Company 8,686,984 ordinary shares (the "Ordinary Shares") of VIEL and an option
to acquire 550,000 Ordinary Shares of VIEL (collectively, the "VIE Interests")
in exchange for 22,015,062 shares of the Company's Common Stock. BEC had
acquired a majority of the VIE Interests from third parties on July 29, 1994.
As a result of the Acquisition, the Company acquired approximately 91% of
VIEL's Ordinary Shares. (See Note 5.)
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 May 2, 1997. See Note 9 regarding the planned disposition of VIE.
The Company has accounted for the Merger and the Acquisition under the purchase
method of accounting. However, with respect to the Merger, the Company has
recorded an adjustment of $6,670,000 to Shareholders' Equity to reflect the
excess of the cash consideration paid for BEC's ownership interest in Republic
Common Stock (see above) over BEC's carrying value for such interest. (See
Note 5.) Further, because BEC controlled both the Company and VIE at the time
of the Acquisition, the Company's purchase price for the VIE Interests has been
determined by reference to the purchase price paid by BEC for the VIE
Interests.
32
33
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The assets and liabilities of Republic are included in the accompanying
consolidated balance sheets as of December 31, 1996 and 1995 at fair value,
with the differences between the total purchase price and such fair values
being included in intangible assets. The excess of the purchase price over net
assets and liabilities acquired is being amortized on a straight-line basis
over forty years. The assets and liabilities of VIE are included in the
accompanying consolidated balance sheets as of December 31, 1996 and 1995 under
the caption "Net Assets of VIE." (See Note 9.)
The results of operations of Republic since April 26, 1994 are included in the
accompanying consolidated statements of operations. The following table
presents the unaudited pro forma results of operations assuming that the Merger
had occurred on January 1, 1993 (in thousands, except per share amounts).
Year Ended
December 31, 1994
-----------------
Revenue $439,700
Income from continuing operations 19,100
Income per share from continuing operations 0.28
The pro forma results set forth in the preceding table are not necessarily
indicative of the results that would have been realized had this transaction
actually taken place on the applicable date or of the results which may occur
in the future.
3. ENTERTAINMENT PRODUCT, NET
Entertainment product, net, is comprised of the following at December 31 (in
thousands):
1996 1995
-------- --------
Entertainment product:
Theatrical
Released $137,266 $106,530
Completed, not released 4,833 -
In process and other 73,745 66,573
-------- --------
215,844 173,103
Television
Released 184,954 158,814
In process and other 14,990 33,326
-------- --------
199,944 192,140
$415,788 $365,243
======== ========
33
34
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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,
1996, approximately 63% of unamortized released entertainment product will be
amortized during the three years ending December 31, 1999.
4. DEBT
In January 1994, the Company entered into a three-year credit agreement with
BEC. As a result of the merger of BEC with and into Viacom, Viacom succeeded
to BEC's position under the credit agreement (the "Viacom Facility"). This
agreement was amended and restated in January 1995 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 (see Note 2) and
(ii) a revolving credit facility of $140,000,000 to fund the Company's working
capital and other requirements. All outstanding borrowings under the Viacom
Facility were due to mature on March 31, 1997. The average interest rate at
December 31, 1995, on borrowings under the Viacom Facility was 6.9%.
On September 30, 1996, the Company and Viacom executed a credit agreement (the
"Viacom Credit Agreement"), which replaced the Viacom Facility. The Viacom
Credit Agreement provides for (i) a term loan of $200,000,000 and (ii) a
revolving credit facility of $155,000,000 to fund the Company's working capital
and other requirements. All outstanding borrowings under the Viacom Credit
Agreement mature on December 31, 1998.
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,
1996, on borrowings under the Viacom Credit Agreement was 8.1%. 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 $19,418,000 in 1996, $13,514,000 in
1995, and $6,968,000 in 1994.
At December 31, 1996, the carrying value of all of the Company's debt
approximated fair value.
See Note 9 regarding debt related to discontinued operations.
34
35
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
5. SHAREHOLDERS' EQUITY
PREFERRED STOCK. At December 31, 1996 and 1995, 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.)
The Company declared and paid cash dividends on its Common Stock of $.06 for
the year ended December 31, 1994. Dividends were discontinued by the Board of
Directors as of the fourth quarter of 1994.
See Note 2 regarding the existence of certain warrants to purchase 1,337,148
shares of Common Stock.
ISSUANCE OF COMMON STOCK. See Note 2 regarding the issuance of 22,015,062
shares of the Company's Common Stock in connection with the acquisition of VIE.
See Note 9 regarding the Company's planned disposition of VIE.
CAPITAL IN EXCESS OF PAR VALUE. See Note 2 regarding adjustments to the
accumulated deficit related to the acquisition of Republic Common Stock from
BEC. An adjustment of $138,000 and $4,318,000 has been recorded to Capital
in Excess of Par Value in 1996 and 1995, respectively, to reflect the tax
benefit obtained by the Company with respect to nonqualified stock options
exercised by its employees. (See Note 8.)
ACCUMULATED DEFICIT. See Note 9 regarding adjustments to the accumulated
deficit related to the Company's pension plan and Note 1 regarding adjustments
related to a common stock investment.
35
36
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:
1996 1995 1994
----------------------------- ---------------------------- -----------------------------
Weighted Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
Outstanding at January 1 5,759,218 $7.72 7,123,669 $ 7.23 3,749,262 $6.34
Granted 3,750,010(a) $7.13 200,000 $10.31 4,859,181 $7.72
Exercised (841,943) $4.91 (974,649) $ 6.04 (1,463,429) $6.00
Terminated (688,967) $7.02 (589,802) $ 6.84 (21,345) $7.06
--------- --------- ---------
Outstanding at December 31 7,978,318 5,759,218 7,123,669
========= ========= =========
Exercisable at December 31 3,079,436 $7.70 2,694,082 $ 6.61 1,069,847
========= ========= =========
Available for grant at
December 31 5,094,251 (a)(b) 3,158,343 2,905,542
========= ========= =========
(a) Includes 1,622,500 shares granted and 5,000,000 shares available for
grant pending shareholder approval of an increase to the number of shares
available for grant under the plans at the Annual Meeting of Shareholders
on May 21, 1997.
(b) Includes 1,360,866 shares available for grant under a plan which expires on
April 13, 1997.
The following table summarizes information concerning currently outstanding and
exercisable stock options at December 31, 1996:
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
- --------------- --------- ---------------- -------------- --------- --------------
$ 0.12 - $ 5.83 285,376 3.01 $ 4.93 285,376 $ 4.93
$ 6.00 - $ 7.25 5,325,774 7.78 6.88 1,622,101 6.37
$ 7.38 - $10.50 956,149 7.32 9.24 484,190 9.22
$10.75 - $19.28 1,411,019 7.68 10.91 687,769 10.94
--------- ---- ------ --------- ------
$ 0.12 - $19.28 7,978,318 7.54 $ 7.80 3,079,436 $ 7.70
========= ==== ====== ========= ======
In connection with the Merger and the Acquisition, the Company converted
outstanding options under the respective stock option plans of Republic and VIE
to options to purchase the Company's Common Stock, which are included in
options granted in the 1994 table above.
Options to acquire shares of Republic common stock outstanding under the
Republic stock options plan(s) were converted into the right to receive, upon
payment of the exercise price as adjusted, 1.6508 shares of the Company's
Common Stock for each share of Republic common stock into which such option was
exercisable. The exercise price of Republic options was adjusted by
multiplying such exercise price by .6058.
36
37
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Options to acquire ordinary shares of VIE were converted into the right to
receive, upon payment of the adjusted exercise price, shares of the Company's
Common Stock. A conversion ratio of 2.4022 was determined based on the
relative fair values of the ordinary shares to the shares of the Company's
Common Stock at that time. The exercise price of VIE options was adjusted by
dividing by the conversion ratio.
The times at which the previously outstanding Republic and VIE options may be
exercised remain unchanged. No additional options may be granted pursuant to
the pre-existing Republic and VIE plans, and the issuance of options to acquire
the Company's Common Stock to Republic and VIE plan participants did not reduce
the amounts available under the Company's current plans.
Options related to employees of VIE and included in the tables above are
875,010, 50,000 and 2,602,806 shares granted, 775,220, 643,003 and 241,164
shares exercised, and 149,921, 140,189 and 20,520 shares terminated for the
years ended December 31, 1996, 1995 and 1994, respectively.
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
period. 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 $2,007,000 ($1,240,000 after
tax or $0.01 per share) and $238,000 ($146,000 after tax) in 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 $2.66
and $3.89 for 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:
1996 1995
-------- --------
Expected dividend yield (a) -- --
Expected stock price volatility 28.45% 29.91%
Risk-free interest rate 6.60% 6.88%
Expected life of options (years) 4.8 4.8
(a) During 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 $1,951,000,
$1,494,000 and $1,564,000 for the three years ended December 31, 1996, 1995 and
1994, 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.
37
38
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
A significant number of the Company's production employees are covered by union
sponsored, collectively bargained, multi-employer pension plans. The Company
contributed approximately $9,229,000, $9,044,000, and $8,771,000 to such
plans for the three years ended December 31, 1996, 1995 and 1994, respectively.
The FASB has issued SFAS No. 112 "Employers' Accounting for Postemployment
Benefits" (effective in 1994). The Company does not provide any postemployment
benefits.
7. RELATED PARTY TRANSACTIONS
See Note 4 regarding the Company's credit facility with Viacom and Viacom's
guarantee of the Company's credit agreement with a bank. The Company was
charged interest and fees by Viacom of $19,808,000 and $13,558,000 for the years
ended December 31, 1996 and 1995, respectively. Included in accounts payable,
accrued expenses and other liabilities is accrued interest payable to Viacom of
$1,226,000 and $813,000 as of December 31, 1996 and 1995, respectively. VIE was
allocated interest charges of $1,633,000 and $265,000 in 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.)
See Note 5 regarding the Company's sale and issuance of Common Stock to BEC in
1994.
Viacom provided the Company with management services in 1996, 1995 and 1994, for
which the Company was charged $150,000, $600,000 and $500,000, 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,
1996 and 1995, the Company had a net payable to Viacom of $2,097,000 and
$1,264,000, respectively, with respect to these and other expenses.
During 1996, 1995 and 1994, 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 (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; and (iv) USA Network and Sci-Fi Channel in which Viacom has equity
interests. For the three years ended December 31, 1996, these transactions are
not material.
Republic has entered into agreements with, and in certain cases has advanced
funds to, BEG, Viacom and its Showtime unit 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," in which the Company will
own the international distribution rights.
In the ordinary course of business, the Company has and expects to continue to
do business with Viacom and its affiliates.
38
39
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. INCOME TAXES
The provision or (benefit) for income taxes for continuing operations and
discontinued operations for each of the three years ended December 31 include
(in thousands):
1996 1995 1994
------- ------- -------
Continuing operations
Current tax expense
Federal $ 0 $ 776 $ 303
Foreign 5,047 4,847 3,965
State and local 80 1,473 1,172
------- ------- -------
Total current 5,127 7,096 5,440
------- ------- -------
Deferred tax expense
Federal 1,099 17,191 9,748
Foreign 234 235 435
State and local 793 (1,938) (207)
------- ------- -------
Total deferred 2,126 15,488 9,976
------- ------- -------
Total provision for continuing operations $ 7,253 $22,584 $15,416
======= ======= =======
Discontinued operations:
Federal $ 7,863 $(5,935) $ 1,254
Foreign 3,678 (2,080) 2,094
State and local 338 (798) 931
------- ------- -------
Total provision for discontinued operations $11,879 $(8,813) $ 4,279
======= ======= =======
In 1996 and 1995, an income tax benefit attributable to employee stock option
transactions was allocated to shareholders' equity. (See Note 5.)
39
40
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, 1996 and 1995 were as
follows (in thousands):
1996 1995
------- -------
Deferred Tax Assets:
Tax attribute carryforwards $ 58,944 $28,678
Other, net 3,145 3,949
Pension liability adjustment 976 2,231
Accounts receivable 1,335 6,076
Discontinued operations allowances - Charter 4,884 6,461
Loss on disposal of VIE 105,863 -
-------- -------
175,147 47,395
Valuation allowance (131,658) (26,990)
-------- -------
$ 43,489 $20,405
======== =======
Deferred Tax Liabilities:
Entertainment product, net $ 38,781 $24,296
Revenue recognition 25,053 18,741
Unrealized holding gain (86) 1,397
Other, net 4,526 3,965
-------- -------
$ 68,274 $48,399
======== =======
The increase in the valuation allowance during 1996 is due to the Company's
determination that the tax benefit from the accrual of the estimated loss for
the disposal of the interactive game business, as well as VIE's previously
recorded net deferred tax assets, are not currently realizable under a more
likely than not standard, partially offset by a reduction of previously recorded
valuation allowances attributable to the expiration of certain limited
investment tax credit carryforwards.
The increase in the valuation allowance during 1995 was due to the Company's
determination that certain additional tax attribute carryforwards recorded in
1995 are not realizable under a more likely than not standard, partially offset
by a reduction of previously recorded valuation allowances attributable to the
expiration of certain foreign tax credit carryforwards during the year.
40
41
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The components of income from continuing operations before the provision for
income taxes in 1996, 1995 and 1994 were as follows (in thousands):
1996 1995 1994
-------- -------- --------
Domestic $(8,540) $31,699 $25,371
Foreign 19,868 25,016 9,475
-------- -------- --------
$11,328 $56,715 $34,846
======== ======== ========
The primary reasons for the effective tax rates on the income from continuing
operations differing from the statutory federal tax rates for each of the three
years ended December 31 are summarized as follows:
1996 1995 1994
------ ------ ------
Federal tax rate 35% 35% 35%
Amortization of intangible assets 17 3 5
Adjustment of valuation allowance and
other reserves (3) (3) (1)
State and local taxes, net of available
federal income tax benefits 8 4 4
Other non-deductible expenses 7 1 1
------ ------ ------
64% 40% 44%
====== ====== ======
The primary reasons for the effective tax rates on the income (loss) from
discontinued operations differing from the statutory federal tax rates for each
of the three years ended December 31 are summarized as follows:
1996 1995 1994
------ ------ ------
Federal tax rate 35% 35% 35%
Amortization of intangible assets (2) (6) 7
Adjustment of valuation allowance and
other reserves (40) - -
State and local taxes, net of available
federal income tax benefits 2 3 5
Other - - (3)
------ ------ ------
(5)% 32% 44%
====== ====== ======
41
42
As of December 31, 1996, the Company has available net operating loss
carryforwards of approximately $97,974,000, foreign tax credit carryforwards of
$18,493,000, investment tax credit carryforwards of $3,481,000 and AMT credit
carryforwards of $2,630,000. The use of these attributes, which except for the
AMT credit will expire in 1997 through 2011, 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 $5,349,000, $11,798,000 and $7,661,000,
respectively for 1996, 1995 and 1994. In addition, the Company received
$1,431,000 and $1,116,000 of income tax refunds during 1996 and 1995,
respectively, the receipt of which had previously been accrued. However, the
Company did recognize benefits of $300,000 and $1,740,000 during 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 position or results of operations.
42
43
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, through a public offering expected to be
completed by December 1997 and has, accordingly, reflected the operations of VIE
as discontinued.
VIE's net assets as of December 31, 1996 and 1995, and results of operations
for the three years then ended are as follows (in thousands):
December 31,
1996 1995
-------- --------
Current assets $152,724 $127,891
Current liabilities (116,400) (77,727)
-------- --------
Net current assets 36,324 50,164
-------- --------
Property and equipment, net 16,793 13,183
Intangibles, net 107,657 189,190
Other non-current assets 21,257 41,591
Non-current liabilities (167,742) (85,107)
-------- --------
Net non-current assets (22,035) 158,857
-------- --------
Net assets $14,289 $209,021
======== ========
Year Ended December 31,
1996 1995 1994
-------- -------- --------
Revenue $254,046 $212,237 $183,394
Costs and expenses 358,275 240,042 173,757
Estimated loss on disposal 139,501 - -
-------- -------- --------
Income (loss) before provision
for income taxes (243,730) (27,805) 9,637
Provision (benefit) for income taxes 11,879 (8,813) 4,279
-------- -------- --------
Net income (loss) before minority
interest (255,609) (18,992) 5,358
Minority interest in income (loss) of
discontinued operations (409) (1,382) 680
-------- -------- --------
Net income (loss) from
discontinued operations ($255,200) ($17,610) $4,678
======== ======== ========
43
44
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Included in costs and expenses in the 1996 results of operations above 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
reflected in the table above 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, 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. During 1996, the term was extended to March 31,
1998. Interest is payable monthly at the bank's reference rate or, at the
Company's option, certain alternative rates. Additionally, the Company must pay
a commitment fee of .0125% on the unused portion of the available credit.
Borrowings under the Credit Agreement as of December 31, 1996 and 1995 were
$98,010,000 and $95,646,000, respectively. 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. There were no letters
of credit outstanding under the Credit Agreement at December 31, 1995.
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, the Company guaranteed the UK
Facility and the guarantees of the two directors were terminated. (See Note 2.)
Advances under the credit facility bear interest at the bank's prime rate plus
1.0%. The UK Facility, which expires on April 30, 1997, has been renegotiated
on terms more favorable to the subsidiary. The renegotiated UK Facility, which
will be an annual facility, will expire on December 31, 1997 and will be
guaranteed by Viacom and the Company. Advances under the renegotiated UK
Facility will bear interest at the bank's prime rate plus 1% or alternatively at
selected Eurocurrency rates. Borrowings under the UK Facility as of December
31, 1996 and 1995 were $3,898,000 and $30,000, respectively. As of December 31,
1996 and 1995, the Company had approximately $461,000 and $2,200,000,
respectively, in letters of credit outstanding under the UK Facility to
guarantee its interactive game purchases. The Company also provides a rent
guarantee for this subsidiary which expires in 2005. This guarantee will be
complemented with a Viacom guarantee when the renegotiated UK Facility is in
place.
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 $7,484,000, $8,779,000 and $1,468,000 in
1996, 1995 and 1994, respectively, with respect to the credit arrangements
discussed above.
44
45
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):
1996 1995
-------- --------
Receivables, net $574 $574
Property, plant and equipment, net 3,186 3,186
Accounts payable and other (1,706) (1,710)
Pension liability (1,902) (5,610)
Allowances for estimated expenses
and disputed claims (10,986) (12,194)
-------- --------
($10,834) ($15,754)
======== ========
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 clean-up 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 or threatened with respect to such possible contamination at an
additional location. Notification of possible cleanup or damages
responsibility has also been received regarding six 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.
45
46
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 in the
range of $4,000,000, which is fully provided for in the allowances for estimated
expenses and disputed claims. The subsidiary received $3,300,000 in
contributions to the clean up cost from two former owners in 1996 (ARCO and the
United States), is continuing to prosecute cost recovery litigation against a
third party (Texaco, in Charter International Oil Company v. United States, et.
al., U.S. District Court, Rhode Island, filed March 3, 1995) and is continuing
to investigate whether other parties or its insurers also may be liable for a
portion of the cost.
In 1990, a subsidiary declined to join a settlement agreement among the United
States, a state government and 15 companies regarding the Sullivan's Ledge
superfund site in New Bedford, Massachusetts, based upon certain legal defenses
and the belief that any liability the subsidiary may have should be less than a
pro rata allocation among the settling parties. Under such agreement, the
subsidiary would have been obligated to pay between $2,000,000 and $3,000,000 in
cleanup costs. The subsidiary subsequently settled its liability to the United
States in 1995 for $215,000 (United States v. Charter International Oil Company,
U.S. District Court, Massachusetts, filed December 2, 1993) and settled a
private cost recovery action filed by the 15 parties to the original agreement
who are performing the cleanup for $540,000 in January 1997 (Acushnet, et. al.
v. Charter International Oil Company, U.S. District Court, Massachusetts, filed
May 17, 1994).
A subsidiary previously was informed by the EPA that it is one of 13 identified
potentially responsible parties at the Sikes superfund site in Crosby, Texas,
which has been cleaned up by the government for approximately $130,000,000.
Although joint and several liability is possible with respect to such sites, and
there is little relevant information presently available, management believes
that there are meritorious defenses against any material liability and the EPA
did not include the subsidiary when it sent a proposed statute of limitations
tolling agreement to other parties in 1996.
While the results of such actions cannot be predicted with certainty, based
upon its current knowledge of the facts and circumstances and its understanding
of the applicable laws, the Company believes the ultimate resolution of these
matters should not have a material adverse effect on its financial condition
and its results of operations. This belief is also based upon (i) allowances
that have been established for estimated expenses related to environmental
matters and remaining Chapter 11 disputed claims (see table above), and (ii) an
insurance-type indemnity agreement with AFC. Although there are significant
uncertainties inherent in estimating environmental-related liabilities, based
upon the Company's experience it is considered unlikely that the amount of
possible environmental liabilities and Joint Plan disputed claims would exceed
the amount of the allowances by more than $50,000,000, 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.
46
47
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
An increase in the discount rate from 7% to 8.25% resulted in an adjustment to
reduce the additional minimum pension liability and related tax benefit with an
offsetting credit to Shareholders' Equity of $380,000 in 1994. The additional
minimum pension liability was further reduced by $829,000 (net of a tax benefit
adjustment of $519,000) in 1995 and by $1,453,000 (net of a tax benefit
adjustment of $909,000) in 1996 with corresponding credits to Shareholders'
Equity.
The following table sets forth the plan's funded status and amounts recognized
as of December 31 (in thousands):
1996 1995
------- -------
Total projected benefit obligation $(47,142) $(47,500)
Market value of assets 44,838 41,890
------- -------
Funded status (2,304) (5,610)
Transition asset (1,974) (2,369)
Unrecognized loss 6,187 8,943
Unrecognized prior service cost - 1
Additional minimum liability (4,213) (6,575)
------- -------
Accrued pension cost $(2,304) $(5,610)
======= =======
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):
1996 1995 1994
------- ------- -------
Interest Cost $ 3,273 $ 3,357 $ 3,750
Expected return on assets (5,857) (7,862) (3,547)
Net amortization and deferrals 2,432 4,911 (105)
------- ------- -------
Pension expense $ (152) $ 406 $ 98
======= ======= =======
The weighted-average discount rates used in determining the actuarial present
value of the projected benefit obligation were 7.25%, 7% and 8.25% for the
years ended December 31, 1996, 1995 and 1994, respectively. The expected
long-term rate of return on assets was 8% for each of the years ended December
31, 1996, 1995 and 1994. 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.
47
48
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
As of December 31, 1996, 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, 1996 was $5,527,000,
$4,645,000 and $3,548,000, 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):
1997 $ 7,800
1998 5,815
1999 5,339
2000 3,923
2001 1,676
Thereafter 10,705
-------
Total $35,258
=======
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 $2,210,000 for 1997, $2,170,000 for 1998, $1,727,000 for 1999, $1,727,000
for 2000, $1,727,000 for 2001 and $31,956,000 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 1996,
1995 and 1994 representing 20%, 22% and 21% 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, 1996 and 1995.
Export sales for the years ended December 31, 1996, 1995 and 1994 totaled
approximately $182,991,000, $167,830,000 and $120,903,000, respectively. Export
sales to Europe for the years ended December 31, 1996, 1995 and 1994 were
$120,925,000, $86,462,000, and $67,952,000, respectively.
48
49
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents quarterly results of operations for the years ended
December 31, 1996 and 1995 (in thousands, except per share data). The net loss
and net loss per common and common equivalent 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 is restating second and third quarter results in filings on Form 10-QA
to reflect these changes. (See Computer Software Development Costs in Note 1.)
1996
--------------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter 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 income (loss) $ (3,746) $(21,986) $(4,561) $(220,832)
======== ======== ======== =========
Net income (loss) per common and
common equivalent share:
Continuing operations $- $(0.02) $(0.01) $0.08
Discontinued operations (0.04) (0.22) (0.04) (2.52)
-------- -------- -------- ---------
Net loss per common and
common equivalent share $(0.04) $(0.24) $(0.05) $(2.44)
======== ======== ======== =========
1995
--------------------------------------------------------
1st 2nd 3rd 4th
1995 Quarter Quarter Quarter Quarter
-------- -------- -------- ---------
Revenue $148,884 $103,338 $92,372 $107,556
Income from continuing
operations, net 10,236 4,561 8,655 10,679
Discontinued operations, net (2,965) (3,681) (8,042) (2,922)
-------- -------- ------- --------
Net income $7,271 $880 $613 $7,757
======== ======== ======= ========
Net income (loss) per common
and common equivalent share:
Continuing operations $0.11 $0.05 $0.10 $0.12
Discontinued operations (0.03) (0.04) (0.09) (0.03)
-------- -------- ------- --------
Net income per common and
common equivalent share $0.08 $0.01 $0.01 $0.09
======== ======== ======= ========
49
50
SPELLING ENTERTAINMENT GROUP INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
1996
- ----------------------------------------------------------------------------------------------------------------
Other
Balance Additions Deductions adjustments Balance at
at beginning charged from during end of
Description of period to income reserves period period
- ----------------------------------------------------------------------------------------------------------------
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
1994
- ----------------------------------------------------------------------------------------------------------------
Deducted from accounts receivable
for doubtful accounts and returns $18,150 $ 4,514 $ (5,353) $ 9,635 (a) $26,946
Estimated expenses and
disputed claims $29,621 $ - $ (9,253) $ - $20,368
(a) Existing allowances at the date of acquisition of Republic.
50
51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
51
52
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 1997 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
52
53
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 1996, 1995 and 1994:
PAGE
II - Valuation and Qualifying Accounts 50
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 55
(b) Reports on Form 8-K:
1. Form 8-K dated May 21, 1996 regarding Viacom Inc.'s announcement
that it decided not to continue to pursue the proposed sale of its
75% interest in the Company.
53
54
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 28, 1997 By: /s/ Peter H. Bachmann
----------------------------
Peter H. Bachmann
Executive Vice President -
Office of the 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 28, 1997 By: /s/ Sumner M. Redstone
-----------------------
Sumner M. Redstone
Chairman of the Board
Date: March 28, 1997 By: /s/ Aaron Spelling
-----------------------
Aaron Spelling
Vice Chairman of the Board
Date: March 28, 1997 By: /s/ William P. Clark
-----------------------
William P. Clark
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: March 28, 1997 By: /s/ James Miller
-----------------------
James Miller
Vice President and
Corporate Controller
(Principal Accounting Officer)
Date: March 28, 1997 By: /s/ Thomas E. Dooley
-----------------------
Thomas E. Dooley
Director
Date: March 28, 1997 By: /s/ Philippe P. Dauman
-----------------------
Philippe P. Dauman
Director
Date: March 28, 1997 By: /s/ J. Brian McGrath
-----------------------
J. Brian McGrath
Director
Date: March 28, 1997 By: /s/ John L. Muething
-----------------------
John L. Muething
Director
54
55
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.
10.6 Second Amended and Restated Credit Agreement dated as of December 1,
1994 between Virgin Interactive Entertainment, Inc. and Bank of America
National Trust and Savings Association (incorporated by reference to
Exhibit 10 (i) to Registrant's Form 10-Q for quarterly period ended June
30, 1995).
10.7 First Amendment to Second Amended and Restated Credit Agreement dated
March 31, 1995, between Virgin Interactive Entertainment, Inc. and Bank
of America National Trust and Savings Association (incorporated by
reference to Exhibit 10 (ii) to Registrant's Form 10-Q for quarterly
period ended June 30, 1995).
10.8 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).
55
56
SPELLING ENTERTAINMENT GROUP INC.
INDEX TO EXHIBITS
NUMBER EXHIBIT DESCRIPTION
- ------ -------------------
10.9 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).
10.10 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.
10.11 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).
10.12 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 statements) (incorporated by
reference to Exhibit 28.1 to Blockbuster Entertainment Corporation's
Current Report on Form 8-K dated March 7, 1993).
10.13 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).
10.14 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).
10.15 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).
10.16 Amendment No. 2 to Exchange Agreement dated as of November 7, 1995, by
and among the Registrant, Blockbuster Entertainment Group on behalf of
Viacom Inc. and Blockbuster Interactive Entertainment, Inc.
(incorporated by reference to Exhibit 10 (ii) to Registrant's Form 10-Q
for the quarterly period ended September 30, 1995).
10.17 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).
10.18 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).
56
57
SPELLING ENTERTAINMENT GROUP INC.
INDEX TO EXHIBITS
NUMBER EXHIBIT DESCRIPTION
- ------ -------------------
10.19 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).
10.20 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.).
10.21 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).
10.22 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).
10.23 Employment Agreement dated as of May 1, 1996, by and between the
Registrant and Aaron Spelling (incorporated by reference to Exhibit 10.3
to Registrant's Form 10-Q for quarterly period ended March 31, 1996).
10.24 Employment Agreement dated as of September 26, 1994, between Registrant
and Peter Bachmann (incorporated by reference to Exhibit 10.15 to
Registrant's Form 10-K for fiscal year ended December 31, 1994).
10.25 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).
10.26 Employment Agreement dated as of November 4, 1996, between Registrant
and William P. Clark.
10.27 Employment Agreement dated as of January 6, 1997, between Registrant
and James Miller.
11 Computation of net income (loss) per common and common equivalent share.
21 Subsidiaries of the Registrant.
23.1 Consent of Price Waterhouse LLP.
27 Financial Data Schedule.
57